SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ending September 30, 1997
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 31-1177614
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5160 Blazer Memorial Parkway
Dublin, Ohio 43017-1339
(Address of principal executive offices)
(614) 718-0530
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes / X / No / /
The number of shares outstanding of Registrant's Common Stock, par value $.01,
on October 31, 1997 was 5,219,269.
CROSS MEDICAL PRODUCTS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
September 30,
1997 December 31,
(Unaudited) 1996
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,647 $ 216
Investments 1,500
Accounts receivable, net 4,303 4,194
Inventories 8,801 4,529
Current assets of discontinued operations 4,437
Other current assets 395 126
Deferred income taxes 475 703
------------ ------------
Total current assets 18,121 14,205
Property and equipment, net 968 784
Other assets:
Intangible assets, net 172 128
Non-current assets of discontinued operations 3,811
Other assets 641 662
------------ ------------
Total assets $ 19,902 $ 19,590
============ ============
</TABLE>
CROSS MEDICAL PRODUCTS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
<TABLE>
September 30,
1997 December 31,
(Unaudited) 1996
------------ ------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion, term debt $ 79 $ 1,594
Current portion, capital lease obligations 66 65
Current liabilities of discontinued operations 2,355
Accounts payable 1,285 1,265
Accrued liabilities 827 620
Accrued disposition costs 496
Accrued income taxes 1,204 65
------------ ------------
Total current liabilities 3,957 5,964
------------ ------------
Term debt, net of current maturities 5,121 5,318
Obligations under capital leases, net of current maturities 131 164
Non-current liabilities of discontinued operations 2,452
Deferred income taxes 52 44
Commitments and contingencies
Shareholders' equity:
Common stock, $.01 par value:
Authorized 10,000,000 shares; issued and
outstanding 5,219,269 and 4,936,265 shares for
1997 and 1996, respectively 52 49
Additional paid-in capital 6,736 4,362
Retained earnings 3,853 1,389
------------ ------------
10,641 5,800
Less treasury stock, at cost, 17,402 shares (152)
------------ ------------
Total shareholders' equity 10,641 5,648
------------ ------------
Total liabilities and shareholders' equity $ 19,902 $ 19,590
============ ============
</TABLE>
See notes to the consolidated financial statements
CROSS MEDICAL PRODUCTS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTH PERIODS ENDING SEPTEMBER 30, 1997 AND 1996
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
Three Three Nine Nine
Months Ended Months Ended Months Ended Months Ended
September 30, September 30, September 30, September 30,
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 3,690 $ 2,325 $ 9,497 $ 5,615
Cost of goods sold 1,769 994 3,747 2,443
------------ ------------ ------------ ------------
Gross margin 1,921 1,331 5,750 3,172
------------ ------------ ------------ ------------
Selling, general and administrative 1,581 1,291 4,824 3,122
Research and development 338 218 802 487
------------ ------------ ------------ ------------
1,919 1,509 5,626 3,609
------------ ------------ ------------ ------------
Operating income (loss) 2 (178) 124 (437)
Interest expense, net (75) (108) (326) (262)
------------ ------------ ------------ ------------
Loss from continuing operations before income taxes (73) (286) (202) (699)
Income tax benefit (30) (102) (68) (292)
------------ ------------ ------------ ------------
Net loss from continuing operations (43) (184) (134) (407)
------------ ------------ ------------ ------------
Net income from discontinued operations (net of income taxes
of $156, $181 and $438, respectively) 375 301 881
Gain on sale of discontinued operations (net of income
tax of $1,529) 2,297
------------ ------------ ------------ ------------
Net income from discontinued operations 375 2,598 881
------------ ------------ ------------ ------------
Net income (loss) $ (43) $ 191 $ 2,464 $ 474
============ ============ ============ ============
Primary earnings per share (A):
Net loss from continuing operations $ (.01) $ (.04) $ (.03) $ (.09)
============ ============ ============ ============
Net income from discontinued operations $ .08 $ .50 $ .18
============ ============ ============ ============
Net income (loss) $ (.01) $ .04 $ .47 $ .09
============ ============ ============ ============
Weighted average shares outstanding used in primary
earnings per share calculations 5,080,762 5,013,661 5,218,788 5,008,837
============ ============ ============ ============
(A) Due to a net loss from continuing operations for the period, the results from the computations are antidilutive.
