UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1998
Commission file number 0-9165
STRYKER CORPORATION
(Exact name of registrant as specified in its charter)
Michigan 38-1239739
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
P.O. Box 4085, Kalamazoo, Michigan 49003-4085
(Address of principal executive offices) (Zip Code)
(616) 385-2600 (Registrant's telephone number, including area code)
************************************************************
Securities registered pursuant to Section 12(b) of the Act: Common Stock,
$.10 par value
Securities registered pursuant to Section 12(g) of the Act: None
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 and 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 1, 1999, the aggregate market
value of the voting stock held by nonaffiliates of the registrant was
approximately $3,169,351,254.
The number of shares outstanding of the registrant's Common Stock, $.10
par value, was 96,775,224 at March 1, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the annual stockholders report for the year ended December
31, 1998 (the "1998 Annual Report") are incorporated by reference into Parts
I,II and IV.
Portions of the proxy statement filed with the Securities and Exchange
Commission relating to the 1999 Annual Meeting of Stockholders (the "1999
proxy statement") are incorporated by reference into Part III.
The information contained in this report includes forward-looking
statements within the meaning of the federal securities laws that are subject
to risks and uncertainties. Factors that could cause the Company's actual
results and financial condition to differ from the Company's expectations
include, but are not limited to: changes in economic conditions that
adversely affect the level of demand for the Company's products, changes in
foreign exchange markets, changes in financial markets, changes in the
competitive environment, and the factors regarding Year 2000 issues. All
forward-looking statements contained in this report are qualified in their
entirety by this cautionary statement.
PART I
ITEM I. BUSINESS
General
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Stryker Corporation and its subsidiaries (the "Company" or "Stryker")
develop, manufacture and market specialty surgical and medical products,
including orthopaedic implants, bone cement, trauma systems used in bone
repair, powered surgical instruments, endoscopic systems, craniomaxillofacial
fixation devices, specialty surgical equipment used in neurosurgery and
patient care and handling equipment for the global market and provide
outpatient physical and occupational rehabilitation 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.
On December 4, 1998, the Company acquired Howmedica, the orthopaedic
division of Pfizer Inc. Howmedica develops, manufactures and markets a wide
range of specialty medical products utilized in the treatment of
musculoskeletal disorders. Howmedica's products include hip and knee
implants for primary and revision surgery, bone cement, trauma systems used
in bone repair, craniomaxillofacial fixation devices and specialty surgical
equipment used in neurosurgery.
In November 1998, the Company purchased the manufacturing rights and
facilities for its OP-1 bone growth device from Creative BioMolecules, Inc.
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. 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. Subsequently, Stryker has purchased
or acquired additional shares of outstanding common stock of Matsumoto,
thereby increasing its direct ownership interest to 83% as of December 31,
1998 and 100% in January 1999.
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
orthopaedic devices.
The Company's subsidiary, Physiotherapy Associates, Inc., has also
purchased a number of physical therapy clinic operations during each of the
last five years.
Product Sales
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Effective in the fourth quarter of 1998, the Company adopted FASB
Statement No. 131, "Disclosures about Segments of an Enterprise and Related
Information". Statement No. 131 establishes standards for the way that
public business enterprises report information about operating segments in
annual financial statements. Prior to 1998, the Company reported under one
business segment. Upon the adoption of Statement No. 131, the Company
segregated its operations into three reportable segments: Orthopaedic
Implants, Medical and Surgical Equipment and Physical Therapy Services. The
Orthopaedic Implants segment sells orthopaedic reconstructive products such
as hip, knee, shoulder and spinal implants and trauma-related products. The
Medical and Surgical Equipment segment sells powered surgical instruments,
endoscopic equipment, medical video imaging equipment and patient care and
handling systems. The Physical Therapy Services segment provides outpatient
physical and occupational rehabilitation services. The following amounts
($000's) and percentages represent sales by business segment during each of
the three years ended December 31:
1998 1997 1996
-------------- -------------- --------------
$ % $ % $ %
-------- --- -------- --- -------- ---
Orthopaedic Implants $409,644 37% $375,028 38% $347,178 38%
Medical and Surgical
Equipment 577,788 52 505,099 52 484,301 53
Physical Therapy Services 115,776 11 100,008 10 78,581 9
-------- --- -------- --- -------- ---
$1,103,208 100% $980,135 100% $910,060 100%
========= === ======== === ======== ===
Additional information regarding financial information about the
Company's operating segments and geographic areas under the caption "Note 12
- - Segment and Geographic Data" on pages 57 through 59 of the 1998 Annual
Report is incorporated herein by reference.
Approximately two-thirds of the Company's sales in 1998, 1997 and 1996
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), trauma-related products, disposables, expendable tools
and parts, service and repair charges and physical therapy revenues. The
balance of sales in each of the years was 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.
ORTHOPAEDIC IMPLANTS
Orthopaedic Implants are designed and manufactured by Howmedica
Osteonics, Osteo and Dimso and consist of such products as hip, knee,
shoulder and spinal implants, associated implant instruments, trauma-related
products and bone cement. Stryker Corporation's orthopaedic implant division,
previously known as Osteonics Corp., was renamed Howmedica Osteonics Corp. to
recognize both the Howmedica and Osteonics brands and to indicate the
importance of Howmedica's role in the integrated organization. Artificial
joints are made of cobalt chrome, titanium alloys, ultra-high molecular
weight polyethylene or ceramics and are implanted in patients whose natural
joints have been damaged by arthritis, osteoporosis, other diseases or
injury. Howmedica Osteonics markets its products under both the Howmedica
and Osteonics brand names.
Hip Implants
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In late 1990, Stryker 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 hydroxylapatite (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. The Company's
clinical experience with HA-coated hip stems now extends over ten years and
their reported clinical performance continues to equal or exceed that of any
comparable hip stem reported in the scientific literature.
Under the Howmedica brand name, the Company offers a variety of hip
systems for both the domestic and international markets. The Partnership hip
system represents a comprehensive system of hip implants and associated
instruments designed to provide physicians with reliable results and reduce
operating time. The Exeter Total Hip System is based on a unique,
collarless, highly polished, double tapered femoral design which reduces
shear stresses and increases compression at the cement/bone interface. In
1998, Howmedica launched the Taro hip system in Japan. The Taro hip system
provides a line of products which offer an increased range of motion
preferred by Japanese surgeons for their patients.
Under the Osteonics brand name, the Company offers a wide array of
cemented and cementless stems and cups, with which physicians may treat the
spectrum of their primary and revision total hip requirements. The Secur-Fit
Plus HA Hip System and Acetabular Shells combine high quality HA coating on
an abrasion resistant, titanium surface to enhance bone loading and implant
stability. Osteonics has a strong history and position in the cemented stem
market with the Omnifit hip stem, which is approaching its 17th year in the
market with a long history of documented clinical performance. Revision
product applications include the Restoration Hip System, a versatile array of
implants designed to address a variety of complex surgical needs and patient
anomalies as well as provide prosthesis support. In 1998, the Company began
marketing ceramic-on-ceramic products in some international markets and
completed enrollment for ceramic-on-ceramic bearing surface clinical trials
in the United States. Ceramic-on-ceramic technology offers reduced wear
rates when compared to metal/polyethylene or ceramic/polyethylene
combinations and demonstrates an increased resistance to the adverse effects
of third body particles on the articulating surface. The Company also
launched Crossfire in 1998, a highly crosslinked polyethylene. In laboratory
testing, this product has indicated a significant wear reduction over
conventional polyethylene.
Knee Implants
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Under the Howmedica brand name the Company offers three major systems,
the Duracon, Kinemax and Interax systems as well as products that serve
specific regional needs. Introduced in 1991 and utilized in hundreds of
thousands of procedures in over 55 countries, the Duracon system combines
high levels of joint conformity throughout the range of motion and
consistent anatomic tracking. The Kinemax system is marketed worldwide with
leadership positions in several international markets, offering advanced
versatility through design principles based on the clinically successful
Total Condylar and Kinematic Knee Systems. The Interax system is the result
of a worldwide program to develop an innovative system specially designed to
address the variable size requirements of patients of different ages and from
different ethnic origins. Precision-designed Monogram instruments provide a
common instrument platform for each Howmedica knee system. The ergonomic
engineering of Monogram instruments facilitates efficient use in the
operating room, enabling the surgeon to choose the instruments that represent
his/her optimal surgical technique.
Under the Osteonics brand name, the Company offers the Osteonics Knee
Systems, the Insight Knee Positioning and Alignment System and Passport Knee
instruments, which provide the surgeon with a simple, cost effective approach
to total knee replacement surgery. Osteonics Knee Systems and
Passport/Insight Knee instruments provide the interoperative flexibility to
meet specific patient needs and the ability to achieve precise, customized
knee alignment and superior leg position during knee surgery, thereby
reducing the risk of post-operative complications. In 1998, Osteonics
released the Scorpio CR (cruciate retaining) Knee System, while in 1997
Osteonics released the Scorpio PS (posterior stabilized) Knee System.
Other Reconstructive Products
- -----------------------------
The Company markets other reconstructive products, principally shoulder
and elbow implants and related instruments. The Osteonics Total Shoulder
system was initially marketed in 1996. The unique design of the humeral head
allows the surgeon to adjust tension of the supporting tissues while
maximizing range of motion. The shoulder instruments offer the surgeon
increased visibility and accessibility into this tightly confined joint
space. The Solar Total Elbow was launched in 1998 to complement products
offered for upper extremity procedures. The semi-constrained design and
modular components address varying patient anatomy.
Trauma
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The Company markets its trauma implants under the Howmedica and Osteo
brand names. Trauma products are used primarily in the fixation of fractures
resulting from sudden injury. Howmedica's trauma products consist of internal
systems marketed under such names as Alta, Grosse & Kempf and Gamma as well
as external systems marketed under such brands as Hoffmann, Monotube and
Monticelli-Spinelli.
Howmedica's internal fixation product portfolio includes a variety of
systems incorporating screws, plates, intramedullary nails and trochanteric
appliances. Howmedica offers both an advanced titanium system, the Alta
System, as well as more traditional stainless steel plating systems. The
standard stainless steel line includes the B.G. System, marketed primarily in
France, and the ICS System, marketed primarily in the United States. The
Grosse & Kempf system is a locking nail system that is used throughout the
world. For the treatment of fractures of the femur, Howmedica offers the
Gamma Locking Nail, a device designed to improve both the procedure and
prognosis for all grades of fractures through increased strength and
stability. Utilized in a wide range of fracture applications (including the
small bones of the hand and foot, long bones and knuckles), the Universal
Compression Screw offers a unique level of controlled compression as well as
greater freedom to select an appropriate length preoperatively and refinement
of compression intraoperatively. The Alta IM Rodding System is utilized in
the treatment of a wide variety of long bone fractures, providing the
increased strength and flexibility of titanium alloy.
Howmedica's external fixation products include the Hoffman II modular
fixation system, the Monotube Triad unilateral fixation system, the Apex
system of pins and the Monticelli-Spinelli circular fixator. The Hoffmann II
system includes a spring-loaded snap-fit mechanism that allows the connection
of rods or pins providing for versatile intraoperative management and
stability. Apex pins have been developed for use with the Hoffmann system,
utilizing a specialized design and U-shaped thread profile which increase
bone contact and reduce both insertion time and the axial force required to
insert the pins. Monticelli-Spinelli offers circular frame components for
small wire fixation and is fully compatible with other Howmedica external
fixation system components. The Monotube design consists of a dynamic axial
fixator designed to maintain rotational and angular stability while allowing
the bone to share the load in the axial plane.
Osteo trauma products include compression hip screws and interlocking
compression nails used for bone fixation in fracture cases. Sold in more
than 50 countries, the largest markets for Osteo products have been in Europe
and the Far East.
Spinal Implants
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Spinal implants are systems comprised of plates, rods, and screws, and
are often used in conjunction with bone grafts to relieve back pain. Through
Dimso, the Company designs and manufactures spinal implant systems for use by
physicians in the treatment of degenerative spinal diseases and the
stabilization of the spine in trauma cases. The Company began marketing the
Dimso spinal implant system in the United States during 1995 and initiated
the sale of the Top-Loading Connector and the Cross Connector during 1997.
The Equinox Cervical Plate, designed to provide compression on bone graft for
anterior cervical fusion, was launched outside of the United States in 1998.
The Ogival Intersomatic Cage, which was launched outside of the United States
in 1996, is designed to restore disk height space and allow lumbar vertebrae
to be fused to stabilize the spine.
Under the Howmedica brand name, the Company offers two spinal systems,
the Bad WildungenMetz (BWM) and the Domino Roy Camille, both of which are
currently marketed outside of the United States. The simple design of the BWM
spine system permits a smaller implant, minimizing soft tissue interference
while providing significant strength. The Domino Roy Camille system offers
the flexibility of advanced technology in current plate designs while
retaining the ease of use of traditional plating systems.
Bone Cement
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Howmedica's Simplex bone cement, a material used to secure cemented
implants to bone, was first approved for domestic orthopaedic use in 1971.
Howmedica manufactures several variations of Simplex bone cement to meet
specific patient needs. Simplex AF, a bone cement developed for significant
ease of mixing and high fatigue strength, is currently in clinical trials in
the United States, while another formulation, antibiotic Simplex AKZ, is
marketed outside the United States.
MEDICAL AND SURGICAL EQUIPMENT
Medical and Surgical Equipment products include powered surgical
instruments, endoscopic systems, medical video imaging equipment and patient
care and handling systems. These products are designed and manufactured by
Stryker Instruments, Stryker Endoscopy, Stryker Medical and Leibinger.
Stryker Instruments
- -------------------
Stryker Instruments products include a broad line of powered surgical
drills, saws, fixation and reaming equipment as well as other surgical
instruments that are used by physicians 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 manufactures hundreds of different-sized and different-shaped
drill bits, burrs, blades, chisels and other attachments for use by
orthopaedic physicians. Stryker Instruments System 4000 Heavy-Duty Battery-
Powered Instrument is the next generation battery powered instrument system
that provides surgeons with a complete line of heavy-duty instruments that
are powerful, precise and maneuverable.
Utilized in conjunction with joint replacement surgery, the Advanced
Cement Mixing System greatly reduces the risk that air bubbles will weaken
the long-term bond between the implant and surrounding bone. SurgiLav Plus is
a disposable, self-contained pulsed lavage system that is used by physicians
to cleanse the surgical site during total joint arthroplasty. The CBC II
System is a post-operative wound drainage and blood reinfusion device that
enables joint replacement patients to receive their own blood rather than
donor blood. As part of a broad surgical product portfolio, Stryker also
markets the Steri-Shield Personal Protection System, combining a helmet, hood
and gown to help provide protection for operating room personnel against
contact with infectious bodily fluids and harmful microorganisms during
surgery.
Stryker Endoscopy
- -----------------
Stryker Endoscopy products include medical video cameras, light sources,
arthroscopes, laparoscopes, powered surgical instruments and disposable
suction/irrigation devices. Stryker Endoscopy has established a position of
technology leadership in the production of video cameras for use in endoscopy
procedures. In 1998, Stryker launched the first voice activated video
system, which was co-developed with Computer Motion Inc. The system allows
the surgeon to control the major components of the video system, including
the camera, lightsource, insufflator, SE5 Shaver System and documentation
equipment through voice commands. The system improves efficiency and gives
the surgeon increased control of the equipment. Stryker also markets 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
feature allowing the surgeon to control documentation equipment and picture
quality from the surgical site. Stryker Endoscopy rigid scopes range in
diameter from 2.3 millimeters to 10 millimeters, containing a series of
precision lenses as well as fiber optics which allow the physician to view
internal anatomy extremely clearly.
