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Stryker Corp – ‘10-K405’ for 12/31/00

On:  Friday, 3/16/01, at 12:46pm ET   ·   For:  12/31/00   ·   Accession #:  310764-1-500006   ·   File #:  0-09165

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  As Of                Filer                Filing    For·On·As Docs:Size

 3/16/01  Stryker Corp                      10-K405    12/31/00    1:484K

Document/Exhibit                   Description                      Pages   Size 

 1: 10-K405     Stryker Corporation                                 HTML    515K 

Washington, D.C. 20549

___________________________

Commission file number: 0-9165

Registrant's telephone number, including area code: (616) 385-2600

___________________________

Securities registered pursuant to Section 12(b) of the Act: Common Stock, $.10 par value

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES [X]         NO [  ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [   ]

Based on the closing sales price of February 28, 2001, the aggregate market value of the voting stock held by nonaffiliates of the registrant was approximately $7,627,948,077.

The number of shares outstanding of the registrant's Common Stock, $.10 par value, was 195,940,893 at February 28, 2001.

Portions of the proxy statement filed with the Securities and Exchange Commission relating to the 2001 Annual Meeting of Stockholders (the "2001 proxy statement") are incorporated by reference into Part III.

The information contained in this report includes forward-looking statements within the meaning of the federal securities laws that are subject to risks and uncertainties. Factors that could cause the Company's actual results and financial condition to differ from the Company's expectations include, but are not limited to: changes in economic conditions that adversely affect the level of demand for the Company's products, changes in foreign exchange markets, changes in financial markets and changes in the competitive environment. All forward-looking statements contained in this report are qualified in their entirety by this cautionary statement.

GENERAL

Stryker Corporation and its subsidiaries (the "Company" or "Stryker") develop, manufacture and market specialty surgical and medical products, including orthopaedic implants, bone cement, trauma systems used in bone repair, powered surgical instruments, endoscopic systems, craniomaxillofacial fixation devices, specialty surgical equipment used in neurosurgery and patient care and handling equipment for the global market and provide outpatient physical and occupational rehabilitative services in the United States. Stryker has developed the bone growth factor osteogenic protein-1 ("OP-1"), which is in the final stage of the marketing authorization process in Europe and Australia for the use of OP-1 for the treatment of specific nonunion fractures of long bones. Stryker was incorporated in Michigan in 1946 as the successor company to a business founded in 1941 by Dr. Homer H. Stryker, a leading orthopaedic surgeon and the inventor of several orthopaedic products.

In October 2000, the Company acquired the intellectual property rights and certain other assets associated with the sale of its Stryker PainPump products in the United States, Canada and Mexico from McKinley Medical LLP. The Stryker PainPump is a pain management device used to aid postsurgical patient recovery.

In August 2000, the Company completed the acquisition of Image Guided Technologies, Inc. (IGT) by merger. IGT manufactures three-dimensional optical measurement devices for anatomical image-display workstations used by physicians to perform image-guided surgery.

In June 2000, the Company acquired Colorado Biomedical, Inc. by merger. Colorado Biomedical, Inc. manufactures the Colorado Micro Needle, which is used for precision electrosurgery in various surgical specialties.

In February 2000, the Company acquired the intellectual property rights associated with the sale of its Neptune Waste Management System ("Neptune") product from American Imuno Tech, LLC. Neptune is a totally self-contained device for handling and disposing of fluid and smoke waste from surgical procedures.

In February 2000, the Company acquired the remaining 50% interest in the patent rights for its Diapason spinal product line.

In November 1999, the Company acquired all of the outstanding common stock of InfoMedix Communications Corporation (now known as Stryker Communications Corporation). Stryker Communications Corporation develops, builds and sells video communications hardware and software that enables telecommunication of surgical images for medical education.

On December 4, 1998, the Company acquired Howmedica, the orthopaedic division of Pfizer Inc. Howmedica develops, manufactures and markets a wide range of specialty medical products utilized in the treatment of musculoskeletal disorders. Howmedica's products include hip and knee implants for primary and revision surgery, bone cement, trauma systems used in bone repair, craniomaxillofacial fixation devices and specialty surgical equipment used in neurosurgery.

In November 1998, the Company purchased the manufacturing rights and facilities for its OP-1 bone growth device from Creative BioMolecules, Inc.

In August 1993, the Company purchased 20% of the outstanding common stock of Matsumoto Medical Instruments, Inc. ("Matsumoto"), Osaka, Japan. Matsumoto was one of the largest distributors of medical devices in Japan. In August 1994, the Company purchased an additional 31% of Matsumoto's outstanding common stock, thereby increasing its direct ownership in Matsumoto to 51%. The results of operations for Matsumoto were consolidated with Stryker beginning in August 1994. Subsequently, Stryker has purchased or acquired additional shares of outstanding common stock of Matsumoto, thereby increasing its direct ownership interest to 100% in January 1999. In 1999, Howmedica Japan was merged into Matsumoto and Matsumoto was renamed Nippon Stryker K.K.

The Company's subsidiary, Physiotherapy Associates, Inc., has also purchased a number of physical therapy clinic operations during each of the last five years.

PRODUCT SALES

The Company segregates its operations into two reportable segments: Orthopaedic Implants and MedSurg Equipment. The Orthopaedic Implants segment includes orthopaedic reconstructive products such as hip, knee, shoulder and spinal implants and trauma-related products. The MedSurg Equipment segment includes powered surgical instruments, endoscopic systems, medical video imaging equipment and patient care and handling equipment. Other consists of Physical Therapy Services, corporate administration, interest expense and interest income. The following amounts ($000,000's) and percentages represent sales by business segment during each of the three years ended December 31:

The above sales amounts include sales of Howmedica beginning December 5, 1998. Additional financial information regarding the Company's operating segments and geographic areas can be found under the caption "Note 11 - Segment and Geographic Data" on pages 48 through 50 of this report.

Approximately 80% of the Company's sales in 2000 and 1999 and approximately two-thirds of the Company's sales in 1998 consisted of products with short lives, such as implants (while implants have a long useful life to the patient, they have a one-time use to the hospital), trauma-related products, disposables and expendable tools and parts, and service revenues, such as service and repair charges and physical therapy revenues. The balance of sales in each of the years was of products that could be considered capital equipment, having useful lives in excess of one year.

The Company's backlog of firm orders is not considered material to an understanding of its business.

Orthopaedic Implants are designed and manufactured by Howmedica Osteonics, Stryker Trauma and Stryker Spine and consist of such products as hip, knee, shoulder and spinal implants, associated implant instrumentation, trauma-related products and bone cement. Artificial joints are made of cobalt chromium, titanium alloys, ceramics or ultra-high molecular weight polyethylene and are implanted in patients whose natural joints have been damaged by arthritis, osteoporosis, other diseases or injury.

The Company is a global leader in sales of hip implants. Under the Howmedica Osteonics brand name, the Company offers a variety of hip systems for the global reconstructive market. The ABG Hip System, Partnership Hip System, Secur-Fit Hip System, Omnifit Hip System and Restoration Hip System represent comprehensive systems of hip implants and associated instrumentation designed to provide physicians with reliable results and reduce operating time for primary and revision procedures. The Exeter Total Hip System is based on a unique, collarless, highly polished, double tapered femoral design that reduces shear stresses and increases compression at the cement/bone interface. In 1998, Howmedica launched the Taro Hip System in Japan. The Taro Hip System provides a line of products that offer an increased range of motion preferred by Japanese surgeons for their patients.

In 1998, the Company introduced Crossfire, a highly cross-linked polyethylene designed to reduce wear. In laboratory testing, this product indicates a significant wear reduction over conventional polyethylene. By the end of 2000, one half of the Company's acetabular inserts utilized Crossfire technology.

In late 1990, Stryker became the first company to receive clearance from the U.S. Food and Drug Administration (FDA) to commercially release for sale in the U.S. a hip implant with hydroxylapatite (HA) surface treatment. HA is a naturally occurring calcium phosphate material that demonstrates a high level of biocompatibility due to its resemblance to human bone. The Company's clinical global experience with HA-coated hip stems now extends over fourteen years and reported clinical performance continues to equal or exceed that of comparable hip stems reported in the scientific literature.

The Company received a recommendation for approval for its ceramic-on-ceramic bearing surfaces from the FDA Advisory Panel in July 2000. Pending FDA approval, which is anticipated in 2001, the ceramic-on-ceramic hip system will be the first of its kind available in the United States. In international markets, the Company has released the Trident Acetabular Shell. This product allows the surgeon to insert either a ceramic insert or polyethylene insert into the same acetabular component. Trident's two independent locking mechanisms provide maximum security for each bearing surface and increase the strength of the ceramic liner.

In 1999, the Company launched the Restoration T-3 and Restoration PS Hip Systems, which provide surgeons hip stems to address the complicated situations encountered in hip revision procedures. Also in 1999, the Company launched the EON hip system. This brand is an evolution of the 20-year clinical history of the Omnifit cemented stem. The EON Stem is designed with neck offset options and a reduced geometry to provide the patient with increased range of motion and further reduce the chance of post-operative hip dislocation.

In 2000, the Company launched the Citation TMZF stem, which incorporates a proprietary new titanium alloy that is more flexible and stronger than traditionally used alloys. The Company also launched the Accolade stem, which is also made from TMZF titanium alloy. With the increased flexibility and strength of TMZF titanium alloy over traditionally used alloys, patients may experience reduced pain due to the less rigid stem which bends with stress while improving overall implant strength.

The Company enters 2001 with 30 years of clinical history with the Exeter Hip System, 20 years of clinical history with the Omnifit cemented stem and 10 years of clinical history with the Omnifit HA stem. Long-term clinical results are an important factor in the Company's ability to market hip implants.

