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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, 1997.
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.
[BIOMET LOGO]
(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 11, 1997, as reported by the Nasdaq Stock Market, was approximately
$2,103,000,000. As of July 11, 1997, there were 111,404,239 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 1997 Annual
Meeting of Shareholders of the Registrant Part III
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This Report contains certain statements that are "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934, as amended. Those statements include,
but are not limited to, statements related to the timing of planned new product
introductions, the timing of the implementation of regulatory requirements and
related compliance plans, trends in new product regulatory review procedures,
the anticipated effects of regulatory matters on product pricing and service
offerings of the Company, trends in technology, the future importance of patent
protection, the future availability of raw materials and the anticipated
adequacy of the Company's capital resources to meet its litigation exposures
and the other needs of its business. Readers of this Report are cautioned that
reliance on any forward-looking statement involves risks and uncertainties.
Although the Company believes that the assumptions on which the forward-looking
statements contained herein are based are reasonable, any of those assumptions
could prove to be inaccurate given the inherent uncertainties as to the
occurrence or nonoccurrence of future events. There can be no assurance that
the forward-looking statements contained in this Report will prove to be
accurate. The inclusion of a forward-looking statement herein should not be
regarded as a representation by the Company that the Company's objectives will
be achieved.
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 fixation devices, electrical bone growth
stimulators, orthopedic support devices, operating room supplies, general
surgical instruments, arthroscopy products, spinal implants and
craniomaxillofacial products and instruments. Biomet has corporate headquarters
in Warsaw, Indiana, and manufacturing and/or office facilities in more than
twenty 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 more than 100 countries.
Unless the context requires otherwise, 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 certain of its Other
Products (fixation devices, orthopedic support devices and operating room
supplies) are designed, manufactured and/or marketed under the Biomet(R),
Kirschner(R), and IQL(TM) trade names. Also included in Other Products are
craniomaxillofacial products and instruments and general surgical instruments
which are marketed under the Walter Lorenz(R) 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, 1997.
<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
(DOLLAR AMOUNTS IN THOUSANDS)
1997 1996 1995
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 $352,122 61% $326,834 61% $272,643 60%
EBI Products 114,321 20% 108,627 20% 98,490 22%
Other Products 113,904 19% 99,698 19% 81,139 18%
-------- ------ -------- ------ -------- ------
Total $580,347 100% $535,159 100% $452,272 100%
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</TABLE>
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RECONSTRUCTIVE PRODUCTS
Reconstructive Products are used to replace joints which have deteriorated as a
result of disease (principally 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 and elbow). 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 cast, 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.
Since February 1994, Biomet has received clearance under Section 510(k) of the
Federal Food, Drug and Cosmetic Act for many of its porous-coated hip
components for cementless use. 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.
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's needs for both primary and revision total hip arthroplasty. The
primary femoral components feature a specific proximal 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 or claw provides additional
rotational stability and implant fixation. In May 1995, the FDA cleared the
Mallory-Head Modular Calcar System for cemented use. This system provides the
surgeon with intraoperative flexibility to independently size the proximal and
distal femur with the appropriate implant size and shape, even in cases of
severe bone deficiency. This is accomplished by using interchangeable modular
subcomponents.
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 Maxim(R) Complete 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.
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 cobalt chromium alloy 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. The Performance(R) Modular Total Knee System
provides a full range of implant components designed to meet the wide variety
of surgical indications seen in today's total knee patient population.
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During fiscal year 1997, the Company received 510(k) clearance for the Bi-Polar
Shoulder System. The Bi-Polar humeral head is marketed for use in primary cases
of noninflammatory degenerative joint disease, rheumatoid arthritis, correction
of severe functional deformity and fracture. The Bi-Polar Shoulder System was
introduced to the United States market in February 1997. (See "Government
Regulation" section for a general discussion of the regulatory clearance and
approval process.)
The Integrated(TM) Shoulder System offers surgeons a wide variety of
reconstructive products. As part of the Integrated Shoulder System, 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. Since its
introduction in the late 1980s, the Bio-Modular Total Shoulder System has
proven to be clinically effective and versatile. This system was designed to
simplify the shoulder replacement procedure and surpass the durability and
clinical outcome requirements of previous designs.
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.
In July 1993, the Company received 510(k) clearance from the United States Food
and Drug Administration ("FDA") 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.
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.
Reconstructive devices contributing to the Company's sales growth include the
Maxim Total Knee System, the Bio-Modular(R) Shoulder System, the Mallory-Head
Total Hip System, ArCom polyethylene products and the Alliance family of total
hip implants.
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.
EBI's Model 1200 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 is a
light-weight, smaller and easier to use unit, which was designed to encourage
patient compliance and enhance clinical success. EBI intends to introduce a
newly designed compact version of the Bone Healing System Model 2100 during
fiscal year 1998.
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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) Implantable Spinal Fusion Stimulators are used in
conjunction with bone grafting to increase the probability of fusion success.
EBI's SpF-2, a two lead implantable spinal fusion stimulator, 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. EBI's SpF-XL, is designed to address multilevel fusions of 3 to 5
levels. The XL has longer leads and delivers 40 mega amps of output. In fiscal
year 1996, the XL line was expanded to include the SpF-XLII which provides the
same benefits as the XL, in a two lead configuration. 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.
During fiscal year 1996, EBI launched its own external fixation system, the EBI
X FIX(TM) DynaFix(R) System. Market acceptance of the EBI X FIX DynaFix System
has been extremely positive, and it is currently the leading external fixation
system in the United States. During fiscal year 1998, EBI plans to introduce
product extensions of the DynaFix System.
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. EBIce is receiving strong market
acceptance in the estimated $25 million domestic cold therapy products market.
At the end of fiscal year 1997, EBI introduced for limited introduction in the
United States, a new spinal hardware system called SpineLink,(TM) a universal
spine system that addresses many of the inherent drawbacks of traditional rod
and plate systems. With the SpineLink system, each spine segment is addressed
individually for intrasegmental control. Through the use of a modular link and
polydirectional screw, this unique system provides an intrasegmental solution
to spine fixation, enabling the surgeon to tailor the segmental construction to
the patient's anatomy.
EBI plans to introduce the SynthoCast(R) HP high performance casting tape
during fiscal year 1998. This casting material is lighter, stronger and more
comfortable than conventional plaster products. The SynthoCast tape offers
pre-cut splints on a roll which saves time, controls waste and improves the
convenience for the patient and physician.
OTHER PRODUCTS
The Company also manufactures and distributes several other products including
fixation devices, orthopedic support devices, operating room supplies,
arthroscopy products and craniomaxillofacial products. AOA, a division of EBI,
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 and the LactoSorb(R) Resorbable
Craniomaxillofacial Fixation System.
The Indiana Tome(TM) Carpal Tunnel Release System is an innovation in carpal
tunnel release. This patented system combines the best aspects of both the
minimally invasive endoscopic approach and the traditional open procedure.
Clinical investigation began on this system in November 1992 with full market
release during fiscal year 1997.
FIXATION DEVICES. The Company's fixation devices include internal bone
fixation devices such as 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 internal
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(R) 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 includes traction framing equipment,
back supports, wrist and forearm splints, cervical collars, shoulder
immobilizers, slings, abdominal binders, 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 in these products 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, glove liners and
drapes. The Redi-Vacette(R) Closed Wound Suction System provides post-operative
wound suction drainage following 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 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. Lorenz Surgical manufactures and
markets resorbable plate and screw systems for craniomaxillofacial surgery in
the United States, the European community, the Pacific Rim, Canada, South
America and South Africa.
The introduction of the LactoSorb System, the first resorbable
craniomaxillofacial fixation system available on the market, has increased
access into certain niche markets previously dominated by the competition. The
LactoSorb Craniomaxillofacial Fixation System is a copolymer of poly-l-lactic
acid and polyglycolic acid. The LactoSorb System is comparable in strength to
titanium plating systems and is completely resorbed within nine to fifteen
months after implantation. The initial market response for the LactoSorb System
has been positive, especially in pediatric and craniofacial reconstruction
cases.
Soft-Ice(R) is a registered trademark of Polar Products, Inc. Active Ankle(R)
is a registered trademark of Active Ankle, Inc.
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PRODUCT DEVELOPMENT
For the years ended May 31, 1997, 1996 and 1995, the Company expended
approximately $23,201,000, $24,054,000 and $21,770,000, respectively, on
research and development. It is expected that research and development expenses
will increase. The Company's principal research and development efforts relate
to its reconstructive devices, electrical stimulation products, spinal fixation
products, fixation products, arthroscopy products and resorbable technology.
The Company's research and development efforts contributed to the introduction
in fiscal year 1997 of the following products: Mallory Head Radial(TM)
Acetabular Cup, Bi-Polar Shoulder, AGC HPS Knee, Tri-Spiked Acetabular Cup,
and the introduction of the TRAC(TM) Knee System in Europe.
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 funding of 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 it sponsors.
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 each of the parties retains the right to pursue the technologies
developed during their joint efforts. 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, until March 15, 1999.
