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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1996
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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
SOFAMOR DANEK GROUP, INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Indiana 35-1580052
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(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1800 Pyramid Place, Memphis, Tennessee 38132
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (901) 396-2695
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
Common Stock, no par value New York Stock Exchange
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SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
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(TITLE OF CLASS)
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Indicate by check mark whether registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment of this
Form 10-K. [ ]
At February 28, 1997, based on the closing sales price of the Common Stock,
as reported on the New York Stock Exchange, the aggregate market value of the
voting stock held by non-affiliates of the registrant was approximately
$753,605,368.
At February 28, 1997, there were 24,564,306 shares of registrant's common
stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement relating to its
1997 Annual Meeting of Shareholders are incorporated by reference in Part III of
this Form 10-K. Certain exhibits to registrant's Form S-1 Registration Statement
No. 33-39593, registrant's Annual Report on Form 10-K for the fiscal years ended
December 31, 1991, 1992, 1993, 1994 and 1995 and registrant's Form S-4
Registration Statement No. 33-63040 are incorporated by reference in Part IV of
this Form 10-K.
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TABLE OF CONTENTS
AND
CROSS REFERENCE SHEET
<TABLE>
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PAGE NUMBER
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PART I Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Use of Spinal Implants . . . . . . . . . . . . . . . . . . . . . . 2
Principal Products . . . . . . . . . . . . . . . . . . . . . . . . 2
Marketing and Distribution . . . . . . . . . . . . . . . . . . . . 4
Manufacturing and Quality Control . . . . . . . . . . . . . . . . 4
Research and Product Development . . . . . . . . . . . . . . . . . 5
New Product Opportunities . . . . . . . . . . . . . . . . . . . . 5
Government Regulations . . . . . . . . . . . . . . . . . . . . . . 6
Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Patents, Trademarks and Copyrights . . . . . . . . . . . . . . . . 8
Royalty and Other Payments . . . . . . . . . . . . . . . . . . . . 9
Raw Materials . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Principal Customers . . . . . . . . . . . . . . . . . . . . . . . 9
Environmental . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . 13
Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . . . . . 13
PART II Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . 15
Item 6. Selected Consolidated Financial Data . . . . . . . . . . . . . . . . 16
Item 7. Management's Discussion and Analysis of Results of
Operations and Financial Condition . . . . . . . . . . . . . . . . 17
Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . 24
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure . . . . . . . . . . . . . . . 45
PART III Item 10. Directors and Executive Officers of the Registrant . . . . . . . . . 45
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . 45
Item 12. Security Ownership of Certain Beneficial Owners
and Management . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Item 13. Certain Relationships and Related Transactions . . . . . . . . . . . 46
PART IV Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
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PART I
ITEM 1. BUSINESS.
OVERVIEW*
Sofamor Danek Group, Inc. is primarily engaged in the development, manufacturing
and marketing of spinal implant devices which are used in the surgical treatment
of spinal conditions such as degenerative diseases, deformities and trauma. The
objective of spinal implants is to facilitate fusion of elements of the spine.
Demand for the Company's products is affected by both the number of spinal
fusions performed and the percentage of these operations which utilize spinal
implants.
The Company is an Indiana corporation formed in 1983. The Company changed its
name from Biotechnology, Inc. to Danek Group, Inc. in August 1990, and from
Danek Group, Inc. to Sofamor Danek Group, Inc. in June 1993. Sofamor Danek
Group, Inc.'s principal offices are located at 1800 Pyramid Place, Memphis,
Tennessee 38132, and its telephone number is (901) 396-2695. As used in this
Report, unless the context indicates otherwise, Sofamor Danek Group, Inc. and
its subsidiaries are collectively referred to as the "Company" and, unless
otherwise indicated, all subsidiaries are wholly owned. "Sofamor" and "Danek"
are trademarks of the Company.
The executive offices, administrative offices and U.S. distribution facility of
the Company are located in Memphis, Tennessee, and its U.S. manufacturing
operations are conducted near Warsaw, Indiana, Broomfield, Colorado, West Palm
Beach, Florida and Las Vegas, Nevada. The Company also has a major manufacturing
and distribution facility in Rang-du- Fliers, France and distributes its
products primarily through its subsidiaries in France, Germany, Spain, Italy,
Hong Kong, Japan, the Benelux region, Australia, Korea, Puerto Rico and Canada.
The Company's principal products include the TSRH(R) Spinal System, the
Cotrel-Dubousset line of products and the ORION(TM) Anterior Cervical Plate
System (the "ORION System"). The TSRH components are part of a specialized
system of support rods and locking bolts which the Company believes allows for
increased torsional and axial spinal support. The Cotrel-Dubousset ("CD") line
of products include the CD(TM) Spinal Instrumentation System ( the "CD System"),
Compact CD System (the "CCD(TM) System") and the CD HORIZON(TM) Spinal System
(the "CD HORIZON System"). The CD System includes spinal rods, hooks, and
transverse traction devices which lock implants together and is principally used
to treat conditions of the spine in the thoracic and lumbar regions. The CCD
System is principally for ease of use by the surgeon when treating spinal
conditions of the lumbar and sacral spine and incorporates many of the same type
of components found in the CD System. The CD HORIZON System combines new types
of hooks and screws with components of several other systems to treat various
spinal conditions. The ORION System consists of plate and screws and is used to
treat conditions of the anterior cervical spine. Additional new products are now
under development. (See "Business-- New Product Opportunities.")
The Company expanded its product line in 1996 with the acquisition of MedNext,
Inc., Surgical Navigation Technologies, Inc. and certain net assets of TiMesh
Inc. MedNext's product line consists of a high-speed pneumatic drill, accessory
equipment and disposable burs for surgical specialties. Surgical Navigation's
product line consists
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* Except for the historical information contained in this Annual Report on Form
10-K, the matters discussed herein, including (without limitation) those
discussed in "New Product Opportunities," "Government Regulations," "Insurance,"
"Legal Proceedings" and "Management's Discussion and Analysis of Results of
Operations and Financial Condition", 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 the other risks and uncertainties detailed from time
to time in the Company's periodic reports filed with the Securities and Exchange
Commission. For information regarding potential factors that could affect the
Company's operating results and financial condition see "Factors That May Affect
Future Operating Results and Financial Condition" contained in Part II, Item 7,
"Management's Discussion and Analysis of Results of Operations and Financial
Condition" of this Annual Report on Form 10-K. The description of products or
proposed products and technologies in this Annual Report on Form 10-K is not
intended nor should be construed as labeling for the Company's products. Readers
should not rely on this document for decisions to purchase, indications in use,
and/or instructions in use, and should see, read and follow all package inserts
accompanying the Company's products.
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of frameless stereotactic surgical products relating to the spinal and
neurological fields. The Timesh product line includes titanium plates and alloy
screws used to treat conditions in the cranial (head and facial) region.
The Company's strategy is to continue its focus on product development and
marketing to its worldwide customer base. The Company markets its products in
the U.S. to spinal surgeons through its network of approximately 180 independent
commissioned sales representatives. Prior to July 1, 1994, the CD System and CCD
System were sold in the U.S. by an independent third-party distributor. (See
Item 7, "Management's Discussion and Analysis of Results of Operations and
Financial Condition--Overview"). The Company markets its products
internationally to spinal surgeons in approximately 65 countries primarily
through a network of independent distributors and agents. In France, Germany,
Spain, Italy, Hong Kong, Japan, the Benelux region, Australia, Korea, Puerto
Rico and Canada, the Company's subsidiaries distribute products.
USE OF SPINAL IMPLANTS
Spinal fusions are performed to treat diseases and conditions such as the
following:
DEGENERATIVE DISEASES. Typically occurring in mature adults,
degenerative diseases of the spine can result in immobility, pinched
nerves and associated pain for the patient.
DEFORMITIES. Deformities, unless treated at a young age, can prevent
proper growth of the spine and can be life threatening if allowed to
progress. Spinal implants straighten the spine to allow for proper
alignment of internal organs.
TRAUMA. The typical cause of traumatic spinal conditions is automobile
accidents.
Spinal implants are used to facilitate the fusion of two or more vertebrae in
the spine. The potential benefit of a spinal implant is increased spinal
stability in order to facilitate fusion of the vertebrae. A surgeon's decision
to treat a spinal condition with an implant is based on many factors. The
relative severity of the patient's condition, such as the degree of the
curvature of the spine, is assessed against the potential risks and benefits of
the spinal operation. The age of the patient, the patient's medical history and
the physical condition of the patient (i.e., the ability to withstand surgery)
are all important considerations in deciding which treatment path to implement.
Until the mid-1980's, surgeons had limited implant options for treating spinal
conditions. Surgeons treating spinal conditions either did so without implants
or utilized basic implant devices. These devices often did not, however,
sufficiently immobilize the spine, and thus limited the fusion rate and efficacy
of the procedures. In seeking better alternatives for spinal fusions, surgeons
began to use implants designed primarily to provide greater structural support
for the spine, which would enhance the healing process. Over the last several
years, clinical studies have shown that surgeries using spinal implants are more
effective in immobilizing the spine than surgeries in which implants are not
used.
PRINCIPAL PRODUCTS
TSRH(R) SPINAL SYSTEM.
The TSRH Spinal System traces its origins to research conducted at the Texas
Scottish Rite Hospital in Dallas, Texas and is used primarily to treat patients
afflicted with scoliosis or deformities of the spine. The Company manufactures
and distributes the TSRH Spinal System under agreements pursuant to which the
Company has received the exclusive worldwide rights to the products in exchange
for an agreement to pay a percentage of net sales of the products. Sales of the
TSRH Spinal System accounted for 33% of the Company's consolidated sales in
1996, 38% in 1995 and 43% in 1994. "TSRH" is a trademark of the Company.
In 1989, the Company introduced the TSRH Spinal System at the American Academy
of Orthopaedic Surgeons' annual meeting and began shipments of the product. The
system consists of specialized hooks, plates and screws that are attached to
rods through locking bolts. There are special configurations of the system
available to address
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specific applications such as pediatric surgery and adult lumbar surgery. This
system is marketed in the U.S. as a spinal device system. (See
"Business--Government Regulations.")
The Company has added enhancements to the TSRH Spinal System, including the
Variable Angle Screw, Central Post Hook, Lateral Offset Plate, Open Eyebolt, and
Top Tightening components. The Variable Angle Screw provides flexibility in
screw placement in relation to the spinal rod. Similarly, the Central Post Hook
offers versatility in hook placement. The Lateral Offset Plate allows variations
in the lateral distance between a hook or sacral screw and the spinal rod. The
Open Eyebolt can be used when an eyebolt must be added after all hooks and
CROSSLINK(R) plates are in place. The Top Tightening components incorporate
T-bolts, hooks, sacral/iliac screws, and staples into a comprehensive spinal
implant system. These enhancements provide interchangeability of components and
improved ease of use for surgeons. The TSRH Spinal System is covered by various
patents.
COTREL-DUBOUSSET LINE OF PRODUCTS.
The Cotrel-Dubousset line of products traces its origin to the development of
the CD System by Dr. Yves Paul Cotrel in cooperation with Sofamor, S.N.C.
("Sofamor"), a subsidiary of the Company, and with the assistance of Professor
Jean Dubousset. Sales of the Cotrel-Dubousset line of products accounted for 23%
of the Company's consolidated sales in 1996, 26% in 1995 and 30% in 1994.
COTREL-DUBOUSSET SPINAL INSTRUMENTATION SYSTEM. The CD System was
introduced in 1984 following years of development by Dr. Yves Paul
Cotrel in cooperation with Sofamor and with the assistance of Professor
Jean Dubousset. The CD System was designed primarily to treat patients
afflicted with spinal deformities and fractures of the spine in the
thoracic and lumbar regions. The principal components of the CD System
include spinal rods, hooks, sacral screws and transverse traction
devices which lock implants together and a wide range of instruments
used to position and secure the implants.
COMPACT COTREL-DUBOUSSET SYSTEM. In response to the growing utilization
of spinal instrumentation in the treatment of degenerative diseases,
Sofamor developed the CCD System. The CCD System was designed
principally for the treatment of degenerative spinal conditions of the
lumbar and sacral spine.
CD HORIZON(TM) SPINAL SYSTEM. The CD HORIZON System combines new types
of hooks and screws with components of several other systems for the
treatment of various spinal conditions.
Each of the CD, CCD and CD HORIZON Systems is marketed in the U.S. as a spinal
device system and is covered by various patents; "CD," "CCD" and "CD HORIZON"
are trademarks of the Company. (See "Business--Government Regulations.)
ORION(TM) ANTERIOR CERVICAL PLATE SYSTEM. The ORION Anterior Cervical Plate
System was introduced in 1994 following development in 1992 by the Company with
the assistance of Gary L. Lowery, M.D., Ph.D. This system is indicated for use
in stabilizing the anterior cervical spine during the development of a solid
spinal fusion in patients with degenerative diseases, traumatic fractures, and
tumors. The system consists of a plate and screws which attach to the anterior
cervical spine (front part of the neck). The Company manufactures and
distributes the ORION System under agreements pursuant to which the Company
obtained the exclusive worldwide rights to the products in exchange for an
agreement to pay a percentage of the net sales of the products. This system is
marketed in the U.S. as a spinal device system. (See "Business--Government
Regulations.") The ORION Anterior Cervical Plate System accounted for 10% of the
Company's consolidated sales in 1996, 8% in 1995 and 3% in 1994. The system is
covered by various patents; "ORION" is a trademark of the Company.
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MARKETING AND DISTRIBUTION
The Company's products currently are used in hospitals and clinics throughout
the U.S. These hospitals and clinics (and their surgeons) are served by a
network of approximately 180 independent commissioned sales representatives.
Prior to July 1, 1994, the CD System and CCD System were sold in the U.S. by an
independent third-party distributor. (See Item 7, "Management's Discussion and
Analysis of Results of Operations and Financial Condition--Overview.") The
Company's direct marketing and distribution activities in the U.S. are performed
primarily from Memphis, Tennessee through Danek Medical, Inc. ("Danek Medical"),
a subsidiary that the Company acquired in 1985. Danek Sales Corporation, a
subsidiary of the Company, provides marketing support in the U.S. In meeting the
needs of hospitals and clinics, the Company offers various instrument and
implant purchase alternatives. For example, one implant purchase alternative is
often referred to as a "loaner program" whereby a complete implant system is
shipped overnight for next-day surgery. The customer is charged only for the
components used, and a premium over the published list price is charged to
defray the additional cost of the program.
Internationally, the Company distributes its products primarily through Company
subsidiaries in France, Germany, Italy, Spain, Hong Kong, Japan, the Benelux
region, Australia, Korea, Puerto Rico and Canada. Sofamor is responsible for the
marketing and distribution of the Company's products in France. In Germany,
Sofamor Danek GmbH ("Sofamor Germany"), a subsidiary, directly sells the
Company's products. Sofamor Danek Asia Pacific Ltd., a subsidiary, is
responsible for marketing support and direct selling in Hong Kong and China. The
Company also has subsidiaries in Milan, Italy (Sofamor Danek Italia S.r.l.) and
in Madrid, Spain (Sofamor Danek Iberica S.A.), each of which is responsible for
selling to customers directly and, in the case of Sofamor Danek Italia, S.r.l.,
to regional distributors as well. Sofamor Danek Benelux, a majority-owned sales
and distribution subsidiary, markets products in Belgium, The Netherlands and
Luxembourg. The Company's subsidiary in Japan, Kobayashi Sofamor Danek K.K., is
co-owned by the Company and Kobayashi Pharmaceutical Co., Ltd., the Company's
distributor in Japan; however, the Company controls the financial and
operational direction of the subsidiary. The Company sells the products it
manufactures to its subsidiary, Kobayashi Sofamor Danek K.K., which, in turn,
resells the product in Japan at near retail prices through Kobayashi
Pharmaceutical's distribution network. The Company's subsidiary in Korea, Danek
Korea Co., Ltd., is co-owned by the Company and Joint Medical Company, the
Company's distributor in Korea; however, the Company controls the financial and
operational direction of the subsidiary. The Company sells the products it
manufactures to its subsidiary, Danek Korea Co., Ltd., which, in turn, resells
the products in Korea at near retail prices through Joint Medical Company's
distribution network. The Company also has subsidiaries in Australia (Sofamor
Danek Australia Pty. Ltd.), Canada (Sofamor Danek Canada, Inc.) and Puerto Rico
(Sofamor Danek Puerto Rico, Inc.), each of which is responsible for selling to
customers directly or, in certain cases, to regional distributors in their
respective countries. Products are distributed to other countries through
independent distributors and agents. The independent distributors have
contractual distribution rights to geographical territories in which they have
established organizations.
International sales have amounted to $82,298,000 and $62,474,000, representing
approximately 34% and 33% of total sales in 1996 and 1995, respectively.
The Company's backlog of firm orders is not considered material to an
understanding of its business.
MANUFACTURING AND QUALITY CONTROL
The Company's products are manufactured in the U.S. primarily by the Company's
subsidiary, Warsaw Orthopedic, Inc. ("Warsaw Orthopedic"), which the Company
acquired in 1983. Warsaw Orthopedic is located near Warsaw, Indiana. The
Company's products are also manufactured by its subsidiaries, Surgical
Navigation Technologies, Inc., located in Broomfield, Colorado, MedNext, Inc. of
West Palm Beach, Florida and Sofamor Danek Nevada, Inc., which is located in Las
Vegas, Nevada. As a medical device manufacturer, the Company is subject to
stringent "good manufacturing practices" and regulations as stipulated by the
Food and Drug Administration ("FDA"). (See "Business--Government Regulations.")
The Company has installed computer controlled machinery in its manufacturing
operations, resulting in greater flexibility in the manufacturing process and
enabling the Company to be cost efficient. The Company also utilizes
comprehensive, integrated MIS (management information system)
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software for production, planning and scheduling. The Company employs a broad
range of inspection and quality assurance standards. The Company utilizes
in-process testing and inspection methods in the manufacturing process to
produce quality products. The design and layout of the Company's manufacturing
facilities affords the Company flexibility to increase production capacity.
Outside the U.S., product manufacturing is done primarily by Sofamor, located in
Rang-du- Fliers, France. Some of the manufacturing outside the U.S. is performed
by subcontractors. Sofamor has a 33.75% equity investment in one of the
subcontractors.
RESEARCH AND PRODUCT DEVELOPMENT
The Company's U.S. and European research and product development activities are
carried on by Danek Medical in Memphis, Tennessee, MedNext, Inc. in West Palm
Beach, Florida, Sofamor Danek Nevada, Inc. in Las Vegas, Nevada, Surgical
Navigation Technologies, Inc. in Broomfield, Colorado and by Sofamor in its
Paris, France office. These departments, with over 60 engineers, have
significant experience in biomedical product design and are divided into
functional groups, focusing on key product groups. The Company has continued to
expand its CAD/CAM (computer assisted design/computer assisted manufacturing)
capabilities internationally, as well as its functional testing programs. The
Company has also expanded its activities in the area of clinical trials and the
manufacturing of special order implants for products used outside the U.S.
In addition, the Company has continued to integrate projects among all its
development groups in order to leverage its resources while enhancing its time
to market on a global basis. The Company incurred research and development
expenses of approximately $15,926,000, $13,980,000 and $11,572,000 for the years
ended December 31, 1996, 1995 and 1994, respectively.
NEW PRODUCT OPPORTUNITIES
The following new products are currently either under development or are being
considered by the Company for possible future development.
BIOLOGICAL PRODUCTS FOR USE IN SPINAL RECONSTRUCTION.
In February 1995, the Company entered into a strategic alliance with Genetics
Institute, Inc. ("Genetics Institute") to provide biological products for use in
spinal applications. The products will use Genetics Institute's recombinant
human bone morphogenetic protein (rhBMP-2) to induce bone growth necessary for
the treatment of spinal disorders. The Company has obtained exclusive North
American rights to these rhBMP-2 proprietary technologies and patents for spinal
applications. Pursuant to the terms of the agreement, the Company will pay
Genetics Institute $50 million over four years, of which $12.5 million was paid
in each of 1995 and 1996. FDA review and approval, which will require the
conduct of clinical trials, will also be necessary to market these biological
products. The Company will purchase the rhBMP-2 product from Genetics Institute.
The Company is considering a variety of different carriers for the Genetics
Institute proteins. One potential carrier is a porous polymer to which the
Company has obtained worldwide rights under an exclusive license. If this porous
polymer carrier is utilized with rhBMP-2, royalty payments will be due to the
owner of the polymer technology.
SPINAL FUSION IMPLANTS, INSTRUMENTS AND METHOD TECHNOLOGIES.
In January 1994, the Company acquired various patented technologies for an
interbody fusion device used in the stabilization of the spine during a spinal
fusion and discectomy. The Company has also entered into a licensing agreement
for the worldwide rights to these patented technologies covering implants,
instruments and methodologies for simultaneously performing a discectomy, a
fusion and an internal stabilization of the spine. The Company sold the devices
covered by the patented technologies internationally during 1996 and, after FDA
authorization, will begin commercializing the devices in the U.S. The Company
pays a royalty based on a percentage of the net sales of the devices.
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OPEN PORE TANTALUM STRUCTURE MATERIAL.
In February 1995, the Company entered into an agreement with Implex Corporation
under which the Company obtained the exclusive worldwide rights to certain
patented proprietary material technologies for spinal applications. This
material is used in the manufacture of the Company's interbody fusion devices
for distribution outside the U.S. and, when authorized by the FDA, for U.S.
distribution.
PROSTHETIC DISC PROGRAM.
The Company is actively evaluating various designs for the replacement of
diseased and/or damaged discs. These designs are at various stages of
development and would ultimately require pre-market approval by the FDA prior to
marketing in the U.S.
There can be no assurances that the products described above in this section
will be marketed or that FDA authorization will be received. Spinal implants and
other related devices are typically rendered obsolete within a few years. While
the Company maintains active research and development programs, there can be no
assurance that it will be able to develop and introduce new products that will
enable it to remain competitive in the future. (See Item 7, "Management's
Discussion and Analysis of Results of Operations and Financial
Condition--Factors That May Affect Future Operating Results and Financial
Condition--Product Obsolescence.")
GOVERNMENT REGULATIONS
In the United States, the Company is subject to regulation by the FDA. FDA
regulations govern the labeling, promotion and sale of medical devices and
require the Company to maintain certain standards and practices with respect to
the manufacturing and labeling of devices, the maintenance of certain records
and medical device reporting. The Company's facilities and records are subject
to FDA inspections.
The FDA is the agency responsible for the regulation of medical devices in the
U.S. pursuant to the Food, Drug and Cosmetic Act (as amended by the 1976 Medical
Devices Amendment), the Safe Medical Devices Act of 1990 (as amended in 1992),
the regulations promulgated thereunder and guidance documents and instructions
issued by the FDA. In general, prior to entering commercial distribution,
medical devices must undergo FDA review, either pursuant to a Section 510(k)
notification or a Pre-Market Approval ("PMA") application filed by the
manufacturer of the device. A Section 510(k) notification is a filing submitted
to demonstrate that the device in question and its labeling are "substantially
equivalent" to "a legally marketed device" and its labeling. In contrast, a PMA
must demonstrate that the device is safe and effective; it is a more complex
submission that typically includes a two-year follow-up of a controlled human
clinical study. Factors that dictate whether a Section 510(k) notification or a
PMA is required include: whether the device and its labeling are "substantially
equivalent" to a "legally marketed device" and its labeling. The process of
obtaining marketing authorizations can be time consuming, and there can be no
assurance that all the necessary authorizations will be granted to the Company
with respect to new products and devices developed by the Company.
All of the Company's implants currently marketed in the U.S. are covered by
Section 510(k) notifications with limited exceptions, such as custom implants.
As devices become increasingly innovative, it is difficult to establish that a
device is "substantially equivalent" to another "legally marketed device" and
thereby obtain Section 510(k) clearance for a new product. Additionally, as
clarified by the Safe Medical Devices Act of 1990, the FDA could, and generally
does, decide to require the submission of additional data. It is impossible to
predict whether additional changes will be made in the Section 510(k) clearance
practices and whether any such changes could have an adverse effect on the
Company and its business. The Company cannot predict the extent or impact of
future federal, state or local legislation or regulation.
Federal law provides that manufacturers can label and promote new medical
devices only for indications that have been allowed by the FDA. The Company's
Section 510(k) clearances do not indicate use of any product for interpedicular
segmental fixation (use of screws in the pedicle, a bony support structure, of
the spine) other than for limited uses pursuant to Section 510(k) clearances
that the Company began receiving in January 1995 (discussed
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further below). Since the FDA does not regulate the practice of medicine,
physicians may use products for applications that have not yet been cleared by
the FDA for such a labeling indication if such use is deemed in their medical
judgment to be in the patient's best interests. Thus, as part of the practice of
medicine, physicians may at their discretion and in the exercise of their
medical judgment use any screws (or any other suitable products) for such
fixation. Although this practice may continue in the future, the Company does
not encourage nor can it predict such use.
In January 1995, the Company received Section 510(k) clearance to begin labeling
and marketing the stainless steel version of the TSRH Spinal System for pedicle
screw attachment only for treating selected patients with grade 3 or 4 severe
spondylolisthesis of the fifth lumbar - first sacral (L5-S1) vertebral joint.
The clearance is based on this spinal system having been found equivalent only
to similar device systems labeled and intended for patients: (a) who have severe
spondylolisthesis (grades 3 and 4) of the fifth lumbar - first sacral (L5-S1)
vertebral joint; (b) who are receiving fusions using autogenous bone graft only;
(c) who are having the device fixed or attached to the lumbar and sacral spine;
and (d) who are having the device removed after the development of a solid
fusion mass. This clearance requires the addition of specific warnings to the
labeling of the product. Since that time, many other systems offered by the
Company have received clearance for similar labeling.
In May 1990, the Director of the FDA's Division of Compliance Operations for the
Center for Devices and Radiological Health sent a letter to approximately 80
manufacturers and distributors of medical devices, including the Company, which
advised that companies must not label, or in any way promote, devices to be used
in the U.S. for pedicular screw attachment to, or fixation of, the vertebral
column. The Company examined all of its literature and voluntarily recalled one
brochure used to recruit clinical investigators. This recall was examined for
effectiveness by the FDA beginning in May 1991 and found to be complete in
February 1992. In August 1993, the Company and six other companies received
warning letters from the FDA, primarily regarding the issue of supporting
medical education programs where physicians "demonstrate" the use of screws in
the pedicle of the spine. The Company responded to the warning letter, and no
official response from the FDA has ever been received. In February 1995, the
Company received a warning letter from the FDA regarding the wording in a
Company press release and "Dear Doctor" letter relating to the January 1995
Section 510(k) clearance referred to above. The Company submitted a written
response to the FDA on March 17, 1995 and took certain actions in response to
the letter. The Company believes that it has taken all the appropriate actions
possible regarding this matter.
With respect to a different but related matter, in April and June 1994, many
orthopaedic companies received letters from the FDA stating that certain warning
statements must appear on all labeling of certain devices. The Company believes
it is complying with all labeling requirements for those devices in the U.S.
that need such warning statements.
The Company cannot, however, rule out the possibility that the FDA could bring a
regulatory action without further notice against the Company with respect to any
of the matters referred to above. Such regulatory action might include, but
would not be limited to, civil and/or criminal penalties, an injunction against
any distribution in the U.S., seizure, fines, and/or recall of any Company
product or labeling. The inability to continue to sell certain products could
have a material adverse impact on the Company's business and financial
condition.
The Company's products are also subject to regulation by foreign governmental
and regulatory authorities. The Company believes that it has all necessary
foreign authorizations where its products are sold. There can be no assurances
that foreign regulatory requirements will not become more stringent in the
future. In Europe, individual European Union ("EU") members have required
compliance and testing for some devices (e.g., electromedical devices), but in
most countries testing of implants has been voluntary.
A Medical Devices Directive (the "Directive") for the EU was adopted on June 14,
1993. Proof of compliance with the harmonized standards will be presumptive
proof of compliance with the legal requirements in each EU member country. If
compliance with the standards cannot be demonstrated or standards have not been
issued for the product in question, the manufacturer will have to supply an
application that proves the product is safe and effective. While there is
uncertainty as to the specific national enabling legislation, the Company does
not anticipate any special
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<PAGE> 11
concerns uniquely applicable to the Company since this legislation affects all
medical device manufacturers and distributors. There can be no assurance that
new legislation will not cause delays or disruptions in the marketing of the
Company's products in Europe. In 1995, the Company's Memphis, Warsaw and French
facilities were ISO 9001 certified pursuant to the Directive. The Company
believes it is well positioned to compete in the European market when the
regulations take full effect in 1998.
All of the Company's products are prescription devices that are in the U.S. for
sale only by or on the order of a physician. Neither this document nor any other
communication to the financial community by the Company is intended or should be
construed as labeling for the Company's products. Any learned intermediary or
health care professional who reads this document or any other communication to
the financial community should not rely on this document for decisions to
purchase, indications in use and/or instructions in use. Instead, any health
care professionals who may read this or any other Company document should see,
read and follow all package inserts accompanying the Company's products. (See
Item 7, "Management's Discussion and Analysis of Results of Operations and
Financial Condition--Factors That May Affect Future Operating Results and
Financial Condition--Regulatory Approvals.")
COMPETITION
Worldwide, there are many firms producing spinal implant devices. Because of the
significant growth of the number of spinal fusion procedures performed in recent
years, a number of companies, including those producing various medical devices
and having financial, marketing and technical resources significantly greater
than those of the Company, have begun to market and sell spinal devices. The
Company anticipates that additional companies will also begin similar efforts.
The Company believes that it competes based on (i) the Company's participation,
through medical symposia and seminars, in the education of surgeons in the
cleared uses of implant products, (ii) the Company's emphasis on research and
development, (iii) the introduction of new products and systems, (iv) the
quality of the Company's products and their ease and versatility of use by
surgeons, (v) the Company's association with spinal surgeons and (vi) the
Company's focus on spinal products coupled with a solid infrastructure of
experienced management personnel. (See Item 7, "Management's Discussion and
Analysis of Results of Operations and Financial Condition-- Factors That May
Affect Future Operating Results and Financial Condition--Competition.")
EMPLOYEES
The Company had approximately 810 employees at December 31, 1996. No U.S.
employee of the Company is represented by a labor union or is subject to a
collective bargaining agreement. All of the employees outside the U.S. are
covered by applicable industry collective bargaining agreements as may be
required by government authorities in the respective countries where those
employees are located. The Company has never experienced a work stoppage due to
labor difficulties.
PATENTS, TRADEMARKS AND COPYRIGHTS
As of December 31, 1996, the Company owned or held licenses to 154 inventions
covered by 232 patents and had 451 applications pending on 121 more inventions
covering the full spectrum of its product lines in the U.S. and major countries
throughout the world. In addition, the Company has acquired rights under various
purchase, license or distribution agreements related to the design, manufacture
and distribution of certain products and devices. (See "Business--Principal
Products.") The Company has 38 registered trademarks and applications pending
for registration on 36 other marks in the U.S. and other major countries
throughout the world. The Company currently has six registered copyrights for
certain of its product manuals and two other applications pending. (See Item 7,
"Management's Discussion and Analysis of Results of Operations and Financial
Condition--Factors That May Affect Future Operating Results and Financial
Condition--Intellectual Property.")
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<PAGE> 12
ROYALTY AND OTHER PAYMENTS
The Company has agreements with certain unaffiliated entities which provide the
Company with the rights to manufacture and market certain spinal system products
developed by these entities. These agreements provide for payments ranging from
1% to 10% of the net selling prices (as defined by the agreements) of all
products sold. These agreements are in force as long as the Company sells these
products.
Royalty expenses and licensing fees made pursuant to the agreements referred to
above during fiscal years 1996, 1995 and 1994 were approximately $6,768,000,
$5,907,000 and $4,083,000, respectively.
RAW MATERIALS
Implant grade stainless steel and titanium alloy account for the majority of the
Company's raw material purchases. There are multiple sources from which the
Company may purchase this type of stainless steel and titanium alloy, and it is
available within one to eight months of the time an order is placed. Titanium
alloy provides less MRI (magnetic resonance image) interference during imaging
of the patient during postoperative follow-up.
PRINCIPAL CUSTOMERS
The Company does not rely on any single hospital or clinic for a material
portion of its business. The Company has over 4,000 hospital and clinic
customers, none of which accounts for more than 2% of sales. Prior to July 1,
1994, the CD System and CCD System were distributed in the U.S. through an
exclusive agreement with National Medical Specialty, Inc. ("NMS"). This customer
accounted for 5% and 16% of the Company's total sales in 1994 and 1993,
respectively.
In 1996, the Company formed a new subsidiary in Japan which is a joint venture
co-owned by the Company and Kobayashi Pharmaceutical Co., Ltd., the Company's
former distributor in Japan. This distributor accounted for 10%, 8% and 6% of
the Company's total sales in 1996, 1995 and 1994, respectively. The Company
sells the products it manufactures to its subsidiary, which, in turn, resells
the products in Japan at near retail prices through Kobayashi Pharmaceutical's
distribution network.
For information relating to the amounts of revenue, operating profit or loss and
identifiable assets attributable to each of the Company's geographic areas, see
"Notes to Consolidated Financial Statements--Foreign Operations."
ENVIRONMENTAL
The Company believes it is in compliance in all material respects with all
applicable environmental regulations and does not expect to require a material
amount of capital expenditures in order to remain in compliance.
INSURANCE
The Company carries comprehensive and general liability insurance, as well as
coverage for product liability. The Company also carries liability insurance
coverage for directors and officers. Such directors' and officers' policy
contains certain exclusions, including, but not limited to, certain claims by
stockholders. (See Item 3, "Legal Proceedings" and Item 7, "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.")
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ITEM 2. PROPERTIES.
The Company's headquarters and primary U.S. distribution facility are located in
Memphis, Tennessee. The Company utilizes a 60,000 square foot owned facility and
9,730 square feet of lease space for these functions. The Company is in need of
additional office and distribution space at its Memphis location. The Company is
currently considering the alternatives of constructing or leasing a new
facility. The primary U.S. manufacturing operations for the Company are
conducted in an 83,000 square foot plant located near Warsaw, Indiana, under a
lease which expires December 31, 1999, with four one-year extensions available
thereafter. Approximately 33,000 square feet of the Warsaw facility are
currently not used by the Company. Management believes that the Company's Warsaw
facility is suitable for its current use and adequate for the Company's
operation for the foreseeable future. The Rang-du-Fliers, France location
utilizes a 57,500 square foot facility situated on 10.8 acres of land owned by
Sofamor, which also has approximately 16,000 square feet of leased office space
in Paris used for marketing, sales, development and administrative activities.
Subsidiaries of the Company have leased office space in Milan, Italy, Cologne,
Germany, Epping, NSW, Australia, Seoul, Korea, San Juan, Puerto Rico,
Mississauga, Canada, Saint Genis Laval, France, Hong Kong, Madrid, Spain, Tokyo
and Osaka, Japan, Luxembourg City, Luxembourg, Broomfield, Colorado, Las Vegas,
Nevada, and West Palm Beach, Florida.
ITEM 3. LEGAL PROCEEDINGS.
The Company is involved from time to time in litigation on various matters which
are routine to the conduct of this business, including product liability and
intellectual property cases.
PRODUCT LIABILITY CASES
Multidistrict Litigation:
In 1994, the Company and other spinal implant manufacturers were named as
defendants in purported class action product liability lawsuits in various
federal courts throughout the country alleging that plaintiffs were injured by
spinal implants manufactured by the Company and others. On August 4, 1994, the
Federal Judicial Panel on Multidistrict Litigation ordered that all federal
court lawsuits then existing be transferred to and consolidated for pretrial
proceedings, including the determination of class certification, in the United
States District Court for the Eastern District of Pennsylvania in Philadelphia
(the "Multidistrict Litigation"). Federal court lawsuits filed after August 4,
1994 have also been transferred to and consolidated in the Eastern District of
Pennsylvania. On February 22, 1995, Chief Judge Emeritus Louis C. Bechtle denied
class certification. The federal court lawsuits before Judge Bechtle will remain
coordinated for further pretrial purposes but are individual lawsuits. As
previously disclosed, as a result of the denial of class certification by Judge
Bechtle, a large number of additional plaintiffs have filed lawsuits alleging
injuries caused by spinal implants manufactured by the Company. To date,
approximately two thousand eight hundred (2,800) plaintiffs have filed lawsuits
against the Company, with a few also naming as defendants various officers and
directors of the Company. A majority of these plaintiffs filed their claims in
1995. Also, plaintiffs' lawyers have filed lawsuits involving about two thousand
eight hundred fifty (2,850) claimants alleging a conspiracy theory among
doctors, manufacturers (including the Company), hospitals, teaching
institutions, professional societies and others to promote, in violation of
applicable law, the use of spinal implants. 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. On August 22, 1996, Judge Bechtle dismissed without
prejudice plaintiffs' conspiracy claims. Many plaintiffs asserting these
conspiracy claims have filed amended or new complaints, but it is not possible
at this time to determine precisely how many of these conspiracy complaints will
be reasserted or the number of additional plaintiffs that may file lawsuits.
The majority of such lawsuits were filed in federal courts throughout the
country and are in the preliminary stages. Discovery proceedings, including the
taking of depositions, have been ongoing in certain of the lawsuits that were
first to be filed. Discovery in certain cases that were filed later will begin
in 1997. Over one thousand eight hundred (1,800) of the plaintiffs have had
their lawsuits returned to the state court in Memphis, Tennessee because it was
determined that the federal courts lacked jurisdiction over their claims. It is
anticipated that the Memphis, Tennessee state court judge will establish a
schedule for case management and discovery. The trials of a number of
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<PAGE> 14
lawsuits involving individual plaintiffs are scheduled to begin in the first six
months of 1997, although delays in trial dates are common. Although plaintiffs
have advanced claims under many different legal theories, the essence of
plaintiffs' claims appears 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 FDA rules and regulations (governing marketing and
labeling), that pedicle fixation has not been proven safe and efficacious in the
context of FDA labeling standards and that plaintiffs have suffered a variety of
injuries as a result of the use of the systems for pedicle fixation. Plaintiffs
in these cases 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 courts in which such
cases are filed.
In December 1996, AcroMed Corporation ("AcroMed"), a spinal implant manufacturer
and a defendant in various of the cases pending in the Multidistrict Litigation,
and the Plaintiffs' Legal Committee in the Multidistrict Litigation announced
that they have entered into an understanding to resolve all product liability
claims involving the use of AcroMed devices to achieve pedicular fixation in
spinal fusion surgery. Under the announced 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. The parties submitted
in January 1997 a formal class settlement agreement and related documentation
for approval by Judge Bechtle. A hearing (scheduled for April 23, 1997) will be
held to consider the fairness, adequacy and reasonableness of the settlement.
All federal court proceedings involving AcroMed devices have been stayed pending
final consideration of the proposed settlement.
Tennessee and Oregon Product Liability Actions:
In January 1995, the Company and other spinal implant manufacturers, doctors and
a hospital were named defendants in a purported class action product liability
lawsuit filed in Nashville, Tennessee state court. This lawsuit is limited to
those individuals whose surgeries were performed at one specific hospital. Class
certification has been denied by the trial judge in Nashville. The judge has
selected two of the Company's cases as test cases to be prepared for trial. Fact
discovery in these cases is scheduled for completion by March 1997. All other
proceedings are stayed. In October 1995, the Company was served with a Portland,
Oregon state court complaint that purported to be a class action. This Oregon
complaint alleged, among other things, injury based upon various legal theories.
In March 1996, the plaintiffs in this Oregon case withdrew the class
allegations. Discovery has begun in these individual cases. In these Tennessee
and Oregon actions, plaintiffs, who seek relief in the form of monetary damages
of unspecified amounts, are continuing their lawsuits as individual cases.
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 and will
continue to assert the 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.
All pending cases are currently being defended by insurance carriers, generally
under reservation of rights. To date the cost of defending against claims has
been largely reimbursed by the Company's insurers. 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 (see below). 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. At December 31, 1996, the Company had a
receivable from Royal of approximately $2.5 million for legal fees associated
with the Company's product liability litigation paid by the Company during the
policy year. The Company believes that the receivable is recoverable under the
terms of the policy. The case is in a preliminary stage. Discovery has just been
initiated. The Company believes the suit is without merit and will defend it
vigorously.
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<PAGE> 15
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.
On January 6, 1997, the Company announced that its 1996 financial results would
include a pre-tax charge of $50 million relating to costs associated with the
product liability litigation described above. The charge, which has now been
reflected in the Company's 1996 financial statements, covers the reasonably
foreseeable costs that the Company was positioned in late December to estimate
because the litigation had progressed and because changes in the fourth quarter
of 1996 had occurred in facts and circumstances relating to the litigation.
Among the changed facts and circumstances were the announcement of the AcroMed
proposed settlement described above, the additional financial resources
available to the plaintiffs' attorneys as a result of the settlement if the
proposed settlement is ultimately approved, the likelihood that the litigation
will continue for several years, in part, due to the additional financial
resources provided to plaintiffs' attorneys if the proposed settlement is
approved, the absence of AcroMed as a member of the joint defense group, the
status of the Company's insurance described above and the continuing absence of
dispositive rulings relating to the Company's defense motions.
While it is not possible to accurately predict the outcome of litigation, the
amount of the charge taken in the fourth quarter represents the Company's best
judgment of the probable reasonable costs (in excess of available insurance) to
defend and conclude the lawsuits based on the facts and circumstances currently
existing. 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.
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
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<PAGE> 16
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 Item 7, "Management's Discussion and Analysis of Results of Operations and
Financial Condition--Product Liability; Insurance and Intellectual Property."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not Applicable.
EXECUTIVE OFFICERS OF THE REGISTRANT
The name, age and position held with the Company of each of the executive
officers of the Company are set forth below. No family relationship exists among
any of the executive officers.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
E. R. (Ron) Pickard 48 Chairman and Chief Executive Officer, Sofamor Danek Group, Inc.
James J. Gallogly 48 President and Chief Operating Officer, Sofamor Danek Group, Inc.
R. L. (Lew) Bennett 70 Senior Vice President, Sofamor Danek Group, Inc.
Richard E. Duerr, Jr. 50 Vice President, General Counsel and Secretary, Sofamor Danek Group, Inc.
Peter J. Elkhuizen 47 President, Sofamor Danek Europe
Laurence Y. Fairey 46 Executive Vice President and Chief Financial Officer, Sofamor Danek
Group, Inc.
Mark D. LoGuidice 41 President, Sofamor Danek USA
J. Mark Merrill 37 Vice President, Treasurer and Assistant Secretary, Sofamor Danek Group,
Inc.
Dr. Marie-Helene Plais 47 Executive Vice President, Sofamor Danek Group, Inc.
Gene B. Sponseller 40 President of Manufacturing, Sofamor Danek USA
Richard W. Treharne, Ph.D. 47 Vice President of Research and Regulatory Affairs, Sofamor Danek Group,
Inc.
Don W. Urbanowicz 41 Executive Vice President of Marketing, Sofamor Danek USA
</TABLE>
The executive officers of the Company serve at the discretion of the Board of
Directors and are elected annually. The following is a brief description of the
previous business background of each of the executive officers.
