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The following is an excerpt from a 10-K SEC Filing, filed by DEPUY INC on 3/31/1998.
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DEPUY INC - 10-K - 19980331 - PART_I




DePuy, Inc. ("DePuy" or the "Company") is one of the world's leading designers, manufacturers and distributors of orthopaedic devices and supplies. The Company's products are used primarily by orthopaedic medical specialists and spinal neurosurgeons in both surgical and nonsurgical therapy to treat patients with musculoskeletal conditions resulting from degenerative diseases, deformities, trauma and sports-related injuries. The Company's products cover a broad range of orthopaedic needs and include hip and knee implants for primary and revision joint replacement; shoulder implants to reconstruct damaged joints; spinal implants to facilitate fusion of elements of the spine and to correct deformities; trauma products to reconstruct small and large bone fractures; and implants, knee braces and other soft good supplies for the rehabilitation of sports-related injuries. Additionally, the Company markets complementary products for the operating room.


Founded in 1895 by Revra DePuy, DePuy is the world's oldest manufacturer of orthopaedic devices. In October 1996, the Company became a public company through an Initial Public Offering of its Common Stock (the "Initial Public Offering" or the "IPO"). Prior to the Initial Public Offering, the worldwide operations of DePuy were consolidated under Corange U.S. Holdings, Inc., an Indiana corporation ("CUSHI"), and an indirect wholly-owned subsidiary of Corange Limited, a Bermuda company and the ultimate parent of the DePuy group ("Corange"). As part of such reorganization, Boehringer Mannheim Corporation ("BMC"), the U.S. operating subsidiary of the Boehringer Mannheim companies (which were under common control with the DePuy subsidiaries) was transferred outside the CUSHI consolidated group. Following such reorganization, for purposes of reincorporating CUSHI in Delaware, CUSHI was merged downstream into the Company, with the Company as the surviving entity in such merger. The Company had been organized in Delaware on July 26, 1996 as a wholly-owned subsidiary of CUSHI for purposes of becoming the holding company for the DePuy group after the Initial Public Offering. On March 5, 1998 Roche Healthcare Limited, a Bermuda corporation and a subsidiary of Hoffman-LaRoche ("Roche"), acquired Corange to become the indirect owner of approximately 84% of DePuy's common stock held by Corange and its subsidiaries. Roche is a multinational company and world leader in research-based healthcare with principal businesses in pharmaceuticals, diagnostics, vitamins and fine chemicals, and fragrances and flavors. Although the Company cannot predict the effect this acquisition may have on its future performance, it believes it will be permitted to continue its growth and success under the guidance of another world leader in healthcare.

The Company's principal executive offices are located at 700 Orthopaedic Drive, Warsaw, Indiana 46580 and its telephone number is (219) 267-8143.


The Company believes the orthopaedic product market had approximately $8.9 billion in 1997 sales worldwide, with U.S. sales constituting approximately $4.9 billion of that total. The Company estimates that reconstructive products accounted for approximately $3.7 billion of the 1997 worldwide orthopaedic market, with the U.S. and international markets split equally with approximately $1.85 billion each. The Company believes that it is one of the leading manufacturers of reconstructive products worldwide, having a worldwide market share of approximately 15% in 1997, and the second leading manufacturer in the U.S. With respect to hip products, the Company believes that it is the leading manufacturer worldwide and one of the two leaders in the U.S. Within the knee market, the Company believes it is the third leading manufacturer worldwide and in the U.S. The Company believes that it is currently one of the leading manufacturers within the worldwide spinal market, and that its market share would significantly increase upon the finalization of the purchase of AcroMed Corporation ("AcroMed") as described in Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations. The spinal market is one of the fastest-growing segments in musculoskeletal surgery.

DePuy has established a leading market position through the continued introduction of high quality, clinically-proven products in major segments of the orthopaedic industry. Geographically, the Company commenced the development of international distribution channels in 1988 and now has Company-owned distribution subsidiaries in all major markets outside the U.S. International sales have increased to 49% of total sales in 1997, up from 11% in 1988. The Company's acquisitions and alliances have also focused on the entry into the high growth markets of spinal implants, trauma and sports medicine. In 1993, the Company entered the expanding market of spinal implants through a joint venture with Biedermann Motech GmbH of Germany. In 1994, the Company expanded its position in the trauma device market through the acquisition of ACE Medical Company, now called DePuy ACE Medical


Company ("DePuy ACE"), a leading manufacturer of titanium alloy trauma products and externally applied fixation devices for the treatment of fractures. Also in 1994, DePuy International Ltd. ("DePuy International", formerly Charles F. Thackray Limited, acquired by the Company in 1990) acquired CMW Laboratories ("CMW"), the oldest orthopaedic bone cement manufacturer in the world. In March 1996, the Company expanded its position in the fast-growing sports medicine device market through its acquisition of Orthopedic Technology, Inc., now called DePuy Orthopaedic Technology, Inc. ("DePuy OrthoTech"), a manufacturer and distributor of external braces used in the prevention and rehabilitation of sports-induced injuries. In order to focus on its core competencies in orthopaedics, the Company entered into agreements in March and May 1997 to sell the pharmaceutical and healthcare businesses of its subsidiary in the United Kingdom, DePuy International. In April 1997, the Company acquired Landanger- Camus ("Landanger"), headquartered in Chaumont, France, the leading French manufacturer of hip implants and one of the leading French distributors of orthopaedic devices and supplies. This acquisition is disclosed in Note 1 to the Consolidated Financial Statements contained herein. DePuy believes that many of its target markets remain fragmented, providing opportunities for continued consolidation. Technologically, DePuy seeks to remain on the leading edge of innovation and has established programs in the area of bone and tissue regeneration and biomaterials.

In the United States, DePuy has been at the forefront of pursuing opportunities in a managed care environment. As the pressures on cost containment continue to increase within the healthcare industry, DePuy has actively pursued contracts with national and regional hospital buying groups, as well as individual healthcare facilities, where the Company believes that the increase in unit volume produced by high levels of product sales to such groups, and the opportunity for increased market share, continue to offset the financial impact of discounting products. The Company has also created and introduced software packages to help surgeons and healthcare facilities document and collect reliable data on costs, clinical results, outcomes and patient satisfaction. By demonstrating the superiority of its products, through careful tracking, evaluation and promotion of clinical outcomes, the Company believes that it is well positioned for its customers to receive patient referrals from third-party payers and integrated healthcare delivery networks.


The Company's core products are, and have traditionally been, reconstructive implant devices for hips and knees. Having established itself as a market leader in the United States in hip and knee replacements, the Company began, in the late 1980s, to expand its product line to cover the full range


of orthopaedic products through strategic acquisitions and alliances. The following chart traces the expansion of the Company's product lines during the last five years. In the table below, reconstructive products include implants for hips, knees and extremities.