GOVERNMENT REGULATION
The development, testing, marketing and manufacture of medical devices - such
as arthroscopy, reconstructive and electrical stimulation products 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.
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 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
6
<PAGE> 8
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. Management does not believe the Act has had a material adverse effect
on the Company or its 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. Thirty countries recognize ISO
9000 for medical products. ISO 9000 certified 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, IN, Parsippany, NJ, Fairlawn, NJ, Jacksonville, FL, and Guaynabo,
Puerto Rico, U.S.A.; Bridgend, South Wales and Swindon, England, United
Kingdom; Berlin, Germany; 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
certification audits in fiscal year 1998.
SALES AND MARKETING
Biomet products are distributed in the United States through approximately 350
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.
EBI's products and AOA'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 over 200 people which operates in assigned territories
throughout the United States. Internationally, EBI and AOA products are
distributed through a growing distribution network in Central and South
America, Canada, Asia and Europe.
Lorenz Surgical products are distributed in the United States through
approximately 75 independent commissioned sales representatives and sales
associates engaged principally in the business of supplying craniomaxillofacial
products and surgical instruments to hospitals and surgeons in their geographic
areas. Additionally, Lorenz Surgical supplies a full-line of surgical 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, 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, other physicians and
healthcare providers 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.
The Company's products are marketed internationally primarily through direct
factory sales representatives in the United Kingdom, Italy, France, Holland,
Spain, Poland, Germany, Belgium, New Zealand, and Australia and through both
independent and direct factory sales representatives and specialty medical
product dealers in other international markets. The Company's products are
distributed in approximately 100 countries worldwide.
For the fiscal years ended May 31, 1997, 1996 and 1995, the Company's foreign
sales were approximately $154,825,000, $138,452,000, and $108,461,000,
respectively, or 27%, 26%, and 24% 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, France, Holland, Spain, Poland, Germany, Belgium, New Zealand and
Australia. As of May 31, 1997, inventory of approximately $49,027,000 was
consigned to these distributors, salespersons and hospitals.
7
<PAGE> 9
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 future impact of these amendments
can not be estimated at the present time.
During fiscal year 1997, Biomet created the National Orthopaedic Alliance
(NOA). NOA's mission is to provide management services and managed care related
products, programs and services to orthopaedic surgeons for the purpose of
assisting them in maintaining the value, control and independence of their
medical practices. NOA is the result of merging the programs, services and
staff of the Health Care Initiatives (HCI) and Biomet Professional Services
departments. Under the direction of NOA, HCI will continue to provide an array
of "value added" programs and services to assist Biomet's customers in
addressing today's highly competitive health care environment. NOA plans to
further enhance these programs and create new programs to increase the
resources available to the Company's distributors and customers
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, Inc.; 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. In recent years the Company has experienced pricing
pressure for its products, however, the Company believes that the pricing
environment is beginning to stabilize and we foresee an environment that will
once again focus on quality of care. 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, NOA's programs are
intended to enhance the Company's offerings of products and services.
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,
Inc. 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., see "Item 3. - Legal Proceedings."
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; Smith
and Nephew Endoscopy, a division of Smith & Nephew Ltd.; Arthrex, Inc.;
Olympus; Richard Wolf and Karl Storz.
The Company's fixation product lines compete with those of ACE Orthopedics, a
division of DePuy, Inc.; 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.
8
<PAGE> 10
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 perceived product liability exposures 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 foreseeable 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, 1997, the Company's domestic operations (including Puerto Rico)
employed approximately 1,800 persons, of whom approximately 1050 were engaged
in production and approximately 750 in sales, marketing, administrative and
clerical efforts. The Company's international subsidiaries employed
approximately 750 persons, of whom approximately 420 were engaged in production
and approximately 330 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 manufacturing locations
in South Wales, England, Spain, and 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, 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.
9
<PAGE> 11
ITEM 2. PROPERTIES.
The Company has the following properties:
<TABLE>
<CAPTION>
FACILITY LOCATION SQUARE FEET OWNED/
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 and administrative offices of EBI
Manufacturing facility of EBI Parsippany, New Jersey 45,000 Owned
Office and warehouse facility of Biomet Canada, Inc. Ontario, Canada 3,400 Leased
Manufacturing and administrative (1) Bridgend, South Wales 85,700 Owned
facilities of Biomet Ltd. (2) Swindon, England 53,400 Owned
Office and manufacturing facilities (1) Ontario, California 35,400 Owned
of Arthrotek (2) Redding, California 6,300 Leased
Office, manufacturing and warehouse facilities (1) Berlin, Germany 36,700 Leased
of Biomet Deutschland GmbH (2) Berlin, Germany 65,800 Owned
Administrative, manufacturing and distribution facility Jacksonville, Florida 92,500 Owned
of Lorenz Surgical
Office and warehouse facility of Biomet SpA Milan, Italy 10,800 Owned
Manufacturing facility of Biomet Fair Lawn, New Jersey 40,000 Owned
Manufacturing facilities of AOA (1) Marlow, Oklahoma 30,000 Owned
(2) Delray Beach, Florida 8,000 Leased
Office and manufacturing facility of IQL Valencia, Spain 80,000 Owned
Office facility of IQL Madrid, Spain 6,000 Owned
Office and research & development facility of Polymers Farum, Denmark 7,500 Leased
Office and warehouse facility of Biomet Polska Warsaw, Poland 900 Leased
Office and warehouse facility of Biomet SA (1) Chauteaurenard, France* 37,500 Owned
(2) Les Pennes Mirabeau, France 7,200 Leased
Office and warehouse facility of Ortomed BV The Netherlands 21,500 Owned
Office and warehouse facility of Mediplant NV Belgium 11,700 Leased
Office and warehouse facility of Biomet Australia 9,100 Leased
Australia Pty. Ltd.
Office and warehouse facility of Biomet Orthopedics Ltd. New Zealand 8,600 Leased
Office manufacturing and warehouse facility of Indianapolis, Indiana 1,600 Leased
Catheter Research Institute
</TABLE>
The Company believes that its facilities are adequate, well maintained and
suitable for the development, manufacture and marketing of all its products.
*The operations at this facility have ceased and the facility is being leased
to another party.
10
<PAGE> 12
ITEM 3. LEGAL PROCEEDINGS.
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. The Company has also
experienced a gradual increase in the number of product liability claims made
against it. This increase would appear to reflect both the increasingly
litigious nature of society and the significant increase in the number of
patients who have received the Company's implants over the past 20 years.
On June 2, 1997, the Company announced the entry of a jury verdict against it
in the United States District Court of New Jersey in an action brought by
Orthofix SRL ("Orthofix") against the Company and its wholly owned
subsidiaries, Electro-Biology, Inc. ("EBI") and EBI Medical Systems, Inc.
("EBIMS") (collectively the "Biomet Group"), related to the events surrounding
the expiration of a distribution agreement under which EBIMS distributed
Orthofix's external fixation devices in the United States. The jury found that,
notwithstanding Orthofix's refusal to renew the distribution agreement, EBIMS's
commencement of development activities on a new external fixation system prior
to the expiration of the contract constituted a breach of the distribution
agreement. The jury awarded damages against the Biomet Group for a breach of
contract and related claims of approximately $49 million and punitive damages
of $100 million. The jury also concluded that Orthofix breached the
distribution agreement and tortiously interfered with EBIMS's economic
relations, but awarded only nominal damages to the Biomet Group. With respect
to certain nonjury issues, the trial court judge entered an order on July 23,
1997, denying Orthofix's motions for enhanced and/or treble damages and
attorney's fees. The trial judge granted Orthofix's motion for prejudgment
interest, but only on the compensatory portion of the damages commencing from
November 29, 1995. The trial judge denied Orthofix's request for an injunction
prohibiting EBIMS's sale or distribution of its remaining Orthofix inventory,
although a final injunction was entered that prescribes the manner in which
EBIMS can sell and distribute the inventory. The trial judge recently entered
judgment in the amount of the jury's verdict and the Biomet Group has moved for
a judgment notwithstanding the verdict, or a new trial. The Company intends to
appeal any adverse final judgment entered against the Biomet Group.
In January of 1996, a jury returned a verdict in favor of Raymond G. Tronzo
awarding him approximately $55 million on his patent and state law claims. On
October 29,1996, the United Stated District Court for the Southern District of
Florida entered a judgment, which implemented and reduced the jury verdict,
awarding $30,207,435 to Tronzo on his state law claims, including compensatory
damages of approximately $7.1 million, punitive damages of $20 million, and
prejudgment interest. The trial court dismissed, with prejudice, Tronzo's claim
based upon unjust enrichment. The trial court denied the Company's motion
challenging the validity of Tronzo's patent. Tronzo was awarded an additional
$6.3 million judgment for patent infringement, including a fifty percent
enhancement based upon willfulness. The trial court also granted an injunction
prohibiting future manufacture, use, promotion or sale, in the United States,
of the finned version of the Mallory-Head acetabular cup, the device found to
have infringed the Tronzo patent. The U.S. Court of Appeals for the Federal
Circuit (the "Federal Circuit") has denied the Company's motion to stay the
injunction pending the conclusion of the appeal. The Mallory/Head finned
acetabular cup accounts for a relatively small portion of the Company's annual
sales. The Company is vigorously pursuing its appeal before the Federal
Circuit. It is anticipated that the court will issue its final decision on the
appeal sometime in late 1997 or early 1998. In connection with the District
Court's final judgment and its order granting a stay of enforcement and
execution of the judgment, the Company was required to deliver to an escrow
agent investments with a value no less than $36.6 million to be held in escrow,
invested and disbursed for the benefit of the plaintiff pending the outcomes of
all appeals.
