<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 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
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Commission File Number: 000-19168
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Sofamor Danek Group, Inc.
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(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Indiana 35-1580052
- ------------------------------------------------------------------------------------------------------------
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification Number)
</TABLE>
1800 Pyramid Place, Memphis, Tennessee 38132
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(Address of principal executive offices) (Zip Code)
(901) 396-2695
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
24,607,504 shares of common stock outstanding as of March 31, 1997
- --------------------------------------------------------------------------------
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PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
SOFAMOR DANEK GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARES)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
----------- ------------
ASSETS (UNAUDITED)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 5,083 $ 2,830
Short-term investments 72 111
Accounts receivable--trade, less allowance for
doubtful accounts of $1,605 and $1,589 for
March 31, 1997 and December 31, 1996,
respectively 74,498 70,031
Other receivables 19,241 15,813
Inventories 41,868 33,483
Loaner set inventories 15,217 14,123
Prepaid expenses 4,906 6,318
Prepaid income taxes 476 --
Current deferred income taxes 5,500 5,312
--------- ---------
Total current assets 166,861 148,021
Property, plant and equipment
Land 1,457 1,484
Buildings 10,828 11,261
Machinery and equipment 32,612 32,083
Automobiles 642 708
--------- ---------
45,539 45,536
Less accumulated depreciation (20,819) (20,026)
--------- ---------
24,720 25,510
Investments 904 920
Intangible assets, net 83,801 83,426
Other assets 28,551 28,282
Non-current deferred income taxes 32,232 33,002
========= =========
Total assets $ 337,069 $ 319,161
========= =========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
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SOFAMOR DANEK GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARES)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
----------- ------------
LIABILITIES (UNAUDITED)
<S> <C> <C>
Current Liabilities:
Notes payable and lines of credit $ 57,441 $ 50,207
Current maturities of long-term debt 16,671 16,687
Accounts payable 11,308 7,332
Income taxes payable 2,080 3,898
Accrued expenses 33,319 38,770
--------- ---------
Total current liabilities 120,819 116,894
Long-term debt, less current maturities 12,297 12,300
Deferred income taxes 112 121
Product liability litigation 47,015 48,000
Minority interest 2,667 2,020
Commitments and contingencies
STOCKHOLDERS' EQUITY
Preferred stock, no par value, 5,000,000 shares
authorized, no shares outstanding
Common stock, no par value 150,000,000 shares
authorized: 25,293,412 and 25,094,277 shares
issued (including 685,908 shares held in treasury)
at March 31, 1997 and December 31, 1996,
respectively 57,813 52,994
Retained earnings 110,818 98,044
Cumulative translation adjustment (745) 2,542
--------- ---------
167,886 153,580
Less:
Cost of common stock held in treasury (9,985) (9,985)
Unearned compensation (27) (54)
Stockholder notes receivable (3,715) (3,715)
--------- ---------
Total stockholder's equity 154,159 139,826
--------- ---------
Total liabilities and stockholder's equity $ 337,069 $ 319,161
========= =========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
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SOFAMOR DANEK GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
1997 1996
--------- ---------
<S> <C> <C>
Revenues $ 69,759 $ 54,218
Cost of goods sold 12,370 10,616
--------- ---------
Gross Profit 57,389 43,602
Operating Expenses:
Selling, general and administrative 32,698 25,988
Research and development 4,730 3,638
--------- ---------
37,428 29,626
--------- ---------
Income from operations 19,961 13,976
Other income 76 980
Interest expense (1,176) (777)
--------- ---------
Income from operations before provision
for and charge in lieu of income taxes 18,861 14,179
Provision for and charge in
lieu of income taxes 5,470 3,582
--------- ---------
Income before minority interest 13,391 10,597
Minority interest (617) (412)
--------- ---------
Net income $ 12,774 $ 10,185
========= =========
Fully diluted net income per share $ 0.48 $ 0.39
========= =========
Weighted average common shares outstanding 26,695 26,091
========= =========
</TABLE>
Note: Primary weighted average shares approximate fully diluted
weighted average shares.
The accompanying notes are an integral part
of the consolidated financial statements.
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SOFAMOR DANEK GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1997 1996
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Income before minority interest $ 13,391 $ 10,597
Minority interest (617) (412)
--------- ---------
Net income 12,774 10,185
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization 3,630 1,936
Provision for doubtful accounts receivable 70 47
Deferred income tax (benefit) expense 222 (1,372)
Gain on disposal of equipment (7) --
Minority interest 617 412
Changes in assets and liabilities:
Accounts receivable (6,771) (344)
Other receivables (3,549) (4,414)
Inventories and loaner set inventories (10,631) (1,120)
Prepaid expenses 1,302 74
Prepaid income taxes (479) (1,322)
Other assets (315) (14,724)
Accounts payable 4,230 (943)
Income taxes payable 44 5,829
Accrued expenses (4,590) 5,035
Product liability litigation (985) --
--------- ---------
Net cash used by operating activities (4,438) (721)
--------- ---------
Cash flows from investing activities:
Purchase of short-term investments (2) (10,856)
Proceeds from maturities of short-term investments 33 12,067
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
5
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SOFAMOR DANEK GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW (CONTINUED)
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1997 1996
--------- ---------
<S> <C> <C>
Payments for purchase of property, plant and equipment (1,549) (1,627)
Proceeds from sale of equipment 14
Purchase of intangible assets (3,867) (992)
Increase in notes receivable, other (23) --
Repayments of notes receivable, other 9 2
Payments for investment (55) --
--------- ---------
Net cash used by investing activities (5,440) (1,406)
--------- ---------
Cash flows from financing activities:
Increase in short-term borrowings 8,423 1,978
Proceeds from long-term debt 130 926
Repayment of long-term debt (41) (28)
Proceeds from issuance of common stock 3,197 2,928
Capital contribution by minority shareholder 148 428
--------- ---------
Net cash provided by financing activities 11,857 6,232
--------- ---------
Effect of exchange rate changes on cash 274 (1,292)
--------- ---------
Increase in cash and cash equivalents 2,253 2,813
Cash and cash equivalents, beginning of period 2,830 11,330
--------- ---------
Cash and cash equivalents, end of period $ 5,083 $ 14,143
========= =========
</TABLE>
Supplemental disclosure of non-cash investing and financing activities:
- In 1997 and 1996, net income tax benefits of $1,622 and $1,429,
respectively, were realized by the Company as a result of certain
common stock options being exercised and vesting of certain restricted
common stock, reducing accrued federal and state income taxes payable
and increasing common stock.