Mr. Pickard was President and Chief Operating Officer of the Company from August
1990 until becoming President and Chief Executive Officer on April 1, 1991 and
Chairman and Chief Executive Officer on May 23, 1994. From 1968 until joining
the Company, Mr. Pickard was employed by Richards Medical Company in varying
capacities including Director of Manufacturing (1975-78), Group Director of
Manufacturing (1979-1981), Vice President, Manufacturing (1982-1985), and
President, Orthopaedics Division (1986-90). Mr. Pickard was appointed as
Director of the Company in February 1991.
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<PAGE> 17
Mr. Gallogly has been President and Chief Operating Officer of the Company since
June 1994. From 1988 to 1994, he was President and Chief Executive Officer of
ReSound Corporation. From 1981 to 1988, Mr. Gallogly held senior executive
positions at Richards Medical Company, including President of the Microsurgery
Division (1986-1988), Senior Vice President of Microsurgery (1982-1985), and
Vice President of Finance and Administration (1981-1982). Prior to 1981, he was
employed by Johnson & Johnson, where he held a variety of executive positions.
Mr. Bennett has been Senior Vice President of the Company since January 1992.
Mr. Bennett joined the Company in January 1991 as Senior Vice President-Sales
and Marketing. He has been active in the medical industry for over 35 years,
including tenures as divisional sales manager for Ethicon and Vice
President-Sales and Vice President-Marketing for the United States, Canada and
the Far East for Howmedica, Inc. Ethicon is a division of Johnson & Johnson
that specializes in medical sutures. Howmedica, Inc. is an orthopaedic
company.
Mr. Duerr has been Vice President, General Counsel and Secretary since he joined
the Company in June 1991. Mr. Duerr was engaged in the private practice of law
prior to joining the Company. From October 1979 through May 1990, Mr. Duerr was
employed by Schering-Plough Corporation in a variety of domestic and
international capacities. He previously served as an Assistant United States
Attorney for the Eastern District of Kentucky and as a law clerk to the
Honorable Pierce Lively, Judge of the United States Court of Appeals for the
Sixth Circuit. He received his B.A. in 1969 from the University of Notre Dame
and is a 1972 graduate of the University of Louisville School of Law.
Mr. Elkhuizen joined Sofamor Danek Europe in November 1996 as President. During
the past 16 years, Mr. Elkhuizen has held senior executive positions, both in
Europe and North America including President of EuroMedical (1993-1996),
President of Datascope international (1992-1993), Managing Director of Valleylab
Europe (1983-1992) and General Manager of Sterisystems Canada (1980-1983).
Mr. Fairey joined Sofamor Danek USA in January 1991 as Vice
President-International. He was appointed a Vice President and the Chief
Financial Officer of the Company in October 1991 and promoted to Executive Vice
President and Chief Financial Officer in July 1992. Prior to joining Sofamor
Danek USA, Mr. Fairey was employed by Richards Medical Company since 1973 in
various positions, including Controller, Treasurer, Vice President Finance for
the International Division and his last position of Vice President of
International Operations. Mr. Fairey holds a B.S. degree in accounting and an
M.B.A. from the University of Memphis.
Mr. LoGuidice has been President of Sofamor Danek USA since February 1995.
Prior to that, he spent 16 years with United States Surgical Corporation, most
recently in the positions of Vice President of Marketing-Sutures and Vice
President of Sales. Mr. LoGuidice is a 1978 graduate of Colgate University and
received his M.B.A. from Pace University in 1984.
Mr. Merrill is Vice President, Treasurer and Assistant Secretary. He joined
the Company in October 1988. Mr. Merrill received his B.S. degree in
accounting from Christian Brothers University in 1981. He became a Certified
Public Accountant in 1983 and received his M.B.A. with a concentration in
finance from the University of Memphis in 1988.
Dr. Plais has been Executive Vice President of the Company since November 1996.
In August 1987, she joined the Company as Medical Director of Sofamor, became
Vice President of Marketing and Sales of Sofamor in 1989 and President of
Sofamor Danek Europe in 1993. Prior to joining the Company, she was a
consultant in genetic diseases in Brittany, France. Dr. Plais graduated from
the University of Paris as a M.D. and holds a Master's Degree in human biology.
Mr. Sponseller has been President of Manufacturing, Sofamor Danek USA since
September 1990. From 1984 to 1990, he was Vice President and General Manager of
Manufacturing Operations. During his career at the Company, he has been
responsible for most of its administrative and management functions, including
the sales and distribution system that was in place prior to the Company's
acquisition of Danek Medical.
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<PAGE> 18
Dr. Treharne joined the Company in November 1990. In January 1991, he was
named Vice President of Regulatory and Clinical Affairs of the Company. Prior
to joining the Company, Dr. Treharne was with Richards Medical Company. Dr.
Treharne has a Ph.D. from the University of Pennsylvania and an M.B.A. from the
University of Memphis. In June 1991, Dr. Treharne was named Vice President of
Research and Regulatory Affairs and is presently in charge of the research and
regulatory efforts of the Company.
Mr. Urbanowicz has been Executive Vice President of Marketing of Sofamor Danek
USA since September 1995. From January 1987 until joining Sofamor Danek USA, Mr.
Urbanowicz held senior executive positions with Smith and Nephew Richards,
including President of the Perry Surgical Glove Division (1992-1995) and Senior
Vice President for Strategic Planning/Business Operations and Vice President of
Global Marketing for the Richards Orthopaedic Division. From 1980 to 1986, he
was employed by Pfizer's Howmedica Orthopaedic Division, where he held a variety
of marketing management positions. Mr. Urbanowicz is a 1977 graduate of Seton
Hall University. He received his M.B.A. from Seton Hall in 1980.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1996
High $35.75 $37.25 $30.88 $32.63
Low 23.50 24.63 21.00 23.75
- --------------------------------------------------------------------------------
1995
High $25.00 $25.25 $27.88 $29.88
Low 12.75 18.38 18.75 21.75
================================================================================
</TABLE>
The Company's common stock is traded on the New York Stock Exchange under the
Symbol "SDG."
The table above sets forth the reported high and low prices of the common stock
as quoted on the New York Stock Exchange.
No cash dividends have been paid to date by the Company on its common stock. The
Company does not anticipate the payment of dividends in the foreseeable future.
Internally generated funds are retained by the Company for working capital
needs.
As of February 28, 1997, the Company had approximately 970 stockholders of
record.
15
<PAGE> 19
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
The following selected consolidated financial data as of and for each of the
years in the five-year period ended December 31, 1996 has been derived from the
audited financial statements of the Company. This data should be read in
conjunction with the Consolidated Financial Statements, the notes thereto and
Management's Discussion and Analysis of Results of Operations and Financial
Condition included elsewhere in this Annual Report.
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31,
- ------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales $244,525 $188,799 $161,677 $161,794 $121,019
Cost of goods sold 45,005 40,309 35,295 35,893 25,171
- ------------------------------------------------------------------------------------------------------------------
Gross profit 199,520 148,490 126,382 125,901 95,848
Operating expenses:
Selling, general and administrative 116,729 89,847 74,183 67,844 56,222
Research and development 15,926 13,980 11,572 11,488 7,903
License agreement acquisition charge - 45,337 - - -
Product liability litigation charge 50,000 - - - -
Royalty expenses discontinued subsequent to the
combination - - - 1,182 3,175
Distributor contract termination charge and
related amortization of short-term intangibles - - 10,000 - -
- ------------------------------------------------------------------------------------------------------------------
Total operating expenses 182,655 149,164 95,755 80,514 67,300
- ------------------------------------------------------------------------------------------------------------------
Income (loss) from operations 16,865 (674) 30,627 45,387 28,548
Other income (expense) 913 2,533 2,153 (179) 917
Interest expense (3,744) (2,794) (629) (193) (25)
Combination expense - - - (9,958) (1,000)
Non-recurring litigation award - - (2,225) - -
- ------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations before
provision (benefit) for and charge in lieu of income taxes 14,034 (935) 29,926 35,057 28,440
Provision (benefit) for and charge in lieu of income
taxes 1,293 (6,319) 6,052 14,429 10,570
- ------------------------------------------------------------------------------------------------------------------
Income from continuing operations 12,741 5,384 23,874 20,628 17,870
Loss from operations of discontinued segment - - - (153) (316)
Minority interest (1,474) (417) (97) (50) -
- ------------------------------------------------------------------------------------------------------------------
Net income $ 11,267 $ 4,967 $ 23,777 $ 20,425 $ 17,554
Net income per share - fully diluted (1,3) $0.44 $0.20 $0.97 $0.83 $0.73
Weighted average number of shares - fully diluted (3) 26,109 25,395 24,582 24,509 24,159
==================================================================================================================
BALANCE SHEET DATA:
Working capital $ 31,127 $ 77,139 $ 69,164 $ 59,441 $ 57,845
Total assets 319,161 196,613 141,792 120,597 110,787
Short-term debt 66,894 16,602 3,949 1,334 1,808
Long-term debt 12,300 28,125 5,324 1,103 9,845
Stockholders' equity (2) 139,826 122,929 111,456 92,806 76,634
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Primary earnings per share were approximately the same as fully diluted
earnings per share in each period presented above.
(2) The Company has never paid cash dividends on its common stock and does not
anticipate paying cash dividends in the foreseeable future.
(3) These amounts have been retroactively adjusted to reflect all stock splits
and for the presentation of combined weighted average shares outstanding;
shares of Sofamor S.A. common stock are shown at the equivalent number of
the Company's shares based on the exchange ratio as defined in the Stock
Exchange Agreement, dated as of March 28, 1993, among the shareholders of
Sofamor S.A. and the Company.
16
<PAGE> 20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
The following table sets forth, for the periods indicated, selected financial
information expressed as a percentage of net sales and the period-to-period
percentage changes in such information.
<TABLE>
<CAPTION>
AS A PERCENTAGE OF NET SALES PERIOD-TO-PERIOD CHANGE
YEARS ENDED DECEMBER 31, YEARS ENDED DECEMBER 31,
- --------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1996 VS 1995 1995 vs 1994
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 29.5% 16.8%
Cost of goods sold 18.4 21.4 21.8 11.7 14.2
- ----------------------------------------------------------------------------------
Gross profit 81.6 78.6 78.2 34.4 17.5
Operating expenses:
Selling, general and administrative 47.7 47.6 45.9 29.9 21.1
Research and development 6.5 7.4 7.2 13.9 20.8
License agreement acquisition charge - 24.0 - (100.0) 100.0
Distributor contract termination
charge and related amortization of
short-term intangibles - - 6.2 N/A (100.0)
Product liability litigation charge 20.5 - - 100.0 N/A
- ----------------------------------------------------------------------------------
Total operating expenses 74.7 79.0 59.3 22.5 55.8
Income (loss) from operations 6.9 (0.4) 18.9 2602.2 (102.2)
Other income 0.4 1.3 1.4 (64.0) 17.6
Interest expense (1.6) (1.4) (0.4) 34.0 344.2
Non-recurring litigation award - - (1.4) N/A (100.0)
- ----------------------------------------------------------------------------------
Income (loss) from continuing
operations before provision (benefit) for
and charge in lieu of income taxes 5.7 (0.5) 18.5 1601.0 (103.1)
Provision (benefit) for and charge in lieu
of income taxes 0.5 (3.3) 3.7 120.5 (204.4)
- ----------------------------------------------------------------------------------
Income from continuing operations 5.2 2.8 14.8 136.6 (77.4)
Minority interest (0.6) (0.2) (0.1) 253.5 329.9
- ----------------------------------------------------------------------------------
Net income 4.6% 2.6% 14.7% 126.8% (79.1)%
==================================================================================
</TABLE>
OVERVIEW
During both 1996 and 1995, the Company attained record sales. The Company has
increased sales through growth in existing businesses, establishing direct sales
and marketing operations in key international countries, as well as the
development and strategic acquisitions of complementary products and
technologies.
During 1995, the Company formed a majority owned subsidiary in the Benelux
region; in 1996, direct operations were established in Australia, Canada, and
Puerto Rico, as well as 50% owned subsidiaries in Japan and Korea. The minority
shareholders of the Japanese and Korean subsidiaries continue to serve as
distributors of the Company in their respective countries. (See Note 11 to the
Consolidated Financial Statements.)
As of the end of the second quarter of 1994, the Company entered into an
agreement to terminate the exclusive U.S. distribution of the Sofamor product
lines by National Medical Specialties, Inc. ("NMS"). On July 1, 1994, the
Company began distributing Sofamor products in the United States at retail
pricing versus the distributor pricing previously charged to NMS.
Following is a summary of certain acquisitions of existing companies and the
rights to distribute products and provide services using new technologies: (See
Note 4 to the Consolidated Financial Statements.)
During the first quarter of 1995, the Company entered into a strategic alliance
with Genetics Institute, Inc. ("Genetics Institute") to provide biological
products for use in spinal applications. Pursuant to the Genetics Institute
agreement (the "G.I. Agreement"), the Company obtained exclusive North American
rights to recombinant human bone morphogenetic protein (rhBMP-2) for spinal
applications.
17
<PAGE> 21
In February of 1995, the Company acquired from Implex Corp., a privately held
company located in Allendale, New Jersey, the exclusive worldwide rights to
certain patented, proprietary material technologies and associated intellectual
property rights for spinal applications.
In March 1995, Sofamor Danek purchased 19.5% of the outstanding stock of
Surgical Navigation Technologies, Inc. ("SNT") and acquired the exclusive
worldwide license (except in Korea until 1997) to manufacture and distribute SNT
products relating to frameless stereotactic surgery in spinal and neurological
fields. In May 1996, the Company acquired the remaining 80.5% of the outstanding
stock of SNT.
In July 1996, the Company acquired certain net assets of TiMesh, Inc., a
privately held company located in Las Vegas, Nevada. The net assets acquired are
used in the design, manufacture and marketing of titanium plates and titanium
alloy screws.
Also in July 1996, the Company acquired all of the capital stock of MedNext,
Inc., a privately held company located in West Palm Beach, Florida that designs,
manufactures and markets powered surgical instrumentation and accessories for
surgical specialties.
In August 1996, the Company entered into an exclusive agreement with The
University of Florida Tissue Bank, Inc. to provide services related to their
cortical bone dowel and other allograft bone products.
In December 1996, the Company acquired all of the capital stock of Colorado,
S.A., a privately held company located in Saint Genis Laval, France that
designs, manufactures and markets a spinal implant system for deformities and
lumbar disorders of the spine.
RESULTS OF OPERATIONS
Years ended December 31, 1996 and 1995
The Company achieved record net sales for the year ended December 31, 1996 of
$244.5 million, which represented a $55.7 million, or 29.5%, increase from sales
of $188.8 million for the year ended December 31, 1995. Net sales growth
included an increase of 8.5% that resulted from the Company's conversion of
certain portions of its international distribution network to direct sales which
resulted in higher selling prices. Other net pricing changes in existing
distribution channels resulted in a 3.9% increase in net sales. Additional sales
volume comprised the remainder of the increase in net sales. Changes in exchange
rates had an immaterial impact on net sales when comparing the Company's 1996
sales with 1995.
U.S. sales increased 28.4% to $162.2 million, as compared with $126.3 million
in 1995. The Company believes the improvement in U.S. sales is primarily the
result of an increased number of instrumented fusions, as well as the
acceptance of new products such as the STEALTHSTATION(TM) system, the
TIMESH(TM) cranial plating system, and the MEDNEXT(R) surgical drill system.
Non-U.S. sales increased 31.7% to $82.3 million, as compared with $62.5 million
in 1995. The strong international sales growth during 1996, compared with 1995,
primarily reflects the Company's strategy of establishing a direct sales
presence in selected countries and the acceptance of the new products mentioned
in the preceding paragraph, as well as enhanced international sales and
marketing programs.
The Company's gross margin improved to 81.6% in 1996 from 78.6% in 1995. The
enhancement in gross margin is due to higher margins relating to changes in
international distribution, greater leveraging of manufacturing costs due to
increased volume, a reduction in the levels of outsourced product manufacturing
and favorable shifts in the sales mix of certain products and sales programs.
Selling, general and administrative expenses were 47.7% of sales in 1996
compared with 47.6% of sales in 1995. The 1996 selling, general, and
administrative expenses as a percentage of sales compared to 1995 were slightly
18
<PAGE> 22
higher due to the effects of expenses related to establishing a direct sales
presence in selected countries. The higher expenses were mostly offset by the
leveraging of other fixed costs over greater sales volume in existing
operations.
Research and development expenses totaled $15.9 million or 6.5% of net sales in
1996 compared with $14.0 million or 7.4% of net sales in 1995. The 1996 dollar
spending represents an increase of 13.9% over 1995. These costs are incurred as
the Company continues to enhance existing product lines and develop new and
complementary products for use in spinal surgery, such as interbody fusion
devices, biological products for use in spinal reconstruction, 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.
In 1995, as a result of the G.I. Agreement, a special charge of $45.3 million
was recorded. The special charge consisted of $45.2 million, which is the net
present value of the $50.0 million in scheduled payments due under the
agreement, plus related transaction costs of $122,000. The charge resulted in an
after-tax impact of $1.16 per share for the year ended December 31, 1995.
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. The Company believes
that these lawsuits are without merit and unfounded. (See Note 15 to the
Consolidated Financial Statements.)
The Company reported net other income of $913,000 in 1996 compared with $2.5
million during 1995. Other income was higher during 1995 due mainly to the
reversal of certain risk provisions and greater foreign exchange gains. Interest
expense was $3.7 million in 1996, representing a $950,000 increase over 1995.
The increase in interest expense was due to increased borrowings against the
Company's credit facilities occurring principally as a result of the
acquisitions described in the Overview Section.
The Company recorded income tax expense of $1.3 million in 1996 and an income
tax benefit of $6.3 million in 1995. The difference between the Company's
effective and statutory tax rates for both 1996 and 1995 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 December 31, 1996,
the balance sheet of the Company reflected a net deferred tax asset of $38.2
million. No valuation allowance was recorded since sufficient taxable income
exists in available carryback periods to recognize fully these net deferred tax
assets. (See Note 12 to the Consolidated Financial Statements.)
Management believes that inflation has not had a material impact on the
Company's business.
Years ended December 31, 1995 and 1994
The Company experienced record net sales for the year ended December 31, 1995 of
$188.8 million, which represented a $27.1 million, or 16.8%, increase from sales
of $161.7 million for the year ended December 31, 1994. Increased volume of
10.3% was the primary component of the sales improvement. Net pricing changes
were responsible for an increase of 4.7% and the effects of a weaker dollar in
1995 compared with 1994 resulted in a favorable impact on sales of 1.8%.
U.S. sales increased 14.4% to $126.3 million as compared with $110.4 million in
1994. The Company believes the improvement in U.S. sales, which had declined
during 1994, was due, in part, to an improvement in the regulatory and legal
outlook for the spinal industry. The improvement was related to the events
discussed below which occurred in 1995. In February 1995, the Federal judge
supervising the multi-district product liability litigation denied class
certification. During 1995, 14 Section 510(k) clearances were received, which
was a record for the
19
<PAGE> 23
Company. One of these Section 510(k) clearances allowed the Company to begin
marketing its stainless steel version of the TSRH(R) spinal system for pedicle
screw attachment for treating patients with grade 3 or 4 severe
spondylolisthesis of the L5-S1 vertebral joint. The clearance is limited to
patients who are receiving fusions using autogenous bone graft only, having the
device fixed or attached to the lumbar and sacral spine and having the device
removed after the development of a solid fusion mass. Also, the Food and Drug
Administration's ("FDA") proposed classification, reclassification and
codification of pedicle screw spinal systems was published in the Federal
Register in early October 1995. The Company believes that this proposed rule is
reflective of the FDA's position on the use of bone screws in the pedicle of the
spine and is the result of the FDA's analytical review of the 1994 FDA Advisory
Panel's recommendation, a large historical cohort study and medical literature,
as well as data from clinical studies sponsored by several companies.
Non-U.S. sales advanced 21.8% to $62.5 million as compared with $51.3 million in
1994. Management believes that the international sales growth during 1995
compared with 1994 reflected the Company's enhanced international sales and
marketing programs. Sales were also bolstered by the initial favorable impact in
those countries where changes in the Company's distribution system were made to
further enhance marketing and profit opportunities.
The Company's gross margin as a percentage of net sales improved to 78.6% in
1995 from 78.2% in 1994. The percentage improvement was primarily the result of
manufacturing cost reduction programs and favorable shifts in the sales mix of
certain products and sales programs.
Selling, general and administrative expenses increased to 47.6% of sales in 1995
compared with 45.9% of sales in 1994. The 1995 increase as a percentage of sales
when compared to 1994 was primarily due to higher legal and other professional
fees incurred in connection with various legal and regulatory matters, as well
as certain commission expenses resulting from the change in distribution of
Sofamor products in the U.S.
Research and development expenses totaled $14.0 million, or 7.4%, of net sales
in 1995 compared with $11.6 million, or 7.2%, of net sales in 1994. These costs
were incurred as the Company continued to enhance existing product lines and to
develop new and complementary products for use in spinal surgery, such as
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.
As a result of the G.I. Agreement, a special charge of $45.3 million was
recorded. The special charge consisted of $45.2 million, which is the net
present value of the $50.0 million in scheduled payments due under the agreement
plus related transaction costs of $122,000. The charge resulted in an after-tax
impact of $1.16 per share for the year ended December 31, 1995.
In connection with the NMS transaction, distributor contract termination expense
and related amortization of short-term intangibles totaling $10.0 million were
recorded as a special charge to earnings and resulted in an after-tax impact of
$0.27 per share for the year ended December 31, 1994.
The non-recurring litigation award of $2.2 million resulted from the ruling of a
Magistrate of the Commercial Court in Paris, which occurred during 1994, on a
claim of wrongful termination of the distribution agreement in favor of the
Company's former Spanish distributor of Sofamor's products. The Company has
appealed this ruling. The appeal process requires a retrial of all issues and is
still ongoing. (See Note 15 to the Consolidated Financial Statements.)
The Company reported net other income of $2.5 million or 1.3% of sales for 1995
compared with $2.2 million or 1.4% of sales for 1994. Foreign exchange gains
were the primary component of the increase. Interest expense for 1995 was $2.8
million as compared with $629,000 in 1994. The increase in interest expense
resulted primarily from the imputed interest under the G.I. Agreement.
The Company recorded an income tax benefit of $6.3 million in 1995 and an income
tax expense of $6.1 million in 1994. The tax benefit resulted primarily from the
special license agreement acquisition charge to earnings of $45.3 million
described above. The difference between the Company's effective and statutory
tax rates for both 1995 and
20
<PAGE> 24
1994 resulted primarily from the impact of the effects of certain elections made
for U.S. tax purposes following the Combination, 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 December 31, 1995, the balance sheet of
the Company reflected a net deferred tax asset of $19.8 million. No valuation
allowance was recorded since sufficient taxable income exists in available
carryback periods to recognize fully these net deferred tax assets. (See Note 12
to the Consolidated Financial Statements.)
Management believes that inflation has not had a material impact on the
Company's business.
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. Cash, cash
equivalents and short-term investments totaled $2.9 million at December 31, 1996
compared with $13.3 million at December 31, 1995.
In connection with the formation of the subsidiary in Japan, Kobayashi Sofamor
Danek, K.K. ("KSD"), the Company is required to pay commissions based on the
sales of KSD to Kobayashi Pharmaceutical Co., Ltd. ("KPC"), which has served as
the Company's distributor in Japan and is the other shareholder in KSD. Payments
of $26.7 million were made to KPC during 1996 as prepayment of commissions.
In connection with the G.I. Agreement, the Company has recorded a liability of
$23.0 million at December 31, 1996, which 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 $16.0 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 Company's working capital decreased $46.0 million during 1996. The change in
working capital was primarily due to the payments required in connection with
the acquisitions of SNT, MedNext, Inc., Colorado S.A., and certain net assets of
TiMesh, Inc. totaling $38.8 million, the $26.7 million prepayment of commissions
to KPC, the $12.5 million payment due under the G.I. Agreement and the $6.2
million increase in the current portion of the Genetics Institute obligation.
These uses of working capital were partially offset by favorable cash flows from
ongoing operations. Net accounts receivable increased $19.6 million from
December 31, 1995, due primarily to the increase in net sales. Inventories and
loaner set inventories increased $11.1 million due to stocking levels required
for recently formed subsidiaries, the manufacture of loaner set inventories in
preparation for new sales and marketing programs and additional inventory
acquired in connection with the 1996 acquisitions described above. Other
receivables increased $6.6 million from the Company's previous year-end,
primarily due to amounts recoverable from the Company's insurance carriers
related to expenses incurred in connection with product liability litigation.
The purchase agreements for two of the acquisitions outlined in the Overview
section 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 by approximately $4.2 million.
The Company is unable to determine whether such payments will be required for
the years 1997 through 1999.
Additions to property, plant and equipment during 1996 of $7.1 million were
related to capital assets acquired in the formation and acquisition of new
subsidiaries and other capital 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. The Company is currently
considering the alternatives of constructing or leasing a new facility. It is
estimated that the capitalized cost of the project, if constructed, would be
approximately $11.0 million. Net
21
<PAGE> 25
intangible assets increased by $53.8 million from December 31, 1995, primarily
due to the intangible assets relative to the acquisitions of SNT, MedNext, Inc.,
Colorado S.A., and certain net assets of TiMesh, Inc.
The Company has committed lines of credit totaling approximately $64.7 million.
At December 31, 1996, $50.2 million was outstanding under the Company's lines of
credit and other short-term borrowings. The lines of credit consist primarily of
a $50.0 million uncollateralized revolving line of credit with a U.S. bank which
is renewable annually and matures October 15, 1997. This line of credit was
increased to $60.0 million as of January 31, 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 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
new products in the past. There can be no assurance that the Company will be
able to develop and introduce 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 15 to the Consolidated Financial Statements.)
There can be no assurance that additional claims will not be asserted against
22
<PAGE> 26
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.
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.
23
<PAGE> 27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
SOFAMOR DANEK GROUP, INC. AND SUBSIDIARIES/REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
Sofamor Danek Group, Inc.
We have audited the consolidated balance sheets of Sofamor Danek Group, Inc. and
Subsidiaries as of December 31, 1996 and 1995, and the related consolidated
statements of income, changes in stockholders' equity and cash flows for each of
the three years in the period ended December 31, 1996. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated 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 consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Sofamor
Danek Group, Inc. and Subsidiaries as of December 31, 1996 and 1995, and the
results of their consolidated operations and their cash flows for each of the
three years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Memphis, Tennessee
January 31, 1997
24
<PAGE> 28
SOFAMOR DANEK GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
(IN THOUSANDS, EXCEPT SHARES)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
1996 1995
- ----------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
- ----------------------------------------------------------------------------------------
Current assets:
Cash and cash equivalents $ 2,830 $ 11,330
Short-term investments 111 1,924
Accounts receivable -- trade, less allowance for
doubtful accounts of $1,589 and $1,555 at
December 31, 1996 and 1995, respectively 70,031 50,451
Other receivables 15,813 9,257
Inventories 33,483 25,723
Loaner set inventories 14,123 10,803
Prepaid expenses 6,318 5,092
Prepaid income taxes -- 2,648
Current deferred income taxes 5,312 4,699
- ----------------------------------------------------------------------------------------
Total current assets 148,021 121,927
Property, plant and equipment
Land 1,484 1,505
Buildings 11,261 10,878
Machinery and equipment 32,083 25,723
Automobiles 708 231
- ----------------------------------------------------------------------------------------
45,536 38,337
Less accumulated depreciation (20,026) (15,714)
- ----------------------------------------------------------------------------------------
25,510 22,623
Investments 920 3,600
Intangible assets, net 83,426 29,600
Other assets 28,282 3,597
Non-current deferred income taxes 33,002 15,266
- ----------------------------------------------------------------------------------------
Total assets $ 319,161 $ 196,613
========================================================================================
LIABILITIES
Current liabilities:
Notes payable and lines of credit $ 50,207 $ 6,516
Current maturities of long-term debt 16,687 10,086
Accounts payable 7,332 6,513
Accrued foreign income taxes 3,898 539
Accrued expenses 38,770 21,134
- ----------------------------------------------------------------------------------------
Total current liabilities 116,894 44,788
Long-term debt, less current maturities 12,300 28,125
Deferred income taxes 121 191
Product liability litigation 48,000 --
Minority interest 2,020 580
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; 25,094,277 and 24,672,131 shares
issued (including 685,908 and 678,433 shares held in
treasury) at December 31, 1996 and 1995, respectively 52,994 44,832
Retained earnings 98,044 86,777
Cumulative translation adjustment 2,542 5,542
- ----------------------------------------------------------------------------------------
153,580 137,151
Less:
Cost of common stock held in treasury (9,985) (9,736)
Unearned compensation (54) (321)
Stockholder notes receivable (3,715) (4,165)
- ----------------------------------------------------------------------------------------
Total stockholders' equity 139,826 122,929
- ----------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 319,161 $ 196,613
========================================================================================
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
25
<PAGE> 29
SOFAMOR DANEK GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 244,525 $ 188,799 $ 161,677
Cost of goods sold 45,005 40,309 35,295
- ----------------------------------------------------------------------------------------------------------------
Gross profit 199,520 148,490 126,382
Operating expenses:
Selling, general and administrative 116,729 89,847 74,183
Research and development 15,926 13,980 11,572
License agreement acquisition charge -- 45,337 --
Product liability litigation charge 50,000 -- --
Distributor contract termination charge and related
amortization of short-term intangibles -- -- 10,000
- ----------------------------------------------------------------------------------------------------------------
Total operating expenses 182,655 149,164 95,755
- ----------------------------------------------------------------------------------------------------------------
Income (loss) from operations 16,865 (674) 30,627
Other income 913 2,533 2,153
Interest expense (3,744) (2,794) (629)
Non-recurring litigation award -- -- (2,225)
- ----------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations before provision
(benefit) for and charge in lieu of income taxes 14,034 (935) 29,926
Provision (benefit) for and charge in lieu of income
taxes 1,293 (6,319) 6,052
- ----------------------------------------------------------------------------------------------------------------
Income from continuing operations 12,741 5,384 23,874
Minority interest (1,474) (417) (97)
- ----------------------------------------------------------------------------------------------------------------
Net income $ 11,267 $ 4,967 $ 23,777
Primary and fully diluted net income per share $ 0.44 $ 0.20 $ 0.97
================================================================================================================
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
26
<PAGE> 30
SOFAMOR DANEK GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS, EXCEPT FOR SHARES)
<TABLE>
<CAPTION>
Foreign
Currency Unearned Stockholders'
Number of Common Retained Translation Treasury Compen- Notes
Shares Stock Earnings Adjustment Stock sation Receivable Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1994 24,369,838 $40,459 $58,033 $ (334) $(1,063) $(4,289) $ 92,806
Common stock issued 9,337 180 180
Repurchase of common stock (678,433) (9,736) (9,736)
Exercise of stock options 54,062 343 343
Income tax benefit from vesting
of restricted stock & stock
options exercised 254 254
Unearned compensation
amortization 370 370
Termination for stock grant 73 -
(73)
Stock issuance valuation
adjustment (392) (392)
Stockholders' contributed 500 500
capital
Stockholders' notes receivable 98 98
Net income 23,777 23,777
Cumulative translation
adjustment 3,256 3,256
- ------------------------------------------------------------------------------------------------------------------------------------
Balances, December 31, 1994 23,754,804 41,271 81,810 2,922 (9,736) (620) (4,191) 111,456
Common stock issued 7,241 146 146
Exercise of stock options 231,653 2,481 2,481
Income tax benefit from
vesting of restricted stock &
stock options exercised 934 934
Unearned compensation
amortization 299 299
Stockholders' notes receivable 26 26
Net income 4,967 4,967
Cumulative translation
adjustment 2,620 2,620
- ------------------------------------------------------------------------------------------------------------------------------------
Balances, December 31, 1995 23,993,698 44,832 86,777 5,542 (9,736) (321) (4,165) 122,929
COMMON STOCK ISSUED 4,702 137 5 142
REPURCHASE OF COMMON STOCK (7,775) (254) (254)
EXERCISE OF STOCK OPTIONS 417,744 5,437 5,437
INCOME TAX BENEFIT FROM
VESTING OF RESTRICTED STOCK &
STOCK OPTIONS EXERCISED 2,588 2,588
UNEARNED COMPENSATION
AMORTIZATION 267 267
STOCKHOLDERS' NOTES RECEIVABLE 450 450
NET INCOME 11,267 11,267
CUMULATIVE TRANSLATION
ADJUSTMENT (3,000) (3,000)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCES, DECEMBER 31, 1996 24,408,369 $52,994 $98,044 $2,542 $(9,985) $ (54) $(3,715) $139,826
===================================================================================================================================
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
27
<PAGE> 31
SOFAMOR DANEK GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS, EXCEPT FOR SHARES)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
1996 1995 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Income from continuing operations $ 12,741 $ 5,384 $ 23,874
Minority interest (1,474) (417) (97)
- -------------------------------------------------------------------------------------------------
Net income 11,267 4,967 23,777
Adjustments to reconcile net income to net
cash provided by
operating activities:
Depreciation and amortization 10,374 7,857 7,375
Provision for doubtful accounts receivable 705 366 965
Deferred income tax benefit (18,678) (15,955) (10)
License agreement acquisition charge -- 45,215 --
Gain (loss) on disposal of equipment 94 6 (13)
Accretion of investment discount -- -- (171)
Equity loss in unconsolidated affiliate 49 -- 261
Minority interest 1,474 417 97
Changes in assets and liabilities, net of
acquisitions:
Accounts receivable (19,606) (12,456) (1,042)
Other receivables (6,968) (6,515) 338
Inventories (9,777) 2,867 (9,870)
Prepaid expenses (1,142) (2,130) (404)
Prepaid income taxes 2,647 902 (3,502)
Other assets (26,709) (1,819) (77)
Accounts payable (357) 2,006 (2,717)
Accrued income taxes 6,186 1,440 (4,545)
Accrued expenses 13,353 3,553 1,803
Product liability litigation 48,000 -- --
- -------------------------------------------------------------------------------------------------
Net cash provided by operating activities 10,912 30,721 12,265
- -------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of short-term investments (116) (18,284) (34,607)
Proceeds from maturities of short-term
investments 1,899 17,633 35,781
Proceeds from sale of equipment 34 19 124
Payments for purchase of property,
plant and equipment (7,110) (4,604) (6,320)
Purchase of intangible assets (18,538) (8,893) (7,853)
Increase in notes receivable, other -- (27) (4)
Repayments of notes receivable, other 85 102 67
Acquisitions, net of cash acquired (33,953) -- --
Payments for investment -- (2,585) --
Purchase of minority interest (1,965) -- (88)
- -------------------------------------------------------------------------------------------------
Net cash used by investing activities (59,664) (16,639) (12,900)
- -------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Increase in short-term borrowings 43,839 3,146 2,265
Proceeds from long-term debt 871 172 123
Repayment of long-term debt (10,353) (12,954) (389)
Repayment of stockholders' notes receivable 450 26 98
Proceeds from issuance of common stock 5,574 2,627 523
Repurchase of common stock -- -- (9,736)
Capital contributions by minority stockholders 489 -- --
- -------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities 40,870 (6,983) (7,116)
- -------------------------------------------------------------------------------------------------
</TABLE>
28
<PAGE> 32
SOFAMOR DANEK GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS, EXCEPT FOR SHARES)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
1996 1995 1994
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Effect of exchange rate changes on cash (618) (156) 520
- -----------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (8,500) 6,943 (7,231)
Cash and cash equivalents, beginning of period 11,330 4,387 11,618
- -----------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 2,830 $ 11,330 $ 4,387
=========================================================================================
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 4,605 $ 1,103 $ 502
Cash paid during the year for income taxes $ 11,015 $ 7,204 $ 11,614
- -----------------------------------------------------------------------------------------
</TABLE>
Supplemental schedule of non-cash investing and financing activities:
- - In 1996, 1995 and 1994, net income tax benefits of $2,588, $934 and $254,
respectively, were realized by the Company as a result of certain common
stock options being exercised and the vesting of certain restricted common
stock, reducing accrued federal and state income taxes payable and
increasing common stock.
- - In January 1994, the Company purchased technology and rights to a medical
device valued at $5,000 in exchange for a non-negotiable, subordinated
convertible note with a principal amount of $4,500. The Company also
recorded the $500 differential as an increase in common stock.
- - In August 1994, the Company acquired various patented technologies and a
non-compete agreement valued at $8,600 from Citation Medical Corporation
("Citation"). These intangible assets were purchased in exchange for $2,000
in cash, Citation's stock, which the Company held as an investment of
$6,200, and the cancellation of a license agreement which carried a net
value of $400 on the Company's books. In addition, the Company adjusted the
value of its Citation investment, resulting in a decrease in common stock
of $392.
- - During 1995, the Company incurred a liability of $45,215 in connection with
the acquisition of a license agreement.
- - During 1996, $698 of accounts receivable were written-off against the
allowance for doubtful accounts.
The accompanying notes are an integral part of the
consolidated financial statements.
29
<PAGE> 33
SOFAMOR DANEK GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except for shares and per share data)
1. ORGANIZATION, BASIS OF PRESENTATION AND NATURE OF OPERATIONS
ORGANIZATION
The consolidated financial statements of Sofamor Danek Group, Inc. (the
"Company") include the accounts of the Company and its subsidiaries. The Company
controls and owns 51% of a subsidiary in Belgium and 50% of two separate
subsidiaries in Japan and Korea. All other subsidiaries are wholly owned.
Minority interest represents minority stockholders' proportionate share of the
equity in the subsidiaries. All significant intercompany balances, transactions
and profits have been eliminated in consolidation.
BASIS OF PRESENTATION
The consolidated financial statements are prepared on the basis of generally
accepted accounting principles. The preparation of 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 at December 31, 1996 and 1995 and reported amounts of revenues and
expenses for each of the three years in the period ended December 31, 1996.
Significant estimates include those made for product liability litigation, the
allowance for doubtful accounts, inventory reserves for excess, obsolete and
damaged products, depreciation and amortization. Actual results could differ
from those estimates made by management.
NATURE OF OPERATIONS
The Company primarily develops, manufactures and markets spinal devices used in
the surgical treatment of spinal disorders.
The Company has subsidiaries located throughout North America, Europe, Asia and
Australia and has manufacturing facilities located in Indiana, Nevada, Florida,
Colorado, and France. Products are sold primarily to hospitals, either directly
or through distributors.
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 international markets in which the
Company distributes its products. In addition, inherent in the accompanying
consolidated financial statements are certain risks and uncertainties. These
risks and uncertainties include, but are not limited to: timely development and
acceptance of new products, impact of competitive products, timely receipt of
regulatory clearances required for new products, regulation of current products,
potential impact on health care cost containment proposals on profitability,
product obsolescence, the availability of product liability insurance,
disposition of certain litigation matters and cash balances in excess of
federally insured limits.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS
The Company considers all highly liquid investments with a remaining maturity of
three months or less when purchased to be cash equivalents.
30
<PAGE> 34
INVESTMENTS
Investments represent the Company's investments in unconsolidated affiliates.
Investments over which the Company exerts significant influence, but does not
control the financial and operational direction, are accounted for using the
equity method of accounting. All other investments are recorded at cost.
INVENTORIES AND LOANER INVENTORIES
Inventories and loaner inventories are stated at the lower of cost (determined
principally by the first-in, first-out method) or market. The Company maintains
a reserve for its estimate of excess, obsolete and damaged goods based on
historical and forecasted usage.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, including certain equipment acquired under
capital leases, are stated at cost. Property and equipment are depreciated on a
straight-line basis over their estimated useful lives which range from 3 to 40
years. Assets acquired under capital leases are amortized over the term of the
underlying lease. Amortization expense of assets under capital leases and
depreciation expense for the years ended December 31, 1996, 1995, and 1994
totaled $5,449, $4,366 and $4,103, respectively.
Amounts expended for maintenance and repairs are charged to expense as incurred.
Upon disposition, both the related cost and accumulated depreciation accounts
are relieved and the related gain or loss is credited or charged to operations.
REVENUE RECOGNITION
Sales are recognized primarily upon the shipment of products to the customer or
distributor. The Company derives revenues from both sales of products and
certain service functions. The revenues from services are insignificant and
accordingly are included in net sales.
Concentration of credit risk with respect to trade accounts receivable is
generally diversified due to the large number of entities comprising the
Company's customer base. The Company performs ongoing credit evaluations and
provides an allowance for potential credit losses against the portion of
accounts receivable which is estimated to be uncollectible. Such losses have
historically been within management's expectations.
INCOME TAXES
The provision for income taxes and corresponding balance sheet accounts are
determined in accordance with SFAS No. 109, "Accounting for Income Taxes" ("SFAS
109"). Under SFAS 109, deferred tax liabilities and assets are determined based
on temporary differences between the bases of certain assets and liabilities for
income tax and financial reporting purposes.
The deferred tax assets and liabilities are classified according to the
financial statement classification of the assets and liabilities generating the
differences. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized.
FOREIGN CURRENCY TRANSLATION
All balance sheet accounts denominated in a currency other than U.S. dollars are
translated into U.S. dollars at the current exchange rate as of the end of the
accounting period. Income statement items are translated at weighted-average
currency exchange rates. The resulting translation adjustment is recorded as a
separate component of stockholders' equity. Gains and losses resulting from
foreign currency transactions denominated in a currency other than the
functional currency are included in net income and amounted to net gains during
1996, 1995, and 1994 of $632, $827, and $487, respectively. Gains and losses
relative to intercompany foreign currency transactions, for
31
<PAGE> 35
which settlement is not planned or anticipated in the foreseeable future, are
excluded from net income and reported as cumulative translation adjustments.
TREASURY STOCK
The Company purchased 7,775 shares in 1996 and 678,433 shares in 1994 of its
common stock at an aggregate cost of approximately $254 and $9,736,
respectively. There were no shares purchased during 1995.
3. INVENTORIES AND LOANER INVENTORIES
Net inventories at December 31, 1996 and 1995 consist of the following:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
1996 1995
- -------------------------------------------------------------------
<S> <C> <C>
Finished goods $28,260 $21,238
Work-in-process 2,961 3,017
Raw materials 2,262 1,468
- -------------------------------------------------------------------
Net inventories $33,483 $25,723
- -------------------------------------------------------------------
Loaner set inventories, net $14,123 $10,803
- -------------------------------------------------------------------
</TABLE>
Loaner set inventories consist of inventory items on loan or available to be
loaned to customers. The inventory items used by the customer in surgery are
recorded as sales when used; the remaining inventory in the set is returned to
the Company.
4. ACQUISITIONS
During 1996, the Company completed four acquisitions which have been accounted
for utilizing the purchase method of accounting. Accordingly, the results of
operations of the acquired businesses, which are not significant to the
Company's consolidated results of operations, have been included in the
accompanying consolidated financial statements from their respective dates of
acquisition.
In March 1995, the Company purchased 19.5% of the outstanding stock of Surgical
Navigation Technologies, Inc. ("SNT"), a privately held company located in
Broomfield, Colorado. In conjunction with the purchase, the Company acquired the
exclusive worldwide license (except in Korea until 1997) to manufacture and
distribute SNT products relating to frameless stereotactic surgery in the spinal
and neurological fields. In May 1996, the Company acquired the remaining 80.5%
of the outstanding stock of SNT.
