<PAGE> 1
FORM 10-K
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, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For The Transition Period From _____________ To_______________
Commission File Number: 000-16893
CROSS MEDICAL PRODUCTS, INC.
(Exact name of Registrant as specified in its charter)
(formerly known as Danninger Medical Technology, Inc.)
DELAWARE 31-0992628
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5160 - A BLAZER MEMORIAL PARKWAY
DUBLIN, OHIO 43017-1339 (614) 718-0530
(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. ( X )
Based upon the closing price reported on NASDAQ SmallCap Market on March
25, 1997, the aggregate market value of the registrant's voting stock held by
non-affiliates on that date was $22,173,676. As of March 25, 1997,
4,921,298 shares of Common Stock, $.01 par value, were outstanding.
Documents incorporated by reference:
Portions of the Registrant's Annual Report to Stockholders for the fiscal
year ended December 31, 1996, are incorporated by reference in Part II.
Portions of the registrant's Definitive Proxy Statement for its Annual
Meeting of Stockholders to be held on May 21, 1996, are incorporated by
reference into Part III of this report.
<PAGE> 2
PART I
ITEM 1. BUSINESS.
In 1996, Cross Medical Products, Inc. (the "Company"), a Delaware
corporation, formerly known as Danninger Medical Technology, Inc. and
subsidiaries, was engaged in two distinct business segments of the orthopedic
device industry: (1) the design, manufacture, distribution and rental of
orthopedic rehabilitation products ("Recovery Products") and (2) the design,
manufacture and marketing of implants and instruments for the surgical treatment
of degenerative diseases, deformities and trauma of the spine ("Spinal
Implants"). On March 12, 1997, the Company sold substantially all of the assets
and the buyer assumed substantially all of the liabilities of the Recovery
Products segment. The Company will focus exclusively on the development of new
products and increasing market penetration both domestically and internationally
for its Spinal Implant business.
Unless the context otherwise requires, the following discussion relates
only to the continuing operations of the Spinal Implant business. On March 21,
1997, the Company formally changed its name to Cross Medical Products, Inc.
SPINAL IMPLANT PRODUCTS
The initial spinal implant system offered by the Company in 1988 was the
Puno/Winter/Byrd Screw/Rod System (the "PWB Screw/Rod System") for fusion of the
lumbar spine. The Company elected to market the PWB Screw/Rod System in the
United States for clinical studies under an Investigational Device Exemption
("IDE"). The IDE allowed the Company to develop a clinical study in order to
gather the data necessary to assess safety and efficacy of the PWB Screw/Rod
System. The IDE did not permit commercial distribution and limited use of the
PWB Screw/Rod System to a small number of surgeons participating in the study.
The study and patient follow-up has been completed and the Company is preparing
to submit 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.
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 patients 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. The screws and hooks are top
tightening, the rods do not require pre-loading of additional components, and
all implants allow for free rod rotation. The Company received 510(k) clearance
from the FDA to market the anterior portion of the SYNERGY(TM) Spinal Implant
System in
- 2 -
<PAGE> 3
October 1994 and for the posterior portion of the system in July 1995. In
September 1996, the Company developed a titanium version of the SYNERGY(TM)
Spinal Implant System for international distribution. The Company received FDA
marketing clearance for the anterior portion of the titanium version in October
1995 and the posterior portion in January 1997. 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 is currently developing a cervical 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.
The Company believes that the SYNERGY(TM) Spinal Implant System is one of the
few "universal" spinal implant systems on the market.
In March 1997, the Company entered into a license agreement with
Polaris Biotechnology, Inc. to develop and market a spinal cage implant. Spinal
cage implants provide a supporting framework for bone in-growth for patients
with trauma, tumors, or degenerative diseases. Distribution of the spinal cage
implant within the United States is subject to regulatory approval which will
involve clinical trials, while international distribution is expected to begin
next year.
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
twenty-four independent commissioned sales agencies. The Company considers the
quality of its independent sales agencies and the level of training and service
they provide to surgeons to be a very important factor in its success, second
only to the technological advantages of its spinal implant products. The
independent sales agencies are prohibited from marketing competing spinal
implant products. However, they are permitted to market non-competing implants
and other orthopedic products. Independent sales agencies are required to
purchase the Company's proprietary surgical instruments that are used to install
the Company's spinal implant products. Spinal implant device inventories 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 $4.2 million, or 49%, of the Company's total sales of spinal
implants and instruments in fiscal 1996. 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 approximately twenty countries and
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 technologies 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
- 3 -
<PAGE> 4
limitations, to its Medical Advisory Board in an amount equal to 6.5% (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:
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, NN
Joseph Perra, M.D. Minneapolis, NM
Manuel Pinto, M.D. Minneapolis, MN
Michael Smith, M.D. Minneapolis, MN
COMPETITION
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. Because of intense competition,
there can be no assurance that the Company will be able to successfully market
its spinal implant products. Additionally, there can be no assurance that other
competing products or technologies will not be technologically superior to those
offered or developed by the Company.
RESEARCH AND DEVELOPMENT
The Company continually strives to improve existing products and
develop new products in the spinal implant market. The Company conducts its
research and development activities primarily through its engineering department
and with the assistance of outside consultants. The Company employs five
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 to be used with the
SYNERGY(TM) Spinal Implant System as well as a minimally invasive device. 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
1997 for the cervical version. The Company will also continue to develop the
spinal implant cage which it licensed in March 1997 under a license agreement
with Polaris Biotechnology, Inc.
The Company's research and development expenditures during the fiscal
years ended December 31, 1996, 1995, and 1994 were $687,000, $859,000, and
$977,000, respectively. The Company intends to continue to invest in the
development of new spinal implant products in 1997.
- 4 -
<PAGE> 5
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.
The Company intends to file patent applications on future products as
appropriate. The mere filing and prosecution of patent applications, however,
cannot guarantee the ultimate issuance of patents. To the extent that the
Company is unsuccessful in securing patents for its devices or for certain
features of its devices which are easily reverse-engineered, there is little to
prevent a competitor from copying the Company's products, although the Company
would have "lead time" in the marketplace during the period needed by its
competitors to copy and secure FDA approval for a duplicate product. Thus, while
the patents may have value, the Company believes that they are of lesser
significance than the innovative skills, technical competence, and marketing
ability of the Company's personnel.
GOVERNMENT REGULATION
The health care industry is subject to extensive government regulation
on both the federal and state levels. In particular, the 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 recordkeeping 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 PWB Screw/Rod System implantable devices and the spinal implant
cage are Class III devices. Class III devices require pre-market 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 judgment of both safety and effectiveness on
information gathered during studies conducted pursuant to an IDE. The Company is
following the premarket approval process for the PWB Screw/Rod System and having
completed the IDE is formulating its PMA for submission to the FDA. In addition,
the Company plans to pursue an IDE for multiple versions of the spinal implant
cage.
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.
- 5 -
<PAGE> 6
PERSONNEL
As of March 21, 1997, the Company employed 39 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.
DISCONTINUED OPERATIONS
On March 12, 1997, the Company, Danninger Healthcare, Inc. ("DHI"), an
Ohio corporation and wholly owned subsidiary of the Company, and OrthoLogic
Corp. (OrthoLogic), a Delaware corporation, entered into an Asset Purchase
Agreement, dated March 12, 1997, whereby OrthoLogic purchased from the Company
and DHI certain assets and assumed certain liabilities related to the Company's
Recovery Products business. Under the Asset Purchase Agreement, the Company and
DHI, collectively, sold substantially all of their accounts receivables,
inventory, fixed assets, intangible assets and other assets related to the
Recovery Products business to OrthoLogic for approximately $8,600,000 in cash
plus the assumption by OrthoLogic of substantially all of the liabilities of the
Company and DHI including accounts payable, lease payable, bank debt and seller
financing debt. Assumed liabilities totaled approximately $5,000,000. In
addition, OrthoLogic acquired 30,000 restricted shares of the Company's Common
Stock for $243,750. The transaction was accomplished through arms-length
negotiations between the Company and DHI and OrthoLogic. There was no material
relationship between the Company, DHI and OrthoLogic or any affiliates,
directors or officers or associates of such directors or officers of any party
to the transaction. The following discussion describes the Company's Recovery
Products business prior to the sale.
Technology Overview. Continuous passive motion ("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.
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 were marketed under the trade name Danniflex(TM). The Company
offered 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
refined and updated 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 offered product accessories that made CPM devices easier to use and
apply.
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.
- 6 -
<PAGE> 7
The Company sold 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 purchased
the unit outright from the Company or financed 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 was committed to
an open distribution policy for its products and, working with independent
financing companies, offered financing programs tailored to the DME marketplace.
In addition, in 1994, the Company formed Recovery Services, Inc. ("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.
In September 1996, the Company acquired Surgical and Orthopedic
Specialties, Inc. ("SOS"), a durable medical equipment dealer that rented
orthopedic rehabilitation equipment primarily to home-care patients in Michigan,
Indiana and Ohio. Upon completion of the merger, RSI and SOS operated under the
DHI name.
Recovery Products Manufacturing. The Company assembled 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 shared
certain basic structural elements. CPM devices were sold with a limited one year
warranty. Claims under the Company's CPM device warranty have been nominal.
BUSINESS RISKS
The Company desires to take advantage of the "safe harbor" provisions
of the Private Securities Litigation Reform Act of 1995. In addition to the
other information in this report, readers should carefully consider the
following important factors, among others, in some cases have affected, and in
the future could affect, the company's actual results and could cause the
Company's actual consolidated results of operations for 1997 and beyond, to
differ materially from those expressed in any forward-looking statements made
by, or on behalf of, the Company.
Limited History of Profitability. In fiscal 1996, the Company reported
net income of $50,000, but had incurred net losses in the previous 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 spinal implant cage. 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 spinal implant industry is intensely competitive with
respect to technology, distribution, quality and variety, and there are two
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 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
- 7 -
<PAGE> 8
the Company has obtained all necessary clearances for the marketing 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 commissioned 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 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 spinal implant
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
the Company's products and substantial monetary damages. The Company has been
named as a defendant in more than 500 cases alleging principally that the
Company participated in an industry-wide conspiracy to market pedicle screw
implants. The Company anticipates that additional similar suits will be filed in
the future. The Company has also been named as 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 judgments. Such insurance is expensive, difficult
to obtain and may not be available in the future on acceptable terms, or at all.
In 1997, the Company's prior insurance carrier exited the spinal implant market.
The new insurance carrier
- 8 -
<PAGE> 9
is providing similar insurance coverage for future claims. For claims that have
been incurred but not yet filed, the Company has purchased extended claims
coverage from its prior carrier. See "Legal Proceedings."
Product Concentration and Obsolescence. The Company anticipates that
most of its spinal implant sales and sales growth in the future, if any, will
come from the SYNERGY(TM) Spinal Implant System. In addition, the Company's
current primary product development efforts involve a cervical version of the
SYNERGY(TM) Spinal Implant System and a spinal implant cage. There can be no
assurance that the Company will be successful in marketing the SYNERGY(TM)
Spinal Implant System or the spinal implant cage 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 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.
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.
On February 8, 1996, the Company entered into a lease for its new
office and production facilities in Dublin, Ohio. The lease term began on April
1, 1996, and terminates on June 1, 2001. The lease covers 27,680 square feet, of
which the Company plans to use approximately 13,680 square feet for office and
production and the remaining approximately 14,000 square feet will be used by
OrthoLogic, the purchaser of the recovery products segment. OrthoLogic may cease
using the space on 90 days notice, and must vacate by December 31, 1997. After
OrthoLogic vacates the space, the Company will expand into part of the space and
attempt to sublease the remainder. The facility is located at 5160 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 ($100,000) and
aggregate ($500,000) 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 formal 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
- 9 -
<PAGE> 10
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 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. 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 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. 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 formal resolution of these matters.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF THE SECURITY HOLDERS.
Not Applicable.
- 10 -
<PAGE> 11
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 "CRSS." 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>
1994
First Quarter $4.375 $1.8125
Second Quarter 4.125 2.625
Third Quarter 4.125 3.125
Fourth Quarter 4.50 3.625
1995
First Quarter ....... $4.375 $ 3.875
Second Quarter 10.00 4.00
Third Quarter 10.50 7.125
Fourth Quarter 7.875 5.375
1996
First Quarter ....... $8.00 $ 5.75
Second Quarter 9.00 6.25
Third Quarter 7.50 5.25
Fourth Quarter 9.00 6.25
</TABLE>
On March 25, 1997, the last reported bid price of the Common Stock on
The Nasdaq SmallCap market was $7.25. At March 25, 1997, there were 413
holders of record of the outstanding Common Stock.
The Company has not declared or paid any cash dividends or
distributions on the Common Stock. The Company intends to retain its earnings to
finance the growth and development of its business and does not expect to
declare or pay any cash dividends in the foreseeable future. The declaration of
dividends is within the discretion of the Company's Board of Directors, subject
to the terms of the Company's revolving credit agreement.
- 11 -
<PAGE> 12
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, 1996 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: 1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenue.............................................. $8,572 $4,091 $2,880 $1,360 $347
Cost of goods sold................................... 3,854 1,995 1,189 358 255
Gross margin......................................... 4,718 2,096 1,691 1,002 92
Selling, general and administrative expenses......... 4,330 3,224 2,483 1,984 1,413
Research and development expenses.................... 687 859 977 800 519
Operating loss ...................................... (299) (1,987) (1,769) (1,782) (1,840)
Interest expense, net................................ 439 101 3 15 9
Loss from continuing operations before income taxes.. (738) (2,088) (1,772) (1,797) (1,849)
Net income (loss) from continuing operations......... 50 (1,442) (1,176) (1,194) (1,207)
Net income (loss) per share from continuing
operations......................................... $ .01 $ (.31) $(.25) $(.27) $(.27)
BALANCE SHEET DATA:
Working Capital...................................... $8,241 $3,135 $2,599 $2,032 $3,742
Total assets......................................... 19,590 9,498 7,413 5,782 7,649
Short-term obligations............................... 1,659 3,081 6 7 157
Long-term obligations................................ 5,482 7 6 163
Total shareholders' equity........................... 5,648 3,522 3,390 3,008 3,727
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OR FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The information required by this item is included under the caption
"MANAGEMENT DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION" in the Company's Annual Report and is incorporated herein by
reference.
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 12, 1997), appear in
the Company's Annual Report and are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
- 12 -
<PAGE> 13
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 21, 1997 (the
"Proxy Statement"), 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 Proxy Statement.
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 21, 1997, 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 21, 1997, is incorporated herein by reference.
- 13 -
<PAGE> 14
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 AS INCORPORATED BY
REFERENCE IN ITEM 8:
FINANCIAL STATEMENTS AND SCHEDULE
Report of Independent Accountants
Consolidated Balance Sheet as of December 31, 1996 and 1995
Consolidated Statement of Operations for the three years ended
December 31, 1996, 1995 and 1994
Consolidated Statement of Changes in Shareholders' Equity for
the three years ended December 31, 1996, 1995 and 1994
Consolidated Statement of Cash Flows for the three years ended
December 31, 1996, 1995 and 1994
Notes to the Consolidated Financial Statements
Financial statement schedule:
Report of Independent Accountants on Financial
Statement Schedule
II. Valuation and Qualifying Accounts
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.
- 14 -
<PAGE> 15
<TABLE>
<CAPTION>
CROSS MEDICAL PRODUCTS, INC.
REPORT ON FORM 10-K
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION PAGE NUMBER
--- ----------- -----------
<S> <C> <C>
3(a) Certificate of Incorporation of the Company. Previously filed as Exhibit 3(a) to
Form 10 (file number 0-16893) filed
May 3, 1988, and incorporated herein
by reference.
3(B) Bylaws of the Company. Previously filed as Exhibit 3(b) to Form
10 (file number 0-16893) filed May 3
1988, and incorporated herein by
reference.
4.1 Reference is made to Articles FOURTH, EIGHTH, Previously filed as Exhibit 4 to Form 10
NINTH and TENTH of the Certificate of Incorporation (file number 0-16893) filed May 3,
of the Company and Articles II, III, IV, VI, VII and VIII 1988, and incorporated herein by
of the Company's Bylaws. Instruments defining the reference.
rights of holders of long-term debt will be furnished to
the Securities and Exchange Commission upon request.
4.2 Form of the Company's Stock Certificate Page___.
10(a) Business Purpose Revolving Promissory Note, dated Previously filed as Exhibit 10(a) to
February 13, 1995, in the amount of $400,000 payable to Annual Report on Form 10-K (file
Bank One, Columbus, N.A. by the Company. number 0-16893) filed on March 30,
1995, and incorporated herein by
reference.
10(b) Non-Titled Personal Property Security Agreement, dated Previously filed as Exhibit 10(b) to
February 13, 1995, granting Bank One Columbus, N.A. a Annual Report on Form 10-K (file
security interest in all inventory, raw materials, work in number 0-16893) filed on March 30,
process, supplies, accounts, general intangibles, chattel 1995, and incorporated herein by
paper, instruments, other forms of obligations and reference.
receivables, goods, equipment, machinery, supplies and
other personal property of the Company.
10(c) Non-Titled Personal Property Security Agreement, dated Previously filed as Exhibit 10(c) to
February 13, 1995, granting Bank One Columbus, N.A. a Annual Report on Form 10-K (file
security interest in all inventory, raw materials, work in number 0-16893) filed on March 30,
process, supplies, accounts, general intangibles, chattel 1995, and incorporated herein by
paper, instruments, other forms of obligations and reference.
receivables, goods, equipment, machinery, supplies and
other personal property of the Company.
10(d) Loan Agreement, dated September 23, 1994, in the Previously filed as Exhibit 10 to Form
amount of $2,500,000 payable to Bank One, Columbus, 10 (file number 0-16893) filed
N.A. by Danninger Medical Technology, Inc., and the November 14, 1994, and incorporated
Company, secured by accounts receivable, lease herein by reference.
receivables, contract rights, chattels, general intangibles,
notes, drafts, acceptances and other forms of obligations
and inventory, goods, merchandise, and all other personal
property of the Company.
10(e) Loan Agreement, dated June 26, 1995, by and among the Previously filed as Exhibit 10 to
Company and Bank One, Columbus, N.A. Form 10-Q (file number 0-16893) filed
August 14, 1995, and incorporated
herein by reference.
</TABLE>
- 15 -
<PAGE> 16
<TABLE>
<CAPTION>
<S> <C> <C>
10(f) Amendment to Loan Agreement, dated March 27, 1996, Previously filed as Exhibit L 10(f) to
by and among the Company and Bank One, Columbus, Annual Report on Form 10-K (file
N.A. number 0-16893) filed March 29, 1996,
and incorporated herein by reference.
10(g) Asset Purchase Agreement, dated March 12, 1997, by Page___.
and among the Company, Danninger Healthcare, Inc.
and OrthoLogic Corp.
The following are management contracts and compensatory plans and arrangements in which directors or
executive officers participate:
10(h) Confidentiality, Assignment and Non-Competition Previously filed as Exhibit 10(a) to
Agreement for Key Personnel, dated September 10, Form 10 (file number 0-16893) filed
1984, between the Company and Edward R. Funk.* May 3, 1988, and incorporated herein
by reference.
10(i) Schedule identifying material details of other agreements Previously filed as Exhibit 10(h) to
substantially identical to Exhibit 10(h).* Annual Report on Form 10-K (file
number 0-16893) filed on March 30,
1995, and incorporated herein by
reference.