The accompanying notes are an integral part
of the consolidated financial statements.
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SOFAMOR DANEK GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. Financial Statement Presentation
The consolidated balance sheet as of March 31, 1997, the consolidated
statements of income for the three months ended March 31, 1997 and 1996,
and the consolidated statements of cash flows for the three months ended
March 31, 1997 and 1996, are unaudited but, in the opinion of management,
include all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of financial position, results of
operations and cash flows.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. It is suggested that
these consolidated financial statements be read in conjunction with the
financial statements and notes thereto included in the Company's 1996
Annual Report on Form 10-K.
2. Inventories and Loaner Set Inventories
Net inventories and loaner set inventories consist of:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
March 31, December 31,
1997 1996
-----------------------------------------------------------------------------
<S> <C> <C>
Finished goods $34,401 $28,260
Work-in-process 4,761 2,961
Raw materials 2,706 2,262
-----------------------------------------------------------------------------
Net inventories $41,868 $33,483
-----------------------------------------------------------------------------
Loaner set inventories, net $15,217 $14,123
-----------------------------------------------------------------------------
</TABLE>
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3. Income Taxes
The Company's effective income tax rates were 29.0% and 25.3%,
respectively, for the quarters ended March 31, 1997 and March 31, 1996.
The difference between the Company's effective and statutory tax rates for
both 1997 and 1996 resulted primarily from the impact of certain elections
made for U.S. tax purposes following the combination (the "Combination")
of Danek Group, Inc. with Sofamor S.A. ("Sofamor"), and the subsequent
reorganization of Sofamor from a Societe Anonyme (S.A.) under French law
to a Societe en Nom Collectif (S.N.C.) in late 1993. At March 31, 1997,
the balance sheet of the Company reflected a net deferred tax asset of
$37,620. No valuation allowance was recorded since sufficient taxable
income existed in available carryback periods to recognize fully these net
deferred tax assets.
During the first quarters of 1996 and 1995, charges in lieu of income
taxes of $1,622 and $1,429, respectively, were recorded by the Company as
a result of certain common stock options being exercised and vesting of
certain restricted common stock.
4. Adoption of SFAS 128
In March 1997, the Financial Accounting Standards Board issued Statement
No. 128 "Earnings Per Share" ("FAS 128"). FAS 128 establishes standards
for computing and presenting earnings per share ("EPS") and replaces the
presentation of primary EPS with a presentation of basic EPS. It also
requires dual presentation of basic and diluted EPS on the face of the
statement of operations and requires a reconciliation of the numerator and
the denominator of the basic EPS computation to the numerator and the
denominator of the diluted EPS computation. The Company will adopt the
disclosure requirements of FAS 128 beginning December 31, 1997. The
Company does not expect the adoption of FAS 128 to have a material impact
on earnings per share when presented on a comparable basis.
5. Commitments and Contingencies
The Company is involved from time to time in litigation on various matters
which are routine to the conduct of its business, including product
liability and intellectual property cases.
PRODUCT LIABILITY LITIGATION
Beginning in 1994, the Company and other spinal implant manufacturers were
named as defendants in a number of product liability lawsuits brought in
various federal and state courts around the country. These lawsuits allege
that plaintiffs were injured by spinal implants manufactured by the
Company and others. Although the plaintiffs have advanced claims under
many different legal theories, the essence of their claims appear to be
that the Company (including Sofamor and its former U.S. distributor)
marketed some of its spinal systems for pedicle fixation in contravention
of Food & Drug Administration ("FDA") rules and regulations (governing
marketing and labeling), that pedicle fixation has not been
8
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proven safe and effective in the context of FDA labeling standards, that
some or all of the spinal systems are defectively designed and
manufactured, and that plaintiffs have suffered a variety of injuries as a
result of their physicians' use of such systems in pedicle fixation. The
Company has also been named as a defendant in a number of lawsuits
instituted by plaintiffs who have received spinal implants manufactured by
other manufacturers and in which the Company is alleged to have
participated in a conspiracy among doctors, manufacturers, hospitals,
teaching institutions, professional societies and others to promote, in
violation of applicable law, the use of spinal implants.
In a number of cases, plaintiffs have sought to proceed as representatives
of classes of spinal implant recipients. All efforts to obtain class
certification have been denied or withdrawn. Some plaintiffs have filed
individual lawsuits, whereas other lawsuits list multiple plaintiffs and,
in certain instances, multiple lawsuits have been filed on behalf of the
same individual plaintiffs. Plaintiffs typically seek relief in the form
of monetary damages, often in unspecified amounts. Many of the plaintiffs
only allege as monetary damages an amount in excess of the jurisdictional
minimum for the court in which the case has been filed. A few suits also
name as defendants various officers and directors of the Company.
To date, approximately two thousand eight hundred fifty (2,850) plaintiffs
have joined in lawsuits against the Company. The majority of these
plaintiffs filed their claims in 1995. The Company is also named as a
defendant in lawsuits involving about two thousand eight hundred (2,800)
claimants where the Company is alleged to have conspired with competitors
and others illegally to promote the use of spinal implant systems.
The Company believes that it has defenses, including, without limitation,
defenses based upon the failure of a cause of action to exist where no
malfunction of the implant has occurred or the plaintiff has suffered no
injury attributable to the Company's product, the expiration of the
applicable statute of limitations and the learned intermediary defense.
The Company has asserted and will continue to assert these defenses
primarily through the filing of dispositive motions. The Company believes
that all product liability lawsuits currently pending against it are
without merit and will continue to defend them vigorously.
FEDERAL MULTIDISTRICT LITIGATION (MDL 1014)
On August 4, 1994, the Federal Judicial Panel for Multidistrict Litigation
ordered all federal court lawsuits to be transferred to and consolidated
for pretrial proceedings, including the determination of class
certification, in the United States District for the Eastern District of
Pennsylvania in Philadelphia (the "Multidistrict Litigation"). Lawsuits
filed in federal court after August 4, 1994, have also been transferred to
and consolidated in the Multidistrict Litigation in the Eastern District
of Pennsylvania. In addition, a number of lawsuits filed in state courts
around the country were removed to federal courts and then transferred
into the Multidistrict Litigation. On February 22, 1995, Chief Judge
Emeritus, Louis C. Bechtle, denied class certification. A large number of
plaintiffs filed individual lawsuits as a result of the denial of class
certification. In some instances lawsuits that had been removed and
transferred into the Multidistrict Litigation have been remanded to the
state courts in which
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they were filed because there was no federal court jurisdiction.
