<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 For the Quarterly Period Ended
SEPTEMBER 30, 1996
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 For the Transition
Period From to .
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Commission file number 0-26116
SPINE-TECH, INC.
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(Exact name of registrant as specified in its charter)
MINNESOTA 06-1258314
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7375 BUSH LAKE ROAD
MINNEAPOLIS, MINNESOTA 55439-2029
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(Address of principal executive offices) (Zip Code)
(612) 832-5600
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if
changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
--- ---
As of NOVEMBER 7, 1996, there were issued and outstanding 9,911,252 shares
of Common Stock, $.01 par value.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SPINE-TECH, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
(unaudited) (Note)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 887,258 $ 1,171,034
Short-term investments 11,413,243 22,416,043
Accounts receivable 1,014,167 1,957,477
Inventories - Note B 6,539,757 1,821,560
Interest receivable 313,236 228,467
Prepaid expenses 253,310 57,726
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Total current assets 20,420,971 27,652,307
Land and building 5,000,664 1,752,773
Furniture and fixtures 119,072 113,993
Equipment 791,908 387,640
Accumulated depreciation (413,477) (196,588)
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5,498,167 2,057,818
Investments 5,251,053 2,955,748
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Total assets $31,170,191 $32,665,873
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 642,640 $ 232,270
Accrued clinical payments 222,365 329,905
Accrued royalties 205,544 198,913
Other accrued expenses 231,471 100,584
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Total current liabilities 1,302,020 861,672
Commitments and contingencies -- --
Shareholders' equity:
Common stock, par value $.01 per share: authorized
shares - 15,000,000. Issued and outstanding shares;
December 31, 1995 - 9,653,252; September 30,
1996 - 9,906,152 98,828 96,532
Additional paid-in capital 34,474,824 34,023,971
Accumulated deficit (4,705,481) (2,316,302)
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Total shareholders' equity 29,868,171 31,804,201
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Total liabilities and shareholders' equity $31,170,191 $32,665,873
----------- -----------
----------- -----------
</TABLE>
Note: The balance sheet at December 31, 1995 has been derived from the audited
financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
See notes to condensed financial statements.
<PAGE>
SPINE-TECH, INC.
CONDENSED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 1,523,486 $ 2,077,415 $ 4,470,955 $ 5,344,232
Cost of goods sold 472,152 504,831 1,601,283 1,734,791
----------- ----------- ----------- -----------
Gross profit 1,051,334 1,572,584 2,869,672 3,609,441
Operating expenses:
Selling, general and
administrative 2,299,383 1,299,166 4,961,430 2,798,015
Research and development 493,227 496,683 1,368,850 1,294,960
----------- ----------- ----------- -----------
Total operating expenses 2,792,610 1,795,849 6,330,280 4,092,975
----------- ----------- ----------- -----------
Operating loss (1,741,276) (223,265) (3,460,608) (483,534)
Interest income, net 292,558 389,008 1,071,429 456,439
----------- ----------- ----------- -----------
Net income (loss) $(1,448,718) $ 165,743 $(2,389,179) $ (27,095)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net income (loss) per share:
Primary $ (0.15) $ 0.02 $ (0.24) $ (0.01)
Fully diluted $ (0.15) $ 0.02 $ (0.24) $ (0.00)
Weighted average shares outstanding:
Primary 9,874,087 10,985,680 9,802,178 4,946,463
Fully diluted 9,874,087 11,022,038 9,802,178 7,582,103
</TABLE>
See notes to condensed financial statements.
<PAGE>
SPINE-TECH, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------------
1996 1995
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<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(2,389,179) $ (27,095)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 216,889 72,196
Common Stock and stock options issued
for consulting services 12,262 51,500
Changes in operating assets and liabilities:
Accounts receivable 943,310 (1,193,650)
Inventories (4,718,197) (605,714)
Interest receivable (84,769) --
Prepaid expenses (195,584) (50,863)
Accounts payable and accrued expenses 440,348 563,643
----------- -----------
Cash used in operating activities (5,774,920) (1,189,983)
INVESTING ACTIVITIES
Purchase of property and equipment (3,657,238) (40,351)
(Purchases) maturities of investments 8,707,495 (21,444,518)
Cash provided by (used in) investing activities 5,050,257 (21,484,869)
FINANCING ACTIVITIES
Proceeds from issuance of Common Stock -- 26,392,954
Proceeds from stock options exercised 440,887 96,208
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Cash provided by financing activities 440,887 26,489,162
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(Decrease) increase in cash and cash equivalents (283,776) 3,814,310
Cash and cash equivalents at beginning of period 1,171,034 419,008
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Cash and cash equivalents at end of period $ 887,258 $ 4,233,318
----------- -----------
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</TABLE>
See Notes to condensed financial statements.
