-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JiUPwoD1opUjGyd38m/gNLUCrYQ2N8unS9WHJbns8rBBMZJncbxDmUiFOoFCL4Sv AGjzz4Phluwzbj6nFEsJiw== 0000950144-97-002719.txt : 19970324 0000950144-97-002719.hdr.sgml : 19970324 ACCESSION NUMBER: 0000950144-97-002719 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970321 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SOFAMOR DANEK GROUP INC CENTRAL INDEX KEY: 0000873730 STANDARD INDUSTRIAL CLASSIFICATION: ORTHOPEDIC, PROSTHETIC & SURGICAL APPLIANCES & SUPPLIES [3842] IRS NUMBER: 351580052 STATE OF INCORPORATION: IN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-12544 FILM NUMBER: 97560601 BUSINESS ADDRESS: STREET 1: 1800 PYRAMID PLACE CITY: MEMPHIS STATE: TN ZIP: 38132 BUSINESS PHONE: 9013962695 MAIL ADDRESS: STREET 1: 1800 PYRAMID PL CITY: MEMPHIS STATE: TN ZIP: 38132 FORMER COMPANY: FORMER CONFORMED NAME: DANEK GROUP INC /IN DATE OF NAME CHANGE: 19930328 10-K 1 SOFAMOR DANEK GROUP, INC. 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------- FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1996 ------------------------------------------------ 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. - -------------------------------------------------------------------------------- (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) Indiana 35-1580052 - -------------------------------------- -------------------------- (STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 1800 Pyramid Place, Memphis, Tennessee 38132 - --------------------------------------------- -------------------------- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (901) 396-2695 --------------------- 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 - ---------------------------------- ------------------------------------------ SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: - -------------------------------------------------------------------------------- (TITLE OF CLASS) 2 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 ----- ------------ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment of this Form 10-K. [ ] At February 28, 1997, based on the closing sales price of the Common Stock, as reported on the New York Stock Exchange, the aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $753,605,368. At February 28, 1997, there were 24,564,306 shares of registrant's common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's definitive Proxy Statement relating to its 1997 Annual Meeting of Shareholders are incorporated by reference in Part III of this Form 10-K. Certain exhibits to registrant's Form S-1 Registration Statement No. 33-39593, registrant's Annual Report on Form 10-K for the fiscal years ended December 31, 1991, 1992, 1993, 1994 and 1995 and registrant's Form S-4 Registration Statement No. 33-63040 are incorporated by reference in Part IV of this Form 10-K. 3 TABLE OF CONTENTS AND CROSS REFERENCE SHEET
PAGE NUMBER ----------- PART I Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Use of Spinal Implants . . . . . . . . . . . . . . . . . . . . . . 2 Principal Products . . . . . . . . . . . . . . . . . . . . . . . . 2 Marketing and Distribution . . . . . . . . . . . . . . . . . . . . 4 Manufacturing and Quality Control . . . . . . . . . . . . . . . . 4 Research and Product Development . . . . . . . . . . . . . . . . . 5 New Product Opportunities . . . . . . . . . . . . . . . . . . . . 5 Government Regulations . . . . . . . . . . . . . . . . . . . . . . 6 Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Patents, Trademarks and Copyrights . . . . . . . . . . . . . . . . 8 Royalty and Other Payments . . . . . . . . . . . . . . . . . . . . 9 Raw Materials . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Principal Customers . . . . . . . . . . . . . . . . . . . . . . . 9 Environmental . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . 13 Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . . . . . 13 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . 15 Item 6. Selected Consolidated Financial Data . . . . . . . . . . . . . . . . 16 Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition . . . . . . . . . . . . . . . . 17 Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . 24 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . . . . . . . 45 PART III Item 10. Directors and Executive Officers of the Registrant . . . . . . . . . 45 Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . 45 Item 12. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . . . . . . . . . . . . . . 45 Item 13. Certain Relationships and Related Transactions . . . . . . . . . . . 46 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
4 PART I ITEM 1. BUSINESS. OVERVIEW* Sofamor Danek Group, Inc. is primarily engaged in the development, manufacturing and marketing of spinal implant devices which are used in the surgical treatment of spinal conditions such as degenerative diseases, deformities and trauma. The objective of spinal implants is to facilitate fusion of elements of the spine. Demand for the Company's products is affected by both the number of spinal fusions performed and the percentage of these operations which utilize spinal implants. The Company is an Indiana corporation formed in 1983. The Company changed its name from Biotechnology, Inc. to Danek Group, Inc. in August 1990, and from Danek Group, Inc. to Sofamor Danek Group, Inc. in June 1993. Sofamor Danek Group, Inc.'s principal offices are located at 1800 Pyramid Place, Memphis, Tennessee 38132, and its telephone number is (901) 396-2695. As used in this Report, unless the context indicates otherwise, Sofamor Danek Group, Inc. and its subsidiaries are collectively referred to as the "Company" and, unless otherwise indicated, all subsidiaries are wholly owned. "Sofamor" and "Danek" are trademarks of the Company. The executive offices, administrative offices and U.S. distribution facility of the Company are located in Memphis, Tennessee, and its U.S. manufacturing operations are conducted near Warsaw, Indiana, Broomfield, Colorado, West Palm Beach, Florida and Las Vegas, Nevada. The Company also has a major manufacturing and distribution facility in Rang-du- Fliers, France and distributes its products primarily through its subsidiaries in France, Germany, Spain, Italy, Hong Kong, Japan, the Benelux region, Australia, Korea, Puerto Rico and Canada. The Company's principal products include the TSRH(R) Spinal System, the Cotrel-Dubousset line of products and the ORION(TM) Anterior Cervical Plate System (the "ORION System"). The TSRH components are part of a specialized system of support rods and locking bolts which the Company believes allows for increased torsional and axial spinal support. The Cotrel-Dubousset ("CD") line of products include the CD(TM) Spinal Instrumentation System ( the "CD System"), Compact CD System (the "CCD(TM) System") and the CD HORIZON(TM) Spinal System (the "CD HORIZON System"). The CD System includes spinal rods, hooks, and transverse traction devices which lock implants together and is principally used to treat conditions of the spine in the thoracic and lumbar regions. The CCD System is principally for ease of use by the surgeon when treating spinal conditions of the lumbar and sacral spine and incorporates many of the same type of components found in the CD System. The CD HORIZON System combines new types of hooks and screws with components of several other systems to treat various spinal conditions. The ORION System consists of plate and screws and is used to treat conditions of the anterior cervical spine. Additional new products are now under development. (See "Business-- New Product Opportunities.") The Company expanded its product line in 1996 with the acquisition of MedNext, Inc., Surgical Navigation Technologies, Inc. and certain net assets of TiMesh Inc. MedNext's product line consists of a high-speed pneumatic drill, accessory equipment and disposable burs for surgical specialties. Surgical Navigation's product line consists - ----------------------------- * Except for the historical information contained in this Annual Report on Form 10-K, the matters discussed herein, including (without limitation) those discussed in "New Product Opportunities," "Government Regulations," "Insurance," "Legal Proceedings" and "Management's Discussion and Analysis of Results of Operations and Financial Condition", are forward-looking statements that involve risks and uncertainties, including (without limitation) the timely development and acceptance of new products, the impact of competitive products, the timely receipt of regulatory clearances required for new products, the regulation of the Company's products generally, the disposition of certain litigation involving the Company and the other risks and uncertainties detailed from time to time in the Company's periodic reports filed with the Securities and Exchange Commission. For information regarding potential factors that could affect the Company's operating results and financial condition see "Factors That May Affect Future Operating Results and Financial Condition" contained in Part II, Item 7, "Management's Discussion and Analysis of Results of Operations and Financial Condition" of this Annual Report on Form 10-K. The description of products or proposed products and technologies in this Annual Report on Form 10-K is not intended nor should be construed as labeling for the Company's products. Readers should not rely on this document for decisions to purchase, indications in use, and/or instructions in use, and should see, read and follow all package inserts accompanying the Company's products. 1 5 of frameless stereotactic surgical products relating to the spinal and neurological fields. The Timesh product line includes titanium plates and alloy screws used to treat conditions in the cranial (head and facial) region. The Company's strategy is to continue its focus on product development and marketing to its worldwide customer base. The Company markets its products in the U.S. to spinal surgeons through its network of approximately 180 independent commissioned sales representatives. Prior to July 1, 1994, the CD System and CCD System were sold in the U.S. by an independent third-party distributor. (See Item 7, "Management's Discussion and Analysis of Results of Operations and Financial Condition--Overview"). The Company markets its products internationally to spinal surgeons in approximately 65 countries primarily through a network of independent distributors and agents. In France, Germany, Spain, Italy, Hong Kong, Japan, the Benelux region, Australia, Korea, Puerto Rico and Canada, the Company's subsidiaries distribute products. USE OF SPINAL IMPLANTS Spinal fusions are performed to treat diseases and conditions such as the following: DEGENERATIVE DISEASES. Typically occurring in mature adults, degenerative diseases of the spine can result in immobility, pinched nerves and associated pain for the patient. DEFORMITIES. Deformities, unless treated at a young age, can prevent proper growth of the spine and can be life threatening if allowed to progress. Spinal implants straighten the spine to allow for proper alignment of internal organs. TRAUMA. The typical cause of traumatic spinal conditions is automobile accidents. Spinal implants are used to facilitate the fusion of two or more vertebrae in the spine. The potential benefit of a spinal implant is increased spinal stability in order to facilitate fusion of the vertebrae. A surgeon's decision to treat a spinal condition with an implant is based on many factors. The relative severity of the patient's condition, such as the degree of the curvature of the spine, is assessed against the potential risks and benefits of the spinal operation. The age of the patient, the patient's medical history and the physical condition of the patient (i.e., the ability to withstand surgery) are all important considerations in deciding which treatment path to implement. Until the mid-1980's, surgeons had limited implant options for treating spinal conditions. Surgeons treating spinal conditions either did so without implants or utilized basic implant devices. These devices often did not, however, sufficiently immobilize the spine, and thus limited the fusion rate and efficacy of the procedures. In seeking better alternatives for spinal fusions, surgeons began to use implants designed primarily to provide greater structural support for the spine, which would enhance the healing process. Over the last several years, clinical studies have shown that surgeries using spinal implants are more effective in immobilizing the spine than surgeries in which implants are not used. PRINCIPAL PRODUCTS TSRH(R) SPINAL SYSTEM. The TSRH Spinal System traces its origins to research conducted at the Texas Scottish Rite Hospital in Dallas, Texas and is used primarily to treat patients afflicted with scoliosis or deformities of the spine. The Company manufactures and distributes the TSRH Spinal System under agreements pursuant to which the Company has received the exclusive worldwide rights to the products in exchange for an agreement to pay a percentage of net sales of the products. Sales of the TSRH Spinal System accounted for 33% of the Company's consolidated sales in 1996, 38% in 1995 and 43% in 1994. "TSRH" is a trademark of the Company. In 1989, the Company introduced the TSRH Spinal System at the American Academy of Orthopaedic Surgeons' annual meeting and began shipments of the product. The system consists of specialized hooks, plates and screws that are attached to rods through locking bolts. There are special configurations of the system available to address 2 6 specific applications such as pediatric surgery and adult lumbar surgery. This system is marketed in the U.S. as a spinal device system. (See "Business--Government Regulations.") The Company has added enhancements to the TSRH Spinal System, including the Variable Angle Screw, Central Post Hook, Lateral Offset Plate, Open Eyebolt, and Top Tightening components. The Variable Angle Screw provides flexibility in screw placement in relation to the spinal rod. Similarly, the Central Post Hook offers versatility in hook placement. The Lateral Offset Plate allows variations in the lateral distance between a hook or sacral screw and the spinal rod. The Open Eyebolt can be used when an eyebolt must be added after all hooks and CROSSLINK(R) plates are in place. The Top Tightening components incorporate T-bolts, hooks, sacral/iliac screws, and staples into a comprehensive spinal implant system. These enhancements provide interchangeability of components and improved ease of use for surgeons. The TSRH Spinal System is covered by various patents. COTREL-DUBOUSSET LINE OF PRODUCTS. The Cotrel-Dubousset line of products traces its origin to the development of the CD System by Dr. Yves Paul Cotrel in cooperation with Sofamor, S.N.C. ("Sofamor"), a subsidiary of the Company, and with the assistance of Professor Jean Dubousset. Sales of the Cotrel-Dubousset line of products accounted for 23% of the Company's consolidated sales in 1996, 26% in 1995 and 30% in 1994. COTREL-DUBOUSSET SPINAL INSTRUMENTATION SYSTEM. The CD System was introduced in 1984 following years of development by Dr. Yves Paul Cotrel in cooperation with Sofamor and with the assistance of Professor Jean Dubousset. The CD System was designed primarily to treat patients afflicted with spinal deformities and fractures of the spine in the thoracic and lumbar regions. The principal components of the CD System include spinal rods, hooks, sacral screws and transverse traction devices which lock implants together and a wide range of instruments used to position and secure the implants. COMPACT COTREL-DUBOUSSET SYSTEM. In response to the growing utilization of spinal instrumentation in the treatment of degenerative diseases, Sofamor developed the CCD System. The CCD System was designed principally for the treatment of degenerative spinal conditions of the lumbar and sacral spine. CD HORIZON(TM) SPINAL SYSTEM. The CD HORIZON System combines new types of hooks and screws with components of several other systems for the treatment of various spinal conditions. Each of the CD, CCD and CD HORIZON Systems is marketed in the U.S. as a spinal device system and is covered by various patents; "CD," "CCD" and "CD HORIZON" are trademarks of the Company. (See "Business--Government Regulations.) ORION(TM) ANTERIOR CERVICAL PLATE SYSTEM. The ORION Anterior Cervical Plate System was introduced in 1994 following development in 1992 by the Company with the assistance of Gary L. Lowery, M.D., Ph.D. This system is indicated for use in stabilizing the anterior cervical spine during the development of a solid spinal fusion in patients with degenerative diseases, traumatic fractures, and tumors. The system consists of a plate and screws which attach to the anterior cervical spine (front part of the neck). The Company manufactures and distributes the ORION System under agreements pursuant to which the Company obtained the exclusive worldwide rights to the products in exchange for an agreement to pay a percentage of the net sales of the products. This system is marketed in the U.S. as a spinal device system. (See "Business--Government Regulations.") The ORION Anterior Cervical Plate System accounted for 10% of the Company's consolidated sales in 1996, 8% in 1995 and 3% in 1994. The system is covered by various patents; "ORION" is a trademark of the Company. 3 7 MARKETING AND DISTRIBUTION The Company's products currently are used in hospitals and clinics throughout the U.S. These hospitals and clinics (and their surgeons) are served by a network of approximately 180 independent commissioned sales representatives. Prior to July 1, 1994, the CD System and CCD System were sold in the U.S. by an independent third-party distributor. (See Item 7, "Management's Discussion and Analysis of Results of Operations and Financial Condition--Overview.") The Company's direct marketing and distribution activities in the U.S. are performed primarily from Memphis, Tennessee through Danek Medical, Inc. ("Danek Medical"), a subsidiary that the Company acquired in 1985. Danek Sales Corporation, a subsidiary of the Company, provides marketing support in the U.S. In meeting the needs of hospitals and clinics, the Company offers various instrument and implant purchase alternatives. For example, one implant purchase alternative is often referred to as a "loaner program" whereby a complete implant system is shipped overnight for next-day surgery. The customer is charged only for the components used, and a premium over the published list price is charged to defray the additional cost of the program. Internationally, the Company distributes its products primarily through Company subsidiaries in France, Germany, Italy, Spain, Hong Kong, Japan, the Benelux region, Australia, Korea, Puerto Rico and Canada. Sofamor is responsible for the marketing and distribution of the Company's products in France. In Germany, Sofamor Danek GmbH ("Sofamor Germany"), a subsidiary, directly sells the Company's products. Sofamor Danek Asia Pacific Ltd., a subsidiary, is responsible for marketing support and direct selling in Hong Kong and China. The Company also has subsidiaries in Milan, Italy (Sofamor Danek Italia S.r.l.) and in Madrid, Spain (Sofamor Danek Iberica S.A.), each of which is responsible for selling to customers directly and, in the case of Sofamor Danek Italia, S.r.l., to regional distributors as well. Sofamor Danek Benelux, a majority-owned sales and distribution subsidiary, markets products in Belgium, The Netherlands and Luxembourg. The Company's subsidiary in Japan, Kobayashi Sofamor Danek K.K., is co-owned by the Company and Kobayashi Pharmaceutical Co., Ltd., the Company's distributor in Japan; however, the Company controls the financial and operational direction of the subsidiary. The Company sells the products it manufactures to its subsidiary, Kobayashi Sofamor Danek K.K., which, in turn, resells the product in Japan at near retail prices through Kobayashi Pharmaceutical's distribution network. The Company's subsidiary in Korea, Danek Korea Co., Ltd., is co-owned by the Company and Joint Medical Company, the Company's distributor in Korea; however, the Company controls the financial and operational direction of the subsidiary. The Company sells the products it manufactures to its subsidiary, Danek Korea Co., Ltd., which, in turn, resells the products in Korea at near retail prices through Joint Medical Company's distribution network. The Company also has subsidiaries in Australia (Sofamor Danek Australia Pty. Ltd.), Canada (Sofamor Danek Canada, Inc.) and Puerto Rico (Sofamor Danek Puerto Rico, Inc.), each of which is responsible for selling to customers directly or, in certain cases, to regional distributors in their respective countries. Products are distributed to other countries through independent distributors and agents. The independent distributors have contractual distribution rights to geographical territories in which they have established organizations. International sales have amounted to $82,298,000 and $62,474,000, representing approximately 34% and 33% of total sales in 1996 and 1995, respectively. The Company's backlog of firm orders is not considered material to an understanding of its business. MANUFACTURING AND QUALITY CONTROL The Company's products are manufactured in the U.S. primarily by the Company's subsidiary, Warsaw Orthopedic, Inc. ("Warsaw Orthopedic"), which the Company acquired in 1983. Warsaw Orthopedic is located near Warsaw, Indiana. The Company's products are also manufactured by its subsidiaries, Surgical Navigation Technologies, Inc., located in Broomfield, Colorado, MedNext, Inc. of West Palm Beach, Florida and Sofamor Danek Nevada, Inc., which is located in Las Vegas, Nevada. As a medical device manufacturer, the Company is subject to stringent "good manufacturing practices" and regulations as stipulated by the Food and Drug Administration ("FDA"). (See "Business--Government Regulations.") The Company has installed computer controlled machinery in its manufacturing operations, resulting in greater flexibility in the manufacturing process and enabling the Company to be cost efficient. The Company also utilizes comprehensive, integrated MIS (management information system) 4 8 software for production, planning and scheduling. The Company employs a broad range of inspection and quality assurance standards. The Company utilizes in-process testing and inspection methods in the manufacturing process to produce quality products. The design and layout of the Company's manufacturing facilities affords the Company flexibility to increase production capacity. Outside the U.S., product manufacturing is done primarily by Sofamor, located in Rang-du- Fliers, France. Some of the manufacturing outside the U.S. is performed by subcontractors. Sofamor has a 33.75% equity investment in one of the subcontractors. RESEARCH AND PRODUCT DEVELOPMENT The Company's U.S. and European research and product development activities are carried on by Danek Medical in Memphis, Tennessee, MedNext, Inc. in West Palm Beach, Florida, Sofamor Danek Nevada, Inc. in Las Vegas, Nevada, Surgical Navigation Technologies, Inc. in Broomfield, Colorado and by Sofamor in its Paris, France office. These departments, with over 60 engineers, have significant experience in biomedical product design and are divided into functional groups, focusing on key product groups. The Company has continued to expand its CAD/CAM (computer assisted design/computer assisted manufacturing) capabilities internationally, as well as its functional testing programs. The Company has also expanded its activities in the area of clinical trials and the manufacturing of special order implants for products used outside the U.S. In addition, the Company has continued to integrate projects among all its development groups in order to leverage its resources while enhancing its time to market on a global basis. The Company incurred research and development expenses of approximately $15,926,000, $13,980,000 and $11,572,000 for the years ended December 31, 1996, 1995 and 1994, respectively. NEW PRODUCT OPPORTUNITIES The following new products are currently either under development or are being considered by the Company for possible future development. BIOLOGICAL PRODUCTS FOR USE IN SPINAL RECONSTRUCTION. In February 1995, the Company entered into a strategic alliance with Genetics Institute, Inc. ("Genetics Institute") to provide biological products for use in spinal applications. The products will use Genetics Institute's recombinant human bone morphogenetic protein (rhBMP-2) to induce bone growth necessary for the treatment of spinal disorders. The Company has obtained exclusive North American rights to these rhBMP-2 proprietary technologies and patents for spinal applications. Pursuant to the terms of the agreement, the Company will pay Genetics Institute $50 million over four years, of which $12.5 million was paid in each of 1995 and 1996. FDA review and approval, which will require the conduct of clinical trials, will also be necessary to market these biological products. The Company will purchase the rhBMP-2 product from Genetics Institute. The Company is considering a variety of different carriers for the Genetics Institute proteins. One potential carrier is a porous polymer to which the Company has obtained worldwide rights under an exclusive license. If this porous polymer carrier is utilized with rhBMP-2, royalty payments will be due to the owner of the polymer technology. SPINAL FUSION IMPLANTS, INSTRUMENTS AND METHOD TECHNOLOGIES. In January 1994, the Company acquired various patented technologies for an interbody fusion device used in the stabilization of the spine during a spinal fusion and discectomy. The Company has also entered into a licensing agreement for the worldwide rights to these patented technologies covering implants, instruments and methodologies for simultaneously performing a discectomy, a fusion and an internal stabilization of the spine. The Company sold the devices covered by the patented technologies internationally during 1996 and, after FDA authorization, will begin commercializing the devices in the U.S. The Company pays a royalty based on a percentage of the net sales of the devices. 5 9 OPEN PORE TANTALUM STRUCTURE MATERIAL. In February 1995, the Company entered into an agreement with Implex Corporation under which the Company obtained the exclusive worldwide rights to certain patented proprietary material technologies for spinal applications. This material is used in the manufacture of the Company's interbody fusion devices for distribution outside the U.S. and, when authorized by the FDA, for U.S. distribution. PROSTHETIC DISC PROGRAM. The Company is actively evaluating various designs for the replacement of diseased and/or damaged discs. These designs are at various stages of development and would ultimately require pre-market approval by the FDA prior to marketing in the U.S. There can be no assurances that the products described above in this section will be marketed or that FDA authorization will be received. Spinal implants and other related devices are typically rendered obsolete within a few years. While the Company maintains active research and development programs, there can be no assurance that it will be able to develop and introduce new products that will enable it to remain competitive in the future. (See Item 7, "Management's Discussion and Analysis of Results of Operations and Financial Condition--Factors That May Affect Future Operating Results and Financial Condition--Product Obsolescence.") GOVERNMENT REGULATIONS In the United States, the Company is subject to regulation by the FDA. FDA regulations govern the labeling, promotion and sale of medical devices and require the Company to maintain certain standards and practices with respect to the manufacturing and labeling of devices, the maintenance of certain records and medical device reporting. The Company's facilities and records are subject to FDA inspections. The FDA is the agency responsible for the regulation of medical devices in the U.S. pursuant to the Food, Drug and Cosmetic Act (as amended by the 1976 Medical Devices Amendment), the Safe Medical Devices Act of 1990 (as amended in 1992), the regulations promulgated thereunder and guidance documents and instructions issued by the FDA. In general, prior to entering commercial distribution, medical devices must undergo FDA review, either pursuant to a Section 510(k) notification or a Pre-Market Approval ("PMA") application filed by the manufacturer of the device. A Section 510(k) notification is a filing submitted to demonstrate that the device in question and its labeling are "substantially equivalent" to "a legally marketed device" and its labeling. In contrast, a PMA must demonstrate that the device is safe and effective; it is a more complex submission that typically includes a two-year follow-up of a controlled human clinical study. Factors that dictate whether a Section 510(k) notification or a PMA is required include: whether the device and its labeling are "substantially equivalent" to a "legally marketed device" and its labeling. The process of obtaining marketing authorizations can be time consuming, and there can be no assurance that all the necessary authorizations will be granted to the Company with respect to new products and devices developed by the Company. All of the Company's implants currently marketed in the U.S. are covered by Section 510(k) notifications with limited exceptions, such as custom implants. As devices become increasingly innovative, it is difficult to establish that a device is "substantially equivalent" to another "legally marketed device" and thereby obtain Section 510(k) clearance for a new product. Additionally, as clarified by the Safe Medical Devices Act of 1990, the FDA could, and generally does, decide to require the submission of additional data. It is impossible to predict whether additional changes will be made in the Section 510(k) clearance practices and whether any such changes could have an adverse effect on the Company and its business. The Company cannot predict the extent or impact of future federal, state or local legislation or regulation. Federal law provides that manufacturers can label and promote new medical devices only for indications that have been allowed by the FDA. The Company's Section 510(k) clearances do not indicate use of any product for interpedicular segmental fixation (use of screws in the pedicle, a bony support structure, of the spine) other than for limited uses pursuant to Section 510(k) clearances that the Company began receiving in January 1995 (discussed 6 10 further below). Since the FDA does not regulate the practice of medicine, physicians may use products for applications that have not yet been cleared by the FDA for such a labeling indication if such use is deemed in their medical judgment to be in the patient's best interests. Thus, as part of the practice of medicine, physicians may at their discretion and in the exercise of their medical judgment use any screws (or any other suitable products) for such fixation. Although this practice may continue in the future, the Company does not encourage nor can it predict such use. In January 1995, the Company received Section 510(k) clearance to begin labeling and marketing the stainless steel version of the TSRH Spinal System for pedicle screw attachment only for treating selected patients with grade 3 or 4 severe spondylolisthesis of the fifth lumbar - first sacral (L5-S1) vertebral joint. The clearance is based on this spinal system having been found equivalent only to similar device systems labeled and intended for patients: (a) who have severe spondylolisthesis (grades 3 and 4) of the fifth lumbar - first sacral (L5-S1) vertebral joint; (b) who are receiving fusions using autogenous bone graft only; (c) who are having the device fixed or attached to the lumbar and sacral spine; and (d) who are having the device removed after the development of a solid fusion mass. This clearance requires the addition of specific warnings to the labeling of the product. Since that time, many other systems offered by the Company have received clearance for similar labeling. In May 1990, the Director of the FDA's Division of Compliance Operations for the Center for Devices and Radiological Health sent a letter to approximately 80 manufacturers and distributors of medical devices, including the Company, which advised that companies must not label, or in any way promote, devices to be used in the U.S. for pedicular screw attachment to, or fixation of, the vertebral column. The Company examined all of its literature and voluntarily recalled one brochure used to recruit clinical investigators. This recall was examined for effectiveness by the FDA beginning in May 1991 and found to be complete in February 1992. In August 1993, the Company and six other companies received warning letters from the FDA, primarily regarding the issue of supporting medical education programs where physicians "demonstrate" the use of screws in the pedicle of the spine. The Company responded to the warning letter, and no official response from the FDA has ever been received. In February 1995, the Company received a warning letter from the FDA regarding the wording in a Company press release and "Dear Doctor" letter relating to the January 1995 Section 510(k) clearance referred to above. The Company submitted a written response to the FDA on March 17, 1995 and took certain actions in response to the letter. The Company believes that it has taken all the appropriate actions possible regarding this matter. With respect to a different but related matter, in April and June 1994, many orthopaedic companies received letters from the FDA stating that certain warning statements must appear on all labeling of certain devices. The Company believes it is complying with all labeling requirements for those devices in the U.S. that need such warning statements. The Company cannot, however, rule out the possibility that the FDA could bring a regulatory action without further notice against the Company with respect to any of the matters referred to above. Such regulatory action might include, but would not be limited to, civil and/or criminal penalties, an injunction against any distribution in the U.S., seizure, fines, and/or recall of any Company product or labeling. The inability to continue to sell certain products could have a material adverse impact on the Company's business and financial condition. The Company's products are also subject to regulation by foreign governmental and regulatory authorities. The Company believes that it has all necessary foreign authorizations where its products are sold. There can be no assurances that foreign regulatory requirements will not become more stringent in the future. In Europe, individual European Union ("EU") members have required compliance and testing for some devices (e.g., electromedical devices), but in most countries testing of implants has been voluntary. A Medical Devices Directive (the "Directive") for the EU was adopted on June 14, 1993. Proof of compliance with the harmonized standards will be presumptive proof of compliance with the legal requirements in each EU member country. If compliance with the standards cannot be demonstrated or standards have not been issued for the product in question, the manufacturer will have to supply an application that proves the product is safe and effective. While there is uncertainty as to the specific national enabling legislation, the Company does not anticipate any special 7 11 concerns uniquely applicable to the Company since this legislation affects all medical device manufacturers and distributors. There can be no assurance that new legislation will not cause delays or disruptions in the marketing of the Company's products in Europe. In 1995, the Company's Memphis, Warsaw and French facilities were ISO 9001 certified pursuant to the Directive. The Company believes it is well positioned to compete in the European market when the regulations take full effect in 1998. All of the Company's products are prescription devices that are in the U.S. for sale only by or on the order of a physician. Neither this document nor any other communication to the financial community by the Company is intended or should be construed as labeling for the Company's products. Any learned intermediary or health care professional who reads this document or any other communication to the financial community should not rely on this document for decisions to purchase, indications in use and/or instructions in use. Instead, any health care professionals who may read this or any other Company document should see, read and follow all package inserts accompanying the Company's products. (See Item 7, "Management's Discussion and Analysis of Results of Operations and Financial Condition--Factors That May Affect Future Operating Results and Financial Condition--Regulatory Approvals.") COMPETITION Worldwide, there are many firms producing spinal implant devices. Because of the significant growth of the number of spinal fusion procedures performed in recent years, a number of companies, including those producing various medical devices and having financial, marketing and technical resources significantly greater than those of the Company, have begun to market and sell spinal devices. The Company anticipates that additional companies will also begin similar efforts. The Company believes that it competes based on (i) the Company's participation, through medical symposia and seminars, in the education of surgeons in the cleared uses of implant products, (ii) the Company's emphasis on research and development, (iii) the introduction of new products and systems, (iv) the quality of the Company's products and their ease and versatility of use by surgeons, (v) the Company's association with spinal surgeons and (vi) the Company's focus on spinal products coupled with a solid infrastructure of experienced management personnel. (See Item 7, "Management's Discussion and Analysis of Results of Operations and Financial Condition-- Factors That May Affect Future Operating Results and Financial Condition--Competition.") EMPLOYEES The Company had approximately 810 employees at December 31, 1996. No U.S. employee of the Company is represented by a labor union or is subject to a collective bargaining agreement. All of the employees outside the U.S. are covered by applicable industry collective bargaining agreements as may be required by government authorities in the respective countries where those employees are located. The Company has never experienced a work stoppage due to labor difficulties. PATENTS, TRADEMARKS AND COPYRIGHTS As of December 31, 1996, the Company owned or held licenses to 154 inventions covered by 232 patents and had 451 applications pending on 121 more inventions covering the full spectrum of its product lines in the U.S. and major countries throughout the world. In addition, the Company has acquired rights under various purchase, license or distribution agreements related to the design, manufacture and distribution of certain products and devices. (See "Business--Principal Products.") The Company has 38 registered trademarks and applications pending for registration on 36 other marks in the U.S. and other major countries throughout the world. The Company currently has six registered copyrights for certain of its product manuals and two other applications pending. (See Item 7, "Management's Discussion and Analysis of Results of Operations and Financial Condition--Factors That May Affect Future Operating Results and Financial Condition--Intellectual Property.") 8 12 ROYALTY AND OTHER PAYMENTS The Company has agreements with certain unaffiliated entities which provide the Company with the rights to manufacture and market certain spinal system products developed by these entities. These agreements provide for payments ranging from 1% to 10% of the net selling prices (as defined by the agreements) of all products sold. These agreements are in force as long as the Company sells these products. Royalty expenses and licensing fees made pursuant to the agreements referred to above during fiscal years 1996, 1995 and 1994 were approximately $6,768,000, $5,907,000 and $4,083,000, respectively. RAW MATERIALS Implant grade stainless steel and titanium alloy account for the majority of the Company's raw material purchases. There are multiple sources from which the Company may purchase this type of stainless steel and titanium alloy, and it is available within one to eight months of the time an order is placed. Titanium alloy provides less MRI (magnetic resonance image) interference during imaging of the patient during postoperative follow-up. PRINCIPAL CUSTOMERS The Company does not rely on any single hospital or clinic for a material portion of its business. The Company has over 4,000 hospital and clinic customers, none of which accounts for more than 2% of sales. Prior to July 1, 1994, the CD System and CCD System were distributed in the U.S. through an exclusive agreement with National Medical Specialty, Inc. ("NMS"). This customer accounted for 5% and 16% of the Company's total sales in 1994 and 1993, respectively. In 1996, the Company formed a new subsidiary in Japan which is a joint venture co-owned by the Company and Kobayashi Pharmaceutical Co., Ltd., the Company's former distributor in Japan. This distributor accounted for 10%, 8% and 6% of the Company's total sales in 1996, 1995 and 1994, respectively. The Company sells the products it manufactures to its subsidiary, which, in turn, resells the products in Japan at near retail prices through Kobayashi Pharmaceutical's distribution network. For information relating to the amounts of revenue, operating profit or loss and identifiable assets attributable to each of the Company's geographic areas, see "Notes to Consolidated Financial Statements--Foreign Operations." ENVIRONMENTAL The Company believes it is in compliance in all material respects with all applicable environmental regulations and does not expect to require a material amount of capital expenditures in order to remain in compliance. INSURANCE The Company carries comprehensive and general liability insurance, as well as coverage for product liability. The Company also carries liability insurance coverage for directors and officers. Such directors' and officers' policy contains certain exclusions, including, but not limited to, certain claims by stockholders. (See Item 3, "Legal Proceedings" and Item 7, "Management's Discussion and Analysis of Results of Operations and Financial Condition-Factors That May Affect Future Operating Results and Financial Condition--Product Liability; Insurance.") 9 13 ITEM 2. PROPERTIES. The Company's headquarters and primary U.S. distribution facility are located in Memphis, Tennessee. The Company utilizes a 60,000 square foot owned facility and 9,730 square feet of lease space for these functions. The Company is in need of additional office and distribution space at its Memphis location. The Company is currently considering the alternatives of constructing or leasing a new facility. The primary U.S. manufacturing operations for the Company are conducted in an 83,000 square foot plant located near Warsaw, Indiana, under a lease which expires December 31, 1999, with four one-year extensions available thereafter. Approximately 33,000 square feet of the Warsaw facility are currently not used by the Company. Management believes that the Company's Warsaw facility is suitable for its current use and adequate for the Company's operation for the foreseeable future. The Rang-du-Fliers, France location utilizes a 57,500 square foot facility situated on 10.8 acres of land owned by Sofamor, which also has approximately 16,000 square feet of leased office space in Paris used for marketing, sales, development and administrative activities. Subsidiaries of the Company have leased office space in Milan, Italy, Cologne, Germany, Epping, NSW, Australia, Seoul, Korea, San Juan, Puerto Rico, Mississauga, Canada, Saint Genis Laval, France, Hong Kong, Madrid, Spain, Tokyo and Osaka, Japan, Luxembourg City, Luxembourg, Broomfield, Colorado, Las Vegas, Nevada, and West Palm Beach, Florida. ITEM 3. LEGAL PROCEEDINGS. The Company is involved from time to time in litigation on various matters which are routine to the conduct of this business, including product liability and intellectual property cases. PRODUCT LIABILITY CASES Multidistrict Litigation: In 1994, the Company and other spinal implant manufacturers were named as defendants in purported class action product liability lawsuits in various federal courts throughout the country alleging that plaintiffs were injured by spinal implants manufactured by the Company and others. On August 4, 1994, the Federal Judicial Panel on Multidistrict Litigation ordered that all federal court lawsuits then existing be transferred to and consolidated for pretrial proceedings, including the determination of class certification, in the United States District Court for the Eastern District of Pennsylvania in Philadelphia (the "Multidistrict Litigation"). Federal court lawsuits filed after August 4, 1994 have also been transferred to and consolidated in the Eastern District of Pennsylvania. On February 22, 1995, Chief Judge Emeritus Louis C. Bechtle denied class certification. The federal court lawsuits before Judge Bechtle will remain coordinated for further pretrial purposes but are individual lawsuits. As previously disclosed, as a result of the denial of class certification by Judge Bechtle, a large number of additional plaintiffs have filed lawsuits alleging injuries caused by spinal implants manufactured by the Company. To date, approximately two thousand eight hundred (2,800) plaintiffs have filed lawsuits against the Company, with a few also naming as defendants various officers and directors of the Company. A majority of these plaintiffs filed their claims in 1995. Also, plaintiffs' lawyers have filed lawsuits involving about two thousand eight hundred fifty (2,850) claimants alleging a conspiracy theory among doctors, manufacturers (including the Company), hospitals, teaching institutions, professional societies and others to promote, in violation of applicable law, the use of spinal implants. Some plaintiffs have filed individual lawsuits, whereas other lawsuits list multiple plaintiffs and, in certain instances, multiple lawsuits have been filed on behalf of the same individual plaintiffs. On August 22, 1996, Judge Bechtle dismissed without prejudice plaintiffs' conspiracy claims. Many plaintiffs asserting these conspiracy claims have filed amended or new complaints, but it is not possible at this time to determine precisely how many of these conspiracy complaints will be reasserted or the number of additional plaintiffs that may file lawsuits. The majority of such lawsuits were filed in federal courts throughout the country and are in the preliminary stages. Discovery proceedings, including the taking of depositions, have been ongoing in certain of the lawsuits that were first to be filed. Discovery in certain cases that were filed later will begin in 1997. Over one thousand eight hundred (1,800) of the plaintiffs have had their lawsuits returned to the state court in Memphis, Tennessee because it was determined that the federal courts lacked jurisdiction over their claims. It is anticipated that the Memphis, Tennessee state court judge will establish a schedule for case management and discovery. The trials of a number of 10 14 lawsuits involving individual plaintiffs are scheduled to begin in the first six months of 1997, although delays in trial dates are common. Although plaintiffs have advanced claims under many different legal theories, the essence of plaintiffs' claims appears to be that the Company (including Sofamor and its former U.S. distributor) marketed some of its spinal systems for pedicle fixation in contravention of FDA rules and regulations (governing marketing and labeling), that pedicle fixation has not been proven safe and efficacious in the context of FDA labeling standards and that plaintiffs have suffered a variety of injuries as a result of the use of the systems for pedicle fixation. Plaintiffs in these cases typically seek relief in the form of monetary damages, often in unspecified amounts. Many of the plaintiffs only allege as monetary damages an amount in excess of the jurisdictional minimum for the courts in which such cases are filed. In December 1996, AcroMed Corporation ("AcroMed"), a spinal implant manufacturer and a defendant in various of the cases pending in the Multidistrict Litigation, and the Plaintiffs' Legal Committee in the Multidistrict Litigation announced that they have entered into an understanding to resolve all product liability claims involving the use of AcroMed devices to achieve pedicular fixation in spinal fusion surgery. Under the announced terms of the proposed settlement, AcroMed will establish a settlement fund consisting of $100 million in cash and the proceeds of its product liability insurance policies. The parties submitted in January 1997 a formal class settlement agreement and related documentation for approval by Judge Bechtle. A hearing (scheduled for April 23, 1997) will be held to consider the fairness, adequacy and reasonableness of the settlement. All federal court proceedings involving AcroMed devices have been stayed pending final consideration of the proposed settlement. Tennessee and Oregon Product Liability Actions: In January 1995, the Company and other spinal implant manufacturers, doctors and a hospital were named defendants in a purported class action product liability lawsuit filed in Nashville, Tennessee state court. This lawsuit is limited to those individuals whose surgeries were performed at one specific hospital. Class certification has been denied by the trial judge in Nashville. The judge has selected two of the Company's cases as test cases to be prepared for trial. Fact discovery in these cases is scheduled for completion by March 1997. All other proceedings are stayed. In October 1995, the Company was served with a Portland, Oregon state court complaint that purported to be a class action. This Oregon complaint alleged, among other things, injury based upon various legal theories. In March 1996, the plaintiffs in this Oregon case withdrew the class allegations. Discovery has begun in these individual cases. In these Tennessee and Oregon actions, plaintiffs, who seek relief in the form of monetary damages of unspecified amounts, are continuing their lawsuits as individual cases. The Company believes that it has defenses, including, without limitation, defenses based upon the failure of a cause of action to exist where no malfunction of the implant has occurred or the plaintiff has suffered no injury attributable to the Company's product, the expiration of the applicable statute of limitations and the learned intermediary defense. The Company has and will continue to assert the defenses primarily through the filing of dispositive motions. The Company believes that all product liability lawsuits currently pending against it are without merit and will continue to defend them vigorously. All pending cases are currently being defended by insurance carriers, generally under reservation of rights. To date the cost of defending against claims has been largely reimbursed by the Company's insurers. The Company's insurance policies are reduced by the costs of defense, except for a policy issued by Royal Surplus Lines Insurance Co. ("Royal") covering the 12-month period that began in November 1995 (see below). The Company estimates that the litigation may continue for several years and, if so, the cost to defend and conclude these lawsuits is likely to exhaust its insurance coverage. An insurer, Royal, providing coverage for the 12-month period commencing in November 1995, brought an action in early December 1996 in the Federal District Court for the Middle District of Tennessee (Nashville Division) seeking a declaratory judgment as to, among other things, whether the policy covers lawsuits which have been reported to the insurer during the policy period. At December 31, 1996, the Company had a receivable from Royal of approximately $2.5 million for legal fees associated with the Company's product liability litigation paid by the Company during the policy year. The Company believes that the receivable is recoverable under the terms of the policy. The case is in a preliminary stage. Discovery has just been initiated. The Company believes the suit is without merit and will defend it vigorously. 11 15 As is common in the insurance industry, the Company's insurance policies covering product liability claims must be renewed annually. Although the Company has been able to obtain insurance coverage relating to product liability claims at a cost and on other terms and conditions that are acceptable to the Company, there can be no assurance that in the future it will be able to do so. On January 6, 1997, the Company announced that its 1996 financial results would include a pre-tax charge of $50 million relating to costs associated with the product liability litigation described above. The charge, which has now been reflected in the Company's 1996 financial statements, covers the reasonably foreseeable costs that the Company was positioned in late December to estimate because the litigation had progressed and because changes in the fourth quarter of 1996 had occurred in facts and circumstances relating to the litigation. Among the changed facts and circumstances were the announcement of the AcroMed proposed settlement described above, the additional financial resources available to the plaintiffs' attorneys as a result of the settlement if the proposed settlement is ultimately approved, the likelihood that the litigation will continue for several years, in part, due to the additional financial resources provided to plaintiffs' attorneys if the proposed settlement is approved, the absence of AcroMed as a member of the joint defense group, the status of the Company's insurance described above and the continuing absence of dispositive rulings relating to the Company's defense motions. While it is not possible to accurately predict the outcome of litigation, the amount of the charge taken in the fourth quarter represents the Company's best judgment of the probable reasonable costs (in excess of available insurance) to defend and conclude the lawsuits based on the facts and circumstances currently existing. The costs provided for include, but are not limited to, legal fees paid or anticipated to be paid and other costs related to the Company's defense and conclusion of these matters. The actual costs to the Company could differ from the estimated charge and will be dependent upon a number of factors that will not be known for some time, including, among other things, the resolution of defense motions and the extent of further discovery. Although an adverse resolution of the lawsuits could have a material effect on the Company's results of operations in future periods, the Company does not believe that these matters will in the future have a material adverse effect on its consolidated financial position. The Company is unable to predict the ultimate outcome or the financial impact of the product liability litigation. SECURITIES LAWS ACTIONS Beginning in April 1994, the Company and four of its officers and directors were named in five shareholder lawsuits filed in the United States District Court in Memphis, Tennessee. Four of the lawsuits purport to be class actions. All of the lawsuits were consolidated into one case in the United States District Court in Memphis through an amended complaint which added four new individual defendants who are either current or former directors of the Company. The lawsuit alleges that the defendants made false and misleading statements and failed to disclose material facts to the investing public and seeks money damages. The alleged securities law violations are based on the claim that the defendants failed to disclose that the Company sold its products illicitly, illegitimately and improperly and to timely disclose facts concerning the termination of the former United States distributor of Sofamor products, National Medical Specialties, Inc. ("NMS"). The allegations relating to illicit and illegitimate sales of product are, for the most part, copied from product liability complaints filed against the Company and other manufacturers currently being coordinated in the United States District Court for the Eastern District of Pennsylvania which are referred to above. The allegations of improper sales relate to one of the Company's selling programs which has been publicly disclosed since May 1991. The allegations concerning NMS relate to the termination of the NMS distribution agreement covering Sofamor products in the United States. On October 3, 1995, the United States District Court Judge in Memphis dismissed with prejudice the entire case against the Company and each of the individual defendants. The plaintiffs have appealed the dismissal to the United States Court of Appeals for the Sixth Circuit, which has not yet ruled on this appeal. SPANISH DISTRIBUTOR ACTION In late September 1994, a Magistrate of the Commercial Court in Paris ruled in favor of a former Spanish distributor of Sofamor's products on a claim of wrongful termination of the distribution agreement in 1992. Prior to the 12 16 Combination, an accrual was established, with a related charge to earnings, for this pending litigation. On the Combination date in June 1993, the Company also established a separate indemnity with respect to potential losses resulting from such lawsuit and placed in escrow shares issued to the former Sofamor shareholders pending the final outcome of this lawsuit. The $3.0 million award (including interest) rendered by the French Magistrate exceeded the pre-established accrual. As a result, the Company recorded an expense of $2.2 million for the non-recurring litigation award during the third and fourth quarters of 1994. The Company filed an appeal which involves a complete retrial on all issues. The former Spanish distributor recently filed its papers in the appeal and seeks additional damages; the Company seeks to have the decision of the Commercial Court reversed. A hearing on the appeal is currently scheduled for the fourth quarter of 1997. The Company does not believe the Securities Laws Actions or the Spanish Distributor Action, described above, will have a material adverse effect on its consolidated financial position, results of operations or cash flows because of, among other reasons, the facts and circumstances existing with respect to each action, the Company's belief that these actions are without merit, certain defenses available to the Company and the availability of insurance in the Securities Laws Actions. See Item 7, "Management's Discussion and Analysis of Results of Operations and Financial Condition--Product Liability; Insurance and Intellectual Property." ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not Applicable. EXECUTIVE OFFICERS OF THE REGISTRANT The name, age and position held with the Company of each of the executive officers of the Company are set forth below. No family relationship exists among any of the executive officers.
