-----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, Q8d3TWQ97eSTgrMPwamDvyNGK49QJ70v2u0N3OgVMHZ5QSPw51OdBl8ZYv00FWnm ZBqmqLKl+egfJMiPvZd/Pg== 0000351346-98-000001.txt : 19980113 0000351346-98-000001.hdr.sgml : 19980113 ACCESSION NUMBER: 0000351346-98-000001 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19971130 FILED AS OF DATE: 19980112 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: BIOMET INC CENTRAL INDEX KEY: 0000351346 STANDARD INDUSTRIAL CLASSIFICATION: ORTHOPEDIC, PROSTHETIC & SURGICAL APPLIANCES & SUPPLIES [3842] IRS NUMBER: 351418342 STATE OF INCORPORATION: IN FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-12515 FILM NUMBER: 98505064 BUSINESS ADDRESS: STREET 1: AIRPORT INDUSTRIAL PARK STREET 2: P O BOX 587 CITY: WARSAW STATE: IN ZIP: 46581-0587 BUSINESS PHONE: 2192676639 MAIL ADDRESS: STREET 1: AIRPORT INDUSTRIAL PARK STREET 2: P O BOX 587 CITY: WARSAW STATE: IN ZIP: 46581-0587 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended November 30, 1997. OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to _______________. Commission file Number 0-12515. BIOMET, INC. (Exact name of registrant as specified in its charter) Indiana 35-1418342 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) Airport Industrial Park, P.O. Box 587, Warsaw, Indiana 46581-0587 (Address of principal executive offices) (219) 267-6639 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No The number of shares outstanding of each of the issuer's classes of common stock, as of November 30, 1997: Common Shares - No Par Value 111,753,388 Shares (Class) (Number of Shares) Rights to Purchase Common Shares 111,753,388 Rights (Class) (Number of Shares) BIOMET, INC. CONTENTS Pages Part I. Financial Information Item 1. Financial Statements: Consolidated Balance Sheets 1-2 Consolidated Statements of Income 3 Consolidated Statements of Cash Flows 4 Notes to Consolidated Financial Statements 5-8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9-11 Part II. Other Information 12-13 Signatures 14 Index to Exhibits 15 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS BIOMET, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS as of November 30, 1997 and May 31, 1997 (in thousands) ASSETS November 30, May 31, 1997 1997 ------------ ------- Current assets: Cash and cash equivalents $ 94,420 $ 82,034 Investments 45,117 41,237 Accounts and notes receivable, net 174,491 162,135 Inventories 158,941 151,523 Prepaid expenses and other 29,169 27,311 ------- ------- Total current assets 502,138 464,240 ------- ------- Property, plant and equipment, at cost 176,589 152,839 Less, Accumulated depreciation 73,241 61,927 ------- ------- Property, plant and equipment, net 103,348 90,912 ------- ------- Investments 50,075 44,527 Intangible assets, net 5,362 5,787 Excess acquisition cost over fair value of acquired net assets, net 26,986 20,306 Other assets 3,602 2,584 ------- ------- Total assets $ 691,511 $ 628,356 ======= ======= The accompanying notes are a part of the consolidated financial statements. BIOMET, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS as of November 30, 1997 and May 31, 1997 (in thousands) LIABILITIES AND SHAREHOLDERS' EQUITY November 30, May 31, 1997 1997 ------------ ------- Current liabilities: Short-term borrowings $ 6,324 $ 5,568 Accounts payable 17,603 17,140 Accrued income taxes 16,295 12,181 Accrued wages and commissions 13,116 12,232 Other accrued expenses 30,655 25,793 ------- ------- Total current liabilities 83,993 72,914 Long-term liabilities: Deferred federal income taxes 2,493 2,229 Other liabilities 767 385 ------- ------- Total liabilities 87,253 75,528 ------- ------- Contingencies (Note 6) Shareholders' equity: Common shares 74,440 73,587 Additional paid-in capital 16,001 16,001 Retained earnings 520,217 472,450 Net unrealized appreciation of available-for-sale securities 1,435 1,040 Cumulative translation adjustment (7,835) (10,250) ------- ------- Total shareholders' equity 604,258 552,828 ------- ------- Total liabilities and shareholders' equity $ 691,511 $ 628,356 ======= ======= The accompanying notes are a part of the consolidated financial statements. BIOMET, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME for the six and three month periods ended November 30, 1997 and 1996 (in thousands, except per share amounts) Six Months Ended Three Months Ended November 30, November 30, ---------------- ------------------ 1997 1996 1997 1996 ---- ---- ---- ---- Net sales $306,111 $281,187 $156,582 $144,009 Cost of sales 95,233 