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, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period
from ____________ to ____________.
Commission File Number: 0-19961
ORTHOFIX INTERNATIONAL N.V.
(Exact name of registrant as specified in its charter)
Netherlands Antilles N/A
- --------------------------------------- -------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
7 Abraham de Veerstraat
Curacao
Netherlands Antilles N/A
- ---------------------------------------- -------------------------------------
(Address of principal executive offices) (Zip Code)
599-9-4658525
----------------------------------------------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.10 par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for at least the past 90 days.
Yes [ X ] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ X ] No [ ]
As of November 4, 2003, 14,221,497 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....................13
Item 3. Quantitative and Qualitative Disclosure About
Market Risk......................................................20
Item 4. Controls and Procedures.............................................20
PART II OTHER INFORMATION.....................................................21
Item 2. Legal Proceedings...................................................21
Item 6. Exhibits and Reports on Form 8-K....................................21
SIGNATURES ...................................................................22
Forward-Looking Statements
This Form 10-Q contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, relating to our business and
financial outlook, 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.
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements to encourage companies to provide
prospective information about their companies without fear of litigation. We
would like to take advantage of the "safe harbor" provisions of the Private
Securities Litigation Reform Act in connection with the forward-looking
statements included in this document.
A number of important factors could cause actual results to differ
materially from those indicated by the forward-looking statements, including,
but not limited to, the risks described under Item 1 - "Business - Risk Factors"
in our Annual Report on Form 10-K for the fiscal year ended December 31, 2002.
- 2 -
PART I FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS AT SEPTEMBER 30, 2003 AND DECEMBER 31,
2002
(U.S. Dollars, in thousands except share data) September 30, December 31,
2003 2002
-------------- ----------------
Assets (Unaudited) (Note 2)
Current assets:
Cash and cash equivalents.................................... $45,729 $48,813
Trade accounts receivable, net............................... 58,702 54,654
Inventories.................................................. 23,908 23,471
Deferred income taxes........................................ 3,271 3,271
Prepaid expenses and other................................... 4,517 6,789
------------- ----------------
Total current assets........................................... 136,127 136,998
Securities and other investments............................... 6,316 4,753
Property, plant and equipment, net............................. 13,170 13,841
Patents and other intangible assets, net....................... 5,504 4,214
Goodwill, net.................................................. 72,653 58,781
Other long-term assets ........................................ 1,462 2,187
------------- ----------------
Total assets................................................... $235,232 $220,774
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Liabilities and shareholders' equity
Current liabilities:
Bank borrowings.............................................. $3,373 $6,977
Current portion of long-term debt............................ 119 399
Trade accounts payable....................................... 8,447 9,637
Other current liabilities.................................... 18,695 20,113
------------- ----------------
Total current liabilities.................................... 30,634 37,126
Long-term debt................................................. 104 44
Deferred income taxes.......................................... 1,817 2,202
Other long-term liabilities.................................... 3,565 3,451
------------- ----------------
Total liabilities............................................ 36,120 42,823
Minority interests............................................. -- 9,867
Contingencies (Note 11)
Shareholders' equity:
Common shares................................................ 1,424 1,384
Additional paid-in capital................................... 52,442 50,884
Less: treasury shares, at cost (2002: 195,000)............. -- (5,281)
------------- ----------------
53,866 46,987
Retained earnings............................................ 141,083 123,194
Accumulated other comprehensive income (loss)................ 4,163 (2,097)
------------- ----------------
Total shareholders' equity..................................... 199,112 168,084
------------- ----------------
Total liabilities, minority interests and shareholders' equity. $235,232 $220,774
------------- ----------------
The accompanying notes form an integral part of these condensed consolidated
financial statements.