Currently, the Company is a defendant in approximately one thousand
(1,000) individual claims and one thousand one hundred (1,100) conspiracy
claims consolidated in the Multidistrict Litigation. On August 22, 1996,
Judge Bechtle dismissed without prejudice plaintiffs' conspiracy claims.
Most plaintiffs asserting conspiracy claims in the Multidistrict
Litigation have filed amended or new complaints. It is not possible to
determine at this time precisely how many of these conspiracy complaints
will be reasserted or the number of additional plaintiffs that may file
new lawsuits. On April 16, 1997, Judge Bechtle dismissed conspiracy claims
alleging fraud on the FDA, but deferred the remaining conspiracy claims
for later consideration by the federal trial courts to whom the cases will
be remanded for trial.
Discovery has been completed in a number of the federal court cases and is
continuing in the remainder. It is anticipated that the first cases to be
returned for trial to the federal court in which they were filed will be
remanded beginning in August 1997. It is not now possible to determine
when the first federal court cases will be tried.
STATE COURT LITIGATION
A number of cases filed in state courts were not eligible for removal and
transfer into the Multidistrict Litigation. Currently, there are
approximately eighteen hundred and fifty (1,850) individual claims pending
against the Company in several courts around the country, principally in
Tennessee, Oklahoma, Texas and Pennsylvania. In addition, there are
approximately seventeen hundred (1,700) conspiracy claims pending in state
courts.
Fifteen hundred and forty-three (1,543) plaintiffs who had joined together
in several complaints which had been removed to the Multidistrict
Litigation proceedings, have had their cases remanded to the state court
in Memphis, Tennessee, where they were originally filed when it was
determined that the federal court lacked jurisdiction over their claims.
The presiding state court judge in Memphis has established a case
management plan which calls for the preparation of eight representative
cases for pretrial preparation and trial.
Discovery is proceeding in all remaining state court cases. Some state
cases have been given trial dates in 1997. It is anticipated that a number
of other state court cases around the country may be scheduled for trial
in 1997, although delays in trial dates are common. Trials in the Memphis
proceedings are scheduled to commence in January of 1998.
ACROMED CORPORATION PROPOSED SETTLEMENT
In December 1996, AcroMed Corporation ("AcroMed"), a spinal implant
manufacturer and a defendant in many of the cases pending in the
Multidistrict Litigation, and the Plaintiff's Legal Committee in the
Multidistrict Litigation announced that they had entered into a
conditional settlement regarding all product liability claims involving
the use of AcroMed devices to achieve pedicular fixation with screws in
spinal fusion surgery. Under the terms of the proposed settlement, AcroMed
will establish a settlement fund consisting of $100 million in cash and
the proceeds of its product liability insurance policies. In January 1997,
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the parties submitted a formal class settlement agreement and related
documentation for approval by Judge Bechtle. Hearings began on April 23,
1997 to consider certification of a settlement class and the fairness,
adequacy and reasonableness of the settlement. Further hearings are
expected. All federal court proceedings involving AcroMed devices have
been stayed pending final consideration of the proposed settlement. A
number of objections to the settlement have been filed with the Court.
INSURANCE
All of the insurance carriers for policy periods in which these claims
have been made have asserted reservation of rights, but have not denied
coverage to the Company. To date, the cost of defending these claims has
been reimbursed by certain of the primary and excess carriers, and the
Company is actively engaged in discussions concerning the recovery of
amounts currently due and owing from all other carriers. The Company
believes that these receivables are recoverable under the terms of the
Company's policies. The Company's insurance policies are reduced by the
costs of defense, except for a policy issued by Royal Surplus Lines
Insurance Co. ("Royal") covering the 12-month period that began in
November 1995. The Company estimates that the litigation may continue for
several years and, if so, the cost to defend and conclude these lawsuits
is likely to exhaust its insurance coverage. An insurer, Royal, providing
coverage for the 12-month period commencing in November 1995, brought an
action in early December 1996 in the Federal District Court for the Middle
District of Tennessee (Nashville Division) seeking a declaratory judgment
as to, among other things, whether the policy covers lawsuits which have
been reported to the insurer during the policy period. The Company has
moved to dismiss or transfer this action to the Federal District Court in
Memphis, Tennessee, on the ground that Nashville is not the proper venue
for the suit. The Company has also filed its answer and counterclaim in
the Royal lawsuit. The Company has initiated its own declaratory judgment
action against Royal in the Federal District Court located in Memphis,
Tennessee. This action seeks a declaration of coverage and immediate
payment of the outstanding balance of amounts due from Royal. Both cases
are in preliminary stages. The Company believes that Royal's suit is
without merit and will defend it vigorously.
As is common in the insurance industry, the Company's insurance policies
covering product liability claims must be renewed annually. Although the
Company has been able to obtain insurance coverage relating to product
liability claims at a cost and on other terms and conditions that are
acceptable to the Company, there can be no assurance that in the future it
will be able to do so.
The Company's 1996 financial results reflect a pre-tax charge relating to
costs associated with the product liability litigation described above.
The costs provided for include, but are not limited to, legal fees paid or
anticipated to be paid and other costs related to the Company's defense
and conclusion of these matters.
The actual costs to the Company could differ from the estimated charge and
will be dependent upon a number of factors that will not be known for some
time, including, among
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other things, the resolution of defense motions and the extent of further
discovery. Although an adverse resolution of the lawsuits could have a
material effect on the Company's results of operations in future periods,
the Company does not believe that these matters will in the future have a
material adverse effect on its consolidated financial position. The
Company is unable to predict the ultimate outcome or the financial impact
of the product liability litigation.
