AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 17, 2002
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
---------------------
FORM 20-F
(Mark One)
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED: DECEMBER 31, 2001
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: 001-14564
SULZER MEDICA LTD
(Exact name of Registrant as specified in its charter)
N/A
(Translation of registrant's name into English)
SWITZERLAND SWITZERLAND
(Jurisdiction of Incorporation or ANDREASSTRASSE 15, 8050 ZURICH
Organization) (Address of Principal Executive Offices)
SECURITIES REGISTERED OR TO BE REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
American Depositary Shares,
each representing 0.1 Registered Share New York Stock Exchange
Registered Shares, par value CHF30 per share New York Stock Exchange*
SECURITIES REGISTERED OR TO BE REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
(Title of Class)
SECURITIES FOR WHICH THERE IS A REPORTING OBLIGATION PURSUANT TO SECTION 15(d)
OF THE ACT:
NONE
(Title of Class)
INDICATE THE NUMBER OF OUTSTANDING SHARES OF EACH OF THE ISSUER'S CLASSES
OF CAPITAL OR COMMON STOCK AS OF THE CLOSE OF THE PERIOD COVERED BY THE ANNUAL
REPORT.
As of December 31, 2001, 9,933,556 outstanding Registered Shares, par value
CHF30 per share.
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 which financial statement item the registrant has
elected to follow. Item 17 [X] Item 18
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--------------------------------------------------------------------------------
* Not for trading, but only in connection with the registration of American
Depositary Shares.
TABLE OF CONTENTS
INTRODUCTION AND USE OF CERTAIN TERMS.................................. 3
PART I................................................................. 4
Item 1. Identity of Directors, Senior Management and Advisers....... 4
Item 2. Offer Statistics and Expected Timetable..................... 4
Item 3. Key Information............................................. 4
3.A Selected Financial Data..................................... 4
3.B Capitalization and Indebtedness............................. 6
3.C Reasons for the Offer and Use of Proceeds................... 6
3.D Risk factors................................................ 6
Item 4. Information on the Company.................................. 9
4.A History and Development of the Company...................... 9
4.B Business Overview........................................... 9
4.C Organizational structure.................................... 26
4.D Property, Plants and Equipment.............................. 27
Item 5. Operating and Financial Review and Prospects................ 27
5.A Operating Results........................................... 27
5.B Liquidity and Capital Resources............................. 31
5.C Research and Development, Patents and Licenses.............. 32
5.D Trend Information........................................... 33
Item 6. Directors, Senior Management and Employees.................. 34
6.A Directors and Senior Management............................. 34
6.B Compensation................................................ 36
6.C Board Practices............................................. 37
6.D Employees................................................... 38
6.E Share Ownership............................................. 38
Item 7. Major Shareholders and Related Party Transactions........... 39
7.A Major Shareholders.......................................... 39
7.B Related Party Transactions.................................. 39
7.C Interests of Experts and Counsel............................ 40
Item 8. Financial Information....................................... 40
8.A Consolidated Statements and Other Financial Information..... 40
8.B Significant Changes......................................... 42
Item 9. The Offer and Listing....................................... 42
9.A Listing Details............................................. 42
9.B Plan of Distribution........................................ 44
9.C Market...................................................... 44
9.D Selling Shareholders........................................ 44
9.E Dilution.................................................... 44
9.F Expenses of the Issue....................................... 44
Item 10. Additional Information...................................... 45
10.A Share Capital............................................... 45
10.B Memorandum and Articles of Association...................... 45
10.C Material Contracts.......................................... 45
1
10.D Exchange Controls and Other Limitations Affecting Security
Holder...................................................... 46
10.E Taxation.................................................... 46
10.F Dividends and Paying Agents................................. 46
10.G Statement by Experts........................................ 46
10.H Documents on Display........................................ 46
10.I Subsidiary Information...................................... 47
Item 11. Quantitative and Qualitative Disclosure About Market Risk... 47
Item 12. Description of Securities Other than Equity Securities...... 48
PART II................................................................ 48
Item 13. Defaults, Dividend Arrearages and Delinquencies............. 48
Item 14. Material Modifications to the Rights of Security Holders and
Use of Proceeds............................................. 48
Item 15. Reserved.................................................... 49
Item 16. Reserved.................................................... 49
PART III............................................................... 49
Item 17. Financial Statements........................................ 49
Item 18. Financial Statements........................................ 49
Item 19. Exhibits.................................................... 49
2
INTRODUCTION AND USE OF CERTAIN TERMS
Sulzer Medica's consolidated financial statements included herein are
presented in Swiss francs, prepared in accordance with International Accounting
Standards ("IAS") and reconciled to generally accepted accounting principles in
the United States ("U.S. GAAP"). See Note 31 to the Consolidated Financial
Statements for this reconciliation to U.S. GAAP. In this annual report, all
references to (i) "CHF" or "Swiss francs" are to the currency of Switzerland and
(ii) "U.S. dollars," "$", "USD", or "US$" are to the currency of the United
States. All monetary amounts in this Annual Report are presented in Swiss
francs, except as otherwise stated herein. See Item 3.A "Selected Financial
Data" for information regarding the rates of exchange between the Swiss franc
and the U.S. dollar during the most recent five years.
All references herein to the "Company" are to Sulzer Medica Ltd and, as the
context requires, its consolidated subsidiaries and the group of Sulzer Ltd
subsidiaries that conducted the business of the "Sulzer Medica" division of
Sulzer Ltd prior to the recapitalization of Sulzer Medica.
This Annual Report on Form 20-F contains a number of forward-looking
statements. These statements are based on the best judgment of the Sulzer Medica
management team based on information currently available. There are numerous
factors relating to government regulation, product development and marketing,
patents, litigation and more, which may affect Sulzer's ability to achieve its
goals. Sulzer undertakes no obligation to publicly update or revise any of these
statements.
Accugraft(TM), AdVent(TM), Allo Pro(R), Alloclassic(R), Alloflex(TM), Allo
Spine(TM), Anaconda(R), Annuloflex(TM), AnnuloFlo(R), Apollo(R), APR(R),
BAK(TM), BAK/C(TM), BAK/Cervical(TM), BAK/L(TM), BAK/Proximity(R), Biolite(R),
BP(TM), CarboSeal(R), Cerablate Plus(TM), Cervi-Lok(R), CLS(TM), CPHV(TM),
Converge(TM), Double Strut(TM), Durasul (TM), DYNESYS(TM), Fluoropassiv(TM),
Fracsure(TM), F/S(TM), Gelseal(TM), Gelsoft(TM), Gelweave(TM), GFm(TM), GSB(TM),
HAT 300(TM), Innex(TM), Inrange(TM), Integral(R), Inter-Op(R), IntraCoil(R),
Intraguard(TM), Intrastent(TM), Intrasys(TM), Magna Rom 21(TM), Malaga(TM),
Metasul(R), Mitroflow(TM), MP-1(R), MS-30(TM), Muller(TM), Natural-Hip(TM),
Natural-Knee(R), Natural-Knee II (TM), Navitrack(TM), Omniloc(R), OptiForm(TM),
Orbis(TM), OrthoXchangePatient Alert(TM), PhotoFix(R), PhotoFix(LOGO)(R), Plexus
Graft(TM), Polypin(TM), Precedent (TM), Protasul (TM), Protege(TM), Protek(R),
Proximity(TM), Puros(TM), Pyrolite(R), R Series(TM), SAL(TM), Screw-Vent(R),
Select(R), Silhouette(TM), SinterLock CSTi(R), Sirus(TM), Solutions for
Life(TM), Spline(R), Starport(TM), SuMit(R), SwissPlus(TM), Symmetry(TM),
Synergy (TM), Sysorb(TM), Taperflo(TM), Thin Wall Fluorpassiv(TM), Top Hat
Transtaper(TM), Trinica(TM), Twist(R), Twist Max(TM), UniSpacer(TM), Wallaby(TM)
and Weber(TM)are trademarks owned by or licensed to Sulzer Medica or its
subsidiaries.
3
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3. KEY INFORMATION
3.A SELECTED FINANCIAL DATA
All financial data should be read in conjunction with "Item 5. Operating
Review and Prospects" and our consolidated financial statements and accompanying
notes which are included elsewhere in this Form 20-F. The audited financial
statements used to create the selected consolidated financial data set forth
below were prepared in accordance with IAS, which differs in certain respects
from US GAAP. For a discussion of the significant differences between IAS and US
GAAP, see "Item 17. Financial Statements -- note 31."
BALANCE SHEET DATA
(USING IAS)
AS OF DECEMBER 31
-----------------------------------------
2001 2000 1999 1998 1997
CHF CHF CHF CHF CHF
----- ----- ----- ----- -----
(AMOUNTS IN MILLIONS)
Cash and cash equivalents.................. 156 633 546 139 987
Total assets............................... 2,871 2,525 2,391 2,242 2,310
Short-term borrowings...................... 75 86 105 480 365
Long-term borrowings....................... 20 19 31 288 430
Shareholders' equity....................... 784 1,993 1,839 1,220 1,173
Return on equity........................... (85.9)% 10.0% 8.4% 12.0% 13.6%
Net assets................................. 791 1,998 1,843 1,223 1,175
Capital stock.............................. 300 300 300 300 300
The shareholders' equity determined in accordance with U.S. GAAP in 2001,
2000, and 1999, respectively, was CHF 872 million, CHF 2,060 million and CHF
1,929 million.
4
The total assets determined in accordance with U.S. GAAP in 2001, 2000 and
1999 respectively, was CHF 2959 million, CHF 2592 million and CHF 2481 million.
INCOME STATEMENT DATA
(USING IAS)
YEAR ENDED DECEMBER 31
-----------------------------------------
2001 2000 1999 1998 1997
CHF CHF CHF CHF CHF
------ ------ ------ ------ -----
(AMOUNTS IN MILLIONS, EXCEPT SHARE DATA)
Net sales
Orthopedics................................... 1,150 1,097 972 877 705
Cardiovascular Prostheses..................... 268 250 210 223 220
Total net sales................................. 1,418 1,347 1,182 1,100 925
Gross profit.................................... 878 927 823 759 620
Selling, general and administrative expense..... (648) (555) (490) (437) (353)
Research and development expense................ (130) (108) (98) (89) (78)
Operating income before exceptional items and
goodwill amortization......................... 100 270 234 243 186
INCOME STATEMENT DATA
(USING IAS)
YEAR ENDED DECEMBER 31
--------------------------------------------
2001 2000 1999 1998 1997
CHF CHF CHF CHF CHF
-------- ------ ------ ------ ------
(AMOUNTS IN MILLIONS, EXCEPT SHARE DATA)
Net income................................... (1,193) 190 483 143 149
Operating income before exceptional items and
goodwill amortization per share............ 10.03 27.01 23.43 24.32 21.65
Basic income per share....................... (119.62) 19.01 48.37 14.32 17.34
Basic income per ADS......................... (11.96) 1.90 4.84 1.43 1.73
Diluted income per share(1).................. (119.62) 18.98 48.37 14.32 17.34
Diluted income per ADS....................... (11.96) 1.90 4.84 1.43 1.73
Other Data:
Number of employees at year-end.............. 3,894 3,397 3,174 3,243 2,826
---------------
(1) Diluted income per share is calculated on the weighted average number of
9,973 thousand shares (2000 -- 10,012 thousand shares, 1999 -- 9,986
thousand shares, 1998 -- 9,988 thousand shares and 1997 -- 8,592 thousand
shares) after the allotment of shares under option schemes.
The net income (net loss) determined in accordance with U.S. GAAP in 2001,
2000 and 1999 respectively, was CHF -- 1162 million, CHF 189 million and CHF 733
million as explained in Note 31 to the Consolidated Financial Statements. The
diluted income per share determined in accordance with U.S. GAAP in 2001, 2000
and 1999 respectively, was CHF 116.51, CHF 18.88 and CHF 73.40.
All of the financial data presented in the Income statement is presented on
a continuing basis.
5
CASH DIVIDENDS PER SHARE
Cash dividends are translated into U.S. dollars at the spot rate on the
payment date. Because dividends are paid by the Company in Swiss francs,
exchange rate fluctuations will affect the U.S. dollar amounts received by the
holders of ADS'. The Company paid no dividends for the year ended 2001.
TOTAL DIVIDEND TOTAL DIVIDEND TOTAL DIVIDEND
MONTH AND PER SHARE PER SHARE PER ADS
YEAR EARNED YEAR PAID CHF USD USD
----------- ---------- -------------- -------------- --------------
1997............................. April 1998 4.50 3.03 0.30
1998............................. April 1999 4.50 2.95 0.29
1999............................. April 2000 5.00 2.87 0.29
2000............................. April 2001 6.00 3.43 0.34
The table below sets forth, for the periods indicated, information
concerning the exchange rate for Swiss francs expressed in Swiss francs per U.S.
dollar. The rate in effect on May 13, 2002 was CHF 1.60 = USD 1.00.
(CLOSING PRICES) AVERAGE HIGH LOW AT PERIOD END
---------------- ------- ---- ---- -------------
1996.............................................. 1.24 1.35 1.16 1.34
1997.............................................. 1.45 1.53 1.34 1.46
1998.............................................. 1.45 1.54 1.31 1.38
1999.............................................. 1.50 1.60 1.36 1.59
2000.............................................. 1.69 1.82 1.55 1.61
2001.............................................. 1.69 1.81 1.58 1.66
November 2001..................................... 1.67 1.63
December 2001..................................... 1.69 1.63
January 2002...................................... 1.72 1.64
February 2002..................................... 1.71 1.68
March 2002........................................ 1.71 1.65
April 2002........................................ 1.68 1.62
May 1, 2002 (through May 13, 2002)................ 1.59 1.61
3.B CAPITALIZATION AND INDEBTEDNESS
Not applicable.
3.C REASONS FOR THE OFFER AND USE OF PROCEEDS
Not applicable.
3.D RISK FACTORS
You should consider carefully the following risk factors in addition to all
of the other information set forth in this annual report. There may be other
risks not described below that could impair our business operations because they
are not currently known or seem immaterial at present. The Company's business,
financial condition or results of operations may be materially adversely
affected by any of these risks.
PRODUCT LIABILITY AND LITIGATION
The development, manufacture and sale of medical devices and products
entail significant risk of product liability claims or recalls. Design defects
and manufacturing defects with respect to products sold by the Company could
result in exacerbation of a patient's condition, further injury or even death.
The occurrence of such an event could result in product liability claims or a
recall of one or more of the Company's products. There can be no assurance that
the Company's current product liability insurance will cover all future
6
liabilities it might incur in connection with the development, manufacture or
sale of its current and potential products. In addition, the Company may not
continue to be able to obtain insurance on satisfactory terms or in adequate
amounts. A successful claim or claims brought against the Company in excess of
available insurance coverage could have a material adverse effect on the
Company. Moreover, product liability claims or product recalls in the future
could, regardless of their outcome, have a material adverse effect on the
Company's reputation and on its ability to obtain and retain customers for its
products.
On December 5, 2000, Sulzer Orthopedics Inc. ("Sulzer Orthopedics"), a
subsidiary of the Company located in Austin, Texas, issued a voluntary recall of
certain lots of Inter-Op acetabular shells manufactured and sold by Sulzer
Orthopedics. As of March 7, 2002, the Company and/or its subsidiaries have been
served with 1,989 lawsuits in federal and state or provincial courts in the
United States and Canada alleging injuries as a result of these Inter-Op
acetabular shells. Sulzer Orthopedics also informed the U.S. Food and Drug
Administration of its ongoing investigation of a porous coated tibia base plate
that was manufactured from July to December 2000.
A number of adverse clinical outcomes have been reported so far and, as of
March 7, 2002, 585 revision surgeries have been reported to Sulzer Orthopedics
and the Company and/or its subsidiaries have been served with a total of 86
lawsuits in U.S. federal and state courts. On June 19, 2001, the Judicial Panel
on Multi-District Litigation ("MDL") ordered that all Inter-Op lawsuits filed in
federal courts be consolidated for pre-trial proceedings in the U.S. District
Court (N.D. Ohio) in Cleveland, Ohio. On August 29, 2001, the Court
provisionally certified a class and granted preliminary approved to the parties'
settlement agreement; and on September 17, the Court issued an order enjoining
all further proceedings in other federal and state courts. The parties have
renegotiated the initial settlement agreement. The revised settlement agreement
(the "MDL Settlement Agreement") provides for the Company to contribute USD 725
million in the form of USD 425 million in cash and USD 300 million in
Convertible Callable instruments (CCI). In addition, Sulzer AG, a Swiss
corporation, which until July 2001 owned approximately 74% of the Company, has
agreed to pay USD 50 million in cash and contribute 480,349 shares in the
Company. In addition, XL Winterthur International Insurance Switzerland,
"Winterthur", the Company's insurer for the relevant policy years, has agreed to
assign all the remaining amounts of the policy covering the period form April 1,
2000 to March 31, 2001, with the consent of Sulzer AG and Sulzer Medica AG, and,
furthermore, "Winterthur" has agreed to pay an amount of USD 40 million into an
escrow account for the eventual transfer into the settlement trust, with
reference to the policy covering the period of April 1, 2001 to March 31, 2002.
On March 13, 2002, the Company and the Plaintiffs have signed the MDL Settlement
Agreement and the U.S. District Court in Cleveland, Ohio, granted preliminary
approval. On May 8, 2002, the Court granted final approval to the MDL Settlement
Agreement. The patients will have the right to reject this settlement by
choosing to opt-out. The opt-out period is scheduled to end on May 15, 2002. If
the number of opt-outs is too large, Sulzer Medica may exercise its right to
terminate the MDL Settlement Agreement and withdraw from the settlement. In such
an event, Sulzer Medica's subsidiary, Sulzer Orthopedics Inc., may consider
filing for protection under Chapter 11 of the Bankruptcy Code. See "Item 8.A.7
Legal Proceedings" for further information.
UNCERTAINTY RELATING TO THIRD-PARTY REIMBURSEMENT
In Europe, the United States and Japan, the Company faces price control
pressures as a result of efforts by governments and other payers interested in
limiting overall health care costs. Typically, however, they include such
features as fixed pricing of products, fixed annual budgets for hospitals and
other similar institutions and a limited number of approved products for each
medical condition. The ability of physicians, hospitals and other users of a
company's products to obtain appropriate reimbursement from governmental and
private third-party payers for procedures in which the company's products are
used is critical to the success of the Company. Also adverse changes in
governmental and private payers' policies toward reimbursement for such
procedures could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Item 4.B Business Overview."
7
CURRENCY FLUCTUATIONS
Due to significant international operations the Company's financial
statements, which are presented in Swiss francs, are impacted by foreign
exchange fluctuations. Changes in exchange rates between the Swiss franc and the
main other operating currencies (US dollar, Euro, Great Britain pound, Japanese
yen) can result in increases or decreases in the Company's costs and earnings.
Fluctuations in exchange rates between the Swiss franc and other currencies may
also affect the book value of our assets outside Switzerland and the amount of
shareholders' equity. See "Item 11 Quantitative and Qualitative Disclosure About
Market Risk."
COMPETITION
The orthopedic and cardiovascular device industries are highly competitive
and are characterized by innovation, technological change and advancement. The
Company currently competes with a number of companies. The Company may not be
able to continue to develop successful new products and enhance existing
products, to obtain required regulatory approvals for such products, to
merchandise such products in a commercially viable manner or to gain market
acceptance for such products. The Company's success will depend to a substantial
degree on its ability to develop and introduce in a timely manner new products
and enhancements that meet changing customer requirements and emerging industry
standards. New product announcements by the Company could cause its customer to
defer purchases of existing products or cause distributors to request price
protection credits or stock rotations. The Company is subject to regulation in
each country in which it sells its products. In addition, the national health or
social security organizations in certain countries require the Company's
products to be qualified before they can be marketed in those countries. Failure
to receive relevant approvals or qualifications or the inability to obtain such
approvals in a timely manner or on terms favorable to the Company could have a
material adverse effect on the Company's business.
Sulzer Orthopedics' success in marketing and selling its products will
depend in part on maintaining good relationships with its sales force and
physician and hospital customers following its voluntary recall of Inter-Op
acetabular shells and reports of adverse clinical outcomes with respect to
porous-coated tibia base plates that were manufactured during the period July to
December 2000. See "Item 8.A.7 Legal Proceedings" for further information.
DEPENDENCE ON PATENTS, PROPRIETARY RIGHTS, CROSS-LICENSES AND PROPRIETARY
KNOW-HOW
The Company's future success in the medical device industry depends in
large part on its proprietary technology, technical know-how and other
intellectual property. The loss or the inability to acquire licenses or other
rights relating to one or more of its products or to current or future
technologies could prevent the Company from manufacturing and selling certain of
its products. The Company owns numerous patents and has numerous patent
applications pending. Pending patent applications may not result in issued
patents, patents issued to or licensed by the Company may be challenged or
circumvented by competitors and such patents may be found to be invalid or
insufficiently broad to protect the Company's technology or to provide the
Company with any competitive advantage.
PATENT LITIGATION
The Company and many of its competitors compete in medical product segments
that are particularly crowded with patents, where it is often difficult and
time-consuming to determine whether patent infringement has occurred.
Participants in these segments are extremely aggressive in asserting patent
protection and alleging patent infringement by others for both offensive and
defensive purposes. The Company and its products may become subject to patent
infringement claims or litigation brought by competitors or others or to
interference proceedings declared by the United States Patent and Trademark
Office ("USPTO") to determine the priority of inventions. The defense and
prosecution of intellectual property suits, USPTO interference proceedings and
related legal and administrative proceedings are both costly and time-consuming.
An adverse determination in litigation or interference proceedings to which the
Company is or may become a party could subject the Company to significant
liabilities to third parties, require disputed rights to be licensed
8
from a third-party for royalties that may be substantial or require the Company
to cease using such technology. One of the Company's subsidiaries, prior to its
acquisition, received a notice in March 1999 that it was infringing a patent by
manufacturing and marketing the IntraStent. See "Item 8.7 Legal Proceedings" for
further information.
ITEM 4. INFORMATION ON THE COMPANY
4.A HISTORY AND DEVELOPMENT OF THE COMPANY
Sulzer Medica Ltd was formed in July 1997 as a public company incorporated
under the laws of Switzerland. Sulzer Medica is domiciled in and governed by the
laws of Switzerland.
Sulzer Medica's principal executive offices are located at Andreasstrasse
15, 8050 Zurich, Switzerland, telephone +41 1 306 9696.
Sulzer Medica has been a leading technological innovator in the medical
products field for several decades. Its European orthopedics companies helped
pioneer the European reconstructive orthopedic implants market. In the early
1960's, a group of engineers performing research work in the laboratories of
Sulzer Ltd's foundries discovered a biocompatible alloy. This group met with
leading Swiss orthopedic surgeons who were seeking a suitable material for hip
implants and an industrial partner who would produce those implants according to
the surgeons' designs. Consequently, Sulzer Ltd entered the medical products
field in 1963. In the late 1980s, Sulzer Ltd acquired the two distribution
companies that had been founded by these surgeons, Protek Ltd and Allo Pro Ltd.
Sulzer Medica established a U.S. presence in orthopedics and broadened its
presence in the medical products field to include cardiovascular products
through its 1988 acquisition of Intermedics Inc. and its operating companies,
Carbomedics Inc., Calcitek Inc. and Intermedics Orthopedics Inc.
Sulzer Medica's cardiovascular operations were further diversified with the
1990 acquisition of Vascutek Ltd, a U.K. designer, manufacturer and marketer of
vascular grafts, the 1996 acquisition of Osypka GmbH, a German company that
provided Sulzer Medica with additional electrophysiology products, and the 2001
acquisition of IntraTherapeutics Inc., a manufacturer and marketer of peripheral
stents. Then, on June 3, 1998, Sulzer Medica announced its intention to divest
the Electrophysiology Division, which was completed on February 1, 1999.
Sulzer Medica's orthopedics operations were further diversified in January
1998 when Sulzer Medica consummated the acquisition of Spine-Tech Inc., a
designer and marketer of spinal implants. Then in January 2001, Sulzer Medica
acquired the assets of Paragon Implant Company, a manufacturer of dental
implants. Both acquisitions were integrated into the Orthopedics Division.
After Sulzer Medica's initial public offering in July 1997, Sulzer Ltd.
retained ownership of approximately 74% of Sulzer Medica's shares. On April 19,
2001, the shareholders of Sulzer Ltd. approved the spin-off of Sulzer Medica.
The spin-off was completed on July 10, 2001 with each Sulzer Ltd. shareholder
receiving two shares of Sulzer Medica for each Sulzer Ltd. share held as of July
9, 2001. Following the spin-off, Sulzer Ltd owned less than 5% of the total
outstanding shares of Sulzer Medica.
4.B BUSINESS OVERVIEW
Sulzer Medica Ltd is one of the world's leading medical technology
companies serving the orthopedic and cardiovascular markets on a global basis.
With a rich history of technological leadership and major operations in Europe
and the United States, Sulzer Medica holds prominent market positions in its
principal areas of activity.
Sulzer Medica designs, manufactures and markets artificial joints, spinal
implants, traumatology and arthroscopy products, dental implants, heart valves,
peripheral stents and vascular grafts. Until 1999, Sulzer Medica also produced
pacemakers, defibrillators and other electrophysiology products. In February
1999, the Electrophysiology Division was sold so Sulzer Medica could concentrate
its resources on the Orthopedics and Cardiovascular Prostheses Divisions where
Sulzer Medica holds solid market positions. The proceeds from the
9
sale of the Electrophysiology Division further strengthened the Orthopedics and
Cardiovascular Prostheses Divisions, and allowed Sulzer Medica to increase its
substantial portfolio of related biological technologies.
PRINCIPAL MARKETS
NET SALES BY DIVISION 2001 2000 1999 01 VS. 00 00 VS. 99
(CONTINUING OPERATIONS) MILL. CHF MILL. CHF MILL. CHF % %
----------------------- --------- --------- --------- --------- ---------
Orthopedics................................ 1,150 1,097 972 5 13
Cardiovascular Prostheses.................. 268 250 210 7 19
Total net sales............................ 1,418 1,347 1,182 5 14
NET SALES BY LOCATION OF CUSTOMER
-------------------------------------------
Switzerland................................ 61 59 55 3 7
EU......................................... 560 530 502 6 6
Rest of Europe............................. 19 17 16 12 6
North America.............................. 629 602 496 5 21
Other countries............................ 149 139 113 7 22
Total net sales............................ 1,418 1,347 1,182 5 14
In 2001, approximately 81% of Sulzer Medica's net sales and 99%% of
operating income before goodwill amortization and exceptional items were derived
from orthopedic products, offered through four operating companies which
comprise the Orthopedics Division: Sulzer Orthopedics Ltd, based in Switzerland,
and Sulzer Orthopedics Inc., Sulzer Spine-Tech Inc., and Sulzer Dental Inc.,
each based in the U.S. Sulzer Orthopedics Ltd and Sulzer Orthopedics Inc.
primarily focus on the reconstructive segment of the orthopedic market with
broad product lines of major implant systems for hips and knees, and additional
product offerings for shoulders, elbows, wrists and ligaments. Sulzer Spine-Tech
Inc. designs and markets spinal implants. Sulzer Dental Inc. manufactures
advanced dental and oral rehabilitation products. Sulzer Medica helped pioneer
the European reconstructive orthopedic market and believes that a key factor
behind its leading market positions is its track record of technological
leadership and innovation.
Sulzer Medica's cardiovascular products accounted for approximately 19% of
net sales and 1%% of operating income before goodwill amortization and
exceptional items of continuing operations in 2001, and were offered through its
Cardiovascular Prostheses Division. Cardiovascular prostheses products are
manufactured by the following four operating companies which make up the
Cardiovascular Division: Sulzer Carbomedics Inc. and Sulzer IntraTherapeutics
Inc, both based in the U.S., Sulzer Mitroflow Corp., based in Canada and Sulzer
Vascutek Ltd, based in Scotland. Sulzer Carbomedics Inc. and Sulzer Mitroflow
Corp. primarily focus on the design, manufacture and marketing of heart valve
repair and replacement products and heart valve components. Sulzer
IntraTherapeutics is focused on the design, manufacture and marketing of
peripheral stents, while Sulzer Vascutek Ltd is focused on the design,
manufacture and marketing of vascular grafts and other vascular surgical
products. As with its orthopedics operations, Sulzer Medica believes that it has
established its leadership positions in cardiovascular products based on a
reputation for industry-leading innovations and quality. Sulzer Medica
originated the application of Pyrolite carbon technology. This technology was
critical to the development of efficacious mechanical heart valves. Sulzer
Medica pioneered the development of the first bi-leaflet mechanical valve with
in-situ rotatability in the aortic and mitral position, the first pediatric
bileaflet mechanical valve, the first mechanical valve to address the issue of a
small aortic root and the first presealed valved conduit. In addition, Sulzer
Medica developed and introduced the first gelatin-sealed polyester large
diameter vascular graft, which has become the industry standard.
Until July 2001, Sulzer Medica's majority shareholder was Sulzer Ltd, a
Swiss company with limited liability that is listed on the Swiss Exchange.
Founded in 1834 and active in more than 140 countries, Sulzer Ltd is a
diversified technology company. Sulzer Ltd entered the medical products field in
1963, and in 1989 established the Sulzer Medica Group (now Sulzer Medica) to
operate its medical activities. In conjunction with the initial public offering
of Sulzer Medica in July 1997, the Sulzer Medica Group was recapitalized as
Sulzer Medica on July 7, 1997. Pursuant to certain agreements between Sulzer Ltd
and Sulzer Medica, Sulzer
10
Ltd has continued to provide services to Sulzer Medica after the IPO. See Note
29 to the consolidated financial statements, "Transactions with Related
Parties." Following the completion of the IPO, Sulzer Ltd continued to own
approximately 74% of the outstanding shares of Sulzer Medica. On July 10, 2001,
Sulzer Ltd divested substantially all of its equity interest in Sulzer Medica.
See "Item 7.A Major Shareholders" for further information. The Company's
business and profitability is dependent on its proprietary technology and
intellectual property, its ability to continue to develop successful new
products and enhance existing ones, and government reimbursement regulations.
See Item "3.D Risk Factors" for further information.
ORTHOPEDICS DIVISION
The orthopedic industry is divided into a wide range of categories,
including reconstructive orthopedic implants for joint replacement, spinal
implants, trauma products and sports medicine products, soft goods, bone cement
and related products and instruments as well as dental implants. Sulzer Medica's
orthopedic products are used primarily to treat patients with musculoskeletal
conditions resulting from degenerative diseases, deformities, trauma and
sports-related injuries. Sulzer Medica's orthopedic product offerings focus on
reconstructive devices for hips and knees, the largest segment of the orthopedic
products market. Also, Sulzer Medica offers a wide range of devices for upper
extremities, fracture treatment, and navigation systems for computer assisted
surgery. Sulzer Medica is focusing in the sports medicine field on cartilage and
meniscus regeneration and ligament reconstruction.
With the acquisition of Spine-Tech in January 1998, Sulzer Medica entered
the spinal implant market. Spine-Tech's spinal implants are designed to
facilitate fusion of spinal vertebrae to eliminate nerve dysfunction that can
cause chronic, disabling back pain. In addition, advanced dental implants and
oral rehabilitation technologies are designed, manufactured and marketed through
Sulzer Dental Inc.
Sulzer Medica's Orthopedics Division designs, manufactures and markets its
orthopedic products as well as trauma products and related surgical instruments
through four principal operating companies. Sulzer Orthopedics Ltd is
headquartered in Baar, Switzerland, and offers a wide range of advanced
orthopedic implants including hips, knees, elbows, shoulders and wrists and
spinal, as well as related surgical instruments. Sulzer Orthopedics Inc.
headquartered in Austin, Texas, markets major implant systems for hips, knees
and shoulders. Sulzer Dental Inc., a manufacturer and marketer of dental
implants and oral rehabilitation products, is headquartered in Carlsbad,
California. Sulzer Spine-Tech Inc., headquartered in Minneapolis, Minnesota,
operates Sulzer Medica's spinal implant and instruments business.
