UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-9165
STRYKER CORPORATION
(Exact name of registrant as specified in its charter)
Michigan 38-1239739
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P.O. Box 4085, Kalamazoo, Michigan 49003-4085
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 616/385-2600
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock $.10
par value
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [x]
Based on the closing sales price of March 3, 1997, the aggregate market value
of the voting stock held by nonaffiliates of the registrant was approximately
$1,894,255,356.
The number of shares outstanding of the registrant's common stock, $.10 par
value, was 96,890,416 at March 3, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the annual stockholders report for the year ended December 31, 1996
are incorporated by reference into Parts II and IV.
Portions of the proxy statement filed with the Securities and Exchange
Commission relating to the 1997 Annual Meeting of Stockholders (the "1997 proxy
statement") are incorporated by reference into Part III.
PART I
ITEM I. BUSINESS
General
Stryker Corporation and its subsidiaries (the "Company" or "Stryker") develop,
manufacture and market specialty surgical and medical products, including
orthopaedic implants, powered surgical instruments, endoscopic systems and
patient care and handling equipment for the global market and provide physical
therapy services in the United States. Stryker was incorporated in Michigan in
1946 as the successor company to a business founded in 1941 by Dr. Homer H.
Stryker, a leading orthopaedic surgeon and the inventor of several orthopaedic
products.
In August 1993, the Company purchased 20% of the outstanding common stock of
Matsumoto Medical Instruments, Inc. ("Matsumoto"), Osaka, Japan. Matsumoto is
one of the largest distributors of medical devices in Japan and is the
exclusive distributor of Stryker products in that country. In August 1994,
the Company purchased an additional 31% of Matsumoto's outstanding common
stock, thereby increasing its direct ownership in Matsumoto to 51%. The
results of operations for Matsumoto were consolidated with Stryker beginning
in August 1994.
In June 1994, the Company purchased the Steri-Shield product line, which is a
personal protection system for operating room personnel, from a private
company.
The Company's subsidiary, Physiotherapy Associates, Inc., has also purchased a
number of physical therapy clinic operations during each of the last five years.
In September 1996, the Company purchased 100% of the outstanding common stock
of Osteo Holding AG and subsidiaries ("Osteo"), Selzach, Switzerland. Osteo
designs and manufacturers trauma products and reconstructive orthopedic devices.
PRODUCT SALES
The Company's products can be divided into three classes: Stryker Surgical
Products, Stryker Medical Products, and Matsumoto Distributed Products.
Stryker Surgical Products are designed, manufactured and marketed under
the Osteonics, Dimso, Osteo, Stryker Instruments and Stryker Endoscopy names
and principally serve the orthopedic market. Stryker Medical Products
consist of specialty beds and stretchers and general patient room beds
designed, manufactured and marketed under the Stryker Medical name and
rehabilitation services provided through Physiotherapy Associates, Inc.
Matsumoto Distributed Products represent products sourced by Matsumoto
Medical Instruments, Inc., the Company's 51% owned subsidiary, from other
companies for sale in Japan. The following amounts ($000's) and percentages
are the sales during each of the three years ended December 31:
<TABLE>
1996 1995 1994
$ % $ % $ %
________ ___ ________ ___ ________ ___
<S> <C> <C> <C> <C> <C> <C>
Stryker Surgical Products $669,898 74% $608,646 70% $502,961 74%
Stryker Medical Products 196,083 21 158,516 18 135,520 20
Matsumoto Dist. Product 44,079 5 104,790 12 43,439 6
________ ___ ________ ___ ________ ___
$910,060 100% $871,952 100% $681,920 100%
======== === ======== === ======== ===
</TABLE>
Approximately two-thirds of the Company's sales in 1996 and 1995 and
approximately 60% of the Company's sales in 1994 consisted of products with
short lives and service revenues, such as implants (while implants have a long
useful life to the patient, they have a one-time use to the hospital), physical
therapy revenues, disposables, expendable tools and parts and service and
repair charges. The balance of sales in each of the years were of products
that could be considered capital equipment, having useful lives in excess of
one year.
The Company's backlog of firm orders is not considered material to an
understanding of its business.
STRYKER SURGICAL PRODUCTS
Stryker Surgical products are designed and manufactured by Osteonics,
Allendale, New Jersey; Dimso, Bordeaux, France; Osteo AG, Selzach,
Switzerland; Stryker Instruments, Kalamazoo, Michigan; and Stryker Endoscopy,
Santa Clara, California. The principal specialty served by Stryker Surgical
products is orthopedics. Orthopaedic reconstructive products, such as hip,
knee, shoulder and spinal implants, compression hip screws and interlocking
compression nails, heavy-duty powered instruments, pulsating irrigation
systems, cement injection systems, medical video cameras and arthroscopes
are manufactured and marketed for use by the orthopaedic surgeon.
Osteonics designs and manufactures innovative total and partial hip, knee and
shoulder replacements and associated instruments for sale around the world.
These artificial implants are made of cobalt chrome or titanium alloys and are
implanted in patients whose natural joints have been damaged by arthritis,
osteoporosis, other diseases or injury. In late 1990, Osteonics became the
first company to receive clearance from the U.S. Food & Drug Administration
(FDA) to commercially release for sale in the U.S. a hip implant with HA
surface treatment. HA is a naturally occurring calcium phosphate material
that demonstrates a high level of biocompatibility due to its resemblance to
human bone. Osteonics' clinical experience with HA-coated hip stems now
extends over ten years and their clinical performance continues to equal or
exceed that of any comparable stem reported in the scientific literature.
The Osteonics Omniflex Hip Stem, which has been in clinical use since 1987 and
has U.S. patent protection, provides a means for interoperatively fitting a
femoral stem to the patient. The device allows the distal portion of the stem
to be uncoupled from the femur, thus helping to avoid stress shielding of the
femur's proximal bone.
In addition to OmniFlex, Osteonics offers a wide array of high performance
cemented and cementless stems and cups, with which physicians may treat the
spectrum of their primary and revision total hip requirements. For example, on
the primary side, the Secur-Fit HA Stems and Acetabular Shells combine
Osteonics revolutionary design concepts with its high quality
hydroxylapatite coating on an abrasion resistant, titanium surface, to
enhance bone loading and implant stability from the time of implantation
onward. For revision indications, Osteonics offers its Restoration Hip
System, a versatile array of implants which is designed to address the
variety of complex surgical needs and patient anomalies that are presented
in revision surgery and where extensive fixation, both distally and
proximally, is required to support the prosthesis.
The Osteonics Series 7000 Total Knee System, the Insight Knee Positioning and
Alignment System and Passport Knee instrumentation provides the surgeon with a
simplified, cost effect approach to total knee arthroplasty. The Series 7000
Total Knee System and Passport Knee instrumentation provide surgeons with the
interoperative flexibility to address a wide range of patient needs, while the
Insight Knee Positioning and Alignment System provide surgeons the ability to
realize precise, customized knee alignment and superior leg position in knee
surgery, which helps reduce the risk of post-operative complications.
In 1996, Osteonics launched the Osteonics Total Shoulder System and received
FDA clearance for its N2/Vac packaging and sterilization process, which helps
avoid the potential oxidative degradation of polyethylene bearing material.
Dimso designs and manufactures spinal implant systems for use by spinal
surgeons in the treatment of degenerative spinal diseases and deformities
and the stabilization of the spine in trauma cases. During 1995, Osteonics
began to market a version of the Dimso spinal implant system in the United
States following the receipt of U.S. FDA acceptance for limited surgical
indications and, in 1997, will launch the Top Loading Connector and the
Cross Connector. In 1996, Dimso launched, for international markets only,
the Ogival Intersomatic Cage, which restores disk height space and allows
lumbar vertebrae to be fused to stabilize the spine.
In September 1996, Stryker acquired Osteo Holding AG, a Swiss manufacturer of
high quality orthopaedic and trauma products, including compression hip screws
and interlocking compression nails for bone fixation in fracture cases. Sold
in more than 50 countries, Osteo products have been especially successful in
Europe and the Far East. Under the guidance of U.S. orthopedists' with whom
Stryker has long-standing relationships, the Osteo line is being adopted to
better meet the needs of American surgeons.
Stryker Instruments' products include a broad line of powered surgical drills,
saws, fixation and reaming equipment and other surgical instruments that are
used by surgeons for drilling, burring, rasping or cutting bone, wiring or
pinning bone fractures and preparing hip or knee surfaces for the placement of
artificial hip or knee joints. Stryker Instruments provides hundreds of
different sized and shaped drill bits, burrs, blades, chisels and other
attachments for use by the orthopaedic surgeon.
Stryker Instruments System 2000 Heavy Duty Battery Powered Instruments provides
surgeons with a complete line of heavy duty instruments that are powerful,
precise and maneuverable. In 1995, Stryker Instruments released the 4100
Cordless Driver, the first battery-powered wire driver, which provides trauma
and sports medicine specialists the power and versatility needed in surgery.
In conjunction with joint replacement surgery, Stryker Instruments Advance
Cement Mixing System greatly reduces the risk that air bubbles will weaken the
long-term bond between implant and surrounding bone. For cleansing the
surgical site during total joint arthroplasty, SurgiLav Plus, a disposable,
self-contained pulsed lavage system is used due to its ease of use. Stryker
Instruments CBC II System is a post-operative wound drainage and blood
reinfusion device which enables joint replacement patients to receive their own
blood rather than donor blood. For operating room personnel, Stryker
Instruments Steri-Shield Personal Protection System (a product line purchased
in 1994) uses an enclosed hood and toga to provide protection against
contamination from blood and airborne particles.
Stryker Endoscopy products include medical video cameras, lightsources,
arthroscopes, laparscopes, powered instruments and a disposable
suction/irrigation device. These systems allow the surgeon to perform numerous
surgical procedures through small incisions usually less than 2cm in length
versus incisions that could be as long as ten inches. The advantage to the
patient is shorter time spent in the operating room along with a reduced
rehabilitation period.
Stryker Endoscopy offers two types of video cameras. A low cost single chip
camera with procedure specific head configurations as well as a broadcast
quality 3-Chip Camera, which has a programmable three function button allowing
the surgeon to control documentation equipment and picture quality from the
surgical site. Both can be used in virtually every surgical specialty. They
have extremely high resolution, which is typically two to three times that of a
standard television set as well as true color reproduction allowing the surgeon
to see the anatomy as if he or she were looking at it with the naked eye.
Stryker Endoscopy's fiber optic scopes range in diameter from 2.33mm to 10mm.
These scopes contain a series of precision lenses as well as fiberoptics, which
allow the surgeon to see into the body. The video camera is attached to the
scope transmitting the image onto a monitor.
Stryker Endoscopy also produces a totally disposable suction irrigation device
that allows the surgeon to irrigate tissue where necessary as well as remove
the fluid, all out of a 5mm or 10mm portal. This device is also capable of
cauterizing tissue when necessary. This product is self contained, and totally
disposable eliminating the need for any additional equipment in the crowded
operating room.
