Biomet Inc · 10-K405 · For 5/31/96
Filed On 8/13/96 · SEC File 0-12515 · Accession Number 950137-96-1405
As Of Filer Filing On/For/As Docs:Pgs Issuer Agent
8/13/96 Biomet Inc 10-K405 5/31/96 5:42 950137
Annual Report -- [X] Reg. S-K Item 405 · Form 10-K
Filing Table of Contents
Document/Exhibit Description Pages Size
1: 10-K405 Annual Report -- [X] Reg. S-K Item 405 38 266K
2: EX-11.1 Computation of Earnings 1 6K
3: EX-21.1 Subsidiaries of the Registrant 1 6K
4: EX-23.1 Consent of Coopers & Lybrand 1 6K
5: EX-27.1 Financial Data Schedule 1 6K
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended MAY 31, 1996.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ____________ to ____________.
Commission file No. 0-12515.
[LOGO]
BIOMET INC.
(Exact name of registrant as specified in its charter)
INDIANA 35-1418342
(State of incorporation) (IRS Employer Identification No.)
AIRPORT INDUSTRIAL PARK, P.O. BOX 587, WARSAW, INDIANA 46581-0587
(Address of principal executive offices) (Zip Code)
(219) 267-6639
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON SHARES, WITHOUT PAR VALUE RIGHTS TO PURCHASE COMMON SHARES
(Title of class) (Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
The aggregate market value of the Common Shares held by nonaffiliates of the
registrant, based on the average bid and asked prices of the Common Shares on
July 19, 1996, as reported by the Nasdaq Stock Market, was approximately
$1,562,778,852. As of July 19, 1996, there were 115,614,201 Common Shares
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
PARTS OF FORM 10-K
INTO WHICH DOCUMENT
IDENTITY OF DOCUMENT IS INCORPORATED
Proxy Statement with respect to the 1996 Annual
Meeting of Shareholders of the Registrant Part III
================================================================================
PART I
ITEM 1. BUSINESS.
GENERAL
Biomet, Inc., an Indiana corporation incorporated in 1977 ("Biomet"), and its
subsidiaries design, manufacture and market products used primarily by
orthopedic medical specialists in both surgical and non-surgical therapy,
including reconstructive and trauma devices, electrical bone growth
stimulators, orthopedic support devices, operating room supplies, powered
surgical instruments, general surgical instruments, arthroscopy products and
craniomaxillofacial products and instruments. Biomet has corporate
headquarters in Warsaw, Indiana and manufacturing and/or office facilities in
more than fifteen locations worldwide. Biomet markets its products in the
United States through independent commissioned sales representatives, in the
United Kingdom and Germany primarily through direct factory sales
representatives, and in other international markets through both independent
and direct factory sales representatives and specialty medical product dealers.
Electro-Biology, Inc. ("EBI"), Biomet's principal domestic subsidiary, sells
electrical stimulation and external fixation devices through direct factory
sales representatives in the United States and the United Kingdom and through
specialty medical product dealers in the remainder of its markets. Biomet and
its subsidiaries currently distribute products in approximately 100 countries.
Unless the context otherwise requires, the term "Company" as used herein refers
to Biomet and all of its subsidiaries.
PRODUCTS
The Company's products can be divided into three groups: Reconstructive
Products, EBI Products and Other Products. The Company's Reconstructive
Products (principally hips, knees and shoulders) and its Other Products
(fixation and trauma devices, orthopedic support devices and operating room
supplies) are designed, manufactured and marketed under the Biomet(R),
Kirschner(R), IQL(TM), and Effner(R) trade names. Also included in Other
Products are craniomaxillofacial products and instruments and general surgical
instruments which are marketed under the Walter Lorenz(TM) trade name,
orthopedic support devices manufactured and marketed under the AOA(R) name, and
arthroscopy products manufactured and marketed under the Arthrotek(R) name.
Through EBI(R), the Company develops, manufactures and markets non-invasive and
implantable electrical bone growth and spinal fusion stimulators and external
fixation devices (the "EBI Products"). The following table shows the net sales
and percentages of net sales contributed by each of these product groups for
each of the three most recent fiscal years ended May 31, 1996:
· Enlarge/Download Table
YEARS ENDED MAY 31,
---------------------------------------
(DOLLAR AMOUNTS IN THOUSANDS)
-------------------------------------------------------------
1996 1995 1994
PERCENT PERCENT PERCENT
NET OF NET NET OF NET NET OF NET
SALES SALES SALES SALES SALES SALES
------- ------- -------- -------- --------- ------
Reconstructive Products $326,834 61% $272,643 60% $218,145 58%
EBI Products 108,627 20% 98,490 22 88,714 24
Other Products 99,698 19% 81,139 18 66,436 18
------- ------- -------- -------- --------- ------
Total $535,159 100% $452,272 100% $373,295 100%
======== ======= ======== ========= ========= ======
2
RECONSTRUCTIVE PRODUCTS
Reconstructive Products are used to replace joints which have deteriorated as a
result of disease (various forms of arthritis and osteoporosis) or injury.
Reconstructive joint surgery involves the modification of the area surrounding
the affected joint and the insertion of one or more manufactured components.
The Company's primary reconstructive joints are the hip, knee and shoulder, but
it also has the capability of producing other peripheral joints (including the
ankle, elbow and great toe). The Company also produces the associated
instruments required by the orthopedic surgeon to implant the Company's
Reconstructive Products.
All femoral hip prostheses produced by the Company consist of a femoral head,
neck and stem, which can be forged or machined depending on the design and
material used. Because of variations in human anatomy and differing design
preferences among surgeons, femoral prostheses are manufactured by the Company
in a variety of head sizes, neck lengths, stem lengths, stem cross-sections and
configurations. The Company currently offers several total hip systems, most
of which utilize titanium or cobalt chromium alloy femoral components and
ultra-high molecular weight polyethylene-lined acetabular components. Many of
the femoral prostheses utilize a porous coating which enhances the attachment
of bone cement to the stem, or in a press-fit configuration, allows the
component's use without bone cement.
During fiscal year 1996, the Company received 510(k) clearance for several fine
grain cast cobalt chromium femoral hip components. This new manufacturing
process produces mechanically superior material as compared to traditional
casting methods.
Since February 1994, the United States Food and Drug Administration ("FDA") has
cleared many of Biomet's porous-coated hip components for cementless use
pursuant to Section 510(k) of the Federal Food, Drug and Cosmetic Act. These
clearances are specifically for noncemented applications in skeletally mature
patients undergoing primary hip replacement surgery as a result of
noninflammatory degenerative joint diseases including osteoarthritis, avascular
necrosis, traumatic arthritis, slipped capital epiphysis, fused hip, fracture
of the pelvis and diastrophic variant.
In July 1993, the Company received FDA clearance for hip and knee polyethylene
components manufactured according to a patented process and marketed under the
trademark, ArCom.(R) ArCom components are machined from uniform compression
molded bar stock manufactured by Biomet, or molded directly from high molecular
weight polyethylene resin. The processes used to mold devices and manufacture
bar stock are designed to maximize mechanical and wear properties of the
polyethylene bearing material. In addition, the finished components are
packaged in argon, an inert gas, to avoid oxidative degradation during and
after sterilization.
Since 1985, one of Biomet's largest selling reconstructive systems has been the
Mallory-Head(R) Total Hip System. The Mallory-Head Hip System is designed to
meet surgeon needs for both primary and revision total hip arthroplasty. The
primary femoral components feature a specific proximal finned geometry for
cementless indications and a slightly different proximal ribbed geometry for
those patients requiring fixation with bone cement. The goal of each of these
primary femoral stems is to ensure proximal loading of the femur to recreate
near-normal bone stresses.
