<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report: June 3, 1998
DEPUY, INC.
(Exact name of registrant as specified in its charter)
Delaware 001-12229 35-1989795
(State or Other (Commission (IRS Employer
Jurisdiction of File Number) Identification No.)
Incorporation)
700 Orthopaedic Drive
Warsaw, Indiana 46580
(Address of principal executive offices) (Zip Code)
(219) 267-8143
(Registrant's telephone number, including area code)
<PAGE>
The undersigned registrant hereby amends the following items of its
current Report on Form 8-K dated June 3, 1998 as set forth below:
Item 2. Acquisition or Disposition of Assets.
Item 2 is hereby amended to read in its entirety as follows:
On June 3, 1998, the Company completed its acquisition of all the
issued and outstanding shares of capital stock of AcroMed Corporation
("AcroMed") (AcroMed, which is based in Cleveland, Ohio, designs and sells
spinal implants and related products). The acquisition was affected through the
merger of a newly-formed, wholly-owned subsidiary of the Company with and into
AcroMed, as a result of which the Company became the sole shareholder of
AcroMed.
All the outstanding shares of and options to acquire shares of AcroMed
which were outstanding at the effective time of the merger were converted into
the right to receive a cash payment in accordance with a formula set forth in
the agreement and plan of merger. The aggregate consideration paid to the
holders of shares of AcroMed or options to purchase shares of AcroMed was
approximately $325 million. The purchase price was determined through a
competitive bidding process, followed by additional negotiations between the
Company and representatives of the holders of shares of AcroMed. Of such
consideration, $200 million was financed through the Company's $300 million
syndicated revolving credit facility for which The First National Bank of
Chicago is the agent; the remaining $125 million of the purchase price was paid
from the Company's internal cash resources.
The financial statements and pro forma financial statements required by
Item 7 of Form 8-K are attached hereto.
Item 7. Financial Statements and Exhibits.
Item 7 is hereby amended to read in its entirety as follows:
(a) Financial statements of business acquired.
Audited financial statements and accompanying notes for Acromed
Corporation for the year ended June 30, 1997 and for the eleven month
period ended May 31, 1998 are attached hereto as attachment A.
<PAGE>
(b) Pro forma financial information.
The following Unaudited Pro Forma Combined Balance Sheet as of March
31, 1998 and the Unaudited Pro Forma Combined Statements of Income for
the year ended December 31, 1997 and the three months ended March 31,
1998 and 1997 (the "Pro Forma Financial Statements"), were prepared
based upon historical financial statements of DePuy, Inc. (the
"Company"), adjusted to give effect to the purchase of AcroMed
Corporation ("AcroMed") effective June 3, 1998, accounted for under
the purchase method of accounting. A description of the transaction,
the assumptions applied and explanations for the related pro forma
adjustments are described in the accompanying notes to the Pro Forma
Financial Statements. The Pro Forma Financial Statements should be
read in conjunction with the historical financial statements of
AcroMed included in Item 7 (a) of this Form 8-K/A and the historical
financial statements of the Company.
The Unaudited Pro Forma Combined Balance Sheet assumes that the
acquisition occurred on March 31, 1998, and the Unaudited Pro Forma
Combined Statements of Income assume that the acquisition occurred on
January 1, 1997. The fiscal year if the Company ends on December 31,
and the fiscal year of AcroMed ends on June 30. For purposes of
presenting the Pro Forma Financial Statements, the historical income
statements for AcroMed were compiled on a calendar year basis ending
December 31, 1997, and three months ending March 31, 1998 and 1997,
consistent with the Company's fiscal year-end.
The Pro Forma Financial Statements exclude any benefits that may be
derived from synergies or the elimination of duplicate efforts as a
result of the acquisition. In addition, the Pro Forma Financial
Statements may not be indicative of the results that actually would
have occurred if the acquisition had been in effect on the dates
indicated or which may be obtained in the future.
<PAGE>
<TABLE>
<CAPTION>
DePuy, Inc.
Unaudited Pro Forma Combined Statements of Income
---------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data) Year Ended December 31, 1997
---------------------------------------------------------------------------------------------------------------------
DePuy, AcroMed Pro Forma Pro Forma
Inc. Corporation Adjustments Combined
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 770,188 $ 95,098 $ - $ 865,286
Cost of sales 229,028 20,457 - 249,485
---------------------------------------------------------------------------------------------------------------------
Gross profit 541,160 74,641 - 615,801
---------------------------------------------------------------------------------------------------------------------
Selling, general and administrative expenses 296,572 39,325 - 335,897
Products liability expenses - 108,397 (M) - 108,397
Research and development expenses 28,419 4,825 - 33,244
Amortization of goodwill and intangibles 14,680 - 13,000 (A) 27,680
Special items, net 8,459 - - 8,459
---------------------------------------------------------------------------------------------------------------------
Operating income (loss) 193,030 (77,906) (13,000) 102,124
---------------------------------------------------------------------------------------------------------------------
Interest expense 7,091 848 13,180 (B) 21,119
Other income (expense), net 8,716 1,451 (6,875)(B) 3,292
---------------------------------------------------------------------------------------------------------------------
Income (loss) before taxes, minority interest
expense and equity in earnings of
unconsolidated affiliate 194,655 (77,303) (33,055) 84,297
---------------------------------------------------------------------------------------------------------------------
Provision for income taxes 70,937 (28,935) (12,022)(C) 29,980
Minority interest expense 2,125 - - 2,125
Equity in earnings of unconsolidated affiliate 1,193 - - 1,193
---------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 122,786 $ (48,368) $ (21,033) $ 53,385
=====================================================================================================================
Basic and diluted earnings per share $ 1.25 $ 0.54
Weighted-average number of common shares outstanding 98,603 98,603
=====================================================================================================================
</TABLE>
See the accompanying notes to these Unaudited Pro Forma Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
DePuy, Inc.