NAME AGE POSITION - ---- --- -------- E. R. (Ron) Pickard 48 Chairman and Chief Executive Officer, Sofamor Danek Group, Inc. James J. Gallogly 48 President and Chief Operating Officer, Sofamor Danek Group, Inc. R. L. (Lew) Bennett 70 Senior Vice President, Sofamor Danek Group, Inc. Richard E. Duerr, Jr. 50 Vice President, General Counsel and Secretary, Sofamor Danek Group, Inc. Peter J. Elkhuizen 47 President, Sofamor Danek Europe Laurence Y. Fairey 46 Executive Vice President and Chief Financial Officer, Sofamor Danek Group, Inc. Mark D. LoGuidice 41 President, Sofamor Danek USA J. Mark Merrill 37 Vice President, Treasurer and Assistant Secretary, Sofamor Danek Group, Inc. Dr. Marie-Helene Plais 47 Executive Vice President, Sofamor Danek Group, Inc. Gene B. Sponseller 40 President of Manufacturing, Sofamor Danek USA Richard W. Treharne, Ph.D. 47 Vice President of Research and Regulatory Affairs, Sofamor Danek Group, Inc. Don W. Urbanowicz 41 Executive Vice President of Marketing, Sofamor Danek USA
The executive officers of the Company serve at the discretion of the Board of Directors and are elected annually. The following is a brief description of the previous business background of each of the executive officers. Mr. Pickard was President and Chief Operating Officer of the Company from August 1990 until becoming President and Chief Executive Officer on April 1, 1991 and Chairman and Chief Executive Officer on May 23, 1994. From 1968 until joining the Company, Mr. Pickard was employed by Richards Medical Company in varying capacities including Director of Manufacturing (1975-78), Group Director of Manufacturing (1979-1981), Vice President, Manufacturing (1982-1985), and President, Orthopaedics Division (1986-90). Mr. Pickard was appointed as Director of the Company in February 1991. 13 17 Mr. Gallogly has been President and Chief Operating Officer of the Company since June 1994. From 1988 to 1994, he was President and Chief Executive Officer of ReSound Corporation. From 1981 to 1988, Mr. Gallogly held senior executive positions at Richards Medical Company, including President of the Microsurgery Division (1986-1988), Senior Vice President of Microsurgery (1982-1985), and Vice President of Finance and Administration (1981-1982). Prior to 1981, he was employed by Johnson & Johnson, where he held a variety of executive positions. Mr. Bennett has been Senior Vice President of the Company since January 1992. Mr. Bennett joined the Company in January 1991 as Senior Vice President-Sales and Marketing. He has been active in the medical industry for over 35 years, including tenures as divisional sales manager for Ethicon and Vice President-Sales and Vice President-Marketing for the United States, Canada and the Far East for Howmedica, Inc. Ethicon is a division of Johnson & Johnson that specializes in medical sutures. Howmedica, Inc. is an orthopaedic company. Mr. Duerr has been Vice President, General Counsel and Secretary since he joined the Company in June 1991. Mr. Duerr was engaged in the private practice of law prior to joining the Company. From October 1979 through May 1990, Mr. Duerr was employed by Schering-Plough Corporation in a variety of domestic and international capacities. He previously served as an Assistant United States Attorney for the Eastern District of Kentucky and as a law clerk to the Honorable Pierce Lively, Judge of the United States Court of Appeals for the Sixth Circuit. He received his B.A. in 1969 from the University of Notre Dame and is a 1972 graduate of the University of Louisville School of Law. Mr. Elkhuizen joined Sofamor Danek Europe in November 1996 as President. During the past 16 years, Mr. Elkhuizen has held senior executive positions, both in Europe and North America including President of EuroMedical (1993-1996), President of Datascope international (1992-1993), Managing Director of Valleylab Europe (1983-1992) and General Manager of Sterisystems Canada (1980-1983). Mr. Fairey joined Sofamor Danek USA in January 1991 as Vice President-International. He was appointed a Vice President and the Chief Financial Officer of the Company in October 1991 and promoted to Executive Vice President and Chief Financial Officer in July 1992. Prior to joining Sofamor Danek USA, Mr. Fairey was employed by Richards Medical Company since 1973 in various positions, including Controller, Treasurer, Vice President Finance for the International Division and his last position of Vice President of International Operations. Mr. Fairey holds a B.S. degree in accounting and an M.B.A. from the University of Memphis. Mr. LoGuidice has been President of Sofamor Danek USA since February 1995. Prior to that, he spent 16 years with United States Surgical Corporation, most recently in the positions of Vice President of Marketing-Sutures and Vice President of Sales. Mr. LoGuidice is a 1978 graduate of Colgate University and received his M.B.A. from Pace University in 1984. Mr. Merrill is Vice President, Treasurer and Assistant Secretary. He joined the Company in October 1988. Mr. Merrill received his B.S. degree in accounting from Christian Brothers University in 1981. He became a Certified Public Accountant in 1983 and received his M.B.A. with a concentration in finance from the University of Memphis in 1988. Dr. Plais has been Executive Vice President of the Company since November 1996. In August 1987, she joined the Company as Medical Director of Sofamor, became Vice President of Marketing and Sales of Sofamor in 1989 and President of Sofamor Danek Europe in 1993. Prior to joining the Company, she was a consultant in genetic diseases in Brittany, France. Dr. Plais graduated from the University of Paris as a M.D. and holds a Master's Degree in human biology. Mr. Sponseller has been President of Manufacturing, Sofamor Danek USA since September 1990. From 1984 to 1990, he was Vice President and General Manager of Manufacturing Operations. During his career at the Company, he has been responsible for most of its administrative and management functions, including the sales and distribution system that was in place prior to the Company's acquisition of Danek Medical. 14 18 Dr. Treharne joined the Company in November 1990. In January 1991, he was named Vice President of Regulatory and Clinical Affairs of the Company. Prior to joining the Company, Dr. Treharne was with Richards Medical Company. Dr. Treharne has a Ph.D. from the University of Pennsylvania and an M.B.A. from the University of Memphis. In June 1991, Dr. Treharne was named Vice President of Research and Regulatory Affairs and is presently in charge of the research and regulatory efforts of the Company. Mr. Urbanowicz has been Executive Vice President of Marketing of Sofamor Danek USA since September 1995. From January 1987 until joining Sofamor Danek USA, Mr. Urbanowicz held senior executive positions with Smith and Nephew Richards, including President of the Perry Surgical Glove Division (1992-1995) and Senior Vice President for Strategic Planning/Business Operations and Vice President of Global Marketing for the Richards Orthopaedic Division. From 1980 to 1986, he was employed by Pfizer's Howmedica Orthopaedic Division, where he held a variety of marketing management positions. Mr. Urbanowicz is a 1977 graduate of Seton Hall University. He received his M.B.A. from Seton Hall in 1980. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
- -------------------------------------------------------------------------------- First Quarter Second Quarter Third Quarter Fourth Quarter - -------------------------------------------------------------------------------- 1996 High $35.75 $37.25 $30.88 $32.63 Low 23.50 24.63 21.00 23.75 - -------------------------------------------------------------------------------- 1995 High $25.00 $25.25 $27.88 $29.88 Low 12.75 18.38 18.75 21.75 ================================================================================
The Company's common stock is traded on the New York Stock Exchange under the Symbol "SDG." The table above sets forth the reported high and low prices of the common stock as quoted on the New York Stock Exchange. No cash dividends have been paid to date by the Company on its common stock. The Company does not anticipate the payment of dividends in the foreseeable future. Internally generated funds are retained by the Company for working capital needs. As of February 28, 1997, the Company had approximately 970 stockholders of record. 15 19 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA. The following selected consolidated financial data as of and for each of the years in the five-year period ended December 31, 1996 has been derived from the audited financial statements of the Company. This data should be read in conjunction with the Consolidated Financial Statements, the notes thereto and Management's Discussion and Analysis of Results of Operations and Financial Condition included elsewhere in this Annual Report.
(IN THOUSANDS, EXCEPT PER SHARE DATA) YEARS ENDED DECEMBER 31, - ------------------------------------------------------------------------------------------------------------------ 1996 1995 1994 1993 1992 - ------------------------------------------------------------------------------------------------------------------ STATEMENT OF OPERATIONS DATA: Net sales $244,525 $188,799 $161,677 $161,794 $121,019 Cost of goods sold 45,005 40,309 35,295 35,893 25,171 - ------------------------------------------------------------------------------------------------------------------ Gross profit 199,520 148,490 126,382 125,901 95,848 Operating expenses: Selling, general and administrative 116,729 89,847 74,183 67,844 56,222 Research and development 15,926 13,980 11,572 11,488 7,903 License agreement acquisition charge - 45,337 - - - Product liability litigation charge 50,000 - - - - Royalty expenses discontinued subsequent to the combination - - - 1,182 3,175 Distributor contract termination charge and related amortization of short-term intangibles - - 10,000 - - - ------------------------------------------------------------------------------------------------------------------ Total operating expenses 182,655 149,164 95,755 80,514 67,300 - ------------------------------------------------------------------------------------------------------------------ Income (loss) from operations 16,865 (674) 30,627 45,387 28,548 Other income (expense) 913 2,533 2,153 (179) 917 Interest expense (3,744) (2,794) (629) (193) (25) Combination expense - - - (9,958) (1,000) Non-recurring litigation award - - (2,225) - - - ------------------------------------------------------------------------------------------------------------------ Income (loss) from continuing operations before provision (benefit) for and charge in lieu of income taxes 14,034 (935) 29,926 35,057 28,440 Provision (benefit) for and charge in lieu of income taxes 1,293 (6,319) 6,052 14,429 10,570 - ------------------------------------------------------------------------------------------------------------------ Income from continuing operations 12,741 5,384 23,874 20,628 17,870 Loss from operations of discontinued segment - - - (153) (316) Minority interest (1,474) (417) (97) (50) - - ------------------------------------------------------------------------------------------------------------------ Net income $ 11,267 $ 4,967 $ 23,777 $ 20,425 $ 17,554 Net income per share - fully diluted (1,3) $0.44 $0.20 $0.97 $0.83 $0.73 Weighted average number of shares - fully diluted (3) 26,109 25,395 24,582 24,509 24,159 ================================================================================================================== BALANCE SHEET DATA: Working capital $ 31,127 $ 77,139 $ 69,164 $ 59,441 $ 57,845 Total assets 319,161 196,613 141,792 120,597 110,787 Short-term debt 66,894 16,602 3,949 1,334 1,808 Long-term debt 12,300 28,125 5,324 1,103 9,845 Stockholders' equity (2) 139,826 122,929 111,456 92,806 76,634 - ------------------------------------------------------------------------------------------------------------------
(1) Primary earnings per share were approximately the same as fully diluted earnings per share in each period presented above. (2) The Company has never paid cash dividends on its common stock and does not anticipate paying cash dividends in the foreseeable future. (3) These amounts have been retroactively adjusted to reflect all stock splits and for the presentation of combined weighted average shares outstanding; shares of Sofamor S.A. common stock are shown at the equivalent number of the Company's shares based on the exchange ratio as defined in the Stock Exchange Agreement, dated as of March 28, 1993, among the shareholders of Sofamor S.A. and the Company. 16 20 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION. The following table sets forth, for the periods indicated, selected financial information expressed as a percentage of net sales and the period-to-period percentage changes in such information.
AS A PERCENTAGE OF NET SALES PERIOD-TO-PERIOD CHANGE YEARS ENDED DECEMBER 31, YEARS ENDED DECEMBER 31, - -------------------------------------------------------------------------------------------------------------------- 1996 1995 1994 1996 VS 1995 1995 vs 1994 - -------------------------------------------------------------------------------------------------------------------- Net sales 100.0% 100.0% 100.0% 29.5% 16.8% Cost of goods sold 18.4 21.4 21.8 11.7 14.2 - ---------------------------------------------------------------------------------- Gross profit 81.6 78.6 78.2 34.4 17.5 Operating expenses: Selling, general and administrative 47.7 47.6 45.9 29.9 21.1 Research and development 6.5 7.4 7.2 13.9 20.8 License agreement acquisition charge - 24.0 - (100.0) 100.0 Distributor contract termination charge and related amortization of short-term intangibles - - 6.2 N/A (100.0) Product liability litigation charge 20.5 - - 100.0 N/A - ---------------------------------------------------------------------------------- Total operating expenses 74.7 79.0 59.3 22.5 55.8 Income (loss) from operations 6.9 (0.4) 18.9 2602.2 (102.2) Other income 0.4 1.3 1.4 (64.0) 17.6 Interest expense (1.6) (1.4) (0.4) 34.0 344.2 Non-recurring litigation award - - (1.4) N/A (100.0) - ---------------------------------------------------------------------------------- Income (loss) from continuing operations before provision (benefit) for and charge in lieu of income taxes 5.7 (0.5) 18.5 1601.0 (103.1) Provision (benefit) for and charge in lieu of income taxes 0.5 (3.3) 3.7 120.5 (204.4) - ---------------------------------------------------------------------------------- Income from continuing operations 5.2 2.8 14.8 136.6 (77.4) Minority interest (0.6) (0.2) (0.1) 253.5 329.9 - ---------------------------------------------------------------------------------- Net income 4.6% 2.6% 14.7% 126.8% (79.1)% ==================================================================================
OVERVIEW During both 1996 and 1995, the Company attained record sales. The Company has increased sales through growth in existing businesses, establishing direct sales and marketing operations in key international countries, as well as the development and strategic acquisitions of complementary products and technologies. During 1995, the Company formed a majority owned subsidiary in the Benelux region; in 1996, direct operations were established in Australia, Canada, and Puerto Rico, as well as 50% owned subsidiaries in Japan and Korea. The minority shareholders of the Japanese and Korean subsidiaries continue to serve as distributors of the Company in their respective countries. (See Note 11 to the Consolidated Financial Statements.) As of the end of the second quarter of 1994, the Company entered into an agreement to terminate the exclusive U.S. distribution of the Sofamor product lines by National Medical Specialties, Inc. ("NMS"). On July 1, 1994, the Company began distributing Sofamor products in the United States at retail pricing versus the distributor pricing previously charged to NMS. Following is a summary of certain acquisitions of existing companies and the rights to distribute products and provide services using new technologies: (See Note 4 to the Consolidated Financial Statements.) During the first quarter of 1995, the Company entered into a strategic alliance with Genetics Institute, Inc. ("Genetics Institute") to provide biological products for use in spinal applications. Pursuant to the Genetics Institute agreement (the "G.I. Agreement"), the Company obtained exclusive North American rights to recombinant human bone morphogenetic protein (rhBMP-2) for spinal applications. 17 21 In February of 1995, the Company acquired from Implex Corp., a privately held company located in Allendale, New Jersey, the exclusive worldwide rights to certain patented, proprietary material technologies and associated intellectual property rights for spinal applications. In March 1995, Sofamor Danek purchased 19.5% of the outstanding stock of Surgical Navigation Technologies, Inc. ("SNT") and acquired the exclusive worldwide license (except in Korea until 1997) to manufacture and distribute SNT products relating to frameless stereotactic surgery in spinal and neurological fields. In May 1996, the Company acquired the remaining 80.5% of the outstanding stock of SNT. In July 1996, the Company acquired certain net assets of TiMesh, Inc., a privately held company located in Las Vegas, Nevada. The net assets acquired are used in the design, manufacture and marketing of titanium plates and titanium alloy screws. Also in July 1996, the Company acquired all of the capital stock of MedNext, Inc., a privately held company located in West Palm Beach, Florida that designs, manufactures and markets powered surgical instrumentation and accessories for surgical specialties. In August 1996, the Company entered into an exclusive agreement with The University of Florida Tissue Bank, Inc. to provide services related to their cortical bone dowel and other allograft bone products. In December 1996, the Company acquired all of the capital stock of Colorado, S.A., a privately held company located in Saint Genis Laval, France that designs, manufactures and markets a spinal implant system for deformities and lumbar disorders of the spine. RESULTS OF OPERATIONS Years ended December 31, 1996 and 1995 The Company achieved record net sales for the year ended December 31, 1996 of $244.5 million, which represented a $55.7 million, or 29.5%, increase from sales of $188.8 million for the year ended December 31, 1995. Net sales growth included an increase of 8.5% that resulted from the Company's conversion of certain portions of its international distribution network to direct sales which resulted in higher selling prices. Other net pricing changes in existing distribution channels resulted in a 3.9% increase in net sales. Additional sales volume comprised the remainder of the increase in net sales. Changes in exchange rates had an immaterial impact on net sales when comparing the Company's 1996 sales with 1995. U.S. sales increased 28.4% to $162.2 million, as compared with $126.3 million in 1995. The Company believes the improvement in U.S. sales is primarily the result of an increased number of instrumented fusions, as well as the acceptance of new products such as the STEALTHSTATION(TM) system, the TIMESH(TM) cranial plating system, and the MEDNEXT(R) surgical drill system. Non-U.S. sales increased 31.7% to $82.3 million, as compared with $62.5 million in 1995. The strong international sales growth during 1996, compared with 1995, primarily reflects the Company's strategy of establishing a direct sales presence in selected countries and the acceptance of the new products mentioned in the preceding paragraph, as well as enhanced international sales and marketing programs. The Company's gross margin improved to 81.6% in 1996 from 78.6% in 1995. The enhancement in gross margin is due to higher margins relating to changes in international distribution, greater leveraging of manufacturing costs due to increased volume, a reduction in the levels of outsourced product manufacturing and favorable shifts in the sales mix of certain products and sales programs. Selling, general and administrative expenses were 47.7% of sales in 1996 compared with 47.6% of sales in 1995. The 1996 selling, general, and administrative expenses as a percentage of sales compared to 1995 were slightly 18 22 higher due to the effects of expenses related to establishing a direct sales presence in selected countries. The higher expenses were mostly offset by the leveraging of other fixed costs over greater sales volume in existing operations. Research and development expenses totaled $15.9 million or 6.5% of net sales in 1996 compared with $14.0 million or 7.4% of net sales in 1995. The 1996 dollar spending represents an increase of 13.9% over 1995. These costs are incurred as the Company continues to enhance existing product lines and develop new and complementary products for use in spinal surgery, such as interbody fusion devices, biological products for use in spinal reconstruction, and products related to frameless stereotactic surgery in the spinal and neurological fields of use. These expenditures demonstrate the Company's continued commitment to the pursuit of applying new medical technologies to product opportunities. In 1995, as a result of the G.I. Agreement, a special charge of $45.3 million was recorded. The special charge consisted of $45.2 million, which is the net present value of the $50.0 million in scheduled payments due under the agreement, plus related transaction costs of $122,000. The charge resulted in an after-tax impact of $1.16 per share for the year ended December 31, 1995. During 1996, the Company recorded a special product liability litigation charge of $50.0 million. This charge was recorded in order to recognize the reasonably anticipated costs associated with the defense and conclusion of certain product liability cases in which the Company is named as defendant. The Company believes that these lawsuits are without merit and unfounded. (See Note 15 to the Consolidated Financial Statements.) The Company reported net other income of $913,000 in 1996 compared with $2.5 million during 1995. Other income was higher during 1995 due mainly to the reversal of certain risk provisions and greater foreign exchange gains. Interest expense was $3.7 million in 1996, representing a $950,000 increase over 1995. The increase in interest expense was due to increased borrowings against the Company's credit facilities occurring principally as a result of the acquisitions described in the Overview Section. The Company recorded income tax expense of $1.3 million in 1996 and an income tax benefit of $6.3 million in 1995. The difference between the Company's effective and statutory tax rates for both 1996 and 1995 resulted primarily from the impact of certain elections made for U.S. tax purposes following the combination (the "Combination") of Danek Group, Inc. with Sofamor S.A. ("Sofamor"), and the subsequent reorganization of Sofamor from a Societe Anonyme (S.A.) under French law to a Societe en Nom Collectif (S.N.C.) in late 1993. Management cannot be certain that such a favorable effective income tax rate will be achieved in future periods, since the effective tax rate calculation is dependent upon the Company's pre-tax income dollar amount. Higher future pre-tax income could lead to higher future effective tax rates. At December 31, 1996, the balance sheet of the Company reflected a net deferred tax asset of $38.2 million. No valuation allowance was recorded since sufficient taxable income exists in available carryback periods to recognize fully these net deferred tax assets. (See Note 12 to the Consolidated Financial Statements.) Management believes that inflation has not had a material impact on the Company's business. Years ended December 31, 1995 and 1994 The Company experienced record net sales for the year ended December 31, 1995 of $188.8 million, which represented a $27.1 million, or 16.8%, increase from sales of $161.7 million for the year ended December 31, 1994. Increased volume of 10.3% was the primary component of the sales improvement. Net pricing changes were responsible for an increase of 4.7% and the effects of a weaker dollar in 1995 compared with 1994 resulted in a favorable impact on sales of 1.8%. U.S. sales increased 14.4% to $126.3 million as compared with $110.4 million in 1994. The Company believes the improvement in U.S. sales, which had declined during 1994, was due, in part, to an improvement in the regulatory and legal outlook for the spinal industry. The improvement was related to the events discussed below which occurred in 1995. In February 1995, the Federal judge supervising the multi-district product liability litigation denied class certification. During 1995, 14 Section 510(k) clearances were received, which was a record for the 19 23 Company. One of these Section 510(k) clearances allowed the Company to begin marketing its stainless steel version of the TSRH(R) spinal system for pedicle screw attachment for treating patients with grade 3 or 4 severe spondylolisthesis of the L5-S1 vertebral joint. The clearance is limited to patients who are receiving fusions using autogenous bone graft only, having the device fixed or attached to the lumbar and sacral spine and having the device removed after the development of a solid fusion mass. Also, the Food and Drug Administration's ("FDA") proposed classification, reclassification and codification of pedicle screw spinal systems was published in the Federal Register in early October 1995. The Company believes that this proposed rule is reflective of the FDA's position on the use of bone screws in the pedicle of the spine and is the result of the FDA's analytical review of the 1994 FDA Advisory Panel's recommendation, a large historical cohort study and medical literature, as well as data from clinical studies sponsored by several companies. Non-U.S. sales advanced 21.8% to $62.5 million as compared with $51.3 million in 1994. Management believes that the international sales growth during 1995 compared with 1994 reflected the Company's enhanced international sales and marketing programs. Sales were also bolstered by the initial favorable impact in those countries where changes in the Company's distribution system were made to further enhance marketing and profit opportunities. The Company's gross margin as a percentage of net sales improved to 78.6% in 1995 from 78.2% in 1994. The percentage improvement was primarily the result of manufacturing cost reduction programs and favorable shifts in the sales mix of certain products and sales programs. Selling, general and administrative expenses increased to 47.6% of sales in 1995 compared with 45.9% of sales in 1994. The 1995 increase as a percentage of sales when compared to 1994 was primarily due to higher legal and other professional fees incurred in connection with various legal and regulatory matters, as well as certain commission expenses resulting from the change in distribution of Sofamor products in the U.S. Research and development expenses totaled $14.0 million, or 7.4%, of net sales in 1995 compared with $11.6 million, or 7.2%, of net sales in 1994. These costs were incurred as the Company continued to enhance existing product lines and to develop new and complementary products for use in spinal surgery, such as interbody fusion devices, biological products for use in spinal applications and products related to frameless stereotactic surgery in the spinal and neurological fields of use. As a result of the G.I. Agreement, a special charge of $45.3 million was recorded. The special charge consisted of $45.2 million, which is the net present value of the $50.0 million in scheduled payments due under the agreement plus related transaction costs of $122,000. The charge resulted in an after-tax impact of $1.16 per share for the year ended December 31, 1995. In connection with the NMS transaction, distributor contract termination expense and related amortization of short-term intangibles totaling $10.0 million were recorded as a special charge to earnings and resulted in an after-tax impact of $0.27 per share for the year ended December 31, 1994. The non-recurring litigation award of $2.2 million resulted from the ruling of a Magistrate of the Commercial Court in Paris, which occurred during 1994, on a claim of wrongful termination of the distribution agreement in favor of the Company's former Spanish distributor of Sofamor's products. The Company has appealed this ruling. The appeal process requires a retrial of all issues and is still ongoing. (See Note 15 to the Consolidated Financial Statements.) The Company reported net other income of $2.5 million or 1.3% of sales for 1995 compared with $2.2 million or 1.4% of sales for 1994. Foreign exchange gains were the primary component of the increase. Interest expense for 1995 was $2.8 million as compared with $629,000 in 1994. The increase in interest expense resulted primarily from the imputed interest under the G.I. Agreement. The Company recorded an income tax benefit of $6.3 million in 1995 and an income tax expense of $6.1 million in 1994. The tax benefit resulted primarily from the special license agreement acquisition charge to earnings of $45.3 million described above. The difference between the Company's effective and statutory tax rates for both 1995 and 20 24 1994 resulted primarily from the impact of the effects of certain elections made for U.S. tax purposes following the Combination, and the subsequent reorganization of Sofamor from a Societe Anonyme (S.A.) under French law to a Societe en Nom Collectif (S.N.C.) in late 1993. Management cannot be certain that such a favorable effective income tax rate will be achieved in future periods, since the effective tax rate calculation is dependent upon the Company's pre-tax income dollar amount. Higher future pre-tax income could lead to higher future effective tax rates. At December 31, 1995, the balance sheet of the Company reflected a net deferred tax asset of $19.8 million. No valuation allowance was recorded since sufficient taxable income exists in available carryback periods to recognize fully these net deferred tax assets. (See Note 12 to the Consolidated Financial Statements.) Management believes that inflation has not had a material impact on the Company's business. LIQUIDITY AND CAPITAL RESOURCES Cash generated from operations and the Company's revolving lines of credit are the principal sources of funding available for the growth of the business, including working capital and additions to property, plant and equipment, as well as debt service requirements and required contractual payments. Cash, cash equivalents and short-term investments totaled $2.9 million at December 31, 1996 compared with $13.3 million at December 31, 1995. In connection with the formation of the subsidiary in Japan, Kobayashi Sofamor Danek, K.K. ("KSD"), the Company is required to pay commissions based on the sales of KSD to Kobayashi Pharmaceutical Co., Ltd. ("KPC"), which has served as the Company's distributor in Japan and is the other shareholder in KSD. Payments of $26.7 million were made to KPC during 1996 as prepayment of commissions. In connection with the G.I. Agreement, the Company has recorded a liability of $23.0 million at December 31, 1996, which represents the present value of the $25.0 million in remaining scheduled payments. Of this amount, $7.0 million is classified as long-term debt and $16.0 million is reflected as a current liability, representing the principal portion of the $17.5 million payable on June 30, 1997. The final payment of $7.5 million is due in June of 1998. The Company's working capital decreased $46.0 million during 1996. The change in working capital was primarily due to the payments required in connection with the acquisitions of SNT, MedNext, Inc., Colorado S.A., and certain net assets of TiMesh, Inc. totaling $38.8 million, the $26.7 million prepayment of commissions to KPC, the $12.5 million payment due under the G.I. Agreement and the $6.2 million increase in the current portion of the Genetics Institute obligation. These uses of working capital were partially offset by favorable cash flows from ongoing operations. Net accounts receivable increased $19.6 million from December 31, 1995, due primarily to the increase in net sales. Inventories and loaner set inventories increased $11.1 million due to stocking levels required for recently formed subsidiaries, the manufacture of loaner set inventories in preparation for new sales and marketing programs and additional inventory acquired in connection with the 1996 acquisitions described above. Other receivables increased $6.6 million from the Company's previous year-end, primarily due to amounts recoverable from the Company's insurance carriers related to expenses incurred in connection with product liability litigation. The purchase agreements for two of the acquisitions outlined in the Overview section contain provisions which provide for contingent payments to the former shareholders of each entity based upon certain calculations relative to revenues and earnings, as defined, through 1999. Such payments will be reflected as purchase price adjustments. During 1996, the Company recorded an adjustment to the purchase price of one of these acquisitions by approximately $4.2 million. The Company is unable to determine whether such payments will be required for the years 1997 through 1999. Additions to property, plant and equipment during 1996 of $7.1 million were related to capital assets acquired in the formation and acquisition of new subsidiaries and other capital expenditures necessary to support the Company's manufacturing and distribution operations. The Company is in need of additional office and distribution space at its Memphis location. The Company is currently considering the alternatives of constructing or leasing a new facility. It is estimated that the capitalized cost of the project, if constructed, would be approximately $11.0 million. Net 21 25 intangible assets increased by $53.8 million from December 31, 1995, primarily due to the intangible assets relative to the acquisitions of SNT, MedNext, Inc., Colorado S.A., and certain net assets of TiMesh, Inc. The Company has committed lines of credit totaling approximately $64.7 million. At December 31, 1996, $50.2 million was outstanding under the Company's lines of credit and other short-term borrowings. The lines of credit consist primarily of a $50.0 million uncollateralized revolving line of credit with a U.S. bank which is renewable annually and matures October 15, 1997. This line of credit was increased to $60.0 million as of January 31, 1997. The Company has the option to convert the debt outstanding under this revolving line of credit to a term loan, amortized on a quarterly basis over a term of up to three years. The Company invests available funds in short-term investment grade instruments, certificates of deposit or direct or guaranteed obligations of the United States of America. These short-term investments are available to fund the Company's working capital requirements and acquisitions of capital assets. FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS AND FINANCIAL CONDITION The Company's future operating results and financial condition are subject to risks and uncertainties, including (without limitation) the following matters: Regulatory Clearances. The Company manufactures devices that are subject to the regulations of the FDA and, in some cases, to the regulations of foreign governmental authorities. In particular, such devices are subject to marketing clearance by the FDA before sales can be made in the United States. The process of obtaining marketing clearances can be time consuming, and there can be no assurance that all necessary clearances will be granted to the Company with respect to new devices or that the FDA review will not involve delays adversely affecting the marketing and sale of new products and devices by the Company. The enforcement of FDA regulations depends heavily on administrative interpretation, and there can be no assurance that future interpretations made by the FDA or other regulatory bodies, with possible retroactive effect, will not adversely affect the Company. The Company cannot predict the extent or impact of future foreign, federal, state or local legislation or regulation. Potential Impact of Health Care Cost Containment Proposals on Profitability. In recent years, the cost of health care has risen significantly, and there have been numerous proposals by legislators, regulators and third party health care payers to curb these cost increases in the United States and Europe. Some of these proposals have involved limitations on the amount of reimbursement for specific surgical procedures. These proposals have been adopted in some cases. The Company is unable to predict what changes will be made in the reimbursement methods utilized by third party health care payers. In addition, hospitals and other health care providers have become increasingly cost sensitive. To date, the Company does not believe that such health care cost containment proposals have negatively affected the profitability or growth of its business; however, the Company is not able to predict the future effect of these proposals on its business. Product Obsolescence. Spinal implant and other devices are subject to continuous improvements and modifications and typically are rendered obsolete within a few years. Success, therefore, requires any medical device company to devote substantial resources to continued product development. The Company maintains active research and development programs and has been successful in developing new products in the past. There can be no assurance that the Company will be able to develop and introduce new products that will enable it to remain competitive in the future. Product Liability; Insurance. In recent years, physicians, hospitals, and other participants in the health care industry have become subject to an increasing number of lawsuits alleging malpractice, product liability or asserting related legal theories, many of which involve large claims and significant defense costs. The Company currently maintains liability insurance intended to cover such claims, although there can be no assurance that the coverage limits of such insurance policies will be adequate or that all amounts will ultimately be collected from each insurer providing the applicable policy. Such insurance is expensive, difficult to obtain and may not be available in the future on acceptable terms or at all. The Company is currently involved in product liability litigation. (See Note 15 to the Consolidated Financial Statements.) There can be no assurance that additional claims will not be asserted against 22 26 the Company in the future. A successful future claim or aggregation of future claims brought against the Company in excess of insurance coverage could have a material adverse effect upon the financial condition, results of operations and/or cash flows of the Company. Claims against the Company, regardless of their merit or eventual outcome, may also have a material adverse effect upon the reputation and business of the Company. Competition. Worldwide, there are a number of firms producing spinal implant devices. The Company currently competes with a number of firms with financial, marketing and technical resources comparable to or greater than those of the Company. Because of the growth of the number of spinal fusion procedures performed in recent years, a number of companies, including those active in producing various orthopaedic and neurological products and having financial, marketing and technical resources significantly greater than those of the Company, have begun producing spinal implant devices. The Company anticipates that additional companies may also begin such production. Retention of Personnel. The Company is highly dependent upon its senior management, and the competition for qualified management personnel is intense. The loss of key personnel or an inability to attract, retain and motivate such persons could adversely affect the business and prospects of the Company. There can be no assurance that the Company will be able to retain its existing senior management personnel or to attract additional qualified personnel if needed. The Company also depends on its contractual relationships with certain physicians for product ideas, research and advice. There can be no assurance that the Company will be able to maintain and develop such relationships. Global Market Risks. A significant portion of the Company's revenue is derived from its international operations. As a result, the Company's operations and financial results could be affected by international factors, such as changes in foreign currency exchange rates or weak economic conditions in the foreign markets in which the Company distributes its products. Intellectual Property. The Company is dependent on its proprietary intellectual property and attempts to protect such intellectual property through patents, licensing, trade secrets and proprietary know-how. In the medical device industry, challenges by third parties regarding intellectual property rights occur frequently. Such challenges may result in litigation which is often complex and expensive. There can be no assurance that the Company's proprietary rights will not be challenged, rendered unenforceable or circumvented and that pending or future patent or trademark applications will be granted. 23 27 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA SOFAMOR DANEK GROUP, INC. AND SUBSIDIARIES/REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders and Board of Directors Sofamor Danek Group, Inc. We have audited the consolidated balance sheets of Sofamor Danek Group, Inc. and Subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Sofamor Danek Group, Inc. and Subsidiaries as of December 31, 1996 and 1995, and the results of their consolidated operations and their cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. Memphis, Tennessee January 31, 1997 24 28 SOFAMOR DANEK GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1996 AND 1995 (IN THOUSANDS, EXCEPT SHARES)
- ---------------------------------------------------------------------------------------- 1996 1995 - ---------------------------------------------------------------------------------------- ASSETS - ---------------------------------------------------------------------------------------- Current assets: Cash and cash equivalents $ 2,830 $ 11,330 Short-term investments 111 1,924 Accounts receivable -- trade, less allowance for doubtful accounts of $1,589 and $1,555 at December 31, 1996 and 1995, respectively 70,031 50,451 Other receivables 15,813 9,257 Inventories 33,483 25,723 Loaner set inventories 14,123 10,803 Prepaid expenses 6,318 5,092 Prepaid income taxes -- 2,648 Current deferred income taxes 5,312 4,699 - ---------------------------------------------------------------------------------------- Total current assets 148,021 121,927 Property, plant and equipment Land 1,484 1,505 Buildings 11,261 10,878 Machinery and equipment 32,083 25,723 Automobiles 708 231 - ---------------------------------------------------------------------------------------- 45,536 38,337 Less accumulated depreciation (20,026) (15,714) - ---------------------------------------------------------------------------------------- 25,510 22,623 Investments 920 3,600 Intangible assets, net 83,426 29,600 Other assets 28,282 3,597 Non-current deferred income taxes 33,002 15,266 - ---------------------------------------------------------------------------------------- Total assets $ 319,161 $ 196,613 ======================================================================================== LIABILITIES Current liabilities: Notes payable and lines of credit $ 50,207 $ 6,516 Current maturities of long-term debt 16,687 10,086 Accounts payable 7,332 6,513 Accrued foreign income taxes 3,898 539 Accrued expenses 38,770 21,134 - ---------------------------------------------------------------------------------------- Total current liabilities 116,894 44,788 Long-term debt, less current maturities 12,300 28,125 Deferred income taxes 121 191 Product liability litigation 48,000 -- Minority interest 2,020 580 Commitments and contingencies STOCKHOLDERS' EQUITY Preferred stock, no par value, 5,000,000 shares authorized, no shares outstanding Common stock, no par value, 150,000,000 shares authorized; 25,094,277 and 24,672,131 shares issued (including 685,908 and 678,433 shares held in treasury) at December 31, 1996 and 1995, respectively 52,994 44,832 Retained earnings 98,044 86,777 Cumulative translation adjustment 2,542 5,542 - ---------------------------------------------------------------------------------------- 153,580 137,151 Less: Cost of common stock held in treasury (9,985) (9,736) Unearned compensation (54) (321) Stockholder notes receivable (3,715) (4,165) - ---------------------------------------------------------------------------------------- Total stockholders' equity 139,826 122,929 - ---------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 319,161 $ 196,613 ========================================================================================
The accompanying notes are an integral part of the consolidated financial statements. 25 29 SOFAMOR DANEK GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- ---------------------------------------------------------------------------------------------------------------- 1996 1995 1994 - ---------------------------------------------------------------------------------------------------------------- Net sales $ 244,525 $ 188,799 $ 161,677 Cost of goods sold 45,005 40,309 35,295 - ---------------------------------------------------------------------------------------------------------------- Gross profit 199,520 148,490 126,382 Operating expenses: Selling, general and administrative 116,729 89,847 74,183 Research and development 15,926 13,980 11,572 License agreement acquisition charge -- 45,337 -- Product liability litigation charge 50,000 -- -- Distributor contract termination charge and related amortization of short-term intangibles -- -- 10,000 - ---------------------------------------------------------------------------------------------------------------- Total operating expenses 182,655 149,164 95,755 - ---------------------------------------------------------------------------------------------------------------- Income (loss) from operations 16,865 (674) 30,627 Other income 913 2,533 2,153 Interest expense (3,744) (2,794) (629) Non-recurring litigation award -- -- (2,225) - ---------------------------------------------------------------------------------------------------------------- Income (loss) from continuing operations before provision (benefit) for and charge in lieu of income taxes 14,034 (935) 29,926 Provision (benefit) for and charge in lieu of income taxes 1,293 (6,319) 6,052 - ---------------------------------------------------------------------------------------------------------------- Income from continuing operations 12,741 5,384 23,874 Minority interest (1,474) (417) (97) - ---------------------------------------------------------------------------------------------------------------- Net income $ 11,267 $ 4,967 $ 23,777 Primary and fully diluted net income per share $ 0.44 $ 0.20 $ 0.97 ================================================================================================================
The accompanying notes are an integral part of the consolidated financial statements. 26 30 SOFAMOR DANEK GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (IN THOUSANDS, EXCEPT FOR SHARES)
Foreign Currency Unearned Stockholders' Number of Common Retained Translation Treasury Compen- Notes Shares Stock Earnings Adjustment Stock sation Receivable Total - ------------------------------------------------------------------------------------------------------------------------------------ Balances, January 1, 1994 24,369,838 $40,459 $58,033 $ (334) $(1,063) $(4,289) $ 92,806 Common stock issued 9,337 180 180 Repurchase of common stock (678,433) (9,736) (9,736) Exercise of stock options 54,062 343 343 Income tax benefit from vesting of restricted stock & stock options exercised 254 254 Unearned compensation amortization 370 370 Termination for stock grant 73 - (73) Stock issuance valuation adjustment (392) (392) Stockholders' contributed 500 500 capital Stockholders' notes receivable 98 98 Net income 23,777 23,777 Cumulative translation adjustment 3,256 3,256 - ------------------------------------------------------------------------------------------------------------------------------------ Balances, December 31, 1994 23,754,804 41,271 81,810 2,922 (9,736) (620) (4,191) 111,456 Common stock issued 7,241 146 146 Exercise of stock options 231,653 2,481 2,481 Income tax benefit from vesting of restricted stock & stock options exercised 934 934 Unearned compensation amortization 299 299 Stockholders' notes receivable 26 26 Net income 4,967 4,967 Cumulative translation adjustment 2,620 2,620 - ------------------------------------------------------------------------------------------------------------------------------------ Balances, December 31, 1995 23,993,698 44,832 86,777 5,542 (9,736) (321) (4,165) 122,929 COMMON STOCK ISSUED 4,702 137 5 142 REPURCHASE OF COMMON STOCK (7,775) (254) (254) EXERCISE OF STOCK OPTIONS 417,744 5,437 5,437 INCOME TAX BENEFIT FROM VESTING OF RESTRICTED STOCK & STOCK OPTIONS EXERCISED 2,588 2,588 UNEARNED COMPENSATION AMORTIZATION 267 267 STOCKHOLDERS' NOTES RECEIVABLE 450 450 NET INCOME 11,267 11,267 CUMULATIVE TRANSLATION ADJUSTMENT (3,000) (3,000) - ------------------------------------------------------------------------------------------------------------------------------------ BALANCES, DECEMBER 31, 1996 24,408,369 $52,994 $98,044 $2,542 $(9,985) $ (54) $(3,715) $139,826 ===================================================================================================================================
The accompanying notes are an integral part of the consolidated financial statements. 27 31 SOFAMOR DANEK GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (IN THOUSANDS, EXCEPT FOR SHARES)
- ------------------------------------------------------------------------------------------------- 1996 1995 1994 - ------------------------------------------------------------------------------------------------- Cash flows from operating activities: Income from continuing operations $ 12,741 $ 5,384 $ 23,874 Minority interest (1,474) (417) (97) - ------------------------------------------------------------------------------------------------- Net income 11,267 4,967 23,777 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 10,374 7,857 7,375 Provision for doubtful accounts receivable 705 366 965 Deferred income tax benefit (18,678) (15,955) (10) License agreement acquisition charge -- 45,215 -- Gain (loss) on disposal of equipment 94 6 (13) Accretion of investment discount -- -- (171) Equity loss in unconsolidated affiliate 49 -- 261 Minority interest 1,474 417 97 Changes in assets and liabilities, net of acquisitions: Accounts receivable (19,606) (12,456) (1,042) Other receivables (6,968) (6,515) 338 Inventories (9,777) 2,867 (9,870) Prepaid expenses (1,142) (2,130) (404) Prepaid income taxes 2,647 902 (3,502) Other assets (26,709) (1,819) (77) Accounts payable (357) 2,006 (2,717) Accrued income taxes 6,186 1,440 (4,545) Accrued expenses 13,353 3,553 1,803 Product liability litigation 48,000 -- -- - ------------------------------------------------------------------------------------------------- Net cash provided by operating activities 10,912 30,721 12,265 - ------------------------------------------------------------------------------------------------- Cash flows from investing activities: Purchase of short-term investments (116) (18,284) (34,607) Proceeds from maturities of short-term investments 1,899 17,633 35,781 Proceeds from sale of equipment 34 19 124 Payments for purchase of property, plant and equipment (7,110) (4,604) (6,320) Purchase of intangible assets (18,538) (8,893) (7,853) Increase in notes receivable, other -- (27) (4) Repayments of notes receivable, other 85 102 67 Acquisitions, net of cash acquired (33,953) -- -- Payments for investment -- (2,585) -- Purchase of minority interest (1,965) -- (88) - ------------------------------------------------------------------------------------------------- Net cash used by investing activities (59,664) (16,639) (12,900) - ------------------------------------------------------------------------------------------------- Cash flows from financing activities: Increase in short-term borrowings 43,839 3,146 2,265 Proceeds from long-term debt 871 172 123 Repayment of long-term debt (10,353) (12,954) (389) Repayment of stockholders' notes receivable 450 26 98 Proceeds from issuance of common stock 5,574 2,627 523 Repurchase of common stock -- -- (9,736) Capital contributions by minority stockholders 489 -- -- - ------------------------------------------------------------------------------------------------- Net cash provided (used) by financing activities 40,870 (6,983) (7,116) - -------------------------------------------------------------------------------------------------
28 32 SOFAMOR DANEK GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS CONTINUED FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (IN THOUSANDS, EXCEPT FOR SHARES)
- ----------------------------------------------------------------------------------------- 1996 1995 1994 - ----------------------------------------------------------------------------------------- Effect of exchange rate changes on cash (618) (156) 520 - ----------------------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents (8,500) 6,943 (7,231) Cash and cash equivalents, beginning of period 11,330 4,387 11,618 - ----------------------------------------------------------------------------------------- Cash and cash equivalents, end of period $ 2,830 $ 11,330 $ 4,387 ========================================================================================= Supplemental disclosure of cash flow information: Cash paid during the year for interest $ 4,605 $ 1,103 $ 502 Cash paid during the year for income taxes $ 11,015 $ 7,204 $ 11,614 - -----------------------------------------------------------------------------------------
