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, 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.
(formerly known as Danninger Medical Technology, Inc.)
(Exact name of Registrant as specified in its charter)
Delaware 31-0992628
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5160 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
uch 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 February 25,
1998, the aggregate market value of the registrant's voting stock held by
non-affiliates on that date was $41,614,697. As of February 25, 1998,
5,284,406 shares of Common Stock, $.01 par value, were outstanding.
PART I
ITEM 1. BUSINESS.
Cross Medical Products is a medical device company that develops and
distributes spinal implant products. Cross' stainless steel and titanium
spinal implants are used by surgeons to obtain fusion of the vertebral body
in areas of the spine affected by degenerative diseases, deformities, trauma
and tumors. The spinal implant stabilizes the spine while fusion occurs, and
assists in preventing the bone graft material (which is typically used in the
areas of the spine where the disc has been removed) from collapsing or
migrating.
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
business"). 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.
On February 12, 1998, the Company announced that it had entered into a
definitive merger agreement with Interpore International, a
California-based company. The agreement, a merger of equals, calls for each
shareholder of the Company to receive 1.275 shares of Interpore common stock
in exchange for each of their shares of the Company's common stock. It is
anticipated that the transaction will be consumated after the customary
conditions, including regulatory approvals and approval by the shareholders of
each company and will close prior to the end of the second quarter of 1998.
Interpore International is a biomaterials company specializing in the
development, manufacture and marketing of synthetic bone and tissue products
for use in the orthopaedic markets.
SPINAL IMPLANT PRODUCTS
The Company's principle product line is the SYNERGY(tm) Spinal Implant System.
The Company formed its Medical Advisory Board and began development of the
SYNERGY(tm) Spinal Implant System in 1992. The SYNERGY(tm) Spinal Implant
System is a "universal" implant system that allows surgeons to treat both the
thoracic (middle) and lumbar (lower) portions of the spine, allowing use of
the SYNERGY(tm) Spinal Implant System in approximately 70% of all instrumented
spinal fusion surgeries in the United States. The SYNERGY(tm) Spinal Implant
System is flexible, strong, and easy for surgeons to use. The SYNERGY(tm)
Spinal Implant System does not demand that surgeons follow a single surgical
protocol, rather, it provides several options. Implants come in various sizes
and types to meet the surgeon's preferences and the patient's anatomy,
providing a secure anatomic fit for virtually any pathology. The SYNERGY(tm)
Spinal Implant System features unique implant locking mechanism designs that,
combined with the use of nitrogen-strengthened stainless steel, allow surgeons
to assemble constructs of exceptional strength while keeping the profile
extremely low. The SYNERGY(tm) Spinal Implant System was engineered to be
easy for surgeons to use, reducing surgical time and requiring less
manipulation. 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 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 instrumental 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
in the second half of 1998.
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 considering filing a Pre-Market Application ("PMA") with the U.S. Food and
Drug Administration ("FDA").
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.
SPINAL IMPLANT MARKETING. The Company markets its spinal implant products to
orthopedic and neurological spine surgeons throughout the world. 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
s 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 thirty
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. 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
$5.1 million, or 39.7%, of the Company's total sales of spinal implants and
instruments in fiscal 1997. 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-two 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
certain of the Company's spinal implant products. The Company is obligated to
pay a royalty, subject to certain limitations, to its Medical Advisory Board
in an amount equal to 6.5% (and increasing 1/2% annually, up to 8%) of the net
revenues generated from the sales of certain 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, MN
Joseph Perra, M.D. Minneapolis, MN
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 six 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 1998
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, 1997, 1996, and 1995 were $1,226,000, $687,000, and $859,000
respectively. The Company intends to continue to invest in the development of
new spinal implant products in 1998.
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(r), CROSS MEDICAL(r),
INTEGRAL(tm), and SYNERGY(tm) are trademarks of the Company.
The Company intends to file patent applications on future products as
appropriate. The mere filing and prosecution of patent applications, however,
cannot guarantee the ultimate issuance of patents. To the extent that the
Company is unsuccessful in securing patents for its devices or for certain
features of its devices which are easily reverse-engineered, there is little
to prevent a competitor from copying the Company's products, although the
Company would have "lead time" in the marketplace during the period needed by
its competitors to copy and secure FDA approval for a duplicate product even
where patents are issued, third parties may contest the validity of the patents
or design around the patents. Enforcement of patents can be expensive and the
time consuming for the patent holder. Thus, while the Company believes that
its patents are valid and 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 (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 considering submitting its PMA 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.
PERSONNEL
As of February 25, 1998, the Company employed 45 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,
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 $8,200,000 in cash plus the assumption by
OrthoLogic of substantially all of the liabilities 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 $242,000. 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. The Company offered a
full range of CPM devices: 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.
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 DanniflexO 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, which 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 1998 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 1997, the Company reported a net
loss from continuing operations of $862,000, and had incurred net losses from
continuing operations in three of the previous four years. 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 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 750 cases alleging principally that the
Company participated in an industry-wide conspiracy to market pedicle screw
implants although none of these lawsuits involve the Company's products. The
Company anticipates that additional similar suits will be filed in the future.
The Company is currently named as a defendant in 16 cases alleging claims of
products liability for defective products manufactured by the Company's
products. 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 contracted with a new
insurance carrier to provide 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 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 is attempting to sublease the remaining space. 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, however, 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 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 750 such
lawsuits. None of the 750 cases involve products manufactured by the Company.
The Company cannot estimate precisely at this time the number of such lawsuits
that may eventually be filed. Most of such lawsuits are pending in federal
courts and are in preliminary stages. Discovery proceedings, including the
taking of depositions, have commenced in certain of the lawsuits. Plaintiffs
in these cases typically seek relief in the form of monetary damages, often in
unspecified amounts. While the aggregate monetary damages eventually sought in
all of such individual actions is substantial and exceeds the limits of the
Company's products liability insurance policies, the Company believes that it
has affirmative defenses, including, without limitation, preemption, and that
these individual lawsuits are otherwise without merit. In addition, Cross has
been named as a defendant in 16 cases alleging claims of product liability for
defective products manufactured by the Company. All pending cases are being
defended by the Company's insurance carrier, in some cases under a reservation
of rights. There can be no assurance, however, that the $5,000,000 per policy
year limit of the Company's coverage will be sufficient to cover the cost of
defending all lawsuits or the payment of any amounts that may be paid in
satisfaction of any settlements or judgments. Further, there can be no
assurance that the Company will continue to be able to obtain sufficient
amounts of products liability insurance coverage at commercially reasonable,
premiums.
In addition, 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, however 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.
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>
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
1997
First Quarter $ 9.13 $ 7.25
Second Quarter 7.38 6.00
Third Quarter 8.88 6.88
Fourth Quarter 9.75 7.50
</TABLE>
On February 25, 1998, the last reported bid price of the Common Stock on The
Nasdaq SmallCap market was $7.875. At February 25, 1998, there were 389 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.
