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FORM 10-K
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For The Transition Period From To
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Commission File Number: 000-16893
DANNINGER MEDICAL TECHNOLOGY, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 31-0992628
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4140 FISHER ROAD
COLUMBUS, OHIO 43228 (614) 276-8267
(Address of principal executive offices, (Registrant's telephone number,
including zip code) including area code)
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
(Title of Class)
Indicate by check mark whether the registrant (1) has Filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for at least the past 90 days. Yes X No .
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. ( )
Based upon the closing price reported on NASDAQ on March 25, 1996, the
aggregate market value of the registrant's voting stock held by non-affiliates
on that date was $20,923,068. As of March 25, 1996, 4,718,990 shares of Common
Stock, $.01 par value, were outstanding.
Documents incorporated by reference:
Portions of the registrant's Definitive Proxy Statement for its Annual
Meeting of Stockholders to be held on May 22, 1996 are incorporated by
reference into Part III of this report.
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PART I
ITEM 1. BUSINESS.
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").
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 Cross 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 U.S. Food and Drug
Administration ("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 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
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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 the cervical (upper) portion of
the spine and, if successful, 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 determines the
type of spinal implant system.
The Company believes that the key to its marketing success in the
United States is to convince spinal surgeons of the efficacy of its implant
system. This is done through direct selling efforts by the Company's
independent sales representatives and direct marketing to the surgeons,
participation by the Company in sponsoring symposiums and training workshops,
and through 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 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 instrumentation 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 the 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.
Medical Advisory Board. The Company has established a Medical Advisory
Board consisting of prominent spinal surgeons. 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 1/2% annually, up to 8%) of the net revenues
generated from the sales of 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.
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<TABLE>
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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: with 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 has the unique ability to 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 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.
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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.
In recent years the DME market has experienced a number of changes.
National DME dealers are consolidating while new dealers are entering the
market at the local level. In response to these changes, the Company remains
committed to an open distribution policy for its products; and, working with
independent financing companies, offers financing programs tailored to the DME
marketplace. 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 international demand is
approximately 50% 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. 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. While the Company's CPM devices are competitively
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
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they are designed and manufactured to be reliable, safe, easy to set up and
operate, cost effective and service oriented. The Company competes with at
least five other CPM device manufacturers, three of whom manufacture
principally for their own equipment rental businesses.
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 U.S. and international patent applications
belonging to the Company. These applications concern various aspects of the
SYNERGY(TM) Spinal Implant System including the bone anchor, the rod/anchor
interface, instrumentation and transverse connectors. CROSS(TM), CROSS
MEDICAL(TM), INTEGRAL(TM) and SYNERGY(TM) are trademarks of the Company.
Broad patent coverage of CPM devices is precluded by prior art. The
Company owns a patent for its shoulder CPM unit. It also owns rights to
pending applications for a hand CPM device, the Body Composition Analyzer, a
knee brace, a thermal therapy pad and an air-powered CPM device.
The Company owns United States Trademark Registration No. 1,339,074 for
"Danninger Medical" in Class 10 and has developed goodwill in several other
trademarks.
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.
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GOVERNMENT REGULATION
The health care industry is subject to extensive government regulation
on both the federal and state levels. In particular, the U.S. Food, Drug and
Cosmetic Act, as amended, and regulations promulgated thereunder (collectively
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 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 and FDA regulations also cover 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'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. The Company has passed all FDA inspections.
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. Cross 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 Cross 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.
PERSONNEL
As of March 31, 1995, 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.
BUSINESS RISKS
The Company desires to take advantage of the new "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995. The
statements contained in this report which are not historical facts are "forward
looking statements" that involve various important risks, uncertainties, and
other factors which could cause the Company's actual results for 1996 and
beyond to differ materially from those expressed in such forward looking
statements. These important factors include, without limitation, the risks and
factors set forth below, as well as other risks previously disclosed in the
Company's security filings.
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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. The Company will continue to invest to
expand the distribution and marketing of the SYNERGY(TM) Spinal Implant System
as well as to invest in research and development to expand the system to include
a cervical version and a titanium version. The Company believes that the
SYNERGY(TM) Spinal Implant System has technological advantages over existing
spinal implant systems, although 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.
COMPETITION. 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."
GOVERNMENT REGULATION. The manufacture and marketing of the Company's
products are subject to regulation by the FDA pursuant to the FDA Act and
numerous other federal, state and foreign governmental authorities. Although
the Company has obtained all necessary clearances for the manufacture and sale
of all the products that the Company currently produces and sells, any products
developed in the future are likely to require FDA approval before they can be
sold in the United States.
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. The Company anticipates that substantially all of
the products currently being developed will qualify for marketing approval
under Section 510(k). However, 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. 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. 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. See "Business - Government Regulation."
LIMITED SALES AND MARKETING EXPERIENCE. The Company anticipates the
majority of its sales growth, if any, in the future will be in spinal implants.
The Company has sold 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 provides extensive sales training, however, 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 sales agencies will be able to successfully sell the
Company's products.
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 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
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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.
PRODUCT LIABILITY LITIGATION AND 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. 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 Cross, 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 15 cases
alleging claims of products 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 "Legal Proceedings."
PRODUCT CONCENTRATION AND OBSOLECENSE. 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 the
components for its CPM devices or its spinal implants and instruments and is
dependent upon several suppliers for the production of such components and
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 - Manufacturing and Quality
Control."
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 programs, private health
insurance, managed care organizations, workers' compensation insurers, 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."
-9-
<PAGE> 10
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.
