<PAGE> 1
As filed with the Securities and Exchange Commission on May 20, 1996
Registration No. 333-02273
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------
AMENDMENT NO. 2
TO
FORM S-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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DANNINGER MEDICAL TECHNOLOGY, INC.
(Exact name of Registrant as specified in its charter)
Delaware 31-1013521
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
---------------------------
4140 Fisher Road
Columbus, Ohio 43228
(614) 276-8267
(Address, including zip code, and telephone number,
including area code, of Registrant's principal executive offices)
---------------------------
Joseph A. Mussey
President and Chief Executive Officer
Danninger Medical Technology, Inc.
4140 Fisher Road
Columbus, Ohio 43228
(614) 276-8267
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
---------------------------
Copies of Correspondence to:
Curtis A. Loveland, Esq. James P. Mulroy, Esq.
Porter, Wright, Morris & Arthur Squire, Sanders & Dempsey
41 South High Street 41 South High Street
Columbus, Ohio 43215 Columbus, Ohio 43215
(614) 227-2004 (614) 365-2728
---------------------------
Approximate date of commencement of proposed sale to the public: As
soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933 check the following box. / /
If the registrant elects to deliver its latest annual report to
security holders, or a complete and legible facsimile thereof, pursuant to Item
11(a)(1) of this Form, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. / /
<PAGE> 2
PROSPECTUS
$5,000,000
[LOGO]
DANNINGER MEDICAL TECHNOLOGY, INC.
% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2003
The % Convertible Subordinated Debentures due 2003 (the "Debentures")
issued by Danninger Medical Technology, Inc. (the "Company"), offered hereby
will mature on June 1, 2003, unless previously redeemed or repurchased. Interest
on the Debentures is payable semi-annually on the first day of June and December
of each year beginning December 1, 1996 and continuing through maturity. The
Debentures are convertible at any time before maturity, unless previously
redeemed, into shares of Common Stock of the Company ("Common Stock") at a
conversion price of $ per share (the "Conversion Price"), subject to
adjustment in certain events. See "Description of Debentures." The Company's
Common Stock is traded on the Nasdaq SmallCap Market under the symbol "DANN."
On May 7, 1996, the last bid price for the Common Stock, as reported on the
Nasdaq SmallCap Market, was $7.00 per share. See "Price Range of Common Stock
and Dividend Policy." The Company does not intend to list the Debentures on
Nasdaq or on any exchange. The Underwriter has informed the Company that it
intends to make a market in the Debentures.
Beginning July 1, 1999, Debentures that are presented for redemption by
June 1, 1999, or June 1 of any succeeding year, will be redeemed on the next
July 1 at par plus accrued interest up to an annual maximum of $25,000 per
holder or beneficial owner and an annual aggregate maximum of 5% of the gross
amount of Debentures sold. Additionally, the Company will redeem at any time
Debentures presented by the personal representative or surviving joint tenant of
a deceased holder subject to the same annual maximums. Upon the occurrence of
certain changes in control of the Company, the Company is obligated to purchase
Debentures at the holder's option at 101% of the principal amount thereof plus
accrued interest. Prior to June 1, 1999, the Debentures are not redeemable at
the option of the Company unless the closing bid price of the Company's Common
Stock is at least 140% of the Conversion Price for at least 20 trading days
within a 30 consecutive trading day period ending no later than five trading
days prior to the notice of redemption. No sinking fund will be established to
redeem the Debentures. See "Description of Debentures."
SEE "RISK FACTORS" FOR A DISCUSSION OF CERTAIN INFORMATION THAT SHOULD BE
CAREFULLY CONSIDERED BY PROSPECTIVE PURCHASERS OF THE DEBENTURES OFFERED HEREBY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECUR-
ITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRE-
SENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNTS (1) COMPANY (2)
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<S> <C> <C> <C>
Per Debenture........... 100.0%
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Total (3)............... $5,000,000 $ $
================================================================================
</TABLE>
(1) The Company has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting estimated expenses of $225,000 payable by the Company.
(3) The Company has granted the Underwriter a 30-day option to purchase up to
an additional $250,000 principal amount of Debentures at par plus accrued
interest to cover over-allotments, if any. If all such Debentures are
purchased by the Underwriter, the total Price to Public will be $5,250,000,
the total Underwriting Discount will be $____ and the total Proceeds to
Company will be $____ . See "Underwriting."
------------------
The Debentures are offered subject to receipt and acceptance by the
Underwriter, to prior sale and to the Underwriter's right to reject any order in
whole or in part and to withdraw, cancel or modify the offer without notice. It
is expected that certificates for the Debentures will be available for delivery
on or about _______________, 1996.
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THE OHIO COMPANY
____________, 1996
<PAGE> 3
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE DEBENTURES OR
THE COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE
PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS, IF COMMENCED, MAY BE DISCONTINUED
AT ANY TIME.
CERTAIN SELLING GROUP MEMBERS (IF ANY) OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE
IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ
SMALLCAP MARKET IN ACCORDANCE WITH RULE 10b-6A UNDER THE SECURITIES EXCHANGE
ACT OF 1934. SEE "UNDERWRITING."
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-2 under the Securities Act, with respect to the Debentures offered hereby and
the Common Stock into which they are convertible. This Prospectus does not
contain all the information set forth in the Registration Statement, certain
portions of which have been omitted as permitted by the rules and regulations of
the Securities and Exchange Commission (the "Commission"). For further
information with respect to the Company and the Debentures offered hereby,
reference is made to the Registration Statement and the exhibits thereto.
Statements herein contained concerning the provisions of any document are not
necessarily complete and in each instance, reference is made to the copy of such
document filed as an exhibit to the Registration Statement. The Registration
Statement and the exhibits may be inspected without charge at the offices of the
Commission described above or copies obtained at prescribed rates from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549.
The Company is subject to the informational requirements of the Exchange
Act and, in accordance therewith, files reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information may be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549 and at the following Regional Offices of the Commission: New York
Regional Office, Seven World Trade Center, 13th Floor, New York, New York 10048;
and Chicago Regional Office, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511. Copies of such materials may be obtained at prescribed
rates from the Public Reference Section of the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549. Such reports, proxy statements and other
information can also be inspected at the offices of The Nasdaq SmallCap Market
at 1735 K Street, N.W., Washington, D.C. 20006.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
Each of the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995, amendments thereto on Form 10-K/A No. 1, Form 10-K/A No. 2
and Form 10-K/A No. 3, and the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1996 has been filed with the Commission (File No.
0-16893) pursuant to Section 13(a) of the Exchange Act and each such report
is incorporated herein by reference. Each document filed subsequent to the
date of this Prospectus pursuant to Section 13(a), 13(c), 14 or 15(d) of the
Exchange Act prior to the termination of this offering shall be deemed to be
incorporated by reference in this Prospectus.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any subsequently filed document that also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.
The Company will provide without charge to each person, including a
beneficial owner, to whom a copy of this Prospectus is delivered, upon the
written or oral request of such person, a copy of any and all of the documents
incorporated herein by reference (other than exhibits unless such exhibits are
expressly incorporated by reference in such documents). Requests should be
directed to Paul A. Miller, Vice President and Chief Financial Officer,
Danninger Medical Technology, Inc.,4140 Fisher Road, Columbus, Ohio 43228.
Telephone requests may be directed to the Company at (614) 276-8267.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements appearing elsewhere in this Prospectus.
Unless otherwise indicated in this Prospectus, all information assumes no
exercise of the Underwriter's over-allotment option.
THE COMPANY
Danninger Medical Technology, Inc. ("Danninger") and its wholly-owned
subsidiary, Cross Medical Products, Inc. ("Cross"), engage in two distinct
business segments of the orthopedic device industry. Danninger designs,
manufactures and distributes orthopedic rehabilitation products, primarily
continuous passive motion therapy devices ("CPM devices") and other orthopedic
rehabilitation products (together with CPM devices "recovery products"). CPM
devices are used in rehabilitation therapy to slowly and continuously move an
injured joint without assistance of the patient's muscle power. This therapy is
most commonly used after joint surgery to improve blood flow, reduce swelling,
increase the range of motion, maintain muscle tone and speed healing. The
Company's wholly owned subsidiary, Recovery Services, Inc. ("RSI"), rents
recovery products directly to end users. Cross designs, manufactures and markets
implants and instruments for the surgical treatment of degenerative diseases,
deformities and trauma of the spine ("spinal implants"). Unless the context
otherwise requires, Danninger, RSI and Cross are hereinafter collectively
referred to as (the "Company").
The sale of recovery products has historically generated the substantial
portion of Company sales and all of its operating income. In 1988, the Company
entered the spinal implant market with its first implant system, which was
offered in the United States for clinical study only. In 1992, the Company
determined to aggressively pursue its strategy to utilize a substantial portion
of the cash flow generated from its position as a leading manufacturer of CPM
devices to fund the development of its spinal implant business. The Company
formed its Medical Advisory Board of prominent spinal surgeons and began
development of the SYNERGY(TM) Spinal Implant System. The SYNERGY(TM) Spinal
Implant System is a "universal" implant system that allows surgeons to treat
both the thoracic (middle) and lumbar (lower) portions of the spine, which the
Company believes covers approximately 70% of all instrumented spinal fusion
surgeries in the United States. The Company received 510(k) clearance from the
U.S. Food and Drug Administration ("FDA") to market the anterior portion of the
SYNERGY(TM) Spinal Implant System in October 1994 and to market the posterior
portion of the system in July 1995. The Company's revenue from its implant
business has increased from $347,000, or less than 5% of total Company revenue,
in 1992 to $4,091,000 in 1995, or approximately 33% of total Company revenue.
The Company's predecessor was incorporated in 1980 and commenced operations
in 1983. In 1986, the Company's predecessor was merged into the Company solely
for the purpose of changing the Company's jurisdiction of incorporation to
Delaware. The Company's offices are located at 4140 Fisher Road, Columbus, Ohio
43228 and its telephone number is (614) 276-8267.
The following are the principal elements of the Company's business
strategy.
Develop United States Distribution. The Company believes that a strong
force of qualified sales and service representatives is essential to increase
its share of the United States spinal implant market, which market was estimated
to exceed $200 million in 1995. The Company utilizes its Medical Advisory Board
to educate spinal surgeons throughout the United States in the use of the
Company's spinal implant systems. With approval of the SYNERGY(TM) Spinal
Implant System by the FDA in 1995, the Company began the process of rapidly
expanding its network of independent sales agencies.
Develop International Distribution. The Company believes that the total
foreign market for spinal implant products is approximately equal in size to the
United States market. The Company has marketed its spinal implant systems in
foreign countries for a number of years, generally obtaining regulatory
clearance to market products in these countries prior to clearance in the United
States. The Company currently markets its spinal implant products and
instruments in 16 foreign countries and plans to add qualified distributors in
other foreign markets. In 1995, foreign sales represented approximately $1.4
million, or approximately 35%, of the Company's total implant product revenue.
Develop New Products. The Company intends to continue its investment in the
research and development of new spinal implant products and the improvement of
existing recovery products. The Company believes that technologically superior
products are needed to compete in both the recovery products market and the
spinal implant market. The
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Company has historically devoted a substantial portion of its resources to
research and development. In recent years the Company has devoted an increasing
amount of its research and development expenditures to spinal implant products.
The Company's research and development expenditures during the fiscal years
ended December 31, 1995, 1994, and 1993 were $1,147,000, $1,324,000, and
$1,248,000, respectively.
Continue Strong Position in Recovery Products Market. The Company believes
that it is one of the largest manufacturers of CPM devices in the United States.
The Company is striving to improve its position in recovery products through
research and development and increased international distribution. The Company,
through RSI, has recently commenced the direct rental of recovery products in
selected markets.
RISK FACTORS
Prospective purchasers of the Debentures offered hereby should carefully
consider the various risk factors that could materially and adversely affect
the operating and financial performance of the Company and the return to
purchasers of the Debentures. Certain of these factors include, in part, the
Company's limited history of profitability, intense competition in the
orthopedic device industry, the Company's substantial debt to equity leverage,
subordination of the Debentures and the fact that they are unsecured
obligations, the Company's significant product liability litigation and
questions regarding the adequacy of insurance coverage, the effect of
government regulation, the Company's limited sales and marketing experience for
spinal implant products, and the Company's dependence on its senior management
and Medical Advisory Board. See "Risk Factors".
THE OFFERING
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<S> <C>
Securities Offered................ % Convertible Subordinated Debentures Due 2003.
Maturity Date..................... June 1, 2003.
Amount of Offering................ $5,000,000 ($5,250,000 if the over-allotment option is
exercised in full.
Interest Payment Dates............ Semi-annually on each June 1 and December 1 beginning
December 1, 1996.
Conversion Rights................. Convertible, prior to maturity or redemption, into Common
Stock, at a conversion price of $0.00 per share, subject to
adjustment in certain events.
Redemption at Holder's Option..... Beginning July 1, 1999, the Company will be obligated to
redeem Debentures tendered by June 1, 1999 or June 1 of
any succeeding year at 100% of their principal amount plus
accrued interest, subject to an annual maximum of $25,000
per holder or beneficial owner and an annual aggregate
maximum of 5% of the gross amount of Debentures sold in
the offering ($250,000; $262,500 if the Underwriter's over-
allotment option is exercised in full). Any Debenture
presented by the personal representative or surviving joint
tenant of a deceased holder or beneficial owner will be
redeemed, beginning immediately, within 60 days of
presentation of necessary documentation, at the same
redemption price subject to the same per holder or
beneficial owner and aggregate maximums. See
"Description of Debentures - Limited Right of Redemption
by Holder."
Repurchase on Change of Control... Upon the occurrence of certain changes of control of the
Company, the Company is obligated to purchase
Debentures at the holder's option at 101% of the principal
amount thereof plus accrued interest. See "Description of
Debentures - Repurchase of Debentures at the Holder's
Option After a Change of Control."
Redemption at Company's Option.... The Debentures are not redeemable at the option of the
Company prior to June 1, 1999, unless the closing bid price
of the Company's Common Stock is at least 140% of the
Conversion Price for at least 20 trading days within a 30
consecutive trading day period ending no later than five
trading days prior to the notice of redemption. The
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<TABLE>
<S> <C>
redemption price for the year beginning June 1, 1996 will be
108% of par, with such redemption price declining each
year thereafter to 100% on June 1, 2002. See "Description of
Debentures - Redemption at Option of the Company."
Subordination....... Subordinated to all existing and future Senior Indebtedness,
as defined. See "Description of Debentures -
Subordination."
Trustee............. The Fifth Third Bank, Columbus, Ohio.
Use of Proceeds..... To repay certain indebtedness and for working capital. See
"Use of Proceeds."
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(In thousands, except per share data and ratios)
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THREE MONTHS ENDED YEARS ENDED DECEMBER 31,
MARCH 31,
------------------ ---------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue.................................. $4,049 $3,298 $12,584 $10,154 $9,313 $7,394 $8,444
Gross margin............................. 2,139 1,764 6,224 5,026 3,885 3,653 4,103
Operating income (loss).................. 296 270 (138) 308 (564) 77 617
Interest expense......................... 114 59 289 158 156 192 144
Income (loss) before income taxes........ 182 213 (431) 210 (682) (103) 516
Net income (loss)........................ 137 154 (359) 81 (774) (48) 401
Net income (loss) per share.............. $ .03 $ .03 $ (0.08) $ 0.02 $(0.18) $(0.01) $ 0.09
OTHER HISTORICAL DATA:
EBITDA(1)................................ 448 325 119 565 (221) 399 939
Ratio of EBITDA to interest.............. 3.93 5.51 0.41 3.58 (1.42) 2.08 6.52
Ratio of earnings to fixed charges (2)... 2.40 4.04 --- (3) 2.01 --- (4) 0.56 3.76
Proforma ratio of earnings
to fixed charges (2).................... 2.62 --- (5)
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MARCH 31, 1996
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BALANCE SHEET DATA: ACTUAL AS ADJUSTED (6)
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<S> <C> <C>
Working capital..................... $ 3,546 $ 8,021
Total assets........................ 10,372 12,372
Short term obligations.............. 3,450 450
Long term obligations............... 943 5,943
Total shareholders' equity.......... 3,687 3,687
</TABLE>
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(1) As used herein, EBITDA is defined as operating income (loss) plus
depreciation and amortization included therein. The Company believes that
EBITDA is generally recognized as an indicator of a Company's ability to
service its debt and capital expenditure requirements. However, EBITDA is
not intended to be a performance measure that should be regarded as an
indicator of operating performance or cash flows as a measure of liquidity,
as determined in accordance with generally accepted accounting principles.
(2) For purposes of calculating the ratio of earnings to fixed charges,
earnings include income before income taxes plus fixed charges. Fixed
charges consist of interest expense and the estimated interest
component of operating leases (assumed to be one-third of total rental
expense). The proforma ratio of earnings to fixed charges assumes the
application of $3,000,000 of net proceeds to repay outstanding
indebtedness.
(3) Reflects a deficiency of ($431,000).
(4) Reflects a deficiency of ($682,000).
(5) Reflects a proforma deficiency of ($511,000).
(6) Adjusted for the sale of the $5,000,000 principal amount of Debentures
offered by the Company and the application of the estimated net proceeds
therefrom. See "Use of Proceeds."
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RISK FACTORS
In addition to the other information contained in this Prospectus, the
following factors should be considered carefully in evaluating an investment in
the Debentures offered hereby.
LIMITED HISTORY OF PROFITABILITY
In fiscal 1995, the Company incurred a net loss of $359,000 and has
incurred net losses in three of the last four years, primarily as a result of
the costs associated with the development of its SYNERGY(TM) Spinal Implant
System. Because certain competitors have much greater market share and
well-developed distribution networks, there can be no assurance that the Company
will be successful in establishing a competitive distribution network to enable
it to increase its sales of spinal implants to a profitable level. See
"Business."
INTENSE COMPETITION IN ORTHOPEDIC DEVICE INDUSTRY
The orthopedic device industry is intensely competitive with respect to
technology, distribution, price, service, quality and variety, and there are
many well-established competitors with substantially greater financial and other
resources than the Company. Some of the Company's competitors have been in
existence for a substantially longer period than the Company and many are better
established with orthopedic physicians in the markets where the Company
distributes its products. See "Business - Competition."
SUBSTANTIAL DEBT TO EQUITY LEVERAGE
As of December 31, 1995, as adjusted for the issuance of the Debentures
and the application of the estimated net proceeds therefrom, the Company's
total long-term debt and shareholders' equity would have been approximately
$5,874,000 and $3,522,000, respectively, and the Company's fixed charges would
have exceeded earnings before fixed charges, reflecting a deficiency of
earnings to fixed charges in the amount of $511,000 for the year ended
December 31, 1995. Subject to any limitations imposed by its lenders, the
Company expects to incur, from time to time, additional borrowings or other
obligations which would be Senior Indebtedness. The debt service requirements
of any such additional indebtedness could make it more difficult for the
Company to make principal and interest payments on the Debentures. The
Company's ability to satisfy its obligations will be dependent upon its future
performance, which is subject to prevailing economic conditions and financial,
business and other factors, including factors beyond the Company's control.
There can be no assurance that the Company's operating cash flow will be
sufficient to meet its debt service requirements or to repay the Debentures at
maturity or that the Company will be able to refinance the Debentures or other
indebtedness at maturity. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources."
SUBORDINATION OF THE DEBENTURES; UNSECURED OBLIGATIONS
The Debentures will be unsecured, subordinated obligations of the Company
and will be subordinated in right of payment to all present and future Senior
Indebtedness. In the event of bankruptcy, liquidation or reorganization of the
Company, the assets of the Company will be available to pay obligations on the
Debentures only after all Senior Indebtedness has been paid in full, and there
may not be sufficient assets remaining to pay amounts due on any or all of the
Debentures then outstanding. As of December 31, 1995, after giving effect to the
application of the estimated net proceeds from the sale of the Debentures
offered hereby, the Company had approximately $1,140,000 of outstanding Senior
Indebtedness. In the event of a default with respect to Senior Indebtedness, no
payments may be made on account of the Debentures until such default has been
cured or waived. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources" and
"Description of Debentures - Subordination."
SIGNIFICANT PRODUCT LIABILITY LITIGATION AND ADEQUACY OF INSURANCE COVERAGE
The orthopedic device industry has been historically litigious and the
Company faces an inherent business risk of financial exposure to product
liability claims. Such claims against the Company, regardless of their merit or
eventual outcome, could have a material adverse effect upon the Company's
business, financial condition and results of operations.
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Since the Company's spinal products are designed to be permanently implanted in
the human body, manufacturing errors or design defects could result in injury or
death to the patient, and could result in a recall of the Company's products and
substantial monetary damages. The Company has been named as a defendant in more
than 500 cases alleging principally that the Company participated in an
industry-wide conspiracy to market pedicle screw implants. The Company
anticipates that additional similar suits will be filed in the future. The
Company has also been named a defendant in approximately 15 cases alleging
claims of product liability for defective products manufactured by the Company.