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, 1997 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: 1997 1996 1995 1994 1993
------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Revenue..................................... $12,918 $8,572 $4,091 $2,880 $1,360
Cost of goods sold.......................... 5,923 3,854 1,995 1,189 358
Gross margin................................ 6,995 4,718 2,096 1,691 1,002
Selling, general and administrative expenses 6,689 4,330 3,224 2,483 1,984
Research and development expenses........... 1,226 687 859 977 800
Operating loss.............................. (920)<F1> (299) (1,987) (1,769) (1,782)
Interest expense, net....................... 426 439 101 3 15
Loss before income taxes.................... (1,346) (738) (2,088) (1,772) (1,797)
Net income (loss) from continuing operations (862) 50<F2> (1,442) (1,176) (1,194)
Net income (loss) per share from continuing
operations basic and diluted.............. $ (0.17) $ 0.01 $(0.31) $(0.25) $(0.27)
Weighted average shares used in basic and
diluted earnings per share calculations... 5,065 4,772 4,661 4,695 4,420
BALANCE SHEET DATA:
Working capital............................. $13,356 $8,241 $3,135 $2,599 $2,032
Total assets................................ 18,762 19,590 9,498 7,413 5,782
Short-term obligations...................... 95 1,659 3,081 6 7
Long-term obligations....................... 5,124 5,482 7 -- 6
Total shareholders' equity.................. 9,998 5,648 3,522 3,390 3,008
</TABLE>
[FN]
<F1>In 1997, Cross recognized $700,000 of inventory valuation adjustment for
obsolete and slow moving inventory related to market acceptance of certain
improvements and modifications to its spinal implant system.
<F2>In 1996, Cross recognized income of $459,000 from the reversal of valuation
allowance provided against deferred tax assets.
</FN>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OR 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,
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Revenue.................................. 100.0% 100.0% 100.0%
Cost of goods sold....................... 45.9 45.0 48.8
Sales, general and administrative expense 51.8 50.5 78.8
Research and development expense......... 9.5 8.0 21.0
Interest expense......................... 3.3 5.1 2.5
Loss before taxes........................ (10.4) (8.6) (51.0)
Income tax benefit....................... 3.7 9.2 15.8
Net income (loss)........................ (6.7) 0.6 (35.2)
</TABLE>
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997
AND 1996
For 1997 net sales increased 51% to $12,918,000 from $8,572,000 for 1996. 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. 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 $5,923,000 or 45.9% of net sales for 1997 compared to
$3,854,000 or 45.0% for 1996. The 1997 cost of goods sold increased as a result
of adjustments to inventory valuation of $700,00 recognized in the fourth
quarter of 1997 for products that became obsolete or slow-moving due to the
widespread acceptance of certain improvements and modifications to the Company's
SYNERGY(tm) Spinal Implant System. Before the inventory allowance, the cost
of goods sold as a percentage of net sales decreased from 1996 to 1997. The
decrease was primarily due to the Company increasing its sales prices in 1997,
while the cost of the spinal implant products remained relatively stable from
1996 to 1997.
Selling, general and administrative expenses increased to 51.8% from 50.5% as
a percentage of net sales, and increased to $6,689,000 from $4,330,000 for 1997
and 1996, respectively. Except for commissions and product liability insurance
premiums, 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 increased to 9.5% from 8.0% as a percentage
of net sales, and increased $1,226,000 from $687,000, for 1997 and 1996,
respectively. In March 1997, the Company entered a license agreement to
develop a spinal cage, the development of which is ongoing. 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 1997, interest expense, net, decreased to $426,000 or 3.3% of net sales from
$439,000 or 5.1% of net sales, for 1997 and 1996, respectively. The decrease
was primarily attributable to the interest income earned on the investment of
the proceeds from the sale of the Company's Recovery Products business in March,
1997.
The Company recorded a tax benefit of $484,000 and $788,000 for 1997 and 1996,
respectively, as the Company had a tax loss from continuing operations in 1997
and 1996.
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 international distributors. On
sales of spinal products in the United States, the Company pays a commission
to its independent sales representatives, however, this commission is recorded
as a selling expense.
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.
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 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.
LIQUIDITY AND CAPITAL RESOURCES
Working capital increased to $13,356,000 at December 31, 1997 from $8,241,000
at December 31, 1996. The current ratio (ratio of current assets to current
liabilities) increased to 4.7 to 1.0 at December 31, 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 $242,000, cash received from the sale of common
stock to its Japanese distributor of $2,000,000, and cash generated from
operations until the sale of the Recovery Products segment on March 12, 1997
of $92,000.
Cash flows used in operating activities were $5,250,000 in 1997 compared to
$3,181,000 in 1996. The reason for continued use of cash flows from operating
activities in 1997 relates to the increases in accounts receivable and
inventories and decreases in accounts payable and accrued liabilities.
Inventories increased 87% to $8,459,000 at December 31, 1997 from $4,529,000
at December 31, 1996 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 $1,968,000 in 1997 compared to
$544,000 in 1996 primarily related to the purchase of a $1,500,000 certificate
of deposit.
Cash flows provided by financing activities were $609,000 in 1997 compared to
$3,325,000 in 1996. The primary source of cash from financing activities in
1996 was the proceeds from the Convertible Subordinated Debenture offering of
$5,250,000, net of offering costs of $557,000.
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 utilizes various PC based computer software packages as tools in
running its daily operations. Management does not believe that the Company
will encounter any material problems with this software as a result of the
change of the millennium on January 1, 2000.
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.
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, computer software, 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 this Annual Report on Form 10-K for the year
ended December 31, 1997.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Consolidated Financial Statements of the Company, together with reports
thereon from Coopers & Lybrand L.L.P., appear in this report beginning on
page ___.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINACIAL
DISCLOSURE.
None.
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 Joint Proxy Statement relating to the
Company's Annual Meeting of Stockholders to be held on May 6, 1998 (the
"Joint 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 Joint Proxy Statement relating to the Company's Annual Meeting of
Stockholders to be held on May 6, 1998, is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICAL 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 Joint Proxy
Statement relating to the Company's Annual Meeting of Stockholders to be held
on May 6, 1998, 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
Joint Proxy Statement relating to the Company's Annual Meeting of Stockholders
to be held on May 6, 1998, is incorporated herein by reference.
ITEM 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, 1997, 1996 and 1995
Consolidated Statement of Operations for the three years ended
December 31, 1997, 1996 and 1995
Consolidated Statement of Changes in Shareholders' Equity for the three
years ended December 31, 1997, 1996 and 1995
Consolidated Statement of Cash Flows for the three years ended
December 31, 1997, 1996 and 1995
Notes to the Consolidated Financial Statements
Financial Statement Schedule:
Report of the 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.
CROSS MEDICAL PRODUCTS, INC.
