THIS PAPER DOCUMENT IS BEING
SUBMITTED PURSUANT TO RULE
901(d) OF REGULATION S-T
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
---- ----
Commission File Number: 000-16893
DANNINGER MEDICAL TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 31-0992628
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No)
5160-B BLAZER MEMORIAL PARKWAY
DUBLIN, OHIO
43017-1339
(Address of principal executive offices)
(614) 718-0500
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days
Yes x No
--- ---
4,739,990
Shares of Common Stock Outstanding
As Of
June 30, 1996
DANNINGER MEDICAL TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
June 30, December 31,
1996 1995
(Unaudited) (Audited)
----------- ---------
ASSETS
CURRENT ASSETS:
Cash $ 1,093
Accounts receivable trade (net of
allowance for doubtful accounts
of $203 and $204 for 1996 and
1995, respectively) 4,652 $ 3,497
Inventories 4,753 4,227
Prepaid expenses, and other current assets 471 409
Deferred income taxes 161 174
-------- -------
Total current assets 11,130 8,307
-------- -------
Property and equipment, net 917 724
-------- -------
OTHER ASSETS:
Other assets 872 304
Deferred income taxes 133 182
-------- -------
Total assets $13,052 $9,517
-------- -------
-------- -------
The accompanying notes are an integral part
of the financial statements
1
DANNINGER MEDICAL TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands except share amounts)
June 30, December 31,
1996 1995
(Unaudited) (Audited)
----------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Cash overdraft $ 167
Current portion, term debt $ 452 3,380
Current portion, capital lease obligations 35 26
Accounts payable, trade 2,011 1,146
Accrued expenses, and other liabilities 448 402
-------- --------
Total current liabilities 2,946 5,121
-------- --------
Non-current portion, term debt 6,138 839
-------- --------
Obligations under capital leases, net of
current maturities 86 35
-------- --------
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value:
Authorized, 10,000,000 shares; issued and
outstanding 4,739,990 and 4,707,490 shares
for 1996 and 1995, respectively 47 47
Paid-in capital 3,444 3,367
Retained earnings 391 108
-------- --------
Total shareholders' equity 3,882 3,522
-------- --------
Total liabilities and shareholders' equity $ 13,052 $ 9,517
-------- --------
-------- --------
The accompanying notes are an integral part
of the financial statements
2
DANNINGER MEDICAL TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three month and six month periods ending June 30, 1996 and 1995
(In thousands except share and per share amounts)
(UNAUDITED)
- --------------------------------------------------------------------------------
Three Three Six Six
Months Months Months Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
1996 1995 1996 1995
- --------------------------------------------------------------------------------
Revenue:
Net sales $ 3,406 $ 2,474 $ 7,163 $ 5,693
Lease and rental revenue 374 176 667 256
--------- --------- --------- ----------
3,780 2,650 7,830 5,949
Cost of goods sold 1,667 1,104 3,578 2,638
--------- --------- --------- ----------
Gross margin 2,113 1,546 4,252 3,311
--------- --------- --------- ----------
Operating expenses:
Sales and marketing 974 695 1,954 1,412
General and administrative 605 460 1,250 971
Research and development 238 306 456 572
--------- --------- --------- ---------
1,817 1,461 3,660 2,955
Operating income 296 85 592 356
Interest expense, net 103 65 217 123
--------- --------- --------- ---------
Income before income taxes 193 20 375 233
Income tax expense 47 17 92 76
--------- --------- --------- ---------
Net income $ 146 $ 3 $ 283 $ 157
--------- --------- --------- ---------
--------- --------- --------- ---------
Earnings per share:
Net income per share $ .03 $ .00 $ .06 $ .03
----- ----- ----- -----
----- ----- ----- -----
Weighted average shares
outstanding including common
stock equivalents 5,001,859 4,914,665 4,981,136 4,875,962
- --------------------------------------------------------------------------------
The accompanying notes are an integral part
of the financial statements
3
DANNINGER MEDICAL TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six month periods ending June 30, 1996 and 1995
(In thousands)
(Unaudited)
1996 1995
-------- --------
Net cash used in operating activities (439) (933)
-------- --------
Cash flows used in investing activities:
Purchases of property and equipment (183) (297)
-------- --------
Net cash used in investing activities (183) (297)
-------- --------
Cash flows from financing activities:
Proceeds from term debt 307 860
Proceeds from convertible subordinated
debenture offering 5,250
Repayment of term debt and capitalized
lease obligations (3,205) 29
Debt issue costs (540)
Cash overdraft (167)
Proceeds from exercise of stock options 70 405
-------- --------
Net cash provided by financing activities 1,093 1,294
-------- --------
Net increase in cash 1,093 64
Cash balance at the beginning of the period 0 3
-------- --------
Cash balance at the end of the period $ 1,093 $ 67
-------- --------
-------- --------
The accompanying notes are an integral part
of the financial statements
4
DANNINGER MEDICAL TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Management's Statement
In the opinion of management, the accompanying unaudited financial
statements contain all adjustments (all of which are normal and recurring in
nature) necessary to present fairly the financial position of Danninger Medical
Technology, Inc. and Subsidiaries at June 30, 1996, and the results of
operations and cash flows for the three month and six month periods ending June
30, 1996 and 1995. The notes to the Consolidated Financial Statements which
are contained in the 1995 Annual Report to Shareholders should be read in
conjunction with these Consolidated Financial Statements.