The Company's current liability insurance coverage limits are $5,000,000 per
occurrence per year and $5,000,000 in the aggregate per year. There can be no
assurance that the Company will not experience losses to the extent that its
insurance coverage is not adequate to cover the cost of defending these and
similar suits that may be filed in the future or the cost of settling such
claims or paying any adverse judgements. Such insurance is expensive, difficult
to obtain and may not be available in the future on acceptable terms, or at all.
See "Business - Legal Proceedings and Insurance Coverage."
GOVERNMENT REGULATION
The manufacture and marketing of the Company's products are subject to
regulation by the FDA pursuant to the U.S. Food, Drug and Cosmetic Act, as
amended, and regulations promulgated thereunder (collectively the "FDA Act") and
numerous other federal, state and foreign governmental authorities. Any products
developed by the Company in the future are likely to require FDA approval
before they can be sold in the United States.
All products and manufacturing facilities are subject to continual review
and periodic inspection by the FDA. The discovery of previously unknown problems
with the Company or its products or facilities may result in product labeling
restrictions, recall or withdrawal of the products from the market. For example,
as a result of FDA inspections the Company has received "Warning Letters" from
the FDA notifying the Company of deficiencies in its manufacturing practices,
which if not corrected could result in the recall of the Company's products, and
was required to recall sterilization instructions for the anterior application
of the SYNERGY(TM) Spinal Implant System in 1995. Any future product recall
could have a material adverse affect on the Company's sales and profitability.
The Company is required to obtain similar approvals, and is subject to similar
regulation for the sale of its products in foreign countries and is subject to
similar risks relating to the inability to obtain or the revocation of such
approvals.
To date, all FDA approvals of the Company's products have been obtained
under Section 510(k) of the FDA Act, which provides for FDA marketing approval
on an expedited basis for products that can be shown to be substantially
equivalent to devices in interstate commerce prior to May 1976, the date of
enactment of the FDA Act. If marketing approval for any product cannot be
obtained under Section 510(k), alternative approval procedures are likely to be
costly and time consuming and there can be no assurance that the required
approvals for marketing any newly developed products will be obtained. See
"Business - Government Regulation."
LIMITED SALES AND MARKETING EXPERIENCE FOR SPINAL IMPLANT PRODUCTS
The Company sells its spinal implant products in the United States
through a limited direct sales and marketing staff and a network of independent
commissioned sales agencies supported by the Company's technical support staff.
Independent commissioned sales agencies typically market orthopedic and
neurological implants and instruments for a variety of manufacturers. The
Company's existing or future sales agencies may not have prior experience
selling spinal implants. There can be no assurance that the Company will be able
to develop an effective distribution network or that such commissioned sales
agencies will be able to successfully sell the Company's products. See
"Business - Marketing and Distribution."
PENDING FDA RECLASSIFICATION OF PEDICLE SCREW IMPLANTS
Under the FDA Act, all medical devices are classified as Class I, Class
II or Class III devices, depending upon the risk they present. Many Class I and
all Class II and III medical devices must be reviewed or approved for marketing
prior to their distribution unless they are specifically excluded from the
requirement to do so. The review/approval process is more expensive and time
consuming for Class III devices, which must receive pre-market approval after
clinical studies under an Investigational Device Exemption. Spinal implant
systems that utilize pedicle screws are Class III devices. Class II devices may
be approved on an expedited basis pursuant to Section 510(k). The FDA has
proposed the reclassification of pedicle screw fixation systems from Class III
devices to Class II devices. The failure of the FDA to reclassify pedicle screw
implants could reduce the number of physicians performing instrumented fusion
surgeries and the potential demand for the Company's implant products. See
"Business - The Spinal Implant Market." "Business - Spinal Implant Products."
and "Business - Government Regulation."
DEPENDENCE ON MANAGEMENT AND MEDICAL ADVISORY BOARD
The Company's success will depend to a great extent on its senior
management, including Joseph A. Mussey, Chief Executive Officer. The Company's
operations could be adversely affected if, for any reason, one or more key
executive officers ceases to be active in the Company's management or in the
event that any member of the Company's Medical Advisory Board would choose to
leave the board and support a competing spinal implant system. In addition, the
Company's success depends in large part on its ability to attract and retain
highly qualified scientific, technical, management and marketing personnel.
Competition for such personnel is intense and there can be no assurance that the
Company will be able to attract and retain the personnel necessary for the
development and operation of its business. The loss of the services of key
personnel could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Management."
7
<PAGE> 9
RELIANCE ON SYNERGY(TM) SPINAL IMPLANT SYSTEM AND POSSIBLE PRODUCT OBSOLESCENCE
The Company anticipates that most of its spinal implant sales and sales
growth in the future, if any, will come from the SYNERGY(TM) Spinal Implant
System. In addition, the Company's current primary product development efforts
involve a cervical version and a titanium version of the SYNERGY(TM) Spinal
Implant System. There can be no assurance that the Company will be successful in
marketing the SYNERGY(TM) Spinal Implant System or that a competitor will not
introduce a superior product or technology. In either event, the Company may not
be able to produce sufficient sales to achieve profitability.
DEPENDENCE ON SUPPLIERS
The Company does not manufacture most of the components for its CPM
devices and its spinal implants and instruments and is dependent upon several
suppliers for the production of such components. The Company expects to continue
to be dependent upon such manufacturers for the foreseeable future. The Company
is dependent upon these manufacturers for timely and cost-effective
manufacturing services. In the event that the Company is unable to obtain
components, or obtain such components on commercially reasonable terms, it may
not be able to manufacture or distribute its products on a timely and
competitive basis, or at all. See "Business."
LIMITATIONS ON THIRD-PARTY REIMBURSEMENT
The Company's ability to sell its products will depend in part on the
extent to which reimbursement for the cost of such products and related
treatments will be available to patients under domestic and foreign governmental
health, private health, managed care, workers' compensation, and other similar
programs. Over the past decade, 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 costs. Some of these proposals have
involved limitations on the amount of reimbursement for certain surgical
procedures. There can be no assurance that adequate third-party reimbursement
will continue to be available for the Company's products. In addition, certain
health care providers are moving towards a managed care system in which such
providers contract to provide comprehensive health care for a fixed cost per
person. Managed care providers are attempting to control the cost of health care
by authorizing fewer elective surgical procedures, such as spinal fusions. The
Company is unable to predict what changes will be made in the reimbursement
methods utilized by third-party health care payors. In addition, hospitals and
other health care providers have become increasingly price competitive and, in
some cases, have put pressure on medical suppliers to lower their prices. Any
reductions in coverage or price limitations by third-party payors could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business - Third-Party Reimbursement."
CONCENTRATION OF OWNERSHIP; ANTI-TAKEOVER PROVISIONS
The Company's directors and officers and their affiliates beneficially
own approximately 40.9% of the outstanding Common Stock. Accordingly, these
persons have the ability to exert significant influence over the business
affairs of the Company, including the ability to influence the election of
directors and the results of voting on all matters requiring stockholder
approval. The Company has adopted certain anti-takeover measures which,
individually or collectively, may be disadvantageous in that they may discourage
takeovers in which stockholders might receive a substantial premium for some or
all of their shares of Common Stock. See "Management," "Description of
Debentures" and "Description of Capital Stock."
VOLATILITY OF MARKET PRICE
From time to time after this offering there may be significant volatility
in the market price for the Debentures and the Common Stock. Because the
Debentures are convertible into Common Stock, the prices at which the Debentures
trade in the market, if and when a market develops, will likely be affected by
the price of the Common Stock. In addition, market prices for securities of
orthopedic device companies have historically been highly volatile. Quarterly
operating results of the Company, the announcement of technological innovations
or new products by the Company or its competitors, governmental regulation,
timing of regulatory approvals, developments related to patents or proprietary
rights or publicity regarding actual or potential malfunctions of the Company's
or its competitors' products may cause the market price of the Common Stock and
the Debentures to fluctuate substantially.
8
<PAGE> 10
ABSENCE OF PUBLIC MARKET FOR THE DEBENTURES
The Debentures are a new issue of securities for which there is currently
no public market. There can be no assurance as to the liquidity of the market
for the Debentures that may develop, the ability of the holders to sell their
Debentures or the prices at which holders of the Debentures would be able to
sell their Debentures. If a market for the Debentures does develop, the
Debentures may trade at a discount from their initial public offering price,
depending on prevailing interest rates, the market for similar securities,
performance of the Company, performance of the health care industry and other
factors. The Underwriter has informed the Company that it intends to make a
market for the Debentures. However, the Underwriter is not obligated to do so
and any such market-making may be discontinued at any time without notice. The
Company does not intend to apply for listing of the Debentures on Nasdaq or any
securities exchange. Therefore, no assurance can be given as to whether an
active trading market will develop or be maintained for the Debentures. See
"Underwriting."
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Company's Common Stock is traded in the over-the-counter market and
is quoted on the Nasdaq SmallCap Market under the symbol "DANN." The following
table sets forth, for the periods indicated, the high and low bid prices per
share for the Common Stock as reported by the Nasdaq SmallCap Market. Such bid
prices reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1993
First Quarter.................... $ 3.125 $ 2.00
Second Quarter................... 2.75 2.00
Third Quarter.................... 2.50 2.0625
Fourth Quarter................... 2.125 1.50
1994
First Quarter.................... $ 4.375 $1.8125
Second Quarter................... 4.125 2.625
Third Quarter.................... 4.125 3.125
Fourth Quarter................... 4.50 3.625
1995
First Quarter.................... $ 4.375 $ 3.875
Second Quarter................... 10.00 4.00
Third Quarter.................... 10.50 7.125
Fourth Quarter................... 7.875 5.375
1996
First Quarter.................... $ 7.50 $ 5.75
Second Quarter
(through May 7, 1996)......... 7.25 6.50
</TABLE>
On April 2, 1996, the last reported bid price of the Common Stock on
the Nasdaq SmallCap market was $6.875. At March 25, 1996, there were 418 holders
of record of the outstanding Common Stock.
The Company has not declared or paid any cash dividends or
distributions on the Common Stock. The Company intends to retain its earnings to
finance the growth and development of its business and does not expect to
declare or pay any cash dividends in the foreseeable future. The declaration of
dividends is within the discretion of the Company's Board of Directors, subject
to the terms of the Company's revolving credit agreement.
9
<PAGE> 11
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Debentures offered
hereby are estimated to be $4,475,000 ($4,710,000 if the Underwriters'
over-allotment option is exercised in full), after deducting the underwriting
discount and estimated offering expenses. The Company will utilize the net
proceeds to repay the revolving credit amount outstanding under its loan
facility, which at March 31, 1996 was $3,000,000 and bears interest at the
lender's prime rate plus one-half percent (total of 9.25% at March 31, 1996). It
is anticipated that net proceeds of this offering will be used to repay the full
$3,000,000 outstanding principal amount together with approximately $22,000 of
accrued interest. The remaining net proceeds will be used for working capital
purposes including estimated increases during 1996 in account receivables and in
inventories of approximately $1,453,000. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources" and "Business."
CAPITALIZATION
The following table sets forth the capitalization of the Company at
March 31, 1996 and as adjusted to reflect the sale by the Company of the
$5,000,000 principal amount of Debentures offered hereby and the application of
the estimated net proceeds therefrom as described in "Use of Proceeds."
<TABLE>
<CAPTION>
MARCH 31, 1996
---------------------------
ACTUAL AS ADJUSTED
------ -----------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Short-term obligations(1):
Revolving line of credit ........................... $3,000 $ --
Current maturities of term debt
and capital leases .............................. 450 450
------ ------
Total short-term obligations .............. $3,450 $ 450
====== ======
Long-term obligations, excluding current maturities(1):
Bank agreement ..................................... $ 650 $ 650
Other long-term debt and capital leases ............ 293 293
% Convertible Subordinated Debentures due 2003 ... -- 5,000
------ ------
Total long-term obligations ............... 943 5,943
------ ------
Shareholders' equity:
Common Stock, $.01 par value:
Authorized 10,000,000 shares; issued and
outstanding 4,718,990 shares(2) ............. 47 47
Paid-in capital .................................... 3,395 3,395
Retained earnings .................................. 245 245
------ ------
Total shareholders' equity ................ 3,687 3,687
------ ------
Total capitalization .................. $4,630 $9,630
====== ======
</TABLE>
-------------------------
(1) See Notes 4 and 5 of Notes to the Consolidated Financial Statements.
(2) Does not include 516,500 shares of Common Stock issuable upon the
exercise of outstanding options granted pursuant to the Company's
existing stock option plans and shares, subject to adjustment
issuable upon conversion of the Debentures.
10
<PAGE> 12
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below for, and as of
the end of, each of the years in the five year period ended December 31, 1995 is
derived from the audited financial statements of the Company, certain of which
statements appear elsewhere in this Prospectus. The selected consolidated
financial data presented below for, and as of the end of, the three month
periods ended March 31, 1996 and 1995 is derived from the unaudited financial
statements of the Company, which appear elsewhere in this Prospectus. The
following selected consolidated financial data should be read in conjunction
with the Company's consolidated financial statements and related notes and with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere herein.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
------------------ --------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ---- ----
(UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AND RATIO DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue ............................ $ 4,049 $3,298 $ 12,584 $ 10,154 $ 9,313 $ 7,394 $ 8,444
Cost of goods sold ................. 1,910 1,534 6,360 5,128 5,428 3,741 4,341
Gross margin ....................... 2,139 1,764 6,224 5,026 3,885 3,653 4,103
Selling, general and administrative
expenses ......................... 1,626 1,228 5,215 3,394 3,201 2,594 2,525
Research and development expenses .. 217 266 1,147 1,324 1,248 982 961
Operating income (loss) ............ 296 270 (138) 308 (564) 77 617
Interest expense ................... 114 59 289 158 156 192 144
Income (loss) before income taxes .. 182 213 (431) 210 (682) (103) 516
Net income (loss) .................. 137 154 (359) 81 (774) (48) 401
Net income (loss) per share ........ $ .03 $ .03 ($ 0.08) $ 0.02 ($ 0.18) ($ 0.01) $ 0.09
OTHER HISTORICAL DATA:
EBITDA (1) ......................... 448 325 119 565 (221) 399 939
Ratio of EBITDA to interest ........ 3.93 5.51 0.41 3.58 (1.42) 2.08 6.52
Ratio of earnings to fixed
charges (2) ...................... 2.40 4.04 -- (3) 2.01 -- (4) 0.56 3.76
Proforma ratio of earnings to fixed
charges(2) ........................ 2.62 -- (5)
BALANCE SHEET DATA:
Working capital .................... 3,546 2,844 $ 3,186 $ 2,614 $ 2,025 $ 3,767 $ 3,510
Total assets ....................... 10,372 9,206 9,517 7,433 5,798 7,667 6,955
Short-term obligations ............. 3,450 2,820 3,406 2,177 1,800 898 529
Long-term obligations .............. 943 24 874 8 45 2,138 1,553
Total shareholders' equity ......... 3,687 3,716 3,522 3,390 3,008 3,727 3,745
</TABLE>
-----------
(1) As used herein, EBITDA is defined as operating income (loss) plus
depreciation and amortization included therein. The Company believes that
EBITDA is generally recognized as an indicator of a Company's ability to
service its debt and capital expenditure requirements. However, EBITDA is
not intended to be a performance measure that should be regarded as an
indicator of operating performance or cash flows as a measure of
liquidity, as determined in accordance with generally accepted accounting
principles.
(2) For purposes of calculating the ratio of earnings to fixed charges,
earnings include income before income taxes plus fixed charges. Fixed
charges consist of interest expense and the estimated interest component
of operating leases (assumed to be one-third of total rental expense). The
proforma ratio of earnings to fixed charges assumes the application of
$3,000,000 of net proceeds to repay outstanding indebtedness.
(3) Reflects a deficiency of ($431,000).
(4) Reflects a deficiency of ($682,000).
(5) Reflects a proforma deficiency of ($511,000).
11
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The Company participates in two segments of the orthopedic device market,
spinal implants and orthopedic recovery products. Since the Company's entry into
the spinal implant market in 1988, revenues from spinal implant sales have grown
to over $4,000,000 in 1995. As a result of the receipt of FDA marketing
clearance for the SYNERGY(TM) Spinal Implant System in July 1995, the Company
believes spinal implant revenues will continue to grow. The Company is also a
major supplier of CPM devices to the orthopedic rehabilitation market. The
Company has been manufacturing CPM devices and other recovery products since
1983. In 1994, the Company implemented a strategy to enter the orthopedic home
care rental market in order to expand the geographic distribution of the
Company's recovery products into those areas where the Company did not have a
strong distribution network.
Shown below for the years indicated are the percentages that certain
items in the Company's Consolidated Statement of Operations bear to total
revenue.
<TABLE>
<CAPTION>
Three Months Ended
March 31, Years Ended December 31,
------------------ -----------------------------
1996 1995 1995 1994 1993
---- ---- ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net sales .................... 92.8% 97.6% 93.7% 99.3% 99.4%
Lease and rental revenue ..... 7.2 2.4 6.3 0.7 0.6
----- ----- ------ ------ ------
100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold ........... 47.2 46.5 50.5 50.5 58.3
Sales and marketing .......... 24.2 21.7 25.4 18.3 18.8
General and administrative ... 15.9 15.5 16.0 15.1 15.6
Research and development ..... 5.4 8.1 9.1 13.0 13.4
Interest expense ............. 2.8 1.8 2.3 1.6 1.7
Other income (expense) ....... -- -- -- 0.6 0.4
Income (loss) before taxes ... 4.5 6.5 (3.4) 2.1 (7.3)
Income taxes (benefit) ....... 1.1 1.8 (0.6) 1.3 1.0
Net income (loss) ............ 3.4 4.7 (2.8)% 0.8% (8.3)%
</TABLE>
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH
31, 1996 AND 1995.
Total revenue increased 23% for the three months ended March 31, 1996 to
$4,049,000 from $3,298,000 for the three months ended March 31, 1995. The
increase is primarily attributable to increased sales of the SYNERGY(TM) Spinal
Implant System. In addition, the Company benefited from continued penetration
into the orthopedic home care rental market.
Cost of goods sold as a percentage of total revenue increased to 47.2%
for the three months ended March 31, 1996 from 46.5% for the three months ended
March 31, 1995. Sales and marketing expense increased to 24.2% of total revenue
compared to 21.7% for the first quarter of 1996 principally as a result of the
addition of sales and marketing employees and advisors in the continued
expansion of the Company's spinal implant distribution network.
General and administrative expenses increased to 15.9% from 15.5% as a
percentage of total revenue for the three months ended March 31, 1996 and 1995,
respectively.
Research and development expenses decreased to 5.4% from 8.1% of total
revenue for the three months ended March 31, 1996 and 1995, respectively,
principally as a result of a higher level of expenditures in 1995 in connection
with obtaining Section 510(k) approval of the SYNERGY(TM) Spinal Implant System.
These factors resulted in an overall increase in operating income to
$296,000 or 7.3% of total revenue for the three months ended March 31, 1996 from
$270,000 or 8.2% for the three months ended March 31, 1995.
Interest expense increased as a result of increased borrowings to
provide additional working capital.
Net income decreased to $137,000 from $154,000 for the three months
ended March 31, 1996 and 1995, respectively, and earnings per share remained
the same at $.03.
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1995
AND 1994
For 1995 total revenue increased 24% to $12,584,000 from $10,154,000 for
1994. The revenue increase was primarily attributable to an increase in net
sales of spinal implant products and increased recovery products lease and
rental revenue. Spinal implant product net sales increased 42% to $4,091,000 for
1995 compared to $2,880,000 for 1994. This increase was principally a result of
the Company's receipt of 510(k) marketing clearance for its SYNERGY(TM) Spinal
Implant System in July 1995. Sales and rentals of the Company's CPM devices and
other orthopedic recovery products increased 17% to $8,493,000 in 1995 from
$7,274,000 in 1994. The increase was primarily a result of penetration into the
recovery products home care rental market.
Cost of goods sold was 50.5% of total revenue for both 1995 and 1994.
Cost of goods sold totaled $6,360,000 for 1995 and $5,128,000 for 1994. Cost of
goods sold relating to spinal implant products increased as a percentage of
spinal implant product revenue to 48.8% in 1995 from 41.3 % in 1994. This
increase was primarily related to an inventory allowance established for the
Company's Puno/Winter/Byrd spinal implant systems as well as a higher percentage
of lower margin sales of surgical instruments in connection with the
introduction of the SYNERGY(TM) Spinal Implant System. Without these factors,
cost of goods sold as a percentage of spinal implant product net sales would
have remained constant in 1995. Cost of goods sold related to the sale and
rental of recovery products decreased to 51.4% of recovery product revenue in
1995 from 54.2% in 1994 as revenue from lower cost products and rental services
increased in 1995. The Company continually evaluates material and production
costs in an effort to reduce costs on all products and rental services.
