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UNITED STATES
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
For the fiscal year ended May 31, 2003.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to __________________.
Commission file No. 0-12515.
BIOMET INC.
(Exact name of registrant as specified in its charter)
INDIANA 35-1418342
(State of incorporation) (IRS Employer
Identification No.)
56 EAST BELL DRIVE, WARSAW, INDIANA 46582
(Address of principal executive offices) (Zip Code)
(574) 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 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. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes [X] No [ ]
The aggregate market value of the Common Shares held by non-affiliates of the
registrant, based on the closing price of the Common Shares on November 29,
2002, as reported by The Nasdaq National Market, was approximately
$6,520,022,987. As of August 7, 2003, there were 256,391,095 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 2003
Annual Meeting of Shareholders of the Registrant Part III
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FORWARD-LOOKING STATEMENTS
This report contains "forward-looking statements" within the meaning of federal
securities laws. Those statements are often indicated by the use of words such
as "will," "intend," "anticipate," "estimate," "expect," "plan" and similar
expressions, and include, but are not limited to, statements related to the
timing and number of planned new product introductions; the effect of
anticipated changes in the size, health and activities of population on demand
for the Company's products; the Company's intent and ability to expand its
operations; assumptions and estimates regarding the size and growth of certain
market segments; the Company's ability and intent to expand in key international
markets; the timing and anticipated outcome of clinical studies; assumptions
concerning anticipated product developments and emerging technologies; the
future availability of raw materials; the anticipated adequacy of the Company's
capital resources to meet the needs of its business; the Company's intent and
ability to consummate acquisitions; the Company's continued investment in new
products and technologies; the ultimate success of the Company's strategic
alliances and joint ventures; the ultimate marketability of products currently
being developed; the ability to successfully implement new technology; future
declarations of cash dividends; the Company's ability to sustain sales and
earnings growth; the Company's goals for sales and earnings growth; the future
value of the Company's Common Stock; the ultimate effect of the Company's Share
Repurchase Programs; the Company's success in achieving timely approval of its
products with domestic and foreign regulatory entities; the stability of certain
foreign economic markets; the impact of anticipated changes in the
musculoskeletal industry and the ability of the Company to react to and
capitalize on those changes; the impact of the transfer of marketing
responsibility for the Company's internal fixation products; and the Company's
ability to take advantage of technological advancements. Readers of this report
are cautioned that reliance on any forward-looking statement involves risks and
uncertainties. Although the Company believes that the assumptions on which the
forward-looking statements contained herein are based are reasonable, any of
those assumptions could prove to be inaccurate given the inherent uncertainties
as to the occurrence or nonoccurrence of future events. There can be no
assurance that the forward-looking statements contained in this report will
prove to be accurate. The inclusion of a forward-looking statement herein should
not be regarded as a representation by the Company that the Company's objectives
will be achieved. Readers of this report should carefully read the factors set
forth under the "Risk Factors" section of this report for a description of
certain risks that could, among other things, cause actual results to differ
from those contained in forward-looking statements made in this report and
presented elsewhere by management from time to time. Such factors, among others,
may have a material adverse effect upon the Company's business, financial
condition and results of operations.
The Company undertakes no obligation to update publicly or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. Accordingly, the reader is cautioned not to place undue
reliance on forward-looking statements, which speak only as of the date on which
they are made. publicly or revise any forward-looking statements, whether as a
result of new information, future events or otherwise. Accordingly, the reader
is cautioned not to place undue reliance on forward-looking statements, which
speak only as of the date on which they are made.
TABLE OF CONTENTS
PART I
ITEM 1. BUSINESS .................................................................................................. 1
ITEM 2. PROPERTIES ................................................................................................ 15
ITEM 3. LEGAL PROCEEDINGS ......................................................................................... 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ....................................................... 17
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS ................................. 18
ITEM 6. SELECTED FINANCIAL DATA ................................................................................... 19
ITEM 7. MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS ......................... 20
ITEM 7A. QUANTITATIVE & QUALITATIVE DISCLOSURES ABOUT MARKET RISK ................................................. 25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ............................................................... 26
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE ...................... 43
ITEM 9A. CONTROLS AND PROCEDURES .................................................................................. 43
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ....................................................... 44
ITEM 11. EXECUTIVE COMPENSATION ................................................................................... 44
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS ........... 44
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ........................................................... 44
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.................................................................... 44
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K .......................................... 45
PART I
ITEM 1. BUSINESS.
GENERAL
Biomet, Inc., an Indiana corporation incorporated in 1977 ("Biomet" or the
"Company"), and its subsidiaries design, manufacture and market products used
primarily by musculoskeletal medical specialists in both surgical and
non-surgical therapy, including reconstructive and fixation devices, electrical
bone growth stimulators, orthopedic support devices, operating room supplies,
general surgical instruments, arthroscopy products, spinal products, bone
cements and accessories, bone substitute materials, craniomaxillofacial implants
and instruments, and dental reconstructive implants and associated
instrumentation. Biomet has corporate headquarters in Warsaw, Indiana, and
manufacturing and/or office facilities in more than 50 locations worldwide.
The Company's principal subsidiaries include Biomet Orthopedics, Inc.; Biomet
Manufacturing Corp.; EBI, L.P.; BioMer CV (the Biomet Merck joint venture);
Implant Innovations, Inc.; Walter Lorenz Surgical, Inc. and Arthrotek, Inc.
Unless the context requires otherwise, the term "Company" as used herein refers
to Biomet and all of its subsidiaries.
The Company's annual reports on Form 10-K (for the four most recent fiscal
years), quarterly reports on Form 10-Q, current reports on Form 8-K and
amendments to these reports filed or furnished pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934 are available free of charge on or
may be accessed through the Investors Section of the Company's Internet website
at www.biomet.com as soon as reasonably practicable after the Company files or
furnishes such material with or to the Securities and Exchange Commission.
PRODUCTS
The Company operates in one business segment, musculoskeletal products, which
includes the design, manufacture and marketing of four major market segments:
reconstructive devices, fixation products, spinal products and other products.
The Company has three reportable geographic markets: United States, Europe and
Rest of World. Reconstructive devices include knee, hip and extremity joint
replacement systems, as well as dental reconstructive implants, bone cements and
accessories and the procedure-specific instrumentation required to implant the
Company's reconstructive systems. Fixation products include internal and
external fixation devices, craniomaxillofacial fixation systems and electrical
stimulation devices that do not address the spine. Spinal products include
electrical stimulation devices addressing the spine, spinal fixation systems and
orthobiologicals. The other product sales category includes softgoods and
bracing products, arthroscopy products, casting materials, general surgical
instruments, operating room supplies, wound care products and other surgical
products. Depending on the intended application, the Company reports sales of
bone substitute materials in the reconstructive device, fixation product or
spinal product group.
The following table shows the net sales and percentages of total net sales
contributed by each of the Company's product groups for each of the three most
recent fiscal years ended May 31, 2003.
YEARS ENDED MAY 31,
(DOLLAR AMOUNTS IN THOUSANDS)
-----------------------------
2003 2002 2001
PERCENT PERCENT PERCENT
NET OF TOTAL NET OF TOTAL NET OF TOTAL
SALES NET SALES SALES NET SALES SALES NET SALES
---------- --------- ---------- --------- ---------- ----------
Reconstructive Devices $ 867,602 63% $ 721,004 60% $ 614,308 59%
Fixation Products 237,117 17% 215,544 18% 202,152 20%
Spinal Products 143,607 10% 125,119 11% 91,103 9%
Other Products 141,974 10% 130,235 11% 123,100 12%
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Total $1,390,300 100% $1,191,902 100% $1,030,663 100%
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1
RECONSTRUCTIVE DEVICES
Orthopedic reconstructive devices are used to replace joints that have
deteriorated as a result of disease (principally osteoarthritis) or injury.
Reconstructive joint surgery involves the modification of the area surrounding
the affected joint and the implantation of one or more manufactured components,
and may involve the use of bone cement. The Company's primary orthopedic
reconstructive joints are knees, hips and extremities, but it produces other
joints as well. The Company also produces the associated instruments required by
orthopedic surgeons to implant the Company's reconstructive devices, as well as
bone cements and delivery systems. The Company's orthopedic reconstructive
devices are sold through its Biomet Orthopedics, Inc. ("Biomet Orthopedics")
subsidiary. Additionally, dental reconstructive devices and associated
instrumentation are used for oral rehabilitation through the replacement of
teeth and repair of hard and soft tissues.
KNEE SYSTEMS. Total knee replacement procedures normally include a femoral
component, a patellar component, a tibial tray and an articulating surface.
Total knee replacement may occur as an initial joint replacement procedure, or
as a revision procedure due to the need to replace, repair or enhance the
initial implant. Partial, or unicondylar, knee replacement is an option when
only a portion of the knee requires replacement.
The Company continues to be a market leader in addressing the increasing demand
from practitioners and patients for procedures and products accommodating
minimally-invasive knee techniques. The Repicci II(R) Unicondylar Knee System is
specifically designed to accommodate a minimally-invasive knee arthroplasty
procedure. This system incorporates self-aligning metal and polyethylene
components. This innovative procedure can often be performed on an outpatient
basis and requires a smaller incision and less bone removal, which may result in
shorter recovery time and reduced blood loss. The Oxford(TM) Phase 3
Unicompartmental Knee, which is a mobile-bearing unicondylar knee that utilizes
a minimally-invasive technique, continues to experience strong sales outside the
United States. The Company is currently seeking clearance from the U.S. Food and
Drug Administration ("FDA") to market the Oxford(TM) Phase 3 Knee. During fiscal
year 2003, the Company introduced the Vanguard(TM) Series Unicompartmental Knee
System. The Vanguard(TM) System is designed to accommodate surgeons who prefer a
fully-instrumented minimally-invasive unicondylar system, and incorporates a
fixed-bearing tibial component to accompany the femoral component and
instruments of the Oxford(TM) Phase 3 Minimally-Invasive Unicompartmental Knee
System.
The Maxim(R) Complete Knee System incorporates cruciate retaining, posterior
stabilized and constrained components, and competes in both the primary and
revision knee market segments. The Maxim(R) System continues to be the Company's
largest-selling knee system.
The Ascent(TM) Total Knee System incorporates an open box posterior-stabilized
femoral component with a swept-back anterior flange that can accept either a
posterior-stabilized or constrained tibial bearing. This system is designed with
a deepened patella groove to enhance patellar tracking and contribute to reduced
lateral release rates. The Ascent(TM) System addresses the needs of both the
primary and revision markets.
The Biomet(R) Orthopaedic Salvage System ("OSS") continues to gain market
acceptance. This system provides modular flexibility while reducing overall
inventory demands. The OSS System is used mainly in instances of severe bone
loss or significant soft tissue instability as a result of multiple revision
surgeries or oncological bone deficiencies.
During fiscal year 2003, the Company received clearance from the FDA for the
fixed-bearing cruciate-retaining and posterior-stabilized versions of the
Vanguard(TM) Complete Knee Replacement System. During fiscal year 2004 the
Company plans to complete the instrument design for these two versions of
Biomet's newest and most comprehensive knee system, and begin development focus
on the mobile-bearing and revision aspects of this system. Biomet is also
planning to launch the Maxim(R) MI (minimally-invasive) instruments during
fiscal year 2004. These instruments are designed for utilization with the
Maxim(R) and the AGC(R) Knee Systems to reduce incision size, which may provide
reduced blood loss, a shortened hospital stay, reduced postoperative pain and
less time spent in rehabilitation as compared to a conventional procedure.