<PAGE>
SPINE-TECH, INC.
Notes to Condensed Financial Statements (Unaudited)
September 30, 1996
Note A - Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the nine-month period ended September 30, 1996
are not necessarily indicative of the results that may be expected for the year
ended December 31, 1996. For further information, refer to the financial
statements and footnotes included in the Company's annual report on Form 10-K
for the year ended December 31, 1995.
Note B - Inventories
The components of inventory consist of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------ ------------
<S> <C> <C>
Raw material $ 48,820 $ 8,423
Work in process 809,473 213,202
Finished products 5,681,464 1,589,935
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$6,539,757 $1,821,560
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---------- ----------
</TABLE>
Note C - Investments
The amortized cost and estimated market value of investments are as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
As of December 31, 1995:
U.S. government obligations $ 4,000,110 $ -- $ -- $ 3,999,961
Corporate debt securities 6,102,249 -- 22,163 6,080,086
Commercial paper 15,269,432 142,661 -- 15,412,093
----------- -------- ------- -----------
$25,371,791 $142,661 $22,163 $25,492,140
----------- -------- ------- -----------
----------- -------- ------- -----------
As of September 30, 1996:
U.S. government obligations $ 6,816,129 $ 20,183 $ -- $ 6,836,312
Corporate debt securities 8,144,615 -- 91,426 8,053,189
Commercial paper 1,703,552 13,650 -- 1,703,552
----------- -------- ------- -----------
$16,664,296 $ 33,833 $91,426 $16,606,703
----------- -------- ------- -----------
----------- -------- ------- -----------
</TABLE>
<PAGE>
The amortized cost and estimated fair market value of investments by contractual
maturity are shown below:
<TABLE>
<CAPTION>
September 30, 1996 December 31, 1995
------------------------ --------------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Due in one year or less $11,413,243 $11,362,038 $22,416,043 $22,549,909
Due after one year 5,251,053 5,244,665 2,955,748 2,946,231
----------- ----------- ----------- -----------
$16,664,296 $16,606,703 $25,371,791 $25,492,140
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
Note D - Initial Public Offering
The Company completed the initial public offering ("IPO") of its Common
Stock in June 1995. The shares of Series A, B and C Preferred Stock were
automatically converted on a three-for-two basis to shares of Common Stock
on the closing date of June 27, 1995.
Note E - Net Loss Per Share
The net loss per share is computed using the weighted average number of shares
of Common Stock outstanding during the periods presented. The fully diluted
net loss per share assumes the conversion of preferred shares outstanding
prior to the IPO to common shares as of the beginning of the earliest period
presented. The net loss per share for periods presented prior to June 27, 1995,
the closing date of the IPO, also gives effect to the requirements of Staff
Accounting Bulletin No. 83 (SAB 83).
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Since commencing full-time operations in July 1991, the Company has been
engaged in the design, development, manufacture and sale of spinal implants
and instruments for the surgical treatment of degenerative disc disease and
other spinal conditions. To date, the Company's revenues have been derived
from sales of the Company's products for clinical trials in the United States
and international sales in various countries. The clinical trial of the
Company's BAK Interbody Fusion System device began in April 1992 under an
Investigational Device Exemption ("IDE") in the United States. In October
1995, the Company received notification from the Food and Drug Administration
("FDA") that its amended Premarket Approval ("PMA") application for the BAK
Interbody Fusion System had met the threshold determination that the PMA is
sufficiently complete to permit a substantive review and was, therefore,
suitable for filing. Additionally, the FDA indicated that the PMA was granted
expedited review because the lower reoperation rate reported in the PMA for
the BAK Interbody Fusion System indicated a potential benefit to public
health. In May 1996, the Food and Drug Administration Orthopaedic and
Rehabilitation Devices Advisory Panel reviewed and recommended approval of
the Company's (PMA) application for clearance to market the BAK Interbody
Fusion System. In June 1996, the FDA informed the Company that its PMA
application for the BAK Interbody Fusion System was approvable subject to
approval of final product labeling and a post-approval study protocol. On
September 20, 1996, the Company received FDA approval for the BAK Interbody
Fusion System, and commenced domestic commercial shipments of the BAK.