VOLATILITY OF MARKET PRICE. 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 to
fluctuate substantially.
ITEM 2. 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
April 1, 1996, and terminates on June 1, 2001. The Company anticipates moving
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.
ITEM 3. LEGAL PROCEEDINGS.
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.
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 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,
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<PAGE> 11
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF THE SECURITY HOLDERS.
Not Applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS.
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
</TABLE>
On March 25, 1996, the last reported bid price of the Common Stock on
The Nasdaq SmallCap market was $7.125. 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
-11-
<PAGE> 12
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.
ITEM 6. SELECTED FINANCIAL DATA.
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. 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>
YEARS ENDED DECEMBER 31,
(In thousands, except per share data)
STATEMENT OF OPERATIONS DATA: 1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenue ........................................... $12,584 $10,154 $9,313 $7,394 $8,444
Cost of goods sold ................................ 6,360 5,128 5,428 3,741 4,341
Gross margin ...................................... 6,224 5,026 3,885 3,653 4,103
Selling, general and administrative expenses ...... 5,215 3,394 3,201 2,594 2,525
Research and development expenses ................. 1,147 1,324 1,248 982 961
Operating income (loss) ........................... (138) 308 (564) 77 617
Interest expense .................................. 289 158 156 192 144
Income (loss) before income taxes ................. (431) 210 (682) (103) 516
Net income (loss) ................................. (359) 81 (774) (48) 401
Net income (loss) per share ....................... ($0.08) $0.02 ($0.18) ($0.01) $0.09
BALANCE SHEET DATA:
Working capital ................................... $ 3,186 $ 2,614 $ 2,025 $3,767 $3,510
Total assets ...................................... 9,517 7,433 5,798 7,667 6,955
Short-term obligations ............................ 3,406 2,177 1,800 898 529
Long-term obligations ............................. 874 8 45 2,138 1,553
Total shareholders' equity ........................ 3,522 3,390 3,008 3,727 3,745
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE> 13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OR FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
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>
Years Ended December 31,
-----------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Net sales 93.7% 99.3% 99.4%
Lease and rental revenue 6.3 0.7 0.6
----- ----- -----
100.0% 100.0% 100.0%
Cost of goods sold 50.5 50.5 58.3
Sales and marketing 25.4 18.3 18.8
General and administrative 16.0 15.1 15.6
Research and development 9.1 13.0 13.4
Interest expense 2.3 1.6 1.7
Other income (expense) -- 0.6 0.4
Income (loss) before taxes (3.4) 2.1 (7.3)
Income taxes (benefit) (0.6) 1.3 1.0
Net income (loss) (2.8)% 0.8% (8.3)%
</TABLE>
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1995
AND 1994
For 1995 total net revenues increased 24% to $12,584,000 from
$10,154,000 for 1994. The net revenues increase was primarily attributable to
an increase in net revenues of spinal implant products and increased recovery
products rental revenues. 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 is 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 revenues to 48.8% in 1995 from 41.3 % in 1994. This
increase is 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 revenues 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 net
revenues in 1995 from 54.2% in 1994 as revenue from lower cost products
and services increased
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<PAGE> 14
in 1995. The Company continually evaluates material and production
costs in an effort to reduce costs on all products.
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
promotional and marketing expenses. As a percentage of spinal implant products
revenue, 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 revenue, 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 care rental market, the Company is able to provide distribution of
recovery products in territories where the Company has 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 revenue, 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 are less than 5% of recovery products revenue.
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 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 net revenues 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 revenues
increased to $2,880,000 in 1994 from $1,360,000 in 1993. Recovery product
revenues decreased to $7,274,000 in 1994 from $7,953,000 in 1993 primarily as a
result of customers' 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 revenues 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 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 revenues 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 revenue grew in 1994, the
expenses relating to the spinal implant business decreased, as a percentage of
spinal implant revenue, 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 customer due to
concerns about the customer's
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<PAGE> 15
financial condition. 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.
In 1994, research and development expenses relating to spinal implant
products decreased as a percentage of spinal implant product revenue to 33.9%
in 1994 from 58.8% in 1993. However, in actual dollars, research and
development expenses increase approximately $177,000.
Interest expense remained constant as a percentage of total revenues 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 is 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
Working capital increased to $3,186,000 at December 31, 1995 from
$2,614,000 at December 31, 1994. The current ratio (ratio of current assets to
current liabilities) 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
revenues 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.