10(j) Amended and Restated 1984 Incentive Stock Option Previously filed as Exhibit 10(e) to
Plan, reserving 750,000 shares of Common Stock, as Annual Report on Form 10-K (file
amended by the Board of Directors on April 2, 1992.* number 0-16893) filed March 30, 1993,
and incorporated herein by reference.
10(k) Form of Stock Option Agreement Under the Amended Previously filed as Exhibit 10(f) to
and Restated 1984 Incentive Stock Option Plan.* Annual Report on Form 10-K (file
number 0-16893) filed March 30, 1993,
and incorporated herein by reference.
10(l) Amended and Restated 1984 on-Statutory Stock Option Previously filed as Exhibit 10(h) to,
Plan reserving 300,000 shares of Common Stock, as Annual Report on Form 10-K (file number
amended by the Board of Directors on April 2, 1992.* 0-16893) filed March 30, 1993, and
incorporated herein by reference.
10(m) Form of Stock Option Agreement Under the Amended Previously filed as Exhibit 10(i) to
and Restated 1984 Non-Statutory Stock Option Plan.* Annual Report on Form 10-K (file
number 0-16893) filed March 30, 1993,
and incorporated herein by reference.
10(n) 1994 Stock Option Plan, reserving 600,000 shares of Previously filed as Exhibit 10(c) to
Common Stock.* Form 10 (file number 0-16893) filed
August 12, 1994, and incorporated
herein by this reference.
10(o) Form of Indemnification Agreement between the Previously filed as Exhibit 10(x) to
Company and its directors.* Form 10 (file number 0-16893) filed
May 3, 1988, and incorporated herein
by reference.
10(p) Schedule identifying material details of other Previously filed as Exhibit 10(o) to
Indemnification Agreements substantially Annual Report on Form 10-K (file
identical to Exhibit 10(n).* number 0-16893) filed on March 30,
1995, and incorporated herein by
reference.
10(q) Employment Agreement Between the Company and Previously filed as Exhibit 10(a) to
Edward R. Funk.* Form 10 (file number 0-16893) filed
August 12, 1994, and incorporated
herein by this reference.
</TABLE>
- 16 -
<PAGE> 17
<TABLE>
<CAPTION>
<S> <C> <C>
10(r) Employment Agreement between the Company and Previously filed as Exhibit 10(b) to
Edward R. Funk.* Form 10 (file number 0-16893) filed
August 12, 1994, and incorporated
herein by this reference.
10(s) Employment Agreement, dated November 7, 1996, Previously filed as Exhibit 10(a) to the
between the Company and Joseph A. Mussey. Company's Quarterly Report on Form
10-Q for the quarter ended September
30, 1996 (file number 0-16893) filed
October 15, 1996, and incorporated
herein by reference.
10(t) Employment Agreement, dated November 7, 1996, Previously filed as Exhibit 10(b) to the
between the Company and Paul A. Miller. Company's Quarterly Report on Form
10-Q for the quarter ended September 30,
1996 (file number 0-16893) filed
October 15, 1996, and incorporated
herein by reference.
10(u) Employment Agreement, dated November 7, 1996, Previously filed as Exhibit 10(c) to the
between the Company and Ira Benson. Company's Quarterly Report on Form
10-Q for the quarter ended September 30,
1996 (file number 0-16893) filed October
15, 1996, and incorporated herein by
reference.
10(v) Employment Agreement, dated November 7, 1996, Previously filed as Exhibit 10(d) to the
between the Company and Thomas E. Zimmer. Company's Quarterly Report on Form 10-K
for the quarter ended September 30, 1996
(file number 0-16893) filed October 15,
1996, and incorporated herein by
reference.
10(w) Employment Agreement, dated November 7, 1996, Previously filed as Exhibit 10(e) to the
between the Company and Paul A. Mellinger. Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1996
(file number 0-16893) filed October 15,
1996, and incorporated herein by
reference.
10(x) Non-Competition Agreement dated September 6, 1996, Previously filed as Exhibit 10(f) to the
between the Company and Stephen R. Draper. Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1996
(file number 0-16893) filed October 15,
1996, and incorporated herein by
reference.
11 Statement Regarding Computation of Net Income Per Page ___.
Share.
13 Portions of the Company's Annual Report to Page ___.
Stockholders.
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 ___.
24 Powers of Attorney. Page ___.
</TABLE>
- 17 -
<PAGE> 18
<TABLE>
<CAPTION>
<S> <C> <C>
27 Financial Data Schedule Page ___.
- --------------------------------
*Management Contract or Compensatory Plan
(B) REPORTS ON FORM 8-K
None.
(C) EXHIBITS
The exhibits to this report begin at page ___.
(D) FINANCIAL STATEMENT SCHEDULES
</TABLE>
The Financial Statement Schedule of the Company, together with report
thereon from Coopers & Lybrand L.L.P. (dated March 12, 1997), are set forth on
the following pages.
- 18 -
<PAGE> 19
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
Our report on the consolidated financial statements of Cross Medical Products,
Inc. and Subsidiaries (formerly Danninger Medical Technology, Inc. and
Subsidiaries) is included in 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 in 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.
/s/ COOPERS & LYBRAND L.L.P.
Columbus, Ohio
March 12, 1997
-19-
<PAGE> 20
<TABLE>
CROSS MEDICAL PRODUCTS, INC. AND SUBSIDIARY
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<CAPTION>
Charged
Balance to Costs
at and Balance
Beginning Expenses at End
of Year (Recoveries) Deductions of Year
------- ------------ ---------- -------
<S> <C> <C> <C> <C>
For the year ended December 31, 1996:
Allowance for doubtful accounts $ 78,947 $84,000 $(67,761) $ 95,186
Inventory valuation reserve 363,332 125,000 (184,386) 303,946
------- ------- ------- -------
$442,279 $209,000 $(252,147) $399,132
======== ======== ========== ========
For the year ended December 31, 1995:
Allowance for doubtful accounts $ 62,329 $16,618 $ 78,947
Inventory valuation reserve 126,186 237,146 363,332
------- ------- -------
$188,515 $253,764 $442,279
======== ======== ========
For the year ended December 31, 1994:
Allowance for doubtful accounts $ 6,000 $59,647 $(3,318) $ 62,329
Inventory valuation reserve 121,332 36,991 (32,137) 126,186
-------- -------- -------- -------
$127,332 $96,638 $(35,455) $188,515
======== ======= ========= ========
</TABLE>
-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, 1997 CROSS MEDICAL PRODUCTS, 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>
/*/ Joseph A. Mussey President, Chief Executive Officer, ) March 27, 1997
- --------------------------- Treasurer and Director )
Joseph A. Mussey (Principal Executive Officer) )
)
)
/*/ Paul A. Miller Vice President and Chief Financial ) March 27, 1997
- --------------------------- Officer (Principal Financial and )
Paul A. Miller Accounting Officer) )
)
)
/*/ Edward R. Funk Chairman of the Board of Directors ) March 27, 1997
- --------------------------- )
Edward R. Funk )
)
)
/*/ Daniel A. Funk Director ) March 27, 1997
- --------------------------- )
Daniel A. Funk, M.D. )
)
)
/*/ Daniel A. Gregorie Director ) March 27, 1997
- --------------------------- )
Daniel A. Gregorie, M.D. )
)
)
/*/ Herbert J. Kahn Director ) March 27, 1997
- --------------------------- )
Herbert J. Kahn )
)
)
/*/ Curtis A. Loveland Director ) March 27, 1997
- --------------------------- )
Curtis A. Loveland )
)
)
/*/ C. Craig Waldbillig Director ) March 27, 1997
- --------------------------- )
C. Craig Waldbillig )
)
)
</TABLE>
- 21 -
<PAGE> 22
<TABLE>
<CAPTION>
<S> <C> <C>
/*/ Peter H. Williams Director ) March 27, 1997
- --------------------------- )
Peter H. Williams )
)
)
/*/ Robert J. Williams Director ) March 27, 1997
- --------------------------- )
Robert J. Williams )
)
*By: /s/ Joseph A. Mussey
- -----------------------------------
Joseph A. Mussey, attorney-in-fact
for each of the persons indicated
</TABLE>
- 22 -
<PAGE> 23
<TABLE>
<CAPTION>
CROSS MEDICAL PRODUCTS, INC.
REPORT ON FORM 10-K
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION PAGE NUMBER
--- ----------- -----------
<S> <C> <C>
3(a) Certificate of Incorporation of the Company. Previously filed as Exhibit 3(a) to Form
10 (file number 0-16893) filed May 3,
1988, and incorporated herein by
reference.
3(B) Bylaws of the Company. Previously filed as Exhibit 3(b) to Form
10 (file number 0-16893) filed May 3
1988, and incorporated herein by
reference.
4.1 Reference is made to Articles FOURTH, EIGHTH, Previously filed as Exhibit 4 to Form 10
NINTH and TENTH of the Certificate of Incorporation (file number 0-16893) filed May 3,
of the Company and Articles II, III, IV, VI, VII and VIII 1988, and incorporated herein by
of the Company's Bylaws. Instruments defining the reference.
rights of holders of long-term debt will be furnished to
the Securities and Exchange Commission upon request.
4.2 Form of the Company's Stock Certificate. Page___.
10(a) Business Purpose Revolving Promissory Note, dated Previously filed as Exhibit 10(a) to
February 13, 1995, in the amount of $400,000 payable to Annual Report on Form 10-K (file
Bank One, Columbus, N.A. by the Company. number 0-16893) filed on March 30,
1995, and incorporated herein by
reference.
10(b) Non-Titled Personal Property Security Agreement, dated Previously filed as Exhibit 10(b) to
February 13, 1995, granting Bank One Columbus, N.A. a Annual Report on Form 10-K (file
security interest in all inventory, raw materials, work in number 0-16893) filed on March 30,
process, supplies, accounts, general intangibles, chattel 1995, and incorporated herein by
paper, instruments, other forms of obligations and reference.
receivables, goods, equipment, machinery, supplies and
other personal property of the Company.
10(c) Non-Titled Personal Property Security Agreement, dated Previously filed as Exhibit 10(c) to
February 13, 1995, granting Bank One Columbus, N.A. a Annual Report on Form 10-K (file
security interest in all inventory, raw materials, work in number 0-16893) filed on March 30,
process, supplies, accounts, general intangibles, chattel 1995, and incorporated herein by
paper, instruments, other forms of obligations and reference.
receivables, goods, equipment, machinery, supplies and
other personal property of the Company.
10(d) Loan Agreement, dated September 23, 1994, in the Previously filed as Exhibit 10 to Form
amount of $2,500,000 payable to Bank One, Columbus, 10 (file number 0-16893) filed
N.A. by Danninger Medical Technology, Inc., and the November 14, 1994, and incorporated
Company, secured by accounts receivable, lease herein by reference.
receivables, contract rights, chattels, general
intangibles, notes, drafts, acceptances and other
forms of obligations and inventory, goods, merchandise,
and all other personal property of the Company.
10(e) Loan Agreement, dated June 26, 1995, by and among the Previously filed as Exhibit 10 to Form
Company and Bank One, Columbus, N.A. 10-Q (file number 0-16893) filed
August 14, 1995, and incorporated herein
by reference.
</TABLE>
- 23 -
<PAGE> 24
<TABLE>
<CAPTION>
<S> <C> <C>
10(f) Amendment to Loan Agreement, dated March 27, 1996, Previously filed as Exhibit L 10(f) to
by and among the Company and Bank One, Columbus, Annual Report on Form 10-K (file
N.A. number 0-16893) filed March 29, 1996,
and incorporated herein by reference.
10(g) Asset Purchase Agreement, dated March 12, 1997, by Page___.
and among the Company, Danninger Healthcare, Inc.
and OrthoLogic Corp.
The following are management contracts and compensatory plans and arrangements in which directors or
executive officers participate:
10(h) Confidentiality, Assignment and Non-Competition Previously filed as Exhibit 10(a) to
Agreement for Key Personnel, dated September 10, Form 10 (file number 0-16893) filed
1984, between the Company and Edward R. Funk.* May 3, 1988, and incorporated herein
by reference.
10(i) Schedule identifying material details of other Previously filed as Exhibit 10(h) to
agreements substantially identical to Exhibit 10(h).* Annual Report on Form 10-K (file number
0-16893) filed on March 30, 1995, and
incorporated herein by reference.
10(j) Amended and Restated 1984 Incentive Stock Option Previously file as Exhibit 10(e) to
Plan, reserving 750,000 shares of Common Annual Report on Form 10-K (file
Stock, as amended by the Board of number 0-16893) filed March 30, 1993,
Directors on April 2, 1992.* and incorporated herein by reference.
10(k) Form of Stock Option Agreement Under the Amended Previously filed as Exhibit 10(f) to
and Restated 1984 Incentive Stock Option Plan.* Annual Report on Form 10-K (file
number 0-16893) filed March 30, 1993,
and incorporated herein by reference.
10(l) Amended and Restated 1984 on-Statutory Stock Option Previously filed as Exhibit 10(h) to
Plan, reserving 300,000 shares of Common Stock, as Annual Report on Form 10-K (file
amended by the Board of Directors on April 2, 1992.* number 0-16893) filed March 30, 1993,
and incorporated herein by reference.
10(m) Form of Stock Option Agreement Under the Amended Previously filed as Exhibit 10(i) to
and Restated 1984 Non-Statutory Stock Option Plan.* Annual Report on Form 10-K (file
number 0-16893) filed March 30, 1993,
and incorporated herein by reference.
10(n) 1994 Stock Option Plan, reserving 600,000 shares of Previously filed as Exhibit 10(c) to
Common Stock.* Form 10 (file number 0-16893) filed
August 12, 1994, and incorporated herein
by this reference.
10(o) Form of Indemnification Agreement between the Previously filed as Exhibit 10(x) to
Company and its directors.* Form 10 (file number 0-16893) filed
May 3, 1988, and incorporated herein by
reference.
10(p) Schedule identifying material details of other Previously filed as Exhibit 10(o) to
Indemnification Agreements substantially Annual Report on Form 10-K (file
identical to Exhibit 10(n).* number 0-16893) filed on March 30, 1995,
and incorporated herein by reference.
- 24 -
</TABLE>
<PAGE> 25
<TABLE>
<CAPTION>
<S> <C> <C>
10(q) Employment Agreement Between the Company and Previously filed as Exhibit 10(a) to
Edward R. Funk.* Form 10 (file number 0-16893) filed
August 12, 1994, and incorporated herein
by this reference.
10(r) Employment Agreement between the Company and Previously filed as Exhibit 10(b) to
Edward R. Funk.* Form 10 (file number 0-16893) filed
August 12, 1994, and incorporated herein
by this reference.
10(s) Employment Agreement, dated November 7, 1996, Previously filed as Exhibit 10(a) to the
between the Company and Joseph A. Mussey. Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1996
(file number 0-16893) filed October 15, 1996
and incorporated herein by reference.
10(t) Employment Agreement, dated November 7, 1996, Previously filed as Exhibit 10(b) to the
between the Company and Paul A. Miller. Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1996
(file number 0-16893) filed October 15,
1996, and incorporated herein by reference.
10(u) Employment Agreement, dated November 7, 1996, Previously filed as Exhibit 10(c) to the
between the Company and Ira Benson. Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1996
(file number 0-16893) filed October 15,
1996, and incorporated herein by reference.
10(v) Employment Agreement, dated November 7, 1996, Previously filed as Exhibit 10(d) to the
between the Company and Thomas E. Zimmer. Company's Quarterly Report on Form 10-K
for the quarter ended September 30, 1996
(file number 0-16893) filed October 15,
1996, and incorporated herein by reference.
10(w) Employment Agreement, dated November 7, 1996, Previously filed as Exhibit 10(e) to the
between the Company and Paul A. Mellinger. Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1996
(file number 0-16893) filed October 15, 1996,
and incorporated herein by reference.
10(x) Non-Competition Agreement dated September 6, 1996, Previously filed as Exhibit 10(f) to the
between the Company and Stephen R. Draper. Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1996
(file number 0-16893) filed October 15,
1996, and incorporated herein by
reference.
11 Statement Regarding Computation of Net Income Per Page ___.
Share.
13 Portions of the Company's Annual Report to Page ___.
Stockholders.
</TABLE>
- 25 -
<PAGE> 26
<TABLE>
<CAPTION>
<S> <C> <C>
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 ___.
24 Powers of Attorney. Page ___.
27 Financial Data Schedule Page ___.
</TABLE>
- 26 -
<PAGE> 1
Exhibit 4.2
COMMON STOCK CROSS MEDICAL COMMON STOCK
[GRAPHIC] PRODUCTS, INC. [GRAPHIC]
INCORPORATED UNDER THE LAWS OF SEE REVERSE FOR CERTAIN
THE STATE OF DELAWARE DEFINITIONS
CUSIP 227910 10 6
THIS CERTIFIES THAT
IS THE OWNER OF
FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK, $0.01 PAR VALUE, OF
- --------------------------CROSS MEDICAL PRODUCTS, INC.--------------------------
transferable only on the books of the Corporation by the holder hereof in
person or by duly authorized attorney upon surrender of this Certificate
properly endorsed. This Certificate is not valid unless countersigned and
registered by the Transfer Agent and Registrar.
WITNESS the facsimile signatures of its duly authorized officers.
Dated:
Authorized Signature
/s/ Curtis A. Loveland /s/ Edward R. Funk
SECRETARY CHAIRMAN OF THE BOARD
- -------------------------------------------------------------------------------
Countersigned and Registered:
FIFTH THIRD BANK
(Cincinnati, Ohio) Transfer Agent
By and Registrar
- -------------------------------------------------------------------------------
<PAGE> 2
CROSS MEDICAL PRODUCTS, INC.
The Corporation will furnish to any shareholder upon request and
without charge a full statement of: (a) the designations, relative rights,
preferences and limitations applicable to each class of capital stock
authorized to be issued; (b) the variations in rights, preferences and
limitations determined for each series authorized to be issued within each such
class; and (c) the authority of the Board of Directors to determine such
variations for subsequent series.
- --------------------------------------------------------------------------------
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in
full according to applicable laws or regulations:
[INSCRIPTIONS]
<TABLE>
<S> <C>
TEN COM- as tenants in common UNIF TRANS MIN ACT- Custodian
--------------------------- -------------------
TEN ENT- as tenants by the entireties (Cust) (Minor)
JT TEN - as joint tenants with
right of survivorship and under Uniform Transfers to Minors
not as tenants in common
Act
-------------------------------------------
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
For Value received, hereby sold assign and transfer unto
----------------
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBERS OF ASSIGNEE
--------------------------------------
--------------------------------------
- --------------------------------------------------------------------------------
PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------Shares
of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
---------------------------------------------
Attorney to
- ---------------------------------------------------------------------
transfer the said stock on the books of the within-named Corporation with full
power of substitution in the premises.
Dated X
-------------------------- --------------------------------------------
X
--------------------------------------------
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT
MUST CORRESPOND WITH THE NAME(S) AS WRITTEN
UPON THE FACE OF THE CERTIFICATE, IN EVERY
PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT, OR ANY CHANGE WHATEVER.
SIGNATURE GUARANTEED:
----------------------------------------------------------
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE
GUARANTOR INSTITUTION, (BANKS, STOCKBROKERS, SAVINGS AND
LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN
APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT
TO S.E.C. RULE 17Ad-15.
KEEP THIS CERTIFICATE IN A SAFE PLACE, IF IT IS LOST, STOLEN, OR DESTROYED, THE
CORPORATION MAY REQUIRE A BOND OF INDEMNITY AS A CONDITION TO THE ISSUANCE OF A
REPLACEMENT CERTIFICATE.