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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND NINE MONTHS
ENDED SEPTEMBER 30, 2003 AND 2002
(Unaudited, U.S. Dollars, in thousands except share Three Months Ended Nine Months Ended
data and per share data) ------------------------------ -------------------------------
2003 2002 2003 2002
------------- ------------- ------------- --------------
Net sales.............................................. $51,253 $44,542 $150,999 $131,718
Cost of sales.......................................... 12,482 10,977 38,077 32,728
------------- ------------- ------------- --------------
Gross profit....................................... 38,771 33,565 112,922 98,990
Operating expenses
Sales and marketing ............................... 20,321 16,582 57,428 47,334
General and administrative......................... 5,039 4,551 15,139 13,337
Research and development........................... 1,721 1,749 5,979 5,851
Amortization of intangible assets.................. 259 178 656 490
Litigation and settlement costs.................... 2,605 -- 4,731 --
------------- ------------- ------------- --------------
29,945 23,060 83,933 67,012
------------- ------------- ------------- --------------
Total operating income ............................ 8,826 10,505 28,989 31,978
Other income (expense), net........................... (470) (871) (772) (1,807)
------------- ------------- ------------- --------------
Income before income tax and minority interests... 8,356 9,634 28,217 30,171
Income tax expense..................................... (2,914) (3,260) (10,328) (9,571)
------------- ------------- ------------- --------------
Income before minority interests ................. 5,442 6,374 17,889 20,600
Minority interests..................................... -- (400) -- (1,261)
------------- ------------- ------------- --------------
Net income ..................................... $5,442 $5,974 $17,889 $19,339
------------- ------------- ------------- --------------
Net income per common share - basic.................... $0.38 $0.44 $1.28 $1.48
------------- ------------- ------------- --------------
Net income per common share - diluted.................. $0.37 $0.41 $1.22 $1.30
------------- ------------- ------------- --------------
Weighted average number of common shares - basic...... 14,181,847 13,444,245 14,001,981 13,091,124
------------- ------------- ------------- --------------
Weighted average number of common shares - diluted..... 14,882,747 14,717,983 14,720,139 14,915,615
------------- ------------- ------------- --------------
The accompanying notes form an integral part of these condensed consolidated
financial statements.
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2003 AND 2002
(Unaudited, U.S. Dollars, in thousands) 2003 2002
---------------- -----------------
Cash flows from operating activities:
Net income................................................ $17,889 $19,339
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization.............................. 4,776 4,096
Provision for doubtful accounts............................ 3,858 3,672
Loss on sale of fixed assets............................... -- 168
Loss on equity investments................................. 1,175 1,436
Minority interest in net income of consolidated subsidiaries -- 1,261
Tax benefit on non-qualified stock options................. 412 --
Other ..................................................... 1,083 (169)
Change in operating assets and liabilities:
Increase in accounts receivable......................... (6,368) (8,608)
Decrease/(increase) in inventories...................... 346 (3,994)
Decrease/(increase) in prepaid expenses and other....... 1,450 (131)
(Decrease)/increase in accounts payable................. (1,717) 367
(Decrease)/increase in other current liabilities........ (2,007) 1,877
---------------- -----------------
Net cash provided by operating activities...................... 20,897 19,314
---------------- -----------------
Cash flows from investing activities:
Investments in affiliates and subsidiaries................ (23,678) (7,254)
Capital expenditures...................................... (3,608) (5,680)
Proceeds from the sale of marketable securities........... 354 --
---------------- -----------------
Net cash used in investing activities.......................... (26,932) (12,934)
---------------- -----------------
Cash flows from financing activities:
Net proceeds from issuance of common stock................ 10,863 14,333
Repurchase of treasury shares............................. (4,395) (16,600)
Proceeds from loans and borrowings........................ 92 3,380
Repayment of loans and borrowings......................... (4,372) (2,769)
---------------- -----------------
Net cash provided (used) by financing activities............... 2,188 (1,656)
---------------- -----------------
Effect of exchange rate changes on cash and cash equivalents... 763 1,456
---------------- -----------------
(Decrease)/increase in cash and cash equivalents............... (3,084) 6,180
Cash and cash equivalents at the beginning of the year......... 48,813 34,273
---------------- -----------------
Cash and cash equivalents at the end of the period............. $45,729 $40,453
---------------- -----------------
The accompanying notes form an integral part of these condensed consolidated
financial statements.
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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 market.
NOTE 2: BASIS OF PRESENTATION
The accompanying unaudited Condensed Consolidated Financial Statements have
been prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and with the instructions to
Form 10-Q and Rule 10-01 of Regulation S-X. Pursuant to these rules and
regulations, certain information and note disclosures, normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States, have been condensed or omitted. In the opinion of
management, all adjustments (consisting of normal recurring items) considered
necessary for a fair presentation have been included. Operating results for the
nine months ended September 30, 2003 are not necessarily indicative of the
results that may be expected for the year ended December 31, 2003. The balance
sheet at December 31, 2002 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, 2002.
