<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 JUNE 30, 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 0-26116
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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
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As of AUGUST 8, 1997, there were issued and outstanding 10,156,216 shares of
Common Stock, $.01 par value.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SPINE-TECH, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
------------ ------------
ASSETS (Unaudited) (Note)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,970,537 $ 1,724,043
Short-term investments - Note C 18,196,505 9,674,222
Accounts receivable 7,246,696 3,150,981
Inventories - Note B 5,627,447 6,982,802
Deferred tax asset - 2,155,300
Interest receivable 179,549 221,178
Prepaid expenses 439,129 146,362
------------ ------------
Total current assets 33,659,863 24,054,888
Land and building 5,236,847 5,049,315
Furniture and fixtures 724,111 704,857
Equipment 1,447,489 1,087,919
Accumulated depreciation (710,680) (373,299)
------------ ------------
6,697,767 6,468,792
Investments - Note C 1,200,000 3,535,474
------------ ------------
Total assets $ 41,557,630 $ 34,059,154
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,178,588 $ 567,490
Accrued clinical payments 100,709 41,850
Accrued royalties 957,834 365,272
Other accrued expenses 2,258,920 437,691
------------ ------------
Total current liabilities 4,496,051 1,412,303
Commitments and contingencies -- --
Shareholders' equity:
Common Stock, par value $.01 per share: authorized
shares - 15,000,000. Issued and outstanding shares:
December 31, 1996 - 9,939,055; June 30, 1997 - 10,103,636 101,036 99,391
Additional paid-in capital 35,382,578 35,108,809
Retained earnings (accumulated deficit) 1,577,965 (2,561,349)
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Total shareholders' equity 37,061,579 32,646,851
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Total liabilities and shareholders' equity $ 41,557,630 $ 34,059,154
------------ ------------
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</TABLE>
Note: The balance sheet at December 31, 1996 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 Six Months Ended
June 30, June 30,
---------------------------- --------------------------
1997 1996 1997 1996
------------- ------------ ------------- -----------
<S> <C> <C> <C> <C>
Net sales $ 14,239,062 $ 1,502,047 $ 23,642,941 $ 2,947,469
Cost of goods sold 3,209,668 566,189 5,400,636 1,129,131
------------- ------------ ------------- -----------
Gross profit 11,029,394 935,858 18,242,305 1,818,338
Operating expenses:
Sales and marketing 4,163,055 788,844 7,464,477 1,336,593
General and administrative 1,328,756 654,317 2,814,289 1,325,454
Research and development 833,761 459,857 1,466,105 875,623
------------- ------------ ------------- -----------
Total operating expenses 6,325,572 1,903,018 11,744,871 3,537,670
------------- ------------ ------------- -----------
Operating income (loss) 4,703,822 (967,160) 6,497,434 (1,719,332)
Interest income, net 214,496 381,703 404,881 778,871
------------- ------------ ------------- -----------
Income (loss) before taxes 4,918,318 (585,457) 6,902,315 (940,461)
Income tax expense 1,968,500 -- 2,763,000 --
------------- ------------ ------------- -----------
Net income (loss) $ 2,949,818 $ (585,457) $ 4,139,315 $ (940,461)
------------- ------------ ------------- -----------
------------- ------------ ------------- -----------
Net income (loss) per share $ 0.25 $ (0.06) $ 0.35 $ (0.10)
Weighted average shares outstanding:
Primary 11,740,783 9,824,959 11,646,506 9,765,828
Fully diluted 11,694,606 9,824,959 11,654,608 9,765,828
</TABLE>
See notes to condensed financial statements.
<PAGE>
SPINE-TECH, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
---------------------------
1997 1996
------------ -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 4,139,315 $ (940,461)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities:
Depreciation and amortization 337,380 159,286
Common Stock and stock options issued
for consulting services 12,262 12,262
Changes in operating assets and liabilities:
Accounts receivable (4,095,715) 1,097,209
Inventories 1,355,355 (3,223,536)
Deferred tax asset 2,155,300 --
Interest receivable 41,629 (103,732)
Prepaid expenses (292,767) (287,679)
Accounts payable and accrued expenses 3,083,748 (285,607)
------------ -----------
Cash provided by (used in) in operating activities 6,736,507 (3,572,258)
INVESTING ACTIVITIES
Purchase of property and equipment (566,356) (480,833)
(Purchase) maturities of investments (6,186,809) 2,940,429
------------ -----------
Cash (used in) provided by investing activities (6,753,165) 2,459,596
FINANCING ACTIVITIES
Proceeds from issuance of Common Stock -- --
Proceeds from stock options exercised 263,152 435,837
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Cash provided by financing activities 263,152 435,837
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Increase (decrease) in cash and cash equivalents 246,494 (676,825)
Cash and cash equivalents at beginning of period 1,724,043 1,171,034
------------ -----------
Cash and cash equivalents at end of period $ 1,970,537 $ 494,209
------------ -----------
------------ -----------
</TABLE>
See notes to condensed financial statements.
