-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, F6LOZYO9dyWelFYUi3k/bpaSBmwlfZOAKDV/6iiSrm1tEClW82Zs2iLsbgJBtn5J GVk4U4xAF1HW+sIOzY/vhA== 0000310764-96-000004.txt : 19960329 0000310764-96-000004.hdr.sgml : 19960329 ACCESSION NUMBER: 0000310764-96-000004 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960328 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: STRYKER CORP CENTRAL INDEX KEY: 0000310764 STANDARD INDUSTRIAL CLASSIFICATION: SURGICAL & MEDICAL INSTRUMENTS & APPARATUS [3841] IRS NUMBER: 381239739 STATE OF INCORPORATION: MI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-09165 FILM NUMBER: 96540059 BUSINESS ADDRESS: STREET 1: 2725 FAIRFIELD ROAD CITY: KALAMAZOO STATE: MI ZIP: 49002 BUSINESS PHONE: 6163852600 MAIL ADDRESS: STREET 1: P.O. BOX 4085 CITY: KALAMAZOO STATE: MI ZIP: 49003-4085 10-K 1 Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1995 ----------------- 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 0-9165 ------ STRYKER CORPORATION ------------------------------------------------------ (Exact name of registrant as specified in its charter) Michigan 38-1239739 - ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) P.O. Box 4085, Kalamazoo, Michigan 49003-4085 - ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 616/385-2600 ------------ Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK $.10 PAR VALUE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Based on the closing sales price of February 29, 1996 the aggregate market value of the voting stock held by nonaffiliates of the registrant was approximately $1,818,000,000. The number of shares outstanding of the registrant's common stock, $.10 par value, was 48,575,841 at February 29, 1996. DOCUMENTS INCORPORATED BY REFERENCE Portions of the annual stockholders report for the year ended December 31, 1995 are incorporated by reference into Parts II and IV. Portions of the proxy statement filed with the Securities and Exchange Commission relating to the 1996 Annual Meeting of Stockholders (the "1996 proxy statement") are incorporated by reference into Part III. PART I ITEM I. BUSINESS GENERAL Stryker Corporation and its subsidiaries (the "Company" or "Stryker") develop, manufacture and market specialty surgical and medical products, including orthopaedic implants, powered surgical instruments, endoscopic systems and patient care and handling equipment for the global market and provide physical therapy services in the United States. Stryker was incorporated in Michigan in 1946 as the successor company to a business founded in 1941 by Dr. Homer H. Stryker, a leading orthopaedic surgeon and the inventor of several orthopaedic products. In October 1992, the Company's subsidiary, Stryker France S.A., acquired Dimso S.A. and its subsidiary companies in France and Spain. Dimso designs and manufactures the Diapason and Stryker 2S spinal implant systems in addition to other orthopaedic products. The Company's European Division had previously marketed the Stryker 2S spinal implant system since 1990. In August 1993, the Company purchased 20% of the outstanding common stock of Matsumoto Medical Instruments, Inc. ("Matsumoto"), Osaka, Japan. Matsumoto is one of the largest distributors of medical devices in Japan and is the exclusive distributor of Stryker products in that country. In August 1994, the Company purchased an additional 31% of Matsumoto's outstanding common stock, thereby increasing its direct ownership in Matsumoto to 51%. The results of operations for Matsumoto were consolidated with Stryker beginning in August 1994. In June 1994, the Company purchased the Steri-Shield product line, which is a personal protection system for operating room personnel, from a private company. The Company's subsidiary, Physiotherapy Associates, Inc., has also purchased a number of physical therapy clinic operations during each of the last five years. PRODUCT SALES The principal classes of products listed below accounted for the following amounts ($000's) and percentages of net sales during each of the three years ended December 31: 1995 1994 1993 ______________ ______________ ______________ $ % $ % $ % ________ ____ ________ ____ ________ ____ Stryker Surgical Products $608,646 70% $502,961 74% $447,042 80% Stryker Medical Products 158,516 18 135,520 20 110,293 20 Matsumoto Distributed Products 104,790 12 43,439 6 -- -- ________ ____ ________ ____ ________ ____ $871,952 100% $681,920 100% $557,335 100% ======== ==== ======== ==== ======== ==== Approximately two-thirds of the Company's sales in 1995 and 1993 and approximately 60% of the Company's sales in 1994 consisted of products with short lives and service revenues, such as implants (while implants have a long useful life to the patient, they have a one-time use to the hospital), physical therapy revenues, disposables, expendable tools and parts and service and repair charges. The balance of sales in each of the years were of products that could be considered capital equipment, having useful lives in excess of one year. The Company's backlog of firm orders is not considered material to an understanding of its business. STRYKER SURGICAL PRODUCTS Stryker Surgical products are designed and manufactured by Osteonics, Allendale, New Jersey; Dimso, Bordeaux, France; Stryker Instruments, Kalamazoo, Michigan; and Stryker Endoscopy, Santa Clara, California. The principal specialty served by Stryker Surgical products is orthopaedics. Orthopaedic reconstructive products, such as hip, knee and spinal implants, heavy-duty powered instruments, pulsating irrigation systems, cement injection systems, medical video cameras and arthroscopes are manufactured and marketed for use by the orthopaedic surgeon. Osteonics designs and manufactures innovative total and partial hip and knee replacements for sale around the world. These artificial implants are made of cobalt chrome or titanium alloys and are implanted in patients whose natural joints have been damaged by arthritis, osteoporosis, other diseases or injury. In late 1990, Osteonics became the first company to receive clearance from the U.S. Food & Drug Administration (FDA) to commercially release for sale in the U.S. a hip implant with HA surface treatment. HA is a naturally occurring calcium phosphate material that demonstrates a high level of biocompatibility due to its resemblance to human bone. Osteonics' clinical experience with HA- coated hip stems now extends over eight years and their clinical performance continues to equal or exceed that of any comparable stem reported in the scientific literature. Dimso designs and manufactures spinal implant systems for use by spinal surgeons in the treatment of degenerative spinal diseases and deformities and to stabilize the spine in trauma cases. During 1995, Osteonics began to market a version of the Dimso spinal implant system in the United States following the receipt of U.S. FDA acceptance for limited surgical indications. Stryker's broad line of powered surgical drills, saws, fixation and reaming equipment and other surgical instruments are used by surgeons for drilling, burring, rasping or cutting bone, wiring or pinning bone fractures, preparing hip or knee surfaces for the placement of artificial hip or knee joints, performing cranial operations or treating skin defects by surgical abrasion. Hundreds of different sized and shaped drill bits, burrs, blades, chisels and other attachments are available to the surgeon. In conjunction with joint replacement surgery, the Company's High Vacuum Cement Injection System is used to mix and inject cement under high vacuum for cemented implant applications. SurgiLav Plus(R), the Company's disposable, self-contained pulsed lavage system, is used to cleanse the surgical site during joint replacement surgery. The Company's endoscopic systems include medical video cameras, light sources, arthroscopes, laparoscopes, powered instruments and manual instruments. These systems are used in less-invasive surgery, such as arthroscopy and cholecystectomy (gall bladder removal), in which the surgeon operates on a patient through a series of small punctures rather than through an open incision as required by conventional surgery. Small, light, "micro" powered tools produced by Stryker Instruments and Stryker Endoscopy are used in such specialties as maxillofacial surgery, functional endoscopic sinus surgery, otology, neurosurgery, spinal surgery, podiatry and plastic surgery. In addition, the oral surgeon is served by the Company's line of powered oral surgery instruments. The Company also produces a number of other operating room or surgery related products. The Company's CBC-ConstavacTM system is a post-operative wound drainage and blood reinfusion device that enables joint replacement patients to receive their own blood rather than donor blood. The Steri-Shield(R) Personal Protection System product line purchased in 1994 is an enclosed hood and toga that helps protect operating room personnel against contamination from blood and airborne particles. STRYKER MEDICAL PRODUCTS Stryker Medical products consist of specialty hospital beds and stretchers and general patient room beds manufactured by the Company's Medical Division in Kalamazoo, Michigan and Clackamas, Oregon and rehabilitation services provided through Physiotherapy Associates, Inc. The Medical Division designs and manufactures innovative specialty stretchers/beds for many departments within the hospital, including emergency, recovery, intensive care, surgery and maternity. These products service the particular treatment needs of each department by providing multiple or custom combinations of hydraulic jacks, removable top sections, built-in weighing systems, on-board x-ray equipment, patient-warming systems and a vast number of additional standard or optional features. In 1993, the Medical Division introduced its first general patient room bed, the MPS(TM) Acute Care Bed, which offers many innovative safety features including a stable twin pedestal design and Center of Gravity Bed Exit Alarm System. In 1994, the Medical Division introduced its Rugged(TM) Ambulance Cot which is purchased by ambulance services and used for patient transport. Medical Division products are generally assembled on a design-to-order basis. Stryker Medical product sales also include revenue of the Company's Physiotherapy Associates, Inc. subsidiary. This organization operates outpatient rehabilitation centers, which offer physical, occupational and speech therapy to patients who have suffered orthopaedic or neurological injuries. It focuses, in particular, on expediting injured workers' return to work. Physiotherapy Associates, Inc. is headquartered in Memphis, Tennessee and operates 158 outpatient physical therapy centers in 19 states. MATSUMOTO DISTRIBUTED PRODUCTS Matsumoto Distributed Products represent products sourced by Matsumoto Medical Instruments, Inc., the Company's 51% owned subsidiary, from other companies for sale in Japan. These products are sold for use in the areas of orthopaedics, ophthalmology, general surgery and emergency care. PRODUCT DEVELOPMENT Most of the Company's products and product improvements have been developed internally. In addition, the Company maintains close working relationships with physicians and medical personnel in hospitals and universities who assist in product research and development. New and improved products play a critical role in the Company's sales growth. The Company has placed increased emphasis on the development of proprietary products and product improvements to complement and expand its existing product lines. Total expenditures for product research, development and engineering were $43,771,000 in 1995; $39,630,000 in 1994; and $36,199,000 in 1993. Research, development and engineering expenses increased in 1995 and 1994 due principally to the development of new implant designs (the Omnifit Plus forged cobalt chrome hip stem was developed in 1994 and the Secur-Fit(TM) HA total hip implant system and Restoration(TM) HA Hip System for revision surgery were developed in 1995), further enhancements to instrumentation related to knee replacement procedures, including development of the Insight Positioning and Alignment System in 1995, the development of advanced powered instruments and video technology (a new line of powered micro instruments for oral/maxillofacial procedures, the Sapphire View(TM) arthroscope system and a low cost high resolution 1-chip camera, all introduced in 1994 and the 4100 Cordless Driver, the first battery-powered wire driver, the next generation 810 3-Chip(R) Camera System and the StrykeFlow suction/irrigator for laparoscopic surgery, all introduced in 1995), the development of new specialized operating room equipment (the second generation ConstaVac(TM) CBCII Blood Conservation System introduced in 1994), the development of new patient handling equipment (the Rugged(TM) Ambulance Cot introduced in 1994 and the Stryker Stretcher Chair introduced in 1995) and ongoing clinical trials of the Company's OP-1 bone growth device. In 1991 the Company received FDA approval to begin human clinical trials of its OP-1 bone growth device which was developed by Creative BioMolecules, Inc. (Creative), a biopharmaceutical company, as part of a long-term research program funded by Stryker since 1985. This device is composed of a recombinant human osteogenic protein (OP-1) and a bioresorbable carrier. This osteogenic protein is naturally present in the human body and directs a cascade of cellular events that result