UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from____________ to ____________.
Commission File Number: 0-19961
ORTHOFIX INTERNATIONAL N.V.
(Exact name of registrant as specified in its charter)
Netherlands Antilles N/A
- ------------------------------------------------------- --------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
7 Abraham de Veerstraat
Curacao
Netherlands Antilles N/A
- ------------------------------------------------------- --------------------------------------------------
(Address of principal executive offices) (Zip Code)
599-9-4658525
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.10 par value
(Title of Class)
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 at least the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [X] No [ ]
As of November 2, 2004, 15,664,903 shares of common stock were issued and
outstanding.
Table of Contents
Page
PART I FINANCIAL INFORMATION 3
Item 1. Condensed Financial Statements...................................3
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................15
Item 3. Quantitative and Qualitative Disclosure About Market Risk.......25
Item 4. Controls and Procedures.........................................26
PART II OTHER INFORMATION 27
Item 1. Legal Proceedings...............................................27
Item 5. Other Information...............................................27
Item 6. Exhibits........................................................28
SIGNATURES 30
Forward-Looking Statements
This Form 10-Q contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, which relate to our business
and financial outlook and which are based on our current expectations,
estimates, forecasts and projections. In some cases, you can identify
forward-looking statements by terminology such as "may," "will," "should,"
"expects," "plans," "anticipates," "believes," "estimates," "predicts,"
"potential" or "continue" or other comparable terminology. These forward-looking
statements are not guarantees of future performance and involve risks,
uncertainties, estimates and assumptions that are difficult to predict.
Therefore, actual outcomes and results may differ materially from those
expressed in these forward-looking statements. You should not place undue
reliance on any of these forward-looking statements. Further, any
forward-looking statement speaks only as of the date on which it is made. The
Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for
forward-looking statements to encourage companies to provide prospective
information about their companies without fear of litigation. We hereby take
advantage of the "safe harbor" provisions of the Private Securities Litigation
Reform Act in connection with the forward-looking statements included in this
document.
A number of important factors could cause actual results to differ
materially from those indicated by the forward-looking statements, including,
but not limited to, the risks described under Item 1 - "Business - Risk Factors"
in our Annual Report on Form 10-K for the fiscal year ended December 31, 2003.
2
PART I FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
(U.S. Dollars, in thousands except share data) September 30, December 31,
2004 2003
----------------- ----------------
Assets (Unaudited) (Note 2)
Current assets:
Cash and cash equivalents ................................... $38,532 $33,559
Trade accounts receivable, net .............................. 80,801 70,690
Inventories ................................................. 31,912 30,713
Deferred income taxes ....................................... 3,978 3,978
Prepaid expenses and other .................................. 8,477 8,928
----------------- ----------------
Total current assets .......................................... 163,700 147,868
Securities and other investments .............................. 4,366 5,775
Property, plant and equipment, net ............................ 17,623 19,169
Patents and other intangible assets, net ...................... 71,791 65,726
Goodwill, net ................................................. 166,425 168,397
Other long-term assets ........................................ 5,656 6,244
----------------- ----------------
Total assets ................................................ $429,561 $413,179
================ ===============
Liabilities and shareholders' equity
Current liabilities:
Bank borrowings ............................................. $1,434 $72
Current portion of long-term debt ........................... 9,852 11,063
Trade accounts payable ...................................... 8,407 11,569
Other current liabilities ................................... 25,532 30,236
----------------- ----------------
Total current liabilities ................................... 45,225 52,940
Long-term debt ................................................ 82,524 99,072
Deferred income taxes ......................................... 17,402 16,642
Other long-term liabilities ................................... 3,762 3,749
----------------- ----------------
Total liabilities ........................................... 148,913 172,403
----------------- ----------------
Contingencies (Note 16)
Shareholders' equity:
Common shares (15,641,609 and 14,980,010 shares issued
at September 30, 2004 and December 31, 2003, respectively) . 1,564 1,498
Additional paid-in capital .................................. 97,034 81,960
Retained earnings ........................................... 172,560 147,924
Accumulated other comprehensive income ...................... 9,490 9,394
----------------- ----------------
Total shareholders' equity .................................. 280,648 240,776
----------------- ----------------
Total liabilities and shareholders' equity .................. $429,561 $413,179
================= ================
The accompanying notes form an integral part of these condensed consolidated
financial statements.
3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND NINE MONTHS
ENDED SEPTEMBER 30, 2004 AND 2003
Three Months Ended Nine Months Ended
------------------------------- -------------------------------
(Unaudited, U.S. Dollars, in thousands except share
and per share data) 2004 2003 2004 2003
-------------- ------------- -------------- -------------
Net sales.............................................. $71,488 $51,253 $213,019 $150,999
Cost of sales.......................................... 19,582 12,482 58,825 38,077
-------------- ------------- -------------- -------------
Gross profit....................................... 51,906 38,771 154,194 112,922
Operating expenses
Sales and marketing................................ 24,678 20,321 76,452 57,428
General and administrative......................... 7,737 5,039 22,402 15,139
Research and development........................... 2,722 1,721 8,732 5,979
Amortization of intangible assets.................. 1,609 259 4,754 656
Litigation and settlement costs.................... 562 2,605 1,266 4,731
-------------- ------------- -------------- -------------
37,308 29,945 113,606 83,933
-------------- ------------- -------------- -------------
Total operating income ............................ 14,598 8,826 40,588 28,989
Interest income (expense), net........................ (1,697) (24) (4,596) 54
Other income, net..................................... 324 126 341 349
Loss in joint venture, net............................ (334) (572) (109) (1,175)
-------------- ------------- -------------- -------------
Income before income tax.......................... 12,891 8,356 36,224 28,217
Income tax expense..................................... (4,474) (2,914) (11,588) (10,328)
-------------- ------------- -------------- -------------
Net income ..................................... $8,417 $5,442 $24,636 $17,889
-------------- ------------- -------------- -------------
Net income per common share - basic.................... $0.54 $0.38 $1.61 $1.28
-------------- ------------- -------------- -------------
Net income per common share - diluted.................. $0.53 $0.37 $1.55 $1.22
-------------- ------------- -------------- -------------
Weighted average number of common shares - basic....... 15,570,313 14,181,847 15,296,717 14,001,981
-------------- ------------- -------------- -------------
Weighted average number of common shares - diluted..... 15,953,268 14,882,747 15,939,801 14,720,139
-------------- ------------- -------------- -------------
The accompanying notes form an integral part of these condensed consolidated
financial statements.
4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2004 AND 2003
(Unaudited, U.S. Dollars, in thousands) 2004 2003
---------------- -----------------
Cash flows from operating activities:
Net income................................................ $24,636 $17,889
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization.............................. 10,789 4,776
Provision for doubtful accounts............................ 2,972 3,858
Loss on equity investments................................. 943 1,175
Tax benefit on non-qualified stock options................. 3,548 412
Deferred taxes............................................. (2,322) (173)
Gain on sale of assets and investments..................... (1,566) (354)
Other ..................................................... 769 1,610
Change in operating assets and liabilities:
Accounts receivable..................................... (12,456) (6,368)
Inventories............................................. (1,169) 346
Prepaid expenses and other.............................. 487 1,450
Accounts payable........................................ (3,517) (1,717)
Current liabilities..................................... (3,065) (2,007)
---------------- -----------------
Net cash provided by operating activities...................... 20,049 20,897
---------------- -----------------
Cash flows from investing activities:
Investments in affiliates and subsidiaries................ (2,081) (23,678)
Capital expenditures...................................... (5,199) (3,275)
Additions to intangible assets............................ (4,626) (333)
Proceeds from sale of joint venture....................... 1,300 --
Proceeds from sale of assets and marketable securities.... 1,578 354
Proceeds from settlement of distributor agreement......... 440 --
---------------- -----------------
Net cash used in investing activities.......................... (8,588) (26,932)
---------------- -----------------
Cash flows from financing activities:
Net proceeds from issuance of common stock................ 11,151 10,863
Repurchase of treasury shares............................. -- (4,395)
Payment of debt issuance costs............................ (532) --
Net repayment of loans and borrowings..................... (17,100) (4,280)
---------------- -----------------
Net cash (used in) provided by financing activities............ (6,481) 2,188
---------------- -----------------
Effect of exchange rate changes on cash........................ (7) 763
---------------- -----------------
Increase (decrease) in cash and cash equivalents............... 4,973 (3,084)
Cash and cash equivalents at the beginning of the year......... 33,559 48,813
---------------- -----------------
Cash and cash equivalents at the end of the period............. $38,532 $45,729
---------------- -----------------
The accompanying notes form an integral part of these condensed consolidated
financial statements.
5
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: BUSINESS
Orthofix International N.V. and its subsidiaries (the "Company") is a
multinational corporation principally involved in the design, development,
manufacture, marketing and distribution of medical equipment, principally for
the orthopedic product market.
