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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended MAY 31, 1996.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ____________ to ____________.
Commission file No. 0-12515.
[LOGO]
BIOMET INC.
(Exact name of registrant as specified in its charter)
INDIANA 35-1418342
(State of incorporation) (IRS Employer Identification No.)
AIRPORT INDUSTRIAL PARK, P.O. BOX 587, WARSAW, INDIANA 46581-0587
(Address of principal executive offices) (Zip Code)
(219) 267-6639
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON SHARES, WITHOUT PAR VALUE RIGHTS TO PURCHASE COMMON SHARES
(Title of class) (Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
The aggregate market value of the Common Shares held by nonaffiliates of the
registrant, based on the average bid and asked prices of the Common Shares on
July 19, 1996, as reported by the Nasdaq Stock Market, was approximately
$1,562,778,852. As of July 19, 1996, there were 115,614,201 Common Shares
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
PARTS OF FORM 10-K
INTO WHICH DOCUMENT
IDENTITY OF DOCUMENT IS INCORPORATED
Proxy Statement with respect to the 1996 Annual
Meeting of Shareholders of the Registrant Part III
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PART I
ITEM 1. BUSINESS.
GENERAL
Biomet, Inc., an Indiana corporation incorporated in 1977 ("Biomet"), and its
subsidiaries design, manufacture and market products used primarily by
orthopedic medical specialists in both surgical and non-surgical therapy,
including reconstructive and trauma devices, electrical bone growth
stimulators, orthopedic support devices, operating room supplies, powered
surgical instruments, general surgical instruments, arthroscopy products and
craniomaxillofacial products and instruments. Biomet has corporate
headquarters in Warsaw, Indiana and manufacturing and/or office facilities in
more than fifteen locations worldwide. Biomet markets its products in the
United States through independent commissioned sales representatives, in the
United Kingdom and Germany primarily through direct factory sales
representatives, and in other international markets through both independent
and direct factory sales representatives and specialty medical product dealers.
Electro-Biology, Inc. ("EBI"), Biomet's principal domestic subsidiary, sells
electrical stimulation and external fixation devices through direct factory
sales representatives in the United States and the United Kingdom and through
specialty medical product dealers in the remainder of its markets. Biomet and
its subsidiaries currently distribute products in approximately 100 countries.
Unless the context otherwise requires, the term "Company" as used herein refers
to Biomet and all of its subsidiaries.
PRODUCTS
The Company's products can be divided into three groups: Reconstructive
Products, EBI Products and Other Products. The Company's Reconstructive
Products (principally hips, knees and shoulders) and its Other Products
(fixation and trauma devices, orthopedic support devices and operating room
supplies) are designed, manufactured and marketed under the Biomet(R),
Kirschner(R), IQL(TM), and Effner(R) trade names. Also included in Other
Products are craniomaxillofacial products and instruments and general surgical
instruments which are marketed under the Walter Lorenz(TM) trade name,
orthopedic support devices manufactured and marketed under the AOA(R) name, and
arthroscopy products manufactured and marketed under the Arthrotek(R) name.
Through EBI(R), the Company develops, manufactures and markets non-invasive and
implantable electrical bone growth and spinal fusion stimulators and external
fixation devices (the "EBI Products"). The following table shows the net sales
and percentages of net sales contributed by each of these product groups for
each of the three most recent fiscal years ended May 31, 1996:
<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
---------------------------------------
(DOLLAR AMOUNTS IN THOUSANDS)
-------------------------------------------------------------
1996 1995 1994
PERCENT PERCENT PERCENT
NET OF NET NET OF NET NET OF NET
SALES SALES SALES SALES SALES SALES
------- ------- -------- -------- --------- ------
<S> <C> <C> <C> <C> <C> <C>
Reconstructive Products $326,834 61% $272,643 60% $218,145 58%
EBI Products 108,627 20% 98,490 22 88,714 24
Other Products 99,698 19% 81,139 18 66,436 18
------- ------- -------- -------- --------- ------
Total $535,159 100% $452,272 100% $373,295 100%
======== ======= ======== ========= ========= ======
</TABLE>
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RECONSTRUCTIVE PRODUCTS
Reconstructive Products are used to replace joints which have deteriorated as a
result of disease (various forms of arthritis and osteoporosis) or injury.
Reconstructive joint surgery involves the modification of the area surrounding
the affected joint and the insertion of one or more manufactured components.
The Company's primary reconstructive joints are the hip, knee and shoulder, but
it also has the capability of producing other peripheral joints (including the
ankle, elbow and great toe). The Company also produces the associated
instruments required by the orthopedic surgeon to implant the Company's
Reconstructive Products.
All femoral hip prostheses produced by the Company consist of a femoral head,
neck and stem, which can be forged or machined depending on the design and
material used. Because of variations in human anatomy and differing design
preferences among surgeons, femoral prostheses are manufactured by the Company
in a variety of head sizes, neck lengths, stem lengths, stem cross-sections and
configurations. The Company currently offers several total hip systems, most
of which utilize titanium or cobalt chromium alloy femoral components and
ultra-high molecular weight polyethylene-lined acetabular components. Many of
the femoral prostheses utilize a porous coating which enhances the attachment
of bone cement to the stem, or in a press-fit configuration, allows the
component's use without bone cement.
During fiscal year 1996, the Company received 510(k) clearance for several fine
grain cast cobalt chromium femoral hip components. This new manufacturing
process produces mechanically superior material as compared to traditional
casting methods.
Since February 1994, the United States Food and Drug Administration ("FDA") has
cleared many of Biomet's porous-coated hip components for cementless use
pursuant to Section 510(k) of the Federal Food, Drug and Cosmetic Act. These
clearances are specifically for noncemented applications in skeletally mature
patients undergoing primary hip replacement surgery as a result of
noninflammatory degenerative joint diseases including osteoarthritis, avascular
necrosis, traumatic arthritis, slipped capital epiphysis, fused hip, fracture
of the pelvis and diastrophic variant.
In July 1993, the Company received FDA clearance for hip and knee polyethylene
components manufactured according to a patented process and marketed under the
trademark, ArCom.(R) ArCom components are machined from uniform compression
molded bar stock manufactured by Biomet, or molded directly from high molecular
weight polyethylene resin. The processes used to mold devices and manufacture
bar stock are designed to maximize mechanical and wear properties of the
polyethylene bearing material. In addition, the finished components are
packaged in argon, an inert gas, to avoid oxidative degradation during and
after sterilization.
Since 1985, one of Biomet's largest selling reconstructive systems has been the
Mallory-Head(R) Total Hip System. The Mallory-Head Hip System is designed to
meet surgeon needs for both primary and revision total hip arthroplasty. The
primary femoral components feature a specific proximal finned geometry for
cementless indications and a slightly different proximal ribbed geometry for
those patients requiring fixation with bone cement. The goal of each of these
primary femoral stems is to ensure proximal loading of the femur to recreate
near-normal bone stresses.
The Mallory-Head revision femoral components provide innovative solutions for
difficult revision cases. The long stem revision components feature the
primary proximal finned geometry with additional stem lengths to bridge
cortical bone defects and to provide increased stability. The head/neck porous
revision components feature multiple resection levels to compensate for
proximal bone deficiencies. An optional trochanteric bolt provides additional
rotational stability and implant fixation. In May 1995, the FDA approved for
cemented use the Mallory-Head Modular Calcar System. This system provides the
surgeon with intraoperative flexibility to independently match femoral geometry
with the appropriate implant size and shape, even in cases of severe bone
deficiency.
The Alliance(R) family is designed to address the growing trend toward
standardization of total hip systems within hospitals and across surgeon
groups. The Alliance family provides the largest selection of primary and
revision stems available for implantation with a single set of instrumentation.
The Alliance family includes the Integral(R), Bi-Metric(R), Answer(R), Hip
Fracture(TM) and Rx90(R) Hip Systems.
The patented Maxim(R) Total Knee System incorporates primary, posterior
stabilized and revision components with state-of-the-art biomaterials and
competes in the revision constrained knee market segment, addressing surgical
situations where the surgeon is required to replace a knee that has compromised
soft tissue and instability. The Company also has developed supporting
instrumentation for the implantation of the Maxim Total Knee System components.
The Maxim Total Knee System is the Company's largest selling knee system.
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The Company's AGC(R) Total Knee System is one of the most clinically successful
comprehensive total knee systems in the orthopedic industry. The AGC Total
Knee System consists of left and right femoral components, matching reinforced
tibial components and appropriately sized reinforced patella components for
patellar resurfacing. AGC components are available either with or without a
porous titanium alloy surface designed to enhance the attachment of bone cement
to the implant surfaces. The Company, in conjunction with developing surgeons,
has also developed surgical techniques and supporting implantation instruments
for the AGC and its other knee systems. These instruments allow for accurate
implantation of the components and improved ligament and tendon balance in the
knee following the surgical procedure. The Company has expanded its total
knee product line to include the Finn(R) Knee Replacement System. This system
offers both resurfacing and segmental component options in a wide range of
sizes to address severe bone loss due to a previous failure or tumor
resections.
Biomet's Patient-Matched Implant ("PMI(R)") services group expeditiously
designs, manufactures and delivers one-of-a-kind reconstructive and trauma
devices to orthopedic specialists. The Company believes this service continues
to enhance Biomet's reconstructive sales. In order to assist orthopedic
surgeons and their surgical teams in preoperative planning, Biomet's PMI group
utilizes a three-dimensional ("3-D") bone and soft tissue reconstruction
imaging system. A patented technology owned by the Company allows the use of
CT or MRI data to produce 3-D reconstructions for the design and manufacture of
patient-matched implants. With this imaging technology, Biomet's PMI group is
able to assist the physician, prior to surgery, by creating electronic 3-D
models. Within strict deadlines, the model is translated into a PMI design for
the actual manufacturing of the custom implant for the patient. Biomet
continues to advance the application of imaging technology for the design and
production of reconstructive devices for various joints of the body.
The Company manufactures and distributes the patented Ultra-Drive(R) Revision
System ("Ultra-Drive") which utilizes ultrasonic technology to safely and
effectively remove bone cement and implants during revision arthroplasty
procedures. This system reduces the amount of time the orthopedic surgeon
would usually spend removing an implant and cement during revision procedures.
Additionally, the Ultra-Drive reduces the possibility of accidental bone trauma
associated with conventional methods addressing bone cement removal.
The Kirschner product line allows the Company to offer surgeons a wider
variety of reconstructive products, including the Performance(R) Knee and the
Integrated Shoulder System.(TM) The Performance Knee provides a full range of
implant components designed to meet the wide variety of surgical indications
seen in today's total knee patient population. The Atlas(R) Modular shoulder
prosthesis was introduced during fiscal year 1996 to further augment the
surgeon's ability to match the prosthesis to the individual patient. This
device incorporates a modular stem as well as a modular head to reduce the
inventory required to support a shoulder procedure. The operations of the
reconstructive division of Kirschner were functionally integrated into the
Company's Warsaw, Indiana facilities in September 1995.
Reconstructive devices contributing to the Company's sales growth include the
Maxim Total Knee System, the Bio-Modular(R) Shoulder, the Mallory-Head Modular
Calcar Hip System, the Finn Knee System, the Integral 180 and 225 Revision
Hips, the MARS(R) RingLoc(R) Revision Acetabular Cup System, ArCom
polyethylene products and the Alliance family of products.
During fiscal year 1996, the Company's product expansion included new lines of
acetabular components, new cemented and cementless hip stems and expanded
product offerings for total shoulders.
EBI PRODUCTS
EBI's primary product categories consist of invasive and non-invasive
electrical stimulation devices used in the treatment of recalcitrant bone
fractures (nonunions), spinal fusion stimulation devices used as an adjunctive
treatment in spinal fusion procedures, external fixation devices and a
controlled cold therapy unit to aid in the reduction of postoperative pain,
edema and blood loss. The FDA has defined a "nonunion" as a case in which nine
months have elapsed from the date of a fracture with no sign of healing for
three months. EBI's non-invasive devices generally provide an alternative to
surgical intervention in the treatment of recalcitrant bone fractures and
failed joint fusions.
One of EBI's primary products, the EBI Bone Healing System(R), is a
non-invasive device which produces low-energy pulsed electromagnetic field
("PEMF") signals that induce weak pulsing currents in living tissues exposed to
the signals. These pulses, when suitably configured in amplitude, repetition
rate and duration, affect bone cells. EBI's non-invasive stimulator has two
components: treatment heads and a control unit. The treatment heads contain
electrical coils and are connected to the control unit. The control unit
transforms household current or battery power into a predetermined sequence of
pulsed currents that are induced into the fracture site through the treatment
heads which may be placed over a patient's cast, incorporated into the cast, or
worn over the skin.
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EBI's Model 1020 Bone Healing System utilizes household current or a
rechargeable power supply and allows for complete patient ambulation during
treatment. This model usually incorporates the treatment coil into the
patient's cast or the coil can be worn over the skin if required. The coil
design is capable of treating the vast majority of nonunion fracture locations.
The device can be pre-programmed as to duration of daily treatment and for
patient compliance history. The Model 1200 Bone Healing System, introduced
during fiscal year 1994, is a light-weight, smaller and easier to use unit,
which was designed to encourage patient compliance and enhance clinical
success.
EBI also manufactures the FLX(R) Flexible Treatment Coils for use with the EBI
Bone Healing System. The FLX Flexible Treatment Coils are extremely
lightweight and provide a slim profile that enhances patient comfort and
compliance during bone healing treatment regimens. When used conjunctively
with the EBI Bone Healing System, the FLX Flexible Treatment Coils afford
higher bone healing success rates. Additionally, EBI offers a series of coils
to address shoulder, foot, ankle, clavicle and metatarsal site applications and
an elliptical coil to be used with external fixation.
The invasive electrical stimulation devices provide an adjunct to surgical
intervention in the treatment of nonunions and spinal fusions. Spinal fusions
are surgical procedures undertaken to establish bony union between adjacent
vertebrae. EBI's SpF(R)-4 Implantable Spinal Fusion Stimulator is used in
conjunction with bone grafting to increase the probability of fusion success.
In addition, EBI's SpF-2, a two lead supplement to its SpF implantable spinal
product line, allows EBI to offer orthopedic surgeons the SpF spinal fusion
technology for the growing bilateral/lateral procedure market. Another SpF
product, the SpF-T Implantable Spinal Fusion Stimulator, incorporates a
telemetry device which emits a signal to allow device monitoring after
implantation. The compact design of the SpF-T provides easier surgical
implantation and explantation while increasing patient comfort. The
implantable devices consist of a generator providing a constant direct current
to a titanium cathode placed where bone growth is required. Over the years EBI
has developed new techniques and device modifications for the SpF product line.
