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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
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CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
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Date of Report (date of earliest event reported): January 6, 1997
Sofamor Danek Group, Inc.
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(Exact name of registrant as specified in its charter)
Indiana 000-19168 35-1580052
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(State or other (Commission File (I.R.S. Employer
jurisdiction of Number) Identification No.)
incorporation)
1800 Pyramid Place, Memphis, Tennessee 38132
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(Address of principal executive offices) (Zip Code)
(901) 396-2695
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name or former address, if changed since last report)
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Item 5. Other Events.
On January 6, 1997, Sofamor Danek Group, Inc. (the "Company")
announced that its upcoming financial results for the year ended December 31,
1996 will include a pre-tax charge of approximately $50 million relating to
costs associated with the product liability lawsuits in which the Company is a
defendant. A press release issued by the Company announcing such pre-tax charge
is attached hereto as an exhibit and is incorporated herein by reference in its
entirety. The product liability lawsuits to which the charge relates are
described below:
PRODUCT LIABILITY LITIGATION
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 Federal
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
anticipated and 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. Also, plaintiffs' lawyers have
filed several lawsuits involving approximately 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 or 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. The Company
anticipates that most plaintiffs asserting these conspiracy claims will file
amended or new complaints, but it is not possible at this time to estimate
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
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filed later may begin this year. A number of the plaintiffs are having their
lawsuits returned to the state court in Memphis, Tennessee. 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, S.N.C., a subsidiary of the
Company, 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.
On April 8, 1996, Judge Bechtle issued a ruling that would have resulted in the
dismissal of many of the claims existing against the Company in the
Multidistrict Litigation. Judge Bechtle's ruling granted defendant AcroMed
Corporation's ("AcroMed") motion for summary judgment on claims involving
failure to warn, manufacturing, design and testing defects, implied warranty,
negligence and defect per se. (AcroMed is a spinal implant manufacturer and a
defendant in various of the cases pending in the Multidistrict Litigation as
well as a number of states). The Court held that under applicable Third Circuit
precedent, all of these claims were expressly preempted by medical device
provisions of the Food, Drug and Cosmetic Act ("FDCA"). The Court's ruling left
only claims for breach of express warranty and unlawful promotion (excluding
device labeling) as a basis for a federal court lawsuit involving spinal
implants. The Court further provided that plaintiffs may seek reinstatement of
some or all of the dismissed claims if the U.S. Supreme Court's decision in Lohr
v. Medtronics altered the existing Third Circuit law on federal preemption. On
June 26, 1996, the Supreme Court ruled in Lohr v. Medtronics that the preemption
provision contained in the medical device amendments of the FDCA does not
expressly preempt state tort causes of actions. On the basis of this decision,
the plaintiffs have sought reinstatement of all claims previously dismissed by
Judge Bechtle's April 8, 1996 ruling, and the Company expects that those claims
will be reinstated. The ruling in Lohr v. Medtronics also applies to all pending
state court cases.
In December 1996, AcroMed 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. Such parties are expected to submit this week a formal class
settlement agreement and related documentation for approval by Judge Bechtle. A
hearing will be held to approve 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.
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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. Discovery has
only recently begun in these individual cases. 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 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 (except for the policy covering the 12-month period commencing
November 1995) are reduced by the costs of defense. The Company estimates that
the litigation may continue for several years and, if so, the cost to defend
such lawsuits is likely to exhaust its insurance coverage. An insurer, Royal
Surplus Lines Insurance Co., providing coverage for the 12-month period
commencing in November 1995 brought an action last month in the Federal
District Court for the Middle District of Tennessee (Nashville Division)
seeking a declaratory judgment as to, among other things, whether the policy
covers lawsuits which have been reported to the insurer during the policy
period. The case is in a preliminary stage, and the Company expects to file a
response within the next 45 days. 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.
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. As noted above, the Company also believes that all of these individual
lawsuits are without merit.
On January 6, 1997, the Company announced that its upcoming 1996 financial
results will include a pre-tax charge of approximately $50 million relating to
costs associated with the product liability litigation described above. The
recording of this change covers
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reasonably foreseeable costs that the Company is currently better positioned to
estimate as the litigation has progressed and as changes have occurred in facts
and circumstances relating to the litigation in the fourth quarter of 1996.
Among the changed facts and circumstances are the announcement of the AcroMed
proposed settlement, 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 difficult to predict accurately 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 this 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. The Company is unable to predict the ultimate
outcome or the financial impact of the product liability litigation.