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. Therefore, in addition to working
capital, bank commitments and funds anticipated to be generated by operations,
the Company is currently investigating several financing options to support
growth and expansion needs.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Consolidated Financial Statements of the Company, together with
reports thereon from Coopers & Lybrand L.L.P. (dated March 27, 1996), are
set forth on pages F-1 though F-23 hereof (see Item 14 of this Annual Report
for the Index).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
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<PAGE> 16
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
In accordance with General Instruction G(3) of Form 10-K, the
information appearing under the caption "Election of Directors" and the
subcaptions "Meetings and Committees of the Board of Directors" and "Officers
and Significant Employees" of the Company's Definitive Proxy Statement relating
to the Company's Annual Meeting of Stockholders to be held on May 22, 1996, is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
In accordance with General Instruction G(3) of Form 10-K, the
information appearing under the subcaptions "Compensation of Officers and
Directors", and "Stock Options", and "Compensation of Directors" and
"Employment Contracts" of the Company's Definitive Proxy Statement relating to
the Company's Annual Meeting of Stockholders to be held on May 22, 1996, is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
In accordance with General Instruction G(3) of Form 10-K, the
information appearing under the subcaption "Security Ownership of Certain
Beneficial Owners" and the caption "Election of Directors" of the Company's
Definitive Proxy Statement relating to the Company's Annual Meeting of
Stockholders to be held on May 22, 1996, is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
In accordance with General Instruction G(3) of Form 10-K, the
information appearing under the subcaption "Related Party Transactions" of the
Company's Definitive Proxy Statement relating to the Company's Annual Meeting
of Stockholders to be held on May 22, 1996, is incorporated herein by
reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(A) THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS REPORT:
FINANCIAL STATEMENTS AND SCHEDULE
Report of Independent Accountants
Consolidated Balance Sheet as of December 31, 1995 and 1994
Consolidated Statement of Operations for the three years ended
December 31, 1995, 1994 and 1993
Consolidated Statement of Changes in Shareholders' Equity for the
three years ended December 31, 1995, 1994 and 1993
Consolidated Statement of Cash Flows for the three years ended
December 31, 1995, 1994 and 1993
Notes to the Consolidated Financial Statements
Financial statement schedule:
Report of Independent Accountants on Financial Statement Schedule
II. Valuation and Qualifying Accounts
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<PAGE> 17
Schedules not listed above are omitted because of the absence of the
conditions under which they are required or because the required information is
included in the financial statements or the notes thereto.
DANNINGER MEDICAL TECHNOLOGY, INC.
REPORT ON FORM 10-K
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE NUMBER
- ------- ----------- -----------
<S> <C> <C>
3(a) Certificate of Incorporation of Danninger Previously filed as Exhibit 3(a) to Form 10
Medical Technology, Inc. (file number 0-16893) filed May 3, 1988, and
incorporated herein by reference.
3(B) Bylaws of Danninger Medical Technology, Previously filed as Exhibit 3(b) to Form 10
Inc. (file number 0-16893) filed May 3 1988, and
incorporated herein by reference.
4 Reference is made to Articles FOURTH, Previously filed as Exhibit 4 to Form 10 (file
EIGHTH, NINTH and TENTH of the number 0-16893) filed May 3, 1988, and
Certificate of Incorporation of the Company incorporated herein by reference.
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.
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 0-16893)
amount of $400,000 payable to Bank One, filed on March 30, 1995, and incorporated
Columbus, N.A. by Danninger Medical herein by reference.
Technology, Inc. and Cross Medical
Products, Inc.
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 0-16893)
granting Bank One Columbus, N.A. a filed on March 30, 1995, and incorporated
security interest in all inventory, raw 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 0-16893)
granting Bank One Columbus, N.A. a filed on March 30, 1995, and incorporated
security interest in all inventory, raw 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.
</TABLE>
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<PAGE> 18
<TABLE>
<S> <C> <C>
10(d) Loan Agreement, dated September 23, 1994, Previously filed as Exhibit 10 to Form 10 (file
in the amount of $2,500,000 payable to Bank number 0-16893) filed November 14, 1994,
One, Columbus, N.A. by Danninger Medical and incorporated herein by reference.
Technology, Inc., and 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-Q
and among Danninger Medical Technology, (file number 0-16893) filed August 14,
Inc., Cross Medical Products, Inc., Recovery 1995, and incorporated herein by reference.
Services, Inc., and Bank One, Columbus,
N.A.
10(f) Amendment to Loan Agreement, dated Page 51.
March 27, 1996, by and among
Danninger Medical Technology, Inc., Cross
Medical Products, Inc., Recovery 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:
<TABLE>
<S> <C> <C>
10(g) Confidentiality, Assignment and Previously filed as Exhibit 10(a) to Form 10
Non-Competition Agreement for Key (file number 0-16893) filed May 3, 1988, and
Personnel, dated September 10, 1984, incorporated herein by reference.
between Danninger Medical Technology,
Inc. and Edward R. Funk.*
10(h) Schedule identifying material details of other Previously filed as Exhibit 10(h) to Annual
agreements substantially identical to Exhibit Report on Form 10-K (file number 0-16893)
10(g).* filed on March 30, 1995, and incorporated
herein by reference.
10(i) Amended and Restated 1984 Incentive Previously filed as Exhibit 10(e) to Annual
Stock Option Plan, reserving Report on Form 10-K (file number 0-16893)
750,000 shares of Common Stock, as filed March 30, 1993, and incorporated herein
amended by the Board of Directors by reference.
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 0-16893)
Incentive Stock Option Plan.* filed March 30, 1993, and incorporated herein
by reference.
</TABLE>
-18-
<PAGE> 19
<TABLE>
<S> <C> <C>
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 0-16893)
reserving 300,000 shares of Common filed March 30, 1993, and incorporated herein
Stock, as amended by the Board of 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 0-16893)
Non-Statutory Stock Option Plan.* filed March 30, 1993, and incorporated herein
by reference.
10(m) 1994 Stock Option Plan, reserving 600,000 Previously filed as Exhibit 10(c) to Form 10
shares of Common Stock.* (file number 0-16893) filed August 12, 1994,
and incorporated herein by this reference.
10(n) Form of Indemnification Agreement between Previously filed as Exhibit 10(x) to Form 10
Danninger Medical Technology, Inc. and its (file number 0-16893) filed May 3, 1988, and
directors.* incorporated herein by reference.
10(o) Schedule identifying material details of other Previously filed as Exhibit 10(o) to Annual
Indemnification Agreements substantially Report on Form 10-K (file number 0-16893)
identical to Exhibit 10(n).* filed on March 30, 1995, and incorporated
herein by reference.
