| CONMED CORP Item 1A Risk Factors An investment in our securities, including our common stock, involves a high degree of risk |
| Investors should carefully consider the specific factors set forth below as well as the other information included or incorporated by reference in this Form 10-K See “Forward Looking Statements” |
| Our financial performance is subject to the risks inherent in our acquisition strategy, including the effects of increased borrowing and integration of newly acquired businesses or product lines |
| A key element of our business strategy has been to expand through acquisitions and we may seek to pursue additional acquisitions in the future |
| Our success is dependent in part upon our ability to integrate acquired companies or product lines into our existing operations |
| We may not have sufficient management and other resources to accomplish the integration of our past and future acquisitions and implementing our acquisition strategy may strain our relationship with customers, suppliers, distributors, manufacturing personnel or others |
| There can be no assurance that we will be able to identify and make acquisitions on acceptable terms or that we will be able to obtain financing for such acquisitions on acceptable terms |
| In addition, while we are generally entitled to customary indemnification from sellers of businesses for any difficulties that may have arisen prior to our acquisition of each business, acquisitions may involve exposure to unknown liabilities and the amount and time for claiming under these indemnification provisions is often limited |
| As a result, our financial performance is now and will continue to be subject to various risks associated with the acquisition of businesses, including the financial effects associated with any increased borrowing required to fund such acquisitions or with the integration of such businesses |
| Failure to comply with regulatory requirements may result in recalls, fines or materially adverse implications |
| All of our products are classified as medical devices subject to regulation by the FDA As a manufacturer of medical devices, our manufacturing processes and facilities are subject to on-site inspection and continuing review by the FDA for compliance with the Quality System Regulations |
| Manufacturing and sales of our products outside the United States are also subject to foreign regulatory requirements which vary from country to -20- _________________________________________________________________ country |
| Moreover, we are generally required to obtain regulatory clearance or approval prior to marketing a new product |
| The time required to obtain approvals from foreign countries may be longer or shorter than that required for FDA approval, and requirements for foreign approvals may differ from FDA requirements |
| Failure to comply with applicable domestic and/or foreign regulatory requirements may result in: • fines or other enforcement actions; • recall or seizure of products; • total or partial suspension of production; • withdrawal of existing product approvals or clearances; • refusal to approve or clear new applications or notices; • increased quality control costs; or • criminal prosecution |
| Failure to comply with Quality System Regulations and applicable foreign regulations could result in a material adverse effect on our business, financial condition or results of operations |
| If we are not able to manufacture products in compliance with regulatory standards, we may decide to cease manufacturing of those products and may be subject to product recall |
| In addition to the Quality System Regulations, many of our products are also subject to industry-defined standards |
| We may not be able to comply with these regulations and standards due to deficiencies in component parts or our manufacturing processes |
| If we are not able to comply with the Quality System Regulations or industry-defined standards, we may not be able to fill customer orders and we may decide to cease production of non-compliant products |
| Our products are subject to product recall and we have made product recalls in the past |
| Although no recall has had a material adverse effect on our business, financial condition or results of operations, we cannot assure you that regulatory issues will not have a material adverse effect in the future or that product recalls will not harm our reputation and our customer relationships |
| The highly competitive market for our products may create adverse pricing pressures |
| The market for our products is highly competitive and our customers have numerous alternatives of supply |
| Many of our competitors offer a range of products in areas other than those in which we compete, which may make such competitors more attractive to surgeons, hospitals, group purchasing organizations and others |
| In addition, several of our competitors are large, technically-competent firms with substantial assets |
| Competitive pricing pressures or the introduction of new products by our competitors could have an adverse effect on our revenues |
| See “Competition” for a further discussion of these competitive forces |
| -21- _________________________________________________________________ Factors which may influence our customers’ choice of competitor products include: • changes in surgeon preferences; • increases or decreases in health care spending related to medical devices; • our inability to supply products to them, as a result of product recall, market withdrawal or back-order; • the introduction by competitors of new products or new features to existing products; • the introduction by competitors of alternative surgical technology; and • advances in surgical procedures, discoveries or developments in the health care industry |
| We use a variety of raw materials in our businesses, and significant shortages or price increases could increase our operating costs and adversely impact the competitive positions of our products |
| Our reliance on certain suppliers and commodity markets to secure raw materials used in our products exposes us to volatility in the prices and availability of raw materials |
| In some instances, we participate in commodity markets that may be subject to allocations by suppliers |
| A disruption in deliveries from our suppliers, price increases, or decreased availability of raw materials or commodities, could have an adverse effect on our ability to meet our commitments to customers or increase our operating costs |
| We believe that our supply management practices are based on an appropriate balancing of the foreseeable risks and the costs of alternative practices |
| Nonetheless, price increases or the unavailability of some raw materials may have an adverse effect on our results of operations or financial condition |