SECURITIES LAWS ACTIONS
Beginning in April 1994, the Company and four of its officers and
directors were named in five shareholder lawsuits filed in the United
States District Court in Memphis, Tennessee. Four of the lawsuits purport
to be class actions. All of the lawsuits were consolidated into one case
in the United States District Court in Memphis through an amended
complaint which added four new individual defendants who are either
current or former directors of the Company. The lawsuit alleges that the
defendants made false and misleading statements and failed to disclose
material facts to the investing public and seeks money damages. The
alleged securities law violations are based on the claim that the
defendants failed to disclose that the Company sold its products
illicitly, illegitimately and improperly and to timely disclose facts
concerning the termination of the former United States distributor of
Sofamor products, National Medical Specialties, Inc. ("NMS"). The
allegations relating to illicit and illegitimate sales of product are, for
the most part, copied from product liability complaints filed against the
Company and other manufacturers currently being coordinated in the United
States District Court for the Eastern District of Pennsylvania which are
referred to above. The allegations of improper sales relate to one of the
Company's selling programs which has been publicly disclosed since May
1991. The allegations concerning NMS relate to the termination of the NMS
distribution agreement covering Sofamor products in the United States. On
October 3, 1995, the United States District Court Judge in Memphis
dismissed with prejudice the entire case against the Company and each of
the individual defendants. The plaintiffs have appealed the dismissal to
the United States Court of Appeals for the Sixth Circuit, which has not
yet ruled on this appeal.
SPANISH DISTRIBUTOR ACTION
In late September 1994, a Magistrate of the Commercial Court in Paris
ruled in favor of a former Spanish distributor of Sofamor's products on a
claim of wrongful termination of the distribution agreement in 1992. Prior
to the Combination, an accrual was established, with a related charge to
earnings, for this pending litigation. On the Combination date in June
1993, the Company also established a separate indemnity with respect to
potential losses resulting from such lawsuit and placed in escrow shares
issued to the former Sofamor shareholders pending the final outcome of
this lawsuit. The $3.0 million award (including interest) rendered by the
French Magistrate exceeded the pre-established accrual. As a result, the
Company recorded an expense of $2.2 million for the non-recurring
litigation award during the third and fourth quarters of 1994. The Company
filed an appeal which involves a complete retrial on all issues. The
former Spanish distributor recently filed its papers in the appeal and
seeks additional damages; the Company seeks to have the decision
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of the Commercial Court reversed. A hearing on the appeal is currently
scheduled for the fourth quarter of 1997.
The Company does not believe the Securities Laws Actions or the Spanish
Distributor Action, described above, will have a material adverse effect
on its consolidated financial position, results of operations or cash
flows because of, among other reasons, the facts and circumstances
existing with respect to each action, the Company's belief that these
actions are without merit, certain defenses available to the Company and
the availability of insurance in the Securities Laws Actions.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
The following table sets forth for the periods indicated selected unaudited
financial information expressed as a percentage of revenues and the
period-to-period change in such information.
<TABLE>
<CAPTION>
Period-to-Period
As a Percentage of Revenues Change
------------------------------- ----------------------
Three Months Ended Three Months Ended
March 31, March 31,
1997 1996 1997 vs. 1996
---------- ---------- ----------------------
<S> <C> <C> <C>
Revenues 100.0% 100.0% 28.7%
Cost of goods sold 17.7 19.6 16.5
---------- ----------
Gross profit 82.3 80.4 31.6
Operating expenses:
Selling, general and administrative 46.9 47.9 25.8
Research and development 6.8 6.7 30.0
---------- ----------
Income from operations 28.6 25.8 42.8
Other income 0.1 1.8 (92.2)
Interest expense (1.7) (1.4) 51.4
---------- ----------
Income from operations before provision for and
charge in lieu of income taxes 27.0 26.2 33.0
Provision for and charge in lieu of income taxes 7.8 6.6 52.7
---------- ----------
Income before minority interest 19.2 19.6 26.4
Minority interest (0.9) (0.8) 49.8
---------- ----------
Net income 18.3% 18.8% 25.4%
========== ==========
</TABLE>
RESULTS OF OPERATIONS*
The Company reported record first quarter revenues of $69.8 million for the
quarter ended March 31, 1997, which represented a $15.5 million, or 28.7%,
increase over the first quarter of 1996. An increase in volume comprised 26.6%
of the revenue growth. The Company's conversion of certain portions of its
international distribution network to direct sales, which resulted in higher
selling prices, contributed a 2.6% increase. Other net pricing changes in
existing distribution channels resulted in a 2.7% increase in revenues. If
exchange rates had been constant, revenues would have reflected an additional
3.2% increase compared with the first quarter of 1996.
- ----------
* Except for the historical information contained in this Quarterly Report on
Form 10-Q, the matters discussed herein (including, in particular, those
discussed in Part II, Item 1, "Legal Proceedings") are forward-looking
statements that involve risks and uncertainties, including (without limitation)
the timely development and acceptance of new products, the impact of competitive
products, the timely receipt of regulatory clearances required for new products,
the regulation of the Company's products generally, the disposition of certain
litigation involving the Company and certain other risks and uncertainties
detailed from time to time in the Company's periodic reports (including the
Annual Report on Form 10-K for the year ended December 31, 1996 and the Current
Report on Form 8-K dated January 6, 1997) filed with the Securities and Exchange
Commission.
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U.S. revenues increased 35.0% to $48.3 million for the quarter ended March 31,
1997, from the same period in 1996. The Company believes the improvement in U.S.
revenues is the result of an increased number of instrumented fusions, as well
as the acceptance of new products and services such as the STEALTHSTATION(TM)
system, the TIMESH(TM) cranial plating system, the MEDNEXT(R) surgical drill
system, and services related to the distribution of cortical bone dowel and
other allograft bone products.
Non-U.S. revenues advanced 16.4% during first quarter 1997, when compared to
first quarter 1996. The increase would have been 25.8% if exchange rates had
been constant. Higher volume in core and new products was the primary source of
the increase in revenues during the first quarter of 1997, compared with the
same period of 1996. In addition, the Company's revenues continued to benefit
from the direct sales operations which were established in selected countries
during 1996.
The Company's gross margin improved as a percentage of revenues during the first
quarter of 1997 to 82.3% from 80.4% for the same period of 1996. The improvement
in gross margin is due to greater leveraging of manufacturing costs due to
increased volume, a reduction in the levels of outsourced product manufacturing,
higher margins relating to changes in international distribution, and favorable
shifts in the sales mix of certain products and sales programs.