<PAGE>
SPINE-TECH, INC.
Notes to Condensed Financial Statements (Unaudited)
June 30, 1997
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 six-month period ended June 30, 1997 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1997. 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, 1996.
Note B - Inventories
The components of inventory consist of the following:
June 30, December 31,
1997 1996
----------- -------------
Raw material $ 82,019 38,653
Work in process 1,117,325 1,285,134
Finished products 4,428,103 5,659,015
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$ 5,627,447 $ 6,982,802
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----------- ------------
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, 1996:
U.S. government obligations $ 3,525,974 $ 7,691 $ -- $ 3,533,665
Corporate debt securities 6,022,928 -- 66,288 5,956,640
Commercial paper 3,660,794 15,059 -- 3,765,853
------------ ---------- ---------- ------------
$ 13,209,696 $ 22,750 $ 66,288 $ 13,166,158
------------ ---------- ---------- ------------
------------ ---------- ---------- ------------
As of June 30, 1997:
U.S. government obligations $ 3,467,621 $ 10,954 $ -- $ 3,478,575
Corporate debt securities 3,168,908 -- 43,280 3,125,088
Commercial paper 12,759,976 67,004 -- 12,826,981
------------ ---------- ---------- ------------
$ 19,396,505 $ 77,959 $ 43,280 $ 19,430,644
------------ ---------- ---------- ------------
------------ ---------- ---------- ------------
</TABLE>
<PAGE>
The amortized cost and estimated fair market value of investments by contractual
maturity are shown below:
<TABLE>
<CAPTION>
June 30, 1997 December 31, 1996
---------------------------- ----------------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Due in one year or less $ 18,196,505 $ 18,230,644 $ 9,674,222 $ 9,645,727
Due after one year 1,200,000 1,200,000 3,535,474 3,520,431
------------ ------------ ------------ ------------
$ 19,396,505 $ 19,430,644 $ 13,209,696 $ 13,166,158
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
Note D - Net Income (Loss) Per Share
The net income (loss) per share is computed using the weighted average number of
shares of Common Stock and common stock equivalents, if dilutive, outstanding
during the periods presented.
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings Per Share", which is required to be adopted on December 31, 1997.
At that time, the Company will be required to change the method currently used
to compute earnings per share and to restate all prior periods. Under the new
requirements for calculating primary earnings per share, the dilutive effect of
stock options will be excluded. The impact is expected to result in an increase
in primary earnings per share for the second quarter ended June 30, 1997 and
1996 of $.04 and $.00 per share, respectively, and $.06 and $.00 per share for
the six months ended June 30, 1997 and 1996, respectively. The impact of
Statement 128 on the calculation of fully diluted earnings per share is not
expected to be material.
<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. The Company's spinal implants are designed to
facilitate fusion of spinal vertebrae in order to reduce spinal instability
that can cause chronic, disabling back pain.
A clinical trial of the Company's BAK-TM- Interbody Fusion System
device began in April 1992 under an Investigational Device Exemption ("IDE")
in the United States. Based upon data from the clinical trial, the Company
submitted a Pre-Market Approval Application ("PMA") to the United States Food
and Drug Administration (the "FDA"). On May 23, 1996, the 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. On September 20, 1996, the Company received FDA approval to
market the BAK Interbody Fusion System in the United States, and the Company
commenced domestic commercial shipments of the BAK.
In the domestic market, the Company sells BAK implants primarily through
direct sales representatives. Currently, the Company has 37 direct sales
representatives, eight clinical specialists and five regional sales managers,
all of whom live in the geographic areas they service. In addition to these
direct sales representatives, the Company uses independent sales agents in
certain geographic areas (for example, Montana, Utah and Nevada are serviced
by independent agents). All domestic sales whether accomplished by direct
sales representatives or independent agents are made directly to hospitals.