NOTE 2: BASIS OF PRESENTATION
The accompanying unaudited Condensed Consolidated Financial Statements have
been prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and with the instructions to
Form 10-Q and Rule 10-01 of Regulation S-X. Pursuant to these rules and
regulations, certain information and note disclosures, normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States, have been condensed or omitted. In the opinion of
management, all adjustments (consisting of normal recurring items) considered
necessary for a fair presentation have been included. Operating results for the
nine months ended September 30, 2004 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2004. The balance
sheet at December 31, 2003 has been derived from the audited financial
statements at that date but does not include all of the information and
footnotes required by accounting principles generally accepted in the United
States for complete financial statements. For further information, refer to the
Consolidated Financial Statements and Notes thereto of our Annual Report on Form
10-K for the year ended December 31, 2003 and our Quarterly Reports on Form 10-Q
for the quarters ended March 31, 2004 and June 30, 2004.
NOTE 3: INVENTORY
Inventories were as follows:
September 30, December 31,
(In thousands) 2004 2003
------------------- -------------------
Raw materials $6,175 $6,153
Work-in-process 2,658 2,453
Finished goods 13,357 13,437
Field inventory 5,292 5,202
Consignment inventory 8,516 7,124
Less reserve for obsolescence (4,086) (3,656)
------------------- -------------------
$31,912 $30,713
=================== ===================
6
NOTE 4: ACQUISITIONS
On December 30, 2003, the Company purchased 100% of the stock of Breg, Inc.
("Breg") for a purchase price of $150 million plus closing adjustments and
acquisition costs. The acquisition and related costs were financed with $110
million of senior secured bank debt, cash on hand and the issuance of 731,715
shares of Orthofix common stock.
The acquisition was accounted for using the purchase method in accordance
with Statement of Financial Accounting Standards No. 141 "Business
Combinations". The allocation of the purchase price has been performed based on
assignment of fair values to assets acquired and liabilities assumed. Fair
values are based, in part, on appraisals performed by an independent appraisal
firm.
The purchase price for the acquisition is preliminary and is subject to
potential upward or downward adjustments based on the final working capital
adjustment and transaction costs. Based on information obtained during 2004, the
preliminary purchase price allocation of Breg was adjusted, resulting in a
reduction in the carrying amount of goodwill.
A preliminary allocation of the purchase price as of September 30, 2004
reflects the following:
(In thousands)
Working capital, other than cash $10,135
Fixed assets acquired 5,570
Identifiable intangible assets (definite lived) 41,501
Identifiable intangible assets (indefinite lived) 23,900
Deferred tax liability (17,451)
Deferred tax assets 1,231
Other long term assets (liabilities), net 516
Goodwill 91,839
----------------
Total purchase price $157,241
===============
In the first quarter of 2004, the Company purchased a distributor in Puerto
Rico for $1.4 million, which consisted of $1.1 million in cash and $0.3 million
of assumed liabilities. The preliminary purchase price included approximately
$0.9 million of working capital and $0.5 million of goodwill. The operations of
the acquired distributor are included in the accompanying consolidated statement
of operations from the date of acquisition.
NOTE 5: GOODWILL
The change in the net carrying value of goodwill for the period ended
September 30, 2004 is as follows:
(In thousands)
Balance at December 31, 2003 $168,397
Acquisitions 532
Adjustments to Breg goodwill (See Note 4) (2,674)
Foreign currency effects 170
----------------
Balance at September 30, 2004 $166,425
================
7
NOTE 6: INTANGIBLES
During the nine month period ended September 30, 2004, the Company
purchased the intellectual property of the Gotfried Percutaneous Compression
Plating (PC.C.P) System for approximately $4.0 million. Additions to intangibles
also included $6.1 million which was a reallocation of the purchase price from
goodwill to definite lived intangible assets related to the distribution network
acquired as a part of the Breg acquisition (See Note 4).
NOTE 7: LONG TERM DEBT
(In thousands) September 30, December 31, 2003
2004
----------------- -------------------
Long-term obligations $91,750 $110,000
Other loans 626 135
---------------- ------------------
92,376 110,135
Less current portion (9,852) (11,063)
----------------- -------------------
$82,524 $99,072
================= ===================
Concurrently with the closing of the Breg acquisition, Colgate Medical
Limited ("Colgate", or the "Borrower"), a wholly owned subsidiary of the
Company, entered into the senior secured bank facility. The original credit
agreement stated that this obligation had a floating interest rate of LIBOR or
prime rate plus a margin that is adjusted quarterly based on the Borrower's
leverage ratio. During the third quarter of 2004, Colgate entered into an
amendment of its senior secured term loan facility. The amendment reduces the
interest rate applicable to borrowings under the term loan facility by reducing
the previous interest rate of LIBOR plus 2.75% to LIBOR plus 2.25%. At the same
time as entering into the amendment, the Company made a voluntary prepayment of
$10.4 million on the borrowings under the term loan facility. At
September 30, 2004, long-term obligations include a senior secured term note for
$91.8 million.
NOTE 8: COMMON SHARES
For the nine months ended September 30, 2004, the Company issued 661,599
shares of common stock upon the exercise of outstanding stock options, warrants
and shares purchased pursuant to the Company's employee stock purchase plan for
proceeds of $11.2 million.
8
NOTE 9: COMPREHENSIVE INCOME
During the three and nine month periods ended September 30, 2003, the
Company reclassified $0.2 million and $3.0 million, respectively, of foreign
currency translation impact on goodwill that is denominated in a non-U.S. dollar
currency, from comprehensive income to goodwill. These reclassifications had no
impact on the results of operations or cash flows of the Company. Total
comprehensive income combines reported net income and other comprehensive
income.
(In thousands) Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------- -------------------------------
2004 2003 2004 2003
-------------- --------------- ------------ --------------
Net income $8,417 $5,442 $24,636 $17,889
Other comprehensive income:
Unrealized gain on
marketable
Securities, net of taxes -- 190 -- 186
Unrealized loss on derivative
instrument (See Note 15) (110) -- (40) --
Reclassification adjustment for
gains on the sale of
marketable securities included
in net income -- (341) (341)
Foreign currency translation
adjustment 944 429 136 6,416
-------------- --------------- ------------ --------------
Total comprehensive income $9,251 $5,720 $24,732 $24,150
============== =============== ============ ==============
NOTE 10: BUSINESS SEGMENT INFORMATION
Prior to the acquisition of Breg, the Company managed its operations as two
geographic business units: the Americas and International plus Group Activities.
Presently, the Company's operations are managed as three business segments
(Americas Orthofix, Americas Breg, and International Orthofix) plus Group
Activities. Americas Orthofix consists of the operations, existing prior to the
acquisition of Breg, which are in the United States, Mexico, Brazil, and Puerto
Rico. Americas Breg consists of Breg, Inc., which was acquired December 30,
2003. Breg, based in Vista, California, designs, manufactures and distributes
orthopedic products for post-operative reconstruction and rehabilitative patient
use and sells its products through a network of domestic and international
independent distributors. International Orthofix consists of operations,
existing prior to the acquisition of Breg, which are located in the rest of the
world as well as independent distribution operations. Group Activities are
comprised of the Parent's operating expenses and identifiable assets.
For the three month period ended September 30:
External Sales Intersegment Sales
-------------- ------------------
(In thousands) 2004 2003 2004 2003
---- ---- ---- ----
Americas Orthofix $32,075 $29,765 $210 $251
Americas Breg 17,383 -- 131 --
International Orthofix 22,030 21,488 11,855 11,945
------ ------ ------ ------
Total $71,488 $51,253 $12,196 $12,196
======= ======= ======= =======
9
For the nine month period ended September 30:
External Sales Intersegment Sales
-------------- ------------------
(In thousands) 2004 2003 2004 2003
---- ---- ---- ----
Americas Orthofix $93,002 $86,127 $1,053 $600
Americas Breg 50,654 -- 224 --
International Orthofix 69,363 64,872 42,401 37,009
Total $213,019 $150,999 $43,678 $37,609
======== ======== ======= =======
For the three and nine month periods ended September 30:
Three Months Ended Nine Months Ended
Operating Income (Expense) September 30, September 30,
------------------------------- -------------------------------
(In thousands) 2004 2003 2004 2003
------------- -------------- ------------ ---------------
Americas Orthofix $7,803 $4,753 $21,310 $18,111
Americas Breg 3,084 -- 7,612 --
International Orthofix 4,197 5,053 14,747 12,970
Group Activities (1,150) (1,086) (3,233) (3,157)
Eliminations 664 106 152 1,065
------------- -------------- ------------ ---------------
Total $14,598 $8,826 $40,588 $28,989
============= ============== ============ ===============
The following table presents identifiable assets by segment, excluding
intercompany balances and investments in consolidated subsidiaries. The December
31, 2003 balances have been reclassified to conform to the current period
presentation.
Identifiable Assets
September 30, December 31,
(In thousands) 2004 2003
------------------- -----------------
Americas Orthofix $106,641 $103,493
Americas Breg 178,218 181,298
International Orthofix 151,044 137,011
Group activities 6,549 5,036
Eliminations (12,891) (13,659)
------------------- -----------------
Total $429,561 $413,179
=================== =================
10
NOTE 11: INCOME TAXES
The difference between the reported provision for income taxes and a
provision computed by applying the statutory rates applicable to each subsidiary
of the Company is primarily attributable to the Company's tax holiday benefit in
the Seychelles. The Company's effective tax rate benefited from the tax planning
associated with the acquisition of Breg and an increase in earnings in
jurisdictions with lower tax rates.