Selling, general and administrative expenses were 46.9% of revenues in the first
quarter of 1997, compared with 47.9% during the same period of 1996. This
decrease in selling, general and administrative expenses, expressed as a
percentage of revenues, resulted from the leveraging of fixed costs over greater
revenue volume, even though higher expenses were incurred related to direct
sales operations established in selected countries during 1996.
Research and development expenses totaled $4.7 million, or 6.8% of revenues, for
the first quarter of 1997, compared with $3.6 million, or 6.7% of revenues, for
the first quarter of 1996. The first quarter 1997 dollar spending represents an
increase of 30.0% over the same period in 1996. These development and clinical
costs are incurred as the Company continues to enhance existing product lines
and develop new and complementary products, such as the interbody fusion
devices, biological products for use in spinal applications, and products
related to frameless stereotactic surgery in the spinal and neurological fields
of use. These expenditures demonstrate the Company's continued commitment to the
pursuit of applying new medical technologies to product opportunities.
The Company reported other income of $76,000 for the quarter ended March 31,
1997, compared with $980,000 for the same period in 1996, which consisted mostly
of foreign exchange gains. Interest expense for the first quarter of 1997 was
$1.2 million and $777,000 during the same period of 1996. Interest expense was
higher during the first quarter of 1997 compared with the prior year due to
interest expense on increased borrowings against the Company's credit facilities
occurring principally as a result of acquisitions made in 1996.
The Company's effective income tax rates were 29.0% and 25.3%, respectively, for
the quarters ended March 31, 1997 and March 31, 1996. The difference between the
Company's effective and
15
<PAGE> 16
statutory tax rates for both 1997 and 1996 resulted primarily from the impact of
certain elections made for U.S. tax purposes following the combination (the
"Combination") of Danek Group, Inc. with Sofamor S.A. ("Sofamor"), and the
subsequent reorganization of Sofamor from a Societe Anonyme (S.A.) under French
law to a Societe en Nom Collectif (S.N.C.) in late 1993. Management cannot be
certain that such a favorable effective income tax rate will be achieved in
future periods, since the effective tax rate calculation is dependent upon the
Company's pre-tax income dollar amount. Higher future pre-tax income could lead
to higher future effective tax rates. At March 31, 1997, the balance sheet of
the Company reflected a net deferred tax asset of $37.6 million. No valuation
allowance was recorded since sufficient taxable income exists in available
carryback periods to recognize fully these net deferred tax assets.
In March 1997, the Financial Accounting Standards Board issued Statement No. 128
"Earnings Per Share" ("FAS 128"). FAS 128 establishes standards for computing
and presenting earnings per share ("EPS") and replaces the presentation of
primary EPS with a presentation of basic EPS. It also requires dual presentation
of basic and diluted EPS on the face of the statement of operations and requires
a reconciliation of the numerator and the denominator of the basic EPS
computation to the numerator and the denominator of the diluted EPS computation.
The Company will adopt the disclosure requirements of FAS 128 beginning December
31, 1997. The Company does not expect the adoption of FAS 128 to have a material
impact on earnings per share when presented on a comparable basis.
LIQUIDITY AND CAPITAL RESOURCES
Cash generated from operations and the Company's revolving lines of credit are
the principal sources of funding available for the growth of the business,
including working capital and additions to property, plant and equipment, as
well as debt service requirements and required contractual payments. The Company
believes that these sources of funding will be sufficient to meet its expected
cash needs for the foreseeable future. Cash, cash equivalents and short-term
investments totaled $5.2 million at March 31, 1997, compared with $2.9 million
at December 31, 1996.
The Company's working capital increased by $14.9 million during the first
quarter of 1997. The increase in working capital resulted primarily from
operations. Accounts receivable increased $4.5 million from December 31, 1996,
due principally to the increase in revenues. Inventories and loaner set
inventories increased by $9.5 million from year-end due mostly to stocking
levels required for recently formed subsidiaries and the manufacture of loaner
set inventories in preparation for new sales and marketing programs. Other
receivables, which consisted primarily of amounts recoverable from insurance
carriers relating to the expenses incurred in connection with product liability
litigation, increased $3.4 million from the Company's previous year-end.
In connection with the Company's 1995 license agreement with Genetic's
Institute, which resulted in a special charge of $45.3 million, the Company had
a remaining liability of $23.0 million at March 31, 1997. This liability
represents the present value of the $25.0 million in remaining scheduled
payments. Of this amount, $7.0 million is classified as long-term debt and
16
<PAGE> 17
$16.0 million is reflected as a current liability, representing the principal
portion of the $17.5 million payable on June 30, 1997. The final payment of $7.5
million is due in June of 1998.
The purchase agreements for two of the acquisitions made by the Company in 1996
contain provisions which provide for contingent payments to the former
shareholders of each entity based upon certain calculations relative to revenues
and earnings, as defined, through 1999. Such payments will be reflected as
purchase price adjustments. During 1996, the Company recorded an adjustment to
the purchase price of one of these acquisitions of $4.2 million. This amount was
paid during April of 1997. The Company is unable to determine whether such
payments will be required for the years 1997 through 1999.
During 1996, the Company recorded a special product liability litigation charge
of $50.0 million. This charge was recorded in order to recognize the reasonably
anticipated costs associated with the defense and conclusion of certain product
liability cases in which the Company is named as defendant. At March 31, 1997,
the balance sheet of the Company reflected a long-term liability of $47.0
million and the current portion of this liability was included in accrued
expenses.
Additions to property, plant and equipment during the first quarter of 1997 of
$1.5 million were related to capital asset expenditures necessary to support the
Company's manufacturing and distribution operations. The Company is in need of
additional office and distribution space at its Memphis location. Management has
entered into an agreement whereby the Company will lease a new facility adjacent
to its existing headquarters. This lease will be accounted for under Statement
of Financial Accounting Standards No. 13, "Accounting for Leases," as an
operating lease.
The Company has committed lines of credit totaling approximately $73.7 million.
At March 31, 1997, $57.4 million was outstanding under the Company's committed
lines of credit and other short-term borrowings. The committed lines of credit
consist primarily of a $60.0 million uncollateralized revolving line of credit
with a U.S. bank which is renewable annually and matures on October 15, 1997.
The Company has the option to convert the debt outstanding under this revolving
line of credit to a term loan, amortized on a quarterly basis over a term of up
to three years.
The Company invests available funds in short-term investment grade instruments,
certificates of deposit or direct or guaranteed obligations of the United States
of America. These short-term investments are available to fund the Company's
working capital requirements and acquisitions of capital assets.