10(p) Employment Agreement between Danninger Previously filed as Exhibit 10(a) to Form 10
Medical Technology, Inc. and Edward R. (file number 0-16893) filed August 12, 1994,
Funk.* and incorporated herein by this reference.
10(q) Employment Agreement between Cross Previously filed as Exhibit 10(b) to Form 10
Medical Products, Inc. and Edward R. (file number 0-16893) filed August 12, 1994,
Funk.* and incorporated herein by this reference.
11 Statement Regarding Computation of Net Page 52.
Income Per Share.
21 List of Subsidiaries. Previously filed as Exhibit 21 (file number 0-
16893) filed March 31, 1995, and
incorporated herein by this reference.
23 Consent of Coopers & Lybrand L.L.P. Page 53.
24 Powers of Attorney. Page 54.
27 Financial Data Schedule Page 56.
<FN>
- -------------------------------
*Management Contract or Compensatory Plan
</TABLE>
(B) REPORTS ON FORM 8-K
None.
-19-
<PAGE> 20
(C) EXHIBITS
The exhibits to this report begin at page 51.
(D) FINANCIAL STATEMENT SCHEDULE
The Financial Statement Schedule of the Company, together with report
thereon from Coopers & Lybrand L.L.P. (dated March 27, 1996), are set forth
on pages F-24 though F-25 hereof.
-20-
<PAGE> 21
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused the Annual Report on Form
10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: March 27, 1996 DANNINGER MEDICAL TECHNOLOGY, INC.
By: /S/ Joseph A. Mussey
-----------------------
Joseph A. Mussey
Chief Executive Officer,
President and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Annual Report on Form 10-K 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> <C>
/s/ Joseph A. Mussey President, Chief Executive Officer, ) March 27, 1996
- ------------------------- Treasurer and Director )
Joseph A. Mussey (Principal Executive Officer) )
)
/s/ Paul A. Miller Vice President and Chief Financial ) March 27, 1996
- ------------------------- Officer (Principal Financial and )
Paul A. Miller Accounting Officer) )
)
/s/ Edward R. Funk Chairman of the Board of Directors ) March 27, 1996
- ------------------------- )
Edward R. Funk )
)
/s/ Daniel A. Funk Director ) March 27, 1996
- ------------------------- )
Daniel A. Funk, M.D. )
)
/s/ Daniel A. Gregorie Director ) March 27, 1996
- ------------------------- )
Daniel A. Gregorie, M.D. )
)
/s/ Herbert J. Kahn Director ) March 27, 1996
- ------------------------- )
Herbert J. Kahn )
)
/s/ Curtis A. Loveland Director ) March 27, 1996
- ------------------------- )
Curtis A. Loveland )
)
/s/ C. Craig Waldbillig Director ) March 27, 1996
- ------------------------- )
C. Craig Waldbillig )
)
</TABLE>
-21-
<PAGE> 22
<TABLE>
<S> <C> <C> <C>
/s/ Peter H. Williams Director ) March 27, 1996
- ------------------------- )
Peter H. Williams )
)
/s/ Robert J. Williams Director ) March 27, 1996
- ------------------------- )
Robert J. Williams )
*By: /s/ Joseph A. Mussey
-------------------------
Joseph A. Mussey, attorney-in-fact
for each of the persons indicated
</TABLE>
-22-
<PAGE> 23
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.
Columbus, Ohio
March 27, 1996
F-1
<PAGE> 24
DANNINGER MEDICAL TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET, December 31, 1995 and 1994
(In thousands)
----------
ASSETS
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Current assets:
Cash $ 3
Accounts receivable trade (net of
allowance for doubtful accounts
of $204 and $131 for 1995
and 1994, respectively) $ 3,497 2,705
Inventories 4,227 3,316
Prepaid expenses and other current assets 409 498
Deferred income taxes 174 127
------- ------
Total current assets 8,307 6,649
------- ------
Property and equipment, net 724 487
------- ------
Other assets:
Notes receivable 85
Other assets 304 171
Deferred taxes 182 41
------- ------
Total assets $ 9,517 $ 7,433
======= =======
</TABLE>
Continued
F-2
<PAGE> 25
DANNINGER MEDICAL TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET, Continued
(In thousands except for share amounts)
----------
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Current liabilities:
Cash overdraft $ 167
Current portion, term debt 3,380 $ 2,140
Current portion, capital lease
obligations 26 37
Accounts payable, trade 1,146 1,532
Accrued expenses and other liabilities 402 326
------- ------
Total current liabilities 5,121 4,035
------- ------
Term debt, net of current maturities 839
-------
Obligations under capital leases, net
of current maturities 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 46
Paid-in capital 3,367 2,877
Retained earnings 108 467
------- ------
Total shareholders' equity 3,522 3,390
------- ------
Total liabilities and
shareholders' equity $ 9,517 $ 7,433
======= =======
</TABLE>
See notes to the consolidated financial statements.