These techniques and modifications address the anterior and posterior lumbar
interbody fusion market segments.
EBI's arrangement with Orthofix s.r.l. of Verona, Italy to distribute the
Orthofix(R) Dynamic Axial External Fixation System in the United States, Canada
and the Caribbean Island Basin expired during fiscal year 1996 and was not
renewed. During fiscal year 1996, EBI launched its own advanced fixation
system, the EBI X FIX(TM) DynaFix(TM) System. The market acceptance of the
EBI X FIX DynaFix System has been extremely positive, as evidenced by the
growth of EBI's external fixation business during fiscal year 1996.
EBI began distribution of its line of controlled cold therapy units during
fiscal year 1996. EBICE(TM), the first disposable and portable controlled
cold therapy product offered by the Company, is used to aid in the reduction
of postoperative pain, edema and blood loss.
OTHER PRODUCTS
The Company also manufactures and distributes several other products including
fixation and trauma devices, orthopedic support devices, operating room
supplies, arthroscopy products and craniomaxillofacial products. Biomet
Medical Products, a division of the Company established during fiscal year
1993 to focus on the expansion of the Company's "other products," excluding
craniomaxillofacial products, was integrated into Biomet's reconstructive
operations in January 1996. AOA manufactures and distributes its own
extensive line of orthopedic support products. Arthrotek manufactures and
markets a line of arthroscopy products. Walter Lorenz Surgical, Inc. ("Lorenz
Surgical") manufactures and markets the craniomaxillofacial product line.
FIXATION AND TRAUMA DEVICES. The Company's fixation and trauma devices
include internal and external bone fixation devices. Internal fixation devices
manufactured by the Company include nails, plates, screws, pins and wires
designed to temporarily stabilize traumatic bone injuries. These devices are
used by orthopedic surgeons to provide an accurate means of setting and
stabilizing fractures. These implants are intended as aids to healing and may
be removed when healing is completed; they are not intended to replace normal
body structures,
The Uniflex(R) Nailing System, which is the Company's largest selling fixation
system, addresses a wide range of fractures utilizing one product system. The
Uniflex Femoral Nailing System is used for internal fixation of femoral
fractures. The flexibility of the system enhances the load transfer to the bone
to further aid in the healing of the fracture. The Uniflex Nailing System also
includes tibial and humeral nailing systems. In addition, the S.S.T.(R) small
bone locking nail and the Vector(R) Intertrochanteric Nail, a compression
nailing system, enhance the Company's intramedullary fracture fixation family.
The Biomet Retrograde Femoral Nail is a clinical option for femoral fractures
that occur below mid-shaft. The Retrograde Femoral Nail completes the
Company's line of nailing systems by allowing for the treatment of distal
femoral fractures.
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The Compression Hip Screw System was designed to provide strong and stable
internal fixation for a variety of intertrochanteric, subtrochanteric and
basilar neck fractures. The BMP(TM) Cable System is used intraoperatively,
often as part of revision hip surgery, to reduce the risk of fracture or to
repair existing femoral fractures. System specific instrumentation for the BMP
Cable System is precise and allows reproducible results.
ORTHOPEDIC SUPPORT DEVICES. The Company produces an extensive line of standard
orthopedic support devices, many of which are sold under the CTN(R) and
START(R) trademarks. These devices include elbow, wrist, abdominal, thigh and
ankle supports, in addition to a wide variety of knee immobilizers and braces.
The CTN product line primarily addresses the sports medicine market. CTN
compression wraps with Soft-Ice(R) are used in compression cold-therapy
treatment, both post-operative and during rehabilitation. The Company also
distributes the Active Ankle(R), a unique ankle stirrup brace which addresses
the sports rehabilitation market.
AOA's line of orthopedic support devices include traction framing equipment,
back supports, wrist and forearm splints, cervical collars, shoulder
immobilizers, slings, abdominal binders, wrist and forearm splints, back
supports, knee braces and immobilizers, rib belts, ankle supports and a variety
of other orthopedic splints. In addition to these products, AOA manufactures
and distributes a variety of casting products for use in the application and
removal of orthopedic casts and splints. Included are both synthetic casting
tape and synthetic splints fabricated using an advanced fiberglass/polyester
substrate material impregnated with a polymer resulting in casting and
splinting products that are lightweight, high strength and available in a
variety of colors.
OPERATING ROOM SUPPLIES. The Company's principal products in the operating
room supplies category are surgical suction devices, filters and drapes. The
Redi-Vacette(R) Closed Wound Suction System provides post-operative wound
suction drainage following both orthopedic and nonorthopedic surgical
procedures. The Redi-Flow(R) Filter automatically strains the flow of body
liquids during surgery. The filter collects fine bone chips and tissue for
subsequent pathological evaluation and saves operating room time by reducing
suction clogs in surgical procedures. The Redi-Drape(R) protects the sterile
operating field from contamination, and provides a drainage bag and built-in
instrument pouches to assist the surgeon.
The Company's patented Blockaid(R) cut-resistant glove liner represents a
breakthrough in continuous filament knitting technology, allowing stainless
steel to be encased in synthetic fibers and providing the most cut-resistant
fabric in the market today. Unlike thicker, spun fibers, these glove liners
are thin enough to allow continued tactile sensitivity. This product reduces
the risk of exposure of operating room personnel to infectious diseases.
ARTHROSCOPY PRODUCTS. Arthroscopy is a less-invasive orthopedic surgical
procedure in which an arthroscope is inserted through a small incision to allow
the surgeon direct visualization of the joint. This market is comprised of
five product categories: power instruments, manual instruments, visualization
products, soft tissue anchors and procedure-specific instruments and implants.
Arthrotek's principal products consist of the Harpoon(R) Soft Tissue Anchor
System, the IES(R) 1000 System, the PowerPump(R) 800, the Tunneloc(TM) ACL
Fixation(TM) System and manual instruments featuring the Ellipticut(R) and
BackBiter(R) instruments. The IES 1000 System is a fully-integrated
arthroscopy system consisting of a camera, light source, shaver, pump, monitor,
printer and VCR contained in a pre-wired cart. The PowerPump 800 provides the
ability for surgeons to independently control flow and pressure and use the
pump in conjunction with other arthroscopy shaver systems. The Tunneloc
System was augmented with the Bone Mulch(TM) Screw, which received 510(k)
clearance from the FDA during fiscal year 1995 and was released in fiscal year
1996. Also released during fiscal year 1996 was the One Step(TM) ACL Guide
System, a patented design for use in anterior cruciate ligament reconstruction.
CRANIOMAXILLOFACIAL PRODUCTS. The Company manufactures and distributes
craniomaxillofacial and neurosurgical titanium implants, along with associated
surgical instrumentation, principally marketed to craniomaxillofacial,
neurosurgical and craniofacial surgeons through its Lorenz Surgical subsidiary
headquartered in Jacksonville, Florida. Craniomaxillofacial surgical
instruments, exodontia instruments, Hard Tissue Replacement Polymer Facial
Implants and custom craniofacial implants, as well as electric powered surgical
drills and saws for use in craniomaxillofacial and small bone surgery are
among the products offered by Lorenz Surgical. In February 1996, Lorenz
Surgical received 510(k) clearance and CE mark approval to market the first
resorbable plate and screw system for craniomaxillofacial surgery in the United
States and the European community. Lorenz Surgical continues to evaluate its
entry into the dental implant market.
Active Ankle (R) is a registered trademark of Active Ankle, Inc. Soft-Ice (R)
is a registered trademark of Polar Products, Inc.
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PRODUCT DEVELOPMENT
For the years ended May 31, 1996, 1995 and 1994, the Company expended
approximately $24,054,000, $21,770,000, and $20,521,000, respectively, on
research and development, and it is expected that research and development
expenses will continue to increase. The Company's principal research and
development efforts relate to its reconstructive devices, electrical
stimulation products and arthroscopy products.
The Company's research and development efforts contributed to the introduction
in fiscal year 1996 of the following products: Vision(TM) Acetabular Cup
System, Precept(TM) Total Hip System, Retrograde Nail System, Anterior
Referencing Knee Instrumentation, AGC Tradition(TM) Knee Tibial Bearings and
Atlas Shoulder.
EBI conducts a program of research and development intended to maintain its
proprietary position and to expand the range of conditions treatable with its
electrical stimulation products. This program includes clinical investigations
and providing equipment and/or funding basic research to study cells and simple
biological systems. Typically, EBI receives proprietary rights with respect to
the data developed as the result of research sponsored by it. EBI has
completed clinical trials to investigate the application of its products in the
treatment of avascular necrosis ("AVN") of the femoral head, a debilitating and
degenerative disease. During fiscal year 1996, the FDA rejected EBI's
premarket approval application for the AVN. EBI is continuing discussions
with the FDA in an effort to gain its approval. EBI's clinical trials to
develop new indications with PEMF technology for the treatment of fresh
fractures continued during fiscal year 1996.
In July 1991, the Company and United States Surgical Corporation ("U.S.
Surgical") entered into a cooperative effort to develop and market a line of
state-of-the-art bioresorbable orthopedic and oral-maxillofacial implants. On
March 15, 1996, that effort was terminated by a mutual agreement under the
terms of which the Company received a net payment of approximately $2.9
million from U.S. Surgical, each of the parties retains the right to pursue
the technologies developed during their joint efforts and the Company and U.S.
Surgical have agreed not to sell products that incorporate the type of
resorbable materials used during the cooperative effort in the orthopedic and
oral-maxillofacial markets, respectively, for a period of 3 years.
The Company is continuing its work to develop hydroxyapatite ("HAP"), a
bioactive surface, to be applied to orthopedic implants which, by eliminating
the fibrous tissue interface between the implant and the bone, would improve
apposition and attachment to the implant and bone ingrowth into the porous
surface of implants. Clinical trials are currently being conducted with three
of the Company's hip systems, in which a surface coating is applied over the
systems' porous coating. HAP is believed to bond directly to bone at a
cellular level.
The Company has a 51% equity interest in Polymers Reconstructive A/S
("Polymers") and holds exclusive worldwide distribution rights, with exception
of Scandinavia, for Polymers' Vacuum Pac Cement System(TM). The patented
Vacuum Pac Cement System is a proprietary method of mixing bone cement within
and delivering it from a single self-contained unit. At the present time,
Polymers is considering several organizational and development changes with
clinical trials and test marketing to begin in certain international markets
sometime in calendar year 1997.
GOVERNMENT REGULATION
The developing, testing, marketing and manufacturing of medical devices -- such
as arthroscopy products and reconstructive, electrical stimulation and internal
fixation devices -- are regulated under the Medical Device Amendments of 1976
to the Federal Food, Drug and Cosmetic Act (the "1976 Amendments") and
additional regulations promulgated by the FDA. In general, these statutes and
regulations require that manufacturers adhere to certain standards designed to
ensure the safety and effectiveness of medical devices.
Under the 1976 Amendments, each medical device manufacturer must be a
"registered device manufacturer" and must comply with regulations applicable
generally to labeling, quality assurance, manufacturing practices and clinical
investigations involving humans. The FDA is authorized to obtain and inspect
devices, their labeling and advertising, and the facilities in which they are
manufactured in order to assure that a device is not improperly manufactured or
labeled. Biomet, EBI, Lorenz Surgical, Arthrotek, AOA and Biomet Ltd. are
registered with the FDA.
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In addition, the sale and marketing of specific medical devices are regulated
by the FDA under the 1976 Amendments, which classify medical devices based upon
the degree of regulation deemed appropriate and necessary. A device is
classified as a Class I, II or III device based on recommendations of advisory
panels appointed by the FDA. Class I devices are subject only to general
controls. Class II devices, in addition to general controls, are subject to
additional controls. Class III devices, including most devices used or
implanted in the body, require FDA premarket approval before they may be
distributed other than in clinical trials.
The Company's reconstructive and trauma products are regulated as Class II or
Class III medical devices. The Company's electrical stimulation products are
regulated as Class III medical devices. The procedure for obtaining approval
to commercially market a device involves the submission of a premarket
notification under Section 510(k) of the 1976 Amendments. If the FDA
determines that the device is substantially equivalent to a pre-enactment
device or to a device subsequently classified in Class I or Class II, it will
grant clearance to commercially market the device. If the FDA determines the
device is not substantially equivalent to a pre-enactment device, it is
automatically placed into Class III, and will either require reclassification
or the submission of valid scientific evidence to prove the device is safe and
effective for human use. For Class III devices, in order to conduct clinical
trials the manufacturer must submit to the FDA an application for an
Investigational Device Exemption ("IDE"). An approved IDE exempts the
manufacturer from certain otherwise applicable FDA regulations and grants
approval for a clinical investigation, or human study, to generate clinical
data to prove safety and efficacy. In addition, the possibility exists that
certain devices marketed prior to 1976, or devices substantially equivalent
thereto, may be placed into Class III by the FDA. In this event, the
manufacturer will be required to submit proof of safety and efficacy for these
devices within 30 months of the Class III determination.
When a manufacturer believes that sufficient clinical data has been generated
to prove the safety and efficacy of the device, it may submit a premarket
approval application ("PMA") to the FDA. The FDA reviews the PMA and
determines whether it is in fileable form and all key elements have been
included. Following acceptance of the PMA, the FDA continues its review
process which includes submission of the PMA to a panel of experts appointed by
the FDA to review the PMA and to recommend appropriate action. The panel then
recommends that the PMA be approved, not approved or approved subject to
conditions. The FDA may act according to the panel's recommendations, or it
may overrule the panel. In approving a PMA, the FDA may require some form of
post-market surveillance whereby the manufacturer follows certain patient
groups for two or more years, making periodic reports to the FDA.
The Safe Medical Device Act of 1990 (the "Act") affects medical device
manufacturers in several areas, including post-market surveillance and device
tracking procedures. The Act is the first major change to the Federal Food,
Drug and Cosmetic Act since the 1976 Amendments. The Act gives the FDA
expanded emergency recall authority, requires that a summary be made available
of the safety and effectiveness in the 510(k) process and adds design
validation as a requirement of Good Manufacturing Practices. The Act also
grants the FDA the authority to require manufacturers to conduct post-market
surveillance on most permanent implants and devices that potentially present a
serious risk to human health, and further grants the FDA the authority to
require manufacturers of certain devices to adopt device tracking methods to
enable patients to receive required notices pertaining to the devices they
receive. The Act increases the importance of tracking products and will most
likely add additional administrative requirements pertaining to the sale of
many of the Company's implants. Although the precise impact on the Company is
currently unknown because the FDA has not yet promulgated all of the
regulations needed to fully implement the Act, management does not believe the
Act will have a material adverse effect on the Company or its operations.