                            1997              1996              1995              1994              1993
                      ---------------   ---------------   ---------------   ---------------   ---------------
                              Percent           Percent           Percent           Percent           Percent
                       Net       of      Net       of      Net       of      Net       of      Net       of
                      Amount   Total    Amount   Total    Amount   Total    Amount   Total    Amount   Total
                      ------  -------   ------  -------   ------  -------   ------  -------   ------  -------
 products...........  $531.7     69%    $470.2     67%    $450.6     71%    $405.9     74%    $363.2     78%
Spinal implants.....    61.8      8       45.5      7       30.6      5       12.5      2        3.2      1
Trauma products.....    61.7      8       56.4      8       49.4      8       38.5      7        8.5      2
Sports medicine(1)..    50.3      7       48.2      7       29.4      4       27.7      5         --     --
Other products......    64.7      8       77.0     11       76.6     12       67.2     12       91.8     19
                      ------  -------   ------  -------   ------  -------   ------  -------   ------  -------
      Total sales...  $770.2    100%    $697.3    100%    $636.6    100%    $551.8    100%    $466.7    100%
                      ======  =======   ======  =======   ======  =======   ======  =======   ======  =======

(1) Prior to 1994, sales of sports medicine products were included in other products.

Recognizing that much of the future growth in its core implant business would come from international markets, the Company began focusing in the late 1980s on increasing its sales outside the United States by developing distribution channels in countries outside the U.S. See "Business--Marketing and Sales." From 1991 to 1997, non-U.S. revenue increased from 33% to 49% of total revenues. The following table sets forth the geographic sources of the Company's revenues for the past five years based on customer location.


                               1997              1996              1995              1994              1993
                         ---------------   ---------------   ---------------   ---------------   ---------------
                                 Percent           Percent           Percent           Percent           Percent
                          Net       of      Net       of      Net       of      Net       of      Net       of
                         Amount   Total    Amount   Total    Amount   Total    Amount   Total    Amount   Total
                         ------  -------   ------  -------   ------  -------   ------  -------   ------  -------
United States........    $394.6     51%    $373.8     54%    $349.9     55%    $333.3     61%    $296.7      64%
Europe...............     229.3     30      186.0     27      172.2     27      132.8     24      112.6      24
Asia/Pacific.........     120.2     16      107.0     15       90.6     14       68.3     12       42.9       9
Other................      26.1      3       30.5      4       23.9      4       17.4      3       14.5       3
                         ------  -------   ------  -------   ------  -------   ------  -------   ------  -------
      Total sales....    $770.2    100%    $697.3    100%    $636.6    100%    $551.8    100%    $466.7     100%
                         ======  =======   ======  =======   ======  =======   ======  =======   ======  =======


The Company's backlog of firm orders is not material.

Reconstructive Products

Until the early 1960s, the orthopaedic industry was primarily involved with the manufacture and sale of products intended for treatment of injuries, most often traumatic injuries. As a result of developments which began in the late 1950s and the early 1960s, products and procedures were developed for the treatment of joint disease, such as arthritis, as well. Total joint replacement surgery replaces worn joints with components made of stainless steel, titanium alloy or cobalt chromium alloy, depending on the design, and ultra-high molecular weight polyethylene ("UHMWPE"), a medical grade plastic. The first widely-used products were various forms of hip replacements, some of which, especially in the early years, involved the replacement of the femoral side only. As the years progressed, total joint replacement became the standard procedure. Development of total knee systems followed the development of total hip replacements.

The worldwide market for reconstructive implant devices in 1997 was approximately $3.7 billion in sales. Of these sales, approximately 50% were in the U.S. and 50% were in the rest of the world. The Company's worldwide sales of reconstructive products in 1997 was approximately $532 million.

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"). Cementless products are "biologically fixed," which means the surrounding tissue grows into the implant's porous, beaded coating, or macro texture features, securing it without the use of cement. A revision product, which may be either cemented or cementless, is the implant used when revision surgery is performed after a primary implant wears out or becomes loose after years of use.

The Company designs, manufactures and markets a full line of joint reconstructive implants for the hip, knee, shoulder, elbow, wrist and ankle.

Hip Systems. The Company believes the market for hip implant products in 1997 was approximately $1.9 billion in sales worldwide and approximately $800 million in sales in the U.S. The Company believes it is the leading manufacturer of hip implant products worldwide and is one of the two leaders in the United States.

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 articulates with the acetabular component. The acetabular component, which usually consists of a polyethylene liner and metal cup or an all polyethylene cup, replaces the socket. DePuy offers a full line of hip implants to meet patient needs and surgeon preferences. Its two leading total hip systems are the Charnley Hip and the AML Hip. The Charnley Hip is one of the leading cemented hip implants in the world by unit volume. The AML Hip and the Solution System are, the leading porous-coated hip system and the leading revision hip system, respectively, in the U.S.

AML Total Hip System. The AML Hip is a cementless system that uses a proprietary porous implant coating ("POROCOAT") to secure the implant in place through biological fixation. Considered the Company's flagship product, the AML hip stem was the first implant to obtain Premarket Approval ("PMA") from the Food and Drug Administration (the "FDA") for


use without cement and has the longest clinical history of any cementless hip implant on the market today, with a survivorship estimated to be 99% at 10 years. The extensively porous-coated AML and Prodigy Hip System is the most widely used cementless system in the U.S.

Charnley Hip System. The Charnley Hip is a stainless steel alloy cemented hip implant with extensive clinical history. It was the world's first total hip implant and has the longest clinical history of any implant on the market. The Charnley femoral hip stem has a survivorship estimate of 95% at 20 years. The Charnley Hip is one of the leading cemented hip implants in the world by unit volume. The new generation of the Charnley family, the Elite Plus Total Hip, was introduced in 1995, and can utilize a Zirconia femoral bearing surface designed to further reduce wear of the surface and prolong the life of the arthroplasty. In the U.S., the Endurance System expands upon the principles of the Charnley Hip. Manufactured from a cobalt chromium alloy, the Endurance System was introduced in 1994.

Solution System. Revision hip surgery is performed when infection occurs or the supporting bone or primary implant wears out from years of use. Introduced in 1990, the Solution System was the first extensively porous-coated revision system on the market. The POROCOAT coating helps provide the additional stability required in revision hip surgery. The Solution System, with its extensive successful clinical history and product offering, has a substantial share of the revision market in the U.S. DePuy also markets a cemented revision implant as part of the Endurance System.

Duraloc Acetabular Cup System. The Duraloc Acetabular Cup System features a sensor-ring locking mechanism, uniform dome loading, optimal polyethylene thickness and offers a wide assortment of options to address specific patient needs. This combination permits mobility without sacrificing structural support. The patented Duraloc Acetabular Cup System is a leading cup system in the U.S.

Knee Systems. The Company believes the worldwide and U.S. markets in 1997 for knee implants were $1.7 billion and $1.0 billion, respectively, in sales. The Company believes it is the third largest manufacturer in the knee market in the U.S. and worldwide.