Stryker Endoscopy also manufactures a disposable suction irrigation
device that allows the surgeon to irrigate tissue, remove fluid through a 5
millimeter or 10 millimeter portal and cauterize tissue. The product is self-
contained, eliminating the need for any additional equipment within the
operating room. The Y-Tube provides a working channel for standard, 5
millimeter laparoscopic instruments while simultaneously allowing for suction
and irrigation from the same port.
The Stryker Instruments and Styker Endoscopy product portfolios both
include micro-powered tools and instruments that are used in orthopaedics,
craniomaxillofacial surgery, functional endoscopic sinus surgery,
neurosurgery, spinal surgery and plastic surgery. The Total Performance
System (TPS), released in 1996, is a universal surgical system that can be
utilized within several medical specialties. The TPS Universal Drill and TPS
Burs are designed for use by spine surgeons and neurosurgeons, while the TPS
MicroDriver and TPS Sagittal Saw are designed for use by sports-physicians
and plastic surgeons. The TPS System is also compatible with the SE5 Shaver
System. The Hummer 2 MicroDebrider System is a powered instrument which
incorporates new irrigation capabilities and specialized cutters, eliminating
the need for over half of the instruments otherwise required for sinus
surgery.
Stryker Medical
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Stryker Medical is a market leader in specialty stretcher products,
offering some 30 different types of stretchers customized to fit the needs of
acute care and specialty surgical care facilities. Stryker Medical produces
beds which are also designed to fit the unique needs of specialty departments
within the acute care environment. The Secure medical/surgical bed addresses
the changing needs of an aging population. The Secure bed is lower to the
ground and has siderails designed to help patients. The Secure bed also
utilizes center-of-gravity technology to help prevent patient falls.
Specifically, the system alarms when more than 50% of the patients body
weight extends beyond the built-in safety limits. Stryker Medical has a
complete line of ICU beds for critical care and step-down units. The beds
incorporate advanced features that enable staff members to weigh patients
accurately and to take chest x-rays without moving patients from their beds.
Stryker Medical also offers the StryKair pressure relief mattress as an
option with its frame. This advanced mattress offers pressure relief and
shear reduction supporting good patient care.
Stryker Medical developed the Rugged EZ-PRO ambulance cot in 1998 to
expand their presence in the Emergency Medical Service (EMS) market. The EZ-
PRO compliments the Rugged MX-PRO introduced in 1997 and enhances Stryker
Medical's reputation for durability and low maintenance established by the
original product line. Ergonomically designed, the Rugged MX-PRO combines
durability with a lighter, narrower frame, making it one of the most mobile
ambulance cots in the medical industry. The Rugged EZ-PRO, with its easy
loading system, reduces the number of EMS professionals required to load the
ambulance cot.
Leibinger
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Leibinger manufactures plate and screw systems for craniomaxillofacial
surgery to repair small bones in the hands, face and head. The Wurzburg brand
represents the first broadly marketed titanium plating system, while the
Micro product line represents the first titanium micro system utilized in the
industry. Leibinger also produces neurosurgery products that are marketed
under the F.L. Fischer brand and include two types of headframe systems, the
RM polar coordinates and the ZD arc radius systems. As part of the
neurosurgery product portfolio, Leibinger markets hardware and software
designed to perform (i) preoperative localization and planning for
neurological procedures (ii) implants of radioactive elements to eliminate
brain tumors and (iii) radiosurgery.
Leibinger also markets BoneSource, a patented bone substitute material
based on an exclusive license from the American Dental Association Health
Foundation. BoneSource is self-setting, sculptable and extremely effective in
filling bone defects as a result of its ability to form a paste in seconds
and harden quickly. In 1996, BoneSource received FDA clearance for use in
treating cranial defects, contiguous cuts and burn holes. In 1997, BoneSource
also received FDA clearance for facial augmentation, which expands the
application into cosmetic procedures.
PHYSICAL THERAPY SERVICES
Physiotherapy Associates provides physical, occupational and speech
therapy services to patients recovering from orthopaedic or neurological
illness and injury through a network of 222 outpatient physical therapy
centers in 23 states and the District of Columbia. Physiotherapy Associates
works closely with referring physicians to design and execute rehabilitation
protocols resulting in quick recoveries for professional and amateur
athletes, injured workers and other patients.
Product Development
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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 continues to place emphasis on the development of proprietary
products and product improvements to complement and expand its existing
product lines. The Company has a decentralized research and development
focus with manufacturing divisions responsible for new product development
and product improvements. Research, development and engineering functions at
the manufacturing divisions maintain relationships with distribution
divisions and customers to understand changes in the market and product
needs.
Total expenditures for product research, development and engineering
were $61,060,000 in 1998, $56,895,000 in 1997 and $56,870,000 in 1996. The
foregoing do not include expenditures related to the Howmedica business prior
to December 5, 1998. The Company's research, development and engineering
expenses represent the continued development of the Company's OP-1 Bone
Growth Device discussed below and the Company-wide focus on new product
developments. The Company also continues the development of a new spinal
technology purchased as part of Howmedica to be used in the treatment of
spinal disorders. Recent new product introductions include the development
of implant, spinal and trauma designs (in 1998 the Scorpio Cruciate Retaining
Knee System and Equinox Cervical Plate were introduced, while the Scorpio
Posterior Knee System, BOS Trauma System and the Osteo Hip Screw System were
introduced in 1997 and the Ogival Intersomatic Cage for spinal surgery was
introduced in 1996) and further enhancements to instrumentation related to
knee replacement procedures, including development of the Passport knee
instruments in 1996. In 1998, the Company completed enrollment in the first
investigational study on contemporary ceramic-on-ceramic bearing surfaces in
the United States. The study encompasses 500 patients for which clinical
data will be collected and analyzed for the next several years. New products
at Stryker Endoscopy and Stryker Instruments include the development of
advanced powered instruments and video technology (the System 4000 (the next
generation battery powered instrument system) and the Quantum 5000 introduced
in 1998, the SE Sagittal Saw and the 882TE 3-Chip Camera System introduced in
1997, the TPS advanced micro-powered instrument set, the 882 3-Chip Camera
System, the Hummer 2 Micro Debrider System and several new arthroscopy
instruments introduced in 1996) and the development of new specialized
operating room equipment (the InterPulse System lightsource and the Hermes
video control system introduced in 1998, the Steri-Shield Turbo 3 Helmet
introduced in 1997 and the Advanced Cement Mixing System, introduced in
1996). The Medical Division has developed new patient handling equipment
(the EZ-Pro Ambulance Cot introduced in 1998, the FirstCare maternity bed and
the 6080 MX-PRO Rugged Ambulance Cot introduced in 1997 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-1 (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. In 1995, the
FDA allowed the Company to enlarge the scope of the clinical trials for
expanded indications of non-union fractures in all long bones. During 1996,
the surgical procedures on the 122 patients in the Company's tibial non-union
clinical trial were completed and, in 1997, the Company began the collection
and analysis of the data from the clinical trial. The study demonstrated that
the OP-1 Bone Growth Device patients had comparable clinical success to the
autograft patients without the need for a second invasive procedure to
harvest autograft from the hip. There were three prospectively determined
clinical trial outcomes defined in the study: weight-bearing; level of pain
with weight-bearing; and radiographic assessment of cortical and/or
trabecular bridging. The study design predicted 80% success at nine months
post-surgery. Both the OP-1 and autograft groups met this prediction for the
clinical outcomes of weight-bearing and pain and both groups had comparable
results. The blinded radiographic assessment by an independent panel of
radiologists showed that neither group achieved the 80% criteria for
bridging, although bridging was higher for the autograft group.
The first module of the Pre-Market Application (PMA) for Pre-Clinical
results was completed and accepted by the FDA in 1998. The Company also
submitted a second module for Manufacturing during 1998 and anticipates
filing the Clinical module and completing the PMA in 1999. However, the
Company can give no assurance that the filing will not be further delayed or
that the Manufacturing and Clinical modules will be accepted by the FDA
staff. If the PMA application is accepted, the FDA staff may determine to
submit it to a panel of industry and medical experts who will review the PMA
application and make a recommendation to the FDA. The FDA staff must also
inspect the Company's OP-1 manufacturing facilities and conduct an audit of
the clinical sites. If the inspection and audit are acceptable and there is
a positive recommendation by the panel, the FDA may grant a PMA allowing the
OP-1 Bone Growth Device to be marketed in the United States for certain
approved uses. Further clinical testing and PMA fillings would be necessary
to expand the approved uses of the product. The Company is also preparing
the necessary filings to seek approval of the OP-1 Bone Growth Device for
certain uses in the European market, which it anticipates filing during 1999.
The Company cannot predict the timing of the regulatory process and there can
be no assurance that required inspection and audits will be acceptable to the
FDA or that approval will be obtained for any use of the OP-1 Bone Growth
Device.
The surgical procedures for several pilot human clinical trials in
Europe in cases involving trauma, spine, and oral/maxillofacial indications
were completed in 1996 and a fresh fracture trial was initiated in Canada in
1997. A pilot study of periodontal defects was initiated in the United
States in 1998.
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-l based products.
The Company has a royalty-free cross license agreement with Genetics
Institute, Inc., a wholly owned subsidiary of American Home Products
Corporation, which holds patents covering a molecule different from OP-1 that
may produce similar effects and is conducting pilot and pivotal clinical
trials of its molecule in similar indications on a global basis. The
agreement will enable Stryker 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.
The purchase of the manufacturing rights, facilities and process
development effort for the Company's OP-1 bone growth device in November 1998
effects the end of the research and developments agreement Stryker has had
with Creative since 1985.
During 1998, the Company entered into an exclusive collaboration
agreement with the Musculoskeletal Transplant Foundation (MTF) to develop
combination OP-1 and allograft products. Combined product of OP-1 and
allograft may have added clinical value in indications such as spine fusions
in the future.
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 1,010 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 35% of the Company's domestic revenues in 1998 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 34% of total revenues in 1998. Since
a higher percentage of Howmedica's sales have historically been to
international markets, this percentage is expected to increase in the future.
The Company's products are sold in over 100 foreign countries, through more
than 830 local dealers, whose efforts are coordinated by approximately 1,340
sales and marketing personnel and through direct sales efforts. Stryker
distributes its products through sales subsidiaries and branches with offices
located in Australia, Belgium, Canada, Chile, Finland, France, Germany, Hong
Kong, Italy, Japan, Mexico, The Netherlands, Poland, Spain, Switzerland and
the United Kingdom. Stryker exports products to dealers and to customers in
China, the CIS (former Soviet Union), India, Korea, Latin America, Malaysia,
the Middle East, Singapore and Taiwan. Additional information regarding the
Company's foreign and domestic operations and sales appearing in "Note 12 -
Segment and Geographic Data" on page 57 of the 1998 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 four leading competitors in the U.S. market for
orthopaedic reconstructive products, the others being J&J DePuy Orthopedics
(a subsidiary of Johnson & Johnson), Zimmer, USA Inc. (a subsidiary of
Bristol-Myers, Squibb, Inc.) and Biomet, Inc. 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 SA subsidiary, with the principal
competitors being Medtronic Sofamor Danek, Inc. (a subsidiary of Medtronic,
Inc.), DePuy AcroMed (a subsidiary of Johnson & Johnson) and the Synthes
companies. The Company entered the U.S. market for spinal implants during
1995 and faces competition from these and other companies.
In the powered surgical instruments market, Stryker is one of the three
market leaders, with the principal domestic competitors being Linvatec, Inc.
(a subsidiary of Conmed Corporation) and Midas-Rex, Inc (a subsidiary of
Medtronic, Inc.). These companies are also 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 Conmed Corporation). 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 (a subsidiary of Maxxim Medical Inc.) 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). In the specialty stretcher market,
the primary competitors are Hausted, Inc. (a subsidiary of Steris
Corporation), Hill-Rom and Midmark Corporation. In the ambulance cot market,
Ferno-Washington is the primary competitor.
In the outpatient physical and occupational rehabilitation market, the
Company's primary competitors are physician-owned independent practices and
hospital-based services, in addition to other national rehabilitation
companies, including HealthSouth Corporation and NovaCare, Inc.
The Company believes that several companies are engaged in the research
and development of morphogenic proteins for the repair of hard and soft
tissues that would compete with the Company's OP-1 Bone Growth Device,
including Genetics Institute, Inc. (a subsidiary of American Home Products
Corporation), which has 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
believes that its 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 that 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 490 U.S. patents and 940 foreign patents.
Manufacturing and Sources of Supply
- -----------------------------------
The Company's manufacturing processes consist primarily of precision
machining, metal fabrication and assembly operations and the forging and
investment casting of cobalt chrome and finishing of cobalt chrome and
titanium. Approximately 15% of the Company's cost of sales in 1998
represented finished products that 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 40% of the total cost of sales in 1998.
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 design and
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 that
require notification of and review by the FDA before marketing (submitted as
a 510(k)). The Company's OP-1 Bone Growth Device requires extensive clinical
testing, consisting of safety and efficacy studies, followed by a PMA
application (see "Product Development").
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 Community European ("CE") marks for
their products. Stryker has authorization to apply the CE mark to its hip,
knee, upper extremity, spinal implant and trauma products, and its Endoscopy,
Instruments and Medical Division products.
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, 1998, the Company had 10,974 employees worldwide,
including 4,559 involved in manufacturing, warehousing and distribution
operations, 2,555 in marketing and sales, 582 in research, development and
engineering, 934 providing physical, occupational and speech therapy and the
balance in general management and administration. Approximately 1,790
employees are covered by collective bargaining agreements. Labor agreements
covering a substantial number of such employees expire in 1999. The Company
believes that its employee relations are satisfactory.