In July 1996, the Company acquired the net assets of TiMesh, Inc., a privately
held company located in Las Vegas, Nevada. The net assets acquired are used in
the design, manufacture, and marketing of titanium plates and titanium alloy
screws.
In July 1996, the Company acquired all of the capital stock of MedNext, Inc., a
privately held company located in West Palm Beach, Florida that designs,
manufactures and markets powered surgical instrumentation and accessories for
surgical specialties.
In December 1996, the Company acquired all of the capital stock of Colorado
S.A., a privately held company located in France. Colorado, S.A. designs and
markets certain spinal devices used in the surgical treatment of deformities and
lumbar disorders of the spine.
In connection with these acquisitions, the Company recorded certain loss
contingencies. The Company has estimated the fair value of these loss
contingencies, at the dates of acquisition, based on currently available
information. The Company does not believe that changes in these estimates will
have a material adverse effect on
32
<PAGE> 36
its consolidated financial position, results of operations or cash flows;
however, material changes could significantly impact the final purchase price
allocation.
The purchase agreements for two of these acquisitions 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 by $4,174. The Company is unable to determine whether such payments
will be required for the years 1997 through 1999.
The estimated fair values assigned to the assets and liabilities acquired were
as follows:
<TABLE>
- -------------------------------------------------------------------------------
<S> <C>
Total consideration paid (including amounts paid during 1995) $ 38,796
Fair value of liabilities assumed 6,935
Fair value of tangible and identifiable assets acquired (11,528)
- -------------------------------------------------------------------------------
Goodwill at acquisition date 34,203
Adjustment to purchase price during 1996 4,174
- -------------------------------------------------------------------------------
Goodwill for 1996 acquisitions $ 38,377
===============================================================================
</TABLE>
5. INTANGIBLE ASSETS
Identifiable intangible assets and goodwill are recorded and amortized over
their estimated economic lives or periods of future benefit. The Company
amortizes goodwill on a straight-line basis over the estimated period of benefit
ranging from 15 to 20 years. Other identifiable purchased intangible assets are
amortized on a straight-line basis over their estimated period of benefit
ranging from 1 to 12 years. The lives established for these assets are a
composite of many factors which are subject to change because of the nature of
the Company's operations. This is particularly true for goodwill which reflects
value attributable to the going concern nature of acquired businesses, the
stability of their operations, market presence and reputation. Accordingly, at
each reporting period, the Company evaluates the continued appropriateness of
these lives and recoverability of the carrying value of such assets based upon
the latest available economic factors and circumstances. Impairment of value, if
any, is recognized in the period in which it is determined. The Company does not
believe that there are any facts or circumstances indicating impairment of
identifiable intangible assets and goodwill at December 31, 1996.
A summary of intangible assets at December 31, is as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
1996 1995
- ------------------------------------------------------------------
<S> <C> <C>
Goodwill $41,957 $ 1,399
Patents 33,960 24,240
Trademarks 1,767 1,350
License agreements 9,009 8,005
Non-compete agreements 6,528 2,325
Other 3,770 519
- ------------------------------------------------------------------
96,991 37,838
Less: accumulated amortization (13,565) (8,238)
- ------------------------------------------------------------------
$83,426 $29,600
==================================================================
</TABLE>
6. LICENSE AGREEMENT ACQUISITION CHARGE
During 1995, the Company entered into a license agreement (the "Agreement") with
Genetics Institute, Inc. ("G.I.") to provide biological products for use in
spinal applications. The Agreement provides exclusive North American
distribution rights to the Company and requires annual payments through 1998
totaling $50,000. The Company charged $45,337 to operations during 1995 as
purchased research and development. This charge represents the net present value
of the total required payments pursuant to the Agreement plus related
transaction costs. The liability
33
<PAGE> 37
recorded at December 31, 1996 represents the present value of the Company's
remaining obligation under the terms of the Agreement.
7. DISTRIBUTOR TERMINATION
During 1994, the Company entered into an agreement to terminate the exclusive
U.S. distribution of the Sofamor product lines by National Medical Specialties,
Inc. ("NMS"). On July 1, 1994, the Company began distributing Sofamor products
in the United States at retail pricing versus the distributor pricing
previously charged to NMS.
As a result of the Company discontinuing its relationship with NMS, a
distributor contract termination charge and the related amortization of
short-term intangibles of $10,000 was recorded as a charge to earnings during
1994.
8. FOREIGN OPERATIONS
The Company operates in predominately one industry. A summary of the Company's
operations by geographical areas for the three years ended December 31, 1996, is
set forth below:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
1996 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES:
North America $189,831 $147,025 $118,803
Europe/Asia 70,410 49,260 50,286
Eliminations (15,716) (7,486) (7,412)
- -------------------------------------------------------------------------------
Total revenues $244,525 $188,799 $161,677
===============================================================================
INCOME (LOSS) BEFORE TAXES:
North America $ 1,244 $ (5,995) $ 33,814
Europe/Asia 12,790 5,060 (3,888)
- -------------------------------------------------------------------------------
Total income (loss) before taxes $ 14,034 $ (935) $ 29,926
===============================================================================
</TABLE>
Included in income (loss) before taxes was a product liability litigation charge
of $50,000 in North America during 1996, a license agreement acquisition charge
of $45,337 in North America during 1995, and a distributor contract termination
charge of $8,750 in Europe/Asia during 1994.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------
<S> <C> <C>
IDENTIFIABLE ASSETS:
North America $270,697 $151,952
Europe/Asia 67,421 53,305
Eliminations (21,898) (21,898)
- --------------------------------------------------------------------
Total identifiable assets 316,220 183,359
Corporate assets 2,941 13,254
- --------------------------------------------------------------------
Total assets $319,161 $196,613
====================================================================
</TABLE>
Corporate assets are composed primarily of cash, cash equivalents and short-term
investments.
34
<PAGE> 38
The following amounts are included in the consolidated financial statements for
international subsidiaries:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
1996 1995 1994
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current assets $ 52,240 $ 40,499 $ 39,329
Property, plant and equipment 12,141 10,496 9,241
Intangible assets 6,303 5,909 4,032
Other assets, not itemized 2,629 1,561 2,420
- ----------------------------------------------------------------------------------------
73,313 58,465 55,022
- ----------------------------------------------------------------------------------------
Current liabilities 33,343 18,240 12,412
Net intercompany balance 8,430 8,853 13,504
Long-term liabilities 2,416 1,396 1,036
- ----------------------------------------------------------------------------------------
44,189 28,489 26,952
- ----------------------------------------------------------------------------------------
Net assets $ 29,124 $ 29,976 $ 28,070
========================================================================================
</TABLE>
9. NOTES PAYABLE AND LINES OF CREDIT
At December 31, 1996 and 1995, the Company had a loan agreement with a bank,
which provided for borrowings of up to $50,000 and $40,000, respectively, under
a revolving line of credit. During 1996, the Company could borrow funds under
the loan agreement denominated in U.S. Dollars, French Francs, or Japanese Yen.
U.S. Dollar, French Franc and Japanese Yen borrowings under the line of credit
bear interest at rates of 0.625% above each of the 30-day adjusted LIBOR rate
(5.5% at December 31, 1996), PIBOR rate (3.50% at December 31, 1996) and TIBOR
rate (0.55% at December 31, 1996), respectively, and interest is payable
monthly. The Company must also pay a quarterly fee of 0.125% per annum on the
unused portion of the commitment. The loan agreement contains covenants which
include certain restrictions, such as minimum levels of tangible net worth,
minimum quarterly net income, and maintenance of an adequate debt service
coverage ratio. The Company had the equivalent of $35,087 outstanding under the
revolving line of credit at December 31, 1996, and no amount outstanding at
December 31, 1995.
At December 31, 1996, the Company also had several loan agreements with various
international banks. The aggregate maximum borrowings available under these
lines of credit were equivalent to approximately $14,711 and bear interest at
rates ranging from 1.625% to 14.25%. The Company had approximately $15,120
outstanding under the revolving lines of credit and various other short-term
borrowings at December 31, 1996.
The Company's weighted average interest rate on short-term borrowings was
approximately 6.5% at December 31, 1996 and 1995.
10. LONG-TERM DEBT
In connection with the acquisition of the G.I. Agreement, the Company has
recorded long-term debt equal to the net present value of the future annual
payments (calculated at inception based on the Company's implicit borrowing rate
of 6.75%). Interest expense is recognized ratably over the term of the
agreement. The Company recognized interest expense of $1,880 and $1,650 relative
to this agreement during 1996 and 1995, respectively.
During January 1994, the Company signed an agreement with an individual to
acquire various technologies valued at $5,000. In exchange, the Company issued a
non-negotiable, subordinated convertible note. The note, in the principal sum of
$4,500, is due January 11, 2004, and bears interest at a rate equal to the rate
that the Company actually earns on its investments calculated on an annual
basis. Interest is payable annually. At any time after January 11, 1996, at the
election of the individual, the note may be converted into 178,571 shares of
common stock of the Company. The Company recorded the $500 differential between
the value of technologies and the principal sum of the note as an increase in
common stock.
35
<PAGE> 39
Long-term debt at December 31, 1996 and 1995 consists of:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Present value of amounts due under the G.I. Agreement $ 22,998 $ 32,715
Subordinated convertible note 4,500 4,500
Various term loans with banks at fixed interest rates
from 0% to 9% maturing from 1997 to 1999 with annual
installments ranging from $17 to $162 639 815
Capital lease obligations 850 181
- --------------------------------------------------------------------------------
28,987 38,211
Less current maturities (16,687) (10,086)
- --------------------------------------------------------------------------------
$ 12,300 $ 28,125
================================================================================
</TABLE>
At December 31, 1996, aggregate required payments of long-term debt, including
capitalized lease obligations, are as follows:
<TABLE>
- --------------------------------------------------------------------------------
<S> <C>
1997 $18,225
1998 7,819
1999 276
2000 160
2001 10
Thereafter 4,500
- --------------------------------------------------------------------------------
$30,990
================================================================================
</TABLE>
11. MINORITY INTERESTS
In February 1996, the Company established Kobayashi Sofamor Danek K.K. ("KSD")
in Japan. The Company and Kobayashi Pharmaceutical Co., Ltd. ("KPC") each hold a
50% interest in KSD; however, the Company controls the financial and operational
direction of KSD. KSD sells the Company's products exclusively to KPC. During
1996, the Company made a $26,700 prepayment of commissions to KPC under a thirty
year agreement. The Company is amortizing the balance based upon sales to KPC.
At December 31, 1996, the Company has recorded an aggregate of $26,338 included
in prepaid expenses and other assets, which represents the unamortized portion
of the prepayment.
In November 1996, the Company established Danek Korea Co., Ltd. ("DK") in Korea.
The Company and Joint Medical Company ("JMC") each hold a 50% interest in DK;
however, the Company controls the financial and operational direction of DK. DK
sells the Company's products exclusively to JMC.
During 1996, in the aggregate, the Company recorded sales of $28,843 to KPC and
JMC. At December 31, 1996, the Company had total receivables, in the aggregate,
of $8,498 from KPC and JMC.
36
<PAGE> 40
12. INCOME TAXES
The provision (benefit) for income taxes for the years ended December 31, is as
follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
U.S.
FEDERAL STATE FOREIGN TOTAL
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1996
Current $ 11,061 $ 1,387 $ 4,676 $ 17,124
Deferred (16,010) (2,837) 427 (18,420)
- ----------------------------------------------------------------------------------
(4,949) (1,450) 5,103 (1,296)
Charge in lieu of income taxes 2,240 349 -- 2,589
- ----------------------------------------------------------------------------------
$ (2,709) $ (1,101) $ 5,103 $ 1,293
==================================================================================
1995
Current $ 7,587 $ 805 $ 670 $ 9,062
Deferred (16,141) (171) (3) (16,315)
- ----------------------------------------------------------------------------------
(8,554) 634 667 (7,253)
Charge in lieu of income taxes 794 140 -- 934
- ----------------------------------------------------------------------------------
$ (7,760) $ 774 $ 667 $ (6,319)
==================================================================================
1994
Current $ 4,896 $ 627 $ 24 $ 5,547
Deferred (400) (14) 665 251
- ----------------------------------------------------------------------------------
4,496 613 689 5,798
Charge in lieu of income taxes 220 34 -- 254
- ----------------------------------------------------------------------------------
$ 4,716 $ 647 $ 689 $ 6,052
==================================================================================
</TABLE>
Charges in lieu of income taxes were recorded by the Company as a result of
certain common stock options being exercised and the vesting of certain
restricted common stock.
An analysis of the net deferred income tax asset at December 31, is as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Current deferred income tax assets:
Accounts receivable $ 356 $ 322
Inventory 3,680 3,720
Other 1,276 657
--------------------------------------------------------------------------------
Total current deferred income tax assets 5,312 4,699
- --------------------------------------------------------------------------------
Non-current deferred income tax assets:
Product liability litigation 17,500 --
License agreement 14,017 15,075
Other 1,485 191
- --------------------------------------------------------------------------------
Total non-current deferred income tax assets 33,002 15,266
- --------------------------------------------------------------------------------
Total deferred income tax assets $38,314 $19,965
================================================================================
Non-current deferred income tax liabilities:
Property, plant and equipment $ 121 $ 191
- --------------------------------------------------------------------------------
Total non-current deferred income tax liabilities $ 121 $ 191
================================================================================
</TABLE>
No valuation allowance was recorded since sufficient taxable income exists in
available carryback periods to fully recognize these net deferred tax assets.
37
<PAGE> 41
A reconciliation of federal statutory and effective income tax rates is as
follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory U.S. federal income tax rate 35.0% 35.0% 35.0%
Effect of:
Foreign operations (12.3) 732.7 (8.0)
State income taxes, net of income tax benefit (7.3) (46.2) 1.3
Tax credits (2.0) 20.5 (2.9)
Inventory contribution (4.2) -- (1.4)
Other, net -- (66.2) (3.7)
- --------------------------------------------------------------------------------
Effective rate 9.2% 675.8% 20.3%
================================================================================
</TABLE>
13. RELATED PARTY TRANSACTIONS
At December 31, 1995, the Company had loans of $4,165 to the Company's Chairman
and Chief Executive Officer ("Chairman") for the purchase of common stock of the
Company and for personal income taxes resulting from the exercise of common
stock options and the vesting of certain restricted stock. Interest was charged
at the applicable short-term federal rate as prescribed by the Internal Revenue
Service and was due annually. During 1996, the Company's Board of Directors
approved an amendment to the Chairman's loan forgiveness arrangements providing
for forgiveness of the loans and the related compensation expense in increments
beginning in 1996 through 2005 and for paying all future applicable taxes and
interest on the loans. This forgiveness is conditional upon the Chairman
remaining continuously employed by the Company for the next ten years and
certain performance criteria. In the event of a change in control of the
Company, the loans are immediately forgiven. The balance of the loans at
December 31, 1996 was approximately $3,715 and collateralized by 200,000 shares
of common stock.
14. COMMITMENTS AND CONTINGENCIES
The Company and its subsidiaries lease certain equipment and facilities under
non-cancelable operating leases expiring in 2001. The future annual minimum rent
payments under these leases at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
YEAR
- --------------------------------------------------------------------------------
<S> <C>
1997 $2,110
1998 1,572
1999 1,314
2000 1,070
2001 77
- --------------------------------------------------------------------------------
$6,143
================================================================================
</TABLE>
Rent expense for 1996, 1995, and 1994, including month-to-month leases, was
approximately $1,914, $903, and $711, respectively.
The Company has agreements with certain entities which provide the Company the
rights to manufacture and market certain spinal system products developed and
patented by these entities. The agreements provide for royalty payments ranging
from 1% to 10% of the net selling prices (as defined by the agreements) of all
the products sold or for required royalty payments, based on a predefined fee.
These agreements are in force as long as the Company sells the related products.
Royalty expense was $6,768, $5,907, and $4,083 in 1996, 1995, and 1994,
respectively.
38
<PAGE> 42
At December 31, 1996, the Internal Revenue Service was conducting an audit of
the Company's federal tax returns for the fiscal years ended December 31, 1995
and 1994. The Company is unable at this time to make a determination as to the
ultimate outcome or the financial impact of these audits.
15. LITIGATION
The Company is involved from time to time in litigation on various matters which
are routine to the conduct of this business, including product liability and
intellectual property cases.
PRODUCT LIABILITY CASES
Multidistrict Litigation:
In 1994, the Company and other spinal implant manufacturers were named as
defendants in purported class action product liability lawsuits in various
federal courts throughout the country alleging that plaintiffs were injured by
spinal implants manufactured by the Company and others. On August 4, 1994, the
Federal Judicial Panel on Multidistrict Litigation ordered that all federal
court lawsuits then existing be transferred to and consolidated for pretrial
proceedings, including the determination of class certification, in the United
States District Court for the Eastern District of Pennsylvania in Philadelphia
(the "Multidistrict Litigation"). Federal court lawsuits filed after August 4,
1994 have also been transferred to and consolidated in the Eastern District of
Pennsylvania. On February 22, 1995, Chief Judge Emeritus Louis C. Bechtle denied
class certification. The federal court lawsuits before Judge Bechtle will remain
coordinated for further pretrial purposes but are individual lawsuits. As
previously disclosed, as a result of the denial of class certification by Judge
Bechtle, a large number of additional plaintiffs have filed lawsuits alleging
injuries caused by spinal implants manufactured by the Company. To date,
approximately two thousand eight hundred (2,800) plaintiffs have filed lawsuits
against the Company, with a few also naming as defendants various officers and
directors of the Company. A majority of these plaintiffs filed their claims in
1995. Also, plaintiffs' lawyers have filed lawsuits involving about two thousand
eight hundred fifty (2,850) claimants alleging a conspiracy theory among
doctors, manufacturers (including the Company), hospitals, teaching
institutions, professional societies and others to promote, in violation of
applicable law, the use of spinal implants. 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. On August 22, 1996, Judge Bechtle dismissed without
prejudice plaintiffs' conspiracy claims. Many plaintiffs asserting these
conspiracy claims have filed amended or new complaints, but it is not possible
at this time to determine precisely how many of these conspiracy complaints will
be reasserted or the number of additional plaintiffs that may file lawsuits.
The majority of such lawsuits were filed in federal courts throughout the
country and are in the preliminary stages. Discovery proceedings, including the
taking of depositions, have been ongoing in certain of the lawsuits that were
first to be filed. Discovery in certain cases that were filed later will begin
in 1997. Over one thousand eight hundred (1,800) of the plaintiffs have had
their lawsuits returned to the state court in Memphis, Tennessee because it was
determined that the federal courts lacked jurisdiction over their claims. It is
anticipated that the Memphis, Tennessee state court judge will establish a
schedule for case management and discovery. The trials of a number of lawsuits
involving individual plaintiffs are scheduled to begin in the first six months
of 1997, although delays in trial dates are common. Although plaintiffs have
advanced claims under many different legal theories, the essence of plaintiffs'
claims appears 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 FDA rules and regulations (governing marketing and labeling),
that pedicle fixation has not been proven safe and efficacious in the context of
FDA labeling standards and that plaintiffs have suffered a variety of injuries
as a result of the use of the systems for pedicle fixation. Plaintiffs in these
cases 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 courts in which such
cases are filed.
In December 1996, AcroMed Corporation ("AcroMed"), a spinal implant manufacturer
and a defendant in various of the cases pending in the Multidistrict Litigation,
and the Plaintiffs' Legal Committee in the Multidistrict Litigation announced
that they have entered into an understanding to resolve all product liability
claims involving
39
<PAGE> 43
the use of AcroMed devices to achieve pedicular fixation in spinal fusion
surgery. Under the announced 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. The parties submitted in January
1997 a formal class settlement agreement and related documentation for approval
by Judge Bechtle. A hearing (scheduled for April 23, 1997) will be held to
consider the fairness, adequacy and reasonableness of the settlement. All
federal court proceedings involving AcroMed devices have been stayed pending
final consideration of the proposed settlement.
Tennessee and Oregon Product Liability Actions:
In January 1995, the Company and other spinal implant manufacturers, doctors and
a hospital were named defendants in a purported class action product liability
lawsuit filed in Nashville, Tennessee state court. This lawsuit is limited to
those individuals whose surgeries were performed at one specific hospital. Class
certification has been denied by the trial judge in Nashville. The judge has
selected two of the Company's cases as test cases to be prepared for trial. Fact
discovery in these cases is scheduled for completion by March 1997. All other
proceedings are stayed. In October 1995, the Company was served with a Portland,
Oregon state court complaint that purported to be a class action. This Oregon
complaint alleged, among other things, injury based upon various legal theories.
In March 1996, the plaintiffs in this Oregon case withdrew the class
allegations. Discovery has begun in these individual cases. In these Tennessee
and Oregon actions, plaintiffs, who seek relief in the form of monetary damages
of unspecified amounts, are continuing their lawsuits as individual cases.
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 and will
continue to assert the 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.
All pending cases are currently being defended by insurance carriers, generally
under reservation of rights. To date the cost of defending against claims has
been largely reimbursed by the Company's insurers. 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 (see below). 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. At December 31, 1996, the Company had a
receivable from Royal of approximately $2.5 million for legal fees associated
with the Company's product liability litigation paid by the Company during the
policy year. The Company believes that the receivable is recoverable under the
terms of the policy. The case is in a preliminary stage. Discovery has just been
initiated. The Company believes the 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.
On January 6, 1997, the Company announced that its 1996 financial results would
include a pre-tax charge of $50 million relating to costs associated with the
product liability litigation described above. The charge, which has now been
reflected in the Company's 1996 financial statements, covers the reasonably
foreseeable costs that the Company was positioned in late December to estimate
because the litigation had progressed and because changes in the fourth quarter
of 1996 had occurred in facts and circumstances relating to the litigation.
Among the changed facts and circumstances were the announcement of the AcroMed
proposed settlement described above, the additional financial resources
available to the plaintiffs' attorneys as a result of the settlement if the
proposed settlement is ultimately approved, the likelihood that the litigation
will continue for several years, in part, due to the
40
<PAGE> 44
additional financial resources provided to plaintiffs' attorneys if the proposed
settlement is approved, the absence of AcroMed as a member of the joint defense
group, the status of the Company's insurance described above and the continuing
absence of dispositive rulings relating to the Company's defense motions.
While it is not possible to accurately predict the outcome of litigation, the
amount of the charge taken in the fourth quarter represents the Company's best
judgment of the probable reasonable costs (in excess of available insurance) to
defend and conclude the lawsuits based on the facts and circumstances currently
existing. 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.
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
41
<PAGE> 45
these actions are without merit, certain defenses available to the Company and
the availability of insurance in the Securities Laws Actions.
16. STOCK OPTION AND RESTRICTED STOCK PLANS
In 1990, the Company adopted an incentive stock option plan (the "1990 Plan")
for certain key employees, covering 1,475,000 shares of common stock, a
non-qualified stock option plan for distributors and consultants (the
"Distributor and Consultant Plan") covering 225,000 shares of common stock, and
a restricted stock plan covering 148,450 shares of common stock. The number of
shares covered under the 1990 Plan was subsequently reduced to 675,000 on June
21, 1993.
Under the Distributor and Consultant Plan, the exercise price may not be less
than $2.22 per share. Options have a maximum term of ten years from the date of
the option grant. During 1995, the number of shares of common stock covered was
increased to 625,000.
In February 1991, the Company adopted a stock option plan for certain directors
of the Company (the "Directors' Plan").
In December 1992, the Company adopted the 1993 long-term incentive plan (the
"Long-Term Incentive Plan") for certain directors and key employees, covering
500,000 shares of common stock. The number of shares of common stock reserved
under the Long-Term Incentive Plan was increased to 800,000 in 1993, to
2,500,000 in 1994 and to 3,500,000 in 1995. Awards may be in the form of stock
options to purchase shares, stock appreciation rights, performance units,
restricted stock or any combination of the above. Options have a maximum term of
ten years from the date of the option grant. Under the Long-Term Incentive Plan,
the exercise price shall be determined by the Company, except that the exercise
price may not be less than the market price at the date of the option grant for
any incentive stock options awarded.
During 1996, the Board of Directors proposed an amendment to the Company's
Long-Term Incentive Plan to increase the number of shares of the common stock
available under the Plan by 2,500,000, contingent upon approval by the Company's
shareholders. Also, the Board of Directors proposed an amendment to the
Company's Incentive Stock Option Plan to decrease the number of shares of the
common stock available under the Plan by 61,642.
42
<PAGE> 46
Activity under all of the stock option plans, including the 2,500,000 shares of
common stock approved by the Board of Directors in 1996, for the years ended
December 31, 1996, 1995, and 1994 is summarized as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Shares under option at beginning of year 3,597,939 2,661,120 808,648
Granted 1,621,150 1,453,700 2,511,000
Exercised (417,744) (231,653) (54,062)
Lapsed (37,873) (285,228) (70,766)
Terminated (468,100) - (533,700)
-------------------------------------------------------------------------------------------------------------------
Shares under option at end of year 4,295,372 3,597,939 2,661,120
====================================================================================================================
Shares under option exercisable at end of year 1,175,832 863,739 480,740
Price range of shares under option excercisable at end
of year $3.87 - $37.50 $3.87 - $37.50 $3.87 - $37.50
Weighted average exercise price $16.17 $14.75 $12.45
Shares available for future grant 2,057,068 733,887 502,359
====================================================================================================================
</TABLE>
Additional information regarding stock options outstanding at December 31, 1996
is shown below:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS EXERCISABLE OPTIONS
- --------------------------------------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE REMAINING TERM EXERCISE
OPTION PRICE RANGE OPTION SHARES PRICE OPTION SHARES PRICE
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 3.50 - $14.50 1,625,880 $12.57 8.8 years 719,976 $12.17
$14.51 - $24.50 1,709,342 $20.05 8.4 years 318,056 $19.76
$24.51 - $37.50 960,150 $27.12 9.1 years 137,800 $28.73
</TABLE>
The Company applies APB Opinion No. 25 and related Interpretations in accounting
for its plans. SFAS 123, "Accounting for Stock-Based Compensations ("SFAS 123")
was issued during 1995 and changes the methods for recognition of cost on plans
similar to those of the Company. Adoption of the accounting provisions of SFAS
123 is optional; however, pro forma disclosures as if the Company adopted the
cost recognition requirements under SFAS 123 is presented below:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $11,267 $8,726 $4,967 $4,063
Net income per share $ 0.44 $ 0.34 $ 0.20 $ 0.16
</TABLE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 1996: dividend yield of 0%, expected volatility
of 44.4%, risk-free interest rate of 6.2%, and expected lives of 4.2 years;
1995: dividend yield of 0%, expected volatility of 44.4%, risk-free interest
rate of 6.3%, and expected lives of 4.2 years. The weighted average fair value
of options at grant date were $12.59 and $8.20 in 1996 and 1995, respectively.
43
<PAGE> 47
The effects of applying SFAS 123 in this pro forma disclosure are not indicative
of future amounts.
SFAS 123 does not apply to awards prior to 1995, and additional awards in future
years are anticipated.
17. NET INCOME PER COMMON SHARE
Primary and fully diluted net income per common share are computed by dividing
net income by the weighted average number of common shares and common share
equivalents outstanding during the period. Common stock equivalents are in the
form of stock options which have an effect on 1996, 1995 and 1994 primary and
fully diluted net income per common share calculations. Common stock equivalents
for 1996 and 1995 also include assumed converted debt securities. For the years
ended December 31, 1996 and 1995, net income was adjusted by $124 and $115,
respectively, to calculate earnings per share. This adjustment represented the
interest charges, net of taxes, incurred in relation to convertible debt which
was assumed to be converted for the weighted average number of shares
calculation. Share equivalents used for fully diluted calculations in 1996, 1995
and 1994 are higher than share equivalents used for primary net income per share
calculations due to the higher fair value of the common stock at the year end
versus the average fair value of the stock during the year. The following table
presents information necessary to calculate net income per share for the fiscal
years ended December 31, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
1996 1995 1994
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Primary:
Weighted average shares outstanding 24,284,005 23,846,242 24,013,855
- -----------------------------------------------------------------------------------------------------------
Shares equivalents 1,762,442 1,369,363 482,852
26,046,447 25,215,605 24,496,707
===========================================================================================================
Fully diluted:
Weighted average shares outstanding 24,284,005 23,846,242 24,013,855
Shares equivalents 1,824,548 1,548,519 568,220
- -----------------------------------------------------------------------------------------------------------
26,108,553 25,394,761 24,582,075
============================================================================================================
</TABLE>
18. ACCRUED EXPENSES
Accrued expenses at December 31, 1996 and 1995 consist of the following:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Amounts due to suppliers $ 2,045 $ 2,778
Commissions 5,001 3,420
Payroll, benefits, and related taxes 12,493 3,848
Royalties 2,288 1,452
Amount due to former shareholders of acquired company 4,174 -
Interest 1,018 1,879
Product liability litigation 2,000 -
Other 9,751 7,757
- --------------------------------------------------------------------------------------------------------
$ 38,770 $ 21,134
=========================================================================================================
</TABLE>
19. EMPLOYEE BENEFIT PLANS
In January 1990, the Company adopted an employee savings plan under Section
401(k) of the Internal Revenue Code. This plan covers all employees that are 21
years of age and have completed at least six months of continuous service with
the Company. In 1994, the Company's allowable match was 50% of the employees'
contributions up to a maximum of 4% of the payroll of each participant. In 1995,
the Company increased its maximum matching contribution to equal 100% of the
employee's first 3% contributed and 50% of the next 2%. These matching
percentages are subject to revision at the discretion of the Company's Board of
Directors. Company contributions generally vest at 20% per year beginning the
end of the second year of service with the participants becoming fully
44
<PAGE> 48
vested in the sixth year of service. The amount charged against income in 1996,
1995, and 1994 was approximately $477, $385, and $172, respectively.
In November 1991, the Company adopted an employee stock purchase plan ("ESPP")
to provide employees of the Company the opportunity to purchase shares of common
stock of the Company. The ESPP covers full-time employees of the Company (as
defined by the ESPP) that have completed 6 months of employment. An aggregate of
60,000 of the Company's shares of common stock have been reserved for inclusion
in the ESPP. The amount charged against income in 1996, 1995, and 1994 was
approximately $22, $14, and $19, respectively, which represented the Company's
contribution of 15% of the employee's contribution.
20. DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount for cash, short-term investments, notes and other
receivables, and notes and loans payable approximates fair value due to the
short maturity of these instruments.
The fair value of the Company's long-term debt is estimated based on current
rates offered to the Company for debt of the same remaining maturities or quoted
market prices for the shares of stock to which the debt instrument may be
converted, as applicable.
The estimated fair value of the Company's financial instruments at December 31,
1996 are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
CARRYING AMOUNT FAIR VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
Cash and short-term investments $ 2,830 $ 2,830
Short-term investments 111 111
Other receivables 15,813 15,813
Notes payable and lines of credit 50,207 50,207
Long-term debt 28,987 30,778
- --------------------------------------------------------------------------------
$ 97,948 $ 99,739
================================================================================
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth under the caption "Election of Directors" contained on
pages 2 and 3 of the Company's definitive Proxy Statement for its 1997 Annual
Meeting of Shareholders (the "1997 Proxy Statement") is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the captions "Executive Compensation" contained
on pages 8 and 9 of the Company's 1997 Proxy Statement is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the caption "Common Stock Owned by Principal
Shareholders and Management" contained on pages 6 and 7 of the Company's 1997
Proxy Statement is incorporated herein by reference.
45
<PAGE> 49
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the caption "Certain Relationships and Related
Transactions" contained on pages 16 and 17 of the Company's 1997 Proxy Statement
is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) DOCUMENTS FILED AS PART OF THIS REPORT
(1) Financial Statements
<TABLE>
<S> <C>
Report of Independent Public Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Consolidated Balance Sheets--December 31, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . . . . 25
Consolidated Statements of Income--Years ended December 31, 1995, 1994 and 1993 . . . . . . . . . . . . 26
Consolidated Statements of Changes in Stockholders' Equity--Years ended
December 31, 1995, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Consolidated Statements of Cash Flows--Years ended December 31, 1995, 1994 and 1993 . . . . . . . . . . 28
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
(2) Financial Statement Schedules
Report of Independent Accountants on Financial Statement Schedules . . . . . . . . . . . . . . . . . . 48
Schedule VIII--Valuation and Qualifying Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
</TABLE>
Schedules other than those referred to above have been omitted because they are
not required or because the information is included elsewhere in the
Consolidated Financial Statements.
(3) Exhibits
See Index to Exhibits
(B) REPORTS ON FORM 8-K
None
46
<PAGE> 50
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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)
BY: /s/ E. R. PICKARD
--------------------------------------
E. R. PICKARD
CHAIRMAN, CHIEF EXECUTIVE
OFFICER AND DIRECTOR
MARCH 21, 1997
-------------------------------------
DATE
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report 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 (CAPACITY) DATE
- --------- ---------------- ----
<S> <C> <C>
/s/ E. R. Pickard Chairman, Chief Executive Officer and March 21, 1997
- --------------------------- Director (Principal Executive Officer)
E. R. Pickard
/s/ Laurence Y. Fairey Chief Financial Officer and Executive Vice March 21, 1997
- --------------------------- President (Principal Financial and
Laurence Y. Fairey Accounting Officer)
L. D. Beard* Director March 21, 1997
- ---------------------------
L. D. Beard
George W. Bryan, Sr.* Director March 21, 1997
- ---------------------------
George W. Bryan, Sr.
Robert A. Compton* Director March 21, 1997
- ---------------------------
Robert A. Compton
Yves Paul Cotrel, M.D.* Director March 21, 1997
- ---------------------------
Yves Paul Cotrel, M.D.
/s/ James J. Gallogly Director, President and March 21, 1997
- --------------------------- Chief Operating Officer
James J. Gallogly
Samuel F. Hulbert, Ph.D.* Director March 21, 1997
- ---------------------------
Samuel F. Hulbert, Ph.D.
Marie-Helene Plais, M.D.* Director March 21, 1997
- ---------------------------
Marie-Helene Plais, M.D.
George F. Rapp, M.D.* Director March 21, 1997
- ---------------------------
George F. Rapp, M.D.
</TABLE>
*By: /s/ J. Mark Merrill
---------------------
J. Mark Merrill
Attorney-in-Fact
47
<PAGE> 51
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Our report on the consolidated financial statements of Sofamor Danek Group, Inc.
and Subsidiaries is included on page 24 of this Form 10-K. In connection with
our audits of such consolidated financial statements, we have also audited the
related consolidated financial statement schedule in the index on page 46 of
this Form 10-K.
In our opinion, the consolidated financial statement schedule referred to above,
when considered in relation to the basic consolidated financial statements taken
as a whole, presents fairly, in all material respects, the information required
to be included therein.
COOPERS & LYBRAND, L.L.P.
Memphis, Tennessee
January 31, 1997
48
<PAGE> 52
SOFAMOR DANEK GROUP, INC. AND SUBSIDIARIES
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Balance at Charged to Balance at
beginning of costs and Deductions and end of
Description period expenses Reclassifications Other(2) period
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts
For the Years Ended December 31,
--------------------------------
1996 $1,555 $705 $(698) (1) $ 27 $1,589
1995 1,654 318 (704) (1) 287 1,555
1994 1,074 966 (377) (1) (9) 1,654
</TABLE>
(1) Amounts written off during the year
(2) Foreign currency translation adjustment
49
<PAGE> 53
SOFAMOR DANEK GROUP, INC.
ANNUAL REPORT ON FORM 10-K
DECEMBER 31, 1996
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Number Assigned
in Regulation
S-K, Item 601 Description of Exhibit
- -------------- ----------------------
<S> <C> <C><C>
(3) 3.1 Amended and Restated Articles of Incorporation of Sofamor
Danek Group, Inc. (the "Company") (1) (3.1), as further
amended by Articles of Amendment dated June 22, 1993 (6) (3.1)
3.2 * Amended and Restated Code of By-Laws of the Company
(4) 4.1 Form of Certificate for Common Stock (6) (4.1)
(10) 10.1 Agreement by and between Danek Medical, Inc. and Texas
Scottish Rite Hospital for Crippled Children, dated
August 9, 1988, as amended by a letter agreement dated
August 21, 1991, amending the schedule to the Agreement
(3) (10.17)
10.2 Agreement by and between AcroMed Corporation and Danek
Medical, Inc., dated March 29, 1989, as amended (2) (10.18)
10.3 Agreement for Sublease by and between Word, Inc. and the
Company, dated February 29, 1988 (2) (10.24)
10.4 * $40,000,000 Revolving Line of Credit Loan Agreement with
Third National Bank in Nashville dated October 14, 1994,
(the "Revolving Loan Agreement") as amended by
* Amendment to Revolving Loan Agreement dated June 30, 1995,
* Second Amendment to Revolving Loan Agreement dated October 11,
1995,
* Third Amendment to Revolving Loan Agreement dated August 1, 1996, and
* Fourth Amendment to Revolving Loan Agreement dated January 31, 1997.
10.5 Stock Exchange Agreement, dated as of March 28, 1993, among
the Company and the Holders listed on the signatory pages
thereto of all of the issued and outstanding shares of capital
stock of Sofamor, S.A. (4) (2.1)
10.6 Amendment No. 1 to the Stock Exchange Agreement, dated as of
June 21, 1993, among the Company and the Holders of all of the
capital stock of Sofamor, S.A. (5)
10.7 Shareholders' Agreement among the Company, the shareholders
listed on the signatory pages thereto and SOFYC, S.C., as the
Designated Representative of such shareholders (4) (10.1)
</TABLE>
i
<PAGE> 54
<TABLE>
<CAPTION>
Number Assigned
in Regulation
S-K, Item 601 Description of Exhibit
- -------------- ----------------------
<S> <C> <C>
10.8 Escrow Agreement among the Company, the Holders listed on
the signatory pages thereof of all of the issued and outstanding
capital stock of Sofamor, S.A. and Citibank, N.A. as escrow
agent dated June 21, 1993 (4) (10.2)
10.9 Intellectual Property Purchase Agreement, dated as of March 28,
1993, among the Company, Dr. Yves Paul Cotrel and Sofamor, S.A. (4) (10.3)
10.10 Amended and Restated License Agreement between Genetics Institute, Inc.
and Sofamor Danek Properties, Inc. dated February 15, 1995 (8) (10.1)
MANAGEMENT CONTRACTS, COMPENSATORY PLANS OR ARRANGEMENTS, ETC.
10.11 Employment Agreement and Letter Agreement between Richard E. Duerr, Jr.
and the Company dated January 1, 1996 (9) (10.15)
10.12 Employment Agreement and Letter Agreement between Laurence Y. Fairey and
the Company dated January 1, 1996 (9) (10.16)
10.13 Employment Agreement and Letter Agreement between Mark D. LoGuidice and
the Company dated January 1, 1996 (9) (10.17)
10.14 Employment Agreement and Letter Agreement between J. Mark Merrill and
the Company dated January 1, 1996 (9) (10.18)
10.15 * Employment Agreement between Peter J. Elkhuizen and the Company dated
October 30, 1996.
10.16 Employment Agreement and Letter Agreement between Richard W. Treharne and
the Company dated January 1, 1996 (9) (10.20)
10.17 Employment Agreement and Letter Agreement between Don W. Urbanowicz and
the Company dated January 1, 1996 (9) (10.21)
10.18 Employment Agreement between R. Lew Bennett and the Company dated
January 1, 1996 (9) (10.22)
10.19 Employment Agreement between Gene B. Sponseller and the Company dated
January 1, 1996 (9) (10.24)
10.20 Letter Agreement between E. R. Pickard and the Company dated January 1, 1996
and Resolution of the Company's Compensation Committee (9) (10.25)
10.21 Letter Agreement between James J. Gallogly and the Company dated January 1, 1996
and Resolution of the Company's Compensation Committee (9) (10.26)
10.22 Employment Agreement between Sofamor and Marie-Helene
Plais dated June 21, 1993 (6) (10.50)
</TABLE>
ii
<PAGE> 55
<TABLE>
<CAPTION>
Number Assigned
in Regulation
S-K, Item 601 Description of Exhibit
- -------------- ---------------------- -
<S> <C> <C>
10.23 Amended and Restated Non-Qualified Stock Option Plan (2) (10.25)
10.24 Non-Qualified Stock Option Agreement between the Company
and E. R. Pickard dated November 30, 1990, (2) (10.26)
as amended by an Amendment dated March 10, 1992 (3) (10.26)
and by Second Amendment dated February 16, 1995 (7) (10.24)
and by Third Amendment dated July 21, 1995 (9) (10.28)
10.25 Incentive Stock Option Plan, as amended (1) (10.30)
10.26 Amended and Restated Stock Option Plan for Distributors and
Consultants (9) (10.30)
10.27 Non-Employee Directors' Stock Option Plan (2) (10.34)
10.28 * Cash Bonus Plan
10.29 * Employee Stock Purchase Plan
10.30 * Amended and Restated Loan Forgiveness Agreement dated
October 11, 1996 between the Company and E.R. Pickard.
10.31 * 1993 Long-Term Incentive Plan, as amended
10.32 Stock Pledge Agreement between E. R. Pickard and the
Company dated November 30, 1990. (6) (10.42)
10.33 Agreement between the Company and E. R. Pickard dated
December 15, 1995 (9) (10.40)
(22) 22.1 * Subsidiaries of the Company
(24) 24.1 * Consent of Coopers & Lybrand, Independent Public Accountants
(25) 25.1 * Powers of attorney from directors of the Company
authorizing signature of this report
(27) 27.1 * Financial Data Schedule (For SEC use only)
(28) 28.1 * Annual Report on Form 11-K of the Employee Stock
Purchase Plan for the fiscal year ended December
31, 1996
- ----------------------
</TABLE>
* Previously unfiled documents are noted with an asterisk
iii
<PAGE> 56
<TABLE>
<S> <C>
(1) Incorporated by reference from the Exhibits to the Form 10-K of the
Registrant for the fiscal year ended December 31, 1992. (Exhibit number in
the Form 10-K is set forth in italics.)
(2) Incorporated by reference from the Exhibits to the Form S-1 Registration
Statement No. 33-39593 of the Registrant. (Exhibit number in the Form S-1
is set forth in italics.)
(3) Incorporated by reference from the Exhibits to the Form 10-K of the
Registrant for the fiscal year ended December 31, 1991. (Exhibit number in
the Form 10-K is set forth in italics.)
(4) Incorporated by reference from the Exhibits to the Form S-4 Registration
Statement No. 33-63040 of the Registrant. (Exhibit number in the Form S-4
is set forth in italics)
(5) Incorporated by reference from the Exhibits to the Form 8-K of the
Registrant filed with the Securities and Exchange Commission on June 29,
1993.
(6) Incorporated by reference from the Exhibits to the Form 10-K of the
Registrant for the fiscal year ended December 31, 1993. (Exhibit number in
the Form 10-K is set forth in italics.)
(7) Incorporated by reference from the Exhibits to the Form 10-K of the
Registrant for the fiscal year ended December 31, 1994. (Exhibit number in
the Form 10-K is set forth in italics.)
(8) Incorporated by reference from the Exhibits to the Form 10-Q of the
Registrant for the quarter ended March 31, 1995. (Exhibit number in the Form
10-K is set forth in italics.)