Total knee arthroplasty consists of several components depending on the product design: the femoral component, the tibial component and the patellar component. The Company offers a full range of implants, including the LCS Knee, the AMK Knee and the Coordinate Revision Knee System.

LCS Total Knee System. The LCS Total Knee System is a mobile-bearing knee system. The mobile bearings incorporated into the design allow the implant to more closely simulate the anatomic movement of a natural knee while minimizing stresses on the implant components. The patented LCS Knee design, launched in 1985 after extensive clinical trials, has FDA Premarket Approval for both cemented and cementless indications for use. The LCS Knee design was the first, and continues to be the only, mobile-bearing knee commercially available for use in the U.S. The LCS Knee has 19 years, including initial development and clinical trials, of clinical history with a 97% survival estimate at seven years. The LCS Knee is the number one selling mobile-bearing knee implant worldwide and in the U.S. Within the U.S. sales have been increasing as the implant's success rate becomes more widely known and its clinical history is extended, providing more clinical data of its success.


AMK Total Knee System. Introduced in 1987, the AMK Total Knee System is a fixed-bearing knee system with left and right, rather than universal, femoral components. The AMK Knee may be used for primary and revision knee surgery needs and has nine years of clinical follow-up history. In 1990, the Company introduced the AMK PS (Posterior Stabilized) design, which is a complementary product intended to address another industry trend toward posterior stabilization of the knee joint, the fastest-growing area in the knee implant market.

Coordinate System. The Coordinate system is a revision knee system which uses the same instrumentation as the AMK Knee family of products.

Extremities. The Company believes the worldwide and U.S. markets in 1997 for extremities implants (shoulders, ankles, elbows, wrists and digits) were nearly $112 million and nearly $75 million, respectively. Within the extremities market, shoulder implants accounted for over 65% of 1997 sales worldwide and in the U.S. DePuy believes it is the leading manufacturer of extremities implant products overall and of shoulder implants. Once considered a difficult surgery with questionable outcomes, the improved technology embodied in the Global Total Shoulder System has helped the procedure gain acceptance. The Global Shoulder was introduced in 1992, and became a market leader within four years in the U.S. shoulder market.

Spinal Implants

One of the fastest-growing markets in musculoskeletal surgery, the spinal implants market for 1997 was approximately $660 million in sales worldwide, with approximately $430 million in the U.S. In 1993, the Company entered the spinal market through a joint venture with Biedermann Motech GmbH of Germany. The resulting company, DePuy Motech, is 80% owned by DePuy. This joint venture has made the Company one of the worldwide leaders in the sale of spinal implant devices in less than four years after its entry into the market. The Company's 1997 worldwide sales were $61.8 million.

The primary goals of spinal instrumentation systems are to correct for spinal deformity or imbalance, to reestablish stability of the spine and to eliminate pain. Hooks, rods, screws and anterior support devices (metallic, ceramic and bone), acting as the equivalent of modular spinal anchoring devices, 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 intended to reconstruct and restore normal spinal biomechanics or facilitate bone fusion.

DePuy Motech has differentiated itself from other manufacturers of spinal implants by basing its implants on "load sharing", which advocates the support of the spine both anteriorly (front) and posteriorly (back). This philosophy has now become an important surgical trend in spinal surgery.

Among the Company's products is the MOSS System, the first system to address the concept of load sharing and recognize the importance of anterior column support to restore and balance the natural forces in the spine. The MOSS Miami System, introduced in 1995, set new design standards, while continuing to adhere to the Company's basic design philosophies. These are complete systems made of both titanium and stainless steel and include anatomical hooks, monoaxial and polyaxial screws and rods. They are designed for universal application in spinal surgery for deformities, tumor, trauma and degenerative diseases of the spinal column. These systems are marketed in the U.S. as spinal devices for fusion and for bone repair under Section 510(k) Premarket Notification ("510(k)") clearances. Within the U.S., DePuy markets the hooks and pedicle screws with labeling restrictions. Outside the U.S.,


marketing of pedicle screws for more general use, and the labeling and marketing of the Company's surgical mesh product for use between vertebrae, is allowed. The MOSS Miami System's availability in titanium alloy allows surgeons to use Magnetic Resonance Imaging and Computer Aided Tomography evaluation following surgery and provides an implant system for patients who may be sensitive to the nickel content of stainless steel.

Among DePuy Motech's other recent products is Titanium Surgical Mesh, designed in Europe by Professor Jurgen Harms and Biedermann Motech, to provide a synthetic device to reinforce weak bony tissue. This product has gained market acceptance outside the U.S. and is marketed in the U.S. under 510(k) clearance received by Biedermann Motech in 1990. DePuy Motech is conducting an IDE study to further evaluate specific indications for use of Titanium Surgical Mesh. In June 1996, the Company offered its Peak Anterior Cervical Compression Plate and Peak Channeled Reconstruction Plate, part of the Peak Fixation System, for sale outside the U.S. The Peak Anterior Cervical Compression Plate addresses degenerative diseases of the anterior cervical spine and the Peak Channeled Reconstruction Plate is used in surgery to stabilize bony structures. These products are currently marketed in the U.S. under 510(k) clearances, with labeling restrictions.

Trauma Products

The orthopaedic trauma field, which involves the management of fractures, has as its objective the achievement of complete bone healing, or "union," and restoration of alignment and full range of motion in patients who have sustained fractures. The worldwide market for trauma products in 1997 was approximately $1.2 billion in sales, of which approximately 42% were sales in the U.S. The Company's fixation devices may be classified generally as external fixation devices and internal fixation devices. The acquisition of DePuy ACE in 1994 added critical mass to the Company's trauma product offerings, specifically adding products in the growing market of external fixation. Within the trauma market, the Company, through DePuy ACE, is a leading manufacturer of titanium alloy trauma products and externally applied fixation devices for the treatment of fractured bones. DePuy ACE was a pioneer in the use of titanium alloy implants in the orthopaedic trauma market. Titanium alloy more closely replicates the physical properties of bone than stainless steel and is associated with a higher degree of biocompatibility than stainless steel implants. The Company had trauma product sales of $61.7 million worldwide in 1997, representing 5% of the market. DePuy ACE is a market leader in Japan, the second largest geographic market for trauma products.

Sports Medicine Products

The sports medicine market, which includes arthroscopy equipment, soft tissue implants, braces and cold therapy, amounted to over $1.2 billion in sales worldwide in 1997, including approximately $920 million in the U.S. The soft goods market, which includes knee immobilizers, supports/splints and traction supplies amounted to approximately $400 million worldwide. The Company expanded its position in these areas through its acquisition of DePuy OrthoTech in March 1996, which added critical mass and expanded product lines. The Company's aggregate sales of sports medicine products in 1997, including soft goods, were $50.3 million worldwide.

The Company's products include arthroscopy instruments, anterior cruciate ligament reconstructive guide systems, tissue fixation devices, cold therapy management systems, foot and ankle supports and orthopaedic knee braces. Within its knee brace product line, the Company offers a complete


line of custom-made braces which are used by professional athletes in a number of sports. The Company also offers a complete line of high-quality, off-the- shelf knee braces.