ITEM 2. PROPERTIES
The Company has the following properties:
Square Owned/
Facility Location Feet Leased
_____________________________________ _________________ _______ ______
Manufacturing, warehousing and
distribution facilities for
orthopaedic implant business Rutherford, New Jersey 187,000 Owned
and administrative offices Rutherford, New Jersey 217,000 Leased
for Howmedica Osteonics: Allendale, New Jersey 146,000 Leased
Manufacturing, warehousing and
distribution facility for surgical
instruments products and
administrative offices for Stryker
Instruments division: Portage, Michigan 226,000 Owned
Manufacturing facility for trauma
products and administrative offices
for Howmedica GmbH: Kiel, Germany 173,000 Owned
Manufacturing, warehousing and
distribution facilities for beds,
stretchers and furniture and
administrative offices for Stryker Portage, Michigan 154,000 Owned
Medical division: Kalamazoo, Michigan 86,000 Owned
Manufacturing facility for hip and
knee products and administrative
offices for Howmedica International
S. de R.L.: Limerick, Ireland 128,000 Owned
Manufacturing, warehousing and
distribution facility for endoscopy
business and administrative offices Santa Clara,
of Stryker Endoscopy division: California 110,000 Leased
Manufacturing, warehousing and
distribution facility for
craniomaxillofacial surgery
plate and screw systems and Freiburg, Germany 85,000 Owned
administrative offices for Leibinger: Stetten, Germany 36,000 Owned
Manufacturing facility for surgical
instruments and endoscopy business: Arroyo, Puerto Rico 98,000 Leased
Manufacturing facility for hip and
knee products and administrative
offices for Howmedica
Beteilgungs GmbH: Herouville, France 85,000 Owned
Manufacturing, warehousing and
distribution facilities for trauma
and orthopaedic products and
administrative offices for Osteo AG: Selzach, Switzerland 63,000 Owned
Manufacturing, warehousing and
distribution facility for beds
and furniture in Canada: Quebec, Canada 51,000 Owned
Manufacturing, warehousing and
distribution facility for
surgical instruments products: Carrigtwohill, Ireland 43,000 Owned
Manufacturing facility for trauma
products and administrative offices
for Jaquet Orthopedie SA: Geneva, Switzerland 42,000 Owned
Manufacturing, warehousing and
distribution facility for
orthopaedic implant business: Carrigtwohill, Ireland 35,000 Owned
Manufacturing and warehousing facilities
for spinal implant products and Bordeaux, France 22,000 Owned
administrative offices for Dimso SA: Bordeaux, France 5,000 Leased
Manufacturing and research facilities West Lebanon, 55,000 Leased
for OP-1 and administrative offices New Hampshire
for Stryker Biotech:
Hopkinton, 31,000 Leased
Massachusetts
Wilder, Vermont 9,000 Leased
Natick, Massachusetts 7,000 Leased
Warehousing and administrative offices Osaka, Japan 147,000 Owned
for Japan division: Osaka, Japan 29,000 Leased
Tokyo, Japan 9,000 Leased
Warehousing and distribution facility
for orthopaedic implant business: Shannon, Ireland 67,000 Leased
Warehousing and distribution facility for
craniomaxillofacial surgery plate and screw
systems and administrative offices for
Leibinger: Carrollton, Texas* 30,000 Leased
Warehousing and distribution facility
for orthopaedic implant business: Cordova, Tennessee 32,000 Leased
222 physical therapy clinics located
throughout the United States: United States 765,000 Leased
Domestic sales and administrative
offices throughout the United States: United States 195,000 Leased
Sales, warehousing and
administrative offices Europe 30,000 Owned
throughout Europe: Europe 367,000 Leased
Sales branches including warehousing
and sales facilities throughout Japan 161,000 Owned
Japan: Japan 50,000 Leased
Sales, warehousing and
administrative offices throughout
Asia, excluding Japan: Asia 65,000 Leased
Sales, warehousing, distribution and
administrative offices for Stryker Burlington, Canada 13,000 Leased
Canada: Guelph, Canada 20,000 Owned
Sales, warehousing and
administrative offices for Stryker
Latin America throughout Latin
America: Latin America 22,000 Leased
Administrative offices for Physiotherapy
Associates located in Memphis,
Tennessee: Memphis, Tennessee 17,000 Owned
Administrative offices for
Stryker Corporation: Kalamazoo, Michigan 15,000 Leased
* Facility to be closed in 1999.
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 beyond amounts already provided
for.
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 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.
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 on the New York Stock Exchange
under the symbol SYK. Prior to July 24, 1997, the Company's Common Stock was
traded in the over-the-counter market on The Nasdaq Stock Market. Quarterly
stock prices appearing under the caption "Summary of Quarterly Data" on page
60 of the 1998 Annual Report and dividend information for the years ended
December 31, 1998 and 1997 under the caption "Ten-Year Review" on pages 32
and 33 of the 1998 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.
Stryker has restrictive covenants in its bank credit agreement that
place limitations on increases in dividend payments and prohibit repurchases
of Common Stock.
In December 1998 and January 1999, the Company issued an aggregate of
255,605 shares of its Common Stock to certain non-United States persons in
exchange for an equivalent number of shares of Matsumoto Medical Instruments,
Inc., a corporation organized under the laws of Japan that was 76.8% owned by
the Company prior to such transactions ("MMII"), in an offshore transaction
pursuant to Regulation S promulgated under the Securities Act of 1933, as
amended. Additional shares of MMII stock were purchased from certain of such
persons for cash. As a result of these transactions, the Company's ownership
percentage of MMII increased to 100%. No underwriter or placement agent was
used in connection with these transactions.
On December 31, 1998, there were 3,061 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, 1998 under the caption "Ten-Year Review" on pages 32 and 33 of
the 1998 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 34 through 39 of
the 1998 Annual Report is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DESCLOSURES ABOUT MARKET RISK
The information under the sub-caption "Other Matters" under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" on pages 38 and 39 of the 1998 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 40 through
60 of the 1998 Annual Report are incorporated herein by reference.
Quarterly results of operations appearing under the caption "Summary of
Quarterly Data" on page 60 of the 1998 Annual Report are incorporated herein
by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the directors of the Company appearing under the
caption "Election of Directors" in the 1999 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, 1999.
John W. Brown, age 64, 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, National City Corporation, a bank, Arthur D. Little, Inc., an
international management consulting company, the Health Industry
Manufacturers Association and The American Business Conference.
J. Patrick Anderson, age 49, was appointed Assistant to the Chairman and
Vice President Business Development in October 1998. Prior to joining the
Company, he was Vice President of Business Development for SemaSys, Inc.
where he led the company's strategic planning activities and the merger of
two former competitors since 1996 and was General Manager of the Oklahoma
division of SemaSys, Inc. since 1994.
Dean H. Bergy, age 39, was appointed Vice President, Finance in October
1998. Previously he was Vice President, Finance of the Stryker Medical
division since October 1996 and Controller of the Company from June 1994.
Prior to joining the Company in June 1994, he was a Senior Manager with Ernst
& Young LLP.
Ronald A. Elenbaas, age 45, was appointed Group President, MedSurg in
November 1998. Previously he was President of the Surgical Group from 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.
Christopher F. Homrich, age 39, 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.
William T. Laube, III, age 59, was appointed President of Stryker
Pacific Limited 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 46, was appointed Group President of Howmedica
Osteonics in November 1998 and has been a Vice President of the Company since
May 1994. He held the position of President, Osteonics Corp. from August
1989 and President, Physiotherapy Associates, Inc. upon joining the Company
in April 1988.
Michael R. Mainelli, Jr., age 37, was appointed Representative Director
and President of Matsumoto Medical Instruments, Inc. in November 1997 and
President of Nippon Stryker K.K. since November 1998 and has been a Vice
President of the Company since joining the Company in April 1996. He had
previously spent twelve years with General Electric Company in manufacturing,
marketing, and product line management positions. Prior to joining the
Company, he was most recently responsible for worldwide planning, development
and marketing of magnetic resonance imaging products at GE Medical Systems.
John J. O'Mahony, age 53, was appointed Vice President of the Company in
February 1999 and Group President, Stryker International. Prior to the
Howmedica acquisition, he was President of the Howmedica division of Pfizer
Inc. since March 1996. He had previously been President of the Asia/Pacific
division of Howmedica, based in Sydney, Australia, since 1992.
David J. Simpson, age 52, 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 46, was appointed Vice President of Administration
of the Company in December 1998 and has been a Vice President of the Company
since December 1984. He had previously been President of Stryker
Americas/Middle East since March 1992 and Vice President, Administration
since June 1987. Since joining the Company in October 1978, he has held
various other positions, including Assistant Controller, Secretary and
Controller.
Jeffrey R. Winter, age 40, was appointed Controller upon joining the
Company in October 1996. He had previously been a Senior Manager at Ernst &
Young LLP, 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 1999 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 1999 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 2 - Plan of acquisition, reorganization, arrangement,
liquidation or succession.
(i) Form of Stock and Asset Purchase Agreement, dated as of
August 13, 1998, between Pfizer Inc. and the Company
(the "Purchase Agreement") - Incorporated by
reference to Exhibit 2.1 to the Company's Form 8-K
dated December 22, 1998
(Commission File No. 0-9165).
(ii) Form of Amendment No. 1, dated October 22,
1998, to the Purchase Agreement - Incorporated by
reference to Exhibit 2.2 to the Company's Form 8-K
dated December 22, 1998 (Commission File No. 0-
9165).
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.
(i) Form of Credit and Guaranty Agreement, dated as
of December 4, 1998, among the Company, certain
subsidiaries of the Company, as guarantors, the
Lenders named therein and certain other parties -
Incorporated by reference to Exhibit 10.1 to the
Company's Form 8-K dated December 22, 1998
(Commission File No. 0-9165).
Exhibit 10 - Material contracts
(i)* 1998 Stock Option Plan - Incorporated by
reference to Exhibit 10(i) to the Company's Form 10-
Q for the quarter ended March 31, 1998 (Commission
File No. 0-9165).
(ii)* Supplemental Savings and Retirement Plan
(as Amended Effective January 1, 1996) -
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)* Description of bonus arrangements between
the Company and certain officers, including Messrs.
Brown, Elenbaas, Laube, Lipes, Mainelli, O'Mahony,
Simpson and Winkel.
Exhibit 11 - Statement re: computation of per share earnings
(i) "Note 9 - Earnings per Share" on page 53 of
the Annual Report is incorporated herein by
reference.
Exhibit 13 - Annual report to security holders
(i) Portions of the 1998 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 during the fourth quarter of 1998 and in 1999
through the date of this report.
(1) - Form 8-K dated December 22, 1998
Item 2. - Acquisition or Disposition of Assets -
Acquisition of Howmedica, the orthopaedic division
of Pfizer Inc.
Item 7. - Financial Statements and Exhibits -
Purchase Agreement and Credit and Guaranty Agreement
related to the acquisition of Howmedica
(2) - Form 8-K dated January 12, 1999
Item 9. - Sales of Equity Securities Pursuant to
Regulations - Issuance of 229,801 shares of $.10 par
value common stock for an equivalent number of
shares of Matsumoto Medical Instruments, Inc.
(3) - Form 8-K/A dated February 22, 1999
Item 7. - Financial Statements and Exhibits -
Financial Statements of Howmedica and pro forma
financial information for the acquisition of
Howmedica
(c) Exhibits - Exhibit Index appears on page 26 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 by the undersigned, thereunto duly authorized.
STRYKER CORPORATION
Date: 3/31/99 /s/ DAVID J. SIMPSON
_____________________________________
David J. Simpson, Vice President,
Chief Financial Officer and Secretary
(Principal Financial Officer)
/s/ DEAN H. BERGY
_____________________________________
Dean H. Bergy, Vice President, Finance
(Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ JOHN W. BROWN 3/31/99 /s/ DAVID J. SIMPSON 3/31/99
- ----------------------------------- --------------------------------------
John W. Brown, Chairman, President David J. Simpson, Vice President,
and Chief Executive Officer Chief Financial Officer and Secretary
(Principal Executive Officer) (Principal Financial Officer)
/s/ HOWARD E. COX, JR. 3/31/99 /s/ DEAN H. BERGY 3/31/99
- ----------------------------------- --------------------------------------
Howard E. Cox, Jr. - Director Dean H. Bergy, Vice President, Finance
(Principal Accounting Officer)
/s/ DONALD M. ENGELMAN 3/31/99 /s/ RONDA E. STRYKER 3/31/99
- ----------------------------------- --------------------------------------
Donald M. Engelman, Ph.D. - Director Ronda E. Stryker - Director
/s/ JEROME H. GROSSMAN 3/31/99 /s/ WILLIAM U. PARFET 3/31/99
- ----------------------------------- --------------------------------------
Jerome H. Grossman, M.D. - Director William U. Parfet - Director
/s/ JOHN S. LILLARD 3/31/99
- -----------------------------------
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, 1998
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 1998
Annual Report, are incorporated by reference in Item 8:
Report of independent auditors
Consolidated balance sheets - December 31, 1998 and 1997.
Consolidated statements of earnings - years ended
December 31, 1998, 1997 and 1996.
Consolidated statements of stockholders' equity - years
ended December 31, 1998, 1997 and 1996.
Consolidated statements of cash flows - years ended
December 31, 1998, 1997 and 1996.
Notes to consolidated financial statements - December 31, 1998.
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.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
STRYKER CORPORATION AND SUBSIDIARIES
Column A Column B Column C Column D Column E
________________ ___________ _______________________ _________ __________
Additions
_______________________
Charged to
Balance at Charged to Other Balance
Beginning Costs & Accounts Deductions at End
Description of Period Expenses Describe Describe of Period
(a) (b)
________________ ___________ __________ ___________ __________ ___________
DEDUCTED FROM ASSET ACCOUNTS
Allowance for Doubtful Accounts
Year ended December 31, 1998
$11,700,000 $2,609,000 $10,483,000 $3,192,000 $21,600,000
=========== ========== =========== ========== ===========
Year ended December 31, 1997
$9,500,000 $4,565,000 $2,365,000 $11,700,000
========== ========== ========== ===========
Year ended December 31, 1996
$7,800,000 $3,865,000 $2,165,000 $9,500,000
========== ========== ========== ==========
(a) Increase resulting from acquisitions.
(b) Uncollectible amounts written off, net of recoveries.
FORM 10-K - ITEM 14(c)
STRYKER CORPORATION AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit Page*
________________________________________________________________ ______
(2) Plan of acquisition, reorganization, arrangement, liquidation or
succession.
(i) Form of Stock and Asset Purchase Agreement,
dated August 13, 1998. 20**
(ii) Form of Amendment No.1 to the Purchase Agreement,
dated October 22, 1998. 20**
(3) Articles of incorporation and by-laws.
(i) Restated Articles of Incorporation and amendment
thereto dated December 28, 1993. 20**
(ii) By Laws. 20**
(4) Instruments defining the rights of security holders, including
indentures.
(i) Form of Credit and Guaranty Agreement,
dated December 4, 1998. 20**
(10) Material contracts.
(i) 1998 Stock Option Plan. 20**
(ii) Supplemental Savings and Retirement Plan
(as Amended Effective January 1, 1996). 20**
(iii) Description of bonus arrangements between the Company
and certain officers, including Messrs. Brown,
Elenbaas, Laube, Lipes, Mainelli, O'Mahony, Simpson
and Winkel. 27
(11) Statement re: computation of per share earnings.
(i) "Note 9 - Earnings per Share" on page 53 of the Annual Report is
incorporated herein by reference. 21**
(13) Annual report to security holders.
(i) Portions of the 1998 Annual Report that are
incorporated herein by reference. 21**
(21) Subsidiaries of the registrant.
(i) List of Subsidiaries. 28
(23) Consents of experts and counsel.
(i) Consent of Independent Auditors. 30
(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)
DESCRIPTION OF BONUS ARRANGEMENTS
The Company has entered into bonus arrangements with certain executive
officers for 1999, including Mr. Brown, Mr. Elenbaas, Mr. Laube, Mr. Lipes,
Mr. Mainelli, Mr. O'Mahony, 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 $3,000,000.
