Exhibit 99.4
ORTHOFIX INTERNATIONAL N.V. PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS (UNAUDITED)
On September 22, 2006, the Company purchased 100% of the stock of Blackstone Medical, Inc. (“Blackstone”) for a purchase price of $333.0 million plus acquisition costs and subject to certain closing adjustments. The acquisition and related costs were financed with $330.0 million of senior secured bank debt and cash on hand. Blackstone, a privately held company based in Springfield, Massachusetts, specializes in the design, development and marketing of spinal implant and related biologic products. Blackstone’s product lines include spinal fixating devices including hooks, rods, screws, plates, various spacers and cages and related biologics products. Blackstone generated $62.1 million in net revenues for the period January 1, 2006 to September 22, 2006.
The purchase price was allocated to assets acquired, purchased in-process research and development, and liabilities assumed based on their estimated fair value at the acquisition date. The amount of the purchase price allocated to purchased in-process research and development was written off at the date of acquisition and resulted in a charge of $40.0 million. This charge was recorded as research and development expense in the Company’s Condensed Consolidated Statement of Income (Loss) during the third quarter of 2006 and included the Dynamic Stabilization and Cervical Disk projects, which together accounted for 93% of the fair value. The fair value of the in-process research and development was estimated using the discounted cash flow method. The amount written off as purchased in-process research and development was not deductible for income tax purposes in the United States. The purchase price for the acquisition is subject to potential upward or downward adjustments based on the difference between the estimated and final working capital of Blackstone, as defined in the agreement and plan of merger.
The pro forma adjustments are based on preliminary purchase price allocations for the Blackstone acquisition. Actual allocations will be based on the final appraisals and other analyses of fair values of acquired contracts in process, inventories, identifiable intangible assets, goodwill, property, plant and equipment, deferred income taxes and litigation liabilities. The Company will finalize the allocations after all of the data required to complete the final appraisals and analysis of fair values of the acquired assets and assumed liabilities is compiled and analyzed. Differences between the preliminary and final purchase price allocations are not expected to have a material impact on the Company’s results of operations.
A preliminary allocation of the purchase price reflects the following:
(In thousands) | ||||
| Working capital, other than cash | $ | 25,041 | ||
| Fixed assets acquired | 2,953 | |||
| Identifiable intangible assets (definite lived) | 124,503 | |||
| Identifiable intangible assets (indefinite lived) | 77,000 | |||
| Deferred tax liability | (83,935 | ) | ||
| In-process research and development | 40,000 | |||
| Goodwill | 150,865 | |||
| Preliminary purchase price, including acquisition costs | $ | 336,427 | ||
There are no residual values for any of the intangible assets subject to amortization acquired during the Blackstone acquisition. Definite lived intangible assets acquired in the Blackstone acquisition consist of:
(In thousands) | |||||||
| Fair value at Acquisition | Remaining Useful Life | ||||||
| Top six distributor relationships | $ | 28,000 | 12 Years | ||||
| All other distributor relationships | 25,000 | 16 Years | |||||
| Technology | 71,000 | 13 Years | |||||
| Total definite lived intangible assets | $ | 124,000 | |||||
The Company has determined that trademarks acquired during the Blackstone acquisition, valued at $77.0 million, are indefinite lived intangible assets. The Company considered the criteria prescribed by paragraphs 11 (a), (c), (e) and (f) of SFAS 142 in determining that registered trademarks acquired during the Blackstone acquisition have an indefinite life. The Company is not aware of any legal, regulatory, or contractual provisions that limit the useful lives of these registered trademarks. The Company does not believe the effects of obsolescence, demand, competition, or other economic factors will cause the useful lives of these registered trademarks to be limited. The Company concluded that no legal, regulatory, contractual, competitive, economic, or other factors limit the useful life of the registered trademarks to the Company, and therefore the useful lives of the registered trademarks are considered to be indefinite.
The following unaudited pro forma combined condensed statement of operations, for the year ended December 31, 2005 and the six months ended June 30, 2006 are presented assuming the acquisition of Blackstone had occurred on January 1, 2005. No pro forma balance sheet is presented, as the Blackstone acquisition has been reflected in the Company’s balance sheet as of September 30, 2006, included in the Company’s Form 10-Q for the third quarter of 2006.
The unaudited pro forma combined condensed statement of operations should be read in conjunction with Orthofix’s historical audited consolidated financial statements contained in its 2005 Annual Report on Form 10-K and its quarterly report on Form 10-Q for the second quarter of 2006, and Blackstone’s historical audited consolidated financial statements and its historical unaudited condensed financial statements contained herein as Exhibit 99.2 and 99.3.