F-3
<PAGE> 26
DANNINGER MEDICAL TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
for the three years ended December 31, 1995, 1994 and 1993
(In thousands except share amounts)
----------
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Revenue:
Net sales $ 11,785 $ 10,083 $ 9,254
Lease and rental revenue 799 71 59
-------- -------- --------
12,584 10,154 9,313
Cost of goods sold 6,360 5,128 5,428
-------- -------- --------
Gross margin 6,224 5,026 3,885
-------- -------- --------
Operating expenses:
Sales and marketing 3,201 1,858 1,750
General and administrative 2,014 1,536 1,451
Research and development 1,147 1,324 1,248
-------- -------- --------
6,362 4,718 4,449
-------- -------- --------
Operating income (loss) (138) 308 (564)
Other income (expense):
Interest expense (289) (158) (156)
Other income (expense), net (4) 60 38
-------- -------- --------
(293) (98) (118)
-------- -------- --------
Income (loss) before
income taxes (431) 210 (682)
-------- -------- --------
Income taxes (benefit):
Federal:
Current 155
Deferred (100) 100 (101)
State and local 28 29 38
-------- -------- --------
(72) 129 92
-------- -------- --------
Net income (loss) $ (359) $ 81 $ (774)
========= ======== =========
Earnings per share:
Net income (loss) per share $(.08) $.02 $(.18)
===== ==== =====
Weighted average shares
outstanding including common
stock equivalents 4,661,332 4,695,418 4,420,312
========= ========= =========
</TABLE>
See notes to the consolidated financial statements.
F-4
<PAGE> 27
DANNINGER MEDICAL TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
for the three years ended December 31, 1995, 1994 and 1993
(In thousands)
----------
<TABLE>
<CAPTION>
Number
Of
Shares
Out- Common Paid-In Retained
standing Stock Capital Earnings Total
-------- ------ ------- -------- -----
<S> <C> <C> <C> <C> <C>
Balance, January 1, 4,401 $44 $2,523 $1,160 $3,727
1993
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, 4,431 44 2,578 386 3,008
1993
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, 4,552 46 2,877 467 3,390
1994
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, 4,708 $47 $3,367 $ 108 $3,522
1995 ===== === ====== ====== ======
</TABLE>
See notes to the consolidated financial statements.
F-5
<PAGE> 28
DANNINGER MEDICAL TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
for the three years ended December 31, 1995, 1994, and 1993
(In thousands)
----------
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (359) $ 81 $ (774)
------- ------- ------
Adjustments to reconcile net
income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization 257 257 343
Reserves for doubtful accounts 118 (53) 188
Gain on sale of fixed assets (50) (21)
Deferred income taxes (100) 100 (100)
Changes in assets and liabilities:
Accounts receivable (878) (1,248) (326)
Net investment in sales-type leases 206 1,586
Inventories (1,113) (580) 252
Prepaid expenses and other assets 52 (105) (77)
Federal income taxes refundable (76)
Accounts payable, accrued
expenses and other liabilities (288) 912 204
------- ------- ------
Total adjustments (1,952) (637) 2,047
------- ------- ------
Net cash provided by (used
in) operating activities (2,311) (556) 1,273
------- ------- ------
Cash flows from investing activities:
Payments received on notes
receivable 21 83
Purchases of property and equipment (183) (295) (209)
Proceeds from sale of property
and equipment 205 60
------- ------- ------
Net cash used in investing activities (162) (90) (66)
------- ------- ------
</TABLE>
Continued
F-6
<PAGE> 29
DANNINGER MEDICAL TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS, Continued
(In thousands)
----------
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Cash flows from financing activities:
Proceeds from term debt $ 4,331 $395 $ 435
Repayment of term debt and
capitalized lease obligations (2,431) (56) (1,626)
Proceeds from exercise of stock options 403 264 49
Cash overdraft 167 (19)
------- ---- -------
Net cash (used in) provided
by financing activities 2,470 603 (1,161)
------- ---- -------
Net increase (decrease) in cash (3) (43) 46
Cash balance at beginning of year 3 46 0
------- ---- -------
Cash balance at end of year $ 0 $ 3 $ 46
======= ==== =======
Supplemental disclosures of cash
flow information:
Cash paid during the year for:
Interest $ 289 $158 $ 156
======= ==== =======
Income taxes (refunds) $ 28 $ 97 $ (160)
======= ==== =======
</TABLE>
See notes to the consolidated financial statements.
F-7
<PAGE> 30
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.
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.
Continued
F-8
<PAGE> 31
DANNINGER MEDICAL TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
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>
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.
Property and equipment are comprised of:
<TABLE>
<CAPTION>
(in thousands) 1995 1994
---- ----
<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>
Continued
F-9
<PAGE> 32
DANNINGER MEDICAL TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
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.
REVENUE RECOGNITION:
Revenue from the sales of products are 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.
Continued
F-10
<PAGE> 33
DANNINGER MEDICAL TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
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.
Continued
F-11
<PAGE> 34
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.
Continued
F-12
<PAGE> 35
DANNINGER MEDICAL TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
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.
Term debt maturities (in thousands):
<TABLE>
<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.
Continued
F-13
<PAGE> 36
DANNINGER MEDICAL TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
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.
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.
Continued
F-14
<PAGE> 37
DANNINGER MEDICAL TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
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 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.
Continued
F-15
<PAGE> 38
DANNINGER MEDICAL TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
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.
Continued
F-16
<PAGE> 39
DANNINGER MEDICAL TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
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 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 Option
Shares Price
------ ---------
<S> <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.
Continued
F-17
<PAGE> 40
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 Option
Shares Price
------ ---------
<S> <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.
Continued
F-18
<PAGE> 41
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 Option
Shares Price
------ ---------
<S> <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,
Continued
F-19
<PAGE> 42
DANNINGER MEDICAL TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
the plaintiffs were denied class certification. In response to the denial of
class certification, a large number of additional individual lawsuits have
been filed alleging, in addition to damages from spinal implants, a
conspiracy among manufacturers, physicians and other spinal implant industry
members. At March 1, 1996, approximately 500 such lawsuits have been filed
in which the Company is a party. Approximately fifteen of such cases involve
individual plaintiffs utilizing implants supplied by the Company. The
Company cannot estimate precisely at this time the number of such lawsuits
that may eventually be filed. The vast majority of such lawsuits are pending
in federal courts and are in preliminary stages. Discovery proceedings,
including the taking of depositions, have commenced in certain of the
lawsuits. Plaintiffs in these cases 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 affect upon the financial position or results of operations
of the Company. However, there can be no assurance that future quarterly or
annually operating results will not be materially adversely affected by the
final resolution of these matters.