HIP SYSTEMS. Total hip replacement procedures involve the replacement of
the head of the femur and the acetabulum, and may occur as an initial joint
replacement procedure, or as a revision procedure due to the need to replace,
repair or enhance the initial implant. A femoral hip prosthesis consists of a
femoral head and stem, which can be cast, forged or machined depending on the
design and material used. Acetabular components include a prosthetic replacement
of the socket portion, or acetabulum, of the pelvic bone. Because of variations
in human anatomy and differing design preferences among surgeons, femoral and
acetabular prostheses are manufactured by the Company in a variety of sizes and
configurations. The Company offers a broad array of total hip systems, most of
which utilize titanium or cobalt chromium alloy femoral components and the
Company's patented ArCom(R) polyethylene-lined or metal-on-metal acetabular
components. Many of the femoral prostheses utilize the Company's proprietary
porous plasma spray (PPS(TM)) coating, which enhances the attachment of bone
cement to the stem or enables cementless fixation.
2
The Alliance(R) family of hip systems is designed to address the demand from
hospitals and surgeon groups toward standardization of total hip systems. The
Alliance(R) hip family provides the largest selection in the marketplace of
primary and revision stems available for implantation with a single set of
instrumentation. The Alliance(R) family of hip systems includes the Answer(R),
Bi-Metric(R), Bio-Groove(R), Hip Fracture(TM), Integral(R), Intrigue(TM),
Osteocap RS(R), Progressive(TM), RX90(TM) and Vision(R) Hip Systems. The
Alliance(R) family was further augmented by introducing Exact(TM)
Instrumentation, an integrated instrument set developed to promote
intraoperative flexibility and increase the efficiency, simplicity and
consolidation of instrument use.
The Mallory-Head(R) Hip System is designed for both primary and revision total
hip arthroplasty procedures. The primary femoral components feature a specific
proximal geometry for cementless indications and a slightly different proximal
ribbed geometry for those patients requiring fixation with bone cement. The
Mallory-Head(R) revision calcar components provide innovative solutions for
difficult revision cases, and have demonstrated excellent clinical results. The
Mallory-Head(R) Calcar Replacement Prosthesis is offered in both a one-piece and
modular geometry, which allows for individual customization at the time of
surgical intervention, even in cases of severe bone deficiency. The modular
version of the Mallory-Head(R) System incorporates the Company's patented roller
hardened technology, which dramatically increases the strength of the modular
connection.
Biomet's Metal-on-Metal Hip System combines a cobalt chrome head with a cobalt
chrome liner and has demonstrated a 20- to 100-fold reduction in volumetric wear
in simulator studies compared to traditional metal-polyethylene articulation
systems. The M(2)a-Taper(TM) Metal-on-Metal Articulation System may be utilized
on most of Biomet's femoral components and has continued to evolve with the
introduction of the M(2)a-38(TM) Hip Articulation System, which incorporates
larger diameter metal-on-metal components designed to offer increased range of
motion and decrease the likelihood of hip dislocation. The Company is also
developing a ceramic-on-ceramic articulation system, which is currently being
marketed outside the United States and is in the patient-enrollment phase of a
clinical trial in the United States.
The Taperloc(R) Hip System is marketed for non-cemented use in patients
undergoing primary hip replacement surgery as a result of noninflammatory
degenerative joint disease. The Taperloc(R) femoral component is a collarless
flat wedge-shaped implant that provides excellent durability and stability in a
design that is relatively simple and predictable to implant. The incorporation
of standard and lateralized offset options provides the surgeon with the ability
to reconstruct a stable joint with proper leg length in virtually all patient
anatomies.
During the second quarter of fiscal year 2003, Biomet Orthopedics commenced the
distribution of its RingLoc(R) constrained hip liners, which are indicated for
patients with a high risk of hip dislocation. While the percentage of patients
requiring a constrained liner is relatively small, surgeons often prefer to
utilize a revision system that includes this option. The Freedom(TM) Constrained
Liner, scheduled for release during fiscal year 2004, offers an enhanced range
of motion of 110(degree) and a wide series of options. Additional new hip
products scheduled for release during fiscal year 2004 include hip instruments
for the Microplasty (TM) Minimally Invasive Hip Program (posterior approach), a
non-flared version of the M(2)a-38(TM) Hip Articulation System and the
Generation 4(TM) Polished Hip System, a smooth, tapered stem designed to help
distribute bone cement evenly around the implant thereby enhancing fixation.
EXTREMITY SYSTEMS. The Company offers a variety of shoulder systems
including the Absolute(R) Bi-Polar, Bi-Angular(R), Bio-Modular(R), Copeland(TM),
Integrated(TM) and Mosaic(TM) Shoulder Systems, as well as uniquely-designed
elbow replacement systems.
The Copeland(TM) Humeral Resurfacing Head, was developed to minimize bone
removal in shoulder procedures and has over 10 years of positive clinical
results in the United Kingdom. The Discovery(TM) Elbow is a unique total elbow
device that incorporates an ArCom(R) polyethylene molded bearing and condylar
hinge mechanism designed to produce a more anatomic articulation than observed
in simple-hinged elbow implants. The iBP(TM) (Instrumented Bone Preserving)
Elbow System is marketed in Europe and is designed to closely resemble the
natural anatomy of the elbow to allow for a more complex pattern of movement
than simple-hinged implants. The modular Mosaic(TM) System is utilized to create
a shoulder implant in complex revision and salvage/oncology procedures. During
fiscal year 2003, Biomet introduced several new extremity products, including
the Liverpool(TM) Radial Head Replacement implant for elbow reconstruction and
the Comprehensive(TM) Shoulder System Fracture Stem, designed to repair and
reconstruct the shoulder joint. Additionally, the AES(R) (Ankle Evolutive
System) modular total ankle was launched in most European countries during
fiscal year 2003.
DENTAL RECONSTRUCTIVE IMPLANTS. Through its subsidiary, Implant
Innovations, Inc. ("3i"), the Company develops, manufactures and markets
products designed to enhance oral rehabilitation through the replacement of
teeth and the repair of hard and soft tissues. These products include dental
reconstructive implants and related instrumentation, bone substitute materials
and regenerative products and materials. A dental implant is a small screw or
cylinder, normally constructed of titanium, that is surgically placed in the
bone of the jaw to replace the root of a missing tooth and provide an anchor for
an artificial tooth. 3i's flagship product, the OSSEOTITE(R) product line,
features a patented micro-porous surface technology, which allows for earlier
3
loading and improved bone integration to the surface of the implant compared to
competitive dental implants. The OSSEOTITE NT(TM) (Natural Taper) Implant,
introduced during fiscal year 2003, continues to gain increased market
acceptance in the dental implant market. The tapered shape of the OSSEOTITE
NT(TM) Implant, which resembles a natural root design, allows for immediate
placement in extraction sockets and facilitates treatment of patients with
convergent roots of adjacent teeth.
3i's offering of restorative treatment options also includes the GingiHue(TM)
Post and the ZiReal(TM) Post. The GingiHue(TM) Post is a gold-colored titanium
nitride coated abutment, which optimizes the projection of natural color to
approximate the appearance of natural teeth. The ZiReal(TM) Post offers a highly
aesthetic restorative option. This zirconia-based implant provides the natural
translucence of ceramic material, but with greater strength, durability and
resistance to cracking than conventional aluminum oxide ceramic abutments. Both
of these products may be used with conventional crown and bridge techniques.
Introduced during fiscal year 2003, the Calcigen(TM) Oral bone graft stabilizer
is a resorbable calcium sulfate powder, which is designed for use with graft
material as a binder or barrier in dental reconstructive applications.
OTHER RECONSTRUCTIVE DEVICES. Biomet's Patient-Matched Implant ("PMI(R)")
services group expeditiously designs, manufactures and delivers one-of-a-kind
reconstructive devices to orthopedic specialists. The Company believes this
service continues to enhance Biomet's reconstructive sales by strengthening its
relationships with orthopedic surgeons and augmenting its reputation as a
responsive company committed to excellent product design. In order to assist
orthopedic surgeons and their surgical teams in preoperative planning, Biomet's
PMI(R) group utilizes a three-dimensional ("3-D") bone and soft tissue
reconstruction imaging system. The Company uses computed tomography ("CT") data
to produce 3-D reconstructions for the design and manufacture of patient-matched
implants. Biomet also provides anatomic physical models based on patient CT
data. With this imaging and model-making technology, Biomet's PMI(R) group is
able to assist the physician prior to surgery by creating 3-D models. Within
strict deadlines, the model is used by engineers to create a PMI(R) design for
the actual manufacturing of the custom implant for the patient.
The Company is involved in the ongoing development of bone cements and delivery
systems. The Company has successfully penetrated the domestic cement market with
Palacos(R) Bone Cement, which is marketed primarily in conjunction with the
Optivac(R) Vacuum Mixing System. During fiscal year 2003, Biomet Orthopedics
introduced the Generation 4(R) Bone Cement with VacPac(R) Delivery System to the
domestic market, where the product is experiencing excellent market acceptance.
The VacPac(R) System is a proprietary, self-contained system designed to promote
consistency and integrity of the cement, eliminate exposure to fumes during
mixing, and reduce operating room time due to ease of the mixing and delivery
process. During fiscal year 2003, Biomet submitted a 510(k) application to the
FDA for Palacos(R) G Bone Cement with gentamicin antibiotic, which is currently
marketed outside the United States.
Additional products and services for reconstructive indications include bone
graft substitute materials and the distribution of allograft material.
Calcigen(TM) S calcium sulfate bone graft substitute is a self-setting paste
used to fill bone voids. The Calcigen(TM) PSI (Porous Synthetic Implant) Bone
Graft System was introduced during fiscal year 2003, and is a porous, calcium
phosphate bone substitute material. The Company also provides services related
to the supply of allograft material procured through several tissue bank
alliances. Biomet's VacPac(TM) System, initially designed for the vacuum mixing
and delivery of bone cement, is also being utilized to package freeze-dried
allografts. The flexible vacuum package allows rehydration with saline, blood or
blood products inside the vacuum package. Markets being addressed by the
distribution of the Company's allograft services include the orthopedic and
dental reconstructive market segments, as well as the spinal and arthroscopy
segments.
The GPS(TM) (Gravitational Platelet Separation) System, which is distributed by
the Company's Cell Factor Technologies subsidiary, is a unique device that
collects platelet concentrate (containing growth factors) from a small volume of
the patient's blood using a fast, single spin process. The concentrate is then
applied to the patient to promote acceleration of the body's natural healing
process.
During fiscal year 2004, Biomet plans to introduce the Acumen(TM) Surgical
Navigation System to the global market, enhancing visualization for
minimally-invasive and traditional procedures. Procedure-specific software has
been developed for reconstructive, fixation and spinal procedures. Clinical
evaluations are scheduled to begin during fiscal year 2004.
FIXATION PRODUCTS
The Company's fixation products include electrical stimulation devices (that do
not address the spine), external fixation devices, craniomaxillofacial fixation
systems, internal fixation devices and bone substitute materials utilized in
fracture fixation applications.