EXHIBIT (21)
LIST OF SUBSIDIARIES
(as of March 31, 1999)
State or Country
Name of Subsidiary of Incorporation
__________________________________________________ ____________________
Benoist Girard & Cie SCA SAS France
Bertec Location Inc. Canada
Bertec Medical Inc. Canada
Comptoir Hospitalier Orthopedique et Chirurgical France
Diagnostic Treatment Rehabilitation Clinic Limited United Kingdom
Dimso Iberica SA Spain
Dimso SA France
Favro B.V. The Netherlands
Groupe Bertec Inc. Canada
Howmedica Beteilgungs GmbH Germany
Howmedica GmbH Germany
Howmedica Iberia SA Spain
Howmedica International S. de R.L. Panama
Howmedica Leibinger GmbH & Co. KG Germany
Howmedica Leibinger Inc. Delaware
Howmedica Osteonics Corp. New Jersey
Jaquet Orthopedie SA Switzerland
Matsumoto Medical Instruments, Inc. Japan
Nettrick Ltd. Ireland
Nippon Stryker KK Japan
N.V. Stryker S.A. Belgium
Osteo AG Switzerland
Osteo Australia Pty. Limited Australia
Osteo France SARL France
Osteo Holding AG Switzerland
PA-Union LLC Maryland
Pficonprod Pty. Ltd. Australia
Physiotherapy Associates, Inc. Michigan
Physiotherapy Associates UK Limited United Kingdom
R.S. Network Inc. Illinois
SMD Corporation Michigan
Stryker AB Sweden
Stryker A/S Denmark
Stryker Australia Pty. Ltd. Australia
Stryker (Barbados) Foreign Sales Corporation Barbados
Stryker Biotech B.V. The Netherlands
Stryker Biotech France SARL France
Stryker B.V. The Netherlands
Stryker Canada Inc. Canada
Stryker Canada LP Canada
Stryker Capital B.V. The Netherlands
Stryker China Limited Hong Kong
Stryker Corporation (Chile) y Compania Limitada Chile
Stryker Corporation (Malaysia) Sdn. Bhd. Malaysia
Stryker Deutschland Holding GmbH Germany
Stryker do Brasil Lda. Brazil
Stryker Far East, Inc. Delaware
Stryker Finance B.V. The Netherlands
Stryker France SA France
Stryker Hellas E.P.E. Greece
Stryker Holdings B.V. The Netherlands
Stryker Iberia S.L. Spain
Stryker IFSC Limited Ireland
Stryker International Inc. Delaware
Stryker Ireland Limited Ireland
Stryker Italia Srl Italy
Stryker Korea Ltd. Korea
Stryker Medical B.V. The Netherlands
Stryker Mexico, S.A. de C.V. Mexico
Stryker Netherlands B.V. The Netherlands
Stryker New Zealand Ltd. New Zealand
Stryker Osteonics (PTY) LTD. South Africa
Stryker Osterreich GmbH Austria
Stryker Pacific Limited Hong Kong
Stryker Polska Sp.z.o.o. Poland
Stryker Portugal-Produtos Medicos Ltd. Portugal
Stryker Puerto Rico Inc. Delaware
Stryker SA Switzerland
Stryker Sales Corporation Michigan
Stryker Singapore Private Limited Singapore
Stryker Spain Holding, S.L. Spain
Stryker Technologies Corporation Michigan
Stryker U.K. Ltd. United Kingdom
Stryker-Osteo GmbH Germany
Stryker-Osteonics SA Switzerland
Stryker Corporation directly or indirectly owns 100% of the outstanding
voting securities of each of the above-named subsidiaries.
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
10-K) of Stryker Corporation of our report dated February 9, 1999, included
in the 1998 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
consolidated 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
Statement Number 33-55662 on Form S-8 dated December 11, 1992, 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 February 9, 1999, 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 10-K) of Stryker Corporation.
/s/ ERNST & YOUNG LLP
Kalamazoo, Michigan
March 26, 1999
TEN-YEAR REVIEW
(dollars in thousands, except per share amounts)
SUMMARY OF OPERATIONS
<TABLE>
1998 1997 1996 1995 1994
--------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Net sales $1,103,208 $980,135 $910,060 $871,952 $681,920
Cost of sales 472,073 397,766 392,358 369,444 300,381
--------- ------- -------- -------- -------
Gross profit 631,135 582,369 517,702 502,508 381,539
Operating expenses:
Research, development
and engineering 61,060 56,895 56,870 43,771 39,630
Selling, general and
administrative 381,211 341,500 326,641 301,426 221,433
Purchased research and
development 83,296 7,500
Acquisition-related and
special charges 49,942 34,278
Gain on patent judgment (61,094)
--------- ------- -------- -------- -------
575,509 398,395 364,195 345,197 261,063
--------- ------- -------- -------- -------
Operating income 55,626 183,974 153,507 157,311 120,476
Other income (expense) (a) 4,334 11,346 12,603 (3,401) 2,694
--------- ------- -------- -------- -------
Earnings before income
taxes and extraordinary
item 59,960 195,320 166,110 153,910 123,170
Income taxes 20,390 70,000 61,650 66,900 50,770
--------- ------- -------- -------- -------
Earnings before
extraordinary item 39,570 125,320 104,460 87,010 72,400
Extraordinary gain (net)
--------- ------- -------- -------- -------
Net earnings $39,570 $125,320 $104,460 $87,010 $72,400
========= ======= ======== ======= =======
Earnings per share of
common stock: (b)
Basic $.41 $1.30 $1.08 $.90 $.75
Diluted $.40 $1.28 $1.06 $.88 $.74
Dividend per share of
common stock (b) $.12 $.11 $.10 $.045 $.04
Average number of shares
outstanding - in
thousands: (b)
Basic 96,301 96,254 96,838 96,936 96,734
Diluted 98,130 98,132 98,427 98,545 98,053
1993 1992 1991 1990 1989
--------- ------- -------- -------- -------
Net sales $557,335 $477,054 $364,825 $280,634 $225,860
Cost of sales 256,748 221,650 172,477 132,882 106,899
--------- ------- -------- -------- -------
Gross profit 300,587 255,404 192,348 147,752 118,961
Operating expenses:
Research, development
and engineering 36,199 32,313 23,703 19,663 15,572
Selling, general and
administrative 172,446 149,390 117,089 92,384 71,761
Purchased research and
development
Acquisition-related and
special charges
Gain on patent judgment
--------- ------- -------- -------- -------
208,645 181,703 140,792 112,047 87,333
--------- ------- -------- -------- -------
Operating income 91,942 73,701 51,556 35,705 31,628
Other income (expense) (a) 4,123 3,239 1,789 2,395 (598)
--------- ------- -------- -------- -------
Earnings before income
taxes and extraordinary
item 96,065 76,940 53,345 38,100 31,030
Income taxes 35,860 29,240 20,270 14,475 11,800
--------- ------- -------- -------- -------
Earnings before
extraordinary item 60,205 47,700 33,075 23,625 19,230
Extraordinary gain (net) 9,910
--------- ------- -------- -------- -------
Net earnings $60,205 $47,700 $33,075 $33,535 $19,230
========= ======= ======== ======= =======
Earnings per share of
common stock: (b)
Basic $.62 $.50 $.35 $.25(c) $.20
Diluted $.62 $.49 $.34 $.25(c) $.20
Dividend per share of
common stock (b) $.035 $.03 $.025
Average number of shares
outstanding - in
thousands: (b)
Basic 96,712 95,432 95,052 94,792 94,356
Diluted 97,847 97,783 97,444 96,444 95,857
(a) Other income (expense) has been restated for 1994 through 1997 to
reflect the reclassification of minority interest, which was shown
separately prior to 1998.
(b) Adjusted for the three-for-two stock split effective May 19, 1989, and
the two-for-one stock splits effective May 13, 1991 and May 10, 1996.
(c) Excludes net extraordinary gain per share of $.11 basic and $.10
diluted.
</TABLE>
FINANCIAL AND STATISTICAL DATA
<TABLE>
1998 1997 1996 1995 1994
------- ------- ------- ------- --------
Cash and marketable
<S> <C> <C> <C> <C> <C>
securities 142,209 351,068 367,573 264,648 202,045
Working capital 612,388 433,692 501,796 448,815 361,318
Current ratio 1.9 2.4 3.0 3.6 3.0
Property, plant and
equipment - net 429,538 163,867 172,303 182,592 180,719
Capital expenditures 51,244 35,213 26,724 36,299 29,239
Depreciation and
amortization 37,596 33,264 34,650 28,654 20,944
Total assets 2,885,852 985,075 993,506 854,891 767,971
Long-term debt 1,487,971 4,449 89,502 96,967 95,276
Stockholders' equity 652,075 612,775 530,361 454,279 358,266
Return on average equity 6.3% 21.9% 21.2% 21.4% 22.4%
Net cash provided by
operating activities 154,515 91,867 204,342 111,536 97,693
Number of stockholders of
record 3,061 3,127 3,306 3,260 3,684
Number of employees 10,974 5,691 5,274 4,629 4,221
1993 1992 1991 1990 1989
------- ------- ------- ------- -------
Cash and marketable
securities 152,637 91,752 80,029 54,052 19,282
Working capital 213,965 168,197 140,296 117,877 89,594
Current ratio 2.6 2.7 2.6 3.0 3.5
Property, plant and
equipment - net 67,707 59,649 36,056 28,700 22,918
Capital expenditures 20,160 31,618 16,570 11,935 7,106
Depreciation and
amortization 16,183 11,382 11,796 7,109 6,312
Total assets 454,204 340,272 270,316 209,521 152,333
Long-term debt 31,282 1,433 1,400 1,900 2,655
Stockholders' equity 288,434 232,261 179,875 147,875 112,029
Return on average equity 23.1% 23.1% 20.2% 18.2% 18.9%
Net cash provided by
operating activities 86,102 50,728 37,644 48,328 21,500
Number of stockholders of
record 3,951 3,512 2,914 2,400 2,294
Number of employees 3,228 2,906 2,448 1,913 1,599
</TABLE>
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
----------------------- -----------------
1998 1997 1996 1998/ 1997/
1997 1996
------ ------ ------ ---- ----
<S> <C> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 13% 8%
Cost of sales 42.8 40.6 43.1 19 1
------ ------ ------
Gross profit 57.2 59.4 56.9 8 13
Research, development and
engineering expenses 5.5 5.8 6.2 7 --
Selling, general and
administrative expenses 34.6 34.8 35.9 12 5
Purchased research and
development 7.6 -- 0.8 -- --
Acquisition-related and
special charges 4.5 -- 3.8 -- --
Gain on patent judgment -- -- (6.7) -- --
------ ------ ------
Operating income 5.0 18.8 16.9 (70) 20
Other income 0.4 1.1 1.3 (62) (10)
------ ------ ------
Earnings before income
taxes 5.4 19.9 18.2 (69) 18
Income taxes 1.8 7.1 6.7 (71) 14
------ ------ ------
Net earnings 3.6% 12.8% 11.5% (68)% 20%
====== ====== ======
</TABLE>
The table below sets forth domestic/international and product line sales
information:
<TABLE>
Net Sales (in thousands) Percentage Change
----------------------- -----------------
1998 1997 1996 1998/ 1997/
1997 1996
---------- ------- --------- ---- ----
Domestic/international sales
<S> <C> <C> <C> <C> <C>
Domestic $728,948 $633,252 $564,534 15% 12%
International 374,260 346,883 345,526 8 --
---------- -------- ---------
Total net sales $1,103,208 $980,135 $910,060 13 8
========== ======== ========
Product line sales
Orthopaedic Implants $409,644 $375,028 $347,178 9 8
Medical and
Surgical Equipment 577,788 505,099 484,301 14 4
Physical Therapy
Services 115,776 100,008 78,581 16 27
---------- ------- ---------
Total net sales $1,103,208 $980,135 $910,060 13% 8%
========== ======== ========
</TABLE>
1998 Compared to 1997
Stryker Corporation's net sales increased 13% in 1998 to $1,103.2 million
from $980.1 million in 1997. Increased unit volume generated a 10% sales
increase. Net sales also increased $42.8 million or 4% as a result of the
acquisition of Howmedica, which was acquired on December 4, 1998; 3% as a
result of other acquired businesses; and 1% related to higher selling prices
from the conversion of Osteonics domestic distributors to direct sales.
These increases were partially offset by a 2% decrease arising from changes
in foreign currency exchange rates, a 2% decrease from sales credits for
inventory returns related to the conversion of the remaining Osteonics
independent distributors to direct sales and a 1% decline in selling prices.
The Company's domestic sales increased 15% in 1998 compared to 1997. The
leading domestic sales gains came from strong shipments of endoscopic
equipment, powered surgical instruments, orthopaedic implants, hospital beds
and stretchers and increased revenue from physical therapy services.
Increased domestic sales from the acquisition of Howmedica were largely
offset by fourth quarter sales credits for inventory returns relating to the
conversion of the remaining Osteonics independent distributors to direct
sales. International sales increased 8% for the year as a result of
incremental sales from the acquisition of Howmedica and strong shipment
growth in international markets outside of Japan. These gains were offset in
part by unfavorable foreign currency comparisons, which reduced the dollar
value of international sales by 5%, and by lower sales volume in Japan.
Sales of Orthopaedic Implants increased 9% for the year. The sales gains for
the year resulted from incremental sales from the acquisition of Howmedica
and higher shipments of hips domestically and spinal, trauma and knee
products worldwide. These Orthopaedic Implants sales increases were
partially offset by sales credits of $17.1 million for inventory returns in
connection with the conversion of the Osteonics domestic distributors, the
unfavorable impact of foreign currency translation and lower sales volumes in
Japan. Sales of Medical and Surgical Equipment increased 14% for the year.
The sales gains for 1998 resulted from higher shipments of endoscopic
equipment, powered surgical instruments, especially the TPS advanced
micropowered instruments, hospital beds and stretchers and incremental sales
from the acquisition of craniomaxillofacial products from Howmedica. These
gains were offset in part by a decline in sales of Matsumoto distributed
products sold in Japan due to unfavorable foreign currency comparisons and
lower sales volume. Revenues from Physical Therapy Services increased 16%
during the year as a result of the start-up of rehabilitative clinics, the
acquisition of certain clinics and same store revenue growth of 1%, all of
which were partially offset by overall price declines of 2%.
Cost of sales represented 42.8% of sales compared to 40.6% in 1997. The
higher cost of sales percentage in 1998 resulted from changes in sales mix
and the general weakness in foreign currencies, which increased the cost of
U.S.-dollar-based inventory purchases for the Company's international
operations. The cost of sales percentage also increased due to the inventory
returns associated with the sales credits related to the Osteonics
distributor conversions and as a result of $7.8 million in additional
nonrecurring cost of sales for inventory sold in the period from December 5
to December 31, 1998, that was stepped-up to fair value in connection with
the acquisition of Howmedica. Research, development and engineering expenses
increased 7% as the Company spent $61.1 million on product development in
1998 compared to $56.9 million in 1997. Research, development and
engineering expenses declined as a percentage of sales partially as a result
of the acquisition of Howmedica. In addition, the Company spent less on its
continuing development of the OP-1 bone growth device at Stryker Biotech.