Selling, general and administrative expenses increased to 41.4% in 1995
from 33.4% in 1994. In 1995, the Company commenced marketing the SYNERGY(TM)
Spinal Implant System in the United States after FDA marketing clearance was
received in the third quarter. The increased expenses related to these efforts
include, but are not limited to, those associated with the expansion of the
Company's distribution network, increased surgeon training, and additional
12
<PAGE> 14
promotional and marketing expenses. As a percentage of spinal implant products
net sales, selling, general and administrative expenses decreased to 63.9% in
1995 from 65.9% in 1994. It is anticipated that, as a percentage of spinal
implant products net sales, these expenses will continue to decrease if sales of
spinal implants increase as planned. The Company also incurred additional
selling, general and administrative expenses relating to the sale and rental of
its recovery products as it entered the recovery products home care rental
market. As a percentage of recovery products revenue, selling, general and
administrative expenses increased to 30.6% in 1995 from 20.5% in 1994. By
entering the home care rental market, the Company is able to provide
distribution of recovery products in territories where the Company has had
little or no distribution network. It is anticipated that, as a percentage of
recovery products revenue, these expenses will begin decreasing if the Company
continues its penetration into the recovery products home rental market as
planned.
Research and development expenses decreased as a percentage of revenue to
9.1% in 1995 from 13.0% in 1994. In 1995, the Company continued its investment
in research and development in spinal implant products. As a percentage of
spinal implant products net sales, the investment decreased to 21.0% in 1995
from 33.9% in 1994. However, in actual dollars, the reduction was only
approximately $118,000 due to increased investment in 1994 relating to the
submission of the SYNERGY(TM) Spinal Implant System to the FDA for marketing
clearance. In 1996, the Company will continue to invest in the development of
new spinal implant products and anticipates additional product submissions to
the FDA for marketing clearance. Research and development expenses relating to
the recovery products business were less than 5% of recovery products revenue in
both years. The Company continues to explore ways to expand its recovery
products line and maintains a program to improve the current product line.
Interest expense for the year increased primarily as a result of
additional borrowings for working capital.
The Company recognized a tax benefit of $72,000 in 1995 compared with a
tax expense of $129,000 in 1994. The Company's effective tax rate is less than
statutory rates as a result of an increase in the valuation allowance used to
reduce the benefit of research and development tax credits and net operating
losses. Research and development tax credit carryforwards were approximately
$361,000 at December 31, 1995, expiring at various times through December 31,
2010. The Company believes that the valuation allowance is appropriate until
such time as the operations of its spinal implant products segment becomes
profitable.
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1994
AND 1993
Total revenue increased 9% to $10,154,000 in 1994 from $9,313,000 in 1993
as a result of steady sales of the Company's recovery products and increased
sales of spinal implant products. Spinal implant net sales increased to
$2,880,000 in 1994 from $1,360,000 in 1993. Recovery product revenue decreased
to $7,274,000 in 1994 from $7,953,000 in 1993 primarily as a result of customer
concerns about proposed health care reform.
Cost of goods sold decreased to 50.5% in 1994 from 58.3% in 1993. Cost of
goods sold relating to spinal implant products increased as a percentage of
spinal implant product revenue to 41.3% in 1994 from 26.3% in 1993 as the
Company initiated international sales of the SYNERGY(TM) Spinal Implant System.
The increase was caused by a higher percentage of lower margin sales to
international distributors in connection with the introduction of the
SYNERGY(TM) Spinal Implant System into foreign markets. Cost of goods sold for
the Company's recovery products as a percentage of recovery product revenue
decreased to 54.2% in 1994 from 63.7% in 1993. This decrease was impacted by a
charge to cost of goods sold in 1993 for excess and obsolete inventory of
approximately $600,000 or 7.5% of revenue.
Selling, general and administrative expenses decreased slightly to 33.4%
in 1994 from 34.3% in 1993. As spinal implant net sales grew in 1994, the
expenses relating to the spinal implant business decreased, as a percentage of
spinal implant net sales, to 65.9% in 1994 from 98.9% in 1993. For the recovery
products business, these expenses decreased as a percentage of recovery products
revenue to 20.5% in 1994 from 23.3% in 1993, due primarily to a reserve
established for approximately $185,000 owed to the Company by a financially
distressed customer. In 1994, the Company repossessed substantially all of the
assets of the customer and recovered approximately $110,000 of the amount
previously reserved. Excluding this transaction, selling, general and
administrative expenses as a percentage of recovery products revenue increased
slightly to 22.1% in 1994 from 21.0% in 1993.
Research and development expenses decreased as a percentage of revenue
from 13.0% in 1994 to 13.4% in 1993, while total expenditures increased by
$76,000. In 1994, research and development expenses relating to spinal implant
products decreased as a percentage of spinal implant product net sales to 33.9%
in 1994 from 58.8% in 1993. However, in actual dollars, spinal implant research
and development expenses increased approximately $177,000.
13
<PAGE> 15
Interest expense remained constant in actual dollars and as a percentage
of total revenue in 1994 from 1993.
The Company recorded a tax expense of $129,000 in 1994 compared to a tax
expense of $92,000 in 1993. The 1994 effective income tax rate was in excess of
statutory tax rates primarily as a result of an increase in the valuation
allowance used to reduce the tax benefit of research and development tax credit
carryforwards and the future tax benefit of deductions generated principally by
reserves established in prior years.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1996, the Company's working capital position increased by
$360,000 during the first three months of 1996, resulting in a working capital
ratio (ratio of current assets to current liabilities) of 1.62 to 1. The
increase in working capital is principally attributable to the operating results
experienced by the Company during the first quarter of 1996. Accounts
receivables increased by $782,000, inventories increased by $47,000, and trade
payables increased by $684,000. The increase in accounts receivables is
attributable to increased sales in the first quarter. Inventories have begun to
level off after experiencing significant growth to support the SYNERGY(TM)
Spinal Implant System.
During the first quarter of 1996, an additional borrowing of $207,000
contributed to an overall increase in liabilities. Property, plant, and
equipment increased due to an increase in the amount of equipment held for
rental. Shareholder's equity increased principally due to the Company's first
quarter earnings and exercise of outstanding stock options in the first quarter.
Working capital increased to $3,186,000 at December 31, 1995 from
$2,614,000 at December 31, 1994. The current ratio remained constant at 1.6 to
1 at December 31, 1995 and December 31, 1994.
In 1995, the cash flows used in operating activities were $2,311,000
compared to $556,000 in 1994. The primary reason for reduced cash flows from
operating activities in 1995 related to increases in accounts receivable and
inventories. Accounts receivable increased 29% to $3,497,000 at December 31,
1995 from $2,705,000 at December 31, 1994, as a result of the increase in
revenue in 1995. Inventories increased 27% to $4,227,000 at December 31, 1995
from $3,316,000 at December 31, 1994, reflecting an increase in inventory to
support the higher level of sales and the market introduction of the SYNERGY(TM)
Spinal Implant System.
Cash flows used in investing activities were $162,000 in 1995 compared to
$90,000 in 1994. Capital expenditures were $183,000 in 1995 compared to $295,000
in 1994. In 1994, the Company sold manufacturing equipment related to its
recovery products business for $318,000, of which $205,000 was received in cash.
Cash flows provided by financing activities were $2,470,000 in 1995
compared to $603,000 in 1994. The primary source of cash flows from financing
activities in 1995 was from additional borrowings and proceeds from the exercise
of stock options and warrants. In 1995, the Company increased its revolving line
of credit facility to $3,000,000 and added a $1,000,000 five year term note.
The nature of the Company's business subjects the Company to product
liability and related claims from time to time. The Company believes that it has
adequate insurance for its business, but there can be no assurance that the
Company's liquidity will not be materially adversely affected by the final
resolution of pending cases or future claims.
The Company's loan facility provides for a term loan in the initial
principal amount of $1,000,000 and a revolving line of credit in an amount of up
to $3,000,000. All of the Company's assets collateralize the loan facility,
which contains covenants that restrict the payment of dividends, limit the
incurrence of additional debt and require the maintenance of certain financial
ratios. The Company has used the proceeds from the revolving credit line to
finance its working capital requirements. At December 31, 1995, the Company had
borrowed $3,000,000 of its revolving line of credit and reported an overdraft of
$167,000. At that date, the Company was not in compliance with certain of the
financial covenants in the loan facility agreement. Effective as of December 31,
1995, the bank waived the noncompliance and amended the financial covenants to
make them less restrictive. The revolving credit line facility expires on June
30, 1996. The Company believes that it will be able to renew the facility on
substantially similar terms on or prior to that date.
If the Company's SYNERGY(TM) Spinal Implant System sales increase as
planned, the Company recognizes the need for capital to support the anticipated
growth. The Company believes that the proceeds of this offering, its bank loan
facility, working capital, and funds anticipated to be generated by operations
will be sufficient to fund the Company's growth plans for the foreseeable
future.
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BUSINESS
OVERVIEW
Danninger and its wholly-owned subsidiary, Cross, engage in two
distinct business segments of the orthopedic device industry. Danninger designs,
manufactures and distributes orthopedic rehabilitation products, primarily CPM
devices and other orthopedic rehabilitation products. CPM devices are used in
rehabilitation therapy to slowly and continuously move an injured joint without
assistance of the patient's muscle power. This therapy is most commonly used
after joint surgery to improve blood flow, reduce swelling, increase the range
of motion, maintain muscle tone and speed healing. The Company's wholly owned
subsidiary, RSI, rents recovery products directly to end users. Cross designs,
manufactures and markets implants and instruments for the surgical treatment of
degenerative diseases, deformities and trauma of the spine.
The sale of recovery products has historically generated the
substantial portion of Company sales and all of its operating income. In 1988,
the Company entered the spinal implant market with its first implant system,
which was offered in the United States for clinical study only. In 1992, the
Company determined to aggressively pursue its strategy to utilize a substantial
portion of the cash flow generated from its position as a leading manufacturer
of CPM devices to fund the development of its spinal implant business. The
Company formed its Medical Advisory Board of prominent spinal surgeons and began
development of the SYNERGY(TM) Spinal Implant System. The SYNERGY(TM) Spinal
Implant System is a "universal" implant system that allows surgeons to treat
both the thoracic (middle) and lumbar (lower) portions of the spine, which the
Company believes covers approximately 70% of all instrumented spinal fusion
surgeries in the United States. The Company received 510(k) clearance from the
FDA to market the anterior portion of the SYNERGY(TM) Spinal Implant System in
October 1994 and to market the posterior portion of the system in July 1995. The
Company's revenues from its implant business have increased from $347,000, or
less than 5% of total Company revenue, in 1992 to $4,091,000 in 1995, or
approximately 33%, of total Company revenue.
The following are the principal elements of the Company's business
strategy.
Develop United States Distribution. The Company believes that a strong
force of qualified sales and service representatives is essential to increase
its share of the United States spinal implant market, which market was estimated
to exceed $200 million in 1995. The Company utilizes its Medical Advisory Board
to educate spinal surgeons throughout the United States in the use of the
Company's spinal implant systems. With approval of the SYNERGY(TM) Spinal
Implant System by the FDA in 1995, the Company began the process of rapidly
expanding its network of independent sales representative agencies.
Develop International Distribution. The Company believes that the total
foreign market for spinal implant products is approximately equal in size to the
United States market. The Company has marketed its spinal implant systems in
foreign countries for a number of years, generally obtaining regulatory
clearance to market products in these countries prior to clearance in the United
States. The Company currently markets its spinal implant products and
instruments in 16 foreign countries and plans to add qualified distributors in
other foreign markets. In 1995, foreign sales represented approximately $1.4
million, or approximately 35%, of the Company's total implant product revenue.
Develop New Products. The Company intends to continue its investment in
the research and development of new spinal implant products and the improvement
of existing recovery products. The Company believes that technologically
superior products are needed to compete in both the recovery products market and
the spinal implant market. The Company has historically devoted a substantial
portion of its resources to research and development. In recent years the
Company has devoted an increasing amount of its research and development
expenditures to spinal implant products. The Company's research and development
expenditures during the fiscal years ended December 31, 1995, 1994, and 1993
were $1,147,000, $1,324,000, and $1,248,000, respectively.
Continue Strong Position in Recovery Products Market. The Company
believes that it is one of the largest manufacturers of CPM devices in the
United States. The Company strives to improve its position in recovery products
through research and development and increased international distribution. The
Company has recently commenced the direct rental of recovery products in
selected markets.
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THE SPINAL IMPLANT MARKET
Spinal implants are a fast growing segment of the worldwide orthopedic
market. The Company believes that in 1995 the United States market for spinal
implants exceeded $200 million and the Company expects continued growth in the
market. The Company believes that the international market for spinal implant
devices is approximately equal to the United States market, and should continue
to grow at a similar rate. The Company believes that this growth is being fueled
by:
- An increasing number of surgeons specializing in spine surgery;
- Increasing number of spine fusions;
- Increasing market acceptance of spinal implants as clinical data
shows superior results; and
- Inability of other technologies to satisfactorily reduce lower back
pain or stabilize degenerative and traumatized spinal segments.
In addition, the Company believes that final action by the FDA to reclassify
spinal implants utilizing pedicle screws as Class II devices, which is pending,
may further increase the number of physicians performing instrumented fusion
surgeries and the number of such surgeries performed by other physicians.
Conversely, the failure of the FDA to reclassify pedicle screw implants could
reduce the potential demand for the Company's implant products. See "Government
Regulation" and "Legal Proceedings and Insurance Coverage."
The objective of spinal vertebral fusion surgery is to eliminate the
excessive vertebral motion (or spinal instability) resulting from degenerative
diseases, deformities and trauma by fusing adjoining vertebrae. Vertebral fusion
involves the surgical implantation of bone graft into the disc space and/or
along the posterior spinal processes. The grafted bone fuses the vertebrae
together over a period of several months. Typically, the implanted bone is
harvested from the patient's hip in a separate surgical procedure. Clinical
studies have shown that vertebral fusion is an effective technique for treating
chronic pain associated with spinal instability caused by degenerative disc
disease. Vertebral fusion surgery can be performed either with or without the
use of spinal implants.
Instrumented fusion involves the surgical attachment of a metal implant
to the vertebrae adjoining one or more diseased discs through an incision in the
patient's back (posterior) or abdomen (anterior) to immobilize the vertebrae of
the spine during fusion. Throughout the 1980s and early 1990s the use of
instrumented fusion procedures increased primarily due to higher fusion success
rates. The number of lumbar spine fusion procedures utilizing implants increased
by 30% annually between 1990 and 1993. Even though the total number of fusion
procedures has historically increased, instrumented fusions plateaued in 1993,
decreased in 1994 and again increased in 1995. The Company believes that the
decrease in 1994 was largely due to the lack of FDA approval for the use of
pedicle screw implants in the lumbar spine and related product liability
litigation regarding these devices. There can be no assurance that the number of
instrumented fusion procedures performed will continue to increase.
SPINAL IMPLANT PRODUCTS
The initial spinal implant system offered by the Company in 1988 was the
Puno/Winter/Byrd Screw/Rod System (the "PWB Screw/Rod System") for fusion of the
lumbar spine. The Company elected to market the PWB Screw/Rod System in the
United States for clinical studies under an Investigational Device Exemption
("IDE"). The IDE allowed the Company to develop a clinical study in order to
gather the data necessary to assess safety and efficacy of the PWB Screw/Rod
System. The IDE did not permit commercial distribution and limited use of the
PWB Screw/Rod System to a small number of surgeons participating in the study.
The study and patient follow-up has been completed and the Company has the
option of filing a Pre-Market Application ("PMA") with the FDA to permit
distribution of the PWB Screw/Rod System in the United States. However, the
Company has not determined whether to proceed with the PMA in light of the
development of the SYNERGY(TM) Spinal Implant System and the potential
reclassification of pedicle screw fixation by the FDA. See "Government
Regulation."
After developing the PWB Screw/Rod System, the Company also developed
lumbar hooks for the treatment of unstable, degenerative conditions of the
lumbar spine. The lumbar hooks, when used in conjunction with rods and sacral
screws, comprise the Puno/Winter/Byrd Lumbosacral System (the "PWB Lumbosacral
System"). The PWB Lumbosacral
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<PAGE> 18
System did not require clinical study and the Company received 510(k) clearance
from the FDA in April 1992, permitting marketing, sale and use of the PWB
Lumbosacral System. In May 1993, the Company received 510(k) clearance from the
FDA to market the INTEGRAL(TM) Screw System. The INTEGRAL(TM) Screw System was
developed to be used with the PWB Lumbosacral System, allowing surgeons the
option of additional diameters as well as a more rigid construct. It also
allowed the Company to expand its potential market penetration as spinal
surgeons sought more rigid constructs, while the Company developed its next
generation of implants.
The Company formed its Medical Advisory Board and began development of
the SYNERGY(TM) Spinal Implant System in 1992. The SYNERGY(TM) Spinal Implant
System is a "universal" implant system that allows surgeons to treat both the
thoracic (middle) and lumbar (lower) portions of the spine, allowing use of the
SYNERGY(TM) Spinal Implant System in approximately 70% of all instrumented
spinal fusion surgeries in the United States. The SYNERGY(TM) Spinal Implant
System is flexible, strong, and easy for surgeons to use. The SYNERGY(TM) Spinal
Implant System does not demand that surgeons follow a single surgical protocol,
rather it provides several options. Implants come in various sizes and types to
meet the surgeon's preferences and the patient's anatomy, providing a secure
anatomic fit for virtually any pathology. The SYNERGY(TM) Spinal Implant System
features unique implant locking mechanism designs, that combined with the use of
nitrogen-strengthened stainless steel, allow surgeons to assemble constructs of
exceptional strength while keeping the profile extremely low. The SYNERGY(TM)
Spinal Implant System was engineered to be easy for surgeons to use, reducing
surgical time and requiring less fiddle. Screws and hooks are top tightening,
rods do not require pre-loading of additional components, and all implants allow
for free rod rotation. The Company received 510(k) clearance from the FDA to
market the anterior portion of the SYNERGY(TM) Spinal Implant System in October
1994 and for the posterior portion of the system in July 1995. The Company is
currently developing a cervical version and a titanium version of the
SYNERGY(TM) Spinal Implant System. The cervical implant version will permit
surgeons to treat cervical (upper) portion of the spine and, if successfully
developed, will expand the Company's product line to cover 100% of instrumented
spinal fusion surgeries. Titanium implant systems are preferred in many foreign
markets and are used in the United States in cases where magnetic resonance
imaging of the spinal area is anticipated to be needed. The Company believes
that the SYNERGY(TM) Spinal Implant System is one of the few "universal" spinal
implant systems on the market.
Spinal Implant Marketing. The Company markets its spinal implant products
to orthopedic and neurological spine surgeons. The Company estimates that more
than 2,000 physicians perform spinal surgery in the United States, primarily in
major metropolitan areas. Typically the surgeon selects the type of spinal
implant system for each procedure.
The Company believes that the keys to its marketing success in the United
States are the superior design of the Company's spinal implant products, support
from prominent surgeons and strong product distribution. Marketing efforts
include direct selling by the Company's independent sales agencies and direct
marketing to surgeons, participation by the Company in sponsoring symposiums and
training workshops, and the education and training efforts of the members of the
Company's Medical Advisory Board.
The Company markets its spinal implant products through a network of
eighteen independent commissioned sales agencies. The Company considers the
quality of its independent sales agencies and the level of training and service
they provide to surgeons to be a very important factor in its success, second
only to the technological advantages of its spinal implant products. The
independent sales agencies are prohibited from marketing competing spinal
implant products. However, they are permitted to market non-competing implants
and other orthopedic products. Independent sales agencies are required to
purchase the Company's proprietary surgical instruments that are used to install
the Company's spinal implant products. Spinal implant products are consigned to
the independent sales agencies. The SYNERGY(TM) Spinal Implant System contains a
variety of related implantable devices from which the surgeon can choose during
each surgical procedure. After each procedure, the hospital is invoiced by the
Company for the implant devices actually used, and the consigned inventory is
replenished.
Foreign sales of spinal implants and instruments represented
approximately $1.4 million, or 35%, of the Company's total sales of spinal
implants and instruments in fiscal 1995. The Company has been able to market the
SYNERGY(TM) Spinal Implant System in those countries where governmental approval
either is not required or was obtained more quickly than in the United States.
The Company markets its spinal implants through individual distributors in each
country who purchase implants and instrumentation directly from the Company. The
Company has distributors in Argentina, Australia, Belgium, Greece, Hungary,
Italy, Japan, Korea, Malaysia, Philippines, Puerto Rico, Singapore, Spain,
Sweden, Turkey and the United Kingdom. The Company intends to continue to seek
qualified distributors in other foreign markets.
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Medical Advisory Board. The Company has established a Medical Advisory
Board consisting of prominent spinal surgeons who have dealt with a wide variety
of spinal conditions and are familiar with virtually every spinal implant system
on the market. The Medical Advisory Board meets periodically to review and
evaluate the Company's research and development efforts and to identify
promising new technology for the Company. Individual members of the Medical
Advisory Board also meet and consult informally with employees of the Company.
In addition, members of the Medical Advisory Board assist the Company in
training other surgeons in the use of the Company's products. Members of the
Medical Advisory Board receive a fixed quarterly payment from the Company and
share an annual royalty payment based on sales of the Company's spinal implant
products. The Company is obligated to pay a royalty, subject to certain
limitations, to its Medical Advisory Board in an amount equal to 6% and
increasing 0.5% each year up to 8% of net sales of most spinal implant products.
The Company's aggregate royalty expense will increase, if and to the extent,
sales of implants increase. The following doctors are members of the Medical
Advisory Board.