Under the Howmedica Osteonics brand name the Company offers four major knee systems, the Duracon, Kinemax, Interax and Scorpio systems, as well as products that serve specific regional needs. Introduced in 1991 and utilized in over 400,000 procedures worldwide, the Duracon system combines high levels of joint conformity throughout the range of motion and consistent anatomic tracking. The Duracon TS, which was introduced in 1999, completes the product line offering with an implant for complex revision procedures. The Kinemax system is marketed worldwide, with leadership positions in several international markets, offering advanced versatility through design principles based on the clinically successful Total Condylar and Kinematic Knee Systems. The Interax system is the result of a worldwide program to develop an innovative system specially designed to address the variable size requirements of patients of different ages and from different ethnic origins. Precision-designed Monogram instruments provide a common instrument platform for the Duracon, Kinemax and Interax knee systems. The ergonomic engineering of Monogram instruments facilitates efficient use in the operating room, enabling the surgeon to choose the instruments that represent his/her optimal surgical technique. The Scorpio system, introduced in 1997, was designed considering motion of the normal knee based off of its epicondylar axis. This patented approach addresses significant clinical issues, such as improved patient rehabilitation, through an increase in the patella-femoral moment arm and mid-flexion stability through a single anterior-posterior radius. The Scorpio TS Revision Knee System was introduced in 2000 to extend the Company's Scorpio product line into the fast growing revision knee market. The Scorpio system is supported by the Passport instrumentation system, which was designed to provide intraoperative flexibility, precision and a simple, cost effective approach to total knee replacement surgery. In 2000, the Company introduced the Xcellerate instrument platform, which combines features from the Monogram and Passport instrumentation and allows the surgeon to use the same basic instrument platform for both Duracon and Scorpio knee implants.

The Company markets other reconstructive products, principally shoulder and elbow implants and related instruments. The Solar Total Shoulder System was initially marketed in 1996. The unique design of the humeral head allows the surgeon to adjust tension of the supporting tissues while maximizing range of motion. The shoulder instruments offer the surgeon increased visibility and accessibility into this tightly confined joint space. In 1999, the Company released the Solar BiPolar Shoulder. This product provides the surgeon with additional options to address arthritis of the shoulder and is designed with the patented bipolar locking mechanism used in the Company's hip implants. In 2000, the Company added offset heads to its Solar Shoulder product line, giving the surgeon increased intraoperative flexibility to restore the patient's shoulder kinematics. The Solar Total Elbow was launched in 1998 to complement products offered for upper extremity procedures. The semi-constrained design and modular components address varying patient anatomy.

The Company markets its trauma-related products under the Stryker Trauma brand name. Trauma products are used primarily in the fixation of fractures resulting from sudden injury. Trauma products consist of internal fixation devices marketed under such names as Gamma, Grosse & Kempf, Omega, Dall Miles and Alta as well as external fixation devices marketed under the Apex, Hoffmann II and Monotube Triax names.

The Company's internal fixation product portfolio includes a variety of titanium and stainless steel systems of intramedullary nails, trochanteric fixation devices, plates and screws. The Alta system for plating and nailing is mainly marketed in the United States and in Japan. A full range of intramedullary nails is led by the Grosse & Kempf system used throughout the world for over 25 years, the Intramedullary Compression system and the recently introduced Antigrade/Retrograde intramedullary nail. For the treatment of fractures around the neck of the femur, the Company offers the Gamma Locking Nail, a device designed to improve both the procedure and the treatment for all grades of fractures. Since its introduction, Gamma has become one of the leading products in the trauma market. It is widely sold throughout Europe and Japan and is gaining acceptance in the United States. The Company also offers the Omega and OHS brand names as alternatives for the treatment of fractures around the neck of the femur. In addition, the Company offers a new generation of the Asnis Cannulated Screw System, which can simplify operative procedures through features that enhance the ability of surgeons to place, insert and remove locking screws.

The Company's external fixation products include the Hoffmann II modular fixation system, the Monotube Triax monolateral system, the Monticelli-Spinelli circular fixator and a full range of Apex fixation pins. The Hoffmann II system for tibia or femur fractures and the smaller Hoffmann II Compact for upper extremities include a spring-loaded snap-fit mechanism that allows the connection of rods or pins providing for easy assembly of each device, simple reduction procedures and stable fixation. Triax is available in three different sizes allowing for easy and stable fixation of all sizes of bones. It provides an adjustable mechanism for fracture stabilization and a distraction mechanism used for bone lengthening. The new Tenxor hybrid frame system features advanced composite materials and the same easy-to-use snap-fit system as Hoffmann II.

Spinal implant systems are comprised of plates, rods, screws, connectors, spacers and proprietary instrument and container systems. Through Stryker Spine, the Company develops, manufactures and markets spinal implant systems. Physicians use these systems in the treatment of degenerative, tumor, trauma and deformity spinal diseases in the cervical and thoraco-lumbar spine. In 1999, the Company launched the Xia Spinal System, which continues to be one of the fastest-growing rod and screw systems in the United States. The Xia Spinal System is a posterior system designed to relieve pain by stabilizing the spine in the thoracic, lumbar and sacral regions and is accompanied by instrumentation that simplifies the surgical procedures. In 2000, the Company launched enhanced versions of the Xia, OPUS and Diapason thoraco-lumbar fixation systems. The Company also introduced Solis, a new cervical interbody device, and an enhanced version of OIC, a lumbar interbody device, in international markets. Centaur, a thoraco-lumbar anterior rod and plate system introduced internationally in 1999, was made available in the United States in 2000.

Simplex bone cement, a material used to secure cemented implants to bone, was first approved for domestic orthopaedic use in 1971 and is the most widely used bone cement in the world. The Company manufactures several variations of Simplex Bone Cement to meet specific patient needs. Simplex P has 40 years of clinical history, the longest clinical history of any bone cement, with over 250 clinical studies having been published. In 2000, another formulation incorporating antibiotics, Simplex P bone cement with Tobramycin, was introduced in selected international markets.

MedSurg Equipment products include powered surgical instruments, endoscopic systems, medical video imaging equipment, craniomaxillofacial fixation devices, image-guided surgery systems and patient care and handling equipment. These products are designed and manufactured by Stryker Instruments, Stryker Endoscopy, Stryker Leibinger and Stryker Medical.

Stryker Instruments products include a broad line of powered surgical instruments that are used by physicians for drilling, burring, rasping or cutting bone, wiring or pinning bone fractures and preparing hip or knee surfaces for the placement of artificial hip or knee joints. Stryker Instruments also manufactures an array of different cutting accessories and other attachments for use by orthopaedic physicians. Stryker Instruments System 4 Heavy-Duty Battery-Powered Instruments provide an ergonomic and versatile system for total joint and sports applications.

Stryker Instruments also produces products that are utilized in conjunction with joint replacement surgery. The Advanced Cement Mixing System, used to mix bone cement, greatly reduces the risk that air bubbles will weaken the long-term bond between the implant and surrounding bone. Interpulse is a disposable, self-contained pulsed lavage system that is used by physicians to cleanse the surgical site during total joint arthroplasty. The CBC II System is a post-operative wound drainage and blood reinfusion device that enables joint replacement patients to receive their own blood rather than donor blood. As part of a broad surgical product portfolio, Stryker also markets the Steri-Shield Personal Protection System, combining a helmet, hood and gown to help provide protection for operating room personnel against contact with infectious bodily fluids and harmful microorganisms during surgery. In 1999, the Company introduced the Stryker PainPump, which is a disposable system that continually delivers a controlled amount of pain medication directly to the surgical area to help manage a patient's postoperative discomfort. In 2000, Stryker Instruments introduced the Neptune Waste Management system, a totally self-contained device for handling and disposing fluid and smoke waste from surgical procedures.

Stryker Endoscopy products include medical video cameras, light sources, arthroscopes, laparoscopes, powered surgical instruments, irrigation fluid management systems, Endosuite operating room equipment management systems, a radio frequency ablation system and state-of-the-art equipment for telemedicine and worldwide connectivity. Stryker Endoscopy has established a position of technology leadership in the production of video cameras and accessories as well as equipment to provide local or worldwide interconnectivity. In 2000, Stryker Endoscopy launched a third generation Switchpoint III video system through Stryker Communications. The Switchpoint III OR control center provides a simple-to-use method for routing video signals from the operating room to other locations, further enhancing the Endosuite concept of operating room equipment management. The X6000 Xenon lightsource, also introduced in 2000, provides powerful color-correct light for all procedures where rigid endoscopes are used .

Stryker Endoscopy's line of rigid scopes range in diameter from 2.3 millimeters to 10 millimeters, containing a series of precision lenses as well as fiber optics that allow the physician to view internal anatomy with a high degree of clarity. In 2000, the Company expanded its rigid scope line with the introduction of a 5.0 millimeter full screen laparoscope, which provides a large, bright image in a minimally invasive scope design, and the launch of a full line of autoclavable arthroscopes and laparoscopes.

The use of radio frequency (RF) energy for tissue ablation is a rapidly growing market within arthroscopy. In 2000, the Company introduced its SERFAS tissue ablation system, which utilizes RF energy to provide rapid tissue resection in arthroscopic procedures while maintaining hemostasis.

Stryker Leibinger manufactures plates, screws and instruments for craniomaxillofacial fixation and image-guided surgery systems. In January 2000, the Company launched the Delta System of screws and plates made of a resorbable polymer. This innovative material dissolves after providing strong fixation, eliminating the need for follow-up explantation surgery. The Company began distributing the Colorado Micro Needle in 1999 and in 2000 the Company acquired the rights to the Colorado Micro Needle. The needle is used for dissecting large areas such as the scalp, breast tissue and muscle and provides surgeons with a precise cutting tool alternative to the expense of laser cutters. Stryker Leibinger also develops and markets software and hardware for image-guided surgery. The new Stryker Navigation System utilizes wireless technology to give surgeons a simpler way to track instruments intraoperatively in relation to preoperative views.