(9) Incorporated by reference from the Exhibits to the Form 10-K of the
Registrant for the fiscal year ended December 31, 1995. (Exhibit number in
the Form 10-K is set forth in italics.)
</TABLE>
iv
<PAGE> 1
EXHIBIT 3.2
AMENDED AND RESTATED
CODE OF BY-LAWS OF THE COMPANY
<PAGE> 2
EXHIBIT 3.2
SOFAMOR DANEK GROUP, INC.
an Indiana corporation
CODE OF BY-LAWS
ARTICLE I
OFFICES
SECTION 1.1 Registered Office. The registered office(s) of Sofamor
Danek Group, Inc. (the OCorporationO) shall be in such place(s) as from time to
time shall be deemed appropriate in accordance with applicable law. The
Corporation shall have the power to designate from time to time those
individuals and entities as registered agents of the Corporation for purposes of
complying with the laws of the various states in which the Corporation may be
required to maintain a registered agent.
SECTION 1.2 Principal Office. The principal office for the transaction
of the business of the Corporation shall be at such place as the Board of
Directors of the Corporation (the OBoard of DirectorsO) may determine. The Board
of Directors is hereby granted full power and authority to change the principal
office from one location to another.
SECTION 1.3 Other Offices. The Corporation may also have an office or
offices at such other place or places, either within or without the State of
Indiana, as the Board of Directors may from time to time determine or as the
business of the Corporation may require.
ARTICLE II
MEETINGS OF SHAREHOLDERS
SECTION 2.1 Place of Meetings. All annual meetings of shareholders and
all other meetings of shareholders shall be held either at the principal office
of the Corporation or at any other place within or without the State of Indiana
that may be designated by the Board of Directors pursuant to authority
hereinafter granted to the Board of Directors.
SECTION 2.2 Annual Meetings. Annual meetings of shareholders of the
Corporation for the purpose of electing directors and for the transaction of
such other proper business as may properly come before such meetings may be held
at such time and place and on such date as the Board of Directors shall
determine by resolution.
SECTION 2.3 Special Meetings. Special meetings of shareholders of the
Corporation for any purpose or purposes may only be called by the Chairman of
the Board of Directors, the President, or the Secretary of the Corporation and
must be called by such officer at the request in
1
<PAGE> 3
writing of the Board of Directors. The shareholders of the Corporation shall not
be permitted to call special meetings of shareholders and shall not be permitted
to require the Board of Directors to call a special meeting of shareholders. Any
request for a special meeting of the shareholders shall be submitted in writing
to the Chairman of the Board of Directors, the President, or the Secretary of
the Corporation and shall state the purpose or purposes of the proposed special
meeting.
SECTION 2.4 Notice of Meetings. Except as otherwise required by any
provision of the Indiana Business Corporation Law, the Articles of Incorporation
or these By-Laws, the notice of each meeting of shareholders, whether annual or
special, shall be given not less than ten (10) days nor more than sixty (60)
days before the date of the meeting to each shareholder of record entitled to
vote at such meeting by delivering a typewritten or printed notice thereof to
each shareholder personally, or by depositing such notice in the United States
mail, in a postage prepaid envelope, directed to each shareholder at each
shareholder's address furnished by the shareholders to the Secretary of the
Corporation for such purpose, or, if any shareholder shall not have furnished an
address to the Secretary for such purpose, then at each shareholder's address
last known to the Secretary, or by transmitting a notice thereof to such
shareholder at such address by telegraph, cable, wireless or facsimile. Every
notice of a meeting of shareholders shall state the place, date and hour of the
meeting and, in the case of a special meeting, shall also state the purpose for
which the meeting is called. Notice of any meeting of shareholders shall not be
required to be given to any shareholder to whom notice is not required under
applicable Indiana law or who shall have waived such notice, and such notice
shall be deemed waived by any shareholder who shall attend such meeting in
person or by proxy (except a shareholder who shall attend such meeting for the
express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened). Notice of any such meeting may be waived in writing by any
shareholder if the waiver sets forth in reasonable detail the purpose or
purposes for which the meeting is called, and the time and place thereof. Except
as otherwise expressly required by law, notice of any adjourned meeting of
shareholder need not be given if the time and place thereof are announced at the
meeting at which the adjournment is taken.
SECTION 2.5 Quorum. Except as otherwise required by law, the holders of
record of a majority in voting interest of the shares of stock of the
Corporation entitled to be voted, present in person or by proxy, shall
constitute a quorum for the transaction of business at any meeting of
shareholders of the Corporation or any adjournment thereof. Subject to the
requirement of a larger percentage vote contained in the Articles of
Incorporation, these By-Laws or by law, the shareholders present at a duly
called or held meeting at which a quorum is present may continue to do business
until adjournment. In the absence of a quorum at any meeting or any adjournment
thereof, a majority in voting interest of the shareholders present in person or
by proxy and entitled to vote, any officer entitled to preside at, or to act as
secretary of, such meeting may adjourn such meeting from time to time. At any
such adjourned meeting at which a quorum is present, any business may be
transacted that might have been transacted at the meeting as originally called.
2
<PAGE> 4
SECTION 2.6 Voting.
(A) Each shareholder shall, at each meeting of shareholders, be
entitled to vote in person or by proxy each share of the stock of the
Corporation that has voting rights on the matter in question and that shall have
been held by such shareholder and registered in such shareholder's name on the
books of the Corporation:
(i) on the date fixed pursuant to Section 8.5 of these By-Laws as
the record date for the determination of shareholders entitled
to notice of and to vote at such meeting; or
(ii) if no such record date shall have been so fixed, then (a) at
the close of business on the day next preceding the day upon
which notice of the meeting shall be given or (b) if notice of
the meeting shall be waived, at the close of the business on
the day next preceding the day upon which the meeting shall be
held.
(B) Shares of its own stock belonging to the Corporation or to another
corporation, if a majority of the shares entitled to vote in the election of
directors in such other corporation is held, directly or indirectly, by the
Corporation, shall neither be entitled to vote nor be counted for quorum
purposes. Persons holding stock of the Corporation in a fiduciary capacity shall
be entitled to vote such stock. Any shareholder whose stock is pledged shall be
entitled to vote his or her shares, unless in the transfer by the pledgor on the
books of the Corporation the pledgor shall have expressly empowered the pledgee
to vote such shares, in which case only the pledgee, or the pledgee's proxy, may
represent and vote such shares. Stock having voting power standing of record in
the names of two or more persons, whether fiduciaries, members of a partnership,
joint tenants, tenants in common, tenants by the entirety or otherwise, or with
respect to which two or more persons have the same fiduciary relationship, shall
be voted in accordance with the provisions of the Indiana Business Corporation
Law.
(C) Any voting rights may be exercised by the shareholder entitled
thereto in person or by such shareholder's proxy appointed by an instrument in
writing, subscribed by such shareholder or by such shareholder's attorney
thereunto authorized and delivered to the Secretary of the Corporation prior to
the meeting; provided, however, that no proxy shall be voted or acted upon after
eleven months from its date unless such proxy shall provide for a shorter or
longer period. The attendance at any meeting of a shareholder who may previously
have given a proxy shall not have the effect of revoking such proxy unless the
shareholder shall in writing so notify the Secretary of the Corporation prior to
the voting of the proxy. At any meeting of shareholders, all matters, except as
otherwise provided in the Articles of Incorporation, in these By-Laws or by law,
shall be decided by the vote of a majority in voting interest of the
shareholders present in person or by proxy and entitled to vote thereon. The
vote at any meeting of shareholders on any matter need not be by ballot, unless
so directed by the chairman of the meeting. On a vote by ballot, each ballot
shall be signed by the shareholder voting, or by such shareholder's proxy, if
such proxy exists, and shall state the number of shares voted.
3
<PAGE> 5
SECTION 2.7 List of Shareholders. The Secretary of the Corporation
shall make, at least five (5) business days before each election of directors, a
complete list of the shareholders entitled by the Articles of Incorporation to
vote at such election, arranged in alphabetical order, with the address and
number of shares so entitled to vote held by each, which list shall be on file
at the principal office of the Corporation and subject to inspection by any
shareholder at any time during the usual business hours for a period of five (5)
business days prior to such election. Such list shall be produced and kept open
at the time and place of election and subject to the inspection of any
shareholder during the holding of such election. The original stock register or
transfer book shall be the only evidence as to who are the shareholders entitled
to examine such list, or the stock ledger or transfer book, or to vote at any
meeting of the shareholders.
SECTION 2.8 Judges. If at any meeting of shareholders a vote by written
ballot shall be taken on any question, the Chairman of such meeting may appoint
a judge or judges to act with respect to such vote. Each judge so appointed
shall first subscribe an oath faithfully to execute the duties of a judge at
such meeting with strict impartiality and according to the best of such judge's
ability. The appointed judges shall decide upon the qualification of the voters
and shall report the number of shares represented at the meeting and entitled to
vote on such question, shall conduct and accept the votes, and, when the voting
is completed, shall ascertain and report the number of shares voted respectively
for and against the question. Reports of judges shall be in writing and
subscribed and delivered by them to the Secretary of the Corporation. The judges
need not be shareholders of the Corporation, and any officer of the Corporation
may be a judge on any question other than a vote for or against a proposal in
which such officer shall have a material interest.
4
<PAGE> 6
SECTION 2.9 Advance Notice of Shareholder Proposals and
Shareholder Nominations.
(A) At any meeting of the shareholders, only such business shall be
conducted as shall have been brought before the meeting (i) by or at the
direction of the Directors or (ii) by any shareholder of the Corporation who
complies with the notice procedures set forth in this Section 2.9(A). For
business to be properly brought before any meeting of the shareholders by a
shareholder, the shareholder must have given notice thereof in writing to the
Secretary of the Corporation not less than sixty (60) nor more than ninety (90)
days in advance of the anniversary of the previous year's annual meeting or, if
later, the seventh day following the first public announcement of the date of
the meeting at which the shareholder wishes to bring business. A shareholder's
notice to the Secretary shall set forth as to each matter the shareholder
proposes to bring before the meeting (1) a brief description of the business
desired to be brought before the meeting and the reasons for conducting such
business at the meeting, (2) the name and address, as they appear on the
Corporation's books, of the shareholder proposing such business, (3) the class
and number of shares of the Corporation that are beneficially owned by the
shareholder; and (4) any interest of the shareholder in such proposed business.
In addition, the shareholder making such proposal shall promptly provide any
other information reasonably requested by the Corporation which may include, but
not be limited to compliance with applicable proxy rules of the Securities
Exchange Act of 1934. Notwithstanding anything in these By-Laws to the contrary,
no business shall be conducted at any meeting of the shareholders except in
accordance with the procedures set forth in this Section 2.9. The Chairman of
any such meeting shall direct that any business not properly brought before the
meeting or which is not a proper subject for action by shareholders shall not be
considered.
(B) Nominations for the election of directors may be made by the Board
of Directors or by any shareholder entitled to vote in the election of
directors; provided, however, that a shareholder may nominate a person for
election as a director at a meeting only if written notice of such shareholder's
intent to make such nomination has been given to the Secretary of the
Corporation not later than sixty (60) nor more than ninety (90) days in advance
of the anniversary of the previous year's annual meeting or, if later, the
seventh day following the first public announcement of the date of the meeting
at which the shareholder wishes to bring business. Each such notice shall set
forth: (i) the name and address of the shareholder who intends to make the
nomination and of the person or persons to be nominated; (ii) a representation
that the shareholder is a holder of record of stock of the Corporation entitled
to vote at such meeting and intends to appear in person or by proxy at the
meeting and nominate the person or persons specified in the notice; (iii) a
description of all arrangements, understandings or relationships between the
shareholder and each nominee and any other person or persons (naming such person
or persons) pursuant to which the nomination or nominations are to be made by
the shareholder; (iv) such other information regarding each nominee proposed by
such shareholder as would be required to be included in a proxy statement filed
pursuant to the proxy rules of the United States Securities and Exchange
Commission had the nominee been nominated, or intended to be nominated, by the
Board of Directors; and (v) the consent of each nominee to serve as a director
of the Corporation if so elected. In addition, the shareholder making such
nomination shall promptly provide any other information reasonably requested by
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the Corporation which may include, but not be limited to compliance with
applicable proxy rules of the Securities Exchange Act of 1934. No person shall
be eligible for election as a director of the Corporation unless nominated in
accordance with the procedures set forth in this Section 2.9(B). The Chairman of
any meeting of shareholders shall direct that any nomination not made in
accordance with these procedures be disregarded.
ARTICLE III
BOARD OF DIRECTORS
SECTION 3.1 Duties and Number. The business and affairs of the
Corporation shall be managed under the direction of a Board of not fewer than
seven (7) Directors and not more than eleven (11) Directors. The members shall
select one of their number to act as Chairman of the Board. The Chairman of the
Board shall preside at all meetings of the Shareholders and Board of Directors.
SECTION 3.2 Election, Term of Office and Qualification. The directors
shall be elected by the shareholders of the Corporation, and at each election,
the persons receiving the greater number of votes, up to the number of directors
then to be elected, shall be the persons then elected. The election of directors
is subject to any provisions contained in the Articles of Incorporation relating
thereto, including any provisions for a classified Board of Directors and for
cumulative voting. Each of the directors of the Corporation shall hold office
until the successor for any director shall have been duly elected and qualified,
or until such director shall have been removed in the manner provided in these
By-Laws.
SECTION 3.3 General Powers. Subject to any requirement in the Articles
of Incorporation, these By-Laws, and of the Indiana Business Corporation Law as
to action which must be authorized or approved by the shareholders, any and all
corporate powers shall be exercised by or under the authority of, and the
business and affairs of the Corporation shall be under the direction of, the
Board of Directors to the fullest extent permitted by law.
SECTION 3.4 Meetings. (A) Meetings of the Board of Directors may be
held at such times as the Board of Directors shall from time to time by
resolution determine. If any day fixed for a regular meeting shall be a legal
holiday at the place where the meeting is to be held, then the meeting shall be
held at the same hour and place on the next succeeding business day not a legal
holiday. Except as provided by law, notice of regular meetings need not be
given.
(B) The Board of Directors or any committee thereof may hold any of its
meetings at such place or places within or without the State of Indiana as the
Board of Directors or such committee may from time to time by resolution
designate or as shall be designated by the person or persons calling the meeting
or in the notice or a waiver of notice of any such meeting. Directors may
participate in any regular or special meeting of the Board of Directors or any
committee thereof by means of conference telephone or similar communications
equipment pursuant to which all persons participating in the meeting of the
Board of Directors or such
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committee can hear each other, and such participation shall constitute presence
in person at such meeting.
SECTION 3.5 Special Meetings. Special meetings of the Board of
Directors for any purpose or purposes shall be called at any time by the
Chairman of the Board of Directors or, if the Chairman of the Board of Directors
is absent or unable or refuses to act, by the President. Except as otherwise
provided by law or by these By-Laws, written notice of the time and place of
special meetings shall be delivered personally or by fax to each director, or
sent to each director by mail or by other form of written communication, charges
prepaid, addressed to such director at such director's address as it is shown
upon the records of the Corporation, or, if it is not so shown on such records
and is not readily ascertainable, at the place in which the meetings of the
directors are regularly held. In case such notice is mailed or telegraphed, it
shall be deposited in the United States mail or delivered to the telegraph
company in the County in which the principal office for the transaction of the
business of the Corporation is located at least one (1) day prior to the time of
the holding of the meeting. In case such notice is delivered personally or by
fax as above provided, it shall be delivered at least one (1) day prior to the
time of the holding of the meeting. Meetings may be held on shorter notice if
the circumstances so require. Such mailing, telegraphing, delivery or faxing as
above provided shall be due, legal and personal notice to such director. Except
where otherwise required by law or by these By-Laws, notice of the purpose of a
special meeting need not be given. Notice of any meeting of the Board of
Directors shall not be required to be given to any director who is present at
such meeting, except a director who shall attend such meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened.
SECTION 3.6 Quorum and Manner of Acting. Except as otherwise provided
in these By-Laws, the Articles of Incorporation or by applicable law, the
presence of a majority of the authorized number of directors shall be required
to constitute a quorum for the transaction of business at any meeting of the
Board of Directors, and all matters shall be decided at any such meeting, a
quorum being present, by the affirmative votes of a majority of the directors
present. A meeting at which a quorum is initially present may continue to
transact business notwithstanding the withdrawal of directors, provided any
action taken is approved by at least a majority of the required quorum for such
meeting. In the absence of a quorum, a majority of directors present at any
meeting may adjourn the same from time to time until a quorum shall be present.
Notice of any adjourned meeting need not be given. The directors shall act only
as a Board of Directors, and the individual directors shall have no power as
such.
SECTION 3.7 Action by Consent. Any action required or permitted to be
taken at any meeting of the Board of Directors or of any committee thereof may
be taken without a meeting, if prior to such action a written consent thereto is
signed by all members of the Board of Directors or of such committee, as the
case may be, and such written consent is filed with the minutes of proceedings
of the Board of Directors or committee.
SECTION 3.8 Resignations. Any Director may resign at any time by
giving written notice to the Board of Directors, the Chairman of the Board, the
President or the Secretary. Such
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resignation shall take effect at the time specified therein, and unless
otherwise specified therein, the acceptance of such resignation shall not be
necessary to make it effective.
SECTION 3.9 Removal. Any director may be removed with or without
cause, at any meeting of the Board of Directors by the affirmative vote of a
majority of the other directors. Further, any director may be removed, either
with or without cause, at any meeting of the shareholders by the majority in
number of shares of the shareholders of record present in person or by proxy
and entitled to vote for the election of directors, if notice of the intention
to act upon such matter shall have been given in the notice calling such
meeting. If a director is elected by a voting group of shareholders, only the
shareholders of that voting group may participate in the vote to remove that
director.
SECTION 3.10 Vacancies. Any vacancy in the Board of Directors, whether
because of death, resignation, disqualification, removal, an increase in the
number of directors, or any other cause, may be filled by vote of the majority
of the remaining directors, although less than a quorum, or by a sole remaining
director; provided, however, that whenever the holders of any class or series of
shares are entitled to elect one or more directors, any vacancy or newly created
directorship of such class or series may be filled by a majority of the
directors elected by such class or series then in office, or by a sole remaining
director so elected. Each director so chosen to fill a vacancy shall hold office
until such director's successor shall have been elected and shall qualify or
until such director shall resign or shall have been removed. No reduction of the
authorized number of directors shall have the effect of removing any director
prior to the expiration of such director's term of office.
SECTION 3.11 Compensation. Directors who are not employees of the
Corporation or any of its subsidiaries may receive an annual fee for their
services as directors in an amount fixed by resolution of the Board of
Directors, and, in addition, a fixed fee, with or without expenses of
attendance, may be allowed by resolution of the Board of Directors for
attendance at each meeting, including each meeting of a committee of the Board
of Directors. Nothing herein contained shall be construed to preclude any
director from serving the Corporation in any other capacity as an officer,
agent, employee, or otherwise, and receiving compensation therefor.
ARTICLE IV
EXECUTIVE COMMITTEE
SECTION 4.1 Designation of Executive Committee. The Board of Directors
may, by resolution adopted by a majority of the actual number of Directors
elected and qualified, from time to time, designate two or more of its number to
constitute an Executive Committee. The Board of Directors shall have the power
at any time to increase or decrease the number of members of the Executive
Committee, to fill vacancies thereon, to change any member thereof, and to
change the function or terminate the existence thereof.
SECTION 4.2 Powers of Executive Committee. During the intervals
between meetings of the Board of Directors, and subject to such limitations as
may be required by law or by
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resolution of the Board of Directors, the Executive Committee shall have and may
exercise all of the authority of the Board of Directors, except that the
Executive Committee shall not have authority to (i) declare dividends or
distributions, (ii) amend the Articles of Incorporation or these By-Laws, (iii)
approve a plan of merger or consolidation, (iv) reduce earned or capital
surplus, (v) authorize the reacquisition of shares unless pursuant to a general
formula or method specified by the Board of Directors, or (vi) recommend to the
shareholders a voluntary dissolution or a revocation thereof.
SECTION 4.3 Meetings; Procedure; Quorum. Regular meetings of the
Executive Committee may be held, without notice, at such time and place as may
from time to time be fixed by the Executive Committee. Special meetings of the
Executive Committee may be called at any time by any member of the Executive
Committee. Notice of such a special meeting shall be sent to each member of the
Executive Committee at his residence or usual place of business by letter or
telegram, at such time that, in regular course, such notice would reach such
place not later than during the day immediately preceding the day for such
meeting; or may be delivered to a member personally at any time during such
immediately preceding day. Notice of any such meeting need not be given to any
member of the Executive Committee who has waived such notice, either in writing
or by telegram, arriving either before or after such meeting, or who shall be
present at the meeting. Any meeting of the Executive Committee shall be a legal
meeting, without notice thereof having been given; if all the members of the
Executive Committee who have not waived notice thereof in writing or by
telegram, shall be present in person. A majority of the Executive Committee,
from time to time, shall be necessary to constitute a quorum for the transaction
of any business, and the act of a majority of the members present at a meeting
at which a quorum is present shall be an act of the Executive Committee. The
members of the Executive Committee shall act only as a Committee, and the
individual members shall be submitted to the next succeeding meeting of the
Board of Directors for approval; but failure to submit the same or to receive
the approval thereof shall not invalidate any completed or uncompleted action
taken by the Executive Committee prior to the time at which the same shall have
been, or were, submitted as above provided.
ARTICLE V
ADDITIONAL COMMITTEES
SECTION 5.1 Designation of Audit Committee. The Board of Directors
shall, by resolution adopted by a majority of the actual number of Directors
elected and qualified, from time to time, designate at least three directors who
are not employees of the Corporation to constitute an Audit Committee.
SECTION 5.2 Powers of the Audit Committee. The Audit Committee shall
have such power and authority as may be designated from time to time by the
Board of Directors.
SECTION 5.3 Designation of Compensation Committee. The Board of
Directors shall, by resolution adopted by a majority of the actual number of
Directors elected and qualified, from time to time, designate a Compensation
Committee which shall be comprised of four Directors.
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SECTION 5.4 Powers of the Compensation Committee. The Compensation
Committee shall have such power and authority as may be designated from time to
time by the Board of Directors.
SECTION 5.5 Other Committees. The Board of Directors may create other
committees and appoint members of the Board of Directors to serve on them. The
creation of a committee and the appointment of members to it must be approved by
a majority of the Directors in office at the time of the creation and the
appointment.
SECTION 5.6 Procedure for Committees. The requirements of these By-Laws
which govern meetings, action without meetings, notice and waiver of notice,
quorum and voting requirements applicable to the Board of Directors shall apply
to committees and their members.
ARTICLE VI
OFFICERS
SECTION 6.1 Number and Qualifications. The officers of the Corporation
shall consist of the Chairman of the Board, the President, one or more Vice
Presidents, the Secretary, Treasurer, and such other officers as may be
appointed by the Board of Directors or the President at such time and in such
manner and for such terms as the Board of Directors or the President may
prescribe. Any two (2) or more offices may be held by the same person, except
that the offices of President, Secretary and Treasurer must be held by different
persons.
SECTION 6.2 Election and Term of Office. The officers shall be chosen
annually by the Board of Directors. Each officer shall hold office until his
successor is chosen and qualified, or until his death, or until he shall have
resigned, or shall have been removed in the manner hereinafter provided.
SECTION 6.3 Resignations. Any officer may resign at any time by giving
written notice to the Board of Directors, the Chairman of the Board, the
President, or the Secretary. Such resignation shall take effect at the time
specified therein. The acceptance of such resignation shall not be necessary to
make it effective.
SECTION 6.4 Removal. Any officer may be removed either with or without
cause, at any time, by the vote of a majority of the actual number of Directors
elected and qualified.
SECTION 6.5 Vacancies. Whenever any vacancies shall occur in any office
by death, resignation, removal, increase in the number of officers of the
Corporation, or otherwise, the same shall be filled by the Board of Directors,
and the officer so chosen shall hold office during the remainder of the term for
which his predecessor was chosen or as otherwise provided herein.
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SECTION 6.6 Chairman of the Board. The Chairman of the Board shall
preside at all meetings of the shareholders and the Board of Directors, and have
such other powers and duties as may from time to time be assigned to him by the
Board of Directors.
SECTION 6.7 Vice Chairman of the Board. The Board of Directors may,
utilizing its discretion, designate a Vice Chairman of the Board and upon
designation, the Vice Chairman of the Board shall perform duties and have such
authority and powers as are incident to his office or as may be defined in these
By-Laws or delegated to him from time to time by the Board of Directors or by
the Chairman of the Board.
SECTION 6.8 The President. The President shall be the Chief Executive
Officer of the Corporation and shall have general charge of, and supervision and
authority over, all of the affairs and business of the Corporation. He shall
have general supervision of and direct all officers, agents and employees of the
Corporation; shall see that all orders and resolutions of the Board are carried
into effect; and in general, shall exercise all powers and perform all duties
incident to his office and such other powers and duties as may from time to time
be assigned to him by the Board of Directors.
SECTION 6.9 Vice Presidents. The Corporation may have one or more Vice
Presidents. Any Vice President shall have such authority and powers and shall
perform such duties as from time to time may be assigned to him or her by the
Board of Directors or by the President. One Vice President shall be designated
by the Board of Directors as the Chief Financial Officer of the Corporation. The
Vice President designated as the Chief Financial Officer shall: (a) keep correct
and complete records of accounts, accurately reflecting the financial condition
of the Corporation, (b) furnish at any meeting of the Board of Directors or
whenever appropriately requested, a statement of the financial condition of the
Corporation; and (c) perform such other duties as these By-Laws, the Board of
Directors, the Chairman of the Board of Directors or the President may
prescribe.
SECTION 6.10 Secretary. The Secretary (a) shall keep the minutes of all
meetings of the Board of Directors and the minutes of all meetings of the
shareholders in books provided for that purpose; (b) shall attend to the giving
and serving of notices; (c) when required, may sign with the President or a Vice
President in the name of the Corporation, and may attest the signature of any
other officers of the Corporation to all contracts, conveyances, transfers,
assignments, encumbrances, authorizations and all other instruments, documents
and papers of any and every description whatsoever, of or executed for or on
behalf of the Corporation and affix the seal of the Corporation thereto; (d) may
sign with the President or a Vice President all certificates for shares of the
capital stock of the Corporation and may affix the seal of the Corporation
thereto; (e) shall have charge of and maintain and keep or supervise and control
the maintenance and keeping of the stock certificate books, transfer books and
stock ledgers and such other books and papers as the Board of Directors may
authorize, direct or provide for, all of which shall at all reasonable times be
open to the inspection of any director, upon request, at the office of the
Corporation during business hours; (f) shall, in general, perform all the duties
incident to the office of Secretary; and (g) shall have such other powers and
duties as may be
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conferred upon or assigned to him by the Board of Directors, the Chairman of
the Board, or the President.
SECTION 6.11 Treasurer. The Treasurer (a) shall be the legal custodian
of all moneys, notes, securities and other valuables which may from time to time
come into the possession of the Corporation, (b) shall immediately deposit all
funds of the Corporation coming into his hands in some reliable bank or other
depository as designated by the Board of Directors, (c) shall keep such bank
accounts in the name of the Corporation, and (d) shall keep correct and complete
records relating to the foregoing. He shall perform such other duties as these
By-Laws, the Board of Directors, the Chairman of the Board, or the President may
prescribe. The Treasurer may be required to furnish bond in such amount as shall
be determined by the Board of Directors.
SECTION 6.12 Other Officers. The Board of Directors or the President
may from time to time designate and appoint other officers who shall have such
powers and duties as the officers whom they are appointed to assist shall
specify and delegate to them, and such other powers and duties as these By-Laws,
the Board of Directors, the Chairman of the Board, or the President may
prescribe. An Assistant Secretary may, in the absence or disability of the
Secretary, attest the execution of all documents by the Corporation.
SECTION 6.13 Delegation of Authority. In case of the absence of any
officer of the Corporation, or for any other reason that the Board of Directors
may deem sufficient, the Board of Directors may delegate the powers or duties of
such officer to any other officer or to any Director, for the time being,
provided a majority of the entire Board of Directors concurs therein.
ARTICLE VII
CONTRACTS, CHECKS, DRAFTS, BANK ACCOUNTS
SECTION 7.1 Execution of Contracts. Except as these By-Laws may
otherwise provide, the Board of Directors may authorize any officer or officers,
or agent or agents, to enter into any contract or execute any instrument in the
name of and on behalf of the Corporation, and such authority may be general or
confined to specific instances; and unless so authorized by the Board of
Directors or by these By-Laws, no officer, agent or employee shall have any
power or authority to bind the Corporation by any contract or engagement or to
pledge its credit or to render it liable for any purpose or in any amount,
except contracts and agreements entered into by the Corporation in the ordinary
course of business of the Corporation may be executed by any officer of the
Corporation.
SECTION 7.2 Checks, Drafts, Etc. All checks, drafts or other orders for
payment of money, notes or other evidence of indebtedness, issued in the name of
or payable to the Corporation, shall be signed or endorsed by such person or
persons and in such manner as, from time to time, determined by the Board of
Directors. Each such officer, assistant, agent or attorney shall give such bond,
if any, as the Board of Directors may from time to time require.
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SECTION 7.3 Deposits. All funds of the Corporation not otherwise
employed shall be deposited from time to time to the credit of the Corporation
in such banks, trust companies or other depositories as the Board of Directors
may select, or as may be selected by any officer or officers, assistant or
assistants, agent or agents, or attorney or attorneys of the Corporation to whom
such power shall have been delegated by the Board of Directors. For the purpose
of deposit and for the purpose of collection for the account of the Corporation,
the Chairman of the Board of Directors, the President, any Vice President or the
Treasurer (or any other officer or officers, assistant or assistants, agent or
agents, or attorney or attorneys of the Corporation who shall from time to time
be determined by the Board of Directors) may endorse, assign and deliver checks,
drafts and other orders for the payment of money which are payable to the order
of the Corporation.
SECTION 7.4 General and Special Bank Accounts. The Board of Directors
may from time to time authorize the opening and keeping of general and special
bank accounts with such banks, trust companies or other depositories as the
Board of Directors may select or as may be selected by any officer or officers,
assistant or assistants, agent or agents, or attorney or attorneys of the
Corporation to whom such power shall have been delegated by the Board of
Directors. The Board of Directors may make such special rules and regulations
with respect to such bank accounts, not inconsistent with the provisions of
these By-Laws, as it may deem expedient.
ARTICLE VIII
SHARES AND THEIR TRANSFER
SECTION 8.1 Certificate for Shares. Every owner of shares of stock of
the Corporation shall be entitled to have a certificate or certificates, to be
in such form as the Board of Directors shall prescribe, certifying the number
and class or series of shares of the stock of the Corporation owned by such
owner. The certificates representing shares of such stock shall be numbered in
the order in which they shall be issued and shall be signed in the name of the
Corporation by the Chairman of the Board of Directors, the President or any Vice
President, and by the Secretary or the Treasurer. Any or all of the signatures
on the certificates may be a facsimile. In case any officer, transfer agent or
registrar who has signed, or whose facsimile signature has been placed upon, any
such certificate, shall have ceased to be such officer, transfer agent or
registrar before such certificate is issued, such certificate may nevertheless
be issued by the Corporation with the same effect as though the person who
signed such certificate, or whose facsimile signature shall have been placed
thereupon, were such officer, transfer agent or registrar at the date of issue.
A record shall be kept of the respective names of the persons, firms or
corporation owning the stock represented by such certificates, the number and
class or series of shares represented by such certificates, respectively, and
the respective dates thereof, and in case of cancellation, the respective dates
of cancellation. Every certificate surrendered to the Corporation for exchange
or transfer shall be canceled, and no new certificate or certificates shall be
issued in exchange for any existing certificate until such existing certificate
shall have been so canceled, except in cases provided for in Section 8.4 hereof.
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SECTION 8.2 Transfers of Shares. Transfers of shares of stock of the
Corporation shall be made only on the books of the Corporation by the registered
holder thereof, or by such holder's attorney authorized by power of attorney
duly executed and filed with the Secretary, or with a transfer clerk or a
transfer agent appointed as provided in Section 8.3 hereof, and upon surrender
of the certificate or certificates for such shares properly endorsed and the
payment of all taxes thereon. The person in whose name shares of stock stand on
the books of the Corporation shall be deemed the owner thereof for all purposes
as regards to the Corporation. Whenever any transfer of shares shall be made for
collateral security, and not absolutely, such fact shall be so expressed in the
entry of transfer if, when the certificate or certificates shall be presented to
the Corporation for transfer, both the transferor and the transferee request the
Corporation to do so.
SECTION 8.3 Regulations. The Board of Directors may make such rules and
regulations as it may deem expedient, not inconsistent with these By-Laws,
concerning the issue, transfer and registration of certificates for shares of
the stock of the Corporation. It may appoint, or authorize any officer or
officers to appoint, one or more transfer clerks or one or more transfer agents
and one or more registrars, and may require all certificates for stock to bear
the signature or signatures of any of them.
SECTION 8.4 Lost, Stolen, Destroyed and Mutilated Certificates. In any
case of loss, theft, destruction, or mutilation of any certificate of stock,
another may be issued in its place upon proof of such loss, theft, destruction,
or mutilation and upon the giving of a bond of indemnity to the Corporation in
such form and in such sum as the Board of Directors may direct; provided,
however, that a new certificate may be issued without requiring any bond when,
in the judgment of the Board of Directors, it is proper so to do.
SECTION 8.5 Fixing Date for Determination of Shareholders of Record. In
order that the Corporation may determine the shareholders entitled to notice of
or to vote at any meeting of shareholders or any adjournment thereof, or
entitled to receive payment of any dividend or other distribution or allotment
of any rights, or entitled to exercise any rights in respect of any other
change, conversion or exchange of stock or for the purpose of any other lawful
action other than to consent to corporate action in writing without a meeting,
the Board of Directors may fix, in advance, a record date, which shall not be
more than 70 nor less than 10 days before the date of such meeting, nor more
than 70 days prior to any such other action. If, in any case involving the
determination of shareholders for any purpose other than notice of or voting at
a meeting of shareholders, the Board of Directors shall not fix a record date,
then the record date for determining shareholders shall be the close of business
on the day on which the Board of Directors shall adopt the resolution relating
thereto. A determination of shareholders entitled to notice of or to vote at a
meeting of shareholders shall apply to any adjournment of such meeting;
provided, however, that the Board of Directors may fix a new record date for the
adjourning meeting.
SECTION 8.6 Voting of Shares Owned by Corporation. Unless otherwise
directed by the Board of Directors, any share or shares issued by any other
corporation and owned, or controlled by the Corporation may be voted at any
shareholder's meeting of such other
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corporation by the President of the Corporation if he be present, or in his
absence by his designee who shall be an officer of the Corporation or by the
Secretary of the Corporation. Whenever, in the judgment of the President, it is
desirable for the Corporation to execute a proxy or give a shareholdersG consent
in respect to any share or shares issued by any other corporation and owned by
the Corporation, such proxy or consent shall be executed in the name of the
Corporation by the President of the Corporation. Any person or persons
designated in the manner above stated as the proxy or proxies of the Corporation
shall have full right, power and authority to vote the share or shares issued by
such other corporation and owned by the Corporation in the same manner as such
share or shares might be voted by the Corporation.
SECTION 8.7 Endorsement of Certificates for Shares. Unless otherwise
directed by the Board of Directors, any share or shares issued by any
corporation and owned by the Corporation (including reacquired shares of the
Corporation) may, for sale or transfer, be endorsed in the name of the
Corporation by the President, a Vice President, or the Treasurer, and such
endorsement shall be duly attested by the Secretary.
ARTICLE IX
INDEMNIFICATION
SECTION 9.1 Right to Indemnification. The Corporation shall indemnify,
to the fullest extent permitted by the Indiana Business Corporation Law, any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, either civil,
criminal, administrative or investigative, by reason of the fact that he or she
is or was a director or officer of the Corporation or a constituent corporation
absorbed in a consolidation or merger against expenses (including attorneysG
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him or her in connection with such action, suit or proceeding,
whether or not the indemnified liability arises or arose from any threatened,
pending or completed action by or in the right of the Corporation. Included
within the foregoing obligation of indemnification shall be the indemnification
of any person while a director or officer of the Corporation, is or was serving
at the request of the Corporation or a constituent corporation absorbed in a
consolidation or merger, or, as a director or officer of another corporation,
partnership, joint venture, trust or other enterprise, including but not limited
to an employee, officer or agent of the Corporation with respect to an employee
benefit plan. The Corporation shall not indemnify any person to the extent that
such person is otherwise indemnified or to the extent that such indemnification
is prohibited by applicable law, or except to the extent that such person's
claim for indemnification arises out of liability (i) for any breach of the
director's duty of loyalty to the Corporation or its shareholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or
knowing violation of law, or (iii) for any transaction from which the director
derived an improper personal benefit.
SECTION 9.2 Advance of Expenses. Expenses incurred by a director or
officer of the Corporation in defending a civil or criminal action, suit or
proceeding shall be paid by the Corporation in advance of the final disposition
of such action, suit or proceeding subject to the provisions of any applicable
law.
15
<PAGE> 17
SECTION 9.3 Procedure for Determining Permissibility. To determine
whether any indemnification or advance of expenses under this Article IX is
permissible, the Board of Directors by a majority vote of a quorum consisting of
directors not parties to such action, suit or proceeding may, and on request of
any person seeking indemnification or advance of expenses shall be required to,
determine in each case whether the applicable standards in any applicable law
have been met, or such determination shall be made by independent legal counsel
if such quorum is not obtainable, or, even if obtainable, a majority vote of a
quorum of disinterested directors so directs provided that, if there has been a
change in control of the Corporation between the time of the action or failure
to act giving rise to the claim for indemnification or advance of expenses and
the time such claim is made, at the option of the person seeking indemnification
or advance of expenses, the permissibility of indemnification or advance of
expenses shall be determined by independent legal counsel. The reasonable
expenses of any director or officer in prosecuting a successful claim for
indemnification, and the fees and expenses of any special legal counsel engaged
to determine permissibility of indemnification or advance of expenses, shall be
borne by the Corporation.
SECTION 9.4 Contractual Obligation. The obligations of the Corporation
to indemnify a director or officer under this Article IX, including the duty to
advance expenses, shall be considered a contract between the Corporation and
such director or officer, and no modification or repeal of any provision of this
Article IX shall affect, to the detriment of the director or officer, such
obligations of the Corporation in connection with a claim based on any act or
failure to act occurring before such modification or repeal.
SECTION 9.5 Indemnification Not Exclusive; Inuring of Benefit. The
indemnification and advance of expenses provided by this Article IX shall not be
deemed exclusive of any other right to which the individual or entity
indemnified may be entitled, both as to action in his official capacity and as
to the action in another capacity while holding such office, and shall inure to
the benefit of the heirs, executors and administrators of any such person.
SECTION 9.6 Insurance and Other Indemnification. The Board of Directors
shall have the power to (i) authorize the Corporation to purchase and maintain,
at the Corporation's expense, insurance on behalf of the Corporation and on
behalf of others to the extent that power to do so has not been prohibited by
applicable law, and (ii) give other indemnification to the fullest extent
permitted by law.
ARTICLE X
EMERGENCY
SECTION 10.1 Purpose. The Emergency By-Laws provided in this Article X
shall be operative during any emergency (as defined in Section 10.5) in the
conduct of the business of the Corporation resulting from a catastrophic event,
notwithstanding any different provision in the preceding By-Laws or in the
Articles of Incorporation of the Corporation or in law. To the extent not
inconsistent with the provisions of this Article X, the By-Laws provided in the
16
<PAGE> 18
preceding Articles shall remain in effect during such emergency and upon its
termination the Emergency By-Laws shall cease to be operative.
SECTION 10.2 Management of Corporation During Emergency.
(A) A meeting of the Board of Directors may be called by any officer or
Director of the Corporation. Notice of the time and place of the meeting shall
be given by the person calling the meeting to such of the Directors as it may be
feasible to reach by any available means of communication. Such notice shall be
given at such time in advance of the meeting as circumstances permit in the
judgment of the person calling the meeting.
(B) At any such meeting of the Board of Directors, a quorum shall
consist of three (3) Directors.
(C) The Board of Directors, either before or during any such emergency,
may provide, and from time to time modify, lines of succession in the event that
during such an emergency any or all officers or agents of the Corporation shall
for any reason be rendered incapable of discharging their respective duties.
(D) The Board of Directors, either before or during any such emergency,
may, effective in the emergency, change the head office or designate several
alternative head offices or regional offices, or authorize the officers so to
do.
SECTION 10.3 Action Taken Pursuant to Emergency By-Laws. Corporate
action taken in good faith and in accordance with these Emergency By-Laws shall
be binding on the Corporation. No officer, Director, employee or agent acting in
good faith and in accordance with these Emergency By-Laws, shall be liable
except for willful misconduct or recklessness.
SECTION 10.4 Repeal or Amendment. These Emergency By-Laws shall be
subject to repeal or change by further action of the Board of Directors or by
action of the shareholders, but no such repeal or change shall modify the
provisions of the Section 12.03 with regard to action taken prior to the time of
such repeal or change. Any amendment of these Emergency By-Laws may make any
further or different provision that may be practical and necessary for the
circumstances of the emergency.
SECTION 10.5 Definition of Emergency. For purposes of this Article X,
an emergency exists if an extraordinary event prevents a quorum of the
Corporation's Directors from assembling in time to deal with the business for
which the meeting has been called or is to be called.
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ARTICLE XI
MISCELLANEOUS
SECTION 11.1 Place of Keeping Corporate Books and Records. The books of
account, records, documents and papers of the Corporation shall be kept at any
place or places within or without the State of Indiana as directed by the Board
of Directors. In the absence of a direction, the books of account, records,
documents and papers shall be kept at the principal office of the Corporation.
SECTION 11.2 Seal. The Board of Directors of the Corporation may
designate the design and cause the Corporation to obtain and use a corporate
seal, but the failure of the Board to designate a seal or the absence of the
impression of the corporate seal from any document shall not affect in any way
the validity or effect of such document.
SECTION 11.3 Fiscal Year. The fiscal year of the Corporation shall end
at the end of each calendar year.
SECTION 11.4 Waiver of Notices. Whenever notice is required to be given
by these By-Laws or the Articles of Incorporation or by law, the person entitled
to said notice may waive such notice in writing, either before or after the time
stated therein, and such waiver shall be deemed equivalent to notice.
SECTION 11.5 Amendments. The power to make, alter, amend or repeal
these By-Laws is vested exclusively in the Board of Directors. The affirmative
vote of a number of Directors equal to a majority of the number who would
constitute a full Board of Directors at the time of such action shall be
necessary to take any action for the making, alteration, amendment or repeal of
these By-Laws.
SECTION 11.6 Indiana Business Corporation Law. The Corporation elects
that the provisions of Chapter 23-1-42 of the Indiana Business Corporation Law
shall not apply to share control acquisitions (as defined in such Chapter
23-1-42) of shares of the Corporation.
