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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(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, 1997
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 000-19168
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Sofamor Danek Group, Inc.
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(Exact name of registrant as specified in its charter)
Indiana 35-1580052
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(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification Number)
1800 Pyramid Place, Memphis, Tennessee 38132
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(Address of principal executive offices) (Zip Code)
(901) 396-2695
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
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.
[X] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
24,801,121 shares of common stock outstanding as of June 30, 1997
- --------------------------------------------------------------------------------
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PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
SOFAMOR DANEK GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARES)
JUNE 30, DECEMBER 31,
1997 1996
----------- ------------
ASSETS (UNAUDITED)
Current Assets:
Cash and cash equivalents $ 2,641 $ 2,830
Short-term investments 71 111
Accounts receivable--trade, less allowance for
doubtful accounts of $1,688 and $1,589 for
June 30, 1997 and December 31, 1996,
respectively 76,338 70,031
Other receivables 22,106 15,813
Inventories 51,987 33,483
Loaner set inventories 16,974 14,123
Prepaid expenses 3,880 6,318
Prepaid income taxes 4,225 --
Current deferred income taxes 6,007 5,312
--------- ---------
Total current assets 184,229 148,021
Property, plant and equipment
Land 1,481 1,484
Buildings 10,809 11,261
Machinery and equipment 34,441 32,083
Automobiles 739 708
--------- ---------
47,470 45,536
Less accumulated depreciation (22,546) (20,026)
--------- ---------
24,924 25,510
Investments 958 920
Intangible assets, net 89,159 83,426
Other assets 29,291 28,282
Non-current deferred income taxes 30,867 33,002
--------- ---------
Total assets $ 359,428 $ 319,161
========= =========
The accompanying notes are an integral part of the
consolidated financial statements.
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SOFAMOR DANEK GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARES)
JUNE 30, DECEMBER 31,
1997 1996
----------- ------------
LIABILITIES (UNAUDITED)
Current Liabilities:
Notes payable and lines of credit $ 85,381 $ 50,207
Current maturities of long-term debt 7,576 16,687
Accounts payable 10,230 7,332
Income taxes payable -- 3,898
Accrued expenses 30,293 38,770
--------- ---------
Total current liabilities 133,480 116,894
Long-term debt, less current maturities 5,268 12,300
Deferred income taxes 108 121
Product liability litigation 45,370 48,000
Minority interest 3,471 2,020
Commitments and contingencies
STOCKHOLDERS' EQUITY
Preferred stock, no par value, 5,000,000 shares
authorized, no shares outstanding
Common stock, no par value 150,000,000 shares
authorized: 25,487,029 and 25,094,277 shares
issued (including 685,908 shares held in treasury)
at June 30, 1997 and December 31, 1996,
respectively
62,793 52,994
Retained earnings 124,471 98,044
Cumulative translation adjustment (1,833) 2,542
--------- ---------
185,431 153,580
Less:
Cost of common stock held in treasury (9,985) (9,985)
Unearned compensation -- (54)
Stockholder notes receivable (3,715) (3,715)
--------- ---------
Total stockholder's equity 171,731 139,826
--------- ---------
Total liabilities and stockholder's equity $ 359,428 $ 319,161
========= =========
The accompanying notes are an integral part of the
consolidated financial statements.
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SOFAMOR DANEK GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1997 1996 1997 1996
-------- -------- --------- ---------
Revenues $ 73,613 $ 56,820 $ 143,372 $ 111,038
Cost of goods sold 12,660 9,731 25,030 20,347
-------- -------- --------- ---------
Gross Profit 60,953 47,089 118,342 90,691
Operating Expenses:
Selling, general and administrative 34,633 26,784 67,331 52,772
Research and development 4,767 3,919 9,497 7,557
-------- -------- --------- ---------
Total operating expenses 39,400 30,703 76,828 60,329
-------- -------- --------- ---------
Income from operations 21,553 16,386 41,514 30,362
Other income 179 90 255 1,070
Interest expense (1,515) (795) (2,691) (1,572)
-------- -------- --------- ---------
Income from operations before
provision for and charge in lieu of
income taxes 20,217 15,681 39,078 29,860
Provision for and charge in
lieu of income taxes 5,863 4,612 11,333 8,194
-------- -------- --------- ---------
Income before minority interest 14,354 11,069 27,745 21,666
Minority interest (701) (437) (1,318) (849)
-------- -------- --------- ---------
Net income $ 13,653 $ 10,632 $ 26,427 $ 20,817
======== ======== ========= =========
Fully diluted net income per share $ 0.50 $ 0.41 $ 0.98 $ 0.80
======== ======== ========= =========
Weighted average common shares
outstanding 27,352 25,994 27,023 26,043
======== ======== ========= =========
Note: Primary weighted average shares approximate fully diluted
weighted average shares.
The accompanying notes are an integral part of the
consolidated financial statements.
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SOFAMOR DANEK GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
1997 1996
------ ------
Cash flows from operating activities:
Net income 26,427 20,817
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization 8,498 4,184
Provision for doubtful accounts receivable 295 180
Deferred income tax (benefit) expense 1,018 (79)
Loss (gain) on disposal of equipment (4) 18
Equity loss in unconsolidated affiliate -- 20
Minority interest 1,318 849
Changes in assets and liabilities, net of effects of acquisition:
Accounts receivable (8,674) (3,655)
Other receivables (6,450) (7,450)
Inventories and loaner set inventories (22,720) (3,641)
Prepaid expenses 2,312 344
Prepaid income taxes (4,227) 3,149
Other assets (667) (14,950)
Accounts payable 3,278 (1,414)
Accrued state income and franchise taxes 320 360
Accrued federal income taxes 2,388 --
Accrued foreign income taxes (2,739) (243)
Accrued expenses (7,406) 2,385
Product liability litigation (2,630) --
------- -------
Net cash provided (used) by operating activities (9,663) 874
------- -------
Cash flows from investing activities:
Purchase of short-term investments (2) (98)
Proceeds from maturities of short-term investments 33 1,899
The accompanying notes are an integral part of the
consolidated financial statements.