<TABLE>
<S> <C>
Robert B. Winter, M.D., Chairman Minneapolis, MN
J. Abbott Byrd, M.D. Norfolk, VA
Rolando M. Puno, M.D. Louisville, KY
John Lonstein, M.D. Minneapolis, MN
Joseph Perra, M.D. Minneapolis, MN
Manuel Pinto, M.D. Minneapolis, MN
Michael Smith, M.D. Minneapolis, MN
</TABLE>
RECOVERY PRODUCTS
Technology Overview. CPM rehabilitation therapy technology in the
orthopedic field employs devices to slowly and continuously move an injured
joint without assistance of the patient's muscle power. This therapy is most
commonly used after joint surgery to improve blood flow, reduce swelling,
increase the range of motion, maintain muscle tone and speed healing.
Prior to the development of CPM therapy, physicians generally believed
that it was necessary to immobilize a bone and adjacent joints in a cast or
splint subsequent to an injury or an operation during the healing process. This
immobilization resulted in muscle atrophy, cartilage degeneration, and tendon
and ligament stiffening, and often required additional rehabilitation to restore
the pre-injury range of motion and strength. Beginning in the early 1970s,
experiments were conducted to determine the rehabilitative benefits of joint
exercise following surgery. These experiments led to the development of CPM
machines to provide the desired exercise with no effort on the part of the
patient. Clinical research has established that CPM therapy can significantly
reduce post-operative joint pain and swelling and increase arterial blood flow,
thus increasing range of motion and reducing the length of hospitalization and
rehabilitation.
At this time, the major market for CPM devices is for use immediately
following knee and hip joint replacement surgeries. The primary function of this
therapy is to rehabilitate injured or diseased joints and to prevent injury to
joints that would otherwise occur through immobilization. The success that CPM
has enjoyed in post-operative knee and hip therapy has generated demand for CPM
devices for the elbow, shoulder, hand, wrist, ankle and toe joints.
Company Recovery Products. The majority of the Company's line of recovery
products is marketed under the trade name Danniflex(TM). The Company offers a
full range of CPM devices: three leg models, a shoulder model, hand and finger
model, wrist model and toe model. The Company periodically refines and updates
its various CPM devices with the addition of new models to expand its existing
line or replace prior models. In addition to CPM devices, the Company continues
to offer product accessories that make CPM devices easier to use and apply.
The Company also offers a thermal therapy unit ("TTU"). The TTU
circulates heated or cooled water through a pad placed on the area designated
for treatment. The TTU can be programmed to cycle between hot and cold within a
wide range of temperature settings and cycle times. Cycling between hot and cold
simplifies extended treatment, reduces thermal shock, and permits the use of
contrast therapy to improve vascular stimulation. At low temperatures, thermal
therapy reduces post-acute or post-operative swelling and pain and helps control
blood loss. At higher temperatures, thermal therapy relieves chronic pain,
improves circulation, and promotes healing. Applications include
oral/maxillofacial, obstetric/gynecologic, urologic, neurologic, orthopedic, and
plastic surgery. The TTU is designed for hospitals, sports training facilities,
rehabilitation clinics, and home use. A disposable, cold-only, TTU was
introduced in 1993 for use by patients at home. The Company continually seeks to
expand and improve its offering of
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TTUs and is exploring opportunities for other devices which utilize its
engineering and manufacturing strengths as well as its distribution networks.
Recovery Products Marketing. CPM devices are used primarily by
post-surgery orthopedic patients in hospitals and in their homes. CPM devices
are also used in nursing homes, sports medicine clinics and private practice
physical therapy clinics.
The Company sells the majority of its CPM devices to independent durable
medical equipment ("DME") dealers. Typically, DME dealers purchase and inventory
CPM devices in sufficient quantity for their rental markets. Dealers may
purchase the unit outright from the Company or finance the purchase through a
third party lessor. Upon receiving a rental order, the dealer transports the
unit to and from the hospital, institution, or home (usually within a 20 to 50
mile radius), aids in setting up the unit and bills the customer for the service
at a daily, weekly or monthly rental rate.
There are approximately five national DME dealers who rent or lease CPM
devices. Three of the five national DME dealers manufacture their own CPM
devices, and thus, are not customers of the Company. The Company sells to the
remaining two national dealers and to numerous smaller regional and local
dealers. In addition, in 1994, the Company formed RSI as a wholly owned
subsidiary to rent recovery products directly to end users. RSI was formed to
expand the geographic scope of the Company's recovery products market in those
areas without suitable DME dealers, to explore alternative distribution methods
for new and existing products, and to assist the Company in assessing the
product needs and requirements of the recovery products market.
Foreign markets represent an additional opportunity for the sale of the
Company's recovery products. The Company believes that the international market
for recovery products is approximately one-half the size of the United States
market. In 1995, approximately 5% of the Company's recovery products sales were
outside the United States. The Company has recently retained an international
independent sales agent to expand sales of recovery products in these markets.
Recovery Products Manufacturing. The Company assembles its recovery
products, fabricating some of the mechanical parts and purchasing the remaining
mechanical and all of the electrical components from a variety of vendors. All
of the Company's Danniflex(TM) line of lower extremity CPM devices share certain
basic structural elements. While the Company is dependent on certain vendors for
several components such as motors, ball screws, transformers and formed plastic
parts, the majority of the products used in the assembly process are widely
available from a variety of vendors. CPM devices are sold with a limited one
year warranty. Claims under the Company's CPM device warranty have been nominal.
COMPETITION
Spinal Implants. Many companies compete in the spinal implant market and
competition is intense. The Company believes that its largest competitors in the
United States offering spinal implant systems are Sofamor Danek Group, Inc. and
Acromed, Inc., each of which has substantially greater sales and financial
resources than the Company. The Company also competes with many other companies
that offer similar products, including large orthopedic product companies that
are now entering, or may in the future enter, the spinal implant market. Other
companies have developed and are marketing products based on technologies that
are different from the Company's, including spinal fusion cages, spinal implants
designed to be used with minimally invasive or laparoscopic surgery,
biodegradable polymer inserts and artificial bone implants. The Company believes
that it competes on the following basis: (a) the technological design and
functional performance of its implant products, (b) the level of training and
service support provided to spinal surgeons, (c) the professional reputation of
members of its Medical Advisory Board and the design and training assistance
they provide, and (d) the ability of its research and development personnel to
produce technologically superior products. Many of the Company's competitors
have capital resources, research and development staff, facilities, experience
in clinical trials and obtaining regulatory approvals, physician relationships
and experience in manufacturing and marketing significantly greater than those
of the Company. There can be no assurance that the Company will be able to
successfully market its spinal implant products, even if they are
technologically superior to others on the market, nor can there be any assurance
that other competing products or technologies will not be technologically
superior to those offered or developed by the Company.
Recovery Products. The Company competes with at least five other CPM
device manufacturers, three of which manufacture principally for their own
equipment rental businesses. While the Company's CPM devices are competitively
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priced, they are at the high end of the price range for CPM devices. The Company
emphasizes design, quality, reliability, ease of use, safety and durability. The
marketing strategy emphasizes that the Danniflex(TM) products are the best value
in the industry because they are designed and manufactured to be reliable, safe,
easy to set up and operate, cost effective and service oriented. The Company
also competes, through its home care rental subsidiary, with numerous national,
regional and local rental concerns, many of which have greater sales and
financial resources than the Company. There can be no assurance that the Company
will be able to maintain or improve its competitive position in the recovery
products market.
RESEARCH AND DEVELOPMENT
The Company continually strives to improve existing products and develop
new products in both the recovery products market and the spinal implant market.
The Company conducts its research and development activities primarily through
its engineering departments and with the assistance of outside consultants. The
Company employs seven professional engineers and a technician engaged
exclusively in research and development.
In addition to research and development conducted by the Company, the
Medical Advisory Board plays an active role in the development of new spinal
implant products. The Company will continue to work with the members of its
Medical Advisory Board to develop new spinal systems which address spinal
deformities and degenerative disease in the cervical spine as well as titanium
implants to be used with the SYNERGY(TM) Spinal Implant System. The Company's
spinal implant research and development is concentrated on the design of these
new systems, and it expects to submit 510(k) applications to the FDA in 1996 for
the cervical version and the titanium version of the SYNERGY(TM) Spinal Implant
System. At the present time, the recovery products efforts are concentrated on
the development of lower cost leg CPM devices and specialty shoulder and elbow
CPM devices.
The Company's research and development expenditures during the fiscal
years ended December 31, 1995, 1994, and 1993 were $1,147,000, $1,324,000, and
$1,248,000, respectively. The Company intends to continue to invest in the
development of new spinal implant products and the improvement of existing
recovery products.
INTELLECTUAL PROPERTY LAW MATTERS
The Company holds the patent, manufacturing and marketing rights to
certain specialty orthopedic products. The SYNERGY(TM) Spinal Implant System is
covered by numerous pending United States and international patent applications
belonging to the Company. Several of these applications have now been issued by
the U.S. Patent and Trademark Office. These patents and applications concern
various aspects of the SYNERGY(TM) Spinal Implant System including the bone
anchor, the rod/anchor interface, instrumentation and transverse connectors.
Broad patent coverage of CPM devices is precluded by prior art. The
Company owns a patent for its shoulder CPM unit, a hand CPM device, a thermal
therapy pad and an air-powered CPM device.
The Company owns a number of United States trademark registrations and
has developed goodwill in several other trademarks. CROSS(R), CROSS
MEDICAL(R), INTEGRAL(TM) and SYNERGY(TM) are trademarks of the Company.
The Company intends to file patent applications on future products, as
appropriate. The mere filing and prosecution of patent applications, however,
cannot guarantee the ultimate issuance of patents. To the extent that the
Company is unsuccessful in securing patents for its devices or for certain
features of its devices which are easily reverse-engineered, there is little to
prevent a competitor from copying the Company's products, although the Company
would have "lead time" in the marketplace during the period needed by its
competitors to copy and secure FDA approval for a duplicate product. Thus, while
the patents may have value, the Company believes that they are of lesser
significance than the innovative skills, technical competence and marketing
ability of the Company's personnel.
GOVERNMENT REGULATION
The health care industry is subject to extensive government regulation on
both the federal and state levels. In particular, the FDA Act provides for
regulation by the FDA of the manufacture and sale of medical devices.
Under the FDA Act, all medical devices are to be classified as Class I,
Class II or Class III devices, depending upon the risk they present. Many Class
I and all Class II and III medical devices must be reviewed or approved for
marketing
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prior to their distribution unless they are specifically excluded from the
requirement to do so. The review/approval process is more or less difficult
depending upon the product Class. In general, Class I devices must comply with
labeling and record keeping requirements and are subject to other general
controls and periodic inspection. In addition to general controls, Class II
devices must comply with performance standards established by the FDA.
Manufacturers of Class II devices also are subject to periodic inspection by the
FDA. Class III devices must receive pre-market approval from the FDA before they
can be commercially distributed in the United States, and manufacturers of Class
III devices are also subject to periodic inspection. The FDA Act also covers all
incoming materials control, processing control, traceability of input materials
and components, traceability of product servicing and other quality and safety
controls. All of these requirements are covered in the broad FDA specifications
known as "good manufacturing practice" regulations. The Company is required to
obtain similar approvals, and is subject to similar regulation for the sale of
its products in foreign countries and is subject to similar risks relating to
the inability to obtain or the revocation of such approvals.
The Company's products and manufacturing facilities are subject to
continual review and periodic inspection by the FDA. The discovery of
previously unknown problems with the Company or its products or facilities may
result in product labeling restrictions, recall or withdrawal of the products
from the market. As a result of FDA inspections, the Company has received
"Warning Letters" from the FDA notifying the Company of deficiencies in its
manufacturing practices, which if not corrected could result in the recall of
the Company's products. The Company believes that it has satisfactorily
responded to all matters raised in the "Warning Letters" by the FDA during
periodic inspections and has completed the recall of sterilization instructions
for the anterior application of the SYNERGY(TM) Spinal Implant System which
commenced in 1995. Any future product recall could have a material adverse
affect on the Company's sales and profitability.
The Company's CPM devices are Class II devices under FDA regulations. The
Company has received permission from the FDA to market its existing CPM devices
subject to the same FDA controls and performance standards required of other
device manufacturers. Additionally, the Company has received Underwriter's
Laboratory approval on all of its recovery products.
The PWB Screw/Rod System implantable devices are Class III devices. Class
III devices require premarket approval from the FDA before full distribution of
the device may begin. The FDA allows only devices proven to be both safe and
effective to be offered for full distribution. The FDA bases its judgement of
both safety and effectiveness on information gathered during studies conducted
pursuant to an IDE. The Company is following the premarket approval process for
the PWB Screw/Rod System and received an IDE from the FDA for the PWB Screw/Rod
System which permitted it to sell these devices to selected surgeons in the
United States. However, the Company has not determined whether to proceed with
the PMA in light of the development of the SYNERGY(TM) Spinal Implant System and
the potential reclassification of pedicle screw fixation by the FDA from Class
III devices to Class II devices.
The PWB Lumbosacral System and SYNERGY(TM) Spinal Implant System are
Class II devices. The Company has received 510(k) marketing clearance for the
PWB Lumbosacral System and the SYNERGY(TM) Spinal Implant System. The 510(k)
notification is a document submitted to demonstrate that the device in question
is "substantially equivalent" to an already legally marketed device, thus
allowing faster clearance by the FDA than the PMA procedure.
PROPERTIES
The Company leases space for its principal offices and production
facilities in Columbus, Ohio under a rental agreement which expires in June,
1996. The space is allocated to the Company's office and production facilities
as follows: approximately 7,500 square feet are used as office space, 23,000
square feet are used as manufacturing space, and 2,500 square feet are used for
engineering activities. The facility is located at 4140 Fisher Road, Columbus,
Ohio. Additionally, Cross leases office space just over 2,000 square feet at
4168 Fisher Road, Columbus, Ohio.
On February 8, 1996, the Company entered into a lease for its new office
and production facilities in Columbus, Ohio. The lease term begins on May 1,
1996, and terminates on June 1, 2001. The Company anticipates moving all of its
operations into this facility in May 1996. The new lease covers 27,680 square
feet and which the Company plans to use for office, manufacturing, and
engineering activities. The facility is located at 5160-D Paul G. Blazer
Memorial Parkway, Dublin, Ohio 43017.
PERSONNEL
As of March 31, 1996, the Company employed 77 full-time employees. The
Company has no part-time employees. None of the Company's employees are subject
to collective bargaining agreements, and the Company considers its relationship
with its employees to be good.
LEGAL PROCEEDINGS AND INSURANCE COVERAGE
The nature of the Company's business subjects the Company to product
liability and related claims from time to time. The Company maintains a claims
made product liability insurance policy with per occurrence ($50,000) and
aggregate ($250,000) retention limits. Beyond these retention limits, the policy
covers aggregate insured claims made during each policy year up to $5,000,000.
The Company believes that it has adequate insurance for its business, but there
can be no assurance that future operating results will not be materially
adversely affected by the final resolution of pending cases or future claims.
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The Company and other spinal implant manufacturers were named as
defendants in various purported class action product liability lawsuits alleging
that the plaintiffs were injured by spinal implants supplied by the Company and
others. All such lawsuits were consolidated for pretrial proceedings in the
Federal District Court for the Eastern District of Pennsylvania and on February
22, 1995, Chief Judge Emeritus Lewis C. Bechtle denied class certification. The
federal court lawsuits before Judge Bechtle will remain coordinated for further
pretrial purposes but are individual lawsuits. In response to the denial of
class certification, a large number of additional individual lawsuits have been
filed alleging, in addition to damages from spinal implants, a conspiracy among
manufacturers, physicians and other spinal implant industry members. The Company
has been named as a defendant, among others, in approximately 500 such lawsuits.
The Company believes that only approximately 15 of such cases involve individual
plaintiffs utilizing implants supplied by the Company. The Company cannot
estimate precisely at this time the number of such lawsuits that may eventually
be filed. Most of such lawsuits are pending in federal courts and are in
preliminary stages. Discovery proceedings, including the taking of depositions,
have commenced in certain of the lawsuits. Plaintiffs in these cases typically
seek relief in the form of monetary damages, often in unspecified amounts. While
the aggregate monetary damages eventually sought in all of such individual
actions is substantial and exceeds the limits of the Company's products
liability insurance policies, the Company believes that it has affirmative
defenses, including, without limitation, preemption, and that these individual
lawsuits are otherwise without merit. All pending cases are being defended by
the Company's insurance carrier, in some cases under a reservation of rights.
There can be no assurance, however, that the $5,000,000 per policy year limit of
the Company's coverage will be sufficient to cover the cost of defending all
lawsuits or the payment of any amounts that may be paid in satisfaction of any
settlements or judgments. Further, there can be no assurance that the Company
will continue to be able to obtain sufficient amounts of products liability
insurance coverage at commercially reasonable premiums.
In addition to the above, in the ordinary course of business the Company
has been named as a defendant in various other legal proceedings. The Company
has denied liability in all such lawsuits and is vigorously defending the same.
The Company believes that it has adequate insurance for its business, but there
can be no assurance that future operating results will not be materially
adversely affected by the final resolution of these matters.
22
<PAGE> 24
MANAGEMENT
The following table sets forth certain information regarding each
executive officer and director of the Company. The terms of the Company's Board
of Directors are separated into three classes, with Class I expiring in 1997,
Class II expiring in 1998, and Class III expiring in 1996.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
---- --- -------------------------
<S> <C> <C>
Edward R. Funk 70 Chairman of the Board of the Company and of
Cross Medical Products, Inc.; Director (Class II)
Joseph A. Mussey 47 President, Treasurer and Chief Executive Officer
of the Company and of Cross Medical Products,
Inc.; Director (Class I)
Ira Benson 40 Vice President-Sales and Marketing of Cross
Medical Products, Inc.
Paul A. Miller 39 Vice President and Chief Financial Officer of the
Company
Thomas E. Zimmer 54 Vice President-Manufacturing of the Company
Curtis A. Loveland 49 Secretary of the Company; Director (Class II)
Daniel A. Funk, M.D. 40 Medical Advisor for the Company;
Director (Class I)
Daniel A. Gregorie, M.D. 46 Director (Class I)
Herbert J. Kahn 55 Director (Class II)
C. Craig Waldbillig 70 Director (Class III)
Peter H. Williams 45 Director (Class III)
Robert J. Williams 63 Director (Class I)
</TABLE>
EDWARD R. FUNK, SC.D. is a founder and director of the Company and has
previously served as President, Chief Executive Officer, and Treasurer of the
Company. Additionally, Dr. Funk has served as Chairman of the Board of the
Company since its inception. Dr. Funk is also a founder of Superconductive
Components, Inc., Columbus, Ohio, and has been a director and President thereof
since its inception in April 1987. Dr. Funk is the father of Dr. Daniel A. Funk,
also a director of the Company.
JOSEPH A. MUSSEY, President, Treasurer, and Chief Executive Officer,
joined the Company in August 1990 as the Company's Vice President and Chief
Financial Officer. Mr. Mussey was named President of the Company in April 1991
and Chief Executive Officer in November 1991. Mr. Mussey was previously
Executive Vice President of the Process Automation Business of Combustion
Engineering, Inc., a division of Asea Brown Boveri from 1987 until joining the
Company in August 1990. From 1984 to 1987, he was Vice President, Operations of
the Engineered Systems and Controls Group of Combustion Engineering. Prior
thereto he worked for the B.F. Goodrich Co. where he held positions including
Operations Controller, Director of Marketing for the Industrial Products
Division, and Director of Analysis for the Engineered Products Group.
IRA BENSON was named Vice President, Sales and Marketing for Cross
Medical Products, Inc., the Company's wholly owned subsidiary, in June 1992.
From November 1988 until he joined the Company in June 1992, Mr. Benson was Vice
President, Marketing and Director of Marketing of Orthomet, Inc., Minneapolis,
Minnesota, a manufacturer and distributor of reconstructive hip and knee
orthopedic implants.
23
<PAGE> 25
PAUL A. MILLER was named Vice President and Chief Financial Officer in
July 1994. From July 1991 until joining the Company, Mr. Miller was Chief
Financial Officer and General Counsel for Litter Industries, Inc., a
diversified, family owned distributor in Chillicothe, Ohio. From 1983 until
joining Litter Industries, Inc. Mr. Miller was with Coopers & Lybrand L.L.P.
THOMAS E. ZIMMER was named Vice President, Manufacturing in August 1993
and served as the Company's Director of Manufacturing from May 1991 to August
1993. From May 1988 until joining the Company, Mr. Zimmer was Director of
Manufacturing, Electronic Transmitter Group for ABB Kent-Taylor, a division of
Asea Brown Boveri in Rochester, New York.
CURTIS A. LOVELAND, Secretary of the Company since January 1984, has been
a practicing attorney for 23 years and has been a partner in the law firm of
Porter, Wright, Morris & Arthur, Columbus, Ohio since 1979. Mr. Loveland is also
a director of Rocky Shoes & Boots, Inc. and Applied Innovation Inc., both
companies which have a class of equity securities registered pursuant to Section
12 of the Securities Exchange Act of 1934.