The activities of these four principal companies are managed by business
unit's presidents who report to the president and CEO of Sulzer Medica. This
coordination permits global strategic planning and joint research and
development, as well as the sales of each company's products through the sales
organization of the others, where appropriate. These specialized companies
provide the local customers with scientific and technical information and
support, as well as high quality support services in their respective countries.
ORTHOPEDICS MARKETING AND SALES
Introduction. Sulzer Medica uses various means of distribution for its
orthopedic products, including direct sales through its own distribution
companies, sales through an independent agent network and sales through
independent distributors. Sulzer Orthopedics' success in marketing and sales of
its products will depend in part on continuing to maintain good relationships
with its sales force and physician and hospital customers following its
voluntary recall of Inter-Op acetabular shells and reports of adverse clinical
outcomes with respect to porous-coated tibia base plates that were manufactured
during the period July to December 2000. See "Item 8.A.7 Legal Proceedings" for
further information. Sulzer Medica selects its means of distribution to suit the
dynamics of the particular market being served. Sulzer Medica currently markets
its products in virtually every country in which a significant volume of
orthopedic devices are utilized.
Sulzer Medica also engages in various marketing practices to increase
market share. Recent initiatives have included educational efforts regarding the
qualitative benefits and value associated with the use of Sulzer Medica's
orthopedic products. By explaining to these customers the long-term benefits
that arise from the use of Sulzer Medica's products, Sulzer Medica believes it
can demonstrate value to customers. In addition,
11
Sulzer Medica offers seminars, with live surgery broadcasts, via satellite
transmission, that provide surgeons with the opportunity to view surgeries and
thereby gain an understanding of the latest techniques.
Europe. Sulzer Medica distributes its products in Europe primarily through
a direct sales force that is specialized in specific product segments as the
local market situation requires, and allows for proximity to the customer. In
addition, exclusive distribution agreements exist for smaller markets.
United States. Sales of all joint care products in the United States are
primarily made through 37 independent agents and three managed territories. The
independent sales force is managed by field-based regional sales managers and
supported within Sulzer Medica by an internal sales and marketing organization.
Sales of spine care products are made through a direct and independent sales
force specialized in the spine market and familiar with the needs and
requirements of spine surgeons. Sales of dental care products are made through a
direct sales force that is managed by Sulzer Dental and supplemented by
international distributors.
As a result of the emergence of managed care, a specific sales support
organization was established to provide targeted programs, services, and product
information to economic customers. Sulzer Medica is attempting to gain market
share by utilizing this initiative and continuously upgrading and expanding
sales coverage. Sulzer Medica continuously adjusts its efforts to provide
maximum value to its evolving customer base, including both traditional and
economic customers.
ORTHOPEDIC PRODUCTS
Introduction. Sulzer Medica's orthopedic products currently focus on:
- Joint & Fracture Care (including supporting technologies and techniques
such as sports medicine, computer assisted surgery and navigation tools,
and cement and cement application devices),
- Spine Care,
- Dental Care
Within the European, American and Asian markets, Sulzer Medica has made and
continues to make efforts to broaden its product offerings so that it can
continue to offer a more comprehensive line of orthopedic products in all
segments of joint care (including Sports Medicine), spine care, fracture care
and dental care. Sulzer Medica believes that its European and U.S.-based
operating companies strongly position it to deliver products that serve the
needs of global markets and to provide surgeons worldwide with a significant
choice of product designs and concepts. Sulzer Medica's product portfolio is
focused to best meet the needs of a wide spectrum of patients, from young,
physically active people to the growing population of elderly, less active
patients.
The comprehensive product line is designed to appeal to the needs of the
economic buyers in the current managed care environment where buying groups and
other large customers have exhibited a preference for a limited number of
suppliers of orthopedic products. The breadth of Sulzer Medica's product line is
designed to increase Sulzer Medica's suitability as a preferred supplier to both
its traditional medical customers and to managed care organizations.
The orthopedic products industry is highly competitive and has been
characterized by technological change and incremental advancement. Sulzer
Orthopedics is advancing orthopedic medicine through its commitment to research
and development. The industry research and development average is 4.5% of sales.
Sulzer Orthopedics commits 9.2% of sales to research and development efforts
focused on delivering innovative technologies that solve major orthopedics
issues.
Competition within the orthopedic implant industry is based primarily on
value, price, breadth of product offerings, product design and performance, ease
of use, peer influence among surgeons, relationships based upon high levels of
customer service and clinical results of the product over time. In recent years,
managed care and the maturing nature of the industry have made price and value
increasingly important competitive factors. Price is a particularly relevant
factor in the sale of products where differentiation of the product cannot be
clearly proven and the decision to buy is significantly influenced by persons
other than the surgeon.
12
Additionally, as health care providers become more cost-conscious, the use of
higher-priced products has become increasingly limited to younger, more active
patients.
Sulzer Medica believes that its future success depends upon providing high
quality service to all customers, offering a wide range of quality products at
different pricing points, continuing to promote its key products, pursuing
additional strategic agreements with buying groups, offering a wide array of
ancillary products utilized by the orthopedic community and continuing to
pursue, through research and development efforts, new products and services that
can set Sulzer Medica apart from its competitors.
JOINT AND FRACTURE CARE
Sulzer Medica designs, manufactures and markets a line of joint
reconstruction implants for the hip, knee, shoulder and elbow. When patients
suffer from the painful and eventual debilitating symptoms associated with
orthopedic joint problems, Sulzer Medica's reconstructive orthopedic implants
typically significantly improve their quality of life. Historically, orthopedic
products were intended for the treatment of injuries. As a result of
developments that began in the late 1950s and the early 1960s, products and
procedures were also developed for the treatment of joint disease, such as
arthritis.
Total joint replacement surgery replaces worn, damaged or diseased joints
with components made of stainless steel, titanium alloy or cobalt chromium alloy
and ultra-high molecular weight polyethylene, a medical grade plastic. The first
widely used products were various forms of hip replacements, with total joint
replacement becoming the norm. Development of total knee systems followed the
development of total hip replacements. Reconstructive products may be further
broken down by category into cemented products, cementless products and revision
products. Cemented products are secured to the bone with a grout made of
polymethylmethacrylate ("cement" or "bone cement"), while cementless products
are "biologically fixed," by means of tissue ingrowth into the implant's porous
surfaces or tissue ongrowth onto a macro or micro texture surface, securing the
implant without the use of cement. The Sunspace Knee System is a small minimally
invasive device that offers a new treatment option for relief from early stage
osteoarthritis of the knee.
Sulzer Medica is actively pursuing computer-aided surgery for hips, knee,
cruciate ligament and spine applications. For example, Navitrack systems are
jointly developed with Orthosoft, Inc. based in Montreal, Canada and exclusively
distributed worldwide by Sulzer Medica. In order to address the Sports Medicine
activities, Sulzer Medica is entering the biological regeneration and
reconstruction business. In 1996 Sulzer Medica acquired the rights from ReGen
Biologics Inc. to distribute their Collagen Meniscus Implant (CMI) outside the
USA. Sulzer Medica performed the clinical studies in Europe and launched the CE
marked CMI in Europe in April 2000.
In HIP ARTHROPLASTY, the "ball and socket" of the hip joint are replaced
with several components, depending on the product design. The stem, made of
stainless steel, titanium alloy or cobalt chromium alloy, supports the head,
which is comprised of a "ball and neck." The acetabular component, which usually
consists of a polyethylene liner and metal cup or an all polyethylene cup,
replaces the socket. Hip implants, as a result of physician preference, are
typically divided into European and American designs. Sulzer Medica offers a
full line of hip implants for primary and revision surgery to meet patient needs
and surgeon preferences, including, among others, the following key products:
MODEL NAME DESCRIPTION
---------- -----------
Muller Straight Stem......................... With more than thirty years of successful
clinical use, the Muller Hip Stem offers a
self-locking, cemented straight stem. The
Muller holds the distinction of being the
most copied hip stem design in the Europe.
CLS Hip System............................... With more than ten years of excellent
clinical results, the CLS Hip system's key
features include its ease of use and simple
instrumentation and cementless application.
It is recommended for use by younger pa-
tients.
13
MODEL NAME DESCRIPTION
---------- -----------
Alloclassic Hip System....................... With more than 15 years of excellent clinical
results, the Alloclassic Hip system offers a
cementless straight stem design.
Durasul Tribological System.................. This unique acetabular system consists of
highly crosslinked Durasul polyethylene
without measurable wear and the Durasul CoCR
head. Durasul Large Diameter Head technology
received FDA clearance in March 2000.
Metasul Tribological System.................. This unique acetabular system has more than
10 years of clinical results and consists of
Metasul metal-metal head and cup for reduced
wear. Metasul received FDA approval in August
1999, making Sulzer Orthopedics the first to
market metal-metal technology in the United
States.
MS-30 Stem System............................ The MS-30 Stem system is a cemented stem with
a three dimensional, conical design and key
features that allow for optimal positioning
during surgery.
Natural-Hip System........................... The Natural-Hip system is an anatomically
shaped, straight stem that combines the
surgical simplicity of a straight stem with
many of the best features of an anatomic
stem. It is available in a wide range of stem
options, including cobalt chromium for
cemented use and hydroxyapatite over porous
coating for non-cemented fixation.
APR Hip System............................... The APR Hip system is a curved, anatomic stem
that addresses key stability and performance
issues such as proximal fill and anatomic fit
and is available in a wide range of stem
options, including hydroxyapatite over porous
for non-cemented fixation and cobalt chromium
for cemented use.
Weber Cemented Total Hip System.............. This is an advanced metal-on-metal system
that provides less wear, significantly
reduces interaction with surrounding tissues
and reduces risk of long-term loosening. This
system is only available in Europe.
Apollo Hip System............................ This system is a less expensive implant
targeted towards lower-demand patients.
Converge Acetabular Cup System............... The Converge acetabular system is a two-piece
modular system that consists of a
polyethylene insert and a porous titanium
acetabular shell. This product is designed to
reduce polyethylene wear debris commonly
associated with implant loosening. The system
includes four shell options and three insert
options. The shells pair with Metasul,
Durasul and standard polyethylene.
Allofit Acetabular Cup System................ This acetabular system is a modular concept
that has been used successfully in Europe for
several years and was introduced to the US
market in 2001. The titanium, macrostructured
shell is available with and without screw
fixation and pairs with Metasul, Durasul and
standard polyethylene. Allofit received FDA
clearance in March 2001.
14
MODEL NAME DESCRIPTION
---------- -----------
Precedent Revision Hip System................ The Precedent is a straight revision stem
designed to address the needs of patients who
have failed primary implants. The Precedent
is available in a wide variety of sizes to
address varying needs.
FracSure Hip System.......................... This system provides the surgeon with a
proven cost-effective means for addressing
the hip fracture patient. Made of cast
cobalt-chromium, this straight stem may be
press-fit or cemented.
Total KNEE ARTHROPLASTY consists of several components depending on the
product design: the femoral component or components; the tibia component or
components; and the patellar component or components. Sulzer Medica offers a
full range of implants. The Company's key products include:
MODEL NAME DESCRIPTION
---------- -----------
Natural-Knee System.......................... With more than ten years of successful
clinical use, this complete knee system was
also approved in 1997 by the FDA for use in
cementless applications. The Natural-Knee
system covers arthritic disease states
ranging from those requiring high tibia
osteotomies to those requiring more
constrained implant options. An added benefit
of the Natural-Knee system is the simplicity
and precision of the instruments used to aid
in implantation. The entire family of
Natural-Knee products has common, adaptable
instrumentation and surgical techniques. The
Natural Knee II with a Rotating Platform was
introduced in Europe in June 2000.
Durasul Tribological System.................. Building upon the successful use in total hip
implants, highly crosslinked Durasul
polyethylene without measurable wear is now
available for use in knee arthroplasty.
Natural-Knee Durasul was cleared by the FDA
in November 2000. Highly crosslinked Durasul
polyethylene improves resistance to
delamination, a major cause of early knee
implant failure.
SAL System................................... The SAL system was launched in 1997, and is a
self-aligning knee with mobile bearing.
UniSpacer Knee System........................ The UniSpacer is technically less demanding
than traditional knee surgery and requires
only minimal surgical intervention with no
bone cuts. It helps relieve arthritic pain
and improve joint stability by restoring
ligament tension and normal knee alignment
while preserving the patient's natural bone.
F/S Knee System.............................. The F/S knee system is a fixed-bearing,
cemented knee that has more than thirty years
of clinical results and can be used to
conform to a variety of surgical philosophies
and cost parameters.
15
MODEL NAME DESCRIPTION
---------- -----------
Apollo Knee System........................... The Apollo knee system is a total knee system
that addresses arthritic knee conditions
requiring cruciate sparing, sacrificing or
constrained implant options. It was designed
to restore patella depth and optimize wear
resistance. Building on 17 years of proven
clinical success observed in total condylar
designs, the Apollo Knee has been shown to
produce the highest contact area through
range of motion of any fixed bearing
components. In addition, its instrumentation
mirrors that of the Natural-Knee system with
its ease and simplicity of use.
Alloflex Monocondylar Knee................... This cementless knee prosthesis has evolved
from a previous successful product and
incorporates innovative design features and
materials that provide increased stability as
well as reduced stress on the patient's
ligaments. This prosthesis is not available
in U.S.
GSB Knee Prosthesis.......................... This product, designed for cemented use, is
the implant of choice in the presence of
severe joint destruction. It is not available
in the U.S.
Wallaby Knee System.......................... Designed in conjunction with a group of
French surgeons, this complete system
includes two lines: with or without retention
of the ligaments. The Wallaby instrumentation
is also used with the F/S and SAL systems. It
is not available in the U.S.
Magna ROM 21 Knee System..................... A knee product introduced in Japan in 1999
that solves the issue of range of motion
required by the Asian market.
Innex Knee System............................ Introduced in Europe in late 1999, the
product continues in 2000. The Innex
addresses the challenge of kinematics and
reduced wear. It also meets Europe's changing
market needs, from fixed to mobile-bearing
surfaces.
UPPER EXTREMITIES product lines encompass complete shoulder and elbow
replacement systems. Components of the shoulder systems are humeral stem,
humeral head and glenoid components. Total elbow components consist of ulnar and
humeral components. The key Upper Extremity product lines include:
MODEL NAME DESCRIPTION
---------- -----------
The Anatomical Shoulder...................... A modular shoulder system designed for
primary and secondary osteoarthrosis,
rheumatoid arthritis and complex fractures of
the humerus. Unique biomechanical concept
allows for precise replication of the humeral
anatomy for excellent long-term clinical
results. A press-fit option received FDA
clearance in February 2001, expanding the
shoulder system to include both cementless
and cemented options.
16
MODEL NAME DESCRIPTION
---------- -----------
The Select Shoulder.......................... A modular shoulder system that has been
providing solutions to orthopedic surgeons
since 1988. The Select Shoulder was designed
to effectively handle cases from the most
simple to the most complex, including
four-part fractures and revision cases.
The GSB-III Elbow............................ An elbow system with 16 years of clinical
experience designed to relieve pain and
restore functioning of the elbow. This
nonconstrained design, with rotational
clearance of the ulna component and easily
moveable rotation encasing, results in a
stable and lasting connection.
The objective of the orthopedic TRAUMA field, which involves the management
of fractures, is the achievement of complete bone healing, or "union," and
restoration of alignment and full range of motion in patients who have sustained
fractures. The February 1997 acquisition of Synos Medical Ltd, a designer and
manufacturer of trauma products, represents the initial phase in Sulzer Medica's
orthopedic trauma market strategy. These products are currently not marketed in
the U.S.
MODEL NAME DESCRIPTION
---------- -----------
SIRUS Intramedullary Nailing System.......... The innovative concept of the Sirus
intramedullary nailing system was developed
in close collaboration with leading surgeons
and is suitable for the treatment of both
simple and complex fractures of the femur and
the tibia. The intramedullary nails cover all
indications for unreamed and reamed
intramedullary nailing. Due to the
anatomically adopted shape, in association
with the cannulation, an easy and safe
insertion of the implants is enabled.
Different interlocking options allow the
stabilization of even complex fractures close
to a joint. The user-friendly, modular
instrument set is intended for use in opera-
tions on both the femur and the tibia. The
implants are made of titanium alloy
(Protasul-100) for excellent
biocompatibility, fatigue strength and MRI
compatibility.
Intrasys Proximal Intramedullary Nail for The versatile implant system Intrasys is
Femur...................................... intended to be used for the treatment of
simple as well as complex fractures of the
proximal femur. It consists basically of
three components: the intramedullary nail,
the stabilizing screw and the cervical screw.
The stabilization screw ensures rotational
stability of the femoral neck during surgery
and also during bony consolidation whereas
the cervical screw transfers the hip forces
to the nail. The implants are available in
stainless steel (Protasul-S 30) or titanium
alloy (Protasul-100).
Plating Systems.............................. The large portfolio offers of a wide range of
indications for the internal fracture
fixation in the epi-, meta- and diaphyseal
area of mini-, small- and large bones. All
these implants are available in stainless
steel (Protasul-S) and in titanium
(Protasul-Ti, Protasul-100).
17
MODEL NAME DESCRIPTION
---------- -----------
Screw Plates for Hip and Condyle............. Screw plates for hip and condyle are used for
the fixation of simple or multifragmentary
fractures of the proximal and the distal
femur. These implant systems present an
efficient and clinically proven concept in
treating a wide range of indications of these
fracture types. The systems are available in
stainless steel (Protasul-S) or titanium
alloy (Protasul-100).
Cannulated screws............................ Cannulated screws can be widely used for
fracture fixations in various indications.
The guidance over a wire provides the surgeon
with an alternative and very precise method
in performing lag screw osteosynthesis. With
the different diameters ( 3.5, 4.5 and 7.0
mm) and the wide range of screw types and
lengths it is possible to treat epi- and
metaphyseal fractures in small and large
bones. The systems are available in stainless
steel (Protasul-S) or titanium alloy
(Protasul-100) for excellent
biocompatibility, fatigue strength and MRI
compatibility.
Polypin...................................... Polypin, the bioresorbable bone pin, is used
for the fixation of fractures with limited
load or shear stress. Different animal trials
and multicenter studies showed that it has
the same functional results like metal
implants, but with one important advantage: a
second surgery for implant removal is not
necessary saving additional costs for the
patient. Polypin is made of an amorphous
Polylactide, which has an excellent
biocompatibility and degrades completely
within two years.
Sulzer Medica's SPORTS MEDICINE has as its objective the biological
meniscus and cartilage regeneration and ligament reconstruction to restore joint
function. The products offered within this portfolio include bioresorbable
products to support tissue regeneration and reconstruction as well as
instruments for tissue transplantation and stimulation of cartilage repair. New
approaches for tissue engineering are being evaluated in close cooperation with
Sulzer Biologics. Following are the company's Sports Medicine products marketed
in Europe.
MODEL NAME DESCRIPTION
---------- -----------
Sysorb....................................... Bioresorbable screw for ligament
reconstruction
Collagen Meniscus Implant (CMI).............. Bioresorbable collagen matrix for meniscus
regeneration
Soft Delivery System (SDS)................... System for Osteochondral Transplantation
Microfracturing Instruments.................. Set of instruments to stimulate cartilage
repair
Navitrack is a COMPUTER-ASSISTED SURGERY (CAS) system offered by Sulzer
Medica that is used for hip, knee, spine and cruciate ligament operations.
Navitrack is jointly developed with Orthosoft, Inc. in Montreal, Canada, and is
exclusively distributed worldwide by Sulzer Medica. The Navitrack System is an
innovative CAS system that provides patient-specific 3-D images in real time to
assist the surgeon in preoperative planning and surgery. Navitrack creates a
real-life, virtual model of a patient's anatomy, enabling the surgeon to
optimize precision in moving instruments and placing implants during surgery.
Electronic visualization makes it possible to reduce the number of
time-consuming X-rays required during an operation. Navitrack is the first CAS
system designed by orthopedic surgeons for orthopedic surgeons to provide
independent multi-tracking of instruments.
18
SPINE CARE
The primary goals of spinal implantation systems are to correct for spinal
deformity or imbalance, to re-establish stability of the spine and to eliminate
pain. Hooks, plates, rods, screws and cages (metallic, ceramic and bone) acting
as the equivalent of modular spinal anchoring, are constructed by the surgeon to
create an internal bracing mechanism. Surgeons adapt these components to the
specific pathology of the individual patient, creating an implant construct that
is intended to reconstruct and restore normal spinal biomechanics or facilitate
bone fusion. Sulzer Medica's January 1998 acquisition of Spine-Tech marked its
significant entry into the spinal implant market.
MODEL NAME DESCRIPTION
---------- -----------
ALLOSPINE Posterior.......................... Belongs to the ALLOSPINE family, ALLOSPINE
posterior is a pedicle screw-rod system for
the posterior approach, used from the
lumbosacral to the upper thoracic level. On
the market since 1994, introduced throughout
Europe.
DYNESYS...................................... A new concept for the treatment of lumbar
degenerative disc disease. DYNESYS stabilizes
the disc, ligaments and capsular articulation
and allows a restoration of the posterior
disc height without fusion. Facet joints and
disc stay intact. Market introduction started
in autumn 1998 in Europe.
BAK/L Cage................................... A fenestrated, porous, threaded titanium
interbody fusion device, cylindrical,
titanium alloy interbody fusion designed to
provide an immediately stability of lumbar
degenerated spinal motion segments to allow
promote fusion and relief of painful chronic
neck pain symptoms.
BAK/Proximity................................ A second generation interbody fusion cage,
designed to BAK/Proximity designed for closer
proximation of the cages within the
degenerated disc space, allowing for reduced
dissection, retraction and exposure re-
quirements. Larger open internal chambers
allow the surgeon to place more bone in the
cage, which enhances fusion.
BP/Proximity................................. A third generation BAK cage designed to
provide the best features and benefits of the
BAK/L and the BAK/Proximity.
Bone Harvester............................... Provides a quick, less invasive bone graft
harvesting method. This allows the surgeon to
harvest the patient's own cancellous bone
from the Illiac Crest.
Cervi-Lok.................................... The instrument and implant design of this
cervical plating system provides precise
screw and plate placement, optimizing spinal
stability.
Trinica...................................... A titanium anterior cervical plating system
indicated for use in treating degenerative
disc disease, trauma, tumor, and fracture, as
well as revision procedures.
BAK/C........................................ A treaded titanium interbody fusion device
used to treat degenerated discs of the
cervical spine, without the need to harvest
bone from the patient's hip.
Silhouette Spinal Fixation System............ A spinal fixation system consisting of rods,
screws, and hooks of various size and shape
to provide fixation that attaches to the
posterior elements of the spine.
19
MODEL NAME DESCRIPTION
---------- -----------
Puros Traditional Allografts................. These Allografts are a family of bone
products specifically designed and processed
to meet the demanding needs of surgeons. The
grafts are processed using the proprietary
Tutoplast process.
Symmetry Allograft Bone...................... A unique lumbar interbody allograft fusion
system that features consistent cortical
strength and density.
Puros Accugraft.............................. This allograft product combines cortical and
cancellous bone material into a unique
horseshoe shaped graft. Used in the lumbar
spine, this graft is inserted from the
anterior approach.
DENTAL CARE
Sulzer Dental Inc. was established in 2001 as an amalgamation of Sulzer
Calcitek (founded 1981) and Paragon Implant Company (founded 1982), former
competitors in the dental implant industry. Sulzer Medica acquired the
constituent companies in 1988 and 2001, respectively. Sulzer Dental Inc.
represents an extension of the orthopedic customer base to include general
dentists, prosthodontists, oral surgeons and periodontists. Using a direct sales
force in the United States, five wholly-owned subsidiary organizations, and an
active network of some 55 distributors, Sulzer Dental Inc. markets products in
three principal areas: dental implants, periodontal therapies and bone grafting
material. Dental implants allow a patient to replace one or more missing teeth
with a product that is permanently inserted into the patient's jaw. Periodontal
therapies address a variety of conditions that affect the attachment apparatus
(e.g., bone, periodontal ligament) that supports a natural tooth or dental
implant, while bone-grafting material may be used to address structural defects
in a patient's jaw.
In 1996, the former Sulzer Calcitek expanded its operations by establishing
direct distribution centers in Germany and France. By 2001, the former Paragon
Implant Company featured a network of 30 distributors worldwide, and direct
distribution centers in Israel and Canada. Combined, these structures provide
Sulzer Dental Inc. with 55 distribution partners worldwide that are increasing
penetration into the European, Asian and Middle Eastern markets and helping it
to better serve its customers.
Sulzer Dental Inc. can boast state-of-the-art product lines that include
numerous patented innovations, such as the highly crystalline MP-1
hydroxyapatite coating, implant Selective Surface technology, external Spline
and internal hexagon abutment connections, multiple lead threads, friction-fit
abutments and more. Historically, our products have also included many industry
"firsts," such as the first hydroxyapatite-coated dental implant system
(Integral, 1985) and the first internal connection for cemented or
screw-retained abutments (Screw-Vent, 1986). Sulzer Dental Inc. produces high
quality dental implant designs for one- or two-stage surgeries. Both the Spline
Dental Implant System (1995) and Paragon Implant Systems (1995) incorporate a
variety of surface features, including microtextured titanium and MP-1
hydroxyapatite. All implants from Sulzer Dental Inc. also incorporate one of
three patented implant-abutment interfaces that eliminate or reduce abutment
micromovement, increase strength, and provide a more precise fit with an
enhanced tactile sense of engagement. Self-tapping screw implants in the
combined systems include the Screw-Vent (1986), Spline Twist (1997), Twist
Max(1999), Tapered Screw-Vent (2000), the one-stage AdVent (2000), one-stage
SwissPlus (2001) and one-stage Tapered SwissPlus (2001) product lines. In
addition, color-coded drills with triple cutting edges and electropolished
surfaces provide a gentle surgical procedure to enhance osseointegration.
In the periodontal therapy market, BioMend (1996) was the first absorbable
collagen membrane cleared for use in the United States. BioMend facilitates the
regeneration of tooth support structures, helps to provide a proper healing
environment and allows wounds to heal with a lower risk of re-infection. Its
biocompatible and absorbable nature eliminates the need for second-stage
surgery. BioMend's ease of use during surgery may prove to be a competitive
advantage. BioMend Extend (1999), a longer-lasting resorbable membrane, allows
healing for up to 18 weeks. Other periodontal therapy products include a variety
of collagen wound dressing
20
products: CollaTape, CollaCote and Colla Plug. In 2001, Sulzer Dental Inc.
introduced Puros, a mineralized allograft product that can be used in various
regenerative procedures.
BIOLOGICS
Orthopedic and cardiovascular tissue engineering and carrier technologies
define the base from which Sulzer Biologics, which manages the research and
development activities in the biological field by Sulzer Medica, develops new
therapies for orthopedic and cardiovascular tissue regeneration and repair
therapies.
Sulzer Biologics had a challenging year in 2001 highlighted by a major
decision to terminate the Ne-Osteo growth factor program and to shut down the
Sulzer Biologics facility in Denver. In-depth analysis undertaken by management
has clearly shown that the Division's proprietary Ne-Osteo growth factor does
not meet the necessary requirements to justify investment in further
development. Although excellent research into the stimulation of endogenous bone
growth had been carried out over the years, management came to the conclusion
that the product would not yield the commercial results required for the
company's core businesses within the necessary timeframe.
As a result, Sulzer Biologics' US-based organization has been consolidated
in a single, new facility in Austin, Texas, located near the Division's two key
collaborators: Sulzer Orthopedics and Sulzer Carbomedics.
In 2001, Sulzer Biologics continued its progress on intervertebral disc
regeneration technology, articular cartilage development, drug-coated stent
research and investigation of other several biochemical agents for cardiac and
peripheral angiogenesis. Research focusing on the development of new and
improved carriers for delivery of growth factors for bone applications also
progressed well. This research resulted in five new patent applications being
filed during the year.
In the area of articular cartilage, Sulzer Biologics and Sulzer Orthopedics
have announced collaborative efforts with Professor Couceiro in Santiago de
Compostela, Spain, to establish set up a human articular-cartilage processing
Operation Center. This collaboration, funded in part by the Spanish Government,
will benefit Sulzer Medica by establishing the company's first introductory
products in the field of articular cartilage regeneration.
CARDIOVASCULAR PROSTHESES DIVISION
The cardiovascular prostheses market comprises principally heart valve and
vascular graft replacement and repair products. Heart valves facilitate the
one-way flow of blood in the heart and prevent significant backflow of blood
into the heart and between the heart's chambers. There are four valves in the
human heart, with the aortic and mitral being the two most often replaced or
repaired. Heart valve replacement or repair may be necessary because the natural
heart valve has deteriorated as a result of congenital defects or disease. There
are generally two types of prosthetic heart valves: mechanical valves and tissue
valves (also known as biological valves). In addition, valve repair is a
fast-growing segment of valve disease therapy. In some cases, surgeons prefer to
treat valve disease through delicate surgical repair procedures instead of valve
replacement, typically using products known as annuloplasty rings.
Historically, there have been trends where, at times, tissue valves were
more popular and, at times, mechanical valves were preferred. Mechanical valves
are extremely durable and have tested well beyond 100 years. On the other hand,
tissue valves are less durable and generally last from 8 to 14 years, depending
upon the age and activity level of the patient. As a result, there is the
potential for high-risk replacement of a biological valve when the patient is
advanced in age. Conversely, tissue valves do not require routine (daily)
anticoagulant therapy, as do mechanical valves.
Vascular grafts are used to replace or bypass occluded, damaged, dilated or
severely diseased arteries. Arteries, with the exception of the pulmonary
artery, are vessels that carry oxygen rich blood away from the heart to the
other tissues throughout the body. In many instances it is possible to harvest
veins or arteries from one portion of a patient's body and implant them in the
area needing vessel repair. Harvested vessels are used most often in coronary
artery bypass while synthetic grafts are required for most peripheral artery
repairs. In addition to these patients, it is often necessary to implant
artificial vessels in end-stage renal disease patients
21
undergoing hemodialysis. Synthetic vascular grafts can be used in large diameter
(greater than 8mm) and medium diameter (6-8mm) applications. The small diameter
application (4-5mm), at present, is primarily serviced by natural vessel
transplant.
Large diameter grafts generally are tubular materials based on polyester
fiber and sealed with a resorbable protein. Medium diameter grafts generally are
ePTFE (a teflon like material) constructions, but there is some overlap in
materials between the two applications.
The Company expects the overall market for heart valves and vascular grafts
to grow over the long term as the result of continuing increases in heart and
vascular disease worldwide. These diseases are generally a result of aging and
lifestyle, including diet. Market size should also increase as emerging market
countries assign a higher priority to health care needs.
CARDIOVASCULAR PROSTHESES PRODUCTS
Cardiac Care
Heart Valves. The company has over 30 years experience in the design,
development and manufacturing of mechanical heart valves and heart valve
components for itself and other companies. The company's proprietary mechanical
heart valve product line, CPHV, has an unmatched record of safety with over
400,000 implants with no postoperative mechanical failures. The company's
overall heart valve product line includes, among others, the following:
MODEL NAME DESCRIPTION
---------- -----------
CPHV Mitral/Aortic Valve..................... The CPHV Standard Valves are available for
both aortic and mitral implantation. Its
advantages, which are incorporated in all of
the company's mechanical heart valves,
include in-situ rotatability, enhanced
radiographic visibility, surgeon-friendly
cuff designs and an unmatched record of
safety.
CPHV Pediatric Valve......................... A specially sized valve for pediatric cases.
Reduced "R" Series Aortic Valve.............. The Company's "R" Series Aortic Valve
features a reduced outside valve diameter to
address the needs of patients with a small
aortic root, where intra-annular placement is
preferred.