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SOFAMOR DANEK GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW (CONTINUED)
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
1997 1996
-------- --------
Payments for purchase of property, plant and equipment (4,420) (3,392)
Proceeds from sale of equipment 14 3
Purchase of intangible assets (11,113) (3,778)
Increase in notes receivable, other (367) --
Repayments of notes receivable, other 12 53
Investment in unconsolidated affiliates (133) --
Acquisition, net of cash acquired -- (10,464)
-------- --------
Net cash used by investing activities (15,976) (15,777)
-------- --------
Cash flows from financing activities:
Increase in short-term borrowings 36,287 13,886
Proceeds from long-term debt 136 433
Repayment of long-term debt (16,208) (9,972)
Proceeds from issuance of common stock 6,329 4,525
Capital contribution by minority shareholders 148 428
-------- --------
Net cash provided by financing activities 26,692 9,300
-------- --------
Effect of exchange rate changes on cash (1,242) (940)
-------- --------
Decrease in cash and cash equivalents (189) (6,543)
Cash and cash equivalents, beginning of period 2,830 11,330
-------- --------
Cash and cash equivalents, end of period $ 2,641 $ 4,787
======== ========
Supplemental disclosure of non-cash investing and financing activities:
- In 1997 and 1996, net income tax benefits of $3,470 and $2,115,
respectively, were realized by the Company as a result of certain
common stock options being exercised and vesting of certain
restricted common stock, reducing accrued federal and state income
taxes payable and increasing common stock.
The accompanying notes are an integral part of the
consolidated financial statements.
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SOFAMOR DANEK GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. Financial Statement Presentation
The consolidated balance sheet as of June 30, 1997, the consolidated
statements of income for the three and six months ended June 30, 1997 and
1996, and the consolidated statements of cash flows for the six months
ended June 30, 1997 and 1996, are unaudited but, in the opinion of
management, include all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of financial position,
results of operations and cash flows. Accordingly, certain information and
footnote disclosures normally included in complete financial statements
prepared in accordance with generally accepted accounting principles have
been condensed or omitted. It is suggested that these consolidated
financial statements be read in conjunction with the financial statements
and notes thereto included in the Company's 1996 Annual Report on Form
10-K.
2. Inventories and Loaner Set Inventories
Net inventories and loaner set inventories consist of:
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June 30, December 31,
1997 1996
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Finished goods $43,843 $28,260
Work-in-process 5,106 2,961
Raw materials 3,038 2,262
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Net inventories $51,987 $33,483
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Loaner set inventories, net $16,974 $14,123
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3. Income Taxes
The Company's effective income tax rate was 29.0% for the quarter and six
months ended June 30, 1997. The effective rates were 29.4% and 27.4% for
the quarter and six months ended June 30, 1996, respectively. The
difference between the Company's effective and statutory tax rates for
both the quarter and six months ended June 30, 1997 and 1996, resulted
primarily from the impact of certain elections made for U.S. tax purposes
following the combination (the "Combination") of Danek Group, Inc. with
Sofamor S.A. ("Sofamor"), and the subsequent reorganization of Sofamor
from a Societe Anonyme (S.A.) under French law to a Societe en Nom
Collectif (S.N.C.) in late 1993. At June 30, 1997, the balance sheet of
the Company reflected a net deferred tax asset of $36,766. No valuation
allowance was recorded since sufficient taxable income existed in
available carryback periods to recognize fully these net deferred tax
assets.
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During the first six months of 1997 and 1996, charges in lieu of income
taxes of $3,470 and $2,115 respectively, were recorded by the Company as
a result of certain common stock options being exercised and vesting of
certain restricted common stock.
4. Adoption of SFAS 128
In March 1997, the Financial Accounting Standards Board (the "Board")
issued Statement No. 128 "Earnings Per Share" ("FAS 128"). FAS 128
establishes standards for computing and presenting earnings per share
("EPS") and replaces the presentation of primary EPS with a presentation
of basic EPS. It also requires dual presentation of basic and diluted EPS
on the face of the statement of operations and requires a reconciliation
of the numerator and the denominator of the basic EPS computation to the
numerator and the denominator of the diluted EPS computation. The Company
will adopt the disclosure requirements of FAS 128 beginning December 31,
1997. The Company does not expect the adoption of FAS 128 to have a
material impact on earnings per share when presented on a comparable
basis.
5. Commitments and Contingencies
The Company is involved from time to time in litigation on various matters
which are routine to the conduct of its business, including product
liability and intellectual property cases.
PRODUCT LIABILITY LITIGATION
Beginning in 1994, the Company and other spinal implant manufacturers were
named as defendants in a number of product liability lawsuits brought in
various federal and state courts around the country. These lawsuits allege
that plaintiffs were injured by spinal implants manufactured by the
Company and others. Although the plaintiffs have advanced claims under
many different legal theories, the essence of their claims appear to be
that the Company (including Sofamor and its former U.S. distributor)
marketed some of its spinal systems for pedicle fixation in contravention
of Food & Drug Administration ("FDA") rules and regulations (governing
marketing and labeling), that pedicle fixation has not been proven safe
and effective in the context of FDA labeling standards, that some or all
of the spinal systems are defectively designed and manufactured, and that
plaintiffs have suffered a variety of injuries as a result of their
physicians' use of such systems in pedicle fixation. The Company has also
been named as a defendant in a number of lawsuits instituted by plaintiffs
who have received spinal implants manufactured by other manufacturers and
in which the Company is alleged to have participated in a conspiracy among
doctors, manufacturers, hospitals, teaching institutions, professional
societies and others to promote, in violation of applicable law, the use
of spinal implants.
In a number of cases, plaintiffs have sought to proceed as representatives
of classes of spinal implant recipients. All efforts to obtain class
certification have been denied or withdrawn. Some plaintiffs have filed
individual lawsuits, whereas other lawsuits list multiple plaintiffs and,
in certain instances, multiple lawsuits have been filed on behalf of the
same individual plaintiffs. Plaintiffs typically seek relief in the form
of monetary damages, often in
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unspecified amounts. Many of the plaintiffs only allege as monetary
damages an amount in excess of the jurisdictional minimum for the court
in which the case has been filed. A few suits also name as defendants
various officers and directors of the Company.
To date, approximately two thousand eight hundred (2,800) plaintiffs have
joined in lawsuits against the Company. The majority of these plaintiffs
filed their claims in 1995. The Company is also named as a defendant in
lawsuits involving about two thousand six hundred (2,600) claimants where
the Company is alleged to have conspired with competitors and others
illegally to promote the use of spinal implant systems.
The Company believes that it has defenses, including, without limitation,
defenses based upon the failure of a cause of action to exist where no
malfunction of the implant has occurred or the plaintiff has suffered no
injury attributable to the Company's product, the expiration of the
applicable statute of limitations and the learned intermediary defense.
The Company has asserted and will continue to assert these defenses
primarily through the filing of dispositive motions. The Company believes
that all product liability lawsuits currently pending against it are
without merit and will continue to defend them vigorously.