90,833 48,611 46,405 ------- ------- ------- ------- Gross profit 210,878 190,354 107,971 97,604 Selling, general and administrative expenses 107,743 101,990 54,873 52,101 Research and development expense 11,648 12,579 5,762 6,061 ------- ------- ------- ------- Operating income 91,487 75,785 47,336 39,442 Other income, net 3,827 4,504 1,501 2,153 ------- ------- ------- ------- Income before income taxes 95,314 80,289 48,837 41,595 Provision for income taxes 35,291 30,017 18,075 15,410 ------- ------- ------- ------- Net income $ 60,023 $ 50,272 $ 30,762 $ 26,185 ======= ======= ======= ======= Earnings per share, based on the weighted average number of shares outstanding during the periods presented $ .54 $ .44 $ .28 $ .23 ==== ==== ==== ==== Weighted average number of shares 111,519 115,349 111,519 114,962 ======= ======= ======= ======= The accompanying notes are a part of the consolidated financial statements. BIOMET, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS for the six months ended November 30, 1997 and 1996 (in thousands) 1997 1996 ---- ---- Cash flows from (used in) operating activities: Net income $ 60,023 $ 50,272 Adjustments to reconcile net income to net cash from operating activities: Depreciation 7,215 5,892 Amortization 2,779 4,524 Gain on sale of investments (523) (108) Changes in current assets and liabilities, excluding effects of acquisitions: Accounts and notes receivable (12,527) (1,708) Inventories (5,019) 3,535 Prepaid expenses and other (1,767) (3,829) Accounts payable 351 (4,716) Accrued income taxes 4,357 2,594 Accrued wages and commissions 986 (722) Other accrued expenses 5,290 872 ------- ------ Net cash from operating activities 61,165 56,606 ------- ------ Cash flows from (used in) investing activities: Proceeds from sales and maturities of investments 13,083 16,836 Purchases of investments (21,288) (12,121) Capital expenditures (16,359) (8,715) Acquisitions, net of cash acquired (13,152) (4,667) Increase in other assets (1,569) (2,859) Other (188) (239) ------- ------ Net cash used in investing activities (39,473) (11,765) ------- ------ Cash flows from (used in) financing activities: Increase in short-term borrowings, net 936 1,200 Issuance of common shares 853 4,436 Cash dividend (12,256) (11,476) Purchase of common shares -- (33,875) ------- ------ Net cash used in financing activities (10,467) (39,715) ------- ------ Effect of exchange rate changes on cash 1,161 1,275 ------- ------ Increase in cash and cash equivalents 12,386 6,401 Cash and cash equivalents, beginning of year 82,034 106,068 ------- ------- Cash and cash equivalents, end of period $ 94,420 $112,469 ======= ======= The accompanying notes are a part of the consolidated financial statements. BIOMET, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: OPINION OF MANAGEMENT. The accompanying consolidated financial statements include the accounts of Biomet, Inc. and its wholly owned subsidiaries (individual and collectively referred to as the "Company"). The unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six month period ended November 30, 1997 are not necessarily indicative of the results that may be expected for the fiscal year ending May 31, 1998. For further information, refer to the consolidated financial statements and notes thereto included in the Company's Annual Report on From 10-K for the fiscal year ended May 31. 1997. The accompanying consolidated balance sheet at May 31, 1997, has been derived from the audited Consolidated Financial Statements at that date, but does not include all disclosures required by generally accepted accounting principles. NOTE 2: INVENTORIES. Inventories at November 30, 1997 and May 31, 1997 are as follows: November 30, May 31, 1997 1997 ------------ ------- (in thousands) Raw materials $ 22,305 $ 20,958 Work in process 20,305 16,546 Finished goods 69,374 64,992 Consigned inventory 46,957 49,027 ------- ------- $158,941 $151,523 ======= ======= NOTE 3: INCOME TAXES. The difference between the reported provision for income taxes and a provision computed by applying the federal statutory rate to pre-tax accounting income is primarily attributable to state income taxes, tax benefits relating to operations in Puerto Rico, tax-exempt income and tax credits. NOTE 4: COMMON SHARES. During the six months ended November 30, 1997 the Company issued 428,803 Common Shares upon the exercise of outstanding stock options for proceeds aggregating $853,000. BIOMET, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued NOTE 5: ACQUISITIONS. On