Supplemental schedule of non-cash investing and financing activities: - - In 1996, 1995 and 1994, net income tax benefits of $2,588, $934 and $254, respectively, were realized by the Company as a result of certain common stock options being exercised and the vesting of certain restricted common stock, reducing accrued federal and state income taxes payable and increasing common stock. - - In January 1994, the Company purchased technology and rights to a medical device valued at $5,000 in exchange for a non-negotiable, subordinated convertible note with a principal amount of $4,500. The Company also recorded the $500 differential as an increase in common stock. - - In August 1994, the Company acquired various patented technologies and a non-compete agreement valued at $8,600 from Citation Medical Corporation ("Citation"). These intangible assets were purchased in exchange for $2,000 in cash, Citation's stock, which the Company held as an investment of $6,200, and the cancellation of a license agreement which carried a net value of $400 on the Company's books. In addition, the Company adjusted the value of its Citation investment, resulting in a decrease in common stock of $392. - - During 1995, the Company incurred a liability of $45,215 in connection with the acquisition of a license agreement. - - During 1996, $698 of accounts receivable were written-off against the allowance for doubtful accounts. The accompanying notes are an integral part of the consolidated financial statements. 29 33 SOFAMOR DANEK GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except for shares and per share data) 1. ORGANIZATION, BASIS OF PRESENTATION AND NATURE OF OPERATIONS ORGANIZATION The consolidated financial statements of Sofamor Danek Group, Inc. (the "Company") include the accounts of the Company and its subsidiaries. The Company controls and owns 51% of a subsidiary in Belgium and 50% of two separate subsidiaries in Japan and Korea. All other subsidiaries are wholly owned. Minority interest represents minority stockholders' proportionate share of the equity in the subsidiaries. All significant intercompany balances, transactions and profits have been eliminated in consolidation. BASIS OF PRESENTATION The consolidated financial statements are prepared on the basis of generally accepted accounting principles. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at December 31, 1996 and 1995 and reported amounts of revenues and expenses for each of the three years in the period ended December 31, 1996. Significant estimates include those made for product liability litigation, the allowance for doubtful accounts, inventory reserves for excess, obsolete and damaged products, depreciation and amortization. Actual results could differ from those estimates made by management. NATURE OF OPERATIONS The Company primarily develops, manufactures and markets spinal devices used in the surgical treatment of spinal disorders. The Company has subsidiaries located throughout North America, Europe, Asia and Australia and has manufacturing facilities located in Indiana, Nevada, Florida, Colorado, and France. Products are sold primarily to hospitals, either directly or through distributors. A significant portion of the Company's revenue is derived from its international operations. As a result, the Company's operations and financial results could be affected by international factors such as changes in foreign currency exchange rates or weak economic conditions in the international markets in which the Company distributes its products. In addition, inherent in the accompanying consolidated financial statements are certain risks and uncertainties. These risks and uncertainties include, but are not limited to: timely development and acceptance of new products, impact of competitive products, timely receipt of regulatory clearances required for new products, regulation of current products, potential impact on health care cost containment proposals on profitability, product obsolescence, the availability of product liability insurance, disposition of certain litigation matters and cash balances in excess of federally insured limits. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CASH EQUIVALENTS The Company considers all highly liquid investments with a remaining maturity of three months or less when purchased to be cash equivalents. 30 34 INVESTMENTS Investments represent the Company's investments in unconsolidated affiliates. Investments over which the Company exerts significant influence, but does not control the financial and operational direction, are accounted for using the equity method of accounting. All other investments are recorded at cost. INVENTORIES AND LOANER INVENTORIES Inventories and loaner inventories are stated at the lower of cost (determined principally by the first-in, first-out method) or market. The Company maintains a reserve for its estimate of excess, obsolete and damaged goods based on historical and forecasted usage. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment, including certain equipment acquired under capital leases, are stated at cost. Property and equipment are depreciated on a straight-line basis over their estimated useful lives which range from 3 to 40 years. Assets acquired under capital leases are amortized over the term of the underlying lease. Amortization expense of assets under capital leases and depreciation expense for the years ended December 31, 1996, 1995, and 1994 totaled $5,449, $4,366 and $4,103, respectively. Amounts expended for maintenance and repairs are charged to expense as incurred. Upon disposition, both the related cost and accumulated depreciation accounts are relieved and the related gain or loss is credited or charged to operations. REVENUE RECOGNITION Sales are recognized primarily upon the shipment of products to the customer or distributor. The Company derives revenues from both sales of products and certain service functions. The revenues from services are insignificant and accordingly are included in net sales. Concentration of credit risk with respect to trade accounts receivable is generally diversified due to the large number of entities comprising the Company's customer base. The Company performs ongoing credit evaluations and provides an allowance for potential credit losses against the portion of accounts receivable which is estimated to be uncollectible. Such losses have historically been within management's expectations. INCOME TAXES The provision for income taxes and corresponding balance sheet accounts are determined in accordance with SFAS No. 109, "Accounting for Income Taxes" ("SFAS 109"). Under SFAS 109, deferred tax liabilities and assets are determined based on temporary differences between the bases of certain assets and liabilities for income tax and financial reporting purposes. The deferred tax assets and liabilities are classified according to the financial statement classification of the assets and liabilities generating the differences. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. FOREIGN CURRENCY TRANSLATION All balance sheet accounts denominated in a currency other than U.S. dollars are translated into U.S. dollars at the current exchange rate as of the end of the accounting period. Income statement items are translated at weighted-average currency exchange rates. The resulting translation adjustment is recorded as a separate component of stockholders' equity. Gains and losses resulting from foreign currency transactions denominated in a currency other than the functional currency are included in net income and amounted to net gains during 1996, 1995, and 1994 of $632, $827, and $487, respectively. Gains and losses relative to intercompany foreign currency transactions, for 31 35 which settlement is not planned or anticipated in the foreseeable future, are excluded from net income and reported as cumulative translation adjustments. TREASURY STOCK The Company purchased 7,775 shares in 1996 and 678,433 shares in 1994 of its common stock at an aggregate cost of approximately $254 and $9,736, respectively. There were no shares purchased during 1995. 3. INVENTORIES AND LOANER INVENTORIES Net inventories at December 31, 1996 and 1995 consist of the following:
- ------------------------------------------------------------------- 1996 1995 - ------------------------------------------------------------------- Finished goods $28,260 $21,238 Work-in-process 2,961 3,017 Raw materials 2,262 1,468 - ------------------------------------------------------------------- Net inventories $33,483 $25,723 - ------------------------------------------------------------------- Loaner set inventories, net $14,123 $10,803 - -------------------------------------------------------------------
Loaner set inventories consist of inventory items on loan or available to be loaned to customers. The inventory items used by the customer in surgery are recorded as sales when used; the remaining inventory in the set is returned to the Company. 4. ACQUISITIONS During 1996, the Company completed four acquisitions which have been accounted for utilizing the purchase method of accounting. Accordingly, the results of operations of the acquired businesses, which are not significant to the Company's consolidated results of operations, have been included in the accompanying consolidated financial statements from their respective dates of acquisition. In March 1995, the Company purchased 19.5% of the outstanding stock of Surgical Navigation Technologies, Inc. ("SNT"), a privately held company located in Broomfield, Colorado. In conjunction with the purchase, the Company acquired the exclusive worldwide license (except in Korea until 1997) to manufacture and distribute SNT products relating to frameless stereotactic surgery in the spinal and neurological fields. In May 1996, the Company acquired the remaining 80.5% of the outstanding stock of SNT. In July 1996, the Company acquired the net assets of TiMesh, Inc., a privately held company located in Las Vegas, Nevada. The net assets acquired are used in the design, manufacture, and marketing of titanium plates and titanium alloy screws. In July 1996, the Company acquired all of the capital stock of MedNext, Inc., a privately held company located in West Palm Beach, Florida that designs, manufactures and markets powered surgical instrumentation and accessories for surgical specialties. In December 1996, the Company acquired all of the capital stock of Colorado S.A., a privately held company located in France. Colorado, S.A. designs and markets certain spinal devices used in the surgical treatment of deformities and lumbar disorders of the spine. In connection with these acquisitions, the Company recorded certain loss contingencies. The Company has estimated the fair value of these loss contingencies, at the dates of acquisition, based on currently available information. The Company does not believe that changes in these estimates will have a material adverse effect on 32 36 its consolidated financial position, results of operations or cash flows; however, material changes could significantly impact the final purchase price allocation. The purchase agreements for two of these acquisitions contain provisions which provide for contingent payments to the former shareholders of each entity based upon certain calculations relative to revenues and earnings, as defined, through 1999. Such payments will be reflected as purchase price adjustments. During 1996, the Company recorded an adjustment to the purchase price of one of these acquisitions by $4,174. The Company is unable to determine whether such payments will be required for the years 1997 through 1999. The estimated fair values assigned to the assets and liabilities acquired were as follows: - ------------------------------------------------------------------------------- Total consideration paid (including amounts paid during 1995) $ 38,796 Fair value of liabilities assumed 6,935 Fair value of tangible and identifiable assets acquired (11,528) - ------------------------------------------------------------------------------- Goodwill at acquisition date 34,203 Adjustment to purchase price during 1996 4,174 - ------------------------------------------------------------------------------- Goodwill for 1996 acquisitions $ 38,377 ===============================================================================
5. INTANGIBLE ASSETS Identifiable intangible assets and goodwill are recorded and amortized over their estimated economic lives or periods of future benefit. The Company amortizes goodwill on a straight-line basis over the estimated period of benefit ranging from 15 to 20 years. Other identifiable purchased intangible assets are amortized on a straight-line basis over their estimated period of benefit ranging from 1 to 12 years. The lives established for these assets are a composite of many factors which are subject to change because of the nature of the Company's operations. This is particularly true for goodwill which reflects value attributable to the going concern nature of acquired businesses, the stability of their operations, market presence and reputation. Accordingly, at each reporting period, the Company evaluates the continued appropriateness of these lives and recoverability of the carrying value of such assets based upon the latest available economic factors and circumstances. Impairment of value, if any, is recognized in the period in which it is determined. The Company does not believe that there are any facts or circumstances indicating impairment of identifiable intangible assets and goodwill at December 31, 1996. A summary of intangible assets at December 31, is as follows:
- ------------------------------------------------------------------ 1996 1995 - ------------------------------------------------------------------ Goodwill $41,957 $ 1,399 Patents 33,960 24,240 Trademarks 1,767 1,350 License agreements 9,009 8,005 Non-compete agreements 6,528 2,325 Other 3,770 519 - ------------------------------------------------------------------ 96,991 37,838 Less: accumulated amortization (13,565) (8,238) - ------------------------------------------------------------------ $83,426 $29,600 ==================================================================
6. LICENSE AGREEMENT ACQUISITION CHARGE During 1995, the Company entered into a license agreement (the "Agreement") with Genetics Institute, Inc. ("G.I.") to provide biological products for use in spinal applications. The Agreement provides exclusive North American distribution rights to the Company and requires annual payments through 1998 totaling $50,000. The Company charged $45,337 to operations during 1995 as purchased research and development. This charge represents the net present value of the total required payments pursuant to the Agreement plus related transaction costs. The liability 33 37 recorded at December 31, 1996 represents the present value of the Company's remaining obligation under the terms of the Agreement. 7. DISTRIBUTOR TERMINATION During 1994, the Company entered into an agreement to terminate the exclusive U.S. distribution of the Sofamor product lines by National Medical Specialties, Inc. ("NMS"). On July 1, 1994, the Company began distributing Sofamor products in the United States at retail pricing versus the distributor pricing previously charged to NMS. As a result of the Company discontinuing its relationship with NMS, a distributor contract termination charge and the related amortization of short-term intangibles of $10,000 was recorded as a charge to earnings during 1994. 8. FOREIGN OPERATIONS The Company operates in predominately one industry. A summary of the Company's operations by geographical areas for the three years ended December 31, 1996, is set forth below:
- ------------------------------------------------------------------------------- 1996 1995 1994 - ------------------------------------------------------------------------------- REVENUES: North America $189,831 $147,025 $118,803 Europe/Asia 70,410 49,260 50,286 Eliminations (15,716) (7,486) (7,412) - ------------------------------------------------------------------------------- Total revenues $244,525 $188,799 $161,677 =============================================================================== INCOME (LOSS) BEFORE TAXES: North America $ 1,244 $ (5,995) $ 33,814 Europe/Asia 12,790 5,060 (3,888) - ------------------------------------------------------------------------------- Total income (loss) before taxes $ 14,034 $ (935) $ 29,926 ===============================================================================
Included in income (loss) before taxes was a product liability litigation charge of $50,000 in North America during 1996, a license agreement acquisition charge of $45,337 in North America during 1995, and a distributor contract termination charge of $8,750 in Europe/Asia during 1994.
- -------------------------------------------------------------------- 1996 1995 - -------------------------------------------------------------------- IDENTIFIABLE ASSETS: North America $270,697 $151,952 Europe/Asia 67,421 53,305 Eliminations (21,898) (21,898) - -------------------------------------------------------------------- Total identifiable assets 316,220 183,359 Corporate assets 2,941 13,254 - -------------------------------------------------------------------- Total assets $319,161 $196,613 ====================================================================
Corporate assets are composed primarily of cash, cash equivalents and short-term investments. 34 38 The following amounts are included in the consolidated financial statements for international subsidiaries:
- ---------------------------------------------------------------------------------------- 1996 1995 1994 - ---------------------------------------------------------------------------------------- Current assets $ 52,240 $ 40,499 $ 39,329 Property, plant and equipment 12,141 10,496 9,241 Intangible assets 6,303 5,909 4,032 Other assets, not itemized 2,629 1,561 2,420 - ---------------------------------------------------------------------------------------- 73,313 58,465 55,022 - ---------------------------------------------------------------------------------------- Current liabilities 33,343 18,240 12,412 Net intercompany balance 8,430 8,853 13,504 Long-term liabilities 2,416 1,396 1,036 - ---------------------------------------------------------------------------------------- 44,189 28,489 26,952 - ---------------------------------------------------------------------------------------- Net assets $ 29,124 $ 29,976 $ 28,070 ========================================================================================
9. NOTES PAYABLE AND LINES OF CREDIT At December 31, 1996 and 1995, the Company had a loan agreement with a bank, which provided for borrowings of up to $50,000 and $40,000, respectively, under a revolving line of credit. During 1996, the Company could borrow funds under the loan agreement denominated in U.S. Dollars, French Francs, or Japanese Yen. U.S. Dollar, French Franc and Japanese Yen borrowings under the line of credit bear interest at rates of 0.625% above each of the 30-day adjusted LIBOR rate (5.5% at December 31, 1996), PIBOR rate (3.50% at December 31, 1996) and TIBOR rate (0.55% at December 31, 1996), respectively, and interest is payable monthly. The Company must also pay a quarterly fee of 0.125% per annum on the unused portion of the commitment. The loan agreement contains covenants which include certain restrictions, such as minimum levels of tangible net worth, minimum quarterly net income, and maintenance of an adequate debt service coverage ratio. The Company had the equivalent of $35,087 outstanding under the revolving line of credit at December 31, 1996, and no amount outstanding at December 31, 1995. At December 31, 1996, the Company also had several loan agreements with various international banks. The aggregate maximum borrowings available under these lines of credit were equivalent to approximately $14,711 and bear interest at rates ranging from 1.625% to 14.25%. The Company had approximately $15,120 outstanding under the revolving lines of credit and various other short-term borrowings at December 31, 1996. The Company's weighted average interest rate on short-term borrowings was approximately 6.5% at December 31, 1996 and 1995. 10. LONG-TERM DEBT In connection with the acquisition of the G.I. Agreement, the Company has recorded long-term debt equal to the net present value of the future annual payments (calculated at inception based on the Company's implicit borrowing rate of 6.75%). Interest expense is recognized ratably over the term of the agreement. The Company recognized interest expense of $1,880 and $1,650 relative to this agreement during 1996 and 1995, respectively. During January 1994, the Company signed an agreement with an individual to acquire various technologies valued at $5,000. In exchange, the Company issued a non-negotiable, subordinated convertible note. The note, in the principal sum of $4,500, is due January 11, 2004, and bears interest at a rate equal to the rate that the Company actually earns on its investments calculated on an annual basis. Interest is payable annually. At any time after January 11, 1996, at the election of the individual, the note may be converted into 178,571 shares of common stock of the Company. The Company recorded the $500 differential between the value of technologies and the principal sum of the note as an increase in common stock. 35 39 Long-term debt at December 31, 1996 and 1995 consists of:
- ------------------------------------------------------------------------------- 1996 1995 - -------------------------------------------------------------------------------- Present value of amounts due under the G.I. Agreement $ 22,998 $ 32,715 Subordinated convertible note 4,500 4,500 Various term loans with banks at fixed interest rates from 0% to 9% maturing from 1997 to 1999 with annual installments ranging from $17 to $162 639 815 Capital lease obligations 850 181 - -------------------------------------------------------------------------------- 28,987 38,211 Less current maturities (16,687) (10,086) - -------------------------------------------------------------------------------- $ 12,300 $ 28,125 ================================================================================
At December 31, 1996, aggregate required payments of long-term debt, including capitalized lease obligations, are as follows: - -------------------------------------------------------------------------------- 1997 $18,225 1998 7,819 1999 276 2000 160 2001 10 Thereafter 4,500 - -------------------------------------------------------------------------------- $30,990 ================================================================================
11. MINORITY INTERESTS In February 1996, the Company established Kobayashi Sofamor Danek K.K. ("KSD") in Japan. The Company and Kobayashi Pharmaceutical Co., Ltd. ("KPC") each hold a 50% interest in KSD; however, the Company controls the financial and operational direction of KSD. KSD sells the Company's products exclusively to KPC. During 1996, the Company made a $26,700 prepayment of commissions to KPC under a thirty year agreement. The Company is amortizing the balance based upon sales to KPC. At December 31, 1996, the Company has recorded an aggregate of $26,338 included in prepaid expenses and other assets, which represents the unamortized portion of the prepayment. In November 1996, the Company established Danek Korea Co., Ltd. ("DK") in Korea. The Company and Joint Medical Company ("JMC") each hold a 50% interest in DK; however, the Company controls the financial and operational direction of DK. DK sells the Company's products exclusively to JMC. During 1996, in the aggregate, the Company recorded sales of $28,843 to KPC and JMC. At December 31, 1996, the Company had total receivables, in the aggregate, of $8,498 from KPC and JMC. 36 40 12. INCOME TAXES The provision (benefit) for income taxes for the years ended December 31, is as follows:
- ---------------------------------------------------------------------------------- U.S. FEDERAL STATE FOREIGN TOTAL - ---------------------------------------------------------------------------------- 1996 Current $ 11,061 $ 1,387 $ 4,676 $ 17,124 Deferred (16,010) (2,837) 427 (18,420) - ---------------------------------------------------------------------------------- (4,949) (1,450) 5,103 (1,296) Charge in lieu of income taxes 2,240 349 -- 2,589 - ---------------------------------------------------------------------------------- $ (2,709) $ (1,101) $ 5,103 $ 1,293 ================================================================================== 1995 Current $ 7,587 $ 805 $ 670 $ 9,062 Deferred (16,141) (171) (3) (16,315) - ---------------------------------------------------------------------------------- (8,554) 634 667 (7,253) Charge in lieu of income taxes 794 140 -- 934 - ---------------------------------------------------------------------------------- $ (7,760) $ 774 $ 667 $ (6,319) ================================================================================== 1994 Current $ 4,896 $ 627 $ 24 $ 5,547 Deferred (400) (14) 665 251 - ---------------------------------------------------------------------------------- 4,496 613 689 5,798 Charge in lieu of income taxes 220 34 -- 254 - ---------------------------------------------------------------------------------- $ 4,716 $ 647 $ 689 $ 6,052 ==================================================================================
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:
- -------------------------------------------------------------------------------- 1996 1995 - -------------------------------------------------------------------------------- Current deferred income tax assets: Accounts receivable $ 356 $ 322 Inventory 3,680 3,720 Other 1,276 657 -------------------------------------------------------------------------------- Total current deferred income tax assets 5,312 4,699 - -------------------------------------------------------------------------------- Non-current deferred income tax assets: Product liability litigation 17,500 -- License agreement 14,017 15,075 Other 1,485 191 - -------------------------------------------------------------------------------- Total non-current deferred income tax assets 33,002 15,266 - -------------------------------------------------------------------------------- Total deferred income tax assets $38,314 $19,965 ================================================================================ Non-current deferred income tax liabilities: Property, plant and equipment $ 121 $ 191 - -------------------------------------------------------------------------------- Total non-current deferred income tax liabilities $ 121 $ 191 ================================================================================
No valuation allowance was recorded since sufficient taxable income exists in available carryback periods to fully recognize these net deferred tax assets. 37 41 A reconciliation of federal statutory and effective income tax rates is as follows:
- -------------------------------------------------------------------------------- 1996 1995 1994 - -------------------------------------------------------------------------------- Statutory U.S. federal income tax rate 35.0% 35.0% 35.0% Effect of: Foreign operations (12.3) 732.7 (8.0) State income taxes, net of income tax benefit (7.3) (46.2) 1.3 Tax credits (2.0) 20.5 (2.9) Inventory contribution (4.2) -- (1.4) Other, net -- (66.2) (3.7) - -------------------------------------------------------------------------------- Effective rate 9.2% 675.8% 20.3% ================================================================================
13. RELATED PARTY TRANSACTIONS At December 31, 1995, the Company had loans of $4,165 to the Company's Chairman and Chief Executive Officer ("Chairman") for the purchase of common stock of the Company and for personal income taxes resulting from the exercise of common stock options and the vesting of certain restricted stock. Interest was charged at the applicable short-term federal rate as prescribed by the Internal Revenue Service and was due annually. During 1996, the Company's Board of Directors approved an amendment to the Chairman's loan forgiveness arrangements providing for forgiveness of the loans and the related compensation expense in increments beginning in 1996 through 2005 and for paying all future applicable taxes and interest on the loans. This forgiveness is conditional upon the Chairman remaining continuously employed by the Company for the next ten years and certain performance criteria. In the event of a change in control of the Company, the loans are immediately forgiven. The balance of the loans at December 31, 1996 was approximately $3,715 and collateralized by 200,000 shares of common stock. 14. COMMITMENTS AND CONTINGENCIES The Company and its subsidiaries lease certain equipment and facilities under non-cancelable operating leases expiring in 2001. The future annual minimum rent payments under these leases at December 31, 1996 are as follows:
- -------------------------------------------------------------------------------- YEAR - -------------------------------------------------------------------------------- 1997 $2,110 1998 1,572 1999 1,314 2000 1,070 2001 77 - -------------------------------------------------------------------------------- $6,143 ================================================================================
Rent expense for 1996, 1995, and 1994, including month-to-month leases, was approximately $1,914, $903, and $711, respectively. The Company has agreements with certain entities which provide the Company the rights to manufacture and market certain spinal system products developed and patented by these entities. The agreements provide for royalty payments ranging from 1% to 10% of the net selling prices (as defined by the agreements) of all the products sold or for required royalty payments, based on a predefined fee. These agreements are in force as long as the Company sells the related products. Royalty expense was $6,768, $5,907, and $4,083 in 1996, 1995, and 1994, respectively. 38 42 At December 31, 1996, the Internal Revenue Service was conducting an audit of the Company's federal tax returns for the fiscal years ended December 31, 1995 and 1994. The Company is unable at this time to make a determination as to the ultimate outcome or the financial impact of these audits. 15. LITIGATION The Company is involved from time to time in litigation on various matters which are routine to the conduct of this business, including product liability and intellectual property cases. PRODUCT LIABILITY CASES Multidistrict Litigation: In 1994, the Company and other spinal implant manufacturers were named as defendants in purported class action product liability lawsuits in various federal courts throughout the country alleging that plaintiffs were injured by spinal implants manufactured by the Company and others. On August 4, 1994, the Federal Judicial Panel on Multidistrict Litigation ordered that all federal court lawsuits then existing be transferred to and consolidated for pretrial proceedings, including the determination of class certification, in the United States District Court for the Eastern District of Pennsylvania in Philadelphia (the "Multidistrict Litigation"). Federal court lawsuits filed after August 4, 1994 have also been transferred to and consolidated in the Eastern District of Pennsylvania. On February 22, 1995, Chief Judge Emeritus Louis C. Bechtle denied class certification. The federal court lawsuits before Judge Bechtle will remain coordinated for further pretrial purposes but are individual lawsuits. As previously disclosed, as a result of the denial of class certification by Judge Bechtle, a large number of additional plaintiffs have filed lawsuits alleging injuries caused by spinal implants manufactured by the Company. To date, approximately two thousand eight hundred (2,800) plaintiffs have filed lawsuits against the Company, with a few also naming as defendants various officers and directors of the Company. A majority of these plaintiffs filed their claims in 1995. Also, plaintiffs' lawyers have filed lawsuits involving about two thousand eight hundred fifty (2,850) claimants alleging a conspiracy theory among doctors, manufacturers (including the Company), hospitals, teaching institutions, professional societies and others to promote, in violation of applicable law, the use of spinal implants. Some plaintiffs have filed individual lawsuits, whereas other lawsuits list multiple plaintiffs and, in certain instances, multiple lawsuits have been filed on behalf of the same individual plaintiffs. On August 22, 1996, Judge Bechtle dismissed without prejudice plaintiffs' conspiracy claims. Many plaintiffs asserting these conspiracy claims have filed amended or new complaints, but it is not possible at this time to determine precisely how many of these conspiracy complaints will be reasserted or the number of additional plaintiffs that may file lawsuits. The majority of such lawsuits were filed in federal courts throughout the country and are in the preliminary stages. Discovery proceedings, including the taking of depositions, have been ongoing in certain of the lawsuits that were first to be filed. Discovery in certain cases that were filed later will begin in 1997. Over one thousand eight hundred (1,800) of the plaintiffs have had their lawsuits returned to the state court in Memphis, Tennessee because it was determined that the federal courts lacked jurisdiction over their claims. It is anticipated that the Memphis, Tennessee state court judge will establish a schedule for case management and discovery. The trials of a number of lawsuits involving individual plaintiffs are scheduled to begin in the first six months of 1997, although delays in trial dates are common. Although plaintiffs have advanced claims under many different legal theories, the essence of plaintiffs' claims appears to be that the Company (including Sofamor and its former U.S. distributor) marketed some of its spinal systems for pedicle fixation in contravention of FDA rules and regulations (governing marketing and labeling), that pedicle fixation has not been proven safe and efficacious in the context of FDA labeling standards and that plaintiffs have suffered a variety of injuries as a result of the use of the systems for pedicle fixation. Plaintiffs in these cases typically seek relief in the form of monetary damages, often in unspecified amounts. Many of the plaintiffs only allege as monetary damages an amount in excess of the jurisdictional minimum for the courts in which such cases are filed. In December 1996, AcroMed Corporation ("AcroMed"), a spinal implant manufacturer and a defendant in various of the cases pending in the Multidistrict Litigation, and the Plaintiffs' Legal Committee in the Multidistrict Litigation announced that they have entered into an understanding to resolve all product liability claims involving 39 43 the use of AcroMed devices to achieve pedicular fixation in spinal fusion surgery. Under the announced terms of the proposed settlement, AcroMed will establish a settlement fund consisting of $100 million in cash and the proceeds of its product liability insurance policies. The parties submitted in January 1997 a formal class settlement agreement and related documentation for approval by Judge Bechtle. A hearing (scheduled for April 23, 1997) will be held to consider the fairness, adequacy and reasonableness of the settlement. All federal court proceedings involving AcroMed devices have been stayed pending final consideration of the proposed settlement. Tennessee and Oregon Product Liability Actions: In January 1995, the Company and other spinal implant manufacturers, doctors and a hospital were named defendants in a purported class action product liability lawsuit filed in Nashville, Tennessee state court. This lawsuit is limited to those individuals whose surgeries were performed at one specific hospital. Class certification has been denied by the trial judge in Nashville. The judge has selected two of the Company's cases as test cases to be prepared for trial. Fact discovery in these cases is scheduled for completion by March 1997. All other proceedings are stayed. In October 1995, the Company was served with a Portland, Oregon state court complaint that purported to be a class action. This Oregon complaint alleged, among other things, injury based upon various legal theories. In March 1996, the plaintiffs in this Oregon case withdrew the class allegations. Discovery has begun in these individual cases. In these Tennessee and Oregon actions, plaintiffs, who seek relief in the form of monetary damages of unspecified amounts, are continuing their lawsuits as individual cases. The Company believes that it has defenses, including, without limitation, defenses based upon the failure of a cause of action to exist where no malfunction of the implant has occurred or the plaintiff has suffered no injury attributable to the Company's product, the expiration of the applicable statute of limitations and the learned intermediary defense. The Company has and will continue to assert the defenses primarily through the filing of dispositive motions. The Company believes that all product liability lawsuits currently pending against it are without merit and will continue to defend them vigorously. All pending cases are currently being defended by insurance carriers, generally under reservation of rights. To date the cost of defending against claims has been largely reimbursed by the Company's insurers. The Company's insurance policies are reduced by the costs of defense, except for a policy issued by Royal Surplus Lines Insurance Co. ("Royal") covering the 12-month period that began in November 1995 (see below). The Company estimates that the litigation may continue for several years and, if so, the cost to defend and conclude these lawsuits is likely to exhaust its insurance coverage. An insurer, Royal, providing coverage for the 12-month period commencing in November 1995, brought an action in early December 1996 in the Federal District Court for the Middle District of Tennessee (Nashville Division) seeking a declaratory judgment as to, among other things, whether the policy covers lawsuits which have been reported to the insurer during the policy period. At December 31, 1996, the Company had a receivable from Royal of approximately $2.5 million for legal fees associated with the Company's product liability litigation paid by the Company during the policy year. The Company believes that the receivable is recoverable under the terms of the policy. The case is in a preliminary stage. Discovery has just been initiated. The Company believes the suit is without merit and will defend it vigorously. As is common in the insurance industry, the Company's insurance policies covering product liability claims must be renewed annually. Although the Company has been able to obtain insurance coverage relating to product liability claims at a cost and on other terms and conditions that are acceptable to the Company, there can be no assurance that in the future it will be able to do so. On January 6, 1997, the Company announced that its 1996 financial results would include a pre-tax charge of $50 million relating to costs associated with the product liability litigation described above. The charge, which has now been reflected in the Company's 1996 financial statements, covers the reasonably foreseeable costs that the Company was positioned in late December to estimate because the litigation had progressed and because changes in the fourth quarter of 1996 had occurred in facts and circumstances relating to the litigation. Among the changed facts and circumstances were the announcement of the AcroMed proposed settlement described above, the additional financial resources available to the plaintiffs' attorneys as a result of the settlement if the proposed settlement is ultimately approved, the likelihood that the litigation will continue for several years, in part, due to the 40 44 additional financial resources provided to plaintiffs' attorneys if the proposed settlement is approved, the absence of AcroMed as a member of the joint defense group, the status of the Company's insurance described above and the continuing absence of dispositive rulings relating to the Company's defense motions. While it is not possible to accurately predict the outcome of litigation, the amount of the charge taken in the fourth quarter represents the Company's best judgment of the probable reasonable costs (in excess of available insurance) to defend and conclude the lawsuits based on the facts and circumstances currently existing. The costs provided for include, but are not limited to, legal fees paid or anticipated to be paid and other costs related to the Company's defense and conclusion of these matters. The actual costs to the Company could differ from the estimated charge and will be dependent upon a number of factors that will not be known for some time, including, among other things, the resolution of defense motions and the extent of further discovery. Although an adverse resolution of the lawsuits could have a material effect on the Company's results of operations in future periods, the Company does not believe that these matters will in the future have a material adverse effect on its consolidated financial position. The Company is unable to predict the ultimate outcome or the financial impact of the product liability litigation. SECURITIES LAWS ACTIONS Beginning in April 1994, the Company and four of its officers and directors were named in five shareholder lawsuits filed in the United States District Court in Memphis, Tennessee. Four of the lawsuits purport to be class actions. All of the lawsuits were consolidated into one case in the United States District Court in Memphis through an amended complaint which added four new individual defendants who are either current or former directors of the Company. The lawsuit alleges that the defendants made false and misleading statements and failed to disclose material facts to the investing public and seeks money damages. The alleged securities law violations are based on the claim that the defendants failed to disclose that the Company sold its products illicitly, illegitimately and improperly and to timely disclose facts concerning the termination of the former United States distributor of Sofamor products, National Medical Specialties, Inc. ("NMS"). The allegations relating to illicit and illegitimate sales of product are, for the most part, copied from product liability complaints filed against the Company and other manufacturers currently being coordinated in the United States District Court for the Eastern District of Pennsylvania which are referred to above. The allegations of improper sales relate to one of the Company's selling programs which has been publicly disclosed since May 1991. The allegations concerning NMS relate to the termination of the NMS distribution agreement covering Sofamor products in the United States. On October 3, 1995, the United States District Court Judge in Memphis dismissed with prejudice the entire case against the Company and each of the individual defendants. The plaintiffs have appealed the dismissal to the United States Court of Appeals for the Sixth Circuit, which has not yet ruled on this appeal. SPANISH DISTRIBUTOR ACTION In late September 1994, a Magistrate of the Commercial Court in Paris ruled in favor of a former Spanish distributor of Sofamor's products on a claim of wrongful termination of the distribution agreement in 1992. Prior to the Combination, an accrual was established, with a related charge to earnings, for this pending litigation. On the Combination date in June 1993, the Company also established a separate indemnity with respect to potential losses resulting from such lawsuit and placed in escrow shares issued to the former Sofamor shareholders pending the final outcome of this lawsuit. The $3.0 million award (including interest) rendered by the French Magistrate exceeded the pre-established accrual. As a result, the Company recorded an expense of $2.2 million for the non-recurring litigation award during the third and fourth quarters of 1994. The Company filed an appeal which involves a complete retrial on all issues. The former Spanish distributor recently filed its papers in the appeal and seeks additional damages; the Company seeks to have the decision of the Commercial Court reversed. A hearing on the appeal is currently scheduled for the fourth quarter of 1997. The Company does not believe the Securities Laws Actions or the Spanish Distributor Action, described above, will have a material adverse effect on its consolidated financial position, results of operations or cash flows because of, among other reasons, the facts and circumstances existing with respect to each action, the Company's belief that 41 45 these actions are without merit, certain defenses available to the Company and the availability of insurance in the Securities Laws Actions. 16. STOCK OPTION AND RESTRICTED STOCK PLANS In 1990, the Company adopted an incentive stock option plan (the "1990 Plan") for certain key employees, covering 1,475,000 shares of common stock, a non-qualified stock option plan for distributors and consultants (the "Distributor and Consultant Plan") covering 225,000 shares of common stock, and a restricted stock plan covering 148,450 shares of common stock. The number of shares covered under the 1990 Plan was subsequently reduced to 675,000 on June 21, 1993. Under the Distributor and Consultant Plan, the exercise price may not be less than $2.22 per share. Options have a maximum term of ten years from the date of the option grant. During 1995, the number of shares of common stock covered was increased to 625,000. In February 1991, the Company adopted a stock option plan for certain directors of the Company (the "Directors' Plan"). In December 1992, the Company adopted the 1993 long-term incentive plan (the "Long-Term Incentive Plan") for certain directors and key employees, covering 500,000 shares of common stock. The number of shares of common stock reserved under the Long-Term Incentive Plan was increased to 800,000 in 1993, to 2,500,000 in 1994 and to 3,500,000 in 1995. Awards may be in the form of stock options to purchase shares, stock appreciation rights, performance units, restricted stock or any combination of the above. Options have a maximum term of ten years from the date of the option grant. Under the Long-Term Incentive Plan, the exercise price shall be determined by the Company, except that the exercise price may not be less than the market price at the date of the option grant for any incentive stock options awarded. During 1996, the Board of Directors proposed an amendment to the Company's Long-Term Incentive Plan to increase the number of shares of the common stock available under the Plan by 2,500,000, contingent upon approval by the Company's shareholders. Also, the Board of Directors proposed an amendment to the Company's Incentive Stock Option Plan to decrease the number of shares of the common stock available under the Plan by 61,642. 42 46 Activity under all of the stock option plans, including the 2,500,000 shares of common stock approved by the Board of Directors in 1996, for the years ended December 31, 1996, 1995, and 1994 is summarized as follows:
- -------------------------------------------------------------------------------------------------------------------- 1996 1995 1994 - -------------------------------------------------------------------------------------------------------------------- Shares under option at beginning of year 3,597,939 2,661,120 808,648 Granted 1,621,150 1,453,700 2,511,000 Exercised (417,744) (231,653) (54,062) Lapsed (37,873) (285,228) (70,766) Terminated (468,100) - (533,700) ------------------------------------------------------------------------------------------------------------------- Shares under option at end of year 4,295,372 3,597,939 2,661,120 ==================================================================================================================== Shares under option exercisable at end of year 1,175,832 863,739 480,740 Price range of shares under option excercisable at end of year $3.87 - $37.50 $3.87 - $37.50 $3.87 - $37.50 Weighted average exercise price $16.17 $14.75 $12.45 Shares available for future grant 2,057,068 733,887 502,359 ====================================================================================================================
Additional information regarding stock options outstanding at December 31, 1996 is shown below:
OUTSTANDING OPTIONS EXERCISABLE OPTIONS - -------------------------------------------------------------------------------------------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE REMAINING TERM EXERCISE OPTION PRICE RANGE OPTION SHARES PRICE OPTION SHARES PRICE - -------------------------------------------------------------------------------------------------------- $ 3.50 - $14.50 1,625,880 $12.57 8.8 years 719,976 $12.17 $14.51 - $24.50 1,709,342 $20.05 8.4 years 318,056 $19.76 $24.51 - $37.50 960,150 $27.12 9.1 years 137,800 $28.73
The Company applies APB Opinion No. 25 and related Interpretations in accounting for its plans. SFAS 123, "Accounting for Stock-Based Compensations ("SFAS 123") was issued during 1995 and changes the methods for recognition of cost on plans similar to those of the Company. Adoption of the accounting provisions of SFAS 123 is optional; however, pro forma disclosures as if the Company adopted the cost recognition requirements under SFAS 123 is presented below:
- -------------------------------------------------------------------------------- 1996 1995 - -------------------------------------------------------------------------------- AS REPORTED PRO FORMA AS REPORTED PRO FORMA - -------------------------------------------------------------------------------- Net income $11,267 $8,726 $4,967 $4,063 Net income per share $ 0.44 $ 0.34 $ 0.20 $ 0.16
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants in 1996: dividend yield of 0%, expected volatility of 44.4%, risk-free interest rate of 6.2%, and expected lives of 4.2 years; 1995: dividend yield of 0%, expected volatility of 44.4%, risk-free interest rate of 6.3%, and expected lives of 4.2 years. The weighted average fair value of options at grant date were $12.59 and $8.20 in 1996 and 1995, respectively. 43 47 The effects of applying SFAS 123 in this pro forma disclosure are not indicative of future amounts. SFAS 123 does not apply to awards prior to 1995, and additional awards in future years are anticipated. 17. NET INCOME PER COMMON SHARE Primary and fully diluted net income per common share are computed by dividing net income by the weighted average number of common shares and common share equivalents outstanding during the period. Common stock equivalents are in the form of stock options which have an effect on 1996, 1995 and 1994 primary and fully diluted net income per common share calculations. Common stock equivalents for 1996 and 1995 also include assumed converted debt securities. For the years ended December 31, 1996 and 1995, net income was adjusted by $124 and $115, respectively, to calculate earnings per share. This adjustment represented the interest charges, net of taxes, incurred in relation to convertible debt which was assumed to be converted for the weighted average number of shares calculation. Share equivalents used for fully diluted calculations in 1996, 1995 and 1994 are higher than share equivalents used for primary net income per share calculations due to the higher fair value of the common stock at the year end versus the average fair value of the stock during the year. The following table presents information necessary to calculate net income per share for the fiscal years ended December 31, 1996, 1995 and 1994:
- ----------------------------------------------------------------------------------------------------------- 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------- Primary: Weighted average shares outstanding 24,284,005 23,846,242 24,013,855 - ----------------------------------------------------------------------------------------------------------- Shares equivalents 1,762,442 1,369,363 482,852 26,046,447 25,215,605 24,496,707 =========================================================================================================== Fully diluted: Weighted average shares outstanding 24,284,005 23,846,242 24,013,855 Shares equivalents 1,824,548 1,548,519 568,220 - ----------------------------------------------------------------------------------------------------------- 26,108,553 25,394,761 24,582,075 ============================================================================================================
18. ACCRUED EXPENSES Accrued expenses at December 31, 1996 and 1995 consist of the following:
- -------------------------------------------------------------------------------------------------------- 1996 1995 - -------------------------------------------------------------------------------------------------------- Amounts due to suppliers $ 2,045 $ 2,778 Commissions 5,001 3,420 Payroll, benefits, and related taxes 12,493 3,848 Royalties 2,288 1,452 Amount due to former shareholders of acquired company 4,174 - Interest 1,018 1,879 Product liability litigation 2,000 - Other 9,751 7,757 - -------------------------------------------------------------------------------------------------------- $ 38,770 $ 21,134 =========================================================================================================
19. EMPLOYEE BENEFIT PLANS In January 1990, the Company adopted an employee savings plan under Section 401(k) of the Internal Revenue Code. This plan covers all employees that are 21 years of age and have completed at least six months of continuous service with the Company. In 1994, the Company's allowable match was 50% of the employees' contributions up to a maximum of 4% of the payroll of each participant. In 1995, the Company increased its maximum matching contribution to equal 100% of the employee's first 3% contributed and 50% of the next 2%. These matching percentages are subject to revision at the discretion of the Company's Board of Directors. Company contributions generally vest at 20% per year beginning the end of the second year of service with the participants becoming fully 44 48 vested in the sixth year of service. The amount charged against income in 1996, 1995, and 1994 was approximately $477, $385, and $172, respectively. In November 1991, the Company adopted an employee stock purchase plan ("ESPP") to provide employees of the Company the opportunity to purchase shares of common stock of the Company. The ESPP covers full-time employees of the Company (as defined by the ESPP) that have completed 6 months of employment. An aggregate of 60,000 of the Company's shares of common stock have been reserved for inclusion in the ESPP. The amount charged against income in 1996, 1995, and 1994 was approximately $22, $14, and $19, respectively, which represented the Company's contribution of 15% of the employee's contribution. 20. DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amount for cash, short-term investments, notes and other receivables, and notes and loans payable approximates fair value due to the short maturity of these instruments. The fair value of the Company's long-term debt is estimated based on current rates offered to the Company for debt of the same remaining maturities or quoted market prices for the shares of stock to which the debt instrument may be converted, as applicable. The estimated fair value of the Company's financial instruments at December 31, 1996 are as follows:
- -------------------------------------------------------------------------------- CARRYING AMOUNT FAIR VALUE - -------------------------------------------------------------------------------- Cash and short-term investments $ 2,830 $ 2,830 Short-term investments 111 111 Other receivables 15,813 15,813 Notes payable and lines of credit 50,207 50,207 Long-term debt 28,987 30,778 - -------------------------------------------------------------------------------- $ 97,948 $ 99,739 ================================================================================
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information set forth under the caption "Election of Directors" contained on pages 2 and 3 of the Company's definitive Proxy Statement for its 1997 Annual Meeting of Shareholders (the "1997 Proxy Statement") is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information set forth under the captions "Executive Compensation" contained on pages 8 and 9 of the Company's 1997 Proxy Statement is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information set forth under the caption "Common Stock Owned by Principal Shareholders and Management" contained on pages 6 and 7 of the Company's 1997 Proxy Statement is incorporated herein by reference. 45 49 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information set forth under the caption "Certain Relationships and Related Transactions" contained on pages 16 and 17 of the Company's 1997 Proxy Statement is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (A) DOCUMENTS FILED AS PART OF THIS REPORT (1) Financial Statements Report of Independent Public Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Consolidated Balance Sheets--December 31, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . . . . 25 Consolidated Statements of Income--Years ended December 31, 1995, 1994 and 1993 . . . . . . . . . . . . 26 Consolidated Statements of Changes in Stockholders' Equity--Years ended December 31, 1995, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Consolidated Statements of Cash Flows--Years ended December 31, 1995, 1994 and 1993 . . . . . . . . . . 28 Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 (2) Financial Statement Schedules Report of Independent Accountants on Financial Statement Schedules . . . . . . . . . . . . . . . . . . 48 Schedule VIII--Valuation and Qualifying Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Schedules other than those referred to above have been omitted because they are not required or because the information is included elsewhere in the Consolidated Financial Statements. (3) Exhibits See Index to Exhibits (B) REPORTS ON FORM 8-K None 46 50 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SOFAMOR DANEK GROUP, INC. (REGISTRANT) BY: /s/ E. R. PICKARD -------------------------------------- E. R. PICKARD CHAIRMAN, CHIEF EXECUTIVE OFFICER AND DIRECTOR MARCH 21, 1997 ------------------------------------- DATE Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE (CAPACITY) DATE - --------- ---------------- ---- /s/ E. R. Pickard Chairman, Chief Executive Officer and March 21, 1997 - --------------------------- Director (Principal Executive Officer) E. R. Pickard /s/ Laurence Y. Fairey Chief Financial Officer and Executive Vice March 21, 1997 - --------------------------- President (Principal Financial and Laurence Y. Fairey Accounting Officer) L. D. Beard* Director March 21, 1997 - --------------------------- L. D. Beard George W. Bryan, Sr.* Director March 21, 1997 - --------------------------- George W. Bryan, Sr. Robert A. Compton* Director March 21, 1997 - --------------------------- Robert A. Compton Yves Paul Cotrel, M.D.* Director March 21, 1997 - --------------------------- Yves Paul Cotrel, M.D. /s/ James J. Gallogly Director, President and March 21, 1997 - --------------------------- Chief Operating Officer James J. Gallogly Samuel F. Hulbert, Ph.D.* Director March 21, 1997 - --------------------------- Samuel F. Hulbert, Ph.D. Marie-Helene Plais, M.D.* Director March 21, 1997 - --------------------------- Marie-Helene Plais, M.D. George F. Rapp, M.D.* Director March 21, 1997 - --------------------------- George F. Rapp, M.D.
