-----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, S+RYxMybhRP1+DD6bwJdffnHCEjghAiG2HLVrAy8svYz90m04oNUviL1iD/3TCs6 fQISVVHzX4RwHCFiLqiEog== 0000950144-98-004315.txt : 19980409 0000950144-98-004315.hdr.sgml : 19980409 ACCESSION NUMBER: 0000950144-98-004315 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980408 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/A SEC ACT: SEC FILE NUMBER: 001-12544 FILM NUMBER: 98590028 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/A 1 SOFAMOR DANEK GROUP INC FORM 10-K/A 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------- FORM 10-K/A (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 ----------------- 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 PART II ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information called for by this item is incorporated herein by reference to the consolidated financial statements and notes thereto and the financial data schedule included in the current report on Form 8-K filed by Sofamor Danek Group, Inc. on February 3, 1998, a copy of which is attached hereto as Exhibit 99.1. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (A) DOCUMENTS FILED AS PART OF THIS REPORT (1) Financial Statements The financial statements to be included in this report are incorporated in Part II, Item 8 hereof by reference to the current report on Form 8-K filed by Sofamor Danek Group, Inc. on February 3, 1998, a copy of which is attached hereto as Exhibit 99.1. (2) Financial Statement Schedules The financial statements to be included in this report are incorporated in Part II, Item 8 hereof by reference to the current report on Form 8-K filed by Sofamor Danek Group, Inc. on February 3, 1998, a copy of which is attached hereto as Exhibit 99.1. 2 3 (3) Exhibits See Index to Exhibits. (B) REPORTS ON FORM 8-K A report on Form 8-K was filed on February 3, 1998, which included the Sofamor Danek Group, Inc. Consolidated Financial Statements and Notes thereto as of December 31, 1997 and 1996 and for each of the three years in the period ended December 31, 1997 and the related financial statement schedule. The information included in the report was filed in connection with the Registration Statement on Form S-3 of Sofamor Danek Group, Inc. dated February 3, 1998, filed under the Securities Act of 1933, as amended. 3 4 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. Date: April 7, 1998 By: /s/ J. Mark Merrill ------------------------------------ Name: J. Mark Merrill Title: Vice President, Treasurer and Assistant Secretary 4 5 SOFAMOR DANEK GROUP, INC. ANNUAL REPORT ON FORM 10-K DECEMBER 31, 1997 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 $80,000,000 Revolving Credit Agreement with SunTrust Bank in Nashville dated July 22, 1997 (the "Credit Agreement") (11) (10.2) as amended by Amendment to Revolving Loan Agreement dated December 22, 1997. 10.5 Amended and Restated License Agreement between Genetics Institute, Inc. and Sofamor Danek Properties, Inc. dated February 15, 1995 (8) (10.1) MANAGEMENT CONTRACTS, COMPENSATORY PLANS OR ARRANGEMENTS, ETC. 10.6 Employment Agreement and Letter Agreement between Richard E. Duerr, Jr. and the Company dated January 1, 1996 (9) (10.15) 10.7 Employment Agreement between Laurence Y. Fairey and the Company dated April 13, 1997 10.8 Employment Agreement between Mark D. LoGuidice and the Company dated April 13, 1997 10.9 Employment Agreement between J. Mark Merrill and the Company dated April 13, 1997
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Number Assigned in Regulation S-K, Item 601 Description of Exhibit - ------------- ---------------------- 10.12 Employment Agreement and Letter Agreement between Richard W. Treharne and the Company dated January 1, 1996 (9) (10.20) 10.13 Employment Agreement between R. Lew Bennett and the Company dated January 1, 1996 (9) (10.22) 10.14 Employment Agreement between Gene B. Sponseller and the Company dated January 1, 1996 (9) (10.24) 10.15 Letter Agreement between E. R. Pickard and the Company dated January 1, 1996 and Resolution of the Company's Compensation Committee (9) (10.25) 10.16 Letter Agreement between James J. Gallogly and the Company dated January 1, 1996 and Resolution of the Company's Compensation Committee (9) (10.26) 10.17 Employment Agreement between Sofamor and Marie-Helene Plais dated June 21, 1993 (6) (10.50) 10.18 Letter Agreement between Robert A. Compton and the Company dated May 28, 1997 10.19 Employment Agreement between John Pafford and the Company dated April 27, 1997 10.20 Employment Agreement between Edward Traurig and the Company dated April 27, 1997 10.21 Letter Agreement between George G. Griffin, III and the Company dated May 15, 1997 10.22 Letter Agreement between Kenneth G. Hayes and the Company dated May 15, 1997 10.23 Letter Agreement between Richard Mazza and the Company dated January 9, 1998 10.24 Amended and Restated Non-Qualified Stock Option Plan (2) (10.25) 10.25 Non-Qualified Stock Option Agreement between the Company and E. R. Pickard dated November 30, 1990, (2) (10.26) as amended by an Amendment dated March 10, 1992 (3) (10.26) and by Second Amendment dated February 16, 1995 (7) (10.24) and by Third Amendment dated July 21, 1995 (9) (10.28) 10.26 Incentive Stock Option Plan, as amended (1) (10.30)
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Number Assigned in Regulation S-K, Item 601 Description of Exhibit - ------------- ---------------------- 10.27 Amended and Restated Stock Option Plan for Distributors and Consultants (9) (10.30) 10.28 Non-Employee Directors' Stock Option Plan (2) (10.34) 10.29 Cash Bonus Plan 10.30 Employee Stock Purchase Plan (10) (10.29) 10.31 Amended and Restated Loan Forgiveness Agreement dated October 11, 1996 between the Company and E.R. Pickard. 10.32 * 1993 Long-Term Incentive Plan, as amended 10.33 Stock Pledge Agreement between E. R. Pickard and the Company dated November 30, 1990. (6) (10.42) 10.34 Agreement between the Company and E. R. Pickard dated December 15, 1995 (9) (10.40) (21) 21.1 Subsidiaries of the Company (23) 23.1 * Consent of Coopers & Lybrand L.L.P., Independent Public Accountants (24) 24.1 Powers of attorney from directors of the Company authorizing signature of this report (27) 27.1 Financial Data Schedule (For SEC use only) (28) 28.1 Annual Report on Form 11-K of the Employee Stock Purchase Plan for the fiscal year ended December 31, 1997 (99) 99.1 * Audited financial statements and related financial statement schedule of Sofamor Danek Group, Inc. and subsidiaries as of December 31, 1997 and 1996, and for each of the three years in the period ended December 31, 1997.
- ---------------------- * Filed herewith. 7 8 (1) Incorporated by reference from the Exhibits to the Form 10-K of the Registrant for the fiscal year ended December 31, 1992. (Exhibit number in the Form 10-K is set forth in italics.) (2) Incorporated by reference from the Exhibits to the Form S-1 Registration Statement No. 33-39593 of the Registrant. (Exhibit number in the Form S-1 is set forth in italics.) (3) Incorporated by reference from the Exhibits to the Form 10-K of the Registrant for the fiscal year ended December 31, 1991. (Exhibit number in the Form 10-K is set forth in italics.) (4) Incorporated by reference from the Exhibits to the Form S-4 Registration Statement No. 33-63040 of the Registrant. (Exhibit number in the Form S-4 is set forth in italics) (5) Incorporated by reference from the Exhibits to the Form 8-K of the Registrant filed with the Securities and Exchange Commission on June 29, 1993. (6) Incorporated by reference from the Exhibits to the Form 10-K of the Registrant for the fiscal year ended December 31, 1993. (Exhibit number in the Form 10-K is set forth in italics.) (7) Incorporated by reference from the Exhibits to the Form 10-K of the Registrant for the fiscal year ended December 31, 1994. (Exhibit number in the Form 10-K is set forth in italics.) (8) Incorporated by reference from the Exhibits to the Form 10-Q of the Registrant for the quarter ended March 31, 1995. (Exhibit number in the Form 10-K is set forth in italics.) (9) Incorporated by reference from the Exhibits to the Form 10-K of the Registrant for the fiscal year ended December 31, 1995. (Exhibit number in the Form 10-K is set forth in italics.) (10) Incorporated by reference from Exhibits to the Form 10-K of the Registrant for the fiscal year ended December 31, 1996. (Exhibit number in the Form 10-K is set forth in italics.) (11) Incorporated by reference from the Exhibits to the Form 10-Q of the registrant for the quarter ended June 30, 1997. (Exhibit number in the Form 10-K is set forth in italics.) 8 EX-10.32 2 1993 LONG TERM INCENTIVE PLAN 1 EXHIBIT 10.32 1993 LONG-TERM INCENTIVE PLAN, AS AMENDED 1. PURPOSE. The purpose of the SOFAMOR DANEK GROUP, INC. 1993 LONG-TERM INCENTIVE PLAN, AS AMENDED (the "Plan") is to further the earnings of SOFAMOR DANEK GROUP, INC., an Indiana corporation, and its subsidiaries (collectively, the "Company") by assisting the Company in attracting, retaining and motivating management employees and directors of high caliber and potential. The Plan provides for the award of long-term incentives to those officers, other key executives and directors who make substantial contributions to the Company by their loyalty, industry and invention. In addition, the Plan contains a program (the "Director Program") which provides for the non-discretionary periodic grant of Non-Qualified Stock Options (as hereinafter defined) to non-employee directors of the Company (the "Director Options"). 2. ADMINISTRATION. The Plan (other than the Director Program) shall be administered by a committee (the "Committee"). The Board of Directors of the Company (the "Board of Directors") may act as the Committee, or it may delegate such responsibility to one or more of its members. The Committee shall have full and final authority in its discretion to interpret the provisions of the Plan (other than the Director Program) and to decide all questions of fact arising in its application. Subject to the provisions hereof and other than with respect to the Director Program, the Committee shall have full and final authority in its discretion to determine the employees and directors to whom awards shall be made under the Plan; to determine the type of awards to be made under the Plan and the amount, size and terms and conditions of each such award under the Plan; to determine the time when awards shall be granted; to determine the provisions of each agreement evidencing an award; and to make all other determinations necessary or advisable for the administration of the Plan. 3. STOCK SUBJECT TO THE PLAN. The Company may grant awards under the Plan with respect to not more than a total of 7,500,000 shares of no par value common stock of the Company (the "Shares") (subject, however, to adjustment as provided in paragraph 21 below). Such Shares may be authorized and un-issued Shares or treasury Shares. In any calendar year, no participant may be granted awards relating to more than 500,000 shares. Except as otherwise provided herein, any Shares subject to an option or right which for any reason is surrendered before exercise or expires or is terminated unexercised as to such Shares shall again be available for the granting of awards under the Plan. Similarly, if any Shares granted pursuant to restricted stock awards are forfeited, such forfeited 1 2 Shares shall again be available for the granting of awards under the Plan, unless the dividends were paid to the holders of such Shares. 4. ELIGIBILITY TO RECEIVE AWARDS. Persons eligible to receive awards under the Plan (other than the Director Program) shall be limited to those officers, other key executive employees and directors of the Company who are in positions in which their decisions, actions and counsel have a significant impact upon the profitability and success of the Company. 5. FORM OF AWARDS. Awards may be made from time to time by the Committee (other than the Director Program) in the form of stock options to purchase Shares, stock appreciation rights, performance units, restricted stock, or any combination of the above. Stock options may be options which are intended to qualify as incentive stock options ("Incentive Stock Options") within the meaning of Section 422(b) of the Internal Revenue Code of 1986, as amended (the "Code"), or options which are not intended to so qualify ("Non-Qualified Stock Options"). 6. EMPLOYEE STOCK OPTIONS. Stock options for the purchase of Shares granted other than under the Director Program shall be evidenced by written agreements in such form not inconsistent with the Plan as the Committee shall approve from time to time. Such agreement shall contain the terms and conditions applicable to the options, including in substance the following terms and conditions: (a) Type of Option. Each option agreement shall identify the options represented thereby as Incentive Stock Options or Non-Qualified Stock Options, as the case may be, and shall set forth the number of Shares subject to the options. (b) Option Price. The option exercise price applicable to a Non-Qualified Stock Option to be paid by the optionee to the Company for each Share purchased upon the exercise of an option shall not be less than 100 percent of the fair market value of such Share on the date the Option is granted as determined by the Committee. (c) Exercise Term. Each option agreement shall state the period or periods of time within which the option may be exercised, in whole or in part, as determined by the Committee and subject to such terms and conditions as are prescribed for such purpose by the Committee, provided that no Incentive Stock Option shall be exercisable after ten years, and no Non-Qualified Stock Option shall be exercisable after ten years and one day, from the date of grant thereof. The Committee, in its discretion, may provide in the option agreement circumstances under which the option shall become immediately exercisable, in whole or in part, 2 3 and, notwithstanding, the foregoing may accelerate the exercisability of any option, in whole or in part, at any time. (d) Payment for Shares. The purchase price of the Shares with respect to which an option is exercised shall be payable in full at the time of exercise in cash, Shares at fair market value owned by the Participant for a period of at least six months, or a combination thereof, as the Committee may determine and subject to such terms and conditions as may be prescribed by the Committee for such purpose. If the purchase price is paid by tendering Shares, the Committee in its discretion, may grant the optionee a new stock option for the number of Shares used to pay the purchase price. (e) Rights Upon Termination of Employment. In the event that an optionee ceases to be an employee or director of the Company for any cause other than Retirement (as defined below), death or Disability (as defined below), the optionee shall have the right to exercise the option during its term within a period of three months after such termination to the extent that the option was exercisable at the time of termination, or within such other period, and subject to such terms and conditions, as may be specified by the Committee. (As used herein, the term "Retirement" means retirement from active employment with the Company on or after age 65, or such earlier age with the express written consent for purposes of the Plan of the Company at or before the time of such retirement, and the term "Retires" has the corresponding meaning. As used herein, the term "Disability" means a condition that, in the judgment of the Committee, has rendered a grantee completely and presumably permanently unable to perform any and every duty of his regular occupation, and the term "Disabled" has the corresponding meaning). In the event that an optionee Retires, dies or becomes Disabled prior to the expiration of his option and without having fully exercised his option, the optionee or his Beneficiary (as defined below) shall have the right to exercise the option during its term within a period of (i) one year after termination of employment due to Retirement, death or Disability, or (ii) one year after death if death occurs either within one year after termination of employment due to Retirement or Disability or within three months after termination of employment for other reasons, to