This decrease was offset by greater spending on new product development in
the remainder of the Company. Stryker Biotech spending is expected to grow
in 1999 as a result of the November 1998 purchase of the manufacturing rights
and facilities for OP-1 from Creative BioMolecules, Inc. New products in
1998 included the Secur-Fit Plus hip stem, Scorpio CR Knee Implant, the
InterPulse System, System 4 (the next generation battery powered instrument
system), the Quantum 5000 lightsource, the Hermes video control system and
the EZ-Pro Ambulance Cot. Selling, general and administrative expenses
increased 12% in 1998 as a result of incremental expenses associated with the
acquisition of Howmedica and an increase in selling expenses, although such
expenses grew at a slower rate than the increase in sales. Selling, general
and administrative expenses declined to 34.6% of sales in 1998 from 34.8% in
1997.
There were several significant nonrecurring acquisition-related items
included in continuing operations in 1998. The Company charged $83.3 million
to operations in the fourth quarter for purchased research and development,
$78.4 million related to the valuation of in-process research and development
projects acquired in the Howmedica purchase and $4.9 million related to the
purchase of tangible research and development assets having no alternative
future use in connection with the acquisition of the OP-1 manufacturing
rights and facility. The Company also recorded $63.9 million in acquisition-
related pre-tax charges in the fourth quarter. These charges included $52.7
million to reorganize Stryker's distribution channels to accommodate the
integration with Howmedica and $11.2 million in expensed transaction costs
associated with the acquisitions of Howmedica and of the manufacturing rights
and facilities for OP-1. The reorganization of Stryker's distribution
channels encompassed conversions of all remaining Osteonics U.S. distributors
and certain distributors in Europe and the Pacific Rim to direct sales. A
portion of the cost to convert Osteonics distributors was incurred in the
form of sales credits for inventory returns, which reduced sales and gross
profit in the fourth quarter.
The purchased research and development of $78.4 million for the Howmedica
acquisition was determined based on an independent valuation of Howmedica's
research and development projects using information and assumptions provided
by management. Among the in-process projects included in the valuation, two
are considered significant. These projects relate to the development of a
new spinal technology to be used in the treatment of spinal disorders and the
development of an improved polyethylene to be used in hip and knee implants.
The estimated future revenues associated with the spinal project were deemed
to be approximately 80% attributable to in-process research and development
based on technological progression towards completion. For the polyethylene
project, future revenues were deemed to be approximately 75% attributable to
in-process research and development based on the same criterion. The spinal
project is expected to be completed in 2002 and the polyethylene project is
expected to be completed in 1999. All of the purchased research and
development projects were valued using an income approach utilizing the
discounted cash flow method. Revenues were projected from the expected date
of product introduction to 2009 with the terminal value included in the
discounted cash flow valuation. The spinal project is considered to have
greater revenue potential with higher market risk and was valued using a 30%
discount rate. The polyethylene project was valued using a 20% discount
rate. Margins estimated for the future products were based on the current
spinal implant market for the spinal project and on the current margins for
hip and knee implants for the polyethylene project. Estimated selling,
royalty and other expenses related to the future products were based on
Howmedica's historical levels of spending in these areas.
During the fourth quarter of 1998, the Company reduced the effective tax rate
for the year to 34% from 35%, thereby reducing income tax expense by $0.6
million. The reduction in the effective tax rate for the year from the 36%
rate used in 1997 was the result of increased participation in a U.S.
employment-related tax incentive program, a reduction in tax assessed on
funds repatriated from Puerto Rico and a more favorable mix of operating
results among tax jurisdictions, which was offset in part by certain
nondeductible permanent differences. Net earnings were $39.6 million
compared to $125.3 million in 1997, a decrease of 68%. Excluding the impact
of Howmedica operating results and the nonrecurring acquisition-related costs
and charges taken in the fourth quarter, net earnings for the year increased
20% to $150.3 million.
1997 Compared to 1996
Stryker Corporation's net sales increased 8% in 1997 to $980.1 million from
$910.1 million in 1996. Increased unit volume generated an 11% sales
increase. Net sales also increased 3% as a result of acquired businesses.
These increases were partially offset by a 3% decrease arising from changes
in foreign currency exchange rates, a 2% decline in selling prices and a 1%
decline from a divested business.
The Company's domestic sales increased 12% in 1997 compared to 1996. The
leading domestic sales gains came from strong shipments of powered surgical
instruments, endoscopic equipment and orthopaedic implants and increased
revenue from physical therapy services. International sales increased less
than 1% for the year as unfavorable foreign currency comparisons and flat
sales in Japan offset a 20% increase in shipments in the other international
markets.
Sales of Orthopaedic Implants increased 8% in 1997 compared to 1996. The
sales gains for the year resulted from higher shipments of trauma products
related to the acquisition of Osteo Holding AG ("Osteo") in September 1996
and of knees and hips. Sales of Medical and Surgical Equipment increased 4%
for the year as higher shipments of powered surgical instruments, especially
the TPS advanced micro-powered instruments, and endoscopic equipment were
offset in part by the January 1997 sale of the Sterilizer Service Division,
by lower shipments of hospital beds and stretchers, by a significant decline
in sales of Matsumoto distributed products and by the lower dollar
translation of foreign currency sales. Revenues from Physical Therapy
Services increased 27% for the year, primarily as a result of business
acquisitions and start-ups. Same store revenue growth for Physical Therapy
Services was 4% in 1997.
Cost of sales represented 40.6% of sales compared to 43.1% in 1996. The
lower cost of sales percentage in 1997 resulted from product mix, the
Company's continued efforts in product cost reductions and from inventory
adjustments of $13.8 million recorded in 1996 that did not occur in 1997.
The 1996 inventory adjustments were for excess inventory and product
deletions, principally in Japan, and obsolete inventory resulting from new
product introductions. Research, development and engineering expenses were
$56.9 million in both 1997 and 1996. The Company's research, development and
engineering expenses represent continued development of the OP-1 bone growth
device at Stryker Biotech and the Company-wide focus on new product
development. New products in 1997 included the Scorpio Knee System, the
Steri-shield Turbo3 Helmet, the SE Sagittal Saw, the Tempest Arthroscopy
Pump and the 6080 MX-Pro Ambulance Cot. Selling, general and administrative
expenses increased 5% in 1997 as a result of an increase in marketing
expenses, due to additional marketing campaigns, and an increase in selling
expenses resulting from increases in sales volume, larger sales forces and
the incremental expenses incurred as a result of the Osteo acquisition.
However, selling, general, and administrative expenses declined to 34.8% of
sales in 1997 compared to 35.9% in 1996. In 1996, $8.9 million of
adjustments were made for additional legal reserves, depreciation charges due
to a change in estimate and other matters. The effect of these adjustments
and the Company's ongoing effort to control operating expenses reduced
selling, general and administrative expenses as a percentage of sales.
There were several significant unusual items reflected in continuing
operations in 1996 that did not occur in 1997. Special charges of $34.3
million were recorded in 1996, consisting of $15.0 million for the
reorganization of the Company's distribution channels, $14.6 million relating
to asset impairments and $4.7 million for patent claims. The Company also
recorded a $7.5 million pretax charge for purchased research and development
associated with the acquisition of Osteo. In addition, the Company was
awarded and received $77.6 million in damages, attorneys' fees and interest
for infringement of the Company's U.S. patent on its Omniflex Hip System.
The Company recognized a pretax gain, net of related legal fees and other
expenses, of $61.1 million.
During the fourth quarter of 1997, the Company reduced the effective tax rate
for the year to 36% from 37%, thereby reducing income tax expense by $1.9
million. The reduction in the effective tax rate in the fourth quarter of
1997 and from the 38.4% rate used in 1996 was the result of higher U.S.
exports, tax-free interest on short-term investments and a more favorable mix
of operating results among tax jurisdictions. Net earnings increased 20% to
$125.3 million in 1997 compared to $104.5 million in 1996.
Liquidity and Capital Resources
Stryker had a strong operating cash flow year in 1998. Operating activities
provided $154.5 million in cash in 1998, compared to $91.9 million provided
in 1997. The increase from 1997 is the result of first quarter 1997 payments
of attorneys' fees and taxes totaling $37.9 million related to the 1996 gain
on patent judgment and to increased 1998 net earnings, excluding the non-cash
charge for purchased research and development and the impact of acquisition-
related charges that did not yet require cash payment.
On December 4, 1998, the Company acquired Howmedica, the orthopaedic division
of Pfizer Inc., for $1,650 million in cash. The acquisition was funded with
cash and approximately $1,500 million borrowed under $1,650 million of credit
facilities established in December 1998. During 1998, the Company also
purchased the manufacturing rights, facilities and product on-hand for its OP-
1 bone growth device for $19.3 million in cash and four of Osteonics
independent distributors for $19.7 million in cash. In addition, the Company
acquired additional shares of the outstanding common stock of Matsumoto
Medical Instruments, Inc., thereby increasing its direct ownership interest
to 83%, through cash purchases of $3.3 million and the exchange of 75,000
shares of Stryker common stock ($3.8 million value). In January 1999, the
Company acquired all of the remaining outstanding common stock of Matsumoto
for $1.0 million in cash and 180,605 shares of Stryker common stock ($9.7
million value).
These acquisitions, particularly of Howmedica, significantly changed the
Company's liquidity and financial position. Working capital at December 31,
1998, increased by $178.7 million to $612.4 million from $433.7 million in
1997. However, the Company's current ratio declined from 2.4 to 1.9. The
working capital increase includes a $213.1 million step-up to fair value of
inventories acquired in connection with the acquisition of Howmedica, which
will be charged off as additional nonrecurring cost of sales as the
inventories are sold. Working capital also includes $206.9 million of
acquisition-related reorganization reserves and liabilities in current
liabilities. Accounts receivable days sales outstanding at the end of 1998
increased to 70 days from 62 days in 1997, primarily as a result of higher
days sales outstanding related to Howmedica direct sales in certain European
markets. Days sales in inventory increased from 127 days in 1997 to 142 days
at December 31, 1998. The increase in inventory days is primarily the result
of higher inventory levels held by the acquired Howmedica business.
The Company had $142.2 million in cash and marketable securities at December
31, 1998. The Company also has outstanding long-term debt totaling $1,503
million at the end of 1998. Current maturities of the long-term debt for
1999 are $15.0 million and will increase to $89.0 million in 2000 and $130.2
million in 2001. The Company believes its cash and marketable securities on-
hand as well as anticipated cash flows from operations will be sufficient to
fund future operating capital requirements and required debt repayments.
Should additional funds be required, the Company has $162.2 million of
additional borrowing capacity available under the $1,650 million credit
facilities at December 31, 1998.
Other Matters
The Company continues to evaluate its plan to integrate Howmedica and
Stryker. As the integration plan evolves, information would become known
that will require adjustments to the purchase liabilities recorded in the
preliminary purchase price allocation. Such adjustments could result in an
increase or decrease to goodwill recorded in connection with the acquisition.
In addition, decisions to further reorganize Stryker's operations could be
made that would result in additional acquisition-related and special charges
against future operating results.
The Company manufactures its products in the United States, France, Germany,
Ireland, Switzerland, Canada and Puerto Rico and distributes its products
throughout the world. As a result, the Company's financial results could be
significantly affected by factors such as changes in foreign currency
exchange rates or weak economic conditions in foreign markets. The Company's
operating results are exposed to changes in exchange rates between the U.S.
dollar and the Japanese yen and European currencies, in particular the Euro
and the Swiss franc. When the U.S. dollar strengthens against foreign
currencies, the dollar value of foreign currency sales declines and the
relative cost of U.S.-sourced product increases, thereby decreasing gross
margins. When the U.S. dollar weakens, the opposite occurs.
The Company enters into forward foreign exchange contracts and options
principally to hedge the currency fluctuations in transactions denominated in
foreign currencies, thereby limiting the Company's risk that would otherwise
result from changes in exchange rates. During 1998, the principal
transactions hedged were intercompany purchases of U.S.-manufactured product
and intercompany payables. The periods of the forward foreign exchange
contracts and options correspond to the periods of the hedged transactions
with realized gains and losses included in the measurement and recording of
the hedged transactions.
At December 31, 1998, the Company had outstanding forward foreign exchange
contracts and options to purchase $79.7 million and sell $92.3 million of
various currencies (principally U.S. dollars) with maturities principally
ranging from 30 to 180 days.
The estimated fair value of foreign currency contracts and options represents
the measurement of the contracts and options at month-end spot rates. At
December 31, 1998, the difference between the fair value of all outstanding
contracts and options and the purchased contract and option amounts was not
material. A hypothetical 10% change in exchange rates for these currencies
would change the fair value by approximately $19.0 million.
The Company's exposure to market risk for changes in interest rates relate to
its borrowings and investment portfolio. The Company manages its interest
rate risk on its borrowings through the purchase of interest rate swap
agreements, which, effective in January 1999, have fixed the base rate on
$800.0 million of the approximate $1,500 million of variable borrowings
outstanding at December 31, 1998. If market interest rates for similar
borrowings average 1% more in 1999 than they did in 1998, the Company's
interest expense, after considering the effects of its interest rate swaps,
would increase, and income before taxes would decrease by $6.9 million.
Comparatively, if market interest rates averaged 1% less in 1999 than they
did during 1998, the Company's interest expense, after considering the
effects of its interest rate swaps, would decrease, and income before taxes
would increase by $6.2 million. These amounts are determined by considering
the impact of hypothetical interest rates on the Company's borrowing cost and
interest rate swap agreements and does not consider any actions by management
to mitigate its exposure to such a change.
The Company manages interest rate risk in its investment portfolio by
investing in high-quality issuers and, by policy, seeks to avoid principal
loss of its invested funds by limiting default risk, market risk and
reinvestment risk. The Company manages default risks by investing in only
high-credit-quality securities and by responding appropriately to a
significant reduction in a credit rating of any investment issuer or
guarantor. The portfolio includes only marketable securities with active
secondary or resale markets to ensure portfolio liquidity. In addition, the
Company does not plan to hold a significant amount of investments, since it
expects to pay off debt with operating cash flow in excess of the Company's
needs.
Year 2000
The information provided below constitutes a "Year 2000 Readiness Disclosure"
for purposes of the Year 2000 Information and Readiness Disclosure Act.
The Company is in the process of preparing a response for the Year 2000 (Y2K)
so that its computer and other systems will function properly with respect to
dates in the year 2000 and beyond. The scope of the Company's Y2K response
includes replacement or upgrades of information technology, such as software
or hardware, as well as non-information-technology systems that may include
embedded chips, such as microcontrollers contained in manufacturing
equipment and in Company products. The Company has already upgraded the
hardware and software at many divisions. Major hardware and software
upgrades are in process at Howmedica Osteonics, Physiotherapy Associates and
at several manufacturing and distribution locations within Europe. The
Company's largest ongoing project is at Howmedica Osteonics, where separate
noncompliant manufacturing and distribution systems are being upgraded or
replaced with integrated systems that are Y2K compliant. The Company has or
will contact key third parties, such as suppliers, customers and financial
institutions in an effort to assure no interruption of its business
relationships occurs due to Y2K compliance issues. However, if the needed
conversions or modifications to computer or other systems are not made, or
are not completed timely, the Y2K issue could have a material impact on the
operations of the Company.
The Company expects that it will be Y2K compliant by September 1999.