To complement cemented reconstructive product lines, the Company entered the bone cement market in 1994 through the acquisition of CMW. CMW manufactures different types of bone cements used with reconstructive implants and had 1997 sales of approximately $20 million. Early in 1997, CMW received FDA clearance to market one type of its bone cement directly in the U.S. and additional versions are awaiting clearance for marketing in the U.S.

Operating Room Products

To complement its reconstructive products, the Company developed a comprehensive line of products designed to shield healthcare workers, surgeons and patients during surgery from cross-contamination and contact with body fluids which could contain potentially infectious bacteria. Orthopaedic reconstructive surgery carries a higher risk of such contamination or contacts than many other types of surgeries because the instrumentation required scatters microscopic particles, including bone and blood.

The Company's product offerings include a series of cut-, stick- and puncture-resistant glove liners, developed and marketed by DePuy DuPont Orthopaedics, which incorporate Kevlar material, a lightweight fabric used in military helmets and in flack jackets that is stronger than steel. Other products include the Sterile View System, "space suits" that shield and filter airborne particulates, and the Cida-system, a line of germicidal products designed to ensure the cleanest possible surgical environment. The Company also markets power and manual instruments, wound drainage and tourniquet systems, smoke evacuation systems and instrument repair services.

Product Development

The Company conducts its research and development programs to maintain its proprietary position by making improvements to existing products and by developing new generations of products focused on new materials, unique designs, biologic biomaterials, and new non-invasive or minimally-invasive forms of treatment for afflictions and injuries currently requiring surgery.

In-house, Company-sponsored research and development programs at Warsaw, Indiana; Leeds, United Kingdom and Roanne, France focus on enhancements to the metallic and polyethylene components of the implant and instrument devices the Company manufactures by increasing their strength, corrosion and oxidation resistance, fatigue resistance, or focusing on bearing surface improvements to the artificial joint being replaced in the human body. In addition, the Company conducts research on artificial joint simulators and enhancements to the bearing interface. The Company has also been instrumental in identifying and eliminating the oxidative effects caused by gamma irradiation sterilization techniques to UHMWPE by pioneering the use of gas plasma sterilization technology for polyethylene bearing components.

As part of its long-range product development efforts, the Company initiated programs in 1990 in the biotechnology arena with an emphasis on orthobiologics and biologic biomaterials. The Company is researching technologies for the next century in the area of bone substitutes, cartilage regeneration,


ligament and tendon reconstruction and musculoskeletal tissue engineering. Some of these efforts, however, if successful, are not expected to produce material product revenue until, at the earliest, the beginning of the next decade.

Musculoskeletal and Tissue Regeneration. In the early 1990s, the demand for musculoskeletal tissue to repair traumatic and sports related injuries increased. At present, there are limited means of repairing injuries such as a rotator cuff deficiency or a meniscus tear. For certain other types of injury (particularly damage to ligaments and tendons), current treatment requires the use of tissue from another site on the patient's body, thereby increasing chances of morbidity and surgery costs. To address these problems DePuy moved into tissue engineering research by entering into an exclusive license agreement with Purdue University in March 1992 to develop a tissue engineering concept using Small Intestine Submucosa ("SIS"). SIS is a patented xenographic biomaterial that may be used as a scaffold in tissue engineering applications. SIS has been shown to facilitate the regeneration, repair and re-growth of the patient's own tissues at various anatomical sites. The Company is investigating SIS for ligament, tendon, bone, cartilage, meniscus and rotator cuff applications. In late 1996, the Company filed an IDE application for anterior cruciate ligament replacement using SIS. Approval was granted in December 1997 to initiate Phase I human clinical trials. Two of the twelve patients allotted for this clinical trial have been implanted with SIS anterior cruciate ligament devices and no complications have been noted to date.

With orthopaedic surgeons identifying cartilage repair and bone substitute materials as significant needs, DePuy entered into an exclusive license agreement with Genentech, Inc. in February 1992 which allows DePuy the right to evaluate the use of Transforming Growth Factor Beta One ("TGF-B1") for orthopaedic applications. TGF-B1 has been shown to aid in bone regeneration and remodeling and to inhibit bone resorption, along with stimulating articular cartilage repair and regeneration. The Company is studying alternate methods of utilizing TGF-B1 for bone regeneration through gene therapy and is investigating the effects, both local and systemic, of direct applications of TGF-B1 to stimulate cartilage repair and regeneration. Initial studies in vitro and in vivo have demonstrated increased cartilage cell proliferation and matrix synthesis.

The Company is also involved in an orthobiologic program aimed at addressing joint trauma and degeneration. The Company is researching articular cartilage repair and bone regeneration through collaborations with companies utilizing resorbable polymers, cell technology applications and gene therapy delivery mechanisms. In addition, the Company is working with Matrix Biotechnologies, Inc., in which the Company has a minority interest, to research and develop cartilage repair products, including materials, procedures and related instrumentation, without the need for prosthetics. One focus of this collaboration is the development of technology for the repair and/or regeneration of focal articular cartilage defects using a bioresorbable device which can be placed at the defect site to promote the body's own ability to repair cartilage damage.

Biomaterials. In July 1987, DePuy signed an exclusive research agreement with E.I. DuPont DeNemours and Company to investigate the use of advanced biomaterials (polymers, composites and resorbables) in orthopaedic applications and formed a partnership, DePuy DuPont Orthopaedics, in 1989 to distribute new products developed by the joint venture. This venture has already introduced a number of new products, including the Hylamer family of orthopaedic bearing polymers consisting of UHMWPE bearing surfaces. The polymers, available for use exclusively in the Company's hip, knee and shoulder implants, are designed to resist wear, deformation and material degradation, providing greater strength than traditional polymers. Recently, the venture gained FDA 510(k) approval to market and sell


an improved cross-linked UHMWPE named Marathon. This new polymer bearing has demonstrated considerable improvements in functional wear studies. The newly- designed metacarpal phalangeal finger spacer/implant, NeuFlex, was released late in 1997. Further improvements to UHMWPE, composite implant designs, resorbable materials for screws, anchors and other fixation devices, as well as continued research in the area of fibers, elastomers and other polymers are at various stages in the research and product development cycle.


The Company markets and distributes its products through a global distribution network. Distribution within the U.S. is through a combination of Company-owned sales offices that supervise independent commissioned sales associates and a number of independent commissioned sales agents. Outside the U.S., the majority of the Company's sales are conducted through Company-owned distribution outlets, although the Company still distributes some products through independent distributors in certain international markets. To promote its key products, the Company collaborates with surgeons with national and, in many cases, international reputations in the relevant area of orthopaedic surgery and neurosurgery. These "surgeon champions" use and study the product and participate in learning centers and other educational or professional activities to educate other doctors on the use of the product.

The Company's business is generally not seasonal in nature. However, the number of elective orthopaedic surgeries performed tends to decline during the summer months.