June 1, 1997, the Company completed the acquisition of one of its foreign distributors. The purchase price consisted of $13.2 million cash. The excess acquisition cost over fair value of acquired net assets at the acquisition date approximated $8.5 million. The acquisition has been accounted for using the purchase method of accounting with the operating results included in the Company's consolidated financial statements from the date of acquisition. Pro forma consolidated results of operations are not presented as the amounts are not materially different from the Company's historical results. On November 24, 1997, the Company announced that it had entered into a definitive agreement providing for the establishment of a 50/50 joint venture for orthopedic products in Europe with Merck KGaA, of Darmstadt, Germany ("Merck"). Under this agreement, the Company and Merck will each contribute their existing European orthopedic operations to the joint venture. Pro forma sales of the joint venture for the next fiscal year are anticipated to be approximately $200 million. This venture is structured to allow the Company to consolidate all of the venture's revenues and its pro-rata share of the venture's earnings with its financial results. Merck brings to this venture an extensive array of chemical, biological, pharmaceutical and orthopedic technologies and products, while the Company brings its orthopedic products and technologies concentrated in total joint replacement. Consummation of the joint venture transaction is expected to occur in early 1998. NOTE 6: CONTINGENCIES. In January 1996, a jury returned a verdict in favor of Raymond G. Tronzo ("Tronzo") awarding him approximately $55 million on his patent and state law claims. On October 29, 1996, the United States District Court for the Southern District of Florida entered a judgment, which implemented and reduced the jury verdict, awarding $30.2 million to Tronzo on his state law claims, including compensatory damages of approximately $7.1 million, punitive damages of $20 million, and prejudgment interest. The trial court dismissed, with prejudice, Tronzo's claim based upon unjust enrichment. The trial court denied the Company's motion challenging the validity of Tronzo's patent. Tronzo was awarded an additional $6.3 million judgment for patent infringement, including a fifty percent enhancement based upon willfulness. The trial court also granted an injunction prohibiting future manufacture, use, promotion or sale, in the United States, of the finned version of the Mallory-Head acetabular cup, the device found to have infringed the Tronzo patent. The U.S. Court of Appeals for the Federal Circuit (the "Federal Circuit") denied the Company's motion to stay the injunction pending the conclusion of the appeal. The Mallory-Head finned acetabular cup accounted for a relatively small portion of the Company's annual sales. The Company is vigorously pursuing its appeal before the Federal Circuit on both the patent and state law claims. The briefing by both parties in the appeal was completed in the Federal Circuit in June 1997 and oral arguments were held in September 1997. It is anticipated that the Federal Circuit will issue its final decision on the appeal sometime in early to mid calendar 1998. In connection with the District Court's final judgment and its order granting a stay of enforcement and execution of the judgment, the Company was required to deliver to an escrow agent investments with a value no less than $36.6 million to be held in escrow, invested and disbursed for the benefit of the plaintiff pending the outcomes of all appeals. The $36.6 million of investments, which are restricted under the terms of the escrow agreement, are included in investments on the Company's consolidated balance sheet as of November 30 and May 31, 1997. On June 2, 1997, the Company announced the entry of a jury verdict against it in the United States District Court of New Jersey in an action brought by Orthofix SRL ("Orthofix") against the Company and its wholly-owned subsidiaries, Electro-Biology, Inc. ("EBI") and EBI Medical Systems, Inc. ("EBIMS"), (the "Biomet Group") related to the events surrounding the expiration of a distribution agreement under which EBIMS distributed Orthofix's external fixation devices in the United States. The jury found that, notwithstanding Orthofix's refusal to renew the distribution agreement, EBIMS's commencement of development activities of a new external fixation system prior to the expiration of the