The medical device industry extensively utilizes the premarket notification
procedures under Section 510(k) of the 1976 Amendments in bringing new products
to the market. The Company currently has approximately more than ten Section
510(k) notifications pending with the FDA. Although there has been improvement
in the FDA's response time in review of new product submissions, delays are
still being experienced due to the extensive requirements of the FDA. While
these delays have improved recently, they are expected to continue through
fiscal year 1996. Although these delays have not had a material adverse
impact on the operations of the Company, management is unable to assess the
impact of such delays on its future operations.
The Company is currently positioning itself for the changing international
regulatory environment. "ISO 9000" is an internationally recognized set of
guidelines that are aimed at ensuring the manufacture of quality products. A
company that passes an ISO audit becomes internationally recognized as being
well-run and functioning under a quality system. Seventeen countries have
adopted ISO 9000 for medical products. ISO 9000 registered companies are able
to sell their products in these countries without the added burden of
individual country regulations. Although not required until 1998, the Company
has taken the first steps in obtaining this registration. The Company's
facilities located in Warsaw, Indiana, U.S.A.; Bridgend, South Wales and
Swindon, England, United Kingdom; and Valencia, Spain have passed this audit
and are registered. EBI has established itself in the international market
through product registration. The Company's other facilities are preparing for
their registration audits in fiscal year 1997.
8
<PAGE> 9
SALES AND MARKETING
Biomet products are distributed in the United States through approximately 336
independent commissioned sales representatives ("distributors") and sales
associates engaged principally in the business of supplying orthopedic products
to hospitals in their geographic areas. Some of these distributors have formal
contractual arrangements with Biomet which limit Biomet's right to terminate
the distributor and provide certain long-term benefits to the distributor upon
termination.
AOA markets and distributes its soft goods through a direct sales force of
approximately 36 persons.
EBI's products are distributed in the United States through EBI's wholly-owned
subsidiary, EBI Medical Systems, Inc. ("EBIMS"), a Delaware corporation with
offices in Parsippany, New Jersey. EBIMS maintains a direct sales force of
approximately 170 people which operates in assigned territories throughout the
United States and through a growing international distribution network in
Central and South America, Canada, Asia and Europe.
Lorenz Surgical products are distributed in the United States through
approximately 42 distributors and sales associates engaged principally in the
business of supplying craniomaxillofacial products and surgical instruments to
hospitals and surgeons in their geographic areas, throughout the United States.
Additionally, Lorenz Surgical supplies a full-line of orthopedic hand-held
instruments for sale through the Biomet distributor network. Lorenz Surgical
products are marketed internationally through a growing network of
distributors and factory sales representatives throughout Europe, Asia, Africa,
Canada, Australia and Central and South America.
Elective surgery-related products appear to be influenced to some degree by
seasonal factors, as the number of elective procedures decline during the
summer months and the holiday seasons.
The Company's customers are the hospitals, surgeons and other physicians who
employ its products in the course of their practices. The business of the
Company is dependent upon the relationships maintained by its distributors and
salespersons with these customers as well as the Company's ability to design
and manufacture products which will meet the physicians' technical requirements
at a competitive price.
Biomet products are marketed internationally primarily through direct factory
sales representatives in the United Kingdom, Italy, France, Spain and Germany
and through both independent and direct factory sales representatives and
specialty medical product dealers in other international markets. EBI products
are sold internationally by EBI's wholly-owned subsidiary, EBI Medical Systems
Ltd., ("EBIMSL") a United Kingdom corporation. EBIMSL utilizes the direct
sales force of Biomet Ltd., a United Kingdom corporation and wholly-owned
subsidiary of the Company. The Company's products are distributed in
approximately 100 countries worldwide.
For the fiscal years ended May 31, 1996, 1995 and 1994, the Company's foreign
sales were $138,452,000, $108,461,000 and $85,079,000, respectively, or
26%, 24% and 23% of net sales, respectively. Additional data concerning
operating income and identifiable assets by geographic areas are set forth in
Note J of the Notes to Consolidated Financial Statements included in Item 8 of
this Report.
The Company consigns inventory to its United States distributors and direct
salespersons for their use in marketing its products and in filling customer
orders. The Company also consigns inventory to hospitals in the United
Kingdom, Italy and Germany. As of May 31, 1996, inventory of approximately
$44,171,000 was consigned to these distributors, salespersons and hospitals.
Under Title VI of the Social Security Amendments of 1983 (the "1983
Amendments"), hospitals receive a predetermined amount of Medicare
reimbursement for treating a particular patient based upon the patient's type
of illness identified with reference to the patient's diagnosis under one or
more of several hundred diagnosis-related groups ("DRG"). Other factors which
affect a specific hospital's reimbursement rate include the size of the
hospital, its teaching status and its geographic location. The Prospective
Payment Assessment Commission acts for Congress in evaluating, redefining and
adjusting DRGs to encompass technology changes and efficiencies experienced by
hospitals. Biomet products are primarily covered by DRG 209 (Major Joint and
Limb Reattachment Procedures) and DRG 210 (Hip and Femur Procedures).
The 1983 Amendments have not adversely affected the Company's reconstructive
device or electrical stimulation business. However, the Company is
experiencing pricing pressure in orthopedic support devices and operating room
supplies and in some generic internal fixation device products. The DRG-based
prospective payment system may increase the future importance of price as a
competitive factor within the orthopedic products and implantable bone growth
stimulation markets. Other effects of the prospective payment system on the
industry and on the Company cannot be estimated at the present time.
9
<PAGE> 10
Biomet's Health Care Initiatives Department (HCI), established in fiscal year
1994, enhances partnerships between hospital administration, surgeon and
supplier. By providing a wide array of "Value Added" programs and services,
Biomet is able to address today's highly competitive health care environment.
The HCI group provides tools to help orthopedic surgeons and hospitals improve
quality of patient care, reduce cost, improve efficiency and improve patient
and staff satisfaction.
COMPETITION
The business of the Company is highly competitive. Approximately seven other
manufacturers offer orthopedic implant products which compete with Biomet
products. Major companies in this industry include Zimmer, Inc., a subsidiary
of Bristol-Myers Squibb Company; Howmedica, Inc., a subsidiary of Pfizer, Inc.;
DePuy, a subsidiary of Boehringer-Mannheim Corporation; Smith & Nephew Inc.;
Osteonics, Inc., a subsidiary of Stryker Corporation; Johnson & Johnson
Orthopaedics, Inc., a subsidiary of Johnson & Johnson; and Intermedics
Orthopedics, Inc., a division of Sulzermedica. Management believes these seven
companies together with Biomet have the predominant share of the orthopedic
implant market. Competition within the orthopedic implant industry is
primarily on the basis of service and product design, although price
competition has become increasingly important in recent years as the orthopedic
industry matures and as providers have become more concerned with health care
costs. At the present time, price is a factor in the sale of generic internal
fixation devices, orthopedic support devices and operating room supplies and is
increasingly becoming a factor in the sale of reconstructive devices. In
addition, health care providers increasingly limit the use of higher-cost
reconstructive devices to younger, more active patients. Biomet's prices are
at approximately the same or slightly lower levels as those of its major
competitors. Biomet believes its future success will depend upon its service
and responsiveness to distributors and orthopedic specialists, and upon its
ability to design and market innovative products which meet the needs of the
marketplace. As discussed above, the Company's Health Care Initiatives program
is intended to enhance the Company's offerings of products, services and
programs.
In the past, new technologies and product concepts in the industry (principally
in reconstructive products) have been introduced and applied at extremely rapid
rates. New developments in implant systems are frequently introduced into the
market before earlier concepts can be fully absorbed. It is management's
opinion that this evolution in advanced technology products will continue for
the foreseeable future.
EBI's electrical stimulation products compete with conventional surgical
procedures and non-invasive electrical stimulation devices manufactured by
others. EBI has the predominant share of the bone growth stimulation market.
Other companies offering products in the electrical stimulation market include
Orthofix, Inc., (formerly American Medical Electronics, Inc.) a subsidiary of
Orthofix International N.V.; Biolectron, Inc.; OrthoLogic Corp. and Exogen.
Competition in the electrical stimulation market is on the basis of product
design, service and success rates of various treatment alternatives. EBI's
non-invasive stimulators offer advantages over conventional surgery or invasive
products in that their use eliminates hospital, surgeon and operating room
costs, and these products can be used in the presence of infection without
creating a risk of additional infection. EBI's invasive stimulators offer the
advantage of conformance to surgical practice and do not require patient
compliance. EBI's external fixation devices compete with other external
fixation devices primarily on the basis of ease of application and clinical
results. EBI's principal competitor in the external fixation market is
Orthofix Inc.
Arthrotek products compete in the areas of power instruments, visualization
products, accessories and manual instruments. Competitors include Linvatec
Corp., a subsidiary of Bristol-Myers Squibb Company; Stryker Corporation;
Dyonics, Inc., a subsidiary of Smith & Nephew Ltd.; Baxter Health Care
Corporation; Olympus; Richard Wolf and Karl Storz.
The Company's trauma and fixation product lines compete with those of ACE
Orthopedics, a division of DePuy; Zimmer, Inc., a subsidiary of Bristol-Myers
Squibb Company; Richards Manufacturing Co., Inc., a subsidiary of Smith &
Nephew Ltd. and Synthes USA.
Lorenz Surgical primarily competes in the surgical instrumentation and
craniomaxillofacial markets. Its competitors include Synthes USA;
Howmedica-Leibinger, a subsidiary of Pfizer, Inc.; ACE Surgical Supply
Company, Inc. KLS-Martin, L.P. and Hu-Friedy Dental.
10
<PAGE> 11
RAW MATERIALS AND SUPPLIES
The raw materials used in the manufacture of Biomet products are principally
nonferrous metallic alloys, stainless steel, polyethylene powder and fabrics.
With the exception of cobalt alloy and polyethylene powder, none of Biomet's
raw material requirements are limited to any material extent by critical supply
or single origins. Biomet purchases its cobalt alloy from two outside
suppliers and is aware of at least three additional suppliers of cobalt alloy.
With respect to polyethylene powder, suppliers of this material have become
increasingly concerned because of products liability exposure in the medical
device industry. However, based upon Biomet's present relationship with such
suppliers, a material shortage of polyethylene powder is not anticipated in the
forseeable future. EBI purchases all components of its electrical stimulators
from approximately 250 outside suppliers, approximately 15 of whom are the
single source of supply for their particular product. In most cases, EBI
believes that all components are replaceable with similar components. In the
event of a shortage, there are alternative sources of supply available for all
components, but some time would likely elapse before EBI's orders could be
filled. The results of the Company's operations are not materially dependent
on raw material costs.
EMPLOYEES
As of May 31, 1996, the Company's domestic operations (including Puerto Rico)
employed approximately 1,800 persons, of whom approximately 1,000 were engaged
in production and approximately 800 in sales, marketing, administrative and
clerical efforts. The Company's European subsidiaries employed approximately
740 persons, of whom approximately 480 were engaged in production and
approximately 260 in sales, marketing, administrative and clerical efforts.
None of the Company's principal domestic manufacturing employees are
represented by a labor union; the production employees at its Bridgend, South
Wales, facility are organized. Employees working at the Berlin, Germany
facility are represented by a statutory Workers' Council which negotiates labor
hours and termination rights. The Workers' Council does not represent such
employees with regard to collective bargaining of wages or benefits. The
Company believes that its relationship with all of its employees is
satisfactory. The establishment of Biomet's domestic operations in north
central Indiana, near other members of the orthopedic industry, provides
excellent access to the highly skilled machine operators required for the
manufacture of Biomet products. The Company's European locations at Bridgend,
South Wales; Swindon, England; Valencia, Spain; and Berlin, Germany; also
provide good sources for skilled manufacturing labor. EBI's Puerto Rican
operations principally involve the assembly of purchased components into
finished products using skilled labor.
PATENTS AND TRADEMARKS
As a result of the rapid development of reconstructive products, patents
historically have not been a major factor in the orthopedic industry. However,
as the industry matures, patents and other forms of intellectual property are
taking on an increased importance. Accordingly, management has placed greater
significance on patents and is taking steps to increase its acquisition of
intellectual property rights. In addition, management is actively enforcing
its intellectual property rights consistent with strategic objectives.
BIOMET, EBI, W. LORENZ, KIRSCHNER, POLYMEDICS, AOA, IQL and ARTHROTEK are the
Company's principal registered trademarks in the United States, and federal
registration has been obtained or is in process with respect to various other
trademarks associated with the Company's products. The Company holds or has
applied for registrations of various trademarks in its principal foreign
markets.
11
<PAGE> 12
ITEM 2. PROPERTIES.
The Company has the following properties:
<TABLE>
<CAPTION>
OWNED/
FACILITY LOCATION SQUARE FEET LEASED
- ------- --------- ----------- ------
<S> <C> <C> <C>
Principal manufacturing facility Warsaw, Indiana 340,000 Owned
and executive offices of Biomet
Office and manufacturing facility of EBI Guaynabo, Puerto Rico 23,200 Owned
Marketing and sales operations Parsippany, New Jersey 63,000 Owned
of EBIMS, including accounting,
order entry and customer service
for all EBI products and sales and
administrative offices of EBI
45,000 Owned
Manufacturing facility of EBI Parsippany, New Jersey
1,800 Leased
Office and warehouse facility of Biomet and EBI Ontario, Canada
80,300 Owned
Manufacturing and administrative (1) Bridgend, South Wales 53,420 Owned
facilities of Biomet Ltd. (2) Swindon, England
35,400 Owned
Office and manufacturing facility (1) Ontario, California 6,300 Leased
of Arthrotek (2) Redding, California
36,700 Leased
Office, manufacturing and warehouse facilities (1) Berlin, Germany
of Biomet Deutschland GmbH
32,500 Owned
Administrative and distribution facility Jacksonville, Florida
of Lorenz Surgical 10,800 Owned
Office and warehouse facility of Biomet SpA Milan, Italy 40,000 Owned
Manufacturing facility of Biomet Fair Lawn, New Jersey 30,000 Owned
8,000 Leased
Manufacturing facility of AOA (1) Marlow, Oklahoma
(2) Delray Beach, Florida 35,700 Leased
Executive, manufacturing and administrative Hunt Valley, Maryland
offices of AOA
Office and manufacturing facilities of IQL Valencia, Spain 80,000 Owned
Office facility of IQL Madrid, Spain 6,000 Owned
Office and manufacturing facilities of Polymers Farum, Denmark 7,500 Leased
Office facilities of Biomet Polska Warsaw, Poland 900 Leased
Office and warehouse facilities of Biomet SA (1) Chauteaurenard, France 37,500 Leased
(2) Les Pennes Mirabeau, France 7,200 Leased
(3) Chaumont, France 37,100 Owned
</TABLE>
The Company believes that its facilities are adequate, well maintained and
suitable for the development, manufacture and marketing of all its products.