2. Inventories
Inventories are valued at the lower of first-in, first-out cost or market
and consisted of the following (In thousands):
June December
1996 1995
Raw materials $ 849 $ 671
Work-in-process 117 108
Finished goods 2,839 2,686
Consigned inventory 948 762
------- -------
$ 4,753 $ 4,227
------- -------
------- -------
3. Income Taxes
The Company provides for federal, state, and local income taxes in interim
periods using an estimated effective tax rate for the year. The Company
maintains valuation allowances of $560,000 against net deferred tax assets.
4. Contingency
The Company maintains a claims made product liability insurance policy
with $50,000 per occurrence and $250,000 aggregate retention limits. Beyond
these retention limits, the policy covers aggregate insured claims made during
each policy year up to $5,000,000.
The Company and other spinal implant manufacturers have been named as
defendants in various class action product liability lawsuits alleging that the
plaintiffs were injured by spinal implants supplied by the Company and others.
All such lawsuits were consolidated for pretrial proceedings in the Federal
District Court for the Eastern District of Pennsylvania and on February 22,
1995, the plaintiffs were denied class certification. In response to the denial
of class certification, a large number of additional individual lawsuits have
been filed alleging, in addition to damages from spinal implants, a
5
DANNINGER MEDICAL TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)
conspiracy among manufacturers, physicians and other spinal implant industry
members. At March 1, 1996, approximately 500 such lawsuits have been filed
in which the Company is a party. Approximately fifteen of such cases involve
individual plaintiffs utilizing implants supplied by the Company. The
Company cannot estimate precisely at this time the number of such lawsuits
that may eventually be filed. The vast majority of such lawsuits are pending
in federal courts and are in preliminary stages. Discovery proceedings,
including the taking of depositions, have commenced in certain lawsuits.
Plaintiffs in these cases typically seek relief in the form of monetary
damages, often in unspecified amounts. While the aggregate monetary damages
eventually sought in all of such individual actions is substantial and
exceeds the limits of the Company's product liability insurance policies, the
Company believes that it has affirmative defenses, and that these individual
lawsuits are otherwise without merit. An estimate of the amount of loss
cannot be made as the Company does not have sufficient information on which
to base an estimate. All pending cases are being defended by the Company's
insurance carrier, in some cases under a reservation of rights. There can be
no assurance, however, that the $5,000,000 per annum limit of the Company's
coverage will be sufficient to cover the cost of defending all lawsuits or
the payment of any amounts that may be paid in satisfaction of any
settlements of judgments. Further, there can be no assurance that the
Company will continue to be able to obtain sufficient amounts of product
liability insurance coverage at commercially reasonable premiums.
In addition to the above, in the ordinary course of business the Company
has been named as a defendant in various other legal proceedings. These
actions, when finally concluded, will not, in the opinion of the Company, have a
material adverse affect upon the financial position or results of operations of
the Company. However, there can be no assurance that future quarterly or
annually operating results will not be materially adversely affected by the
final resolution of these matters.
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of trade accounts receivable
(domestic and international). The Company follows certain guidelines in
determining the credit-worthiness of domestic and foreign customers. The credit
risk associated with each customer and each country is reviewed before a credit
decision is made. All international sales are denominated in U.S. dollars.
Certain of the Company's accounts receivable result from third party
reimbursements that may be dependent on limitations imposed by the payor on the
amount of reimbursement. The Company records the receivable and related revenue
net of such limitations.
6
DANNINGER MEDICAL TECHNOLOGY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table shows Danninger Medical Technology's operating results
as a percent of revenues for the periods indicated for certain items reflected
in the statement of operations.