The unaudited pro forma information is presented for illustrative purposes only and is not necessarily indicative of the operating results that would have occurred if the acquisition occurred at the beginning of the period presented, nor is it necessarily indicative of future operating results.
ORTHOFIX INTERNATIONAL N.V.
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2006
(UNAUDITED)
Historical Orthofix | Historical Blackstone | Pro Forma Adjustments | Pro Forma Combined | ||||||||||
(In USD, '000's) | |||||||||||||
| Net sales | $ | 165,851 | $ | 40,827 | $ | - | $ | 206,678 | |||||
| Cost of sales | 42,658 | 8,900 | - | 51,558 | |||||||||
| Gross profit | 123,193 | 31,927 | - | 155,120 | |||||||||
| Operating expenses | |||||||||||||
| Sales and marketing | 62,708 | 18,394 | - | 81,102 | |||||||||
| General and administrative | 24,589 | 4,020 | - | 28,609 | |||||||||
| Research and development | 5,685 | 3,747 | - | 9,432 | |||||||||
| Customer service | - | 187 | - | 187 | |||||||||
| International | - | 1,713 | - | 1,713 | |||||||||
| Research and education | - | 476 | - | 476 | |||||||||
| Amortization of intangible assets | 3,479 | - | 4,726 | (a) | 8,205 | ||||||||
| 96,461 | 28,537 | 4,726 | 129,724 | ||||||||||
| Total operating income | 26,732 | 3,390 | (4,726 | ) | 25,396 | ||||||||
| Other income (expense) | |||||||||||||
| Interest income (expense), net | 110 | (363 | ) | (11,840 | ) (b) | (12,093 | ) | ||||||
| KCI settlement, net | 1,093 | - | - | 1,093 | |||||||||
| Other, net | 291 | 2 | - | 293 | |||||||||
| Other income (expense), net | 1,494 | (361 | ) | (11,840 | ) | (10,707 | ) | ||||||
| Income before taxes | 28,226 | 3,029 | (16,566 | ) | 14,689 | ||||||||
| Income tax (expense) benefit | (7,252 | ) | (942 | ) | 5,964 | (c) | (2,230 | ) | |||||
| Net income | $ | 20,974 | $ | 2,087 | $ | (10,602 | ) | $ | 12,459 | ||||
| Net income per common share - basic | $ | 1.31 | $ | 0.78 | |||||||||
| Net income per common share - diluted | $ | 1.30 | $ | 0.77 | |||||||||
| Weighted average number of common shares - basic | 16,029,137 | 16,029,137 | |||||||||||
| Weighted average number of common shares - diluted | 16,173,679 | 16,173,679 | |||||||||||
ORTHOFIX INTERNATIONAL N.V.
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2005
(UNAUDITED)
Historical Orthofix | Historical Blackstone | Pro Forma Adjustments | Pro Forma Combined | ||||||||||
(In USD, '000's) | |||||||||||||
| Net sales | $ | 313,304 | $ | 59,701 | $ | - | $ | 373,005 | |||||
| Cost of sales | 83,788 | 9,717 | - | 93,505 | |||||||||
| Gross profit | 229,516 | 49,984 | - | 279,500 | |||||||||
| Operating expenses | |||||||||||||
| Sales and marketing | 115,744 | 30,229 | - | 145,973 | |||||||||
| General and administrative | 36,177 | 8,554 | - | 44,731 | |||||||||
| Research and development | 11,317 | 6,645 | - | 17,962 | |||||||||
| Amortization of intangible assets | 6,572 | - | 10,253 | (a) | 16,825 | ||||||||
| Quality control | - | 859 | - | 859 | |||||||||
| Customer service | - | 283 | - | 283 | |||||||||
| International | - | 2,236 | - | 2,236 | |||||||||
| 169,810 | 48,806 | 10,253 | 228,869 | ||||||||||
| Total operating income | 59,706 | 1,178 | (10,253 | ) | 50,631 | ||||||||
| Other income (expense) | |||||||||||||
| Interest income (expense), net | (5,468 | ) | (412 | ) | (24,010 | ) (b) | (29,890 | ) | |||||
| KCI settlement, net | 40,089 | - | - | 40,089 | |||||||||
| Other, net | 1,188 | 17 | - | 1,205 | |||||||||
| Other income (expense), net | 35,809 | (395 | ) | (24,010 | ) | 11,404 | |||||||
| Income before taxes | 95,515 | 783 | (34,263 | ) | 62,035 | ||||||||
| Income tax (expense) benefit | (22,113 | ) | (227 | ) | 12,560 | (c) | (9,780 | ) | |||||
| Net income | $ | 73,402 | $ | 556 | $ | (21,703 | ) | $ | 52,255 | ||||
| Net income per common share - basic | $ | 4.61 | $ | 3.28 | |||||||||
| Net income per common share - diluted | $ | 4.51 | $ | 3.21 | |||||||||
| Weighted average number of common shares - basic | 15,913,475 | 15,913,475 | |||||||||||
| Weighted average number of common shares - diluted | 16,288,975 | 16,288,975 | |||||||||||
ORTHOFIX INTERNATIONAL N.V.