Based on the information currently available and advice from legal counsel,
management believes that the trial courts' judgments in the Tronzo and Orthofix
cases will not be upheld upon appeal. Therefore, no amounts related to these
two cases have been recorded in the Company's financial statements, except for
estimated legal costs associated with the appeal process. If the Company is
unsuccessful in its appeal of either, or both, of these cases, the ultimate
liabilities could be material to the operating results in the period such
losses are recognized. The Company's cash, cash equivalents and investments are
adequate to address the payment of any losses that could ultimately be
determined with respect to these two cases.
The Company and DePuy, Inc. were involved in litigation in which each each
company made claims of patent infringement, and related claims, against the
other with respect to several products. DePuy filed a lawsuit against Biomet
and one of its employees alleging, among other things, that the Company makes
and sells certain products which fall within the scope of DePuy's patents. The
Company filed four patent infringement lawsuits against DePuy alleging, among
other things, that certain DePuy products and surgical instrumentation
infringed claims of the Company's patents. On February 25, 1997, DePuy and the
Company agreed to settle all pending litigation and reported this agreement to
the United States District Court for the Northern District of Indiana. All five
cases were dismissed under a royalty-free cross-licensing arrangement between
DePuy and the Company under which each party can continue to manufacture and
distribute its respective current products. Under the terms of the settlement,
no money exchanged hands and each party is responsible for its own costs and
expenses.
Joint Medical Products Corporation ("Joint Medical") brought suit on January
28, 1997, in the U.S. District Court of Connecticut against Biomet, Inc.,
Kirschner Medical Corporation and several other manufacturers of orthopedic
devices. The suit seeks injunctive relief and treble damages for the Company's
alleged infringement of a patent owned by Joint Medical generally relating to
certain acetabular cups which have an asymmetric bearing. Joint Medical has not
served the complaint on
11
<PAGE> 13
the Company and has offered the Company a license to this patent as well as any
patent resulting from a reissue preceding involving the patent-in-suit that is
currently pending in the United States Patent and Trademark Office. As to the
lawsuit filed by Joint Medical, the Company's outside counsel has rendered an
opinion that the claims of the patent are either invalid or not infringed. When
required, the Company will vigorously defend the action filed against it.
The Company also has been and is now involved in disputes with certain of its
independent commissioned sales representatives over various issues presented by
the agreements between those sales representatives and the Company, including
the right of the sales representative to distribute certain of the products of
the Company and the right of the Company to terminate those relationships.
Generally, these disputes relate to a small minority of the Company's sales
representative relationships. Management does not anticipate that the
resolution of these matters will have a material effect on the Company's
financial position or future operations.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not Applicable.
12
<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., 51
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, 46
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, 41
Senior Vice President - International Operations of 1984 Senior Vice President -
the Company. Director of the Company since 1987. International Operations
and Director of the Company.
GARRY L. ENGLAND, 43
Senior Vice President - Warsaw Operations of the 1987 Senior Vice President -
Company since May 1994; Prior to May 1994, Warsaw Operations of the
Vice President - Research and Development of Company.
the Company.
DANIEL P. HANN, 42
Vice President, General Counsel, and 1989 Vice President and General
Secretary of the Company. Director Counsel, Secretary and
of the Company since 1989. Director of the Company.
JOEL P. PRATT, 43
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, 40
Vice President - Finance of the Company. 1991 Vice President - Finance
of the Company.
JAMES W. HALLER, 40
Controller of the Company. 1991 Controller of the Company.
JERRY L. FERGUSON, 56
Senior Vice President of the Company since 1994 Senior Vice President
December 1994; Special Projects Advisor to and Director the Company.
the Company from December 1993 to
December 1994; prior to December 1993,
Owner of Classic Car Centre, Inc.; Director
of the Company since 1978.
</TABLE>
13
<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 Stock Market for each of
the three most recent fiscal years ended May 31, 1997. The approximate number
of recordholders of outstanding Common Shares as of May 31, 1997 was 10,200.
<TABLE>
<CAPTION>
High Low
<S> <C> <C>
1997
Fourth $19 3/4 $14 7/8
Third 16 5/8 14 1/4
Second 17 1/8 15
First 17 1/4 12 7/8
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
</TABLE>
The Company paid a cash dividend of ten cents ($0.10) per share on November 22,
1996 to shareholders of record at the close of business on October 25, 1996. On
July 2, 1997 the Company announced the declaration of a cash dividend of eleven
cents ($.11) per share, payable August 8, 1997, to shareholders of record at
the close of business on July 11, 1997.
14
<PAGE> 16
ITEM 6. SELECTED FINANCIAL DATA.
INCOME STATEMENT DATA
Years ended May 31,
(in thousands, except earnings per share)
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net sales ......................................... $580,347 $535,159 $452,272 $373,295 $335,373
Cost of sales ..................................... 185,795 174,364 142,143 114,829 104,741
-------- -------- -------- -------- --------
Gross profit .................................... 394,552 360,795 310,129 258,466 230,632
Selling, general and administrative expenses ...... 211,540 199,461 169,332 136,191 122,170
Research and development expense .................. 23,201 24,054 21,770 20,521 17,995
-------- -------- -------- -------- --------
Operating income ................................ 159,811 137,280 119,027 101,754 90,467
Other income, net ................................. 9,321 12,389 5,915 5,278 3,805
-------- -------- -------- -------- --------
Income before income taxes ...................... 169,132 149,669 124,942 107,032 94,272
Provision for income taxes ........................ 62,678 55,563 45,742 37,214 30,311
-------- -------- -------- -------- --------
Net income ...................................... $106,454 $ 94,106 $ 79,200 $ 69,818 $ 63,961
======== ======== ======== ======== ========
Earnings per share ................................ $.94 $.82 $.69 $.61 $.56
======== ======== ======== ======== ========
Weighted average number of shares ................. 113,765 115,461 115,459 115,215 114,934
======== ======== ======== ======== ========
</TABLE>
BALANCE SHEET DATA
As of May 31,
(in thousands)
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Working capital ................................... $391,326 $400,817 $302,752 $288,408 $224,387
Total assets ...................................... 628,356 598,469 539,084 418,077 354,409
Shareholders' equity .............................. 552,828 534,070 444,617 357,283 301,319
</TABLE>
- - The selected consolidated financial information includes the operations of
Kirschner Medical Corporation from November 4, 1994.
- - The Company paid a cash dividend of $.10 per common share in 1997. The
Company paid no cash dividends during any of the other periods presented.
15
<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
Years ended May 31, Percentage of Increase (Decrease)
Net Sales 1997 1996
1997 1996 1995 VS. 1996 VS. 1995
------ ------ ------
<S> <C> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 8% 18%
Cost of sales ................................. 32.0 32.6 31.4 7 23
----- ----- -----
Gross profit .................................. 68.0 67.4 68.6 9 16
Selling, general and administrative expenses .. 36.5 37.2 37.5 6 18
Research and development expense .............. 4.0 4.5 4.8 (4) 10
----- ----- -----
Operating income .............................. 27.5 25.7 26.3 16 15
Other income, net ............................. 1.6 2.3 1.3 (25) 109
----- ----- -----
Income before income taxes .................... 29.1 28.0 27.6 13 20
Provision for income taxes .................... 10.8 10.4 10.1 13 21
----- ----- -----
Net income .............................. 18.3% 17.6% 17.5% 13 19%
===== ===== =====
</TABLE>
1997 COMPARED TO 1996
The Company experienced strong increases in operating income and net income in
1997, driven by growth in net sales and improvements in manufacturing
productivity. Net income increased despite inclusion in 1996 of several
nonrecurring items, which increased 1996 net income by approximately $2.1
million.
Net Sales - Net sales increased 8% from $535,159,000 in fiscal 1996 to
$580,347,000 in fiscal 1997. The Company's U.S.-based revenues increased 7% to
$425,522,000 in fiscal 1997, while foreign sales increased 12% in fiscal 1997
to $154,825,000. The Company continued to gain market share in the
international and domestic reconstructive device markets as evidenced by an 8%
increase in worldwide reconstructive device sales during 1997 to $352,122,000.
Products contributing to this growth are the Maxim(R) Total Knee and
Alliance(R) Hip Systems. In fiscal 1997, EBI's sales increased 5% to
$114,321,000 due to strong sales of the SpF Spinal Fusion Stimulation System
and the EBIce(TM) Controlled Cold Therapy System. Sales of EBI's DynaFix(TM)
External Fixation System increased slightly from last year. The DynaFix System
is becoming more widely accepted as the market-leading external fixation system
in the United States. The Company's "Other Products" sales increased 14% in
fiscal 1997 to $113,904,000, primarily as a result of increased sales of IQL's
spinal products internationally and Biomet's fixation products and Lorenz's
craniomaxillofacial products both in the domestic and international markets. In
addition, Lorenz has strongly positioned itself in the domestic and
international marketplace through an expanded distribution network.