Continued
F-20
<PAGE> 43
DANNINGER MEDICAL TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
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.
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.
Continued
F-21
<PAGE> 44
DANNINGER MEDICAL TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
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.
Continued
F-22
<PAGE> 45
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-23
<PAGE> 46
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
Our report on the consolidated financial statements of Danninger Medical
Technology, Inc., and Subsidiaries is included on page F-1 of this Form 10-K.
In connection with our audits of such financial statements, we have also
audited the related financial statement schedule listed in the index on page 20
of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information required to be
included therein.
COOPERS & LYBRAND L.L.P.
Columbus, Ohio
March 27, 1996
F-24
<PAGE> 47
DANNINGER MEDICAL TECHNOLOGY, INC. AND SUBSIDIARY
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Charged
Balance to Costs
at and Balance
Beginning Expenses (Deductions) at End
of Year (Recoveries) Additions of Year
------ ------------ --------- -------
<S> <C> <C> <C> <C>
For the year ended December 31, 1995:
Allowance for doubtful accounts $130,782 $ 117,890 $ (44,844) $203,828
Inventory valuation reserve 329,439 148,535 0 477,974
-------- --------- --------- --------
$460,221 $ 266,425 $ (44,844) $681,802
======== ========= ========= ========
For the year ended December 31, 1994:
Allowance for doubtful accounts $253,836 $ (36,227) $ (86,827) $130,782
Inventory valuation reserve 408,998 (47,397) (32,162) 329,439
Investment valuation allowance 17,128 (17,128) 0 0
-------- --------- --------- --------
$679,962 $(100,752) $(118,989) $460,221
======== ========= ========= ========
For the year ended December 31, 1993:
Allowance for doubtful accounts $ 85,000 $ 171,086 $ (2,250) $253,836
Inventory valuation reserve 78,009 622,026 (291,037) 408,998
Investment valuation allowance 0 17,128 0 17,128
-------- --------- --------- --------
$163,009 $ 810,240 $(293,287) $679,962
======== ========= ========= ========
</TABLE>
F-25
<PAGE> 48
DANNINGER MEDICAL TECHNOLOGY, INC.
REPORT ON FORM 10-K
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE NUMBER
- ------- ----------- -----------
<S> <C> <C>
3(a) Certificate of Incorporation of Danninger Previously filed as Exhibit 3(a) to Form 10
Medical Technology, Inc. (file number 0-16893) filed May 3, 1988, and
incorporated herein by reference.
3(B) Bylaws of Danninger Medical Technology, Previously filed as Exhibit 3(b) to Form 10
Inc. (file number 0-16893) filed May 3 1988, and
incorporated herein by reference.
4 Reference is made to Articles FOURTH, Previously filed as Exhibit 4 to Form 10 (file
EIGHTH, NINTH and TENTH of the number 0-16893) filed May 3, 1988, and
Certificate of Incorporation of the Company incorporated herein by reference.
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.
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 0-16893)
amount of $400,000 payable to Bank One, filed on March 30, 1995, and incorporated
Columbus, N.A. by Danninger Medical herein by reference.
Technology, Inc. and Cross Medical
Products, Inc.
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 0-16893)
granting Bank One Columbus, N.A. a filed on March 30, 1995, and incorporated
security interest in all inventory, raw 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 0-16893)
granting Bank One Columbus, N.A. a filed on March 30, 1995, and incorporated
security interest in all inventory, raw 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.
</TABLE>
<PAGE> 49
<TABLE>
<S> <C> <C>
10(d) Loan Agreement, dated September 23, 1994, Previously filed as Exhibit 10 to Form 10 (file
in the amount of $2,500,000 payable to Bank number 0-16893) filed November 14, 1994,
One, Columbus, N.A. by Danninger Medical and incorporated herein by reference.
Technology, Inc., and 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-Q
and among Danninger Medical Technology, (file number 0-16893) filed August 14,
Inc., Cross Medical Products, Inc., Recovery 1995, and incorporated herein by reference.
Services, Inc., and Bank One, Columbus,
N.A.
10(f) Amendment to Loan Agreement, dated Page 51.
March 28, 1996, by and among
Danninger Medical Technology, Inc., Cross
Medical Products, Inc., Recovery 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:
<TABLE>
<S> <C> <C>
10(g) Confidentiality, Assignment and Previously filed as Exhibit 10(a) to Form 10
Non-Competition Agreement for Key (file number 0-16893) filed May 3, 1988, and
Personnel, dated September 10, 1984, incorporated herein by reference.
between Danninger Medical Technology,
Inc. and Edward R. Funk.*
10(h) Schedule identifying material details of other Previously filed as Exhibit 10(h) to Annual
agreements substantially identical to Exhibit Report on Form 10-K (file number 0-16893)
10(g).* filed on March 30, 1995, and incorporated
herein by reference.
10(i) Amended and Restated 1984 Incentive Previously filed as Exhibit 10(e) to Annual
Stock Option Plan, reserving Report on Form 10-K (file number 0-16893)
750,000 shares of Common Stock, as filed March 30, 1993, and incorporated herein
amended by the Board of Directors by reference.