in bone growth. In preclinical studies, OP-1 has induced the formation of new bone when implanted into bone defect sites. The ongoing human clinical studies, which began in 1992, will compare the efficacy of the OP-1 bone growth device to autografts in the repair of non-union fractures in the tibia. In late 1995, the FDA allowed the Company to enlarge the scope of these trials for expanded indications of non- union fractures in all long bones. Stryker owns the patents on osteogenic protein technology and has the exclusive right under those patents to develop, market and sell OP-1 for treatment, repair or replacement of bone and joint tissue. Creative has exclusive license to the technology under the patents for use in other applications. Others, including Genetics Institute, Inc., are also attempting to develop osteogenic proteins for the treatment, repair or replacement of bone and joint tissue. These other companies have filed and obtained patents in the U.S. and elsewhere claiming such proteins and methods of making and using them and may in the future file and obtain other such patents. The Company can provide no assurance that it will not need a license under one or more of those patents to market or sell OP-1 for treatment, repair or replacement of bone and joint tissue or whether such licenses will be available. MARKETING Most of the Company's products are marketed in the United States directly to more than 5,000 hospitals, and to doctors and other health care facilities, by the Company's sales force consisting of approximately 340 salespersons. Stryker maintains separate and dedicated sales forces for each of its principal product lines to provide focus and a high level of expertise to each medical specialty served. Certain products, primarily orthopaedic implants, are sold to hospitals in the United States through both direct sales forces and independent dealer organizations. Approximately 30% of the Company's domestic revenues in 1995 were accounted for by sales to hospital cooperative buying groups and other large national accounts and 1% by sales to the Veterans Administration and other hospitals operated by the Federal government. International sales accounted for 45% of total revenues in 1995. Stryker products are sold in over 100 foreign countries primarily through more than 400 local dealers whose efforts are coordinated by approximately 580 sales and marketing personnel who are local nationals. Certain limited markets are served through direct sales efforts. Stryker distributes its products through sales subsidiaries and branches with offices located in The Netherlands, Belgium, Finland, France, Germany, Italy, Spain, Switzerland, the United Kingdom, Australia, Hong Kong, Japan, Canada and Mexico. Stryker exports products to dealers and to customers in Latin America, the Middle East, Singapore, Korea, India, Taiwan, Malaysia, the CIS (former Soviet Union) and China. Additional information regarding the Company's foreign and domestic operations and export sales appearing in "Note 9--Geographic Data" on page 34 of the 1995 Annual Report is incorporated herein by reference. The Company's business is generally not seasonal in nature; however, the number of orthopaedic surgeries is lower during the summer months. COMPETITION The Company is one of the six leading competitors in the U.S. market for orthopaedic reconstructive products, the others being Zimmer, USA Inc. (a subsidiary of Bristol-Myers, Squibb, Inc.), DePuy (a subsidiary of Boehringer Mannheim Corporation, a German company), Howmedica, Inc. (a subsidiary of Pfizer, Inc.), Biomet and J&J Professional, Inc. (a subsidiary of Johnson & Johnson). While competition abroad varies from area to area, the Company believes it is also a leading factor in the international markets, with these same companies being its principal competitors. In the international market for spinal implants, the Company is one of the four market leaders through its Dimso S.A. subsidiary, with the principal competitors being Sofamor Danek Group, Inc., AcroMed Corporation and the Synthes companies. The Company entered the U.S. market for spinal implants during 1995 and faces competition from these same companies. In the powered surgical instruments market, Stryker is one of the three market leaders, with the principal domestic competitors being Zimmer and Midas-Rex, Inc.. These same companies are competitors in the international markets along with Aesculap-Werke AG, a large European manufacturer, In the arthroscopy market, the Company considers itself to be one of the three market leaders, with the principal competitors being Smith & Nephew Endoscopy (a division of Smith & Nephew PLC) and Linvatec, Inc. (a subsidiary of Bristol-Myers, Squibb, Inc.). In the laparoscopic imaging products market, the Company considers itself to be one of the four market leaders, with the principal competitors being Karl Storz GmbH & Co. (a German company), Circon Corporation and Olympus Optical Co. Ltd. (a Japanese company). The Company's primary competitor in the hospital bed market is Hill-Rom (a division of Hillenbrand Industries) and in the specialty stretcher market the primary competitors are Ferno-Washington, Hausted, Inc., Hill-Rom and Midmark Corporation. In the outpatient physical therapy market, the Company's primary competitors are physician owned/independent practices and hospital-based services. There are also several other national rehabilitation companies, such as HealthSouth Corporation and NovaCare, Inc. In the area of research and development of the Company's OP-1 bone growth device with Creative Biomolecules, Inc., the Company believes that several companies are engaged in the research and development of morphogenic proteins for the repair of hard and soft tissues. Genetics Institute, Inc., a company in which American Home Products Corporation holds a majority interest, has also begun human clinical trials of a recombinant bone morphogenetic protein for repair of orthopaedic and other skeletal defects. A number of other companies currently provide various other therapies, including allografts, bone fillers and electrical stimulation devices, for the treatment, repair or replacement of bone and joint tissue. The Company's OP-1 bone growth device would ultimately compete with these products and traditional therapies such as autografts. The principal factors which the Company believes differentiate its products in these highly competitive markets and enable it to compete effectively are innovative products, reliability, service and reputation. The Company is not able to predict the effect that continuing efforts to reduce health care expenses generally and hospital costs in particular will have on the future sales of its products or its competitive position. (See "Regulation and Product Quality.") The Company believes that its competitive position in the future will depend to a large degree upon the new products and improvements in existing products it is able to develop. While the Company does not consider patents a major factor in its overall competitive success, patents and trademarks are significant to the extent that a product or attribute of a product represents a unique design or process. Patent or trademark protection of such products restricts competitors from duplicating these unique product designs and features. Stryker seeks to obtain patent protection whenever possible on its products. The Company currently has approximately 120 U.S. patents and 70 foreign patents which generally expire in the next 10-15 years. MANUFACTURING AND SOURCES OF SUPPLY The Company's manufacturing processes consist primarily of precision machining, metal fabrication, assembly operations and the investment casting of cobalt chrome and finishing of cobalt chrome and titanium. Approximately 23% of the Company's cost of sales in 1995 represented finished products which were purchased complete from outside suppliers. The Company also purchases parts and components, such as forgings, castings, gears, bearings, casters and electrical components and uses outside sources for certain finishing operations such as plating, hardening and coating of machined components and sterilization of certain products. The principal raw materials used by the Company are stainless steel, aluminum, cobalt chrome and titanium alloys. In all, purchases from outside sources were approximately 48% of the total cost of sales in 1995. While the Company relies on single sources for certain purchased materials and services, it believes alternate sources are available if needed. The Company has not experienced any significant difficulty in the past in obtaining the materials necessary to meet its production schedules. Products manufactured by the Company's Medical Division are generally assembled to order, while other products are stocked in inventory. REGULATION AND PRODUCT QUALITY The Medical Device Amendments of 1976 to the Federal Food, Drug and Cosmetic Act, the Safe Medical Devices Act of 1990, and regulations issued or proposed thereunder, provide for regulation by the FDA of the manufacture of medical devices, including most of the Company's products. The FDA's "Good Manufacturing Practices" regulations set forth standards for the Company's manufacturing processes, require the maintenance of certain records and provide for unscheduled inspections of the Company's facilities by the FDA. There are also certain requirements of state, local and foreign governments which must be complied with in the manufacturing and marketing of the Company's products. The Company believes that the manufacturing and quality control procedures it employs meet the requirements of these regulations. Most of the Company's new products fall into FDA classifications which require notification of and review by the FDA before marketing (submitted as a 510(k)). The Company's Osteogenic Protein Device (see "Product Development") requires extensive clinical testing, consisting of safety and efficacy studies, followed by a Pre-Market Approval (PMA) application. The Company currently is in the clinical testing stage of this process and has not yet filed a PMA application. A panel of industry and medical experts will review the results of clinical studies and make their recommendations to the FDA. If there is a positive recommendation by the panel, the FDA may grant a PMA allowing the product to be marketed. Stryker also is subject to the laws that govern the manufacture and distribution of medical devices of each country in which the Company manufactures or sells products. The member states of the European Union ("EU") have adopted the European Medical Device Directives, which create a single set of medical device regulations for all EU member countries. These regulations require companies that wish to manufacture and distribute medical devices in EU member countries to obtain CE marks for their products by June 14, 1998. Stryker has received authorization to apply the CE mark to its hip, knee and spinal implant products and continues to work to obtain CE marks for all other products that it will manufacture or distribute in EU member states. Government agencies and legislative bodies in the United States and other countries are considering various proposals designed to hold down increases in health care costs. It is impossible to predict at this time the long-term impact of such cost containment measures on the Company's future business. EMPLOYEES At December 31, 1995, the Company had 4,629 employees worldwide, including 1,348 involved in manufacturing, warehousing and distribution operations, 1,205 in marketing and sales, 240 in research, development and engineering, 605 providing physical, occupational and speech therapy and the balance in general management and administration. No employees are covered by collective bargaining agreements. The Company believes that its employee relations are satisfactory. ITEM 2. PROPERTIES The Company's principal owned domestic facilities are located in Kalamazoo and Portage, Michigan. A 212,000 square foot Portage facility completed in 1992 houses manufacturing (86,000 square feet) and warehousing and distribution (25,000 square feet) for surgical instrument products, with the remaining portion of the facility used for Division offices. The Medical Division is located in two facilities, one in Portage which was completed in 1985 and contains manufacturing and warehousing (127,000 square feet) and Division offices (23,000 square feet), and another in Kalamazoo which contains manufacturing and warehousing (64,000 square feet) and offices (22,000 square feet). The Medical Division also leases 11,000 square feet of warehousing space in Kalamazoo. The Company leases 198,000 square feet in an industrial park in Allendale, New Jersey for its orthopaedic implant business, 115,000 square feet of which is used for manufacturing and warehousing; 111,000 square feet in Santa Clara, California for its endoscopy business, 49,000 square feet of which is used for manufacturing and warehousing; 28,000 square feet in Clackamas, Oregon for production of maternity beds and furniture; 41,000 square feet in Fenton, Missouri for its Medical service business; and 65,000 square feet in Arroyo, Puerto Rico for the manufacture of various products. The Company's 158 physical therapy clinics and its administrative offices are all located in leased offices which total 523,000 square feet. The Company's subsidiary, Matsumoto Medical Instruments, Inc., maintains its principal facilities in two buildings in Osaka, Japan, but also owns buildings used for branch warehousing and sales offices in eight other cities throughout Japan. Of the total owned 105,000 square feet, 37,000 square feet is devoted to warehousing, with the balance used for administrative offices. Matsumoto also leases 51,000 square feet at certain branch locations, with 27,000 square feet used for warehousing and 24,000 square feet used for administrative offices. In Europe, the Company maintains 33,000 square feet in Bordeaux, France (5,000 of which is leased) for its spinal implant manufacturing operation. Manufacturing and warehousing account for 26,000 square feet of the total and the remainder is used for administrative offices. The Company also leases other foreign sales and administration offices which total 163,000 square feet. In addition, the Company leases 12,000 square feet in Kalamazoo, Michigan for its administrative offices. ITEM 3. LEGAL PROCEEDINGS The Company is a defendant and plaintiff in various legal actions arising in the normal course of business. The Company does not anticipate material losses as a result of these actions. In July 1995, a decision was issued by a Federal District Court in a patent suit brought by the Company against Intermedics Orthopedics, Inc. and its distributor for infringement of the Company's U.S. patent on its Omniflex Hip System. The Court held that the Company's patent is valid and enforceable and that the Company is entitled to damages and attorney fees. In a subsequent decision, the Court fixed the damage award at $72,700,000, including interest. Intermedics has appealed the Court's decision. Until the appeal process is complete, management is unable to determine the financial impact of the Court's decision on the Company. Accordingly, the financial statements for the year ended December 31, 1995, incorporated herein by reference, do not give recognition to any gain which might ultimately be realized as a result of this decision. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. EXECUTIVE OFFICERS Certain information with respect to the executive officers of the Company is set forth in Item 10 of this report. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock is traded in the over-the-counter market on The Nasdaq Stock Market under the symbol STRY. Quarterly stock prices appearing under the caption "Summary of Quarterly Data" on page 36 of the 1995 Annual Report and dividend information for the years ended December 31, 1994 and 1995 under the caption "Ten Year Review" on page 18 of the 1995 Annual Report are incorporated herein by reference. The Company's Board of Directors intends to consider a year-end cash dividend annually at its December meeting. On December 31, 1993, the Company's Board of Directors authorized the repurchase in the open market from time to time, depending upon revailing market conditions, of up to 600,000 shares of its common stock. At March 20, 1996, 122,500 shares had been repurchased under this plan. On December 31, 1995 there were 3,260 stockholders of record of the Company's common stock. ITEM 6. SELECTED FINANCIAL DATA The financial information for each of the five years in the period ended December 31, 1995 under the caption "Ten Year Review" on pages 18 and 19 of the 1995 Annual Report is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 20 through 23 of the 1995 Annual Report is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements of the Company and its subsidiaries and report of independent auditors, included on pages 24 through 37 of the 1995 Annual Report are incorporated herein by reference. Quarterly results of operations appearing under the caption "Summary of Quarterly Data" on page 36 of the 1995 Annual Report are incorporated herein by reference. ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS Information regarding the directors of the Company appearing under the caption "Election of Directors" and the information appearing under the caption "Miscellaneous - Section 16 Reporting" in the 1996 proxy statement is incorporated herein by reference. Information regarding the executive officers of the Company appears below. All officers are elected annually. Reported ages are as of January 31, 1996. John W. Brown, age 61, has been Chairman of the Board since January 1981, and President and Chief Executive Officer of the Company since February 1977. He is also a director of Lunar Corporation, a medical products company, First of America Bank Corporation, a bank, the Health Industry Manufacturers Association and The American Business Conference. Dean H. Bergy, age 36, was appointed Controller upon joining the Company in June 1994. He had previously been a Senior Manager at Ernst & Young LLP, independent public accountants, since October 1988. Ronald A. Elenbaas, age 42, was appointed President of the Surgical Group in 1985 and has been a Vice President of the Company since August 1983. Previously he was the Director of Surgical Sales since May 1982. Since joining the Company in September 1975 he has held various other positions, including Sales Representative, Marketing Product Manager, Plant Manager, Canadian Sales Director, Assistant to the President and Director of Customer Relations. William T. Laube, III, age 56, was appointed President of Stryker Pacific Group in 1985 and has been a Vice President of the Company since March 1979. Since joining the Company in July 1975 he has held various international sales management positions. Edward B. Lipes, age 43, was appointed a Vice President of the Company in May 1994 and has been President of Osteonics Corp. since August 1989. He held the position of President, Physiotherapy Associates, Inc. upon joining the Company in April 1988. Julia M. Paradine-Rice, age 34, was appointed Treasurer of the Company in June 1994. She had previously held the position of Assistant Treasurer since 1990 and also held the position of Corporate Accounting Manager since joining the Company in 1988. David J. Simpson, age 49, was appointed Vice President, Chief Financial Officer and Secretary upon joining the Company in June 1987. He had previously been Vice President and Treasurer of Rexnord Inc., a manufacturer of industrial and aerospace products, since July 1985. Thomas R. Winkel, age 43, was appointed President of Stryker Americas/Middle East in March 1992 and has been a Vice President of the Company since December 1984. He had previously been Vice President, Administration since June 1987. Since joining the Company in October 1978 he has held various other positions, including Assistant Controller, Secretary and Corporate Controller. ITEM 11. EXECUTIVE COMPENSATION Information regarding the compensation of the management of the Company appearing under the captions "Director Compensation" and "Executive Compensation" in the 1996 proxy statement is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information under the captions "Beneficial Ownership of More than 5% of the Outstanding Common Stock" and "Beneficial Ownership of Management" in the 1996 proxy statement is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Not applicable. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (Executive compensation plans and arrangements are referenced as exhibits 10(i), (ii) and (iii).) (a)(1) and (2) - The response to this portion of Item 14 is submitted as a separate section of this report following the signature page. (a)(3) - Exhibits Exhibit 3 - Articles of Incorporation and By- Laws (i) Restated Articles of Incorporation and amendment thereto dated December 28, 1993--Incorporated by reference to Exhibit 3(i) to the Company's Form 10-K for the year ended December 31, 1993 (Commission File No. 0-9165). (ii) By-Laws--Incorporated by reference to Exhibit 3(ii) to the Company's Form 10-Q for the quarter ended June 30, 1988 (Commission File No. 0-9165). Exhibit 4 - Instruments defining the rights of security holders, including indentures--The Company agrees to furnish to the Commission upon request a copy of each instrument pursuant to which long-term debt of the Company and its subsidiaries not exceeding 10% of the total assets of the Company and its consolidated subsidiaries is authorized. Exhibit 10 - Material contracts (i)* 1988 Stock Option Plan as amended-- Incorporated by reference to Exhibit 10(i) to the Company's Form 10-K for the year ended December 31, 1992 (Commission File No. 0-9165). (ii)* Supplemental Savings and Retirement Plan (as Amended Effective January 1, 1995--Incorporated by reference to Exhibit 10(iii) to the Company's Form 10-K for the year ended December 31, 1994 (Commission File No. 0-9165) (iii)* Description of bonus arrangements between the Company and certain officers, including Messrs. Brown, Elenbaas, Laube, Lipes, Simpson and Winkel. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K --continued Exhibit 11 - Statement re computation of per share earnings (i) Statement Re: Computation of earnings per share of common stock. Exhibit 13 - Annual report to security holders (i) Portions of the 1995 Annual Report that are incorporated herein by reference. Exhibit 21 - Subsidiaries of the registrant (i) List of Subsidiaries. Exhibit 23 - Consents of experts and counsel (i) Consent of Independent Auditors. Exhibit 27 - Financial data schedule (i) Financial data schedule (included in EDGAR filing only). (b) Reports on Form 8-K - No reports on Form 8-K were required to be filed in the fourth quarter of 1995. (c) Exhibits - The response to this portion of Item 14 is submitted as a separate section of this report following the signature page. (d) Financial statement schedules - The response to this portion of Item 14 is submitted as a separate section of this report following the signature page. *compensation arrangement SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. STRYKER CORPORATION ----------------------------------------- Date: 3/20/96 DAVID J. SIMPSON ---------------------- ----------------------------------------- David J. Simpson, Vice President, Chief Financial Officer and Secretary Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. JOHN W. BROWN 3/20/96 DAVID J. SIMPSON 3/20/96 - ----------------------------------- ----------------------------------- John W. Brown, Chairman, President David J. Simpson, Vice President, and Chief Executive Officer Chief Financial Officer and Secretary (Principal Executive Officer) (Principal Financial Officer) HOWARD E. COX, JR. 3/20/96 DEAN H. BERGY 3/20/96 - ----------------------------------- ----------------------------------- Howard E. Cox, Jr. - Director Dean H. Bergy, Controller (Principal Accounting Officer) DONALD M. ENGELMAN 3/20/96 RONDA E. STRYKER 3/20/96 - ----------------------------------- ----------------------------------- Donald M. Engelman, Ph.D.- Director Ronda E. Stryker - Director JEROME H. GROSSMAN 3/20/96 WILLIAM U. PARFET 3/20/96 - ----------------------------------- ----------------------------------- Jerome H. Grossman, M.D. - Director William U. Parfet - Director JOHN S. LILLARD 3/20/96 - ----------------------------------- John S. Lillard - Director ANNUAL REPORT ON FORM 10-K ITEM 14(a)(1) and (2), (c) and (d) LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE CERTAIN EXHIBITS FINANCIAL STATEMENT SCHEDULE YEAR ENDED DECEMBER 31, 1995 STRYKER CORPORATION KALAMAZOO, MICHIGAN FORM 10-K--ITEM 14(a)(1), (2) AND (d) STRYKER CORPORATION AND SUBSIDIARIES List of Financial Statements and Financial Statement Schedule The following consolidated financial statements of Stryker Corporation and subsidiaries and report of independent auditors, included in the annual stockholders report of the registrant for the year ended December 31, 1995, are incorporated by reference in Item 8: Report of independent auditors Consolidated balance sheets--December 31, 1995 and 1994. Consolidated statements of earnings--years ended December 31, 1995, 1994 and 1993. Consolidated statements of stockholders' equity--years ended December 31, 1995, 1994 and 1993. Consolidated statements of cash flows--years ended December 31, 1995, 1994 and 1993. Notes to consolidated financial statements--December 31, 1995. The following consolidated financial statement schedule of Stryker Corporation and subsidiaries is included in Item 14(d): Schedule II--Valuation and qualifying accounts All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS STRYKER CORPORATION AND SUBSIDIARIES
Col. A Col. B Col. C Col. D Col. E ADDITIONS ________________________________ (1) (2) Charged to Balance at Charged to Costs Other Accounts Deductions-- Balance at End Description Beginning Period and Expenses --Describe Describe of Period ________________________________ ________________ ________________ ______________ ____________ ______________ DEDUCTED FROM ASSET ACCOUNTS Allowance for Doubtful Accounts: Year ended December 31, 1995 $6,400,000 $1,934,000 $534,000 $7,800,000 ========== ========== ======== ========== Year ended December 31, 1994 $3,800,000 $3,090,000 $800,000 $1,290,000 $6,400,000 ========== ========== ======== ========== ========== Year ended December 31, 1993 $2,900,000 $1,660,000 $760,000 $3,800,000 ========== ========== ======== ========== Uncollectible amounts written off, net of recoveries Represents allowance for doubtful accounts acquired in connection with the acquisition of an additional 31% interest in Matsumoto Medical Instruments, Inc. in August 1994, thereby increasing the Company's direct ownership in Matsumoto to 51% and requiring Matsumoto's consolidation with Stryker beginning with that date.
