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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, 1997
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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 ____________
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 27, 1998, 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
$1,789.5 million.
At February 27, 1998, there were 26,327,756 shares of registrant's
common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement relating to its
1998 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, 1995 and 1996 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.............................................................. 9
Patents, Trademarks and Copyrights..................................... 9
Royalty and Other Payments............................................. 9
Raw Materials.......................................................... 9
Principal Customers................................................... 9
Environmental.......................................................... 9
Insurance.............................................................. 10
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...................................... 14
PART II Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.................................................... 16
Item 6. Selected Consolidated Financial Data...................................... 18
Item 7. Management's Discussion and Analysis of Results of
Operations and Financial Condition..................................... 19
Item 8. Financial Statements and Supplementary Data............................... 27
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................................... 27
PART III Item 10. Directors and Executive Officers of the Registrant........................ 27
Item 11. Executive Compensation.................................................... 27
Item 12. Security Ownership of Certain Beneficial Owners
and Management......................................................... 27
Item 13. Certain Relationships and Related Transactions............................ 27
PART IV Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K............................................................ 27
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PART I
ITEM 1. BUSINESS.
OVERVIEW*
Sofamor Danek Group, Inc. is primarily involved in developing, manufacturing and
marketing devices, instruments, computer-assisted visualization products and
biomaterials used in the treatment of spinal and cranial disorders. The
objective of spinal implants is to increase spinal stability and facilitate the
bone growth required for fusion of the vertebrae 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 and West
Palm Beach, Florida. 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, South Africa, the United Kingdom
and Canada.
The Company's principal products include the TSRH(R) Spinal System, the
Cotrel-Dubousset line of products and the ORION(R) Anterior Cervical Plate
System (the "ORION System") and the STEALTHSTATION(TM). The Company's spinal
systems include the TSRH(R) Spinal System, the CD(TM) line of products and the
ORION(R) System. These lines of surgical implants include tools for fusion such
as rods, plates, screws, hooks, locking bolts and transverse traction devices
that lock implants together. The Company markets products which treat
degenerative diseases, deformities and trauma in all regions of the spine.
Spinal surgeons and neurosurgeons choose a spinal implant system based on, among
other things, the nature and location of the spinal instability. The Company
currently markets approximately 33 spinal implant product lines. The
STEALTHSTATION(TM) is an advanced computer-assisted, image-guided surgery system
which provides surgeons with the capability to plan, navigate and precisely
position surgical tools and devices during cranial, spinal, ear, nose and throat
procedures. 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
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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 risks and uncertainties 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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drill, accessory equipment and disposable burs for surgical specialties.
Surgical Navigation's product line consists 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 200 independent
commissioned sales representatives. The Company markets its products
internationally to spinal surgeons in approximately 60 countries primarily
through a network of independent distributors and agents. In France, Germany,
Spain, Italy, Hong Kong, Japan, the Benelux region, Australia, New Zealand,
Korea, Puerto Rico, South Africa, the United Kingdom 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.
The objective of spinal implants is to increase spinal stability and facilitate
the bone growth required for fusion of the vertebrae of the spine. Fusion
immobilizes the vertebrae, which generally relieves the pressure on the nerves
of the spinal column and alleviates chronic back pain. Approximately 500,000
spinal fusion procedures were performed worldwide in 1997, and spinal implants
(commonly referred to as "instrumentation") are currently used in approximately
40% of these procedures. The Company believes that the success rate for fusion
with instrumentation is over 90%. Spinal implant procedure growth will be driven
by continued penetration of instrumentation, technological advances and
demographics. 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(R) 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 degenerative diseases, scoliosis (curvature of the spine) or
other spinal deformities. The system consists of specialized hooks, plates and
screws that are attached to rods
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through locking bolts, which the Company believes allows for increased torsional
and axial spinal support. There are special configurations of the system
available to address specific applications such as pediatric surgery and adult
lumbar surgery. The Company manufactures and distributes the TSRH(R) Spinal
System under agreements pursuant to which the Company has received the exclusive
worldwide rights to the products in exchange for royalty payments. Sales of the
TSRH(R) Spinal System accounted for 24% of the Company's revenues in 1997, 33%
in 1996 and 38% in 1995.
Since its introduction in 1989, the Company has added enhancements to the
TSRH(R) 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(R) Spinal System is covered by various patents.
COTREL-DUBOUSSET LINE OF PRODUCTS
The Cotrel-Dubousset line of products was developed by Dr. Yves Paul Cotrel in
cooperation with Sofamor and with the assistance of Professor Jean Dubousset.
This product line includes the CD(TM) Spinal Instrumentation System (the "CD(TM)
System"), the Compact CD or CCD(TM) System (the "CCD(TM) System") and the CD
HORIZON(R) Spinal System (the "CD HORIZON(R) System"). The CD(TM) System was
introduced in 1984 and 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(TM) 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. The CCD(TM) System was designed principally for the treatment of
degenerative spinal conditions of the lumbar and sacral spine. The CD HORIZON(R)
System combines new, low profile hooks and screws with components of several
other systems for the treatment of various spinal conditions. Sales of the
Cotrel-Dubousset line of products accounted for 17% of the Company's revenues in
1997, 23% in 1996 and 26% in 1995.
ORION(R) ANTERIOR CERVICAL PLATE SYSTEM
The ORION(R) System was introduced by the Company in 1994. 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(R) System under agreements pursuant to
which the Company obtained the exclusive worldwide rights to the products in
exchange for royalty payments. The ORION(R) System accounted for 11% of the
Company's revenues in 1997, 10% in 1996 and 8% in 1995.
STEALTHSTATION(TM) SYSTEM
The STEALTHSTATION(TM) System is an advanced computer-assisted, image-guided
surgery system which provides surgeons with the capability to plan, navigate and
precisely position surgical tools and devices during cranial, spinal, ear, nose
and throat procedures. Specifically, the STEALTHSTATION(TM) System allows
surgeons to take standard image data sets from practically any image source (CT,
MR, etc.) and transform them into a three-dimensional image. Surgeons can use
the system to plan the most desirable path through critical anatomy, then move
seamlessly into the operating room where this image data is registered, or
matched, to the patient's actual anatomy. Thus, the STEALTHSTATION(TM) System
enhances the accuracy of delicate surgical procedures. The STEALTHSTATION(TM)
System assists the surgeon by precisely identifying in real-time the location of
a surgical
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instrument's tip in relation to the patient's preoperative diagnostic imaging
scan. The Company believes that use of the STEALTHSTATION(TM) System
significantly reduces operating room time and the length of the patient's
hospital stay, which has reduced the overall cost of such procedures. The
Company obtained initial FDA marketing clearance for the STEALTHSTATION(TM)
System in January 1996 for use throughout the body. The Company believes the
STEALTHSTATION(TM) System is the leading frameless stereotactic image-guided
surgery system in the world. The Company generates recurring revenue from this
product from annual maintenance contracts, software upgrades and product
enhancements.
Each of the TSRH, CD, CCD, CD HORIZON, ORION and STEALTHSTATION Systems is
marketed in the U.S. as a spinal device system and is covered by various
patents; "TSRH," "CD," "CCD," "CD HORIZON," "ORION," and "STEALTHSTATION" are
trademarks of the Company. (See "Business-Government Regulations.")
MARKETING AND DISTRIBUTION
Sofamor Danek markets its spinal implant and surgical systems products in the
United States directly to the spinal surgeons and neurosurgeons who perform
spinal and cranial surgery. The Company distributes its products through its
unique network of approximately 200 commissioned, dedicated sales
representatives. The Company markets its products internationally directly to
spinal surgeons and neurosurgeons in major markets including the Benelux region,
France, Germany, Italy, Spain, the United Kingdom, Canada, South Africa, Puerto
Rico, Hong Kong, Japan, Korea, Australia and New Zealand, and indirectly in
approximately 60 other countries through a network of independent distributors
and agents. The Company believes that its distribution capabilities provide it
with significant competitive advantages by facilitating strong relationships
with the physicians, hospitals and clinics that comprise the Company's customer
base. The Company strengthens these relationships by organizing and sponsoring
the education of surgeons through medical symposia, seminars, payor relations
and practice management consulting. In order to meet the needs of hospitals and
clinics, the Company offers instrument and implant purchase alternatives. For
example, the Company offers 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. The Company's premier distribution
capability also enables it to attract alliance partners who seek its
distribution breadth.
International sales have amounted to $101.5 million and $82.3 million,
representing approximately 32% and 34% of total sales in 1997 and 1996,
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 United States primarily by the
Company's subsidiary, Warsaw Orthopedic, Inc., which the Company acquired in
1983. The Company's products are also manufactured by its subsidiaries, SNT,
located in Broomfield, Colorado, and MedNext of West Palm Beach, Florida. The
Company believes that its current assets will provide it with sufficient
manufacturing capacity for the future. As a medical device manufacturer, the
Company is subject to the FDA's stringent QSR and regulations as stipulated by
the FDA. 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) 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
United States, product manufacturing is done primarily by Sofamor in
Rang-du-Fliers, France. Some of the manufacturing outside the United States is
performed by subcontractors. Sofamor has a 33.75% equity investment in one of
the subcontractors. See "--Government Regulation."
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RESEARCH AND PRODUCT DEVELOPMENT
In addition to its currently marketed products, the Company has a broad pipeline
of spinal and neurosurgical products under development to augment its existing
product offerings and further advance the state of the art of surgical and
diagnostic procedures. Key products under development include the Novus Cage,
which is an interbody fusion device approved for use in certain non-U.S.
countries, biological products to induce bone growth, prosthetic discs and
visualization technology to aid surgeons. The Company incurred research and
development expense of approximately $19.7 million, $15.9 million and $14.0
million for the years ended December 31, 1997, 1996 and 1995, respectively.
NEW PRODUCT OPPORTUNITIES
BIOLOGICAL PRODUCTS FOR USE IN SPINAL RECONSTRUCTION
In February 1995, the Company entered into a strategic alliance with Genetics
Institute to develop biological products for use in spinal applications. These
products are being designed to use Genetics Institute's recombinant human bone
morphogenetic protein rhBMP-2 to induce bone growth for the treatment of spinal
disorders and replace the current therapy, which is transplantation of bone
tissue from the pelvis of the patient. The Company has completed an FDA approved
pilot study in which all 11 patients achieved fusion in three months. Typically,
fusion can take between 15 to 18 months to occur. The Company is currently
submitting an IDE to conduct a pivotal study with respect to rhBMP-2. 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 license agreement, the Company will pay the Genetics Institute $50
million over four years, of which $12.5 million was paid in each of 1995 and
1996 and $17.5 million was paid in 1997. An additional $7.5 million is due in
1998. 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. See "Risk Factors -- Uncertainty of Regulatory Clearances;
Regulatory Compliance" and "-- Dependence on Patents and Proprietary
Technology."
NOVUS CAGE
In addition to the cages that it currently markets, the Company is developing a
wide variety of products that the Company believes will more effectively meet
patient needs in the cage segment. These products include cages designed to more
accurately match the anatomy of the spine to ease insertion and conserve the
patient's bone. These products will utilize materials that are designed to
better match the characteristics of bone and/or allow the bone to better
incorporate into the implant. 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.
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 United States.
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VISUALIZATION TECHNOLOGIES
In January 1998, the Company entered into a cooperative technology agreement
with Vista to develop and distribute new advanced visualization systems based on
Vista's proprietary high resolution digital technology. Pursuant to the
agreement, the Company will have the worldwide distribution rights to these new
products for use in neurosurgery, spinal surgery and otolaryngological surgery.
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,
image guidance 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 "Risk Factors--Rapid Technological Change and Risk of Technological
Obsolescence."
GOVERNMENT REGULATION
In the United States, the Company is subject to regulation by the FDA. FDA
regulations govern the testing, 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
United States 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 Food and Drug Administration Modernization Act of 1997,
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 510(k)
notification or a PMA application filed by the manufacturer of the device. A
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 application 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 510(k) notification or a PMA application 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 United States are
covered by 510(k) notifications with limited exceptions. As devices become
increasingly innovative, it is difficult to establish that a device is
"substantially equivalent" to another "legally marketed device" and thereby
obtain 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 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.
If human clinical trials of a device are required and if the device presents a
"significant risk," the manufacturer or distributor of the device is required to
file an IDE application with the FDA prior to commencing human clinical trials.
The IDE application must be supported by data, typically the result of animal,
and, possibly, mechanical testing. If the IDE application is approved by the
FDA, human clinical trials may begin at a specific number of investigational
sites with a maximum number of patients, as approved by the FDA.
Federal law provides that manufacturers can label and promote new medical
devices only for indications that have been allowed by the FDA. Since the FDA
does not regulate the practice of medicine, physicians may use products
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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
legally marketed screws for indications not in the labeling. Although this
practice may continue in the future, the Company does not encourage nor can it
predict such use.
In October 1997, the Company received 510(k) clearance to begin labeling and
marketing its CD Spinal System with the following restrictions. As a pedicle
screw fixation system, the device system is intended only for: (a) degenerative
disc disease (defined as back pain of discogenic origin with degeneration of the
disc confirmed by patient history and radiographic studies) for noncervical
screw fixation; and (b) for severe spondylolisthesis (Grades 3 and 4) at the
L5-S1 joint in patients who are receiving fusions using autogenous bone graft
only and who are having the device removed after the development of a solid
fusion for screw fixation from L3 to the sacrum. Additional warnings in the
package insert regarding the potential risks and unestablished benefits of the
device were also required.
In January 1995, the Company received 510(k) clearance to begin labeling and
marketing the stainless steel version of the TSRH(R) 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 United States 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
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
orthopedic 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 United
States 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 United States, 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.
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<PAGE> 11
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 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 for sale in the United
States 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
The medical device industry is subject to intense competition. The market for
products designed to treat spinal conditions is highly competitive, and the
Company expects competition to increase. Accordingly, the Company's future
success will depend in part on its ability to respond quickly to medical and
technological change and user preferences through the development and
introduction of new products that are of high quality and that address patient
and surgeon requirements and, in part, on its ability to differentiate its
mature products from those of its competitors. Worldwide, there are many firms
producing spinal implant devices, and certain of the Company's competitors
currently manufacture and sell interbody fusion cages that have received
clearance from the FDA. A number of the Company's competitors have greater
financial, research and development, manufacturing and sales and marketing
resources than the Company. The Company's inability to compete effectively
against existing or future competitors would have a material adverse effect on
its business, financial condition and results of operations.
The Company believes that the primary competitive factors in the market for
treatment of spinal disorders include regulatory approvals, clinical and patient
acceptance, post-operative discomfort, ease of use, product performance,
marketing and sales capability and the enforceability of patent and other
proprietary rights. The Company believes that it is, and will continue to be, a
leader with respect to these factors. The Company believes that it successfully
competes based on (i) the quality of the Company's products and their ease and
versatility of use by surgeons, (ii) the introduction of new products and
systems, (iii) the Company's emphasis on research and development, (iv) the
Company's focus on spinal products coupled with a solid infrastructure of
experienced management personnel, (v) the Company's association with spinal
surgeons and neurosurgeons and (vi) the Company's participation, through medical
symposia and seminars, in the education of surgeons in the cleared uses of
implant products. See "Risk Factors--Increasing Competition."
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<PAGE> 12
EMPLOYEES
The Company had approximately 1,000 employees at December 31, 1997. 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 United States
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, 1997, the Company owned or held licenses to 208 inventions
covered by 348 patents and had 422 applications pending on 141 more inventions
covering the full spectrum of its product lines in the United States 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. The
Company has 38 registered trademarks and applications pending for registration
on 36 other marks in the United States 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 "--Principal Products"
and "Risk Factors--Dependence on Patents and Proprietary Technology." (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.")
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. The agreements generally provide for payments
ranging from 1% to 10% of the net selling prices (as defined by the agreements)
of all such 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 1997, 1996 and 1995 were
approximately $9.1 million, $6.8 million and $5.9 million, 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.
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," which are
incorporated by reference herein.
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.
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<PAGE> 13
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.")
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 leased space for these functions. The Company is in need of
additional office and distribution space at its Memphis location and is planning
to lease a 106,000 square foot building that is currently under construction
adjacent to its corporate headquarters. The primary U.S. manufacturing
operations of 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 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 LITIGATION
Beginning in 1994, the Company and other spinal implant manufacturers were named
as defendants in a number of product liability lawsuits brought in various
federal and state courts around the country. These lawsuits allege that
plaintiffs were injured by spinal implants manufactured by the Company and
others. The essence of the plaintiff's 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 of medical devices), that pedicle fixation has
not been proven safe and effective in the context of FDA labeling standards,
that some or all of the spinal systems are defectively designed and manufactured
and that plaintiffs have suffered a variety of injuries as a result of their
physicians' use of such systems in pedicle fixation. The Company has also been
named as a defendant in a number of lawsuits instituted by plaintiffs who have
received spinal implants manufactured by other manufacturers and in which the
Company is alleged to have participated in a conspiracy among doctors,
manufacturers, hospitals, teaching institutions, professional societies and
others to promote, in violation of applicable law, the use of spinal implants.
In a number of cases, plaintiffs have sought to proceed as representatives of
classes of spinal implant recipients. All efforts to obtain class certification
have been denied or withdrawn, except with respect to a class-action settlement
entered into between the plaintiffs and another spinal implant manufacturer,
AcroMed Corporation (see below under the heading entitled "AcroMed Corporation
Settlement"). 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
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<PAGE> 14
same individual plaintiffs. Plaintiffs typically seek relief in the form of
monetary damages, often in unspecified amounts. Many of the plaintiffs only
allege as monetary damage an amount in excess of the jurisdictional minimum for
the court in which the case has been filed. A few suits also name as defendants
various officers and directors of the Company.
As of December 31, 1997, approximately 2,800 plaintiffs were joined in lawsuits
against the Company. A number of plaintiffs have failed to pursue the claims
made on their behalf and their claims were dismissed without prejudice. As of
March 31, 1998, the claims of approximately 2,200 plaintiffs remain active in
the litigation. As of December 31, 1997, the Company was also named as a
defendant in lawsuits involving about 2,600 plaintiffs where the Company is
alleged to have conspired with competitors and others legally to promote the use
of spinal implant systems.
The Company believes that it has defenses, including, without limitation,
defenses based upon the failure of a cause of action to exist where no
malfunction of the implant has occurred or the plaintiff has suffered no injury
attributable to the Company's product, the expiration of the applicable statute
of limitations and the learned intermediary defense. The Company has asserted
and will continue to assert these defenses primarily through the filing of
dispositive motions. The Company believes that all product liability lawsuits
currently pending against it are without merit and will continue to defend
against them vigorously.
FEDERAL MULTIDISTRICT LITIGATION (MDL 1014)
On August 4, 1994, the Federal Judicial Panel for Multidistrict Litigation
ordered all federal court lawsuits to be transferred to and consolidated for
pretrial proceedings, including the determination of class certification, in the
United States District Court for the Eastern District of Pennsylvania in
Philadelphia (the "Multidistrict Litigation"). Lawsuits filed in federal court
after August 4, 1994 have also been transferred to and consolidated in the
Multidistrict Litigation in the Eastern District of Pennsylvania. In addition, a
number of lawsuits filed in state courts around the country were removed to
federal courts and then transferred into the Multidistrict Litigation. On
February 22, 1995, Chief Judge Emeritus, Louis C. Bechtle, denied class
certification. A large number of plaintiffs filed individual lawsuits as a
result of the denial of class certification. In some instances, lawsuits that
had been removed and transferred into the Multidistrict Litigation have been
remanded to the state courts in which they were filed because there was no
federal court jurisdiction. As of December 31, 1997, the Company is a defendant
in approximately 920 individual claims and 1,065 conspiracy claims consolidated
in the Multidistrict Litigation. On April 16, 1997, Judge Bechtle dismissed
conspiracy claims alleging fraud on the FDA, but deferred the remaining
conspiracy claims for later consideration by the federal trial courts to whom
the cases will be remanded for trial.
Discovery has been completed in a number of the federal court cases and is
continuing in the remainder. A small number of cases have been transferred to
the federal courts in which they were filed for further proceedings and trial.
Judge Bechtle has begun the process of transferring the remaining federal court
cases to various federal courts throughout the United States. As of December 31,
1997, the Federal Judicial Panel on Multidistrict Litigation ordered the remand
of approximately 210 cases to transferor courts for further proceedings. It is
not now possible to determine when the first federal court cases will be tried.
STATE COURT LITIGATION
A number of cases filed in state courts were not eligible for removal and
transfer into the Multidistrict Litigation. As of December 31, 1997, there were
approximately 1,800 individual claims pending against the Company in several
courts around the country, principally in Tennessee, Oklahoma, Texas and
Pennsylvania. In addition, there were approximately 1,600 conspiracy claims
pending in state courts.
Approximately 1,550 plaintiffs who had joined together in several complaints
which had been removed to the Multidistrict Litigation proceedings have had
their cases remanded to the state court in Memphis, Tennessee, where
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<PAGE> 15
they were originally filed when it was determined that the federal court lacked
jurisdiction over their claims. A number of plaintiffs have failed to pursue
claims made on their behalf and their claims were dismissed without prejudice.
As of March 31, 1998, the claims of approximately 1,000 plaintiffs remain active
in the litigation pending in Memphis, Tennessee. The presiding state court judge
in Memphis has established a case management plan which calls for the
preparation of eight representative cases for preparation and trial.
Discovery is proceeding in all remaining state court cases. Some state cases
have been given trial dates in 1998. It is anticipated that a number of other
state court cases around the country may be scheduled for trial in 1998,
although delays in trial dates are common. Trials in the Memphis proceedings are
scheduled to begin in 1998.
ACROMED CORPORATION SETTLEMENT
In December 1996, AcroMed Corporation ("AcroMed"), a spinal implant manufacturer
and a defendant in many of the cases pending in the Multidistrict Litigation,
and the Plaintiff's Legal Committee in the Multidistrict Litigation announced
that they had entered into a conditional settlement regarding all product
liability claims involving the use of AcroMed devices to achieve pedicular
fixation with screws in spinal fusion surgery. Under the terms of the
settlement, AcroMed will establish a settlement fund consisting of $100 million
in cash plus the proceeds of its product liability insurance policies. In
January 1997, the parties submitted a formal class settlement agreement and
related documentation for approval by Judge Bechtle. By order dated October 17,
1997, Judge Bechtle certified the proposed settlement class and approved the
proposed settlement. All federal and court proceedings involving AcroMed devices
have been stayed pending final jurisdictional consideration of the proposed
settlement.
INSURANCE
Several insurance carriers have asserted reservation of rights concerning the
scope and timing of the Company's remaining insurance coverage, but have not
denied insurance coverage by the Company. Three of the carriers, Royal Surplus
Lines Insurance Company ("Royal"), Steadfast Insurance Company ("Steadfast") and
Agricultural Excess and Surplus Insurance Company ("Agricultural"), have each
filed declaratory judgment actions against the Company seeking clarification of
their rights and obligations, if any, under their respective policies. Neither
Royal nor Agricultural has paid amounts due to the Company; Steadfast has paid
only a portion of the amounts due to the Company.
The Royal and Steadfast lawsuits are pending in the United States District Court
for the Western District of Tennessee in Memphis. The Agricultural lawsuit is
pending in the United States District Court for the Southern District of Ohio in
Cincinnati. The Company believes that the receivables are recoverable under the
terms of the Royal, Steadfast and Agricultural policies. The Company has filed
an answer and counterclaim in the Royal litigation and a motion seeking the
interim payment of the Company's defense costs. The Company has filed an answer
and counterclaim in the Steadfast litigation and intends to file an answer and
counterclaim in the Agricultural litigation. These litigations are in the
preliminary stages. The Company believes that Royal's, Steadfast's and
Agricultural's claims are without merit and will defend against them 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 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 is reflected in
the Company's 1996 financial statements, covers the reasonable foreseeable costs
that the Company was positioned in late December 1996 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
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<PAGE> 16
and circumstances were the announcement of the AcroMed settlement described
above, the likelihood that the litigation will continue for several years, in
part, due to the additional financial resources provided to the plaintiff's
attorneys as a result of the AcroMed settlement, 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
accrued liability which remained on the Company's consolidated balance sheet at
December 31, 1997 represents the Company's best judgment of the probable
reasonable costs (in excess of amount of insurance the Company believes are
recoverable) to defend and conclude the lawsuits based on the facts and
circumstances currently existing. The costs provided for in the accrued
liability 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 lawsuits could have a
material effect on the Company's results of operations and cash flows 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 purported 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 Company sold its products illicitly,
illegitimately and improperly and to timely disclose facts concerning the
termination of the former U.S. distributor of Sofamor products, National Medical
Specialties, Inc. ("NMS"). The allegations relating to illicit and illegitimate
sales of product are, for the most part, copies from product liability
complaints filed against the Company and other manufacturers currently being
coordinated in improper sales related 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 appealed the
dismissal to the United States Court of Appeals for the Sixth Circuit. On August
14, 1997, the Court of Appeals affirmed the dismissal of the plaintiffs'
complaint. The Court of Appeals denied the plaintiffs' request for
reconsideration on October 9, 1997. The plaintiffs have filed a petition for
certiorari in the United States Supreme Court.
The Company does not believe the Securities Laws Actions 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."
Also see "Risk Factors - Risk of Product Liability; Adequate Insurance Coverage"
and "--Dependence on Patents and Proprietary Technology."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not Applicable.
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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 49 Chairman and Chief Executive Officer, Sofamor Danek Group, Inc.
James J. Gallogly 49 President and Chief Operating Officer, Sofamor Danek Group, Inc.
Robert A. Compton 41 Group President, Operations, Sofamor Danek Group, Inc.
R. L. (Lew) Bennett 71 Senior Vice President, Sofamor Danek Group, Inc.
Richard E. Duerr, Jr. 51 Vice President, General Counsel and Secretary, Sofamor Danek Group, Inc.
Laurence Y. Fairey 47 President, International Division, Sofamor Danek Group, Inc.
George G. Griffin, III 50 Executive Vice President and Chief Financial Officer, Sofamor Danek Group, Inc.
Kenneth G. Hayes 45 President, Surgical Navigation Technologies Division
Mark D. LoGuidice 42 Executive Vice President, New Products and Markets, Sofamor Danek Group, Inc.
Richard Mazza 51 Executive Vice President, Global Manufacturing and Distribution, Sofamor Danek
Group, Inc.
J. Mark Merrill 38 Vice President, Treasurer and Assistant Secretary, Sofamor Danek Group, Inc.
John Pafford 38 Executive Vice President, Global Research and Development, Sofamor Danek Group, Inc.
Dr. Marie-Helene Plais 48 Executive Vice President, Sofamor Danek Group, Inc.
Gene B. Sponseller 41 President of Manufacturing, Sofamor Danek USA
Edward Traurig 40 Executive Vice President, Sales, Sofamor Danek USA
Richard W. Treharne, Ph.D. 48 Vice President of Research and Regulatory Affairs, Sofamor Danek Group, Inc.
</TABLE>
In May 1998, Mr. Compton will become the President and Chief Operating Officer
of the Company. Mr. Gallogly, the current President and Chief Operating Officer
of the Company, will relinquish these positions at such time but will remain on
the Board of Directors of the Company. In addition, Mr. Gallogly will become an
exclusive consultant to the Company.
The executive officers of the Company serve at the discretion of the Board of
Directors and are appointed annually. The following is a brief description of
the previous business background of each of the executive officers and
directors.
E. R. (Ron) Pickard has been Chairman and Chief Executive Officer of the Company
since May 1994. He was President and Chief Operating Officer of the Company from
August 1990 until becoming President and Chief Executive Officer in April 1991.
He was appointed as Director of the Company in February 1991. 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). He was appointed as Director of the
Company in February 1991.
James J. 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. He was appointed as a Director of the Company in 1994.
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.
Robert A. Compton joined the Company in May 1997 as Group President, Operations.
He has served on the Company's Board of Directors since 1990. For 12 years prior
to joining the Company, Mr. Compton developed a successful career in the venture
capital industry, and most recently worked for the Corporation for Innovation
and Development. He first invested in the Company in 1989 and subsequently
served on the Company's Board of Directors. His past venture capital activities
have included investing in and building rapidly growing companies in
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<PAGE> 18
the fields of medical devices, healthcare services, information technology and
biotechnology. He received his B.A. from Principia College in 1978 and his
M.B.A. from Harvard University in 1984.
R. L. (Lew) 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 orthopedic
company.
Richard E. Duerr, Jr. 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.
Laurence Y. Fairey has been President of the Company's International Division
since January 1998. He 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. In July 1997, Mr. Fairey was
named President of the Company's Americas, Asia, Pacific Division. 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.
George G. Griffin III joined the Company in July 1997 as Executive Vice
President and Chief Financial Officer. For four years prior to joining the
Company, Mr. Griffin served as Chief Financial Officer and Executive Vice
President of Wright Medical Technology, Inc., and from 1988 through 1993, he
served as Vice President--Finance of Smith and Nephew Richards. Mr. Griffin has
over 18 years of management experience in the orthopedic industry. He received a
degree in accounting from Mississippi State University in 1970 and became a
certified public accountant in 1980.
Kenneth G. Hayes joined the Company in July 1997 as President, Image Guided
Surgery Division. Mr. Hayes has more than 20 years experience in the medical
devices industry and, prior to joining the Company, served as President of the
USCI Division of C.R. Bard. He received his B.S. from Marist College in 1974.
Mark D. LoGuidice has been Executive Vice President, New Products and Markets
since January 1998. He joined Sofamor Danek USA as President in 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.
Richard Mazza joined the Company in February 1998 as Executive Vice President,
Global Manufacturing and Distribution. For the four years prior to joining the
Company, Mr. Mazza was employed by Wright Medical Technology, Inc., most
recently serving as Chief Operating Officer. From 1991 to 1994, he served as
Senior Director of Operations for United States Surgical Corporation. Mr. Mazza
is a graduate of Central Connecticut State University.
J. Mark 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
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<PAGE> 19
Public Accountant in 1983 and received his M.B.A. with a concentration in
finance from the University of Memphis in 1988.
John Pafford has been Executive Vice President, Global Research and Development
since October 1997. He joined the Company in January 1991 as Director of Product
Development. In September 1991, he was promoted to Vice President of Product
Development overseeing all U.S. product developing activities. Prior to joining
the Company, Mr. Pafford was employed by Dow Corning Wright, holding various
positions in Product Development from 1977 onward. Mr. Pafford holds a B.S.
degree in engineering from the University of Memphis and is a member of the
University's Advisory Council of the Herff College of Engineering.
Marie-Helene Plais, M.D. 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 an M.D. and holds a Master's Degree in human biology.
Gene B. 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.
Edward Traurig has been Executive Vice President, Sales since October 1997. He
joined the Company in February 1995 as Vice President, Sales. Mr. Traurig had
previously been employed with United States Surgical Corporation for 13 years
holding various positions. He holds a B.S. degree from Miami University in Ohio.
Richard W. Treharne, Ph.D. has been Vice President of Regulatory and Clinical
Affairs of the Company since January 1991. He joined the Company in November
1990. Prior to that, 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.
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>
1997
High $43.75 $47.18 $57.13 $73.19
Low 30.75 35.50 44.13 56.63
- --------------------------------------------------------------------------------------------------------------------
1995
High $35.50 $36.88 $30.88 $32.63
Low 24.00 25.25 21.63 24.75
====================================================================================================================
</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.
16
<PAGE> 20
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, 1998, the Company had approximately 963 stockholders of
record.
17
<PAGE> 21
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, 1997 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,
- ----------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues $312,902 $244,525 $188,799 $161,677 $161,794
Cost of goods sold 58,068 45,005 40,309 35,295 35,893
- ----------------------------------------------------------------------------------------------------------------------
Gross profit 254,834 199,520 148,490 126,382 125,901
Operating expenses:
Selling, general and administrative 145,414 116,729 89,847 74,183 67,844
Research and development 19,747 15,926 13,980 11,572 11,488
License agreement acquisition charge - - 45,337 - -
Product liability litigation charge - 50,000 - - -
Royalty expenses discontinued subsequent to the
combination - - - - 1,182
Distributor contract termination charge and
related amortization of short-term intangibles - - - 10,000 -
- ----------------------------------------------------------------------------------------------------------------------
Total operating expenses 165,161 182,655 149,164 95,755 80,514
- ----------------------------------------------------------------------------------------------------------------------
Income (loss) from operations 89,673 16,865 (674) 30,627 45,387
Other income (expense) 5 913 2,533 2,153 (179)
Interest expense (5,539) (3,744) (2,794) (629) (193)
Combination expense - - - - (9,958)
Non-recurring litigation award - - - (2,225) -
- ----------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations before
provision (benefit) for and charge in lieu of
income taxes 84,139 14,034 (935) 29,926 35,057
Provision (benefit) for and charge in lieu of income taxes 25,073 1,293 (6,319) 6,052 14,429
- ----------------------------------------------------------------------------------------------------------------------
Income before loss from operations of discontinued
segment and minority interest 59,066 12,741 5,384 23,874 20,628
Loss from operations of discontinued segment - - - - (153)
Minority interest (2,282) (1,474) (417) (97) (50)
- ----------------------------------------------------------------------------------------------------------------------
Net income $ 56,784 $ 11,267 $ 4,967 $ 23,777 $ 20,425
Net income per share - diluted $2.12 $0.44 $0.20 $0.97 $0.83
Net income per share - basic $2.29 $0.46 $0.21 $0.99 $0.85
Weighted average number of shares - diluted 26,783 26,046 25,216 24,496 24,499
Weighted average number of shares - basic 24,797 24,284 23,846 24,014 24,133
- ----------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA:
Working capital $122,992 $ 31,127 $ 77,139 $ 69,164 $ 59,441
Total assets 385,657 319,161 196,613 141,792 120,597
Short-term debt 19,317 66,894 16,602 3,949 1,334
Long-term debt 60,650 12,300 28,125 5,324 1,103
Stockholders' equity (1) 211,298 139,826 122,929 111,456 92,806
</TABLE>
- ----------
(1) The Company has never paid cash dividends on its common stock and does
not anticipate paying cash dividends in the foreseeable future.
18
<PAGE> 22
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,
- -------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1997 VS 1996 1996 vs 1995
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 28.0% 29.5%
Cost of goods sold 18.6 18.4 21.4 29.0 11.7
- --------------------------------------------------------------------------------
Gross profit 81.4 81.6 78.6 27.7 34.4
Operating expenses:
Selling, general and administrative 46.4 47.7 47.6 24.6 29.9
Research and development 6.3 6.5 7.4 24.0 13.9
License agreement acquisition charge - - 24.0 - (100.0)
Product liability litigation charge - 20.5 - (100.0) 100.0
- --------------------------------------------------------------------------------
Total operating expenses 52.7 74.7 79.0 (9.6) 22.5
Income (loss) from operations 28.7 6.9 (0.4) 431.8 2602.2
Other income - 0.4 1.3 (99.5) (64.0)
Interest expense (1.8) (1.6) (1.4) 47.9 34.0
- --------------------------------------------------------------------------------
Income (loss) before provision
(benefit) for and charge in lieu of
income taxes and minority interest 26.9 5.7 (0.5) 499.5 1601.0
Provision (benefit) for and charge in
lieu of income taxes 8.0 0.5 (3.3) 1839.1 120.5
- --------------------------------------------------------------------------------
Income before minority interest 18.9 5.2 2.8 363.6 136.6
Minority interest (0.7) (0.6) (0.2) 54.8 253.5
- --------------------------------------------------------------------------------
Net income 18.2% 4.6% 2.6% 404.0% 126.8%
================================================================================
</TABLE>
RESULTS OF OPERATIONS
Years ended December 31, 1997 and 1996
The Company reported revenues for 1997 of $312.9 million, which represented a
$68.4 million, or 28.0%, increase over 1996 revenues of $244.5 million. The
record 1997 revenues reflect the Company's position as the leader in providing
products to treat spinal disorders. Increased volume generated growth of 26.1%.
Revenues were higher by 3.6% due to net changes in pricing and by 2.0% as a
result of the Company's conversion of certain portions of its international
distribution network to direct sales which resulted in higher selling prices. If
exchange rates had been constant, revenues would have reflected an additional
3.7% increase compared with the prior year.
U.S. revenues increased 30.3% to $211.4 million compared with $162.2 million in
1996. The Company believes the improvement in U.S. revenues is primarily the
result of the increasing number of instrumented spinal fusions. The increase in
the number of instrumented fusions has occurred, in part, due to the broad range
of quality spinal products provided by the Company to assist physicians in
treating their patients. In addition to this broad range of implant products,
the Company is benefiting from offering complimentary product technologies
including the STEALTHSTATION(TM) system, the MedNext(R) surgical drill system
and the MED(TM) system. The Company has also benefited from service fees related
to cortical bone dowel and other allograft bone products.
Non-U.S. revenues advanced 23.4% to $101.5 million compared with $82.3 million
in 1996. If exchange rates had been constant, the international revenue growth
over 1996 would have been 34.4%. Higher sales volume in core products and the
acceptance of new products were the primary sources of the increase in revenues
over the prior year. In addition, the Company's revenues continued to benefit
from the direct sales operations which were established in selected countries
during 1996 and 1997.
19
<PAGE> 23
The Company's gross margin was 81.4% in 1997 compared with 81.6% in 1996. The
slight decrease was primarily attributable to the effects of changes in product
mix.