NOTE 3: INVENTORY
Inventories are as follows:
September 30, December 31,
(In thousands) 2003 2002
---------------- -----------------
Raw materials $3,679 $2,177
Work-in-process 1,653 1,210
Finished goods 9,321 11,668
Field inventory 5,790 5,260
Consignment inventory 6,606 5,910
Less reserve for obsolescence (3,141) (2,754)
---------------- -----------------
$23,908 $23,471
---------------- -----------------
NOTE 4: ACQUISITIONS AND INVESTMENTS
During the second quarter of 2003, Ferrer Freeman & Co., a private equity
firm that invests exclusively in health care and health care-related companies,
purchased 100% of HealthSouth's interest in OrthoRx, which resulted in them
becoming the Company's new partner in the 50/50 joint venture. On May 6, 2003
and June 16, 2003, the Company invested an additional $350,000 and $1,150,000,
respectively in the OrthoRx joint venture. Ferrer Freeman & Co. matched the
Company's investment.
On March 20, 2003, the Company completed the acquisition of the remaining
48% minority interest in Intavent Orthofix Limited ("IOL") for $20.6 million
(including acquisition costs) with an effective date of January 14, 2003. The
Company utilized an independent firm to complete a valuation of IOL. The Company
used cash on hand to complete this purchase from Intavent Limited ("Intavent").
Mr. Gaines-Cooper, Chairman of Orthofix, is a settlor of a trust which owns a
30% interest in Intavent. IOL has been a fully consolidated subsidiary and is
now a wholly-owned subsidiary of the Company. The Company recorded this
additional equity purchase using the purchase
- 6 -
method of accounting and the impact has been included in the results of
operations from the date of acquisition. A preliminary allocation of the
purchase price reflects the settlement of a minority interest obligation of
approximately $9.9 million and $10.7 million of additional goodwill. The Company
expects to finalize the purchase price allocation during 2003.
The pro forma effect on operations or earnings per share would not be
substantially different than those reported, assuming consummation of the
purchase as of January 1, 2003. The pro forma unaudited results of operations
and earnings per share for the three and nine month periods ended September 30,
2002, assuming consummation of the purchase as of January 1, 2002, are as
follows:
(In thousands, Three Months Ended September 30 Nine Months Ended September 30
except per share data) --------------------------------------- ----------------------------------
As Reported Pro Forma As Reported Pro Forma
------------------ ------------------ --------------- ------------
Net sales $44,542 $44,542 $131,718 $131,718
Net income 5,974 6,374 19,339 20,570
Per share data:
Basic $0.44 $0.47 $1.48 $1.57
Diluted $0.41 $0.43 $1.30 $1.38
On February 5, 2003, the Company purchased an equity interest in Innovative
Spinal Technologies (IST), a start-up company focused on commercializing spinal
products, for $1.5 million. The investment is accounted for at cost.
NOTE 5: COMMON SHARES
For the nine months ended September 30, 2003, the Company issued 720,983
shares of common stock upon the exercise of outstanding stock options and
warrants for proceeds of $10.9 million and paid $4.4 million to purchase 157,000
shares of its common stock in the open market for treasury. During the period,
the Company also retired 352,000 treasury shares recorded at a cost of $9.7
million.
NOTE 6: COMPREHENSIVE INCOME
Other comprehensive income includes foreign currency translation
adjustments and unrealized gains/losses on available-for-sale securities, net of
tax. During the three and nine month periods ended September 30, 2003, the
Company reclassified $0.2 million and $3.0 million, respectively, of foreign
currency translation impact on goodwill that is denominated in a non-U.S. dollar
currency, from comprehensive income to goodwill. These reclassifications had no
impact on the results of operations or cash flows of the Company. Total
comprehensive income combines reported net income and other comprehensive
income.
(In thousands) Three Months Ended Nine Months Ended
------------------------------- -------------------------------
2003 2002 2003 2002
------------- -------------- ------------- --------------
Net income $5,442 $5,974 $17,889 $19,339
Other comprehensive income:
Unrealized gain (loss) on marketable
securities net of taxes 190 (17) 186 (31)
Reclassification adjustment for gains on the
sale of marketable securities included in
net income (341) -- (341) --
Foreign currency translation adjustment 429 992 6,416 4,544
------------- -------------- ------------- --------------
Total comprehensive income $5,720 $6,949 $24,150 $23,852
------------- -------------- ------------- --------------
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NOTE 7: BUSINESS SEGMENT INFORMATION
The Company's operations are managed as two geographic business units (the
Americas and International) plus Group activities. The Americas consists of the
United States, Mexico and Brazil. International consists of the rest of the
world plus export distribution operations.