Accordingly, the amounts are not presented.
</TABLE>
See notes to the consolidated financial statements
CROSS MEDICAL PRODUCTS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTH PERIODS ENDING SEPTEMBER 30, 1997 AND 1996
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
1997 1996
------------ ------------
<S> <C> <C>
Net cash used in continuing operations $ (4,508) $ (2,752)
Net cash provided by discontinued operations 175 1,616
------------ ------------
Net cash used in operating activities (4,333) (1,136)
Cash flows from investing activities:
Expenditures for patent rights and license (48) (62)
Purchase of investment (1,500)
Purchases of property and equipment (323) (288)
------------ ------------
Net cash used in continuing operations (1,871) (350)
Net cash used in discontinued operations (91) (1,041)
Cash received from sale of Recovery Products segment 8,177
------------ ------------
Net cash provided by (used in) investing activities 6,215 (1,391)
Cash flows from financing activities:
Repayment of term debt and capitalized lease obligations (1,654) (3,017)
Proceeds from convertible subordinated debenture offering 5,250
Proceeds from term debt 100
Debt issue costs (542)
Proceeds from exercise of stock options 158 207
Proceeds from the sale of common stock 2,242
Cash overdraft (167)
------------ ------------
Net cash provided by continuing operations 746 1,831
Net cash provided by (used in) discontinued operations (197) 937
------------ ------------
Net cash provided by financing activities 549 2,768
------------ ------------
Net increase in cash 2,431 241
Cash and cash equivalents beginning of period 216 0
------------ ------------
Cash and cash equivalents end of period $ 2,647 $ 241
============ ============
Supplemental disclosures of non-cash investing and
financing activities:
Debt assumed by buyer of discontinued operations $ 3,363
============
</TABLE>
See notes to the consolidated financial statements
CROSS MEDICAL PRODUCTS, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Management's Statement
In the opinion of management the accompanying unaudited financial statements
contain all adjustments (all of which are normal and recurring in nature)
necessary to present fairly the financial position of Cross Medical Products,
Inc. and Subsidiary at September 30, 1997, and the results of operations and
cash flows for the three and nine month periods ending September 30, 1997 and
1996. The notes to the Consolidated Financial Statements which are contained
in the 1996 Annual Report to Shareholders should be read in conjunction with
these Consolidated Financial Statements.
2. Restatement
In February 1998, the Company restated its earnings for the quarter ended
March 31, 1997 to expense payments made during that period for an extension of
the claims reporting period for certain product liability insurance.
Accordingly the consolidated balance sheets at September 30, 1997 have been
adjusted to reflect the restatement.
3. Sale of Recovery Products Segment
On March 12, 1997, the Company entered into an agreement to sell the Recovery
Products segment for approximately $8,200,000 in cash and the assumption of
approximately $5,000,000 of debt and other liabilities. The buyer also
acquired 30,000 shares of the Company's common stock for $240,000. The
purchase price was 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 improvements, other assets and certain
related liabilities and leases of the discontinued segment.
4. Investments
Investments include a 270 day certificate of deposit with a maturity of January
27, 1998 bearing interest of 5.65%.
5. Inventories
Inventories are valued at the lower of first-in, first-out cost or market and
consisted of the following (in thousands):
<TABLE>
September 30, December 31,
1997 1996
------------ ------------
<S> <C> <C>
Raw materials $ 148 $ 125
Finished goods 6,110 3,194
Consigned inventory 2,543 1,210
------------ ------------
$8,801 $4,529
============ ============
</TABLE>
6. Income Taxes
The Company provides for federal, state, and local income taxes in interim
periods using estimated temporary differences for the annual period.
7. Term Debt
Term debt included $5,152,000 of Convertible Subordinated Debentures
("Debentures") at 8.5% 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 or June 1 of any succeeding year at their fair amount
plus accrued interest, subject to an annual limitation of $25,000 per holder
and an aggregate of $262,500. Redemption may be accelerated in the event of a
change of 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 payments and defaults under
other indebtedness of the Company in excess of $1,000,000. Interest expense
for the three and six months ended September 30, 1997 and 1996 was $140,000,
$115,000 and $446,000, $270,000, respectively. During 1997, $129,000 of
Debentures were converted to 15,875 shares of common stock.