Palacos(R) is a registered trademark of Hereaus Kulzer GmbH.
4
ELECTRICAL STIMULATION SYSTEMS. The Company's subsidiary, EBI, L.P.
("EBI"), is the market leader in the electrical stimulation segment of the
fixation market. The EBI Bone Healing System(R) unit is a non-invasive option
for the treatment of recalcitrant bone fractures (nonunions) which have not
healed with conventional surgical and/or non-surgical methods. The non-invasive
treatments sold by EBI generally provide an alternative to surgical intervention
in the treatment of recalcitrant bone fractures, failed joint fusions and
congenital pseudarthrosis. The EBI Bone Healing System(R) units produce
low-energy pulsed electromagnetic field ("PEMF") signals that induce weak
pulsing currents in living tissues that are exposed to the signals. These
pulses, when suitably configured in amplitude, repetition and duration, affect
bone cells. The EBI Bone Healing System(R) unit may be utilized over a patient's
cast, incorporated into the cast or worn over the skin. In addition, the
OrthoPak(R) Bone Growth Stimulation System offers a small, lightweight
non-invasive bone growth stimulator using capacitive coupling technology. The
OrthoPak(R) System provides greater ease of use and enhances access to fracture
sites.
EBI also offers an implantable option when bone growth stimulation is required
subsequent to surgical intervention. EBI's OsteoGen(TM) Totally Implantable Bone
Growth Stimulator is an adjunct treatment when bone grafting and surgical
intervention are required to treat a recalcitrant fracture.
EXTERNAL FIXATION DEVICES. External fixation is generally indicated to
immobilize fractures when traditional casting is not a viable solution. The
DynaFix(R) and DynaFix Vision(TM) Systems are patented devices for use in
complicated trauma situations and in certain limb-lengthening and deformity
correction applications. EBI also offers several other fixation systems
addressing distal radius fractures and elbow fractures, as well as extensions to
the DynaFix(R) and DynaFix Vision(TM) Systems designed to treat the varying and
unique needs of practitioners and patients.
INTERNAL FIXATION DEVICES. The Company's internal fixation products include
devices such as nails, plates, screws, pins and wires designed to temporarily
stabilize traumatic bone injuries. These devices are used by orthopedic surgeons
to provide an accurate means of setting and stabilizing fractures. They are
intended as aids to healing and may be removed when healing is complete; they
are not intended to replace normal body structures.
The VHS(R) Vari-Angle Hip Fixation System is a growing internal fixation product
line for the Company. Its components can be adjusted intraoperatively, allowing
the hospital to carry less inventory, while providing greater intraoperative
selection of the optimum fixation angle. The Holland(TM) Nail System is a single
universal nail designed to treat all types of femoral (hip or thigh) fractures.
The Biomet(R) Low Profile Tibial Nail, used to treat fractures between the knee
and ankle, is primarily indicated in the treatment of unstable or nonunion
fractures. The Biomet(R) Ankle Arthrodesis Nail creates a solid fusion to
correct ankle deformity.
During fiscal year 2003, the Company began to introduce the Quad 4(TM)
Intramedullary Nail System to the domestic market. The Quad 4(TM) System
requires approximately 50% less inventory than competitive systems and is
uniquely designed to address the widest possible variety of femoral fractures.
CRANIOMAXILLOFACIAL FIXATION SYSTEMS. The Company manufactures and
distributes craniomaxillofacial and neurosurgical titanium and resorbable
implants, along with associated surgical instrumentation, principally marketed
to craniomaxillofacial, neurosurgical and craniofacial surgeons through its
subsidiary, Walter Lorenz Surgical, Inc. ("Lorenz Surgical"). Lorenz Surgical
also offers specialty craniomaxillofacial surgical instruments, HTR-PMI(R) Hard
Tissue Replacement material custom craniofacial implants and the Mimix(TM) Bone
Substitute Material for use in craniomaxillofacial surgery.
Lorenz Surgical manufactures and markets the LactoSorb(R) Resorbable Fixation
System of resorbable plates and screws comprised of a copolymer of poly-L-lactic
acid and polyglycolic acid. As a result of its innovative design, the
LactoSorb(R) System is comparable in strength to titanium plating systems at its
initial placement and is resorbed within 9 to 15 months after implantation. The
LactoSorb(R) System is especially beneficial in pediatric reconstruction cases
by eliminating the need for a second surgery to remove the plates and screws.
Mimix(TM) Bone Substitute Material is a synthetic tetra-calcium
phosphate/tri-calcium phosphate material. This material is most commonly used
for the repair of cranial defects, and is currently offered in putty form.
Mimix(TM) QS, a quick-setting bone substitute material, was introduced during
fiscal year 2003 to provide surgeons with a faster-setting formulation.
BONE SUBSTITUTE MATERIALS. When presented with a patient demonstrating a
bone defect, such as a fractured bone or bone loss due to removal of a tumor,
the treating surgeon may remove a portion of bone from the patient at a second
site to use as a graft to induce healing at the site of the defect. Bone
substitute materials can eliminate the pain created at the graft site, as well
as the costs associated with this additional surgical procedure. Depending on
the specific use of the bone substitute material, it can have reconstructive,
fixation or spinal applications. During fiscal year 2003, the Company introduced
Calcigen(TM) S (calcium sulfate) bone substitute material in granular and
self-setting forms in the United States for orthopedic applications.
VHS(R) is a registered trademark of Implant Distribution Network, Ltd.
5
SPINAL PRODUCTS
The Company's spinal products include electrical stimulation devices for spinal
applications, spinal fixation systems and bone substitute materials and
allograft products for spinal applications.
SPINAL FUSION STIMULATION SYSTEMS. Spinal fusions are surgical procedures
undertaken to establish bony union between adjacent vertebrae. EBI distributes
both non-invasive and implantable electrical stimulation units that surgeons can
use as options to provide an appropriate adjunct to surgical intervention in the
treatment of spinal fusion applications. EBI's Spinal-Pak(R) Spine Fusion
Stimulator utilizes capacitative coupling technology to encourage fusion
incorporation. The unit consists of a small, lightweight generator worn outside
the body that is connected to wafer-thin electrodes applied over the fusion
site. The SpinalPak(R) System is patient friendly, enhancing comfort whether the
patient is standing, sitting or reclining, and optimizing compliance with the
treatment regimen to achieve fusion success. EBI's SpF(R) Implantable units each
consist of a generator that provides a constant direct current to a titanium
cathode placed where bone growth is required. EBI's implantable SpF(R)-PLUS
Spinal Stimulation System, which was introduced during the fourth quarter of
fiscal year 2003 and offers three times the current density at the cathode. The
SpF(R) System has exhibited a 50% increase in fusion success rates over fusions
with autograft alone.
SPINAL FIXATION SYSTEMS. The Company distributes a traditional rod and
plate system under the trademark EBI(R) Omega 21(TM) Spine System. EBI also
manufactures and markets the SpineLink(R) Spinal Fixation System, which
addresses many of the inherent limitations of traditional rod and plate systems
by linking each spine segment individually for intrasegmental control. Through
the use of a modular titanium link and polydirectional screw, this unique system
provides an intrasegmental solution to spine fixation, enabling the surgeon to
tailor the segmental construction to the patient's anatomy. The SpineLink(R)-II
Spinal Fixation System is a second generation SpineLink(R) product launched
during fiscal year 2003 that combines the independent, intrasegmental concept of
the SpineLink(R) System with a low-profile design, which simplifies
point-to-point fixation for the surgeon. EBI's VueLock(R) Anterior Cervical
Plate System offers surgeons several important benefits, including a one-step
locking mechanism featuring a pre-attached expansive ring that eliminates the
need for additional locking components, as well as a low profile that minimizes
interference with anatomical soft tissue structures. In addition, the open
design of the VueLock(R) System provides surgeons with enhanced visualization of
the bone graft both during the actual surgical procedure and post-operatively on
x-ray. During fiscal year 2003, EBI began its launch of the VuePASS(TM) Portal
Access Surgical System, which offers a minimally-invasive spinal fusion
procedure option for use with the SpineLink(R)-II System. EBI also released the
EBI(R) Ionic(TM) Spine Spacer System during fiscal year 2003. The open design of
this system allows for optimal bone graft placement and bone ingrowth, along
with the additional benefit of excellent postoperative x-ray visualization. The
Company recently secured nonexclusive licenses on three patents for top-loading
spine systems from Interpore Cross, which will allow EBI to enter the spinal
deformity market in January 2004. In addition, EBI co-owns the patent covering
Interpore Cross' GEO Structure(TM) System and the Company plans to develop and
release a competitive device.
BONE SUBSTITUTE MATERIALS. Traditional spinal fixation surgery includes the
use of a spinal fixation device in conjunction with a bone substitute or bone
graft material to increase the likelihood of successful bone fusion. The
OsteoStim(R) resorbable bone graft substitute material is a granular form of
calcium phosphate that is resorbed and replaced with natural bone during the
healing process. During fiscal year 2003, EBI introduced its EBI(R) OsteoStim(R)
DBM (Demineralized Bone Matrix) Putty. Derived exclusively from human bone, the
putty can be used with a variety of substances, such as bone substitute
material, machined allograft, autograft and platelet rich plasma, to enhance the
surgeon's treatment options. In addition, EBI began the launch of the
OsteoStim(R) Skelite(TM) Resorbable Bone Graft Substitute during fiscal year
2003. EBI plans to begin clinical trials for the implantable EBI(R) Restore(TM)
vertebral motion restoration product during fiscal year 2004. The one-piece
design of the EBI(R) Restore(TM) product is intended to help in the restoration
of the patient's normal spine motion, as well as helping to simplify the implant
procedure and permitting more minimally-invasive approaches.
OTHER PRODUCTS
The Company also manufactures and distributes several other products including
orthopedic support products (also referred to as softgoods and bracing
products), arthroscopy products, operating room supplies, casting materials,
general surgical instruments, wound care products and other surgical products.
EBI manufactures and distributes an extensive line of orthopedic support
products under the EBI(R) Sports Medicine trade name. The Company manufactures
and markets a line of arthroscopy products through its Arthrotek, Inc.
("Arthrotek") subsidiary.
Skelite is a trademark of Millenium Biologix, Inc.
6
ORTHOPEDIC SUPPORT PRODUCTS. EBI distributes a line of orthopedic support
products under the EBI(R) Sports Medicine name, including traction framing
equipment, back supports, wrist and forearm splints, cervical collars, shoulder
immobilizers, slings, abdominal binders, knee braces and immobilizers, rib
belts, ankle supports and a variety of other orthopedic splints. Sales of these
softgoods and bracing products are assisted by the Support-on-Site (S.O.S.(SM))
stock and bill program, which efficiently handles the details of product
delivery for the healthcare provider. The Alliance(TM) Knee Brace is a
lightweight product, anatomically designed for each patient. The MD
(multi-dimensional) Elbow Brace, with its dual-hinge adjustment to control range
of motion, accommodates various treatment and rehabilitation plans. EBI is
committed to continuing to expand its line of orthopedic support devices and
introduced the Quick Fit(TM) Post-Op Knee Brace and the EBI(R) Fracture Walker
with Range-of-Motion Option during fiscal year 2003.