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. Like the BAK, the BAK/C is subject to
extensive clinical trials under a separate IDE from the FDA. The BAK/C
clinical trial commenced during the first quarter of fiscal 1995. The BAK/C
has been introduced into certain international markets. As international
approvals are received, the BAK/C will be introduced into additional
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. While the
product has been rolled-out on a nationwide basis, sales efforts have been
minimal on this product since BAK commercial launch. 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 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
retained 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. The Company has been appointing independent international
distributors on a country by country basis to distribute the BAK product
line. There can be no assurance that the Company will be successful in
identifying and appointing independent international distributors who will be
able to successfully sell the BAK product line.
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1997 AND JUNE 30, 1996
Net sales increased to $14.2 million for the three months ended June 30,
1997 from $1.5 million for the three months ended June 30, 1996. Net sales
for the period were primarily affected by the previously discussed FDA
approval to market the BAK in the United States. For the three months ended
June 30, 1997, domestic BAK revenues accounted for 92% of net sales, as
compared to 58% of net sales for the three months ended June 30, 1996. Total
domestic revenues increased to $13.4 million for the three months ended June
30, 1997 from $1.1 million for the three months ended June 30, 1996. Total
international revenues increased to $826,000 for the three months ended June
30, 1997 from $409,000 for the three months ended June 30, 1996.
International sales for the period were primarily affected by increased BAK
sales to an expanded distributor network.
Gross profit increased to $11.0 million for the three months ended June
30, 1997 from $936,000 for the three months ended June 30, 1996. This
increase was primarily due to the substantial increase in net sales for the
second quarter of 1997 over the second quarter of 1996. As a percentage of
net sales, gross profit was 77.5% for the three months ended June 30, 1997,
as compared to 62.3% in the comparable period in 1996. This improvement is
the direct result of the increased sales of the BAK implants as a percentage
of total sales.
Total operating expenses increased to $6.3 million for the three months
ended June 30, 1997 from $1.9 million for the three months ended June 30,
1996. Sales and marketing expenses increased to $4.2 million for the three
months ended June 30, 1997 from $789,000 for the three months ended June 30,
1996, decreasing as a percentage of net sales to 29.2%, as compared to 52.5%
for the comparable period in 1996. Most of the increase was related to the
establishment of a direct sales force in the United States, increased sales
commissions to both direct sales representatives and independent sales
agents, the cost of conducting surgeon BAK training programs and increased
marketing efforts. General and administrative expenses increased to $1.3
million for the three months ended June 30, 1997 from $654,000 for the three
months ended June 30, 1996, decreasing as percentage of net sales to 9.3%, as
compared to 43.6% for the comparable period in 1996. Expense increases
relate primarily to additional personnel needed to support increased sales
activities. Research and development expenses increased to $834,000 for the
three months ended June 30, 1997, from $460,000 for the three months ended
June 30, 1996, decreasing as a percentage of net sales to 5.9%, as compared
to 30.6% for the comparable period in 1996. Research and development expenses
have increased due to the adding of additional personnel and increased
spending on independent research projects. Interest income totaled $215,000
for the three months ended June 30, 1997, as compared to $382,000 for the
three months ended June 30, 1996. The decrease is due to the reduced amount
of funds available for short term investments during the three months ended
June 30, 1997 resulting from the use of cash to fund working capital needs
and capital purchases during the past twelve month period.
SIX MONTHS ENDED JUNE 30, 1997 AND JUNE 30, 1996
Net sales increased to $23.6 million for the six months ended June 30,
1997 from $2.9 million for the six months ended June 30, 1996. Net sales for
the period were primarily affected by the previously discussed FDA approval
to market the BAK in the United States. For the six months ended June 30,
1997, domestic BAK revenues accounted for 91% of net sales, as compared to
55% of net sales for the six months ended June 30, 1996. Total domestic
revenues increased to $22.2 million for the six months ended June 30, 1997
from $2.0 million for the six months ended June 30, 1996. Total
international revenues increased to $1.4 million for the six months ended
June 30, 1997 from $950,000 for the six months ended
<PAGE>
June 30, 1996. International sales for the period were primarily
affected by increased BAK sales to an expanded distributor network.
