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, 2005
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 [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes [ ] No [ X ]
As of November 3, 2005 16,007,249 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.............................18
Item 3. Quantitative and Qualitative Disclosure About Market Risk.......30
Item 4. Controls and Procedures.........................................30
PART II OTHER INFORMATION...................................................31
Item 1. Legal Proceedings...............................................31
Item 2. Unregistered Sale of Equity Securities and Use of Proceeds......31
Item 6. Exhibits........................................................33
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, and we
undertake no obligation to update any such statement to reflect new information,
the occurrence of future events or circumstances or otherwise.
Factors that could cause actual results to differ materially from those
indicated by the forward-looking statements or that could contribute to such
differences include, but are not limited to, unanticipated expenditures,
changing relationships with customers, suppliers and strategic partners,
unfavorable results in litigation matters, risks relating to the protection of
intellectual property, changes to the reimbursement policies of third parties,
changes to governmental regulation of medical devices, the impact of competitive
products, changes to the competitive environment, the acceptance of new products
in the market, conditions of the orthopedic industry and the economy, currency
or interest rate fluctuations and the other risks described under Item 1 -
"Business - Risk Factors" in our Annual Report on Form 10-K for the fiscal year
ended December 31, 2004.
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,
2005 2004
----------------- ---------------
Assets (Unaudited) (Note 2)
Current assets:
Cash and cash equivalents.................................... $ 93,474 $ 25,944
Restricted cash.............................................. 11,317 14,302
Trade accounts receivable, net............................... 80,885 75,321
Inventories.................................................. 35,262 32,895
Deferred income taxes........................................ 3,948 4,130
Prepaid expenses and other current assets.................... 13,045 10,000
----------------- ---------------
Total current assets........................................... 237,931 162,592
Securities and other investments............................... 4,082 4,082
Property, plant and equipment, net............................. 19,780 18,326
Patents and other intangible assets, net....................... 66,666 70,627
Goodwill, net.................................................. 165,931 169,329
Other long-term assets ........................................ 4,388 6,144
----------------- ---------------
Total assets................................................. $ 498,778 $ 431,100
================= ===============
Liabilities and shareholders' equity
Current liabilities:
Bank borrowings.............................................. $ 65 $ 76
Current portion of long-term debt............................ 10,454 10,057
Trade accounts payable....................................... 9,183 9,507
Other current liabilities.................................... 56,064 25,745
----------------- ---------------
Total current liabilities.................................... 75,766 45,385
Long-term debt................................................. 42,792 67,249
Deferred income taxes.......................................... 15,820 17,555
Other long-term liabilities.................................... 1,253 3,739
----------------- ---------------
Total liabilities............................................ 135,631 133,928
----------------- ---------------
Contingencies (Note 16)
Shareholders' equity:
Common shares (16,004,549 and 15,711,943 shares issued
at September 30, 2005 and December 31, 2004, respectively)... 1,601 1,572
Additional paid-in capital................................... 106,479 98,388
Retained earnings............................................ 248,278 182,073
Accumulated other comprehensive income....................... 6,789 15,139
----------------- ---------------
Total shareholders' equity................................... 363,147 297,172
----------------- ---------------
Total liabilities and shareholders' equity $ 498,778 $ 431,100
================= ===============
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, 2005 AND 2004
Three Months Ended Nine Months Ended
------------------------------- -------------------------------
(Unaudited, U.S. Dollars, in thousands except share 2005 2004 2005 2004
and per share data)
-------------- ------------- -------------- -------------
Net sales.............................................. $ 75,812 $ 71,488 $ 233,040 $ 213,019
Cost of sales.......................................... 20,193 19,582 61,864 58,825
-------------- ------------- -------------- -------------
Gross profit....................................... 55,619 51,906 171,176 154,194
Operating expenses
Sales and marketing................................ 29,214 24,678 85,611 76,452
General and administrative......................... 8,444 7,737 25,822 22,402
Research and development........................... 2,516 2,722 8,323 8,732
Amortization of intangible assets.................. 1,635 1,609 4,923 4,754
-------------- ------------- -------------- -------------
41,809 36,746 124,679 112,340
-------------- ------------- -------------- -------------
Total operating income ............................ 13,810 15,160 46,497 41,854
Interest expense, net................................. (1,160) (1,697) (3,721) (4,596)
Other income (expense), net........................... 73 (10) 1,508 232
KCI settlement, net of litigation costs............... 40,860 (562) 40,355 (1,266)
-------------- ------------- -------------- -------------
Income before income tax.......................... 53,583 12,891 84,639 36,224
Income tax expense..................................... (7,563) (4,474) (18,434) (11,588)
-------------- ------------- -------------- -------------
Net income ..................................... $ 46,020 $ 8,417 $ 66,205 $ 24,636
-------------- ------------- -------------- -------------
Net income per common share - basic.................... $ 2.88 $ 0.54 $ 4.17 $ 1.61
-------------- ------------- -------------- -------------
Net income per common share - diluted.................. $ 2.81 $ 0.53 $ 4.07 $ 1.55
-------------- ------------- -------------- -------------
Weighted average number of common shares - basic...... 15,986,599 15,570,313 15,881,902 15,296,717
-------------- ------------- -------------- -------------
Weighted average number of common shares - diluted..... 16,384,106 15,953,268 16,279,724 15,939,801
-------------- ------------- -------------- -------------
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, 2005 AND 2004
(Unaudited, U.S. Dollars, in thousands) 2005 2004
---------------- -----------------
Cash flows from operating activities:
Net income................................................ $ 66,205 $ 24,636
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization.............................. 10,976 10,789
Deferred royalty income.................................... (2,443) --
Provision for doubtful accounts............................ 3,279 2,972
Other ..................................................... 2,113 1,372
Change in operating assets and liabilities:
Restricted cash......................................... 2,985 (13,471)
Accounts receivable..................................... (11,653) (12,456)
Inventories............................................. (4,221) (1,169)
Prepaid expenses and other.............................. (3,211) 2,690
Accounts payable........................................ 270 (3,517)
Current liabilities..................................... 30,488 (3,065)
---------------- -----------------
Net cash provided by operating activities...................... 94,788 8,781
---------------- -----------------
Cash flows from investing activities:
Investments in affiliates and subsidiaries................ -- (2,081)
Proceeds from sale of assets.............................. -- 1,578
Capital expenditures...................................... (8,928) (9,825)
Proceeds from sale of joint venture....................... -- 1,300
Other..................................................... -- 440
---------------- -----------------
Net cash used in investing activities.......................... (8,928) (8,588)
---------------- -----------------
Cash flows from financing activities:
Net proceeds from issuance of common stock................ 6,367 11,151
Payment of debt issuance costs............................ -- (532)
Net repayment of loans and borrowings..................... (24,060) (17,100)
---------------- -----------------
Net cash used in financing activities.......................... (17,693) (6,481)
---------------- -----------------
Effect of exchange rate changes on cash........................ (637) (7)
---------------- -----------------
Net increase (decrease) in cash and cash equivalents........... 67,530 (6,295)
Cash and cash equivalents at the beginning of the year......... 25,944 31,356
---------------- -----------------
Cash and cash equivalents at the end of the period............. $ 93,474 $ 25,061
---------------- -----------------
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
three and nine months ended September 30, 2005 are not necessarily indicative of
the results that may be expected for the year ending December 31, 2005. The
balance sheet at December 31, 2004 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, 2004.
NOTE 3: RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to the 2005
presentation. The reclassifications have no effect on previously reported net
income or shareholders' equity.