Gross Profit - The Company's gross profit increased 9% from $360,795,000 in
fiscal 1996 to $394,552,000 in fiscal 1997 primarily as a result of increased
sales of higher margin reconstructive products, increased in-house
manufacturing efficiencies of the external fixation product line, and improved
margins realized through acquisitions of international distributors. As a
percentage of net sales, gross profit was 68% in 1997 and 67.4% in 1996. Cost
of sales increased from $174,364,000 in fiscal 1996 to $185,795,000 in fiscal
1997, due primarily to increased sales.
Selling, General and Administrative Expenses - Selling, general and
administrative expenses increased slightly to $211,540,000 in fiscal 1997 from
$199,461,000 in fiscal 1996. Increased litigation costs is the primary reason
for this increase. Excluding litigation costs, selling, general and
administrative expenses remained relatively level during the current year in
comparison with fiscal 1996 as the Company continues to control costs through
consolidation of key operations and other measures designed to improve
operating efficiencies.
Research and Development Expense - Research and development expense in fiscal
1997 decreased to $23,201,000 from $24,054,000 in fiscal 1996. As a percentage
of sales, research and development expense decreased from 4.5% in fiscal 1996
to 4.0% in fiscal 1997. The decrease in research and development expense is the
result of the completion of the resorbable craniomaxillofacial products project
and the termination of the United States Surgical Corporation ("USSC") joint
venture. The Company will continue to invest in both its research and
development staff and research and development activities.
16
<PAGE> 18
Other Income - Other income decreased from $12,389,000 in 1996 to $9,321,000.
This decrease was due to two nonrecurring items in fiscal 1996. First, the
Company sold all of its holdings in American Medical Electronics, Inc.
realizing a gain of $2.5 million and secondly, $2.9 million was received
pursuant to the termination of a joint venture agreement with USSC. Excluding
these nonrecurring items, the Company experienced an increase in other income
in fiscal 1997 as a result of improved returns on its cash and investments.
Provision for Income Taxes - Provision for income taxes increased to
$62,678,000 in fiscal 1997 compared to $55,563,000 in fiscal 1996, primarily as
a result of increased income before taxes. The Company's effective tax rate
remained at 37.1% in fiscal 1997. The Company will continue to be adversely
affected by the changes in the Puerto Rico local tax structure and reduction of
U.S. tax benefits from operating in Puerto Rico; however, the effect is not
expected to be material to the consolidated tax provision.
Net Income - The factors mentioned above resulted in a 13% and 15% increase in
net income and earnings per share, respectively, for fiscal 1997 as compared to
fiscal 1996, increasing from $94,106,000 to $106,454,000 and $.82 to $.94,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company's net cash from operating activities totalled $122,998,000 in 1997
compared to $68,485,000 in 1996. This increase is largely due to increased net
income, measures initiated in monitoring inventory levels and improvements in
collections of accounts receivable balances. Although net sales increased 8%,
accounts receivables increased only 5% and inventories remained level compared
to last year. Included in the aforementioned changes were decreases in accounts
and notes receivable and inventories attributable to the decrease from May 31,
1996 to May 31, 1997 in the exchange rates used to convert the financial
statements of Biomet's foreign subsidiaries from their functional currency to
the U.S. dollar. These decreases were immaterial and 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 used in investing activities were $56,151,000 in fiscal 1997
compared to cash flows provided by investing activities of $13,361,000 in
fiscal 1996. The primary use of cash flows for investing activities was
purchases of investments, purchases of capital equipment and the acquisition of
two foreign distributors. Included in capital expenditures are costs to
complete Lorenz's new manufacturing facility in Jacksonville, Florida and
Biomet Deutschland's facility in Berlin, Germany. During the current fiscal
year, Lorenz completed a 60,000 square foot expansion of its facilities which
allowed consolidation of its manufacturing, research and development, marketing
and distribution functions under one roof.
Cash flows used in financing activities were $87,898,000 in 1997 compared to
$6,621,000 in 1996. The primary use of cash flows for financing activities were
the purchase of the Company's Common Shares as part of the Common Share
Repurchase Program and the Company's first cash dividend of ten cents ($.10)
per share. On July 2, 1997, the Board of Directors declared a cash dividend of
eleven cents ($.11) per share, payable August 8,1997 to shareholders of record
at the close of business on July 11, 1997.
The Company expects to have significant capital requirements in the coming
years and intends to continue to devote a substantial amount of time and
resources to research and development. The Company expects to spend
approximately $90 million during the next two fiscal years for capital
expenditures and research and development, and expects additional outlays to
fund future acquisitions and other business development activities. Management
expects the funding for these aforementioned activities will come from
currently available funds and cash flows generated from future operations.
LITIGATION AND OTHER MATTERS
As more fully described in Note K of the Notes to Consolidated Financial
Statements, the Company is currently appealing adverse jury awards in two
separate cases (Tronzo and Orthofix). The judgment in the Tronzo case, which
involved patent infringement and state law claims, approximates $36.6 million
and the judgment in the Orthofix case, which alleged breach of a distribution
agreement, approximates $149 million, including punitive damages of $100
million. Management believes, based on available information and advice from
legal counsel, that the judgments in both these cases will be reversed on
appeal. Except for estimated litigation costs associated with the appeals
process, no additional amounts have been accrued in the Company's consolidated
financial statements. The Company's cash, cash equivalents and investments are
adequate to address the payment of any losses that could ultimately result if
the Company is unsuccessful in the appeal of these cases. As disclosed in Note
K, the Company's investments include $36.6 million of investment securities
which have been placed with an escrow agent pending the outcome of the appeal
of the Tronzo judgment.
On May 19, 1997, Biomet and Merck KGaA, Darmstadt, Germany, announced their
intention to enter into a joint venture to which Biomet and Merck KGaA each
would contribute its existing European orthopedic operations. The joint venture
with Merck KGaA, which is subject to the negotiation of a definitive agreement,
certain regulatory approvals and approval by the Boards of Directors of both
companies, would operate as "Biomet-Merck" and ownership would be shared 50/50.
Merck KGaA
17
<PAGE> 19
would bring to this venture an extensive array of chemical, biological,
pharmaceutical and orthopedic technologies and products. Pro forma sales of the
joint venture are estimated to approach $200 million. At this point in our
discussions, the joint venture appears to provide an excellent strategic fit
between Biomet's European operations and Merck KGaA's biomaterials division in
terms of product lines, geographic distribution and core competencies.
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, " Earnings per
Share." SFAS No. 128 requires all entities with complex capital structures to
make a dual presentation of basic and diluted earnings per share on the face of
the income statement and is effective for all financial statements issued for
periods ending after December 15, 1997. In June 1997, the FASB issued SFAS No.
130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information" both of which the Company
will be required to adopt in its financial statements for the year ending May
31, 1999. SFAS No. 130 will require the Company to report comprehensive income
in its financial statements. Comprehensive income includes net income and
certain transactions that are reported as a separate component of shareholders'
equity, such as translation adjustments and net unrealized appreciation of
available-for-sale securities. SFAS No. 131 specifies revised guidelines for
determining operating segments and the type and level of information to be
disclosed. The Company has not yet determined what changes in its disclosures,
if any, will be required by SFAS No. 131.
1996 COMPARED TO 1995
Net Sales - 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 revenues 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 20% to $326,834,000 compared to fiscal 1995. 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 increased 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 as a result of
increased sales of Lorenz's craniomaxillofacial products, Biomet's fixation
products, and the inclusion of a full year of Kirschner's AOA products.
Gross Profit - The Company's gross profit increased 16% to $360,795,000 in
fiscal 1996 compared to $310,129,000 in fiscal 1995. 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 - 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 the
Warsaw operations, 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 - 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.
Other Income - 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 USSC, offset by $400,000 of interest expense related to
the Ramos litigation.
Provision For Income Taxes - 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.
Net Income - 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.
18
<PAGE> 20
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 1997 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> 21
PART IV
(ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.)
<TABLE>
<S> <C>
(a) (1)FINANCIAL STATEMENTS:
Report of Independent Accountants.
Consolidated Balance Sheets as of May 31, 1997 and 1996.
Consolidated Statements of Income for the years ended May 31, 1997, 1996 and 1995.
Consolidated Statements of Shareholders' Equity for the years ended May 31, 1997, 1996 and 1995.
Consolidated Statements of Cash Flows for the years ended May 31, 1997, 1996 and 1995.
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.
</TABLE>
20
<PAGE> 22
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 20, 1997
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 20, 1997.