12
<PAGE> 13
ITEM 3. LEGAL PROCEEDINGS.
The Company has experienced an increase in the number and significance of the
legal matters in which it is involved. In addition to those matters arising in
the ordinary course of its business, the Company recently has been and is now a
party to several actions in which patent infringement is one of the claims made
against it. In addition, the Company has experienced a gradual increase in the
number of product liability claims made against it.
The patent matters can be classified into two general categories: those cases
in which the plaintiff is an inventor seeking to hold the Company liable for
damages, and those cases in which the plaintiff is a competitor seeking a
strategic advantage in the marketplace.
There are two significant cases in the first category. In the Ramos case,
the United States Court of Appeals for the Federal Circuit reversed a finding
of willful infringement by the Company, but affirmed a finding of infringement
under the doctrine of equivalents. As a result of this decision, Biomet
incurred a one-time $2.0 million charge against pre-tax earnings for the
quarter ended August 31, 1995. In the Tronzo case, a jury returned a verdict
in January of this year in favor of Raymond G. Tronzo awarding him
approximately $55 million on his patent and state law claims. On August 6,
1996, the United Stated District Court for the Southern District of Florida
entered a judgment, which implements and reduces the jury verdict, awarding
$33,756,492 to Tronzo on his state law claims, including compensatory damages
of approximately $7.1 million, punitive damages of $20 million, and prejudgment
interest of approximately $6.6 million. The trial court dismissed, with
prejudice, Tronzo's claim based upon unjust enrichment. For reasons unknown,
the trial court has not yet ruled on the Company's motion challenging the
validity of Tronzo's patent. If the trial court ultimately finds the patent to
be invalid, management believes that this finding will provide additional
support to its legal arguments challenging the judgment on the state law
claims. If, however, the trial court ultimately finds the patent to be valid,
Tronzo will be awarded an additional $5.7 million judgement for patent
infringement, including a fifty percent enhancement based upon willfulness and
the trial court will also consider whether Tronzo is entitled to an award of
attorney's fees and an injunction prohibiting future sales of the finned
version of the Mallory-Head acetabular cup, the device found to have infringed
the Tronzo patent. This device accounts for a relatively small portion of the
total sales of the Company's Mallory-Head Total Hip System, and represents less
than one percent of the Company's annual sales. The Company intends to file
post-judgment motions for judgment in its favor and, alternatively, for a new
trial or to amend or modify the judgment to seek reduction of the punitive
damages and prejudgment interest components of the judgment. Management
anticipates that it will vigorously pursue an appeal of the judgment if these
motions are not favorably resolved. Based on the information and advice
currently available, management believes that the Company has adequate accruals
to cover legal costs and estimated loss exposure, if any, and the Company's
cash and cash equivalents are more than adequate to address the payment of any
loss that may ultimately be determined with respect to this matter.
There are two matters of significance in the latter category. The Company and
DePuy, a subsidiary of Boehringer Mannheim, are involved in litigation in which
each company has made claims of patent infringement (and related claims)
against the other with respect to several products. The Company has filed four
patent infringement lawsuits against DePuy alleging, among other things, that
DePuy's AML hip system, instrumentation and other products infringe claims of
the Company's patents. In addition, DePuy has filed a lawsuit against Biomet
and one of its employees alleging that the Company makes and sells a modular
hip prosthesis and knee prosthesis which fall within the scope of its patents.
The Complaint also alleges that the individual defendant misappropriated
certain alleged trade secrets when he left DePuy to begin employment with the
Company. All of the lawsuits seek recovery of compensatory damages (including
trebling for willfulness), as well as attorneys' fees and injunctive relief
from infringing the patents at issue. As to the lawsuit filed by DePuy, the
Company's counsel has rendered a non-infringement opinion and has opined that
the claims in these patents are invalid. The Company intends to vigorously
defend the actions filed against it and pursue its counterclaims.
Lastly, the Company is a defendant in two consolidated lawsuits now pending in
the United States District Court for the District of New Jersey in which the
plaintiffs are Orthofix, Inc. and two affiliated corporations ("Orthofix"). The
Complaints include allegations of tortious interference with contractual
relations, breach of contract, patent and trademark infringement, unfair and
deceptive trade practices and failure to pay for goods sold and delivered. The
allegations generally relate to the events surrounding the expiration of a
Distributor Agreement between Orthofix and the Company's subsidiary, EBI, in
fiscal year 1996, and the acquisition by Orthofix of American Medical
Electronics, Inc., EBI's principal competitor in the sale of electrical bone
growth stimulation devices. The plaintiffs seek the payment of approximately
$880,000 for goods shipped to EBI prior to the expiration of the Distributor
Agreement, together with unspecified damages related to the allegations set
forth in the Complaint. On April 2, 1996, the plaintiffs filed a Motion for
Preliminary Injunction, seeking to bar the continued sale by EBI of its
inventory of Orthofix devices, to bar the sale of EBI's "DynaFix" system for a
period of 14 months and for other injunctive relief; however, Orthofix
subsequently abandoned its claim that EBI should be barred from selling its
DynaFix products and the Court ultimately denied the request for a preliminary
injunction by refusing to set the matter for hearing. The Company has denied
all of the substantive allegations of the Complaints, other than receipt of the
goods shipped by Orthofix, and has asserted various defenses and counterclaims
against Orthofix, including breach of the Distributor Agreement by it and
intentional interference with EBI's existing and potential customer
relationships. The Company intends to vigorously defend against the Orthofix
claims and to vigorously pursue its counterclaims.
There are various other claims, lawsuits, disputes with third parties,
investigations and pending actions involving various allegations against the
Company incident to the operations of its business. The results of litigations
proceedings cannot be predicted with certainty; however, management believes
the ultimate disposition of these matters will not have a material adverse
effect on the consolidated financial position of the Company.
13
<PAGE> 14
EXECUTIVE OFFICERS OF THE REGISTRANT
The name, age, business background, positions held with the Company and tenure
as an executive officer of each of the Company's executive officers are set
forth below. No family relationship exists among any of the executive
officers. Except as otherwise stated, each executive officer has held the
position indicated during the last five years.
<TABLE>
<CAPTION>
Served as Executive Current Position(s)
Name, Age and Business Experience Officer Since with the Company
- --------------------------------- ------------------- -------------------
<S> <C> <C>
DANE A. MILLER, PH. D., 50
President and Chief Executive Officer of the 1977 President and Chief
Company; Director of the Company since 1977 Executive Officer and Director
of the Company.
NILES L. NOBLITT, 45
Chairman of the Board of the Company; 1978 Chairman of the Board
Director of the Company since 1977. and Director of the Company.
CHARLES E. NIEMIER, 40
Senior Vice President - International Operations of 1984 Senior Vice President -
the Company since November 1991; prior to November 1991, International Operations
Senior Vice President - Warsaw Operations of the Company, and Director of the Company.
Director of the Company since 1987.
GARRY L. ENGLAND, 42
Senior Vice President - Warsaw Operations of the 1987 Senior Vice President -
Company since May 1994; Vice President - Warsaw Operations of the
Research and Development of the Company Company.
from November 1991 to May 1994; prior to
November 1991, Vice President - Manufacturing
of the Company.
DANIEL P. HANN, 41
Vice President and General Counsel, 1989 Vice President and General
Secretary and Director of the Company since 1989. Counsel, Secretary and
Director of the Company.
JOEL P. PRATT, 42
Vice President of the Company and 1990 Vice President of
President of Arthrotek since June 1996; the Company
Vice President of the Company and General Manager of
Biomet Medical Products from March 1993
to January 1996; prior to March 1993,
Vice President - Sales and Marketing of the Company.
GREGORY D. HARTMAN, 39
Vice President - Finance of the Company since 1991 Vice President - Finance of
December 1991; prior to December 1991, Controller the Company.
of the Company.
JAMES W. HALLER, 39
Controller of the Company since December 1991; 1991 Controller of the Company.
prior to December 1991, Assistant Controller
of the Company.
JERRY L. FERGUSON, 55
Senior Vice President of the Company since 1994 Senior Vice President of the
December 1994; Special Projects Advisor to Company and Director of
the Company from December 1993 to the Company.
December 1994; prior to December 1993,
Owner of Classic Car Centre, Inc.; Director
of the Company since 1978.
</TABLE>
14
<PAGE> 15
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The following table shows the quarterly range of high and low sales prices for
the Company's Common Shares as reported by the Nasdaq National Market for each
of the three most recent fiscal years ended May 31. They reflect inter-dealer
prices, without retail mark-up, mark-down or commission. The approximate
number of recordholders of outstanding Common Shares as of May 31, 1996 was
11,500.
<TABLE>
<CAPTION>
High Low
<S> <C> <C>
1996
Fourth $ 19 5/8 $ 12 1/2
Third 20 5/8 17 3/8
Second 18 1/2 16
First 16 1/2 14 1/8
1995
Fourth $ 18 1/2 $ 13 1/8
Third 17 11 1/2
Second 12 5/8 10 5/8
First 11 7/8 9
1994
Fourth $ 11 7/8 $ 9 5/8
Third 11 7/8 9 7/8
Second 13 1/4 8 3/8
First 11 1/4 8 3/8
</TABLE>
The Company has not paid any dividend within the last three years; however, the
Board of Directors of the Company periodically considers the payment of
dividends.
15
<PAGE> 16
ITEM 6. SELECTED FINANCIAL DATA
INCOME STATEMENT DATA
(in thousands, except earnings per share)
<TABLE>
<CAPTION>
Years ended May 31, 1996 1995 1994 1993 1992
------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $535,159 $452,272 $373,295 $335,373 $274,795
Cost of sales 174,364 142,143 114,829 104,741 85,657
------------------------------------------------
Gross profit 360,795 310,129 258,466 230,632 189,138
Selling, general and
administrative expenses 199,461 169,332 136,191 122,170 102,695
Research and development expense 24,054 21,770 20,521 17,995 16,620
------------------------------------------------
Operating income 137,280 119,027 101,754 90,467 69,823
Other income, net 12,389 5,915 5,278 3,805 6,688
------------------------------------------------
Income before income taxes 149,669 124,942 107,032 94,272 76,511
Provision for income taxes 55,563 45,742 37,214 30,311 24,702
------------------------------------------------
Net income $94,106 $79,200 $69,818 $63,961 $51,809
================================================
Earnings per share $.82 $.69 $.61 $.56 $.46
================================================
Weighted average number of shares 115,461 115,459 115,215 114,934 113,009
================================================
BALANCE SHEET DATA
(in thousands)
<CAPTION>
As of May 31, 1996 1995 1994 1993 1992
------------------------------------------------
<S> <C> <C> <C> <C> <C>
Working capital $400,817 $302,752 $288,408 $224,387 $167,707
Total assets 598,469 539,084 418,077 354,409 279,234
Shareholders' equity 534,070 444,617 357,283 301,319 232,467
</TABLE>
- - The selected consolidated financial information includes the operations of
Kirschner Medical Corporation from November 4, 1994 and Lorenz Surgical from
June 1, 1992.
- - The Company paid no cash dividends during any of the periods presented.
16
<PAGE> 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following table shows the percentage relationship to net sales of items
derived from the Consolidated Statements of Income and the percentage change
from year to year.
<TABLE>
<CAPTION>
Percentage of Percentage
Net Sales Increase
1996 1995
Years ended May 31, 1996 1995 1994 VS. 1995 vs. 1994
--------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 18% 21%
Cost of sales 32.6 31.4 30.8 23 24
----------------------
Gross profit 67.4 68.6 69.2 16 20
Selling, general and administrative expenses 37.2 37.5 36.5 18 24
Research and development expense 4.5 4.8 5.5 10 6
----------------------
Operating income 25.7 26.3 27.2 15 17
Other income, net 2.3 1.3 1.5 109 12
----------------------
Income before income taxes 28.0 27.6 28.7 20 17
Provision for income taxes 10.4 10.1 10.0 21 23
----------------------
Net income 17.6% 17.5% 018.7% 19% 13%
=======================
</TABLE>
1996 COMPARED TO 1995
The Company again achieved record net sales and earnings per share in fiscal
1996. Net sales increased 18% to $535,159,000 in fiscal 1996 as compared to
$452,272,000 in fiscal 1995. The Company's U.S.-based revenue increased 15% to
$396,707,000 in fiscal 1996, while foreign sales increased 28% to $138,452,000.
Worldwide reconstructive device sales during fiscal 1996 increased by 20% to
$326,834,000 compared to fiscal 1995, largely a result of Biomet's continued
penetration into the reconstructive device market and the inclusion of
Kirschner sales for the full year. Products recording significant increases in
unit sales include the Maxim(R) Total Knee System, the Bio-Modular(R) Shoulder
and the Alliance(R) Hip System. In fiscal 1996, EBI's sales increased 10% to
$108,627,000, principally as a result of increase sales of the DynaFix(TM)
external fixation system and the EBI Bone Healing System(R) Model 1200. The
Company's "Other Products" revenues totaled $99,698,000, representing a 23%
increase over fiscal 1995, primarily a result of increased sales of Lorenz's
craniomaxillofacial products and Biomet's trauma products, and the inclusion of
a full year of Kirschner's AOA products.