contract, constituted a breach of the distribution agreement. The jury awarded compensatory damages against the Biomet Group for breach of contract and related claims of approximately $49 million and punitive damages of $100 million. The jury also concluded that Orthofix breached the distribution agreement and tortiously interfered with EBIMS's economic relations, but awarded only nominal damages to the Biomet Group. With respect to certain non-jury issues, the trial court entered an order denying Orthofix's motions for enhanced and/or treble damages and attorneys' fees. The trial court also granted Orthofix's motion for prejudgment interest, but only on the compensatory portion of the damages commencing from November 29, 1995. On September 2, 1997, the trial court entered an amended judgment reducing to $50 million, the $100 million in punitive damages awarded to Orthofix by the jury. The Company is appealing the final amended judgment entered against the Biomet Group to the Federal Circuit. Based on the information currently available and advice from legal counsel, management believes that the trial court's judgments in the Tronzo and Orthofix cases will not be upheld upon appeal. Therefore, no amounts related to these two cases have been recorded in the Company's financial statements, except for estimated legal costs associated with the appeal process. If the Company is unsuccessful in its appeal of either, or both, of these cases, the ultimate liabilities could be material to the operating results in the period such losses are recognized. The Company's cash, cash equivalents and investments are adequate to address the payment of any losses that could ultimately be determined with respect to these two cases. In October 1997, Biomet, Inc. ("Biomet") received a subpoena from the United States Department of Health and Human Services, Office of Inspector General ("HHS/OIG"), in connection with the possible fraudulent submission of claims for Medicare reimbursement. The subpoena seeks the production of documents referring or relating to any of Pennsylvania Hospital and Thomas Jefferson Hospital, two of Biomet's major hospital customers in Philadelphia; a physician group practicing under the name Orthopaedic Reconstructive Associates; and The Rothman Institute. Biomet also is aware that its distributor servicing the hospitals has received a similar subpoena. Biomet does not itself submit claims to or receive reimbursements from Medicare, but the laws with respect to Medicare reimbursement prohibit any person from paying or offering to pay any direct or indirect remuneration intended to induce the purchase of products or services. Those laws are complex and can be broadly construed to cover a wide range of financial and business activities. Biomet has not been advised of the precise subject matter of the HHS/OIG investigation, but it has long-standing research, product development, physician training, clinical follow-up and data collection relationships with the physician group. Biomet is fully cooperating with HHS/OIG in this matter, and is unable to predict what action, if any, might be taken in the future by HHS/OIG as a result of its investigation or what impact, if any, the outcome of this matter might have on its financial position or business operations. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL CONDITION AS OF NOVEMBER 30, 1997 The Company's cash and investments have increased $21,814,000 during the last six months to $189,612,000 at November 30, 1997, despite the $12,256,000 cash dividend paid during the first quarter. Cash flows provided by operating activities were $61,165,000 for the first six months of fiscal 1998 compared to $56,606,000 in 1997. Net income plus depreciation and amortization were the principal sources of cash from operating activities, offset by increases in accounts receivable and inventories. Cash flows used in investing activities were $39,473,000 for the first six months of fiscal 1998 compared to $11,765,000 in 1997. The primary uses of cash flows for investing activities were purchases of investments, purchases of capital equipment and a business acquisition (See Note 5 of the Notes to Consolidated Financial Statements) offset by sales and maturities of investments . Cash flows used in financing activities were $10,467,000 for the first six months of fiscal 1998 compared to $39,715,000 in 1997. The primary use of cash flows for financing activities was the cash dividend paid in the first quarter. In June 1997, the Company's Board of Directors