NOTE 12: DISPOSITION OF ASSETS
In March 2004, the Company sold a portion of its investment in OrthoRx to
its partner in the joint venture, Ferrer Freeman & Co. The sale, combined with
not electing to participate in the next round of financing, reduced the
Company's ownership in OrthoRx to approximately 21%. The Company recorded a gain
on the sale of the investment of approximately $0.8 million, which is reported
as other income.
During the same period, the Company also sold its one-half interest in a
property as part of its plan to consolidate its United Kingdom facilities. The
sale resulted in a gain of approximately $0.6 million, which is reported as
other income. This facility was purchased by a company owned by Mr. Robert
Gaines-Cooper, Chairman of the Company's Board of Directors. The fair value of
this facility was determined by two independent appraisal firms and the amount
paid approximates fair value.
NOTE 13: EARNINGS PER SHARE
For the three and nine month periods ended September 30, 2004 and 2003,
there were no adjustments to net income (the numerators) for purposes of
calculating basic and diluted net income per common share. The following table
sets forth a reconciliation of the share numbers (the denominators) in computing
earnings per share in accordance with Statement of Financial Accounting
Standards No. 128, `Earnings Per Share':
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ --------------------------------
2004 2003 2004 2003
------------- ------------- ------------- ---------------
Weighted average common shares - basic 15,570,313 14,181,847 15,296,717 14,001,981
Effect of diluted securities:
Stock options 382,955 700,900 643,084 718,158
------------- ------------- ------------- ---------------
Weighted average common shares - diluted 15,953,268 14,882,747 15,939,801 14,720,139
------------- ------------- ------------- ---------------
The Company did not include 221,000 and 200,000 options in the diluted
shares outstanding calculation for the three and nine month periods ended
September 30, 2004, respectively, because their inclusion would have been
antidilutive or because their exercise price exceeded the average market price
of our common stock during the period. For the nine month period ended September
30, 2003, the Company did not include in the diluted shares outstanding
calculation 97,736 options because their inclusion would have been antidilutive.
All options were included in the diluted shares outstanding calculation for the
three month period ended September 30, 2003.
11
NOTE 14:.STOCK BASED COMPENSATION
The Company accounts for stock based awards to employees under the
intrinsic value method in accordance with APB 25 "Accounting for Stock Issued to
Employees." For the three and nine month periods ended September 30, 2004,
$146,750 and $440,250, respectively, of compensation expense was recognized
relating to options granted at exercise prices lower than the fair market value
of the underlying stock on the date of grant. No compensation expense was
recorded for the three and nine month periods ended September 30, 2003. In
accordance with Statement of Financial Accounting Standards (SFAS) No. 148,
"Accounting for Stock Based Compensation Transition and Disclosure and Amendment
of FASB Statement No. 123", the Company has provided the Company's pro forma net
income and net income per common share for the three and nine month periods
ended September 30, 2004 and 2003 as if the Company had accounted for its
employee stock option plans under the fair value method. The Company used the
same pricing model and assumptions that were used in the Annual Report on Form
10-K for the year ended December 31, 2003. For purposes of pro forma
disclosures, the estimated fair value of the options is amortized to expense
over the options' vesting period.
Three Months Ended Nine Months Ended
September 30, September 30,
(In thousands, except per share data) 2004 2003 2004 2003
------------- ------------- ----------- ---------------
Net income
As reported $8,417 $5,442 $24,636 $17,889
Add: Stock-based employee compensation
expense included in reported net
income, net of related tax effects 90 -- 267 --
Less: Total stock-based employee
compensation expense determined
under fair value method for all
awards net of tax (592) (566) (1,880) (1,736)
------------- ------------- ----------- ---------------
Pro forma $7,915 $4,876 $23,025 $16,153
Net income per common share - basic
As reported $0.54 $0.38 $1.61 $1.28
Pro forma $0.51 $0.34 $1.51 $1.15
Net income per common share - diluted
As reported $0.53 $0.37 $1.55 $1.22
Pro forma $0.50 $0.33 $1.44 $1.10
12
NOTE 15: DERIVATIVE INSTRUMENT
The Company makes use of interest rate swap agreements to manage its
exposure to fluctuations in interest rates. SFAS No. 133 "Accounting for
Derivative Instruments and Hedging Activities" requires the recognition of all
derivatives in the balance sheet as either assets or liabilities measured at
fair value. The statement also requires a company to recognize changes in the
derivative's fair value currently in earnings unless it meets specific hedge
accounting criteria. If the derivative is designated as a cash flow hedge, the
effective portions of changes in fair value of the derivative are recorded in
other comprehensive earnings and are recognized in the income statement when the
hedged item affects earnings.
The Company has formally documented the relationship between the
hedging instrument and hedged item, as well as its risk-management objective and
strategy for undertaking the hedge transaction. In addition, the Company
formally assesses (both at the hedge's inception and on an ongoing basis)
whether the derivative that is used in the hedging transaction has been
effective in offsetting changes in the cash flows of the hedged item and whether
such derivative may be expected to remain effective in future periods. If it is
determined that a derivative is not (or has ceased to be) effective as a hedge
the Company will discontinue the related hedge accounting prospectively. Such a
determination would be made (1) when the derivative is no longer effective in
offsetting changes in the cash flows of the hedged item; (2) the derivative
expires or is sold, terminated, or exercised; or (3) management determines that
designating the derivative as a hedging instrument is no longer appropriate.
Ineffective portions of changes in the fair value of cash flow hedges are
recognized in earnings.
During the second quarter of 2004, the Company entered into an interest
rate swap agreement (the "Swap") to manage its interest rate exposure related to
a portion of the Company's $110 million credit facility entered into on December
30, 2003. The Swap, a three year fully amortizable agreement with a notional
amount of $50.0 million, expires on June 27, 2007. The amount outstanding under
the Swap as of September 30, 2004 was $45.8 million. Under the Swap, the Company
is paying a fixed rate of 3.16% and receiving interest at floating rates based
on the three month LIBOR rate at each quarterly re-pricing date until the
expiration of the Swap.
The Swap is designated as a cash flow hedge and, at September 30, 2004,
is determined to be effective. At September 30, 2004, the fair value of the
derivative was approximately $70,000 and has been included in other current
liabilities. The net unrealized loss of approximately $110,000 and $40,000,
respectively, has been included in other comprehensive income for the three and
nine months ended September 30, 2004. The fair value of the swap is the
estimated amount the Company would pay or receive to terminate the agreement at
the reporting date.
NOTE 16: CONTINGENCIES
Litigation
The Company, in the normal course of its business, is involved in various
lawsuits from time to time. In addition, the Company is subject to certain other
contingencies discussed below:
On December 4, 1998, a Review Committee, established to determine the
amount of any contingent contract rights under the Merger Agreement, dated May
8, 1995, between Orthofix International and American Medical Electronics
unanimously determined that Orthofix International would pay to the AME record
holders an earnout of $500,000 plus interest and 12% of the net recovery
received from the resolution in 2000 of a litigation against Biomet, Inc. and
Electro Biology, Inc., up to a maximum of $5,500,000, plus interest. Two
lawsuits were subsequently initiated disputing the determination of the Review
Committee and seeking monetary damages and interest. The lawsuits were entitled
Clarence Frere, Louise Frere, Joseph Mooibroek, and Marla B. Mooibroek,
individually and on behalf of all others similarly situated v. Orthofix Inc.,
Arthur Schwalm, Robert Gaines-Cooper, James Gero, and John and Jane Does One (1)
Through Four (4), No. 99-S-445 (D. Colo.); Clarence Frere, Louise Frere, Joseph
Mooibroek, and Marla B. Mooibroek, individually and on behalf of all others
similarly situated v. Orthofix Inc., Arthur Schwalm, Robert Gaines-Cooper, James
Gero, and John and Jane Does One (1) Through Four (4), No. 99 Civ. 4049
(S.D.N.Y.).
13
The federal district court hearing the cases resolved them in favor or
the Company on May 21, 2003. The plaintiff's subsequent appeal was denied and
the time within which the plaintiffs could have requested further review in the
United States Supreme Court expired on June 10, 2004.
On August 31, 2004 the Company concluded the above mentioned actions by
a final payout pursuant to the Merger Agreement between the Company and AME. The
aggregate amount of the payout was $5.6 million, which is the sum of $5.2
million in principal plus $0.4 million in interest from June 30, 2000, to the
payout date of August 31, 2004.
The final payout was fully reserved and had no impact on the Company's
financial results from operations for the three or nine month periods ended
September 30, 2004.
Novamedix, a subsidiary of the Company, filed an action on February 21,
1992 against Kinetic Concepts Inc. ("KCI") alleging infringement of the patents
relating to Novamedix's A-V Impulse System product, breach of contract, and
seeks damages relating to past infringement, breach of contract, and unfair
competition. KCI has filed counterclaims alleging that Novamedix engaged in
inequitable conduct before the United States Patent and Trademark Office and
fraud as to KCI and that Novamedix engaged in common law and statutory unfair
competition against KCI. KCI withdrew several of its counterclaims, but
continues to assert affirmative defenses contending that the patents are
invalid, unenforceable, and not infringed. KCI also seeks monetary damages,
injunctive relief, costs, attorney's fees, and other unspecified relief. During
2002, the United States Patent and Trademark Office issued re-examination
certificates validating four U.S. vascular patents owned by us. The U.S.