NOTE 4: RECENTLY ISSUED ACCOUNTING STANDARDS
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 123 (R), "Share-Based
Payment", a revision of FASB Statement No. 123, "Accounting for Stock-Based
Compensation". SFAS No. 123 (R) also supersedes APB Opinion No. 25, "Accounting
for Stock Issued to Employees". The revision will require companies to recognize
compensation costs based on the fair value of the equity or liability
instruments issued and to report the benefits of tax deductions in excess of
recognized compensation cost as a financing cash flow rather than as an
operating cash flow as reported in the accompanying consolidated statements of
cash flows. While we cannot estimate what these amounts will be in the future
(because they depend on, among other things, when employees exercise their
options), the amount of operating cash flows recognized in the nine months ended
September 30, 2005 and 2004 for such excess tax distributions were $1.3 million
and $3.5 million, respectively. Statement 123 (R) covers a wide range of
share-based compensation arrangements including share options, restricted share
plans, performance-based awards, share appreciation rights, and employee share
purchase plans.
In March 2005, the SEC issued Staff Accounting Bulletin ("SAB") No. 107
regarding the interaction between SFAS 123 (R) which was revised in December
2004 and certain SEC rules and regulations and provides the SEC's staff views
regarding the valuation of share-based payment arrangements for public
companies. The Company is evaluating the impact this guidance will have on its
financial conditions, results of operation and cash flows.
In April 2005, the SEC issued a press release that revises the required
date of adoption under SFAS 123 (R). The new rule allows for companies to adopt
the provisions of SFAS 123 (R) beginning on the first annual period beginning
after June 15, 2005. Based on the new required adoption date, the Company
currently expects to adopt SFAS 123 (R) effective January 1, 2006 using the
"modified prospective" method. Under the modified prospective method,
compensation cost is recognized in the financial statements beginning with the
effective date, based on the requirements of SFAS 123 (R) for all share-based
payments granted after that date, and based on the requirements of SFAS 123 for
all unvested awards granted prior to the effective date of SFAS 123 (R). The
Company is currently evaluating the different valuation methods available to
determine the fair market value of the Company's stock options and therefore is
unable to estimate the impact of this new standard.
NOTE 5: INVENTORY
Inventories are valued at the lower of cost or estimated net realizable
value, after provision for excess or obsolete items. Cost is determined on a
weighted-average basis, which approximates the FIFO method. The valuation of
work-in-process, finished goods, field inventory and consignment inventory
includes the cost of materials, labor and production. Field inventory
6
represents immediately saleable finished goods inventory that is in the
possession of the Company's direct sales representatives.
Inventories were as follows:
September 30, December 31,
(In thousands) 2005 2004
------------------- -------------------
Raw materials $7,463 $6,456
Work-in-process 3,716 2,445
Finished goods 13,411 14,823
Field inventory (as described above) 5,264 5,346
Consignment inventory 8,919 7,835
Less reserve for obsolescence (3,511) (4,010)
------------------- -------------------
$35,262 $32,895
=================== ===================
NOTE 6: GOODWILL
The change in the net carrying value of goodwill for the period ended
September 30, 2005 is as follows:
(In thousands)
Americas Americas International
Orthofix Breg Orthofix Total
-------------- -------------- -------------- --------------
At December 31, 2004 $32,952 $91,762 $44,615 $169,329
Foreign Currency - - (3,398) (3,398)
-------------- -------------- -------------- --------------
At September 30, 2005 $32,952 $91,762 $41,217 $165,931
============== ============== ============== ==============
7
NOTE 7: LONG TERM DEBT
(In thousands) September 30, December 31, 2004
2005
-------------------- -------------------
Long-term obligations $52,750 $76,750
Other loans 496 556
-------------------- -------------------
53,246 77,306
Less current portion (10,454) (10,057)
-------------------- -------------------
$42,792 $67,249
==================== ===================
Long-term debt primarily consists of a senior secured bank facility, as
amended, entered into by Colgate Medical Limited ("Colgate", or the "Borrower"),
concurrent with the closing of the Breg acquisition. At September 30, 2005 and
December 31, 2004 this senior secured bank facility had outstanding borrowings,
included in long-term obligations, of $52.8 million and $76.8 million,
respectively. The senior secured bank facility provides for (1) a five-year
amortizing term loan of $110 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 million, which was not drawn on as of September 30, 2005.
This obligation has a floating interest rate of LIBOR or prime rate plus a
margin. The current interest rate is LIBOR plus 2.00%, which is adjusted
quarterly based on the Borrower's leverage ratio.
In May 2004, the Company entered into a three year fully amortizable
interest rate swap agreement (the "Swap"). Under the Swap, the Company pays a
fixed rate of 3.16% and receives 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, 2005, we had $52.8 million of variable rate debt
represented by borrowings under our senior secured term loans at an interest
rate of 5.48% of which $29.2 million was swapped for fixed rate debt at an
interest rate of 5.16%. The effective interest rate, including the impact of the
Swap, as of September 30, 2005 on the senior secured debt was 5.31%.
NOTE 8: COMMON SHARES
For the nine months ended September 30, 2005, the Company issued 292,606
shares of common stock upon the exercise of outstanding stock options, warrants
and shares issued pursuant to the Company's employee stock purchase plan for
proceeds of $6.4 million.
8
NOTE 9: COMPREHENSIVE INCOME
Accumulated other comprehensive income (loss) is comprised of foreign
currency translation adjustments and the effective portion of the gain (loss)
for derivatives designated and accounted for as a cash flow hedge. The
components of and changes in other comprehensive income (loss) are as follows:
(In thousands) Foreign Fair Value Accumulated
Currency of Other
Translation Derivatives, Comprehensive
Adjustments net of tax Income/(Loss)
-------------- --------------- -------------
Balance at December 31, 2004 $15,047 $ 92 $ 15,139
Unrealized gain on derivative
instrument, net of tax of $66 -- 155 155
Foreign currency translation (8,505) -- (8,505)
adjustment
-------------- --------------- -------------
Balance at September 30, 2005 $ 6,542 $ 247 $ 6,789
============== =============== =============
(In thousands) Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------- -------------------------------
2005 2004 2005 2004
-------------- --------------- ------------ --------------
Net income $46,020 $ 8,417 $ 66,205 $ 24,636
Other comprehensive income:
Unrealized (loss) gain on
derivative instrument (See
Note 15) 70 (110) 155 (40)
Foreign currency translation
adjustment (499) 944 (8,505) 136
-------------- --------------- ------------ --------------
Total comprehensive income $ 45,591 $ 9,251 $ 57,855 $ 24,732
============== =============== ============ ==============
9
NOTE 10: BUSINESS SEGMENT INFORMATION
The Company's segment information is prepared on the same basis that the
Company's management reviews the financial information for operational decision
making purposes.
Americas Orthofix
Americas Orthofix operation ("Americas") consists of operations in the
United States, excluding Breg, as well as operations in Mexico, Brazil, and
Puerto Rico. The Americas uses both direct and distributor sales representatives
to sell to hospitals, doctors, and other healthcare providers in the Americas
market.
Americas Breg
Americas Breg operation ("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 distributors and affiliates.
International Orthofix
International Orthofix operation ("International") consists of operations
which are located in the rest of the world as well as independent distributors.
International uses both direct and distributor sales representatives to sell to
hospitals, doctors, and other healthcare providers.
Group Activities
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) 2005 2004 2005 2004
-------------- ------------- ---------- -----------
Americas Orthofix $ 35,954 $ 32,075 $ 300 $ 210
Americas Breg 17,983 17,383 102 131
International Orthofix 21,875 22,030 13,289 11,855
-------------- ------------- ---------- -----------
Total $ 75,812 $ 71,488 $ 13,691 $ 12,196
============== ============= ========== ===========
For the nine month period ended September 30:
External Sales Intersegment Sales
------------------------------- --------------------------
(In thousands) 2005 2004 2005 2004
-------------- ------------- ---------- -----------
Americas Orthofix $ 105,596 $ 93,002 $ 1,304 $ 1,053
Americas Breg 53,368 50,654 365 224
International Orthofix 74,076 69,363 42,192 42,401
-------------- ------------- ---------- -----------
Total $ 233,040 $ 213,019 $ 43,861 $ 43,678
============== ============= ========== ===========
10
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) 2005 2004 2005 2004
------------- -------------- ------------ ---------------
Americas Orthofix $ 8,475 $ 7,803 $ 25,195 $ 21,310
Americas Breg 1,534 3,084 6,881 7,612
International Orthofix 5,314 4,759 19,237 16,013
Group Activities (1,298) (1,150) (4,056) (3,233)
Eliminations (215) 664 (760) 152
------------- -------------- ------------ ---------------
Total $ 13,810 $ 15,160 $ 46,497 $ 41,854
============= ============== ============ ===============
The following table presents identifiable assets by segment, excluding
intercompany balances and investments in consolidated subsidiaries.