*By: /s/ J. Mark Merrill --------------------- J. Mark Merrill Attorney-in-Fact 47 51 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS Our report on the consolidated financial statements of Sofamor Danek Group, Inc. and Subsidiaries is included on page 24 of this Form 10-K. In connection with our audits of such consolidated financial statements, we have also audited the related consolidated financial statement schedule in the index on page 46 of this Form 10-K. In our opinion, the consolidated financial statement schedule referred to above, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. COOPERS & LYBRAND, L.L.P. Memphis, Tennessee January 31, 1997 48 52 SOFAMOR DANEK GROUP, INC. AND SUBSIDIARIES SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
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, -------------------------------- 1996 $1,555 $705 $(698) (1) $ 27 $1,589 1995 1,654 318 (704) (1) 287 1,555 1994 1,074 966 (377) (1) (9) 1,654
(1) Amounts written off during the year (2) Foreign currency translation adjustment 49 53 SOFAMOR DANEK GROUP, INC. ANNUAL REPORT ON FORM 10-K DECEMBER 31, 1996 INDEX TO EXHIBITS
Number Assigned in Regulation S-K, Item 601 Description of Exhibit - -------------- ---------------------- (3) 3.1 Amended and Restated Articles of Incorporation of Sofamor Danek Group, Inc. (the "Company") (1) (3.1), as further amended by Articles of Amendment dated June 22, 1993 (6) (3.1) 3.2 * Amended and Restated Code of By-Laws of the Company (4) 4.1 Form of Certificate for Common Stock (6) (4.1) (10) 10.1 Agreement by and between Danek Medical, Inc. and Texas Scottish Rite Hospital for Crippled Children, dated August 9, 1988, as amended by a letter agreement dated August 21, 1991, amending the schedule to the Agreement (3) (10.17) 10.2 Agreement by and between AcroMed Corporation and Danek Medical, Inc., dated March 29, 1989, as amended (2) (10.18) 10.3 Agreement for Sublease by and between Word, Inc. and the Company, dated February 29, 1988 (2) (10.24) 10.4 * $40,000,000 Revolving Line of Credit Loan Agreement with Third National Bank in Nashville dated October 14, 1994, (the "Revolving Loan Agreement") as amended by * Amendment to Revolving Loan Agreement dated June 30, 1995, * Second Amendment to Revolving Loan Agreement dated October 11, 1995, * Third Amendment to Revolving Loan Agreement dated August 1, 1996, and * Fourth Amendment to Revolving Loan Agreement dated January 31, 1997. 10.5 Stock Exchange Agreement, dated as of March 28, 1993, among the Company and the Holders listed on the signatory pages thereto of all of the issued and outstanding shares of capital stock of Sofamor, S.A. (4) (2.1) 10.6 Amendment No. 1 to the Stock Exchange Agreement, dated as of June 21, 1993, among the Company and the Holders of all of the capital stock of Sofamor, S.A. (5) 10.7 Shareholders' Agreement among the Company, the shareholders listed on the signatory pages thereto and SOFYC, S.C., as the Designated Representative of such shareholders (4) (10.1)
i 54
Number Assigned in Regulation S-K, Item 601 Description of Exhibit - -------------- ---------------------- 10.8 Escrow Agreement among the Company, the Holders listed on the signatory pages thereof of all of the issued and outstanding capital stock of Sofamor, S.A. and Citibank, N.A. as escrow agent dated June 21, 1993 (4) (10.2) 10.9 Intellectual Property Purchase Agreement, dated as of March 28, 1993, among the Company, Dr. Yves Paul Cotrel and Sofamor, S.A. (4) (10.3) 10.10 Amended and Restated License Agreement between Genetics Institute, Inc. and Sofamor Danek Properties, Inc. dated February 15, 1995 (8) (10.1) MANAGEMENT CONTRACTS, COMPENSATORY PLANS OR ARRANGEMENTS, ETC. 10.11 Employment Agreement and Letter Agreement between Richard E. Duerr, Jr. and the Company dated January 1, 1996 (9) (10.15) 10.12 Employment Agreement and Letter Agreement between Laurence Y. Fairey and the Company dated January 1, 1996 (9) (10.16) 10.13 Employment Agreement and Letter Agreement between Mark D. LoGuidice and the Company dated January 1, 1996 (9) (10.17) 10.14 Employment Agreement and Letter Agreement between J. Mark Merrill and the Company dated January 1, 1996 (9) (10.18) 10.15 * Employment Agreement between Peter J. Elkhuizen and the Company dated October 30, 1996. 10.16 Employment Agreement and Letter Agreement between Richard W. Treharne and the Company dated January 1, 1996 (9) (10.20) 10.17 Employment Agreement and Letter Agreement between Don W. Urbanowicz and the Company dated January 1, 1996 (9) (10.21) 10.18 Employment Agreement between R. Lew Bennett and the Company dated January 1, 1996 (9) (10.22) 10.19 Employment Agreement between Gene B. Sponseller and the Company dated January 1, 1996 (9) (10.24) 10.20 Letter Agreement between E. R. Pickard and the Company dated January 1, 1996 and Resolution of the Company's Compensation Committee (9) (10.25) 10.21 Letter Agreement between James J. Gallogly and the Company dated January 1, 1996 and Resolution of the Company's Compensation Committee (9) (10.26) 10.22 Employment Agreement between Sofamor and Marie-Helene Plais dated June 21, 1993 (6) (10.50)
ii 55
Number Assigned in Regulation S-K, Item 601 Description of Exhibit - -------------- ---------------------- - 10.23 Amended and Restated Non-Qualified Stock Option Plan (2) (10.25) 10.24 Non-Qualified Stock Option Agreement between the Company and E. R. Pickard dated November 30, 1990, (2) (10.26) as amended by an Amendment dated March 10, 1992 (3) (10.26) and by Second Amendment dated February 16, 1995 (7) (10.24) and by Third Amendment dated July 21, 1995 (9) (10.28) 10.25 Incentive Stock Option Plan, as amended (1) (10.30) 10.26 Amended and Restated Stock Option Plan for Distributors and Consultants (9) (10.30) 10.27 Non-Employee Directors' Stock Option Plan (2) (10.34) 10.28 * Cash Bonus Plan 10.29 * Employee Stock Purchase Plan 10.30 * Amended and Restated Loan Forgiveness Agreement dated October 11, 1996 between the Company and E.R. Pickard. 10.31 * 1993 Long-Term Incentive Plan, as amended 10.32 Stock Pledge Agreement between E. R. Pickard and the Company dated November 30, 1990. (6) (10.42) 10.33 Agreement between the Company and E. R. Pickard dated December 15, 1995 (9) (10.40) (22) 22.1 * Subsidiaries of the Company (24) 24.1 * Consent of Coopers & Lybrand, Independent Public Accountants (25) 25.1 * Powers of attorney from directors of the Company authorizing signature of this report (27) 27.1 * Financial Data Schedule (For SEC use only) (28) 28.1 * Annual Report on Form 11-K of the Employee Stock Purchase Plan for the fiscal year ended December 31, 1996 - ----------------------
* Previously unfiled documents are noted with an asterisk iii 56 (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.)
iv EX-3.2 2 CODE OF BY LAWS OF COMPANY 1 EXHIBIT 3.2 AMENDED AND RESTATED CODE OF BY-LAWS OF THE COMPANY 2 EXHIBIT 3.2 SOFAMOR DANEK GROUP, INC. an Indiana corporation CODE OF BY-LAWS ARTICLE I OFFICES SECTION 1.1 Registered Office. The registered office(s) of Sofamor Danek Group, Inc. (the OCorporationO) shall be in such place(s) as from time to time shall be deemed appropriate in accordance with applicable law. The Corporation shall have the power to designate from time to time those individuals and entities as registered agents of the Corporation for purposes of complying with the laws of the various states in which the Corporation may be required to maintain a registered agent. SECTION 1.2 Principal Office. The principal office for the transaction of the business of the Corporation shall be at such place as the Board of Directors of the Corporation (the OBoard of DirectorsO) may determine. The Board of Directors is hereby granted full power and authority to change the principal office from one location to another. SECTION 1.3 Other Offices. The Corporation may also have an office or offices at such other place or places, either within or without the State of Indiana, as the Board of Directors may from time to time determine or as the business of the Corporation may require. ARTICLE II MEETINGS OF SHAREHOLDERS SECTION 2.1 Place of Meetings. All annual meetings of shareholders and all other meetings of shareholders shall be held either at the principal office of the Corporation or at any other place within or without the State of Indiana that may be designated by the Board of Directors pursuant to authority hereinafter granted to the Board of Directors. SECTION 2.2 Annual Meetings. Annual meetings of shareholders of the Corporation for the purpose of electing directors and for the transaction of such other proper business as may properly come before such meetings may be held at such time and place and on such date as the Board of Directors shall determine by resolution. SECTION 2.3 Special Meetings. Special meetings of shareholders of the Corporation for any purpose or purposes may only be called by the Chairman of the Board of Directors, the President, or the Secretary of the Corporation and must be called by such officer at the request in 1 3 writing of the Board of Directors. The shareholders of the Corporation shall not be permitted to call special meetings of shareholders and shall not be permitted to require the Board of Directors to call a special meeting of shareholders. Any request for a special meeting of the shareholders shall be submitted in writing to the Chairman of the Board of Directors, the President, or the Secretary of the Corporation and shall state the purpose or purposes of the proposed special meeting. SECTION 2.4 Notice of Meetings. Except as otherwise required by any provision of the Indiana Business Corporation Law, the Articles of Incorporation or these By-Laws, the notice of each meeting of shareholders, whether annual or special, shall be given not less than ten (10) days nor more than sixty (60) days before the date of the meeting to each shareholder of record entitled to vote at such meeting by delivering a typewritten or printed notice thereof to each shareholder personally, or by depositing such notice in the United States mail, in a postage prepaid envelope, directed to each shareholder at each shareholder's address furnished by the shareholders to the Secretary of the Corporation for such purpose, or, if any shareholder shall not have furnished an address to the Secretary for such purpose, then at each shareholder's address last known to the Secretary, or by transmitting a notice thereof to such shareholder at such address by telegraph, cable, wireless or facsimile. Every notice of a meeting of shareholders shall state the place, date and hour of the meeting and, in the case of a special meeting, shall also state the purpose for which the meeting is called. Notice of any meeting of shareholders shall not be required to be given to any shareholder to whom notice is not required under applicable Indiana law or who shall have waived such notice, and such notice shall be deemed waived by any shareholder who shall attend such meeting in person or by proxy (except a shareholder who shall attend such meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened). Notice of any such meeting may be waived in writing by any shareholder if the waiver sets forth in reasonable detail the purpose or purposes for which the meeting is called, and the time and place thereof. Except as otherwise expressly required by law, notice of any adjourned meeting of shareholder need not be given if the time and place thereof are announced at the meeting at which the adjournment is taken. SECTION 2.5 Quorum. Except as otherwise required by law, the holders of record of a majority in voting interest of the shares of stock of the Corporation entitled to be voted, present in person or by proxy, shall constitute a quorum for the transaction of business at any meeting of shareholders of the Corporation or any adjournment thereof. Subject to the requirement of a larger percentage vote contained in the Articles of Incorporation, these By-Laws or by law, the shareholders present at a duly called or held meeting at which a quorum is present may continue to do business until adjournment. In the absence of a quorum at any meeting or any adjournment thereof, a majority in voting interest of the shareholders present in person or by proxy and entitled to vote, any officer entitled to preside at, or to act as secretary of, such meeting may adjourn such meeting from time to time. At any such adjourned meeting at which a quorum is present, any business may be transacted that might have been transacted at the meeting as originally called. 2 4 SECTION 2.6 Voting. (A) Each shareholder shall, at each meeting of shareholders, be entitled to vote in person or by proxy each share of the stock of the Corporation that has voting rights on the matter in question and that shall have been held by such shareholder and registered in such shareholder's name on the books of the Corporation: (i) on the date fixed pursuant to Section 8.5 of these By-Laws as the record date for the determination of shareholders entitled to notice of and to vote at such meeting; or (ii) if no such record date shall have been so fixed, then (a) at the close of business on the day next preceding the day upon which notice of the meeting shall be given or (b) if notice of the meeting shall be waived, at the close of the business on the day next preceding the day upon which the meeting shall be held. (B) Shares of its own stock belonging to the Corporation or to another corporation, if a majority of the shares entitled to vote in the election of directors in such other corporation is held, directly or indirectly, by the Corporation, shall neither be entitled to vote nor be counted for quorum purposes. Persons holding stock of the Corporation in a fiduciary capacity shall be entitled to vote such stock. Any shareholder whose stock is pledged shall be entitled to vote his or her shares, unless in the transfer by the pledgor on the books of the Corporation the pledgor shall have expressly empowered the pledgee to vote such shares, in which case only the pledgee, or the pledgee's proxy, may represent and vote such shares. Stock having voting power standing of record in the names of two or more persons, whether fiduciaries, members of a partnership, joint tenants, tenants in common, tenants by the entirety or otherwise, or with respect to which two or more persons have the same fiduciary relationship, shall be voted in accordance with the provisions of the Indiana Business Corporation Law. (C) Any voting rights may be exercised by the shareholder entitled thereto in person or by such shareholder's proxy appointed by an instrument in writing, subscribed by such shareholder or by such shareholder's attorney thereunto authorized and delivered to the Secretary of the Corporation prior to the meeting; provided, however, that no proxy shall be voted or acted upon after eleven months from its date unless such proxy shall provide for a shorter or longer period. The attendance at any meeting of a shareholder who may previously have given a proxy shall not have the effect of revoking such proxy unless the shareholder shall in writing so notify the Secretary of the Corporation prior to the voting of the proxy. At any meeting of shareholders, all matters, except as otherwise provided in the Articles of Incorporation, in these By-Laws or by law, shall be decided by the vote of a majority in voting interest of the shareholders present in person or by proxy and entitled to vote thereon. The vote at any meeting of shareholders on any matter need not be by ballot, unless so directed by the chairman of the meeting. On a vote by ballot, each ballot shall be signed by the shareholder voting, or by such shareholder's proxy, if such proxy exists, and shall state the number of shares voted. 3 5 SECTION 2.7 List of Shareholders. The Secretary of the Corporation shall make, at least five (5) business days before each election of directors, a complete list of the shareholders entitled by the Articles of Incorporation to vote at such election, arranged in alphabetical order, with the address and number of shares so entitled to vote held by each, which list shall be on file at the principal office of the Corporation and subject to inspection by any shareholder at any time during the usual business hours for a period of five (5) business days prior to such election. Such list shall be produced and kept open at the time and place of election and subject to the inspection of any shareholder during the holding of such election. The original stock register or transfer book shall be the only evidence as to who are the shareholders entitled to examine such list, or the stock ledger or transfer book, or to vote at any meeting of the shareholders. SECTION 2.8 Judges. If at any meeting of shareholders a vote by written ballot shall be taken on any question, the Chairman of such meeting may appoint a judge or judges to act with respect to such vote. Each judge so appointed shall first subscribe an oath faithfully to execute the duties of a judge at such meeting with strict impartiality and according to the best of such judge's ability. The appointed judges shall decide upon the qualification of the voters and shall report the number of shares represented at the meeting and entitled to vote on such question, shall conduct and accept the votes, and, when the voting is completed, shall ascertain and report the number of shares voted respectively for and against the question. Reports of judges shall be in writing and subscribed and delivered by them to the Secretary of the Corporation. The judges need not be shareholders of the Corporation, and any officer of the Corporation may be a judge on any question other than a vote for or against a proposal in which such officer shall have a material interest. 4 6 SECTION 2.9 Advance Notice of Shareholder Proposals and Shareholder Nominations. (A) At any meeting of the shareholders, only such business shall be conducted as shall have been brought before the meeting (i) by or at the direction of the Directors or (ii) by any shareholder of the Corporation who complies with the notice procedures set forth in this Section 2.9(A). For business to be properly brought before any meeting of the shareholders by a shareholder, the shareholder must have given notice thereof in writing to the Secretary of the Corporation not less than sixty (60) nor more than ninety (90) days in advance of the anniversary of the previous year's annual meeting or, if later, the seventh day following the first public announcement of the date of the meeting at which the shareholder wishes to bring business. A shareholder's notice to the Secretary shall set forth as to each matter the shareholder proposes to bring before the meeting (1) a brief description of the business desired to be brought before the meeting and the reasons for conducting such business at the meeting, (2) the name and address, as they appear on the Corporation's books, of the shareholder proposing such business, (3) the class and number of shares of the Corporation that are beneficially owned by the shareholder; and (4) any interest of the shareholder in such proposed business. In addition, the shareholder making such proposal shall promptly provide any other information reasonably requested by the Corporation which may include, but not be limited to compliance with applicable proxy rules of the Securities Exchange Act of 1934. Notwithstanding anything in these By-Laws to the contrary, no business shall be conducted at any meeting of the shareholders except in accordance with the procedures set forth in this Section 2.9. The Chairman of any such meeting shall direct that any business not properly brought before the meeting or which is not a proper subject for action by shareholders shall not be considered. (B) Nominations for the election of directors may be made by the Board of Directors or by any shareholder entitled to vote in the election of directors; provided, however, that a shareholder may nominate a person for election as a director at a meeting only if written notice of such shareholder's intent to make such nomination has been given to the Secretary of the Corporation not later than sixty (60) nor more than ninety (90) days in advance of the anniversary of the previous year's annual meeting or, if later, the seventh day following the first public announcement of the date of the meeting at which the shareholder wishes to bring business. Each such notice shall set forth: (i) the name and address of the shareholder who intends to make the nomination and of the person or persons to be nominated; (ii) a representation that the shareholder is a holder of record of stock of the Corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting and nominate the person or persons specified in the notice; (iii) a description of all arrangements, understandings or relationships between the shareholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the shareholder; (iv) such other information regarding each nominee proposed by such shareholder as would be required to be included in a proxy statement filed pursuant to the proxy rules of the United States Securities and Exchange Commission had the nominee been nominated, or intended to be nominated, by the Board of Directors; and (v) the consent of each nominee to serve as a director of the Corporation if so elected. In addition, the shareholder making such nomination shall promptly provide any other information reasonably requested by 5 7 the Corporation which may include, but not be limited to compliance with applicable proxy rules of the Securities Exchange Act of 1934. No person shall be eligible for election as a director of the Corporation unless nominated in accordance with the procedures set forth in this Section 2.9(B). The Chairman of any meeting of shareholders shall direct that any nomination not made in accordance with these procedures be disregarded. ARTICLE III BOARD OF DIRECTORS SECTION 3.1 Duties and Number. The business and affairs of the Corporation shall be managed under the direction of a Board of not fewer than seven (7) Directors and not more than eleven (11) Directors. The members shall select one of their number to act as Chairman of the Board. The Chairman of the Board shall preside at all meetings of the Shareholders and Board of Directors. SECTION 3.2 Election, Term of Office and Qualification. The directors shall be elected by the shareholders of the Corporation, and at each election, the persons receiving the greater number of votes, up to the number of directors then to be elected, shall be the persons then elected. The election of directors is subject to any provisions contained in the Articles of Incorporation relating thereto, including any provisions for a classified Board of Directors and for cumulative voting. Each of the directors of the Corporation shall hold office until the successor for any director shall have been duly elected and qualified, or until such director shall have been removed in the manner provided in these By-Laws. SECTION 3.3 General Powers. Subject to any requirement in the Articles of Incorporation, these By-Laws, and of the Indiana Business Corporation Law as to action which must be authorized or approved by the shareholders, any and all corporate powers shall be exercised by or under the authority of, and the business and affairs of the Corporation shall be under the direction of, the Board of Directors to the fullest extent permitted by law. SECTION 3.4 Meetings. (A) Meetings of the Board of Directors may be held at such times as the Board of Directors shall from time to time by resolution determine. If any day fixed for a regular meeting shall be a legal holiday at the place where the meeting is to be held, then the meeting shall be held at the same hour and place on the next succeeding business day not a legal holiday. Except as provided by law, notice of regular meetings need not be given. (B) The Board of Directors or any committee thereof may hold any of its meetings at such place or places within or without the State of Indiana as the Board of Directors or such committee may from time to time by resolution designate or as shall be designated by the person or persons calling the meeting or in the notice or a waiver of notice of any such meeting. Directors may participate in any regular or special meeting of the Board of Directors or any committee thereof by means of conference telephone or similar communications equipment pursuant to which all persons participating in the meeting of the Board of Directors or such 6 8 committee can hear each other, and such participation shall constitute presence in person at such meeting. SECTION 3.5 Special Meetings. Special meetings of the Board of Directors for any purpose or purposes shall be called at any time by the Chairman of the Board of Directors or, if the Chairman of the Board of Directors is absent or unable or refuses to act, by the President. Except as otherwise provided by law or by these By-Laws, written notice of the time and place of special meetings shall be delivered personally or by fax to each director, or sent to each director by mail or by other form of written communication, charges prepaid, addressed to such director at such director's address as it is shown upon the records of the Corporation, or, if it is not so shown on such records and is not readily ascertainable, at the place in which the meetings of the directors are regularly held. In case such notice is mailed or telegraphed, it shall be deposited in the United States mail or delivered to the telegraph company in the County in which the principal office for the transaction of the business of the Corporation is located at least one (1) day prior to the time of the holding of the meeting. In case such notice is delivered personally or by fax as above provided, it shall be delivered at least one (1) day prior to the time of the holding of the meeting. Meetings may be held on shorter notice if the circumstances so require. Such mailing, telegraphing, delivery or faxing as above provided shall be due, legal and personal notice to such director. Except where otherwise required by law or by these By-Laws, notice of the purpose of a special meeting need not be given. Notice of any meeting of the Board of Directors shall not be required to be given to any director who is present at such meeting, except a director who shall attend such meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. SECTION 3.6 Quorum and Manner of Acting. Except as otherwise provided in these By-Laws, the Articles of Incorporation or by applicable law, the presence of a majority of the authorized number of directors shall be required to constitute a quorum for the transaction of business at any meeting of the Board of Directors, and all matters shall be decided at any such meeting, a quorum being present, by the affirmative votes of a majority of the directors present. A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, provided any action taken is approved by at least a majority of the required quorum for such meeting. In the absence of a quorum, a majority of directors present at any meeting may adjourn the same from time to time until a quorum shall be present. Notice of any adjourned meeting need not be given. The directors shall act only as a Board of Directors, and the individual directors shall have no power as such. SECTION 3.7 Action by Consent. Any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if prior to such action a written consent thereto is signed by all members of the Board of Directors or of such committee, as the case may be, and such written consent is filed with the minutes of proceedings of the Board of Directors or committee. SECTION 3.8 Resignations. Any Director may resign at any time by giving written notice to the Board of Directors, the Chairman of the Board, the President or the Secretary. Such 7 9 resignation shall take effect at the time specified therein, and unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. SECTION 3.9 Removal. Any director may be removed with or without cause, at any meeting of the Board of Directors by the affirmative vote of a majority of the other directors. Further, any director may be removed, either with or without cause, at any meeting of the shareholders by the majority in number of shares of the shareholders of record present in person or by proxy and entitled to vote for the election of directors, if notice of the intention to act upon such matter shall have been given in the notice calling such meeting. If a director is elected by a voting group of shareholders, only the shareholders of that voting group may participate in the vote to remove that director. SECTION 3.10 Vacancies. Any vacancy in the Board of Directors, whether because of death, resignation, disqualification, removal, an increase in the number of directors, or any other cause, may be filled by vote of the majority of the remaining directors, although less than a quorum, or by a sole remaining director; provided, however, that whenever the holders of any class or series of shares are entitled to elect one or more directors, any vacancy or newly created directorship of such class or series may be filled by a majority of the directors elected by such class or series then in office, or by a sole remaining director so elected. Each director so chosen to fill a vacancy shall hold office until such director's successor shall have been elected and shall qualify or until such director shall resign or shall have been removed. No reduction of the authorized number of directors shall have the effect of removing any director prior to the expiration of such director's term of office. SECTION 3.11 Compensation. Directors who are not employees of the Corporation or any of its subsidiaries may receive an annual fee for their services as directors in an amount fixed by resolution of the Board of Directors, and, in addition, a fixed fee, with or without expenses of attendance, may be allowed by resolution of the Board of Directors for attendance at each meeting, including each meeting of a committee of the Board of Directors. Nothing herein contained shall be construed to preclude any director from serving the Corporation in any other capacity as an officer, agent, employee, or otherwise, and receiving compensation therefor. ARTICLE IV EXECUTIVE COMMITTEE SECTION 4.1 Designation of Executive Committee. The Board of Directors may, by resolution adopted by a majority of the actual number of Directors elected and qualified, from time to time, designate two or more of its number to constitute an Executive Committee. The Board of Directors shall have the power at any time to increase or decrease the number of members of the Executive Committee, to fill vacancies thereon, to change any member thereof, and to change the function or terminate the existence thereof. SECTION 4.2 Powers of Executive Committee. During the intervals between meetings of the Board of Directors, and subject to such limitations as may be required by law or by 8 10 resolution of the Board of Directors, the Executive Committee shall have and may exercise all of the authority of the Board of Directors, except that the Executive Committee shall not have authority to (i) declare dividends or distributions, (ii) amend the Articles of Incorporation or these By-Laws, (iii) approve a plan of merger or consolidation, (iv) reduce earned or capital surplus, (v) authorize the reacquisition of shares unless pursuant to a general formula or method specified by the Board of Directors, or (vi) recommend to the shareholders a voluntary dissolution or a revocation thereof. SECTION 4.3 Meetings; Procedure; Quorum. Regular meetings of the Executive Committee may be held, without notice, at such time and place as may from time to time be fixed by the Executive Committee. Special meetings of the Executive Committee may be called at any time by any member of the Executive Committee. Notice of such a special meeting shall be sent to each member of the Executive Committee at his residence or usual place of business by letter or telegram, at such time that, in regular course, such notice would reach such place not later than during the day immediately preceding the day for such meeting; or may be delivered to a member personally at any time during such immediately preceding day. Notice of any such meeting need not be given to any member of the Executive Committee who has waived such notice, either in writing or by telegram, arriving either before or after such meeting, or who shall be present at the meeting. Any meeting of the Executive Committee shall be a legal meeting, without notice thereof having been given; if all the members of the Executive Committee who have not waived notice thereof in writing or by telegram, shall be present in person. A majority of the Executive Committee, from time to time, shall be necessary to constitute a quorum for the transaction of any business, and the act of a majority of the members present at a meeting at which a quorum is present shall be an act of the Executive Committee. The members of the Executive Committee shall act only as a Committee, and the individual members shall be submitted to the next succeeding meeting of the Board of Directors for approval; but failure to submit the same or to receive the approval thereof shall not invalidate any completed or uncompleted action taken by the Executive Committee prior to the time at which the same shall have been, or were, submitted as above provided. ARTICLE V ADDITIONAL COMMITTEES SECTION 5.1 Designation of Audit Committee. The Board of Directors shall, by resolution adopted by a majority of the actual number of Directors elected and qualified, from time to time, designate at least three directors who are not employees of the Corporation to constitute an Audit Committee. SECTION 5.2 Powers of the Audit Committee. The Audit Committee shall have such power and authority as may be designated from time to time by the Board of Directors. SECTION 5.3 Designation of Compensation Committee. The Board of Directors shall, by resolution adopted by a majority of the actual number of Directors elected and qualified, from time to time, designate a Compensation Committee which shall be comprised of four Directors. 9 11 SECTION 5.4 Powers of the Compensation Committee. The Compensation Committee shall have such power and authority as may be designated from time to time by the Board of Directors. SECTION 5.5 Other Committees. The Board of Directors may create other committees and appoint members of the Board of Directors to serve on them. The creation of a committee and the appointment of members to it must be approved by a majority of the Directors in office at the time of the creation and the appointment. SECTION 5.6 Procedure for Committees. The requirements of these By-Laws which govern meetings, action without meetings, notice and waiver of notice, quorum and voting requirements applicable to the Board of Directors shall apply to committees and their members. ARTICLE VI OFFICERS SECTION 6.1 Number and Qualifications. The officers of the Corporation shall consist of the Chairman of the Board, the President, one or more Vice Presidents, the Secretary, Treasurer, and such other officers as may be appointed by the Board of Directors or the President at such time and in such manner and for such terms as the Board of Directors or the President may prescribe. Any two (2) or more offices may be held by the same person, except that the offices of President, Secretary and Treasurer must be held by different persons. SECTION 6.2 Election and Term of Office. The officers shall be chosen annually by the Board of Directors. Each officer shall hold office until his successor is chosen and qualified, or until his death, or until he shall have resigned, or shall have been removed in the manner hereinafter provided. SECTION 6.3 Resignations. Any officer may resign at any time by giving written notice to the Board of Directors, the Chairman of the Board, the President, or the Secretary. Such resignation shall take effect at the time specified therein. The acceptance of such resignation shall not be necessary to make it effective. SECTION 6.4 Removal. Any officer may be removed either with or without cause, at any time, by the vote of a majority of the actual number of Directors elected and qualified. SECTION 6.5 Vacancies. Whenever any vacancies shall occur in any office by death, resignation, removal, increase in the number of officers of the Corporation, or otherwise, the same shall be filled by the Board of Directors, and the officer so chosen shall hold office during the remainder of the term for which his predecessor was chosen or as otherwise provided herein. 10 12 SECTION 6.6 Chairman of the Board. The Chairman of the Board shall preside at all meetings of the shareholders and the Board of Directors, and have such other powers and duties as may from time to time be assigned to him by the Board of Directors. SECTION 6.7 Vice Chairman of the Board. The Board of Directors may, utilizing its discretion, designate a Vice Chairman of the Board and upon designation, the Vice Chairman of the Board shall perform duties and have such authority and powers as are incident to his office or as may be defined in these By-Laws or delegated to him from time to time by the Board of Directors or by the Chairman of the Board. SECTION 6.8 The President. The President shall be the Chief Executive Officer of the Corporation and shall have general charge of, and supervision and authority over, all of the affairs and business of the Corporation. He shall have general supervision of and direct all officers, agents and employees of the Corporation; shall see that all orders and resolutions of the Board are carried into effect; and in general, shall exercise all powers and perform all duties incident to his office and such other powers and duties as may from time to time be assigned to him by the Board of Directors. SECTION 6.9 Vice Presidents. The Corporation may have one or more Vice Presidents. Any Vice President shall have such authority and powers and shall perform such duties as from time to time may be assigned to him or her by the Board of Directors or by the President. One Vice President shall be designated by the Board of Directors as the Chief Financial Officer of the Corporation. The Vice President designated as the Chief Financial Officer shall: (a) keep correct and complete records of accounts, accurately reflecting the financial condition of the Corporation, (b) furnish at any meeting of the Board of Directors or whenever appropriately requested, a statement of the financial condition of the Corporation; and (c) perform such other duties as these By-Laws, the Board of Directors, the Chairman of the Board of Directors or the President may prescribe. SECTION 6.10 Secretary. The Secretary (a) shall keep the minutes of all meetings of the Board of Directors and the minutes of all meetings of the shareholders in books provided for that purpose; (b) shall attend to the giving and serving of notices; (c) when required, may sign with the President or a Vice President in the name of the Corporation, and may attest the signature of any other officers of the Corporation to all contracts, conveyances, transfers, assignments, encumbrances, authorizations and all other instruments, documents and papers of any and every description whatsoever, of or executed for or on behalf of the Corporation and affix the seal of the Corporation thereto; (d) may sign with the President or a Vice President all certificates for shares of the capital stock of the Corporation and may affix the seal of the Corporation thereto; (e) shall have charge of and maintain and keep or supervise and control the maintenance and keeping of the stock certificate books, transfer books and stock ledgers and such other books and papers as the Board of Directors may authorize, direct or provide for, all of which shall at all reasonable times be open to the inspection of any director, upon request, at the office of the Corporation during business hours; (f) shall, in general, perform all the duties incident to the office of Secretary; and (g) shall have such other powers and duties as may be 11 13 conferred upon or assigned to him by the Board of Directors, the Chairman of the Board, or the President. SECTION 6.11 Treasurer. The Treasurer (a) shall be the legal custodian of all moneys, notes, securities and other valuables which may from time to time come into the possession of the Corporation, (b) shall immediately deposit all funds of the Corporation coming into his hands in some reliable bank or other depository as designated by the Board of Directors, (c) shall keep such bank accounts in the name of the Corporation, and (d) shall keep correct and complete records relating to the foregoing. He shall perform such other duties as these By-Laws, the Board of Directors, the Chairman of the Board, or the President may prescribe. The Treasurer may be required to furnish bond in such amount as shall be determined by the Board of Directors. SECTION 6.12 Other Officers. The Board of Directors or the President may from time to time designate and appoint other officers who shall have such powers and duties as the officers whom they are appointed to assist shall specify and delegate to them, and such other powers and duties as these By-Laws, the Board of Directors, the Chairman of the Board, or the President may prescribe. An Assistant Secretary may, in the absence or disability of the Secretary, attest the execution of all documents by the Corporation. SECTION 6.13 Delegation of Authority. In case of the absence of any officer of the Corporation, or for any other reason that the Board of Directors may deem sufficient, the Board of Directors may delegate the powers or duties of such officer to any other officer or to any Director, for the time being, provided a majority of the entire Board of Directors concurs therein. ARTICLE VII CONTRACTS, CHECKS, DRAFTS, BANK ACCOUNTS SECTION 7.1 Execution of Contracts. Except as these By-Laws may otherwise provide, the Board of Directors may authorize any officer or officers, or agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the Corporation, and such authority may be general or confined to specific instances; and unless so authorized by the Board of Directors or by these By-Laws, no officer, agent or employee shall have any power or authority to bind the Corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or in any amount, except contracts and agreements entered into by the Corporation in the ordinary course of business of the Corporation may be executed by any officer of the Corporation. SECTION 7.2 Checks, Drafts, Etc. All checks, drafts or other orders for payment of money, notes or other evidence of indebtedness, issued in the name of or payable to the Corporation, shall be signed or endorsed by such person or persons and in such manner as, from time to time, determined by the Board of Directors. Each such officer, assistant, agent or attorney shall give such bond, if any, as the Board of Directors may from time to time require. 12 14 SECTION 7.3 Deposits. All funds of the Corporation not otherwise employed shall be deposited from time to time to the credit of the Corporation in such banks, trust companies or other depositories as the Board of Directors may select, or as may be selected by any officer or officers, assistant or assistants, agent or agents, or attorney or attorneys of the Corporation to whom such power shall have been delegated by the Board of Directors. For the purpose of deposit and for the purpose of collection for the account of the Corporation, the Chairman of the Board of Directors, the President, any Vice President or the Treasurer (or any other officer or officers, assistant or assistants, agent or agents, or attorney or attorneys of the Corporation who shall from time to time be determined by the Board of Directors) may endorse, assign and deliver checks, drafts and other orders for the payment of money which are payable to the order of the Corporation. SECTION 7.4 General and Special Bank Accounts. The Board of Directors may from time to time authorize the opening and keeping of general and special bank accounts with such banks, trust companies or other depositories as the Board of Directors may select or as may be selected by any officer or officers, assistant or assistants, agent or agents, or attorney or attorneys of the Corporation to whom such power shall have been delegated by the Board of Directors. The Board of Directors may make such special rules and regulations with respect to such bank accounts, not inconsistent with the provisions of these By-Laws, as it may deem expedient. ARTICLE VIII SHARES AND THEIR TRANSFER SECTION 8.1 Certificate for Shares. Every owner of shares of stock of the Corporation shall be entitled to have a certificate or certificates, to be in such form as the Board of Directors shall prescribe, certifying the number and class or series of shares of the stock of the Corporation owned by such owner. The certificates representing shares of such stock shall be numbered in the order in which they shall be issued and shall be signed in the name of the Corporation by the Chairman of the Board of Directors, the President or any Vice President, and by the Secretary or the Treasurer. Any or all of the signatures on the certificates may be a facsimile. In case any officer, transfer agent or registrar who has signed, or whose facsimile signature has been placed upon, any such certificate, shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, such certificate may nevertheless be issued by the Corporation with the same effect as though the person who signed such certificate, or whose facsimile signature shall have been placed thereupon, were such officer, transfer agent or registrar at the date of issue. A record shall be kept of the respective names of the persons, firms or corporation owning the stock represented by such certificates, the number and class or series of shares represented by such certificates, respectively, and the respective dates thereof, and in case of cancellation, the respective dates of cancellation. Every certificate surrendered to the Corporation for exchange or transfer shall be canceled, and no new certificate or certificates shall be issued in exchange for any existing certificate until such existing certificate shall have been so canceled, except in cases provided for in Section 8.4 hereof. 13 15 SECTION 8.2 Transfers of Shares. Transfers of shares of stock of the Corporation shall be made only on the books of the Corporation by the registered holder thereof, or by such holder's attorney authorized by power of attorney duly executed and filed with the Secretary, or with a transfer clerk or a transfer agent appointed as provided in Section 8.3 hereof, and upon surrender of the certificate or certificates for such shares properly endorsed and the payment of all taxes thereon. The person in whose name shares of stock stand on the books of the Corporation shall be deemed the owner thereof for all purposes as regards to the Corporation. Whenever any transfer of shares shall be made for collateral security, and not absolutely, such fact shall be so expressed in the entry of transfer if, when the certificate or certificates shall be presented to the Corporation for transfer, both the transferor and the transferee request the Corporation to do so. SECTION 8.3 Regulations. The Board of Directors may make such rules and regulations as it may deem expedient, not inconsistent with these By-Laws, concerning the issue, transfer and registration of certificates for shares of the stock of the Corporation. It may appoint, or authorize any officer or officers to appoint, one or more transfer clerks or one or more transfer agents and one or more registrars, and may require all certificates for stock to bear the signature or signatures of any of them. SECTION 8.4 Lost, Stolen, Destroyed and Mutilated Certificates. In any case of loss, theft, destruction, or mutilation of any certificate of stock, another may be issued in its place upon proof of such loss, theft, destruction, or mutilation and upon the giving of a bond of indemnity to the Corporation in such form and in such sum as the Board of Directors may direct; provided, however, that a new certificate may be issued without requiring any bond when, in the judgment of the Board of Directors, it is proper so to do. SECTION 8.5 Fixing Date for Determination of Shareholders of Record. In order that the Corporation may determine the shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment thereof, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any other change, conversion or exchange of stock or for the purpose of any other lawful action other than to consent to corporate action in writing without a meeting, the Board of Directors may fix, in advance, a record date, which shall not be more than 70 nor less than 10 days before the date of such meeting, nor more than 70 days prior to any such other action. If, in any case involving the determination of shareholders for any purpose other than notice of or voting at a meeting of shareholders, the Board of Directors shall not fix a record date, then the record date for determining shareholders shall be the close of business on the day on which the Board of Directors shall adopt the resolution relating thereto. A determination of shareholders entitled to notice of or to vote at a meeting of shareholders shall apply to any adjournment of such meeting; provided, however, that the Board of Directors may fix a new record date for the adjourning meeting. SECTION 8.6 Voting of Shares Owned by Corporation. Unless otherwise directed by the Board of Directors, any share or shares issued by any other corporation and owned, or controlled by the Corporation may be voted at any shareholder's meeting of such other 14 16 corporation by the President of the Corporation if he be present, or in his absence by his designee who shall be an officer of the Corporation or by the Secretary of the Corporation. Whenever, in the judgment of the President, it is desirable for the Corporation to execute a proxy or give a shareholdersG consent in respect to any share or shares issued by any other corporation and owned by the Corporation, such proxy or consent shall be executed in the name of the Corporation by the President of the Corporation. Any person or persons designated in the manner above stated as the proxy or proxies of the Corporation shall have full right, power and authority to vote the share or shares issued by such other corporation and owned by the Corporation in the same manner as such share or shares might be voted by the Corporation. SECTION 8.7 Endorsement of Certificates for Shares. Unless otherwise directed by the Board of Directors, any share or shares issued by any corporation and owned by the Corporation (including reacquired shares of the Corporation) may, for sale or transfer, be endorsed in the name of the Corporation by the President, a Vice President, or the Treasurer, and such endorsement shall be duly attested by the Secretary. ARTICLE IX INDEMNIFICATION SECTION 9.1 Right to Indemnification. The Corporation shall indemnify, to the fullest extent permitted by the Indiana Business Corporation Law, any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, either civil, criminal, administrative or investigative, by reason of the fact that he or she is or was a director or officer of the Corporation or a constituent corporation absorbed in a consolidation or merger against expenses (including attorneysG fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him or her in connection with such action, suit or proceeding, whether or not the indemnified liability arises or arose from any threatened, pending or completed action by or in the right of the Corporation. Included within the foregoing obligation of indemnification shall be the indemnification of any person while a director or officer of the Corporation, is or was serving at the request of the Corporation or a constituent corporation absorbed in a consolidation or merger, or, as a director or officer of another corporation, partnership, joint venture, trust or other enterprise, including but not limited to an employee, officer or agent of the Corporation with respect to an employee benefit plan. The Corporation shall not indemnify any person to the extent that such person is otherwise indemnified or to the extent that such indemnification is prohibited by applicable law, or except to the extent that such person's claim for indemnification arises out of liability (i) for any breach of the director's duty of loyalty to the Corporation or its shareholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or knowing violation of law, or (iii) for any transaction from which the director derived an improper personal benefit. SECTION 9.2 Advance of Expenses. Expenses incurred by a director or officer of the Corporation in defending a civil or criminal action, suit or proceeding shall be paid by the Corporation in advance of the final disposition of such action, suit or proceeding subject to the provisions of any applicable law. 15 17 SECTION 9.3 Procedure for Determining Permissibility. To determine whether any indemnification or advance of expenses under this Article IX is permissible, the Board of Directors by a majority vote of a quorum consisting of directors not parties to such action, suit or proceeding may, and on request of any person seeking indemnification or advance of expenses shall be required to, determine in each case whether the applicable standards in any applicable law have been met, or such determination shall be made by independent legal counsel if such quorum is not obtainable, or, even if obtainable, a majority vote of a quorum of disinterested directors so directs provided that, if there has been a change in control of the Corporation between the time of the action or failure to act giving rise to the claim for indemnification or advance of expenses and the time such claim is made, at the option of the person seeking indemnification or advance of expenses, the permissibility of indemnification or advance of expenses shall be determined by independent legal counsel. The reasonable expenses of any director or officer in prosecuting a successful claim for indemnification, and the fees and expenses of any special legal counsel engaged to determine permissibility of indemnification or advance of expenses, shall be borne by the Corporation. SECTION 9.4 Contractual Obligation. The obligations of the Corporation to indemnify a director or officer under this Article IX, including the duty to advance expenses, shall be considered a contract between the Corporation and such director or officer, and no modification or repeal of any provision of this Article IX shall affect, to the detriment of the director or officer, such obligations of the Corporation in connection with a claim based on any act or failure to act occurring before such modification or repeal. SECTION 9.5 Indemnification Not Exclusive; Inuring of Benefit. The indemnification and advance of expenses provided by this Article IX shall not be deemed exclusive of any other right to which the individual or entity indemnified may be entitled, both as to action in his official capacity and as to the action in another capacity while holding such office, and shall inure to the benefit of the heirs, executors and administrators of any such person. SECTION 9.6 Insurance and Other Indemnification. The Board of Directors shall have the power to (i) authorize the Corporation to purchase and maintain, at the Corporation's expense, insurance on behalf of the Corporation and on behalf of others to the extent that power to do so has not been prohibited by applicable law, and (ii) give other indemnification to the fullest extent permitted by law. ARTICLE X EMERGENCY SECTION 10.1 Purpose. The Emergency By-Laws provided in this Article X shall be operative during any emergency (as defined in Section 10.5) in the conduct of the business of the Corporation resulting from a catastrophic event, notwithstanding any different provision in the preceding By-Laws or in the Articles of Incorporation of the Corporation or in law. To the extent not inconsistent with the provisions of this Article X, the By-Laws provided in the 16 18 preceding Articles shall remain in effect during such emergency and upon its termination the Emergency By-Laws shall cease to be operative. SECTION 10.2 Management of Corporation During Emergency. (A) A meeting of the Board of Directors may be called by any officer or Director of the Corporation. Notice of the time and place of the meeting shall be given by the person calling the meeting to such of the Directors as it may be feasible to reach by any available means of communication. Such notice shall be given at such time in advance of the meeting as circumstances permit in the judgment of the person calling the meeting. (B) At any such meeting of the Board of Directors, a quorum shall consist of three (3) Directors. (C) The Board of Directors, either before or during any such emergency, may provide, and from time to time modify, lines of succession in the event that during such an emergency any or all officers or agents of the Corporation shall for any reason be rendered incapable of discharging their respective duties. (D) The Board of Directors, either before or during any such emergency, may, effective in the emergency, change the head office or designate several alternative head offices or regional offices, or authorize the officers so to do. SECTION 10.3 Action Taken Pursuant to Emergency By-Laws. Corporate action taken in good faith and in accordance with these Emergency By-Laws shall be binding on the Corporation. No officer, Director, employee or agent acting in good faith and in accordance with these Emergency By-Laws, shall be liable except for willful misconduct or recklessness. SECTION 10.4 Repeal or Amendment. These Emergency By-Laws shall be subject to repeal or change by further action of the Board of Directors or by action of the shareholders, but no such repeal or change shall modify the provisions of the Section 12.03 with regard to action taken prior to the time of such repeal or change. Any amendment of these Emergency By-Laws may make any further or different provision that may be practical and necessary for the circumstances of the emergency. SECTION 10.5 Definition of Emergency. For purposes of this Article X, an emergency exists if an extraordinary event prevents a quorum of the Corporation's Directors from assembling in time to deal with the business for which the meeting has been called or is to be called. 