District Court in San Antonio, Texas restored the litigation to active status. A
portion of any amounts received by the Company will be payable to former owners
of Novamedix under the original purchase agreement. This matter is currently in
the pre-trial motions phase.
In management's opinion, based upon information available to date, the
Company is not currently involved in any other legal proceeding, individually or
in the aggregate, that will have a material effect on the financial position,
liquidity or operating results of the Company.
Concentrations of credit risk
There have been no material changes from the information provided in the
Company's Annual Report on Form 10-K for the year ended December 31, 2003.
14
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis addresses our liquidity, financial
condition, and the results of our operations for the three and nine months ended
September 30, 2004 compared to our results of operations for the three and nine
months ended September 30, 2003. These discussions should be read in conjunction
with our historical consolidated financial statements and related notes thereto
and the other financial information included in this Form 10-Q and in our Annual
Report on Form 10-K for the year ended December 31, 2003.
General
We are a diversified orthopedic products company offering a broad line of
minimally invasive surgical, as well as non-surgical, products for the spine,
reconstruction and trauma Market Sectors. Our products are designed to address
the lifelong bone-and-joint health needs of patients of all ages, helping them
achieve a more active and mobile lifestyle. We design, develop, manufacture,
market and distribute medical equipment used principally by musculoskeletal
medical specialists for orthopedic applications. Our main products are external
and internal fixation devices used in fracture treatment, limb lengthening and
bone reconstruction, non-invasive stimulation products used to enhance the
success rate of spinal fusions and to treat non-union fractures, and bracing
products used for ligament injury prevention, pain management and protection of
surgical repair to promote faster healing. Our products also include a device
for enhancing venous circulation, cold therapy, other pain management products,
bone cement and devices for removal of the bone cement used to fix artificial
implants, a bone substitute compound and airway management products.
We have administrative and training facilities in the United States, the
United Kingdom and Italy and manufacturing facilities in the United States, the
United Kingdom, Italy, Mexico and the Seychelles. We directly distribute our
products in the United States, the United Kingdom, Ireland, Italy, Germany,
Switzerland, Austria, France, Belgium, Mexico, Brazil and Puerto Rico. In
several of these and other markets, we also distribute our products through
independent distributors.
Our condensed consolidated financial statements include the financial
results of the Company and our wholly owned and majority-owned subsidiaries and
entities over which we have control. All intercompany accounts and transactions
are eliminated in consolidation. The equity method of accounting is used when a
company has influence over significant operating decisions but does not hold
control. Under the equity method, original investments are recorded at cost and
adjusted by the Company's share of undistributed earnings or losses of these
companies. All material intercompany transactions and profits associated with
the equity investees are eliminated in consolidation.
Our reporting currency is the United States dollar. All balance sheet
accounts, except shareholders' equity, are translated at the period end exchange
rates, and revenue and expense items are translated at weighted average rates of
exchange prevailing during the period. Gains and losses resulting from foreign
currency transactions are included in other income (expense). Gains and losses
resulting from the translation of foreign currency financial statements are
recorded in the accumulated other comprehensive income (loss) component of the
shareholders' equity.
Our financial condition, results of operations and cash flows are not
significantly impacted by seasonal trends. In addition, we do not believe our
operations will be significantly affected by inflation. However, in the ordinary
course of business, we are exposed to the impact of changes in interest rates
and foreign currency fluctuations. Our objective is to limit the impact of
such movements on earnings and cash flows. In order to achieve this objective,
we seek to balance non-dollar income and expenditures. We do not ordinarily use
derivative instruments to hedge foreign exchange exposure. We also have in
place an interest rate swap derivative instrument that hedges our exposure to a
rise in interest rates.
Prior to the acquisition of Breg, Inc. (Breg) in December 2003, we managed
our operations as two geographic business units: the Americas and International
plus Group Activities. Presently, our operations are managed as three business
segments (Americas Orthofix, Americas Breg and International Orthofix) plus
Group Activities. Americas Orthofix consists of the operations, existing prior
to the acquisition of Breg, which are in the United States, Mexico, Brazil, and
Puerto Rico. Americas Breg consists of Breg's domestic and independent
international distributor operations. International Orthofix consists of
operations, existing prior to the acquisition of Breg, which are located
15
in the rest of the world as well as independent export distribution operations.
Group Activities are comprised of the Parent's operating expenses and
identifiable assets.
Revenues
Our revenues are generally derived from two primary sources: sales of
orthopedic and non-orthopedic products. Sales of orthopedic products are made
into three Market Sectors, Spine, Reconstruction, and Trauma, which together
accounted for 93% and 92% of our total net sales in the three and nine months
ended September 30, 2004, as compared to 91% of our total net sales in each of
the same periods in the prior year. Sales of non-orthopedic products, including
the airway management products, woman's care and other products, accounted for
7% and 8% of our total net sales in the three and nine months ended September
30, 2004, as compared to 9% of our total net sales in each of the same periods
in the prior year.
The following tables display the net sales by geographic destination, net
sales by business segment, net of intercompany eliminations, and net sales by
each of our Market Sectors for the three and nine months ended September 30,
2004 and 2003. We provide net sales by geographic destination and by Market
Sector for informational purposes only. We maintain our books and records by
business segment.
Geographic Destination:
Three Months Ended September 30,
(In thousands) 2004 2003
------------------------------- ---------------------------------
Percent of Percent of
Total Net Total Net
Net Sales Sales Net Sales Sales
---------- ---------- ---------- ----------
Americas $53,416 75% $35,680 70%
International 18,072 25% 15,573 30%
---------- ---------- ---------- ----------
Total $71,488 100 % $51,253 100%
========== ========== ========== ==========
Nine Months Ended September 30,
(In thousands) 2004 2003
------------------------------- ---------------------------------
Percent of Percent of
Total Net Total Net
Net Sales Sales Net Sales Sales
---------- ---------- ---------- ----------
Americas (1) $156,234 73% $101,404 67%
International (1) 56,785 27% 49,595 33%
---------- ---------- ---------- ----------
Total $213,019 100 % $150,999 100%
========== ========== ========== ==========
- --------------------------------------------------------------------------------
Note 1: The nine months ended September 30, 2004 contain a first and
second quarter reclass of $211 and $302, respectively from
International to Americas
16
Business Segment:
Three Months Ended September 30,
(In thousands) 2004 2003
------------------------------- ---------------------------------
Percent of Percent of
Total Net Total Net
Net Sales Sales Net Sales Sales
---------- ---------- ---------- ----------
Americas Orthofix $32,075 45% $29,765 58%
Americas Breg 17,383 24% -- -- %
International Orthofix 22,030 31% 21,488 42%
---------- ---------- ---------- ----------
Total $71,488 100% $51,253 100%
========== ========== ========== ==========
Nine Months Ended September 30,
(In thousands) 2004 2003
------------------------------- ---------------------------------
Percent of Percent of
Total Net Total Net
Net Sales Sales Net Sales Sales
---------- ---------- ---------- ----------
Americas Orthofix $93,002 44% $86,127 57%
Americas Breg 50,654 24% -- -- %
International Orthofix 69,363 32% 64,872 43%
---------- ---------- ---------- ----------
Total $213,019 100% $150,999 100%
========== ========== ========== ==========
Market Sector:
Three Months Ended September 30,
(In thousands) 2004 2003
------------------------------- ---------------------------------
Percent of Percent of
Total Net Total Net
Net Sales Sales Net Sales Sales
---------- ---------- ---------- ----------
Orthopedic
Spine $20,397 29% $20,236 39%
Reconstruction 30,332 42% 13,054 26%
Trauma 15,669 22% 13,291 26%
---------- ---------- ---------- ----------
Total Orthopedic 66,398 93% 46,581 91%
Non-Orthopedic 5,090 7% 4,672 9%
---------- ---------- ---------- ----------
Total $71,488 100% $51,253 100%
========== ========== ========== ==========
17
Nine Months Ended September 30,
(In thousands) 2004 2003
------------------------------- ---------------------------------
Percent of Percent of
Total Net Total Net
Net Sales Sales Net Sales Sales
---------- ---------- ---------- ----------
Orthopedic
Spine $60,255 28% $58,909 39%
Reconstruction (2) 89,586 42% 37,779 25%
Trauma (2) 47,107 22% 40,142 27%
---------- ---------- ---------- ----------
Total Orthopedic 196,948 92% 136,830 91%
Non-Orthopedic 16,071 8% 14,169 9%
---------- ---------- ---------- ----------
Total $213,019 100% $150,999 100%
========== ========== ========== ==========
- --------------------------------------------------------------------------------
Note 2: The nine months ended September 30, 2004 contain a first quarter
reclass of $407 from Trauma to Reconstruction.