FORM 10-K--ITEM 14(c) STRYKER CORPORATION AND SUBSIDIARIES Exhibit Index EXHIBIT Page* (3) Articles of incorporation and by-laws (i) Restated Articles of Incorporation and amendment thereto dated December 28, 1993 . . . . . . . . . . . . 13** (ii) By Laws . . . . . . . . . . . . . . . . . . . . . . . . 13** (10) Material contracts (i) 1988 Stock Option Plan as amended . . . . . . . . . . . 13** (ii) Supplemental Savings and Retirement Plan (as Amended Effective January 1, 1995). . . . . . . . . . . . . . . 13** (iii) Description of bonus arrangements between the Company and certain officers, including Messrs. Brown, Elenbaas, Laube, Lipes, Simpson and Winkel . . . . . . . . . . . 20 (11) Statement re computation of per share earnings (i) Statement Re: Computation of earnings per share of common stock. . . . . . . . . . . . . . . . . . . . . . 21 (13) Annual report to security holders (i) Portions of the 1995 Annual Report that are incorporated herein by reference. . . . . . . . . . . . 14** (21) Subsidiaries of the registrant (i) List of Subsidiaries. . . . . . . . . . . . . . . . . . 22 (23) Consents of experts and counsel (i) Consent of Independent Auditors . . . . . . . . . . . . 23 (27) Financial data schedule (i) Financial data schedule (included in EDGAR filing only) * Page number in sequential numbering system where such exhibit can be found, or it is stated that such exhibit is incorporated by reference. ** Incorporated by reference in this Annual Report on Form 10-K. EXHIBIT (10)(iii) DESCRIPTION OF BONUS ARRANGEMENTS The Company has entered into bonus arrangements with certain executive officers for 1996, including Mr. Brown, Mr. Elenbaas, Mr. Laube, Mr. Lipes, Mr. Simpson and Mr. Winkel, based on specific performance criteria including sales, profits and asset management. The aggregate amount of such bonuses is not expected to exceed $1,500,000. EXHIBIT (11) STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE OF COMMON STOCK Year Ended December 31 1995 1994 1993 ----------- ----------- ----------- Average number of shares outstanding 48,468,000 48,367,000 48,356,000 Net earnings $87,010,000 $72,400,000 $60,205,000 =========== =========== =========== Earnings per share of common stock: Net earnings $1.80 $1.50 $1.25 ===== ===== ===== Primary: Average shares outstanding 48,468,000 48,367,000 48,356,000 Net effect of dilutive stock options, based on the treasury stock method using average market price 799,000 737,000 536,000 ----------- ----------- ----------- Total Primary Shares 49,267,000 49,104,000 48,892,000 =========== =========== =========== Fully Diluted: Average shares outstanding 48,468,000 48,367,000 48,356,000 Net effect of dilutive stock options, using the year-end market price, if higher then average market price 898,000 770,000 586,000 ----------- ----------- ----------- Total Fully Diluted Shares 49,366,000 49,137,000 48,942,000 =========== =========== =========== Note: Shares subject to stock options are not included in the earnings per share computation because the present effect thereof is not materially dilutive. EX-13 2 PORTION OF THE 1995 ANNUAL REPORT - AUDITORS REPORT REPORT OF INDEPENDENT AUDITORS Board of Directors Stryker Corporation We have audited the accompanying consolidated balance sheet of Stryker Corporation and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of earnings, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these 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 financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Stryker Corporation and subsidiaries at December 31, 1995 and 1994, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Ernst & Young LLP Kalamazoo, Michigan January 31, 1996 EX-13 3 PORTION OF 1995 ANNUAL REPORT - TEN YEAR REVIEW TEN-YEAR REVIEW (dollars in thousands, except per share amounts)
SUMMARY OF OPERATIONS 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ Net Sales $871,952 $681,920 $557,335 $477,054 $364,825 $280,634 $225,860 $178,636 $148,095 $129,183 Costs and expenses: Cost of sales 369,444 300,381 256,748 221,650 172,477 132,882 106,899 85,037 71,420 64,090 Research, development and engineering 43,771 39,630 36,199 32,313 23,703 19,663 15,572 12,193 8,888 6,509 Selling, general and administrative 301,426 221,433 172,446 149,390 117,089 92,384 71,761 55,046 45,776 39,946 ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ 714,641 561,444 465,393 403,353 313,269 244,929 194,232 152,276 126,084 110,545 ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ Operating Income 157,311 120,476 91,942 73,701 51,556 35,705 31,628 26,360 22,011 18,638 Other income (expense) 5,782 7,099 4,123 3,239 1,789 2,395 (598) (360) 14 77 ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ Earnings Before Income Taxes, Minority Interest and Extraordinary Item 163,093 127,575 96,065 76,940 53,345 38,100 31,030 26,000 22,025 18,715 Income taxes 66,900 50,770 35,860 29,240 20,270 14,475 11,800 10,140 9,300 8,502 Earnings before Minority Interest 96,193 76,805 60,205 47,700 33,075 23,625 19,230 15,860 12,725 10,213 Minority interest (9,183) (4,405) ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ Earnings Before Extraordinary Item 87,010 72,400 60,205 47,700 33,075 23,625 19,230 15,860 12,725 10,213 Extraordinary gain (net) 9,910 ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ Net Earnings $87,010 $72,400 $60,205 $47,700 $33,075 $33,535 $19,230 $15,860 $12,725 $10,213 Earnings Per Share of Common Stock:(a) Before extraordinary item $1.80 $1.50 $1.25 $1.00 $.70 $.50 $.41 $.34 $.27 $.22 Extraordinary gain (net) Net Earnings $1.80 $1.50 $1.25 $1.00 $.70 $.71 $.41 $.34 $.27 $.22 Dividend Per Share of Common Stock $.09 $.08 $.07 $.06 $.05 Average Number of Shares Outstanding - in thousands (a) 48,468 48,367 48,356 47,716 47,526 47,396 47,178 46,864 46,734 46,410 (a) Adjusted for the three-for-two stock split effective May 19, 1989, and the two-for-one stock splits effective May 11, 1987 and May 13, 1991.