United States

The Company markets its orthopaedic products in the United States through a network of approximately 500 independent, commissioned sales associates managed by 19 Company-employed territory general managers and five independent sales agents as of December 31, 1997. This structure has been evolving since 1994. The salesforce was reorganized as described below to create a structure where requisite investments in personnel, training and instruments would be made in the Company's new product areas such as spinal implants and trauma products. The reorganization also allowed the Company to ensure that sales associates were receiving appropriate incentives and compensation and to eliminate the involvement of those sales agents who were unproductive.

For many decades, as was typical in the industry, the Company distributed its products in the U.S. exclusively through a network of independent commissioned sales agents, each assigned a geographic territory in which the agent had the exclusive right to solicit orders for the Company's products. Sales agents established and maintained personal contact with customers and provided services related to the products sold, such as attending surgeries to ensure that the surgeon had the correct size of implant and the necessary instrumentation. In exchange for soliciting orders, the sales agents were paid a commission on the invoice price of all orders shipped to their respective territory.

As the Company's business expanded, in both product offering and share of market, in the 1980s and 1990s the sales agents were no longer able to maintain personal customer contact with all of the customers in their respective territories. As a result they began hiring independent sales associates who they assigned to segments of their territories and who in time took over customer and surgeon contact. The sales associates were compensated by the sales agent in accordance with separate arrangements between the sales agent and sales associates.


In mid-1994, sales agents who were not managing their areas and sales associates to the Company's satisfaction began to be replaced with territory sales managers, who were charged with managing the territory and the sales associates who work there. Sales associates continue to function as before but are now compensated directly by the Company through commissions. The Company provides the investment in training, support and general administrative services.

Trauma and sports medicine products are both marketed through a combination of dedicated sales representatives and the Company's reconstructive implant marketing system of sales associates, sales agents and territory sales managers. In some areas, the Company has dedicated sales representatives for each product line, while in others the sales agents and sales associates sell all of the Company's product lines. In addition to the Company's sales agents, sales associates and territory sales managers, DePuy ACE uses two independent sales agents who do not carry any other DePuy products. DePuy OrthoTech's dedicated salesforce consists of its own 79-person employee sales organization and one regional distributor. Spinal implant products are marketed through a specialized sales force.

To address the changing customer base in the U.S. orthopaedic market resulting from healthcare reform and the emergence of managed care, the Company has strengthened its national contracts department and added a managed care area to its sales department. See "Business--Industry Overview".


The Company distributes its products outside the United States and Canada, for the most part, through a number of distribution subsidiaries. Establishing a separate distribution channel in each country has been a critical part of the Company's strategy for marketing abroad. Knowledge of, and on site compliance with, each country's regulatory scheme requires the presence and unique knowledge of a local distributor. The ability to communicate with physicians, nurses and other operating room personnel in their own language, is also important. In addition, successful marketing requires an understanding of each country's healthcare system and its purchasing and reimbursement practices. Until 1988, all of the Company's sales outside the United States and Canada were to distributors who purchased the products, sold on their own account and established prices to their customers. Beginning in 1988 with the acquisition of the former Chevalier A.G. (now DePuy A.G.) in Switzerland, and continuing through the present time, the Company has followed a strategy of establishing a separate Company-owned subsidiary with DePuy employed salesmen in each major market or potential major market. These subsidiaries establish the prices for the products sold in their respective countries, first purchasing them from the Company and then reselling them at retail. In major markets, this process has sometimes involved the acquisition of the Company's previous distributor or entering into a joint venture with such distributor. In other markets, new companies have been created or are being formed at the present time. The Company now has distribution subsidiaries in the United Kingdom, Canada, Germany, France, Italy, Switzerland, Austria, Belgium, Portugal, Spain, Sweden, Japan, Korea, Singapore, Mexico, Taiwan, Hungary, the Czech Republic, Australia, New Zealand, Argentina, India and Hong Kong.

Japan represents a significant market for the Company's trauma products. DePuy ACE has a longstanding exclusive arrangement with Japan Medical Dynamic Marketing, an independent distributor, to sell DePuy ACE's products.

In the sports medicine market, DePuy OrthoTech has an exclusive distribution arrangement with Beiersdorf AG covering Germany, Austria, Belgium, Spain and The Netherlands.


For a breakdown of the Company's sales by geographic region and product, see "Business--Products." Additional information regarding sales, operating income and identifiable assets are disclosed in Note 16 to the Consolidated Financial Statements contained herein.


The Company holds domestic and foreign patents covering certain of its systems, components and instrumentation, has patent applications pending with respect to certain implant components and certain surgical instrumentation and anticipates that it will apply for additional patents it deems appropriate. In addition, the Company holds licenses from third parties to utilize certain patents, patent applications and technology utilized in the design of some of its devices. See "Item 3. Legal Proceedings" for information concerning patent infringement suits involving the Company.

In addition, the Company relies on non-patented proprietary know-how, trade secrets, processes and other proprietary information, which the Company protects through a variety of methods, including confidentiality agreements and proprietary information agreements.

The Company markets its LCS Knee through an exclusive, worldwide license to manufacture and sell the LCS Knee under patents owned by Biomedical Engineering Trust ("BET").

The Company and its subsidiaries market their products under a number of trademarks.


The Company's manufacturing operations are carried out at a number of facilities owned or leased by the Company or its subsidiaries. In 1995 and 1996, the Company obtained ISO 9001 series registration for its manufacturing facilities in Warsaw, Indiana; Leeds, England; Blackpool, England; and Los Angeles, California and ISO 9002 for its Albuquerque, New Mexico facilities. The Company is in the process of obtaining appropriate ISO registration for its other facilities. ISO 9001 and ISO 9002 are internationally recognized quality standards for manufacturing. ISO certification assists the Company in marketing its products in certain foreign markets. See "Business--Government Regulation."

The Company devotes significant attention to quality control in manufacturing its products. At the main reconstructive products manufacturing facilities, the quality control measures begin with an inspection of all raw materials and castings to be used in implants. Each piece is inspected at each step of the manufacturing process. As a final step, products pass through a "clean room" environment designed and maintained to reduce product exposure to particulate matter. The Company utilizes a new gas plasma sterilization system for its implants which was cleared with the FDA through the 510(k) process. The Company is the first and only company to receive such clearance for the industrial application of gas plasma sterilization. This process reduces the possibility of oxidation of polyethylene and is believed not to pose the environmental threats of other methods of sterilization.

Approximately 75% of the Company's products are manufactured in-house, with the remaining 25% outsourced. Approximately 70% of DePuy ACE's trauma products are presently outsourced. The Company intends to bring all trauma implant manufacturing in-house over time. The primary raw materials used in the manufacture of the Company's reconstructive products are cobalt chromium alloy, stainless steel alloys, titanium alloy and UHMWPE. Certain components used, primarily castings and forgings which are the major material components of most implants, are purchased from a limited number


of suppliers. However, the Company has back-up sources for all of its materials and believes that adequate capacity exists at its suppliers to meet all anticipated needs.