The Company has developed and is developing additional products which
address degenerative disc disease and other spinal conditions. In addition to
the BAK Interbody Fusion System, the Company has developed the BAK/C-TM-
which is used in the cervical spine and the BAK/T-TM- which is used in the
thoracic spine. Both of these products are subject to extensive clinical
trials under separate IDEs from the FDA. The BAK/C clinical trial commenced
during the first quarter of fiscal 1995. The BAK/T clinical trial commenced
during the third quarter of fiscal 1995. The BAK/C has been introduced on a
very limited basis into certain international markets. As international
approvals are received, both the BAK/C and the BAK/T will be introduced into
select international markets.
In May 1995, the Company introduced Cervi-Lok-Registered Trademark-, an
anterior cervical implantable plate and screw system for use in the cervical
spine, pursuant to a 510(k) clearance received from the FDA. The product had
been introduced on a limited basis in the United States during the second
quarter of fiscal 1995. National roll-out commenced during the third quarter
of fiscal 1995. International roll-out of Cervi-Lok began in the fourth
quarter of fiscal 1995.
In September 1993, the Company entered into an exclusive agreement with
Smith & Nephew-Richards, Inc. ("Smith & Nephew") for the distribution of the
BAK Interbody Fusion System outside of the United States for a period of up
to eight years as long as quarterly minimum purchases were made by Smith &
Nephew from the Company. During the first quarter of 1996, Smith & Nephew
informed the Company that they would not make their required minimum
purchases under the contract. Based upon provisions in the agreement, the
Company terminated Smith & Nephew's exclusive distribution rights. Under
terms of the agreement, Smith & Nephew retains non-exclusive rights to
distribute the BAK outside of the United States for a period of one year from
notification of termination of exclusive rights. Smith & Nephew accounted for
57% and 64% of net sales, respectively, for the three and nine month periods
ended September 30, 1995. With the termination of the exclusive distribution
agreement, Smith & Nephew accounted for 0% and 16% of net sales,
respectively, for the three and nine month periods ended September 30, 1996.
The Company is in the process of appointing independent international
distributors on a country by country basis to distribute the BAK Interbody
Fusion System. There can be no assurance
<PAGE>
that the Company will be successful in identifying and appointing
independent international distributors who will be able to
successfully sell the BAK/L product line.
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1996 AND SEPTEMBER 30, 1995
Net sales decreased to $1.5 million for the three months ended
September 30, 1996 from $2.1 million for the three months ended September 30,
1995. Net sales for the period were primarily affected by the decrease in
international sales to Smith & Nephew. There were no sales to Smith &
Nephew during the three months ended September 30, 1996, as compared to
$1.2 million for the comparable period in 1995. Domestic sales increased
33% to $1.2 million for the three months ended September 30, 1996 from
$800,000 for the comparable period in 1995. On September 20, 1996, the Company
received FDA approval to begin marketing the BAK Interbody Fusion System, and
the Company began commercial shipment of the product, resulting in a limited
impact to net sales for the three months. During the first half of 1995,
the Company was not able to sell BAK/L devices for clinical trials under
certain portions of its IDE because the Company had previously reached
the maximum patient enrollment allowed. On September 28, 1995,
the Company received approval from the FDA to expand patient enrollment in
the U.S. clinical trial of the BAK/L device. In addition to its sales of BAK/L
devices and related BAK/L instruments, during the three months ended
September 30, 1996, the Company had both domestic and international sales
of its BAK/C, BAK/T and Cervi-Lok devices and related instruments.
Gross profit decreased to $1.1 million for the three months ended
September 30, 1996 from $1.6 million for the three months ended
September 30, 1995. As a percentage of net sales, gross profit was 69%
for the three months ended September 30, 1996, as compared to 76% in the
comparable period in 1995. The decline in both the amount of gross profit
and as a percentage of net sales are due primarily to decreased
net sales and an increase in manufacturing overhead expenses as the Company
prepares for anticipated domestic sales activities.