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 0-16893)
Incentive Stock Option Plan.* filed March 30, 1993, and incorporated herein
by reference.
</TABLE>
<PAGE> 50
<TABLE>
<S> <C> <C>
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 0-16893)
reserving 300,000 shares of Common filed March 30, 1993, and incorporated herein
Stock, as amended by the Board of 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 0-16893)
Non-Statutory Stock Option Plan.* filed March 30, 1993, and incorporated herein
by reference.
10(m) 1994 Stock Option Plan, reserving 600,000 Previously filed as Exhibit 10(c) to Form 10
shares of Common Stock.* (file number 0-16893) filed August 12, 1994,
and incorporated herein by this reference.
10(n) Form of Indemnification Agreement between Previously filed as Exhibit 10(x) to Form 10
Danninger Medical Technology, Inc. and its (file number 0-16893) filed May 3, 1988, and
directors.* incorporated herein by reference.
10(o) Schedule identifying material details of other Previously filed as Exhibit 10(o) to Annual
Indemnification Agreements substantially Report on Form 10-K (file number 0-16893)
identical to Exhibit 10(n).* filed on March 30, 1995, and incorporated
herein by reference.
10(p) Employment Agreement between Danninger Previously filed as Exhibit 10(a) to Form 10
Medical Technology, Inc. and Edward R. (file number 0-16893) filed August 12, 1994,
Funk.* and incorporated herein by this reference.
10(q) Employment Agreement between Cross Previously filed as Exhibit 10(b) to Form 10
Medical Products, Inc. and Edward R. (file number 0-16893) filed August 12, 1994,
Funk.* and incorporated herein by this reference.
11 Statement Regarding Computation of Net Page 52.
Income Per Share.
21 List of Subsidiaries. Previously filed as Exhibit 21 (file number 0-
16893) filed March 31, 1995, and
incorporated herein by this reference.
23 Consent of Coopers & Lybrand L.L.P. Page 53.
24 Powers of Attorney. Page 54.
27 Financial Data Schudule Page 56.
<FN>
- -------------------------------
*Management Contract or Compensatory Plan
</TABLE>
<PAGE> 1
EXHIBIT 10(f)
AMENDMENT TO LOAN AGREEMENT
This Amendment to Loan Agreement dated as of this 27th day of
March, 1996, by and among Bank One Columbus, NA (hereafter referred to as "Bank
One") and Danninger Medical Technology, Inc., Cross Medical Products, Inc., and
Recovery Services, Inc., Corporation organized and existing under the laws of
the State of Delaware, (hereafter collectively referred to as "Borrower").
WITNESSETH:
THAT WHEREAS, Bank One and Borrower are parties to a Loan Agreement
dated June 26, 1995, (hereafter referred to as the "Agreement"); and
WHEREAS, all parties hereto desire to provide for certain amendments to
and modifications of the existing Agreement;
NOW THEREFORE, in consideration of the foregoing the parties hereto
agree that the Agreement be amended and modified effective as of January 1,
1996 as follows:
1. Amend Section 6.2 of the Agreement as follows:
6.2 Borrower agrees to maintain a ratio of Debt to Tangible Net Worth
of not more than 2.5 to 1.0.
2. Amend Section 6.4 of the Agreement as follows:
6.4 Borrower agrees to maintain a Cash Flow Ratio (net income before
interest, taxes, depreciation, amortization, plus (or minus) the change in the
allowances for doubtful accounts and inventory from quarter to quarter divided
by interest and current maturities of long term debt) of not less than 1.0 to
1.0 as of March 31, 1996 and June 30, 1996; 1.5 to 1.0 as of September 30,
1996; and 2.0 to 1.0 as of December 31, 1996 and thereafter, said ratio
calculated on a rolling four quarter basis.
3. The Borrower and each of the undersigned guarantors authorize(s)
any Attorney-at-Law to appear for the Borrower and each of the undersigned
guarantors in action on the Note, at a time after the same becomes due, as
herein provided, in any court of record in or of the State of Ohio, or
elsewhere, to waive the issuing and service of process against the Borrower and
each of the undersigned guarantors, and to confess judgment in favor of the
legal holder of the Note against the Borrower and each of the undersigned
guarantors, for the amount that may be due, with interest at the rate therein
mentioned and cost of suit, and to waive and release all errors in said
proceedings and judgment rendered.
4. As modified and amended by this Amendment to Loan Agreement, the
original Agreement is in all respects reinstated, ratified and confirmed by the
parties hereto and the Agreement and this Amendment to Loan Agreement shall be
read, taken and construed as one and the same instrument.
IN WITNESS WHEREOF, the undersigned have caused this Amendment to Loan
Agreement to be executed on the day and year first above written.
WARNING -- BY SIGNING THIS PAPER YOU GIVE UP YOUR RIGHT TO NOTICE AND
COURT TRIAL. IF YOU DO NOT PAY ON TIME A COURT JUDGMENT MAY BE TAKEN AGAINST
YOU WITHOUT YOUR PRIOR KNOWLEDGE AND THE POWERS OF A COURT CAN BE USED TO
COLLECT FROM YOU REGARDLESS OF ANY CLAIMS YOU MAY HAVE AGAINST THE CREDITOR
WHETHER FOR RETURNED GOODS, FAULTY GOODS, FAILURE, ON HIS PART TO COMPLY WITH
THE AGREEMENT, OR ANY OTHER CAUSE.
Danninger Medical Technology, Inc.