ARTHROSCOPY PRODUCTS. Arthroscopy is a minimally-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 CurvTek(R) Bone Tunneling System
for the reattachment of soft tissue to bone, LactoSorb(R) resorbable
arthroscopic fixation products, CuffPatch(TM) soft tissue reinforcement material
for rotator cuff repair, and the Bone Mulch(TM) Screw/WasherLoc(TM) Device for
anterior cruciate ligament repair.
PRODUCT DEVELOPMENT
The Company's research and development efforts are essentially divided into two
categories: innovative new technology and evolutionary developments. Most of the
innovative new technology development efforts are focused on biomaterial
products, and are managed at the corporate level and take place primarily in
Warsaw, Indiana and Darmstadt, Germany. Evolutionary developments are driven
primarily by the individual subsidiaries and include product line extensions and
improvements.
The Company continues to aggressively conduct internal research and development
efforts to generate new marketable products, technologies and materials. In
addition, the Company is well positioned to take advantage of external
acquisition and development opportunities. An important component of the
Company's strategy has been the formation of strategic alliances to enhance the
development of new musculoskeletal products, including the relationships forged
with Organogenesis, Inc. and Z-KAT, Inc. during fiscal year 2002. The Company is
working with Organogenesis to market orthopedic products incorporating
Organogenesis' FortaFlex(TM) bio-engineered matrix technology, such as the
CuffPatch(TM) rotator cuff repair product marketed by the Company's Arthrotek
subsidiary. The Company is collaborating with Z-KAT to co-develop and distribute
image-guided software and intelligent instrumentation for various
musculoskeletal applications and techniques, including minimally-invasive
procedures.
For the years ended May 31, 2003, 2002 and 2001, the Company expended
approximately $55,309,000, $50,750,000, and $43,020,000, respectively, on
research and development. It is expected that ongoing research and development
expenses will continue to increase. The Company's principal research and
development efforts relate to its reconstructive devices, electrical stimulation
products, spinal fixation products, revision orthopedic reconstructive devices,
dental reconstructive implants, arthroscopy products, resorbable technology,
biomaterial products, gene therapy technologies and image-guided software in the
musculoskeletal products field.
The Company's research and development efforts have produced approximately 340
new products and services during the last four fiscal years, including the
following new products and services introduced during fiscal year 2003: GPS(TM)
Gravitational Platelet Separation System, ReCap(TM) Hemi Hip Resurfacing System,
Mallory-Head(R) HA Coated Primary Stem, Microplasty Minimally Invasive Hip
Program, RingLoc(R) II Constrained Liner, Ascent(TM) Anterior Stabilized Bearing
Knee, Generation 4(R) Bone Cement with VacPac(R) Delivery System, Vanguard(TM)
Series Unicompartmental Knee System, Quad 4(TM) Intramedullary Nail System,
Comprehensive(TM) Fracture Stem, Liverpool(TM) Radial Head, Mosaic(TM) Humeral
Replacement System, DynaFix(R) Hip Distractor, DynaFix(R) Radiolucent Rail,
OptiROM(R) Posterior Approach System, EBI(R) Ionic(TM) Spine Spacer System,
EBI(R) Osteo-Stim(R) ALIF Allograft Spacer System, EBI(R) OsteoStim(R)
Demineralized Bone Matrix Putty, EBI(R) OsteoStim(R) Lordotic Cervical Allograft
Spacer System, EBI(R) OsteoStim(R) PLIF Allograft Spacer System, EBI(R)
VuePASS(TM) Portal Access Surgical System, SpF(R)-PLUS(TM) Spinal Fusion
Stimulator, EBI(R) Fracture Walker with Range of Motion Option, Quick Fit(TM)
Post-Op Knee Brace, Universal Wrist Splint, Allograft Cross Pin, CuffPatch(TM)
Soft Tissue Reinforcement, LactoSorb(R) L-15 Cross Pin, Howell(TM) 65(degree)
Tibial Guide with Coronal Rod, Mimix(TM) QS (Quick Set) Bone Substitute Putty,
Calcigen(TM) PSI Bone Graft System, Calcibon(TM) Bone Substitute Granules,
Calcibon(TM) Bone Substitute Paste, Mesofol(TM) Resorbable Anti-Adhesion Foil,
PMI Beads (antibiotic carrier), Septodrain(R) Surgical Drain, Optigun(TM)
Bayonet, Optigun(TM) Ratchet, Osteopal(R) V Vertebroplasty Cement, F40(TM) Hip
Stem, Petroch(TM) Hip Stem, Performance(R) CrCo Tibia, Performance(R) Modular
Tibial Tray, Performance(R) Tibial Stems with Offset, TMK(TM) Knee (Total
Meniscal Knee), Cemento(TM) Vertebroplasty Cement Delivery System, OSSEOTITE
NT(TM) Natural-Taper Implant and Calcigen(TM) Oral bone graft stabilizer.
FortaFlex is a trademark of Organogenesis, Inc.
7
During fiscal year 2004, the Company intends to release other new products,
including, but not limited to, the following products: Total Mandibular System,
a top-loading universal spine system, a rod and coupler-based spine system,
fixed-bearing cruciate-retaining and posterior-stabilized versions of the
Vanguard(TM) Complete Knee Replacement System, Maxim(R) MI instruments,
Freedom(TM) Constrained Liner, instruments for the Microplasty(TM) Minimally
Invasive Hip Program (posterior approach), non-flared version of the M2a-38(TM)
Hip Articulation System, Generation 4(TM) Polished Hip System, and the
Acumen(TM) Surgical Navigation System.
GOVERNMENT REGULATION
Most aspects of the Company's business are subject to some degree of government
regulation in the countries in which its operations are conducted. It has always
been the practice of the Company to comply with all regulatory requirements
governing its products and operations and to conduct its affairs in an ethical
manner. This practice is reflected in the Company's code of conduct and the
responsibility of the Audit Committee of the Board of Directors to review the
Company's systems of internal control, its process for monitoring compliance
with laws and regulations and its process for monitoring compliance with its
code of conduct. For some products, and in some areas of the world such as the
United States, Canada, Japan and Europe, government regulation is significant,
and, in general, there appears to be a trend toward more stringent regulation
throughout the world. The Company devotes significant time, effort and expense
addressing the extensive government and regulatory requirements applicable to
its business. Governmental regulatory actions can result in the recall or
seizure of products, suspension or revocation of the authority necessary for the
production or sale of a product, and other civil and criminal sanctions. The
Company believes that it is no more or less adversely affected by existing
government regulations than are its competitors.
In the United States, the development, testing, marketing and manufacturing of
medical devices are regulated under the Medical Device Amendments of 1976 to the
Federal Food, Drug and Cosmetic Act, the Safe Medical Devices Act of 1990, the
FDA Modernization Act of 1997, and additional regulations promulgated by the FDA
and various other federal, state and local agencies. In general, these statutes
and regulations require that manufacturers adhere to certain standards designed
to ensure the safety and efficacy of medical devices.
The Company believes it is well-positioned to face the changing international
regulatory environment. The International Standards Organization ("ISO") has an
internationally recognized set of standards aimed at ensuring the design and
manufacture of quality products. A company that has passed an ISO audit and
obtained ISO registration is internationally recognized as having quality
manufacturing processes. The European Union requires that medical products bear
a CE mark. The CE mark is an international symbol, which indicates that the
product adheres to European Medical Device Directives. Compliance with ISO
quality systems standards is one of the requirements for placing the CE mark on
the Company's products. Each of the Company's products sold in Europe bears the
CE mark.
In addition, governmental bodies in the United States and throughout the world
have expressed concern about the costs relating to health care and, in some
cases, have focused attention on the pricing of medical devices. Government
regulation regarding pricing of medical devices already exists in some countries
and may be expanded in the United States and other countries in the future. The
Company is subject to increasing pricing pressures worldwide as a result of
growing regulatory pressures, as well as the expanding predominance of managed
care groups and institutional and governmental purchasers. Under Title VI of the
Social Security Amendments of 1983, 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 ("DRGs"). Other
factors affecting a specific hospital's reimbursement rate include the size of
the hospital, its teaching status and its geographic location. The Company's
orthopedic reconstructive products are primarily covered by DRG 209 (Major Joint
and Limb Reattachment Procedures-Lower Extremities), DRG 471 (Bilateral Major
Procedures of the Lower Extremity) and DRG 491 (Major Joint and Limb
Reattachment Procedures-Upper Extremities), and have also received approval for
pass-through coding under the Hospital Outpatient Prospective Payment System.
Effective October 1, 2002, certain reimbursements for DRG payment were adjusted.
The payments for DRG 209, 471 and 491 increased 6.9% 5.8% and 6.7%,
respectively. The average DRG payments for spinal and trauma procedures
increased 5.7% and 5.8%, respectively. Additional increases in DRG reimbursement
rates will also take effect on October 1, 2003. The payments for DRG 209, 471
and 491 will increase 1.6%, 2.3% and 4.0%, respectively. The average DRG
payments for spinal and trauma procedures will increase 4.5% and 4.7%,
respectively.
While the Company is unable to predict the extent to which its business may be
affected by future regulatory developments, it believes that its substantial
experience in dealing with governmental regulatory requirements and restrictions
throughout the world, its emphasis on efficient means of distribution and its
ongoing development of new and technologically-advanced products should enable
it to continue to compete effectively within this increasingly regulated
environment.
8
SALES AND MARKETING
The Company believes that sales of its products are currently affected and will
continue to be positively affected by favorable demographic trends and a shift
toward a preference for technologically-advanced products. The demand for
musculoskeletal products continues to grow, in part, as a result of the aging of
the baby boomer population in the United States. The U.S. Census Bureau
projections indicate that the population aged 55 to 75 years is expected to grow
to approximately 74.7 million by the year 2023. Moreover, the age range of
potential patients is expanding outside the traditional 55 to 75 year range, as
procedures are now being recommended for younger patients and as elderly
patients are remaining healthier and more active than in past generations. The
Company has also observed a trend toward a demand for technologically-advanced
products that are simple to use and cost effective, while incorporating
state-of-the-art solutions to the demands of the increasingly active patient.
The Company has firmly positioned itself as the advocate of the surgeon and has
worked to promote the right of the surgeon to prescribe the medical treatment
best suited to the needs of the individual patient.
The Company has diligently worked to attract and retain qualified, well-trained
and motivated sales representatives. The breadth of the Company's product
offering and the quality of its salesforces collaborate to create synergies that
uniquely position the Company to continue to efficiently penetrate the
musculoskeletal market. In the United States, the Company's products are
marketed by a combination of independent commissioned sales agents and direct
sales representatives, based on the specific product group being represented. In
Europe, the Company's products are promoted by a mixture of direct sales
representatives, independent third-party distributors, and some independent
commissioned sales agents, based primarily on the geographic location. In the
rest of the world, the Company maintains direct selling organizations in
approximately ten countries, as well as independent commissioned sales agents
and independent third-party distributors in other key markets. In aggregate, the
Company's products are marketed by more than 2,000 sales representatives
throughout the world.
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, with the exception of some elective pediatric
procedures scheduled to coincide with school breaks.
The Company's customers are the hospitals, surgeons, other physicians and
healthcare providers who employ its products in the course of their practices.
The business of the Company is dependent upon the relationships maintained by
its distributors and salespersons with these customers, as well as the Company's
ability to design and manufacture products that meet the physicians' technical
requirements at a competitive price.
