SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of report (Date of earliest event reported): December 4, 1998
STRYKER CORPORATION
(Exact name of registrant as specified in charter)
MICHIGAN 0-9165 38-1239739
(State or other (Commission (IRS employer
jurisdiction of file number) identification no.)
incorporation)
P.O. Box 4085, 49003-4085
Kalamazoo, Michigan (Zip Code)
(Address of principal
executive offices)
(616) 385-2600
(Registrant's telephone number, including area code)
This Current Report on Form 8-K/A amends the Current Report on Form 8-K
filed by Stryker Corporation (the "Company") on December 21, 1998 (the
"Initial 8-K") to include certain financial information omitted from the
Initial Report pursuant to Item 7(a)(4) of Form 8-K and the consent of
independent certified accountants with respect to the audited financial
statements included herein.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial statements of the business acquired.
- ---------------------------------------------------------------------------
Howmedica (A Business of Pfizer Inc.) Combined Financial Statements for the
years ended December 31, 1997, 1996 and 1995 and Independent Auditor's
Report.
- ----------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Pfizer, Inc.
We have audited the accompanying combined balance sheets of Howmedica, a
Business of Pfizer Inc. ("the Company") as of December 31, 1997 and 1996, and
the combined statements of income and cash flows for each of the years in the
three-year period ended December 31, 1997. These combined financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these combined financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the combined financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the combined
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall combined financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Howmedica, a
Business of Pfizer Inc., as of December 31, 1997 and 1996 and the results of
its operations and its cash flows for each of the years in the three-year
period ended December 31, 1997, in conformity with generally accepted
accounting principles.
/s/ KPMG LLP
September 9, 1998
Howmedica
(A Business of Pfizer Inc.)
COMBINED BALANCE SHEET
(Dollars in Thousands)
December 31 December 31
1997 1996
----------- -----------
Assets
CURRENT ASSETS
Cash $11,662 $31,131
Accounts receivable, less allowance for
doubtful accounts:
1997 - $13,361; 1996 - $13,773 208,859 212,050
Due from parent and affiliates 170,841 103,612
Inventories 253,889 263,514
Deferred taxes 57,717 61,287
Prepaid expenses and other assets 21,232 22,271
---------- ----------
Total current assets 724,200 693,865
Property, plant and equipment, less
accumulated depreciation 192,346 194,221
Goodwill and other intangible assets, net 104,758 114,644
Deferred charges 188,261 186,982
Deferred taxes 635 0
Other assets 2,425 2,526
---------- ----------
Total assets $1,212,625 $1,192,238
========== ==========
Liabilities and Business Unit Equity
CURRENT LIABILITIES
Accounts payable $84,911 $93,620
Short-term borrowings 3,447 25,146
Due to parent and affiliates 516,183 474,094
Income taxes payable 24,262 29,820
Deferred taxes 7,335 4,435
Accrued compensation and related items 34,620 31,975
Other current liabilities 63,254 43,206
---------- ----------
Total current liabilities 734,012 702,296
Long-term debt 337 1,753
Deferred taxes 48,751 55,819
Other noncurrent liabilities 8,574 7,973
---------- ----------
Total liabilities 791,674 767,841
Business unit equity 420,915 380,221
Currency translation adjustment 36 44,176
---------- ----------
Total business unit equity 420,951 424,397
---------- ----------
Total liabilities and business unit equity $1,212,625 $1,192,238
========== ==========
See accompanying notes to combined financial statements.
Howmedica
(A Business of Pfizer Inc.)
COMBINED STATEMENT OF INCOME
(Dollars in Thousands)
Years Ended December 31,
-----------------------------------
1997 1996 1995
-------- -------- --------
Net sales $820,708 $792,620 $732,686
Cost and expenses:
Cost of sales 295,606 281,071 271,484
Selling, informational and
administrative expenses 325,831 289,549 255,254
Research and development expenses 50,102 49,925 40,512
Corporate and division overhead costs 27,031 21,825 18,034
Other deductions--net 32,907 15,140 26,972
-------- -------- --------
Income before provision for taxes on
income 89,231 135,110 120,430
Provision for taxes on income 34,343 55,549 48,400
-------- -------- --------
Net income $54,888 $79,561 $72,030
======== ======== ========
See accompanying notes to combined financial statements.
Howmedica
(A Business of Pfizer Inc.)
COMBINED STATEMENT OF CASH FLOWS
(Dollars in Thousands)
YEARS ENDED DECEMBER 31,
------------------------------
1997 1996 1995
--------- -------- --------
OPERATING ACTIVITIES
Net income $54,888 $79,561 $72,030
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization of intangibles 68,204 56,786 39,090
Gain on disposals of property, plant
and equipment (101) (6) (29)
Deferred taxes 1,171 7,860 (1,642)
Other (162) 60 438
Changes in assets and liabilities:
Accounts receivable (14,193) 4,570 (8,497)
Inventories (13,139) 4,912 6,826
Prepaid, other assets and deferred charges (41,417) (87,224) (55,470)
Accounts payable and accrued liabilities 20,020 (3,523) 33,185
Other noncurrent liabilities 868 (418) 3,511
Due from/to parent and affiliates (3,857) 113,155 (33,908)
------- ------- -------
Net cash provided by operating activities 72,282 175,733 55,534
------- ------- -------
INVESTING ACTIVITIES
Purchases of property, plant and equipment (45,386) (54,337) (35,454)
Proceeds from sales of property, plant
and equipment 1,456 1,706 1,759
Acquisition, net of cash acquired 0 (53,083) 0
Other (690) 0 (818)
------- ------- -------
Net cash used in investing activities (44,620) (105,714) (34,513)
------- ------- -------
FINANCING ACTIVITIES
Proceeds from borrowings 0 3,107 0
Repayments of borrowings (19,912) 0 (4,102)
Dividends to parent company (6,825) (21,405) (10,640)
Branch earnings remitted (17,036) (45,251) (35,510)
Capital contribution 0 12,316 7,731
------- ------- -------
Net cash used in financing activities (43,773) (51,233) (42,521)
------- ------- -------
Effect of exchange rate changes on cash (3,358) (377) 1,253
------- ------- -------
Net increase/(decrease) in cash (19,469) 18,409 (20,247)
Cash at beginning of year 31,131 12,722 32,969
------- ------- -------
Cash at end of year $11,662 $31,131 $12,722
======= ======= =======
See accompanying notes to combined financial statements.
Howmedica
(A Business of Pfizer Inc.)
Notes to Combined Financial Statements
(Dollars in Thousands)
1. Organization and Business Description
Organization
Howmedica is a business unit within the Medical Technology Group ("MTG") of
Pfizer Inc. ("Pfizer"). Howmedica is comprised of the following wholly-owned
(directly or indirectly) subsidiaries of Pfizer - Howmedica GmbH (Germany);
Howmedica Leibinger Inc.; Howmedica Leibinger GmbH & Co.; Jaquet Orthopedie
S.A.; Howmedica International Inc. (includes Panama, Germany and Irish
branches); Howmedica International Limited; Pfizer Hospital Products Ltd.;
Benoist Girard & Cie S.C.A.; Pfizer Medical Technology Group Ltd.; Howmedica
France S.C.A.; Howmedica GesMBH (Austria); Pfizer Medical Technology Group
A.B.; Pfizer Medical Technology Group (Belgium) N.V.; Pfizer Medical
Technology Group (Netherlands) B.V.; Howmedica Iberica S.A; Pficonprod Pty
Ltd. (Australia) and the Rutherford, New Jersey branch (Orthopedic Division)
of Howmedica Inc. In addition, Howmedica includes certain net assets used
exclusively in its business but located at various Pfizer subsidiaries.
Business Description
Howmedica manufactures, markets and distributes a wide range of
reconstructive, trauma and specialty products used by orthopedic medical
professionals in the treatment of musculoskeletal disorders. In addition,
Howmedica's products include specialty surgical instrumentation focused on
stereotactic surgery. Howmedica has a global direct sales and distribution
presence in all major markets of the world and has its manufacturing
operations in the United States and Europe. The raw materials for its
products are readily available and Howmedica is not dependent on a single
supplier or only a few suppliers for its raw materials.
2. Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation
The accompanying combined financial statements present the financial
position, results of operations and cash flows for Howmedica as if it were a
separate legal entity. All significant intercompany transactions and
balances have been eliminated. Operations outside of the U.S. are included
on a fiscal year basis ending November 30. The combined financial statements
include the accounts specifically attributed to Howmedica, including
allocations of certain assets, liabilities and expenses relating to shared
services and administrative functions incurred at the corporate and business
segment operating levels of Pfizer. The Rutherford branch's earnings are
included in the net income of Howmedica and are remitted to Pfizer through
the intercompany accounts on an annual basis. Cash from Howmedica's domestic
operations is not included in cash in the accompanying combined balance sheet
at December 31, 1997 and 1996 since this cash is included in Pfizer's
centralized cash management system. Accordingly, Howmedica's cash at
December 31, 1997 and 1996 may not be representative of an independent
company.
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the combined financial statements and
accompanying notes. Actual results could differ from those estimates.
Significant accounting estimates used include depreciation, amortization and
estimates used in allocating certain assets, liabilities and the costs of
shared services and administrative functions.
Management believes that it exercised reasonableness in deriving these
amounts. Howmedica is subject to risks and uncertainties that may cause
actual results to differ from estimated results, such as, but not limited to,
changes in the healthcare environment, competition, foreign exchange,
legislation, regulation, litigation and other such matters.
Summary of Significant Accounting Policies
Due from/to parent and affiliates - Due from/to parent and affiliates
reflects balances and transactions among Howmedica, Pfizer and other Pfizer
entities. Howmedica participates in Pfizer's centralized cash management
system and, as such, its cash funding requirements are met by Pfizer and
generally all excess cash from Howmedica's domestic operations is transferred
to Pfizer.
Inventories - Inventories are valued at the lower of cost or market, with
cost determined for finished goods and work-in-process at average actual cost
and raw materials and supplies at average or latest actual cost.
Property, plant and equipment - Property, plant and equipment are carried at
cost less accumulated depreciation. Major improvements are capitalized while
maintenance and repairs are expensed when incurred. Depreciation is computed
generally on a straight-line basis over the following estimated useful lives:
Buildings 33 1/3 years
Machinery and equipment 8 - 12 years
Furniture, fixtures and other 3 - 12 years
Goodwill and other intangible assets - Goodwill represents the excess of
purchase price over fair value of the net tangible and identified intangible
assets acquired in purchase transactions. Goodwill is being amortized on a
straight-line basis over 40 years. Other intangible assets are amortized on
a straight-line basis over their estimated useful lives. Amortization
expense of goodwill and other intangible assets is included in "Other
deductions--net" in the accompanying combined statement of income. The
carrying values of goodwill and other intangible assets are reviewed for
impairment whenever events or changes in business conditions indicate they
may not be recoverable. Howmedica considers assets to be impaired and writes
them down to fair value if expected associated cash flows are less than their
carrying amounts.
Foreign currency translation - The financial statements of operations outside
of the U.S. are maintained in their local currency. Howmedica translates
assets and liabilities to their U.S. dollar equivalents at rates in effect at
the balance sheet date. Income and expense items are translated into their
U.S. dollar equivalents at average rates of exchange for the period.
Translation gains and losses are accumulated in a separate component of
business unit equity. Gains and losses on foreign currency transactions,
which were not material, are included in earnings.
Financial instruments - The carrying values of Howmedica's financial
instruments approximate their estimated fair values. At December 31, 1997
and 1996, the cost of each type of financial instrument, primarily accounts
receivable, due from/to parent and affiliates, accounts payable and short-
term borrowings approximates fair value because of the short maturity period
of these instruments.
Royalty expenses - Royalty expenses are primarily related to product design
and development and are expensed as incurred. Royalty expenses included in
"Cost of sales" on the accompanying combined statement of income were
$40,091, $36,918 and $41,147 for 1997, 1996 and 1995, respectively.
Loaner instruments - Howmedica provides certain instruments for surgical
implants primarily to hospitals. These instruments are included in "Deferred
charges" on the accompanying combined balance sheet and are amortized on a
straight-line basis over five years. The carrying values of these
instruments are $175,109 and $172,838 at December 31, 1997 and 1996.
Amortization expense of loaner instruments is included in "Cost of sales" in
the accompanying combined statement of income and was $34,194, $26,273 and
$15,997 for the years ended December 31, 1997, 1996 and 1995, respectively.
Advertising expense - Advertising costs are expensed as incurred.
Advertising expenses were $33,474, $26,793 and $21,561 for 1997, 1996 and
1995, respectively.
Concentration of credit risk - Howmedica does not have significant
concentrations of credit risk from its customers. Periodically, Howmedica
reviews the credit quality of its customers' financial condition. In
general, there is no requirement for collateral from customers.
Income taxes - As an operating unit of Pfizer, Howmedica does not file
separate U. S. Federal or certain foreign tax returns but rather is included
as part of the various returns filed by Pfizer or its subsidiaries. For
reporting purposes, Howmedica's tax provision is computed as if it were a
separate company. For jurisdictions where Howmedica is included in Pfizer's
or its subsidiaries' tax returns, allocated domestic income taxes are settled
with Pfizer on a current basis. Deferred tax assets and liabilities are
recognized for the expected future tax consequences of differences between
the financial reporting and tax bases of assets and liabilities using enacted
tax rates and laws. No provision has been made for taxes on overseas
retained earnings as they all have been deemed to be permanently reinvested.
3. Financial Instruments and Concentrations of Credit Risk
Howmedica enters into forward-exchange contracts to match local market short-
term assets and liabilities denominated in currencies other than the
functional currency. The contracts generally have maturities of six months
or less. Changes in the fair value of the forward-exchange contracts are
included in "Other deductions-net" in the accompanying combined statement of
income together with foreign-exchange gains and losses. At December 31, 1997
and 1996, Howmedica had outstanding forward-exchange contracts with an
aggregate notional amount of $99,100 and $39,500, respectively, primarily for
the exchange of U.S. dollars and major European currencies. At December 31,
1997, outstanding forward-exchange contracts with an aggregate notional
amount of $55,626 and all of the outstanding forward-exchange contracts at
December 31, 1996 are with an affiliated entity as the counterparty.
Purchased currency options serve as hedges of anticipated inventory
purchases. They are recorded at cost and amortized evenly to operations
through the expected inventory delivery date. Unrealized gains are recorded
at the transaction date and are included in the cost of the related inventory
purchased. At December 31, 1997 and 1996, $18,000 and $24,000 of yen-
denominated currency options with maturities through October 1998 were held
by Pfizer on Howmedica's behalf. The unrealized differences between fair and
carrying values were not material at December 31, 1997 and 1996.
4. Corporate and Division Overhead Costs
Pfizer allocates certain corporate service and employee benefit expenses
(based on actual costs incurred) to Howmedica on the basis of number of
personnel, occupied office space and third party sales. Pfizer does not
allocate various other corporate overhead expenses to its operating
divisions.
However, for purposes of the accompanying combined financial statements,
allocations of such expenses have been included in the combined statement of
income and are summarized as follows:
Years Ended December 31,
----------------------------
1997 1996 1995
------- ------- -------
Pfizer corporate overhead costs $13,023 $14,136 $11,531
MTG division overhead costs 14,008 7,689 6,503
------- ------- -------
$27,031 $21,825 $18,034
======= ======= =======
Pfizer corporate overhead costs represent a portion of corporate functions
such as personnel, legal, accounting, treasury and information systems which
are primarily allocated based on sales of Howmedica compared to total Pfizer
revenues.
MTG division overhead costs represent personnel, quality control, regulatory
compliance, finance and business development which are primarily allocated
based on sales to third party customers of Howmedica compared to total MTG
sales.
Management believes that all allocations are made on a reasonable basis;
however, these costs are not necessarily representative of the costs that
would have been or will be incurred by Howmedica as an independent company.
5. Restructuring and Other Charges
In 1993, Pfizer initiated a worldwide restructuring program which included
the consolidation of manufacturing facilities, the demolition of buildings
resulting from the consolidation, reconfiguration and rehabilitation of
remaining facilities, the consolidation of distribution and administrative
organizations and infrastructures and the write-down of inventory.
Restructuring charges related to Howmedica were $104,645. The restructuring
reserve was utilized in the amounts of $20,245, $600, $42,400 and $41,400 in
1996, 1995, 1994 and 1993, respectively. As of December 31, 1996, this
program was completed.
In 1995, Howmedica began a reorganization of its distribution system and
recorded a related charge of $19,600 which is included in "Other deductions-
net" in the accompanying combined statement of income for the year ended
December 31, 1995. As of December 31, 1996, the reorganization was
completed.
6. Patent Settlements
During 1997, Howmedica settled patent infringement cases and expensed related
settlement costs of $16,150 which are included in "Other deductions-net" in
the accompanying combined statement of income for the year ended December 31,
1997.
7. Inventory
1997 1996
--------- ---------
Finished goods $275,515 $277,741
Work-in-process 26,771 37,318
Raw materials 22,632 24,103
-------- --------
324,918 339,162
Less: allowance for obsolescence (71,029) (75,648)
-------- --------
$253,889 $263,514
======== ========
8. Acquisitions
On January 11, 1996, Howmedica acquired Leibinger GmbH for approximately $53
million in cash. The purchase price of Leibinger GmbH exceeded the fair value
of the net assets acquired by approximately $35 million. At the same time,
Pfizer acquired Leibinger U.S. for approximately $80 million in cash and
contributed the net assets of Leibinger U.S. to Howmedica. The purchase
price of Leibinger U.S. exceeded the fair value of the net assets acquired by
approximately $74 million. These acquisitions were recorded under the
purchase method of accounting. The financial statements of Howmedica include
the operating results of Leibinger GmbH and Leibinger U.S. subsequent to the
date of acquisition and contribution.
9. Property, Plant and Equipment
1997 1996
--------- ---------
Land and buildings $50,038 $55,827
Machinery and equipment 135,211 135,673
Furniture, fixtures and other 151,530 143,526
Construction in progress 11,962 3,695
-------- --------
348,741 338,721
Less: Accumulated depreciation (156,395) (144,500)
-------- --------
Net property, plant and equipment $192,346 $194,221
======== ========
Depreciation expense totaled $30,398, $27,503 and $22,655 for the years ended
December 31, 1997, 1996 and 1995, respectively.
10. Goodwill and Other Intangible Assets
1997 1996
-------- --------
Goodwill $61,902 $63,642
Patents 13,256 13,699
Trademarks 17,753 21,600
Customer lists 9,400 9,400
License agreements 5,168 4,268
Other 9,797 10,547
-------- --------
117,276 123,156
Less: Accumulated amortization (12,518) (8,512)
-------- --------
Net goodwill and other intangible assets $104,758 $114,644
======== ========
Amortization expense totaled $3,612, $3,010 and $438 for the years ended
December 31, 1997, 1996 and 1995, respectively, and is included in "Other
deductions-net" in the accompanying combined statement of income.
11. Income Taxes
The components of the income tax provision are:
1997 1996 1995
--------- --------- ---------
United States:
Taxes currently payable:
Federal $1,091 $13,406 $15,481
State and local 288 3,505 2,538
Deferred income taxes 857 3,318 (1,064)
------- ------- -------
Total U.S. tax provision 2,236 20,229 16,955
------- ------- -------
International:
Taxes currently payable 34,197 26,711 30,617
Deferred income taxes (2,090) 8,609 828
------- ------- -------
Total International tax provision 32,107 35,320 31,445
------- ------- -------
Total provision for taxes on income $34,343 $55,549 $48,400
======= ======= =======
Reconciliations of the U.S. income tax rate to Howmedica's effective rate
follow:
1997 1996 1995
-------- -------- --------
Federal statutory income tax rate 35.0% 35.0% 35.0%
Effect of foreign operations 3.6% 3.2% 3.2%
State & local taxes and other (0.1)% 2.9% 2.0%
------- ------- -------
Effective income tax rate 38.5% 41.1% 40.2%
======= ======= =======
Deferred income taxes are provided for the temporary differences between the
financial reporting basis and the tax basis of Howmedica's assets and
liabilities. Deferred tax assets and liabilities are comprised of the
following:
1997 1996
------------------ ------------------
Assets Liabilities Assets Liabilities
------- ----------- ------- -----------
Prepaid/deferred items $16,362 $9,494 $12,376 $10,875
Inventories 54,401 2,702 56,188 3,918
Deferred charges -- 35,531 -- 29,010
Employee benefits 939 3,076 411 3,342
Property, plant and equipment 11,312 28,508 5,555 29,964
Tax carryforwards 617 -- 807 --
Other 2,000 4,054 5,020 2,215
------- ------- ------- -------
Total deferred taxes $85,631 $83,365 $80,357 $79,324
------- ------- ------- -------
Net deferred tax asset $2,266 $1,033
======= =======
The deferred tax assets and liabilities at December 31, 1997 and 1996 are
disclosed separately in the accompanying combined balance sheet.
12. Pension and Postretirement Benefits
Certain Howmedica subsidiaries sponsor various pension plans. At other
locations, their employees participate in Pfizer's pension plans for
employees worldwide. Plan benefits depend on years of service and employee
final average earnings. Participants vest in their benefits after as few as
five years of service. The following tables present the benefit obligations
and the funded status of the Howmedica sponsored plans which exclude the
Howmedica employees who participate in Pfizer's plans, as well as the
assumptions used:
1997 1996
------------ ------------
Assumptions:
Discount rate:
U.S. plan 7.0% 7.5%
International plans 4.5% - 7.0% 4.5% - 7.0%
Rate of increase in salary levels:
International plans 2.5% - 3.8% 2.0% - 3.8%
The benefit obligation of the Howmedica sponsored U.S. plan reflects a pre-
determined salary component, adjusted from time to time, as defined in an
agreement between the plan participants and Howmedica.
1997 1996
-------- --------
Fair value of plan assets $45,993 $40,895
Actuarial present value of accumulated benefit
obligation:
Vested 41,834 37,587
Non-vested 4,815 4,798
-------- --------
Total 46,649 42,385
Effect of future salary increases 9,327 10,549
------- -------
Projected benefit obligation 55,976 52,934
------- -------
Plan assets less than benefit obligation (9,983) (12,039)
Unrecognized overfunding at date of adoption 2,263 2,659
Unrecognized net losses 433 2,998
Unrecognized prior service cost 2,935 2,906
Minimum liability adjustment (266) (58)
------- -------
Accrued costs included in the combined balance sheet $(4,618) $(3,534)
======= =======
The annual cost related to these plans and the assumptions used consist of
the following:
1997 1996
-------- ----------
Assumptions:
Expected long-term rate of return on plan assets:
U.S. plan 10.0% 10.0%
International plans 3.0-8.0% 5.0%-8.75%
Expected return on plan assets:
Actual return $(8,484) $(2,776)
Deferred return 5,264 (1,025)
------- -------
Net expected return (3,220) (3,801)
Service cost-benefits earned during the period 3,425 3,395
Interest cost on benefit obligation 3,536 3,364
Net amortization and deferral 499 495
------- -------
Net periodic pension cost $4,240 $3,453
======= =======
The pension plan trustees invest plan assets primarily in stocks, bonds and
short-term investments.
Pfizer makes contributions to its U.S. sponsored pension plan, as necessary,
to satisfy the minimum funding requirements of the Employee Retirement Income
Security Act of 1974. No contributions to Pfizer's U.S. plan were made or
required in 1997, 1996 or 1995 as the full funding limitation had already
been reached for these years. Pfizer is in the process of identifying the
plan assets that will be used to satisfy past service liabilities for the
Howmedica employees. For the years ended December 31, 1997, 1996 and 1995, a
pension cost of $275, $555 and $1,862, respectively, was allocated to
Howmedica. Pfizer funds its international pension plans as required by local
government and tax requirements.
Howmedica participates in an international pension plan of Pfizer that is
underfunded. At December 31, 1997 and 1996, the related minimum pension
liability attributable to Howmedica is approximately $3,171 and $2,889,
respectively, and is included in "Other noncurrent liabilities" in the
accompanying combined balance sheet.
Pfizer does not fund other postretirement plans, but contributes to the plans
as benefits are paid. At December 31, 1997 and 1996, the postretirement
benefit obligation principally related to medical insurance at Howmedica was
$4,199 and $3,852, respectively, and is included in "Other noncurrent
liabilities" in the accompanying combined balance sheet
13. Business Unit Equity
The changes in business unit equity during the years ended December 31, 1995,
1996 and 1997 were as follows:
Business
Unit
Equity
Exclusive
of Accumulated Minimum Business
Translation Translation Pension Unit
Adjustment Adjustment Liability Equity
----------- ---------- --------- --------
Balance at January 1, 1995 $239,669 $18,530 $-- $258,199
Net income 72,030 -- -- 72,030
Activity with Pfizer:
Dividends to parent company (10,640) -- -- (10,640)
Rutherford branch earnings
remitted (35,510) -- -- (35,510)
Capital contribution 7,731 -- -- 7,731
Other net assets distributed
to or disposed of by Pfizer (2,945) -- -- (2,945)
Other activity, net (2,575) -- -- (2,575)
Translation adjustment -- 13,579 -- 13,579
Minimum pension liability
adjustment -- -- (3,152) (3,152)
-------- ------- -------- --------
Balance at December 31, 1995 267,760 32,109 (3,152) 296,717
Net income 79,561 -- -- 79,561
Activity with Pfizer:
Dividends to parent company (21,405) -- -- (21,405)
Rutherford branch earnings
remitted (45,251) -- -- (45,251)
Contributed net assets of
Leibinger U.S. 79,619 -- -- 79,619
Capital contribution 12,316 -- -- 12,316
Other net assets distributed
to or disposed of by Pfizer 3,540 -- -- 3,540
Other activity, net 6,970 -- -- 6,970
Translation adjustment -- 12,067 -- 12,067
Minimum pension liability
adjustment -- -- 263 263
-------- ------- -------- --------
Balance at December 31, 1996 383,110 44,176 (2,889) 424,397
Net income 54,888 -- -- 54,888
Activity with Pfizer:
Dividends to parent company (6,825) -- -- (6,825)
Rutherford branch earnings
remitted (17,036) -- -- (17,036)
Other net assets distributed
to or disposed of by Pfizer 15,316 -- -- 15,316
Other activity, net (5,367) -- -- (5,367)
Translation adjustment -- (44,140) -- (44,140)
Minimum pension liability
adjustment -- -- (282) (282)
-------- ------- -------- --------
Balance at December 31, 1997 $424,086 $36 $(3,171) $420,951
======== ======= ======== ========
14. Stock Option Awards
Stock options are granted to Howmedica employees under the Pfizer Inc. Stock
and Incentive Plan. Options are exercisable after five years or less,
subject to continuous employment and certain other conditions and expire 10
years after the grant date. Once exercisable, the employee can purchase
shares of Pfizer common stock at the market price on the date the option was
granted. The weighted-average fair value per stock option granted was
$16.77, $10.90 and $6.46 for the options granted in 1997, 1996 and 1995,
respectively.
The fair values were estimated using the Black-Scholes option pricing model,
modified for dividends and using the following assumptions:
1997 1996 1995
------ ------ ------
Expected dividend yield 1.76% 1.97% 2.85%
Risk-free interest rate 6.23% 6.38% 6.26%
Expected stock price volatility 25.56% 25.45% 26.00%
Expected term until exercise (years) 5.50 5.25 5.25
Compensation expense was not recognized for the issuance of employee stock
options. If Pfizer had recorded compensation expense for option grants,
Howmedica's pro forma net income for 1997, 1996 and 1995 reflecting the
compensation cost for the fair value of stock options awarded to Howmedica
employees in 1997, 1996 and 1995 would have been as follows:
Year Ended December 31,
---------------------------
1997 1996 1995
------- ------- -------
Net income:
As reported $54,888 $79,561 $72,030
Pro forma $48,728 $76,428 $71,479
In 1997, 737,500 options were granted to Howmedica employees with a weighted
average exercise price of $55.04; in 1996, 1,132,148 options were granted
with a weighted average exercise price of $37.25 and in 1995, 683,800 options
were granted with a weighted average exercise price of $24.50. Information
regarding outstanding options and exercisability for Howmedica employees is
not available. In the opinion of Pfizer management, this information is not
significant to the presentation of the financial statements.
15. Contingent Liabilities and Commitments
Howmedica is involved in a number of claims and litigations considered normal
in its business, including product liability, employment, tax, and
intellectual property matters. In the product liability area, there are
approximately 150 matters pending, including suits and claims involving
allegedly defective hip or knee prostheses, fixation devices, or other
products, most based on allegations of mechanical failure. Eleven matters,
including nine hip and two knee cases, allege long-term effects of the
materials in the prostheses. While it is not possible to predict the outcome
of any of these proceedings, Howmedica believes that the liability resulting
from all pending lawsuits and claims, irrespective of the demands in any of
them, will not have a material adverse effect on its results of operations,
cash flows or financial position.
Howmedica leases facilities, vehicles and office equipment under various
noncancelable operating leases. Total rent expense under operating leases was
approximately $7,943, $7,043 and $5,810 for the years ended December 31,
1997, 1996 and 1995, respectively.
At December 31, 1997, future minimum lease payments in years ending December
31 are:
Operating
Leases
----------
1998 $7,308
1999 5,128
2000 4,082
2001 2,964
2002 2,521
Later years 2,251
-------
Total minimum lease payments $24,254
=======
16. Subsequent Event
In 1998, Pfizer entered into an agreement to sell Howmedica to Stryker
Corporation for $1.65 billion. The transaction, pending the usual regulatory
approvals, is expected to close in the fourth quarter of 1998.
- ---------------------------------------------------------------------------
Howmedica (A Business of Pfizer Inc.) Combined Financial Statements for the
years ended December 31, 1997, 1996 and 1995 and Independent Auditor's
Report.
- ----------------------------------------------------------------------------
Howmedica
(A Business of Pfizer Inc.)
COMBINED BALANCE SHEET
(Dollars in thousands)
(Unaudited)
September 27, September 14,
1998 1997
------------- -------------
Assets
CURRENT ASSETS
Cash $1,965 $35,844
Accounts receivable, less allowance for doubtful
accounts: 1998 - $11,234; 1997 - $13,874 190,407 190,816
Due from parent and affiliates 239,809 133,977
Inventories 263,517 246,062
Deferred taxes 65,729 63,375
Prepaid expenses and other assets 29,406 20,943
------------- -------------
Total current assets 790,833 691,017
Property, plant and equipment, less accumulated
depreciation 189,161 184,117
Goodwill and other intangible assets, net 110,781 104,219
Deferred charges 191,959 188,441
Deferred taxes 718 0
Other assets 6,044 2,437
------------- -------------
Total assets $1,289,496 $1,170,231
============= =============
Liabilities and Business Unit Equity
CURRENT LIABILITIES
Accounts payable $93,913 $70,536
Short-term borrowings 9,925 23,240
Due to parent and affiliates 595,960 482,696
Income taxes payable 25,565 21,728
Deferred taxes 7,477 7,710
Accrued compensation and related items 40,367 28,638
Other current liabilities 55,532 62,101
------------- -------------
Total current liabilities 828,739 696,649
Long-term debt 166 779
Deferred taxes 46,670 47,842
Other noncurrent liabilities 9,692 9,069
------------- -------------
Total liabilities 885,267 754,339
Business unit equity 423,356 427,878
Accumulated other comprehensive income/(expense) (19,127) (11,986)
------------- -------------
Total business unit equity 404,229 415,892
------------- -------------
Total liabilities and business unit equity $1,289,496 $1,170,231
============= =============
See accompanying notes to combined financial statements.
Howmedica
(A Business of Pfizer Inc.)
COMBINED STATEMENT OF INCOME
(Dollars in Thousands)
(Unaudited)
Nine Months Ended
------------------------------
September 27, September 14,
1998 1997
-------------- --------------
Net sales $595,268 $583,667
Cost and expenses:
Cost of sales 211,937 212,674
Selling, informational and
administrative expenses 248,996 238,787
Research and development expenses 38,249 36,010
Corporate and division overhead costs 25,892 17,719
Other deductions--net 11,712 15,066
-------- --------
Income before provision for taxes on
income 58,482 63,411
Provision for taxes on income 22,283 24,084
-------- --------
Net income $36,199 $39,327
======== ========
See accompanying notes to combined financial statements.
Howmedica
(A Business of Pfizer Inc.)
COMBINED STATEMENT OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
NINE MONTHS ENDED
-----------------------------
September 27, September 14,
1998 1997
--------- --------
OPERATING ACTIVITIES
Net income $36,199 $39,327
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization of intangibles 50,925 48,671
Gain on disposals of property, plant
and equipment (174) (125)
Deferred taxes (9,393) (3,544)
Other 531 639
Changes in assets and liabilities:
Accounts receivable 14,319 (269)
Inventories (16,922) (11,083)
Prepaid, other assets and deferred charges (45,605) (34,033)
Accounts payable and accrued liabilities 10,838 (5,181)
Other noncurrent liabilities 1,154 1,451
Due from/to parent and affiliates 5,833 17,734
------- -------
Net cash provided by operating activities 47,705 53,587
------- -------
INVESTING ACTIVITIES
Purchases of property, plant and equipment (32,436) (31,542)
Acquisition of patent license (12,500) 0
------- -------
Net cash used in investing activities (44,936) (31,542)
------- -------
FINANCING ACTIVITIES
Net proceeds from borrowings 6,411 1,539
Branch earnings remitted (17,958) (14,388)
------- -------
Net cash used in financing activities (11,547) (12,849)
------- -------
Effect of exchange rate changes on cash (919) (4,483)
------- -------
Net increase/(decrease) in cash (9,697) 4,713
Cash at beginning of year 11,662 31,131
------- -------
Cash at end of period $1,965 $35,844
======= =======
See accompanying notes to combined financial statements.
Howmedica
(A Business of Pfizer Inc.)
Notes to Combined Financial Statements
(Dollars in Thousands)
(Unaudited)
1. Organization and Business Description
Organization
Howmedica is a business unit within the Medical Technology Group ("MTG") of
Pfizer Inc. ("Pfizer"). Howmedica is comprised of the following wholly-owned
(directly or indirectly) subsidiaries of Pfizer - Howmedica GmbH (Germany);
Howmedica Leibinger Inc.; Howmedica Leibinger GmbH & Co.; Jaquet Orthopedie
S.A.; Howmedica International Inc. (includes Panama, Germany and Irish
branches); Howmedica International Limited; Pfizer Hospital Products Ltd.;
Benoist Girard & Cie S.C.A.; Pfizer Medical Technology Group Ltd.; Howmedica
France S.C.A.; Howmedica GesMBH (Austria); Pfizer Medical Technology Group
A.B.; Pfizer Medical Technology Group (Belgium) N.V.; Pfizer Medical
Technology Group (Netherlands) B.V.; Howmedica Iberica S.A; Pficonprod Pty
Ltd. (Australia) and the Rutherford, New Jersey branch (Orthopedic Division)
of Howmedica Inc. In addition, Howmedica includes certain net assets used
exclusively in its business but located at various Pfizer subsidiaries.
Business Description
Howmedica manufactures, markets and distributes a wide range of
reconstructive, trauma and specialty products used by orthopedic medical
professionals in the treatment of musculoskeletal disorders. In addition,
Howmedica's products include specialty surgical instrumentation focused on
stereotactic surgery. Howmedica has a global direct sales and distribution
presence in all major markets of the world and has its manufacturing
operations in the United States and Europe. The raw materials for its
products are readily available and Howmedica is not dependent on a single
supplier or only a few suppliers for its raw materials.
2. Basis of Presentation
The combined financial information presented herein is unaudited. Howmedica
is responsible for the unaudited financial statements included in this
document. The financial statements include all normal and recurring
adjustments that are considered necessary for the fair presentation of
financial position and operating results. Revenues, expenses, assets and
liabilities can vary during each quarter of the year. Therefore, the results
and trends in these interim financial statements may not be the same as those
for the full year. The interim financial statements and notes thereto do not
include all disclosures required by generally accepted accounting principles
and should be read in conjunction with Howmedica's annual audited financial
statements for 1997.
The accompanying combined financial statements present the financial
position, results of operations and cash flows for Howmedica as if it were a
separate legal entity. All significant intercompany transactions and
balances have been eliminated. Operations outside of the U.S. are included
as of August 23, 1998 and August 24, 1997. The combined financial statements
include the accounts specifically attributed to Howmedica, including
allocations of certain assets, liabilities and expenses relating to shared
services and administrative functions incurred at the corporate and business
segment operating levels of Pfizer.
The Rutherford branch's earnings are included in the net income of Howmedica
and are remitted to Pfizer through the intercompany accounts on a quarterly
basis. Cash from Howmedica's domestic operations is not included in cash in
the accompanying combined balance sheet at September 27, 1998 and September
14, 1997 since this cash is included in Pfizer's centralized cash management
system. Accordingly, Howmedica's cash at September 27, 1998 and September
14, 1997 may not be representative of an independent company.
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the combined financial statements and
accompanying notes. Actual results could differ from those estimates.
Significant accounting estimates used include depreciation, amortization and
estimates used in allocating certain assets, liabilities and the costs of
shared services and administrative functions. Management believes that it
exercised reasonableness in deriving these amounts. Howmedica is subject to
risks and uncertainties that may cause actual results to differ from
estimated results, such as, but not limited to, changes in the healthcare
environment, competition, foreign exchange, legislation, regulation,
litigation and other such matters.
3. New Accounting Pronouncements
Effective January 1, 1998, Howmedica adopted Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income." This
Statement establishes standards for reporting and display of comprehensive
income, which consists of all changes in equity from nonshareholder sources.
Prior year financial statements have been conformed to the requirements of
SFAS No. 130 (see Note 5).
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" which becomes
effective for Howmedica's financial statements beginning January 1, 2000.
SFAS No. 133 requires a company to recognize all derivative instruments as
assets or liabilities in its balance sheet and measure them at fair value.
Howmedica is currently evaluating this Statement and its impact on its
existing accounting policies and financial reporting disclosures.
4. Divestiture
In 1998, Pfizer entered into an agreement to sell Howmedica to Stryker
Corporation for $1.65 billion in cash. The transaction, pending the usual
regulatory approvals, is expected to close in the fourth quarter of 1998.
5. Comprehensive Income/(Expense)
Nine Months Ended
-------------------------------
Sept. 27, 1998 Sept. 14, 1997
-------------- --------------
Net income $36,199 $39,327
Other comprehensive expense-currency
translation adjustment (19,163) (56,162)
-------------- --------------
Total comprehensive income/(expense) $17,036 $(16,835)
============== ==============
Changes in the currency translation adjustment included in "Accumulated other
comprehensive expense" were as follows:
Nine Months Ended
------------------------------
Sept. 27, 1998 Sept. 14, 1997
-------------- --------------
Opening balance $36 $44,176
Translation adjustments (19,163) (56,162)
-------- --------
Ending balance $(19,127) $(11,986)
======== ========
6. Corporate and Division Overhead Costs
Pfizer allocates certain corporate service and employee benefit expenses
(based on actual costs incurred) to Howmedica on the basis of number of
personnel, occupied office space and third party sales. Pfizer does not
allocate various other corporate overhead expenses to its operating
divisions. However, for purposes of the accompanying combined financial
statements, allocations of such expenses have been included in the combined
statement of income and are summarized as follows:
Nine Months Ended
-----------------------------
Sept. 27, 1998 Sept. 14, 1997
-------------- -------------
Pfizer corporate overhead costs $12,206 $8,332
MTG division overhead costs 13,686 9,387
------- -------
$25,892 $17,719
======= =======
Pfizer corporate overhead costs represent a portion of corporate functions
such as personnel, legal, accounting, treasury and information systems which
are primarily allocated based on sales of Howmedica compared to total Pfizer
revenues.
MTG division overhead costs represent personnel, quality control, regulatory
compliance, finance and business development which are primarily allocated
based on sales to third party customers of Howmedica compared to total MTG
sales.
Management believes that all allocations are made on a reasonable basis;
however, these costs are not necessarily representative of the costs that
would have been or will be incurred by Howmedica as an independent company.
7. Inventory
Sept. 27, 1998 Sept. 14, 1997
-------------- -------------
Finished goods $276,946 $272,557
Work-in-process 39,771 26,556
Raw materials 25,088 22,706
--------- ---------
341,805 321,819
Less: allowance for obsolescence (78,288) (75,757)
--------- ---------
$263,517 $246,062
========= =========
8. Contingent Liabilities and Commitments
Howmedica is involved in a number of claims and litigations considered normal
in its business, including product liability, employment, tax, and
intellectual property matters. In the product liability area, there are
approximately 150 matters pending, including suits and claims involving
allegedly defective hip or knee prostheses, fixation devices, or other
products, most based on allegations of mechanical failure. Eleven matters,
including nine hip and two knee cases, allege long-term effects of the
materials in the prostheses. While it is not possible to predict the outcome
of any of these proceedings, Howmedica believes that the liability resulting
from all pending lawsuits and claims, irrespective of the demands in any of
them, will not have a material adverse effect on its results of operations,
cash flows or financial position.
(b) Pro Forma financial information.
- ---------------------------------------------------------------------------
Unaudited Pro Forma Condensed Consolidated Balance Sheet of the Company and
Howmedica as of September 30, 1998.
Unaudited Pro Forma Condensed Consolidated Statements of Earnings of the
Company and Howmedica for the year ended December 31, 1997 and the nine
months ended September 30, 1998.
- ---------------------------------------------------------------------------
STRYKER CORPORATION AND HOWMEDICA
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
On August 14, 1998, Stryker Corporation ("Stryker" or "the Company")
announced it had entered into a definitive agreement to acquire Howmedica,
the orthopaedic division of Pfizer, Inc,. for $1.9 billion in cash. On
October 22, 1998, the Company reached an agreement with Pfizer to reduce the
purchase price for Howmedica to $1.65 billion in cash as a result of changes
in the financial markets. On December 4, 1998, the Company completed the
acquisition for $1.65 billion in cash. The acquisition of Howmedica was
accounted for using the purchase method of accounting.
The aggregate purchase price for Howmedica, including an estimate for a
contractually required adjustment based on the estimated increase in
Howmedica's working capital since December 31, 1997, has been allocated on a
preliminary basis to the assets acquired and liabilities assumed based on
their estimated fair values at date of acquisition, as valued by an
independent appraiser using information and assumptions provided by
management. In addition, certain purchase liabilities have been provided in
conjunction with a plan of integration to combine Stryker and Howmedica. The
excess of purchase price and purchase liabilities over the fair value of net
tangible assets acquired was allocated to specific intangible asset
categories as follows (in thousands):
Goodwill $437,000
Developed technology 194,000
Customer base 178,900
Purchased research and development 78,400
Trademarks and assembled workforce 41,200
--------
$929,500
========
Immediately after the acquisition was consummated, management of the Company
began to implement an integration plan to combine Stryker and Howmedica. In
conjunction with the integration plan, the Company recorded additional
purchase liabilities of approximately $111 million ($67 million net of
related tax benefit), which were included in the acquisition cost allocation.
The additional purchase liabilities include approximately $71 million for
severance and related costs for Howmedica employees, $27 million to convert
Howmedica's distribution network to direct sales to accommodate the
integration and $13 million associated with Howmedica facility closures and
contractual obligations. The severance and related costs are provided for
planned workforce reductions covering all Howmedica employee groups other
than sales. The cost of the distributor conversions is based on negotiated
contracts. The restructuring actions will be completed in 1999. As the
Company's integration plan evolves, information could become known that may
require adjustments to the purchase liabilities recorded in the preliminary
purchase price allocation. Any increases or decreases in the estimated
liabilities for these integration activities will result in a corresponding
increase or decrease in goodwill.
During the fourth quarter of 1998, the Company recorded a $78.4 million
charge ($51.7 million net of tax) to account for purchased research and
development acquired. The valuation of purchased research and development
was based upon an analysis of those projects which had not reached
technological feasibility and had no alternative use. The valuation
considered expected future cash flows and was discounted for risks and
uncertainties related to target markets and completion of products. The
other intangible assets recorded in connection with the acquisition will be
amortized on a straight-line basis over their estimated period of benefit.
These Unaudited Pro Forma Condensed Consolidated Financial Statements are
based on the historical Consolidated Financial Statements of Stryker
Corporation and the historical Combined Financial Statements of Howmedica
under the assumptions and adjustments set forth in the accompanying Notes to
Unaudited Pro Forma Condensed Consolidated Financial Statements. The
Unaudited Pro Forma Condensed Consolidated Balance Sheet reflects the
combined company as if the transaction had occurred on September 30, 1998.
The Unaudited Pro Forma Condensed Consolidated Statements of Earnings assume
that the acquisition occurred on January 1, 1997, and do not give effect to
the purchased research and development charge recorded in connection with the
acquisition.
The Unaudited Pro Forma Condensed Consolidated Financial Statements do not
purport to represent what the Company's financial position or the results of
operations would have been if the Howmedica acquisition had been in effect on
the dates indicated or which may be achieved in the future. The Unaudited
Pro Forma Condensed Consolidated Financial Statements should be read in
conjunction with the historical Consolidated Financial Statements of Stryker
Corporation and the historical Combined Financial Statements of Howmedica and
the notes accompanying both statements.
STRYKER CORPORATION AND HOWMEDICA
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(Amounts in thousands)
September 30, 1998
----------------------------------------------
Pro Forma Pro Forma
Adjustments Stryker
And Corporation
Stryker Reclassifi- and
Corporation Howmedica Cations Howmedica
----------- ---------- ----------- -----------
ASSETS
Current Assets
Cash and cash
equivalents $223,069 $1,965 ($137,140) (1) $87,894
Marketable debt
securities 135,731 (135,731) (1) 0
Accounts receivable,
less allowance for
doubtful accounts 191,173 190,407 381,580
Due from parent and
affiliates 239,809 (239,809) (2) 0
Inventories 165,971 263,517 146,800 (3) 576,288
Deferred income taxes 86,140 65,729 (63,842) (4) 132,027
44,000 (5)
Prepaid expenses and
other current assets 16,666 29,406 46,072
--------- --------- --------- ---------
Total Current Assets 818,750 790,833 (385,722) 1,223,861
Property, plant and
equipment, less
allowance for
depreciation 182,998 189,161 11,700 (6) 383,859
Goodwill and other
intangibles, net of
amortization 110,781 (110,781) (7) 953,408
49,790 (8)
903,618 (9)
Deferred charges 191,959 (56,800)(10) 135,159
Other assets 69,927 6,762 25,493 (1) 79,048
(49,790) (8)
26,656 (11)
--------- --------- --------- ---------
TOTAL ASSETS $1,071,675 $1,289,496 $414,164 $2,775,335
========== ========== ========= ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $51,662 $93,913 $145,575
Short-term borrowings 9,925 ($9,925) (4) 0
Due to parent and
Affiliates 595,960 (595,960) (2) 0
Accrued compensation 45,373 40,367 85,740
Income taxes 50,599 25,565 (5,000) (4) 71,164
Accrued expenses and
Other liabilities 65,427 63,009 (1,600) (4) 237,836
111,000 (5)
Current maturities of
long-term debt 71,280 (69,331) (1) 1,949
--------- --------- --------- ---------
Total Current Liabilities 284,341 828,739 (570,816) 542,264
Long-term debt, excluding
Current maturities 3,874 166 1,471,953 (1) 1,475,993
Deferred income taxes 46,670 (25,000) (4) 21,670
Other liabilities 28,455 9,692 (6,000) (4) 32,147
Minority interest 29,235 29,235
Stockholders' equity
Common stock 9,642 9,642
Additional paid-in
Capital 8,433 8,433
Howmedica business
unit equity 423,356 (423,356)(12) 0
Retained earnings 718,949 (51,744)(11) 667,205
Accumulated other
Comprehensive loss (11,254) (19,127) 19,127 (12) (11,254)
--------- --------- --------- ---------
Total Stockholders'
Equity 725,770 404,229 (455,973) 674,026
--------- --------- --------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $1,071,675 $1,289,496 $414,164 $2,775,335
========== ========== ========= ==========
See accompanying notes to unaudited pro forma condensed consolidated
financial statements.
STRYKER CORPORATION AND HOWMEDICA
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Amounts in thousands, except per share amounts)
Year Ended December 31, 1997
------------------------------------------------
Pro Forma Pro Forma
Adjustments Stryker
and Corporation
Stryker Reclassifi- and
Corporation Howmedica cations Howmedica
----------- --------- ------------- ----------
Net sales $980,135 $820,708 $1,800,843
Cost of sales 397,766 295,606 ($34,194) (13) 659,178
-------- -------- -------- --------
Gross profit 582,369 525,102 34,194 1,141,665
Operating expenses:
Research, development
and engineering 56,895 50,102 106,997
Selling, general and
administrative 341,500 325,831 34,194 (13) 757,209
27,887 (14)
27,797 (15)
Pfizer corporate and
division overhead
costs 27,031 27,031
-------- -------- -------- --------
398,395 402,964 89,878 891,237
-------- -------- -------- --------
Operating income 183,974 122,138 (55,684) 250,428
Interest expense (121,454) (16) (121,454)
Other income (expense) 11,346 (32,907) 27,887 (14) 2,745
3,702 (17)
(10,895) (18)
3,612 (19)
-------- -------- -------- --------
Earnings before income
taxes 195,320 89,231 (152,832) 131,719
Income taxes 70,000 34,343 (58,076) (20) 46,267
-------- -------- -------- --------
Net earnings $125,320 $54,888 ($94,756) $85,452
======== ======== ======== ========
Net earnings per share
of common stock:
Basic $1.30 $0.89
===== =====
Diluted $1.28 $0.87
===== =====
Weighted-average shares
outstanding for the
period:
Basic 96,254 96,254
Diluted 98,132 98,132
See accompanying notes to unaudited pro forma condensed consolidated
financial statements.
STRYKER CORPORATION AND HOWMEDICA
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Amounts in thousands, except per share amounts)
For Nine Months Ended September 30, 1998
------------------------------------------------
Pro Forma Pro Forma
Adjustments Stryker
and Corporation
Stryker Reclassifi- and
Corporation Howmedica cations Howmedica
----------- --------- ------------- ----------
Net sales $781,826 $595,268 $1,377,094
Cost of sales 324,680 211,937 ($28,150) (13) 508,467
-------- -------- -------- --------
Gross profit 457,146 383,331 28,150 868,627
Operating expenses:
Research, development
and engineering 41,428 38,249 79,677
Selling, general and
administrative 263,451 248,996 28,150 (13) 570,024
8,579 (14)
20,848 (15)
Pfizer corporate and
division overhead
costs 25,892 25,892
-------- -------- -------- --------
304,879 313,137 57,577 675,593
-------- -------- -------- --------
Operating income 152,267 70,194 (29,427) 193,034
Interest expense (88,653) (16) (88,653)
Other income (expense) 10,823 (11,712) 8,579 (14) 3,915
2,020 (17)
(8,691) (18)
2,896 (19)
-------- -------- -------- --------
Earnings before income
taxes 163,090 58,482 (113,276) 108,296
Income taxes 57,080 22,283 (43,045) (20) 36,318
-------- -------- -------- --------
Net earnings $106,010 $36,199 ($70,231) $71,978
======== ======== ======== ========
Net earnings per share
of common stock:
Basic $1.10 $0.75
===== =====
Diluted $1.08 $0.73
===== =====
Weighted-average shares
outstanding for the
period:
Basic 96,253 96,253
Diluted 98,040 98,040
See accompanying notes to unaudited pro forma condensed consolidated
financial statements.
STRYKER CORPORATION AND HOWMEDICA
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands)
The Unaudited Pro Forma Condensed Consolidated Financial Statements have been
prepared to reflect the acquisition of Howmedica accounted for under the
purchase method of accounting. The Unaudited Pro Forma Condensed
Consolidated Balance Sheet assumes that the acquisition was completed as of
September 30, 1998 and the Unaudited Pro Forma Condensed Consolidated
Statements of Earnings assume that the acquisition was completed on January
1, 1997. The acquisition was completed on December 4, 1998.
All interim financial data used to develop the Unaudited Pro Forma Condensed
Consolidated Financial Statements are unaudited, but in the opinion of
management, include all adjustments, consisting of normal recurring accruals,
necessary for a fair presentation thereof.
The Unaudited Pro Forma Condensed Consolidated Statements of Earnings are
based on the historical Consolidated Financial Statements of Stryker
Corporation and the historical Combined Financial Statements of Howmedica.
The historical Unaudited Combined Financial Statements of Howmedica used to
prepare the Unaudited Pro Forma Condensed Consolidated Balance Sheet as of
September 30, 1998 and the Unaudited Pro Forma Condensed Consolidated
Statements of Earnings for the nine months ended September 30, 1998 actually
reflect results as of and for the nine months ended September 27, 1998. The
difference between that date and September 30, 1998 was not deemed
significant. As a result, no pro forma adjustments were made to reflect the
impact of the difference in dates. For purposes of the historical Combined
Financial Statements of Howmedica, Pfizer allocated certain corporate and
division overhead costs to Howmedica. These allocated costs totaled
$27,031,000 and $25,892,000 for the year ended December 31, 1997 and for the
nine months ended September 27, 1998, respectively.
The Unaudited Pro Forma Condensed Consolidated Statements of Earnings are not
necessarily indicative of operating results which would have been achieved
had the acquisition occurred as of January 1, 1997 and should not be
construed as representative of future earnings. The Unaudited Pro Forma
Condensed Consolidated Statements of Earnings do not include any benefits
from synergies that may result from the acquisition.
The excess of the estimated aggregate purchase price for Howmedica and
purchase liabilities over the fair value of net tangible assets acquired was
preliminarily allocated to specific intangible asset categories and is being
amortized over the estimated periods of benefit associated with each
category. The final allocations may be different from the amounts reflected
herein. The amount of goodwill reported in the Unaudited Pro Forma Condensed
Consolidated Balance Sheet differs from the amount of goodwill recorded by
the Company at December 4, 1998 due to the difference in Howmedica's net
assets at September 30, 1998 as compared to the actual net assets as of the
acquisition date.
Following is a description of pro forma adjustments reflected in the
Unaudited Pro Forma Condensed Consolidated Financial Statements:
(1) Represents the payment of cash and marketable securities totaling
$272,871 and the debt established to fund the acquisition. The long-term
debt was borrowed under an agreement through which $1,650,000 in Senior
Secured Credit Facilities are available to the Company. The Senior Secured
Credit Facilities provide for $1,150,000 in term loans extending over six to
eight years, a six-year $250,000 U.S. revolving credit facility and a six-
year $250,000 reducing multi-currency facility. Borrowings shown under the
facilities reflect amounts necessary to pay the remaining purchase price not
paid with cash, to pay deferred loan costs of $25,493 and to refinance
$69,331 of outstanding Japanese yen borrowing. The actual amount of Japanese
yen refinanced at December 4, 1998 on a U.S. dollar equivalent basis
increased to $78,316 as a result of foreign currency exchange changes.
(2) Represents the elimination of intercompany receivables and payables due
between Howmedica and Pfizer entities as of September 30, 1998.
(3) Represents the net adjustment to fair value of Howmedica's inventories.
The Company recorded a $74,200 decrease in inventories to conform to the
Company's methodologies and stepped-up the remaining inventory by $221,000 to
fair value. The effects of this adjustment on cost of sales has not been
reflected in the Unaudited Pro Forma Condensed Consolidated Statements of
Earnings since it is non-recurring.
(4) Represents the elimination of certain items included on Howmedica's
balance sheet which will not be transferred to Stryker Corporation in
accordance with the terms of the purchase agreement underlying the
acquisition.
(5) Represents the recording of purchase liabilities arising in connection
with the transaction, including severance payments and other reorganization
costs, as well as the related deferred tax benefit.
(6) Represents a write-up to fair value of property, plant and equipment
acquired.
(7) Represents the elimination of Howmedica's historical goodwill and other
intangibles.
(8) Represents a reclassification of Stryker Corporation's historical
goodwill and other intangibles to conform with the pro forma presentation.
(9) Represents the recording of goodwill and other intangibles arising from
the acquisition on a pro forma basis. The actual goodwill recorded at
December 4, 1998 differs from this amount due to differences in Howmedica's
net assets at that date. In addition, the amounts assigned to goodwill and
other intangibles are based on a preliminary purchase price allocation and
are subject to adjustment during 1999.
(10) Represents a write-down to fair value of loaner instruments acquired.
(11) Represents the write-off of purchased research and development of
$78,400 net of a deferred income tax benefit of $26,656.
(12) Represents the elimination of Howmedica's historical equity, including
accumulated other comprehensive loss.
(13) Represents the reclassification of amortization of Howmedica loaner
instruments included in deferred charges to conform with Stryker
Corporation's presentation.
(14) Represents the reclassification of certain amounts included in other
expense by Howmedica to conform with Stryker Corporation's presentation.
(15) Represents amortization of goodwill and other intangibles related to the
acquisition. This amortization is based on the preliminary allocation to
specific intangible asset categories of the excess of the purchase price and
purchase liabilities over the fair value of net tangible assets acquired
using estimated periods of benefit associated with the specific intangible
asset categories. The aggregate purchase price has been allocated on a
preliminary basis to the assets acquired and liabilities assumed based on
their estimated fair values at date of acquisition, as valued by an
independent appraiser using information and assumptions provided by
management.
The $221,000 step-up of Howmedica's inventory to fair value at date of
acquisition and the $78,400 write-off of purchased research and development
are not reflected in the Unaudited Pro Forma Condensed Consolidated
Statements of Earnings. The purchased research and development has been
charged to operations during the fourth quarter of 1998 and the inventory
step-up will be charged off as additional non-recurring cost of sales as the
acquired inventory is sold.
(16) Represents the estimated increase in interest expense and amortization
of deferred loan costs resulting from the debt financing obtained by Stryker
Corporation in connection with the acquisition of Howmedica. The interest
expense shown for the periods presented is calculated using interest rates in
effect in January 1999 with a portion of the interest rate fixed under the
Company's interest rate swap agreement which was effective beginning in
January 1999. Interest expense and deferred loan cost amortization decline
slightly in the nine months ended September 30, 1998 as a result of required
debt repayments which begin in the second year of the loans under the debt
repayment schedule.
(17) Represents the elimination of interest expense on Stryker Corporation's
previous Japanese yen denominated debt which was refinanced through the
proceeds of the debt financing obtained in connection with the acquisition.
(18) Represents an adjustment to eliminate interest income earned by Stryker
Corporation on cash and marketable securities of $272,871 used to pay a
portion of the purchase price for Howmedica.
(19) Represents the elimination of amounts recorded by Howmedica for
amortization of goodwill and other intangible assets.
(20) Represents the estimated tax effect of the Unaudited Pro Forma Condensed
Consolidated Statements of Earnings' pro forma adjustments based on rates
applicable to those adjustments.
(c) Exhibits
Exhibit
Number Description
------- ------------
2.1* Form of Stock and Asset Purchase
Agreement, dated as of August 13, 1998,
between Pfizer Inc. and the Company (the
"Purchase Agreement").
2.2* Form of Amendment No. 1, dated as of
October 22, 1998, to the Purchase
Agreement.
10.1* Form of Credit and Guaranty Agreement,
dated as of December 4, 1998, among the
Company, certain subsidiaries of the
Company, as guarantors, the Lenders named
therein and certain other parties.
23.1 Consent of KPMG LLP.
*Previously filed with the Initial 8-K.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: February 19, 1999
STRYKER CORPORATION
By: /s/ David J. Simpson
Vice President, Chief
Financial Officer and Secretary
EXHIBIT INDEX
Exhibit Number Description
- -------------- -----------
2.1* Form of Stock and Asset Purchase Agreement, dated
as of August 13, 1998, between Pfizer Inc. and
the Company (the "Purchase Agreement").
2.2* Form of Amendment No. 1, dated as of October 22,
1998, to the Purchase Agreement.
10.1* Form of Credit and Guaranty Agreement, dated as
of December 4, 1998, among the Company, certain
subsidiaries of the Company, as guarantors, the
Lenders named therein and certain other parties.
23.1 Consent of KPMG LLP.
*Previously filed with the Initial 8-K.
Exhibit 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Pfizer Inc.:
We consent to the incorporation by reference in the following registration
statements:
* File No. 33-55662 on Form S-8,
* File No. 2-96467 on Form S-8,
* File No. 33-32240 on Form S-8
of Stryker Corporation of our report dated September 9, 1998, with respect to
the combined balance sheets of Howmedica, a Business of Pfizer Inc. as of
December 31, 1997 and 1996, and the related combined statements of income and
cash flows for each of the years in the three-year period ended December 31,
1997, which report appears in the Form 8-K/A of Stryker Corporation dated
February 19, 1999.
/s/ KPMG LLP
New York, New York
February 17, 1999