For the three month periods ended September 30:
Net Sales To Intersegment Operating
External Customers Net Sales Income/(Expense)
------------------------- ---------------------- ----------------------
(In thousands) 2003 2002 2003 2002 2003 2002
------------ ----------- ---------- ---------- --------- -----------
International $21,488 $18,661 $11,945 $9,673 $5,053 $6,221
Americas 29,765 25,881 251 338 4,753 6,050
Group activities -- -- -- -- (1,086) (958)
Eliminations -- -- -- -- 106 (808)
------------ ----------- ---------- ---------- --------- -----------
Total $51,253 $44,542 $12,196 $10,011 $8,826 $10,505
------------ ----------- ---------- ---------- --------- -----------
For the nine month periods ended September 30:
Net Sales To Intersegment Operating
External Customers Net Sales Income/(Expense)
------------------------- ---------------------- ----------------------
(In thousands) 2003 2002 2003 2002 2003 2002
------------ ----------- ---------- ---------- --------- -----------
International $64,872 $55,362 $37,009 $29,870 $12,970 $19,600
Americas 86,127 76,356 600 559 18,111 17,650
Group activities -- -- -- -- (3,157) (2,790)
Eliminations -- -- -- -- 1,065 (2,482)
------------ ----------- ---------- ---------- --------- -----------
Total $150,999 $131,718 $37,609 $30,429 $28,989 $31,978
------------ ----------- ---------- ---------- --------- -----------
Identifiable Assets
--------------------------------
September 30, December 31,
(In thousands) 2003 2002
------------- -------------
International $165,039 $169,071
Americas 92,442 80,848
Group 77,496 56,652
Eliminations (99,745) (85,797)
--------------- ---------------
Total $235,232 $220,774
================ ================
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NOTE 8: INCOME TAX EXPENSE
The difference between the reported provision for income taxes and a
provision computed by applying the statutory rates applicable to each subsidiary
of the Company is primarily attributable to the Company's tax holiday benefit in
the Seychelles.
NOTE 9: EARNINGS PER SHARE
For each of the three and nine month periods ended September 30, 2003 and
2002, there were no adjustments to net income (the numerators) for purpose of
calculating basic and diluted net income per common share. The following table
sets forth a reconciliation of 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
------------------------------- -------------------------------
2003 2002 2003 2002
------------- -------------- ------------- --------------
Weighted average common shares - basic 14,181,847 13,444,245 14,001,981 13,091,124
Effect of diluted securities:
Stock options 700,900 1,273,738 718,158 1,824,491
------------- -------------- ------------- --------------
Weighted average common shares - diluted 14,882,747 14,717,983 14,720,139 14,915,615
------------- -------------- ------------- --------------
The Company did not include in the diluted shares outstanding calculation
97,736 options for the nine month period ended September 30, 2003, because their
inclusion would be antidilutive or their exercise price exceeded the average
market price of our common stock during the period. All options were included in
the diluted shares outstanding calculation for the three month period ended
September 30, 2003, as well as, the three and nine month periods ended September
30, 2002 as the average market value of our common stock for the period was
higher than the exercise prices of all options outstanding for the period.
- 9 -
NOTE 10: 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" and related interpretations and, accordingly, no compensation cost
has been recognized for stock options issued under the Company's plans.
In December 2002, Statement of Financial Accounting Standards (SFAS) No.
148, "Accounting for Stock Based Compensation Transition and Disclosure and
Amendment of FASB Statement No. 123" was issued. This statement provides
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock based employee compensation and requires
prominent disclosure in both annual and interim financial statements about the
method of accounting for stock based employee compensation and the effects of
the method used on reporting results. The interim financial statement disclosure
aspect of this standard is effective beginning with these financial statements
and the provision has been adopted herein.
Pro forma information regarding the Company's net income and net income per
common share for the three and nine month periods ended September 30, 2003 and
2002 has been determined 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, 2002. For purposes of pro forma disclosures, the
estimated fair value of the options is amortized to expense over the options'
vesting period.