Selling, general and administrative ("SG&A") expenses expressed as a percentage
of revenues decreased to 46.4% in 1997 compared with 47.7% in 1996. The decrease
in SG&A expenses as a percentage of revenues resulted from the leveraging of
fixed costs over greater revenue volume, despite higher expenses incurred in
direct sales operations established in selected countries during 1996 and 1997.
Research and development expenses totaled $19.7 million, or 6.3% of revenues, in
1997 compared with $15.9 million, or 6.5% of revenues, in 1996. The 1997 dollar
spending represented an increase of 24.0% over 1996. These development and
clinical costs are incurred as the Company continues to enhance existing product
lines and develop new and complementary products, such as the interbody fusion
devices, biological products for use in spinal applications, and products
related to frameless stereotactic surgery in the spinal and neurological fields
of use.
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. No such charge was
recorded in 1997. The Company believes that these lawsuits are without merit and
unfounded. (See Note 14 to the Consolidated Financial Statements.)
The Company reported net other income of $5,000 in 1997 compared with $913,000
during 1996. Other income was higher during 1996 due mainly to foreign exchange
gains. Interest expense was $5.5 million in 1997, representing a $1.8 million
increase over 1996. Interest expense was higher during 1997 due to interest on
increased borrowings under the Company's credit facilities occurring principally
as a result of acquisitions made in 1996.
The Company recorded income tax expense of $25.1 million in 1997 and $1.3
million in 1996. The difference between the Company's effective and statutory
tax rates for both 1997 and 1996 resulted primarily from the impact of certain
elections made for U.S. tax purposes following the combination (the
"Combination") of Danek Group, Inc. with Sofamor S.A., and the subsequent
reorganization of Sofamor S.A. 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, 1997, the balance sheet of
the Company reflected a net deferred tax asset of $39.4 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 11
to the Consolidated Financial Statements.)
Minority interest was $2.3 million in 1997 compared with $1.5 million in 1996.
The increase was primarily related to the existence of a minority interest for a
full year in the Company's Korean subsidiary which was formed in November 1996.
The Company believes that historically inflation has not had a material impact
on its business.
Years ended December 31, 1996 and 1995
The Company achieved record revenues during 1996 of $244.5 million, which
represented a $55.7 million, or 29.5%, increase over revenues of $188.8 million
in 1995. Revenue growth included an increase of 8.5% that resulted from the
conversion of certain portions of the Company's international distribution
network to direct sales, which resulted in higher selling prices. Other net
pricing changes in existing distribution channels resulted in a
20
<PAGE> 24
3.9% increase in revenues. Additional volume comprised the remainder of the
increase in revenues. Changes in exchange rates had an immaterial impact on
revenues when comparing the Company's 1996 revenues with 1995.
U.S. revenues increased 28.4% to $162.2 million, as compared with $126.3 million
in 1995. The Company believes the improvement in U.S. revenues was 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. revenues increased 31.7% to $82.3 million, as compared with $62.5
million in 1995. The strong international revenue growth during 1996 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.
SG&A expenses were 47.7% of revenues in 1996 compared with 47.6% of revenues in
1995. The 1996 SG&A expenses as a percentage of revenues compared to 1995 were
slightly higher due to the effects of expenses related to establishing a direct
sales presence in selected countries. These higher expenses were mostly offset
by the leveraging of other fixed costs over greater volume in existing
operations.
Research and development expenses totaled $15.9 million or 6.5% of revenues in
1996 compared with $14.0 million or 7.4% of revenues in 1995. The 1996 dollar
spending represented an increase of 13.9% over 1995. These costs were incurred
as the Company continued 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.
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 14 to the
Consolidated Financial Statements.)
In 1995, the Company entered into a strategic alliance with Genetics Institute
to provide biological products for use in spinal applications (the "G.I.
Agreement"). Pursuant to the G.I. Agreement, the Company obtained exclusive
North American rights to recombinant human bone morphogenetic protein (rhBMP-2)
for spinal applications. 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
represented 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 diluted share for the year ended
December 31, 1995.
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 under the
Company's credit facilities occurring principally as a result of the
acquisitions made during 1996.
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
21
<PAGE> 25
primarily from the impact of certain elections made for U.S. tax purposes
following the Combination of Danek Group, Inc. with Sofamor S.A., and the
subsequent reorganization of Sofamor S.A. from an S.A. under French law to an
S.N.C. in late 1993.
Minority interest was $1.5 million in 1996 compared with $417,000 in 1995. The
increase was principally due to the minority interest in the Company's Japanese
subsidiary which was formed in February 1996.
LIQUIDITY AND CAPITAL RESOURCES
On January 26, 1998, the Company purchased all of the outstanding capital stock
of SOFYC, S.A. ("SOFYC") for an aggregate of 2,806,080 privately placed shares
of the Company's Common Stock, $1.0 million in cash (less certain expenses
relating to the repurchase) and the Company's agreement to repay certain
outstanding loans of SOFYC equal to approximately $925,000 (the "SOFYC
Exchange"). SOFYC, which was the personal holding company of the Cotrel family,
owns 3,337,272 shares of the Company's Common Stock. As a result of the SOFYC
Exchange, the outstanding shares of Common Stock of the Company will be reduced
by 531,192 shares. In connection with the transaction, certain registration
rights were granted to SOFYC shareholders. In accordance with these rights, the
Company filed a registration statement with the Securities and Exchange
Commission relating to a proposed public offering on behalf of the former SOFYC
holders of 1,600,000 of their 3,689,711 shares of Sofamor Danek common Stock
that they own in the aggregate. The registration statement also includes a
proposed public offering of up to 1,200,000 shares of common stock to be sold by
Sofamor Danek for its own account. In addition, Sofamor Danek will grant to the
underwriters an over-allotment option relating to a maximum of 420,000 shares of
common stock.
Cash generated from operations and the Company's revolving lines of credit are
the principal ongoing sources of funding available for growth of the business,
including working capital and additions to property, plant and equipment, as
well as debt service requirements and required contractual payments. The Company
believes that these sources of funding together with the proceeds from the
Offering will be sufficient to meet its expected cash needs for the foreseeable
future. Cash, cash equivalents and short-term investments totaled $2.8 million
at December 31, 1997, compared with $2.9 million at December 31, 1996.
The Company's working capital increased by $91.9 million during 1997. The
increase in working capital resulted primarily from the renegotiation of the
Company's $100.0 million uncollateralized revolving line of credit with a
syndicate of U.S. banks which extended the maturity thereof from October 1997 to
July 2000 (see Notes 8 and 9 to the Consolidated Financial Statements) as well
as the effects of operating activities. Accounts receivable increased $18.2
million or 26.0% from December 31, 1996, due principally to the 30.2% increase
in revenues in the fourth quarter of 1997 compared with the last quarter of
1996. Inventories and loaner set inventories increased by $14.5 million from
prior year, due mostly to stocking levels required for recently formed
subsidiaries and the production of inventories in preparation for new sales and
marketing programs. Other receivables, which consisted primarily of amounts
recoverable from insurance carriers related to the costs incurred in connection
with product liability litigation (see Note 14 to the Consolidated Financial
Statements), increased $13.6 million from the previous year-end.
In connection with the formation of its 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 $2.0 million and $26.7 million in 1997 and 1996, respectively, were made to
KPC as prepayments of commissions.
In connection with the G.I. Agreement, the Company has a liability of $7.0
million at December 31, 1997. This liability represents the initial present
value of the remaining $7.5 million payment due in June of 1998 under the
agreement. Under this agreement, payments of $17.5 million, $12.5 million and
$12.5 million were made in 1997, 1996 and 1995, respectively.
22
<PAGE> 26
The purchase agreements for two acquisitions made by the Company in 1996 contain
provisions which provide for contingent payments to the former shareholders of
each entity based upon certain calculations relative to revenues and earnings,
as defined, through 1999. Such payments are reflected as purchase price
adjustments. The Company recorded adjustments to the purchase price of these
acquisitions of $5.1 million and $4.2 million in 1997 and 1996, respectively.
The amount recorded in 1996 was paid in April 1997, and the amount recorded in
1997 is expected to be paid in March 1998. The Company is unable to determine
whether such adjustments will be required for 1998 or 1999.
Additions to property, plant and equipment amounting to $10.3 million, $7.1
million and $4.6 million in 1997, 1996 and 1995, respectively, were made
primarily relating 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. Management has
entered into an agreement whereby the Company will lease, with an initial term
of 10 years, a new facility adjacent to its existing headquarters with an
expected occupancy date of mid 1998. This lease will be accounted for as an
operating lease.
The Company has committed lines of credit totaling $115.9 million. At December
31, 1997, $67.3 million was outstanding under these lines of credit and other
short-term borrowings. The committed lines of credit consist primarily of the
$100.0 million U.S. revolving line of credit.
In 1996, the Internal Revenue Service began an examination of the Company's
federal income tax returns. The years under examination are 1993, 1994 and 1995.
Management believes that the resolution of any issues that may be developed as a
result of the examination will not have a significant impact on the Company's
results of operations or financial condition.
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.
The "Year 2000" issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any computer programs
that have time sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices or engage
in similar normal business activities. Management has conducted an assessment of
its exposure to disruption associated with the "Year 2000" issue. The Company is
currently in the process of implementing purchased software that will serve as
an enterprise resource planning system providing enhanced productivity and
customer service benefits in addition to mitigating potential consequences of
the Year 2000 issue. The cost of the software license and the majority of the
costs of implementation will be capitalized. Management expects this
implementation to be complete by the end of 1998. The Company believes that with
modifications to existing software and conversions to new software, the Year
2000 issue will not pose significant operational problems for its computer
systems. However, if such modifications are not made, or are not completed in a
timely manner, the Year 2000 issue could have an impact on the Company's ability
to operate. The Company does not believe that the costs of addressing this issue
will be material to the Company's operations.
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:
23
<PAGE> 27
Regulatory Clearances and Compliance. The preclinical testing, manufacturing,
labeling, distribution and promotion of the Company's products are subject to
extensive government regulation by the FDA in the United States and comparable
regulatory bodies in other countries. Noncompliance with the applicable
regulatory requirements can lead to enforcement action which may result in,
among other things, warning letters, fines, recall or seizure of products, total
or partial suspension of production, refusal by governments to grant pre-market
clearances and criminal prosecution. 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 process will not involve delays adversely affecting the marketing
and sale of new devices. In the United States, even after regulatory clearance
or approval to market a device is obtained from the FDA, the Company is subject
to continuing FDA regulation. FDA approvals are required for new intended uses
and certain changes to a marketed device. FDA regulations depend 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 is also
subject to numerous federal, state and local laws relating to such matters as
safe working conditions, manufacturing practices and environmental protection.
There can be no assurance that the Company will not be required to incur
significant costs to comply with such laws and regulations. Unanticipated
changes in existing regulatory requirements, failure of the Company to comply
with such requirements or adoption of new requirements could have a material
adverse effect on the Company's business.
Potential Impact of Healthcare Cost Containment Proposals on Profitability.
Sales of a large portion of the Company's products depend to a significant
extent on the availability of reimbursement to the Company's customers by
government and private insurance plans. In recent years, the cost of healthcare
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 the ultimate
timing, scope or effect of any legislation concerning healthcare reform. Any
legislation, if adopted, could result in significant changes in the
availability, delivery, pricing and payment for healthcare services and products
and adversely affect the Company's business. In addition, hospitals and other
healthcare providers have become increasingly cost sensitive. To date, the
Company does not believe that such healthcare 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.
Rapid Technological Change; Technological Obsolescence; Acceptance Of New
Products. The medical device industry is characterized by rapidly changing
technology and frequent new product introductions. The Company's future success
will depend largely on the Company's ability to develop and introduce in a
timely manner new products and enhancements that meet changing customer
requirements and emerging industry standards. Although the Company's strategy
for growth includes the introduction of new products, the development of new
technologically advanced products and enhancements is a complex and uncertain
process requiring high levels of innovation as well as the anticipation of
technology and market trends. The Company may not be able to respond effectively
to technological changes, emerging industry standards or product announcements
by competitors, it may not be able to identify, develop, manufacture, market,
sell or support new products and enhancements successfully and its new products
or enhancements may not achieve market acceptance. Market acceptance for
products under development could be adversely affected by numerous factors,
including the lack of availability of third-party reimbursement to consumers of
such products, the cost of the products, clinical acceptance thereof and
effective physician training. Market acceptance will also depend on the
Company's ability to demonstrate that such products are an attractive
alternative to existing products, which will depend on physicians' evaluations
of the clinical safety and efficacy, ease of use, reliability and
cost-effectiveness of the products. Furthermore, the Company believes that, once
the products receive approval, recommendations and endorsements by influential
surgeons will be essential to market acceptance of its products. There can be no
assurance that the Company's products under development will adequately
demonstrate these characteristics or that they will receive market acceptance
among consumers or physicians. Any of these events could have a material adverse
effect on the Company's business, financial condition and results of operations.
24
<PAGE> 28
Product Liability; Insurance. In recent years, physicians, hospitals, and other
participants in the healthcare industry have become subject to an increasing
number of lawsuits alleging malpractice, product liability or related legal
theories, many of which involve large claims and significant defense costs. The
Company is currently involved in product liability litigation. (See Note 14 to
the Consolidated Financial Statements.) There can be no assurance that
additional claims will not be asserted against the Company in the future. A
successful future claim or aggregation of future claims brought against the
Company in excess of insurance coverage could have a material adverse effect
upon the financial condition, results of operations and/or cash flows of the
Company. Claims against the Company, regardless of their merit or eventual
outcome, may also have a material adverse effect upon the reputation and
business of the Company. The Company currently maintains liability insurance at
coverage levels which it deems commercially reasonable. Historically, the
Company has been required to call on its insurance for product liability claims,
and assuming all amounts are paid by the insurance carriers, the Company will
have exhausted its insurance coverage for the coverage year ended November 1995.
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.
Increasing Competition. The medical device industry is subject to intense
competition. The market for products designed to treat spinal conditions is
highly competitive, and the Company expects competition to increase as a result
of new entrants and consolidations. Accordingly, the Company's future success
will depend in part on its ability to respond quickly to medical and
technological change and user preferences through the development and
introduction of new products that are of high quality and that address patient
and surgeon requirements and, in part, on its ability to differentiate its
mature products from those of its competitors. Worldwide, there are many firms
producing spinal implant devices, and certain of the Company's competitors
currently manufacture and sell interbody fusion cages that have received a PMA
from the FDA. A number of these firms have greater financial, research and
development, manufacturing and sales and marketing resources than the Company.
The Company's inability to compete effectively against existing or future
competitors would have a material adverse effect on its business, financial
condition and results of operations.
Dependence On Key Personnel. The Company's future success depends in significant
part upon the continued service of certain key scientific, technical and
managerial personnel and its continuing ability to attract and retain highly
qualified scientific, technical and managerial personnel. Competition for such
personnel is intense, and there can be no assurance that the Company can retain
its current personnel or that it can attract, assimilate or retain other highly
qualified scientific, technical and managerial personnel in the future. The
Company has taken steps to retain its key employees, including the granting of
stock options that vest over time. The loss of key personnel, especially if
without advanced notice, or the inability to hire or retain qualified personnel
could have a material adverse effect upon the Company's business, financial
condition and results of operations.
Risks Associated With International Sales. A significant portion of the
Company's revenues relate to international sales of its products, which are
subject to numerous risks. Regulatory requirements, as well as pricing,
marketing and distribution structures, vary significantly from country to
country. Additionally, international sales can be adversely affected by
limitations or disruptions caused by the imposition of government controls,
export licenses, political instability, trade restrictions, changes in foreign
tax laws or tariffs, or other trade regulations and difficulties coordinating
communications among and managing international operations. Moreover, the
Company's business, financial condition and results of operations may be
adversely effected by fluctuations in overseas economic conditions and
international currency exchange rates, as well as by increases in duty rates,
difficulty in obtaining export licenses, constraints on its ability to maintain
or increase prices and competition. There can be no assurance that the Company
will be able to successfully commercialize its existing products or any of its
future products in any international market, which could have a material adverse
effect on the Company's business, financial condition and results of operations.
25
<PAGE> 29
Dependence On Patents And Proprietary Technology. The patent and trade secret
positions of medical device companies, including those of the Company, are
uncertain and involve complex and evolving legal and factual questions. The
coverage sought in a patent application either can be denied or significantly
reduced before or after the patent is issued. Consequently, there can be no
assurance that any patents from pending applications or from any future patent
application will be issued, that the scope of the patent protection will exclude
competitors or provide competitive advantages to the Company, that any of the
Company's patents will be held valid if subsequently challenged or that others
will not claim rights in or ownership of the patents and other proprietary
rights held by the Company. Since patent applications are secret until patents
are issued in the United States, or corresponding applications are published in
other countries, and since publication of discoveries in the scientific or
patent literature lags behind actual discoveries, the Company cannot be certain
that it was the first to file patent applications for its inventions. In
addition, there can be no assurance that competitors, many of which have
substantial resources, will not seek to apply for and obtain patents that will
prevent, limit or interfere with the Company's ability to make, use or sell its
products either in the United States or in international markets. Further, the
laws of certain foreign countries do not protect the Company's intellectual
property rights to the same extent as do the laws of the United States.
Litigation or regulatory proceedings, which could result in substantial cost and
uncertainty to the Company, may also be necessary to enforce patent or other
intellectual property rights of the Company or to determine the scope and
validity of other parties' proprietary rights. There can be no assurance that
the Company will have the financial resources to defend its patents from
infringement or claims of invalidity.
The Company also relies upon unpatented proprietary technology, and no assurance
can be given that others will not independently develop substantially equivalent
proprietary information and techniques or otherwise gain access to or disclose
the Company's proprietary technology or that the Company can meaningfully
protect its rights in such unpatented proprietary technology. The Company's
policy is to require each of its key employees, consultants, investigators and
advisors to execute a confidentiality agreement upon the commencement of an
employment or consulting relationship with the Company. There can be no
assurance, however, that these agreements will provide meaningful protection for
the Company's proprietary information in the event of unauthorized use or
disclosure of such information.
Dependence On Suppliers. The Cortical Bone Dowel, a product the Company
distributes on behalf of the University of Florida Tissue Bank ("UFTB"), is made
of human bone tissue obtained from cadavers. The UFTB supplies significant
amounts of such tissue pursuant to an exclusive agreement with the Company.
There can be no assurance that the supply of bone tissue will continue to meet
current demand, or that the Company, if required, will be able to locate
alternative sources of human bone tissue on a timely and cost-effective basis.
To date, constrained supply of human bone tissue has limited growth in this
area. There can be no assurance that the UFTB will meet the Company's future
delivery requirements of human bone tissue. The inability to procure an adequate
supply of such tissue could have a material adverse effect on the Company's
business, financial condition and results of operations.
26
<PAGE> 30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information called for by this item is incorporated herein by reference to
the consolidated financial statements and notes thereto and the financial data
schedule included in the current report on Form 8-K filed by Sofamor Danek
Group, Inc. on February 3, 1998.
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 1998 Annual
Meeting of Shareholders (the "1998 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 1998 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 1998
Proxy Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the caption "Certain Relationships and Related
Transactions" contained on pages 15 and 16 of the Company's 1998 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
The financial statements to be included in this report are
incorporated in Part II, Item 8 hereof by reference to the
current report on Form 8-K filed by Sofamor Danek Group,
Inc. on February 3, 1998.
(2) Financial Statement Schedules
The financial statements to be included in this report are
incorporated in Part II, Item 8 hereof by reference to the
current report on Form 8-K filed by Sofamor Danek Group,
Inc. on February 3, 1998.
27
<PAGE> 31
(3) Exhibits
See Index to Exhibits
(B) REPORTS ON FORM 8-K
A report on Form 8-K was filed on February 3, 1998, which
included the Sofamor Danek Group, Inc. Consolidated
Financial Statements and Notes thereto as of December 31,
1997 and 1996 and for each of the three years in the period
ended December 31, 1997 and the related financial statement
schedule. The information included in the report was filed
in connection with the Registration Statement on Form S-3 of
Sofamor Danek Group, Inc. dated February 3, 1998, filed
under the Securities Act of 1933, as amended.
28
<PAGE> 32
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 24, 1998
----------------------------
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 24, 1998
- ----------------------------- Director (Principal Executive Officer)
E. R. Pickard
/s/ George G. Griffin, III Chief Financial Officer and Executive Vice March 24, 1998
- ----------------------------- President (Principal Financial and
George G. Griffin, III Accounting Officer)
L. D. Beard* Director March 24, 1998
- -----------------------------
L. D. Beard
George W. Bryan, Sr.* Director March 24, 1998
- -----------------------------
George W. Bryan, Sr.
Robert A. Compton* Director March 24, 1998
- -----------------------------
Robert A. Compton
Yves Paul Cotrel, M.D.* Director March 24, 1998
- -----------------------------
Yves Paul Cotrel, M.D.
/s/ James J. Gallogly Director, President and March 24, 1998
- ----------------------------- Chief Operating Officer
James J. Gallogly
Samuel F. Hulbert, Ph.D.* Director March 24, 1998
- -----------------------------
Samuel F. Hulbert, Ph.D.
Marie-Helene Plais, M.D.* Director March 24, 1998
- -----------------------------
Marie-Helene Plais, M.D.
George F. Rapp, M.D.* Director March 24, 1998
- -----------------------------
George F. Rapp, M.D.
*By: /s/ J. Mark Merrill
- -----------------------------
J. Mark Merrill
Attorney-in-Fact
</TABLE>
29
<PAGE> 33
SOFAMOR DANEK GROUP, INC.
ANNUAL REPORT ON FORM 10-K
DECEMBER 31, 1997
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Number Assigned
in Regulation
S-K, Item 601 Description of Exhibit
- ------------- ----------------------
<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 $80,000,000 Revolving Credit Agreement with SunTrust Bank in
Nashville dated July 22, 1997 (the "Credit Agreement") (11) (10.2)
as amended by
* Amendment to Revolving Loan Agreement dated December 22, 1997.
10.5 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.
10.6 Employment Agreement and Letter Agreement between Richard E. Duerr, Jr.
and the Company dated January 1, 1996 (9) (10.15)
10.7 * Employment Agreement between Laurence Y. Fairey and the Company
dated April 13, 1997
10.8 * Employment Agreement between Mark D. LoGuidice and the Company
dated April 13, 1997
10.9 * Employment Agreement between J. Mark Merrill and the Company
dated April 13, 1997
</TABLE>
30
<PAGE> 34
<TABLE>
<CAPTION>
Number Assigned
in Regulation
S-K, Item 601 Description of Exhibit
- ------------- ----------------------
<C> <C> <C>
10.12 Employment Agreement and Letter Agreement between Richard W. Treharne and
the Company dated January 1, 1996 (9) (10.20)
10.13 Employment Agreement between R. Lew Bennett and the Company dated
January 1, 1996 (9) (10.22)
10.14 Employment Agreement between Gene B. Sponseller and the Company dated
January 1, 1996 (9) (10.24)
10.15 Letter Agreement between E. R. Pickard and the Company dated January 1, 1996
and Resolution of the Company's Compensation Committee (9) (10.25)
10.16 Letter Agreement between James J. Gallogly and the Company dated January 1, 1996
and Resolution of the Company's Compensation Committee (9) (10.26)
10.17 Employment Agreement between Sofamor and Marie-Helene
Plais dated June 21, 1993 (6) (10.50)
10.18 * Letter Agreement between Robert A. Compton and the Company
dated May 28, 1997
10.19 * Employment Agreement between John Pafford and the Company
dated April 27, 1997
10.20 * Employment Agreement between Edward Traurig and the Company
dated April 27, 1997
10.21 * Letter Agreement between George G. Griffin, III and the Company
dated May 15, 1997
10.22 * Letter Agreement between Kenneth G. Hayes and the Company
dated May 15, 1997
10.23 * Letter Agreement between Richard Mazza and the Company
dated January 9, 1998
10.24 Amended and Restated Non-Qualified Stock Option Plan (2) (10.25)
10.25 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)
10.26 Incentive Stock Option Plan, as amended (1) (10.30)
</TABLE>
31
<PAGE> 35
<TABLE>
<CAPTION>
Number Assigned
in Regulation
S-K, Item 601 Description of Exhibit
- ------------- ----------------------
<C> <C> <C>
10.27 Amended and Restated Stock Option Plan for Distributors and
Consultants (9) (10.30)
10.28 Non-Employee Directors' Stock Option Plan (2) (10.34)
10.29 Cash Bonus Plan
10.30 Employee Stock Purchase Plan (10) (10.29)
10.31 Amended and Restated Loan Forgiveness Agreement dated
October 11, 1996 between the Company and E.R. Pickard.
10.32 * 1993 Long-Term Incentive Plan, as amended
10.33 Stock Pledge Agreement between E. R. Pickard and the
Company dated November 30, 1990. (6) (10.42)
10.34 Agreement between the Company and E. R. Pickard dated
December 15, 1995 (9) (10.40)
(21) 21.1 * Subsidiaries of the Company
(23) 23.1 * Consent of Coopers & Lybrand L.L.P., Independent Public Accountants
(24) 24.1 * 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, 1997
(99) 99.1 * Audited financial statements and related financial
statement schedule of Sofamor Danek Group, Inc. and
subsidiaries as of December 31, 1997 and 1996, and for
each of the three years in the period ended December 31,
1997.
</TABLE>
- ----------------------
*Previously unfiled documents are noted with an asterisk
32
<PAGE> 36
(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.)
(10) Incorporated by reference from Exhibits to the Form 10-K of the Registrant
for the fiscal year ended December 31, 1996. (Exhibit number in the Form
10-K is set forth in italics.)
(11) Incorporated by reference from the Exhibits to the Form 10-Q of the
registrant for the quarter ended June 30, 1997. (Exhibit number in the Form
10-K is set forth in italics.)
33
<PAGE> 1
EXHIBIT 10.4
FIRST AMENDMENT TO CREDIT AGREEMENT
THIS FIRST AMENDMENT TO CREDIT AGREEMENT (the "Amendment") is dated
this the 22nd day of December, 1997 by and between SOFAMOR DANEK GROUP, INC., an
Indiana corporation ("Borrower") and SUNTRUST BANK, NASHVILLE, N.A., a national
banking association as agent (the "Agent") for the Lenders, as described and
defined below.
RECITALS:
A. Borrower, Agent and the Lenders are parties to a Credit Agreement dated
as of July 22, 1997 (as amended or restated from time to time, the "Credit
Agreement").
B. In connection with the Credit Agreement, Borrower, Agent, Lenders and
other parties, entered into certain other Loan Documents (as defined in the
Credit Agreement).
C. SunTrust Bank, Nashville, N.A., Wachovia Bank of Georgia, N.A., Union
Planters National Bank and Banque Nationale de Paris, Houston Agency, presently
constitute all the Lenders under the Credit Agreement.
D. The Borrower and the Lenders desire to amend the Credit Agreement as
hereinafter provided.
E. Terms not defined herein shall have the meanings ascribed to such terms
in the Credit Agreement.
F. Attached hereto as collective Exhibit A are the requisite consents of
the Majority Lenders, consenting to this Amendment and to Agent's execution and
delivery of this Amendment on behalf of Lenders.
NOW, THEREFORE, in consideration of the foregoing and the covenants and
agreements contained herein, and other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, the parties hereto
agree as follows:
1. Section 1.02 of the Credit Agreement concerning "Definitions" is amended as
follows:
To increase the availability of the Revolving Credit Loan from
$80,000,000 to $100,000,000 in accordance with Section 2.20 of the Credit
Agreement, the definition of "Maximum Total Amount" is deleted, and the
following is substituted in lieu thereof:
"Maximum Total Amount" means: (i) with respect to the
Revolving Credit Loan, the principal amount of $100,000,000,
less the aggregate face amount of all outstanding Letters of
Credit, less the aggregate outstanding principal amount of the
Swing Line Note, less the aggregate outstanding principal
amount of all borrowings under the Foreign Currency Loan; (ii)
with respect to the Foreign Currency Loan,
1
<PAGE> 2
the principal amount of $15,000,000; (iii) with respect to the
Letters of Credit Subcommitment, $5,000,000; and (iv) with
respect to the Swing Line Loan, the principal amount of
$5,000,000.
2. Section 6.01 of the Credit Agreement concerning "Debts, Guaranties and
Other Obligations" is amended by deleting subsection (g) of such Section
and the following is substituted in lieu thereof:
(g) other Debt (including final judgments not covered
by insurance and capital expenditures of Borrower and its
Significant Subsidiaries) not to exceed $25,000,000 in the
aggregate for Borrower and its Subsidiaries, however
$5,000,000 of such Debt shall consist only of Debt incurred by
Subsidiaries of Borrower domiciled in countries other than the
United States.
3. The Loan Documents are hereby amended to the extent necessary to conform to
this Amendment. Except as specifically amended herein, the Credit Agreement
and the Loan Documents shall remain unamended and in full force and effect.
4. Borrower represents and warrants that the execution and terms of this
Amendment have been duly authorized by all necessary corporate action.
5. This Amendment shall be governed by and construed in accordance with the
laws of the State of Tennessee.
6. This Amendment may be executed in one or more counterparts, all of which
shall, taken together, constitute one original. The parties agree that
facsimile signatures shall be deemed to be and treated as original
signatures of such parties.
IN WITNESS WHEREOF, the parties hereto have duly executed this First
Amendment to Credit Agreement as of the day and date first set forth above.
SOFAMOR DANEK GROUP, INC.
By: /s/ George G. Griffin, III
-----------------------------------
Title: Executive Vice President & CFO
-------------------------------
SUNTRUST BANK, NASHVILLE, N.A.,
as Agent for the Lenders
By: /s/ Bryan W. Ford
-----------------------------------
Title: Vice President
-------------------------------
2
<PAGE> 1
EXHIBIT 10.7
EMPLOYMENT AGREEMENT
BETWEEN LAURENCE Y. FAIREY
AND THE COMPANY DATED
APRIL 13, 1997
<PAGE> 2
EXHIBIT 10.7
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
AMENDED AND RESTATED EMPLOYMENT AGREEMENT, dated as of 13 day of April, 1997,
between SOFAMOR DANEK GROUP, INC., an Indiana oration (the "Employer"), and
Laurence Fairey (the "Employee").
RECITALS
WHEREAS, the Employer is an Indiana corporation and through its wholly
owned subsidiaries, Warsaw Orthopedic, Inc., Danek Medical, Inc., and Sofamor,
S.N.C. is engaged in the business of developing, manufacturing and distributing
medical devices, trauma instruments, surgical tools and implants (such business,
as it may change from time to time, is hereinafter refer-red to as "Business");
and
WHEREAS, the Board of Directors of the Employer (the "Board") has
concluded that it desires to retain the valued services of the Employee by
entering into a new agreement which shall provide the Employee with certain
additional protections which are designed to ensure that the Employee will
devote himself attentively and energetically to his duties without distraction:
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants contained herein the parties agree as follows:
1. Employment. The Employer (or a subsidiary of the Employer) hereby
employs the Employee and the Employee hereby accepts employment upon the terms
and conditions hereinafter set forth,
2. Term. Subject to the provisions for termination as provided in
paragraph 10 hereof, the term of this Agreement shall be from April 13, 1997 to
December 31, 1999, and it shall be automatically renewed for successive one (1)
year periods thereafter, unless either party elects not to renew this Agreement
by serving notice of such intention not to renew on the other party at least
ninety (90) days prior to the renewal date. Notwithstanding the foregoing, if a
Change in Control Date (as defined in paragraph 11) occurs during the term
described in the immediately preceding sentence, the term of the Employee's
employment hereunder shall extend until the third anniversary of such Change in
Control Date (the period beginning on such Change in Control Date and ending on
the third anniversary thereof being hereinafter referred to as the "Covered
Period").
3. Duties. The Employee is engaged as Executive Vice President and
Chief Financial Officer of the Employer to assist the President and CEO of the
Employer in managing, directing and administering all aspects and matters of the
Business, subject to the direction and guidance of the President and CEO of the
Employer. Prior to a Change in Control (as hereinafter defined), the precise
services, duties and authority of the Employee as Executive Vice President
<PAGE> 3
and Chief Financial Officer of the Employer may be further defined, extended or
curtailed from time to time at the discretion of the President and CEO of the
Employer.
4. Extent of Services. The Employee shall have the power and authority
commensurate and necessary to his position of Executive Vice President and Chief
Financial Officer and his other duties as assigned to him from time to time. He
shall devote his entire employable time, attention and best efforts to the
Business as may be necessary to efficiently and effectively perform and complete
the duties he is to undertake as described in this Agreement. The Employee shall
not, without the consent of the Employer, which consent shall not be
unreasonably withheld, during the term of this Agreement, be actively engaged in
any other business activity, whether or not such business activity is pursued
for gain, profit and other pecuniary advantage; but this shall not be construed
as preventing the Employee from investing his personal assets in such form or
manner as will not require any services on the part of the Employee in the
operation of the affairs of the companies in which such investments are made.
5. Compensation. The Employee shall be compensated for services
rendered hereunder as follows:
(a) The Employee shall receive a salary of not less than $19,167 per
month for each month of the first twelve (12) months that this Agreement is in
effect and for each month thereafter so long as the Employee receives Job
Performance Evaluations of "good" or better. After such first year, if the
Employee receives a Job Performance Evaluation of less than "good", his salary
shall be determined in the discretion of the President and CEO of the Employer.
Such salary paid to the Employee shall be subject to withholding of taxes and
other appropriate and customary amounts.
(b) The Employee shall be entitled to participate in the employee
benefit plans the Employer may adopt from time to time for its management or
supervisory personnel generally at such time as the Employee shall have
fulfilled the eligibility requirements for participation therein as shall be
determined by the terms of the applicable contracts for each program. Nothing
herein shall be construed so as to prevent the Employer from modifying or
terminating any employee benefit plans or programs or employee fringe benefits
it currently sponsors or may adopt from time to time.
6. Expenses and Travel. It is expected that in the course of his
employment, the Employee and his spouse shall be required to spend time
traveling and entertaining various persons on behalf of the Employer and
promoting the affairs of the Employer. The Employer shall provide to the
Employee an Employer Mastercard credit card or the Employer shall pay the
Employee the annual fee for one (1) personal credit card. The Employer shall pay
for or reimburse the Employee for all such reasonable expenses upon the
Employee's periodic presentation of an itemized account of such expenditures,
provided, however, the Employer shall only pay for or reimburse for the cost of
coach class air fare for business travel within the United States and only for
the cost of business class air fare for international business air travel. The
Employer shall bear the expense, in an amount not to exceed $250 per month, for
country club or social club dues for which the Employee may become a member
during the term hereof and/or a
<PAGE> 4
portable telephone and related telephone service, the use of either of which is
related to the Business. The Employee shall bear the expense of any initiation
fees and other assessments for or resulting from such membership. The Employee
shall be reimbursed in an amount not to exceed a total of $2,000 for each year
during the term or any renewal term hereof, for expenses incurred for his spouse
when traveling with the Employee on business matters for the Employer.
7. Disability. If the Employee shall become physically or mentally
disabled during the term of this Agreement to the extent that he shall be unable
to perform his duties and services for and on behalf of the Employer, the
benefits made available to the Employee and the salary then payable to the
Employee pursuant to the foregoing paragraph 5 shall continue to be made
available and paid to the Employee for the shorter of (i) the period of
disability; or (ii) six (6) months from the commencement of the disability.
Thereafter, the Employee shall receive no salary from the Employer.
8. Confidentiality. The Employee possesses and will continue to possess
information which has been created, discovered, developed by or otherwise become
known to the Employee (including information discovered or made available by
subsidiaries, affiliates or joint ventures of the Employer or in which property
rights have been assigned or otherwise conveyed to the Employer), which
information has commercial value to the Employer, including but not limited to
trade secrets, innovations, processes, computer codes, data, know-how,
improvements, discoveries, developments, techniques, marketing plans,
strategies, costs, customer and client lists, or any information the Employee
has reason to know the Employer would treat as confidential for any purpose,
whether or not developed by the Employee (hereinafter referred to as
"Confidential Information"). Unless previously authorized in writing or
instructed in writing by the Employer, the Employee will not, at any time,
disclose to others, or use, or allow anyone else to disclose or use any
Confidential Information (except as may be necessary in the performance of the
Employee's employment with the Employer), unless, until and then only to the
extent that such Confidential Information has become ascertainable or obtained
from public or published sources or was available to the Employee on a
non-confidential basis prior to any such disclosure or use, provided that the
source of such material is or was not bound by an obligation of confidentiality
to the Employer. This paragraph 8 shall survive termination of this Agreement.
9. Restrictive Covenants. The terms of this paragraph 9 shall be
applicable during the Employee's employment and upon the termination of such
employment for any reason occurring prior to a Change in Control Date. In the
event of termination it without cause" as defined in paragraph 10(b) occurring
prior to a Change in Control Date, in consideration of, and subject to, the
Employee's continued compliance with the terms of this paragraph 9, the Employer
shall pay to the Employee twelve (12) months salary based on his salary for the
month immediately preceding the date of termination which shall be paid in
accordance with the Employer's customary payroll practices over twelve (12)
months. In the event of a termination for any other reason, including for "just
cause" as defined in paragraph 10(b) occurring prior to a Change in Control
Date, the Employer shall have no obligation to the Employee, This paragraph 9
shall survive termination of this Agreement occurring prior to a Change in
Control Date.