Stryker Leibinger markets BoneSource, a patented bone substitute material based on an exclusive license from the American Dental Association Health Foundation. BoneSource is self-setting, sculptable and effective in filling bone defects as a result of its ability to form a paste in seconds and harden quickly. In 1996, BoneSource received United States Food and Drug Administration (FDA) clearance for use in treating cranial defects, contiguous cuts and burr holes. In 1997, BoneSource also received FDA clearance for facial augmentation, which expands the application into cosmetic procedures.

The Stryker Instruments, Stryker Endoscopy and Stryker Leibinger product portfolios all include micro-powered tools and instruments that are used in orthopaedics, craniomaxillofacial surgery, functional endoscopic sinus surgery, neurosurgery, spinal surgery and plastic surgery. The Total Performance System (TPS), released in 1996, is a universal surgical system that can be utilized within several medical specialties. The TPS U2 Drill, introduced in 2000, and TPS Burs are designed for use by spine surgeons and neurosurgeons, while the TPS MicroDriver and TPS Sagittal Saw are designed for use by sports physicians and plastic surgeons. The TPS System also powers the SE5 and SE12 Shaver Systems. The Hummer TPS is a powered instrument that incorporates new irrigation capabilities and specialized cutters, eliminating the need for over half of the instruments otherwise required for sinus surgery.

Stryker Medical is the market leader in specialty stretcher products, offering some 30 different types of stretchers customized to fit the needs of acute care and specialty surgical care facilities. Stryker Medical produces beds that are designed to fit the unique needs of specialty departments within the acute care environment. The Secure medical/surgical bed addresses the changing needs of an aging population by being lower to the ground and utilizing the Chaperone center-of-gravity bed exit system to help prevent patient falls. The Chaperone system alarms when more than 50% of the patient's body weight extends beyond the built-in safety limits. Stryker Medical has a complete line of ICU beds for critical care and step-down units. The beds incorporate advanced features that facilitate patient care such as in-bed scales that accurately weigh the patient regardless of bed position and a radiolucent surface that facilitates chest x-rays without moving patients from the beds. Stryker Medical also offers a continuum of mattresses as an option with its frames. In 1999, Stryker Medical launched the Big Wheel stretcher which improves mobility and efficiency of patient handling with less physical strain on the clinical staff. Stryker Medical introduced the Zoom Drive in 1999. The Zoom Drive is the first and only motorized patient handling device to increase patient mobility without necessitating transfer for specialized procedures.

In 2000, Stryker Medical continued to enhance its reputation for durability and innovation by upgrading its easy-loading MX-PRO cot to a 600-pound weight capacity. The EZ-PRO2 and Incubator Transport Cot, both introduced in 1999, round out the Company's line of ambulance cots reputed for durability and low maintenance.

Other includes Physical Therapy Services. Physiotherapy Associates provides physical, occupational and speech therapy services to patients recovering from orthopaedic or neurological illness and injury through a network of 266 outpatient physical therapy centers in 25 states and the District of Columbia. Physiotherapy Associates works closely with referring physicians to design and execute rehabilitation protocols with the goal of quick recoveries for athletes, injured workers and other patients.

PRODUCT DEVELOPMENT

Most of the Company's products and product improvements have been developed internally. In addition, the Company maintains close working relationships with physicians and medical personnel in hospitals and universities who assist in product research and development. New and improved products play a critical role in the Company's sales growth. The Company continues to place emphasis on the development of proprietary products and product improvements to complement and expand its existing product lines. The Company has a decentralized research and development focus with manufacturing divisions responsible for new product development and product improvements. Research, development and engineering functions at the manufacturing divisions maintain relationships with distribution divisions and customers to understand changes in the market and product needs.

Total expenditures for product research, development and engineering were $122.2 million in 2000, $105.2 million in 1999 and $61.0 million in 1998. The foregoing do not include expenditures related to the Howmedica business prior to December 5, 1998. The Company's research, development and engineering expenses represent the continued development of the Company's OP-1 Bone Growth Device discussed below and the Company-wide focus on new product developments. The Company also continues the development of a new spinal technology to be used in the treatment of spinal disorders and in 2000 completed the development of an improved polyethylene to be used in hip and knee implants. Recent new product introductions include the development of implant, spinal and trauma designs. In 2000, the Citation TMZF and Accolade hip stems, Scorpio TS Knee Revision System, Xcellerate knee instrument system, Antigrade/Retrograde intramedullary nail, Tenxor Hybrid external fixator, Asnis III cannulated screw system, OPUS spine system and Solis interbody device were introduced. In 1999, the EON hip implant, Restoration PS and Restoration T-3 hip systems, Duracon Total Stabilizer revision knee system, Xia Spinal System, Centaur thoraco-lumbar anterior rod and plate system and Crossfire Highly Crosslinked Polyethylene for hip implants were introduced, while the Scorpio Cruciate Retaining Knee System and Equinox Cervical Plate were introduced in 1998. In 1998, the Company completed enrollment in its investigational study of contemporary ceramic-on-ceramic bearing surfaces. In July 2000, the Company presented a Pre-Market Approval (PMA) application to the FDA's Orthopaedic Panel and received a recommendation for approval. The Company anticipates approval in 2001 and expects to be the first company in the United States market to offer contemporary ceramic-on-ceramic bearing surfaces. Product introductions in 2000 also included Simplex P bone cement with Tobramycin. New products at Stryker Instruments and Stryker Endoscopy include the development of advanced powered instruments, pain management systems, video technology and specialized operating room equipment. In 2000, the TPS U2 drill, Steri-Shield T4 Personal Protection System, Switchpoint router system, X6000 xenon light source and SERFAS radio frequency ablation system were introduced. In 1999, the Stryker PainPump, 3-Chip 888 video camera, 12K Shaver System and InfraVision Esophageal Kit were introduced, while the System 4000 (the next generation battery-powered instrument system), the Quantum 5000, the InterPulse System lightsource and the Hermes video control system were introduced in 1998. In 2000, Leibinger new product introductions included the Stryker Navigation System for image-guided surgery and the Delta System of resorbable screws and plates. Stryker Medical continues to develop new patient handling equipment with the Adel maternity bed, the Gynnie OB/GYN stretcher and the REM, Aires and Isoflex sleep surfaces. The Big Wheel stretcher, Zoom Drive and EZ-PRO2 Ambulance Cot were introduced in 1999.

In 1991, the Company received FDA approval to begin human clinical trials of its OP-1 Bone Growth Device ("OP-1 Implant"), which was developed in collaboration with Creative BioMolecules, Inc. (a company that subsequently merged into Curis, Inc.) as part of a long-term research program funded by Stryker since 1985. This device is composed of recombinant human osteogenic protein-1 (OP-1) and a bioresorbable collagen matrix. OP-1 is naturally present in the human body and directs a cascade of cellular events that result in bone growth. In preclinical studies, OP-1 induced the formation of new bone when implanted into bony defect sites. In addition, results from early-stage animal trials of OP-1 in cartilage repair have been encouraging. The initial human clinical study, which began in 1992, compared the efficacy of the OP-1 Implant to autografts (the current standard bone graft procedure for the treatment of tibial nonunion fractures, which uses bone chips removed from a patient's hip in a second operation) in the repair of nonunion fractures of long bones. The patients involved in the trial all suffered tibial fractures that showed no evidence of healing at least nine months from the initial injury and at least three months after any prior surgical intervention. Patients received either the OP-1 Implant or autograft bone on a random basis. In 1995, the FDA allowed the Company to enlarge the scope of the clinical trials for expanded indications of nonunion fractures in all long bones. During 1996, the surgical procedures on the 122 patients in the Company's tibial nonunion clinical trial were completed and, in 1997, the Company began the collection and analysis of the data from the clinical trial. The study demonstrated that the OP-1 Implant patients had comparable clinical success to the autograft patients without the need for a second invasive procedure to harvest autograft from the hip. There were three prospectively determined clinical trial outcomes defined in the study: weight-bearing; level of pain with weight-bearing; and radiographic assessment of cortical and/or trabecular bridging. The study design predicted 80% success at nine months post-surgery. Both the OP-1 Implant and autograft groups met this prediction for the clinical outcomes of weight-bearing and pain and both groups had comparable results. The blinded radiographic assessment by an independent panel of radiologists showed that neither group achieved the 80% criteria for bridging, although bridging was higher for the autograft group.

The Pre-Market Approval (PMA) application for the OP-1 Implant was filed and accepted by the FDA in June 1999. The Company received a "Not Approvable" letter from the FDA on January 29, 2001 that cited the failure of the pivotal clinical trial to meet the study endpoint of non-inferiority of the OP-1 Implant compared to the autograft control on a combined clinical and radiographic basis. The FDA has recommended to Stryker that to bring the PMA to an approvable state, a new clinical trial for the same indication is required. Stryker believes the data show that OP-1 Implant has comparable clinical success to autograft and is in the process of meeting with the FDA to explore additional options. The Company cannot predict the outcome of these meetings or the potential approval of the OP-1 Implant for the nonunion indication in the United States. Further clinical testing and PMA fillings would be necessary to expand the approved uses of the product beyond nonunions, if received. The Company also filed a Marketing Authorization Application (MAA) with the European Medicines Evaluation Agency (EMEA) for certain OP-1 uses, which was accepted for filing in July 1999. On December 14, 2000, the Committee for Proprietary Medicinal Products (CPMP) in Europe voted unanimously to recommend market authorization for OP-1 for the indication of nonunions of the tibia which have failed prior autograft treatment or when autograft is not feasible. A New Drug Application with the Therapeutic Goods Administration (TGA) in Australia was filed in December of 1999, and in February 2001 the Australian Drug Evaluation Committee (ADEC) adopted a positive opinion to recommend the granting of marketing authorization for the OP-1 Implant for treatment of long bone nonunions secondary to trauma for the purpose of initiating new bone formation. The Company believes that it will receive full approval in Europe and Australia during the first half of 2001 for the use of OP-1 in the above respective clinical indications. The Company cannot predict the exact timing of the regulatory process at the FDA or other global regulatory agencies.