(In thousands, except per share data) Three Months Ended Nine Months Ended
------------------------------ -------------------------------
2003 2002 2003 2002
------------- ------------- ------------- --------------
Net income
As reported $5,442 $5,974 $17,889 $19,339
Less: Total stock-based employee
compensation expense determined
under fair value method for all
awards, net of tax (566) (623) (1,736) (1,869)
------------- ------------- ------------- --------------
Pro forma $4,876 $5,351 $16,153 $17,470
Net income per common share - basic
As reported $0.38 $0.44 $1.28 $1.48
Pro forma $0.34 $0.40 $1.15 $1.33
Net income per common share - diluted
As reported $0.37 $0.41 $1.22 $1.30
Pro forma $0.33 $0.36 $1.10 $1.17
- 10 -
NOTE 11: CONTINGENCIES
The Company, in the normal course of its business, is involved in various
lawsuits from time to time. In addition, the Company is subject to certain other
contingencies discussed below:
On January 29, 1999, two couples who owned shares of the common stock of
American Medical Electronics Inc. ("AME") commenced a civil action against the
Company and one of its subsidiaries and the Review Committee (defined below)
seeking, among other relief, the maximum earnout and bonus under the merger
agreement. The Company is vigorously defending against the action. On August 21,
1995, the Company acquired substantially all the outstanding stock of AME and
merged AME into Orthofix Inc. Prior to the merger, Orthofix Inc. had no
operating activity. The principal terms of the acquisition included cash
payments of approximately $47.5 million and the issuance of approximately 1.95
million shares of the Company's common stock with a fair market value of
approximately $33.5 million. Additionally, the Agreement and Plan of Merger
provided for payments contingent upon the attainment of certain gross revenue
thresholds by the Company in 1995, 1996 and/or 1997 and were not compensatory in
nature. The earnout and bonus, if paid, were to be paid in cash, common stock of
the Company or a combination thereof on a Payout Date defined in the Agreement
and Plan of Merger. The Company announced that the Review Committee, established
to determine contingent amounts payable under the Agreement and Plan of Merger
relating to the acquisition of AME, determined that Orthofix will pay the AME
Record Holders $500,000 (which was satisfied in cash and issuance of treasury
shares with a fair market value of $259,000), and 12% of the net recovery, if
any, received from its judgment against Biomet, EBI and EBI MS up to a maximum
of $5,500,000.
The New York federal court resolved the two consolidated actions in favor
of the Company and its subsidiary. On July 12, 2002, the New York federal court
denied the plaintiffs' motion to vacate the consent award. On May 21, 2003, the
court denied plaintiffs' motion for leave to file a second amended complaint and
dismissed the Earnout and Bonus action in its entirety with prejudice.
Plaintiffs filed an appeal to the United States Court of Appeals for the Second
Circuit. No briefs have been filed in the appellate court.
The Company is vigorously defending the trial court's decision in favor of
the Company and its subsidiary. The Company expects the appeal to be heard and
decided in the first half of 2004. The Company has previously reserved
approximately $5.0 million plus accrued interest for the settlement of this
matter.
Novamedix, a subsidiary of the Company, filed an action on February 21,
1992 against Kinetic Concepts Inc ("KCI") alleging infringement of the patents
relating to Novamedix's A-V Impulse System product, breach of contract, and
unfair competition. In this action, Novamedix is seeking a permanent injunction
enjoining further infringement by KCI. Novamedix also seeks damages relating to
past infringement, breach of contract, and unfair competition. KCI has filed
counterclaims alleging that Novamedix engaged in inequitable conduct before the
United States Patent and Trademark Office and fraud as to KCI and that Novamedix
engaged in common law and statutory unfair competition against KCI. KCI seeks a
declaratory judgment that the patents are invalid, unenforceable, and not
infringed. KCI also seeks monetary damages, injunctive relief, costs, attorney's
fees, and other unspecified relief. During 2002, the United States Patent and
Trademark Office issued re-examination certificates validating four U.S.
vascular patents owned by us. The U.S. District Court in San Antonio, Texas has
restored the litigation to active status, and has provided a Scheduling Order
that will govern this matter. KCI has sought to add a charge of infringement
against Novamedix under a recently issued KCI patent but that request was denied
on a procedural basis. KCI retains the right to seek enforcement of its patent
in a separate proceeding. A portion of any amounts received will be payable to
former owners of Novamedix under the original purchase agreement.