Identifiable Assets
September 30, December 31,
(In thousands) 2005 2004
------------------ ----------------
Americas Orthofix $110,548 $108,119
Americas Breg 177,410 177,365
International Orthofix 216,740 148,517
Group activities 7,625 9,688
Eliminations (13,545) (12,589)
------------------ ----------------
Total $498,778 $431,100
=================== =================
11
Sales by Market Sector for Information Purposes Only:
Sales by Market Sector
for the three month period ended September 30, 2005
------------------------------------------------------------------------------
Americas International
(In thousands) Orthofix Americas Breg Orthofix Total
------------------ --------------- --------------- ---------------
Orthopedic
Spine $ 25,422 $ - $ 26 $ 25,448
Reconstruction 1,940 17,983 10,062 29,985
Trauma 8,107 - 6,900 15,007
------------------ --------------- --------------- ---------------
Total Orthopedic 35,469 17,983 16,988 70,440
Non-Orthopedic 485 - 4,887 5,372
------------------ --------------- --------------- ---------------
Total $ 35,954 $ 17,983 $ 21,875 $ 75,812
================== =============== =============== ===============
Sales by Market Sector
for the three month period ended September 30, 2004
------------------------------------------------------------------------------
Americas International
(In thousands) Orthofix Americas Breg Orthofix Total
------------------ --------------- --------------- ---------------
Orthopedic
Spine $ 20,356 $ - $ 41 $ 20,397
Reconstruction 1,829 17,387 11,116 30,332
Trauma 9,364 (4) 6,309 15,669
------------------ --------------- --------------- ---------------
Total Orthopedic 31,549 17,383 17,466 66,398
Non-Orthopedic 526 - 4,564 5,090
------------------ --------------- --------------- ---------------
Total $ 32,075 $ 17,383 $ 22,030 $ 71,488
================== =============== =============== ===============
12
Sales by Market Sector
for the nine month period ended September 30, 2005
------------------------------------------------------------------------------
Americas International
(In thousands) Orthofix Americas Breg Orthofix Total
------------------ --------------- --------------- ---------------
Orthopedic
Spine $ 73,752 $ - $ 95 $ 73,847
Reconstruction 6,182 53,368 34,737 94,287
Trauma 24,433 - 23,230 47,663
------------------ --------------- --------------- ---------------
Total Orthopedic 104,367 53,368 58,062 215,797
Non-Orthopedic 1,229 - 16,014 17,243
------------------ --------------- --------------- ---------------
Total $ 105,596 $ 53,368 $ 74,076 $ 233,040
================== =============== =============== ===============
Sales by Market Sector
for the nine month period ended September 30, 2004
------------------------------------------------------------------------------
Americas International
(In thousands) Orthofix Americas Breg Orthofix Total
------------------ --------------- --------------- ---------------
Orthopedic
Spine $ 60,140 $ - $ 115 $ 60,255
Reconstruction 5,326 50,438 33,822 89,586
Trauma 26,651 216 20,240 47,107
------------------ --------------- --------------- ---------------
Total Orthopedic 92,117 50,654 54,177 196,948
Non-Orthopedic 885 - 15,186 16,071
------------------ --------------- --------------- ---------------
Total $ 93,002 $ 50,654 $ 69,363 $ 213,019
================== =============== =============== ===============
NOTE 12: 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 generation of net operating
losses in various jurisdictions that the Company believes will not be utilized,
the Company's tax holiday benefit in the Seychelles, tax planning associated
with the acquisition of Breg, non-deductible obligations related to the KCI
settlement and the new Section 199 deduction, enacted as part of the American
Jobs Creation Act of 2004, related to income attributable to production
activities occurring in the United States.
13
NOTE 13: EARNINGS PER SHARE
For the nine month periods ended September 30, 2005 and 2004, 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,
------------------------------ --------------------------------
2005 2004 2005 2004
------------- ------------- ------------- ---------------
Weighted average common shares - basic 15,986,599 15,570,313 15,881,902 15,296,717
Effect of dilutive securities:
Stock options 397,507 382,955 397,822 643,084
------------- ------------- ------------- ---------------
Weighted average common shares - diluted 16,384,106 15,953,268 16,279,724 15,939,801
============= ============= ============= ===============
The Company did not include 266,000 and 617,000 options in the diluted
shares outstanding calculation for the three and nine month periods ended
September 30, 2005, 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. 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 for our common stock during the period.
14
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, 2005,
$87,000 and $261,000, 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 compared to $90,000 and $267,000
for the same periods of the prior year, respectively. 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, 2005 and September 30, 2004 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, 2004. 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) 2005 2004 2005 2004
------------------------------- -------------------------------
Net income
As reported $46,020 $8,417 $66,205 $24,636
Add: Stock-based employee compensation
expense included in reported net
income, net of related tax effects 87 90 261 267
Less: Total stock-based employee
compensation expense determined
under fair value method for all
awards net of tax (906) (378) (2,189) (1,225)
------------- ------------- ----------- ---------------
Pro forma $45,201 $8,129 $64,277 $23,678
Net income per common share - basic
As reported $2.88 $0.54 $4.17 $1.61
Pro forma $2.83 $0.52 $4.05 $1.55
Net income per common share - diluted
As reported $2.81 $0.53 $4.07 $1.55
Pro forma $2.76 $0.51 $3.95 $1.49
15
NOTE 15: DERIVATIVE INSTRUMENTS
In May 2004, the Company entered into a three year fully amortizable
interest rate swap agreement (the "Swap") to manage its interest rate exposure
related to a portion of the Company's $110.0 million credit facility entered
into on December 30, 2003. The Swap has a notional amount of $50.0 million and
expires on June 27, 2007. The amount outstanding under the Swap as of September
30, 2005 was $29.2 million. Under the Swap, the Company pays a fixed rate of
3.16% and receives 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, 2005, is
determined to be effective. At September 30, 2005, the fair value of the
derivative was approximately $353,000 and has been included in prepaid expenses
and other current assets. The net unrealized gain of approximately $70,000, net
of tax of $30,000, has been included in other comprehensive income for the three
month period ended September 30, 2005. The net unrealized gain of approximately
$155,000, net of tax of $66,000, has been included in the other comprehensive
income for the nine month period ended September 30, 2005. The fair value of the
Swap is the estimated amount the Company would pay or receive to terminate the
agreement at the reporting date.
In August 2005, the Company entered into a foreign currency forward
contract (the "Forward Contract") to manage its foreign currency exposure
related to a portion of the Company's accounts receivable that are denominated
in Euros. Under the Forward Contract the Company sold 5.0 million Euros at an
all-in rate of 1.2339. On September 30, 2005, the Company settled the Forward
Contract by purchasing 5.0 million Euros at 1.2030 and selling them under the
Forward Contract for 1.2339, resulting in cash received of $154,500 and a gain
of $108,150, net of related taxes. This Forward Contract has been accounted for
as a fair value hedge in accordance with FASB 133 and the gain was recorded in
other income and the related tax amount in taxation. On September 30, 2005, the
Company entered into a new forward currency contract to sell 5.0 million Euros
at an all-in rate of 1.2070, which has a settlement date of December 30, 2005
and is being accounted for as a fair value hedge.