<PAGE> 5
The Employee acknowledges that because of his skills, the Employee's
position with the Employer and the Confidential Information to which the
Employee shall have access or be provided on account of such employment with the
Employer, competition by the Employee with the Employer could damage the
Employer in a manner which cannot adequately be compensated by damages or an
action at law. In view of such circumstances, because of the Confidential
Information obtained by, or disclosed to the Employee, and as a material
inducement to the Employer to enter into this Agreement and to compensate the
Employee, as described in paragraph 5, as well as provide him with additional
benefits as provided herein and other good and valuable consideration, the
Employee covenants and agrees that:
(a) Noncompetition. During the Employee's employment with the Employer
and for a period of three (3) years thereafter, the Employee shall not (as
principal, agent, employee, consultant or otherwise), directly or indirectly, in
any geographic area in which the Employer is engaged in Business, engage in
activities for, or render services of any nature to. any firm or business, which
firm or business competes. directly or indirectly, with the Employer or the
Business.
(b) Nonsolicitation of Customers. During the Employee's employment with
the Employer and for a period of three (3) years thereafter, the Employee shall
not, directly or indirectly, solicit, divert or accept any work or services
which compete with the Employer's Business from any customer of the Employer or
seek to cause any such customer to refrain from doing business with or
patronizing the Employer.
(c) Nonsolicitation of Employees. During the Employee's employment with
the Employer and for a period of three (3) years thereafter, the Employee shall
not, directly or indirectly, solicit for employment or employ any current or
former employee of the Employer.
(d) Definitions. For purposes of this Agreement, the term "directly or
indirectly" shall be construed in its broadest sense and shall include the
activities of the members of the Employee's immediate family or any partnership.
The term "Business" shall be construed in its broadest sense and shall include
any activity engaged in or conducted by the Employer or any of its subsidiaries,
affiliates or joint ventures or which the Employer or any of its subsidiaries,
affiliates or joint ventures intends to engage in or conduct. The term
"customer" shall mean any person or entity with which the Employer, or any of
its subsidiaries, affiliates or joint ventures has engaged in or conducted
Business during the one (1) year period prior to the date the Employee ceased
employment with the Employer or any persons or entities targeted by the Employer
or contacted for the purpose of engaging in or conducting Business during such
one (1) year period.
(e) Reasonable Limitations. Given the important nature of the position
the Employee will hold with the Employer, the nature of the Employer's Business
and the sensitive nature of the Confidential Information and duties the Employee
will have with the Employer, the parties acknowledge that the limitations,
including but not limited to, the scope of activities prohibited. the geographic
area covered and the time limitation, are reasonable.
<PAGE> 6
In the event of an actual or threatened breach by the Employee of the
provisions of paragraphs 8 and 9 of this Agreement, the Employer shall be
entitled to a temporary restraining order and an injunction restraining the
Employee from such breach. Nothing herein, however, shall be construed as
prohibiting the Employer from pursuing any other remedies available to it for
such actual or threatened breach, including, without limitation, the recovery of
damages and reasonable attorneys' and paralegals' fees and costs from the
Employee. If the Employee violates any of the covenants in paragraphs 8 and 9 of
this Agreement, the term and the covenant violated shall be automatically
extended for the period of time of the violation, either from the date on which
the Employee ceases such violation or from the date of the entry by a court of
competent jurisdiction of an order or judgment enforcing such covenants.
whichever period is later,
10. Termination Prior to a Change in Control Date. The Employer may, at
its option, terminate this Agreement at any time prior to the occurrence of a
Change in Control Date upon written notice to the Employee for just cause or
without cause.
(a) "Just cause" shall include, but not be limited to:
(i) The Employee receiving a Job Performance Evaluation of
less than "good";
(ii) The Employee's misuse or embezzlement of funds
belonging to the Employer, conviction of a felony or
crime involving moral turpitude or use of alcohol or
drugs in such a manner as will injure or adversely
affect the reputation of the Employer or its
employees, customers, agents, officers or directors,
(iii) The Employee's absence from his employment, for
whatever cause, other than by disability for which
salary is continued pursuant to paragraph 7, for a
period of thirty (30) consecutive days or more;
(iv) The Employee's absence from employment as a result of
disability beyond the period for which salary is
continued pursuant to paragraph 7;
(v) The Employee's resignation from employment during the
term hereof or if the Employee serves notice to not
renew this Agreement as provided in paragraph 2;
(vi) The Employee's willful malfeasance in discharging his
obligations hereunder and such acts and their
consequences are not remedied within ten (10) days or
such longer reasonable period of time designated by
the Employer after written notice thereof has been
given to the Employee; or
(vii) The Employee's breach of the provisions of this
Agreement and such breach and its consequences are not
remedied within ten (10) days or such
<PAGE> 7
longer reasonable period of time designated by the
Employer, after written notice thereof has been given
to the Employee.
(b) "Without cause" shall mean:
(i) The termination and dissolution of the Employer or a
bona fide decision by the Employer to terminate its
Business; or
(ii) Any involuntary termination of the Employee's
employment by the Employer without just cause.
(c) In addition to those reasons enumerated above, this Agreement shall
be terminated upon the happening of any of the following events:
(i) Whenever the Employer and the Employee shall mutually
agree to a termination in writing; or
(ii) Upon death of the Employee.
Upon the termination of this Agreement prior to the occurrence of a Change in
Control Date for any of the foregoing reasons in paragraph 10, the Employee
shall be entitled to receive only the compensation accrued but unpaid as of the
date of the termination hereof and shall not be entitled to additional
compensation except as expressly provided in paragraph 9 of this Agreement.
11. Effect of a Change in Control.
(a) Involuntary Termination; Consulting Period.
(i) Consulting Services Following an Involuntary Termination. In the
event of the Employee's Involuntary Termination during the Covered Period he
shall commence providing consulting services to the Employer for a period (the
"Consulting Period") of (i) three years, in the event the Involuntary
Termination occurs during the first year of the Covered Period, (ii) two years,
in the event the Involuntary Termination occurs during the second year of the
Covered Period, or (iii) one year, in the event the Involuntary Termination
occurs in the last year of the Covered Period. The Employee's consulting
services shall consist in advising the Employer on such matters as may be
reasonably requested by the Employer. Such services shall be performed at such
times and in such locations as shall be mutually agreed by the Employee and the
Employer, and shall not interfere with his duties to a new employer. In any
event, the Employee shall not be required to perform consulting services for
more than 8 hours per month during the Consulting Period. The Employee shall not
be an employee of the Employer during the Consulting Period, but shall act
solely in the capacity of an independent contractor.
(ii) Consulting Fees; Reimbursement of Expenses. In consideration of
the Employee's agreement to provide consulting services hereunder, the Employer
shall pay the Employee, not less than 5 days following an Involuntary
Termination, a lump sum consulting fee
<PAGE> 8
payment equal to the product of (A) the Employee's base salary in effect
immediately prior to his Date of Termination (without taking into account any
salary reduction that gave rise to Good Reason), and (B) the number of years in
the Consulting Period, as determined pursuant to paragraph 11(a)(i) above. In
addition, the Employee shall be reimbursed for all expenses reasonably incurred
by him in connection with the performance of his consulting services hereunder.
The Employee shall not be entitled to benefits under any other severance pay
plan or arrangement sponsored by the Employer and its subsidiaries in the event
of an Involuntary Termination during the Covered Period, and any amounts payable
to him under any statutory severance policy shall reduce the aggregate amount of
the consulting fees payable hereunder. In addition, in the event of the
Employee's Involuntary Termination, the Employer shall pay him within 5 days of
the date of such Involuntary Termination the full amount of any earned but
unpaid base salary through the Date of Termination at the rate in effect at the
time of the Notice of Termination, plus a cash payment for all unused vacation
time which he may have accrued as of the Date of Termination. The Employer shall
also pay the Employee within 5 days of the Date of Termination a pro rata
portion of his projected annual bonus for the year in which his Involuntary
Termination occurs, calculated on the basis of his target bonus for that year.
(iii) Benefits. The Employee and his eligible dependents shall continue
to be eligible to participate during the Consulting Period in the medical,
dental, health, life and other fringe benefit plans and arrangements applicable
to him immediately prior to his Involuntary Termination on the same terms and
conditions in effect for the Employee and his dependents immediately prior to
such Involuntary Termination; provided, however, that any benefit plan or
arrangement will end on the date that the Employee and his dependents are
eligible and elect coverage under a plan or arrangement of a subsequent employer
which provides a substantially equivalent or greater benefit to him and his
dependents.
(iv) Date and Notice of Termination. Any termination of the Employee's
employment during the Covered Period by the Employer or by the Employee shall be
communicated by a notice of termination to the other party hereto (the "Notice
of Termination"). The Notice of Termination shall indicate the specific
termination provision in this Agreement relied upon and shall set forth in
reasonable detail the facts and circumstances, claimed to provide a basis for
termination of the Employee's employment under the provision so indicated. The
date of the Employee's termination of employment with the Employer and its
subsidiaries (the "Date of Termination") shall be determined as follows: (i) if
the Employee's employment is terminated by the Employer in an Involuntary
Termination, five (5) days after the date the Notice of Termination is received
by the Employee and (ii) if the Employee's employment is terminated by the
Employer for just cause, the date specified in the Notice of Termination. If the
basis for the Employee's Involuntary Termination is his resignation for Good
Reason, the Date of Termination shall be ten (10) days after the date his Notice
of Termination is received by the Employer. The Date of Termination for a
resignation of employment other than for Good Reason shall be the date set forth
in the applicable notice, which shall be no earlier than ten (10) days after the
date such notice is received by the Employer.
(b) Non-Competition Agreement. During the Consulting Period, the
Employee shall comply with the substantive restrictions set forth in paragraphs
8 and 9 above.
<PAGE> 9
(c) Legal Fees and Expenses. The Employer shall pay or reimburse the
Employee on an after-tax basis for all costs and expenses (including, without
limitation, court costs and reasonable legal fees and expenses which reflect
common practice with respect to the matters involved) incurred by him as a
result of any claim, action or proceeding (i) arising out of his termination of
employment during the Covered Period, (ii) contesting, disputing or enforcing
any right, benefits or obligations under this paragraph 11 or (iii) arising out
of or challenging the validity, advisability or enforceability of this paragraph
I 1 or any provision thereof; provided, however, that this provision will not
apply if the trier of fact determines that the Employee's claim was entirely
without merit.
(d) Definitions. For purposes of this paragraph 11, the following
capitalized words shall have the meanings set forth below:
"Cause" shall mean a termination of the Employee's employment by the
Employer which is a result of (i) his felony conviction, (ii) his willful
disclosure of material trade secrets or other material confidential information
related to the business of the Employer and its subsidiaries or (iii) his
willful and continued failure substantially to perform his duties with the
Employer (other than any such failure resulting from his incapacity due to
physical or mental illness or any such actual or anticipated failure resulting
from a resignation by the Employee for Good Reason) after a written demand for
substantial performance is delivered to the Employee by the Board, which demand
specifically identifies the manner in which the Board believes that the Employee
has not substantially performed his duties, and which performance is not
substantially corrected by him within 10 days of receipt of such demand. For
purposes of the previous sentence, no act or failure to act on the Employee's
part shall be deemed "willful" unless done, or omitted to be done, by him not in
good faith and without reasonable belief that his action or omission was in the
best interest of the Employer. Notwithstanding the foregoing, the Employee shall
not be deemed to have been terminated for Cause unless and until there shall
have been delivered to him a copy of a resolution duly adopted by the
affirmative vote of not less than three-fourths (3/4ths) of the entire
membership of the Board at a meeting of the Board called and held for such
purpose (after reasonable notice to the Employee and an opportunity for him,
together with his counsel, to be heard before the Board), finding that in the
good faith opinion of the Board he was guilty of conduct set forth above in
clause (i), (ii) or (iii) of the first sentence of this definition and
specifying the particulars thereof in detail.
"Change in Control" shall mean the happening of any of the following:
(i) any person or entity, including a "group" as defined in
Section 13(d)(3) of the Exchange Act. other than the Employer, a
subsidiary of the Employer, or any employee benefit plan of the
Employer or its subsidiaries, becomes the beneficial owner of the
Employer's securities having 25 percent or more of the combined voting
power of the then outstanding securities of the Employer that may be
cast for the election for directors of the Employer (other than as a
result of an issuance of securities initiated by the Employer in the
ordinary course of business); or
<PAGE> 10
(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 Employer or any successor
corporation or entity entitled to vote generally in the election of
directors of the Employer or such other corporation or entity after
such transaction, are held in the aggregate by holders of the
Employer's securities entitled to vote generally in the election of
directors of the Employer 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 cease for
any reason to constitute at least a majority thereof, unless the
election, or the nomination for election by the Employer's
stockholders, of each director of the Employer first elected during
such period was approved by a vote of at least two-thirds of the
directors of the Employer then still in office who were directors of
the Employer at the beginning of any such period (together, directors
at the beginning of such period and new directors whose election or
nomination was so approved are the "Incumbent Directors").
"Change in Control Date" shall mean the date on which the Change in
Control occurs. Notwithstanding the first sentence of this section, if the
Employee's employment with the Employer terminates prior to the Change in
Control Date and it is reasonably demonstrated that his termination of
employment (i) was at the request of the third party who has taken steps
reasonably calculated to effect the Change in Control or (ii) otherwise arose in
connection with or in anticipation of the Change in Control, then Change in
Control Date shall mean the date immediately prior to the date of the Employee's
termination of employment.
"Common Stock" shall mean the common stock of the Employer.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, and any successor provisions thereto.
"Good Reason" shall mean a resignation by the Employee from his
employment with the Employer on or following the Change in Control Date as a
result of the occurrence of any of the following without his consent:
(i) A failure by the Employer to ensure that the Employee's
position, titles, nature and status of responsibilities and reporting
obligations are substantially equivalent to those that the Employee
enjoyed immediately prior to the Change in Control Date, it being
understood and agreed that such features shall be deemed less than
substantially equivalent by reason of the Employer ceasing to be a
public company.
(ii) A reduction by the Employer in the Employee's annual base
salary as in effect immediately prior to the Change in Control Date or
as the same may be increased from time to time thereafter; a failure by
the Employer to increase the Employee's salary at a rate commensurate
with that of other key executives of the Employer; or a reduction
<PAGE> 11
in the Employee's target annual bonus (expressed as a percentage of
base salary) below the target in effect for him prior to the Change in
Control Date;
(iii) The relocation of the office of the Employer where the
Employee is employed immediately prior to the Change in Control Date
(the "CIC Location") to a location which is more than fifty (50) miles
away from the CIC Location or the Employer's requiring the Employee to
be based more than fifty (50) miles away from the CIC Location (except
for required travel on the Employer's business to an extent
substantially consistent with his customary business travel obligations
in the ordinary course of business prior to the Change in Control
Date), unless such relocation is to a location closer to his principal
residence;
(iv) The failure by the Employer to continue in effect any
compensation plan in which the Employee participated prior to the
Change in Control Date or made available to him after the Change in
Control Date, unless an equitable arrangement (embodied in an ongoing
substitute or alternative plan) has been made with respect to such plan
in connection with the Change in Control, or the failure by the
Employer to continue the Employee's participation therein on at least
as favorable a basis, both in terms of the amount of benefits provided
and the level of his participation relative to other participants, as
existed on the Change in Control Date;
(v) The failure by the Employer to continue to provide the
Employee with benefits at least as favorable in the aggregate to those
enjoyed by him under the Employer's pension, savings, life insurance,
medical, health and accident, disability, and fringe benefit plans and
programs in which he was participating immediately prior to the Change
in Control Date, or the failure by the Employer to provide the Employee
with the number of paid vacation days to which he is entitled on the
basis of years of service with the Employer in accordance with the
Employer's normal vacation policy in effect immediately prior to the
Change in Control;
(vi) The failure of the Employer to obtain an agreement
reasonably satisfactory to the Employee from any successor to assume
and agree to perform this Agreement, as contemplated in paragraph 12(a)
hereof or, if the business of the Employer for which the Employee's
services are principally performed is sold at any time after a Change
in Control, the failure of the Employer to obtain such an agreement
from the purchaser of such business;
(vii) Any termination of the Employee's employment which is
not effected pursuant to the terms of this Agreement; or
(viii) A material breach by the Employer of the provisions of
this Agreement;
provided, however, that an event described above in clause (i), (ii), (iv), (v)
or (viii) shall not constitute Good Reason unless it is communicated by the
Employee to the Employer in writing and is not corrected by the Employer in a
manner which is reasonably satisfactory to the
<PAGE> 12
Employee (including full retroactive correction with respect to any monetary
matter) within 10 days of the Employer's receipt of such written notice from
him.
"Involuntary Termination" shall mean (i) the termination of the
Employee's employment during the Covered Period by the Employer and its
subsidiaries other than for Cause or disability or (ii) the Employee's
resignation of employment during the Covered Period with the Employer and its
subsidiaries for Good Reason.
12. Successors, Binding Agreement.
(a) Assumption by Successor. The Employer will require any successor
(whether direct or indirect, by purchase, merger, consolidation or otherwise) to
all or substantially all of the business or assets of the Employer expressly to
assume and to agree to perform this Agreement in the same manner and to the same
extent that the Employer would be required to perform it if no such succession
had taken place; provided, however, that no such assumption shall relieve the
Employer of its obligations hereunder. As used in this Agreement, the "Employer"
shall mean the Employer as hereinbefore defined and any successor to its
business and/or assets as aforesaid which assumes and agrees to perform this
Agreement by operation of law or otherwise.
(b) Enforceability; Beneficiaries. This Agreement shall be binding upon
and inure to the benefit of the Employee (and his personal representatives and
heirs) and the Employer and any organization which succeeds to substantially all
of the business or assets of the Employer, whether by means of merger,
consolidation, acquisition of all or substantially all of the assets of the
Employer or otherwise, including, without limitation, as a result of a Change in
Control or by operation of law. This Agreement shall inure to the benefit of and
be enforceable by the Employee's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees. If the
Employee should die while any amount would still be payable to him hereunder if
he had continued to live, all such amounts. unless otherwise provided herein,
shall be paid in accordance with the terms of this Agreement to his devisee,
legatee or other designee or, if there is no such designee, to his estate.
13. Notices. Any notice required or permitted to be given under this
Agreement shall be sufficient if in writing and delivered personally or sent by
registered mail (i) to Employee's residence, in the case of the Employee, or
(ii) to the business address of its President and Chief Executive Officer, in
the case of the Employer.
14. Waiver of Breach and Severability. The waiver by the Employer of a
breach of any provision of this Agreement by the Employee shall not operate or
be construed as a waiver of any subsequent breach by the Employee. In the event
any provision of this Agreement is found to be invalid or unenforceable, it may
be severed from the Agreement and the remaining provision of the Agreement shall
continue to be binding and effective; provided, however, that, if possible, it
is the intention of the Employer and the Employee that such provision be
construed and interpreted as narrowly as necessary in order to make such
provision valid and enforceable.
<PAGE> 13
15. Entire Agreement. This instrument and the letter agreement between
the Employee and the Employer dated January 1, 1996 contain the entire agreement
of the parties and supersede any prior understandings and agreements between
them respecting the subject matter of this Agreement, including, without
limitation, the Employment Agreement dated as of January 1, 1996. It may not be
changed orally, but only by an agreement in writing signed by the party against
whom enforcement of any waiver, change, modification, extension or discharge is
sought.
16. Survival. Upon termination of the Employee's employment with the
Company prior to a Change in Control Date, the rights and obligations of the
parties hereto as provided in paragraphs 8 and 9 shall continue for the time
periods as set forth herein.
17. Governing Law. This Agreement shall be construed in accordance with
and governed by the laws of the State of Tennessee without regard to the laws of
any other state or jurisdiction. Any action brought or maintained in connection
with this Agreement shall be brought exclusively in the courts located in Shelby
County, Tennessee. Each of the Employer and the Employee hereby irrevocably
waives all right to trial by jury in any action, proceeding or counterclaim
arising out of or relating to this Agreement.
<PAGE> 14
IN WITNESS WHEREOF, the parties hereto execute this Agreement on the
date first above written.
SOFAMOR DANEK GROUP, INC.
BY: /s/ E. Ron Pickard
---------------------------
"Employer"
ATTEST:
/s/ J. Mark Merrill
- ------------------------
/s/ Laurence Y. Fairey
-------------------------------
Laurence Fairey
"Employee"
<PAGE> 1
EXHIBIT 10.8
EMPLOYMENT AGREEMENT
BETWEEN MARK D. LOGUIDICE
AND THE COMPANY DATED
APRIL 13, 1997
<PAGE> 2
EXHIBIT 10.8
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
AMENDED AND RESTATED EMPLOYMENT AGREEMENT, dated as of the 13th day of
April, 1997, between SOFAMOR DANEK GROUP, INC., an Indiana corporation (the
"Employer"), and Mark LoGuidice (the "Employee"),
RECITALS
WHEREAS, the Employer is an Indiana corporation and through its wholly
owned subsidiaries, Warsaw Orthopedic, Inc., Danek Medical, Inc., and Sofamor,
S.N.C. is engaged in the business of developing, manufacturing and distributing
medical devices, trauma instruments, surgical tools and implants (such business,
as it may change from time to time, is hereinafter referred to as "Business");
and
WHEREAS, the Board of Directors of the Employer (the "Board") has
concluded that it desires to retain the valued services of the Employee by
entering into a new agreement which shall provide the Employee with certain
additional protections which are designed to ensure that the Employee will
devote himself attentively and energetically to his duties without distraction;
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants contained herein, the parties agree as follows:
1. Employment. The Employer (or a subsidiary of the Employer) hereby
employs the Employee and the Employee hereby accepts employment upon the terms
and conditions hereinafter set forth.
2. Term. Subject to the provisions for termination as provided in
paragraph 10 hereof, the term of this Agreement shall be from April 13, 1997 to
December 31, 1999, and it shall be automatically renewed for successive one (1)
year periods thereafter, unless either party elects not to renew this Agreement
by serving notice of such intention not to renew on the other party at least
ninety (90) days prior to the renewal date. Notwithstanding the foregoing, if a
Change in Control Date (as defined in paragraph 11) occurs during the term
described in the immediately preceding sentence, the term of the Employee's
employment hereunder shall extend until the third anniversary of such Change in
Control Date (the period beginning on such Change in Control Date and ending on
the third anniversary thereof being hereinafter referred to as the "Covered
Period").
3. Duties. The Employee is engaged as President, Sofamor Danek U.S.A.
to assist the President and CEO of the Employer in managing, directing and
administering all aspects and matters of the Business, subject to the direction
and guidance of the President and CEO of the Employer. Prior to a Change in
Control (as hereinafter defined), the precise services, duties and
<PAGE> 3
authority of the Employee as President, Sofamor Danek U.S.A. may be further
defined, extended or curtailed from time to time at the discretion of the
President and CEO of the Employer.
4. Extent of Services. The Employee shall have the power and authority
commensurate and necessary to his position of President, Sofamor Danek U.S.A.
and his other duties as assigned to him from time to time. He shall devote his
entire employable time, attention and best efforts to the Business as may be
necessary to efficiently and effectively perform and complete the duties he is
to undertake as described in this Agreement. The Employee shall not, without the
consent of the Employer, which consent shall not be unreasonably withheld,
during the term of this Agreement, be actively engaged in any other business
activity, whether or not such business activity is pursued for gain, profit and
other pecuniary advantage; but this shall not be construed as preventing the
Employee from investing his personal assets in such form or manner as will not
require any services on the part of the Employee in the operation of the affairs
of the companies in which such investments are made.
5. Compensation. The Employee shall be compensated for services
rendered hereunder as follows:
(a) The Employee shall receive a salary of not less than $20,834 per
month for each month of the first twelve (12) months that this Agreement is in
effect and for each month thereafter so long as the Employee receives Job
Performance Evaluations of "good" or better. After such first year, if the
Employee receives a Job Performance Evaluation of less than "good", his salary
shall be determined in the discretion of the President and CEO of the Employer.
Such salary paid to the Employee shall be subject to withholding of taxes and
other appropriate and customary amounts.
(b) The Employee shall be entitled to participate in the employee
benefit plans the Employer may adopt from time to time for its management or
supervisory personnel generally at such time as the Employee shall have
fulfilled the eligibility requirements for Participation therein as shall be
determined by the terms of the applicable contracts for each program. Nothing
herein shall be construed so as to prevent the Employer from modifying or
terminating any employee benefit plans or programs or employee fringe benefits
it currently sponsors or may adopt from time to time.
6. Expenses and Travel. It is expected that in the course of his
employment, the Employee and his spouse shall be required to spend time
traveling and entertaining various persons on behalf of the Employer and
promoting the affairs of the Employer, The Employer shall provide to the
Employee an Employer Mastercard credit card or the Employer shall pay the
Employee the annual fee for one (1) personal credit card. The Employer shall pay
for or reimburse the Employee for all such reasonable expenses upon the
Employee's periodic presentation of an itemized account of such expenditures,
provided, however, the Employer shall only pay for or reimburse for the cost of
coach class air fare for business travel within the United States and only for
the cost of business class air fare for international business air travel. The
Employer shall bear the expense, in an amount not to exceed $250 per month, for
country club or social club dues for which the Employee may become a member
during the term hereof and/or a
<PAGE> 4
portable telephone and related telephone service, the use of either of which is
related to the Business, The Employee shall bear the expense of any initiation
fees and other assessments for or resulting from such membership. The Employee
shall be reimbursed in an amount not to exceed a total of $2,000 for each year
during the term or any renewal term hereof, for expenses incurred for his spouse
when traveling with the Employee on business matters for the Employer.
7. Disability. If the Employee shall become physically or mentally
disabled during the term of this Agreement to the extent that he shall be unable
to perform his duties and services for and on behalf of the Employer, the
benefits made available to the Employee and the salary then payable to the
Employee pursuant to the foregoing paragraph 5 shall continue to be made
available and paid to the Employee for the shorter of (i) the period of
disability; or (ii) six (6) months from the commencement of the disability.
Thereafter, the Employee shall receive no salary from the Employer.
8. Confidentiality. The Employee possesses and will continue to possess
information which has been created, discovered, developed by or otherwise become
known to the Employee (including information discovered or made available by
subsidiaries, affiliates or joint ventures of the Employer or in which property
rights have been assigned or otherwise conveyed to the Employer), which
information has commercial value to the Employer, including but not limited to
trade secrets, innovations, processes, computer codes, data, know-how,
improvements, discoveries, developments, techniques, marketing plans,
strategies, costs, customer and client lists, or any information the Employee
has reason to know the Employer would treat as confidential for any purpose,
whether or not developed by the Employee (hereinafter referred to as
"Confidential Information"). Unless previously authorized in writing or
instructed in writing by the Employer, the Employee will not, at any time,
disclose to others, or use, or allow anyone else to disclose or use any
Confidential Information (except as may be necessary in the performance of the
Employee's employment with the Employer), unless, until and then only to the
extent that such Confidential Information has become ascertainable or obtained
from public or published sources or was available to the Employee on a
non-confidential basis prior to any such disclosure or use, provided that the
source of such material is or was not bound by an obligation of confidentiality
to the Employer. This paragraph 8 shall survive termination of this Agreement.
9. Restrictive Covenants. The terms of this paragraph 9 shall be
applicable during the Employee's employment and upon the termination of such
employment for any reason occurring prior to a Change in Control Date. In the
event of termination "without cause" as defined in paragraph 10(b) occurring
prior to a Change in Control Date, in consideration of, and subject to, the
Employee's continued compliance with the terms of this paragraph 9, the Employer
shall pay to the Employee twelve (12) months salary based on his salary for the
month immediately preceding the date of termination which shall be paid in
accordance with the Employer's customary payroll practices over twelve (12)
months. III the event of a termination for any other reason, including for "just
cause" as defined in paragraph 10(b) occurring prior to a Change in Control
Date, the Employer shall have no obligation to the Employee. This paragraph 9
shall survive termination of this Agreement occurring prior to a Change in
Control Date.
<PAGE> 5
The Employee acknowledges that because of his skills, the Employee's
position with the Employer and the Confidential Information to which the
Employee shall have access or be provided on account of such employment with the
Employer, competition by the Employee with the Employer could damage the
Employer in a manner which cannot adequately be compensated by damages or an
action at law. In view of such circumstances, because of the Confidential
Information obtained by, or disclosed to the Employee, and as a material
inducement to the Employer to enter into this Agreement and to compensate the
Employee, as described in paragraph 5, as well as provide him with additional
benefits as provided herein and other good and valuable consideration, the
Employee covenants and agrees that:
(a) Noncompetition. During the Employee's employment with the Employer
and for a period of three (3) years thereafter, the Employee shall not (as
principal, agent, employee, consultant or otherwise), directly or indirectly, in
any geographic area in which the Employer is engaged in Business, engage in
activities for, or render services of any nature to, any firm or business, which
firm or business competes, directly or indirectly, with the Employer or the
Business.
(b) Nonsolicitation of Customers. During the Employee's employment with
the Employer and for a period of three (3) years thereafter, the Employee shall
not, directly or indirectly, solicit, divert or accept any work or services
which compete with the Employer's Business from any customer of the Employer or
seek to cause any such customer to refrain from doing business with or
patronizing the Employer.
(c) Nonsolicitation of Employees. During the Employee's employment with
the Employer and for a period of three (3) years thereafter, the Employee shall
not, directly or indirectly, solicit for employment or employ any current or
former employee of the Employer.
(d) Definitions. For purposes of this Agreement, the term "directly or
indirectly" shall be construed in its broadest sense and shall include the
activities of the members of the Employee's immediate family or any partnership,
The term "Business" shall be construed in its broadest sense and shall include
any activity engaged in or conducted by the Employer or any of its subsidiaries,
affiliates or joint ventures or which the Employer or any of its subsidiaries,
affiliates or joint ventures intends to engage in or conduct. The term if
customer" shall mean any person or entity with which the Employer, or any of its
subsidiaries, affiliates or joint ventures has engaged in or conducted Business
during the one (1) year period prior to the date the Employee ceased employment
with the Employer or any persons or entities targeted by the Employer or
contacted for the purpose of engaging in or conducting Business during such one
(1) year period.
(e) Reasonable Limitations. Given the important nature of the position
the Employee will hold with the Employer, the nature of the Employer's Business
and the sensitive nature of the Confidential Information and duties the Employee
will have with the Employer, the parties acknowledge that the limitations,
including but not limited to, the scope of activities prohibited, the geographic
area covered and the time limitation, are reasonable.
<PAGE> 6
In the event of an actual or threatened breach by the Employee of the
provisions of paragraphs 8 and 9 of this Agreement, the Employer shall be
entitled to a temporary restraining order and an injunction restraining the
Employee from such breach. Nothing herein, however, shall be construed as
prohibiting the Employer from pursuing any other remedies available to it for
such actual or threatened breach, including, without limitation, the recovery of
damages and reasonable attorneys' and paralegals' fees and costs from the
Employee. If the Employee violates any of the covenants in paragraphs 8 and 9 of
this Agreement, the term and the covenant violated shall be automatically
extended for the period of time of the violation, either from the date on which
the Employee ceases such violation or from the date of the entry by a court of
competent jurisdiction of an order or judgment enforcing such covenants,
whichever period is later.
10. Termination Prior to a Change in Control Date. The Employer may, at
its option, terminate this Agreement at any time prior to the occurrence of a
Change in Control Date upon written notice to the Employee for just cause or
without cause.
(a) "Just cause" shall include, but not be limited to:
(i) The Employee receiving a Job Performance Evaluation
of less than "good";
(ii) The Employee's misuse or embezzlement of funds
belonging to the Employer, conviction of a felony or
crime involving moral turpitude or use of alcohol or
drugs in such a manner as will injure or adversely
affect the reputation of the Employer or its
employees, customers, agents, officers or directors;
(iii) The Employee's absence from his employment, for
whatever cause, other than by disability for which
salary is continued pursuant to paragraph 7, for a
period of thirty (30) consecutive days or more;
(iv) The Employee's absence from employment as a result of
disability beyond the period for which salary is
continued pursuant to paragraph 7;
(v) The Employee's resignation from employment during the
term hereof or if the Employee serves notice to not
renew this Agreement as provided in paragraph 2;
(vi) The Employee's willful malfeasance in discharging his
obligations hereunder and such acts and their
consequences are not remedied within ten (10) days or
such longer reasonable period of time designated by
the Employer after written notice thereof has been
given to the Employee; or
(vii) The Employee's breach of the provisions of this
Agreement and such breach and its consequences are
not remedied within ten (10) days or such
<PAGE> 7
longer reasonable period of time designated by the
Employer, after written notice thereof has been given
to the Employee.
(b) "Without cause" shall mean:
(i) The termination and dissolution of the Employer or a
bona fide decision by the Employer to terminate its
Business; or
(ii) Any involuntary termination of the Employee's
employment by the Employer without just cause.
(c) In addition to those reasons enumerated above, this Agreement shall
be terminated upon the happening of any of the following events:
(i) Whenever the Employer and the Employee shall mutually
agree to a termination in writing; or
(ii) Upon death of the Employee.
Upon the termination of this Agreement prior to the occurrence of a Change in
Control Date for any of the foregoing reasons in paragraph 10, the Employee
shall be entitled to receive only the compensation accrued but unpaid as of the
date of the termination hereof and shall not be entitled to additional
compensation except as expressly provided in paragraph 9 of this Agreement.
11. Effect of a Change in Control.
(a) Involuntary Termination; Consulting Period.
(i) Consulting Services Following an Involuntary Termination. In the
event of the Employee's Involuntary Termination during the Covered Period he
shall commence providing consulting services to the Employer for a period (the
"Consulting Period") of (i) three years, in the event the Involuntary
Termination occurs during the first year of the Covered Period, (ii) two years,
in the event the Involuntary Termination occurs during the second year of the
Covered Period, or (iii) one year, in the event the Involuntary Termination
occurs in the last year of the Covered Period. The Employee's consulting
services shall consist in advising the Employer on such matters as may be
reasonably requested by the Employer. Such services shall be performed at such
times and in such locations as shall be mutually agreed by the Employee and the
Employer, and shall not interfere with his duties to a new employer. In any
event, the Employee shall not be required to perform consulting services for
more than 8 hours per month during the Consulting Period. The Employee shall not
be an employee of the Employer during the Consulting Period, but shall act
solely in the capacity of an independent contractor.
(ii) Consulting Fees; Reimbursement of Expenses. In consideration of
the Employee's agreement to provide consulting services hereunder, the Employer
shall pay the Employee, not less than 5 days following an Involuntary
Termination, a lump sum consulting fee
<PAGE> 8
payment equal to the product of (A) the Employee's base salary in effect
immediately prior to his Date of Termination (without taking into account any
salary reduction that gave rise to Good Reason), and (B) the number of years in
the Consulting Period, as determined pursuant to paragraph 11 (a)(1) above. in
addition, the Employee shall be reimbursed for all expenses reasonably incurred
by him in connection with the performance of his consulting services hereunder.
The Employee shall not be entitled to benefits under any other severance pay
plan or arrangement sponsored by the Employer and its subsidiaries in the event
of an Involuntary Termination during the Covered Period, and any amounts payable
to him under any statutory severance policy shall reduce the aggregate amount of
the consulting fees payable hereunder. In addition, in the event of the
Employee's Involuntary Termination, the Employer shall pay him within 5 days of
the date of such Involuntary Termination the full amount of any earned but
unpaid base salary through the Date of Termination at the rate in effect at the
time of the Notice of Termination, plus a cash payment for all unused vacation
time which he may have accrued as of the Date of Termination. The Employer shall
also pay the Employee within 5 days of the Date of Termination a pro rata
portion of his projected annual bonus for the year in which his Involuntary
Termination occurs, calculated on the basis of his target bonus for that year.
(iii) Benefits. The Employee and his eligible dependents shall continue
to be eligible to participate during the Consulting Period in the medical,
dental, health, life and other fringe benefit plans and arrangements applicable
to him immediately prior to his Involuntary Termination on the same terms and
conditions in effect for the Employee and his dependents immediately prior to
such Involuntary Termination; provided, however, that any benefit plan or
arrangement will end on the date that the Employee and his dependents are
eligible and elect coverage under a plan or arrangement of a subsequent employer
which provides a substantially equivalent or greater benefit to him and his
dependents.
(iv) Date and Notice of Termination. Any termination of the Employee's
employment during the Covered Period by the Employer or by the Employee shall be
communicated by a notice of termination to the other party hereto (the "Notice
of Termination"), The Notice of Termination shall indicate the specific
termination provision in this Agreement relied upon and shall set forth in
reasonable detail the facts and circumstances claimed to provide a basis for
termination of the Employee's employment under the provision so indicated. The
date of the Employee's termination of employment with the Employer and its
subsidiaries (the "Date of Termination") shall be determined as follows: (i) if
the Employee's employment is terminated by the Employer in an Involuntary
Termination, five (5) days after the date the Notice of Termination is received
by the Employee and (ii) if the Employee's employment is terminated by the
Employer for just cause, the date specified in the Notice of Termination. If the
basis for the Employee's Involuntary Termination is his resignation for Good
Reason, the Date of Termination shall be ten (10) days after the date his Notice
of Termination is received by the Employer. The Date of Termination for a
resignation of employment other than for Good Reason shall be the date set forth
in the applicable notice, which shall be no earlier than ten (10) days after the
date such notice is received by the Employer.
(b) Non-Competition Agreement. During the Consulting Period, the
Employee shall comply with the substantive restrictions set forth in paragraphs
8 and 9 above.