As part of its business strategy, the Company has implemented manufacturing procedures to reduce costs and improve efficiencies as well as inventory management and control systems. The Company is incorporating manufacturing efficiencies into the design of instruments and is redesigning current instruments to reduce manufacturing costs. Due in large measure to these process improvements, manufacturing lead times have been considerably reduced. The Company also uses robotics to increase the manufacturing efficiency of its orthopaedic products. In addition, in 1996, the Company purchased one of its major instrument suppliers to further reduce costs and shorten the time required to get instruments to market.

In its trauma products, the Company uses commercial titanium and titanium alloy in addition to stainless steel alloys. The Company competes with both government and commercial aerospace requirements for titanium, as well as golf equipment manufacturers. The aerospace industry controls both the price and supply of titanium products and can dramatically affect both the cost and availability of such materials. To address this concern, DePuy ACE has entered into a long-term agreement with its primary titanium supplier.

In its sports medicine products, the Company uses rolled cloth goods, metals, plastics and foams, all of which are of standard stock and are readily available from a number of sources.


The orthopaedic device industry is highly competitive and has been characterized by innovation, technological change and advancement. Major companies that compete in the total joint implant market, some of which also market complementary non-implant lines that compete with the Company's other products, include Biomet Inc.; Zimmer, Inc., a subsidiary of the Bristol-Myers Squibb Company; Howmedica Worldwide, a subsidiary of Pfizer, Inc.; Smith & Nephew Orthopaedics, a division of Smith & Nephew Ltd.; Osteonics, Inc., a subsidiary of the Stryker Corporation; Johnson & Johnson Professional, Inc., a subsidiary of Johnson & Johnson; and Protek, Allopro and Sulzer Orthopedics, all divisions of Sulzer Limited. In the spinal instrumentation area, the Company's main competitors are Sofamor Danek Group, Inc.; Synthes; AcroMed Corporation; Cross Medical Products, Inc., Spine-Tech, Inc. and United States Surgical.

Competition within the orthopaedic implant industry is primarily based on customer service, product design and performance, ease of use, peer influence among surgeons and results of the product over time. In recent years, price has become increasingly important as the industry matures and healthcare providers become more concerned with costs. At the present time, price is a factor in the sale of those devices where differentiation of the product cannot be clearly proven and the decision to buy is not significantly influenced by the surgeon. Additionally, as healthcare providers become more cost-conscious, the use of higher-priced devices has become increasingly limited to younger, more active patients, while lesser-priced devices are used in patients with a lower demand (i.e., shorter life expectancy and/or lower activity level). The Company 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 and their already existing long- term successful outcomes and clinical results, pursuing additional strategic agreements with buying groups, offering a wide array of ancillary products used by the orthopaedic community and continuing to pursue, through


research and development efforts, new products and services that can set the Company apart from its competitors.

The Company's trauma product lines compete with products of Biomet, Inc.; Zimmer, Inc.; Smith & Nephew Orthopaedics, a division of Smith & Nephew Ltd; Howmedica, Inc., a subsidiary of Pfizer; Mathys Medical Ltd.; Stratec Medical; Synthes and Orthofix International N.V. Competition in this area is primarily based on service, product design and performance, technological advances, reputation and price.

In the sports medicine product area, the Company competes with numerous other companies, principally Smith & Nephew Donjoy, Innovation Sports, Inc. and Lenox Hill Brace Co., Inc., a division of Hanger Orthopedic Group, Inc. The Company believes that the principal competitive factors affecting the sports medicine product field are customer service, product performance, technology, reputation and price. It believes that its service and technology distinguish it favorably from its competitors in the marketing and sale of its products.

In the cement market, the Company competes with numerous other companies, primarily Howmedica, Inc., Schering-Plough Corp. and Zimmer, Inc.


As of December 31, 1997, the Company had approximately 3,220 employees worldwide, including approximately 1,090 engaged in the Company's U.S. reconstructive device business, approximately 70 employed by DePuy Motech, approximately 210 employed by DePuy ACE, approximately 430 employed by DePuy OrthoTech, and approximately 1,420 engaged in the Company's international businesses.

Approximately 320 employees in the Warsaw, Indiana facility are represented by the United Paperworkers International Union, Local No. 7809, and are subject to a five year collective bargaining agreement expiring in June 2002. Approximately 215 employees in the Leeds, England facility are represented by the Amalgamated Engineering and Electrical Union and are subject to a collective bargaining agreement which expires in April 1999. In addition, approximately 20 employees at the Leeds, England facility are represented by the Manufacturing Scientific and Finance Union.

The Company believes that its employee relations are satisfactory, and that its relationships with all unions representing its workers are non-adversarial and cooperative.


The Company's operations are subject to rigorous governmental agency regulation in the United States and certain other countries.

The FDA regulates the testing, labeling, manufacturing and marketing of medical devices to ensure that medical products distributed in the United States are safe and effective for their intended uses. The FDA also regulates the export of medical devices manufactured in the United States to international markets.


Under the Food, Drug and Cosmetic Act, as amended, medical devices are classified into one of three classes depending on the degree of risk the medical device imparts to patients. Class I devices are those for which safety and effectiveness can be assured by adherence to General Controls, which include compliance with Good Manufacturing Practices ("GMPs") and Quality Systems Regulations, facility and device registrations and listings, reporting of adverse medical events, and appropriate truthful and non-misleading labeling, advertising and promotional materials. Some Class I devices also require premarket review and clearance by the FDA through the 510(k) process described below. Class II devices are those which are subject to General Controls as well as premarket demonstration of adherence to certain Performance Standards or other Special Controls as specified by the FDA. Premarket review and clearance by the FDA for these devices is accomplished through the 510(k) Premarket Notification procedure. In the 510(k) procedure, the manufacturer submits appropriate information to the FDA in a Premarket Notification submission. If the FDA determines that the device is "substantially equivalent" to a device that was legally marketed prior to May 28, 1976, the date upon which the Medical Device Amendments of 1976 were enacted, or to another commercially available similar device subsequently cleared through the 510(k) process, it will grant clearance to commercially market the device. It generally takes from three to 12 months from the date of submission to obtain clearance of a 510(k) submission, but may take longer.

A Class III product is a product which has a wholly new intended use or is based on advances in technology for which the device's safety and effectiveness cannot be assured solely by the General Controls, Performance Standards and Special Controls applied to Class I and II devices. These devices often require formal clinical investigation studies to assess their safety and effectiveness. A PMA from the FDA is required before marketing of a Class III product can proceed. The PMA process is much more extensive than the 510(k) process. In order to obtain a PMA, Class III devices, or a particular intended use of any such devices, usually must undergo clinical trials pursuant to an application submitted by the manufacturer for an IDE. An approved IDE exempts the manufacturer from the otherwise applicable FDA regulations and grants approval for the conduct of the human clinical investigation to generate the clinical data necessary to scientifically evaluate the safety and efficacy of the Class III device or intended use. When a manufacturer believes that sufficient pre- clinical and clinical data has been generated to prove the safety and efficacy of the new device or new intended use, it may submit a PMA application to the FDA. An FDA review of a PMA application generally takes one to two years from the date the PMA application is accepted for filing, but may take significantly longer.