NOTE 16: CONTINGENCIES
Litigation
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 foot pump product, breach of
contract, unfair competition and was seeking damages. KCI filed counterclaims
alleging inequitable conduct by Novamedix before the United States Patent and
Trademark Office, fraud and unfair competition. KCI withdrew several of its
counterclaims, but continued to assert affirmative defenses contending that the
patents were invalid, unenforceable, and not infringed. During 2002, the United
States Patent and Trademark Office issued re-examination certificates validating
four U.S. vascular patents owned by the Company. The U.S. District Court in San
Antonio, Texas denied certain motions filed by KCI that would have disposed of
the case without a trial. On September 30, 2005 KCI, Novamedix and the Company
announced a settlement had been reached under which KCI agreed to pay Novamedix
$75.0 million and gave Novamedix an option to receive an assignment of or a
license to certain KCI foot pump patent rights.
At September 30, 2005 the Company recorded as other income the cash receipt
of $75.0 million and an estimate of $37.3 million in liabilities for taxes and
contractual obligations to distribute a portion of the settlement proceeds to
certain parties including the former owners of Novamedix and the original patent
holders. The net gain recorded is subject to adjustment based on the difference
between our estimated and final contractual obligations which we expect to
finalize in the fourth quarter of 2005. The Company is also in the process of
determining if the assignment or a license of certain KCI foot pump patents has
any economic value to the Company. Following preliminary discussions with patent
experts, the Company currently believes that no significant value will be placed
on these patents. Further, the Company agreed to indemnify KCI against certain
tax liabilities that might arise out of the settlement. Management believes the
risk that any such claims might arise under this indemnity to be remote.
16
The Company, in the normal course of its business, is involved in various
legal proceedings or claims from time to time.
Although management cannot predict the outcome of any proceedings or claims
made against the Company, management does not anticipate that the ultimate
outcome of any such proceedings or claims will have a material adverse effect on
the Company's financial position, results of operations or cash flows.
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, 2004.
17
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, 2005 compared to our results of operations for the three and nine
months ended September 30, 2004. 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, 2004.
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 electrical bone growth 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 we
have significant influence over significant operating decisions but do not hold
control.
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 and use hedging instruments
where appropriate. We have in place an interest rate swap derivative instrument
to hedge a portion of our exposure to interest rate fluctuation. We also have in
place a forward contract to sell 5.0 million Euros to hedge the foreign exchange
exposure on a portion of our accounts receivable that is denominated in Euros.
We manage our operations as three business segments: Americas Orthofix,
Americas Breg and International Orthofix. Americas Orthofix consists of
operations in the United States, excluding Breg, as well as operations in
Mexico, Brazil, and Puerto Rico. Americas Breg consists of Breg's domestic and
independent international distributor operations. International Orthofix
consists of operations which are located 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.
18
Segment and Market Sector 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% of our total net sales in the three and nine months ended
September 30, 2005 and 93% and 92% of our total net sales in the three and nine
months ended September 30, 2004, respectively. Sales of non-orthopedic products,
including the airway management products for use during anesthesia, woman's care
and other products, accounted for 7% of our total net sales in the three and
nine months ended September 30, 2005 and 7% and 8% of our total net sales in the
three and nine months ended September 30, 2004, respectively.
The following tables display the net sales by business segment and net
sales by market sectors for the three and nine months ended September 30, 2005
and 2004. We provide net sales by market sector for information purposes only.
We keep our books and records and account for net sales, cost of sales and
expenses by business segment.
Business Segment:
Three Months Ended September 30,
(In US$ thousands) 2005 2004
------------------------------- ---------------------------------
Percent of Percent of
Total Net Total Net
Net Sales Sales Net Sales Sales
-------------- ---------------- ----------------- ---------------
Americas Orthofix $35,954 47% $32,075 45%
Americas Breg 17,983 24% 17,383 24%
International Orthofix 21,875 29% 22,030 31%
-------------- ---------------- ----------------- ---------------
Total $75,812 100% $71,488 100%
============== ================ ================= ===============
Nine Months Ended September 30,
(In US$ thousands) 2005 2004
------------------------------ ----------------------------------
Percent of Percent of
Total Net Total Net
Net Sales Sales Net Sales Sales
-------------- --------------- ------------------ ---------------
Americas Orthofix $105,596 45% $93,002 44%
Americas Breg 53,368 23% 50,654 24%
International Orthofix 74,076 32% 69,363 32%
-------------- --------------- ------------------ ---------------
Total $233,040 100% $213,019 100%
============== =============== ================== ===============
19
Market Sector:
Three Months Ended September 30,
(In US$ thousands) 2005 2004
------------------------------- ---------------------------------
Percent of Percent of
Total Net Total Net
Net Sales Sales Net Sales Sales
-------------- ---------------- ----------------- ---------------
Orthopedic
Spine $25,448 34% $20,397 29%
Reconstruction 29,985 39% 30,332 42%
Trauma 15,007 20% 15,669 22%
-------------- ---------------- ----------------- ---------------
Total Orthopedic 70,440 93% 66,398 93%
Non-Orthopedic 5,372 7% 5,090 7%
-------------- ---------------- ----------------- ---------------
Total $75,812 100% $71,488 100%
============== ================ ================= ===============
Nine Months Ended September 30,
(In US$ thousands) 2005 2004
------------------------------- ---------------------------------
Percent of Percent of
Total Net Total Net
Net Sales Sales Net Sales Sales
-------------- ---------------- ----------------- ---------------
Orthopedic
Spine $73,847 32% $60,255 28%
Reconstruction 94,287 41% 89,586 42%
Trauma 47,663 20% 47,107 22%
-------------- ---------------- ----------------- ---------------
Total Orthopedic 215,797 93% 196,948 92%
Non-Orthopedic 17,243 7% 16,071 8%
-------------- ---------------- ----------------- ---------------
Total $233,040 100% $213,019 100%
============== ================ ================= ===============
20
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,
---------------------------------------------------------------
2005 2004 2005 2004
---- ---- ---- ----
(%) (%) (%) (%)
Net sales........................... 100 100 100 100
Cost of sales....................... 27 27 27 28
Gross profit........................ 73 73 73 72
Operating expenses
Sales and marketing .............. 39 35 37 36
General and administrative........ 11 11 11 10
Research and development.......... 3 4 4 4
Amortization of intangible assets. 2 2 2 2
Total operating income.............. 18 21 20 20
Net income (1)...................... 61 12 28 12
--------------------------------
(1) Includes the nonrecurring net income related to the KCI settlement.
This settlement represented 50% and 16% of net sales for the three and
nine months ended September 30, 2005, respectively.
Nine Months Ended September 30, 2005 Compared to Nine Months Ended
September 30, 2004
Sales by Business Segment:
Net sales increased 9% to $233.0 million in the first nine months of 2005
compared to $213.0 million in the first nine months of 2004. The impact of
foreign currency increased sales by $2.1 million, or 1.0%, during the first nine
months of 2005 as compared to the first nine months of 2004.
Net sales in Americas Orthofix (the "Americas"), primarily in the United
States, increased 14% to $105.6 million in the first nine months of 2005
compared to $93.0 million in the first nine months of 2004. The Americas
represented 45% of total net sales during the first nine months of 2005 and 44%
of total net sales for the first nine months of 2004. The increase in sales was
primarily the result of a 23% increase in sales in the Spine market sector
attributable to sales of Cervical-Stim(R) which was approved by the FDA in
December 2004 and growth in the sales of Spinal-Stim(R), used for lumbar
applications. The Americas Reconstruction market sector increased 16% in the
first nine months of 2005 compared to the same period of the prior year. This
growth continues to be driven by fixation products used in reconstruction
applications, including the recently introduced growth plate (the eight-Plate)
and the ISKD limb lengthening system. These increases in the Americas Spine and
Reconstruction market sectors were partially offset by an 8% decrease in the
Americas Trauma market sector in the first nine months of 2005 as compared to
the same period in the prior year. This decrease is attributable to a decline in
external fixation sales used in these applications and the cannibalization of
some stimulation sales, previously recorded in the Trauma market sector, by the
recent introduction of the Cervical-Stim(R). In the Americas Trauma market
sector, external fixation devices are sharing the market for treatment of
difficult fractures with alternatives such as plating, nailing and biologics.