Total operating expenses increased to $2.8 million for the three months
ended September 30, 1996 from $1.8 million for the three months ended
September 30, 1995. Selling, general and administrative expenses increased
to $2.3 million for the three months ended September 30, 1996 from
$1.3 for the three months ended September 30, 1995, increasing as a
percentage of net sales to 151%, compared to 63% for the comparable
period in 1995. This increase was primarily the result of increased
sales and marketing expenses as the Company expands its capabilities to
support international activities and the anticipated increase in domestic
sales activity. Research and development expenses were $.5 million for
the three months ended September 30, 1996 unchanged from $.5 million
for the three months ended September 30, 1995, increasing as a percentage
of net sales to 32%, compared to 24% for the comparable period in 1995.
Interest income totaled $292,000 for the three months ended September 30,
1996, compared to $389,000 for the comparable period in 1995. The decrease
is due to the reduced cash available for investment during the period,
compared to the comparable period in 1995 which followed the completion of
the Company's initial public offering in June 1995.
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND SEPTEMBER 30, 1995
Net sales decreased to $4.5 million for the nine months ended September
30, 1996 from $5.3 million for the nine months ended September 30, 1995. Net
sales for the period were primarily affected by a decrease in international
sales to $1.3 million, or 29% of net sales, as compared to $3.5 million, or
67% of net sales for the comparable period in 1995. Sales to Smith & Nephew
decreased to $332,000, or 7% of net sales, as compared to $3.4 million, or
64% of net sales for the comparable period in 1995. Domestic sales increased
82% to $3.2 million for the nine months ended September 30, 1996 from $1.9
million for the comparable period in 1995. On September 20, 1996, the Company
received FDA approval to begin
<PAGE>
marketing the BAK Interbody Fusion System, and the Company began commercial
shipment of the product, resulting in a limited impact to net sales for the
nine months. In addition to its sales of BAK/L devices and related BAK/L
instruments, during the nine months ended September 30, 1996, the Company had
both domestic and international sales of its BAK/C, BAK/T and Cervi-Lok
devices and related instruments.
Gross profit decreased to $2.9 million for the nine months ended
September 30, 1996 from $3.6 million for the nine months ended September 30,
1995 As a percentage of net sales, gross profit was 64% for the nine months
ended September 30, 1996, as compared to 68% in the comparable period in
1995. The decline in both the amount of gross profit and as a percentage of
net sales are due primarily to decreased net sales and the increase in
manufacturing overhead expenses as the Company prepares for anticipated
domestic sales activities.
Total operating expenses increased to $6.3 million for the nine months
ended September 30, 1996 from $4.1 million for the nine months ended
September 30, 1995. Selling, general and administrative expenses increased to
$5.0 million for the nine months ended September 30, 1996 from $2.8 million
for the nine months ended September 30, 1995, increasing as a percentage of
net sales to 142%, compared to 52% for the comparable period in 1995,
primarily as a result of increased sales and marketing expenses as the
Company expands its capabilities to support international activities and
increasing domestic sales. Research and development expenses increased
slightly to $1.4 for the nine months ended September 30, 1996, versus $1.3
for the nine months ended September 30, 1995, increasing as a percentage of
net sales to 31%, compared to 24% for the comparable period in 1995 due to
additional development projects being undertaken by the Company. Interest
income totaled $1.1 for the nine months ended September 30, 1996, compared to
$.5 million for the comparable period in 1995. The increase is due to
additional cash available for investments resulting from the Company's June
1995 initial public offering.
LIQUIDITY AND CAPITAL RESOURCES
In June 1995, the Company successfully completed its initial public
offering of 3,225,000 shares of newly issued Common Stock. After selling
expenses, the Company received proceeds of just over $26 million from the
offering. The Company expects to use these proceeds for working capital
requirements, funding of clinical trials, expansion of research and
development and sales and marketing activities, and, other general corporate
purposes. In November 1995, the Company used a portion of these proceeds to
acquire and relocate to a new facility. The Company is currently in the
process of renovating the acquired facility and is using a portion of the
initial public offering proceeds to finance such renovation. During the nine
months ended September 30, 1996, the Company used approximately $9.4 million
for operating activities and for capital asset acquisitions. Of this amount,
$4.7 million was used to increase inventory, $3.7 to renovate the facilities
and purchase equipment, and $1.9 million to finance operating activities and
working capital needs. Approximately $.9 million was provided by a net
reduction in the level of receivables and $440,000 in proceeds from the
exercise of stock options.
Until funds are needed for the purposes described above, they have been
invested primarily in short term U.S. government obligations and corporate
debt securities. As of September 30, 1996, the Company had $11.4 million of
these investments with a maturity of one year or less and $5.2 million with a
maturity of more than one year. The Company believes that its currently
available cash and cash equivalents combined with additional cash flow from
operations will be adequate to finance ongoing operations for the foreseeable
future.