Gross profit increased to $18.2 million for the six months ended June
30, 1997 from $1.8 million for the six months ended June 30, 1996. This
increase was primarily due to the substantial increase in net sales for the
first six months of 1997 over the first six months of 1996. As a percentage
of net sales, gross profit was 77.2% for the six months ended June 30, 1997,
as compared to 61.7% in the comparable period in 1996. This improvement is
the direct result of the increased sales of the BAK implants as a percentage
of total sales.
Total operating expenses increased to $11.7 million for the six months
ended June 30, 1997 from $3.5 million for the six months ended June 30, 1996.
Sales and marketing expenses increased to $7.5 million for the six months
ended June 30, 1997 from $1.3 million the six months ended June 30, 1996,
decreasing as a percentage of net sales to 31.6%, as compared to 45.3% for
the comparable period in 1996. Most of the increase was related to the
establishment of a direct sales force in the United States, increased sales
commissions to both direct sales representatives and independent agents, the
cost of conducting surgeon BAK training programs and increased marketing
efforts. General and administrative expenses increased to $2.8 million for
the six months ended June 30, 1997 from $1.3 million for the six months ended
June 30, 1996, decreasing as percentage of net sales to 11.9%, as compared to
45% for the comparable period in 1996. Expense increases relate primarily to
additional personnel needed to support increased sales activities. Research
and development expenses increased to $1.5 million for the six months ended
June 30, 1997, from $876,000 for the six months ended June 30, 1996,
decreasing as a percentage of net sales to 6.2%, as compared to 29.7% for the
comparable period in 1996. Interest income totaled $405,000 for the six
months ended June 30, 1997, as compared to $779,000 for the quarter ended
June 30, 1996. The decrease is due to the reduced amount of funds available
for short term investments during the six months ended June 30, 1997
resulting from the use of cash to fund working capital needs and capital
purchases during the past twelve month period.
LIQUIDITY AND CAPITAL RESOURCES
During the three months ended June 30, 1997, cash and cash equivalents
increased by $246,000. Of this amount, $6.7 million was generated by
operating activities, $263,000 provided by the exercise of stock options,
while $566,000 was used to purchase property and equipment, and $6.2 million
was used to purchase short-term investments.
Until funds are needed for operating purposes, they have been invested
primarily in short term U.S. government obligations and corporate debt
securities. As of June 30, 1997, the Company had $19.4 million of these
investments, of which $18.2 million mature in one year or less. 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 medical device market is characterized by frequent and substantial
intellectual property litigation. Intellectual property litigation is
complex and expensive, and the outcome of such litigation is difficult to
predict.
The Company is not aware of any patent infringement charge or any
violation of other proprietary rights claimed by any third party relating to
the Company or the Company's products, except as set forth below. However,
no assurance can be given that the Company or its products will not become
the subject of such a claim in the future. Any future litigation could
result in substantial expense to the Company and significant diversion of
effort by its technical and management personnel. Litigation may also be
necessary to enforce patents issued to the Company, to protect trade secrets
or know-how owned by it or to determine the enforceability, scope and
validity of the proprietary rights of others. An adverse determination in
any such proceeding could subject the Company to significant liabilities to
third parties, or require it to seek licenses from, and pay substantial
royalties to, third parties. Furthermore, there can be no assurance that
necessary licenses would be available to the Company on satisfactory terms,
or at all. Accordingly, an adverse determination in a judicial or
administrative proceeding or failure to obtain necessary licenses could
prevent the Company from manufacturing and selling certain of its products,
which would have a material adverse effect on its business, financial
condition and results of operations.
The Company is involved in litigation related to its license of the
Karlin Technology from Dr. Michelson and 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 and the inventorship of one of the Company's patents. 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, Central District of California. In December
1994, the plaintiffs served the defendants with a second amended complaint
(the "Complaint"). The Company filed an answer to the Complaint in January
1995 denying the material allegations and setting forth affirmative defenses.
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. 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 relating to
the Karlin Technology has been the subject of a dispositive motion resulting
in an order by the court granting its dismissal in the Company's favor. On
February 12, 1996, the court entered Judgment finding that the Company is the
prevailing party on all counts of the Complaint, and on July 3, 1997, the
Ninth Circuit Court of Appeals affirmed the Judgement. Michelson and Karlin
have filed a petition for rehearing en banc.
