-----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, Sm75Eo9dzUpQsCilknlwwc6emePCWJtj/f4xWKinOs3KR+bmL6D6yI4cdRkbfhuu OHxTpv3hMSoIoQ1rghyEzQ== 0000912057-97-027326.txt : 19970813 0000912057-97-027326.hdr.sgml : 19970813 ACCESSION NUMBER: 0000912057-97-027326 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970812 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SPINE TECH INC CENTRAL INDEX KEY: 0000889842 STANDARD INDUSTRIAL CLASSIFICATION: ORTHOPEDIC, PROSTHETIC & SURGICAL APPLIANCES & SUPPLIES [3842] IRS NUMBER: 061258314 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-26116 FILM NUMBER: 97657377 BUSINESS ADDRESS: STREET 1: 7375 BUSH LAKE ROAD CITY: MINNEAPOLIS STATE: MN ZIP: 55439 BUSINESS PHONE: 6126279631 MAIL ADDRESS: STREET 1: 7375 BUSH LAKE ROAD CITY: MINNEAPOOLIS STATE: MN ZIP: 55439 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarterly Period Ended JUNE 30, 1997 -------------- or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Transition Period From _______________ to _________________. Commission file number 0-26116 ---------- SPINE-TECH, INC. - ------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) MINNESOTA 06-1258314 - ------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 7375 BUSH LAKE ROAD MINNEAPOLIS, MINNESOTA 55439-2029 - ------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (612) 832-5600 - ------------------------------------------------------------------------------- (Registrant's telephone number, including area code) - ------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No -------- --------- As of AUGUST 8, 1997, there were issued and outstanding 10,156,216 shares of Common Stock, $.01 par value. PART I - FINANCIAL INFORMATION Item 1. Financial Statements SPINE-TECH, INC. CONDENSED BALANCE SHEETS
June 30, December 31, 1997 1996 ------------ ------------ ASSETS (Unaudited) (Note) Current assets: Cash and cash equivalents $ 1,970,537 $ 1,724,043 Short-term investments - Note C 18,196,505 9,674,222 Accounts receivable 7,246,696 3,150,981 Inventories - Note B 5,627,447 6,982,802 Deferred tax asset - 2,155,300 Interest receivable 179,549 221,178 Prepaid expenses 439,129 146,362 ------------ ------------ Total current assets 33,659,863 24,054,888 Land and building 5,236,847 5,049,315 Furniture and fixtures 724,111 704,857 Equipment 1,447,489 1,087,919 Accumulated depreciation (710,680) (373,299) ------------ ------------ 6,697,767 6,468,792 Investments - Note C 1,200,000 3,535,474 ------------ ------------ Total assets $ 41,557,630 $ 34,059,154 ------------ ------------ ------------ ------------ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 1,178,588 $ 567,490 Accrued clinical payments 100,709 41,850 Accrued royalties 957,834 365,272 Other accrued expenses 2,258,920 437,691 ------------ ------------ Total current liabilities 4,496,051 1,412,303 Commitments and contingencies -- -- Shareholders' equity: Common Stock, par value $.01 per share: authorized shares - 15,000,000. Issued and outstanding shares: December 31, 1996 - 9,939,055; June 30, 1997 - 10,103,636 101,036 99,391 Additional paid-in capital 35,382,578 35,108,809 Retained earnings (accumulated deficit) 1,577,965 (2,561,349) ------------ ------------ Total shareholders' equity 37,061,579 32,646,851 ------------ ------------ Total liabilities and shareholders' equity $ 41,557,630 $ 34,059,154 ------------ ------------ ------------ ------------
Note: The balance sheet at December 31, 1996 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. See notes to condensed financial statements. SPINE-TECH, INC. CONDENSED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended Six Months Ended June 30, June 30, ---------------------------- -------------------------- 1997 1996 1997 1996 ------------- ------------ ------------- ----------- Net sales $ 14,239,062 $ 1,502,047 $ 23,642,941 $ 2,947,469 Cost of goods sold 3,209,668 566,189 5,400,636 1,129,131 ------------- ------------ ------------- ----------- Gross profit 11,029,394 935,858 18,242,305 1,818,338 Operating expenses: Sales and marketing 4,163,055 788,844 7,464,477 1,336,593 General and administrative 1,328,756 654,317 2,814,289 1,325,454 Research and development 833,761 459,857 1,466,105 875,623 ------------- ------------ ------------- ----------- Total operating expenses 6,325,572 1,903,018 11,744,871 3,537,670 ------------- ------------ ------------- ----------- Operating income (loss) 4,703,822 (967,160) 6,497,434 (1,719,332) Interest income, net 214,496 381,703 404,881 778,871 ------------- ------------ ------------- ----------- Income (loss) before taxes 4,918,318 (585,457) 6,902,315 (940,461) Income tax expense 1,968,500 -- 2,763,000 -- ------------- ------------ ------------- ----------- Net income (loss) $ 2,949,818 $ (585,457) $ 4,139,315 $ (940,461) ------------- ------------ ------------- ----------- ------------- ------------ ------------- ----------- Net income (loss) per share $ 0.25 $ (0.06) $ 0.35 $ (0.10) Weighted average shares outstanding: Primary 11,740,783 9,824,959 11,646,506 9,765,828 Fully diluted 11,694,606 9,824,959 11,654,608 9,765,828
See notes to condensed financial statements. SPINE-TECH, INC. CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
Six Months Ended June 30, --------------------------- 1997 1996 ------------ ----------- OPERATING ACTIVITIES Net income (loss) $ 4,139,315 $ (940,461) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 337,380 159,286 Common Stock and stock options issued for consulting services 12,262 12,262 Changes in operating assets and liabilities: Accounts receivable (4,095,715) 1,097,209 Inventories 1,355,355 (3,223,536) Deferred tax asset 2,155,300 -- Interest receivable 41,629 (103,732) Prepaid expenses (292,767) (287,679) Accounts payable and accrued expenses 3,083,748 (285,607) ------------ ----------- Cash provided by (used in) in operating activities 6,736,507 (3,572,258) INVESTING ACTIVITIES Purchase of property and equipment (566,356) (480,833) (Purchase) maturities of investments (6,186,809) 2,940,429 ------------ ----------- Cash (used in) provided by investing activities (6,753,165) 2,459,596 FINANCING ACTIVITIES Proceeds from issuance of Common Stock -- -- Proceeds from stock options exercised 263,152 435,837 ------------ ----------- Cash provided by financing activities 263,152 435,837 ------------ ----------- Increase (decrease) in cash and cash equivalents 246,494 (676,825) Cash and cash equivalents at beginning of period 1,724,043 1,171,034 ------------ ----------- Cash and cash equivalents at end of period $ 1,970,537 $ 494,209 ------------ ----------- ------------ -----------
See notes to condensed financial statements. SPINE-TECH, INC. Notes to Condensed Financial Statements (Unaudited) June 30, 1997 Note A - Basis of Presentation The accompanying unaudited condensed financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six-month period ended June 30, 1997 are not necessarily indicative of the results that may be expected for the year ending December 31, 1997. For further information, refer to the financial statements and footnotes included in the Company's annual report on Form 10-K for the year ended December 31, 1996. Note B - Inventories The components of inventory consist of the following: June 30, December 31, 1997 1996 ----------- ------------- Raw material $ 82,019 38,653 Work in process 1,117,325 1,285,134 Finished products 4,428,103 5,659,015 ----------- ------------ $ 5,627,447 $ 6,982,802 ----------- ------------ ----------- ------------ Note C - Investments The amortized cost and estimated market value of investments are as follows:
Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value ------------ ---------- ---------- ------------ As of December 31, 1996: U.S. government obligations $ 3,525,974 $ 7,691 $ -- $ 3,533,665 Corporate debt securities 6,022,928 -- 66,288 5,956,640 Commercial paper 3,660,794 15,059 -- 3,765,853 ------------ ---------- ---------- ------------ $ 13,209,696 $ 22,750 $ 66,288 $ 13,166,158 ------------ ---------- ---------- ------------ ------------ ---------- ---------- ------------ As of June 30, 1997: U.S. government obligations $ 3,467,621 $ 10,954 $ -- $ 3,478,575 Corporate debt securities 3,168,908 -- 43,280 3,125,088 Commercial paper 12,759,976 67,004 -- 12,826,981 ------------ ---------- ---------- ------------ $ 19,396,505 $ 77,959 $ 43,280 $ 19,430,644 ------------ ---------- ---------- ------------ ------------ ---------- ---------- ------------
The amortized cost and estimated fair market value of investments by contractual maturity are shown below:
June 30, 1997 December 31, 1996 ---------------------------- ---------------------------- Estimated Estimated Amortized Market Amortized Market Cost Value Cost Value ------------ ------------ ------------ ------------ Due in one year or less $ 18,196,505 $ 18,230,644 $ 9,674,222 $ 9,645,727 Due after one year 1,200,000 1,200,000 3,535,474 3,520,431 ------------ ------------ ------------ ------------ $ 19,396,505 $ 19,430,644 $ 13,209,696 $ 13,166,158 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Note D - Net Income (Loss) Per Share The net income (loss) per share is computed using the weighted average number of shares of Common Stock and common stock equivalents, if dilutive, outstanding during the periods presented. In February 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings Per Share", which is required to be adopted on December 31, 1997. At that time, the Company will be required to change the method currently used to compute earnings per share and to restate all prior periods. Under the new requirements for calculating primary earnings per share, the dilutive effect of stock options will be excluded. The impact is expected to result in an increase in primary earnings per share for the second quarter ended June 30, 1997 and 1996 of $.04 and $.00 per share, respectively, and $.06 and $.00 per share for the six months ended June 30, 1997 and 1996, respectively. The impact of Statement 128 on the calculation of fully diluted earnings per share is not expected to be material. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Since commencing full-time operations in July 1991, the Company has been engaged in the design, development, manufacture and sale of spinal implants and instruments for the surgical treatment of degenerative disc disease and other spinal conditions. The Company's spinal implants are designed to facilitate fusion of spinal vertebrae in order to reduce spinal instability that can cause chronic, disabling back pain. A clinical trial of the Company's BAK-TM- Interbody Fusion System device began in April 1992 under an Investigational Device Exemption ("IDE") in the United States. Based upon data from the clinical trial, the Company submitted a Pre-Market Approval Application ("PMA") to the United States Food and Drug Administration (the "FDA"). On May 23, 1996, the Orthopaedic and Rehabilitation Devices Advisory Panel reviewed and recommended approval of the Company's PMA application for clearance to market the BAK Interbody Fusion System. On September 20, 1996, the Company received FDA approval to market the BAK Interbody Fusion System in the United States, and the Company commenced domestic commercial shipments of the BAK. In the domestic market, the Company sells BAK implants primarily through direct sales representatives. Currently, the Company has 37 direct sales representatives, eight clinical specialists and five regional sales managers, all of whom live in the geographic areas they service. In addition to these direct sales representatives, the Company uses independent sales agents in certain geographic areas (for example, Montana, Utah and Nevada are serviced by independent agents). All domestic sales whether accomplished by direct sales representatives or independent agents are made directly to hospitals. The Company has developed and is developing additional products which address degenerative disc disease and other spinal conditions. In addition to the BAK Interbody Fusion System, the Company has developed the BAK/C-TM- which is used in the cervical spine. Like the BAK, the BAK/C is subject to extensive clinical trials under a separate IDE from the FDA. The BAK/C clinical trial commenced during the first quarter of fiscal 1995. The BAK/C has been introduced into certain international markets. As international approvals are received, the BAK/C will be introduced into additional international markets. In May 1995, the Company introduced Cervi-Lok-Registered Trademark-, an anterior cervical implantable plate and screw system for use in the cervical spine, pursuant to a 510(k) clearance received from the FDA. While the product has been rolled-out on a nationwide basis, sales efforts have been minimal on this product since BAK commercial launch. International roll-out of Cervi-Lok began in the fourth quarter of fiscal 1995. In September 1993, the Company entered into an exclusive agreement with Smith & Nephew-Richards, Inc. ("Smith & Nephew") for the distribution of the BAK Interbody Fusion System outside of the United States as long as quarterly minimum purchases were made by Smith & Nephew from the Company. During the first quarter of 1996, Smith & Nephew informed the Company that they would not make their required minimum purchases under the contract. Based upon provisions in the agreement, the Company terminated Smith & Nephew's exclusive distribution rights. Under terms of the agreement, Smith & Nephew retained non-exclusive rights to distribute the BAK outside of the United States for a period of one year from notification of termination of exclusive rights. The Company has been appointing independent international distributors on a country by country basis to distribute the BAK product line. There can be no assurance that the Company will be successful in identifying and appointing independent international distributors who will be able to successfully sell the BAK product line. RESULTS OF OPERATIONS THREE MONTHS ENDED JUNE 30, 1997 AND JUNE 30, 1996 Net sales increased to $14.2 million for the three months ended June 30, 1997 from $1.5 million for the three months ended June 30, 1996. Net sales for the period were primarily affected by the previously discussed FDA approval to market the BAK in the United States. For the three months ended June 30, 1997, domestic BAK revenues accounted for 92% of net sales, as compared to 58% of net sales for the three months ended June 30, 1996. Total domestic revenues increased to $13.4 million for the three months ended June 30, 1997 from $1.1 million for the three months ended June 30, 1996. Total international revenues increased to $826,000 for the three months ended June 30, 1997 from $409,000 for the three months ended June 30, 1996. International sales for the period were primarily affected by increased BAK sales to an expanded distributor network. Gross profit increased to $11.0 million for the three months ended June 30, 1997 from $936,000 for the three months ended June 30, 1996. This increase was primarily due to the substantial increase in net sales for the second quarter of 1997 over the second quarter of 1996. As a percentage of net sales, gross profit was 77.5% for the three months ended June 30, 1997, as compared to 62.3% in the comparable period in 1996. This improvement is the direct result of the increased sales of the BAK implants as a percentage of total sales. Total operating expenses increased to $6.3 million for the three months ended June 30, 1997 from $1.9 million for the three months ended June 30, 1996. Sales and marketing expenses increased to $4.2 million for the three months ended June 30, 1997 from $789,000 for the three months ended June 30, 1996, decreasing as a percentage of net sales to 29.2%, as compared to 52.5% for the comparable period in 1996. Most of the increase was related to the establishment of a direct sales force in the United States, increased sales commissions to both direct sales representatives and independent sales agents, the cost of conducting surgeon BAK training programs and increased marketing efforts. General and administrative expenses increased to $1.3 million for the three months ended June 30, 1997 from $654,000 for the three months ended June 30, 1996, decreasing as percentage of net sales to 9.3%, as compared to 43.6% for the comparable period in 1996. Expense increases relate primarily to additional personnel needed to support increased sales activities. Research and development expenses increased to $834,000 for the three months ended June 30, 1997, from $460,000 for the three months ended June 30, 1996, decreasing as a percentage of net sales to 5.9%, as compared to 30.6% for the comparable period in 1996. Research and development expenses have increased due to the adding of additional personnel and increased spending on independent research projects. Interest income totaled $215,000 for the three months ended June 30, 1997, as compared to $382,000 for the three months ended June 30, 1996. The decrease is due to the reduced amount of funds available for short term investments during the three months ended June 30, 1997 resulting from the use of cash to fund working capital needs and capital purchases during the past twelve month period. SIX MONTHS ENDED JUNE 30, 1997 AND JUNE 30, 1996 Net sales increased to $23.6 million for the six months ended June 30, 1997 from $2.9 million for the six months ended June 30, 1996. Net sales for the period were primarily affected by the previously discussed FDA approval to market the BAK in the United States. For the six months ended June 30, 1997, domestic BAK revenues accounted for 91% of net sales, as compared to 55% of net sales for the six months ended June 30, 1996. Total domestic revenues increased to $22.2 million for the six months ended June 30, 1997 from $2.0 million for the six months ended June 30, 1996. Total international revenues increased to $1.4 million for the six months ended June 30, 1997 from $950,000 for the six months ended June 30, 1996. International sales for the period were primarily affected by increased BAK sales to an expanded distributor network. Gross profit increased to $18.2 million for the six months ended June 30, 1997 from $1.8 million for the six months ended June 30, 1996. This increase was primarily due to the substantial increase in net sales for the first six months of 1997 over the first six months of 1996. As a percentage of net sales, gross profit was 77.2% for the six months ended June 30, 1997, as compared to 61.7% in the comparable period in 1996. This improvement is the direct result of the increased sales of the BAK implants as a percentage of total sales. Total operating expenses increased to $11.7 million for the six months ended June 30, 1997 from $3.5 million for the six months ended June 30, 1996. Sales and marketing expenses increased to $7.5 million for the six months ended June 30, 1997 from $1.3 million the six months ended June 30, 1996, decreasing as a percentage of net sales to 31.6%, as compared to 45.3% for the comparable period in 1996. Most of the increase was related to the establishment of a direct sales force in the United States, increased sales commissions to both direct sales representatives and independent agents, the cost of conducting surgeon BAK training programs and increased marketing efforts. General and administrative expenses increased to $2.8 million for the six months ended June 30, 1997 from $1.3 million for the six months ended June 30, 1996, decreasing as percentage of net sales to 11.9%, as compared to 45% for the comparable period in 1996. Expense increases relate primarily to additional personnel needed to support increased sales activities. Research and development expenses increased to $1.5 million for the six months ended June 30, 1997, from $876,000 for the six months ended June 30, 1996, decreasing as a percentage of net sales to 6.2%, as compared to 29.7% for the comparable period in 1996. Interest income totaled $405,000 for the six months ended June 30, 1997, as compared to $779,000 for the quarter ended June 30, 1996. The decrease is due to the reduced amount of funds available for short term investments during the six months ended June 30, 1997 resulting from the use of cash to fund working capital needs and capital purchases during the past twelve month period. LIQUIDITY AND CAPITAL RESOURCES During the three months ended June 30, 1997, cash and cash equivalents increased by $246,000. Of this amount, $6.7 million was generated by operating activities, $263,000 provided by the exercise of stock options, while $566,000 was used to purchase property and equipment, and $6.2 million was used to purchase short-term investments. Until funds are needed for operating purposes, they have been invested primarily in short term U.S. government obligations and corporate debt securities. As of June 30, 1997, the Company had $19.4 million of these investments, of which $18.2 million mature in one year or less. The Company believes that its currently available cash and cash equivalents combined with additional cash flow from operations will be adequate to finance ongoing operations for the foreseeable future. The Company's future liquidity and capital requirements will depend on numerous factors, including FDA regulatory actions and continued domestic and international sales of its entire product line. PART II - OTHER INFORMATION Item 1. Legal Proceedings The medical device market is characterized by frequent and substantial intellectual property litigation. Intellectual property litigation is complex and expensive, and the outcome of such litigation is difficult to predict. The Company is not aware of any patent infringement charge or any violation of other proprietary rights claimed by any third party relating to the Company or the Company's products, except as set forth below. However, no assurance can be given that the Company or its products will not become the subject of such a claim in the future. Any future litigation could result in substantial expense to the Company and significant diversion of effort by its technical and management personnel. Litigation may also be necessary to enforce patents issued to the Company, to protect trade secrets or know-how owned by it or to determine the enforceability, scope and validity of the proprietary rights of others. An adverse determination in any such proceeding could subject the Company to significant liabilities to third parties, or require it to seek licenses from, and pay substantial royalties to, third parties. Furthermore, there can be no assurance that necessary licenses would be available to the Company on satisfactory terms, or at all. Accordingly, an adverse determination in a judicial or administrative proceeding or failure to obtain necessary licenses could prevent the Company from manufacturing and selling certain of its products, which would have a material adverse effect on its business, financial condition and results of operations. The Company is involved in litigation related to its license of the Karlin Technology from Dr. Michelson and Karlin, co-owners of the Karlin Technology. The litigation principally relates to the interpretation of Dr. Michelson's and Karlin's right to co-license the Karlin Technology to a third party and the inventorship of one of the Company's patents. In December 1993, Dr. Michelson and Karlin filed a complaint against the Company and Smith & Nephew Group, an entity under common control with Smith & Nephew, in United States District Court, Central District of California. In December 1994, the plaintiffs served the defendants with a second amended complaint (the "Complaint"). The Company filed an answer to the Complaint in January 1995 denying the material allegations and setting forth affirmative defenses. The Complaint alleged various causes of action, including tortious interference with prospective and contractual business relationships, unfair competition and breach of contract, and requested various types of relief, including money damages, injunctive relief and declaratory judgment. In addition, in the event the Company objected to the co-license of the Karlin Technology to a third party, the Complaint requested rescission of the license agreement. Danek, a competitor of the Company, is the other co-licensee of the Karlin Technology. The Company is not contesting the co-license of the Karlin Technology to Danek. Each of the claims relating to the Karlin Technology has been the subject of a dispositive motion resulting in an order by the court granting its dismissal in the Company's favor. On February 12, 1996, the court entered Judgment finding that the Company is the prevailing party on all counts of the Complaint, and on July 3, 1997, the Ninth Circuit Court of Appeals affirmed the Judgement. Michelson and Karlin have filed a petition for rehearing en banc. On June 19, 1995, the Company received a purported notice of termination of the Karlin license agreement based on alleged inadequacy in the reporting of the royalty payments due by the Company to Karlin under the license agreement. Karlin has claimed that the Company has therefore breached the license agreement. The Company denies, however, that it has breached the agreement. Under the terms of the agreement, the license agreement may not be terminated until after a final, non-appealable determination of the existence of the breach by a court of competent jurisdiction. The license agreement also provides for non-binding arbitration and the right of a breaching party to cure a preach by adopting the recommendation of the arbitrator. On September 15, 1995, the Company commenced a non-binding arbitration against Dr. Michelson and Karlin in Minneapolis before the American Arbitration Association asserting that purported termination of the license agreement is meritless and ineffective. Dr. Michelson and Karlin have taken the position in the arbitration that they do not intend to seek to enforce the purported termination. They also contend, however, that they may in the future terminate the license agreement if the royalty reports are determined to have been inadequate. Although the Company believes that a valid termination of the agreement will not be a remedy available to Karlin and Michelson, a determination against the Company could have a material adverse effect on the Company's business, financial condition and results of operations. On August 13, 1996, Karlin and Michelson filed an arbitration before the American Arbitration Association in Los Angeles. Karlin and Michelson seek in this arbitration (i) an award of royalties which they claim the Company has not paid, and (ii) a declaration that Dr. Michelson is the inventor of certain surgical methods used by or claimed to be invented by the Company, damages for failure to give Dr. Michelson inventive credit for these methods, and an order that the Company place corrective advertising to ameliorate the purported failure. After the Company objected to Los Angeles as the forum for this arbitration, the AAA transferred the arbitration to Minnesota so that it could be coordinated with the prior pending arbitration filed by the Company. Both arbitrations are currently pending before the AAA in Minnesota. No discovery has yet taken place and no hearing dates have been set. The Company and Karlin and Dr. Michelson are also in litigation in the United States District Court for the District of Minnesota concerning inventorship of U.S. Patent No. 5,489,307. Prior to the issuance of the patent to the Company, Dr. Michelson in the above-referenced California action asserted that he was the true inventor of the then pending patent application for the patent. This claim was dismissed for lack of a justifiable controversy. In the Minnesota action brought by the Company, Dr. Michelson filed a motion to dismiss for lack of personal jurisdiction which was denied. Karlin and Michelson then filed a motion to dismiss, transfer or stay the action, asserting that the action should be heard only in the United States District Court for the Central District of California. In April 1997, the Minnesota court denied the motions to dismiss or transfer, but granted the motion to stay pending the decision of the Ninth Circuit Court of Appeals: the stay is still in effect. On December 16, 1996, Karlin and Dr. Michelson filed an action against the Company in the United States District Court for the Central District of California. The complaint seeks (i) declaratory relief that Dr. Michelson is the true inventor and owner of the patent, or in the alternative, that the patent in invalid; (ii) unspecified damages and an injunction based upon the Company's acquisition and exploitation of the patent; (iii) unspecified damages and termination of the Karlin license agreement based upon numerous allegedly false representations made by the Company in connection with the entry into the License Agreement; (iv) unspecified damages for alleged disparagement of title in connection with the bilateral predistraction method and associated instruments specified in the patent; (v) unspecified damages for breach of fudiciary duty in connection with alleged failures by the Company to pay royalties due and the Company's conduct related to the patent; (vi) unspecified damages for misappropriation of trade secrets in connection with the application for and exploitation of the patent; and (vii) unspecified damages for statutory unfair competition in connection with the same alleged conduct. The complaint also seeks unspecified punitive damages. The Company has not yet responded to this complaint. Although the Company believes that neither a termination of the agreement nor substantial damages will be remedies available to Karlin and Dr. Michelson in this action, a determination against the Company could have a material adverse effect on its business, financial condition and results of operation. Surgical Dynamics, Inc., a competitor of the Company, has filed a complaint for declaratory judgment in the United States District Court for the Central District of California of patent invalidity, unenforceability and non-infringement against Karlin and Danek regarding the U.S. Patent No. 5,015,247, which is part of the Karlin Technology. Karlin and Danek have counterclaimed against Surgical Dynamics claiming patent infringement. On June 2, 1997, the court granted partial summary judgment to Surgical Dynamics, ruling that its implant does not infringe the '247 patent. The court also denied summary judgment to Surgical Dynamics on its claim that the '247 patent is invalid. Karlin and Danek have filed an interlocutory appeal to the Federal Circuit Court of Appeals. The outcome of the litigation is uncertain. There can be no assurances that the patent related to the Karlin Technology will be upheld or that the Company will continue to have such patent protection for its products. Item 4. Submission of Matters to a Vote of Security Holders At the Company's 1997 Annual Meeting of Shareholders on May 8, 1997, the shareholders approved the following: 1. Election of directors to serve until his successor is duly elected. The directors were approved as follows: Names of Director Votes For Votes Withheld ----------------- --------- -------------- David W. Stassen 7,268,325 8,228 Stephen D. Kuslich, M.D. 7,268,325 8,228 Robert J. DePasqua 7,268,225 8,328 James F. Lyons 7,268,325 8,228 Kenneth W. Anstey 7,268,125 8,428 2. Proposal to amend the Spine-Tech, Inc. 1996 Omnibus Stock Plan. The proposal received 6,867,789 votes for and 317,368 votes against. There were 31,081 abstentions and 60,315 broker non-votes. 3. Proposal to ratify the appointment of Ernst & Young LLP as independent auditors for the 1997 fiscal year. The proposal received 7,258,941 votes for and 5,700 votes against. There were 11,912 abstentions and no broker non-votes. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: 3.1 Amended and Restated Articles of Incorporation of the Company. (1) (2) (3) 3.2 Restated By-Laws of the Company and Amendment to Restated By-Laws of the Company. (4) 4.1 Specimen of Common Stock certificate. (5) 4.2 Form of Rights Agreement dated as of August 21, 1996 between the Company and Norwest Bank Minnesota, N.A. (3) 10.1 1994 Spine-Tech, Inc. Stock Option Plan.* (6) 10.2 Spine-Tech, Inc. 1993 Non-Employee Director Stock Option Plan.* (7) 10.3 Spine-Tech, Inc. 1991 Stock Option Plan.* (8) 10.4 Loan Agreement between the Company and Riverside Bank dated April 20, 1995. (9) 10.5 Spine-Tech, Inc. 1996 Employee Stock Purchase Plan.* (10) 10.6 Spine-Tech, Inc. 1996 Omnibus Stock Plan.* (11) 10.7 License Agreement dated as of May 10, 1992, among the Company, Karlin Technology, Inc. and Gary K. Michelson. (12) (13) 10.8 License Agreement dated as of January 1, 1995 between the Company and Dr. Ted Obenchain. (13) (14) 10.9 Employment Agreement between the Company and David W. Stassen dated June 15, 1992.* (15) 10.10 Employment Letter from the Company to David W. Stassen dated June 2, 1992.* (16) 10.11 Employment Agreement between the Company and Ted K. Schwarzrock dated November 1, 1993.* (17) 10.12 Management Agreement dated as of February 1, 1996 between the Company and David W. Stassen. (18) 10.13 Management Agreement dated as of February 1, 1996 between the Company and Keith M. Eastman.* (19) 10.14 Management Agreement dated as of February 1, 1996 between the Company and Ted K. Schwarzrock.* (20) 10.15 Management Agreement dated as of February 1, 1996 between the Company and Douglas W. Kohrs.* (21) 10.16 Management Agreement dated as of February 1, 1996 between the Company and Richard C. Jansen.* (22) 10.17 Management Agreement dated as of February 1, 1996 between the Company and David L. Shaw.* (23) 10.18 Collaboration agreement between the Company and Ethicon Endo Surgery dated June 27, 1994. (24) 11 Statement of Computation of Net Income (Loss). 27 Financial Data Schedule (filed electronically). _____________________________ * Management contract of compensatory plan or arrangement required to be filed as an exhibit to this form pursuant to Item 14(c) of Form 10-K. (1) Incorporated herein by reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1995 (File No. 0-26116). (2) Incorporated herein by reference to Exhibit 3.2 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 (File No. 0-26116). (3) Incorporated herein by reference to Exhibit 1 to the Company's Current Report on Form 8-K dated August 21, 1996. (4) Incorporated by reference to Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1996. (5) Incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-1 (Registration No. 33-91928). (6) Incorporated by reference to Exhibit 10.1 to the Company's Registration Statement on Form S-1 (Registration No. 33-91928). (7) Incorporated by reference to Exhibit 10.2 to the Company's Registration Statement on Form S-1 (Registration No. 33-91928). (8) Incorporated by reference to Exhibit 10.3 to the Company's Registration Statement on Form S-1 (Registration No. 33-91928). (9) Incorporated by reference to Exhibit 10.11 to the Company's Registration Statement on Form S-1 (Registration No. 33-91928). (10) Incorporated by reference to Exhibit 10.13 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995. (11) Incorporated by reference to Exhibit 10.14 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995. (12) Incorporated by reference to Exhibit 10.17 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995. (13) Exhibit contains portions for which confidential treatment has been granted to the Company. (14) Incorporated by reference to Exhibit 10.18 to the Company's Registration Statement on Form S-1 (Registration No. 33-91928). (15) Incorporated by reference to Exhibit 10.19 to the Company's Registration Statement on Form S-1 (Registration No. 33-91928). (16) Incorporated by reference to Exhibit 10.20 to the Company's Registration Statement on Form S-1 (Registration No. 33-91928). (17) Incorporated by reference to Exhibit 10.21 to the Company's Registration Statement on Form S-1 (Registration No. 33-91928). (18) Incorporated by reference to Exhibit 10.22 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995. (19) Incorporated by reference to Exhibit 10.23 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995. (20) Incorporated by reference to Exhibit 10.24 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995. (21) Incorporated by reference to Exhibit 10.25 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995. (22) Incorporated by reference to Exhibit 10.26 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995. (23) Incorporated by reference to Exhibit 10.27 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995. (24) Incorporated by reference to Exhibit 10.12 to the Company's Registration Statement on Form S-1 (Registration No. 33-91928). (b) Reports on Form 8-K No reports were filed during the quarter ended June 30, 1997. SIGNATURES Pursuant to the requirements of the Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SPINE-TECH, INC. ---------------- (Registrant) Date: August 8, 1997 By: David W. Stassen --------------------------------------- David W. Stassen, President and Chief Executive Officer (Principal Executive Officer) Date: August 8, 1997 By: Keith M. Eastman --------------------------------------- Keith M. Eastman, Chief Financial Officer (Principal Financial and Accounting Officer) EXHIBIT INDEX Exhibit Description - ------- ----------- 3.1 Amended and Restated Articles of Incorporation of the Company. (1) (2) (3) 3.2 Restated By-Laws of the Company and Amendment to Restated By-Laws of the Company. (4) 4.1 Specimen of Common Stock certificate. (5) 4.2 Form of Rights Agreement dated as of August 21, 1996 between the Company and Norwest Bank Minnesota, N.A. (3) 10.1 1994 Spine-Tech, Inc. Stock Option Plan.* (6) 10.2 Spine-Tech, Inc. 1993 Non-Employee Director Stock Option Plan.* (7) 10.3 Spine-Tech, Inc. 1991 Stock Option Plan.* (8) 10.4 Loan Agreement between the Company and Riverside Bank dated April 20, 1995. (9) 10.5 Spine-Tech, Inc. 1996 Employee Stock Purchase Plan.* (10) 10.6 Spine-Tech, Inc. 1996 Omnibus Stock Plan.* (11) 10.7 License Agreement dated as of May 10, 1992, among the Company, Karlin Technology, Inc. and Gary K. Michelson. (12) (13) 10.8 License Agreement dated as of January 1, 1995 between the Company and Dr. Ted Obenchain. (13) (14) 10.9 Employment Agreement between the Company and David W. Stassen dated June 15, 1992.* (15) 10.10 Employment Letter from the Company to David W. Stassen dated June 2, 1992.* (16) 10.11 Employment Agreement between the Company and Ted K. Schwarzrock dated November 1, 1993.* (17) 10.12 Management Agreement dated as of February 1, 1996 between the Company and David W. Stassen. (18) 10.13 Management Agreement dated as of February 1, 1996 between the Company and Keith M. Eastman.* (19) 10.14 Management Agreement dated as of February 1, 1996 between the Company and Ted K. Schwarzrock.* (20) 10.15 Management Agreement dated as of February 1, 1996 between the Company and Douglas W. Kohrs.* (21) 10.16 Management Agreement dated as of February 1, 1996 between the Company and Richard C. Jansen.* (22) 10.17 Management Agreement dated as of February 1, 1996 between the Company and David L. Shaw.* (23) 10.18 Collaboration agreement between the Company and Ethicon Endo Surgery dated June 27, 1994. (24) 11 Statement of Computation of Net Income (Loss). Filed Electronically 27 Financial Data Schedule. Filed Electronically _____________________________ * Management contract of compensatory plan or arrangement required to be filed as an exhibit to this form pursuant to Item 14(c) of Form 10-K. (1) Incorporated herein by reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1995 (File No. 0-26116). (2) Incorporated herein by reference to Exhibit 3.2 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 (File No. 0- 26116). (3) Incorporated herein by reference to Exhibit 1 to the Company's Current Report on Form 8-K dated August 21, 1996. (4) Incorporated by reference to Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1996. (5) Incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-1 (Registration No. 33-91928). (6) Incorporated by reference to Exhibit 10.1 to the Company's Registration Statement on Form S-1 (Registration No. 33-91928). (7) Incorporated by reference to Exhibit 10.2 to the Company's Registration Statement on Form S-1 (Registration No. 33-91928). (8) Incorporated by reference to Exhibit 10.3 to the Company's Registration Statement on Form S-1 (Registration No. 33-91928). (9) Incorporated by reference to Exhibit 10.11 to the Company's Registration Statement on Form S-1 (Registration No. 33-91928). (10) Incorporated by reference to Exhibit 10.13 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995. (11) Incorporated by reference to Exhibit 10.14 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995. (12) Incorporated by reference to Exhibit 10.17 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995. (13) Exhibit contains portions for which confidential treatment has been granted to the Company. (14) Incorporated by reference to Exhibit 10.18 to the Company's Registration Statement on Form S-1 (Registration No. 33-91928). (15) Incorporated by reference to Exhibit 10.19 to the Company's Registration Statement on Form S-1 (Registration No. 33-91928). (16) Incorporated by reference to Exhibit 10.20 to the Company's Registration Statement on Form S-1 (Registration No. 33-91928). (17) Incorporated by reference to Exhibit 10.21 to the Company's Registration Statement on Form S-1 (Registration No. 33-91928). (18) Incorporated by reference to Exhibit 10.22 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995. (19) Incorporated by reference to Exhibit 10.23 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995. (20) Incorporated by reference to Exhibit 10.24 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995. (21) Incorporated by reference to Exhibit 10.25 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995. (22) Incorporated by reference to Exhibit 10.26 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995. (23) Incorporated by reference to Exhibit 10.27 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995. (24) Incorporated by reference to Exhibit 10.12 to the Company's Registration Statement on Form S-1 (Registration No. 33-91928). EX-11 2 EXHIBIT 11 SPINE-TECH, INC. EXHIBIT 11---STATEMENT RE: COMPUTATION OF INCOME (LOSS) PER SHARE (Unaudited)
Three Months Ended Six Months Ended June 30, June 30, ---------------------------- -------------------------- 1997 1996 1997 1996 ------------- ------------ ------------ ---------- PRIMARY INCOME (LOSS) PER SHARE: Weighted average shares outstanding 10,091,531 9,824,959 10,051,533 9,765,828 Net effect of dilutive stock options -- based on the treasury stock method 1,649,252 -- 1,594,973 -- ------------- ------------ ------------ ---------- 11,740,783 9,824,959 11,646,506 9,765,828 ------------- ------------ ------------ ---------- ------------- ------------ ------------ ---------- Net income (loss) $ 2,949,818 $ (585,457) $ 4,139,315 $ (940,461) ------------- ------------ ------------ ---------- ------------- ------------ ------------ ---------- Primary income (loss) per share $ 0.25 $ (0.06) $ 0.35 $ (0.10) ------------- ------------ ------------ ---------- ------------- ------------ ------------ ---------- FULLY DILUTED INCOME (LOSS) PER SHARE: Weighted average shares outstanding 10,091,531 9,824,959 10,051,533 9,765,828 Net effect of dilutive stock options -- based on the treasury stock method 1,603,075 -- 1,603,075 -- ------------- ------------ ------------ ---------- 11,694,606 9,824,959 11,654,608 9,765,828 ------------- ------------ ------------ ---------- ------------- ------------ ------------ ---------- ------------- ------------ ------------ ---------- Net income (loss) $ 2,949,818 $ (585,457) $ 4,139,315 $ (940,461) ------------- ------------ ------------ ---------- ------------- ------------ ------------ ---------- Fully diluted income (loss) per share $ 0.25 $ (0.06) $ 0.35 $ (0.10) ------------- ------------ ------------ ---------- ------------- ------------ ------------ ----------
EX-27 3 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE SHEET AND STATEMENT OF OPERATIONS OF SPINE-TECH, INC. FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 1,970,537 19,396,505 7,408,558 161,862 5,627,447 33,659,863 7,408,447 710,680 41,557,630 4,496,051 0 0 0 101,036 36,960,543 41,557,630 23,642,941 23,642,941 5,400,636 5,400,636 11,744,871 0 0 6,902,315 2,763,000 4,139,315 0 0 0 4,139,315 .35 .35
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