18
<PAGE> 1
EXHIBIT 10.4
$40,000,000 REVOLVING LINE OF CREDIT
LOAN AGREEMENT WITH THIRD NATIONAL
BANK IN NASHVILLE DATED OCTOBER 14,1994,
(THE "REVOLVING LOAN AGREEMENT")
AMENDMENT TO REVOLVING LOAN AGREEMENT DATED JUNE 30, 1995
SECOND AMENDMENT TO REVOLVING LOAN AGREEMENT DATED OCTOBER 11, 1995
THIRD AMENDMENT TO REVOLVING LOAN AGREEMENT DATED
AUGUST 1, 1996
FOURTH AMENDMENT TO REVOLVING LOAN AGREEMENT DATED JANUARY 31, 1997
<PAGE> 2
EXHIBIT 10.4
LOAN AGREEMENT
By and Between
SOFAMOR DANEK GROUP, INC.
and
THIRD NATIONAL BANK IN NASHVILLE
$40,000,000.00 October 14, 1994
<PAGE> 3
INDEX
<TABLE>
<S> <C>
Article I. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Article II. The Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 2.01 The Revolving Credit Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 2.02. Term Loan Option . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 2.03. Borrowing Procedure under Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 2.04. Optional Prepayment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 2.05. Participation Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 2.06. Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 2.07. Conditions of Lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 2.08. Term of Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 2.09. Right of Offset, Etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 2.10. Non-Use Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Article III. Guaranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 3.01. Guarantors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Article IV. Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 4.01. Organization and Qualification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 4.02. Corporate Power and Authorization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 4.03. Binding Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 4.04. No Legal Bar or Resultant Lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 4.05. No Consent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 4.06. Liabilities and Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 4.07. Taxes; Governmental Charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 4.08. Title, Etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 4.09. No Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 4.10. Compliance with Laws, Etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 4.11. Significant Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 4.12. No Material Misstatements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 4.13. Financial Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Article V. Conditions Precedent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Section 5.01. Initial Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Section 5.02. All Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Article VI. Affirmative Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 6.01 Financial Statements and Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Section 6.02. Certificates of Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
</TABLE>
1
<PAGE> 4
<TABLE>
<S> <C>
Section 6.03. Taxes and Other Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Section 6.04 Maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Section 6.05. Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Section 6.06. Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 6.07. Right of Inspection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 6.08. Notice of Certain Events . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 6.09. ERISA Information and Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 6.10. Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 6.11. Acquired Subsidiaries' Guaranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
ARTICLE VII. Negative Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Section 7.01. Debts, Guaranties, and Other Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Section 7.02. Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Section 7.03. Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Section 7.04. Dividends, Distributions, and Redemptions; Issuance of Stock . . . . . . . . . . . . . . . . . 15
Section 7.05. Nature of Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Section 7.06. Mergers, Dispositions, Etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Section 7.07. Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Section 7.08. Disposition of Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Section 7.09. No Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Section 7.10. Prepayment of Other Debts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Section 7.11. Sales and Leasebacks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Section 7.12. Financial Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Article VIII. Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Section 8.01. Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Section 8.02. Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Section 8.03. Right of Set-off . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Article IX. General Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Section 9.01. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Section 9.02. Deviation from Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Section 9.03. Invalidity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Section 9.04. Survival of Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Section 9.05. Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Section 9.06. Renewal, Extension, or Rearrangement . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Section 9.07. Waivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Section 9.08. Cumulative Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Section 9.09. Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Section 9.10. Nature of Commitment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Section 9.11. Governance; Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Section 9.12. Titles of Articles, Sections, and Subsections . . . . . . . . . . . . . . . . . . . . . . . . 21
Section 9.13. Time of Essence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
</TABLE>
2
<PAGE> 5
<TABLE>
<S> <C> <C>
Section 9.14. Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Section 9.15. Application of Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Section 9.16. Costs, Expenses, and Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Section 9.17. Governing Law; Consent to Forum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Section 9.18. Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Section 9.19. Entire Agreement; No Oral Representations Limiting Enforcement . . . . . . . . . . . . . . . 22
Section 9.20. Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
</TABLE>
3
<PAGE> 6
LOAN AGREEMENT
This Loan Agreement is executed by SOFAMOR DANEK GROUP, INC., an Indiana
corporation ("Borrower") and THIRD NATIONAL BANK IN NASHVILLE, a national
banking association ("Lender"), as of the 14th day of October, 1994.
RECITALS:
A. Borrower has previously executed that certain $25,000,000 Line of
Credit Note dated June 23, 1994 as amended by a First Amendment to Line
of Credit Note dated July 28, 1994, and as amended by a Second
Amendment to Line of Credit Note dated September 29, 1994 (the "Interim
Note") in favor of Lender as the holder thereof.
B. Borrower and Lender are entering into this Loan Agreement to advance
additional credit to Borrower and, a portion of such credit shall be
used to prepay the Interim Note.
NOW, THEREFORE, Borrower and Lender agree as follows:
Article I. Definitions.
As used in this Agreement, the following terms shall have the following
meanings, unless the context expressly otherwise requires:
"Adjusted LIBOR Rate" means the LIBOR Rate adjusted to include
(if imposed upon Lender) the cost, in basis points, of any applicable
reserve requirements of the Board of Governors of the Federal Reserve
System (or any successor), applicable to "Eurocurrency Liabilities"
pursuant to Regulation D or other then-applicable regulations of the
Board of Governors.
"Advance" means any extension of credit made pursuant to this
Agreement and/or the Note. The terms "Advance" and "Loan" (or the
plural forms thereof) are used interchangeably in this Agreement.
"Affiliate" means a Person (i) which directly or indirectly
through one or more intermediaries controls, or is controlled by, or is
under common control with, the Borrower, (ii) which beneficially owns
or holds 5% or more of any class of the Voting Stock of the Borrower,
or (iii) of which 5% or more of the Voting Stock (or in the case of a
Person which is not a corporation, 5% or more of the equity interest)
is beneficially owned or held by the Borrower or another Affiliate.
"Agreement" means this Loan Agreement (including all exhibits
hereto) as the same may be modified, amended, or supplemented from time
to time.
"Business Day" means any day other than a Saturday, Sunday or
day on which commercial banks are authorized to close under the laws of
the State of Tennessee.
"Closing" means the time and place of the execution and/or
delivery of the Loan Documents.
"Closing Date" means the 14th day of October, 1994.
"Code" means the Internal Revenue Code of 1986, as amended.
<PAGE> 7
"Conditions Precedent" means (unless waived in writing by
Lender) those matters or events that must be completed or must occur or
exist prior to Lender's being obligated to fund any Advance, including,
but not limited to, those matters described in Article V hereof.
"Debt" means, with respect to any Person, without duplication,
(a) the Indebtedness and all other indebtedness which in accordance
with GAAP would be classified on a balance sheet as indebtedness for
the repayment of borrowed money, (b) all indebtedness, contingent or
otherwise, for reimbursement of drafts drawn or available to be drawn
under letters of credit, (c) all deferred indebtedness which in
accordance with GAAP would be classified on a balance sheet as
indebtedness, for the payment of the purchase price of property or
assets purchased, (d) all capitalized lease obligations classified as
such under current criteria of FASB No. 13, (e) all guaranties, and (f)
all obligations of such Person to indemnify another Person to the
extent of the amount of indemnity, if any, which would be payable by
such Person at the time of determination of Debt. Each subsection's
determination of "Debt" under this paragraph shall constitute
indebtedness only if so classified under GAAP. The definition of "Debt"
shall exclude checks and drafts endorsed for collection in the ordinary
course of business.
"Default" or "Event of Default" means the occurrence of any of
the events specified in Section 8.01 hereof.
"Determination Date" means the day three Business Days before
the date fixed for a prepayment.
"Financial Statements" means (i) the financial statement or
statements of Borrower described or referenced in Section 6.01 hereof
and delivered to Lender pursuant to this Agreement.
"Fiscal Quarter" means each of the quarters of the Fiscal Year
ending on March 31, June 30, September 30, and December 31.
"Fiscal Year" means any twelve-month accounting period ending
December 31.
"GAAP" means generally accepted accounting principles applied
on a consistent basis.
"Guarantor" and "Guarantors" mean each and all of the
Significant Subsidiaries of Borrower.
"Guaranty" and "Guaranties" mean each and all of the guaranty
agreements executed by Guarantors in favor of Lender, in form and
substance as set forth in Exhibit B.
"Indebtedness" means any and all amounts and liabilities owing
or to be owing by Borrower to Lender from time to time whether now
existing or hereafter incurred, in connection with this Agreement
and/or the Note.
"Liabilities" means, with respect to any Person, all Debt and
all other items (including without limitation taxes accrued as
estimated) that, in accordance with GAAP, would be included in
determining total liabilities as shown on the liabilities side of a
balance sheet.
"LIBOR Rate" means the LIBOR rate of interest reported by the
Telerate Computer Service to which Lender subscribes, for 30-day
periods, as such rate changes daily. The LIBOR Rate shall be
-2-
<PAGE> 8
determined on the day of any borrowing hereunder to which the LIBOR
Rate Option applies, and on the first (1st) day of each month
thereafter (and such rate shall be "fixed" for the periods beginning on
the date of borrowing, or the first day of each month, whichever is
applicable, and ending on the last day of such month). The LIBOR Rate
may vary from month to month.
"Lien" means any interest in Property securing an obligation
owed to, or a claim by, a Person other than the owner of the Property,
whether such interest is based on the common law, statute, or contract,
and including, but not limited to, the lien or security interest
arising from a mortgage, encumbrance, pledge, security agreement,
conditional sale, or trust receipt or a lease, consignment, or bailment
for security purposes.
"Loan" or "Loans" means any borrowing by Borrower under this
Agreement, including any renewal, amendment, extension, or modification
thereof.
"Loan Documents" means, collectively, each document, paper or
certificate executed, furnished or delivered in connection with this
Agreement (whether before, at, or after the Closing Date), including,
without limitation, this Agreement, the Note, the Negative Pledge, the
Guaranties, and all other documents, certificates, reports, and
instruments that this Agreement requires or that were executed or
delivered (or both) at Lender's request.
"Maturity Date" means October 15, 1995, with respect to the
Revolving Credit Loan (unless the Maturity Date is extended in writing
by the Lender) and with respect to a Term Loan, the 1, 2, or 3-year
period elected by Borrower in writing pursuant to the provisions of
Section 2.02 herein.
"Maximum Amount" means the principal amount of $40,000,000,
which is the maximum principal amount that may be outstanding at any
time under the Loan.
"Negative Pledge" means that certain Negative Pledge Agreement
dated as of the date hereof executed by Borrower and the Significant
Subsidiaries in favor of Lender, including all amendments and
restatements thereof.
"Net Income" means (for any period of computation thereof) the
consolidated net income before extraordinary items (but after giving
effect to the credit resulting from tax loss carry forwards) of the
Borrower for any period determined in conformity with GAAP.
"Note" means that certain Promissory Note in the form as set
forth in Exhibit A hereto, in the principal amount of up to
$40,000,000.00, including all amendments, extensions, increases and
restatements thereto and thereof, and all replacement and substitute
notes therefor.
"Obligations" means all of Borrower's undertakings in the Loan
Documents including, but not limited to, all agreements,
representations, warranties, and covenants. The term "Obligations"
includes the Indebtedness.
"Offering Proceeds" means all net cash proceeds or the net fair
market value of any tangible assets derived by Borrower or any
Significant Subsidiary through the issuance of any equity security
(other than in connection with any employee benefit plan or
compensatory arrangement generally available to employees).
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"PBGC" means the Pension Benefit Guaranty Corporation.
"Person" means any individual, corporation, partnership, joint
venture, association, joint stock company, trust, unincorporated
organization, government, or any agency or political subdivision
thereof, or any other form of entity.
"Prepayment Premium" means as of any Determination Date, to the
extent that the Reinvestment Yield on such Determination Date is lower
than the interest rate payable on or in respect of the Term Loan, the
excess, if any, of (a) the present value of the principal and interest
payments to be foregone by any prepayment (exclusive of accrued
interest on such Term Loan through the date of prepayment) for such
Term Loan to be prepaid, determined by discounting (monthly on the
basis of a 360-day year composed of twelve 30-day months), such
payments at a rate that is equal to the Reinvestment Yield over (b) the
aggregate principal amount of such Term Loan then to be prepaid. To the
extent that the Reinvestment Yield on any Determination Date is equal
to or higher than the interest rate payable with respect to such Term
Loan, the Prepayment Premium shall be zero.
"Principal Office" means the principal office of the Lender
located at 201 Fourth Avenue North, Nashville, Tennessee 37219.
"Property" or "Properties" means any interest in any kind of
property or asset, whether real, personal, or mixed, or tangible or
intangible.
"Reinvestment Yield" means, with respect to a Term Loan Rate
Option determined by reference to U.S. Treasury yields, the yield as
set forth on page "USD" of the Bloomberg Financial Markets Service at
10:00 a.m. (Chicago time) on the Determination Date for actively traded
U.S. Treasury securities having a maturity equal to the Weighted
Average Life to the applicable Maturity Date of the Term Loan then
being prepaid, rounded to the nearest month, or if such yields shall
not be reported as of such time or the yields reported as of such time
are not ascertainable in accordance with the preceding clause, then the
arithmetic mean of the yields published in the statistical release
designated H.15(519) of the Board of Governors of the Federal Reserve
System under the caption "U.S. Government Securities-Treasury Constant
Maturities" (the "statistical release") for the maturity corresponding
to the remaining Weighted Average Life to the applicable Maturity Date
of the Term Loan then being prepaid as of the date of such prepayment
rounded to the nearest month. If no maturity exactly corresponding to
such rounded Weighted Average Life to the applicable Maturity Date
shall appear therein, yields for the two most closely corresponding
published maturities (one of which occurs prior and the other
subsequent to the Weighted Average Life to the applicable Maturity
Date) shall be calculated pursuant to the foregoing sentence and the
Reinvestment Yield shall be interpolated from such yields on a
straight-line basis (rounding, in each of such relevant periods, to the
nearest month). Reinvestment Yield means, with respect to a Term Loan
Rate Option determined by reference to Federal Home Loan Bank funds,
the yield as set forth on the Weekly Summary of FHLB Advance Rates on
the Determination Date for advances having a maturity equal to the
Weighted Average Life to the applicable Maturity Date of the Term Loan
then being prepaid. For purposes of calculating the Reinvestment Yield,
the most recent weekly statistical release published prior to the
applicable Determination Date shall be used.
"Revolving Credit Loan" means the Advances made on a revolving
credit basis under the Note, excluding the amounts converted to a Term
Loan under Section 2.02 hereof.
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"Share Repurchase Plan" means that certain Stock Repurchase
Program approved by the Board of Directors of Borrower on April 20,
1994.
"Significant Subsidiary" means any Subsidiary which has gross
assets (based on undepreciated historical cost) aggregating $250,000 or
more at any time (excluding Subsidiaries whose sole material assets
consist of stock in another Subsidiary). As of the date hereof, the
Significant Subsidiaries are the following Subsidiaries:
Danek Medical, Inc.
Warsaw Orthopedic, Inc.
Sofamor Danek Japan K.K.
Sofamor Danek GmbH
Sofamor Danek Asia Pacific Limited
Sofamor S.N.C.
Sofamor Italia S.r.l.
Sofamor Iberica S.A.
"Subsidiary" means any corporation (or other entity) of which
fifty-one percent (51%) or more of the issued and outstanding voting
stock (or other ownership interest therein) is owned or controlled
directly or indirectly, by the Borrower and/or by one or more of any
Subsidiaries of the Borrower.
"Tangible Net Worth" means (i) the aggregate amount of all
assets of the Borrower as may properly be classified as such under
GAAP, other than goodwill and such other assets as are properly
classified as "intangible assets" in accordance with GAAP, less (ii)
the aggregate amount of all Liabilities of the Borrower as may properly
be classified under GAAP. The net amount raised by Borrower in an
equity offering will be included in determining Borrower's Tangible Net
Worth for purposes of the financial covenant set forth in Section 7.12
(c) of this Agreement.
"Term Loan" means the portion of the Revolving Credit Loan
converted to a Term Loan by Borrower under the provisions of Section
2.02 hereof.
"Term Loan Rate" or "Term Loan Rate Option" means one of the
following rates as selected by Borrower under Section 2.02: (i) a
floating rate equal to three-quarters of one percent (.75%) per annum
above the 30- day Adjusted LIBOR Rate as such rate may change from time
to time; (ii) a fixed rate equal to one and two- tenths of one percent
(1.2%) in excess of the Federal Home Loan Bank Board's "Fixed Rate
Advances" rate applicable to the average life (as determined by the
weighted maturity of the applicable Term Loan) of the Term Loan for
amounts of $1,000,000 and integral multiples thereof (provided,
however, this option shall be available only if Federal Home Loan Bank
Board funds are available to Lender in the amount converted to a Term
Loan by Borrower); or (iii) one and three-tenths of one percent (1.3%)
in excess of the 1-year, 2-year, or 3- year (determined by the maturity
of the applicable Term Loan) U.S. Treasury yield (as published by the
Wall Street Journal) for amounts of $1,000,000 and integral multiples
thereof. The fixed Term Loan Rate under subsections (ii) and (iii) of
this paragraph shall be determined on the first Business Day following
Lender's receipt of Borrower's written election to convert all or a
portion of the outstanding Advance(s) of the Revolving Credit Loan to a
Term Loan.
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"Trailing Four Quarter Basis" means, with respect to any date,
the period that includes the twelve previous consecutive months of
Borrower (on a consolidated basis) ending the applicable date set forth
herein.
"Voting Stock" means securities of any class of a corporation
the holders of which are ordinarily, in the absence of contingencies,
entitled to elect a majority of the corporate directors (or persons
performing similar functions).
"Weighted Average Life to Maturity" means as applied to any
payment or prepayment of principal of the Term Loan, at any date, the
number of years obtained by dividing (a) the principal amount of the
Term Loan to be paid or prepaid into (b) the sum of the products
obtained by multiplying (i) the amount of each then remaining
installment, sinking fund, serial maturity, or other required payment,
including payment at final maturity, foregone by virtue of such payment
or prepayment, by (ii) the number of years (calculated to the nearest
1/12th) which would have elapsed between such date and the making of
such required payment.
Article II. The Loan.
Section 2.01 The Revolving Credit Loan. Subject to the conditions and
pursuant to the terms of the Loan Documents, and in reliance upon the
representations, warranties and covenants set forth in the Loan Documents,
Lender agrees to make Advances to Borrower on a revolving credit basis as a
Revolving Credit Loan pursuant to the Note in the aggregate principal amount of
up to $40,000,000, less any amounts converted to a Term Loan under Section 2.02
hereof. Each Advance hereunder as a Revolving Credit Loan, shall bear interest
from the date of such Advance at the 30-day Adjusted LIBOR Rate plus .625% per
annum, as such rate may change from time to time, until the Maturity Date or
until the principal amount of any such Advance(s) is converted to a Term Loan.
The terms, and provisions of repayment of the Revolving Credit Loan shall be as
set forth in the Note. Each of the provisions of the Note are incorporated
herein by reference. Interest on the Revolving Credit Loan shall be paid on the
first Business Day of each month in arrears commencing November 1, 1994. The
Revolving Credit Loan shall mature on the Maturity Date, at which time all
outstanding principal, accrued interest and fees (if any) under the Revolving
Credit Loan will be immediately due and payable. The Maximum Amount available
under the Revolving Credit Loan shall be automatically reduced by any amounts
that the Borrower converts to a Term Loan hereunder.
Section 2.02. Term Loan Option. From time to time until the Maturity
Date of the Revolving Credit Loan, Borrower shall have the option to convert all
or a portion of the outstanding principal amount of any Advance(s) previously
made on a revolving credit basis to a term loan (the "Term Loan(s)"). The
principal amount of such Term Loan(s) shall be amortized by equal quarterly
payments of principal over a one, two, or three-year period (commencing on the
first day of a calendar quarter following such conversion to a Term Loan) as
elected by Borrower. Borrower shall exercise its option to convert a revolving
credit Advance to a Term Loan in writing by delivery of a certificate in the
form set forth in Exhibit E, delivered to Borrower at least three (3) Business
Days prior to such conversion, specifying (i) the amount of the Term Loan; (ii)
the maturity date of the Term Loan (which shall be 1, 2, or 3-years from the
first day of the calendar quarter following the date of such conversion); (iii)
the Term Loan Rate Option elected by Borrower. Borrower shall have the right to
exercise its option to convert an Advance (previously made on a revolving credit
basis) to a Term Loan from time to time (until the Maturity Date of the
Revolving Credit Loan) in minimum denominations of $1,000,000 and integral
multiples thereof. Each Term Loan will mature on the applicable Maturity Date of
the Term Loan, at which time all outstanding principal, accrued interest, fees
and other charges (if any) under the Term Loan will be immediately
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<PAGE> 12
due and payable. The Term Loan will bear interest at the Term Loan Rate Option
as elected by Borrower until its Maturity Date. The terms and provisions of
repayment of the Term Loan shall be as set forth in the Note. Interest and
principal shall be payable quarterly commencing on the first Business Day of the
calendar quarter following the conversion to a Term Loan.
Section 2.03. Borrowing Procedure under Loan. Until the Maturity Date
of the Revolving Credit Loan, the Borrower shall give the Lender written or
telephonic notice of the proposed borrowing prior to 1:00 p.m. Central Standard
(or Daylight) Time on the Business Day of such borrowing. The following persons
are authorized to request an Advance: E. Ron Pickard, C.E.O., James J. Gallogly,
President, Laurence Y. Fairey, Chief Financial Officer, J. Mark Merrill,
Treasurer, or Jack B. Pearson, Jr., Assistant Treasurer. The Lender shall make
the Loan by wiring such Advance pursuant to the instructions of the Borrower, or
at the option of the Borrower, by depositing the funds being advanced into the
Borrower's operating account with the Lender no later than the close of the
Lender's business on the next Business Day. The giving of notice by the Borrower
that it is requesting the Loan shall constitute a warranty by the Borrower that,
as of the date notice is given and as of the date the Advance is made, the
officers of the Borrower do not have knowledge of any Event of Default as
defined herein; and that as of such dates, the representations and warranties
contained in Article IV are and will be true and correct, except as to changes
occurring after the date of this Agreement caused by transactions permitted
under this Agreement or as approved in writing by Lender.
Section 2.04. Prepayment Penalty. The outstanding principal amount of a
Term Loan may be prepaid, in whole or in part, at any time prior to its maturity
upon ten (10) days prior written notice to Lender. Each partial prepayment shall
be in a principal amount of not less than $500,000 and integral multiples of
$100,000 in excess thereof. Any Term Loan to which a fixed interest rate
described in Section 2.02 of the Loan Agreement applies, if prepaid, shall be
subject to a Prepayment Premium. The Prepayment Premium shall be due and payable
on the first Business Day subsequent to any such prepayment, whether prepayment
has been made at the option of the Borrower or upon acceleration. Any prepayment
shall be applied first to the interest accrued on the outstanding principal
balance of the Term Loan, and the remainder, if any, shall be applied to reduce
the outstanding principal balance of the Term Loan in the inverse order of
maturity. If Borrower prepays any portion of a Term Loan without specifying
whether the prepayment shall be applied to amounts bearing interest at a LIBOR
Rate or a fixed rate, such prepayment(s) shall be deemed to apply (after
application to fees and other charges and accrued interest) first to the fixed
rate Term Loan, then to a LIBOR rate Term Loan.
Section 2.05. Participation Agreements. Lender may, at any time enter
into participation agreements with one or more participating banks or other
institutions, whereby Lender may sell all or a portion of this Loan.
Section 2.06. Use of Proceeds. The proceeds of the Loan hereunder shall
be used by the Borrower for general corporate purposes, including without
limitation, the financing of the acquisition of entities (subject to approval by
Lender under Section 7.07 hereof) by Borrower, the repayment of the Interim
Facility, for Borrower's capital expenditures and working capital purposes, and
for repurchase of Borrower's common stock pursuant to the terms of the Share
Repurchase Plan.
Section 2.07. Conditions of Lending. Notwithstanding any other
provision of this Agreement, the Lender shall not be obligated or required to
make any Advance under the Note unless each of the Conditions Precedent set
forth in this Agreement has been satisfied at the time the Advance is made or
such Conditions Precedent are waived by Lender in writing.
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Section 2.08. Term of Agreement. This Agreement shall be binding on
the Borrower so long as any portion of the Obligations described herein remains
outstanding.
Section 2.09. Right of Offset, Etc. The Borrower hereby agrees that, in
addition to (and without limitation of) any right of set-off, banker's lien or
counterclaim the Lender may otherwise have, the Lender (and any participant of
this Loan under Section 2.05) shall be entitled, at its option, to offset
balances held by it at any of its offices against any principal of or interest
on the Obligations hereunder which is not paid when due by reason of a failure
by the Borrower to make any payment when due to the Lender (regardless whether
such balances are then due to the Borrower), in which case it shall promptly
notify the Borrower, provided that its failure to give such notice shall not
affect the validity thereof.
Section 2.10. Non-Use Fee. As additional consideration for the Lender's
commitment to make the Loan hereunder and reservation of monies to fund the
Loan, the Borrower shall pay to the Lender on the first Business Day of each
Calendar Quarter, a fee in the amount of .125% per annum of the average daily
unused portion of the Maximum Amount of the Revolving Credit Loan during the
prior calendar quarter.
Article III. Guaranties.
Section 3.01. Guarantors. Repayment of all of the Indebtedness and
performance of the Obligations shall be guaranteed by the Guarantors pursuant to
guaranty agreements in substantially the form as set forth in Exhibit B, subject
to the provisions of Section 6.11 hereof.
Article IV. Representations and Warranties.
To induce Lender to enter this Agreement and extend credit under this
Agreement, Borrower covenants, represents, and warrants to Lender that as of the
date hereof and as of the Closing Date:
Section 4.01. Organization and Qualification. Borrower is a corporation
duly organized and existing under the laws of the State of Indiana, each of its
Subsidiaries is a corporation duly organized and existing under the laws of its
jurisdiction of incorporation, and Borrower and each of the Subsidiaries is
qualified to do business in all jurisdictions in which it conducts its business,
the failure to qualify in which would have a material adverse effect on the
business, Properties, operations or financial condition of the Borrower and its
Subsidiaries on a consolidated basis.
Section 4.02. Corporate Power and Authorization. Borrower is duly
authorized and empowered to execute, deliver, and perform under all Loan
Documents to which it is a party; and all other corporate and/or shareholder
action required for the due execution, delivery, and performance of the Loan
Documents has been duly and effectively taken.
Section 4.03. Binding Obligations. This Agreement is, the Note, and the
other Loan Documents when executed and delivered in accordance with this
Agreement will be, legal, valid and binding upon the Borrower, enforceable in
accordance with their respective terms, subject to applicable bankruptcy,
insolvency or similar laws relating to enforcement of creditors' rights and
general equity principles which may limit the specific enforcement of certain
remedies herein.
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Section 4.04. No Legal Bar or Resultant Lien. The Borrower's execution,
delivery and performance of the Loan Documents to which it is a party do not
constitute a default under, and will not violate any provisions of the articles
of incorporation or bylaws of Borrower, any contract, agreement, law,
regulation, order, injunction, judgment or decree to which Borrower is subject,
or result in the creation or imposition of any Lien upon any Properties of
Borrower, other than those contemplated by the Loan Documents, which violation,
creation or imposition would have a material adverse effect on the business,
Properties, operations or financial condition of the Borrower and its
Subsidiaries on a consolidated basis, or on the ability of the Borrower to
perform its obligations under this Agreement or any of the other Loan Documents.
Section 4.05. No Consent. Borrower's execution, delivery, and
performance of the Loan Documents do not require the consent or approval of any
other Person, which has not been obtained.
Section 4.06. Liabilities and Litigation. Except as described in
Exhibit G, there is no litigation, legal or administrative proceeding,
investigation, or other action of any nature pending or, to the knowledge of
Borrower, threatened against or affecting Borrower or any of its Subsidiaries,
not fully covered by insurance (except for deductibles allowable herein), that
may materially and adversely affect the business or the Properties of the
Borrower and its Subsidiaries on a consolidated basis, the ability of Borrower
to carry out the terms of the Loan Documents, or the ability of Borrower and its
Subsidiaries on a consolidated basis, to carry on its/their business as now
conducted.
Section 4.07. Taxes; Governmental Charges. Subject to Borrower's right
to contest taxes and assessments in Section 6.03 hereof, Borrower has filed or
caused to be filed all tax returns and reports required to be filed and has paid
all taxes, assessments, fees, and other governmental charges levied upon it or
upon any of its Properties or income, which are due and payable, in each case
the failure to file or pay which would have a material adverse effect on the
business, Properties, financial condition or operations of the Borrower and its
Subsidiaries on a consolidated basis, or on the ability of the Borrower to
perform its obligations under this Agreement or any of the other Loan Documents.
Section 4.08. Title, Etc. Borrower has good title to its owned
Properties, free and clear of all liens except those referenced or reflected in
the Financial Statements described in Section 4.13 hereof.
Section 4.09. No Default. Borrower is not in default in any respect
that materially adversely affects its business, Properties, operations, or
condition, financial or otherwise, of the Borrower and its Subsidiaries on a
consolidated basis, under any indenture, mortgage, deed of trust, credit
agreement, note, agreement, or other instrument to which Borrower is a party or
by which it or its Properties are bound. No party to any such indenture,
mortgage, deed of trust, credit agreement, note, agreement or other instrument
has declared a default thereunder which default would have a material adverse
effect on the business, Properties, financial condition or operations of the
Borrower and its Subsidiaries on a consolidated basis.
Section 4.10. Compliance with Laws, Etc. Borrower is not in violation
of any law, judgment, decree, order, ordinance, or governmental rule or
regulation to which Borrower or any of its respective Properties, is subject,
which violation would have a material adverse effect on the business,
Properties, financial condition or operations of the Borrower and its
Subsidiaries on a consolidated basis, or on the ability of the Borrower to
perform its obligations under this Agreement or any of the other Loan Documents.
Borrower is in compliance in all material respects with the applicable
provisions of ERISA. The Borrower has not incurred any "accumulated funding
deficiency" within the meaning of ERISA, and the Borrower has not incurred any
material liability to
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<PAGE> 15
PBGC in connection with any plan, which deficiency or liability would be
materially adverse to the business, Properties, financial condition or
operations of the Borrower and its Subsidiaries, on a consolidated basis.
Section 4.11. Significant Subsidiaries. As of the date hereof, Borrower
has no Significant Subsidiaries other than the Significant Subsidiaries set
forth under the definition of "Significant Subsidiary" in Article I of this
Agreement.
Section 4.12. No Material Misstatements. No information, exhibit, or
report furnished or to be furnished by Borrower to Lender in connection with
this Agreement, contains as of the date thereof, or will contain as of the
Closing Date, any material misstatement of fact or failed or will fail to state
any material fact, the omission of which would render the statements therein
materially false or misleading.
Section 4.13. Financial Statement. The consolidated financial
statements dated December 31 1993, and June 30, 1994 previously delivered by
Borrower to Lender fairly and accurately presents the financial condition of
Borrower and its Subsidiaries as of such date and has been prepared in
accordance with generally accepted accounting principles consistently applied.
Since the date of that financial statement, there has been no material, adverse
change in the financial condition of the Borrower and its Subsidiaries.
Article V. Conditions Precedent.
Section 5.01. Initial Conditions. Lender's obligation to extend credit
hereunder is subject to the Conditions Precedent that Lender shall have received
(or agreed in writing to waive or defer receipt of) all of the following, each
duly executed, dated and delivered as of the Closing Date, in form and substance
satisfactory to Lender and its counsel:
(a) Note and Loan Documents. The Note of Borrower payable to
the order of Lender, the Guaranties, the Negative Pledge in the form
attached hereto as Exhibit D, and all other Loan Documents;
(b) Evidence Of All Corporate Action By The Borrower.
Certified copies of all corporate action taken by the Borrower,
including resolutions of its Board of Directors, authorizing the
execution, delivery, and performance of the Loan Documents to which it
is a party and each other document to be delivered pursuant to this
Agreement;
(c) Incumbency Certificate Of The Borrower. A certificate of
the Secretary of the Borrower certifying the names and true signatures
of the officers of the Borrower authorized to sign the Loan Documents
to which it is a party and the other documents to be delivered by the
Borrower under this Agreement;
(d) Opinion of Counsel For the Borrower and the Guarantors. An
opinion of counsel for the Borrower and the Guarantors in form and
substance satisfactory to the Lender.
(e) Evidence Of All Corporate Action By The Guarantors.
Certified (as of the date of delivery of their respective Guaranties)
copies of all corporate action taken by the Guarantors, authorizing the
execution, delivery, and performance of their respective Guaranties;
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<PAGE> 16
(f) Incumbency Certificates Of The Guarantors. A certificate
of the secretary or assistant secretary of each of the Guarantors,
certifying the names and true signatures of the officers of the
Guarantors authorized to sign the respective Guaranties;
(g) Other Opinions, Approvals And Documents. The Lender shall
have received such other approvals, opinions or documents as the Lender
or its counsel may reasonably request;
(h) No Material Adverse Change. No material adverse changes in
the financial or other condition of Borrower or any of the Guarantors
shall have occurred since the date of this Agreement which, in the
opinion of Lender, is likely to materially adversely affect the ability
of Borrower to perform its obligations under this Agreement, or of the
Guarantors to perform their obligations under the Guaranties;
(i) Certificates of Good Standing. Certificates of good
standing of Borrower and each Guarantor from the states (or other
jurisdiction) of their incorporation and each state (or other
jurisdiction) in which Borrower and each Guarantor has qualified to do
business and is doing business;
(j) Charter and By-Laws. Copies of Borrower's and Guarantors'
by-laws and articles of incorporation, certified by the secretary of
Borrower or the respective Guarantor, as being true and complete copies
of the current by-laws, articles of incorporation of Borrower, and the
Guarantors, as applicable;
(k) Evidence of Insurance. Evidence of insurance as required
by Section 6.06 herein.
Section 5.02. All Borrowings. The Lender's obligations to extend credit
under the Note are subject to the following additional Conditions Precedent
which shall be met when an Advance is requested: (a) The representations of the
Borrower contained in Article IV are true and correct as of the date of the
requested Advance, with the same effect as though made on the date additional
funds are advanced; (b) There has been no material adverse change in the
Borrower's financial condition since the date of the last borrowing hereunder;
(c) No Event of Default has occurred and continues to exist; (d) No material
litigation (not disclosed in writing by the Borrower to the Lender prior to the
date of the execution and delivery of this Agreement) is pending or known to be
threatened against the Borrower, which is includable on Borrower's Financial
Statements by its auditors in accordance with GAAP, materially adversely
affecting the financial position or business of the Borrower and its
Subsidiaries on a consolidated basis or impairing the ability of the Borrower or
the Guarantors to perform their obligations under this Agreement or any other
Loan Documents.
Article VI. Affirmative Covenants.
Borrower covenants that, during the term of this Agreement (including
any extensions hereof) and until all Indebtedness shall have been finally paid
in full and all Obligations shall have been fully paid and discharged, Borrower
shall:
Section 6.01 Financial Statements and Reports. Furnish to Lender:
(a) Annual Reports. As soon as available, and in any event
within ninety (90) days after the close of each Fiscal Year, from the
present independent certified public accountants of Borrower or by such
other firm of independent public accountants as may be designated by
Borrower and be reasonably
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<PAGE> 17
satisfactory to the Lender, the audited consolidated Financial
Statements of the Borrower and its Subsidiaries setting forth the
audited consolidated balance sheets (and unaudited consolidating
balance sheets prepared by Borrower) of Borrower and its Subsidiaries
at the end of such year, and the audited consolidated statements of
income, cash flow and retained earnings (and unaudited consolidating
statements of income, cash flows, and retained earnings) prepared by
Borrower of Borrower and its Subsidiaries for such year, setting forth
in each case in comparative form (beginning when comparative data are
available) the corresponding figures for the preceding Fiscal Year;
(b) Quarterly and Year-to-Date Reports. As soon as available
and in any event within forty-five (45) days after the end of each
Fiscal Quarter, the unaudited consolidated and consolidating balance
sheet of Borrower and its Subsidiaries as of the end of such Fiscal
Quarter and the unaudited consolidated and consolidating statement of
income of Borrower and its Subsidiaries for such Fiscal Quarter and for
the period from the beginning of the Fiscal Year to the close of such
quarter, all certified by the chief financial or chief accounting
officer of the Borrower as being true and correct to the best of his or
her knowledge;
(c) Annual Budgets. Within thirty (30) days after its Fiscal
Year end, annual budgets and projections for the ensuing Fiscal Year;
and
(d) Securities and Exchange Filings. At the same time as they
are filed with the Securities and Exchange Commission, copies of
Borrower's 10-Q and 10-K reports and any other filings made with the
Securities and Exchange Commission.
(e) Other Information. With reasonable promptness, such other
information as Lender may from time to time reasonably request.
All such balance sheets and other Financial Statements referred to in Sections
6.01(a) and (b) hereof shall conform to GAAP on a basis consistent with those of
previous Financial Statements.
Section 6.02. Certificates of Compliance. (a) Annual and Quarterly
Certificates. Concurrently with the furnishing of the annual Financial
Statements pursuant to Section 6.01(a) hereof and the quarterly Financial
Statements pursuant to Section 6.01(b) hereof, furnish or cause to be furnished
to Lender a certificate of compliance in the form of Exhibit C hereto, certified
by the president or chief accounting or financial officer of the Borrower,
stating that neither such officer nor the Borrower has obtained knowledge of any
Event of Default, or event which, after notice or lapse of time (or both), would
constitute an Event of Default or, if such officer or the Borrower has obtained
such knowledge, disclosing the nature, details, and period of existence of such
event.
Section 6.03. Taxes and Other Liens. Pay and discharge promptly all
taxes, assessments, and governmental charges or levies imposed upon it or upon
any of its income or Property as well as all claims of any kind (including
claims for labor, materials, supplies, and rent) which, if unpaid, might become
a Lien (other than Liens permitted under Section 7.02) upon any or all of its
Property, the failure to pay which might have material adverse effect on the
business, Properties, financial condition or operations of the Borrower and its
Significant Subsidiaries on a consolidated basis; provided, however, that
Borrower shall not be required to pay any such tax, assessment, charge, levy, or
claim if the amount, applicability, or validity thereof shall currently be
contested in good faith by appropriate proceedings diligently conducted and if
Borrower shall establish reserves therefor adequate under GAAP.
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<PAGE> 18
Section 6.04 Maintenance.
(a) Maintain its corporate existence;
(b) Maintain its Property in good and workable condition at
all times and make all repairs, replacements, additions, and
improvements to its Property reasonably necessary and proper to ensure
that the business carried on in connection with its Property may in all
respects material to the business, financial condition or operations of
the Borrower and its Subsidiaries on a consolidated basis, be conducted
properly and efficiently at all times.
Section 6.05. Further Assurances. Promptly cure any defects in the
creation, issuance, and delivery of the Loan Documents. Borrower at its expense
promptly will execute and deliver to Lender upon request all such other and
further documents, agreements, and instruments in compliance with or
accomplishment of the covenants and agreements of Borrower in the Loan
Documents, or to correct any omissions in the Loan Documents, or to state more
fully the Obligations and agreements set out in any of the Loan Documents, or to
file any notices, or to obtain any consents, all as may be reasonably necessary
or appropriate in connection therewith.
Section 6.06. Insurance. Maintain and continue to maintain, with
financially sound and reputable insurors, insurance reasonably satisfactory in
type, coverage and amount to Lender against such liabilities, casualties, risks,
and contingencies and in such types and amounts as is customary in the case of
corporations engaged in the same or similar businesses and similarly situated.
Such insurance presently includes: (i) general liability insurance with a total
limit of $2,000,000 and an each event limit of $1,000,000; (ii) umbrella excess
liability protection total limit coverage of $5,000,000 and an each event limit
of $5,000,00; (iii) property and casualty insurance in amounts of at least
$47,000,000 for its Indiana and Memphis facilities (including earthquake
insurance of $5,000,000 for the Indiana facility and the Memphis facility); (iv)
$15,000,000 excess "difference in conditions" policy including flood and
earthquake for the Memphis facility; and (v) products liability insurance with
coverage of no less than $20,000,000 for U.S./Canada operations, with
deductibles not greater than $75,000 per occurrence and $500,000 in the
aggregate and coverage for non-U.S./Canada operations of 80,000,000 French
Francs with deductibles not greater than 100,000 French Francs per occurrence
and 500,000 French Francs in the aggregate. Upon request of Lender, Borrower
will furnish or cause to be furnished to Lender from time to time a summary of
the insurance coverage of Borrower in form and substance satisfactory to Lender
and at least annually will furnish Lender copies of the applicable policies or
insurance binders evidencing such insurance.
Section 6.07. Right of Inspection. Permit any officer, employee, or
agent of Lender to visit and inspect any of the Property of Borrower, to examine
Borrower's books of record and accounts, to take copies and extracts from such
books of record and accounts, all at such reasonable times and upon reasonable
notice.
Section 6.08. Notice of Certain Events. Promptly notify Lender if
Borrower learns of the occurrence of (i) any event that constitutes an Event of
Default; or (ii) the receipt of any notice from, or the taking of any other
action by, the holder of any promissory note, debenture, or other evidence of
Debt of Borrower or of any security (as defined under the Securities Act of
1933, as amended) of Borrower, representing Debt in excess of $500,000, with
respect to a claimed default, together with a detailed statement by an officer
of Borrower specifying the notice given or other action taken by such holder and
the nature of the claimed default and what action Borrower is taking or proposes
to take with respect thereto; or (iii) any legal, judicial, or regulatory
proceedings affecting Borrower, not covered by insurance (which are included on
Borrower's Financial Statements by its auditors in accordance with GAAP) which,
if adversely determined, would have a material and adverse effect on the
business or the financial condition of Borrower; or (iv) any dispute between
Borrower and any governmental or regulatory
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<PAGE> 19
authority or any other person, entity, or agency which, if adversely determined,
might materially interfere with the normal business operations of Borrower; or
(v) any material adverse changes, either individually or in the aggregate, in
the assets, liabilities, financial condition, business, operations, affairs, or
circumstances of Borrower from those reflected in the Financial Statements or
from the facts warranted or represented in any Loan Document.
Section 6.09. ERISA Information and Compliance. Comply in all respects
in which noncompliance might cause a material adverse effect on the business,
Properties, financial condition or operations of the Borrower and its
Significant Subsidiaries on a consolidated basis, with the Employee Retirement
and Income Security Act ("ERISA") and all other applicable laws governing any
pension or profit sharing plan or arrangement to which Borrower is a party.
Borrower shall provide Lender with notice of any "reportable event" or
"prohibited transaction" or the imposition of a "withdrawal liability" within
the meaning of ERISA.
Section 6.10. Management. Give notice to Lender of any change in the
senior management of Borrower. The term "senior management" shall include only
Borrower's President, Chairman, Chief Financial Officer or Treasurer.
Section 6.11. Acquired Subsidiaries' Guaranties. In the event a
Subsidiary has assets sufficient to be defined as a Significant Subsidiary
subsequent to the date hereof, or in the event of the acquisition of a
Subsidiary by Borrower subsequent to the date hereof which has assets sufficient
to be defined as a Significant Subsidiary, cause each new Significant Subsidiary
to execute a Guaranty (in the form attached as Exhibit B) and deliver to Lender
the related articles of incorporation, bylaws, certificates of good standing,
certificates of incumbency, and all other applicable items described in Article
V related thereto, within 90 days after the occurrence of such event.