"Top Hat" Supra-Annular Aortic Valve......... The Top Hat Supra-Annular Aortic Valve is a
bi-leaflet valve designed to allow the
implantation of a one to two size larger
valve compared to intra-annular placement.
This promotes better blood flow and serves as
an alternative to surgical annulus enlarge-
ment.
Orbis Universal Valve........................ The Orbis Universal Valve features a
"universal" design that allows it to be used
for either aortic or mitral implantation,
thereby reducing multiple inventory stocking
needs. The company received FDA approval in
early 1999.
OptiForm Mitral Valve........................ The Optiform valve is designed to allow the
valve to sit higher in the mitral annulus
with an expanded cuff that optimally conforms
to the patient's annulus. The company has
received FDA approval and the CE Mark.
SuMit Mitral Valve........................... The SuMit Mitral Valve allows atrialized
implantation where there is a concern of left
ventricular out-flow track obstruction. The
company received CE marking in 1999 and has
not sought FDA approval.
22
MODEL NAME DESCRIPTION
---------- -----------
Carbo-Seal Ascending Aortic.................. The Carbo-Seal Ascending Aortic Prosthesis
combines a heart valve Prosthesis with a
pre-sealed vascular graft, thereby increasing
the convenience to the implanting surgeon and
reducing operating time and therefore the
associated risk to the patient.
AnnuloFlo/AnnuloFlex Annuloplasty Rings...... Among its heart valve products, the company
also designs and manufactures annuloplasty
rings to facilitate valve repair. The company
produces both a rigid and flexible ring
mounted on instrumentation for easier and
faster implantation.
Synergy PC................................... A leader in performance in the most rapidly
growing pericardial segment of the tissue
valve market, the Synergy PC is manufactured
by the recently acquired Sulzer Mitroflow
subsidiary in Richmond, B.C., Canada.
Mitroflow has over 17 years of experience in
developing and manufacturing pericardial
tissue heart valves. The valve is CE marked
and the company is currently seeking FDA
approval.
Synergy ST................................... Since April 1997 the company has distributed
this stented porcine valve manufactured by
Labcor Laboratorios. Labcor has over 16 years
of experience with in the manufacture of
tissue heart valves. The product is CE
marked.
CardioFix Pericardial Patch.................. Using the proprietary PhotoFix(R) tissue
fixation process, the CardioFix offers a
pericardial patch material for use in cardiac
repair that has unprecedented immunological
and surgical handling characteristics. The
product has both CE mark and FDA approval.
Historically, in addition to selling heart valves to customers directly,
the company has manufactured heart valve components for certain of its
competitors, which components are then assembled and marketed under the
competitor's brands. Customers for the company's products have included, among
others, St. Jude, Medtronic, Baxter, Medical Inc., Aortech and ATS Medical, Inc.
In addition to mechanical heart valves, the company is developing a tissue
heart valve presence. In July 1998, the company entered into a distribution
agreement with Mitroflow International. Subsequently, the company acquired
Mitroflow in October 1999. Mitroflow has over 17 years of experience in
developing and manufacturing pericardial tissue heart valves.
In April 1997 the company entered a distribution agreement with Labcor to
market Labcor's tissue valve prostheses, including the Labcor Porcine Stented
Valve Bioprostheses. Labcor has accumulated over 16 years of experience with its
tissue heart valves.
Vascular Care
Sulzer Vascutek, one of the Company's subsidiaries, is a world leader in
the design, manufacturing and marketing of Vascular Prostheses.
Combining state of the art extrusion and textile technology with a
commitment to focused research, Sulzer Vascutek manufactures an extensive range
of sealed and unsealed ePTFE and polyester prostheses to meet the global needs
of vascular and cardiovascular surgeons.
Recent developments focus on a new modular system for endovascular aneurysm
repair which features a unique Nitinol ring-stent combined with an innovative
graft material, which has been designed by Sulzer Vascutek specifically for
endovascular application. This is the newest and fastest growing area in
vascular surgery today.
23
The Company will be commencing a clinical trial with its redesigned AAA
endovascular system Anaconda in June 2002.
MODEL NAME DESCRIPTION
---------- -----------
Sulzer Vascutek ePTFE........................ Is an ePTFE prosthesis indicated for
peripheral and vascular access surgery. The
range consists of standard and thin wall
configurations, either unsupported or with
end, central or full external support.
SEALPTFE..................................... Is an ePTFE prosthesis using the substrate of
Sulzer Vascutek ePTFE and coated with our
hydrolysable gelatin sealant. This
significant advance addresses suture hole
bleeding, one of the main problems asso-
ciated with conventional ePTFE. SEALPTFE also
produces minimal "sweating" -- a problem
associated with seroma formation. Most
importantly the coating may be bonded with
antibiotic to reduce the risk of infection.
The range consists of standard and thin wall
configurations, either unsupported or with
end, central or full external support.
Taperflo..................................... Is a range of SEALPTFE prostheses for
vascular access surgery in renal dialysis.
The range consists of standard and thin wall
configurations, either unsupported or
centrally supported in both stepped and short
taper designs.
Gelsoft...................................... Gelsoft is a zero porosity, warp lock knitted
polyester graft combining superior handling
with a unique modified gelatin impregnation.
Gelsoft(TM) is indicated for abdominal and
peripheral applications and is available in
straight, bifurcation and externally
reinforced designs.
Gelsoft Plus................................. Gelsoft Plus is the first of a new generation
of zero porosity polyester grafts featuring a
unique Koper knitted structure. This provides
graft dilatation resistance while preserving
all the advantages of a warp knitted
structure i.e. soft handling and absence of
fraying. Gelsoft(TM)Plus is indicated for
abdominal and peripheral applications and is
available in straight, bifurcation and
externally reinforced designs.
Gelseal...................................... Gelseal is a zero porosity, warp-lock knitted
polyester graft featuring an additional set
of yarns to provide the additional strength
required in the high flow, high pressure
thoracic area. Gelseal(TM) is available in
straight, bifurcation and externally
reinforced designs. Single and multibranched
configurations are also available for aortic
arch procedures.
Gelweave..................................... Gelweave is a zero porosity gelatin
impregnated graft. This twill woven polyester
structure featuring "floating yarns" which
create a velour on the external surface of
the graft, encouraging better attachment of
ingrowing tissue and improved healing
capacity. Gelweave(TM) is indicated for
thoracic applications and is available as
straight, bifurcation as well as single and
multibranched configurations.
24
MODEL NAME DESCRIPTION
---------- -----------
Gelweave Valsalva............................ Gelweave Valsalva, an innovative graft
design, is indicated for aortic valve sparing
and prosthetic valve implant procedures. It
mimics the stretch responses of the Valsalva
sinuses and provides the potential to reduce
the tension on the coronary anastomoses,
minimising valve leaflet stress.
Thin Wall Fluoropassiv....................... Fluoropassiv is a unique fluoropolymer
coated, Koper knitted zero porosity polyester
biomaterial. Each polyester fibre is covered
by and bonded to fluoropolymer molecules
thereby creating an interpenetrating network
between the two polymers. The fluoropolymer
imparts low thrombogenic characteristics thus
providing the potential for improved healing
and long term patency. The range consists of
crimped and externally reinforced grafts.
Carotid patches are also available.
Primary purpose of peripheral stents, those intended for use outside of the
heart, is to restore flow through a obstructed lumen be it a duct, artery or
vein. The primary products from the company are stents, which are mechanical
scaffolds that hold open the lumen to restore flow. The stents are designed such
that they either expand upon release from a delivery system (self-expanding) or
expanding via a balloon catheter (balloon expandable) when the balloon is
enlarged under pressure. Stents are permanent implants that are implanted by
Interventional Radiologist, Interventional Cardiologist and Vascular Surgeons.
Sulzer Medica's February 2001 acquisition of IntraTherapeutics Inc. marks its
significant entry into the peripheral stent market.
The worldwide peripheral stent market consists of two types of stents:
balloon expandable and self-expanding. Balloon expandable stents are available
unmounted or premounted on a catheter delivery system. The Company's balloon
expandable stents are available unmounted and premounted on delivery catheters,
and the Company offers a nitinol wire coil, self-expanding stent on a
proprietary delivery catheter and a cut tube self-expanding stent on a
proprietary delivery system. Since 1998, the Company has launched several
balloon expandable stent products, a nitinol coil self-expanding stent and a cut
tube self-expanding stent, which are marketed in the United States and
internationally under the IntraStent family name. In the United States, the
Company has received 510(k) pre-market clearance for these products either for
use in the biliary ducts or for use in the bronchial tubes.
MODEL NAME DESCRIPTION
---------- -----------
IntraStent................................... This is a single strut, stainless steel,
balloon expandable stent which optimizes
flexibility, coverage and radial force with
minimal shortening. This stent's
well-balanced performance characteristics
make it especially versatile and
cost-effective.
IntraStent LP................................ This is a single strut, stainless steel, and
balloon expandable stent customized for use
with a low profile delivery balloon catheter
that retains the performance characteristics
of the IntraStent. The IntraStent LP enables
the physician to use a smaller diameter
delivery system that is less traumatic at the
point of entry into the body and increases
the possibility of deploying a stent in a
vessel dramatically constricted by a lesion.
25
MODEL NAME DESCRIPTION
---------- -----------
IntraStent Double Strut...................... This is a double strut, stainless steel,
balloon expandable stent. This innovative
concept in stent design incorporates cell
geometry of two parallel struts rather than a
single strut. This stent is highly flexible,
provides good vessel coverage, maintains the
natural vessel shape and experiences no
shortening.
IntraStent Double Strut ParaMount............ This is a double strut, stainless steel,
balloon expandable stent pre-mounted on a
peripheral angioplasty balloon catheter. The
pre-mounted balloon expandable stent expands
the customer base by reaching physicians who
prefer pre-mounted stents.
IntraStent Double Strut LD................... This is a double strut, stainless steel,
balloon expandable stent optimized for larger
vessels of 9mm to 18mm in diameter, although
it is only cleared for use in the biliary
ducts for up to 12mm. The stent design
provides the vessel coverage and radial force
needed in a larger lumen, while remaining
flexible for easy delivery and not shortening
to ensure precise placement.
IntraStent Double Strut XS................... This is a double strut, stainless steel,
balloon expandable stent designed for the
unique requirements of strictures or lesions
where high radial force at the stent ends is
needed while retaining the flexibility of the
IntraStent Double Strut.
ParaMount XS................................. This is a premounted IntraStent Double Strut
for physician convenience. The premounted
stent ready for use and does not require the
physician to mount the stent on a PTA balloon
catheter.
Protege...................................... This is a self-expanding, nitinol, single
strut, cut tube stent. The combined
proprietary stent and delivery catheter
features expand the customer base by reach-
ing physicians who require a self-expanding
stent and delivery system that is easy to use
and allows for precise stent placement.
IntraCoil.................................... This is a nitinol wire coil, self-expanding
stent available on a patented delivery
catheter. This stent, which is equally
flexible in all directions and optimizes
radial force and lumen coverage, is best
suited for vessels, which must respond to
repeated motion or compression.
4.C ORGANIZATIONAL STRUCTURE
Sulzer Medica Ltd, a Swiss company, is one of the world's leading medical
technology companies serving the orthopedic and cardiovascular markets on a
global basis. With a rich history of technological leadership and major
operations in Europe and the United States, Sulzer Medica holds prominent market
positions in its principal areas of activity. Sulzer Medica Ltd, a Swiss holding
company owns, directly or indirectly, 100% of all significant operating
companies. For a list of our subsidiaries see Note 5 to the Consolidated
Financial Statements.
26
The managerial organizational structure of Sulzer Medica's principal
operating subsidiaries is as follows:
(Organization Chart)
4.D PROPERTY, PLANTS AND EQUIPMENT
At December 31, 2001, Sulzer Medica had 11 manufacturing facilities located
in North America, Switzerland, France and Scotland, five of which also house
research and development activities. Of these facilities, Sulzer Medica owns its
primary manufacturing facility for the Orthopedics Division in Austin, Texas,
and its manufacturing facility in Inchinnan, Glasgow, Scotland. Sulzer Medica
leases most of its other facilities. Owned and leased facilities, along with a
stand-alone research and development location in Austin comprise a total area of
approximately 140,000 square meters approximately 1,250,000 square feet). Sulzer
Medica also owns and leases office space at its other manufacturing and research
and development facilities and in other locations throughout the world.
Sulzer Medica believes that its facilities are adequate for the
development, manufacture and marketing of current and planned products. See Note
16 of the Consolidated Financial Statements for further details.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
5.A OPERATING RESULTS
The following operating and financial review should be read in conjunction
with Sulzer Medica's consolidated financial statements and notes thereto
included elsewhere in this Annual Report on Form 20-F. Sulzer Medica's financial
statements are stated in Swiss francs, have been prepared in accordance with IAS
and have been reconciled with U.S. GAAP. See Note 31 to the Consolidated
Financial Statements for a summary of the principal differences between IAS and
U.S. GAAP as they relate to Sulzer Medica. Unless
27
otherwise noted, all amounts are Swiss francs (CHF) in millions.
Critical Accounting Policies
The following accounting policies are considered to be critical to the
reporting of the Group's result:
Legal provisions: A number of our subsidiaries are subject to litigation
arising out to the normal conduct of their business, as a result of which claims
could be made against them, which might not be covered by insurance. As
described in more detail in Note 9 to our consolidated financial statements our
most significant litigation exposure relates to a litigation with the patients
in the US affected by defective hip and knee implants. In 2001 we have reached a
tentative settlement agreement and recognized a provision of USD 873 million as
an estimate of our exposure directly related to this pending litigation,
primarily for the proposed tentative settlement agreement, legal and other
advisor costs and medical costs. The ultimate outcome of this pending litigation
cannot presently determined mainly due to the risks of a high number of
plaintiffs deciding to opt-out, the funding of the settlement and possible
appeals. Our current estimated provision might not be adequate and our ability
to generate sufficient cash flow for repayment of financing arrangements could
be adversely different.
Goodwill and intangible assets: Goodwill arising from acquisition are
capitalized and amortized on a straight-line basis over its useful life,
not exceeding 20 years. Other intangible assets include licenses, patents,
trademarks and similar rights as well as existing technology acquired from
third parties. These assets are amortized over their estimated useful lives,
not exceeding 10 years. Management estimates these useful lives as the benefit
provided to the organization. Changes in the assumptions of the estimated
useful life could have a negative impact on our results of operations.
In 2002, we will continue to amortize goodwill under IAS although for US
GAAP purposes goodwill and certain indefinite lived intangibles will no longer
be amortized but periodically tested for impairment upon the adoption of
Statement of Financial Accounting Standards No. 142, "Goodwill and other
Intangible Assets".
Impairments: Tangible and intangible assets are reviewed for impairment
annually and when circumstances changes that cause management to question the
recoverability of these assets. The Company's assessment compares the estimated
discounted cash flows to be generated by the asset with its carrying value. When
the carrying value is greater than the estimated discounted cash flows an
impairment charge is recognized. In 2001 we performed this analysis and recorded
impairment charges of CHF 91 million for intangible assets and CHF 50 million
for financial assets. We intend to perform a similar review in 2002 and
currently do not expect a material impairment charge. However, it cannot be
excluded that at the time the review will be completed an impairment charge
would be required. Our estimate of the these charges is subject to actual
results or further deterioration of the cash flows generated by these assets.
Taxes: The Company recognizes annual provisions for income taxes assessed
on our earnings and profits. These provisions are paid when due to the
appropriate tax authorities. Timing differences exist between their payment and
financial statement recognition. Deferred taxes are provided for these
differences. We have recognized substantial deferred tax assets, some of which
are comprised of tax loss carry-forwards. The recoverability of these deferred
tax assets is dependant on the Company being able to generate sufficient taxable
income or capital gains. In the event the Company determines that it would not
be able to realize all or part of these deferred tax assets in the future, an
adjustment to the deferred tax assets is charged to income in the period such
determination is made. We have recognized valuation allowances in those
jurisdictions where based on our operating projections, we do not expect to
utilize the deferred tax assets before they expire. The outcome of the hip and
knee litigation (discussed above) could affect our ability to realize our tax
assets in the US.
OVERVIEW
NET SALES BY DIVISION 2001 2000 1999 01 VS. 00 00 VS. 99
(CONTINUING OPERATIONS) MILL. CHF MILL. CHF MILL. CHF % %
----------------------- --------- --------- --------- --------- ---------
Orthopedics................................ 1,150 1,097 972 5 13
Cardiovascular Prostheses.................. 268 250 210 7 19
Total net sales............................ 1,418 1,347 1,182 5 14
NET SALES BY LOCATION OF CUSTOMER
------------------------------
Switzerland................................ 61 59 55 3 7
EU......................................... 560 530 502 6 6
Rest of Europe............................. 19 17 16 12 6
North America.............................. 629 602 496 4 21
Other countries............................ 149 139 113 7 22
Total net sales............................ 1,418 1,347 1,182 5 14
At Sulzer Medica we design, manufacture and market artificial joints,
traumatology products, spinal implants, dental implants, heart valves including
repair products, peripheral stents and vascular grafts.
Until 1998, we also produced pacemakers and defibrillators, but market
developments led us to divest this business and concentrate our resources on our
Orthopedics and Cardiovascular Prostheses Divisions where we hold solid market
positions. We used the proceeds from this transaction, which was completed on
February 1, 1999, to further strengthen our Orthopedics and Cardiovascular
Prostheses Divisions, and to increase our already substantial portfolio of
related biological technologies.
28
RESULTS OF OPERATIONS 2001 COMPARED TO 2000
Net sales for the Group for the year ended on December 31, 2001, totaled
CHF 1.42 billion and were up 5% from the previous year. Excluding currency
impacts, year-on-year net sales increased in 2001 by 1%.
Net sales in 2001 of the Orthopedics Division increased 5% over the
previous year, on a currency adjusted basis by 1%. The strong currency adjusted
growth rates in Europe with hip and knee implants (+8%) were offset by the
declining market share in the US market (-9%) as a direct result of the recall
of some of the Inter-Op acetabular shells and the market withdrawal of some
tibia base plates by Sulzer Orthopedics Inc in Austin, TX.
The Cardiovascular prostheses Division grew by 7% in 2001. However, the
acquisition and currency adjusted growth rate was -2%. The strong growth rates
with tissue valves could not offset the declining sales volume of mechanical
heart valves.
The overall gross margin fell from 68.8% in 2000 to 61.9% in 2001. This
decrease relates to the impacts of the two acquisitions (including inventory
step up and existing technology write-off), inventory allowances for
discontinued products and increased product liability costs. The key ratio
operating income before goodwill amortization and exceptional items in relation
to sales decreased in 2001 to 7.0%, down from 20.0% in 2000. Acquisition effects
as inventory step up and amortization of existing technology amounted to 1.0%.
In addition, the decision to restructure the both divisions as well as the
management companies and weak operating performance of our peripheral stent
unit, acquired in 2001, contributed to this development.
The exceptional operating items amount in total to CHF 1.67 billion. The
majority of it relates to the provisions for the settlement of the recalled
Inter-Op hip shells or withdrawn tibia base plates (USD 873 million). In
addition, various other impairment charges (Goodwill in IntraTherapeutics Inc)
and restructuring costs were recorded in connection with the review of
operational activities as initiated by the new management after the spin-off
from the former major shareholder, Sulzer Ltd. These items include also write-
downs of minority holdings ReGen Inc, Orquest Inc., @Outcome Inc. and Orthosoft
Inc. Non-operating expenses of about CHF 21 million largely resulted from the
spin-off from Sulzer Ltd and the defense cost for the unsuccessful hostile
takeover bid for Sulzer Ltd.
Management believes that there are no new standards as promulgated by the
International Accounting Standards Committee, which would significantly impact
its financial position or certain standards earlier than necessary.
Operating expense as percent of net sales of continuing operations, year
ended December 31
2001 2000 1999
% % %
----- ----- -----
Net sales................................................... 100.0 100.0 100.0
Gross profit................................................ 61.9 68.8 69.6
Selling, general and administrative expense................. (45.7) (41.2) (41.5)
Research and development expense............................ (9.2) (8.0) (8.3)
Other operating income/expense.............................. 0.0 0.4 0.0
Operating income before goodwill amortization and
exceptional items of continuing operations................ 7.0 20.0 19.8
RESULTS OF OPERATIONS 2000 COMPARED TO 1999
Net sales for the year ended on December 31, 2000, totaled CHF 1.35 billion
and were up 14% from the previous year. Excluding currency impacts, year-on-year
net sales increased in 2000 by 8%.
2000 net sales of the Orthopedics Division increased 13% over the previous
year, on a currency adjusted basis by 7.5%. The continuing favorable acceptance
of the 1999 introduced Orthopedics products, Metasul(TM) and Durasul(TM), was
mainly responsible for the positive performance in the U.S. Expressed in Swiss
francs, growth was above average 21% in North America. The newly introduced
spinal fusion systems in the U.S. and
29
the continuing favorable sales trend in Europe and Asia could not offset the
decline in the US market for interbody fusion cage systems. The sales growth in
the U.S. was hampered by the voluntary recall of some of the Inter-Op acetabular
shells in December 2000.
2000 net sales of the Cardiovascular Prostheses Division grew by 19% to CHF
250 million, of which 10% was attributable to favorable exchange rates. It
achieved this growth despite persistent price pressure in several markets.
The gross margin fell from 69.6% in 1999 to 68.8% in 2000 mainly due to the
pressure on pricing predominantly in Europe and to the reduced sales of spinal
implants. As royalty expenses were reclassified in 2000 from "Selling, general
and administrative expense" to "Cost of sales" gross margins for prior years
have been adjusted accordingly.
The key ratio operating income before goodwill amortization and exceptional
items in relation to sales increased in 2000 to 20.0%, up from 19.8% in 1999.
The implementation of the "Redesign to World Class" project within the
Orthopedics Division supported the increase, while the cost associated with the
launch of several new spinal implant products had a negative impact.
The exceptional operating item amounting to CHF 1 million represents Sulzer
Medica's share of the exceptional operating costs of our majority shareholder
resulting from the aborted merger plan in autumn 2000.
Net income of CHF 190 million in 2000 was positively impacted by an
increased interest rates and favorable exchange rates as well as the repayments
of short-term and long-term borrowings during 1999 compared to the previous
year. Excluding exceptional impact our net income grew by 29% over the previous
year.
BIOLOGICS ACTIVITIES
Sulzer Biologics had a challenging year in 2001 highlighted by a major
decision to terminate the Ne-Osteo growth factor program and to shut down the
Sulzer Biologics facility in Denver, Colorado. A comprehensive analysis
undertaken by management has clearly shown that the Division "s proprietary Ne-
Osteo growth factor does not meet the necessary requirements to justify
investment in further development. Although excellent research into the
stimulation of endogenous bone growth had been carried out over the years,
management came to the conclusion that the product would not yield the
commercial results required for the Company's core businesses within the
necessary timeframe.
As a result, Sulzer Biologics' US-based organization has been consolidated
in a new facility in Austin, Texas, located near the Division's key
collaborators: Sulzer Orthopedics and Sulzer Carbomedics.
NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board has recently issued several new
accounting standards, including SFAS No. 141 "Business Combinations", SFAS No.
142 "Goodwill and other Intangible Assets", and SFAS No. 144 "Accounting for
Impairment or Disposal of Long-Lived Assets", will be effective for periods
beginning on or after January 1, 2002. The Group is currently determining the
effect, if any, these new standards cause divergences from its Consolidated
Financial Statements.
The Group adopted SFAS No. 141 for all business combinations after June 30,
2001. This standard requires that all business combinations be accounted for
using the purchase method, and it further clarifies the criteria for recognition
of intangible assets separately from goodwill. Since June 30, 2001, there have
been no material business combinations.
Effective January 1, 2002, the Group will adopt SFAS No. 142 for existing
goodwill and other intangibles. This standard eliminates the amortization of
goodwill and intangible assets with indefinite useful lives and requires annual
testing for impairment. This standard requires the assignment of assets acquired
and liabilities assumed, including goodwill, to reporting units for purpose of
goodwill impairment testing. Under
30
the provisions of this standard, any impairment of goodwill will be written off
and recognized as a cumulative effect of a change in accounting principle as at
January 1, 2002.
Effective January 1, 2002, the Group will adopt SFAS No. 144. This standard
supersedes and amends existing accounting literature related to the impairment
and disposal of long-lived assets.
The Company does not intend to adopt certain standards earlier than
necessary. See "Item 17. Financial Statements -- Note 3" for a summary of the
accounting and consolidation principles of Sulzer Medica.
5.B LIQUIDITY AND CAPITAL RESOURCES
In 2000 and 1999 Sulzer Medica generated cash flows, which were more than
sufficient to fund operations. The balance sheet at year-end 2000 was still
characterized by the strengthening impact of the net proceeds from the
divestiture of the Electrophysiology Division in 1999. In 2001 Sulzer Medica did
not generate a cash flow from operating activities sufficient to fund investing
activities, resulting in a reduction in the cash position at the end of 2001
compared to 2000.
Cash flow from operating activities of continuing operations amounted to
CHF 93 million in 2001, CHF 297 million in 2000 and CHF 178 million in 1999. The
working capital (Current assets minus Current liabilities) amounted to CHF 453
million at December 31, 2001 compared to 1,027 million at December 31, 2000. The
decrease in working capital was primarily attributable to the primarily
attributable to the acquisitions of Paragon Implant Company, USA,
IntraTherapeutics Inc and Sulzer Australia, as well as the build up of
provisions for the hip and knee settlement. The current ratio, which is the
relation of current assets to current liabilities, decreased from 4.0 to 1.8 in
2001.
Sulzer Medica's total capitalization of equity and interest bearing
long-term debt was CHF 0.81 billion in 2001, CHF 2.02 billion in 2000 and CHF
1.88 billion in 1999.
Sulzer Medica expects its cash from operations to be adequate to meet its
obligations to make interest payments and other anticipated operating cash needs
including planned capital expenditures. Capital expenditures, excluding any
acquisition, are expected to be approximately CHF 123 million in 2002. The
acquisitions in early 2001 of Paragon Implant Company and IntraTherapeutics Inc.
for a total purchase price of USD 245 million were both settled in cash. For
further discussion of a cash impact from hip and knee settlement see sections
below.
The following summarizes our contractual obligations and other commercial
commitments, and the effect such obligations and commitments are expected to
have on our liquidity and cash flow in future periods:
PAYMENTS DUE BY PERIOD
-----------------------------------
LESS THAN 2-3 4-5 AFTER 5
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR YEARS YEARS YEARS
----------------------- ----- --------- ----- ----- -------
(IN CHF MILLION)
Long-Term Debt................................ 75 75 0 0 0
Operating Leases.............................. 25 7 8 8 2
Research & Development Commitments............ 0 0 0 0 0
TOTAL CONTRACTUAL CASH OBLIGATIONS............ 100 82 8 8 2
On December 5, 2000 Sulzer Orthopedics initiated the voluntary recall of
certain lots of the Inter-Op acetabular shells immediately after Sulzer
Orthopedics discovered an unacceptable level of residue of mineral oil based
lubricant on the surface of some shells.
On June 19, 2001, the Judicial Panel on Multi-District-Litigation ("MDL")
ordered that all Inter-Op lawsuits filed in federal courts be consolidated for
pre-trial proceedings in the U.S. District court (N.D. Ohio) in Cleveland, Ohio.
On August 29, 2001, the Court provisionally certified a class and granted
preliminary approval to the parties' settlement agreement; and on September 17,
the Court issued an order enjoining all further proceedings in other federal and
state courts.
31
The parties have renegotiated the initial settlement agreement. The revised
settlement agreement (the "MDL Settlement Agreement) provides for the Company to
contribute USD 725 million in the form of USD 425 million in cash and USD 300
million in Convertible Callable Instruments (CCI). Sulzer Medica as group has
the obligation to deliver USD 425 million at the later of 180 days after Trial
Court Approval or 60 days after the Final Judicial Approval date. At the later
of 180 days after Trial Court Approval or 60 days after Final Judicial Approval
Date, Sulzer Medica has the obligation to issue the CCI. Unless earlier
redeemed, 18 months after the issue date of the CCI, The Company will provide
the settlement trust ADSs or shares at the conversion price in effect of the
Maturity date.
Sulzer Medica is in discussion with several banks regarding the financing
of the USD 425 million cash payment and anticipates the facility to be ready by
November 2002. The USD 425 million facilities will result in an annual interest
expense burden of USD 22-30 million depending on the final terms agreed. The USD
300 million related to the CCI will result in an annual interest expense burden
of USD 22.5 million calculated at a rate of 7.5%. The CCI including interest
payment have to be settled until mid of 2004.
Sulzer Medica's historical cash from operations (USD 200-300 million) show
the company's potential to serve the interest payments as well as to
continuously finance the capital expenditures needed to keep its competitive
position in the market. However the ability to finance acquisitions through own
cash from operations will be limited for the next 2 to 3 years.
5.C RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES
Sulzer Medica has been a leading technological innovator in the medical
products field for several decades. The products developed by Sulzer Medica's
European orthopedics companies helped pioneer the European reconstructive
implants market during the 1960s and 1970s. In the cardiovascular prosthesis
field, Sulzer Medica married the pyrolitic carbon coating technology, design
capabilities and manufacturing know-how that were critical to the development of
efficacious mechanical heart valves. Since 1969, Sulzer Medica has used this
material in the manufacture of components used in mechanical heart valves
worldwide.
To maintain its position as a technological innovator, Sulzer Medica
conducts research and development on a variety of levels. Product specific
research and development is performed primarily by the individual operating
companies of Sulzer Medica. Sharing of information takes place at regular
intervals. For projects of common interest, and those that are conceptual in
nature, Sulzer Markets and Technology Ltd, a subsidiary of Sulzer Ltd that is
not a part of Sulzer Medica, conducts contract research. In 2001, Sulzer Medica
paid approximately CHF 2 million to Sulzer Ltd for research and development. The
core technologies at Sulzer Markets and Technology Ltd. of particular interest
to Sulzer Medica, include flow dynamics, materials technology, biomaterials and
electronics and signals. These technologies, for example, are applicable to
Sulzer Medica; in analyzing blood flow through a variety of heart valve designs
and developing materials/coating solutions.
Sulzer Medica incurred CHF 130, 108 and 98 million in research and
development costs in 2001, 2000 and 1999 respectively, representing 9.2%, 8.0%
and 8.3% respectively, of 2001, 2000 and 1999 sales. Sulzer Medica's current
research and development focus includes new materials, biologics and minimally
invasive forms of treatment for diseases and injuries currently requiring
invasive surgery. Sulzer Medica's research and development programs focus on
enhancements to the metallic and polyethylene components of implants and
instrument products with a view to increasing their strength or resistance to
corrosion, oxidation or fatigue, or focusing on bearing surface improvements to
the artificial joint being replaced in the human body. In addition, research is
being conducted on artificial joint simulators and enhancements to the bearing
interface.
32
5.D TREND INFORMATION
PRODUCT PIPELINE
The following products have received approvals or are being first launched
in 2002:
DurasulPatella for Natural Knee II........... In February, the Company launched Durasul
patellae for the Natural Knee II product line
in the U.S.
UniSpacer.................................... In February, the UniSpacer was launched in
the U.S.
Large Heads (44mm) for Durasul............... Use of large heads is possible with Durasul
inserts and reduces possibilities for
dislocation in hip surgeries.
BP Lordotic.................................. In May, the Company received approval by the
FDA. It is a tapered cage in the BAK family
Cervical Allograft ACDF...................... Cervical Allograft ACDF is a bone product for
use with Trinica plate.
Trinica Select............................... Trinica Select is a narrow version of Trinica
for smaller stature patients.
IntraCoil Vascular Approval.................. IntraCoil will receive US FDA premarket
approval for use in the superficial femoral
and popliteal arteries marking the first
stent approved for such use in the USA.