The following table presents certain items from our statements of
operations as a percentage of net sales for the periods indicated:
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ---------------------------
2004 2003 2004 2003
---- ---- ---- ----
(%) (%) (%) (%)
Net sales........................... 100 100 100 100
Cost of sales....................... 27 24 28 25
Gross profit........................ 73 76 72 75
Operating expenses
Sales and marketing .............. 35 40 36 38
General and administrative........ 11 10 10 10
Research and development.......... 4 3 4 4
Amortization of intangible assets. 2 1 2 1
Litigation and settlement costs.. 1 5 1 3
Total operating income.............. 20 17 19 19
Net income.......................... 12 11 12 12
Nine Months Ended September 30, 2004 Compared to Nine Months Ended September 30,
2003
Sales - Net sales increased 41% to $213.0 million for the first nine months of
2004, which included $50.6 million of net sales attributable to Americas Breg,
compared to $151.0 million for the first nine months of 2003. The impact of
foreign currency increased sales by $5.1 million during the first nine months of
2004 as compared to the first nine months of 2003.
Net sales in Americas Orthofix, primarily within the United States,
increased to $93.0 million in the first nine months of 2004 compared to $86.1
million in the first nine months of 2003, an increase of 8%. Americas Orthofix
represented 44% of total net sales during the first nine months of 2004 and 57%
of total net sales for the same period of 2003. The increase in sales was
primarily the result of an increase in sales of stimulators for long bone
applications and external fixators used in the reconstruction and trauma
markets, along with minimal growth in spine market products as a result of
reimbursement issues associated with EZ Brace and Orthotrac and reduced growth
of spinal stimulators.
18
Net sales in Americas Breg for the first nine months of 2004 were $50.7
million, which represented 24% of total net sales during the first nine months
of 2004. Breg was acquired on December 30, 2003; therefore there are no sales
for Americas Breg for the comparable period of the prior year. However, on a pro
forma year-over-year basis, Americas Breg sales grew 12% in the first nine
months of 2004 compared to the first nine months of 2003.
Net sales in International Orthofix increased 7% to $69.4 million in the
first nine months of 2004 compared to $64.9 million in the first nine months of
2003. The primary factors that led to this increase were increased sales of
external fixation products, strong start-up sales of the PC.C.P hip fracture
fixation system and growth of non-orthopedic airway management products; these
were partially offset by a decrease in sales of the A-V Impulse system,
primarily the Impad component. The decrease in A-V Impulse system sales is due
to a combination of lower contract pricing, a more competitive environment and
inventory balancing in the second quarter by our primary customer in the United
States. The impact of foreign currency increased International Orthofix sales
for the first nine months of 2004 by $5.2 million as compared to the same period
of the prior year.
By Market Sector, sales of spine products increased 2% to $60.3 million in
the first nine months of 2004 compared to $58.9 million in the first nine months
of 2003. Sales of stimulation products for spine applications, the main
component of our Spine Market Sector, increased 4%. This Market Sector was
negatively impacted by reimbursement issues relating to our Orthotrac and EZ
Brace products. A change in the reimbursement for the EZ Brace product has had a
negative impact on the period-over-period sales for this product. Reimbursement
issues, emerging new technologies and increased competitive activity for spinal
stimulators could negatively impact growth, while the pending approval of a
stimulator for cervical applications could positively impact growth in this
Market Sector in future periods.
Sales of our reconstruction products increased 137% to $89.6 million in the
first nine months of 2004 compared to $37.8 million in the first nine months of
2003. This increase is primarily attributable to the sales of Breg products,
classified as reconstruction products, which totaled $50.7 million in the first
nine months of 2004. Sales of our external fixation products used in
reconstruction applications increased 32%, which also contributed to the
period-over-period growth in this Market Sector. Growth in this Market Sector
was negatively impacted in the first nine months of 2004 compared to 2003 by a
decrease of 13% in the A-V Impulse systems sales as discussed above.
Sales of our trauma products increased 17% to $47.1 million in the first
nine months of 2004 compared to $40.1 million in the first nine months of 2003.
This Market Sector benefited from a 12% growth in sales of external fixation
products used for trauma applications, a 21% growth in sales of stimulation
products used for long bone applications, and strong start-up sales of the
PC.C.P hip fracture fixation system.
Sales of our non-orthopedic products grew 13% to $16.1 million in the first
nine months of 2004 compared to $14.2 million in the first nine months of 2003.
This Market Sector continues to be driven by the airway management products,
including a new single-use version which we distribute in the United Kingdom,
Ireland and Italy.
Gross Profit - Our gross profit increased 37% to $154.2 million in the first
nine months of 2004, compared to $112.9 million in the first nine months of
2003. The increase was primarily due to an increase of 41% in net sales,
including the addition of Breg sales. Gross profit as a percent of net sales in
the first nine months of 2004 was 72.4% compared to 74.8% in the first nine
months of 2003, reflecting the impact of the inclusion of Breg with lower gross
profit margins relative to pre-Breg gross profit margins, purchase accounting
and foreign currency. Although currency contributed $5.1 million to sales
growth, the year-over-year appreciation of the Euro and the Great Britain Pound
against the U.S. Dollar has been detrimental to our gross profit and gross
profit margin in those situations where we produce products whose costs are
denominated in Euros or Pounds and are sold in U.S. Dollars.
Sales and Marketing Expenses - Sales and marketing expenses, which include
commissions, royalties and bad debt provision, generally increase and decrease
in relation to sales. Sales and marketing expenses increased $19.0 million to
$76.5 million in the first nine months of 2004 from $57.4 million in the first
nine months of 2003, an increase of 33% on a net sales increase of 41% over the
same period. The incremental increase is primarily the result of the addition of
Breg marketing and sales costs, for which there are no comparable costs in the
first nine months of the prior year, and the impact of foreign currency. Sales
and marketing expense as a percent of net sales
19
decreased to 35.9% in the first nine months of 2004 from 38.0% in the same
period of 2003. The decrease as a percent of net sales is primarily associated
with our new Breg segment, which carries a lower sales and marketing expense as
a percent of net sales than the Company has experienced in prior years.
General and Administrative Expense - General and administrative expense
increased $7.3 million in the first nine months of 2004 to $22.4 million
compared to $15.1 million in the first nine months of 2003. This increase is
primarily attributable to the addition of general and administrative expenses of
Breg for which there are no comparable costs in the same period of the prior
year, purchase accounting adjustments from the acquisition of Breg for the
depreciation of step-up in the value of fixed assets acquired, and the
acquisition of a Puerto Rico distributor, for which there are also no comparable
costs in the same period of the prior year. We have also incurred incremental
costs in the first nine months of 2004 associated with our efforts to comply
with Section 404 of the Sarbanes-Oxley Act of 2002.
Research and Development Expense - Research and development expense increased
$2.8 million in the first nine months of 2004 to $8.7 million compared to $6.0
million in the first nine months of 2003 and remained constant as a percent of
net sales at 4%. Approximately $2.3 million of this increase is attributable to
expenses related to Breg , for which there were no comparable expenses for the
same period of 2003.
Amortization of Intangible Assets - Amortization of intangible assets was $4.8
million in the first nine months of 2004 compared to $0.7 million for the same
period of 2003. The increase in amortization expense of approximately $3.8
million was due to the amortization recorded for the distribution network
acquired in the Breg acquisition.
Litigation and Settlement Costs - Based on an assessment of the merits of the
Kinetics Concepts Inc. (KCI) case (further described in Note 16 "Contingencies"
of Item 1, "Condensed Financial Statements"), we incurred $1.3 million in
litigation costs in the first nine months of 2004, compared to $3.0 million in
the same period of 2003. Further, in the first nine months of 2003, we incurred
$1.7 million in settlement costs to conclude the investigation by the Office of
Inspector General into the appropriateness of claims made to federal health care
programs for the off-label use of our FDA approved pulsed electronic magnetic
field device, and for billing and coding for its off-label use.
Interest Income (Expense), net - Interest income (expense), net was an expense
of $4.6 million in the first nine months of 2004 compared to income of $0.1
million in the first nine months of 2003. We incurred interest expense on
borrowings under our senior secured term loan of approximately $4.5 million
which included the amortization of debt costs. Additional interest expense of
$0.3 million was incurred on borrowings under a line of credit in Italy,
partially offset by interest income on cash deposits of $0.2 million.
Other Income, net - Other income, net was income of $0.3 million in the first
nine months of 2004 and 2003. In the first nine months of 2004, other income was
generated by the sale of a facility that resulted in a gain of approximately
$0.6 million. The sale of this facility was part of our consolidation plan in
the United Kingdom. We also experienced foreign exchange losses of $0.3 million
during the first nine months of 2004. For the same period of the prior year,
other income was generated by a sale of marketable securities that resulted in a
gain of $0.4 million that was partially offset by foreign exchange losses of
$0.1 million. Foreign exchange losses for both periods were a result of foreign
currency movements on the carrying value of current assets and current
liabilities held by foreign subsidiaries that were denominated in foreign
currencies.
Loss in Joint Venture, net - Loss in joint venture, net was a loss of $0.1
million in the first nine months of 2004. During the first nine months of 2004,
we sold part of our ownership in the OrthoRx joint venture to our partner Ferrer
Freedman & Company; this sale resulted in a gain of approximately $0.8 million.
This gain was offset by our portion of the joint venture's operating losses for
the first nine months of 2004 of approximately $0.9 million, which resulted in a
net loss associated with OrthoRx of $0.1 million for the first nine months of
2004 compared to a net loss of $1.2 million for the same period of the prior
year.