FEDERAL MULTIDISTRICT LITIGATION (MDL 1014)
On August 4, 1994, the Federal Judicial Panel for Multidistrict Litigation
ordered all federal court lawsuits to be transferred to and consolidated
for pretrial proceedings, including the determination of class
certification, in the United States District for the Eastern District of
Pennsylvania in Philadelphia (the "Multidistrict Litigation"). Lawsuits
filed in federal court after August 4, 1994, have also been transferred to
and consolidated in the Multidistrict Litigation in the Eastern District
of Pennsylvania. In addition, a number of lawsuits filed in state courts
around the country were removed to federal courts and then transferred
into the Multidistrict Litigation. On February 22, 1995, Chief Judge
Emeritus, Louis C. Bechtle, denied class certification. A large number of
plaintiffs filed individual lawsuits as a result of the denial of class
certification. In some instances lawsuits that had been removed and
transferred into the Multidistrict Litigation have been remanded to the
state courts in which they were filed because there was no federal court
jurisdiction. Currently, the Company is a defendant in approximately one
thousand (1,000) individual claims and one thousand (1,000) conspiracy
claims consolidated in the Multidistrict Litigation. On August 22, 1996,
Judge Bechtle dismissed without prejudice plaintiffs' conspiracy claims.
Most plaintiffs asserting conspiracy claims in the Multidistrict
Litigation have filed amended or new complaints. It is not possible to
determine at this time precisely how many of these conspiracy complaints
will be reasserted or the number of additional plaintiffs that may file
new lawsuits. On April 16, 1997, Judge Bechtle dismissed conspiracy claims
alleging fraud on the FDA, but deferred the remaining conspiracy claims
for later consideration by the federal trial courts to whom the cases will
be remanded for trial.
Discovery has been completed in a number of the federal court cases and is
continuing in the remainder. It is anticipated that the first cases to be
returned for trial to the federal court in which they were filed will be
remanded beginning in August 1997. It is not now possible to determine
when the first federal court cases will be tried.
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STATE COURT LITIGATION
A number of cases filed in state courts were not eligible for removal and
transfer into the Multidistrict Litigation. Currently, there are
approximately one thousand eight hundred (1,800) individual claims pending
against the Company in several courts around the country, principally in
Tennessee, Oklahoma, Texas and Pennsylvania. In addition, there are
approximately one thousand six hundred (1,600) conspiracy claims pending
in state courts.
Approximately one thousand five hundred fifty (1,550) plaintiffs who had
joined together in several complaints which had been removed to the
Multidistrict Litigation proceedings, have had their cases remanded to the
state court in Memphis, Tennessee, where they were originally filed when
it was determined that the federal court lacked jurisdiction over their
claims. The presiding state court judge in Memphis has established a case
management plan which calls for the preparation of eight representative
cases for pretrial preparation and trial.
Discovery is proceeding in all remaining state court cases. Some state
cases have been given trial dates in 1997. It is anticipated that a number
of other state court cases around the country may be scheduled for trial
in 1997, although delays in trial dates are common. Trials in the Memphis
proceedings are scheduled to commence in January of 1998.
ACROMED CORPORATION PROPOSED SETTLEMENT
In December 1996, AcroMed Corporation ("AcroMed"), a spinal implant
manufacturer and a defendant in many of the cases pending in the
Multidistrict Litigation, and the Plaintiff's Legal Committee in the
Multidistrict Litigation announced that they had entered into a
conditional settlement regarding all product liability claims involving
the use of AcroMed devices to achieve pedicular fixation with screws in
spinal fusion surgery. Under the terms of the proposed settlement, AcroMed
will establish a settlement fund consisting of $100 million in cash plus
the proceeds of its product liability insurance policies. In January 1997,
the parties submitted a formal class settlement agreement and related
documentation for approval by Judge Bechtle. Judge Bechtle is currently
considering whether to certify the proposed settlement class and the
fairness, adequacy and reasonableness of the proposed settlement. All
federal court proceedings involving AcroMed devices have been stayed
pending final consideration of the proposed settlement.
INSURANCE
All of the insurance carriers for policy periods in which these claims
have been made have asserted reservation of rights, but have not denied
coverage to the Company. To date, the cost of defending these claims has
been reimbursed by certain of the primary and excess carriers, and the
Company is actively engaged in discussions concerning the recovery of
amounts currently due and owing from all other carriers. The Company
believes that these receivables are recoverable under the terms of the
Company's policies. The Company's insurance policies are reduced by the
costs of defense, except for a policy issued by Royal Surplus Lines
Insurance Co. ("Royal") covering the 12-month period that began in
November 1995. The Company estimates that the litigation may continue for
several years and, if so, the cost to defend and conclude these lawsuits
is likely to exhaust its insurance
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coverage. Royal brought an action in December 1996 in the Federal District
Court for the Middle District of Tennessee (Nashville Division) seeking a
declaratory judgment as to, among other things, whether the policy covers
lawsuits which have been reported to the insurer during the policy period.
The Company has filed its answer and counterclaim in the Royal lawsuit. In
addition, the Company has initiated its own declaratory judgment lawsuit
against Royal in the Federal District Court located in Memphis, Tennessee.
This lawsuit seeks a declaration of coverage and immediate payment of the
outstanding balance of amounts due from Royal. Based on the Company's
motion, Royal's lawsuit has been transferred to the Federal District Court
in Memphis Tennessee. This litigation is in the preliminary stages. The
Company believes that Royal's claims are without merit and will defend
them vigorously.
As is common in the insurance industry, the Company's insurance policies
covering product liability claims must be renewed annually. Although the
Company has been able to obtain insurance coverage relating to product
liability claims at a cost and on other terms and conditions that are
acceptable to the Company, there can be no assurance that in the future it
will be able to do so.
The Company's 1996 financial results reflect a pre-tax charge relating to
costs associated with the product liability litigation described above.
The costs provided for include, but are not limited to, legal fees paid or
anticipated to be paid and other costs related to the Company's defense
and conclusion of these matters.
The actual costs to the Company could differ from the estimated charge and
will be dependent upon a number of factors that will not be known for some
time, including, among other things, the resolution of defense motions and
the extent of further discovery. Although an adverse resolution of the
lawsuits could have a material effect on the Company's results of
operations in future periods, the Company does not believe that these
matters will in the future have a material adverse effect on its
consolidated financial position. The Company is unable to predict the
ultimate outcome or the financial impact of the product liability
litigation.