The surgical procedures for several pilot OP-1 human clinical trials in Europe in cases involving trauma, spine and oral/maxillofacial indications were completed in 1996 and a fresh fracture trial was initiated in Canada in 1997. Enrollment in the Canadian fresh fracture study is ongoing. A pilot study of periodontal defects was initiated in the United States in 1998 and patient enrollment was completed in 2000. Analysis of the clinical data will commence after all patients have reached their follow-up point of one-year post treatment during the second half of 2001. In 1999, the Company began to enroll patients for the first United States investigational device exemption (IDE) study for OP-1 in a spine indication. Enrollment was completed in the first quarter of 2001. Based on preliminary results, the Company intends to seek approval to begin a pivotal clinical trial in the United States in the same indication.

Stryker owns the patents on its osteogenic protein technology and has exclusive worldwide rights under those patents to develop, market and sell OP-1 for treatment, repair or replacement of bone and joint tissue. Curis, Inc. has an exclusive license to the technology for use in other applications. Stryker and Curis, Inc. are obligated to pay royalties to the other on its sales of OP-l based products.

The Company has a royalty-free cross-license agreement with Genetics Institute, Inc., a wholly owned subsidiary of American Home Products Corporation, which holds patents covering a molecule different from OP-1 that may produce similar effects and is conducting pilot and pivotal clinical trials of its molecule in similar indications on a global basis. The agreement will enable Stryker to commercialize OP-1 unencumbered by patent litigation with this competitor. Others also are attempting to develop osteogenic proteins and bioresorbable carriers for the treatment, repair or replacement of bone and joint tissue. These other companies have filed and obtained patents in the U.S. and elsewhere claiming such compounds and methods of making them and using them and may in the future file and obtain other such patents. The Company can provide no assurance that it will not need a license under one or more of those patents to further expand the OP-1 program or whether such licenses will be available.

The purchase of the manufacturing rights, facilities and process development effort for the Company's OP-1 bone growth device in November 1998 ended the research and development agreements Stryker had with Curis, Inc. and its predecessor, Creative BioMolecules, Inc., since 1985.

During 1998, the Company entered into an exclusive collaboration agreement with the Musculoskeletal Transplant Foundation (MTF) to develop combination OP-1 and allograft products. Combinations of OP-1 and allograft may have added clinical value in indications such as spine fusions in the future. A feasibility pilot study was initiated in 2000 in the United States for a combined OP-1 and allograft product for interbody spinal fusion at a single investigational site.

MARKETING

In the United States, most of the Company's products are marketed directly to more than 6,000 hospitals, and to doctors and other health care facilities, by approximately 1,500 sales and marketing personnel. Stryker maintains separate and dedicated sales forces for each of its principal product lines to provide focus and a high level of expertise to each medical specialty served.

Approximately 71% of the Company's domestic revenues in 2000 were accounted for by sales to hospital cooperative buying groups and other large national accounts and 1% by sales to the Veterans Administration and other hospitals operated by the Federal government.

International sales accounted for 38% of total revenues in 2000. The Company's products are sold in over 100 foreign countries, through more than 630 local dealers and direct sales efforts. Local dealer support and direct sales are coordinated by approximately 1,500 sales and marketing personnel. Stryker distributes its products through sales subsidiaries and branches with offices located in Australia, Belgium, Brazil, Canada, Chile, Denmark, Finland, France, Germany, Greece, Hong Kong, India, Italy, Japan, Korea, Mexico, The Netherlands, New Zealand, Norway, Poland, Romania, South Africa, Spain, Sweden, Switzerland and the United Kingdom. Stryker exports products to dealers and to customers in China, the CIS (former Soviet Union), India, Italy, Korea, Latin America, Malaysia, the Middle East, Singapore and Taiwan. Additional information regarding the Company's foreign and domestic operations and sales appears in "Note 11--Segment and Geographic Data" on pages 48 through 50 of this report.

The Company's business is generally not seasonal in nature; however, the number of orthopaedic implant surgeries is lower during the summer months.

COMPETITION

The Company is one of four leading competitors in the U.S. market for orthopaedic reconstructive products, the others being J&J DePuy Orthopedics (a subsidiary of Johnson & Johnson), Zimmer, USA Inc. (a subsidiary of Bristol-Myers, Squibb, Inc.) and Biomet, Inc. While competition abroad varies from area to area, the Company believes it is also a leading factor in the international markets, with these same companies, along with Sulzer Medica being its principal competitors.

In the trauma market, Stryker is one of four market leaders with the principal competitors being Synthes-Stratec, Smith & Nephew Richards (a division of Smith & Nephew PLC) and J&J DePuy Orthopedics (a subsidiary of Johnson & Johnson).

In the spinal implant market, the Company is one of five market leaders with the principal competitors being Medtronic Sofamor Danek, Inc. (a subsidiary of Medtronic, Inc.), DePuy AcroMed (a subsidiary of Johnson & Johnson), Synthes-Stratec and Spine-Tech (a subsidiary of Sulzer Medica).

In the powered surgical instruments market, Stryker is one of the three market leaders, with the principal domestic competitors being Linvatec, Inc. (a subsidiary of Conmed Corporation) and Midas-Rex, Inc. (a subsidiary of Medtronic, Inc.). These companies are also competitors in the international markets, along with Aesculap-Werke AG, a large European manufacturer.

In the arthroscopy market, the Company considers itself to be one of the three market leaders, with the principal competitors being Smith & Nephew Endoscopy (a division of Smith & Nephew PLC) and Linvatec, Inc. (a subsidiary of Conmed Corporation). In the laparoscopic imaging products market, the Company considers itself to be one of the four market leaders, with the principal competitors being Karl Storz GmbH & Co. (a German company), Circon Corporation (a subsidiary of Maxxim Medical Inc.) and Olympus Optical Co. Ltd. (a Japanese company).

In the craniomaxillofacial market, Stryker is one of three market leaders, with the principal competitors being Synthes-Stratec and Walter Lorenz (a subsidiary of Biomet, Inc.).

The Company is a new participant in the surgical navigation market with the five principal competitors being Medtronic Surgical Navigation Technologies (a division of Medtronic, Inc.), BrainLAB Inc., Radionics, Inc. (a subsidiary of Tyco International Ltd.), Surgical Navigation Network Inc. (a division of Cedara Software Corporation) and Visualization Technology Inc.

The Company's primary competitor in the hospital bed market is Hill-Rom (a division of Hillenbrand Industries). In the specialty stretcher market, the primary competitors are Hausted, Inc. (a subsidiary of Steris Corporation), Hill-Rom and Midmark Hospital Products Group (a subsidiary of OMI, Inc.). In the ambulance cot market, Ferno-Washington is the Company's primary competitor.

In the outpatient physical and occupational rehabilitation market, the Company's primary competitors are independent therapist-owned practices and hospital-based services, in addition to other national rehabilitation companies, including HealthSouth Corporation and NovaCare Rehabilitation (a division of Select Medical Corporation).

The Company believes that several companies are engaged in the research and development of morphogenic proteins for the repair of hard and soft tissues that would compete with the Company's OP-1 Implant, including Genetics Institute, Inc. (a subsidiary of American Home Products Corporation), which has completed human clinical trials of a recombinant bone morphogenetic protein (rhBMP-2) for repair of orthopaedic and other skeletal defects. The Company believes that based on the results of these studies Genetics Institute has filed a PMA in the United States for the indication of tibial fresh fractures. It is expected that a partner of Genetics Institute in the spine field, Medtronic Sofamor Danek, will file a PMA for the use of rhBMP-2 in an interbody fusion cage. A number of other companies currently provide various other therapies, including allografts, bone fillers and electrical stimulation devices for the treatment, repair or replacement of bone and joint tissue. The Company believes that its OP-1 Implant, which is currently in clinical trials, would ultimately compete with these products and traditional therapies, such as autografts.

The principal factors that the Company believes differentiate its products in these highly competitive markets and enable it to compete effectively are innovative products, reliability, service and reputation. The Company is not able to predict the effect that continuing efforts to reduce health care expenses generally and hospital costs in particular will have on the future sales of its products or its competitive position. (See "Regulation and Product Quality.") The Company believes that its competitive position in the future will depend to a large degree upon the new products and improvements in existing products it is able to develop. While the Company does not consider patents a major factor in its overall competitive success, patents and trademarks are significant to the extent that a product or attribute of a product represents a unique design or process. Patent or trademark protection of such products restricts competitors from duplicating these unique product designs and features. Stryker seeks to obtain patent protection whenever possible on its products. The Company currently has approximately 580 U.S. patents and 930 foreign patents.

MANUFACTURING AND SOURCES OF SUPPLY

The Company's manufacturing processes consist primarily of precision machining, metal fabrication and assembly operations and the forging and investment casting of cobalt chrome and finishing of cobalt chrome and titanium. Approximately 11% of the Company's cost of sales in 2000 represented finished products that were purchased complete from outside suppliers. The Company also purchases parts and components, such as forgings, castings, gears, bearings, casters and electrical components, and uses outside sources for certain finishing operations, such as plating, hardening and coating of machined components and sterilization of certain products. The principal raw materials used by the Company are stainless steel, aluminum, cobalt chrome and titanium alloys. In all, purchases from outside sources were approximately 30% of the total cost of sales in 2000.

While the Company relies on single sources for certain purchased materials and services, it believes alternate sources are available if needed. The Company has not experienced any significant difficulty in the past in obtaining the materials necessary to meet its production schedules.

Products manufactured by the Company's Medical Division are generally assembled to order, while other products are stocked in inventory.

REGULATION AND PRODUCT QUALITY

The Medical Device Amendments of 1976 to the Federal Food, Drug and Cosmetic Act, the Safe Medical Devices Act of 1990, and regulations issued or proposed thereunder, provide for regulation by the FDA of the design, manufacture and marketing of medical devices, including most of the Company's products.