<PAGE> 1
EXHIBIT 10(g)
- 25 -
<PAGE> 2
ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT is made this 12th day of March, 1997 by
and among OrthoLogic Corp., a Delaware corporation or its designated subsidiary
("Buyer"), Danninger Medical Technology, Inc., a Delaware corporation ("DMTI"),
and Danninger Healthcare, Inc., an Ohio corporation and a wholly-owned
subsidiary of DMTI ("DHI" and, together with DMTI, "Seller").
RECITALS
WHEREAS, DMTI is engaged in the business of manufacturing and marketing
continuous passive motion (CPM) devices and manufacturing and marketing spinal
implant products through its wholly-owned subsidiary, Cross Medical Products,
Inc.; and
WHEREAS, DHI is engaged in the business of renting and selling CPM
devices; and
WHEREAS, Buyer is engaged in the business of manufacturing, marketing,
renting and selling of CPM devices and other derivative orthopaedic devices; and
WHEREAS, Seller desires to sell to Buyer, and Buyer desires to purchase
from Seller, certain of the assets, rights and properties of Seller relating to
the CPM business of Seller, upon all of the terms and subject to all of the
conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants, conditions and agreements set forth in this Agreement and for other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, it is hereby agreed that:
ARTICLE I. DEFINITIONS
When used in this Agreement, the following terms shall have the
meanings specified:
"AGREEMENT" shall mean this Asset Purchase Agreement, together with any
annexes, exhibits or schedules and the Disclosure Schedule attached hereto, as
the same may be amended from time to time in accordance with the terms hereof.
"ASSETS" shall mean all assets of Seller used in the conduct of the
Business, including, but not limited to, Seller's accounts receivable which are
derived from the Business of Seller prior to the Effective Time of Closing (but
excluding intercompany accounts receivable), the Contracts, Equipment,
Intangible Assets, Inventory, Miscellaneous Assets and Records and excluding all
Retained Assets.
<PAGE> 3
"ASSUMED LIABILITIES" shall mean and be limited to those liabilities
and obligations of Seller: (i) under the Contracts being assumed by Buyer (which
shall not include any liabilities or obligations for events occurring or
conditions existing prior to the Effective Time of Closing except to the extent
included in the Closing Balance Sheet); (ii) under the written employment
agreement dated September 6, 1996 between DMTI and Stephen R. Draper, the
written employment agreement dated September 4, 1996 between DMTI and Tim Alonzi
and the written employment agreement dated September 4, 1996 between DMTI and
Nancy Cribar (iii) relating exclusively to the Business or the Assets that are
(A) reflected in the Financial Information, (B) incurred after December 31, 1996
in the ordinary course of business consistent with prior practice and in
accordance with the terms of this Agreement (applied as if this Agreement had
been in effect from the close of business on December 31, 1996 through the
Closing Date) or (C) that are not, individually or in the aggregate, material to
the Business; (iv) drawings by Seller on Seller's bank loan facility prior to
the date hereof to the extent used in the Business; (v) under the promissory
note dated as of September 6, 1996 by Seller, as maker, to Stephen R. Draper in
the original principal amount of $1,400,000 and the promissory note dated as of
September 6, 1996 by Seller, as maker, to Stephen R. Draper in the original
principal amount of $100,000, each issued in the acquisition by Seller of
Surgical & Orthopedic Specialties, Ltd. ("SOS"); (vi) warranty expense for
products sold prior to the Effective Time of Closing to the extent of the amount
accrued on the Closing Balance Sheet (warranty expense at Buyer's actual cost
incurred prior to March 12, 1998 for products sold prior to the Closing Date in
excess of the amount accrued on the Closing Balance Sheet shall not be an
Assumed Liability and is referred to herein as "Excess Warranty Expense"); and
(vii) all obligations and liabilities arising out of the operation of the
Business or the ownership of the Assets on and after the Effective Time of
Closing; provided, however, that Assumed Liabilities shall not include the
following to the extent of events occurring or conditions existing prior to the
Effective Time of Closing: (1) liabilities related to product liability claims;
(2) liabilities related to Environmental Claims; (3) liabilities for taxes
relating to or arising out of the conduct of the Business accruing, or with
respect to any event or time period occurring, at or prior to the Effective Time
of Closing; (4) liabilities in respect of employees or Employee Benefit Plans,
other than for Accrued Employee Benefits as set forth in Section III.11.a; and
(5) intercompany accounts payable which do not represent trade accounts payable.
"BILL OF SALE" shall mean the Bill of Sale and Assumption of
Liabilities in substantially the form of Exhibit 1 attached to this Agreement.
"BUSINESS" shall mean the business of manufacturing, marketing, renting
and selling continuous passive motion equipment conducted by Seller prior to the
Closing and shall not mean the business of manufacturing, marketing and sale of
spinal implant products.
"BUYER COUNSEL OPINION" shall mean the opinion of Quarles & Brady in
substantially the form of Exhibit 2 attached to this Agreement.
2
<PAGE> 4
"CLOSING" shall mean the conference to be held commencing at 10:00
a.m., local time, on the Closing Date at the offices of Quarles & Brady, One
East Camelback, Suite 400, Phoenix, Arizona 85012, or such other time and place
as the parties may mutually agree to in writing, at which the transactions
contemplated by this Agreement shall be consummated.
"CLOSING BALANCE SHEET" shall mean the balance sheet prepared by Seller
based on its books and records that shows the net tangible book value of the
Assets as of the close of business on the date immediately preceding the Closing
Date, prepared in the same manner as set forth in Exhibit 3 at December 31,
1996.
"CLOSING DATE" shall mean: (i) March 12, 1997; or (ii) such other date
as the parties may mutually agree to in writing.
"CODE" shall mean the Internal Revenue Code of 1986, as the same may be
in effect from time to time.
"CONFIDENTIALITY AGREEMENT" shall mean the confidentiality agreement
between Buyer and Seller in the form attached hereto as Exhibit 4.
"CONTRACTS" shall mean all of the contracts, agreements, leases,
relationships and commitments, written or oral, related to the Business to which
Seller is a party or by which Seller is bound, including but not limited to
those on the list (or summary of oral Contracts) of which is set forth in the
Disclosure Schedule attached hereto.
"CPM RENTAL FLEET" shall mean all continuous passive motion devices of
Seller rented by Seller in the conduct of the Business.
"DISCLOSURE SCHEDULE" shall have the meaning set forth in Section
III.2.
"EMPLOYEE BENEFIT PLANS" shall have the meaning set forth in Section
IV.9.a.
"EQUIPMENT" shall mean all equipment, tools, machinery, furniture,
fixtures, motor vehicles, furnishings, parts, office equipment, computers and
other items of tangible personal property which are owned by Seller and used by
Seller in the operation of the Business, including but not limited to those
assets which are listed in the Disclosure Schedule and excluding all Retained
Assets.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974,
as the same may be in effect from time to time.
3
<PAGE> 5
"ESCROW AGREEMENT" shall mean the escrow agreement among Buyer, Seller
and Bank One Trust Company, N.A. (as "Escrow Agent") in substantially the form
of Exhibit 5 attached to this Agreement.
"EXISTING INSURANCE POLICIES" shall mean all of the insurance policies
currently in effect and owned by Seller covering the Assets or the Business, all
of which are listed and briefly described on the Disclosure Schedule.
"EXISTING PERMITS" shall mean all permits, licenses, approvals,
qualifications, permissions and governmental authorizations (including, without
limitation, from the Food and Drug Administration and health and safety permits
and Environmental Permits) used in the conduct of the Business, all of which are
listed and briefly described on the Disclosure Schedule.
"FINANCIAL INFORMATION" shall mean: (i) the audited consolidated
balance sheets of DMTI as of December 31, 1996, 1995 and 1994 and the related
audited consolidated statements of operations, changes in shareholders' equity
and cash flows for each of the three years in the period ended December 31, 1996
(the "DMTI Financials"); (ii) the unaudited quarterly financial statements of
DHI for the period January 1, 1994 through December 31, 1996 (the "DHI
Financials"); (iii) the books and records of account of the Business; (iv) the
Closing Balance Sheet; and (v) all other financial information relating to the
financial condition of the Business delivered or to be delivered by Seller to
Buyer. The Disclosure Schedule attached hereto includes a consolidating schedule
to the unaudited consolidated balance sheet as of December 31, 1996, and such
consolidating schedule, together with the unaudited consolidated balance sheet
as of December 31, 1996 and the related unaudited consolidated statements of
operations, changes in shareholders' equity and cash flows for the period ended
December 31, 1996 is referred to herein as the "December 31, 1996 Balance
Sheet."
"INTANGIBLE ASSETS" shall mean all of the intangible assets owned by
Seller and used in the Business or otherwise used in the Business by Seller,
including but not limited to trade secrets, know-how, data, operating methods
and procedures, proprietary information, processes, technical knowledge,
advertising formats, logos, United States and foreign patents, patent
applications, the names "Danninger Medical Technology, Inc.," "Danninger
Healthcare, Inc." and "Surgical & Orthopedic Specialties, Ltd.," trade names,
any trade dress, trademarks, service marks, trademark registrations, service
mark registrations, copyrights, copyright applications, franchise rights,
customer lists, telephone numbers and related rights, past and present research
and development projects and all associated goodwill relating thereto.
"INVENTORY" shall mean inventories used by Seller in the Business
including, without limitation, raw materials, work in process, finished
products, the CPM Rental Fleet, goods, spare parts, replacement and component
parts and other supplies, including inventories held at any location controlled
by Seller and inventories previously ordered or purchased and in transit to
Seller at such locations.
4
<PAGE> 6
"LAW" shall mean any federal, state, local or other law, rule,
regulation or governmental requirement of any kind, and the rules, regulations
and orders promulgated thereunder.
"LEASE" shall mean the Standard Mini-Office Lease, dated February 8,
1996, between Freshman Wrap Properties Partnership, L.P. dba Galloway Industrial
Properties, as landlord, and DMTI, as tenant, for the Premises.
"LEASED ASSETS" shall mean all items of personal property which Seller
leases and uses in the Business, including but not limited to those assets which
are set forth in the Disclosure Schedule and excluding all Retained Assets.
"LIEN" shall mean, with respect to any asset: (i) any mortgage, pledge,
lien, charge, claim, restriction, condition, easement, covenant, lease,
encroachment, title defect, imposition, security interest or other encumbrance
of any kind, excluding any of the foregoing that do not by themselves materially
affect the use of the asset; and (ii) the interest of a vendor or lessor under
any conditional sale agreement, financing lease or other title retention
agreement relating to such asset.
"MISCELLANEOUS ASSETS" shall mean Business-related security deposits,
prepaid expenses and assets, leasehold improvements and those assets set forth
in the Disclosure Schedule and excluding all Retained Assets.
"NONCOMPETE AGREEMENTS" shall mean five-year noncompetition and
nonsolicitation agreement between Buyer and each of Seller and Edward Funk in
the form of Exhibits 6 and 6-A attached to this Agreement.
"PERSON" shall mean and include a natural person, corporation, trust,
partnership, limited liability company, association, unincorporated
organization, governmental entity, agency or branch or department thereof, or
any other legal entity.
"PREMISES" shall mean the buildings which Seller occupies and out of
which it conducts the Business, the location of which is 5160-B Paul G. Blazer
Memorial Parkway, Dublin, Ohio 43017.
"PURCHASE PRICE" shall mean $8,606,250, subject to adjustment pursuant
to Section II.2..
"RECORDS" shall mean such books, documents and records owned or used by
Seller in the conduct of the Business, including personnel, Medicare, Medicaid,
medical and accounting records, correspondence, governmentally required records,
business plans and forecasts, patient lists, computer media, software and
software documentation, sales literature, catalogues, promotional items,
advertising materials and other written materials and excluding all Retained
Assets.
5
<PAGE> 7
"RETAINED ASSETS" shall mean the following assets of Seller as of the
Closing Date which, although they may relate to the Business, are not Assets and
are to be retained by Seller: (i) Seller's franchise to be a corporation,
articles of incorporation, bylaws, minute books, stock books, corporate seals
and other corporate records having to do with the corporate organization and
capitalization of Seller; (ii) Seller's canceled checks, bank statements and tax
returns; (iii) policies of insurance purchased by Seller, including the cash
surrender value of any life insurance policy; (iv) Seller's cash and cash
equivalents on hand prior to the Effective Time of Closing; (v) any tax loss
carry-forwards, credits, deferred taxes or other tax benefits; (vi) intercompany
accounts receivable and investments in subsidiaries; and (vii) any other assets
described as "Retained Assets" in the Disclosure Schedule.
"RETAINED LIABILITIES" shall mean all obligations and liabilities of
Seller or otherwise arising out of the operation of the Business or the
ownership of the Assets and which are not Assumed Liabilities. Without limiting
the foregoing, the Retained Liabilities are described in the Disclosure
Schedule.
"SELLER'S CLOSING CERTIFICATES" shall mean the closing certificates of
each of Seller in substantially the form of Exhibit 7 attached to this
Agreement.
"SELLER'S COUNSEL OPINION" shall mean the opinion of Porter, Wright,
Morris & Arthur, in substantially the form of Exhibit 8 attached to this
Agreement.
"TEMPORARY SERVICES AGREEMENT" shall mean the agreement between Buyer
and Seller in the form attached as Exhibit 9.
"WARN ACT" shall mean the Workers Adjustment and Retraining
Notification Act, as amended.
ARTICLE II. PURCHASE AND SALE; PURCHASE PRICE
1. PURCHASE AND SALE. At the Closing, and upon all of the terms
and subject to all of the conditions of this Agreement:
A. Seller shall sell, assign, convey and deliver to Buyer,
and Buyer shall purchase and accept from Seller, the Assets; and
B. Buyer shall assume and agree to perform in accordance with
and be bound by all of the covenants, terms and obligations under the Assumed
Liabilities. Buyer has agreed to pay $2,445,728.61 of the Assumed Liabilities
(the "Bank Assumed Liabilities") on the Closing Date, instead of assuming the
same.
2. ADJUSTMENT TO PURCHASE PRICE. Within thirty (30) days after
the Closing Date, Seller shall prepare and deliver to Buyer the Closing Balance
Sheet. If the Closing Balance Sheet
6
<PAGE> 8
shows the Assets have a net tangible book value of less than $900,000, then the
Purchase Price shall be reduced dollar for dollar for every dollar below
$900,000. If the Closing Balance Sheet shows the Assets have a net tangible book
value of more than $1,100,000, then the Purchase Price shall be increased dollar
for dollar for every dollar above $1,100,000. Any resulting adjustment to the
Purchase Price shall be paid in cash within fifteen (15) days of Buyer having
received the Closing Balance Sheet.
3. PAYMENT OF PURCHASE PRICE. At the Closing, Buyer shall pay 95% of
the Purchase Price, or $8,175,937, prior to any adjustment, by wire transfer of
immediately available funds to an account designated by Seller and shall deposit
5% of the Purchase Price, or $430,313, with the Escrow Agent pursuant to the
Escrow Agreement, by wire transfer of immediately available funds.
ARTICLE III. OTHER AGREEMENTS
1. ACCESS. Seller shall afford to Buyer and the agents, accountants,
attorneys and representatives of Buyer, full and complete access to all of the
books, records, financial statements, facilities, key personnel and other
documents and materials relating to Seller's financial condition, assets,
liabilities and Business.
2. DISCLOSURE SCHEDULE. Contemporaneously with the execution and
delivery of this Agreement Seller is delivering to Buyer one portion of the
Disclosure Schedule and within thirty (30) days after the Closing Date shall
deliver to Buyer the remaining portion of the Disclosure Schedule, which
remaining portion shall include schedules as of March 11, 1997 of the fixed
assets, Inventory, Accounts Receivable (as defined below and, to the extent
practicable, showing separately the Accounts Receivable attributable to Seller's
acquisition of SOS), accruals and accounts payable. The portion of the
Disclosure Schedule delivered contemporaneously with the execution and delivery
of this Agreement is, and that portion to be delivered within thirty (30) days
after the Closing Date shall be, accompanied by a certificate signed by the
President of Seller, stating that the Disclosure Schedule is being delivered
pursuant to this Agreement and is the Disclosure Schedule referred to in this
Agreement. Together both portions of the Disclosure Schedule shall constitute
one Disclosure Schedule (the "Disclosure Schedule").
3. PUBLIC ANNOUNCEMENTS. Subject to each party's disclosure obligations
imposed by Law, Buyer and Seller will cooperate with each other in the
development and distribution of all news releases and other public information
disclosures with respect to this Agreement or any of the transactions
contemplated by this Agreement and shall not issue any public announcement or
statement with respect thereto prior to consultation with the other party.
4. TRANSFER OF INTANGIBLE ASSETS. Prior to or at the Closing, Seller
shall take all steps so that: (i) Seller shall transfer to Buyer all of its
right, title and interest in and to the name and trade dress "Danninger Medical
Technology, Inc.," "Danninger Healthcare, Inc." and "Surgical & Orthopedic
Specialties, Ltd.," together with any trademarks, service marks and copyrights,
7
<PAGE> 9
registered or not, and applications and all associated goodwill relating
thereto; and (ii) Seller shall transfer to Buyer all of its right, title and
interest in and to the Intangible Assets.
5. RETAINED LIABILITIES. Except as otherwise specifically provided
for herein with respect to the Assumed Liabilities, Buyer is not assuming any
liabilities or obligations of Seller, and Seller shall pay, perform in
accordance with, be bound by and satisfy all of its Retained Liabilities in the
ordinary course of business.
6. REFERRALS AND DELIVERIES. After the Closing: (i) Seller shall
promptly deliver to Buyer, in the form received with the addition of any
required endorsements by Seller, any cash, checks or other payments received by
Seller relating to the Business or the Assets except to the extent such payments
are Retained Assets; and (ii) Seller shall promptly refer to Buyer any and all
inquiries relating to the Business from customers or suppliers of the Business
or from other Persons. Buyer and Seller shall use their best efforts to
cooperate in maintaining good relationships with creditors and customers.
7. EFFECTIVE TIME OF CLOSING. The parties agree that, for all financial
statement, accounting and other purposes, the transactions described in this
Agreement shall be deemed effective as of 12:01 a.m., Phoenix local time, on the
Closing Date (the "Effective Time of Closing").
8. ALLOCATION OF PURCHASE PRICE. The Purchase Price shall be allocated
among the classes of Assets in accordance with Section 1060 of the Internal
Revenue Code. Buyer and Seller shall cooperate with each other in the
preparation and filing of I.R.S. Form 8594 in connection with the Purchase Price
allocation.
9. PRORATIONS.
A. All personal property taxes, if any, assessed against the
Assets shall be prorated as of the Effective Time of Closing, based on the
applicable tax rate of the period for which such taxes are assessed or prepaid.
Seller shall be responsible for that portion of the prorated taxes accrued for
the period ending as of the Effective Time of Closing, and Buyer shall be
responsible for that portion of the prorated taxes attributable to the period
beginning as of the Effective Time of Closing.
B. All payments for utilities, and other similar expenses paid
or payable with respect to the Business shall be prorated and settled between
Buyer and Seller so that all such expenses applicable to the period ending as of
the Effective Time of Closing shall be for the account of Seller, and all such
expenses for the periods after the Effective Time of Closing shall be for the
account of Buyer.
8
<PAGE> 10
C. To the extent ascertainable, said amounts prorated
pursuant to this Section III.9. shall be settled between the parties at Closing.
Otherwise said amounts will be determined and settled between the parties within
thirty (30) days after Closing.
10. RISK OF LOSS. Physical possession of and all risk of loss
with respect to the Assets shall remain with Seller until the Effective Time of
Closing and shall pass to Buyer at the Effective Time of Closing.