The Mallory-Head revision femoral components provide innovative solutions for
difficult revision cases. The long stem revision components feature the
primary proximal finned geometry with additional stem lengths to bridge
cortical bone defects and to provide increased stability. The head/neck porous
revision components feature multiple resection levels to compensate for
proximal bone deficiencies. An optional trochanteric bolt provides additional
rotational stability and implant fixation. In May 1995, the FDA approved for
cemented use the Mallory-Head Modular Calcar System. This system provides the
surgeon with intraoperative flexibility to independently match femoral geometry
with the appropriate implant size and shape, even in cases of severe bone
deficiency.
The Alliance(R) family is designed to address the growing trend toward
standardization of total hip systems within hospitals and across surgeon
groups. The Alliance family provides the largest selection of primary and
revision stems available for implantation with a single set of instrumentation.
The Alliance family includes the Integral(R), Bi-Metric(R), Answer(R), Hip
Fracture(TM) and Rx90(R) Hip Systems.
The patented Maxim(R) Total Knee System incorporates primary, posterior
stabilized and revision components with state-of-the-art biomaterials and
competes in the revision constrained knee market segment, addressing surgical
situations where the surgeon is required to replace a knee that has compromised
soft tissue and instability. The Company also has developed supporting
instrumentation for the implantation of the Maxim Total Knee System components.
The Maxim Total Knee System is the Company's largest selling knee system.
3
The Company's AGC(R) Total Knee System is one of the most clinically successful
comprehensive total knee systems in the orthopedic industry. The AGC Total
Knee System consists of left and right femoral components, matching reinforced
tibial components and appropriately sized reinforced patella components for
patellar resurfacing. AGC components are available either with or without a
porous titanium alloy surface designed to enhance the attachment of bone cement
to the implant surfaces. The Company, in conjunction with developing surgeons,
has also developed surgical techniques and supporting implantation instruments
for the AGC and its other knee systems. These instruments allow for accurate
implantation of the components and improved ligament and tendon balance in the
knee following the surgical procedure. The Company has expanded its total
knee product line to include the Finn(R) Knee Replacement System. This system
offers both resurfacing and segmental component options in a wide range of
sizes to address severe bone loss due to a previous failure or tumor
resections.
Biomet's Patient-Matched Implant ("PMI(R)") services group expeditiously
designs, manufactures and delivers one-of-a-kind reconstructive and trauma
devices to orthopedic specialists. The Company believes this service continues
to enhance Biomet's reconstructive sales. In order to assist orthopedic
surgeons and their surgical teams in preoperative planning, Biomet's PMI group
utilizes a three-dimensional ("3-D") bone and soft tissue reconstruction
imaging system. A patented technology owned by the Company allows the use of
CT or MRI data to produce 3-D reconstructions for the design and manufacture of
patient-matched implants. With this imaging technology, Biomet's PMI group is
able to assist the physician, prior to surgery, by creating electronic 3-D
models. Within strict deadlines, the model is translated into a PMI design for
the actual manufacturing of the custom implant for the patient. Biomet
continues to advance the application of imaging technology for the design and
production of reconstructive devices for various joints of the body.
The Company manufactures and distributes the patented Ultra-Drive(R) Revision
System ("Ultra-Drive") which utilizes ultrasonic technology to safely and
effectively remove bone cement and implants during revision arthroplasty
procedures. This system reduces the amount of time the orthopedic surgeon
would usually spend removing an implant and cement during revision procedures.
Additionally, the Ultra-Drive reduces the possibility of accidental bone trauma
associated with conventional methods addressing bone cement removal.
The Kirschner product line allows the Company to offer surgeons a wider
variety of reconstructive products, including the Performance(R) Knee and the
Integrated Shoulder System.(TM) The Performance Knee provides a full range of
implant components designed to meet the wide variety of surgical indications
seen in today's total knee patient population. The Atlas(R) Modular shoulder
prosthesis was introduced during fiscal year 1996 to further augment the
surgeon's ability to match the prosthesis to the individual patient. This
device incorporates a modular stem as well as a modular head to reduce the
inventory required to support a shoulder procedure. The operations of the
reconstructive division of Kirschner were functionally integrated into the
Company's Warsaw, Indiana facilities in September 1995.
Reconstructive devices contributing to the Company's sales growth include the
Maxim Total Knee System, the Bio-Modular(R) Shoulder, the Mallory-Head Modular
Calcar Hip System, the Finn Knee System, the Integral 180 and 225 Revision
Hips, the MARS(R) RingLoc(R) Revision Acetabular Cup System, ArCom
polyethylene products and the Alliance family of products.
During fiscal year 1996, the Company's product expansion included new lines of
acetabular components, new cemented and cementless hip stems and expanded
product offerings for total shoulders.
EBI PRODUCTS
EBI's primary product categories consist of invasive and non-invasive
electrical stimulation devices used in the treatment of recalcitrant bone
fractures (nonunions), spinal fusion stimulation devices used as an adjunctive
treatment in spinal fusion procedures, external fixation devices and a
controlled cold therapy unit to aid in the reduction of postoperative pain,
edema and blood loss. The FDA has defined a "nonunion" as a case in which nine
months have elapsed from the date of a fracture with no sign of healing for
three months. EBI's non-invasive devices generally provide an alternative to
surgical intervention in the treatment of recalcitrant bone fractures and
failed joint fusions.
One of EBI's primary products, the EBI Bone Healing System(R), is a
non-invasive device which produces low-energy pulsed electromagnetic field
("PEMF") signals that induce weak pulsing currents in living tissues exposed to
the signals. These pulses, when suitably configured in amplitude, repetition
rate and duration, affect bone cells. EBI's non-invasive stimulator has two
components: treatment heads and a control unit. The treatment heads contain
electrical coils and are connected to the control unit. The control unit
transforms household current or battery power into a predetermined sequence of
pulsed currents that are induced into the fracture site through the treatment
heads which may be placed over a patient's cast, incorporated into the cast, or
worn over the skin.
4
EBI's Model 1020 Bone Healing System utilizes household current or a
rechargeable power supply and allows for complete patient ambulation during
treatment. This model usually incorporates the treatment coil into the
patient's cast or the coil can be worn over the skin if required. The coil
design is capable of treating the vast majority of nonunion fracture locations.
The device can be pre-programmed as to duration of daily treatment and for
patient compliance history. The Model 1200 Bone Healing System, introduced
during fiscal year 1994, is a light-weight, smaller and easier to use unit,
which was designed to encourage patient compliance and enhance clinical
success.
EBI also manufactures the FLX(R) Flexible Treatment Coils for use with the EBI
Bone Healing System. The FLX Flexible Treatment Coils are extremely
lightweight and provide a slim profile that enhances patient comfort and
compliance during bone healing treatment regimens. When used conjunctively
with the EBI Bone Healing System, the FLX Flexible Treatment Coils afford
higher bone healing success rates. Additionally, EBI offers a series of coils
to address shoulder, foot, ankle, clavicle and metatarsal site applications and
an elliptical coil to be used with external fixation.
The invasive electrical stimulation devices provide an adjunct to surgical
intervention in the treatment of nonunions and spinal fusions. Spinal fusions
are surgical procedures undertaken to establish bony union between adjacent
vertebrae. EBI's SpF(R)-4 Implantable Spinal Fusion Stimulator is used in
conjunction with bone grafting to increase the probability of fusion success.