Recognizing this trend, we have introduced the contour plate for distal radius
fractures, the Osteomax bone void filler product line, and anticipate the
introduction of other internal fixation and biologic products to our Americas
Trauma product line. The following table illustrates net sales by market sector
in the Americas:
21
Net Sales for the
Nine Months Ended September 30,
---------------------------------------
(In US$ thousands) 2005 2004 Growth
-------------------- -------------------- --------------
Orthopedic
Spine $73,752 $60,140 23%
Reconstruction 6,182 5,326 16%
Trauma 24,433 26,651 -8%
-------------------- --------------------
Total Orthopedic 104,367 92,117 13%
Non-Orthopedic 1,229 885 39%
-------------------- --------------------
Americas Orthofix $105,596 $93,002 14%
==================== ====================
Net sales in Americas Breg ("Breg") increased $2.7 million to $53.4 million
for the first nine months of 2005 compared to $50.7 million for the first nine
months of 2004, an increase of 5%. This increase in sales was primarily
attributable to the sale of Breg bracing products which increased 9% from the
first nine months of 2004. Our new Fusion(TM) XT knee brace, which experienced
positive market response upon its introduction, contributed to this increase.
This increase was partially offset by an 8% decrease in sales for pain therapy
products resulting in part from delays in the introduction of new pain therapy
products.
Net sales in International Orthofix ("International") increased 7% to $74.1
million in the first nine months of 2005 compared to $69.4 million in first nine
months of 2004. Our Trauma market sector continues to contribute to the growth
in International, led primarily by the sales of external fixation products, the
Physio-Stim and the PC.C.P hip fracture system. The International Reconstruction
market sector continues to be impacted by a decrease in sales of the A-V Impulse
product when compared to the same period of the prior year. This decrease is
primarily attributable to the competitive landscape for this product and
decreased prices to our principal US distributor. The impact of foreign currency
increased International Orthofix sales by $1.7 million during the first nine
months of 2005 as compared to the first nine months of 2004. The following table
illustrates net sales by market sector in International:
Net Sales for the
Nine Months Ended September 30,
---------------------------------------
(In US$ thousands) 2005 2004 Growth
-------------------- -------------------- --------------
Orthopedic
Spine $ 95 $ 115 -17%
Reconstruction 34,737 33,822 3%
Trauma 23,230 20,240 15%
-------------------- --------------------
Total Orthopedic 58,062 54,177 7%
Non-Orthopedic 16,014 15,186 5%
-------------------- --------------------
International Orthofix $74,076 $69,363 7%
==================== ====================
Sales by Market Sector:
Net sales of spine products increased 23% to $73.8 million in the nine
months of 2005 compared to $60.3 million in the first nine months of 2004. This
increase is primarily due to sales of Cervical-Stim(R), which was approved by
the FDA in December 2004 and began selling in January 2005, and growth of our
Spinal-Stim(R), used for lumbar applications.
22
Sales of our reconstruction products increased 5% to $94.3 million in the
first nine months of 2005 compared to $89.6 million in the first nine months of
2004. The increase is attributable to sales of our fixation products used in
reconstruction applications which increased 5%, sales of the Breg products which
increased 7% worldwide, sales of the ISKD limb lengthening device which
increased 52%, and sales of our OSCAR product which increased 13%. These
increases were partially offset by a 1% decrease in the sale of our A-V Impulse
product as discussed above.
Sales of our trauma products increased 1% to $47.7 million in the first
nine months of 2005, compared to $47.1 million in the first nine months of 2004.
This market sector was positively impacted from a 6% growth in sales of external
fixation products and a 29% growth in sales of PC.C.P. Growth in this market
sector was negatively impacted by a decrease of 10% in sales of stimulation
products used for long bone applications including increased competition and the
effect of cannibalization of some stimulation sales previously recorded in this
market sector by Cervical-Stim(R).
Sales of our non-orthopedic products grew 7% to $17.2 million in the first
nine months of 2005 compared to $16.1 million in the first nine months of 2004.
The increase was primarily due to an increase in sales of woman's care and other
products. This increase was slightly offset by a decrease in sales of airway
management products due to the introduction of a new single-use version of the
Laryngeal Mask which has a lower selling price than reusable Laryngeal Mask
products.
Gross Profit - Our gross profit increased 11% to $171.2 million in the first
nine months of 2005, from $154.2 million in the first nine months of 2004. The
increase was primarily due to the increase of 9% in net sales. Gross profit as a
percent of net sales in the first nine months 2005 was 73.5% compared to 72.4%
in the first nine months of 2004. The improvement in gross profit margin for the
comparative periods is due to increased margins on our stimulation products, a
more favorable product mix resulting from higher sales of higher margin
stimulation products and higher gross margins at Breg as a result of moving
manufacturing facilities to Mexico.
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 $9.2 million to
$85.6 million in the first nine months of 2005 compared to $76.4 million in the
first nine months of 2004, an increase of 12% on a net sales increase of 9% over
the same period. The higher sales and marketing expense relates to higher
commissions and other variable costs on higher sales, additional sales force
personnel principally in the Americas and higher expenses related to the
addition of more marketing programs and personnel at Breg.
General and Administrative Expense - General and administrative expense
increased $3.4 million in the first nine months of 2005 to $25.8 million
compared to $22.4 million in the first nine months of 2004. This increase is a
result of higher costs associated with Section 404 of the Sarbanes-Oxley Act of
2002, legal activity, employee benefit costs in the United States and training
costs associated with implementing an Oracle system at Breg. We also had an
increase in the area of business development, when compared to the same period
of the prior year. We added a new Chief Operating Officer during the current
year to lead these activities and have incurred costs of outside consultants to
help us define market potential and target new opportunities. General and
administrative expense as a percent of net sales was 11% for the first nine
months of 2005 compared to 10% for the first nine months of 2004.
Research and Development Expense - Research and development expense decreased
$0.4 million in the first nine months of 2005 to $8.3 million compared to $8.7
million in the first nine months of 2004 and remained constant as a percent of
net sales at 4% in 2005 compared to 2004.
Amortization of Intangible Assets - Amortization of intangible assets was $4.9
million in the first nine months of 2005 compared to $4.8 million for the first
nine months of 2004.
23
Interest Expense, net - Interest expense was $3.7 million in the first nine
months of 2005 compared to $4.6 million in the first nine months of 2004. We
incurred interest expense on borrowings under our senior secured term loan of
approximately $3.7 million which included the amortization of debt placement
costs. The reduction in interest expense in the first nine months of 2005 when
compared to the same period of 2004 is a result of a decrease in the borrowing
amount under our senior secured term loan, partially offset by a rise in
interest rates and the increase in amortization of debt placement costs related
to the accelerated debt pay down.
Other Income, net - Other income, net was income of $1.5 million in the first
nine months of 2005 compared to income of $0.2 in the first nine months of 2004.
Other income for the first nine months of 2005 was attributable to $2.4 million
of deferred royalty income resulting from the conclusion of the BoneSource
agreement with Stryker which was partially offset by $0.9 million of foreign
currency losses. During the first nine months of 2004, we sold our interest in a
property as part of a plan to consolidate our United Kingdom facilities that
resulted in a gain of approximately $0.6 million which was partially offset by
foreign exchange losses of $0.3 million. We also recorded a loss of $0.1 million
from our investment in OrthoRx. Our investment in OrthoRx, which is accounted
for using the equity method of accounting, has been reduced to zero.