SECURITIES LAWS ACTIONS
Beginning in April 1994, the Company and four of its officers and
directors were named in five shareholder lawsuits filed in the United
States District Court in Memphis, Tennessee. Four of the lawsuits purport
to be class actions. All of the lawsuits were consolidated into one case
in the United States District Court in Memphis through an amended
complaint which added four new individual defendants who are either
current or former directors of the Company. The lawsuit alleges that the
defendants made false and misleading statements and failed to disclose
material facts to the investing public and seeks money damages. The
alleged securities law violations are based on the claim that the
defendants failed to disclose that the Company sold its products
illicitly, illegitimately and improperly and to timely disclose facts
concerning the termination of the former United States distributor of
Sofamor products, National Medical Specialties, Inc. ("NMS"). The
allegations relating to illicit and illegitimate sales of product are, for
the most part, copied from product liability complaints filed against the
Company and other manufacturers currently being coordinated in the
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United States District Court for the Eastern District of Pennsylvania
which are referred to above. The allegations of improper sales relate to
one of the Company's selling programs which has been publicly disclosed
since May 1991. The allegations concerning NMS relate to the termination
of the NMS distribution agreement covering Sofamor products in the United
States. On October 3, 1995, the United States District Court Judge in
Memphis dismissed with prejudice the entire case against the Company and
each of the individual defendants. The plaintiffs have appealed the
dismissal to the United States Court of Appeals for the Sixth Circuit,
which has not yet ruled on this appeal.
SPANISH DISTRIBUTOR ACTION
In late September 1994, a Magistrate of the Commercial Court in Paris
ruled in favor of a former Spanish distributor of Sofamor's products on a
claim of wrongful termination of the distribution agreement in 1992. Prior
to June 1993, an accrual was established, with a related charge to
earnings, for this pending litigation. In June 1993, the Company also
established a separate indemnity with respect to potential losses
resulting from such lawsuit and placed in escrow shares issued to the
former Sofamor shareholders pending the final outcome of this lawsuit. The
$3.0 million award (including interest) rendered by the French Magistrate
exceeded the pre-established accrual. As a result, the Company recorded an
expense of $2.2 million for the non-recurring litigation award during the
third and fourth quarters of 1994. The Company filed an appeal which
involves a complete retrial on all issues. The former Spanish distributor
has filed its papers in the appeal and seeks additional damages; the
Company seeks to have the decision of the Commercial Court reversed. A
hearing on the appeal is currently scheduled for the fourth quarter of
1997.
The Company does not believe the Securities Laws Actions or the Spanish
Distributor Action, described above, will have a material adverse effect
on its consolidated financial position, results of operations or cash
flows because of, among other reasons, the facts and circumstances
existing with respect to each action, the Company's belief that these
actions are without merit, certain defenses available to the Company and
the availability of insurance in the Securities Laws Actions.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
The following table sets forth for the periods indicated, selected unaudited
financial information expressed as a percentage of revenues and the
period-to-period change in such information.
PERIOD-TO-PERIOD
CHANGE
-----------------
THREE SIX
MONTHS MONTHS
JUNE 30, JUNE 30,
THREE MONTHS SIX MONTHS 1997 1997
ENDED JUNE 30, ENDED JUNE 30, VS VS
1997 1996 1997 1996 1996 1996
------ ------ ------ ------ ----- -----
Revenues 100.0% 100.0% 100.0% 100.0% 29.6% 29.1%
Cost of goods sold 17.2 17.1 17.5% 18.3 30.1 23.0
------ ------ ------ ------
Gross profit 82.8 82.9 82.5% 81.7 29.4 30.5
Operating expenses:
Selling, general and administrative 47.0 47.2 47.0 47.6 29.3 27.6
Research and development 6.5 6.9 6.5 6.8 21.6 25.7
------ ------ ------ ------
Total operating expenses 53.5 54.1 53.5 54.4 28.3 27.3
Income from operations 29.3 28.8 29.0 27.3 31.5 36.7
Other income 0.2 0.2 0.2 1.0 98.9 76.2
Interest expense (2.0) (1.4) (1.9) (1.4) 90.6 71.2
------ ------ ------ ------
Income from operations before provision
for and charge in lieu of income taxes 27.5 27.6 27.3 26.9 28.9 30.9
Provision for and charge in lieu of
income taxes 8.0 8.1 7.9 7.4 27.1 38.3
------ ------ ------ ------
Income before minority interest 19.5 19.5 19.4 19.5 29.7 28.1
Minority interest (1.0) (0.8) (1.0) (0.8) 60.4 55.2
------ ------ ------ ------
Net income 18.5% 18.7% 18.4% 18.7% 28.4% 26.9%
====== ====== ====== ======
RESULTS OF OPERATIONS*
The Company reported record revenues of $73.6 million and $143.4 million for the
quarter and six months ended June 30, 1997. Second quarter 1997 revenues
increased $16.8 million or 29.6%, compared with the second quarter of 1996. An
increase in volume contributed revenue growth of 28.0%. The Company's conversion
of certain portions of its international distribution network to direct sales,
which resulted in higher selling prices, contributed a 1.7% increase. Other net
pricing changes in existing distribution channels resulted in a 3.5% increase in
revenues. If exchange rates had been constant, revenues would have reflected an
additional 3.6% increase compared with the second quarter of 1996.
- ----------
* Except for the historical information contained in this Quarterly Report on
Form 10-Q, the matters discussed herein (including, in particular, those
discussed in Part II, Item 1, "Legal Proceedings") are forward-looking
statements that involve risks and uncertainties, including (without limitation)
the timely development and acceptance of new products, the impact of competitive
products, the timely receipt of regulatory clearances required for new products,
the regulation of the Company's products generally, the disposition of certain
litigation involving the Company and certain other risks and uncertainties
detailed from time to time in the Company's periodic reports (including the
Annual Report on Form 10-K for the year ended December 31, 1996) filed with the
Securities and Exchange Commission and "Factors That May Affect Future Operating
Results and Financial Condition" detailed in this Quarterly Report on Form 10-Q
for the quarter ended June 30, 1997.
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Revenues for the six months ended June 30, 1997, represented a $32.3 million or
29.1% increase over the same period in 1996. Higher volume generated 27.3%
revenue growth. The Company's conversion of certain portions of its
international distribution network to direct sales, which resulted in higher
selling prices, contributed a 2.1% increase. Other net pricing changes in
existing distribution channels resulted in a 3.1% increase in revenues. If
exchange rates had been constant, revenues would have reflected an additional
3.4% increase compared with the first six months of 1996.
U.S. revenues increased 30.9% to $48.9 million and 32.9% to $97.2 million during
the quarter and six months ended June 30, 1997, respectively, from the same
periods in 1996. The Company believes the improvement in U.S. revenues is
primarily the result of the increasing number of instrumented spinal fusions, as
well as the acceptance of new products and services such as the
STEALTHSTATION(TM) system, the MEDNEXT(R) surgical drill system, and service
fees related to cortical bone dowel and other allograft bone products.