DANIEL A. FUNK, M.D. has been an orthopedic surgeon in private practice
in Cincinnati, Ohio, since September 1989 and is a partner with Orthopedic
Consultants of Cincinnati, Inc. Dr. Funk completed a five-year residency in
orthopedic surgery at the Mayo Clinic, Rochester, Minnesota in June 1986. Dr.
Funk then completed a one-year fellowship in sports medicine with Dr. Frank
Noyes, Director of the Cincinnati Sports Medicine Institute, Cincinnati, Ohio,
in June 1987. Thereafter, Dr. Funk was in private practice in Columbus, Ohio,
specializing in orthopedic surgery. From April 1988 to June 1989, Dr. Funk was
Assistant Professor of The Ohio State University School of Medicine, Department
of Orthopedic Surgery. Dr. Funk served as a member of the Company's Technical
Advisory Board from 1984 until he was named as the Company's Medical Advisor in
1990. He is the son of Dr. Edward R. Funk, Chairman of the Board of the Company.
DANIEL A. GREGORIE, M.D. has been the President and Chief Executive
Officer of Choice Care, Cincinnati, Ohio, a managed health care company,
since June 1989.
HERBERT J. KAHN joined CompuServe, Inc. in September 1991 as Vice
President of Administration and is currently an Executive Vice President of that
company. Previously, Mr. Kahn had been the Executive Vice President of ABB
Process Automation Inc., a division of Asea Brown Boveri, from December 1990 to
September 1991. Asea Brown Boveri acquired Combustion Engineering, Inc., in
January 1990, including its Process Automation Business where Mr. Kahn served as
President of the Pulp and Paper Systems Group. Prior to that Mr. Kahn headed
International Operations for the Process Automation Business.
C. CRAIG WALDBILLIG has been Chairman of the Board of Medex, Inc., a
manufacturer of disposable medical supplies and equipment based in Hilliard,
Ohio for more than five years. Mr. Waldbillig also is retired as the Chief
Executive Officer of Medex, Inc. Mr. Waldbillig, as a director of Medex, Inc.,
holds a directorship in a company which has a class of equity securities
registered pursuant to Section 12 of the Securities Exchange Act of 1934.
PETER H. WILLIAMS has been Senior Vice President of Sena, Weller, Rohs
and Williams, Inc., a registered investment advisory firm in Cincinnati, Ohio,
since March 1989. Mr. Williams was President of Sena, Weller, Rohs and Williams,
Inc. for more than five years prior to the sale of that company in February
1989.
ROBERT J. WILLIAMS has been the Chairman of the Board, President and
Chief Executive Officer of ARTEC, Inc. since 1988. ARTEC is an Indianapolis
based manufacturer of disposable anesthesia and respiratory products. Prior to
joining ARTEC, Inc., Mr. Williams served as President of De Puy Orthopedics in
Warsaw, Indiana for fifteen years. De Puy Orthopedics is a leading manufacturer
and marketer of orthopedic devices.
24
<PAGE> 26
DESCRIPTION OF DEBENTURES
The Debentures are to be issued under an Indenture (the "Indenture") to
be dated as of , 1996, between the Company and The Fifth Third Bank as
trustee (the "Trustee"), a copy of which has been filed as an exhibit to the
Registration Statement. The following summary of certain provisions of the
Indenture does not purport to be complete and is subject to, and is qualified in
its entirety by reference to, all the provisions of the Indenture, including the
definitions therein of certain terms. Wherever particular sections or defined
terms of the Indenture are referred to, it is intended that such sections or
defined terms shall be incorporated herein by reference. All parenthetical
references are to sections of the Indenture.
GENERAL
The Debentures will be limited to $5,000,000 aggregate principal amount
($5,250,000 if the Underwriter's over-allotment option is exercised in full),
will be issued only in fully registered form in denominations of $1,000 or any
integral multiple thereof, will bear interest from the date of original issue at
the rate per annum set forth on the cover page of this Prospectus and will
mature on June 1, 2003. Debentures issued pursuant to the over-allotment option
will bear interest from the date of issuance of the original $5,000,000
principal amount of Debentures, and the purchase price for over-allotment option
Debentures will include accrued interest if issued after the date of issuance of
the original $5,000,000 principal amount of Debentures. The Debentures will not
be secured, and the Indenture will not limit the amount of other indebtedness or
securities which may be issued by the Company. The Debentures are not subject to
any sinking fund.
Principal, Change of Control Purchase Price (as defined below), and
premium, if any, are to be payable, and the Debentures will be transferable and
exchangeable at, and conversion may be effected by delivery to, the corporate
trust office of the Trustee in Cincinnati, Ohio.
Interest on the Debentures will be payable semi-annually on June 1 and
December 1 of each year, commencing December 1, 1996, to registered holders of
record at the close of business on the fifteenth day of the month immediately
preceding such interest payment date. At the option of the Company, interest may
be paid by checks mailed to such registered holders.
The Company has been advised by the Underwriter that they presently
intend to make a market in the Debentures offered hereby; however, they are not
obligated to do so, and any market making activity may be discontinued at any
time. There can be no assurance that a trading market for the Debentures will
develop and continue after the offering. Because the Debentures are convertible
into Common Stock, the prices at which the Debentures may trade in the market
likely will be affected by the price of the Common Stock.
CONVERSION RIGHTS
The Debentures will be convertible into Common Stock (except as described
in the following paragraph) of the Company at any time before the close of
business on June 1, 2003 (unless a Debenture or a portion thereof has been
tendered, repurchased or called for redemption, in which case such Debenture may
be converted prior to and including, but not after, the fifteenth day (or, if
such day is not a business day, then on the next following business day) before
the redemption date in respect of such Debenture or portion thereof tendered or
called for redemption unless the Company defaults in the payment of amounts due
on redemption) at the Conversion Price set forth on the cover page of this
Prospectus, adjusted as described below. (Section 5.01) A Debenture in respect
of which the holder has delivered a Change of Control Purchase Notice (as
defined in Section 4.01) may be converted only if such notice is withdrawn in
accordance with the terms of the Indenture. (Section 4.02)
In case of any consolidation or merger to which the Company is a party
other than a merger or consolidation in which the Company is the continuing
corporation, or in case of any sale or conveyance to another corporation of the
property of the Company as an entirety or substantially as an entirety, or in
the case of any statutory exchange of securities with another corporation, there
will be no adjustment of the Conversion Price, but the holder of each Debenture
then outstanding will have the right thereafter to convert such Debenture into
the kind and amount of securities, cash or other property which he would have
owned or have been entitled to receive after such consolidation, merger,
statutory exchange, sale or conveyance had such Debenture been converted
immediately before the effective date of such consolidation, merger, statutory
exchange, sale or conveyance. (Section 5.09) In the case of an all cash merger
of the Company into
25
<PAGE> 27
another corporation or any other cash transaction of the type mentioned above,
the Debentures would thereafter be convertible into the same amount of cash per
share that such holder would have received had such holder converted the
Debentures into Common Stock immediately before the effective date of such cash
merger or transaction. Depending upon the terms of such cash merger or
transaction, the aggregate amount of cash so received on conversion could be
more or less than the principal amount of the Debentures.
The Conversion Price is subject to adjustment upon the occurrence of
certain events, including the issuance of Common Stock as a dividend or
distribution on Common Stock; subdivisions, combinations or reclassification of
Common Stock; the issuance to holders of the Common Stock generally of rights or
warrants (expiring within 45 days after the record date for determining
stockholders entitled to receive them) to subscribe for Common Stock at less
than the then current market price as defined; or the distribution to the
holders of Common Stock generally of evidences of indebtedness, assets
(excluding dividends in cash out of retained earnings) or rights or warrants to
subscribe to securities of the Company other than those mentioned above. If, as
a result of such adjustment, the holder of any Debenture thereafter surrendered
for conversion becomes entitled to receive shares of two or more classes of
capital stock or Common Stock and other capital stock of the Company, the Board
of Directors (whose determination shall be conclusive and shall be described in
a statement filed with the Trustee and with any conversion agent) shall
determine in an equitable manner the allocation of the adjusted Conversion Price
between or among the shares of such classes of capital stock or Common Stock and
other capital stock. Upon conversion, no adjustments will be made for accrued
interest or dividends and, therefore, Debentures surrendered for conversion
after the fifteenth day of the month next preceding an interest payment date and
before such interest payment date must be accompanied by payment of an amount
equal to the interest thereon which is to be paid on such interest payment date.
No adjustment of the Conversion Price will be required to be made in any case
until cumulative adjustments amount to 1% or more of the Conversion Price. The
Company reserves the right to make such reductions in the Conversion Price in
addition to those required in the foregoing provisions as the Company in its
discretion may determine to be advisable in order that certain stock-related
distributions hereafter made by the Company to its stockholders will not be
taxable. (Sections 5.02 and 5.04)
If at any time the Company makes a distribution of property to its
stockholders which would be taxable to such stockholders as a dividend for
federal income tax purposes (e.g., distributions of evidences of indebtedness or
assets of the Company, but generally not share dividends) and, pursuant to the
anti-dilution provisions of the Indenture, the Conversion Price of the
Debentures is reduced, such reduction may be deemed to be the receipt of taxable
income by Debenture holders.
Conversion of Debentures may be effected by delivering them to the
Trustee's corporate trust office at 38 Fountain Square Plaza, Cincinnati, Ohio
45263.
Fractional shares of Common Stock will not be delivered upon conversion,
but a cash payment will be made in respect of such fractional interests, based
on the then current market price of the Common Stock. (Section 5.03)
SUBORDINATION
The Debentures will be subordinated and subject, to the extent and in the
manner set forth in the Indenture, in right of payment to the prior payment in
full of all Senior Indebtedness of the Company. (Section 17.01) Senior
Indebtedness is defined as any indebtedness of the Company or a subsidiary for
money borrowed from banks, trust companies, insurance companies or other
financial institutions and any indebtedness evidenced by notes, bonds or
debentures (whether or not certificated) issued under the provisions of a trust
indenture or similar instrument between the Company and a bank, trust company or
other corporate trustee, which is outstanding on the date hereof or is hereafter
created, incurred or assumed and all deferrals, renewals, extensions and
refundings thereof, other than indebtedness as to which, in the instrument
creating or evidencing the same or pursuant to which the same is outstanding, it
is provided that such indebtedness is subordinate to or equally subordinate with
the Debentures. (Section 1.01 ) At December 31, 1995, the Company had $4,140,000
of outstanding Senior Indebtedness. The Company expects to incur, from time to
time, additional borrowings or other obligations which would be Senior
Indebtedness. The Indenture does not limit the amount of Senior Indebtedness
which the Company may incur, nor does the Indenture prohibit the Company from
creating liens on its property for any purpose. In addition to the subordination
of the Debentures to Senior Indebtedness, the Trustee has a lien prior to the
Debentureholders upon all property and funds held or collected by the Trustee
for its fees and expenses, including fees and expenses of its agents, attorneys
and counsel.
26
<PAGE> 28
No payment shall be made by or on behalf of the Company on account of
principal of, or premium on, if any, or interest on, or on account of the
purchase, redemption or other acquisition or defeasance of the Debentures
(including any purchase required as a result of a Change of Control) if there
shall have occurred and be continuing any default in the payment of any Senior
Indebtedness beyond the period of grace, if any, specified in the instrument
evidencing such Senior Indebtedness (a "Payment Default"). In addition, if any
event of default with respect to any Senior Indebtedness, other than a Payment
Default, occurs and is continuing and as a result thereof the maturity of such
Senior Indebtedness is or may be accelerated (a "Covenant Default"), and the
Company and the Trustee receive written notice (such notice being herein
referred to as a "Deferral Notice") thereof from the holders of at least 10% in
principal amount of Senior Indebtedness, then no payment shall be made by or on
behalf of the Company on account of the Debentures or on account of the
purchase, redemption or other acquisition or defeasance of the Debentures
(including any purchase required as a result of a Change of Control) until the
earlier to occur of (x) the date such Covenant Default is cured, effectively
waived in writing by the holders of such Senior Indebtedness or otherwise ceases
to exist in accordance with the terms of the instruments or agreements creating
or evidencing such Senior Indebtedness, (y) the date the holders of such Senior
Indebtedness or other respective representatives shall have delivered to the
Trustee a written notice of waiver of the benefits of this sentence, or (z) the
179th day after receipt by the Company or the Trustee of such Deferral Notice,
if in any such case such payment is otherwise permitted at such time; provided,
however, that any number of Deferral Notices may be given, but during any 365
consecutive day period only one such period during which such payments on the
Debentures may not be made may commence and the duration of such period may not
exceed 179 days, and provided, further, that no subsequent Deferral Notice
relating to the same or any other Covenant Default existing or continuing on the
date of receipt of any prior Deferral Notice, whether or not such subsequent
Deferral Notice is received by the Company or Trustee within 365 days after
receipt of such prior Deferral Notice, shall be effective to further prohibit
such payments on the Debentures unless all events of default in respect of such
Senior Indebtedness shall have been cured or waived after the date of receipt of
such prior Deferral Notice for a period of not less than 180 consecutive days.
(Section 17.03)
Upon any acceleration of the principal due on the Debentures or any
payment or distribution of assets of the Company to creditors upon any total or
partial dissolution, winding up, liquidation, reorganization or receivership,
whether voluntary or involuntary or in bankruptcy, insolvency, receivership or
other proceedings, all principal of (and premium, if any) and interest due or to
become due on all Senior Indebtedness must be paid in full before the
Debentureholders are entitled to receive or retain any Payment (other than
shares of stock or subordinated indebtedness provided by a plan of
reorganization or adjustment which does not alter the rights of holders of
Senior Indebtedness). (Section 17.02) When the Senior Indebtedness is paid in
full, the Debentureholders will be subrogated to the rights of the holders of
Senior Indebtedness to receive payments or distributions of assets of the
Company applicable to Senior Indebtedness until the Debentures are paid in full.
(Section 17.05) By reason of the subordination described above, holders of
Senior Indebtedness may recover more, ratably, than the Debentureholders in the
event of the insolvency of the Company.
In the event of a recapitalization of the Company (in which a Change of
Control did not occur), the Debentures may remain outstanding; however, the
Conversion Price (including securities into which the Debentures are
convertible) may be adjusted. In the event of a liquidation of the Company, no
payment on account of principal of (or premium, if any) or interest on the
Debentures would be made until all Senior Indebtedness had been paid in full,
but holders of Debentures would be entitled to payment in full of the principal
amount of the Debentures before any distributions are made to any holders of
capital stock of the Company.
LIMITED RIGHT OF REDEMPTION BY HOLDER
Except for personal representative(s) or joint tenant(s) of deceased
Debentureholders, who may present Debentures at any time after June 1, 1996,
holders may present Debentures for payment prior to maturity at 100% of their
principal amount plus accrued interest (but without any premium), subject to the
limitation that the Company is not obligated to redeem any Debentures during the
period beginning with the original issuance of the Debentures and ending prior
to June 1, 1999, and during any 12-month period ending each June 1 thereafter
(i) the portion of the Debenture or Debentures exceeding an aggregate principal
amount of $25,000 per holder or (ii) Debentures in an aggregate principal amount
exceeding $250,000 ($262,500 if the Underwriter's over-allotment option is
exercised in full). Redemption of the Debentures presented for payment by the
last day (June 1) of each such period will be made on the July 1 immediately
following such date, beginning July 1, 1999. Debentures not redeemed in any such
period because they have not been presented by the last day (June 1) of that
period or because of the $25,000 or $250,000 limitations, will be held in order
of their receipt for redemption during the following 12-month period (s) until
redeemed, unless sooner withdrawn by the holder. Subject to the $25,000 and
$250,000 limitations, the Company will, upon the death of any holder, redeem
27
<PAGE> 29
Debentures within 60 days following receipt by the Trustee of a proper written
request therefor from such holder's personal representative or surviving joint
tenant(s), tenant by the entirety or tenant(s) in common. Debentures will be
redeemed in order of their receipt by the Trustee except Debentures presented
for payment in the event of death of the holder, which will be given priority in
order of their receipt. For purposes of a holder's request for redemption, a
Debenture held in tenancy by the entirety or tenancy in common will be deemed to
be held by a single holder and the death of a tenant by the entirety, joint
tenant or tenant in common will be deemed the death of a holder. The death of a
person who, during his lifetime, was entitled to substantially all of the
beneficial ownership interests of a Debenture will be deemed the death of a
holder, regardless of the registered holder, if such beneficial ownership
interest can be established to the satisfaction of the Trustee. (Section 4.05)
For purposes of a holder's request for redemption or a request for
redemption on behalf of a deceased holder, a beneficial interest shall be deemed
to exist in cases of street name or nominee ownership, ownership under the
Uniform Gift to Minors Act, community property or other joint ownership
arrangements between a husband and wife (including individual retirement
accounts or Keogh [H.R. 10] plans maintained solely by or for the holder or
decedent and his or her spouse), and trusts and certain other arrangements where
a person has substantially all of the beneficial ownership interests in the
Debentures during his or her lifetime. Beneficial ownership shall include the
power to sell, transfer or otherwise dispose of the Debenture and the right to
receive the proceeds therefrom, as well as interest and principal payable with
respect thereto. (Section 4.05)
Subject to the foregoing, Debentures must be presented for redemption by
delivering to the Trustee no later than 4:00 p.m., Columbus, Ohio time, on June
1 of any Redemption Period (i) a written request for redemption, in form
satisfactory to the Trustee, signed by the registered holder(s) or his duly
authorized representative, (ii) the Debenture to be redeemed, free and clear of
any liens or encumbrances of any kind, and (iii) in the case of a request made
by reason of the death of a holder, appropriate evidence of death and, if made
by a representative of the deceased holder, appropriate evidence of authority to
make such request. (Section 4.05) Any Debentures presented for redemption at the
option of the holder may be withdrawn by the person (s) presenting the same upon
delivery of a written request for such withdrawal to the Trustee no later than
4:00 p.m., Columbus, Ohio time, on June 1 of any Redemption Period, or prior to
the issuance of a check in payment thereof in the case of Debentures presented
by reason of the death of a holder. (Section 4.06)
In the case of Debentures registered in the names of banks, trust
companies or broker-dealers who are members of a national securities exchange or
the National Association of Securities Dealers, Inc. ("Qualified Institutions"),
the redemption limitations described above will apply to each beneficial owner
of Debentures held by any Qualified Institution and the death of a beneficial
owner shall entitle a Qualified Institution to seek redemption of such
Debentures as if the deceased beneficial owner were the record holder. Such
Qualified Institution, in its request for redemption on behalf of such
beneficial owners, must submit evidence, satisfactory to the Trustee, that it
holds the Debentures subject to the request on behalf of such beneficial owner
and must specify the aggregate principal amount of Debentures being presented
for redemption on behalf of such beneficial owner. (Section 4.05)
The Company is legally obligated to redeem the Debentures properly
presented for redemption in accordance with the terms and conditions of the
Indenture, subject to the foregoing limitations. This redemption obligation is
not cumulative. Holders of the Debentures have no assurance, however, that all
of their Debentures presented for redemption will be redeemed prior to maturity
due to the application of the pro rata and annual amount limitations. The
Company is not required and does not intend to establish a sinking fund or
otherwise to set aside funds for prepayment of the Debentures prior to their
maturity.
Nothing in the Indenture prohibits the Company from redeeming, in
acceptance of tenders made pursuant to the Indenture, Debentures in excess of
the principal amount that the Company is obligated to redeem, nor does anything
in the Indenture prohibit the Company from purchasing any Debentures in the open
market. However, the Company may not use any Debentures purchased in the open
market as a credit against its redemption obligation.