Income Tax Expense - In the first nine months of 2004 and 2003, the effective
tax rates were 32.0% and 36.6%, respectively. The effective tax rate in the
first nine months of 2004 was reduced by the following: (i) the non-taxable gain
recorded on our sale of OrthoRx; (ii) lower spending on the KCI case (which
occurs in a low tax
20
jurisdiction); and (iii) inherent tax benefits resulting from the financing
structure of our senior secured term loan obtained in conjunction with the Breg
acquisition.
Net Income - Net income for the first nine months of 2004 was $24.6 million, or
$1.61 per basic share and $1.55 per diluted share, compared to $17.9 million, or
$1.28 per basic share and $1.22 per diluted share, for the first nine months of
2003, an increase in net income of 37%. The weighted average number of basic
common shares outstanding was 15,296,717 and 14,001,981 during the first nine
months of 2004 and 2003, respectively. The weighted average number of diluted
common shares outstanding was 15,939,801 and 14,720,139 during the first nine
months of 2004 and 2003, respectively.
Three Months Ended September 30, 2004 Compared to Three Months Ended September
30, 2003
Sales - Net sales increased 39% to $71.5 million for the third quarter of
2004 compared to $51.3 million for the third quarter of 2003. The impact of
foreign currency increased sales by $1.3 million during the third quarter of
2004 as compared to the same period of the prior year.
Net sales in Americas Orthofix, primarily in the United States, increased
to $32.1 million in the third quarter of 2004 compared to $29.8 million in the
third quarter of 2003, an increase of 8%. Americas Orthofix represented 45% of
total net sales during the third quarter of 2004 and 58% of total net sales for
the same period of 2003. The increase in sales was primarily the result of an
increase in sales of stimulators used for long bone applications and external
fixators used in the reconstruction and trauma markets. Net sales in spine
market products included a 2% growth in stimulators used in spinal applications
in the third quarter of 2004 as compared to the same period of the prior year
and decreases in our EZ Brace and Orthotrac products as a result of
reimbursement issues.
Net sales in Americas Breg for the third quarter of 2004 were $17.4
million, which represented 24% of total net sales for the third quarter of 2004.
Breg was acquired on December 30, 2003; therefore there are no sales for
Americas Breg for the comparable period of 2003. However, on a pro forma
year-over-year basis, Americas Breg sales grew 13% in the third quarter of 2004
compared to the same period in 2003.
Net sales in International Orthofix increased 2% to $22.0 million in the
third quarter of 2004 compared to $21.5 million in 2003. International Orthofix
experienced growth in its external fixation products PC.C.P hip fracture
fixation system and non-orthopedic airway management products, but experienced a
decrease of 20% in sales of its A-V Impulse system, primarily the Impad
component. The impact of foreign currency increased International Orthofix sales
by $1.4 million during the third quarter of 2004 as compared to the same period
of the prior year.
By Market Sector, sales of spine products increased 1% to $20.4 million in
the third quarter of 2004 compared to $20.2 million in the third quarter of
2003. Sales of stimulation products for spine applications, the main component
of our Spine Market Sector, increased 2%. This Market Sector was negatively
impacted by reimbursement issues relating to our Orthotrac and EZ Brace
products. Reimbursement issues, emerging new technologies and increased
competitive activity for spinal stimulators could negatively impact growth,
while the pending approval of a stimulator for cervical applications could
positively impact the growth in this Market Sector in future periods.
Sales of our reconstruction products increased 132% to $30.3 million in the
third quarter of 2004 compared to $13.1 million in the third quarter of 2003.
This increase is primarily attributable to the sales of Breg products,
classified as reconstruction products, which totaled $17.4 million in the third
quarter of 2004. Sales of our external fixation products used in reconstruction
applications increased 27%, which also contributed to the period-over-period
growth of this Market Sector. Growth in this Market Sector was negatively
impacted in the third quarter of 2004 compared to 2003 by a decrease of 20% in
A-V Impulse system sales as discussed above.
Sales of our trauma products increased 18% to $15.7 million in the third
quarter of 2004, compared to $13.3 million in the third quarter of 2003. This
Market Sector was positively impacted from a 15% growth in sales of external
fixation products, an 18% growth in sales of stimulation products used for long
bone applications and strong start-up sales of the PC.C.P hip fracture fixation
system.
21
Sales of our non-orthopedic products grew 9% to $5.1 million in the third
quarter of 2004 compared to $4.7 million in the third quarter of 2003. The
increase was primarily due to the growth in sales of airway management products,
including a new single-use version, which we distribute in the United Kingdom,
Ireland and Italy.
Gross Profit - Our gross profit increased 34% to $51.9 million in the third
quarter of 2004, from $38.8 million in the third quarter of 2003. The increase
was primarily due to the increase of 39% in net sales including the addition of
Breg sales. Gross profit as a percent of net sales in the third quarter 2004 was
72.6% compared to 75.6% in 2003, reflecting the inclusion of Breg with lower
gross profit margins and product mix, primarily lower spinal stimulation and A-V
Impulse Impad sales, as a percent of net sales in the third quarter of 2004
compared to the same period of 2003. Although the impact of foreign currency
contributed $1.3 million to sales growth, the year-over-year appreciation of the
Euro and the Great Britain Pound against the U.S. Dollar was detrimental to our
gross profit and gross profit margin in those situations where we produce
products whose costs are denominated in Euros or Pounds and sold in U.S.
Dollars.
Sales and Marketing Expenses - Sales and marketing expenses, which include
commissions, royalties and bad debt provision, generally increase and decrease
in relation to sales. Sales and marketing expense increased $4.4 million to
$24.7 million in the third quarter of 2004 compared to $20.3 million in the
third quarter of 2003, an increase of 21% on a net sales increase of 39% over
the same period. The incremental increase is primarily the result of the
addition of Breg marketing and sales costs, for which there are no comparable
costs in the third quarter of the prior year, and foreign currency. Sales and
marketing expense as a percent of net sales decreased to 34.5% in the third
quarter of 2004 from 39.6% in the same period of 2003. The decrease as a percent
of net sales is primarily associated with our new Breg segment, which carries a
lower sales and marketing expense as a percent of net sales than the Company has
experienced in prior years.
General and Administrative Expense - General and administrative expense
increased $2.7 million in the third quarter of 2004 to $7.7 million compared to
$5.0 million in the third quarter of 2003. This increase is primarily
attributable to the addition of general and administrative expenses of Breg, for
which there are no comparable costs in the same period of the prior year,
purchase accounting adjustments from the acquisition of Breg for the
depreciation of step-up in the value of fixed assets acquired, and the
acquisition of a Puerto Rico distributor, for which there are also no comparable
costs in the same period of the prior year. We have also incurred incremental
costs in the third quarter of 2004 associated with our efforts to comply with
Section 404 of the Sarbanes-Oxley Act of 2002. General and administrative
expense as a percent of net sales was 11% for the third quarter of 2004 compared
to 10% for the third quarter of 2003.
Research and Development Expense - Research and development expense increased
$1.0 million in the third quarter of 2004 to $2.7 million compared to $1.7
million in the third quarter of 2003 and remained constant as a percent of net
sales at 4%. The incremental increase is attributable to expenses related to
Breg, for which there were no comparable expenses for the same period of 2003.
Amortization of Intangible Assets - Amortization of intangible assets was $1.6
million in the third quarter of 2004 compared to $0.3 million for the same
period of 2003. The increase in amortization expense of approximately $1.3
million was due to the amortization recorded for the distribution network
acquired in the Breg acquisition.
Litigation and Settlement Costs - Based on an assessment of the merits of the
Kinetics Concepts Inc. (KCI) case (further described in Note 16 "Contingencies"
of Item 1, "Condensed Financial Statements"), we incurred $0.6 million in
litigation costs in the third quarter of 2004, compared to $0.9 million in the
same period of 2003. Further, in the third quarter of 2003, we incurred $1.7
million in settlement costs to conclude the investigation by the Office of
Inspector General into the appropriateness of claims made to federal health care
programs for the off-label use of our FDA approved pulsed electronic magnetic
field device, and for billing and coding for its off-label use.
22
Interest Income (Expense), net - Interest income (expense), net was an expense
of $1.7 million in the third quarter of 2004 compared to expense of $24,000 in
the third quarter of 2003. We incurred interest expense on borrowings under our
senior secured term loan of approximately $1.7 million which included the
amortization of debt costs. Additional interest expense of $0.1 million was
incurred on borrowings under a line of credit in Italy. Interest expense was
partially offset by interest income on cash deposits of $0.1 million.
Other Income, net - Other income, net was income of $0.3 million in the third
quarter of 2004 compared to income of $0.1 million in the third quarter of 2003.
Other income for the third quarter of 2004 was attributable to foreign exchange
gains on the revaluation of current assets and current liabilities held by
foreign subsidiaries. For the same period of the prior year, other income was
generated by a sale of marketable securities that resulted in a gain of $0.4
million partially offset by foreign exchange losses of $0.3 million.
Loss in Joint Venture - Loss in joint venture, net was a loss of $0.3 million in
the third quarter of 2004 compared to a loss of $0.6 million for the same period
of 2003, primarily as a result of our reduced ownership in the OrthoRx joint
venture.