ARTICLE VII. Negative Covenants.
Borrower covenants and agrees that, during the term of this Agreement and
any extensions hereof and until the Indebtedness has been paid and satisfied in
full, unless Lender shall otherwise first consent in writing, Borrower will not,
and will not allow or suffer any of its Significant Subsidiaries to,:
Section 7.01. Debts, Guaranties, and Other Obligations. Incur, create,
assume, suffer to exist or in any manner become or be liable with respect to any
Debt; provided that subject to all other provisions of this Article, the
foregoing prohibitions shall not apply to: (a) any Debt (and refinancings
thereof) reflected on Borrower's financial statements for the periods ending
December 31, 1993 and June 30, 1994; (b) indebtedness incurred under this
Agreement or any other loan agreement between Borrower and Lender; (c) trade
indebtedness incurred in the ordinary course of business not to exceed amounts
historically and customarily incurred by Borrower (or its Significant
Subsidiaries, as applicable); (d) any subordinate indebtedness in form, amount
and substance reasonably approved in advance in writing by the Lender (which
approval shall not be unreasonably withheld) and subordinated by subordination
agreements reasonably satisfactory to Lender; (e) Debt of a corporation acquired
by the Borrower or a Significant Subsidiary subsequent to the date of this
Agreement, which Debt was incurred prior to such acquisition and is outstanding
on the date of such acquisition; (f) intercompany Debt arising solely among
Borrower and its Subsidiaries that is not otherwise prohibited under Section
7.09 of this Agreement; and (g) other indebtedness (including final judgments
not covered by insurance and capital expenditures of Borrower and its
Significant Subsidiaries) not to exceed $5,000,000.00 in the aggregate for
Borrower and its Subsidiaries, excepting such other indebtedness approved by
Lender in writing. Lender's response to a request for additional indebtedness
under this Section shall be delivered within fifteen (15) business days after
receipt of Borrower's written request.
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<PAGE> 20
Section 7.02. Liens. Grant any Lien in, or otherwise encumber, any of its
Properties or assets or permit any of the Significant Subsidiaries to grant any
Lien in, or otherwise encumber, any of such Significant Subsidiary's Properties
or assets, except for (i) Liens now existing (including Liens existing on the
date of acquisition of any corporation subsequently acquired by Borrower as a
Significant Subsidiary in accordance with this Agreement); (ii) liens for taxes
not yet due and payable or which are being actively contested in good faith by
appropriate proceedings; (iii) Liens arising in favor of the Lender; (iv) Liens
incurred or pledges and deposits made in connection with worker's compensation,
unemployment insurance, old age pensions, social security and public liability
laws and similar legislation; (v) statutory liens of landlords and other liens
imposed by law, such as carriers', warehousemen's, mechanics', materialmen's and
vendor's liens, incurred in the ordinary course of business; (vi) zoning
restrictions, easements, licenses, reservations, restrictions on the use or
transfer of real property which do not in the aggregate materially detract from
the value of the property or assets of the Borrower and its Significant
Subsidiaries taken as a whole, or materially impair the use of such property or
assets in the operations of the business of the Borrower or any Significant
Subsidiary; (vii) attachment, judgment or similar liens so long as the finality
of any judgments related thereto in excess of $250,000.00 in the aggregate is
being contested in good faith, and for which adequate reserves have been
provided in the financial statements of the Borrower; (viii) liens securing any
property for rent or hire or any deferred purchase price for any property; (ix)
liens arising from set offs; and (x) renewals and extensions of liens described
in subsections (i) through (ix) above.
Section 7.03. Investments. Subject to any limitations otherwise
provided in this Agreement but excepting transactions allowed under Section 7.07
hereof, make investments in any Person, except that, the foregoing restriction
shall not apply to: (a) investments in direct obligations of the United States
of America or any agency thereof; (b) investments in certificates of deposit
having maturities of less than one year, or repurchase agreements issued by
commercial banks in the United States of America having capital and surplus in
excess of $50,000,000, or commercial paper of the highest quality; (c)
investments in money market funds so long as the entire investment therein is
fully insured or so long as the fund is a fund operated by a commercial bank of
the type specified in (b) above; and (d) investments made pursuant to the
Investment Policy of Borrower dated August of 1994 (or amendments or
restatements thereof without material changes in risk) which is attached hereto
as Exhibit F.
Section 7.04. Dividends, Distributions, and Redemptions; Issuance of
Stock. Declare or pay any dividend (other than dividends payable solely in
common stock of Borrower or dividends payable from a Subsidiary to Borrower), or
purchase, redeem, or otherwise retire or acquire for value any of its stock now
or hereafter outstanding, except pursuant to the Share Repurchase Plan, or
return any capital to its stockholders, or make any distribution of its assets
to its stockholders as such, in excess of Fifty percent (50%) of the aggregate
Net Income (as defined in accordance with GAAP) of Borrower and its
Subsidiaries, on a consolidated basis, for such Fiscal Year.
Section 7.05. Nature of Business. Suffer or permit any material
adverse change to be made in the character of its business as carried on at the
Closing Date.
Section 7.06. Mergers, Dispositions, Etc. (a) Sell, assign, lease,
transfer, or otherwise dispose of (whether in one transaction or in a series of
transactions) all or substantially all of its Property, or the Property (whether
now owned or hereafter acquired) of any of its Significant Subsidiaries, to any
Person; or (b) consolidate with or merge into, or permit any Significant
Subsidiary to consolidate with or merge into, any other corporation or entity,
unless the Borrower or a Significant Subsidiary is the surviving entity and has
a Tangible Net Worth equal to or greater than Borrower or Significant Subsidiary
prior to such consolidation or merger; (c) suffer or permit in whole or in part
dissolution or liquidation of Borrower or any Significant Subsidiary (except in
a transaction permitted by
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<PAGE> 21
clause (b) immediately preceding and except, with regard to a Significant
Subsidiary, but not with regard to the Borrower, in a transaction permitted by
clause (a) immediately preceding); or (d) permit a reorganization or sale of
securities that would cause Borrower to no longer maintain control of a
Significant Subsidiary (other than any Significant Subsidiary subject to a
transaction permitted under clauses (a), (b) or (c) immediately preceding).
Section 7.07. Acquisitions. Without the written approval of Lender
(which shall not be unreasonably withheld), acquire the assets of or the shares
of an unrelated entity or form a joint venture (or partnership) with an
unrelated entity, during the term hereof, provided, that the foregoing shall not
apply to acquisitions (or joint ventures) in a business related to Borrower's
current activities with a purchase price (or capital contribution) aggregating
$10,000,000 or less in any twelve-month period. In the event Borrower shall
request Lender to approve an acquisition or joint venture under this Section,
Borrower shall supply to Lender at least fifteen (15) days prior to such
acquisition or capital contribution, historical audited (if prepared) financial
statements of the entity to be acquired (or the entity to be a joint venturer)
for the two prior fiscal years, the most recent unaudited report of the entity
to be acquired (or the entity to be a joint venturer), and revised internal
projections of Borrower (on a consolidated basis) including the entity to be
acquired (or joint venture) such other financial information reasonably
requested by Lender.
Section 7.08. Disposition of Assets. Dispose of any of its assets or
any assets of any of its Significant Subsidiaries, other than as permitted under
Section 7.06, assets which are obsolete, insignificant or depleted, and other
than in the ordinary course of Borrower's (or the respective Significant
Subsidiary's, as applicable) present business upon terms not materially adverse
to Borrower (or the applicable Significant Subsidiary), and in any event only
for full and adequate consideration.
Section 7.09. No Loans. Excepting loans approved by Lender in writing
(Lender's response to a request by Borrower under this Section shall be
delivered within fifteen (15) business days following receipt of Borrower's
written request), make any loans, advances or extensions of credit to any person
or entity, except for such loans, advances or extensions (i) set forth in the
10-K report of the Borrower dated December 31, 1993 and June 30, 1994, filed
with the Securities and Exchange Commission and delivered to the Lender; and
(ii) loans aggregating $1,000,000 or less at any time.
Section 7.10. Prepayments of Other Debts. Without the written consent
of Lender (which consent will not be unreasonably withheld) prepay any Debt
(excluding trade payables) to any Person.
Section 7.11. Sales and Leasebacks. Enter into any arrangement,
directly or indirectly, with any Person by which Borrower shall sell or transfer
any Property (which in the aggregate shall exceed in value $500,000), whether
now owned or hereafter acquired, and by which Borrower shall then or thereafter
rent or lease as lessee such Property or any part thereof or other Property that
Borrower intends to use for substantially the same purpose or purposes as the
Property sold or transferred.
Section 7.12. Financial Covenants. On a consolidated basis for
Borrower and its Subsidiaries:
(a) Maximum Debt to Tangible Net Worth. Permit the ratio of
Debt to Tangible Net Worth to exceed .75 to 1.0 at any time from the
Closing Date through December 31, 1995, and than .65 to 1.0 at any time
after December 31, 1995 until the Maturity Date.
(b) Interest Coverage. Permit the ratio of its Net Income
before interest, taxes, and rent under operating leases (as classified
under current criteria of FASB No. 13) to its interest on all Debt and
rents
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<PAGE> 22
under operating leases to be less than 3.0 to 1.0, based upon a
Trailing Four Quarter Basis (calculated on the last day of each Fiscal
Quarter), from the Closing Date through the Maturity Date.
(c) Tangible Net Worth. Permit, at any time, Tangible Net
Worth to be less than the following amounts for the periods indicated
below:
<TABLE>
<CAPTION>
Time Periods Minimum Tangible Net Worth
------------ --------------------------
<S> <C>
From the Closing Date
through December 30, 1994 $72,000,000
From December 31, 1994
through December 30, 1995 $85,000,000 plus Offering Proceeds received in any equity
offerings, plus 50% of net earnings for the Fiscal Year
ending December 31, 1995, less amounts paid under the Share
Repurchase Plan (1994 Required Net Worth).
From December 31, 1995
through December 30, 1996 1994 Required Net Worth plus Offering Proceeds received in
any equity offerings, plus 50% of net earnings for the Fiscal
Year ending December 31, 1995 (1995 Required Net Worth)
From December 31, 1996
through December 30, 1997 1995 Required Net Worth plus Offering Proceeds received in
any equity offerings, plus 50% of net earnings for the Fiscal
Year ending December 31, 1996 (1996 Required Net Worth)
From December 31, 1997
to Maturity 1996 Required Net Worth plus Offering Proceeds received in
any equity offerings, plus 50% of net earnings for the Fiscal Year
ending December 31, 1997
</TABLE>
(d) Earnings. Fail to have positive earnings (pre-tax),
measured on a Trailing Four Quarter Basis, and calculated on the last
day of each Fiscal Quarter.
Article VIII. Events of Default.
Section 8.01. Events of Default. Any of the following events shall
be considered an Event of Default as those terms are used in this Agreement:
(a) Borrower fails to make payment within ten (10) days of the
due date of any payment of interest, principal or other amount(s) on
the Note or due hereunder or under any of the Loan Documents; or
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<PAGE> 23
(b) Failure by Borrower to pay to Lender within ten (10) days
from the due date thereof any principal, interest or other amount due
on any other indebtedness of Borrower to Lender, now existing or
hereafter owing or arising; or
(c) Should any representation or warranty contained herein or
made by or furnished on behalf of Borrower or any of the Subsidiaries
in connection herewith be false or misleading in any material respect
as of the date made; or
(d) Failure to perform or observe any covenant, or agreement,
duty or obligation (other than those for which an Event of Default is
specifically listed in this Section 8.01, contained in this Agreement
within thirty (30) days after Lender sends written notice to Borrower
specifying such non-performance, however, an Event of Default under
this Subsection (d) caused by force majure shall not constitute an
Event of Default if Borrower is diligently engaged in curing such Event
of Default; or
(e) A Receiver, custodian, liquidator, or trustee of Borrower
or of any Significant Subsidiary, or of any of its respective Property,
is appointed by the order or decree of any court or agency or
supervisory authority having jurisdiction; or Borrower or any
Significant Subsidiary is adjudicated bankrupt or insolvent; or any of
the Property of Borrower or any Significant Subsidiary is sequestered
by court order or a petition is filed against Borrower and/or any
Significant Subsidiary under any state or federal bankruptcy,
reorganization, debt arrangement, insolvency, readjustment of debt,
dissolution, liquidation, or receivership law of any jurisdiction,
whether now or hereafter in effect (and if made involuntarily against
Borrower or such Significant Subsidiary, without the consent or
cooperation of Borrower or any Significant Subsidiary, is not dismissed
within 90 days of the filing thereof) (it being acknowledged and agreed
that no notice requirement on the part of Lender, and no cure period
except for the 90 days in which Borrower or the applicable Significant
Subsidiary may obtain a dismissal of an involuntary bankruptcy
petition, shall apply to this Subsection 8.01(e)); or
(f) Borrower or any Significant Subsidiary files a petition in
voluntary bankruptcy or to seek relief under any provision of any
bankruptcy, reorganization, debt arrangement, insolvency, readjustment
of debt, dissolution, or liquidation law of any jurisdiction, whether
now or hereafter in effect, or consents to the filing of any petition
against it under any such law (it being acknowledged and agreed that no
notice requirement on the part of Lender, and no cure period, shall
apply to this Subsection 8.01(f)); or
(g) Borrower or any Significant Subsidiary makes an assignment
for the benefit of its creditors, or admits in writing its inability to
pay its debts generally as they become due, or consents to the
appointment of a receiver, trustee, or liquidator of Borrower (or any
Significant Subsidiary) or of all or any part of its Properties (it
being acknowledged and agreed that no notice requirement on the part of
Lender, and no cure period, shall apply to this Subsection 8.01 (g));
(h) If final judgment for the payment of money in excess of
$5,000,000 (in any twelve-month period during the term hereof) is
rendered by any court or other governmental authority against Borrower
unless such judgment is covered by insurance in excess of such amount;
or
(i) A default under the Negative Pledge Agreement.
Section 8.02. Remedies. Upon the happening of any Event of Default
set forth above, with the exception of those events set forth in Section
8.01(e) and 8.01(f): (i) Lender may declare the entire principal amount of all
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<PAGE> 24
Indebtedness then outstanding, including interest accrued thereon, to be
immediately due and payable without presentment, demand, protest, notice of
protest, or dishonor or other notice of default of any kind, all of which
Borrower hereby expressly waives, (ii) at Lender's sole discretion and option,
all obligations of Lender under this Agreement shall immediately cease and
terminate unless and until Lender shall reinstate such obligations in writing;
or (iii) Lender may bring an action to protect or enforce its rights under the
Loan Documents or seek to collect the Indebtedness and/or enforce the
Obligations by any lawful means.
Upon the happening of any event specified in Section 8.01(e) and Section
8.01(f): (i) all Indebtedness, including all principal. accrued interest, and
other charges or monies due in connection therewith shall be immediately and
automatically due and payable in full, without presentment, demand, protest, or
dishonor or other notice of any kind, all of which Borrower hereby expressly
waives, (ii) all obligations of Lender under this Agreement shall immediately
cease and terminate unless and until Lender shall reinstate such obligations in
writing; or (iii) Lender may bring an action to protect or enforce its rights
under the Loan Documents or seek to collect the Indebtedness and/or enforce the
Obligations by any lawful means.
Section 8.03. Right of Set-off. Upon the occurrence and during the
continuance of any Event of Default, Lender is authorized, at any time and from
time to time, without notice to Borrower (any such notice being expressly waived
by Borrower), to set-off and apply any and all deposits (general or special,
time or demand, provisional or final) at any time held and other indebtedness at
any time owing by Lender to or for the credit or the account of Borrower against
any and all of the Obligations, irrespective of whether or not Lender shall have
accelerated the Indebtedness or made any demand under this Agreement or the
Notes and although such obligations may be unmatured.
Article IX. General Provisions.
Section 9.01. Notices. All communications under or in connection with
this Agreement or any of the other Loan Documents shall be in writing and shall
be mailed by first class certified mail, postage prepaid, or otherwise sent by
telex, telegram, telecopy, or other similar form of rapid transmission confirmed
by mailing (in the manner stated above) a written confirmation at substantially
the same time as such rapid transmission, or personally delivered to an officer
of the receiving party. All such communications shall be mailed, sent, or
delivered as follows:
(a) if to Borrower, to its address shown below, or to such
other address as Borrower may have furnished to Lender in writing:
Sofamor Danek Group, Inc.
1800 Pyramid Place
Memphis, TN 38132
Attn: Mr. Jack B. Pearson, Jr.
With a copy to Mr. J. Mark Merrill
Mr. Richard E. Duerr, Jr.
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<PAGE> 25
(b) if to Lender, to its address shown below, or to such other
address or to such individual's or department's attention as it may
have furnished Borrower in writing:
with a copy to:
Third National Bank in Nashville Third National Bank in Nashville
6000 Poplar Avenue, Suite 145 201 Fourth Avenue, North
Memphis, Tennessee 38119 Nashville, Tennessee 37219
Attn: Bryan Ford Attn: Mr. J.H. Miles
Department: Regional Department: Regional
Any communication so addressed and mailed by certified mail shall be deemed to
be given three (3) days after such mailing.
Section 9.02. Deviation from Covenants. The procedure to be followed by
Borrower to obtain the consent of Lender to any deviation from the covenants
contained in this Agreement or any other Loan Document shall be as follows:
(a) Borrower shall send a written notice to Lender setting
forth (i) the covenant(s) relevant to the matter, (ii) the requested
deviation from the covenant(s) involved, and (iii) the reason for the
requested deviation from the covenant(s); and
(b) Lender, within a reasonable time, will send a written
notice to Borrower, signed by an authorized officer of Lender,
permitting or refusing the request, but in no event will any deviation
from the covenants of this Agreement or any other Loan Document be
effective without the express prior written consent of Lender. Lender's
failure to provide such written notice shall be deemed a refusal of
such request.
Section 9.03. Invalidity. In the event that any one or more of the
provisions contained in any Loan Document for any reason shall be held invalid,
illegal, or unenforceable in any respect, such invalidity, illegality, or
unenforceability shall not affect any other provision of any Loan Document.
Section 9.04. Survival of Agreements. All representations and
warranties of Borrower in this Agreement and all covenants and agreements in
this Agreement not fully performed before the Closing Date of this Agreement
shall survive the Closing.
Section 9.05. Successors and Assigns. Borrower may not assign its
rights or delegate its duties under this Agreement or any other Loan Document.
All covenants and agreements contained by or on behalf of Borrower in any Loan
Document shall bind the Borrower's successors and assigns and shall inure to the
benefit of Lender and its successors and assigns. In the event that Lender sells
participations in Indebtedness to participating lenders, each of such
participating lenders shall have the rights of set-off against such Indebtedness
and similar rights or Liens to the same extent available to Lender, except as
otherwise provided in this Agreement.
Section 9.06. Renewal, Extension, or Rearrangement. All provisions of
this Agreement relating to Indebtedness shall apply with equal force and effect
to each and all promissory notes executed hereafter which in whole or in part
represent a renewal, extension for any period, increase, or rearrangement of any
part of the Indebtedness originally represented by any part of such other
Indebtedness.
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<PAGE> 26
Section 9.07. Waivers. Pursuant to T.C.A. Section 47-50-112, no action
or course of dealing on the part of Lender, its officers, employees,
consultants, or agents, nor any failure or delay by Lender with respect to
exercising any right, power, or privilege of Lender under the Note, this
Agreement, or any other Loan Document shall operate as a waiver thereof, except
as otherwise provided in this Agreement. Lender may from time to time waive any
requirement hereof, including any of the Conditions Precedent; however no waiver
shall be effective unless in writing and signed by the Lender. The execution by
Lender of any waiver shall not obligate Lender to grant any further, similar, or
other waivers.
Section 9.08. Cumulative Rights. Rights and remedies of Lender under
each Loan Document shall be cumulative, and the exercise or partial exercise of
any such right or remedy shall not preclude the exercise of any other right or
remedy.
Section 9.09. Construction. This Agreement, the Note, and the other
Loan Documents constitute a contract made under and shall be construed in
accordance with and governed by the laws of the State of Tennessee.
Section 9.10. Nature of Commitment. With respect to the Loan and the
Advances, Lender's obligation to make the Loan or any Advances shall be deemed
to be pursuant to a contract to make a loan or to extend debt financing or
financial accommodations to or for the benefit of Borrower within the meaning of
Sections 365(c)(2) and 365(e)(2)(B) of the United States Bankruptcy Code, 11
U.S.C. Section 101 et seq.
Section 9.11. Governance; Exhibits. The terms of this Agreement shall
govern if determined to be in conflict with the terms or provisions in any other
Loan Document. The exhibits attached to this Agreement are incorporated in this
Agreement and shall be considered a part of this Agreement except that in the
event of any conflict between an exhibit and this Agreement or another Loan
Document, the provisions of this Agreement or the Loan Document, as the case may
be, shall prevail over the exhibit.
Section 9.12. Titles of Articles, Sections, and Subsections. All titles
or headings to articles, sections, subsections, or other divisions of this
Agreement or the exhibits to this Agreement are only for the convenience of the
parties and shall not be construed to have any effect or meaning with respect to
the other content of such articles, sections, subsections, or other divisions,
such other content being controlling with respect to the agreement between the
parties.
Section 9.13. Time of Essence. Time is of the essence with regard to
each and every provision of this Agreement.
Section 9.14. Remedies. All remedies for which this Agreement and all
other Loan Documents provide for Lender shall be in addition to all other
remedies available to Lender under the principles of law and equity, and
pursuant to any other body of law, statutory or otherwise.
Section 9.15. Application of Prepayments. Prepayments shall be applied
at Lender's sole discretion (i) first to accrued interest under any of the
Obligations as determined by Lender and (ii) second to reduce principal of any
of the Obligations, all in such manner as determined by Lender.
Section 9.16. Costs, Expenses, and Taxes. Borrower agrees to pay on
demand all out-of-pocket costs and expenses of Lender (including the reasonable
fees and out-of-pocket expenses of counsel for Lender) incurred by
-21-
<PAGE> 27
Lender in connection with the preparation of the Loan Documents or the
enforcement, or protection of Lender's rights under the Loan Documents. In
addition, Borrower agrees to pay, and to hold Lender harmless from all liability
for, any taxes (excluding taxes levied or apportioned upon Lender's income,
revenues, or assets) which may be payable in connection with the execution or
delivery of this Agreement, the Advances, or the issuance of the Note or any
other Loan Documents. Borrower, upon request, promptly will reimburse Lender for
all amounts expended, advanced, or incurred by Lender to satisfy any obligation
of Borrower under this Agreement or any other Loan Documents, or to protect the
Properties or business of Borrower or to collect the obligations, or to enforce
the rights of Lender under this Agreement or any other Loan Document, which
amounts will include all court costs, attorney's fees, fees of auditors and
accountants, and investigation expenses reasonably incurred by Lender in
connection with any such matters, together with interest thereon at the rate
applicable to past due principal and interest as set forth in the Loan Documents
but in no event in excess of the maximum lawful rate of interest permitted by
applicable law on each such amount. All obligations for which this Section
provides shall survive any termination of this Agreement.
Section 9.17. Governing Law; Consent to Forum. This Agreement has been
negotiated, executed and delivered at and shall be deemed to have been made in
Nashville, Tennessee. This Agreement shall be governed by and construed in
accordance with the internal laws of the State of Tennessee. As part of the
consideration for new value received, and regardless of any present or future
domicile or principal place of business of Borrower or Lender, Borrower hereby
consents and agrees that any Tennessee state courts sitting in Davidson County,
Tennessee, or, at Lender's option, the United States District Court for the
Middle District of Tennessee, shall have jurisdiction to hear and determine any
claims or disputes between Borrower and Lender pertaining to this Agreement.
Section 9.18. Counterparts. This Agreement may be executed by
counterpart signature pages, and it shall not be necessary that the signatures
of all parties be contained on any one counterpart; each counterpart shall be
deemed an original, but all of them together shall constitute one and the same
instrument.
Section 9.19. Entire Agreement; No Oral Representations Limiting
Enforcement. This Agreement represents the entire agreement between the parties
hereto except for such other agreements set forth in the Loan Documents, and any
and all oral statements heretofore made regarding the matters set forth herein
are merged herein.
Section 9.20. Amendments. The parties hereto agree that this Agreement
may not be modified or amended except in writing signed by the parties hereto.
-22-
<PAGE> 28
IN WITNESS WHEREOF, the undersigned, by and through their duly
authorized officers execute this Loan Agreement as of the day and date first set
forth above.
BORROWER:
SOFAMOR DANEK GROUP, INC.
By: /s/ James J. Gallogly
-----------------------------------------
Title: President and Chief Operating Officer
---------------------------------------
LENDER:
THIRD NATIONAL BANK IN NASHVILLE
By: /s/ Bryan W. Ford
------------------------------------------
Title: Assistant Vice President
---------------------------------------
-23-
<PAGE> 29
AMENDMENT TO LOAN AGREEMENT
THIS AMENDMENT TO LOAN AGREEMENT (this "Amendment") is entered into by
and between SOFAMOR DANEK GROUP, INC., an Indiana corporation ("Borrower") and
THIRD NATIONAL BANK IN NASHVILLE, a national banking association ("Lender"), to
be effective as of June 30, 1995.
W I T N E S S E T H:
WHEREAS, Borrower and Lender previously entered into that certain loan
agreement dated as of October 14, 1994 (the "Loan Agreement"), in connection
with a certain credit facility from Lender to Borrower in the original principal
amount of up to $40,000,000 as described therein; and
WHEREAS, Borrower has requested that Lender make certain amendments to
the Loan Agreement, as set forth herein; and
WHEREAS, subject to certain terms and conditions, Lender has agreed to
make certain amendments to the Loan Agreement as described herein; and
WHEREAS, the parties desire to amend the Loan Agreement as set forth
herein;
NOW, THEREFORE, in consideration of the premises, and for other good
and valuable consideration, the adequacy and receipt of which are hereby
acknowledged, the parties agree as follows:
1. Subsection 7.12(a) of the Loan Agreement, the "Maximum Debt to
Tangible Net Worth" section, is deleted.
2. Subsection 7.12(b) of the Loan Agreement, the "Interest Coverage"
section, is re-lettered as subsection 7.12(a) and is amended and restated to
read as follows:
(a) EBITDA to Debt Service. Permit its ratio of EBITDA to Debt
Service to be less than 1.0 to 1.0 measured on a Trailing Four-Quarter
Basis (calculated on the last day of each Fiscal Quarter), beginning
with the Fiscal Quarter ending June 30, 1995, through the Maturity
Date.
As used herein, "EBITDA" means Earnings before interest, taxes,
depreciation and amortization, and "Earnings" means net income as such
term is used in accordance with GAAP, less the one-time charge to net
income taken by the Borrower for the Fiscal Quarter ended March 31,
1995 due to Borrower's acquisition and licensing of technology from
Genetics Institute, Inc. ("GI") pursuant to the terms of a certain Deal
Summary dated February of 1995.
<PAGE> 30
Also as used herein, "Debt Service" means all amounts payable
or to be paid during the twelve months following any date of
measurement, in connection with debt and capitalized lease obligations
of the Borrower or its Subsidiaries, including without limitation notes
payable, short-term obligations, current maturities of long-term debt
and capitalized lease obligations, plus interest, fees and expenses on
any of the foregoing, plus all Indebtedness outstanding from time to
time (including without limitation interest, fees and expenses).
3. Subsection 7.12(c) of the Loan Agreement, the "Tangible Net Worth"
section, is re-lettered as subsection 7.12(b) and is amended by changing the
reference therein to the amount "$85,000,000" (appearing in the Minimum Tangible
Net Worth column for the period December 31, 1994 through December 30, 1995) to
read: "$70,000,000". The other provisions in such subsection shall remain
unchanged.
4. Subsection 7.12(d) of the Loan Agreement is re-lettered as
subsection 7.12(c) but is otherwise unchanged.
5. Except as amended herein, all other terms, provisions, agreements,
covenants, representations and warranties in the Loan Agreement shall remain in
full force and effect, and Borrower hereby reaffirms all of its duties,
obligations, covenants, agreements, representations and warranties in the Loan
Agreement and the other documents executed and delivered from time to time in
connection therewith and/or in connection with any indebtedness or obligation of
Borrower to Lender, direct or contingent, in existence from time to time.
6. Borrower represents that its acquisition and licensing of
technology from Genetics Institute, Inc. ("GI") was made in accordance with the
terms of the Deal Summary dated February, 1995 and disclosed to Lender.
7. Borrower represents, warrants and covenants that no Event of Default
has occurred and is continuing under the Loan Agreement and that no event has
occurred and no claim, offset, defense or other condition exists that would
relieve Borrower of any of its obligations to the Lender under the Loan
Agreement, as amended hereby.
8. Borrower reaffirms its representations and represents that all such
representations and warranties set forth in the Loan Agreement are true and
correct as of the date of this Amendment.
9. This Amendment shall be governed by Tennessee law.
10. Borrower represents that the execution and performance of this
Amendment have been duly authorized by all necessary and appropriate corporate
action.
- 2 -
<PAGE> 31
11. This Amendment shall not become effective until the execution
hereof by both parties.
IN WITNESS WHEREOF, the parties have executed this Amendment to be
effective as of the date set forth above.
LENDER: BORROWER:
THIRD NATIONAL BANK IN NASHVILLE SOFAMOR DANEK GROUP, INC.
By: /s/ Bryan W. Ford By: /s/ J. Mark Merrill
------------------------------- -------------------------------
Title: Assistant Vice President Title: Vice President and Treasurer
--------------------------- -----------------------------
- 3 -
<PAGE> 32
SECOND AMENDMENT TO LOAN AGREEMENT
AND FIRST AMENDMENT TO REVOLVING CREDIT AND OPTIONAL TERM NOTE
THIS SECOND AMENDMENT TO LOAN AGREEMENT AND FIRST AMENDMENT TO
REVOLVING CREDIT AND OPTIONAL TERM NOTE (this "Amendment") is entered into this
the 11th day of October, 1995 by and between SOFAMOR DANEK GROUP, INC., an
Indiana corporation ("Borrower") and THIRD NATIONAL BANK IN NASHVILLE, a
national banking association ("Lender").
RECITALS:
A. Borrower and Lender previously entered into that certain loan
agreement dated as of October 14, 1994 (as amended, the "Loan Agreement"), in
connection with a certain credit facility from Lender to Borrower in the
original principal amount of up to $40,000,000, and in connection therewith
Borrower executed that certain Revolving Credit and Optional Term Note (the
"Note") in the principal amount of up to $40,000,000.
B. Borrower and Lender previously executed that certain Amendment to
Loan Agreement (the "First Amendment") effective June 30, 1995.
C. Borrower and Lender have agreed to further amend the Loan Agreement
and to amend the Note as set forth herein in order to extend the maturity
thereof.
NOW, THEREFORE, in consideration of the premises, and for other good
and valuable consideration, the adequacy and receipt of which are hereby
acknowledged, the parties agree as follows:
1. Article I of the Loan Agreement concerning "Definitions" is amended
by the deletion of the reference to "October 15, 1995," under the definition of
"Maturity Date," and "October 15, 1996" is inserted in lieu thereof as the new
Maturity Date.
2. The Note is amended by changing the reference therein to "October
15, 1995" as the Maturity Date to read "October 15, 1996" as the new Maturity
Date.
3. Except as specifically amended herein, all other terms and
provisions in the Loan Agreement and the Note shall remain in full force and
effect.
4. Borrower represents, warrants and covenants that no Event of Default
has occurred and is continuing under the Loan Agreement and that no event has
occurred and no claim, offset, defense or other condition exists that would
relieve Borrower of any of its obligations to the Lender under the Loan
Agreement, as amended hereby.
<PAGE> 33
5. This Amendment shall be governed by Tennessee law.
6. Borrower represents that the execution and performance of this
Amendment have been duly authorized by all necessary and appropriate corporate
action.
7. This Amendment may be executed in multiple counterparts.
IN WITNESS WHEREOF, the parties have executed this Amendment to be
effective as of the date first set forth above.
BORROWER:
--------
SOFAMOR DANEK GROUP, INC.
By: /s/ J. Mark Merrill
---------------------------------------
Title: Vice President and Treasurer
------------------------------------
LENDER:
------
THIRD NATIONAL BANK IN NASHVILLE
By: /s/ Bryan W. Ford
---------------------------------------
Title: Vice President
------------------------------------
- 2 -
<PAGE> 34
THIRD AMENDMENT TO LOAN AGREEMENT
THIS THIRD AMENDMENT TO LOAN AGREEMENT (the "Amendment") is entered
into this the 1st day of August, 1996 by and between SOFAMOR DANEK GROUP, INC.,
an Indiana corporation (the "Borrower") and SUNTRUST BANK, NASHVILLE, N.A.,
formerly Third National Bank in Nashville, a national banking association (the
"Lender").
RECITALS:
A. Borrower and Lender previously entered into that certain loan
agreement dated as of October 14, 1995 (as amended from time to time, the "Loan
Agreement"), in connection with a certain credit facility from Lender to
Borrower in the original principal amount of up to $40,000,000. Borrower and
Lender amended the Loan Agreement pursuant to an Amendment to Loan Agreement
effective June 30, 1995. Borrower and Lender further amended the Loan Agreement
pursuant to a Second Amendment to Loan Agreement and First Amendment to
Revolving Credit Optional Term Note dated October 11, 1995.
B. In connection with the execution of the Loan Agreement, the Borrower
executed that certain Revolving Credit and Optional Term Note (as amended from
time to time, the "Note") in the original principal amount of $40,000,000. The
Note was amended pursuant to the Second Amendment to Loan Agreement and First
Amendment to Revolving Credit and Optional Term Note dated October 11, 1995.
C. Concurrently herewith the Borrower and Lender have amended the Note
pursuant to a Second Amendment to Revolving Credit and Optional Term Note dated
as of the date hereof.
D. Borrower and Lender have agreed to make certain amendments to the
Loan Agreement as set forth herein.
NOW, THEREFORE, in consideration of the premises, and for other good
and valuable consideration, the adequacy and receipt of which are hereby
acknowledged, the parties agree as follows:
1. Section 1 of the Loan Agreement concerning "Definitions," is amended
as follows:
The term "Maturity Date" is deleted and the following is substituted in
lieu thereof to extend the maturity of the Loan:
"Maturity Date" means October 15, 1997 with repect to
the Revolving Credit Loan (unless the Maturity Date is extended
in writing by the Lender) and with respect to a Term Loan, the
1, 2 or 3-year period elected by Borrower in writing pursuant
to the provisions of Section 2.02 herein.
<PAGE> 35
The term "Maximum Amount" is deleted and the following is substituted
in lieu thereof to increase the principal amount available under the
Loan Agreement to $50,000,000:
"Maximum Amount" means the principal amount of
$50,000,000, which is the maximum principal amount that may be
outstanding at any time under the Loan.
The term "Note" is deleted and the following is substituted in lieu
thereof, with the Exhibit A to the Loan Agreement being amended
accordingly to increase the principal amount to $50,000,000:
"Note" means that certain Promissory Note in the form
set forth in Exhibit A hereto in the principal amount of up to
$50,000,000, including all amendments, extensions, increases
and restatements thereto and thereof, and all replacements and
substitute notes therefor.
The term "Significant Subsidiary" is amended by adding the following
entities thereto:
Sofamor Danek Canada, Inc.
Sofamor Danek Nevada, Inc.
Surgical Navigation Technologies, Inc.
Sofamor Danek Benelux S.A.
2. Section 2.01 of the Loan Agreement concerning the "Revolving Credit
Loan," is amended by deleting the reference therein to $40,000,000 and
the term "$50,000,000" is substituted in lieu thereof.
3. Section 7.01(g) of the Loan Agreement concerning "Debts, Guaranties,
and Other Obligations," is amended to delete the reference therein to
$5,000,000, and the term "$15,000,000" is substituted in lieu thereof.
4. Section 7.09 concerning "No Loans," is amended to delete the reference
therein to $1,000,000 and the term "$2,000,000" is substituted in lieu
thereof.
5. Except as amended herein, all other terms, provisions, agreements,
covenants, representations and warranties in the Loan Agreement shall
remain in full force and effect, and Borrower hereby reaffirms all of
its duties, obligations, covenants, agreements, representations and
warranties in the Loan Agreement.
<PAGE> 36
6. Borrower represents, warrants and covenants that no Event of Default
has occurred and is continuing under the Loan Agreement and that no
event has occurred or other condition exists that would relieve
Borrower of any of its obligations to the Lender under the Loan
Agreement, as amended.
7. This Amendment shall be governed by Tennessee law.
8. Borrower represents that the execution and performance of this
Amendment have been duly authorized by all necessary and appropriate
corporate action.
9. This Amendment may be executed in multiple counterparts.
IN WITNESS WHEREOF, the parties have executed this Amendment to be
effective as of the date set forth above.
LENDER: BORROWER:
- ------ --------
SUNTRUST BANK, NASHVILLE, N.A. SOFAMOR DANEK GROUP, INC.
By: /s/ Bryan W. Ford By: /s/ J. Mark Merrill
------------------------- --------------------------------
Title: Vice President Title: Vice President and Treasurer
---------------------- ------------------------------
<PAGE> 37
FOURTH AMENDMENT TO LOAN AGREEMENT
THIS FOURTH AMENDMENT TO LOAN AGREEMENT (the "Amendment") is entered
into this the 31st day of January, 1997 by and between SOFAMOR DANEK GROUP,
INC., an Indiana corporation (the "Borrower") and SUNTRUST BANK, NASHVILLE,
N.A., a national banking association (the "Lender").
RECITALS:
A. Borrower and Lender previously entered into that certain loan
agreement dated as of October 14, 1994 (as amended from time to time, the "Loan
Agreement"), in connection with a certain credit facility from Lender to
Borrower in the original principal amount of up to $40,000,000. Borrower and
Lender amended the Loan Agreement pursuant to an Amendment to Loan Agreement
effective June 30, 1995. Borrower and Lender further amended the Loan Agreement
pursuant to a Second Amendment to Loan Agreement and First Amendment to
Revolving Credit Optional Term Note dated October 11, 1995. Borrower and Lender
further amended the Loan Agreement pursuant to a Third Amendment to Loan
Agreement dated August 1, 1996.
B. In connection with the execution of the Loan Agreement, the Borrower
executed that certain Revolving Credit and Optional Term Note (as amended from
time to time, the "Note") in the original principal amount of $40,000,000. The
Note was amended pursuant to the Second Amendment to Loan Agreement and First
Amendment to Revolving Credit and Optional Term Note dated October 11, 1995, and
further amended pursuant to the Second Amendment to Revolving Credit and
Optional Term Note dated August 1, 1996.
C. Concurrently herewith the Borrower and Lender have amended the Note
pursuant to a Third Amendment to Revolving Credit and Optional Term Note dated
as of the date hereof.
D. Borrower and Lender have agreed to make certain amendments to the
Loan Agreement as set forth herein.
NOW, THEREFORE, in consideration of the premises, and for other good
and valuable consideration, the adequacy and receipt of which are hereby
acknowledged, the parties agree as follows:
1. Section 1 of the Loan Agreement concerning "Definitions," is amended
as follows:
The definition of "EBITDA" is added as follows:
"EBITDA" means Earnings before interest expense,
taxes, depreciation and amortization, all calculated on a
consolidated basis
<PAGE> 38
in accordance with GAAP. The term "Earnings" shall mean net
income on a consolidated basis as such term is determined in
accordance with GAAP, excluding the one-time deduction of a
reserve for litigation expenses in an amount of $50,000,000 in
the Fiscal Quarter ending December 31, 1996.
The term "Funded Debt" is added as follows:
"Funded Debt" means, without duplication, the sum of
(a) all indebtedness of Borrower and its Subsidiaries on a
consolidated basis for borrowed money, (b) all purchase money
indebtedness of Borrower and its Subsidiaries, (c) the
principal portion of all obligations of Borrower and its
Subsidiaries under capital leases, (d) commercial letters of
credit and the maximum amount of all performance and standby
letters of credit issued or bankers's acceptance facilities
created for the account of Borrower or its Subsidiaries,
including, without duplication, all unreimbursed draws
thereunder, (e) all guaranty obligations of Borrower and its
Subsidiaries, (f) all Funded Debt of any partnership, limited
liability company or unincorporated joint venture to the extent
that Borrower or any of its Subsidiaries is legally obligated
with respect thereto, net of any assets of such partnership,
limited liability company or joint venture and (g) liability
under any bond, indenture, note or similar instrument. Funded
Debt shall exclude existing notes payable by Borrower to
Genetics Institute and that certain Non-Negotiable,
Subordinated Convertible Note dated January 11, 1994 executed
by Borrower in favor of Gary K. Michelson.
The term "Maximum Amount" is deleted and the following is substituted
in lieu thereof to increase the principal amount available under the
Loan Agreement to $60,000,000:
"Maximum Amount" means the principal amount of
$60,000,000, which is the maximum principal amount that may be
outstanding at any time under the Loan.
The term "Note" is deleted and the following is substituted in lieu
thereof, with the Exhibit A to the Loan Agreement amended accordingly
to increase the principal amount to $60,000,000:
"Note" means that certain Promissory Note in the form
set forth in Exhibit A hereto in the principal amount of up to
$60,000,000, including all amendments, extensions, increases
and
<PAGE> 39
restatements thereto and thereof, and all replacements and
substitute notes therefor.
2. Section 2.01 of the Loan Agreement concerning the "Revolving Credit
Loan," is amended by deleting the reference therein to $50,000,000 and
the term "$60,000,000" is substituted in lieu thereof.
3. Section 7.12 of the Loan Agreement concerning "Financial Covenants" is
deleted, and the following is substituted in lieu thereof:
Section 7.12 Financial Covenants. On a consolidated
basis for Borrower and its Subsidiaries:
(a) Ratio of Funded Debt to EBITDA. Permit its ratio
of Funded Debt to EBITDA (measured on a Trailing Four-Quarter
Basis) to be more than 1.0 to 1.0, determined on the last day
of each Fiscal Quarter.
(b) Tangible Net Worth. Permit, at any time,
Tangible Net Worth to be less than the following amounts for
the periods indicated below:
<TABLE>
<CAPTION>
Time Periods Minimum Tangible Net Worth
----------------------------------------------------------
<S> <C>
From December 31, 1996
through December 30, 1997 $50,000,000
From December 31, 1997
through December 30, 1998 $50,000,000 plus Offering
Proceeds received in any equity
offerings, plus 50% of net
earnings for the Fiscal Year
ending December 31, 1997 (1997
Required Net Worth).
</TABLE>
<PAGE> 40
<TABLE>
<S> <C>
From December 31, 1998
through December 30, 1999 1997 Required Net Worth plus
Offering Proceeds received in
any equity offerings, plus 50%
of net earnings for the Fiscal
Year ending December 31, 1998
(1998 Required Net Worth)
From December 31, 1999
through December 30, 2000 1998 Required Net Worth plus
Offering Proceeds received in
any equity offerings, plus 50%
of net earnings for the Fiscal
Year ending December 31, 1999
(1999 Required Net Worth)
From December 31, 2000
to Maturity 1999 Required Net Worth
plus Offering Proceeds received
in any equity offerings, plus
50% of net earnings for the
Fiscal Year ending December 31,
2000
</TABLE>
(c) Earnings. Fail to have net income of
$5,000,000 for any Fiscal Quarter, beginning with the Fiscal
Quarter ending March 31, 1997.