FINANCIAL AND STATISTICAL DATA
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ Cash and Marketable Securities 264,648 202,045 152,637 91,752 80,029 54,052 19,282 4,602 5,999 8,390 Working Capital 448,815 361,318 213,965 168,197 140,296 117,877 89,594 70,071 56,399 43,538 Current Ratio 3.6 3.0 2.6 2.7 2.6 3.0 3.5 3.4 3.3 2.9 Property, Plant and Equipment - Net 182,592 180,719 67,707 59,649 36,056 28,700 22,918 20,703 17,658 17,018 Capital Expenditures 36,299 29,239 20,160 31,618 16,570 11,935 7,106 7,987 3,895 5,377 Depreciation and Amortization 28,654 20,944 16,183 11,382 11,796 7,109 6,312 5,999 5,402 3,860 Total Assets 854,891 767,971 454,204 340,272 270,316 209,521 152,333 124,830 104,965 89,323 Long-Term Debt 96,967 95,276 31,282 1,433 1,400 1,900 2,655 3,121 3,704 3,951 Stockholders' Equity 454,279 358,266 288,434 232,261 179,875 147,875 112,029 91,019 75,216 60,455 Return on Average Equity 21.4 22.4 23.1 23.1 20.2 18.2 18.9 19.1 18.8 18.6 Number of Stockholders of Record 3,260 3,684 3,951 3,512 2,914 2,400 2,294 2,049 2,055 1,626 Number of Employees 4,629 4,221 3,228 2,906 2,448 1,913 1,599 1,408 1,180 1,073
EX-13 4 PORTION OF 1995 ANNUAL REPORT - MANAGEMENTS DISCUSSION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The table below outlines the components of the consolidated statements of earnings as a percentage of net sales: Percentage Percentage of Net Sales Increase _______________________ ________________ 1995 1994 1993 1995/94 1994/93 ______ ______ ______ _______ _______ Net Sales 100.0% 100.0% 100.0% 28% 22% Cost of sales 42.4 44.0 46.1 23 17 Research, development and engineering expense 5.0 5.8 6.5 10 9 Selling, general and administrative expense 34.6 32.5 30.9 36 28 ______ ______ ______ Operating Income 18.0 17.7 16.5 31 31 Other income 0.7 1.0 0.7 ______ ______ ______ Earnings Before Income Taxes and Minority Interest 18.7 18.7 17.2 28 33 Income taxes 7.7 7.4 6.4 32 42 ______ ______ ______ Earnings Before Minority Interest 11.0 11.3 10.8 25 28 Minority interest (1.0) (.7) ______ ______ ______ Net Earnings 10.0% 10.6% 10.8% 20 20 ====== ====== ====== The table below sets forth domestic/international and product line sales information: Percentage Net Sales (in thousands) Increase ____________________________ ________________ 1995 1994 1993 1995/94 1994/93 ________ ________ ________ _______ _______ Domestic/International Sales Domestic $477,207 $405,549 $378,255 18% 7% International 394,745 276,371 179,080 43 54 Total Net Sales $871,952 $681,920 $557,335 28 22 Product Line Sales Stryker Surgical $608,646 $502,961 $447,042 21 13 Stryker Medical 158,516 135,520 110,293 17 23 Matsumoto Distributed Products 104,790 43,439 141 -- ________ ________ ________ Total Net Sales $871,952 $681,920 $557,335 28 22 ======== ======== ======== 1995 COMPARED TO 1994 Stryker Corporation's net sales increased 28% in 1995 to $872.0 million from $681.9 million in 1994. The 1994 purchase by Stryker of an additional 31% interest in its Japanese distributor, Matsumoto Medical Instruments, Inc. (Matsumoto), and Matsumoto's resulting consolidation with Stryker beginning in August 1994, accounted for a 15% sales increase through incremental sales of Matsumoto Distributed Products, which are sourced by Matsumoto from other companies for sale in Japan, and incremental margins and increased unit volume of Stryker products in Japan for the first seven months of 1995. Increased unit volume generated a 6% sales increase, other business acquisitions accounted for a 3% increase and a 1% increase arose from changes in foreign currency exchange rates. Net sales increased 3% as a result of the Company's conversion of certain portions of the Osteonics domestic distribution network to direct sales, which began in 1994 and resulted in higher selling prices offset by the repurchase of inventory from distributors converted in 1995. The Company's domestic sales increased 18% in 1995 compared to 1994. The leading domestic sales gains came from strong shipments of Stryker Surgical products and increased physical therapy revenue. International sales increased 43% in 1995 and were led by incremental Japanese sales from the consolidation of Matsumoto along with increased shipments of Stryker Surgical and Medical products. International sales grew to 45% of total sales in 1995 compared to 41% in 1994. Stryker Surgical product sales (principally orthopaedic products) increased 21% for the year. The increase in domestic sales of Stryker Surgical products was led by Osteonics hip and knee implants, the Steri-Shield Personal Protection System product line acquired in June 1994 and Stryker Instruments' heavy duty powered surgical instruments and High Vacuum Cement Injection System. The increase in international sales of Stryker Surgical products was led by incremental sales from the consolidation of Matsumoto along with sales of Osteonics orthopaedic implants, endoscopic equipment and powered surgical instruments. Stryker Medical product sales (principally specialty stretchers/beds and physical therapy services) increased 17% for the year, led by increased revenues from physical therapy services,primarily as a result of business acquisitions during the year. Sales of Matsumoto Distributed Products increased by 141% for the year as a result of the consolidation of Matsumoto for twelve months in 1995 and only five months in 1994. Sales of Matsumoto Distributed Products declined 29% in the fourth quarter of 1995 compared to the fourth quarter of 1994 as a result of the termination of several distribution agreements. These terminations are expected to lead to a further decrease in sales of Matsumoto Distributed Products in 1996. Cost of sales represented 42.4% of sales compared to 44.0% in 1994. The lower cost of sales percentage in 1995 resulted from additional margins on Stryker products sold by Matsumoto since its consolidation and the conversion of certain portions of the Osteonics domestic distribution network, which resulted in increased direct sales to hospitals. Research, development and engineering expense increased 10% as the Company spent $43.8 million on product development in 1995 compared to $39.6 million in 1994. The decrease in research, development and engineering expense as a percentage of sales in 1995 is principally a result of consolidating Matsumoto which, as a distributor, incurs minimal research and development costs. The Company's continued commitment to product development resulted in several new products in 1995 including the Secur-Fit HA total hip implant system, the Restoration HA Hip System for revision surgery, the Insight Positioning and Alignment System for knee replacement surgery, the 810 3-Chip Camera System, the StrykeFlow suction/irrigator for laparoscopic surgery, the 4100 Cordless Driver and the Stryker Stretcher Chair. Selling, general and administrative expenses increased 36% in 1995 as a result of consolidating Matsumoto which, as a distributor, has a higher percentage of these expenses, along with increased selling expenses resulting from the changes in the Osteonics distribution network. These costs increased to 34.6% of sales in 1995 compared to 32.5% in 1994. The effective tax rate increased to 41.0% in 1995 compared to 39.8% in 1994 as a result of the higher Japanese tax rate on the earnings of Matsumoto. Earnings before minority interest increased 25% in 1995 compared to 1994. Net earnings in 1995 were $87.0 million, a 20% increase over the Company's 1994 net earnings of $72.4 million. The consolidation with Matsumoto increased net earnings for 1995 by $3.0 million ($.06 per share) from 1994. 1994 COMPARED TO 1993 Stryker Corporation's net sales increased 22% in 1994 to $681.9 million compared to $557.3 million in 1993. The consolidation of Matsumoto beginning in August 1994, accounted for a 12% sales increase through incremental sales at end customer selling prices of Stryker products and added sales of Matsumoto Distributed Products. Increased unit volume generated an 8% increase in sales, other business acquisitions accounted for 3% of the overall gain and higher selling prices provided an additional 2% increase. The Company also converted certain portions of the Osteonics domestic distribution network to direct sales, resulting in the repurchase of inventory from distributors, which reduced net sales by 3%. Uncertainty over the impact of U.S. health care reform programs generally slowed domestic sales of medical devices during 1994. The Company's domestic sales increased 7% in 1994 compared to 1993. International sales increased 54% in 1994. The international sales gains were led by incremental Japanese sales from the consolidation of Matsumoto along with increased shipments of Osteonics orthopaedic implants, Dimso spinal implants, powered surgical instruments and hospital beds and stretchers. International sales grew to 41% of total sales in 1994 compared to 32% in 1993. Stryker Surgical product sales increased 13% for the year. The increase in domestic sales of Stryker Surgical products was led by Stryker Instruments' SurgiLav Plus pulsed irrigation system and High Vacuum Cement Injection System and Stryker Endoscopy's line of powered arthroscopic instruments. The increase in international sales of Surgical products was led by sales of Osteonics orthopaedic implants, Dimso spinal implants, powered surgical instruments and incremental margins on Stryker products resulting from the consolidation of Matsumoto. Sales of Stryker Medical products increased 23%, led by increased revenues from physical therapy services as a result of business acquisitions during the year, increased sales of the MPS Primary Acute Care Bed, which was introduced in the third quarter of 1993, and increased sales of patient handling equipment. Sales of Matsumoto Distributed Products were added beginning with the consolidation of Matsumoto in August 1994. Cost of sales represented 44.0% of sales compared to 46.1% in 1993. The lower cost of sales percentage in 1994 resulted from additional margins on Stryker products sold by Matsumoto since its consolidation and improved margins from ongoing cost reduction programs and the conversion of certain portions of the Osteonics domestic distribution network, which resulted in increased direct sales to hospitals. Research, development and engineering expense increased 9% as the Company spent $39.6 million on product development in 1994 compared to $36.2 million in 1993. The decrease in research, development and engineering expense as a percentage of sales in 1994 is principally a result of consolidating Matsumoto which, as a distributor, incurs minimal research and development costs. The Company's continued commitment to product development resulted in several new products in 1994, including the Omnifit- Plus forged cobalt chrome hip stem, the Sapphire View arthroscope system, a new low cost high resolution 1-chip camera, a second generation ConstaVac CBCII Blood Conservation System and a new line of powered micro instruments for oral/maxillofacial