8. Earnings Per Share Calculations
Primary earnings (loss) per share amounts are computed by dividing net income
(loss) by the average number of common shares and dilutive common share
equivalents outstanding during the period. Fully diluted earnings (loss) per
share assumes the conversion of the Debentures into common shares as of the
beginning of the period. Accordingly, income (loss) used in the calculation
of fully diluted earnings (loss) per share is adjusted to remove the interest
expense, net of tax, related to the Debentures for the period.
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per
Share". SFAS No. 128 establishes standards for computing and presenting
earnings per share "EPS" and supersedes APB Opinion No. 15 "Earnings Per Share"
("Opinion 15"). SFAS No. 128 replaces the presentation of primary EPS with a
presentation of basic EPS which excludes dilution and is computed by dividing
income available to common shareholders by the weighted average number of
common shares outstanding during the period. This statement also requires
dual presentation of basic EPS and diluted EPS on the face of the income
statement for all periods presented. Diluted EPS is computed similarly to
fully diluted EPS pursuant to Opinion 15, with some modifications.
SFAS No. 128 is effective for financial statements issued for periods ending
after December 15, 1997, including interim periods. Early adoption is not
permitted and the statement requires restatement of all prior EPS data
presented after the effective date.
The Company will adopt SFAS No. 128 effective with its 1997 year end. Pro
forma earnings per share data calculated in accordance with this pronouncement
for the three and nine months ended September 30, 1997 and 1996 would not
result in a material difference in the amounts previously presented.
9. New Accounting Standards
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income"
and SFAS No. 131, "Disclosure About Segments of an Enterprise and Related
Information", each standard is effective for financial statements for fiscal
years beginning after December 15, 1997.
SFAS No. 130 establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses). SFAS No.
130 requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. Comprehensive income is defined as the change in equity
of a business enterprise during a period from transactions and other events and
circumstances from non-owners sources; it includes all changes in equity
during a period except those resulting from investments by owners and
distributions to owners.
SFAS No. 131 establishes standards for the way that public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. This statement
defines business segments as components of an enterprise about which separate
financial information is available and used internally for evaluating segment
performance and decision making on resource allocations. SFAS No. 131
requires reporting a measure of segment profit or loss, certain specific
revenue and expense items, and segment assets; and other reporting about
geographic and customer matters.
The Company is evaluating each of these recent pronouncements and has not yet
determined the ultimate impact of these pronouncements on its future financial
statements.
10. Commitments and Contingency
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 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 and that these individual lawsuits
are otherwise without merit. An estimate of the amount of loss cannot be made
as the Company does not have sufficient information on which to base an
estimate. All pending cases are being defended by the Company's insurance
carrier, in some cases under a reservation of rights. There can be no
assurance, however, that the $5,000,000 per annum limit of the Company's
coverage will be sufficient to cover the cost of defending all lawsuits or the
payment of any amounts that may be paid in satisfaction of any settlements or
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.
CROSS MEDICAL PRODUCTS, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table shows Cross Medical Product's operating results as a
percent of revenues for the periods indicated for certain items reflected in
the statement of operations.
<TABLE>
Percent Percent Percent Percent
of of of of
Sales Sales Sales Sales
for for for for
three three nine nine
months months months months
ending ending ending ending
September September September September
30, 30, 30, 30,
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 47.9% 42.8% 39.5% 43.5%
Gross margin 52.1% 57.2% 60.5% 56.5%
Selling, general and administrative 42.8% 55.5% 50.8% 55.6%
Research and development 9.2% 9.4% 8.4% 8.7%
Operating income (loss) 0.1% (7.7)% 1.3% (7.8)%
Interest expense, net (2.1)% (4.6)% (3.4)% (4.7)%
Income (loss) from continuing operations before income taxes (2.0)% (12.3)% (2.1)% (12.5)%
Income tax expense (benefit) (0.8)% (4.4)% (0.7)% (5.3)%
Net income (loss) from continuing operations (1.2)% (7.9)% (1.4)% (7.2)%
</TABLE>
CROSS MEDICAL PRODUCTS, INC. AND SUBSIDIARY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
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.