Substantially all of the Company's products that contain embedded chips are
Y2K compliant. The Company will continue testing and documentation efforts
throughout 1999 and will formulate and finalize any contingency plans needed
during that time. These contingency plans will address worst-case scenarios
if needed conversions or modifications are not made or completed with certain
key systems as well as worst-case scenarios for key third party relationships
affected by Y2K. The total estimated incremental cost for the Y2K project is
approximately $5.1 million, of which $2.1 million had been spent through
December 31, 1998. All costs will be expensed as incurred and will be funded
through operating cash flows.
The costs and timing of the Y2K project are based on management's best
estimates, which were derived utilizing assumptions regarding future events,
including the continued availability of certain resources and other factors.
However, there can be no guarantee that these estimates will be achieved, and
actual results could differ materially from those anticipated. Specific
factors that might cause such material differences include, but are not
limited to, the availability and cost of personnel trained in this area, the
ability to locate and correct relevant computer codes and similar
uncertainties.
Forward-Looking Statements
The information contained in this report includes forward-looking statements
within the meaning of the federal securities laws that are subject to risks
and uncertainties. Factors that could cause the Company's actual results and
financial condition to differ from the Company's expectations include, but
are not limited to: changes in economic conditions that adversely affect the
level of demand for the Company's products, changes in foreign exchange
markets, changes in financial markets, changes in the competitive
environment, and the factors referred to above regarding Y2K issues. All
forward-looking statements contained in this report are qualified in their
entirety by this cautionary statement.
<TABLE>
CONSOLIDATED BALANCE SHEETS
STRYKER CORPORATION AND SUBSIDIARIES
(in thousands, except per share amounts)
December 31
1998 1997
----------- ---------
Assets
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents $124,951 $154,027
Marketable debt securities 17,258 197,041
Accounts receivable, less allowance of
$21,600 ($11,700 in 1997) 425,609 176,214
Inventories 553,959 116,341
Deferred income taxes 139,109 78,896
Prepaid expenses and other current assets 50,957 14,184
----------- ---------
Total current assets 1,311,843 736,703
PROPERTY, PLANT AND EQUIPMENT
Land, buildings and improvements 225,025 116,830
Machinery and equipment 372,183 183,619
----------- ---------
597,208 300,449
Less allowance for depreciation 167,670 136,582
----------- ---------
429,538 163,867
OTHER ASSETS
Goodwill, less accumulated amortization of
$8,650 ($7,670 in 1997) 475,446 34,744
Other intangibles, less accumulated
amortization of $15,560 ($15,730 in 1997) 422,512 11,366
Deferred charges, less accumulated
amortization of $52,150 ($35,960 in 1997) 168,802 19,905
Other 77,711 18,490
----------- ---------
1,144,471 84,505
----------- ---------
$2,885,852 $985,075
========== =========
Liabilities and Stockholders' Equity
CURRENT LIABILITIES
Accounts payable $162,433 $ 55,034
Accrued compensation 89,654 43,927
Income taxes 49,102 36,971
Acquisition-related reorganization reserves
and liabilities 206,875
Accrued expenses and other liabilities 176,377 93,452
Current maturities of long-term debt 15,014 73,627
----------- ---------
Total current liabilities 699,455 303,011
LONG-TERM DEBT, EXCLUDING CURRENT MATURITIES 1,487,971 4,449
OTHER LIABILITIES 29,617 29,168
MINORITY INTEREST 16,734 35,672
STOCKHOLDERS' EQUITY
Common stock, $.10 par value:
Authorized--150,000 shares
Outstanding-96,540 shares (96,059 in 1997) 9,654 9,606
Additional paid-in capital 10,499 18
Retained earnings 640,924 612,939
Accumulated other comprehensive loss (9,002) (9,788)
----------- ---------
Total stockholders' equity 652,075 612,775
----------- ---------
$2,885,852 $985,075
========== =========
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
CONSOLIDATED STATEMENTS OF EARNINGS
STRYKER CORPORATION AND SUBSIDIARIES
(in thousands, except per share amounts)
Years Ended December 31
------------------------
1998 1997 1996
---------- --------- --------
<S> <C> <C> <C>
Net sales $1,103,208 $980,135 $910,060
Cost of sales 472,073 397,766 392,358
---------- --------- --------
Gross profit 631,135 582,369 517,702
Operating expenses:
Research, development and
engineering 61,060 56,895 56,870
Selling, general and administrative 381,211 341,500 326,641
Purchased research and development 83,296 7,500
Acquisition-related and special
charges 49,942 34,278
Gain on patent judgment (61,094)
---------- --------- --------
575,509 398,395 364,195
---------- --------- --------
55,626 183,974 153,507
Operating income
Other income 4,334 11,346 12,603
---------- --------- --------
59,960 195,320 166,110
Earnings before income taxes
Income taxes 20,390 70,000 61,650
---------- --------- --------
Net earnings $39,570 $125,320 $104,460
========== ========= ========
Net earnings per share of common
stock:
Basic $.41 $1.30 $1.08
Diluted $.40 $1.28 $1.06
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
STRYKER CORPORATION AND SUBSIDIARIES
(In thousands, except per share amounts)
Accumulated
Additional Other
Common Paid-In Retained Comprehensive
Stock Capital Earnings Gain (Loss) Total
------- --------- --------- ----------- --------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1996 $9,711 $14,736 $419,537 $10,295 $454,279
Net earnings for 1996 104,460 104,460
Unrealized losses on
securities, net of $825
income tax benefit (1,118) (1,118)
Foreign currency translation
adjustments (8,735) (8,735)
--------
Comprehensive earnings for 1996 94,607
Sales of 257 shares of common
stock under stock option and
benefit plans, including
$1,152 income tax benefit 26 4,095 4,121
Common stock issued in
business acquisitions 8 2,089 2,097
Repurchase of 657 shares of
common stock (66) (14,998) (15,064)
Cash dividend declared of $.10
per share of common stock (9,679) (9,679)
------- --------- --------- ----------- --------
Balance at December 31, 1996 9,679 5,922 514,318 442 530,361
Net earnings for 1997 125,320 125,320
Unrealized losses on
securities, net of $1,483
income tax benefit (1,572) (1,572)
Foreign currency translation
adjustments (8,658) (8,658)
--------
Comprehensive earnings for 1997 115,090
Sales of 386 shares of common
stock under stock option and
benefit plans, including
$3,878 income tax benefit 38 5,317 5,355
Repurchase of 993 shares of
common stock (99) (9,358) (16,119) (25,576)
Elimination of 120 shares of
common stock held by a
subsidiary (12) (1,863) (1,875)
Cash dividend declared of $.11
per share of common stock (10,580) (10,580)
------- --------- --------- ----------- --------
Balance at December 31, 1997 9,606 18 612,939 (9,788) 612,775
Net earnings for 1998 39,570 39,570
Unrealized gains on securities
of $873 ($300 net of tax)
net of reclassification
adjustment for gains
included in net earnings of
$18 ($42 loss net of tax) 342 342
Foreign currency translation
adjustments 444 444
--------
Comprehensive earnings for 1998 40,356
Sales of 406 shares of common
stock under stock option and
benefit plans, including
$5,225 income tax benefit 41 6,696 6,737
Common stock issued in
business acquisitions 7 3,785 3,792
Cash dividend declared of $.12
per share of common stock (11,585) (11,585)
------- --------- --------- ---------- --------
Balance at December 31, 1998 $9,654 $10,499 $640,924 ($9,002)$652,075
======= ========= ========= =========== ========
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
STRYKER CORPORATION AND SUBSIDIARIES
(in thousands)
Years Ended December 31
-----------------------
1998 1997 1996
---------- -------- --------
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net earnings $39,570 $125,320 $104,460
Adjustments to reconcile net earnings to
net cash provided by operating
activities:
Depreciation 29,961 26,113 28,397
Amortization 7,635 7,151 6,253
Write-off of purchased research
and development 83,296 7,500
Acquisition-related and special
charges, net of cash paid 46,106 33,678
Sale of inventory stepped-up to
fair value at acquisition 7,845
Minority interest (2,107) (870) (5,664)
Provision for losses on accounts
receivable 2,609 2,200 1,700
Deferred income taxes (credit) (44,421) 1,960 (30,693)
Changes in operating assets and
liabilities, net of effects of
business acquisitions:
Accounts receivable (10,064) (20,968) (7,312)
Inventories (30,246) (19,237) 9,632
Deferred charges (3,221) 1,067 (6,166)
Accounts payable 15,820 (8,192) 12,041
Income taxes (2,540) (25,728) 27,431
Other 14,272 3,051 23,085
---------- -------- --------
Net cash provided by operating
activities 154,515 91,867 204,342
INVESTING ACTIVITIES
Business acquisitions, net of cash
acquired (1,694,731) (39,385) (51,295)
Purchases of property, plant and
equipment (51,244) (35,213) (26,724)
Sales (purchases) of marketable
securities 179,783 (5,141) 3,699
---------- -------- --------
Net cash used in investing activities (1,566,192) (79,739) (74,320)
FINANCING ACTIVITIES
Proceeds from borrowings 1,553,863
Payments on borrowings (170,648) (6,734) (3,278)
Dividends paid (10,580) (9,679) (4,370)
Proceeds from exercise of stock options 6,737 5,355 4,121
Repurchases of common stock (25,576) (15,064)
Other 7,382 6,203 (2,804)
---------- -------- --------
Net cash provided by (used in) financing
activities 1,386,754 (30,431) (21,395)
Effect of exchange rate changes on cash
and cash equivalents (4,153) (3,343) (2,003)
---------- -------- --------
Increase (decrease) in cash and cash
equivalents (29,076) (21,646) 106,624
Cash and cash equivalents at beginning
of year 154,027 175,673 69,049
---------- -------- --------
Cash and cash equivalents at end of year $124,951 $154,027 $175,673
========== ======== ========
See accompanying notes to consolidated financial statements.
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
STRYKER CORPORATION AND SUBSIDIARIES
December 31, 1998
(in thousands, except share and per share amounts)
1. Significant Accounting Policies
BUSINESS: Stryker Corporation develops, manufactures and markets specialty
surgical and medical products that 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 its
majority 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) and their equity in Matsumoto's net assets.
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 within accumulated
other comprehensive gain (loss) in 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 94% (78% in 1997) 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,
except for certain inventories acquired in connection with the purchase of
Howmedica that have been stepped-up to fair value (see Note 4).
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.
GOODWILL AND OTHER INTANGIBLE ASSETS: Goodwill and other intangible assets
represent the excess of purchase price over fair value of tangible net assets
of acquired businesses. Goodwill is amortized on a straight-line basis over
10 to 40 years (weighted average life of 34 years). Developed technology is
amortized on a straight-line basis over 20 years. Other intangible assets,
consisting primarily of customer base, which reflects expected continued
customer patronage, trademarks, trade names and assembled work force, are
amortized on a straight-line basis over 5 to 35 years (weighted average life
of 24 years).
The carrying amounts of goodwill and other intangible assets are reviewed if
facts and circumstances suggest they may be impaired. If the review
indicates that the carrying amount of any intangible asset will not be
recoverable, as determined using an undiscounted cash flow analysis, the
carrying amount of the goodwill or other intangible asset is reduced by the
estimated shortfall of cash flows to fair value.
DEFERRED CHARGES: Deferred charges represent the net book value of loaner
instruments for surgical implants provided to customers by the Company.
These instruments are amortized on a straight-line basis over periods ranging
from one to three years. Amortization expense of instruments is included in
selling, general and administrative expense in the Consolidated Statements of
Earnings.
DEFERRED LOAN COSTS: Deferred loan costs of $25,493 associated with the
Company's Senior Secured Credit Facilities are being amortized over the terms
of the related debt, based on the amount of outstanding debt, using the
effective interest method and are classified in other assets. Amortization
expenses for these deferred loans costs are included in interest expense and
were $402 for 1998.
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.
DERIVATIVE FINANCIAL INSTRUMENTS: The Company uses derivative financial
instruments to manage the economic impact of fluctuations in interest rates
and foreign currency exchange rates. The Company enters into interest rate
swaps, foreign currency forward contracts and foreign currency options to
manage these economic risks.
Interest rate differentials to be paid or received as a result of interest
rate swaps are accrued and recognized as an adjustment of interest expense
related to the designated debt. Foreign currency forward contracts and
foreign currency options used to hedge intercompany financial activity are
carried off-balance sheet with realized gains and losses included in the
measurement and recording of the hedged transactions.
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.
COMPREHENSIVE INCOME: As of January 1, 1998, the Company adopted Financial
Accounting Standards Board (FASB) Statement No. 130, "Reporting Comprehensive
Income". Statement No. 130 establishes rules for the reporting of
comprehensive earnings and its components; however, the adoption of this
statement had no impact on the Company's net earnings or stockholders'
equity. Statement No. 130 requires unrealized gains or losses on the
Company's available-for-sale securities and foreign currency translation
adjustments, which prior to adoption were reported separately in
stockholders' equity, to be aggregated and disclosed as accumulated other
comprehensive gain (loss) within stockholders' equity. Prior year financial
statements have been reclassified to conform to the requirements of Statement
No. 130. The components of accumulated other comprehensive gain (loss) are
as follows:
<TABLE>
Unrealized Foreign Accumulated
Gains Currency Other
(Losses) on Translation Comprehensive
Securities Adjustments Gain (Loss)
------------ ------------ --------------
<S> <C> <C> <C>
Balance at December 31, 1997 ($376) ($9,412) ($9,788)
Other comprehensive earnings for 1998 342 444 786
------------ ------------ --------------
Balance at December 31, 1998 ($34) ($8,968) ($9,002)
============ ============ ==============
</TABLE>
NEW ACCOUNTING STANDARDS NOT YET ADOPTED: In June 1998, the FASB issued
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities". The Statement will require the Company to record all
derivatives on the balance sheet at fair value. Changes in the fair value of
derivatives that do not meet the criteria to be treated as a hedge under the
Statement will be included in earnings. If derivatives meet the hedge
criteria, changes in the fair value of the derivatives will offset changes in
the fair value of the items being hedged. The Statement is required to be
adopted by the Company beginning in the first quarter of 2000. The Company
has not determined what effect the Statement will have on the Company's
future consolidated results of operations or financial position when adopted.
RECLASSIFICATIONS: Certain prior year amounts have been reclassified to
conform with the presentation used in 1998.
2. Investments
The following is a summary of the Company's investments in marketable equity
and debt securities:
<TABLE>
Gross Gross
Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
------- ----------- ----------- ----------
At December 31, 1998:
<S> <C> <C> <C> <C>
Debt securities $17,275 $0 ($17) $17,258
Equity securities 1,665 531 (693) 1,503
------- ----------- ----------- ----------
Total $18,940 $531 ($710) $18,761
======= =========== =========== ==========
At December 31, 1997:
Debt securities $197,505 $147 ($611) $197,041
Equity securities 4,796 1,317 (1,887) 4,226
------- ----------- ----------- ----------
Total $202,301 $1,464 ($2,498) $201,267
======= =========== =========== ==========
</TABLE>
Gross realized gains on sales of the Company's investments totaled $702, $118
and $516 in 1998, 1997 and 1996, respectively, and gross realized losses
totaled $1,145, $750 and $589 in 1998, 1997 and 1996, respectively. At
December 31, 1998, approximately 80% of the Company's investments in debt
securities mature within one year and substantially all of the remainder
mature within two years.