REPORT ON FORM 10-K
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Description Page Number
No.
- ------- --------------------------------------------------- ----------------------------------
<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, NINTH Previously filed as Exhibit 4 to Form 10
and TENTH of the Certificate of Incorporation of the (file number 0-16893) filed May 3,
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.
10(a) Non-Titled Personal Property Security Agreement, Previously filed as Exhibit 10(b) to
dated February 13, 1995, granting Bank One Columbus, Annual Report on Form 10-K (file
N.A. a security interest in all inventory, raw number 0-16893) filed on March 30,
materials, work in process, supplies, accounts, 1995, and incorporated herein by
general intangibles, chattel paper, instruments, reference.
other forms of obligations and receivables, goods,
equipment, machinery, supplies and other personal
property of the Company.
10(b) Non-Titled Personal Property Security Agreement, Previously filed as Exhibit 10(c) to
dated February 13, 1995, granting Bank One Columbus, Annual Report on Form 10-K
N.A. a security interest in all inventory, raw (file number 0-16893) filed on
materials, work in process, supplies, accounts, March 30, 1995, and incorporated
general intangibles, chattel paper, instruments, herein by reference.
other forms of obligations and receivables, goods,
equipment, machinery, supplies and other personal
property of the Company.
10(c) Asset Purchase Agreement, dated March 12, 1997, by Previously filed as Exhibit 10(g) to Form
and among the Company, Danninger Healthcare, Inc. 10-K (file number 0-16893) filed March
and OrthoLogic Corp. 27, 1997, and incorporated herein by
reference.
The following are management contracts and compensatory plans and arrangements
in which directors or executive officers participate:
10(d) 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(e) 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(f) 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(g) Form of Stock Option Agreement Under the Amended and Previously filed as Exhibit 10(f) to
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(h) 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(i) Form of Stock Option Agreement Under the Amended and Previously filed as Exhibit 10(i) to
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(j) 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(k) 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(l) Schedule identifying material details of other Previously filed as Exhibit 10(o) to
Indemnification Agreements substantially identical Annual Report on Form 10-K (file
to Exhibit 10(n).* number 0-16893) filed on March 30,
1995, and incorporated herein by reference.
10(m) 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(n) 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(o) Non-Competition Agreement dated September 6, 1996, Previously filed as Exhibit 10(f) to
between the Company and Stephen R. Draper. the 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(p) Employment Agreement, dated August 15, 1997, between Previously filed as Exhibit 10(a) to
the Company and Joseph A. Mussey.* the Company's Quarterly Report on Form
10-Q for the quarter ended September 30,
1997 (file number 0-16893) filed
November 12, 1997, and incorporated
herein by reference.
10(q) Employment Agreement, dated August 15, 1997, between Previously filed as Exhibit 10(b) to
the Company and Paul A. Miller.* the Company's Quarterly Report on Form
10-Q for the quarter ended September 30,
1997 (file number 0-16893) filed
November 12, 1997, and incorporated
herein by reference.
10(r) Employment Agreement, dated August 15, 1997, between Previously filed as Exhibit 10(c) to
the Company and Ira Benson.* the Company's Quarterly Report on Form
10-Q for the quarter ended September 30,
1997 (file number 0-16893) filed
November 12, 1997, and incorporated
herein by reference.
10(s) Employment Agreement, dated August 15, 1997, between Previously filed as Exhibit 10(d) to
the Company and Thomas E. Zimmer.* the Company's Quarterly Report on Form
10-Q for the quarter ended September 30,
1997 (file number 0-16893) filed
November 12, 1997, and incorporated
herein by reference.
10(t) Employment Agreement, dated August 15, 1997, between Previously filed as Exhibit 10(e) to
the Company and Philip A. Mellinger.* the Company's Quarterly Report on Form
10-Q for the quarter ended September 30,
1997 (file number 0-16893) filed
November 12, 1997, and incorporated
herein by reference.
10(u) Agreement between Dr. Edward Funk and the Company, Page ___.
dated February 11, 1998.
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 ___.
27 Financial Data Schedule. Page ___.
</TABLE>
________________________________________
*Management Contract or Compensatory Plan
(B) REPORTS ON FORM 8-K
Agreement and Plan of Merger, dated as of February 11, 1998 among Interpore
International, a California corporation, Buckeye International, Inc., a
Delaware corporation and Cross Medical Products, Inc., a Delaware corporation.
Filed February 17, 1998.
(C) EXHIBITS
The exhibits to this report begin at page ____.
(D) FINANCIAL STATEMENT SCHEDULES
The Financial Statement Schedule of the Company, together with report thereon
from Coopers & Lybrand L.L.P., are set forth on the following pages.
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
Our report on the consolidated financial statements of Cross Medical Products,
Inc. and Subsidiary (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
February 4, 1998,
except for Note 11
to the consolidated
financial statements,
for which the date is
February 11, 1998
CROSS MEDICAL PRODUCTS, INC. AND SUBSIDIARY
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Charged
Balance to Costs
at and Balance
Beginning Expenses (Deductions) at End
of Year (Recoveries) Additions of Year
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
For the year ended December 31, 1997:
Allowance for doubtful accounts $ 95,186 $ 77,000 $ (5,545) $ 166,641
Inventory valuation reserve 303,946 925,000 (590,801) 638,145
----------- ----------- ----------- -----------
$ 399,132 $1,002,000 $ (596,346) $ 804,786
=========== =========== =========== ===========
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
=========== =========== ===========
</TABLE>
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, 1998 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, 1998
- -------------------- Treasurer and Director )
Joseph A. Mussey (Principal Executive Officer) )
)
)
/*/ Paul A. Miller Vice President and Chief Financial ) March 27, 1998
- ------------------ Officer (Principal Financial and )
Paul A. Miller Accounting Officer) )
)
)
/*/ Edward R. Funk Chairman of the Board of Directors ) March 27, 1998
- ------------------ )
Edward R. Funk )
)
)
/*/ Daniel A. Funk Director ) March 27, 1998
- ------------------ )
Daniel A. Funk, M.D. )
)
)
/*/ Daniel A. Gregorie Director ) March 27, 1998
- ---------------------- )
Daniel A. Gregorie, M.D. )
)
)
/*/ Herbert J. Kahn Director ) March 27, 1998
- ------------------- )
Herbert J. Kahn )
)
)
/*/ Curtis A. Loveland Director ) March 27, 1998
- ---------------------- )
Curtis A. Loveland )
)
)
/*/ C. Craig Waldbillig Director ) March 27, 1998
- ----------------------- )
C. Craig Waldbillig )
)
)
/*/ Peter H. Williams Director ) March 27, 1998
- --------------------- )
Peter H. Williams )
)
)
/*/ Robert J. Williams Director ) March 27, 1998
- ---------------------- )
Robert J. Williams )
)
*By: /s/ Joseph A. Mussey
--------------------
Joseph A. Mussey, attorney-in-fact
for each of the persons indicated
</TABLE>
EXHIBIT 10(u)
AGREEMENT
THIS AGREEMENT (the "Agreement") is made on this 11th day of February, 1998 by
and among Cross Medical Products, Inc., a Delaware corporation ("DECORP"),
Cross Medical Products, Inc., an Ohio corporation ("OHCORP") (collectively
DECORP and OHCORP are hereinafter referred to as the "Companies"). Edward R.