The foregoing discussion (including, in particular, statements made in the
preceding five paragraphs) contains forward-looking statements relating to the
ongoing lawsuits. Such forward-looking statements involve risks and
uncertainties principally regarding the resolution of the Company's defense
motions, the conclusion of individual lawsuits and the actual costs to defend
the cases.
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Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
(a)-(b) Not Applicable.
(c) Exhibits required by Item 601 of Regulation S-K.
99.1. Press release issued by Sofamor Danek Group, Inc. on
January 6, 1997
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed by the undersigned
hereunto duly authorized.
Sofamor Danek Group, Inc.
By: /s/ Laurence Y. Fairey
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Laurence Y. Fairey
Executive Vice President
and Chief Financial Officer
Dated: January 6, 1997
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INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
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99.1 Press release issued by Sofamor Danek Group, Inc. on
January 6, 1997
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EXHIBIT 99.1
Sofamor Danek Group [letterhead] NEWS RELEASE
Contact: James J. Gallogly
President and Chief Operating Officer
Laurence Y. Fairey
Executive Vice President
(901) 396-2695
SOFAMOR DANEK GROUP ANNOUNCES ONE-TIME CHARGE
RELATING TO COSTS OF PRODUCT LIABILITY LITIGATION
Memphis, Tennessee (January 6, 1997) - Sofamor Danek Group, Inc. (NYSE:SDG)
today announced that its upcoming 1996 financial results will include a pre-tax
charge of approximately $50 million relating to costs associated with the
product liability lawsuits in which the Company is a defendant.
"We have taken this charge in order to recognize the reasonably
anticipated costs associated with these product liability cases, which we
believe are without merit and unfounded," stated Ron Pickard, chairman of
Sofamor Danek Group, Inc. "The establishment of this reserve symbolizes our
commitment to demonstrate that our products are beneficial to patients and that
the lawsuits are baseless."
"Today's announcement addresses reasonably foreseeable costs that we
are now better positioned to estimate as the litigation has progressed and as
changes have occurred in facts and circumstances relating to the litigation in
the fourth quarter," commented James J. Gallogly, president and chief
operating officer. "We believe that this charge will allow our future
financial results to reflect clearly the financial health of our business.
Despite the potential distraction of this litigation, the Company's operating
management has remained focused on the development of innovative products and
meeting the needs of our customers."
As previously reported, Sofamor Danek Group is a defendant in
approximately 2,800 individual product liability lawsuits. Early efforts by
the plaintiffs to seek certification of class actions were denied. The
majority of individual claims were filed thereafter. The suits assert numerous
theories of liability arising out of instrumented fusion surgeries in which the
surgeon elected to fasten the instrumentation to the spine using a bone screw
in one or more posterior pedicles of the spine. Many other manufacturers of
internal fixation devices have been sued by patients who have undergone spinal
fusion surgery in which screws which they manufactured have been utilized. The
Company has been joined as an alleged co-conspirator along with the majority of
other manufacturers in approximately 2,850 such lawsuits.
The Company has national coordinating counsel and over 40 regional
counsel defending against the claims. Discovery has been ongoing in certain of
the cases filed first, and hundreds of
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SDG Announces One-Time Charge
January 6, 1997
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thousands of documents have been produced and over 1,000 depositions have been
taken. In addition, both the Company and the plaintiffs have exchanged
numerous expert reports.
The Company believes that it has defenses to these lawsuits, including
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.
While it is difficult to predict accurately the outcome of litigation,
the amount of the charge taken in the fourth quarter represents the Company's
best judgement 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 cost to the Company could differ from this estimate 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, however, is unable to predict the ultimate outcome or the
potential financial impact of this litigation.
The foregoing discussion (including, in particular, statements made in
the second, third, seventh and eight paragraphs of this press release) contains
forward-looking statements relating to the ongoing lawsuits. Such
forward-looking statements involve risks and uncertainties principally
regarding the resolution of the Company's defense motions, the conclusion of
individual lawsuits, the actual costs to defend the cases and other
uncertainties detailed from time to time in the Company's periodic reports
(including the Annual Report on Form 10-K for the year ended December 31, 1995,
and the Quarterly Report on Form 10-Q for the quarter ended September 30, 1996)
filed with the Securities and Exchange Commission. In connection with this
announcement, the Company intends to file a Form 8-K describing in more detail
certain of the matters addressed in this press release.
Sofamor Danek Group, Inc. is primarily involved in developing,
manufacturing and marketing spinal devices used in the surgical treatment of
spinal disorders. The Company's stock is traded on the New York Stock Exchange
(NYSE) under the symbol SDG.
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