Non-U.S. revenues advanced 27.1% to $24.7 million and 21.8% to $46.2 million
during second quarter and first six months of 1997, respectively, from the same
periods in 1996. If exchange rates had been constant, the revenue increases for
the second quarter and first six months of 1997 over the comparative periods in
1996 would have been 38.1% and 32.1%, respectively. Higher sales volume in core
products and the acceptance of new products were the primary sources of the
increases in revenues for the quarter and six months ended June 30, 1997,
compared with the same periods in 1996. In addition, the Company's revenues
continued to benefit from the direct sales operations which were established in
selected countries during 1996 and the first half of 1997.
The Company's second quarter 1997 gross margin of 82.8% remained relatively
constant with the second quarter 1996 gross margin of 82.9%. Gross margin during
the first six months of 1997 improved to 82.5% from 81.7% during the same period
in 1996. The slight improvement in gross margin during the first six months of
1997 was due to leveraging of manufacturing costs over greater unit volume and
higher selling prices related to changes in international distribution.
Selling, general, and administrative ("SG&A") expenses expressed as a percentage
of revenues decreased to 47.0% in the second quarter of 1997, compared with
47.2% during the same period in 1996. SG&A expenses for the first six months of
1997 were 47.0% of revenues, down from 47.6%, during the first six months of
1996. The decreases in SG&A expenses as a percentage of revenues resulted from
the leveraging of fixed costs over greater revenue volume, despite higher
expenses incurred in direct sales operations established in selected countries
during 1996 and the first half of 1997.
Research and development ("R&D") expenses totaled $4.8 million, or 6.5% of
revenues, for the second quarter of 1997, compared with $3.9 million, or 6.9% of
revenues, for the second quarter of 1996. For the first six months of 1997, R&D
expenses were $9.5 million or 6.5% of revenues compared to 6.8% of revenues for
the same period in 1996. In dollars, R&D spending increased 21.6% and 25.7% for
the quarter and six months ended June 30, 1997, respectively, over the same
periods in 1996. These development and clinical costs are incurred as the
Company continues to enhance existing product lines and develop new and
complementary products, such as the interbody fusion devices, biological
products for use in spinal applications, and products
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related to frameless stereotactic surgery in the spinal and neurological fields
of use. These expenditures demonstrate the Company's continued commitment to the
pursuit of applying new medical technologies to product opportunities.
Interest expense for the quarter and six months ended June 30, 1997, was $1.5
million and $2.7 million, respectively, compared with $795,000 and $1.6 million,
respectively, for the same periods in 1996. Interest expense was higher during
the quarter and six months ended June 30, 1997, compared with the same periods
in the prior year due to interest on increased borrowings against the Company's
credit facilities occurring principally as a result of acquisitions made in
1996.
The Company's effective income tax rate was 29.0% for the quarter and six months
ended June 30, 1997. The effective rates for the second quarter and first six
months of 1996 were 29.4% and 27.4%, respectively. The difference between the
Company's effective and statutory tax rates for both the quarter and six months
ended June 30, 1997 and 1996, resulted primarily from the impact of certain
elections made for U.S. tax purposes following the combination of Danek Group,
Inc. with Sofamor S.A. ("Sofamor"), and the subsequent reorganization of Sofamor
from a Societe Anonyme (S.A.) under French law to a Societe en Nom Collectif
(S.N.C.) in late 1993. Management cannot be certain that such a favorable
effective income tax rate will be achieved in future periods, since the
effective tax rate calculation is dependent upon the Company's pre-tax income
dollar amount among other factors. Higher future pre-tax income could lead to
higher future effective tax rates. At June 30, 1997, the balance sheet of the
Company reflected a net deferred tax asset of $36.8 million. No valuation
allowance was recorded since sufficient taxable income exists in available
carryback periods to recognize fully these net deferred tax assets.
In June 1997, the Financial Accounting Standards Board issued Statement No. 128
"Earnings Per Share" ("FAS 128"). FAS 128 establishes standards for computing
and presenting earnings per share ("EPS") and replaces the presentation of
primary EPS with a presentation of basic EPS. It also requires dual presentation
of basic and diluted EPS on the face of the statement of operations and requires
a reconciliation of the numerator and the denominator of the basic EPS
computation to the numerator and the denominator of the diluted EPS computation.
The Company will adopt the disclosure requirements of FAS 128 beginning December
31, 1997. The Company does not expect the adoption of FAS 128 to have a material
impact on earnings per share when presented on a comparable basis.
LIQUIDITY AND CAPITAL RESOURCES
Cash generated from operations and the Company's revolving lines of credit are
the principal sources of funding available for growth of the business, including
working capital and additions to property, plant and equipment, as well as debt
service requirements and required contractual payments. The Company believes
that these sources of funding will be sufficient to meet its expected cash needs
for the foreseeable future. Cash, cash equivalents and short-term investments
totaled $2.7 million at June 30, 1997, compared with $2.9 million at December
31, 1996.
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The Company's working capital increased by $19.6 million during the first six
months of 1997. The increase in working capital resulted primarily from
operations. Accounts receivable increased $6.3 million from December 31, 1996,
due principally to the increase in revenues. Inventories and loaner set
inventories increased by $21.4 million from year-end, due mostly to stocking
levels required for recently formed subsidiaries and the production of
inventories in preparation for new sales and marketing programs. Other
receivables, which consisted primarily of amounts recoverable from insurance
carriers related to the expenses incurred in connection with product liability
litigation, increased $6.3 million from the previous year-end.
In 1995, the Company entered into to a license agreement (the "Agreement") with
Genetics Institute which resulted in a special charge of $45.3 million. The
Company made payments in June 1997 and 1996 of $17.5 million and $12.5 million,
respectively, as required by the Agreement. The final scheduled payment of $7.5
million is payable on June 30, 1998. All payments include both principal and
imputed interest.
The purchase agreements for two of the acquisitions made by the Company in 1996
contain provisions which provide for contingent payments to the former
shareholders of each entity based upon certain calculations relative to revenues
and earnings, as defined, through 1999. Such payments will be reflected as
purchase price adjustments. During 1996, the Company recorded an adjustment to
the purchase price of one of these acquisitions of $4.2 million. This amount was
paid during April of 1997. The Company is unable to determine whether such
payments will be required for the years 1997 through 1999.
During 1996, the Company recorded a special product liability litigation charge
of $50.0 million. This charge was recorded in order to recognize the reasonably
anticipated costs associated with the defense and conclusion of certain product
liability cases in which the Company is named as defendant. At June 30, 1997,
the balance sheet of the Company reflected a long-term liability of $45.4
million and the current portion of this liability was included in accrued
expenses. (See Part II, Item 1.)