For the fiscal years ended May 31, 2003, 2002 and 2001, the Company's foreign
sales aggregated $423,662,000, $335,527,000 and $308,292,000, respectively, or
30%, 28% and 30% of net sales, respectively. Major international markets for the
Company's products are Western Europe, Asia Pacific, Australia, Canada and Latin
America. The Company's business in these markets is subject to pricing pressures
and currency fluctuation risks. During fiscal year 2003, foreign sales were
positively impacted by $16.4 million due to foreign currency translations. As
the Company continues to expand in key international markets, it faces obstacles
created by competition, governmental regulations and regulatory requirements.
Additional data concerning net sales to customers, operating income, long-lived
assets, capital expenditures and depreciation and amortization by geographic
areas are set forth in Note K of the Notes to Consolidated Financial Statements
included in Item 8 of this report and are incorporated herein by reference.
The Company consigns inventory throughout the world to its customers and to its
distributors and direct salespersons for their use in marketing its products and
in filling customer orders. As of May 31, 2003, inventory of approximately
$137,992,000 was consigned to these distributors, salespersons and customers.
COMPETITION
The business of the Company is highly competitive. Major competitors in the
orthopedic reconstructive device market include DePuy, Inc., a subsidiary of
Johnson & Johnson; Stryker Howmedica Osteonics, a subsidiary of Stryker Corp.;
Zimmer, Inc., a subsidiary of Zimmer Holdings, Inc.; Smith & Nephew plc and
Centerpulse Orthopedics, a division of Centerpulse AG. Management believes these
five companies, together with Biomet Orthopedics, have the predominant share of
the orthopedic reconstructive device market. Competition within the industry is
primarily based on service, clinical results, and product design, although price
competition is an important factor as healthcare providers continue to be
concerned with costs. The Company believes that its prices for orthopedic
reconstructive devices are competitive with those in the industry. The Company
believes its future success will depend upon its service and responsiveness to
its distributors and orthopedic specialists, the continued superior clinical
results of its products, and upon its ability to design and market innovative
and technologically-advanced products that meet the needs of the marketplace.
9
EBI's spinal fixation systems compete with those of Medtronic/Sofamor Danek,
Inc., a subsidiary of Medtronic, Inc.; DePuy AcroMed Corporation, a subsidiary
of Johnson & Johnson; Synthes, Inc.; Stryker Spine, a division of Stryker Corp.;
Centerpulse Spine-Tech, Inc., a division of Centerpulse AG; Interpore
International, Inc.; and others.
EBI's external fixation devices compete with other external fixation devices
primarily on the basis of price, ease of application and clinical results. EBI's
principal competitors in the external fixation market are Smith & Nephew plc;
Stryker Corp.; Synthes, Inc. and Orthofix, Inc., a subsidiary of Orthofix
International N.V. The Company's internal fixation product lines compete with
those of DePuy ACE, a Johnson & Johnson company; Zimmer, Inc., a subsidiary of
Zimmer Holdings, Inc.; Smith & Nephew plc; and Synthes, Inc.
EBI's electrical stimulation devices primarily complete with those offered by
Orthofix, Inc., a subsidiary of Orthofix International N.V.; OrthoLogic Corp.;
and Exogen, Inc., a subsidiary of Smith & Nephew plc. Competition in the
electrical stimulation market is on the basis of product design, service and
success rates of various treatment alternatives.
3i products compete in the areas of dental reconstructive implants and related
products. Its primary competitors in the dental implant market include Straumann
AG; Nobel Biocare AB and Centerpulse Dental, Inc., a subsidiary of Centerpulse
AG.
Lorenz Surgical primarily competes in the craniomaxillofacial fixation and
specialty surgical instrumentation and neurosurgical cranial flap fixation
markets. Its competitors include Synthes, Inc.; Stryker-Leibinger, a subsidiary
of Stryker Corp.; KLS-Martin, L.P.; and Osteomed Corp.
Arthrotek products compete primarily in the areas of procedure-specific implants
and instruments, manual instruments and power instruments. Competitors include
Smith & Nephew Endoscopy, a division of Smith & Nephew plc; Stryker Corp;
Linvatec Corp., a subsidiary of CONMED Corporation; Mitek, a division of
Ethicon, a Johnson & Johnson Company; Arthrex, Inc.; and Bionx Implants, Inc.
RAW MATERIALS AND SUPPLIES
The raw materials used in the manufacture of the Company's orthopedic
reconstructive devices are principally nonferrous metallic alloys, stainless
steel and polyethylene powder. With the exception of limitations on the supply
of polyethylene powder, none of the Company's raw material requirements are
limited to any material extent by critical supply or single origins. The demand
for certain raw materials used by the Company, such as cobalt alloy and titanium
may vary. The primary buyers of these metallic alloys are in the aerospace
industry. If the demands of the aerospace industry should increase dramatically,
the Company could experience complications in obtaining these raw materials.
However, based on its current relationship with its suppliers, the Company does
not anticipate a material shortage in the foreseeable future. Further, the
Company believes that its inventory of raw materials is sufficient to meet any
short-term supply shortages of metallic alloys.
EBI purchases all components of its electrical stimulators from approximately
250 outside suppliers, approximately 15 of whom are the single source of supply
for the 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.
3i purchases all materials to produce its products from approximately 82
suppliers, approximately 21 of whom are the single source of supply for the
particular product. 3i believes that, in the event of a shortage, there are
alternative sources of supply for all products, and maintains an inventory of
materials sufficient to meet any short-term shortages of supply. The results of
the Company's operations are not materially dependent on raw material costs.
EMPLOYEES
As of May 31, 2003, the Company's domestic operations (including Puerto Rico)
employed approximately 3,400 persons, of whom approximately 1,770 were engaged
in production and approximately 1,630 in research and development, sales,
marketing, administrative and clerical efforts. The Company's international
subsidiaries employed approximately 1,720 persons, of whom approximately 815
were engaged in production and approximately 905 in research and development,
sales, marketing, administrative and clerical efforts. None of the Company's
principal domestic manufacturing employees is represented by a labor union. The
production employees at its Bridgend, South Wales facility are organized.
Employees working at the facilities in Darmstadt and Berlin, Germany; Valence,
France; and Valencia, Spain are represented by statutory Workers' Councils which
negotiate labor hours and termination rights. The Workers' Councils do not
directly 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.
10
The establishment of Biomet's domestic operations in north central Indiana, near
other members of the orthopedic industry, provides access to the highly skilled
machine operators required for the manufacture of Biomet products. The Company's
European manufacturing locations in South Wales, England, France, Spain, Sweden
and Germany also provide good sources for skilled manufacturing labor. EBI's
Puerto Rican operations principally involve the assembly of purchased components
into finished products using a skilled labor force.
PATENTS AND TRADEMARKS
The Company believes that patents and other intellectual property will continue
to be of importance in the musculoskeletal industry. Accordingly, management
continues to protect technology developed internally and to acquire intellectual
property rights associated with technology developed outside the Company.
Management enforces its intellectual property rights consistent with the
Company's strategic objectives. The Company does not believe that it has any
single patent or license (or series of patents or licenses), which is material
to its operations. The Company is not aware of any single patent, the loss or
invalidity of which would be material to its consolidated revenues or earnings.
BIOMET, EBI, W'. LORENZ, 3i 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. Unless otherwise noted in
this report, all trademarks contained herein are owned by Biomet, Inc. or one of
its affiliates.
RISK FACTORS
The following factors, among others, could cause the Company's future results to
differ from those contained in forward-looking statements made in this report
and presented elsewhere by management from time to time. Such factors, among
others, may have a material adverse effect on the Company's business, financial
condition, and results of operations. The risks identified in this section are
not exhaustive. The Company operates in a dynamic and competitive environment.
New risk factors affecting the Company emerge from time to time and it is not
possible for management to predict all such risk factors. Further, it is not
possible to assess the impact of all risk factors on the Company's business or
the extent to which any single factor or combination of factors may cause actual
results to differ materially from those contained in any forward-looking
statements. Given these inherent risks and uncertainties, investors are
cautioned not to place undo reliance on forward-looking statements as a
prediction of actual results. In addition, the Company undertakes no obligation
to update publicly or revise any forward-looking statements, whether as a result
of new information, future events or otherwise. The following discussion of the
Company's risk factors speaks only as of the date on which they were made and
should be read in conjunction with the consolidated financial statements and
related notes included herein. Because of these and other factors, past
financial performance should be not considered an indication of future
performance.
THE COMPANY'S FUTURE PROFITABILITY DEPENDS ON THE SUCCESS OF THE COMPANY'S
PRINCIPAL PRODUCT LINES.
Sales of the Company's reconstructive products accounted for approximately 63%
of the Company's net sales for the year ended May 31, 2003. The Company expects
sales of reconstructive products to continue to account for a significant
portion of the Company's aggregate sales. Any event adversely affecting the sale
of reconstructive products may, as a result, adversely affect the Company's
business, results of operations and financial condition.
IF THE COMPANY IS UNABLE TO CONTINUE TO DEVELOP AND MARKET NEW PRODUCTS AND
TECHNOLOGIES IN A TIMELY MANNER, THE DEMAND FOR THE COMPANY'S PRODUCTS MAY
DECREASE, OR THE COMPANY'S PRODUCTS COULD BECOME OBSOLETE, AND THE COMPANY'S
REVENUE AND PROFITABILITY MAY DECLINE.
The market for the Company's products is highly competitive and dominated by a
small number of large companies. The Company is continually engaged in product
development, research and improvement efforts, and new products and line
extensions of existing products represent a significant component of the
Company's growth rate. The Company's ability to continue to grow sales
effectively depends on its capacity to keep up with existing or new products and
technologies in the musculoskeletal products market. In addition, if the
Company's competitors' new products and technologies reach the market before the
Company's products, they may gain a competitive advantage or render the
Company's products obsolete. See "Competition" in Item 1 - "Business" of this
Form 10-K for more information about the Company's competitors. The ultimate
success of the Company's product development efforts will depend on many
factors, including, but not limited to, the Company's ability to create
innovative designs, materials and surgical techniques; accurately anticipate and
meet customers' needs; commercialize new products in a timely manner; and
manufacture and deliver products and instrumentation in sufficient volumes on
time.
11
Moreover, research and development efforts may require a substantial
investment of time and resources before the Company is adequately able to
determine the commercial viability of a new product, technology, material, or
other innovation. Even in the event that the Company is able to successfully
develop innovations, they may not produce revenue in excess of the costs of
development and may be quickly rendered obsolete as a result of changing
customer preferences or the introduction by the Company's competitors of
products embodying new technologies or features.
THE COMPANY IS SUBJECT TO SUBSTANTIAL GOVERNMENT REGULATION THAT COULD HAVE A
MATERIAL ADVERSE EFFECT ON THE COMPANY'S BUSINESS.
Most aspects of the Company's business are subject to some degree of government
regulation in the countries in which its operations are conducted. As discussed
under the heading "Government Regulation" in Item 1 - "Business" of this Form
10-K, for some products and in some areas of the world, such as the United
States, Canada, Japan and Europe, government regulation is significant. Overall,
there appears to be a trend toward more stringent regulation throughout the
world. The Company does not anticipate this trend to dissipate in the near
future. In addition, the medical device industry is subject to a myriad of
complex laws governing Medicare and Medicaid reimbursements, and the U.S.