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> 23
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/ 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> 24
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, 1997 and 1996............................................. 24
Consolidated Statements of Income for the years ended May 31, 1997, 1996 and 1995................... 25
Consolidated Statements of Shareholders' Equity for the years ended May 31, 1997, 1996 and 1995..... 26
Consolidated Statements of Cash Flows for the years ended May 31, 1997, 1996 and 1995............... 27
Notes to Consolidated Financial Statements.......................................................... 28-36
2. FINANCIAL STATEMENT SCHEDULE:
Schedule II - Valuation and Qualifying Accounts..................................................... 37
Schedules other than those listed above are omitted because they are not required.
</TABLE>
REPORT OF INDEPENDENT ACCOUNTANTS
[Coopers & Lybrand L.L.P. 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, 1997 and 1996, and the consolidated results of their
operations and their cash flows for each of the three years in the period ended
May 31, 1997, 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 L.L. P.
South Bend, Indiana
July 3, 1997
23
<PAGE> 25
BIOMET, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS.
As of May 31,
(in thousands, except per share data)
<TABLE>
<CAPTION>
1997 1996
-------- --------
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents............................................................. $ 82,034 $106,068
Investments........................................................................... 41,237 30,834
Accounts and notes receivable, less allowance for doubtful receivables
(1997 -- $6,175 and 1996 -- $6,889).................................................. 162,135 154,055
Inventories........................................................................... 151,523 151,465
Prepaid expenses and other............................................................ 27,311 20,494
-------- --------
Total current assets................................................................. 464,240 462,916
-------- --------
Property, plant and equipment:
Land and improvements................................................................. 9,544 5,874
Buildings and improvements............................................................ 53,156 48,648
Machinery and equipment............................................................... 90,139 78,175
-------- --------
152,839 132,697
Less, Accumulated depreciation........................................................ 61,927 52,533
-------- --------
Property, plant and equipment, net................................................... 90,912 80,164
-------- --------
Investments............................................................................. 44,527 31,159
Intangible assets, net of accumulated amortization (1997 - $12,215 and 1996 - $9,973)... 5,787 7,665
Excess acquisition costs over fair value of acquired net assets, net of accumulated
amortization (1997 -- $6,979 and 1996 -- $4,468)...................................... 20,306 14,947
Other assets............................................................................ 2,584 1,618
-------- --------
Total assets......................................................................... $628,356 $598,469
======== ========
LIABILITIES AND SHAREHOLDERS, EQUITY
Current liabilities:
Short-term borrowings................................................................. $ 5,568 $ 3,358
Accounts payable...................................................................... 17,140 16,667
Accrued income taxes.................................................................. 12,181 11,295
Accrued wages and commissions......................................................... 12,232 11,460
Other accrued expenses................................................................ 25,793 19,319
-------- --------
Total current liabilities............................................................ 72,914 62,099
Deferred federal income taxes........................................................... 2,229 1,509
Other liabilities....................................................................... 385 791
-------- --------
Total liabilities.................................................................... 75,528 64,399
======== ========
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 1997 - 111,214 shares and 1996 - 115,826 shares............... 73,587 68,376
Additional paid-in capital............................................................ 16,001 14,410
Retained earnings..................................................................... 472,450 458,193
Net unrealized appreciation of available-for-sale securities.......................... 1,040 584
Cumulative translation adjustment..................................................... (10,250) (7,493)
-------- --------
Total shareholders, equity........................................................... 552,828 534,070
-------- --------
Total liabilities and shareholders' equity........................................... $628,356 $598,469
======== ========
</TABLE>
The accompanying notes are a part of the consolidated financial statements.
24
<PAGE> 26
BIOMET, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME.
For the years ended May 31,
(in thousands, except earnings per share)
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
NET SALES............................................................. $580,347 $535,159 $452,272
Cost of sales......................................................... 185,795 174,364 142,143
--------- --------- --------
Gross profit....................................................... 394,552 360,795 310,129
Selling, general and administrative expenses.......................... 211,540 199,461 169,332
Research and development expense...................................... 23,201 24,054 21,770
--------- --------- --------
Operating income................................................... 159,811 137,280 119,027
Other income, net..................................................... 9,972 13,505 6,947
Interest expense...................................................... (651) (1,116) (1,032)
--------- --------- --------
Income before income taxes........................................ 169,132 149,669 124,942
Provision for income taxes............................................ 62,678 55,563 45,742
--------- --------- --------
NET INCOME........................................................ $106,454 $ 94,106 $ 79,200
========= ========= ========
EARNINGS PER SHARE, BASED ON THE WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING DURING THE YEAR................................. $.94 $.82 $.69
========= ========= ========
Weighted average number of shares..................................... 113,765 115,461 115,459
========= ========= ========
</TABLE>
The accompanying notes are a part of the consolidated financial statements.
25
<PAGE> 27
BIOMET, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS, EQUITY.
For the years ended May 31,
(in thousands, except per share data)
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
COMMON SHARES, NUMBER:
Balance, June, 1............................................................... 115,826 115,188 114,424
Issuance of shares............................................................. - 173 35
Exercise of stock options...................................................... 612 465 465
Purchase of shares............................................................. (5,424) - (1,120)
Common shares used in acquisitions............................................. 200 - 1,384
-------- -------- --------
Balance, May, 31............................................................... 111,214 115,826 115,188
======== ======== ========
COMMON SHARES, AMOUNT:
Balance, June, 1............................................................... $ 68,376 $ 64,526 $ 47,290
Issuance of shares............................................................. - 2,293 261
Exercise of stock options...................................................... 5,292 1,557 1,192
Purchase of shares............................................................. (3,202) - (463)
Acquisitions................................................................. 3,121 - 16,246
-------- -------- --------
Balance, May, 31............................................................. 73,587 68,376 64,526
-------- -------- --------
ADDITIONAL PAID-IN CAPITAL:
Balance, June, 1............................................................... 14,410 12,624 13,606
Purchase of shares............................................................. (675) - (133)
Tax benefit arising from the exercise of stock options......................... 1,315 1,199 689
Other.......................................................................... 951 587 (1,538)
-------- -------- --------
Balance, May, 31........................................................... 16,001 14,410 12,624
-------- -------- --------
RETAINED EARNINGS:
Balance, June, 1............................................................... 458,193 364,087 299,510
Net income..................................................................... 106,454 94,106 79,200
Purchase of shares............................................................. (80,723) - (14,623)
Cash dividend ($.10 per share in 1997)......................................... (11,474) - -
-------- -------- --------
Balance, May, 31............................................................... 472,450 458,193 364,087
-------- -------- --------
NET UNREALIZED APPRECIATION OF AVAILABLE-FOR-SALE SECURITIES:
Balance, June, 1............................................................... 584 2,800 -
Change in unrealized appreciation of available-for-sale securities............. 456 (2,216) 2,800
-------- -------- --------
Balance, May, 31............................................................... 1,040 584 2,800
-------- -------- --------
CUMULATIVE TRANSLATION ADJUSTMENT:
Balance, June, 1............................................................... (7,493) 580 (3,123)
Translation adjustment......................................................... (2,757) (8,073) 3,703
-------- -------- --------
Balance, May, 31............................................................... (10,250) (7,493) 580
-------- -------- --------
TOTAL SHAREHOLDERS, EQUITY, MAY, 31.............................................. $552,828 $534,070 $444,617
======== ======== ========
</TABLE>
The accompanying notes are a part of the consolidated financial statements.
26
<PAGE> 28
BIOMET, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS.
For the years ended May 31,
(in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $106,454 $ 94,106 $ 79,200
Adjustments to reconcile net income to net cash from operating activities:
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,578 12,928 9,303
Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,962 7,884 5,067
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (471) (3,018) 1,747
Deferred federal income taxes . . . . . . . . . . . . . . . . . . . . . (4,527) (1,417) (400)
Changes in current assets and liabilities, excluding effects of acquisitions:
Accounts and notes receivable . . . . . . . . . . . . . . . . . . . . . (5,766) (15,906) (22,499)
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,189 (13,386) (26,239)
Prepaid expenses and other . . . . . . . . . . . . . . . . . . . . . . . (1,664) 615 (962)
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,332) (9,297) 2,999
Accrued income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . 1,816 460 (2,494)
Accrued wages and commissions . . . . . . . . . . . . . . . . . . . . . 951 (1,581) 2,611
Other accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . 4,808 (2,903) 4,263
-------- -------- --------
Net cash from operating activities . . . . . . . . . . . . . . . . . . 122,998 68,485 52,596
-------- -------- --------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
Proceeds from sales and maturities of investments . . . . . . . . . . . . . . 25,212 54,823 20,313
Purchases of investments . . . . . . . . . . . . . . . . . . . . . . . . . . (47,272) (25,630) (37,349)
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . (21,380) (14,065) (28,938)
Acquisitions, net of cash acquired . . . . . . . . . . . . . . . . . . . . . (10,670) - (27,315)
Cash invested in affiliates . . . . . . . . . . . . . . . . . . . . . . . . . (1,039) - (238)
Increase in other assets . . . . . . . . . . . . . . . . . . . . . . . . . . (649) (932) (83)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (353) (835) (145)
-------- -------- --------
Net cash from (used in) investing activities . . . . . . . . . . . . . (56,151) 13,361 (73,755)
-------- -------- --------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:
Increase (decrease) in short-term borrowings . . . . . . . . . . . . . . . . 2,884 (65) (225)
Payments on long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . - - (10,705)
Issuance of shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,292 3,850 1,453
Cash dividend . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (11,474) - -
Purchase of common shares . . . . . . . . . . . . . . . . . . . . . . . . . . (84,600) (10,406) (4,813)
-------- -------- --------
Net cash (used in) financing activities . . . . . . . . . . . . . . . (87,898) (6,621) (14,290)
-------- -------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH . . . . . . . . . . . . . . . . . . . . (2,983) (3,248) (851)
-------- -------- --------
Increase (decrease) in cash and cash equivalents . . . . . . . . . . . (24,034) 71,977 (36,300)
Cash and cash equivalents, beginning of year . . . . . . . . . . . . . . . . . 106,068 34,091 70,391
-------- -------- --------
Cash and cash equivalents, end of year . . . . . . . . . . . . . . . . . . . . $ 82,034 $106,068 $ 34,091
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 666 $ 1,116 $ 936
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64,447 55,576 48,350
NONCASH INVESTING AND FINANCING ACTIVITIES:
Acquisitions:
Common shares issued . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,121 - 14,708
Liabilities assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,775 - 26,859
Purchase of common shares and related liability . . . . . . . . . . . . . . . - - 10,406
</TABLE>
The accompanying notes are a part of the consolidated financial statements.