Gelweave Valsalva............................ Regulatory approval is expected in the USA
and Canada. A submission for approval is
planned in Japan.
SEALPTFE..................................... Submissions for approval have been made
during the second quarter in China and Korea.
Symmetry Allograft Bone...................... A unique lumbar interbody allograft fusion
system that features consistent cortical
strength and density.
Despite the weak economy in many geographic regions of the world, the
endosseous dental implant market continues to expand at a double-digit rate of
growth. Through the first quarter of 2002, the growth rate for Sulzer Dental has
met or slightly exceeded the market due to the optimization of the product
portfolio. This has been accomplished while still addressing some integration
issues (e.g., product consolidations, product & process improvements) related to
the acquisition of The Paragon Implant Company. Key trends in the dental implant
segment include the following:
- Simplification -- major competitors continue to streamline systems and
improve the simplicity of the implant restorative process in the hopes of
increasing referral volumes. Sulzer Dental is well positioned on this
front and has several new product development initiatives in place that
will enhance packaging and product delivery systems.
- Esthetics -- more natural appearing restorations to meet the increasing
expectations of patients are on the rise. The use of all ceramic
components is gaining popularity given the preferred esthetics. The use
of CAD/CAM technology to fabricate custom abutments to ensure an optimal
fit is growing. Sulzer Dental has several new product development
initiatives in place that offer more esthetic alternatives.
- Immediacy -- the ability to offer patients a more immediate functional
and/or esthetic implant solution is a clear trend. The length of the
process has historically impacted the level of patient acceptance. Sulzer
Dental has packaged a number of immediacy techniques into a marketing
campaign known as SmartSteps(SM).
- Tapered and Single Stage Implant Geometries -- tapered implant designs
are gaining favor as they more naturally mimic the geometry of a tooth
root. Single stage one-piece implant designs are also a growing product
segment given the simplicity of placement and elimination of a surgical
procedure.
33
Sulzer Dental is extremely well positioned on these fronts with numerous
tapered designs (Tapered Screw-Vent, AdVent, Tapered SwissPlus) and two
single stage implant systems (AdVent, SwissPlus).
Bound on leading an active life, an increasing number of elderly stays fit
for an increasing period of time. Where indicated biological heart valves are
now moving into the spotlight. Their product life may be limited, but many
physicians believe that the risk of reoperation is less than the risk of
complications with anticoagulation for these active patients. Also, innovative
valvular repair products make it possible to restore the function of an injured
or impaired heart valve without replacing the native valve As a major trend,
vascular surgery is turning towards gentle i.e. minimally invasive operative
procedures. This in turn requires vascular grafts, stents and other repair
products that can be placed in a patient's body by way of a catheter advanced
through the vascular system. These two dominating market trends determine the
research and development strategy of the Cardiovascular Prostheses Division. The
emphasis is placed on enlarging the tissue product line for heart valve repair
and replacement and furthermore developing vascular products suited for
minimally invasive positioning.
SUBSEQUENT EVENTS
On May 13, 2002, the Company announced that it has plans to launch a
program aimed at optimizing efficiency at their European Orthopedics Division.
As of June 1, 2002, the Company will begin shifting staff members from Baar,
Switzerland to Oberwinterthur and Zurich, Switzerland. The Company will abandon
the administration facility in Baar, while the logistics unit will remain there.
The optimization program envisions a reduction of some 100 positions in an
initial step, followed by a further 20 positions in a second step.
As of the close of the opt-out period on May 15, 2002, the Claims
Administrator under the MDL Class Settlement Agreement had received notice from
approximately 130 patients who have opted-out of the settlement.
The Company's financial statements have been prepared in accordance with
IAS, which differs in certain significant respects from U.S. GAAP. Details are
contained in Note 31 of the Consolidated Financial Statements.
This annual report also contains forward-looking statements that involve
risks and uncertainties. Many factors could cause our actual results,
performance or achievements to be materially different from those anticipated in
these forward-looking statements.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
6.A DIRECTORS AND SENIOR MANAGEMENT
Certain information concerning Sulzer Medica's current Directors and Senior
Management as of May 12, 2002, is provided below.
Max Link (Age 62) has been a Board member of several biotechnology ventures
since 1994. He served as Chief Executive Officer of Corange Ltd from 1993 to
1994. Prior to these endeavors, Mr. Link spent his career with Sandoz from 1970
until his retirement in 1993. He served as Chairman of Sandoz Pharma from 1992
to 1993, Chief Executive Officer of Sandoz Pharma from 1987 to 1992, Chief
Executive Officer of Sandoz Corp., USA from 1981 to 1986, and Chief Financial
Officer of Sandoz USA from 1978 to 1980. Currently Mr. Link is member of the
Board of the following companies: Cell Therapeutics Inc., Seattle WA, USA;
Igeneon, Vienna, Austria; Human Genome Sciences Inc., Rockville MD, USA; Mipharm
SpA, Milan, Italy; Protein Design Labs Inc., Fremont CA, USA; Noxxon Pharma AG,
Berlin, Germany.
Larry L. Mathis (Age 59) was President and Chief Executive Officer of The
Methodist Health Care System, an affiliation of over 40 hospitals in the United
States and overseas, from 1983 to 1997. From 1980 to
34
1982, Mr. Mathis served as Executive Vice President and Chief Operating Officer
of the Methodist Hospital System. He is past Chairman of the 30,000-member
American College of Healthcare Executives, Past-Chairman of the American
Hospital Association, the Texas Hospital Association, the Greater Houston
Hospital Council and the National Task Force on Health Care Technology
Assessment, and a past member of Medicare's Prospective Payment Assessment
Commission. He is a Consultant in healthcare leadership and management.
Steffen Gay (Age 54) graduated from the Institute of Pathology at the
University of Leipzig (Germany) in 1973. Afterward he served as a researcher at
the Max-Planck-Institute of Biochemistry in Munich and as a research specialist
at CMDNJ-Rutgers Medical School in Piscataway (USA) until 1976. Thereafter he
held different positions at the University of Alabama (USA). In 1983 he assumed
the responsibility of Director at the UAG, School of Dentistry. From 1984 to
1996 Mr. Gay was Director of the WHO Collaborating Center of Biochemical
Classification and Diagnostic Criteria of Rheumatoid Arthritis and Allied
Diseases. Most recently, Mr. Gay has held three different positions: 1) Adjunct
Professor of Medicine (Division of Clinical Immunology and Rheumatology); 2)
Professor of Experimental Rheumatology and Doctor at the Clinic of Rheumatology
at University Hospital in Zurich; 3) Director of WHO Collaborating Center for
Molecular Biology and Novel Therapeutic Strategies for Rheumatic Diseases.
On May 31, 2001 the Board of Directors named Dr. Stephan Rietiker (Age 46)
as successor to Mr. Andre P. Buchel as President and Chief Executive Officer. He
assumed his new duties on August 1, 2001. Dr. Rietiker completed his studies as
a medical doctor at the University of Zurich in 1982 and also qualified to
practice medicine in the U.S. He began his business career with Roche in 1987
and has held various management positions with Boehringer Mannheim and Essex
Chemie. He was the President of HPC Healthcare & Pharma Consulting in Zurich
from 1997 to 1999. Prior to joining Sulzer Medica, Dr. Rietiker was Vice
President and General Manager for Europe and South Africa for Covance Central
Laboratory Services in Geneva.
On August 7, 2001 the Board of Directors named Mr. Urs Kamber (Age 50) as
successor to Mr. George Hahnloser as Chief Financial Officer. He assumed his new
duties on September 1, 2002. Mr. Kamber holds a Swiss CPA from the AKAD Zurich.
Prior to joining Sulzer Medica, he held various management positions in the area
of Finance, including CFO of Cesky Telecom (1996-2001), Corporate Controller of
Ascom Holding (1993-1994), President Ascom Holding USA (1989-1993), CFO Avtelca
AG (1985-1989) and CFO of subsidiary of Motor-Columbus (1976-1985).
On July 19, 2001 the Board of Directors named Dr. Gabor-Paul Ondo (Age 39)
as Chief Risk Officer and as successor to Mrs. Oelz as General Secretary of the
Board of Directors. He assumed his new duties on August 1, 2001. Dr. Ondo
obtained a doctoral degree in law and attorney at law from the University of
Zurich and a master's degree in European business law from the University of St.
Gallen. Prior to joining Sulzer Medica, Dr. Ondo held various management
positions in the area of Corporate Risk Management, including Executive Director
at Group Compliance Services of UBS Financial Services Group (2000-2001), Chief
Claims Officer & General Counsel and Member of the Extended Executive Board at
Winterthur International, Winterthur (1998-2000), Attorney at law at
Baer&Karrer, Zurich (1997-1998), and Head of Legal and Claims Services at Zurich
Re, Zurich (1992-1996).
On August 7, 2001 the Board of Directors named Dr. Thomas Zehnder (Age 34)
as Group Vice President of Business and Technology Development. He assumed his
new duties on August 15, 2001. He has a degree in Industrial Engineering from
the Federal Institute of Technology (ETH), Zurich, and a doctoral degree in
Business Administration from the University of St. Gallen. Prior to joining
Sulzer Medica, Dr. Zehnder held various management positions in the healthcare
industry in the area of Strategic Business Development and Marketing, including
Director Process Development and Reengineering and Director Clinical Project
Management at Covance Central Laboratory Services, Geneva (1999-2001),
Consultant and Project Manager at HPC Healthcare & Pharma Consulting AG, Zug
(1999), International Product Manager at Stratec Medical AG, Oberdorf
(1997-1999).
On August 7, 2001 the Board of Directors named Mrs Beatrice Tschanz (Age
59) as Group Vice President of Corporate Communications. She assumed her new
duties on August 15, 2001. She studied
35
languages and history at the universities of Oxford, Sorbonne and Barcelona.
Prior to joining Sulzer Medica, Mrs. Tschanz held various management positions
in the area of Corporate Communications, including Head of Corporate
Communications at SAir Group (1997-2001), Head of Corporate Communications at
Jelmoli AG (1991-1997), and Head of Communications at Ringier AG (1987-1991).
On March 28, 2002, 2002 the Board of Directors named Mr. Matthias Moelleney
(Age 42) as successor to Mr. John Rankin as Group Vice President of Human
Resources. He assumed his new duties on May 1, 2002. Prior to joining Sulzer
Medica, Mr. Moelleney held various management positions in the area of Human
Resources, including Head of Human Resources at SAir Group (1998-2001) and Vice
President Human Resources at Lufthansa (1988-1998).
David Floyd (Age 41) has been President of Sulzer Orthopedics, Inc., since
July 2001. He has a B.S. from Grace College and attended the Graduate School of
Business at Ball State University. Mr. Floyd joined Sulzer Orthopedics, Inc. in
1994 and held several senior management positions until 1998, among others Vice
President of Sales. Before re-joining Sulzer Orthopedics in December 2000, Mr.
Floyd was Vice President of Sales with OrthoLogic Corp (1998-2000), responsible
for the US Market. Additionally Mr. Floyd has held various management positions
in the U.S., including National Account Executive at Zimmer Inc.
Dennis Wallach (Age 58) has been President of the Cardiovascular Prostheses
Division and Sulzer Spine-Tech Inc since October 15, 2001. Mr. Wallach is a
seasoned Senior Executive who has experience in multinational service and
manufacturing industries. Mr. Wallach is a Graduate of City University of New
York and has completed a graduate work at George Washington University. Prior to
joining Sulzer Medica as President of Sulzer Spine-Tech Inc., Minneapolis, Mr.
Wallach served six years as Senior Advisor for the Operating Committee of Czech
Telecom. Prior to this, he was Senior Vice President and interim CFO at Autotote
Inc., where he was also responsible for all manufacturing and procurement
functions and sales in Europe and Asia. As President with Ascom Communications
Inc., he restructured the company and led the organization successfully exiting
Chapter 11.
Richard Fritschi (Age 42) has been President of the business unit
Europe/Asia/Latin America for the Orthopedics Division of Sulzer Medica since
July 2001. He has a degree in Business Administration from the Business school
of Zurich and followed an advanced management program at Harvard Business School
in 1999. Mr. Fritschi joined Allo Pro (Sulzer Medica) in 1991 as Controller and
during his career at Sulzer; he has held various operational and financial
management positions, including General Manager of Sulzer Orthopedics
(1999-2001) and CFO of Allo Pro. Before joining Allo Pro, Mr. Fritschi was CFO
of Isolag and Controller at Mangold Energy for whom he was working in London and
Paris.
Steven Hanson (Age 49) has been President of Sulzer Dental Inc. since
September 1992. He has an MBA from Boston College. Mr. Hanson joined Sulzer
Medica (Sulzer AG) in 1982 as a manager and has held various operational
management positions, including President of Sulzer Dental Inc. (1992-current),
Vice President International Sulzer Intermedics Inc. (1987-1992) and Director
International Sulzer Intermedics Inc. (1982-1987). Prior to joining Sulzer
Intermedics, Mr. Hanson was a Vice President for sales and marketing at American
Pacemaker Corporation.
6.B COMPENSATION
During the financial year ended December 31, 2001, the aggregate amount of
compensation paid by Sulzer Medica and its subsidiaries to its former and
current Directors and Senior Management was approximately CHF 20.1 million,
whereof approximately 25% was paid to current Directors and Senior Management as
listed in 6.A. No benefits in kind were provided.
The total amount contributed by Sulzer Medica to company pension plans for
former and current Directors and Senior Management during 2001 was approximately
CHF 0.9 million.
Performance-related incentive compensation is an element of Sulzer Medica's
remuneration policy and applies to all management staff. Sulzer Medica maintains
various plans, including the Annual Incentive Award and the Long-Term Incentive
Plan, which link a portion of the compensation to Sulzer Medica's achievement of
financial performance criteria and personal objectives.
36
ANNUAL INCENTIVE AWARD
The purpose of Sulzer Medica's Annual Incentive Plan is to provide a direct
annual financial incentive to executives and key managers to achieve corporate
performance goals established under Sulzer Medica's annual operating plan.
Executives are eligible for target awards determined by the executives'
position and competitive data for similar positions at peer companies. In
keeping with the performance-based philosophy, the resulting awards decrease or
increase substantially if actual Sulzer Medica performance fails to meet or
exceed target levels.
LONG-TERM INCENTIVE PLAN
The primary purpose of the Long-Term Incentive Plan is to motivate
executives to achieve the long-term performance goals of the Sulzer Medica
Group.
The program provides the possibility of earning a payout in cash at the end
of a three-year performance cycle. As with short-term incentive compensation, a
threshold level of performance is required before payout occurs.
The Long-Term Incentive Plan was discontinued in 2000. From 2001 onwards,
long-term performance will be rewarded through the Sulzer Medica share plans.
MANAGEMENT STOCK OPTION PLAN
In July 1997, Sulzer Medica adopted the 1997 Management Stock Option Plan
to provide executive and selected key employees throughout Sulzer Medica with an
opportunity to obtain options to purchase shares.
The options with respect to employees located in the United States are not
intended to qualify as incentive stock options as defined in Section 422A of the
Internal Revenue Code of 1986, as amended. The price at which shares may be
purchased upon exercise of a particular option is not less than 100% of the fair
market value of each Share/ADS on the date of grant or the par value per share
(or 1/10th thereof for each ADS) if greater. Options granted under the Option
Plan vest at 25% of the options granted per year and may not be exercised after
the fifth anniversary of the date of grant.
During 2001, options to purchase Sulzer Medica shares granted to Directors
and Senior Managers under the Sulzer Medica 1997 Management Stock Option Plan.
The aggregate number of options granted to Directors and Senior Managers in 2001
was 35,665 shares. The options were granted at Fair Market Value on the date of
the grant and expire on April 11, 2005. In the United States and Canada, these
are granted as options to purchase American Depositary Shares (ADS), which are
traded on the New York Stock Exchange. The exercise price for the ADS options in
April was USD 19.46 and in August USD 7.80. Outside North America options are
granted on Sulzer Medica shares traded on the Swiss Stock Exchange. The exercise
price for options granted on shares in April was CHF 333 and in August was CHF
111.
In October 2000, the Board approved the Sulzer Medica 2001 Stock Option
Plan, which replaced the 1997 Sulzer Medica Management Stock Option Plan. The
first grant under this plan was made in April 2001. These options were granted
with an exercise price at fair market value and vest 25% per year over four
years. The term is ten years from the date of grant.
See also Note 30 "Management Stock Option Plan" to the Consolidated
Financial Statements.
6.C BOARD PRACTICES
Board members enjoy customary service contracts under Swiss law, which do
not provide for benefits on termination.
37
Set forth below, are the names and terms of office of Sulzer Medica's
current directors:
NAME POSITION START OF TERM END OF TERM
---- -------- ------------- -----------
Max Link......................... Chairman since March 2001 1997 2003
Larry L. Mathis.................. 1997 2003
Steffen Gay...................... 2001 2004
The Board is currently comprised of three directors who are each elected
for a three-year term.
Sulzer Medica has established an Audit Committee, whose members currently
are Max Link, Stephan Rietiker and Gabor-Paul Ondo. Urs Kamber is the Secretary
of the Audit Committee. Among its duties, the Audit Committee is charged with
reviewing the arm's length nature of transactions between Sulzer Medica and
Sulzer Ltd.
The Board established a Compensation Committee composed of all Board
members. The Committee establishes the Executive Compensation System for Sulzer
Medica and determines the remuneration provided to the Chief Executive Officer
and his direct reports.
The Audit Committee and Compensation Committee do not have formally adopted
operating procedures.
6.D EMPLOYEES
At year-end 2001, 2000 and 1999, Sulzer Medica had worldwide 3,894, 3,397
and 3,174 employees, respectively.
The table below sets forth the breakdown of our employees by geographic
area for the past three years.
FOR THE YEAR ENDED 2001 2000 1999
------------------ ----- ----- -----
Switzerland................................................. 717 636 644
Europe...................................................... 889 841 788
North America............................................... 2,108 1,800 1,639
Rest of the World........................................... 180 120 103
Total....................................................... 3,894 3,397 3,174
Sulzer Medica complies with legislation regarding employee representation
in each of the countries in which it operates and strives to maintain positive
labor relations. Sulzer Medica does not employ a significant number of temporary
workers.
6.E SHARE OWNERSHIP
Based on the information available to us, the aggregate amount of shares
held by current Directors and Senior Management as listed in 6.A as of April 30,
2002, was 3'881shares. The aggregate number of options on the Company's shares
held by the same group of persons as of April 30, 2002 is set out below:
TOTAL NUMBER
EXPIRATION DATE EXERCISE PRICE OF OPTIONS HELD
--------------- -------------- ---------------
July 14, 2002................................... CHF 350/USD 23.85 840
April 15, 2003.................................. CHF 382/USD 24.92 1,696
April 16, 2004.................................. CHF 300/USD 20.00 2,263
April 12, 2005.................................. CHF 376/USD 22.67 2,040
April 18, 2011.................................. CHF 333/USD 19.46 3,622
August 24, 2011................................. CHF 111/USD 6.71 24,186
October 1, 2012................................. CHF 145/USD 8.76 77,387
Total........................................... 112,034
Options granted to participants in North America are in the form of
American Depositary Shares (ADS), which have a ratio of 10 ADS to 1 share. Each
granted option calls for one share, respectively one
38
ADS of the Company. Vesting for all grants is 25% per year following the grant.
The grants expiring between July 14, 2002 and April 12, 2005 have a five-year
term. Grants expiring in 2011 and 2012 have a ten-year term.
EMPLOYEE STOCK PURCHASE PLAN
Sulzer Medica had in place a 2001 Employee Stock Purchase Plan for the
purpose of providing employees of Sulzer Medica and its subsidiary companies
with an opportunity to participate in equity ownership of Sulzer Medica by the
annual purchase of Shares (in the U.S. and Canada ADSs) of Sulzer Medica at a
discount. The price of the Shares/ADSs under the 2001 Plan period was 85% of the
lesser of the fair market value of the Shares/ADSs on the offering commencement
date or of the fair market value on the exercise date.
The 2002 Employee Stock Purchase Plan provides that Sulzer Medica may sell
Shares/ADSs to participants through quarterly offerings of purchase rights. The
2002 Plan provides that Sulzer Medica will make a matching contribution of 15%
of a participant's payroll deductions used to purchase Shares/ADSs at fair
market value on the exercise date.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
7.A MAJOR SHAREHOLDERS
On April 19, 2001, at the Annual General Meeting of Shareholders, the
shareholders of Sulzer Ltd approved a plan to spin off substantially all of
Sulzer Ltd's equity ownership in Sulzer Medica. The spin-off took place on July
10, 2001. Sulzer Ltd shareholders have received two shares of Sulzer Medica
stock for each share of Sulzer Ltd that they owned at the time of the spin-off.
As of April 30, 2002, 353'559 shares representing approximately 3.5% of the
outstanding shares were held of record in the U.S. in the form of 3'535'590
ADSs. Since some ADSs are held by brokers or other nominees, the number of
direct record holders in the U.S. may not be fully indicative of the number of
beneficial owners in the U.S. or of whether the beneficial owners of such ADSs
are U.S. residents.
As of April 30, 2002, InCentive Capital, Zug, Switzerland and Silchester
International Investors, London, United Kingdom, were known as the only
shareholders of more than 5 percent of the shares (whether in the form of
registered shares or American Depository Shares) of Sulzer Medica Ltd. As of
April 30, 2002, the directors and executive officers of Sulzer Medica as a group
owned 3'881 (less than one percent) of the outstanding shares.
7.B RELATED PARTY TRANSACTIONS
Prior to the spin-off of Sulzer Medica in July 2001, Sulzer Medica and its
subsidiaries were parties to a number of agreements with Sulzer Ltd and its
affiliates, which Sulzer Medica believes are consistent with arm's length
principles. Certain subsidiaries of Sulzer Medica were parties to agreements
with Sulzer Markets and Technology AG that provide for certain research and
development activities. In addition, Sulzer Medica leased some of its properties
from subsidiaries of Sulzer Ltd. See Note 29, "Transactions with Related
Parties," to the consolidated financial statements.
Additionally, the parties also agreed, that the Sulzer Medica shall pay
Sulzer Ltd. CHF 26,682,276.67 minus USD 266,288.48 and that Sulzer Ltd. shall
pay Sulzer Medica USD 8,606,835.56, in settlement of all claims arising out of
the Spin-Off Agreement, an inter-company loan and a claim of Sulzer Carbomedics
Inc. against Sulzer Mexico S.A.
Sulzer Medica and Sulzer Ltd. have also entered into an agreement regarding
claims arising out of the Inter-Op and tibia base plate litigation. See Item
8.A.7 "Legal Proceedings" for more information.
39
7.C INTERESTS OF EXPERTS AND COUNSEL
Not applicable.
ITEM 8. FINANCIAL INFORMATION
8.A CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
See Item 17.
8.A.7 LEGAL PROCEEDINGS
The Company designs, manufactures and markets highly sophisticated products
that involve proprietary technology, technical know-how and intellectual
property rights. The Company may own these rights outright, or operate under
licenses from other parties. Patent challenges, as well as patent infringement
and major product liability claims, are common in the medical device industry.
On December 5, 2000, Sulzer Orthopedics Inc. issued a voluntary recall of
certain lots of the Inter-Op acetabular shells that failed to adhere in certain
cases to patient's acetabulum. Sulzer Orthopedics Inc. has continued to
investigate the reason for the product failure, utilizing the expertise and
counsel of physicians as well as internal and external scientists and engineers.
The investigation initially appeared to reveal that a trace of mineral oil-based
lubricant remaining on the implant after the manufacturing process was
responsible for the lack of proper bonding between the implant and the bone, in
some cases.
More recently, Sulzer Orthopedics Inc. has focused its investigation on
various other contaminants on the surface of the porous coated shell. Sulzer
Orthopedics has implemented manufacturing and cleaning steps to ensure the
problem does not recur.
As of March 7, 2002, the Company and its subsidiaries have been served with
a total of 1989 lawsuits in federal and state and provincial courts in the U.S.
and Canada, alleging injuries as a result of Inter-Op acetabular shells
manufactured and sold by Sulzer Orthopedics Inc. As of March 14, 2002, 2,860
revision surgeries have been reported.
The plaintiffs' allegations of liability are based on various theories of
recovery, including, but not limited to, product liability, strict liability,
negligence, and breach of warranty. Plaintiffs typically seek relief in the form
of monetary damages (including general damages, medical care and monitoring
expenses, loss of earnings and earnings capacity, compensatory damages and
punitive damages), generally in unspecified amounts, on behalf of the individual
or class. Sulzer Orthopedics Inc. has informed the United States Food and Drug
Administration of its ongoing investigation of a porous-coated tibia base plate
that was manufactured from July to December 2000. A number of adverse clinical
outcomes have been reported, and as of March 7, 2002, 585 revision surgeries
have been reported to Sulzer Orthopedics and the Company and its subsidiaries
have been served with a total of 86 lawsuits. On June 19, 2001, the Judicial
Panel on Multi-District Litigation ("MDL") ordered that all Inter-Op lawsuits
filed in federal courts be consolidated for per-trial proceedings in the U.S.
District Court (N.D. Ohio) in Cleveland, Ohio. On August 29, 2001, the Court
provisionally certified a class and granted preliminary approval to the parties'
settlement agreement and on September 17, 2001, the Court issued an order
enjoining all further proceedings in other federal and state courts.
The parties have renegotiated the initial settlement agreement. The revised
settlement agreement (the "MDL Settlement Agreement") provides for the Company
to contribute to the settlement trust for the benefit of USD 725 million in the
form of USD 425 million in cash and USD 300 million in Convertible Callable
Instruments (CCI). In additional, Sulzer Ltd., a Swiss corporation, which until
July 2001 owned approximately 74% of the Company, has agreed to pay USD 50
million in cash and contribute 480,349 shares in the company. In addition, XL
Winterthur International Insurance Switzerland, "Winterthur", the Company's
insurer for the relevant policy years, has agreed to assign all the remaining
amounts of the policy covering the period from April 1, 2000 to March 31, 2001,
with the consent of Sulzer Ltd. and the Company, and, furthermore, "Winterthur"
has agreed to pay an amount of USD 40 million into an escrow account for the
40
eventual transfer into the settlement trust, with reference to the policy
covering the period of April 2, 2001 to March 31, 2002.
The Company has the obligation to deliver USD 425 million at the later of
180 days after trial court approval or 60 days after the final judicial approval
date. The amount is increased by an amount equal to the interest calculated at a
floating LIBOR rate (one month LIBOR), starting 180 days after trial court
approval and compounded annually. At the later of 180 days after trial court
approval or 60 days after final judicial approval date, the Company has the
obligation to issue the CCI. Unless earlier redeemed, 18 months after the issue
date, the Company will provide the settlement trust ADS or shares at the
conversion price in effect on the maturity date. The payment obligation under
the CCI will be under the CCI will be unsecured and subordinated to the
financing. Beginning with the issue date, the CCI shall accrue interest in the
amount of 7.5% compounded annually. The Company has the option at any time to
redeem for cash any portion of the face amount of the CCI plus unpaid interest.
The partial redemption shall be in a minimum amount of USD 10 million. While the
CCI is issued, the Company will not pay out any dividends and will be subject to
other financing limitations.
On March 13, 2002, the Company and the plaintiffs have signed the MDL
Settlement Agreement and the U.S. District Court in Cleveland, Ohio, granted
preliminary approval. The U.S. District Court granted final approval on May 8,
2002, after conducting a fairness hearing on May 6, 2002. The patients have the
right to reject this settlement by choosing to opt-out. The opt-out period is
scheduled to end on May 15, 2002. The Company has the right to terminate the
settlement agreement and withdraw for any reason at any time before May 22,
2002. If too many opt-outs are forcing the Company to withdraw from the
settlement agreement, the Company will then be forced to file for Chapter 11 for
its subsidiary Sulzer Orthopedics, Inc., based in Austin. As of the close of the
opt-out period on May 15, 2002, the Claims Administrator under the MDL Class
Settlement Agreement had received notice from approximately 130 patients who
have opted out of the settlement. Sulzer Orthopedics Inc. believes that it has
acted properly at all times in handling the voluntary recall of Inter-Op
acetabular shells and its investigation of the tibia base plates and, with
respect to any patients who opt out of the MDL Settlement Agreement, intends to
defend the related litigation vigorously.
As an integral part of the MDL Settlement Agreement, the Company agreed to
indemnify and hold Sulzer Ltd. and all its direct or indirect subsidiaries
harmless for any and all claims and liabilities related to the affected products
including, in particular, actions of members of the settlement class (as defined
in the MDL Settlement Agreement) who exercise their right to opt-out of the MDL
Settlement Agreement. Sulzer Ltd. releases the Company from any indemnification
obligation arising out of the pre-existing indemnity agreement. The indemnity is
only valid and enforceable if the MDL Settlement Agreement achieves final
judicial approval.
Furthermore, as a condition precedent to execution of the above MDL
Settlement Agreement, and in return of their payments under the MDL Settlement
Agreement, the Company agreed to indemnify and hold "Winterthur" Insurance
Company and its subsidiaries harmless from all claims and liabilities which may
be brought against "Winterthur" under the original and under the second year
policy, including in particular, actions of members of the settlement class (as
defined in the MDL Settlement Agreement) who exercise their right to opt-out of
the MDL Settlement Agreement.
In March, 1999, IntraTherapeutics, Inc., a stent company located in St.
Paul, Minnesota, which the Company acquired in February 2001, received a notice
from Cordis Corporation that it was infringing U.S. Patent No. 4,739,762 (the
"762 Patent") by manufacturing and marketing the IntraStent. The notice demanded
that IntraTherapeutics cease manufacturing and selling the IntraStent and that
if it failed to do so, Cordis Corporation would commence litigation against
IntraTherapeutics once Cordis Corporation had completed lawsuits regarding the
762 Patent in the U.S. District Court of Delaware. The Company does not believe
the IntraStent infringes the 762 Patent and will vigorously defend against any
such litigation.
Joint Medical Products Corporation, a division of Johnson & Johnson, filed
a complaint on January 28, 1997, in the U.S. District Court for the District of
Connecticut against Sulzer Medica USA Inc. and Sulzer
41
Orthopedics Inc. The suit alleged infringement of a patent owned by Joint
Medical relating to an acetabular cup and polymeric insert used in hip
prostheses and sought treble damages, attorneys' fees, and injunctive relief. In
December 1997 (and as later amended in December 1999), the parties stipulated
and the Court ordered that the case be dismissed without prejudice and that the
parties' April 1995 Tolling Agreement remains in effect pending conclusion of
reexamination proceedings involving the Joint Medical patent. The reexamination
period has not concluded, but a substantial possibility exists that it will
conclude in 2002.
In addition, the Company is party to certain other litigation incidental to
its business. These matters are unlikely, individually or together, to have an
adverse material effect on the Company's business, financial condition or
operational results.
8.A.8 DIVIDEND POLICY
The level of dividends in each year will depend upon general business
conditions, the Company's current and expected future financial performance,
developments with respect to the legal proceedings described in 8.A.7 above, and
other relevant factors. As long as the CCI is issued, the Company will not be
able to pay out any dividends and will be subject to other financing
limitations.
The distribution of dividends proposed by the directors of the Company
requires the approval of the shareholders of the Company in a General Meeting.
In addition, the Company's statutory auditors are required to declare that the
dividend proposal is in accordance with Swiss law. Dividends will be payable
following the end of the relevant financial year, if approved at the Company's
Annual General Meeting which will be held in April or May.
Because cash dividends, if any, will be paid by the Company in Swiss
francs, exchange rate fluctuations will affect the U.S. dollar amounts received
by holders of ADS upon conversion by the Depositary of such dividends.
8.B SIGNIFICANT CHANGES
The information required by Item 8.B is incorporated by reference from the
information under Item 8.A.7 regarding the voluntary product recall.