the extent that the option was exercisable at the time of death or termination, or within such other period, and subject to such terms and conditions, as may be specified by the Committee. (As used herein, the term "Beneficiary" means the person or persons designated in writing by the grantee as his Beneficiary with respect to an award under the Plan; or, in the absence of an effective designation or if the designated person or persons predecease the grantee, the grantee's Beneficiary shall be the person or persons who acquire by bequest or inheritance the grantee's rights in respect of an award). In order to be effective, a grantee's designation of a Beneficiary must be on file with the Committee before the 3 4 grantee's death, but any such designation may be revoked and a new designation substituted therefor at any time before the grantee's death. (f) Incentive Stock Options. In the case of an Incentive Stock Option, each option shall be subject to such other terms conditions and provisions as the Committee determines necessary or desirable in order to qualify such option as an incentive stock option within the meaning of Section 422(b) of the Code (or any amendment or substitute or successor thereto or regulation thereunder), including in substance, without limitation, the following: (i) Subject to clause (iii) below, the purchase price of stock subject to an Incentive Stock Option shall not be less than 100 percent of the fair market value of such stock on the date the option is granted, as determined by the Committee. (ii) The aggregate fair market value (determined as of the time the option is granted) of the stock with respect to which incentive stock options are exercisable for the first time by an optionee in any calendar year (under all plans of the Company and its subsidiary corporations (which term, as used hereinafter, shall have the meaning ascribed thereto in Section 425(f) of the Code (or successor provision of similar import))) shall not exceed $100,000. (iii) No Incentive Stock Option shall be granted to any employee if at the time the option is granted the individual owns stock possessing more than 10 percent of the total combined voting power of all classes of stock of the Company or of a subsidiary corporation of the Company, unless at the time such option is granted the option price is at least 110 percent of the fair market value (as determined by the Committee) of the stock subject to the option and such option by its terms is not exercisable after the expiration of five years from the date of grant. (iv) Directors who are not employees of the Company shall not be eligible to receive Incentive Stock Options. (v) In the event of termination of employment by reason of Retirement, if an Incentive Stock Option is exercised after the expiration of the exercise periods that apply for purposes of Section 422 of the Code, the option will thereafter be treated as a Non-Qualified Stock Option. 4 5 7. STOCK APPRECIATION RIGHTS. Stock appreciation rights (SARs) shall be evidenced by written SAR agreements in such form not inconsistent with the Plan as the Committee shall approve from time to time. Such SAR agreements shall contain the terms and conditions applicable to the SARs, including in substance the following terms and conditions: (a) Award. SARs may be granted in connection with a previously or contemporaneously granted stock option (other than an option granted pursuant to the Director Program), or independently of a stock option. SARs shall entitle the grantee, subject to such terms and conditions as may be determined by the Committee, to receive upon exercise thereof all or a portion of the excess of (i) the fair market value at the time of exercise, as determined by the Committee, of a specified number of Shares with respect to which the SAR is exercised, over (ii) a specified price which shall not be less than 100 percent of the fair market value of the Shares at the time the SAR is granted, or, if the SAR is granted in connection with a previously issued stock option, not less than 100 percent of the fair market value of the Shares at the time such option was granted. Upon exercise of an SAR, the number of Shares reserved for issuance hereunder shall be reduced by the number of Shares covered by the SAR. Shares covered by an SAR shall not be used more than once to calculate the amount to be received pursuant to the exercise of the SAR. (b) SARs Related to Stock Options. If an SAR is granted in relation to a stock option, (i) the SAR shall be exercisable only at such times, and by such persons, as the related option is exercisable; (ii) the grantee's right to exercise the related option shall be canceled if and to the extent that the Shares subject to the option are used to calculate the amount to be received upon the exercise of the related SAR; (iii) the grantee's right to exercise the related SAR shall be canceled if and to the extent that the Shares subject to the SAR are purchased upon the exercise of the related option; and (iv) the SAR shall not be transferable other than by will or by the laws of descent and distribution, and shall be exercisable during the lifetime of the grantee only by him. (c) Term. Each SAR agreement shall state the period or periods of time within which the SAR may be exercised, in whole or in part, as determined by the Committee and subject to such terms and conditions as are prescribed for such purpose by the Committee, provided that no SAR shall be exercisable later than ten years after the date of grant. The Committee may, in its discretion, provide in the SAR agreement circumstances under which the SARs shall become immediately exercisable, in whole or in part, and may, notwithstanding the foregoing, accelerate the exercisability of any SAR, in whole or in part, at any time. 5 6 (d) Termination of Employment. SARs shall be exercisable only during the grantee's employment by the Company (or, in the case of a grantee who is a non-employee director, only during his service as a director of the Company), except that, in the discretion of the Committee, an SAR may be made exercisable for up to three months after the grantee's employment (or tenure as a director) is terminated for any reason other than Retirement, death or Disability, and for up to one year after the grantee's employment (or tenure as a director) is terminated because of Retirement, death or Disability. (e) Payment. Upon exercise of an SAR, payment shall be made in cash, in Shares at fair market value on the date of exercise, or in a combination thereof, as the Committee may determine at the time of exercise. (f) Other Terms. SARs shall be granted in such manner and such form, and subject to such additional terms and conditions, as the Committee in its sole discretion deems necessary or desirable, including without limitation: (i) if granted in connection with an Incentive Stock Option, in order to satisfy any requirements set forth under Section 422 of the Code; or, (ii) in order to avoid any liability in connection with an SAR under Section 16(b) of the Securities Exchange Act of 1934, as amended (the "1934 Act"). 8. RESTRICTED STOCK AWARDS. Restricted stock awards under the Plan shall consist of Shares free of any purchase price or for such purchase price as may be established by the Committee restricted against transfer, subject to forfeiture, and subject to such other terms and conditions (including attainment of performance objectives) as may be determined by the Committee. Restricted stock shall be evidenced by written restricted stock agreements in such form not inconsistent with the Plan as the Committee shall approve from time to time, which agreement shall contain the terms and conditions applicable to such awards, including in substance the following terms and conditions: (a) Restriction Period. Restrictions shall be imposed for such period or periods as may be determined by the Committee; provided, however, that in no event (other than upon the occurrence of a Change in Control or Potential Change in Control) will the restrictions on such Shares lapse in full earlier than three years from the date of grant; provided further, however, that if such restrictions lapse as a result of the attainment of performance objectives, then the restrictions may not lapse earlier than one year from the date of grant. The Committee, in its discretion but subject to the provisos in the preceding sentence, may provide in the agreement circumstances under which the restricted stock shall become immediately transferable and non-forfeitable, or under which the restricted stock shall be forfeited. 6 7 (b) Restrictions Upon Transfer. Restricted stock and the right to vote such Shares and to receive dividends thereon, may not be sold, assigned, transferred, exchanged, pledged, hypothecated, or otherwise encumbered, except as herein provided, during the restriction period applicable to such Shares. Notwithstanding the foregoing, and except as otherwise provided in the Plan, the grantee shall have all of the other rights of a stockholder, including, but not limited to, the right to receive dividends and the right to vote such Shares. (c) Certificates. A certificate or certificates representing the number of restricted Shares granted shall be registered in the name of the grantee. The Committee, in its sole discretion, shall determine when the certificate or certificates shall be delivered to the grantee (or, in the event of the grantee's death, to his Beneficiary), may provide for the holding of such certificate or certificates in escrow or in custody by the Company or its designee pending their delivery to the grantee or Beneficiary, and may provide for any appropriate legend to be borne by the certificate or certificates. (d) Lapse of Restrictions. The restricted stock agreement shall specify the terms and conditions upon which any restriction upon restricted stock awarded under the Plan shall expire, lapse, or be removed, as determined by the Committee. Upon the expiration, lapse, or removal of such restrictions, Shares free of the restrictive legend shall be issued to the grantee of his legal representative. 9. PERFORMANCE UNITS. Performance unit awards under the Plan shall entitle grantees to future payments based upon the achievements of pre-established long-term performance objectives and shall be evidenced by written performance unit agreements in such form not inconsistent with this Plan as the Committee shall approve from time to time. Such agreements shall contain the terms and conditions applicable to the performance unit awards, including in substance the following terms and conditions: (a) Performance Period. The Committee shall establish with respect to each unit award a performance period of not fewer than two years. (b) Unit Value. The Committee shall establish with respect to each unit award value for each unit which shall not thereafter change, or which may vary thereafter pursuant to criteria specified by the Committee. (c) Performance Targets. The Committee shall establish with respect to each unit award maximum and minimum performance targets to be achieved during the applicable performance period. Achievement of maximum targets shall entitle grantees to payment with respect to the full value of a unit award. Grantees shall 7 8 be entitled to payment with respect to a portion of a unit award according to the level of achievement of targets as specified by the Committee for performance which achieves or exceeds the minimum target but fails to achieve the maximum target. (d) Performance Measures. Performance targets established by the Committee shall relate to corporate, subsidiary, division, or unit performance and may be established in terms of growth in gross revenue, earnings per share, ratios of earnings to equity or assets, or such other measures or standards as may be determined by the Committee in its discretion. Multiple targets may be used and may have the same or different weighting, and they may relate to absolute performance or relative performance measured against other companies or businesses. (e) Adjustments. At any time prior to the payment of a unit award, the Committee may adjust previously established performance targets or other terms and conditions, including the Company's or other corporations' financial performance for Plan purposes, to reflect major unforeseen events such as changes in laws, regulations or accounting practices, mergers, acquisitions or divestitures or other extraordinary unusual or nonrecurring items or events. (f) Payment of Unit Awards. Following the conclusion of each performance period, the Committee shall determine the extent to which performance targets have been attained and any other terms and conditions satisfied for such period. The Committee shall determine what, if any, payment is due on the unit award and whether such payment shall be made in cash, Shares, or a combination thereof. Payment shall be made in a lump sum or installments, as determined by the Committee, commencing as promptly as practicable following the end of the performance period unless deferred subject to such terms and conditions and in such form as may be prescribed by the Committee. (g) Termination of Employment. In the event that a grantee ceases to be employed by the Company prior to the end of the performance period by reason of death, Disability, or Retirement with the consent of the Company, any unit award, to the extent earned under the applicable performance targets, shall be payable at the end of the performance period according to the portion of the performance period during which the grantee was employed by the Company, provided that the Committee shall have the power to provide for an appropriate settlement of a unit award before the end of the performance period. Upon any other termination of employment, participation shall terminate forthwith and all outstanding unit awards shall be canceled. 8 9 10. LOANS AND SUPPLEMENTAL CASH. The Committee, in its sole discretion to further the purpose of the Plan, may provide for supplemental cash payments or loans to individuals in connection with all or any part of an award under the Plan. Supplemental cash payments shall be subject to such terms and conditions as shall be prescribed by the Committee at the time of grant, provided that in no event shall the amount of payment exceed: (a) In the case of an option, the excess fair market value of a Share on the date of exercise over the option price multiplied by the number of Shares for which such option is exercised, or (b) In the case of an SAR, performance unit, or restricted stock award, the value of the Shares and other consideration issued in payment of such award. Any loan shall be evidenced by a written loan agreement or other instrument in such form and containing such terms and conditions (including, without limitation, provisions for interest, payment schedules, collateral, forgiveness or acceleration) as the Committee may prescribe from time to time. 11. DIRECTOR PROGRAM. (a) Eligible Directors. Each member of the Board of Directors who is not a full-time employee of the Company is an "Eligible Director." (b) Administration. The Director Program shall be administered by the Board of Directors. Subject to the provisions of the Director Program, the Board shall be authorized to: (i) adopt, revise and repeal such administrative rules, guidelines and practices governing the Director Program as it shall from time to time deem advisable; (ii) interpret the terms and provisions of the Director Program and any option issued under the Director Program (and any agreements relating thereto), and otherwise settle all claims and disputes arising under the Director Program; (iii) delegate responsibility and authority for the operation and administration of the Director Program, appoint employees and officers of the Company to act on its behalf, and employ persons to assist in the fulfilling of its responsibilities under the Director Program; and 9 10 (iv) otherwise supervise the administration of the Director Program; provided, however, that the Board of Directors shall have no discretion with respect to the selection of Eligible Directors to receive options hereunder, the number of Shares covered by such option or the price or timing of any options granted hereunder; provided, further, that any action by the Board of Directors relating to the Director Program will be taken only if approved by the affirmative vote of a majority of the directors who are not then eligible to participate under the Director Program. (c) Option Grants. (i) Number of Options Granted. The following number of Director Options are hereby granted to each Eligible Director under the Director Program: (A) As of the date of Board approval of the Director Program, a Director Option to purchase 5,000 Shares is granted to each person who on that date is an incumbent Eligible Director. (B) With respect to each person who first becomes an Eligible Director after the date of Board approval of the Director Program, a Director Option to purchase 5,000 Shares is granted as of the date such person first becomes an Eligible Director. (C) As of the date of every third annual meeting of the Company's shareholders following the grant of a Director Option to an Eligible Director pursuant to section (A) or (B) above, and provided that such Eligible Director remains an incumbent on such date, a Director Option to purchase 5,000 Shares is granted to such Eligible Director. (d) Terms and Conditions of Director Options Under the Director Program. (i) Option Agreement. Each Director Option granted under the Director Program shall be evidenced by an option agreement. (ii) Option Price. The option exercise price per Share of a Director Option shall be the fair market value of a Share as of the date of grant. The Director Options granted as of the date of Board approval of the Director Program have an exercise price of $11.875. (iii) Option Term. The term of each Director Option shall be ten years. No Director Option shall be exercised by any person after expiration of the term of the Director Option. 