REDEMPTION AT OPTION OF THE COMPANY
The Debentures may be redeemed, in whole or in part, at any time on or
after June 1, 1996, on at least 30 and not more than 60 days' notice at the
option of the Company, if then permitted by the Company's other debt
instruments; provided, however, that the Debentures may not be redeemed prior to
June 1, 1999, unless the average closing bid price per share of the Common Stock
is at least 140% of the Conversion Price in effect on each Trading Day (as
defined) for a period of not less than 20 Trading Days with a period of 30
consecutive Trading Days ending within five Trading Days
28
<PAGE> 30
immediately prior to the date on which notice of redemption is first given to
any Debentureholder. (Sections 3.01 and 3.02) The redemption prices for
Debentures redeemed on or after June 1, 1996 are as follows (expressed in
percentages of principal amounts):
If redeemed during the 12-month period beginning June 1,
<TABLE>
<CAPTION>
YEAR PERCENTAGE
<S> <C>
1996...................................... 108%
1997...................................... 107%
1998...................................... 106%
1999...................................... 105%
2000...................................... 104%
2001...................................... 102%
</TABLE>
and thereafter at 100% of the principal amount thereof, in each case together
with accrued interest to the date fixed for redemption. In the event the Company
notifies the holder of Debentures that the Company intends to redeem the
Debentures and the holder elects to convert the Debentures, no payment or
adjustment shall be made on such conversion for interest accrued on the
Debentures surrendered for conversion. (Section 5.02)
Notice of redemption will be given to holders of Debentures to be
redeemed by first class mail at their last addresses on the registry books of
the Company. (Section 3.02)
REPURCHASE OF DEBENTURES AT THE HOLDER'S OPTION AFTER A CHANGE OF CONTROL
In the event of any Change of Control of the Company, each holder of
Debentures will have the right, at the holder's option, subject to the terms and
conditions of the Indenture, to require the Company to become obligated to
purchase all or any part (provided that the principal amount at maturity of such
part must be $1,000 or an integral multiple thereof) of the holder's Debentures
on the date that is 35 business days after the occurrence of such Change of
Control (the "Change of Control Purchase Date") at a price equal to 101% of the
principal amount thereof plus accrued interest to the Change of Control Purchase
Date (the "Change of Control Purchase Price"). (Section 4.01)
Within 20 business days after the Change of Control, the Company is
obligated to provide to all holders of Debentures at their addresses shown on
the registry books of the Company (and to beneficial owners if required by
applicable law) a notice regarding the Change of Control, which notice shall
state, among other things, (i) the date of such Change of Control and the events
causing such Change of Control, (ii) the last date by which the Change of
Control Purchase Notice must be given, (iii) the Change of Control Purchase
Date, (iv) the Change of Control Purchase Price, (v) the place to surrender
Debentures in exchange for the Change of Control Purchase Price, (vi) the
current Conversion Price, (vii) that Debentures as to which a Change of Control
Purchase Notice has been given may be converted into Common Stock only if the
Change of Control Purchase Notice has been withdrawn in accordance with the
terms of the Indenture, (viii) the procedures the holder must follow to exercise
these rights and (ix) the procedures for withdrawing a Change of Control
Purchase Notice. (Section 4.01)
To exercise this right, the holder must deliver the Change of Control
Purchase Notice to the Company prior to the close of business on the Change of
Control Purchase Date. The Change of Control Purchase Notice shall state (i) the
certificate numbers of the Debentures to be delivered by the holder thereof for
purchase by the Company, (ii) the portion of the principal amount of Debentures
to be purchased, which portion must be $1,000 or an integral multiple thereof,
and (iii) that such Debentures are to be purchased by the Company pursuant to
the applicable provisions of the Indenture. (Section 4.01)
Any Change of Control Purchase Notice may be withdrawn by the holder by a
written notice of withdrawal delivered to the Company prior to the close of
business on the Change of Control Purchase Date. The notice of withdrawal shall
state the principal amount and the certificate numbers of the Debentures as to
which the withdrawal notice relates and the principal amount, if any, that
remains subject to a Change of Control Purchase Notice. (Section 4.02)
Payment of the Change of Control Purchase Price for a Debenture for which
a Change of Control Purchase Notice has been delivered and not validly withdrawn
is conditioned upon delivery of such Debenture (together with necessary
endorsements) to the Company at any time (whether prior to, on or after the
Change of Control Purchase Date) after the
29
<PAGE> 31
delivery of such Change of Control Purchase Notice. (Section 4.01) Payment of
the Change of Control Purchase Price for such Debenture will be made promptly
following the later of the Change of Control Purchase Date or the time of
delivery of such Debenture. (Section 4.01)
Under the Indenture, a "Change of Control" of the Company is deemed to
have occurred at such time, as (i) any person (including such person's
Affiliates and Associates) other than the Company, its subsidiaries or their
employee benefit plans, files a Schedule 13D or 14D-1 (or any successor
schedule, form or report under the Securities Exchange Act of 1934, as amended
(the "Exchange Act")), disclosing that such person has become the beneficial
owner of 50% or more of the Common Stock, (ii) there shall be consummated any
consolidation or merger of the Company into any other entity, or conveyance,
transfer or lease of all or substantially all of its assets to any person or any
other corporation merges into the Company, other than, in any case, a
transaction in which the stockholders of the Company immediately prior to such
transaction own immediately following such transaction at least 70% of the
combined voting power of the outstanding voting stock of the corporation
resulting from such transaction in substantially the same proportion as their
ownership of Common Stock of the Company immediately before such transaction, or
(iii) there is (a) declared effective by the Commission a registration statement
pursuant to the Securities Act of 1933, as amended (or any successor thereto),
which includes shares of voting capital stock of any Material Subsidiary of the
Company, or (b) a distribution by the Company, by way of dividend or any other
form of transfer or conveyance to its then existing stockholders or other
persons in a corporate reorganization, recapitalization or spin-off transaction,
of any shares of voting capital stock of any Material Subsidiary of the Company.
(Section 1.01) A Change of Control does not include other events that might
adversely affect the financial condition of the Company or result in a downgrade
in the credit rating of the Debentures if indeed such a rating is publicly
available.
The Board of Directors of the Company does not have the right to limit a
Debentureholder's right to receive the Change of Control Purchase Price by
approving a Change of Control, including any Change of Control involving the
Company's management.
The Company will comply with the provisions of Rule 13e-4 and any other
tender offer rules under the Exchange Act which may then be applicable and will
file a Schedule 13E-4 or any other schedule required thereunder in connection
with any offer by the Company to purchase Debentures at the option of holders
upon a Change of Control. (Section 4.04)
The Change of Control purchase feature of the Debentures may in certain
circumstances make more difficult or discourage a takeover of the Company and,
thus, the removal of incumbent management. The Change of Control purchase
feature of the Debentures, however, is not the result of management's knowledge
of any specific effort to accumulate Common Stock or to obtain control of the
Company by means of a merger, tender offer, solicitation or otherwise, or part
of a plan by management to adopt a series of antitakeover provisions. Instead,
the Change of Control purchase feature is a standard term contained in other
convertible debt offerings that have been marketed by the Underwriter and the
terms of such feature result from negotiations between the Company and the
Underwriter.
There can be no assurance that the Company would have sufficient funds to
pay the Change of Control Purchase Price for all Debentures tendered by the
holders thereof if a Change of Control were to occur. In addition, the Company's
ability to purchase Debentures with cash may be limited by the terms of its then
existing borrowing agreements. A default by the Company on its obligation to pay
the Change of Control Purchase Price would result in an Event of Default and
could result in acceleration of the maturity of other indebtedness of the
Company at the time outstanding pursuant to cross-default provisions. See
"Events of Default." In such event, the ability of a holder to receive the
Change of Control Purchase Price may be limited unless and until such default or
acceleration can be cured, waived or cease to exist. In general, however, no
such default would occur as long as the Company were permitted under its other
loan agreements to purchase the Debentures tendered for purchase. No Debentures
may be purchased if an Event of Default described under "Events of Default"
below has occurred and is continuing (other than a default in the payment of the
Change of Control Purchase Price with respect to such Debentures). (Section
4.02)
Because the Indenture does not limit the amount of Senior Indebtedness,
in the event that the Company undertakes a highly leveraged transaction in which
no Change of Control occurs, holders of the Debentures would have no right to
require repurchase of the Debentures after such an event.
30
<PAGE> 32
EVENTS OF DEFAULT
Events of Default are defined in the Indenture as being: default in
payment of any interest installment due on the Debentures and not cured within
21 business days; default in payment of principal, Change of Control Purchase
Price, or premium, if any; failure to make any redemption payment with respect
to any of the Debentures as and when the same shall have become due and payable
and continuance of such default for a period of 10 business days; default in
performance of any other covenant in the Indenture continuing for 60 days after
notice to the Company by the Trustee or to the Company and the Trustee by the
holders of 25% in principal amount of the outstanding Debentures; default by the
Company or any subsidiary under any mortgage, indenture, loan agreement or other
financial obligation providing for indebtedness or securing indebtedness of the
Company in excess of $1,000,000 and such default results in acceleration of such
indebtedness which acceleration is not rescinded or annulled within 30 days
after written notice to the Company from the Trustee or to the Company and the
Trustee from holders of not less than 25% in aggregate principal amount of
Debentures then outstanding; and certain events of bankruptcy, insolvency and
reorganization of the Company. (Section 8.01)
The Indenture contains a provision entitling the Trustee, subject to the
duty of the Trustee during default to act with the required standard of care, to
be indemnified by the Debentureholders before proceeding to exercise any right
or power under the Indenture at the request of Debentureholders. (Section 9.01)
The Indenture also provides that the holders of a majority in principal amount
of the outstanding Debentures may direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee, or exercising
any trust or power conferred on the Trustee, and prior to any declaration
accelerating the maturity of the Debentures, may waive certain past defaults
under the Debentures. (Section 8.07)
The Indenture provides that no Debentureholder may institute any action
against the Company under the Indenture (except actions for payment of overdue
principal, payment upon redemption, Change of Control Purchase Price, interest
or any premium) unless such Debentureholder previously shall have given to the
Trustee written notice of default and continuance thereof, and unless the
holders of at least 25% in principal amount of Debentures then outstanding shall
have requested the Trustee to institute such action and shall have offered the
Trustee reasonable indemnity, the Trustee shall not have instituted such action
within 60 days of such request and the Trustee shall not have received direction
inconsistent with such written request by the holders of not less than 50% in
aggregate principal amount of the Debentures then outstanding. (Section 8.04)
The Indenture contains a covenant that the Company will file annually
with the Trustee a certificate as to compliance with the terms and provisions of
the Indenture. (Section 6.05)
MODIFICATION OF THE INDENTURE
The Indenture contains provisions permitting the Company and the Trustee
with the consent of the holders of 66 2/3% in principal amount of the
outstanding Debentures, to execute supplemental indentures adding any provisions
to or changing or eliminating any of the provisions of the Indenture or
modifying the rights of the Debentureholders, except that no such supplemental
indenture may (i) extend the fixed maturity of any Debenture, reduce the rate or
extend the time of payment of interest thereon, reduce the principal amount
thereof or premium thereon, change the currency of payment of the Debentures or
impair the right to convert or redeem the Debentures or the terms upon which the
Debentures may be converted or redeemed or impair the right of a Debentureholder
to receive the Change of Control Purchase Price upon a Change of Control,
without the consent of the holder of each Debenture so affected, or (ii) reduce
the aforesaid percentage of Debentures, the holders of which are required to
consent to any such supplemental indenture, without the consent of the holders
of all outstanding Debentures. (Section 12.02)
REPORTS TO DEBENTUREHOLDERS
The Company intends to furnish to holders of the Debentures all quarterly
and annual reports which it furnishes to holders of its Common Stock.
31
<PAGE> 33
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 10,000,000 shares
of Common Stock, $0.01 par value. The following summary of the Company's capital
stock is subject to, and qualified in its entirety by, the Company's Restated
Certificate of Incorporation, as amended (the "Certificate of Incorporation"),
and the Amended and Restated Bylaws (the "Bylaws") that are included as exhibits
to the Registration Statement of which this Prospectus forms a part and by the
provisions of applicable law.
COMMON STOCK
At March 1, 1996, there were 4,716,990 shares of Common Stock
outstanding. In addition, at December 31, 1995, 516,500 shares of Common Stock
were reserved for issuance upon exercise of outstanding stock options. Holders
of Common Stock are entitled to one vote per share on any matter submitted to
the vote of stockholders. Cumulative voting is prohibited in the election of
directors. Accordingly, the holders of a majority of the outstanding shares have
the power to elect all directors and to control the resolution of most issues
put to a vote of the stockholders. The holders of Common Stock are entitled to
receive ratably such dividends, if any, as may be declared from time to time by
the Board of Directors out of funds legally available therefor. See "Price Range
of Common Stock and Dividend Policy." The Common Stock is not redeemable, does
not have any conversion rights and is not subject to call. Holders of shares of
Common Stock have no preemptive rights to maintain their respective percentage
of ownership in future offerings or sales of stock by the Company. The shares of
Common Stock presently outstanding are fully paid and nonassessable.
LIMITATIONS ON LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Company's Certificate of Incorporation limits the liability of
directors to the extent currently permitted by the Delaware General Corporation
Law. In addition, the Company's Bylaws provide that the Company shall indemnify
directors and officers of the Company to the extent permitted by such law. The
Company has entered into an indemnification agreement with each of its
directors.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "Securities Act") may be permitted to directors,
officers and controlling persons of the Company pursuant to the above referenced
provisions, or otherwise, the Company has been advised that in the opinion of
the Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable.
DELAWARE TAKEOVER STATUTE
The Company is subject to Section 203 of the Delaware General Corporation
Law which, subject to certain exceptions, prohibits a Delaware corporation from
engaging in any business combination with an interested stockholder for a period
of three years following the date that such stockholder became an interested
stockholder, unless: (i) prior to such date, the board of directors of the
corporation approved either the business combination or the transaction which
resulted in the stockholder becoming an interested stockholder; (ii) upon
consummation of the transaction which resulted in the stockholder becoming an
interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced, excluding for purposes of determining the number of shares
outstanding those shares owned (x) by persons who are directors and also
officers, and (y) by employee stock plans in which employee participants do not
have the right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer, or (iii) on or subsequent
to such date, the business combination is approved by the board of directors and
authorized at an annual or special meeting of stockholders, and not by written
consent, by the affirmative vote of at least 66 2/3% of the outstanding voting
stock which is not owned by the interested stockholder.
In general, Section 203 defines an interested stockholder as any entity
or person beneficially owning 15% or more of the outstanding voting stock of a
Delaware corporation and any entity or person associated with or controlling or
controlled by such an entity or person. Section 203 defines business combination
to include: (i) any merger or consolidation involving the corporation and the
interested stockholder, (ii) any sale, transfer, pledge or other disposition
involving the interested stockholder of 10% or more of the assets of the
corporation; (iii) subject to certain exceptions, any transaction which results
in the issuance or transfer by the corporation of any stock of the corporation
to the interested stockholder, (iv) any transaction involving the corporation
which has the effect of increasing the proportionate share of the stock of any
class or series of the corporation beneficially owned by the interested
stockholder, or (v) the receipt by
32
<PAGE> 34
the interested stockholder of the benefit of any loans, advances, guarantees,
pledges or other financial benefits provided by or through the corporation.
CERTAIN PROVISIONS OF THE CERTIFICATE OF INCORPORATION AND BYLAWS; BUSINESS
COMBINATION PROVISIONS
The Company's Certificate of Incorporation and Bylaws contain various
provisions that may have the effect, either alone or in combination with each
other, of making more difficult or discouraging a business combination or an
attempt to obtain control of the Company that is not approved by the Board of
Directors. These provisions include (i) the right of the Board of Directors to
issue shares of unissued and unreserved Common Stock without stockholder
approval, (ii) the division of the Board of Directors into three classes, (iii)
the requirement of the vote of the holders of not less than 80% of the
outstanding voting stock to remove a director, unless the removal is recommended
by at least 80% of the entire Board of Directors, (iv) prohibitions on the right
of stockholders to call a special meeting, of stockholders, and (v) the right of
a majority of the directors then in office to fill any vacancies in the Board of
Directors or newly created directorships.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Fifth Third
Bank.
UNDERWRITING
Pursuant to the Underwriting Agreement, and subject to the terms and
conditions thereof, The Ohio Company (the "Underwriter") has agreed to purchase
from the Company $5,000,000 of Debentures.
In the Underwriting Agreement, the Underwriter has agreed, subject to
the terms and conditions contained therein, to purchase the entire $5,000,000
principal amount of Debentures offered hereby if any are purchased.
The Company has been advised by the Underwriter that it proposes
initially to offer the Debentures to the public at the public offering price set
forth on the cover page of this Prospectus and to certain dealers at such price
less a concession not in excess of $______ per Debenture. The Underwriter may
allow and such dealers may reallow a concession not in excess of $______ per
Debenture to certain other dealers. After the Debentures are released for sale
to the public, the offering price and such concessions may be changed.
The offering of the Debentures is made for delivery when, as and if,
accepted by the Underwriter and subject to prior sale and to withdrawal,
cancellation or modification of the offer without notice. The Underwriter
reserves the right to reject any order for the purchase of the Debentures.
The Company has granted to the Underwriter an option, exercisable not
later than 30 days from the date of this Prospectus, to purchase up to an
additional $250,000 principal amount of Debentures to cover overallotments. To
the extent that the Underwriter exercises this option, the Underwriter will have
a firm commitment to purchase such Debentures and the Company will be obligated,
pursuant to the option, to sell such Debentures to the Underwriter. The
Underwriter may exercise such option only to cover over-allotments made in
connection with the sale of the Debentures offered hereby. If purchased, the
Underwriter will sell such additional Debentures on the same terms as those on
which the $5,000,000 principal amount are being offered.
The Underwriting Agreement provides that the Company will indemnify the
Underwriter and controlling persons, if any, against certain liabilities,
including liabilities under the Securities Act, or will contribute to payments
which the Underwriter or any such controlling persons may be required to make in
respect thereof.
In connection with this offering, certain selling group members (if any)
or their respective affiliates who are qualifying registered market makers on
the Nasdaq SmallCap market may engage in passive market making transactions in
the Common Stock on the Nasdaq SmallCap market in accordance with Rule 10b-6A
under the Exchange Act during the two business day period before commencement of
offers or sales of the Debentures. The passive market making transactions must
comply with applicable volume and price limits and be identified as such. In
general, a passive market maker may display its bid at a price not in excess of
the highest independent bid for the security; if all independent bids
33
<PAGE> 35
are lowered below the passive market maker's bid, however, such bid must then be
lowered when certain purchase limits are exceeded.
LEGAL MATTERS
The validity of the Debentures offered hereby is being passed upon for
the Company by Porter, Wright, Morris & Arthur, Columbus, Ohio. Curtis A.
Loveland, Esq., a director and Secretary of the Company and a partner at
Porter, Wright, Morris & Arthur, beneficially owns 559,378 shares of the
Company's Common Stock, or 11.83% of the outstanding shares, including 27,460
shares held by Mr. Loveland directly or in a self-directed retirement account,
12,500 shares subject to exercisable options, and 519,418 shares held as
trustee for various irrevocable trusts for the benefit of Dr. Edward R. Funk
and/or members of his family. Certain legal matters will be passed upon for
the Underwriter by Squire, Sanders & Dempsey, Columbus, Ohio.
EXPERTS
The financial statements and the related financial statement schedule
as of December 31, 1995 and December 31, 1994 and for each of the three years in
the period ended December 31, 1995 included or incorporated by reference in
this Prospectus have been audited by Coopers & Lybrand L.L.P., independent
accountants, as stated in their reports, which are included or incorporated by
reference herein, and have been so included or incorporated in reliance upon
the reports of such firm given upon their authority as experts in accounting and
auditing.
34
<PAGE> 36
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Accountants................................................................ F-2
Consolidated Balance Sheet as of March 31, 1996 (Unaudited) and
December 31, 1995 and 1994............................................................. F-3
Consolidated Statement of Operations for the three months ended
March 31, 1996 and 1995 (Unaudited) and the three years
ended December 31, 1995, 1994 and 1993................................................. F-4
Consolidated Statement of Changes in Shareholders' Equity for
the three months ended March 31, 1996 (Unaudited) and
the three years ended December 31, 1995, 1994 and 1993................................. F-5
Consolidated Statement of Cash Flows for the three months ended
March 31, 1996 and 1995 (Unaudited) and the three years
ended December 31, 1995, 1994 and 1993................................................. F-6
Notes to the Consolidated Financial Statements................................................... F-8
</TABLE>
F-1
<PAGE> 37
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders of
Danninger Medical Technology, Inc.
Columbus, Ohio
We have audited the accompanying consolidated balance sheets of Danninger
Medical Technology, Inc. and Subsidiaries as of December 31, 1995 and 1994, and
the related consolidated statements of operations, changes in shareholders'
equity, and cash flows for each of the three years in the period ended December
31, 1995. 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 audits.
We conducted our audits 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 audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Danninger Medical
Technology, Inc. and Subsidiaries as of December 31, 1995 and 1994, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1995 in conformity with generally
accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Columbus, Ohio
March 27, 1996
F-2
<PAGE> 38
DANNINGER MEDICAL TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET, March 31, 1996 (Unaudited)
December 31, 1995 and 1994
(In thousands)
-------
ASSETS
<TABLE>
<CAPTION>
MARCH 31,
1996 1995 1994
--------- ---- ----
(Unaudited)
<S> <C> <C> <C>
Current assets:
Cash $ 75 $ 3
Accounts receivable trade (net of allowance for
doubtful accounts of $204 and $131 for 1995
and 1994, respectively 4,279 $3,497 2,705
Inventories 4,274 4,227 3,316
Prepaid expenses and other current assets 467 409 498
Deferred income taxes 193 174 127
------ ------ ------
Total current assets 9,288 8,307 6,649
------ ------ ------
Property and equipment, net 660 724 487
------ ------ ------
Other assets:
Notes receivable 85
Other assets 298 304 171
Deferred taxes 126 182 41
------ ------ ------
Total assets $10,372 $9,517 $7,433
======= ====== ======
</TABLE>
Continued
F-3
<PAGE> 39
DANNINGER MEDICAL TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET, Continued
(In thousands except for share amounts)
---------
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
MARCH 31,
1996 1995 1994
---- ---- ----
(UNAUDITED)
<S> <C> <C> <C>
Current liabilities:
Cash overdraft $ 167
Current portion, term debt $ 3,429 3,380 $2,140
Current portion, capital lease obligations 21 26 37
Accounts payable, trade 1,830 1,146 1,532
Accrued expenses and other liabilities 462 402 326
------- ------ ------
Total current liabilities 5,742 5,121 4,035
------- ------ ------
Term debt, net of current maturities 913 839
------- ------
Obligations under capital leases, net
of current maturities 30 35 8
------- ------ ------
Commitments and contingencies
Shareholders' equity:
Common stock, $.01 par value:
Authorized, 10,000,000 shares; issued and
outstanding 4,707,490 and 4,551,390 shares
for 1995 and 1994, respectively 47 47 46
Paid-in capital 3,395 3,367 2,877
Retained earnings 245 108 467
------- ------ ------
Total shareholders' equity 3,687 3,522 3,390
------- ------ ------
Total liabilities and shareholders' equity $10,372 $9,517 $7,433
======= ====== ======
</TABLE>
See notes to the consolidated financial statements.