declared a cash dividend of eleven cents ($.11) per share payable to shareholders of record at the close of business on July 11, 1997. In January 1997, the Company's Board of Directors authorized the purchase of up to an additional $60,000,000 of the outstanding Common Shares of the Company in open market or privately negotiated transactions through the close of business on January 28, 1998. During the first six months of this fiscal year, the Company did not purchase any additional Common Shares, and has approximately $38,000,000 under this authorization for future purchases. Future purchases, if any, will be dependent on market conditions. Currently available funds, together with anticipated cash flows generated from future operations, are believed to be adequate to cover the Company's anticipated cash requirements, including capital expenditures, research and development costs, purchases of Common Shares under the repurchase program and litigation settlements, if any. RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED NOVEMBER 30, 1997 AS COMPARED TO THE SIX MONTHS ENDED NOVEMBER 30, 1996 Net sales increased 9% to $306,111,000 for the six-month period ended November 30, 1997, from $281,187,000 for the same period last year. The Company's U.S.-based revenue increased 9% to $227,470,000 during the first six months, while foreign sales increased 8% to $78,641,000, net of a negative foreign exchange adjustment of $3,900,000. Biomet's worldwide sales of reconstructive products during the first six months of fiscal 1998 were $181,684,000, representing an 8% increase compared to the first six months of last year. This increase was primarily a result of Biomet's continued penetration of the reconstructive device market led by the Maxim Total Knee System and the Alliance Hip System. Sales of fixation products were $70,504,000 for the first six months of fiscal 1998, representing a 9% increase as compared to the same period in 1997. Sales of spinal products were $16,161,000 for the first six months of fiscal 1998, representing a 6% increase as compared to the same period in 1997. The Company's sales of other products totaled $37,762,000, representing a 16% increase over the first six months of fiscal year 1997, primarily as a result of increased sales of arthroscopic and soft goods products and the Indiana Tome Carpal Tunnel Release System. Cost of sales decreased as a percentage of net sales to 31.1% for the first six months of fiscal 1998 from 32.3% last year primarily as a result of increased sales of higher margin products, increased in-house manufacturing efficiencies and improved margins realized through acquisitions of international distributors. Selling, general and administrative expenses decreased as a percentage of net sales to 35.2%, compared to 36.3% for the first six months of last year. This reduction is principally the result of the consolidation of the operations of Kirschner into various other subsidiaries and reduced legal costs. Research and development expenditures decreased during the first six months to $11,648,000 reflecting the completion or termination of several research and development projects. Operating income rose 21% from $75,785,000 for the first six months of fiscal 1997, to $91,487,000 for the first six months of fiscal 1998. Other income decreased for the first six months of fiscal year 1998 compared to the prior year's first six months as a result of exchange losses realized on foreign currency transactions. The effective income tax rate decreased to 37.0% for the current period compared to 37.4% for the same period in fiscal 1997. These factors resulted in a 19% increase in net income to $60,023,000 from $50,272,000 for the first six months of fiscal 1998 as compared to the same period in fiscal 1997 . Earnings per share increased 23%, from $.44 to $.54 for the periods presented. RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED NOVEMBER 30, 1997 AS COMPARED TO THE THREE MONTHS ENDED NOVEMBER 30, 1996 Net sales increased 9% to $156,582,000 for the second quarter of fiscal year 1998, as compared to $144,009,000 for the same period last year. Operating income rose 20% from $39,442,000 for the second quarter of fiscal 1997, to $47,336,000 for the second quarter of fiscal 1998. During the second quarter, net income increased 17% to $30,762,000 as compared to $26,185,000 for the same period last year. Earnings per share increased 22% from $.23 per share for the second quarter of fiscal 1997, to $.28 per share for the same period of fiscal 