procedures. Selling, general and administrative expenses increased 28% in 1994, principally as a result of consolidating Matsumoto which, as a distributor, has a higher percentage of these expenses, along with increased selling expenses resulting from the changes in the Osteonics distribution network. These costs increased to 32.5% of sales in 1994 compared to 30.9% in 1993. The effective tax rate increased to 39.8% in 1994 compared to 37.3% in 1993 as a result of the higher Japanese tax rate on the earnings of Matsumoto. Earnings before minority interest increased 28% in 1994 compared to 1993. Net earnings in 1994 were $72.4 million, a 20% increase over the Company's 1993 net earnings of $60.2 million. LIQUIDITY AND CAPITAL RESOURCES Stryker's financial position continued to strengthen in 1995, with operating activities providing $111.5 million in cash. Working capital increased to $448.8 million from $361.3 million in the prior year. Accounts receivable increased 6% and days sales outstanding at the end of 1995 decreased to 64 days from 67 days at the end of 1994. Inventories increased 15% in 1995 and days sales in inventory finished 1995 at 133 days compared to 131 days at the end of 1994. The Company's cash and marketable securities of $264.6 million at December 31, 1995, as well as anticipated cash flows from operations, are expected to be sufficient to fund planned future operating capital requirements and to finance future acquisitions. Should additional funds be required, the Company has unsecured lines of credit with banks totaling $55.4 million, of which none was utilized at December 31, 1995. EX-13 5 PORTION OF 1995 ANNUAL REPORT - BALANCE SHEET CONSOLIDATED BALANCE SHEETS STRYKER CORPORATION AND SUBSIDIARIES December 31 (in thousands, except per share amounts) 1995 1994 ________ ________ ASSETS CURRENT ASSETS Cash and cash equivalents $ 69,049 $116,781 Marketable securities 195,599 85,264 Accounts receivable, less allowance of $7,800 ($6,400 in 1994) 163,593 154,590 Inventories 133,619 115,757 Deferred income taxes 47,058 54,333 Prepaid expenses and other current assets 14,335 13,804 ________ ________ TOTAL CURRENT ASSETS 623,253 540,529 PROPERTY, PLANT AND EQUIPMENT Land, buildings and improvements 138,324 131,320 Machinery and equipment 147,177 139,948 ________ ________ 285,501 271,268 Less allowance for depreciation 102,909 90,549 ________ ________ 182,592 180,719 OTHER ASSETS Intangibles, less accumulated amortization of $11,344 ($8,159 in 1994) 18,193 17,272 Other 30,853 29,451 ________ ________ 49,046 46,723 ________ ________ $854,891 $767,971 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Notes payable $ 208 Accounts payable $ 49,029 50,433 Accrued compensation 32,447 28,834 Income taxes 25,633 38,811 Accrued expenses and other liabilities 64,277 55,556 Current maturities of long-term debt 3,052 5,369 ________ ________ TOTAL CURRENT LIABILITIES 174,438 179,211 LONG-TERM DEBT, EXCLUDING CURRENT MATURITIES 96,967 95,276 OTHER LIABILITIES 24,214 35,245 MINORITY INTEREST 104,993 99,973 STOCKHOLDERS' EQUITY Common stock, $.10 par value: Authorized--150,000 shares Outstanding--48,554 shares (48,369 in 1994) 4,855 4,837 Additional paid-in capital 19,592 15,796 Retained earnings 419,537 336,897 Unrealized gains (losses) on securities 2,314 (1,315) Foreign translation adjustments 7,981 2,051 ________ ________ TOTAL STOCKHOLDERS' EQUITY 454,279 358,266 ________ ________ $854,891 $767,971 ======== ======== See accompanying notes to consolidated financial statements. EX-13 6 PORTION OF 1995 ANNUAL REPORT - STATEMENT OF EARNINGS CONSOLIDATED STATEMENTS OF EARNINGS STRYKER CORPORATION AND SUBSIDIARIES Years Ended December 31 (in thousands, except per share amounts) 1995 1994 1993 ________ ________ ________ Net Sales $871,952 $681,920 $557,335 Costs and expenses: Cost of sales 369,444 300,381 256,748 Research, development and engineering 43,771 39,630 36,199 Selling, general and administrative 301,426 221,433 172,446 ________ ________ ________ 714,641 561,444 465,393 ________ ________ ________ Operating Income 157,311 120,476 91,942 Other income 5,782 7,099 4,123 ________ ________ ________ Earnings Before Income Taxes and Minority Interest 163,093 127,575 96,065 Income taxes 66,900 50,770 35,860 ________ ________ ________ Earnings Before Minority Interest 96,193 76,805 60,205 Minority interest (9,183) (4,405) ________ ________ ________ Net Earnings $ 87,010 $ 72,400 $ 60,205 ======== ======== ======== Net Earnings Per Share of Common Stock $1.80 $1.50 $1.25 ======== ======== ======== Average Number of Shares Outstanding 48,468 48,367 48,356 ======== ======== ======== See accompanying notes to consolidated financial statements. EX-13 7 PORTION OF 1995 ANNUAL REPORT - STOCKHOLDERS' EQUITY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY STRYKER CORPORATION AND SUBSIDIARIES
Years Ended December 31 Additional Unrealized Foreign (in thousands, except Common Paid-In Retained Gains (Losses) Translation per share amounts) Stock Capital Earnings on Securities Adjustments ______ __________ ________ ______________ ___________ Balance at January 1, 1993 $4,830 $15,732 $211,550 $ 149 Net earnings for 1993 60,205 Sales of 92 shares of common stock under stock option and benefit plans, including $393 income tax benefit 10 1,379 Cash dividend declared of $.07 per share of common stock (3,388) Translation adjustment (2,033) ______ _______ ________ _______ ______ Balance at December 31, 1993 4,840 17,111 268,367 (1,884) Net earnings for 1994 72,400 Sales of 96 shares of common stock under stock option and benefit plans, including $740 income tax benefit 9 1,782 Repurchases of 122 shares of common stock (12) (3,097) Cash dividend declared of $.08 per share of common stock (3,870) Adjustment to beginning balance for change in accounting method, net of income taxes of $751 $1,180 Unrealized losses, net of $1,636 income tax benefit (2,495) Translation adjustment 3,935 ______ _______ ________ _______ ______ Balance at December 31, 1994 4,837 15,796 336,897 (1,315) 2,051 Net earnings for 1995 87,010 Sales of 185 shares of common stock under stock option and benefit plans, including $1,615 income tax benefit 18 3,796 Cash dividend declared of $.09 per share of common stock (4,370) Unrealized gains, net of income taxes of $2,535 3,629 Translation adjustment 5,930 ______ _______ ________ _______ ______ Balance at December 31, 1995 $4,855 $19,592 $419,537 $ 2,314 $7,981 ====== ======= ======== ======= ====== See accompanying notes to consolidated financial statements.
EX-13 8 PORTION OF 1995 ANNUAL REPORT - CASH FLOW CONSOLIDATED STATEMENTS OF CASH FLOWS STRYKER CORPORATION AND SUBSIDIARIES Years Ended December 31 (in thousands) 1995 1994 1993 ________ ________ ________ OPERATING ACTIVITIES Net Earnings $ 87,010 $ 72,400 $ 60,205 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation 25,542 18,717 13,048 Amortization 3,112 2,227 3,135 Minority interest 9,183 4,405 Provision for losses on accounts receivable 1,400 2,600 900 Deferred income taxes (credit) 2,484 (3,818) (2,917) Changes in operating assets and liabilities, net of effects of business acquisitions: Decrease (increase) in accounts receivable (13,560) 2,862 (11,305) Decrease (increase) in inventories (1,599) 5,798 2,271 Increase (decrease) in accounts payable (703) (8,594) 4,982 Increase (decrease) in income taxes (5,909) (3,898) 11,092 Other 4,576 4,994 4,691 ________ ________ ________ Net Cash Provided by Operating Activities 111,536 97,693 86,102 INVESTING ACTIVITIES Purchases of property, plant and equipment (36,299) (29,239) (20,160) Sales (purchases) of marketable securities (110,335) 17,661 (54,264) Business acquisitions, net of cash acquired (17,743) (42,557) (34,654) ________ ________ ________ Net Cash Used in Investing Activities (164,377) (54,135) (109,078) FINANCING ACTIVITIES Proceeds from borrowings 9,795 59,919 33,563 Payments on borrowings (5,913) (31,771) (2,016) Dividends paid (3,870) (3,388) (2,898) Proceeds from exercise of stock options 3,814 1,791 1,389 Repurchases of common stock (3,109) Other 1,131 (1,307) (126) ________ ________ ________ Net Cash Provided by Financing Activities 4,957 22,135 29,912 Effect of exchange rate changes on cash and cash equivalents 152 1,376 (315) ________ ________ ________ Increase (Decrease) in Cash and Cash Equivalents (47,732) 67,069 6,621 Cash and cash equivalents at beginning of year 116,781 49,712 43,091 ________ ________ ________ Cash and Cash Equivalents at End of Year $ 69,049 $116,781 $ 49,712 ======== ======== ======== See accompanying notes to consolidated financial statements. EX-13 9 PORTION OF 1995 ANNUAL REPORT - NOTES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS STRYKER CORPORATION AND SUBSIDIARIES December 31, 1995 1. SIGNIFICANT ACCOUNTING POLICIES BUSINESS: Stryker Corporation develops, manufactures and markets specialty surgical and medical products which are sold primarily to hospitals throughout the world and provides outpatient physical therapy services in the United States. PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries and, effective in August 1994 (see Note 4), its 51% owned subsidiary, Matsumoto Medical Instruments, Inc., after elimination of all significant intercompany accounts and transactions. Minority interest represents the minority stockholders' equity in Matsumoto's net earnings since August 1994 and their equity in Matsumoto's net assets at December 31, 1995 and 1994. The Company's 20% investment in Matsumoto during the period from August 1993 to July 1994 was accounted for by the equity method. REVENUE RECOGNITION: Revenue is recognized on the sale of products and services when the related goods have been shipped or services have been rendered. USE OF ESTIMATES: The preparation of these consolidated financial statements in conformity with generally accepted accounting principles requires management of the Company to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. CASH EQUIVALENTS AND INVESTMENTS: Cash equivalents are highly liquid investments with a maturity of three months or less when purchased. Investments include marketable equity and debt securities classified as current assets and certain noncurrent investments included in other assets. The Company's investments in marketable equity and debt securities are classified as "available-for-sale" and are carried at fair value, with the unrealized gains and losses, net of income taxes, reported as a separate component of stockholders' equity. Interest and dividends on these securities are included in other income. INVENTORIES: Inventories are stated at the lower of cost or market. Cost for approximately 78% (75% in 1994) of inventories is determined using the lower of first-in, first-out (FIFO) cost or market. Cost for certain domestic inventories is determined using the last-in, first-out (LIFO) cost method. The FIFO cost for all inventories approximates replacement cost. PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment is stated at cost. Depreciation is computed by the straight-line or declining balance methods over the estimated useful lives of the assets. INTANGIBLE ASSETS: Intangible assets represent the excess of purchase price over fair value of tangible net assets of acquired businesses. Intangible assets, which include patents and intangibles not specifically identifiable, are being amortized using the straight-line method over periods of up to sixteen years. INCOME TAXES: The Company accounts for income taxes using the liability method. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates in effect for the years in which the differences are expected to reverse. Deferred tax expense represents the change in net deferred tax assets and liabilities during the year. STOCK OPTIONS: The Company follows Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees" in accounting for its employee stock options. Under APB 25, no compensation expense is recognized because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant. EARNINGS PER SHARE: Earnings per share is based upon the average number of shares of common stock outstanding during each year. Shares subject to option are not included in earnings per share computations because the present effect thereof is not materially dilutive. 2. INVESTMENTS Effective January 1, 1994, the Company adopted Financial Accounting Standards Board (FASB) Statement No. 115, "Accounting for Certain Investments in Debt and Equity Securities," for investments held as of or acquired after that date. In accordance with the Statement, prior period financial statements were not restated to reflect the change in accounting principle. The balance of stockholders' equity at January 1, 1994 was increased by $1,180,000 (net of $751,000 in deferred income taxes) to reflect the net unrealized holding gains on securities classified as available-for-sale previously carried at cost. The following is a summary of the Company's investments in marketable equity and debt securities (in thousands): Gross Gross Unrealized Unrealized Estimated Cost Gains Losses Fair Value ________ __________ __________ __________ At December 31, 1995: Debt securities $193,988 $1,720 ($109) $195,599 Equity securities 7,575 2,579 (226) 9,928 ________ ______ ______ ________ Total $201,563 $4,299 ($335) $205,527 ======== ====== ====== ======== At December 31, 1994: Debt securities $ 87,490 ($2,081) $ 85,409 Equity securities 7,700 $ 263 (382) 7,581 ________ ______ ______ ________ Total $ 95,190 $ 263 ($2,463) $ 92,990 ======== ====== ====== ======== Gross realized gains on sales of the Company's investments totaled $248,000 and $50,000 in 1995 and 1994, respectively, and gross realized losses totaled $768,000 and $306,000 in 1995 and 1994, respectively. At December 31, 1995, approximately 30% of the Company's investments in debt securities mature within one year and substantially all of the remainder mature within three years. Interest income, which is included in other income, totaled $11,197,000 in 1995, $6,048,000 in 1994 and $3,520,000 in 1993. 3. INVENTORIES Inventories are as follows (in thousands): December 31 1995 1994 ________ ________ Finished goods $105,209 $ 86,719 Work-in-process 7,552 7,552 Raw material 28,602 28,784 ________ ________ FIFO cost 141,363 123,055 Less LIFO reserve 7,744 7,298 ________ ________ $133,619 $115,757 ======== ======== 4. BUSINESS ACQUISITIONS In August 1994, the Company purchased 31% of the outstanding common stock of Matsumoto Medical Instruments, Inc., Osaka, Japan, thereby increasing its direct ownership interest in Matsumoto to 51%. Matsumoto is one of the largest distributors of medical devices in Japan and is the exclusive distributor of most Stryker products in that country. The cost of the 31% investment, which was based on net book value, was approximately 6.0 billion yen ($62.0 million). Payment of approximately 847 million yen ($9.8 million) of the purchase price was deferred to March 1995. The acquisition was accounted for by the purchase method and the results of operations for Matsumoto were consolidated with Stryker beginning in August 1994. If the acquisition had occurred on January 1, 1993, pro forma net sales for the Company would have been $762,341,000 for 1994 and $694,923,000 for 1993. Pro forma net earnings would not have differed significantly from reported results. In August 1993, the Company purchased 20% of the outstanding common stock of Matsumoto. The cost of the investment, which was based on net book value, was approximately 3.4 billion yen ($32.8 million). This initial investment was accounted for under the equity method until August 1994, when the additional 31% interest was acquired. The Company's share of Matsumoto's net earnings did not have a material impact on the Company's net earnings in 1993. In June 1994, the Company purchased the Steri-Shield product line, which is a personal protection system for operating room personnel. The acquisition was accounted for by the purchase method at a total cost of $6,500,000, of which $5,500,000 in royalties will be paid over the following seven years. Intangible assets acquired, principally patents, are being amortized over seven to ten years. Pro forma consolidated results including the purchased business would not differ significantly from reported results. During 1995, 1994 and 1993, the Company's subsidiary, Physiotherapy Associates, Inc., purchased several physical therapy clinic operations. The aggregate purchase price of these clinics in 1995, 1994 and 1993 was approximately $5,700,000, $7,600,000 and $1,900,000, respectively. Intangible assets acquired, principally employment contracts and goodwill, are being amortized over periods ranging from one to fifteen years. Pro forma consolidated results including the purchased businesses would not differ significantly from reported results. 5. BORROWINGS The Company and its subsidiaries have unsecured short-term line of credit arrangements with banks aggregating $20,000,000 domestically and $35,400,000 equivalent in foreign currencies. There were no borrowings under these lines at December 31, 1995. Borrowings under these lines at December 31, 1994 were $208,000 in foreign funds at an average interest rate of 12.8%. These lines generally expire on July 31, 1996. Long-term debt is as follows (in thousands): December 31 1995 1994 ________ ________ Bank loans $ 91,606 $ 86,616 Other 8,413 14,029 ________ ________ 100,019 100,645 Less current maturities 3,052 5,369 ________ ________ $ 96,967 $ 95,276 ======== ======== The bank loans represent two separate borrowings made to finance the acquisition of the Company's 51% interest in Matsumoto Medical Instruments, Inc. (see Note 4). Both loans are Japanese yen denominated, are unsecured and mature in August 1998. The first loan is from the Chicago branch of The Sanwa Bank, Limited, has a principal balance of $33,167,000 ($34,442,000 at December 31, 1994) and bears interest at a fixed annual rate of 4.76%. The second loan is a floating rate loan from the Chicago branches of The Bank of Tokyo, Ltd., The Mitsubishi Bank Limited and The Sanwa Bank, Limited and has a principal balance of $58,439,000 ($52,174,000 at December 31, 1994). The Company has fixed the effective annual interest rate of this debt at 4.10% using an interest rate swap with a notional amount and term equal to that of the related loan. The yen denominated loans act as hedges of the Company's investment in Matsumoto. As a result, adjustments made to the loan balances to reflect applicable currency exchange rates at December 31 are included in the foreign translation adjustments component of stockholders' equity. Maturities of debt for the four years succeeding 1996 are: 1997 - $52,000; 1998 - $91,662,000; 1999 - $4,918,000; and 2000 - $66,000. The carrying amounts of the Company's long-term debt and interest rate swap approximate their fair values based on the Company's current borrowing rates for similar types of borrowing agreements and quoted market rates, respectively. Total interest expense, which is included in other income and approximates interest paid, was $6,319,000 in 1995, $3,677,000 in 1994, and $1,067,000 in 1993. 6. CAPITAL STOCK The Company has key employee and director Stock Option Plans under which options are granted at a price not less than fair market value at the date of grant. The options are granted for periods of up to ten years and become exercisable in varying installments. A summary of stock option activity follows: Option Shares Price Per Share _________ _________________ Options Outstanding at January 1, 1994 1,656,525 $ 3.20 - $34.25 Granted 37,500 25.88 - 28.00 Canceled (58,000) 6.75 - 34.25 Exercised (88,040) 3.20 - 25.50 _________ _________________ Options Outstanding at December 31, 1994 1,547,985 3.20 - 34.25 Granted 25,000 45.88 Canceled (66,700) 6.75 - 25.50 Exercised (184,585) 3.20 - 34.25 _________ _________________ Options Outstanding at December 31, 1995 1,321,700 $4.34 - $45.88 ========= ================= At December 31, 1995, options for 809,600 shares were exercisable and 1,175,300 shares were reserved for future grants. The Company has 500,000 authorized shares of $1 par value preferred stock, none of which are outstanding. 7. RETIREMENT PLANS Substantially all employees of the Company are covered by retirement plans. The majority of employees are covered by profit sharing or defined contribution retirement plans. The Company's 51% owned subsidiary, Matsumoto Medical Instruments, Inc., has a noncontributory defined benefit plan covering all employees who are generally entitled, upon termination, to lump-sum or annuity payments of amounts determined by reference to the current level of salary, length of service, and the conditions under which the termination occurs. Matsumoto's funding policy for the plan is to contribute actuarially determined amounts on a monthly basis. In addition, certain officers of Matsumoto are customarily entitled to lump-sum payments under an unfunded retirement plan. An accrual has been provided for the expected cost of these benefits earned to date, although such payments are subject to the approval of Matsumoto's stockholders. Amounts accrued for both Matsumoto retirement plans, which provide for substantially all unfunded obligations under the plans, totaled $16,369,000 at December 31, 1995 ($16,235,000 at December 31, 1994) and are recorded as other noncurrent liabilities in the consolidated balance sheets. Retirement plan expense under all of the Company's retirement plans totaled $11,253,000 in 1995, $6,753,000 in 1994 and $5,302,000 in 1993. 