ITEM 9. THE OFFER AND LISTING
9.A LISTING DETAILS
Sulzer Medica's shares are listed on the Swiss Stock Exchange under the
symbol "SMEN" and the ADSs are listed on the New York Stock Exchange under the
symbol "SM." Consequently, Sulzer Medica is subject to the listing regulations
of both stock exchanges.
NEW YORK STOCK EXCHANGE
The ADSs have been trading on the NYSE since July 14, 1997. Each ADS
represents the right to receive one-tenth ( 1/10) of a registered share, par
value CHF 30 per share, and is evidenced by an American Depository Receipt. The
ADSs have been issued pursuant to a deposit agreement with Citibank, N.A., as
depositary. The following table sets forth, for the periods indicated, the high
and low sales prices in U.S. dollars of the ADSs on the NYSE:
HIGH LOW
----- ------
Annual information for the most recent full years (closing
prices)
1997...................................................... 30.50 20.31
1998...................................................... 28.88 16.00
1999...................................................... 21.75 16.00
2000...................................................... 29.75 18.88
2001...................................................... 28.38 2.55
42
HIGH LOW
----- ------
Quarterly information for the past two years (closing
prices)
2000:
First Quarter............................................. 24.50 18.88
Second Quarter............................................ 24.38 20.94
Third Quarter............................................. 29.75 24.06
Fourth Quarter............................................ 27.63 23.50
2001:
First Quarter............................................. 28.38 20.10
Second Quarter............................................ 20.20 5.95
Third Quarter............................................. 8.50 4.40
Fourth Quarter............................................ 5.40 2.55
2002:
First Quarter............................................. 9.77 4.43
Monthly information for most recent six months (closing
prices)
November 2001............................................. 4.50 2.55
December 2001............................................. 4.76 3.85
January 2002.............................................. 5.45 4.43
February 2002............................................. 8.29 5.60
March 2002................................................ 9.77 7.90
April 2002................................................ 10.40 9.39
SWISS STOCK EXCHANGE
The shares have also been trading on the Swiss Exchange since July 14,
1997. Securities traded on the Swiss Exchange include Swiss and non-Swiss bonds,
equities, investment funds, rights and warrants.
The following table sets forth, for the periods indicated, the high and low
sales prices in Swiss francs, of the registered shares on the Swiss Exchange:
HIGH LOW
---- ---
Annual information for the most recent full years (closing
prices)
1997...................................................... 448 298
1998...................................................... 430 214
1999...................................................... 334 234
2000...................................................... 535 298
2001...................................................... 465 37
Quarterly information for the past two years (closing
prices)
2000:
First Quarter............................................. 416 298
Second Quarter............................................ 403 346
Third Quarter............................................. 535 390
Fourth Quarter............................................ 490 407
2001:
First Quarter............................................. 465 345
Second Quarter............................................ 351 100
Third Quarter............................................. 135 72
Fourth Quarter............................................ 87 37
43
HIGH LOW
---- ---
2002:
First Quarter............................................. 159 71
Monthly information for most recent six months (closing
prices)
November 2000............................................. 75 39
December 2000............................................. 77 63
January 2001.............................................. 90 71
February 2001............................................. 137 92
March 2001................................................ 159 136
April 2001................................................ 169 156
9.B PLAN OF DISTRIBUTION
Not applicable.
9.C MARKET
Sulzer Medica's registered shares are listed on the SWS Swiss Exchange
under the symbol "SMEN" and the ADSs are listed on the New York Stock Exchange
under the symbol "SM." Consequently, Sulzer Medica is subject to the listing
regulations of both stock exchanges.
NEW YORK STOCK EXCHANGE
The ADSs have been trading on the NYSE since July 14, 1997. Each ADS
represents the right to receive one-tenth ( 1/10) of a registered share and is
evidenced by an American Depository Receipt. The ADSs have been issued pursuant
to a deposit agreement with Citibank, N.A., as depositary.
SWX SWISS EXCHANGE
The registered shares have also been trading on the Swiss Exchange, our
principal trading market, since July 14, 1997. Securities traded on the Swiss
Exchange include Swiss and non-Swiss bonds, equities, investment funds, rights
and warrants.
The Swiss Exchange is an order-driven exchange system. Transactions on the
Swiss Exchange are transmitted electronically via a high-speed
computer-processing center. Trading is divided into three separate phases:
pre-opening, opening and continuous trading. During the pre-opening phase, the
system is available for entries into the order book, inquiries and reporting of
off-exchange transactions, which are subject to additional regulations. During
the opening phase, the system fixes the price for the particular security.
During the continuous trading phase orders are matched. The Swiss Exchange
interrupts trading in a security that is subject to significant price
fluctuations during a particular trading period.
9.D SELLING SHAREHOLDERS
Not applicable.
9.E DILUTION
Not applicable.
9.F EXPENSES OF THE ISSUE
Not applicable.
44
ITEM 10. ADDITIONAL INFORMATION
10.A SHARE CAPITAL
Not applicable.
10.B MEMORANDUM AND ARTICLES OF ASSOCIATION
The information required by Item 10.B is incorporated by reference from
information contained in the Company's Annual Report on Form 20-F for the year
ended December 31, 1998 as filed with the Commission on June 28, 1999 as Exhibit
1.
10.C MATERIAL CONTRACTS
Sulzer Medica USA Inc., a Delaware corporation, and certain other
subsidiaries of the Company (collectively "Purchaser") entered into an Asset
Purchase Agreement (the "Purchase Agreement") dated as of November 1, 2000, with
Core-Vent Corporation d/b/a Paragon Implant Company, a Nevada corporation
("Paragon") and certain Paragon shareholders (collectively "Seller") whereby
Purchaser agreed to buy substantially all of the assets of Seller for one
hundred million ($100,000,000) U.S. dollars, subject to certain post-closing
adjustments. The Purchase Agreement contains customary terms and conditions for
a transaction of this type and the purchase closed on January 8, 2001.
A subsidiary of the Company, Sulzer Medica USA Holding Co, a Delaware
corporation, ("Acquirer"), entered into an Agreement and Plan of Merger (the
"Merger Agreement") dated as of January 5, 2001, with IntraTherapeutics, Inc., a
Minnesota corporation ("IntraTherapeutics") whereby Acquirer acquired 100% of
the issued and outstanding equity of IntraTherapeutics for one-hundred
forty-five million ($145,000,000) U.S. dollars. The Merger Agreement contains
usual and customary terms and conditions for transactions of this type, and the
merger was effective on February 1, 2001.
Sulzer Medica, Sulzer Orthopedics Inc. and Sulzer Ltd. entered into the MDL
Settlement Agreement dated as of March 13, 2002, with class counsel in
connection with the Inter-Op and tibial baseplate litigation. Sulzer Medica,
Sulzer AG and XL Winterthur International Insurance Switzerland also entered
into an Indemnification and Release Agreement effective as of March 14, 2002,
pursuant to which XL Winterthur International Insurance Switzerland has agreed
to assign certain insurance proceeds to the Settlement Trust Fund and Sulzer
Medica has agreed to indemnify Sulzer Ltd against all claims and liabilities of
members of the settlement class who opt-out of the MDL Settlement. See Item 8.A7
for more information.
Sulzer Orthopedics Inc. has entered into a Settlement and Release Agreement
with the United States of America concerning the Centers for Medicare and
Medicaid Services ("CMS") claims for reimbursement of medical items and services
provided to Medicare beneficiaries in connection with the voluntary recall of
the Inter-Op shells. Under the terms of the Settlement and Release Agreement,
Sulzer Orthopedics Inc. agrees to reimburse the United States for up to USD
10,000 dollars for hospital services and USD 5,000 dollars for physicians
services for each Medicare patient who has had a revision surgery. Payments to
the United States will be paid out of the Settlement Trust established for the
administration of the MDL Settlement Agreement.
Sulzer Orthopedics has also entered into a Letter Agreement dated April 25,
2002, with XL Winterthur International Insurance Switzerland under the terms of
which XL Winterthur International Insurance Switzerland has agreed to fund
payments to be made under the Settlement and Release Agreement Sulzer
Orthopedics Inc. has entered into with CMS.
Sulzer Orthopedics Inc. has also entered into a Memorandum of Understanding
("MOU") with several large third-party payors including various
BlueCross/BlueShied plans, Humana Health plans, Mutual of Omaha and CIGNA plans
throughout the United States to resolve certain claims of subrogation for
reimbursement relating to revision surgeries for both the recalled acetabular
shells and withdrawn tibial baseplates. The MOU is subject to negotiation and
execution of a definitive settlement agreement. The payments to be made to these
third-party payors will also be made out of the Settlement Trust Fund.
45
10.D EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDER
Sulzer Medica may restrict transfers or, to the extent permitted under
applicable law or Sulzer Medica's Articles of Incorporation and Organizational
Regulations, cause the mandatory sale or disposition of Shares and ADSs where
such transfer or ownership, as the case may be, might result in ownership of
registered shares or ADR's exceeding the limits under applicable law or Sulzer
Medica's Articles of Incorporation and Organizational Regulations. As of the
date hereof, there are no such limitations affecting ownership of registered
shares under applicable laws of Switzerland or the Articles of Incorporation and
Organizational Regulations of Sulzer Medica.
10.E TAXATION
The following is a summary of Swiss tax matters that may be relevant with
respect to the acquisition, ownership and disposition of registered shares or
ADSs (which are evidenced by ADRs).
For purposes of the Convention between the United States of America and
Switzerland for the avoidance of double taxation with respect to Taxes on income
of 1996 ("the Treaty") and the IRC of 1986, as amended, United States Holders of
ADSs are treated as the owners of the registered shares corresponding to such
ADSs. Accordingly, the Swiss tax consequences discussed below also generally
apply to United States holders of registered shares.
SWISS TAXATION
Gain on Sale. Under present Swiss law, a holder of registered shares or
ADSs, will be exempted from any Swiss federal, cantonal or municipal income or
other tax on gains realized during the year on the sale of registered shares or
ADSs who:
(i) is a non-resident of Switzerland,
(ii) during the taxable year has not engaged in a trade or business
through a permanent establishment within Switzerland and
(iii) is not subject to taxation by Switzerland for any other reason.
Stamp, Issue and Other Taxes. The transfer of shares of Sulzer Medica or
ADSs may be subject to the Swiss security transfer stamp duty (Umsatzabgabe) as
defined in the Swiss Federal Stamp Tax Act.
Withholding Tax. Dividends paid in respect of shares will be subject to
the Swiss Anticipatory Tax at the rate of 35%, and Sulzer Medica will be
required to withhold tax at such rate from any dividend payments made to a
holder of registered shares. Dividend payments may qualify for reduction of or
refund of the Swiss Anticipatory Tax because of the provisions of a double tax
treaty between Switzerland and the country of residence or incorporation of a
holder. In such cases the holder will be entitled to claim a refund of all or a
portion of such tax in accordance with such treaty. The Treaty provides for a
mechanism where a United States resident or United States corporations can
generally seek a refund of the Swiss Anticipatory Tax paid on dividends in
respect of registered shares, to the extent the withholding exceeds 15%.
10.F DIVIDENDS AND PAYING AGENTS
Not applicable.
10.G STATEMENT BY EXPERTS
Not applicable.
10.H DOCUMENTS ON DISPLAY
The documents that are exhibits to or incorporated by reference in this
annual report can be read at U.S. Securities and Exchange Commission's public
reference facilities.
46
10.I SUBSIDIARY INFORMATION
Not applicable.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
MARKET-RATE-SENSITIVE INSTRUMENTS AND RISK MANAGEMENT
Due to the global nature of its operations, Sulzer Medica conducts its
business in various foreign currencies and, as a result, is subject to the
exposures that arise from foreign currency exchange rate movements. Such
exposures arise from transactions denominated in foreign currencies, primarily
intercompany loans and purchases of inventory, as well as from the translation
of results of operations from outside of Switzerland.
The Group manages volatility risks where necessary under the Group's risk
management policies. Through its Foreign Exchange Risk Policy, the Group seeks
to protect its net income and net worth in Swiss Francs against major currency
fluctuations. Sulzer Medica's Chief Executive Officer and Chief Financial
Officer have approved of the Foreign Exchange Risk Policy. The foreign exchange
risks are managed by the Finance Department based on strategies defined in
conformity with the Foreign Exchange Risk Policy and are reviewed on a regular
basis with the frequency depending on the size and nature of the underlying
risks. The individual companies of the Sulzer Medica Group are responsible for
protecting their net income and net worth in their local currencies. In order to
avoid any significant impact on a subsidiary's net income because of changes in
foreign currency rates, transactional foreign currency risks shall be kept to a
minimum or have to be hedged. The Group mainly uses currency forward contracts
to address the currency transaction risk. Adding and holding additional risk
positions, especially speculative positions without underlying operating
transactions, is explicitly prohibited.
Due to its borrowings and cash position the Group is also exposed to
changes in interest risks. These risks are covered by the respective Group
policy. Borrowings at year-end remained at almost same levels compared to 2000.
But the Group's cash position has been reduced significantly due to two major
acquisitions in January and February 2001. The Group's borrowings are to be
expected to increase significantly by year-end in the event the MDL Settlement
Agreement approved by the U.S. District Court is not terminated. Consequently,
the interest rate risks will increase substantially in 2003.
FOREIGN CURRENCY EXCHANGE RATE RISK
The financial statements for the Group are reported in Swiss francs.
However, approximately 90% of Group sales (Orthopedics and Cardiovascular
Prostheses Divisions) of CHF 1,418 million are denominated in currencies other
than the Swiss franc. In addition, approximately 75% of its long-term debt is
denominated in currencies other than the Swiss franc. As a result, fluctuations
in exchange rates can have a significant effect on the Group's sales, operating
results and financial position.
Sulzer Medica's financial instruments are subject to changes in fair values
(as reported in the consolidated balance sheet) due to changes in market rates
of exchange. All financial instruments hedge foreign currency assets,
liabilities and intercompany transactions. As a result, changes in fair values
of financial instruments do not affect Sulzer Medica's net income.
The net fair values of all foreign currency derivative contracts
outstanding at December 31, 2001, were negative by CHF 1 million. An analysis
has been prepared to estimate the sensitivity of the fair value of all
derivative instruments to a hypothetical 10% unfavorable change in spot exchange
rates at December 31, 2001. The results of the estimation, which may vary from
actual results, are as follows:
Fair value of foreign currency exchange rate sensitive instruments
10% adverse rate movement................................... 2.5 million (Loss)
At year-end rates........................................... 20.5 million (Gain)
47
Losses and gains on underlying transactions or anticipated transactions
would largely offset any gains and losses of fair value on derivative contracts.
These offsetting gains and losses are not reflected in the above table. There
were no anticipatory hedges at December 31, 2001.
In addition, approximately 170% of the Group's net assets as per December
31, 2001 are denominated in currencies other than the Swiss franc (USD, GBP,
EURO). As a result, fluctuations in exchange rates can have a significant effect
on the Group's equity (currency translation adjustment); if Swiss francs were to
have strengthened 10% against all other currencies, Sulzer Medica's equity,
reported in Swiss francs, would have decreased by CHF 107 million.
INTEREST RATE RISK
The financial statements for the Group report CHF 21 million long-term
borrowings as of December 31, 2001. The table below provides information about
Sulzer Medica's derivative financial instruments and other financial instruments
that are sensitive to changes in interest rates.
Maturity date for debt and notional amount outstanding for loans at
December 31, 2001 in million Swiss francs equivalents, which is Sulzer Medica's
reporting currency:
2002 CARRYING 2003 AND TOTAL
MATURITY DATES AS AT YEAR END VALUES THEREAFTER TOTAL FAIR VALUE
----------------------------- ------------- ---------- ----- ----------
LIABILITIES
LONG-TERM BORROWINGS:
Various, principally in CHF, EUR, GBP, USD and JPY
floating based on Libor............................ -- 21 21 21
TOTAL LONG-TERM BORROWINGS........................... -- 21 21 21
SHORT-TERM BORROWINGS:
Other borrowings (floating rate based in Libor, in
CHF, Euro, Pound Yen and USD)...................... 75 -- 75 75
TOTAL SHORT-TERM BORROWINGS.......................... 75 -- 75 75
Based upon the net cash position at December 31, 2001 (CHF 61 million) a
decrease in short-term interest rates by 1% point would lower Sulzer Medica's
annual net interest income by CHF 0.6 million.
So far Sulzer Medica does not consider it necessary to hedge the interest
rate exposure of its interest bearing assets and liabilities; Sulzer Medica has
no outstanding interest swaps at December 31, 2001.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
The Company's Registration Statement on Form F-1, Commission file number
333-7068, was declared effective on July 8, 1997. Pursuant to such Registration
Statement, Sulzer Medica conducted its IPO of 2,300,000 registered shares,
nominal value CHF 30 per share. The U.S. tranche of the IPO consisted of 580,859
registered shares. The offerees in the U.S. had the option to request the shares
in the form of American Depositary Shares ("ADSs"), each of which represents 0.1
of a registered share.
48
The IPO commenced on July 14, 1997 and terminated after all offered shares
were sold for an aggregate offering price of $620,100,000, including the
exercise of the underwriters' over-allotment option. The offering price per
share was CHF 350 and per ADS was $23.85. The Company's expenses relating to the
IPO were approximately $17,000,000, all of which was paid to persons other than
directors or officers of the Company, and the underwriting discount was
approximately $31,616,000, leaving net proceeds to Sulzer Medica of
approximately $571,484,000. Morgan Stanley Dean Witter was both the Global
Coordinator of the IPO and the managing underwriter of the U.S. tranche.
In January 1998, Sulzer Medica acquired Spine-Tech, Inc. through a cash
tender offer for approximately CHF 883 million (net of cash on hand and amounts
tendered by Spine-Tech shareholders for exercise of options). The cash purchase
price was paid from the net proceeds of the IPO and operating cash flow of the
Company. The entire purchase price was paid to the shareholders of Spine-Tech.
ITEM 15. RESERVED
ITEM 16. RESERVED
PART III
ITEM 17. FINANCIAL STATEMENTS
The following audited and consolidated financial statements, together with
the report of PricewaterhouseCoopers AG thereon, are filed as part of this
Annual Report:
PAGE
----
Report of Group Auditors.................................... F-1
Consolidated Financial Statements:
Consolidated Statements of Income for the years ended
December 31, 2001, 2000 and 1999....................... F-2
Consolidated Balance Sheets of December 31, 2001 and
2000................................................... F-3
Consolidated Statements of Changes in Stockholders' equity
for the years ended December 31, 2001, 2000 and 1999... F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 2001, 2000 and 1999....................... F-5
Notes to Consolidated Financial Statements................ F-6
ITEM 18. FINANCIAL STATEMENTS
Not applicable.
ITEM 19. EXHIBITS
1. Articles*
4.1 1997 Management Stock Option Plan of Sulzer Medica Ltd. And
Affiliated Companies, as amended**
4.2 Sulzer Medica 2001 Stock Option Plan, as amended(1)
4.3 2001 Employee Stock Purchase Plan United States and Canada,
as amended(2)
4.4 Sulzer Medica 2001 Long-Term Stock Option Plan, as
amended(3)
4.5 Sulzer Medica 2002 Stock Purchase Plan United States and
Canada, as amended(4)
4.6 AGREEMENT AND PLAN OF MERGER dated as of January 5, 2001,
among SULZER MEDICA USA HOLDING CO., a Delaware corporation
("Parent"), ELVER ACQUISITION CORPORATION, a Minnesota
corporation and a wholly owned subsidiary of Parent ("Merger
Sub"), and INTRATHERAPEUTICS, INC., a Minnesota corporation
(the "Company").(5)
49
4.7 ASSET PURCHASE AGREEMENT, dated as of November 1, 2000, as
amended January 8, 2001, and May 23, 2001, among CORE-VENT
CORPORATION, d/b/a Paragon Implant Company, a Nevada
corporation ("Paragon"), CORE-VENT BIOENGINEERING, INC., a
California corporation ("C-V BioEngineering"), CORE-VENT
PARAGON BIO, a California corporation ("C-V Paragon"),
PARAGON ADMINISTRATION, INC. , a California corporation
("Paragon Administration"), CORE-VENT GmbH, a corporation
organized under the laws of the Federal Republic of Germany
("C-V GmbH"), CORE-VENT ISRAEL (1997), a PARAGON Company
Ltd., a corporation organized under the laws of Israel ("C-V
Israel"; and together with Paragon, C-V BioEngineering, C-V
Paragon, Paragon Administration, C-V GmbH and C-V Israel,
the "Seller"), the shareholders of Paragon identified on the
signature page hereof (the "Paragon Shareholders"), the
shareholders of C-V BioEngineering identified on the
signature page hereof (the "C-V BioEngineering
Shareholders"), the Niznick Family Foundation (the "Niznick
Foundation"), a California not-for-profit corporation, DR.
GERALD A. NIZNICK, an individual ("Dr. Niznick"; and
together with the Paragon Shareholders, the C-V
BioEngineering Shareholders and the Niznick Foundation, the
"Shareholders"), SULZER MEDICA USA INC., a Delaware
corporation ("Parent"), SULZER CALCITEK INC., a Delaware
corporation ("Calcitek"), and SULZER CALCITEK GmbH, a
corporation organized under the laws of the Federal Republic
of Germany ("Calcitek GmbH"), GASHTAR LTD, a corporation
organized under the laws of Israel ("Calcitek Israel") and
SULZER DENTAL CORP, a corporation organized under the laws
of Canada ("Calcitek Canada" and together with Calcitek, and
Calcitek GmbH and Calcitek Israel, the "Purchaser").(6)
4.8 Class Action Settlement Agreement among Sulzer Orthopedics
Inc., Sulzer Medica AG, Sulzer Ltd. and Class Counsel, on
Behalf of Class Representatives In Re Sulzer Hip Prosthesis
and Knee Prosthesis Liability Litigation MDL Docket No.
01-CV-9000 (MDL No. 1401) dated as of March 13, 2002
4.9 Indemnification and Release Agreement by and among Sulzer
Medica AG, Sulzer AG and XL Winterthur International
Insurance Switzerland effective as of March 14, 2002.
4.10 Settlement and Release Agreement dated as of May 2, 2002,
Among the United States of America, acting through the Civil
Division of the United States Department of Justice and on
behalf of the Department of Health and Human Services and
Sulzer Orthopedics Inc.
4.11 Letter Agreement between Sulzer Orthopedics Inc. and XL
Winterthur International Insurance Switzerland dated April
25, 2002.
4.12 Memorandum of Understanding among the Settling Health Plans
and Sulzer Entities named therein.
10. Consent of PricewaterhouseCoopers AG, Independent Public
Accountants
---------------
* Incorporated by reference to Exhibit 1 to the Company's annual report on
Form 20-F for the year ended December 31, 1998, filed with the Commission on
June 28, 1999.
** Incorporated by reference to Exhibit 1 to the Company's annual report on
Form 20-F for the year ended December 31, 1999, filed with the Commission on
June 9, 2000.
(1) Incorporated by reference to Exhibit 4.3 to the Company's Registration
Statement on Form S-8 (Reg. No. 333-76282) filed with the Commission on
January 4, 2002.
(2) Incorporated by Reference to Exhibit 4 to the Company's Annual Report on
Form 20-F for the year ended December 31, 2000 filed with the Commission on
June 18, 2001.
(3) Incorporated by reference to Exhibit 4.3 to the Company's Registration
Statement on Form S-8 (Reg. No. 333-76280) filed with the Commission on
January 4, 2002.
(4) Incorporated by reference to Exhibit 4.3 to the Company's Registration
Statement on Form S-8 (Reg. No. 333-85388) filed with the Commission on
April 2, 2002.
(5) Incorporated by reference to Exhibit 5(a)(i) to the Company's Annual Report
on Form 20-F for the year ended December 31, 2000 filed with the Commission
on June 18, 2001.
(6) Incorporated by reference to Exhibit 5(a)(ii) to the Company's Annual Report
on Form 20-F for the year ended December 31, 2000 filed with the Commission
on June 18, 2001.
50
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant certifies that it meets all of the requirements for
filing on Form 20-F and has duly caused this annual report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SULZER MEDICA LTD
By: /s/ Urs Kamber
------------------------------------
Urs Kamber
Chief Financial Officer
By: /s/ Stephan Rietiker
------------------------------------
Stephan Rietiker
Chief Executive Officer
Date: May 16, 2002
51
SULZER MEDICA LTD AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Group Auditors.................................... F-1
Consolidated Financial Statements:
Consolidated Income Statement for the years ended December
31, 2001, 2000 and 1999................................ F-2
Consolidated Balance Sheets at December 31, 2001 and
2000................................................... F-3
Consolidated Statements of Shareholders' Equity for the
year ended December 31, 2001, 2000 and 1999............ F-4
Consolidated Cash Flow Statement for the years ended
December 31, 2001, 2000 and 1999....................... F-5
Notes to the Consolidated Financial Statements............ F-6
52
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
of Sulzer Medica Ltd, Winterthur
We have audited the consolidated financial statements (balance sheet, income
statement, cash flow statement, statement of changes in equity and notes) of
Sulzer Medica Ltd and its subsidiaries as of December 31, 2001 and 2000 and for
each of the three years in the period ended December 31, 2001, all expressed in
Swiss francs.
These consolidated financial statements are the responsibility of the Board of
Directors. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits. We confirm that we meet the Swiss
legal requirements concerning professional qualification and independence.
Our audits were conducted in accordance with auditing standards promulgated by
the profession and with International Standards on Auditing issued by the
International Federation of Accountants (IFAC) and auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. We have
examined on a test basis evidence supporting the amounts and disclosures in the
consolidated financial statements. We have also assessed the accounting
principles used, significant estimates made and the overall consolidated
financial statement presentation. We believe that our audit provide a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements give a true and fair view
of the financial position, of the Sulzer Medica Ltd and its subsidiaries as of
December 31, 2001 and 2000 and the results of operations and the cash flows for
each of the three years in the period ended December 31, 2001 in accordance with
International Accounting Standards and comply with Swiss law.
International Accounting Standards vary in certain respects from accounting
principles generally accepted in the United States of America. The application
of the latter would have affected the determination of the consolidated net
income expressed in Swiss francs for each of the three years in the period ended
December 31, 2001 and the determination of consolidated shareholders' equity
also expressed in Swiss francs at December 31, 2001 and 2000 to the extent
summarized in note 31 to the consolidated financial statements.
PricewaterhouseCoopers AG
/s/ R. Rausenberger /s/ St. Haag
R Rausenberger St Haag
Winterthur, April 2, 2002
F-1
--------------------------------------------------------------------------------
CONSOLIDATED INCOME STATEMENTS
--------------------------------------------------------------------------------
*
--------------------------------------------------------------------------------
2001 2001 2000 1999
Mill. USD
Notes unaudited(1) Mill. CHF Mill. CHF Mill. CHF
------------ ------------ ------------ ------------ ------------
NET SALES 839 1,418 1,347 1,182
------------ ------------ ------------ ------------
Cost of sales (320) (540) (420) (359)
------------ ------------ ------------ ------------
GROSS PROFIT 519 878 927 823
============ ============ ============ ============
Selling, general and administrative expense (383) (648) (555) (490)
------------ ------------ ------------ ------------
Research and development expense (77) (130) (108) (98)
------------ ------------ ------------ ------------
Other operating income/expense 8 -- -- 6 (1)
------------ ------------ ------------ ------------
OPERATING INCOME BEFORE GOODWILL
AMORTIZATION AND EXCEPTIONAL ITEMS 59 100 270 234
============ ============ ============ ============
Goodwill amortization (34) (57) (39) (46)
------------ ------------ ------------ ------------
Hip and knee settlement 9 (873) (1,476) -- --
------------ ------------ ------------ ------------
Exceptional operating items 10 (117) (198) (1) (254)
------------ ------------ ------------ ------------
Gain on sale of the Electrophysiology Division 11 -- -- -- 579
------------ ------------ ------------ ------------
OPERATING INCOME/LOSS (965) (1,631) 230 513
============ ============ ============ ============
Financial income/expense 12 4 7 29 17
------------ ------------ ------------ ------------
Other non-operating income/expense 12 (12) (21) -- --
------------ ------------ ------------ ------------
INCOME/LOSS BEFORE TAXES (973) (1,645) 259 530
============ ============ ============ ============
Taxes 13 268 454 (67) (46)
------------ ------------ ------------ ------------
NET INCOME/NET LOSS BEFORE MINORITY INTERESTS (705) (1,191) 192 484
============ ============ ============ ============
Minority interests (1) (2) (2) (1)
------------ ------------ ------------ ------------
NET INCOME/NET LOSS (706) (1,193) 190 483
============ ============ ============ ============
PER REGISTERED SHARE/PER AMERICAN
DEPOSITARY SHARE (ADS) USD CHF CHF CHF
------------ ------------ ------------ ------------
Basic income per share 14 (70.79) (119.62) 19.01 48.37
------------ ------------ ------------ ------------
Basic income per ADS (7.08) (11.96) 1.90 4.84
------------ ------------ ------------ ------------
Diluted income per share(2) 14 (70.79) (119.62) 18.98 48.37
------------ ------------ ------------ ------------
Diluted income per ADS(2) (7.08) (11.96) 1.90 4.84
============ ============ ============ ============
(1) Translated solely for the convenience of the reader, see note 32.
(2) According to IAS 33 and due to the net loss in 2001 the diluted income
corresponds to the basic income.
The accompanying notes are an integral part of these financial statements.
F-2
--------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
*
--------------------------------------------------------------------------------
2001 2001 2000
ASSETS Notes Mill. USD Mill. CHF Mill. CHF
unaudited(1)
-------------- -------------- -------------- --------------
NON-CURRENT ASSETS
Intangible assets 15 554 930 689
-------------- -------------- --------------
Property, plant and equipment 16 140 236 223
-------------- -------------- --------------
Investments and other financial assets 17 39 65 104
-------------- -------------- --------------
Deferred income taxes 13 383 643 142
-------------- -------------- --------------
TOTAL NON-CURRENT ASSETS 1,116 1,874 1,158
============== ============== ==============
CURRENT ASSETS
Inventories 18 245 411 389
-------------- -------------- --------------
Trade accounts receivable 19 183 308 287
-------------- -------------- --------------
Other accounts receivable and prepaid expenses 73 122 58
-------------- -------------- --------------
Cash and cash equivalents 93 156 633
-------------- -------------- --------------
TOTAL CURRENT ASSETS 594 997 1,367
============== ============== ==============
TOTAL ASSETS 1,710 2,871 2,525
============== ============== ==============
EQUITY AND LIABILITIES
SHAREHOLDERS' EQUITY 21 467 784 1,993
-------------- -------------- --------------
Minority interests 4 7 5
============== ============== ==============
LONG-TERM LIABILITIES
Long-term borrowings 22 12 20 19
-------------- -------------- --------------
Deferred income taxes 13 11 19 20
-------------- -------------- --------------
Long-term provisions 23 874 1,468 144
-------------- -------------- --------------
Other long-term liabilities 7 11 4
-------------- -------------- --------------
TOTAL LONG-TERM LIABILITIES 904 1,518 187
============== ============== ==============
CURRENT LIABILITIES
Short-term borrowings 24 44 75 86
-------------- -------------- --------------
Short-term provisions 23 133 223 54
-------------- -------------- --------------
Trade accounts payable 42 70 55
-------------- -------------- --------------
Other current and accrued liabilities 25 116 194 145
-------------- -------------- --------------
TOTAL CURRENT LIABILITIES 335 562 340
============== ============== ==============
TOTAL LIABILITIES 1,239 2,080 527
============== ============== ==============
TOTAL EQUITY AND LIABILITIES 1,710 2,871 2,525
============== ============== ==============
Commitments and contingencies 26
(1) Translated solely for the convenience of the reader, see note 32.
The accompanying notes are an integral part of these financial statements.