27
<PAGE> 29
BIOMET, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
- --------------------------------------------------------------------------------
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 fixation devices, electrical bone growth
stimulators, orthopedic support devices, operating room supplies, powered
surgical instruments, general surgical instruments, arthroscopy products,
spinal implants and craniomaxillofacial implants and instruments. Biomet has
corporate headquarters in Warsaw, Indiana and manufacturing and/or office
facilities in more than twenty locations worldwide. The Company currently
distributes its products in more than 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.
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 - Highly liquid investments with insignificant interest rate risk
and with original maturities of three months or less are classified as cash and
cash equivalents. Certificates of deposit with maturities greater than three
months and less than one year are classified as short-term investments.
Certificates of deposit with maturities greater than one year are classified as
long-term investments. The Company accounts for its investments in debt and
equity securities under Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," which
requires certain securities to be categorized as either trading, available-for-
sale or held-to-maturity. 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 Company has no trading securities. The cost of investment securities
sold is determined by the specific identification method. Dividend and interest
income are accrued as earned.
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 carrying value of goodwill is periodically reviewed by the
Company based on the expected future undiscounted operating cash flows of the
related business unit. Based upon its most recent analysis, the Company
believes no material impairment of goodwill exists at May 31, 1997.
Short-Term Borrowings - Certain of the Company's foreign subsidiaries had
short-term borrowings of $5,568,000 and $3,358,000 as of May 31, 1997 and 1996,
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 ($68.9 million at May 31, 1997)
of foreign subsidiaries because it is expected that such earnings will be
reinvested overseas indefinitely. Upon distribution of those earnings
28
<PAGE> 30
BIOMET, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS,
CONTINUED.
- --------------------------------------------------------------------------------
NOTE B: ACCOUNTING POLICIES, CONCLUDED.
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.
Fair Value of Financial Instruments - The carrying amounts of cash and cash
equivalents, receivables, short-term borrowings, accounts payable and accruals
that meet the definition of a financial instrument approximate fair value. The
fair value of investments is disclosed in Note D.
Earnings Per Share - Earnings per share are based on the weighted average
number of common shares outstanding. The common stock equivalents (stock
options) have not entered into the computation of earnings per share since the
inclusion in each year reported would have been immaterial.
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
healthcare provider. The Company provides credit, in the normal course of
business, to hospitals, private and governmental institutions and healthcare
agencies, insurance providers and physicians. The Company maintains an
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 investments. At May 31,1997 and 1996, cash and cash equivalents and
investments included $60 million and $58 million, respectively, of cash
deposits and certificates of deposit with financial institutions in Puerto
Rico. Also, at May 31, 1997 and 1996, investments included $21 and $19
million, respectively, of municipal bonds issued by state and local
subdivisions in Puerto Rico.
NOTE C: ACQUISITIONS.
On August 1, 1996, the Company completed the acquisition of one of its foreign
distributors. The purchase price consisted of 200,385 Common Shares of the
Company, $4.7 million cash and $3.8 million of assumed liabilities. The excess
acquisition cost over fair value of acquired net assets at the acquisition date
approximated $4.8 million. On April 1, 1997, the Company completed the
acquisition of another one of its foreign distributors. The purchase price
consisted of $6.0 million cash. The excess acquisition cost over fair value of
acquired net assets at the acquisition date approximated $3.1 million. Both of
these acquisitions were accounted for using the purchase method of accounting
with the operating results of the acquired businesses included in the Company's
consolidated financial statements from the dates of acquisition. Pro forma
financial information reflecting these acquisitions has not been presented as
it is not materially different from the Company's historical results.
On August 12, 1994, the Company 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, 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 manufactured and marketed 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.
Unaudited pro forma financial information for 1995 which reflect the
acquisition as if it had occurred at the beginning of fiscal 1995 is as
follows: net sales - $481.0 million; net income - $79.2 million; and earnings
per share - $.68.
29
<PAGE> 31
BIOMET, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS,
CONTINUED.
- --------------------------------------------------------------------------------
NOTE D: INVESTMENTS.
As of May 31, 1997, the Company's investment securities were classified as
follows:
(in thousands)
<TABLE>
<CAPTION>
Amortized Unrealized
Cost Gains Losses Fair Value
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available-for-sale:
Debt securities . . . . . . . . . . . . . . . . . . . $19,592 $ 38 $ (138) $19,492
Equity securities . . . . . . . . . . . . . . . . . . 3,554 1,895 (62) 5,387
------- -------- ------- -------
Total available-for-sale . . . . . . . . . . . . . . 23,146 1,933 (200) 24,879
------- -------- ------- -------
Held-to-maturity:
Debt securities . . . . . . . . . . . . . . . . . . . 11,062 151 (1,294) 9,919
Mortgage-backed obligations . . . . . . . . . . . . . 12,223 12 (914) 11,321
------- -------- ------- -------
Total held-to-maturity . . . . . . . . . . . . . . . 23,285 163 (2,208) 21,240
------- -------- ------- -------
Certificates of deposit . . . . . . . . . . . . . . . . . 37,600 - - 37,600
------- -------- ------- -------
Total . . . . . . . . . . . . . . . . . . . . . . . . . $84,031 $ 2,096 $(2,408) $83,719
======= ======== ======= =======
</TABLE>
As of May 31, 1996, the Company's investment securities were classified as
follows:
(in thousands)
<TABLE>
<CAPTION>
Amortized Unrealized
Cost Gains Losses Fair Value
- ---------------------------------------------------------------------------------------------------------------------
<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>
Proceeds from sales of available-for-sale securities were $14,476,000 and
$15,381,000 for the years ended May 31, 1997 and 1996, respectively, and
proceeds from such sales were immaterial for the year ended May 31, 1995. There
were no sales of held-to-maturity securities for the years ended May 31, 1997,
1996 and 1995. For the year ended May 31, 1997, gross realized gains and
(losses) on sales of available-for-sale securities were $563,000 and ($92,000),
respectively. Gross realized gains and (losses) for the year ended May 31, 1996
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. The Company's
investment securities at May 31, 1997 include $32,500,000 of certificates of
deposit, $5,378,000 of debt securities and $3,359,000 of mortgage-backed
obligations all maturing within one year, and $5,100,000 of certificates of
deposit, $25,176,000 of debt securities, $5,387,000 of equity securities and
$8,864,000 of mortgage-backed obligations all maturing past one year.
Investment income (included in other income, net) consists of the following:
(in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
------ ------- -------
<S> <C> <C> <C>
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $6,782 $ 6,454 $ 5,656
Dividend income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,480 1,217 870
Net realized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 471 3,018 68
------ ------- -------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $8,733 $10,689 $ 6,594
====== ======= =======
</TABLE>
30
<PAGE> 32
BIOMET, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS,
CONTINUED.
- --------------------------------------------------------------------------------
NOTE E: INVENTORIES.
Inventories at May 31, 1997 and 1996 consist of the following:
(in thousands)
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Raw materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 20,958 $ 19,643
Work-in-progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,546 15,677
Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64,992 71,974
Consigned distributor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49,027 44,171
-------- --------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $151,523 $151,465
======== ========
</TABLE>
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, 1997, 1996 and 1995 were $2,461,000, $2,165,000, and
$1,573,000, 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, 1997, 1996 and 1995 were $1,484,000, $1,406,000, and $1,148,000
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 and
directors, 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 and directors 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 in September 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. For the years
ended May 31, 1997 and 1996, the amount of compensation expense applicable to
common shares issued under the Distributor Plan was not material to the
consolidated financial statements.
31
<PAGE> 33
BIOMET, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS,
CONTINUED.
- --------------------------------------------------------------------------------
NOTE G: STOCK OPTION PLANS, CONCLUDED.