On August 18, 2003, the Company announced that it settled a two-year-long
investigation by the Office of Inspector General of its billings to federal and
state health care programs for the off-label use of its FDA approved pulsed
electronic magnetic field device. Without admitting any wrong doing, the Company
agreed to pay CHAMPUS/Tricare $1.7 million ($1.1 million after-tax) in order to
avoid protracted litigation and related legal costs, and placing this government
inquiry into our billings to federal programs firmly in the past.
In management's opinion, the Company is not currently involved in any other
legal proceeding, individually or in the aggregate, that could have a material
effect on the financial position, liquidity or operating results of the Company.
- 11 -
NOTE 12: RECENTLY ISSUED ACCOUNTING STANDARDS
In January 2003, FASB Interpretation No. 46 (FIN 46), "Consolidation of Variable
Interest Entities," was issued. The interpretation provides guidance on
consolidating variable interest entities and applies immediately to variable
interests created or obtained after January 31, 2003. On October 8, 2003, the
FASB delayed the effective date of the interpretation until periods ending after
December 15, 2003, for variable entities acquired before February 1, 2003. The
Company is currently reviewing FIN 46 to determine its impact, if any, on future
reporting periods from its equity investments including the OrthoRx joint
venture.
- 12 -
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis addresses the results of our
operations for the nine and three months ended September 30, 2003, as compared
to our results of operations for the nine and three months ended September 30,
2002. The discussion and analysis also addresses our liquidity and financial
condition and other matters.
General
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, and
non-invasive stimulation products used to enhance the success rate of spinal
fusions and to treat non-union fractures. Our products also include devices for
removal of the bone cement used to fix artificial implants, the ultrasonic
treatment of musculoskeletal pain, bracing products and a bone substitute
compound, from which we receive a royalty. We also produce a device for
enhancing venous circulation used primarily in support of orthopedic procedures.
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 and the Seychelles. We directly distribute our products in
the United States, the United Kingdom, Ireland, Italy, Germany, Switzerland,
Austria, France, Belgium, Mexico and Brazil. In 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 its wholly owned and majority-owned subsidiaries and
entities over which the Company has control. All intercompany accounts and
transactions are eliminated in consolidation. The equity method of accounting is
used when the Company has significant influence over significant operating
decisions but does not hold control. Under the equity method, original
investments are recorded at cost and adjusted by the Company's share of
undistributed earnings or losses of these companies. All material intercompany
transactions and profits associated with the equity investees are eliminated in
consolidation.
Our reporting currency is the United States dollar. All balance sheet
accounts, except shareholders' equity, are translated at the period end exchange
rates, and revenue and expense items are translated at weighted average rates of
exchange prevailing during the period. Gains and losses resulting from foreign
currency transactions are included in other income (expense). Gains and losses
resulting from the translation of foreign currency financial statements are
recorded in the accumulated other comprehensive income (loss) component of the
shareholders' equity.
Our financial condition, results of operations and cash flows are not
significantly impacted by seasonality trends. In addition, we do not believe our
operations will be significantly affected by inflation. However, in the ordinary
course of business, we are exposed to the impact of changes in interest rates
and foreign currency fluctuations. Our objective is to limit the impact of such
movements on earnings and cash flows. In order to achieve this objective, we
seek to balance non-dollar income and expenditures. We do not ordinarily use
derivative instruments to hedge foreign exchange exposure.
We manage our operations in two geographic business units: the Americas and
International. The Americas unit covers the United States, Mexico and Brazil.
The International unit covers the rest of the world plus export operations.
Revenues
Our revenues are generally derived from two primary sources: sales of
orthopedic and non-orthopedic products. Sales of orthopedic products, including
orthopedic devices, stimulation products and vascular products, accounted for
89% of our total net sales in both the three and nine months ended September 30,
2003, respectively, as compared to 89% of our total net sales for the same
periods in the prior year. Sales of non-orthopedic products, including some
vascular products and the Laryngeal Mask product, accounted for 11% of our total
net sales in both
- 13 -
the three and nine months ended September 30, 2003, respectively, as compared to
11% of our total net sales for the same periods in the prior year.
The following tables display the net sales by geographic destination and by
geographic origination, net of inter-company eliminations, for each of our
geographic markets and by each of our product groups for the three and nine
months ended September 30, 2003 and 2002. We provide net sales by geographic
destination and by product group for information purposes only. We keep our
books and records and account for net sales, costs and expenses in accordance
with the geographic origination of our products.