11. EMPLOYEES.
A. Buyer shall, on the Closing Date, offer to employ the
employees of Seller identified in the Disclosure Schedule attached hereto as
"New Danninger Employees" at the same pay rate indicated in the Disclosure
Schedule and on substantially the same other terms and conditions as similarly
situated employees of Buyer. Seller shall include, for each New Danninger
Employee on such list accrued employee vacation and sick leave benefits
("Accrued Employee Benefits"), hire date and current salary. Buyer agrees to
assume the Accrued Employee Benefits to the extent such Accrued Employee
Benefits were included in the Closing Balance Sheet. Buyer and Seller shall
cooperate to provide an orderly assumption of the Accrued Employee Benefits by
Buyer in order to preserve the benefits available to the New Danninger
Employees. Seller shall not be obligated to Buyer or any other party for any
labor-related obligations or liabilities arising out of any New Danninger
Employees' employment with Buyer, and Buyer agrees to satisfy all such
obligations or liabilities, including, without limitation, any required notices
or payments under the WARN Act or other plant closing Law.
B. With respect to employees of Seller who are identified as
retained employees of Seller ("Retained Employees") and who will continue
employment with Seller and who will not become employees of Buyer, Seller shall
be responsible for all payments to said employees for wages, commissions,
bonuses, vacations, severance and other similar forms of compensation owing to
or accrued by such employees.
C. Subject to Subsection III.11.a above, Buyer shall not be
obligated to Seller or any other party for any labor-related obligations or
liabilities arising out of any person's employment with Seller, and Seller
agrees to satisfy all such obligations or liabilities, including, without
limitation, any required notices or payments under the WARN Act or other plant
closing Law.
12. INTENTION.
A. It is the intention of the parties that the Assets shall
include all of the tangible and intangible assets owned by Seller and used in
the operation of the Business as of the Closing Date, excepting therefrom only
the Retained Assets.
9
<PAGE> 11
B. It is the intention of the parties that Buyer shall assume
no liabilities or obligations of Seller relating to the Business except the
Assumed Liabilities.
13. AUDITED FINANCIAL STATEMENTS. Within 30 days after the Closing
Date, Seller and Buyer agree that Seller shall deliver to Buyer a copy of the
audited consolidated balance sheet of DMTI as of December 31, 1996 and the
related audited consolidated statements of operations, changes in shareholders'
equity and cash flows for the year ended December 31, 1996, which financial
statements shall include any appropriate reclassifications to reflect the
transactions contemplated by this Agreement.
ARTICLE IV. REPRESENTATIONS AND WARRANTIES OF SELLER
For purposes of this Article, each of DMTI and DHI hereby represents
and warrants to Buyer as "Seller" that:
1. ORGANIZATION; BUSINESS.
A. Seller is a corporation duly and validly organized and
existing and in good standing under the Laws of its state of incorporation.
Seller is qualified to do business as a foreign corporation in each jurisdiction
in which the use of the Assets or the operation of the Business requires Seller
to so qualify, except where the failure to so qualify would not have a material
adverse effect on the Business or Assets. The Disclosure Schedule contains a
list of all states and foreign jurisdictions where Seller is so qualified as a
foreign corporation.
B. Seller has the full corporate power and authority and all
material franchises, permits, licenses, approvals, authorizations,
registrations, grants and orders necessary to carry on the Business as it is now
conducted, to own, lease and operate the Assets and to perform all of its
obligations under the Contracts.
2. AUTHORIZATION; ENFORCEABILITY. The execution, delivery and
performance of this Agreement and all of the documents and instruments required
by this Agreement to be executed and delivered by Seller are within the
corporate power of Seller and have been duly authorized by all necessary
corporate action by Seller. This Agreement is, and the other documents and
instruments required by this Agreement to be executed and delivered by Seller
will be, when executed and delivered by Seller, the legal, valid and binding
obligations of Seller, enforceable against Seller in accordance with their
respective terms, except as the enforcement thereof may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or similar Laws generally
affecting the rights of creditors and subject to general equity principles.
3. NO VIOLATION OR CONFLICT.
A. The execution, delivery and performance of this Agreement
by Seller do not and will not, directly or indirectly (with or without notice or
lapse of time):
10
<PAGE> 12
(1) contravene, conflict with or violate the
Articles or Certificate of Incorporation or Bylaws of Seller;
(2) contravene, conflict with or violate or give
any governmental body or any other Person the right to challenge the
consummation of the transactions contemplated by this Agreement or to exercise
any remedy or obtain any relief under any Law or any judgment, order or decree
to which Seller or any of the Assets may be subject;
(3) except as set forth in the Disclosure
Schedule, contravene, conflict with, violate or breach any provision, or give
any Person the right to declare a default or exercise any remedy under, or to
accelerate the maturity or performance of, or to cancel, terminate or modify any
of the Contracts which are material to the Business;
(4) result in the imposition or creation of any
Lien upon or with respect to the Assets; or
(5) to Seller's knowledge, disrupt or impair
any material relationship with any supplier, customer, distributor, sales
representative or employee of the Business.
B. Except as set forth in the Disclosure Schedule, Seller is
not and will not be required to give any notice or obtain any consent or
approval from any Person in connection with the execution and delivery of this
Agreement or the consummation or performance of the transactions contemplated
hereby.
4. FINANCIAL INFORMATION; BOOKS AND RECORDS.
A. Seller has delivered, or within thirty (30) days after the
Closing will deliver, to Buyer the DMTI Financials, the DHI Financials and the
Closing Balance Sheet and has made available to Buyer all of the other Financial
Information. The financial statements (and notes where applicable) which are
part of the Financial Information are accurate and complete in all material
respects and fairly present the financial condition and the results of
operations of the Business as at the respective dates of and for the periods
referred to therein, all in accordance with generally accepted accounting
principles applied on a consistent basis throughout all periods, subject, in the
case of unaudited interim financial statements, to normal year-end and audit
adjustments (the effect of which are not or will not, individually or in the
aggregate, be materially adverse).
B. The books of account, minute books and other records of
Seller, as they relate to the Business and all of which have been made available
to Buyer: (i) are complete and correct in all material respects; (ii) have been
maintained in accordance with sound business practices and consistent with past
practice; (iii) have recorded therein all material properties and assets and
liabilities of the Business; and (iv) reflect all material transactions entered
into by the Business or to which the Business is a party.
11
<PAGE> 13
5. ASSETS.
A. Except as set forth in the Financial Information or the
Disclosure Schedule: Seller owns good and valid title to the Assets, free and
clear of any and all Liens; Seller is in sole possession of, and has sole
control of, the Assets; all of Seller's tangible Assets are physically located
on the Premises; and none of the Assets is leased, rented, licensed or otherwise
not owned by Seller.
B. The Assets include all assets of Seller which are used in
the operation of the Business, excepting therefrom only any Retained Asset.
C. Except as set forth in the Disclosure Schedule, the
Equipment and Leased Assets are in good operating condition and repair and are
adequate for the uses for which they are being put, normal wear and tear
excepted.
D. Except as set forth in the Financial Information or the
Disclosure Schedule: (i) the items of Inventory are located at the locations
listed in the Disclosure Schedule are of good, usable and merchantable quality
and do not include obsolete or discontinued items; (ii) all items of Inventory
are of such quality as to meet the quality control standards of Seller and any
applicable governmental quality control standards; (iii) all items of Inventory
that are finished goods are saleable or rentable as current inventories at the
current prices thereof in the ordinary course of business; (iv) Inventory, other
than the CPM Rental Fleet, are recorded on the books of the Business at the
lower of cost or market value determined in accordance with GAAP; and (vi) no
write-down in Inventory has been made or should have been made pursuant to GAAP
during the past two years.
E. The accounts receivable which are derived from the Business
prior to the Effective Time of Closing (the "Accounts Receivable") represent
valid obligations arising from sales actually made or services actually
performed in the ordinary course of the Business. Except as set forth in the
Disclosure Schedule, the Accounts Receivable are currently collectible net of
the respective reserves shown on the Closing Balance Sheet (which reserves are
adequate and calculated consistent with past practice), and, to Seller's
knowledge, there is no contest, claim, or right of set-off under any Contract
with any obligor of an Accounts Receivable relating to the amount or validity of
such Accounts Receivable in excess of the amount of the reserves. Set forth on
the Disclosure Schedule will be a complete and accurate list of Accounts
Receivable for DMTI at the Closing Date and a summary of Accounts Receivables of
DHI at the Closing Date, in each case including the aging of such Accounts
Receivable.
6. CONTINGENT AND UNDISCLOSED LIABILITIES. Except pursuant to
the deposit and collection of checks in the ordinary course of business, Seller
does not have any liabilities, obligations or indebtedness of any nature
(whether known or unknown and whether absolute, accrued, contingent or
otherwise) in connection with the Business, other than as set forth in the
12
<PAGE> 14
Financial Information or as specifically identified in the Disclosure Schedule
or as incurred in the ordinary course of business since the most recent
financial statements.
7. TAXES.
A. Except as set forth in the Disclosure Schedule, Seller has
timely and properly filed all federal, state, local and foreign tax returns
(including but not limited to income, franchise, sales, payroll, employee
withholding and social security and unemployment) with respect to the Business
which were required to be filed. Seller has delivered to Buyer copies of all
such all income tax and other material tax returns with respect to the Business
which have been filed since January 1, 1994.
B. Seller has paid or made provision for all federal, state,
local, foreign or other governmental charges with respect to the Business and/or
the Assets that may or could follow the Assets or otherwise affect Buyer after
the consummation of the transactions contemplated herein.
C. There are no tax Liens upon any of the Assets, except
for Liens for current taxes not yet due and payable.
8. ABSENCE OF CERTAIN CHANGES.
A. Except as set forth in the Disclosure Schedule, since
December 31, 1996, there has not been any:
(1) material adverse change in the financial
condition, properties, liabilities, business, results of operations or prospects
of the Business;
(2) damage, destruction or loss which has
materially and adversely affected the financial condition, properties, business,
results of operation or prospects of the Business and/or the Assets (whether or
not covered by insurance);
(3) transactions by the Business outside the
ordinary course of business, except for the transactions contemplated by this
Agreement;
(4) payment or increase of any bonus, salary or
other compensation to any officer or employee of the Business except in the
ordinary course of business or entry into any employment, severance or similar
arrangement with any officer or employee of the Business;
(5) adoption of or increase in the payments to
or benefits under any Employee Benefit Plan;
13
<PAGE> 15
(6) entry into, termination of, or receipt of
notice of termination of any license, service, joint venture, credit or similar
agreement, or any Contract or transaction involving a total remaining commitment
by or to Seller relating to the Business of at least $50,000;
(7) cancellation or waiver of any claims or
rights relating to the Business with a value in excess of $50,000;
(8) material change in the accounting methods
used by Seller;
(9) agreement, whether oral or written, by
Seller to do any of the foregoing; or
(10) commitments to provide CPM units to any one
customer in excess of $50,000.
B. Seller knows of no presently established facts or existing
circumstances which will materially adversely affect the operations, results or
prospects of the Business after the Closing Date.
9. EMPLOYEE BENEFIT PLANS.
A. The Disclosure Schedule sets forth all employee benefit
plans (within the meaning of Section 3(3) of ERISA) and all bonus, stock option,
stock purchase, restricted stock, incentive, deferred compensation, retiree
medical, dental or life insurance, supplemental retirement, severance or other
benefit plans, programs or arrangements, and all employment, termination,
severance or other contracts or agreements, formal or informal, legally binding
or not, with respect to which Seller is a party, with respect to which Seller
has or could have any obligation (whether primary or secondary) (collectively,
the "Employee Benefit Plans").
B. Except as otherwise indicated on the Disclosure Schedule,
each Plan may be amended or terminated without obligation or liability (other
than those obligations and liabilities for which specific assets have been set
aside in a trust or other funding vehicle).
C. To Seller's knowledge, all contributions (including all
employee contributions and employee salary reduction contributions) or premiums
which are due before the Closing Date under the terms of any Plan, the Code,
ERISA, or other applicable laws, rules and regulations, have been or will be
timely made to the Plan before the Closing Date.
D. Seller has delivered to Buyer correct and complete copies
of the plan documents and summary plan descriptions, summaries of material
modifications, highlights brochures or similar descriptions, the most recent
determination letter received from the Internal Revenue Service, the most recent
Form 5500 Annual Report (including the attached schedules and
14
<PAGE> 16
audited financial statements), the most recent actuarial valuation reports, and
all related trust agreements, insurance contracts, and other funding agreements
that implement each Employee Benefit Plan.
E. With respect to each Plan that either Seller or any United
States member of a controlled group of organizations that includes Seller
("Commonly Controlled Entity") within the meaning of Section 414(b), (c) and
(m)(5) of the Code or Section 210(c) - (d) of ERISA, maintains or ever has
maintained, or to which any of them contributes, ever has contributed, or ever
has been required to contribute:
(1) No such Employee Benefit Plan which is an
employee pension benefit plan (within the meaning of Section 3(2) of ERISA) has
been completely or partially terminated or been the subject of a "reportable
event" (other than this Agreement) as to which notices would be required to be
filed with the Pension Benefit Guaranty Corporation ("PBGC"). No proceeding by
the PBGC to terminate any such employee pension benefit plan has been instituted
or threatened.
(2) To Seller's knowledge Seller has not
incurred, and none of the directors and officers (and employees with
responsibility for employee benefits matters) of Seller has any reason to expect
that Seller will incur, any liability to the PBGC (other than PBGC premium
payments) or otherwise under Title IV of ERISA (including any withdrawal
liability).
(3) To Seller's knowledge neither Seller nor
any Commonly Controlled Entity: (i) currently maintains or contributes to any
employee benefit plan subject to Title IV of ERISA as to which the assets of
each such Plan are not at least equal in value to the present value of the
projected benefit obligations (vested and unvested) of the participants in such
Plan, based on the actuarial methods and assumptions used in the most recent
actuarial valuation report; or (ii) has any liability for any lien imposed under
section 302(f) of ERISA or interest payment required under Section 302(e) of
ERISA or Section 412(n) of the Code or excise tax imposed by Section 4971 of the
Code.
F. Neither Seller nor any Commonly Controlled Entity
contributes to, ever has contributed to, or ever has been required to contribute
to any multiemployer plan within the meaning of Section 4001(a)(3) of ERISA or
has any liability (including withdrawal liability) under any multiemployer plan.
G. Seller does not maintain and has not maintained, or
contribute, ever contributed, or has ever been required to contribute to, any
employee welfare benefit plan (within the meaning of Section 3(1) of ERISA)
providing medical, health, or life insurance or other welfare-type benefits for
current or future retired or terminated employees, their spouses, or their
dependents (other than in accordance with Code Section 4980B).
15
<PAGE> 17
10. COMPLIANCE WITH LAW.
A. The present and past operation of the Business, and the
Assets, is and has been, in compliance in all material respects with all
Existing Permits, Laws, governmental specifications, authorizations or
requirements and any decree, judgment, order or similar restriction. To the best
knowledge of Seller, the Business is not currently the subject of an inspection
or inquiry regarding violations or alleged violations of any Law by any federal,
state, local or other governmental agency.
B. To the best knowledge of Seller, no event has occurred or
circumstance exists that (with or without notice or lapse of time) (i) may
constitute or result in a violation by the Business, of, or a failure on the
part of the Business to comply in all material respects with, any Existing
Permit, Law, governmental specification, authorization or requirement or any
decree, judgment, order or similar restriction or (ii) may give rise to any
obligation on the part of the Business to undertake, or to bear all or any
portion of the cost of, any remedial action of any nature.
C. With respect to the Business, Seller has not received, at
any time since January 1, 1994, any notice or other communication (whether oral
or written) from any governmental body or any other Person regarding (i) any
actual or alleged violation of, or failure to comply with, any Existing Permit
or Law having a material effect on the Business or Assets or (ii) any actual or
alleged obligation on the part of Seller to undertake, or to bear all or any
portion of the cost of, any material remedial action.
D. The Disclosure Schedule contains a complete and accurate
list of each Existing Permit having a material effect on the Business or Assets.
Each Existing Permit listed or required to be listed in the Disclosure Schedule
is valid and in full force and effect, and such Existing Permits collectively
constitute all of the permits, licenses, approvals, qualifications, permissions
or authorizations necessary to permit Seller to lawfully conduct and operate the
Business in the manner currently conducted and to permit Seller to own and use
the Assets in the manner in which it currently owns and uses such assets.
11. LITIGATION. Except as listed in the Disclosure Schedule,
there is no litigation, arbitration, proceeding, governmental investigation,
citation or action of any kind pending or, to Seller's knowledge, proposed or
threatened, against or relating to the Business or the Assets, nor is there
any basis known to Seller for any such action. There are no actions, suits or
proceedings pending or, to Seller's knowledge, proposed or threatened, against
Seller by any Person which question the legality, validity or propriety of the
transactions contemplated by this Agreement.
16
<PAGE> 18
12. CONTRACTS; PERFORMANCE OF CONTRACTS.
A. The Disclosure Schedule contains a complete and accurate
list (or summary of oral Contracts) of, and Seller has delivered to Buyer true
and complete copies of, the Contracts described therein. The Contracts
identified in the Disclosure Schedule as the "Material Contracts" are the only
Contracts to which Seller is a party or by which Seller is bound which:
(1) involves the performance of services by the Business of an
amount or value in excess of $50,000;
(2) involves the performance of services or delivery of goods
or materials to the Business of an amount or value in excess of $50,000;
(3) was not entered into in the ordinary course of business
and involves expenditures or receipts of the Business in excess of $50,000;
(4) is a lease, rental or occupancy agreement, license,
installment and conditional sale agreement, or other Contract affecting the
ownership of, leasing of, title to, use of, or any leasehold or other interest
in, any real or personal property (except personal property leases and
installment and conditional sales agreements having a value per item or
aggregate payments of less than $50,000 and with terms of less than one year);
(5) is a joint venture, partnership, and other Contract
(however named) involving a sharing of profits, losses, costs, or liabilities by
the Business with any other Person;
(6) contains covenants that in any way purport to restrict the
business activity of the Business or limit the freedom of the Business to engage
in any line of business or to compete with any Person or otherwise restricts the
right of the Business to use or disclose any information in its possession;
(7) is a power of attorney that is currently effective and
outstanding;
(8) is a management, consulting, employment, personal service,
agency or other contract or contracts providing for employment or rendition of
services and which: (i) is in writing; or (ii) creates other than an at will
employment relationship; or (iii) provides for any commission, bonus, profit
sharing, incentive, retirement, consulting or additional compensation; or (iv)
contains any termination or severance pay obligations or liabilities;
(9) is an agreement with any subsidiary or affiliate of
Seller, including, without limitation, any director, officer, employee or, to
Seller's knowledge, any shareholder of Seller that owns more than 5% of DMTI's
outstanding common stock (a "Principal Shareholder"); or
17
<PAGE> 19
(10) is any other written or unwritten agreement that is
material, either in amount or significance, to the ongoing operation of the
Business.