<TABLE>
<CAPTION>
Number Exercise
of Shares Price*
<S> <C> <C>
The following table summarizes stock option activity:
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 9.75
Granted . . . . . . . . . . . . . . . . . . . . . . . . . 1,240,006 14.03
Exercised . . . . . . . . . . . . . . . . . . . . . . . . (763,720) 8.72
Terminated . . . . . . . . . . . . . . . . . . . . . . . (201,924) 10.96
---------
Outstanding, May 31, 1997 . . . . . . . . . . . . . . . . . 3,124,393 $ 11.66
=========
</TABLE>
*The exercise price presented for fiscal year 1997 represents the
weighted-average exercise price in accordance with Statements of Financial
Accounting Standards No. 123. Amounts for fiscal years 1996 and 1995 represent
the range of exercise prices in accordance with Accounting Principles Board
Opinion No. 25.
Options outstanding at May 31, 1997 are exercisable at prices ranging from
$5.06 to $18.69 and have a weighted average remaining contractual life of 4.9
years. The following table summarizes information about stock options
outstanding at May 31, 1997.
<TABLE>
<CAPTION>
Outstanding Exercisable
------------------------------------------------ -------------------------------
Weighted- Weighted-
Number Average Average Number Weighted-
Range of Outstanding at Remaining Exercise Exercisable at Average
Exercise Price May 31, 1997 Contractual Life Price May 31,1997 Exercise Price
- -------------- -------------- ---------------- --------- -------------- --------------
<S> <C> <C> <C> <C> <C>
$5.06 - $ 9.00 768,745 3.2 years $ 8.02 403,000 $ 7.72
9.01 - 13.00 1,333,367 5.6 years 11.89 212,000 10.69
13.01 - 18.69 1,022,281 5.8 years 14.61 152,000 14.17
--------- -------
3,124,393 767,000
========= =======
</TABLE>
At May 31, 1996 and 1995, there were exercisable options outstanding to
purchase 826,000 and 837,000 shares at weighted-average exercise prices of
$8.40 and $7.75, respectively. Pro forma net income and earnings per share for
the years ended May 31, 1997 and 1996 and the weighted- average grant-date fair
value of options granted are not presented as amounts are not material.
NOTE H: SHAREHOLDERS' EQUITY.
During the year ended May 31, 1997, the Company purchased 5,424,165 common
shares at an aggregate cost of $84,600,000 pursuant to the Common Share
repurchase programs authorized by the Board of Directors in January 1997 and
June 1996. The Board of Directors declared a cash dividend of $.10 per common
share payable on November 22, 1996 to shareholders of record on October 25,
1996.
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
32
<PAGE> 34
BIOMET, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS,
CONTINUED.
NOTE H: SHAREHOLDERS' EQUITY, CONCLUDED.
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.
The components of income before income taxes are as follows:
<TABLE>
<CAPTION>
(in thousands) 1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
United States operations.................................................................. $154,827 $138,742 $114,595
Foreign operations........................................................................ 14,305 10,927 10,347
-------- -------- --------
Total..................................................................................... $169,132 $149,669 $124,942
======== ======== ========
The provision for income taxes is summarized as follows:
(in thousands)
<CAPTION>
Current: 1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Federal................................................................................. $49,945 $39,480 $31,046
State, including Puerto Rico............................................................ 11,439 11,675 10,395
Foreign................................................................................. 5,821 5,825 4,701
-------- -------- --------
67,205 56,980 46,142
Deferred.................................................................................. (4,527) (1,417) (400)
-------- -------- --------
Total................................................................................... $62,678 $55,563 $45,742
======== ======== ========
Effective tax rate........................................................................ 37.1% 37.1% 36.6%
======== ======== ========
A reconciliation of the statutory federal income tax rate to the
Company's effective tax rate follows:
<CAPTION>
1997 1996 1995
-------- -------- --------
<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........................................... 3.9 3.8 3.8
Foreign income taxes at rates different from the U.S. statutory rate.................... 5 1.4 1.0
Tax benefit relating to operations in Puerto Rico....................................... (1.7) (2.0) (2.7)
Tax credits............................................................................. (.2) (.1) (.2)
Earnings of Foreign Sales Corporation................................................... (.5) (.5) (.4)
Other................................................................................... .1 (.5) .1
-------- -------- --------
Effective tax rate........................................................................ 37.1% 37.1% 36.6%
======== ======== ========
</TABLE>
The components of the net deferred tax asset and liability at May 31, 1997 and
1996 are as follows:
(in thousands)
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Current deferred tax asset:.........................................................................
Accounts and notes receivable..................................................................... $ 3,274 $ 2,864
Inventories....................................................................................... 7,958 6,539
Accrued expenses.................................................................................. 5,566 3,117
Investments in affiliates......................................................................... 1,116 840
------- -------
Current deferred tax asset...................................................................... $17,914 $13,360
======= =======
Long-term deferred tax asset (liability):...........................................................
Depreciation...................................................................................... $(2,594) $(2,449)
Other............................................................................................. 365 940
------- -------
Long-term deferred tax liability................................................................ $(2,229) $(1,509)
======= =======
</TABLE>
33
<PAGE> 35
BIOMET, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS,
CONTINUED.
- --------------------------------------------------------------------------------
NOTE J: INDUSTRY SEGMENT AND GEOGRAPHIC INFORMATION.
The Company operates in one industry segment which includes the designing,
manufacturing and marketing of reconstructive and fixation devices, electrical
bone growth stimulators, orthopedic support devices, operating room supplies,
general surgical instruments, arthroscopy products, spinal implants 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>
(in thousands)
1997 1996 1995
-------------------------- -----------
<S> <C> <C> <C>
Net sales:
North America........................................... $468,757 $439,638 $377,923
Europe.................................................. 110,039 95,521 74,349
Other................................................... 1,551 - -
Intercompany............................................ 19,085 14,023 16,572
----------- ----------- -----------
Eliminations............................................ (19,085) (14,023) (16,572)
$580,347 $535,159 $452,272
=========== =========== ===========
Operating income:
North America........................................... $144,536 $124,667 $106,954
Europe.................................................. 15,131 12,613 12,073
Other................................................... 144 - -
----------- ----------- -----------
$ 159,81 $137,280 $119,027
=========== =========== ===========
Identifiable assets:
North America........................................... $511,442 $502,229 $438,985
Europe.................................................. 138,059 125,126 117,525
Other................................................... 7,149 - -
Eliminations............................................ (28,294) (28,886) (17,426)
----------- ----------- -----------
$628,356 $598,469 $539,084
=========== =========== ===========
</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 $43,235,000, $42,931,000 and
$34,112,000 for the years ended May 31, 1997, 1996 and 1995, respectively.
Selected financial data of the Company's foreign subsidiaries is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Net sales................................................ $111,591 $ 98,907 $ 80,209
======== ======== ========
Net income............................................... $ 8,585 $ 5,237 $ 6,137
======== ======== ========
Current assets........................................... $111,872 $101,425 $ 87,135
Property, plant and equipment............................ 29,554 21,407 21,721
Intangible assets...................................... 12,525 6,396 11,060
-------- -------- --------
153,951 129,228 119,916
-------- -------- --------
Current liabilities.................................... 31,054 29,617 32,939
Intercompany loans..................................... 38,297 40,738 28,676
Long-term liabilities.................................. 11 380 1,679
-------- -------- --------
69,362 70,735 63,294
-------- -------- --------
Net assets............................................... $ 84,589 $ 58,493 $ 56,622
======== ======== ========
</TABLE>
34
<PAGE> 36
BIOMET, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS,
CONTINUED.
- --------------------------------------------------------------------------------
NOTE K: COMMITMENTS AND CONTINGENCIES.
Common Share Repurchase Program - In January 1997, the Board of Directors
authorized the Company to repurchase up to $60,000,000 of the outstanding
Common Shares of the Company in open market purchases or privately negotiated
transactions through the close of business on January 28, 1998. Through May 31,
1997, the Company has purchased approximately $21,800,000 under the current
Common Share repurchase program.
Proposed Joint Venture - On May 19,1997, the Company and Merck KGaA entered
into a letter of intent related to a proposed joint venture between the Company
and Merck KGaA. The purpose of the joint venture is to combine the existing
businesses of the two Companies located in certain European countries to create
a new legal entity to transact business in the joint venture territory and to
export products to certain non-European markets. The joint venture, which is
subject to the negotiation of a definitive agreement, certain regulatory
approvals and approval by the Boards of Directors of both companies, is
expected to be a 50/50 joint venture of which the Company will have sufficient
control to allow the Company to consolidate the operations of the joint venture
for financial reporting.
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, 1997 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 - In January 1996, a jury returned a verdict in favor of Raymond G.