The FDA's "Good Manufacturing Practices" and "Quality System" regulations set forth standards for the Company's product design and manufacturing processes, require the maintenance of certain records and provide for inspections of the Company's facilities by the FDA. There are also certain requirements of state, local and foreign governments that must be complied with in the manufacturing and marketing of the Company's products. The Company believes that the manufacturing and quality control procedures it employs meet the requirements of these regulations.

Most of the Company's new products fall into FDA classifications that require notification of and review by the FDA before marketing (submitted as a 510(k)). The Company's OP-1 Implant requires extensive clinical testing, consisting of safety and efficacy studies, followed by a PMA application (see "Product Development").

Stryker also is subject to the laws that govern the manufacture and distribution of medical devices of each country in which the Company manufactures or sells products. The member states of the European Union ("EU") have adopted the European Medical Device Directives, which create a single set of medical device regulations for all EU member countries. These regulations require companies that wish to manufacture and distribute medical devices in EU member countries to obtain Community European ("CE") marks for their products. Stryker has authorization to apply the CE mark to its hip, knee, upper extremity, spinal implant and trauma products, and its Endoscopy, Instruments, Leibinger and Medical Division products. The Company's OP-1 Implant has been considered a drug under the regulations for Europe, Australia and Japan.

Government agencies and legislative bodies in the United States and other countries are considering various proposals designed to hold down increases in health care costs. It is impossible to predict at this time the long-term impact of such cost containment measures on the Company's future business.

EMPLOYEES

At December 31, 2000, the Company had 12,084 employees worldwide, including 4,644 involved in manufacturing, warehousing and distribution operations, 3,024 in marketing and sales, 737 in research, development and engineering, 2,344 providing physical, occupational and speech therapy and the balance in general management and administration. Approximately 1,450 employees are covered by collective bargaining agreements. Labor agreements covering approximately 460 domestic employees expire in August 2002 and labor agreements covering approximately 990 international employees are updated annually. The Company believes that its employee relations are satisfactory.

The Company has the following properties:

The Company is a defendant in various legal actions arising in the normal course of business. The Company does not anticipate material losses as a result of these actions beyond amounts already provided for.

Not applicable.

EXECUTIVE OFFICERS

Certain information with respect to the executive officers of the Company is set forth in Item 10 of this report.

The Company's Common Stock is traded on the New York Stock Exchange under the symbol SYK. Prior to July 24, 1997, the Company's Common Stock was traded in the over-the-counter market on The Nasdaq Stock Market. Quarterly stock prices appear under the caption "Summary of Quarterly Data" on page 52 of this report and dividend information for the years ended December 31, 2000 and 1999 under the caption "Summary of Operations" on page 19 of this report. The Company's Board of Directors intends to consider a year-end cash dividend annually at its December meeting.

Stryker has restrictive covenants in its bank credit agreement that place limitations on increases in dividend payments and prohibit repurchases of Common Stock.

On February 28, 2001, there were 3,035 stockholders of record of the Company's Common Stock.

The financial information for each of the five years in the period ended December 31, 2000 is set forth below (dollars in millions, except per share amounts):

SUMMARY OF OPERATIONS

FINANCIAL AND STATISTICAL DATA

RESULTS OF OPERATIONS

The table below outlines the components of the consolidated statements of earnings as a percentage of net sales and the year-to-year percentage change in dollar amounts:

The table below sets forth domestic/international and product line sales information:

Stryker Corporation's net sales increased 9% in 2000 to $2,289.4 million from $2,103.7 million in 1999. Net sales grew by 9% as a result of increased unit volume; 1% related to higher selling prices; and 1% as a result of acquired businesses. These increases were partially offset by a 2% decline due to changes in foreign currency exchange rates.

The Company's domestic sales increased 15% in 2000 compared with 1999. The domestic sales gain is a result of higher shipments of orthopaedic implants, powered surgical instruments, endoscopic equipment and hospital beds and stretchers, together with higher revenue from physical therapy services. International sales increased 1% for the year as a result of higher shipments of Orthopaedic Implants and MedSurg Equipment. The impact of foreign currency comparisons on the dollar value of international sales was unfavorable by $43.0 million for the year. Sales of discontinued products in 1999 were $7.7 million. Excluding the impact of foreign currency and discontinued products, international sales increased 7% in 2000.

Worldwide sales of Orthopaedic Implants were $1,313.0 million for 2000, representing an increase of 5% as a result of higher shipments of reconstructive (hip, knee and shoulder), trauma and spinal implants. Excluding the impact of foreign currency, sales of Orthopaedic Implants increased 8% in 2000. Worldwide sales of MedSurg Equipment were $829.1 million for 2000, representing an increase of 13% based on higher shipments of powered surgical instruments, endoscopic systems, hospital beds and stretchers and Leibinger craniomaxillofacial implants and image-guided surgical systems. Excluding the impact of foreign currency and discontinued products, sales of MedSurg Equipment increased 14% in 2000. Physical Therapy Services revenues were $147.3 million for 2000, representing an increase of 21% as a result of new physical therapy centers and higher revenues from existing centers.

Cost of sales represented 35.6% of sales compared with 47.0% in 1999. The higher cost of sales percentage in 1999 resulted from $198.2 million of additional nonrecurring cost of sales for inventory sold in 1999 that was stepped-up to fair value in connection with the acquisition of Howmedica, compared with no inventory step-up included in 2000 cost of sales. Excluding the nonrecurring cost of sales charges for inventory step-up, cost of sales would have declined from 37.6% of sales in 1999 to 35.6% in 2000. The decline is primarily the result of the realization of cost savings from cost reduction plans implemented at former Howmedica manufacturing plants and of slightly higher selling prices in 2000.

Research, development and engineering expenses increased 16% in 2000 and represented 5.3% of sales in 2000 compared with 5.0% in 1999. The increase in research, development and engineering spending in 2000 resulted from continued Company-wide focus on new product development. New product introductions in 2000 included Crossfire Highly Crosslinked Polyethylene for Howmedica implants, the Scorpio TS Revision Knee System, Stryker Instruments' TPS U2 drill, the Steri-Shield T4 Personal Protection System, the Stryker Navigation System, the Antigrade/Retrograde intramedullary nail, the OPUS spinal system, resorbable craniomaxillofacial plates and screws and, in certain international markets, Simplex P bone cement with Tobramycin.

Selling, general and administrative expenses increased 10% in 2000 and represented 38.7% of sales compared with 38.4% in 1999. Selling, general and administrative expenses as a percentage of sales were comparable in both years after considering the inclusion of $7.1 million in 2000 and $0.6 million in 1999 of discount expense related to the accounts receivable securitization program established in November 1999.

The Company recognized nonrecurring credits of $1.0 million in continuing operations relating to various acquisition-related and restructuring events in the fourth quarter of 2000 and recognized nonrecurring acquisition-related charges of $18.9 million in 1999. The 2000 acquisition-related and restructuring credits include the reversal of prior year restructuring accruals totaling $7.0 million, offset by charges totaling $6.0 million. The $7.0 million in credits includes $1.2 million related to the reorganization of Stryker's distribution channels associated with the acquisition of Howmedica and $2.7 million to reverse reserves for a distributor reorganization that was charged to operations in 1996. The credits also include $2.7 million related to a reduction in the expected costs to complete headcount reductions in Japan and $0.4 million to reverse a portion of loss reserves established for discontinued ophthalmology inventories sold on a contingent basis. Both of these credits represent the reversal of charges originally taken in connection with the 1999 reorganization of the Company's Japanese distribution operation and the discontinuance of distribution of ophthalmology products in Japan. The $6.0 million in 2000 restructuring charges includes a $4.0 million charge to cover severance costs for 95 employees, primarily in Europe. Approximately 10% of the planned workforce reductions were completed in December 2000, with the remaining reductions expected to be completed in 2001. The 2000 restructuring charges also include $1.4 million for asset write-offs, primarily for goodwill and inventory, and lease commitments associated with certain operations, principally in Europe, that were closed in the fourth quarter of 2000. The 2000 restructuring charges also include $0.6 million to terminate two small European distributors.

In 1999, the Company recognized nonrecurring acquisition-related charges of $18.9 million, consisting of $14.2 million to reorganize Stryker's Japanese distribution operation and to discontinue the distribution of ophthalmology products in Japan and $4.7 million to complete the reorganization of Stryker's distribution channels to accommodate the Howmedica integration.

Interest expense declined to $96.6 million in 2000 from $122.6 million in 1999, primarily as a result of lower outstanding debt balances. The increase in intangibles amortization to $34.7 million in 2000 from $33.9 million in 1999 relates primarily to business acquisitions during 2000. Other income declined from $4.8 million in 1999 to other expense of $1.2 million in 2000 primarily as a result of foreign currency transaction losses. The effective tax rate for 2000 was 34.0% compared with a 34.9% effective tax rate in 1999. The decrease in the rate from 1999 to 2000 is attributable to the mix of operating results among the tax jurisdictions.

Net earnings were $221.0 million (basic and diluted net earnings per share of $1.13 and $1.10, respectively) compared with $19.4 million (basic and diluted net earnings per share of $.10) in 1999. Excluding nonrecurring items in both years, net earnings in 2000 increased 37% to $220.3 million from $160.5 million in 1999; basic net earnings per share increased 36% to $1.13 in 2000 from $.83 in 1999; and diluted net earnings per share increased 36% to $1.10 in 2000 from $.81 in 1999.

Stryker Corporation's net sales increased 91% in 1999 to $2,103.7 million from $1,103.2 million in 1998. Net sales increased $854.5 million, or 77%, as a result of the Howmedica acquisition. Net sales also grew by 9% as a result of increased unit volume; 3% related to higher selling prices from the conversion of distributors to direct sales; 2% as a result of other acquired businesses; and 1% due to changes in foreign currency exchange rates. These increases were partially offset by a 1% decline in selling prices.