F-3
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
--------------------------------------------------------------------------------
*
--------------------------------------------------------------------------------
Additional Cumulative
(in millions of Swiss francs, Share paid-in Retained translation Treasury
except share data) capital capital earnings adjustment stock(2) Total
======== ========= ========= ========= ======== ========
JANUARY 1, 1999 300 766 247 (86) (7) 1,220
======== ========= ========= ========= ======== ========
Adjustments for adopting IAS 19, revised (2) (2)
-------- --------- --------- --------- -------- --------
Dividends (CHF 4.50 per share) (45) (45)
-------- --------- --------- --------- -------- --------
Options exercised --
-------- --------- --------- --------- -------- --------
Decrease in treasury stock 2 2
-------- --------- --------- --------- -------- --------
Net income 483 483
-------- --------- --------- --------- -------- --------
Currency translation adjustments 181 181
-------- --------- --------- --------- -------- --------
Comprehensive income(1) 483 181 664
======== ========= ========= ========= ======== ========
DECEMBER 31, 1999 300 766 683 95 (5) 1,839
======== ========= ========= ========= ======== ========
Dividends (CHF 5.00 per share) (50) (50)
-------- --------- --------- --------- -------- --------
Options exercised (note 30) 3 3
-------- --------- --------- --------- -------- --------
Increase in treasury stock (2) (2)
-------- --------- --------- --------- -------- --------
Net income 190 190
-------- --------- --------- --------- -------- --------
Currency translation adjustments 13 13
-------- --------- --------- --------- -------- --------
Comprehensive income(1) 190 13 203
======== ========= ========= ========= ======== ========
DECEMBER 31, 2000 300 769 823 108 (7) 1,993
======== ========= ========= ========= ======== ========
Adjustments for adopting IAS 39 (note 21) 12 12
-------- --------- --------- --------- -------- --------
Dividends (CHF 6.00 per share) (60) (60)
-------- --------- --------- --------- -------- --------
Options exercised (note 30) --
-------- --------- --------- --------- -------- --------
Increase in treasury stock (9) (9)
-------- --------- --------- --------- -------- --------
Fair value adjustments on (9) (9)
financial instruments (note 21)
-------- --------- --------- --------- -------- --------
Net income (1,193) (1,193)
-------- --------- --------- --------- -------- --------
Currency translation adjustments 50 50
-------- --------- --------- --------- -------- --------
Comprehensive income(1) (1,193) 50 (1,143)
======== ========= ========= ========= ======== ========
DECEMBER 31, 2001 300 769 (427) 158 (16) 784
======== ========= ========= ========= ======== ========
(1) Comprehensive income includes changes in equity, other than those arising
from investment by owners and distributions to owners. The comprehensive
income was CHF -1143 million in 2001, CHF 203 million in 2000 and CHF 664
million in 1999.
(2) The financial statements 1999 have been restated to reflect the adoption of
SIC 16 which requires treasury stock to be deducted from equity.
The accompanying notes are an integral part of these financial statements.
F-4
--------------------------------------------------------------------------------
CONSOLIDATED CASH FLOW STATEMENTS
--------------------------------------------------------------------------------
*
--------------------------------------------------------------------------------
2001 2000 1999
Mill. CHF Mill. CHF Mill. CHF
------------ ------------ ------------
CASH FLOW FROM OPERATING ACTIVITIES OF CONTINUING OPERATIONS
Net income/net loss (1,193) 190 483
------------ ------------ ------------
Minority interests 2 2 1
------------ ------------ ------------
Gain on sale of the Electrophysiology Division -- -- (579)
------------ ------------ ------------
Depreciation and amortization 195 117 102
------------ ------------ ------------
Change in provisions 1,492 (7) 12
------------ ------------ ------------
Change in net current assets and long-term receivables (40) (10) (90)
------------ ------------ ------------
Exceptional non-cash write-down of goodwill 53 -- 240
------------ ------------ ------------
Other non-cash items, net (416) 5 9
------------ ------------ ------------
TOTAL CASH FLOW FROM OPERATING ACTIVITIES
OF CONTINUING OPERATIONS 93 297 178
============ ============ ============
CASH FLOW FROM INVESTING ACTIVITIES OF CONTINUING OPERATIONS
Purchase/sale of intangible assets (8) (6) (12)
------------ ------------ ------------
Purchase/sale of tangible assets (71) (49) (31)
------------ ------------ ------------
Acquisitions including minority investments (413) (80) (58)
------------ ------------ ------------
Proceeds from divestitures 27 4 1,037
------------ ------------ ------------
Purchase/sale of long-term financial assets (38) (22) --
------------ ------------ ------------
TOTAL CASH FLOW OF INVESTING ACTIVITIES (503) (153) 936
============ ============ ============
NET CASH FLOW BEFORE FINANCING ACTIVITIES (410) 144 1,114
------------ ------------ ------------
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from issuance of share capital -- 3 --
------------ ------------ ------------
Change in treasury stock (9) (2) 2
------------ ------------ ------------
Change in borrowings (19) (4) (696)
------------ ------------ ------------
Dividends (60) (50) (45)
------------ ------------ ------------
TOTAL CASH FLOW (- USED IN) FROM FINANCING ACTIVITIES (88) (53) (739)
============ ============ ============
Net effect of currency translation on cash and cash equivalents 21 (4) 32
------------ ------------ ------------
CHANGE IN CASH AND CASH EQUIVALENTS OF CONTINUING OPERATIONS (477) 87 407
------------ ------------ ------------
Cash and cash equivalents at January 1 633 546 139
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT DECEMBER 31 156 633 546
============ ============ ============
Supplemental cash flow information:
Interest receipts 14 39 30
------------ ------------ ------------
Interest payments (8) (8) (20)
------------ ------------ ------------
Income tax payments (24) (55) (25)
------------ ------------ ------------
The accompanying notes are an integral part of these financial statements.
F-5
--------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - Accounting Policies
--------------------------------------------------------------------------------
*
--------------------------------------------------------------------------------
NOTE 1. GENERAL INFORMATION
On January 9, 1997, the Board of Directors of Sulzer Ltd, Winterthur,
Switzerland ("Sulzer") approved a plan to offer a minority shareholding in its
SulzerMedica Group to the public. In order to prepare for this offering, Sulzer
transferred its ownership interest in its orthopedic, electrophysiology and
cardiovascular prostheses subsidiaries to SulzerMedica Ltd ("SulzerMedica" or
the "Company"), a company previously named Sulzer Orthopedics Ltd, incorporated
in Switzerland. On July 14, 1997, SulzerMedica Ltd increased its share capital
by 2,600,000 registered shares, each with a nominal value of CHF 30. These
shares were sold to the public through an Initial Public Offering (IPO) in July
1997, for CHF 350 per share. Upon completion of the IPO via capital increase,
Sulzer's beneficial ownership of the Company's common stock was reduced to 74%.
On February 1, 1999, SulzerMedica consummated its sale of the Electrophysiology
business. At the Annual General Meeting of Sulzer on April 19, 2001 the
shareholders approved the separation of Sulzer and SulzerMedica. The separation
was completed on July 10, 2001. With the extraordinary shareholders' meeting of
SulzerMedica on July 9, 2001 the Company took the final step to complete its
independence from parent company Sulzer.
NOTE 2. BASIS OF PRESENTATION
The term "mill. CHF" in these Consolidated Financial Statements refers to
millions of Swiss francs.
NOTE 3. ACCOUNTING AND CONSOLIDATION PRINCIPLES
The financial statements are based on the following consolidation and valuation
principles and present fairly the financial position and results of the
SulzerMedica Group ("Group") in accordance with the standards formulated by the
International Accounting Standards Committee (IASC) under the historical cost
convention.
The preparation of financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. The most significant estimates relate to the valuation of
depreciable lives of fixed assets and intangible assets, allowances for doubtful
accounts, inventory obsolescence, provisions, impairment charges and deferred
taxes. Actual results could differ from estimates.
The consolidated financial statements include all of the assets, liabilities,
income and expense of companies in which Sulzer Medica, directly or indirectly,
holds more than 50% of the voting rights.
Acquisitions have been accounted for using the purchase method. All material
intercompany balances and transactions are eliminated. In addition, unrealized
gains on intercompany transfers of inventory and of fixed assets are eliminated
and recognized only upon sale to third parties or depreciation, respectively.
Investments in associated companies in which the Group holds between 20% and 50%
of the voting rights and exercises significant influence are accounted for by
using the equity method. The Group's share in the equity is presented under
"Investments and other financial assets" and the Group's share of net income
under "Other operating income/expense".
CHANGE IN ACCOUNTING POLICY. In 2001 the following new IAS have been adopted:
IAS 39 Financial Instruments: Recognition and Measurement IAS 40 Investment
Properties
These new applications resulted in minor changes in the presentation
of the financial statements.
FOREIGN CURRENCY CONVERSION. In the individual financial statements of
affiliated companies, income and expense in foreign currencies are recorded at
the exchange rates applicable on the date of the transaction. Assets and
liabilities in foreign currencies are stated at the year-end or hedged exchange
rates. The resulting exchange differences are included in the net income.
The assets and liabilities of foreign affiliates, including acquired goodwill,
are translated using the year-end rates of exchange. Income and expense items
are translated at average exchange rates for the year if the effective rate does
not deviate significantly from the average exchange rate. Currency conversion
differences resulting from consolidation are included in shareholders' equity.
In the event of sale or liquidation of foreign affiliated companies, the
cumulative currency conversion differences relating to the Company disposed form
part of the gain or loss on the sale or liquidation proceeds.
GOODWILL AND OTHER INTANGIBLE ASSETS. Goodwill arising from acquisitions is
capitalized in the currency of the acquired company and amortized on a
straight-line basis over its useful life, not exceeding 20 years.
F-6
--------------------------------------------------------------------------------
Other intangible assets include licenses, patents, trademarks and similar rights
as well as existing technology acquired from third parties. These assets are
amortized over their estimated useful lives, not exceeding 10 years.
PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment are stated at cost
less accumulated depreciation. Depreciation is provided on a straight-line basis
over the estimated useful life. In the case of land, depreciation is only
recorded in the event of a permanent impairment in value.
The estimated useful lives of property, plant and equipment are as follows:
Buildings 25-40 years
Machinery 5-15 years
Equipment 5-10 years
Tools, EDP equipment and patterns max. 5 years
Motor vehicles 4 years
Investment property is held for long-term rental yields and is not occupied by
the Group. Such properties are carried at cost less accumulated depreciation.
The fair value is based on market evidence and on discounted cash flow
projections based on existing and potential rent contracts.
Interest costs on borrowings to finance the construction of property, plant and
equipment are capitalized during the period of time that is required to complete
and prepare the property for its intended use, as part of the cost of the asset.
In 2001, 2000 and 1999 the interest costs were expensed as incurred since they
did not fulfill the criteria for capitalization.
IMPAIRMENT. If circumstances affecting the recoverability of tangible and
intangible assets change, and impairment has occured, the Company compares the
estimated discounted cash flows expected to be generated by the asset with its
carrying value and recognizes an impairment charge by means of special
depreciation of the excess carrying value and adjusts the useful lives of
intangible assets as appropriate.
INVESTMENTS AND OTHER FINANCIAL ASSETS. Investments in associates are accounted
for under the equity method. As of January 1, 2001 minority investments and
other financial assets are initially recorded at cost and subsequently carried
at fair value. The Group has classified all these equity investments as
available-for-sale. Changes in fair value are deferred as a fair value
adjustment in equity and recycled to the income statement when the asset is
sold. Unrealized losses which are considered to be other than temporary are
included in the income statement. Depending on the classification of the
investment as operating or not the impairment is recorded as other operating
expenses or as financial expense, respectively.
INVENTORIES. Raw materials, supplies and consumables are stated at the lower of
cost or market value. Finished products and work in progress are stated at the
lower of production cost or net realizable value. Production costs include the
cost of materials and direct and indirect manufacturing cost. Depending on the
nature and the use, inventories are valued on the basis of weighted average
prices or the FIFO method. Allowances are made for obsolete, slow-moving and
excess inventories.
ACCOUNTS RECEIVABLE. Trade and other accounts receivable are stated at face
value net of necessary allowances for doubtful accounts.
CASH AND CASH EQUIVALENTS. Cash and cash equivalents comprise bills, postal and
bank accounts, together with current account and deposit balances with
maturities of under three months at acquisition, including deposits with Sulzer
and its subsidiaries.
PROVISIONS. Provisions are made for all probable losses arising from warranties,
penalties and litigation risks and for the cost of restructuring measures which
have been approved by management and announced to those affected.
DERIVATIVE FINANCIAL INSTRUMENTS. The Company uses derivative financial
instruments to manage the economic impact of fluctuations in foreign currency
exchange rates. The Company does not enter into derivative financial instruments
for trading or speculative purposes. All derivatives are to be recognized on the
balance sheet at fair value. Derivatives that are not hedges must be adjusted to
fair value through earnings. Changes in the fair value of derivative financial
instruments are either recognized in the income statement or in equity depending
on whether the instrument qualifies for hedge accounting. To qualify for hedge
accounting, the hedging relationship must meet several strict conditions
starting at the inception of the transaction.
EMPLOYEE BENEFITS. The liability of defined benefit plans for retirement
benefits corresponds to the present value of benefits payable. The discount rate
used for determining the present value is based on the prevailing interest rates
applicable to long-term corporate or government bond issues with maturities
extending over the average duration of the retirement benefit entitlements. All
actuarially computed gains and losses which exceed 10% of the present value of
future benefits payable or the underlying assets of the benefit plan
("corridor"), are amortized over the average remaining active
F-7
--------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
*
--------------------------------------------------------------------------------
period of employment.
Defined contribution plans are pure saving plans without any added benefits. The
contributions made are charged directly to personnel costs.
REVENUE RECOGNITION. Sales of supplies and services are recorded at the time of
delivery or implant. Net sales exclude sales or value-added taxes and are stated
net of credits, discounts and rebates. Accruals for estimated future returns and
credits are made when the related revenue is recognized. Such amounts are
estimated based on historical rates of return, customer inventory levels and
other factors.
INCOME PER SHARE. Basic income per share is calculated by dividing net income by
the weighted average number of shares issued minus treasury stock during the
year.
Diluted net income per share is computed by dividing net income by the weighted
average number of registered shares issued minus treasury stock during the year
plus the incremental shares that would have been outstanding under the
management stock option plan (see "Stock-based compensation") upon the assumed
exercise of dilutive stock options.
RESEARCH AND DEVELOPMENT COSTS. Research costs are charged directly to income as
incurred. In accordance with IAS 38, intangible assets, development costs
during the years ended on December 31, 2001, 2000 and 1999 were charged to
income as incurred because they did not fulfill the criteria for capitalization.
STOCK-BASED COMPENSATION. Under the terms of the management stock option plan,
the option exercise price is equal to the fair market value of the share at the
date of grant and, accordingly, almost no cost is recorded in connection with
the plans.
TAXES. Provision is made for all income taxes assessed on the profits earned up
to the balance sheet date in the year to which they relate. Deferred taxes are
provided on differences between carrying amounts for tax and corporate purposes,
applying the liability method. For this purpose, all the valuation differences
of affiliated companies and their available tax loss carry-forwards are taken
into consideration. Deferred taxes are calculated at the locally applicable tax
rates. These tax rates are immediately adjusted to reflect the effects of
changes in the law. A potential offset against future tax costs as a result of
available loss carry-forwards and valuation differences is only taken up in the
balance sheet if realization by means of anticipated profits is expected.
Deferred taxes on proposed profit distributions of subsidiaries are accrued.
Profits of subsidiaries retained in the business and used for local investment
are not taken up in the deferred tax calculation. Where the disposal of an
investment is foreseen, the applicable deferred taxes are provided. Deferred tax
assets and liabilities are only offset by the entities subject to tax to the
extent that income taxes are payable to the same authority and such offset is
permitted by law. The movement in the deferred tax position is accounted for as
a direct charge or credit to tax expense.
F-8
--------------------------------------------------------------------------------
EXPLANATORY NOTES
NOTE 4.
CURRENCY
EXCHANGE RATES
AVERAGE RATES
YEAR-END RATES CONSOLIDATED STATEMENTS OF INCOME
CONSOLIDATED BALANCE SHEETS AND CASH FLOW STATEMENTS
CHF 2001 2000 1999 2001 2000 1999
---------- ---------- ---------- ---------- ---------- ----------
1 US Dollar USD 1.68 1.62 1.59 1.69 1.69 1.50
1 Pound Sterling GBP 2.44 2.43 2.58 2.43 2.56 2.43
1 Euro EUR 1.48 1.52 1.61 1.51 1.56 1.60
100 Japanese Yen JPY 1.28 1.42 1.56 1.39 1.57 1.33
NOTE 5.
COMPOSITION OF THE GROUP
A list of investments held directly or indirectly by SulzerMedica Ltd is
provided below:
COMPANY/MANAGEMENT SHARE REGISTERED CAPITAL
------------------ ------- --------------------
SWITZERLAND
* SulzerMedica Management Ltd, Zurich 100% CHF 100,000.-
Stephan Rietiker
[ ] Sulzer Orthopedics Ltd, Baar 100% CHF 12,000,000.-
Richard Fritschi
[ ] Sulzer Orthopedics (Switzerland) Ltd, Munsingen 100% CHF 100,000.-
Peter Liniger
[X] Sulzer Cardiovascular Ltd, Baar 100% CHF 500,000.-
Mike Barrett
BELGIUM
[ ] Sulzer Orthopedics Belgium SA, Bruxelles 100% EUR 300,000.-
Marc Dusart
GERMANY
* SulzerMedica Holding GmbH, Freiburg 100% EUR 35,000,000.-
Urs Kamber
[ ] Sulzer Orthopedics GmbH, Freiburg 100% EUR 4,500,000.-
Klaus Hug
[ ] Sulzer Dental GmbH, Freiburg 100% EUR 511,292.-
Steven E. Hanson, Christophe Lizot
[X] Sulzer Cardiovascular GmbH, Hamburg 100% EUR 512,000.-
Manfred Reinhardt, Mike Barrett
[ ] Orthopedics
[x] Cardiovascular Prostheses
* Management
o Research & Development Biologics
F-9
--------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
*
--------------------------------------------------------------------------------
COMPANY/MANAGEMENT SHARE REGISTERED CAPITAL
------------------------------------------------------------------------------------------------------
FRANCE
[ ] Sulzer Orthopedie SA, Etupes 100% EUR 130,000.-
Maurice Meytre
[ ] Sulzer Orthopedie Sud-Ouest Sarl, Toulouse 100% EUR 54,000.-
Francoise Loesch
[ ] Sulzer Orthopedie Ouest Sarl, La Chappelle-des-Fougeretz 100% EUR 2,256,000.-
Philippe Jaffres
[ ] Sulzer Orthopedie Centre Sarl, Ebreuil (Vichy) 100% EUR 8,000.-
Benoit Combe
[ ] Sulzer Orthopedie Nord Sarl, Lille 100% EUR 8,000.-
Eric Bauduin
[ ] Sulzer Orthopedie Cedior Sarl, Etupes 100% EUR 1,600,000.-
Maurice Meytre
[X] Sulzer Cardiovascular SA, Meudon (Paris) 100% EUR 2,515,409.-
James F.A. Deegan
[ ] Sulzer Dental Sarl, Rungis (Paris) 100% EUR 76,225.-
Christophe Lizot
GREAT BRITAIN
* SulzerMedica (UK) Holdings Ltd, Inchinnan 100% GBP 16,160,000.-
Roshan Maini
[ ] Sulzer Orthopaedics (UK) Ltd, Alton 100% GBP 1,050,000.-
Roger Norman
[X] Sulzer Carbomedics UK Ltd, Crawley 100% GBP 1,000.-
James F.A. Deegan
[X] Sulzer Vascutek Ltd, Inchinnan 100% GBP 100.-
Roshan Maini
NETHERLANDS
[ ] Sulzer Orthopedie Nederland BV, Utrecht 100% EUR 25,000.-
Rob Ringelberg
[X] Sulzer Cardiovascular BV, Utrecht 100% EUR 150,500.-
Roshan Maini
ITALY
[ ] Sulzer Orthopedics Italia S.p.A., Opera (Milano) 100% EUR 14,025,000.-
Marco Grubenmann
[ ] Allo System Srl, Villorba (Treviso) 51% EUR 40,000.-
Antonio De Cristofaro
[ ] Migliori Srl, Viagrande (Catania) 51% EUR 434,000.-
Fernando Migliori
[ ] Orthopedics
[X] Cardiovascular Prostheses
* Management
o Research & Development Biologics
F-10
--------------------------------------------------------------------------------
COMPANY/MANAGEMENT SHARE REGISTERED CAPITAL
----------------------------------------------------------------------------------------------------------
AUSTRIA
[ ] Sulzer Orthopadie GmbH, Modling 100% ATS 800,000.-
Manfred Koppl
SPAIN
[ ] Sulzer Orthopedics Iberica SA, Madrid 100% EUR 62,000.-
Marcel Kyburz
SWEDEN
[ ] Sulzer Orthopedics Sweden AB, Stockholm 100% SEK 200,000.-
Bengt Sedell
CZECH REPUBLIC
[ ] Sulzer Orthopedics CZ sro, Praha 100% CZK 24,700,000.-
Oldrich Cech
CANADA
[X] SulzerMedica Canada Inc., Toronto 100% CAD 3,200,000.-
Paul E. Parsons
[ ] Sulzer Orthopedics Canada Inc., Toronto 100% CAD 2,500,001.-
Thomas Fischer
[X] Sulzer Carbomedics Canada Ltd, Calgary 100% CAD 100.-
Charles D. Griffin
[X] Sulzer Mitroflow Corp., Richmond 100% CAD 12,000,000.-
Mark Seboldt
[ ] Sulzer Dental Corp., Etobicoke (Ontario) 100% CAD 100.-
Steven E. Hanson
[ ] Orthopedics
[X] Cardiovascular Prostheses
* Management
o Research & Development Biologics
F-11
--------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
*
--------------------------------------------------------------------------------
COMPANY/MANAGEMENT SHARE REGISTERED CAPITAL
--------------------------------------------------------------------------------------------------------
USA
* SulzerMedica USA Holding Co., Houston/Texas 100% USD 185,000,000.-
Stephan Rietiker
* SulzerMedica USA Inc., Houston/Texas 100% USD 1,000.-
Stephan Rietiker
[X] Sulzer Carbomedics Inc., Austin/Texas 100% USD 117,490,215.-
Charles D. Griffin
[ ] Sulzer Orthopedics Inc., Austin/Texas 100% USD 206,592,044.-
David Floyd
[ ] Sulzer Spine-Tech Inc., Minneapolis/Minnesota 100% USD 615,195,877.-
Dennis Wallach
[ ] Sulzer Dental Inc., Carlsbad/California 100% USD 52,378,029.-
Steven E. Hanson
[X] Sulzer Vascutek USA Inc., Austin/Texas 100% USD 3,000,000.-
Roshan Maini
o Sulzer Biologics Inc., Austin/Texas 100% USD 1,280,394.-
Thomas Zehnder
[X] Sulzer IntraTherapeutics Inc., St. Paul 100% USD 145,150,001.-
Dennis Wallach
AUSTRALIA
[ ] [X] SulzerMedica Australia Pty Ltd, Chatswood 100% AUD 14,450,000.-
Paul Aragones
SOUTH AFRICA
[ ] Sulzer Orthopedics South Africa (Pty) Ltd, Greenside 100% ZAR 100.-
Michael Nesbitt
INDIA
[ ] Sulzer Orthopedics India Ltd, Chennai 74% INR 3,000,000.-
K. Senthilnathan
JAPAN
[ ] SulzerMedica Japan KK, Tokyo 100% JPY 350,000,000.-
Hans-Rudolf Schuerch
KOREA
[ ] Sulzer Orthopedics Korea Ltd, Seoul 100% KRW 319,220,000.-
Dae Sik Pyon
[ ] Orthopedics
[X] Cardiovascular Prostheses
* Management
o Research & Development Biologics
F-12
--------------------------------------------------------------------------------
Acquisitions of subsidiaries in the years 2001 and 1999 are set out in the
following list which indicates the companies acquired, the country, the division
and the date of integration into the consolidation. In each acquisition, all
voting rights were acquired. No significant acquisitions took place in 2000.
2001: Paragon Implant Company Encino (USA);
Orthopedics Division; Jan. 1, 2001
IntraTherapeutics Inc. St. Paul (USA);
Cardiovascular Prostheses
Division; Feb. 1, 2001
Sulzer Australia Pty Ltd Chatswood (Australia); both Divisions;
July 1, 2001
1999: Mitroflow Enterprise Inc. Richmond (Canada); Cardiovascular Prostheses
Division; Oct. 1, 1999
The purchase price considerations of these acquisitions amount to CHF 432
million and CHF 38 million in 2001 and 1999, respectively.
No agreements to make contingent payments, apart from the following, have been
entered into in connection with these acquisitions: The agreement to purchase
Mitroflow Inc. foresees a potential adjustment of the purchase price of a
maximum of USD 17 million including interest depending upon the time when
SulzerMedica receives approval from the US Federal Drug Administration, FDA, for
the main product, a biological valve. If FDA approval is not obtained within a
specified time frame no payment beyond the recorded liability is required.
NOTE 6.
EFFECTS OF ACQUISITIONS
The impact of significant subsidiaries acquired was as follows:
MILL. CHF 2001 2000 1999
---------- ---------- ----------
Net sales 91 -- 1
---------- ---------- ----------
Operating income (33) -- (1)
---------- ---------- ----------
Non-current assets acquired 89 -- 16
---------- ---------- ----------
Current assets acquired 53 -- 2
---------- ---------- ----------
thereof cash acquired 6 -- --
---------- ---------- ----------
Liabilities acquired (47) -- 1
---------- ---------- ----------
F-13
--------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
*
--------------------------------------------------------------------------------
NOTE 7.
SEGMENT INFORMATION
PRIMARY REPORTING FORMAT - SEGMENT INFORMATION BY DIVISION
MILL. CHF 2001 2000 1999
------------ ------------ ------------
Net sales
Orthopedics 1,150 1,097 972
------------ ------------ ------------
Cardiovascular prostheses 268 250 210
------------ ------------ ------------
TOTAL 1,418 1,347 1,182
============ ============ ============
Operating income before goodwill
amortization and exceptional items
Orthopedics 130 222 179
------------ ------------ ------------
Cardiovascular prostheses 1 63 60
------------ ------------ ------------
Biologics and Group management (31) (15) (5)
------------ ------------ ------------
TOTAL 100 270 234
============ ============ ============
Operating income
Orthopedics (1,403) 185 (120)
------------ ------------ ------------
Cardiovascular prostheses (88) 61 59
------------ ------------ ------------
Other operating income including
Biologics and Group management (140) (16) 574
------------ ------------ ------------
TOTAL (1,631) 230 513
============ ============ ============
Capital expenditure
Orthopedics 79 55 41
------------ ------------ ------------
Cardiovascular prostheses 9 6 5
------------ ------------ ------------
Biologics and Group management 4 2 1
------------ ------------ ------------
TOTAL 92 63 47
============ ============ ============
Depreciation and amortization
Orthopedics 117 102 332
------------ ------------ ------------
Cardiovascular prostheses 104 12 9
------------ ------------ ------------
Biologics and Group management 3 2 1
------------ ------------ ------------
TOTAL 224 116 342
============ ============ ============
Assets
Orthopedics 1,759 1,552 1,493
------------ ------------ ------------
Cardiovascular prostheses 342 198 197
------------ ------------ ------------
Biologics and Group management 770 775 701
------------ ------------ ------------
Net assets from discontinuing operations -- -- --
------------ ------------ ------------
TOTAL ASSETs 2,871 2,525 2,391
============ ============ ============
Liabilities
Orthopedics 1,706 287 288
------------ ------------ ------------
Cardiovascular prostheses 70 51 59
------------ ------------ ------------
Biologics and Group management 304 189 201
------------ ------------ ------------
TOTAL LIABILITIES 2,080 527 548
============ ============ ============
Sulzer Medica's business is managed on a worldwide basis structured in two
Divisions. The Orthopedics Division develops, manufactures and distributes hips,
knees, spine, other orthopedics and dental implants. The Cardiovascular
prostheses Division develops, manufactures and distributes heart valves
including repair products, vascular grafts and stents.
Further operating activities consist of biologic activities and of Group
management, including the costs of holding, financing and management of Sulzer
Medica.
The geographic segmentation reflects the main operating areas of the Group. The
Group's policy determines that transfers of goods and services between the
various segments are carried out at arm's length.
F-14
--------------------------------------------------------------------------------
SECONDARY REPORTING FORMAT - GEOGRAPHICAL SEGMENTS PART 1
MILL. CHF 2001 2000 1999
------------ ------------ ------------
Net sales by location of customers
Switzerland 61 59 55
------------ ------------ ------------
European Union 560 530 502
------------ ------------ ------------
Other Europe 19 17 16
------------ ------------ ------------
North America 629 602 496
------------ ------------ ------------
All Other countries 149 139 113
------------ ------------ ------------
TOTAL 1,418 1,347 1,182
============ ============ ============
Net sales by location of subsidiaries
Switzerland 472 431 419
------------ ------------ ------------
European Union 563 537 514
------------ ------------ ------------
Other Europe 4 4 3
------------ ------------ ------------
North America 849 806 664
------------ ------------ ------------
All Other countries 70 52 38
------------ ------------ ------------
TOTAL 1,958 1,829 1,638
============ ============ ============
Transfers to other geographic areas from
Switzerland (364) (338) (335)
------------ ------------ ------------
European Union (17) (20) (20)
------------ ------------ ------------
Other Europe -- -- --
------------ ------------ ------------
North America (159) (124) (101)
------------ ------------ ------------
All Other countries -- -- --
------------ ------------ ------------
TOTAL (540) (482) (456)
============ ============ ============
Net sales to third parties by location of subsidiaries
Switzerland 108 93 84
------------ ------------ ------------
European Union 546 517 494
------------ ------------ ------------
Other Europe 4 4 3
------------ ------------ ------------
North America 690 681 563
------------ ------------ ------------
All Other countries 70 52 38
------------ ------------ ------------
TOTAL 1,418 1,347 1,182
============ ============ ============
F-15
--------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
*
--------------------------------------------------------------------------------
SECONDARY REPORTING FORMAT - GEOGRAPHICAL SEGMENTS PART 2
MILL. CHF 2001 2000 1999
------------ ------------ ------------
Operating income by location of subsidiaries
Switzerland (22) 49 12
------------ ------------ ------------
European Union 46 58 55
------------ ------------ ------------
Other Europe -- -- --
------------ ------------ ------------
North America (1,662) 118 441
------------ ------------ ------------
All Other countries 7 5 5
------------ ------------ ------------
TOTAL (1,631) 230 513
============ ============ ============
Assets by location of subsidiaries
Switzerland 210 223 240
------------ ------------ ------------
European Union 452 454 460
------------ ------------ ------------
Other Europe 4 4 4
------------ ------------ ------------
North America (2,138) (1,796) (1,638)
------------ ------------ ------------
All Other countries 67 48 49
------------ ------------ ------------
TOTAL ASSETS (2,871) (2,525) (2,391)
============ ============ ============
Capital expenditure by location of subsidiaries
Switzerland 1 3 8
------------ ------------ ------------
European Union 25 27 6
------------ ------------ ------------
Other Europe -- -- --
------------ ------------ ------------
North America 63 30 33
------------ ------------ ------------
All Other countries 3 3 --
------------ ------------ ------------
TOTAL 92 63 47
============ ============ ============
NOTE 8.
OTHER OPERATING
INCOME/EXPENSE
MILL. CHF 2001 2000 1999
------------ ------------ ------------
Currency exchange differences (3) (2) --
------------ ------------ ------------
Sundry operating income/expense 4 8 (1)
------------ ------------ ------------
Share of loss of associate earnings (1) -- --
------------ ------------ ------------
TOTAL OTHER OPERATING INCOME/EXPENSE, NET -- 6 (1)
============ ============ ============
Sundry operating income in 2001 and 2000 relates mainly to revenue from an
OEM-Agreement entered into at the end of 1999.