KCI Settlement, net of litigation costs - In September 2005, we reached an
agreement to settle our case against Kinetics Concepts Inc. ("KCI") (further
described in Note 16 "Contingencies" of Item 1, "Condensed Financial
Statements"). The gain, net of related costs, for the nine months ended
September 30, 2005 was $40.4 million, compared to costs of $1.3 million for the
nine months ended September 30, 2004. The net gain recorded is subject to
adjustment based on the difference between our estimated and final contractual
obligations which we expect to finalize in the fourth quarter of 2005. In
addition to the net gain of $40.4 million for the nine months, we recorded cash
received of $75.0 million and accrued liabilities, before taxes, of $34.6
million at September 30, 2005. The accrued liabilities relate to contractual
obligations to distribute a portion of the settlement proceeds to certain
parties including the former owners of Novamedix.
Income Tax Expense - Our worldwide effective tax rate was 21.7% and 32.0% during
the first nine months of 2005 and 2004, respectively. The decrease in the
effective tax rate compared to the same period of the prior year is due
primarily to the gain recorded from the KCI settlement. This gain was recorded
at Novamedix Distribution Limited, a wholly-owned Cypriot subsidiary, which is
in a favorable tax jurisdiction. Excluding the nonrecurring KCI settlement our
effective tax rate is approximately 36.0% for the first nine months of 2005. The
increase in our normalized effective tax rate is primarily attributable to a
change in tax law in the United Kingdom and earning more taxable income in
higher tax jurisdictions such as the United States.
Net Income - Net income for the first nine months of 2005 was $66.2 million, or
$4.17 per basic share and $4.07 per diluted share, compared to $24.6 million, or
$1.61 per basic share and $1.55 per diluted share, for the first nine months of
2004, an increase in net income of 169%. Net income for the first nine months of
2005 included a gain of $37.7 million or $2.38 per basic share and $2.32 per
diluted share, net of related costs and taxes, from the settlement of the KCI
litigation. The weighted average number of basic common shares outstanding was
15,881,902 and 15,296,717 during the first nine months of 2005 and 2004,
respectively. The weighted average number of diluted common shares outstanding
was 16,279,724 and 15,939,801 during the first nine months of 2005 and 2004,
respectively.
Three Months Ended September 30, 2005 Compared to Three Months Ended
September 30, 2004
Sales by Business Segment:
Net sales increased 6% to $75.8 million in the third quarter of 2005
compared to $71.5 million in the third quarter of 2004. The impact of foreign
currency increased sales by $0.2 million, or 0.3%, during the third quarter of
2005 as compared to the third quarter of 2004.
Net sales in the Americas, primarily in the United States, increased 12% to
$36.0 million in the third quarter of 2005 compared to $32.1 million in the
third quarter of 2004. The Americas represented 47% of total net sales during
the third quarter of 2005 and 45% of total net sales for the third quarter of
2004. The increase in sales was primarily the result of a 25% increase in sales
in the Spine market sector attributable to sales of Cervical-Stim(R) which was
approved by the FDA in December 2004 and growth in the sales of our
Spinal-Stim(R), used for lumbar applications. The Americas Trauma market sector
decreased 13% in the third quarter of 2005 as compared to the same period in the
prior year. This decrease is attributable to a decline in external fixation
sales and the cannibalization of some stimulation sales, previously recorded in
the Trauma market sector, by the recent introduction of the Cervical-Stim(R). In
the Americas Trauma market sector, external fixation devices are sharing the
market for treatment of difficult fractures with alternatives such as plating,
nailing and biologics. Recognizing this trend, we have introduced the contour
plate for distal radius fractures, the Osteomax bone void filler product line,
and
24
anticipate the introduction of other internal fixation and biologic products to
our Americas Trauma product line. The following table illustrates net sales by
market sector in the Americas:
Net Sales for the
Three Months Ended September 30,
---------------------------------------
(In US$ thousands) 2005 2004 Growth
-------------------- -------------------- --------------
Orthopedic
Spine $25,422 $20,356 25%
Reconstruction 1,940 1,829 6%
Trauma 8,107 9,364 -13%
-------------------- --------------------
Total Orthopedic 35,469 31,549 12%
Non-Orthopedic 485 526 -8%
-------------------- --------------------
Americas Orthofix $35,954 $32,075 12%
==================== ====================
Net sales in Breg increased $0.6 million to $18.0 million in the third
quarter of 2005 compared to $17.4 million in the third quarter of 2004, an
increase of 3%. This increase in sales was primarily attributable to the sale of
Breg bracing products which increased 9% from the third quarter of 2004. Our new
Fusion(TM) XT knee brace, which experienced positive market response upon its
introduction into the market, contributed to this increase. This increase was
partially offset by a 17% decrease in sales for pain therapy products resulting
in part from delays in the introduction of new pain therapy products.
Net sales in International decreased 1% to $21.9 million in the third
quarter of 2005 compared to $22.0 million in third quarter of 2004. The Trauma
market sector contributed to growth in International, led primarily by sales of
external fixation, Physio-Stim and the PC.C.P hip fracture system. The
International Reconstruction market sector continues to be impacted by a
decrease in sales of the A-V Impulse product when compared to the same period of
the prior year. This decrease is primarily attributable to the competitive
landscape for this product. The impact of foreign currency increased
International Orthofix sales by $0.1 million during the third quarter of 2005 as
compared to the third quarter of 2004. The following table illustrates net sales
by market sector in International:
Net Sales for the
Three Months Ended September 30,
---------------------------------------
(In US$ thousands) 2005 2004 Growth
--------------------- ----------------- -----------------
Orthopedic
Spine $ 26 $ 41 -37%
Reconstruction 10,062 11,116 -9%
Trauma 6,900 6,309 9%
--------------------- -----------------
Total Orthopedic 16,988 17,466 -3%
Non-Orthopedic 4,887 4,564 7%
--------------------- -----------------
International Orthofix $21,875 $22,030 -1%
===================== ==================
25
Sales by Market Sector:
Net sales of spine products increased 25% to $25.4 million in the third
quarter of 2005 compared to $20.4 million in the third quarter of 2004. As
discussed above, the increase is primarily due to sales of Cervical-Stim(R)
which was approved by the FDA in December 2004 and began selling in January
2005, and good growth of our Spinal-Stim(R), used for lumbar applications.
Sales of reconstruction products decreased 1% to $30.0 million in the third
quarter of 2005 compared to $30.3 million in the third quarter of 2004. The
decrease in this market sector was primarily attributable to lower sales of
external fixation products used in reconstruction and a decrease in sales of our
A-V Impulse product sales as discussed above. These decreases were partially
offset by a 6% increase in the sales of Breg products worldwide.
Sales of trauma products decreased 4% to $15.0 million in the third quarter
of 2005, compared to $15.7 million in the third quarter of 2004. This market
sector was negatively impacted from a 21% decline in sales of the Physio-Stim
product which has experienced increased competition and cannibalization of some
sales by the recent introduction of the Cervical-Stim(R).
Sales of our non-orthopedic products grew 6% to $5.4 million in the third
quarter of 2005 compared to $5.1 million in the third quarter of 2004. The
increase was primarily due to an increase in sales of woman's care and other
products.
Gross Profit - Our gross profit increased 7% to $55.6 million in the third
quarter of 2005, from $51.9 million in the third quarter of 2004. The increase
was primarily due to the increase of 6% in net sales. Gross profit as a percent
of net sales in the third quarter 2005 was 73.4% compared to 72.6% in the third
quarter of 2004. The improvement in gross profit margin for the comparative
periods is due to increased margins on our stimulation products and a more
favorable product mix resulting from higher sales of higher margin stimulation
products.