The Company's future liquidity and capital requirements will depend on
numerous factors, including FDA regulatory actions and continued domestic and
international sales of its entire product line.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is involved in litigation related to its license of certain
technology (the "Karlin Technology") from Dr. Gary Michelson and an
affiliated company, Karlin Technology, Inc. ("Karlin"), co-owners of the
Karlin Technology. The litigation principally relates to the interpretation
of Dr. Michelson's and Karlin's right to co-license the Karlin Technology to
a third party. In December 1993, Dr. Michelson and Karlin filed a complaint
against the Company and Smith & Nephew Group, an entity under common control
with Smith & Nephew, in United States District Court for the Central District
of California. In December 1994, the plaintiffs served the defendants with a
second amended complaint (the "Complaint"). The Complaint alleged various
causes of action, including tortious interference with prospective and
contractual business relationships, unfair competition and breach of
contract, and requested various types of relief, including money damages,
injunctive relief and declaratory judgment. In addition, in the event the
Company objected to the co-license of the Karlin Technology to a third party,
the Complaint requested rescission of the license agreement. Sofamor Danek
Inc. ("Danek"), a competitor of the Company, is the other co-licensee of the
Karlin Technology. The Company is not contesting the co-license of the Karlin
Technology to Danek. Each of the claims of the Complaint was the subject of a
dispositive motion resulting in an order by the Court granting its dismissal.
On February 12, 1996, the Court entered Judgment finding that the Company is
the prevailing party on all counts of the Complaint. The plaintiffs have
appealed the judgment to the Ninth Circuit Court of Appeals. The parties have
filed briefs and are awaiting an oral hearing before the appellate court.
On June 19, 1995, the Company received a purported notice of termination
of the license agreement based on alleged inadequacy in the reporting of the
royalty payments due by the Company to Karlin under the license agreement.
Karlin has claimed that the Company has therefore breached the license
agreement. However, the Company contests that it has breached the agreement.
Under the terms of the agreement, the license agreement may not be terminated
until after a final, non-appealable determination of the existence of the
breach by a court of competent jurisdiction. The Company, on September 15,
1995, commenced a non-binding arbitration against plaintiffs in Minneapolis
before the American Arbitration Association asserting that plaintiffs'
purported termination of the License agreement is meritless and ineffective
and that its royalty reporting was not inadequate. Karlin and Michelson have
taken the position in the arbitration that they do not intend to seek to
enforce the purported termination; however, they have also contended that
they may in the future terminate the agreement if the royalty reports are
determined to have been inadequate. Although the Company believes that a
valid termination of the agreement will not be a remedy available to Karlin
and Michelson, a determination against the Company could have a material
adverse effect on the Company's business, financial condition and results of
operations.
On August 13, 1996, Karlin and Michelson filed an arbitration before the
American Arbitration Association in Los Angeles. Karlin and Michelson seek in
this arbitration (i) an award of royalties which they claim Spine-Tech has
not paid, and (ii) a declaration that Michelson is the inventor of certain
surgical methods used by or claimed to be invented by the Company, damages
for failure to give Michelson inventive credit for these methods, and an
order that the Company place corrective advertising to ameliorate the
purported failure. The Company has objected to Los Angeles as the forum for
this arbitration and requested the AAA to transfer the arbitration to
Minnesota so that it can be consolidated with the prior pending arbitration
filed by the Company.
The Company and Karlin and Michelson are also in litigation in the
United States District Court for the District of Minnesota concerning
inventorship of U.S. Patent No. 5,489,307. Prior to the issuance of the
patent to the Company, Michelson in the above-referenced California action
asserted that he was the true inventor of the then pending patent application
for the '307 patent. This claim was dismissed for lack of a justifiable
controversy. In the Minnesota action brought by the Company, Michelson has
filed a motion to dismiss for lack of personal jurisdiction which was denied.
Karlin and Michelson have since
<PAGE>
filed a motion to dismiss, transfer or stay the action, asserting that the
action should be heard only in the United States District Court for the
Central District of California. Karlin and Michelson have stated that if the
motion is denied, they will assert as-yet-unidentified counterclaims.