17 19 ARTICLE XI MISCELLANEOUS SECTION 11.1 Place of Keeping Corporate Books and Records. The books of account, records, documents and papers of the Corporation shall be kept at any place or places within or without the State of Indiana as directed by the Board of Directors. In the absence of a direction, the books of account, records, documents and papers shall be kept at the principal office of the Corporation. SECTION 11.2 Seal. The Board of Directors of the Corporation may designate the design and cause the Corporation to obtain and use a corporate seal, but the failure of the Board to designate a seal or the absence of the impression of the corporate seal from any document shall not affect in any way the validity or effect of such document. SECTION 11.3 Fiscal Year. The fiscal year of the Corporation shall end at the end of each calendar year. SECTION 11.4 Waiver of Notices. Whenever notice is required to be given by these By-Laws or the Articles of Incorporation or by law, the person entitled to said notice may waive such notice in writing, either before or after the time stated therein, and such waiver shall be deemed equivalent to notice. SECTION 11.5 Amendments. The power to make, alter, amend or repeal these By-Laws is vested exclusively in the Board of Directors. The affirmative vote of a number of Directors equal to a majority of the number who would constitute a full Board of Directors at the time of such action shall be necessary to take any action for the making, alteration, amendment or repeal of these By-Laws. SECTION 11.6 Indiana Business Corporation Law. The Corporation elects that the provisions of Chapter 23-1-42 of the Indiana Business Corporation Law shall not apply to share control acquisitions (as defined in such Chapter 23-1-42) of shares of the Corporation. 18 EX-10.4 3 REVOLVING LINE OF CREDIT LOAN AGREEMENT 1 EXHIBIT 10.4 $40,000,000 REVOLVING LINE OF CREDIT LOAN AGREEMENT WITH THIRD NATIONAL BANK IN NASHVILLE DATED OCTOBER 14,1994, (THE "REVOLVING LOAN AGREEMENT") AMENDMENT TO REVOLVING LOAN AGREEMENT DATED JUNE 30, 1995 SECOND AMENDMENT TO REVOLVING LOAN AGREEMENT DATED OCTOBER 11, 1995 THIRD AMENDMENT TO REVOLVING LOAN AGREEMENT DATED AUGUST 1, 1996 FOURTH AMENDMENT TO REVOLVING LOAN AGREEMENT DATED JANUARY 31, 1997 2 EXHIBIT 10.4 LOAN AGREEMENT By and Between SOFAMOR DANEK GROUP, INC. and THIRD NATIONAL BANK IN NASHVILLE $40,000,000.00 October 14, 1994 3 INDEX Article I. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Article II. The Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Section 2.01 The Revolving Credit Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Section 2.02. Term Loan Option . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Section 2.03. Borrowing Procedure under Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Section 2.04. Optional Prepayment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Section 2.05. Participation Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Section 2.06. Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Section 2.07. Conditions of Lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Section 2.08. Term of Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Section 2.09. Right of Offset, Etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Section 2.10. Non-Use Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Article III. Guaranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Section 3.01. Guarantors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Article IV. Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Section 4.01. Organization and Qualification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Section 4.02. Corporate Power and Authorization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Section 4.03. Binding Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Section 4.04. No Legal Bar or Resultant Lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Section 4.05. No Consent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Section 4.06. Liabilities and Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Section 4.07. Taxes; Governmental Charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Section 4.08. Title, Etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Section 4.09. No Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Section 4.10. Compliance with Laws, Etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Section 4.11. Significant Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Section 4.12. No Material Misstatements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Section 4.13. Financial Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Article V. Conditions Precedent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Section 5.01. Initial Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Section 5.02. All Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Article VI. Affirmative Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Section 6.01 Financial Statements and Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Section 6.02. Certificates of Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
1 4 Section 6.03. Taxes and Other Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Section 6.04 Maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Section 6.05. Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Section 6.06. Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Section 6.07. Right of Inspection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Section 6.08. Notice of Certain Events . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Section 6.09. ERISA Information and Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Section 6.10. Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Section 6.11. Acquired Subsidiaries' Guaranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 ARTICLE VII. Negative Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Section 7.01. Debts, Guaranties, and Other Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Section 7.02. Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Section 7.03. Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Section 7.04. Dividends, Distributions, and Redemptions; Issuance of Stock . . . . . . . . . . . . . . . . . 15 Section 7.05. Nature of Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Section 7.06. Mergers, Dispositions, Etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Section 7.07. Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Section 7.08. Disposition of Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Section 7.09. No Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Section 7.10. Prepayment of Other Debts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Section 7.11. Sales and Leasebacks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Section 7.12. Financial Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Article VIII. Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Section 8.01. Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Section 8.02. Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Section 8.03. Right of Set-off . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Article IX. General Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Section 9.01. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Section 9.02. Deviation from Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Section 9.03. Invalidity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Section 9.04. Survival of Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Section 9.05. Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Section 9.06. Renewal, Extension, or Rearrangement . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Section 9.07. Waivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Section 9.08. Cumulative Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Section 9.09. Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Section 9.10. Nature of Commitment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Section 9.11. Governance; Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Section 9.12. Titles of Articles, Sections, and Subsections . . . . . . . . . . . . . . . . . . . . . . . . 21 Section 9.13. Time of Essence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
2 5 Section 9.14. Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Section 9.15. Application of Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Section 9.16. Costs, Expenses, and Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Section 9.17. Governing Law; Consent to Forum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Section 9.18. Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Section 9.19. Entire Agreement; No Oral Representations Limiting Enforcement . . . . . . . . . . . . . . . 22 Section 9.20. Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
3 6 LOAN AGREEMENT This Loan Agreement is executed by SOFAMOR DANEK GROUP, INC., an Indiana corporation ("Borrower") and THIRD NATIONAL BANK IN NASHVILLE, a national banking association ("Lender"), as of the 14th day of October, 1994. RECITALS: A. Borrower has previously executed that certain $25,000,000 Line of Credit Note dated June 23, 1994 as amended by a First Amendment to Line of Credit Note dated July 28, 1994, and as amended by a Second Amendment to Line of Credit Note dated September 29, 1994 (the "Interim Note") in favor of Lender as the holder thereof. B. Borrower and Lender are entering into this Loan Agreement to advance additional credit to Borrower and, a portion of such credit shall be used to prepay the Interim Note. NOW, THEREFORE, Borrower and Lender agree as follows: Article I. Definitions. As used in this Agreement, the following terms shall have the following meanings, unless the context expressly otherwise requires: "Adjusted LIBOR Rate" means the LIBOR Rate adjusted to include (if imposed upon Lender) the cost, in basis points, of any applicable reserve requirements of the Board of Governors of the Federal Reserve System (or any successor), applicable to "Eurocurrency Liabilities" pursuant to Regulation D or other then-applicable regulations of the Board of Governors. "Advance" means any extension of credit made pursuant to this Agreement and/or the Note. The terms "Advance" and "Loan" (or the plural forms thereof) are used interchangeably in this Agreement. "Affiliate" means a Person (i) which directly or indirectly through one or more intermediaries controls, or is controlled by, or is under common control with, the Borrower, (ii) which beneficially owns or holds 5% or more of any class of the Voting Stock of the Borrower, or (iii) of which 5% or more of the Voting Stock (or in the case of a Person which is not a corporation, 5% or more of the equity interest) is beneficially owned or held by the Borrower or another Affiliate. "Agreement" means this Loan Agreement (including all exhibits hereto) as the same may be modified, amended, or supplemented from time to time. "Business Day" means any day other than a Saturday, Sunday or day on which commercial banks are authorized to close under the laws of the State of Tennessee. "Closing" means the time and place of the execution and/or delivery of the Loan Documents. "Closing Date" means the 14th day of October, 1994. "Code" means the Internal Revenue Code of 1986, as amended. 7 "Conditions Precedent" means (unless waived in writing by Lender) those matters or events that must be completed or must occur or exist prior to Lender's being obligated to fund any Advance, including, but not limited to, those matters described in Article V hereof. "Debt" means, with respect to any Person, without duplication, (a) the Indebtedness and all other indebtedness which in accordance with GAAP would be classified on a balance sheet as indebtedness for the repayment of borrowed money, (b) all indebtedness, contingent or otherwise, for reimbursement of drafts drawn or available to be drawn under letters of credit, (c) all deferred indebtedness which in accordance with GAAP would be classified on a balance sheet as indebtedness, for the payment of the purchase price of property or assets purchased, (d) all capitalized lease obligations classified as such under current criteria of FASB No. 13, (e) all guaranties, and (f) all obligations of such Person to indemnify another Person to the extent of the amount of indemnity, if any, which would be payable by such Person at the time of determination of Debt. Each subsection's determination of "Debt" under this paragraph shall constitute indebtedness only if so classified under GAAP. The definition of "Debt" shall exclude checks and drafts endorsed for collection in the ordinary course of business. "Default" or "Event of Default" means the occurrence of any of the events specified in Section 8.01 hereof. "Determination Date" means the day three Business Days before the date fixed for a prepayment. "Financial Statements" means (i) the financial statement or statements of Borrower described or referenced in Section 6.01 hereof and delivered to Lender pursuant to this Agreement. "Fiscal Quarter" means each of the quarters of the Fiscal Year ending on March 31, June 30, September 30, and December 31. "Fiscal Year" means any twelve-month accounting period ending December 31. "GAAP" means generally accepted accounting principles applied on a consistent basis. "Guarantor" and "Guarantors" mean each and all of the Significant Subsidiaries of Borrower. "Guaranty" and "Guaranties" mean each and all of the guaranty agreements executed by Guarantors in favor of Lender, in form and substance as set forth in Exhibit B. "Indebtedness" means any and all amounts and liabilities owing or to be owing by Borrower to Lender from time to time whether now existing or hereafter incurred, in connection with this Agreement and/or the Note. "Liabilities" means, with respect to any Person, all Debt and all other items (including without limitation taxes accrued as estimated) that, in accordance with GAAP, would be included in determining total liabilities as shown on the liabilities side of a balance sheet. "LIBOR Rate" means the LIBOR rate of interest reported by the Telerate Computer Service to which Lender subscribes, for 30-day periods, as such rate changes daily. The LIBOR Rate shall be -2- 8 determined on the day of any borrowing hereunder to which the LIBOR Rate Option applies, and on the first (1st) day of each month thereafter (and such rate shall be "fixed" for the periods beginning on the date of borrowing, or the first day of each month, whichever is applicable, and ending on the last day of such month). The LIBOR Rate may vary from month to month. "Lien" means any interest in Property securing an obligation owed to, or a claim by, a Person other than the owner of the Property, whether such interest is based on the common law, statute, or contract, and including, but not limited to, the lien or security interest arising from a mortgage, encumbrance, pledge, security agreement, conditional sale, or trust receipt or a lease, consignment, or bailment for security purposes. "Loan" or "Loans" means any borrowing by Borrower under this Agreement, including any renewal, amendment, extension, or modification thereof. "Loan Documents" means, collectively, each document, paper or certificate executed, furnished or delivered in connection with this Agreement (whether before, at, or after the Closing Date), including, without limitation, this Agreement, the Note, the Negative Pledge, the Guaranties, and all other documents, certificates, reports, and instruments that this Agreement requires or that were executed or delivered (or both) at Lender's request. "Maturity Date" means October 15, 1995, with respect to the Revolving Credit Loan (unless the Maturity Date is extended in writing by the Lender) and with respect to a Term Loan, the 1, 2, or 3-year period elected by Borrower in writing pursuant to the provisions of Section 2.02 herein. "Maximum Amount" means the principal amount of $40,000,000, which is the maximum principal amount that may be outstanding at any time under the Loan. "Negative Pledge" means that certain Negative Pledge Agreement dated as of the date hereof executed by Borrower and the Significant Subsidiaries in favor of Lender, including all amendments and restatements thereof. "Net Income" means (for any period of computation thereof) the consolidated net income before extraordinary items (but after giving effect to the credit resulting from tax loss carry forwards) of the Borrower for any period determined in conformity with GAAP. "Note" means that certain Promissory Note in the form as set forth in Exhibit A hereto, in the principal amount of up to $40,000,000.00, including all amendments, extensions, increases and restatements thereto and thereof, and all replacement and substitute notes therefor. "Obligations" means all of Borrower's undertakings in the Loan Documents including, but not limited to, all agreements, representations, warranties, and covenants. The term "Obligations" includes the Indebtedness. "Offering Proceeds" means all net cash proceeds or the net fair market value of any tangible assets derived by Borrower or any Significant Subsidiary through the issuance of any equity security (other than in connection with any employee benefit plan or compensatory arrangement generally available to employees). -3- 9 "PBGC" means the Pension Benefit Guaranty Corporation. "Person" means any individual, corporation, partnership, joint venture, association, joint stock company, trust, unincorporated organization, government, or any agency or political subdivision thereof, or any other form of entity. "Prepayment Premium" means as of any Determination Date, to the extent that the Reinvestment Yield on such Determination Date is lower than the interest rate payable on or in respect of the Term Loan, the excess, if any, of (a) the present value of the principal and interest payments to be foregone by any prepayment (exclusive of accrued interest on such Term Loan through the date of prepayment) for such Term Loan to be prepaid, determined by discounting (monthly on the basis of a 360-day year composed of twelve 30-day months), such payments at a rate that is equal to the Reinvestment Yield over (b) the aggregate principal amount of such Term Loan then to be prepaid. To the extent that the Reinvestment Yield on any Determination Date is equal to or higher than the interest rate payable with respect to such Term Loan, the Prepayment Premium shall be zero. "Principal Office" means the principal office of the Lender located at 201 Fourth Avenue North, Nashville, Tennessee 37219. "Property" or "Properties" means any interest in any kind of property or asset, whether real, personal, or mixed, or tangible or intangible. "Reinvestment Yield" means, with respect to a Term Loan Rate Option determined by reference to U.S. Treasury yields, the yield as set forth on page "USD" of the Bloomberg Financial Markets Service at 10:00 a.m. (Chicago time) on the Determination Date for actively traded U.S. Treasury securities having a maturity equal to the Weighted Average Life to the applicable Maturity Date of the Term Loan then being prepaid, rounded to the nearest month, or if such yields shall not be reported as of such time or the yields reported as of such time are not ascertainable in accordance with the preceding clause, then the arithmetic mean of the yields published in the statistical release designated H.15(519) of the Board of Governors of the Federal Reserve System under the caption "U.S. Government Securities-Treasury Constant Maturities" (the "statistical release") for the maturity corresponding to the remaining Weighted Average Life to the applicable Maturity Date of the Term Loan then being prepaid as of the date of such prepayment rounded to the nearest month. If no maturity exactly corresponding to such rounded Weighted Average Life to the applicable Maturity Date shall appear therein, yields for the two most closely corresponding published maturities (one of which occurs prior and the other subsequent to the Weighted Average Life to the applicable Maturity Date) shall be calculated pursuant to the foregoing sentence and the Reinvestment Yield shall be interpolated from such yields on a straight-line basis (rounding, in each of such relevant periods, to the nearest month). Reinvestment Yield means, with respect to a Term Loan Rate Option determined by reference to Federal Home Loan Bank funds, the yield as set forth on the Weekly Summary of FHLB Advance Rates on the Determination Date for advances having a maturity equal to the Weighted Average Life to the applicable Maturity Date of the Term Loan then being prepaid. For purposes of calculating the Reinvestment Yield, the most recent weekly statistical release published prior to the applicable Determination Date shall be used. "Revolving Credit Loan" means the Advances made on a revolving credit basis under the Note, excluding the amounts converted to a Term Loan under Section 2.02 hereof. -4- 10 "Share Repurchase Plan" means that certain Stock Repurchase Program approved by the Board of Directors of Borrower on April 20, 1994. "Significant Subsidiary" means any Subsidiary which has gross assets (based on undepreciated historical cost) aggregating $250,000 or more at any time (excluding Subsidiaries whose sole material assets consist of stock in another Subsidiary). As of the date hereof, the Significant Subsidiaries are the following Subsidiaries: Danek Medical, Inc. Warsaw Orthopedic, Inc. Sofamor Danek Japan K.K. Sofamor Danek GmbH Sofamor Danek Asia Pacific Limited Sofamor S.N.C. Sofamor Italia S.r.l. Sofamor Iberica S.A. "Subsidiary" means any corporation (or other entity) of which fifty-one percent (51%) or more of the issued and outstanding voting stock (or other ownership interest therein) is owned or controlled directly or indirectly, by the Borrower and/or by one or more of any Subsidiaries of the Borrower. "Tangible Net Worth" means (i) the aggregate amount of all assets of the Borrower as may properly be classified as such under GAAP, other than goodwill and such other assets as are properly classified as "intangible assets" in accordance with GAAP, less (ii) the aggregate amount of all Liabilities of the Borrower as may properly be classified under GAAP. The net amount raised by Borrower in an equity offering will be included in determining Borrower's Tangible Net Worth for purposes of the financial covenant set forth in Section 7.12 (c) of this Agreement. "Term Loan" means the portion of the Revolving Credit Loan converted to a Term Loan by Borrower under the provisions of Section 2.02 hereof. "Term Loan Rate" or "Term Loan Rate Option" means one of the following rates as selected by Borrower under Section 2.02: (i) a floating rate equal to three-quarters of one percent (.75%) per annum above the 30- day Adjusted LIBOR Rate as such rate may change from time to time; (ii) a fixed rate equal to one and two- tenths of one percent (1.2%) in excess of the Federal Home Loan Bank Board's "Fixed Rate Advances" rate applicable to the average life (as determined by the weighted maturity of the applicable Term Loan) of the Term Loan for amounts of $1,000,000 and integral multiples thereof (provided, however, this option shall be available only if Federal Home Loan Bank Board funds are available to Lender in the amount converted to a Term Loan by Borrower); or (iii) one and three-tenths of one percent (1.3%) in excess of the 1-year, 2-year, or 3- year (determined by the maturity of the applicable Term Loan) U.S. Treasury yield (as published by the Wall Street Journal) for amounts of $1,000,000 and integral multiples thereof. The fixed Term Loan Rate under subsections (ii) and (iii) of this paragraph shall be determined on the first Business Day following Lender's receipt of Borrower's written election to convert all or a portion of the outstanding Advance(s) of the Revolving Credit Loan to a Term Loan. -5- 11 "Trailing Four Quarter Basis" means, with respect to any date, the period that includes the twelve previous consecutive months of Borrower (on a consolidated basis) ending the applicable date set forth herein. "Voting Stock" means securities of any class of a corporation the holders of which are ordinarily, in the absence of contingencies, entitled to elect a majority of the corporate directors (or persons performing similar functions). "Weighted Average Life to Maturity" means as applied to any payment or prepayment of principal of the Term Loan, at any date, the number of years obtained by dividing (a) the principal amount of the Term Loan to be paid or prepaid into (b) the sum of the products obtained by multiplying (i) the amount of each then remaining installment, sinking fund, serial maturity, or other required payment, including payment at final maturity, foregone by virtue of such payment or prepayment, by (ii) the number of years (calculated to the nearest 1/12th) which would have elapsed between such date and the making of such required payment. Article II. The Loan. Section 2.01 The Revolving Credit Loan. Subject to the conditions and pursuant to the terms of the Loan Documents, and in reliance upon the representations, warranties and covenants set forth in the Loan Documents, Lender agrees to make Advances to Borrower on a revolving credit basis as a Revolving Credit Loan pursuant to the Note in the aggregate principal amount of up to $40,000,000, less any amounts converted to a Term Loan under Section 2.02 hereof. Each Advance hereunder as a Revolving Credit Loan, shall bear interest from the date of such Advance at the 30-day Adjusted LIBOR Rate plus .625% per annum, as such rate may change from time to time, until the Maturity Date or until the principal amount of any such Advance(s) is converted to a Term Loan. The terms, and provisions of repayment of the Revolving Credit Loan shall be as set forth in the Note. Each of the provisions of the Note are incorporated herein by reference. Interest on the Revolving Credit Loan shall be paid on the first Business Day of each month in arrears commencing November 1, 1994. The Revolving Credit Loan shall mature on the Maturity Date, at which time all outstanding principal, accrued interest and fees (if any) under the Revolving Credit Loan will be immediately due and payable. The Maximum Amount available under the Revolving Credit Loan shall be automatically reduced by any amounts that the Borrower converts to a Term Loan hereunder. Section 2.02. Term Loan Option. From time to time until the Maturity Date of the Revolving Credit Loan, Borrower shall have the option to convert all or a portion of the outstanding principal amount of any Advance(s) previously made on a revolving credit basis to a term loan (the "Term Loan(s)"). The principal amount of such Term Loan(s) shall be amortized by equal quarterly payments of principal over a one, two, or three-year period (commencing on the first day of a calendar quarter following such conversion to a Term Loan) as elected by Borrower. Borrower shall exercise its option to convert a revolving credit Advance to a Term Loan in writing by delivery of a certificate in the form set forth in Exhibit E, delivered to Borrower at least three (3) Business Days prior to such conversion, specifying (i) the amount of the Term Loan; (ii) the maturity date of the Term Loan (which shall be 1, 2, or 3-years from the first day of the calendar quarter following the date of such conversion); (iii) the Term Loan Rate Option elected by Borrower. Borrower shall have the right to exercise its option to convert an Advance (previously made on a revolving credit basis) to a Term Loan from time to time (until the Maturity Date of the Revolving Credit Loan) in minimum denominations of $1,000,000 and integral multiples thereof. Each Term Loan will mature on the applicable Maturity Date of the Term Loan, at which time all outstanding principal, accrued interest, fees and other charges (if any) under the Term Loan will be immediately -6- 12 due and payable. The Term Loan will bear interest at the Term Loan Rate Option as elected by Borrower until its Maturity Date. The terms and provisions of repayment of the Term Loan shall be as set forth in the Note. Interest and principal shall be payable quarterly commencing on the first Business Day of the calendar quarter following the conversion to a Term Loan. Section 2.03. Borrowing Procedure under Loan. Until the Maturity Date of the Revolving Credit Loan, the Borrower shall give the Lender written or telephonic notice of the proposed borrowing prior to 1:00 p.m. Central Standard (or Daylight) Time on the Business Day of such borrowing. The following persons are authorized to request an Advance: E. Ron Pickard, C.E.O., James J. Gallogly, President, Laurence Y. Fairey, Chief Financial Officer, J. Mark Merrill, Treasurer, or Jack B. Pearson, Jr., Assistant Treasurer. The Lender shall make the Loan by wiring such Advance pursuant to the instructions of the Borrower, or at the option of the Borrower, by depositing the funds being advanced into the Borrower's operating account with the Lender no later than the close of the Lender's business on the next Business Day. The giving of notice by the Borrower that it is requesting the Loan shall constitute a warranty by the Borrower that, as of the date notice is given and as of the date the Advance is made, the officers of the Borrower do not have knowledge of any Event of Default as defined herein; and that as of such dates, the representations and warranties contained in Article IV are and will be true and correct, except as to changes occurring after the date of this Agreement caused by transactions permitted under this Agreement or as approved in writing by Lender. Section 2.04. Prepayment Penalty. The outstanding principal amount of a Term Loan may be prepaid, in whole or in part, at any time prior to its maturity upon ten (10) days prior written notice to Lender. Each partial prepayment shall be in a principal amount of not less than $500,000 and integral multiples of $100,000 in excess thereof. Any Term Loan to which a fixed interest rate described in Section 2.02 of the Loan Agreement applies, if prepaid, shall be subject to a Prepayment Premium. The Prepayment Premium shall be due and payable on the first Business Day subsequent to any such prepayment, whether prepayment has been made at the option of the Borrower or upon acceleration. Any prepayment shall be applied first to the interest accrued on the outstanding principal balance of the Term Loan, and the remainder, if any, shall be applied to reduce the outstanding principal balance of the Term Loan in the inverse order of maturity. If Borrower prepays any portion of a Term Loan without specifying whether the prepayment shall be applied to amounts bearing interest at a LIBOR Rate or a fixed rate, such prepayment(s) shall be deemed to apply (after application to fees and other charges and accrued interest) first to the fixed rate Term Loan, then to a LIBOR rate Term Loan. Section 2.05. Participation Agreements. Lender may, at any time enter into participation agreements with one or more participating banks or other institutions, whereby Lender may sell all or a portion of this Loan. Section 2.06. Use of Proceeds. The proceeds of the Loan hereunder shall be used by the Borrower for general corporate purposes, including without limitation, the financing of the acquisition of entities (subject to approval by Lender under Section 7.07 hereof) by Borrower, the repayment of the Interim Facility, for Borrower's capital expenditures and working capital purposes, and for repurchase of Borrower's common stock pursuant to the terms of the Share Repurchase Plan. Section 2.07. Conditions of Lending. Notwithstanding any other provision of this Agreement, the Lender shall not be obligated or required to make any Advance under the Note unless each of the Conditions Precedent set forth in this Agreement has been satisfied at the time the Advance is made or such Conditions Precedent are waived by Lender in writing. -7- 13 Section 2.08. Term of Agreement. This Agreement shall be binding on the Borrower so long as any portion of the Obligations described herein remains outstanding. Section 2.09. Right of Offset, Etc. The Borrower hereby agrees that, in addition to (and without limitation of) any right of set-off, banker's lien or counterclaim the Lender may otherwise have, the Lender (and any participant of this Loan under Section 2.05) shall be entitled, at its option, to offset balances held by it at any of its offices against any principal of or interest on the Obligations hereunder which is not paid when due by reason of a failure by the Borrower to make any payment when due to the Lender (regardless whether such balances are then due to the Borrower), in which case it shall promptly notify the Borrower, provided that its failure to give such notice shall not affect the validity thereof. Section 2.10. Non-Use Fee. As additional consideration for the Lender's commitment to make the Loan hereunder and reservation of monies to fund the Loan, the Borrower shall pay to the Lender on the first Business Day of each Calendar Quarter, a fee in the amount of .125% per annum of the average daily unused portion of the Maximum Amount of the Revolving Credit Loan during the prior calendar quarter. Article III. Guaranties. Section 3.01. Guarantors. Repayment of all of the Indebtedness and performance of the Obligations shall be guaranteed by the Guarantors pursuant to guaranty agreements in substantially the form as set forth in Exhibit B, subject to the provisions of Section 6.11 hereof. Article IV. Representations and Warranties. To induce Lender to enter this Agreement and extend credit under this Agreement, Borrower covenants, represents, and warrants to Lender that as of the date hereof and as of the Closing Date: Section 4.01. Organization and Qualification. Borrower is a corporation duly organized and existing under the laws of the State of Indiana, each of its Subsidiaries is a corporation duly organized and existing under the laws of its jurisdiction of incorporation, and Borrower and each of the Subsidiaries is qualified to do business in all jurisdictions in which it conducts its business, the failure to qualify in which would have a material adverse effect on the business, Properties, operations or financial condition of the Borrower and its Subsidiaries on a consolidated basis. Section 4.02. Corporate Power and Authorization. Borrower is duly authorized and empowered to execute, deliver, and perform under all Loan Documents to which it is a party; and all other corporate and/or shareholder action required for the due execution, delivery, and performance of the Loan Documents has been duly and effectively taken. Section 4.03. Binding Obligations. This Agreement is, the Note, and the other Loan Documents when executed and delivered in accordance with this Agreement will be, legal, valid and binding upon the Borrower, enforceable in accordance with their respective terms, subject to applicable bankruptcy, insolvency or similar laws relating to enforcement of creditors' rights and general equity principles which may limit the specific enforcement of certain remedies herein. -8- 14 Section 4.04. No Legal Bar or Resultant Lien. The Borrower's execution, delivery and performance of the Loan Documents to which it is a party do not constitute a default under, and will not violate any provisions of the articles of incorporation or bylaws of Borrower, any contract, agreement, law, regulation, order, injunction, judgment or decree to which Borrower is subject, or result in the creation or imposition of any Lien upon any Properties of Borrower, other than those contemplated by the Loan Documents, which violation, creation or imposition would have a material adverse effect on the business, Properties, operations or financial condition of the Borrower and its Subsidiaries on a consolidated basis, or on the ability of the Borrower to perform its obligations under this Agreement or any of the other Loan Documents. Section 4.05. No Consent. Borrower's execution, delivery, and performance of the Loan Documents do not require the consent or approval of any other Person, which has not been obtained. Section 4.06. Liabilities and Litigation. Except as described in Exhibit G, there is no litigation, legal or administrative proceeding, investigation, or other action of any nature pending or, to the knowledge of Borrower, threatened against or affecting Borrower or any of its Subsidiaries, not fully covered by insurance (except for deductibles allowable herein), that may materially and adversely affect the business or the Properties of the Borrower and its Subsidiaries on a consolidated basis, the ability of Borrower to carry out the terms of the Loan Documents, or the ability of Borrower and its Subsidiaries on a consolidated basis, to carry on its/their business as now conducted. Section 4.07. Taxes; Governmental Charges. Subject to Borrower's right to contest taxes and assessments in Section 6.03 hereof, Borrower has filed or caused to be filed all tax returns and reports required to be filed and has paid all taxes, assessments, fees, and other governmental charges levied upon it or upon any of its Properties or income, which are due and payable, in each case the failure to file or pay which would have a material adverse effect on the business, Properties, financial condition or operations of the Borrower and its Subsidiaries on a consolidated basis, or on the ability of the Borrower to perform its obligations under this Agreement or any of the other Loan Documents. Section 4.08. Title, Etc. Borrower has good title to its owned Properties, free and clear of all liens except those referenced or reflected in the Financial Statements described in Section 4.13 hereof. Section 4.09. No Default. Borrower is not in default in any respect that materially adversely affects its business, Properties, operations, or condition, financial or otherwise, of the Borrower and its Subsidiaries on a consolidated basis, under any indenture, mortgage, deed of trust, credit agreement, note, agreement, or other instrument to which Borrower is a party or by which it or its Properties are bound. No party to any such indenture, mortgage, deed of trust, credit agreement, note, agreement or other instrument has declared a default thereunder which default would have a material adverse effect on the business, Properties, financial condition or operations of the Borrower and its Subsidiaries on a consolidated basis. Section 4.10. Compliance with Laws, Etc. Borrower is not in violation of any law, judgment, decree, order, ordinance, or governmental rule or regulation to which Borrower or any of its respective Properties, is subject, which violation would have a material adverse effect on the business, Properties, financial condition or operations of the Borrower and its Subsidiaries on a consolidated basis, or on the ability of the Borrower to perform its obligations under this Agreement or any of the other Loan Documents. Borrower is in compliance in all material respects with the applicable provisions of ERISA. The Borrower has not incurred any "accumulated funding deficiency" within the meaning of ERISA, and the Borrower has not incurred any material liability to -9- 15 PBGC in connection with any plan, which deficiency or liability would be materially adverse to the business, Properties, financial condition or operations of the Borrower and its Subsidiaries, on a consolidated basis. Section 4.11. Significant Subsidiaries. As of the date hereof, Borrower has no Significant Subsidiaries other than the Significant Subsidiaries set forth under the definition of "Significant Subsidiary" in Article I of this Agreement. Section 4.12. No Material Misstatements. No information, exhibit, or report furnished or to be furnished by Borrower to Lender in connection with this Agreement, contains as of the date thereof, or will contain as of the Closing Date, any material misstatement of fact or failed or will fail to state any material fact, the omission of which would render the statements therein materially false or misleading. Section 4.13. Financial Statement. The consolidated financial statements dated December 31 1993, and June 30, 1994 previously delivered by Borrower to Lender fairly and accurately presents the financial condition of Borrower and its Subsidiaries as of such date and has been prepared in accordance with generally accepted accounting principles consistently applied. Since the date of that financial statement, there has been no material, adverse change in the financial condition of the Borrower and its Subsidiaries. Article V. Conditions Precedent. Section 5.01. Initial Conditions. Lender's obligation to extend credit hereunder is subject to the Conditions Precedent that Lender shall have received (or agreed in writing to waive or defer receipt of) all of the following, each duly executed, dated and delivered as of the Closing Date, in form and substance satisfactory to Lender and its counsel: (a) Note and Loan Documents. The Note of Borrower payable to the order of Lender, the Guaranties, the Negative Pledge in the form attached hereto as Exhibit D, and all other Loan Documents; (b) Evidence Of All Corporate Action By The Borrower. Certified copies of all corporate action taken by the Borrower, including resolutions of its Board of Directors, authorizing the execution, delivery, and performance of the Loan Documents to which it is a party and each other document to be delivered pursuant to this Agreement; (c) Incumbency Certificate Of The Borrower. A certificate of the Secretary of the Borrower certifying the names and true signatures of the officers of the Borrower authorized to sign the Loan Documents to which it is a party and the other documents to be delivered by the Borrower under this Agreement; (d) Opinion of Counsel For the Borrower and the Guarantors. An opinion of counsel for the Borrower and the Guarantors in form and substance satisfactory to the Lender. (e) Evidence Of All Corporate Action By The Guarantors. Certified (as of the date of delivery of their respective Guaranties) copies of all corporate action taken by the Guarantors, authorizing the execution, delivery, and performance of their respective Guaranties; -10- 16 (f) Incumbency Certificates Of The Guarantors. A certificate of the secretary or assistant secretary of each of the Guarantors, certifying the names and true signatures of the officers of the Guarantors authorized to sign the respective Guaranties; (g) Other Opinions, Approvals And Documents. The Lender shall have received such other approvals, opinions or documents as the Lender or its counsel may reasonably request; (h) No Material Adverse Change. No material adverse changes in the financial or other condition of Borrower or any of the Guarantors shall have occurred since the date of this Agreement which, in the opinion of Lender, is likely to materially adversely affect the ability of Borrower to perform its obligations under this Agreement, or of the Guarantors to perform their obligations under the Guaranties; (i) Certificates of Good Standing. Certificates of good standing of Borrower and each Guarantor from the states (or other jurisdiction) of their incorporation and each state (or other jurisdiction) in which Borrower and each Guarantor has qualified to do business and is doing business; (j) Charter and By-Laws. Copies of Borrower's and Guarantors' by-laws and articles of incorporation, certified by the secretary of Borrower or the respective Guarantor, as being true and complete copies of the current by-laws, articles of incorporation of Borrower, and the Guarantors, as applicable; (k) Evidence of Insurance. Evidence of insurance as required by Section 6.06 herein. Section 5.02. All Borrowings. The Lender's obligations to extend credit under the Note are subject to the following additional Conditions Precedent which shall be met when an Advance is requested: (a) The representations of the Borrower contained in Article IV are true and correct as of the date of the requested Advance, with the same effect as though made on the date additional funds are advanced; (b) There has been no material adverse change in the Borrower's financial condition since the date of the last borrowing hereunder; (c) No Event of Default has occurred and continues to exist; (d) No material litigation (not disclosed in writing by the Borrower to the Lender prior to the date of the execution and delivery of this Agreement) is pending or known to be threatened against the Borrower, which is includable on Borrower's Financial Statements by its auditors in accordance with GAAP, materially adversely affecting the financial position or business of the Borrower and its Subsidiaries on a consolidated basis or impairing the ability of the Borrower or the Guarantors to perform their obligations under this Agreement or any other Loan Documents. Article VI. Affirmative Covenants. Borrower covenants that, during the term of this Agreement (including any extensions hereof) and until all Indebtedness shall have been finally paid in full and all Obligations shall have been fully paid and discharged, Borrower shall: Section 6.01 Financial Statements and Reports. Furnish to Lender: (a) Annual Reports. As soon as available, and in any event within ninety (90) days after the close of each Fiscal Year, from the present independent certified public accountants of Borrower or by such other firm of independent public accountants as may be designated by Borrower and be reasonably -11- 17 satisfactory to the Lender, the audited consolidated Financial Statements of the Borrower and its Subsidiaries setting forth the audited consolidated balance sheets (and unaudited consolidating balance sheets prepared by Borrower) of Borrower and its Subsidiaries at the end of such year, and the audited consolidated statements of income, cash flow and retained earnings (and unaudited consolidating statements of income, cash flows, and retained earnings) prepared by Borrower of Borrower and its Subsidiaries for such year, setting forth in each case in comparative form (beginning when comparative data are available) the corresponding figures for the preceding Fiscal Year; (b) Quarterly and Year-to-Date Reports. As soon as available and in any event within forty-five (45) days after the end of each Fiscal Quarter, the unaudited consolidated and consolidating balance sheet of Borrower and its Subsidiaries as of the end of such Fiscal Quarter and the unaudited consolidated and consolidating statement of income of Borrower and its Subsidiaries for such Fiscal Quarter and for the period from the beginning of the Fiscal Year to the close of such quarter, all certified by the chief financial or chief accounting officer of the Borrower as being true and correct to the best of his or her knowledge; (c) Annual Budgets. Within thirty (30) days after its Fiscal Year end, annual budgets and projections for the ensuing Fiscal Year; and (d) Securities and Exchange Filings. At the same time as they are filed with the Securities and Exchange Commission, copies of Borrower's 10-Q and 10-K reports and any other filings made with the Securities and Exchange Commission. (e) Other Information. With reasonable promptness, such other information as Lender may from time to time reasonably request. All such balance sheets and other Financial Statements referred to in Sections 6.01(a) and (b) hereof shall conform to GAAP on a basis consistent with those of previous Financial Statements. Section 6.02. Certificates of Compliance. (a) Annual and Quarterly Certificates. Concurrently with the furnishing of the annual Financial Statements pursuant to Section 6.01(a) hereof and the quarterly Financial Statements pursuant to Section 6.01(b) hereof, furnish or cause to be furnished to Lender a certificate of compliance in the form of Exhibit C hereto, certified by the president or chief accounting or financial officer of the Borrower, stating that neither such officer nor the Borrower has obtained knowledge of any Event of Default, or event which, after notice or lapse of time (or both), would constitute an Event of Default or, if such officer or the Borrower has obtained such knowledge, disclosing the nature, details, and period of existence of such event. Section 6.03. Taxes and Other Liens. Pay and discharge promptly all taxes, assessments, and governmental charges or levies imposed upon it or upon any of its income or Property as well as all claims of any kind (including claims for labor, materials, supplies, and rent) which, if unpaid, might become a Lien (other than Liens permitted under Section 7.02) upon any or all of its Property, the failure to pay which might have material adverse effect on the business, Properties, financial condition or operations of the Borrower and its Significant Subsidiaries on a consolidated basis; provided, however, that Borrower shall not be required to pay any such tax, assessment, charge, levy, or claim if the amount, applicability, or