Stryker Instruments and Endoscopy both produce small, light "micro" powered
tools and instruments that are used in orthopedics, maxillofacial surgery,
functional endoscopic sinus surgery, neurosurgery, spinal surgery and plastic
surgery. Stryker Instruments Total Performance System (TPS), which was
released in 1996, provides a universal surgical system that can be used by
several specialties. Spine and neuro surgeons use the TPS Universal Drill and
TPS burs, while sports medicine and plastic surgeons use the TPS MicroDriver
and TPS Sagittal Saw. The TPS System is also compatible with Stryker
Endoscopy's SE5 Shaver System. Stryker Endoscopy's Hummer 2 Micro Debrider
System is a powered instrument used in sinus surgery which incorporates new
irrigation capabilities and specialized cutters for sinus surgery. This device
eliminates the need for over 50% of the instrumentation required for sinoscopy
surgery.
STRYKER MEDICAL PRODUCTS
Stryker Medical products consist of specialty stretchers, medical/surgical
beds, intensive care unit beds, maternity beds and products and assorted room
furnishings, which are assembled on a design-to-order basis at the Company's
Medical Division in Kalamazoo, Michigan, and rehabilitation services provided
through Physiotherapy Associates, Inc. Medical Division products are designed
and developed through extensive clinical research, and tested in real-world
environments before product designs are finalized. In 1996, the Medical
Division introduced the Complete Care ICU bed for critical care units. This
innovative treatment platform offers a load-cell patient weighing system to
help avoid time-consuming, awkward transfers. An LCD monitor provides
accurate readings with just a touch and the 90 degree fowler range makes it
easy to take upright chest x-rays while the patient stays in bed. Similarly,
the Medical Division plans to release in 1997 its FirstCare maternity bed
for labor and delivery room and labor and delivery room postpartum settings.
Ergonomically engineered features like a one-step breakdown foot section,
adjustable seat section and powered pelvic tilt make positioning the patient
for delivery more efficient and make it easy for clinicians to move quickly.
Stryker Medical product sales also include revenue of the Company's
Physiotherapy Associates, Inc. subsidiary. This organization operates
outpatient rehabilitation centers, which offer physical, occupational and
speech therapy to patients who have suffered orthopaedic or neurological
injuries. It focuses, in particular, on expediting injured workers' return
to work. Physiotherapy Associates, Inc. is headquartered in Memphis,
Tennessee and operates 185 outpatient physical therapy centers in 20 states
and the District of Columbia.
MATSUMOTO DISTRIBUTED PRODUCTS
Matsumoto Distributed Products represent products sourced by Matsumoto Medical
Instruments, Inc. from other companies for sale in Japan. These products are
sold for use in the areas of orthopedics, ophthalmology, general surgery and
emergency care.
PRODUCT DEVELOPMENT
Most of the Company's products and product improvements have been developed
internally. In addition, the Company maintains close working relationships
with physicians and medical personnel in hospitals and universities who assist
in product research and development. New and improved products play a
critical role in the Company's sales growth. The Company has placed increased
emphasis on the development of proprietary products and product improvements
to complement and expand its existing product lines.
Total expenditures for product research, development and engineering were
$56,870,000 in 1996; $43,771,000 in 1995; and $39,630,000 in 1994. Research,
development and engineering expenses increased in 1996 and 1995 due principally
to ongoing clinical trials of the Company's OP-1 Bone Growth Device and the
development of new implant designs (the Secur-Fit HA total hip implant system
and Restoration HA Hip System for revision surgery were developed in 1995),
further enhancements to instrumentation related to knee replacement procedures,
including development of the Insight Positioning and Alignment System in 1995
and the Passport knee instruments in 1996, the development of advanced powered
instruments and video technology (the 4100 Cordless Driver, the first battery-
powered wire driver, the next generation 810 3-Chip Camera System and the
StrykeFlow suction/irrigator for laparoscopic surgery, all introduced in 1995
and the TPS advanced micro-powered instrument set, the 882 3-Chip Camera
System, the Hummer 2 Micro Debrider System and several new arthroscopy
instruments, all introduced in 1996), the development of new specialized
operating room equipment (the Advanced Cement Mixing System introduced in 1996),
the development of new patient handling equipment (the Stryker Stretcher Chair
introduced in 1995 and the Complete Care 2025 ICU Bed introduced in 1996).
In 1991, the Company received FDA approval to begin human clinical trials of
its OP-1 Bone Growth Device which was developed in collaboration with Creative
BioMolecules, Inc. (Creative), as part of a long-term research program funded
by Stryker since 1985. This device is composed of recombinant human
osteogenic protein (OP-1) and a bioresorbable collagen matrix. OP-1 is
naturally present in the human body and directs a cascade of
cellular events that result in bone growth. In preclinical studies, OP-1
induced the formation of new bone when implanted into bony defect sites. In
addition, results from early-stage animal trials of OP-1 in cartilage repair
have been encouraging. The initial human clinical study, which began in 1992,
compares the efficacy of the OP-1 Bone Growth Device to autografts (the current
standard bone graft procedure for the treatment of tibial non-union fractures,
which uses bone chips removed from a patient's hip in a second operation) in
the repair of non-union fractures of the tibia. The patients involved in the
trial all suffered tibial fractures that showed no evidence of healing at
least nine months from the initial injury and at least three months after any
prior surgical intervention. Patients received either the OP-1 Bone Growth
Device or autograft bone on a random basis. During 1996, the surgical
procedures on the 122 patients in the Company's tibial non-union clinical
trial were completed and preliminary data from two of 18 study sites indicate
that the OP-1 Bone Growth Device is comparable to autograft. The data from the
two sites have not yet undergone blinded radiographic analysis by an
independent panel and represent only 15% of patients under study. Full
analysis of all of the results, including blinded radiographic analysis by an
independent panel, the primary endpoint in the study, is currently underway. In
late 1995, the FDA allowed the Company to enlarge the scope of these trials
for expanded indications of non-union fractures in all long bones.
Additionally, the surgical procedures for several pilot human clinical trials
in Europe in cases involving trauma, spine, and oral/maxillofacial indications
were completed in 1996.
Stryker owns the patents on its osteogenic protein technology and has exclusive
worldwide rights under those patents to develop, market and sell OP-1 for
treatment, repair or replacement of bone and joint tissue. Creative has an
exclusive license to the technology for use in other applications. Stryker and
Creative are obligated to pay royalties to the other on its sales of OP-1 based
products.
In 1996, the Company completed a royalty-free cross license agreement with
Genetics Institute, Inc., which holds patents covering a molecule different
from OP-1 that may produce similar effects. The agreement will enable Stryker
to proceed to commercialize OP-1 unencumbered by patent litigation with this
competitor. Others are also attempting to develop osteogenic proteins and
bioresorbable carriers for the treatment, repair or replacement of bone and
joint tissue. These other companies have filed and obtained patents in the
U.S. and elsewhere claiming such compounds and methods of making them and
using them and may in the future file and obtain other such patents. The
Company can provide no assurance that it will not need a license under one or
more of those patents to further expand the OP-1 program or whether such
licenses will be available.
MARKETING
Most of the Company's products are marketed in the United States directly to
more than 5,000 hospitals, and to doctors and other health care facilities, by
the Company's sales force consisting of approximately 400 salespersons.
Stryker maintains separate and dedicated sales forces for each of its principal
product lines to provide focus and a high level of expertise to each medical
specialty served. Certain products, primarily orthopaedic implants, are sold
to hospitals in the United States through both direct sales forces and
independent dealer organizations.
Approximately 23% of the Company's domestic revenues in 1996 were accounted
for by sales to hospital cooperative buying groups and other large national
accounts and 1% by sales to the Veterans Administration and other hospitals
operated by the Federal government.
International sales accounted for 38% of total revenues in 1996. Stryker
products are sold in over 100 foreign countries, through more than 450 local
dealers whose efforts are coordinated by approximately 660 sales and marketing
personnel who are local nationals, and through direct sales efforts. Stryker
distributes its products through sales subsidiaries and branches with offices
located in The Netherlands, Belgium, Finland, France, Germany, Italy, Spain,
Switzerland, the United Kingdom, Australia, Hong Kong, Japan, Canada and
Mexico. Stryker exports products to dealers and to customers in Latin America,
the Middle East, Singapore, Korea, India, Taiwan, Malaysia, the CIS (former
Soviet Union) and China. Additional information regarding the Company's
foreign and domestic operations and export sales appearing in "Note
11-Geographic Data" on page 39 of the 1996 Annual Report is incorporated herein
by reference.
The Company's business is generally not seasonal in nature; however, the number
of orthopaedic surgeries is lower during the summer months.
COMPETITION
The Company is one of the six leading competitors in the U.S. market for
orthopaedic reconstructive products, the others being Zimmer, USA Inc. (a
subsidiary of Bristol-Myers, Squibb, Inc.), Howmedica, Inc.(a subsidiary of
Pfizer, Inc.), DePuy Orthopedics, Inc., Biomet, Inc., and J&J Professional,
Inc. (a subsidiary of Johnson & Johnson). While competition abroad varies
from area to area, the Company believes it is also a leading factor in the
international markets, with these same companies being its principal
competitors.
In the international market for spinal implants, the Company is one of the four
market leaders through its Dimso S.A. subsidiary, with the principal
competitors being Sofamor Danek Group, Inc., AcroMed Corporation and the
Synthes companies. The Company entered the U.S. market for spinal implants
during 1995 and faces competition from these same and other companies.
In the powered surgical instruments market, Stryker is one of the three market
leaders, with the principal domestic competitors being Zimmer and Midas-Rex,
Inc.. These same companies are competitors in the international markets along
with Aesculap-Werke AG, a large European manufacturer.
In the arthroscopy market, the Company considers itself to be one of the three
market leaders, with the principal competitors being Smith & Nephew Endoscopy
(a division of Smith & Nephew PLC) and Linvatec, Inc. (a subsidiary of Bristol-
Myers, Squibb, Inc.). In the laparoscopic imaging products market, the Company
considers itself to be one of the four market leaders, with the principal
competitors being Karl Storz GmbH & Co. (a German company), Circon Corporation
and Olympus Optical Co. Ltd. (a Japanese company).
The Company's primary competitor in the hospital bed market is Hill-Rom (a
division of Hillenbrand Industries) and in the specialty stretcher market the
primary competitors are Ferno-Washington, Hausted, Inc., Hill-Rom and Midmark
Corporation. In the outpatient physical therapy market, the Company's primary
competitors are physician owned/independent practices and hospital-based
services. There are also several other national rehabilitation companies,
such as HealthSouth Corporation and NovaCare, Inc.
In the area of research and development of the Company's OP-1 Bone Growth
Device, the Company believes that several companies are engaged in the research
and development of morphogenic proteins for the repair of hard and soft
tissues. Genetics Institute, Inc., a subsidiary of American Home Products
Corporation, has also begun human clinical trials of a recombinant bone
morphogenetic protein for repair of orthopaedic and other skeletal defects.
A number of other companies currently provide various other therapies,
including allografts, bone fillers and electrical stimulation devices, for the
treatment, repair or replacement of bone and joint tissue. The Company's
OP-1 Bone Growth Device, which is currently in clinical trials, would
ultimately compete with these products and traditional therapies such as
autografts.
The principal factors which the Company believes differentiate its products in
these highly competitive markets and enable it to compete effectively are
innovative products, reliability, service and reputation. The Company is not
able to predict the effect that continuing efforts to reduce health care
expenses generally and hospital costs in particular will have on the future
sales of its products or its competitive position. (See "Regulation and
Product Quality.") The Company believes that its competitive position in the
future will depend to a large degree upon the new products and improvements in
existing products it is able to develop. While the Company does not consider
patents a major factor in its overall competitive success, patents and
trademarks are significant to the extent that a product or attribute of a
product represents a unique design or process. Patent or trademark protection
of such products restricts competitors from duplicating these unique product
designs and features. Stryker seeks to obtain patent protection whenever
possible on its products. The Company currently has approximately 130 U.S.
patents and 115 foreign patents which generally expire in the next 10-15 years.