On June 19, 1995, the Company received a purported notice of termination
of the Karlin 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. The Company denies, however, 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 license agreement
also provides for non-binding arbitration and the right of a breaching party
to cure a preach by adopting the recommendation of the arbitrator. On
September 15, 1995, the Company commenced a non-binding arbitration against
Dr. Michelson and Karlin in Minneapolis before the American Arbitration
Association asserting that purported termination of the license agreement is
meritless and ineffective. Dr. Michelson and Karlin have taken the position
in the arbitration that they do not intend to seek to enforce the purported
termination. They also contend, however, that they may in the future
terminate the license agreement if the
<PAGE>
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 the Company
has not paid, and (ii) a declaration that Dr. Michelson is the inventor of
certain surgical methods used by or claimed to be invented by the Company,
damages for failure to give Dr. Michelson inventive credit for these methods,
and an order that the Company place corrective advertising to ameliorate the
purported failure. After the Company objected to Los Angeles as the forum
for this arbitration, the AAA transferred the arbitration to Minnesota so
that it could be coordinated with the prior pending arbitration filed by the
Company. Both arbitrations are currently pending before the AAA in
Minnesota. No discovery has yet taken place and no hearing dates have been
set.
The Company and Karlin and Dr. 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, Dr. Michelson in the above-referenced California
action asserted that he was the true inventor of the then pending patent
application for the patent. This claim was dismissed for lack of a
justifiable controversy. In the Minnesota action brought by the Company, Dr.
Michelson filed a motion to dismiss for lack of personal jurisdiction which
was denied. Karlin and Michelson then 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. In April 1997,
the Minnesota court denied the motions to dismiss or transfer, but granted
the motion to stay pending the decision of the Ninth Circuit Court of
Appeals: the stay is still in effect. On December 16, 1996, Karlin and Dr.
Michelson filed an action against the Company in the United States District
Court for the Central District of California. The complaint seeks (i)
declaratory relief that Dr. Michelson is the true inventor and owner of the
patent, or in the alternative, that the patent in invalid; (ii) unspecified
damages and an injunction based upon the Company's acquisition and
exploitation of the patent; (iii) unspecified damages and termination of the
Karlin license agreement based upon numerous allegedly false representations
made by the Company in connection with the entry into the License Agreement;
(iv) unspecified damages for alleged disparagement of title in connection
with the bilateral predistraction method and associated instruments specified
in the patent; (v) unspecified damages for breach of fudiciary duty in
connection with alleged failures by the Company to pay royalties due and the
Company's conduct related to the patent; (vi) unspecified damages for
misappropriation of trade secrets in connection with the application for and
exploitation of the patent; and (vii) unspecified damages for statutory
unfair competition in connection with the same alleged conduct. The
complaint also seeks unspecified punitive damages. The Company has not yet
responded to this complaint. Although the Company believes that neither a
termination of the agreement nor substantial damages will be remedies
available to Karlin and Dr. Michelson in this action, a determination against
the Company could have a material adverse effect on its business, financial
condition and results of operation.
Surgical Dynamics, Inc., 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. On
June 2, 1997, the court granted partial summary judgment to Surgical
Dynamics, ruling that its implant does not infringe the '247 patent. The
court also denied summary judgment to Surgical Dynamics on its claim that the
'247 patent is invalid. Karlin and Danek have filed an interlocutory appeal
to the Federal Circuit Court of Appeals. 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.
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's 1997 Annual Meeting of Shareholders on May 8, 1997, the
shareholders approved the following:
1. Election of directors to serve until his successor is duly elected.
The directors were approved as follows:
Names of Director Votes For Votes Withheld
----------------- --------- --------------
David W. Stassen 7,268,325 8,228
Stephen D. Kuslich, M.D. 7,268,325 8,228
Robert J. DePasqua 7,268,225 8,328
James F. Lyons 7,268,325 8,228
Kenneth W. Anstey 7,268,125 8,428
2. Proposal to amend the Spine-Tech, Inc. 1996 Omnibus Stock Plan.
The proposal received 6,867,789 votes for and 317,368 votes
against. There were 31,081 abstentions and 60,315 broker
non-votes.