4. The amendments set forth in Section 3 of this Amendment shall be
effective as of December 31, 1996. All other amendments set forth
herein shall be effective as of the date of this Amendment.
5. Except as amended herein, all other terms, provisions, agreements,
covenants, representations and warranties in the Loan Agreement shall
remain in full force and effect, and Borrower hereby reaffirms all of
its duties, obligations, covenants, agreements, representations and
warranties in the Loan Agreement.
6. Borrower represents, warrants and covenants that no Event of Default
has occurred and is continuing under the Loan Agreement and that no
event has occurred or other condition exists that would relieve
Borrower of any of its obligations to the Lender under the Loan
Agreement, as amended.
7. This Amendment shall be governed by Tennessee law.
8. Borrower represents that the execution and performance of this
Amendment have been duly authorized by all necessary and appropriate
corporate action.
9. This Amendment may be executed in multiple counterparts.
<PAGE> 41
IN WITNESS WHEREOF, the parties have executed this Amendment as of the
date first set forth above.
LENDER: BORROWER:
- ------ --------
SUNTRUST BANK, NASHVILLE, N.A. SOFAMOR DANEK GROUP, INC.
By: /s/ Bryan W. Ford By: /s/ J. Mark Merrill
------------------------- ---------------------------------
Title: Vice President Title: Vice President and Treasurer
---------------------- -------------------------------
<PAGE> 1
EXHIBIT 10.15
EMPLOYMENT AGREEMENT BETWEEN
PETER J. ELKHUIZEN AND THE COMPANY
DATED OCTOBER 30, 1996
<PAGE> 2
EXHIBIT 10.15
EMPLOYMENT AGREEMENT
The undersigned:
1. SOFAMOR DANEK GROUP, INC., a company with its corporate
headquarters located in Memphis, Tennessee, USA, hereinafter
referred to as the "Company".
and
2. Mr. Peter Elkhuizen, residing at Treekerbergje 2, in (3817KK)
Amersfoort, the Netherlands, hereinafter referred to as
"Employee".
WHEREAS the Company has appointed Mr. P.J. Elkhuizen as President of
the European Division of the Company, which appointment Mr. Elkhuizen has
accepted;
WHEREAS the parties wish to set forth herein the terms and
conditions governing this Employment Agreement.
HEREBY AGREE AS FOLLOWS:
1. Function/Location/Reporting Relation
1.1 No later than November 15, 1996, Employee will enter into the
employment as President of the European Division of the Company.
1.2 Employee's principal location for the performance of his
services hereunder will be Amersfoort, the Netherlands; provided, however, that
Employee will be required to travel four to six times a month to the offices of
Sofamor Danek SNC (the "Subsidiary") in Roissy, France.
1.3 Employee will report to the President and Chief Operating
Officer of the Company.
2. Rights and Obligations
2.1 Employee has the obligation to perform the duties of a Gerant of
the Subsidiary. Employee has as a Gerant the obligations which are imposed on a
Gerant pursuant to applicable French law and the articles of incorporation of
the Subsidiary.
2.2 Employee shall engage himself and exercise his capabilities to
the best of his ability in order to promote the growth of the Company.
<PAGE> 3
3. Duration of the Agreement
3.1 The Employment Agreement shall remain in effect for an
indefinite period of time. However, the Employment Agreement will terminate in
any case, without notice being required, when Employee reaches the age of 65
years.
4. Salary and Benefits
4.1 Employee will receive an annual base salary of DGLD 400,000
gross plus an annual vacation allowance of 8% of base salary. Base salary will
be paid every month in equal installments. After 1997, Employee's salary will be
reviewed annually by the Compensation Committee of the Company's Board of
Directors.
4.2 Employee will participate in a corporate bonus plan consistent
with the overall Company program based upon European economic value added
performance, as determined by the Company from time to time.
4.3 Employer offers Employee the possibility to acquire an option on
a maximum of 200,000 shares of Company common stock. The price for such option
is $2.25 per share and such Option provides Employee with the right to purchase,
at any time on or prior to the first business day following the fifth
anniversary of the date hereof, Company common stock. The price at which such
stock may be purchased (the exercise price) will be equal to the NYSE closing
value of the stock on the date such option is purchased.
5. Expenses and Company Car
5.1 Necessary expenses incurred by Employee in the exercise of his
duties will be refunded by the Company on a monthly basis upon submittance of
supporting vouchers provided that such expenses are reasonable.
5.2 In addition to Article 5.1, the Company shall provide Employee
with a fixed payment of DGLD 480 per month as compensation for general costs,
such as parking and toll fees, tips, and use of personal computer at home for
Company purposes, which costs do not lend themselves to specified accounting.
5.3 The telephone costs incurred at the residence of Employee shall
be paid for by the Company; however, an amount as compensation for personal use
of the telephone will be deducted. Such deduction shall be in accordance with
the fiscal required minimum.
5.4 The Company will make available to Employee an automobile for
his business and personal use, in accordance with the Company car policy.
5.5 The benefits referred to in Articles 5.2 through 5.4 will only
be available if and so long as Employee is actively performing his duties.
Employee will be deemed to actively perform his duties also while taking
holidays and during illness of no longer than two months.
<PAGE> 4
6. Insurance
6.1 Employee is obligated to retain health insurance. The Company
will provide a monthly contribution of DGLD 544 to assist in the payment of the
premium for this insurance.
6.2 The Company shall pay the annual premium of the supplementary
disability insurance.
7. Pension
7.1 The Company will, beginning as of the first day of the
Executive's employment, which shall occur on or before November 15, 1996,
contribute to an annual pension premium for the benefit of a personal pension
plan for Employee. The contribution of the Company shall equal 17.8% of
Employee's annual gross salary. By making such payments, the Company shall have
wholly satisfied all of its pension obligations with respect to Employee.
Employee shall furnish the Company with a copy of employee's personal pension
plan.
8. Vacation
8.1 Employee will, without loss of income, be entitled to 25
vacation days per year. In taking up his vacation, Employee will take into
account the company's interest and obtain prior approval from the President and
Chief Operating Officer of the Company.
9. Disability
9.1 In case of disability of Employee, Employee shall retain his
right to full payment of his salary and benefits for a period of one year.
10. Other Employment
10.1 Employee shall be barred from engaging in any other form of
employment or service, whether or not compensated, to the extent that the
performance of such labor or service results in any disadvantage to the Company
or its subsidiaries whatsoever.
11. Notice and Termination
11.1 Both the Company and Employee shall be required to provide six
months prior written notice of cancellation of this Employment Agreement,
provided that the effective date of termination shall be the last day of the
month.
11.2 In the event that the Company terminates the Employee's
employment following a change in control, Employee shall be entitled to a lump
sum payment of two and one-half times his base salary then in effect (as
provided in Section 4.1).
<PAGE> 5
12. Amendments/Jurisdiction
12.1 This Employment Agreement may only be amended pursuant to a
written document signed by both parties.
12.2 This Employment Agreement shall be governed by the law of the
Netherlands.
IN WITNESS WHEREOF, the parties hereto have executed this agreement
in duplicate on October 30, 1996.
/s/ Peter J. Elkhuizen /s/ James J. Gallogly
- ----------------------------------- ------------------------------
Peter J. Elkhuizen Sofamor Danek Group, Inc.
<PAGE> 1
EXHIBIT 10.28
CASH BONUS PLAN
<PAGE> 2
EXHIBIT 10.28
DESCRIPTION OF SOFAMOR DANEK GROUP, INC.
CASH BONUS PLANS
Sofamor Danek Group, Inc. ("Company") has established Cash Bonus Plans
for its executive officers, non- executive officers and other middle management
level employees. The executive officer Cash Bonus Plan is administered by the
Board of Directors based on recommendations made by the Compensation Committee.
All other Cash Bonus Plans are administered by Company management. The Plans are
performance based on individual goals and objectives and overall Company
operational performance. The Plans are designed so that if individual and
Company performance goals are met, an individual will receive a bonus that is
determined annually based on Plan criteria.
Each employee under the Plan must meet a specified percentage of his or
her individual performance objectives for the period as a prerequisite to
receiving a bonus under the applicable plan. In such event, and provided the
Company's threshold goals are met for the period, the employee will receive a
specified percentage of his or her actual annual earnings. The percentage varies
depending on (i) the level of the Company performance measured in accordance
with the plan formula and (ii) the category in which the employee's position is
included, which categories range from supervisor to mid- and upper-level
management to executive officers. The percentage increases if the operations
performance threshold is exceeded. No bonus is paid if the operational
performance threshold is not met.
All payments under all Cash Bonus Plans are made on or before March 15
of the year following the calendar year period in which the bonus is earned.
<PAGE> 1
EXHIBIT 10.29
EMPLOYEE STOCK PURCHASE PLAN
<PAGE> 2
EXHIBIT 10.29
SOFAMOR DANEK GROUP, INC.
EMPLOYEE STOCK PURCHASE PLAN
1. PURPOSE OF PLAN
The purpose of this Employee Stock Purchase Plan is to provide employees the
opportunity to purchase Shares of Sofamor Danek Group, Inc. (the "Company")
common stock through periodic offerings to be made during the term of the
Plan. Ownership by the employees strengthens the sense of identity between
the Company and its employees and furthers the recognition of the essential
unity of purpose among the Company, its employees, and its Shareholders and
allows it employees to share in the success of the Company. This Employee
Stock Purchase Plan is designed to facilitate the equity ownership by the
employees of the Company and to provide a convenient and economical means
through which such employees of the Company may own Shares of the Company
and a method by which the Company may assist in achieving this objective. An
aggregate of 60,000 of the Company's Shares have been reserved for inclusion
in this Plan.
2. DEFINITIONS
The following definitions apply to this Plan:
a. "Account" shall mean the payroll deduction account for each Plan
Participant, which is maintained as required by this Plan.
b. "Committee" shall mean the Committee appointed by the Board of
Directors of the Company in accordance with Section 4 of this Plan.
c. "Company" shall mean Sofamor Danek Group, Inc. and its Subsidiaries as
of the effective date of the Plan, and any future subsidiaries the
employees of which the Committee approves for participation in the
Plan.
d. "Custodian" shall mean a regulated bank, trust company, or brokerage
firm domiciled in the United States of America as may be designated by
the Company from time to time to receive contributions, purchase
Shares, and maintain Participant Accounts all for the benefit of the
Participants.
e. "Enrollment Dates" shall mean the dates on which any eligible Company
employee can become a Participant in the Plan as set forth in Section
6 hereof.
f. "Effective Date" shall mean November 1, 1991.
g. "Gross Earnings" shall mean the annual basic salary plus any overtime
wages of a Participant before payroll deductions for all usual and
normal employment withholding taxes or other purposes and shall not
include the value of any other direct or indirect benefits or
compensation.
h. "Offering Period" shall mean any three (3) month calendar quarter,
which begins on January 1, April 1, July 1 or October 1, the two month
period beginning November 1, 1991 and ending December 31, 1991, and the
thirty-one day period beginning October 1, 2006 and ending October 31,
2006.
i. "Option Price" shall mean the price paid by a Plan Participant for
each whole Share.
j. "Participant" shall mean an employee who satisfies the eligibility
criteria of this Plan and has elected in writing to participate in the
Plan.
k. "Plan" shall mean this Employee Stock Purchase Plan and all of its
amendments.
<PAGE> 3
l. "Share," "Shares" or "Stock" shall mean the common stock of Sofamor
Danek Group, Inc.
m. "Shareholder Approval" shall have the same meaning as set forth in
Section 423 of the United States Internal Revenue Code.
n. "Subsidiaries" or "Subsidiary" shall mean Sofamor Danek Group, Inc.,
Danek Medical, Inc., Warsaw Orthopedic, Inc. and Sofamor SNC
subsidiaries.
3. TERM OF PLAN
The operations of the Plan shall commence on the first day of November,
1991, and shall continue through October 31, 2006 unless terminated prior to
that date in accordance with Section 22 hereof.
4. ADMINISTRATION OF THE PLAN
The Plan will be administered by a Committee appointed by the Board of
Directors of the Company. At least two (2) members of the Committee shall be
members of the Board of Directors of the Company. Members of the Committee
shall not be eligible to participate in the Plan. The Committee will have
the sole authority to make rules and regulations for the administration of
the Plan, the sole discretion to administer and interpret the Plan, and the
interpretations and decisions of the Committee with regard to the Plan shall
be final and conclusive.
5. ELIGIBILITY TO PARTICIPATE IN THE PLAN
All employees of the Company will be eligible to participate in the Plan,
except for those employees who have been employed less than six months,
those employees whose customary employment is twenty hours or less per week,
and those employees whose customary employment is for not more than five
months in any calendar year.
6. PARTICIPATION IN THE PLAN
Eligible employees may enroll in the Plan within the thirty (30) days after
the Effective Date. Thereafter, eligible employees may enroll in the Plan on
each January 1, April 1, July 1 and October 1 while the Plan is in effect,
except that eligible employees may also enroll at any time within the thirty
(30) days after Shareholder Approval. On or before December 1, March 1, June
1 and September 1 of each year or such other dates as may be prescribed by
the Committee, those employees determined by the Committee to be eligible to
participate in the Plan shall be notified of their right to enroll in the
Plan. Each employee who is eligible to participate in the Plan may elect to
become a Participant by delivering to the Company an Employee Stock Purchase
Plan Enrollment Form ("Enrollment Form") on or before the date prescribed by
the Committee. Upon acceptance by the Company, the employee will become a
Participant as of the next enrollment date. The delivery of a completed
Enrollment Form by the employee to the Company shall constitute:
A. written notice of the employee's election to participate in the Plan;
B. authorization to the Company to make payroll deductions in accordance
with the terms of the Plan and pursuant to the Enrollment Form; and
C. direction to the Custodian to establish and operate an Account under
the terms of the Plan in the name of and for the benefit of the
employee.
The percentage rate of contribution contained in the Enrollment Form elected
by an employee shall remain in effect until changed by the employee pursuant
to Section 8 of this Plan. The Company shall designate a location at the
Company and at each Subsidiary where employees may receive a copy of the
Plan and all applicable forms, and may submit completed forms.
<PAGE> 4
7. PAYROLL DEDUCTIONS
The Company will maintain an Account for each Participant. With respect to
any offering made under this Plan, an employee may authorize a payroll
deduction in terms of whole number percentages up to a maximum of 5% (or
such other maximum percentage amount as determined by the Committee) of the
Gross Earnings an employee receives during an Offering Period or during such
portion of an Offering Period during which an employee participates in the
Plan. Payroll deductions will begin as soon as practical, but not later than
the first payroll period commencing after receipt and acceptance of a
Participant's enrollment form.
8. CONTRIBUTIONS AND PURCHASE OF SHARES
Each Participant, in any offering under this Plan, will be granted an
option, on the effective date of such offering, for as many whole number
Shares of Company stock as may be purchased on the Purchase Date, as
hereinafter defined, with the following amounts:
A. one percent (1%), two percent (2%), three percent (3%), four percent
(4%), or five percent (5%) of Gross Earnings received during the
Offering Period or that portion of the Offering Period during which an
employee participates in the Plan, which purchase will be paid by
payroll deductions during such Offering Period; and
B. the balance (if any) carried forward from the Participant's Account
for the preceding Offering Period pursuant to the third to the last
paragraph of this Section 8.
No employee may be granted an option to purchase Shares under this Plan, if
(a) the grant of that option permits an employee to purchase Shares under
this Plan and any other stock purchase plan of the Company to exceed
Twenty-Five Thousand ($25,000.00) of the fair market value of such Stock
during any calendar year, or (b) an employee owns five percent (5%) or more
of the Stock of the Company immediately after the option is granted. For
purposes of subpart (b) in the immediately preceding sentence of this
Section 8, the rules of Section 424(d) of the United States Internal Revenue
Code shall apply to determine the stock ownership of an individual and stock
which the employee may purchase under any option granted pursuant to this
Plan shall be treated as stock owned by that employee.
The Option Price, paid from each Participant's Account for each Share
purchased under this Plan, shall not be less that eighty-five percent (85%)
of the fair market value of the Stock as of the last business day of an
Offering Period (the "Purchase Date"), the actual percentage to be
determined by the Committee. As of the Purchase Date, the Account of each
Participant shall be totaled. If such Participant Account contains
sufficient funds to purchase one or more full Shares as of that date then
the Participant shall be deemed to have purchased such full Share or Shares
at the Option Price based on the funds in the Participant's Account. The
Participant's Account shall be charged for the amount of the Option Price,
the Shares so purchased shall be promptly distributed to the Account of such
Participant, and the ownership of such Share or Shares by such Participant,
shall be appropriately evidenced on the books of the Company. Subsequent
Shares will be purchased in the same manner as of the last day of an
Offering Period whenever sufficient funds have again accrued in the
Participant's Account. Until Shareholder Approval for this Plan is obtained,
any purchase of Shares made pursuant to this Plan shall be deemed a
conditional purchase of those Shares. No Participant shall have any rights
in any Shares until Shares are purchased on behalf of a Participant.
A Participant may change his or her percentage rate of payroll deduction
contributions in the Plan subject to the percentage rates permitted herein
by filing an amended Enrollment Form with the Company, which amendment will
become effective as soon as practical but not later than 45 days after the
date such amended Enrollment Form is received by the Company. The amount of
the payroll deduction may changed only once during any Offering Period.
<PAGE> 5
Any balance remaining in Participant's Account at the end of any Offering
Period will be carried forward into the Participant's Account for the
following Offering Period. In no event will the balance carried forward be
equal to or greater than the Option Price of one Share on the last day of
any Offering Period. All options for Shares which have not been exercised at
the end of an Offering Period shall terminate on the last day of the
Offering Period. If, with respect to an offering of Shares, there is an
insufficient number of Shares available to satisfy all outstanding options,
then the available Shares shall be allocated to each Participant in the
proportion that the funds credited to the Account of each Participant bears
to the aggregate funds available in the accounts of all Participants.
For the purposes of this Section 8 the phrase "Fair Market Value" shall mean
the fair market value of Shares as determined by the Committee consistent
with those rules and regulations of the United States Internal Revenue Code
used to determine fair market value.
No option granted hereunder may be exercised after the expiration of five
(5) years from the date such option is granted.
9. VOTING AND DIVIDENDS
Each Participant shall have the right to vote or to direct the voting of any
Shares and to receive any dividends paid by the Company in connection with
any Shares purchased by the Custodian for his or her Account.
10. SHARE CERTIFICATES
Within sixty (60) days after the end of each December 31, within sixty (60)
days after the termination of this Plan, or sooner if requested in writing
by a Participant, the Custodian shall cause to be delivered to each
Participant at the address indicated on the Participant's Enrollment Form, a
Share certificate representing the whole Share or Shares purchased by the
Custodian for such Participant during the immediately preceding Offering
Period. No Share certificate shall be delivered until Shareholder Approval
is obtained.
11. INTEREST
No interest shall be credited to each Participant's Account unless
authorized by the Committee.
12. TRANSACTION COSTS OF SHARE PURCHASES
The Custodian shall be reimbursed by the Company in respect of any brokerage
costs it incurs in order to purchase Shares on behalf of Participants, and
no such costs shall be charged to the Account of any Participant.
13. TERMINATION OF PARTICIPATION
Participants may terminate their participation in the Plan at any time by
giving written notice to the Company on a form prescribed by the Company. A
Participant's participation and the Company's obligations hereunder shall
terminate immediately upon the Company's receipt of that form. The assets
held in the Participant's Account by the Custodian pursuant to this Plan
shall be distributed to the Participant promptly upon such termination, and
the Participant's Account with the Custodian shall be closed. Any funds
remaining in the Participant's Account shall be distributed to the
Participant. A Participant who has terminated his or her participation in
the Plan but otherwise remains eligible to participate in accordance with
Section 5 of this Plan, may re-enroll in the Plan in accordance with Section
6.
14. TERMINATION OF EMPLOYMENT, RETIREMENT, OR DEATH
When a Participant ceases to be an employee of the Company for any reason
other than death or legal incapacity, the Custodian shall distribute the
assets of the Participant's Account in accordance with Section 13 of this
Plan. Upon the death or legal incapacity of a Participant, no further Shares
shall be purchased for that
<PAGE> 6
Participant, and all assets held in that Participant's Account shall be
disbursed to the beneficiaries as directed by the Participant on his or her
Enrollment Form in accordance with Section 13 of this Plan.
15. FEES AND EXPENSES
All fees and expenses related to the administration of the Plan shall be the
responsibility of and paid solely by the Company.
16. PARTICIPANT'S STATEMENT OF ACCOUNT
Promptly following the end of each calendar quarter, the Custodian shall
forward a statement to each Participant setting out the activity of his or
her Account for such calendar quarter and the net asset position as of the
end of the preceding calendar quarter including the adjusted cost basis of
all Shares then held, the market value of the Shares then held, and any cash
balances.
17. PARTICIPANTS' INCOME TAX REPORTING REQUIREMENTS
Within thirty-one (31) days following the end of each calendar year, the
Custodian shall provide to each Participant the necessary reporting
statements as required by law with respect to interest (if any), dividends
(if any), and other investment income (if any) earned for the year in each
Participant's Account under this Plan. In the event of a disqualifying
disposition of Shares by a Participant, funds may be required to be withheld
in an amount sufficient to satisfy the rules and regulation of the United
States Internal Revenue Code.
18. SHAREHOLDER INFORMATION
The Company shall provide to the Custodian sufficient copies of all
information normally sent to Shareholders for distribution to each
Participant. The Custodian shall promptly distribute such information to
each Participant.
19. ADJUSTMENT IN CASE OF CHANGES AFFECTING SHARES
In the event of a subdivision of Shares, or the payment of a stock dividend,
the number of Shares approved for this Plan, and the Share limitation set
forth in Section 8, shall be increased proportionately, and such other
adjustment shall be made as may be deemed equitable by the Board of
Directors. In the event of any other change affecting the Shares, such
adjustment shall be made as may be deemed equitable by the Board of
Directors to give proper effect to such events.
20. AMENDMENT OF THE PLAN
The Board of Directors may at any time, or from time to time, amend this
Plan in any respect, except that, without the approval of the Shareholders
of the Company, no amendment shall be made (i) to increase or decrease the
number of Shares approved for this Plan (other than as provided in Section
19), (ii) to decrease the Option Price of each Share, (iii) to change the
class of employees eligible to participate in this Plan, or (iv) to
materially increase the benefits accruing to Participants under the Plan.
21. PLAN SHARE PURCHASES AND COMPANY FUNDING
Purchases of Shares may be made pursuant to and on behalf of this Plan, upon
such terms as the Company may approve, for delivery under this Plan. The
Company shall provide to the Custodian such funds as are necessary to
fulfill its obligations under Section 8 and Section 15.
<PAGE> 7
22. TERMINATION OF THE PLAN
This Plan and all rights of Participants under any offering hereunder shall
terminate:
A. on the day that Participants become entitled to purchase a number of
Shares equal to or greater than the number of Shares remaining
available for purchase. If the number of Shares to be purchased is
greater than the Shares remaining available, the available Shares shall
be allocated by the Committee among such Participants in such manner as
it deems appropriate; or
B. at any time, at the discretion of the Board of Directors of the
Company. No offering hereunder shall be made which shall be extended
beyond October 31, 2006. Upon the termination of this Plan, all amounts
in the Account of each Participant shall be carried forward into each
Participant's Account for disposition as determined by the Committee or
the Board of Directors of the Company.
C. This Plan initially received Shareholder Approval on April 29, 1992,
and received Shareholder Approval on May 9, 1996 to extend the term of
this Plan to October 31, 2006.
23. HEADINGS
Titles of Sections, headings and subheadings in this Plan are solely for
convenience and ease of reference and are not deemed to be or form a
substantive part or in any way modify or define the text or the meaning of
any provision of this Plan.
24. EMPLOYMENT
The Plan shall not be deemed to constitute a contract of employment or
inducement for employment between the Company or any Subsidiary and any
employee, and nothing contained in this Plan shall be deemed to give any
employee the right to be retained in the employ of the Company or any
Subsidiary or to interfere with the right of the Company or any Subsidiary
to reassign, discipline, demote or discharge any employee at any time,
regardless of the effect of such reassignment, discipline, demotion or
discharge on such employee as a Participant in the Plan.
25. RIGHTS NOT TRANSFERABLE
Rights under this Plan and the options granted under this Plan are not
transferable by a Participant other than by will or the laws of descent and
distribution, and are exerciseable during the employee's lifetime only by
the employee.
26. CHOICE OF LAW
This Plan and the rights and obligations contained herein shall be
interpreted and construed for all purposes solely in accordance with the
laws of the State of Tennessee, without regard to the laws of any other
state or jurisdiction.
<PAGE> 1
EXHIBIT 10.30
AMENDED AND RESTATED
LOAN FORGIVENESS AGREEMENT
DATED OCTOBER 11, 1996 BETWEEN
THE COMPANY AND E. R. PICKARD
<PAGE> 2
EXHIBIT 10.30
AMENDED AND RESTATED LOAN FORGIVENESS AGREEMENT
This Agreement, which is effective this 11TH day of October, 1996, is
by and between Sofamor Danek Group, Inc., an Indiana corporation with principal
offices at 1800 Pyramid Place, Memphis, Tennessee 38132 (the "Company") and E.
R. Pickard ("Pickard"),
WHEREAS, Pickard is the Chairman and Chief Executive
Officer of the Company; and
WHEREAS, the Company loaned Pickard $1,740,000 pursuant
to a Promissory Note dated November 30, 1990, as amended, related to
the exercise of certain stock options, and $2,424,997 pursuant to
various Promissory Notes, as amended, for taxes related to the
exercise of those stock options (collectively, the "Loans"), which
Loans have a maturity date of March 31, 2006;
WHEREAS, the Loans are secured by shares of the
Company's common stock that are owned by Pickard;
WHEREAS, the Company and Pickard entered into a loan
forgiveness agreement on August 26, 1991 (the "Original Agreement"),
which has been, pursuant to the action of the Company's Board of
Directors, amended on February 16, 1995, December 15, 1995 and
October 13, 1996; and
WHEREAS, the Company and Pickard desire to amend the
Original Agreement and all amendments thereto and restate them in
one document.
<PAGE> 3
NOW, THEREFORE, in consideration of the mutual promises and
obligations contained herein, and each act done in furtherance thereof,
the Company and Pickard agree as follows:
1. TERM. This Agreement shall commence as of October 11, 1996
and shall terminate on March 31, 2006.
2. LOAN FORGIVENESS CREDIT. As used in this Agreement, "Loan
Forgiveness Credit" means a reduction in the principal balance
of the Loans between the Company and Pickard. During the term
of this Agreement there shall accrue to Pickard, subject to the
terms and conditions of this Agreement, Loan Forgiveness
Credits in the amounts and on the dates set forth below:
<TABLE>
<CAPTION>
DATE AMOUNT
---- ------
<S> <C>
December 31, 1996 $ 450,000
December 31, 1997 $ 450,000
December 31, 1998 $ 450,000
December 31, 1999 $ 450,000
December 31, 2000 $ 450,000
December 31, 2001 $ 450,000
December 31, 2002 $ 450,000
December 31, 2003 $ 450,000
December 31, 2004 $ 450,000
March 31, 2005 $ 114,997
</TABLE>
3. VESTING OF LOAN FORGIVENESS CREDIT. Each Loan Forgiveness
Credit shall vest in favor of Pickard and shall become
effective if, but only if, on the date that a Loan Forgiveness
Credit is accrued pursuant to the schedule set forth above in
Section 2 of
<PAGE> 4
this Agreement, the following conditions have been fully
satisfied: (a) Pickard shall have remained, at his sole
discretion, employed by the Company, and (b) that the Company
shall have met or exceeded operational performance thresholds
as determined by the Company Board of Directors on an annual
basis.
4. CHANGE OF CONTROL. In the event of a change of control or a
threatened change of control in the Company, any Loan
Forgiveness Credit which has not accrued to and vested in
Pickard shall immediately vest upon the Change of Control and
the Company shall further pay to Pickard an amount equal to
cover any applicable taxes, interest, penalties and charges,
including without limitation, any interest and penalties
related in any way to the vesting of the Loan Forgiveness
Credits, together with any payments to Pickard necessary to
make the Loan Forgiveness tax neutral to Pickard.
For purposes of this Section 4 the terms "Change of
Control" and "Threatened Change of Control" shall have the
same definitions as those terms have and are used in Section
10 of the Company's Long Term Incentive Plan as of the
effective date of this Agreement.
5. ADDITIONAL COMPENSATION TO PICKARD. In connection with this
agreement the Company shall also continue to pay to
Pickard, as further compensation, a full tax gross up equal
to Pickard's personal tax liabilities resulting from (1) any
and all Loan Forgiveness Credits, and (2) the tax gross up
payments
<PAGE> 5
resulting therefrom. The Company shall also continue
to pay to Pickard, as additional compensation, an
amount equal to the amount of interest due on the
loans, plus a full tax gross up equal to Pickard's
personal tax liabilities resulting from (1) such
additional compensation, and (2) the tax gross up
payments resulting therefrom. The purpose of this
Section 5 is that all payments made by the Company to
Pickard and any and all Loan Forgiveness Credits
vested in Pickard shall be tax neutral for Pickard.
6. EXTENSION OF OPTION LOAN TERM. All appropriate
action necessary shall be taken to cause the term of
the Loans to be extended and make terminus with the
term of this Agreement.
7. ENTIRE AGREEMENT; AMENDMENT AND MODIFICATIONS. This
Agreement contains the entire agreement of the Parties
and supersedes any prior understandings and agreements
between the Company and Pickard with respect to the
subject matter of this Agreement. It may not be
changed orally, but only by agreement in writing,
signed by both the Company and Pickard.
8. RIGHT TO TERMINATE EMPLOYMENT. Nothing contained in
this Agreement shall restrict the right of the
Company to terminate the employment of Pickard at any
time.
9. BINDING EFFECT. This Agreement shall adhere to the
benefit of and be binding upon the parties hereto and
the respective heirs, executors, administrators,
successors and assigns.
<PAGE> 6
10. ENTIRE AGREEMENT. This Agreement supersedes and replaces the
Original Agreement and all amendments thereto.
11. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of
Tennessee.
IN WITNESS WHEREOF, the Company and Pickard have executed this Amended
and Restated Loan Forgiveness Agreement as of October 11, 1996.
E. R. Pickard Sofamor Danek Group, Inc.
/s/ E. R. Pickard By: /s/ James J. Gallogly
- ---------------------------------- ---------------------------------
James J. Gallogly
President & Chief Operating Officer
<PAGE> 1
EXHIBIT 10.31
1993 LONG-TERM INCENTIVE PLAN,
AS AMENDED
1
<PAGE> 2
EXHBIT 10.31
SOFAMOR DANEK GROUP, INC.
1993 LONG-TERM INCENTIVE PLAN, AS AMENDED
1. PURPOSE.
The purpose of the SOFAMOR DANEK GROUP, INC. 1993 LONG-TERM INCENTIVE PLAN, AS
AMENDED (the "Plan") is to further the earnings of SOFAMOR DANEK GROUP, INC., an
Indiana corporation, and its subsidiaries (collectively, the "Company") by
assisting the Company in attracting, retaining and motivating management
employees and directors of high caliber and potential. The Plan provides for the
award of long-term incentives to those officers, other key executives and
directors who make substantial contributions to the Company by their loyalty,
industry and invention. In addition, the Plan contains a program (the "Director
Program") which provides for the non-discretionary periodic grant of Non-
qualified Stock Options (as hereinafter defined) to non-employee directors of
the Company (the "Director Options").
2. ADMINISTRATION.
The Plan (other than the Director Program) shall be administered by a committee
(the "Committee"). The Board of Directors of the Company (the "Board of
Directors") may act as the Committee, or it may delegate such responsibility to
one or more of its members. The Committee shall have full and final authority in
its discretion to interpret the provisions of the Plan (other than the Director
Program) and to decide all questions of fact arising in its application. Subject
to the provisions hereof, the Committee shall have full and final authority in
its discretion to determine the employees and directors to whom awards shall be
made under the Plan (other than the Director Program); to determine the type of
awards to be made under the Plan (other than the Director Program) and the
amount, size and terms and conditions of each such award under the Plan (other
than the Director Program); to determine the time when awards shall be granted;
to determine the provisions of each agreement evidencing an award; and to make
all other determinations necessary or advisable for the administration of the
Plan (other than the Director Program).
3. STOCK SUBJECT TO THE PLAN.
The Company may grant awards under the Plan with respect to not more than a
total of 6,000,000 shares of no par value common stock of the Company (the
"Shares") (subject, however, to adjustment as provided in paragraph 21, below).
Such Shares may be authorized and un-issued Shares or treasury Shares. In any
calendar year, no participant may be granted awards relating to more than
500,000 shares. Except as otherwise provided herein, any Shares subject to an
option or right which for any reason is surrendered before exercise or expires
or is terminated unexercised as to such Shares shall again be available for the
granting of awards under the Plan. Similarly, if any Shares granted pursuant to
restricted stock awards are forfeited, such forfeited
2
<PAGE> 3
Shares shall again be available for the granting of awards under the Plan,
unless the dividends were paid to the holders of such Shares.
4. ELIGIBILITY TO RECEIVE AWARDS.
Persons eligible to receive awards under the Plan (other than the Director
Program) shall be limited to those officers, other key executive employees and
directors of the Company who are in positions in which their decisions, actions
and counsel have a significant impact upon the profitability and success of the
Company.
5. FORM OF AWARDS.
Awards may be made from time to time by the Committee (other than the Director
Program) in the form of stock options to purchase Shares, stock appreciation
rights, performance units, restricted stock, or any combination of the above.
Stock options may be options which are intended to qualify as incentive stock
options ("Incentive Stock Options") within the meaning of Section 422(b) of the
Internal Revenue Code of 1986, as amended (the "Code"), or options which are not
intended to so qualify ("Non-Qualified Stock Options").
6. EMPLOYEE STOCK OPTIONS.
Stock options for the purchase of Shares granted other than under the Director
Program shall be evidenced by written agreements in such form not inconsistent
with the Plan as the Committee shall approve from time to time. Such agreement
shall contain the terms and conditions applicable to the options, including in
substance the following terms and conditions:
(a) Type of Option. Each option agreement shall identify the
options represented thereby as Incentive Stock Options or
Non-Qualified Stock Options, as the case may be, and shall set
forth the number of Shares subject to the options.
(b) Option Price. The option exercise price to be paid by the
optionee to the Company for each Share purchased upon the
exercise of an option shall be determined by the Committee, but
shall in no event be less than the par value of a Share.
(c) Exercise Term. Each option agreement shall state the period
or periods of time within which the option may be exercised,
in whole or in part, as determined by the Committee and
subject to such terms and conditions as are prescribed for
such purpose by the Committee, provided that no Incentive
Stock Option shall be exercisable after ten years, and no
Non-Qualified Stock Option shall be exercisable after ten
years and one day, from the date of grant thereof. The
Committee, in its discretion, may provide in the option
agreement circumstances under which the option
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<PAGE> 4
shall become immediately exercisable, in whole or in part, and,
notwithstanding, the foregoing may accelerate the
exercisability of any option, in whole or in part, at any time.
(d) Payment for Shares. The purchase price of the Shares with
respect to which an option is exercised shall be payable in
full at the time of exercise in cash, Shares at fair market
value, or a combination thereof, as the Committee may
determine and subject to such terms and conditions as may be
prescribed by the Committee for such purpose. If the purchase
price is paid by tendering Shares, the Committee in its
discretion, may grant the optionee a new stock option for the
number of Shares used to pay the purchase price.
(e) Rights Upon Termination of Employment. In the event that an
optionee ceases to be an employee or director of the Company
for any cause other than Retirement (as defined below), death
or Disability (as defined below), the optionee shall have the
right to exercise the option during its term within a period
of three months after such termination to the extent that the
option was exercisable at the time of termination, or within
such other period, and subject to such terms and conditions,
as may be specified by the Committee. (As used herein, the
term "Retirement" means retirement from active employment with
the Company on or after age 65, or such earlier age with the
express written consent for purposes of the Plan of the
Company at or before the time of such retirement, and the term
"Retires" has the corresponding meaning. As used herein, the
term "Disability" means a condition that, in the judgment of
the Committee, has rendered a grantee completely and
presumably permanently unable to perform any and every duty of
his regular occupation, and the term "Disabled" has the
corresponding meaning). In the event that an optionee
Retires, dies or becomes Disabled prior to the expiration of
his option and without having fully exercised his option, the
optionee or his Beneficiary (as defined below) shall have the
right to exercise the option during its term within a period
of (i) one year after termination of employment due to
Retirement, death or Disability, or (ii) one year after death
if death occurs either within one year after termination of
employment due to Retirement or Disability or within three
months after termination of employment for other reasons, to
the extent that the option was exercisable at the time of
death or termination, or within such other period, and subject
to such terms and conditions, as may be specified by the
Committee. (As used herein, the term "Beneficiary" means the
person or persons designated in writing by the grantee as his
Beneficiary with respect to an award under the Plan; or, in
the absence of an effective designation or if the designated
person or persons predecease the grantee, the grantee's
Beneficiary shall be the
4
<PAGE> 5
person or persons who acquire by bequest or inheritance the
grantee's rights in respect of an award). In order to be
effective, a grantee's designation of a Beneficiary must be on
file with the Committee before the grantee's death, but any
such designation may be revoked and a new designation
substituted therefor at any time before the grantee's death.
(f) Non-Transferability. Options granted under the Plan shall not
be sold, assigned, transferred, exchanged, pledged,
hypothecated, or otherwise encumbered, other than by will, by
the laws of descent and distribution or pursuant to a qualified
domestic relations order. During the lifetime of the optionee
the option is exercisable only by the optionee.
(g) Incentive Stock Options. In the case of an Incentive Stock
Option, each option shall be subject to such other terms
conditions and provisions as the Committee determines
necessary or desirable in order to qualify such option as an
incentive stock option within the meaning of Section 422(b) of
the Code (or any amendment or substitute or successor thereto
or regulation thereunder), including in substance, without
limitation, the following:
(i) The purchase price of stock subject to an Incentive
Stock Option shall not be less than 100 percent of the
fair market value of such stock on the date the option
is granted, as determined by the Committee.
(ii) The aggregate fair market value (determined as of the
time the option is granted) of the stock with respect
to which incentive stock options are exercisable for
the first time by an optionee in any calendar year
(under all plans of the Company and its subsidiary
corporations (which term, as used hereinafter, shall
have the meaning ascribed thereto in Section 425(f)
of the Code (or successor provision of similar
import))) shall not exceed $100,000.
(iii) No Incentive Stock Option shall be granted to any
employee if at the time the option is granted the
individual owns stock possessing more than 10 percent
of the total combined voting power of all classes of
stock of the Company or of a subsidiary corporation
of the Company, unless at the time such option is
granted the option price is at least 110 percent of
the fair market value (as determined by the
Committee) of the stock subject to the option and
such option by its terms is not exercisable after the
expiration of five years from the date of grant.
(iv) Directors who are not employees of the Company shall
not be eligible to receive Incentive Stock Options.
5
<PAGE> 6
(v) In the event of termination of employment by reason of
Retirement, if an Incentive Stock Option is exercised
after the expiration of the exercise periods that
apply for purposes of Section 422 of the Code, the
option will thereafter be treated as a Non-Qualified
Stock Option.
7. STOCK APPRECIATION RIGHTS.
Stock appreciation rights (SARs) shall be evidenced by written SAR agreements in
such form not inconsistent with the Plan as the Committee shall approve from
time to time. Such SAR agreements shall contain the terms and conditions
applicable to the SARs, including in substance the following terms and
conditions:
(a) Award. SARs may be granted in connection with a previously or
contemporaneously granted stock option (other than an option
granted pursuant to the Director Program), or independently of
a stock option. SARs shall entitle the grantee, subject to
such terms and conditions as may be determined by the
Committee, to receive upon exercise thereof all or a portion
of the excess of (i) the fair market value at the time of
exercise, as determined by the Committee, of a specified
number of Shares with respect to which the SAR is exercised,
over (ii) a specified price which shall not be less than 100
percent of the fair market value of the Shares at the time the
SAR is granted, or, if the SAR is granted in connection with a
previously issued stock option, not less than 100 percent of
the fair market value of the Shares at the time such option
was granted. Upon exercise of an SAR, the number of Shares
reserved for issuance hereunder shall be reduced by the number
of Shares covered by the SAR. Shares covered by an SAR shall
not be used more than once to calculate the amount to be
received pursuant to the exercise of the SAR.
(b) SARs Related to Stock Options. If an SAR is granted in
relation to a stock option, (i) the SAR shall be exercisable
only at such times, and by such persons, as the related option
is exercisable; (ii) the grantee's right to exercise the
related option shall be canceled if and to the extent that the
Shares subject to the option are used to calculate the amount
to be received upon the exercise of the related SAR; (iii) the
grantee's right to exercise the related SAR shall be canceled
if and to the extent that the Shares subject to the SAR are
purchased upon the exercise of the related option; and (iv)
the SAR shall not be transferable other than by will or by the
laws of descent and distribution, and shall be exercisable
during the lifetime of the grantee only by him.
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<PAGE> 7
(c) Term. Each SAR agreement shall state the period or periods of
time within which the SAR may be exercised, in whole or in
part, as determined by the Committee and subject to such terms
and conditions as are prescribed for such purpose by the
Committee, provided that no SAR shall be exercisable later
than ten years after the date of grant. The Committee may, in
its discretion, provide in the SAR agreement circumstances
under which the SARs shall become immediately exercisable, in
whole or in part, and may, notwithstanding the foregoing,
accelerate the exercisability of any SAR, in whole or in part,
at any time.
(d) Termination of Employment. SARs shall be exercisable only
during the grantee's employment by the Company (or, in the
case of a grantee who is a non-employee director, only during
his service as a director of the Company), except that, in the
discretion of the Committee, an SAR may be made exercisable
for up to three months after the grantee's employment (or
tenure as a director) is terminated for any reason other than
Retirement, death or Disability, and for up to one year after
the grantee's employment (or tenure as a director) is
terminated because of Retirement, death or Disability.
(e) Payment. Upon exercise of an SAR, payment shall be made in
cash, in Shares at fair market value on the date of exercise,
or in a combination thereof, as the Committee may determine at
the time of exercise.
(f) Other Terms. SARs shall be granted in such manner and such
form, and subject to such additional terms and conditions, as
the Committee in its sole discretion deems necessary or
desirable, including without limitation: (i) if granted in
connection with an Incentive Stock Option, in order to satisfy
any requirements set forth under Section 422 of the Code; or,
(ii) in order to avoid any liability in connection with an SAR
under Section 16(b) of the Securities Exchange Act of 1934, as
amended (the "1934 Act").