<PAGE> 9
(c) Legal Fees and Expenses. The Employer shall pay or reimburse the
Employee on an after-tax basis for all costs and expenses (including, without
limitation, court costs and reasonable legal fees and expenses which reflect
common practice with respect to the matters involved) incurred by him as a
result of any claim, action or proceeding (i) arising out of his termination of
employment during the Covered Period, (ii) contesting, disputing or enforcing
any right, benefits or obligations under this paragraph II or (iii) arising out
of or challenging the validity, advisability or enforceability of this paragraph
11 or any provision thereof; provided, however, that this provision will not
apply if the trier of fact determines that the Employee's claim was entirely
without merit.
(d) Definitions. For purposes of this paragraph 11, the following
capitalized words shall have the meanings set forth below:
"Cause" shall mean a termination of the Employee's employment by the
Employer which is a result of (1) his felony conviction, (ii) his willful
disclosure of material trade secrets or other material confidential information
related to the business of the Employer and its subsidiaries or (iii) his
willful and continued failure substantially to perform his duties with the
Employer (other than any such failure resulting from his incapacity due to
physical or mental illness or any such actual or anticipated failure resulting
from a resignation by the Employee for Good Reason) after a written demand for
substantial performance is delivered to the Employee by the Board, which demand
specifically identifies the manner in which the Board believes that the Employee
has not substantially performed his duties, and which performance is not
substantially corrected by him within 10 days of receipt of such demand. For
purposes of the previous sentence, no act or failure to act on the Employee's
part shall be deemed "willful" unless done, or omitted to be done, by him not in
good faith and without reasonable belief that his action or omission was in the
best interest of the Employer. Notwithstanding the foregoing, the Employee shall
not be deemed to have been terminated for Cause unless and until there shall
have been delivered to him a copy of a resolution duly adopted by the
affirmative vote of not less than three-fourths (3/4ths) of the entire
membership of the Board at a meeting of the Board called and held for such
purpose (after reasonable notice to the Employee and an opportunity for him,
together with his counsel, to be heard before the Board), finding that in the
good faith opinion of the Board he was guilty of conduct set forth above in
clause (i), (ii) or (iii) of the first sentence of this definition and
specifying the particulars thereof in detail.
"Change in Control" shall mean the happening of any of the following:
(i) any person or entity, including a "group" as defined in
Section 13(d)(3) of the Exchange Act, other than the Employer, a
subsidiary of the Employer, or any employee benefit plan of the
Employer or its subsidiaries, becomes the beneficial owner of the
Employer's securities having 25 percent or more of the combined voting
power of the then outstanding securities of the Employer that may be
cast for the election for directors of the Employer (other than as a
result of an issuance of securities initiated by the Employer in the
ordinary course of business); or
<PAGE> 10
(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 Employer or any successor
corporation or entity entitled to vote generally in the election of
directors of the Employer or such other corporation or entity after
such transaction, are held in the aggregate by holders of the
Employer's securities entitled to vote generally in the election of
directors of the Employer 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 cease for
any reason to constitute at least a majority thereof, unless the
election, or the nomination for election by the Employer's
stockholders, of each director of the Employer first elected during
such period was approved by a vote of at least two-thirds of the
directors of the Employer then still in office who were directors of
the Employer at the beginning of any such period (together, directors
at the beginning of such period and new directors whose election or
nomination was so approved are the "Incumbent Directors").
"Change in Control Date" shall mean the date on which the Change in
Control occurs, Notwithstanding the first sentence of this section, if the
Employee's employment with the Employer terminates prior to the Change in
Control Date and it is reasonably demonstrated that his termination of
employment (i) was at the request of the third party who has taken steps
reasonably calculated to effect the Change in Control or (ii) otherwise arose in
connection with or in anticipation of the Change in Control, then Change in
Control Date shall mean the date immediately prior to the date of the Employee's
termination of employment.
"Common Stock" shall mean the common stock of the Employer.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, and any successor provisions thereto.
"Good Reason" shall mean a resignation by the Employee from his
employment with the Employer on or following the Change in Control Date as a
result of the occurrence of any of the following without his consent:
(i) A failure by the Employer to ensure that the Employee's
position, titles, nature and status of responsibilities and reporting
obligations are substantially equivalent to those that the Employee
enjoyed immediately prior to the Change in Control Date, it being
understood and agreed that such features shall not be deemed less than
substantially equivalent solely by reason of the Employer ceasing to be
a public company.
(ii) A reduction by the Employer in the Employee's annual base
salary as in effect immediately prior to the Change in Control Date or
as the same may be increased from time to time thereafter; a failure by
the Employer to increase the Employee's salary at a rate commensurate
with that of other key executives of the Employer; or a reduction
<PAGE> 11
in the Employee's target annual bonus (expressed as a percentage of
base salary) below the target in effect for him prior to the Change in
Control Date;
(iii) The relocation of the office of the Employer where the
Employee is employed immediately prior to the Change in Control Date
(the "CIC Location") to a location which is more than fifty (50) miles
away from the CIC Location or the Employer's requiring the Employee to
be based more than fifty (50) miles away from the CIC Location (except
for required travel on the Employer's business to an extent
substantially consistent with his customary business travel obligations
in the ordinary course of business prior to the Change in Control
Date), unless such relocation is to a location closer to his principal
residence;
(iv) The failure by the Employer to continue in effect any
compensation plan in which the Employee participated prior to the
Change in Control Date or made available to him after the Change in
Control Date, unless an equitable arrangement (embodied in an ongoing
substitute or alternative plan) has been made with respect to such plan
in connection with the Change in Control, or the failure by the
Employer to continue the Employee's participation therein on at least
as favorable a basis, both in terms of the amount of benefits provided
and the level of his participation relative to other participants, as
existed on the Change in Control Date;
(v) The failure by the Employer to continue to provide the
Employee with benefits at least as favorable in the aggregate to those
enjoyed by him under the Employer's pension, savings, life insurance,
medical, health and accident, disability, and fringe benefit plans and
programs in which he was participating immediately prior to the Change
in Control Date; or the failure by the Employer to provide the Employee
with the number of paid vacation days to which he is entitled on the
basis of years of service with the Employer in accordance with the
Employer's normal vacation policy in effect immediately prior to the
Change in Control;
(vi) The failure of the Employer to obtain an agreement
reasonably satisfactory to the Employee from any successor to assume
and agree to perform this Agreement, as contemplated in paragraph 12(a)
hereof or, if the business of the Employer for which the Employee's
services are principally performed is sold at any time after a Change
in Control, the failure of the Employer to obtain such an agreement
from the purchaser of such business;
(vii) Any termination of the Employee's employment which is
not effected pursuant to the terms of this Agreement; or
(viii) A material breach by the Employer of the provisions of
this Agreement;
provided, however, that an event described above in clause (i), (ii), (iv), (v)
or (viii) shall not constitute Good Reason unless it is communicated by the
Employee to the Employer in writing and is not corrected by the Employer in a
manner which is reasonably satisfactory to the
<PAGE> 12
Employee (including full retroactive correction with respect to any monetary
matter) within 10 days of the Employer's receipt of such written notice from
him.
"Involuntary Termination" shall mean (i) the termination of the
Employee's employment during the Covered Period by the Employer and its
subsidiaries other than for Cause or disability or (ii) the Employee's
resignation of employment during the Covered Period with the Employer and its
subsidiaries for Good Reason.
12. Successors; Binding Agreement.
(a) Assumption by Successor. The Employer will require any successor
(whether direct or indirect, by purchase, merger, consolidation or otherwise) to
all or substantially all of the business or assets of the Employer expressly to
assume and to agree to perform this Agreement in the same manner and to the same
extent that the Employer would be required to perform it if no such succession
had taken place- provided, however, that no such assumption shall relieve the
Employer of its obligations hereunder. As used in this Agreement, the "Employer"
shall mean the Employer as hereinbefore defined and any successor to its
business and/or assets as aforesaid which assumes and agrees to perform this
Agreement by operation of law or otherwise.
(b) Enforceability, Beneficiary. This Agreement shall be binding upon
and inure to the benefit of the Employee (and his personal representatives and
heirs) and the Employer and any organization which succeeds to substantially all
of the business or assets of the Employer, whether by means of merger,
consolidation, acquisition of all or substantially all of the assets of the
Employer or otherwise, including, without limitation, as a result of a Change in
Control or by operation of law. This Agreement shall inure to the benefit of and
be enforceable by the Employee's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees. If the
Employee should die while any amount would still be payable to him hereunder if
he had continued to live, all such amounts, unless otherwise provided herein,
shall be paid in accordance with the terms of this Agreement to his devisee,
legatee or other designee or, if there is no such designee, to his estate.
13. Notices. Any notice required or permitted to be given under this
Agreement shall be sufficient if in writing and delivered personally or sent by
registered mail (i) to Employee's residence, in the case of the Employee, or
(ii) to the business address of its President and Chief Executive Officer, in
the case of the Employer.
14. Waiver of Breach and Severability. The waiver by the Employer of a
breach of any provision of this Agreement by the Employee shall not operate or
be construed as a waiver of any subsequent breach by the Employee. In the event
any provision of this Agreement is found to be invalid or unenforceable, it may
be severed from the Agreement and the remaining provision of the Agreement shall
continue to be binding and effective; provided, however, that, if possible, it
is the intention of the Employer and the Employee that such provision be
construed and interpreted as narrowly as necessary in order to make such
provision valid and enforceable.
<PAGE> 13
15. Entire Agreement. This instrument and the letter agreement between
the Employee and the Employer dated January 1, 1996 contain the entire agreement
of the parties and supersede any prior understandings and agreements between
them respecting the subject matter of this Agreement, including, without
limitation, the Employment Agreement dated as of January 1, 1996. It may not be
changed orally, but only by an agreement in writing signed by the party against
whom enforcement of any waiver, change, modification, extension or discharge is
sought.
16. Survival. Upon termination of the Employee's employment with the
Company prior to a Change in Control Date, the rights and obligations of the
parties hereto as provided in paragraphs 8 and 9 shall continue for the time
periods as set forth herein.
17. Governing Law. This Agreement shall be construed in accordance with
and governed by the laws of the State of Tennessee without regard to the laws of
any other state or jurisdiction. Any action brought or maintained in connection
with this Agreement shall be brought exclusively in the courts located in Shelby
County, Tennessee. Each of the Employer and the Employee hereby irrevocably
waives all right to trial by jury in any action, proceeding or counterclaim
arising out of or relating to this Agreement.
<PAGE> 14
IN WITNESS WHEREOF, the parties hereto execute this Agreement on the
date first above written.
SOFAMOR DANEK GROUP, INC.
BY: /s/ E. Ron Pickard
---------------------------
"Employer"
ATTEST:
/s/ Ann Shinall
- -----------------------
/s/Mark LoGuidice
-------------------------------
Mark LoGuidice
"Employee"
<PAGE> 1
EXHIBIT 10.9
EMPLOYMENT AGREEMENT
BETWEEN J. MARK MERRILL
AND THE COMPANY DATED
APRIL 13, 1997
<PAGE> 2
EXHIBIT 10.9
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
AMENDED AND RESTATED EMPLOYMENT AGREEMENT, dated as of the 13th day of
April, 1997, between SOFAMOR DANEK GROUP, INC., an Indiana corporation (the
"Employer"), and Mark Merrill (the "Employee").
RECITALS
WHEREAS, the Employer is an Indiana corporation and through its wholly
owned subsidiaries, Warsaw Orthopedic, Inc., Danek Medical, Inc., and Sofamor,
S.N.C. is engaged in the business of developing, manufacturing and distributing
medical devices, trauma instruments, surgical tools and implants (such business,
as it may change from time to time, is hereinafter referred to as "Business");
and
WHEREAS, the Board of Directors of the Employer (the "Board") has
concluded that it desires to retain the valued services of the Employee by
entering into a new agreement which shall provide the Employee with certain
additional protections which are designed to ensure that the Employee will
devote himself attentively and energetically to his duties without distraction;
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants contained herein, the parties agree as follows:
1. Employment. The Employer (or a subsidiary of the Employer) hereby
employs the Employee and the Employee hereby accepts employment upon the terms
and conditions hereinafter set forth.
2. Term. Subject to the provisions for termination as provided in
paragraph 10 hereof, the term of this Agreement shall be from April 13, 1997 to
December 31, 1999, and it shall be automatically renewed for successive one (1)
year periods thereafter, unless either party elects not to renew this Agreement
by serving notice of such intention not to renew on the other party at least
ninety (90) days prior to the renewal date. Notwithstanding the foregoing, if a
Change in Control Date (as defined in paragraph 11) occurs during the term
described in the immediately preceding sentence, the term of the Employee's
employment hereunder shall extend until the third anniversary of such Change in
Control Date (the period beginning on such Change in Control Date and ending on
the third anniversary thereof being hereinafter referred to as the "Covered
Period").
3. Duties. The Employee is engaged as Vice President and Treasurer of
the Employer to assist the President and CEO of the Employer in managing,
directing and administering all aspects and matters of the Business, subject to
the direction and guidance of the President and CEO of the Employer. Prior to a
Change in Control (as hereinafter defined), the precise services, duties and
authority of the Employee as Vice President and Treasurer of the
<PAGE> 3
Employer may be further defined, extended or curtailed from time to time at the
discretion of the President and CEO of the Employer.
4. Extent of Services. The Employee shall have the power and authority
commensurate and necessary to his position of Vice President and Treasurer and
his other duties as assigned to him from time to time. He shall devote his
entire employable time, attention and best efforts to the Business as may be
necessary to efficiently and effectively perform and complete the duties he is
to undertake as described in this Agreement. The Employee shall not, without the
consent of the Employer, which consent shall not be unreasonably withheld,
during the term of this Agreement, be actively engaged in any other business
activity, whether or not such business activity is pursued for gain, profit and
other pecuniary advantage; but this shall not be construed as preventing the
Employee from investing his personal assets in such form or manner as will not
require any services on the part of the Employee in the operation of the affairs
of the companies in which such investments are made.
5. Compensation. The Employee shall be compensated for services
rendered hereunder as follows:
(a) The Employee shall receive a salary of not less than $14,167 per
month for each month of the first twelve (12) months that this Agreement is in
effect and for each month thereafter so long as the Employee receives Job
Performance Evaluations of "good" or better. After such first year, if the
Employee receives a Job Performance Evaluation of less than "good", his salary
shall be determined in the discretion of the President and CEO of the Employer.
Such salary paid to the Employee shall be subject to withholding of taxes and
other appropriate and customary amounts.
(b) The Employee shall be entitled to participate in the employee
benefit plans the Employer may adopt from time to time for its management or
supervisory personnel generally at such time as the Employee shall have
fulfilled the eligibility requirements for participation therein as shall be
determined by the terms of the applicable contracts for each program. Nothing
herein shall be construed so as to prevent the Employer from modifying or
terminating any employee benefit plans or programs or employee fringe benefits
it currently sponsors or may adopt from time to time.
6. Expenses and Travel. It is expected that in the course of his
employment, the Employee and his spouse shall be required to spend time
traveling and entertaining various persons on behalf of the Employer and
promoting the affairs of the Employer. The Employer shall provide to the
Employee an Employer Mastercard credit card or the Employer shall pay the
Employee the annual fee for one (1) personal credit card. The Employer shall pay
for or reimburse the Employee for all such reasonable expenses upon the
Employee's periodic presentation of an itemized account of such expenditures.
provided, however, the Employer shall only pay for or reimburse for the cost of
coach class air fare for business travel within the United States and only for
the cost of business class air fare for international business air travel. The
Employer shall bear the expense, in an amount not to exceed $250 per month, for
country club or social club dues for which the Employee may become a member
during the term hereof and/or a
<PAGE> 4
portable telephone and related telephone service, the use of either of which is
related to the Business. The Employee shall bear the expense of any initiation
fees and other assessments for or resulting from such membership. The Employee
shall be reimbursed in an amount not to exceed a total of $2,000 for each year
during the term or any renewal term hereof, for expenses incurred for his spouse
when traveling with the Employee on business matters for the Employer.
7. Disability. If the Employee shall become physically or mentally
disabled during the ten-n of this Agreement to the extent that he shall be
unable to perform his duties and services for and on behalf of the Employer, the
benefits made available to the Employee and the salary then payable to the
Employee pursuant to the foregoing paragraph 5 shall continue to be made
available and paid to the Employee for the shorter of (i) the period of
disability; or (ii) six (6) months from the commencement of the disability.
Thereafter, the Employee shall receive no salary from the Employer.
8. Confidentiality. The Employee possesses and will continue to possess
information which has been created, discovered, developed by or otherwise become
known to the Employee (including information discovered or made available by
subsidiaries, affiliates or joint ventures of the Employer or in which property
rights have been assigned or otherwise conveyed to the Employer), which
information has commercial value to the Employer, including but not limited to
trade secrets, innovations, processes, computer codes, data, know-how,
improvements, discoveries, developments, techniques, marketing plans,
strategies, costs, customer and client lists, or any information the Employee
has reason to know the Employer would treat as confidential for any purpose,
whether or not developed by the Employee (hereinafter referred to as
"Confidential Information"). Unless previously authorized in writing or
instructed in writing by the Employer, the Employee will not, at any time,
disclose to others, or use, or allow anyone else to disclose or use any
Confidential Information (except as may be necessary in the performance of the
Employee's employment with the Employer), unless, until and then only to the
extent that such Confidential Information has become ascertainable or obtained
from public or published sources or was available to the Employee on a
non-confidential basis prior to any such disclosure or use, provided that the
source of such material is or was not bound by an obligation of confidentiality
to the Employer. This paragraph 8 shall survive termination of this Agreement.
9. Restrictive Covenants. The terms of this paragraph 9 shall be
applicable during the Employee's employment and upon the termination of such
employment for any reason occurring prior to a Change in Control Date. In the
event of termination it without cause" as defined in paragraph 10(b) occurring
prior to a Change in Control Date, in consideration of, and subject to, the
Employee's continued compliance with the terms of this paragraph 9, the Employer
shall pay to the Employee twelve (12) months salary based on his salary for the
month immediately preceding the date of termination which shall be paid in
accordance with the Employer's customary payroll practices over twelve (12)
months. In the event of a termination for any other reason, including for "just
cause" as defined in paragraph 10(b) occurring prior to a Change in Control
Date, the Employer shall have no obligation to the Employee. This paragraph 9
shall survive termination of this Agreement occurring prior to a Change in
Control Date.
<PAGE> 5
The Employee acknowledges that because of his skills, the Employee's
position with the Employer and the Confidential Information to which the
Employee shall have access or be provided on account of such employment with the
Employer, competition by the Employee with the Employer could damage the
Employer in a manner which cannot adequately be compensated by damages or an
action at law. In view of such circumstances, because of the Confidential
Information obtained by, or disclosed to the Employee, and as a material
inducement to the Employer to enter into this Agreement and to compensate the
Employee, as described in paragraph 5, as well as provide him with additional
benefits as provided herein and other good and valuable consideration, the
Employee covenants and agrees that:
(a) Noncompetition. During the Employee's employment with the Employer
and for a period of three (3) years thereafter, the Employee shall not (as
principal, agent, employee, consultant or otherwise), directly or indirectly, in
any geographic area in which the Employer is engaged in Business, engage in
activities for, or render services of any nature to, any firm or business, which
firm or business competes, directly or indirectly, with the Employer or the
Business.
(b) Nonsolicitation of Customers. During the Employee's employment with
the Employer and for a period of three (3) years thereafter, the Employee shall
not, directly or indirectly, solicit, divert or accept any work or services
which compete with the Employer's Business from any customer of the Employer or
seek to cause any such customer to refrain from doing business with or
patronizing the Employer.
(c) Nonsolicitation of Employees. During the Employee's employment with
the Employer and for a period of three (3) years thereafter, the Employee shall
not, directly or indirectly, solicit for employment or employ any current or
former employee of the Employer.
(d) Definitions. For purposes of this Agreement, the term "directly or
indirectly" shall be construed in its broadest sense and shall include the
activities of the members of the Employee's immediate family or any partnership.
The term "Business" shall be construed in its broadest sense and shall include
any activity engaged in or conducted by the Employer or any of its subsidiaries,
affiliates or joint ventures or which the Employer or any of its subsidiaries,
affiliates or joint ventures intends to engage in or conduct. The term
"customer" shall mean any person or entity with which the Employer, or any of
its subsidiaries, affiliates or joint ventures has engaged in or conducted
Business during the one (1) year period prior to the date the Employee ceased
employment with the Employer or any persons or entities targeted by the Employer
or contacted for the purpose of engaging in or conducting Business during such
one (1) year period.
(e) Reasonable Limitations. Given the important nature of the position
the Employee will hold with the Employer, the nature of the Employer's Business
and the sensitive nature of the Confidential Information and duties the Employee
will have with the Employer, the parties acknowledge that the limitations,
including but not limited to, the scope of activities prohibited, the geographic
area covered and the time limitation, are reasonable.
<PAGE> 6
In the event of an actual or threatened breach by the Employee of the
provisions of paragraphs 8 and 9 of this Agreement, the Employer shall be
entitled to a temporary restraining order and an injunction restraining the
Employee from such breach. Nothing herein, however, shall be construed as
prohibiting the Employer from pursuing any other remedies available to it for
such actual or threatened breach, including, without limitation, the recovery of
damages and reasonable attorneys' and paralegals' fees and costs from the
Employee. If the Employee violates any of the covenants in paragraphs 8 and 9 of
this Agreement, the term and the covenant violated shall be automatically
extended for the period of time of the violation, either from the date on which
the Employee ceases such violation or from the date of the entry by a court of
competent jurisdiction of an order or judgment enforcing such covenants,
whichever period is later.
10. Termination Prior to a Change in Control Date. The Employer may, at
its option, terminate this Agreement at any time prior to the occurrence of a
Change in Control Date upon written notice to the Employee for just cause or
without cause.
(a) "Just cause" shall include, but not be limited to:
(i) The Employee receiving a Job Performance Evaluation of
less than "good";
(ii) The Employee's misuse or embezzlement of funds
belonging to the Employer, conviction of a felony or
crime involving moral turpitude or use of alcohol or
drugs in such a manner as will injure or adversely
affect the reputation of the Employer or its
employees, customers, agents, officers or directors;
(iii) The Employee's absence from his employment, for
whatever cause, other than by disability for which
salary is continued pursuant to paragraph 7, for a
period of thirty (30) consecutive days or more;
(iv) The Employee's absence from employment as a result of
disability beyond the period for which salary is
continued pursuant to paragraph 7;
(v) The Employee's resignation from employment during the
term hereof or if the Employee serves notice to not
renew this Agreement as provided in paragraph 2;
(vi) The Employee's willful malfeasance in discharging his
obligations hereunder and such acts and their
consequences are not remedied within ten (10) days or
such longer reasonable period of time designated by
the Employer after written notice thereof has been
given to the Employee; or
(vii) The Employee's breach of the provisions of this
Agreement and such breach and its consequences are not
remedied within ten (10) days or such longer
reasonable period of time designated by the Employer,
after written notice thereof has been given to the
Employee.
<PAGE> 7
(b) "Without cause" shall mean:
(i) The termination and dissolution of the Employer or a
bona fide decision by the Employer to terminate its
Business; or
(ii) Any involuntary termination of the Employee's
employment by the Employer without just cause.
(c) In addition to those reasons enumerated above, this Agreement shall
be terminated upon the happening of any of the following events:
(i) Whenever the Employer and the Employee shall mutually
agree to a termination in writing; or
(ii) Upon death of the Employee.
Upon the termination of this Agreement prior to the occurrence of a Change in
Control Date for any of the foregoing reasons in paragraph 10, the Employee
shall be entitled to receive only the compensation accrued but unpaid as of the
date of the termination hereof and shall not be entitled to additional
compensation except as expressly provided in paragraph 9 of this Agreement.
11. Effect of a Change in Control.
(a) Involuntary Termination, Consulting Period.
(i) Consulting Services Following an Involuntary Termination. In the
event of the Employee's Involuntary Termination during the Covered Period he
shall commence providing consulting services to the Employer for a period (the
"Consulting Period") of (i) three years, in the event the Involuntary
Termination occurs during the first year of the Covered Period, (ii) two years,
in the event the Involuntary Termination occurs during the second year of the
Covered Period, or (iii) one year, in the event the Involuntary Termination
occurs in the last year of the Covered Period. The Employee's consulting
services shall consist in advising the Employer on such matters as may be
reasonably requested by the Employer. Such services shall be performed at such
times and in such locations as shall be mutually agreed by the Employee and the
Employer, and shall not interfere with his duties to a new employer. In any
event, the Employee shall not be required to perform consulting services for
more than 8 hours per month during the Consulting Period. The Employee shall not
be an employee of the Employer during the Consulting Period, but shall act
solely in the capacity of an independent contractor.
(ii) Consulting Fees, Reimbursement of Expenses. In consideration of
the Employee's agreement to provide consulting services hereunder, the Employer
shall pay the Employee, not less than 5 days following an Involuntary
Termination, a lump sum consulting fee payment equal to the product of (A) the
Employee's base salary in effect immediately prior to his Date of Termination
(without taking into account any salary reduction that gave rise to Good
<PAGE> 8
Reason), and (B) the number of years in the Consulting Period, as determined
pursuant to paragraph I 1 (a)(i) above. In addition, the Employee shall be
reimbursed for all expenses reasonably incurred by him in connection with the
performance of his consulting services hereunder. The Employee shall not be
entitled to benefits under any other severance pay plan or arrangement sponsored
by the Employer and its subsidiaries in the event of an Involuntary Termination
during the Covered Period, and any amounts payable to him under any statutory
severance policy shall reduce the aggregate amount of the consulting fees
payable hereunder. In addition, in the event of the Employee's Involuntary
Termination, the Employer shall pay him within 5 days of the date of such
Involuntary Termination the full amount of any earned but unpaid base salary
through the Date of Termination at the rate in effect at the time of the Notice
of Termination, plus a cash payment for all unused vacation time which he may
have accrued as of the Date of Termination. The Employer shall also pay the
Employee within 5 days of the Date of Termination a pro rata portion of his
projected annual bonus for the year in which his Involuntary Termination occurs,
calculated on the basis of his target bonus for that year.
(iii) Benefits. The Employee and his eligible dependents shall continue
to be eligible to participate during the Consulting Period in the medical,
dental, health, life and other fringe benefit plans and arrangements applicable
to him immediately prior to his Involuntary Termination on the same terms and
conditions in effect for the Employee and his dependents immediately prior to
such Involuntary Termination; provided, however, that any benefit plan or
arrangement will end on the date that the Employee and his dependents are
eligible and elect coverage under a plan or arrangement of a subsequent employer
which provides a substantially equivalent or greater benefit to him and his
dependents.
(iv) Date and Notice of Termination. Any termination of the Employee's
employment during the Covered Period by the Employer or by the Employee shall be
communicated by a notice of termination to the other party hereto (the "Notice
of Termination"). The Notice of Termination shall indicate the specific
termination provision in this Agreement relied upon and shall set forth in
reasonable detail the facts and circumstances claimed to provide a basis for
termination of the Employee's employment under the provision so indicated. The
date of the Employee's termination of employment with the Employer and its
subsidiaries (the "Date of Termination") shall be determined as follows-. (i) if
the Employee's employment is terminated by the Employer in an Involuntary
Termination, five (5) days after the date the Notice of Termination is received
by the Employee and (ii) if the Employee's employment is terminated by the
Employer for just cause, the date specified in the Notice of Termination. If the
basis for the Employee's Involuntary Termination is his resignation for Good
Reason, the Date of Termination shall be ten (10) days after the date his Notice
of Termination is received by the Employer. The Date of Termination for a
resignation of employment other than for Good Reason shall be the date set forth
in the applicable notice, which shall be no earlier than ten (10) days after the
date such notice is received by the Employer.
(b) Non-Competition Agreement. During the Consulting Period, the
Employee shall comply with the substantive restrictions set forth in paragraphs
8 and 9 above.
<PAGE> 9
(c) Legal Fees and Expenses. The Employer shall pay or reimburse the
Employee on an after-tax basis for all costs and expenses (including, without
limitations court costs and reasonable legal fees and expenses which reflect
common practice with respect to the matters involved) incurred by him as a
result of any claim, action or proceeding (i) arising out of his termination of
employment during the Covered Period, (ii) contesting, disputing or enforcing
any right, benefits or obligations under this paragraph 11 or (iii) arising out
of or challenging the validity, advisability or enforceability of this paragraph
11 or any provision thereof; provided, however, that this provision will not
apply if the trier of fact determines that the Employee's claim was entirely
without merit.
(d) Definitions. For purposes of this paragraph 11, the following
capitalized words shall have the meanings set forth below:
"Cause" shall mean a termination of the Employee's employment by the
Employer which is a result of (i) his felony conviction, (ii) his willful
disclosure of material trade secrets or other material confidential information
related to the business of the Employer and its subsidiaries or (iii) his
willful and continued failure substantially to perform his duties with the
Employer (other than any such failure resulting from his incapacity due to
physical or mental illness or any such actual or anticipated failure resulting
from a resignation by the Employee for Good Reason) after a written demand for
substantial performance is delivered to the Employee by the Board, which demand
specifically identifies the manner in which the Board believes that the Employee
has not substantially performed his duties, and which performance is not
substantially corrected by him within 10 days of receipt of such demand. For
purposes of the previous sentence, no act or failure to act on the Employee's
part shall be deemed "willful" unless done, or omitted to be done, by him not in
good faith and without reasonable belief that his action or omission was in the
best interest of the Employer. Notwithstanding the foregoing, the Employee shall
not be deemed to have been terminated for Cause unless and until there shall
have been delivered to him a copy of a resolution duly adopted by the
affirmative vote of not less than three-fourths (3/4ths) of the entire
membership of the Board at a meeting of the Board called and held for such
purpose (after reasonable notice to the Employee and an opportunity for him,
together with his counsel, to be heard before the Board), finding that in the
good faith opinion of the Board he was guilty of conduct set forth above in
clause (i), (ii) or (iii) of the first sentence of this definition and
specifying the particulars thereof in detail.
"Change in Control" shall mean the happening of any of the following-
(i) any person or entity, including a "group" as defined in
Section 13(d)(3) of the Exchange Act, other than the Employer, a
subsidiary of the Employer, or any employee benefit plan of the
Employer or its subsidiaries, becomes the beneficial owner of the
Employer's securities having 25 percent or more of the combined voting
power of the then outstanding securities of the Employer that may be
cast for the election for directors of the Employer (other than as a
result of an issuance of securities initiated by the Employer in the
ordinary course of business); or
<PAGE> 10
(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 Employer or any successor
corporation or entity entitled to vote generally in the election of
directors of the Employer or such other corporation or entity after
such transaction, are held in the aggregate by holders of the
Employer's securities entitled to vote generally in the election of
directors of the Employer 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 cease for
any reason to constitute at least a majority thereof, unless the
election, or the nomination for election by the Employer's
stockholders, of each director of the Employer first elected during
such period was approved by a vote of at least two-thirds of the
directors of the Employer then still in office who were directors of
the Employer at the beginning of any such period (together, directors
at the beginning of such period and new directors whose election or
nomination was so approved are the "Incumbent Directors").
"Change in Control Date" shall mean the date on which the Change in
Control occurs. Notwithstanding the first sentence of this section, if the
Employee's employment with the Employer terminates prior to the Change in
Control Date and it is reasonably demonstrated that his termination of
employment (i) was at the request of the third party who has taken steps
reasonably calculated to effect the Change in Control or (ii) otherwise arose in
connection with or in anticipation of the Change in Control, then Change in
Control Date shall mean the date immediately prior to the date of the Employee's
termination of employment.
"Common Stock" shall mean the common stock of the Employer.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, and any successor provisions thereto.
"Good Reason" shall mean a resignation by the Employee from his
employment with the Employer on or following the Change in Control Date as a
result of the occurrence of any of the following without his consent:
(i) A failure by the Employer to ensure that the Employee's
position, titles, nature and status of responsibilities and reporting
obligations are substantially equivalent to those that the Employee
enjoyed immediately prior to the Change in Control Date, it being
understood and agreed that such features shall not be deemed less than
substantially equivalent solely by reason of the Employer ceasing to be
a public company.
(ii) A reduction by the Employer in the Employee's annual base
salary as in effect immediately prior to the Change in Control Date or
as the same may be increased from time to time thereafter; a failure by
the Employer to increase the Employee's salary at a rate commensurate
with that of other key executives of the Employer; or a reduction
<PAGE> 11
in the Employee's target annual bonus (expressed as a percentage of
base salary) below the target in effect for him prior to the Change in
Control Date,
(iii) The relocation of the office of the Employer where the
Employee is employed immediately prior to the Change in Control Date
(the "CIC Location") to a location which is more than fifty (50) miles
away from the CIC Location or the Employer's requiring the Employee to
be based more than fifty (50) miles away from the CIC Location (except
for required travel on the Employer's business to an extent
substantially consistent with his customary business travel obligations
in the ordinary course of business prior to the Change in Control
Date), unless such relocation is to a location closer to his principal
residence,
(iv) The failure by the Employer to continue in effect any
compensation plan in which the Employee participated prior to the
Change in Control Date or made available to him after the Change in
Control Date, unless an equitable arrangement (embodied in an ongoing
substitute or alternative plan) has been made with respect to such plan
in connection with the Change in Control, or the failure by the
Employer to continue the Employee's participation therein on at least
as favorable a basis, both in terms of the amount of benefits provided
and the level of his participation relative to other participants, as
existed on the Change in Control Date;
(v) The failure by the Employer to continue to provide the
Employee with benefits at least as favorable in the aggregate to those
enjoyed by him under the Employer's pension, savings, life insurance,
medical, health and accident, disability, and fringe benefit plans and
programs in which he was participating immediately prior to the Change
in Control Date; or the failure by the Employer to provide the Employee
with the number of paid vacation days to which he is entitled on the
basis of years of service with the Employer in accordance with the
Employer's normal vacation policy in effect immediately prior to the
Change in Control;
(vi) The failure of the Employer to obtain an agreement
reasonably satisfactory to the Employee from any successor to assume
and agree to perform this Agreement, as contemplated in paragraph 12(a)
hereof or, if the business of the Employer for which the Employee's
services are principally performed is sold at any time after a Change
in Control, the failure of the Employer to obtain such an agreement
from the purchaser of such business;
(vii) Any termination of the Employee's employment which is
not effected pursuant to the terms of this Agreement; or
(viii) A material breach by the Employer of the provisions of
this Agreement;
provided, however, that an event described above in clause (i), (ii), (iv), (v)
or (viii) shall not constitute Good Reason unless it is communicated by the
Employee to the Employer in writing and is not corrected by the Employer in a
manner which is reasonably satisfactory to the
<PAGE> 12
Employee (including full retroactive correction with respect to any monetary
matter) within 10 days of the Employer's receipt of such written notice from
him.
"Involuntary Termination" shall mean (i) the termination of the
Employee's employment during the Covered Period by the Employer and its
subsidiaries other than for Cause or disability or (ii) the Employee's
resignation of employment during the Covered Period with the Employer and its
subsidiaries for Good Reason.
12. Successors, Binding Agreement.
(a) Assumption by Successor. The Employer will require any successor
(whether direct or indirect, by purchase, merger, consolidation or otherwise) to
all or substantially all of the business or assets of the Employer expressly to
assume and to agree to perform this Agreement in the same manner and to the same
extent that the Employer would be required to perform it if no such succession
had taken place; provided, however, that no such assumption shall relieve the
Employer of its obligations hereunder. As used in this Agreement, the "Employer"
shall mean the Employer as hereinbefore defined and any successor to its
business and/or assets as aforesaid which assumes and agrees to perform this
Agreement by operation of law or otherwise.
(b) Enforceability, Beneficiaries. This Agreement shall be binding upon
and inure to the benefit of the Employee (and his personal representatives and
heirs) and the Employer and any organization which succeeds to substantially all
of the business or assets of the Employer, whether by means of merger,
consolidation, acquisition of all or substantially all of the assets of the
Employer or otherwise, including, without limitation, as a result of a Change in
Control or by operation of law. This Agreement shall inure to the benefit of and
be enforceable by the Employee's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees. If the
Employee should die while any amount would still be payable to him hereunder if
he had continued to live, all such amounts, unless otherwise provided herein,
shall be paid in accordance with the terms of this Agreement to his devisee,
legatee or other designee or, if there is no such designee, to his estate.
13. Notices. Any notice required or permitted to be given under this
Agreement shall be sufficient if in writing and delivered personally or sent by
registered mail (i) to Employee's residence, in the case of the Employee, or
(ii) to the business address of its President and Chief Executive Officer, in
the case of the Employer.
14. Waiver of Breach and Severability. The waiver by the Employer of a
breach of any provision of this Agreement by the Employee shall not operate or
be construed as a waiver of any subsequent breach by the Employee. In the event
any provision of this Agreement is found to be invalid or unenforceable, it may
be severed from the Agreement and the remaining provision of the Agreement shall
continue to be binding and effective; provided, however, that, if possible, it
is the intention of the Employer and the Employee that such provision be
construed and interpreted as narrowly as necessary in order to make such
provision valid and enforceable.
<PAGE> 13
15. Entire Agreement. This instrument and the letter agreement between
the Employee and the Employer dated January 1, 1996 contain the entire agreement
of the parties and supersede any prior understandings and agreements between
them respecting the subject matter of this Agreement, including, without
limitation, the Employment Agreement dated as of January 1, 1996. It may not be
changed orally, but only by an agreement in writing signed by the party against
whom enforcement of any waiver, change, modification,' extension or discharge is
sought.
16. Survival. Upon termination of the Employee's employment with the
Company prior to a Change in Control Date, the rights and obligations of the
parties hereto as provided in paragraphs 8 and 9 shall continue for the time
periods as set forth herein.