3. Proposal to ratify the appointment of Ernst & Young LLP as
independent auditors for the 1997 fiscal year. The proposal
received 7,258,941 votes for and 5,700 votes against. There
were 11,912 abstentions and no broker non-votes.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
3.1 Amended and Restated Articles of Incorporation of the
Company. (1) (2) (3)
3.2 Restated By-Laws of the Company and Amendment to Restated
By-Laws of the Company. (4)
4.1 Specimen of Common Stock certificate. (5)
4.2 Form of Rights Agreement dated as of August 21, 1996
between the Company and Norwest Bank Minnesota, N.A. (3)
10.1 1994 Spine-Tech, Inc. Stock Option Plan.* (6)
10.2 Spine-Tech, Inc. 1993 Non-Employee Director Stock
Option Plan.* (7)
10.3 Spine-Tech, Inc. 1991 Stock Option Plan.* (8)
10.4 Loan Agreement between the Company and Riverside Bank dated
April 20, 1995. (9)
10.5 Spine-Tech, Inc. 1996 Employee Stock Purchase Plan.* (10)
<PAGE>
10.6 Spine-Tech, Inc. 1996 Omnibus Stock Plan.* (11)
10.7 License Agreement dated as of May 10, 1992, among the Company,
Karlin Technology, Inc. and Gary K. Michelson. (12) (13)
10.8 License Agreement dated as of January 1, 1995 between the
Company and Dr. Ted Obenchain. (13) (14)
10.9 Employment Agreement between the Company and David W. Stassen
dated June 15, 1992.* (15)
10.10 Employment Letter from the Company to David W. Stassen dated
June 2, 1992.* (16)
10.11 Employment Agreement between the Company and Ted K.
Schwarzrock dated November 1, 1993.* (17)
10.12 Management Agreement dated as of February 1, 1996 between
the Company and David W. Stassen. (18)
10.13 Management Agreement dated as of February 1, 1996 between
the Company and Keith M. Eastman.* (19)
10.14 Management Agreement dated as of February 1, 1996 between
the Company and Ted K. Schwarzrock.* (20)
10.15 Management Agreement dated as of February 1, 1996 between
the Company and Douglas W. Kohrs.* (21)
10.16 Management Agreement dated as of February 1, 1996 between
the Company and Richard C. Jansen.* (22)
10.17 Management Agreement dated as of February 1, 1996 between
the Company and David L. Shaw.* (23)
10.18 Collaboration agreement between the Company and Ethicon Endo
Surgery dated June 27, 1994. (24)
11 Statement of Computation of Net Income (Loss).
27 Financial Data Schedule (filed electronically).
_____________________________
* Management contract of compensatory plan or arrangement required to be
filed as an exhibit to this form pursuant to Item 14(c) of Form 10-K.
(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 1 to the Company's Current
Report on Form 8-K dated August 21, 1996.
<PAGE>
(4) Incorporated by reference to Exhibit 3.2 to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended March 31, 1996.
(5) Incorporated by reference to Exhibit 4.1 to the Company's Registration
Statement on Form S-1 (Registration No. 33-91928).
(6) Incorporated by reference to Exhibit 10.1 to the Company's
Registration Statement on Form S-1 (Registration No. 33-91928).
(7) Incorporated by reference to Exhibit 10.2 to the Company's
Registration Statement on Form S-1 (Registration No. 33-91928).
(8) Incorporated by reference to Exhibit 10.3 to the Company's
Registration Statement on Form S-1 (Registration No. 33-91928).
(9) Incorporated by reference to Exhibit 10.11 to the Company's
Registration Statement on Form S-1 (Registration No. 33-91928).
(10) Incorporated by reference to Exhibit 10.13 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1995.
(11) Incorporated by reference to Exhibit 10.14 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1995.
(12) Incorporated by reference to Exhibit 10.17 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1995.
(13) Exhibit contains portions for which confidential treatment has been
granted to the Company.
(14) Incorporated by reference to Exhibit 10.18 to the Company's
Registration Statement on Form S-1 (Registration No. 33-91928).
(15) Incorporated by reference to Exhibit 10.19 to the Company's
Registration Statement on Form S-1 (Registration No. 33-91928).
(16) Incorporated by reference to Exhibit 10.20 to the Company's
Registration Statement on Form S-1 (Registration No. 33-91928).
(17) Incorporated by reference to Exhibit 10.21 to the Company's
Registration Statement on Form S-1 (Registration No. 33-91928).
(18) Incorporated by reference to Exhibit 10.22 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1995.
(19) Incorporated by reference to Exhibit 10.23 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1995.
(20) Incorporated by reference to Exhibit 10.24 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1995.
(21) Incorporated by reference to Exhibit 10.25 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1995.