10 11 (iv) Exercisability. A Director Option shall be exercisable during its term, 33.33% on the first anniversary of the date of grant, an additional 33.33% on the second anniversary of the date of grant, and the remaining 33.33% on the third anniversary of the date of grant. The Director Options granted on the date the Director Program was approved by the Board vest 33.33% on December 19, 1995, 1996, and 1997. (e) Method of Exercise. Director Options may be exercised, in whole or in part, at any time and from time to time during the relevant exercise period, by giving written notice of exercise to the Company specifying the number of Shares to be purchased. Such notice shall be accompanied by payment in full of the purchase price, either in cash or by certified or bank check, or such other instrument as the Board of Directors may accept. Payment in full or in part may also be made in the form of unrestricted Shares already owned by the Director (and based upon the fair market value of the Shares so tendered as of the date the Director Option is exercised, as determined by the Board of Directors). No Shares shall be issued until full payment therefor has been made. Eligible Directors shall generally have the rights to dividends or other rights of a stockholder with respect to Shares subject to the Director Option when the Eligible Director has given notice as to exercise, has paid in full for such shares and, if requested, has given any representations required by the Board of Directors. (f) Termination by Reason of Death. If an optionee ceases to be an Eligible Director by reason of death, any Director Option held by such optionee may thereafter be exercised to the extent then exercisable, by the legal representative of the estate or by the legatee of the Eligible Director under the will of the Eligible Director, for a period of one year from the date of such death or until the expiration of the stated term of such Director Option, whichever period is shorter. (g) Termination by Reason of Disability. If an optionee ceases to be an Eligible Director by reason of disability, any Director Option held by such optionee may thereafter be exercised by the optionee, to the extent it was exercisable at the time of termination, for a period of one year from the date of such termination or until the expiration of the stated term of such Director Option, whichever period is shorter, provided, however, that if the optionee dies within such one-year period, any unexercised Director Option held by such optionee shall thereafter be exercisable to the extent it was exercisable at the time of death for a period of one year from the date of such death or until the expiration of the stated term of such Director Option, whichever period is shorter. (h) Other Termination. If an optionee ceases to be an Eligible Director for any reason other than death or disability (except as a result of becoming an employee of the 11 12 Company), any Director Option held by such optionee may thereafter be exercised by the optionee, to the extent it was exercisable at the time of such termination, for a period of three months from the date of such termination or the expiration of the stated term of such Director Option, whichever period is shorter; provided, however, that if the optionee dies within such three-month period, any unexercised Director Option held by such optionee shall thereafter be exercisable, to the extent to which it was exercisable at the time of death, for a period of one year from the date of such death or until the expiration of the stated term of the Director Option, whichever period is shorter. If an optionee ceases to be an Eligible Director by reason of his becoming an employee of the Company and his employment with the Company is subsequently terminated, any Director Option held by such optionee may thereafter be exercised by the optionee, to the extent that it was exercisable at the time of such termination, for a period of three months from the date of such termination or the expiration of the stated term of the Director Option, whichever period is shorter; provided, however, that if the optionee dies within such three-month period, any unexercised Option held by such optionee shall thereafter be exercisable, to the extent to which it was exercisable at the time of death, for a period of one year from the date of such death or until the expiration of the stated term of the Director Option, whichever period is shorter. 12. GENERAL RESTRICTIONS. Each award under the Plan shall be subject to the requirement that if at any time the Company shall determine that (i) the listing, registration or qualification of the Shares subject or related thereto upon any securities exchange or under any state or federal law, or (ii) the consent or approval of any regulatory body, or (iii) an agreement by the recipient of an award with respect to the disposition of Shares, or (iv) the satisfaction of withholding tax or other withholding liabilities is necessary or desirable as a condition of or in connection with the granting of such award or the issuance or purchase of Shares thereunder, such award shall not be consummated in whole or in part unless such listing, registration, qualification, consent, approval, agreement, or withholding shall have been effected or obtained free of any conditions not acceptable to the Company. Any such restriction affecting an award shall not extend the time within which the award may be exercised; and neither the Company nor its directors or officers nor the Committee shall have any obligation or liability to the grantee or to a Beneficiary with respect to any Shares with respect to which an award shall lapse or with respect to which the grant, issuance or purchase of Shares shall not be effected, because of any such restriction. 13. SINGLE OR MULTIPLE AGREEMENTS. Multiple awards, multiple forms of awards, or combinations thereof may be evidenced by a single agreement or multiple agreements, as determined by the Committee. 12 13 14. RIGHTS OF THE SHAREHOLDER. The recipient of any award under the Plan, shall have no rights as a shareholder with respect thereto unless and until certificates for Shares are issued to him, and the issuance of Shares shall confer no retroactive right to dividends. 15. RIGHTS TO TERMINATE EMPLOYMENT. Nothing in the Plan or in any agreement entered into pursuant to the Plan shall confer upon any person the right to continue in the employment of the Company or affect any right which the Company may have to terminate the employment of such person. 16. WITHHOLDING. (a) Prior to the issuance or transfer of Shares under the Plan, the recipient shall remit to the Company an amount sufficient to satisfy any federal, state or local withholding tax requirements. Other than with respect to awards under the Director Program, the recipient may satisfy the withholding requirement in whole or in part by electing to have the Company withhold Shares having a value equal to the amount required to be withheld. The value of the Shares to be withheld shall be the fair market value, as determined by the Committee, of the stock on the date that the amount of tax to be withheld is determined (the "Tax Date"). Such election must be made prior to the Tax Date, must comply with all applicable securities law and other legal requirements, as interpreted by the Committee, and may not be made unless approved by the Committee, in its discretion. (b) Whenever payments to a grantee in respect of an award under the Plan to be made in cash, such payments shall be net of the amount necessary to satisfy any federal, state or local withholding tax requirements. 17. NON-ASSIGNABILITY. No award under the Plan shall be sold, assigned, transferred, exchanged, pledged, hypothecated, or otherwise encumbered, other than by will or by the laws of descent and distribution, or, with respect to Awards other than Incentive Stock Options, by such other means as the Committee (or the Board of Directors, in the case of the Director Program) may approve. Except as otherwise provided herein or a permitted transferee approved by the Committee (or the Board of Directors, in the case of the Director Program) during the life of the recipient, such Award shall be exercisable only by such person or by such person's guardian or legal representative. 13 14 18. NON-UNIFORM DETERMINATIONS. The Committee's determinations under the Plan (including without limitation determinations of the persons to receive awards, the form, amount and timing of such awards, the terms and provisions of such awards and the agreements evidencing same, and the establishment of values and performance targets) need not be uniform and may be made selectively among persons who receive, or are eligible to receive, awards under the Plan, whether or not such persons are similarly situated. 19. CHANGE IN CONTROL PROVISIONS. (a) In the event of (1) a Change in Control (as defined) or (2) a Potential Change in Control (as defined) the following acceleration and valuation provisions shall apply unless the Board of Directors otherwise determines by resolution: (i) Any SARs and any stock options awarded under the Plan not previously exercisable and vested shall become fully exercisable and vested. (ii) Any restrictions and deferral limitations applicable to any restricted stock, performance units or other Stock-based awards, in each case to the extent not already vested under the Plan, shall lapse and such shares, performance units or other stock-based awards shall be deemed fully vested. (iii) The value of all outstanding stock options, SARs, restricted stock, performance units and other stock-based awards, in each case to the extent vested, shall, unless otherwise determined by the Committee (or the Board of Directors with respect to the Director Program) in its sole discretion at or after grant but prior to any Change in Control, be cashed out on the basis of the Change in Control Price (as defined) as of the date such Change in Control or such Potential Change in Control is determined to have occurred or such other date as the Committee may determine prior to the Change in Control. (b) As used herein, the term "Change in Control" means the happening of any of the following: (i) Any person or entity, including a "group" as defined in Section 13(d)(3) of the 1934 Act, other than the Company, a subsidiary of the Company, or any employee benefit plan of the Company or its subsidiaries, becomes the beneficial owner of the Company's securities having 25 percent or more of the combined voting power of the then outstanding securities of the Company that may be cast for the election for directors of the Company 14 15 (other than as a result of an issuance of securities initiated by the Company in the ordinary course of business), or (ii) As the result of, or in connection with, any cash tender or exchange offer, merger or other business combination, sale of assets or contested election, or any combination of the foregoing transactions, less than a majority of the combined voting power of the then outstanding securities of the Company or any successor corporation or entity entitled to vote generally in the election of directors of the Company or such other corporation or entity after such transaction, are held in the aggregate by holders of the Company's securities entitled to vote generally in the election of directors of the Company immediately prior to such transactions; or (iii) During any period of two consecutive years, individuals who at the beginning of any such period constitute the Board of Directors cease for any reason to constitute at least a majority thereof, unless the election, or the nomination for election by the Company's stockholders, of each director of the Company first elected during such period was approved by a vote of at least two-thirds of the directors of the Company then still in office who were directors of the Company at the beginning of an such period. (c) As used herein, the term "Potential Change in Control" means the happening of any of the following: (i) The approval by stockholders of an agreement by the Company, the consummation of which would result in a Change in Control of the Company; or (ii) The acquisition of beneficial ownership, directly or indirectly, by any entity, person or group (other than the Company, a wholly-owned subsidiary thereof or any employee benefit plan of the Company or its subsidiaries (including any trustee of such plan acting as such trustee)) of securities of the Company representing 5 percent or more of the combined voting power of the Company's outstanding securities and the adoption by the Board of Directors of a resolution to the effect that a Potential Change in Control of the Company has occurred for purposes of this Plan. (d) As used herein, the term "Change in Control Price" means the highest price per share paid in any transaction reported on the New York Stock Exchange, or paid or offered in any bonafide transaction related to a Potential or actual Change in Control of the Company at any time during the 60 day period immediately preceding the occurrence of the Change in Control (or, where applicable, the 15 16 occurrence of the Potential Change in Control event), in each case determined by the Committee except that, in the case of Incentive Stock Options and SARs relating to Incentive Stock Options, such price shall be based only on transactions reported for the date on which the optionee exercises such SARs or, where applicable, the date on which a cash out occurs under Section 19(a)(iii). 20. NON-COMPETITION PROVISION. Unless the award agreement relating to a stock option, SAR, restricted stock or performance unit specifies otherwise, a grantee shall forfeit all un-exercised, unearned and/or unpaid awards, including, but not by way of limitation, awards earned but not yet paid, all unpaid dividends and dividend equivalents, and all interest, if any, accrued on the foregoing if, (i) in the opinion of the Committee, the grantee without the written consent of the Company, engages directly or indirectly in any manner or capacity as principal, agent, partner, officer, director, employee or otherwise, in any business or activity competitive with the business conducted by the Company or any of its subsidiaries; or (ii) the grantee performs any act or engages in any activity which in the opinion of the Chief Executive Officer of the Company is inimical to the best interests of the Company. 