F-4
<PAGE> 40
DANNINGER MEDICAL TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
for the three months ended March 31, 1996 and 1995 (Unaudited)
and the three years ended December 31, 1995, 1994 and 1993
(In thousands except share amounts)
---------
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C> <C>
Revenue:
Net sales $3,757 $3,218 $ 11,785 $ 10,083 $ 9,254
Lease and rental revenue 292 80 799 71 59
------ ------ ----------- ----------- -----------
4,049 3,298 12,584 10,154 9,313
Cost of goods sold 1,910 1,534 6,360 5,128 5,428
------ ----- ----------- ----------- -----------
Gross margin 2,139 1,764 6,224 5,026 3,885
------ ----- ----------- ----------- -----------
Operating expenses:
Sales and marketing 981 717 3,201 1,858 1,750
General and administrative 645 511 2,014 1,536 1,451
Research and development 217 266 1,147 1,324 1,248
------ ----- ----------- ----------- -----------
1,843 1,494 6,362 4,718 4,449
------ ----- ----------- ----------- -----------
Operating income (loss) 296 270 (138) 308 (564)
Other income (expense):
Interest expense (114) (59) (289) (158) (156)
Other income (expense), net 2 (4) 60 38
------ ----- ----------- ----------- -----------
(114) (57) (293) (98) (118)
------ ----- ----------- ----------- -----------
Income (loss) before
income taxes 182 213 (431) 210 (682)
------ ----- ----------- ----------- -----------
Income taxes (benefit):
Federal:
Current 60 155
Deferred 37 (11) (100) 100 (101)
State and local 8 10 28 29 38
------ ----- ----------- ----------- -----------
45 59 (72) 129 92
------ ----- ----------- ----------- -----------
Net income (loss) $ 137 $ 154 $ (359) $ 81 $ (774)
====== ===== =========== =========== ===========
Earnings per share:
Net income (loss) per share $ .03 $ .03 ($ .08) $ .02 ($ .18)
====== ===== =========== =========== ===========
Weighted average shares
outstanding including common
stock equivalents 4,986,755 4,745,652 4,661,332 4,695,418 4,420,312
========= ========= =========== =========== ===========
</TABLE>
See notes to the consolidated financial statements.
F-5
<PAGE> 41
DANNINGER MEDICAL TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
for the three months ended March 31, 1996 and 1995 (Unaudited)
and the three years ended December 31, 1995, 1994 and 1993
(In thousands)
----------
<TABLE>
<CAPTION>
Number
Of Shares Common Paid-In Retained
Outstanding Stock Capital Earnings Total
----------- ----- ------- -------- -----
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1993 4,401 $ 44 $2,523 $1,160 $3,727
Exercise of stock options
for shares of common stock 30 49 49
Tax benefit from stock options
exercised 6 6
Net loss (774) (774)
------ ------ ------ ------ ------
Balance, December 31, 1993 4,431 44 2,578 386 3,008
Exercise of stock options and warrants
for shares of common stock 121 2 262 264
Tax benefit from stock options
exercised 37 37
Net income 81 81
------ ------ ------ ------ ------
Balance, December 31, 1994 4,552 46 2,877 467 3,390
Exercise of stock options and warrants
for shares of common stock 156 1 402 403
Tax benefit from stock options
exercised 88 88
Net loss (359) (359)
------ ------ ------ ------ ------
Balance, December 31, 1995 4,708 $ 47 $3,367 $ 108 $3,522
Exercise of stock options and warrants
for shares of common stock 11 28 28
Net income 137 137
------ ------ ------ ------ ------
Balance, March 31, 1996
(unaudited) 4,719 47 3,395 245 3,687
====== ====== ====== ====== ======
</TABLE>
See notes to the consolidated financial statements.
F-6
<PAGE> 42
DANNINGER MEDICAL TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
for the three months ended March 31, 1996 and 1995 (Unaudited)
and the three years ended December 31, 1995, 1994, and 1993
(In thousands)
----------
<TABLE>
<CAPTION>
Three Months ended
March 31,
-------------------
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 137 $ 154 $ (359) $ 81 $ (774)
----- ----- ------- ------- -------
Adjustments to reconcile net
income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization 152 55 257 257 343
Reserves for doubtful accounts 45 14 118 (53) 188
Gain on sale of fixed assets (50) (21)
Deferred income taxes 37 (11) (100) 100 (100)
Changes in assets and liabilities:
Accounts receivable (827) (909) (878) (1,248) (326)
Net investment in sales-type leases 10 206 1,586
Inventories (92) (785) (1,113) (580) 252
Prepaid expenses and other assets (57) 27 52 (105) (77)
Federal income taxes refundable (20) (76)
Accounts payable, accrued
expenses and other liabilities 743 808 (288) 912 204
---- ----- ------- ------- -------
Total adjustments 1 (811) (1,952) (637) 2,047
---- ----- ------- ------- -------
Net cash provided by (used
in) operating activities 138 (657) (2,311) (556) 1,273
---- ----- ------- ------- -------
Cash flows from investing activities:
Payments received on notes receivable 21 83
Purchases of property and equipment (37) (127) (183) (295) (209)
Proceeds from sale of property and equipment 205 60
---- ----- ------- ------- -------
Net cash used in investing activities (37) (127) (162) (90) (66)
---- ----- ------- ------- -------
</TABLE>
Continued
F-7
<PAGE> 43
DANNINGER MEDICAL TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS, Continued
(In thousands)
----------
<TABLE>
<CAPTION>
Three Momths ended
March 31,
------------------
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from financing activities:
Proceeds from term debt $ 207 $636 $ 4,331 $ 395 $ 435
Repayment of term debt and
capitalized lease obligations (93) 23 (2,431) (56) (1,626)
Proceeds from exercise of stock
options and Warrants 27 172 403 264 49
Cash overdraft (167) 167 (19)
----- ---- ------- ------- -------
Net cash (used in) provided
by financing activities (26) 831 2,470 603 (1,161)
----- ---- ------- ------- -------
Net increase (decrease)
in cash 75 47 (3) (43) 46
Cash balance at beginning of year 0 3 3 46 0
----- ---- ------- ------- -------
Cash balance at end of year $ 75 $ 50 $ 0 $ 3 $ 46
===== ==== ======= ======= =======
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 114 $ 59 $ 289 $ 158 $ 156
===== ==== ======= ======= =======
Income taxes (refunds) $ 28 $ 97 $ (160)
======= ======= =======
</TABLE>
See notes to the consolidated financial statements.
F-8
<PAGE> 44
DANNINGER MEDICAL TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------
1. Description of Business:
Danninger Medical Technology, Inc. (Danninger) designs, manufactures,
and markets, through dealers, products that assist orthopedic patients
in their recovery following surgery or trauma. Recovery Services, Inc.
(RSI) was established to rent and sell durable medical equipment to
orthopedic patients. Cross Medical Products, Inc. (Cross) develops and
markets orthopedic surgical instrumentation and implants. In 1992, Cross
received the Food & Drug Administration (FDA) 510(k) marketing clearance
for general distribution of its Puno\Winter\Byrd (PWB) Lumbosacral
System. In 1995 Cross received FDA 510(k) marketing clearance for
general distribution of its Synergy Spinal Implant system.
2. Summary of Significant Accounting Policies:
The following is a summary of certain significant accounting policies
followed in the preparation of these consolidated financial statements:
Basis of Presentation:
The consolidated financial statements include the accounts of
Danninger Medical Technology, Inc. and its wholly-owned
subsidiaries, Cross Medical Products, Inc. and Recovery Services,
Inc. (collectively, the "Company"). All significant intercompany
accounts and transactions have been eliminated.
Accounting Estimates:
The preparation of the 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 disclosures of contingent assets and liabilities
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.
Interim Unaudited Financial Information
The accompanying interim unaudited financial statements for the
three months ended March 31, 1996 have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to
such rules and regulations, although management believes that the
disclosures are adequate to make the information presented not
misleading. In the opinion of management, all adjustments and
eliminations, consisting only of normal recurring adjustments,
necessary to present fairly the combined financial position of the
Company as of March 31, 1996 and the results of operations and cash
flows for the three months ended March 31, 1996 and March 31, 1995,
have been included. The results of operations for interim periods
are not necessarily indicative of the results for the full year.
Earnings Per Share:
Primary earnings per share is calculated based on the weighted
average number of common shares and common share equivalents
outstanding. Common share equivalents include options and warrants
to purchase common shares that are potentially dilutive using the
treasury stock method.
Inventories:
Inventories are valued at the lower of first-in, first-out cost or
market and consisted of the following:
<TABLE>
<CAPTION>
(in thousands) 1995 1994
---- ----
<S> <C> <C>
Raw materials $ 671 $1,086
Work-in-process 108 99
Finished goods 2,686 1,790
Consigned inventory 762 341
------ ------
$4,227 $3,316
====== ======
</TABLE>
F-9
<PAGE> 45
DANNINGER MEDICAL TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
Property and Equipment:
Property and equipment are recorded at cost. Depreciation is
computed using the straight-line method at rates designed to
amortize the costs of such items over their estimated useful lives.
Depreciation expense for the years ended December 31, 1995, 1994 and
1993 was $251,000, $255,000 and $340,000, respectively.
Expenditures for major improvements are capitalized, while
expenditures for repairs and maintenance are charged to operations
as incurred. When property and equipment are retired or sold, the
cost and related accumulated depreciation or amortization are
removed from the accounts with any gain or loss reflected in the
results of operations.
The Company transferred $222,000 and $95,000 of inventory to rental
equipment during 1995 and 1994, respectively.
<TABLE>
<CAPTION>
Property and equipment are comprised of: 1995 1994
---- ----
(in thousands)
<S> <C> <C>
Machinery and equipment $ 656 $ 571
Rental equipment 453 134
Office furniture and fixtures 286 233
Computer equipment 569 492
Leasehold improvements 242 242
------ ------
2,206 1,672
Less accumulated depreciation 1,482 1,185
------ ------
$ 724 $ 487
====== ======
</TABLE>
Intangibles:
Other assets include patents and goodwill. Intangible assets including
goodwill are amortized on a straight-line basis over their estimated
useful lives ranging from five to 17 years. Management periodically
evaluates the recoverability of all intangible assets based on estimated
future cash flows. Amortization expense for the years ended December 31,
1995, 1994, and 1993 was $6,000, $3,000 and $3,000, respectively.
Product Warranty Costs:
The Company accrues estimated future costs for product warranty expense
based on the number of units in service and the anticipated cost per
unit of fulfilling its warranty obligation. Included in accrued expenses
at December 31, 1995 and 1994 was $40,000 of accrued product warranty
cost.
F-10
<PAGE> 46
DANNINGER MEDICAL TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
Revenue Recognition:
Revenue from the sales of products is recognized upon shipment. Revenue
from the rental of equipment is recorded over the period during which
the unit is rented.
Income Taxes:
Income tax expense is determined on the liability method. Under this
method, deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax bases of the assets
and liabilities and net operating loss and tax credit carryforwards for
which income tax benefits will be realized in future years using enacted
tax rates. Valuation allowances are provided against deferred tax assets
based on estimated future recoverability of the assets.
Stock Compensation:
In December 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 123, Accounting
for Stock-Based Compensation, which changes the measurement, recognition
and disclosure standards for stock-based compensation. Management is
currently evaluating the provisions of SFAS No. 123 on the results of
operations, and the method of disclosure has not been determined.
3. Sales-Type Leases:
Prior to 1992, the Company marketed several products through lease
arrangements. The leases generally had four-year terms with no buyout or
renewal options. The leases were accounted for as sales-type leases with
unearned income recognized on the interest method over the term of the
lease. During 1992, the Company discontinued this program and
renegotiated substantially all of its sales-type leases to amend payment
terms.
In 1994, the Company acted upon a security interest granted by a
customer in default of its lease agreement and repossessed substantially
all of the assets of the customer. Prior to repossession, the Company's
net investment in sales-type leases relating to this customer was
$145,000.
F-11
<PAGE> 47
DANNINGER MEDICAL TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
4. Term Debt:
Term debt at December 31, 1995 and 1994 was:
<TABLE>
<CAPTION>
(in thousands) 1995 1994
---- ----
<S> <C> <C>
Revolving credit agreement $3,000 $2,140
Note payable, bank, due in monthly installments of $16,667 plus
accrued interest of prime (8.75% at December 31, 1995) plus .75%,
maturing in June 2000. 917
Note payable, finance company, due in monthly principal payments of
$6,997 plus accrued interest of prime (8.75% at December 31, 1995)
plus 1.5%, maturing in June 1998. 223
Note payable, related party, payable on demand. 79
------ ------
4,219 2,140
Less current maturities 3,380 2,140
------ ------
$ 839 $ 0
====== ======
</TABLE>
Under the terms of the revolving credit agreement, the Company may
borrow up to $3,000,000 at the bank's prime interest rate (8.75% at
December 31, 1995) plus .5%. The weighted average borrowing rate on
short-term borrowings outstanding was 9.34% and 7.80% at December 31,
1995 and 1994, respectively. The borrowings on the revolving credit
agreement are due on June 30, 1996. The agreement contains financial
covenants requiring the Company to maintain certain financial ratios. At
December 31, 1995, the Company was not in compliance with certain of the
financial covenants in the loan facility agreement. The Bank waived the
covenant noncompliance effective December 31, 1995 and amended the
financial covenants effective January 1, 1996 to make them less
restrictive. Substantially all of the Company's assets are pledged as
collateral on the revolving credit agreement and other term debt.
During 1995, the Company obtained a loan from a keyman life insurance
policy in the irrevocable life trust of a significant shareholder and
director at an interest rate of 8%, payable on the anniversary date of
the loan.
F-12
<PAGE> 48
DANNINGER MEDICAL TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
Term debt maturities (in thousands):
<TABLE>
<CAPTION>
<S> <C>
1996 $3,380
1997 292
1998 247
1999 200
2000 100
------
$4,219
======
</TABLE>
5. Rental and Lease Agreements:
The Company leases its offices and manufacturing facilities under
operating lease agreements which expire on June 30, 1996. The Company
has entered into a new lease agreement for its offices and manufacturing
facility which will expire on May 31, 2001. Total rent expense was
$178,000, $151,000, and $131,000 in 1995, 1994, and 1993, respectively.
The Company leases certain manufacturing and computer equipment under
noncancelable lease agreements that are accounted for as capitalized
leases. The leases provide that the Company pay taxes, insurance and
maintenance expenses related to the equipment. Leased equipment under
capital leases is included in the accompanying consolidated balance
sheets as property and equipment with an aggregate cost of $305,000 and
$235,000, and accumulated depreciation of $241,000 and $192,000 at
December 31, 1995 and 1994, respectively. New capital lease obligations
in 1995 were $70,000.
Future minimum payments including the new lease arrangement for the
corporate offices and manufacturing facilities (in thousands):
<TABLE>
<CAPTION>
Capital Operating
Year Ending December 31, Leases Leases
------------------------ ------- ---------
<S> <C> <C>
1996 $31 $ 262
1997 22 283
1998 11 270
1999 6 273
2000 3 276
Thereafter 115
--- ------
Total minimum lease payments 73 $1,479
======
Less amount representing interest 12
---
61
Less current maturities 26
---
Long-term obligations under capital leases $35
===
</TABLE>
The Company rents certain medical products to orthopedic patients
following surgery or trauma. The arrangements are accounted for as
operating leases with terms generally less than one year. The carrying
value of rental equipment was $355,000 and $128,000 at December 31, 1995
and 1994, respectively.
F-13
<PAGE> 49
DANNINGER MEDICAL TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
6. Notes Receivable:
In December, 1994, the Company acted upon a security interest it had
been granted by a customer and repossessed the collateral which secured
the customer's note. As a result of the repossession, the Company
settled the note and recognized income for the recovery of previously
provided valuation allowances of $76,000 for the year ended December 31,
1994.
During 1994, the Company sold equipment to a major supplier totalling
$113,000. The Company agreed to finance the sale over 48 months at an
interest rate based on the published prime rate on the first business
day of each month plus an additional one-half percent. The monthly
principal payment was $2,360 plus interest calculated on the outstanding
principal balance. In 1995, the major supplier settled the remaining
balance of the note receivable of $92,000 in exchange for amounts owed
by the Company to the supplier.
7. Federal Income Tax:
The components of the deferred tax asset are (in thousands):
<TABLE>
<CAPTION>
Temporary differences: 1995 1994
---- ----
<S> <C> <C>
Deferred tax assets
Accounts receivable $ 68 $ 44
Inventories 205 162
Warranty reserve 12 13
State and local taxes 13 13
Net operating loss 295 64
Tax credit carryforwards 367 332
---- -----
Total deferred tax asset 960 628
Less valuation allowance (600) (456)
Deferred tax liability
Property and equipment (4) (4)
---- -----
Net deferred tax asset $356 $ 168
==== =====
</TABLE>
The current and non-current components of the net deferred tax asset
recognized in the balance sheet are (in thousands):
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Net current asset $174 $127
Net non-current asset 182 41
---- ----
Net asset $356 $168
==== ====
</TABLE>
The Company has established a valuation allowance for the future
recoverability of deferred tax assets. The
F-14
<PAGE> 50
DANNINGER MEDICAL TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
allowance has been established based on the Company's historical
experience of paying federal income taxes at alternative minimum tax
rates and expected limitations on the future use of research and
development and alternative minimum tax credit carryforwards. Research
and development credit carryforwards were $361,000 at December 31, 1995
and expire as follows: $95,000 in 2006, $77,000 in 2007, $92,000 in
2008, $61,000 in 2009 and $36,000 in 2010.
The following is a reconciliation of income tax expense to the amount
computed at the federal statutory rate:
<TABLE>
<CAPTION>
(in thousands) 1995 1994 1993
----- ----- -----
<S> <C> <C> <C>
Income tax (benefit)
expense at statutory rates $(146) $ 72 $(232)
Increase (reduction) in taxes resulting from:
Research and development tax credits (36) (82) (96)
State and local income taxes, net of
federal income tax benefit 18 20 25
Valuation allowance 78 39 391
Other permanent differences 14 80 5
----- ----- -----
Total income tax expense (benefit) $ (72) $ 129 $ 93
====== ===== =====
</TABLE>
Tax benefits credited to equity for stock options exercised were
$88,000, $37,000 and $6,000 for the years ending December 31, 1995, 1994
and 1993, respectively.
8. Shareholders' Equity:
Pursuant to a license agreement for a patent on certain implant devices,
the Company issued warrants to purchase 150,000 shares of common stock
at $2.75 each. The warrants vested 50% in each of February 1994 and 1995
and were exercisable through February 1998. The warrants were exercised
for 100,000 and 50,000 shares of common stock during 1995 and 1994,
respectively.
In January 1984, the Company adopted an Incentive Stock Option Plan
(Incentive Plan) which expired on January 27, 1994. The Incentive Plan
was administered by the Compensation Committee of the Board of Directors
(the Committee) and provided that options be granted to key employees at
exercise prices no less than market value on the date the option was
granted. All options currently outstanding vest prorata over five
F-15
<PAGE> 51
DANNINGER MEDICAL TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
years beginning one year from date of grant and expire six years from
date of grant. The Company has reserved 750,000 shares of its common
stock for distribution under the Incentive Plan.
Changes in stock options are:
<TABLE>
<CAPTION>
Number Per Share
Of Shares Option Price
--------- ------------
<S> <C> <C> <C>
1993
Granted 0
Exercised 6,000 $ .9375 - $1.85
Canceled 64,000 $ .9375 - $2.9375
Outstanding at December 31, 1993 229,600 $ .9375 - $2.9375
1994
Granted 82,500 $1.94
Exercised 14,640 $ .9375 - $2.38
Canceled 1,960 $ .9375 - $1.85
Outstanding at December 31, 1994 295,550 $ .9375 - $2.9375
1995
Granted 0
Exercised 20,100 $ .9375 - $2.53
Canceled 6,400 $1.94 - $2.53
Outstanding at December 31, 1995 269,000 $1.75 - $2.9375
</TABLE>
Options outstanding and exercisable under the Incentive Plan at December
31, 1995, represent 160,000 shares. The remaining options become
exercisable in 1996 - 47,500 shares; 1997 - 30,500 shares; 1998 - 15,500
shares; 1999 - 15,500 shares.