MANUFACTURING AND SOURCES OF SUPPLY
The Company's manufacturing processes consist primarily of precision machining,
metal fabrication and assembly operations and the investment casting of cobalt
chrome and finishing of cobalt chrome and titanium. Approximately 19% of the
Company's cost of sales in 1996 represented finished products which were
purchased complete from outside suppliers. The Company also purchases parts and
components, such as forgings, castings, gears, bearings, casters and electrical
components and uses outside sources for certain finishing operations such as
plating, hardening and coating of machined components and sterilization of
certain products. The principal raw materials used by the Company are
stainless steel, aluminum, cobalt chrome and titanium alloys. In all,
purchases from outside sources were approximately 42% of the total cost of
sales in 1996.
Pursuant to the Company's agreement with Creative, Creative has the exclusive
right and obligation to supply the Company's worldwide commercial requirements
of OP-1 Bone Growth Device as long as certain conditions relating to quality,
quantity and pricing are satisfied.
While the Company relies on single sources for certain purchased materials and
services, it believes alternate sources are available if needed. The Company
has not experienced any significant difficulty in the past in obtaining the
materials necessary to meet its production schedules.
Products manufactured by the Company's Medical Division are generally assembled
to order, while other products are stocked in inventory.
REGULATION AND PRODUCT QUALITY
The Medical Device Amendments of 1976 to the Federal Food, Drug and Cosmetic
Act, the Safe Medical Devices Act of 1990, and regulations issued or proposed
thereunder, provide for regulation by the FDA of the manufacture of medical
devices, including most of the Company's products.
The FDA's "Good Manufacturing Practices" and "Quality System" regulations set
forth standards for the Company's product design and manufacturing processes,
require the maintenance of certain records and provide for inspections of the
Company's facilities by the FDA. There are also certain requirements of state,
local and foreign governments which must be complied with in the manufacturing
and marketing of the Company's products. The Company believes that the
manufacturing and quality control procedures it employs meet the requirements
of these regulations.
Most of the Company's new products fall into FDA classifications which require
notification of and review by the FDA before marketing (submitted as a 510(k)).
The Company's Osteogenic Protein Device (see "Product Development") requires
extensive clinical testing, consisting of safety and efficacy studies, followed
by a Pre-Market Approval (PMA) application. The Company currently is in the
clinical testing stage of this process and has not yet filed a PMA application
but expects to do so in late 1997. A panel of industry and medical experts
will review the results of clinical studies and make their recommendations to
the FDA. If there is a positive recommendation by the panel, the FDA may
grant a PMA allowing the product to be marketed.
Stryker also is subject to the laws that govern the manufacture and
distribution of medical devices of each country in which the Company
manufactures or sells products. The member states of the European Union ("EU")
have adopted the European Medical Device Directives, which create a single set
of medical device regulations for all EU member countries. These regulations
require companies that wish to manufacture and distribute medical devices in EU
member countries to obtain CE marks for their products by June 14, 1998.
Stryker has authorization to apply the CE mark to its hip, knee, upper
extremity, spinal implant and trauma products, its SE 5 Arthroscopy System,
its castcutter, and its Medical Division products, and continues to work to
obtain CE marks for all other products that it will manufacture or distribute
in EU member states.
Government agencies and legislative bodies in the United States and other
countries are considering various proposals designed to hold down increases in
health care costs. It is impossible to predict at this time the long-term
impact of such cost containment measures on the Company's future business.
EMPLOYEES
At December 31, 1996, the Company had 5,274 employees worldwide, including
1,571 involved in manufacturing, warehousing and distribution operations,
1,402 in marketing and sales, 265 in research, development and engineering,
698 providing physical, occupational and speech therapy and the balance in
general management and administration. No employees are covered by
collective bargaining agreements. The Company believes that its employee
relations are satisfactory.
Item 2. PROPERTIES
The Company has the following properties:
<TABLE>
OWNED/
FACILITY LOCATION SQ FT LEASED
________ ________ _____ ______
<S> <C> <C> <C>
Manufacturing, warehousing and Portage, Michigan 212,000 Owned
distribution facility for surgical
instruments products and administra-
tive offices for Stryker Instruments
division.
Manufacturing, warehousing and Portage, Michigan 150,000 Owned
distribution facilities for beds, Kalamazoo, Michigan 86,000 Owned
stretchers and furniture and admini-
strative offices for Stryker Medical
division.
Manufacturing and warehousing Allendale, New Jersey 153,000 Leased
facility for orthopedic implant
business and administrative offices
for Osteonics division.
Manufacturing, warehousing and Santa Clara, California 110,000 Leased
distribution facility for endoscopy
business and administrative offices
of Stryker Endoscopy division.
Manufacturing facility for surgical Arroyo, Puerto Rico 119,000 Leased
instruments and endoscopy business.
Administrative offices for Memphis, Tennessee 16,000 Owned
Physiotherapy Associates located in United States 568,000 Leased
Memphis, Tennessee and 185 individual
physical therapy clinics located
throughout the United States.
Warehousing and administrative Japan 105,000 Owned
offices for Matsumoto Medical
Instruments, Inc. in Osaka, Japan.
Sales branches including warehousing
and sales facilities in eight other
cities in Japan.
Manufacturing, warehousing and Selzach, Switzerland 48,100 Owned
distribution facilities for trauma Bellach, Switzerland 1,390 Owned
and orthopedic products and Selzach, Switzerland 12,000 Leased
administrative offices for Osteo AG.
Administrative offices for Stryker Natick, Massachusetts 6,000 Leased
Biotech.
Manufacturing and warehousing Bordeaux, France 28,000 Owned
facilities for spinal implant Bordeaux, France 5,000 Leased
products and administrative
offices for Dimso SA.
Administrative offices for Stryker Kalamazoo, Michigan 14,000 Leased
Corporation.
Domestic sales and administrative United States 101,000 Leased
offices throughout the United
States.
Foreign sales and administrative World-wide 213,000 Leased
offices throughout the world.
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
The Company is a defendant and plaintiff in various legal actions arising in
the normal course of business. The Company does not anticipate material
losses as a result of these actions.
In September 1996, the United States Court of Appeals for the Federal Circuit
affirmed the 1995 decision of the Federal District Court for the Eastern
District of New York awarding the Company damages, attorney fees and interest
for infringement of the Company's U.S. patent on its OmniFlex Hip System. A
petition for rehearing or rehearing en banc was denied by the Federal Circuit
in December 1996 and the Company was paid $77,600,000. The Company recognized
a pre-tax gain, net of related legal fees and other expenses of $61,094,000.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
EXECUTIVE OFFICERS
Certain information with respect to the executive officers of the Company is
set forth in Item 10 of this report.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is traded in the over-the-counter market on The
NASDAQ Stock Market under the symbol STRY. Quarterly stock prices appearing
under the caption "Summary of Quarterly Data" on page 41 of the 1996 Annual
Report and dividend information for the years ended December 31, 1996 and 1995
under the caption "Ten Year Review" on page 22 of the 1996 Annual Report are
incorporated herein by reference. The Company's Board of Directors intends to
consider a year-end cash dividend annually at its December meeting.
On December 31, 1993, the Company's Board of Directors authorized the
repurchase in the open market from time to time, depending upon prevailing
market conditions, of up to 1,200,000 shares of its common stock (after
adjustment for the two-for-one stock split) of which 895,000 split-adjusted
shares had been repurchased under this plan. This repurchase authorization
was replaced by a new authorization approved by the Company's Board of
Directors on April 24, 1996, for repurchase of up to 1,000,000 split adjusted
shares of common stock. At March 20, 1997, 11,200 shares had been repurchased
under this plan.
On December 31, 1996, there were 3,306 stockholders of record of the Company's
common stock.
ITEM 6. SELECTED FINANCIAL DATA
The financial information for each of the five years in the period ended
December 31, 1996 under the caption "Ten Year Review" on pages 22 and 23 of the
1996 Annual Report is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations" on pages 24 through 27 of the
1996 Annual Report is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company and its subsidiaries and
report of independent auditors, included on pages 28 through 42 of the 1996
Annual Report are incorporated herein by reference.
Quarterly results of operations appearing under the caption "Summary of
Quarterly Data" on page 41 of the 1996 Annual Report are incorporated herein by
reference.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
Information regarding the directors of the Company appearing under the caption
"Election of Directors" and the information appearing under the caption
"Miscellaneous - Section 16 Reporting" in the 1997 proxy statement is
incorporated herein by reference.
Information regarding the executive officers of the Company appears below. All
officers are elected annually. Reported ages are as of January 31, 1997.
John W. Brown, age 62, has been Chairman of the Board since January 1981, and
President and Chief Executive Officer of the Company since February 1977. He
is also a director of Lunar Corporation, a medical products company, First of
America Bank Corporation, a bank, the Health Industry Manufacturers Association
and The American Business Conference.
Ronald A. Elenbaas, age 43, was appointed President of the Surgical Group in
1985 and has been a Vice President of the Company since August 1983.
Previously he was the Director of Surgical Sales since May 1982. Since
joining the Company in September 1975 he has held various other positions,
including Sales Representative, Marketing Product Manager, Plant Manager,
Canadian Sales Director, Assistant to the President and Director of Customer
Relations.
Michael R. Mainelli, Jr., age 35, was appointed Vice President, Business
Development and Assistant to the Chairman upon joining the Company in April
1996. He had previously spent twelve years with General Electric Company in
manufacturing, marketing, and product line management positions. Most recently
he was responsible for world-wide planning, development, and marketing of
magnetic resonance imaging products at GE Medical Systems.
William T. Laube, III, age 57, was appointed President of Stryker Pacific Group
in 1985 and has been a Vice President of the Company since March 1979. Since
joining the Company in July 1975 he has held various international sales
management positions.
Edward B. Lipes, age 44, was appointed a Vice President of the Company in May
1994 and has been President of Osteonics Corp. since August 1989. He held the
position of President, Physiotherapy Associates, Inc. upon joining the Company
in April 1988.
Christopher F. Homrich, age 37, was appointed Treasurer upon joining the
Company in April 1996. He had previously been Assistant Treasurer at Ingram
Industries Inc., a privately held corporation with business activities
including wholesale distribution of microcomputer products, books and video
cassettes, inland marine transportation, oil and gas wellhead manufacturing
and insurance since June 1991.
David J. Simpson, age 50, was appointed Vice President, Chief Financial Officer
and Secretary upon joining the Company in June 1987. He had previously been
Vice President and Treasurer of Rexnord Inc., a manufacturer of industrial and
aerospace products, since July 1985.
Thomas R. Winkel, age 44, was appointed President of Stryker Americas/Middle
East in March 1992 and has been a Vice President of the Company since December
1984. He had previously been Vice President, Administration since June 1987.
Since joining the Company in October 1978 he has held various other positions,
including Assistant Controller, Secretary and Corporate Controller.