17. Governing Law. This Agreement shall be construed in accordance with
and governed by the laws of the State of Tennessee without regard to the laws of
any other state or jurisdiction. Any action brought or maintained in connection
with this Agreement shall be brought exclusively in the courts located in Shelby
County, Tennessee. Each of the Employer and the Employee hereby irrevocably
waives all right to trial by jury in any action, proceeding or counterclaim
arising out of or relating to this Agreement.
<PAGE> 14
IN WITNESS WHEREOF, the parties hereto execute this Agreement on the
date first above written.
SOFAMOR DANEK GROUP, INC.
BY: /s/ E. Ron Pickard
-------------------------
"Employer"
ATTEST:
/s/ Laurence Y. Fairey
- --------------------------
/s/ Mark Merrill
------------------------------
Mark Merrill
"Employee"
<PAGE> 1
EXHIBIT 10.18
LETTER AGREEMENT
BETWEEN ROBERT A. COMPTON
AND THE COMPANY DATED
MAY 28, 1997
<PAGE> 2
EXHIBIT 10.18
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT, dated as of the 28th day of May, 1997, between
SOFAMOR DANEK GROUP, INC., an Indiana corporation (the "Employer"), and Robert
A. Compton (the "Employee").
RECITALS
WHEREAS, the Employer is an Indiana corporation and through its wholly
owned subsidiaries, Warsaw Orthopedic, Inc., Danek Medical, Inc., and Sofamor,
S.N.C. is engaged in the business of developing, manufacturing and distributing
medical devices, trauma instruments, surgical tools and implants (such business,
as it may change from time to time, is hereinafter referred to as "Business");
and
WHEREAS, the Board of Directors of the Employer (the "Board") has
concluded that it desires to engage the valued services of the Employee by
entering into an agreement which shall provide the Employee with certain
protections which are designed to ensure that the Employee will devote himself
attentively and energetically to his duties without distraction;
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants contained herein the parties agree as follows:
1. Employment. The Employer (or a subsidiary of the Employer) hereby
employs the Employee and the Employee hereby accepts employment upon the terms
and conditions hereinafter set forth.
2. Term. Subject to the provisions for termination as provided in
paragraph 10 hereof, the term of this Agreement shall be from June 1, 1997 to
December 31, 2000, and it shall be automatically renewed for successive one (1)
year periods thereafter, unless either party elects not to renew this Agreement
by serving notice of such intention not to renew on the other party at least
ninety (90) days prior to the renewal date. Notwithstanding the foregoing, if a
Change in Control Date (as defined in paragraph I 1) occurs during the term
described in the immediately preceding sentence, the term of the Employee's
employment hereunder shall extend until the third anniversary of such Change in
Control Date (the period beginning on such Change in Control Date and ending on
the third anniversary thereof being hereinafter referred to as the "Covered
Period").
3. Duties. The Employee is engaged as Group President-Operations of the
Employer to assist the President and CEO of the Employer in managing, directing
and administering all aspects and matters of the Business, subject to the
direction and guidance of the President and CEO of the Employer, Prior to a
Change in Control (as hereinafter defined), the precise services, duties and
authority of the Employee as Group President-Operations of the Employer may be
further defined, extended or curtailed from time to time at the discretion of
the President and CEO of the Employer. During the term of your employment with
the Company, you shall be
<PAGE> 3
nominated each year for election as a director of the Company. With respect to
the options (the "Director Options") granted to the Employee in November 1994
under the Director Program of the Company's 1993 Long Term Incentive Plan, as
amended, such Director Options shall continue to vest in accordance with the
terms of such grant; provided that the Employee remains in the employ of the
Company or serves as a director thereof,
4. Extent of Services. The Employee shall have the power and authority
commensurate and necessary to his position of Group President-Operations, and
his other duties as assigned to him from time to time, He shall devote his
entire employable time, attention and best efforts to the Business as may be
necessary to efficiently and effectively perform and complete the duties he is
to undertake as described in this Agreement. The Employee shall not, without the
consent of the Employer, which consent shall not be unreasonably withheld,
during the term of this Agreement, be actively engaged in any other business
activity, whether or not such business activity is pursued for gain, profit and
other pecuniary advantage; but this shall not be construed as preventing the
Employee from (i) investing his personal assets in such form or manner as will
not require any services on the part of the Employee in the operation of the
affairs of the companies in which such investments are made or (ii) subject to
the restrictions on competition contained in paragraph 9 of this Agreement,
serving on boards of directors or boards of trustees of other entities, Any
remuneration associated with service on such other boards shall belong to the
Employee, The Employee currently serves on the boards listed on Schedule A
attached hereto and shall promptly notify the Company of his appointment on any
other boards during the term of this Agreement.
5. Compensation. The Employee shall be compensated for services
rendered hereunder as follows:
(a) The Employee shall receive a salary during the term of not less
than $12,500 on a biweekly basis, Such salary paid to the Employee shall be
subject to withholding of taxes and other appropriate and customary amounts.
(b) The Employee shall be entitled to participate in the employee
benefit plans the Employer may adopt from time to time for its management or
supervisory personnel generally, including, without limitation, the Executive
Level of the Management Bonus Program, at such time as the Employee shall have
fulfilled the eligibility requirements for participation therein as shall be
determined by the terms of the applicable contracts for each program; provided
that upon the satisfaction of the eligibility period, the Company shall maintain
life insurance coverage on behalf of the Employee equal to two times the
Employee's annual salary. In addition to the foregoing, the Company shall
reimburse the Employee for the continuation of his current medical coverage
until such time as the Employee satisfies the 90-day eligibility period for the
medical plan maintained by the Company. Nothing herein shall be construed so as
to prevent the Employer from modifying or terminating any employee benefit plans
or programs or employee fringe benefits it currently sponsors or may adopt from
time to time.
(c) The Company shall reimburse the Employee for the expenses incurred
by him in connection with his relocation to Memphis, Tennessee as described
under the heading
<PAGE> 4
"Relocation" in the letter dated April 4, 1997 from the Company to the Employee
(the "April 4th Letter").
6. Expenses and Travel. It is expected that in the course of his
employment, the Employee and his spouse shall be required to spend time
traveling and entertaining various persons on behalf of the Employer and
promoting the affairs of the Employer. The Employer shall provide to the
Employee an Employer Mastercard credit card or the Employer shall pay the
Employee the annual fee for one (1) personal credit card. The Employer shall pay
for or reimburse the Employee for all such reasonable expenses upon the'
Employee's periodic presentation of an itemized account of such expenditures.
The Employer shall bear the expense, in an amount not to exceed $300 per month,
for country club or social club dues for which the Employee may become a member
during the term hereof and/or a portable telephone and related telephone
service, the use of either of which is related to the Business. The Employee
shall bear the expense of any initiation fees and other assessments for or
resulting from such membership. The Employee shall be reimbursed in an amount
not to exceed a total of $4,000 for each year during the term or any renewal
term hereof, for expenses incurred for his spouse when traveling with the
Employee on business matters for the Employer. The Employee shall be reimbursed
in an amount not to exceed $300 for each year during the term for periodical
subscriptions. The Employee shall be entitled to a minimum of four (4) weeks
vacation annually during the term of this Agreement.
7. Disability. If the Employee shall become physically or mentally
disabled during the term of this Agreement to the extent that he shall be unable
to perform his duties and services for and on behalf of the Employer, the
benefits made available to the Employee and the salary then payable to the
Employee pursuant to the foregoing paragraph 5 shall continue to be made
available and paid to the Employee for the shorter of (i) the period of
disability; or (ii) six (6) months from the commencement of the disability.
Thereafter, the Employee shall receive no salary from the Employer.
8. Confidentiality. The Employee possesses and will continue to possess
information which has been created, discovered, developed by or otherwise become
known to the Employee (including information discovered or made available by
subsidiaries, affiliates or joint ventures of the Employer or in which property
rights have been assigned or otherwise conveyed to the Employer), which
information has commercial value to the Employer, including but not limited to
trade secrets, innovations, processes, computer codes, data, know-how,
improvements, discoveries, developments, techniques, marketing plans,
strategies, costs, customer and client lists, or any information the Employee
has reason to know the Employer would treat as confidential for any purpose,
whether or not developed by the Employee (hereinafter referred to as
"Confidential Information"). Unless previously authorized in writing or
instructed in writing by the Employer, the Employee will not, at any time,
disclose to others, or use, or allow anyone else to disclose or use any
Confidential Information (except as may be necessary in the performance of the
Employee's employment with the Employer), unless, until and then only to the
extent that such Confidential Information has become ascertainable or obtained
from public or published sources or was available to the Employee on a
non-confidential basis prior to any such disclosure or use, provided that the
source of such material is or was not bound by an
<PAGE> 5
obligation of confidentiality to the Employer. This paragraph 8 shall survive
termination of this Agreement.
9. Restrictive Covenants. The terms of this paragraph 9 shall be
applicable during the Employee's employment and upon the termination of such
employment for any reason occurring prior to a Change in Control Date. In the
event of termination "without cause" as defined in paragraph 10(b) occurring
prior to a Change in Control Date, in consideration of, and subject to, the
Employee's continued compliance with the terms of this paragraph 9, the Employer
shall pay to the Employee (i) in the event such termination occurs during the
first year of the term of this Agreement, thirty-six months salary, (ii) in the
event such termination occurs during the second year of the term of this
Agreement, twenty-four months salary, and (iii) in the event such termination
occurs during the third year of the term of this Agreement or thereafter if the
term is extended pursuant to paragraph 2 of this Agreement, twelve months
salary. Salary shall be based on the Employee's salary for the month immediately
preceding the date of termination which shall be paid in accordance with the
Employer's customary payroll practices over the applicable period. In the event
of a termination for any other reason, including for "just cause" as defined in
paragraph 10(b) occurring prior to a Change in Control Date, the Employer shall
have no obligation to the Employee. This paragraph 9 shall survive termination
of this Agreement occurring prior to a Change in Control Date.
The Employee acknowledges that because of his skills, the Employee's
position with the Employer and the Confidential Information to which the
Employee shall have access or be provided on account of such employment with the
Employer, competition by the Employee with the Employer could damage the
Employer in a manner which cannot adequately be compensated by damages or an
action at law. In view of such circumstances, because of the Confidential
Information obtained by, or disclosed to the Employee, and as a material
inducement to the Employer to enter into this Agreement and to compensate the
Employee, as described in paragraph 5, as well as provide him with additional
benefits as provided herein and other good and valuable consideration, the
Employee covenants and agrees that:
(a) Noncompetition. During the Employee's employment with the Employer
and for a period of three (3) years thereafter, the Employee shall not (as
principal, agent, employee, consultant or otherwise), directly or indirectly, in
any geographic area in which the Employer is engaged in Business, engage in
activities for, or render services of any nature to, any firm or business, which
firm or business competes, directly or indirectly, with the Employer or the
Business.
(b) Nonsolicitation of Customers. During the Employee's employment with
the Employer and for a period of three (3) years thereafter, the Employee shall
not, directly or indirectly, solicit, divert or accept any work or services
which compete with the Employer's Business from any customer of the Employer or
seek to cause any such customer to refrain from doing business with or
patronizing the Employer.
<PAGE> 6
(c) Nonsolicitation of Employees, During the Employee's employment with
the Employer and for a period of three (3) years thereafter, the Employee shall
not, directly or indirectly, solicit for employment or employ any current or
former employee of the Employer.
(d) Definitions. For purposes of this Agreement, the term "directly or
indirectly" shall be construed in its broadest sense and shall include the
activities of the members of the Employee's immediate family or any partnership.
The term "Business" shall be construed in its broadest sense and shall include
any activity engaged in or conducted by the Employer or any of its subsidiaries,
affiliates or joint ventures or which the Employer or any of its subsidiaries,
affiliates or joint ventures intends to engage in or conduct. The "customer"
shall mean any person or entity with which the Employer, or any of its
subsidiaries, affiliates or joint ventures has engaged in or conducted Business
during the one (1) year period prior to the date the Employee ceased employment
with the Employer or any persons or entities targeted by the Employer or
contacted for the purpose of engaging in or conducting Business during such one
(1) year period.
(e) Reasonable Limitations. Given the important nature of the position
the Employee will hold with the Employer, the nature of the Employer's Business
and the sensitive nature of the Confidential Information and duties the Employee
will have with the Employer, the parties acknowledge that the limitations,
including but not limited to, the scope of activities prohibited, the geographic
area covered and the time limitation, are reasonable.
In the event of an actual or threatened breach by the Employee of the
provisions of paragraphs 8 and 9 of this Agreement, the Employer shall be
entitled to a temporary restraining order and an injunction restraining the
Employee from such breach. Nothing herein, however, shall be construed as
prohibiting the Employer from pursuing any other remedies available to it for
such actual or threatened breach, including, without limitation, the recovery of
damages and reasonable attorneys' and paralegals' fees and costs from the
Employee. If the Employee violates any of the covenants in paragraphs 8 and 9 of
this Agreement, the term and the covenant violated shall be automatically
extended for the period of time of the violation, either from the date on which
the Employee ceases such violation or from the date of the entry by a court of
competent jurisdiction of an order or judgment enforcing such covenants,
whichever period is later.
10. Termination Prior to a Change in Control Date, The Employer may, at
its option, terminate this Agreement at any time prior to the occurrence of a
Change in Control Date upon written notice to the Employee for just cause or
without cause.
(a) "Just cause" shall include, but not be limited to:
(i) The Employee's misuse or embezzlement of funds
belonging to the Employer, conviction of a felony or
crime involving moral turpitude or use of alcohol or
drugs in such a manner as will injure or adversely
affect the reputation of the Employer or its
employees, customers, agents, officers or directors;
<PAGE> 7
(ii) The Employee's absence from his employment, for
whatever cause, other than by disability for which
salary is continued pursuant to paragraph 7, for a
period of thirty (30) consecutive days or more;
(iii) The Employee's absence from employment as a result of
disability beyond the period for which salary is
continued pursuant to paragraph 7;
(iv) The Employee's resignation from employment during the
term hereof or if the Employee serves notice to not
renew this Agreement as provided in paragraph 2;
(v) The Employee's willful malfeasance in discharging his
obligations hereunder and such acts and their
consequences are not remedied within ten (10) days or
such longer reasonable period of time designated by
the Employer after written notice thereof has been
given to the Employee; or
(vi) The Employee's breach of the provisions of this
Agreement and such breach and its consequences are not
remedied within ten (10) days or such longer
reasonable period of time designated by the Employer,
after written notice thereof has been given to the
Employee.
(b) "Without cause" shall mean:
(i) The termination and dissolution of the Employer or a
bona fide decision by the Employer to terminate its
Business; or
(ii) Any involuntary termination of the Employee's
employment by the Employer without just cause.
(c) In addition to those reasons enumerated above, this Agreement shall
be terminated upon the happening of any of the following events:
(i) Whenever the Employer and the Employee shall mutually
agree to a termination in writing; or
(ii) Upon death of the Employee.
Upon the termination of this Agreement prior to the occurrence of a Change in
Control Date for any of the foregoing reasons in paragraph 10, the Employee
shall be entitled to receive only the compensation accrued but unpaid as of the
date of the termination hereof and shall not be entitled to additional
compensation except as expressly provided in paragraph 9 of this Agreement.
11. Effect of a Change in Control.
(a) Involuntary Termination; Consulting Period.
<PAGE> 8
(i) Consulting Services Following an Involuntary Termination. In the
event of the Employee's Involuntary Termination during the Covered Period he
shall commence providing consulting services to the Employer for a period (the
"Consulting Period") of (i) three years, in the event the Involuntary
Termination occurs during the first year of the Covered Period, (ii) two years,
in the event the Involuntary Termination occurs during the second year of the
Covered Period, or (iii) one year, in the event the Involuntary Termination
occurs in the last year of the Covered Period. The Employee's consulting
services shall consist in advising the Employer on such matters as may be
reasonably requested by the Employer. Such services shall be performed at such
times and in such locations as shall be mutually agreed by the Employee and the
Employer, and shall not interfere with his duties to a new employer. In any
event, the Employee shall not be required to perform consulting services for
more than 8 hours per month during the Consulting Period. The Employee shall not
be an employee of the Employer during the Consulting Period, but shall act
solely in the capacity of an independent contractor.
(ii) Consulting Fees; Reimbursement of Expenses. In consideration of
the Employee's agreement to provide consulting services hereunder, the Employer
shall pay the Employee, not less than 5 days following an Involuntary
Termination, a lump sum consulting fee payment equal to the product of (A) the
Employee's base salary in effect immediately prior to his Date of Termination
(without taking into account any salary reduction that gave rise to Good
Reason), and (B) the number of years in the Consulting Period, as determined
pursuant to paragraph II (a)(i) above. In addition, the Employee shall be
reimbursed for all expenses reasonably incurred by him in connection with the
performance of his consulting services hereunder. The Employee shall not be
entitled to benefits under any other severance pay plan or arrangement sponsored
by the Employer and its subsidiaries in the event of an Involuntary Termination
during the Covered Period, and any amounts payable to him under any statutory
severance policy shall reduce the aggregate amount of the consulting fees
payable hereunder. In addition, in the event of the Employee's Involuntary
Termination, the Employer shall pay him within 5 days of the date of such
Involuntary Termination the full amount of any earned but unpaid base salary
through the Date of Termination at the rate in effect at the time of the Notice
of Termination, plus a cash payment for all unused vacation time which he may
have accrued as of the Date of Termination. The Employer shall also pay the
Employee within 5 days of the Date of Termination a pro rata portion of his
projected annual bonus for the year in which his Involuntary Termination occurs,
calculated on the basis of his target bonus for that year.
(iii) Benefits. The Employee and his eligible dependents shall continue
to be eligible to participate during the Consulting Period in the medical,
dental, health, life and other fringe benefit plans and arrangements applicable
to him immediately prior to his Involuntary Termination on the same terms and
conditions in effect for the Employee and his dependents immediately prior to
such Involuntary Termination; provided, however, that any benefit plan or
arrangement will end on the date that the Employee and his dependents are
eligible and elect coverage under a plan or arrangement of a subsequent employer
which provides a substantially equivalent or greater benefit to him and his
dependents,
<PAGE> 9
(iv) Date and Notice of Termination, Any termination of the Employee's
employment during the Covered Period by the Employer or by the Employee shall be
communicated by a notice of termination to the other party hereto (the "Notice
of Termination"). The Notice of Termination shall indicate the specific
termination provision in this Agreement relied upon and shall set forth in
reasonable detail the facts and circumstances claimed to provide a basis for
termination of the Employee's employment under the provision so indicated. The
date of the Employee's termination of employment with the Employer and its
subsidiaries (the "Date of Termination") shall be determined as follows: (i) if
the Employee's employment is terminated by the Employer in an Involuntary
Termination, five (5) days after the date the Notice of Termination is received
by the Employee and (ii) if the Employee's employment is terminated by the
Employer for just cause, the date specified in the Notice of Termination, If the
basis for the Employee's Involuntary Termination is his resignation for Good
Reason, the Date of Termination shall be ten (10) days after the date his Notice
of Termination is received by the Employer. The Date of Termination for a
resignation of employment other than for Good Reason shall be the date set forth
in the applicable notice, which shall be no earlier than ten (10) days after the
date such notice is received by the Employer.
(b) Non-Competition Agreement, During the Consulting Period, the
Employee shall comply with the substantive restrictions set forth in paragraphs
8 and 9 above.
(c) Legal Fees and Expenses. The Employer shall pay or reimburse the
Employee on an after-tax basis for all costs and expenses (including, without
limitation, court costs and reasonable legal fees and expenses which reflect
common practice with respect to the matters involved) incurred by him as a
result of any claim, action or proceeding (i) arising out of his termination of
employment during the Covered Period, (ii) contesting, disputing or enforcing
any right, benefits or obligations under this paragraph 11 or (iii) arising out
of or challenging the validity, advisability or enforceability of this paragraph
11 or any provision thereof; provided, however, that this provision will not
apply if the trier of fact determines that the Employee's claim was entirely
without merit.
(d) Definitions. For purposes of this paragraph 11, the following
capitalized words shall have the meanings set forth below:
"Cause" shall mean a termination of the Employee's employment by the
Employer which is a result of (i) his felony conviction, (ii) his willful
disclosure of material trade secrets or other material confidential information
related to the business of the Employer and its subsidiaries or (iii) his
willful and continued failure substantially to perform his duties with the
Employer (other than any such failure resulting from his incapacity due to
physical or mental illness or any such actual or anticipated failure resulting
from a resignation by the Employee for Good Reason) after a written demand for
substantial performance is delivered to the Employee by the Board, which demand
specifically identifies the manner in which the Board believes that the Employee
has not substantially performed his duties, and which performance is not
substantially corrected by him within 10 days of receipt of such demand. For
purposes of the previous sentence, no act or failure to act on the Employee's
part shall be deemed "willful" unless done, or omitted to be done, by him not in
good faith and without reasonable belief that his action or omission was in
<PAGE> 10
the best interest of the Employer, Notwithstanding the foregoing, the Employee
shall not be deemed to have been terminated for Cause unless and until there
shall have been delivered to him a copy of a resolution duty adopted by the
affirmative vote of not less than three-fourths (3/4ths) of the entire
membership of the Board at a meeting of the Board called and held for such
purpose (after reasonable notice to the Employee and an opportunity for him,
together with his counsel, to be heard before the Board), finding that in the
good faith opinion of the Board he was guilty of conduct set forth above in
clause (i), (ii) or (iii) of the first sentence of this definition and
specifying the particulars thereof in detail.
"Change in Control" shall mean the happening of any of the following:
(i) any person or entity, including a "group" as defined in
Section 13(d)(3) of the Exchange Act, other than the Employer, a
subsidiary of the Employer, or any employee benefit plan of the
Employer or its subsidiaries, becomes the beneficial owner of the
Employer's securities having 25 percent or more of the combined voting
power of the then outstanding securities of the Employer that may be
cast for the election for directors of the Employer (other than as a
result of an issuance of securities initiated by the Employer 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 Employer or any successor
corporation or entity entitled to vote generally in the election of
directors of tile Employer or such other corporation or entity after
such transaction, are held in the aggregate by holders of the
Employer's securities entitled to vote generally in the election of
directors of the Employer 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 cease for
any reason to constitute at least a majority thereof, unless the
election, or the nomination for election by the Employer's
stockholders, of each director of the Employer first elected during
such period was approved by a vote of at least two-thirds of the
directors of the Employer then still in office who were directors of
the Employer at the beginning of any such period (together, directors
at the beginning of such period and new directors whose election or
nomination was so approved are the "Incumbent Directors"),
"Change in Control Date" shall mean the date on which the Change in
Control occurs. Notwithstanding the first sentence of this paragraph, if the
Employee's employment with the Employer terminates prior to the Change in
Control Date and it is reasonably demonstrated that his termination of
employment (i) was at the request of the third party who has taken steps
reasonably calculated to effect the Change in Control or (ii) otherwise arose in
connection with or in anticipation of the Change in Control, then Change in
Control Date shall mean the date immediately prior to the date of the Employee's
termination of employment,
<PAGE> 11
"Common Stock" shall mean the common stock of the Employer.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, and any successor provisions thereto.
"Good Reason" shall mean a resignation by the Employee from his
employment with the Employer on or following the Change in Control Date as a
result of the occurrence of any of the following without his consent:
(i) A failure by the Employer to ensure that the Employee's
position, titles, nature and status of responsibilities and reporting
obligations are substantially equivalent to those that the Employee
enjoyed immediately prior to the Change in Control Date, it being
understood and agreed that such features shall be deemed less than
substantially equivalent by reason of the Employer ceasing to be a
public company.
(ii) A reduction by the Employer in the Employee's annual base
salary as in effect immediately prior to the Change in Control Date or
as the same may be increased from time to time thereafter; a failure by
the Employer to increase the Employee's salary at a rate commensurate
with that of other key executives of the Employer; or a reduction IN
the Employee's target annual bonus (expressed as a percentage of base
salary) below the target in effect for him prior to the Change in
Control Date;
(iii) The relocation of the office of the Employer where the
Employee is employed immediately prior to the Change in Control Date
(the "CIC Location") to a location which is more than fifty (50) miles
away from the CIC Location or the Employer's requiring the Employee to
be based more than fifty (50) miles away from the CIC Location (except
for required travel on the Employer's business to an extent
substantially consistent with his customary business travel obligations
in the ordinary course of business prior to the Change in Control
Date), unless such relocation is to a location closer to his principal
residence;
(iv) The failure by the Employer to continue in effect any
compensation plan in which the Employee participated prior to the
Change in Control Date or made available to him after the Change in
Control Date, unless an equitable arrangement (embodied in an ongoing
substitute or alternative plan) has been made with respect to such plan
in connection with the Change in Control, or the failure by the
Employer to continue the Employee's participation therein on at least
as favorable a basis, both in terms of the amount of benefits provided
and the level of his participation relative to other participants, as
existed on the Change in Control Date;
(v) The failure by the Employer to continue to provide the
Employee with benefits at least as favorable in the aggregate to those
enjoyed by him under the Employer's pension, savings, life insurance,
medical, health and accident, disability, and fringe benefit plans and
programs in which he was participating immediately prior to the Change
in Control Date; or the failure by the Employer to provide the Employee
with the
<PAGE> 12
number of paid vacation days to which he is entitled to under this
Agreement or on the basis of years of service with the Employer in
accordance with the Employer's normal vacation policy in effect
immediately prior to the Change in Control, whichever is greater;
(vi) The failure of the Employer to obtain an agreement
reasonably satisfactory to the Employee from any successor to assume
and agree to perform this Agreement, as contemplated in paragraph 12(a)
hereof or, if the business of the Employer for which the Employee's
services are principally performed is sold at any time after a Change
in Control, the failure of the Employer to obtain such an agreement
from the purchaser of such business;
(vii) Any termination of the Employee's employment which is
not effected pursuant to the terms of this Agreement; or
(viii) A material breach by the Employer of the provisions of
this Agreement;
provided, however, that an event described above in clause (1), (ii), (iv), (v)
or (viii) shall not constitute Good Reason unless it is communicated by the
Employee to the Employer in writing and is not corrected by the Employer in a
manner which is reasonably satisfactory to the Employee (including full
retroactive correction with respect to any monetary matter) within 10 days of
the Employer's receipt of such written notice from him.
"Involuntary Termination" shall mean (1) the termination of the
Employee's employment during the Covered Period by the Employer and its
subsidiaries other than for Cause or disability or (ii) the Employee's
resignation of employment during the Covered Period with the Employer and its
subsidiaries for Good Reason.
12. Successors; Binding Agreement.
(a) Assumption by Successor. The Employer will require any successor
(whether direct or indirect, by purchase, merger, consolidation or otherwise) to
all or substantially all of the business or assets of the Employer expressly to
assume and to agree to perform this Agreement in the same manner and to the same
extent that the Employer would be required to perform it if no such succession
had taken place; provided, however, that no such assumption shall relieve the
Employer of its obligations hereunder. As used in this Agreement, the "Employer"
shall mean the Employer as hereinbefore defined and any successor to its
business and/or assets as aforesaid which assumes and agrees to perform this
Agreement by operation of law or otherwise.
(b) Enforceability; Beneficiaries. This Agreement shall be binding upon
and inure to the benefit of the Employee (and his personal representatives and
heirs) and the Employer and any organization which succeeds to substantially all
of the business or assets of the Employer, whether by means of merger,
consolidation, acquisition of all or substantially all of the assets of the
Employer or otherwise, including, without limitation, as a result of a Change in
Control or by
<PAGE> 13
operation of law. This Agreement shall inure to the benefit of and be
enforceable by the Employee's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees. If the
Employee should die while any amount would still be payable to him hereunder if
he had continued to live, all such amounts, unless otherwise provided herein,
shall he paid in accordance with the terms of this Agreement to his devisee,
legatee or other designee or, if there is no such designee, to his estate.
13. Notices. Any notice required or permitted to be given under this
Agreement shall be sufficient if in writing and delivered personally or sent by
registered mail (i) to Employee's residence, in the case of the Employee, or
(ii) to the business address of its President and Chief Executive Officer, in
the case of the Employer.
14. Waiver of Breach and Severability. The waiver by the Employer of a
breach of any provision of this Agreement by the Employee shall not operate or
be construed as a waiver of any subsequent breach by the Employee, In the event
any provision of this Agreement is found to be invalid or unenforceable, it may
be severed from the Agreement and the remaining provision of the Agreement shall
continue to be binding and effective; provided, however, that, if possible, it
is the intention of the Employer and the Employee that such provision be
construed and interpreted as narrowly as necessary in order to make such
provision valid and enforceable.
15. Entire Agreement. This Agreement, the section relating to
Relocation contained in the April 4th letter and the letter agreement between
the Employee and the Employer dated as of the date hereof contain the entire
agreement of the parties and supersede any prior understandings and agreements
between them respecting the subject matter of this Agreement. It may not be
changed orally, but only by an agreement in writing signed by the party against
whom enforcement of any waiver, change, modification, extension or discharge is
sought.
16. Survival. Upon termination of the Employee's employment with the
Company prior to a Change in Control Date, the rights and obligations of the
parties hereto as provided in paragraphs 8 and 9 shall continue for the time
periods as set forth herein.
17. Governing Law. This Agreement shall be construed in accordance with
and governed by the laws of the State of Tennessee without regard to the laws of
any other state or jurisdiction. Any action brought or maintained in connection
with this Agreement shall be brought exclusively in the courts located in Shelby
County, Tennessee. Each of the Employer and the Employee hereby irrevocably
waives all right to trial by jury in any action, proceeding or counterclaim
arising out of or relating to this Agreement.
<PAGE> 14
IN WITNESS WHEREOF, the parties hereto execute this Agreement on the
date first above written.
SOFAMOR DANEK GROUP, INC.
BY: /s/ E. Ron Pickard
----------------------------
"Employer"
ATTEST:
/s/ Lindia Paulson
- -----------------------------
/s/ Bob Compton
---------------------------------
Bob Compton
"Employee"
<PAGE> 15
SCHEDULE A
1. Sofamor Danek Group, Inc., Memphis, TN (NYSE)
2. LateNite Magic, Inc., Las Vegas, NV (private)
3. Enterprise Systems, Inc., Wheeling, ]IL (NASDAQ)
4. Interactive Intelligence, Inc., Indianapolis, IN (private)
5. The Center for Entrepreneurial Leadership, Kansas City, MO (501c3)
6. The Ewing Marion Kauffman Foundation, Kansas City, MO (501c3)
7. Rose-Hulman Institute of Technology, Terre Haute, IN (Trustee)
8. Exchange City, USA, Kansas City, MO (Steering Committee) (501c3)
<PAGE> 1
EXHIBIT 10.19
LETTER AGREEMENT
BETWEEN JOHN PAFFORD
AND THE COMPANY DATED
APRIL 27, 1997
<PAGE> 2
EXHIBIT 10.19
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
AMENDED AND RESTATED EMPLOYMENT AGREEMENT, dated as of the 27th day of
April, 1997, between SOFAMOR DANEK GROUP, INC., an Indiana corporation (the
"Employer"), and John Pafford (the "Employee").
RECITALS
WHEREAS, the Employer is an Indiana corporation and through its wholly
owned subsidiaries, Warsaw Orthopedic, Inc., Danek Medical, Inc., and Sofamor,
S.N.C. is engaged in the business of developing, manufacturing and distributing
medical devices, trauma instruments, surgical tools and implants (such business,
as it may change from time to time, is hereinafter referred to as "Business");
and
WHEREAS, the Board of Directors of the Employer (the "Board") has
concluded that it desires to retain the valued services of the Employee by
entering into a new agreement which shall provide the Employee with certain
additional protections which are designed to ensure that the Employee will
devote himself attentively and energetically to his duties without distraction;
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants contained herein, the parties agree as follows:
1. Employment. The Employer (or a subsidiary of the Employer) hereby
employs the Employee and the Employee hereby accepts employment upon the terms
and conditions hereinafter set forth.
2. Term. Subject to the provisions for termination as provided in
paragraph 10 hereof, the term of this Agreement shall be from April 29, 1997 to
December 31, 1999, and it shall be automatically renewed for successive one (1)
year periods thereafter, unless either party elects not to renew this Agreement
by serving notice of such intention not to renew on the other party at least
ninety (90) days prior to the renewal date. Notwithstanding the foregoing, if a
Change in Control Date (as defined in paragraph II) occurs during the term
described in the immediately preceding sentence, the term of the Employee's
employment hereunder shall extend until the third anniversary of such Change in
Control Date (the period beginning on such Change in Control Date and ending on
the third anniversary thereof being hereinafter referred to as the "Covered
Period").
3. Duties. The Employee is engaged as Vice President, U.S. Product
Development of the Employer to assist the President and CEO of the Employer in
managing, directing and administering all aspects and matters of the Business,
subject to the direction and guidance of the President and CEO of the Employer.
Prior to a Change in Control (as hereinafter defined), the precise services,
duties and authority of the Employee as Vice President, U.S. Product
<PAGE> 3
Development of the Employer may be further defined, extended or curtailed from
time to time at the discretion of the President and CEO of the Employer.
4. Extent of Services. The Employee shall have the power and authority
commensurate and necessary to his position of Vice President, U.S. Product
Development and his other duties as assigned to him from time to time. He shall
devote his entire employable time, attention and best efforts to the Business as
may be necessary to efficiently and effectively perform and complete the duties
he is to undertake as described in this Agreement. The Employee shall not,
without the consent of the Employer, which consent shall not be unreasonably
withheld, during the term of this Agreement, be actively engaged in any other
business activity, whether or not such business activity is pursued for gain,
profit and other pecuniary advantage; but this shall not be construed as
preventing the Employee from investing his personal assets in such form or
manner as will not require any services on the part of the Employee in the
operation of the affairs of the companies in which such investments are made.
5. Compensation. The Employee shall be compensated for services
rendered hereunder as follows:
(a) The Employee shall receive a salary of not less than $15,000 per
month for each month of the first twelve (12) months that this Agreement is in
effect and for each month thereafter so long as the Employee receives Job
Performance Evaluations of "good" or better. After such first year, if the
Employee receives a Job Performance Evaluation of less than "good", his salary
shall be determined in the discretion of the President and CEO of the Employer.
Such salary paid to the Employee shall be subject to withholding of taxes and
other appropriate and customary amounts.
(b) The Employee shall be entitled to participate in the employee
benefit plans the Employer may adopt from time to time for its management or
supervisory personnel generally at such time as the Employee shall have
fulfilled the eligibility requirements for participation therein as shall be
determined by the terms of the applicable contracts for each program. Nothing
herein shall be construed so as to prevent the Employer from modifying or
terminating any employee benefit plans or programs or employee fringe benefits
it currently sponsors or may adopt from time to time.
6. Expenses and Travel. It is expected that in the course of his
employment, the Employee and his spouse shall be required to spend time
traveling and entertaining various persons on behalf of the Employer and
promoting the affairs of the Employer. The Employer shall provide to the
Employee an Employer Mastercard credit card or the Employer shall pay the
Employee the annual fee for one (1) personal credit card. The Employer shall pay
for or reimburse the Employee for all such reasonable expenses upon the
Employee's periodic presentation of an itemized account of such expenditures,
provided, however, the Employer shall only pay for or reimburse for the cost of
coach class air fare for business travel within the United States and only for
the cost of business class air fare for international business air travel. The
Employer shall bear the expense, in an amount not to exceed $250 per month, for
country club or social club dues for which the Employee may become a member
during the term hereof and/or a
<PAGE> 4
portable telephone and related telephone service, the use of either of which is
related to the Business. The Employee shall bear the expense of any initiation
fees and other assessments for or resulting from such membership. The Employee
shall be reimbursed in an amount not to exceed a total of $2,000 for each year
during the term or any renewal term hereof, for expenses incurred for his spouse
when traveling with the Employee on business matters for the Employer.
7. Disability. If the Employee shall become physically or mentally
disabled during the term of this Agreement to the extent that he shall be unable
to perform his duties and services for and on behalf of the Employer, the
benefits made available to the Employee and the salary then payable to the
Employee pursuant to the foregoing paragraph 5 shall continue to be made
available and paid to the Employee for the shorter of (i) the period of
disability; or (ii) six (6) months from the commencement of the disability.
Thereafter, the Employee shall receive no salary from the Employer.
8. Confidentiality. The Employee possesses and will continue to possess
information which has been created, discovered, developed by or otherwise become
known to the Employee (including information discovered or made available by
subsidiaries, affiliates or joint ventures of the Employer or in which property
rights have been assigned or otherwise conveyed to the Employer), which
information has commercial value to the Employer, including but not limited to
trade secrets, innovations, processes, computer codes, data, know-how,
improvements, discoveries, developments, techniques, marketing plans,
strategies, costs, customer and client lists, or any information the Employee
has reason to know the Employer would treat as confidential for any purpose,
whether or not developed by the Employee (hereinafter referred to as
"Confidential Information"). Unless previously authorized in writing or
instructed in writing by the Employer, the Employee will not, at any time,
disclose to others, or use, or allow anyone else to disclose or use any
Confidential Information (except as may be necessary in the performance of the
Employee's employment with the Employer), unless, until and then only to the
extent that such Confidential Information has become ascertainable or obtained
from public or published sources or was available to the Employee on a
non-confidential basis prior to any such disclosure or use, provided that the
source of such material is or was not bound by an obligation of confidentiality
to the Employer. This paragraph 8 shall survive termination of this Agreement.