In addition, EBI's SpF-2, a two lead supplement to its SpF implantable spinal
product line, allows EBI to offer orthopedic surgeons the SpF spinal fusion
technology for the growing bilateral/lateral procedure market. Another SpF
product, the SpF-T Implantable Spinal Fusion Stimulator, incorporates a
telemetry device which emits a signal to allow device monitoring after
implantation. The compact design of the SpF-T provides easier surgical
implantation and explantation while increasing patient comfort. The
implantable devices consist of a generator providing a constant direct current
to a titanium cathode placed where bone growth is required. Over the years EBI
has developed new techniques and device modifications for the SpF product line.
These techniques and modifications address the anterior and posterior lumbar
interbody fusion market segments.
EBI's arrangement with Orthofix s.r.l. of Verona, Italy to distribute the
Orthofix(R) Dynamic Axial External Fixation System in the United States, Canada
and the Caribbean Island Basin expired during fiscal year 1996 and was not
renewed. During fiscal year 1996, EBI launched its own advanced fixation
system, the EBI X FIX(TM) DynaFix(TM) System. The market acceptance of the
EBI X FIX DynaFix System has been extremely positive, as evidenced by the
growth of EBI's external fixation business during fiscal year 1996.
EBI began distribution of its line of controlled cold therapy units during
fiscal year 1996. EBICE(TM), the first disposable and portable controlled
cold therapy product offered by the Company, is used to aid in the reduction
of postoperative pain, edema and blood loss.
OTHER PRODUCTS
The Company also manufactures and distributes several other products including
fixation and trauma devices, orthopedic support devices, operating room
supplies, arthroscopy products and craniomaxillofacial products. Biomet
Medical Products, a division of the Company established during fiscal year
1993 to focus on the expansion of the Company's "other products," excluding
craniomaxillofacial products, was integrated into Biomet's reconstructive
operations in January 1996. AOA manufactures and distributes its own
extensive line of orthopedic support products. Arthrotek manufactures and
markets a line of arthroscopy products. Walter Lorenz Surgical, Inc. ("Lorenz
Surgical") manufactures and markets the craniomaxillofacial product line.
FIXATION AND TRAUMA DEVICES. The Company's fixation and trauma devices
include internal and external bone fixation devices. Internal fixation devices
manufactured by the Company include nails, plates, screws, pins and wires
designed to temporarily stabilize traumatic bone injuries. These devices are
used by orthopedic surgeons to provide an accurate means of setting and
stabilizing fractures. These implants are intended as aids to healing and may
be removed when healing is completed; they are not intended to replace normal
body structures,
The Uniflex(R) Nailing System, which is the Company's largest selling fixation
system, addresses a wide range of fractures utilizing one product system. The
Uniflex Femoral Nailing System is used for internal fixation of femoral
fractures. The flexibility of the system enhances the load transfer to the bone
to further aid in the healing of the fracture. The Uniflex Nailing System also
includes tibial and humeral nailing systems. In addition, the S.S.T.(R) small
bone locking nail and the Vector(R) Intertrochanteric Nail, a compression
nailing system, enhance the Company's intramedullary fracture fixation family.
The Biomet Retrograde Femoral Nail is a clinical option for femoral fractures
that occur below mid-shaft. The Retrograde Femoral Nail completes the
Company's line of nailing systems by allowing for the treatment of distal
femoral fractures.
5
The Compression Hip Screw System was designed to provide strong and stable
internal fixation for a variety of intertrochanteric, subtrochanteric and
basilar neck fractures. The BMP(TM) Cable System is used intraoperatively,
often as part of revision hip surgery, to reduce the risk of fracture or to
repair existing femoral fractures. System specific instrumentation for the BMP
Cable System is precise and allows reproducible results.
ORTHOPEDIC SUPPORT DEVICES. The Company produces an extensive line of standard
orthopedic support devices, many of which are sold under the CTN(R) and
START(R) trademarks. These devices include elbow, wrist, abdominal, thigh and
ankle supports, in addition to a wide variety of knee immobilizers and braces.
The CTN product line primarily addresses the sports medicine market. CTN
compression wraps with Soft-Ice(R) are used in compression cold-therapy
treatment, both post-operative and during rehabilitation. The Company also
distributes the Active Ankle(R), a unique ankle stirrup brace which addresses
the sports rehabilitation market.
AOA's line of orthopedic support devices include traction framing equipment,
back supports, wrist and forearm splints, cervical collars, shoulder
immobilizers, slings, abdominal binders, wrist and forearm splints, back
supports, knee braces and immobilizers, rib belts, ankle supports and a variety
of other orthopedic splints. In addition to these products, AOA manufactures
and distributes a variety of casting products for use in the application and
removal of orthopedic casts and splints. Included are both synthetic casting
tape and synthetic splints fabricated using an advanced fiberglass/polyester
substrate material impregnated with a polymer resulting in casting and
splinting products that are lightweight, high strength and available in a
variety of colors.
OPERATING ROOM SUPPLIES. The Company's principal products in the operating
room supplies category are surgical suction devices, filters and drapes. The
Redi-Vacette(R) Closed Wound Suction System provides post-operative wound
suction drainage following both orthopedic and nonorthopedic surgical
procedures. The Redi-Flow(R) Filter automatically strains the flow of body
liquids during surgery. The filter collects fine bone chips and tissue for
subsequent pathological evaluation and saves operating room time by reducing
suction clogs in surgical procedures. The Redi-Drape(R) protects the sterile
operating field from contamination, and provides a drainage bag and built-in
instrument pouches to assist the surgeon.
The Company's patented Blockaid(R) cut-resistant glove liner represents a
breakthrough in continuous filament knitting technology, allowing stainless
steel to be encased in synthetic fibers and providing the most cut-resistant
fabric in the market today. Unlike thicker, spun fibers, these glove liners
are thin enough to allow continued tactile sensitivity. This product reduces
the risk of exposure of operating room personnel to infectious diseases.
ARTHROSCOPY PRODUCTS. Arthroscopy is a less-invasive orthopedic surgical
procedure in which an arthroscope is inserted through a small incision to allow
the surgeon direct visualization of the joint. This market is comprised of
five product categories: power instruments, manual instruments, visualization
products, soft tissue anchors and procedure-specific instruments and implants.
Arthrotek's principal products consist of the Harpoon(R) Soft Tissue Anchor
System, the IES(R) 1000 System, the PowerPump(R) 800, the Tunneloc(TM) ACL
Fixation(TM) System and manual instruments featuring the Ellipticut(R) and
BackBiter(R) instruments. The IES 1000 System is a fully-integrated
arthroscopy system consisting of a camera, light source, shaver, pump, monitor,
printer and VCR contained in a pre-wired cart. The PowerPump 800 provides the
ability for surgeons to independently control flow and pressure and use the
pump in conjunction with other arthroscopy shaver systems. The Tunneloc
System was augmented with the Bone Mulch(TM) Screw, which received 510(k)
clearance from the FDA during fiscal year 1995 and was released in fiscal year
1996. Also released during fiscal year 1996 was the One Step(TM) ACL Guide
System, a patented design for use in anterior cruciate ligament reconstruction.
CRANIOMAXILLOFACIAL PRODUCTS. The Company manufactures and distributes
craniomaxillofacial and neurosurgical titanium implants, along with associated
surgical instrumentation, principally marketed to craniomaxillofacial,
neurosurgical and craniofacial surgeons through its Lorenz Surgical subsidiary
headquartered in Jacksonville, Florida. Craniomaxillofacial surgical
instruments, exodontia instruments, Hard Tissue Replacement Polymer Facial
Implants and custom craniofacial implants, as well as electric powered surgical
drills and saws for use in craniomaxillofacial and small bone surgery are
among the products offered by Lorenz Surgical. In February 1996, Lorenz
Surgical received 510(k) clearance and CE mark approval to market the first
resorbable plate and screw system for craniomaxillofacial surgery in the United
States and the European community. Lorenz Surgical continues to evaluate its
entry into the dental implant market.