Jeffrey R. Winter, age 38, was appointed Controller upon joining the Company in
October 1996. He had previously been a Senior Manager at Ernst & Young LLP,
independent public accountants, since October 1991.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding the compensation of the management of the Company
appearing under the captions "Director Compensation" and "Executive
Compensation" in the 1997 proxy statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information under the captions "Beneficial Ownership of More than 5% of the
Outstanding Common Stock" and "Beneficial Ownership of Management" in the 1997
proxy statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) and (2) - The response to this portion of Item 14 is
submitted as a separate section of this report following
the signature page.
(a)(3) - Exhibits
Exhibit 3 - Articles of Incorporation and By-Laws
(i) Restated Articles of Incorporation and amendment
thereto dated December 28, 1993--Incorporated by
reference to Exhibit 3(i) to the Company's Form
10-K for the year ended December 31, 1993
(Commission File No. 0-9165).
(ii) By-Laws--Incorporated by reference to Exhibit
3(ii) to the Company's Form 10-Q for the quarter
ended June 30, 1988 (Commission File No. 0-9165).
Exhibit 4 - Instruments defining the rights of security
holders, including indentures--The Company agrees
to furnish to the Commission upon request a copy
of each instrument pursuant to which long-term
debt of the Company and its subsidiaries not
exceeding 10% of the total assets of the Company
and its consolidated subsidiaries is authorized.
Exhibit 10-Material contracts
(i)* 1988 Stock Option Plan as amended--
Incorporated by reference to Exhibit 10(i) to the
Company's Form 10-K for the year ended
December 31, 1992 (Commission File No. 0-9165).
(ii)* Supplemental Savings and Retirement Plan (as
Amended Effective January 1, 1995).--Incorporated
by reference to Exhibit 10(iii) to the Company's
Form 10-K for the year ended December 31, 1994
(Commission File No. 0-9165)
(iii)* Resolution amending Supplemental Savings
and Retirement Plan (effective January 1,1996).
(iv)* Description of bonus arrangements between the
Company and certain officers, including Messrs.
Brown, Elenbaas, Laube, Lipes, Simpson and Winkel.
Exhibit 11-Statement re computation of per share earnings
(i) Statement Re: Computation of earnings per
share of common stock.
Exhibit 13-Annual report to security holders
(i) Portions of the 1996 Annual Report that are
incorporated herein by reference.
Exhibit 21-Subsidiaries of the registrant
(i) List of Subsidiaries.
Exhibit 23-Consents of experts and counsel
(i) Consent of Independent Auditors.
Exhibit 27-Financial data schedule
(i) Financial data schedule (included in EDGAR filing
only).
(b) Reports on Form 8-K - Filed in the fourth quarter of 1996.
Form 8-K dated October 1, 1996.
Item 5. Other Events - Disclosure of United States Court
of Appeals for the Federal Circuit decision
affirming the 1995 decision of the Federal
District Court awarding the Company damages
in a patent suit brought by the Company.
Item 7. Financial Statements and Exhibits - Exhibit,
press release.
(c) Exhibits - Exhibit Index appears on page 19 of this report.
(d) Financial statement schedules - The response to this portion of
Item 14 is submitted as a separate section of this report
following the signature page.
* compensation arrangement
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 of the undersigned, thereunto duly authorized.
STRYKER CORPORATION
Date: 3/20/97 DAVID J. SIMPSON
David J. Simpson, Vice President, Chief
Financial Officer and Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.
JOHN W. BROWN 3/20/97 DAVID J. SIMPSON 3/20/97
__________________________________ ____________________________________
John W. Brown, Chairman, President David J. Simpson, Vice President,
and Chief Executive Officer Chief Financial Officer and
(Principal Executive Officer) Secretary
(Principal Financial Officer)
HOWARD E. COX, JR. 3/20/97 JEFFREY R. WINTER 3/20/97
__________________________________ ____________________________________
Howard E. Cox, Jr.-Director Jeffrey R. Winter, Controller
(Principal Accounting Officer)
DONALD M. ENGELMAN 3/20/97 RONDA E. STRYKER 3/20/97
__________________________________ ___________________________________
Donald M. Engelman, Ph.D.-Director Ronda E. Stryker-Director
JEROME H. GROSSMAN 3/20/97 WILLIAM U. PARFET 3/20/97
__________________________________ ___________________________________
Jerome H. Grossman,M.D.-Director William U. Parfet-Director
JOHN S. LILLARD 3/20/97
__________________________________
John S. Lillard-Director
ANNUAL REPORT ON FORM 10-K
ITEM 14(a)(1) and (2), (c) and (d)
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
CERTAIN EXHIBITS
FINANCIAL STATEMENT SCHEDULE
YEAR ENDED DECEMBER 31, 1996
STRYKER CORPORATION
KALAMAZOO, MICHIGAN
FORM 10-K--ITEM 14(a)(1), (2) AND (d)
STRYKER CORPORATION AND SUBSIDIARIES
List of Financial Statements and Financial Statement Schedule
The following consolidated financial statements of Stryker Corporation and
subsidiaries and report of independent auditors, included in the annual
stockholders report of the registrant for the year ended December 31, 1996, are
incorporated by reference in Item 8:
Report of independent auditors
Consolidated balance sheets--December 31, 1996 and 1995.
Consolidated statements of earnings--years ended December 31, 1996, 1995 and
1994.
Consolidated statements of stockholders' equity--years ended December 31,
1996, 1995 and 1994.
Consolidated statements of cash flows--years ended December 31, 1996, 1995
and 1994.
Notes to consolidated financial statements--December 31, 1996.
The following consolidated financial statement schedule of Stryker Corporation
and subsidiaries is included in Item 14(d):
Schedule II--Valuation and qualifying accounts
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
<TABLE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
STRYKER CORPORATION AND SUBSIDIARIES
<CAPTION>
Column A Column B Column C Column D Column E
Additions
________________________
(1) (2)
Charged
Balance at Charged to Other Balance
Beginning to Costs Accounts- Deductions- at End
Description of Period & Expenses Descrb.<F2>Descrb.<F1> of Period
<S> <C> <C> <C> <C> <C>
DEDUCTED FROM ASSET
ACCOUNTS
Allowance for Doubtful
Accounts
Year ended Dec 31, 1996 $7,800,000 $3,865,000 $2,165,000 $9,800,000
========== ========== ========== ==========
Year ended Dec 31, 1995 $6,400,000 $1,934,000 $534,000 $7,800,000
========== ========== ========== ==========
Year ended Dec 31, 1994 $3,800,000 $3,090,000 $800,000 $1,290,000 $6,400,000
========== ========== ======== ========== ===========
<FN>
<FN1> Uncollectible amounts written off, net of recoveries
<FN2> Represents allowance for doubtful accounts acquired in connection with
the acquisition of an additional 31% of Matsumoto Medical Instruments,
Inc. in August 1994, thereby increasing the Company's direct ownership
in Matsumoto to 51% and requiring Matsumoto's consolidation with
Stryker beginning with that date.
</FN>
</TABLE>
FORM 10-K--ITEM 14(c)
STRYKER CORPORATION AND SUBSIDIARIES
Exhibit Index
Exhibit
Page*
(3) Articles of incorporation and by-laws
(i) Restated Articles of Incorporation and amendment thereto
dated December 28, 1993.. . . . . . . . . . . . . . 13**
(ii) By Laws . . . . . . . . . . . . . . . . . . . . . . 13**
(10) Material contracts
(i) 1988 Stock Option Plan as amended . . . . . . . . . 14**
(ii) Supplemental Savings and Retirement Plan
(as Amended Effective January 1, 1995). . . . . . . 14**
(iii) Resolution amending the Supplemental Savings
and Retirement Plan (effective January 1, 1996) . . 20
(iv) Description of bonus arrangements between the Company and
certain officers, including Messrs. Brown, Elenbaas,
Laube, Lipes, Simpson and Winkel . . . . . . . . . 21
(11) Statement re computation of per share earnings
(i) Statement Re: Computation of earnings per share of
common stock. . . . . . . . . . . . . . . . . . . . 22
(13) Annual report to security holders
(i) Portions of the 1996 Annual Report that are
incorporated herein by reference. . . . . . . . . . 14**
(21) Subsidiaries of the registrant
(i) List of Subsidiaries. . . . . . . . . . . . . . . . 23
(23) Consents of experts and counsel
(i) Consent of Independent Auditors . . . . . . . . . . . 24
(27) Financial data schedule
(i) Financial data schedule (included in EDGAR filing only)
*Page number in sequential numbering system where such exhibit can be found,
or it is stated that such exhibit is incorporated by reference.
**Incorporated by reference in this Annual Report on Form 10-K.
EXHIBIT (10)(iii)
RESOLUTION AMENDING SUPPLEMENTAL SAVINGS AND RETIREMENT PLAN
(Adoped at a meeting of the Board of Directors of Stryker Corporation
held on Wednesday, December 6, 1995)
RESOLVED, that the Stryker Corporation Supplemental Savings
and Retirement Plan (the "Supplemental Plan") be, an it hereby is,
ameded effective January 1, 1996, to eliminate from the definition
of Compensation the proviso limiting Compensation to 200% of the
Section 401(a)(17) Limitation.
Further RESOLVED, that the proper Officers of the Company be, and they
hereby are, authorized and directed to take such steps as they deem
necessary or appropriate to effectuate the intent of the foregoing
resolutions.
Further RESOLVED, that the proper Officers of the Company be, and they
hereby are, authorized and directed to adopt from time to time such
technical amendments, and such other amendments that are not expected
give rise to a material cost increase to the Company, to the
Supplemental Plan and to the Company's savings plans as they deem
necessary or appriate.
EXHIBIT (10)(iv)
DESCRIPTION OF BONUS ARRANGEMENTS
The Company has entered into bonus arrangements with certain executive officers
for 1997, including Mr. Brown, Mr. Elenbaas, Mr. Laube, Mr. Lipes, Mr. Simpson
and Mr. Winkel, based on specific performance criteria including sales, profits
and asset management. The aggregate amount of such bonuses is not expected to
exceed $1,800,000.
<PAGE>
EXHIBIT (11)
STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE OF COMMON STOCK
<TABLE>
Year Ended December 31
___________________________________
1996 1995 1994
___________ __________ __________
<S> <C> <C> <C>
Average number of shares
outstanding 96,838,000 96,936,000 96,734,000
____________ ___________ ___________
Net earnings $104,460,000 $87,010,000 $72,400,000
============ =========== ===========
Net earnings per share of
common stock $1.08 $0.90 $0.75
===== ===== =====
Primary:
Average shares outstanding 96,838,000 96,936,000 96,734,000
Net effect of dilutive stock
options, based on the treasury
stock method using average market
price 1,743,000 1,598,000 1,474,000
__________ __________ __________
Total Primary Shares 98,581,000 98,534,000 98,208,000
========== ========== ==========
Fully Diluted:
Average shares outstanding 96,838,000 96,936,000 96,734,000
Net effect of dilutive stock
options, using the year-end
market price, if higher then
average market price 1,763,000 1,796,000 1,540,000
__________ __________ __________
Total Fully Diluted Shares 98,601,000 98,732,000 98,274,000
========== ========== ==========
</TABLE>
Note: Shares subject to stock options are not included in the earnings
per share computation because the present effect thereof is not
materially dilutive.