The Company's products include both pre-amendment and post-amendment Class I, II and III medical devices. Most pre-amendment devices (those marketed prior to the enactment of the Medical Device Amendment of 1976) are, in general, Class I and Class II devices and are exempt from such Premarket Approval requirements, as are post-amendment Class I and Class II devices. All currently marketed devices hold the relevant exemptions or premarket clearances or approvals, as applicable, required under federal medical device law.

In addition, the Company's manufacturing processes are required to comply with GMP and Quality Systems Regulations which cover the methods and documentation of the design, testing, production, control, quality assurance, labeling, packaging and shipping of the Company's products. The Company's facilities, records and manufacturing processes are subject to periodic scheduled and unscheduled inspections by the FDA or other agencies.

The Company is also subject to regulations in many of the foreign countries in which it sells its products in the areas of product standards, packaging requirements, labeling requirements, import


restrictions, tariff regulations, duties and tax requirements. Many of the regulations applicable to the Company's devices and products in such countries are similar to those of the FDA. The national health or social security organizations of certain such countries require the Company's products to be qualified before they can be marketed in those countries. To date, the Company has not experienced difficulty in complying with these regulations.

The Company is also implementing policies and procedures intended to allow it to position itself for the changing international regulatory environment. The ISO 9000 series of standards has been developed as an internationally recognized set of guidelines that are aimed at ensuring the design and manufacture of quality products. A company that passes an ISO audit and obtains ISO registration becomes internationally recognized as being well run and functioning under a competent quality system. In certain foreign markets, it may be necessary or advantageous to obtain ISO 9000 series certification, which, in some ways, is analogous to compliance with the FDA's GMP and Quality Systems Requirements. The European Union has promulgated rules which require that medical products receive a CE mark by mid-1998. A CE mark is an international symbol of adherence to certain standards and compliance with applicable European medical device requirements and certification. ISO 9000 series certification is one of the prerequisites for CE marking of most of the Company's products. Certain of the Company's facilities have received ISO certification and ISO certification is being pursued at the others. See "Business--Manufacturing."

In addition, the Company must obtain export certificates from the FDA before it can export some of its products.

Certain provisions of the Social Security Act, commonly known as the "Medicare Fraud and Abuse Statute," prohibit entities, such as the Company, from offering, paying, soliciting or receiving any form of remuneration in return for the referral of Medicare or state health program patients or patient care opportunities, or in return for the recommendation, arrangement, purchase, lease or order of items or services that are covered by Medicare or state health programs. Many states have adopted similar prohibitions against payments intended to induce referrals of Medicaid and other third-party payer patients.

Federal physician self-referral legislation prohibits, subject to certain exemptions, a physician or a member of his immediate family from referring Medicare or Medicaid patients to an entity providing "designated health services" in which the physician has an ownership or investment interest, or with which the physician has entered into a compensation arrangement.



As of December 31, 1997, the Company owned or leased the following facilities:

                                                                             APPROXIMATE      LEASED OR
         LOCATION                             TYPE OF FACILITY             SQUARE FOOTAGE       OWNED
------------------------------------  --------------------------------  -------------------  -----------
Warsaw, Indiana(1)..................  Executive Offices, Research and         260,200            Owned
                                        Development, Manufacturing
                                        and Distribution
El Segundo, California(2)...........  Executive Offices, Research and         114,000           Leased
                                        Development, Manufacturing
                                        and Distribution
St. Louis, Missouri.................  Warehousing and Distribution            100,900           Leased
Tracy, California(3)................  Corporate Offices and                   129,000           Leased
Albuquerque, New Mexico.............  Manufacturing                            20,600           Leased
Los Alamitos, California............  Manufacturing and Repair                  2,919           Leased
Dayton, Ohio........................  Manufacturing                             7,700           Leased
Leeds, England(4)...................  Corporate Offices, Research and         158,000            Owned
                                        Development, Manufacturing
                                        and Warehousing
Leeds, England......................  Manufacturing                            32,400            Owned
Barnet, England.....................  Manufacturing and Research               30,000            Owned
                                        and Development
Blackpool, England..................  Manufacturing                            28,500           Leased
Chaumont, France....................  Administrative Offices                   33,300            Owned
Chaumont, France....................  Administrative Offices and              126,300           Leased
Roanne, France......................  Manufacturing                            33,700           Leased
Toulouse, France....................  Manufacturing                            29,100            Owned
Villeurbanne, France................  Manufacturing                            27,600           Leased
Villeurbanne, France................  Manufacturing                            11,000            Owned

(1) The Company's principal executive offices and primary U.S. manufacturing plant for reconstructive devices. The facility also currently serves as a distribution facility.
(2) Corporate offices of DePuy ACE and main manufacturing plant for trauma products.
(3) Corporate offices of DePuy OrthoTech and main manufacturing plant for sports medicine products.
(4) Corporate offices and primary manufacturing facility for DePuy International.


In 1990, the Company voluntarily recalled certain acetabular cups. Of all such products sold and implemented, less than 2% have resulted in incidents of product failure reported by the Company. Of those reported incidents, as of March 13, 1998, 314 resulted in claims against the Company for product failure, of which all but 39 have been settled. Of those settled incidents, 106 were in litigation. Thirty-


four claims remain in litigation. All such claims and suits have been treated as one occurrence under the applicable insurance policies. Any additional claims will be paid by the Company's insurers.