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 $4.5 million to
$29.2 million in the third quarter of 2005 compared to $24.7 million in the
third quarter of 2004, an increase of 18% on a net sales increase of 6% over the
same period. The higher sales and marketing expense relates to higher
commissions and other variable costs on higher sales, higher expenses with
Medtronic Sofamor Danek related to a new marketing services agreement,
additional sales force personnel principally in the Americas and higher expenses
related to the addition of more marketing programs and personnel at Breg.
General and Administrative Expense - General and administrative expense
increased $0.7 million in the third quarter of 2005 to $8.4 million compared to
$7.7 million in the third quarter of 2004. This increase is a result of higher
costs associated with Section 404 of the Sarbanes-Oxley Act of 2002, legal
activity, employee benefit costs in the United States and training costs
associated with implementing an Oracle system at Breg. We also had an increase
in the area of business development, when compared to the same period of the
prior year. We added a new Chief Operating Officer during the current year to
lead these activities and have incurred costs of outside consultants to help us
define market potential and target new opportunities. General and administrative
expense as a percent of net sales remained constant at 11% for the third quarter
of 2005 compared to the third quarter of 2004.
Research and Development Expense - Research and development expense decreased
$0.2 million in the third quarter of 2005 to $2.5 million compared to $2.7
million in the third quarter of 2004 and decreased as a percent of net sales to
3% in 2005 as compared to 4% in 2004.
Amortization of Intangible Assets - Amortization of intangible assets was $1.6
million in the third quarter of 2005 and the third quarter of 2004.
Interest Expense, net - Interest expense was $1.2 million in the third quarter
of 2005 compared to $1.7 million in the third quarter of 2004. In the third
quarter of 2005, we incurred interest expense on borrowings under our senior
secured term loan of approximately $1.2 million which included the amortization
of debt placement costs. The reduction in interest expense in the third quarter
of 2005 when compared to the same period of 2004 is a result of a decrease in
the borrowing amount under our senior secured term loan, partially offset by a
rise in interest rates and the increase in amortization of debt placement costs
related to accelerated debt pay down.
26
Other Income (Expense), net - Other income (expense), net was income of
$0.1 million in the third quarter of 2005 compared to no income in the third
quarter of 2004. For the third quarter of 2004, we recorded foreign currency
gains of $0.3 million offset by a loss of $0.3 million which was a result of our
portion of losses in OrthoRx. Our investment in OrthoRx, which is accounted for
using the equity method of accounting, has been reduced to zero.
KCI Settlement, net of litigation costs - In September 2005, we reached an
agreement to settle our case against KCI (further described in Note 16
"Contingencies" of Item 1, "Condensed Financial Statements"). The gain, net of
related costs, for the third quarter of 2005 was $40.9 million, compared to
costs of $0.6 million for the third quarter of 2004. The net gain recorded is
subject to adjustment based on the difference between our estimated and final
contractual obligations which we expect to finalize in the fourth quarter of
2005. In addition to the net gain of $40.8 million for the third quarter, we
recorded cash received of $75.0 million and accrued liabilities, before taxes,
of $34.6 million at September 30, 2005. The accrued liabilities relate to
contractual obligations to distribute a portion of the settlement proceeds to
certain parties including the former owners of Novamedix.
Income Tax Expense - Our worldwide effective tax rate was 14.1% and 34.7% during
the third quarter of 2005 and 2004, respectively. The decrease in the effective
tax rate compared to the same period of the prior year is due primarily to the
gain recorded from the KCI settlement. This gain was recorded at Novamedix
Distribution Limited, a wholly-owned Cypriot subsidiary, which is in a favorable
tax jurisdiction.
Net Income - Net income for the third quarter of 2005 was $46.0 million, or
$2.88 per basic share and $2.81 per diluted share, compared to $8.4 million, or
$0.54 per basic share and $0.53 per diluted share, for the third quarter of
2004, an increase in net income of 447%. Net income for the third quarter of
2005 included a gain of $38.2 million or $2.39 per basic share and $2.33 per
diluted share, net of related costs and taxes, from the settlement of the KCI
litigation. The weighted average number of basic common shares outstanding was
15,986,599 and 15,570,313 during the third quarter of 2005 and 2004,
respectively. The weighted average number of diluted common shares outstanding
was 16,384,106 and 15,953,268 during the third quarter of 2005 and 2004,
respectively.
Liquidity and Capital Resources
Cash was $104.8 million at September 30, 2005 and included $75.0 million
from the settlement of the KCI litigation of which a portion is due to the
original shareholders of Novamedix, former patent owners and attorneys. Cash
balances also included $11.3 million which is subject to certain restrictions
under the senior secured credit agreement described below. This compares to
$40.2 million at December 31, 2004, of which $14.3 million was subject to
certain restrictions under the senior secured credit agreement.
Net cash provided by operating activities was $94.8 million, including
$75.0 million from the settlement of the KCI litigation, for the first nine
months of 2005 compared to $8.8 million of cash provided by operating activities
for the first nine months of 2004. Net cash provided by operating activities is
comprised of net income, non-cash items and changes in working capital. Net
income increased approximately $41.6 million to $66.2 million, including $37.7
million related to the settlement of the KCI litigation, in the first nine
months of 2005 from $24.6 million in the first nine months of 2004. Non-cash
items decreased $1.2 million in the first nine months of 2005 compared to the
first nine months of 2004, primarily as a result of the termination of the
BoneSource agreement which reduced deferred royalties. Working capital accounts
provided $14.7 million, including $37.3 million related to the settlement of the
KCI litigation, of cash in the first nine months of 2005 compared to the use of
$31.0 million in cash during the first nine months of 2004 of which $13.5
million resulted from the reclassification of cash as restricted cash. Excluding
the KCI litigation settlement, working capital accounts consumed $22.6 million
in the first nine months of 2005 with increases in accounts receivable to
support additional sales, increases in inventory and prepaid expenses and other
assets along with a decrease in other current liabilities. Overall, performance
indicators for our two primary working capital accounts, accounts receivable and
inventory, reflect days sales in receivables of 98 days at September 30, 2005
compared to 104 days at September 30, 2004 and inventory turnover of 2.3 times
at September 30, 2005 compared to 2.5 times at September 30, 2004.
27
Net cash used in investing activities was $8.9 million during the first
nine months of 2005, compared to $8.6 million during the first nine months of
2004. During the first nine months of 2005, we invested $8.9 million in capital
expenditures. During the first nine months of 2004, we invested $2.1 million in
affiliates and subsidiaries including $1.1 million for the purchase of a Puerto
Rican distributor, invested $9.8 million in capital expenditures and received
$3.3 million from the sale of certain assets.
Net cash used in financing activities was $17.7 million in the first nine
months of 2005 compared to $6.5 million in the first nine months in 2004. In the
first nine months of 2005, we repaid approximately $24.0 million of principal on
a senior secured term loan, which was obtained to help finance the Breg
acquisition. We also received proceeds of $6.4 million from the issuance of
292,606 shares of our common stock upon the exercise of stock options, warrants
and shares issued pursuant to our employee stock purchase plan. 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 issued pursuant to our employee stock purchase plan. We also had net
borrowings of $1.4 million on a line of credit in Italy used to finance working
capital. Further, in the first nine months of 2004, we repaid approximately
$18.2 million against principal on a 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 is being 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 senior secured
bank credit facility with a syndicate of financial institutions to finance the
transaction. The senior secured facility provides for (1) a five-year amortizing
term loan 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, 2005 and as of November 7, 2005, we had no
amounts outstanding under the revolving credit facility and $52.8 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 LIBOR plus 2.00%, 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, 2005 was $29.2 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, 2005, the interest rate on the debt
related to the Swap was 5.16% (3.16% plus a margin of 2.00%). Our effective
interest rate, including the impact of the Swap, as of September 30, 2005 on our
senior secured debt was 5.31%. 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 facility. The obligations of
Colgate under the senior secured 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 facility on a limited recourse basis.