Department of Health and Human Services has become increasingly vigilant in
recent years with respect to investigations of various business practices.
Further, as a publicly-traded company, the Company is subject to increasingly
demanding corporate legislation in the United States, such as the Sarbanes-
Oxley Act of 2002.
In general, the development, testing, manufacture and marketing of the Company's
products are subject to extensive regulation and review by numerous governmental
authorities both in the United States and abroad. The regulatory process
requires the expenditure of significant time, effort and expense to bring new
products to market. In addition, the Company is required to implement and
maintain stringent reporting, labeling and record keeping procedures. The
Company cannot assure that the relevant authorities will approve any of its
products. Furthermore, governmental and regulatory actions against the Company
can result in various actions that could adversely impact the Company's
operations, including:
o the recall or seizure of products;
o the suspension or revocation of the authority necessary for the
production or sale of a product;
o the imposition of fines and penalties;
o the delay of the Company's ability to introduce new products into the
market; and
o other civil or criminal sanctions against the Company.
THE COMPANY IS SUBJECT TO RISKS ARISING FROM CURRENCY EXCHANGE RATE
FLUCTUATIONS, WHICH COULD INCREASE THE COMPANY'S COSTS AND MAY CAUSE THE
COMPANY'S PROFITABILITY TO DECLINE.
During fiscal year 2003, sales of the Company's products in foreign markets
approximated $423,662,000, or 30% of the Company's total revenues. Accordingly,
the U.S. dollar value of the Company's foreign-generated revenues varies with
currency exchange rate fluctuations. Measured in local currency, the majority of
the Company's foreign-generated revenues was generated in Europe. Significant
increases in the value of the U.S. dollar relative to foreign currencies could
have an adverse effect on the Company's results of operations. The Company's
consolidated net sales were favorably affected by 3.2% during fiscal year 2003,
and adversely impacted by 0.7% during fiscal year 2002 as a result of the impact
of foreign currency translations. At the present time, the Company does not
engage in hedging transactions to protect against uncertainty in future exchange
rates between any particular foreign currency and the U.S. dollar.
SALES MAY DECLINE IF THE COMPANY'S CUSTOMERS DO NOT RECEIVE ADEQUATE LEVELS OF
REIMBURSEMENT FROM THIRD-PARTY PAYORS FOR THE COMPANY'S PRODUCTS AND IF CERTAIN
TYPES OF HEALTH CARE PROGRAMS ARE ADOPTED IN THE COMPANY'S KEY MARKETS.
In the United States, health care providers that purchase the Company's products
generally rely on payments from third-party payors (principally federal
Medicare, state Medicaid and private health insurance plans) to cover all or a
portion of the cost of the Company's musculoskeletal products. In the event that
third-party payors deny coverage or reduce their current levels of
reimbursement, the Company may be unable to sell certain of its products on a
profitable basis, thus adversely impacting the Company's results of operations.
Further, third-party payors are continuing to carefully review their coverage
policies with respect to existing and new therapies and can, without notice,
deny coverage for treatments that may include the use of the Company's products.
In addition, some health care providers in the United States have adopted or are
considering the adoption of a managed care system in which the providers
contract to provide comprehensive heath care for a fixed cost per person. Health
care providers in a managed care system may attempt to control costs by
authorizing fewer elective surgical procedures, including joint reconstructive
surgeries, or by requiring the use of the least expensive implant available. In
response to these, and other, pricing
12
pressures, the Company's competitors may lower the prices for their products.
The Company may not be able to match the prices offered by the Company's
competitors, thus adversely impacting the Company's results of operations and
prospects. Further, in the event that the United States considers the adoption
of a national health care system in which prices are controlled and patient care
is managed by the government, such regulation could have a material adverse
effect on the Company's business, results of operations and financial condition.
Outside of the United States, reimbursement systems vary significantly from
country to country. In the majority of the international markets in which the
company's products are sold, government-managed health care systems mandate the
reimbursement rates and methods for medical devices and procedures. If adequate
levels of reimbursement from third-party payors outside of the United States are
not obtained, international sales of the Company's products may decline. Many
foreign markets, including Canada, and some European and Asian countries, have
tightened reimbursement rates. The ability of the Company to continue to sell
certain of its products profitably in these markets may diminish if the
government-managed health care systems continue to reduce reimbursement rates.
THE COMPANY'S BUSINESS MAY BE HARMED AS A RESULT OF LITIGATION.
The Company's involvement in the manufacture and sale of medical devices creates
exposure to significant risk of product liability claims, particularly in the
United States. In the past, the Company has received product liability claims
relating to the Company's products and anticipates that it will continue to
receive claims in the future, some of which could have a negative impact on the
Company's business. Additionally, the Company could experience a material design
or manufacturing failure in its products, a quality system failure, other safety
issues, or heightened regulatory scrutiny that would warrant a recall of some of
the Company's products. The Company's existing product liability insurance
coverage may be inadequate to satisfy liabilities the Company might incur. If a
product liability claim or series of claims is brought against the Company for
uninsured liabilities or in excess of the Company's insurance coverage limits,
the Company's business could suffer and its results could be materially
impacted.
In addition, the musculoskeletal products industry is highly litigious with
respect to the enforcement of patents and other intellectual property rights. In
some cases, intellectual property litigation may be used to gain a competitive
advantage. The Company has in the past and may in the future become a party to
lawsuits involving patents or other intellectual property. A legal proceeding,
regardless of the outcome, could put pressure on the Company's financial
resources and divert the time and effort of the Company's management.
A NATURAL OR MAN-MADE DISASTER COULD HAVE A MATERIAL ADVERSE EFFECT ON THE
COMPANY'S BUSINESS.
The Company has nearly twenty manufacturing operations located throughout the
world. However, a significant portion of the Company's products are produced at
and shipped from its facility in Warsaw, Indiana. In the event that this
facility were severely damaged or destroyed as a result of a natural or man-made
disaster, the Company would be forced to shift production to its other
facilities and/or rely on third-party manufacturers. Although the Company
believes that it is adequately insured, such an event could have a material
adverse effect on the Company's business, results of operations and financial
condition.
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. Executive officers are elected annually by
the Board of Directors to serve for one year and until their successors are
elected, subject to resignation, retirement or removal.
Served as Executive Current Position(s)
Name, Age and Business Experience Officer Since with the Company
- --------------------------------- ------------------- -------------------
DANE A. MILLER, PH.D., 57 President and Chief
President and Chief Executive Officer of the 1977 Executive Officer and
Company. Director of the Company since 1977. Director of the Company.
NILES L. NOBLITT, 52
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, 47
Senior Vice President - International Operations of 1984 Senior Vice President -
the Company. Director of the Company since 1987. International Operations
and Director of the Company.
GARRY L. ENGLAND, 49
Senior Vice President - Warsaw Operations of the Company. 1987 Senior Vice President -
Warsaw Operations of the Company.
DANIEL P. HANN, 48
Senior Vice President, General Counsel and Secretary of the Company 1989 Senior Vice President and
since June 1999; prior thereto, Vice President, General Counsel and General Counsel, Secretary
Secretary of the Company. Director of the Company since 1989. and Director of the Company.
JOEL P. PRATT, 49
Senior Vice President of the Company since June 1999 and President 1990 Senior Vice President
of Walter Lorenz Surgical, Inc. since January 2002; prior thereto, of the Company and President
President of Arthrotek, Inc. of Walter Lorenz Surgical, Inc.
GREGORY D. HARTMAN, 46
Senior Vice President - Finance and Chief Financial Officer of the 1991 Senior Vice President -
Company since June 1999; prior thereto, Vice President - Finance and Finance and Chief Financial
Chief Financial Officer of the Company. Officer of the Company.
JAMES W. HALLER, 46
Controller of the Company and Vice President - Finance 1991 Controller of the Company
of Biomet Orthopedics, Inc. since June 2001; prior thereto, and Vice President - Finance
Controller of the Company. of Biomet Orthopedics, Inc.
JERRY L. FERGUSON, 62
Vice Chairman of the Board of the Company since December 1997. 1994 Vice Chairman of the Board
Director of the Company since 1977. and Director of the Company.
JAMES R. PASTENA, 52
Vice President of the Company since September 1998 and President 1998 Vice President of the Company
of EBI, L.P. and President of EBI, L.P.
14
ITEM 2. PROPERTIES.
The following are the principal properties of the Company:
FACILITY LOCATION SQUARE OWNED/
FEET LEASED
Corporate headquarters of Biomet, Inc.; Warsaw, Indiana 413,600 Owned
manufacturing and research and development facility
of Biomet Manufacturing Corp.; and distribution center
and offices of Biomet Orthopedics, Inc.
Administrative, manufacturing and distribution facility (1) Parsippany, New Jersey(1) 63,000 Owned
of EBI, L.P. and administrative offices of Electro-Biology, Inc. (2) Parsippany, New Jersey 165,700 Owned
Manufacturing facility of EBI, L.P. and administrative offices Allendale, New Jersey 30,000 Leased
of Biolectron, Inc.
Manufacturing facility of EBI, L.P. Marlow, Oklahoma 51,500 Owned
Administrative, manufacturing and distribution facility Jacksonville, Florida 82,500 Owned
of Lorenz Surgical
Office, manufacturing and distribution facility (1) Palm Beach Gardens, FL 67,000 Owned
of Implant Innovations, Inc. (2) Palm Beach Gardens, FL(2) 69,000 Owned
Office and manufacturing facilities (1) Ontario, California 35,400 Owned
of Arthrotek, Inc. (2) Redding, California 14,400 Leased
Manufacturing facility of Biomet Fair Lawn L.P. Fair Lawn, New Jersey 40,000 Owned
Office and manufacturing facility of Electro-Biology, Inc. Guaynabo, Puerto Rico 34,700 Owned
Office, manufacturing and warehouse facility Indianapolis, Indiana 16,000 Leased
of Catheter Research, Inc.
Office, manufacturing and warehouse facility of Valence, France 86,100 Owned
Biomet Merck France Sarl
Office, manufacturing and warehouse facilities of (1) Berlin, Germany 49,900 Owned
Biomet Merck Deutschland GmbH (2) Berlin, Germany 16,900 Owned
Office and research and development facility of Biomet Darmstadt, Germany 29,200 Leased
Merck Biomaterials GmbH
Administrative offices of Biomet Merck and office Dordrecht, The Netherlands 37,700 Owned
and warehouse facility of Ortomed BV
(1) Operations at this facility have ceased and the facility is being leased to
other parties.
(2) Includes 46,000 square feet of space in this facility that is subleased to
other parties.
15
FACILITY LOCATION SQUARE OWNED/
FEET LEASED
Office and manufacturing facility of IQL Valencia, Spain 69,600 Owned
Office, manufacturing and warehouse facilities of Biomet Sjobo, Sweden 24,200 Owned
Merck Cementing Technologies AB
Manufacturing and administrative facilities of (1) Bridgend, South Wales 105,200 Owned
Biomet Merck Ltd. (2) Swindon, England 53,400 Owned
In addition, the Company maintains more than 30 offices and warehouse facilities
in various countries, including Canada, Europe, Asia Pacific and Latin America.
The Company believes that all of its facilities are adequate, well-maintained
and suitable for the development, manufacture, distribution and marketing of all
its products.