NOTES TO PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
(UNAUDITED)
| 1. | Basis of Presentation |
The unaudited pro forma combined condensed statement of operations, for the six months ended June 30, 2006 and for the year ended December 31, 2005, of Orthofix International N.V. (“Orthofix” or the “Company”), illustrates the effect of the acquisition of Blackstone Medical, Inc. (“Blackstone”), and related financing as if it occurred on January 1, 2005.
The unaudited pro forma combined condensed statement of operations, for the six month period ended June 30, 2006 was derived from the historical unaudited condensed statement of income of Blackstone for the six month period ended June 30, 2006, combined with Orthofix’s historical unaudited condensed consolidated statement of income (loss) for the six month period ended June 30, 2006. The unaudited pro forma combined condensed statement of operations, for the year ended December 31, 2005, was derived from the historical audited statements of income of Blackstone, for the year ended December 31, 2005, combined with Orthofix’s historical audited statement of income, for the year ended December 31, 2005.
| 2. | Assumptions for Blackstone Medical and Pro Forma Adjustments |
On September 22, 2006, the Company purchased 100% of the stock of Blackstone Medical, Inc. (“Blackstone”) for a purchase price of $333.0 million plus acquisition costs and subject to certain closing adjustments. The acquisition and related costs were financed with $330.0 million of senior secured bank debt and cash on hand.
The purchase price of the transaction was allocated based on the fair market value of the assets acquired and liabilities assumed as of the date of the acquisition, September 22, 2006. The pro forma adjustments are based on management’s estimates of the fair value and useful lives of the assets acquired and the liabilities assumed and have been prepared to illustrate the estimated effect of the acquisition and certain other adjustments. A final valuation of acquired intangibles and assessment of useful lives has not yet been completed, which may affect the final allocation of the purchase price to these assets and the related amortization expense. Consequently, the amounts reflected in the unaudited pro forma combined statements of operations are subject to change based on final purchase accounting adjustments.
Pro forma adjustments made by Orthofix in connection with the preparation of the unaudited pro forma combined statement of operations for the six months ended June 30, 2006 and for the year ended December 31, 2005 are as follows:
Assumptions for Blackstone and Pro Forma Adjustments (Continued)
(a) Adjustment to add amortization expense, based on the pattern of economic benefit of the intangible asset calculated over the remaining useful lives ranging from 12 to 16 years. The effect of amortization expense on operating results for the five years following the acquisition is reflected in the table below.
(In thousands) | ||||
| Year ended December 31, | ||||
| 2006 (September 23, 2006 to December 31, 2006) | $ | 1,963 | ||
| 2007 | 11,053 | |||
| 2008 | 12,581 | |||
| 2009 | 14,106 | |||
| 2010 | 14,431 | |||
| 2011 | 13,449 | |||
(b) Adjustments to interest expense, net of interest income are as follows:
(In thousands) | |||||||
Six months ended June 30, 2006 | Year ended December 31, 2005 | ||||||
| Increase of interest expense related to new Term loan (assumed rate of 7.12%) | $ | (11,748 | ) | $ | (23,496 | ) | |
| Amortization expense of related debt issuance costs of new credit agreement | (467 | ) | (932 | ) | |||
| Decrease of interest expense for historical debt | 375 | 418 | |||||
| Net adjustment to interest expense | $ | (11,840 | ) | $ | (24,010 | ) | |
As of September 30, 2006, the Company had $330.0 million of variable rate term debt represented by borrowings under its senior secured term loan at a floating interest rate of LIBOR or prime rate plus a margin, currently LIBOR plus 1.75%, which is adjusted quarterly based upon the leverage ratio of the Company and its subsidiaries. The effective interest rate as of September 30, 2006 on the senior secured debt is 7.12%. Based on the balance outstanding under the credit facility as of December 31, 2006 an immediate change of 1/8th percentage point in the applicable interest rate on the variable rate debt would cause an increase or decrease in interest expense of approximately $412,500 on an annual basis.
(c) Income tax expense has been adjusted to reflect the effective rate in effect during the periods.
The pro forma combined condensed statements of operations do not reflect a non-recurring adjustment to cost of sales of $3.7 million for an adjustment to the fair value of inventory recorded as part of the purchase price allocation. An in-process research and development charge of $40.0 million has been excluded from the pro form financial information.