Cost of sales increased as a percentage of sales to 32.6% for fiscal 1996
compared to 31.4% for fiscal 1995. This increase is due to the acquisition in
November 1994 of Kirschner, whose cost of sales was historically higher than
Biomet's due to its higher levels of outsourced product manufacturing. Selling,
general and administrative expenses decreased to 37.2% of net sales in fiscal
1996 compared to 37.5% of net sales in fiscal 1995, primarily due to the
reduction of payroll costs resulting from the consolidation of the Kirschner
operation into Warsaw, partially offset by $1.6 million paid in connection
with the judgment in the Ramos litigation and legal expenses incurred in
connection with the Tronzo litigation. Research and development expense
increased by $2,284,000 during the current fiscal year reflecting the Company's
commitment to remain competitive through technological advancements, but
decreased as a percentage of net sales principally as a result of Kirschner's
lower expenditures on research and development. The increase in other income is
the result of income earned on higher investment balances throughout the year,
a $2.5 million gain on marketable securities and $2.9 million received on the
termination of a joint venture agreement with United States Surgical
Corporation, offset by $400,000 of interest expense related to the Ramos
litigation. The effective income tax rate increased to 37.1% in fiscal 1996
compared to 36.6% in fiscal 1995. This increase is due to the changes in the
Puerto Rico local tax structure and reduction of U.S. tax benefits from
operating in Puerto Rico. The Company's effective tax rate will continue to
increase in future years as the full impact of these tax changes materialize.
These factors resulted in a 19% increase in net income and earnings per share
for fiscal 1996 as compared to fiscal 1995, increasing from $79,200,000 to
$94,106,000 and $.69 to $.82, respectively.
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," which is effective for fiscal years beginning after December
15,1995. This statement addresses the accounting for and financial reporting of
stock-based compensation plans including stock options. The Company will adopt
the new statement as of June 1, 1996, and the effect of implementation will
change the Company's accounting and financial statement disclosures related to
employee and distributor stock options, however, such changes will not be
material to the Company's consolidated financial statements (see Note G of
Notes to Consolidated Financial Statements).
17
<PAGE> 18
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and investments increased $43,586,000 to $168,061,000 at May
31,1996, despite the $10,406,000 cash outlay for Common Shares purchased late
last fiscal year and the significant decrease in accounts payable. This
increase is attributable to cash flows generated from operating activities and
increased attention placed on reducing general and administrative expenses and
limiting inventory growth.
Cash flows provided by operating activities were $68,485,000 in 1996 compared
to $52,596,000 in 1995. The primary source of 1996 cash flows from operating
activities was net income offset by increases in accounts and notes receivable
and inventories and a decrease in accounts payable. The increase in accounts
and note receivable and inventories is attributable to the increased sales
volume. Included in the aforementioned changes were decreases in accounts and
notes receivables and inventories of approximately $2,645,000 and $2,558,000,
respectively, attributable to the decrease from May 31, 1995 to May 31, 1996 in
the exchange rates used to convert the financial statements of the Company's
foreign subsidiaries from their functional currency to the U.S. dollar. These
decreases did not affect the Company's earnings during the year because foreign
currency translation adjustments to balance sheet items are recognized as a
component of shareholders' equity in the Company's consolidated balance sheet.
The Company will continue to be exposed to the effects of foreign currency
translation adjustments.
Cash flows provided by (used in) investing activities were $13,361,000 in 1996
compared to $(73,755,000) in 1995. The primary source of cash flows from
investing activities were sales and maturities of marketable securities
partially offset by purchases of capital equipment. Included in capital
expenditures are costs to construct Lorenz's new manufacturing facility in
Jacksonville, Florida and facilities expansion to the Company's operations in
Europe.
Cash flows used in financing activities were $6,621,000 in 1996 compared to
$14,290,000 in 1995. The primary use of cash flows from financing activities
was the purchase of the Company's Common Shares as part of the Common Share
Repurchase Program. In June 1996, the Company's Board of Directors authorized
the purchase of up to 4,000,000 additional Common Shares of the Company in open
market or privately negotiated transactions through the close of business on
June 23, 1997. These purchases, if any, will be dependent upon market
conditions.
Based on the information and advice currently available, management believes
the Company has adequate accruals to cover legal costs and estimated loss
exposure, if any, with respect to the Tronzo litigation (see Note K of the
Notes to Consolidated Financial Statements).
Currently available funds, together with anticipated cash flows generated from
future operations, are believed to be adequate to cover the Company's
anticipated cash requirements, including the Common Share Repurchase Program,
the Tronzo litigation, capital expenditures and research and development costs.
The Company expects to spend approximately $76 million during the next two
fiscal years for capital expenditures and research and development, and expects
using a portion of its cash reserves to fund future acquisitions and other
business development activities.
1995 COMPARED TO 1994
In fiscal 1995, net sales increased 21% to $452,272,000 as compared to
$373,295,000 in fiscal 1994. The Company's U.S. - based revenue increased 19%
to $343,811,000 in fiscal 1995, while foreign sales increased 27% to
$108,461,000. Biomet's worldwide reconstructive device sales during fiscal 1995
increased by 25% to $272,643,000 compared to fiscal 1994. This revenue increase
is attributable to Biomet's continued penetration into the reconstructive
device market and the acquisition of Kirschner. EBI's product sales increased
11% to $98,490,000 in fiscal 1995. This increase was primarily due to the
resurgence in the bone healing market and increased sales in external fixation
devices. The Company's "Other Products" revenues totaled $81,139,000,
representing a 22% increase over fiscal 1994, primarily as a result of the
inclusion of seven months of revenue of AOA, a division of Kirschner.
Cost of sales increased as a percentage of net sales to 31.4% for fiscal 1995
from 30.8% for fiscal 1994 due to the acquisition of Kirschner in November
1994. The reason for this increase is discussed in the 1996 compared to 1995
analysis. The Company's selling, general and administrative expenses increased
as a percentage of net sales from 36.5% in fiscal 1994 to 37.5% in fiscal 1995.
The major cause of this increase is the inclusion of Kirschner's relatively
higher selling, general and administrative costs, and expenses incurred in the
reconfiguration of the combined sales forces of the two companies. Research and
development expense decreased as a percentage of net sales to 4.8% due to
Kirschner lower expenditures on research and development. The increase in
other income was the result of higher investment balances throughout most of
fiscal 1995. The effective tax rate increased to 36.6% in fiscal 1995 from
34.8% in fiscal 1994. This is due to the change in the Puerto Rico tax
structure as mentioned earlier. These factors resulted in a 13% increase in net
income and earnings per share in fiscal 1995.
18
<PAGE> 19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by this Item is set forth on pages 23 through 36 of
this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information included under the caption "Election of Directors" in the
Company's definitive Proxy Statement filed pursuant to Regulation 14A in
connection with its 1996 Annual Meeting of Shareholders (the "Proxy Statement")
is incorporated herein by reference in response to this item.
Information regarding executive officers of the Company is included in Part I
of this Report under the caption "Executive Officers of the Registrant."
ITEM 11. EXECUTIVE COMPENSATION.
The information included under the captions "Election of Directors -
Compensation of Directors" and "Executive Compensation" in the Proxy Statement
is incorporated herein by reference in response to this item.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information contained under the captions "Principal Shareholders" and
"Share Ownership of Directors and Executive Officers" in the Proxy Statement is
incorporated herein by reference in response to this item.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information contained under the caption "Certain Transactions" in the Proxy
Statement is incorporated herein by reference in response to this item.
19
<PAGE> 20
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) FINANCIAL STATEMENTS:
Report of Independent Accoutants
Consolidated Balance Sheets as of May 31, 1996 and 1995
Consolidated Statements of Income for the years ended May 31, 1996,
1995, and 1994
Consolidated Statements of Shareholders' Equity for the years ended May
31, 1996, 1995 and 1994
Consolidate Statements of Cash Flows for the years ended May 31, 1996,
1995 and 1994.
Notes to Consolidated Financial Statements.
(2) FINANCIAL STATEMENT SCHEDULE
Schedule II - Valuation and Qualifying Accounts.
Schedules other than those listed above are omitted because they are
not required.
(3) EXHIBITS
3.1 Amended Articles of Incorporation filed July 23,1982. (Incorporated
by reference to Exhibit 3(a) to Biomet, Inc. Form S-18 Registration
Statement, File No. 2-78589C).
3.2 Articles of Amendment to Amended Articles of Incorporation filed
July 11, 1983. (Incorporated by reference to Exhibit 3.2 to Biomet,
Inc. Form 10-K Report for year ended May 31, 1983, File No.
0-12515).
3.3 Articles of Amendment to Amended Articles of Incorporation filed
August 22, 1987. (Incorporated by reference to Exhibit 3.3 to
Biomet, Inc. Form 10-K Report for year ended May 31,1987, File No.
0-12515).
3.4 Articles of Amendment to the Amended Articles of Incorporation filed
September 18, 1989. (Incorporated by reference to Exhibit 3.4 to
Biomet, Inc. Form 10-K Report for year ended May 31, 1990, File No.
0-12515).
3.5 Amended and Restated Bylaws. (Incorporated by reference to Exhibit
4.2 to Biomet, Inc. Form S-3 Registration Statement, File No.
33-33376).
4.1 Specimen certificate for Common Shares. (Incorporated by reference
to Exhibit 4.1 to Biomet, Inc. Form 10-K Report for year ended May
31, 1985, File No. 0-12515).
4.2 Rights Agreement between Biomet, Inc. and Lake City Bank as Rights
Agent, dated as of December 2, 1989. (Incorporated by reference to
Exhibit 4 to Biomet, Inc. Form 8-K current Report dated December 22,
1989, File No. 0-12515).
10.1 Employee Stock Option Plan, as last amended December 14, 1991.
(Incorporated by reference to Exhibit 10.1 to Biomet, Inc. Form 10-K
Report for year ended May 31, 1992, File No. 0-12515).
10.2 Form of Employee Stock Option Agreement. (Incorporated by reference
to Exhibit 10.2 to Biomet, Inc. Form 10-K Report for year ended May
31, 1991, File No. 0-12515).
10.3 Employee and Non-Employee Director Stock Option Plan, dated
September 18, 1992. (Incorporated by reference to Exhibit 19.1 to
Biomet, Inc. Form 10-K Report for year ended May 31, 1993, File No.
0-12515).
10.4 Form of Stock Option Agreement under the Employee and Non-Employee
Stock Option Plan dated September 18, 1992. (Incorporated by
reference to Exhibit 4.03 to Biomet, Inc. Form S-8 Registration
Statement, File No. 33-65700).
10.5 401(k) Profit Sharing Plan filed January 19,1996. (Incorporated by
reference to Form S-8 Registration Statement, File No. 333-00331).
11.1 Computation of Earnings Per Common Share.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Coopers & Lybrand L.L.P.
27.1 Financial Data Schedule
(b) REPORTS ON FORM 8-K.
None.
20
<PAGE> 21
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 on August 1, 1996
BIOMET, INC.
By: /s/ DANE A. MILLER
------------------------------------------------
Dane A. Miller
President and Chief Executive 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 indicated on August 1, 1996.
By: /s/ NILES L. NOBLITT
------------------------------------------------
Niles L. Noblitt, Director
By: /s/ DANE A. MILLER
------------------------------------------------
Dane A. Miller, Director (Principal
Executive Officer)
By: /s/ JERRY L. FERGUSON
------------------------------------------------
Jerry L. Ferguson, Director
By: /s/ M. RAY HARROFF
------------------------------------------------
M. Ray Harroff, Director
By: /s/ KENNETH V. MILLER
------------------------------------------------
Kenneth V. Miller, Director
By: /s/ JERRY L. MILLER
------------------------------------------------
Jerry L. Miller, Director
By: /s/ L. GENE TANNER
------------------------------------------------
L. Gene Tanner, Director
21
<PAGE> 22
By: /s/ THOMAS F. KEARNS, JR
-------------------------------
Thomas F. Kearns, Jr., Director
By: /s/ CHARLES E. NIEMIER
-------------------------------
Charles E. Niemier, Director
By: /s/ DANIEL P. HANN
-------------------------------
Daniel P. Hann, Director
By: /s/ MARILYN TUCKER QUAYLE
-------------------------------
Marilyn Tucker Quayle, Director
By: /s/ RONALD R. FISHER
-------------------------------
Ronald R. Fisher, Director
By: /s/ C. SCOTT HARRISON
-------------------------------
C. Scott Harrison, Director
By: /s/ GREGORY D. HARTMAN
-------------------------------
Gregory D. Hartman, Vice President -
Finance (Principal Financial Officer)
By: /s/ JAMES W. HALLER
-------------------------------
James W. Haller, Controller (Principal
Accounting Officer)
22
<PAGE> 23
BIOMET, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
<TABLE>
<CAPTION>
1. FINANCIAL STATEMENTS: PAGE
------
<S> <C>
Report of Independent Accountants................................................................. 23
Consolidated Balance Sheets as of May 31, 1996 and 1995........................................... 24
Consolidated Statements of Income for the years ended May 31, 1996, 1995 and 1994................. 25
Consolidated Statements of Shareholders' Equity for the years ended May 31, 1996, 1995 and 1994... 26
Consolidated Statements of Cash Flows for the years ended May 31, 1996, 1995 and 1994............. 27
Notes to Consolidated Financial Statements........................................................ 28-35
2. FINANCIAL STATEMENT SCHEDULE:
Schedule II - Valuation and Qualifying Accounts................................................... 36
Schedules other than those listed above are omitted because they are not required.
</TABLE>
REPORT OF INDEPENDENT ACCOUNTANTS
[COOPERS & LYBRAND LLP LETTERHEAD]
To the Shareholders and Board of Directors of Biomet, Inc.:
We have audited the consolidated financial statements and the financial
statement schedule of Biomet, Inc. and subsidiaries listed in Item 14(a) of
this Form 10-K. These financial statements and financial statement schedule are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and financial statement
schedule 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 Biomet, Inc. and
subsidiaries as of May 31, 1996 and 1995, and the consolidated results of their
operations and their cash flows for each of the three years in the period ended
May 31, 1996, in conformity with generally accepted accounting principles. In
addition, in our opinion, the financial statement schedule referred to above,
when considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material aspects, the information required to be
included therein.