9. Restrictive Covenants. The terms of this paragraph 9 shall be
applicable during the Employee's employment and upon the termination of such
employment for any reason occurring prior to a Change in Control Date, In the
event of termination "without cause" as defined in paragraph 10(b) occurring
prior to a Change in Control Date, in consideration of, and subject to, the
Employee's continued compliance with the terms of this paragraph 9, the Employer
shall pay to the Employee twelve (12) months salary based on his salary for the
month immediately preceding the date of termination which shall be paid in
accordance with the Employer's customary payroll practices over twelve (12)
months. In the event of a termination for any other reason, including for "just
cause" as defined in paragraph 10(b) occurring prior to a Change in Control
Date, the Employer shall have no obligation to the Employee. This paragraph 9
shall survive termination of this Agreement occurring prior to a Change in
Control Date.
<PAGE> 5
The Employee acknowledges that because of his skills, the Employee's
position with the Employer and the Confidential Information to which the
Employee shall have access or be provided on account of such employment with the
Employer, competition by the Employee with the Employer could damage the
Employer in a manner which cannot adequately be compensated by damages or an
action at law. In view of such circumstances, because of the Confidential
Information obtained by, or disclosed to the Employee, and as a material
inducement to the Employer to enter into this Agreement and to compensate the
Employee, as described in paragraph 5, as well as provide him with additional
benefits as provided herein and other good and valuable consideration, the
Employee covenants and agrees that:
(a) Noncompetition. During the Employee's employment with the Employer
and for a period of three (3) years thereafter, the Employee shall not (as
principal, agent, employee, consultant or otherwise), directly or indirectly, in
any geographic area in which the Employer is engaged in Business, engage in
activities for, or render services of any nature to, any firm or business, which
firm or business competes, directly or indirectly, with the Employer or the
Business.
(b) Nonsolicitation of Customers. During the Employee's employment with
the Employer and for a period of three (3) years thereafter, the Employee shall
not, directly or indirectly, solicit, divert or accept any work or services
which compete with the Employer's Business from any customer of the Employer or
seek to cause any such customer to refrain from doing business with or
patronizing the Employer.
(c) Nonsolicitation of Employees. During the Employee's employment with
the Employer and for a period of three (3) years thereafter, the Employee shall
not, directly or indirectly, solicit for employment or employ any current or
former employee of the Employer.
(d) Definitions. For purposes of this Agreement, the term "directly or
indirectly" shall be construed in its broadest sense and shall include the
activities of the members of the Employee's immediate family or any partnership.
The term "Business" shall be construed in its broadest sense and shall include
any activity engaged in or conducted by the Employer or any of its subsidiaries,
affiliates or joint ventures or which the Employer or any of its subsidiaries,
affiliates or joint ventures intends to engage in or conduct. The term
"customer" shall mean any person or entity with which the Employer, or any of
its subsidiaries, affiliates or joint ventures has engaged in or conducted
Business during the one (1) year period prior to the date the Employee ceased
employment with the Employer or any persons or entities targeted by the Employer
or contacted for the purpose of engaging in or conducting Business during such
one (1) year period.
(e) Reasonable Limitations. Given the important nature of the position
the Employee will hold with the Employer, the nature of the Employer's Business
and the sensitive nature of the Confidential Information and duties the Employee
will have with the Employer, the parties acknowledge that the limitations,
including but not limited to, the scope of activities prohibited, the geographic
area covered and the time limitation, are reasonable.
<PAGE> 6
In the event of an actual or threatened breach by the Employee of the
provisions of paragraphs 8 and 9 of this Agreement, the Employer shall be
entitled to a temporary restraining order and an injunction restraining the
Employee from such breach. Nothing herein, however, shall be construed as
prohibiting the Employer from pursuing any other remedies available to it for
such actual or threatened breach, including, without limitation, the recovery of
damages and reasonable attorneys' and paralegals' fees and costs from the
Employee, If the Employee violates any of the covenants in paragraphs 8 and 9 of
this Agreement, the term and the covenant violated shall be automatically
extended for the period of time of the violation, either from the date on which
the Employee ceases such violation or from the date of the entry by a court of
competent jurisdiction of an order or judgment enforcing such covenants,
whichever period is later.
10. Termination Prior to a Change in Control Date. The Employer may, at
its option, terminate this Agreement at any time prior to the occurrence of a
Change in Control Date upon written notice to the Employee for just cause or
without cause.
(a) "Just cause" shall include, but not be limited to:
(i) The Employee receiving a Job Performance Evaluation of
less than "good";
(ii) The Employee's misuse or embezzlement of funds
belonging to the Employer, conviction of a felony or
crime involving moral turpitude or use of alcohol or
drugs in such a manner as will injure or adversely
affect the reputation of the Employer or its
employees, customers, agents, officers or directors;
(iii) The Employee's absence from his employment, for
whatever cause, other than by disability for which
salary is continued pursuant to paragraph 7, for a
period of thirty (30) consecutive days or more;
(iv) The Employee's absence from employment as a result of
disability beyond the period for which salary is
continued pursuant to paragraph 7;
(v) The Employee's resignation from employment during the
term hereof or if the Employee serves notice to not
renew this Agreement as provided in paragraph 2;
(vi) The Employee's willful malfeasance in discharging his
obligations hereunder and such acts and their
consequences are not remedied within ten (10) days or
such longer reasonable period of time designated by
the Employer after written notice thereof has been
given to the Employee; or
(vii) The Employee's breach of the provisions of this
Agreement and such breach and its consequences are not
remedied within ten (10) days or such longer
reasonable period of time designated by the Employer,
after written notice thereof has been given to the
Employee.
<PAGE> 7
(b) "Without cause" shall mean:
(i) The termination and dissolution of the Employer or a
bona fide decision by the Employer to terminate its
Business; or
(ii) Any involuntary termination of the Employee's
employment by the Employer without just cause.
(c) In addition to those reasons enumerated above, this Agreement shall
be terminated upon the happening of any of the following events:
(i) Whenever the Employer and the Employee shall mutually
agree to a termination in writing; or
(ii) Upon death of the Employee.
Upon the termination of this Agreement prior to the occurrence of a Change in
Control Date for any of the foregoing reasons in paragraph 10, the Employee
shall be entitled to receive only the compensation accrued but unpaid as of the
date of the termination hereof and shall not be entitled to additional
compensation except as expressly provided in paragraph 9 of this Agreement.
11. Effect of a Change in Control.
(a) Involuntary Termination, Consulting Period.
(i) Consulting Services Following an Involuntary Termination. In the
event of the Employee's Involuntary Termination during the Covered Period he
shall commence providing consulting services to the Employer for a period (the
"Consulting Period") of (i) three years, in the event the Involuntary
Termination occurs during the first year of the Covered Period, (ii) two years,
in the event the Involuntary Termination occurs during the second year of the
Covered Period, or (iii) one year, in the event the Involuntary Termination
occurs in the last year of the Covered Period. The Employee's consulting
services shall consist in advising the Employer on such matters as may be
reasonably requested by the Employer. Such services shall be performed at such
times and in such locations as shall be mutually agreed by the Employee and the
Employer, and shall not interfere with his duties to a new employer. In any
event, the Employee shall not be required to perform consulting services for
more than 8 hours per month during the Consulting Period. The Employee shall not
be an employee of the Employer during the Consulting Period, but shall act
solely in the capacity of an independent contractor.
(ii) Consulting Fees, Reimbursement of Expenses. In consideration of
the Employee's agreement to provide consulting services hereunder, the Employer
shall pay the Employee, not less than 5 days following an Involuntary
Termination, a lump sum consulting fee payment equal to the product of (A) the
Employee's base salary in effect immediately prior to his Date of Termination
(without taking into account any salary reduction that gave rise to Good
<PAGE> 8
Reason), and (B) the number of years in the Consulting Period, as determined
pursuant to paragraph II (a)(i) above. In addition, the Employee shall be
reimbursed for all expenses reasonably incurred by him in connection with the
performance of his consulting services hereunder. The Employee shall not be
entitled to benefits under any other severance pay plan or arrangement sponsored
by the Employer and its subsidiaries in the event of an Involuntary Termination
during the Covered Period, and any amounts payable to him under any statutory
severance policy shall reduce the aggregate amount of the consulting fees
payable hereunder. In addition, in the event of the Employee's Involuntary
Termination, the Employer shall pay him within 5 days of the date of such
Involuntary Termination the full amount of any earned but unpaid base salary
through the Date of Termination at the rate in effect at the time of the Notice
of Termination, plus a cash payment for all unused vacation time which he may
have accrued as of the Date of Termination. The Employer shall also pay the
Employee within 5 days of the Date of Termination a pro rata portion of his
projected annual bonus for the year in which his Involuntary Termination occurs,
calculated on the basis of his target bonus for that year.
(iii) Benefits. The Employee and his eligible dependents shall continue
to be eligible to participate during the Consulting Period in the medical,
dental, health, life and other fringe benefit plans and arrangements applicable
to him immediately prior to his Involuntary Termination on the same terms and
conditions in effect for the Employee and his dependents immediately prior to
such Involuntary Termination; provided, however, that any benefit plan or
arrangement will end on the date that the Employee and his dependents are
eligible and elect coverage under a plan or arrangement of a subsequent employer
which provides a substantially equivalent or greater benefit to him and his
dependents.
(iv) Date and Notice of Termination. Any termination of the Employee's
employment during the Covered Period by the Employer or by the Employee shall be
communicated by a notice of termination to the other party hereto (the "Notice
of Termination"). The Notice of Termination shall indicate the specific
termination provision in this Agreement relied upon and shall set forth in
reasonable detail the facts and circumstances claimed to provide a basis for
termination of the Employee's employment under the provision so indicated. The
date of the Employee's termination of employment with the Employer and its
subsidiaries (the "Date of Termination") shall be determined as follows: (i) if
the Employee's employment is terminated by the Employer in an Involuntary
Termination, five (5) days after the date the Notice of Termination is received
by the Employee and (ii) if the Employee's employment is terminated by the
Employer for just cause, the date specified in the Notice of Termination. If the
basis for the Employee's Involuntary Termination is his resignation for Good
Reason, the Date of Termination shall be ten (10) days after the date his Notice
of Termination is received by the Employer. The Date of Termination for a
resignation of employment other than for Good Reason shall be the date set forth
in the applicable notice, which shall be no earlier than ten (10) days after the
date such notice is received by the Employer.
(b) Non-Competition Agreement. During the Consulting Period, the
Employee shall comply with the substantive restrictions set forth in paragraphs
8 and 9 above.
<PAGE> 9
(c) Legal Fees and Expenses. The Employer shall pay or reimburse the
Employee on an after-tax basis for all costs and expenses (including, without
limitation, court costs and reasonable legal fees and expenses which reflect
common practice with respect to the matters involved) incurred by him as a
result of any claim, action or proceeding (i) arising out of his termination of
employment during the Covered Period, (ii) contesting, disputing or enforcing
any right, benefits or obligations under this paragraph 11 or (iii) arising out
of or challenging the validity, advisability or enforceability of this paragraph
11 or any provision thereof- provided, however, that this provision will not
apply if the trier of fact determines that the Employee's claim was entirely
without merit.
(d) Definitions. For purposes of this paragraph 11, the following
capitalized words shall have the meanings set forth below:
"Cause" shall mean a termination of the Employee's employment by the
Employer which is a result of (i) his felony conviction, (ii) his willful
disclosure of material trade secrets or other material confidential information
related to the business of the Employer and its subsidiaries or (iii) his
willful and continued failure substantially to perform his duties with the
Employer (other than any such failure resulting from his incapacity due to
physical or mental illness or any such actual or anticipated failure resulting
from a resignation by the Employee for Good Reason) after a written demand for
substantial performance is delivered to the Employee by the Board, which demand
specifically identifies the manner in which the Board believes that the Employee
has not substantially performed his duties, and which performance is not
substantially corrected by him within 10 days of receipt of such demand. For
purposes of the previous sentence, no act or failure to act on the Employee's
part shall be deemed "willful" unless done, or omitted to be done, by him not in
good faith and without reasonable belief that his action or omission was in the
best interest of the Employer. Notwithstanding the foregoing, the Employee shall
not be deemed to have been terminated for Cause unless and until there shall
have been delivered to him a copy of a resolution duly adopted by the
affirmative vote of not less than three-fourths (3/4ths) of the entire
membership of the Board at a meeting of the Board called and held for such
purpose (after reasonable notice to the Employee and an opportunity for him,
together with his counsel, to be heard before the Board), finding that in the
good faith opinion of the Board he was guilty of conduct set forth above in
clause (i), (ii) or (iii) of the first sentence of this definition and
specifying the particulars thereof in detail.
"Change in Control" shall mean the happening of any of the following:
(i) any person or entity, including a "group" as defined in Section
13(d)(3) of the Exchange Act, other than the Employer, a subsidiary of the
Employer, or any employee benefit plan of the Employer or its subsidiaries,
becomes the beneficial owner of the Employer's securities having 25 percent
or more of the combined voting power of the then outstanding securities of
the Employer that may be cast for the election for directors of the
Employer (other than as a result of an issuance of securities initiated by
the Employer in the ordinary course of business); or
<PAGE> 10
(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 Employer or any successor corporation or entity entitled
to vote generally in the election of directors of the Employer or such
other corporation or entity after such transaction, are held in the
aggregate by holders of the Employer's securities entitled to vote
generally in the election of directors of the Employer 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 cease for any reason
to constitute at least a majority thereof, unless the election, or the
nomination for election by the Employer's stockholders, of each director of
the Employer first elected during such period was approved by a vote of at
least two-thirds of the directors of the Employer then still in office who
were directors of the Employer at the beginning of any such period
(together, directors at the beginning of such period and new directors
whose election or nomination was so approved are the "Incumbent
Directors").
"Change in Control Date" shall mean the date on which the Change in
Control occurs. Notwithstanding the first sentence of this section, if the
Employee's employment with the Employer terminates prior to the Change in
Control Date and it is reasonably demonstrated that his termination of
employment (i) was at the request of the third party who has taken steps
reasonably calculated to effect the Change in Control or (ii) otherwise arose in
connection with or in anticipation of the Change in Control, then Change in
Control Date shall mean the date immediately prior to the date of the Employee's
termination of employment.
"Common Stock" shall mean the common stock of the Employer.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, and any successor provisions thereto.
"Good Reason" shall mean a resignation by the Employee from his
employment with the Employer on or following the Change in Control Date as a
result of the occurrence of any of the following without his consent:
(i) A failure by the Employer to ensure that the Employee's position,
titles, nature and status of responsibilities and reporting obligations are
substantially equivalent to those that the Employee enjoyed immediately
prior to the Change in Control Date, it being understood and agreed that
such features shall not be deemed less than substantially equivalent solely
by reason of the Employer ceasing to be a public company.
(ii) A reduction by the Employer in the Employee's annual base salary
as in effect immediately prior to the Change in Control Date or as the same
may be increased from time to time thereafter; a failure by the Employer to
increase the Employee's salary at a rate commensurate with that of other
key executives of the Employer; or a reduction in the
<PAGE> 11
Employee's target annual bonus (expressed as a percentage of base salary)
below the target in effect for him prior to the Change in Control Date;
(iii) The relocation of the office of the Employer where the Employee
is employed immediately prior to the Change in Control Date (the "CIC
Location") to a location which is more than fifty (50) miles away from the
CIC Location or the Employer's requiring the Employee to be based more than
fifty (50) miles away from the CIC Location (except for required travel on
the Employer's business to an extent substantially consistent with his
customary business travel obligations in the ordinary course of business
prior to the Change in Control Date), unless such relocation is to a
location closer to his principal residence;
(iv) The failure by the Employer to continue in effect any compensation
plan in which the Employee participated prior to the Change in Control Date
or made available to him after the Change in Control Date, unless an
equitable arrangement ' (embodied in an ongoing substitute or alternative
plan) has been made with respect to such plan in connection with the Change
in Control, or the failure by the Employer to continue the Employee's
participation therein on at least as favorable a basis, both in terms of
the amount of benefits provided and the level of his participation relative
to other participants, as existed on the Change in Control Date;
(v) The failure by the Employer to continue to provide the Employee
with benefits at least as favorable in the aggregate to those enjoyed by
him under the Employer's pension, savings, life insurance, medical, health
and accident, disability, and fringe benefit plans and programs in which he
was participating immediately prior to the Change in Control Date, or the
failure by the Employer to provide the Employee with the number of paid
vacation days to which he is entitled on the basis of years of service with
the Employer in accordance with the Employer's normal vacation policy in
effect immediately prior to the Change in Control;
(vi) The failure of the Employer to obtain an agreement reasonably
satisfactory to the Employee from any successor to assume and agree to
perform this Agreement, as contemplated in paragraph 12(a) hereof or, if
the business of the Employer for which the Employee's services are
principally performed is sold at any time after a Change in Control, the
failure of the Employer to obtain such an agreement from the purchaser of
such business;
(vii) Any termination of the Employee's employment which is not
effected pursuant to the terms of this Agreement; or
(viii) A material breach by the Employer of the provisions of this
Agreement;
provided, however, that an event described above in clause (i), (ii), (iv), (v)
or (viii) shall not constitute Good Reason unless it is communicated by the
Employee to the Employer in writing and is not corrected by the Employer in a
manner which is reasonably satisfactory to the Employee (including full
retroactive correction with respect to any monetary matter) within 10 days of
the Employer's receipt of such written notice from him.
<PAGE> 12
"Involuntary Termination" shall mean (i) the termination of the
Employee's employment during the Covered Period by the Employer and its
subsidiaries other than for Cause or disability or (ii) the Employee's
resignation of employment during the Covered Period with the Employer and its
subsidiaries for Good Reason.
12. Successors; Binding Agreement.
(a) Assumption by Successor. The Employer will require any successor
(whether direct or indirect, by purchase, merger, consolidation or otherwise) to
all or substantially all of the business or assets of the Employer expressly to
assume and to agree to perform this Agreement in the same manner and to the same
extent that the Employer would be required to perform it if no such succession
had taken place-, provided, however, that no such assumption shall relieve the
Employer of its obligations hereunder. As used in this Agreement, the "Employer"
shall mean the Employer as hereinbefore defined and any successor to its
business and/or assets as aforesaid which assumes and agrees to perform this
Agreement by operation of law or otherwise.
(b) Enforceability: Beneficiaries. This Agreement shall be binding upon
and inure to the benefit of the Employee (and his personal representatives and
heirs) and the Employer and any organization which succeeds to substantially all
of the business or assets of the Employer, whether by means of merger,
consolidation, acquisition of all or substantially all of the assets of the
Employer or otherwise, including, without limitation, as a result of a Change in
Control or by operation of law. This Agreement shall inure to the benefit of and
be enforceable by the Employee's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees. If the
Employee should die while any amount would still be payable to him hereunder if
he had continued to live, all such amounts, unless otherwise provided herein,
shall be paid in accordance with the terms of this Agreement to his devisee,
legatee or other designee or, if there is no such designee, to his estate.
13. Notices. Any notice required or permitted to be given under this
Agreement shall be sufficient if in writing and delivered personally or sent by
registered mail (i) to Employee's residence, in the case of the Employee, or
(ii) to the business address of its President and Chief Executive Officer, in
the case of the Employer.
14. Waiver of Breach and Severability. The waiver by the Employer of a
breach of any provision of this Agreement by the Employee shall not operate or
be construed as a waiver of any subsequent breach by the Employee. In the event
any provision of this Agreement is found to be invalid or unenforceable, it may
be severed from the Agreement and the remaining provision of the Agreement shall
continue to be binding and effective; provided, however, that, if possible, it
is the intention of the Employer and the Employee that such provision be
construed and interpreted as narrowly as necessary in order to make such
provision valid and enforceable.
15. Entire Agreement. This instrument and the letter agreement between
the Employee and the Employer dated January 1, 1996 contain the entire agreement
of the parties and supersede any prior understandings and agreements between
them respecting the subject
<PAGE> 13
matter of this Agreement, including, without limitation, the Employment
Agreement dated as of January 1, 1996. It may not be changed orally, but only by
an agreement in writing signed by the party against whom enforcement of any
waiver, change, modification; extension or discharge is sought.
16. Survival. Upon termination of the Employee's employment with the
Company prior to a Change in Control Date, the rights and obligations of the
parties hereto as provided in paragraphs 8 and 9 shall continue for the time
periods as set forth herein.
17. Governing Law. This Agreement shall be construed in accordance with
and governed by the laws of the State of Tennessee without regard to the laws of
any other state or jurisdiction. Any action brought or maintained in connection
with this Agreement shall be brought exclusively in the courts located in Shelby
County, Tennessee. Each of the Employer and the Employee hereby irrevocably
waives all right to trial by jury in any action, proceeding or counterclaim
arising out of or relating to this Agreement.
<PAGE> 14
IN WITNESS WHEREOF, the parties hereto execute this Agreement on the
date first above written.
SOFAMOR DANEK GROUP, INC.
BY: /s/ E. Ron Pickard
----------------------------
"Employer"
ATTEST:
/s/ Lindia Paulson
- -------------------------
/s/ John Pafford
--------------------------------
John Pafford
"Employee"
<PAGE> 1
EXHIBIT 10.20
LETTER AGREEMENT
BETWEEN EDWARD TRAURIG
AND THE COMPANY DATED
APRIL 27, 1997
<PAGE> 2
EXHIBIT 10.20
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
AMENDED AND RESTATED EMPLOYMENT AGREEMENT, dated as of the 27th day of
April, 1997, between SOFAMOR DANEK GROUP, INC., an Indiana corporation (the
"Employer"), and Ed Traurig (the "Employee").
RECITALS
WHEREAS, the Employer is an Indiana corporation and through its wholly
owned subsidiaries, Warsaw Orthopedic, Inc., Danek Medical, Inc., and Sofamor,
S.N.C. is engaged in the business of developing, manufacturing and distributing
medical devices, trauma instruments, surgical tools and implants (such business,
as it may change from time to time, is hereinafter referred to as "Business");
and
WHEREAS, the Board of Directors of the Employer (the "Board") has
concluded that it desires to retain the valued services of the Employee by
entering into a new agreement which shall provide the Employee with certain
additional protections which are designed to ensure that the Employee will
devote himself attentively and energetically to his duties without distraction;
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants contained herein, the parties agree as follows:
1. Employment. The Employer (or a subsidiary of the Employer) hereby
employs the Employee and the Employee hereby accepts employment upon the terms
and conditions hereinafter set forth.
2. Term. Subject to the provisions for termination as provided in
paragraph 10 hereof, the term of this Agreement shall be from April 29, 1997 to
December 31, 1999, and it shall be automatically renewed for successive one (1)
year periods thereafter, unless either party elects not to renew this Agreement
by serving notice of such intention not to renew on the other party at least
ninety (90) days prior to the renewal date. Notwithstanding the foregoing, if a
Change in Control Date (as defined in paragraph 11) occurs during the term
described in the immediately preceding sentence, the term of the Employee's
employment hereunder shall extend until the third anniversary of such Change in
Control Date (the period beginning on such Change in Control Date and ending on
the third anniversary thereof being hereinafter referred to as the "Covered
Period").
3. Duties. The Employee is engaged as Vice President, U.S. Sales of the
Employer to assist the President and CEO of the Employer in managing, directing
and administering all aspects and matters of the Business, subject to the
direction and guidance of the President and CEO of the Employer. Prior to a
Change in Control (as hereinafter defined), the precise services, duties and
authority of the Employee as Vice President, U.S. Sales of the Employer may be
<PAGE> 3
further defined, extended or curtailed from time to time at the discretion of
the President and CEO of the Employer.
4. Extent of Services. The Employee shall have the power and authority
commensurate and necessary to his position of Vice President, U.S. Sales and his
other duties as assigned to him from time to time. He shall devote his entire
employable time, attention and best efforts to the Business as may be necessary
to efficiently and effectively perform and complete the duties he is to
undertake as described in this Agreement. The Employee shall not, without the
consent of the Employer, which consent shall not be unreasonably withheld,
during the term of this Agreement, be actively engaged in any other business
activity, whether or not such business activity is pursued for gain, profit and
other pecuniary advantage; but this shall not be construed as preventing the
Employee from investing his personal assets in such form or manner as will not
require any services on the part of the Employee in the operation of the affairs
of the companies in which such investments are made.
5. Compensation. The Employee shall be compensated for services
rendered hereunder as follows:
(a) The Employee shall receive a salary of not less than $16,467 per
month for each month of the first twelve (12) months that this Agreement is in
effect and for each month thereafter so long as the Employee receives Job
Performance Evaluations of "good" or better. After such first year, if the
Employee receives a Job Performance Evaluation of less than "good", his salary
shall be determined in the discretion of the President and CEO of the Employer.
Such salary paid to the Employee shall be subject to withholding of taxes and
other appropriate and customary amounts.
(b) The Employee shall be entitled to participate in the employee
benefit plans the Employer may adopt from time to time for its management or
supervisory personnel generally at such time as the Employee shall have
fulfilled the eligibility requirements for participation therein as shall be
determined by the terms of the applicable contracts for each program. Nothing
herein shall be construed so as to prevent the Employer from modifying or
terminating any employee benefit plans or programs or employee fringe benefits
it currently sponsors or may adopt from time to time.
6. Expenses and Travel. It is expected that in the course of his
employment, the Employee and his spouse shall be required to spend time
traveling and entertaining various persons on behalf of the Employer and
promoting the affairs of the Employer. The Employer shall provide to the
Employee an Employer Mastercard credit card or the Employer shall pay the
Employee the annual fee for one (1) personal credit card. The Employer shall pay
for or reimburse the Employee for all such reasonable expenses upon the
Employee's periodic presentation of an itemized account of such expenditures,
provided, however, the Employer shall only pay for or reimburse for the cost of
coach class air fare for business travel within the United States and only for
the cost of business class air fare for international business air travel. The
Employer shall bear the expense, in an amount not to exceed $250 per month, for
country club or social club dues for which the Employee may become a member
during the term hereof and/or a
<PAGE> 4
portable telephone and related telephone service, the use of either of which is
related to the Business. The Employee shall bear the expense of any initiation
fees and other assessments for or resulting from such membership. The Employee
shall be reimbursed in an amount not to exceed a total of $2,000 for each year
during the term or any renewal term hereof, for expenses incurred for his spouse
when traveling with the Employee on business matters for the Employer.
7. Disability. If the Employee shall become physically or mentally
disabled during the term of this Agreement to the extent that he shall be unable
to perform his duties and services for and on behalf of the Employer, the
benefits made available to the Employee and the salary then payable to the
Employee pursuant to the foregoing paragraph 5 shall continue to be made
available and paid to the Employee for the shorter of (i) the period of
disability; or (ii) six (6) months from the commencement of the disability.
Thereafter, the Employee shall receive no salary from the Employer.
8. Confidentiality. The Employee possesses and will continue to possess
information which has been created, discovered, developed by or otherwise become
known to the Employee (including information discovered or made available by
subsidiaries, affiliates or joint ventures of the Employer or in which property
rights have been assigned or otherwise conveyed to the Employer), which
information has commercial value to the Employer, including but not limited to
trade secrets, innovations, processes, computer codes, data, know-how,
improvements, discoveries, developments, techniques, marketing plans,
strategies, costs, customer and client lists, or any information the Employee
has reason to know the Employer would treat as confidential for any purpose,
whether or not developed by the Employee (hereinafter referred to as
"Confidential Information"). Unless previously authorized in writing or
instructed in writing by the Employer, the Employee will not, at any time,
disclose to others, or use, or allow anyone else to disclose or use any
Confidential Information (except as may be necessary in the performance of the
Employee's employment with the Employer), unless, until and then only to the
extent that such Confidential Information has become ascertainable or obtained
from public or published sources or was available to the Employee on a
non-confidential basis prior to any such disclosure or use, provided that the
source of such material is or was not bound by an obligation of confidentiality
to the Employer. This paragraph 8 shall survive termination of this Agreement.
9. Restrictive Covenants. The terms of this paragraph 9 shall be
applicable during the Employee's employment and upon the termination of such
employment for any reason occurring prior to a Change in Control Date. In the
event of termination "without cause" as defined in paragraph 10(b) occurring
prior to a Change in Control Date, in consideration of, and subject to, the
Employee's continued compliance with the terms of this paragraph 9, the Employer
shall pay to the Employee twelve (12) months salary based on his salary for the
month immediately preceding the date of termination which shall be paid in
accordance with the Employer's customary payroll practices over twelve (12)
months. In the event of a termination for any other reason, including for "just
cause" as defined in paragraph 10(b) occurring prior to a Change in Control
Date, the Employer shall have no obligation to the Employee. This paragraph 9
shall survive termination of this Agreement occurring prior to a Change in
Control Date.
<PAGE> 5
The Employee acknowledges that because of his skills, the Employee's
position with the Employer and the Confidential Information to which the
Employee shall have access or be provided on account of such employment with the
Employer, competition by the Employee with the Employer could damage the
Employer in a manner which cannot adequately be compensated by damages or an
action at law, In view of such circumstances, because of the Confidential
Information obtained by, or disclosed to the Employee, and as a material
inducement to the Employer to enter into this Agreement and to compensate the
Employee, as described in paragraph 5, as well as provide him with additional
benefits as provided herein and other good and valuable consideration, the
Employee covenants and agrees that:
(a) Noncompetition. During the Employee's employment with the Employer
and for a period of three (3) years thereafter, the Employee shall not (as
principal, agent, employee, consultant or otherwise), directly or indirectly, in
any geographic area in which the Employer is engaged in Business, engage in
activities for, or render services of any nature to, any firm or business, which
firm or business competes, directly or indirectly, with the Employer or the
Business.
(b) Nonsolicitation of Customers. During the Employee's employment with
the Employer and for a period of three (3) years thereafter, the Employee shall
not, directly or indirectly, solicit, divert or accept any work or services
which compete with the Employer's Business from any customer of the Employer or
seek to cause any such customer to refrain from doing business with or
patronizing the Employer.
(c) Nonsolicitation of Employees. During the Employee's employment with
the Employer and for a period of three (3) years thereafter, the Employee shall
not, directly or indirectly, solicit for employment or employ any current or
former employee of the Employer.
(d) Definitions. For purposes of this Agreement, the term "directly or
indirectly" shall be construed in its broadest sense and shall include the
activities of the members of the Employee's immediate family or any partnership.
The term "Business" shall be construed in its broadest sense and shall include
any activity engaged in or conducted by the Employer or any of its subsidiaries,
affiliates or joint ventures or which the Employer or any of its subsidiaries,
affiliates or joint ventures intends to engage in or conduct. The term
"customer" shall mean any person or entity with which the Employer, or any of
its subsidiaries, affiliates or joint ventures has engaged in or conducted
Business during the one (1) year period prior to the date the Employee ceased
employment with the Employer or any persons or entities targeted by the Employer
or contacted for the purpose of engaging in or conducting Business during such
one (1) year period.
(e) Reasonable Limitations. Given the important nature of the position
the Employee will hold with the Employer, the nature of the Employer's Business
and the sensitive nature of the Confidential Information and duties the Employee
will have with the Employer, the parties acknowledge that the limitations,
including but not limited to, the scope of activities prohibited, the geographic
area covered and the time limitation, are reasonable.
<PAGE> 6
In the event of an actual or threatened breach by the Employee of the
provisions of paragraphs 8 and 9 of this Agreement, the Employer shall be
entitled to a temporary restraining order and an injunction restraining the
Employee from such breach. Nothing herein, however, shall be construed as
prohibiting the Employer from pursuing any other remedies available to it for
such actual or threatened breach, including, without limitation, the recovery of
damages and reasonable attorneys' and paralegals' fees and costs from the
Employee. If the Employee violates any of the covenants in paragraphs 8 and 9 of
this Agreement, the term and the covenant violated shall be automatically
extended for the period of time of the violation, either from the date on which
the Employee ceases such violation or from the date of the entry by a court of
competent jurisdiction of an order or judgment enforcing such covenants,
whichever period is later.
10. Termination Prior to a Change in Control Date. The Employer may, at
its option, terminate this Agreement at any time prior to the occurrence of a
Change in Control Date upon written notice to the Employee for just cause or
without cause.
(a) "Just cause" shall include, but not be limited to:
(i) The Employee receiving a Job Performance Evaluation of
less than "good";
(ii) The Employee's misuse or embezzlement of funds
belonging to the Employer, conviction of a felony or
crime involving moral turpitude or use of alcohol or
drugs in such a manner as will injure or adversely
affect the reputation of the Employer or its
employees, customers, agents, officers or directors;
(iii) The Employee's absence from his employment, for
whatever cause, other than by disability for which
salary is continued pursuant to paragraph 7, for a
period of thirty (30) consecutive days or more;
(iv) The Employee's absence from employment as a result of
disability beyond the period for which salary is
continued pursuant to paragraph 7;
(v) The Employee's resignation from employment during the
term hereof or if the Employee serves notice to not
renew this Agreement as provided in paragraph 2;
(vi) The Employee's willful malfeasance in discharging his
obligations hereunder and such acts and their
consequences are not remedied within ten (10) days or
such longer reasonable period of time designated by
the Employer after written notice thereof has been
given to the Employee; or
(vii) The Employee's breach of the provisions of this
Agreement and such breach and its consequences are not
remedied within ten (10) days or such longer
reasonable period of time designated by the Employer,
after written notice thereof has been given to the
Employee.
<PAGE> 7
(b) "Without cause" shall mean:
(i) The termination and dissolution of the Employer or a
bona fide decision by the Employer
to terminate its Business; or
(ii) Any involuntary termination of the Employee's
employment by the Employer without just cause.
(c) In addition to those reasons enumerated above, this Agreement shall
be terminated upon the happening of any of the following events:
(i) Whenever the Employer and the Employee shall mutually
agree to a termination in writing; or
(ii) Upon death of the Employee.
Upon the termination of this Agreement prior to the occurrence of a Change in
Control Date for any of the foregoing reasons in paragraph 10, the Employee
shall be entitled to receive only the compensation accrued but unpaid as of the
date of the termination hereof and shall not be entitled to additional
compensation except as expressly provided in paragraph 9 of this Agreement.
11. Effect of a Change in Control.
(a) Involuntary Termination; Consulting Period.
(i) Consulting Services Following an Involuntary Termination. In the
event of the Employee's Involuntary Termination during the Covered Period he
shall commence providing consulting services to the Employer for a period (the
"Consulting Period") of (i) three years, in the event the Involuntary
Termination occurs during the first year of the Covered Period, (ii) two years,
in the event the Involuntary Termination occurs during the second year of the
Covered Period, or (iii) one year, in the event the Involuntary Termination
occurs in the last year of the Covered Period. The Employee's consulting
services shall consist in advising the Employer on such matters as may be
reasonably requested by the Employer. Such services shall be performed at such
times and in such locations as shall be mutually agreed by the Employee and the
Employer, and shall not interfere with his duties to a new employer. In any
event, the Employee shall not be required to perform consulting services for
more than 8 hours per month during the Consulting Period. The Employee shall not
be an employee of the Employer during the Consulting Period, but shall act
solely in the capacity of an independent contractor.
(ii) Consulting Fees: Reimbursement of Expenses. In consideration of
the Employee's agreement to provide consulting services hereunder, the Employer
shall pay the Employee, not less than 5 days following an Involuntary
Termination, a lump sum consulting fee payment equal to the product of (A) the
Employee's base salary in effect immediately prior to his Date of Termination
(without taking into account any salary reduction that gave rise to Good
Reason), and (B) the number of years in the Consulting Period, as determined
pursuant to
<PAGE> 8
paragraph 11(a)(i) above. In addition, the Employee shall be reimbursed for all
expenses reasonably incurred by him in connection with the performance of his
consulting services hereunder. The Employee shall not be entitled to benefits
under any other severance pay plan or arrangement sponsored by the Employer and
its subsidiaries in the event of an Involuntary Termination during the Covered
Period, and any amounts payable to him under any statutory severance policy
shall reduce the aggregate amount of the consulting fees payable hereunder. In
addition, in the event of the Employee's Involuntary Termination, the Employer
shall pay him within 5 days of the date of such Involuntary Termination the full
amount of any earned but unpaid base salary through the Date of Termination at
the rate in effect at the time of the Notice of Termination, plus a cash payment
for all unused vacation time which he may have accrued as of the Date of
Termination. The Employer shall also pay the Employee within 5 days of the Date
of Termination a pro rata portion of his projected annual bonus for the year in
which his Involuntary Termination occurs, calculated on the basis of his target
bonus for that year.
(iii) Benefits. The Employee and his eligible dependents shall continue
to be eligible to participate during the Consulting Period in the medical,
dental, health, life and other fringe benefit plans and arrangements applicable
to him immediately prior to his Involuntary Termination on the same terms and
conditions in effect for the Employee and his dependents immediately prior to
such Involuntary Termination; provided, however, that any benefit plan or
arrangement will end on the date that the Employee and his dependents are
eligible and elect coverage under a plan or arrangement of a subsequent employer
which provides a substantially equivalent or greater benefit to him and his
dependents.