| Cost reduction efforts in the health care industry could put pressures on our prices and margins |
| In recent years, the health care industry has undergone significant change driven by various efforts to reduce costs |
| Such efforts include national health care reform, trends towards managed care, cuts in Medicare, consolidation of health care distribution companies and collective purchasing arrangements by GPOs and IHNs |
| Demand and prices for our products may be adversely affected by such trends |
| We may not be able to keep pace with technological change or to successfully develop new products with wide market acceptance, which could cause us to lose business to competitors |
| The market for our products is characterized by rapidly changing technology |
| Our future financial performance will depend in part on our ability to develop and manufacture new products on a cost-effective basis, to introduce them to the market on a timely basis, and to have them accepted by surgeons |
| We may not be able to keep pace with technology or to develop viable new products |
| Factors which may result in delays of new product introductions or cancellation of our plans to manufacture and market new products include: • capital constraints; • research and development delays; • delays in securing regulatory approvals; or -22- _________________________________________________________________ • changes in the competitive landscape, including the emergence of alternative products or solutions which reduce or eliminate the markets for pending products |
| Our new products may fail to achieve expected levels of market acceptance |
| New product introductions may fail to achieve market acceptance |
| The degree of market acceptance for any of our products will depend upon a number of factors, including: • our ability to develop and introduce new products and product enhancements in the time frames we currently estimate; • our ability to successfully implement new technologies; • the market’s readiness to accept new products; • having adequate financial and technological resources for future product development and promotion; • the efficacy of our products; and • the prices of our products compared to the prices of our competitors’ products |
| If our new products do not achieve market acceptance, we may be unable to recover our investments and may lose business to competitors |
| In addition, some of the companies with which we now compete or may compete in the future have or may have more extensive research, marketing and manufacturing capabilities and significantly greater technical and personnel resources than we do, and may be better positioned to continue to improve their technology in order to compete in an evolving industry |
| See “Competition” for a further discussion of these competitive forces |
| Our senior credit agreement contains covenants which may limit our flexibility or prevent us from taking actions |
| Our senior credit agreement contains, and future credit facilities are expected to contain, certain restrictive covenants which will affect, and in many respects significantly limit or prohibit, among other things, our ability to: • incur indebtedness; • make investments; • engage in transactions with affiliates; • pay dividends or make other distributions on, or redeem or repurchase, capital stock; • sell assets; and • pursue acquisitions |
| These covenants, unless waived, may prevent us from pursuing acquisitions, significantly limit our operating and financial flexibility and limit our ability to respond to changes in our business or competitive activities |
| Our ability to comply with such provisions may be affected by events beyond our control |
| In the event of any default under our credit agreement, the credit agreement lenders may elect to declare all amounts borrowed under our credit agreement, together with accrued interest, to be due and payable |
| If we were unable to repay such borrowings, the credit agreement lenders could proceed -23- _________________________________________________________________ against collateral securing the credit agreement, which consists of substantially all of our property and assets, except for our accounts receivable and related rights which are sold in connection with the accounts receivable sales agreement |
| See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” for a discussion of the accounts receivable sales agreement |
| Our credit agreement also contains a material adverse effect clause which may limit our ability to access additional funding under our credit agreement should a material adverse change in our business occur |
| Our substantial leverage and debt service requirements may require us to adopt alternative business strategies |
| We have indebtedness that is substantial in relation to our shareholders’ equity, as well as interest and debt service requirements that are significant compared to our cash flow from operations |
| As of December 31, 2005, we had dlra306dtta9 million of debt outstanding, representing 40prca of total capitalization and which does not include the dlra40 million of accounts receivable sold under the accounts receivable sales agreement |
| See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” |
| The degree to which we are leveraged could have important consequences to investors, including but not limited to the following: • a substantial portion of our cash flow from operations must be dedicated to debt service and will not be available for operations, capital expenditures, acquisitions, dividends and other purposes; • our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions or general corporate purposes may be limited or impaired, or may be at higher interest rates; • we may be at a competitive disadvantage when compared to competitors that are less leveraged; • we may be hindered in our ability to adjust rapidly to market conditions; • our degree of leverage could make us more vulnerable in the event of a downturn in general economic conditions or other adverse circumstances applicable to us; and • our interest expense could increase if interest rates in general increase because a portion of our borrowings, including our borrowings under our credit agreement, are and will continue to be at variable rates of interest |
| We may not be able to generate sufficient cash to service our indebtedness, which could require us to reduce our expenditures, sell assets, restructure our indebtedness or seek additional equity capital |
| Our ability to satisfy our obligations will depend upon our future operating performance, which will be affected by prevailing economic conditions and financial, business and other factors, many of which are beyond our control |