/s/ Coopers & Lybrand LLP
South Bend, Indiana
July 3, 1996
23
<PAGE> 24
<TABLE>
<CAPTION>
BIOMET, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
(in thousands)
as of May 31, 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $106,068 $ 34,091
Marketable securities 30,834 56,354
Accounts and notes receivable, less allowance for doubtful receivables
(1996 - $6,889 and 1995 - $6,039) 154,055 140,283
Inventories 151,465 140,885
Prepaid expenses and other 20,494 20,289
- ---------------------------------------------------------------------------------------------------------------------------------
Total current assets 462,916 391,902
- ---------------------------------------------------------------------------------------------------------------------------------
Property, plant and equipment:
Land and improvements 5,874 5,268
Buildings and improvements 48,648 44,571
Machinery and equipment 78,175 71,179
- ---------------------------------------------------------------------------------------------------------------------------------
132,697 121,018
Less, Accumulated depreciation 52,533 40,710
- ---------------------------------------------------------------------------------------------------------------------------------
Property, plant and equipment, net 80,164 80,308
- ---------------------------------------------------------------------------------------------------------------------------------
Marketable securities 31,159 34,030
Intangible assets, net of accumulated amortization (1996 - $9,973 and 1995 - $12,649) 7,665 8,170
Excess acquisition costs over fair value of acquired net assets, net of
accumulated amortization (1996 - $4,468 and 1995 - $9,984 ) 14,947 22,828
Other assets 1,618 1,846
- ---------------------------------------------------------------------------------------------------------------------------------
Total assets $598,469 $539,084
=================================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 3,358 $ 3,518
Accounts payable 16,667 27,194
Accrued income taxes 11,295 12,366
Accrued wages and commissions 11,460 13,050
Liability for purchased common shares - 10,406
Other accrued expenses 19,319 22,616
- ---------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 62,099 89,150
Deferred federal income taxes 1,509 2,240
Other liabilities 791 3,077
- ---------------------------------------------------------------------------------------------------------------------------------
Total liabilities 64,399 94,467
- ---------------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies (Note K)
- ---------------------------------------------------------------------------------------------------------------------------------
Shareholders' equity
Preferred shares, $100 par value: Authorized 5 shares; none issued - -
Common shares, without par value: Authorized 500,000 shares;
issued and outstanding 1996 - 115,826 shares and 1995 - 115,188 shares 68,376 64,526
Additional paid-in capital 14,410 12,624
Retained earnings 458,193 364,087
Net unrealized appreciation of available-for-sale securities 584 2,800
Cumulative translation adjustment (7,493) 580
- ---------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 534,070 444,617
- ---------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $598,469 $539,084
==================================================================================================================================
</TABLE>
The accompanying notes are a part of the consolidated financial statements.
24
<PAGE> 25
BIOMET, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
(in thousands, except earnings per share)
for the years ended May 31, 1996 1995 1994
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET SALES $535,159 $452,272 $373,295
Cost of sales 174,364 142,143 114,829
- ---------------------------------------------------------------------------------------------
Gross profit 360,795 310,129 258,466
Selling, general and administrative expenses 199,461 169,332 136,191
Research and development expense 24,054 21,770 20,521
- ---------------------------------------------------------------------------------------------
Operating income 137,280 119,027 101,754
Other income, net 13,505 6,947 5,867
Interest expense (1,116) (1,032) (589)
- ---------------------------------------------------------------------------------------------
Income before income taxes 149,669 124,942 107,032
Provision for income taxes 55,563 45,742 37,214
- ---------------------------------------------------------------------------------------------
NET INCOME $94,106 $79,200 $69,818
=============================================================================================
EARNINGS PER SHARE, BASED ON THE WEIGHTED AVERAGE
NUMBER OF SHARES OUTSTANDING DURING THE YEAR $.82 $.69 $.61
=============================================================================================
Weighted average number of shares 115,461 115,459 115,215
=============================================================================================
</TABLE>
The accompanying notes are a part of the consolidated financial statements.
25
<PAGE> 26
BIOMET, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
for the years ended May 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Net Unrealized
Additional Appreciation of Cumulative
Common Shares Paid-In Retained Available-for-Sale Translation
Number Amount Capital Earnings Securities Adjustment
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, June 1, 1993 115,288 $ 46,829 $ 13,106 $242,618 $ - $ (1,234)
Issuance of shares 7 62 - - - -
Exercise of stock options 389 911 - - - -
Purchase of shares (1,260) (512) (144) (11,620) - -
Tax benefit arising from the
exercise of stock options - - 644 - - -
Net income - - - 69,818 - -
Other - - - (1,306) - -
Translation adjustment - - - - - (1,889)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, May 31, 1994 114,424 47,290 13,606 299,510 - (3,123)
Issuance of shares 35 261 - - - -
Exercise of stock options 465 1,192 - - - -
Purchase of shares (1,120) (463) (133) (14,623) - -
Tax benefit arising from the
exercise of stock options - - 689 - - -
Acquisition of Kirschner Medical 1,384 16,246 (1,538) - - -
Net income - - - 79,200 - -
Net unrealized appreciation of
available-for-sale securites - - - - 2,800 -
Translation adjustment - - - - - 3,703
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, May 31, 1995 115,188 64,526 12,624 364,087 2,800 580
Issuance of shares 173 2,293 - - - -
Exercise of stock options 465 1,557 - - - -
Purchase of shares - - - - - -
Tax benefit arising from the
exercise of stock options - - 1,786 - - -
Net income - - - 94,106 - -
Change in unrealized appreciation of
available-for-sale securites - - - - (2,216) -
Translation adjustment - - - - - (8,073)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, May 31, 1996 115,826 $68,376 $14,410 $458,193 $584 $(7,493)
===================================================================================================================================
</TABLE>
The accompanying notes are a part of the consolidated financial statements.
26
<PAGE> 27
BIOMET, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(in thousands)
for the years ended May 31, 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from (used in) operating activities:
Net income $ 94,106 $ 79,200 $ 69,818
Adjustments to reconcile net income to net cash from operating activities:
Depreciation 12,928 9,303 8,167
Amortization 7,884 5,067 3,879
Gain on sale of marketable securities, net (3,018) (68) (2,213)
Equity in losses of affiliates - 1,815 1,579
Deferred federal income taxes (1,417) (400) (1,130)
Changes in current assets and liabilities, excluding effects of acquisitions:
Accounts and notes receivable (15,906) (22,499) (13,092)
Inventories (13,386) (26,239) (10,097)
Prepaid expenses and other 615 (962) (448)
Accounts payable (9,297) 2,999 6,414
Accrued income taxes 460 (2,494) 1,818
Accrued wages and commissions (1,581) 2,611 1,048
Other accrued expenses (2,903) 4,263 -
- -----------------------------------------------------------------------------------------------------------------------------
Net cash from operating activities 68,485 52,596 65,743
- -----------------------------------------------------------------------------------------------------------------------------
Cash flows from (used in) investing activities:
Proceeds from sales and maturities of marketable securities 54,823 20,313 21,259
Purchases of marketable securities (25,630) (37,349) (40,453)
Capital expenditures (14,065) (28,938) (6,545)
Purchase of Kirschner Medical Corporation, net of cash acquired - (27,315) -
Cash invested in affiliates - (238) (1,466)
Increase in other assets (932) (83) (666)
Other (835) (145) 892
- -----------------------------------------------------------------------------------------------------------------------------
Net cash (used in) investing activities 13,361 (73,755) (26,979)
- -----------------------------------------------------------------------------------------------------------------------------
Cash flows from (used in) financing activities:
Decrease in short-term borrowings (65) (225) (719)
Payments on long-term debt - (10,705) (418)
Issuance of shares 3,850 1,453 973
Purchase of common shares (10,406) (4,813) (12,276)
- -----------------------------------------------------------------------------------------------------------------------------
Net cash (used in) financing activities (6,621) (14,290) (12,440)
- -----------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (3,248) (851) (512)
- -----------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 71,977 (36,300) 25,812
Cash and cash equivalents, beginning of year 34,091 70,391 44,579
- -----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $106,068 $34,091 $70,391
=============================================================================================================================
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $1,116 $936 $581
Income taxes 55,576 48,350 36,480
Non-cash investing and financing activities:
Purchase of Kirschner Medical Corporation:
Common shares issued - 14,708 -
Liabilities assumed - 26,859 -
Purchase of common shares and related liability - 10,406 -
============================================================================================================================
The accompanying notes are a part of the consolidated financial statements.
</TABLE>
27
<PAGE> 28
BIOMET, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for the years ended May 31, 1996, 1995 and 1994
NOTE A: NATURE OF OPERATIONS.
Biomet, Inc., and its subsidiaries design, manufacture and market products used
primarily by orthopedic medical specialists in both surgical and nonsurgical
therapy, including reconstructive and trauma devices, electrical bone growth
stimulators, orthopedic support devices, operating room supplies, powered
surgical instruments, general surgical instruments, arthroscopy products and
craniomaxillofacial implants and instruments. Biomet has corporate headquarters
in Warsaw, Indiana and manufacturing and/or office facilities in more than
fifteen locations worldwide. The Company currently distributes its products in
approximately 100 countries.
NOTE B: ACCOUNTING POLICIES.
The following is a summary of the accounting policies adopted by Biomet, Inc.
and subsidiaries which have a significant effect on the consolidated financial
statements.
Principles of Consolidation - The consolidated financial statements include the
accounts of Biomet, Inc. and its subsidiaries (individually and collectively,
the "Company"). All intercompany accounts and transactions have been
eliminated in the consolidated financial statements. All foreign subsidiaries
are consolidated on the basis of an April 30 fiscal year. Investments in less
than 20% owned affiliates are accounted for on the cost method, the carrying
amount of which approximates market. Investments in more than 20% owned
affiliates are accounted for on the equity method. The equity in losses of
affiliates aggregated $1,815,000 and $1,579,000 for the years ended May 31,
1995 and 1994, respectively, and consisted primarily of research and development
expense. Accordingly, these amounts are included in research and development
expense in the consolidated statements of income.
Translation of Foreign Currency - Assets and liabilities of foreign
subsidiaries are translated at rates of exchange in effect at the close of
their fiscal year. Revenues and expenses are translated at the weighted
average exchange rates during the year. Translation gains and losses are
accumulated as a separate component of shareholders' equity. Foreign currency
transaction gains and losses are included in other income, net.
Cash and Cash Equivalents - The Company considers all highly liquid investments
with original maturities of three months or less to be cash equivalents.
Investments which do not meet the definition of cash equivalents are classified
as marketable securities.
Inventories - Inventories are stated at the lower of cost or market, with cost
determined under the first-in, first-out method.
Property, Plant and Equipment - Property, plant and equipment are carried at
cost less accumulated depreciation. Depreciation is computed based on the
estimated useful lives using the straight-line method. Gains or losses on the
disposition of property, plant and equipment are included in income.
Maintenance and repairs are expensed as incurred.
Intangible Assets - Intangible assets consist primarily of patents, trademarks,
product technology and acquired license agreements and are carried at cost less
accumulated amortization. Amortization of intangibles is computed based on the
straight-line method over periods ranging from eight to twelve years.
Excess Acquisition Costs Over Fair Value of Acquired Net Assets - Excess
acquisition costs over fair value of acquired net assets (goodwill) are
amortized using the straight-line method over periods ranging from eight to
fifteen years. The Company continually reviews goodwill to access
recoverability from future operations. Impairments would be recognized in
operating results if a permanent diminution in value occurred.
Short-Term Borrowings - Certain of the Company's foreign subsidiaries had
short-term borrowings of $3,358,000 and $3,518,000 as of May 31, 1996 and
1995, respectively.
Income Taxes - Deferred income taxes are determined using the liability method.
No provision has been made for U.S. and state income taxes or foreign
withholding taxes of the undistributed earnings ($57.6 million at May 31, 1996)
of foreign subsidiaries because it is expected that such earnings will be
reinvested overseas indefinitely. Upon distribution of those earnings in the
form of dividends or otherwise, the Company would be subject to U.S. income
taxes (subject to an adjustment for foreign tax credits), state income taxes
and withholding taxes payable to the various foreign countries. Determination
of the amount of any unrecognized deferred income tax liability on these
undistributed earnings is not practical.
Use of Estimates - The financial statements are prepared in conformity with
generally accepted accounting principals and, accordingly, include amounts that
are based on management's best estimates and judgments.
Revenue Recognition, Concentrations of Credit Risk and Allowance for Doubtful
Receivables - Revenue is recognized when the product is shipped to the health
care provider. The Company provides credit, in the normal course of business,
to hospitals, private and governmental institutions and health-care agencies,
insurance providers and physicians. The Company maintains an
28
<PAGE> 29
BIOMET, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
for the years ended May 31, 1996, 1995 and 1994
NOTE B: ACCOUNTING POLICIES, CONCLUDED.
allowance for doubtful receivables and charges actual losses to the allowance
when incurred. The Company invests the majority of its excess cash in
certificates of deposit with financial institutions, money market securities,
short-term municipal securities and common stocks. The Company does not
believe it is exposed to any significant credit risk on its cash and cash
equivalents and marketable securities. At May 31, 1996 and 1995, cash and cash
equivalents and marketable securities included $58 million and $48 million,
respectively, of cash deposits and certificates of deposit with financial
institutions in Puerto Rico. Also, at May 31, 1996 and 1995, marketable
securities included $19 million and $24 million, respectively, of municipal
bonds issued by state and local subdivisions in Puerto Rico.
NOTE C: ACQUISITION.
On August 12, 1994, the Company, through a wholly-owned subsidiary,
purchased 685,222 common shares of Kirschner Medical Corporation ("Kirschner")
and a promissory note in the amount of 329.5 million Spanish pesetas
(approximately $2.5 million) issued to Kirschner's Spanish subsidiary from
Figgie International Inc. for $8,700,000. On November 4, 1994, the Company,
through the same wholly-owned subsidiary, acquired all of the remaining issued
and outstanding common shares of Kirschner, in exchange for 1,384,309 of the
Company's common shares and $16,245,981 cash. Kirschner manufactures and
markets orthopedic devices and musculoskeletal orthopedic support products.
The $13.3 million excess of acquisition cost over the fair value of acquired
net assets is being amortized on a straight-line basis over 15 years. The
acquisition has been accounted for using the purchase method of accounting,
with the operating results of Kirschner included in the Company's consolidated
financial statements from the date of acquisition.
The following unaudited pro forma financial information reflects the
acquisition as if it had occurred at the beginning of each year. The unaudited
pro forma financial information is presented for informational purposes only
and is not necessarily indicative of the operating results that would have
occurred had the acquisition been consummated as of the above dates, nor are
they necessarily indicative of future operating results.
<TABLE>
<CAPTION>
1995 1994
- -------------------------------------------------------------------------
(in thousands, except earnings per share)
<S> <C> <C>
Net sales $481,015 $440,023
Net income 79,204 69,847
Earnings per share .68 .60
</TABLE>
NOTE D: MARKETABLE SECURITIES.