(iv) Date and Notice of Termination. Any termination of the Employee's
employment during the Covered Period by the Employer or by the Employee shall be
communicated by a notice of termination to the other party hereto (the "Notice
of Termination"). The Notice of Termination shall indicate the specific
termination provision in this Agreement relied upon and shall set forth in
reasonable detail the facts and circumstances claimed to provide a basis for
termination of the Employee's employment under the provision so indicated. The
date of the Employee's termination of employment with the Employer and its
subsidiaries (the "Date of Termination") shall be determined as follows- (i) if
the Employee's employment is terminated by the Employer in an Involuntary
Termination, five (5) days after the date the Notice of Termination is received
by the Employee and (ii) if the Employee's employment is terminated by the
Employer for just cause, the date specified in the Notice of Termination. If the
basis for the Employee's Involuntary Termination is his resignation for Good
Reason, the Date of Termination shall be ten (10) days after the date his Notice
of Termination is received by the Employer. The Date of Termination for a
resignation of employment other than for Good Reason shall be the date set forth
in the applicable notice, which shall be no earlier than ten (10) days after the
date such notice is received by the Employer.
(b) Non-Competition Agreement. During the Consulting Period, the
Employee shall comply with the substantive restrictions set forth in paragraphs
8 and 9 above.
(c) Legal Fees and Expenses. The Employer shall pay or reimburse the
Employee on an after-tax basis for all costs and expenses (including, without
limitation, court costs and
<PAGE> 9
reasonable legal fees and expenses which reflect common practice with respect to
the matters involved) incurred by him as a result of any claim, action or
proceeding (i) arising out of his termination of employment during the Covered
Period, (ii) contesting, disputing or enforcing any right, benefits or
obligations under this paragraph I 1 or (iii) arising out of or challenging the
validity, advisability or enforceability of this paragraph I 1 or any provision
thereof; provided, however, that this provision will not apply if the trier of
fact determines that the Employee's claim was entirely without merit.
(d) Definitions. For purposes of this paragraph 11, the following
capitalized words shall have the meanings set forth below:
"Cause" shall mean a termination of the Employee's employment by the
Employer which is a result of (i) his felony conviction, (ii) his willful
disclosure of material trade secrets or other material confidential information
related to the business of the Employer and its subsidiaries or (iii) his
willful and continued failure substantially to perform his duties with the
Employer (other than any such failure resulting from his incapacity due to
physical or mental illness or any such actual or anticipated failure resulting
from a resignation by the Employee for Good Reason) after a written demand for
substantial performance is delivered to the Employee by the Board, which demand
specifically identifies the manner in which the Board believes that the Employee
has not substantially performed his duties, and which performance is not
substantially corrected by him within 10 days of receipt of such demand. For
purposes of the previous sentence, no act or failure to act on the Employee's
part shall be deemed "willful" unless done, or omitted to be done, by him not in
good faith and without reasonable belief that his action or omission was in the
best interest of the Employer. Notwithstanding the foregoing, the Employee shall
not be deemed to have been terminated for Cause unless and until there shall
have been delivered to him a copy of a resolution duly adopted by the
affirmative vote of not less than three-fourths (3/4ths) of the entire
membership of the Board at a meeting of the Board called and held for such
purpose (after reasonable notice to the Employee and an opportunity for him,
together with his counsel, to be heard before the Board), finding that in the
good faith opinion of the Board he was guilty of conduct set forth above in
clause (i), (ii) or (iii) of the first sentence of this definition and
specifying the particulars thereof in detail.
"Change in Control" shall mean the happening of any of the following:
(i) any person or entity, including a "group" as defined in
Section 13(d)(3) of the Exchange Act, other than the Employer, a
subsidiary of the Employer, or any employee benefit plan of the
Employer or its subsidiaries, becomes the beneficial owner of the
Employer's securities having 25 percent or more of the combined voting
power of the then outstanding securities of the Employer that may be
cast for the election for directors of the Employer (other than as a
result of an issuance of securities initiated by the Employer 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
<PAGE> 10
power of the then outstanding securities of the Employer or any
successor corporation or entity entitled to vote generally in the
election of directors of the Employer or such other corporation or
entity after such transaction, are held in the aggregate by holders of
the Employer's securities entitled to vote generally in the election
of directors of the Employer 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 cease for
any reason to constitute at least a majority thereof, unless the
election, or the nomination for election by the Employer's
stockholders, of each director of the Employer first elected during
such period was approved by a vote of at least two-thirds of the
directors of the Employer then still in office who were directors of
the Employer at the beginning of any such period (together, directors
at the beginning of such period and new directors whose election or
nomination was so approved are the "Incumbent Directors").
"Change in Control Date" shall mean the date on which the Change in
Control occurs. Notwithstanding the first sentence of this section, if the
Employee's employment with the Employer terminates prior to the Change in
Control Date and it is reasonably demonstrated that his termination of
employment (i) was at the request of the third party who has taken steps
reasonably calculated to effect the Change in Control or (ii) otherwise arose in
connection with or in anticipation of the Change in Control, then Change in
Control Date shall mean the date immediately prior to the date of the Employee's
termination of employment.
"Common Stock" shall mean the common stock of the Employer.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, and any successor provisions thereto.
"Good Reason" shall mean a resignation by the Employee from his
employment with the Employer on or following the Change in Control Date as a
result of the occurrence of any of the following without his consent:
(i) A failure by the Employer to ensure that the Employee's
position, titles, nature and status of responsibilities and reporting
obligations are substantially equivalent to those that the Employee
enjoyed immediately prior to the Change in Control Date, it being
understood and agreed that such features shall not be deemed less than
substantially equivalent solely by reason of the Employer ceasing to be
a public company.
(ii) A reduction by the Employer in the Employee's annual base
salary as in effect immediately prior to the Change in Control Date or
as the same may be increased from time to time thereafter; a failure by
the Employer to increase the Employee's salary at a rate commensurate
with that of other key executives of the Employer; or a reduction in
the Employee's target annual bonus (expressed as a percentage of base
salary) below the target in effect for him prior to the Change in
Control Date;
<PAGE> 11
(iii) The relocation of the office of the Employer where the
Employee is employed immediately prior to the Change in Control Date
(the "CIC Location") to a location which is more than fifty (50) miles
away from the CIC Location or the Employer's requiring the Employee to
be based more than fifty (50) miles away from the CIC Location (except
for required travel on the Employer's business to an extent
substantially consistent with his customary business travel obligations
in the ordinary course of business prior to the Change in Control
Date), unless such relocation is to a location closer to his principal
residence;
(iv) The failure by the Employer to continue in effect any
compensation plan in which the Employee participated prior to the
Change in Control Date or made available to him after the Change in
Control Date, unless an equitable arrangement ' (embodied in an ongoing
substitute or alternative plan) has been made with respect to such plan
in connection with the Change in Control, or the failure by the
Employer to continue the Employee's participation therein on at least
as favorable a basis, both in terms of the amount of benefits provided
and the level of his participation relative to other participants, as
existed on the Change in Control Date;
(v) The failure by the Employer to continue to provide the
Employee with benefits at least as favorable in the aggregate to those
enjoyed by him under the Employer's pension, savings, life insurance,
medical, health and accident, disability, and fringe benefit plans and
programs in which he was participating immediately prior to the Change
in Control Date; or the failure by the Employer to provide the Employee
with the number of paid vacation days to which he is entitled on the
basis of years of service with the Employer in accordance with the
Employer's normal vacation policy in effect immediately prior to the
Change in Control;
(vi) The failure of the Employer to obtain an agreement
reasonably satisfactory to the Employee from any successor to assume
and agree to perform this Agreement, as contemplated in paragraph 12(a)
hereof or, if the business of the Employer for which the Employee's
services are principally performed is sold at any time after a Change
in Control, the failure of the Employer to obtain such an agreement
from the purchaser of such business;
(vii) Any termination of the Employee's employment which is
not effected pursuant to the terms of this Agreement; or
(viii) A material breach by the Employer of the provisions of
this Agreement;
provided, however, that an event described above in clause (i), (ii), (iv), (v)
or (viii) shall not constitute Good Reason unless it is communicated by the
Employee to the Employer in writing and is not corrected by the Employer in a
manner which is reasonably satisfactory to the Employee (including full
retroactive correction with respect to any monetary matter) within 10 days of
the Employer's receipt of such written notice from him.
<PAGE> 12
"Involuntary Termination" shall mean (i) the termination of the
Employee's employment during the Covered Period by the Employer and its
subsidiaries other than for Cause or disability or (ii) the Employee's
resignation of employment during the Covered Period with the Employer and its
subsidiaries for Good Reason.
12. Successors, Binding Agreement.
(a) Assumption by Successor. The Employer will require any successor
(whether direct or indirect, by purchase, merger, consolidation or otherwise) to
all or substantially all of the business or assets of the Employer expressly to
assume and to agree to perform this Agreement in the same manner and to the same
extent that the Employer would be required to perform it if no such succession
had taken place; provided, however, that no such assumption shall relieve the
Employer of its obligations hereunder. As used in this Agreement, the "Employer"
shall mean the Employer as hereinbefore defined and any successor to its
business and/or assets as aforesaid which assumes and agrees to perform this
Agreement by operation of law or otherwise.
(b) Enforceability; Beneficiaries. This Agreement shall be binding upon
and inure to the benefit of the Employee (and his personal representatives and
heirs) and the Employer and any organization which succeeds to substantially all
of the business or assets of the Employer, whether by means of merger,
consolidation, acquisition of all or substantially all of the assets of the
Employer or otherwise, including, without limitation, as a result of a Change in
Control or by operation of law. This Agreement shall inure to the benefit of and
be enforceable by the Employee's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees. If the
Employee should die while any amount would still be payable to him hereunder if
he had continued to live, all such amounts, unless otherwise provided herein,
shall be paid in accordance with the terms of this Agreement to his devisee,
legatee or other designee or, if there is no such designee, to his estate.
13. Notices. Any notice required or permitted to be given under this
Agreement shall be sufficient if in writing and delivered personally or sent by
registered mail (i) to Employee's residence, in the case of the Employee, or
(ii) to the business address of its President and Chief Executive Officer, in
the case of the Employer.
14. Waiver of Breach and Severability. The waiver by the Employer of a
breach of any provision of this Agreement by the Employee shall not operate or
be construed as a waiver of any subsequent breach by the Employee. In the event
any provision of this Agreement is found to be invalid or unenforceable, it may
be severed from the Agreement and the remaining provision of the Agreement shall
continue to be binding and effective; provided, however, that, if possible, it
is the intention of the Employer and the Employee that such provision be
construed and interpreted as narrowly as necessary in order to make such
provision valid and enforceable.
15. Entire Agreement. This instrument and the letter agreement between
the Employee and the Employer dated January 1, 1996 contain the entire agreement
of the parties
<PAGE> 13
and supersede any prior understandings and agreements between them respecting
the subject matter of this Agreement, including, without limitation, the
Employment Agreement dated as of January 1, 1996. It may not be changed orally,
but only by an agreement in writing signed by the party against whom enforcement
of any waiver, change, modification; extension or discharge is sought.
16. Survival. Upon termination of the Employee's employment with the
Company prior to a Change in Control Date, the rights and obligations of the
parties hereto as provided in paragraphs 8 and 9 shall continue for the time
periods as set forth herein.
17. Governing Law. This Agreement shall be construed in accordance with
and governed by the laws of the State of Tennessee without regard to the laws of
any other state or jurisdiction. Any action brought or maintained in connection
with this Agreement shall be brought exclusively in the courts located in Shelby
County, Tennessee. Each of the Employer and the Employee hereby irrevocably
waives all right to trial by jury in any action, proceeding or counterclaim
arising out of or relating to this Agreement.
<PAGE> 14
IN WITNESS WHEREOF, the parties hereto execute this Agreement on the
date first above written.
SOFAMOR DANEK GROUP, INC.
BY: /s/ E. Ron Pickard
--------------------------
"Employer"
ATTEST:
/s/ Lindia Paulson
- --------------------------
/s/ Ed Traurig
------------------------------
Ed Traurig
"Employee"
<PAGE> 1
EXHIBIT 10.21
LETTER AGREEMENT
BETWEEN GEORGE G. GRIFFIN, III
AND THE COMPANY DATED
MAY 15, 1997
<PAGE> 2
EXHIBIT 10.21
May 15,1997
Mr. George Griffin
2276 Lansing Wood
Germantown, TN 38139
Dear George:
After a thorough review of your qualifications, 1 am pleased to offer you the
position of Chief Financial Officer of Sofamor Danek Group, Inc. This position
will report to Jim Gallogly and assumes you will be available to begin full-time
employment on or before August 1, 1997. The major points of the offer are
outlined in the paragraphs below and reflect the verbal agreement we reached on
May 12.
SALARY
Your bi-weekly salary will be $7,692.30. The salary will remain at this level
unless increased by the Compensation Committee at that committee's annual
review. This review process occurs in the fourth quarter of each year for
compensation changes for the following year.
BONUS
As agreed, you will participate in the Executive Level of the Management Bonus
Program beginning in 1997. Your bonus plan will be consistent with the overall
company program and based upon EVA (economic value added) performance. A minimum
bonus of $100,000 for 1997 will be guaranteed based on a start date of not later
than August 1, 1997.
STOCK OPTIONS
Sofamor Danek Group, Inc., is granting you options on 130,000 shares of Sofamor
Danek Group, Inc., common stock at the closing price on May 12. These options
will be non-qualified options.
<PAGE> 3
The stock will vest one-fifth each year over five years beginning on the first
anniversary date of the grant. The vesting is contingent upon your continued
employment with Sofamor Danek Group, Inc. Details of the option grant will be
contained in your Employment Agreement. All other terms of the options are
contained in the Company's Long Term Incentive Plan.
As a full-time employee and Chief Financial Officer of Sofamor Danek Group,
Inc., you will receive the following benefits-
1. Medical insurance coverage will be effective the first of the month
following your hire date. Pre-existing medical conditions will be covered
by this medical insurance.
2. Life insurance coverage equal to two times your annual salary, subject to
a 90-day probationary period.
3. Short-term and long-term disability.
4. Eligibility for 401(k) Tax Deferred Savings Plan after six (6) months of
employment.
5. Eligibility for the Sofamor Danek Group, Inc. Employee Stock Purchase
plan after six (6) months of employment and per the Plan's enrollment
requirements.
6. At least four weeks vacation per year.
7. Payment or reimbursement for business related club dues or cellular phone
charges of $300.00 per month.
8. Spouse travel of $4,000.00 per year.
9. Subscription reimbursement of $300.00 per year.
You will be an employee at will; either you or Sofamor Danek Group, Inc., may
terminate your employment at any time for any reason subject to the conditions
of your Employment Agreement. Sofamor Danek Group, Inc., reserves the right to
modify or eliminate any benefits, policies, plans or programs at any time for
any reason with or without notice unless otherwise specified in your Employment
Agreement.
<PAGE> 4
Sofamor Danek Group, Inc.'s Board of Directors, Ron Pickard, Bob Compton and I
are enthusiastic about having you as a senior executive of the Company. Please
signify your acceptance of our offer by signing below and returning one original
of this letter to me at your earliest convenience.
Sincerely,
/s/ Jim Gallogly
Jim Gallogly
President, Chief Operating Officer
ACCEPTED BY:
/s/ George Griffin III May 16, 1997
- -------------------------- ----------------
George Griffin Date
<PAGE> 1
EXHIBIT 10.22
LETTER AGREEMENT
BETWEEN KENNETH G. HAYES
AND THE COMPANY DATED
MAY 15, 1997
<PAGE> 2
EXHIBIT 10.22
May 15, 1997
Mr. Kenneth G. Hayes, Jr.
5 Jay Lane
Acton, MA 01720
Dear Ken:
After a thorough review of your qualifications, I am pleased to offer you the
position of President, Image Guided Surgery of Sofamor Danek Group, Inc. This
position will report to Bob Compton and assumes you will be available to begin
full-time employment on or before August 1, 1997. The major points of the offer
are outlined in the paragraphs below and reflect the verbal agreement we reached
on May 12.
SALARY
Your bi-weekly salary will be $7,692.30. The salary will remain at this level
unless increased by the Compensation Committee at that committee's annual
review. This review process occurs in the fourth quarter of each year for
compensation changes for the following year.
BONUS
As agreed, you will participate in the Executive Level of the Management Bonus
Program beginning in 1997. Your bonus plan will be consistent with the overall
company program and based upon EVA (economic value added) performance. A minimum
bonus of $100,000 for 1997 will be guaranteed based on a start date of not later
than August 1, 1997.
STOCK OPTIONS
Sofamor Danek Group, Inc., is granting you options on 120,000 shares of Sofamor
Danek Group, Inc., common stock at the closing price on May 12. These options
will be non-qualified options.
The stock will vest one-fifth each year over five years beginning on the first
anniversary date of the grant. The vesting is contingent upon your continued
employment with Sofamor Danek
<PAGE> 3
Group, Inc. Details of the option grant will be contained in your Employment
Agreement. All other terms of the options are contained in the Company's Long
Term Incentive Plan.
RELOCATION
Sofamor Danek Group, Inc., will assist you with your relocation to Memphis,
Tennessee, as indicated below:
1. House Hunting Trip Expenses, Sofamor Danek Group, Inc., will pay and/or
reimburse you for the cost of your family's house hunting trips from
Acton to Memphis. This reimbursement will include transportation, car
rental, lodging, meals, and other reasonable expenses.
2. Moving Cost. Sofamor Danek Group, Inc., will pay and/or reimburse you for
the cost of packing, transporting, storing, and unpacking your household
goods from Acton to Memphis. Sofamor Danek will further pay the cost of
transporting two automobiles, should that be necessary.
3. Real Estate Commission. Sofamor Danek Group, Inc., will reimburse you for
the real estate commission on the sale of your Acton home, not to exceed
6% of the sale price.
4. Closing Cost. Sofamor Danek Group, Inc., will reimburse you for any
closing cost, appraisals, and legal fees associated with the sale of your
current residence and the purchase of your new home in Memphis.
This total cost is not to exceed $25,000.
S. Sale of Massachusetts Home. In the event you are unable to sell your home
in Massachusetts, Sofamor Danek Group, Inc., will purchase or cause to
have purchased such house. The purchase price shall be the average of
three appraisals, provided by mutually agreeable appraisal firms. The
Company will also pay for the appraisal costs.
6. Dual Temporary Living Expenses. Sofamor Danek Group, Inc., agrees to pay
dual temporary living expenses of $3,000 per month for a maximum of six
months.
7. Payment of Tax Liability, In the event that you incur any additional
federal or state income tax liability because the relocation expenses are
treated as income to you, are not deductible and are taxable, Sofamor
Danek Group, Inc., agrees to pay (a) a dollar amount equal to the tax
liability, and (b) an amount equal to the tax liability on the dollar
amount determined under 7(a). The total amount calculated under 7 shall
be paid by Sofamor Danek Group, Inc., directly to the United States
Internal Revenue Service and the Massachusetts Department of Revenue, and
will appear on a form W-2 that Sofamor Danek Group, Inc., will prepare
and deliver to your as appropriate.
8. Repayment of Relocation Expenses. You acknowledge and agree that these
relocation expenses are integral parts of Sofamor Danek Group, Inc.'s
offer of employment to you and that Sofamor Danek Group, Inc., is
advancing and/or spending substantial funds to relocate
<PAGE> 4
you and your family to Memphis, Tennessee. In consideration thereof, you
agree that if you voluntarily leave Sofamor Danek Group, Inc., within two
(2) years of your employment date, then you agree to repay Sofamor Danek
Group, Inc., all relocation expenses paid and/or reimbursed under the
terms of our offer letter.
As a full-time employee and President, Image Guided Surgery of Sofamor Danek
Group, Inc., you will receive the following benefits:
1. Medical insurance coverage subject to a 90-day probationary period.
Should you decide to continue your current medical coverage for the
90-day probationary period, Sofamor Danek Group, Inc., will reimburse you
for the medical insurance premiums paid by you during this period.
Pre-existing medical conditions will be covered by this medical
insurance.
2. Life insurance coverage equal to two times your annual salary, subject to
a 90-day probationary period.
3. Short-term and long-term disability.
4. Eligibility for 401(k) Tax Deferred Savings Plan after six (6) months of
employment.
5. Eligibility for the Sofamor Danek Group, Inc. Employee Stock Purchase
plan after six (6) months of employment and per the Plan's enrollment
requirements.
6. At least four weeks vacation per year.
7. Payment or reimbursement for business related club dues or cellular phone
charges of $300.00 per month.
8. Spouse travel of $4,000.00 per year.
9. Subscription reimbursement of $300.00 per year.
You will be an employee at will; either you or Sofamor Danek Group, Inc., may
terminate your employment at any time for any reason subject to the conditions
of your Employment Agreement. Sofamor Danek Group, Inc., reserves the right to
modify or eliminate any benefits, policies, plans or programs at any time for
any reason with or without notice unless otherwise specified in your Employment
Agreement.
Sofamor Danek Group, Inc., will assume responsibility for the handling of any
issue raised by a third party that relates to your taking the position of
President, Image Guided Surgery of Sofamor Danek Group, Inc.
Sofamor Danek Group, Inc.'s Board of Directors, Ron Pickard, Bob Compton and I
are enthusiastic about having you as a senior executive of the Company. Please
signify your
<PAGE> 5
acceptance of our offer by signing below and returning one original of this
letter to me at your earliest convenience.
Sincerely,
/s/ Jim Gallogly
Jim Gallogly
President, Chief Operating Officer
ACCEPTED BY:
/s/ Kenneth G. Hayes, Jr. May 29, 1997
- ------------------------------ ------------------------
Kenneth G. Hayes, Jr. Date
<PAGE> 1
EXHIBIT 10.23
LETTER AGREEMENT
BETWEEN RICHARD MAZZA
AND THE COMPANY DATED
JANUARY 9, 1998
<PAGE> 2
EXHIBIT 10.23
January 9, 1998
Mr. Richard Mazza
9727 N. Fox Hill Circle
Germantown, TN 38139
Dear Dick:
After a thorough review of your qualifications, I am pleased to offer you the
position of Executive Vice President, Global Manufacturing & Operations of
Sofamor Danek Group, Inc. In this position you will be the executive in charge
of all of Sofamor Danek's manufacturing and distribution activities worldwide
and you will be part of the senior management team leading our company in the
years ahead. You will report directly to Robert Compton and will be responsible
for our current Warsaw, Memphis, French and Florida manufacturing and
distribution facilities. The Surgical Navigation Technologies assembly operation
in Colorado will continue to report to Ken Hayes, President, SNT Division.
Based on our conversations, I assume you will be available to begin full-time
employment on or before February 1, 1998. The major points of the offer are
outlined in the paragraphs below and reflect the verbal agreement we reached and
which were approved by the Compensation Committee on December 12, 1997.
SALARY
Your annual salary will be $225,000. The salary will remain at this level unless
increased by the Compensation Committee at that committee's annual review. This
review process occurs in the fourth quarter of each year for compensation
changes for the following year.
BONUS
As agreed, you will participate in the Executive Level of the Management Bonus
Program beginning in 1998. Your bonus plan will be consistent with the overall
company program and based upon EVA (economic value added) performance, A minimum
bonus of $50,000 for 1998 will be guaranteed based on a start date of not later
than February 1, 1998.
<PAGE> 3
In addition, we recognize that by joining Sofamor Danek by February 1, you will
have to forgo an earned 1997 bonus at your current employer. To mitigate that
loss, we propose to pay you on April 1, 1998 a one-time signing bonus of
$25,000.
STOCK OPTIONS
Sofamor Danek Group, Inc., is granting you options on 100,000 shares of Sofamor
Danek Group, Inc., common stock at the closing price on December 12, 1997, of
$59.25 per share. These options will be non-qualified options. In connection
with the grant of these stock options, the Company requires a one year
competitive restriction. To accept this stock option grant you will be required
to sign the enclosed one year non-compete agreement.
The grant of these Options is subject to the Company obtaining the approval of
its shareholders, no later than the next annual meeting of shareholders, to
increase the number of Shares available for issuance under the Plan. The Board
of Directors has unanimously approved recommendation of such increase to be
included in the proxy statement for the May 20, 1998 annual meeting. In the
event that such approval is not obtained, the Options granted hereby shall be
null and void and of no further force and effect.
The stock will vest one-fifth each year over five years beginning on the first
anniversary date of the grant. The vesting is contingent upon your continued
employment with Sofamor Danek Group, Inc. Details of the option grant will be
contained in your Employment Agreement. All other terms of the options are
contained in the Company's Long Term Incentive Plan.
As a full-time employee and Executive Vice President of Sofamor Danek Group,
Inc., you will receive the following benefits:
1. Medical insurance coverage will be effective the first of the month
following your hire date. Pre-existing medical conditions will be covered
by this medical insurance.
2. Life insurance coverage equal to two times your annual salary, subject to
a 90-day probationary period.
3. Short-term and long-term disability.
4. Eligibility for 40 1 (k) Tax Deferred Savings Plan after six (6) months
of employment.
5. Eligibility for the Sofamor Danek Group, Inc. Employee Stock Purchase
plan after six (6) months of employment and per the Plan's enrollment
requirements.
6. At least four weeks vacation per year.
7. Payment or reimbursement for business related club dues or cellular phone
charges of $300.00 per month.
<PAGE> 4
8. Spouse travel of $6,000.00 per year.
9. Subscription reimbursement of $300.00 per year.
You will be an employee at will; either you or Sofamor Danek Group, Inc., may
terminate your employment at any time for any reason subject to the conditions
of your Employment Agreement. Sofamor Danek Group, Inc., reserves the right to
modify or eliminate any benefits, policies, plans or programs at any time for
any reason with or without notice unless otherwise specified in your Employment
Agreement.
Sofamor Danek Group, Inc.'s Board of Directors, Ron Pickard, Jim Gallogly and I
are all enthusiastic about having you as a senior executive of the Company.
Please signify your acceptance of our offer by signing below and returning one
original of this letter to me at your earliest convenience.
Sincerely,
/s/ Robert A. Compton
Robert A. Compton
Group President, Operations
ACCEPTED BY:
/s/ Richard Mazza January 27, 1998
- ------------------------- --------------------------
Richard Mazza Date
<PAGE> 1
EXHIBIT 10.26
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 and other than with respect to the Director Program,
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; to
determine the type of awards to be made under the Plan and the amount, size and
terms and conditions of each such award under the Plan; 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.
3. STOCK SUBJECT TO THE PLAN.
The Company may grant awards under the Plan with respect to not more than a
total of 7,500,000 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
1
<PAGE> 2
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 applicable to a
Non-Qualified Stock Option to be paid by the optionee to the
Company for each Share purchased upon the exercise of an
option shall not be less than 100 percent of the fair market
value of such Share on the date the Option is granted as
determined by the Committee.
(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 shall become
immediately exercisable, in whole or in part,
2
<PAGE> 3
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 owned by the Participant for a period of at least six
months, 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 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
3
<PAGE> 4
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) 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) Subject to clause (iii) below, 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.
(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.
4
<PAGE> 5
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.
(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.
5
<PAGE> 6
(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;
provided, however, that in no event (other than upon the
occurrence of a Change in Control or Potential Change in
Control) will the restrictions on such Shares lapse in full
earlier than three years from the date of grant; provided
further, however, that if such restrictions lapse as a result
of the attainment of performance objectives, then the
restrictions may not lapse earlier than one year from the date
of grant. The Committee, in its discretion but subject to the
provisos in the preceding sentence, 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.
6
<PAGE> 7
(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.
(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
7
<PAGE> 8
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 corporations' 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 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.
8
<PAGE> 9
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;
(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
9
<PAGE> 10
(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.
(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.
10
<PAGE> 11
(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) 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.
(g) 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.
(h) 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
11
<PAGE> 12
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 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.
12
<PAGE> 13
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 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 "Tax Date"). 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, with respect to Awards other than
Incentive Stock Options, 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 or a permitted transferee approved by the Committee (or the
Board of Directors, in the case of the Director Program) during the life of the
recipient, such Award shall be exercisable only by such person or by such
person's guardian or legal representative.
13
<PAGE> 14
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.
(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 "Change in Control" means the
happening of any of the following:
(i) Any person or entity, including a "group" 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
14
<PAGE> 15
(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 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 "Potential Change in Control" 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 "Change in Control Price" 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
15
<PAGE> 16
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 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 any 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.
16
<PAGE> 17
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.
24. EFFECTIVE DATE AND DURATION OF THE PLAN.
The initial effective date of the Plan was December 16, 1992. 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 after December 16, 2002.
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 December 12, 1997, the Board of Directors approved an amendment to the Long
Term Incentive Plan that increased the Shares available for grant thereunder
from 6,000,000 to 7,500,000. In addition, the Board of Directors has approved
certain other technical amendments. 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 May 20, 1998.
17
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF SOFAMOR DANEK GROUP, INC.
<TABLE>
<CAPTION>
JURISDICTION OF
NAME INCORPORATION
- -------------------------------------------------------------------------------------------------------------------
WHOLLY OWNED SUBSIDIARIES
<S> <C>
Colorado S.A.................................................................................................France
Danek Capital Corporation..................................................................................Delaware
Danek International, Inc........................................................................U.S. Virgin Islands
Danek Medical, Inc........................................................................................Tennessee
Danek Sales Corporation...................................................................................Tennessee
DMI Delaware Holdings, Inc.................................................................................Delaware
DMI Tennessee Holdings, Inc...............................................................................Tennessee
Medical Education K.K.........................................................................................Japan
Mednext, Inc................................................................................................Florida
SDGI Holdings, Inc.........................................................................................Delaware
Sofamor Danek Americas & Asia Pacific Corporation.........................................................Tennessee
Sofamor Danek Asia Pacific Limited........................................................................Hong Kong
Sofamor Danek Australia Pty. Ltd..........................................................................Australia
Sofamor Danek Benelux S.A................................................................................Luxembourg
Sofamor Danek Canada, Inc....................................................................................Canada
Sofamor Danek Group, Inc..................................................................................Tennessee
Sofamor Danek Holdings, Inc................................................................................Delaware
Sofamor Danek Iberica S.A.....................................................................................Spain
Sofamor Danek Ireland Limited...............................................................................Ireland
Sofamor Danek Italia S.r.l....................................................................................Italy
Sofamor Danek L.P.........................................................................................Tennessee
Sofamor Danek Limited...................................................................................New Zealand
Sofamor Danek Limited.......................................................................................England
Sofamor Danek Nederland B.V.........................................................................The Netherlands
Sofamor Danek Nevada, Inc....................................................................................Nevada
Sofamor Danek Properties, Inc..............................................................................Delaware
Sofamor Danek South Africa (Pty.) Limited..............................................................South Africa
Sofamor Danek, Inc......................................................................................Puerto Rico
Sofamor S.N.C................................................................................................France
Surgical Navigation Technologies, Inc......................................................................Colorado
Warsaw Orthopedic, Inc......................................................................................Indiana
OTHER NON WHOLLY OWNED SUBSIDIARIES
Danek Korea Co., Ltd .........................................................................................Korea
IntellX, L.L.C. ...........................................................................................Colorado
Kobayashi Sofamor Danek K.K...................................................................................Japan
Richards SDA L.L.C........................................................................................Tennessee
Somepic S.A..................................................................................................France
</TABLE>
The registrant's subsidiaries do businesses under their corporate name or under
the name of Sofamor Danek.
<PAGE> 1
EXHIBIT 23.1
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 February 2, 1998, on our audits of the
consolidated financial statements and consolidated financial statement schedule
of Sofamor Danek Group, Inc. and Subsidiaries as of December 31, 1997 and 1996,
and for the three years in the period ended December 31, 1997, which report is
included as an exhibit to Form 10-K.
Memphis, Tennessee COOPERS & LYBRAND L.L.P.
March 23, 1998
<PAGE> 2
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 February 2, 1998, on our audits of the
consolidated financial statements and consolidated financial statement schedule
of Sofamor Danek Group, Inc. and Subsidiaries as of December 31, 1997 and 1996
and for the three years in the period ended December 31, 1997, which report is
included as an exhibit to Form 10-K.
COOPERS & LYBRAND L.L.P.
Memphis, Tennessee
March 23, 1998
<PAGE> 3
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 12, 1998, on our audits of the consolidated
financial statements and consolidated financial statement schedule of Sofamor
Danek Group, Inc. and Subsidiaries as of December 31, 1997 and 1996 and for the
three years in the period ended December 31, 1997, which report is included as
an exhibit to Form 10-K.
COOPERS & LYBRAND L.L.P.
Memphis, Tennessee
March 23, 1998
<PAGE> 1
EXHIBIT 24.1
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, George G. Griffin III 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, 1997
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 9th day of March, 1998.
/s/ Yves Paul Cotrel, M.D.
-----------------------------------
Yves Paul Cotrel, M.D.
<PAGE> 2
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, George G. Griffin III 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, 1997
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 9th day of March, 1998.
/s/ Samuel F. Hulbert
-----------------------------------
Samuel F. Hulbert, Ph.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, George G. Griffin III 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, 1997
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 9th day of March, 1998.
/s/ Marie-Helene Plais
-----------------------------------
Marie-Helene Plais, M.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, George G. Griffin III 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, 1997
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 9th day of March, 1998.
/s/ George F. Rapp, M.D.
-----------------------------------
George F. Rapp, 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, George G. Griffin III 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, 1997
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 9th day of March, 1998.
/s/ Robert A. Compton
-----------------------------------
Robert A. Compton
<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, George G. Griffin III 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, 1997
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 9th day of March, 1998.
/s/ L. D. Beard
-----------------------------------
L. D. Beard
<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, George G. Griffin III 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, 1997
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 9th day of March, 1998.
/s/ George W. Bryan, Sr.