The Company continues to develop its strategy of focusing on increasing market
penetration with its SYNERGY-TM- Spinal Implant System as it continues to expand
its distribution network in the United States and internationally. The
Company also continues to assess and develop new products to add to its
existing spinal implant product line.
CROSS MEDICAL PRODUCTS, INC. AND SUBSIDIARY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION AS OF SEPTEMBER 30, 1997
Working capital increased to $14,164,000 at September 30, 1997 from $8,241,000
at December 31, 1996. The current ratio (ratio of current assets to current
liabilities) increased to 4.6 to 1.0 at September 30, 1997 from 2.4 to 1.0 at
December 31, 1996. The increase in working capital is principally
attributable to the net cash received from the sale of the Recovery Products
segment of approximately $6,010,000 after paying off the Company's line of
credit of $2,190,000, cash received from the sale of common stock to the buyer
of the Recovery Products segment of $240,000, cash received from the sale of
common stock to its Japanese distributor of $2,000,000, and cash from
operations until the sale of the Recovery Products segment on March 12, 1997
of $175,000. Accounts receivable increased by $109,000, inventories increased
by $4,272,000 and accounts payable increased by $20,000. The marginal
increase in accounts receivable is attributable to a significant increase in
the third quarter sales and offset by an expanded collection effort put into
effect in 1997. The increase in the inventory and accounts payable is
primarily due to the need to build inventory, including consigned inventory,
to support the growing demand for titanium and steel SYNERGY-TM- Spinal
Implant Systems.
The nature of the Company's business subjects the Company to product liability
and related claims from time to time. The Company believes that it has
adequate insurance for its business, but there can be no assurance that the
Company's liquidity will not be materially adversely affected by the final
resolution of pending cases or future claims.
The Company believes that the funds generated by the divestiture of the
Recovery Products segment, funds received from the sale of common stock, its
bank loan facility, working capital, and funds anticipated to be generated by
operations will be sufficient to fund the Company's growth plans through at
least the end of fiscal year 1998.
CROSS MEDICAL PRODUCTS, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AS
COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 1996
Net sales increased 59% for the three months ended September 30, 1997 to
$3,690,000 from $2,325,000 for the three months ended September 30, 1996.
The 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. The Company
received FDA marketing clearance for the posterior portion of the titanium
version of the SYNERGY-TM- Spinal Implant System for sale in the United States
in January 1997.
Cost of goods sold was $1,769,000 or 47.9% of net sales for the three months
ended September 30, 1997 compared to $994,000 or 42.8% for the three months
ended September 30, 1996. Cost of goods sold as a percentage of sales was
negatively impacted in the third quarter by (i) the increase in the sale of
instrumentation sets to new sales representatives at cost, and (ii) the
increase in international distributor sales which are at a lower gross profit
margin than domestic sales which are made through commissioned sales
representatives. Commissions paid to domestic sales distributors are treated
as selling expenses and not as part of cost of goods sold. Commissions are
not paid to international distributors.
Selling, general and administrative expenses decreased to 42.8% from 55.5% as
a percentage of net sales, and increased to $1,581,000 from $1,291,000, for
the three months ended September 30, 1997 and 1996, respectively. Except for
commissions, most of the selling, general and administrative expenses are
relatively fixed expenses and as net sales increase, these expenses as a
percentage of net sales decrease. The Company intends to continue to invest
in the development of additional markets domestically and internationally,
which expenditures will tend to keep selling, general and administrative
expenses at a relatively high percentage of sales until sales increase.
Research and development expenses decreased to 9.2% from 9.4% as a percentage
of net sales, and increased to $338,000 from $218,000, for the three months
ended September 30, 1997 and 1996, respectively. In March 1997, the Company
entered into a license agreement to develop a spinal cage, the development of
which is ongoing. The Company is also developing a cervical spinal system.
The Company continues to explore ways to expand its product lines either
through internal development or acquisition.
These factors resulted in an overall increase in operating income from
continuing operations to $2,000 or 0.1% of net sales for the three months
ended September 30, 1997, compared to a loss from continuing operations of
$(178,000) or (7.7%) of net sales for the three months ended September 30,
1996.
Interest expense, net, decreased to $75,000 or 2.0% of net sales from $108,000
or 4.6% of net sales for the three months ended September 30, 1997 and 1996,
respectively. The decrease was primarily attributable to the interest income
earned on the certificate of deposit and the money market funds.