<PAGE>
(22) Incorporated by reference to Exhibit 10.26 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1995.
(23) Incorporated by reference to Exhibit 10.27 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1995.
(24) Incorporated by reference to Exhibit 10.12 to the Company's
Registration Statement on Form S-1 (Registration No. 33-91928).
(b) Reports on Form 8-K
No reports were filed during the quarter ended June 30, 1997.
<PAGE>
SIGNATURES
Pursuant to the requirements of the 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.
SPINE-TECH, INC.
----------------
(Registrant)
Date: August 8, 1997 By: David W. Stassen
---------------------------------------
David W. Stassen,
President and Chief Executive
Officer (Principal Executive Officer)
Date: August 8, 1997 By: Keith M. Eastman
---------------------------------------
Keith M. Eastman,
Chief Financial Officer
(Principal Financial and Accounting
Officer)
<PAGE>
EXHIBIT INDEX
Exhibit Description
- ------- -----------
3.1 Amended and Restated Articles of Incorporation of the Company. (1) (2)
(3)
3.2 Restated By-Laws of the Company and Amendment to Restated By-Laws of
the Company. (4)
4.1 Specimen of Common Stock certificate. (5)
4.2 Form of Rights Agreement dated as of August 21, 1996 between the
Company and Norwest Bank Minnesota, N.A. (3)
10.1 1994 Spine-Tech, Inc. Stock Option Plan.* (6)
10.2 Spine-Tech, Inc. 1993 Non-Employee Director Stock Option Plan.* (7)
10.3 Spine-Tech, Inc. 1991 Stock Option Plan.* (8)
10.4 Loan Agreement between the Company and Riverside Bank dated April 20,
1995. (9)
10.5 Spine-Tech, Inc. 1996 Employee Stock Purchase Plan.* (10)
10.6 Spine-Tech, Inc. 1996 Omnibus Stock Plan.* (11)
10.7 License Agreement dated as of May 10, 1992, among the Company, Karlin
Technology, Inc. and Gary K. Michelson. (12) (13)
10.8 License Agreement dated as of January 1, 1995 between the Company and
Dr. Ted Obenchain. (13) (14)
10.9 Employment Agreement between the Company and David W. Stassen dated
June 15, 1992.* (15)
10.10 Employment Letter from the Company to David W. Stassen dated June 2,
1992.* (16)
10.11 Employment Agreement between the Company and Ted K. Schwarzrock dated
November 1, 1993.* (17)
10.12 Management Agreement dated as of February 1, 1996 between the Company
and David W. Stassen. (18)
10.13 Management Agreement dated as of February 1, 1996 between the Company
and Keith M. Eastman.* (19)
10.14 Management Agreement dated as of February 1, 1996 between the Company
and Ted K. Schwarzrock.* (20)
10.15 Management Agreement dated as of February 1, 1996 between the Company
and Douglas W. Kohrs.* (21)
<PAGE>
10.16 Management Agreement dated as of February 1, 1996 between the Company
and Richard C. Jansen.* (22)
10.17 Management Agreement dated as of February 1, 1996 between the Company
and David L. Shaw.* (23)
10.18 Collaboration agreement between the Company and Ethicon Endo Surgery
dated June 27, 1994. (24)
11 Statement of Computation of Net Income (Loss). Filed Electronically
27 Financial Data Schedule. Filed Electronically
_____________________________
* Management contract of compensatory plan or arrangement required to be
filed as an exhibit to this form pursuant to Item 14(c) of Form 10-K.
(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 1 to the Company's Current
Report on Form 8-K dated August 21, 1996.
(4) Incorporated by reference to Exhibit 3.2 to the Company's Quarterly Report
on Form 10-Q for the quarterly period ended March 31, 1996.
(5) Incorporated by reference to Exhibit 4.1 to the Company's Registration
Statement on Form S-1 (Registration No. 33-91928).
(6) Incorporated by reference to Exhibit 10.1 to the Company's Registration
Statement on Form S-1 (Registration No. 33-91928).
(7) Incorporated by reference to Exhibit 10.2 to the Company's Registration
Statement on Form S-1 (Registration No. 33-91928).
(8) Incorporated by reference to Exhibit 10.3 to the Company's Registration
Statement on Form S-1 (Registration No. 33-91928).
(9) Incorporated by reference to Exhibit 10.11 to the Company's Registration
Statement on Form S-1 (Registration No. 33-91928).