1998. The business factors resulting in these changes and relevant trends affecting the Company's business during the periods in question are comparable to those described in the preceding discussion for the six-month period. OTHER SIGNIFICANT EVENTS. On November 24, 1997, the Company announced that it had entered into a definitive agreement providing for the establishment of a 50/50 joint venture for orthopedic products in Europe with Merck KGaA, of Darmstadt, Germany ("Merck"). Under this agreement, the Company and Merck will each contribute their existing European orthopedic operations to the joint venture. Pro forma sales of the joint venture for the next fiscal year are anticipated to be approximately $200 million. This venture is structured to allow the Company to consolidate all of the venture's revenues and its pro-rata share of the venture's earnings with its financial results. Merck brings to this venture an extensive array of chemical, biological, pharmaceutical and orthopedic technologies and products, while the Company brings its orthopedic products and technologies concentrated in total joint replacement. Consummation of the joint venture transaction is expected to occur in early 1998. PART II. OTHER INFORMATION Item 1: Legal Proceedings. In January 1996, a jury returned a verdict in favor of Raymond G. Tronzo ("Tronzo") awarding him approximately $55 million on his patent and state law claims. On October 29, 1996, the United States District Court for the Southern District of Florida entered a judgment, which implemented and reduced the jury verdict, awarding $30.2 million to Tronzo on his state law claims, including compensatory damages of approximately $7.1 million, punitive damages of $20 million, and prejudgment interest. The trial court dismissed, with prejudice, Tronzo's claim based upon unjust enrichment. The trial court denied the Company's motion challenging the validity of Tronzo's patent. Tronzo was awarded an additional $6.3 million judgment for patent infringement, including a fifty percent enhancement based upon willfulness. The trial court also granted an injunction prohibiting future manufacture, use, promotion or sale, in the United States, of the finned version of the Mallory-Head acetabular cup, the device found to have infringed the Tronzo patent. The U.S. Court of Appeals for the Federal Circuit (the "Federal Circuit") denied the Company's motion to stay the injunction pending the conclusion of the appeal. The Mallory-Head finned acetabular cup accounted for a relatively small portion of the Company's annual sales. The Company is vigorously pursuing its appeal before the Federal Circuit on both the patent and state law claims. The briefing by both parties in the appeal was completed in the Federal Circuit in June 1997 and oral arguments were held in September 1997. It is anticipated that the Federal Circuit will issue its final decision on the appeal sometime in early to mid calendar 1998. In connection with the District Court's final judgment and its order granting a stay of enforcement and execution of the judgment, the Company was required to deliver to an escrow agent investments with a value no less than $36.6 million to be held in escrow, invested and disbursed for the benefit of the plaintiff pending the outcomes of all appeals. The $36.6 million of investments, which are restricted under the terms of the escrow agreement, are included in investments on the Company's consolidated balance sheet as of November 30 and May 31, 1997. On June 2, 1997, the Company announced the entry of a jury verdict against it in the United States District Court of New Jersey in an action brought by Orthofix SRL ("Orthofix") against the Company and its wholly-owned subsidiaries, Electro-Biology, Inc. ("EBI") and EBI Medical Systems, Inc. ("EBIMS"), (the "Biomet Group") related to the events surrounding the expiration of a distribution agreement under which EBIMS distributed Orthofix's external fixation devices in the United States. The jury found that, notwithstanding Orthofix's refusal to renew the distribution agreement, EBIMS's commencement of development activities of a new external fixation system prior to the expiration of the contract, constituted a breach of the distribution agreement. The jury awarded compensatory damages against the Biomet Group for breach of contract and related claims of approximately $49 million and punitive damages of $100 million. The jury also concluded that Orthofix breached the distribution agreement and tortiously interfered