| We may not have sufficient cash flow available to enable us to meet our obligations |
| If we are unable to service our indebtedness, we will be forced to adopt an alternative strategy that may include actions such as foregoing acquisitions, reducing or delaying capital expenditures, selling assets, restructuring or refinancing our indebtedness or seeking additional equity capital |
| We cannot assure you that any of these strategies could be -24- _________________________________________________________________ implemented on terms acceptable to us, if at all |
| See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources” for a discussion of our indebtedness and its implications |
| We may be unable to continue to sell our accounts receivable, which could require us to seek alternative sources of financing |
| Under our accounts receivable sales agreement, there are certain statistical ratios which must be maintained relating to the pool of receivables in order for us to continue selling to the purchaser |
| These ratios relate to sales dilution and losses on accounts receivable |
| If new accounts receivable arising in the normal course of business do not qualify for sale or the purchaser otherwise ceases to purchase our receivables, we may require access to alternate sources of working capital, which may be more expensive or difficult to obtain |
| Our accounts receivable sales agreement, as amended, also requires us to obtain a commitment (the “purchaser commitment”), on an annual basis from the purchaser to fund the purchase of our accounts receivable |
| The purchaser commitment was amended effective October 21, 2005 whereby it was extended for an additional year |
| In the event we are unable to renew our purchaser commitment in the future, we would need to access alternate sources of working capital which may be more expensive or difficult to obtain |
| If we infringe third parties’ patents, or if we lose our patents or they are held to be invalid, we could become subject to liability and our competitive position could be harmed |
| Much of the technology used in the markets in which we compete is covered by patents |
| We have numerous US patents and corresponding foreign patents on products expiring at various dates from 2006 through 2023 and have additional patent applications pending |
| See “Research and Development” for a further description of our patents |
| The loss of our patents could reduce the value of the related products and any related competitive advantage |
| Competitors may also be able to design around our patents and to compete effectively with our products |
| In addition, the cost of enforcing our patents against third parties and defending our products against patent infringement actions by others could be substantial |
| We cannot assure you that: • pending patent applications will result in issued patents, • patents issued to or licensed by us will not be challenged by competitors, • our patents will be found to be valid or sufficiently broad to protect our technology or provide us with a competitive advantage, or • we will be successful in defending against pending or future patent infringement claims asserted against our products |
| Ordering patterns of our customers may change resulting in reductions in sales |
| Our hospital and surgery center customers purchase our products in quantities sufficient to meet their anticipated demand |
| Likewise, our health care distributor customers purchase our products for ultimate resale to health care providers in quantities sufficient to meet the anticipated requirements of the distributors’ customers |
| Should inventories of our products owned by our hospital, surgery center and distributor customers grow to levels higher than their requirements, our customers may reduce the ordering of products -25- _________________________________________________________________ from us |
| This could result in reduced sales during a financial accounting period |
| Our significant international operations subject us to risks associated with operating in foreign countries |
| A significant portion of our revenues are derived from foreign sales |
| As a result, our international presence exposes us to certain inherent risks, including: • devaluations and fluctuations in currency exchange rates; • imposition of limitations on conversions of foreign currencies into dollars or remittance of dividends and other payments by international subsidiaries; • imposition or increase of withholding and other taxes on remittances and other payments by international subsidiaries; • trade barriers; • political risks, including political instability; • reliance on third parties to distribute our products; • hyperinflation in certain foreign countries; and • imposition or increase of investment and other restrictions by foreign governments |
| We cannot assure you that such risks will not have a material adverse effect on our business and results of operations |
| We can be sued for producing defective products and our insurance coverage may be insufficient to cover the nature and amount of any product liability claims |
| The nature of our products as medical devices and today’s litigious environment should be regarded as potential risks which could significantly and adversely affect our financial condition and results of operations |
| The insurance we maintain to protect against claims associated with the use of our products have deductibles and may not adequately cover the amount or nature of any claim asserted against us |
| We are also exposed to the risk that our insurers may become insolvent or that premiums may increase substantially |
| See “Legal Proceedings” for a further discussion of the risk of product liability actions and our insurance coverage |
| Damage to our physical properties as a result of windstorm, earthquake, fire or other natural or man-made disaster may cause a financial loss and a loss of customers |
| Although we maintain insurance coverage for physical damage to our property and the resultant losses that could occur during a business interruption, we are required to pay deductibles and our insurance coverage is limited to certain caps |
| For example, our deductible for windstorm damage to our Florida property amounts to 1prca of any loss and coverage for earthquake damage to our California properties is limited to dlra10 million |
| Further, while insurance reimburses us for our lost gross earnings during a business interruption, if we are unable to supply our customers with our products for an extended period of time, there can be no assurance that we will regain the customers’ business once the product supply is returned to normal |