Additions to property, plant and equipment during the first six months of 1997
of $4.4 million were related to capital asset expenditures necessary to
support the Company's manufacturing and distribution operations. The Company is
in need of additional office and distribution space at its Memphis location.
Management has entered into an agreement whereby the Company will lease a new
facility adjacent to its existing headquarters. This lease will be accounted for
under Statement of Financial Accounting Standards No. 13, "Accounting for
Leases," as an operating lease.
The Company has committed lines of credit totaling $95.9 million. At June 30,
1997, $85.4 million was outstanding under these committed lines of credit and
other short-term borrowings. The committed lines of credit consist primarily of
a $80.0 million uncollateralized revolving line of credit with a U.S. bank which
matures in July 2000.
The Company invests available funds in short-term investment grade instruments,
certificates of deposit or direct or guaranteed obligations of the United States
of America. These short-term investments are available to fund the Company's
working capital requirements and acquisitions of capital assets.
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FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS AND FINANCIAL CONDITION
The Company's future operating results and financial condition are subject to
risks and uncertainties, including (without limitation) the following matters:
Regulatory Clearances. The Company manufactures devices that are subject to the
regulations of the FDA and, in some cases, to the regulations of foreign
governmental authorities. In particular, such devices are subject to marketing
clearance by the FDA before sales can be made in the United States. The process
of obtaining marketing clearances can be time consuming, and there can be no
assurance that all necessary clearances will be granted to the Company with
respect to new devices or that the FDA review will not involve delays adversely
affecting the marketing and sale of new products and devices by the Company. The
enforcement of FDA regulations depends heavily on administrative interpretation,
and there can be no assurance that future interpretations made by the FDA or
other regulatory bodies, with possible retroactive effect, will not adversely
affect the Company. The Company cannot predict the extent or impact of future
foreign, federal, state or local legislation or regulation.
Potential Impact of Health Care Cost Containment Proposals on Profitability. In
recent years, the cost of health care has risen significantly, and there have
been numerous proposals by legislators, regulators and third party health care
payers to curb these cost increases in the United States and Europe. Some of
these proposals have involved limitations on the amount of reimbursement for
specific surgical procedures. These proposals have been adopted in some cases.
The Company is unable to predict what changes will be made in the reimbursement
methods utilized by third-party health care payers. In addition, hospitals and
other health care providers have become increasingly cost sensitive. To date,
the Company does not believe that such health care cost containment proposals
have negatively affected the profitability or growth of its business; however,
the Company is not able to predict the future effect of these proposals on its
business.
Product Obsolescence. Spinal implant and other devices are subject to continuous
improvements and modifications and typically are rendered obsolete within a few
years. Success, therefore, requires any medical device company to devote
substantial resources to continued product development. The Company maintains
active research and development programs and has been successful in developing
or acquiring new products in the past. There can be no assurance that the
Company will be able to develop and introduce or acquire new products that will
enable it to remain competitive in the future.
Product Liability; Insurance. In recent years, physicians, hospitals, and other
participants in the health care industry have become subject to an increasing
number of lawsuits alleging malpractice, product liability or asserting related
legal theories, many of which involve large claims and significant defense
costs. The Company currently maintains liability insurance intended to cover
such claims, although there can be no assurance that the coverage limits of such
insurance policies will be adequate or that all amounts will ultimately be
collected from each insurer providing the applicable policy. Such insurance is
expensive, difficult to obtain and may not be available in the future on
acceptable terms or at all. The Company is currently involved in product
liability litigation. (See Note 5 to the Consolidated Financial Statements.)
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There can be no assurance that additional claims will not be asserted against
the Company in the future. A successful future claim or aggregation of future
claims brought against the Company in excess of insurance coverage could have a
material adverse effect upon the financial condition, results of operations
and/or cash flows of the Company. Claims against the Company, regardless of
their merit or eventual outcome, may also have a material adverse effect upon
the reputation and business of the Company.
Competition. Worldwide, there are a number of firms producing spinal implant
devices. The Company currently competes with a number of firms with financial,
marketing and technical resources comparable to or greater than those of the
Company. Because of the growth of the number of spinal fusion procedures
performed in recent years, a number of companies, including those active in
producing various orthopaedic and neurological products and having financial,
marketing and technical resources significantly greater than those of the
Company, have begun producing spinal implant devices. The Company anticipates
that additional companies may also begin such production.
Retention of Personnel. The Company is highly dependent upon its senior
management, and the competition for qualified management personnel is intense.
The loss of key personnel or an inability to attract, retain and motivate such
persons could adversely affect the business and prospects of the Company. There
can be no assurance that the Company will be able to retain its existing senior
management personnel or to attract additional qualified personnel if needed. The
Company also depends on its contractual relationships with certain physicians
for product ideas, research and advice. There can be no assurance that the
Company will be able to maintain and develop such relationships.
Global Market Risks. A significant portion of the Company's revenue is derived
from its international operations. As a result, the Company's operations and
financial results could be affected by international factors, such as changes in
foreign currency exchange rates or weak economic conditions in the foreign
markets in which the Company distributes its products.
Intellectual Property. The Company is dependent on its proprietary intellectual
property and attempts to protect such intellectual property through patents,
licensing, trade secrets and proprietary know-how. In the medical device
industry, challenges by third parties regarding intellectual property rights
occur frequently. Such challenges may result in litigation which is often
complex and expensive. There can be no assurance that the Company's proprietary
rights will not be challenged, rendered unenforceable or circumvented and that
pending or future patent or trademark applications will be granted.
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PART II -- OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Company is involved from time to time in litigation on various matters which
are routine to the conduct of its business, including product liability and
intellectual property cases.
PRODUCT LIABILITY LITIGATION
Beginning in 1994, the Company and other spinal implant manufacturers were named
as defendants in a number of product liability lawsuits brought in various
federal and state courts around the country. These lawsuits allege that
plaintiffs were injured by spinal implants manufactured by the Company and
others. Although the plaintiffs have advanced claims under many different legal
theories, the essence of their claims appear to be that the Company (including
Sofamor and its former U.S. distributor) marketed some of its spinal systems for
pedicle fixation in contravention of Food & Drug Administration ("FDA") rules
and regulations (governing marketing and labeling), that pedicle fixation has
not been proven safe and effective in the context of FDA labeling standards,
that some or all of the spinal systems are defectively designed and
manufactured, and that plaintiffs have suffered a variety of injuries as a
result of their physicians' use of such systems in pedicle fixation. The Company
has also been named as a defendant in a number of lawsuits instituted by
plaintiffs who have received spinal implants manufactured by other manufacturers
and in which the Company is alleged to have participated in a conspiracy among
doctors, manufacturers, hospitals, teaching institutions, professional societies
and others to promote, in violation of applicable law, the use of spinal
implants.