16
ITEM 3. LEGAL PROCEEDINGS.
In January 1996, a jury returned a verdict in a patent infringement matter
against the Company and in favor of Raymond G. Tronzo ("Tronzo"), which in
August 1998 was subsequently reversed and vacated by the United States Court of
Appeals for the Federal Circuit (the "Federal Circuit"). The Federal Circuit
then remanded the case to the District Court for the Southern District of
Florida (the "District Court") for further consideration on state law claims
only. On August 27, 1999, the District Court entered a final judgment of $53,530
against the Company. Tronzo then appealed the District Court's final judgment
with the Federal Circuit and in January 2001 the Federal Circuit reinstated a
$20 million punitive damages award against the Company while affirming the
compensatory damage award of $520. The Federal Circuit's decision was based
principally on procedural grounds, and in March 2001 it denied the Company's
combined petition for panel rehearing and petition for rehearing en banc. On
November 13, 2001, the United States Supreme Court ("Supreme Court") denied the
Company's petition to review the $20 million punitive damage award against the
Company given to Tronzo. The Company had previously recorded a one-time special
charge during the third quarter of fiscal year 2001 of $26.1 million, which
represents the total damage award plus the maximum amount of interest that, as
calculated by the Company, may be due under the award and related expenses. The
Company has paid $20.2 million out of escrow. On February 12, 2003 the Federal
Circuit ruled that the Company does not owe post-judgment interest in connection
with the damage award paid in this case. As a result of this favorable ruling,
the Company recorded a pre-tax gain of approximately $5.8 million in the third
quarter of fiscal year 2003. Management considers this matter fully to be
concluded.
In October 1997 and April 2000 the Company received subpoenas from the United
States Department of Health and Human Services, Office of Inspector General
("HHS/OIG"), and the United States Attorney's Office for the Eastern District of
Pennsylvania ("USAO") in conjunction with an investigation of a physician group,
with which the Company had a relationship, under the Medicare laws. The
subpoenas sought the production of documents referring or relating to
Pennsylvania Hospital and Thomas Jefferson Hospital, (two of the Company's major
hospital customers at that time in Philadelphia), a physician group practicing
under the name Orthopaedic Reconstructive Associates and The Rothman Institute.
The Company also is aware that its distributor servicing the hospitals received
a similar subpoena. The Company does not itself submit claims to or receive
reimbursements from Medicare with respect to its orthopedic reconstructive
products, but the laws with respect to Medicare reimbursement prohibit any
person from paying or offering to pay any direct or indirect remuneration
intended to induce the purchase of products or services. Those laws are complex
and can be broadly construed to cover a wide range of financial and business
activities. During the time period covered by the subpoenas, the Company had
research, product development, physician training, clinical follow-up and data
collection relationships with The Rothman Institute. The Company has not been
advised of the precise subject matter of the USAO and HHS/OIG investigation, but
was advised by the USAO in May 2003 that it is not a target of the
investigation. As a result, the Company believes it is unlikely that this matter
will have a material impact on the Company's financial position or business
operations.
There are various other claims, lawsuits, disputes with third parties,
investigations and pending actions involving various allegations against the
Company incident to the operation of its business, principally product liability
and intellectual property cases. Each of these matters is subject to various
uncertainties, and it is possible that some of these matters may be resolved
unfavorably to the Company. The Company does not anticipate that the adverse
outcome of these matters will result in a material loss. The Company establishes
accruals for losses that are deemed to be probable and subject to reasonable
estimate. Based on the advice of counsel to the Company in these matters,
management believes that the ultimate outcome of these matters and any
liabilities in excess of amounts provided will not have a material adverse
impact on the Company's consolidated financial position or on its future
business operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not Applicable.
17
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. The approximate number of
shareholders of record as of August 7, 2003 was 6,389.
High Low
2003
Fourth $ 33.50 $ 26.74
Third 30.50 26.42
Second 31.87 25.69
First 29.28 21.75
2002
Fourth 32.68 25.18
Third 33.26 26.77
Second 33.74 24.33
First 34.36 25.06
2001
Fourth 30.67 23.67
Third 27.83 20.46
Second 26.92 19.08
First 23.50 14.97
The Company paid cash dividends of $0.10, $0.09 and $0.07 per share on July 15,
2002; July 27, 2001 and July 17, 2000, respectively.
On July 2, 2003, the Company announced a cash dividend of $0.15, payable July
18, 2003, to shareholders of record at the close of business on July 11, 2003.
All market prices and dividend information have been adjusted to give
retroactive effect to the three-for-two stock splits announced July 9, 2001 and
July 6, 2000.
18
ITEM 6. SELECTED FINANCIAL DATA.
INCOME STATEMENT DATA
Years ended May 31,
(in thousands, except per share amounts)
2003 2002 2001 2000 1999
Net sales ..................................................... $1,390,300 $1,191,902 $1,030,663 $ 923,551 $ 830,835
Cost of sales ................................................. 407,295 332,727 296,063 281,351 262,362
----------------------------------------------------------------
Gross profit .................................................. 983,005 859,175 734,600 642,200 568,473
Selling, general and administrative expenses .................. 501,191 437,731 374,793 326,618 295,401
Research and development expense .............................. 55,309 50,750 43,020 40,208 38,723
Other charges/(credits) ....................................... (5,800) - 26,100 11,700 48,447
----------------------------------------------------------------
Operating income ............................................ 432,305 370,694 290,687 263,674 185,902
Other income, net ............................................. 19,438 5,421* 19,989 17,018 13,899
----------------------------------------------------------------
Income before income taxes and minority interest ............ 451,743 376,115 310,676 280,692 199,801
Provision for income taxes .................................... 156,961 127,665 105,906 99,738 67,317
----------------------------------------------------------------
Income before minority interest ............................. 294,782 248,450 204,770 180,954 132,484
Minority interest ............................................. 8,081 8,710 7,224 7,183 7,458
----------------------------------------------------------------
Net income .................................................. $ 286,701 $ 239,740 $ 197,546 $ 173,771 $ 125,026
================================================================
Earnings per share:
Basic ....................................................... $ 1.10 $ .89 $ .74 $ .66 $ .48
Diluted ..................................................... 1.10 .88 .73 .65 .47
----------------------------------------------------------------
Shares used in the computation of earnings per share:
Basic ....................................................... 259,493 268,475 267,915 264,294 261,662
Diluted ..................................................... 261,394 271,245 270,746 267,242 265,815
----------------------------------------------------------------
Cash dividends paid per common share .......................... $ .10 $ .09 $ .07 $ .06 $ .05
BALANCE SHEET DATA
At May 31,
(in thousands)
2003 2002 2001 2000 1999
Working capital ............................................... $ 845,101 $ 715,245 $ 726,557 $ 608,185 $ 497,010
Total assets .................................................. 1,672,169 1,521,723 1,489,311 1,218,448 1,110,940
Long-term obligations, including redeemable preferred stock ... - - - - 8,074
Shareholders' equity .......................................... 1,286,134 1,176,479 1,146,186 943,323 795,849
o All share and per share data have been adjusted to give retroactive effect to
the three-for-two stock splits declared on July 9, 2001 and July 6, 2000.
* Other income, net for fiscal 2002 was adversely impacted by a $9 million
charge as a result of equity write-downs in marketable securities and other
investments.
19
ITEM 7. MANAGEMENT'S DISCUSSION & ANALYSIS
OF FINANCIAL CONDITION & RESULTS OF OPERATIONS.
OVERVIEW
This discussion should be read in conjunction with the Company's consolidated
financial statements and the corresponding notes contained herein. The
Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements that are subject to certain risk
factors, as described in this report under "Risk Factors" in Part I, Item 1 -
"Business". The Company is engaged in the research, development, manufacturing
and marketing of products used primarily by musculoskeletal medical specialists.
The Company's primary products include reconstructive devices, dental
reconstructive implants, bone cements and accessories, electrical bone growth
stimulators, fixation devices, craniomaxillofacial implants, bone substitute
materials, spinal products, softgoods and bracing products, arthroscopy
products, operating room supplies and instruments. The Company has operations in
over 30 countries and distributes its products in over 100 countries throughout
the world. The solid growth experienced by the Company during fiscal year 2003
in both domestic and international markets is attributable to the Company's
emphasis on technological advances through line extensions and new product
introductions. In addition, growth in the patient population (as a result of
increases in both the size of the elderly population and the expansion of the
traditional age bracket of musculoskeletal patients) has contributed to this
growth.
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.
Percentage
Percentage of Net Sales Increase (Decrease)
2003 2002
2003 2002 2001 VS. 2002 vs. 2001
Net sales ........................................... 100.0% 100.0% 100.0% 17% 16%
Cost of sales ....................................... 29.3 27.9 28.7 22 12
----------------------------
Gross profit ........................................ 70.7 72.1 71.3 14 17
Selling, general and administrative expenses ........ 36.0 36.7 36.3 14 17
Research and development expense .................... 4.0 4.3 4.2 9 18
Other charges/(credits) ............................. (0.4) - 2.5 n/m n/m
----------------------------
Operating income .................................... 31.1 31.1 28.3 17 28
Other income, net ................................... 1.4 0.5 1.9 258 (73)
----------------------------
Income before income taxes and minority interest .... 32.5 31.6 30.2 20 21
Provision for income taxes .......................... 11.3 10.8 10.3 23 21
----------------------------
Income before minority interest ..................... 21.2 20.8 19.9 19 21
Minority interest ................................... 0.6 0.7 0.7 (7) 21
----------------------------
Net income .......................................... 20.6% 20.1% 19.2% 20% 21%
============================
n/m - Not Meaningful
FISCAL 2003 COMPARED TO FISCAL 2002*
Net Sales - Net sales increased 17% during the current fiscal year to
$1,390,300,000 from $1,191,902,000 in 2002. Excluding the positive impact of
foreign currency translation adjustments (3.2%), net sales increased 14%.
Worldwide sales of reconstructive devices increased 20% to $867,602,000 in
fiscal year 2003 compared to $721,004,000 in 2002. Contributing to this increase
was approximately 4% due to currency translation, 3% from pricing and 13% from
incremental volume and product mix. Worldwide hip and bone cement sales
increased 23% during the current year, while knee sales increased 18%,
extremities sales increased 16% and dental reconstructive product sales
increased 19%.
Fixation sales increased 10% during fiscal 2003 to $237,117,000 from
$215,544,000 in 2002. Contributing to this increase was approximately 1% due to
currency translation, 1% from pricing and 8% from incremental volume and product
mix. Worldwide sales of internal fixation devices increased 13%, external
fixation devices increased 7%, electrical stimulation devices increased 6%, and
craniomaxillofacial products including bone substitutes increased 21%.
Spinal sales increased 15% to $143,607,000 in fiscal 2003 compared to
$125,119,000 in 2002. Contributing to this increase was approximately 1% due to
currency translation, 2% from pricing and 12% from incremental volume and
product mix. Worldwide sales of spinal stimulation products increased 13%, while
spinal hardware including bone substitutes increased 18%.
Sales of the Company's other products increased 9% to $141,974,000 in fiscal
2003 from $130,235,000 in 2002. Contributing to this increase was approximately
2% due to currency translation, 1% from pricing and 6% from incremental volume
and product mix. Worldwide sales of arthroscopy products increased 16%,
softgoods and bracing products increased 8% and general surgical instrumentation
increased 12%.