Income Tax Expense - In the third quarters of 2004 and 2003, the effective tax
rates were 34.7% and 34.8%, respectively. The higher effective tax rate in the
third quarter of 2004 of 34.7% as compared to the year-to-date rate of 32% is
the result of: i) higher spending on the KCI case (which occurs in a low tax
jurisdiction); ii) higher non-tax deductible loss in our OrthoRx investment; and
iii) higher taxable income in our U.S. subsidiaries which carry a higher
statutory tax rate than our overall effective tax rate.
Net Income - Net income for the third quarter of 2004 was $8.4 million, or $0.54
per basic share and $0.53 per diluted share, compared to $5.4 million, or $0.38
per basic share and $0.37 per diluted share, for the third quarter of 2003, an
increase in net income of 55%. The weighted average number of basic common
shares outstanding was 15,570,313 and 14,181,847 during the third quarter of
2004 and 2003, respectively. The weighted average number of diluted common
shares outstanding was 15,953,268 and 14,882,747 during the third quarter of
2004 and 2003, respectively.
Liquidity and Capital Resources
Cash and cash equivalents were $38.5 million at September 30, 2004 compared
to $33.6 million at December 31, 2003, an increase of $4.9 million.
Net cash provided by operating activities was $20.0 million for the first
nine months of 2004 compared to $20.9 million for the first nine months of 2003,
a decrease of $0.9 million. Net cash provided by operating activities is
comprised of net income, non-cash items and changes in working capital. Net
income increased approximately $6.7 million to $24.6 million in the first nine
months of 2004 from $17.9 million in the first nine months of 2003. Non-cash
items increased $3.8 million in the first nine months of 2004 compared to the
first nine months of 2003, primarily as a result of the increased depreciation
and amortization expense associated with the application of purchase accounting
to the assets acquired in the Breg acquisition. Working capital accounts
consumed $19.7 million of cash in the first nine months of 2004 compared to the
use of $8.3 million in cash during the same period of 2003. The principal uses
of cash for working capital in the first nine months of 2004 were for increases
in accounts receivable overall from increased year-over-year sales, increases in
International accounts receivable and the final payout pursuant to the Agreement
and Plan of Merger among the Company and American Medical Electronics, Inc. (See
Part II, Item 1, "Legal Proceedings"). The aggregate amount of the payout was
$5.6 million which had previously been fully reserved. Increases in
International accounts receivable stem principally from the increase in
Italian receivables between periods in which we factor accounts receivable and
from the timing of payments by our U.S. distributor for A-V Impulse system
products. In the first 15 days of October we received a significant payment from
our U.S. distributor of A-V Impulse system products returning their account to
credit terms. Our Italian accounts receivable are consistent with published DSO
statistics for Italian healthcare suppliers. We expect to factor Italian
receivables in the fourth quarter of approximately $5.0 million. In the interim,
Italian DSO will reflect the published norm. Overall performance indicators of
our two primary working capital accounts, accounts receivable and inventory,
reflect days sales in receivables of 104 days at September 30, 2004 compared to
23
105 days at September 30, 2003 and inventory turnover of 2.5 times at September
30, 2004 compared to 2.1 times at September 30, 2003.
Net cash used in investing activities was $8.6 million during the first
nine months of 2004, compared to $26.9 million during the first nine months of
2003. During the first nine months of 2004, we paid $1.1 million as part of the
consideration for the purchase of a Puerto Rican distributor, invested $5.2
million in capital expenditures and $4.6 million in intangible assets, including
a payment of $4.0 million to purchase the technology of the PC.C.P hip fracture
fixation system. Further, in the first nine months of 2004 we paid $1.0 million
for transactions fees associated with the acquisition of Breg. During the first
nine months of 2004 we received $1.3 million from the sale of shares in the
OrthoRx joint venture, $1.6 million from the sale of a facility in the UK, and
$0.4 million from a contract settlement in Mexico. During the first nine months
of 2003, we purchased the remaining 48% minority interest in our UK distribution
company for $20.6 million, invested $1.5 million to take an equity interest in
Innovative Spinal Technologies (IST), invested an additional $1.5 million in the
OrthoRx joint venture and invested $3.6 million in capital expenditures.
Net cash used in financing activities was $6.5 million in the first nine
months of 2004 compared to cash provided by financing activities of $2.2 million
for the same period in 2003. In the first nine months of 2004, we received
proceeds of $11.2 million from the issuance of 661,599 shares of our common
stock upon the exercise of stock options, warrants and shares purchased pursuant
to our employee stock purchase plan. In the first nine months of 2004, we also
had net borrowings of $1.4 million on a line of credit in Italy used to finance
working capital. Further, we repaid approximately $18.2 million against the
principal of the senior secured term loan obtained to help finance the Breg
acquisition, paid $0.3 million against other outstanding debt and paid $0.5
million for costs associated with obtaining the senior secured term loan, which
will be amortized over the term of the credit facility.
When we acquired Breg on December 30, 2003, one of our wholly owned
subsidiaries, Colgate Medical Limited ("Colgate"), entered into a new senior
secured bank credit facility with a syndicate of financial institutions to
finance the transaction. The senior secured bank facility provides for (1) a
five-year amortizing term loan facility of $110.0 million, the proceeds of which
were used for partial payment of the purchase price of Breg; and (2) a five-year
revolving credit facility of $15.0 million. As of September 30, 2004 and as of
November 5, 2004, we had no amounts outstanding under the revolving credit
facility and $91.8 million outstanding under the term loan facility. Obligations
under the senior secured bank facility have a floating interest rate of LIBOR or
prime rate plus a margin, currently 2.25%, which is adjusted quarterly based on
Colgate's leverage ratio. In May 2004 we entered into a three year fully
amortizable interest rate swap agreement (the "Swap") with a notional amount of
$50.0 million and an expiration date of June 27, 2007. The amount outstanding
under the Swap as of September 30, 2004 was $45.8 million. Under the Swap we
will pay a fixed rate of 3.16% and receive interest at floating rates based on
the three month LIBOR rate at each quarterly re-pricing date until the
expiration of the Swap. As of September 30, 2004 the interest rate on the debt
related to the Swap was 5.41% (3.16% plus a margin of 2.25%). Our overall
effective interest rate, including the impact of the Swap, as of September 30,
2004 on our senior secured debt was 4.82%. Orthofix and each of Colgate's direct
and indirect subsidiaries, including Orthofix Inc. and Breg, have guaranteed the
obligations of Colgate under the senior secured bank facility. The obligations
of Colgate under the senior secured bank facility and Colgate's subsidiaries
under their guarantees are secured by the pledges of their respective assets.
Certain of our other subsidiaries have also guaranteed the obligations of
Colgate under the senior secured bank facility on a limited recourse basis.
As of September 30, 2004, Colgate entered into an amendment of the term
loan facility. The amendment reduces the interest rate applicable to borrowings
under the term loan facility by reducing the previous interest rate of LIBOR
plus 2.75% to LIBOR plus 2.25%. At the same time as entering into the amendment,
we made a voluntary prepayment of $10.4 million on the borrowings under the term
loan facility. We anticipate the amendment and the prepayment will reduce our
interest rate further upon delivering our third quarter compliance report to the
lender's administrative agent evidencing our attainment of a leverage ratio
threshold that reduces the interest rate to LIBOR plus 2.0%.
The credit agreement relating to the senior secured bank facility contains
customary negative covenants applicable to Colgate and its subsidiaries,
including restrictions on indebtedness, liens, dividends, mergers and the sale
of assets. The credit agreement also contains certain financial covenants,
including a fixed charge coverage ratio, an interest coverage ratio and a
leverage ratio applicable to Colgate and its subsidiaries on a consolidated
24
basis, and a leverage ratio applicable to Orthofix and its subsidiaries on a
consolidated basis. We have assessed our compliance with the financial covenants
as of September 30, 2004, on a pro forma basis, as required by the credit
agreement, and note that we are in compliance with all financial covenants.
At September 30, 2004, we had outstanding borrowings of $1.4 million and
unused available lines of credit of approximately $9.1 million under a line of
credit established in Italy to finance the working capital of our Italian
operations. The terms of the line of credit give us the option to borrow amounts
in Italy at rates determined at the time of borrowing.
We continue to search for viable acquisition candidates that would expand
our worldwide presence as well as additional products appropriate for current
distribution channels. An acquisition of another company or product line by us
could result in our incurrence of additional debt and contingent liabilities.
We believe that current cash balances together with projected cash flows
from operating activities, the unused revolving credit facility and available
Italian line of credit, the exercise of stock options, and our remaining
available debt capacity are sufficient to cover anticipated operating capital
needs and research and development costs over the near term.