Surgical Dynamics, Inc. ("Surgical Dynamics"), a competitor of the
Company, has filed a complaint for declaratory judgment in the United States
District Court for the Central District of California of patent invalidity,
unenforceability and non-infringement against Karlin and Danek regarding the
U.S. Patent No. 5,015,247, which is part of the Karlin Technology. Karlin and
Danek have counterclaimed against Surgical Dynamics claiming patent
infringement. The outcome of the litigation is uncertain. There can be no
assurances that the patent related to the Karlin Technology will be upheld or
that the Company will continue to have such patent protection for its
products.
On April 16, 1996, Surgical Dynamics filed a complaint in state court in
Hawaii against the Company and Terry Corley, a former sales employee of
Surgical Dynamics who had agreed to work for the Company. The complaint
alleged, among other things, that the Company aided and abetted a breach of
fiduciary duty by Corley and tortiously interfered with Corley's employment
by Surgical Dynamics. The complaint seeks injunctive relief and unspecified
compensatory and punitive damages. In response to the Company's motion to be
dismissed from the action for lack of personal jurisdiction, the parties
stipulated to dismissal of the action in Hawaii and recommencement of the
action in Minnesota. On July 11, 1996, the Company filed an action against
Surgical Dynamics in the U.S. District Court for the District of Minnesota
seeking declaratory relief that the Company did not aid or abet a breach of
fiduciary duty by Corley or tortiously interfere with Corley's employment by
Surgical Dynamics. On October 3, 1996, the Company, Surgical Dynamics, and
Corley entered into a settlement agreement pursuant to which Surgical
Dynamics released all claims against the Company and Corley relating to
Corley, and the Company released all claims against Surgical Dynamics
relating to Corley. The Company also agreed to dismiss its action against
Surgical Dynamics with prejudice. No amount was paid by any party to the
settlement.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Amended and Restated Articles of Incorporation of the Company
(1) and Notice of Change of Registered Office/Registered Agent
dated January 19, 1996 (2)
3.2 Restated By-Laws of the Company and Amendment to Restated By-Laws
of the Company (3)
4.1 Specimen of Common Stock certificate (4)
10.1 1994 Spine-Tech, Inc. Stock Option Plan (4)
10.2 Spine-Tech, Inc. 1993 Non-Employee Director Stock Option Plan (4)
10.3 Spine-Tech, Inc. 1991 Stock Option Plan (4)
10.4 Stock Purchase Agreement between the Company and Smith & Nephew
Richards, Inc. dated September 30, 1993 (4)
10.5 Master Distributor Agreement between the Company and Smith &
Nephew Richards, Inc. dated September 30, 1993 (4) (5)
<PAGE>
10.6 Stock Purchase Agreement among the Company, St. Paul Fire and
Marine Insurance Company and the other Purchasers named therein
dated June 27, 1991 (4)
10.7 Amendment dated September 15, 1993 to Stock Purchase Agreement
among the Company, St. Paul Fire and Marine Insurance Company
and the other Purchasers named therein dated June 27, 1991 (4)
10.8 Amendment dated October 21, 1991 to Stock Purchase Agreement
among the Company, St. Paul Fire and Marine Insurance Company
and the other Purchasers named therein dated June 27, 1991 (4)
10.9 Agreement between the Company and Orthomet, Inc. dated
June 27, 1991 (4)
10.11 Loan Agreement between the Company and Riverside Bank dated
April 20, 1995 (4)
10.12 Collaboration Agreement between the Company and Ethicon
Endo-Surgery dated June 27, 1994 (4)
10.13 Spine-Tech, Inc. 1996 Employee Stock Purchase Plan (6)
10.14 Spine-Tech, Inc. 1996 Omnibus Stock Plan (6)
10.15 Intentionally omitted.
10.16 Intentionally omitted.
10.17 License Agreement dated as of May 10, 1992, among the Company,
Karlin Technology, Inc. and Gary K. Michelson (4) (5)
10.18 License Agreement dated as of January 1, 1995 between the Company
and Dr. Ted Obenchain (4) (5)
10.19 Employment Agreement between the Company and David W. Stassen dated
June 15, 1992 (4)
10.20 Employment Letter from the Company to David W. Stassen dated
June 2, 1992 (4)
10.21 Employment Agreement between the Company and Ted K. Schwarzrock
dated November 1, 1993 (4)
10.22 Management Agreement dated as of February 1, 1996 between the
Company and David W. Stassen (6)
10.23 Management Agreement dated as of February 1, 1996 between the
Company and Keith M. Eastman (6)
10.24 Management Agreement dated as of February 1, 1996 between the
Company and Ted K. Schwarzrock (6)
10.25 Management Agreement dated as of February 1, 1996 between the
Company and Douglas W. Kohrs (6)
<PAGE>
10.26 Management Agreement dated as of February 1, 1996 between the
Company and Richard C. Jansen (6)
10.27 Management Agreement dated as of February 1, 1996 between the
Company and David L. Shaw (6)
11 Statement of Computation of Per Share Loss
27 Financial Data Schedule (filed electronically)
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
September 30, 1996.