Active Ankle (R) is a registered trademark of Active Ankle, Inc. Soft-Ice (R)
is a registered trademark of Polar Products, Inc.
6
PRODUCT DEVELOPMENT
For the years ended May 31, 1996, 1995 and 1994, the Company expended
approximately $24,054,000, $21,770,000, and $20,521,000, respectively, on
research and development, and it is expected that research and development
expenses will continue to increase. The Company's principal research and
development efforts relate to its reconstructive devices, electrical
stimulation products and arthroscopy products.
The Company's research and development efforts contributed to the introduction
in fiscal year 1996 of the following products: Vision(TM) Acetabular Cup
System, Precept(TM) Total Hip System, Retrograde Nail System, Anterior
Referencing Knee Instrumentation, AGC Tradition(TM) Knee Tibial Bearings and
Atlas Shoulder.
EBI conducts a program of research and development intended to maintain its
proprietary position and to expand the range of conditions treatable with its
electrical stimulation products. This program includes clinical investigations
and providing equipment and/or funding basic research to study cells and simple
biological systems. Typically, EBI receives proprietary rights with respect to
the data developed as the result of research sponsored by it. EBI has
completed clinical trials to investigate the application of its products in the
treatment of avascular necrosis ("AVN") of the femoral head, a debilitating and
degenerative disease. During fiscal year 1996, the FDA rejected EBI's
premarket approval application for the AVN. EBI is continuing discussions
with the FDA in an effort to gain its approval. EBI's clinical trials to
develop new indications with PEMF technology for the treatment of fresh
fractures continued during fiscal year 1996.
In July 1991, the Company and United States Surgical Corporation ("U.S.
Surgical") entered into a cooperative effort to develop and market a line of
state-of-the-art bioresorbable orthopedic and oral-maxillofacial implants. On
March 15, 1996, that effort was terminated by a mutual agreement under the
terms of which the Company received a net payment of approximately $2.9
million from U.S. Surgical, each of the parties retains the right to pursue
the technologies developed during their joint efforts and the Company and U.S.
Surgical have agreed not to sell products that incorporate the type of
resorbable materials used during the cooperative effort in the orthopedic and
oral-maxillofacial markets, respectively, for a period of 3 years.
The Company is continuing its work to develop hydroxyapatite ("HAP"), a
bioactive surface, to be applied to orthopedic implants which, by eliminating
the fibrous tissue interface between the implant and the bone, would improve
apposition and attachment to the implant and bone ingrowth into the porous
surface of implants. Clinical trials are currently being conducted with three
of the Company's hip systems, in which a surface coating is applied over the
systems' porous coating. HAP is believed to bond directly to bone at a
cellular level.
The Company has a 51% equity interest in Polymers Reconstructive A/S
("Polymers") and holds exclusive worldwide distribution rights, with exception
of Scandinavia, for Polymers' Vacuum Pac Cement System(TM). The patented
Vacuum Pac Cement System is a proprietary method of mixing bone cement within
and delivering it from a single self-contained unit. At the present time,
Polymers is considering several organizational and development changes with
clinical trials and test marketing to begin in certain international markets
sometime in calendar year 1997.
GOVERNMENT REGULATION
The developing, testing, marketing and manufacturing of medical devices -- such
as arthroscopy products and reconstructive, electrical stimulation and internal
fixation devices -- are regulated under the Medical Device Amendments of 1976
to the Federal Food, Drug and Cosmetic Act (the "1976 Amendments") and
additional regulations promulgated by the FDA. In general, these statutes and
regulations require that manufacturers adhere to certain standards designed to
ensure the safety and effectiveness of medical devices.
Under the 1976 Amendments, each medical device manufacturer must be a
"registered device manufacturer" and must comply with regulations applicable
generally to labeling, quality assurance, manufacturing practices and clinical
investigations involving humans. The FDA is authorized to obtain and inspect
devices, their labeling and advertising, and the facilities in which they are
manufactured in order to assure that a device is not improperly manufactured or
labeled. Biomet, EBI, Lorenz Surgical, Arthrotek, AOA and Biomet Ltd. are
registered with the FDA.
7
In addition, the sale and marketing of specific medical devices are regulated
by the FDA under the 1976 Amendments, which classify medical devices based upon
the degree of regulation deemed appropriate and necessary. A device is
classified as a Class I, II or III device based on recommendations of advisory
panels appointed by the FDA. Class I devices are subject only to general
controls. Class II devices, in addition to general controls, are subject to
additional controls. Class III devices, including most devices used or
implanted in the body, require FDA premarket approval before they may be
distributed other than in clinical trials.
The Company's reconstructive and trauma products are regulated as Class II or
Class III medical devices. The Company's electrical stimulation products are
regulated as Class III medical devices. The procedure for obtaining approval
to commercially market a device involves the submission of a premarket
notification under Section 510(k) of the 1976 Amendments. If the FDA
determines that the device is substantially equivalent to a pre-enactment
device or to a device subsequently classified in Class I or Class II, it will
grant clearance to commercially market the device. If the FDA determines the
device is not substantially equivalent to a pre-enactment device, it is
automatically placed into Class III, and will either require reclassification
or the submission of valid scientific evidence to prove the device is safe and
effective for human use. For Class III devices, in order to conduct clinical
trials the manufacturer must submit to the FDA an application for an
Investigational Device Exemption ("IDE"). An approved IDE exempts the
manufacturer from certain otherwise applicable FDA regulations and grants
approval for a clinical investigation, or human study, to generate clinical
data to prove safety and efficacy. In addition, the possibility exists that
certain devices marketed prior to 1976, or devices substantially equivalent
thereto, may be placed into Class III by the FDA. In this event, the
manufacturer will be required to submit proof of safety and efficacy for these
devices within 30 months of the Class III determination.
When a manufacturer believes that sufficient clinical data has been generated
to prove the safety and efficacy of the device, it may submit a premarket
approval application ("PMA") to the FDA. The FDA reviews the PMA and
determines whether it is in fileable form and all key elements have been
included. Following acceptance of the PMA, the FDA continues its review
process which includes submission of the PMA to a panel of experts appointed by
the FDA to review the PMA and to recommend appropriate action. The panel then
recommends that the PMA be approved, not approved or approved subject to
conditions. The FDA may act according to the panel's recommendations, or it
may overrule the panel. In approving a PMA, the FDA may require some form of
post-market surveillance whereby the manufacturer follows certain patient
groups for two or more years, making periodic reports to the FDA.
The Safe Medical Device Act of 1990 (the "Act") affects medical device
manufacturers in several areas, including post-market surveillance and device
tracking procedures. The Act is the first major change to the Federal Food,
Drug and Cosmetic Act since the 1976 Amendments. The Act gives the FDA
expanded emergency recall authority, requires that a summary be made available
of the safety and effectiveness in the 510(k) process and adds design
validation as a requirement of Good Manufacturing Practices. The Act also
grants the FDA the authority to require manufacturers to conduct post-market
surveillance on most permanent implants and devices that potentially present a
serious risk to human health, and further grants the FDA the authority to
require manufacturers of certain devices to adopt device tracking methods to
enable patients to receive required notices pertaining to the devices they
receive. The Act increases the importance of tracking products and will most
likely add additional administrative requirements pertaining to the sale of
many of the Company's implants. Although the precise impact on the Company is
currently unknown because the FDA has not yet promulgated all of the
regulations needed to fully implement the Act, management does not believe the
Act will have a material adverse effect on the Company or its operations.