Funk Irrevocable Life Insurance Trust #1 ("Trust #1"), Edward R. Funk
Irrevocable Life Insurance Trust #2 ("Trust #2), and Edward R. Funk ("Funk").
RECITALS
1. Effective January 1, 1994, Funk entered into written employment
agreements with the Companies (the "Employment Agreements"). The Employment
Agreements are effective until December 31, 2003, unless earlier terminated
pursuant to the terms of the Employment Agreements. Under the Employment
Agreements, Funk has been paid a combined salary the Companies at an annual rate
of $90,000 per year. In addition, pursuant to the Employment Agreements, the
Companies agreed to provide medical insurance coverage to Funk and his spouse
and to pay premiums on certain split-dollar life insurance policies owned by
irrevocable life insurance trusts established by Funk in 1988.
2. Trust #1 and Trust #2 each own a policy of insurance on the life of
Funk in the face amount of $250,000 (the "Policies"). Trust #1, Trust #2, and
DECORP are parties to Split Dollar Insurance Plan agreements entered into
November 10, 1988 (the "Plans"), with Northwestern Mutual Life Insurance
Company as the insurer ("Insurer"), and Funk and his spouse as the insureds.
Under the Plans, the Companies have paid approximately $176,000 in advance
premiums since the inception of the Plans. The present cash surrender value
of the Policies is approximately $140,000.
3. The Companies have this date entered into an Agreement and Plan of
Merger ("Merger Agreement") with Interpore International ("Successor"),
whereby a subsidiary of Successor will merge into DECORP, with DECORP surviving
and the stockholders of DECORP receiving shares of stock of Successor for their
shares of DECORP as outlined in the Merger Agreement.
4. The parties desire to terminate the Employment Agreements and the Plans
pursuant to the terms and conditions provided herein conditioned and
effective upon the consummation of the proposed merger with Successor as set
forth in the Merger Agreement.
STATEMENT OF AGREEMENT
In consideration of the foregoing, the parties agree as follows:
1. TERMINATION OF EMPLOYMENT AGREEMENTS; RESIGNATION. The Companies and
Funk agree that for the good and valuable consideration provided herein, the
Employment Agreements shall be terminated and Funk shall resign as a director,
officer and employee of the Companies as of the Effective Time as defined in
Section 1.2 of the Merger Agreement (the "Effective Date").
2. TERMINATION OF PLANS; ASSIGNMENT OF POLICIES TO DECORP.
(a) Funk, DECORP, Trust #1 and Trust #2 agree to terminate the Plans
as of the Effective Date.
(b) Trust #1 and Trust #2 agree to assign, transfer and convey
their respective ownership interest in the Policies, as of the Effective
Date, to DECORP as complete payment and return of premiums advanced by
the Companies under the Plans.
(c) The Policies shall remain in full force, and Trust #1 and Trust
#2 will have no rights or interests in the Policies or any proceeds from
the Policies after assignment to DECORP.
3. NONCOMPETITION. Funk agrees that for a period beginning on the
Effective Date and ending December 31, 2003:
(a) he will not engage or participate, directly or indirectly,
either as principal, agent, employee, employer, consultant, stockholder
(except as the holder of not more than two percent of the stock of any
publicly traded corporation), or in any other individual or
representative capacity whatsoever, in the operation, management or
ownership of any business, firm, corporation, association, or other
entity engaged in the design, license, manufacture, marketing, or sale
of devices and instruments used in spinal surgery or in any other
business engaged in by DECORP or OHCORP at the Effective Date; and
(b) he will not directly or indirectly, for himself or in conjunction
with or on behalf of any other individual or entity, solicit, diver
take away or endeavor to take away from DECORP or OHCORP any customer,
account or employee of the Company who was a customer, account or
employee of DECORP or OHCORP at any time during the 12 months prior to
the Effective Date.
4. CONSIDERATION. The Companies agree to pay Funk $240,000 on the
Effective Date in immediately available funds constituting lawful money of the
United States of America.
5. ASSIGNMENT. This Agreement is personal to Funk, and Funk may not
assign or delegate any of his rights or obligations hereunder. Subject to the
foregoing, this Agreement shall be binding upon and inure to the benefit of
the respective parties hereto, their heirs, executors, administrators,
successors and assigns.
6. WAIVER. The waiver by either party hereto of any breach or violation
of any provision of this Agreement by the other party shall not operate as or
be construed to be a waiver of any subsequent breach of such waiving party.
7. CONSENT OF JURISDICTION. The parties to this Agreement, jointly and
severally, (a) acknowledge that this Agreement was executed in Franklin County,
Ohio, and (b) consent to the jurisdiction of the Court of Common Pleas for
Franklin County, Ohio, to determine any dispute regarding the performance or
nonperformance of any obligations evidenced by this Agreement or any guarantee
thereof.
8. GOVERNING LAW. This Agreement shall be interpreted, construed and
governed according to the laws of the State of Ohio applicable to contracts
made and to be wholly performed within such state.
9. AMENDMENT. This Agreement may be amended in any and every respect by
agreement in writing executed by both parties hereto.
10. SECTION HEADINGS. Section headings contained in this Agreement are
for convenience only and shall not be considered in construing any provision
hereof.
11. ENTIRE AGREEMENT. This Agreement terminates, cancels and supersedes
all previous agreements relating to the employment of Funk with the Companies,
written or oral, and this Agreement contains the entire understanding of the
parties with respect to the subject matter of this Agreement. This Agreement
was fully reviewed and negotiated on behalf of each party and shall not be
construed against the interest of either party as the drafter of this Agreement.
12. SEVERABILITY. The invalidity or unenforceability of any one or more
provisions of this Agreement shall not affect the validity or enforceability
of any other provisions of this Agreement or parts thereof.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
day and year first above written.