validity thereof shall currently be contested in good faith by appropriate proceedings diligently conducted and if Borrower shall establish reserves therefor adequate under GAAP. -12- 18 Section 6.04 Maintenance. (a) Maintain its corporate existence; (b) Maintain its Property in good and workable condition at all times and make all repairs, replacements, additions, and improvements to its Property reasonably necessary and proper to ensure that the business carried on in connection with its Property may in all respects material to the business, financial condition or operations of the Borrower and its Subsidiaries on a consolidated basis, be conducted properly and efficiently at all times. Section 6.05. Further Assurances. Promptly cure any defects in the creation, issuance, and delivery of the Loan Documents. Borrower at its expense promptly will execute and deliver to Lender upon request all such other and further documents, agreements, and instruments in compliance with or accomplishment of the covenants and agreements of Borrower in the Loan Documents, or to correct any omissions in the Loan Documents, or to state more fully the Obligations and agreements set out in any of the Loan Documents, or to file any notices, or to obtain any consents, all as may be reasonably necessary or appropriate in connection therewith. Section 6.06. Insurance. Maintain and continue to maintain, with financially sound and reputable insurors, insurance reasonably satisfactory in type, coverage and amount to Lender against such liabilities, casualties, risks, and contingencies and in such types and amounts as is customary in the case of corporations engaged in the same or similar businesses and similarly situated. Such insurance presently includes: (i) general liability insurance with a total limit of $2,000,000 and an each event limit of $1,000,000; (ii) umbrella excess liability protection total limit coverage of $5,000,000 and an each event limit of $5,000,00; (iii) property and casualty insurance in amounts of at least $47,000,000 for its Indiana and Memphis facilities (including earthquake insurance of $5,000,000 for the Indiana facility and the Memphis facility); (iv) $15,000,000 excess "difference in conditions" policy including flood and earthquake for the Memphis facility; and (v) products liability insurance with coverage of no less than $20,000,000 for U.S./Canada operations, with deductibles not greater than $75,000 per occurrence and $500,000 in the aggregate and coverage for non-U.S./Canada operations of 80,000,000 French Francs with deductibles not greater than 100,000 French Francs per occurrence and 500,000 French Francs in the aggregate. Upon request of Lender, Borrower will furnish or cause to be furnished to Lender from time to time a summary of the insurance coverage of Borrower in form and substance satisfactory to Lender and at least annually will furnish Lender copies of the applicable policies or insurance binders evidencing such insurance. Section 6.07. Right of Inspection. Permit any officer, employee, or agent of Lender to visit and inspect any of the Property of Borrower, to examine Borrower's books of record and accounts, to take copies and extracts from such books of record and accounts, all at such reasonable times and upon reasonable notice. Section 6.08. Notice of Certain Events. Promptly notify Lender if Borrower learns of the occurrence of (i) any event that constitutes an Event of Default; or (ii) the receipt of any notice from, or the taking of any other action by, the holder of any promissory note, debenture, or other evidence of Debt of Borrower or of any security (as defined under the Securities Act of 1933, as amended) of Borrower, representing Debt in excess of $500,000, with respect to a claimed default, together with a detailed statement by an officer of Borrower specifying the notice given or other action taken by such holder and the nature of the claimed default and what action Borrower is taking or proposes to take with respect thereto; or (iii) any legal, judicial, or regulatory proceedings affecting Borrower, not covered by insurance (which are included on Borrower's Financial Statements by its auditors in accordance with GAAP) which, if adversely determined, would have a material and adverse effect on the business or the financial condition of Borrower; or (iv) any dispute between Borrower and any governmental or regulatory -13- 19 authority or any other person, entity, or agency which, if adversely determined, might materially interfere with the normal business operations of Borrower; or (v) any material adverse changes, either individually or in the aggregate, in the assets, liabilities, financial condition, business, operations, affairs, or circumstances of Borrower from those reflected in the Financial Statements or from the facts warranted or represented in any Loan Document. Section 6.09. ERISA Information and Compliance. Comply in all respects in which noncompliance might cause a material adverse effect on the business, Properties, financial condition or operations of the Borrower and its Significant Subsidiaries on a consolidated basis, with the Employee Retirement and Income Security Act ("ERISA") and all other applicable laws governing any pension or profit sharing plan or arrangement to which Borrower is a party. Borrower shall provide Lender with notice of any "reportable event" or "prohibited transaction" or the imposition of a "withdrawal liability" within the meaning of ERISA. Section 6.10. Management. Give notice to Lender of any change in the senior management of Borrower. The term "senior management" shall include only Borrower's President, Chairman, Chief Financial Officer or Treasurer. Section 6.11. Acquired Subsidiaries' Guaranties. In the event a Subsidiary has assets sufficient to be defined as a Significant Subsidiary subsequent to the date hereof, or in the event of the acquisition of a Subsidiary by Borrower subsequent to the date hereof which has assets sufficient to be defined as a Significant Subsidiary, cause each new Significant Subsidiary to execute a Guaranty (in the form attached as Exhibit B) and deliver to Lender the related articles of incorporation, bylaws, certificates of good standing, certificates of incumbency, and all other applicable items described in Article V related thereto, within 90 days after the occurrence of such event. ARTICLE VII. Negative Covenants. Borrower covenants and agrees that, during the term of this Agreement and any extensions hereof and until the Indebtedness has been paid and satisfied in full, unless Lender shall otherwise first consent in writing, Borrower will not, and will not allow or suffer any of its Significant Subsidiaries to,: Section 7.01. Debts, Guaranties, and Other Obligations. Incur, create, assume, suffer to exist or in any manner become or be liable with respect to any Debt; provided that subject to all other provisions of this Article, the foregoing prohibitions shall not apply to: (a) any Debt (and refinancings thereof) reflected on Borrower's financial statements for the periods ending December 31, 1993 and June 30, 1994; (b) indebtedness incurred under this Agreement or any other loan agreement between Borrower and Lender; (c) trade indebtedness incurred in the ordinary course of business not to exceed amounts historically and customarily incurred by Borrower (or its Significant Subsidiaries, as applicable); (d) any subordinate indebtedness in form, amount and substance reasonably approved in advance in writing by the Lender (which approval shall not be unreasonably withheld) and subordinated by subordination agreements reasonably satisfactory to Lender; (e) Debt of a corporation acquired by the Borrower or a Significant Subsidiary subsequent to the date of this Agreement, which Debt was incurred prior to such acquisition and is outstanding on the date of such acquisition; (f) intercompany Debt arising solely among Borrower and its Subsidiaries that is not otherwise prohibited under Section 7.09 of this Agreement; and (g) other indebtedness (including final judgments not covered by insurance and capital expenditures of Borrower and its Significant Subsidiaries) not to exceed $5,000,000.00 in the aggregate for Borrower and its Subsidiaries, excepting such other indebtedness approved by Lender in writing. Lender's response to a request for additional indebtedness under this Section shall be delivered within fifteen (15) business days after receipt of Borrower's written request. -14- 20 Section 7.02. Liens. Grant any Lien in, or otherwise encumber, any of its Properties or assets or permit any of the Significant Subsidiaries to grant any Lien in, or otherwise encumber, any of such Significant Subsidiary's Properties or assets, except for (i) Liens now existing (including Liens existing on the date of acquisition of any corporation subsequently acquired by Borrower as a Significant Subsidiary in accordance with this Agreement); (ii) liens for taxes not yet due and payable or which are being actively contested in good faith by appropriate proceedings; (iii) Liens arising in favor of the Lender; (iv) Liens incurred or pledges and deposits made in connection with worker's compensation, unemployment insurance, old age pensions, social security and public liability laws and similar legislation; (v) statutory liens of landlords and other liens imposed by law, such as carriers', warehousemen's, mechanics', materialmen's and vendor's liens, incurred in the ordinary course of business; (vi) zoning restrictions, easements, licenses, reservations, restrictions on the use or transfer of real property which do not in the aggregate materially detract from the value of the property or assets of the Borrower and its Significant Subsidiaries taken as a whole, or materially impair the use of such property or assets in the operations of the business of the Borrower or any Significant Subsidiary; (vii) attachment, judgment or similar liens so long as the finality of any judgments related thereto in excess of $250,000.00 in the aggregate is being contested in good faith, and for which adequate reserves have been provided in the financial statements of the Borrower; (viii) liens securing any property for rent or hire or any deferred purchase price for any property; (ix) liens arising from set offs; and (x) renewals and extensions of liens described in subsections (i) through (ix) above. Section 7.03. Investments. Subject to any limitations otherwise provided in this Agreement but excepting transactions allowed under Section 7.07 hereof, make investments in any Person, except that, the foregoing restriction shall not apply to: (a) investments in direct obligations of the United States of America or any agency thereof; (b) investments in certificates of deposit having maturities of less than one year, or repurchase agreements issued by commercial banks in the United States of America having capital and surplus in excess of $50,000,000, or commercial paper of the highest quality; (c) investments in money market funds so long as the entire investment therein is fully insured or so long as the fund is a fund operated by a commercial bank of the type specified in (b) above; and (d) investments made pursuant to the Investment Policy of Borrower dated August of 1994 (or amendments or restatements thereof without material changes in risk) which is attached hereto as Exhibit F. Section 7.04. Dividends, Distributions, and Redemptions; Issuance of Stock. Declare or pay any dividend (other than dividends payable solely in common stock of Borrower or dividends payable from a Subsidiary to Borrower), or purchase, redeem, or otherwise retire or acquire for value any of its stock now or hereafter outstanding, except pursuant to the Share Repurchase Plan, or return any capital to its stockholders, or make any distribution of its assets to its stockholders as such, in excess of Fifty percent (50%) of the aggregate Net Income (as defined in accordance with GAAP) of Borrower and its Subsidiaries, on a consolidated basis, for such Fiscal Year. Section 7.05. Nature of Business. Suffer or permit any material adverse change to be made in the character of its business as carried on at the Closing Date. Section 7.06. Mergers, Dispositions, Etc. (a) Sell, assign, lease, transfer, or otherwise dispose of (whether in one transaction or in a series of transactions) all or substantially all of its Property, or the Property (whether now owned or hereafter acquired) of any of its Significant Subsidiaries, to any Person; or (b) consolidate with or merge into, or permit any Significant Subsidiary to consolidate with or merge into, any other corporation or entity, unless the Borrower or a Significant Subsidiary is the surviving entity and has a Tangible Net Worth equal to or greater than Borrower or Significant Subsidiary prior to such consolidation or merger; (c) suffer or permit in whole or in part dissolution or liquidation of Borrower or any Significant Subsidiary (except in a transaction permitted by -15- 21 clause (b) immediately preceding and except, with regard to a Significant Subsidiary, but not with regard to the Borrower, in a transaction permitted by clause (a) immediately preceding); or (d) permit a reorganization or sale of securities that would cause Borrower to no longer maintain control of a Significant Subsidiary (other than any Significant Subsidiary subject to a transaction permitted under clauses (a), (b) or (c) immediately preceding). Section 7.07. Acquisitions. Without the written approval of Lender (which shall not be unreasonably withheld), acquire the assets of or the shares of an unrelated entity or form a joint venture (or partnership) with an unrelated entity, during the term hereof, provided, that the foregoing shall not apply to acquisitions (or joint ventures) in a business related to Borrower's current activities with a purchase price (or capital contribution) aggregating $10,000,000 or less in any twelve-month period. In the event Borrower shall request Lender to approve an acquisition or joint venture under this Section, Borrower shall supply to Lender at least fifteen (15) days prior to such acquisition or capital contribution, historical audited (if prepared) financial statements of the entity to be acquired (or the entity to be a joint venturer) for the two prior fiscal years, the most recent unaudited report of the entity to be acquired (or the entity to be a joint venturer), and revised internal projections of Borrower (on a consolidated basis) including the entity to be acquired (or joint venture) such other financial information reasonably requested by Lender. Section 7.08. Disposition of Assets. Dispose of any of its assets or any assets of any of its Significant Subsidiaries, other than as permitted under Section 7.06, assets which are obsolete, insignificant or depleted, and other than in the ordinary course of Borrower's (or the respective Significant Subsidiary's, as applicable) present business upon terms not materially adverse to Borrower (or the applicable Significant Subsidiary), and in any event only for full and adequate consideration. Section 7.09. No Loans. Excepting loans approved by Lender in writing (Lender's response to a request by Borrower under this Section shall be delivered within fifteen (15) business days following receipt of Borrower's written request), make any loans, advances or extensions of credit to any person or entity, except for such loans, advances or extensions (i) set forth in the 10-K report of the Borrower dated December 31, 1993 and June 30, 1994, filed with the Securities and Exchange Commission and delivered to the Lender; and (ii) loans aggregating $1,000,000 or less at any time. Section 7.10. Prepayments of Other Debts. Without the written consent of Lender (which consent will not be unreasonably withheld) prepay any Debt (excluding trade payables) to any Person. Section 7.11. Sales and Leasebacks. Enter into any arrangement, directly or indirectly, with any Person by which Borrower shall sell or transfer any Property (which in the aggregate shall exceed in value $500,000), whether now owned or hereafter acquired, and by which Borrower shall then or thereafter rent or lease as lessee such Property or any part thereof or other Property that Borrower intends to use for substantially the same purpose or purposes as the Property sold or transferred. Section 7.12. Financial Covenants. On a consolidated basis for Borrower and its Subsidiaries: (a) Maximum Debt to Tangible Net Worth. Permit the ratio of Debt to Tangible Net Worth to exceed .75 to 1.0 at any time from the Closing Date through December 31, 1995, and than .65 to 1.0 at any time after December 31, 1995 until the Maturity Date. (b) Interest Coverage. Permit the ratio of its Net Income before interest, taxes, and rent under operating leases (as classified under current criteria of FASB No. 13) to its interest on all Debt and rents -16- 22 under operating leases to be less than 3.0 to 1.0, based upon a Trailing Four Quarter Basis (calculated on the last day of each Fiscal Quarter), from the Closing Date through the Maturity Date. (c) Tangible Net Worth. Permit, at any time, Tangible Net Worth to be less than the following amounts for the periods indicated below:
Time Periods Minimum Tangible Net Worth ------------ -------------------------- From the Closing Date through December 30, 1994 $72,000,000 From December 31, 1994 through December 30, 1995 $85,000,000 plus Offering Proceeds received in any equity offerings, plus 50% of net earnings for the Fiscal Year ending December 31, 1995, less amounts paid under the Share Repurchase Plan (1994 Required Net Worth). From December 31, 1995 through December 30, 1996 1994 Required Net Worth plus Offering Proceeds received in any equity offerings, plus 50% of net earnings for the Fiscal Year ending December 31, 1995 (1995 Required Net Worth) From December 31, 1996 through December 30, 1997 1995 Required Net Worth plus Offering Proceeds received in any equity offerings, plus 50% of net earnings for the Fiscal Year ending December 31, 1996 (1996 Required Net Worth) From December 31, 1997 to Maturity 1996 Required Net Worth plus Offering Proceeds received in any equity offerings, plus 50% of net earnings for the Fiscal Year ending December 31, 1997
(d) Earnings. Fail to have positive earnings (pre-tax), measured on a Trailing Four Quarter Basis, and calculated on the last day of each Fiscal Quarter. Article VIII. Events of Default. Section 8.01. Events of Default. Any of the following events shall be considered an Event of Default as those terms are used in this Agreement: (a) Borrower fails to make payment within ten (10) days of the due date of any payment of interest, principal or other amount(s) on the Note or due hereunder or under any of the Loan Documents; or -17- 23 (b) Failure by Borrower to pay to Lender within ten (10) days from the due date thereof any principal, interest or other amount due on any other indebtedness of Borrower to Lender, now existing or hereafter owing or arising; or (c) Should any representation or warranty contained herein or made by or furnished on behalf of Borrower or any of the Subsidiaries in connection herewith be false or misleading in any material respect as of the date made; or (d) Failure to perform or observe any covenant, or agreement, duty or obligation (other than those for which an Event of Default is specifically listed in this Section 8.01, contained in this Agreement within thirty (30) days after Lender sends written notice to Borrower specifying such non-performance, however, an Event of Default under this Subsection (d) caused by force majure shall not constitute an Event of Default if Borrower is diligently engaged in curing such Event of Default; or (e) A Receiver, custodian, liquidator, or trustee of Borrower or of any Significant Subsidiary, or of any of its respective Property, is appointed by the order or decree of any court or agency or supervisory authority having jurisdiction; or Borrower or any Significant Subsidiary is adjudicated bankrupt or insolvent; or any of the Property of Borrower or any Significant Subsidiary is sequestered by court order or a petition is filed against Borrower and/or any Significant Subsidiary under any state or federal bankruptcy, reorganization, debt arrangement, insolvency, readjustment of debt, dissolution, liquidation, or receivership law of any jurisdiction, whether now or hereafter in effect (and if made involuntarily against Borrower or such Significant Subsidiary, without the consent or cooperation of Borrower or any Significant Subsidiary, is not dismissed within 90 days of the filing thereof) (it being acknowledged and agreed that no notice requirement on the part of Lender, and no cure period except for the 90 days in which Borrower or the applicable Significant Subsidiary may obtain a dismissal of an involuntary bankruptcy petition, shall apply to this Subsection 8.01(e)); or (f) Borrower or any Significant Subsidiary files a petition in voluntary bankruptcy or to seek relief under any provision of any bankruptcy, reorganization, debt arrangement, insolvency, readjustment of debt, dissolution, or liquidation law of any jurisdiction, whether now or hereafter in effect, or consents to the filing of any petition against it under any such law (it being acknowledged and agreed that no notice requirement on the part of Lender, and no cure period, shall apply to this Subsection 8.01(f)); or (g) Borrower or any Significant Subsidiary makes an assignment for the benefit of its creditors, or admits in writing its inability to pay its debts generally as they become due, or consents to the appointment of a receiver, trustee, or liquidator of Borrower (or any Significant Subsidiary) or of all or any part of its Properties (it being acknowledged and agreed that no notice requirement on the part of Lender, and no cure period, shall apply to this Subsection 8.01 (g)); (h) If final judgment for the payment of money in excess of $5,000,000 (in any twelve-month period during the term hereof) is rendered by any court or other governmental authority against Borrower unless such judgment is covered by insurance in excess of such amount; or (i) A default under the Negative Pledge Agreement. Section 8.02. Remedies. Upon the happening of any Event of Default set forth above, with the exception of those events set forth in Section 8.01(e) and 8.01(f): (i) Lender may declare the entire principal amount of all -18- 24 Indebtedness then outstanding, including interest accrued thereon, to be immediately due and payable without presentment, demand, protest, notice of protest, or dishonor or other notice of default of any kind, all of which Borrower hereby expressly waives, (ii) at Lender's sole discretion and option, all obligations of Lender under this Agreement shall immediately cease and terminate unless and until Lender shall reinstate such obligations in writing; or (iii) Lender may bring an action to protect or enforce its rights under the Loan Documents or seek to collect the Indebtedness and/or enforce the Obligations by any lawful means. Upon the happening of any event specified in Section 8.01(e) and Section 8.01(f): (i) all Indebtedness, including all principal. accrued interest, and other charges or monies due in connection therewith shall be immediately and automatically due and payable in full, without presentment, demand, protest, or dishonor or other notice of any kind, all of which Borrower hereby expressly waives, (ii) all obligations of Lender under this Agreement shall immediately cease and terminate unless and until Lender shall reinstate such obligations in writing; or (iii) Lender may bring an action to protect or enforce its rights under the Loan Documents or seek to collect the Indebtedness and/or enforce the Obligations by any lawful means. Section 8.03. Right of Set-off. Upon the occurrence and during the continuance of any Event of Default, Lender is authorized, at any time and from time to time, without notice to Borrower (any such notice being expressly waived by Borrower), to set-off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by Lender to or for the credit or the account of Borrower against any and all of the Obligations, irrespective of whether or not Lender shall have accelerated the Indebtedness or made any demand under this Agreement or the Notes and although such obligations may be unmatured. Article IX. General Provisions. Section 9.01. Notices. All communications under or in connection with this Agreement or any of the other Loan Documents shall be in writing and shall be mailed by first class certified mail, postage prepaid, or otherwise sent by telex, telegram, telecopy, or other similar form of rapid transmission confirmed by mailing (in the manner stated above) a written confirmation at substantially the same time as such rapid transmission, or personally delivered to an officer of the receiving party. All such communications shall be mailed, sent, or delivered as follows: (a) if to Borrower, to its address shown below, or to such other address as Borrower may have furnished to Lender in writing: Sofamor Danek Group, Inc. 1800 Pyramid Place Memphis, TN 38132 Attn: Mr. Jack B. Pearson, Jr. With a copy to Mr. J. Mark Merrill Mr. Richard E. Duerr, Jr. -19- 25 (b) if to Lender, to its address shown below, or to such other address or to such individual's or department's attention as it may have furnished Borrower in writing: with a copy to: Third National Bank in Nashville Third National Bank in Nashville 6000 Poplar Avenue, Suite 145 201 Fourth Avenue, North Memphis, Tennessee 38119 Nashville, Tennessee 37219 Attn: Bryan Ford Attn: Mr. J.H. Miles Department: Regional Department: Regional Any communication so addressed and mailed by certified mail shall be deemed to be given three (3) days after such mailing. Section 9.02. Deviation from Covenants. The procedure to be followed by Borrower to obtain the consent of Lender to any deviation from the covenants contained in this Agreement or any other Loan Document shall be as follows: (a) Borrower shall send a written notice to Lender setting forth (i) the covenant(s) relevant to the matter, (ii) the requested deviation from the covenant(s) involved, and (iii) the reason for the requested deviation from the covenant(s); and (b) Lender, within a reasonable time, will send a written notice to Borrower, signed by an authorized officer of Lender, permitting or refusing the request, but in no event will any deviation from the covenants of this Agreement or any other Loan Document be effective without the express prior written consent of Lender. Lender's failure to provide such written notice shall be deemed a refusal of such request. Section 9.03. Invalidity. In the event that any one or more of the provisions contained in any Loan Document for any reason shall be held invalid, illegal, or unenforceable in any respect, such invalidity, illegality, or unenforceability shall not affect any other provision of any Loan Document. Section 9.04. Survival of Agreements. All representations and warranties of Borrower in this Agreement and all covenants and agreements in this Agreement not fully performed before the Closing Date of this Agreement shall survive the Closing. Section 9.05. Successors and Assigns. Borrower may not assign its rights or delegate its duties under this Agreement or any other Loan Document. All covenants and agreements contained by or on behalf of Borrower in any Loan Document shall bind the Borrower's successors and assigns and shall inure to the benefit of Lender and its successors and assigns. In the event that Lender sells participations in Indebtedness to participating lenders, each of such participating lenders shall have the rights of set-off against such Indebtedness and similar rights or Liens to the same extent available to Lender, except as otherwise provided in this Agreement. Section 9.06. Renewal, Extension, or Rearrangement. All provisions of this Agreement relating to Indebtedness shall apply with equal force and effect to each and all promissory notes executed hereafter which in whole or in part represent a renewal, extension for any period, increase, or rearrangement of any part of the Indebtedness originally represented by any part of such other Indebtedness. -20- 26 Section 9.07. Waivers. Pursuant to T.C.A. Section 47-50-112, no action or course of dealing on the part of Lender, its officers, employees, consultants, or agents, nor any failure or delay by Lender with respect to exercising any right, power, or privilege of Lender under the Note, this Agreement, or any other Loan Document shall operate as a waiver thereof, except as otherwise provided in this Agreement. Lender may from time to time waive any requirement hereof, including any of the Conditions Precedent; however no waiver shall be effective unless in writing and signed by the Lender. The execution by Lender of any waiver shall not obligate Lender to grant any further, similar, or other waivers. Section 9.08. Cumulative Rights. Rights and remedies of Lender under each Loan Document shall be cumulative, and the exercise or partial exercise of any such right or remedy shall not preclude the exercise of any other right or remedy. Section 9.09. Construction. This Agreement, the Note, and the other Loan Documents constitute a contract made under and shall be construed in accordance with and governed by the laws of the State of Tennessee. Section 9.10. Nature of Commitment. With respect to the Loan and the Advances, Lender's obligation to make the Loan or any Advances shall be deemed to be pursuant to a contract to make a loan or to extend debt financing or financial accommodations to or for the benefit of Borrower within the meaning of Sections 365(c)(2) and 365(e)(2)(B) of the United States Bankruptcy Code, 11 U.S.C. Section 101 et seq. Section 9.11. Governance; Exhibits. The terms of this Agreement shall govern if determined to be in conflict with the terms or provisions in any other Loan Document. The exhibits attached to this Agreement are incorporated in this Agreement and shall be considered a part of this Agreement except that in the event of any conflict between an exhibit and this Agreement or another Loan Document, the provisions of this Agreement or the Loan Document, as the case may be, shall prevail over the exhibit. Section 9.12. Titles of Articles, Sections, and Subsections. All titles or headings to articles, sections, subsections, or other divisions of this Agreement or the exhibits to this Agreement are only for the convenience of the parties and shall not be construed to have any effect or meaning with respect to the other content of such articles, sections, subsections, or other divisions, such other content being controlling with respect to the agreement between the parties. Section 9.13. Time of Essence. Time is of the essence with regard to each and every provision of this Agreement. Section 9.14. Remedies. All remedies for which this Agreement and all other Loan Documents provide for Lender shall be in addition to all other remedies available to Lender under the principles of law and equity, and pursuant to any other body of law, statutory or otherwise. Section 9.15. Application of Prepayments. Prepayments shall be applied at Lender's sole discretion (i) first to accrued interest under any of the Obligations as determined by Lender and (ii) second to reduce principal of any of the Obligations, all in such manner as determined by Lender. Section 9.16. Costs, Expenses, and Taxes. Borrower agrees to pay on demand all out-of-pocket costs and expenses of Lender (including the reasonable fees and out-of-pocket expenses of counsel for Lender) incurred by -21- 27 Lender in connection with the preparation of the Loan Documents or the enforcement, or protection of Lender's rights under the Loan Documents. In addition, Borrower agrees to pay, and to hold Lender harmless from all liability for, any taxes (excluding taxes levied or apportioned upon Lender's income, revenues, or assets) which may be payable in connection with the execution or delivery of this Agreement, the Advances, or the issuance of the Note or any other Loan Documents. Borrower, upon request, promptly will reimburse Lender for all amounts expended, advanced, or incurred by Lender to satisfy any obligation of Borrower under this Agreement or any other Loan Documents, or to protect the Properties or business of Borrower or to collect the obligations, or to enforce the rights of Lender under this Agreement or any other Loan Document, which amounts will include all court costs, attorney's fees, fees of auditors and accountants, and investigation expenses reasonably incurred by Lender in connection with any such matters, together with interest thereon at the rate applicable to past due principal and interest as set forth in the Loan Documents but in no event in excess of the maximum lawful rate of interest permitted by applicable law on each such amount. All obligations for which this Section provides shall survive any termination of this Agreement. Section 9.17. Governing Law; Consent to Forum. This Agreement has been negotiated, executed and delivered at and shall be deemed to have been made in Nashville, Tennessee. This Agreement shall be governed by and construed in accordance with the internal laws of the State of Tennessee. As part of the consideration for new value received, and regardless of any present or future domicile or principal place of business of Borrower or Lender, Borrower hereby consents and agrees that any Tennessee state courts sitting in Davidson County, Tennessee, or, at Lender's option, the United States District Court for the Middle District of Tennessee, shall have jurisdiction to hear and determine any claims or disputes between Borrower and Lender pertaining to this Agreement. Section 9.18. Counterparts. This Agreement may be executed by counterpart signature pages, and it shall not be necessary that the signatures of all parties be contained on any one counterpart; each counterpart shall be deemed an original, but all of them together shall constitute one and the same instrument. Section 9.19. Entire Agreement; No Oral Representations Limiting Enforcement. This Agreement represents the entire agreement between the parties hereto except for such other agreements set forth in the Loan Documents, and any and all oral statements heretofore made regarding the matters set forth herein are merged herein. Section 9.20. Amendments. The parties hereto agree that this Agreement may not be modified or amended except in writing signed by the parties hereto. -22- 28 IN WITNESS WHEREOF, the undersigned, by and through their duly authorized officers execute this Loan Agreement as of the day and date first set forth above. BORROWER: SOFAMOR DANEK GROUP, INC. By: /s/ James J. Gallogly ----------------------------------------- Title: President and Chief Operating Officer --------------------------------------- LENDER: THIRD NATIONAL BANK IN NASHVILLE By: /s/ Bryan W. Ford ------------------------------------------ Title: Assistant Vice President --------------------------------------- -23- 29 AMENDMENT TO LOAN AGREEMENT THIS AMENDMENT TO LOAN AGREEMENT (this "Amendment") is entered into by and between SOFAMOR DANEK GROUP, INC., an Indiana corporation ("Borrower") and THIRD NATIONAL BANK IN NASHVILLE, a national banking association ("Lender"), to be effective as of June 30, 1995. W I T N E S S E T H: WHEREAS, Borrower and Lender previously entered into that certain loan agreement dated as of October 14, 1994 (the "Loan Agreement"), in connection with a certain credit facility from Lender to Borrower in the original principal amount of up to $40,000,000 as described therein; and WHEREAS, Borrower has requested that Lender make certain amendments to the Loan Agreement, as set forth herein; and WHEREAS, subject to certain terms and conditions, Lender has agreed to make certain amendments to the Loan Agreement as described herein; and WHEREAS, the parties desire to amend the Loan Agreement as set forth herein; NOW, THEREFORE, in consideration of the premises, and for other good and valuable consideration, the adequacy and receipt of which are hereby acknowledged, the parties agree as follows: 1. Subsection 7.12(a) of the Loan Agreement, the "Maximum Debt to Tangible Net Worth" section, is deleted. 2. Subsection 7.12(b) of the Loan Agreement, the "Interest Coverage" section, is re-lettered as subsection 7.12(a) and is amended and restated to read as follows: (a) EBITDA to Debt Service. Permit its ratio of EBITDA to Debt Service to be less than 1.0 to 1.0 measured on a Trailing Four-Quarter Basis (calculated on the last day of each Fiscal Quarter), beginning with the Fiscal Quarter ending June 30, 1995, through the Maturity Date. As used herein, "EBITDA" means Earnings before interest, taxes, depreciation and amortization, and "Earnings" means net income as such term is used in accordance with GAAP, less the one-time charge to net income taken by the Borrower for the Fiscal Quarter ended March 31, 1995 due to Borrower's acquisition and licensing of technology from Genetics Institute, Inc. ("GI") pursuant to the terms of a certain Deal Summary dated February of 1995. 30 Also as used herein, "Debt Service" means all amounts payable or to be paid during the twelve months following any date of measurement, in connection with debt and capitalized lease obligations of the Borrower or its Subsidiaries, including without limitation notes payable, short-term obligations, current maturities of long-term debt and capitalized lease obligations, plus interest, fees and expenses on any of the foregoing, plus all Indebtedness outstanding from time to time (including without limitation interest, fees and expenses). 3. Subsection 7.12(c) of the Loan Agreement, the "Tangible Net Worth" section, is re-lettered as subsection 7.12(b) and is amended by changing the reference therein to the amount "$85,000,000" (appearing in the Minimum Tangible Net Worth column for the period December 31, 1994 through December 30, 1995) to read: "$70,000,000". The other provisions in such subsection shall remain unchanged. 4. Subsection 7.12(d) of the Loan Agreement is re-lettered as subsection 7.12(c) but is otherwise unchanged. 5. Except as amended herein, all other terms, provisions, agreements, covenants, representations and warranties in the Loan Agreement shall remain in full force and effect, and Borrower hereby reaffirms all of its duties, obligations, covenants, agreements, representations and warranties in the Loan Agreement and the other documents executed and delivered from time to time in connection therewith and/or in connection with any indebtedness or obligation of Borrower to Lender, direct or contingent, in existence from time to time. 6. Borrower represents that its acquisition and licensing of technology from Genetics Institute, Inc. ("GI") was made in accordance with the terms of the Deal Summary dated February, 1995 and disclosed to Lender. 7. Borrower represents, warrants and covenants that no Event of Default has occurred and is continuing under the Loan Agreement and that no event has occurred and no claim, offset, defense or other condition exists that would relieve Borrower of any of its obligations to the Lender under the Loan Agreement, as amended hereby. 8. Borrower reaffirms its representations and represents that all such representations and warranties set forth in the Loan Agreement are true and correct as of the date of this Amendment. 9. This Amendment shall be governed by Tennessee law. 10. Borrower represents that the execution and performance of this Amendment have been duly authorized by all necessary and appropriate corporate action. - 2 - 31 11. This Amendment shall not become effective until the execution hereof by both parties. IN WITNESS WHEREOF, the parties have executed this Amendment to be effective as of the date set forth above. LENDER: BORROWER: THIRD NATIONAL BANK IN NASHVILLE SOFAMOR DANEK GROUP, INC. By: /s/ Bryan W. Ford By: /s/ J. Mark Merrill ------------------------------- ------------------------------- Title: Assistant Vice President Title: Vice President and Treasurer --------------------------- ----------------------------- - 3 - 32 SECOND AMENDMENT TO LOAN AGREEMENT AND FIRST AMENDMENT TO REVOLVING CREDIT AND OPTIONAL TERM NOTE THIS SECOND AMENDMENT TO LOAN AGREEMENT AND FIRST AMENDMENT TO REVOLVING CREDIT AND OPTIONAL TERM NOTE (this "Amendment") is entered into this the 11th day of October, 1995 by and between SOFAMOR DANEK GROUP, INC., an Indiana corporation ("Borrower") and THIRD NATIONAL BANK IN NASHVILLE, a national banking association ("Lender"). RECITALS: A. Borrower and Lender previously entered into that certain loan agreement dated as of October 14, 1994 (as amended, the "Loan Agreement"), in connection with a certain credit facility from Lender to Borrower in the original principal amount of up to $40,000,000, and in connection therewith Borrower executed that certain Revolving Credit and Optional Term Note (the "Note") in the principal amount of up to $40,000,000. B. Borrower and Lender previously executed that certain Amendment to Loan Agreement (the "First Amendment") effective June 30, 1995. C. Borrower and Lender have agreed to further amend the Loan Agreement and to amend the Note as set forth herein in order to extend the maturity thereof. NOW, THEREFORE, in consideration of the premises, and for other good and valuable consideration, the adequacy and receipt of which are hereby acknowledged, the parties agree as follows: 1. Article I of the Loan Agreement concerning "Definitions" is amended by the deletion of the reference to "October 15, 1995," under the definition of "Maturity Date," and "October 15, 1996" is inserted in lieu thereof as the new Maturity Date. 2. The Note is amended by changing the reference therein to "October 15, 1995" as the Maturity Date to read "October 15, 1996" as the new Maturity Date. 3. Except as specifically amended herein, all other terms and provisions in the Loan Agreement and the Note shall remain in full force and effect. 4. Borrower represents, warrants and covenants that no Event of Default has occurred and is continuing under the Loan Agreement and that no event has occurred and no claim, offset, defense or other condition exists that would relieve Borrower of any of its obligations to the Lender under the Loan Agreement, as amended hereby. 33 5. This Amendment shall be governed by Tennessee law. 6. Borrower represents that the execution and performance of this Amendment have been duly authorized by all necessary and appropriate corporate action. 7. This Amendment may be executed in multiple counterparts. IN WITNESS WHEREOF, the parties have executed this Amendment to be effective as of the date first set forth above. BORROWER: -------- SOFAMOR DANEK GROUP, INC. By: /s/ J. Mark Merrill --------------------------------------- Title: Vice President and Treasurer ------------------------------------ LENDER: ------ THIRD NATIONAL BANK IN NASHVILLE By: /s/ Bryan W. Ford --------------------------------------- Title: Vice President ------------------------------------ - 2 - 34 THIRD AMENDMENT TO LOAN AGREEMENT THIS THIRD AMENDMENT TO LOAN AGREEMENT (the "Amendment") is entered into this the 1st day of August, 1996 by and between SOFAMOR DANEK GROUP, INC., an Indiana corporation (the "Borrower") and SUNTRUST BANK, NASHVILLE, N.A., formerly Third National Bank in Nashville, a national banking association (the "Lender"). RECITALS: A. Borrower and Lender previously entered into that certain loan agreement dated as of October 14, 1995 (as amended from time to time, the "Loan Agreement"), in connection with a certain credit facility from Lender to Borrower in the original principal amount of up to $40,000,000. Borrower and Lender amended the Loan Agreement pursuant to an Amendment to Loan Agreement effective June 30, 1995. Borrower and Lender further amended the Loan Agreement pursuant to a Second Amendment to Loan Agreement and First Amendment to Revolving Credit Optional Term Note dated October 11, 1995. B. In connection with the execution of the Loan Agreement, the Borrower executed that certain Revolving Credit and Optional Term Note (as amended from time to time, the "Note") in the original principal amount of $40,000,000. The Note was amended pursuant to the Second Amendment to Loan Agreement and First Amendment to Revolving Credit and Optional Term Note dated October 11, 1995. C. Concurrently herewith the Borrower and Lender have amended the Note pursuant to a Second Amendment to Revolving Credit and Optional Term Note dated as of the date hereof. D. Borrower and Lender have agreed to make certain amendments to the Loan Agreement as set forth herein. NOW, THEREFORE, in consideration of the premises, and for other good and valuable consideration, the adequacy and receipt of which are hereby acknowledged, the parties agree as follows: 1. Section 1 of the Loan Agreement concerning "Definitions," is amended as follows: The term "Maturity Date" is deleted and the following is substituted in lieu thereof to extend the maturity of the Loan: "Maturity Date" means October 15, 1997 with repect to the Revolving Credit Loan (unless the Maturity Date is extended in writing by the Lender) and with respect to a Term Loan, the 1, 2 or 3-year period elected by Borrower in writing pursuant to the provisions of Section 2.02 herein. 35 The term "Maximum Amount" is deleted and the following is substituted in lieu thereof to increase the principal amount available under the Loan Agreement to $50,000,000: "Maximum Amount" means the principal amount of $50,000,000, which is the maximum principal amount that may be outstanding at any time under the Loan. The term "Note" is deleted and the following is substituted in lieu thereof, with the Exhibit A to the Loan Agreement being amended accordingly to increase the principal amount to $50,000,000: "Note" means that certain Promissory Note in the form set forth in Exhibit A hereto in the principal amount of up to $50,000,000, including all amendments, extensions, increases and restatements thereto and thereof, and all replacements and substitute notes therefor. The term "Significant Subsidiary" is amended by adding the following entities thereto: Sofamor Danek Canada, Inc. Sofamor Danek Nevada, Inc. Surgical Navigation Technologies, Inc. Sofamor Danek Benelux S.A. 2. Section 2.01 of the Loan Agreement concerning the "Revolving Credit Loan," is amended by deleting the reference therein to $40,000,000 and the term "$50,000,000" is substituted in lieu thereof. 3. Section 7.01(g) of the Loan Agreement concerning "Debts, Guaranties, and Other Obligations," is amended to delete the reference therein to $5,000,000, and the term "$15,000,000" is substituted in lieu thereof. 4. Section 7.09 concerning "No Loans," is amended to delete the reference therein to $1,000,000 and the term "$2,000,000" is substituted in lieu thereof. 5. Except as amended herein, all other terms, provisions, agreements, covenants, representations and warranties in the Loan Agreement shall remain in full force and effect, and Borrower hereby reaffirms all of its duties, obligations, covenants, agreements, representations and warranties in the Loan Agreement. 36 6. Borrower represents, warrants and covenants that no Event of Default has occurred and is continuing under the Loan Agreement and that no event has occurred or other condition exists that would relieve Borrower of any of its obligations to the Lender under the Loan Agreement, as amended. 7. This Amendment shall be governed by Tennessee law. 8. Borrower represents that the execution and performance of this Amendment have been duly authorized by all necessary and appropriate corporate action. 9. This Amendment may be executed in multiple counterparts. IN WITNESS WHEREOF, the parties have executed this Amendment to be effective as of the date set forth above. LENDER: BORROWER: - ------ -------- SUNTRUST BANK, NASHVILLE, N.A. SOFAMOR DANEK GROUP, INC. By: /s/ Bryan W. Ford By: /s/ J. Mark Merrill ------------------------- -------------------------------- Title: Vice President Title: Vice President and Treasurer ---------------------- ------------------------------ 37 FOURTH AMENDMENT TO LOAN AGREEMENT THIS FOURTH AMENDMENT TO LOAN AGREEMENT (the "Amendment") is entered into this the 31st day of January, 1997 by and between SOFAMOR DANEK GROUP, INC., an Indiana corporation (the "Borrower") and SUNTRUST BANK, NASHVILLE, N.A., a national banking association (the "Lender"). RECITALS: A. Borrower and Lender previously entered into that certain loan agreement dated as of October 14, 1994 (as amended from time to time, the "Loan Agreement"), in connection with a certain credit facility from Lender to Borrower in the original principal amount of up to $40,000,000. Borrower and Lender amended the Loan Agreement pursuant to an Amendment to Loan Agreement effective June 30, 1995. Borrower and Lender further amended the Loan Agreement pursuant to a Second Amendment to Loan Agreement and First Amendment to Revolving Credit Optional Term Note dated October 11, 1995. Borrower and Lender further amended the Loan Agreement pursuant to a Third Amendment to Loan Agreement dated August 1, 1996. B. In connection with the execution of the Loan Agreement, the Borrower executed that certain Revolving Credit and Optional Term Note (as amended from time to time, the "Note") in the original principal amount of $40,000,000. The Note was amended pursuant to the Second Amendment to Loan Agreement and First Amendment to Revolving Credit and Optional Term Note dated October 11, 1995, and further amended pursuant to the Second Amendment to Revolving Credit and Optional Term Note dated August 1, 1996. C. Concurrently herewith the Borrower and Lender have amended the Note pursuant to a Third Amendment to Revolving Credit and Optional Term Note dated as of the date hereof. D. Borrower and Lender have agreed to make certain amendments to the Loan Agreement as set forth herein. NOW, THEREFORE, in consideration of the premises, and for other good and valuable consideration, the adequacy and receipt of which are hereby acknowledged, the parties agree as follows: 1. Section 1 of the Loan Agreement concerning "Definitions," is amended as follows: The definition of "EBITDA" is added as follows: "EBITDA" means Earnings before interest expense, taxes, depreciation and amortization, all calculated on a consolidated basis 38 in accordance with GAAP. The term "Earnings" shall mean net income on a consolidated basis as such term is determined in accordance with GAAP, excluding the one-time deduction of a reserve for litigation expenses in an amount of $50,000,000 in the Fiscal Quarter ending December 31, 1996. The term "Funded Debt" is added as follows: "Funded Debt" means, without duplication, the sum of (a) all indebtedness of Borrower and its Subsidiaries on a consolidated basis for borrowed money, (b) all purchase money indebtedness of Borrower and its Subsidiaries, (c) the principal portion of all obligations of Borrower and its Subsidiaries under capital leases, (d) commercial letters of credit and the maximum amount of all performance and standby letters of credit issued or bankers's acceptance facilities created for the account of Borrower or its Subsidiaries, including, without duplication, all unreimbursed draws thereunder, (e) all guaranty obligations of Borrower and its Subsidiaries, (f) all Funded Debt of any partnership, limited liability company or unincorporated joint venture to the extent that Borrower or any of its Subsidiaries is legally obligated with respect thereto, net of any assets of such partnership, limited liability company or joint venture and (g) liability under any bond, indenture, note or similar instrument. Funded Debt shall exclude existing notes payable by Borrower to Genetics Institute and that certain Non-Negotiable, Subordinated Convertible Note dated January 11, 1994 executed by Borrower in favor of Gary K. Michelson. The term "Maximum Amount" is deleted and the following is substituted in lieu thereof to increase the principal amount available under the Loan Agreement to $60,000,000: "Maximum Amount" means the principal amount of $60,000,000, which is the maximum principal amount that may be outstanding at any time under the Loan. The term "Note" is deleted and the following is substituted in lieu thereof, with the Exhibit A to the Loan Agreement amended accordingly to increase the principal amount to $60,000,000: "Note" means that certain Promissory Note in the form set forth in Exhibit A hereto in the principal amount of up to $60,000,000, including all amendments, extensions, increases and 39 restatements thereto and thereof, and all replacements and substitute notes therefor. 2. Section 2.01 of the Loan Agreement concerning the "Revolving Credit Loan," is amended by deleting the reference therein to $50,000,000 and the term "$60,000,000" is substituted in lieu thereof. 3. Section 7.12 of the Loan Agreement concerning "Financial Covenants" is deleted, and the following is substituted in lieu thereof: Section 7.12 Financial Covenants. On a consolidated basis for Borrower and its Subsidiaries: (a) Ratio of Funded Debt to EBITDA. Permit its ratio of Funded Debt to EBITDA (measured on a Trailing Four-Quarter Basis) to be more than 1.0 to 1.0, determined on the last day of each Fiscal Quarter. (b) Tangible Net Worth. Permit, at any time, Tangible Net Worth to be less than the following amounts for the periods indicated below:
Time Periods Minimum Tangible Net Worth ---------------------------------------------------------- From December 31, 1996 through December 30, 1997 $50,000,000 From December 31, 1997 through December 30, 1998 $50,000,000 plus Offering Proceeds received in any equity offerings, plus 50% of net earnings for the Fiscal Year ending December 31, 1997 (1997 Required Net Worth).