As of May 31, 1996, the Company's marketable securities were classified as
follows:
<TABLE>
<CAPTION>
Amortized Unrealized
Cost Gains Losses Fair Value
- ----------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
Available-for-sale:
Debt securities $17,030 $37 $(550) $16,517
Mortgage-backed obligations 2,075 - (28) 2,047
Equity securities 3,097 1,175 (50) 4,222
- ----------------------------------------------------------------------------------------------------
Total available-for-sale 22,202 1,212 (628) 22,786
- ----------------------------------------------------------------------------------------------------
Held-to-maturity:
Debt securities 4,785 37 (24) 4,798
Mortgage-backed obligations 16,322 18 (1,062) 15,278
- ----------------------------------------------------------------------------------------------------
Total held-to-maturity 21,107 55 (1,086) 20,076
- ----------------------------------------------------------------------------------------------------
Certificates of deposit 18,100 - - 18,100
- ----------------------------------------------------------------------------------------------------
Total $61,409 $1,267 $(1,714) $60,962
====================================================================================================
</TABLE>
29
<PAGE> 30
BIOMET, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
for the years ended May 31, 1996, 1995 and 1994
- --------------------------------------------------------------------------------
NOTE D: MARKETABLE SECURITIES, CONCLUDED.
As of May 31, 1995, the Company's marketable securities were classified as
follows:
<TABLE>
<CAPTION>
Amortized Unrealized
Cost Gains Losses Fair Value
- ------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
Available-for-sale:
Debt securities $22,856 $ 72 $ (34) $22,894
Mortgage-backed obligations 4,207 - (42) 4,165
Equity securities 4,770 2,917 (113) 7,574
- ------------------------------------------------------------------------------------------------------
Total available-for-sale 31,833 2,989 (189) 34,633
- ------------------------------------------------------------------------------------------------------
Held-to-maturity:
Debt securities 6,552 71 (2) 6,621
Mortgage-backed obligations 16,099 69 (305) 15,863
- ------------------------------------------------------------------------------------------------------
Total held-to-maturity 22,651 140 (307) 22,484
- ------------------------------------------------------------------------------------------------------
Certificates of deposit 33,100 - - 33,100
- ------------------------------------------------------------------------------------------------------
Total $87,584 $3,129 $(496) $90,217
======================================================================================================
</TABLE>
Effective June 1, 1994, the Company adopted Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" ("SFAS No. 115"). SFAS No. 115 requires certain securities to be
categorized as either trading, available-for-sale or held-to-maturity. Trading
securities are carried at fair value with unrealized gains and losses included
in income. Available-for-sale securities are carried at fair value with
unrealized gains and losses recorded as a separate component of shareholders'
equity. Held-to-maturity securities are carried at amortized cost. The impact
of adopting SFAS No. 115 was to increase shareholders' equity by $2,800,000
at May 31, 1995. The Company has no trading securities. Proceeds from sales
of available-for-sale securities were $15,381,000 for the year ended May 31,
1996 and such proceeds were immaterial for the year ended May 31, 1995. There
were no sales of held-to-maturity securities during the years ended May 31,
1996 and 1995. The cost of marketable securities sold is determined by the
specific identification method. For the year ended May 31, 1996, gross realized
gains and (losses) on sales of available-for-sale securities were $3,090,000
and ($72,000), respectively. Gross realized gains and losses on such sales were
immaterial for the year ended May 31, 1995. Dividend and interest income are
accrued as earned. The Company's marketable securities at May 31, 1996 include
$18,100,000 of certificates of deposit, $6,739,000 of debt securities and
$5,995,000 of mortgage-backed obligations all maturing within one year. The
Company's marketable securities include $14,563,000 of debt securities,
$4,222,000 of equity securities and $12,374,000 of mortgage-backed securities
all maturing past one year.
Investment income (included in other income, net) consists of the following:
<TABLE>
<CAPTION>
1996 1995 1994
- ----------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Interest income $ 6,454 $5,656 $3,977
Dividend income 1,217 870 442
Net realized gains 3,018 68 2,213
- ---------------------------------------------------------------------------------------------------
Total $10,689 $6,594 $6,632
===================================================================================================
NOTE E: INVENTORIES.
Inventories at May 31, 1996 and 1995 consisted of the following:
1996 1995
- ---------------------------------------------------------------------------------------------------
(in thousands)
Raw material $19,643 $19,146
Work-in-process 15,677 15,163
Finished goods 71,974 62,884
Consigned distributor 44,171 43,692
- --------------------------------------------------------------------------------------------------
Total $151,465 $140,885
==================================================================================================
</TABLE>
30
<PAGE> 31
Biomet, Inc. and Subsidiaries Notes to Consolidated Financial Statements
(Continued)
for the years ended May 31, 1996, 1995 and 1994
NOTE F: TEAM MEMBER BENEFIT PLANS.
The Company has an Employee Stock Bonus Plan for eligible Team Members of the
Company and certain subsidiaries. The amounts expensed under this plan for the
years ended May 31, 1996, 1995 and 1994 were $2,165,000, $1,573,000 and
$1,546,000, respectively.
The Company also has a defined contribution profit sharing plan which covers
substantially all of the Team Members within the continental U.S. and allows
participants to make contributions by salary reduction pursuant to Section
401(k) of the Internal Revenue Code. The Company may match up to 50% of the
Team Member's contribution up to a maximum of 5% of the Team Member's
compensation. The amounts expensed under this profit sharing plan for the
years ended May 31, 1996, 1995 and 1994 were $1,406,000, $1,148,000 and
$1,075,000, respectively.
Biomet Ltd., a subsidiary based in the United Kingdom, has a defined benefit
pension plan for all of its salaried Team Members. Pension expense and related
pension amounts are immaterial to the consolidated financial statements.
NOTE G: STOCK OPTION PLANS.
The Company has three stock option plans: the 1984 Employee Stock Option Plan,
as amended, the 1992 Employee and Non-Employee Director Stock Option Plan (the
"Employee Plans") and the 1992 Distributor Stock Option Plan (the "Distributor
Plan").
Under the Employee Plans, options may be granted to key employees, at the
discretion of the stock option committee, and generally become exercisable in
annual increments beginning one year after the date of grant. In the case of
options granted to an employee of the Company who is a 10% or more shareholder,
the option price is an amount per share of not less than 110% of the fair
market value per share on the date of granting the option, as determined by the
stock option committee. No options have been granted to employees who are 10%
or more shareholders. The option price for options granted to all other
employees is an amount per share of not less than the fair market value per
share on the date of granting the option. The term of each option granted
expires within the period prescribed by the stock option committee, but shall
not be more than five years from the date the option is granted if the optionee
is a 10% or more shareholder, and not more than ten years for all other
optionees.
An aggregate of 9,680,000 common shares had been reserved for granting under
the 1984 Employee Stock Option Plan. This plan expired on September 15, 1994
which has no effect on unexpired shares. An aggregate of 3,000,000 common
shares have been reserved for granting under the 1992 Employee and Non-Employee
Director Stock Option Plan. The 1992 Plan does not affect options granted
under the 1984 Plan.
The Distributor Plan provides for granting of options to purchase common shares
of the Company to persons who serve as distributors of the Company's products.
An aggregate of 4,000,000 common shares have been reserved for granting under
this plan. Under the Distributor Plan, options may be granted from time to
time at the discretion of the stock option committee, and become exercisable in
full at any time or on a cumulative basis from time to time, in accordance with
the stock option agreement prescribed by the stock option committee. The
option price is determined by the stock option committee, but shall not be less
than the fair market value of such shares on the date of grant, as determined
by the stock option committee. All rights under the option terminate upon the
termination of an optionee's distributorship with the Company unless such
termination results from retirement, disability or death. No option may have a
term longer than ten years from the date the option is granted.
The transactions for common shares under options for the years ended May 31,
1996 and 1995 were as follows:
<TABLE>
<CAPTION>
Number Per Share
of Shares Option Price
- ----------------------------------------------------------------------
<S> <C> <C>
Outstanding, June 1, 1994 3,061,353 $ 1.53 - $15.00
Granted 931,793 9.00 - 14.88
Exercised (641,905) 1.53 - 11.00
Terminated (124,597) 5.00 - 12.88
- ----------------------------------------------------------------------
Outstanding, May 31, 1995 3,226,644 1.53 - 15.00
Granted 473,742 13.25 - 17.50
Exercised (676,398) 2.44 - 14.00
Terminated (173,957) 2.86 - 15.00
- ----------------------------------------------------------------------
Outstanding, May 31, 1996 2,850,031 $1.53 - $17.50
======================================================================
</TABLE>
31
<PAGE> 32
Biomet, Inc. and Subsidiaries Notes to Consolidated Financial Statements
(Continued)
for the years ended May 31, 1996, 1995 and 1994
NOTE G: STOCK OPTION PLANS, CONCLUDED.
Options outstanding at May 31, 1996 which are currently exercisable represent
826,000 shares. As of May 31, 1996, 5,000,788 shares were reserved for future
options, compared with 5,409,361 shares at May 31, 1995. No adjustment was
made to the weighted average number of shares outstanding to reflect the
exercise of outstanding stock options since the effect would be immaterial.
In October 1995, Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS No. 123"), was issued, and is
effective for fiscal years beginning after December 15, 1995. This statement
requires the fair value of stock options and other stock-based compensation
issued to employees to either be included as compensation expense in the income
statement, or the pro forma effect on net income and earnings per share of such
compensation expense to be disclosed in the notes to the financial statements.
Further, SFAS No. 123 now requires that any equity instrument issued to
nonemployees, such as the option to purchase common shares issued by the
Company pursuant to the Distributor Plan, must now be expensed based on the
fair value of the consideration received or the fair value of the equity
instruments issued. Beginning June 1, 1996, the Company will recognize expense
as options are granted under the Distributor Plan; however, such expense will
not be material to the consolidated financial statements. With respect to
options granted under the Employee Plan, the Company expects to adopt SFAS No.
123 on a disclosure basis only and, accordingly, implementation of SFAS No. 123
for options granted under the Employee Plan will not impact the Company's
consolidated balance sheet or income statement.
NOTE H: SHAREHOLDERS' EQUITY.
During the year ended May 31, 1995, the Company purchased 1,120,000 common
shares at an aggregate cost of $15,219,000. At May 31, 1995, the Company had
recorded a liability of $10,406,000 for purchased common shares for which the
settlement date was subsequent to May 31, 1995. During the year ended May 31,
1994, the Company purchased 1,260,000 common shares at an aggregate cost of
$12,276,000.
On December 2, 1989, the Board of Directors of the Company approved the
adoption of a Shareholder Rights Plan (the "Plan") under which the Company
declared a dividend of one common share purchase right for each common share
outstanding to shareholders of record on December 26, 1989 (the "Right"). Each
Right entitles the shareholder to purchase from the Company one common share at
a price of $37.50 per common share, subject to adjustment. The Rights will not
be exercisable or separable from the common shares until ten business days
after a person or group acquires 15% or more or tenders for 30% or more of the
Company's outstanding common shares. The Plan also provides that if any person
or group becomes an "Acquiring Person", each Right, other than Rights
beneficially owned by the Acquiring Person (which will thereafter be void),
will entitle its holder to receive upon exercise that number of common shares
having a market value of two times the exercise price of the Right. In the
event the Company is acquired in a merger or other business combination
transaction, each Right will entitle its holder to receive upon exercise of the
Right, at the Right's then current exercise price, that number of the acquiring
company's common shares having a market value of two times the exercise price
of the Right. The Company is entitled to redeem the Rights at a price of one
cent per Right at any time prior to them becoming exercisable, and the Rights
expire on December 2, 1999. The Plan was designed to protect the interests of
the Company's shareholders against certain coercive tactics sometimes employed
in takeover attempts.
NOTE I: INCOME TAXES.
<TABLE>
<CAPTION>
The components of income before income taxes are as follows:
1996 1995 1994
- --------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
United States operations $138,742 $114,595 $96,014
Foreign operations 10,927 10,347 11,018
- --------------------------------------------------------------------
Total $149,669 $124,942 $107,032
====================================================================
The provision for income taxes is summarized as follows:
1996 1995 1994
- ---------------------------------------------------------------------
(in thousands)
Current:
Federal $39,480 $31,046 $25,937
State, including Puerto Rico 11,675 10,395 7,806
Foreign 5,825 4,701 4,601
- ---------------------------------------------------------------------
56,980 46,142 38,344
Deferred (1,417) (400) (1,130)
- ---------------------------------------------------------------------
Total $55,563 $45,742 $37,214
=====================================================================
Effective tax rate 37.1% 36.6% 34.8%
=====================================================================
</TABLE>
32
<PAGE> 33
BIOMET, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
for the years ended May 31, 1996, 1995 and 1994
- --------------------------------------------------------------------------------
NOTE I: INCOME TAXES, CONCLUDED.
A reconciliation of the statutory federal income tax rate to the Company's
effective tax rate follows:
<TABLE>
<CAPTION>
1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. statutory income tax rate 35.0% 35.0% 35.0%
Add (deduct):
State taxes, less effect of federal reduction 3.8 3.8 3.7
Foreign income taxes at rates different from the U.S. statutory rate 1.4 1.0 .3
Tax benefit relating to operations in Puerto Rico (2.0) (2.7) (4.8)
Tax credits (.1) (.2) (.1)
Earnings of Foreign Sales Corporation (.5) (.4) (.5)
Other (.5) .1 1.2
- -----------------------------------------------------------------------------------------------------------------------
Effective tax rate 37.1% 36.6% 34.8%
=======================================================================================================================
</TABLE>
The components of the net deferred tax asset and liability at May 31, 1996 and
1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
- -----------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Current deferred tax asset:
Accounts and notes receivable $ 2,864 $ 2,511
Inventories 6,539 4,090
Accrued expenses 3,117 3,732
Investments in affiliates 840 1,470
- -----------------------------------------------------------------------
Current deferred tax asset $ 13,360 $11,803
- -----------------------------------------------------------------------
Long-term deferred tax asset (liability):
Depreciation $(2,449) $(2,640)
Other 940 400
- -----------------------------------------------------------------------
Long-term deferred tax liability $(1,509) $(2,240)
=======================================================================
</TABLE>
33
<PAGE> 34
BIOMET, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
for the years ended May 31, 1995, 1994 and 1993
NOTE J: INDUSTRY SEGMENT AND GEOGRAPHIC INFORMATION.
The Company operates in one industry segment which includes the
designing, manufacturing and marketing of reconstructive and trauma devices,
electrical bone growth and neuromuscular stimulators, orthopedic support
devices, operating room supplies, powered surgical instruments, general
surgical instruments, arthroscopy products and craniomaxillofacial implants and
instruments used primarily by orthopedic medical specialists in both surgical
and non-surgical therapy.
Net sales, operating income and identifiable assets by geographic area are
presented in the following table. The Company's major identifiable assets are
located in the United States (North America) and France, Germany, Italy, Spain
and the United Kingdom, (Europe).