F-16
<PAGE> 52
DANNINGER MEDICAL TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
In April 1984, the Company adopted a Nonstatutory Stock Option Plan
(Nonstatutory Plan) which expired on April 26, 1994. The Nonstatutory Plan
specified that options be granted to officers, directors, advisors and key
employees at a price specified by the Board of Directors on the date the option
was granted. The options vest prorata over a period of up to five years
beginning one year from date of grant and expire six years from date of grant.
The Company has reserved 300,000 shares for distribution under the Nonstatutory
Plan.
Changes in stock options are:
<TABLE>
<CAPTION>
Number Per Share
Of Shares Option Price
--------- ------------
<S> <C> <C> <C>
1993
Granted 50,000 $2.50
Exercised 24,000 $1.75
Canceled 4,500 $1.75
Outstanding at December 31, 1993 160,000 $.875 - $2.94
1994
Granted 5,000 $1.94
Exercised 56,000 $ .875 - $2.94
Canceled 11,500 $ .875 - $2.5652
Outstanding at December 31, 1994 97,500 $ .875 - $2.94
1995
Granted 0
Exercised 26,000 $1.85 - $2.94
Canceled 0
Outstanding at December 31, 1995 71,500 $1.94 - $2.94
</TABLE>
Options outstanding and exercisable under the Nonstatutory Plan at
December 31, 1995, represent 67,500 shares. The remaining options become
exercisable in 1996 through 1999-1,000 shares each year.
F-17
<PAGE> 53
DANNINGER MEDICAL TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
In February 1994, the Company adopted the 1994 Stock Option Plan (1994
Plan). The 1994 Plan was intended to replace both the Incentive Plan and
the Nonstatutory Plan. The 1994 Plan is administered the Committee. The
1994 Plan provides for the granting of nonstatutory or incentive options
to directors, consultants, advisors, or key employees of the Company who
are selected by the Committee. Vesting periods are determined by the
Committee. The Company has reserved 600,000 shares for distribution
under the 1994 Plan.
Changes in stock options are:
<TABLE>
<CAPTION>
Number Per Share
Of Shares Option Price
--------- ------------
<S> <C> <C> <C>
1994
Granted 45,000 $3.50
Exercised
Canceled
Outstanding at December 31, 1994 45,000 $3.50
1995
Granted 150,000 $4.25 - $8.875
Exercised 10,000 $3.50
Canceled 9,000 $4.25
Outstanding at December 31, 1995 176,000 $3.50 - $8.875
</TABLE>
Options outstanding and exercisable under the 1994 Plan at December 31,
1995, represent 45,000 shares. The remaining options become exercisable
in 1996-62,800 shares; 1997-17,800 shares; 1998-16,800 shares; 1999-
16,800 shares; 2000-16,800 shares.
9. Commitments and Contingencies:
The Company maintains a claims made product liability insurance policy
with per occurrence ($50,000) and aggregate ($250,000) retention limits.
Beyond these retention limits, the policy covers aggregate insured
claims made during each policy year up to $5,000,000.
The Company and other spinal implant manufacturers have been named as
defendants in various class action product liability lawsuits alleging
that the plaintiffs were injured by spinal implants supplied by the
Company and others. All such lawsuits were consolidated for pretrial
proceedings in the Federal District Court for the Eastern District of
Pennsylvania and on February 22, 1995, the plaintiffs were denied class
certification. In response to the denial of class certification, a large
number of additional individual lawsuits have been filed alleging, in
addition to damages from spinal implants, a conspiracy among
manufacturers, physicians and other spinal implant industry members. At
March 1, 1996, approximately 500 such lawsuits have been filed in which
the Company is a party. Approximately fifteen of such cases involve
individual plaintiffs utilizing
F-18
<PAGE> 54
DANNINGER MEDICAL TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
implants supplied by the Company. The Company cannot estimate precisely
at this time the number of such lawsuits that may eventually be filed.
The vast majority of such lawsuits are pending in federal courts and are
in preliminary stages. Discovery proceedings, including the taking of
depositions, have commenced in certain of the lawsuits. Plaintiffs in
these cases typically seek relief in the form of monetary damages, often
in unspecified amounts. While the aggregate monetary damages eventually
sought in all of such individual actions is substantial and exceeds the
limits of the Company's product liability insurance policies, the
Company believes that it has affirmative defenses, including, without
limitation, preemption, and that these individual lawsuits are otherwise
without merit. An estimate of the amount of loss cannot be made as the
Company does not have sufficient information on which to base an
estimate. All pending cases are being defended by the Company's
insurance carrier, in some cases under a reservation of rights. There
can be no assurance, however, that the $5,000,000 per annum limit of the
Company's coverage will be sufficient to cover the cost of defending all
lawsuits or the payment of any amounts that may be paid in satisfaction
of any settlements or judgements. Further, there can be no assurance
that the Company will continue to be able to obtain sufficient amounts
of product liability insurance coverage at commercially reasonable
premiums.
In addition to the above, in the ordinary course of business the Company
has been named as a defendant in various other legal proceedings. These
actions, when finally concluded, will not, in the opinion of the
Company, have a material adverse effect upon the financial position or
results of operations of the Company. However, there can be no assurance
that future quarterly or annually operating results will not be
materially adversely affected by the final resolution of these matters.
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of trade accounts
receivable (domestic and international). The Company follows certain
guidelines in determining the credit-worthiness of domestic and foreign
customers. The credit risk associated with each customer and each
country is reviewed before a credit decision is made. All international
sales are denominated in U.S. dollars.
Certain of the Company's accounts receivable result from third party
reimbursements that may be dependent on limitations imposed by the payor
on the amount of reimbursement. The Company records the receivable and
related revenue net of its estimate of such limitations.
The Company has royalty agreements with the inventors of the spinal
implant systems. The Company is obligated to pay the inventors 6% (and
increasing 1/2% annually up to 8%) of the net revenues generated from
the sales of these spinal implant products.
10. Employee Benefit Plan:
In January 1992, the Company adopted the Danninger Medical Corporation
401(k) Profit Sharing Plan (the Plan) covering substantially all
employees. Pursuant to the Plan, employees may make voluntary
contributions, and the Company may make matching contributions based on
25% of the employee's contribution, up to 4% of the employee's salary,
subject to certain limitations. The Company expensed matching
contributions of $17,000, $12,000 and $14,000 during 1995, 1994, and
1993, respectively.
F-19
<PAGE> 55
DANNINGER MEDICAL TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
11. Fourth Quarter Adjustments:
During the fourth quarter of 1995, the Company recognized income for the
recovery of previously provided valuation allowances of approximately
$120,000 relating to inventory which previously was thought would be
slow moving. Subsequent to the previous decision to provide a valuation
allowance for this inventory, sales continued to support a lower
valuation allowance.
During the fourth quarter of 1994, the Company recognized income for the
recovery of previously provided valuation allowances of approximately
$177,000 relating to accounts receivable, sales-type lease and notes
receivable reserves principally related to the repossession of assets
pursuant to a security agreement granted to the Company by a major
customer.
12. Acquisition of Business
During 1995, the Company acquired TROM, Inc., a company that rents and
sells durable medical equipment to orthopedic patients, through the
purchase of identifiable assets of $95,000 and the assumption of
liabilities of $196,000. Other assets in the accompanying consolidated
balance sheet includes $101,000 of goodwill which is amortized over five
years. The acquisition of TROM, Inc. was accounted for under the
purchase method.
13. Information by Industry Group and Geographic Area:
The company operates principally in two business segments: recovery
products and spinal implants. Danninger and RSI operate in the recovery
products industry group, and Cross operates in the spinal implants
industry group.
All assets are located in the United States. Revenues are derived from
sales in the United States, Asia, Europe, and other foreign countries.
F-20
<PAGE> 56
DANNINGER MEDICAL TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
Financial information by Industry Group and Geographic Area for the
years 1995, 1994, and 1993 is presented below:
<TABLE>
<CAPTION>
(In thousands) 1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
INDUSTRY GROUP
Revenue
Recovery Products $ 8,493 $ 7,274 $ 7,953
Spinal Implants 4,091 2,880 1,360
-------- -------- --------
Total revenue $ 12,584 $ 10,154 $ 9,313
======== ======== ========
Operating profit
Recovery Products $ 1,239 $ 1,493 $ 578
Spinal Implants (1,377) (1,185) (1,142)
-------- -------- --------
Total operating profit (loss) $ (138) $ 308 $ (564)
======== ======== ========
Identifiable assets
Recovery Products $ 4,610 $ 5,017 $ 4,351
Spinal Implants 4,907 2,416 1,447
-------- -------- --------
Total assets $ 9,517 $ 7,433 $ 5,798
======== ======== ========
Depreciation and amortization
Recovery Products $ 212 $ 235 $ 325
Spinal Implants 45 22 18
-------- -------- --------
Total depreciation and
amortization $ 257 $ 257 $ 343
======== ======== ========
Capital expenditures
Recovery Products $ 86 $ 222 $ 209
Spinal Implants 97 73
-------- -------- --------
Total capital expenditures $ 183 $ 295 $ 209
======== ======== ========
GEOGRAPHIC AREA
Revenue
United States $ 10,689 $ 8,830 $ 9,011
Foreign 1,895 1,324 302
-------- -------- --------
Total revenue $ 12,584 $ 10,154 $ 9,313
======== ======== ========
</TABLE>
F-21
<PAGE> 57
===============================================================================
No person has been authorized to give any information or to make any
representations not contained in this Prospectus in connection with the offer
made hereby and, if given or made, such information or representation must not
be relied upon. This Prospectus does not constitute an offer to sell or the
solicitation of an offer to buy any securities other than the securities to
which it relates, or an offer to sell or the solicitation of an offer to buy
such securities in any jurisdiction in which such offer or solicitation may not
be legally made. Neither the delivery of this Prospectus nor any sale made
hereunder shall, under any circumstances, create any implication that the
information contained herein is correct as of any date subsequent to the date
hereof.
--------------------------
TABLE OF CONTENTS
Page
----
Available Information......................................
Incorporation of Certain Documents by Reference............
Prospectus Summary.........................................
Risk Factors...............................................
Price Range of Common Stock and Dividend Policy............
Use of Proceeds............................................
Capitalization.............................................
Selected Consolidated Financial Data.......................
Management's Discussion and Analysis of Financial
Condition and Results of Operations.....................
Business...................................................
Management.................................................
Description of Debentures..................................
Description of Capital Stock...............................
Underwriting...............................................
Legal Matters..............................................
Experts....................................................
Index to Consolidated Financial Statements................. F-1
===============================================================================
===============================================================================
$5,000,000
[LOGO]
DANNINGER MEDICAL
TECHNOLOGY, INC.
% CONVERTIBLE
SUBORDINATED DEBENTURES
DUE 2003
------------------
PROSPECTUS
------------------
THE OHIO COMPANY
, 1996
===============================================================================
<PAGE> 58
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table presents a reasonably itemized estimate of all
expenses in connection with the issuance and distribution of the debentures,
other than underwriting discounts and commissions.
<TABLE>
<S> <C>
SEC registration fee .................................... $ 2,500
Printing and engraving fee .............................. 30,000
Legal fees and expenses ................................. 120,000
Accounting fees and expenses ............................ 50,000
Blue Sky fees and expenses (including fees of counsel) .. 5,000
Transfer agent and registrar's fees and expenses ........ 3,000
Miscellaneous expenses .................................. 14,500
--------
TOTAL .............................................. $225,000
========
</TABLE>
ITEM 15. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Reference is made to the Form of Indemnification Agreement between
Danninger Medical Technology, Inc. and its directors (previously filed as
Exhibit 10(x) to Form 10 (file number 1-16893) filed May 3, 1988, and
incorporated herein by reference) and the Schedule identifying material details
of other Indemnification Agreements substantially similar to the Form of
Indemnification Agreement (previously filed as Exhibit 10(o) to Form 10-K (file
number 0-16893) filed March 31, 1995, and incorporated herein by this reference.
ITEM 16. EXHIBITS.
The following Exhibits are filed as part of this Registration
Statement:
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE NUMBER
------- ----------- -----------
<S> <C> <C>
#1.1 Form of Underwriting Agreement.
4.1 Reference is made to Articles FOURTH, Previously filed as Exhibit 4 to Form 10
EIGHTH, NINTH and TENTH of the (file number 0-16893) filed May 3, 1988,
Certificate of Incorporation of the and incorporated herein by reference.
Company and Articles II, III, IV, VI, VII
and VIII of the Company's Bylaws.
Instruments defining the rights of holders
of long-term debt will be furnished to the
Securities and Exchange Commission
upon request.
#4.2 Form of Indenture dated as of
______________ __, 1996, between
Registrant and Fifth Third Bank, as
Trustee.
#5 Opinion of Porter, Wright, Morris &
Arthur as to the legality of the debentures
and Common Shares being registered.
10(a) Business Purpose Revolving Promissory Previously filed as Exhibit 10(a) to Annual
Note, dated February 13, 1995, in the Report on Form 10-K (file number o-
amount of $400,000 payable to Bank 16893) filed on March 30, 1995, and
One, Columbus, N.A. by Danninger incorporated herein by reference.
Medical Technology, Inc. and Cross
Medical Products, Inc.
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<PAGE> 59
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10(b) Non-Titled Personal Property Security Previously filed as Exhibit 10(b) to Annual
Agreement, dated February 13, 1995, Report on Form 10-K (file number o-
granting Bank One Columbus, N.A. a 16893) filed on March 30, 1995, and
security interest in all inventory, raw incorporated herein by reference.
materials, work in process, supplies,
accounts, general intangibles, chattel
paper, instruments, other forms of
obligations and receivables, goods,
equipment, machinery, supplies and other
personal property of Danninger Medical
Technology, Inc.
10(c) Non-Titled Personal Property Security Previously filed as Exhibit 10(c) to Annual
Agreement, dated February 13, 1995, Report on Form 10-K (file number o-
granting Bank One Columbus, N.A. a 16893) filed on March 30, 1995, and
security interest in all inventory, raw incorporated herein by reference.
materials, work in process, supplies,
accounts, general intangibles, chattel
paper, instruments, other forms of
obligations and receivables, goods,
equipment, machinery, supplies and other
personal property of Cross Medical
Products, Inc.
10(d) Loan Agreement, dated September 23, Previously filed as Exhibit 10 to Form 10
1994, in the amount of $2,500,000 (file number 0-16893) filed November 14,
payable to Bank One, Columbus, N.A. by 1994, and incorporated herein by
Danninger Medical Technology, Inc., and reference.
Cross Medical Products, Inc., secured by
accounts receivable, lease receivables,
contract rights, chattels, general
intangibles, notes, drafts, acceptances and
other forms of obligations and inventory,
goods, merchandise, and all other
personal property of Danninger Medical
Technology, Inc. and Cross Medical
Products, Inc.
10(e) Loan Agreement, dated June 26, 1995, by Previously filed as Exhibit 10 to Form 10-
and among Danninger Medical Q (file number 0-16893) filed August 14,
Technology, Inc., Cross Medical 1995, and incorporated herein by
Products, Inc., Recovery Services, Inc., reference.
and Bank One, Columbus, N.A.
10(f) Amendment to Loan Agreement, dated Previously filed as Exhibit 10(f) to Form
March 27, 1996, by and among 10-K (file number 0-16893) filed April 1,
Danninger Medical Technology, Inc., 1996, and incorporated herein by
Cross Medical Products, Inc., Recovery reference.
Services, Inc., and Bank One, Columbus,
N.A.
</TABLE>
The following are management contracts and compensatory plans and arrangements
in which directors or executive officers participate:
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10(g) Confidentiality, Assignment and Previously filed as Exhibit 10(a) to Form
Non-Competition Agreement for Key 10 (file number 0-16893) filed May 3,
Personnel, dated September 10, 1984, 1988, and incorporated herein by
between Danninger Medical Technology, reference.
Inc. and Edward R. Funk.*
10(h) Schedule identifying material details of Previously filed as Exhibit 10(h) to Annual
other agreements substantially identical to Report on Form 10-K (file number o-
Exhibit 10(g).* 16893) filed on March 30, 1995, and
incorporated herein by reference.
Amended and Restated 1984 Incentive Previously filed as Exhibit 10(e) to Annual
10(i) Stock Option Plan, reserving Report on Form 10-K (file number
750,000 shares of Common Stock, as 0-16893) filed March 30, 1993, and
amended by the Board of Directors incorporated herein by reference.
</TABLE>
<PAGE> 60
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on April 2, 1992.*
10(j) Form of Stock Option Agreement Previously filed as Exhibit 10(f) to Annual
Under the Amended and Restated 1984 Report on Form 10-K (file number
Incentive Stock Option Plan.* 0-16893) filed March 30, 1993, and
incorporated herein by reference.
10(k) Amended and Restated 1984 Previously filed as Exhibit 10(h) to Annual
Non-Statutory Stock Option Plan, Report on Form 10-K (file number
reserving 300,000 shares of Common 0-16893) filed March 30, 1993, and
Stock, as amended by the Board of incorporated herein by reference.
Directors on April 2, 1992.*
10(l) Form of Stock Option Agreement Previously filed as Exhibit 10(i) to Annual
Under the Amended and Restated 1984 Report on Form 10-K (file number
Non-Statutory Stock Option Plan.* 0-16893) filed March 30, 1993, and
incorporated herein by reference.
10(m) 1994 Stock Option Plan, reserving Previously filed as Exhibit 10(c) to Form
600,000 shares of Common Stock.* 10 (file number 0-16893) filed August 12,
1994, and incorporated herein by this
reference.
10(n) Form of Indemnification Agreement Previously filed as Exhibit 10(x) to Form
between Danninger Medical Technology, 10 (file number 0-16893) filed May 3,
Inc. and its directors.* 1988, and incorporated herein by
reference.
10(o) Schedule identifying material details of Previously filed as Exhibit 10(o) to Annual
other Indemnification Agreements Report on Form 10-K (file number o-
substantially identical to Exhibit 10(n).* 16893) filed on March 30, 1995, and
incorporated herein by reference.
10(p) Employment Agreement between Previously filed as Exhibit 10(a) to Form
Danninger Medical Technology, Inc. and 10 (file number 0-16893) filed August 12,
Edward R. Funk.* 1994, and incorporated herein by this
reference.
10(q) Employment Agreement between Cross Previously filed as Exhibit 10(b) to Form
Medical Products, Inc. and Edward R. 10 (file number 0-16893) filed August 12,
Funk.* 1994, and incorporated herein by this
reference.
11 Statement Regarding Computation of Net Previously filed as Exhibit 11 to Form 10-
Income Per Share. K (file number 0-16893) filed April 1,
1996, and incorporated herein by
reference.
#11.1 Statement Regarding Computation of Net Page ___.
Income Per Share
#12 Statement Regarding Computation of Page ___.
Ratios
**23.1 Consent of Coopers & Lybrand L.L.P. Page ___.
23.2 Consent of Porter, Wright, Morris &
Arthur is set forth as part of Exhibit 5
above.
#24 Powers of Attorney.
27 Financial Data Schedule Page ___.
<FN>
-----------------
* Management Contract or Compensatory Plan
# Previously filed
** Filed herewith
</TABLE>
<PAGE> 61
ITEM 17. UNDERTAKINGS.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in this registration statement shall be
deemed to be a new registration statement relating to the securities offered
herein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(h) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
(i) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
<PAGE> 62
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-2 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: May 17, 1996 DANNINGER MEDICAL TECHNOLOGY, INC.
By: /s/ Joseph A. Mussey
---------------------------------------------
Joseph A. Mussey
President, Chief Executive Officer and Treasurer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Joseph A. Mussey President, Chief Executive Officer, ) May 17, 1996
------------------------------------ Treasurer and Director )
Joseph A. Mussey (Principal Executive Officer) )
)
)
* Vice President and Chief Financial ) May 17, 1996
------------------------------------ Officer (Principal Accounting Officer) )
Paul A. Miller
* Chairman of the Board of Directors ) May 17, 1996
------------------------------------ )
Edward R. Funk )
)
)
* Director ) May 17, 1996
------------------------------------ )
Daniel A. Funk, M.D. )
)
)
* Director ) May 17, 1996
------------------------------------ )
Daniel A. Gregorie, M.D. )
)
)
* Director ) May 17, 1996
------------------------------------ )
Herbert J. Kahn )
)
)
* Director ) May 17, 1996
------------------------------------ )
Curtis A. Loveland )
)
)
* Director ) May 17, 1996
------------------------------------ )
C. Craig Waldbillig )
)
)
* Director ) May 17, 1996
------------------------------------ )
Peter H. Williams )
)
)
</TABLE>
<PAGE> 63
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* Director ) May 17, 1996
------------------------------------ )
Robert J. Williams )
)
*By: /s/ Joseph A. Mussey
----------------------------------
Joseph A. Mussey, attorney-in-fact
for each of the persons indicated
</TABLE>
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this registration statement of
Danninger Medical Technology, Inc. on Form S-2 (File No. 333-02273) of
our reports dated March 27, 1996, on our audits of the consolidated financial
statements and financial statement schedule of Danninger Medical Technology,
Inc. as of December 31, 1995 and 1994, and for each of the three years in the
period ended December 31, 1995. We also consent to the reference to our firm
under the caption "Experts".
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
Columbus, Ohio
May 17, 1996