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS AND FINANCIAL CONDITION
The Company's future operating results and financial condition are subject to
risks and uncertainties, including (without limitation) the following matters:
Regulatory Clearances. The Company manufactures devices that are subject to the
regulations of the FDA and, in some cases, to the regulations of foreign
governmental authorities. In
17
<PAGE> 18
particular, such devices are subject to marketing clearance by the FDA before
sales can be made in the United States. The process of obtaining marketing
clearances can be time consuming, and there can be no assurance that all
necessary clearances will be granted to the Company with respect to new devices
or that the FDA review will not involve delays adversely affecting the marketing
and sale of new products and devices by the Company. The enforcement of FDA
regulations depends heavily on administrative interpretation, and there can be
no assurance that future interpretations made by the FDA or other regulatory
bodies, with possible retroactive effect, will not adversely affect the Company.
The Company cannot predict the extent or impact of future foreign, federal,
state or local legislation or regulation.
Potential Impact of Health Care Cost Containment Proposals on Profitability. In
recent years, the cost of health care has risen significantly, and there have
been numerous proposals by legislators, regulators and third party health care
payers to curb these cost increases in the United States and Europe. Some of
these proposals have involved limitations on the amount of reimbursement for
specific surgical procedures. These proposals have been adopted in some cases.
The Company is unable to predict what changes will be made in the reimbursement
methods utilized by third-party health care payers. In addition, hospitals and
other health care providers have become increasingly cost sensitive. To date,
the Company does not believe that such health care cost containment proposals
have negatively affected the profitability or growth of its business; however,
the Company is not able to predict the future effect of these proposals on its
business.
Product Obsolescence. Spinal implant and other devices are subject to continuous
improvements and modifications and typically are rendered obsolete within a few
years. Success, therefore, requires any medical device company to devote
substantial resources to continued product development. The Company maintains
active research and development programs and has been successful in developing
or acquiring new products in the past. There can be no assurance that the
Company will be able to develop and introduce or acquire new products that will
enable it to remain competitive in the future.
Product Liability; Insurance. In recent years, physicians, hospitals, and other
participants in the health care industry have become subject to an increasing
number of lawsuits alleging malpractice, product liability or asserting related
legal theories, many of which involve large claims and significant defense
costs. The Company currently maintains liability insurance intended to cover
such claims, although there can be no assurance that the coverage limits of such
insurance policies will be adequate or that all amounts will ultimately be
collected from each insurer providing the applicable policy. Such insurance is
expensive, difficult to obtain and may not be available in the future on
acceptable terms or at all. The Company is currently involved in product
liability litigation. (See Note 5 to the Consolidated Financial Statements.)
There can be no assurance that additional claims will not be asserted against
the Company in the future. A successful future claim or aggregation of future
claims brought against the Company in excess of insurance coverage could have a
material adverse effect upon the financial condition, results of operations
and/or cash flows of the Company. Claims against the Company, regardless of
their merit or eventual outcome, may also have a material adverse effect upon
the reputation and business of the Company.
18
<PAGE> 19
Competition. Worldwide, there are a number of firms producing spinal implant
devices. The Company currently competes with a number of firms with financial,
marketing and technical resources comparable to or greater than those of the
Company. Because of the growth of the number of spinal fusion procedures
performed in recent years, a number of companies, including those active in
producing various orthopaedic and neurological products and having financial,
marketing and technical resources significantly greater than those of the
Company, have begun producing spinal implant devices. The Company anticipates
that additional companies may also begin such production.
Retention of Personnel. The Company is highly dependent upon its senior
management, and the competition for qualified management personnel is intense.
The loss of key personnel or an inability to attract, retain and motivate such
persons could adversely affect the business and prospects of the Company. There
can be no assurance that the Company will be able to retain its existing senior
management personnel or to attract additional qualified personnel if needed. The
Company also depends on its contractual relationships with certain physicians
for product ideas, research and advice. There can be no assurance that the
Company will be able to maintain and develop such relationships.
Global Market Risks. A significant portion of the Company's revenue is derived
from its international operations. As a result, the Company's operations and
financial results could be affected by international factors, such as changes in
foreign currency exchange rates or weak economic conditions in the foreign
markets in which the Company distributes its products.
Intellectual Property. The Company is dependent on its proprietary intellectual
property and attempts to protect such intellectual property through patents,
licensing, trade secrets and proprietary know-how. In the medical device
industry, challenges by third parties regarding intellectual property rights
occur frequently. Such challenges may result in litigation which is often
complex and expensive. There can be no assurance that the Company's proprietary
rights will not be challenged, rendered unenforceable or circumvented and that
pending or future patent or trademark applications will be granted.
19
<PAGE> 20
PART II -- OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Company is involved from time to time in litigation on various matters which
are routine to the conduct of its business, including product liability and
intellectual property cases.
PRODUCT LIABILITY LITIGATION
Beginning in 1994, the Company and other spinal implant manufacturers were named
as defendants in a number of product liability lawsuits brought in various
federal and state courts around the country. These lawsuits allege that
plaintiffs were injured by spinal implants manufactured by the Company and
others. Although the plaintiffs have advanced claims under many different legal
theories, the essence of their claims appear to be that the Company (including
Sofamor and its former U.S. distributor) marketed some of its spinal systems for
pedicle fixation in contravention of Food & Drug Administration ("FDA") rules
and regulations (governing marketing and labeling), that pedicle fixation has
not been proven safe and effective in the context of FDA labeling standards,
that some or all of the spinal systems are defectively designed and
manufactured, and that plaintiffs have suffered a variety of injuries as a
result of their physicians' use of such systems in pedicle fixation. The Company
has also been named as a defendant in a number of lawsuits instituted by
plaintiffs who have received spinal implants manufactured by other manufacturers
and in which the Company is alleged to have participated in a conspiracy among
doctors, manufacturers, hospitals, teaching institutions, professional societies
and others to promote, in violation of applicable law, the use of spinal
implants.
In a number of cases, plaintiffs have sought to proceed as representatives of
classes of spinal implant recipients. All efforts to obtain class certification
have been denied or withdrawn. Some plaintiffs have filed individual lawsuits,
whereas other lawsuits list multiple plaintiffs and, in certain instances,
multiple lawsuits have been filed on behalf of the same individual plaintiffs.