Interest income, which is included in other income, totaled $16,501 in 1998,
$14,963 in 1997 and $13,339 in 1996.
3. Inventories
Inventories are summarized as follows:
<TABLE>
December 31
-----------
1998 1997
--------- ---------
<S> <C> <C>
Finished goods $451,880 $83,386
Work-in-process 49,758 11,114
Raw material 59,853 29,560
--------- ---------
FIFO cost 561,491 124,060
Less LIFO reserve 7,532 7,719
--------- ---------
$553,959 $116,341
========= =========
</TABLE>
Inventories at December 31, 1998, reflect a step-up of $213,155 to fair value
in connection with the acquisition of Howmedica (see Note 4).
4. Business Acquisitions
On December 4, 1998, the Company acquired Howmedica, the orthopaedic division
of Pfizer Inc., for $1,650,000 in cash. Howmedica develops, manufactures and
markets a wide range of specialty medical products utilized in the treatment
of musculoskeletal disorders. Howmedica's products include hip and knee
implants for primary and revision surgery, bone cement, trauma systems used
in bone repair, craniomaxillofacial fixation devices and specialty surgical
equipment used in neurosurgery. The acquisition was funded with cash and cash
equivalents and approximately $1,500,000 borrowed under $1,650,000 of credit
facilities established in December 1998 (see Note 7).
The acquisition of Howmedica was accounted for using the purchase method of
accounting. The results of operations for Howmedica are included in the
Company's consolidated financial statements beginning December 5, 1998. The
purchase price of $1,650,000 in cash plus an estimate for a contractually
required adjustment based on the increase in Howmedica's working capital
since December 31, 1997, and liabilities assumed has been preliminarily
allocated to the assets acquired based on their estimated fair values at the
date of acquisition.
Based on the preliminary purchase price allocation, goodwill of $437,000 was
recorded by the Company in connection with the acquisition. Goodwill
represents the excess of the purchase price and purchase liabilities over the
fair value of net identifiable tangible and intangible assets acquired.
Approximately $492,500 of the purchase price was allocated to identifiable
intangible assets, including purchased research and development of $78,400,
developed technology of $194,000, customer base of $178,900 and trademarks
and assembled work force of $41,200. The purchased research and development
was charged to operations during the fourth quarter as required by generally
accepted accounting principles.
The purchased research and development of $78,400 was determined based on an
independent valuation of Howmedica's research and development projects using
information and assumptions provided by management. Among the in-process
projects included in the valuation, two are considered significant. These
projects relate to the development of a new spinal technology to be used in
the treatment of spinal disorders and the development of an improved
polyethylene to be used in hip and knee implants. The estimated future
revenues associated with the spinal project were deemed to be approximately
80% attributable to in-process research and development based on
technological progression towards completion. For the polyethylene
project, future revenues were deemed to be approximately 75% attributable to
in-process research and development based on the same criterion. The spinal
project is expected to be completed in 2002 and the polyethylene project is
expected to be completed in 1999. All of the purchased research and
development projects were valued using an income approach utilizing the
discounted cash flow method. Revenues were projected from the expected date
of product introduction to 2009 with the terminal value included in the
discounted cash flow valuation. The spinal project is considered to have
greater revenue potential with higher market risk and was valued using a 30%
discount rate. The polyethylene project was valued using a 20% discount
rate. Margins estimated for the future products were based on the current
spinal implant market for the spinal project and on the current margins for
hip and knee implants for the polyethylene project. Estimated selling,
royalty and other expenses related to the future products were based on
Howmedica's historical levels of spending in these areas.
In connection with the preliminary purchase price allocation, Howmedica
inventories were stepped-up $221,000 to fair value. This step-up will be
charged off as additional nonrecurring cost of sales as the acquired
inventory is sold. Fourth quarter cost of sales for 1998 was increased as a
result of the step-up, reducing pretax earnings in the quarter by $7,845
($5,178 net of tax).
Immediately after the acquisition was consummated, management of the Company
began to implement an integration plan to combine Stryker and Howmedica. In
conjunction with the integration plan, the Company recorded additional
purchase liabilities of approximately $111,000 ($67,000 net of related tax
benefit), which were included in the acquisition cost allocation. The
additional purchase liabilities include approximately $71,000 for severance
and related costs for Howmedica employees, $27,000 to convert Howmedica's
distribution network to direct sales to accommodate the integration and
$13,000 associated with Howmedica facility closures and contractual
obligations. The severance and related costs are provided for planned
workforce reductions covering all Howmedica employee groups other than sales.
The cost of the distributor conversions is based on negotiated contracts. At
December 31, 1998, substantially all of the purchase liabilities remained on
the balance sheet along with an estimate for the additional amount to be paid
as a result of the working capital adjustment to the purchase price. The
restructuring actions will be completed in 1999, and any increases or
decreases in the estimated liability for these integration activities will
result in a corresponding increase or decrease in goodwill. The Company also
incurred $63,944 in costs and charges related to the acquisition that were
charged to operations during the fourth quarter of 1998 (see Note 5).
The following unaudited pro forma financial information presents the combined
results of operations of Stryker and Howmedica as if the acquisition had
occurred as of January 1, 1997, after giving effect to certain adjustments,
including amortization of goodwill and intangible assets, increased interest
expense on debt related to the acquisition, reduced interest income from cash
utilized to complete the acquisition and the related tax effects. The pro
forma financial information does not necessarily reflect the results of
operations that would have occurred had Stryker and Howmedica operated as a
combined entity during such periods.
<TABLE>
Years ended December 31
(Unaudited)
-----------------------
1998 1997
----------- -----------
<S> <C> <C>
Net sales $1,921,782 $1,800,843
Net earnings $107,200 $85,500
Net earnings per share:
Basic $1.11 $0.89
Diluted $1.09 $0.87
</TABLE>
The pro forma financial information presented above does not include
nonrecurring charges for purchased research and development, the sale of
inventory stepped-up to fair value at the date of acquisition and integration
activities. These items are included in the actual results of operations for
1998. The pro forma financial information includes pretax costs of
approximately $31,700 for 1998 and $27,000 for 1997, representing an
allocation of certain Pfizer corporate and division overhead costs to
Howmedica.
In November 1998, the Company purchased the manufacturing rights, facilities
and product on-hand for its OP-1 bone growth device from Creative
BioMolecules, Inc., for approximately $19,300 in cash. In addition, the
purchase agreement provides for increases in royalty payments associated with
potential future OP-1 sales. The acquisition was accounted for using the
purchase method. In connection with the acquisition, $4,896 of the purchase
price paid for tangible research and development assets that have no
alternative future use was allocated to purchased research and development
and charged to operations during the fourth quarter of 1998.
During 1998, the Company's Osteonics Corp.subsidiary purchased four of its
independent distributors at a cost of approximately $19,700. The entire
purchase price was allocated to tangible assets acquired.
During 1998 and 1997, the Company acquired additional shares of outstanding
common stock of Matsumoto Medical Instruments, Inc., its Japanese
distributor, thereby increasing its direct ownership to 83% at December 31,
1998 (75% at December 31, 1997). During 1998, additional shares were
acquired for cash of $3,349 and 75,000 shares of Stryker common stock ($3,792
value). During 1997, additional shares of Matsumoto were purchased for cash
of $28,636. Each acquisition of additional shares was accounted for using
the purchase method. Subsequent to December 31, 1998, the Company acquired
all of the remaining outstanding common stock of Matsumoto, increasing its
direct ownership to 100%. The acquisition of these additional shares
occurred in January 1999 for cash of $1,009 and 180,605 shares of Stryker
common stock ($9,682 value).
The Company's Physiotherapy Associates, Inc. subsidiary has purchased a
number of physical therapy clinic operations. The aggregate purchase price
of these clinics in 1998, 1997 and 1996 was approximately $2,600, $5,600 and
$8,600, respectively. Intangible assets acquired, principally employment
contracts and goodwill, are being amortized over periods ranging from one to
15 years.
In September 1996, the Company purchased 100% of the outstanding stock of
Osteo Holding AG and its subsidiaries ("Osteo"), based in Selzach,
Switzerland. Osteo designs and manufactures trauma products and
reconstructive orthopaedic devices. The purchase price of $45,500 was paid
$41,500 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, $7,500 million was
allocated to purchased research and development and was charged to operations
upon the completion of the valuation. The remaining excess purchase price of
$27,600 was allocated to intangibles to be amortized over 15 years.
For all of the above acquisitions other than that of Howmedica, pro forma
consolidated results would not differ significantly from reported results.
5. Acquisition-Related and Special Charges
In the fourth quarters of 1998 and 1996, the Company recorded acquisition-
related and special pretax charges consisting of the following items:
<TABLE>
1998 1996
------- --------
<S> <C> <C>
Reorganization of distribution channels $52,751 $15,000
Expensed transaction costs 11,193
Asset impairments 14,578
Patent claims 4,700
------- --------
63,944 34,278
Less margin impact related to sales credits 14,002
------- --------
$49,942 $34,278
======= ========
</TABLE>
The 1998 acquisition-related charges for the reorganization of distribution
channels, including the margin impact related to sales credits, relates to
the conversion of a portion of Stryker's distributors in the U.S., Europe and
the Pacific Rim to direct sales to accommodate the integration of the
Howmedica sales force. The cost of the conversions is based on contractual
terms or is in accordance with a plan to complete such conversions. The 1998
expensed transaction costs represent costs associated with the acquisitions
of Howmedica and of the manufacturing rights, facilities and product on-hand
for the Company's OP-1 bone growth device (see Note 4).
At December 31, 1998, $46,106 of the charges incurred during 1998 was
included in acquisition-related reorganization reserves and liabilities,
consisting primarily of accruals related to the reorganization of
distribution channels that have not yet been completed. All actions are
expected to be completed by the end of 2000.
The 1996 special charge for the reorganization of distribution channels
related to the implementation of a plan to convert a portion of the Company's
distributors to direct sales. The costs of the conversions was based on
contractual terms. The charge for asset impairments included $9,678 for
property, plant and equipment write-downs and goodwill impairments of $3,900.
Both the property and goodwill were written down to fair value. The charge
for patent claims was related to patent disputes on certain products. At
December 31, 1998, $2,700 related to the 1996 charges was included in other
accrued liabilities. The remaining accrual is related to the reorganization
of distribution channels that have not yet been completed. All actions are
expected to be completed by 2001.
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.
The Company recognized a pretax gain, net of related legal fees and other
expenses, of $61,094, which was included in operating income in 1996.
7. Borrowings
Long-term debt is as follows:
<TABLE>
December 31
-------------------
1998 1997
----------- -------
Term loans $1,150,000
Revolving credit 107,575
Multi-currency loan 230,194
<S> <C> <C>
Unsecured bank loans -- $72,565
Other 15,216 5,511
----------- -------
1,502,985 78,076
Less current maturities 15,014 73,627
----------- -------
$1,487,971 $4,449
=========== =======
</TABLE>
In December 1998, the Company entered into $1,650,000 of Senior Secured
Credit Facilities in conjunction with the acquisition of Howmedica (see Note
4). The facilities provide for $1,150,000 in term loans, a six-year $250,000
U.S. revolving credit facility and a six-year $250,000 reducing multi-
currency facility.
The term loans consist of three tranches. Tranche A provides for a six-year
$575,000 term loan, Tranche B a seven-year $290,000 term loan and Tranche C
an eight-year $285,000 term loan. The term loans bear interest at a base
rate, as defined, plus an applicable margin ranging from 1.75% to 3.75%,
depending on the leverage ratio of the Company. The six-year $250,000 U.S.
revolving credit facility bears interest at a base rate, as defined, plus an
applicable margin ranging from 1.75% to 2.75%, depending on the leverage
ratio of the Company. The six-year, $250,000 reducing multi-currency
facility provides borrowings in yen, euro, U.S. dollars and other negotiated
currencies. Multicurrency borrowings bear interest at a base rate, as
defined, plus an applicable margin ranging from 1.375% to 2.25% depending on
the leverage ratio of the Company. At December 31, 1998, the Company had
borrowed yen 11,900,000 and euro 107,100. The multicurrency borrowings act
as a hedge of the Company's investments in Japan and Europe. As a result,
adjustments made to the loan balances to reflect applicable currency exchange
rates at December 31 are included within accumulated other comprehensive gain
(loss) in stockholders' equity. In addition, the revolving credit facility
and the multicurrency facility each requires a commitment fee that ranges
from 0.375% to 0.50% on the unused portion of the facility depending on the
leverage ratio of the Company. At December 31, 1998, the weighted average
interest rate for all borrowings under the Senior Secured Credit Facilities
was 8.29%.
Effective in January 1999, the Company has fixed the base rate on an $800,000
notional amount of the U.S.-dollar-denominated borrowings at an average rate
of 5.7% using interest rate swaps. The interest rate swaps mature over
various terms ranging from September 2000 through December 2004.
Borrowings under the credit facilities are guaranteed by certain of the
Company's subsidiaries and are fully secured by a substantial portion of the
assets of the Company and such subsidiaries. The credit agreement requires
the Company among other things to comply with certain financial and other
covenants and places certain limitations on the amount of increases in
dividend payments. The Company must comply with the financial covenants
beginning in 1999.
The unsecured bank loans represented two separate borrowings made to finance
the acquisition of the Company's investment in Matsumoto Medical Instruments,
Inc. Both loans were Japanese-yen-denominated, were unsecured and bore
interest at rates ranging from 4.10% to 4.76%. Both loans matured in August
1998 and were repaid with a portion of the yen-denominated borrowings under
the multicurrency facility.
Maturities of debt for the four years succeeding 1999 are: 2000 - $89,025;
2001 - $130,157; 2002 - $171,138; and 2003 - $212,283.
The carrying amounts of the Company's long-term debt approximate their fair
values based on the Company's current borrowing rates for similar types of
borrowing agreements and quoted market rates. The fair value of the
Company's interest rate swap contracts at December 31, 1998, was ($17,679)
and at December 31, 1997, approximated its carrying amount. Interest rate
swap agreements are valued based on current termination values.
Interest expense on debt, which is included in other income and approximates
interest paid, was $12,181 in 1998, $4,117 in 1997 and $4,349 in 1996.
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 10 years and become
exercisable in varying installments. A summary of stock option activity
follows:
<TABLE>
Weighted
Shares Average
Exercise
Price
---------- ---------
<S> <C> <C>
Options outstanding at January 1, 1996 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
Granted 845,000 28.86
Canceled (103,800) 17.72
Exercised (405,100) 6.50
---------- ---------
Options outstanding at December 31, 1997 3,530,700 17.77
Granted 1,923,000 38.60
Canceled (1,183,400) 39.93
Exercised (424,444) 8.52
---------- ---------
Options outstanding at December 31, 1998 3,845,856 $22.39
========== =========
Price range $7.32 - $15.00 1,351,156 $10.90
Price range $15.01 - $30.00 1,512,700 24.61
Price range $30.01 - $44.625 982,000 34.76
---------- ---------
Options outstanding at December 31, 1998 3,845,856 $22.39
========== =========
</TABLE>
Shares reserved for future grants were 9,173,000 and 839,600 at December 31,
1998, and 1997, respectively. Exercise prices for options outstanding as of
December 31, 1998, ranged from $7.32 to $44.625. A summary of shares
exercisable follows:
<TABLE>
Weighted
Shares Average
Exercise
Price
----------- -----------
<S> <C> <C>
Price range $7.32 - $15.00 1,337,356 $10.88
Price range $15.01 - $30.00 494,700 23.13
Price range $30.01 - $44.625 32,000 31.10
----------- -----------
Shares exercisable at December 31, 1998 1,864,056 $14.48
=========== ===========
</TABLE>
The Company follows APB Opinion No. 25 in accounting for its stock option
plans. Accordingly, no compensation cost has been recognized in the
Consolidated Statements of Earnings for options issued under Company stock
option plans. Had compensation cost for the Company's stock-based
compensation plans been determined based on the fair value at the grant dates
for awards under those plans consistent with the method of FASB Statement No.