Net sales on a pro forma basis increased 10% in 1999 compared with 1998. Increased unit volume generated a 7% sales increase. Net sales also increased 2% related to the conversion of certain portions of the Company's distribution networks to direct sales and 1% from changes in foreign currency exchange rates.

The Company's domestic sales increased 69% (12% on a pro forma basis) in 1999 compared with 1998. The domestic sales gain was a result of the Howmedica acquisition; higher shipments of orthopaedic implants, powered surgical instruments and endoscopic equipment; and increased revenue from physical therapy services. U.S. sales of Howmedica products in 1999 were $413.9 million, representing an increase of 6% over sales for 1998. Excluding a $17.1 million sales credit in 1998 for inventory repurchased from distributors, pro forma domestic sales increased 10% for the year. International sales increased 134% (8% on a pro forma basis) for the year as a result of the Howmedica acquisition and higher shipments of Stryker products. International sales of Howmedica products were $488.5 million in 1999, representing an increase of 7% over sales for the prior year. Foreign currency comparisons were favorable in 1999, adding $13.1 million ($12.9 million on a pro forma basis), or 3% (2% on a pro forma basis), to the dollar value of international sales.

Worldwide sales of Orthopaedic Implants were $1,248.2 million for 1999, representing an increase of 205% (12% on a pro forma basis) as a result of the Howmedica acquisition and higher shipments of reconstructive, trauma and spinal implants. Excluding the $17.1 million sales credit in the prior year, pro forma sales of Orthopaedic Implants increased 11% for the year. Worldwide sales of MedSurg Equipment were $733.5 million in 1999, representing an increase of 27% (8% on a pro forma basis) based on higher shipments of powered surgical instruments and endoscopic systems along with the Leibinger craniomaxillofacial product line acquired with Howmedica. Revenues from Physical Therapy Services increased 5% during the year as a result of the start-up of rehabilitative clinics, the acquisition of certain clinics and same-store revenue growth of 2%.

Cost of sales represented 47.0% of sales compared with 42.8% in 1998. The higher cost of sales percentage in 1999 resulted from $198.2 million of additional nonrecurring cost of sales for inventory sold in 1999 that was stepped-up to fair value in connection with the acquisition of Howmedica, compared with $7.8 million of inventory step-up included in 1998 cost of sales. Excluding the nonrecurring cost of sales charges for inventory step-up, cost of sales would have declined to 37.6% of sales in 1999 compared with 42.1% in 1998. The decline is primarily the result of a higher mix of Orthopaedic Implant sales as a result of the acquisition of Howmedica.

Research, development and engineering expenses increased 72% in 1999 and represented 5.0% of sales in 1999 compared with 5.5% in 1998. The increase in research, development and engineering spending in 1999 resulted from the acquisition of Howmedica and from the 1998 purchase of the manufacturing rights and facilities for OP-1. New product introductions in 1999 included Crossfire Highly Crosslinked Polyethylene for hip implants, the Secur-Fit Plus Hip Restoration System, the Duracon Total Stabilizer revision knee system, the Xia Spinal System, Stryker Instruments' PainPump, 12K Shaver System, 888 3-Chip Digital Camera, the Big Wheel stretcher and the Zoom Drive.

Selling, general and administrative expenses increased 116% in 1999 and represented 38.4% of sales in 1999 compared with 33.9% in 1998. The increase in selling, general and administrative expenses was the result of the acquisition of Howmedica, and the increase as a percent of sales reflected the higher mix of Orthopaedic Implant sales, which cost more to sell than the Company's other products.

The Company recognized nonrecurring acquisition-related charges in continuing operations of $18.9 million in 1999 and $116.3 million in 1998. The 1999 charges included $14.2 million to reorganize Stryker's Japanese distribution operation in order to accommodate the integration with Howmedica and to discontinue the distribution of ophthalmology products in Japan. The $14.2 million charge included $11.6 million of severance-related costs and $2.6 million to cover costs associated with the discontinuance of the ophthalmology product line. The 1999 charges also included $4.7 million to complete the reorganization of Stryker's distribution channels to accommodate the Howmedica integration. The cost of the conversions was based on contractual terms. In 1998 the Company recognized a charge of $83.3 million to operations for purchased research and development, $78.4 million related to the Howmedica acquisition and $4.9 million related to the acquisition of the OP-1 manufacturing rights and facilities. The Company also recorded 1998 charges of $21.8 million to reorganize Stryker distribution channels in order to accommodate the integration with Howmedica and $11.2 million in expensed transaction costs associated with the acquisition of Howmedica and of the manufacturing rights and facilities for OP-1.

The completion dates of the two significant acquired in-process research projects, which were in development by Howmedica at the time of the acquisition, have generally progressed according to plan. These projects relate to the development of a new spinal technology to be used in the treatment of spinal disorders and the development of an improved polyethylene to be used in hip and knee implants. The spinal project development is expected to be completed in 2002 as planned, but the timing of estimated future revenues is expected to be delayed due to clinical trial and regulatory approval requirements. The timing of estimated future revenues associated with the polyethylene project was slightly delayed due to the leveraging of the technology acquired from Howmedica with technology previously existing in the Company. The integration of the two technologies was completed in the second half of 2000 with the introduction of Crossfire Highly Crosslinked Polyethylene for Howmedica implants.

Interest expense increased to $122.6 million in 1999 from $12.2 million in 1998 due to the borrowing of approximately $1,500.0 million to fund the Howmedica acquisition. The increase in intangibles amortization to $33.9 million in 1999 from $7.6 million in 1998 relates primarily to the Howmedica acquisition. Other income declined to $4.8 million in 1999 from $16.5 million in the prior year due to lower interest income. The effective tax rate for 1999 was 34.9% compared with a 34.0% effective tax rate in 1998. The increase in the rate from 1998 to 1999 was attributable to the mix of operating results among the tax jurisdictions.

Net earnings were $19.4 million (basic and diluted net earnings per share of $.10) compared with $60.0 million (basic and diluted net earnings per share of $.31) in 1998, a decrease of 68%. Excluding nonrecurring charges in both years, net earnings in 1999 increased 13% to $160.5 million from $141.9 million in 1998; basic net earnings per share increased 12% to $.83 in 1999 from $.74 in 1998; and diluted net earnings per share increased 13% to $.81 in 1999 from $.72 in 1998.

The Company's working capital at December 31, 2000 decreased $61.2 million to $379.6 million from $440.8 million at December 31, 1999. The working capital decrease is primarily due to the use of cash and the sale of an additional $30.3 million of domestic accounts receivable under a securitization facility established in November 1999, along with cash earnings, to reduce total debt by $274.9 million. Accounts receivable days sales outstanding, excluding the effect of the securitization program, decreased seven days to 69 days at the end of 2000 from 76 days at December 31, 1999. The lower days sales outstanding at December 31, 2000 is the result of a decrease in the aging of certain U.S. accounts receivable. Days sales in inventory decreased to 166 days at December 31, 2000 from 174 days at December 31, 1999.

The Company generated cash of $331.8 million from operations in 2000 compared with $284.0 million in 1999. The generation of cash in 2000 is the result of strong cash earnings (net earnings plus noncash adjustments) plus $30.3 million in proceeds from the accounts receivable securitization program and an increase in accrued expenses. These increases were partially offset by increases in accounts receivable, inventories and deferred charges, payments of $37.4 million attributable to acquisition-related and restructuring charges and acquisition purchase liabilities, and a decrease in accounts payable. In 2000, the Company used cash of $80.7 million for capital expenditures, $24.5 million for business acquisitions and $12.7 million for the payment of dividends. The Company also borrowed an additional $209.9 million under the existing credit facilities to fund cash flow needs at various times during 2000 and made repayments of $463.3 million against the credit facilities in 2000. Total debt declined by $274.9 million during 2000.

In November 1999, the Company established a securitization facility under which certain domestic accounts receivable are sold on an ongoing basis to a special-purpose subsidiary which in turn may sell up to a $130.0 million undivided percentage ownership interest in such receivables to a third party. The accounts receivable securitization facility was established to reduce the Company's overall cost of borrowing. The accounts receivable securitization facility provided $30.3 million of proceeds during 2000, with the program-to-date proceeds totaling $127.3 million as of December 31, 2000. The proceeds were used to reduce the Company's long-term debt.

The Company had $54.0 million in cash and cash equivalents at December 31, 2000. The Company also had outstanding borrowings totaling $1,012.5 million at that date. Current maturities of long-term debt at December 31, 2000 are $136.0 million and will increase to $156.9 million in 2002 and $195.3 million in 2003. The Company believes its cash on hand as well as anticipated cash flows from operations will be sufficient to fund future operating and capital requirements, payment of a working capital adjustment to the purchase price of the Howmedica acquisition and required debt repayments. Should additional funds be required, the Company had $294.1 million of additional borrowing capacity available under existing credit facilities at December 31, 2000.

The Company finalized its plan to integrate Howmedica and Stryker in 1999. As the integration plan evolved and was implemented during 1999, the Company made certain adjustments to the purchase liabilities recorded in the preliminary purchase price allocation. These adjustments resulted in net increases of $13.1 million to goodwill recorded in connection with the acquisition. The additional purchase liabilities recorded in connection with the acquisition of Howmedica totaled $126.5 million. At December 31, 2000, there were $12.0 million in additional purchase liabilities remaining to be paid out. The Company anticipates that approximately one-half of these obligations will be paid in 2001. Certain obligations, such as those related to lease commitments for facility closures, will result in payments extending to as late as 2008.