<TABLE>
<CAPTION>
1996 1995 1994
- --------------------------------------------------------------------------
<S> <C> <C> <C>
(in thousands)
Net sales:
North America $439,638 $377,923 $316,936
Europe 95,521 74,349 56,359
Intercompany 14,023 16,572 13,827
Eliminations (14,023) (16,572) (13,827)
- --------------------------------------------------------------------------
$535,159 $452,272 $373,295
==========================================================================
Operating income:
North America $124,667 $106,954 $89,805
Europe 12,613 12,073 11,949
- --------------------------------------------------------------------------
$137,280 $119,027 $101,754
==========================================================================
Identifiable assets:
North America $502,229 $438,985 $355,206
Europe 125,126 117,525 70,131
Eliminations (28,886) (17,426) (7,260)
- --------------------------------------------------------------------------
$598,469 $539,084 $418,077
==========================================================================
</TABLE>
Intercompany transfers, primarily from North America to Europe, are made at
agreed-upon prices which include a profit element. Domestic export sales,
primarily to European countries, aggregated $42,931,000, $34,112,000, and
$28,720,000 for the years ended May 31, 1996, 1995 and 1994, respectively.
<TABLE>
<CAPTION>
Selected financial data of the Company's foreign subsidiaries is as follows:
1996 1995 1994
- --------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Net sales $98,907 $80,209 $61,197
==========================================================================
Net income $5,237 $6,137 $6,417
==========================================================================
Current assets $101,425 $87,135 $53,515
Property, plant and equipment 21,407 21,721 11,151
Intangible assets 6,396 11,060 2,734
- --------------------------------------------------------------------------
129,228 119,916 67,400
- --------------------------------------------------------------------------
Current liabilities 29,617 32,939 18,332
Intercompany loans 40,738 28,676 13,803
Long-term liabilities 380 1,679 1,345
- --------------------------------------------------------------------------
70,735 63,294 33,480
- --------------------------------------------------------------------------
Net assets $58,493 $56,622 $33,920
==========================================================================
</TABLE>
34
<PAGE> 35
BIOMET, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONCLUDED)
for the years ended May 31, 1996, 1995 and 1994
NOTE K: COMMITMENTS AND CONTINGENCIES.
Common Share Repurchase Program - In June 1996, the Board of Directors
authorized the Company to repurchase up to 4,000,000 Common Shares of the
Company in open market purchases or privately negotiated transactions through
the close of business on June 23, 1997.
Self Insurance - Medical Insurance Plan - The Company maintains a
self-insurance program for covered medical expenses for all Team Members within
the continental U.S. The Company is liable for claims up to $125,000 per Team
Member annually. Self-insurance costs are accrued based upon the aggregate of
the liability for reported claims and a management determined estimated
liability for claims incurred but not reported.
Liability Insurance - Since 1989, the Company has self-insured against product
liability claims, and at May 31, 1996 the Company's self-insurance limits were
$3,000,000 per occurrence and $5,000,000 aggregate per year. Liabilities in
excess of these amounts are the responsibility of the Company's insurance
carrier. Self-insurance costs are accrued based on reserves set in consultation
with the insurance carrier for reported claims and a management-determined
estimated liability for claims incurred but not reported. Based on historical
experience, management does not anticipate that incurred but unreported claims
would have a material impact on the Company's consolidated financial position.
Litigation - Raymond G. Tronzo - On January 25, 1996, the Company announced the
entry of a jury verdict against it in the United States District Court for the
Southern District of Florida in an action brought by Raymond G. Tronzo. That
verdict, in the total amount of approximately $55 million, included damages
with respect to claims of patent infringement, breach of confidential
relationship, fraud and unjust enrichment. The jury had been instructed by the
Court to enter separate damage awards with respect to each claim and to
disregard the possible overlap of those damage awards. As of July 3, 1996, the
judge had not entered judgment on the jury verdict. Management anticipates,
based upon the advice of counsel, that the judgment, when entered, will be for
substantially less than the aggregate amount of the jury verdict. The Company
believes that the verdict is not supported by the facts and the applicable law,
based on evidence that the patent in question is invalid; and, further, if the
patent is held to be valid, the Company's product does not infringe the patent.
The Company also believes that it has meritorious arguments in support of a
complete elimination of the jury verdict, including claims that the patent in
question was improperly obtained due to alleged "inequitable conduct" on the
part of the plaintiff. Unless the final judgment, when entered, reflects the
Company's view of the law applicable to the plaintiff's claims, the Company
intends to vigorously pursue all remedies available to it for reduction or
reversal of the judgment. The Court has yet to rule on significant, complex and
interrelated issues that could alter or eliminate the jury verdict, and it is
not possible to estimate the amount of loss, if any, that may ultimately be
incurred. Based on the information and advice currently available, management
believes that the Company has adequate accruals to cover legal costs and
estimated loss exposure, if any, and the Company's cash and cash equivalents
are more than adequate to address the payment of any loss that may ultimately
be determined with respect to this matter.
Litigation - Pedro A. Ramos - On September 2, 1995, the U.S. Court of Appeals
for the Federal Circuit reversed in part and affirmed in part the judgment
previously entered against the Company. The Court of Appeals held that,
although the Company's product did infringe the Ramos patent under the doctrine
of equivalents, that infringement was neither literal nor willful on the part
of the Company and reduced the original $6.0 million judgment to approximately
$2.0 million. The Company's petition for rehearing to the Court of Appeals was
denied and the Company recorded a $2.0 million charge against pre-tax earnings
during the year ended May 31, 1996. The Company has discontinued sales of the
product in question.
Litigation - Other - There are various other claims, lawsuits, disputes with
third parties, investigations and pending actions involving various allegations
against the Company incident to the operation of its business, principally
product liability and intellectual property cases. Each of these matters is
subject to various uncertainties, and it is possible that some of these matters
may be resolved unfavorably to the Company. The Company establishes accruals
for losses that are deemed to be probable and subject to reasonable estimate.
Based on the advice of counsel to the Company in these matters, management
believes that the ultimate outcome of these matters and any liabilities in
excess of amounts provided will not have a material adverse impact on the
Company's consolidated financial position or on its future business operations.
35
<PAGE> 36
BIOMET, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
for the years ended May 31, 1996, 1995 and 1994
(in thousands)
________
<TABLE>
<CAPTION>
Col. A Col. B Col. C Col. D Col. E
Additions
(1) (2)
--------------------------
Charged to
Balance at Charged to other Balance at
beginning costs and accounts - Deductions - end
Description of period expenses describe describe of period
----------- --------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Allowance for
doubtful receivables:
For the year ended
May 31, 1996 $6,039 $6,208 $197(B) $5,080(A) $6,889
475(C)
====== ====== ======= ======== ======
For the year ended
May 31, 1995 $3,619 $3,614 $156(B) $2,853 (A) $6,039
(30)(C)
(1,473)(D)
====== ====== ======= ======== ======
For the year ended
May 31, 1994 $3,175 $2,415 $129(B) $2,137 (A) $3,619
(37)(C)
====== ====== ======= ======== ======
</TABLE>
Notes:
(A) Uncollectible accounts written off
(B) Collection of previously written off accounts
(C) Effect of foreign currency translation adjustment
(D) Allowance of Kirschner Medical Corporation at date of acquisition.
36
<PAGE> 37
BIOMET, INC.
FORM 10-K
MAY 31, 1996
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Number Assigned
in Regulation
S-K, Item 601 Title of Exhibit
- --------------- ----------------
<S> <C>
(3) 3.1 Amended Articles of Incorporation filed July 23, 1982. (Incorporated
by reference to Exhibit 3(a) to Biomet, Inc. Form S-18
Registration Statement, File No. 2-78589C).
3.2 Articles of Amendment to Amended Articles of Incorporation filed
July 11, 1983. (Incorporated by reference to Exhibit 3.2 to
Biomet, Inc. Form 10-K Report for year ended May 31, 1983, File No.
0-12515).
3.3 Articles of Amendment to Amended Articles of Incorporation filed
August 22, 1987. (Incorporated by reference to Exhibit 3.3 to
Biomet, Inc. Form 10-K Report for year ended May 31, 1987, File No.
0-12515).
3.4 Articles of Amendment to the Amended Articles of Incorporation
filed September 18, 1989. (Incorporated by reference to Exhibit 3.4
to Biomet, Inc. Form 10-K Report for year ended May 31, 1990, File
No. 0-12515).
3.5 Amended and Restated Bylaws. (Incorporated by reference to Exhibit
4.2 to Biomet, Inc. Form S-3 Registration Statement, File No.
33-33376).
(4) 4.1 Specimen certificate for Common Shares. (Incorporated by reference
to Exhibit 4.1 to Biomet, Inc. Form 10-K Report for year ended May
31, 1985, File No. 0-12515).
4.2 Rights Agreement between Biomet, Inc. and Lake City Bank as Rights
Agent, dated as of December 2, 1989. (Incorporated by
reference to Exhibit 4 to Biomet, Inc. Form 8-K current Report dated
December 22, 1989, File No. 0-12515).
(9) No exhibit.
(10) 10.1 Employee Stock Option Plan, as last amended December 14, 1991.
(Incorporated by reference to Exhibit 10.1 to Biomet, Inc. Form 10-K
Report for year ended May 31, 1992, File No. 0-12515).
10.2 Form of Employee Stock Option Agreement. (Incorporated by
reference to Exhibit 10.2 to Biomet, Inc. Form 10-K Report for year
ended May 31, 1991, File No. 0-12515).
</TABLE>
<PAGE> 38
<TABLE>
<S> <C>
10.3 Employee and Non-Employee Director Stock Option Plan, dated
September 18, 1992. (Incorporated by reference to Exhibit
19.1 to Biomet, Inc. Form 10-K Report for year ended May 31, 1993,
File No. 0-12515).
10.4 Form of Stock Option Agreement under the Employee and Non-Employee
Stock Option Plan dated September 18, 1992. (Incorporated by
reference to Exhibit 4.03 to Biomet, Inc. Form S-8 Registration
Statement, File No. 33-65700).
10.5 401(k) Profit Sharing Plan filed January 19, 1996. (Incorporated by
reference to Form S-8 Registration Statement, File No. 333-00331).
(11) 11.1 Computation of Earnings Per Common Share.
(12) No exhibit.
(13) No exhibit.
(16) No exhibit.
(18) No exhibit.
(21) 21.1 Subsidiaries of the Registrant.
(22) No exhibit.
(23) 23.1 Consent of Coopers & Lybrand L.L.P.
(24) No exhibit.
(27) 27.1 Financial Data Schedule
(28) No exhibit.
(99) No exhibit.
</TABLE>
<PAGE> 1
EXHIBIT 11.1
COMPUTATION OF EARNINGS PER COMMON SHARE
BIOMET, INC. AND SUBSIDIARIES
for the years ended May 31, 1996, 1995, and 1994
(in thousands, except earnings per share)
---------------------------
Computation of EPS based on simple capital
structure without regard to common stock
equivalents:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net income applicable to common shares $ 94,106 $ 79,200 $ 69,818
Weighted average number of shares
outstanding during the year 115,461 115,459 115,215
Primary earnings per common share $.82 $.69 $.61
</TABLE>
Computation of EPS using stock options as
common stock equivalents:
A computation of EPS using stock options is not presented since their inclusion
would not result in a different earnings per share amount for the years ended
May 31, 1996, 1995 and 1994.
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
Biomet, Inc. (the Registrant; Indiana corporation)
Domestic subsidiaries:
Arthrotek, Inc. (Indiana corporation)
Biomet Acquisition Corp. (Delaware corporation)
Biomet International, Inc. (Barbados corporation)
Biomet Investment Corp. (Delaware corporation)
EBI Holding, Inc. (Delaware corporation)
EBI Medical Systems, Inc. (Delaware corporation)
Electro-Biology, Inc. (Delaware corporation)
Kirschner Medical Corporation (Delaware corporation)
OEC Ltd., Inc. (Delaware corporation)
Poly-Medics, Inc. (Indiana corporation)
Vascu-Med, Inc. (Indiana corporation)
Walter Lorenz Surgical, Inc. (Florida corporation)
Foreign subsidiaries:
Biomet Deutschland GmbH (German corporation)
Biomet Ltd. (U.K. corporation)
Biomet Ltda. (Brazilian corporation)
Biomet Norge (Norwegian corporation)
Biomet Polska (Polish corporation)
Biomet S.A. (French corporation)
Biomet SpA (Italian corporation)
EBI Medical Systems Ltd. (U.K. corporation)
Industrias Quirgicas de Levante s.a. (IQL) (Spanish corporation)
ORTA Holdings, A.G. (Swiss Corporation)
Polymers Reconstructive A/S (Danish corporation)
Each subsidiary is wholly-owned by its immediate parent, except for the
following:
Polymers Reconstructive A/S of which Biomet, Inc. owns 51% of the outstanding
shares and Biomet Norge of which Biomet Ltd. owns 40% of the outstanding
shares.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statements of
Biomet, Inc. on Form S-8 (File Nos. 33-7361, 33-26826, 33-37561, 33-50268,
33-65700, 33-75618 and 333-00331) and on Form S-3 (File Nos. 33-33376, 33-50420
and 33-27008) and in the related Prospectus of our report dated July 3, 1996,
on our audits of the consolidated financial statements and financial statement
schedule of Biomet, Inc. and subsidiaries as of May 31, 1996 and 1995, and for
each of the three years in the period ended May 31, 1996, which report is
included in this Annual Report on Form 10-K.
COOPERS & LYBRAND L.L.P.
South Bend, Indiana
August 8, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAY-31-1996
<PERIOD-END> MAY-31-1996
<CASH> 106068000
<SECURITIES> 30834000
<RECEIVABLES> 160944000
<ALLOWANCES> 6889000
<INVENTORY> 151465000
<CURRENT-ASSETS> 462916000
<PP&E> 132697000
<DEPRECIATION> 52533000
<TOTAL-ASSETS> 598469000
<CURRENT-LIABILITIES> 62099000
<BONDS> 0
<COMMON> 68376000
0
0
<OTHER-SE> 465694000
<TOTAL-LIABILITY-AND-EQUITY> 598469000
<SALES> 535159000
<TOTAL-REVENUES> 535159000
<CGS> 174364000
<TOTAL-COSTS> 397879000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1116000
<INCOME-PRETAX> 149669000
<INCOME-TAX> 55563000
<INCOME-CONTINUING> 94106000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 94106000
<EPS-PRIMARY> .82
<EPS-DILUTED> .82
</TABLE>