- --------------------------------------------------------------------------------
Percent Percent
of Sales of Sales
for for
three months six months
ending ending
June 30, June 30,
- --------------------------------------------------------------------------------
1996 1995 1996 1995
---- ---- ---- ----
Net Sales 90.1% 93.4% 91.5% 95.7%
Lease/rental revenue 9.9% 6.6% 8.5% 4.3%
------ ------ ------ ------
100.0% 100.0% 100.0% 100.0%
Cost of goods sold 44.1% 41.7% 45.7% 44.3%
Gross margin 55.9% 58.3% 54.3% 55.7%
Operating expenses:
Sales and marketing 25.8% 26.2% 25.0% 23.8%
General and administrative 16.0% 17.4% 15.9% 16.3%
Research and development 6.3% 11.5% 5.8% 9.6%
Interest expense 2.7% 2.5% 2.8% 2.1%
Income before income taxes 5.1% .7% 4.8% 3.9%
Income taxes expense 1.2% .6% 1.2% 1.3%
Net income 3.9% .1% 3.6% 2.6%
- --------------------------------------------------------------------------------
7
DANNINGER MEDICAL TECHNOLOGY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION AS OF JUNE 30, 1996
As of June 30, 1996, the Company's working capital position increased by
$4,998,000 resulting in a working capital ratio of 3.78 to 1. The increase
in working capital is principally attributable to the retirement of the
$3,000,000 line of credit facility with the proceeds from the Company's
$5,000,000 convertible subordinated debenture offering which was completed in
May. The $3,000,000 line of credit facility has been renewed, along with the
remaining net proceeds of the offering, and is available to fund future
working capital requirements. In addition, working capital increased due to
the operating results experienced by the Company during the second quarter of
1996.
Accounts receivables increased by $1,155,000, inventories increased by
$526,000 and trade payables increased by $865,000. The increase in accounts
receivables is attributable to increased sales in the second quarter.
During the second quarter of 1996, the Company received $5,250,000 during
the debenture offering. During 1996, the Company had additional borrowings of
$387,000 which contributed to an overall increase in liabilities.
The Company believes that the proceeds from the offering, its bank loan
facility, working capital, and funds anticipated to be generated by operations
will be sufficient to fund the Company's growth plans for the foreseeable
future.
8
DANNINGER MEDICAL TECHNOLOGY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1996 AS COMPARED TO
THE THREE MONTHS ENDED JUNE 30, 1995
Total revenue increased 42.6% for the three months ended June 30, 1996 to
$3,780,000 from $2,650,000 for the three months ended June 30, 1995. The
increase is primarily attributable to increased sales of the Company's
Synergy-TM- Spinal implant system. In addition, the Company benefited from
continued penetration into the orthopedic home care rental market.
Cost of sales as a percentage of total revenue increased to 44.1% for the
three months ended June 30, 1996 from 41.7% for the three months ended June 30,
1995. Sales and marketing expense decreased to 25.8% from 26.2% of total
revenue for the three months ended June 30, 1996 and 1995, respectively.
General and administrative expenses decreased to 16.0% from 17.4% of total
revenue for the three months ended June 30, 1996 and 1995, respectively.
Research and development expenses decreased to 6.3% from 11.5% of total
revenue for the three months ended June 30, 1996 and 1995, respectively,
principally as a result of higher level of expenditures in 1995 in connection
with obtaining Section 510(k) approval of the Synergy-TM- Spinal implant
system.
These factors resulted in an overall increase in operating income to
$296,000 or 7.8% of total revenue for the three months ended June 30, 1996 from
$85,000 or 3.2% for the three months ended June 30, 1995.
Interest expense increased as a result of increased borrowings to provide
additional working capital.
Net income increased to $146,000 from $3,000 for the three months ended
June 30, 1996 and 1995, respectively, and earnings per share increased to $.03
from $.00 for the same periods.
9
DANNINGER MEDICAL TECHNOLOGY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1996 AS COMPARED TO THE
SIX MONTHS ENDED JUNE 30, 1995
For the six months ended June 30, 1996 total revenue increased 31.6% to
$7,830,000 from $5,949,000 for the six months ended June 30, 1995. Cost of
goods sold increased to 45.7% from 44.3% for the six months ended June 30, 1996
and 1995, respectively. As a percentage of total revenue, sales and marketing
expense increased to 25.0% from 23.8%, general and administrative expenses
decreased to 15.9% from 16.3% and research and development expense decreased to
5.8% from 9.6% for the six months ended June 30, 1996 and 1995, respectively.
Interest expense increased to 2.8% from 2.1% for the same periods.