F-16
-------------------------------------------------------------------------------
NOTE 9.
HIP AND KNEE
SETTLEMENT
On December 5, 2000, Sulzer Orthopedics Inc. issued a voluntary recall of
certain lots of the Inter-Op acetabular shells that failed to adhere in certain
cases to patients acetabulum. Sulzer Orthopedics Inc has continued to
investigate the reason for the product failure, utilizing the expertise and
counsel of physicians as well as internal and external scientists and engineers.
The investigation initially appeared to reveal that a trace of mineral oil-based
lubricant remaining on the implant after the manufacturing process was
responsible for the lack of proper bonding between the implant and the bone, in
some cases. More recently, Sulzer Orthopedics Inc has focused its investigation
on various other contaminants on the surface of the porous coated shell. Sulzer
Orthopedics Inc has implemented manufacturing and cleaning steps to ensure the
problem does not recur. As of March 7, 2002, the Company and its subsidiaries
have been served with a total of 1989 lawsuits in federal and state courts in
the U.S. and Canada, alleging injuries as a result of Inter-Op acetabular shells
manufactured and sold by Sulzer Orthopedics Inc. As of March 14, 2002, 2860
revision surgeries have been reported.
Sulzer Orthopedics Inc has informed the Food and Drug Administration of its
ongoing investigation of a porous-coated tibial baseplate that was manufactured
from July to December 2000. A number of adverse clinical outcomes have been
reported, and as of March 7, 2002, 585 revision surgeries have been reported to
Sulzer Orthopedics and the company and its subsidiaries have been served with a
total of 86 lawsuits.
On June 19, 2001, the Judicial Panel on Multi-District Litigation ("MDL")
ordered that all Inter-Op lawsuits filed in federal courts be consolidated for
pre-trial proceedings in the U.S. District Court (N.D. Ohio) in Cleveland, Ohio.
On August 29, 2001, the Court provisionally certified a class and granted
preliminary approval to the parties settlement agreement and on September 17,
the Court issued an order enjoining all further proceedings in other federal and
state courts.
The parties have renegotiated the initial settlement agreement.
The revised settlement agreement (the "MDL Settlement Agreement") provides for
the Company to contribute USD 725 million in the form of USD 425 million in cash
and USD 300 million in Convertible Callable Instruments (CCI).
SulzerMedica as group has the obligation to deli-ver USD 425 million at the
later of 180 days after Trial Court Approval or 60 days after the Final Judicial
Approval Date. The amount is increased by an amount equal to the interest
calculated at a floating LIBOR rate (one month LIBOR), starting 180 days after
Trial Court Approval and compounded annually. At the later of 180 days after
Trial Court Approval or 60 days after Final Judicial Approval Date, SulzerMedica
has the obligation to issue the CCI. Unless earlier redeemed, 18 months after
the issue date of the CCI, SulzerMedica will provide the settlement trust ADR's
or shares at the conversion price in effect on the Maturity Date. The payment
obligation under the CCI will be unsecured and subordinated to the Financing.
Beginning with the issue date, the CCI shall accrue interest in the amount of
7.5% compounded annually. SulzerMedica has the option at any time to redeem for
cash any portion of the face amount of the CCI plus unpaid interest. The partial
redemption shall be in a minimum amount of USD 10 million. While the CCI is
issued, SulzerMedica will not pay out any dividends and will be subject to other
financing limitations.
On March 13, 2002, the Company and the Plaintiffs have signed the revised
settlement agreement and the U.S. District Court in Cleveland, Ohio, has granted
preliminary approval.
The patients will have the right to reject this settlement by choosing to
Opt-Out. The Opt-Out period is scheduled to end on May 14, 2002. The U.S.
District Court in Cleveland has scheduled a Final Fairness Hearing for May 6,
2002. SulzerMedica has the right to terminate the settlement agreement and
withdraw for any reason at any time before May 21, 2002.
As integral part of the above settlement agreement SulzerMedica agreed to
indemnify and hold Sulzer AG and all its direct or indirect subsidiaries
harmless for any and all claims and liabilities related to the Affected Products
including in particular, actions of members of the settlement class (as defined
in the MDL Settlement Agreement) who exercise their right to Opt-Out of the
Settlement Agreement. Sulzer releases SulzerMedica from any indemnification
obligation arising out of the Pre-Existing Indemnity agreements. The indemnity
is only valid and enforceable if the MDL Settlement Agreement achieves Final
Judicial Approval.
Additionally, the parties also agreed, that the Company shall pay Sulzer CHF
26,682,276.67 minus USD 266,288.48 and that Sulzer shall pay Sulzer
F-17
--------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
*
--------------------------------------------------------------------------------
Medica USD 8,606,835.56, in settlement of all claims out of the Spin-Off
agreement and the inter-company loan. Furthermore, as condition precedent to
execution of the above MDL Settlement Agreement, and in return of their payments
under the MDL Settlement agreement, SulzerMedica agreed to indemnify and hold
"Winterthur" Insurance company and its subsidiaries harmless from all claims and
liabilities which may be brought against "Winterthur" under the Original and
under the Second Year Policy, including in particular, actions of members of the
settlement class (as defined in the MDL Settlement Agreement) who exercise their
right to opt-out of the settlement agreement.
The company fully provided for the face amounts of the cash as well as the CCI
portion of the MDL Settlement Agreement. In addition to that, the company made
provisions to cover cost that are directly related to the recalled Inter-Op
acetabular shells and adverse clinical outcomes of porous-coated tibial
baseplates, but which are not covered in the Settlement Agreement, such as
Revisions in excess of 4000, Non-US revisions, legal fees and other
miscellaneous expenses etc. The total provisions related to the Settlement
Reserve amounts to USD 874 million. The related tax accrual amounts to USD 240
million.
If the settlement proposal should not go through then the going concern basis of
the Groups US operations is in doubt. However, management believes based on
currently available information, that the Group, excluding its US operations,
would be able to continue as a going concern. There are mainly three risks that
need to be considered, namely opt-outs, the funding of the settlement and
possible appeals. In the view of management, the risk that the settlement does
not go through is primarily related to a potential high number of plaintiffs,
deciding to optout, at which point the company will have to abandon the
settlement agreement.
With regard to the funding of the cash amount of the settlement, the USD 425
million, the company is currently in negotiations with a number of financial
institutions and management has no indications that the funding would not be
possible. Also, management is confident that the shareholders will approve the
settlement as proposed.
After the final fairness hearing on May 6, 2002, the plaintiffs will also have
the possibility to appeal the final fairness decision of the judge. An appeal
would have to be filed within 30 days of the courts decision. In the view of
management, an appeal would not materially negatively impact the financial
condition of the company. All payments that will have to be made by the company
are subject to Final Judicial Approval.
NOTE 10. EXCEPTIONAL OPERATING ITEMS
MILL. CHF 2001 2000 1999
---------- ---------- ----------
Litigation settlement income 48 -- --
---------- ---------- ----------
Impairment of intangibles (91) -- (240)
---------- ---------- ----------
Investments in non-consolidated companies write-off (50) -- --
---------- ---------- ----------
Restructuring costs (105) (1) (14)
---------- ---------- ----------
TOTAL EXCEPTIONAL OPERATING ITEMS (198) (1) (254)
========== ========== ==========
In 2001, the Company received approximately USD 28 million in connection with
the settlement of a pending litigation by Sulzer Spine-Tech Inc.
Soon after the integration but especially towards year-end 2001, the stent
market did not develop in line with high sales expectations. Despite
restructuring measures initiated in the fourth quarter at Sulzer
IntraTherapeutics Inc., the impairment test performed as of year end showed an
impairment on goodwill of USD 31 million and on existing technology of USD 11
million. The value in use (based on the income approach utilizing the discounted
cash flow method) was determined using a weighted discount rate of 10.3%.
As result of deterioration of cage sales and also in connection with the
introduction of a competitors' product in December 2001, the impairment test at
Sulzer Spine-Tech's Inc existing technology showed an amount of USD 8 million.
The value in use was determined using a discount rate of 15%.
In relation to the Orthosoft Inc engagement, a minority holding, total charges
of CHF 5 million are recorded. The high expectations regarding the product
development were not realistic and a Canadian court order to purchase the
remaining stake resulted in an additional charge of CHF 16 million. For an
additional payment commitment of CHF 8 million in 2002 a provision was booked.
F-18
--------------------------------------------------------------------------------
The investment in Orquest Inc and license, crosslicense, research and
distribution agreement was determined to be impaired as of year end 2001 as a
result of further delays of the common research and development programs. In
addition, since further benefits are unlikely to be realized, the write down
related to this exposure resulted in an exceptional operating item of USD 20
million.
Sulzer Orthopedics Inc cooperated in 1999 with @Outcome in order to offer
orthopedic clinics and surgical group practices a secure internet access for the
communication with patients thus simplifying patient management. The market
acceptance of the product but also the financial outlook resulted in a complete
write down of the exposure of total USD 8 million in 2001.
In addition, various other charges exist. As a result of the change in
management middle of 2001 various restructuring measures were initiated in order
to improve the operational efficiencies. This resulted in exceptional operating
items of CHF 33 million in various other US businesses and the group office in
the US. Restructuring costs of CHF 20 million for Sulzer Biologics Inc are
included in this position.
In June 1999, SulzerMedica announced the introduction of a comprehensive program
to achieve a step in performance improvement and secure sustainable success in
the future of the Orthopedics Division. This initiative resulted in personnel
costs and inventory allowances of CHF 14 million.
Due to the developments in the spinal implant markets SulzerMedica performed an
impairment test in 1999 in order to check the value of the net assets (including
goodwill) of Sulzer Spine-Tech which belongs to the Orthopedics Division. The
method for the test was in line with the requirements defined in IAS 36. The
"value in use" (based on the income approach utilizing the discounted cash flow
method) was determined using a discount rate of 10.0%. This resulted in an
exceptional amortization of Sulzer Spine-Tech's goodwill of CHF 240 million.
NOTE 11. DISCONTINUING OPERATIONS
On June 3, 1998, the Group announced its intention to exit the electrophysiology
business. The subsidiaries comprising this segment were sold on February 1,
1999, for USD 802 million (including cash on hand of CHF 19 million). The
transactions of the discontinuing operations from January 1, 1999, to the date
of sale are not considered significant and are included in the "Gain on sale of
the Electrophysiology Division." The book profit of CHF 579 million realized
from this transaction is provisional since negotiations with the buyer about the
final sales price are not yet complete. This trans-action resulted in a tax
credit of CHF 6 million. No adjustments were necessary in 2000 and 2001.
NOTE 12. FINANCIAL INCOME/EXPENSE
OTHER NON-OPERATING INCOME/EXPENSE
MILL. CHF 2001 2000 1999
------------ ------------ ------------
Gain on sale of investments 26 4 6
------------ ------------ ------------
Interest income 11 38 33
------------ ------------ ------------
Interest expense (8) (8) (21)
------------ ------------ ------------
Other financial expense (22) (5) (1)
------------ ------------ ------------
TOTAL FINANCIAL INCOME 7 29 17
============ ============ ============
In 2001 and 2000 the gain on sale of investments is a result of a partial sale
of the Company's investment in Thoratec Laboratories Corp. In 1999 it relates to
the divested investment in Maxxim Medical Inc. In 2001 the market value of the
stake in Japan Lifeline Co. Ltd, declined significantly and the related charge
of USD 5 million is included in other financial expense. In connection with the
impairment test on ReGen Biologics Inc, an additional loan allowance of USD 7
million was recorded as other financial expense.
The other non-operating expenses of CHF 21 million resulted from the spin-off of
Sulzer and from the defense cost for the unsuccessful hostile takeover attempt.
F-19
--------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
*
--------------------------------------------------------------------------------
NOTE 13. TAXES
MILL. CHF 2001 2000 1999
---------- ---------- ----------
Current income taxes
Switzerland 12 18 13
---------- ---------- ----------
European Union 10 14 15
---------- ---------- ----------
Other Europe -- -- --
---------- ---------- ----------
North America (4) 11 32
---------- ---------- ----------
All Other Countries 7 11 6
---------- ---------- ----------
TOTAL CURRENT INCOME TAXES 25 54 66
========== ========== ==========
Deferred income taxes
Switzerland (7) (2) (5)
---------- ---------- ----------
European Union 5 (1) 1
---------- ---------- ----------
Other Europe -- -- (1)
---------- ---------- ----------
North America (481) 13 (19)
---------- ---------- ----------
All Other Countries 2 (2) --
---------- ---------- ----------
TOTAL DEFERRED INCOME TAXES (481) 8 (24)
========== ========== ==========
TOTAL INCOME TAXES (456) 62 42
========== ========== ==========
Other taxes 2 5 4
---------- ---------- ----------
TOTAL TAXES (454) 67 46
========== ========== ==========
Current income taxes, comprising taxes paid or due on the underlying income of
individual subsidiaries, are calculated according to the law applicable in the
individual countries. Other taxes include taxes not directly related to income.
INCOME BEFORE TAXES/MILL. CHF 2001 2000 1999
---------- ---------- ----------
Switzerland (84) 105 89
---------- ---------- ----------
European Union 34 40 38
---------- ---------- ----------
Other Europe 1 1 2
---------- ---------- ----------
North America (1,652) 48 382
---------- ---------- ----------
All Other Countries 56 65 19
---------- ---------- ----------
TOTAL INCOME/LOSS BEFORE TAXES (1,645) 259 530
========== ========== ==========
Using the maximum tax rate for Winterthur, Switzerland, of 25.1% the tax benefit
on 2001 consolidated loss before taxes of CHF -1,645 million amounts to CHF 413
million. The following table serves to indicate the reasons why in 2001, 2000
and 1999 the charge was below the reference amount.
MILL. CHF 2001 2000 1999
---------- ---------- ----------
Income/loss before taxes (1,644.8) 258.5 529.9
---------- ---------- ----------
Maximum tax rate (Winterthur, Switzerland) 25.1% 25.2% 25.3%
---------- ---------- ----------
Income tax benefit/expense at maximum tax rate (412.8) 65.1 134.1
---------- ---------- ----------
Taxes at other rates (31.4) (10.6) (7.0)
---------- ---------- ----------
Effect of losses/credits and loss carry-forwards (84.8) (1.9) (2.6)
---------- ---------- ----------
Permanent differences 19.2 13.4 14.2
---------- ---------- ----------
Impact of the exceptional write-down of goodwill 13.3 -- 60.7
---------- ---------- ----------
Impact of the gain on the divestiture of the Electrophysiology Division -- -- (152.6)
---------- ---------- ----------
Impact of hip and knee settlement (35.4) -- --
---------- ---------- ----------
Changes in tax rate and tax laws (3.5) (1.5) (0.9)
---------- ---------- ----------
Change in valuation allowance 84.2 0.1 (1.0)
---------- ---------- ----------
Other (4.6) (3.1) (2.6)
---------- ---------- ----------
TAX INCOME/EXPENSE (CURRENT AND DEFERRED) (455.8) 61.5 42.3
========== ========== ==========
F-20
-------------------------------------------------------------------------------
The tax effect on permanent differences is mainly due to the annual amortization
of goodwill which is not deductible for tax purposes.
At December 31, deferred taxes consisted of the following:
2001 2000 1999
MILL. CHF Assets Liabilities Assets Liabilities Assets Liabilities
---------- ----------- ---------- ----------- ---------- -----------
Intangible and financial assets 10 (14) 14 (28) 15 (31)
---------- ---------- ---------- ---------- ---------- ----------
Tangible fixed assets 3 (5) 1 (9) 2 (9)
---------- ---------- ---------- ---------- ---------- ----------
Loss carry-forwards 245 -- 154 -- 166 --
---------- ---------- ---------- ---------- ---------- ----------
Inventories 33 (9) 16 (8) 15 (8)
---------- ---------- ---------- ---------- ---------- ----------
Other assets 26 (5) 19 (3) 17 (3)
---------- ---------- ---------- ---------- ---------- ----------
Eliminations of unrealized gains 46 -- 40 -- 36 --
---------- ---------- ---------- ---------- ---------- ----------
Long-term provisions 411 -- 27 (2) 18 (2)
---------- ---------- ---------- ---------- ---------- ----------
Short-term provisions 113 (2) 48 (2) 55 (1)
---------- ---------- ---------- ---------- ---------- ----------
Other current liabilities 35 -- 9 -- 7 --
---------- ---------- ---------- ---------- ---------- ----------
TOTAL POTENTIAL TAX EFFECT 922 (35) 328 (52) 331 (54)
========== ========== ========== ========== ========== ==========
Valuation allowance (263) -- (154) -- (149) --
---------- ---------- ---------- ---------- ---------- ----------
DEFERRED TAXES 659 (35) 174 (52) 182 (54)
========== ========== ========== ========== ========== ==========
Set off of assets and liabilities (16) 16 (32) 32 (35) 35
---------- ---------- ---------- ---------- ---------- ----------
DEFERRED TAXES, NET 643 (19) 142 (20) 147 (19)
========== ========== ========== ========== ========== ==========
The majority of the increase, from prior year, in the net deferred tax position
is attributable to the Hip and Knee Settlement. The deferred taxes on
eliminations of unrealized gains above primarily relate to unrealized gains from
a Swiss company belonging to the Orthopedics Division.
There was no unrecognized deferred tax liability relating to undistributed
earnings of subsidiaries at December 31, 2001 and 2000.
The Company has loss carry-forwards available of CHF 1,861 million as of
December 31, 2001. Of this amount, CHF 1,673 million will expire between 2002
and 2008 with the remaining amount of CHF 188 million still available for use
post-2008. The tax effect of these loss carry-forwards, at their respective
jurisdictional statutory rate, is CHF 245 million, which when netted with the
associated valuation allowance of CHF 221 million, results in an anticipated tax
benefit of CHF 24 million.
NOTE 14. EARNINGS PER SHARE
The earnings per share were calculated as follows:
2001 2000 1999
-------- -------- --------
NET LOSS/INCOME IN MILL. CHF (1,193) 190 483
------- ------- ------
Weighted average number of shares outstanding, in thousands 9,973 9,996 9,986
------- ------- ------
BASIC LOSS/INCOME PER SHARE IN CHF (119.62) 19.01 48.37
======= ======= ======
Net loss/income in mill. CHF (1,193) 190 483
======= ======= ======
Weighted average number of shares adjusted
for dilutive share options, in thousands 9,973 10,012 9,986
------- ------- ------
DILUTED LOSS/INCOME PER SHARE IN CHF (119.62) 18.98 48.37
======= ======= ======
The share options outstanding are in connection with the Management Stock Option
Plan. Diluted income per share is affected by share options outstanding when the
average share price of the year is above the strike prices of the outstanding
options.
F-21
--------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
*
--------------------------------------------------------------------------------
NOTE 15. INTANGIBLE ASSETS
2001 2000
MILL. CHF Goodwill Other Total Goodwill Other Total
---------- ---------- ---------- ---------- ---------- ----------
Cost
Balance at January 1 1,795 148 1,943 1,724 142 1,866
---------- ---------- ---------- ---------- ---------- ----------
Changes in composition of Group -- 53 53 -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Additions 339 8 347 59 5 64
---------- ---------- ---------- ---------- ---------- ----------
Disposals -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Currency conversion adjustment 28 3 31 12 1 13
---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31 2,162 212 2,374 1,795 148 1,943
========== ========== ========== ========== ========== ==========
Accumulated amortization
Balance at January 1 1,204 50 1,254 1,161 35 1,196
---------- ---------- ---------- ---------- ---------- ----------
Amortization 111 68 179 39 15 54
---------- ---------- ---------- ---------- ---------- ----------
Disposals -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Currency conversion adjustment 11 -- 11 4 -- 4
---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31 1,326 118 1,444 1,204 50 1,254
========== ========== ========== ========== ========== ==========
Net book value at January 1 591 98 689 563 107 670
========== ========== ========== ========== ========== ==========
NET BOOK VALUE AT DECEMBER 31 836 94 930 591 98 689
========== ========== ========== ========== ========== ==========
The annual amortization of goodwill in 2001 includes the exceptional writedown
on Sulzer IntraTherapeutics Inc goodwill as described in Note 10 of CHF 52 Mio.
The total amount of impairment of goodwill in 2001, 2000 and 1999 is CHF 292
Mio. In the amortization of other intangible assets, the existing technology
impairment charges are included.
In 2000 as a result of the acquisition of the stake in Tutogen Medical Inc,
goodwill in the amount of CHF 57 million was capitalized.
NOTE 16. PROPERTY, PLANT AND EQUIPMENT
Land and Machinery and Other 2001 2000
MILL. CHF buildings equipment fixed assets Total Total
---------- ------------- ------------ ---------- ----------
Cost
Balance at January 1 115 140 307 562 534
---------- ---------- ---------- ---------- ----------
Changes in composition of Group -- 15 12 27 --
---------- ---------- ---------- ---------- ----------
Additions 3 16 62 81 58
---------- ---------- ---------- ---------- ----------
Disposals (6) (9) (33) (48) (25)
---------- ---------- ---------- ---------- ----------
Currency conversion adjustment 2 3 (1) 4 (5)
---------- ---------- ---------- ---------- ----------
Balance at December 31 114 165 347 626 562
========== ========== ========== ========== ==========
Accumulated depreciation
Balance at January 1 36 101 202 339 295
---------- ---------- ---------- ---------- ----------
Changes in composition of Group -- 8 7 15 --
---------- ---------- ---------- ---------- ----------
Depreciation 6 14 49 69 62
---------- ---------- ---------- ---------- ----------
Disposals (4) (6) (26) (36) (14)
---------- ---------- ---------- ---------- ----------
Currency conversion adjustment -- 3 -- 3 (4)
---------- ---------- ---------- ---------- ----------
Balance at December 31 38 120 232 390 339
========== ========== ========== ========== ==========
Net book value at January 1 79 39 105 223 239
========== ========== ========== ========== ==========
NET BOOK VALUE AT DECEMBER 31 76 45 115 236 223
========== ========== ========== ========== ==========
Fire insurance value at December 31 155 195 421 771 625
========== ========== ========== ========== ==========
No property within SulzerMedica is recognized as an Investment property in
accordance with IAS 40.
F-22
-------------------------------------------------------------------------------
Details of leased assets included in tangible fixed assets are as follows:
Mill. CHF 2001 2000
---------- ----------
Cost capitalized 1 2
---------- ----------
Net book value -- 1
---------- ----------
Related lease liability 3 1
========== ==========
NOTE 17. INVESTMENTS AND OTHER FINANCIAL ASSETS
Investments Investments in Other
in non-consoli- financial 2001 2000
Mill. CHF Associates dated companies assets Total Total
------------ --------------- ------------ ------------ ------------
Balance at January 1 7 64 33 104 63
------------ ------------ ------------ ------------ ------------
Adoption of IAS 39 -- 15 -- 15 --
------------ ------------ ------------ ------------ ------------
Additions -- 1 42 43 48
------------ ------------ ------------ ------------ ------------
Disposals -- (18) (17) (35) (7)
------------ ------------ ------------ ------------ ------------
Fair value adjustments -- (54) (12) (66) --
------------ ------------ ------------ ------------ ------------
Currency conversion adjustment -- 3 1 4 --
------------ ------------ ------------ ------------ ------------
Balance at December 31 7 11 47 65 104
============ ============ ============ ============ ============
NET BOOK VALUE
at January 1 7 64 33 104 63
------------ ------------ ------------ ------------ ------------
AT DECEMBER 31 7 11 47 65 104
============ ============ ============ ============ ============
Investments in non-consolidated companies as of December 31, 2001, include ReGen
Biologics Inc, Redwood City (USA), @Outcome Inc, Austin (USA), Orquest Inc,
Mountain View (USA), Orthosoft Inc, Outremont (Canada), and publicly traded
securities of Thoratec Inc, Berkeley (USA), and Japan Lifeline Co. Ltd, Tokyo
(Japan), held as non-current assets.
Revaluation of fair value consists of write-offs for the investments in Orquest
Inc, ReGen, @Outcome, Japan Lifeline and Orthosoft Inc.
NOTE 18. INVENTORIES
2001 2000
Gross Net Gross Net
Mill. CHF value Allowances Total value Allowances Total
------------ ------------ ------------ ------------ ------------ ------------
Raw materials, supplies and consumables 63 (7) 56 46 (7) 39
------------ ------------ ------------ ------------ ------------ ------------
Work in progress 44 (2) 42 48 (4) 44
------------ ------------ ------------ ------------ ------------ ------------
Finished products and trade merchandise 447 (134) 313 365 (59) 306
------------ ------------ ------------ ------------ ------------ ------------
TOTAL INVENTORIES 554 (143) 411 459 (70) 389
============ ============ ============ ============ ============ ============
Obsolescence expense was CHF 75 million, CHF 35 million, and CHF 16 million at
December 31, 2001, 2000, and 1999, respectively. Write-offs of scrapped
inventory against the allowance for obsolescence were CHF 3 million, CHF 4
million, and CHF 5 million at December 31, 2001, 2000, and 1999, respectively.
Cost of materials included in cost of sales was CHF 254 million, CHF 243
million, and CHF 215 million at December 31, 2001, 2000, and 1999, respectively.
F-23
--------------------------------------------------------------------------------
Notes to the Consolidated Financial Statements
--------------------------------------------------------------------------------
*
--------------------------------------------------------------------------------
NOTE 19.
TRADE ACCOUNTS RECEIVABLE
MILL. CHF 2001 2000
------------ ------------
Gross trade accounts receivable 332 301
------------ ------------
Allowance for doubtful accounts (24) (14)
------------ ------------
TRADE ACCOUNTS RECEIVABLE 308 287
============ ============
Bad debt expenses were CHF 7 million, CHF 2 million, and CHF 1 million at
December 31, 2001, 2000, and 1999, respectively. Bad debt write-offs against the
allowance were CHF 1 million, CHF 1 million, and CHF 3 million in 2001, 2000,
and 1999, respectively.
NOTE 20.
PLEDGED ASSETS
In connection with the global settlement negotiations related to the hip and
knee implant litigation all assets of the Group were pledged as of December 31,
2001. In 2002 the settlement has been revised and the pledged assets will be
released.(1) In 2000 total CHF 5 million assets were pledged.
(1) Described in Note 9.
NOTE 21. SHAREHOLDERS' EQUITY
Outstanding shares with a nominal amount of CHF 30.- each as of December 31,
2001 and 2000, amount to 9,933,556 and 9,991,300, respectively.
The conditional share capital with a nominal value totaling CHF 6 million was
reduced due to shares and ADS options exercised in 2001 to CHF 5,752,890, and in
2000 to CHF 5,758,860.
Amounts planned for dividend distribution by the Company's subsidiaries at
December 31, 2001, 2000, and 1999 were approximately CHF 53 million, CHF 86
million and CHF 72 million, respectively.
If the shareholders' meeting approves the proposed appropriation of available
earnings of December 31, 2001, no dividend will be distributed.
Due to the adoption of IAS 39 as of January 1, 2001 the following entries were
recorded directly to equity:
Retained
MILL. CHF earnings
------------
JANUARY 1, 2001 FAIR VALUE ADJUSTMENTS
Available-for-sale securities 15
------------
Derivative and other financial instruments 3
------------
Deferred tax on above (6)
============
EFFECT OF INTRODUCING IAS 39 ON JANUARY 1, 2001 12
------------
Changes in fair value:
- Available-for-sale securities --
------------
- Cash flow hedges --
------------
Realized gains or losses transferred to the income statement:
------------
- securities sold (18)
------------
Impaired securities and instruments 4
------------
Deferred tax on above 5
------------
FAIR VALUE ADJUSTMENTS AT DECEMBER 31, 2001 3
============
F-24
--------------------------------------------------------------------------------
NOTE 22.
LONG-TERM BORROWINGS
MILL. CHF 2001 2000
------------ ------------
Loans from third parties 13 13
------------ ------------
Mortgage loans 6 5
------------ ------------
Leasing commitments 2 1
------------ ------------
TOTAL LONG-TERM BORROWINGS 21 19
------------ ------------
Current portion 1 --
------------ ------------
TOTAL LONG-TERM BORROWINGS NON-CURRENT 20 19
============ ============
Non-current borrowings will mature as follows:
Third-party
MILL. CHF loans Mortgage Other Total
-------------- -------------- -------------- --------------
2003 - 2006 3 -- 2 5
-------------- -------------- -------------- --------------
2007 and thereafter 10 5 -- 15
-------------- -------------- -------------- --------------
TOTAL LONG-TERM BORROWINGS 13 5 2 20
============== ============== ============== ==============
NOTE 23.
PROVISIONS
Personnel
related Warranties, Provision Other 2001 2000
MILL. CHF provisions litigation risks for taxes provisions Total Total
------------ ---------------- ------------ ------------ ------------ ------------
Balance of January 1 18 3 107 70 198 203
------------ ------------ ------------ ------------ ------------ ------------
Changes in composition
of Group -- -- -- 3 3 --
------------ ------------ ------------ ------------ ------------ ------------
Increase 1 1,563 29 44 1,637 71
------------ ------------ ------------ ------------ ------------ ------------
Unused amounts reversed -- -- -- -- -- (6)
------------ ------------ ------------ ------------ ------------ ------------
Utilisation (15) (84) (27) (15) (141) (71)
------------ ------------ ------------ ------------ ------------ ------------
Currency conversion adjustment -- (8) -- 2 (6) 1
------------ ------------ ------------ ------------ ------------ ------------
BALANCE OF DECEMBER 31 4 1,474 109 104 1,691 198
============ ============ ============ ============ ============ ============
Short-term portion 1 170 31 21 223 54
------------ ------------ ------------ ------------ ------------ ------------
Long-term portion 3 1,304 78 83 1,468 144
------------ ------------ ------------ ------------ ------------ ------------
BALANCE OF DECEMBER 31 4 1,474 109 104 1,691 198
============ ============ ============ ============ ============ ============
Personnel provisions are accrued to cover expenses arising primarily from
grants, rewards for years of service, termination and pension benefits.
The strong increase in provisions for litigation risks of CHF 1563 million is
mainly related to the hip and knee settlement of CHF 1476 million. Additional
provisions were built to reflect the settlement of all claims between Sulzer and
SulzerMedica relating to the Spin-Off agreement.
Furthermore, provisions have been built to reflect the restructuring actions
taken in some of the US entities as well as to reflect the risks related to our
activities with Orthosoft. See note 9.
"Other provisions" are mainly relating to the divestiture of the
Electrophysiology Division in 1999 and to accrued stop-loss complying with
insurance policies.
As a result of the divestiture of the Electrophysiology Division in 1999 the
Company is involved in the procedure, as provided for in the contract, to
determine the final selling price. Management believes that the recorded
provisions are adequate.
F-25
--------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
*
--------------------------------------------------------------------------------
NOTE 24.
SHORT-TERM BORROWINGS
MILL. CHF 2001 2000
------------ ------------
Borrowings from third parties 75 83
------------ ------------
Loans from related parties -- 3
------------ ------------
TOTAL SHORT-TERM BORROWINGS 75 86
============ ============
NOTE 25.
OTHER CURRENT AND ACCRUED LIABILITIES
MILL. CHF 2001 2000
------------ ------------
Notes payable 1 1
Social security contributions 3 4
------------ ------------
Assessed taxes payable 5 8
------------ ------------
Commissions payable 14 18
------------ ------------
Other liabilities 53 46
------------ ------------
Vacation and overtime claims 15 8
------------ ------------
Salaries, wages and bonuses 34 33
------------ ------------
Corporate identity 15 --
------------ ------------
Fair value of derivative instruments 2 --
------------ ------------
Other accruals 52 27
------------ ------------
TOTAL OTHER CURRENT LIABILITIES AND ACCRUALS 194 145
============ ============
NOTE 26. COMMITMENTS AND CONTINGENCIES
The contractual commitments for future investments in property, plant, and
equipment for which the applicable financing will arise in future years at
December 31, 2001, 2000, and 1999, were CHF 6 million, CHF 3 million, and CHF 1
million, respectively.