The medical device industry extensively utilizes the premarket notification
procedures under Section 510(k) of the 1976 Amendments in bringing new products
to the market. The Company currently has approximately more than ten Section
510(k) notifications pending with the FDA. Although there has been improvement
in the FDA's response time in review of new product submissions, delays are
still being experienced due to the extensive requirements of the FDA. While
these delays have improved recently, they are expected to continue through
fiscal year 1996. Although these delays have not had a material adverse
impact on the operations of the Company, management is unable to assess the
impact of such delays on its future operations.
The Company is currently positioning itself for the changing international
regulatory environment. "ISO 9000" is an internationally recognized set of
guidelines that are aimed at ensuring the manufacture of quality products. A
company that passes an ISO audit becomes internationally recognized as being
well-run and functioning under a quality system. Seventeen countries have
adopted ISO 9000 for medical products. ISO 9000 registered companies are able
to sell their products in these countries without the added burden of
individual country regulations. Although not required until 1998, the Company
has taken the first steps in obtaining this registration. The Company's
facilities located in Warsaw, Indiana, U.S.A.; Bridgend, South Wales and
Swindon, England, United Kingdom; and Valencia, Spain have passed this audit
and are registered. EBI has established itself in the international market
through product registration. The Company's other facilities are preparing for
their registration audits in fiscal year 1997.
8
SALES AND MARKETING
Biomet products are distributed in the United States through approximately 336
independent commissioned sales representatives ("distributors") and sales
associates engaged principally in the business of supplying orthopedic products
to hospitals in their geographic areas. Some of these distributors have formal
contractual arrangements with Biomet which limit Biomet's right to terminate
the distributor and provide certain long-term benefits to the distributor upon
termination.
AOA markets and distributes its soft goods through a direct sales force of
approximately 36 persons.
EBI's products are distributed in the United States through EBI's wholly-owned
subsidiary, EBI Medical Systems, Inc. ("EBIMS"), a Delaware corporation with
offices in Parsippany, New Jersey. EBIMS maintains a direct sales force of
approximately 170 people which operates in assigned territories throughout the
United States and through a growing international distribution network in
Central and South America, Canada, Asia and Europe.
Lorenz Surgical products are distributed in the United States through
approximately 42 distributors and sales associates engaged principally in the
business of supplying craniomaxillofacial products and surgical instruments to
hospitals and surgeons in their geographic areas, throughout the United States.
Additionally, Lorenz Surgical supplies a full-line of orthopedic hand-held
instruments for sale through the Biomet distributor network. Lorenz Surgical
products are marketed internationally through a growing network of
distributors and factory sales representatives throughout Europe, Asia, Africa,
Canada, Australia and Central and South America.
Elective surgery-related products appear to be influenced to some degree by
seasonal factors, as the number of elective procedures decline during the
summer months and the holiday seasons.
The Company's customers are the hospitals, surgeons and other physicians who
employ its products in the course of their practices. The business of the
Company is dependent upon the relationships maintained by its distributors and
salespersons with these customers as well as the Company's ability to design
and manufacture products which will meet the physicians' technical requirements
at a competitive price.
Biomet products are marketed internationally primarily through direct factory
sales representatives in the United Kingdom, Italy, France, Spain and Germany
and through both independent and direct factory sales representatives and
specialty medical product dealers in other international markets. EBI products
are sold internationally by EBI's wholly-owned subsidiary, EBI Medical Systems
Ltd., ("EBIMSL") a United Kingdom corporation. EBIMSL utilizes the direct
sales force of Biomet Ltd., a United Kingdom corporation and wholly-owned
subsidiary of the Company. The Company's products are distributed in
approximately 100 countries worldwide.
For the fiscal years ended May 31, 1996, 1995 and 1994, the Company's foreign
sales were $138,452,000, $108,461,000 and $85,079,000, respectively, or
26%, 24% and 23% of net sales, respectively. Additional data concerning
operating income and identifiable assets by geographic areas are set forth in
Note J of the Notes to Consolidated Financial Statements included in Item 8 of
this Report.
The Company consigns inventory to its United States distributors and direct
salespersons for their use in marketing its products and in filling customer
orders. The Company also consigns inventory to hospitals in the United
Kingdom, Italy and Germany. As of May 31, 1996, inventory of approximately
$44,171,000 was consigned to these distributors, salespersons and hospitals.
Under Title VI of the Social Security Amendments of 1983 (the "1983
Amendments"), hospitals receive a predetermined amount of Medicare
reimbursement for treating a particular patient based upon the patient's type
of illness identified with reference to the patient's diagnosis under one or
more of several hundred diagnosis-related groups ("DRG"). Other factors which
affect a specific hospital's reimbursement rate include the size of the
hospital, its teaching status and its geographic location. The Prospective
Payment Assessment Commission acts for Congress in evaluating, redefining and
adjusting DRGs to encompass technology changes and efficiencies experienced by
hospitals. Biomet products are primarily covered by DRG 209 (Major Joint and
Limb Reattachment Procedures) and DRG 210 (Hip and Femur Procedures).
The 1983 Amendments have not adversely affected the Company's reconstructive
device or electrical stimulation business. However, the Company is
experiencing pricing pressure in orthopedic support devices and operating room
supplies and in some generic internal fixation device products. The DRG-based
prospective payment system may increase the future importance of price as a
competitive factor within the orthopedic products and implantable bone growth
stimulation markets. Other effects of the prospective payment system on the
industry and on the Company cannot be estimated at the present time.
9
Biomet's Health Care Initiatives Department (HCI), established in fiscal year
1994, enhances partnerships between hospital administration, surgeon and
supplier. By providing a wide array of "Value Added" programs and services,
Biomet is able to address today's highly competitive health care environment.
The HCI group provides tools to help orthopedic surgeons and hospitals improve
quality of patient care, reduce cost, improve efficiency and improve patient
and staff satisfaction.
COMPETITION
The business of the Company is highly competitive. Approximately seven other
manufacturers offer orthopedic implant products which compete with Biomet
products. Major companies in this industry include Zimmer, Inc., a subsidiary
of Bristol-Myers Squibb Company; Howmedica, Inc., a subsidiary of Pfizer, Inc.;
DePuy, a subsidiary of Boehringer-Mannheim Corporation; Smith & Nephew Inc.;
Osteonics, Inc., a subsidiary of Stryker Corporation; Johnson & Johnson
Orthopaedics, Inc., a subsidiary of Johnson & Johnson; and Intermedics
Orthopedics, Inc., a division of Sulzermedica. Management believes these seven
companies together with Biomet have the predominant share of the orthopedic
implant market. Competition within the orthopedic implant industry is
primarily on the basis of service and product design, although price
competition has become increasingly important in recent years as the orthopedic
industry matures and as providers have become more concerned with health care
costs. At the present time, price is a factor in the sale of generic internal
fixation devices, orthopedic support devices and operating room supplies and is
increasingly becoming a factor in the sale of reconstructive devices. In
addition, health care providers increasingly limit the use of higher-cost
reconstructive devices to younger, more active patients. Biomet's prices are
at approximately the same or slightly lower levels as those of its major
competitors. Biomet believes its future success will depend upon its service
and responsiveness to distributors and orthopedic specialists, and upon its
ability to design and market innovative products which meet the needs of the
marketplace. As discussed above, the Company's Health Care Initiatives program
is intended to enhance the Company's offerings of products, services and
programs.