The Company manufactures its products in the United States, France, Germany, Ireland, Switzerland, Canada and Puerto Rico and distributes its products throughout the world. As a result, the Company's financial results could be significantly affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets. The Company's operating results are exposed to changes in exchange rates between the U.S. dollar and the Japanese yen and European currencies, in particular the euro and the British pound. When the U.S. dollar strengthens against foreign currencies, the dollar value of foreign currency sales declines and the relative cost of U.S.-sourced product increases, thereby decreasing gross margins. When the U.S. dollar weakens, the opposite situation occurs.

The Company enters into forward foreign exchange contracts to mitigate the impact of currency fluctuations on transactions denominated in foreign currencies, thereby limiting risk to the Company that would otherwise result from changes in exchange rates. These foreign currency exposures principally relate to intercompany payables arising from intercompany purchases of manufactured products. The periods of the forward foreign exchange contracts correspond to the periods of the exposed transactions, with realized gains and losses included in the measurement and recording of the foreign-currency-denominated transactions.

At December 31, 2000, the Company had outstanding forward foreign exchange contracts to purchase $82.7 million and sell $33.8 million of various currencies (principally U.S. dollars and euros) with maturities principally ranging from 30 to 90 days. At December 31, 1999, the Company also had outstanding forward foreign exchange contracts to purchase $31.1 million and sell $47.3 million of various currencies (principally U.S. dollars) with maturities ranging from 30 to 180 days.

The estimated fair value of foreign currency contracts represents the measurement of the contracts at month-end spot rates as adjusted for amortized forward points. At December 31, 2000 and 1999, the difference between fair values and contract amounts was not material. A hypothetical 10% change in exchange rates for these currencies would change the 2000 fair value by approximately $1.6 million and would have changed the 1999 fair value by approximately $7.0 million.

The Company's exposure to market risk for changes in interest rates relates to its borrowings. The Company manages its interest rate risk on its borrowings through interest rate swap agreements, which have fixed the base rate on a $600.0 million notional amount of the $1,012.5 million of variable borrowings outstanding at December 31, 2000. If market interest rates for similar borrowings average 1% more in 2001 than they did in 2000, the Company's interest expense, after considering the effects of its interest rate swaps, would increase, and earnings before income taxes would decrease by $3.9 million. By comparison, if market interest rates average 1% less in 2001 than they did during 2000, the Company's interest expense, after considering the effects of its interest rate swaps, would decrease, and earnings before income taxes would increase by $3.9 million. These amounts are determined by considering the impact of hypothetical interest rates on the Company's borrowing cost and interest rate swap agreements without any actions by management to mitigate its exposure to such changes.

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BUSINESS: Stryker Corporation develops, manufactures and markets specialty surgical and medical products that are sold primarily to hospitals throughout the world and provides outpatient physical therapy services in the United States.

PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries after elimination of all significant intercompany accounts and transactions.

REVENUE RECOGNITION: Revenue is recognized on the sale of products and services when the related goods have been shipped or services have been rendered.

SHIPPING AND HANDLING COSTS: Costs incurred related to shipment and handling of products are included in cost of sales.

USE OF ESTIMATES: The preparation of these consolidated financial statements in conformity with generally accepted accounting principles requires Company management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

FOREIGN CURRENCY TRANSLATION: The financial statements of the Company's international affiliates are translated into U.S. dollars using current exchange rates for balance sheets and average exchange rates for statements of earnings and cash flows. Unrealized translation adjustments are included in accumulated other comprehensive gain (loss) in stockholders' equity. Transaction gains and losses, such as those resulting from the settlement of foreign currency receivables or payables, are included in net earnings.

CASH EQUIVALENTS AND INVESTMENTS: Cash equivalents are highly liquid investments with a maturity of three months or less when purchased. Investments include marketable debt securities classified as current assets and marketable equity securities and other investments classified in other assets. Other investments consist of mutual funds that are acquired to offset changes in certain liabilities related to deferred compensation arrangements.

The Company's investments are stated at fair value based on quoted market prices. Interest, dividends and realized gains and losses on the sale of cash equivalents and the equity and debt securities are included in other expense (income). Adjustments to fair value of the equity and debt securities, which are classified as available-for-sale, are recorded as increases or decreases, net of income taxes, within accumulated other comprehensive gain (loss) in stockholders' equity. Adjustments to other investments, which are classified as trading, are recorded as offsets to the related changes in liabilities under deferred compensation arrangements.

ACCOUNTS RECEIVABLE SECURITIZATION: In November 1999, the Company established an accounts receivable securitization facility pursuant to which certain subsidiaries of the Company sell on an ongoing basis all of their domestic receivables to Stryker Funding Corporation, a wholly owned special-purpose subsidiary of the Company, which in turn may sell up to an aggregate of a $130.0 undivided percentage ownership interest in such receivables to a multiseller commercial paper conduit administered by a bank. Creditors of Stryker Funding Corporation have a claim to its assets before any equity becomes available to the Company.

The amounts of accounts receivable sold to Stryker Funding Corporation totaled $127.3 and $97.0 at December 31, 2000 and 1999, respectively, and are reflected in the balance sheet as reductions of accounts receivable. The amount of receivables sold is subject to change monthly, based on the level of defined eligible receivables less contractual reserves. The Company's retained interest in accounts receivable administered by Stryker Funding Corporation, which represents an overcollateralization of the undivided interest sold, totaled $55.6 and $94.0 at December 31, 2000 and 1999, respectively. Costs associated with the securitization facility, including the conduit's financing cost of issuing its commercial paper, were $7.1 in 2000 and $0.6 in 1999 and are included in selling, general and administrative expenses.

INVENTORIES: Inventories are stated at the lower of cost or market. Cost for approximately 89% (90% in 1999) of inventories is determined using the lower of first-in, first-out (FIFO) cost or market. Cost for certain domestic inventories is determined using the last-in, first-out (LIFO) cost method. The FIFO cost for all inventories approximates replacement cost.

PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment is stated at cost. Depreciation is computed by the straight-line or declining-balance methods over the estimated useful lives of 3 to 30 years for buildings and improvements and 3 to 10 years for machinery and equipment.

GOODWILL AND OTHER INTANGIBLE ASSETS: Goodwill and other intangible assets represent the excess of purchase price over fair value of tangible net assets of acquired businesses. Goodwill is amortized on a straight-line basis over 10 to 40 years (weighted average life of 32 years). Other intangible assets include developed technology, which is amortized on a straight-line basis over 20 years, and customer base (which reflects expected continued customer patronage), trademarks, trade names, patents and assembled work force, which are amortized on a straight-line basis over 5 to 35 years (weighted average life of 18 years for other intangible assets).

The carrying amounts of goodwill and other intangible assets are reviewed if facts and circumstances suggest they may be impaired. If the review indicates that the carrying amount of any intangible asset will not be recoverable, as determined using an undiscounted cash flow analysis, the carrying amount of the goodwill or other intangible asset is reduced by the estimated shortfall of cash flows to fair value.

DEFERRED CHARGES: Deferred charges represent the net book value of loaner instruments for surgical implants provided to customers by the Company. These instruments are amortized on a straight-line basis over periods ranging from one to three years. Amortization expenses for instruments are included in selling, general and administrative expenses.

DEFERRED LOAN COSTS: Deferred loan costs associated with the Company's Senior Secured Credit Facilities are being amortized over the terms of the related debt using the effective-interest method. Deferred loan costs are classified in other assets and had a net book value of $13.1 and $21.3 at December 31, 2000 and 1999, respectively. Amortization expenses for deferred loan costs are included in interest expense and were $8.2 in 2000, $7.4 in 1999 and $0.4 in 1998.

INCOME TAXES: The Company accounts for income taxes using the liability method. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates in effect for the years in which the differences are expected to reverse. Deferred tax expense represents the change in net deferred tax assets and liabilities during the year.

DERIVATIVE FINANCIAL INSTRUMENTS: The Company uses derivative financial instruments to manage the economic impact of fluctuations in interest rates and foreign currency exchange rates. The Company enters into interest rate swaps and foreign currency forward contracts to manage these economic risks.

Interest rate differentials to be paid or received as a result of interest rate swaps are accrued and recognized as an adjustment of interest expense related to the designated debt. Foreign currency forward contracts, which are principally used to mitigate the effects of changes in foreign currency exchange rates on intercompany financial activity, are recorded in the balance sheet with realized gains and losses included in the measurement and recording of the transactions.

STOCK OPTIONS: The Company follows Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," in accounting for its employee stock options. Under APB 25, no compensation expense is recognized because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant.

COMPREHENSIVE GAIN (LOSS): The components of accumulated other comprehensive gain (loss) are as follows:

NEW ACCOUNTING STANDARDS NOT YET ADOPTED: In June 1998, the Financial Accounting Standards Board (FASB) issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities." Statements No. 137 and No. 138, issued in June 1999 and June 2000, respectively, amended the original Statement. The Statements require the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through earnings. If a derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives are either offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in accumulated other comprehensive gain (loss) until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value must be immediately recognized in earnings. The Company is required to adopt Statement No. 133, as amended, beginning in the first quarter of 2001. Upon adoption on January 1, 2001, the Company will recognize a gain from the cumulative effect of an accounting change of $3.5 in accumulated other comprehensive gain (loss).

The following is a summary of the Company's investments:

Gross realized gains on sales of the Company's investments totaled $7.2, $2.5 and $2.6 in 2000, 1999 and 1998, respectively, and gross realized losses totaled $3.9, $0.1 and $1.1 in 2000, 1999 and 1998, respectively.

Interest income, which is included in other income, totaled $4.1 in 2000, $4.2 in 1999 and $16.5 in 1998.

The Company enters into forward foreign exchange contracts to mitigate the impact of currency fluctuations on transactions denominated in foreign currencies, thereby limiting risk to the Company that would otherwise result from changes in exchange rates. These foreign currency exposures principally relate to intercompany payables arising from intercompany purchases of manufactured products. The periods of the forward foreign exchange contracts correspond to the periods of the exposed transactions, with realized gains and losses included in the measurement and recording of the foreign-currency-denominated transactions.