123, "Accounting for Stock-Based Compensation", the Company's net earnings
and earnings per share would have been as follows:
<TABLE>
1998 1997 1996
-------- --------- ---------
Net earnings
<S> <C> <C> <C>
As reported $39,570 $125,320 $104,460
Pro forma 37,136 123,619 103,876
Basic earnings per share
As reported $.41 $1.30 $1.08
Pro forma .39 1.28 1.07
Diluted earnings per share
As reported $.40 $1.28 $1.06
Pro forma .38 1.26 1.06
</TABLE>
The weighted average per share fair value of options granted during 1998,
1997 and 1996 estimated on the date of grant using the Black-Scholes option
pricing model was $15.74, $11.49 and $9.14, respectively. The fair value of
options granted is estimated on the date of grant using the following
assumptions:
<TABLE>
1998 1997 1996
-------- --------- ---------
<S> <C> <C> <C>
Risk-free interest rate 4.75% 5.65% 6.25%
Expected dividend yield 0.30% 0.41% 0.38%
Expected stock price volatility 37.6% 29.4% 29.4%
Expected option life 6.4 years 6.3 years 6.2 years
</TABLE>
The Company has 500,000 authorized shares of $1 par value preferred stock,
none of which are outstanding.
9. Earnings per Share
The following table sets forth the computation of basic and diluted earnings
per share:
<TABLE>
1998 1997 1996
------- -------- --------
<S> <C> <C> <C>
Net earnings $39,570 $125,320 $104,460
======= ======== ========
Weighted-average shares outstanding for
basic earnings per share 96,301 96,254 96,838
Effect of dilutive employee stock options 1,829 1,878 1,589
------- -------- --------
Adjusted weighted-average shares
outstanding for diluted earnings per share 98,130 98,132 98,427
======= ======== ========
Basic earnings per share $.41 $1.30 $1.08
Diluted earnings per share $.40 $1.28 $1.06
</TABLE>
10. Retirement Plans
Certain of the Company's subsidiaries have defined benefit plans covering
some or all of their employees. Effective in 1998, the Company adopted FASB
Statement No. 132, "Employer's Disclosures about Pensions and Other Post-
Retirement Benefits", which revises the disclosure requirements related to
defined benefit plans. A summary of the information required under the new
Statement related to all of the Company's defined benefit plans is as
follows:
<TABLE>
December 31
-----------
1998 1997
-------- --------
Change in benefit obligation:
<S> <C> <C>
Benefit obligation at beginning of year $5,839 $6,543
Service cost 906 706
Interest cost 403 245
Plan participants' contributions 16 0
Actuarial gain (59) (112)
Foreign exchange impact 336 (1,052)
Acquisitions 27,339 0
Benefits paid (632) (491)
-------- --------
Benefit obligation at end of year 34,148 5,839
Change in plan assets:
Fair value of plan assets at beginning of year 4,827 5,409
Actual return 827 28
Employer contributions 786 699
Plan participants' contributions 16 0
Foreign exchange impact 335 (818)
Acquisitions 29,030 0
Benefits paid (632) (491)
-------- --------
Fair value of plan assets at end of year 35,189 4,827
-------- --------
Funded status 1,041 (1,012)
Unrecognized net actuarial loss (gain) 1,145 (1,410)
Unrecognized transition amount 126 0
-------- --------
Unrecognized prior service cost (1,803) (1,603)
Prepaid (accrued) benefit cost $509 ($4,025)
======== ========
Amounts recognized in balance sheet:
Prepaid benefit cost $5,035 $0
Accrued benefit liability (2,723) (2,422)
Intangible asset (1,803) (1,603)
-------- --------
Net amount recognized $509 ($4,025)
======== ========
Weighted-average assumptions as of December 31:
Discount rate 5.60% 4.50%
Expected return on plan assets 6.70% 3.00%
Rate of compensation increase 2.40% 2.33%
</TABLE>
<TABLE>
1998 1997 1996
-------- ------- -------
Components of net periodic benefit cost:
<S> <C> <C> <C>
Service cost $832 $759 $843
Interest cost 374 263 293
Expected return on plan assets (316) (151) (168)
Amortization of transition amount 8 6 7
Amortization of prior service cost (98) (106) (118)
Recognized actuarial gain (36) (47) (52)
-------- ------- ------
Net periodic benefit cost $764 $724 $805
======== ======= ======
</TABLE>
At December 31, 1998, defined benefit plans with plan assets in excess of
benefit obligations had plan assets totaling $23,077 and benefit obligations
totaling $19,856, and defined benefit plans with benefit obligations in
excess of plan assets had plan assets totaling $12,112 and benefit
obligations totaling $14,292.
Retirement plan expense under the Company's profit sharing and defined
contribution retirement plans totaled $14,332 in 1998, $11,248 in 1997 and
$10,147 in 1996.
11. Income Taxes
Earnings before income taxes consist of the following:
<TABLE>
1998 1997 1996
------- -------- --------
<S> <C> <C> <C>
United States operations $66,899 $180,407 $152,680
Foreign operations (6,939) 14,913 13,430
------- -------- --------
$59,960 $195,320 $166,110
======= ======== ========
</TABLE>
The components of the provision for income taxes follow:
<TABLE>
1998 1997 1996
-------- --------- --------
Current:
<S> <C> <C> <C>
Federal $56,879 $57,608 $74,808
State, including Puerto Rico 8,633 8,648 8,981
Foreign (credit) (701) 1,784 8,554
-------- --------- --------
64,811 68,040 92,343
Deferred tax expense (credit) (44,421) 1,960 (30,693)
-------- --------- --------
$20,390 $70,000 $61,650
======== ========= ========
</TABLE>
A reconciliation of the statutory federal income tax rate to the Company's
effective tax rate follows:
<TABLE>
1998 1997 1996
------ ------ ------
<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 3.4 2.4 1.3
Tax benefit relating to operations in Puerto Rico (6.9) (1.4) (1.5)
Earnings of Foreign Sales Corporation (5.1) (1.7) (1.6)
Nondeductible purchased research and development
and permanent differences 6.6 0.1 2.6
Other 1.0 1.6 2.6
------ ------ ------
34.0% 36.0% 38.4%
====== ====== ======
</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:
<TABLE>
December 31
------------
1998 1997
-------- --------
Deferred Tax Assets:
<S> <C> <C>
Inventories $42,807 $41,041
Accounts receivable and other 4,088 11,371
assets
Other accrued expenses 76,716 25,546
Depreciation and amortization 34,901
State taxes 6,411 3,552
Other 5,355 3,295
-------- --------
Total deferred tax assets 170,278 84,805
Deferred tax liabilities:
Depreciation and amortization (16,818) 370
Other (7,363) (3,960)
-------- --------
Total deferred tax liabilities (24,181) (3,590)
-------- --------
Total net deferred tax assets $146,097 $81,215
======== ========
</TABLE>
Deferred tax assets and liabilities are included in the consolidated balance
sheets as follows:
<TABLE>
December 31
-----------
1998 1997
-------- ---------
<S> <C> <C>
Current assets -- Deferred income taxes $139,109 $78,896
Noncurrent assets -- Other assets 31,169 5,909
Current liabilities -- Accrued expenses and other
liabilities (7,346)
Noncurrent liabilities -- Other liabilities (16,835) (3,590)
-------- ---------
Total net deferred tax assets $146,097 $81,215
======== =========
</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
($196,528 at December 31, 1998) 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 $56,197 in 1998, $87,462 in 1997 and $62,330 in
1996.
12. Segment and Geographic Data
Effective in the fourth quarter of 1998, the Company adopted FASB Statement
No. 131, "Disclosures about Segments of an Enterprise and Related
Information". Statement No. 131 establishes standards for the way that
public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports.
The Statement also establishes standards for related disclosures about
products and services, geographic areas, and major customers. The adoption
of Statement No. 131 does not affect the Company's results of operations or
financial position, but does affect the disclosure of segment information.
Prior to 1998, the Company reported under one business segment. Upon the
adoption of Statement No. 131, the Company segregated its operations into
three reportable business segments: Orthopaedic Implants, Medical and
Surgical Equipment and Physical Therapy Services. The Orthopaedic Implants
segment sells orthopaedic reconstructive products such as hip, knee, shoulder
and spinal implants and trauma related products. The Medical and Surgical
Equipment segment sells powered surgical instruments, endoscopic systems,
medical video imaging equipment and patient care and handling systems. The
Physical Therapy Services segment provides outpatient physical and
occupational rehabilitation services.
The Company's reportable segments are business units that offer different
products and services and are managed separately because each business
requires different manufacturing, technology and marketing strategies.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Company evaluates
performance based on net earnings of each segment. Identifiable assets are
those assets used exclusively in the operations of each business segment or
are allocated when used jointly. Corporate assets are principally cash
and cash equivalents, short-term investments and property, plant and
equipment.
Sales and other financial information by business segment follows:
<TABLE>
Medical
and Physical Corporate
Orthopaedic Surgical Therapy Admini-
Implants Equipment Services stration Total
----------- --------- -------- --------- ----------
Year ended December 31, 1998
<S> <C> <C> <C> <C>
Net sales $409,644 $577,788 $115,776 $1,103,208
Interest income $16,501 16,501
Interest expense 12,181 12,181
Depreciation and
amortization expense 16,763 15,987 4,391 455 37,596
Purchased research and
development 83,296 83,296
Acquisition-related charges 52,751 11,193 63,944
Income taxes (11,463) 33,584 4,027 (5,758) 20,390
Segment net profit (loss) (20,182) 68,769 7,015 (16,032) 39,570
Total assets 2,157,747 601,406 71,785 54,914 2,885,852
Capital expenditures 21,825 23,881 4,450 1,088 51,244
Year ended December 31, 1997
Net sales 375,028 505,099 100,008 980,135
Interest income 14,963 14,963
Interest expense 4,812 4,812
Depreciation and
amortization expense 12,105 16,983 3,759 417 33,264
Income taxes 40,542 25,764 3,904 (210) 70,000
Segment net profit (loss) 69,447 53,264 6,375 (3,766) 125,320
Total assets 304,944 315,656 62,785 301,690 985,075
Capital expenditures 17,594 13,925 3,525 169 35,213
Year ended December 31, 1996
Net sales 347,178 484,301 78,581 910,060
Interest income 13,339 13,339
Interest expense 8,349 8,349
Depreciation and
amortization expense 12,324 18,420 3,492 414 34,650
Purchased research and
development 7,500 7,500
Special charges 26,893 4,485 2,900 34,278
Gain on patent judgement 61,094 61,094
Income taxes 46,263 12,145 1,724 1,518 61,650
Segment net profit (loss) 71,892 39,393 2,809 (9,634) 104,460
Total assets 301,395 331,388 51,655 309,068 993,506
Capital expenditures 6,916 14,541 5,160 107 26,724
</TABLE>
The Company's area of operations outside of the United States, Japan and
Europe principally includes the Pacific Rim, Canada, Latin America and the
Middle East. Geographic information follows:
<TABLE>
Long-
Net Lived
Sales Assets
----------- -----------
Year ended December 31, 1998
<S> <C> <C>
United States $728,948 $827,047
Japan 131,282 141,642
Europe 135,273 541,444
Other foreign countries 107,705 32,707
----------- -----------
$1,103,208 $1,542,840
=========== ===========
Year ended December 31, 1997
United States $633,252 $122,635
Japan 154,308 68,289
Europe 104,376 49,278
Other foreign countries 88,199 2,260
----------- -----------
$980,135 $242,462
=========== ===========
Year ended December 31, 1996
United States $564,534 $103,832
Japan 172,522 88,428
Europe 99,177 46,724
Other foreign countries 73,827 985
----------- -----------
$910,060 $239,969
=========== ===========
</TABLE>
Gains (losses) on foreign currency transactions, which are included in other
income, totaled ($2,093), $325 and $1,949 in 1998, 1997 and 1996,
respectively.
13. Leases
The Company leases various manufacturing and office facilities and equipment
under operating leases. Future minimum lease commitments under these leases
are as follows:
<TABLE>
<S> <C>
1999 $27,944
2000 19,853
2001 18,398
2002 14,922
2003 11,117
Thereafter 7,839
---------
$100,073
=========
</TABLE>
Rent expense totaled $32,676 in 1998, $26,293 in 1997 and $24,915 in 1996.
14. 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 beyond amounts already provided in the
accompanying financial statements.
SUMMARY OF QUARTERLY DATA (Unaudited)
(dollars in thousands, except per share data)
<TABLE>
1998 Quarter Ended
------------------
March 31 June 30 Sept. 30 Dec. 31
(a)
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $253,588 $267,273 $260,965 $321,382
Gross profit 152,175 155,816 149,155 173,989
Earnings (loss)
before income
taxes 55,400 54,230 53,460 (103,130)
Net earnings (loss) 36,010 35,250 34,750 (66,440)
Net earnings (loss)
per share of
common stock:
Basic .37 .37 .36 (.69)
Diluted .37 .36 .35 (.68)
Market price of
common stock:
High 49-1/8 48-11/16 45-1/8 55-3/4
Low 34-3/4 36-7/8 31-7/8 31
1997 Quarter Ended
------------------
March 31 June 30 Sept. 30 Dec. 31
(b)
-------- -------- -------- --------
Net sales $239,536 $248,036 $238,143 $254,420
Gross profit 141,851 147,504 140,338 152,676
Earnings (loss)
before income
taxes 47,840 46,698 45,785 54,997
Net earnings (loss) 30,020 29,380 28,970 36,950
Net earnings (loss)
per share of
common stock:
Basic .31 .31 .30 .38
Diluted .30 .30 .30 .38
Market price of
common stock:
High 32-3/8 37-7/8 45-5/16 43-9/16
Low 24-3/4 24-1/4 35 35
</TABLE>
The price quotations reported above were supplied by the New York Stock
Exchange, except for the period prior to July 24, 1997, which were supplied
by The NASDAQ Stock Market.
(a) In the fourth quarter of 1998, the Company recorded a charge of $83,296
for the write-off of purchased research and development and acquisition-
related charges of $63,944. Both of these charges relate to the
acquisitions of Howmedica and of the manufacturing rights, facilities
and product on-hand for the Company's OP-1 bone growth device (see Note
4).
(b) In the fourth quarter of 1997, the Company reduced the effective tax
rate for the year to 36% from 37%, thereby decreasing income tax expense
by $1,900.
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, 1998 and 1997, and the
related consolidated statements of earnings, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1998.
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, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
Kalamazoo, Michigan
February 9, 1999