The Company recorded a tax benefit of $30,000 and $102,000 for the three
months ended September 30, 1997 and 1996, respectively, as the Company had a
tax loss from continuing operations in the third quarter of 1997 and 1996.
Net loss from continuing operations was $(43,000) and $(184,000) for the three
months ended September 30, 1997 and 1996, respectively, and loss per share from
continuing operations decreased to $(.01) from $(.04) for the same periods.
CROSS MEDICAL PRODUCTS, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AS COMPARED
TO THE NINE MONTHS ENDED SEPTEMBER 30, 1996
Net sales increased 69% for the nine months ended September 30, 1997 to
$9,497,000 from $5,615,000 for the nine months ended September 30, 1996. The
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. The Company
received FDA marketing clearance for the posterior portion of the titanium
version of the SYNERGY-TM- Spinal Implant System for sale in the United States
in January 1997.
Cost of goods sold was $3,747,000 or 39.5% of net sales for the nine months
ended September 30, 1997 compared to $2,443,000 or 43.5% for the nine months
ended September 30, 1996. The decrease as a percentage of sales was primarily
related to an increase in domestic sales prices for the SYNERGY-TM- Spinal
Implant System as well as an increase in the number of surgeries performed in
the United States as a percentage of total surgeries performed with the
Company's products.
Selling, general and administrative expenses decreased to 50.8% from 55.6% as
a percentage of net sales, and increased to $4,824,000 from $3,122,000, for
the nine months ended September 30, 1997 and 1996, respectively. Most of the
selling, general and administrative expenses are relatively fixed expenses and
as net sales increase, these expenses as a percentage of net sales decrease.
The Company intends to continue to invest in the development of additional
markets domestically and internationally, which expenditures will tend to keep
selling, general and administrative expenses at a relatively high percentage
of sales until sales increase.
Research and development expenses decreased to 8.4% from 8.7% as a percentage
of net sales, and increased to $802,000 from $487,000, for the nine months
ended September 30, 1997 and 1996, respectively. The Company continues to
support the development of the spinal cage and the cervical spine system.
These factors resulted in an overall increase in operating income from
continuing operations to $124,000 or 1.3% of net sales for the nine months
ended September 30, 1997, compared to a loss from continuing operations of
$(437,000) or (7.8%) of net sales for the nine months ended September 30, 1996.
Interest expense, net, increased to $326,000 from $262,000, and decreased to
3.4% from 4.7% of net sales, for the nine months ended September 30, 1997 and
1996, respectively, as a result of the issuance of $5,250,000 Convertible
Subordinated Debentures in May 1996.
The Company recorded a tax benefit of $(68,000) for the nine months ended
September 30, 1997 compared to a tax benefit of $(292,000) for the nine months
ended September 30, 1996, as the Company had a loss from continuing operations
in the first three quarters of 1997 and 1996 and the estimated effective tax
rate increased to 40% in 1997 from 20% in 1996.
Net loss from continuing operations increased to $(134,000) from a net loss
from continuing operations of $(407,000) for the nine months ended September
30, 1997 and 1996, respectively, and primary loss per share from
continuing operations increased to $(.03) from a loss of $(.09) for the same
periods.
CROSS MEDICAL PRODUCTS, INC. AND SUBSIDIARY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
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 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 and that these individual lawsuits
are otherwise without merit. An estimate of the amount of loss cannot be made
as the Company does not have sufficient information on which to base an
estimate. All pending cases are being defended by the Company's insurance
carrier, in some cases under a reservation of rights. There can be no
assurance, however, that the $5,000,000 per annum limit of the Company's
coverage will be sufficient to cover the cost of defending all lawsuits or the
payment of any amounts that may be paid in satisfaction of any settlements or
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 from future quarterly or
annual operating results will not be materially adversely affected by the
final resolution of these matters.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The exhibits listed in the accompanying index to exhibits are
filed as a part of this Report.
(b) Reports on Form 8-K.
Report filed on August 25, 1997 regarding the sale of common
stock to Century Medical.
Signatures
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
CROSS MEDICAL PRODUCTS, INC.