Contractual Obligations
The following chart sets forth changes to our contractual obligations that
have occurred since December 31, 2003:
- -------------------------------------- Payments Due By Period
Contractual Obligations
- --------------------------------------- ------------------------------------------------------------------------------
(Dollars in thousands) Total Less Than 1 to 3 4 to 5 Over 5
1 Year Years Years Years
Senior secured term loan:
As of December 31, 2003 $110,000 $11,000 $22,000 $77,000 -
As of September 30, 2004 $91,750 $9,600 $20,000 $62,150 -
In addition to scheduled contractual obligations of the debt as set forth
above, our senior secured bank facility requires us to make mandatory
prepayments with (a) the excess cash flow (as defined in the credit agreement)
of Colgate and its subsidiaries in an amount initially equal to 75% of the
excess annual cash flow of Colgate and its subsidiaries, reducing to 50% upon
the attainment of a leverage ratio of less than or equal to 1.50 to 1.00, (b)
the net cash proceeds of any debt or equity issuances, excluding the exercise of
stock options, by any of the Credit Parties (as defined in the credit
agreement), (c) the net cash proceeds of asset dispositions over a minimum
threshold or (d) unless reinvested, insurance proceeds or condemnation awards.
Other than described above there were no material changes in the
contractual obligations specified in our Annual Report on Form 10-K for the year
ended December 31, 2003.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
There have been no material changes from the information provided in our
Annual Report on Form 10-K for the year ended December 31, 2003.
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Item 4. Controls and Procedures
As of September 30, 2004, we performed an evaluation under the supervision
and with the participation of our management, including the Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures. Based on the evaluation,
our management, including the Chief Executive Officer and Chief Financial
Officer, concluded that our disclosure controls and procedures were adequate and
effective as of the end of the period covered by this report. During the
quarterly period covered by this report, there were no changes in our internal
controls over financial reporting that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
26
PART II OTHER INFORMATION
Item 1. Legal Proceedings
On December 4, 1998, a Review Committee, established to determine the
amount of any contingent contract rights under the Merger Agreement, dated May
8, 1995, between Orthofix International and American Medical Electronics
unanimously determined that Orthofix International would pay to the AME record
holders an earnout of $500,000 plus interest and 12% of the net recovery
received from the resolution in 2000 of a litigation against Biomet, Inc. and
Electro Biology, Inc., up to a maximum of $5,500,000, plus interest. Two
lawsuits were subsequently initiated disputing the determination of the Review
Committee and seeking monetary damages and interest. The lawsuits were entitled
Clarence Frere, Louise Frere, Joseph Mooibroek, and Marla B. Mooibroek,
individually and on behalf of all others similarly situated v. Orthofix Inc.,
Arthur Schwalm, Robert Gaines-Cooper, James Gero, and John and Jane Does One (1)
Through Four (4), No. 99-S-445 (D. Colo.); Clarence Frere, Louise Frere, Joseph
Mooibroek, and Marla B. Mooibroek, individually and on behalf of all others
similarly situated v. Orthofix Inc., Arthur Schwalm, Robert Gaines-Cooper, James
Gero, and John and Jane Does One (1) Through Four (4), No. 99 Civ. 4049
(S.D.N.Y.).
The federal district court hearing the cases resolved them in favor or the
Company on May 21, 2003. The plaintiff's subsequent appeal was denied and the
time within which the plaintiffs could have requested further review in the
United States Supreme Court expired on June 10, 2004.
On August 31, 2004 the Company concluded the above mentioned actions by a
final payout pursuant to the Merger Agreement between the Company and AME. The
aggregate amount of the payout was $5.6 million, which is the sum of $5.2
million in principal plus $0.4 million in interest from June 30, 2000, to the
payout date of August 31, 2004.
The final payout was fully reserved and had no impact on the Company's
financial results from operations for the three or nine month periods ended
September 30, 2004.
Item 5. Other Information
On November 5, 2004, the Company amended and restated its Long-Term
Incentive Plan to include limitations with respect to minimum vesting
requirements and awards to non-employee directors. A copy of the Amended and
Restated Long Term Incentive Plan is attached as Exhibit 10.5 to this quarterly
report on Form 10-Q.
27
Item 6. Exhibits
(a) Exhibits
--------
Exhibit
Number Description
------ -----------
3.1 Certificate of Incorporation of the Company (filed as an
exhibit to the Company's annual report on Form 20-F dated
June 29, 2001 and incorporated herein by reference).
3.2* Articles of Association of the Company as Amended.
10.1 Orthofix Inc. Employee Stock Purchase Plan (filed as an
exhibit to the Company's annual report on Form 10-K for the
fiscal year ended December 31, 2002 and incorporated herein
by reference).
10.2 Orthofix International N.V. Staff Share Option Plan (filed as
an exhibit to the Company's annual report on Form 10-K for
the fiscal year ended December 31, 2002 and incorporated
herein by reference).
10.3 Form of Performance Accelerated Stock Option under the Staff
Share Option Plan (filed as an exhibit to the Company's
annual report on Form 10-K for the fiscal year ended December
31, 2002 and incorporated herein by reference).
10.4 Form of Performance Accelerated Stock Option Inducement
Agreement (filed as an exhibit to the Company's annual report
on Form 10-K for the fiscal year ended December 31, 2003 and
incorporated here in by reference).
10.5* Orthofix International N.V. 2004 Long Term Incentive Plan.
10.6 Employment Agreement, dated as of July 1, 2001, between
Orthofix International N.V. and Charles W. Federico (filed as
an exhibit to the Company's annual report on Form 10-K for
the fiscal year ended December 31, 2002 and incorporated
herein by reference).
10.7 Employment Agreement, dated as of March 1, 2003, between the
Company and Thomas Hein (filed as an exhibit to the Company's
annual report on Form 10-K for the fiscal year ended December
31, 2002 and incorporated herein by reference).
10.8 Employment Agreement, dated as of March 1, 2003, between the
Company and Gary D. Henley (filed as an exhibit to the
Company's annual report on Form 10-K for the fiscal year
ended December 31, 2002 and incorporated herein by
reference).
10.9 Employment Agreement, dated as of November 20, 2003, between
Orthofix International N.V. and Bradley R. Mason (filed as an
exhibit to the Company's annual report on Form 10-K for the
fiscal year ended December 31, 2003 and incorporated herein
by reference).
10.10 Full Recourse Promissory Note between Orthofix International
N.V. and Charles W. Federico dated January 10, 2002 (filed as
an exhibit to the Company's annual report on Form 10-K for
the fiscal year ended December 31, 2002 and incorporated
herein by reference).
10.11 Full Recourse Promissory Note between Orthofix International
N.V. and Gary D. Henley dated January 10, 2002 (filed as an
exhibit to the Company's annual report on Form 10-K for the
fiscal year ended December 31, 2002 and incorporated herein
by reference).
10.12 Share Purchase Agreement, dated as of March 20, 2003, between
Orthofix International N.V. and Intavent Limited (filed as an
exhibit to the Company's quarterly report of Form 10-Q for
the quarter ended June 30, 2003 and incorporated herein by
reference).
10.13 Acquisition Agreement dated as of November 20, 2003, among
Orthofix International
28
N.V., Trevor Acquisition, Inc., Breg, Inc. and Bradley R.
Mason, as shareholders' representative (filed as an exhibit
to the Company's current report on Form 8-K filed January 8,
2004 and incorporated herein by reference).
10.14 Voting and Subscription Agreement dated as of November 20,
2003, among Orthofix International N.V. and the significant
shareholders of Breg, Inc. identified on the signature pages
thereto (filed as an exhibit to the Company's current report
on Form 8-K filed January 8, 2004 and incorporated herein by
reference).
10.15 Credit Agreement dated as of December 30, 2003, among Colgate
Medical Limited, as borrower, and Orthofix International N.V
and certain subsidiaries of the borrower, as guarantors,
certain limited guarantors party thereto, the lenders parties
thereto, Wachovia Bank, National Association, as
administrative agent, and Wachovia Capital Markets, LLC, as
sole lead arranger and book manager (filed as an exhibit to
the Company's current report on Form 8-K filed January 8,
2004 and incorporated herein by reference).
10.16 The First Amendment dated as of September 30, 2004 of the
Credit Agreement dated as of December 30, 2003, among Colgate
Medical Limited, as borrower, and Orthofix International N.V
and certain subsidiaries of the borrower, as guarantors,
certain limited guarantors party thereto, the lenders parties
thereto, Wachovia Bank, National Association, as
administrative agent, and Wachovia Capital Markets, LLC, as
sole lead arranger and book manager (filed as an exhibit to
the Company's current report on Form 8-K filed October 6,
2004 and incorporated herein by reference).
14.1 Code of Ethics of the Company (filed as an exhibit to the
Company's annual report on Form 10-K for the fiscal year
ended December 31, 2003 and incorporated herein by
reference).
21.1* Subsidiaries of the Company.
31.1* Rule 13a - 14(a)/15d - 14(a) Certification of Chief Executive
Officer.
31.2* Rule 13a - 14(a)/15d - 14(a) Certification of Chief Financial
Officer.
32.1* Section 1350 Certification of Chief Executive Officer.
32.2* Section 1350 Certification of Chief Financial Officer.
----------
* Filed herewith.
29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ORTHOFIX INTERNATIONAL N.V.
Date: November 5, 2004 By: /s/ CHARLES W. FEDERICO
---------------------------------------
Name: Charles W. Federico
Title: Chief Executive Officer and
President
Date: November 5, 2004 By: /s/ THOMAS HEIN
---------------------------------------
Name: Thomas Hein
Title: Chief Financial Officer
30