Plaintiffs typically seek relief in the form of monetary damages, often in
unspecified amounts. Many of the plaintiffs only allege as monetary damages an
amount in excess of the jurisdictional minimum for the court in which the case
has been filed. A few suits also name as defendants various officers and
directors of the Company.
To date, approximately two thousand eight hundred fifty (2,850) plaintiffs have
joined in lawsuits against the Company. The majority of these plaintiffs filed
their claims in 1995. The Company is also named as a defendant in lawsuits
involving about two thousand eight hundred (2,800) claimants where the Company
is alleged to have conspired with competitors and others illegally to promote
the use of spinal implant systems.
The Company believes that it has defenses, including, without limitation,
defenses based upon the failure of a cause of action to exist where no
malfunction of the implant has occurred or the plaintiff has suffered no injury
attributable to the Company's product, the expiration of the applicable statute
of limitations and the learned intermediary defense. The Company has
20
<PAGE> 21
asserted and will continue to assert these defenses primarily through the filing
of dispositive motions. The Company believes that all product liability lawsuits
currently pending against it are without merit and will continue to defend them
vigorously.
FEDERAL MULTIDISTRICT LITIGATION (MDL 1014)
On August 4, 1994, the Federal Judicial Panel for Multidistrict Litigation
ordered all federal court lawsuits to be transferred to and consolidated for
pretrial proceedings, including the determination of class certification, in the
United States District for the Eastern District of Pennsylvania in Philadelphia
(the "Multidistrict Litigation"). Lawsuits filed in federal court after August
4, 1994, have also been transferred to and consolidated in the Multidistrict
Litigation in the Eastern District of Pennsylvania. In addition, a number of
lawsuits filed in state courts around the country were removed to federal courts
and then transferred into the Multidistrict Litigation. On February 22, 1995,
Chief Judge Emeritus, Louis C. Bechtle, denied class certification. A large
number of plaintiffs filed individual lawsuits as a result of the denial of
class certification. In some instances lawsuits that had been removed and
transferred into the Multidistrict Litigation have been remanded to the state
courts in which they were filed because there was no federal court jurisdiction.
Currently, the Company is a defendant in approximately one thousand (1,000)
individual claims and one thousand one hundred (1,100) conspiracy claims
consolidated in the Multidistrict Litigation. On August 22, 1996, Judge Bechtle
dismissed without prejudice plaintiffs' conspiracy claims. Most plaintiffs
asserting conspiracy claims in the Multidistrict Litigation have filed amended
or new complaints. It is not possible to determine at this time precisely how
many of these conspiracy complaints will be reasserted or the number of
additional plaintiffs that may file new lawsuits. On April 16, 1997, Judge
Bechtle dismissed conspiracy claims alleging fraud on the FDA, but deferred the
remaining conspiracy claims for later consideration by the federal trial courts
to whom the cases will be remanded for trial.
Discovery has been completed in a number of the federal court cases and is
continuing in the remainder. It is anticipated that the first cases to be
returned for trial to the federal court in which they were filed will be
remanded beginning in August 1997. It is not now possible to determine when the
first federal court cases will be tried.
STATE COURT LITIGATION
A number of cases filed in state courts were not eligible for removal and
transfer into the Multidistrict Litigation. Currently, there are approximately
eighteen hundred and fifty (1,850) individual claims pending against the Company
in several courts around the country, principally in Tennessee, Oklahoma, Texas
and Pennsylvania. In addition, there are approximately seventeen hundred (1,700)
conspiracy claims pending in state courts.
Fifteen hundred and forty-three (1,543) plaintiffs who had joined together in
several complaints which had been removed to the Multidistrict Litigation
proceedings, have had their cases remanded to the state court in Memphis,
Tennessee, where they were originally filed when it was determined that the
federal court lacked jurisdiction over their claims. The presiding state court
21
<PAGE> 22
judge in Memphis has established a case management plan which calls for the
preparation of eight representative cases for pretrial preparation and trial.
Discovery is proceeding in all remaining state court cases. Some state cases
have been given trial dates in 1997. It is anticipated that a number of other
state court cases around the country may be scheduled for trial in 1997,
although delays in trial dates are common. Trials in the Memphis proceedings are
scheduled to commence in January of 1998.
ACROMED CORPORATION PROPOSED SETTLEMENT
In December 1996, AcroMed Corporation ("AcroMed"), a spinal implant manufacturer
and a defendant in many of the cases pending in the Multidistrict Litigation,
and the Plaintiff's Legal Committee in the Multidistrict Litigation announced
that they had entered into a conditional settlement regarding all product
liability claims involving the use of AcroMed devices to achieve pedicular
fixation with screws in spinal fusion surgery. Under the terms of the proposed
settlement, AcroMed will establish a settlement fund consisting of $100 million
in cash and the proceeds of its product liability insurance policies. In January
1997, the parties submitted a formal class settlement agreement and related
documentation for approval by Judge Bechtle. Hearings began on April 23, 1997 to
consider certification of a settlement class and the fairness, adequacy and
reasonableness of the settlement. Further hearings are expected. All federal
court proceedings involving AcroMed devices have been stayed pending final
consideration of the proposed settlement. A number of objections to the
settlement have been filed with the Court.
INSURANCE
All of the insurance carriers for policy periods in which these claims have been
made have asserted reservation of rights, but have not denied coverage to the
Company. To date, the cost of defending these claims has been reimbursed by
certain of the primary and excess carriers, and the Company is actively engaged
in discussions concerning the recovery of amounts currently due and owing from
all other carriers. The Company believes that these receivables are recoverable
under the terms of the Company's policies. The Company's insurance policies are
reduced by the costs of defense, except for a policy issued by Royal Surplus
Lines Insurance Co. ("Royal") covering the 12-month period that began in
November 1995. The Company estimates that the litigation may continue for
several years and, if so, the cost to defend and conclude these lawsuits is
likely to exhaust its insurance coverage. An insurer, Royal, providing coverage
for the 12-month period commencing in November 1995, brought an action in early
December 1996 in the Federal District Court for the Middle District of Tennessee
(Nashville Division) seeking a declaratory judgment as to, among other things,
whether the policy covers lawsuits which have been reported to the insurer
during the policy period. The Company has moved to dismiss or transfer this
action to the Federal District Court in Memphis, Tennessee, on the ground that
Nashville is not the proper venue for the suit. The Company has also filed its
answer and counterclaim in the Royal lawsuit. The Company has initiated its own
declaratory judgment action against Royal in the Federal District Court located
in Memphis, Tennessee. This action seeks a declaration of coverage and immediate
payment of the outstanding balance of amounts
22
<PAGE> 23
due from Royal. Both cases are in preliminary stages. The Company believes that
Royal's suit is without merit and will defend it vigorously.