At December 31, 2000, the Company had outstanding forward foreign exchange contracts to purchase $82.7 and sell $33.8 of various currencies (principally U.S. dollars and euros) with maturities principally ranging from 30 to 90 days. At December 31, 1999, the Company also had outstanding forward foreign exchange contracts to purchase $31.1 and sell $47.3 of various currencies (principally U.S. dollars) with maturities ranging from 30 to 180 days. The estimated fair value of foreign currency contracts represents the measurement of the contracts at month-end spot rates as adjusted for amortized forward points. At December 31, 2000 and 1999, the difference between fair values and contract amounts was not material.

The Company manages its interest rate risk on its borrowings through the purchase of interest rate swap agreements, which have fixed the base rate on a $600.0 notional amount of the $1,012.5 of variable borrowings outstanding at December 31, 2000. Under the agreements, the Company has fixed the base rate on a $600.0 notional amount of the U.S.-dollar-denominated borrowings at an average rate of 5.4%. The interest rate swaps mature over various terms ranging from September 2001 through December 2003. The fair value of the Company's interest rate swap agreements represents the estimated receipts or payments that would be made to terminate the agreements. The Company would have received $3.5 and $24.1 at December 31, 2000 and December 31, 1999, respectively, to terminate the agreements.

Inventories are summarized as follows:

In October 2000, the Company acquired the intellectual property rights and certain other assets associated with the sale of its Stryker PainPump products in the United States, Canada and Mexico from McKinley Medical LLP for cash of $8.4. The Stryker PainPump is a pain management device used to aid postsurgical patient recovery. The acquisition was accounted for using the purchase method of accounting. Substantially all of the purchase price was allocated to patents, which are being amortized over nine years.

In August 2000, the Company completed the acquisition of Image Guided Technologies, Inc. (IGT) by merger for 0.3 shares of Stryker common stock with a value of $12.0. IGT manufactures three-dimensional optical measurement devices ("optical localizers") for anatomical image-display workstations used by physicians to perform image-guided surgery. The acquisition was accounted for using the purchase method of accounting. Intangible assets acquired, principally patents and goodwill, are being amortized over periods ranging from 10 to 15 years.

In June 2000, the Company acquired all of the outstanding common stock of Colorado Biomedical, Inc. by merger for 0.2 shares of Stryker common stock with a value of $7.8. Colorado Biomedical, Inc. manufactures the Colorado Micro Needle, which is used for precision electrosurgery in various surgical specialties. The acquisition was accounted for using the purchase method of accounting. Intangible assets acquired, principally patents and goodwill, are being amortized over periods ranging from 7 to 15 years.

In February 2000, the Company purchased the Neptune System product line, which is a medical waste management system used in hospital operating rooms. The acquisition was accounted for using the purchase method of accounting at a total cost of $10.0, of which $7.0 represents royalties to be paid over the following three years. Intangible assets acquired, principally patents, are being amortized over 15 years. The Company has the right to terminate the purchase agreement within a three-year period if the sales of the Neptune System do not meet certain levels. If the agreement is terminated, the Company will relinquish all of its rights to the patents. If the Company does not exercise its right to terminate the agreement at the end of three years, the Company will be required to pay additional royalties totaling a minimum amount of $30.4 over the following four years.

In February 2000, the Company acquired the remaining 50% interest in the patent rights for its Diapason spinal product line for cash of FFr 50.2 ($7.6). The acquired patents are being amortized over approximately nine years.

In November 1999, the Company acquired all of the outstanding common stock of InfoMedix Communications Corporation (now known as Stryker Communications Corporation), which develops, builds and sells video communications hardware and software that enables telecommunication of surgical images for medical education for cash of $1.2 and 0.2 shares of Stryker common stock ($9.4 value). The acquisition was accounted for using the purchase method of accounting. Substantially all of the purchase price for InfoMedix was allocated to goodwill, which is being amortized over 20 years.

In April 1999, the Company acquired the portion of the Japanese distributor of Leibinger products associated with the distribution of such products for cash of approximately $2.7. The entire purchase price was allocated to tangible assets acquired.

On December 4, 1998, the Company acquired Howmedica, the orthopaedic division of Pfizer Inc., for $1,650.0 in cash. Howmedica develops, manufactures and markets a wide range of specialty medical products utilized in the treatment of musculoskeletal disorders. Howmedica products include hip and knee implants for primary and revision surgery, bone cement, trauma systems used in bone repair, craniomaxillofacial fixation devices and specialty surgical equipment used in neurosurgery. The acquisition was funded with cash and cash equivalents and approximately $1,500.0 borrowed under $1,650.0 of credit facilities established in December 1998 (see Note 6).

The acquisition of Howmedica was accounted for using the purchase method of accounting. The results of operations for Howmedica are included in the Company's consolidated financial statements beginning December 5, 1998. The purchase price of $1,650.0 in cash plus an estimate for a contractually required adjustment, based on the increase in Howmedica's working capital since December 31, 1997, and liabilities assumed, was preliminarily allocated in December 1998 to the assets acquired, based on their estimated fair values at the date of acquisition. The purchase price allocation was finalized in the fourth quarter of 1999, except that the amount of the final working capital adjustment remained in dispute. A significant portion of the disputed working capital adjustment amount was determined in the fourth quarter of 2000, with $17.5 in potential additional purchase price remaining in dispute at December 31, 2000.

Based on the final purchase price allocation (as adjusted for determined working capital adjustment amounts), goodwill of $448.6 has been recorded by the Company in connection with the acquisition. Goodwill represents the excess of the purchase price and purchase liabilities over the fair value of net identifiable tangible and intangible assets acquired. Approximately $488.3 of the purchase price was allocated to identifiable intangible assets, including purchased research and development of $78.4, developed technology of $227.0, customer base of $141.8 and trademarks and assembled work force of $41.1. The purchased research and development was charged to operations during the fourth quarter of 1998.

The purchased research and development of $78.4 for the Howmedica acquisition was determined based on an independent valuation of Howmedica's research and development projects using information and assumptions provided by management. Among the in-process projects included in the valuation, two were considered significant. These projects relate to the development of a new spinal technology to be used in the treatment of spinal disorders and the development of an improved polyethylene to be used in hip and knee implants. The amount of purchased in-process research and development allocated to the spinal project was $50.7, and the amount allocated to the polyethylene project was $26.0. The estimated future revenues associated with the spinal project were deemed to be approximately 80% attributable to in-process research and development, based on technological progression towards completion. For the polyethylene project, future revenues were deemed to be approximately 75% attributable to in-process research and development, based on the same criterion. The spinal project development is expected to be completed in 2002 as planned, but the timing of estimated future revenues is expected to be delayed due to clinical trial and regulatory approval requirements. The timing of estimated future revenues associated with the polyethylene project was slightly delayed due to the leveraging of this technology with technology previously existing in the Company, the combination of which was completed in 2000 with the introduction of Crossfire Highly Crosslinked Polyethylene for Howmedica implants. All of the purchased research and development projects were valued using an income approach that employs the discounted cash flow method.

In connection with the final purchase price allocation, Howmedica inventories were stepped-up $207.5 to fair value. This step-up was charged off as additional nonrecurring cost of sales as the acquired inventory was sold. Cost of sales for 1999 and for the fourth quarter of 1998 were increased as a result of the step-up. These increases in cost of sales reduced pretax earnings for 1999 by $198.2 ($128.8 net of tax) and 1998 fourth quarter pretax earnings by $7.8 ($5.2 net of tax).

Immediately after the acquisition was consummated, management of the Company began to implement an integration plan to combine Stryker and Howmedica. In conjunction with the integration plan, the Company recorded additional purchase liabilities of $126.5 ($80.5 net of related tax benefits) that were included in the final acquisition cost allocation. The Company also incurred $37.7 in costs and charges related to the acquisition that were charged to operations during 1999 and 1998 (see Note 5).

During 1999, the Company finalized its purchase price allocation to reflect additional purchase liabilities relating to the Company's integration activities as the restructuring was implemented, as shown in the table below. The related increases and decreases in these additional purchase liabilities resulted in corresponding changes to goodwill associated with the acquisition of Howmedica.

The additional purchase liabilities include severance and related costs for Howmedica employees, the cost to convert Howmedica's distribution network to direct sales and the cost associated with Howmedica facility closures and contractual obligations. The severance and related costs are provided for workforce reductions covering approximately 1,250 Howmedica employees in the areas of general management, marketing, research and development, general administration and product manufacturing. The cost of the distributor conversions is based on negotiated contracts. The Howmedica facility closures include two facilities in Europe -- a leased facility used for centralized administrative functions such as finance, accounting and information systems and a leased facility used for centralized warehousing and distribution in Europe and certain other regions. The facility closures also include certain facilities in the United States -- a leased facility supporting administration, warehousing and distribution for Howmedica's craniomaxillofacial business in the United States and leased facilities supporting administration, marketing, research and development and a portion of the U.S. warehousing and distribution for Howmedica's orthopaedic implant business. The contractual obligations represent noncancelable commitments for third-party research and development related to projects that were not continued after the acquisition and purchase commitments for inventory related to discontinued Howmedica products.

Substantially all of the activities for which additional purchase liabilities are recorded were completed during 1999 and 2000. These activities include the conversion of Howmedica's distribution network to direct sales and the planned workforce reductions of Howmedica employees. Payments of distributor conversion obligations and severance and related costs are expected to be completed by the third quarter of 2001. The two Howmedica facilities in Europe and Howmedica's U.S. craniomaxillofacial facility were closed during 1999. The remaining leased facilities in the United States were closed during 2000, with the exception of one facility that is expected to be closed during 2001. Facility closure and contractual obligations include lease obligation payments that extend to 2008.

The following table provides a rollforward from December 4, 1998 (the date of the Howmedica acquisition) to December 31, 2000 of the additional purchase liabilities recorded in connection with the acquisition of Howmedica: