UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 31, 1999.
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 Number 0-12515.
BIOMET, INC.
(Exact name of registrant as specified in its charter)
Indiana 35-1418342
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Airport Industrial Park, P.O. Box 587, Warsaw, Indiana 46581-0587
(Address of principal executive offices)
(219) 267-6639
(Registrant's telephone number, including area code)
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
As of August 31, 1999, the registrant had 112,821,554 common shares outstanding.
BIOMET, INC.
CONTENTS
Pages
Part I. Financial Information
Item 1. Financial Statements:
Consolidated Balance Sheets 1-2
Consolidated Statements of Income 3
Consolidated Statements of Cash Flows 4
Notes to Consolidated Financial Statements 5-7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-10
Part II. Other Information 11-12
Signatures 13
Index to Exhibits 14
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BIOMET, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
at August 31, 1999 and May 31, 1999
(in thousands)
ASSETS
August 31, May 31,
1999 1999
---------- -------
Current assets:
Cash and cash equivalents $ 160,268 $ 129,359
Investments 76,487 60,078
Accounts and notes receivable, net 221,700 215,034
Refundable income taxes 31,308 31,308
Inventories 215,854 205,238
Prepaid expenses and other 41,895 40,691
--------- ---------
Total current assets 747,512 681,708
--------- ---------
Property, plant and equipment, at cost 275,152 265,010
Less, Accumulated depreciation 101,298 96,137
--------- ---------
Property, plant and equipment, net 173,854 168,873
--------- ---------
Investments 127,970 146,859
Intangible assets, net 8,673 7,665
Excess acquisition costs over fair value
of acquired net assets, net 48,471 47,861
Other assets 15,106 14,990
--------- ---------
Total assets $1,121,586 $1,067,956
========= =========
The accompanying notes are a part of the consolidated financial statements.
BIOMET, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
at August 31, 1999 and May 31, 1999
(in thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY
August 31, May 31,
1999 1999
---------- -------
Current liabilities:
Short-term borrowings $ 58,020 $ 45,137
Accounts payable 31,271 27,676
Accrued income taxes 27,674 17,088
Accrued wages and commissions 17,569 19,596
Accrued litigation 55,250 55,000
Other accrued expenses 42,123 36,933
--------- ---------
Total current liabilities 231,907 201,430
Long-term liabilities:
Deferred federal income taxes 8,445 9,565
Other liabilities 324 324
--------- ---------
Total liabilities 240,676 211,319
--------- ---------
Minority interest 82,106 80,690
--------- ---------
Contingencies (Note 8)
Shareholders' equity:
Common shares 79,936 77,843
Additional paid-in capital 26,920 26,920
Retained earnings 711,346 687,828
Accumulated other comprehensive income (19,398) (16,644)
--------- ---------
Total shareholders' equity 798,804 775,947
--------- ---------
Total liabilities and shareholders' equity $1,121,586 $1,067,956
========= =========
The accompanying notes are a part of the consolidated financial statements.
BIOMET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
for the three months ended August 31, 1999 and 1998
(in thousands, except per share amounts)
1999 1998
---- ----
Net sales $192,151 $176,664
Cost of sales 56,836 53,517
------- -------
Gross profit 135,315 123,147
Selling, general and
administrative expenses 66,296 60,879
Research and development expense 8,538 8,092
------- -------
Operating income 60,481 54,176
Other income, net 3,119 2,844
------- -------
Income before income taxes
and minority interest 63,600 57,020
Provision for income taxes 22,880 21,096
------- -------
Income before minority interest 40,720 35,924
Minority interest 1,416 2,330
------- -------
Net income $ 39,304 $ 33,594
======= =======
Earnings per share:
Basic $ .35 $ .30
==== ====
Diluted $ .35 $ .30
==== ====
Shares used in the computation of earnings per share:
Basic 112,709 112,110
======= =======
Diluted 113,799 113,562
======= =======
Cash dividends per common share $ .14 $ .12
==== ====
The accompanying notes are a part of the consolidated financial statements.
BIOMET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the three months ended August 31, 1999 and 1998
(in thousands)
1999 1998
---- ----
Cash flows from (used in) operating activities:
Net income $ 39,304 $ 33,594
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation 5,654 4,856
Amortization 1,782 2,002
Gain on sale of investments, net (139) (600)
Minority interest 1,416 2,330
Deferred federal income taxes (90) (121)
Changes in current assets and liabilities,
excluding effects of acquisitions:
Accounts and notes receivable, net (5,987) (4,191)
Inventories (6,934) (3,994)
Prepaid expenses and other 208 10,812
Accounts payable 2,398 (2,467)
Accrued income taxes 11,002 15,701
Accrued wages and commissions (1,833) (1,434)
Other accrued expenses 1,788 (5,246)
------- ------
Net cash from operating activities 48,569 51,242
------- ------
Cash flows from (used in) investing activities:
Proceeds from sales and maturities of investments 5,890 10,595
Purchases of investments (5,965) (41,268)
Capital expenditures (10,674) (10,792)
Acquisitions, net of cash acquired (3,733) --
Other (423) (2,388)
------- ------
Net cash used in investing activities (14,905) (43,853)
------- ------
Cash flows from (used in) financing activities:
Increase (decrease) in short-term borrowings, net 12,754 (310)
Issuance of common shares 2,093 513
Cash dividends (15,786) (13,453)
------- ------
Net cash used in financing activities (939) (13,250)
------- ------
Effect of exchange rate changes on cash (1,816) 846
------- ------
Increase (decrease) in cash and cash equivalents 30,909 (5,015)
Cash and cash equivalents, beginning of year 129,359 117,089
------- -------
Cash and cash equivalents, end of period $160,268 $112,074
======= =======
The accompanying notes are a part of the consolidated financial statements.
BIOMET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION.
The accompanying consolidated financial statements include the accounts of
Biomet, Inc. and its subsidiaries (individually and collectively referred to as
the "Company"). The unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Rule
10-01 of Regulation S-X. Accordingly, they do not include all of the
information and notes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three-month period
ended August 31, 1999 are not necessarily indicative of the results that may be
expected for the fiscal year ending May 31, 2000. For further information,
refer to the consolidated financial statements and notes thereto included in
the Company's Annual Report on From 10-K for the fiscal year ended May 31, 1999.
The accompanying consolidated balance sheet at May 31, 1999, has been derived
from the audited Consolidated Financial Statements at that date, but does not
include all disclosures required by generally accepted accounting principles.
The Company has one reportable segment, orthopedic products, which includes
designing, manufacturing and marketing of reconstructive products, fixation
devices, spinal products and other. Other products consist primarily of
Arthrotek's arthroscopy products, AOA's softgoods products, general instruments
and operating room supplies. The Company manages its business segments
primarily on a geographic basis. These geographic segments are comprised of
the United States, Europe and other. Other geographic segments include Canada,
South America, Mexico, Japan, and the Pacific Rim.
Net sales of orthopedic products by product category are as follows for the
three months ended August 31:
1999 1998
---- ----
(in thousands)
Reconstructive $112,520 $103,748
Fixation 42,034 39,442
Spinal products 12,168 9,757
Other 25,429 23,717
------- -------
$192,151 $176,664
======= =======
NOTE 2: COMPREHENSIVE INCOME.
Other comprehensive income includes foreign currency translation adjustments
and unrealized appreciation of available-for-sale securities, net of taxes.
Other comprehensive income (loss) for the three months ended August 31, 1999
and 1998 was $(2,754) and $(287), respectively. Total comprehensive income
combines reported net income and other comprehensive income. Total
comprehensive income for the three months ended August 31, 1999 and 1998 was
$36,550 and $33,307, respectively.
NOTE 3: INVENTORIES.
Inventories at August 31, 1999 and May 31, 1999 are as follows:
August 31, May 31,
1999 1999
---------- -------
(in thousands)
Raw materials $ 26,957 $ 26,372
Work-in-process 26,169 24,221
Finished goods 91,968 87,362
Consigned inventory 70,760 67,283
------- -------
$215,854 $205,238
======= =======
NOTE 4: COMMON SHARES.
During the three months ended August 31, 1999, the Company issued 244,050 Common
Shares upon the exercise of outstanding stock options for proceeds aggregating
$2,092,745.
NOTE 5: EARNINGS PER SHARE.
Earnings per common share amounts ("basic EPS") are computed by dividing net
income by the weighted average number of common shares outstanding and excludes
any potential dilution. Earnings per common share amounts assuming dilution
("diluted EPS") are computed by reflecting potential dilution from the
exercise of stock options.
NOTE 6: INCOME TAXES.
The difference between the reported provision for income taxes and a provision
computed by applying the federal statutory rate to pre-tax accounting income is
primarily attributable to state income taxes, tax benefits relating to
operations in Puerto Rico, tax-exempt income and tax credits.
NOTE 7: PROPOSED ACQUISITION.
On August 28, 1999, the Company and Implant Innovations International
Corporation ("3i") entered into an Agreement and Plan of Merger (the "Merger
Agreement") whereby the Company will acquire all of 3i's outstanding shares in a
stock-for-stock merger transaction intended to be accounted for as a
pooling-of-interests. The agreement is subject to certain collar provisions,
which among other things, limits the number of the Company's common shares to
be exchanged for 3i stock to a minimum of 4.0 million and a maximum of 5.2
million. The merger transaction is subject to regulatory approvals, approval of
the shareholders of 3i and other terms and conditions set forth in the Merger
Agreement.
NOTE 8: CONTINGENCIES.
On August 27, 1999, the United States District Court for the Southern District
of Florida (the "District Court") entered a final judgment of $53,530 against
the Company in the Raymond G. Tronzo ("Tronzo") case. In January 1996, a jury
returned a verdict in a patent infringement matter in favor of Tronzo which
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 further consideration on the state law claims
only. Although the Company welcomes the fact that the District Court has now
greatly reduced the prior judgment, the Company continues to believe that it
engaged in no wrongdoing in the matter. This final judgment will not have a
material adverse effect on the Company's consolidated financial position or its
future business operations and all funds previously escrowed in this case have
now been returned to the Company. Tronzo has filed a notice of appeal of the
District Court's final judgment with the Federal Circuit; however, management is
confident it will continue to prevail in this case.
On June 30, 1999, the United States Court of Appeals for the Third Circuit (the
"Third Circuit") significantly reduced the judgment previously entered against
the Company and its wholly-owned subsidiaries, Electro-Biology, Inc. and EBI
Medical Systems, Inc. and in favor of Orthofix SRL ("Orthofix"). The Third
Circuit upheld the trial court's award of compensatory damages to Orthofix in
the amount of $48,875,397; however, it virtually eliminated the $50 million
punitive damage award, reducing it to $1 million. The Company and Orthofix
filed petitions for rehearing with the Third Circuit and both petitions were
denied. The Company is currently considering whether to appeal the Third
Circuit's decision to the United States Supreme Court. As a result of the Third
Circuit's decision, and consultation with outside legal counsel, the Company
recorded a special charge of $55 million, including interest of $5.1 million in
its fiscal 1999 consolidated financial statements. On August 31, 1999, the
Company's investments on the consolidated balance sheet include $108 million of
investment securities which have been delivered to an escrow agent pursuant to
an order of the trial court and related to the trial court's judgment in this
case.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION AS OF AUGUST 31, 1999
The Company's cash and investments increased $28,429,000 to $364,725,000 at
August 31, 1999, despite the $15,786,000 cash dividend paid during the first
quarter.
Cash flows provided by operating activities were $48,569,000 for the first three
months of fiscal 2000 compared to $51,242,000 in 1999. The primary sources of
fiscal year 2000 cash flows from operating activities were net income and an
increase in accrued income taxes. Accrued income taxes increased in the first
quarter because there is no federal tax estimate due in the first quarter.
Cash flows used in investing activities were $14,905,000 for the first three
months of fiscal 2000 compared to a use of $43,853,000 in 1999. The primary
source of cash flows from investing activities were sales and maturities of
investments offset by purchases of investments and purchases of capital
equipment.
Cash flows used in financing activities were $939,000 for the first three months
of fiscal 2000 compared to a use of $13,250,000 in 1999. The primary use of
cash flows from financing activities was the cash dividend paid in the first
quarter while the primary source of cash flows from financing activities was
from increasing short-term borrowings used by BioMer in its operations. In
June 1999, the Company's Board of Directors declared a cash dividend of fourteen
cents ($.14) per share payable to shareholders of record at the close of
business on July 9, 1999.
Currently available funds, together with anticipated cash flows generated from
future operations, are believed to be adequate to cover the Company's
anticipated cash requirements, including capital expenditures, research and
development costs and litigation settlements, if any.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED AUGUST 31, 1999
AS COMPARED TO THE THREE MONTHS ENDED AUGUST 31, 1998
Net sales increased 9% to $192,151,000 for the three-month period ended August
31, 1999, from $176,664,000 for the same period last year. Elective surgery-
related products appear to be influenced to some degree by seasonal factors, as
the number of elective orthopedic procedures decline during the summer months
and the holiday season. The Company's U.S.-based revenue increased 10% to
$132,286,000 during the first three months, while foreign sales increased 5% to
$59,865,000, net of a negative foreign exchange adjustment of approximately
$2,000,000. Biomet's worldwide sales of reconstructive products during the
first three months of fiscal 2000 were $112,520,000, representing an 8% increase
compared to the first three months of last year. This increase was primarily a
result of Biomet's continued penetration of the reconstructive device market led
by revision products, the Repicci Unicondylar Knee and the Ascent Total Knee
System. Sales of fixation products were $42,034,000 for the first three months
of fiscal 2000, representing a 7% increase as compared to the same period in
1999. Sales of spinal products were $12,168,000 for the first three months of
fiscal 2000, representing a 25% increase as compared to the same period in 1999.
The Company's sales of other products totaled $25,429,000, representing a 7%
increase over the first three months of fiscal year 1999, primarily as a result
of increased sales of softgood and Arthroscopy products.
Cost of sales decreased as a percentage of net sales to 29.6% for the first
three months of fiscal 2000 from 30.3% last year primarily as a result of
increased sales of higher margin products, increased in-house manufacturing
efficiencies, improved margins realized through acquisitions of international
distributors and the higher growth rate of U.S. sales compared to international
sales. Selling, general and administrative expenses as a percentage of net
sales remained the same at 34.5% for both periods presented. Research and
development expenditures increased during the first three months to $8,538,000
reflecting the Company's continued emphasis on new product introductions.
Operating income rose 12% from $54,176,000 for the first three months of fiscal
1999, to $60,481,000 for the first three months of fiscal 2000. Other income
increased 10% resulting from the increase in the Company's investable cash. The
effective income tax rate decreased to 36.0% for the first quarter of fiscal
year 2000 from 37.0% last year primarily as a result of U.S. pretax income
growing at a higher rate than international pretax income where tax rates are
higher.
These factors resulted in a 17% increase in net income to $39,304,000 from
$33,594,000 for the first three months of fiscal 2000 as compared to the same
period in fiscal 1999. Basic and diluted earnings per share increased 17%, from
$.30 to $.35 for the periods presented.
YEAR 2000
The Year 2000 ("Y2K") issue stems from the way dates are recorded in many
computer-dependent products and software programs. As the century date change
occurs, date-sensitive systems may recognize the year 2000 as the year 1900, or
not at all. This inability to recognize or properly treat the year 2000 may
cause systems to process financial or operations information incorrectly.
The Company recognized this challenge early and started work in 1997. The
Company's Y2K strategy to make systems Y2K compliant includes a common
Company-wide focus on policies, methods and correction tools, and coordination
with customers and suppliers. This focus has been on all systems potentially
impacted by the Y2K issue, including information technology ("IT") systems and
non-IT systems or embedded technology such as microcontrollers contained in
various manufacturing and lab equipment, environment and safety systems,
facilities and utilities. Each operating unit has responsibility for its own
conversion, in line with overall guidance and oversight provided by a
corporate-level task force.
The majority of the most vital information systems of the Company are now Y2K
compliant. Three of the Company's European subsidiaries are undergoing computer
hardware and software upgrades to ensure Y2K compliance. Two of these upgrades
have been completed during the past two months, while the third is scheduled for
completion November 30, 1999. The Company is presently completing compliancy
testing and finalizing contingency plans.
A Company-wide process to assess key supplier readiness is ongoing. The Company
is unable to definitively determine that all key suppliers will reach a Y2K
compliant status that will ensure no production disruptions from suppliers.
The Company's Y2K conversion efforts have not been budgeted or tracked as
separate projects, but have occurred in conjunction with normal sustaining
activities. These costs are expensed as incurred and are being funded through
operating cash flows. These costs have not had, and are not expected to have,
an adverse impact on operating results.
The Company believes there is low risk of any internal critical system, embedded
system or critical asset not being Y2K compliant by the end of calendar 1999.
The Company continues to assess its risk exposure attributable to external
factors, such as suppliers, both domestic and international. Although the
Company has no reason to conclude that any specific supplier poses a risk, there
does exist the possibility of production disruption due to inability of
suppliers to deliver critical materials or processes. The Company is unable to
quantify such a scenario, but it could result in a material adverse impact on
results of operations or financial position of the Company. Contingency plans
for suppliers and critical systems are being developed to lessen the impact of a
worse-case Y2K scenario.
PROPOSED ACQUISITION
As discussed in Note 7 of the Notes to Consolidated Financial Statements, on
August 28, 1999, the Company and Implant Innovations International Corporation
entered into an Agreement and Plan of Merger.
PART II. OTHER INFORMATION
Item 1: Legal Proceedings.