B. To the best knowledge of Seller, each Contract identified
or required to be identified on the Disclosure Schedule, and, except as set
forth therein, is in full force and effect and is valid and enforceable in
accordance with its terms, subject to the effect of bankruptcy, insolvency,
reorganization and other laws of general application affecting the rights and
remedies of creditors and to general principles of equity (regardless of whether
such enforceability is considered in a proceeding in equity or at law). Except
as set forth on the Disclosure Schedule:
(1) the Business is, and at all times since January 1, 1994
has been, in compliance in all material respects with all applicable terms and
requirements of each Contract under which the Business has or had any obligation
or liability or by which the Business or any of the Assets is or was bound;
(2) to the best knowledge of Seller, no event has occurred or
circumstance exists that (with or without notice or lapse of time) may
contravene, conflict with, or result in a violation or breach of, or give the
Business or other Person the right to declare a default or exercise any remedy
under, or to accelerate the maturity or performance of, or to cancel, terminate,
or modify, any Contract; and
(3) the Business has not given to or received from any other
Person, at any time since January 1, 1994, any notice or other communication
(whether oral or written) regarding any actual or alleged violation or breach
of, or default under, any Contract.
C. There are no renegotiations of, attempts to renegotiate, or
outstanding rights to renegotiate any material amounts paid or payable to the
Business under current or completed Contracts with any Person other than in the
ordinary course of business, and no such Person has made written demand for such
renegotiation.
D. The Contracts relating to the provision of services by the
Business have been entered into in the ordinary course of business and have been
entered into without the commission of any act alone or in concert with any
other Person, or any consideration having been paid or promised, that is or
would be in violation of any Law.
13. EXISTING INSURANCE POLICIES.
A. Seller has delivered to Buyer a true and complete list of
the Existing Insurance Policies, all pending applications for an insurance
policy to cover the Assets, the Premises or the Business and any statement by
the preparer of Seller's financial statements with regard to the adequacy of
Seller's insurance coverage with respect to the Assets, the Premises or the
Business.
18
<PAGE> 20
B. The Existing Insurance Policies: (i) are valid, outstanding
and enforceable; and (ii) are sufficient for compliance in all material respects
with all Laws, the Existing Permits and the Contracts.
C. The Disclosure Schedule sets forth, by year, for the
current policy year and each of the two preceding policy years in respect of
each policy for liability, property or casualty (in each case relating only to
the Business): (i) a summary of loss experience under each policy; (ii) a
statement describing each claim under each policy for an amount in excess of
$10,000; and (iii) a statement describing the loss experience for all claims
that were self-insured, including the number and aggregate cost of such claims.
D. Except as set forth in the Disclosure Schedule, Seller has
not received: (i) any refusal of coverage or notice that a defense will not be
afforded with reservation of rights; or (ii) any notice of cancellation or any
other indication that any Existing Insurance Policy is no longer in full force
and effect or will not be renewed or that the issuer of any such policy is not
willing or able to perform its obligations thereunder.
14. ENVIRONMENTAL PROTECTION.
A. As used in this Agreement:
(1) "Environmental Claim" shall mean any and all
administrative, regulatory or judicial actions, suits, demands, demand letters,
directives, claims, Liens, investigations, proceedings or notices of
noncompliance or violation (written or oral) by any Person alleging potential
liability of Seller (including, without limitation, potential liability for
enforcement, investigatory costs, cleanup costs, governmental response costs,
removal costs, remedial costs, natural resources damages, property damages,
personal injuries, or penalties) arising out of, based on or resulting from: (i)
the presence, or release into the environment, of any Environmental Hazardous
Materials at any location, whether or not owned by Seller; or (ii) circumstances
forming the basis of any violation or alleged violation, of any Environmental
Law by Seller; or (iii) any and all claims by any Person seeking damages,
contribution, indemnification, cost, recovery, compensation or injunctive relief
from or against Seller resulting from the presence or Environmental Release of
any Environmental Hazardous Materials.
(2) "Environmental Laws" shall mean all federal,
state, local or foreign statutes, Laws, rules, ordinances, codes, policy, rule
of common law, regulations, judgments, and orders relating to pollution or
protection of human health or the environment (including, without limitation,
ambient air, surface water, ground water, drinking water, wildlife, plants, land
surface or subsurface strata), including, without limitation, Laws and
regulations relating to Environmental Releases or threatened Environmental
Releases of Environmental Hazardous Materials, or otherwise relating to the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of Environmental Hazardous Materials.
19
<PAGE> 21
(3) "Environmental Hazardous Materials" shall mean: (i) any
petroleum or petroleum products, radioactive materials, asbestos in any form,
urea formaldehyde foam insulation, and transformers or other equipment that
contain dielectric fluid containing levels of polychlorinated biphenyls (PCBs)
and radon gas; and (ii) any chemicals, materials or substances which are now
defined as or included in the definition of "hazardous substances," "hazardous
wastes," "hazardous materials," extremely hazardous wastes," restricted
hazardous wastes," "toxic substances," "toxic pollutants," or words of similar
import, under any Environmental Law; and (iii) any other chemical, medical or
material, substance or waste exposure to which is now prohibited, limited or
regulated by any governmental authority.
(4) "Environmental Permits" shall mean all environmental,
health and safety permits and governmental authorizations.
(5) "Environmental Release" shall mean any release, spill,
emission, leaking, injection, deposit, disposal, discharge, dispersal, leaching
or migration into the atmosphere, soil, surface water, groundwater or property.
B. The Business: (i) to the best knowledge of Seller, is in
compliance with all applicable Environmental Laws; and (ii) Seller has not
received any communication (written or oral) that alleges that the Business is
not or was not in compliance with applicable Environmental Laws.
C. The Business has obtained all Environmental Permits necessary
for its operations, and all such permits are in good standing and the Business
is in compliance in all material respects with all terms and conditions of its
Environmental Permits, if any.
D. There is no Environmental Claim pending or, to the best
knowledge of Seller, threatened against the Business or the Assets or against
any Person whose liability for any Environmental Claim Seller has or may have
retained or assumed in connection to the Business or the Assets either
contractually or by operation of Law, or against any real or personal property
or operation which the Business owns, leases or manages, nor is there any basis
for any such Environmental Claim.
E. There have been no Environmental Releases of any Environmental
Hazardous Material by the Business or any employee or agent of the Business, or
by any Person on real property owned, used, leased or operated by the Business
now or in the past.
F. To the best knowledge of Seller, no real property at any time
owned, operated, used or controlled by the Business is currently listed on the
National Priorities List or the Comprehensive Environmental Response,
Compensation and Liability Information System, both promulgated under the
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended ("CERCLA"), or on any comparable state list.
20
<PAGE> 22
G. Seller has not received any written notice from any Person
under or relating to CERCLA or any comparable state or local Law.
H. To the best knowledge of Seller, no off-site location at which
the Business has disposed or arranged for the disposal of any waste is listed on
the National Priorities List or on any comparable state list.
I. Seller has not received any written notice from any Person with
respect to any off-site location, of potential or actual liability or a written
request for information from any Person under or relating to CERCLA or any
comparable state or local Law.
J. There is not and has not been any Environmental Hazardous
Materials used, generated, treated, stored, transported, disposed of, handled or
otherwise existing on, under or about the Premises, or any other real property
owned, operated, used or controlled by the Business in the past, except for
quantities of any such Environmental Hazardous Materials stored or otherwise
held on, under or about the Premises, or any other real property owned,
operated, used or controlled by the Business in the past, in full compliance
with all Environmental Laws and intended to be used in the operation of the
Business.
K. Except as listed on the Disclosure Schedule, there is not now
and has not been in the past any underground or above-ground storage tank or
pipeline on the Premises, or any other real property owned, operated, used or
controlled by the Business in the past, and there has been no Environmental
Release from or rupture of any such tank or pipeline, including, without
limitation, any Environmental Release from or in connection with the filling or
emptying of such tank.
15. LABOR MATTERS.
A. Except as set forth in the Disclosure Schedule, there has
been provided to Buyer a complete and accurate list of the following information
for each employee of the Business, including each employee on leave of absence
or layoff status: name; job title; current compensation paid or payable;
vacation accrued.
B. Except as set forth on the Disclosure Schedule, to Seller's
knowledge, no employee of the Business is a party to, or is otherwise bound by,
any agreement or arrangement, including any confidentiality, noncompetition, or
proprietary rights agreement, between such employee and any other Person
("Proprietary Rights Agreement") that in any way adversely affects or will
affect (i) the performance of such employee's duties as an employee of the
Business or (ii) the ability of Buyer to conduct the Business, including any
Proprietary Rights Agreement with Seller by any such employee.
C. Each of DHI's seven territory managers and eight account reps
indicated in the Disclosure Schedule have executed either a Territory Manager
Employment Agreement or
21
<PAGE> 23
an Account Representative Employment Agreement in the form included in the
Disclosure Schedule and Jerry McKevitt has executed a Regional Vice President
Employment Agreement, also included in the Disclosure Schedule.
16. LABOR RELATIONS; COMPLIANCE.
A. Seller has not been and is not a party to any collective
bargaining or other labor Contract.
B. There has not been, there is not presently pending or existing,
and to Seller's knowledge there is not threatened, (i) any strike, slowdown,
picketing, work stoppage, or employee grievance process, (ii) any charge,
grievance, proceeding or other claim against or affecting the Business relating
to the alleged violation of any Law pertaining to labor relations or employment
matters, including any charge or complaint filed by an employee or union with
the National Labor Relations Board, the Equal Employment Opportunity Commission,
or any comparable governmental body, organizational activity, or other labor or
employment dispute against or affecting the Business or the Premises or (iii)
any application for certification of a collective bargaining agent.
C. The Business has complied in all material respects with all
Laws relating to employment, equal employment opportunity, nondiscrimination,
immigration, wages, hours, benefits, collective bargaining, the payment of
social security and similar taxes, occupational safety and health and plant
closing. The Business is not liable for the payment of any compensation,
damages, taxes, fines, penalties, or other amounts, however designated, for
failure to comply with any of the foregoing Laws.
D. To the knowledge of Seller, there is no present or former
employee of the Business who has any claim against Seller on account of or for:
(i) overtime pay, other than overtime pay for the current payroll period; (ii)
wages or salaries, other than wages or salaries for the current payroll period;
or (iii) sales commissions, vacations, sick leave, time off or pay in lieu of
vacation, sick leave or time off, other than sales commissions, vacation, sick
leave or time off (or pay in lieu thereof) earned under the standard policies of
the Business.
17. BROKERS. Except for fees to The Ohio Company to be paid solely
by Seller, Seller has not incurred any brokers', finders' or any similar fee in
connection with the transactions contemplated by this Agreement.
18. GOVERNMENTAL APPROVALS. Except as set forth in the Disclosure
Schedule, no permission, approval, determination, consent or waiver by, or any
declaration, filing or registration with, any governmental or regulatory
authority is required in connection with the execution, delivery and performance
of this Agreement by Seller.
22
<PAGE> 24
19. DISCLOSURE. Seller has furnished to Buyer complete and accurate
copies of all documents and/or information requested by Buyer. To Seller's
knowledge, no statement of fact by Seller contained in this Agreement or the
Disclosure Schedule contains any untrue statement of a material fact or omits to
state a material fact necessary in order to make the statements herein or
therein contained, in the light of the circumstances under which they were made,
not misleading.
20. INTANGIBLE ASSETS.
A. The Intangible Assets are all those used in the operation
of the Business as currently conducted. Except as set forth in the Disclosure
Schedule, Seller owns all of the right, title, and interest in and to each of
the Intangible Assets free and clear of all liens, security interests, charges,
encumbrances, equities, and other adverse claims, and has the right to use all
of the Intangible Assets without payment to a third party.
B. To Seller's knowledge, the Business does not infringe on
the intellectual property rights of others.
C. No trade name, registered or unregistered trademark,
service mark or application therefor included in the Intangible Assets has been
or is involved in any opposition, invalidation or cancellation and, to Seller's
knowledge, no such action is threatened with respect to such assets.
D. To the knowledge of Seller, no trade secret or other
confidential or proprietary information used in the Business has been used,
divulged, or appropriated either for the benefit of any Person (other than
Seller) or to the detriment of the Business.
21. CERTAIN PAYMENTS. Neither Seller nor, to the knowledge of Seller,
any director, officer, agent, employee of Seller or any other Person associated
with or acting for or on behalf of Seller, has directly or indirectly, in each
case in violation of any Law: (i) made any contribution, gift, bribe, rebate,
payoff, influence payment, kickback, or other payment to any Person, private or
public, regardless of form, whether in money, property, or services (A) to
obtain favorable treatment in securing business for the Business, (B) to pay for
favorable treatment for business secured for the Business or (C) to obtain
special concessions or for special concessions already obtained for or in
respect of the Business; or (ii) established or maintained any fund or asset
that has not been recorded in the books and records of the Business.
22. RELATIONSHIPS WITH RELATED PARTIES. Except as set forth on the
Disclosure Schedule, no Principal Shareholder or any affiliate of any Principal
Shareholder or of Seller has, or since January 1, 1996, has had, any interest in
any property (whether real, personal, or mixed and whether tangible or
intangible), used in or pertaining to the Business. Except as set forth on the
Disclosure Schedule, no Principal Shareholder or any affiliate of a Principal
Shareholder or of Seller owns, or since January 1, 1996 has owned, an equity
interest (of record or as a beneficial
23
<PAGE> 25
owner) or any other financial or profit interest in, a Person that has (i) had
business dealings or a material financial interest in any transaction with the
Business of the type required to be disclosed under Securities and Exchange
Commission Regulation S-K, Item 404 ("Item 404"), or (ii) engaged in competition
with the Business with respect to any products or services of the Business (a
"Competing Business") in any market presently served by the Business except for
less than one percent of the outstanding capital stock of any Competing Business
that is publicly traded on any recognized exchange or in the over-the-counter
market. Except as set forth on the Disclosure Schedule, no Principal Shareholder
or any affiliate of a Principal Shareholder or of Seller is a party to any
Contract with, or has any claim or right against, Seller with respect to the
Business of the type required to be disclosed under Item 404.
23. NO REAL PROPERTY. Seller does not own any real property in
connection with the operation of the Business.
ARTICLE V. REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer hereby represents and warrants to Seller that:
1. ORGANIZATION; BUSINESS.
A. Buyer is a corporation duly and validly organized and
existing under the Laws of its state of incorporation.
B. Buyer has the full corporate power and authority and all
material franchises, permits, licenses, approvals, authorizations,
registrations, grants and orders necessary to carry on its business as it is now
conducted.
2. AUTHORIZATION; ENFORCEABILITY. The execution, delivery and
performance of this Agreement by Buyer and all of the documents and instruments
required by this Agreement to be executed and delivered by Buyer are within the
corporate power of Buyer and have been duly authorized by all necessary
corporate action by Buyer. This Agreement is, and the other documents and
instruments required by this Agreement to be executed and delivered by Buyer
will be, when executed and delivered by Buyer, the valid and binding obligations
of Buyer, enforceable against Buyer in accordance with their respective terms,
except as the enforcement thereof may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or similar Laws generally affecting the
rights of creditors and subject to general equity principles.
3. NO VIOLATION OR CONFLICT. The execution, delivery and performance of
this Agreement by Buyer do not and will not conflict with or violate any Law,
the Certificate or Articles of Incorporation or Bylaws of Buyer or any contract
or agreement to which Buyer is a party or by which Buyer is bound.
24
<PAGE> 26
4. GOVERNMENTAL APPROVALS. No permission, approval, determination,
consent or waiver by, or any declaration, filing or registration with, any
governmental or regulatory authority is required in connection with the
execution, delivery and performance of this Agreement by Buyer.
5. DISCLOSURE. To Buyer's knowledge, no statement of fact by Buyer
contained in this Agreement contains any untrue statement of a material fact or
omits to state a material fact necessary in order to make the statements herein
contained, in the light of the circumstances under which they were made, not
misleading.
6. LITIGATION. There are no actions, suits or proceedings pending or,
to Buyer's knowledge, proposed or threatened, against Buyer by any Person which
question the legality, validity or propriety of the transactions contemplated by
this Agreement.
7. BROKERS. Except for fees to Furman Selz to be paid solely by Buyer,
Buyer has not incurred any brokers', finders' or any similar fee in connection
with the transactions contemplated by this Agreement.
ARTICLE VI. CONDITIONS PRECEDENT TO THE OBLIGATIONS OF BUYER
Each and every obligation of Buyer to be performed on the Closing Date
shall be subject to the satisfaction prior to or at the Closing of the following
express conditions precedent:
1. COMPLIANCE WITH AGREEMENT. Seller shall have performed and
complied in all material respects with all of its obligations under this
Agreement which are to be performed or complied with by it prior to or on the
Closing Date.
2. PROCEEDINGS AND INSTRUMENTS SATISFACTORY. All proceedings, corporate
or other, to be taken in connection with the transactions contemplated by this
Agreement, and all documents incident thereto, shall be reasonably satisfactory
in form and substance to Buyer, and Seller shall have made available to Buyer
for examination the originals or true and correct copies of all documents Buyer
may reasonably request in connection with the transactions contemplated by this
Agreement.
3. NO LITIGATION. No suit, action or other proceeding shall be pending
or threatened before any court in which the consummation of the transactions
contemplated by this Agreement is restrained or enjoined or in which the relief
requested is to restrain, enjoin or prohibit the consummation of the
transactions contemplated by this Agreement.
4. DELIVERIES AT CLOSING. Seller shall have delivered or caused to be
delivered to Buyer the following documents, each dated the Closing Date and
properly executed by Seller, appropriate officers of Seller or counsel for
Seller or third parties, as appropriate: (i) the Bill of Sale; (ii) the
Confidentiality Agreement; (iii) the Noncompete Agreements; (iv) Seller's
Closing
25
<PAGE> 27
Certificates; (v) the Seller's Counsel Opinion; (vi) Temporary Services
Agreement; (vii) a stock purchase agreement of even date herewith between DMTI
and Buyer (the "Stock Purchase Agreement"); and (viii) any assignments necessary
to effect the transfer of the Intangible Assets to Buyer.
5. OTHER DELIVERIES. Seller shall have delivered to Buyer:
A. such certificates and documents of officers of Seller and
public officials as shall be reasonably requested by Buyer to establish the
existence of Seller and the due authorization of this Agreement and the
transactions contemplated by this Agreement by Seller;
B. legal title to and legal possession of the Assets;
C. such other bills of sale, endorsements, assignments or
other instruments of conveyance as shall be effective to vest in Buyer good and
marketable title to the Assets; and
D. such tax clearance certificates or other similar document(s)
which may be required by any state taxing authority in order to relieve Buyer of
any obligation to withhold a portion of the Purchase Price or which may be
necessary or advisable in order to comply with any applicable sales tax
exemption.
ARTICLE VII. CONDITIONS PRECEDENT TO THE OBLIGATIONS OF SELLER
Each and every obligation of Seller to be performed on the Closing Date
shall be subject to the satisfaction prior to or at the Closing of the following
express conditions precedent:
1. COMPLIANCE WITH AGREEMENT. Buyer shall have performed and
complied in all material respects with all of its obligations under this
Agreement which are to be performed or complied with by it prior to or on the
Closing Date.
2. PROCEEDINGS AND INSTRUMENTS SATISFACTORY. All proceedings,
corporate or other, to be taken in connection with the transactions contemplated
by this Agreement, and all documents incident thereto, shall be reasonably
satisfactory in form and substance to Seller, and Buyer shall have made
available to Seller for examination the originals or true and correct copies of
all documents which Seller may reasonably request in connection with the
transactions contemplated by this Agreement.
3. NO LITIGATION. No suit, action or other proceeding shall be
pending before any court in which the consummation of the transactions
contemplated by this Agreement is restrained or enjoined.
4. DELIVERIES AT CLOSING. Buyer shall have delivered to Seller the
following documents, each dated the Closing Date and properly executed by Buyer,
or counsel for Buyer,
26
<PAGE> 28
as appropriate: (i) the Bill of Sale; (ii) the Buyer Closing Certificate; (iii)
the Buyer Counsel Opinion; (iv) the Temporary Services Agreement; (v) the
Confidentiality Agreement; and (vi) the Stock Purchase Agreement.