EXHIBIT (21)
List of Subsidiaries
State or Country of
Name of Subsidiary Incorporation
Diagnostic Treatment Rehabilitation Clinic Limited United Kingdom
Dimso Iberica S.A. Spain
Dimso SA France
Favro B.V. The Netherlands
N.V. Stryker S.A. Belgium
Oscobal AG Switzerland
Osteo AG Switzerland
Osteo America New Jersey
Osteo Australia Pty. Limited Australia
Osteo Deutschland GmbH Germany
Osteo France SARL France
Osteo Holding AG Switzerland
Osteo Polska SP.z0.0 Poland
Osteonics Corp. New Jersey
Physiotherapy Associates, Inc. Michigan
Physiotherapy Associates UK Ltd. United Kingdom
Stryker AB Sweden
Stryker Arroyo, Inc. Delaware
Stryker A/S Denmark
Stryker Australia Pty. Ltd. Australia
Stryker B.V. The Netherlands
Stryker (Barbados) Foreign Sales Corporation Barbados
Stryker Biotech B.V. The Netherlands
Stryker Biotech France SARL France
Stryker Canada Inc. Canada
Stryker China Limited Hong Kong
Stryker Corporation (Chile) y Compania Limitada Chile
Stryker Corporation (Malaysia) SDN.BHD. Malaysia
Stryker Deutschland GmbH Germany
Stryker Far East, Inc. Delaware
Stryker France SA France
Stryker Korea Ltd. Korea
Stryker B.V. The Netherlands
Stryker Mexico, S.A. de C.V. Mexico
Stryker-Osteonics SA Switzerland
Stryker/Osteonics PTY Ltd. South Africa
Stryker Ostereich GmbH Austria
Stryker Pacific Limited Hong Kong
Stryker Puerto Rico, Inc. Delaware
Stryker SA Switzerland
Stryker Sales Corporation Michigan
Stryker Singapore Private Limited Singapore
Stryker Corporation directly or indirectly owns 100% of the outstanding
voting securities of each of the above-named subsidiaries.
Stryker is a 51% investor in:
Matsumoto Medical Instruments, Inc. Japan
Stryker effectively controls:
Stryker India Medical Equipment Private Limited India
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 10K)
of Stryker Corporation of our report dated January 31, 1997, included in the
1996 Annual Report to Stockholders of Stryker Corporation.
Our audits also included the financial statement schedule of Stryker
Corporation and subsidiaries listed in Item 14(a). This schedule is the
responsibility of the Company's management. Our responsibility is to express
an opinion based on our audits. In our opinion, the financial statement
schedule referred to above, when considered in relation to the basic
consolidation financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
We also consent to the incorporation by reference in the Registration State-
ment Number 33-55662 on Form S-8 dated December 11, 1992, Registration
Statement Number 2-96467 on Form S-8 dated April 4, 1985, Registration
Statement Number 33-32240 on Form S-8 dated November 20, 1989, and to the
related prospectus for each of the registration statements of our report
dated January 31, 1997, with respect to the consolidated financial statements
incorporated herein by reference, and our report included in the preceding
paragraph with respect to the financial statement schedule included in this
Annual Report (Form 10K) of Stryker Corporation.
ERNST & YOUNG LLP
Kalamazoo, Michigan
March 17, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 175,673
<SECURITIES> 191,900
<RECEIVABLES> 175,552
<ALLOWANCES> 9,500
<INVENTORY> 127,387
<CURRENT-ASSETS> 753,537
<PP&E> 172,303
<DEPRECIATION> 117,882
<TOTAL-ASSETS> 993,506
<CURRENT-LIABILITIES> 251,741
<BONDS> 0
0
0
<COMMON> 9,679
<OTHER-SE> 520,682
<TOTAL-LIABILITY-AND-EQUITY> 993,506
<SALES> 910,060
<TOTAL-REVENUES> 910,060
<CGS> 392,358
<TOTAL-COSTS> 756,553
<OTHER-EXPENSES> (5,782)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,319
<INCOME-PRETAX> 160,446
<INCOME-TAX> 61,650
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 104,460
<EPS-PRIMARY> 1.08
<EPS-DILUTED> 1.08
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 69,049
<SECURITIES> 195,599
<RECEIVABLES> 163,593
<ALLOWANCES> 7,800
<INVENTORY> 133,619
<CURRENT-ASSETS> 623,253
<PP&E> 182,592
<DEPRECIATION> 102,909
<TOTAL-ASSETS> 854,891
<CURRENT-LIABILITIES> 174,438
<BONDS> 0
0
0
<COMMON> 9,711
<OTHER-SE> 444,568
<TOTAL-LIABILITY-AND-EQUITY> 854,891
<SALES> 871,852
<TOTAL-REVENUES> 871,952
<CGS> 369,444
<TOTAL-COSTS> 714,641
<OTHER-EXPENSES> (5,782)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,319
<INCOME-PRETAX> 163,093
<INCOME-TAX> 66,900
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 87,010
<EPS-PRIMARY> 0.90
<EPS-DILUTED> 0.90
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<CASH> 116,781
<SECURITIES> 85,264
<RECEIVABLES> 154,590
<ALLOWANCES> 6,400
<INVENTORY> 115,757
<CURRENT-ASSETS> 540,529
<PP&E> 271,268
<DEPRECIATION> 90,549
<TOTAL-ASSETS> 767,971
<CURRENT-LIABILITIES> 179,211
<BONDS> 0
0
0
<COMMON> 9,675
<OTHER-SE> 348,591
<TOTAL-LIABILITY-AND-EQUITY> 767,971
<SALES> 681,920
<TOTAL-REVENUES> 681,920
<CGS> 300,381
<TOTAL-COSTS> 561,444
<OTHER-EXPENSES> (7,099)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 127,575
<INCOME-TAX> 50,770
<INCOME-CONTINUING> 72,400
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 72,400
<EPS-PRIMARY> 0.75
<EPS-DILUTED> 0.75
</TABLE>
Report of Independent Auditors
Board of Directors
Stryker Corporation
We have audited the accompanying consolidated balance sheets of Stryker
Corporation and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of earnings, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1996.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Stryker
Corporation and subsidiaries at December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
Kalamazoo, Michigan
January 31, 1997
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
The table below outlines the components of the consolidated statements of
earnings as a percentage of net sales:
<TABLE>
Percentage of Net Sales Percentage Change
1996 1995 1994 1996/95 1995/94
______ ______ ______ _______ _______
<S> <C> <C> <C> <C> <C>
Net Sales 100.0% 100.0% 100.0% 4% 28%
Cost of sales 43.1 42.4 44.0 6 23
Research, development
and engineering expense 6.2 5.0 5.8 30 10
Selling, general and
administrative expense 35.9 34.6 32.5 8 36
Special charges 4.6
Gain on patent judement (6.7)
______ ______ ______
Operating Income 16.9 18.0 17.7 (2) 31
Other income 0.7 0.7 1.0 20
______ ______ ______
Earnings Before Income
Taxes & Minority Int. 17.6 18.7 18.7 (2) 28
Income taxes 6.7 7.7 7.4 (8) 32
______ ______ ______
Earnings Before Minority
Interest 10.9 11.0 11.3 3 25
Minority interest 0.6 (1.0) (.7)
______ ______ ______
Net Earnings 11.5% 10.0% 10.6% 20 20
===== ===== =====
</TABLE>
The table below sets forth domestic/international and product line sales
information:
<TABLE>
Net Sales (in thousands) Percentage Change
1996 1995 1994 1996/95 1995/94
____ ____ ____ _______ _______
<S> <C> <C> <C> <C> <C>
Domestic/International Sales
Domestic $564,534 $477,207 $405,549 18% 18%
International 345,526 394,745 276,371 (12) 43
________ ________ ________
Total Net Sales $910,060 $871,952 $681,920 4 28
======== ======== ========
Product Line Sales
Stryker Surgical $669,898 $608,646 $502,961 10 21
Stryker Medical 196,083 158,516 135,520 24 17
Matsumoto Dist. Prod. 44,079 104,790 43,439 (58) 141
________ _______ ________
Total Net Sales $910,060 $871,952 $681,920 4 28
======== ======== ========
</TABLE>
1996 COMPARED TO 1995
Stryker Corporation's net sales increased 4% in 1996 to $910.1 million from
$872.0 million in 1995. Increased unit volume of Stryker Surgical and Medical
products generated an 11% sales increase. Net sales also increased 3% as a
result of acquired businesses and 1% as a result of the Company's conversion
of certain portions of the Osteonics domestic distribution network to direct
sales, which resulted in higher selling prices. These increases were
partially offset by a 6% decrease in unit volume of Matsumoto Distributed
Products, a 4% decrease arising from changes in foreign currency exchange
rates and a 1% decline in selling prices.
The Company's domestic sales increased 18% in 1996 compared to 1995. The
leading domestic sales gains came from strong shipments of endoscopic
equipment, powered surgical instruments and orthopaedic implants; increased
revenue from physical therapy services; and higher shipments of hospital beds
and stretchers. International sales declined 12% for the year as lower sales
in Japan more than offset strong shipments in the other international
markets. Sales in Japan declined 31% for the year because of lower shipments
of Matsumoto Distributed Products, which are sourced by Matsumoto from other
companies for sale in Japan, and unfavorable currency comparisons. Sales in
the other international markets increased 20% for the year.
Sales of Stryker Surgical products (principally orthopaedic products) increased
10% for the year. The sales gains for the year resulted from higher shipments
of orthopaedic implants, especially the Osteonics Series 7000 knee implants,
powered surgical instruments and endoscopic equipment but were reduced by the
lower dollar translation of foreign currency sales. Stryker Medical product
sales increased 24% for the year resulting from increased revenues from physical
therapy services, primarily as a result of business acquisitions and higher
shipments of hospital beds and stretchers. Sales of Matsumoto Distributed
Products declined 58% for the year. The decline is a result of the termination
of several distribution arrangements commencing in the third quarter of 1995 and
unfavorable foreign currency comparisons in Japan. Matsumoto has lost three
major suppliers who have chosen other distribution channels. Matsumoto has
introduced new products to replace two of the lost lines.
Cost of sales represented 43.1% of sales compared to 42.4% in 1995. The higher
cost of sales percentage in 1996 resulted from additional inventory adjustments
of $13.8 million recorded in the fourth quarter of 1996 for excess inventory and
product deletions, principally in Japan, and obsolete inventory resulting from
new product introductions. The effect of these adjustments was partially offset
by the conversion of certain portions of the Osteonics domestic distribution
network, which resulted in increased direct sales to hospitals. Research,
development and engineering expense increased 30% as the Company spent
$56.9 million on product development in 1996 compared to $43.8 million in 1995.
The increase in research, development and engineering expense as a percentage of
sales in 1996 is principally a result of the continued development of the OP-1
bone growth device at Stryker Biotech and the Company-wide focus on new product
development. New products in 1996 include the TPS advanced micro-powered
instruments, the Osteonics Total Shoulder System, the 882 3-Chip Camera System,
the Advanced Cement Mixing System, Passport knee instruments, several new
arthroscopy instruments and the 2025 ICU Bed. Selling, general and
administrative expenses increased 8% in 1996 as a result of increased selling
expense resulting from the changes in the Osteonics distribution network, larger
sales forces and the incremental expenses incurred as a result of the Osteo
Holdings AG ("Osteo") acquisition. Also, $8.9 million of adjustments were made
in the fourth quarter for additional legal reserves, depreciation charges due to
a change in estimate, and other matters. Selling, general, and administrative
expenses increased to 35.9% of sales in 1996 compared to 34.6% in 1995.