40 From December 31, 1998 through December 30, 1999 1997 Required Net Worth plus Offering Proceeds received in any equity offerings, plus 50% of net earnings for the Fiscal Year ending December 31, 1998 (1998 Required Net Worth) From December 31, 1999 through December 30, 2000 1998 Required Net Worth plus Offering Proceeds received in any equity offerings, plus 50% of net earnings for the Fiscal Year ending December 31, 1999 (1999 Required Net Worth) From December 31, 2000 to Maturity 1999 Required Net Worth plus Offering Proceeds received in any equity offerings, plus 50% of net earnings for the Fiscal Year ending December 31, 2000
(c) Earnings. Fail to have net income of $5,000,000 for any Fiscal Quarter, beginning with the Fiscal Quarter ending March 31, 1997. 4. The amendments set forth in Section 3 of this Amendment shall be effective as of December 31, 1996. All other amendments set forth herein shall be effective as of the date of this Amendment. 5. Except as amended herein, all other terms, provisions, agreements, covenants, representations and warranties in the Loan Agreement shall remain in full force and effect, and Borrower hereby reaffirms all of its duties, obligations, covenants, agreements, representations and warranties in the Loan Agreement. 6. Borrower represents, warrants and covenants that no Event of Default has occurred and is continuing under the Loan Agreement and that no event has occurred or other condition exists that would relieve Borrower of any of its obligations to the Lender under the Loan Agreement, as amended. 7. This Amendment shall be governed by Tennessee law. 8. Borrower represents that the execution and performance of this Amendment have been duly authorized by all necessary and appropriate corporate action. 9. This Amendment may be executed in multiple counterparts. 41 IN WITNESS WHEREOF, the parties have executed this Amendment as of the date first set forth above. LENDER: BORROWER: - ------ -------- SUNTRUST BANK, NASHVILLE, N.A. SOFAMOR DANEK GROUP, INC. By: /s/ Bryan W. Ford By: /s/ J. Mark Merrill ------------------------- --------------------------------- Title: Vice President Title: Vice President and Treasurer ---------------------- ------------------------------- EX-10.15 4 EMPLOYMENT AGREEMENT-ELKHUIZEN 1 EXHIBIT 10.15 EMPLOYMENT AGREEMENT BETWEEN PETER J. ELKHUIZEN AND THE COMPANY DATED OCTOBER 30, 1996 2 EXHIBIT 10.15 EMPLOYMENT AGREEMENT The undersigned: 1. SOFAMOR DANEK GROUP, INC., a company with its corporate headquarters located in Memphis, Tennessee, USA, hereinafter referred to as the "Company". and 2. Mr. Peter Elkhuizen, residing at Treekerbergje 2, in (3817KK) Amersfoort, the Netherlands, hereinafter referred to as "Employee". WHEREAS the Company has appointed Mr. P.J. Elkhuizen as President of the European Division of the Company, which appointment Mr. Elkhuizen has accepted; WHEREAS the parties wish to set forth herein the terms and conditions governing this Employment Agreement. HEREBY AGREE AS FOLLOWS: 1. Function/Location/Reporting Relation 1.1 No later than November 15, 1996, Employee will enter into the employment as President of the European Division of the Company. 1.2 Employee's principal location for the performance of his services hereunder will be Amersfoort, the Netherlands; provided, however, that Employee will be required to travel four to six times a month to the offices of Sofamor Danek SNC (the "Subsidiary") in Roissy, France. 1.3 Employee will report to the President and Chief Operating Officer of the Company. 2. Rights and Obligations 2.1 Employee has the obligation to perform the duties of a Gerant of the Subsidiary. Employee has as a Gerant the obligations which are imposed on a Gerant pursuant to applicable French law and the articles of incorporation of the Subsidiary. 2.2 Employee shall engage himself and exercise his capabilities to the best of his ability in order to promote the growth of the Company. 3 3. Duration of the Agreement 3.1 The Employment Agreement shall remain in effect for an indefinite period of time. However, the Employment Agreement will terminate in any case, without notice being required, when Employee reaches the age of 65 years. 4. Salary and Benefits 4.1 Employee will receive an annual base salary of DGLD 400,000 gross plus an annual vacation allowance of 8% of base salary. Base salary will be paid every month in equal installments. After 1997, Employee's salary will be reviewed annually by the Compensation Committee of the Company's Board of Directors. 4.2 Employee will participate in a corporate bonus plan consistent with the overall Company program based upon European economic value added performance, as determined by the Company from time to time. 4.3 Employer offers Employee the possibility to acquire an option on a maximum of 200,000 shares of Company common stock. The price for such option is $2.25 per share and such Option provides Employee with the right to purchase, at any time on or prior to the first business day following the fifth anniversary of the date hereof, Company common stock. The price at which such stock may be purchased (the exercise price) will be equal to the NYSE closing value of the stock on the date such option is purchased. 5. Expenses and Company Car 5.1 Necessary expenses incurred by Employee in the exercise of his duties will be refunded by the Company on a monthly basis upon submittance of supporting vouchers provided that such expenses are reasonable. 5.2 In addition to Article 5.1, the Company shall provide Employee with a fixed payment of DGLD 480 per month as compensation for general costs, such as parking and toll fees, tips, and use of personal computer at home for Company purposes, which costs do not lend themselves to specified accounting. 5.3 The telephone costs incurred at the residence of Employee shall be paid for by the Company; however, an amount as compensation for personal use of the telephone will be deducted. Such deduction shall be in accordance with the fiscal required minimum. 5.4 The Company will make available to Employee an automobile for his business and personal use, in accordance with the Company car policy. 5.5 The benefits referred to in Articles 5.2 through 5.4 will only be available if and so long as Employee is actively performing his duties. Employee will be deemed to actively perform his duties also while taking holidays and during illness of no longer than two months. 4 6. Insurance 6.1 Employee is obligated to retain health insurance. The Company will provide a monthly contribution of DGLD 544 to assist in the payment of the premium for this insurance. 6.2 The Company shall pay the annual premium of the supplementary disability insurance. 7. Pension 7.1 The Company will, beginning as of the first day of the Executive's employment, which shall occur on or before November 15, 1996, contribute to an annual pension premium for the benefit of a personal pension plan for Employee. The contribution of the Company shall equal 17.8% of Employee's annual gross salary. By making such payments, the Company shall have wholly satisfied all of its pension obligations with respect to Employee. Employee shall furnish the Company with a copy of employee's personal pension plan. 8. Vacation 8.1 Employee will, without loss of income, be entitled to 25 vacation days per year. In taking up his vacation, Employee will take into account the company's interest and obtain prior approval from the President and Chief Operating Officer of the Company. 9. Disability 9.1 In case of disability of Employee, Employee shall retain his right to full payment of his salary and benefits for a period of one year. 10. Other Employment 10.1 Employee shall be barred from engaging in any other form of employment or service, whether or not compensated, to the extent that the performance of such labor or service results in any disadvantage to the Company or its subsidiaries whatsoever. 11. Notice and Termination 11.1 Both the Company and Employee shall be required to provide six months prior written notice of cancellation of this Employment Agreement, provided that the effective date of termination shall be the last day of the month. 11.2 In the event that the Company terminates the Employee's employment following a change in control, Employee shall be entitled to a lump sum payment of two and one-half times his base salary then in effect (as provided in Section 4.1). 5 12. Amendments/Jurisdiction 12.1 This Employment Agreement may only be amended pursuant to a written document signed by both parties. 12.2 This Employment Agreement shall be governed by the law of the Netherlands. IN WITNESS WHEREOF, the parties hereto have executed this agreement in duplicate on October 30, 1996. /s/ Peter J. Elkhuizen /s/ James J. Gallogly - ----------------------------------- ------------------------------ Peter J. Elkhuizen Sofamor Danek Group, Inc. EX-10.28 5 CASH BONUS PLAN 1 EXHIBIT 10.28 CASH BONUS PLAN 2 EXHIBIT 10.28 DESCRIPTION OF SOFAMOR DANEK GROUP, INC. CASH BONUS PLANS Sofamor Danek Group, Inc. ("Company") has established Cash Bonus Plans for its executive officers, non- executive officers and other middle management level employees. The executive officer Cash Bonus Plan is administered by the Board of Directors based on recommendations made by the Compensation Committee. All other Cash Bonus Plans are administered by Company management. The Plans are performance based on individual goals and objectives and overall Company operational performance. The Plans are designed so that if individual and Company performance goals are met, an individual will receive a bonus that is determined annually based on Plan criteria. Each employee under the Plan must meet a specified percentage of his or her individual performance objectives for the period as a prerequisite to receiving a bonus under the applicable plan. In such event, and provided the Company's threshold goals are met for the period, the employee will receive a specified percentage of his or her actual annual earnings. The percentage varies depending on (i) the level of the Company performance measured in accordance with the plan formula and (ii) the category in which the employee's position is included, which categories range from supervisor to mid- and upper-level management to executive officers. The percentage increases if the operations performance threshold is exceeded. No bonus is paid if the operational performance threshold is not met. All payments under all Cash Bonus Plans are made on or before March 15 of the year following the calendar year period in which the bonus is earned. EX-10.29 6 EMPLOYEE STOCK PURCHASE PLAN 1 EXHIBIT 10.29 EMPLOYEE STOCK PURCHASE PLAN 2 EXHIBIT 10.29 SOFAMOR DANEK GROUP, INC. EMPLOYEE STOCK PURCHASE PLAN 1. PURPOSE OF PLAN The purpose of this Employee Stock Purchase Plan is to provide employees the opportunity to purchase Shares of Sofamor Danek Group, Inc. (the "Company") common stock through periodic offerings to be made during the term of the Plan. Ownership by the employees strengthens the sense of identity between the Company and its employees and furthers the recognition of the essential unity of purpose among the Company, its employees, and its Shareholders and allows it employees to share in the success of the Company. This Employee Stock Purchase Plan is designed to facilitate the equity ownership by the employees of the Company and to provide a convenient and economical means through which such employees of the Company may own Shares of the Company and a method by which the Company may assist in achieving this objective. An aggregate of 60,000 of the Company's Shares have been reserved for inclusion in this Plan. 2. DEFINITIONS The following definitions apply to this Plan: a. "Account" shall mean the payroll deduction account for each Plan Participant, which is maintained as required by this Plan. b. "Committee" shall mean the Committee appointed by the Board of Directors of the Company in accordance with Section 4 of this Plan. c. "Company" shall mean Sofamor Danek Group, Inc. and its Subsidiaries as of the effective date of the Plan, and any future subsidiaries the employees of which the Committee approves for participation in the Plan. d. "Custodian" shall mean a regulated bank, trust company, or brokerage firm domiciled in the United States of America as may be designated by the Company from time to time to receive contributions, purchase Shares, and maintain Participant Accounts all for the benefit of the Participants. e. "Enrollment Dates" shall mean the dates on which any eligible Company employee can become a Participant in the Plan as set forth in Section 6 hereof. f. "Effective Date" shall mean November 1, 1991. g. "Gross Earnings" shall mean the annual basic salary plus any overtime wages of a Participant before payroll deductions for all usual and normal employment withholding taxes or other purposes and shall not include the value of any other direct or indirect benefits or compensation. h. "Offering Period" shall mean any three (3) month calendar quarter, which begins on January 1, April 1, July 1 or October 1, the two month period beginning November 1, 1991 and ending December 31, 1991, and the thirty-one day period beginning October 1, 2006 and ending October 31, 2006. i. "Option Price" shall mean the price paid by a Plan Participant for each whole Share. j. "Participant" shall mean an employee who satisfies the eligibility criteria of this Plan and has elected in writing to participate in the Plan. k. "Plan" shall mean this Employee Stock Purchase Plan and all of its amendments. 3 l. "Share," "Shares" or "Stock" shall mean the common stock of Sofamor Danek Group, Inc. m. "Shareholder Approval" shall have the same meaning as set forth in Section 423 of the United States Internal Revenue Code. n. "Subsidiaries" or "Subsidiary" shall mean Sofamor Danek Group, Inc., Danek Medical, Inc., Warsaw Orthopedic, Inc. and Sofamor SNC subsidiaries. 3. TERM OF PLAN The operations of the Plan shall commence on the first day of November, 1991, and shall continue through October 31, 2006 unless terminated prior to that date in accordance with Section 22 hereof. 4. ADMINISTRATION OF THE PLAN The Plan will be administered by a Committee appointed by the Board of Directors of the Company. At least two (2) members of the Committee shall be members of the Board of Directors of the Company. Members of the Committee shall not be eligible to participate in the Plan. The Committee will have the sole authority to make rules and regulations for the administration of the Plan, the sole discretion to administer and interpret the Plan, and the interpretations and decisions of the Committee with regard to the Plan shall be final and conclusive. 5. ELIGIBILITY TO PARTICIPATE IN THE PLAN All employees of the Company will be eligible to participate in the Plan, except for those employees who have been employed less than six months, those employees whose customary employment is twenty hours or less per week, and those employees whose customary employment is for not more than five months in any calendar year. 6. PARTICIPATION IN THE PLAN Eligible employees may enroll in the Plan within the thirty (30) days after the Effective Date. Thereafter, eligible employees may enroll in the Plan on each January 1, April 1, July 1 and October 1 while the Plan is in effect, except that eligible employees may also enroll at any time within the thirty (30) days after Shareholder Approval. On or before December 1, March 1, June 1 and September 1 of each year or such other dates as may be prescribed by the Committee, those employees determined by the Committee to be eligible to participate in the Plan shall be notified of their right to enroll in the Plan. Each employee who is eligible to participate in the Plan may elect to become a Participant by delivering to the Company an Employee Stock Purchase Plan Enrollment Form ("Enrollment Form") on or before the date prescribed by the Committee. Upon acceptance by the Company, the employee will become a Participant as of the next enrollment date. The delivery of a completed Enrollment Form by the employee to the Company shall constitute: A. written notice of the employee's election to participate in the Plan; B. authorization to the Company to make payroll deductions in accordance with the terms of the Plan and pursuant to the Enrollment Form; and C. direction to the Custodian to establish and operate an Account under the terms of the Plan in the name of and for the benefit of the employee. The percentage rate of contribution contained in the Enrollment Form elected by an employee shall remain in effect until changed by the employee pursuant to Section 8 of this Plan. The Company shall designate a location at the Company and at each Subsidiary where employees may receive a copy of the Plan and all applicable forms, and may submit completed forms. 4 7. PAYROLL DEDUCTIONS The Company will maintain an Account for each Participant. With respect to any offering made under this Plan, an employee may authorize a payroll deduction in terms of whole number percentages up to a maximum of 5% (or such other maximum percentage amount as determined by the Committee) of the Gross Earnings an employee receives during an Offering Period or during such portion of an Offering Period during which an employee participates in the Plan. Payroll deductions will begin as soon as practical, but not later than the first payroll period commencing after receipt and acceptance of a Participant's enrollment form. 8. CONTRIBUTIONS AND PURCHASE OF SHARES Each Participant, in any offering under this Plan, will be granted an option, on the effective date of such offering, for as many whole number Shares of Company stock as may be purchased on the Purchase Date, as hereinafter defined, with the following amounts: A. one percent (1%), two percent (2%), three percent (3%), four percent (4%), or five percent (5%) of Gross Earnings received during the Offering Period or that portion of the Offering Period during which an employee participates in the Plan, which purchase will be paid by payroll deductions during such Offering Period; and B. the balance (if any) carried forward from the Participant's Account for the preceding Offering Period pursuant to the third to the last paragraph of this Section 8. No employee may be granted an option to purchase Shares under this Plan, if (a) the grant of that option permits an employee to purchase Shares under this Plan and any other stock purchase plan of the Company to exceed Twenty-Five Thousand ($25,000.00) of the fair market value of such Stock during any calendar year, or (b) an employee owns five percent (5%) or more of the Stock of the Company immediately after the option is granted. For purposes of subpart (b) in the immediately preceding sentence of this Section 8, the rules of Section 424(d) of the United States Internal Revenue Code shall apply to determine the stock ownership of an individual and stock which the employee may purchase under any option granted pursuant to this Plan shall be treated as stock owned by that employee. The Option Price, paid from each Participant's Account for each Share purchased under this Plan, shall not be less that eighty-five percent (85%) of the fair market value of the Stock as of the last business day of an Offering Period (the "Purchase Date"), the actual percentage to be determined by the Committee. As of the Purchase Date, the Account of each Participant shall be totaled. If such Participant Account contains sufficient funds to purchase one or more full Shares as of that date then the Participant shall be deemed to have purchased such full Share or Shares at the Option Price based on the funds in the Participant's Account. The Participant's Account shall be charged for the amount of the Option Price, the Shares so purchased shall be promptly distributed to the Account of such Participant, and the ownership of such Share or Shares by such Participant, shall be appropriately evidenced on the books of the Company. Subsequent Shares will be purchased in the same manner as of the last day of an Offering Period whenever sufficient funds have again accrued in the Participant's Account. Until Shareholder Approval for this Plan is obtained, any purchase of Shares made pursuant to this Plan shall be deemed a conditional purchase of those Shares. No Participant shall have any rights in any Shares until Shares are purchased on behalf of a Participant. A Participant may change his or her percentage rate of payroll deduction contributions in the Plan subject to the percentage rates permitted herein by filing an amended Enrollment Form with the Company, which amendment will become effective as soon as practical but not later than 45 days after the date such amended Enrollment Form is received by the Company. The amount of the payroll deduction may changed only once during any Offering Period. 5 Any balance remaining in Participant's Account at the end of any Offering Period will be carried forward into the Participant's Account for the following Offering Period. In no event will the balance carried forward be equal to or greater than the Option Price of one Share on the last day of any Offering Period. All options for Shares which have not been exercised at the end of an Offering Period shall terminate on the last day of the Offering Period. If, with respect to an offering of Shares, there is an insufficient number of Shares available to satisfy all outstanding options, then the available Shares shall be allocated to each Participant in the proportion that the funds credited to the Account of each Participant bears to the aggregate funds available in the accounts of all Participants. For the purposes of this Section 8 the phrase "Fair Market Value" shall mean the fair market value of Shares as determined by the Committee consistent with those rules and regulations of the United States Internal Revenue Code used to determine fair market value. No option granted hereunder may be exercised after the expiration of five (5) years from the date such option is granted. 9. VOTING AND DIVIDENDS Each Participant shall have the right to vote or to direct the voting of any Shares and to receive any dividends paid by the Company in connection with any Shares purchased by the Custodian for his or her Account. 10. SHARE CERTIFICATES Within sixty (60) days after the end of each December 31, within sixty (60) days after the termination of this Plan, or sooner if requested in writing by a Participant, the Custodian shall cause to be delivered to each Participant at the address indicated on the Participant's Enrollment Form, a Share certificate representing the whole Share or Shares purchased by the Custodian for such Participant during the immediately preceding Offering Period. No Share certificate shall be delivered until Shareholder Approval is obtained. 11. INTEREST No interest shall be credited to each Participant's Account unless authorized by the Committee. 12. TRANSACTION COSTS OF SHARE PURCHASES The Custodian shall be reimbursed by the Company in respect of any brokerage costs it incurs in order to purchase Shares on behalf of Participants, and no such costs shall be charged to the Account of any Participant. 13. TERMINATION OF PARTICIPATION Participants may terminate their participation in the Plan at any time by giving written notice to the Company on a form prescribed by the Company. A Participant's participation and the Company's obligations hereunder shall terminate immediately upon the Company's receipt of that form. The assets held in the Participant's Account by the Custodian pursuant to this Plan shall be distributed to the Participant promptly upon such termination, and the Participant's Account with the Custodian shall be closed. Any funds remaining in the Participant's Account shall be distributed to the Participant. A Participant who has terminated his or her participation in the Plan but otherwise remains eligible to participate in accordance with Section 5 of this Plan, may re-enroll in the Plan in accordance with Section 6. 14. TERMINATION OF EMPLOYMENT, RETIREMENT, OR DEATH When a Participant ceases to be an employee of the Company for any reason other than death or legal incapacity, the Custodian shall distribute the assets of the Participant's Account in accordance with Section 13 of this Plan. Upon the death or legal incapacity of a Participant, no further Shares shall be purchased for that 6 Participant, and all assets held in that Participant's Account shall be disbursed to the beneficiaries as directed by the Participant on his or her Enrollment Form in accordance with Section 13 of this Plan. 15. FEES AND EXPENSES All fees and expenses related to the administration of the Plan shall be the responsibility of and paid solely by the Company. 16. PARTICIPANT'S STATEMENT OF ACCOUNT Promptly following the end of each calendar quarter, the Custodian shall forward a statement to each Participant setting out the activity of his or her Account for such calendar quarter and the net asset position as of the end of the preceding calendar quarter including the adjusted cost basis of all Shares then held, the market value of the Shares then held, and any cash balances. 17. PARTICIPANTS' INCOME TAX REPORTING REQUIREMENTS Within thirty-one (31) days following the end of each calendar year, the Custodian shall provide to each Participant the necessary reporting statements as required by law with respect to interest (if any), dividends (if any), and other investment income (if any) earned for the year in each Participant's Account under this Plan. In the event of a disqualifying disposition of Shares by a Participant, funds may be required to be withheld in an amount sufficient to satisfy the rules and regulation of the United States Internal Revenue Code. 18. SHAREHOLDER INFORMATION The Company shall provide to the Custodian sufficient copies of all information normally sent to Shareholders for distribution to each Participant. The Custodian shall promptly distribute such information to each Participant. 19. ADJUSTMENT IN CASE OF CHANGES AFFECTING SHARES In the event of a subdivision of Shares, or the payment of a stock dividend, the number of Shares approved for this Plan, and the Share limitation set forth in Section 8, shall be increased proportionately, and such other adjustment shall be made as may be deemed equitable by the Board of Directors. In the event of any other change affecting the Shares, such adjustment shall be made as may be deemed equitable by the Board of Directors to give proper effect to such events. 20. AMENDMENT OF THE PLAN The Board of Directors may at any time, or from time to time, amend this Plan in any respect, except that, without the approval of the Shareholders of the Company, no amendment shall be made (i) to increase or decrease the number of Shares approved for this Plan (other than as provided in Section 19), (ii) to decrease the Option Price of each Share, (iii) to change the class of employees eligible to participate in this Plan, or (iv) to materially increase the benefits accruing to Participants under the Plan. 21. PLAN SHARE PURCHASES AND COMPANY FUNDING Purchases of Shares may be made pursuant to and on behalf of this Plan, upon such terms as the Company may approve, for delivery under this Plan. The Company shall provide to the Custodian such funds as are necessary to fulfill its obligations under Section 8 and Section 15. 7 22. TERMINATION OF THE PLAN This Plan and all rights of Participants under any offering hereunder shall terminate: A. on the day that Participants become entitled to purchase a number of Shares equal to or greater than the number of Shares remaining available for purchase. If the number of Shares to be purchased is greater than the Shares remaining available, the available Shares shall be allocated by the Committee among such Participants in such manner as it deems appropriate; or B. at any time, at the discretion of the Board of Directors of the Company. No offering hereunder shall be made which shall be extended beyond October 31, 2006. Upon the termination of this Plan, all amounts in the Account of each Participant shall be carried forward into each Participant's Account for disposition as determined by the Committee or the Board of Directors of the Company. C. This Plan initially received Shareholder Approval on April 29, 1992, and received Shareholder Approval on May 9, 1996 to extend the term of this Plan to October 31, 2006. 23. HEADINGS Titles of Sections, headings and subheadings in this Plan are solely for convenience and ease of reference and are not deemed to be or form a substantive part or in any way modify or define the text or the meaning of any provision of this Plan. 24. EMPLOYMENT The Plan shall not be deemed to constitute a contract of employment or inducement for employment between the Company or any Subsidiary and any employee, and nothing contained in this Plan shall be deemed to give any employee the right to be retained in the employ of the Company or any Subsidiary or to interfere with the right of the Company or any Subsidiary to reassign, discipline, demote or discharge any employee at any time, regardless of the effect of such reassignment, discipline, demotion or discharge on such employee as a Participant in the Plan. 25. RIGHTS NOT TRANSFERABLE Rights under this Plan and the options granted under this Plan are not transferable by a Participant other than by will or the laws of descent and distribution, and are exerciseable during the employee's lifetime only by the employee. 26. CHOICE OF LAW This Plan and the rights and obligations contained herein shall be interpreted and construed for all purposes solely in accordance with the laws of the State of Tennessee, without regard to the laws of any other state or jurisdiction. EX-10.30 7 AMENDED & RESTATED LOAN FORGIVENESS 1 EXHIBIT 10.30 AMENDED AND RESTATED LOAN FORGIVENESS AGREEMENT DATED OCTOBER 11, 1996 BETWEEN THE COMPANY AND E. R. PICKARD 2 EXHIBIT 10.30 AMENDED AND RESTATED LOAN FORGIVENESS AGREEMENT This Agreement, which is effective this 11TH day of October, 1996, is by and between Sofamor Danek Group, Inc., an Indiana corporation with principal offices at 1800 Pyramid Place, Memphis, Tennessee 38132 (the "Company") and E. R. Pickard ("Pickard"), WHEREAS, Pickard is the Chairman and Chief Executive Officer of the Company; and WHEREAS, the Company loaned Pickard $1,740,000 pursuant to a Promissory Note dated November 30, 1990, as amended, related to the exercise of certain stock options, and $2,424,997 pursuant to various Promissory Notes, as amended, for taxes related to the exercise of those stock options (collectively, the "Loans"), which Loans have a maturity date of March 31, 2006; WHEREAS, the Loans are secured by shares of the Company's common stock that are owned by Pickard; WHEREAS, the Company and Pickard entered into a loan forgiveness agreement on August 26, 1991 (the "Original Agreement"), which has been, pursuant to the action of the Company's Board of Directors, amended on February 16, 1995, December 15, 1995 and October 13, 1996; and WHEREAS, the Company and Pickard desire to amend the Original Agreement and all amendments thereto and restate them in one document. 3 NOW, THEREFORE, in consideration of the mutual promises and obligations contained herein, and each act done in furtherance thereof, the Company and Pickard agree as follows: 1. TERM. This Agreement shall commence as of October 11, 1996 and shall terminate on March 31, 2006. 2. LOAN FORGIVENESS CREDIT. As used in this Agreement, "Loan Forgiveness Credit" means a reduction in the principal balance of the Loans between the Company and Pickard. During the term of this Agreement there shall accrue to Pickard, subject to the terms and conditions of this Agreement, Loan Forgiveness Credits in the amounts and on the dates set forth below:
DATE AMOUNT ---- ------ December 31, 1996 $ 450,000 December 31, 1997 $ 450,000 December 31, 1998 $ 450,000 December 31, 1999 $ 450,000 December 31, 2000 $ 450,000 December 31, 2001 $ 450,000 December 31, 2002 $ 450,000 December 31, 2003 $ 450,000 December 31, 2004 $ 450,000 March 31, 2005 $ 114,997
3. VESTING OF LOAN FORGIVENESS CREDIT. Each Loan Forgiveness Credit shall vest in favor of Pickard and shall become effective if, but only if, on the date that a Loan Forgiveness Credit is accrued pursuant to the schedule set forth above in Section 2 of 4 this Agreement, the following conditions have been fully satisfied: (a) Pickard shall have remained, at his sole discretion, employed by the Company, and (b) that the Company shall have met or exceeded operational performance thresholds as determined by the Company Board of Directors on an annual basis. 4. CHANGE OF CONTROL. In the event of a change of control or a threatened change of control in the Company, any Loan Forgiveness Credit which has not accrued to and vested in Pickard shall immediately vest upon the Change of Control and the Company shall further pay to Pickard an amount equal to cover any applicable taxes, interest, penalties and charges, including without limitation, any interest and penalties related in any way to the vesting of the Loan Forgiveness Credits, together with any payments to Pickard necessary to make the Loan Forgiveness tax neutral to Pickard. For purposes of this Section 4 the terms "Change of Control" and "Threatened Change of Control" shall have the same definitions as those terms have and are used in Section 10 of the Company's Long Term Incentive Plan as of the effective date of this Agreement. 5. ADDITIONAL COMPENSATION TO PICKARD. In connection with this agreement the Company shall also continue to pay to Pickard, as further compensation, a full tax gross up equal to Pickard's personal tax liabilities resulting from (1) any and all Loan Forgiveness Credits, and (2) the tax gross up payments 5 resulting therefrom. The Company shall also continue to pay to Pickard, as additional compensation, an amount equal to the amount of interest due on the loans, plus a full tax gross up equal to Pickard's personal tax liabilities resulting from (1) such additional compensation, and (2) the tax gross up payments resulting therefrom. The purpose of this Section 5 is that all payments made by the Company to Pickard and any and all Loan Forgiveness Credits vested in Pickard shall be tax neutral for Pickard. 6. EXTENSION OF OPTION LOAN TERM. All appropriate action necessary shall be taken to cause the term of the Loans to be extended and make terminus with the term of this Agreement. 7. ENTIRE AGREEMENT; AMENDMENT AND MODIFICATIONS. This Agreement contains the entire agreement of the Parties and supersedes any prior understandings and agreements between the Company and Pickard with respect to the subject matter of this Agreement. It may not be changed orally, but only by agreement in writing, signed by both the Company and Pickard. 8. RIGHT TO TERMINATE EMPLOYMENT. Nothing contained in this Agreement shall restrict the right of the Company to terminate the employment of Pickard at any time. 9. BINDING EFFECT. This Agreement shall adhere to the benefit of and be binding upon the parties hereto and the respective heirs, executors, administrators, successors and assigns. 6 10. ENTIRE AGREEMENT. This Agreement supersedes and replaces the Original Agreement and all amendments thereto. 11. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Tennessee. IN WITNESS WHEREOF, the Company and Pickard have executed this Amended and Restated Loan Forgiveness Agreement as of October 11, 1996. E. R. Pickard Sofamor Danek Group, Inc. /s/ E. R. Pickard By: /s/ James J. Gallogly - ---------------------------------- --------------------------------- James J. Gallogly President & Chief Operating Officer EX-10.31 8 1993 LONG-TERM INCENTIVE PLAN AGREEMENT 1 EXHIBIT 10.31 1993 LONG-TERM INCENTIVE PLAN, AS AMENDED 1 2 EXHBIT 10.31 SOFAMOR DANEK GROUP, INC. 1993 LONG-TERM INCENTIVE PLAN, AS AMENDED 1. PURPOSE. The purpose of the SOFAMOR DANEK GROUP, INC. 1993 LONG-TERM INCENTIVE PLAN, AS AMENDED (the "Plan") is to further the earnings of SOFAMOR DANEK GROUP, INC., an Indiana corporation, and its subsidiaries (collectively, the "Company") by assisting the Company in attracting, retaining and motivating management employees and directors of high caliber and potential. The Plan provides for the award of long-term incentives to those officers, other key executives and directors who make substantial contributions to the Company by their loyalty, industry and invention. In addition, the Plan contains a program (the "Director Program") which provides for the non-discretionary periodic grant of Non- qualified Stock Options (as hereinafter defined) to non-employee directors of the Company (the "Director Options"). 2. ADMINISTRATION. The Plan (other than the Director Program) shall be administered by a committee (the "Committee"). The Board of Directors of the Company (the "Board of Directors") may act as the Committee, or it may delegate such responsibility to one or more of its members. The Committee shall have full and final authority in its discretion to interpret the provisions of the Plan (other than the Director Program) and to decide all questions of fact arising in its application. Subject to the provisions hereof, the Committee shall have full and final authority in its discretion to determine the employees and directors to whom awards shall be made under the Plan (other than the Director Program); to determine the type of awards to be made under the Plan (other than the Director Program) and the amount, size and terms and conditions of each such award under the Plan (other than the Director Program); to determine the time when awards shall be granted; to determine the provisions of each agreement evidencing an award; and to make all other determinations necessary or advisable for the administration of the Plan (other than the Director Program). 3. STOCK SUBJECT TO THE PLAN. The Company may grant awards under the Plan with respect to not more than a total of 6,000,000 shares of no par value common stock of the Company (the "Shares") (subject, however, to adjustment as provided in paragraph 21, below). Such Shares may be authorized and un-issued Shares or treasury Shares. In any calendar year, no participant may be granted awards relating to more than 500,000 shares. Except as otherwise provided herein, any Shares subject to an option or right which for any reason is surrendered before exercise or expires or is terminated unexercised as to such Shares shall again be available for the granting of awards under the Plan. Similarly, if any Shares granted pursuant to restricted stock awards are forfeited, such forfeited 2 3 Shares shall again be available for the granting of awards under the Plan, unless the dividends were paid to the holders of such Shares. 4. ELIGIBILITY TO RECEIVE AWARDS. Persons eligible to receive awards under the Plan (other than the Director Program) shall be limited to those officers, other key executive employees and directors of the Company who are in positions in which their decisions, actions and counsel have a significant impact upon the profitability and success of the Company. 5. FORM OF AWARDS. Awards may be made from time to time by the Committee (other than the Director Program) in the form of stock options to purchase Shares, stock appreciation rights, performance units, restricted stock, or any combination of the above. Stock options may be options which are intended to qualify as incentive stock options ("Incentive Stock Options") within the meaning of Section 422(b) of the Internal Revenue Code of 1986, as amended (the "Code"), or options which are not intended to so qualify ("Non-Qualified Stock Options"). 6. EMPLOYEE STOCK OPTIONS. Stock options for the purchase of Shares granted other than under the Director Program shall be evidenced by written agreements in such form not inconsistent with the Plan as the Committee shall approve from time to time. Such agreement shall contain the terms and conditions applicable to the options, including in substance the following terms and conditions: (a) Type of Option. Each option agreement shall identify the options represented thereby as Incentive Stock Options or Non-Qualified Stock Options, as the case may be, and shall set forth the number of Shares subject to the options. (b) Option Price. The option exercise price to be paid by the optionee to the Company for each Share purchased upon the exercise of an option shall be determined by the Committee, but shall in no event be less than the par value of a Share. (c) Exercise Term. Each option agreement shall state the period or periods of time within which the option may be exercised, in whole or in part, as determined by the Committee and subject to such terms and conditions as are prescribed for such purpose by the Committee, provided that no Incentive Stock Option shall be exercisable after ten years, and no Non-Qualified Stock Option shall be exercisable after ten years and one day, from the date of grant thereof. The Committee, in its discretion, may provide in the option agreement circumstances under which the option 3 4 shall become immediately exercisable, in whole or in part, and, notwithstanding, the foregoing may accelerate the exercisability of any option, in whole or in part, at any time. (d) Payment for Shares. The purchase price of the Shares with respect to which an option is exercised shall be payable in full at the time of exercise in cash, Shares at fair market value, or a combination thereof, as the Committee may determine and subject to such terms and conditions as may be prescribed by the Committee for such purpose. If the purchase price is paid by tendering Shares, the Committee in its discretion, may grant the optionee a new stock option for the number of Shares used to pay the purchase price. (e) Rights Upon Termination of Employment. In the event that an optionee ceases to be an employee or director of the Company for any cause other than Retirement (as defined below), death or Disability (as defined below), the optionee shall have the right to exercise the option during its term within a period of three months after such termination to the extent that the option was exercisable at the time of termination, or within such other period, and subject to such terms and conditions, as may be specified by the Committee. (As used herein, the term "Retirement" means retirement from active employment with the Company on or after age 65, or such earlier age with the express written consent for purposes of the Plan of the Company at or before the time of such retirement, and the term "Retires" has the corresponding meaning. As used herein, the term "Disability" means a condition that, in the judgment of the Committee, has rendered a grantee completely and presumably permanently unable to perform any and every duty of his regular occupation, and the term "Disabled" has the corresponding meaning). In the event that an optionee Retires, dies or becomes Disabled prior to the expiration of his option and without having fully exercised his option, the optionee or his Beneficiary (as defined below) shall have the right to exercise the option during its term within a period of (i) one year after termination of employment due to Retirement, death or Disability, or (ii) one year after death if death occurs either within one year after termination of employment due to Retirement or Disability or within three months after termination of employment for other reasons, to the extent that the option was exercisable at the time of death or termination, or within such other period, and subject to such terms and conditions, as may be specified by the Committee. (As used herein, the term "Beneficiary" means the person or persons designated in writing by the grantee as his Beneficiary with respect to an award under the Plan; or, in the absence of an effective designation or if the designated person or persons predecease the grantee, the grantee's Beneficiary shall be the 4 5 person or persons who acquire by bequest or inheritance the grantee's rights in respect of an award). In order to be effective, a grantee's designation of a Beneficiary must be on file with the Committee before the grantee's death, but any such designation may be revoked and a new designation substituted therefor at any time before the grantee's death. (f) Non-Transferability. Options granted under the Plan shall not be sold, assigned, transferred, exchanged, pledged, hypothecated, or otherwise encumbered, other than by will, by the laws of descent and distribution or pursuant to a qualified domestic relations order. During the lifetime of the optionee the option is exercisable only by the optionee. (g) Incentive Stock Options. In the case of an Incentive Stock Option, each option shall be subject to such other terms conditions and provisions as the Committee determines necessary or desirable in order to qualify such option as an incentive stock option within the meaning of Section 422(b) of the Code (or any amendment or substitute or successor thereto or regulation thereunder), including in substance, without limitation, the following: (i) The purchase price of stock subject to an Incentive Stock Option shall not be less than 100 percent of the fair market value of such stock on the date the option is granted, as determined by the Committee. (ii) The aggregate fair market value (determined as of the time the option is granted) of the stock with respect to which incentive stock options are exercisable for the first time by an optionee in any calendar year (under all plans of the Company and its subsidiary corporations (which term, as used hereinafter, shall have the meaning ascribed thereto in Section 425(f) of the Code (or successor provision of similar import))) shall not exceed $100,000. (iii) No Incentive Stock Option shall be granted to any employee if at the time the option is granted the individual owns stock possessing more than 10 percent of the total combined voting power of all classes of stock of the Company or of a subsidiary corporation of the Company, unless at the time such option is granted the option price is at least 110 percent of the fair market value (as determined by the Committee) of the stock subject to the option and such option by its terms is not exercisable after the expiration of five years from the date of grant. (iv) Directors who are not employees of the Company shall not be eligible to receive Incentive Stock Options. 5 6 (v) In the event of termination of employment by reason of Retirement, if an Incentive Stock Option is exercised after the expiration of the exercise periods that apply for purposes of Section 422 of the Code, the option will thereafter be treated as a Non-Qualified Stock Option. 7. STOCK APPRECIATION RIGHTS. Stock appreciation rights (SARs) shall be evidenced by written SAR agreements in such form not inconsistent with the Plan as the Committee shall approve from time to time. Such SAR agreements shall contain the terms and conditions applicable to the SARs, including in substance the following terms and conditions: (a) Award. SARs may be granted in connection with a previously or contemporaneously granted stock option (other than an option granted pursuant to the Director Program), or independently of a stock option. SARs shall entitle the grantee, subject to such terms and conditions as may be determined by the Committee, to receive upon exercise thereof all or a portion of the excess of (i) the fair market value at the time of exercise, as determined by the Committee, of a specified number of Shares with respect to which the SAR is exercised, over (ii) a specified price which shall not be less than 100 percent of the fair market value of the Shares at the time the SAR is granted, or, if the SAR is granted in connection with a previously issued stock option, not less than 100 percent of the fair market value of the Shares at the time such option was granted. Upon exercise of an SAR, the number of Shares reserved for issuance hereunder shall be reduced by the number of Shares covered by the SAR. Shares covered by an SAR shall not be used more than once to calculate the amount to be received pursuant to the exercise of the SAR. (b) SARs Related to Stock Options. If an SAR is granted in relation to a stock option, (i) the SAR shall be exercisable only at such times, and by such persons, as the related option is exercisable; (ii) the grantee's right to exercise the related option shall be canceled if and to the extent that the Shares subject to the option are used to calculate the amount to be received upon the exercise of the related SAR; (iii) the grantee's right to exercise the related SAR shall be canceled if and to the extent that the Shares subject to the SAR are purchased upon the exercise of the related option; and (iv) the SAR shall not be transferable other than by will or by the laws of descent and distribution, and shall be exercisable during the lifetime of the grantee only by him. 6 7 (c) Term. Each SAR agreement shall state the period or periods of time within which the SAR may be exercised, in whole or in part, as determined by the Committee and subject to such terms and conditions as are prescribed for such purpose by the Committee, provided that no SAR shall be exercisable later than ten years after the date of grant. The Committee may, in its discretion, provide in the SAR agreement circumstances under which the SARs shall become immediately exercisable, in whole or in part, and may, notwithstanding the foregoing, accelerate the exercisability of any SAR, in whole or in part, at any time. (d) Termination of Employment. SARs shall be exercisable only during the grantee's employment by the Company (or, in the case of a grantee who is a non-employee director, only during his service as a director of the Company), except that, in the discretion of the Committee, an SAR may be made exercisable for up to three months after the grantee's employment (or tenure as a director) is terminated for any reason other than Retirement, death or Disability, and for up to one year after the grantee's employment (or tenure as a director) is terminated because of Retirement, death or Disability. (e) Payment. Upon exercise of an SAR, payment shall be made in cash, in Shares at fair market value on the date of exercise, or in a combination thereof, as the Committee may determine at the time of exercise. (f) Other Terms. SARs shall be granted in such manner and such form, and subject to such additional terms and conditions, as the Committee in its sole discretion deems necessary or desirable, including without limitation: (i) if granted in connection with an Incentive Stock Option, in order to satisfy any requirements set forth under Section 422 of the Code; or, (ii) in order to avoid any liability in connection with an SAR under Section 16(b) of the Securities Exchange Act of 1934, as amended (the "1934 Act"). 