On August 27, 1999, the United States District Court for the Southern District
of Florida (the "District Court") entered a final judgment of $53,530 against
the Company in the Raymond G. Tronzo ("Tronzo") case. In January 1996, a jury
returned a verdict in a patent infringement matter in favor of Tronzo which
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 further consideration on the state law claims
only. Although the Company welcomes the fact that the District Court has now
greatly reduced the prior judgment, the Company continues to believe that it
engaged in no wrongdoing in the matter. This final judgment will not have a
material adverse effect on the Company's consolidated financial position or its
future business operations and all funds previously escrowed in this case have
now been returned to the Company. Tronzo has filed a notice of appeal of the
District Court's final judgment with the Federal Circuit; however, management is
confident it will continue to prevail in this case.
On June 30, 1999, the United States Court of Appeals for the Third Circuit (the
"Third Circuit") significantly reduced the judgment previously entered against
the Company and its wholly-owned subsidiaries, Electro-Biology, Inc. and EBI
Medical Systems, Inc. and in favor of Orthofix SRL ("Orthofix"). The Third
Circuit upheld the trial court's award of compensatory damages to Orthofix in
the amount of $48,875,397; however, it virtually eliminated the $50 million
punitive damage award, reducing it to $1 million. The Company and Orthofix
filed petitions for rehearing with the Third Circuit and both petitions were
denied. The Company is currently considering whether to appeal the Third
Circuit's decision to the United States Supreme Court. As a result of the Third
Circuit's decision, and consultation with outside legal counsel, the Company
recorded a special charge of $55 million, including interest of $5.1 million in
its fiscal 1999 consolidated financial statements. On August 31, 1999, the
Company's investments on the consolidated balance sheet include $108 million of
investment securities which have been delivered to an escrow agent pursuant to
an order of the trial court and related to the trial court's judgment in this
case.
Item 4. Submission of Matters to a Vote of Security Holders.
The Annual Meeting of Shareholders of the Company was held on September 18,
1999.
At the Annual Meeting:
1. The following persons were elected as Directors of the Company for a
three-year term expiring in 2002.
Name Votes For Votes Withheld
C. Scott Harrison, M.D. 106,817,514 414,540
Niles L. Noblitt 106,831,608 400,496
Kenneth V. Miller 106,788,840 443,264
L. Gene Tanner 106,811,506 420,598
Marilyn Tucker Quayle 106,407,460 824,544
The following directors will continue in office until their term expires at the
2000 Annual meeting of shareholders: Dane A. Miller, Ph. D., Jerry L. Ferguson,
Thomas F. Kearns, Jr., and Daniel P. Hann.
The following directors will continue in office until their term expires at the
2001 Annual meeting of shareholders: M. Ray Harroff, Jerry L. Miller, Charles E.
Niemier, and Prof. Dr. Bernhard Scheuble.
2. The selection of PricewaterhouseCoopers LLP as certified public accountants
for the Company for the fiscal year ending May 31, 2000 was ratified by the
shareholders, as follows: Votes For - 106,909,963; Votes Against - 60,480; and
Abstentions and Broker Non-Votes - 261,661.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits. See Index to Exhibits.
(b) Reports on Form 8-K. None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
BIOMET, INC.
- ------------
(Registrant)
DATE: 10/12/99 BY: /s/ GREGORY D. HARTMAN
-------- -------------------------
Gregory D. Hartman
Vice President - Finance
(Principal Financial Officer)
(Signing on behalf of the Registrant
and as Principal Financial Officer)
BIOMET, INC.
FORM 10-Q
INDEX TO EXHIBITS
Sequential
Number Assigned Numbering System
in Regulation S-K Page Number
Item 601 Description of Exhibit of Exhibit
- ----------------- -------------------------------- ----------------
(2) No exhibit.
(4) 4.1 Specimen certificate for Common
Shares. (Incorporated by reference
to Exhibit 4.1 to the registrant's
Report on Form 10-K for the fiscal
year ended May 31, 1985).
4.2 Rights Agreement between Biomet,
Inc. and Lake City Bank, as Rights
Agent, dated as of December 2, 1989.
(Incorporated by reference to Exhibit
4 to Biomet, Inc. Form 8-K Current Report
dated December 22, 1989, File No. 0-12515).
(10) No exhibit.
(11) No exhibit.
(15) No exhibit.
(18) No exhibit.
(19) No exhibit.
(22) No exhibit.
(23) No exhibit.
(24) No exhibit.
(27) Financial data schedules.
(99) No exhibit.