Tronzo ("Tronzo") awarding him approximately $55 million on his patent and
state law claims. On October 29,1996, the United States District Court for the
Southern District of Florida entered a judgment, which implemented and reduced
the jury verdict, awarding $30,207,435 to Tronzo on his state law claims,
including compensatory damages of approximately $7.1 million, punitive damages
of $20 million, and prejudgment interest. The trial court dismissed, with
prejudice, Tronzo's claim based upon unjust enrichment. The trial court denied
the Company's motion challenging the validity of Tronzo's patent. Tronzo was
awarded an additional $6.3 million judgment for patent infringement, including
a fifty percent enhancement based upon willfulness. The trial court also
granted an injunction prohibiting future manufacture, use, promotion or sale,
in the United States, of the finned version of the Mallory-Head acetabular cup,
the device found to have infringed the Tronzo patent. The U.S. Court of Appeals
for the Federal Circuit (the "Federal Circuit") has denied the Company's motion
to stay the injunction pending the conclusion of the appeal. The Mallory-Head
finned acetabular cup accounts for a relatively small portion of the Company's
annual sales. The Company is vigorously pursuing its appeal before the Federal
Circuit on both the patent and state law claims. The briefing by both parties
in the appeal was completed in the Federal Circuit in June 1997 and oral
arguments will occur in early fall 1997. It is anticipated that the Federal
Circuit will issue its final decision on the appeal sometime in early calendar
1998. In connection with the District Court's final judgment and its order
granting a stay of enforcement and execution of the judgment, the Company was
required to deliver to an escrow agent investments with a value no less than
$36.6 million to be held in escrow, invested and disbursed for the benefit of
the plaintiff pending the outcomes of all appeals. The $36.6 million of
investments, which are restricted under the terms of the escrow agreement, are
included in investments on the Company's consolidated balance sheet as of May
31, 1997.
On June 2, 1997, the Company announced the entry of a jury verdict against it
in the United States District Court of New Jersey in an action brought by
Orthofix SRL ("Orthofix") against the Company and its wholly-owned
subsidiaries, Electro-Biology, Inc. ("EBI") and EBI Medical Systems, Inc.
("EBIMS"), (the "Biomet Group") related to the events surrounding the
expiration of a distribution agreement under which EBIMS distributed Orthofix's
external fixation devices in the United States. The jury found that,
notwithstanding Orthofix's refusal to renew the distribution agreement, EBIMS's
commencement of development activities of a new external fixation system prior
to the expiration of the contract, constituted a breach of the distribution
agreement. The jury awarded compensatory damages against the Biomet Group for
breach of contract and related claims of approximately $49 million and punitive
damages of $100 million. The jury also concluded that Orthofix breached the
distribution agreement and tortiously interfered with EBIMS' economic
relations, but awarded only nominal damages to the Biomet Group. With respect
to certain non-jury issues, the trial court entered an order denying Orthofix's
motions for enhanced and/or treble damages and attorneys' fees. The trial court
also granted Orthofix's motion for prejudgment interest, but only on the
35
<PAGE> 37
BIOMET, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS,
CONCLUDED.
- -------------------------------------------------------------------------------
NOTE K: COMMITMENTS AND CONTINGENCIES, CONCLUDED.
compensatory portion of the damages commencing from November 29, 1995.
Subsequent to May 31, 1997, the trial court entered judgment in the amount of
the jury's verdict and the Biomet Group has moved for a judgment
notwithstanding the verdict, or a new trial. The Company intends to appeal any
adverse final judgment entered against the Biomet Group.
Based on the information currently available and advice from legal counsel,
management believes that the trial courts' judgments in the Tronzo and Orthofix
cases will not be upheld upon appeal. Therefore, no amounts related to these
two cases have been recorded in the Company's financial statements, except for
estimated legal costs associated with the appeal process. If the Company is
unsuccessful in its appeal of either, or both, of these cases, the ultimate
liabilities could be material to the operating results in the period such
losses are recognized. The Company's cash, cash equivalents and investments are
adequate to address the payment of any losses that could ultimately be
determined with respect to these two cases.
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.
NOTE L: SUBSEQUENT EVENTS.
Cash Dividend - On July 2, 1997, the Company's Board of Directors declared a
cash dividend of $.11 per share, payable August 8, 1997, to shareholders of
record on July 11, 1997.
Acquisition - In June 1997, the Company completed the acquisition of one of its
foreign distributors. The purchase price consisted of $13.1 million cash. The
acquisition will be accounted for using the purchase method of accounting.
36
<PAGE> 38
BIOMET, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
for the years ended May 31, 1997, 1996 and 1995
(in thousands)
- -----------
<TABLE>
<CAPTION>
Col. A Col. B Col. C Col. D Col. E
Additions
--------------------------
(1) (2)
Description Charged to
Balance at Charged to other Balance at
beginning of costs an accounts- Deductions- end of
period expenses describe describe period
------------ ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Allowance for
doubtful receivables:
For the year ended
May 31, 1997 $6,889 $6,912 $528(B) $8,142 (A) $6,175
12 (C)
====== ====== ====== ======== ======
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)
====== ====== ====== ======== ======
</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.
37
<PAGE> 39
BIOMET, INC.
FORM 10-K
MAY 31, 1997
INDEX TO EXHIBITS
Number Assigned
Regulation S-K, Item 601 Title of Exhibit
(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 refer ence 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 ref erence 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).
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.
38
<PAGE> 40
(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.
39
<PAGE> 1
EXHIBIT 11.1
COMPUTATION OF EARNINGS PER COMMON SHARE
BIOMET, INC. AND SUBSIDIARIES
for the years ended May 31, 1997, 1996 and 1995
(in thousands, except earnings per share)
___________________
Computation of EPS based on simple capital
structure without regard to common stock
equivalents:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net income applicable to common shares $106,454 $94,106 $79,200
Weighted average number of shares
outstanding during the year 113,765 115,461 115,459
Primary earnings per common share $.94 $.82 $.69
</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, 1997, 1996 and 1995.
<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 Europe Ltd. (Delaware corporation)
Biomet FSC, Inc. (Barbados corporation)
Biomet Holdings Ltd. (Delaware corporation)
Biomet International Ltd. (Delaware corporation)
Biomet Investment Corp. (Delaware corporation)
Catheter Research, Inc. (Indiana corporation)
EBI Holdings, Inc. (Delaware corporation)
EBI Medical Systems, Inc. (Delaware corporation)
Electro-Biology, Inc. (Delaware corporation)
Kirschner Medical Corporation (Delaware corporation)
Poly-Medics, Inc. (Indiana coporation)
Surgical Ventures, Inc. (Indiana corporation)
Thoramet, Inc. (Indiana corporation)
Vascu-Med, Inc. (Indiana corporation)
Walter Lorenz Surgical, Inc. (Florida corporation)
Foreign subsidiaries:
Biomet AS (Danish corporation)
Biomet Australia Pty. Ltd. (Australia coporation)
Biomet Deutschland GmbH (German corporation)
Biomet Ltd. (U.K. corporation)
Biomet Norge (Norwegian corporation)
Biomet Orthopaedics Ltd. (New Zealand corporation)
Biomet Polska (Polish corporation)
Biomet S.A. (French corporation)
Biomet SpA (Italian corporation)
Canzek AG (Swiss corporation)
EBI Medical Systems Ltd. (U.K. corporation)
Industrias Quirurgicas de Levante s.a. (IQL) (Spanish corporation)
Kirschner Hellas (Greek corporation)
Mediplant NV (Belgian corporation)
ORTA Holdings, A.G. (Swiss corporation)
Ortomed BV (Holland corporatoin)
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
oustanding shares, Biomet Norge of which Biomet Ltd. owns 40% of the
outstanding shares, Biomet AS of which Biomet, Inc. owns 30% of the
outstanding shares, Biomet Polska, of which Biomet Ltd. owns 51% of the
outstanding shares, and Kirschner Hellas of which IQL owns 30% 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. 33-50420 and
33-27008) and in the related Prospectus of our report dated July 3, 1997, on
our audits of the consolidated financial statements and financial statement
schedule of Biomet, Inc. and subsidiaries as of May 31, 1997 and 1996, and for
each of the three years in the period ended May 31, 1997, which report is
included in this Annual Report on Form 10-K.
COOPERS & LYBRAND L.L.P.
South Bend, Indiana
August 15, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-END> MAY-31-1997
<CASH> 82,034,000
<SECURITIES> 41,237,000
<RECEIVABLES> 168,310,000
<ALLOWANCES> 6,175,000
<INVENTORY> 151,523,000
<CURRENT-ASSETS> 464,240,000
<PP&E> 152,839,000
<DEPRECIATION> 61,927,000
<TOTAL-ASSETS> 628,356,000
<CURRENT-LIABILITIES> 72,914,000
<BONDS> 0
0
0
<COMMON> 73,587,000
<OTHER-SE> 479,241,000
<TOTAL-LIABILITY-AND-EQUITY> 628,356,000
<SALES> 580,347,000
<TOTAL-REVENUES> 580,347,000
<CGS> 185,795,000
<TOTAL-COSTS> 420,536,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 651,000
<INCOME-PRETAX> 169,132,000
<INCOME-TAX> 62,678,000
<INCOME-CONTINUING> 106,454,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 106,454,000
<EPS-PRIMARY> .94
<EPS-DILUTED> .94
</TABLE>