________________________
(1) Incorporated herein by reference to Exhibit 3.1 to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1995 (File No. 0-26116).
(2) Incorporated herein by reference to Exhibit 3.2 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1995
(File No. 0-26116).
(3) Incorporated herein by reference to Exhibit 3.2 to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 1996 (File No. 0-26116).
(4) Incorporated herein by reference to the same numbered Exhibit to the
Company's Registration Statement on Form S-1 (Registration No. 33-91928).
(5) Exhibit contains portions for which confidential treatment has been
granted to the Company.
(6) Incorporated herein by reference to the same numbered Exhibit to the
Company's Annual Report on Form 10-K for the year ended December 31, 1995
(File No. 0-26116).
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SPINE-TECH, INC.
-------------------
(Registrant)
Date: November 8, 1996 By: David W. Stassen
---------------------
David W. Stassen,
President and Chief Executive Officer
(Principal Executive Officer)
Date: November 8, 1996 By: Keith M. Eastman
---------------------
Keith M. Eastman,
Chief Financial Officer
(Principal Financial and Accounting Officer)
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Description Page
- ------- ----------- ----
<S> <C> <C>
3.1 Amended and Restated Articles of Incorporation of the Company (1)
and Notice of Change of Registered Office/Registered Agent dated
January 19, 1996 (2)
3.2 Restated By-Laws of the Company and Amendment
to Restated By-Laws of the Company (3)
4.1 Specimen of Common Stock certificate (4)
10.1 1994 Spine-Tech, Inc. Stock Option Plan (4)
10.2 Spine-Tech, Inc. 1993 Non-Employee Director Stock Option Plan (4)
10.3 Spine-Tech, Inc. 1991 Stock Option Plan (4)
10.4 Stock Purchase Agreement between the Company and Smith & Nephew
Richards, Inc. dated September 30, 1993 (4)
10.5 Master Distributor Agreement between the Company and Smith & Nephew
Richards, Inc. dated September 30, 1993 (4) (5)
10.6 Stock Purchase Agreement among the Company, St. Paul Fire and
Marine Insurance Company and the other Purchasers named therein
dated June 27, 1991 (4)
10.7 Amendment dated September 15, 1993 to Stock Purchase Agreement among
the Company, St. Paul Fire and Marine Insurance Company and the other
Purchasers named therein dated June 27, 1991 (4)
10.8 Amendment dated October 21, 1991 to Stock Purchase Agreement among
the Company, St. Paul Fire and Marine Insurance Company and the other
Purchasers named therein dated June 27, 1991 (4)
10.9 Agreement between the Company and Orthomet, Inc. dated June 27, 1991 (4)
10.11 Loan Agreement between the Company and Riverside Bank dated
April 20, 1995 (4)
10.12 Collaboration Agreement between the Company and Ethicon Endo-Surgery
dated June 27, 1994 (4)
10.13 Spine-Tech, Inc. Employee Stock Purchase Plan (6)
10.14 Spine-Tech, Inc. 1996 Omnibus Stock Plan (6)
10.15 Intentionally Omitted
10.16 Intentionally Omitted
10.17 License Agreement dated as of May 10, 1992, among the Company, Karlin
<PAGE>
Technology, Inc. and Gary K. Michelson (4) (5)
10.18 License Agreement dated as of January 1, 1995 between the Company and
Dr. Ted Obenchain (4) (5)
10.19 Employment Agreement between the Company and David W. Stassen
dated June 15, 1992 (4)
10.20 Employment Letter from the Company to David W. Stassen dated
June 2, 1992 (4)
10.21 Employment Agreement between the Company and Ted K. Schwarzrock
dated November 1, 1993 (4)
10.22 Management Agreement dated as of February 1, 1996 between
the Company and David W. Stassen (6)
10.23 Management Agreement dated as of February 1, 1996 between
the Company and Keith M. Eastman (6)
10.24 Management Agreement dated as of February 1, 1996 between
the Company and Ted K. Schwarzrock (6)
10.25 Management Agreement dated as of February 1, 1996 between
the Company and Douglas W. Kohrs (6)
10.26 Management Agreement dated as of February 1, 1996 between
the Company and Richard C. Jansen (6)
10.27 Management Agreement dated as of February 1, 1996 between
the Company and David L. Shaw (6)
11 Statement of Computation of Per Share Loss Filed Electronically
27 Financial Data Schedule Filed Electronically
</TABLE>
___________________________
(1) Incorporated herein by reference to Exhibit 3.1 to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended June 30, 1995
(File No. 0-26116).