8. INCOME TAXES Earnings before income taxes and minority interest consist of the following (in thousands): 1995 1994 1993 ________ ________ _______ United States operations $103,813 $100,996 $88,181 Foreign operations 59,280 26,579 7,884 ________ ________ _______ $163,093 $127,575 $96,065 ======== ======== ======= The components of the provision for income taxes follow (in thousands): 1995 1994 1993 _______ ________ _______ Current: Federal $34,676 $31,932 $26,114 State, including Puerto Rico 2,300 5,133 10,372 Foreign 27,440 17,523 2,291 _______ ________ _______ 64,416 54,588 38,777 Deferred tax expense (credit) 2,484 (3,818) (2,917) _______ ________ _______ $66,900 $50,770 $35,860 ======= ======== ======= A reconciliation of the statutory federal income tax rate to the Company's effective tax rate follows: 1995 1994 1993 _____ _____ ____ U.S. statutory income tax rate 35.0% 35.0% 35.0% Add (deduct): State taxes, less effect of federal deduction .3 2.3 6.3 Foreign income taxes at rates different from the U.S. statutory rate 6.8 5.4 (.8) Tax benefit relating to operations in Puerto Rico (1.7) (2.0) (1.8) U.S. research and development tax credit (.2) (.6) (1.4) Earnings of Foreign Sales Corporation (1.0) (1.4) (1.4) Other 1.8 1.1 1.4 ____ ____ ____ 41.0% 39.8% 37.3% ==== ==== ==== Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The tax effect of significant temporary differences which comprise the Company's deferred tax assets and liabilities are as follows (in thousands): December 31 1995 1994 _______ _______ Deferred Tax Assets: Inventories $30,533 $34,475 Accounts receivable and other assets 1,877 2,048 Other accrued expenses 20,729 18,165 State taxes 1,677 3,127 Other 164 2,226 _______ _______ Total Deferred Tax Assets 54,980 60,041 Deferred Tax Liabilities: Depreciation (2,017) (1,681) Other (2,030) (2,244) Total Deferred Tax Liabilities (4,047) (3,925) _______ _______ Total Net Deferred Tax Assets $50,933 $56,116 ======= ======= Deferred tax assets and liabilities are included in the consolidated balance sheets as follows (in thousands): December 31 1995 1994 _______ _______ Current assets -- Deferred income taxes $47,058 $54,333 Noncurrent assets -- Other assets 6,269 4,438 Noncurrent liabilities -- Other liabilities (2,394) (2,655) _______ _______ Total Net Deferred Tax Assets $50,933 $56,116 ======= ======= No provision has been made for U.S. federal and state income taxes or foreign taxes that may result from future remittances of the undistributed earnings ($168,630,000 at December 31, 1995) of foreign subsidiaries because it is expected that such earnings will be reinvested overseas indefinitely. Determination of the amount of any unrecognized deferred income tax liability on these unremitted earnings is not practicable. Total income taxes paid were $70,009,000 in 1995, $51,898,000 in 1994 and $27,641,000 in 1993. 9. GEOGRAPHIC DATA Geographic area information follows (in thousands): 1995 1994 1993 ________ ________ ________ NET SALES United States operations: Domestic $477,207 $405,549 $378,255 Export 137,355 117,669 115,977 Foreign operations: Pacific 272,362 130,223 33,651 Europe 83,674 70,366 63,366 Other 13,521 12,094 11,987 Eliminations (112,167) (53,981) (45,901) ________ ________ ________ Total Net Sales $871,952 $681,920 $557,335 ======== ======== ======== OPERATING INCOME United States operations $121,411 $109,429 $ 90,726 Foreign operations: Pacific 35,060 12,560 1,465 Europe 9,491 6,554 6,571 Other 1,954 1,686 1,660 ________ ________ ________ Total Foreign Operations 46,505 20,800 9,696 Corporate expenses (10,605) (9,753) (8,480) ________ ________ ________ Total Operating Income $157,311 $120,476 $ 91,942 ======== ======== ======== ASSETS United States operations $283,471 $248,883 $225,587 Foreign operations: Pacific 273,686 281,259 12,053 Europe 65,406 50,111 39,313 Other 9,304 9,801 4,067 Corporate 223,024 177,917 173,184 ________ ________ ________ Total Assets $854,891 $767,971 $454,204 ======== ======== ======== Intercompany sales between geographic areas are included in export and foreign operations sales at agreed upon prices which include a profit element. No customer accounted for 10% or more of the Company's sales in 1995 or 1994. For the year ended December 31, 1993, sales to Matsumoto Medical Instruments, Inc. were $64,300,000 or 12% of total net sales. Gains (losses) on foreign currency transactions, which are included in other income, totaled $904,000, $586,000 and $(256,000) in 1995, 1994 and 1993, respectively. Corporate assets consist primarily of domestic cash and cash equivalents and marketable securities and, in 1993, the investment in affiliate. 10. LEASES The Company leases various manufacturing and office facilities and equipment under operating leases. Future minimum lease commitments under these leases are as follows (in thousands): 1996 $14,137 1997 9,951 1998 8,030 1999 4,641 2000 3,151 Thereafter 5,093 _______ $45,003 ======= Rent expense totaled $21,437,000 in 1995, $14,644,000 in 1994 and $10,950,000 in 1993. 11. CONTINGENCIES The Company is involved in various claims and legal actions arising in the normal course of business. The Company does not anticipate material losses as a result of these actions. In July 1995, a decision was issued by a Federal District Court in a patent suit brought by the Company against Intermedics Orthopedics, Inc. and its distributor for infringement of the Company's U.S. patent on its Omniflex Hip System. The Court held that the Company's patent is valid and enforceable and that the Company is entitled to damages and attorney fees. In a subsequent decision, the Court fixed the damage award at $72,700,000 million, including interest. Intermedics has appealed the Court's decision. Until the appeal process is complete, management is unable to determine the financial impact of the Court's decision on the Company. Accordingly, these financial statements do not give recognition to any gain which might ultimately be realized as a result of this decision. EX-13 10 PORTION OF 1995 ANNUAL REPORT - SALES ANALYSIS, QRTLY DATA SALES ANALYSIS, QUARTERLY DATA (dollars in thousands, except per share data)
PRODUCT LINE SALES (Unaudited) 1995 1994 1993 _______________ _______________ _______________ STRYKER SURGICAL Orthopaedic implants, endoscopic systems, powered surgical instruments and other operating room devices $608,646 70% $502,961 74% $447,042 80% STRYKER MEDICAL Patient care and patient handling equipment and physical therapy services 158,516 18 135,520 20 110,293 20 MATSUMOTO DISTRIBUTED PRODUCTS Orthopaedic, opthalmic, general surgery and emergency care products sourced from other companies for sale in Japan 104,790 12 43,439 6 ________ ____ ________ ____ ________ ____ $871,952 100% $681,920 100% $557,335 100% ======== ==== ======== ==== ======== ==== DOMESTIC/INTERNATIONAL SALES (Unaudited) Domestic $477,207 55% $405,549 59% $378,255 68% International 394,745 45 276,371 41 179,080 32 ________ ____ ________ ____ ________ ____ $871,952 100% $681,920 100% $557,335 100% ======== ==== ======== ==== ======== ====
SUMMARY OF QUARTERLY DATA (Unaudited)
1995 Quarter Ended 1994 Quarter Ended _____________________________________________ ______________________________________________ March31 June 30 Sept. 30 Dec. 31 March 31 June 30 Sept. 30 Dec. 31 __________ __________ ________ ________ ________ ________ ___________ __________ Net Sales $214,013 $228,509 $205,363 $224,067 $148,759 $154,226 $174,316 $204,619 Gross Profit 126,429 130,861 116,610 128,608 81,215 83,705 96,495 120,124 Earnings Before Income Taxes and Minority Interest 42,879 40,216 35,949 44,049 27,970 27,435 29,714 42,456 Net Earnings 20,800 20,410 20,130 25,670 17,340 17,010 16,730 21,320 Net Earnings Per Share of Common Stock 0.43 0.42 0.42 0.53 0.36 0.35 0.35 0.44 Market Price of Common Stock: High 48-3/4 48-1/8 48-7/8 58-1/2 35-1/2 30-3/4 37-1/2 37-1/2 Low 36-1/8 37-1/2 38 44 26 23-3/4 27-1/4 32-3/4 The price quotations reported above were supplied by The Nasdaq Stock Market. The consolidation of Matsumoto Medical Instruments, Inc., which was consolidated beginning in August 1994 (see Note 4 to consolidated financial statements), resulted in incremental net sales of $43,000,000 and incremental net earnings of $1,900,000 ($.04 per share) in the first quarter of 1995 and incremental net sales of $49,700,000 and incremental net earnings of $900,000 ($.02 per share) in the second quarter of 1995. In the third quarter of 1994, the consolidation of Matsumoto resulted in incremental net sales of $25,000,000. The incremental impact on net earnings was not material. In the fourth quarter of 1994, the consolidation of Matsumoto resulted in incremental net sales of $40,200,000 and incremental net earnings of $1,900,000 ($.04 per share).
EX-21 11 EXHIBIT (21) LIST OF SUBSIDIARIES State or Country of Name of Subsidiary Incorporation - ------------------ ------------------- Dimso Iberica S.A. Spain Dimso SA France Osteonics Corp. New Jersey Physiotherapy Associates, Inc. Michigan Physiotherapy Associates UK Ltd. United Kingdom Stryker Arroyo, Inc. Delaware Stryker Australia Pty. Ltd. Australia Stryker B.V. The Netherlands Stryker (Barbados) Foreign Sales Corporation Barbados Stryker Biotech France SARL France Stryker Canada Inc. Canada Stryker China Limited Hong Kong Stryker Corporation (Malaysia) SDN.BHD. Malaysia Stryker Deutschland GmbH Germany Stryker Far East, Inc. Delaware Stryker Foreign Sales Corporation U.S. Virgin Islands Stryker France SA France Stryker Italia SRL Italy Stryker Korea Ltd. Korea Stryker Mexico, S.A. de C.V. Mexico Stryker Osteonics SA Switzerland Stryker Pacific Limited Hong Kong Stryker Puerto Rico, Inc. Delaware Stryker SA Switzerland Stryker Sales Corporation Michigan Stryker Singapore Private Limited Singapore Stryker Corporation directly or indirectly owns 100% of the outstanding voting securities of each of the above-named subsidiaries. Stryker is a 51% investor in: Matsumoto Medical Instruments, Inc. Japan Stryker effectively controls: Stryker India Medical Equipment Private Limited India EX-23 12 EXHIBIT 23--CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of Stryker Corporation of our report dated January 31, 1996, included in the 1995 Annual Report to Stockholders of Stryker Corporation. Our auditors also included the financial statement schedule of Stryker Corporation and subsidiaries listed in Item 14(a). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We also consent to the incorporation by reference in the Registration Statement Number 33-55662 on Form S-8 dated December 11, 1992, Registration Statement Number 2-96467 on Form S-8 dated April 4, 1985, and Registration Statement Number 33-32240 on Form S-8 dated November 20, 1989 and to the related prospectus for each of the registration statements, of our report dated January 31, 1996, with respect to the consolidated financial statements incorporated herein by reference, and our report included in the preceding paragraph with respect to the financial statement schedule included in this Annual Report (Form 10-K) of Stryker Corporation. /s/ERNST & YOUNG LLP Kalamazoo, Michigan March 14, 1996 EX-27 13
5 1,000 YEAR DEC-31-1995 DEC-31-1995 69,049 195,599 163,593 7,800 133,619 623,253 182,592 102,909 854,891 174,438 0 0 0 4,855 449,424 854,891 871,852 871,952 369,444 714,641 (5,782) 0 6,319 163,093 66,900 0 0 0 0 87,010 1.80 1.80
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