Geographic Destination:
-----------------------
Three Months Ended September 30,
------------------------------------------------------------------
(In thousands) 2003 2002
------------------------------- -------------------------------
Percent of Percent of
Net Sales Net Sales Net Sales Net Sales
------------- -------------- ------------- --------------
Americas $35,680 70% $31,219 67%
International 15,573 30% 13,323 33%
------------- -------------- ------------- --------------
Total $51,253 100% $44,542 100%
------------- -------------- ------------- --------------
Nine Months Ended September 30,
------------------------------------------------------------------
(In thousands) 2003 2002
------------------------------- -------------------------------
Percent of Percent of
Net Sales Net Sales Net Sales Net Sales
------------- -------------- ------------- --------------
Americas $101,404 67% $91,593 70%
International 49,595 33% 40,125 30%
------------- -------------- ------------- --------------
Total $150,999 100% $131,718 100%
------------- -------------- ------------- --------------
Geographic Origination:
-----------------------
Three Months Ended September 30,
------------------------------------------------------------------
(In thousands) 2003 2002
------------------------------- -------------------------------
Percent of Percent of
Net Sales Net Sales Net Sales Net Sales
------------- -------------- ------------- --------------
Americas $29,765 58% $25,881 58%
International 21,488 42% 18,661 42%
------------- -------------- ------------- --------------
Total $51,253 100% $44,542 100%
------------- -------------- ------------- --------------
Nine Months Ended September 30,
------------------------------------------------------------------
(In thousands) 2003 2002
------------------------------- -------------------------------
Percent of Percent of
Net Sales Net Sales Net Sales Net Sales
------------- -------------- ------------- --------------
Americas $86,127 57% $76,356 58%
International 64,872 43% 55,362 42%
------------- -------------- ------------- --------------
- 14 -
------------- -------------- ------------- --------------
Total $150,999 100% $131,718 100%
------------- -------------- ------------- --------------
Product Groups:
---------------
Three Months Ended September 30,
------------------------------------------------------------------
(In thousands) 2003 2002
------------------------------- -------------------------------
Percent of Percent of
Net Sales Net Sales Net Sales Net Sales
------------- -------------- ------------- --------------
Orthopedic
Devices $14,851 29% $13,392 30%
Stimulation 24,024 47% 20,119 45%
Vascular(1) 6,552 13% 5,950 14%
------------- -------------- ------------- --------------
Total Orthopedic 45,427 89% 39,461 89%
Non-Orthopedic
Vascular(1) 1,157 2% 1,050 2%
Other 4,669 9% 4,031 9%
------------- -------------- ------------- --------------
Total Non-Orthopedic 5,826 11% 5,081 11%
------------- -------------- ------------- --------------
Total $51,253 100% $44,542 100%
------------- -------------- ------------- --------------
- --------------------
(1) Approximately 85% of the revenue from vascular products is classified as
from orthopedic applications while 15% is classified as from
Non-Orthopedic applications.
Nine Months Ended September 30,
------------------------------------------------------------------
(In thousands) 2003 2002
------------------------------- -------------------------------
Percent of Percent of
Net Sales Net Sales Net Sales Net Sales
------------- -------------- ------------- --------------
Orthopedic
Devices $46,422 31% $40,627 31%
Stimulation 68,851 46% 59,238 45%
Vascular(1) 18,323 12% 16,529 13%
------------- -------------- ------------- --------------
Total Orthopedic 133,596 89% 116,394 89%
Non-Orthopedic
Vascular(1) 3,233 2% 2,917 2%
Other 14,170 9% 12,407 9%
------------- -------------- ------------- --------------
Total Non-Orthopedic 17,403 11% 15,324 11%
------------- -------------- ------------- --------------
Total $150,999 100% $131,718 100%
------------- -------------- ------------- --------------
- ---------------------
(1) Approximately 85% of the revenue from vascular products is
classified as from orthopedic applications while 15% is classified as
from Non-Orthopedic applications.