8. RESTRICTED STOCK AWARDS.
Restricted stock awards under the Plan shall consist of Shares free of any
purchase price or for such purchase price as may be established by the Committee
restricted against transfer, subject to forfeiture, and subject to such other
terms and conditions (including attainment of performance objectives) as may be
determined by the Committee. Restricted stock shall be evidenced by written
restricted stock agreements in such form not inconsistent with the Plan as the
Committee shall approve from time to time, which agreement shall contain the
terms and conditions applicable to such awards, including in substance the
following terms and conditions:
(a) Restriction Period. Restrictions shall be imposed for such
period or periods as may be determined by the Committee. The
Committee, in its
7
<PAGE> 8
discretion, may provide in the agreement circumstances under
which the restricted stock shall become immediately
transferable and non-forfeitable, or under which the restricted
stock shall be forfeited, and, notwithstanding the foregoing,
may accelerate the expiration of the restriction period imposed
on any Shares at any time.
(b) Restrictions Upon Transfer. Restricted stock and the right to
vote such Shares and to receive dividends thereon, may not be
sold, assigned, transferred, exchanged, pledged, hypothecated,
or otherwise encumbered, except as herein provided, during the
restriction period applicable to such Shares. Notwithstanding
the foregoing, and except as otherwise provided in the Plan,
the grantee shall have all of the other rights of a
stockholder, including, but not limited to, the right to
receive dividends and the right to vote such Shares.
(c) Certificates. A certificate or certificates representing the
number of restricted Shares granted shall be registered in the
name of the grantee. The Committee, in its sole discretion,
shall determine when the certificate or certificates shall be
delivered to the grantee (or, in the event of the grantee's
death, to his Beneficiary), may provide for the holding of
such certificate or certificates in escrow or in custody by
the Company or its designee pending their delivery to the
grantee or Beneficiary, and may provide for any appropriate
legend to be borne by the certificate or certificates.
(d) Lapse of Restrictions. The restricted stock agreement shall
specify the terms and conditions upon which any restriction
upon restricted stock awarded under the Plan shall expire,
lapse, or be removed, as determined by the Committee. Upon the
expiration, lapse, or removal of such restrictions, Shares free
of the restrictive legend shall be issued to the grantee of his
legal representative.
9. PERFORMANCE UNITS.
Performance unit awards under the Plan shall entitle grantees to future payments
based upon the achievements of pre- established long-term performance objectives
and shall be evidenced by written performance unit agreements in such form not
inconsistent with this Plan as the Committee shall approve from time to time.
Such agreements shall contain the terms and conditions applicable to the
performance unit awards, including in substance the following terms and
conditions:
(a) Performance Period. The Committee shall establish with
respect to each unit award a performance period of not fewer
than two years.
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<PAGE> 9
(b) Unit Value. The Committee shall establish with respect to each
unit award value for each unit which shall not thereafter
change, or which may vary thereafter pursuant to criteria
specified by the Committee.
(c) Performance Targets. The Committee shall establish with
respect to each unit award maximum and minimum performance
targets to be achieved during the applicable performance
period. Achievement of maximum targets shall entitle grantees
to payment with respect to the full value of a unit award.
Grantees shall be entitled to payment with respect to a
portion of a unit award according to the level of achievement
of targets as specified by the Committee for performance which
achieves or exceeds the minimum target but fails to achieve
the maximum target.
(d) Performance Measures. Performance targets established by the
Committee shall relate to corporate, subsidiary, division, or
unit performance and may be established in terms of growth in
gross revenue, earnings per share, ratios of earnings to
equity or assets, or such other measures or standards as may
be determined by the Committee in its discretion. Multiple
targets may be used and may have the same or different
weighting, and they may relate to absolute performance or
relative performance measured against other companies or
businesses.
(e) Adjustments. At any time prior to the payment of a unit
award, the Committee may adjust previously established
performance targets or other terms and conditions, including
the Company's or other corporationsG financial performance for
Plan purposes, to reflect major unforeseen events such as
changes in laws, regulations or accounting practices, mergers,
acquisitions or divestitures or other extraordinary unusual or
nonrecurring items or events.
(f) Payment of Unit Awards. Following the conclusion of each
performance period, the Committee shall determine the extent
to which performance targets have been attained and any other
terms and conditions satisfied for such period. The Committee
shall determine what, if any, payment is due on the unit award
and whether such payment shall be made in cash, Shares, or a
combination thereof. Payment shall be made in a lump sum or
installments, as determined by the Committee, commencing as
promptly as practicable following the end of the performance
period unless deferred subject to such terms and conditions
and in such form as may be prescribed by the Committee.
(g) Termination of Employment. In the event that a grantee ceases
to be employed by the Company prior to the end of the
performance period by
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<PAGE> 10
reason of death, Disability, or Retirement with the consent of
the Company, any unit award, to the extent earned under the
applicable performance targets, shall be payable at the end of
the performance period according to the portion of the
performance period during which the grantee was employed by the
Company, provided that the Committee shall have the power to
provide for an appropriate settlement of a unit award before
the end of the performance period. Upon any other termination
of employment, participation shall terminate forthwith and all
outstanding unit awards shall be canceled.
10. LOANS AND SUPPLEMENTAL CASH.
The Committee, in its sole discretion to further the purpose of the Plan, may
provide for supplemental cash payments or loans to individuals in connection
with all or any part of an award under the Plan. Supplemental cash payments
shall be subject to such terms and conditions as shall be prescribed by the
Committee at the time of grant, provided that in no event shall the amount of
payment exceed:
(a) In the case of an option, the excess fair market value of a
Share on the date of exercise over the option price multiplied
by the number of Shares for which such option is exercised, or
(b) In the case of an SAR, performance unit, or restricted stock
award, the value of the Shares and other consideration issued
in payment of such award.
Any loan shall be evidenced by a written loan agreement or other instrument in
such form and containing such terms and conditions (including, without
limitation, provisions for interest, payment schedules, collateral, forgiveness
or acceleration) as the Committee may prescribe from time to time.
11. DIRECTOR PROGRAM.
(a) Eligible Directors. Each member of the Board of Directors who
is not a full-time employee of the Company is an "Eligible
Director."
(b) Administration. The Director Program shall be administered by
the Board of Directors. Subject to the provisions of the
Director Program, the Board shall be authorized to:
(i) adopt, revise and repeal such administrative rules,
guidelines and practices governing the Director
Program as it shall from time to time deem advisable;
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<PAGE> 11
(ii) interpret the terms and provisions of the Director
Program and any option issued under the Director
Program (and any agreements relating thereto), and
otherwise settle all claims and disputes arising under
the Director Program;
(iii) delegate responsibility and authority for the
operation and administration of the Director Program,
appoint employees and officers of the Company to act
on its behalf, and employ persons to assist in the
fulfilling of its responsibilities under the Director
Program; and
(iv) otherwise supervise the administration of the
Director Program; provided, however, that the Board
of Directors shall have no discretion with respect to
the selection of Eligible Directors to receive
options hereunder, the number of Shares covered by
such option or the price or timing of any options
granted hereunder; provided, further, that any action
by the Board of Directors relating to the Director
Program will be taken only if approved by the
affirmative vote of a majority of the directors who
are not then eligible to participate under the
Director Program.
(c) Option Grants.
(i) Number of Options Granted. The following number of
Director Options are hereby granted to each Eligible
Director under the Director Program:
(A) As of the date of Board approval of the
Director Program, a Director Option to
purchase 5,000 Shares is granted to each
person who on that date is an incumbent
Eligible Director.
(B) With respect to each person who first
becomes an Eligible Director after the date
of Board approval of the Director Program, a
Director Option to purchase 5,000 Shares is
granted as of the date such person first
becomes an Eligible Director.
(C) As of the date of every third annual meeting
of the Company's shareholders following the
grant of a Director Option to an Eligible
Director pursuant to section (A) or (B)
above, and provided that such Eligible
Director remains an incumbent on such date,
a Director Option to purchase 5,000 Shares
is granted to such Eligible Director.
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<PAGE> 12
(d) Terms and Conditions of Director Options Under the Director
Program.
(i) Option Agreement. Each Director Option granted under
the Director Program shall be evidenced by an option
agreement.
(ii) Option Price. The option exercise price per Share of
a Director Option shall be the fair market value of a
Share as of the date of grant. The Director Options
granted as of the date of Board approval of the
Director Program have an exercise price of $11.875.
(iii) Option Term. The term of each Director Option shall
be ten years. No Director Option shall be exercised
by any person after expiration of the term of the
Director Option.
(iv) Exercisability. A Director Option shall be
exercisable during its term, 33.33% on the first
anniversary of the date of grant, an additional
33.33% on the second anniversary of the date of
grant, and the remaining 33.33% on the third
anniversary of the date of grant. The Director
Options granted on the date the Director Program was
approved by the Board vest 33.33% on December 19,
1995, 1996, and 1997.
(e) Method of Exercise. Director Options may be exercised, in
whole or in part, at any time and from time to time during the
relevant exercise period, by giving written notice of exercise
to the Company specifying the number of Shares to be
purchased. Such notice shall be accompanied by payment in
full of the purchase price, either in cash or by certified or
bank check, or such other instrument as the Board of Directors
may accept. Payment in full or in part may also be made in
the form of unrestricted Shares already owned by the Director
(and based upon the fair market value of the Shares so
tendered as of the date the Director Option is exercised, as
determined by the Board of Directors). No Shares shall be
issued until full payment therefor has been made. Eligible
Directors shall generally have the rights to dividends or
other rights of a stockholder with respect to Shares subject
to the Director Option when the Eligible Director has given
notice as to exercise, has paid in full for such shares and,
if requested, has given any representations required by the
Board of Directors.
(f) Nontransferability. Director Option shall not be sold,
assigned, transferred, exchanged, pledged, hypothecated, or
otherwise encumbered, otherwise than by will, by the laws of
descent and distribution or
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<PAGE> 13
pursuant to a qualified domestic relations order. During the
lifetime of the optionee, a Director Option shall be
exercisable only by the optionee.
(g) Termination by Reason of Death. If an optionee ceases to be
an Eligible Director by reason of death, any Director Option
held by such optionee may thereafter be exercised to the
extent then exercisable, by the legal representative of the
estate or by the legatee of the Eligible Director under the
will of the Eligible Director, for a period of one year from
the date of such death or until the expiration of the stated
term of such Director Option, whichever period is shorter.
(h) Termination by Reason of Disability. If an optionee ceases to
be an Eligible Director by reason of disability, any Director
Option held by such optionee may thereafter be exercised by
the optionee, to the extent it was exercisable at the time of
termination, for a period of one year from the date of such
termination or until the expiration of the stated term of such
Director Option, whichever period is shorter, provided,
however, that if the optionee dies within such one-year
period, any unexercised Director Option held by such optionee
shall thereafter be exercisable to the extent it was
exercisable at the time of death for a period of one year from
the date of such death or until the expiration of the stated
term of such Director Option, whichever period is shorter.
(i) Other Termination. If an optionee ceases to be an Eligible
Director for any reason other than death or disability (except
as a result of becoming an employee of the Company), any
Director Option held by such optionee may thereafter be
exercised by the optionee, to the extent it was exercisable at
the time of such termination, for a period of three months
from the date of such termination or the expiration of the
stated term of such Director Option, whichever period is
shorter; provided, however, that if the optionee dies within
such three-month period, any unexercised Director Option held
by such optionee shall thereafter be exercisable, to the
extent to which it was exercisable at the time of death, for a
period of one year from the date of such death or until the
expiration of the stated term of the Director Option,
whichever period is shorter. If an optionee ceases to be an
Eligible Director by reason of his becoming an employee of the
Company and his employment with the Company is subsequently
terminated, any Director Option held by such optionee may
thereafter be exercised by the optionee, to the extent that it
was exercisable at the time of such termination, for a period
of three months from the date of such termination or the
expiration of the stated term of the Director Option,
whichever period is shorter; provided, however, that if the
optionee dies within such three-month period, any unexercised
Option held by such
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<PAGE> 14
optionee shall thereafter be exercisable, to the extent to
which it was exercisable at the time of death, for a period of
one year from the date of such death or until the expiration of
the stated term of the Director Option, whichever period is
shorter.
12. GENERAL RESTRICTIONS.
Each award under the Plan shall be subject to the requirement that if at any
time the Company shall determine that (i) the listing, registration or
qualification of the Shares subject or related thereto upon any securities
exchange or under any state or federal law, or (ii) the consent or approval of
any regulatory body, or (iii) an agreement by the recipient of an award with
respect to the disposition of Shares, or (iv) the satisfaction of withholding
tax or other withholding liabilities is necessary or desirable as a condition of
or in connection with the granting of such award or the issuance or purchase of
Shares thereunder, such award shall not be consummated in whole or in part
unless such listing, registration, qualification, consent, approval, agreement,
or withholding shall have been effected or obtained free of any conditions not
acceptable to the Company. Any such restriction affecting an award shall not
extend the time within which the award may be exercised; and neither the Company
nor its directors or officers nor the Committee shall have any obligation or
liability to the grantee or to a Beneficiary with respect to any Shares with
respect to which an award shall lapse or with respect to which the grant,
issuance or purchase of Shares shall not be effected, because of any such
restriction.
13. SINGLE OR MULTIPLE AGREEMENTS.
Multiple awards, multiple forms of awards, or combinations thereof may be
evidenced by a single agreement or multiple agreements, as determined by the
Committee.
14. RIGHTS OF THE SHAREHOLDER.
The recipient of any award under the Plan, shall have no rights as a shareholder
with respect thereto unless and until certificates for Shares are issued to him,
and the issuance of Shares shall confer no retroactive right to dividends.
15. RIGHTS TO TERMINATE EMPLOYMENT.
Nothing in the Plan or in any agreement entered into pursuant to the Plan shall
confer upon any person the right to continue in the employment of the Company or
affect any right which the Company may have to terminate the employment of such
person.
16. WITHHOLDING.
(a) Prior to the issuance or transfer of Shares under the Plan,
the recipient shall remit to the Company an amount sufficient
to satisfy any federal, state or local withholding tax
requirements. Other than with respect to
14
<PAGE> 15
awards under the Director Program, the recipient may satisfy
the withholding requirement in whole or in part by electing to
have the Company withhold Shares having a value equal to the
amount required to be withheld. The value of the Shares to be
withheld shall be the fair market value, as determined by the
Committee, of the stock on the date that the amount of tax to
be withheld is determined (the OTax DateO). Such election must
be made prior to the Tax Date, must comply with all applicable
securities law and other legal requirements, as interpreted by
the Committee, and may not be made unless approved by the
Committee, in its discretion.
(b) Whenever payments to a grantee in respect of an award under the
Plan to be made in cash, such payments shall be net of the
amount necessary to satisfy any federal, state or local
withholding tax requirements.
17. NON-ASSIGNABILITY.
No award under the Plan shall be sold, assigned, transferred, exchanged,
pledged, hypothecated, or otherwise encumbered, other than by will or by the
laws of descent and distribution, or by such other means as the Committee (or
the Board of Directors, in the case of the Director Program) may approve. Except
as otherwise provided herein, during the life of the recipient, such award shall
be exercisable only by such person or by such person's guardian or legal
representative.
18. NON-UNIFORM DETERMINATIONS.
The Committee's determinations under the Plan (including without limitation
determinations of the persons to receive awards, the form, amount and timing of
such awards, the terms and provisions of such awards and the agreements
evidencing same, and the establishment of values and performance targets) need
not be uniform and may be made selectively among persons who .receive, or are
eligible to receive, awards under the Plan, whether or not such persons are
similarly situated.
19. CHANGE IN CONTROL PROVISIONS.
(a) In the event of (1) a Change in Control (as defined) or (2) a
Potential Change in Control (as defined) the following
acceleration and valuation provisions shall apply unless the
Board of Directors otherwise determines by resolution:
(i) Any SARs and any stock options awarded under the Plan
not previously exercisable and vested shall become
fully exercisable and vested.
15
<PAGE> 16
(ii) Any restrictions and deferral limitations applicable
to any restricted stock, performance units or other
Stock-based awards, in each case to the extent not
already vested under the Plan, shall lapse and such
shares, performance units or other stock-based awards
shall be deemed fully vested.
(iii) The value of all outstanding stock options, SARs,
restricted stock, performance units and other
stock-based awards, in each case to the extent
vested, shall, unless otherwise determined by the
Committee (or the Board of Directors with respect to
the Director Program) in its sole discretion at or
after grant but prior to any Change in Control, be
cashed out on the basis of the Change in Control
Price (as defined) as of the date such Change in
Control or such Potential Change in Control is
determined to have occurred or such other date as the
Committee may determine prior to the Change in
Control.
(b) As used herein, the term OChange in ControlO means the
happening of any of the following:
(i) Any person or entity, including a OgroupO as defined
in Section 13(d)(3) of the 1934 Act, other than the
Company, a subsidiary of the Company, or any employee
benefit plan of the Company or its subsidiaries,
becomes the beneficial owner of the Company's
securities having 25 percent or more of the combined
voting power of the then outstanding securities of
the Company that may be cast for the election for
directors of the Company (other than as a result of
an issuance of securities initiated by the Company in
the ordinary course of business), or
(ii) As the result of, or in connection with, any cash
tender or exchange offer, merger or other business
combination, sale of assets or contested election, or
any combination of the foregoing transactions, less
than a majority of the combined voting power of the
then outstanding securities of the Company or any
successor corporation or entity entitled to vote
generally in the election of directors of the Company
or such other corporation or entity after such
transaction, are held in the aggregate by holders of
the Company's securities entitled to vote generally
in the election of directors of the Company
immediately prior to such transactions; or
(iii) During any period of two consecutive years,
individuals who at the beginning of any such period
constitute the Board of Directors
16
<PAGE> 17
cease for any reason to constitute at least a majority
thereof, unless the election, or the nomination for
election by the Company's stockholders, of each
director of the Company first elected during such
period was approved by a vote of at least two-thirds
of the directors of the Company then still in office
who were directors of the Company at the beginning of
an such period.
(c) As used herein, the term OPotential Change in ControlO means
the happening of any of the following:
(i) The approval by stockholders of an agreement by the
Company, the consummation of which would result in a
Change in Control of the Company; or
(ii) The acquisition of beneficial ownership, directly or
indirectly, by any entity, person or group (other
than the Company, a wholly-owned subsidiary thereof
or any employee benefit plan of the Company or its
subsidiaries (including any trustee of such plan
acting as such trustee)) of securities of the Company
representing 5 percent or more of the combined voting
power of the Company's outstanding securities and the
adoption by the Board of Directors of a resolution to
the effect that a Potential Change in Control of the
Company has occurred for purposes of this Plan.
(d) As used herein, the term OChange in Control PriceO means the
highest price per share paid in any transaction reported on
the New York Stock Exchange, or paid or offered in any
bonafide transaction related to a Potential or actual Change
in Control of the Company at any time during the 60 day period
immediately preceding the occurrence of the Change in Control
(or, where applicable, the occurrence of the Potential Change
in Control event), in each case determined by the Committee
except that, in the case of Incentive Stock Options and SARs
relating to Incentive Stock Options, such price shall be based
only on transactions reported for the date on which the
optionee exercises such SARs or, where applicable, the date on
which a cash out occurs under Section 19(a)(iii).
20. NON-COMPETITION PROVISION.
Unless the award agreement relating to a stock option, SAR, restricted stock or
performance unit specifies otherwise, a grantee shall forfeit all un-exercised,
unearned and/or unpaid awards, including, but not by way of limitation, awards
earned but not yet paid, all unpaid dividends and dividend equivalents, and all
interest, if any, accrued on the foregoing if, (i) in the opinion of the
Committee, the grantee without the written consent of the Company, engages
directly or indirectly in any manner or capacity as principal, agent, partner,
officer, director, employee or
17
<PAGE> 18
otherwise, in any business or activity competitive with the business conducted
by the Company or any of its subsidiaries; or (ii) the grantee performs any act
or engages in any activity which in the opinion of the Chief Executive Officer
of the Company is inimical to the best interests of the Company.
21. ADJUSTMENTS.
In the event of any change in the outstanding common stock of the Company, by
reason of a stock dividend or distribution, recapitalization, merger,
consolidation, reorganization, split-up, combination, exchange or Shares or the
like, the Board of Directors, in its discretion, may adjust proportionately the
number of Shares which may be issued under the Plan, the number of Shares
subject to outstanding awards, and the option exercise price of each outstanding
option, and may make such other changes in outstanding, options, SARs,
performance units and restricted stock awards, as it deems equitable in its
absolute discretion to prevent dilution or enlargement of the rights of
grantees, provided that any fractional Shares resulting from such adjustments
shall be eliminated.
22. AMENDMENT.
The Board of Directors may terminate, amend, modify or suspend the Plan at any
time, except that no termination, amendment, modification or suspension shall be
effective without the authorization of the holders of a majority of Company's
outstanding Shares, if such authorization is required to comply with Rule 16b-3
under the 1934 Act or to comply with any other law regulation or stock exchange
rule. No termination, modification, amendment or suspension of the Plan shall
adversely affect the rights of any grantee or Beneficiary under an award
previously granted, unless the grantee or Beneficiary shall consent; but it
shall be conclusively presumed that any adjustment pursuant to paragraph 21
hereof does not adversely affect any such right.
23. EFFECT ON OTHER PLANS.
Participation in this Plan shall not affect a grantee's eligibility to
participate in any other benefit or incentive plan of the Company. Any awards
made pursuant to this Plan shall not be used in determining the benefits
provided under any other plan of the Company unless specifically provided
therein.
18
<PAGE> 19
24. EFFECTIVE DATE AND DURATION OF THE PLAN.
The Plan shall become effective when adopted by the Board of Directors, provided
that the Plan is approved by the holders of a majority of the outstanding Shares
on the date of its adoption by the Board or before the first anniversary of that
date. Unless it is sooner terminated in accordance with paragraph 22 hereof, the
Plan shall remain in effect until all awards under the Plan have been satisfied
by the issuance of Shares or payment of cash or have expired or otherwise
terminated, but no award shall be granted more than ten years after the earlier
of the date the Plan is adopted by the Board of Directors or is approved by the
Company's shareholders.
25. UNFUNDED PLAN.
The Plan shall be unfunded, except to the extent otherwise provided in
accordance with Section 8 hereof. Neither the Company nor any affiliate shall be
required to segregate any assets that may be represented by stock options, SARs,
or performance units, and neither the Company nor any affiliate shall be deemed
to be a trustee of any amounts to be paid under any stock option, SAR or
performance unit. Any liability of the Company or any affiliate to pay any
grantee or Beneficiary with respect to an option, SAR or performance unit shall
be based solely upon any contractual obligations created pursuant to the
provisions of the Plan; no such obligations will be deemed to be secured by a
pledge or encumbrance on any property of the Company or an affiliate.
26. GOVERNING LAW.
The Plan shall be construed and its provisions enforced and administered in
accordance with the laws of the State of Tennessee, except to the extent that
such laws may be superseded by any federal law.
On October 11, 1996, the Board of Directors approved an amendment to the Long
Term Incentive Plan that increased the Shares available for grant thereunder
from 3,500,000 to 6,000,000. In addition, the Board of Directors has approved
certain technical amendments in response to Section 162(m) of the Internal
Revenue Code and recent amendments to Section 16 of the Securities and Exchange
Act of 1934, as amended. The proposal to approve the Company's 1993 Long Term
Incentive Plan, as amended, will be acted upon by the Company's Shareholders at
the annual meeting on April 29, 1997.
19
<PAGE> 1
EXHIBIT 22.1
SUBSIDIARIES OF THE COMPANY
<PAGE> 2
EXHIBIT 22.1
SUBSIDIARIES OF SOFAMOR DANEK GROUP, INC.
Danek Medical, Inc.
Warsaw Orthopedic, Inc.
Danek Capital Corporation
Danek Sales Corporation
Danek International, Inc.
Sofamor Danek Properties, Inc.
Sofamor S.N.C.
Sofamor Danek GmbH
Sofamor Danek Asia Pacific Limited
Sofamor Danek Italia S.r.l.
Sofamor Danek Iberica S.A.
Sofamor Danek Americas and Asia/Pacific Corporation
Somepic S.A.
Sofamor Danek Benelux S.A.
Kobayashi Sofamor Danek K.K.
Medical Education K.K.
Sofamor Danek Canada, Inc.
Mednext, Inc.
Sofamor Danek Nevada, Inc.
Sofamor Danek Australia Pty. Ltd.
Danek Korea Co., Ltd.
Sofamor Danek Puerto Rico, Inc.
Colorado, S.A.
Surgical Navigation Technologies, Inc.
<PAGE> 1
EXHIBIT 24.1
CONSENT OF COOPERS & LYBRAND,
INDEPENDENT PUBLIC ACCOUNTANTS
<PAGE> 2
EXHIBIT 24.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
Sofamor Danek Group, Inc. 1993 Long-Term Incentive Plan on Form S-8 (File No.
33-60840) of our report dated January 31, 1997, on our audits of the
consolidated financial statements and consolidated financial statement schedule
of Sofamor Danek Group, Inc. and Subsidiaries as of December 31, 1996 and 1995,
and for the three years in the period ended December 31, 1996, which report is
included in this annual report on Form 10-K.
Memphis, Tennessee COOPERS & LYBRAND, L.L.P.
March 21, 1997
<PAGE> 3
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
Sofamor Danek Group, Inc. Incentive Stock Option Plan on Form S-8 (File No.
33-43614) of our report dated January 31, 1997, on our audits of the
consolidated financial statements and consolidated financial statement schedule
of Sofamor Danek Group, Inc. and Subsidiaries as of December 31, 1996 and 1995
and for the three years in the period ended December 31, 1996, which report is
included in this annual report on Form 10-K.
COOPERS & LYBRAND, L.L.P.
Memphis, Tennessee
March 21, 1997
<PAGE> 4
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
Sofamor Danek Group, Inc. Employee Stock Purchase Plan on Form S-8 (File No.
33-43597) of our report dated January 31, 1997, on our audits of the
consolidated financial statements and consolidated financial statement schedule
of Sofamor Danek Group, Inc. and Subsidiaries as of December 31, 1996 and 1995
and for the three years in the period ended December 31, 1996, which report is
included in this annual report on Form 10-K.
COOPERS & LYBRAND, L.L.P.
Memphis, Tennessee
March 21, 1997
<PAGE> 1
EXHIBIT 25.1
POWERS OF ATTORNEY FROM DIRECTORS
OF THE COMPANY AUTHORIZING
SIGNATURE OF THIS REPORT
<PAGE> 2
EXHIBIT 25.1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENT that the undersigned Director of Sofamor
Danek Group, Inc., an Indiana corporation, hereby constitutes and appoints J.
Mark Merrill, Laurence Y. Fairey and Richard E. Duerr, Jr., and each of them,
his true and lawful agents and attorneys-in-fact, for him and in his name, place
and stead in any and all capacities, to sign for the undersigned the Annual
Report of the company on Form 10-K for the fiscal year ended December 31, 1996
to be filed with the Securities and Exchange Commission, Washington, D.C., and
any and all amendments thereto; hereby ratifying and confirming all acts taken
by such agents and attorneys-in-fact, or in any one or more of them, as herein
authorized.
WITNESS MY SIGNATURE, this 28 th day of February, 1997.
/s/ Yves Paul Cotrel, M.D.
--------------------------
Yves Paul Cotrel, M.D.
<PAGE> 3
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENT that the undersigned Director of Sofamor
Danek Group, Inc., an Indiana corporation, hereby constitutes and appoints J.
Mark Merrill, Laurence Y. Fairey and Richard E. Duerr, Jr., and each of them,
his true and lawful agents and attorneys-in-fact, for him and in his name, place
and stead in any and all capacities, to sign for the undersigned the Annual
Report of the company on Form 10-K for the fiscal year ended December 31, 1996
to be filed with the Securities and Exchange Commission, Washington, D.C., and
any and all amendments thereto; hereby ratifying and confirming all acts taken
by such agents and attorneys-in-fact, or in any one or more of them, as herein
authorized.
WITNESS MY SIGNATURE, this 25 th day of February, 1997.
/s/ Samuel F. Hulbert
-------------------------------
Samuel F. Hulbert, Ph.D.
<PAGE> 4
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENT that the undersigned Director of Sofamor
Danek Group, Inc., an Indiana corporation, hereby constitutes and appoints J.
Mark Merrill, Laurence Y. Fairey and Richard E. Duerr, Jr., and each of them,
his true and lawful agents and attorneys-in-fact, for him and in his name, place
and stead in any and all capacities, to sign for the undersigned the Annual
Report of the company on Form 10-K for the fiscal year ended December 31, 1996
to be filed with the Securities and Exchange Commission, Washington, D.C., and
any and all amendments thereto; hereby ratifying and confirming all acts taken
by such agents and attorneys-in-fact, or in any one or more of them, as herein
authorized.
WITNESS MY SIGNATURE, this 28 th day of February, 1997.
/s/ Marie-Helene Plais
------------------------
Marie-Helene Plais, M.D.
<PAGE> 5
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENT that the undersigned Director of Sofamor
Danek Group, Inc., an Indiana corporation, hereby constitutes and appoints J.
Mark Merrill, Laurence Y. Fairey and Richard E. Duerr, Jr., and each of them,
his true and lawful agents and attorneys-in-fact, for him and in his name, place
and stead in any and all capacities, to sign for the undersigned the Annual
Report of the company on Form 10-K for the fiscal year ended December 31, 1996
to be filed with the Securities and Exchange Commission, Washington, D.C., and
any and all amendments thereto; hereby ratifying and confirming all acts taken
by such agents and attorneys-in-fact, or in any one or more of them, as herein
authorized.
WITNESS MY SIGNATURE, this 21 st day of February, 1997.
/s/ George F. Rapp, M.D.
------------------------
George F. Rapp, M.D.
<PAGE> 6
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENT that the undersigned Director of Sofamor
Danek Group, Inc., an Indiana corporation, hereby constitutes and appoints J.
Mark Merrill, Laurence Y. Fairey and Richard E. Duerr, Jr., and each of them,
his true and lawful agents and attorneys-in-fact, for him and in his name, place
and stead in any and all capacities, to sign for the undersigned the Annual
Report of the company on Form 10-K for the fiscal year ended December 31, 1996
to be filed with the Securities and Exchange Commission, Washington, D.C., and
any and all amendments thereto; hereby ratifying and confirming all acts taken
by such agents and attorneys-in-fact, or in any one or more of them, as herein
authorized.
WITNESS MY SIGNATURE, this 25 th day of February, 1997.
/s/ Robert A. Compton
-------------------------
Robert A. Compton
<PAGE> 7
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENT that the undersigned Director of Sofamor
Danek Group, Inc., an Indiana corporation, hereby constitutes and appoints J.
Mark Merrill, Laurence Y. Fairey and Richard E. Duerr, Jr., and each of them,
his true and lawful agents and attorneys-in-fact, for him and in his name, place
and stead in any and all capacities, to sign for the undersigned the Annual
Report of the company on Form 10-K for the fiscal year ended December 31, 1996
to be filed with the Securities and Exchange Commission, Washington, D.C., and
any and all amendments thereto; hereby ratifying and confirming all acts taken
by such agents and attorneys-in-fact, or in any one or more of them, as herein
authorized.
WITNESS MY SIGNATURE, this 21 st day of February, 1997.
/s/ L. D. Beard
------------------------
L. D. Beard
<PAGE> 8
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENT that the undersigned Director of Sofamor
Danek Group, Inc., an Indiana corporation, hereby constitutes and appoints J.
Mark Merrill, Laurence Y. Fairey and Richard E. Duerr, Jr., and each of them,
his true and lawful agents and attorneys-in-fact, for him and in his name, place
and stead in any and all capacities, to sign for the undersigned the Annual
Report of the company on Form 10-K for the fiscal year ended December 31, 1996
to be filed with the Securities and Exchange Commission, Washington, D.C., and
any and all amendments thereto; hereby ratifying and confirming all acts taken
by such agents and attorneys-in-fact, or in any one or more of them, as herein
authorized.
WITNESS MY SIGNATURE, this 21 st day of February, 1997.
/s/ George W. Bryan, Sr.
------------------------
George W. Bryan, Sr.
<PAGE> 1
EXHIBIT 28.1
ANNUAL REPORT ON FORM 11-K
OF THE EMPLOYEE STOCK PURCHASE
PLAN FOR THE FISCAL YEAR
ENDED DECEMBER 31, 1996
<PAGE> 2
EXHIBIT 28.1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 11-K
ANNUAL REPORT
Pursuant to Section 15(d) of the
Securities Exchange Act of 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 1996
-----------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from to
-------------- ------------
Commission file number 33-43597
--------
A. Full title of the plan and the address of the plan, if different from
that of the issuer named below.
Sofamor Danek Group, Inc. Employee Stock Purchase Plan
B. Name of issuer of the securities held pursuant to the plan and the
address of its principal executive office:
Sofamor Danek Group, Inc.
1800 Pyramid Place
Memphis, TN 38132
<PAGE> 3
REQUIRED INFORMATION
<TABLE>
<CAPTION>
(a) Financial Statements
Page
----
<S> <C>
Report of Independent Accountants 1
Statement of Net Assets Available for Benefits 2
Statement of Changes in Net Assets Available for Benefits 3
Notes to Financial Statements 4
Schedules I, II and III are not required or are not applicable, or the
required information is shown in the financial statements or notes
thereto.
(b) Consent of Coopers & Lybrand, Independent Accountants 8
</TABLE>
<PAGE> 4
SOFAMOR DANEK GROUP, INC.
EMPLOYEE STOCK PURCHASE PLAN
FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
<PAGE> 5
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Plan Committee of the
Sofamor Danek Group, Inc. Employee Stock
Purchase Plan
We have audited the accompanying statements of net assets available for benefits
of the Sofamor Danek Group, Inc. Employee Stock Purchase Plan (the "Plan") as of
December 31, 1996 and 1995, and the related statements of changes in net assets
available for benefits for the three years in the period ended December 31,
1996. These financial statements are the responsibility of the Plan Committee.
Our responsibility is to express an opinion on the 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 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 net assets available for benefits of the Plan as of
December 31, 1996 and 1995, and the changes in net assets available for benefits
for each of the three years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Memphis, Tennessee
March 10, 1997
1
<PAGE> 6
SOFAMOR DANEK GROUP, INC.
EMPLOYEE STOCK PURCHASE PLAN
STATEMENTS OF NET ASSETS AVAILABLE FOR BENEFITS
December 31, 1996 and 1995
<TABLE>
<CAPTION>
ASSETS 1996 1995
<S> <C> <C>
Cash $ 1,568 $ 1,113
Employee contributions receivable 45,650 33,897
Employer contributions receivable 6,847 5,085
Investments, cost of $180,955 and $142,958 at December 31, 1996 and
1995, respectively
181,048 157,623
--------- -------
Total assets 235,113 197,718
--------- -------
LIABILITIES
Payable due Sofamor Danek Group, Inc. 52,490 39,044
========= =======
Net assets available for benefits $182,623 $158,674
========= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 7
SOFAMOR DANEK GROUP, INC.
EMPLOYEE STOCK PURCHASE PLAN
STATEMENTS OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS
for the years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Additions to net assets:
Net appreciation (depreciation) in investments $ 22,133 $114,140 $(21,167)
Employee contributions 167,338 129,940 153,308
Employer contributions 25,101 19,491 22,996
------- ------- -------
Total additions 214,572 263,571 155,137
------- ------- -------
Deductions from net assets:
Stock distributions to participants 190,496 231,148 191,798
Cash distributions to participants 127 984 422
------- ------- -------
Total deductions 190,623 232,132 192,220
------- ------- -------
Net increase (decrease) 23,949 31,439 (37,083)
Net assets available for benefits:
Beginning of year 158,674 127,235 164,318
------- ------- -------
End of year $182,623 $158,674 $127,235
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 8
SOFAMOR DANEK GROUP, INC.
EMPLOYEE STOCK PURCHASE PLAN
NOTES TO FINANCIAL STATEMENTS
1. PLAN DESCRIPTION AND BASIS OF PRESENTATION:
PLAN DESCRIPTION
In November 1991 Sofamor Danek Group, Inc. (the "Company") adopted the
employee stock purchase plan to provide employees the opportunity to
purchase shares of the Company.
All eligible employees may participate in the Plan six months after
their date of employment. Total participants of the Plan at December
31, 1996 and 1995, were 125 and 95, respectively. The employee and
Company contributions are used to purchase shares of common stock of
the Company at the fair market value on the last business day of each
quarter and the related stock certificates are issued to the
participants within 60 days after the end of each calendar year. An
employee may discontinue his participation in the Plan at any time
upon written notice to the Company. A participant may thereafter
withdraw common shares allocated to his or her account. Cash dividends
or stock dividends, if any, are credited to each participant's account
in proportion to the number of common shares in his account.
Participants are entitled to vote the shares held in their account.
The Board of Directors of the Company (the "Board") may amend or
terminate the Plan, provided, no amendment shall be made, without
first obtaining the approval of the Company's shareholders, to (1)
increase or decrease the number of shares approved for the Plan
(except to reflect a stock split or stock dividend), (2) decrease the
option price per share, (3) change the class of employees eligible to
participate in the Plan, or (4) materially increase the benefits
accruing to participants under the Plan. In the event that the Board
elects to terminate the Plan all amounts will be carried forward into
each participant's account for disposition as determined by the Board.
Following the end of each calendar quarter, the Custodian provides a
statement to each participant which details all activity in the
participant account for that quarter. The custodian provides a
statement providing any necessary tax reporting as required by law.
The 60,000 shares of Common Stock reserved for the Plan were
registered under the Securities Act of 1933 with the Securities and
Exchange Commission on October 25, 1991.
4
<PAGE> 9
SOFAMOR DANEK GROUP, INC.
EMPLOYEE STOCK PURCHASE PLAN
NOTES TO FINANCIAL STATEMENTS, CONTINUED
1. PLAN DESCRIPTION AND BASIS OF PRESENTATION, CONTINUED:
PLAN DESCRIPTION, CONTINUED
During 1996, the Board of Directors and stockholders of the Company
approved an amendment which allows the Plan to continue in force until
all of the Plan shares have been sold or, if earlier, October 31,
2006.
BASIS OF PRESENTATION
The accompanying financial statements have been prepared in accordance
with generally accepted accounting principles. The preparation of
financial statements in conformity with generally accepted accounting
principles requires the Plan Committee 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 additions and
deductions from net assets available for benefits during the reporting
period. Actual results could differ from those estimates.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
INVESTMENT VALUATION AND INCOME RECOGNITION
The common shares of the Company are valued at fair market value
measured by quoted market prices in an active market. Purchases of
common stock are recorded on a trade-date basis. Thus, the valuation
of the Plan's investments are subject to fluctuations in the quoted
market price for the Company's common stock.
The Plan presents in the statement of changes in net assets the net
appreciation (depreciation) in the fair value of its investments which
consists of the realized gains or losses and the unrealized
appreciation (depreciation) on those investments.
EMPLOYEE CONTRIBUTIONS
The employee may contribute to the Plan by requesting that the Company
withhold up to 5% of the participating employee's gross earnings (as
defined by the Plan).
5
<PAGE> 10
SOFAMOR DANEK GROUP, INC.
EMPLOYEE STOCK PURCHASE PLAN
NOTES TO FINANCIAL STATEMENTS, CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
EMPLOYER CONTRIBUTIONS
The Company is obligated to make contributions to the participant's
account in the Plan in an amount equal to approximately, but not more
than, 15% of the employee's contribution. The participants fully vest
in the employer contribution at the end of each calendar quarter.
FEDERAL INCOME TAX STATUS
The Plan qualifies as an Employee Stock Purchase Plan as defined in
Section 423 of the Internal Revenue Code of 1986 as amended.
A participant cannot dispose of his stock within two years after the
grant of an option or within one year after the date of exercise of
the option (the "Prohibited Sale Period") without adverse tax
consequences. The Company has been advised that for federal income tax
purposes, a participant who sells his stock within the Prohibited Sale
Period will recognize ordinary income with respect to the shares sold
in an amount equal to the difference between the fair market value on
the option date and the option price for the shares. The ordinary
income will be recognized regardless of whether any gain or loss is
realized from the sale of the stock. This ordinary income is
considered compensation and is subject to federal and state
withholding, and social security withholding (if applicable).
The tax basis of the participant's shares is equal to the fair market
value of the stock on the exercise date, plus any ordinary income
recognized by the participant. Thus, for a sale during the Prohibited
Sale Period, any excess of the sale proceeds received upon disposition
of the shares by the participant over the tax basis in such shares
sold is considered capital gain. Similarly, if the tax basis of the
participant exceeds the sales proceeds received by the participant,
after adjustment for any required recognition of ordinary income, then
the excess is considered a capital loss. If the participant recognized
ordinary income during the Prohibited Sale Period, then the Company
has a matching deduction equal to the amount of ordinary income
recognized by the participant.
If the stock is sold after the Prohibited Sale Period for more than
the option price, a portion of the gain realized (but only to the
extent of the gain realized) will first be taxed as ordinary income in
an amount equal to the excess of the fair market value of such stock
on the option date over the option price. Any excess gain will be
considered long-
6
<PAGE> 11
SOFAMOR DANEK GROUP, INC.
EMPLOYEE STOCK PURCHASE PLAN
NOTES TO FINANCIAL STATEMENTS, CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
FEDERAL INCOME TAX STATUS, CONTINUED
term capital gain. If the stock is sold for less than the option price
after the Prohibited Sale Period, no ordinary income will be
recognized and the resulting loss will be considered long-term capital
loss. If the participant recognized ordinary income or capital gain
from a disposition after the Prohibited Sale Period, the Company
receives no deduction.
INVESTMENTS
The Plan's investments consist of 5,936 and 5,555 shares of Sofamor
Danek Group, Inc. common stock at December 31, 1996 and 1995,
respectively.
PAYABLE DUE SOFAMOR DANEK GROUP, INC.
As of December 31, 1996 and 1995, the Plan recorded a payable to the
Company of $52,490 and $39,044, respectively, for the fourth quarter
purchases of common stock.
3. ADMINISTRATION OF PLAN ASSETS:
The Plan provides that a Committee (the "Committee"), appointed by the
Board, will administer the Plan. Members of the Committee may not
participate in the Plan.
The trust department of SunTrust Bank in Atlanta, Georgia, is the Plan
custodian.
The Company pays all commission, fees and expenses incurred in
connection with the acquisition of shares under the Plan and all other
expenses of administering the Plan.
7
<PAGE> 12
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
Sofamor Danek Group, Inc. Employee Stock Purchase Plan on Form S-8 (File No.
33-43597) of our report dated March 10, 1997 on our audit of the financial
statements of Sofamor Danek Group, Inc. Employee Stock Purchase Plan as of
December 31, 1996 and 1995 and for each of the three years in the period ended
December 31, 1996, which report is included as an exhibit to Form 10-K.
COOPERS & LYBRAND, L.L.P.
Memphis, Tennessee
March 21, 1997
8
<PAGE> 13
SIGNATURES
The Plan. Pursuant to the requirements of the Securities Exchange Act of
1934, the trustees (or other persons who administer the employee benefit plan)
have duly caused this annual report to be signed on its behalf by the
undersigned hereunto duly authorized.
Sofamor Danek Group, Inc. Employee Stock Purchase Plan
(Name of Plan)
Date: March 21, 1997 /s/ J. Mark Merrill
-------------------------
J. Mark Merrill, Treasurer
9
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<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
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0
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