Unaudited Pro Forma Combined Statements of Income
- ----------------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data) Three Months Ended March 31, 1998
- ----------------------------------------------------------------------------------------------------------------------------------
DePuy, AcroMed Pro Forma Pro Forma
Inc. Corporation Adjustments Combined
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 207,331 $ 24,138 $ - $ 231,469
Cost of sales 60,568 3,715 - 64,283
- ----------------------------------------------------------------------------------------------------------------------------------
Gross profit 146,763 20,423 - 167,186
- ----------------------------------------------------------------------------------------------------------------------------------
Selling, general and administrative expenses 77,619 13,354 - 90,973
Research and development expenses 7,209 1,334 - 8,543
Amortization of goodwill and intangibles 3,642 - 3,250 (A) 6,892
Special items, net 23,996 - - 23,996
- --------------------------------------------------------------------------------------------------------------------------------- -
Operating income (loss) 34,297 5,735 (3,250) 36,782
- ----------------------------------------------------------------------------------------------------------------------------------
Interest expense 1,787 55 3,295 (B) 5,137
Other income (expense), net 2,791 (25) (1,719)(B) 1,047
- ----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before taxes, minority interest expense
and equity in earnings of unconsolidated affiliate 35,301 5,655 (8,264) 32,692
- ----------------------------------------------------------------------------------------------------------------------------------
Provision for income taxes 16,122 2,126 (3,006)(C) 15,242
Minority interest expense 663 - - 663
Equity in earnings of unconsolidated affiliate 332 - - 332
- ----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 18,848 $ 3,529 $ (5,258) $ 17,119
==================================================================================================================================
Basic and diluted earnings per share $ 0.19 $ 0.17
Weighted-average number of common shares outstanding 98,711 98,711
================================================================================================================================= =
</TABLE>
<TABLE>
<CAPTION>
(in thousands, except per share data) Three Months Ended March 31, 1997
- ----------------------------------------------------------------------------------------------------------------------------------
DePuy, AcroMed Pro Forma Pro Forma
Inc. Corporation Adjustments Combined
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 187,842 $ 21,780 $ - $ 209,622
Cost of sales 56,001 4,444 - 60,445
- ----------------------------------------------------------------------------------------------------------------------------------
Gross profit 131,841 17,336 - 149,177
- ----------------------------------------------------------------------------------------------------------------------------------
Selling, general and administrative expenses 69,531 11,232 - 80,763
Products liability expense - 108,397 (M) - 108,397
Research and development expenses 5,832 858 - 6,690
Amortization of goodwill and intangibles 3,179 - 3,250 (A) 6,429
Special items, net 908 - - 908
- ----------------------------------------------------------------------------------------------------------------------------------
Operating income (loss) 52,391 (103,151) (3,250) (54,010)
- ----------------------------------------------------------------------------------------------------------------------------------
Interest expense 1,192 379 3,295 (B) 4,866
Other income (expense), net 2,322 (188) (1,719)(B) 415
- ----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before taxes, minority interest expense and
equity in earnings of unconsolidated affiliate 53,521 (103,718) (8,264) (58,461)
- ----------------------------------------------------------------------------------------------------------------------------------
Provision for income taxes 22,311 (38,462) (3,006)(C) (19,157)
Minority interest expense 373 - - 373
Equity in earnings of unconsolidated affiliate 428 - - 428
- ----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 31,265 $ (65,256) $ (5,258) $ (39,249)
==================================================================================================================================
Basic and diluted earnings (loss) per share $ 0.32 $ (0.40)
Weighted-average number of common shares outstanding 98,580 98,580
==================================================================================================================================
</TABLE>
See the accompanying notes to these Unaudited Pro Forma Financial Statements.
<PAGE>
DePuy, Inc.
Unaudited Pro Forma Combined Balance Sheet
March 31, 1998
(in thousands, except share data)
<TABLE>
<CAPTION>
DePuy, AcroMed Pro Forma Pro Forma
Inc. Corporation Adjustments Combined
----------------- ------------------ ---------------- ---------------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 198,934 $ 12,112 $ (122,620)(D) $ 88,426
Short-term investments 10,343 3,995 - 14,338
Accounts receivable 151,973 18,473 - 170,446
Inventories at lower of cost or market 177,826 18,619 10,600 (E) 207,045
Deferred income taxes 54,897 11,157 (2,793)(F) 63,261
Income taxes receivable - - 28,621 (F) 28,621
Prepaid expenses and other current assets 30,051 10,218 600 (L) 40,869
--------------- --------------- -------------- -------------
Total current assets 624,024 74,574 (85,592) 613,006
--------------- --------------- -------------- -------------
NONCURRENT ASSETS
Goodwill 337,012 4,203 89,370 (H) 431,148
Other intangible assets 3,511 1,698 147,302 (H) 152,511
Deferred income taxes 15,359 28,323 - 43,682
Investment in affiliate 2,088 - - 2,088
Other assets 9,680 9,658 (826)(G) 17,949
--------------- --------------- -------------- -------------
367,650 43,882 235,846 647,378
Property, plant and equipment, net 104,876 5,639 1,000 (I) 111,515
--------------- --------------- -------------- -------------
Total assets $ 1,096,550 $ 124,095 $ 151,254 $ 1,371,899
=============== =============== ============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term debt $ 18,205 $ 1,928 $ - $ 20,133
Accounts payable 33,506 1,958 - 35,464
Amounts payable to affiliates, net 1,130 - - 1,130
Income taxes payable 40,232 121 5,500 (F) 45,853
Accrued product liability - 99,712 - 99,712
Accrued royalties 25,498 - - 25,498
Accrued employee compensation 20,345 2,168 - 22,513
Other accrued expenses 53,536 2,527 7,670 (J) 63,733
--------------- --------------- -------------- -------------
Total current liabilities 192,452 108,414 13,170 314,036
--------------- --------------- -------------- -------------
NONCURRENT LIABILITIES
Long-term debt 63,751 - 215,000 (D) 278,751
Noncurrent product liability - 9,128 - 9,128
Long-term employee benefits 20,289 - - 20,289
Noncurrent deferred income taxes 8,154 - 59,600 (H) 67,754
Other noncurrent liabilities 13,349 37 - 13,386
--------------- --------------- -------------- ---------------
Total noncurrent liabilities 105,543 9,165 274,600 389,308
--------------- --------------- -------------- ---------------
MINORITY INTEREST 4,244 - - 4,244
--------------- --------------- -------------- ---------------
SHAREHOLDERS' EQUITY
Common stock 988 2,923 (2,923)(K) 988
Additional paid-in capital 694,669 4,878 (4,878)(K)(G) 694,669
Retained earnings 146,906 (523) (129,477)(K) 16,906
Accumulated other comprehensive income (48,252) (762) 762 (K) (48,252)
--------------- -------------- -------------- --------------
Total shareholders' equity 794,311 6,516 (136,516) 664,311
--------------- -------------- -------------- --------------
Total liabilities and $ 1,096,550 $ 124,095 $ 151,254 $1,371,899
shareholders' equity =============== ============== ============== ==============
</TABLE>
See the accompanying notes to these Unaudited Pro Forma Financial Statements.
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET AND STATEMENTS OF INCOME
On June 3, 1998, DePuy, Inc. (the "Company") completed its acquisition of all of
the issued and outstanding shares of capital stock of AcroMed Corporation
("AcroMed"). AcroMed designs and sells spinal implants and related products and
is based in Cleveland, Ohio. The aggregate purchase price of the acquisition,
including expenses, was approximately $340 million. The Company paid $125
million from its internal cash resources and funded the remaining $215 million
of the purchase price (including acquisition expenses yet to be paid) through a
$300 million syndicated revolving credit facility.
The Unaudited Pro Forma Combined Balance Sheet assumes that the acquisition
occurred on March 31, 1998, and the Unaudited Pro Forma Combined Statements of
Income assume that the acquisition occurred on January 1, 1997. The acquisition
has been accounted for under the purchase method of accounting. The excess of
the purchase price over the fair value of the net assets acquired totaled
approximately $313 million with $130 million being expensed as acquired in-
process research and development costs and the remaining $183 million being
allocated as follows:
Intangible assets - to be amortized over 15 years $ 149.0 million
Goodwill - to be amortized over 30 years 93.1 million
Deferred tax liability related to intangible assets (59.6) million
-------
Total purchase allocation $ 182.5 million
=======
The following is a summary of pro forma adjustments reflected in the Unaudited
Pro Forma Combined Balance Sheet and Statements of Income. These adjustments
exclude all non-recurring items which are not expected to have a continuing
impact on the Company.