In a number of cases, plaintiffs have sought to proceed as representatives of
classes of spinal implant recipients. All efforts to obtain class certification
have been denied or withdrawn. Some plaintiffs have filed individual lawsuits,
whereas other lawsuits list multiple plaintiffs and, in certain instances,
multiple lawsuits have been filed on behalf of the same individual plaintiffs.
Plaintiffs typically seek relief in the form of monetary damages, often in
unspecified amounts. Many of the plaintiffs only allege as monetary damages an
amount in excess of the jurisdictional minimum for the court in which the case
has been filed. A few suits also name as defendants various officers and
directors of the Company.
To date, approximately two thousand eight hundred (2,800) plaintiffs have joined
in lawsuits against the Company. The majority of these plaintiffs filed their
claims in 1995. The Company is also named as a defendant in lawsuits involving
about two thousand six hundred (2,600) claimants where the Company is alleged to
have conspired with competitors and others illegally to promote the use of
spinal implant systems.
The Company believes that it has defenses, including, without limitation,
defenses based upon the failure of a cause of action to exist where no
malfunction of the implant has occurred or the plaintiff has suffered no injury
attributable to the Company's product, the expiration of the applicable statute
of limitations and the learned intermediary defense. The Company has asserted
and will continue to assert these defenses primarily through the filing of
dispositive
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motions. The Company believes that all product liability lawsuits currently
pending against it are without merit and will continue to defend them
vigorously.
FEDERAL MULTIDISTRICT LITIGATION (MDL 1014)
On August 4, 1994, the Federal Judicial Panel for Multidistrict Litigation
ordered all federal court lawsuits to be transferred to and consolidated for
pretrial proceedings, including the determination of class certification, in the
United States District for the Eastern District of Pennsylvania in Philadelphia
(the "Multidistrict Litigation"). Lawsuits filed in federal court after August
4, 1994, have also been transferred to and consolidated in the Multidistrict
Litigation in the Eastern District of Pennsylvania. In addition, a number of
lawsuits filed in state courts around the country were removed to federal courts
and then transferred into the Multidistrict Litigation. On February 22, 1995,
Chief Judge Emeritus, Louis C. Bechtle, denied class certification. A large
number of plaintiffs filed individual lawsuits as a result of the denial of
class certification. In some instances lawsuits that had been removed and
transferred into the Multidistrict Litigation have been remanded to the state
courts in which they were filed because there was no federal court jurisdiction.
Currently, the Company is a defendant in approximately one thousand (1,000)
individual claims and one thousand (1,000) conspiracy claims consolidated in the
Multidistrict Litigation. On August 22, 1996, Judge Bechtle dismissed without
prejudice plaintiffs' conspiracy claims. Most plaintiffs asserting conspiracy
claims in the Multidistrict Litigation have filed amended or new complaints. It
is not possible to determine at this time precisely how many of these conspiracy
complaints will be reasserted or the number of additional plaintiffs that may
file new lawsuits. On April 16, 1997, Judge Bechtle dismissed conspiracy claims
alleging fraud on the FDA, but deferred the remaining conspiracy claims for
later consideration by the federal trial courts to whom the cases will be
remanded for trial.
Discovery has been completed in a number of the federal court cases and is
continuing in the remainder. It is anticipated that the first cases to be
returned for trial to the federal court in which they were filed will be
remanded beginning in August 1997. It is not now possible to determine when the
first federal court cases will be tried.
STATE COURT LITIGATION
A number of cases filed in state courts were not eligible for removal and
transfer into the Multidistrict Litigation. Currently, there are approximately
one thousand eight hundred (1,800) individual claims pending against the Company
in several courts around the country, principally in Tennessee, Oklahoma, Texas
and Pennsylvania. In addition, there are approximately one thousand six hundred
(1,600) conspiracy claims pending in state courts.
Approximately one thousand five hundred fifty (1,550) plaintiffs who had joined
together in several complaints which had been removed to the Multidistrict
Litigation proceedings, have had their cases remanded to the state court in
Memphis, Tennessee, where they were originally filed when it was determined that
the federal court lacked jurisdiction over their claims. The presiding state
court judge in Memphis has established a case management plan which calls for
the preparation of eight representative cases for pretrial preparation and
trial.
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Discovery is proceeding in all remaining state court cases. Some state cases
have been given trial dates in 1997. It is anticipated that a number of other
state court cases around the country may be scheduled for trial in 1997,
although delays in trial dates are common. Trials in the Memphis proceedings are
scheduled to commence in January of 1998.
ACROMED CORPORATION PROPOSED SETTLEMENT
In December 1996, AcroMed Corporation ("AcroMed"), a spinal implant manufacturer
and a defendant in many of the cases pending in the Multidistrict Litigation,
and the Plaintiff's Legal Committee in the Multidistrict Litigation announced
that they had entered into a conditional settlement regarding all product
liability claims involving the use of AcroMed devices to achieve pedicular
fixation with screws in spinal fusion surgery. Under the terms of the proposed
settlement, AcroMed will establish a settlement fund consisting of $100 million
in cash plus the proceeds of its product liability insurance policies. In
January 1997, the parties submitted a formal class settlement agreement and
related documentation for approval by Judge Bechtle. Judge Bechtle is currently
considering whether to certify the proposed settlement class and the fairness,
adequacy and reasonableness of the proposed settlement. All federal court
proceedings involving AcroMed devices have been stayed pending final
consideration of the proposed settlement.
INSURANCE
All of the insurance carriers for policy periods in which these claims have been
made have asserted reservation of rights, but have not denied coverage to the
Company. To date, the cost of defending these claims has been reimbursed by
certain of the primary and excess carriers, and the Company is actively engaged
in discussions concerning the recovery of amounts currently due and owing from
all other carriers. The Company believes that these receivables are recoverable
under the terms of the Company's policies. The Company's insurance policies are
reduced by the costs of defense, except for a policy issued by Royal Surplus
Lines Insurance Co. ("Royal") covering the 12-month period that began in
November 1995. The Company estimates that the litigation may continue for
several years and, if so, the cost to defend and conclude these lawsuits is
likely to exhaust its insurance coverage. Royal brought an action in December
1996 in the Federal District Court for the Middle District of Tennessee
(Nashville Division) seeking a declaratory judgment as to, among other things,
whether the policy covers lawsuits which have been reported to the insurer
during the policy period. The Company has filed its answer and counterclaim in
the Royal lawsuit. In addition, the Company has initiated its own declaratory
judgment lawsuit against Royal in the Federal District Court located in Memphis,
Tennessee. This lawsuit seeks a declaration of coverage and immediate payment of
the outstanding balance of amounts due from Royal. Based on the Company's
motion, Royal's lawsuit has been transferred to the Federal District Court in
Memphis Tennessee. This litigation is in the preliminary stages. The Company
believes that Royal's claims are without merit and will defend them vigorously.