21. ADJUSTMENTS. In the event of any change in the outstanding common stock of the Company, by reason of a stock dividend or distribution, recapitalization, merger, consolidation, reorganization, split-up, combination, exchange or Shares or the like, the Board of Directors, in its discretion, may adjust proportionately the number of Shares which may be issued under the Plan, the number of Shares subject to outstanding awards, and the option exercise price of each outstanding option, and may make such other changes in outstanding, options, SARs, performance units and restricted stock awards, as it deems equitable in its absolute discretion to prevent dilution or enlargement of the rights of grantees, provided that any fractional Shares resulting from such adjustments shall be eliminated. 22. AMENDMENT. The Board of Directors may terminate, amend, modify or suspend the Plan at any time, except that no termination, amendment, modification or suspension shall be effective without the authorization of the holders of a majority of Company's outstanding Shares, if such authorization is required to comply with any law, regulation or stock exchange rule. No termination, modification, amendment or suspension of the Plan shall adversely affect the rights of any grantee or Beneficiary under an award previously granted, unless the grantee or Beneficiary shall consent; but it shall be conclusively presumed that any adjustment pursuant to paragraph 21 hereof does not adversely affect any such right. 16 17 23. EFFECT ON OTHER PLANS. Participation in this Plan shall not affect a grantee's eligibility to participate in any other benefit or incentive plan of the Company. Any awards made pursuant to this Plan shall not be used in determining the benefits provided under any other plan of the Company unless specifically provided therein. 24. EFFECTIVE DATE AND DURATION OF THE PLAN. The initial effective date of the Plan was December 16, 1992. Unless it is sooner terminated in accordance with paragraph 22 hereof, the Plan shall remain in effect until all awards under the Plan have been satisfied by the issuance of Shares or payment of cash or have expired or otherwise terminated, but no award shall be granted after December 16, 2002. 25. UNFUNDED PLAN. The Plan shall be unfunded, except to the extent otherwise provided in accordance with Section 8 hereof. Neither the Company nor any affiliate shall be required to segregate any assets that may be represented by stock options, SARs, or performance units, and neither the Company nor any affiliate shall be deemed to be a trustee of any amounts to be paid under any stock option, SAR or performance unit. Any liability of the Company or any affiliate to pay any grantee or Beneficiary with respect to an option, SAR or performance unit shall be based solely upon any contractual obligations created pursuant to the provisions of the Plan; no such obligations will be deemed to be secured by a pledge or encumbrance on any property of the Company or an affiliate. 26. GOVERNING LAW. The Plan shall be construed and its provisions enforced and administered in accordance with the laws of the State of Tennessee, except to the extent that such laws may be superseded by any federal law. On December 12, 1997, the Board of Directors approved an amendment to the Long Term Incentive Plan that increased the Shares available for grant thereunder from 6,000,000 to 7,500,000. In addition, the Board of Directors has approved certain other technical amendments. The proposal to approve the Company's 1993 Long Term Incentive Plan, as amended, will be acted upon by the Company's Shareholders at the annual meeting on May 20, 1998. 17 EX-23.1 3 CONSENT OF COOPERS & LYBRAND LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statement of Sofamor Danek Group, Inc. 1993 Long-Term Incentive Plan on Form S-8 (File No. 33-60840) of our report dated February 2, 1998, on our audits of the consolidated financial statements and consolidated financial statement schedule of Sofamor Danek Group, Inc. and Subsidiaries as of December 31, 1997 and 1996, and for the three years in the period ended December 31, 1997, which report is included as an exhibit to Form 10-K. Memphis, Tennessee COOPERS & LYBRAND L.L.P. March 23, 1998 2 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statement of Sofamor Danek Group, Inc. Incentive Stock Option Plan on Form S-8 (File No. 33-43614) of our report dated February 2, 1998, on our audits of the consolidated financial statements and consolidated financial statement schedule of Sofamor Danek Group, Inc. and Subsidiaries as of December 31, 1997 and 1996 and for the three years in the period ended December 31, 1997, which report is included as an exhibit to Form 10-K. COOPERS & LYBRAND L.L.P. Memphis, Tennessee March 23, 1998 3 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statement of Sofamor Danek Group, Inc. Employee Stock Purchase Plan on Form S-8 (File No. 33-43597) of our report dated February 2, 1998, on our audits of the consolidated financial statements and consolidated financial statement schedule of Sofamor Danek Group, Inc. and Subsidiaries as of December 31, 1997 and 1996 and for the three years in the period ended December 31, 1997, which report is included as an exhibit to Form 10-K. COOPERS & LYBRAND L.L.P. Memphis, Tennessee March 23, 1998 EX-99.1 4 AUDITED FINANCIAL STATEMENTS 1 Exhibit 99.1 REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders and Board of Directors Sofamor Danek Group, Inc. We have audited the consolidated balance sheets of Sofamor Danek Group, Inc. and Subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Sofamor Danek Group, Inc. and Subsidiaries as of December 31, 1997 and 1996, and the results of their consolidated operations and their cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. Memphis, Tennessee February 2, 1998 12 2 CONSOLIDATED BALANCE SHEETS SOFAMOR DANEK GROUP, INC. AND SUBSIDIARIES
(in thousands, except shares) December 31, - ------------------------------------------------------------------------------------------- 1997 1996 - ------------------------------------------------------------------------------------------- ASSETS - ------------------------------------------------------------------------------------------- Current assets: Cash and cash equivalents $ 2,729 $ 2,830 Short-term investments 36 111 Accounts receivable -- trade, less allowance for doubtful accounts of $1,812 and $1,589 at December 31, 1997 and 1996, respectively 88,209 70,031 Other receivables 29,374 15,813 Inventories 40,575 33,483 Loaner set inventories 21,511 14,123 Prepaid expenses 6,061 6,318 Prepaid income taxes 3,052 -- Current deferred income taxes 8,013 5,312 - ------------------------------------------------------------------------------------------- Total current assets 199,560 148,021 Property, plant and equipment Land 1,477 1,484 Buildings 10,905 11,261 Machinery and equipment 35,677 32,083 Automobiles 759 708 - ------------------------------------------------------------------------------------------- 48,818 45,536 Less accumulated depreciation (23,797) (20,026) - ------------------------------------------------------------------------------------------- 25,021 25,510 Investments 954 920 Intangible assets, net 97,048 83,426 Other assets 31,649 28,282 Non-current deferred income taxes 31,425 33,002 - ------------------------------------------------------------------------------------------- Total assets $ 385,657 $ 319,161 - ------------------------------------------------------------------------------------------- LIABILITIES Current liabilities: Notes payable and lines of credit $ 11,731 $ 50,207 Current maturities of long-term debt 7,586 16,687 Accounts payable 4,684 7,332 Income taxes payable 2,473 3,898 Accrued expenses 50,094 38,770 - ------------------------------------------------------------------------------------------- Total current liabilities 76,568 116,894 Long-term debt, less current maturities 60,650 12,300 Deferred income taxes -- 121 Product liability litigation, less current portion 33,970 48,000 Minority interest 3,171 2,020 Commitments and contingencies STOCKHOLDERS' EQUITY Preferred stock, no par value, 5,000,000 shares authorized, no shares outstanding Common stock, no par value, 150,000,000 shares authorized; 25,867,749 and 25,094,277 shares issued (including 685,908 shares held in treasury at December 31, 1997 and 1996, respectively) 74,014 52,994 Retained earnings 154,828 98,044 Cumulative translation adjustment (4,294) 2,542 - ------------------------------------------------------------------------------------------- 224,548 153,580 Less: Cost of common stock held in treasury (9,985) (9,985) Unearned compensation -- (54) Stockholder notes receivable (3,265) (3,715) - ------------------------------------------------------------------------------------------- Total stockholders' equity 211,298 139,826 - ------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 385,657 $ 319,161 - -------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial statements. 13 3 CONSOLIDATED STATEMENTS OF INCOME SOFAMOR DANEK GROUP, INC. AND SUBSIDIARIES
(in thousands, except per share data) for the years ended December 31, - ------------------------------------------------------------------------------------------------------------------ 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------ Revenues $ 312,902 $ 244,525 $ 188,799 Cost of goods sold 58,068 45,005 40,309 - ------------------------------------------------------------------------------------------------------------------ Gross profit 254,834 199,520 148,490 Operating expenses: Selling, general and administrative 145,414 116,729 89,847 Research and development 19,747 15,926 13,980 License agreement acquisition charge -- -- 45,337 Product liability litigation charge -- 50,000 -- - ------------------------------------------------------------------------------------------------------------------ Total operating expenses 165,161 182,655 149,164 - ------------------------------------------------------------------------------------------------------------------ Income (loss) from operations 89,673 16,865 (674) Other income 5 913 2,533 Interest expense (5,539) (3,744) (2,794) - ------------------------------------------------------------------------------------------------------------------ Income (loss) before provision (benefit) for and charge in lieu of income taxes and minority interest 84,139 14,034 (935) Provision (benefit) for and charge in lieu of income taxes 25,073 1,293 (6,319) - ------------------------------------------------------------------------------------------------------------------ Income before minority interest 59,066 12,741 5,384 Minority interest (2,282) (1,474) (417) - ------------------------------------------------------------------------------------------------------------------ Net income $ 56,784 $ 11,267 $ 4,967 Net income per share - diluted $ 2.12 $ 0.44 $ 0.20 Net income per share - basic $ 2.29 $ 0.46 $ 0.21 - ------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial statements. 14 4 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY SOFAMOR DANEK GROUP, INC. AND SUBSIDIARIES (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, 1995 23,754,804 $41,271 $ 81,810 $ 2,922 $(9,736) $(620) $(4,191) $111,456 Common stock issued 7,241 146 146 Exercise of stock options 231,653 2,481 2,481 Income tax benefit from vesting of restricted stock & 934 934 stock options exercised Unearned compensation amortization 299 299 Stockholders' notes 26 26 receivable Net income 4,967 4,967 Cumulative translation adjustment 2,620 2,620 - ---------------------------------------------------------------------------------------------------------------------------------- Balances, December 31, 1995 23,993,698 44,832 86,777 5,542 (9,736) (321) (4,165) 122,929 Common stock issued 4,702 137 5 142 Repurchase of common stock (7,775) (254) (254) Exercise of stock options 417,744 5,437 5,437 Income tax benefit from vesting of restricted stock & 2,588 2,588 stock options exercised Unearned compensation amortization 267 267 Stockholders' notes 450 450 receivable Net income 11,267 11,267 Cumulative translation adjustment (3,000) (3,000) - ---------------------------------------------------------------------------------------------------------------------------------- Balances, December 31, 1996 24,408,369 52,994 98,044 2,542 (9,985) (54) (3,715) 139,826 Common stock issued 10,000 593 593 Exercise of stock options 763,472 13,103 13,103 Income tax benefit from vesting of restricted stock & 7,324 7,324 stock options exercised Unearned compensation amortization 54 54 Stockholders' notes 450 450 receivable Net income 56,784 56,784 Cumulative translation adjustment (6,836) (6,836) - ---------------------------------------------------------------------------------------------------------------------------------- Balances, December 31, 1997 25,181,841 $74,014 $154,828 $(4,294) $(9,985) -- $(3,265) $211,298 ==================================================================================================================================
The accompanying notes are an integral part of the consolidated financial statements. 15 5 CONSOLIDATED STATEMENTS OF CASH FLOWS SOFAMOR DANEK GROUP, INC. AND SUBSIDIARIES
(in thousands) for the years ended December 31, - ---------------------------------------------------------------------------------------------------------------- 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 56,784 $ 11,267 $ 4,967 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 16,629 10,374 7,857 Provision for doubtful accounts receivable 504 705 366 Deferred income tax benefit (1,710) (18,678) (15,955) License agreement acquisition charge -- -- 45,215 Loss on disposal of equipment 94 94 6 Equity loss in unconsolidated affiliate -- 49 -- Minority interest 2,282 1,474 417 Changes in assets and liabilities, net of acquisitions: Accounts receivable (25,007) (19,606) (12,456) Other receivables (12,794) (6,968) (6,515) Inventories (17,489) (9,777) 2,867 Prepaid expenses 77 (1,142) (2,130) Prepaid income taxes (3,054) 2,647 902 Other assets (3,328) (26,709) (1,819) Accounts payable (2,120) (357) 2,006 Accrued income taxes 6,349 6,186 1,440 Accrued expenses 6,206 13,353 3,553 Product liability litigation (7,424) 48,000 -- - ---------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 15,999 10,912 30,721 - ---------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Purchase of short-term investments (347) (116) (18,284) Proceeds from maturities of short-term investments 405 1,899 17,633 Proceeds from sale of equipment 774 34 19 Payments for purchase of property, plant and equipment (10,293) (7,110) (4,604) Purchase of intangible assets (22,746) (18,538) (8,893) Increase in notes receivable, other (1,716) -- (27) Repayments of notes receivable, other 358 85 102 Acquisitions, net of cash acquired (1,420) (33,953) -- Payments for investment -- -- (2,585) Investment in unconsolidated affiliates (146) -- -- Purchase of minority interest (483) (1,965) -- - ---------------------------------------------------------------------------------------------------------------- Net cash used by investing activities (35,614) (59,664) (16,639) - ---------------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Increase in short-term borrowings 36,243 43,839 3,146 Proceeds from long-term debt 19,678 871 172 Repayment of long-term debt (52,438) (10,353) (12,954) Repayment of stockholders' notes receivable 450 450 26 Proceeds from issuance of common stock 13,103 5,574 2,627 Capital contribution by minority shareholders 148 489 -- - ---------------------------------------------------------------------------------------------------------------- Net cash provided (used) by financing activities 17,184 40,870 (6,983) - ----------------------------------------------------------------------------------------------------------------
16 6 CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) SOFAMOR DANEK GROUP, INC. AND SUBSIDIARIES