The future minimum rental commitments for operating leases as of December 31
are:
2001 2000
MILL. CHF Buildings Other Total Buildings Other Total
------------ ------------ ------------ ------------ ------------ ------------
Maturity: <1 year 5 2 7 6 2 8
------------ ------------ ------------ ------------ ------------ ------------
Maturity: 1-5 years 11 5 16 15 3 18
------------ ------------ ------------ ------------ ------------ ------------
Maturity: >5 years -- 2 2 -- -- --
------------ ------------ ------------ ------------ ------------ ------------
TOTAL RENTAL COMMITMENTS 16 9 25 21 5 26
============ ============ ============ ============ ============ ============
Employees of the Company are committed to respect local laws and regulatory
guidelines in the course of their business activities. In the normal course of
business, certain subsidiaries are involved in administrative and civil
proceedings which could give rise to claims not covered, or only partly covered,
by insurance, the effects of which on future earnings cannot be foreseen. In the
opinion of management, the ultimate outcome of these situations will not have a
material impact on the consolidated financial position and results of
operations. The Company is party to certain other legal actions arising in the
ordinary course of its business. Provisions have been recorded for such
litigation risks where it is probable that the Company has incurred a loss and a
reasonable estimate of such loss can be made. Because the judicial process for
such cases is complex, management cannot estimate the amount of any additional
losses which might be incurred in excess of the amounts provided, especially the
legal cases related to the recalled Inter-Op hipshells and withdrawn tibial
baseplates. See also Note 33 and 9.
F-26
-------------------------------------------------------------------------------
NOTE 27. RETIREMENT BENEFIT PLANS AND EMPLOYEE COSTS
DEFINED CONTRIBUTION PLANS
The Company has defined contribution plans which cover substantially all of its
US employees and employees in other countries. The benefits of these plans
relate to local customs and practices in the countries concerned. Company
contributions to such plans for the years ended on December 31, 2001, 2000, and
1999, were CHF 10 million, CHF 8 million, and CHF 6 million, respectively.
DEFINED BENEFIT PLANS
Defined benefit plans covering employees of Sulzer Medica are in place in
Switzerland, France, and the United Kingdom. Those in Switzerland and the United
Kingdom cover employees of the Company in addition to employees of Sulzer. The
assets and liabilities of these plans which relate to Company personnel have
been determined based on actuarial valuations. The most recent actuarial
valuations were performed on December 31, 2001.
PERSONNEL COSTS FOR DEFINED BENEFIT PLANS
MILL. CHF 2001 2000
------------ ------------
Current service costs of retirement benefit plans (10) (10)
------------ ------------
Interest costs (5) (5)
------------ ------------
Expected return on plan assets 7 7
------------ ------------
Employees contributions 4 4
------------ ------------
Change in portion of overfunding not capitalized (2) (1)
------------ ------------
PERSONNEL COSTS FOR DEFINED BENEFIT PLANS (6) (5)
============ ============
The actual return on assets was a loss of CHF 7 million in 2001 and a gain of
CHF 6 million in 2000.
FUNDED STATUS
MILL. CHF 2001 2000
------------ ------------
Present value of funded obligations (134) (122)
------------ ------------
Fair value of plan assets(1) 148 148
------------ ------------
OVER-/UNDERFUNDING 14 26
------------ ------------
Actuarial gains (-) and losses 10 (4)
------------ ------------
Portion of overfunding not capitalized(2) (24) (21)
------------ ------------
OVERFUNDING REFLECTED IN THE BALANCE SHEET -- 1
============ ============
Long-term provision portion -- --
------------ ------------
Asset portion -- 1
------------ ------------
(1) The joint plan assets as of December 31, 2001, and 2000, include the amount
of CHF 17 million and 3 million shares of SulzerMedica Ltd which is about
0.4% and 0.2% of the total plan assets.
(2) Legal requirements, particularly those of Switzerland, restrict the
utilization of overfunded contributions in legally separated benefit plans.
Only amounts that will potentially reduce future pension costs are
capitalized in the consolidated balance sheet.
Due to the large discrepance between expected and actual return on assets the
overfunding diminished and unrecognized actuarial losses resulted. Based on this
development the Group did not reduce the allowance on a recognizable asset in
the balance sheet.
F-27
--------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
*
--------------------------------------------------------------------------------
The actuarial weighted average assumptions used were as follows:
2001 2000
------------ ------------
Discount rate 4.5% 4.5%
------------ ------------
Long-term return on assets 5.1% 5.1%
------------ ------------
Salary increases 2.8% 2.8%
------------ ------------
Pension benefit increases 1.3% 1.3%
------------ ------------
Employee turnover 5.3% 4.3%
============ ============
MILL. CHF 2001 2000 1999
------------ ------------ ------------
Employee costs
Salaries and wages 346 286 263
------------ ------------ ------------
Fringe benefits 72 63 53
------------ ------------ ------------
TOTAL PERSONNEL EXPENSES 418 349 316
============ ============ ============
The increase in 2001 in personnel expenses ~mainly relates to the acquisitions
Paragon Implant Company and IntraTherapeutics Inc. See note 5.
NOTE 28.
FINANCIAL INSTRUMENTS
The balance sheet values of cash, cash equivalents and current accounts
receivable and payable approximate their market values. In the case of the items
below, the carrying value in the balance sheet and their market values at the
closing date were as follows:
2001 2000 1999
Carrying Fair Carrying Fair Carrying Fair
MILL. CHF value value value value value value
---------- ---------- ---------- ---------- ---------- ----------
Investments in non-consolidated companies
and other financial assets 58 58 97 112 63 94
---------- ---------- ---------- ---------- ---------- ----------
Long-term borrowings (21) (21) (19) (19) (31) (31)
---------- ---------- ---------- ---------- ---------- ----------
With the adoption of IAS 39 as per January 1, 2001, the carrying value
corresponds to the fair value.
The fair value of investments in non-consolidated companies and other financial
assets is based on quoted market prices for those of similar investments. For
investments and other financial assets which have no quoted market prices, a
reasonable estimate of fair value was made using available market information
and appropriate valuation techniques. The fair value of long-term borrowings is
based on the current rates offered to the Company for debt of similar
maturities. The estimates presented above on long-term financial instruments are
not necessarily indicative of the amounts that would be realized in a current
market exchange.
F-26
2001 2000
Notional Carrying Fair Notional Carrying Fair
MILL. CHF value value value value value value
---------- ---------- ---------- ---------- ---------- ----------
FOREIGN CURRENCY INSTRUMENTS
Forward exchange contracts (profit) 39 1 1 185 -- 8
---------- ---------- ---------- ---------- ---------- ----------
Forward exchange contracts (- loss) 209 (2) (2) 97 -- (2)
---------- ---------- ---------- ---------- ---------- ----------
The Group's sales are denominated in a variety of different currencies. The
currency structure of costs deviates to some extent from the currency structure
of sales. In order to manage the exposure to the risk of foreign exchange
movements, the Group makes use of financial instruments such as forward
contracts. These instruments are entered into with major international
institutions and typically expire within one year.
The notional value indicates the volume of the open derivative positions at the
balance sheet date. The determination of the fair value of open transactions is
based, where possible, on quoted prices, or alternatively on other recognized
valuation methods.
Changes in fair values resulting from currency hedging of existing assets and
liabilities are recognized in financial income. These gains and losses generally
correspond to changes in the hedged balance sheet items.
CONCENTRATIONS OF CREDIT RISK
Financial instruments, which potentially subject the Company to significant
concentrations of credit risk, consist principally of cash investments, foreign
currency exchange contracts, and trade accounts receivable. The Company
maintains cash and cash equivalents, investments and certain other financial
instruments with various major financial institutions. The Company performs
periodic evaluations of the relative credit standing of these financial
institutions and limits the amount of credit exposure with any institution.
Financial transactions are spread over a number of financial institutions each
of which has a high credit rating.
The overall credit risk relating to derivatives at December 31, 2001 and 2000,
amounted to CHF 0.6 million and CHF 7.9 million, respectively. The credit risk
measures the maximum exposure which would arise if the counterparties failed to
meet their obligations. The outstanding financial market transactions have all
been arranged with top-rated financial institutions, and there is no
unreasonable concentration of risks.
Concentration of credit risks with respect to trade accounts receivable is
limited due to the large number of customers and their dispersion across many
geographic areas. However, a significant proportion of trade accounts receivable
is with national health care systems in several countries. Although the Company
does not currently foresee a credit risk associated with these receivables,
repayment is dependent upon the financial stability of those countries' national
economies.
F-29
--------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
*
--------------------------------------------------------------------------------
NOTE 29.
TRANSACTIONS WITH RELATED PARTIES
At the Annual General Meeting of Sulzer on April 19, 2001 the Shareholders
approved the proposed separation of Sulzer and SulzerMedica into two fully
independent quoted companies. The separation was effected on July 10, 2001, by
distributing the SulzerMedica shares held by Sulzer to Sulzer's Shareholders, on
the basis of two Sulzer Medica shares for each Sulzer share held as of July 9,
2001. The spin-off of practically all of the 74% shareholding in SulzerMedica
increased the free float to nearly 100%. As a consequence the Company ceased to
be a subsidiary of Sulzer as of July 2001. Transactions in the years before the
spin-off between the Company and Sulzer and its subsidiaries are summarized
below:
1. In certain countries the Company's products were distributed by companies
within Sulzer's Markets and Technology Division. Transfer prices charged to
Sulzer's Markets and Technology Division were equivalent to the prices charged
to third-party distributors.
2. The Company entered into an Administrative Services Agreement with Sulzer
Management Ltd in 1993 under which the Company pays an annual charge for the
cost of certain functions such as treasury, risk management, group accounting
systems and procedures, and human resources which were performed on a corporate
basis by Sulzer. These costs were allocated to subsidiaries of Sulzer based on
the proportion of last year's consolidated third-party sales, personnel costs,
general and administrative expenses, and total assets which were attributable to
the related company, as applicable, based upon the nature of the costs being
allocated. The costs of this agreement are included under selling, general and
administrative expense in the table on page 39.
3. The Company entered into a Name and Trademark License Agreement under which
it has the right to use "Sulzer" to market medical products. The annual charge
amounting to 0.2% of third-party sales is included under selling, general and
administrative expense in the table on page 39.
4. Certain research and development activities were performed centrally by
Sulzer Markets and Technology Ltd, a subsidiary of Sulzer. Under various cost
sharing agreements, the costs of such activities were charged to the companies
which benefit directly therefrom. Direct research and development costs charged
to the Company are separately disclosed in the table on page 39. Exploratory
research and development was allocated to subsidiaries of Sulzer based on
third-party sales and the extent to which each company is considered to benefit
from such activities. Exploratory research and development charges allocated to
the Company are disclosed under selling, general and administrative expense on
page 39.
5. The Company made use of certain premises, facilities and specific services
which are put at its disposal by subsidiaries of Sulzer. Charges were allocated
to the Company based either on the actual costs incurred on the Company's behalf
or, in the case of rented properties, by reference to rental charges paid by
third parties for similar accommodations.
6. The Company has agreed to indemnify certain suppliers for liability claims
which may be made against them in connection with the incorporation of their
products into SulzerMedica products. The Company's liability under three of
these agreements has been guaranteed by Sulzer.
F-30
--------------------------------------------------------------------------------
7. The Company has insurance coverage for product liability under an umbrella
insurance policy arranged by Sulzer for all of its subsidiaries.
Management considers that the methods used to allocate the costs referred to in
the arrangements described above are reasonable. Under an umbrella agreement
entered into by the Company with Sulzer during 1997, the parties have agreed
that all transactions shall continue to be consistent with arm's length
principles.
To effect the spin-off of SulzerMedica, the two companies have entered into a
Separation Agreement which will govern certain arrangements between parties
following the completion of the spin-off. Based on this Agreement the Board of
Directors will present at the Annual Shareholders' Meeting on May 17, 2002 a new
name for the Company to be approved by the assembly.
A listing of the members of the Board of Directors (BoD) and officers is shown
on page 4 of the Annual Report; in 2001 the total remuneration of the BoD
approximated CHF 1.3 million (in 2000: CHF 0.4 million). Members of the Board of
Directors receive a substantial portion of their fees in stock options.
REMUNERATION BY EACH INDIVIDUAL BOARD MEMBER IN 2001:
Thousands CHF Cash Options
--------------- ---------------
Gay 65 30
--------------- ---------------
Borgeaud 80 40
--------------- ---------------
Spalti 80 40
--------------- ---------------
Domeniconi 80 40
--------------- ---------------
Link 570 173
--------------- ---------------
Mathis 46 85
--------------- ---------------
TOTAL REMUNERATION 921 408
=============== ===============
TRANSACTIONS BETWEEN THE COMPANY AND SULZER AND ITS SUBSIDIARIES AMOUNTED TO:
MILL. CHF 2001(1) 2000 1999
------- ------- -------
Sales
Sulzer Medica products 9 19 19
------- ------- -------
Other sales -- -- --
------- ------- -------
TOTAL SALES 9 19 19
======= ======= =======
Costs
------- ------- -------
Rent and maintenance of buildings (2) (5) (5)
------- ------- -------
Selling, general and administrative expense (2) (4) (9)
------- ------- -------
Research and development expense (2) (3) (4)
------- ------- -------
TOTAL COSTS (6) (12) (18)
======= ======= =======
Interest
------- ------- -------
Interest expense -- -- (1)
------- ------- -------
Interest income 2 3 --
------- ------- -------
TOTAL INTEREST, NET 2 3 (1)
======= ======= =======
(1) Until July 10, 2001, SulzerMedica was part of the Sulzer Group.
F-31
--------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
*
--------------------------------------------------------------------------------
BALANCES WITH SULZER AND ITS SUBSIDIARIES AMOUNTED TO:
MILL. CHF 2000 1999
------------ ------------
Assets
Current accounts receivable 5 6
------------ ------------
Cash and cash equivalents 98 2
------------ ------------
TOTAL ASSETS 103 8
============ ============
Liabilities
Short-term borrowings 3 27
------------ ------------
Current accounts payable 4 4
------------ ------------
TOTAL LIABILITIES 7 31
============ ============
NOTE 30. MANAGEMENT STOCK OPTION PLAN
In 1997, the Company adopted the SulzerMedica Stock Option Plan to provide
options to management and key employees. Under this plan options were granted
for a five term and were sourced from up to 200,000 shares (or 2,000,000 ADS) of
authorized, but unissued registered shares of Sulzer Medica Ltd. In 2001, the
Company modified this plan and introduced the SulzerMedica Long-term Stock
Option Plan with a term of 10.5 years. Pursuant to the two plans the Company
grants stock options at exercise prices not less than the fair market value at
the date of the grant. Options are exercisable beginning one year from the date
of the grant in cumulative yearly amounts of 25% of the shares under option and
have a term of ten or ten and one-half years. In addition to the annual grant in
April, options may be granted to new employees during the year. For grants under
the 2001 plans, the Company will buy the necessary shares on the open market at
its convenience.
MOVEMENTS IN THE NUMBER OF SHARES AND ADS OPTIONS OUTSTANDING ARE AS FOLLOWS:
2001 2000 1999
Options Options Options
------------ ------------ ------------
At beginning of year 177,472 126,458 95,446
------------ ------------ ------------
Granted 233,943 74,048 69,125
------------ ------------ ------------
Exercised (199) (7,674) --
------------ ------------ ------------
Cancelled and expired (66,753) (15,360) (38,113)
============ ============ ============
AT END OF YEAR 344,463 177,472 126,458
============ ============ ============
The annual grant of shares and ADS options was made on April 18, 2001, at a
price of CHF 333.00/USD 19.46 per share/ADS (April 12, 2000: CHF 376.00/USD
22.67). Due to the spin-off from the parent Sulzer Ltd in July 2001 a second
grant was pronounced on August 24, 2001 at a price of CHF 111.00/USD 6.71.
Options exercised in 2001 resulted in 199 shares being issued, in 2000 in 7,674
shares, yielding aggregate proceeds of CHF 0.1 million and CHF 2.7 million,
respectively.
F-32
SHARE OPTIONS OUTSTANDING AT THE END OF THE YEAR HAVE THE FOLLOWING TERMS:
2001 2000
Weighted average Weighted average
remaining contractual exercise price
Grant Year life in years Options Options
---------- --------------------- ---------------- ------- -------
1997 0.5 CHF 350.00/USD 23.89 17,440 22,958
------- -------
1998 1.3 CHF 382.00/USD 24.94 24,293 31,819
------- -------
1999 2.3 CHF 300.00/USD 19.98 43,710 54,703
------- -------
2000 3.3 CHF 376.00/USD 22.70 54,119 67,992
------- -------
2001 9.7 CHF 170.00/USD 12.48 204,901 --
------- -------
TOTAL CHF 243.00/USD 16.47 344,463 177,472
======= ========
NOTE 31. DIFFERENCES BETWEEN IAS AND US GAAP
The Group's consolidated financial statements are prepared in accordance with
International Accounting Standards (IAS) which differ in certain material
respects from accounting principles generally accepted in the United States of
America (U.S. GAAP).
RECONCILIATION OF IAS NET INCOME TO U.S. GAAP NET INCOME:
MILL. CHF 2001 2000 1999
------------ ------------ ------------
NET INCOME/NET LOSS UNDER IAS (1,193) 190 483
============ ============ =============
Impact of in-process research
and development cost on goodwill 11 11 10
------------ ------------ ------------
Impact of impairment charge on intangibles 17 (13) 240
------------ ------------ ------------
Employee benefits 3 1 --
------------ ------------ ------------
Deferred taxes -- -- --
============ ============ =============
NET INCOME/NET LOSS UNDER U.S. GAAP (1,162) 189 733
============ ============ ============
In accordance with IAS 22, the amount of "in-process research and development"
included in the purchase price of acquisitions is considered a form of goodwill
which the Company amortizes over a twenty-year period. U.S. GAAP requires the
entire "in-process research and development" amount to be expensed in the year
of acquisition. This difference reverses over the twenty-year period in which
goodwill is amortized under IAS. In 2001, CHF 11 million of this difference were
reversed (2000: CHF 11 million).
U.S. Statement of Financial Accounting Standards No. 121 (FAS 121) "Accounting
for the impairment of long-term assets and for long-lived assets to be disposed
of" provides that an impairment is evaluated based on expectations of
undiscounted cash flows. This test according to U.S. GAAP determined that in
2000 and 1999 no impairment has occurred and no impairment charges were
recognized. This difference reverses over the remaining seventeen-year period in
which this goodwill is amortized under IAS.
U.S. Statement of Financial Accounting Standards No. 87 (FAS 87) "Employer's
Accounting for pensions" does not provide for an impairment test for the
overfunding of pension plans. The change of the amount of the overfunding is
shown in the income statement.
F-33
--------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
*
--------------------------------------------------------------------------------
The principal differences between IAS and U.S. GAAP are presented on pages 41 -
44 with explanations of certain adjustments that affect consolidated
shareholders' equity as of December 31, 2001 and 2000.
RECONCILIATION OF SHAREHOLDERS' EQUITY
MILL. CHF 2001 2000
------------ ------------
SHAREHOLDERS' EQUITY UNDER IAS 784 1,993
------------ ------------
Impact of in-process research & development cost on goodwill (a) (177) (182)
------------ ------------
Exceptional non-cash write-down on intangibles (b) 241 216
------------ ------------
Employee benefits (c) 24 21
------------ ------------
Investments (d) -- 15
------------ ------------
Deferred tax effect of U.S. GAAP adjustment on investments -- (3)
------------ ------------
SHAREHOLDERS' EQUITY UNDER U.S. GAAP 872 (2,060)
============ ============
(a) IN-PROCESS RESEARCH & DEVELOPMENT
The application of U.S. GAAP may result in differences in the period of
amortization for goodwill. As permitted by SEC rules, the Company has not
attempted to quantify those differences for purposes of the reconciliation to
U.S. GAAP as the amount presented complies with IAS 22. However, under U.S. GAAP
the amount of "in-process research and development" is expensed in the year of
acquisition as described in the Reconciliation of IAS net income to U.S. GAAP
net income.
(b) INTANGIBLES
As discussed in the reconciliation of net income, the impairment charge to
goodwill and existing technology was not recognized under FAS 121.
(c) EMPLOYEE BENEFITS
IAS 19 (revised 1998) "Employee benefits", effective as of January 1, 1999,
limits the benefit amount of plan assets to be recognized to the realizable
economic future benefit. U.S. GAAP Financial Accounting Standard No 87 (FAS 87),
"Employers' Accounting for pensions," does not provide for an impairment test
for the overfunding of pension plans, as such the amount of the overfunding is
recognized as an asset.
(d) INVESTMENTS
The IAS cost and estimated fair value of available-for-sale securities at
December 31, 2000 are as follows: In accordance with IAS 25, "Accounting for
Investments," the Group has classified its market
MILL. CHF 2000
----------
IAS cost investments 16
----------
Gross unrealized gains marketable securities 15
----------
FAIR VALUE IN ACCORDANCE WITH FAS 115 31
==========
F-34
--------------------------------------------------------------------------------
able securities as long-term, and carries such investments at the lower of cost
or market value, determined on a total aggregate portfolio basis. Reductions in
the carrying value of marketable securities are charged to the consolidated
income statement.
U.S. GAAP Statement of Financial Accounting Standards No. 115 (FAS 115),
"Accounting for Certain Investments in Debt and Equity Securities," provides
that investments in marketable securities which are classified as available for
sale are reported at fair value with unrealized gains and losses excluded from
earnings and included as a separate component of shareholders' equity.
Accordingly, the effect of this treatment is included in the U.S. GAAP
reconciliation of shareholders' equity. The marketable securities shown on page
42 represent equity securities.
With the implementation of IAS 39 as of January 1, 2001 this variance was
eliminated.
(e) DEFERRED TAXES
In the consolidated financial statements, deferred tax assets and liabilities
are classified as long-term and have been presented as such in the assets and
liabilities sections of the balance sheet. This presentation is in accordance
with IAS 12, "Income taxes." U.S. GAAP Statement of Financial Accounting
Standards No. 109 (FAS 109), "Accounting for Income Taxes," provides that
deferred taxes must be separated into a current and a non-current amount based
on the classification of the related asset or liability.
The presentation of deferred tax assets and liabilities in accordance with FAS
109 at December 31 would be as follows:
2001 2000
Non- Non- Non- Non-
Current current Current current Current current Current current
MILL. CHF assets assets liabilities liabilities assets assets liabilities liabilities
---------- ---------- ----------- ----------- ---------- ---------- ----------- -----------
Deferred taxes 243 679 15 20 116 212 13 39
---------- ---------- ---------- ---------- ---------- ---------- ----------- ----------
Valuation allowance (69) (194) -- -- (54) (100) -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------- ----------
TOTAL DEFERRED TAXES 174 485 15 20 62 112 13 39
========== ========== ========== ========== ========== ========== =========== ==========
This difference relating to deferred taxes does not result in a reconciling
adjustment to shareholders' equity as of December 31, 2001 and 2000, between IAS
and U.S. GAAP.
F-35
--------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
*
--------------------------------------------------------------------------------
(f) OPERATING INCOME BEFORE GOODWILL AMORTIZATION AND EXCEPTIONAL ITEMS
Disclosure of operating income before exceptional items and goodwill
amortization is not permitted under U.S. GAAP. The exceptional items, goodwill
amortization and non-operating expenses would be included in the determination
of operating income under U.S. GAAP.
(g) OPERATING INCOME
Operating income under IAS also consists of the income from discontinuing
operations. Under U.S. GAAP, this income from the Electrophysiology Division in
1999 would not be included in the operating income. It would be shown below the
operating income as income from discontinuing operations.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has recently issued several new
accounting standards, including SFAS No. 141 "Business Combinations"; SFAS
No. 142 "Goodwill and other Intangible Assets"; and SFAS No. 144 "Accounting for
Impairment or Disposal of Long-Lived Assets" will be effective for periods
beginning on or after January 1, 2002. The Group is currently determining the
effect, if any, these new standards cause divergences from its Consolidated
Financial Statements.
The Group adopted SFAS No. 141 for all business combinations after June 30,
2001. This standard requires that all business combinations be accounted for
using the purchase method, and it further clarifies the criteria for recognition
of intangible assets separately from goodwill. Since June 30, 2001, there have
been no material business combinations.
Effective January 1, 2002, the Group will adopt SFAS No. 142 for existing
goodwill and other intangibles. This standard eliminates the amortization of
goodwill and intangible assets with indefinite useful lives and requires annual
testing for impairment. This standard requires the assignment of assets acquired
and liabilities assumed, including goodwill, to reporting units for purpose of
goodwill impairment testing. Under the provisions of this standard, any
impairment of goodwill will be written off and recognized as a cumulative effect
of a change in accounting principle as at January 1, 2002.
Effective January 1, 2002 the Group will adopt SFAS No. 144. This standard
supersedes and amends existing accounting literature related to the impairment
and disposal of long-lived assets.
NOTE 32. CONVENIENCE TRANSLATION (UNAUDITED)
Solely for the convenience of the reader, the consolidated balance sheet as of
December 31, 2001, has been translated into US dollars (USD) at the year-end
exchange rate of 1.68 Swiss francs per USD, and the consolidated income
statement has been translated at the 2001 average exchange rate of 1.69 Swiss
francs per USD. The translation should not be construed as a representation that
the Swiss franc amounts represent or have been or could be converted into USD at
those or any other rate.
NOTE 33. SUBSEQUENT EVENTS
On March 13, 2002, the detailed proposal of the settlement with patients
affected by revision of hip or knee surgery has been signed by the parties and
preliminarily approved by the court. The patients will have until May 14, 2002,
to decide on the opt-out. See note 9.
NOTE 34. SUBSEQUENT EVENTS UNAUDITED
On May 13, 2002, the Company announced that it has plans to launch a
program aimed at optimizing efficiency at their European Orthopedics Division.
As of June 1, 2002, the Company will begin shifting staff members from Baar,
Switzerland to Oberwinterthur and Zurich, Switzerland. The Company will abandon
the administration facility in Baar, while the logistics unit will remain there.
The optimization program envisions a reduction of some 100 positions in an
initial step, followed by a further 20 positions in a second step.
As of the close of the opt-out period on May 15, 2002, the Claims
Administrator under the MDL Class Settlement Agreement had received notice from
approximately 130 patients who have opted-out of the settlement. See "Item 8.A.7
Legal Proceedings" for further information.
F-36
EXHIBIT INDEX
1. Articles*
4.1 1997 Management Stock Option Plan of Sulzer Medica Ltd. And
Affiliated Companies, as amended**
4.2 Sulzer Medica 2001 Stock Option Plan, as amended(1)
4.3 2001 Employee Stock Purchase Plan United States and Canada,
as amended(2)
4.4 Sulzer Medica 2001 Long-Term Stock Option Plan, as
amended(3)
4.5 Sulzer Medica 2002 Stock Purchase Plan United States and
Canada, as amended(4)
4.6 AGREEMENT AND PLAN OF MERGER dated as of January 5, 2001,
among SULZER MEDICA USA HOLDING CO., a Delaware corporation
("Parent"), ELVER ACQUISITION CORPORATION, a Minnesota
corporation and a wholly owned subsidiary of Parent ("Merger
Sub"), and INTRATHERAPEUTICS, INC., a Minnesota corporation
(the "Company").(5)
4.7 ASSET PURCHASE AGREEMENT, dated as of November 1, 2000, as
amended January 8, 2001, and May 23, 2001, among CORE-VENT
CORPORATION, d/b/a Paragon Implant Company, a Nevada
corporation ("Paragon"), CORE-VENT BIOENGINEERING, INC., a
California corporation ("C-V BioEngineering"), CORE-VENT
PARAGON BIO, a California corporation ("C-V Paragon"),
PARAGON ADMINISTRATION, INC. , a California corporation
("Paragon Administration"), CORE-VENT GmbH, a corporation
organized under the laws of the Federal Republic of Germany
("C-V GmbH"), CORE-VENT ISRAEL (1997), a PARAGON Company
Ltd., a corporation organized under the laws of Israel ("C-V
Israel"; and together with Paragon, C-V BioEngineering, C-V
Paragon, Paragon Administration, C-V GmbH and C-V Israel,
the "Seller"), the shareholders of Paragon identified on the
signature page hereof (the "Paragon Shareholders"), the
shareholders of C-V BioEngineering identified on the
signature page hereof (the "C-V BioEngineering
Shareholders"), the Niznick Family Foundation (the "Niznick
Foundation"), a California not-for-profit corporation, DR.
GERALD A. NIZNICK, an individual ("Dr. Niznick"; and
together with the Paragon Shareholders, the C-V
BioEngineering Shareholders and the Niznick Foundation, the
"Shareholders"), SULZER MEDICA USA INC., a Delaware
corporation ("Parent"), SULZER CALCITEK INC., a Delaware
corporation ("Calcitek"), and SULZER CALCITEK GmbH, a
corporation organized under the laws of the Federal Republic
of Germany ("Calcitek GmbH"), GASHTAR LTD, a corporation
organized under the laws of Israel ("Calcitek Israel") and
SULZER DENTAL CORP, a corporation organized under the laws
of Canada ("Calcitek Canada" and together with Calcitek, and
Calcitek GmbH and Calcitek Israel, the "Purchaser").(6)
4.8 Class Action Settlement Agreement among Sulzer Orthopedics
Inc., Sulzer Medica AG, Sulzer Ltd. and Class Counsel, on
Behalf of Class Representatives In Re Sulzer Hip Prosthesis
and Knee Prosthesis Liability Litigation MDL Docket No.
01-CV-9000 (MDL No. 1401) dated as of March 13, 2002
4.9 Indemnification and Release Agreement by and among Sulzer
Medica AG, Sulzer AG and XL Winterthur International
Insurance Switzerland effective as of March 14, 2002.
4.10 Settlement and Release Agreement dated as of May 2, 2002,
Among the United States of America, acting through the Civil
Division of the United States Department of Justice and on
behalf of the Department of Health and Human Services and
Sulzer Orthopedics Inc.
4.11 Letter Agreement between Sulzer Orthopedics Inc. and XL
Winterthur International Insurance Switzerland dated April
25, 2002.
4.12 Memorandum of Understanding among the Settling Health Plans
and Sulzer Entities named therein.
10. Consent of PricewaterhouseCoopers AG, Independent Public
Accountants
---------------
* Incorporated by reference to Exhibit 1 to the Company's annual report on
Form 20-F for the year ended December 31, 1998, filed with the Commission on
June 28, 1999.
** Incorporated by reference to Exhibit 1 to the Company's annual report on
Form 20-F for the year ended December 31, 1999, filed with the Commission on
June 9, 2000.
(1) Incorporated by reference to Exhibit 4.3 to the Company's Registration
Statement on Form S-8 (Reg. No. 333-76282) filed with the Commission on
January 4, 2002.
(2) Incorporated by Reference to Exhibit 4 to the Company's Annual Report on
Form 20-F for the year ended December 31, 2000 filed with the Commission on
June 18, 2001.
(3) Incorporated by reference to Exhibit 4.3 to the Company's Registration
Statement on Form S-8 (Reg. No. 333-76280) filed with the Commission on
January 4, 2002.
(4) Incorporated by reference to Exhibit 4.3 to the Company's Registration
Statement on Form S-8 (Reg. No. 333-85388) filed with the Commission on
April 2, 2002.
(5) Incorporated by reference to Exhibit 5(a)(i) to the Company's Annual Report
on Form 20-F for the year ended December 31, 2000 filed with the Commission
on June 18, 2001.
(6) Incorporated by reference to Exhibit 5(a)(ii) to the Company's Annual Report
on Form 20-F for the year ended December 31, 2000 filed with the Commission
on June 18, 2001.