There were several significant unusual items reflected in continuing operations
in 1996. Special charges of $41.8 million were recorded in the fourth quarter
consisting of $15.0 million for the reorganization of the Company's
distribution channels, $14.6 million relating to asset impairments, $7.5 million
for purchased in-process research and development, and $4.7 million for patent
claims. The reorganization of the Company's distribution channels relates to
the implementation of a plan to convert a portion of the Company's distributors
to direct sales. The cost of the conversions are based on contractual terms.
During the fourth quarter of 1996, certain assets in Tokyo, Japan, were
designated as assets to be disposed of and were written down $9.7 million to
their fair value. In addition, an estimated undiscounted cash flow analysis
confirmed the impairment of certain goodwill, which was written down by $3.9
million to its fair value. Seven and a half million dollars of the Osteo
purchase price was allocated to purchased in-process research and development
and charged to operations based upon a valuation completed in the fourth
quarter. Patent claims represent amounts that the Company has agreed to pay
for patent disputes related to certain of its products. In addition, the
Company was awarded and paid $77.6 million in damages, attorney fees and
interest for infringement of the Company's U.S. patent on its OmniFlex Hip
System. The Company recognized a pre-tax gain, net of related legal fees
and other expenses, of $61.1 million.
The effective tax rate decreased to 38.4% in 1996 compared to 41% in 1995 as a
result of losses reported by Matsumoto, which provided a tax benefit at the
higher Japanese tax rate. The net losses reported at Matsumoto reduced
Stryker's operating income below the prior year level; however, 49% of those
losses were reversed by the minority interest benefit. As a result, earnings
before income taxes and minority interest declined 2%, and minority interest
was reflected as an income item in 1996. Net earnings increased 20% to $104.5
million in 1996 compared to $87.0 million in 1995.
1995 COMPARED TO 1994
Stryker Corporation's net sales increased 28% in 1995 to $872.0 million from
$681.9 million in 1994. The 1994 purchase by Stryker of an additional 31%
interest in Matsumoto, and Matsumoto's resulting consolidation with Stryker
beginning in August 1994, accounted for a 15% sales increase through incremental
sales of Matsumoto Distributed Products and incremental margins and increased
unit volume of Stryker products in Japan for the first seven months of 1995.
Increased unit volume generated a 6% sales increase, other business
acquisitions accounted for a 3% increase, and a 1% increase arose from changes
in foreign currency exchange rates. Net sales increased 3% as a result of the
Company's conversion of certain portions of the Osteonics domestic distribution
network to direct sales, which began in 1994 and resulted in higher selling
prices offset by the repurchase of inventory from distributors converted
in 1995.
The Company's domestic sales increased 18% in 1995 compared to 1994. The
leading domestic sales gains came from strong shipments of Stryker Surgical
products and increased physical therapy revenue. International sales increased
43% in 1995 and were led by incremental Japanese sales from the consolidation of
Matsumoto along with increased shipments of Stryker Surgical and Medical
products. International sales grew to 45% of total sales in 1995 compared to
41% in 1994.
Stryker Surgical product sales (principally orthopaedic products) increased 21%
for the year. The increase in domestic sales of Stryker Surgical products was
led by Osteonics hip and knee implants, the Steri-Shield Personal Protection
System product line acquired in June 1994 and Stryker Instruments' heavy-duty
powered surgical instruments and High Vacuum Cement Injection System. The
increase in international sales of Stryker Surgical products was led by
incremental sales from the consolidation of Matsumoto along with sales of
Osteonics orthopaedic implants, endoscopic equipment and powered surgical
instruments. Stryker Medical product sales (principally specialty stretchers
and beds and physical therapy services) increased 17% for the year, led by
increased revenues from physical therapy services, primarily as a result of
business acquisitions during the year. Sales of Matsumoto Distributed Products
increased by 141% for the year as a result of the consolidation of Matsumoto
for twelve months in 1995 and only five months in 1994. Sales of Matsumoto
Distributed Products declined 29% in the fourth quarter of 1995 compared to the
fourth quarter of 1994 as a result of the termination of several distribution
agreements.
Cost of sales represented 42.4% of sales compared to 44.0% in 1994. The lower
cost of sales percentage in 1995 resulted from additional margins on Stryker
products sold by Matsumoto since its consolidation and the conversion of
certain portions of the Osteonics domestic distribution network, which
resulted in increased direct sales to hospitals. Research, development and
engineering expense increased 10% as the Company spent $43.8 million on
product development in 1995 compared to $39.6 million in 1994. The decrease
in research, development and engineering expense as a percentage of sales in
1995 is principally a result of consolidating Matsumoto which, as a
distributor, incurs minimal research and development costs. The Company's
continued commitment to product development resulted in several new products in
1995 including the Secure-Fit HA total hip implant system, the Restoration
HA Hip System for revision surgery, the Insight Knee Positioning and
Alignment System for knee replacement surgery, the 810 3-Chip Camera System,
the StrykeFlow suction/irrigator for laparoscopic surgery, the 4100 Cordless
Driver and the Stryker Stretcher Chair. Selling, general and administrative
expenses increased 36% in 1995 as a result of consolidating Matsumoto which,
as a distributor, has a higher percentage of these expenses, along with
increased selling expenses resulting from the changes in the Osteonics
distribution network. These costs increased to 34.6% of sales in 1995 compared
to 32.5% in 1994.
The effective tax rate increased to 41.0% in 1995 compared to 39.8% in 1994 as
a result of the higher Japanese tax rate on the earnings of Matsumoto.
Earnings before minority interest increased 25% in 1995 compared to 1994.
Net earnings in 1995 were $87.0 million, a 20% increase over the Company's 1994
net earnings of $72.4 million. The consolidation with Matsumoto increased net
earnings for 1995 by $3.0 million ($.06 per share) from 1994.
LIQUIDITY AND CAPITAL RESOURCES
Stryker's financial position continued to strengthen in 1996, with operating
activities providing $204.3 million in cash, which includes $77.6 million
received from the gain on the patent judgment. Working capital at December 31,
1996, increased by $53 million to $501.8 million from $448.8 million in 1995.
Accounts receivable increased 2% and days sales outstanding at the end of 1996
decreased to 62 days from 64 days at the end of 1995. Inventories decreased 5%
in 1996 and days sales in inventory finished 1996 at 104 days compared to 133
days at the end of 1995.
In September 1996, the Company purchased 100% of the outstanding stock of Osteo
Holdings AG and its subsidiaries. The purchase price of Sfr 55 million ($45.5
million) was paid Sfr 50 million ($41.5 million) in cash with the remaining
amount being paid ratably over a five-year period. During 1996, the Company
repurchased 657,200 shares of common stock (after adjustment for the two-for
- -one stock split) in the open market at a cost of $15.1 million. A portion
of these purchases brought the total shares repurchased under a December 9,
1993, repurchase authorization by the Company's Board of Directors to 895,000
of the 1,200,000 shares authorized. This repurchase authorization was replaced
by a new authorization approved by the Board of Directors on April 24, 1996,
for repurchases of up to 1,000,000 split-adjusted shares of common stock.
Seven thousand two-hundred shares have been repurchased under the new share
repurchase program. Shares repurchased under the share repurchase programs
will be used for employee stock option plans and other corporate purposes.
The Company's cash and marketable securities of $367.6 million at December 31,
1996, as well as anticipated cash flows from operations, are expected to be
sufficient to fund planned future operating capital requirements and to finance
future acquisitions. Should additional funds be required, the Company has
unsecured lines of credit with banks totaling $52.4 million, of which none were
utilized at December 31, 1996.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
STRYKER CORPORATION AND SUBSIDIARIES
December 31, 1996
1. Significant Accounting Policies
BUSINESS: Stryker Corporation develops, manufactures and markets specialty
surgical and medical products which are sold primarily to hospitals throughout
the world and provides outpatient physical therapy services in the United
States.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries and, effective in
August 1994 (see Note 4), its 51% owned subsidiary, Matsumoto Medical
Instruments, Inc., after elimination of all significant intercompany accounts
and transactions. Minority interest represents the minority stockholders'
equity in Matsumoto's net earnings (loss) since August 1994 and their equity
in Matsumoto's net assets at December 31, 1996 and December 31, 1995. The
Company's original 20% investment in Matsumoto was accounted for by the equity
method until July 1994.
REVENUE RECOGNITION: Revenue is recognized on the sale of products and
services when the related goods have been shipped or services have been
rendered.
USE OF ESTIMATES: The preparation of these consolidated financial statements
in conformity with generally accepted accounting principles requires Company
management to make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. Actual results could
differ from those estimates.
CASH EQUIVALENTS AND INVESTMENTS: Cash equivalents are highly liquid
investments with a maturity of three months or less when purchased.
Investments include marketable debt securities classified as current assets and
marketable equity securities classified in other assets.
The Company's investments in marketable equity and debt securities are
classified as "available-for-sale" and are carried at fair value, with the
unrealized gains and losses, net of income taxes, reported as a separate
component of stockholders' equity. Interest, dividends and realized gains and
losses on the sale of such securities are included in other income.
INVENTORIES: Inventories are stated at the lower of cost or market. Cost for
approximately 75% (78% in 1995) of inventories is determined using the lower
of first-in, first-out (FIFO) cost or market. Cost for certain domestic
inventories is determined using the last-in, first-out (LIFO) cost method.
The FIFO cost for all inventories approximates replacement cost.
PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment is stated at
cost. Depreciation is computed by the straight-line or declining balance
methods over the estimated useful lives of the assets.
INTANGIBLE ASSETS: Intangible assets represent the excess of purchase price
over fair value of tangible net assets of acquired businesses. Intangible
assets, which include patents and intangibles not specifically identifiable,
are being amortized using the straight-line method over periods of up to
twenty years.
INCOME TAXES: The Company accounts for income taxes using the liability
method. Under this method, deferred tax assets and liabilities are determined
based on differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates in effect for the years
in which the differences are expected to reverse. Deferred tax expense
represents the change in net deferred tax assets and liabilities during the
year.
STOCK OPTIONS: The Company follows Accounting Principles Board (APB) Opinion
No. 25, Accounting for Stock Issued to Employees" in accounting for its employee
stock options. Under APB 25, no compensation expense is recognized because the
exercise price of the Company's employee stock options equals the market price
of the underlying stock on the date of grant.
EARNINGS PER SHARE: Earnings per share is based upon the average number of
shares of common stock outstanding during each year. Shares subject to option
are not included in earnings per share computations because the present effect
thereof is not materially dilutive.
2. Investments
Effective January 1, 1994, the Company adopted Financial Accounting Standards
Board (FASB) Statement No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," for investments held as of or acquired after that date. In
accordance with the Statement, prior period financial statements were not
restated to reflect the change in accounting principle. The balance of
stockholders' equity at January 1, 1994 was increased by $1,180,000 (net of
$751,000 in deferred income taxes) to reflect the net unrealized holding gains
on securities classified as available-for-sale previously carried at cost.