(in thousands) for the years ended December 31, - ------------------------------------------------------------------------------------------------------ 1997 1996 1995 - ------------------------------------------------------------------------------------------------------ Effect of exchange rate changes on cash 2,330 (618) (156) - ------------------------------------------------------------------------------------------------------ Increase (decrease) in cash and cash equivalents (101) (8,500) 6,943 Cash and cash equivalents, beginning of period 2,830 11,330 4,387 - ------------------------------------------------------------------------------------------------------ Cash and cash equivalents, end of period $ 2,729 $ 2,830 $ 11,330 - ------------------------------------------------------------------------------------------------------ Supplemental disclosure of cash flow information: Cash paid during the year for interest $ 5,901 $ 4,605 $ 1,103 Cash paid during the year for income taxes $ 23,116 $ 11,015 $ 7,204 - ------------------------------------------------------------------------------------------------------
Supplemental schedule of non-cash investing and financing activities: - - In 1997, 1996 and 1995, net income tax benefits of $7,324, $2,588 and $934, respectively, were realized by the Company as a result of certain common stock options being exercised and the vesting of certain restricted common stock, reducing accrued federal and state income taxes payable and increasing common stock. - - During 1995, the Company incurred a liability of $45,215 in connection with the acquisition of a license agreement. The accompanying notes are an integral part of the consolidated financial statements. 17 7 NOTE TO CONSOLIDATED FINANCIAL STATEMENTS SOFAMOR DANEK GROUP, INC. AND SUBSIDIARIES (IN THOUSANDS, EXCEPT FOR SHARES AND PER SHARE DATA) 1. ORGANIZATION, BASIS OF PRESENTATION AND NATURE OF OPERATIONS ORGANIZATION The consolidated financial statements of Sofamor Danek Group, Inc. (the "Company") include the accounts of the Company and its subsidiaries over which it maintains control. Minority interest represents minority shareholders' proportionate share of their equity ownership in the subsidiaries. All significant intercompany balances, transactions and profits have been eliminated in consolidation. BASIS OF PRESENTATION The consolidated financial statements are prepared on the basis of generally accepted accounting principles. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at December 31, 1997 and 1996 and reported amounts of revenues and expenses for each of the three years in the period ended December 31, 1997. Significant estimates include those made for product liability litigation, the allowance for doubtful accounts, inventory reserves for excess, obsolete and damaged products, and accumulated depreciation and amortization. Actual results could differ from those estimates made by management. NATURE OF OPERATIONS The Company is primarily involved in developing, manufacturing and marketing devices, instruments, computer-assisted visualization products and biomaterials used in the treatment of spinal and cranial disorders. The Company has subsidiaries located throughout North America, Europe, Asia and Australia and has manufacturing facilities located in Indiana, Florida, Colorado and France. Products are sold primarily to hospitals, either directly or through distributors. A significant portion of the Company's revenue is derived from its international operations. As a result, the Company's operations and financial results could be affected by international factors such as changes in foreign currency exchange rates or weak economic conditions in the international markets in which the Company distributes its products. In addition, inherent in the accompanying consolidated financial statements are certain risks and uncertainties. These risks and uncertainties include, but are not limited to: timely development and acceptance of new products, impact of competitive products, timely receipt of regulatory clearances required for new products, regulation of current products, potential impact on healthcare cost containment proposals on profitability, product 18 8 obsolescence, the availability of product liability insurance, disposition of certain litigation matters and cash balances in excess of federally insured limits. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CASH EQUIVALENTS The Company considers all highly liquid investments with a remaining maturity of three months or less when purchased to be cash equivalents. OTHER RECEIVABLES Other receivables consist primarily of amounts due from insurance carriers under the Company's product liability policies. INVENTORIES AND LOANER INVENTORIES Inventories and loaner inventories are stated at the lower of cost (determined principally by the first-in, first-out method) or market. The Company maintains a reserve for its estimate of excess, obsolete and damaged goods based on historical and forecasted usage. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment, including certain equipment acquired under capital leases, are stated at cost. Property and equipment are depreciated on a straight-line basis over their estimated useful lives which range from 3 to 40 years. Assets acquired under capital leases are amortized over the term of the underlying lease. Amortization expense of assets under capital leases and depreciation expense for the years ended December 31, 1997, 1996 and 1995 totaled $7,011, $5,449 and $4,366, respectively. Amounts expended for maintenance and repairs are charged to expense as incurred. Upon disposition, both the related cost and accumulated depreciation accounts are relieved and the related gain or loss is credited or charged to operations. INVESTMENTS Investments represent the Company's investments in unconsolidated affiliates. Investments over which the Company exerts significant influence, but does not control the financial and operational direction, are accounted for using the equity method of accounting. All other investments are recorded at cost. 19 9 REVENUE RECOGNITION The Company derives revenues from both sales of products and certain service functions. Sales are recognized primarily upon the shipment of products to the customer or distributor. The revenues from services are recognized at the time services are rendered. Concentration of credit risk with respect to trade accounts receivable is generally diversified due to the large number of entities comprising the Company's customer base. The Company performs ongoing credit evaluations and provides an allowance for potential credit losses against the portion of accounts receivable which is estimated to be uncollectible. Such losses have historically been within management's expectations. INTEREST RATE SWAP AGREEMENTS During 1997, the Company entered into certain interest rate swap agreements to reduce the impact of changes in interest rates on its floating rate debt. The agreements are contracts to exchange floating rate for fixed interest payments periodically over the life of the agreements without the exchange of the underlying notional amounts. The notional amounts of interest rate agreements are used to measure the interest to be received or paid and do not represent the amount of exposure to credit loss. The differential paid or received on interest rate agreements is recognized as an adjustment to interest expense. INCOME TAXES The provision for income taxes and corresponding balance sheet accounts are determined in accordance with SFAS No. 109, "Accounting for Income Taxes" ("SFAS 109"). Under SFAS 109, deferred tax liabilities and assets are determined based on temporary differences between the bases of certain assets and liabilities for income tax and financial reporting purposes. The deferred tax assets and liabilities are classified according to the financial statement classification of the assets and liabilities generating the differences. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. FOREIGN CURRENCY TRANSLATION All balance sheet accounts denominated in a foreign currency are translated into U.S. dollars at the current exchange rate as of the end of the accounting period. Income statement items are translated at weighted-average currency exchange rates. The Company will continue to be exposed to the effects of foreign currency translation adjustments. Gains and losses resulting from foreign currency transactions denominated in a currency other than the functional currency are included in net income and amounted to a net loss in 1997 of $2,012 and net gains during 1996 and 1995 of $632 and $827, respectively. Gains and losses relative to intercompany foreign currency transactions, for which settlement is 20 10 not planned or anticipated in the foreseeable future, are excluded from net income and reflected as cumulative translation adjustments. 3. INVENTORIES AND LOANER INVENTORIES Net inventories at December 31, 1997 and 1996 consist of the following:
----------------------------------------------------------------------- 1997 1996 ----------------------------------------------------------------------- Finished goods $35,029 $28,260 Work-in-process 3,405 2,961 Raw materials 2,141 2,262 ----------------------------------------------------------------------- Inventories $40,575 $33,483 ----------------------------------------------------------------------- Loaner set inventories $21,511 $14,123 -----------------------------------------------------------------------
Loaner set inventories consist of inventory items on loan or available to be loaned to customers. 4. ACQUISITIONS The Company completed one acquisition in 1997 and four acquisitions in 1996. These acquisitions have been accounted for utilizing the purchase method of accounting. Accordingly, the results of operations of the acquired businesses, which are not significant to the Company's consolidated results of operations, have been included in the accompanying consolidated financial statements from their respective dates of acquisition. In December 1997, the Company acquired certain net assets of MAN Ceramics GmbH, a privately held company located in Germany. MAN Ceramics designs, manufactures and markets carbon fiber interbody fusion devices. In December 1996, the Company acquired all of the capital stock of Colorado S.A., a privately held company located in France. Colorado, S.A. designs and markets certain spinal devices used in the surgical treatment of deformities and lumbar disorders of the spine. In July 1996, the Company acquired all of the capital stock of MedNext, Inc., a privately held company located in West Palm Beach, Florida that designs, manufactures and markets powered surgical instrumentation and accessories for surgical specialties. In July 1996, the Company acquired the net assets of TiMesh, Inc., a privately held company located in Las Vegas, Nevada. The net assets acquired are used in the design, manufacture, and marketing of titanium plates and titanium alloy screws. 21 11 In March 1995, the Company purchased 19.5% of the outstanding stock of Surgical Navigation Technologies, Inc. ("SNT"), a privately held company located in Broomfield, Colorado. In conjunction with the purchase, the Company acquired the exclusive worldwide license to manufacture and distribute SNT products relating to frameless stereotactic surgery in the spinal and neurological fields. In May 1996, the Company acquired the remaining 80.5% of the outstanding stock of SNT. The purchase agreements for two of these acquisitions contain provisions which provide for contingent payments to the former shareholders of each entity based upon certain calculations relative to revenues and earnings, as defined, through 1999. Such payments will be reflected as purchase price adjustments. The Company recorded adjustments to the purchase price of these acquisitions of $5,072 and $4,174, in 1997 and 1996, respectively. The Company is unable to determine whether such payments will be required for the years 1998 and 1999. The estimated fair values assigned to the assets and liabilities acquired were as follows:
------------------------------------------------------------------------------------ 1997 1996 ------------------------------------------------------------------------------------ Total consideration paid $ 1,420 $ 38,796* Fair value of liabilities assumed -- 6,935 Fair value of tangible and identifiable assets acquired (1,420) (11,528) ------------------------------------------------------------------------------------ Goodwill at acquisition date -- 34,203 Adjustments to purchase price 5,072 4,174 ------------------------------------------------------------------------------------ Additions to goodwill $ 5,072 $ 38,377 ------------------------------------------------------------------------------------
* Includes $2,585 paid in 1995. 5. INTANGIBLE ASSETS Identifiable intangible assets and goodwill are recorded and amortized over their estimated economic lives or periods of future benefit. The Company amortizes goodwill on a straight-line basis over the estimated period of benefit ranging from 15 to 20 years. Other identifiable purchased intangible assets are amortized on a straight-line basis over their estimated period of benefit ranging from 1 to 12 years. The lives established for these assets are a composite of many factors which are subject to change because of the nature of the Company's operations. This is particularly true for goodwill which reflects value attributable to the going concern nature of acquired businesses, the stability of their operations, market presence and reputation. Accordingly, the Company evaluates the continued appropriateness of these lives and recoverability of the carrying value of such assets based upon the latest available economic factors and circumstances, compared with the undiscounted cashflows associated with the underlying asset. Impairment of value, if any, is recognized in the period in which it is determined. The Company does not believe that there are any facts or circumstances indicating impairment of identifiable intangible assets and goodwill, at December 31, 1997. 22 12 A summary of intangible assets at December 31, is as follows:
---------------------------------------------------------------------------- 1997 1996 ---------------------------------------------------------------------------- Goodwill $ 46,125 $ 41,957 Patents 39,865 33,960 Trademarks 1,897 1,767 License agreements 12,062 9,009 Non-compete agreements 15,888 6,528 Other 1,378 3,770 ---------------------------------------------------------------------------- 117,215 96,991 Less: accumulated amortization (20,167) (13,565) ---------------------------------------------------------------------------- $ 97,048 $ 83,426 ----------------------------------------------------------------------------
6. LICENSE AGREEMENT ACQUISITION CHARGE During 1995, the Company entered into a license agreement (the "Agreement") with Genetics Institute, Inc. ("G.I.") to provide biological products for use in spinal applications. The Agreement provides exclusive North American distribution rights to the Company and requires annual payments through 1998 totaling $50,000. The Company charged $45,337 to operations during 1995 as purchased research and development. This charge represents the net present value of the total required payments pursuant to the Agreement plus related transaction costs. The liability recorded at December 31, 1997 represents the present value of the Company's remaining obligation under the terms of the Agreement. 7. FOREIGN OPERATIONS The Company operates in predominately one industry. A summary of the Company's operations by geographical areas for the three years ended December 31, 1997, is set forth below:
----------------------------------------------------------------------------------- 1997 1996 1995 ----------------------------------------------------------------------------------- REVENUES: North America $ 243,094 $ 189,831 $ 147,025 Europe/Asia 87,493 70,410 49,260 Eliminations (17,685) (15,716) (7,486) ----------------------------------------------------------------------------------- Total revenues $ 312,902 $ 244,525 $ 188,799 ----------------------------------------------------------------------------------- INCOME (LOSS) BEFORE TAXES AND MINORITY INTERESTS: North America $ 62,193 $ 1,244 $ (5,995) Europe/Asia 21,946 12,790 5,060 ----------------------------------------------------------------------------------- Total income (loss) before taxes and minority interests $ 84,139 $ 14,034 $ (935) -----------------------------------------------------------------------------------
23 13 Included in income (loss) before taxes and minority interest was a product liability litigation charge of $50,000 in North America during 1996 and a license agreement acquisition charge of $45,337 in North America during 1995.