(A) The adjustment represents the amortization of goodwill and intangibles using
the amortization periods indicated above.
(B) These amounts represent the increase in interest expense resulting from the
$215 million additional debt obtained to finance a portion of the
acquisition assuming a 6.13% interest rate and the reduction in interest
income due to cash used to fund part of the acquisition assuming an average
5.5% earnings rate.
(C) This adjustment represents the tax effect of the pro forma adjustments made
in the Unaudited Pro Forma Combined Statements of Income, including the
nondeductability of the goodwill amortization, and the reversing effect of
the deferred tax liability related to the intangible assets recorded as a
result of the acquisition.
(D) Cash of $123 million was disbursed, net of shareholder receivables recovered
as part of the transaction as described in Note (G), and additional
financing of $215 million was obtained to fund the acquisition price.
(E) The Company has recorded a fair value adjustment to inventory of $12 million
and has increased inventory reserves by $1.4 million to conform to the
Company's methodologies, resulting in a net increase in inventory of $10.6
million. The effects of these adjustments on cost of sales have not been
reflected in the Pro Forma Combined Statements of Income since they are
non-recurring items.
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET AND STATEMENTS OF INCOME
(CONTINUED)
(F) These adjustments include the current and deferred tax effects of these pro
forma adjustments and various other tax adjustments resulting from the
acquisition transaction.
(G) This adjustment eliminates long-term receivables, a portion of which is
included as a component of equity, and interest due from shareholders that
will be satisfied as a result of the acquisition.
(H) These amounts represent the adjustments required to record the goodwill,
intangible assets and related tax effects resulting from the acquisition.
Further description of the purchase price allocation was described above.
Goodwill reported in the Pro Forma Financial Statements differs from the
actual amount of goodwill recorded by the Company due to the difference in
net assets at March 31, 1998, as compared to the actual net assets as of the
acquisition date.
(I) The Company has recorded a fair value adjustment of $1 million to property,
plant and equipment.
(J) This amount represents accruals arising from the transaction, including
severance payments to be made to AcroMed management, restructuring costs
related to the acquisition and other miscellaneous items.
(K) This adjustment represents the elimination of AcroMed's historical equity
and the write off of the acquired in-process research and development of
$130 million.
(L) Prepaid expenses and other current assets were adjusted by $.6 million to
conform to the Company's amortization policies.
(M) AcroMed recognized products liability expenses of $108.4 million in January
1997, primarily related to a settlement agreement covering litigation
associated with orthopaedic bone screws. For further explanation of this
settlement, see the Notes to AcroMed's consolidated financial statements for
the year ended June 30, 1997 included in this Report.
<PAGE>
(c) Exhibits.
2.1 Agreement and Plan of Merger dated as of March 18, 1998 among
AcroMed Corporation, DePuy, Inc. and DP Merger Sub, Inc.
(incorporated by reference to Exhibit 2.1 to the Company's
Quarterly Report on Form 10-Q for the period ended March 31, 1998)
* **
* Does not include certain exhibits to the Agreement and Plan of Merger. A
list briefly identifying all omitted exhibits has been provided in Exhibit
2.1 to the Company's Quarterly Report on Form 10-Q for the period ended
March 31, 1998. The Company will furnish supplementally to the Securities
and Exchange Commission upon request a copy of any omitted exhibit.
** Confidential material omitted and filed separately with the Securities and
Exchange Commission pursuant to the Company's Application for Confidential
Treatment under Rule 24b-2 of the Securities Exchange Act of 1934.
<PAGE>
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 hereunto duly authorized.
DEPUY, INC.
Date: August 13, 1998
By: /s/ Steven L. Artusi
------------------------
Name: Steven L. Artusi
Title: Senior Vice President,
General Counsel and
Secretary
<PAGE>
Attachment A
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of
Directors of AcroMed Corporation
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, shareholders' equity (deficiency) and of
cash flows present fairly, in all material respects, the financial position of
AcroMed Corporation and its subsidiaries at May 31, 1998, and the results of
their operations and their cash flows for the eleven month period then ended in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Indianapolis, Indiana
August 7, 1998
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholder of
AcroMed Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheet of AcroMed
Corporation and subsidiaries (the "Company") as of June 30, 1997, and the
related consolidated statements of operations, shareholders' equity (deficiency)
and cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the accompanying consolidated financial statements present
fairly, in all material respects, the financial position of the Company as of
June 30, 1997 and the results of its operations and its cash flows for the year
then ended in conformity with generally accepted accounting principles.
As discussed in Note 12 to the consolidated financial statements, AcroMed
Corporation is a defendant in numerous products liability lawsuits and has
entered into a proposed settlement agreement designed to dismiss AcroMed from
this litigation upon final court approval.