Sales in the United States increased 13% to $966,638,000 during the current
fiscal year compared to $856,375,000 last year. Components of this increase were
incremental volume and product mix (9%) and positive pricing environment (4%).
European sales increased 28% to
* For purposes of this Management's Discussion and Analysis, the fiscal
period is June 1 - May 31.
20
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL
CONDITION & RESULTS OF OPERATIONS (CONTINUED)
$332,053,000 during the current fiscal year from $260,420,000 in 2002.
Components of this increase were positive currency translation (13%),
incremental volume and product mix (13%) and positive pricing environment (2%).
The Company anticipates foreign currency translations to positively influence
sales during fiscal 2004. Sales in Rest of World increased 22% to $91,609,000
this year from $75,107,000 last year. Components of this increase were
incremental volume and product mix (18%) and positive pricing environment (4%).
The Company commenced direct sales of its products in Japan during fiscal 2002
which accounted for about half of this increased product demand.
Gross Profit - The Company's gross profit increased 14% to $983,005,000 in
fiscal 2003 from $859,175,000 in 2002. The gross profit margin decreased to
70.7% of sales in fiscal 2003 compared to 72.1% in 2002. On a country-by-country
basis, the Company improved gross margins through higher selling prices,
improved manufacturing efficiencies and general cost controls, but due to the
lower margins received on international sales and the higher growth rate on
international sales compared to domestic sales, the consolidated gross margin
decreased.
Selling, General and Administrative Expenses - Selling, general and
administrative expenses increased 14% in fiscal 2003 to $501,191,000 compared to
$437,731,000 last year. This increase is primarily a result of increased
commission expense on higher sales compared to last year. As a percent of sales,
selling, general and administrative expenses were 36.0% in fiscal 2003 compared
to 36.7% in 2002. Factors contributing to this decrease include eliminating the
amortization of goodwill (approximately $7.2 million) and an overall slower
growth rate for expenditures, partially offset by increased liability insurance
premiums. Due to tighter insurance markets, the Company anticipates its cost for
liability insurance coverage to increase during fiscal 2004.
Other charges/(credits) - On February 12, 2003, the United States Court of
Appeals for the Federal Circuit ruled that the Company did not owe post-judgment
interest in connection with the damage award paid in the Tronzo case. As a
result of this favorable ruling, the Company recorded a pre-tax gain of
approximately $5.8 million during the third quarter (See Note L in the Notes to
Consolidated Financial Statements).
Research and Development Expense - Research and development expense increased 9%
during the current year to $55,309,000 compared to $50,750,000 in 2002. This
increase reflects the Company's continued emphasis on new product development,
enhancements and additions to existing product lines and technologies, and
clinical outcomes research related to the safety, efficacy and clinical
performance of the Company's products. As a percent of sales, research and
development expenses were 4.0% in fiscal 2003 compared to 4.3% in 2002.
Operating Income - Operating income increased 17% during fiscal 2003 to
$432,305,000 from $370,694,000 in 2002. U.S. operating income increased 19% to
$388,841,000 from $326,906,000, reflecting solid sales growth for higher-margin
product lines. European operating income increased 7% to $41,924,000 compared to
$39,152,000 in 2002. This growth reflects solid sales growth in Europe, lower
gross margins, higher selling expenses and improved foreign currency
translation. Rest of World operating income decreased to $1,540,000 in fiscal
2003 from $4,636,000 in 2002 due to start up expenses associated with
establishing direct operations in Japan and Brazil for the orthopedic and dental
reconstructive businesses, respectively.
Other Income, Net - Other income, net increased during the current year to
$19,438,000 from $5,421,000 in 2002. During the fourth quarter of last year, the
Company recorded a pre-tax charge of $9 million as a result of equity
write-downs in Selective Genetics, Inc. and other marketable securities. The
loss in value of these investments was considered other than temporary.
Excluding these write-downs, other income, net increased 35% as a result of
higher cash and investment balances, partially offset by lower investment
yields.
Provision for Income Taxes - The provision for income taxes increased to
$156,961,000, or 34.7% of income before income taxes for fiscal 2003 compared to
$127,665,000 or 33.9% of income before income taxes last year. This increase is
due to income growing faster in countries with higher tax rates, changes in the
U.S. tax code which, over time reduce the historical U.S. tax benefits from
operating in Puerto Rico and various state tax rate increases. The Company
expects these tax increases to continually increase its effective rate in future
years and anticipates its effective rate to be 34.8% in 2004.
Net Income - The factors mentioned above resulted in a 20% increase in net
income to $286,701,000 for fiscal 2003 from $239,740,000 in 2002. These factors
and the reduction in the shares used in the computation of earnings per share
through the Company's share repurchase programs resulted in a 24% increase in
basic earnings per share for 2003 to $1.10 compared to $0.89 in 2002.
FISCAL 2002 COMPARED TO FISCAL 2001
Net Sales - Net sales increased 16% during fiscal 2002 to $1,191,902,000 from
$1,030,663,000 in 2001. Excluding the negative impact of foreign currency
translation (0.7%) and discontinued products (1.3%) and the positive impact of
acquisitions (2.6%), net sales increased 15% during fiscal 2002. Worldwide sales
of reconstructive devices increased 17% to $721,004,000 in fiscal 2002 compared
to $614,308,000 in 2001 (16% excluding acquisitions). Worldwide hip sales
increased 16% during fiscal 2002. Worldwide knee sales increased 18% in fiscal
2002. The Company's 3i division experienced a 17% increase in dental
reconstructive implant sales.
Fixation sales increased 7% during fiscal 2002 to $215,544,000 from $202,152,000
in 2001. Fixation sales growth was positively influenced by 2% from the
inclusion of Biolectron's OrthoPak(R) Stimulation System for the whole fiscal
year compared to eight months for fiscal 2001. Worldwide sales of internal
fixation devices increased 8% and external fixation devices increased 6% in
fiscal 2002. Worldwide sales of electrical stimulation systems increased 14%.
Sales of Lorenz Surgical's craniomaxillofacial products experienced a 14%
decrease compared to fiscal 2001.
21
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL
CONDITION & RESULTS OF OPERATIONS (CONTINUED)
Spinal sales increased to $125,119,000 in fiscal 2002 compared to $91,103,000 in
fiscal 2001, an increase of 37%. Spinal sales growth was positively influenced
by 13% from the inclusion of Biolectron's SpinalPak(R) Fusion Stimulation System
for the full fiscal year compared to eight months for fiscal 2001. In addition,
Biomet Merck discontinued distributing a spinal product line that resulted in a
3% decrease in spinal sales. Excluding the effect of these events, spinal
product sales increased 27% for fiscal 2002.
Sales of the Company's other products increased 6% to $130,235,000 in fiscal
2002 from $123,100,000 in 2001. These results include discontinued general
surgery products distributed in Portugal through Biomet Merck. Excluding the
effects of this discontinuation, other product sales increased 14% during the
year. Products posting sales growth include EBI's softgoods and bracing
products, and Arthrotek's procedure-specific products. Products experiencing
sales decreases include Lorenz Surgical's surgical instrumentation.
Sales in the United States increased 19% to $856,375,000 during fiscal 2002
compared to $722,372,000 in 2001. This is due largely to increased product
demand and continued market penetration (14%) and positive pricing environment
(5%). Foreign sales increased 9% to $335,527,000 in fiscal 2002 from
$308,291,000 in 2001. Excluding the effect of currency translation, foreign
sales increased 11%. Foreign sales continued to be negatively influenced by the
expiration and non-renewal of the distribution agreement with the Company's
Japanese distributor of Biomet products during fiscal 2001. However, the Company
commenced direct sales in Japan during fiscal 2002.
Gross Profit - The Company's gross profit increased 17% to $859,175,000 in
fiscal 2002 from $734,600,000 in 2001. The gross profit margin increased to
72.1% of sales in fiscal 2002 compared to 71.3% in 2001. The improved gross
margin was attributable to increased sales of higher margin reconstructive and
spinal products worldwide and improved manufacturing efficiencies and general
cost controls at the Company's European operations.
Selling, General and Administrative Expenses - Selling, general and
administrative expenses increased 17% in fiscal 2002 to $437,731,000 compared to
$374,793,000 in 2001. This increase was a result of increased commission expense
on higher sales compared to the previous year. As a percent of sales, selling,
general and administrative expenses were 36.7% in fiscal 2002 compared to 36.3%
in 2001. Factors contributing to this increase include reorganization costs at
Lorenz Surgical (approximately $2 million); costs associated with a direct
selling operation and expanded marketing presence in Japan (approximately $3
million); inclusion of Biolectron operations for a full fiscal year, including
amortization of goodwill (approximately $1.5 million); and continued expansion
of the Company's worldwide salesforces.
Research and Development Expense - Research and development expense
increased 18% during fiscal 2002 to $50,750,000 compared to $43,020,000 in 2001.
As a percent of sales, research and development expenses were 4.3% in fiscal
2002 compared to 4.2% in 2001. This increase reflects the Company's continued
emphasis on new product development, enhancements and additions to existing
product lines and technologies, and clinical outcomes research related to the
safety, efficacy and clinical performance of the Company's products.
Operating Income - Operating income increased 28% during fiscal 2002 to
$370,694,000 from $290,687,000 in 2001. Excluding the $26.1 million charge in
2001 for the Tronzo litigation, operating income increased 17%. U.S. operating
income increased 30% to $326,906,000 from $251,927,000, reflecting solid sales
growth for higher-margin product lines. Non-U.S. operating income increased 13%
to $43,788,000 compared to $38,760,000 in 2001. This growth reflects solid
foreign sales growth, effective cost controls and improved foreign currency
translation.
Other Income, Net - Other income, net decreased 73% during fiscal 2002 to
$5,421,000 from $19,989,000 in 2001. During the fourth quarter of fiscal 2002,
the Company recorded a pre-tax charge of $9 million as a result of equity
write-downs in Selective Genetics, Inc. and other marketable securities. The
loss in value of these investments was considered other than temporary.
Excluding these write-downs, other income, net declined 28% as a result of lower
interest rates on lower cash balances during fiscal 2002.
Provision for Income Taxes - The provision for income taxes increased to
$127,665,000, or 33.9% of income before income taxes in fiscal 2002 compared to
$105,906,000 or 34.1% of income before income taxes in 2001. This percentage
decrease was due to income growing faster in countries with a lower tax rate.
These benefits are partially offset by changes in the Puerto Rican local tax
structure, which, over time reduce the historical U.S. tax benefits from
operating in Puerto Rico. As a result of various state tax law changes, the
Company expects its effective rate to increase in future years.
Net Income - The factors mentioned above resulted in a 21% and 20% increase in
net income and basic earnings per share, respectively, for 2002 compared to
2001. Net income increased to $239,740,000 from $197,546,000 and basic earnings
per share increased to $.89 from $.74.
LIQUIDITY & CAPITAL RESOURCES
The Company's cash and investments increased to $418,594,000 at May 31, 2003,
from $386,517,000 at May 31, 2002. Net cash from operating activities was
$310,277,000 in fiscal 2003 compared to $184,237,000 in 2002. The principal
sources of cash from operating activities were net income of $286,701,000 and
non-cash charges of depreciation and amortization of $45,659