As is common in the insurance industry, the Company's insurance policies
covering product liability claims must be renewed annually. Although the Company
has been able to obtain insurance coverage relating to product liability claims
at a cost and on other terms and conditions that are acceptable to the Company,
there can be no assurance that in the future it will be able to do so.
The Company's 1996 financial results reflect a pre-tax charge relating to costs
associated with the product liability litigation described above. The costs
provided for include, but are not limited to, legal fees paid or anticipated to
be paid and other costs related to the Company's defense and conclusion of these
matters.
The actual costs to the Company could differ from the estimated charge and will
be dependent upon a number of factors that will not be known for some time,
including, among other things, the resolution of defense motions and the extent
of further discovery. Although an adverse resolution of the lawsuits could have
a material effect on the Company's results of operations in future periods, the
Company does not believe that these matters will in the future have a material
adverse effect on its consolidated financial position. The Company is unable to
predict the ultimate outcome or the financial impact of the product liability
litigation.
SECURITIES LAWS ACTIONS
Beginning in April 1994, the Company and four of its officers and directors were
named in five shareholder lawsuits filed in the United States District Court in
Memphis, Tennessee. Four of the lawsuits purport to be class actions. All of the
lawsuits were consolidated into one case in the United States District Court in
Memphis through an amended complaint which added four new individual defendants
who are either current or former directors of the Company. The lawsuit alleges
that the defendants made false and misleading statements and failed to disclose
material facts to the investing public and seeks money damages. The alleged
securities law violations are based on the claim that the defendants failed to
disclose that the Company sold its products illicitly, illegitimately and
improperly and to timely disclose facts concerning the termination of the former
United States distributor of Sofamor products, National Medical Specialties,
Inc. ("NMS"). The allegations relating to illicit and illegitimate sales of
product are, for the most part, copied from product liability complaints filed
against the Company and other manufacturers currently being coordinated in the
United States District Court for the Eastern District of Pennsylvania which are
referred to above. The allegations of improper sales relate to one of the
Company's selling programs which has been publicly disclosed since May 1991. The
allegations concerning NMS relate to the termination of the NMS distribution
agreement covering Sofamor products in the United States. On October 3, 1995,
the United States District Court Judge in Memphis dismissed with prejudice the
entire case against the Company and each of the individual defendants. The
plaintiffs have appealed the dismissal to the United States Court of Appeals for
the Sixth Circuit, which has not yet ruled on this appeal.
23
<PAGE> 24
SPANISH DISTRIBUTOR ACTION
In late September 1994, a Magistrate of the Commercial Court in Paris ruled in
favor of a former Spanish distributor of Sofamor's products on a claim of
wrongful termination of the distribution agreement in 1992. Prior to the
Combination, an accrual was established, with a related charge to earnings, for
this pending litigation. On the Combination date in June 1993, the Company also
established a separate indemnity with respect to potential losses resulting from
such lawsuit and placed in escrow shares issued to the former Sofamor
shareholders pending the final outcome of this lawsuit. The $3.0 million award
(including interest) rendered by the French Magistrate exceeded the
pre-established accrual. As a result, the Company recorded an expense of $2.2
million for the non-recurring litigation award during the third and fourth
quarters of 1994. The Company filed an appeal which involves a complete retrial
on all issues. The former Spanish distributor recently filed its papers in the
appeal and seeks additional damages; the Company seeks to have the decision of
the Commercial Court reversed. A hearing on the appeal is currently scheduled
for the fourth quarter of 1997.
The Company does not believe the Securities Laws Actions or the Spanish
Distributor Action, described above, will have a material adverse effect on its
consolidated financial position, results of operations or cash flows because of,
among other reasons, the facts and circumstances existing with respect to each
action, the Company's belief that these actions are without merit, certain
defenses available to the Company and the availability of insurance in the
Securities Laws Actions.
See Part I, Item 2, "Management's Discussion and Analysis of Results of
Operations and Financial Condition--Factors That May Affect Future Operating
Results and Financial Condition--Product Liability; Insurance and Intellectual
Property."
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibit No. Description
27 Financial Data Schedule
(For SEC use only)
b) Reports on Form 8-K
1. Announcement that financial results for the year
ended December 31, 1996, will include a pre-tax
charge of approximately $50 million relating to costs
associated with the product liability lawsuits in
which the Company is a defendant.
24
<PAGE> 25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SOFAMOR DANEK GROUP, INC.
(Registrant)
DATE: May 8, 1997 BY: /s/ E.R. Pickard
--------------------- ---------------------------------
E.R. Pickard
Chairman, Chief Executive Officer
and Director
(Principal Executive Officer)
DATE: May 8, 1997 BY: /s/ Laurence Y. Fairey
--------------------- --------------------------------
Laurence Y. Fairey
Executive Vice President
and Chief Financial Officer
(Principal Financial Officer)
25
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF SOFAMOR DANEK FOR THE THREE MONTHS ENDED MARCH 31, 1997
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 5,083
<SECURITIES> 72
<RECEIVABLES> 76,103
<ALLOWANCES> 1,605
<INVENTORY> 57,085
<CURRENT-ASSETS> 166,861
<PP&E> 45,539
<DEPRECIATION> 20,819
<TOTAL-ASSETS> 337,069
<CURRENT-LIABILITIES> 120,819
<BONDS> 12,297
0
0
<COMMON> 57,813
<OTHER-SE> 96,346
<TOTAL-LIABILITY-AND-EQUITY> 337,069
<SALES> 68,484
<TOTAL-REVENUES> 69,759
<CGS> 12,370
<TOTAL-COSTS> 12,370
<OTHER-EXPENSES> 4,730
<LOSS-PROVISION> 70
<INTEREST-EXPENSE> 1,176
<INCOME-PRETAX> 18,861
<INCOME-TAX> 5,470
<INCOME-CONTINUING> 12,774
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<EPS-PRIMARY> 0.48
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</TABLE>