(2) Incorporated herein by reference to Exhibit 3.2 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1995
(File No. 0-26116).
(3) Incorporated herein by reference to Exhibit 3.2 to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended March 31,
1996 (File No. 0-26116).
(4) Incorporated herein by reference to the same numbered Exhibit to the
Company's Registration Statement on Form S-1 (Registration No. 33-91928).
(5) Exhibit contains portions for which confidential treatment has been
granted to the Company.
(6) Incorporated herein by reference to the same numbered Exhibit to the
Company's Annual Report on Form 10-K for the year ended December 31, 1995
(File No. 0-26116).
<PAGE>
SPINE-TECH, INC.
EXHIBIT 11--STATEMENT RE: COMPUTATION OF LOSS PER SHARE
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- -----------------------
1996 1995 1996 1995
------------ ----------- ----------- ----------
<S> <C> <C> <C> <C>
PRIMARY INCOME (LOSS) PER SHARE:
Weighted average shares outstanding 9,874,087 9,373,619 9,802,178 4,710,635
Net effect of dilutive stock options --
based on the treasury stock method -- 1,612,061 -- --
SAB No. 83 shares -- for stock options
granted at exercise prices less than the
initial public offering price during the
12 months preceding the initial public
offering using the treasury stock method -- -- -- 235,828
----------- ----------- ----------- ----------
9,874,087 10,985,680 9,802,178 4,946,463
----------- ----------- ----------- ----------
----------- ----------- ----------- ----------
Net income (loss) $(1,448,718) $ 165,743 $(2,389,179) $ (27,095)
----------- ----------- ----------- ----------
----------- ----------- ----------- ----------
Primary income (loss) per share $ (0.15) $ 0.02 $ (0.24) $ (0.01)
----------- ----------- ----------- ----------
----------- ----------- ----------- ----------
FULLY DILUTED INCOME (LOSS) PER SHARE:
Weighted average shares outstanding 9,874,087 9,373,619 9,802,178 7,346,275
Net effect of dilutive stock options --
based on the treasury stock method -- 1,648,419 -- --
SAB No. 83 shares -- for stock options
granted at exercise prices less than the
initial public offering price during the
12 months preceding the initial public
offering using the treasury stock method -- -- -- 235,828
----------- ----------- ----------- ----------
9,874,087 11,022,038 9,802,178 7,582,103
----------- ----------- ----------- ----------
----------- ----------- ----------- ----------
Net income (loss) $(1,448,718) $ 165,743 $(2,389,179) $ (27,095)
----------- ----------- ----------- ----------
----------- ----------- ----------- ----------
Fully diluted income (loss) per share $ (0.15) $ 0.02 $ (0.24) $ (0.00)
----------- ----------- ----------- ----------
----------- ----------- ----------- ----------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AND STATEMENT OF OPERATIONS OF SPINE-TECH, INC. FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 887,258
<SECURITIES> 16,664,296
<RECEIVABLES> 1,074,750
<ALLOWANCES> 60,583
<INVENTORY> 6,539,757
<CURRENT-ASSETS> 20,420,971
<PP&E> 5,911,644
<DEPRECIATION> 413,477
<TOTAL-ASSETS> 31,170,191
<CURRENT-LIABILITIES> 1,302,020
<BONDS> 0
0
0
<COMMON> 98,828
<OTHER-SE> 29,769,343
<TOTAL-LIABILITY-AND-EQUITY> 31,170,191
<SALES> 4,470,955
<TOTAL-REVENUES> 4,470,955
<CGS> 1,601,283
<TOTAL-COSTS> 1,601,283
<OTHER-EXPENSES> 6,330,280
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,389,179)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,389,179)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,389,179)
<EPS-PRIMARY> (.24)
<EPS-DILUTED> (.24)
</TABLE>