------------------------------------------------------------------- 1997 1996 ------------------------------------------------------------------- IDENTIFIABLE ASSETS: North America $ 319,606 $ 270,697 Europe/Asia 85,184 67,421 Eliminations (21,898) (21,898) ------------------------------------------------------------------- Total identifiable assets 382,892 316,220 Corporate assets 2,765 2,941 ------------------------------------------------------------------- Total assets $ 385,657 $ 319,161 -------------------------------------------------------------------
Corporate assets are composed of cash, cash equivalents and short-term investments. The following amounts are included in the consolidated financial statements for international subsidiaries:
-------------------------------------------------------------------------- 1997 1996 1995 -------------------------------------------------------------------------- Current assets: $63,761 $52,240 $40,499 Property, plant and equipment,(net) 11,482 12,141 10,496 Intangible assets, (net) 12,921 6,303 5,909 Other assets, not itemized 1,985 2,629 1,561 -------------------------------------------------------------------------- 90,149 73,313 58,465 -------------------------------------------------------------------------- Current liabilities: 24,104 33,343 18,240 Net intercompany balance 25,661 8,430 8,853 Long-term liabilities 3,111 2,416 1,396 -------------------------------------------------------------------------- 52,876 44,189 28,489 -------------------------------------------------------------------------- Net assets $37,273 $29,124 $29,976 --------------------------------------------------------------------------
8. NOTES PAYABLE AND LINES OF CREDIT At December 31, 1997 and 1996, the Company had a loan agreement with a syndicate of U.S. banks, which provided for borrowings of up to $100,000 and $50,000, respectively, under a revolving line of credit. The Company can borrow funds under the loan agreement denominated in U.S. Dollars, French Francs, or Japanese Yen. U.S. Dollar, French Franc, and Japanese Yen borrowings under the line of credit bear interest at rates of 0.625% above each of the 30-day adjusted LIBOR rate (5.7188% at December 31, 1997), PIBOR rate (3.5664% at December 31, 1997) and TIBOR rate (1.0007% at December 31, 1997), respectively, and interest is payable monthly. The Company must also pay a quarterly fee of 0.125% per annum on the unused portion of the commitment. The loan agreement contains covenants which include certain restrictions, such as minimum levels of tangible net worth and maintenance of a certain debt service coverage ratio. The Company had the equivalent of $55,573 and $35,087 outstanding under the revolving line of credit at 24 14 December 31, 1997 and 1996, respectively. During July, 1997, the Company renegotiated its uncollateralized revolving line of credit. The revision extended the maturity of this instrument to July 2000. At December 31, 1997, the balance sheet of the Company reflected the outstanding balance as long-term debt. As of December 31, 1997, the Company had entered into interest rate swap agreements with certain financial institutions. The agreements effectively fix the interest rate on floating rate debt at a rate of 7.625% and 6.965% for notional principal amounts of $12,000 and $18,000, respectively. At December 31, 1997, the Company also had loan agreements with various international banks. The aggregate maximum borrowings available under these committed lines of credit were equivalent to approximately $15,925 and bear interest at rates ranging from 0.25% to 20.0%. The Company had approximately $11,731 and $15,120, outstanding under the revolving lines of credit and various other short-term borrowings at December 31, 1997 and 1996, respectively. The Company's weighted average interest rate on lines of credit and short-term borrowings was approximately 6.4% and 6.5% at December 31, 1997 and 1996, respectively. The Company has two stand-by letters of credit totaling $3,700. Amounts available under the Company's $100,000 revolving line of credit are reduced by the letters of credit. 9. LONG-TERM DEBT In connection with the G.I. Agreement, the Company has recorded long-term debt equal to the net present value of the future annual payments (calculated at inception based on the Company's implicit borrowing rate of 6.75%). Interest expense is recognized ratably over the term of the agreement. The Company recognized interest expense of $1,012, $1,880, and $1,650 relative to this agreement during 1997, 1996 and 1995, respectively. Long-term debt at December 31, 1997 and 1996 consists of:
----------------------------------------------------------------------------- 1997 1996 ----------------------------------------------------------------------------- Amounts payable under line of credit $55,573 - Present value of amounts due under the G.I. 7,026 $ 22,998 Agreement Subordinated note (convertible into 178,571 shares of common stock) 4,500 4,500 Various term loans with banks at fixed interest rates from 0% to 8% maturing from 1998 to 2001 with annual installments 301 639 ranging from $10 to $212 Capital lease obligations 836 850 ----------------------------------------------------------------------------- 68,236 28,987 Less current maturities (7,586) (16,687) ----------------------------------------------------------------------------- $60,650 $ 12,300 -----------------------------------------------------------------------------
25 15 At December 31, 1997, aggregate required principal payments of long-term debt, including capitalized lease obligations, are as follows: 1998 $ 7,586 1999 383 2000 55,751 2001 16 2002 - Thereafter 4,500 ------------------------------------------------------------------------- $ 68,236 -------------------------------------------------------------------------
26 16 10. MINORITY INTERESTS In February 1996, the Company established Kobayashi Sofamor Danek K.K. ("KSD") in Japan. The Company and Kobayashi Pharmaceutical Co., Ltd. ("KPC") each hold a 50% interest in KSD; however, the Company controls the financial and operational direction of KSD through voting control of the board of directors. KSD sells the Company's products exclusively to KPC. During 1996 and 1997, the Company made prepayments totaling $28,700 of commissions to KPC under a thirty year agreement. The Company is amortizing the balance based upon sales to KPC. The Company has recorded an aggregate of $27,763 and $26,338 included in prepaid expenses and other assets, which represents the unamortized portion of the prepayment at December 31, 1997 and 1996, respectively. In November 1996, the Company established Sofamor Danek Korea Co., Ltd. ("SDK") in Korea. The Company and Joint Medical Company ("JMC") each hold a 50% interest in SDK; however, the Company controls the financial and operational direction of SDK through voting control of the board of directors. SDK sells the Company's products primarily to JMC. During 1997 and 1996, in the aggregate, the Company recorded sales of $33,626 and $28,843, respectively, to KPC and JMC. At December 31, 1997 and 1996, the Company had total receivables, in the aggregate, of $11,320 and $8,498, respectively, from KPC and JMC. 11. INCOME TAXES The provision (benefit) for income taxes for the years ended December 31, is as follows:
-------------------------------------------------------------------------------- U.S. FEDERAL STATE FOREIGN TOTAL -------------------------------------------------------------------------------- 1997 Current $ 12,217 $ 678 $ 6,098 $18,993 Deferred 1,480 1,100 (3,824) (1,244) -------------------------------------------------------------------------------- 13,697 1,778 2,274 17,749 Charge in lieu of income taxes 7,093 231 - 7,324 -------------------------------------------------------------------------------- $ 20,790 $ 2,009 $ 2,274 $ 25,073 -------------------------------------------------------------------------------- 1996 Current $ 11,062 $ 1,387 $ 4,676 $ 17,125 Deferred (16,010) (2,837) 427 (18,420) -------------------------------------------------------------------------------- (4,948) (1,450) 5,103 (1,295) Charge in lieu of income taxes 2,239 349 - 2,588 -------------------------------------------------------------------------------- $ (2,709) $(1,101) $ 5,103 $ 1,293 -------------------------------------------------------------------------------- 1995 Current $7,587 $ 805 $ 670 $ 9,062 Deferred (16,141) (171) (3) (16,315) -------------------------------------------------------------------------------- (8,554) 634 667 (7,253) Charge in lieu of income taxes 794 140 - 934 -------------------------------------------------------------------------------- $ (7,760) $ 774 $ 667 $ (6,319) --------------------------------------------------------------------------------
27 17 Charges in lieu of income taxes were recorded by the Company as a result of certain common stock options being exercised and the vesting of certain restricted common stock. An analysis of the net deferred income tax asset at December 31, is as follows:
--------------------------------------------------------------------------------------- 1997 1996 --------------------------------------------------------------------------------------- Current deferred income tax assets: Accounts receivable $ 100 $ 356 Inventory 6,574 3,680 Other 1,339 1,276 --------------------------------------------------------------------------------------- Total current deferred income tax assets 8,013 5,312 --------------------------------------------------------------------------------------- Non-current deferred income tax assets: Product liability litigation 16,985 17,500 License agreement 12,959 14,017 Other 1,481 1,485 --------------------------------------------------------------------------------------- Total non-current deferred income tax assets 31,425 33,002 --------------------------------------------------------------------------------------- Total deferred income tax assets $ 39,438 $38,314 --------------------------------------------------------------------------------------- Non-current deferred income tax liabilities: Property, plant and equipment - $ 121 --------------------------------------------------------------------------------------- Total non-current deferred income tax liabilities $ - $ 121 ---------------------------------------------------------------------------------------
No valuation allowance was recorded since sufficient taxable income exists in available carryback periods to fully recognize these net deferred tax assets. A reconciliation of federal statutory and effective income tax rates is as follows:
--------------------------------------------------------------------------- 1997 1996 1995 --------------------------------------------------------------------------- Statutory U.S. federal income tax rate 35.0% 35.0% 35.0% Effect of: Foreign operations (5.8) (12.3) 732.7 State income taxes, net of income 1.3 (7.3) (46.2) tax benefit Tax credits (0.7) (2.0) 20.5 Nondeductible amortization 0.6 (4.2) - Other, net (0.6) - (66.2) --------------------------------------------------------------------------- Effective rate 29.8% 9.2% 675.8% ---------------------------------------------------------------------------
12. RELATED PARTY TRANSACTIONS At December 31, 1995, the Company had loans of $4,165 to the Company's Chairman and Chief Executive Officer ("Chairman") for the purchase of common stock of the Company and for personal income taxes resulting from the exercise of common stock options and the 28 18 vesting of certain restricted stock. Interest was charged at the applicable short-term federal rates as prescribed by the Internal Revenue Service and was due annually. During 1996, the Company's Board of Directors approved an amendment to the Chairman's loan forgiveness arrangements providing for forgiveness of the loans and the related compensation expense in equal increments beginning in 1996 through 2005 and for paying all future applicable taxes and interest on the loans. This forgiveness is conditional upon the Chairman remaining continuously employed by the Company for the next ten years and certain performance criteria. In the event of a change in control of the Company, the loans are immediately forgiven. The balance of the loans at December 31, 1997 and 1996 was $3,265 and $3,715, respectively. The loans are collateralized by 200,000 shares of common stock. 13. COMMITMENTS AND CONTINGENCIES The Company and its subsidiaries lease certain equipment and facilities under non-cancelable operating leases expiring in 2008. The future annual minimum rent payments under these leases at December 31, 1997 are as follows:
------------------------------------------------------------------------ YEAR ------------------------------------------------------------------------ 1998 $ 2,754 1999 2,334 2000 1,097 2001 1,049 2002 1,016 Thereafter 4,850 ------------------------------------------------------------------------ $ 13,100 ------------------------------------------------------------------------
Rent expense for 1997, 1996 and 1995, including month-to-month leases, was approximately $2,975, $1,914 and $903, respectively. The Company has agreements with certain entities which provide the Company the rights to manufacture and market certain spinal system products developed and patented by these entities. The agreements generally provide for royalty payments ranging from 1% to 10% of the net selling prices (as defined by the agreements) of all such products sold or for required royalty payments based on a predefined fee. These agreements are in force as long as the Company sells the related products. Royalty expense was $9,134, $6,768 and $5,907 in 1997, 1996 and 1995, respectively. In 1996, the IRS began an examination of the Company's federal income tax returns. The years under examination are 1993, 1994 and 1995. Management believes that the resolution of any issues that may be developed as a result of the examination will not have a significant impact on the Company's results of operations or financial condition. 29 19 14. LITIGATION The Company is involved from time to time in litigation on various matters which are routine to the conduct of this business, including product liability and intellectual property cases. PRODUCT LIABILITY LITIGATION Beginning in 1994, the Company and other spinal implant manufacturers were named as defendants in a number of product liability lawsuits brought in various federal and state courts around the country. These lawsuits allege that plaintiffs were injured by spinal implants manufactured by the Company and others. The essence of the plaintiff's claims appears to be that the Company (including Sofamor and its former U.S. distributor) marketed some of its spinal systems for pedicle fixation in contravention of FDA rules and regulations (governing marketing and labeling of medical devices), that pedicle fixation has not been proven safe and effective in the context of FDA labeling standards, that some or all of the spinal systems are defectively designed and manufactured and that plaintiffs have suffered a variety of injuries as a result of their physicians' use of such systems in pedicle fixation. The Company has also been named as a defendant in a number of lawsuits instituted by plaintiffs who have received spinal implants manufactured by other manufacturers and in which the Company is alleged to have participated in a conspiracy among doctors, manufacturers, hospitals, teaching institutions, professional societies and others to promote, in violation of applicable law, the use of spinal implants. In a number of cases, plaintiffs have sought to proceed as representatives of classes of spinal implant recipients. All efforts to obtain class certification have been denied or withdrawn, except with respect to a class-action settlement entered into between the plaintiffs and another spinal implant manufacturer, AcroMed Corporation (see below under the heading entitled "AcroMed Corporation Settlement"). Some plaintiffs have filed individual lawsuits, whereas other lawsuits list multiple plaintiffs and, in certain instances, multiple lawsuits have been filed on behalf of the same individual plaintiffs. Plaintiffs typically seek relief in the form of monetary damages, often in unspecified amounts. Many of the plaintiffs only allege as monetary damage an amount in excess of the jurisdictional minimum for the court in which the case has been filed. A few suits also name as defendants various officers and directors of the Company. As of December 31, 1997, approximately 2,800 plaintiffs were joined in lawsuits against the Company. The Company is also named as a defendant of lawsuits involving about 2,600 claimants where the Company is alleged to have conspired with competitors and others illegally to promote the use of spinal implant systems. The Company believes that it has defenses, including, without limitation, defenses based upon the failure of a cause of action to exist where no malfunction of the implant has occurred or the plaintiff has suffered no injury attributable to the Company's product, the expiration of the applicable statute of limitations and the learned intermediary defense. The 30 20 Company has asserted and will continue to assert these defenses primarily through the filing of dispositive motions. The Company believes that all product liability lawsuits currently pending against it are without merit and will continue to defend against them vigorously. FEDERAL MULTIDISTRICT LITIGATION (MDL 1014) On August 4, 1994, the Federal Judicial Panel for Multidistrict Litigation ordered all federal court lawsuits to be transferred to and consolidated for pretrial proceedings, including the determination of class certification, in the United States District Court for the Easter District of Pennsylvania in Philadelphia (the "Multidistrict Litigation"). Lawsuits filed in federal court after August 4, 1994 have also been transferred to and consolidated in the Multidistrict Litigation in the Easter District of Pennsylvania. In addition, a number of lawsuits filed in state courts around the country were removed to federal courts and then transferred into the Multidistrict Litigation. On February 22, 1995, Chief Judge Emeritus, Louis C. Bechtle, denied class certification. A large number of plaintiffs filed individual lawsuits as a result of the denial of class certification. In some instances, lawsuits that had been removed and transferred into the Multidistrict Litigation have been remanded to the state courts in which they were filed because there was no federal court jurisdiction. As of December 31, 1997, the Company is a defendant in approximately 920 individual claims and 1,065 conspiracy claims consolidated in the Multidistrict Litigation. On April 16, 1997, Judge Bechtle dismissed conspiracy claims alleging fraud on the FDA, but deferred the remaining conspiracy claims for later consideration by the federal trial courts to whom the cases will be remanded for trial. Discovery has been completed in a number of the federal court cases and is continuing in the remainder. A small number of cases have been transferred to the federal courts in which they were filed for further proceedings and trial. Judge Bechtle has begun the process of transferring the remaining federal court cases to various federal courts throughout the United States. As of December 31, 1997, the Federal Judicial Panel on Multidistrict Litigation ordered the remand of approximately 210 cases to transferor courts for further proceedings. It is not now possible to determine when the first federal court cases will be tried. STATE COURT LITIGATION A number of cases filed in state courts were not eligible for removal and transfer into the Multidistrict Litigation. As of December 31, 1997, there were approximately 1,800 individual claims pending against the Company in several courts around the country, principally in Tennessee, Oklahoma, Texas and Pennsylvania. In addition, there were approximately 1,600 conspiracy claims pending in state courts. Approximately 1,550 plaintiffs who had joined together in several complaints which had been removed to the Multidistrict Litigation proceedings have had their cases remanded to the state court in Memphis, Tennessee, where they were originally filed when it was 31 21 determined that the federal court lacked jurisdiction over their claims. The presiding state court judge in Memphis has established a case management plan which calls for the preparation of eight representative cases for preparation and trial. Discovery is proceeding in all remaining state court cases. Some state cases have been given trial dates in 1998. It is anticipated that a number of other state court cases around the country may be scheduled for trial in 1998, although delays in trial dates are common. Trials in the Memphis proceedings are scheduled to begin in 1998. ACROMED CORPORATION SETTLEMENT In December 1996, AcroMed Corporation ("AcroMed"), a spinal implant manufacturer and a defendant in many of the cases pending in the Multidistrict Litigation, and the Plaintiff's Legal Committee in the Multidistrict Litigation announced that they had entered into a conditional settlement regarding all product liability claims involving the use of AcroMed devices to achieve pedicular fixation with screws in spinal fusion surgery. Under the terms of the settlement, AcroMed will establish a settlement fund consisting of $100 million in cash plus the proceeds of its product liability insurance policies. In January 1997, the parties submitted a formal class settlement agreement and related documentation for approval by Judge Bechtle. By order dated October 17, 1997, Judge Bechtle certified the proposed settlement class and approved the proposed settlement. All federal and court proceedings involving AcroMed devices have been stayed pending final jurisdictional consideration of the proposed settlement. INSURANCE Several insurance carriers have asserted reservation of rights concerning the scope and timing of the Company's remaining insurance coverage, but have not denied insurance coverage by the Company. Three of the carriers, Royal Surplus Lines Insurance Company ("Royal"), Steadfast Insurance Company ("Steadfast") and Agricultural Excess and Surplus Insurance Company ("Agricultural"), have each filed declaratory judgment actions against the Company seeking clarification of their rights and obligations, if any, under their respective policies. Neither Royal nor Agricultural has paid amounts due to the Company; Steadfast has paid only a portion of the amounts due to the Company. The Royal and Steadfast lawsuits are pending in the United States District Court for the Western District of Tennessee in Memphis. The Agricultural lawsuit is pending in the United States District Court for the Southern District of Ohio in Cincinnati. The Company believes that the receivables are recoverable under the terms of the Royal, Steadfast and Agricultural policies. The Company has filed an answer and counterclaim in the Royal litigation and a motion seeking the interim payment of the Company's defense costs. The Company has filed an answer and counterclaim in the Steadfast litigation and intends to file an answer and counterclaim in the Agricultural litigation. These litigations are in the preliminary stages. The Company believes that Royal's, Steadfast's and Agricultural's claims are without merit and will defend against them vigorously. 32 22 As is common in the insurance industry, the Company's insurance policies covering product liability claims must be renewed annually. Although the Company has been able to obtain insurance relating to product liability claims at a cost and on other terms and conditions that are acceptable to the Company, there can be no assurance that in the future it will be able to do so. On January 6, 1997, the Company announced that its 1996 financial results would include a pre-tax charge of $50 million relating to costs associated with the product liability litigation described above. The charge, which is reflected in the Company's 1996 financial statements, covers the reasonable foreseeable costs that the Company was positioned in late December 1996 to estimate because the litigation had progressed and because changes in the fourth quarter of 1996 had occurred in facts and circumstances relating to the litigation. Among the changed facts and circumstances were the announcement of the AcroMed settlement described above, the likelihood that the litigation will continue for several years, in part, due to the additional financial resources provided to the plaintiff's attorneys as a result of the AcroMed settlement, the absence of AcroMed as a member of the joint defense group, the status of the Company's insurance described above and the continuing absence of dispositive rulings relating to the Company's defense motions. While it is not possible to accurately predict the outcome of litigation, the accrued liability which remained on the Company's consolidated balance sheet at December 31, 1997 represents the Company's best judgment of the probable reasonable costs (in excess of amount of insurance the Company believes are recoverable) to defend and conclude the lawsuits based on the facts and circumstances currently existing. The costs provided for in the accrued liability include, but are not limited to, legal fees paid or anticipated to be paid and other costs related to the Company's defense and conclusion of these matters. The actual costs to the Company could differ from the estimated charge and will be dependent upon a number of factors that will not be known for some time, including, among other things, the resolution of defense motions and the extent of further discovery. Although an adverse resolution of lawsuits could have a material effect on the Company's results of operations and cash flows in future periods, the Company does not believe that these matters will in the future have a material adverse effect on its consolidated financial position. The Company is unable to predict the ultimate outcome or the financial impact of the product liability litigation. SECURITIES LAWS ACTIONS Beginning in April 1994, the Company and four of its officers and directors were named in five shareholder lawsuits filed in the United States District Court in Memphis, Tennessee. Four of the lawsuits purported to be class actions. All of the lawsuits were consolidated into one case in the United States District Court in Memphis through an amended complaint which added four new individual defendants who are either current or former directors of the Company. The lawsuit alleges that the defendants made false and misleading statements and failed to disclose material facts to the investing public and seeks 33 23 money damages. The alleged securities law violations are based on the claim that the defendants failed to disclose that Company sold its products illicitly, illegitimately and improperly and to timely disclose facts concerning the termination of the former U.S. distributor of Sofamor products, National Medical Specialties, Inc. ("NMS"). The allegations relating to illicit and illegitimate sales of product are, for the most part, copies from product liability complaints filed against the Company and other manufacturers currently being coordinated in improper sales related to one of the Company's selling programs which has been publicly disclosed since May 1991. The allegations concerning NMS relate to the termination of the NMS distribution agreement covering Sofamor products in the United States. On October 3, 1995, the United States District Court Judge in Memphis dismissed with prejudice the entire case against the Company and each of the individual defendants. The plaintiffs appealed the dismissal to the United States Court of Appeals for the Sixth Circuit. On August 14, 1997, the Court of Appeals affirmed the dismissal of the plaintiffs' complaint. The Court of Appeals denied the plaintiffs' request for reconsideration on October 9, 1997. On January 6, 1998, the plaintiffs filed a petition for certiorari in the United States Supreme Court. The Company does not believe the Securities Laws Actions will have a material adverse effect on its consolidated financial position, results of operations or cash flows because of, among other reasons, the facts and circumstances existing with respect to each action, the Company's belief that these actions are without merit, certain defenses available to the Company and the availability of insurance in the Securities Laws Actions. 