with EBIMS's economic relations, but awarded only nominal damages to the Biomet Group. With respect to certain non-jury issues, the trial court entered an order denying Orthofix's motions for enhanced and/or treble damages and attorneys' fees. The trial court also granted Orthofix's motion for prejudgment interest, but only on the compensatory portion of the damages commencing from November 29, 1995. On September 2, 1997, the trial court entered an amended judgment reducing to $50 million, the $100 million in punitive damages awarded to Orthofix by the jury. The Company is appealing the final amended judgment entered against the Biomet Group to the Federal Circuit. Based on the information currently available and advice from legal counsel, management believes that the trial court's judgments in the Tronzo and Orthofix cases will not be upheld upon appeal. Therefore, no amounts related to these two cases have been recorded in the Company's financial statements, except for estimated legal costs associated with the appeal process. If the Company is unsuccessful in its appeal of either, or both, of these cases, the ultimate liabilities could be material to the operating results in the period such losses are recognized. The Company's cash, cash equivalents and investments are adequate to address the payment of any losses that could ultimately be determined with respect to these two cases. In October 1997, Biomet, Inc. ("Biomet") received a subpoena from the United States Department of Health and Human Services, Office of Inspector General ("HHS/OIG"), in connection with the possible fraudulent submission of claims for Medicare reimbursement. The subpoena seeks the production of documents referring or relating to any of Pennsylvania Hospital and Thomas Jefferson Hospital, two of Biomet's major hospital customers in Philadelphia; a physician group practicing under the name Orthopaedic Reconstructive Associates; and The Rothman Institute. Biomet also is aware that its distributor servicing the hospitals has received a similar subpoena. Biomet does not itself submit claims to or receive reimbursements from Medicare, but the laws with respect to Medicare reimbursement prohibit any person from paying or offering to pay any direct or indirect remuneration intended to induce the purchase of products or services. Those laws are complex and can be broadly construed to cover a wide range of financial and business activities. Biomet has not been advised of the precise subject matter of the HHS/OIG investigation, but it has long-standing research, product development, physician training, clinical follow-up and data collection relationships with the physician group. Biomet is fully cooperating with HHS/OIG in this matter, and is unable to predict what action, if any, might be taken in the future by HHS/OIG as a result of its investigation or what impact, if any, the outcome of this matter might have on its financial position or business operations. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits. See Index to Exhibits. (b) Reports on Form 8-K. None. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. BIOMET, INC. - ------------ (Registrant) DATE: 1/12/98 BY: /s/ GREGORY D. HARTMAN ------- ------------------------- Gregory D. Hartman Vice President - Finance (Principal Financial Officer) (Signing on behalf of the Registrant and as Principal Financial Officer) BIOMET, INC. FORM 10-Q INDEX TO EXHIBITS Sequential Number Assigned Numbering System in Regulation S-K Page Number Item 601 Description of Exhibit of Exhibit - ----------------- -------------------------------- ---------------- (2) No exhibit. (4) 4.1 Specimen certificate for Common Shares. (Incorporated by reference to Exhibit 4.1 to the registrant's Report on Form 10-K for the fiscal year ended May 31, 1985). 4.2 Rights Agreement between Biomet, Inc. and Lake City Bank, as Rights Agent, dated as of December 2, 1989. (Incorporated by reference to Exhibit 4 to Biomet, Inc. Form 8-K Current Report dated December 22, 1989, File No. 0-12515). (10) No exhibit. (11) No exhibit. (15) No exhibit. (18) No exhibit. (19) No exhibit. (22) No exhibit. (23) No exhibit. (24) No exhibit. (27) Financial data schedules. (99) No exhibit. EX-27 2
5 6-MOS MAY-31-1998 NOV-30-1997 94420000 45117000 180188000 5697000 158941000 502138000 176589000 73241000 691511000 83993000 0 74440000 0 0 529818000 691511000 306111000 306111000 95233000 214624000 0 0 135000 95314000 35291000 60023000 0 0 0 60023000 .54 .54
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