In the past, new technologies and product concepts in the industry (principally
in reconstructive products) have been introduced and applied at extremely rapid
rates. New developments in implant systems are frequently introduced into the
market before earlier concepts can be fully absorbed. It is management's
opinion that this evolution in advanced technology products will continue for
the foreseeable future.
EBI's electrical stimulation products compete with conventional surgical
procedures and non-invasive electrical stimulation devices manufactured by
others. EBI has the predominant share of the bone growth stimulation market.
Other companies offering products in the electrical stimulation market include
Orthofix, Inc., (formerly American Medical Electronics, Inc.) a subsidiary of
Orthofix International N.V.; Biolectron, Inc.; OrthoLogic Corp. and Exogen.
Competition in the electrical stimulation market is on the basis of product
design, service and success rates of various treatment alternatives. EBI's
non-invasive stimulators offer advantages over conventional surgery or invasive
products in that their use eliminates hospital, surgeon and operating room
costs, and these products can be used in the presence of infection without
creating a risk of additional infection. EBI's invasive stimulators offer the
advantage of conformance to surgical practice and do not require patient
compliance. EBI's external fixation devices compete with other external
fixation devices primarily on the basis of ease of application and clinical
results. EBI's principal competitor in the external fixation market is
Orthofix Inc.
Arthrotek products compete in the areas of power instruments, visualization
products, accessories and manual instruments. Competitors include Linvatec
Corp., a subsidiary of Bristol-Myers Squibb Company; Stryker Corporation;
Dyonics, Inc., a subsidiary of Smith & Nephew Ltd.; Baxter Health Care
Corporation; Olympus; Richard Wolf and Karl Storz.
The Company's trauma and fixation product lines compete with those of ACE
Orthopedics, a division of DePuy; Zimmer, Inc., a subsidiary of Bristol-Myers
Squibb Company; Richards Manufacturing Co., Inc., a subsidiary of Smith &
Nephew Ltd. and Synthes USA.
Lorenz Surgical primarily competes in the surgical instrumentation and
craniomaxillofacial markets. Its competitors include Synthes USA;
Howmedica-Leibinger, a subsidiary of Pfizer, Inc.; ACE Surgical Supply
Company, Inc. KLS-Martin, L.P. and Hu-Friedy Dental.
10
RAW MATERIALS AND SUPPLIES
The raw materials used in the manufacture of Biomet products are principally
nonferrous metallic alloys, stainless steel, polyethylene powder and fabrics.
With the exception of cobalt alloy and polyethylene powder, none of Biomet's
raw material requirements are limited to any material extent by critical supply
or single origins. Biomet purchases its cobalt alloy from two outside
suppliers and is aware of at least three additional suppliers of cobalt alloy.
With respect to polyethylene powder, suppliers of this material have become
increasingly concerned because of products liability exposure in the medical
device industry. However, based upon Biomet's present relationship with such
suppliers, a material shortage of polyethylene powder is not anticipated in the
forseeable future. EBI purchases all components of its electrical stimulators
from approximately 250 outside suppliers, approximately 15 of whom are the
single source of supply for their particular product. In most cases, EBI
believes that all components are replaceable with similar components. In the
event of a shortage, there are alternative sources of supply available for all
components, but some time would likely elapse before EBI's orders could be
filled. The results of the Company's operations are not materially dependent
on raw material costs.
EMPLOYEES
As of May 31, 1996, the Company's domestic operations (including Puerto Rico)
employed approximately 1,800 persons, of whom approximately 1,000 were engaged
in production and approximately 800 in sales, marketing, administrative and
clerical efforts. The Company's European subsidiaries employed approximately
740 persons, of whom approximately 480 were engaged in production and
approximately 260 in sales, marketing, administrative and clerical efforts.
None of the Company's principal domestic manufacturing employees are
represented by a labor union; the production employees at its Bridgend, South
Wales, facility are organized. Employees working at the Berlin, Germany
facility are represented by a statutory Workers' Council which negotiates labor
hours and termination rights. The Workers' Council does not represent such
employees with regard to collective bargaining of wages or benefits. The
Company believes that its relationship with all of its employees is
satisfactory. The establishment of Biomet's domestic operations in north
central Indiana, near other members of the orthopedic industry, provides
excellent access to the highly skilled machine operators required for the
manufacture of Biomet products. The Company's European locations at Bridgend,
South Wales; Swindon, England; Valencia, Spain; and Berlin, Germany; also
provide good sources for skilled manufacturing labor. EBI's Puerto Rican
operations principally involve the assembly of purchased components into
finished products using skilled labor.
PATENTS AND TRADEMARKS
As a result of the rapid development of reconstructive products, patents
historically have not been a major factor in the orthopedic industry. However,
as the industry matures, patents and other forms of intellectual property are
taking on an increased importance. Accordingly, management has placed greater
significance on patents and is taking steps to increase its acquisition of
intellectual property rights. In addition, management is actively enforcing
its intellectual property rights consistent with strategic objectives.
BIOMET, EBI, W. LORENZ, KIRSCHNER, POLYMEDICS, AOA, IQL and ARTHROTEK are the
Company's principal registered trademarks in the United States, and federal
registration has been obtained or is in process with respect to various other
trademarks associated with the Company's products. The Company holds or has
applied for registrations of various trademarks in its principal foreign
markets.
11
ITEM 2. PROPERTIES.
The Company has the following properties:
· Enlarge/Download Table
OWNED/
FACILITY LOCATION SQUARE FEET LEASED
------- --------- ----------- ------
Principal manufacturing facility Warsaw, Indiana 340,000 Owned
and executive offices of Biomet
Office and manufacturing facility of EBI Guaynabo, Puerto Rico 23,200 Owned
Marketing and sales operations Parsippany, New Jersey 63,000 Owned
of EBIMS, including accounting,
order entry and customer service
for all EBI products and sales and
administrative offices of EBI
45,000 Owned
Manufacturing facility of EBI Parsippany, New Jersey
1,800 Leased
Office and warehouse facility of Biomet and EBI Ontario, Canada
80,300 Owned
Manufacturing and administrative (1) Bridgend, South Wales 53,420 Owned
facilities of Biomet Ltd. (2) Swindon, England
35,400 Owned
Office and manufacturing facility (1) Ontario, California 6,300 Leased
of Arthrotek (2) Redding, California
36,700 Leased
Office, manufacturing and warehouse facilities (1) Berlin, Germany
of Biomet Deutschland GmbH
32,500 Owned
Administrative and distribution facility Jacksonville, Florida
of Lorenz Surgical 10,800 Owned
Office and warehouse facility of Biomet SpA Milan, Italy 40,000 Owned
Manufacturing facility of Biomet Fair Lawn, New Jersey 30,000 Owned
8,000 Leased
Manufacturing facility of AOA (1) Marlow, Oklahoma
(2) Delray Beach, Florida 35,700 Leased
Executive, manufacturing and administrative Hunt Valley, Maryland
offices of AOA
Office and manufacturing facilities of IQL Valencia, Spain 80,000 Owned
Office facility of IQL Madrid, Spain 6,000 Owned
Office and manufacturing facilities of Polymers Farum, Denmark 7,500 Leased
Office facilities of Biomet Polska Warsaw, Poland 900 Leased
Office and warehouse facilities of Biomet SA (1) Chauteaurenard, France 37,500 Leased
(2) Les Pennes Mirabeau, France 7,200 Leased
(3) Chaumont, France 37,100 Owned
The Company believes that its facilities are adequate, well maintained and
suitable for the development, manufacture and marketing of all its products.