5. OTHER DOCUMENTS. Buyer shall have delivered to Seller such
certificates and documents of officers of Buyer and of public officials as shall
be reasonably requested by Seller to establish the existence and good standing
of Buyer and the due authorization of this Agreement and the transactions
contemplated by this Agreement by Buyer.
6. DELIVERY OF PURCHASE PRICE. Buyer shall have delivered to Seller
the Purchase Price as described in Section II.3. of this Agreement, and shall
have paid in full all Bank Assumed Liability as required under Section II. 1.b
of this Agreement.
ARTICLE VIII. INDEMNITIES
1. SELLER'S INDEMNITY. Seller hereby indemnifies and holds Buyer
harmless from and against, and agrees to promptly defend Buyer from and
reimburse Buyer for, any and all losses, damages, costs, expenses, liabilities,
obligations and claims of any kind (including, without limitation, reasonable
attorneys' fees and other reasonable legal costs and expenses, including without
limitation, those incurred in connection with any suit, action or other
proceeding) which Buyer may at any time suffer or incur, or become subject to,
as a result of or in connection with:
A. any breach of any of the representations and warranties made by
Seller in or pursuant to this Agreement;
B. any failure by Seller to carry out, perform, satisfy and
discharge any of its covenants, agreements, undertakings, liabilities or
obligations under this Agreement or under any of the documents and materials
required to be delivered by Seller pursuant to this Agreement;
C. the Retained Liabilities;
D. Excess Warranty Expense;
E. noncompliance with any bulk transfer or plant closing Laws in
connection with the sale of the Assets;
F. the failure of Seller to deliver to Buyer a tax clearance
certificate pursuant to Section VI.5.d; or
G. any suit, action or other proceeding brought by any Person
arising out of, or in any way related to, any of the matters referred to in
Sections VIII.1.a. through VIII.1.f, inclusive, of this Agreement.
27
<PAGE> 29
2. BUYER'S INDEMNITY. Buyer hereby indemnifies and holds Seller
harmless from and against, and agrees to promptly defend Seller from and
reimburse Seller for, any and all losses, damages, costs, expenses, liabilities,
obligations and claims of any kind (including, without limitation, reasonable
attorneys' fees and other reasonable legal costs and expenses, including,
without limitation, those incurred in connection with any suit, action or other
proceeding) which Seller may at any time suffer or incur, or become subject to,
as a result of or in connection with:
A. any breach of any of the representations and warranties made by
Buyer in or pursuant to this Agreement;
B. any failure by Buyer to carry out, perform, satisfy and
discharge any of its covenants, agreements, undertakings, liabilities or
obligations under this Agreement or under any of the documents and materials
required to be delivered by Buyer pursuant to this Agreement;
C. the Assumed Liabilities;
D. any suit, action or other proceeding brought by any Person
arising out of, or in any way related to, any of the matters referred to in
Sections VIII.2.a. through VIII.2.c, inclusive, of this Agreement.
3. PROVISIONS REGARDING INDEMNITIES.
A. INSURANCE RECOVERIES. The amounts for which an indemnifying
party shall be liable under Sections VIII.1. and VIII.2. of this Agreement shall
be net of any insurance proceeds actually received by the indemnified party in
connection with the facts giving rise to the right of indemnification.
B. NOTICE; THIRD PARTY CLAIMS. The indemnified party shall
promptly notify the indemnifying party in reasonable detail of any claim,
demand, action or proceeding for which indemnification will be sought under
Section VIII.1. or Section VIII.2. of this Agreement, and if such claim, demand,
action or proceeding is a third party claim, demand, action or proceeding, the
indemnifying party will have the right at its expense to assume the defense
thereof using counsel reasonably acceptable to the indemnified party. The
indemnified party shall have the right to participate, at its own expense, with
respect to any such third party claim, demand, action or proceeding. In
connection with any such third party claim, demand, action or proceeding, the
parties shall cooperate with each other and provide each other with access to
relevant books and records in their possession. No such third party claim,
demand, action or proceeding shall be settled without the prior written consent
of the indemnified party. If a firm written offer is made to settle any such
third party claim, demand, action or proceeding and the indemnifying party
proposes to accept such settlement and the indemnified party refuses to consent
to such settlement, then: (i) the indemnifying party shall be excused from, and
the indemnified party shall be solely responsible for, all further defense of
such third party claim, demand, action or proceeding; (ii) the maximum liability
of the indemnifying party relating to such third party claim, demand, action
28
<PAGE> 30
or proceeding shall be the amount of the proposed settlement if the amount
thereafter recovered from the indemnified party on such third party claim,
demand, action or proceeding is greater than the amount of the proposed
settlement; and (iii) the indemnified party shall pay all attorneys' fees and
legal costs and expenses incurred after rejection of such settlement by the
indemnified party, but if the amount thereafter recovered by such third party
from the indemnified party is less than the amount of the proposed settlement,
the indemnified party shall be reimbursed by the indemnifying party for such
attorneys' fees and legal costs and expenses up to a maximum amount equal to the
difference between the amount recovered by such third party and the amount of
the proposed settlement.
C. EXCLUSIVITY. The rights of indemnity provided by this Article
VIII. of this Agreement shall be exclusive of all other rights of indemnity or
contribution, whether created by Law or otherwise, either before or after the
Effective Time of Closing, relating in any way to the subject matter of this
Agreement.
D. TERMINATION OF SELLER'S RIGHTS. The right of Seller to receive
indemnity provided by Section VIII.2. of this Agreement shall, as to any matter
(other than pursuant to VIII.2.c.) which has not been noticed to Buyer prior to
such time, expire at 11:59 P.M., Phoenix, Arizona time, on the first anniversary
of the Effective Time of Closing.
E. TERMINATION OF BUYER'S RIGHTS. The right of Buyer to receive
indemnity provided by Section VIII.1. of this Agreement shall, as to any matter
which has not been noticed to Seller prior to such time, expire at 11:59 P.M.
Phoenix, Arizona time, on the first anniversary of the Effective Time of
Closing.
F. RIGHTS ON TERMINATION. The termination of the rights of an
indemnified party to receive indemnity under this Agreement shall not affect
that Person's right to prosecute to conclusion any claim made by that Person
prior to the time that the relevant right of indemnity terminates.
G. LIMITATIONS ON SELLER'S LIABILITY. The liability of Seller
under Section VIII.1. of this Agreement shall be without deduction or
limitation, except that the liability of Seller under Section VIII.1.a., and
Section VIII.1.d. and Section VIII.1.g (to the extent it relates to Sections
VIII.1.a or VIII.1.d of this Agreement) shall:
(1) not arise with respect to a single course of conduct,
related set of circumstances, occurrence or event unless the damages suffered by
an indemnified party arising therefrom exceed One Thousand and 00/100 Dollars
($1,000.00) (a "Seller Indemnifiable Breach");
(2) be recoverable only if and to the extent that the
cumulative damages suffered by Buyer for all Seller Indemnifiable Breaches
exceeds One Hundred Thousand and 00/100 Dollars ($100,000.00); and
29
<PAGE> 31
(3) Buyer shall not be entitled to more than one recovery for
any single loss, damage, cost, expense, liability, obligation or claim even
though such may have resulted from the breach or inaccuracy of more than one of
the representations and warranties made by Seller in or pursuant to this
Agreement.
H. LIMITATIONS ON BUYER'S LIABILITY. The liability of Buyer
under Section VIII.2. of this Agreement shall be without deduction or
limitation, except that the liability of Buyer under Section VIII.2.a. and
Section VIII.2.d (to the extent it relates to Section VIII.2.a of this
Agreement) shall:
(1) not arise with respect to a single course of conduct,
related set of circumstances, occurrence or event unless the damages suffered by
an indemnified party arising therefrom exceed One Thousand and 00/100 Dollars
($1,000.00) (a "Buyer Indemnifiable Breach");
(2) be recoverable only if and to the extent that the
cumulative damages suffered by Seller for all Buyer Indemnifiable Breaches
exceeds One Hundred Thousand and 00/100 Dollars ($100,000.00); and
(3) Seller shall not be entitled to more than one recovery for
any single loss, damage, cost, expense, liability, obligation or claim even
though such may have resulted from the breach or inaccuracy of more than one of
the representations and warranties made by Buyer in or pursuant to this
Agreement.
I. WAIVER OF CONSEQUENTIAL AND PUNITIVE DAMAGES. Each party
hereby waives and agrees to forfeit any right it may have to seek consequential
or punitive damages under or related to this Agreement.
ARTICLE IX. MISCELLANEOUS
1. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations and
warranties of the parties contained in this Agreement or made pursuant to this
Agreement shall survive the Closing Date and the Effective Time of Closing and
the consummation of the transactions contemplated by this Agreement and shall
terminate and be of no further force and effect at 11:59 P.M. Phoenix, Arizona
time on the first anniversary of the Effective Time of Closing (other than
representations and warranties of Seller set forth in Sections IV.7, and IV.14,
which shall terminate and be of no further force and effect at 11:59 P.M.
Phoenix, Arizona time on the second anniversary of the Effective Time of
Closing). The termination of the representations and warranties contained in the
immediately preceding sentence shall not affect a party's right to prosecute to
conclusion any claim made by such party prior to such time.
2. INSURANCE COVERAGE FOLLOWING THE CLOSING. In connection with
certain Retained Liabilities, Seller desires to obtain a claims made liability
insurance policy covering such Retained
30
<PAGE> 32
Liabilities. Buyer and Seller agree that such insurance shall be obtained with
such companies and through such brokers offering the necessary coverage as
designated by Seller. Buyer and Seller agree that Seller shall pay the premiums
or otherwise provide for such insurance and that Buyer shall reimburse Seller,
promptly upon demand for reimbursement accompanied by proof of such insurance,
for 50% of the cost of such coverage; provided, however, that Buyer's
reimbursement obligation under this Section IX.2. shall in no event exceed
$50,000 and provided further that Buyer's agreement to reimburse Seller under
this Section IX.2. shall not affect Buyer's rights to indemnification by Seller
pursuant to Section VIII.1. hereof.
3. RIGHT TO USE NAME. Immediately following the Closing, DMTI, as the
sole shareholder of DHI, shall take all necessary corporate action and shall
file all required instruments to change the name of DHI to a name which does not
include any of the Intangible Assets to be transferred to Buyer hereunder. For
the period following the Closing and through the annual meeting of stockholders
of DMTI to be held in 1997 (the "1997 Annual Meeting"), Buyer grants DMTI the
right to use the name "Danninger Medical Technology, Inc." as its corporate
name, provided that DMTI shall do business under another name which does not
include any of the Intangible Assets to be transferred to Buyer hereunder. DMTI
agrees that in preparation for the 1997 Annual Meeting its Board of Directors
shall adopt a resolution to the corporation's certificate of incorporation to
change the name of the corporation to another name which does not include any of
the Intangible Assets to be transferred to Buyer hereunder. DMTI agrees that it
will include such resolution in the proxy statement to be furnished to
stockholders of DMTI in connection with the 1997 Annual Meeting and that the
proxy statement will include a recommendation from the Board of Directors of
DMTI to the stockholders of DMTI to vote in favor of the proposal to change the
name of the corporation.
4. ENTIRE AGREEMENT; AMENDMENT. This Agreement and the documents
referred to in this Agreement and required to be delivered pursuant to this
Agreement constitute the entire agreement among the parties pertaining to the
subject matter of this Agreement, and supersede all prior and contemporaneous
agreements, understandings, negotiations and discussions of the parties, whether
oral or written, and there are no warranties, representations or other
agreements between the parties in connection with the subject matter of this
Agreement, except as specifically set forth in this Agreement. No amendment,
supplement, modification, waiver or termination of this Agreement shall be
binding unless executed in writing by Buyer and Seller. No waiver of any of the
provisions of this Agreement shall be deemed or shall constitute a waiver of any
other provision of this Agreement, whether or not similar, nor shall such waiver
constitute a continuing waiver unless otherwise expressly provided.
5. EXPENSES. Whether or not the transactions contemplated by this
Agreement are consummated, each of the parties to this Agreement shall pay the
fees and expenses of its respective counsel, accountants, brokers, consultants,
investment bankers and other experts incident to the negotiation and preparation
of this Agreement and consummation of the transactions contemplated by this
Agreement.
31
<PAGE> 33
6. GOVERNING LAW. This Agreement shall be construed and interpreted
according to the internal Laws of the State of Arizona without regard to the
conflicts of laws principles thereof.
7. ASSIGNMENT; GUARANTEE. This Agreement shall not be assigned by
Seller except with the prior written consent of Buyer. OrthoLogic Corp. may
assign this Agreement to a subsidiary of OrthoLogic Corp. without the prior
written consent of Seller and to any other party with the prior written consent
of Seller; provided, however, any assignment of this Agreement by OrthoLogic
Corp. or designation of a subsidiary as Buyer shall not limit or otherwise
affect OrthoLogic Corp.'s continuing primary and direct liability as Buyer under
this Agreement.
8. NOTICES. All communications or notices required or permitted by this
Agreement shall be in writing and shall be deemed to have been given at the
earlier of the date when actually delivered to an officer of a party by personal
delivery or telephonic facsimile transmission or when deposited in the United
States mail, certified or registered mail, postage prepaid, return receipt
requested, and addressed as follows, unless and until any of such parties
notifies the others in accordance with this Section of a change of address:
If to Seller: Danninger Medical Technology, Inc.
Attention: Joseph A. Mussey, President
5160-A Paul G. Blazer Memorial Parkway
Dublin, Ohio 43017
Telephone No.: (614) 718-0500
Facsimile No.: (614) 718-0528
with a copy to: Porter, Wright, Morris & Arthur
Attention: Curtis A. Loveland
41 South High Street
Columbus, Ohio 43215
Telephone No.: (614) 227-2004
Facsimile No.: (614) 227-2100
If to Buyer: OrthoLogic Corp.
Attention: Allan M. Weinstein, Ph.D.
2850 South 36th Street
Phoenix, Arizona 85034
Telephone No.: (602) 437-5520
Facsimile No.: (602) 470-7080
32
<PAGE> 34
with a copy to: Quarles & Brady
Attention: P. Robert Moya
One East Camelback, Suite 400
Phoenix, Arizona 85012
Telephone No.: (602) 230-5500
Facsimile No.: (602) 230-5598
9. COUNTERPARTS; HEADINGS. This Agreement may be executed in several
counterparts, each of which shall be deemed an original, but such counterparts
shall together constitute but one and the same Agreement. The Table of Contents
and Article and Section headings in this Agreement are inserted for convenience
of reference only and shall not constitute a part hereof.
10. SEVERABILITY. If any provision, clause, or part of this Agreement,
or the application thereof under certain circumstances, is held invalid, the
remainder of this Agreement, or the application of such provision, clause or
part under other circumstances, shall not be affected thereby unless such
invalidity materially impairs the ability of the parties to consummate the
transactions contemplated by this Agreement.
11. SPECIFIC PERFORMANCE. The parties agree that the Assets and
Business as a going concern constitute unique property. There is no adequate
remedy at Law for the damage which either party might sustain for failure of the
other party to consummate the transactions contemplated by this Agreement, and
accordingly, each party shall be entitled, at its option, to the remedy of
specific performance to enforce the transactions contemplated by this Agreement.
12. TAXES AND FEES. Seller shall pay all transfer taxes of any kind,
all sales and use taxes and all recording and filing fees which arise as a
result of the conveyance of the Assets by Seller to Buyer.
13. INCOME TAX POSITION. Neither Buyer nor Seller shall take a
position for income tax purposes which is inconsistent with this Agreement.
14. WAIVERS. No waiver of any breach or default hereunder shall be
considered valid unless in writing and signed by the party giving such waiver,
and no such waiver shall be deemed a waiver of any subsequent breach or default.
15. FURTHER ASSURANCES. From time to time after the Closing Date, upon
the reasonable request of Buyer and without any additional consideration other
than payment of any out-of-pocket expenses by Buyer, Seller shall execute and
deliver or cause to be executed and delivered such further instruments of
conveyance, assignment and transfer and take such further action as Buyer may
reasonably request in order to more effectively sell, assign, convey, transfer,
reduce to possession and record title to any of the Assets. Seller agrees to
cooperate with Buyer in all reasonable respects to assure to Buyer the continued
title to and possession of the Assets in
33
<PAGE> 35
the condition and manner contemplated by this Agreement. From time to time after
the Closing Date, upon the reasonable request of Seller and without any
additional consideration, other than payment of any out-of-pocket expenses by
Seller, Buyer shall provide Seller and its agents and representatives access and
copies of the Assets and access to and the reasonable services of employees of
the Business during normal working hours and without interfering with the
operation of the Business to enable Seller to prepare any tax returns and to
verify, pay or perform any Retained Liability, and Buyer shall cause its
employees to cooperate with Seller in the defense of any claim relating to any
Retained Liability.
16. NO THIRD PARTY BENEFICIARY. Nothing expressed or referred to herein
will be construed to give any Person, other than the parties to this Agreement,
any legal or equitable right, remedy or claim under or in respect to this
Agreement or any provision of this Agreement. This Agreement and all of its
provisions and conditions are for the sole and exclusive benefit of the parties
to this Agreement and their successors and assigns.
34
<PAGE> 36
Signature Page to Asset Purchase Agreement
IN WITNESS WHEREOF, the parties have caused this Asset Purchase
Agreement to be duly executed as of the day and year first above written.
Buyer:
OrthoLogic Corp.,
a Delaware corporation or its designated
subsidiary
By: /s/ Allan M. Weinstein
---------------------------------
Name: Allan M. Weinstein
------------------------------
Title: Chief Financial Officer
Seller:
Danninger Medical Technology, Inc.,
a Delaware corporation
By: /s/ Joseph Mussey
--------------------------------
Name: Joseph Mussey
------------------------------
Title: President
-----------------------------
Danninger Healthcare, Inc.,
an Ohio corporation
By: /s/ Joseph Mussey
--------------------------------
Name: Joseph Mussey
------------------------------
Title: President
------------------------------
35
<PAGE> 1
EXHIBIT 11
- 26 -
<PAGE> 2
CROSS MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
EXHIBIT 11
COMPUTATION OF NET INCOME PER SHARE
<TABLE>
<CAPTION>
Years ended December 31,
------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Weighted average number of common shares
outstanding 4,772,082 4,661,332 4,475,954
Shares issuable pursuant to stock option plans
and stock warrants 232,812 (1) 219,464
----------- --------------- ----------
Weighted average shares outstanding, including
common stock equivalents 5,004,894 4,661,332 4,695,418
========= =========== ===========
Net income (loss) from continuing operations $ 50,000 $(1,442,000) $(1,176,000)
========= =========== ===========
Net income from discontinued operations $1,231,000 $ 1,083,000 $ 1,257,000
========= =========== ===========
Net income (loss) $1,281,000 $ (359,000) $ 81,000
========= =========== =============
Net income (loss) per share from continuing operations $ .01 $ (.31) $ (.25)
============= =============== ===============
Net income per share from discontinued
operations $ .25 $ .23 $ .27
============== =============== ================
Net income (loss) per share $ .26 $ (.08) $ .02
============== ============== ================
<FN>
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 a
change to the calculation of primary earnings per share.
(1) Shares issuable under these common stock equivalents are anti-dilutive and
therefore have been excluded from this schedule.
</TABLE>
<PAGE> 1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
At December 31, 1996, the Company had two primary business segments:
Recovery Products focused on orthopedic rehabilitative treatment; and Spinal
Implant focused on the development and marketing of spinal implant devices. On
March 12, 1997 the Company sold substantially all of the assets and the buyer
assumed substantially all of the liabilities of its Recovery Products segment.
The results of the Company have been reported so as to segregate the
discontinued operations from continuing operations. The management discussion
that follows pertains to the Company's continuing operations.
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>
- -----------------------------------------------------------------------------------------------
Year Ended December 31, 1996 1995 1994
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue 100.0% 100.0% 100.0%
Cost of goods sold 45.0% 48.8% 41.3%
Sales and marketing 33.4 47.8 49.2
General and administrative 17.1 31.0 37.0
Research and development 8.0 21.0 33.9
Interest expense 5.1 2.5 0.1
Loss before taxes (8.6) (51.0) (61.5)
Income tax benefit 9.2 15.8 20.7
Net income (loss) 0.6% (35.2)% (40.8)%
</TABLE>
<PAGE> 2
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1996
AND 1995
For 1996 net sales increased 110% to $8,572,000 from $4,091,000 for
1995. This increase was primarily a result of the Company's increased
penetration into the spinal implant market as the Company continued to increase
its distribution network, the number of surgeons using the SYNERGY(TM) Spinal
Implant System and its offering of spinal implant products. In the third quarter
of 1996, the Company began marketing internationally the titanium version of the
SYNERGY(TM) System. The Company received FDA marketing clearance for the
posterior portion of the titanium version for sale in the United States in the
first quarter of 1997.
Cost of goods sold was $3,854,000 or 45.0% of net sales for 1996
compared to $1,995,000 or 48.8% for 1995. This decrease as a percentage of sales
was primarily related to an inventory allowance established for the Company's
Puno/Winter/Byrd spinal implant systems in 1995. Cost of goods sold is affected
by the amount of international sales as a percentage of total sales since such
sales are sold at a lower margin to our international distributors. On sales of
spinal products in the United States, the Company pays a commission to it's
independent sales representatives, however, this commission is recorded as a
selling expense. The Company continually evaluates material and production costs
in an effort to reduce costs on all products.
Selling, general and administrative expenses decreased to 50.5% of
sales in 1996 from 78.8% in 1995. The decrease is primarily attributable to an
increase in sales. The Company intends to continue investing in selling and
marketing in order to attract quality independent product representatives and to
increase its presence in international markets.
Research and development expenses decreased by $172,000 and as a
percentage of sales to 8.0% in 1996 from 21.0% in 1995. The decrease was due to
investments in 1995 relating to the FDA approval of the SYNERGY(TM) Spinal
Implant System for marketing clearance. In 1996, the Company focused its
financial resources in expanding its distribution network in the United States
and internationally. In 1997, the Company intends to invest more resources in
product development. In March 1997, the Company entered a license agreement to
develop a spinal implant cage. The cage is expected to open new market segments
for the Company. The Company also is developing a cervical spinal system. The
Company continues to explore ways to expand its product lines either through
internal development or acquisition.
In 1996, interest expense increased to 5.1% of sales from 2.5% in
1995 as a result of a $5,250,000 convertible subordinated debenture offering in
May 1996.
The Company recorded a tax benefit of $788,000 in 1996 compared to a
tax benefit of $646,000 in 1995. The 1996 effective income tax rate is below
statutory tax rates primarily as a result of the reversal of the valuation
allowance used to reduce the tax benefit of research and development tax credits
and net operating losses. Management believes that the reversal of the
valuation allowance is appropriate due to the improved performance of the
Company during 1996 and expectations of future profitability. Research and
development credit carryforwards were $455,000 at December 31, 1996 and expire
at various times through December 31, 2011. Net operating loss carryforwards
were approximately $232,000 and expire in 2010.
<PAGE> 3
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1995
AND 1994
Net sales increased 42% to $4,091,000 in 1995 from $2,880,000 in 1994.
The increase was primarily attributable to the Company's receipt of the FDA
510(k) marketing clearance for it's SYNERGY(TM) Spinal System in the third
quarter of 1995.
Cost of goods sold increased as a percentage of sales to 48.8% in 1995
from 41.3% in 1994. The increase was caused by a higher percentage of lower
margin sales to international distributors in connection with the introduction
of the SYNERGY(TM) Spinal Implant System as well as an inventory allowance
established for the Company's Puno/Winter/Byrd spinal implant systems.
Selling, general and administrative expenses increased to $3,224,000 in
1995 from $2,483,000 in 1994. As a percentage of sales, selling, general and
administrative expenses decreased to 78.8% in 1995 from 86.2% in 1994. In 1995,
the Company commenced marketing of 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,
the expansion of the Company's distribution network, increased surgeon training,
and additional promotional and marketing expense. It is anticipated that, as a
percentage of sales, these expenses will continue to decrease if sales of spinal
implants increase as planned.
In 1994, research and development expenses decreased as a percentage of
sales to 21.0% in 1995 from 33.9% in 1994. However, in actual dollars, the
reduction was 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 1995, interest expense increased to 2.5% of sales from 0.1% in 1994
as a result of additional borrowings for working capital.
The Company recorded a tax benefit of $646,000 in 1995 compared to a
tax benefit of $596,000 in 1994. The 1995 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 credits
and net operating losses. Research and development tax credit carryforwards were
approximately $367,000 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.
LIQUIDITY AND CAPITAL RESOURCES
Working capital increased to $8,241,000 at December 31, 1996 from
$3,135,000 at December 31, 1995. The current ratio (ratio of current assets to
current liabilities) increased to 2.4 to 1.0 at December 31, 1996 from 1.6 to
1.0 at December 31, 1995.
Cash flows used in operating activities were $3,181,000 in 1996
compared to $3,402,000 in 1995. The reason for continued use of cash flows from
operating activities in 1996 relates to the increases in accounts receivable and
inventories. Accounts receivable increased 179% to $4,194,000 at December 31,
1996 from $1,505,000 at December 31, 1995 as a result of the increase in
revenues in 1996. Inventories increased 45% to $4,529,000 at December 31, 1996
from $3,134,000 at December 31, 1995 reflecting an increase in inventory to
support the higher level of sales of the SYNERGY(TM) Spinal Implant System.
Cash flows used in investing activities were $544,000 in 1996 compared
to $87,000 in 1995 primarily related to leasehold improvements and equipment in
the Company's office facilities.
Cash flows provided by financing activities were $3,325,000 in 1996
compared to $3,642,000 in 1995. The primary source of cash from financing
activities in 1996 was the proceeds from the convertible subordinated debenture
offering of $4,693,000, net of offering costs of $557,000.
<PAGE> 4
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, 1996, the Company had borrowed $1,495,000 of its
revolving line of credit. At that date, the Company was in compliance with the
financial covenants in the loan facility agreement. If the Company's SYNERGY(TM)
Spinal Implant System sales increase as planned, the Company recognizes the need
for capital to fully support the anticipated sales growth. Therefore, the
Company believes that the funds generated by the divestiture of the Recovery
Products business, its bank loan facility, working capital and funds anticipated
to be generated by operations will be sufficient to fund the Company's growth
plans for the foreseeable future.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The foregoing statements include forward-looking statements concerning
the Company's products, market, cost of goods sold, selling, general and
administrative expenses, and research and development. The Company's actual
experience may differ materially from that projected above. Factors that might
cause the Company's present expectations to not materialize or to change
include, but are not limited to, competition, government regulation, the
Company's limited sales and marketing experience, dependence on management and
the Company's medical advisory board, product liability litigation, product
concentration and obsolescence, dependence on suppliers, and other factors
discussed in the Company's prior filings with the Securities and Exchange
Commission, including the Annual Report on Form 10-K for the year ended
December 31, 1996.
<PAGE> 5
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Cross Medical Products, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of Cross Medical
Products, Inc. and Subsidiaries (formerly Danninger Medical Technology, Inc. and
Subsidiaries) as of December 31, 1996 and 1995, 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, 1996. 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 Cross Medical
Products, Inc. and Subsidiaries as of December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
/s/ Coopers & Lybrand, L.L.P.
Columbus, Ohio
March 12, 1997
<PAGE> 6
<TABLE>
<CAPTION>
CROSS MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996 AND 1995
(IN THOUSANDS)
1996 1995
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $216
Accounts receivable, net 4,194 $1,505
Inventories 4,529 3,134
Current assets of discontinued operations 4,437 3,367
Other current assets 126 143
Deferred income taxes 703 88
-----------------------
Total current assets 14,205 8,237
-----------------------
Property and equipment, net 784 138
Other assets:
Intangible assets, net 128 58
Non-current assets of discontinued operations 3,811 762
Other assets 662 133
Deferred income taxes 170
=======================
Total assets $19,590 $9,498
=======================
</TABLE>
2
<PAGE> 7
<TABLE>
CROSS MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996 AND 1995
(IN THOUSANDS, EXCEPT SHARE AMOUNTS )
<CAPTION>
1996 1995
<S> <C> <C>
Liabilities and Shareholders' Equity
Current liabilities:
Cash overdraft $167
Current portion, term debt $1,594 3,079
Current portion, capital lease obligations 65 2
Current liabilities of discontinued operations 2,355 1,175
Accounts payable 1,265 361
Accrued liabilities 685 318
-------------------------------
Total current liabilities 5,964 5,102
-------------------------------
Term debt, net of current maturities 5,318
---------------
Obligations under capital leases, net of current maturities 164 7
-------------------------------
Non-current liabilities of discontinued operations 2,452 867
-------------------------------
Deferred income taxes 44
---------------
Commitments and contingencies
Shareholders' equity:
Common stock, $.01 par value:
Authorized, 10,000,000 shares; issued and outstanding
4,936,265 and 4,707,490 shares for 1996
and 1995, respectively 49 47
Additional paid-in capital 4,362 3,367
Retained earnings 1,389 108
------------------------------
5,800 3,522
Less treasury stock, at cost, 17,402 shares (152)
------------------------------
Total shareholders' equity 5,648 3,522
------------------------------
Total liabilities and shareholders' equity $19,590 $9,498
==============================
See notes to the consolidated financial statements.
</TABLE>
3
<PAGE> 8
<TABLE>
CROSS MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Net sales $8,572 $4,091 $2,880
Cost of goods sold 3,854 1,995 1,189
---------------------------------------------------
Gross margin 4,718 2,096 1,691
---------------------------------------------------
Sales and marketing 2,863 1,954 1,417
General and administrative 1,467 1,270 1,066
Research and development 687 859 977
---------------------------------------------------
5,017 4,083 3,460
---------------------------------------------------
Operating loss (299) (1,987) (1,769)
Interest expense, net (439) (101) (3)
---------------------------------------------------
(439) (101) (3)
---------------------------------------------------
Loss from continuing operations before
income taxes (738) (2,088) (1,772)
---------------------------------------------------
Income tax benefit:
Federal:
Current (261) (549) (587)
Deferred (527) (97) (9)
---------------------------------------------------
(788) (646) (596)
---------------------------------------------------
Net income (loss) from continuing operations $ 50 $(1,442) $(1,176)
Net income from discontinued operations (net of
income taxes of $140, $366 and $532 for
1996, 1995 and 1994, respectively) 1,231 1,083 1,257
---------------- ----------------- ----------------
Net income (loss) $ 1,281 $(359) $81
================ ================= =================
Earnings per share:
Net income (loss) from continuing operations $ .01 $(.31) $(.25)
================ ================= =================
Net income from discontinued operations $.25 $.23 $.27
================ ================= =================
Net income (loss) $.26 $(.08) $.02
================ ================= =================
Weighted average shares outstanding
including common stock equivalents 5,004,894 4,661,332 4,695,418
================ ================= =================
See notes to the consolidated financial statements.
</TABLE>
4
<PAGE> 9
<TABLE>
CROSS MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS)
<CAPTION>
Number of Additional
Shares Common Paid-In Retained Treasury
Outstanding Stock Capital Earnings Stock Total
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1993 4,431 $44 $2,578 $386 $0 $3,008
Exercise of stock options and warrants 121 2 262 264
Tax benefit from stock
options exercised 37 37
Net income 81 81
-------------------------------------------------------------------------------
Balance, December 31, 1994 4,552 46 2,877 467 0 3,390
Exercise of stock options and warrants 156 1 402 403
Tax benefit from stock
options exercised 88 88
Net loss (359) (359)
-------------------------------------------------------------------------------
Balance, December 31, 1995 4,708 47 3,367 108 0 3,522
Exercise of stock options 145 1 383 (152) 232
Tax benefit from stock
options exercised 113 113
Issuance of common shares to
purchase business 83 1 499 500
Net income 1,281 1,281
-------------------------------------------------------------------------------
Balance, December 31, 1996 4,936 $49 $4,362 $1,389 $(152) $5,648
================================================================================
See notes to the consolidated financial statements.
</TABLE>
5
<PAGE> 10
<TABLE>
CROSS MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS)
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) from continuing operations $ 50 $(1,442) $(1,176)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 112 45 22
Reserves for doubtful accounts 84 17 60
Deferred income taxes (527) (97) (9)
Changes in assets and liabilities:
Accounts receivable (2,773) (101) (1,154)
Inventories (1,395) (1,298) (677)
Other assets (3) (48) (160)
Accounts payable and accrued liabilities 1,271 (478) 681
-----------------------------------------------------
Net cash used in continuing operations (3,181) (3,402) (2,413)
Net cash provided by discontinued operations 903 1,091 1,857
-----------------------------------------------------
Net cash used in operating activities (2,278) (2,311) (556)
-----------------------------------------------------
Cash flows from investing activities:
Expenditures for patents rights (70)
Purchases of property and equipment (474) (87) (73)
-----------------------------------------------------
Net cash used in continuing operations (544) (87) (73)
Net cash used in discontinued operations (1,106) (75) (17)
-----------------------------------------------------
Net cash used in investing activities (1,650) (162) (90)
-----------------------------------------------------
</TABLE>
6
<PAGE> 11
<TABLE>
<CAPTION>
CROSS MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS)
1996 1995 1994
Cash flows from financing activities:
<S> <C> <C>
Proceeds from term debt $1,595 $3,079
Proceeds from convertible subordinated
debenture offering 5,250
Repayment of term debt and capitalized lease obligations (3,028) (7) $(7)
Debt issue costs (557)
Proceeds from exercise of stock options 232 403 264
Cash overdraft (167) 167
-----------------------------------------------------
Net cash provided by continuing operations 3,325 3,642 257
Net cash provided by (used in) discontinued operations 819 (1,172) 345
-----------------------------------------------------
Net cash provided by financing activities 4,144 2,470 602
-----------------------------------------------------
Net increase (decrease) in cash 216 (3) (44)
Cash and cash equivalents beginning of year 0 3 47
=====================================================
Cash and cash equivalents end of year $216 $0 $3
=====================================================
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $356 $101 $3
=====================================================
Income taxes (refunds) $(79) $28 $97
=====================================================
See notes to the consolidated financial statements.
</TABLE>
7
<PAGE> 12
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS:
Prior to March 12, 1997, Cross Medical Products, Inc. and Subsidiaries (the
"Company"), formerly known as Danninger Medical Technology, Inc. and
Subsidiaries, was engaged in two distinct business segments of the orthopedic
device industry: 1) the design, manufacture, distribution and rental of
orthopedic rehabilitation products ("recovery products") and 2) the design,
manufacture and marketing of implants and instruments for the surgical treatment
of degenerative diseases, deformities and trauma of the spine ("spinal
implants"). On March 12, 1997, the Company sold substantially all of the assets
and liabilities related to the recovery products segment (See Note 10).
Effective March 21, 1997 Danninger Medical Technology, Inc. changed its name to
Cross Medical Products, Inc.
In 1992, the Company received the Food & Drug Administration (FDA) 510(k)
marketing clearance for general distribution of its Puno/Winter/Byrd (PWB)
Lumbosacral System. In 1995, the Company received FDA 510(k) marketing clearance
for general distribution of its SYNERGY(TM) Spinal Implant System. In January
1997, the Company received FDA 510(k) marketing clearance for general
distribution of its titanium SYNERGY(TM) Spinal Implant System.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The following is a summary of significant accounting policies followed in
preparation of these consolidated financial statements:
BASIS OF PRESENTATION:
The accompanying consolidated financial statements reflect the
reclassification of the recovery products segment as discontinued operations.
Assets and liabilities of the discontinued operations exclude assets and
liabilities to be retained by the Company. Income from discontinued operations
has been adjusted for the effect of the allocation of certain general corporate
overhead costs associated with continuing operations. Interest expense has been
allocated to continuing operations based upon specific identification of
indebtedness to be retained. All significant intercompany accounts and
transactions have been eliminated. Unless otherwise stated, the notes to the
financial statements disclose information related to continuing operations.
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 expenses during the reporting
period. The most significant of these estimates are related to the allowance for
doubtful accounts, inventory valuation reserves, amortization of intangible
assets, valuation allowance on deferred tax assets, depreciation of property and
equipment and accrued liabilities including product liability claims. 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 outstanding and common share equivalents. Common share
equivalents include options and warrants to purchase common shares that are
potentially dilutive using the treasury stock method.
CASH AND CASH EQUIVALENTS:
8
<PAGE> 13
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
INVENTORIES:
Inventories are valued at the lower of first-in, first-out cost or market
and consisted of the following (in thousands):
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Raw materials $125 $17
Finished goods 3,194 2,356
Consigned inventory 1,210 761
----- ---
$4,529 $3,134
====== ======
</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 estimated useful lives. Depreciation expense for the years ended December
31, 1996, 1995 and 1994 was $64,000, $44,000 and $22,000, 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.
Property and equipment are comprised of (in thousands):
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Machinery and equipment $906 $479
Office furniture and fixtures 94 4
Computer equipment 106 19
Leasehold improvements 131 25
----------------------------------
1,237 527
Less accumulated depreciation 453 389
----------------------------------
$784 $138
==================================
</TABLE>
INTANGIBLE ASSETS:
Intangible assets include patents which are amortized on a straight-line
basis over their estimated useful lives of seventeen years. Amortization begins
at the time the patent is granted. Management periodically evaluates the
recoverability of intangible assets based on estimated undiscounted future cash
flows. Amortization expense for the years ended December 31, 1996, 1995 and 1994
was $2,000, $1,000 and $0, respectively. Accumulated amortization of intangible
assets was $3,000 and $1,000 at December 31, 1996 and 1995, respectively.
REVENUE RECOGNITION:
Revenue from the sales of product is recognized upon shipment. Revenue from
the sales of consigned inventory is recorded upon receipt of written
acknowledgment from distributors that the surgical procedure has been completed.
Allowance for doubtful accounts was $95,000 and $79,000 at December 31,
1996 and 1995, respectively.
9
<PAGE> 14
INCOME TAXES:
Income tax provisions are determined using 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 rates. Valuation
allowances are provided against deferred tax assets based on estimated future
recoverability of the assets.
NEW ACCOUNTING STANDARDS:
In 1996, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." The adoption of this statement had no
effect on the Company's financial condition or results of operations as of and
for the year ended December 31, 1996.
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share," which establishes new standards for computing and
presenting earnings per share. This statement is effective for periods ending
after December 15, 1997. The Company has not yet determined the effect of
adopting this statement.
3. TERM DEBT:
<TABLE>
<CAPTION>
Term debt at December 31, 1996 and 1995 was:
1996 1995
(in thousands)
<S> <C> <C>
Revolving credit agreement $1,495 $3,000
Convertible Subordinated Debentures, due in 5,250
June 2003 plus interest at 8.5%, payable
semi-annually
Note payable, due in monthly installments of 88
$1,666 plus interest at prime plus .75%,
maturing in May 2001
Note payable, related party, payable on demand 79 79
with interest at 8%, payable annually
------------- --------------
6,912 3,079
Less current maturities 1,594 3,079
============= ==============
$5,318 $0
============= ==============
The prime rate was 8.25% at December 31, 1996.
</TABLE>
Under the terms of the revolving credit agreements, the Company may borrow
up to $3,000,000 at the bank's prime interest rate plus .5%. The weighted
average borrowing rate on short-term borrowings outstanding was 8.80% and 9.31%
at December 31, 1996 and 1995, respectively. The borrowings on the revolving
credit agreements are due on June 30, 1997. The agreements contain financial
covenants requiring the Company to maintain certain financial ratios and limits
on the Company's ability to pay dividends. Effective December 31, 1996, the bank
amended certain financial covenants in the loan facility agreement.
Substantially all of the Company's assets are pledged as collateral on the
revolving credit agreement and other term debt.
10
<PAGE> 15
Term debt includes $5,250,000 of Convertible Subordinated Debentures
("Debentures") at 8.5% interest, due June 1, 2003. The Debentures are
convertible prior to maturity or redemption into the Company's Common Stock at
$8.125 per share beginning July 1, 1999. The Company will be obligated to redeem
Debentures tendered by June 1, 1999 at their fair amount plus accrued interest.
Redemption may be accelerated in the event of a change in control of the Company
and in certain other circumstances as described in the bond indenture. The
Debentures contain certain covenants with respect to default of interest and
redemption of payments and defaults under other indebtedness of the Company in
excess of $1,000,000.
Other assets include approximately $557,000 of offering costs related to
issuance of the Debentures. Amortization of such costs of $46,000 for the year
ended December 31, 1996 are included in interest expense. Accumulated
amortization as of December 31, 1996 was $46,000.
During 1995, the Company obtained a loan from a split-dollar 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.
<TABLE>
<CAPTION>
Term debt maturities (in thousands):
<S> <C>
1997 $1,594
1998 20
1999 20
2000 20
2001 8
Thereafter 5,250
----------------------------------------
$6,912
</TABLE>
4. RENTAL AND LEASE AGREEMENTS:
The Company leases its offices and manufacturing facility under an operating
lease agreement which will expire on May 31, 2001. Total rent expense from
continuing operations was $103,000, $42,000 and $34,000 in 1996, 1995, and 1994,
respectively.
The Company leases certain office 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 from continuing operations under
capital leases is included in the accompanying consolidated balance sheet as
property and equipment with an aggregate cost of $272,000 and $32,000, and
accumulated depreciation of $37,000 and $23,000 at December 31, 1996 and 1995,
respectively. New capital lease obligations in 1996 were $236,000.
<TABLE>
<CAPTION>
Future minimum payments under capital and operating leases are as follows
(in thousands):
Capital
Year Ending December 31, Leases Operating
-------------------------------------------------------------------------------
<S> <C> <C>
1997 $85 $267
1998 85 270
1999 70 273
2000 20 276
2001 10 115
---------------------------
Total minimum lease payments 270 $1,201
==========
Less amount representing interest 41
--------------
229
Less current maturities 65
--------------
Long-term obligations
under capital leases $164
=============
</TABLE>
11
<PAGE> 16
<TABLE>
<CAPTION>
5. FEDERAL INCOME TAX:
The components of the net deferred tax asset are (in thousands):
Temporary differences: 1996 1995
<S> <C> <C>
Deferred tax assets
Accounts receivable $32 $27
Inventories 103 123
Reserve for product liability 34
Net operating loss 79 295
Tax credit carryforwards 455 367
----------------------------
Total deferred tax asset 703 812
Less valuation allowance (547)
Deferred tax liability
Property and equipment (44) (7)
----------------------------
Net deferred tax asset $659 $258
============================
</TABLE>
<TABLE>
<CAPTION>
The current and non-current components of the net deferred tax asset
recognized in the balance sheet are (in thousands):
----------------------------------------------------------------------
1996 1995
----------------------------------------------------------------------
<S> <C> <C>
Net current asset $703 $88
Net non-current asset 170
Net non-current liability 44
------------- --------------
Net asset $659 $258
============= ==============
</TABLE>
The Company previously established a valuation allowance for the future
recoverability of deferred tax assets. The allowance was 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.
During the fourth Quarter of 1996, the Company reversed the previously
established valuation allowance based on the improved performance of the spinal
implant segment during 1996 and expectations of future profitability. Research
and development credit carryforwards were $455,000 at December 31, 1996 and
expires as follows: $95,000 in 2006, $63,000 in 2007, $92,000 in 2008, $82,000
in 2009 and $35,000 in 2010, and $88,000 in 2011. Net operating loss tax
carryforwards of approximately $232,000 expire in 2010.
12
<PAGE> 17
<TABLE>
<CAPTION>
The following is a reconciliation of income tax expense to the amount
computed at the federal statutory rate (in thousands):
----------------------------------------------------------------------------------
1996 1995 1994
----------------------------------------------------------------------------------
<S> <C> <C> <C>
Income tax benefit
at statutory rates $(251) $(710) $(602)
Increase (reduction) in taxes resulting from:
Research and development
tax credits (88) (35) (82)
Valuation allowance (459) 101 91
Other permanent differences 10 (2) (3)
---------------------------------------
Total income tax benefit $(788) $(646) $(596)
=======================================
</TABLE>
Tax benefits credited to equity for stock options exercised were $113,000,
$88,000 and $37,000 for the years ending December 31, 1996, 1995 and 1994,
respectively.
6. 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.
At December 31, 1996, the Company has three stock-based compensation plans,
which are described below.
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 pro rata 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.
<TABLE>
<CAPTION>
Changes in stock options are:
------------------------------------------------------------------------------------------------
Number of Weighted Average
Shares Option Price
------------------------------------------------------------------------------------------------
1994
<S> <C> <C>
Outstanding at January 1, 1994 229,600 $2.29
Granted 82,500 $1.94
Exercised 14,640 $1.82
Canceled 1,960 $1.11
-------------------
Outstanding at December 31, 1994 295,500 $2.22
===================
Options exercisable at December 31, 1994 122,200
1995
Outstanding at January 1, 1995 295,500 $2.22
Granted 0
Exercised 20,100 $1.73
Canceled 6,400 $2.16
-------------------
Outstanding at December 31, 1995 269,000 $2.26
===================
Options exercisable at December 31, 1995 160,000
1996
Outstanding at January 1, 1996 269,000 $2.26
Granted 0
Exercised 124,441 $2.42
Canceled 4,000 $2.38
-------------------
Outstanding at December 31, 1996 140,559 $2.11
===================
Options exercisable at December 31, 1996 88,459
</TABLE>
13
<PAGE> 18
As of December 31, 1996, the options outstanding under the Incentive Plan
have exercise prices between $1.75 and $2.9375 and a weighted-average remaining
contractual life of 2.2 years. The remaining options become exercisable in 1997
- - 24,700 shares; 1998 - 13,700 shares; 1999 - 13,700 shares. Certain options
exercised in 1996 resulted from the exchange of 65,841 shares held by the
participants based on the then current market value of $152,268 for 17,402
common shares under option.
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 pro rata 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.
<TABLE>
<CAPTION>
Changes in stock options are:
-------------------------------------------------------------------------------------------------
Number of Weighted Average
Shares Option Price
-------------------------------------------------------------------------------------------------
<S> <C> <C>
1994
Outstanding at January 1, 1994 160,000 $2.23
Granted 5,000 $1.94
Exercised 56,000 $1.77
Canceled 11,500 $2.34
--------------------
Outstanding at December 31, 1994 97,500 $2.47
====================
Options exercisable at December 31, 1994 87,500
1995
Outstanding at January 1, 1995 97,500 $2.47
Granted 0
Exercised 26,000 $2.25
Canceled 0
--------------------
Outstanding at December 31, 1995 71,500 $2.42
====================
Options exercisable at December 31, 1995 71,500
1996
Outstanding at January 1, 1996 71,500 $2.42
Granted 0
Exercised 14,000 $2.37
Canceled 0
--------------------
Outstanding at December 31, 1996 57,500 $2.59
====================
Options exercisable at December 31, 1996 57,500
</TABLE>
14
<PAGE> 19
As of December 31, 1996, the options outstanding under the Nonstatutory
Plan have exercise prices between $1.94 and $2.94 and a weighted-average
remaining contractual life of 1.5 years.
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 by 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.
<TABLE>
<CAPTION>
Changes in stock options are:
-------------------------------------------------------------------------------------------------
Number of Weighted Average
Shares Option Price
-------------------------------------------------------------------------------------------------
<S> <C> <C>
1994
Granted 45,000 $3.50
Exercised 0
Canceled 0
--------------------
Outstanding at December 31, 1994 45,000 $3.50
====================
Options exercisable at December 31, 1994 0
1995
Outstanding at January 1, 1995 45,000 $3.50
Granted 150,000 $5.64
Exercised 10,000 $3.50
Canceled 9,000 $4.25
--------------------
Outstanding at December 31, 1995 176,000 $5.28
====================
Options exercisable at December 31, 1995 45,000
Weighted-average fair value of options
granted during 1995 $1.78
1996
Outstanding at January 1, 1996 176,000 $5.28
Granted 164,000 $6.63
Exercised 7,000 $4.25
Canceled 14,000 $5.10
--------------------
Outstanding at December 31, 1996 319,000 $6.01
====================
Options exercisable at December 31, 1996 142,350
Weighted-average fair value of options
granted during 1996 $2.10
</TABLE>
As of December 31, 1996, the options outstanding under the 1994 Plan
have exercise prices between $3.50 and $8.875 and a weighted-average
remaining contractual life of 4.7 years. The remaining options become
exercisable in 1997 - 63,850 shares; 1998 - 31,600 shares; 1999 -
31,600 shares; 2000 - 31,600 shares; 2001 - 18,000 shares.
The Company applies APB Opinion 25 and related Interpretations in
accounting for its plans. There has been no compensation cost charged
against income for its stock option plans in 1994, 1995, and 1996. Had
compensation cost for the Company's three stock option plans been
determined based on the fair value at the grant dates for the awards
under those plans consistent with the method of SFAS No. 123,
"Accounting for Stock-Based Compensation", the Company's net income and
earnings per share would have been reduced to the pro forma amounts
indicated below (in thousands):
15
<PAGE> 20
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Net income (loss) As reported $1,281 $(359)
Pro forma $1,085 $(450)
Earnings per share As reported $0.26 $(0.08)
Pro forma $0.22 $(0.10)
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1996 and 1995, respectively: risk-free interest
rates of 7% expected life of 5 years and expected volatility of 57%.
7. EMPLOYEE BENEFIT PLAN:
In January 1992, the Company adopted a 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
$7,000, 6,000 and $4,000 during 1996, 1995 and 1994, respectively.
8. FOURTH QUARTER ADJUSTMENTS:
During the fourth quarter of 1996, the Company increased the reserve for product
liabilities by $70,000 and recognized income of $459,000 from the reversal of a
valuation allowance provided against deferred tax assets. 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 to be slow moving. Subsequent to the previous
decision to provide a valuation allowance for this inventory, sales continued to
support a lower valuation allowance.
9. ACQUISITION OF BUSINESS:
During 1995, the Company acquired TROM, Inc., a company that rents and sells
durable medical equipment to orthopedic patients. The acquisition has been
accounted for on the purchase method. The purchase included assets of $95,000
and the assumption of liabilities of $196,000. Non-current assets of
discontinued operations in the accompanying consolidated balance sheet includes
$101,000 of goodwill which is being amortized over five years.
In September 1996, the Company acquired all of the outstanding stock of
Surgical & Orthopedic Specialties, Inc. (SOS) for approximately $3.0 million.
The acquisition has been accounted for on the purchase method. The consideration
was comprised of $1.0 million cash, $0.5 million in common stock (83,334
shares), $1.5 million in a seller financed note payable. SOS is engaged in the
rental of recovery products. Non-current assets of discontinued operations in
the accompanying consolidated balance sheet includes approximately $2.5 million
of goodwill resulting from this transaction which is being amortized over 20
years. The purchase price has been allocated to the assets acquired and
liabilities assumed based on their estimated fair values at the date of
acquisition. The results of operations of SOS have been included in the
Consolidated Statements of Operations from the acquisition date and classified
as discontinued operations.
Business acquired (in thousands):
Fair value of assets $3,767
Fair value of liabilities (818)
Common stock issued (500)
Acquisition indebtedness (1,500)
-------
Net cash paid $949
=======
16
<PAGE> 21
10. SALE OF BUSINESS:
On March 12, 1997, the Company entered into an agreement to sell the recovery
products segment for approximately $8.6 million in cash and the assumption of
approximately $5 million of debt and other liabilities. The buyer also acquired
30,000 restricted shares of the Company's common stock for $243,750. The
purchase price is subject to adjustment if the net tangible book value is
outside a range as defined in the agreement. In connection with the sale, the
Company agreed to retain cash, leasehold improvement, other assets and certain
related accrued liabilities and leases of the discontinued segment.
11. COMMITMENTS AND CONTINGENCIES:
The range of estimated product liability exposures was $100,000 to $230,000. The
Company has provided a reserve for these exposures of $100,000.
In 1996, the Company maintained a claims made product liability insurance
policy with $50,000 per occurrence and $250,000 aggregate retention limits.
Beyond these retention limits, the policy covers aggregate insured claims made
during each policy year up to $5,000,000. Effective January 1, 1997, the Company
revised its product liability insurance policy with the recovery products
business having a $75,000 per occurrence and $250,000 aggregate retention limits
and the spinal implant business having a $100,000 per occurrence and $500,000
aggregate retention limits. The new policy covers aggregate insured claims made
during each policy year up to $5,000,000. For spinal implant claims incurred
before January 1, 1997, and filed after such date, the Company's aggregate
insured claims limit equals the outstanding balance as of December 31, 1996. For
spinal implant claims incurred after December 31, 1996, the new policy limits
would apply.
The Company and other spinal implant manufacturers have been named as
defendants in various class action product liability lawsuits alleging that the
plaintiffs were injured by spinal implants supplied by the Company and others.
All such lawsuits were consolidated for pretrial proceedings in the Federal
District Court for the Eastern District of Pennsylvania, and on February 22,
1995, the plaintiffs were denied class certification. In response to the denial
of class certification, a large number of additional individual lawsuits have
been filed alleging, in addition to damages from spinal implants, a conspiracy
among manufacturers, physicians and other spinal implant industry members.
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
17
<PAGE> 22
cost of defending all lawsuits or the payment of any amounts that may be paid in
satisfaction of any settlements or judgments. Further, there can be no assurance
that the Company will continue to be able to obtain sufficient amounts of
product liability insurance coverage at commercially reasonable premiums.
In addition to the above, in the ordinary course of business the Company
has been named as a defendant in various other legal proceedings. These actions,
when finally concluded, will not, in the opinion of management, 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 annual
operating results will not be materially adversely affected by the final
resolution of these matters.
Financial instruments that potentially subject the Company to concentration
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.
The Company has royalty agreements with the inventors of the spinal implant
systems. The Company is obligated to pay the inventors 6.5% (and increasing 1/2%
annually up to 8%) of the net sales of these spinal implant products.
International sales were $4,200,000, $1,400,000 and $1,100,000,
in 1996, 1995 and 1994, respectively. Sales to individual customers
constituting more than 10% of net sales were $1,837,000, $652,000 and $716,000
in 1996, 1995 and 1994, respectively. Accounts receivable include amounts from
two customers of approximately $1,500,000 million at December 31, 1996.
18
<PAGE> 23
SHAREHOLDERS INFORMATION
STOCK PRICE AND DIVIDEND INFORMATION:
The Company's Common Stock has been traded in the over-the-counter market since
July, 1987, and been listed on the National Association of Securities Dealers
Automated Quotation System since October, 1988. The following table sets forth,
for the periods indicated the high and low bid prices for the Company's Common
Stock in the over-the-counter market as reported by the NASDAQ System. The
prices shown represent quotations between dealers, without adjustment for retail
markups, markdowns or commissions, and may not represent actual transactions.
Effective March 21, 1997 the Company changed its name to Cross Medical
Products, Inc. and is currently trading under the NASDAQ symbol "CRSS".
There has been no cash dividend declared or paid on the Company's
outstanding Common Stock during the three most recent fiscal years. The Company
presently intends to retain substantially all of its earnings to finance the
growth and development of its business and, therefore, does not expect to pay
any cash dividends in the foreseeable future.
As of March 27, 1997, the following broker-dealer firms made a market in
Cross Medical Products, Inc's Common Stock.
Charles M. Blarr & Co., Inc.
Herzog, Heine, Geduld, Inc.
Mayer & Schweitzer, Inc.
McDonald & Company Securities, Inc.
NatCity Investment Inc.
The Ohio Company
Paine Webber, Incorporated
Rodman & Renshaw, Inc.
Sherwood Securities
Wedbush Morgan Securities, Inc.
<TABLE>
<CAPTION>
High Low
-----------------------------------------------------------------------------
1995
<S> <C> <C>
First Quarter $4.375 $3.875
Second Quarter $10.00 $4.00
Third Quarter $10.50 $7.125
Fourth Quarter $7.875 $5.375
-----------------------------------------------------------------------------
1996
First Quarter $8.00 $5.75
Second Quarter $9.00 $6.25
Third Quarter $7.50 $5.25
Fourth Quarter $9.00 $6.25
-----------------------------------------------------------------------------
</TABLE>
19
<PAGE> 1
EXHIBIT 23
<PAGE> 2
Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
Cross Medical Products, Inc. and Subsidiaries (formerly Danninger Medical
Technology, Inc. and Subsidiaries) on Form S-8 (file numbers 33-26211, 33-39336,
33-61995 and 33-91610) of our reports dated March 12, 1997, on our audits of the
consolidated financial statements and financial statement schedule of Cross
Medical Products, Inc. and Subsidiaries as of December 31, 1996 and 1995, and
for the years ended December 31, 1996, 1995 and 1994, which reports are included
in this Annual Report on Form 10-K.
/s/ COOPERS & LYBRAND L.L.P.
Columbus, Ohio
March 27, 1997
<PAGE> 1
EXHIBIT 24
<PAGE> 2
POWER OF ATTORNEY
Each of the undersigned directors and officers of Cross Medical Products,
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 Annual
Report on Form 10-K (the "Annual Report") for the fiscal year ended December 31,
1996, and likewise to sign and file any amendments, including post-effective
amendments, to the Annual Report, 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 20, 1997.
DIRECTORS/OFFICERS:
SIGNATURE TITLE
- --------- -----
/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.
/s/ Herbert J. Kahn Director
- ----------------------------
Herbert J. Kahn
<PAGE> 3
/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> <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-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 216
<SECURITIES> 0
<RECEIVABLES> 4,289
<ALLOWANCES> 95
<INVENTORY> 4,529
<CURRENT-ASSETS> 14,205
<PP&E> 1,237
<DEPRECIATION> 453
<TOTAL-ASSETS> 19,590
<CURRENT-LIABILITIES> 5,964
<BONDS> 5,417
0
0
<COMMON> 49
<OTHER-SE> 5,599
<TOTAL-LIABILITY-AND-EQUITY> 19,590
<SALES> 8,572
<TOTAL-REVENUES> 8,572
<CGS> 3,900
<TOTAL-COSTS> 3,900
<OTHER-EXPENSES> 5,017
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 393
<INCOME-PRETAX> (738)
<INCOME-TAX> (788)
<INCOME-CONTINUING> 50
<DISCONTINUED> 1,231
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,281
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
</TABLE>