As is common in the insurance industry, the Company's insurance policies
covering product liability claims must be renewed annually. Although the Company
has been able to obtain insurance coverage relating to product liability claims
at a cost and on other terms and conditions
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that are acceptable to the Company, there can be no assurance that in the future
it will be able to do so.
The Company's 1996 financial results reflect a pre-tax charge relating to costs
associated with the product liability litigation described above. The costs
provided for include, but are not limited to, legal fees paid or anticipated to
be paid and other costs related to the Company's defense and conclusion of these
matters.
The actual costs to the Company could differ from the estimated charge and will
be dependent upon a number of factors that will not be known for some time,
including, among other things, the resolution of defense motions and the extent
of further discovery. Although an adverse resolution of the lawsuits could have
a material effect on the Company's results of operations in future periods, the
Company does not believe that these matters will in the future have a material
adverse effect on its consolidated financial position. The Company is unable to
predict the ultimate outcome or the financial impact of the product liability
litigation.
SECURITIES LAWS ACTIONS
Beginning in April 1994, the Company and four of its officers and directors were
named in five shareholder lawsuits filed in the United States District Court in
Memphis, Tennessee. Four of the lawsuits purport to be class actions. All of the
lawsuits were consolidated into one case in the United States District Court in
Memphis through an amended complaint which added four new individual defendants
who are either current or former directors of the Company. The lawsuit alleges
that the defendants made false and misleading statements and failed to disclose
material facts to the investing public and seeks money damages. The alleged
securities law violations are based on the claim that the defendants failed to
disclose that the Company sold its products illicitly, illegitimately and
improperly and to timely disclose facts concerning the termination of the former
United States distributor of Sofamor products, National Medical Specialties,
Inc. ("NMS"). The allegations relating to illicit and illegitimate sales of
product are, for the most part, copied from product liability complaints filed
against the Company and other manufacturers currently being coordinated in the
United States District Court for the Eastern District of Pennsylvania which are
referred to above. The allegations of improper sales relate to one of the
Company's selling programs which has been publicly disclosed since May 1991. The
allegations concerning NMS relate to the termination of the NMS distribution
agreement covering Sofamor products in the United States. On October 3, 1995,
the United States District Court Judge in Memphis dismissed with prejudice the
entire case against the Company and each of the individual defendants. The
plaintiffs have appealed the dismissal to the United States Court of Appeals for
the Sixth Circuit, which has not yet ruled on this appeal.
SPANISH DISTRIBUTOR ACTION
In late September 1994, a Magistrate of the Commercial Court in Paris ruled in
favor of a former Spanish distributor of Sofamor's products on a claim of
wrongful termination of the distribution agreement in 1992. Prior to June 1993,
an accrual was established, with a related charge to earnings, for this pending
litigation. In June 1993, the Company also established a separate indemnity with
respect to potential losses resulting from such lawsuit and placed in escrow
shares issued to the former Sofamor shareholders pending the final outcome of
this lawsuit. The
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$3.0 million award (including interest) rendered by the French Magistrate
exceeded the pre-established accrual. As a result, the Company recorded an
expense of $2.2 million for the non-recurring litigation award during the third
and fourth quarters of 1994. The Company filed an appeal which involves a
complete retrial on all issues. The former Spanish distributor has filed its
papers in the appeal and seeks additional damages; the Company seeks to have the
decision of the Commercial Court reversed. A hearing on the appeal is currently
scheduled for the fourth quarter of 1997.
The Company does not believe the Securities Laws Actions or the Spanish
Distributor Action, described above, will have a material adverse effect on its
consolidated financial position, results of operations or cash flows because of,
among other reasons, the facts and circumstances existing with respect to each
action, the Company's belief that these actions are without merit, certain
defenses available to the Company and the availability of insurance in the
Securities Laws Actions.
See Part I, Item 2, "Management's Discussion and Analysis of Results of
Operations and Financial Condition--Factors That May Affect Future Operating
Results and Financial Condition--Product Liability; Insurance and Intellectual
Property."
Item 4. Submission of Matters to a Vote of Security Holders
a) The Company's annual shareholders' meeting was held on
April 29, 1997, to elect the directors of the Company for
the ensuing year and to approve the Sofamor Danek Group, Inc.
Long-Term Incentive Plan, as amended.
b) The following directors were elected at the Annual Meeting of
Shareholders:
For Withheld
---------- --------
E. R. Pickard 21,439,751 247,896
James J. Gallogly 21,439,484 248,163
L. D. Beard 21,435,477 252,170
George W. Bryan, Sr. 21,481,884 205,763
Robert A. Compton 21,481,884 205,763
Yves Paul Cotrel, M.D. 21,438,404 249,243
Samuel F. Hulbert, Ph.D. 21,480,784 206,863
Marie-Helene Plais, M.D. 21,424,732 262,915
George F. Rapp, M.D. 21,466,832 220,815
c) The resolution passed was as follows:
Act upon a proposal to approve the Sofamor Danek Group, Inc.
Long-Term Incentive Plan, as amended.
For 11,446,083 Against 7,256,755 Abstain 53,509
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Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibit No. Description
----------- -----------
10.1 Fifth Amendment to Loan Agreement
between SunTrust Bank, Nashville, N.A.
and Sofamor Danek Group, Inc. dated
June 27, 1997.
10.2 Credit Agreement by and among Sofamor Danek
Group, Inc., The Lenders
Listed Herein, and SunTrust, Nashville,
N.A., As Agent dated July 22, 1997.
27 Financial Data Schedule
(For SEC use only)
b) Reports on Form 8-K
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SOFAMOR DANEK GROUP, INC.
(Registrant)
DATE: August 13, 1997 BY: /s/ E.R. Pickard
--------------------- ---------------------------------
E.R. Pickard
Chairman, Chief Executive Officer
and Director
(Principal Executive Officer)
DATE: August 13, 1997 BY: /s/ George G. Griffin, III
--------------------- -------------------------------
George G. Griffin, III
Executive Vice President
and Chief Financial Officer
(Principal Financial Officer)
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