-----------------------------------
George W. Bryan, Sr.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-1-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,729
<SECURITIES> 36
<RECEIVABLES> 90,021
<ALLOWANCES> 1,812
<INVENTORY> 62,086
<CURRENT-ASSETS> 199,560
<PP&E> 48,818
<DEPRECIATION> 23,797
<TOTAL-ASSETS> 385,657
<CURRENT-LIABILITIES> 76,568
<BONDS> 60,650
0
0
<COMMON> 74,014
<OTHER-SE> 137,284
<TOTAL-LIABILITY-AND-EQUITY> 385,657
<SALES> 312,902
<TOTAL-REVENUES> 312,902
<CGS> 58,068
<TOTAL-COSTS> 58,068
<OTHER-EXPENSES> 19,747
<LOSS-PROVISION> 504
<INTEREST-EXPENSE> 5,539
<INCOME-PRETAX> 84,139
<INCOME-TAX> 25,073
<INCOME-CONTINUING> 56,784
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 56,784
<EPS-PRIMARY> 2.29
<EPS-DILUTED> 2.12
</TABLE>
<PAGE> 1
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, 1997
-----------------
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
1
<PAGE> 1
Exhibit 99.1
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, 1997 and 1996, 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, 1997. 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, 1997 and 1996, and the
results of their consolidated operations and their cash flows for each of the
three years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Memphis, Tennessee
February 2, 1998
12
<PAGE> 2
CONSOLIDATED BALANCE SHEETS
SOFAMOR DANEK GROUP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
(in thousands, except shares)
December 31,
- -------------------------------------------------------------------------------------------
1997 1996
- -------------------------------------------------------------------------------------------
ASSETS
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,729 $ 2,830
Short-term investments 36 111
Accounts receivable -- trade, less allowance for
doubtful accounts of $1,812 and $1,589 at
December 31, 1997 and 1996, respectively 88,209 70,031
Other receivables 29,374 15,813
Inventories 40,575 33,483
Loaner set inventories 21,511 14,123
Prepaid expenses 6,061 6,318
Prepaid income taxes 3,052 --
Current deferred income taxes 8,013 5,312
- -------------------------------------------------------------------------------------------
Total current assets 199,560 148,021
Property, plant and equipment
Land 1,477 1,484
Buildings 10,905 11,261
Machinery and equipment 35,677 32,083
Automobiles 759 708
- -------------------------------------------------------------------------------------------
48,818 45,536
Less accumulated depreciation (23,797) (20,026)
- -------------------------------------------------------------------------------------------
25,021 25,510
Investments 954 920
Intangible assets, net 97,048 83,426
Other assets 31,649 28,282
Non-current deferred income taxes 31,425 33,002
- -------------------------------------------------------------------------------------------
Total assets $ 385,657 $ 319,161
- -------------------------------------------------------------------------------------------
LIABILITIES
Current liabilities:
Notes payable and lines of credit $ 11,731 $ 50,207
Current maturities of long-term debt 7,586 16,687
Accounts payable 4,684 7,332
Income taxes payable 2,473 3,898
Accrued expenses 50,094 38,770
- -------------------------------------------------------------------------------------------
Total current liabilities 76,568 116,894
Long-term debt, less current maturities 60,650 12,300
Deferred income taxes -- 121
Product liability litigation, less current portion 33,970 48,000
Minority interest 3,171 2,020
Commitments and contingencies
STOCKHOLDERS' EQUITY
Preferred stock, no par value, 5,000,000 shares
authorized, no shares outstanding
Common stock, no par value, 150,000,000 shares
authorized; 25,867,749 and 25,094,277 shares issued
(including 685,908 shares held in treasury
at December 31, 1997 and 1996, respectively) 74,014 52,994
Retained earnings 154,828 98,044
Cumulative translation adjustment (4,294) 2,542
- -------------------------------------------------------------------------------------------
224,548 153,580
Less:
Cost of common stock held in treasury (9,985) (9,985)
Unearned compensation -- (54)
Stockholder notes receivable (3,265) (3,715)
- -------------------------------------------------------------------------------------------
Total stockholders' equity 211,298 139,826
- -------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 385,657 $ 319,161
- -------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
13
<PAGE> 3
CONSOLIDATED STATEMENTS OF INCOME
SOFAMOR DANEK GROUP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
(in thousands, except per share data)
for the years ended December 31,
- ------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $ 312,902 $ 244,525 $ 188,799
Cost of goods sold 58,068 45,005 40,309
- ------------------------------------------------------------------------------------------------------------------
Gross profit 254,834 199,520 148,490
Operating expenses:
Selling, general and administrative 145,414 116,729 89,847
Research and development 19,747 15,926 13,980
License agreement acquisition charge -- -- 45,337
Product liability litigation charge -- 50,000 --
- ------------------------------------------------------------------------------------------------------------------
Total operating expenses 165,161 182,655 149,164
- ------------------------------------------------------------------------------------------------------------------
Income (loss) from operations 89,673 16,865 (674)
Other income 5 913 2,533
Interest expense (5,539) (3,744) (2,794)
- ------------------------------------------------------------------------------------------------------------------
Income (loss) before provision (benefit) for and charge in
lieu of income taxes and minority interest 84,139 14,034 (935)
Provision (benefit) for and charge in lieu of income taxes 25,073 1,293 (6,319)
- ------------------------------------------------------------------------------------------------------------------
Income before minority interest 59,066 12,741 5,384
Minority interest (2,282) (1,474) (417)
- ------------------------------------------------------------------------------------------------------------------
Net income $ 56,784 $ 11,267 $ 4,967
Net income per share - diluted $ 2.12 $ 0.44 $ 0.20
Net income per share - basic $ 2.29 $ 0.46 $ 0.21
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
14
<PAGE> 4
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
SOFAMOR DANEK GROUP, INC. AND SUBSIDIARIES
(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, 1995 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 & 934 934
stock options exercised
Unearned compensation
amortization 299 299
Stockholders' notes 26 26
receivable
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 & 2,588 2,588
stock options exercised
Unearned compensation
amortization 267 267
Stockholders' notes 450 450
receivable
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
Common stock issued 10,000 593 593
Exercise of stock options 763,472 13,103 13,103
Income tax benefit from
vesting of restricted stock & 7,324 7,324
stock options exercised
Unearned compensation
amortization 54 54
Stockholders' notes 450 450
receivable
Net income 56,784 56,784
Cumulative translation
adjustment (6,836) (6,836)
- ----------------------------------------------------------------------------------------------------------------------------------
Balances, December 31, 1997 25,181,841 $74,014 $154,828 $(4,294) $(9,985) -- $(3,265) $211,298
==================================================================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
15
<PAGE> 5
CONSOLIDATED STATEMENTS OF CASH FLOWS
SOFAMOR DANEK GROUP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
(in thousands)
for the years ended December 31,
- ----------------------------------------------------------------------------------------------------------------
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 56,784 $ 11,267 $ 4,967
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 16,629 10,374 7,857
Provision for doubtful accounts receivable 504 705 366
Deferred income tax benefit (1,710) (18,678) (15,955)
License agreement acquisition charge -- -- 45,215
Loss on disposal of equipment 94 94 6
Equity loss in unconsolidated affiliate -- 49 --
Minority interest 2,282 1,474 417
Changes in assets and liabilities, net of acquisitions:
Accounts receivable (25,007) (19,606) (12,456)
Other receivables (12,794) (6,968) (6,515)
Inventories (17,489) (9,777) 2,867
Prepaid expenses 77 (1,142) (2,130)
Prepaid income taxes (3,054) 2,647 902
Other assets (3,328) (26,709) (1,819)
Accounts payable (2,120) (357) 2,006
Accrued income taxes 6,349 6,186 1,440
Accrued expenses 6,206 13,353 3,553
Product liability litigation (7,424) 48,000 --
- ----------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 15,999 10,912 30,721
- ----------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of short-term investments (347) (116) (18,284)
Proceeds from maturities of short-term investments 405 1,899 17,633
Proceeds from sale of equipment 774 34 19
Payments for purchase of property, plant and equipment (10,293) (7,110) (4,604)
Purchase of intangible assets (22,746) (18,538) (8,893)
Increase in notes receivable, other (1,716) -- (27)
Repayments of notes receivable, other 358 85 102
Acquisitions, net of cash acquired (1,420) (33,953) --
Payments for investment -- -- (2,585)
Investment in unconsolidated affiliates (146) -- --
Purchase of minority interest (483) (1,965) --
- ----------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (35,614) (59,664) (16,639)
- ----------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Increase in short-term borrowings 36,243 43,839 3,146
Proceeds from long-term debt 19,678 871 172
Repayment of long-term debt (52,438) (10,353) (12,954)
Repayment of stockholders' notes receivable 450 450 26
Proceeds from issuance of common stock 13,103 5,574 2,627
Capital contribution by minority shareholders 148 489 --
- ----------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities 17,184 40,870 (6,983)
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
16
<PAGE> 6
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
SOFAMOR DANEK GROUP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
(in thousands)
for the years ended December 31,
- ------------------------------------------------------------------------------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Effect of exchange rate changes on cash 2,330 (618) (156)
- ------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (101) (8,500) 6,943
Cash and cash equivalents, beginning of period 2,830 11,330 4,387
- ------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 2,729 $ 2,830 $ 11,330
- ------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 5,901 $ 4,605 $ 1,103
Cash paid during the year for income taxes $ 23,116 $ 11,015 $ 7,204
- ------------------------------------------------------------------------------------------------------
</TABLE>
Supplemental schedule of non-cash investing and financing activities:
- - In 1997, 1996 and 1995, net income tax benefits of $7,324, $2,588 and
$934, 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.
- - During 1995, the Company incurred a liability of $45,215 in connection
with the acquisition of a license agreement.
The accompanying notes are an integral part of the consolidated
financial statements.
17
<PAGE> 7
NOTE TO CONSOLIDATED FINANCIAL STATEMENTS
SOFAMOR DANEK GROUP, INC. AND SUBSIDIARIES
(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
over which it maintains control. Minority interest represents minority
shareholders' proportionate share of their equity ownership 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, 1997 and
1996 and reported amounts of revenues and expenses for each of the
three years in the period ended December 31, 1997. Significant
estimates include those made for product liability litigation, the
allowance for doubtful accounts, inventory reserves for excess,
obsolete and damaged products, and accumulated depreciation and
amortization. Actual results could differ from those estimates made by
management.
NATURE OF OPERATIONS
The Company is primarily involved in developing, manufacturing and
marketing devices, instruments, computer-assisted visualization
products and biomaterials used in the treatment of spinal and cranial
disorders. The Company has subsidiaries located throughout North
America, Europe, Asia and Australia and has manufacturing facilities
located in Indiana, 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 healthcare cost containment
proposals on profitability, product
18
<PAGE> 8
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.
OTHER RECEIVABLES
Other receivables consist primarily of amounts due from insurance
carriers under the Company's product liability policies.
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, 1997, 1996 and 1995 totaled $7,011, $5,449 and
$4,366, 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.
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.
19
<PAGE> 9
REVENUE RECOGNITION
The Company derives revenues from both sales of products and certain
service functions. Sales are recognized primarily upon the shipment of
products to the customer or distributor. The revenues from services are
recognized at the time services are rendered.
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.
INTEREST RATE SWAP AGREEMENTS
During 1997, the Company entered into certain interest rate swap
agreements to reduce the impact of changes in interest rates on its
floating rate debt. The agreements are contracts to exchange floating rate
for fixed interest payments periodically over the life of the agreements
without the exchange of the underlying notional amounts. The notional
amounts of interest rate agreements are used to measure the interest to be
received or paid and do not represent the amount of exposure to credit
loss. The differential paid or received on interest rate agreements is
recognized as an adjustment to interest expense.
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 foreign currency 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 Company will continue to be
exposed to the effects of foreign currency translation adjustments. 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 a net loss in 1997 of $2,012 and net gains during 1996 and
1995 of $632 and $827, respectively. Gains and losses relative to
intercompany foreign currency transactions, for which settlement is
20
<PAGE> 10
not planned or anticipated in the foreseeable future, are excluded from
net income and reflected as cumulative translation adjustments.
3. INVENTORIES AND LOANER INVENTORIES
Net inventories at December 31, 1997 and 1996 consist of the following:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
1997 1996
-----------------------------------------------------------------------
<S> <C> <C>
Finished goods $35,029 $28,260
Work-in-process 3,405 2,961
Raw materials 2,141 2,262
-----------------------------------------------------------------------
Inventories $40,575 $33,483
-----------------------------------------------------------------------
Loaner set inventories $21,511 $14,123
-----------------------------------------------------------------------
</TABLE>
Loaner set inventories consist of inventory items on loan or available to
be loaned to customers.
4. ACQUISITIONS
The Company completed one acquisition in 1997 and four acquisitions in
1996. These acquisitions 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 December 1997, the Company acquired certain net assets of MAN Ceramics
GmbH, a privately held company located in Germany. MAN Ceramics designs,
manufactures and markets carbon fiber interbody fusion devices.
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 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 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.
21
<PAGE> 11
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 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.
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. The Company recorded adjustments to the purchase price
of these acquisitions of $5,072 and $4,174, in 1997 and 1996,
respectively. The Company is unable to determine whether such payments
will be required for the years 1998 and 1999.
The estimated fair values assigned to the assets and liabilities acquired
were as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------
1997 1996
------------------------------------------------------------------------------------
<S> <C> <C>
Total consideration paid $ 1,420 $ 38,796*
Fair value of liabilities assumed -- 6,935
Fair value of tangible and identifiable assets acquired (1,420) (11,528)
------------------------------------------------------------------------------------
Goodwill at acquisition date -- 34,203
Adjustments to purchase price 5,072 4,174
------------------------------------------------------------------------------------
Additions to goodwill $ 5,072 $ 38,377
------------------------------------------------------------------------------------
</TABLE>
* Includes $2,585 paid in 1995.
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, 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, compared with the undiscounted
cashflows associated with the underlying asset. 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,
1997.
22
<PAGE> 12
A summary of intangible assets at December 31, is as follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------
1997 1996
----------------------------------------------------------------------------
<S> <C> <C>
Goodwill $ 46,125 $ 41,957
Patents 39,865 33,960
Trademarks 1,897 1,767
License agreements 12,062 9,009
Non-compete agreements 15,888 6,528
Other 1,378 3,770
----------------------------------------------------------------------------
117,215 96,991
Less: accumulated amortization (20,167) (13,565)
----------------------------------------------------------------------------
$ 97,048 $ 83,426
----------------------------------------------------------------------------
</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 recorded at
December 31, 1997 represents the present value of the Company's remaining
obligation under the terms of the Agreement.
7. 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, 1997, is set forth below:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------
1997 1996 1995
-----------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES:
North America $ 243,094 $ 189,831 $ 147,025
Europe/Asia 87,493 70,410 49,260
Eliminations (17,685) (15,716) (7,486)
-----------------------------------------------------------------------------------
Total revenues $ 312,902 $ 244,525 $ 188,799
-----------------------------------------------------------------------------------
INCOME (LOSS) BEFORE TAXES AND
MINORITY INTERESTS:
North America $ 62,193 $ 1,244 $ (5,995)
Europe/Asia 21,946 12,790 5,060
-----------------------------------------------------------------------------------
Total income (loss) before
taxes and minority interests $ 84,139 $ 14,034 $ (935)
-----------------------------------------------------------------------------------
</TABLE>
23
<PAGE> 13
Included in income (loss) before taxes and minority interest was a product
liability litigation charge of $50,000 in North America during 1996 and a
license agreement acquisition charge of $45,337 in North America during
1995.
<TABLE>
<CAPTION>
-------------------------------------------------------------------
1997 1996
-------------------------------------------------------------------
<S> <C> <C>
IDENTIFIABLE ASSETS:
North America $ 319,606 $ 270,697
Europe/Asia 85,184 67,421
Eliminations (21,898) (21,898)
-------------------------------------------------------------------
Total identifiable assets 382,892 316,220
Corporate assets 2,765 2,941
-------------------------------------------------------------------
Total assets $ 385,657 $ 319,161
-------------------------------------------------------------------
</TABLE>
Corporate assets are composed of cash, cash equivalents and short-term
investments.
The following amounts are included in the consolidated financial
statements for international subsidiaries:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------
1997 1996 1995
--------------------------------------------------------------------------
<S> <C> <C> <C>
Current assets: $63,761 $52,240 $40,499
Property, plant and equipment,(net) 11,482 12,141 10,496
Intangible assets, (net) 12,921 6,303 5,909
Other assets, not itemized 1,985 2,629 1,561
--------------------------------------------------------------------------
90,149 73,313 58,465
--------------------------------------------------------------------------
Current liabilities: 24,104 33,343 18,240
Net intercompany balance 25,661 8,430 8,853
Long-term liabilities 3,111 2,416 1,396
--------------------------------------------------------------------------
52,876 44,189 28,489
--------------------------------------------------------------------------
Net assets $37,273 $29,124 $29,976
--------------------------------------------------------------------------
</TABLE>
8. NOTES PAYABLE AND LINES OF CREDIT
At December 31, 1997 and 1996, the Company had a loan agreement with a
syndicate of U.S. banks, which provided for borrowings of up to $100,000
and $50,000, respectively, under a revolving line of credit. The Company
can 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 (5.7188% at December 31,
1997), PIBOR rate (3.5664% at December 31, 1997) and TIBOR rate (1.0007%
at December 31, 1997), 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
and maintenance of a certain debt service coverage ratio. The Company had
the equivalent of $55,573 and $35,087 outstanding under the revolving line
of credit at
24
<PAGE> 14
December 31, 1997 and 1996, respectively. During July, 1997, the Company
renegotiated its uncollateralized revolving line of credit. The revision
extended the maturity of this instrument to July 2000. At December 31,
1997, the balance sheet of the Company reflected the outstanding balance
as long-term debt.
As of December 31, 1997, the Company had entered into interest rate swap
agreements with certain financial institutions. The agreements effectively
fix the interest rate on floating rate debt at a rate of 7.625% and 6.965%
for notional principal amounts of $12,000 and $18,000, respectively.
At December 31, 1997, the Company also had loan agreements with various
international banks. The aggregate maximum borrowings available under
these committed lines of credit were equivalent to approximately $15,925
and bear interest at rates ranging from 0.25% to 20.0%. The Company had
approximately $11,731 and $15,120, outstanding under the revolving lines
of credit and various other short-term borrowings at December 31, 1997 and
1996, respectively.
The Company's weighted average interest rate on lines of credit and
short-term borrowings was approximately 6.4% and 6.5% at December 31, 1997
and 1996, respectively.
The Company has two stand-by letters of credit totaling $3,700. Amounts
available under the Company's $100,000 revolving line of credit are
reduced by the letters of credit.
9. LONG-TERM DEBT
In connection with 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 $1,012, $1,880, and
$1,650 relative to this agreement during 1997, 1996 and 1995,
respectively.
Long-term debt at December 31, 1997 and 1996 consists of:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
1997 1996
-----------------------------------------------------------------------------
<S> <C> <C>
Amounts payable under line of credit $55,573 -
Present value of amounts due under the G.I. 7,026 $ 22,998
Agreement
Subordinated note (convertible into 178,571
shares of common stock) 4,500 4,500
Various term loans with banks at fixed
interest rates from 0% to 8% maturing from
1998 to 2001 with annual installments 301 639
ranging from $10 to $212
Capital lease obligations 836 850
-----------------------------------------------------------------------------
68,236 28,987
Less current maturities (7,586) (16,687)
-----------------------------------------------------------------------------
$60,650 $ 12,300
-----------------------------------------------------------------------------
</TABLE>
25
<PAGE> 15
At December 31, 1997, aggregate required principal payments of long-term
debt, including capitalized lease obligations, are as follows:
<TABLE>
<S> <C>
1998 $ 7,586
1999 383
2000 55,751
2001 16
2002 -
Thereafter 4,500
-------------------------------------------------------------------------
$ 68,236
-------------------------------------------------------------------------
</TABLE>
26
<PAGE> 16
10. 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 through voting control of the
board of directors. KSD sells the Company's products exclusively to KPC.
During 1996 and 1997, the Company made prepayments totaling $28,700 of
commissions to KPC under a thirty year agreement. The Company is
amortizing the balance based upon sales to KPC. The Company has recorded
an aggregate of $27,763 and $26,338 included in prepaid expenses and other
assets, which represents the unamortized portion of the prepayment at
December 31, 1997 and 1996, respectively.
In November 1996, the Company established Sofamor Danek Korea Co., Ltd.
("SDK") in Korea. The Company and Joint Medical Company ("JMC") each hold
a 50% interest in SDK; however, the Company controls the financial and
operational direction of SDK through voting control of the board of
directors. SDK sells the Company's products primarily to JMC.
During 1997 and 1996, in the aggregate, the Company recorded sales of
$33,626 and $28,843, respectively, to KPC and JMC. At December 31, 1997
and 1996, the Company had total receivables, in the aggregate, of $11,320
and $8,498, respectively, from KPC and JMC.
11. 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>
1997
Current $ 12,217 $ 678 $ 6,098 $18,993
Deferred 1,480 1,100 (3,824) (1,244)
--------------------------------------------------------------------------------
13,697 1,778 2,274 17,749
Charge in lieu of income taxes 7,093 231 - 7,324
--------------------------------------------------------------------------------
$ 20,790 $ 2,009 $ 2,274 $ 25,073
--------------------------------------------------------------------------------
1996
Current $ 11,062 $ 1,387 $ 4,676 $ 17,125
Deferred (16,010) (2,837) 427 (18,420)
--------------------------------------------------------------------------------
(4,948) (1,450) 5,103 (1,295)
Charge in lieu of income taxes 2,239 349 - 2,588
--------------------------------------------------------------------------------
$ (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)
--------------------------------------------------------------------------------
</TABLE>
27
<PAGE> 17
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>
---------------------------------------------------------------------------------------
1997 1996
---------------------------------------------------------------------------------------
<S> <C> <C>
Current deferred income tax assets:
Accounts receivable $ 100 $ 356
Inventory 6,574 3,680
Other 1,339 1,276
---------------------------------------------------------------------------------------
Total current deferred income tax assets 8,013 5,312
---------------------------------------------------------------------------------------
Non-current deferred income tax assets:
Product liability litigation 16,985 17,500
License agreement 12,959 14,017
Other 1,481 1,485
---------------------------------------------------------------------------------------
Total non-current deferred income tax assets 31,425 33,002
---------------------------------------------------------------------------------------
Total deferred income tax assets $ 39,438 $38,314
---------------------------------------------------------------------------------------
Non-current deferred income tax liabilities:
Property, plant and equipment - $ 121
---------------------------------------------------------------------------------------
Total non-current deferred income tax liabilities $ - $ 121
---------------------------------------------------------------------------------------
</TABLE>
No valuation allowance was recorded since sufficient taxable income exists
in available carryback periods to fully recognize these net deferred tax
assets.
A reconciliation of federal statutory and effective income tax rates is as
follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
1997 1996 1995
---------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory U.S. federal income tax rate 35.0% 35.0% 35.0%
Effect of:
Foreign operations (5.8) (12.3) 732.7
State income taxes, net of income 1.3 (7.3) (46.2)
tax benefit
Tax credits (0.7) (2.0) 20.5
Nondeductible amortization 0.6 (4.2) -
Other, net (0.6) - (66.2)
---------------------------------------------------------------------------
Effective rate 29.8% 9.2% 675.8%
---------------------------------------------------------------------------
</TABLE>
12. 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
28
<PAGE> 18
vesting of certain restricted stock. Interest was charged at the
applicable short-term federal rates 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 equal 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, 1997
and 1996 was $3,265 and $3,715, respectively. The loans are collateralized
by 200,000 shares of common stock.
13. COMMITMENTS AND CONTINGENCIES
The Company and its subsidiaries lease certain equipment and facilities
under non-cancelable operating leases expiring in 2008. The future annual
minimum rent payments under these leases at December 31, 1997 are as
follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------
YEAR
------------------------------------------------------------------------
<S> <C>
1998 $ 2,754
1999 2,334
2000 1,097
2001 1,049
2002 1,016
Thereafter 4,850
------------------------------------------------------------------------
$ 13,100
------------------------------------------------------------------------
</TABLE>
Rent expense for 1997, 1996 and 1995, including month-to-month leases, was
approximately $2,975, $1,914 and $903, 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 generally provide
for royalty payments ranging from 1% to 10% of the net selling prices (as
defined by the agreements) of all such 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
$9,134, $6,768 and $5,907 in 1997, 1996 and 1995, respectively.
In 1996, the IRS began an examination of the Company's federal income tax
returns. The years under examination are 1993, 1994 and 1995. Management
believes that the resolution of any issues that may be developed as a
result of the examination will not have a significant impact on the
Company's results of operations or financial condition.
29
<PAGE> 19
14. 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 LITIGATION
Beginning in 1994, the Company and other spinal implant manufacturers were
named as defendants in a number of product liability lawsuits brought in
various federal and state courts around the country. These lawsuits allege
that plaintiffs were injured by spinal implants manufactured by the
Company and others. The essence of the plaintiff's 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 of medical
devices), that pedicle fixation has not been proven safe and effective in
the context of FDA labeling standards, that some or all of the spinal
systems are defectively designed and manufactured and that plaintiffs have
suffered a variety of injuries as a result of their physicians' use of
such systems in pedicle fixation. The Company has also been named as a
defendant in a number of lawsuits instituted by plaintiffs who have
received spinal implants manufactured by other manufacturers and in which
the Company is alleged to have participated in a conspiracy among doctors,
manufacturers, hospitals, teaching institutions, professional societies
and others to promote, in violation of applicable law, the use of spinal
implants.
In a number of cases, plaintiffs have sought to proceed as representatives
of classes of spinal implant recipients. All efforts to obtain class
certification have been denied or withdrawn, except with respect to a
class-action settlement entered into between the plaintiffs and another
spinal implant manufacturer, AcroMed Corporation (see below under the
heading entitled "AcroMed Corporation Settlement"). Some plaintiffs have
filed individual lawsuits, whereas other lawsuits list multiple plaintiffs
and, in certain instances, multiple lawsuits have been filed on behalf of
the same individual plaintiffs. Plaintiffs typically seek relief in the
form of monetary damages, often in unspecified amounts. Many of the
plaintiffs only allege as monetary damage an amount in excess of the
jurisdictional minimum for the court in which the case has been filed. A
few suits also name as defendants various officers and directors of the
Company.
As of December 31, 1997, approximately 2,800 plaintiffs were joined in
lawsuits against the Company. The Company is also named as a defendant of
lawsuits involving about 2,600 claimants where the Company is alleged to
have conspired with competitors and others illegally to promote the use of
spinal implant systems.
The Company believes that it has defenses, including, without limitation,
defenses based upon the failure of a cause of action to exist where no
malfunction of the implant has occurred or the plaintiff has suffered no
injury attributable to the Company's product, the expiration of the
applicable statute of limitations and the learned intermediary defense.
The
30
<PAGE> 20
Company has asserted and will continue to assert these defenses primarily
through the filing of dispositive motions. The Company believes that all
product liability lawsuits currently pending against it are without merit
and will continue to defend against them vigorously.
FEDERAL MULTIDISTRICT LITIGATION (MDL 1014)
On August 4, 1994, the Federal Judicial Panel for Multidistrict Litigation
ordered all federal court lawsuits to be transferred to and consolidated
for pretrial proceedings, including the determination of class
certification, in the United States District Court for the Easter District
of Pennsylvania in Philadelphia (the "Multidistrict Litigation"). Lawsuits
filed in federal court after August 4, 1994 have also been transferred to
and consolidated in the Multidistrict Litigation in the Easter District of
Pennsylvania. In addition, a number of lawsuits filed in state courts
around the country were removed to federal courts and then transferred
into the Multidistrict Litigation. On February 22, 1995, Chief Judge
Emeritus, Louis C. Bechtle, denied class certification. A large number of
plaintiffs filed individual lawsuits as a result of the denial of class
certification. In some instances, lawsuits that had been removed and
transferred into the Multidistrict Litigation have been remanded to the
state courts in which they were filed because there was no federal court
jurisdiction. As of December 31, 1997, the Company is a defendant in
approximately 920 individual claims and 1,065 conspiracy claims
consolidated in the Multidistrict Litigation. On April 16, 1997, Judge
Bechtle dismissed conspiracy claims alleging fraud on the FDA, but
deferred the remaining conspiracy claims for later consideration by the
federal trial courts to whom the cases will be remanded for trial.
Discovery has been completed in a number of the federal court cases and is
continuing in the remainder. A small number of cases have been transferred
to the federal courts in which they were filed for further proceedings and
trial. Judge Bechtle has begun the process of transferring the remaining
federal court cases to various federal courts throughout the United
States. As of December 31, 1997, the Federal Judicial Panel on
Multidistrict Litigation ordered the remand of approximately 210 cases to
transferor courts for further proceedings. It is not now possible to
determine when the first federal court cases will be tried.
STATE COURT LITIGATION
A number of cases filed in state courts were not eligible for removal and
transfer into the Multidistrict Litigation. As of December 31, 1997, there
were approximately 1,800 individual claims pending against the Company in
several courts around the country, principally in Tennessee, Oklahoma,
Texas and Pennsylvania. In addition, there were approximately 1,600
conspiracy claims pending in state courts.
Approximately 1,550 plaintiffs who had joined together in several
complaints which had been removed to the Multidistrict Litigation
proceedings have had their cases remanded to the state court in Memphis,
Tennessee, where they were originally filed when it was
31
<PAGE> 21
determined that the federal court lacked jurisdiction over their
claims. The presiding state court judge in Memphis has established a
case management plan which calls for the preparation of eight
representative cases for preparation and trial.
Discovery is proceeding in all remaining state court cases. Some state
cases have been given trial dates in 1998. It is anticipated that a
number of other state court cases around the country may be scheduled
for trial in 1998, although delays in trial dates are common. Trials in
the Memphis proceedings are scheduled to begin in 1998.
ACROMED CORPORATION SETTLEMENT
In December 1996, AcroMed Corporation ("AcroMed"), a spinal implant
manufacturer and a defendant in many of the cases pending in the
Multidistrict Litigation, and the Plaintiff's Legal Committee in the
Multidistrict Litigation announced that they had entered into a
conditional settlement regarding all product liability claims involving
the use of AcroMed devices to achieve pedicular fixation with screws in
spinal fusion surgery. Under the terms of the settlement, AcroMed will
establish a settlement fund consisting of $100 million in cash plus the
proceeds of its product liability insurance policies. In January 1997,
the parties submitted a formal class settlement agreement and related
documentation for approval by Judge Bechtle. By order dated October 17,
1997, Judge Bechtle certified the proposed settlement class and
approved the proposed settlement. All federal and court proceedings
involving AcroMed devices have been stayed pending final jurisdictional
consideration of the proposed settlement.
INSURANCE
Several insurance carriers have asserted reservation of rights
concerning the scope and timing of the Company's remaining insurance
coverage, but have not denied insurance coverage by the Company. Three
of the carriers, Royal Surplus Lines Insurance Company ("Royal"),
Steadfast Insurance Company ("Steadfast") and Agricultural Excess and
Surplus Insurance Company ("Agricultural"), have each filed declaratory
judgment actions against the Company seeking clarification of their
rights and obligations, if any, under their respective policies.
Neither Royal nor Agricultural has paid amounts due to the Company;
Steadfast has paid only a portion of the amounts due to the Company.
The Royal and Steadfast lawsuits are pending in the United States
District Court for the Western District of Tennessee in Memphis. The
Agricultural lawsuit is pending in the United States District Court for
the Southern District of Ohio in Cincinnati. The Company believes that
the receivables are recoverable under the terms of the Royal, Steadfast
and Agricultural policies. The Company has filed an answer and
counterclaim in the Royal litigation and a motion seeking the interim
payment of the Company's defense costs. The Company has filed an answer
and counterclaim in the Steadfast litigation and intends to file an
answer and counterclaim in the Agricultural litigation. These
litigations are in the preliminary stages. The Company believes that
Royal's, Steadfast's and Agricultural's claims are without merit and
will defend against them vigorously.
32
<PAGE> 22
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 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 is reflected in the Company's 1996 financial statements,
covers the reasonable foreseeable costs that the Company was positioned
in late December 1996 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 settlement
described above, the likelihood that the litigation will continue for
several years, in part, due to the additional financial resources
provided to the plaintiff's attorneys as a result of the AcroMed
settlement, 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 accrued liability which remained on the Company's
consolidated balance sheet at December 31, 1997 represents the
Company's best judgment of the probable reasonable costs (in excess of
amount of insurance the Company believes are recoverable) to defend and
conclude the lawsuits based on the facts and circumstances currently
existing. The costs provided for in the accrued liability 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 lawsuits could have a material effect on the Company's
results of operations and cash flows 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
purported 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
33
<PAGE> 23
money damages. The alleged securities law violations are based on the
claim that the defendants failed to disclose that Company sold its
products illicitly, illegitimately and improperly and to timely
disclose facts concerning the termination of the former U.S.
distributor of Sofamor products, National Medical Specialties, Inc.
("NMS"). The allegations relating to illicit and illegitimate sales of
product are, for the most part, copies from product liability
complaints filed against the Company and other manufacturers currently
being coordinated in improper sales related 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 appealed the dismissal to
the United States Court of Appeals for the Sixth Circuit. On August 14,
1997, the Court of Appeals affirmed the dismissal of the plaintiffs'
complaint. The Court of Appeals denied the plaintiffs' request for
reconsideration on October 9, 1997. On January 6, 1998, the plaintiffs
filed a petition for certiorari in the United States Supreme Court.
The Company does not believe the Securities Laws Actions 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.
15. 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. During 1996,
the Board of Directors proposed an amendment to the 1990 Plan to
decrease the number of shares of the common stock available under the
Plan by 61,642.
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 ("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, to 3,500,000 in
34
<PAGE> 24
1995 and to 6,000,000 in 1997. 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 1997, 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 1,500,000, contingent upon
approval by the Company's shareholders.
Activity under all of the stock option plans, including the 1,500,000
shares of common stock approved by the Board of Directors in 1997, for
the years ended December 31, 1997, 1996, and 1995 is summarized as
follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
1997 1996 1995
------------------------- ------------------------ ------------------------
Weighted Weighted Weighted
Average Average Average
Option Exercise Option Exercise Option Exercise
Shares Price Shares Price Shares Price
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Shares under option at
beginning of year 4,295,372 $18.80 3,597,939 $16.18 2,661,120 $13.96
Granted 1,965,800 $44.05 1,621,150 $25.82 1,453,700 $18.93
Exercised (754,771) $16.70 (417,744) $13.02 (231,653) $10.73
Canceled (201,640) $21.00 (505,973) $27.26 (285,228) $13.94
------------- ------------- -----------
Shares under option at end
of year 5,304,761 $28.38 4,295,372 $18.80 3,597,939 $16.18
- -----------------------------------------------------------------------------------------------------------------
Shares under option
exercisable at end of
year 1,380,345 1,175,832 863,739
Shares available for future
grant 1,786,307 2,057,068 733,887
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
Additional information regarding stock options outstanding at December
31, 1997 is shown below:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS EXERCISEABLE OPTIONS
---------------------------------------------------------------------- ---------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
OPTION PRICE OPTION EXERCISE REMAINING OPTION EXERCISE
RANGE SHARES PRICE TERM SHARES PRICE
--------------------- ------------- --------- -------------- ------------- ----------------
<S> <C> <C> <C> <C> <C>
$3.50 - $15.00 1,134,399 $12.73 6.4 679,339 $12.66
$15.01 - $25.00 1,529,994 $20.13 7.4 557,941 $19.65
$25.01 - $35.00 678,568 $27.26 8.5 115,065 $27.08
$35.01 - $45.00 886,600 $37.04 9.1 28,000 $37.50
$45.01 - $55.00 858,700 $48.09 9.7 - -
$55.01 - $65.00 216,500 $58.46 10.0 - -
</TABLE>
35
<PAGE> 25
The Company applies APB Opinion No. 25 and related Interpretations in
accounting for its plans. During 1995, the Financial Accounting
Standards Board issued Statement No. 123, "Accounting for Stock-Based
Compensation" ("FAS 123") changing the methods for recognition of cost
on plans similar to those of the Company. Adoption of the accounting
provisions of FAS 123 is optional; however, proforma disclosures as if
the Company adopted the cost recognition requirements under FAS 123 is
presented below:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
1997 1996 1995
--------------------- --------------------- ---------------------
AS AS AS
REPORTED PROFORMA REPORTED PROFORMA REPORTED PROFORMA
- ------------------------------- -------- ---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net income $56,784 $50,586 $ 11,267 $ 8,726 $ 4,967 $ 4,063
Net income per share - diluted $ 2.12 $ 1.89 $ 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 1997: dividend yield of
0%, expected volatility of 40.0%, risk-free interest rate of 6.1%, and
expected lives of 5.0 years; 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
$19.65, $12.59 and $8.20 in 1997, 1996 and 1995, respectively.
The effects of applying FAS 123 in this proforma disclosure are not
indicative of future amounts.
FAS 123 does not apply to awards prior to 1995, and additional awards
in future years are anticipated.
16. NET INCOME PER COMMON SHARE
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128 ("FAS 128"). This statement establishes standards for
computing and presenting earnings per share ("EPS"). Basic EPS excludes
dilution and is computed by dividing income available to common
stockholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the
entity. FAS 128 requires restatement of all prior-period EPS data
presented.
Potential common stock is in the form of stock options which have an
effect on 1997, 1996 and 1995 diluted net income per common share
calculations. Potential common stock also includes assumed converted
debt securities. For the years ended December 31, 1997, 1996 and 1995,
net income was adjusted by $125, $124 and $115, respectively, to
calculate EPS.
36
<PAGE> 26
This adjustment represented the interest charges, net of taxes, from
convertible debt which was assumed to be converted for the weighted
average number of shares calculation. The following table presents
information necessary to calculate diluted EPS for the years ended
December 31, 1997, 1996 and 1995:
37
<PAGE> 27
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------
1997 1996 1995
------------------------------------------------------------------------------------
<S> <C> <C> <C>
Diluted:
Weighted average shares outstanding 24,796,630 24,284,005 23,846,242
Shares equivalents 1,986,821 1,762,442 1,369,363
------------------------------------------------------------------------------------
26,783,451 26,046,447 25,215,605
------------------------------------------------------------------------------------
</TABLE>
17. ACCRUED EXPENSES
Accrued expenses at December 31, 1997 and 1996 consist of the
following:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------
1997 1996
------------------------------------------------------------------------------------
<S> <C> <C>
Amounts due to suppliers $ 1,820 $ 2,045
Commissions 5,510 5,001
Payroll, benefits, and related taxes 12,412 12,493
Royalties 3,727 2,288
Amount due to former shareholders of acquired companies 5,072 4,174
Interest 656 1,018
Product liability litigation 8,606 2,000
Legal 2,907 2,226
Other 9,384 7,525
------------------------------------------------------------------------------------
$ 50,094 $ 38,770
------------------------------------------------------------------------------------
</TABLE>
18. 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
full-time employees that are 21 years of age and have completed at
least six months of continuous service with the Company. 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 vested in the sixth year of service. The
amounts charged against income in 1997, 1996, and 1995 were $800, $477
and $385, respectively.
In November 1991, the Company adopted an employee stock purchase plan
("ESPP") to provide employees the opportunity to purchase shares of
common stock of the Company. The ESPP covers full-time employees (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 1997, 1996 and 1995 was $33, $22 and $14, respectively, which
represented the Company's match of 15% of the employee's contribution.
38
<PAGE> 28
19. DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts for cash, short-term investments, notes and other
receivables, and notes and loans payable approximate fair value due to
the short maturity of these instruments.
The fair value of long-term debt is estimated based on current rates
available to the Company for debt with similar 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, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------- --------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 2,729 $ 2,729 $ 2,830 $ 2,830
Short-term investments 36 36 111 111
Other receivables 29,374 29,374 15,813 15,813
Notes payable and lines of credit 11,731 11,731 50,207 50,207
Long-term debt 68,236 75,388 28,987 30,778
</TABLE>
20. SUBSEQUENT EVENTS
On January 26, 1998, the Company purchased Sofyc, S.A. ("Sofyc") for an
aggregate of 2,806,080 privately placed shares of the Company's common
stock, $1,000 in cash (less certain expenses relating to the
repurchase), and the Company's agreement to repay certain outstanding
loans of Sofyc equal to approximately $925. Sofyc is the personal
holding company of the Cotrel family and owner of approximately 14% or
3,337,272 shares of the Company's common stock. As a result of the
purchase of SOFYC, the outstanding shares of common stock of the
Company will be reduced by 531,192 shares. In accordance with the
purchase agreement, the Company filed a registration statement with the
Securities and Exchange Commission relating to a proposed public
offering of 1,600,000 shares of the common stock owned by the Cotrel
family. The registration statement also includes a proposed public
offering of up to 1,125,000 newly issued shares of common stock to be
sold by the Company and 75,000 shares to be sold by a director of the
Company. In addition, Sofamor Danek will grant to the underwriters an
over-allotment option relating to a maximum of 420,000 shares of common
stock. The Company expects to incur a foreign tax liability of
approximately $10,500 in connection with exchange of the Sofyc shares
which will result in an adjustment to equity by such amount.
39
<PAGE> 29
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
- -----------------------------------------------------------------------------------------------------------------------
Allowance for doubtful accounts
For the Years Ended December 31,
- -----------------------------------
<S> <C> <C> <C> <C> <C>
1997 $1,589 $504 $(199) (1) $(82) $1,812
1996 1,555 705 (698) (1) 27 1,589
1995 1,654 318 (704) (1) 287 1,555
</TABLE>
(1) Amounts written off during the year
(2) Foreign currency translation adjustment
41