12
ITEM 3. LEGAL PROCEEDINGS.
The Company has experienced an increase in the number and significance of the
legal matters in which it is involved. In addition to those matters arising in
the ordinary course of its business, the Company recently has been and is now a
party to several actions in which patent infringement is one of the claims made
against it. In addition, the Company has experienced a gradual increase in the
number of product liability claims made against it.
The patent matters can be classified into two general categories: those cases
in which the plaintiff is an inventor seeking to hold the Company liable for
damages, and those cases in which the plaintiff is a competitor seeking a
strategic advantage in the marketplace.
There are two significant cases in the first category. In the Ramos case,
the United States Court of Appeals for the Federal Circuit reversed a finding
of willful infringement by the Company, but affirmed a finding of infringement
under the doctrine of equivalents. As a result of this decision, Biomet
incurred a one-time $2.0 million charge against pre-tax earnings for the
quarter ended August 31, 1995. In the Tronzo case, a jury returned a verdict
in January of this year in favor of Raymond G. Tronzo awarding him
approximately $55 million on his patent and state law claims. On August 6,
1996, the United Stated District Court for the Southern District of Florida
entered a judgment, which implements and reduces the jury verdict, awarding
$33,756,492 to Tronzo on his state law claims, including compensatory damages
of approximately $7.1 million, punitive damages of $20 million, and prejudgment
interest of approximately $6.6 million. The trial court dismissed, with
prejudice, Tronzo's claim based upon unjust enrichment. For reasons unknown,
the trial court has not yet ruled on the Company's motion challenging the
validity of Tronzo's patent. If the trial court ultimately finds the patent to
be invalid, management believes that this finding will provide additional
support to its legal arguments challenging the judgment on the state law
claims. If, however, the trial court ultimately finds the patent to be valid,
Tronzo will be awarded an additional $5.7 million judgement for patent
infringement, including a fifty percent enhancement based upon willfulness and
the trial court will also consider whether Tronzo is entitled to an award of
attorney's fees and an injunction prohibiting future sales of the finned
version of the Mallory-Head acetabular cup, the device found to have infringed
the Tronzo patent. This device accounts for a relatively small portion of the
total sales of the Company's Mallory-Head Total Hip System, and represents less
than one percent of the Company's annual sales. The Company intends to file
post-judgment motions for judgment in its favor and, alternatively, for a new
trial or to amend or modify the judgment to seek reduction of the punitive
damages and prejudgment interest components of the judgment. Management
anticipates that it will vigorously pursue an appeal of the judgment if these
motions are not favorably resolved. Based on the information and advice
currently available, management believes that the Company has adequate accruals
to cover legal costs and estimated loss exposure, if any, and the Company's
cash and cash equivalents are more than adequate to address the payment of any
loss that may ultimately be determined with respect to this matter.
There are two matters of significance in the latter category. The Company and
DePuy, a subsidiary of Boehringer Mannheim, are involved in litigation in which
each company has made claims of patent infringement (and related claims)
against the other with respect to several products. The Company has filed four
patent infringement lawsuits against DePuy alleging, among other things, that
DePuy's AML hip system, instrumentation and other products infringe claims of
the Company's patents. In addition, DePuy has filed a lawsuit against Biomet
and one of its employees alleging that the Company makes and sells a modular
hip prosthesis and knee prosthesis which fall within the scope of its patents.
The Complaint also alleges that the individual defendant misappropriated
certain alleged trade secrets when he left DePuy to begin employment with the
Company. All of the lawsuits seek recovery of compensatory damages (including
trebling for willfulness), as well as attorneys' fees and injunctive relief
from infringing the patents at issue. As to the lawsuit filed by DePuy, the
Company's counsel has rendered a non-infringement opinion and has opined that
the claims in these patents are invalid. The Company intends to vigorously
defend the actions filed against it and pursue its counterclaims.
Lastly, the Company is a defendant in two consolidated lawsuits now pending in
the United States District Court for the District of New Jersey in which the
plaintiffs are Orthofix, Inc. and two affiliated corporations ("Orthofix"). The
Complaints include allegations of tortious interference with contractual
relations, breach of contract, patent and trademark infringement, unfair and
deceptive trade practices and failure to pay for goods sold and delivered. The
allegations generally relate to the events surrounding the expiration of a
Distributor Agreement between Orthofix and the Company's subsidiary, EBI, in
fiscal year 1996, and the acquisition by Orthofix of American Medical
Electronics, Inc., EBI's principal competitor in the sale of electrical bone
growth stimulation devices. The plaintiffs seek the payment of approximately
$880,000 for goods shipped to EBI prior to the expiration of the Distributor
Agreement, together with unspecified damages related to the allegations set
forth in the Complaint. On April 2, 1996, the plaintiffs filed a Motion for
Preliminary Injunction, seeking to bar the continued sale by EBI of its
inventory of Orthofix devices, to bar the sale of EBI's "DynaFix" system for a
period of 14 months and for other injunctive relief; however, Orthofix
subsequently abandoned its claim that EBI should be barred from selling its
DynaFix products and the Court ultimately denied the request for a preliminary
injunction by refusing to set the matter for hearing. The Company has denied
all of the substantive allegations of the Complaints, other than receipt of the
goods shipped by Orthofix, and has asserted various defenses and counterclaims
against Orthofix, including breach of the Distributor Agreement by it and
intentional interference with EBI's existing and potential customer
relationships. The Company intends to vigorously defend against the Orthofix
claims and to vigorously pursue its counterclaims.
There are various other claims, lawsuits, disputes with third parties,
investigations and pending actions involving various allegations against the
Company incident to the operations of its business. The results of litigations
proceedings cannot be predicted with certainty; however, management believes
the ultimate disposition of these matters will not have a material adverse
effect on the consolidated financial position of the Company.
13
EXECUTIVE OFFICERS OF THE REGISTRANT
The name, age, business background, positions held with the Company and tenure
as an executive officer of each of the Company's executive officers are set
forth below. No family relationship exists among any of the executive
officers. Except as otherwise stated, each executive officer has held the
position indicated during the last five years.
· Enlarge/Download Table
Served as Executive Current Position(s)
Name, Age and Business Experience Officer Since with the Company
--------------------------------- ------------------- -------------------
DANE A. MILLER, PH. D., 50
President and Chief Executive Officer of the 1977 President and Chief
Company; Director of the Company since 1977 Executive Officer and Director
of the Company.
NILES L. NOBLITT, 45
Chairman of the Board of the Company; 1978 Chairman of the Board
Director of the Company since 1977. and Director of the Company.
CHARLES E. NIEMIER, 40
Senior Vice President - International Operations of 1984 Senior Vice President -
the Company since November 1991; prior to November 1991, International Operations
Senior Vice President - Warsaw Operations of the Company, and Director of the Company.
Director of the Company since 1987.
GARRY L. ENGLAND, 42
Senior Vice President - Warsaw Operations of the 1987 Senior Vice President -
Company since May 1994; Vice President - Warsaw Operations of the
Research and Development of the Company Company.
from November 1991 to May 1994; prior to
November 1991, Vice President - Manufacturing
of the Company.
DANIEL P. HANN, 41
Vice President and General Counsel, 1989 Vice President and General
Secretary and Director of the Company since 1989. Counsel, Secretary and
Director of the Company.
JOEL P. PRATT, 42
Vice President of the Company and 1990 Vice President of
President of Arthrotek since June 1996; the Company
Vice President of the Company and General Manager of
Biomet Medical Products from March 1993
to January 1996; prior to March 1993,
Vice President - Sales and Marketing of the Company.