Deloitte & Touche LLP
Cleveland, Ohio
August 28, 1997
<PAGE>
ACROMED CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MAY 31, 1998 AND JUNE 30, 1997
($ IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MAY 31, JUNE 30,
ASSETS 1998 1997
<S> <C> <C>
Current assets
Cash and cash equivalents $ 1,276 $ 12,018
Accounts receivable (Notes 2 and 7) 19,656 17,959
Inventories (Notes 4 and 7) 18,451 19,340
Prepaid expenses 14 673
Income taxes refundable (Notes 2 and 8) 7,527 2,788
Deferred income taxes, current (Notes 2 and 8) 29,972 11,341
Initial payment for proposed products liability settlement
(Notes 3 and 12) - 10,000
Other current assets 2,489 -
-------- --------
Total current assets 79,385 74,119
Property and equipment, net (Notes 5 and 7) 5,514 5,630
Intangibles - net (Notes 6 and 7) 5,871 6,006
Deferred income taxes, non-current (Notes 2 and 8) 3,390 28,815
Other assets:
Cash surrender value of life insurance (Note 7) 1,318 2,344
Other non-current assets 6,189 6,348
-------- --------
Total assets $101,667 $123,262
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
ACROMED CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MAY 31, 1998 AND JUNE 30, 1997
($ IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MAY 31, JUNE 30,
1998 1997
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Notes payable (Note 7) $ 5,000 $ 10,000
Products liability accrual, current (Notes 3 and 12) 71,028 34,000
Accounts payable 5,600 4,989
Accrued liabilities:
Compensation 2,069 2,062
Taxes 1,770 1,169
Other 4,036 895
-------- --------
Total current liabilities 89,503 53,115
Products liability accrual, non-current
(Notes 3 and 12) 7,212 76,500
Other non-current liabilities 13 150
Commitments and contingent liabilities
(Notes 11 and 12)
Shareholders' Equity (Deficiency) (Note 9)
Common stock, no par value; at stated value of
$100 per share - 29,225 and 29,150 shares issued
and outstanding, respectively 2,923 2,915
Additional paid-in capital 5,091 4,601
Accumulated deficit (2,157) (13,459)
Accumulated translation adjustment (918) (560)
-------- --------
Total shareholders' equity (deficiency) 4,939 (6,503)
-------- --------
Total liabilities and shareholders' equity (deficiency) $101,667 $123,262
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
ACROMED CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
ELEVEN MONTH PERIOD ENDED MAY 31, 1998 AND YEAR ENDED JUNE 30, 1997
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ELEVEN MONTH
PERIOD ENDED YEAR ENDED
MAY 31, 1998 JUNE 30, 1997
<S> <C> <C>
Net sales $ 90,554 $ 91,217
-------- --------
Cost of sales 18,059 20,182
-------- --------
Gross profit 72,495 71,035
Selling, general and administrative expenses 44,606 40,144
Products liability expenses (Note 3) 4,546 108,397
Research and development expenses 3,745 4,424
-------- --------
Operating income (loss) 19,598 (81,930)
Interest expense 410 653
Other (income) - net (182) (633)
-------- --------
Income (loss) before income taxes 19,370 (81,950)
Income tax provision (benefit) 8,068 (30,827)
-------- --------
Net income (loss) $ 11,302 $(51,123)
======== ========
Net income (loss) per share:
Basic $ 387 $ (1,760)
======== ========
Diluted $ 335 $ (1,760)
======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
ACROMED CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY)
ELEVEN MONTH PERIOD ENDED MAY 31, 1998 AND YEAR ENDED JUNE 30, 1997
($ IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
--------------------
NUMBER OF ADDITIONAL ACCUMULATED ACCUMULATED SHAREHOLDERS'
SHARES PAID-IN EARNINGS TRANSLATION EQUITY
ISSUED AMOUNT CAPITAL (DEFICIT) ADJUSTMENT (DEFICIENCY)
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT JULY 1, 1996 29,025 $2,903 $4,122 $ 37,664 $ 291 $ 44,980
Net loss (51,123) (51,123)
Stock options exercised 125 12 191 203
Compensatory stock options 288 288
Translation adjustment (851) (851)
-------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 1997 29,150 2,915 4,601 (13,459) (560) (6,503)
-------------------------------------------------------------------------------------
Net income 11,302 11,302
Stock options exercised 75 8 62 70
Compensatory stock options 428 428
Translation adjustment (358) (358)
-------------------------------------------------------------------------------------
BALANCE AT MAY 31, 1998 29,225 $2,923 $5,091 $ (2,157) $(918) $ 4,939
=====================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
ACROMED CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
ELEVEN MONTH PERIOD ENDED MAY 31, 1998 AND YEAR ENDED JUNE 30, 1997
($ IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ELEVEN MONTH
PERIOD ENDED YEAR ENDED
MAY 31, 1998 JUNE 30, 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 11,302 $(51,123)
Adjustments to reconcile net income (loss) to net
cash used for operating activities:
Depreciation and amortization 1,743 1,897
Deferred income taxes 7,127 (36,030)
Other gains - (82)
Stock option compensation 428 288
Changes in operating assets and liabilities:
Accounts receivable (1,715) (1,160)
Inventories 869 (2,508)
Prepaid expenses 659 172
Other assets (6,043) (360)
Accounts payable 611 77
Products liability, net (22,260) 92,480
Other liabilities 3,279 (3,971)
-------- --------
Net cash used for operating activities (4,000) (320)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property (1,495) (2,351)
Proceeds from sales of property 3 70
-------- --------
Net cash used for investing activities (1,492) (2,281)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
(Repayments) borrowings under line of credit agreement (5,000) 10,000
Stock options exercised 70 116
-------- --------
Net cash (used) provided by financing activities (4,930) 10,116
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH
EQUIVALENTS (320) (63)
-------- --------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (10,742) 7,452
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 12,018 4,566
-------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,276 $ 12,018
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
ACROMED CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE ELEVEN MONTH PERIOD ENDED MAY 31, 1998 AND
YEAR ENDED JUNE 30, 1997
($ IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
- --------------------------------------------------------------------------------
1. ORGANIZATION AND OPERATIONS
AcroMed Corporation ("AcroMed") is a developer and international marketer of
a comprehensive line of spinal implant devices and related instruments used
in the treatment of spinal disorders. AcroMed, Inc., a subsidiary in the
United States, develops, assembles and markets cervical spinal stabilization
devices. AcroMed Holding B.V. and AcroMed B.V., subsidiaries in the
Netherlands, AcroMed UK Ltd., a subsidiary in the United Kingdom and AcroMed
Canada, a subsidiary in Canada, facilitate the international distribution
process. Products are sold on credit primarily to health care providers in
the United States, the United Kingdom, the Netherlands and Canada, and to
distributors in Europe, the Pacific Rim, the Americas, and other
international locations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include
the accounts of AcroMed Corporation and its subsidiaries (the "Company").
All significant intercompany accounts and transactions are eliminated in
consolidation.
CASH EQUIVALENTS - The Company considers all highly liquid investments
purchased with initial maturities of 90 days or less to be cash equivalents.
ALLOWANCE FOR DOUBTFUL ACCOUNTS AND OTHER SALES ALLOWANCES - The Company
sells its products worldwide and grants credit to substantially all of its
customers. Trade accounts receivable are net of allowances for doubtful
accounts and other sales allowances of $2,047 and $2,599, at May 31, 1998 and
June 30, 1997, respectively.
REVENUE RECOGNITION - Revenues from product sales are recognized at the time
of shipment to the customer.
INCOME TAXES - Income taxes are accounted for under the asset and liability
approach of accounting for income taxes set forth in Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes". This
approach can result in recording tax provisions or benefits in periods
different than the periods in which such taxes are paid or benefits received.
Deferred income taxes are provided for temporary differences between tax and
financial reporting of deductible or taxable items and tax loss and credit
carryforwards. A valuation allowance is established to reduce deferred tax
assets if it is more likely than not that all, or some portion, of such
deferred tax asset will not be realized.
STOCK OPTIONS - The Company accounts for stock options pursuant to Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees", and accordingly incurs compensation expense to the extent that
the fair value of options at the grant date exceeds the option exercise
price. Compensation expense for stock options outstanding is recognized
during the service period related to the options. The Company
<PAGE>
ACROMED CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE ELEVEN MONTH PERIOD ENDED MAY 31, 1998 AND
YEAR ENDED JUNE 30, 1997
($ IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
- --------------------------------------------------------------------------------
derives a tax deduction measured by the excess of the fair value over the
option price at the date options are exercised. Tax benefits related to tax
deductions in excess of compensation expense recognized for financial
reporting purposes are credited to additional paid-in capital.
FOREIGN CURRENCY TRANSLATION - The assets and liabilities of subsidiaries
located outside the United States are translated into U.S. dollars at
exchange rates in effect at the balance sheet date. Revenues and expenses
are translated at the average rates of exchange for the year. Unrealized
gains and losses from translation are accumulated as a separate component of
shareholders' equity (deficiency). Realized gains and losses from foreign
currency transactions are included in other income and are not material to
the results of operations.
FAIR VALUE OF FINANCIAL INSTRUMENTS - SFAS No. 107, "Disclosures About Fair
Value of Financial Instruments", requires disclosure about the fair value of
all financial instruments. The carrying values of cash and cash equivalents,
receivables, certain other assets and notes payable are reasonable estimates
of their fair value.
NET INCOME (LOSS) PER SHARE - Amounts presented for net income (loss) per
share have been computed in accordance with SFAS No. 128, "Earnings per
Share". This Statement specifies disclosure of basic and diluted per share
amounts. Basic per share amounts are calculated by dividing net income
(loss) by the weighted-average number of common shares outstanding during the
period. Diluted per share amounts are calculated by dividing net income
(loss) by the weighted-average number of common shares outstanding during the
period plus the incremental shares that would have been outstanding upon the
assumed exercise of dilutive stock options. Additional option shares
included in the diluted calculation, based upon application of the treasury
stock method, were 4,532 for the eleven month period ended May 31, 1998. No
additional option shares were included in the diluted calculation for the
year ended June 30, 1997, as the effect would have been anti-dilutive.
NEW ACCOUNTING STANDARDS - In June 1997, the Financial Accounting Standards
Board issued SFAS No. 130, "Reporting Comprehensive Income" and No. 131,
"Disclosures about Segments of an Enterprise and Related Information". These
Statements establish standards for reporting and display of comprehensive
income and its components and establish standards for the way in which
business enterprises report information about operating segments,
respectively. Both of these Statements become effective for financial
statements for fiscal years beginning after December 15, 1997.
In June, 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". This
Statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities and requires that all derivatives be
recognized on the balance sheet at fair value. Changes in fair values
<PAGE>
ACROMED CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE ELEVEN MONTH PERIOD ENDED MAY 31, 1998 AND
YEAR ENDED JUNE 30, 1997
($ IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
- --------------------------------------------------------------------------------
of derivatives will be accounted for based upon their intended use and
designation. This Statement will be effective for fiscal quarters of fiscal
years beginning after June 15, 1999.
FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF CREDIT RISK - Financial
instruments that potentially subject the Company to credit risk consist
primarily of trade accounts receivable. While overall credit risk is
mitigated by the large number and types of entities comprising the Company's
customer base and their dispersion across many geographic regions, including
significant exposure to Pacific Rim countries, currency risk also exists as
European sales are denominated in a foreign currency. The Company does not
routinely enter into foreign currency hedging arrangements and no foreign
currency or derivative financial instruments were outstanding as of May 31,
1998. The Company does not routinely require collateral or other security as
a condition of sale.
USE OF ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingencies at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RECLASSIFICATIONS - Certain amounts within the June 30, 1997 financial
statements have been reclassified to conform with the presentation adopted in
the current period.
3. PRODUCTS LIABILITY LITIGATION
AcroMed has been named as a defendant in products liability lawsuits filed in
federal and state courts on behalf of over 3,200 patients treated with
AcroMed's orthopedic bone screws and related devices to facilitate spinal
fusion surgery. AcroMed also has been named as a defendant on conspiracy or
concert-of-action theories in federal and state court cases filed on behalf
of over 1,500 patients treated with other manufacturers' devices. Patients'
spouses are additional plaintiffs in many instances. All federal cases have
been coordinated in the United States District Court for the Eastern District
of Pennsylvania (the "Court").
AcroMed and the Plaintiffs' Legal Committee in the coordinated federal cases
entered into a Settlement Agreement on January 8, 1997 which was
preliminarily approved by the Court on January 16, 1997. The Court
subsequently held hearings and final arguments on the Settlement Agreement,
as amended, on July 8, 1997. On October 17, 1997, the Court entered its
Final Order and Judgment approving the Settlement Agreement, with the Court's
Final Order and Judgment becoming final on April 3, 1998. The settlement is
based on certification of a mandatory class action, with no opt-out rights.
The Court has certified the class and approved the settlement as fair,
reasonable, and adequate.
<PAGE>
ACROMED CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE ELEVEN MONTH PERIOD ENDED MAY 31, 1998 AND
YEAR ENDED JUNE 30, 1997
($ IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
- --------------------------------------------------------------------------------
The class includes all persons and entities who may have pending or potential
claims against AcroMed and a number of other released parties relating to
orthopedic bone screws that were implanted in a surgery that occurred in the
United States on or before December 31, 1996. The intent of the settlement
is designed to achieve the dismissal of AcroMed and the other released
parties from all of the orthopedic bone screw related lawsuits currently
pending or later filed by class members in federal or state court. The
settlement is also designed to achieve the dismissal of all orthopedic bone
screw related cross-claims and third-party claims currently pending or later
filed by parties who are not class members.
Under the terms of the Settlement Agreement, AcroMed will contribute $100,000
in cash and the proceeds of certain products liability insurance policies to
a settlement fund to be administered by the Court. All class members will be
required to submit their claims against the settlement fund under procedures
to be established by the Court. No class member will be entitled to recover
any sums from AcroMed over and above the amounts, if any, that they are
entitled to receive from the settlement fund. All of the plaintiffs' legal
fees and expenses and all costs of administering the settlement will be paid
from the settlement fund and will not constitute separate or additional
obligations of AcroMed.
Pursuant to the terms of the Settlement Agreement, AcroMed paid $10,000 into
the settlement fund upon preliminary approval of the Settlement Agreement in
January 1997 and an additional $20,000 installment in April 1998 upon final
approval of the Final Order and Judgment. At June 30, 1997, the initial
$10,000 payment to the Settlement Fund was classified as a current asset as
the monies were required to be returned to AcroMed if the Settlement
Agreement had not received final approval. With such approval in April 1998,
the asset was applied as a reduction of the settlement accrual. The final
$70,000 installment (plus interest from October 17, 1997) is required to be
paid by April, 1999. The Settlement Agreement required AcroMed to grant a
security interest in all of its assets to collateralize its payment
obligations to the settlement fund. Upon final approval of the Final Order
and Judgement, all payments made to the Settlement Fund are nonrefundable to
AcroMed.
The Company is self-insured with respect to its products liability exposures
and in the year ended June 30, 1997 accrued the estimated cost to complete
the bone screw litigation settlement, including legal and other costs
expected to be incurred. As of May 31, 1998, amounts remaining related to
this accrual totaled $71,028, all of which is classified as a current
liability within the balance sheet.
<PAGE>
ACROMED CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE ELEVEN MONTH PERIOD ENDED MAY 31, 1998 AND
YEAR ENDED JUNE 30, 1997
($ IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
- --------------------------------------------------------------------------------
The Company has also recorded estimated liabilities, based upon actuarial
projections and assumptions, for potential products liability claims not
subject to the settlement (e.g., time periods and products outside of the
settlement). As of May 31, 1998 and June 30, 1997, the Company had accrued
$7,212 and $4,000, respectively, to cover such potential claims. It is
reasonably possible that the Company's estimates of these liabilities will
change in the near term.
4. INVENTORIES
Inventories at May 31, 1998 and June 30, 1997 consist primarily of purchased
finished goods and are valued on a first-in, first-out basis at the lower-of-
cost or market.
<TABLE>
<CAPTION>
MAY 31, JUNE 30,
1998 1997
<S> <C> <C>
Finished goods $12,714 $14,562
Consignment and loaner set inventories 5,594 5,230
Raw materials 2,648 2,371
Allowance for excess and obsolete inventory (2,505) (2,823)
------- -------
$18,451 $19,340
======= =======
</TABLE>
5. PROPERTY AND EQUIPMENT
Equipment, furniture, and leasehold improvements are stated at cost.
Depreciation is computed using accelerated or straight line methods over the
estimated useful lives of the assets which range from 5 to 15 years.
Expenditures for maintenance and repairs are charged to expense as incurred.
Property and equipment at May 31, 1998 and June 30, 1997 consist of the
following:
<TABLE>
<CAPTION>
MAY 31, JUNE 30,
1998 1997
<S> <C> <C>
Equipment and office furniture $ 8,092 $ 7,272
Leasehold improvements 4,063 3,880
------- -------
Total 12,155 11,152
Accumulated depreciation (6,641) (5,522)
------- -------
Property and equipment - net $ 5,514 $ 5,630
======= =======
</TABLE>
<PAGE>
ACROMED CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE ELEVEN MONTH PERIOD ENDED MAY 31, 1998 AND
YEAR ENDED JUNE 30, 1997
($ IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
- --------------------------------------------------------------------------------
6. INTANGIBLES
PATENTS AND TRADEMARKS - The external costs of filing and obtaining patents
and trademarks are capitalized when incurred. These costs are amortized
using the straight line method over their estimated useful lives of up to 17
years for patents and 20 years for trademarks. Accumulated amortization is
$441 and $358 at May 31, 1998 and June 30, 1997, respectively.
GOODWILL - The excess of purchase price over the fair value of net assets
acquired is being amortized using the straight line method over periods not
exceeding 20 years. Accumulated amortization is $2,166 and $1,876 at May 31,
1998 and June 30, 1997. Amortization expense is included in other (income) -
net.
Intangibles at May 31, 1998 and June 30, 1997 consist of the following:
<TABLE>
<CAPTION>
MAY 31, JUNE 30,
1998 1997
<S> <C> <C>
Goodwill - net of amortization $4,150 $4,440
Patents and trademarks - net of amortization 1,721 1,566
------ ------
Intangibles - net $5,871 $6,006
====== ======
</TABLE>
The Company assesses the recoverability of long-lived assets, including
goodwill and other intangible assets, whenever adverse events or changes in
circumstances indicate that an impairment may have occurred. If the future
cash flows (undiscounted and without interest) expected to result from the
use of the related asset are less than the carrying value of such assets, an
impairment has been incurred and a loss is recognized to reduce the carrying
value to fair value based upon discounted cash flows or market prices.
7. NOTES PAYABLE AND LINE OF CREDIT
The Company entered into a $30,000 revolving line of credit agreement with a
bank in September 1997, replacing a previous revolving line of credit with
the same bank in the amount of $10,000. The new agreement terminates 12
months from the date of the final settlement approval discussed in Note 3,
with amounts outstanding as of such termination date due and payable within
one year of such date. Borrowings under the agreement unrelated to the
funding of the settlement discussed in Note 3 are limited to $10,000.
Interest on outstanding borrowings are paid at the bank's prime rate or 2.50
percent in excess of the LIBOR rate, at the direction of the Company.
Amounts available under the facility are subject to a commitment fee of
three-tenths of one percent per annum.
<PAGE>
ACROMED CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE ELEVEN MONTH PERIOD ENDED MAY 31, 1998 AND
YEAR ENDED JUNE 30, 1997
($ IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
- --------------------------------------------------------------------------------
The line of credit agreement contains requirements to maintain certain
financial results and ratios, prohibits the payment of cash dividends, and
places restrictions and limitations on the purchase and sale of assets,
additional borrowings and other items. Borrowings under the agreement are
collateralized by certain accounts receivable, inventory, property and
equipment, life insurance proceeds, and certain intangible assets. Amounts
outstanding under the respective credit agreements at May 31, 1998 and June
30, 1997 were $5,000 and $10,000, respectively.
AcroMed B.V. has a demand line of credit with a bank that permits borrowings
of up to 1,675 Dutch Guilders (approximately $832). The agreement has no
stated expiration date. Interest on outstanding balances are payable monthly
at the prime rate of the Dutch National Bank plus 1.50 percent. Borrowings
are collateralized by the accounts receivable of AcroMed B.V. There were no
outstanding borrowings under this line of credit as of May 31, 1998 or June
30, 1997.
For the eleven month period ended year ended May 31, 1998 and the year ended
June 30, 1997, cash paid for interest was $410 and $607, respectively.
8. INCOME TAXES
Income (loss) before income taxes for the eleven month period ended May 31,
1998 and the year ended June 30, 1997 consists of:
<TABLE>
<CAPTION>
MAY 31 JUNE 30,
SOURCE 1998 1997
<S> <C> <C>
United States $ 21,136 $ (85,026)
Foreign (1,766) 3,076
-------- ---------
Total $ 19,370 $ (81,950)
======== =========
</TABLE>
<PAGE>
ACROMED CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE ELEVEN MONTH PERIOD ENDED MAY 31, 1998 AND
YEAR ENDED JUNE 30, 1997
($ IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
- --------------------------------------------------------------------------------
Income tax provision (benefit) for the eleven month period ended May 31, 1998
and the year ended June 30, 1997 is summarized as follows:
<TABLE>
<CAPTION>
MAY 31, JUNE 30,
DESCRIPTION 1998 1997
<S> <C> <C>
Current:
Federal $ 1,277 $ 3,299
State and local 64 304
Foreign (400) 1,600
-------- --------
Total current 941 5,203
-------- --------
Deferred:
Federal 6,377 (32,135)
State and local 750 (3,895)
-------- --------
Total deferred 7,127 (36,030)
-------- --------
Total income tax provision (benefit) $ 8,068 $(30,827)
======== ========
</TABLE>
Deferred tax assets and liabilities have been recognized in the consolidated
balance sheet at May 31, 1998 and June 30, 1997 for temporary differences and
foreign net operating and capital loss carryforwards as follows:
<TABLE>
<CAPTION>
MAY 31, JUNE 30,
DESCRIPTION 1998 1997
<S> <C> <C>
Current deferred tax assets:
Products liability accrual $ 26,280 $ 8,880
Allowances for receivables and inventories 3,139 2,020
State and local income taxes 34 93
Other - net 519 348
-------- --------
Current deferred tax assets $ 29,972 $ 11,341
======== ========
Noncurrent deferred tax assets:
Employee compensation 504 337
Investment write-downs - 581
Depreciation 216 170
Products liability accrual 2,668 28,305
Foreign net operating losses 345 -
Other - net 2 3
-------- --------
Total 3,735 29,396
-------- --------
Less valuation allowance (345) (581)
-------- --------
Noncurrent deferred tax assets - net $ 3,390 $ 28,815
======== ========
</TABLE>
<PAGE>
ACROMED CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE ELEVEN MONTH PERIOD ENDED MAY 31, 1998 AND
YEAR ENDED JUNE 30, 1997
($ IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
- --------------------------------------------------------------------------------
As of June 30, 1997, the Company had capital loss carryforwards for financial
reporting purposes resulting from the write-off of investments. The Company
recorded a valuation allowance against these capital loss carryforwards because
management did not believe that realization of future capital gains to use these
capital loss carryforwards was likely. These capital loss carryforwards expired
unused during the current period. The Company has foreign net operating loss
carryforwards available in the United Kingdom and Canada. Such operations, which
began in fiscal 1997 and 1998, respectively, have yet to achieve profitability.
Management does not currently believe it is more likely than not that the
available foreign net operating loss carryforwards will be utilized and a full
valuation allowance has been provided.
A reconciliation between the federal statutory income tax rate and the
Company's effective tax rate for the eleven month period ended May 31, 1998
and the year ended June 30, 1997 is summarized as follows:
<TABLE>
<CAPTION>
MAY 31, JUNE 30,
DESCRIPTION 1998 1997
<S> <C> <C>
Statutory tax rate 35.0% 35.0%
Effects of:
State and local taxes, net of federal benefit 2.7 2.9
Foreign Sales Corporation benefit (4.3) .7
Foreign operations 1.8 (1.8)
Nondeductible compensation 0.7 (.4)
Accrual for potential disallowances 5.3 -
Other .5 1.2
------ ------
Effective tax rate 41.7% 37.6%
====== ======
</TABLE>
The Company's wholly-owned subsidiary, AcroMed Export, Inc., qualifies as a
Foreign Sales Corporation.
Incremental U.S. income taxes or foreign withholding taxes have not been
provided on the cumulative undistributed earnings of the foreign subsidiaries
totaling $3,657 as of May 31, 1998. These earnings, which reflect full
provision for non-U.S. income taxes, are expected to be reinvested
indefinitely in non-U.S. operations or to be remitted substantially free of
additional tax due to the availability of foreign tax credits.
Cash paid for income taxes was $5,461 and $6,848 for the eleven month period
ended May 31, 1998 and the year ended June 30, 1997, respectively.
<PAGE>
ACROMED CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE ELEVEN MONTH PERIOD ENDED MAY 31, 1998 AND
YEAR ENDED JUNE 30, 1997
($ IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
- --------------------------------------------------------------------------------
9. SHAREHOLDERS' EQUITY
Authorized common stock of the Company consists of 250,000 shares with a
stated value of $100 per share. As of May 31, 1998 and June 30, 1997, there
were 29,225 and 29,150 shares of common stock issued and outstanding.
STOCK OPTION PLANS - The Company has granted stock options under various
agreements. Stock options vest over varying periods ranging from three to
ten years. Outstanding options at May 31, 1998 and June 30, 1997 were as
follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES PRICE EXERCISE
----------------
MAY 31, 1998 JUNE 30, 1997 PER SHARE EXPIRATION DATE
------------ -------------
<S> <C> <C> <C>
700 700 $ 1 December 1, 2004
2,100 2,100 70 December 1, 2004
1,050 1,050 186 December 1, 2004
150 150 236 December 1, 2004
100 100 239 December 1, 2004
7,410 7,610 925 April 15, 2003 - May 31, 2006
225 225 1,600 April 1, 2004
740 305 2,000 February 11, 2007 - October 20, 2008
------------ ----------
12,475 12,240
=========== ==========
</TABLE>
A summary of stock option transactions for the eleven month period ended May
31, 1998 and the year ended June 30, 1997 is as follows:
<TABLE>
<CAPTION>
MAY 31, 1998 JUNE 30, 1997
--------------------------------------------- ----------------------------------------
NUMBER WEIGHTED NUMBER WEIGHTED
OF AVERAGE OF AVERAGE
DESCRIPTION SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------------------------------- ----------------- ----------------------- ------------ ------------------------
<S> <C> <C> <C> <C>
Outstanding at beginning
of period 12,240 $ 687 12,135 $ 658
Granted 435 2,000 305 2,000
Exercised (75) 925 (125) 925
Cancelled or expired (125) 925 (75) 925
----------------- ----------------------- ------------ ------------------------
Outstanding at end
of period 12,475 $ 729 12,240 $ 687
================= ======================= ============ ========================
Exerciseable options 10,584 10,014
================= ============
</TABLE>
<PAGE>
ACROMED CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE ELEVEN MONTH PERIOD ENDED MAY 31, 1998 AND
YEAR ENDED JUNE 30, 1997
($ IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
- --------------------------------------------------------------------------------
During the eleven month period ended May 31, 1998, all stock option grants
were made with exercise prices below the estimated market value at date of
grant, resulting in the options being compensatory. Compensation expense
related to such options will be recognized over the service period. No
options granted during the year ended June 30, 1997 were considered
compensatory. Compensation expense recognized for compensatory stock
options granted in current and prior periods totaled $428 and $288,
respectively, for the eleven month period ended May 31, 1998 and the year
ended June 30, 1997.
If the fair value method described in SFAS No. 123, "Accounting for Stock-
Based Compensation", had been used for options granted during the eleven
month period ended May 31, 1998 and the year ended June 30, 1997, there
would have been no material effect on the consolidated financial
statements. The weighted average fair value of options granted in fiscal
1998 and 1997, estimated using the Black-Scholes option pricing model with
a risk free interest rate of 6%, was $2,652 and $902 per share,
respectively.
10. PROFIT SHARING PLAN
The Company contributes to defined contribution profit sharing retirement
plans that cover substantially all United States employees and full-time
employees in the Netherlands. United States employees may elect to
contribute a percentage of compensation during the plan year. Employer
contributions in the United States include a match of certain employee
contributions and, at the discretion of the Board of Directors, an annual
profit sharing component. The Netherlands plan is fully funded by the
employer and contributions are based upon a fixed percentage of base
compensation. Costs of $839 and $803 were incurred for the eleven month
period ended May 31, 1998 and the year ended June 30, 1997, respectively.
<PAGE>
ACROMED CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE ELEVEN MONTH PERIOD ENDED MAY 31, 1998 AND
YEAR ENDED JUNE 30, 1997
($ IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
- --------------------------------------------------------------------------------
11. LEASES
At May 31, 1998, the Company is obligated under operating lease agreements
for equipment, automobiles, office space, and other facilities. Future
minimum annual rentals are:
YEAR ENDING
JUNE 30 AMOUNT
1999 $ 628
2000 388
2001 242
2002 55
2003 10
---- ------
Total $1,323
======
Rent expense was $797 and $821 for the eleven month period ended May 31,
1998 and the year ended June 30, 1997, respectively.
12. COMMITMENTS AND CONTINGENCIES
PRODUCTS LIABILITY - As described in Note 3, AcroMed has entered into a
Settlement Agreement which is designed to achieve the dismissal of AcroMed
from all pending or future products liability litigation resulting from
orthopedic bone screws and related devices implanted in U.S. surgeries
performed through December 31, 1996. Management believes that the Company
will be able to generate sufficient funds from external financing and
operations to satisfy the remaining $70,000 due under the Settlement
Agreement, which along with accrued interest is required to be paid by
April, 1999. AcroMed has a $30,000 revolving credit facility (Note 7),
under which $5,000 is outstanding at May 31, 1998, following payment of the
second installment of $20,000 under the Settlement Agreement in April,
1998. This revolving credit facility is scheduled to terminate in April
1999 with amounts outstanding as of such date due and payable within one
year of such date. Management believes that the Company will be able to
obtain additional financing arrangements before the final $70,000
installment is due which will be sufficient to allow the Company to fund
the final installment and refinance any outstanding balances under the
revolving credit facility. See Note 15 for subsequent developments.
<PAGE>
ACROMED CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE ELEVEN MONTH PERIOD ENDED MAY 31, 1998 AND
YEAR ENDED JUNE 30, 1997
($ IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
- --------------------------------------------------------------------------------
The Company is subject to a number of investigations, lawsuits and claims
during the normal course of its business. Management does not expect that
resulting liabilities beyond provisions already recorded will have a
material adverse effect on the Company's consolidated financial position,
results of operations or cash flows. The loss provisions have not been
reduced by any amounts of potential insurance recoveries. As outlined in
Note 3, the Company is self-insured with respect to all products liability
exposures.
13. OTHER RELATED PARTY TRANSACTIONS
The Company has engaged in transactions with affiliates and other related
parties as follows:
(a) At May 31, 1998 and June 30, 1997, the Company had a loan receivable
from a shareholder of $571 and $532, respectively. The loan is
included in other non-current assets. The loan is payable quarterly,
including interest at a rate of 7.83 percent, beginning October 31,
1997 through October 2000 and is collateralized by 838 shares of
AcroMed common stock.
(b) The Company has loaned $1,554 to a shareholder. Interest accrues over
the period of the loan at the prime rate. The shareholder has pledged
3,360 shares of AcroMed common stock as collateral for the loan. The
entire unpaid principal and all accrued interest is due on April 15,
2001. The note receivable is a reduction of additional paid-in
capital. An interest receivable on the loan of $263 and $126 at May
31, 1998 and June 30, 1997, respectively, has been recorded in other
non-current assets.
(c) A shareholder of the Company controlled a majority ownership interest
of a company that served as a distributor of the Company's products in
Europe. Sales to that company were $418 during the year ended June 30,
1997, and trade accounts receivable were $339 as of June 30, 1997. The
Company terminated its distributor agreement with this company
effective June 30, 1997. In July 1997, that company initiated an
arbitration proceeding against the Company for alleged breach of the
agreement. As of June 30, 1997, the Company accrued a liability of
$655 for costs expected to be incurred. In May 1998 this matter was
settled at a cost of approximately $2,500.
<PAGE>
ACROMED CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE ELEVEN MONTH PERIOD ENDED MAY 31, 1998 AND
YEAR ENDED JUNE 30, 1997
($ IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
- --------------------------------------------------------------------------------
14. OPERATIONS IN GEOGRAPHIC AREAS
The Company operates in one primary industry segment which includes the
development, manufacture and distribution of spinal implants.
Financial data by geographic area based upon the location of the entity
that conducted the activity as of and for the eleven month period ended May
31, 1998 and the year ended June 30, 1997, is summarized as follows:
<TABLE>
<CAPTION>
MAY 31, JUNE 30,
1998 1997
<S> <C> <C>
Net sales to customers:
United States and other $ 83,918 $ 77,718
Europe 6,636 13,499
-------- --------
Total 90,554 91,217
Intercompany transfers from:
United States and other 4,191 3,312
Europe 505 1,215
-------- --------
Total 95,250 95,744
Less intercompany transfers (4,696) (4,527)
-------- --------
Consolidated net sales $ 90,554 $ 91,217
======== ========
Operating profit (loss):
United States and other $ 23,776 $(82,878)
Europe (1,542) 3,583
Eliminations (1,110) (926)
-------- --------
Total 21,124 (80,221)
General corporate expenses (1,526) (1,371)
Other expense (228) (358)
-------- --------
Income (loss) before taxes $ 19,370 $(81,950)
======== ========
Identifiable assets:
United States and other $103,738 $116,285
Europe 12,719 14,230
Eliminations (16,119) (9,604)
-------- --------
Total 100,338 120,911
Corporate assets 1,329 2,351
-------- --------
Total assets $101,667 $123,262
======== ========
</TABLE>
<PAGE>
ACROMED CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE ELEVEN MONTH PERIOD ENDED MAY 31, 1998 AND
YEAR ENDED JUNE 30, 1997
($ IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
- --------------------------------------------------------------------------------
Export sales from the United States to customers, primarily in Europe,
Central and South America, and the Pacific Rim, were $22,183 and $14,356
for the eleven month period ended May 31, 1998 and for the year ended June
30, 1997, respectively. Net assets of non-U.S. subsidiaries were $10,385
and $10,658 at May 31, 1998 and June 30, 1997. The Company's consolidated
net income (loss) includes net (losses) income of these subsidiaries of
($1,367) and $2,402 for the eleven month period ended May 31, 1998 and the
year ended June 30, 1997, respectively.
No dividends were received from subsidiaries during the periods covered by
these financial statements. In addition, no customers accounted for 10% or
more of the Company's sales during such periods.
15. SUBSEQUENT EVENTS
On March 19, 1998, the shareholders of the Company entered into an
agreement to sell 100% of its shares to DePuy, Inc., the world's oldest
manufacturer of orthopedic products and a majority-owned subsidiary of
Roche Holding Ltd. This transaction was finalized on June 3, 1998 at a
purchase price of $325,000, which included payment for all outstanding
stock options which were immediately vested at closing. Under the terms of
the purchase agreement, the outstanding shareholder receivables outlined in
Note 13, along with any accrued interest thereon, were fully satisfied from
the proceeds due each shareholder. All amounts outstanding under the
revolving line of credit facilities were repaid shortly after the closing
date and the facilities were terminated.
* * * * * * *
<PAGE>
EXHIBIT INDEX
Exhibit No. Description Page No.
- ----------- ----------- --------
2.1 Agreement and Plan of Merger dated as of
March 18, 1998 among AcroMed Corporation,
DePuy, Inc. and DP Merger Sub, Inc.
(incorporated by reference to Exhibit 2.1
to the Company's Quarterly Report on Form 10-Q
for the period ended March 31, 1998)* **
* Does not include certain exhibits to the Agreement and Plan of Merger. A
list briefly identifying all omitted exhibits has been provided in Exhibit
2.1 to the Company's Quarterly Report on Form 10-Q for the period ended
March 31, 1998. The Company will furnish supplementally to the Securities
and Exchange Commission upon request a copy of any omitted exhibit.
** Confidential material omitted and filed separately with the Securities and
Exchange Commission pursuant to the Company's Application for Confidential
Treatment under Rule 24b-2 of the Securities Exchange Act of 1934.