8. RESTRICTED STOCK AWARDS. Restricted stock awards under the Plan shall consist of Shares free of any purchase price or for such purchase price as may be established by the Committee restricted against transfer, subject to forfeiture, and subject to such other terms and conditions (including attainment of performance objectives) as may be determined by the Committee. Restricted stock shall be evidenced by written restricted stock agreements in such form not inconsistent with the Plan as the Committee shall approve from time to time, which agreement shall contain the terms and conditions applicable to such awards, including in substance the following terms and conditions: (a) Restriction Period. Restrictions shall be imposed for such period or periods as may be determined by the Committee. The Committee, in its 7 8 discretion, may provide in the agreement circumstances under which the restricted stock shall become immediately transferable and non-forfeitable, or under which the restricted stock shall be forfeited, and, notwithstanding the foregoing, may accelerate the expiration of the restriction period imposed on any Shares at any time. (b) Restrictions Upon Transfer. Restricted stock and the right to vote such Shares and to receive dividends thereon, may not be sold, assigned, transferred, exchanged, pledged, hypothecated, or otherwise encumbered, except as herein provided, during the restriction period applicable to such Shares. Notwithstanding the foregoing, and except as otherwise provided in the Plan, the grantee shall have all of the other rights of a stockholder, including, but not limited to, the right to receive dividends and the right to vote such Shares. (c) Certificates. A certificate or certificates representing the number of restricted Shares granted shall be registered in the name of the grantee. The Committee, in its sole discretion, shall determine when the certificate or certificates shall be delivered to the grantee (or, in the event of the grantee's death, to his Beneficiary), may provide for the holding of such certificate or certificates in escrow or in custody by the Company or its designee pending their delivery to the grantee or Beneficiary, and may provide for any appropriate legend to be borne by the certificate or certificates. (d) Lapse of Restrictions. The restricted stock agreement shall specify the terms and conditions upon which any restriction upon restricted stock awarded under the Plan shall expire, lapse, or be removed, as determined by the Committee. Upon the expiration, lapse, or removal of such restrictions, Shares free of the restrictive legend shall be issued to the grantee of his legal representative. 9. PERFORMANCE UNITS. Performance unit awards under the Plan shall entitle grantees to future payments based upon the achievements of pre- established long-term performance objectives and shall be evidenced by written performance unit agreements in such form not inconsistent with this Plan as the Committee shall approve from time to time. Such agreements shall contain the terms and conditions applicable to the performance unit awards, including in substance the following terms and conditions: (a) Performance Period. The Committee shall establish with respect to each unit award a performance period of not fewer than two years. 8 9 (b) Unit Value. The Committee shall establish with respect to each unit award value for each unit which shall not thereafter change, or which may vary thereafter pursuant to criteria specified by the Committee. (c) Performance Targets. The Committee shall establish with respect to each unit award maximum and minimum performance targets to be achieved during the applicable performance period. Achievement of maximum targets shall entitle grantees to payment with respect to the full value of a unit award. Grantees shall be entitled to payment with respect to a portion of a unit award according to the level of achievement of targets as specified by the Committee for performance which achieves or exceeds the minimum target but fails to achieve the maximum target. (d) Performance Measures. Performance targets established by the Committee shall relate to corporate, subsidiary, division, or unit performance and may be established in terms of growth in gross revenue, earnings per share, ratios of earnings to equity or assets, or such other measures or standards as may be determined by the Committee in its discretion. Multiple targets may be used and may have the same or different weighting, and they may relate to absolute performance or relative performance measured against other companies or businesses. (e) Adjustments. At any time prior to the payment of a unit award, the Committee may adjust previously established performance targets or other terms and conditions, including the Company's or other corporationsG financial performance for Plan purposes, to reflect major unforeseen events such as changes in laws, regulations or accounting practices, mergers, acquisitions or divestitures or other extraordinary unusual or nonrecurring items or events. (f) Payment of Unit Awards. Following the conclusion of each performance period, the Committee shall determine the extent to which performance targets have been attained and any other terms and conditions satisfied for such period. The Committee shall determine what, if any, payment is due on the unit award and whether such payment shall be made in cash, Shares, or a combination thereof. Payment shall be made in a lump sum or installments, as determined by the Committee, commencing as promptly as practicable following the end of the performance period unless deferred subject to such terms and conditions and in such form as may be prescribed by the Committee. (g) Termination of Employment. In the event that a grantee ceases to be employed by the Company prior to the end of the performance period by 9 10 reason of death, Disability, or Retirement with the consent of the Company, any unit award, to the extent earned under the applicable performance targets, shall be payable at the end of the performance period according to the portion of the performance period during which the grantee was employed by the Company, provided that the Committee shall have the power to provide for an appropriate settlement of a unit award before the end of the performance period. Upon any other termination of employment, participation shall terminate forthwith and all outstanding unit awards shall be canceled. 10. LOANS AND SUPPLEMENTAL CASH. The Committee, in its sole discretion to further the purpose of the Plan, may provide for supplemental cash payments or loans to individuals in connection with all or any part of an award under the Plan. Supplemental cash payments shall be subject to such terms and conditions as shall be prescribed by the Committee at the time of grant, provided that in no event shall the amount of payment exceed: (a) In the case of an option, the excess fair market value of a Share on the date of exercise over the option price multiplied by the number of Shares for which such option is exercised, or (b) In the case of an SAR, performance unit, or restricted stock award, the value of the Shares and other consideration issued in payment of such award. Any loan shall be evidenced by a written loan agreement or other instrument in such form and containing such terms and conditions (including, without limitation, provisions for interest, payment schedules, collateral, forgiveness or acceleration) as the Committee may prescribe from time to time. 11. DIRECTOR PROGRAM. (a) Eligible Directors. Each member of the Board of Directors who is not a full-time employee of the Company is an "Eligible Director." (b) Administration. The Director Program shall be administered by the Board of Directors. Subject to the provisions of the Director Program, the Board shall be authorized to: (i) adopt, revise and repeal such administrative rules, guidelines and practices governing the Director Program as it shall from time to time deem advisable; 10 11 (ii) interpret the terms and provisions of the Director Program and any option issued under the Director Program (and any agreements relating thereto), and otherwise settle all claims and disputes arising under the Director Program; (iii) delegate responsibility and authority for the operation and administration of the Director Program, appoint employees and officers of the Company to act on its behalf, and employ persons to assist in the fulfilling of its responsibilities under the Director Program; and (iv) otherwise supervise the administration of the Director Program; provided, however, that the Board of Directors shall have no discretion with respect to the selection of Eligible Directors to receive options hereunder, the number of Shares covered by such option or the price or timing of any options granted hereunder; provided, further, that any action by the Board of Directors relating to the Director Program will be taken only if approved by the affirmative vote of a majority of the directors who are not then eligible to participate under the Director Program. (c) Option Grants. (i) Number of Options Granted. The following number of Director Options are hereby granted to each Eligible Director under the Director Program: (A) As of the date of Board approval of the Director Program, a Director Option to purchase 5,000 Shares is granted to each person who on that date is an incumbent Eligible Director. (B) With respect to each person who first becomes an Eligible Director after the date of Board approval of the Director Program, a Director Option to purchase 5,000 Shares is granted as of the date such person first becomes an Eligible Director. (C) As of the date of every third annual meeting of the Company's shareholders following the grant of a Director Option to an Eligible Director pursuant to section (A) or (B) above, and provided that such Eligible Director remains an incumbent on such date, a Director Option to purchase 5,000 Shares is granted to such Eligible Director. 11 12 (d) Terms and Conditions of Director Options Under the Director Program. (i) Option Agreement. Each Director Option granted under the Director Program shall be evidenced by an option agreement. (ii) Option Price. The option exercise price per Share of a Director Option shall be the fair market value of a Share as of the date of grant. The Director Options granted as of the date of Board approval of the Director Program have an exercise price of $11.875. (iii) Option Term. The term of each Director Option shall be ten years. No Director Option shall be exercised by any person after expiration of the term of the Director Option. (iv) Exercisability. A Director Option shall be exercisable during its term, 33.33% on the first anniversary of the date of grant, an additional 33.33% on the second anniversary of the date of grant, and the remaining 33.33% on the third anniversary of the date of grant. The Director Options granted on the date the Director Program was approved by the Board vest 33.33% on December 19, 1995, 1996, and 1997. (e) Method of Exercise. Director Options may be exercised, in whole or in part, at any time and from time to time during the relevant exercise period, by giving written notice of exercise to the Company specifying the number of Shares to be purchased. Such notice shall be accompanied by payment in full of the purchase price, either in cash or by certified or bank check, or such other instrument as the Board of Directors may accept. Payment in full or in part may also be made in the form of unrestricted Shares already owned by the Director (and based upon the fair market value of the Shares so tendered as of the date the Director Option is exercised, as determined by the Board of Directors). No Shares shall be issued until full payment therefor has been made. Eligible Directors shall generally have the rights to dividends or other rights of a stockholder with respect to Shares subject to the Director Option when the Eligible Director has given notice as to exercise, has paid in full for such shares and, if requested, has given any representations required by the Board of Directors. (f) Nontransferability. Director Option shall not be sold, assigned, transferred, exchanged, pledged, hypothecated, or otherwise encumbered, otherwise than by will, by the laws of descent and distribution or 12 13 pursuant to a qualified domestic relations order. During the lifetime of the optionee, a Director Option shall be exercisable only by the optionee. (g) Termination by Reason of Death. If an optionee ceases to be an Eligible Director by reason of death, any Director Option held by such optionee may thereafter be exercised to the extent then exercisable, by the legal representative of the estate or by the legatee of the Eligible Director under the will of the Eligible Director, for a period of one year from the date of such death or until the expiration of the stated term of such Director Option, whichever period is shorter. (h) Termination by Reason of Disability. If an optionee ceases to be an Eligible Director by reason of disability, any Director Option held by such optionee may thereafter be exercised by the optionee, to the extent it was exercisable at the time of termination, for a period of one year from the date of such termination or until the expiration of the stated term of such Director Option, whichever period is shorter, provided, however, that if the optionee dies within such one-year period, any unexercised Director Option held by such optionee shall thereafter be exercisable to the extent it was exercisable at the time of death for a period of one year from the date of such death or until the expiration of the stated term of such Director Option, whichever period is shorter. (i) Other Termination. If an optionee ceases to be an Eligible Director for any reason other than death or disability (except as a result of becoming an employee of the Company), any Director Option held by such optionee may thereafter be exercised by the optionee, to the extent it was exercisable at the time of such termination, for a period of three months from the date of such termination or the expiration of the stated term of such Director Option, whichever period is shorter; provided, however, that if the optionee dies within such three-month period, any unexercised Director Option held by such optionee shall thereafter be exercisable, to the extent to which it was exercisable at the time of death, for a period of one year from the date of such death or until the expiration of the stated term of the Director Option, whichever period is shorter. If an optionee ceases to be an Eligible Director by reason of his becoming an employee of the Company and his employment with the Company is subsequently terminated, any Director Option held by such optionee may thereafter be exercised by the optionee, to the extent that it was exercisable at the time of such termination, for a period of three months from the date of such termination or the expiration of the stated term of the Director Option, whichever period is shorter; provided, however, that if the optionee dies within such three-month period, any unexercised Option held by such 13 14 optionee shall thereafter be exercisable, to the extent to which it was exercisable at the time of death, for a period of one year from the date of such death or until the expiration of the stated term of the Director Option, whichever period is shorter. 12. GENERAL RESTRICTIONS. Each award under the Plan shall be subject to the requirement that if at any time the Company shall determine that (i) the listing, registration or qualification of the Shares subject or related thereto upon any securities exchange or under any state or federal law, or (ii) the consent or approval of any regulatory body, or (iii) an agreement by the recipient of an award with respect to the disposition of Shares, or (iv) the satisfaction of withholding tax or other withholding liabilities is necessary or desirable as a condition of or in connection with the granting of such award or the issuance or purchase of Shares thereunder, such award shall not be consummated in whole or in part unless such listing, registration, qualification, consent, approval, agreement, or withholding shall have been effected or obtained free of any conditions not acceptable to the Company. Any such restriction affecting an award shall not extend the time within which the award may be exercised; and neither the Company nor its directors or officers nor the Committee shall have any obligation or liability to the grantee or to a Beneficiary with respect to any Shares with respect to which an award shall lapse or with respect to which the grant, issuance or purchase of Shares shall not be effected, because of any such restriction. 13. SINGLE OR MULTIPLE AGREEMENTS. Multiple awards, multiple forms of awards, or combinations thereof may be evidenced by a single agreement or multiple agreements, as determined by the Committee. 14. RIGHTS OF THE SHAREHOLDER. The recipient of any award under the Plan, shall have no rights as a shareholder with respect thereto unless and until certificates for Shares are issued to him, and the issuance of Shares shall confer no retroactive right to dividends. 15. RIGHTS TO TERMINATE EMPLOYMENT. Nothing in the Plan or in any agreement entered into pursuant to the Plan shall confer upon any person the right to continue in the employment of the Company or affect any right which the Company may have to terminate the employment of such person. 16. WITHHOLDING. (a) Prior to the issuance or transfer of Shares under the Plan, the recipient shall remit to the Company an amount sufficient to satisfy any federal, state or local withholding tax requirements. Other than with respect to 14 15 awards under the Director Program, the recipient may satisfy the withholding requirement in whole or in part by electing to have the Company withhold Shares having a value equal to the amount required to be withheld. The value of the Shares to be withheld shall be the fair market value, as determined by the Committee, of the stock on the date that the amount of tax to be withheld is determined (the OTax DateO). Such election must be made prior to the Tax Date, must comply with all applicable securities law and other legal requirements, as interpreted by the Committee, and may not be made unless approved by the Committee, in its discretion. (b) Whenever payments to a grantee in respect of an award under the Plan to be made in cash, such payments shall be net of the amount necessary to satisfy any federal, state or local withholding tax requirements. 17. NON-ASSIGNABILITY. No award under the Plan shall be sold, assigned, transferred, exchanged, pledged, hypothecated, or otherwise encumbered, other than by will or by the laws of descent and distribution, or by such other means as the Committee (or the Board of Directors, in the case of the Director Program) may approve. Except as otherwise provided herein, during the life of the recipient, such award shall be exercisable only by such person or by such person's guardian or legal representative. 18. NON-UNIFORM DETERMINATIONS. The Committee's determinations under the Plan (including without limitation determinations of the persons to receive awards, the form, amount and timing of such awards, the terms and provisions of such awards and the agreements evidencing same, and the establishment of values and performance targets) need not be uniform and may be made selectively among persons who .receive, or are eligible to receive, awards under the Plan, whether or not such persons are similarly situated. 19. CHANGE IN CONTROL PROVISIONS. (a) In the event of (1) a Change in Control (as defined) or (2) a Potential Change in Control (as defined) the following acceleration and valuation provisions shall apply unless the Board of Directors otherwise determines by resolution: (i) Any SARs and any stock options awarded under the Plan not previously exercisable and vested shall become fully exercisable and vested. 15 16 (ii) Any restrictions and deferral limitations applicable to any restricted stock, performance units or other Stock-based awards, in each case to the extent not already vested under the Plan, shall lapse and such shares, performance units or other stock-based awards shall be deemed fully vested. (iii) The value of all outstanding stock options, SARs, restricted stock, performance units and other stock-based awards, in each case to the extent vested, shall, unless otherwise determined by the Committee (or the Board of Directors with respect to the Director Program) in its sole discretion at or after grant but prior to any Change in Control, be cashed out on the basis of the Change in Control Price (as defined) as of the date such Change in Control or such Potential Change in Control is determined to have occurred or such other date as the Committee may determine prior to the Change in Control. (b) As used herein, the term OChange in ControlO means the happening of any of the following: (i) Any person or entity, including a OgroupO as defined in Section 13(d)(3) of the 1934 Act, other than the Company, a subsidiary of the Company, or any employee benefit plan of the Company or its subsidiaries, becomes the beneficial owner of the Company's securities having 25 percent or more of the combined voting power of the then outstanding securities of the Company that may be cast for the election for directors of the Company (other than as a result of an issuance of securities initiated by the Company in the ordinary course of business), or (ii) As the result of, or in connection with, any cash tender or exchange offer, merger or other business combination, sale of assets or contested election, or any combination of the foregoing transactions, less than a majority of the combined voting power of the then outstanding securities of the Company or any successor corporation or entity entitled to vote generally in the election of directors of the Company or such other corporation or entity after such transaction, are held in the aggregate by holders of the Company's securities entitled to vote generally in the election of directors of the Company immediately prior to such transactions; or (iii) During any period of two consecutive years, individuals who at the beginning of any such period constitute the Board of Directors 16 17 cease for any reason to constitute at least a majority thereof, unless the election, or the nomination for election by the Company's stockholders, of each director of the Company first elected during such period was approved by a vote of at least two-thirds of the directors of the Company then still in office who were directors of the Company at the beginning of an such period. (c) As used herein, the term OPotential Change in ControlO means the happening of any of the following: (i) The approval by stockholders of an agreement by the Company, the consummation of which would result in a Change in Control of the Company; or (ii) The acquisition of beneficial ownership, directly or indirectly, by any entity, person or group (other than the Company, a wholly-owned subsidiary thereof or any employee benefit plan of the Company or its subsidiaries (including any trustee of such plan acting as such trustee)) of securities of the Company representing 5 percent or more of the combined voting power of the Company's outstanding securities and the adoption by the Board of Directors of a resolution to the effect that a Potential Change in Control of the Company has occurred for purposes of this Plan. (d) As used herein, the term OChange in Control PriceO means the highest price per share paid in any transaction reported on the New York Stock Exchange, or paid or offered in any bonafide transaction related to a Potential or actual Change in Control of the Company at any time during the 60 day period immediately preceding the occurrence of the Change in Control (or, where applicable, the occurrence of the Potential Change in Control event), in each case determined by the Committee except that, in the case of Incentive Stock Options and SARs relating to Incentive Stock Options, such price shall be based only on transactions reported for the date on which the optionee exercises such SARs or, where applicable, the date on which a cash out occurs under Section 19(a)(iii). 20. NON-COMPETITION PROVISION. Unless the award agreement relating to a stock option, SAR, restricted stock or performance unit specifies otherwise, a grantee shall forfeit all un-exercised, unearned and/or unpaid awards, including, but not by way of limitation, awards earned but not yet paid, all unpaid dividends and dividend equivalents, and all interest, if any, accrued on the foregoing if, (i) in the opinion of the Committee, the grantee without the written consent of the Company, engages directly or indirectly in any manner or capacity as principal, agent, partner, officer, director, employee or 17 18 otherwise, in any business or activity competitive with the business conducted by the Company or any of its subsidiaries; or (ii) the grantee performs any act or engages in any activity which in the opinion of the Chief Executive Officer of the Company is inimical to the best interests of the Company. 21. ADJUSTMENTS. In the event of any change in the outstanding common stock of the Company, by reason of a stock dividend or distribution, recapitalization, merger, consolidation, reorganization, split-up, combination, exchange or Shares or the like, the Board of Directors, in its discretion, may adjust proportionately the number of Shares which may be issued under the Plan, the number of Shares subject to outstanding awards, and the option exercise price of each outstanding option, and may make such other changes in outstanding, options, SARs, performance units and restricted stock awards, as it deems equitable in its absolute discretion to prevent dilution or enlargement of the rights of grantees, provided that any fractional Shares resulting from such adjustments shall be eliminated. 22. AMENDMENT. The Board of Directors may terminate, amend, modify or suspend the Plan at any time, except that no termination, amendment, modification or suspension shall be effective without the authorization of the holders of a majority of Company's outstanding Shares, if such authorization is required to comply with Rule 16b-3 under the 1934 Act or to comply with any other law regulation or stock exchange rule. No termination, modification, amendment or suspension of the Plan shall adversely affect the rights of any grantee or Beneficiary under an award previously granted, unless the grantee or Beneficiary shall consent; but it shall be conclusively presumed that any adjustment pursuant to paragraph 21 hereof does not adversely affect any such right. 23. EFFECT ON OTHER PLANS. Participation in this Plan shall not affect a grantee's eligibility to participate in any other benefit or incentive plan of the Company. Any awards made pursuant to this Plan shall not be used in determining the benefits provided under any other plan of the Company unless specifically provided therein. 18 19 24. EFFECTIVE DATE AND DURATION OF THE PLAN. The Plan shall become effective when adopted by the Board of Directors, provided that the Plan is approved by the holders of a majority of the outstanding Shares on the date of its adoption by the Board or before the first anniversary of that date. Unless it is sooner terminated in accordance with paragraph 22 hereof, the Plan shall remain in effect until all awards under the Plan have been satisfied by the issuance of Shares or payment of cash or have expired or otherwise terminated, but no award shall be granted more than ten years after the earlier of the date the Plan is adopted by the Board of Directors or is approved by the Company's shareholders. 25. UNFUNDED PLAN. The Plan shall be unfunded, except to the extent otherwise provided in accordance with Section 8 hereof. Neither the Company nor any affiliate shall be required to segregate any assets that may be represented by stock options, SARs, or performance units, and neither the Company nor any affiliate shall be deemed to be a trustee of any amounts to be paid under any stock option, SAR or performance unit. Any liability of the Company or any affiliate to pay any grantee or Beneficiary with respect to an option, SAR or performance unit shall be based solely upon any contractual obligations created pursuant to the provisions of the Plan; no such obligations will be deemed to be secured by a pledge or encumbrance on any property of the Company or an affiliate. 26. GOVERNING LAW. The Plan shall be construed and its provisions enforced and administered in accordance with the laws of the State of Tennessee, except to the extent that such laws may be superseded by any federal law. On October 11, 1996, the Board of Directors approved an amendment to the Long Term Incentive Plan that increased the Shares available for grant thereunder from 3,500,000 to 6,000,000. In addition, the Board of Directors has approved certain technical amendments in response to Section 162(m) of the Internal Revenue Code and recent amendments to Section 16 of the Securities and Exchange Act of 1934, as amended. The proposal to approve the Company's 1993 Long Term Incentive Plan, as amended, will be acted upon by the Company's Shareholders at the annual meeting on April 29, 1997. 19 EX-22.1 9 SUBSIDIARIES OF THE COMPANY 1 EXHIBIT 22.1 SUBSIDIARIES OF THE COMPANY 2 EXHIBIT 22.1 SUBSIDIARIES OF SOFAMOR DANEK GROUP, INC. Danek Medical, Inc. Warsaw Orthopedic, Inc. Danek Capital Corporation Danek Sales Corporation Danek International, Inc. Sofamor Danek Properties, Inc. Sofamor S.N.C. Sofamor Danek GmbH Sofamor Danek Asia Pacific Limited Sofamor Danek Italia S.r.l. Sofamor Danek Iberica S.A. Sofamor Danek Americas and Asia/Pacific Corporation Somepic S.A. Sofamor Danek Benelux S.A. Kobayashi Sofamor Danek K.K. Medical Education K.K. Sofamor Danek Canada, Inc. Mednext, Inc. Sofamor Danek Nevada, Inc. Sofamor Danek Australia Pty. Ltd. Danek Korea Co., Ltd. Sofamor Danek Puerto Rico, Inc. Colorado, S.A. Surgical Navigation Technologies, Inc. EX-24.1 10 CONSENT OF COOPERS & LYBRAND 1 EXHIBIT 24.1 CONSENT OF COOPERS & LYBRAND, INDEPENDENT PUBLIC ACCOUNTANTS 2 EXHIBIT 24.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statement of Sofamor Danek Group, Inc. 1993 Long-Term Incentive Plan on Form S-8 (File No. 33-60840) of our report dated January 31, 1997, on our audits of the consolidated financial statements and consolidated financial statement schedule of Sofamor Danek Group, Inc. and Subsidiaries as of December 31, 1996 and 1995, and for the three years in the period ended December 31, 1996, which report is included in this annual report on Form 10-K. Memphis, Tennessee COOPERS & LYBRAND, L.L.P. March 21, 1997 3 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statement of Sofamor Danek Group, Inc. Incentive Stock Option Plan on Form S-8 (File No. 33-43614) of our report dated January 31, 1997, on our audits of the consolidated financial statements and consolidated financial statement schedule of Sofamor Danek Group, Inc. and Subsidiaries as of December 31, 1996 and 1995 and for the three years in the period ended December 31, 1996, which report is included in this annual report on Form 10-K. COOPERS & LYBRAND, L.L.P. Memphis, Tennessee March 21, 1997 4 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statement of Sofamor Danek Group, Inc. Employee Stock Purchase Plan on Form S-8 (File No. 33-43597) of our report dated January 31, 1997, on our audits of the consolidated financial statements and consolidated financial statement schedule of Sofamor Danek Group, Inc. and Subsidiaries as of December 31, 1996 and 1995 and for the three years in the period ended December 31, 1996, which report is included in this annual report on Form 10-K. COOPERS & LYBRAND, L.L.P. Memphis, Tennessee March 21, 1997 EX-25.1 11 POWERS OF ATTORNEY FROM DIRECTORS 1 EXHIBIT 25.1 POWERS OF ATTORNEY FROM DIRECTORS OF THE COMPANY AUTHORIZING SIGNATURE OF THIS REPORT 2 EXHIBIT 25.1 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENT that the undersigned Director of Sofamor Danek Group, Inc., an Indiana corporation, hereby constitutes and appoints J. Mark Merrill, Laurence Y. Fairey and Richard E. Duerr, Jr., and each of them, his true and lawful agents and attorneys-in-fact, for him and in his name, place and stead in any and all capacities, to sign for the undersigned the Annual Report of the company on Form 10-K for the fiscal year ended December 31, 1996 to be filed with the Securities and Exchange Commission, Washington, D.C., and any and all amendments thereto; hereby ratifying and confirming all acts taken by such agents and attorneys-in-fact, or in any one or more of them, as herein authorized. WITNESS MY SIGNATURE, this 28 th day of February, 1997. /s/ Yves Paul Cotrel, M.D. -------------------------- Yves Paul Cotrel, M.D. 3 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENT that the undersigned Director of Sofamor Danek Group, Inc., an Indiana corporation, hereby constitutes and appoints J. Mark Merrill, Laurence Y. Fairey and Richard E. Duerr, Jr., and each of them, his true and lawful agents and attorneys-in-fact, for him and in his name, place and stead in any and all capacities, to sign for the undersigned the Annual Report of the company on Form 10-K for the fiscal year ended December 31, 1996 to be filed with the Securities and Exchange Commission, Washington, D.C., and any and all amendments thereto; hereby ratifying and confirming all acts taken by such agents and attorneys-in-fact, or in any one or more of them, as herein authorized. WITNESS MY SIGNATURE, this 25 th day of February, 1997. /s/ Samuel F. Hulbert ------------------------------- Samuel F. Hulbert, Ph.D. 4 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENT that the undersigned Director of Sofamor Danek Group, Inc., an Indiana corporation, hereby constitutes and appoints J. Mark Merrill, Laurence Y. Fairey and Richard E. Duerr, Jr., and each of them, his true and lawful agents and attorneys-in-fact, for him and in his name, place and stead in any and all capacities, to sign for the undersigned the Annual Report of the company on Form 10-K for the fiscal year ended December 31, 1996 to be filed with the Securities and Exchange Commission, Washington, D.C., and any and all amendments thereto; hereby ratifying and confirming all acts taken by such agents and attorneys-in-fact, or in any one or more of them, as herein authorized. WITNESS MY SIGNATURE, this 28 th day of February, 1997. /s/ Marie-Helene Plais ------------------------ Marie-Helene Plais, M.D. 5 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENT that the undersigned Director of Sofamor Danek Group, Inc., an Indiana corporation, hereby constitutes and appoints J. Mark Merrill, Laurence Y. Fairey and Richard E. Duerr, Jr., and each of them, his true and lawful agents and attorneys-in-fact, for him and in his name, place and stead in any and all capacities, to sign for the undersigned the Annual Report of the company on Form 10-K for the fiscal year ended December 31, 1996 to be filed with the Securities and Exchange Commission, Washington, D.C., and any and all amendments thereto; hereby ratifying and confirming all acts taken by such agents and attorneys-in-fact, or in any one or more of them, as herein authorized. WITNESS MY SIGNATURE, this 21 st day of February, 1997. /s/ George F. Rapp, M.D. ------------------------ George F. Rapp, M.D. 6 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENT that the undersigned Director of Sofamor Danek Group, Inc., an Indiana corporation, hereby constitutes and appoints J. Mark Merrill, Laurence Y. Fairey and Richard E. Duerr, Jr., and each of them, his true and lawful agents and attorneys-in-fact, for him and in his name, place and stead in any and all capacities, to sign for the undersigned the Annual Report of the company on Form 10-K for the fiscal year ended December 31, 1996 to be filed with the Securities and Exchange Commission, Washington, D.C., and any and all amendments thereto; hereby ratifying and confirming all acts taken by such agents and attorneys-in-fact, or in any one or more of them, as herein authorized. WITNESS MY SIGNATURE, this 25 th day of February, 1997. /s/ Robert A. Compton ------------------------- Robert A. Compton 7 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENT that the undersigned Director of Sofamor Danek Group, Inc., an Indiana corporation, hereby constitutes and appoints J. Mark Merrill, Laurence Y. Fairey and Richard E. Duerr, Jr., and each of them, his true and lawful agents and attorneys-in-fact, for him and in his name, place and stead in any and all capacities, to sign for the undersigned the Annual Report of the company on Form 10-K for the fiscal year ended December 31, 1996 to be filed with the Securities and Exchange Commission, Washington, D.C., and any and all amendments thereto; hereby ratifying and confirming all acts taken by such agents and attorneys-in-fact, or in any one or more of them, as herein authorized. WITNESS MY SIGNATURE, this 21 st day of February, 1997. /s/ L. D. Beard ------------------------ L. D. Beard 8 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENT that the undersigned Director of Sofamor Danek Group, Inc., an Indiana corporation, hereby constitutes and appoints J. Mark Merrill, Laurence Y. Fairey and Richard E. Duerr, Jr., and each of them, his true and lawful agents and attorneys-in-fact, for him and in his name, place and stead in any and all capacities, to sign for the undersigned the Annual Report of the company on Form 10-K for the fiscal year ended December 31, 1996 to be filed with the Securities and Exchange Commission, Washington, D.C., and any and all amendments thereto; hereby ratifying and confirming all acts taken by such agents and attorneys-in-fact, or in any one or more of them, as herein authorized. WITNESS MY SIGNATURE, this 21 st day of February, 1997. /s/ George W. Bryan, Sr. ------------------------ George W. Bryan, Sr. EX-28.1 12 FORM 11-K 1 EXHIBIT 28.1 ANNUAL REPORT ON FORM 11-K OF THE EMPLOYEE STOCK PURCHASE PLAN FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 2 EXHIBIT 28.1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 11-K ANNUAL REPORT Pursuant to Section 15(d) of the Securities Exchange Act of 1934 (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1996 ----------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to -------------- ------------ Commission file number 33-43597 -------- A. Full title of the plan and the address of the plan, if different from that of the issuer named below. Sofamor Danek Group, Inc. Employee Stock Purchase Plan B. Name of issuer of the securities held pursuant to the plan and the address of its principal executive office: Sofamor Danek Group, Inc. 1800 Pyramid Place Memphis, TN 38132 3 REQUIRED INFORMATION
(a) Financial Statements Page ---- Report of Independent Accountants 1 Statement of Net Assets Available for Benefits 2 Statement of Changes in Net Assets Available for Benefits 3 Notes to Financial Statements 4 Schedules I, II and III are not required or are not applicable, or the required information is shown in the financial statements or notes thereto. (b) Consent of Coopers & Lybrand, Independent Accountants 8
4 SOFAMOR DANEK GROUP, INC. EMPLOYEE STOCK PURCHASE PLAN FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1995 5 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Plan Committee of the Sofamor Danek Group, Inc. Employee Stock Purchase Plan We have audited the accompanying statements of net assets available for benefits of the Sofamor Danek Group, Inc. Employee Stock Purchase Plan (the "Plan") as of December 31, 1996 and 1995, and the related statements of changes in net assets available for benefits for the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Plan Committee. Our responsibility is to express an opinion on the financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the net assets available for benefits of the Plan as of December 31, 1996 and 1995, and the changes in net assets available for benefits for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. Memphis, Tennessee March 10, 1997 1 6 SOFAMOR DANEK GROUP, INC. EMPLOYEE STOCK PURCHASE PLAN STATEMENTS OF NET ASSETS AVAILABLE FOR BENEFITS December 31, 1996 and 1995
ASSETS 1996 1995 Cash $ 1,568 $ 1,113 Employee contributions receivable 45,650 33,897 Employer contributions receivable 6,847 5,085 Investments, cost of $180,955 and $142,958 at December 31, 1996 and 1995, respectively 181,048 157,623 --------- ------- Total assets 235,113 197,718 --------- ------- LIABILITIES Payable due Sofamor Danek Group, Inc. 52,490 39,044 ========= ======= Net assets available for benefits $182,623 $158,674 ========= =======
The accompanying notes are an integral part of these financial statements. 2 7 SOFAMOR DANEK GROUP, INC. EMPLOYEE STOCK PURCHASE PLAN STATEMENTS OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS for the years ended December 31, 1996, 1995 and 1994
1996 1995 1994 Additions to net assets: Net appreciation (depreciation) in investments $ 22,133 $114,140 $(21,167) Employee contributions 167,338 129,940 153,308 Employer contributions 25,101 19,491 22,996 ------- ------- ------- Total additions 214,572 263,571 155,137 ------- ------- ------- Deductions from net assets: Stock distributions to participants 190,496 231,148 191,798 Cash distributions to participants 127 984 422 ------- ------- ------- Total deductions 190,623 232,132 192,220 ------- ------- ------- Net increase (decrease) 23,949 31,439 (37,083) Net assets available for benefits: Beginning of year 158,674 127,235 164,318 ------- ------- ------- End of year $182,623 $158,674 $127,235 ======= ======= =======
The accompanying notes are an integral part of these financial statements. 3 8 SOFAMOR DANEK GROUP, INC. EMPLOYEE STOCK PURCHASE PLAN NOTES TO FINANCIAL STATEMENTS 1. PLAN DESCRIPTION AND BASIS OF PRESENTATION: PLAN DESCRIPTION In November 1991 Sofamor Danek Group, Inc. (the "Company") adopted the employee stock purchase plan to provide employees the opportunity to purchase shares of the Company. All eligible employees may participate in the Plan six months after their date of employment. Total participants of the Plan at December 31, 1996 and 1995, were 125 and 95, respectively. The employee and Company contributions are used to purchase shares of common stock of the Company at the fair market value on the last business day of each quarter and the related stock certificates are issued to the participants within 60 days after the end of each calendar year. An employee may discontinue his participation in the Plan at any time upon written notice to the Company. A participant may thereafter withdraw common shares allocated to his or her account. Cash dividends or stock dividends, if any, are credited to each participant's account in proportion to the number of common shares in his account. Participants are entitled to vote the shares held in their account. The Board of Directors of the Company (the "Board") may amend or terminate the Plan, provided, no amendment shall be made, without first obtaining the approval of the Company's shareholders, to (1) increase or decrease the number of shares approved for the Plan (except to reflect a stock split or stock dividend), (2) decrease the option price per share, (3) change the class of employees eligible to participate in the Plan, or (4) materially increase the benefits accruing to participants under the Plan. In the event that the Board elects to terminate the Plan all amounts will be carried forward into each participant's account for disposition as determined by the Board. Following the end of each calendar quarter, the Custodian provides a statement to each participant which details all activity in the participant account for that quarter. The custodian provides a statement providing any necessary tax reporting as required by law. The 60,000 shares of Common Stock reserved for the Plan were registered under the Securities Act of 1933 with the Securities and Exchange Commission on October 25, 1991. 4 9 SOFAMOR DANEK GROUP, INC. EMPLOYEE STOCK PURCHASE PLAN NOTES TO FINANCIAL STATEMENTS, CONTINUED 1. PLAN DESCRIPTION AND BASIS OF PRESENTATION, CONTINUED: PLAN DESCRIPTION, CONTINUED During 1996, the Board of Directors and stockholders of the Company approved an amendment which allows the Plan to continue in force until all of the Plan shares have been sold or, if earlier, October 31, 2006. BASIS OF PRESENTATION The accompanying financial statements have been prepared in accordance with generally accepted accounting principles. The preparation of financial statements in conformity with generally accepted accounting principles requires the Plan Committee to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of additions and deductions from net assets available for benefits during the reporting period. Actual results could differ from those estimates. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: INVESTMENT VALUATION AND INCOME RECOGNITION The common shares of the Company are valued at fair market value measured by quoted market prices in an active market. Purchases of common stock are recorded on a trade-date basis. Thus, the valuation of the Plan's investments are subject to fluctuations in the quoted market price for the Company's common stock. The Plan presents in the statement of changes in net assets the net appreciation (depreciation) in the fair value of its investments which consists of the realized gains or losses and the unrealized appreciation (depreciation) on those investments. EMPLOYEE CONTRIBUTIONS The employee may contribute to the Plan by requesting that the Company withhold up to 5% of the participating employee's gross earnings (as defined by the Plan). 5 10 SOFAMOR DANEK GROUP, INC. EMPLOYEE STOCK PURCHASE PLAN NOTES TO FINANCIAL STATEMENTS, CONTINUED 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED: EMPLOYER CONTRIBUTIONS The Company is obligated to make contributions to the participant's account in the Plan in an amount equal to approximately, but not more than, 15% of the employee's contribution. The participants fully vest in the employer contribution at the end of each calendar quarter. FEDERAL INCOME TAX STATUS The Plan qualifies as an Employee Stock Purchase Plan as defined in Section 423 of the Internal Revenue Code of 1986 as amended. A participant cannot dispose of his stock within two years after the grant of an option or within one year after the date of exercise of the option (the "Prohibited Sale Period") without adverse tax consequences. The Company has been advised that for federal income tax purposes, a participant who sells his stock within the Prohibited Sale Period will recognize ordinary income with respect to the shares sold in an amount equal to the difference between the fair market value on the option date and the option price for the shares. The ordinary income will be recognized regardless of whether any gain or loss is realized from the sale of the stock. This ordinary income is considered compensation and is subject to federal and state withholding, and social security withholding (if applicable). The tax basis of the participant's shares is equal to the fair market value of the stock on the exercise date, plus any ordinary income recognized by the participant. Thus, for a sale during the Prohibited Sale Period, any excess of the sale proceeds received upon disposition of the shares by the participant over the tax basis in such shares sold is considered capital gain. Similarly, if the tax basis of the participant exceeds the sales proceeds received by the participant, after adjustment for any required recognition of ordinary income, then the excess is considered a capital loss. If the participant recognized ordinary income during the Prohibited Sale Period, then the Company has a matching deduction equal to the amount of ordinary income recognized by the participant. If the stock is sold after the Prohibited Sale Period for more than the option price, a portion of the gain realized (but only to the extent of the gain realized) will first be taxed as ordinary income in an amount equal to the excess of the fair market value of such stock on the option date over the option price. Any excess gain will be considered long- 6 11 SOFAMOR DANEK GROUP, INC. EMPLOYEE STOCK PURCHASE PLAN NOTES TO FINANCIAL STATEMENTS, CONTINUED 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED: FEDERAL INCOME TAX STATUS, CONTINUED term capital gain. If the stock is sold for less than the option price after the Prohibited Sale Period, no ordinary income will be recognized and the resulting loss will be considered long-term capital loss. If the participant recognized ordinary income or capital gain from a disposition after the Prohibited Sale Period, the Company receives no deduction. INVESTMENTS The Plan's investments consist of 5,936 and 5,555 shares of Sofamor Danek Group, Inc. common stock at December 31, 1996 and 1995, respectively. PAYABLE DUE SOFAMOR DANEK GROUP, INC. As of December 31, 1996 and 1995, the Plan recorded a payable to the Company of $52,490 and $39,044, respectively, for the fourth quarter purchases of common stock. 3. ADMINISTRATION OF PLAN ASSETS: The Plan provides that a Committee (the "Committee"), appointed by the Board, will administer the Plan. Members of the Committee may not participate in the Plan. The trust department of SunTrust Bank in Atlanta, Georgia, is the Plan custodian. The Company pays all commission, fees and expenses incurred in connection with the acquisition of shares under the Plan and all other expenses of administering the Plan. 7 12 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statement of Sofamor Danek Group, Inc. Employee Stock Purchase Plan on Form S-8 (File No. 33-43597) of our report dated March 10, 1997 on our audit of the financial statements of Sofamor Danek Group, Inc. Employee Stock Purchase Plan as of December 31, 1996 and 1995 and for each of the three years in the period ended December 31, 1996, which report is included as an exhibit to Form 10-K. COOPERS & LYBRAND, L.L.P. Memphis, Tennessee March 21, 1997 8 13 SIGNATURES The Plan. Pursuant to the requirements of the Securities Exchange Act of 1934, the trustees (or other persons who administer the employee benefit plan) have duly caused this annual report to be signed on its behalf by the undersigned hereunto duly authorized. Sofamor Danek Group, Inc. Employee Stock Purchase Plan (Name of Plan) Date: March 21, 1997 /s/ J. Mark Merrill ------------------------- J. Mark Merrill, Treasurer 9 EX-27.1 13 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 2,830 111 71,620 1,589 47,606 148,201 45,536 20,026 319,161 116,894 12,300 0 0 52,994 86,832 319,161 244,525 244,525 45,005 45,005 15,926 705 3,744 14,034 1,293 11,267 0 0 0 11,267 1.68 1.68
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