Backdated Options Probe Leads to Exit of Biomet Execs

April 1, 2007

4 Min Read
Backdated Options Probe Leads to Exit of Biomet Execs

Following an internal probe that uncovered significant mismanagement of stock options practices at Biomet Inc. (Warsaw, IN), the company announced the resignation of CFO Gregory Hartman and executive vice president of administration Daniel Hann. The company said that a special committee formed to investigate the matter determined that Hartman and Hann "were or should have been aware of certain accounting and legal ramifications, respectively, of issuing an option with an exercise price lower than the fair market value on the date of issuance."

Commenting on the departure of Hartman and Hann, Jeffrey R. Binder, president and CEO of Biomet, said, "The transition of senior officers presents a significant challenge for any organization. However, we have a talented executive team in place, and I am highly confident in our ability to move forward successfully." Binder replaced Hann, who was interim CEO, only weeks before the fallout from the stock options probe.

Despite being shown the door, both executives will continue as consultants "to ensure a smooth transition of business operations," Biomet reports. Hartman will reportedly stay on at $29,166 per month for six months, while Hann will receive $41,666 monthly for a year of consulting work.

Hann: Making the transition.

"I am leaving the company well positioned in the market and in very capable hands," Hann said in an issued statement. "As a consultant to the company, I will ensure a smooth transition for our team members and shareholders. I am proud of the success that Biomet has achieved during my 18-year tenure, establishing itself as a leader in our market."

The special committee that Biomet set up to investigate the stock options matter found that most of the options issued during the 11-year period from 1996 through 2006 were not priced at fair market value. The probe's findings suggested "opportunistic misdating and mispricing" that took advantage of lower exercise prices. The findings also revealed that Biomet did not devote sufficient resources to the administration of its stock options plans, failed to maintain adequate records, lacked sufficient internal controls over the issuance and accounting of options, and did not follow legal rules regarding options plans. As a result of such deficiencies, the committee said Biomet's public filings with respect to stock options were inaccurate.

As a result of the probe, Biomet said it will restate its most recent annual report to reflect the disparity between the recorded expenses for stock options grants and the actual expenses for the grants. Such disparity over the course of the 11 years in question is estimated at about $50 million, according to preliminary findings.

The issue of Biomet's backdated stock options initially came to light last year when two stockholders brought suit against the company. Biomet initially sought to have the suit thrown out, but it later launched its own probe.

Biomet is not alone in its stock options problems. According to an Associated Press report, more than 200 companies have disclosed that they are involved in investigations into their stock options practices with the Securities and Exchange Commission, the Department of Justice, or their own internal audits.

Backdating stock options, although not always illegal, tends to displease shareholders since it can result in lower corporate profits stemming from higher executive compensation than was originally represented. To avoid legal concerns, backdating must be properly accounted for and reported to investors, and must not involve any fraud.

Analyst Denhoy: A minor setback.

Most industry observers don't expect Biomet's stock options problems to have much of a lasting effect on the company. Raj Denhoy, vice president and senior medtech research analyst with Piper Jaffray & Co. (Minneapolis), said the probe is not likely to cause any serious or lasting damage to the company. "When you consider Biomet's $2.1 billion in annual revenues and $10.5 billion market cap, the fact that there is a discrepancy of $50 million over 11 years is a relatively minor issue," he says. Denhoy notes that the investors in the private equity consortium that purchased Biomet for $10.9 billion last December were well aware of the stock options issue when they made their offer. If anything, Denhoy thinks the probe may actually expedite the closing of the deal, which is expected later this year.

Smith & Nephew plc (London) apparently took a different tack on Biomet's stock options problems and backed out of its bid to buy the company. This cleared the way for the bid by the private equity consortium, which includes the Blackstone Group (New York City), Goldman Sachs Capital Partners (New York City), Kohlberg Kravis Roberts & Co. (New York City), and TPG (Fort Worth, TX).

The group, which declined to comment on the stock options probe, is expected to take Biomet private within the next six months. Dane Miller, Biomet's founder and longtime president and chief executive, is part of the private equity consortium.

© 2007 Canon Communications LLC

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