By: /s/ JOSEPH A. MUSSEY
------------------------------
Joseph A. Mussey, President
Cross Medical Products, Inc.
By: /s/ JOSEPH A. MUSSEY
------------------------------
Joseph A. Mussey, President
Recovery Services, Inc.
By: /s/ JOSEPH A. MUSSEY
------------------------------
Joseph A. Mussey, President
Agreed and Acknowledged by: Bank One, Columbus, N.A.
By: /s/ JEFF JOHNS
-------------------------
Title: Vice President
----------------------
<PAGE> 1
DANNINGER MEDICAL TECHNOLOGY, INC. AND SUBSIDIARIES
EXHIBIT 11
COMPUTATION OF NET INCOME PER SHARE
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Weighted average number of common shares outstanding 4,661,332 4,475,954 4,420,312
Shares issuable pursuant to employee stock option plans
and stock warrants, less shares assumed repurchased at
the average market share (1) 219,464 (1)
---------- ---------- ----------
Weighted average shares outstanding, including common
stock equivalents 4,661,332 4,695,418 4,420,312
========== ========== ==========
Net income (loss) $ (358,941) $ 81,388 $ (744,262)
========== ========== ==========
Net income (loss) per share $ (.08) $ .02 $ (.18)
========== ========== ==========
</TABLE>
Note: The application of the higher of quarter-end or year-end market prices
in calculating fully-diluted earnings per share does not result in material
dilution to the reported earnings per share amounts.
(1) Shares issuable under these common stock equivalents are anti-dilutive and
therefore have been excluded from this schedule.
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
Danninger Medical Technology, Inc. on Form S-8 (file numbers 33-26211,
33-39336, 33-61995 and 33-91610) or our reports dated March 27, 1996, on our
audits of the consolidated financial statements of Danninger Medical
Technology, Inc. as of December 31, 1995 and 1994, and for the years ended
December 31, 1995, 1994 and 1993, which report is included in this Annual
Report on Form 10-K.
COOPERS & LYBRAND L.L.P.
Columbus, Ohio
March 29, 1996
<PAGE> 1
EXHIBIT 24
POWER OF ATTORNEY
Each of the undersigned directors and officers of Danninger Medical
Technology, Inc. (the "Corporation") whose signature appears below hereby
appoints Edward R. Funk or Joseph A. Mussey, or either of them, as his
attorney-in-fact to sign, in his name and behalf and in any and all capacities
stated below, and to cause to be filed with the Securities and Exchange
Commission, the Corporation's Registration Statement on Form S-2 (the
"Registration Statement") for the purpose of registering under the Securities
Act of 1933, Convertible Subordinated Debentures (the "Debentures") of the
Corporation, and likewise to sign and file any amendments, including post-
effective amendments, to the Debentures, hereby granting unto such attorneys
and each of them full power and authority to do and perform in the name and on
behalf off the undersigned, and in any and all such capacities, every act and
thing whatsoever necessary to be done in and about the premises as fully as the
undersigned could or might do in person, hereby granting to such
attorney-in-fact full power of substitution and revocation, and hereby
ratifying all that such attorney-in-fact or his substitute may do by virtue
hereof.
IN WITNESS WHEREOF, the undersigned have executed this Power of
Attorney in counterparts if necessary, effective as of March 25, 1996.
DIRECTORS/OFFICERS:
<TABLE>
<CAPTION>
SIGNATURE TITLE
- --------- -----
<S> <C>
/s/ Joseph A. Mussey President, Chief Executive Officer, and
- ------------------------ Treasurer
Joseph A. Mussey (Principal Executive Officer)
/s/ Paul A. Miller Vice President and Chief Financial Officer
- ------------------------ (Principal Accounting Officer)
Paul A. Miller
/s/ Edward R. Funk Chairman of the Board of Directors
- ------------------------
Edward R. Funk, Ph.D.
/s/ Daniel A. Funk Director
- ------------------------
Daniel A. Funk, M.D.
/s/ Daniel A. Gregorie Director
- ------------------------
Daniel A. Gregorie, M.D.
</TABLE>
<PAGE> 2
<TABLE>
<S> <C>
/s/ Herbert J. Kahn Director
- ------------------------
Herbert J. Kahn
/s/ Curtis A. Loveland Director
- ------------------------
Curtis A. Loveland
/s/ C. Craig Waldbillig Director
- ------------------------
C. Craig Waldbillig
/s/ Peter H. Williams Director
- ------------------------
Peter H. Williams
/s/ Robert J. Williams Director
- ------------------------
Robert J. Williams
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS FOUND ON
PAGES 1, 2, AND 3 OF THE COMPANY'S FORM 10-Q FOR THE YEAR-TO-DATE, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 3,701
<ALLOWANCES> 204
<INVENTORY> 4,227
<CURRENT-ASSETS> 8,307
<PP&E> 2,206
<DEPRECIATION> 1,482
<TOTAL-ASSETS> 9,517
<CURRENT-LIABILITIES> 5,121
<BONDS> 1,219
<COMMON> 47
0
0
<OTHER-SE> 3,475
<TOTAL-LIABILITY-AND-EQUITY> 9,517
<SALES> 12,584
<TOTAL-REVENUES> 12,584
<CGS> 6,360
<TOTAL-COSTS> 6,360
<OTHER-EXPENSES> 6,362
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 289
<INCOME-PRETAX> (431)
<INCOME-TAX> (72)
<INCOME-CONTINUING> (359)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (359)
<EPS-PRIMARY> (.08)
<EPS-DILUTED> (.08)
</TABLE>