GREGORY D. HARTMAN, 39
Vice President - Finance of the Company since 1991 Vice President - Finance of
December 1991; prior to December 1991, Controller the Company.
of the Company.
JAMES W. HALLER, 39
Controller of the Company since December 1991; 1991 Controller of the Company.
prior to December 1991, Assistant Controller
of the Company.
JERRY L. FERGUSON, 55
Senior Vice President of the Company since 1994 Senior Vice President of the
December 1994; Special Projects Advisor to Company and Director of
the Company from December 1993 to the Company.
December 1994; prior to December 1993,
Owner of Classic Car Centre, Inc.; Director
of the Company since 1978.
14
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The following table shows the quarterly range of high and low sales prices for
the Company's Common Shares as reported by the Nasdaq National Market for each
of the three most recent fiscal years ended May 31. They reflect inter-dealer
prices, without retail mark-up, mark-down or commission. The approximate
number of recordholders of outstanding Common Shares as of May 31, 1996 was
11,500.
· Download Table
High Low
1996
Fourth $ 19 5/8 $ 12 1/2
Third 20 5/8 17 3/8
Second 18 1/2 16
First 16 1/2 14 1/8
1995
Fourth $ 18 1/2 $ 13 1/8
Third 17 11 1/2
Second 12 5/8 10 5/8
First 11 7/8 9
1994
Fourth $ 11 7/8 $ 9 5/8
Third 11 7/8 9 7/8
Second 13 1/4 8 3/8
First 11 1/4 8 3/8
The Company has not paid any dividend within the last three years; however, the
Board of Directors of the Company periodically considers the payment of
dividends.
15
ITEM 6. SELECTED FINANCIAL DATA
INCOME STATEMENT DATA
(in thousands, except earnings per share)
· Download Table
Years ended May 31, 1996 1995 1994 1993 1992
------------------------------------------------
Net sales $535,159 $452,272 $373,295 $335,373 $274,795
Cost of sales 174,364 142,143 114,829 104,741 85,657
------------------------------------------------
Gross profit 360,795 310,129 258,466 230,632 189,138
Selling, general and
administrative expenses 199,461 169,332 136,191 122,170 102,695
Research and development expense 24,054 21,770 20,521 17,995 16,620
------------------------------------------------
Operating income 137,280 119,027 101,754 90,467 69,823
Other income, net 12,389 5,915 5,278 3,805 6,688
------------------------------------------------
Income before income taxes 149,669 124,942 107,032 94,272 76,511
Provision for income taxes 55,563 45,742 37,214 30,311 24,702
------------------------------------------------
Net income $94,106 $79,200 $69,818 $63,961 $51,809
================================================
Earnings per share $.82 $.69 $.61 $.56 $.46
================================================
Weighted average number of shares 115,461 115,459 115,215 114,934 113,009
================================================
BALANCE SHEET DATA
(in thousands)
As of May 31, 1996 1995 1994 1993 1992
------------------------------------------------
Working capital $400,817 $302,752 $288,408 $224,387 $167,707
Total assets 598,469 539,084 418,077 354,409 279,234
Shareholders' equity 534,070 444,617 357,283 301,319 232,467
- The selected consolidated financial information includes the operations of
Kirschner Medical Corporation from November 4, 1994 and Lorenz Surgical from
June 1, 1992.
- The Company paid no cash dividends during any of the periods presented.
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following table shows the percentage relationship to net sales of items
derived from the Consolidated Statements of Income and the percentage change
from year to year.
· Enlarge/Download Table
Percentage of Percentage
Net Sales Increase
1996 1995
Years ended May 31, 1996 1995 1994 VS. 1995 vs. 1994
--------------------------------------------
Net sales 100.0% 100.0% 100.0% 18% 21%
Cost of sales 32.6 31.4 30.8 23 24
----------------------
Gross profit 67.4 68.6 69.2 16 20
Selling, general and administrative expenses 37.2 37.5 36.5 18 24
Research and development expense 4.5 4.8 5.5 10 6
----------------------
Operating income 25.7 26.3 27.2 15 17
Other income, net 2.3 1.3 1.5 109 12
----------------------
Income before income taxes 28.0 27.6 28.7 20 17
Provision for income taxes 10.4 10.1 10.0 21 23
----------------------
Net income 17.6% 17.5% 018.7% 19% 13%
=======================
1996 COMPARED TO 1995
The Company again achieved record net sales and earnings per share in fiscal
1996. Net sales increased 18% to $535,159,000 in fiscal 1996 as compared to
$452,272,000 in fiscal 1995. The Company's U.S.-based revenue increased 15% to
$396,707,000 in fiscal 1996, while foreign sales increased 28% to $138,452,000.
Worldwide reconstructive device sales during fiscal 1996 increased by 20% to
$326,834,000 compared to fiscal 1995, largely a result of Biomet's continued
penetration into the reconstructive device market and the inclusion of
Kirschner sales for the full year. Products recording significant increases in
unit sales include the Maxim(R) Total Knee System, the Bio-Modular(R) Shoulder
and the Alliance(R) Hip System. In fiscal 1996, EBI's sales increased 10% to
$108,627,000, principally as a result of increase sales of the DynaFix(TM)
external fixation system and the EBI Bone Healing System(R) Model 1200. The
Company's "Other Products" revenues totaled $99,698,000, representing a 23%
increase over fiscal 1995, primarily a result of increased sales of Lorenz's
craniomaxillofacial products and Biomet's trauma products, and the inclusion of
a full year of Kirschner's AOA products.
Cost of sales increased as a percentage of sales to 32.6% for fiscal 1996
compared to 31.4% for fiscal 1995. This increase is due to the acquisition in
November 1994 of Kirschner, whose cost of sales was historically higher than
Biomet's due to its higher levels of outsourced product manufacturing. Selling,
general and administrative expenses decreased to 37.2% of net sales in fiscal
1996 compared to 37.5% of net sales in fiscal 1995, primarily due to the
reduction of payroll costs resulting from the consolidation of the Kirschner
operation into Warsaw, partially offset by $1.6 million paid in connection
with the judgment in the Ramos litigation and legal expenses incurred in
connection with the Tronzo litigation. Research and development expense
increased by $2,284,000 during the current fiscal year reflecting the Company's
commitment to remain competitive through technological advancements, but
decreased as a percentage of net sales principally as a result of Kirschner's
lower expenditures on research and development. The increase in other income is
the result of income earned on higher investment balances throughout the year,
a $2.5 million gain on marketable securities and $2.9 million received on the
termination of a joint venture agreement with United States Surgical
Corporation, offset by $400,000 of interest expense related to the Ramos
litigation. The effective income tax rate increased to 37.1% in fiscal 1996
compared to 36.6% in fiscal 1995. This increase is due to the changes in the
Puerto Rico local tax structure and reduction of U.S. tax benefits from
operating in Puerto Rico. The Company's effective tax rate will continue to
increase in future years as the full impact of these tax changes materialize.
These factors resulted in a 19% increase in net income and earnings per share
for fiscal 1996 as compared to fiscal 1995, increasing from $79,200,000 to
$94,106,000 and $.69 to $.82, respectively.
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," which is effective for fiscal years beginning after December
15,1995. This statement addresses the accounting for and financial reporting of
stock-based compensation plans including stock options. The Company will adopt
the new statement as of June 1, 1996, and the effect of implementation will
change the Company's accounting and financial statement disclosures related to
employee and distributor stock options, however, such changes will not be
material to the Company's consolidated financial statements (see Note G of
Notes to Consolidated Financial Statements).
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