The following is a summary of the Company's investments in marketable equity and
debt securities (in thousands):
<TABLE>
Gross Gross Estimated
Unrealized Unrealized Fair
Cost Gains Losses Value
________ __________ __________ _________
S> <C> <C> <C> <C>
At December 31, 1996:
Debt securities $192,334 $360 ($794) $191,900
Equity ecurities 7,117 3,654 (1,199) 9,572
________ ______ ________ ________
Total $199,451 $4,014 ($1,993) $201,472
======== ====== ======== ========
At December 31, 1995:
Debt securities $193,988 $1,720 ($109) $195,599
Equity securities 7,575 2,579 (226) 9,928
________ ______ _______ ________
Total $201,563 $4,299 ($335) $205,527
======== ====== ======= ========
</TABLE>
Gross realized gains on sales of the Company's investments totaled $516,000,
$248,000 and $50,000 in 1996, 1995 and 1994, respectively, and gross realized
losses totaled $589,000, $768,000 and $306,000 in 1996, 1995 and 1994,
respectively. At December 31, 1996, approximately 19% of the Company's
investments in debt securities mature within one year and substantially all of
the remainder mature within three years.
Interest income, which is included in other income, totaled $13,339,000 in 1996,
$11,197,000 in 1995 and $6,048,000 in 1994.
3. Inventories
Inventories are as follows (in thousands):
<TABLE>
December 31
1996 1995
____ ____
<S> <C> <C>
Finished goods $94,424 $105,209
Work-in-process 8,328 7,552
Raw material 31,989 28,602
_______ _______
FIFO cost 134,741 141,363
Less LIFO reserve 7,354 7,744
_______ _______
$127,387 $133,619
======== ========
</TABLE>
4. Business Acquisitions
In September 1996, the Company purchased 100% of the outstanding stock of Osteo
Holdings AG and its subsidiaries ("Osteo"), based in Selzach, Switzerland.
Osteo designs and manufactures trauma products and reconstructive orthopaedic
devices. The purchase price of Sfr 55 million ($45.5 million) was paid Sfr 50
million ($41.5 million) in cash with the remaining amount being paid ratably
over a five year period. The acquisition was accounted for using the purchase
method. The results of operations for Osteo are included in the Company's
consolidated financial statements beginning in September 1996. Of the excess
purchase price over fair value of the net tangible assets acquired, $7.5 million
was allocated to purchased in-process research and development and was charged
to operations (See Note 5) upon the completion of the valuation. The remaining
excess purchase price of $27.6 million was allocated to intangibles to be
amortized over fifteen years.
During 1996, 1995 and 1994, the Company's subsidiary, Physiotherapy Associates,
Inc., purchased several physical therapy clinic operations. The aggregate
purchase price of these clinics in 1996, 1995 and 1994 was approximately
$8,605,000, $5,700,000 and $7,600,000, respectively. Intangible assets
acquired, principally employment contracts and goodwill, are being amortized
over periods ranging from one to fifteen years.
In June 1994, the Company purchased the Steri-Shield product line, which is a
personal protection system for operating room personnel. The acquisition was
accounted for by the purchase method at a total cost of $6,500,000, of which
$5,500,000 in royalties will be paid over the following seven years. Intangible
assets acquired, principally patents, are being amortized over seven to ten
years.
For all of the above acquisitions, pro forma consolidated results would not
differ significantly from reported results.
In August 1994, the Company purchased 31% of the outstanding common stock of
Matsumoto Medical Instruments, Inc., Osaka, Japan, thereby increasing its direct
ownership interest in Matsumoto to 51%.
Matsumoto is one of the largest distributors of medical devices in Japan and is
the exclusive distributor of most Stryker products in that country. The cost of
the 31% investment, which was based on net book value, was approximately
6.0 billion yen ($62.0 million). Payment of approximately 847 million yen
($9.8 million) of the purchase price was deferred to March 1995. The
acquisition was accounted for by the purchase method and the results of
operations for Matsumoto were consolidated with Stryker beginning in August
1994. If the acquisition had occurred on January 1, 1994, pro forma net sales
for the Company in 1994 would have been $762,341,000.
5. Special Charges
In the fourth quarter of 1996, the Company recorded special pre-tax charges of
$41,778,000 consisting of the following items (in thousands):
<TABLE>
Special
Charges
_______
<S> <C>
Reorganization of distribution channels $15,000
Asset impairments 14,578
Purchased in-process research
and development (See Note 4) 7,500
Patent claims 4,700
_______
$41,778
=======
</TABLE>
Reorganization of distribution channels consists of a $15,000,000 charge
related to the implementation of a plan to convert a portion of the Company's
distributors to direct sales. The cost of the conversions are based on
contractual terms. Asset impairments consist of land, building and goodwill
impairments of $14,578,000. During the fourth quarter, Matsumoto analyzed its
branch operations throughout Japan and determined that certain assets, which
consist of land and a parking garage in Tokyo, Japan, would no longer be
utilized in its normal operations. Based on this evaluation, the Company
adopted a plan to sell these assets and wrote them down $9,678,000 to their
fair value, which was estimated based on market value information of
comparable properties in Tokyo. Also during the fourth quarter, an
estimated undiscounted cash flow analysis indicated that certain goodwill
was impaired. The goodwill was written down $3,900,000 to its fair value,
which was based on discounted future cash flows. Patent claims, which
are included in accrued expenses, represent amounts that the Company has
agreed to pay for patent disputes related to certain of its products.
6. Gain on Patent Judgment
In September 1996, the United States Court of Appeals for the Federal Circuit
affirmed the 1995 decision of the Federal District Court for the Eastern
District of New York awarding the Company damages, attorneys' fees and interest
for infringement of the Company's U.S. patent on its Omniflex Hip System. A
petition for rehearing or rehearing en banc was denied by the Federal Circuit
Court in December 1996 and the Company was paid $77,600,000. The Company
recognized a pre-tax gain, net of related legal fees and other expenses, of
$61,094,000, which is included in operating income.
7. Borrowings
The Company and its subsidiaries have unsecured short-term line of credit
arrangements with banks aggregating $20,000,000 domestically and $32,400,000
equivalent in foreign currencies. There were no borrowings under these lines at
December 31, 1996. These lines generally expire on July 31, 1997.
Long-term debt is as follows (in thousands):
<TABLE>
December 31
1996 1995
____ ____
<S> <C> <C>
Bank loans $81,785 $91,606
Other 12,120 8,413
_______ _______
93,905 100,019
Less current
maturities 4,403 3,052
_______ _______
$89,502 $96,967
======= =======
</TABLE>
The bank loans represent two separate borrowings made to finance the
acquisition of the Company's 51% interest in Matsumoto Medical Instruments,
Inc. (see Note 4). Both loans are Japanese yen denominated, are unsecured and
mature in August 1998. The first loan is from the Chicago branch of The Sanwa
Bank, Limited, has a principal balance of $29,611,000 ($33,167,000 at December
31, 1995) and bears interest at a fixed annual rate of 4.76%. The second
loan is a floating rate loan (Japanese Libor + 0.25%) from the Chicago
branches of The Bank of Tokyo-Mitsubishi, Ltd. and The Sanwa Bank, Limited and
has a principal balance of $52,174,000 ($58,439,000 at December 31, 1995). The
Company has fixed the effective annual interest rate of this debt at 4.10%
using an interest rate swap with a notional amount and term equal to that of
the related loan. The yen denominated loans act as hedges of the Company's
investment in Matsumoto. As a result, adjustments made to the loan balances
to reflect applicable currency exchange rates at December 31 are included in
the foreign translation adjustments component of stockholders' equity.
Maturities of debt for the four years succeeding 1997 are: 1998 - $84,811,000;
1999 - $4,368,000; 2000 - $66,000; and 2001 - $72,000.
The carrying amounts of the Company's long-term debt and interest rate swap
approximate their fair values based on the Company's current borrowing rates for
similar types of borrowing agreements and quoted market rates, respectively.
Interest expense on debt, which is included in other income and approximates
interest paid, was $4,349,000 in 1996, $6,319,000 in 1995, and $3,677,000 in
1994.
8. Capital Stock
On May 10, 1996, the Company effected a two-for-one stock split. All share and
per share data have been adjusted to reflect the stock split as though it had
occurred at the beginning of the earliest period presented.
The Company has key employee and director Stock Option Plans under which options
are granted at a price not less than fair market value at the date of grant.
The options are granted for periods of up to ten years and become exercisable in
varying installments. A summary of stock option activity follows:
<TABLE>
Weighted
Average
Shares Option Price
______ ____________
<S> <C> <C>
Options Outstanding at January 1, 1994 3,313,050 $ 9.11
Granted 75,000 13.16
Canceled (116,000) 10.49
Exercised (176,080) 5.11
_________ ______
Options Outstanding at December 31, 1994 3,095,970 9.38
Granted 50,000 22.94
Canceled (133,400) 11.00
Exercised (369,170) 6.93
_________ ______
Options Outstanding at December 31, 1995 2,643,400 9.90
Granted 955,000 22.50
Canceled (185,200) 15.47
Exercised (218,600) 9.12
_________ ______
Options Outstanding at December 31, 1996 3,194,600 $13.40
========= ======
</TABLE>
At December 31, 1996, options for 1,684,600 shares were exercisable at a
weighted average exercise price of $8.61 and 1,580,800 shares were reserved for
future grants. Exercise prices for options outstanding as of December 31, 1996
ranged from $2.17 to $30.75. Net earnings and net earnings per share would not
be materially different if the Company accounted for its employee stock options
under the fair value method as provided for under FASB Statement No. 123,
"Accounting for Stock-Based Compensation."
The Company has 500,000 authorized shares of $1 par value preferred stock, none
of which are outstanding.
9. Retirement Plans
Substantially all employees of the Company are covered by retirement plans. The
majority of employees are covered by profit sharing or defined contribution
retirement plans.
The Company's 51% owned subsidiary, Matsumoto Medical Instruments, Inc., has a
noncontributory defined benefit plan covering all employees who are generally
entitled, upon termination, to lump-sum or annuity payments of amounts
determined by reference to the current level of salary, length of service, and
the conditions under which the termination occurs. Matsumoto's funding policy
for the plan is to contribute actuarially determined amounts on a monthly basis.
During 1996, Matsumoto changed the plan's benefit formula which caused the
projected benefit obligation to decrease by $4,550,000. In addition, certain
officers of Matsumoto are customarily entitled to lump-sum payments under an
unfunded retirement plan. An accrual has been provided for the expected cost of
these benefits earned to date, although such payments are subject to the
approval of Matsumoto's stockholders. The net periodic retirement costs for the
Matsumoto retirement plans totaled $1,290,000 in 1996, $2,276,000 in 1995, and
$758,000 in 1994.
The following is a summary of the significant actuarial assumptions used as of
December 31:
<TABLE>
1996 1995 1994
____ ____ ____
<S> <C> <C> <C>
Discount rate 4.50% 4.50% 5.50%
Expected long-term rate of return on assets 3.00% 3.00% 5.00%
Rate of increase in compensation levels 2.33% 6.00% 6.00%
</TABLE>
The funded status of the plan is as follows (in thousands):
<TABLE>
December 31
1996 1995
____ ____
<S> <C> <C>
Vested accumulated plan benefits $4,620 $3,309
===== =====
Accumulated benefit obligation 4,784 6,364
===== =====
Projected benefit obligation for
service rendered to date 6,909 12,437
Plan assets at fair value (stocks & bonds) (5,151) (5,455)
______ ______
Net pension obligation 1,758 6,982
Unrecognized net pension asset (obligation) 3,283 (556)
______ ______
Accrued pension obligation 5,041 6,426
Accrued retirement benefits for officers 6,520 9,943
______ ______
Accrued retirement benefits
(included in other liabilities) $11,561 $16,369
======= =======
</TABLE>
Retirement plan expense under the Company's profit sharing and defined
contribution retirement plans totaled $10,147,000 in 1996, $8,977,000 in
1995 and $5,995,000 in 1994.