CROSS MEDICAL PRODUCTS, INC.
a Delaware corporation
By: /s/ Joseph A. Mussey
---------------------
Its: President
CROSS MEDICAL PRODUCTS, INC.
an Ohio corporation
By: /s/ Joseph A. Mussey
---------------------
Its: President
EDWARD R. FUNK IRREVOCABLE LIFE
INSURANCE TRUST #1
By: /s/ Curtis A. Loveland
-----------------------
Its: Trustee
EDWARD R. FUNK IRREVOCABLE LIFE
INSURANCE TRUST #2
By: /s/ Curtis A. Loveland
-----------------------
Its: Trustee
/s/ Edward R. Funk
------------------
EDWARD R. FUNK
EXHIBIT 11
CROSS MEDICAL PRODUCTS, INC. AND SUBSIDIARY
COMPUTATION OF NET INCOME PER SHARE
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Weighted average number of common shares outstanding used
in basic earnings per share calculation 5,065,294 4,772,082 4,661,332
Shares issuable pursuant to stock option plans and stock
warrants 197,762 121,020
Shares issuable under the Convertible Subordinated
Debentures 625,232 646,154
------------ ------------ ------------
Weighted average shares outstanding used in diluted earnings
per share calculation 5,888,288 5,539,256 4,661,332
============ ============ ============
Net income (loss) from continuing operations $ (862,000) $ 50,000 $(1,442,000)
============ ============ ============
Net income from discontinued operations $ 2,470,000 $ 1,231,000 $ 1,083,000
============ ============ ============
Net income (loss) used in calculation of basic earnings per
share $ 1,608,000 $ 1,281,000 $ (359,000)
Interest, net of tax, on Convertible Subordinated Debentures $ 263,000 $ 162,000
------------ ------------ ------------
Net income used in calculation of diluted earnings per share $ 1,871,000 $ 1,443,000 $ (359,000)
============ ============ ============
Basic earnings per share:
Net income (loss) per share from continuing operations $ (.17) $ .01 $ (.31)
============ ============ ============
Net income per share from discontinued operations $ .49 $ .26 $ .23
============ ============ ============
Net income (loss) per share $ .32 $ .27 $ (.08)
============ ============ ============
Diluted earnings per share:
Net income (loss) per share from continuing operations $ (.10) $ .04 $ (.31)
============ ============ ============
Net income per share from discontinued operations $ .42 $ .22 $ .23
============ ============ ============
Net income (loss) per share $ .32 $ .26 $ (.08)
============ ============ ============
</TABLE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Cross Medical Products, Inc. and Subsidiary
We have audited the accompanying consolidated balance sheets of Cross Medical
Products, Inc. and Subsidiary (formerly Danninger Medical Technology, Inc. and
Subsidiaries) as of December 31, 1997 and 1996, 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, 1997. 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 Subsidiary as of December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Columbus, Ohio
February 4, 1998, except for
Note 11, for which the date
is February 11, 1998
CROSS MEDICAL PRODUCTS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 1,588 $ 216
Investments 1,500
Accounts receivable, net 4,304 4,194
Inventories 8,459 4,529
Current assets of discontinued operations 4,437
Other current assets 207 126
Deferred income taxes 883 703
------- -------
Total current assets 16,941 14,205
------- -------
Property and equipment, net 970 784
Other assets:
Intangible assets, net 183 128
Non-current assets of discontinued operations 3,811
Other assets 668 662
------- -------
Total assets $18,762 $19,590
======= =======
</TABLE>
CROSS MEDICAL PRODUCTS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997 AND 1996
(IN THOUSANDS EXCEPT SHARE AMOUNTS )
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Liabilities and Shareholders' Equity
Current liabilities:
Current portion, term debt and capital lease obligations $ 95 $ 1,659
Current liabilities of discontinued operations 2,355
Accounts payable 992 1,265
Accrued liabilities 821 620
Accrued disposition costs 610
Accrued income taxes 1,067 65
------- -------
Total current liabilities 3,585 5,964
------- -------
Term debt, net of current maturities 5,080 5,318
------- -------
Obligations under capital leases, net of current maturities 44 164
------- -------
Non-current liabilities of discontinued operations 2,452
-------
Deferred income taxes 55 44
------- -------
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.01 par value:
Authorized, 10,000,000 shares; no shares issued and
outstanding
Common stock, $.01 par value:
Authorized, 40,000,000 shares; issued and outstanding
5,224,314 and 4,936,265 shares for 1997 and 1996,
respectively 53 49
Additional paid-in capital 6,948 4,362
Retained earnings 2,997 1,389
------- -------
9,998 5,800
Less treasury stock, at cost, 17,402 shares (152)
------- -------
Total shareholders' equity 9,998 5,648
Total liabilities and shareholders' equity $18,762 $19,590
======= =======
See notes to the consolidated financial statements.
</TABLE>
CROSS MEDICAL PRODUCTS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ---------
<S> <C> <C> <C>
Net sales $ 12,918 $ 8,572 $ 4,091
Cost of goods sold 5,923 3,854 1,995
---------- ---------- ---------
Gross margin 6,995 4,718 2,096
---------- ---------- ---------
Selling, general and administrative 6,689 4,330 3,224
Research and development 1,226 687 859
---------- ---------- ---------
7,915 5,017 4,083
---------- ---------- ---------
Operating loss (920) (299) (1,987)
Interest expense, net (426) (439) (101)
---------- ---------- ---------
Loss from continuing operations before income taxes (1,346) (738) (2,088)
---------- ---------- ---------
Income tax benefit:
Federal:
Current (321) (261) (549)
Deferred (163) (527) (97)
---------- ---------- ---------
(484) (788) (646)
---------- ---------- ---------
Net income (loss) from continuing operations (862) 50 (1,442)
---------- ---------- ---------
Net income from discontinued operations (net of income
taxes of $168, $140 and $366 for 1997, 1996 and 1995,
respectively) 290 1,231 1,083
Gain on sale of discontinued operations (net of income
taxes of $1,400) 2,180
---------- ---------- ---------
Net income from discontinued operations 2,470 1,231 1,083
Net income (loss) $ 1,608 $ 1,281 $ (359)
========== ========== =========
Basic earnings per share:
Net income (loss) from continuing operations $ (.17) $ .01 $ (.31)
========== ========== =========
Net income from discontinued operations .49 .26 .23
========== ========== =========
Net income (loss) $ .32 $ .27 $ (.08)
========== ========== =========
Diluted earnings per share:
Net income (loss) from continuing operations $ (.17) $ .01 $ (.31)
========== ========== =========
Net income from discontinued operations .49 .26 .23
========== ========== =========
Net income (loss) $ .32 $ .27 $ (.08)
========== ========== =========
Weighted average shares outstanding used in basic and
diluted earnings per share calculations 5,065,294 4,772,082 4,661,332
========== ========== =========
</TABLE>
See notes to the consolidated financial statements.
CROSS MEDICAL PRODUCTS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<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, 1995 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
Exercise of stock options 26 1 157 158
Retirement of treasury stock (152) 152
Options granted in exchange for services 172 172
Sale of common stock 241 2 2,240 2,242
Converted debentures 21 1 169 170
Net income 1,608 1,608
---------- --------- ---------- ---------- ---------- ----------
Balance, December 31, 1997 5,224 $ 53 $ 6,948 $ 2,997 $ 0 $ 9,998
========== ========= ========== ========== ========== ==========
See notes to the consolidated financial statements.
</TABLE>
CROSS MEDICAL PRODUCTS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) from continuing operations $ (862) $ 50 $ (1,442)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 369 112 45
Reserves for doubtful accounts 77 84 17
Deferred income taxes (163) (527) (97)
Changes in assets and liabilities:
Accounts receivable (187) (2,773) (101)
Inventories (3,931) (1,395) (1,298)
Other assets (170) (3) (48)
Accounts payable and accrued liabilities (383) 1,271 (478)
---------- ---------- ----------
Net cash used in continuing operations (5,250) (3,181) (3,402)
Net cash provided by discontinued operations 92 903 1,091
---------- ---------- ----------
Net cash used in operating activities (5,158) (2,278) (2,311)
---------- ---------- ----------
Cash flows from investing activities:
Expenditures for patents rights (60) (70)
Purchase of investment (1,500)
Purchases of property and equipment (408) (474) (87)
---------- ---------- ----------
Net cash used in continuing operations (1,968) (544) (87)
Net cash used in discontinued operations (91) (1,106) (75)
Cash received from sale of Recovery Products segment 8,177
---------- ---------- ----------
Net cash provided by (used in) investing activities 6,118 (1,650) (162)
---------- ---------- ----------
Cash flows from financing activities:
Proceeds from term debt 1,595 3,079
Proceeds from convertible subordinated debenture offering 5,250
Repayment of term debt and capitalized lease obligations (1,791) (3,028) (7)
Debt issue costs (557)
Proceeds from exercise of stock options 158 232 403
Proceeds from sale of common stock 2,242
Cash overdraft (167) 167
---------- ---------- ----------
Net cash provided by continuing operations 609 3,325 3,642
Net cash provided by (used in) discontinued operations (197) 819 (1,172)
---------- ---------- ----------
Net cash provided by financing activities 412 4,144 2,470
---------- ---------- ----------
Net increase (decrease) in cash 1,372 216 (3)
Cash and cash equivalents beginning of year 216 0 3
---------- ---------- ----------
Cash and cash equivalents end of year $ 1,588 $ 216 $ 0
========== ========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 596 $ 356 $ 101
========== ========== ==========
Income taxes (refunds) $ 9 $ (79) $ 28
========== ========== ==========
See notes to the consolidated financial statements.
</TABLE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS:
Prior to March 12, 1997, Cross Medical Products, Inc. and Subsidiary (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. On February 12, 1998, the Company
announced a merger agreement with Interpore International (See Note 11).
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.
CASH AND CASH EQUIVALENTS:
The Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents. The Company has cash
and investments on deposit with a single financial institution of $3,088,000
at December 31, 1997.
INVENTORIES:
Inventories are valued at the lower of first-in, first-out cost or market and
consisted of the following (in thousands):
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Raw materials $ 197 $ 125
Finished goods 5,949 3,498
Consigned inventory 2,951 1,210
------ ------
9,097 4,833
Less inventory reserve 638 304
------ ------
$8,459 $4,529
====== ======
</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 ranging from three to five years. Depreciation
expense for the years ended December 31, 1997, 1996 and 1995 was $279,000,
$64,000 and $44,000, 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>
1997 1996
------ ------
<S> <C> <C>
Machinery and equipment $ 603 $ 906
Office furniture and fixtures 244 94
Computer equipment 436 106
Leasehold improvements 169 131
------ ------
1,452 1,237
Less accumulated depreciation 482 453
------ ------
$ 970 $ 784
====== ======
</TABLE>
INTANGIBLE ASSETS:
Intangible assets include patents and a license right which are amortized on
a straight-line basis over their estimated useful lives of seventeen years.
Amortization begins at the time the patents are granted. Management
periodically evaluates the recoverability of intangible assets based on
estimated undiscounted future cash flows. Amortization expense for the years
ended December 31, 1997, 1996 and 1995 was $6,000, $2,000 and $1,000,
respectively. Accumulated amortization of intangible assets was $9,000 and
$3,000 at December 31, 1997 and 1996, respectively.
INVESTMENTS:
Investments include a 270 day certificate of deposit with a maturity of
January 27, 1998 bearing interest of 5.65%. Management intends to hold the
certificate to maturity. Accordingly, the investment is carried at cost.
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 $167,000 and $95,000 at December 31, 1997
and 1996, respectively.
RESEARCH AND DEVELOPMENT:
Research and development costs are expensed as incurred.
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 June 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income" and SFAS No. 131, "Disclosures About Segments of an Enterprise and
Related Information". Each standard will be effective December 31, 1998.
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 pronouncements and has not yet
determined the ultimate impact of these pronouncements on its future financial
statements.
3. TERM DEBT:
Term debt at December 31, 1997 and 1996 was:
<TABLE>
<CAPTION>
1997 1996
------ ------
(in thousands)
<S> <C> <C>
Revolving credit agreement $1,495
Convertible Subordinated Debentures,
due in June 2003 plus interest at
8.5%, payable semi-annually $5,080 5,250
Note payable, due in monthly
installments of $1,666 plus
interest at prime plus .75%,
maturing in May 2001 87
Note payable, related party, payable
on demand with interest at 8%,
payable annually 80 80
------ ------
5,160 6,912
Less current maturities 80 1,594
------ ------
$5,080 $5,318
====== ======
</TABLE>
The Convertible Subordinated 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
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 payments and defaults under other
indebtedness of the Company in excess of $1,000,000. Interest expense was
$601,000, $418,000, and $102,000 in 1997, 1996, and 1995, respectively. During
1997, $170,000 of Debentures were converted to 20,920 shares of Common Stock.
Other assets include $573,000 of offering costs related to issuance of the
Debentures. Amortization of such costs of $83,000 and $46,000 for the year
ended December 31, 1997 and 1996, respectively, are included in interest
expense. Accumulated amortization was $129,000 and $46,000 as of December 31,
1997 and 1996, respectively.
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.
Term debt maturities (in thousands):
1998 $ 80
1999 0
2000 0
2001 0
2002 0
Thereafter 5,080
------
$5,160
======
4. RENTAL AND LEASE AGREEMENTS:
The Company leases its offices and distribution facility under an operating
lease agreement which will expire on May 31, 2001. Total rent expense from
continuing operations was $160,000, $103,000 and $42,000 in 1997, 1996, and
1995, 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 under capital leases is included in the
accompanying consolidated balance sheet as property and equipment with an
aggregate cost of $79,000 and $272,000, and accumulated depreciation of $25,000
and $37,000 at December 31, 1997 and 1996, respectively. New capital lease
obligations were $38,000 and $236,000 in 1997 and 1996, respectively.
Future minimum payments under capital and operating leases are as follows
(in thousands):
<TABLE>
<CAPTION>
Capital
Year Ending December 31, Leases Operating
------------------------ ------ ---------
<S> <C> <C>
1998 $ 20 $270
1999 19 273
2000 19 276
2001 10 115
------ ---------
Total minimum lease payments 68 $934
Less amount representing interest 9
------
59
Less current maturities 15
------
Long-term obligations under
capital leases $44
======
</TABLE>
5. INCOME TAXES:
The components of the net deferred tax asset are (in thousands):
<TABLE>
<CAPTION>
Temporary differences: 1997 1996
----- -----
<S> <C> <C>
Deferred tax assets
Accounts receivable $ 32
Inventories $217 103
Reserve liabilities 407 34
Net operating loss 79
Tax credit carryforwards 259 455
----- -----
Total deferred tax asset 883 703
Deferred tax liability
Property and equipment (55) (44)
----- -----
Net deferred tax asset $828 $659
===== =====
</TABLE>
The current and non-current components of the net deferred tax asset recognized
in the balance sheet are (in thousands):
<TABLE>
<CAPTION>
1997 1996
----- ----
<S> <C> <C>
Net current asset $883 $703
Net non-current liability 55 44
---- ----
Net asset $828 $659
==== ====
</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 $259,000 at December 31,
1997 and expires as follows: $78,000 in 2009, $35,000 in 2010, $88,000 in 2011,
and $58,000 in 2012.
The following is a reconciliation of income tax expense to the amount computed
at the federal statutory rate (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Income tax benefit at statutory rates $(458) $(251) $(710)
Increase (reduction) in taxes resulting from:
Research and development tax credits (58) (88) (35)
Valuation allowance (459) 101
Other permanent differences 32 10 (2)
------ ------ ------
Total income tax benefit $(484) $(788) $(646)
====== ====== ======
</TABLE>
Tax benefits credited to equity for stock options exercised were $0, $113,000
and $88,000 for the years ending December 31, 1997, 1996 and 1995, respectively.
6. SHAREHOLDERS EQUITY:
At December 31, 1997, 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.
Changes in stock options are:
<TABLE>
<CAPTION>
Number of Weighted Average
Shares Option Price
- --------------------------------------------------------------------------------
<S> <C> <C>
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 8,500 $2.15
-------
Outstanding at December 31, 1996 136,059 $2.12
=======
Options exercisable at December 31, 1996 83,059
1997
Outstanding at January 1, 1997 136,059 $2.12
Granted 0
Exercised 25,059 $2.56
Canceled 0
-------
Outstanding at December 31, 1997 111,000 $2.02
=======
Options exercisable at December 31, 1997 83,000
</TABLE>
As of December 31, 1997, the options outstanding under the Incentive Plan have
exercise prices between $1.75 and $2.38 and a weighted-average remaining
contractual life of 1.4 years. The remaining options become exercisable in
1998 - 14,000 shares; 1999 - 14,000 shares. Certain options exercised in 1996
resulted from the exchange of 17,402 shares of common stock held by the
participants at the then current market value of $152,268 for the exercise of
options to purchase 65,841 shares of common stock. These shares were retired
in 1997.
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 of common stock.
Changes in stock options are:
<TABLE>
<CAPTION>
Number of Weighted Average
Shares Option Price
- --------------------------------------------------------------------------------
<S> <C> <C>
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 $2.54
=======
Options exercisable at December 31, 1995 71,500
1996
Outstanding at January 1, 1996 71,500 $2.54
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
1997
Outstanding at January 1, 1997 57,500 $2.59
Granted 0
Exercised 0
Canceled 0
-------
Outstanding at December 31, 1997 57,500 $2.59
=======
Options exercisable at December 31, 1997 57,500
</TABLE>
As of December 31, 1997, the options outstanding under the Nonstatutory Plan
have exercise prices between $1.94 and $2.94 and a weighted-average remaining
contractual life of 1.1 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 1,000,000 shares of common stock for distribution
under the 1994 Plan.
Changes in stock options are:
<TABLE>
<CAPTION>
Number of Weighted Average
Shares Option Price
- --------------------------------------------------------------------------------
<S> <C> <C>
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 $3.20
1996
Outstanding at January 1, 1996 176,000 $5.28
Granted 164,000 $6.74
Exercised 7,000 $4.25
Canceled 18,000 $4.91
-------
Outstanding at December 31, 1996 315,000 $6.09
=======
Options exercisable at December 31, 1996 142,800
Weighted-average fair value of options
granted during 1996 $3.76
1997
Outstanding at January 1, 1997 315,000 $6.09
Granted 227,276 $7.94
Exercised 22,000 $5.55
Canceled 15,000 $7.38
-------
Outstanding at December 31, 1997 505,276 $6.91
=======
Options exercisable at December 31, 1997 298,177
Weighted-average fair value of options
granted during 1997 $4.50
</TABLE>
As of December 31, 1997, the options outstanding under the 1994 Plan have
exercise prices between $3.50 and $8.875 and a weighted-average remaining
contractual life of 4.4 years. The remaining options become exercisable in
1998 - 100,779 shares; 1999 - 34,480 shares; 2000 - 34,480 shares;
2001 - 23,680 shares; and 2002 - 13,680 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 1995, 1996, and 1997. 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):
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Net income As reported $1,608 $1,281
Pro forma $1,250 $1,093
Diluted earnings per share As reported $0.32 $0.26
Pro forma $0.25 $0.22
</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 1997 and 1996, respectively: risk-free interest
rates of 7%, expected life of 5 years and expected volatility of 57%.
In August 1997, the Company sold restricted common shares to a distributor.
The restrictions include a two year holding period and certain voting
restrictions. The Company has the right of first refusal in the event of a
transfer of such shares and the distributor is prohibited from the purchase of
additional shares.
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 $15,000, $7,000 and $6,000 during 1997, 1996, and 1995, respectively.
8. FOURTH QUARTER ADJUSTMENTS:
During the fourth quarter of 1997, the Company recognized $700,000 of inventory
valuation adjustments related to obsolete and slow-moving inventory.
During the fourth quarter of 1996, the Company increased the reserve for
product liability by $70,000 and recognized income of $459,000 from the reversal
of a valuation allowance provided against deferred tax assets.
9. EARNINGS PER SHARE CALCULATIONS:
The Company adopted Statement of Financial Accounting Standard No. 128
("FAS 128"), Earnings Per Share, for the year ended December 31, 1997. All
prior period earnings per share data have been restated to conform to the
provisions of this statement. Basic earnings per share is computed using the
weighted average number of shares outstanding. Diluted earnings per share is
computed using the weighted average number of shares outstanding adjusted for
the incremental shares attributed to outstanding options and warrants to
purchase common stock and convertible subordinated debentures. For purposes
of computing diluted earnings per share assuming conversion of the subordinated
debentures, income from continuing operations is adjusted for interest expense,
net of tax. For the years ended December 31, 1997, 1996 and 1995, the common
stock equivalents were not considered in the diluted earnings per share
calculation since the results were antidilutive.
10. SALE OF RECOVERY PRODUCTS SEGMENT:
On March 12, 1997, the Company entered into an agreement to sell its 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 $242,000. The buyer entered
into a "temporary services agreement" to pay the Company $30,000 a month for
the use of the Company's facility and accounting services from the date of the
sale until July 1997. In connection with the sale, the Company agreed to
retain cash, leasehold improvements, other assets and certain related accrued
liabilities and leases of the discontinued segment.
The Company recognized a gain of $2,180,000, net of related income taxes of
$1,400,000. Included in the determination of the gain are future lease
commitments of $332,000, severance and other compensation arrangements of
$96,000 and disposal costs of $222,000. At December 31, 1997, the Company is
in negotiations with the buyer concerning matters related to escrow deposits
and the temporary services agreement.
Revenues from discontinued operations through the date of disposal were
$2,500,000. Accrued disposition costs at December 31, 1997 include estimated
amounts for lease commitments and other contingent liabilities related to
discontinued operations.
11. MERGER AGREEMENT:
On February 12, 1998, the Company entered into a definitive merger agreement
with Interpore International, Inc., a California-based company. The agreement
calls for each shareholder of the Company to receive 1.275 shares of Interpore
common stock in exchange for each of their shares of the Company's common stock.
It is anticipated that the transaction will be consumated after the customary
conditions are met and after approval by the shareholders of each company.
The transaction is expected to close prior to June 30, 1998.
Interpore International is a biomaterials company specializing in the
development, manufacture and marketing of synthetic bone and tissue products
for use in the orthopaedic markets.
12. COMMITMENTS AND CONTINGENCIES:
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 anytime within
five years after such date, the Company's aggregate insured claims limit equals
the outstanding balance for spinal implants claims incurred after 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 750 such lawsuits have been filed in which the Company is a
party, although none of these lawsuits involve the Company's products. 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. In addition, the Company
has been named as a defendant in sixteen cases alleging claims of product
liability for defective products manufactured by the Company. 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 Companys 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 Companys 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.
The range of estimated product liability exposures was $300,000 to $575,000.
The Company has provided a reserve for these exposures of $300,000.
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 revenues generated from the sales of these
spinal implant products.
International sales were $5,100,000, $4,200,000, $1,400,000 in 1997, 1996,
and 1995, respectively. Sales to individual customers constituting more than
10% of net sales were $1,837,000 and $652,000, in 1996, and 1995, respectively.
Accounts receivable include amounts from two customers of approximately
$1,500,000 at December 31, 1996.
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 February 1998, the following broker-dealer firms made a market in Cross
Medical Products, Inc.'s Common Stock.
Charles M. Blair & 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
------ ------
<S> <C> <C>
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
1997
First Quarter $9.13 $7.25
Second Quarter $7.38 $6.00
Third Quarter $8.88 $6.88
Fourth Quarter $9.75 $7.50
</TABLE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
Cross Medical Products, Inc. and Subsidiary (formerly Danninger Medical
Technology, Inc. and Subsidiaries) on Form S-8 (file numbers 33-26211, 33-39336,
33-61995, 33-91710 and 333-29063) of our reports dated February 4, 1998 (except
for Note 11 to the consolidated financial statements for which the date is
February 11, 1998), on our audits of the consolidated financial statements and
financial statement schedule of Cross medical Products, Inc. and Subsidiary as
of December 31, 1997 and 1996, and for the years ended December 31, 1997, 1996
and 1995, which reports are included in this Annual Report on Form 10-K.
/s/ COOPERS & LYBRAND L.L.P.
Columbus, Ohio
March 27, 1997
EXHIBIT 24
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, 1997, 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 1, 1998.
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
/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 DECEMBER
31, 1997 CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS
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-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,588
<SECURITIES> 0
<RECEIVABLES> 4,471
<ALLOWANCES> 167
<INVENTORY> 8,459
<CURRENT-ASSETS> 16,941
<PP&E> 1,452
<DEPRECIATION> 482
<TOTAL-ASSETS> 18,762
<CURRENT-LIABILITIES> 3,585
<BONDS> 5,160
0
0
<COMMON> 53
<OTHER-SE> 9,945
<TOTAL-LIABILITY-AND-EQUITY> 18,762
<SALES> 12,918
<TOTAL-REVENUES> 12,918
<CGS> 5,923
<TOTAL-COSTS> 5,923
<OTHER-EXPENSES> 7,915
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 426
<INCOME-PRETAX> (1,346)
<INCOME-TAX> (484)
<INCOME-CONTINUING> (862)
<DISCONTINUED> 2,470
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,608
<EPS-PRIMARY> .32<F1>
<EPS-DILUTED> .32<F1>
<FN>
<F1>WE HAVE CALCULATED EARNINGS PER SHARE AMOUNTS IN ACCORDANCE WITH FAS 128
"EARNINGS PER SHARE". WE HAVE ENTERED BASIC AND DILUTED AMOUNTS IN PLACE OF
PRIMARY AND FULLY DILUTED, RESPECTIVELY.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
***RESTATED FINANCIAL DATA SCHEDULE***
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DECEMBER
31, 1996 CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS
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-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> .27<F1>
<EPS-DILUTED> .27<F1>
<FN>
<F1>WE HAVE CALCULATED EARNINGS PER SHARE AMOUNTS IN ACCORDANCE WITH FAS 128
"EARNINGS PER SHARE". WE HAVE ENTERED BASIC AND DILUTED AMOUNTS IN PLACE OF
PRIMARY AND FULLY DILUTED, RESPECTIVELY.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
***RESTATED FINANCIAL DATA SCHEDULE***
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DECEMBER
31, 1995 CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 3,701
<ALLOWANCES> 204
<INVENTORY> 4,224
<CURRENT-ASSETS> 8,307
<PP&E> 2,206
<DEPRECIATION> 1,482
<TOTAL-ASSETS> 9,517
<CURRENT-LIABILITIES> 5,121
<BONDS> 1,219
0
0
<COMMON> 47
<OTHER-SE> 3,475
<TOTAL-LIABILITY-AND-EQUITY> 9,517
<SALES> 12,584
<TOTAL-REVENUES> 12,584
<CGS> 6,360
<TOTAL-COSTS> 6,360
<OTHER-EXPENSES> 6,362
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 289
<INCOME-PRETAX> (431)
<INCOME-TAX> (72)
<INCOME-CONTINUING> (359)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (359)
<EPS-PRIMARY> (.08)<F1>
<EPS-DILUTED> (.08)<F1>
<FN>
<F1>WE HAVE CALCULATED EARNINGS PER SHARE AMOUNTS IN ACCORDANCE WITH FAS 128
"EARNINGS PER SHARE". WE HAVE ENTERED BASIC AND DILUTED AMOUNTS IN PLACE OF
PRIMARY AND FULLY DILUTED, RESPECTIVELY.
</FN>
</TABLE>