(Registrant)
Date: November 11, 1997 /S/ Joseph A. Mussey
Joseph A. Mussey
Chief Executive Officer, President
and Treasurer
Date: November 11, 1997 /S/ Paul A. Miller
Paul A. Miller
Chief Financial Officer
(Principal Financial/Accounting Officer)
CROSS MEDICAL PRODUCTS, INC. AND SUBSIDIARY
FORM 10-Q
EXHIBIT INDEX
Exhibit No. Exhibit
10(a) Employment Agreement, dated August 15, 1997 between the
Company and Joseph A. Mussey.
10(b) Employment Agreement, dated August 15, 1997 between the
Company and Paul A. Miller.
10(c) Employment Agreement, dated August 15, 1997 between the
Company and Ira Benson.
10(d) Employment Agreement, dated August 15, 1997 between the
Company and Thomas E. Zimmer.
10(e) Employment Agreement, dated August 15, 1997 between the
Company and Philip A. Mellinger.
11 Statement re: Computation of Per Share Earnings
27 Financial Data Schedule
CROSS MEDICAL PRODUCTS, INC. AND SUBSIDIARY
EXHIBIT 11
COMPUTATION OF NET INCOME PER SHARE
FOR THE THREE AND NINE MONTH PERIODS ENDING SEPTEMBER 30, 1997 AND 1996
<TABLE>
Three Three Nine Nine
Months Months Months Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Weighted average number of common shares outstanding 5,080,762 4,776,571 5,012,454 4,754,819
Shares issuable pursuant to stock option plans and
stock warrants 237,090 206,334 254,018
------------ ------------ ------------ ------------
Weighted average shares outstanding used in primary
earnings per share calculation 5,080,762 5,013,661 5,218,788 5,008,837
Shares issuable under the Convertible Subordinated
Debentures 630,277 646,154 630,277 646,154
------------ ------------ ------------ ------------
Weighted average shares outstanding used in fully
diluted earnings per share calculation 5,711,039 5,659,815 5,849,065 5,654,991
============ ============ ============ ============
Net loss from continuing operations $(43,000) $(184,000) $(134,000) $(407,000)
============ ============ ============ ============
Net income from discontinued operations $375,000 $2,598,000 $881,000
============ ============ ============ ============
Net income (loss) used in calculation of primary earnings
per share $(43,000) $191,000 $2,464,000 $474,000
Interest, net of tax, on Convertible Subordinated
Debentures $67,000 $67,000 $198,000 $89,000
------------ ------------ ------------ ------------
Net income used in calculation of fully diluted
earnings per share $24,000 $258,000 $2,662,000 $563,000
============ ============ ============ ============
Primary earnings per share:
Net loss per share from continuing operations $(.01) $(.04) $(.03) $(.09)
============ ============ ============ ============
Net income per share from discontinued operations $.08 $.50 $.18
============ ============ ============ ============
Net income (loss) per share $(.01) $.04 $.47 $.09
============ ============ ============ ============
Fully diluted earnings per share:
Net loss per share from continuing operations $.00 $(.02) $.01 $(.06)
============ ============ ============ ============
Net income per share from discontinued operations $.07 $.43 $.16
============ ============ ============ ============
Net income per share $.00 $.05 $.44 $.10
============ ============ ============ ============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS FOUND ON
PAGES 1,2 AND 3 OF THE COMPANY'S FORM 10-Q FOR THE YEAR-TO-DATE, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 2,647
<SECURITIES> 1,500
<RECEIVABLES> 4,303
<ALLOWANCES> 147
<INVENTORY> 8,801
<CURRENT-ASSETS> 18,121
<PP&E> 1,368
<DEPRECIATION> 400
<TOTAL-ASSETS> 19,902
<CURRENT-LIABILITIES> 3,957
<BONDS> 5,200
0
0
<COMMON> 52
<OTHER-SE> 10,589
<TOTAL-LIABILITY-AND-EQUITY> 19,902
<SALES> 9,497
<TOTAL-REVENUES> 9,497
<CGS> 3,747
<TOTAL-COSTS> 3,747
<OTHER-EXPENSES> 5,626
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 326
<INCOME-PRETAX> (202)
<INCOME-TAX> (68)
<INCOME-CONTINUING> (134)
<DISCONTINUED> 2,598
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,464
<EPS-PRIMARY> .47
<EPS-DILUTED> .44
</TABLE>