10. Income Taxes
Earnings before income taxes and minority interest consist of the following
(in thousands):
<TABLE>
1996 1995 1994
____ ____ ____
<S> <C> <C> <C>
United States operations $152,680 $103,813 $100,996
Foreign operations 7,766 59,280 26,579
________ ________ ________
$160,446 $163,093 $127,575
======== ======== ========
</TABLE>
The components of the provision for income taxes follow (in thousands):
<TABLE>
1996 1995 1994
____ ____ ____
<S> <C> <C> <C>
Current
Federal $74,808 $34,676 $31,932
State, including Puerto Rico 8,981 2,300 5,133
Foreign 8,554 27,440 17,523
_______ _______ _______
92,343 64,416 54,588
Deferred tax expense (credit) (30,693) 2,484 (3,818)
_______ _______ _______
$61,650 $66,900 $50,770
======= ======= =======
</TABLE>
A reconciliation of the statutory federal income tax rate to the Company's
effective tax rate follows:
<TABLE>
1996 1995 1994
____ ____ ____
<S> <C> <C> <C>
U.S. statutory income tax rate 35.0% 35.0% 35.0%
Add (deduct):
State taxes, less effect of federal
deduction 1.3 .3 2.3
Foreign income taxes at rates different
from the U.S. statutory rate (1.5) 6.8 5.4
Tax benefit relating to operations in
Puerto Rico (1.5) (1.7) (2.0)
Earnings of Foreign Sales Corporation (1.6) (1.0) (1.4)
Nondeductible purchased research &
development & permanent differences 2.6 (0.1) (0.1)
Other 4.1 1.7 0.6
____ ____ ____
38.4% 41.0% 39.8%
==== ==== ====
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The tax effect of
significant temporary differences which comprise the Company's deferred tax
assets and liabilities are as follows (in thousands):
<TABLE>
December 31
1996 1995
____ ____
<S> <C> <C>
Deferred Tax Assets:
Inventories $38,887 $30,533
Accounts receivable & other assets 2,757 1,877
Other accrued expenses 33,643 20,729
State taxes 3,446 1,677
Other 2,126 164
_______ _______
Total Deferred Tax Assets 80,859 54,980
Deferred Tax Liabilities:
Depreciation (546) (2,017)
Other (1,861) (2,030)
_______ _______
Total Deferred Tax Liabilities (2,407) (4,047)
_______ _______
Total Net Deferred Tax Assets $78,452 $50,933
======= =======
</TABLE>
Deferred tax assets and liabilities are included in the consolidated balance
sheets as follows (in thousands):
<TABLE>
December 31
1996 1995
____ ____
<S> <C> <C>
Current assets -- Deferred income taxes $78,034 $47,058
Noncurrent assets -- Other assets 2,825 6,269
Noncurrent liabilities -- Other liabilities (2,407) (2,394)
_______ _______
Total Net Deferred Tax Assets $78,452 $50,933
======= =======
</TABLE>
No provision has been made for U.S. federal and state income taxes or foreign
taxes that may result from future remittances of the undistributed earnings
($177,180,000 at December 31, 1996) of foreign subsidiaries because it is
expected that such earnings will be reinvested overseas indefinitely.
Determination of the amount of any unrecognized deferred income tax liability on
these unremitted earnings is not practicable.
Total income taxes paid were $62,330,000 in 1996, $70,009,000 in 1995 and
$51,898,000 in 1994.
11. Geographic Data
Information in the table below is presented on the same basis as utilized by the
Company to manage the business. The Company's area of operations outside the
United States, Europe and Pacific principally includes Canada, Latin America and
the Middle East.
Geographic area information follows (in thousands):
<TABLE>
1996 1995 1994
____ ____ ____
<S> <C> <C> <C>
Net Sales
United States operations:
Domestic $564,534 $477,207 $405,549
Export 156,242 137,355 117,669
Foreign operations:
Pacific 193,723 272,362 130,223
Europe 102,859 83,674 70,366
Other 15,764 13,521 12,094
Eliminations (123,062) (112,167) (53,981)
________ ________ ________
Total Net Sales $910,060 $871,952 $681,920
======== ======== ========
Operating Income
United States operations $176,370 $121,411 $109,429
Foreign operations:
Pacific (19,824) 35,060 12,560
Europe 8,396 9,491 6,554
Other 2,561 1,954 1,686
________ ________ ________
Total Foreign Operations (8,867) 46,505 20,800
Corporate expenses (13,996) (10,605) (9,753)
________ ________ ________
Total Operating Income $153,507 $157,311 $120,476
======== ======== ========
Assets
United States operations $319,481 $283,471 $248,883
Foreign operations:
Pacific 228,315 273,686 281,259
Europe 118,292 65,406 50,111
Other 12,500 9,304 9,801
Corporate 314,918 223,024 177,917
________ ________ ________
Total Assets $993,506 $854,891 $767,971
======== ======== ========
</TABLE>
Intercompany sales between geographic areas are included in export and foreign
operations sales at agreed upon prices which include a profit element.
Gains on foreign currency transactions, which are included in other income,
totaled $1,949,000, $904,000 and $586,000 in 1996, 1995 and 1994, respectively.
Corporate assets consist primarily of domestic cash and cash equivalents and
marketable securities.
12. Leases
The Company leases various manufacturing and office facilities and equipment
under operating leases. Future minimum lease commitments under these leases are
as follows (in thousands):
1997 $13,676
1998 10,819
1999 7,386
2000 4,426
2001 2,943
Thereafter 2,615
_______
$41,865
=======
Rent expense totaled $24,915,000 in 1996, $21,437,000 in 1995 and $14,644,000
in 1994.
13. Contingencies
The Company is involved in various claims and legal actions arising in the
normal course of business. The Company does not anticipate material losses
as a result of these actions.
CONSOLIDATED STATEMENTS OF EARNINGS
STRYKER CORPORATION AND SUBSIDIARIES
<TABLE>
Years Ended December 31
(in thousands, except per share amounts) 1996 1995 1994
_____ _____ _____
<S> <C> <C> <C>
Net Sales $910,060 $871,952 $681,920
Costs and expenses:
Cost of sales 392,358 369,444 300,381
Research, development and engineering 56,870 43,771 39,630
Selling, general and administrative 326,641 301,426 221,433
Special charges 41,778
Gain on patent judgment (61,094)
_______ _______ _______
756,553 714,641 561,444
Operating Income 153,507 157,311 120,476
Other income 6,939 5,782 7,099
_______ _______ _______
Earnings Before Income Taxes and
Minority Interest 160,446 163,093 127,575
Income taxes 61,650 66,900 50,770
_______ _______ _______
Earnings Before Minority Interest 98,796 96,193 76,805
Minority interest 5,664 (9,183) (4,405)
________ _______ _______
Net Earnings $104,460 $87,010 $72,400
======== ======= =======
Net Earnings Per Share of Common Stock $1.08 $.90 $.75
Average Number of Shares Outstanding 96,838 96,936 96,734
See accompanying notes to consolidated financial statements.
</TABLE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
STRYKER CORPORATION AND SUBSIDIARIES
<TABLE>
Unrealized
Years Ended December 31 Adtl. Gains Foreign
(in thousands,except per Common Paid-In Retained (Losses) Trans.
share amounts Stock Capital Earnings Securities Adj.
____ _______ ________ __________ ___
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1994
as previously reported $4,840 $17,111 $268,367 ($1,884)
Adjustment for May 10, 1996
stock split (see Note 8) 4,841 (4,841)
______ ______ ________ _______ ______
Balance at January 1, 1994,
as restated 9,681 12,270 268,367 (1,884)
Net earnings for 1994 72,400
Sales of 192 shares of common
stock under stock option and
benefit plans, including $740
income tax benefit 18 1,773
Repurchases of 244 shares of
common stock (24) (3,085)
Cash dividend declared of $.04
per share of Common stock (3,870)
Adjustment to beginning balance for
change in accounting method,
net of income taxes of $751 $1,180
Unrealized losses, net of
$1,636 income tax benefit (2,495)
Translation adjustment 3,935
______ ______ _______ _______ _____
Balance at December 31, 1994 9,675 10,958 336,897 (1,315) 2,051
Net earnings for 1995 87,010
Sales of 370 shares of common
stock under stock option and
benefit plans, including
$1,615 income tax benefit 36 3,778
Cash dividend declared of
$.045 per share of common stock (4,370)
Unrealized gains, net of
income taxes of $2,535 3,629
Translation adjustment 5,930
______ ______ _______ _______ _____
Balance at December 31, 1995 9,711 14,736 419,537 2,314 7,981
Net earnings for 1996 104,460
Sales of 257 shares of common
stock under stock option and
benefit plans, including
$1,152 income tax benefit 26 4,095
Common stock issued in
business acquisitions 8 2,089
Repurchases of 657 shares of
common stock (66) (14,998)
Cash dividend declared of $.10
per share of common stock (9,679)
Unrealized losses, net of $825
income tax benefit (1,118)
Translation adjustment (8,735)
______ _______ _______ ______ ______
Balance at December 31, 1996 $9,679 $5,922 $514,318 $1,196 ($754)
====== ====== ======== ====== ======
See accompanying notes to condolidated financial statements.
</TABLE>
CONSOLIDATED BALANCE SHEETS
STRYKER CORPORATION AND SUBSIDIARIES
<TABLE>
December 31 (in thousands, except per 1996 1995
share amounts) ____ ____
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $175,673 $ 69,049
Marketable debt securities 191,900 195,599
Accounts receivable, less allowance of 166,052 163,593
$9,500 ($7,800 in 1995)
Inventories 127,387 133,619
Deferred income taxes 78,034 47,058
Prepaid expenses and other
current assets 14,491 14,335
________ ________
Total Current Assets 753,537 623,253
PROPERTY, PLANT AND EQUIPMENT
Land, buildings and improvements 130,240 138,324
Machinery and equipment 159,945 147,177
________ ________
290,185 285,501
Less allowance for depreciation 117,882 102,909
________ ________
172,303 182,592
OTHER ASSETS
Intangibles, less accumulated
amortization of $17,510
($11,344 in 1995) 45,375 18,193
Other 22,291 30,853
________ ________
67,666 49,046
________ ________
$993,506 $854,891
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 62,433 $ 49,029
Accrued compensation 37,693 32,447
Income taxes 56,723 25,633
Accrued expenses and other liabilities 90,489 64,277
Current maturities of long-term debt 4,403 3,052
________ ________
Total Current Liabilities 251,741 174,438
LONG-TERM DEBT, EXCLUDING CURRENT
MATURITIES 89,502 96,967
OTHER LIABILITIES 36,034 24,214
MINORITY INTEREST 85,868 104,993
STOCKHOLDERS' EQUITY
Common stock, $.10 par value:
Authorized-150,000 shares
Outstanding-96,787 shares 9,679 9,711
(97,108 in 1995)
Additional paid-in capital 5,922 14,736
Retained earnings 514,318 419,537
Unrealized gains on securities 1,196 2,314
Foreign translation adjustments (754) 7,981
________ ________
Total Stockholders' Equity 530,361 454,279
________ ________
$993,506 $854,891
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