15. STOCK OPTION AND RESTRICTED STOCK PLANS In 1990, the Company adopted an incentive stock option plan (the "1990 Plan") for certain key employees covering 1,475,000 shares of common stock, a non-qualified stock option plan for distributors and consultants (the "Distributor and Consultant Plan") covering 225,000 shares of common stock, and a restricted stock plan covering 148,450 shares of common stock. The number of shares covered under the 1990 Plan was subsequently reduced to 675,000 on June 21, 1993. During 1996, the Board of Directors proposed an amendment to the 1990 Plan to decrease the number of shares of the common stock available under the Plan by 61,642. Under the Distributor and Consultant Plan, the exercise price may not be less than $2.22 per share. Options have a maximum term of ten years from the date of the option grant. During 1995, the number of shares of common stock covered was increased to 625,000. In February 1991, the Company adopted a stock option plan for certain directors of the Company ("Directors' Plan"). In December 1992, the Company adopted the 1993 long-term incentive plan (the "Long-Term Incentive Plan") for certain directors and key employees covering 500,000 shares of common stock. The number of shares of common stock reserved under the Long-Term Incentive Plan was increased to 800,000 in 1993, to 2,500,000 in 1994, to 3,500,000 in 34 24 1995 and to 6,000,000 in 1997. Awards may be in the form of stock options to purchase shares, stock appreciation rights, performance units, restricted stock or any combination of the above. Options have a maximum term of ten years from the date of the option grant. Under the Long-Term Incentive Plan, the exercise price shall be determined by the Company, except that the exercise price may not be less than the market price at the date of the option grant for any incentive stock options awarded. During 1997, the Board of Directors proposed an amendment to the Company's Long-Term Incentive Plan to increase the number of shares of the common stock available under the Plan by 1,500,000, contingent upon approval by the Company's shareholders. Activity under all of the stock option plans, including the 1,500,000 shares of common stock approved by the Board of Directors in 1997, for the years ended December 31, 1997, 1996, and 1995 is summarized as follows:
- ----------------------------------------------------------------------------------------------------------------- 1997 1996 1995 ------------------------- ------------------------ ------------------------ Weighted Weighted Weighted Average Average Average Option Exercise Option Exercise Option Exercise Shares Price Shares Price Shares Price - ----------------------------------------------------------------------------------------------------------------- Shares under option at beginning of year 4,295,372 $18.80 3,597,939 $16.18 2,661,120 $13.96 Granted 1,965,800 $44.05 1,621,150 $25.82 1,453,700 $18.93 Exercised (754,771) $16.70 (417,744) $13.02 (231,653) $10.73 Canceled (201,640) $21.00 (505,973) $27.26 (285,228) $13.94 ------------- ------------- ----------- Shares under option at end of year 5,304,761 $28.38 4,295,372 $18.80 3,597,939 $16.18 - ----------------------------------------------------------------------------------------------------------------- Shares under option exercisable at end of year 1,380,345 1,175,832 863,739 Shares available for future grant 1,786,307 2,057,068 733,887 - -----------------------------------------------------------------------------------------------------------------
Additional information regarding stock options outstanding at December 31, 1997 is shown below:
OUTSTANDING OPTIONS EXERCISEABLE OPTIONS ---------------------------------------------------------------------- --------------------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE OPTION PRICE OPTION EXERCISE REMAINING OPTION EXERCISE RANGE SHARES PRICE TERM SHARES PRICE --------------------- ------------- --------- -------------- ------------- ---------------- $3.50 - $15.00 1,134,399 $12.73 6.4 679,339 $12.66 $15.01 - $25.00 1,529,994 $20.13 7.4 557,941 $19.65 $25.01 - $35.00 678,568 $27.26 8.5 115,065 $27.08 $35.01 - $45.00 886,600 $37.04 9.1 28,000 $37.50 $45.01 - $55.00 858,700 $48.09 9.7 - - $55.01 - $65.00 216,500 $58.46 10.0 - -
35 25 The Company applies APB Opinion No. 25 and related Interpretations in accounting for its plans. During 1995, the Financial Accounting Standards Board issued Statement No. 123, "Accounting for Stock-Based Compensation" ("FAS 123") changing the methods for recognition of cost on plans similar to those of the Company. Adoption of the accounting provisions of FAS 123 is optional; however, proforma disclosures as if the Company adopted the cost recognition requirements under FAS 123 is presented below:
- ----------------------------------------------------------------------------------------------------------- 1997 1996 1995 --------------------- --------------------- --------------------- AS AS AS REPORTED PROFORMA REPORTED PROFORMA REPORTED PROFORMA - ------------------------------- -------- ---------- -------- ---------- -------- ---------- Net income $56,784 $50,586 $ 11,267 $ 8,726 $ 4,967 $ 4,063 Net income per share - diluted $ 2.12 $ 1.89 $ 0.44 $ 0.34 $ 0.20 $ 0.16
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants in 1997: dividend yield of 0%, expected volatility of 40.0%, risk-free interest rate of 6.1%, and expected lives of 5.0 years; 1996: dividend yield of 0%, expected volatility of 44.4%, risk-free interest rate of 6.2%, and expected lives of 4.2 years, 1995: dividend yield of 0%, expected volatility of 44.4%, risk-free interest rate of 6.3%, and expected lives of 4.2 years. The weighted average fair value of options at grant date were $19.65, $12.59 and $8.20 in 1997, 1996 and 1995, respectively. The effects of applying FAS 123 in this proforma disclosure are not indicative of future amounts. FAS 123 does not apply to awards prior to 1995, and additional awards in future years are anticipated. 16. NET INCOME PER COMMON SHARE In February 1997, the Financial Accounting Standards Board issued Statement No. 128 ("FAS 128"). This statement establishes standards for computing and presenting earnings per share ("EPS"). Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. FAS 128 requires restatement of all prior-period EPS data presented. Potential common stock is in the form of stock options which have an effect on 1997, 1996 and 1995 diluted net income per common share calculations. Potential common stock also includes assumed converted debt securities. For the years ended December 31, 1997, 1996 and 1995, net income was adjusted by $125, $124 and $115, respectively, to calculate EPS. 36 26 This adjustment represented the interest charges, net of taxes, from convertible debt which was assumed to be converted for the weighted average number of shares calculation. The following table presents information necessary to calculate diluted EPS for the years ended December 31, 1997, 1996 and 1995: 37 27
------------------------------------------------------------------------------------ 1997 1996 1995 ------------------------------------------------------------------------------------ Diluted: Weighted average shares outstanding 24,796,630 24,284,005 23,846,242 Shares equivalents 1,986,821 1,762,442 1,369,363 ------------------------------------------------------------------------------------ 26,783,451 26,046,447 25,215,605 ------------------------------------------------------------------------------------
17. ACCRUED EXPENSES Accrued expenses at December 31, 1997 and 1996 consist of the following:
------------------------------------------------------------------------------------ 1997 1996 ------------------------------------------------------------------------------------ Amounts due to suppliers $ 1,820 $ 2,045 Commissions 5,510 5,001 Payroll, benefits, and related taxes 12,412 12,493 Royalties 3,727 2,288 Amount due to former shareholders of acquired companies 5,072 4,174 Interest 656 1,018 Product liability litigation 8,606 2,000 Legal 2,907 2,226 Other 9,384 7,525 ------------------------------------------------------------------------------------ $ 50,094 $ 38,770 ------------------------------------------------------------------------------------
18. EMPLOYEE BENEFIT PLANS In January 1990, the Company adopted an employee savings plan under Section 401(k) of the Internal Revenue Code. This plan covers all full-time employees that are 21 years of age and have completed at least six months of continuous service with the Company. In 1995, the Company increased its maximum matching contribution to equal 100% of the employee's first 3% contributed and 50% of the next 2%. These matching percentages are subject to revision at the discretion of the Company's Board of Directors. Company contributions generally vest at 20% per year beginning the end of the second year of service with the participants becoming fully vested in the sixth year of service. The amounts charged against income in 1997, 1996, and 1995 were $800, $477 and $385, respectively. In November 1991, the Company adopted an employee stock purchase plan ("ESPP") to provide employees the opportunity to purchase shares of common stock of the Company. The ESPP covers full-time employees (as defined by the ESPP) that have completed 6 months of employment. An aggregate of 60,000 of the Company's shares of common stock have been reserved for inclusion in the ESPP. The amount charged against income in 1997, 1996 and 1995 was $33, $22 and $14, respectively, which represented the Company's match of 15% of the employee's contribution. 38 28 19. DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts for cash, short-term investments, notes and other receivables, and notes and loans payable approximate fair value due to the short maturity of these instruments. The fair value of long-term debt is estimated based on current rates available to the Company for debt with similar remaining maturities or quoted market prices for the shares of stock to which the debt instrument may be converted, as applicable. The estimated fair value of the Company's financial instruments at December 31, 1997 and 1996 are as follows:
--------------------------------------------------------------------------------- DECEMBER 31, 1997 DECEMBER 31, 1996 ------------------- -------------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE --------------------------------------------------------------------------------- Cash and cash equivalents $ 2,729 $ 2,729 $ 2,830 $ 2,830 Short-term investments 36 36 111 111 Other receivables 29,374 29,374 15,813 15,813 Notes payable and lines of credit 11,731 11,731 50,207 50,207 Long-term debt 68,236 75,388 28,987 30,778
20. SUBSEQUENT EVENTS On January 26, 1998, the Company purchased Sofyc, S.A. ("Sofyc") for an aggregate of 2,806,080 privately placed shares of the Company's common stock, $1,000 in cash (less certain expenses relating to the repurchase), and the Company's agreement to repay certain outstanding loans of Sofyc equal to approximately $925. Sofyc is the personal holding company of the Cotrel family and owner of approximately 14% or 3,337,272 shares of the Company's common stock. As a result of the purchase of SOFYC, the outstanding shares of common stock of the Company will be reduced by 531,192 shares. In accordance with the purchase agreement, the Company filed a registration statement with the Securities and Exchange Commission relating to a proposed public offering of 1,600,000 shares of the common stock owned by the Cotrel family. The registration statement also includes a proposed public offering of up to 1,125,000 newly issued shares of common stock to be sold by the Company and 75,000 shares to be sold by a director of the Company. In addition, Sofamor Danek will grant to the underwriters an over-allotment option relating to a maximum of 420,000 shares of common stock. The Company expects to incur a foreign tax liability of approximately $10,500 in connection with exchange of the Sofyc shares which will result in an adjustment to equity by such amount. 39 29 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, - ----------------------------------- 1997 $1,589 $504 $(199) (1) $(82) $1,812 1996 1,555 705 (698) (1) 27 1,589 1995 1,654 318 (704) (1) 287 1,555
(1) Amounts written off during the year (2) Foreign currency translation adjustment 41 30 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS Our report on the consolidated financial statements of Sofamor Danek Group, Inc. and subsidiaries is included in Exhibit 99.1 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 contained in Exhibit 99.1 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 February 2, 1998 -----END PRIVACY-ENHANCED MESSAGE-----