Net income for the six months ended June 30, 1996 increased to $283,000
from $157,000 for the six months ended June 30, 1995. Earnings per share
increased to $.06 from $.03 for the same periods.
Except for the historical information in this report, it includes forward-
looking statements that involve risks and uncertainties, including, but not
limited to quarterly fluctuations in results, the management of growth, and
other risks detailed from time to time in the Company's Securities and Exchange
Commission filings, including the Company's Form 10-K for the fiscal year ended
December 31, 1995. Actual results may differ materially from management
expectations.
10
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
The Company maintains a claims made product liability insurance policy
with per occurrence ($50,000) and aggregate ($250,000) retention limits. Beyond
these retention limits, the policy covers aggregate insured claims made during
each policy year up to $5,000,000.
The Company and other spinal implant manufacturers have been named as
defendants in various class action product liability lawsuits alleging that
the plaintiffs were injured by spinal implants supplied by the Company and
others. All such lawsuits were consolidated for pretrial proceedings in the
Federal District court for the Eastern District of Pennsylvania and on
February 22, 1995 the plaintiffs were denied class certification. In
response to the denial of class certification, a large number of additional
individual lawsuits have been filed alleging, in addition to damages from
spinal implants, a conspiracy among manufacturers, physicians and other
spinal implant industry members. At March 1, 1996, approximately 500 such
lawsuits have been filed in which the Company is a party. Approximately
fifteen of such cases involve individual plaintiffs utilizing implants
supplied by the Company. The Company cannot estimate precisely at this time
the number of such lawsuits that may eventually be filed. The vast majority
of such lawsuits are pending in federal courts and are in preliminary stages.
Discovery proceedings, including the taking of depositions, have commenced
in certain of the lawsuits. Plaintiffs in these cases are typically seek
relief in the form of monetary damages, often in unspecified amounts. While
the aggregate monetary damages eventually sought in all of such individual
actions is substantial and exceeds the limits of the Company's product
liability insurance policies, the Company believes that it has affirmative
defenses, and that these individual lawsuits are otherwise without merit. An
estimate of the amount of loss cannot be made as the Company does not have
sufficient information on which to base an estimate. All pending cases are
being defended by the Company's insurance carrier, in some cases under a
reservation of rights. There can be no assurance, however, that the
$5,000,000 per annum limit of the Company's coverage will be sufficient to
cover the cost of defending all lawsuits or the payment of any amounts that
may be paid in satisfaction of any settlements or judgments. Further, there
can be no assurance that the Company will continue to be able to obtain
sufficient amounts of product liability insurance coverage at commercially
reasonable premiums.
In addition to the above, in the ordinary course of business the Company
has been named as a defendant in various other legal proceedings. These
actions, when finally concluded, will not, in the opinion of the Company, have a
material adverse affect upon the financial position or results of operations of
the Company. However, there can be no assurance that future quarterly or
annually operating results will not be materially adversely affected by the
final resolution of these matters.
ITEM 4. Submission of Matters to a Vote of Security Holders
(a) Danninger Medical Technology, Inc. held its annual meeting of
stockholders on May 22, 1996, for the purpose of electing three Class
II directors and ratifying the appointment of independent certified
public accountants for the fiscal year 1996.
(b) At the annual meeting of stockholders, all directors nominated were
elected.
11
PART II - OTHER INFORMATION, Continued
(c) The table shows the voting tabulation for each matter voted upon at
the annual meeting of shareholders.
ACTION FOR WITHHELD
------ --- --------
Election of Class III Directors:
C. Craig Waldbillig 3,468,658 15,620
Peter H. Williams 3,470,658 13,620
FOR AGAINST ABSTENTIONS
--- ------- -----------
Ratification of appointment 3,467,698 7,525 9,055
of Coopers & Lybrand as
independent certified public
accountants for the fiscal
year 1996
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The exhibits listed in the accompanying index to exhibits are filed as
a part of this Report.
(b) Reports on Form 8-K
None
12
Signatures
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
DANNINGER MEDICAL TECHNOLOGY, INC.
(Registrant)
Dated: August 14, 1996 /s/ Joseph A. Mussey
Joseph A. Mussey
Chief Executive Officer,
President, and Treasurer
Dated: August 14, 1996 /s/ Paul A. Miller
Paul A. Miller
Chief Financial Officer
(Principal Financial/Accounting Officer)
13
DANNINGER MEDICAL TECHNOLOGY, INC. AND SUBSIDIARIES
FORM 10-Q
EXHIBIT INDEX
Exhibit No. Exhibit Page No.
11 Statement re: Computation of Per Share Earnings 15
27 Financial Data Schedules 16
14