(10) Incorporated by reference to Exhibit 10.13 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1995.
(11) Incorporated by reference to Exhibit 10.14 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1995.
(12) Incorporated by reference to Exhibit 10.17 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1995.
<PAGE>
(13) Exhibit contains portions for which confidential treatment has been granted
to the Company.
(14) Incorporated by reference to Exhibit 10.18 to the Company's Registration
Statement on Form S-1 (Registration No. 33-91928).
(15) Incorporated by reference to Exhibit 10.19 to the Company's Registration
Statement on Form S-1 (Registration No. 33-91928).
(16) Incorporated by reference to Exhibit 10.20 to the Company's Registration
Statement on Form S-1 (Registration No. 33-91928).
(17) Incorporated by reference to Exhibit 10.21 to the Company's Registration
Statement on Form S-1 (Registration No. 33-91928).
(18) Incorporated by reference to Exhibit 10.22 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1995.
(19) Incorporated by reference to Exhibit 10.23 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1995.
(20) Incorporated by reference to Exhibit 10.24 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1995.
(21) Incorporated by reference to Exhibit 10.25 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1995.
(22) Incorporated by reference to Exhibit 10.26 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1995.
(23) Incorporated by reference to Exhibit 10.27 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1995.
(24) Incorporated by reference to Exhibit 10.12 to the Company's Registration
Statement on Form S-1 (Registration No. 33-91928).
<PAGE>
SPINE-TECH, INC.
EXHIBIT 11---STATEMENT RE: COMPUTATION OF INCOME (LOSS) PER SHARE
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- --------------------------
1997 1996 1997 1996
------------- ------------ ------------ ----------
<S> <C> <C> <C> <C>
PRIMARY INCOME (LOSS) PER SHARE:
Weighted average shares outstanding 10,091,531 9,824,959 10,051,533 9,765,828
Net effect of dilutive stock options --
based on the treasury stock method 1,649,252 -- 1,594,973 --
------------- ------------ ------------ ----------
11,740,783 9,824,959 11,646,506 9,765,828
------------- ------------ ------------ ----------
------------- ------------ ------------ ----------
Net income (loss) $ 2,949,818 $ (585,457) $ 4,139,315 $ (940,461)
------------- ------------ ------------ ----------
------------- ------------ ------------ ----------
Primary income (loss) per share $ 0.25 $ (0.06) $ 0.35 $ (0.10)
------------- ------------ ------------ ----------
------------- ------------ ------------ ----------
FULLY DILUTED INCOME (LOSS) PER SHARE:
Weighted average shares outstanding 10,091,531 9,824,959 10,051,533 9,765,828
Net effect of dilutive stock options --
based on the treasury stock method 1,603,075 -- 1,603,075 --
------------- ------------ ------------ ----------
11,694,606 9,824,959 11,654,608 9,765,828
------------- ------------ ------------ ----------
------------- ------------ ------------ ----------
------------- ------------ ------------ ----------
Net income (loss) $ 2,949,818 $ (585,457) $ 4,139,315 $ (940,461)
------------- ------------ ------------ ----------
------------- ------------ ------------ ----------
Fully diluted income (loss) per share $ 0.25 $ (0.06) $ 0.35 $ (0.10)
------------- ------------ ------------ ----------
------------- ------------ ------------ ----------
</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 SIX
MONTHS ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 1,970,537
<SECURITIES> 19,396,505
<RECEIVABLES> 7,408,558
<ALLOWANCES> 161,862
<INVENTORY> 5,627,447
<CURRENT-ASSETS> 33,659,863
<PP&E> 7,408,447
<DEPRECIATION> 710,680
<TOTAL-ASSETS> 41,557,630
<CURRENT-LIABILITIES> 4,496,051
<BONDS> 0
0
0
<COMMON> 101,036
<OTHER-SE> 36,960,543
<TOTAL-LIABILITY-AND-EQUITY> 41,557,630
<SALES> 23,642,941
<TOTAL-REVENUES> 23,642,941
<CGS> 5,400,636
<TOTAL-COSTS> 5,400,636
<OTHER-EXPENSES> 11,744,871
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 6,902,315
<INCOME-TAX> 2,763,000
<INCOME-CONTINUING> 4,139,315
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,139,315
<EPS-PRIMARY> .35
<EPS-DILUTED> .35
</TABLE>