The credit agreement relating to the senior secured 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
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, 2005, as required by the credit agreement, and note that we
are in compliance with all financial covenants.
At September 30, 2005, we had outstanding borrowings of $0.1 million and
unused available lines of credit of approximately $11.4 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 are considering utilizing some of the excess cash generated from
operations plus a portion of the net cash received from the KCI settlement to
make further prepayments on our senior secured credit facility. This would
accelerate amortization of debt placement costs.
28
We continue to search for viable acquisition candidates that would expand
our global 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, 2004:
Contractual Obligations Payments Due By Period
- -----------------------------------------------------------------------------------------------------------------------
Total Less Than 1 to 3 4 to 5 Over 5
(Dollars in thousands) 1 Year Years Years Years
------------- ------------ ------------ ------------ ------------
Senior secured term loan:
As of December 31, 2004 $76,750 $9,700 $67,050 - -
As of September 30, 2005 $52,750 $10,000 $42,750 - -
In addition to scheduled contractual obligations of the debt as set forth
above, our senior secured 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 equal to 50% of the excess annual cash flow of
Colgate and its subsidiaries, on the maintenance 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, 2004.
29
Item 3. Quantitative and Qualitative Disclosure About Market Risk
We are exposed to interest rate risk in connection with our senior secured
term loan and borrowings under our revolving credit facility, which bear
floating interest rates based on the London Inter-Bank Offered Rate (LIBOR) or
the prime rate plus an applicable borrowing margin. Therefore, interest rate
changes generally do not affect the fair market value of the debt, but do impact
future earnings and cash flows, assuming other factors are held constant.
As of September 30, 2005, we had $52.8 million of variable rate debt
represented by borrowings under our senior secured term loans at an interest
rate of 5.48% of which $29.2 million was swapped for fixed rate debt at an
interest rate of 5.16%. Based on the balance outstanding under the credit
facility as of September 30, 2005 and the swap agreement, an immediate change of
one percentage point in the applicable interest rate on the variable rate debt
would cause an increase or decrease in interest expense of approximately $0.2
million on an annual basis. The fair value of the interest rate swap agreement
was $0.4 million at September 30, 2005.
Other than described above there have been no material changes from the
information provided in our Annual Report on Form 10-K for the year ended
December 31, 2004.
Item 4. Controls and Procedures
As of September 30, 2005, 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 third quarter of 2005, we implemented an Enterprise Resource
Planning ("ERP") system at Breg, a wholly-owned subsidiary. The ERP system,
developed by Oracle, is expected to improve and enhance internal controls over
financial reporting. This ERP system materially changes how transactions are
processed at Breg. However, the implementation has not had a material adverse
effect on our internal control over financial reporting and is not expected to
have a material adverse effect in the future. We ensured the data converted to
the Oracle system was accurate by maintaining appropriate data conversion
controls throughout the implementation process. We also performed additional
control procedures around the current financial reporting period to ensure the
financial information reported at September 30, 2005 was materially accurate.
Other than the changes required by the implementation of the Oracle ERP system,
there were no changes in our internal control over financial reporting that
occurred during the most recent fiscal quarter that has materially affected, or
is reasonably likely to materially affect, our internal control over financial
reporting.
Other than the changes mentioned above, no other significant changes in the
our internal control over financial reporting occurred during the third quarter
of 2005 that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
30
PART II OTHER INFORMATION
Item 1. Legal Proceedings
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 foot pump product, breach of
contract, unfair competition and was seeking damages. KCI filed counterclaims
alleging inequitable conduct by Novamedix before the United States Patent and
Trademark Office, fraud and unfair competition. KCI withdrew several of its
counterclaims, but continued to assert affirmative defenses contending that the
patents were invalid, unenforceable, and not infringed. During 2002, the United
States Patent and Trademark Office issued re-examination certificates validating
four U.S. vascular patents owned by the Company. The U.S. District Court in San
Antonio, Texas denied certain motions filed by KCI that would have disposed of
the case without a trial. On September 30, 2005 KCI, Novamedix and the Company
announced a settlement had been reached under which KCI agreed to pay Novamedix
$75.0 million and give Novamedix an option to receive an assignment of or a
license to certain KCI foot pump patent rights. The Company has contractual
obligations to distribute a portion of the settlement proceeds to certain former
owners of Novamedix and the original patents. Further, the Company agreed to
indemnify KCI against certain tax liabilities that might arise out of the
settlement. Management believes the risk that any such claims might arise under
this indemnity to be remote.
The Company, in the normal course of its business, is involved in various
legal proceedings or claims from time to time.
Although management cannot predict the outcome of any proceedings or claims
made against the Company, management does not expect that the ultimate outcome
of any such proceedings or claims will have a material adverse effect on the
Company's financial position, results of operations or cash flows.
Item 2. Unregistered Sale of Equity Securities and Use of Proceeds
Except as described below there were no securities sold by us during the
first nine months of 2005 that were not registered under the Securities Act.
On August 15, 2000, in conjunction with our asset purchase agreement with
Kinesis, each outstanding Kinesis warrant was converted on a predetermined
formula into Orthofix warrants to purchase shares of our common stock at a price
per share ranging from $19.125 to $38.25, subject to adjustment as determined by
the warrant agreement. These warrants were initially issued by Kinesis Medical,
Inc.
The following shares of common stock were issued to one or more of our
warrant holders upon the exercise of such warrants during the nine months ended
September 30, 2005:
Number of Shares
Date of Issuance Issued
---------------- ----------------
January 31, 2005 495
April 4, 2005 53
August 1, 2005 198
August 15, 2005 66
August 26, 2005 592
August 29, 2005 119
August 30, 2005 1,449
31
The above transaction was exempt from the registration requirements of the
Securities Act pursuant to Section 4(2) and the rules and regulations
promulgated under the Securities Act on the basis that the transactions did not
involve a public offering.
32
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
(filed as an exhibit to the Company's quarterly
report on Form 10-Q for the quarter ended June 30,
2005 and incorporated herein by reference).
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, as amended (filed as an exhibit to the
Company's quarterly report on Form 10-Q for the
quarter ended September 30, 2004 and incorporated
herein by reference).
10.6 Form of Nonqualified Stock Option Agreement Under
the Orthofix International N.V. 2004 Long Term
Incentive Plan.
10.7 Form of Nonqualified Stock Option Agreement for
Non-Employee Directors under the Orthofix
International N.V. 2004 Long Term Incentive Plan.
10.8 Employment Agreement, dated as of April 15, 2005,
between Orthofix International N.V. and Charles W.
Federico (filed as an exhibit to the Company's
current report on Form 8-K filed April 18, 2005 and
incorporated herein by reference).
10.9 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).
10.10 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).
10.11 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).
10.12 Change of Control Agreement, dated as of February
18, 2005, between Orthofix Inc. and Raymond C. Kolls
(filed as an exhibit to the Company's current report
on Form 8-K filed February 22, 2005 and incorporated
herein by reference).
10.13 Change of Control Agreement, dated as of September
1, 2005, between Orthofix Inc. and Alan W. Milinazzo
(filed as an exhibit to the Company's current report
on Form 8-K filed September 8, 2005 and incorporated
herein by reference).
33
10.14 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).
10.15 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).
10.16 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).
10.17 Acquisition Agreement dated as of November 20, 2003,
among Orthofix International 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).
10.18 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).
10.19 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).
10.19 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 (filed as an exhibit to
the Company's annual report on Form 10-K for the
fiscal year ended December 31, 2004 and incorporated
herein by reference).
34
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.
35
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 8, 2005 By: /s/ CHARLES W. FEDERICO
--------------------------------------------
Name: Charles W. Federico
Title: Chief Executive Officer and President
Date: November 8, 2005 By: /s/ THOMAS HEIN
--------------------------------------------
Name: Thomas Hein
Title: Chief Financial Officer
36