On April 20, 1994, DePuy Motech was served with a class action complaint, entitled Barbara Brown et al. v. DePuy Motech et al. filed in the U.S. District Court for the Eastern District of Louisiana on behalf of individuals who claim to have been damaged through the use of various types of surgical screws implanted in spinal pedicles. DePuy ACE was subsequently served with this complaint as well. Numerous other manufacturers of spinal products, hospitals, physicians, medical societies and other associations were also sued. The suits allege tortious misconduct against all manufacturers engaged in spinal product manufacture and sale, several surgeons, industry associations and professional medical associations. Specific counts range from product liability and negligence to various conspiracies allegedly involving efforts to mislead the FDA into approving the use of the screws in spinal pedicles. DePuy Motech has been named in approximately 600 lawsuits for damages filed on behalf of individuals who claim to have been damaged through the use of various types of surgical screws in spinal pedicles. On August 4, 1994, the Federal Judicial Panel on multidistrict litigation ordered that all federal court cases be transferred to and consolidated for pretrial proceedings, including the determination of class certification, in the Federal District Court for the Eastern District of Pennsylvania. On February 22, 1995, Chief Judge Emeritus Louis C. Bechtle denied class certification. Individual suits followed that denial. A hearing ordered by the Court to determine if any factual basis exists to support the conspiracy count was held July 23, 1996. On August 22, 1996, Judge Bechtle issued an order dismissing without prejudice claims based on allegations of conspiracy and fraud and requiring that any amended complaint be filed by September 30, 1996, which deadline was subsequently extended to October 30, 1996. Amended or new complaints on behalf of approximately 850 plaintiffs alleging liability of DePuy Motech based solely on a theory of industry-wide conspiracy have been served after the August 22, 1996 dismissal order. Many, but not all, of these conspiracy complaints also name DePuy ACE as a defendant. In April, 1997, Judge Bechtle dismissed claims based on allegations of conspiracy to defraud the FDA but allowed claims based on allegations of conspiracy to defraud doctors at medical meetings to continue. Twenty plaintiffs in the multidistrict litigation allege implantations of products which were sold by DePuy Motech or DePuy ACE. Two product claims and a smaller number of conspiracy claims are pending in state courts. DePuy ACE and DePuy Motech have responded to certain discovery initiated by the Plaintiffs' Legal Committee, including a number of depositions of DePuy ACE and DePuy Motech personnel. Beginning in December, 1997, 325 cases were remanded to their appropriate state or federal courts. Seventy-seven of these cases allege conspiracy by DePuy ACE and/or DePuy Motech. The Company believes that it has substantial defenses to all these claims and will continue to defend them vigorously, although no assurance can be given of the eventual outcome of this litigation.

On February 25, 1995, DePuy filed suit against BET, its licensor for technology used in the LCS Knee in the U.S. District Court for the Northern District of Indiana. The case was transferred to the U.S. District Court for the District of New Jersey on April 25, 1996. DePuy is seeking a declaratory judgment as to the proper construction of contract language relating to the calculation of royalties on sales of various licensed products to purchasers outside the United States. BET has counterclaimed seeking damages and a declaration ordering DePuy to continue to pay royalties after the expiration of the patents to which the royalties relate. DePuy has filed a motion for partial summary judgment which has not been ruled on.

Joint Medical Products Corporation ("Joint Medical") filed a complaint on April 3, 1995 in the U.S. District Court of Connecticut against DePuy Inc. and several other manufacturers of orthopaedic devices. The suit seeks injunctive relief and treble damages for DePuy's alleged infringement of a patent


owned by Joint Medical. DePuy has made a counterclaim seeking to have the patent declared invalid and unenforceable. The Company believes it has substantial defenses and is aggressively defending this action. The same patent was the subject of an interference proceeding in the United States Patent and Trademark Office between Joint Medical and a patentee from whom the Company has a license. On October 3, 1996 Joint Medical, which has been acquired by Johnson & Johnson, announced that, as a result of an agreement to arbitrate between Joint Medical and the patentee from whom the Company has a license, it has prevailed in the interference proceeding, and established its right to ownership of the patent. The resolution of the interference proceeding does not affect the defenses the Company has against the claims of Joint Medical. Additionally, as a result of the purchase of Joint Medical by Johnson & Johnson and the agreement between Joint Medical and the patentee from whom the Company has a license and the terms under which the interference proceedings were submitted to arbitration, the Company has filed suit to add both the patentee from whom the Company has a license and Johnson & Johnson as defendants and to assert additional claims against Joint Medical.

In addition, the Company is party to certain other routine litigation incidental to its business. The Company does not believe that any litigation to which it is a party is likely, individually or in the aggregate, to have a material adverse effect on the Company's business, financial condition or results of operations.


Not Applicable.


Set forth below are the names, ages, positions and a brief description of the Company's executive officers:

          NAME             AGE                     POSITION
------------------------- -----  ------------------------------------------
James A. Lent............   55   Chairman of the Board and Chief Executive
Michael J. Dormer........   46   President and Chief Operating Officer
Robert E. Morel..........   60   President, DePuy ACE
James M. Taylor..........   41   President, DePuy International
William E. Tidmore, Jr...   55   President, DePuy Motech
Steven L. Artusi.........   53   Senior Vice President, General Counsel and
R. Michael McCaffrey.....   55   President, DePuy Development, Inc.
Thomas J. Oberhausen.....   45   Senior Vice President, Chief Financial Officer
                                   and Treasurer
G. Taylor Seward.........   52   Senior Vice President, Personnel

James A. Lent has been Chairman and Chief Executive Officer of DePuy since 1991, having served as President from 1985 to 1991. Prior to joining DePuy, Mr. Lent worked for Johnson & Johnson from 1967 to 1985, serving as President of J&J Orthopaedics from 1982 to 1985. Mr. Lent is also a director of Spectranetics Inc., a cardiovascular device company.


Michael J. Dormer has been President and Chief Operating Officer of DePuy since August 1996. Prior to that, he served as President of DePuy International since 1993 and as Executive Vice President from 1992 until 1993.

Robert E. Morel has served as President and Chief Executive Officer of DePuy ACE since May 1996. From 1993 until 1996, he served as Senior Vice President, Operations for DePuy. From 1985, when he originally joined DePuy, until 1993, he was Vice President, Operations.

James M. Taylor has been President of DePuy International since August 1996. He joined DePuy in July 1994 as Vice President, Operations. From June 1993 until April 1994, Mr. Taylor was the Chief Executive Officer of MSS Group in the U.K. From 1989 to June 1993, Mr. Taylor was employed by Chloride Industrial Batteries Ltd., as Operations Director.

William E. Tidmore, Jr. has served as President of DePuy Motech since August 1996. Prior to that, he served as President of DePuy Orthopaedics, a division of DePuy, from 1994 to 1996, as Executive Vice President of DePuy from 1993 to 1994, as President of DePuy International from 1992 to 1993 and as Vice President, International of DePuy Inc. from 1988 until 1992. Mr. Tidmore joined DePuy in 1986.

Steven L. Artusi has served as the Company's Senior Vice President, General Counsel and Secretary since 1992. Mr. Artusi served as Vice President, Legal and Regulatory Affairs for DePuy, Division of BMC from 1987 to 1992 and as Corporate Counsel of BMC from 1985 to 1987.

R. Michael McCaffrey became President of DePuy Development, Inc., which is engaged in business development for the DePuy worldwide group, in August 1996. Prior to that, from 1994 until 1996, he was President of DePuy Motech, from 1990 until 1994 he was President of DePuy, and from 1985 until 1990 held various positions at DePuy in management, marketing and sales.

Thomas J. Oberhausen has served as Senior Vice President and Chief Financial Officer of DePuy since 1992 and from 1993 to 1995, he also served as the Finance Director for DePuy International. He joined Bio-Dynamics, Inc., a subsidiary of BMC, in 1980.

G. Taylor Seward has served as Senior Vice President, Personnel of DePuy since 1990. Mr. Seward joined DePuy in 1978 and prior to 1990 held various positions in DePuy's human resources department, including Personnel Manager, Director of Personnel and Vice President, Personnel.