- 15 -
Select Financial Data
The following table presents certain items in our statements of operations
as a percentage of net sales for the periods ended September 30:
Three Months Ended Nine Months Ended
--------------------------- -------------------------------
2003 2002 2003 2002
---- ---- ---- ----
(%) (%) (%) (%)
--------- -------------- ---------- --------------
Net sales.............................. 100 100 100 100
Cost of sales.......................... 24 25 25 25
Gross profit........................... 76 75 75 75
Operating expenses
Sales and marketing.................. 40 37 38 36
General and administrative........... 10 10 10 10
Research and development............. 3 4 4 4
Amortization of intangible assets.... 1 -- 1 1
Litigation and settlement costs...... 5 -- 3 --
Total operating income................. 17 24 19 24
Net income............................. 11 13 12 15
Nine Months Ended September 30, 2003 Compared to Nine Months Ended September 30,
2002
Sales - Net sales increased 15% to $151.0 million for the first nine months
of 2003, compared to $131.7 million for the same period of 2002. The impact of
foreign currency increased sales by $5.3 million in the first nine months of
2003 as compared to the same period of 2002.
Net sales in the Americas (primarily the United States) increased 13% to
$86.1 million for the first nine months of 2003, compared to $76.4 million for
the same period of 2002. The Americas represented 57% and 58% of total net sales
during the first nine months of 2003 and 2002, respectively. The increase in
sales was primarily the result of an increase in volume of stimulators sold, a
contract increase and moderate growth in orthopedic devices.
Net sales in International increased 17% to $64.9 million for the first
nine months of 2003, compared to $55.4 million for the same period of 2002. The
primary contributors were increased sales of orthopedic devices, vascular
products and the Laryngeal Mask product. The impact of foreign currency
increased International sales for the period by $5.7 million.
All product groups experienced growth in the first nine months of 2003
compared to the same period of 2002. Sales of orthopedic devices grew 14% to
$46.4 million for the period in 2003 from $40.6 million for the same period of
2002. The increase was primarily due to increased sales of our external and
internal fixation products. Sales of stimulation products grew 16% to $68.9
million for the first nine months of 2003 from $59.2 million in the same period
of the prior year. The increase in sales was primarily due to an increase in
sales of stimulators, resulting from an increase in volume of stimulators sold
and the renewal of our distribution agreement with Medtronic Sofamor Danek. The
renewed distribution agreement had the effect of increasing sales by $3.8
million in the first nine months of 2003. Stimulation products are sold almost
exclusively in the United States, although we are undertaking to expand
distribution of stimulation products to Europe and Mexico. Sales of vascular
products grew 11% to $18.3 million for the first nine months of 2003 from $16.5
million for the same period of 2002. The growth was principally the result of
increased sales in Japan and through our direct sales organizations in Europe.
- 16 -
Approximately 85% of the sales from vascular products are classified as from
orthopedic applications, while 15% are classified as from non-orthopedic
applications.
Sales of our non-orthopedic products grew 14% to $17.4 in the first nine
months of 2003 compared to $15.3 million for the same period of 2002. The
increase was primarily due to the growth in sales of the Laryngeal Mask product,
including a new single use version, which we distribute in the United Kingdom,
Ireland and Italy, and increased sales of vascular products for non-orthopedic
applications.
Gross Profit - Our gross profit increased 14% to $112.9 million in the first
nine months of 2003, from $99.0 million for the same period of 2002. The
increase was primarily due to the 15% increase in net sales partially offset by
a slight decrease in gross profit margin. Gross profit as a percent of net sales
for the first nine months of 2003 was 74.8% compared to 75.2% for the same
period in 2002, reflecting the negative impact of foreign currency translation,
partially offset by a favorable product mix and the renewal of our distribution
agreement with Medtronic Sofamor Danek. Although foreign currency contributed
$5.3 million to sales growth, the year-over-year appreciation of the Euro and
the Great Britain Pound against the U.S. Dollar increased production costs of
external fixation and vascular products, which was detrimental to our gross
profit and gross profit margin in those situations where we sell these products
in U. S. Dollars.
Sales and Marketing Expenses - Sales and marketing expenses, which include
commissions, royalties and bad debt provision, generally increase and decrease
in relation to sales. Sales and marketing expense increased $10.1 million to
$57.4 million in the first nine months of 2003 from $47.3 million in the same
period of 2002, an increase of 21% on a net sales increase of 15% over the same
period. Sales and marketing expense as a percent of net sales increased to 38.0%
in the first nine months of 2003 from 35.9% for the same period of 2002. The
2.1% increase in the first nine months of 2003 compared to the same period of
2002 reflects the negative impact of currency on operating expenses, higher
commissions on stimulation sales resulting from our renewed distribution
agreement with Medtronic Sofamor Danek and additional costs to support the
hiring of additional sales people and the launch of new products. In 2003,
additional new sales people have been hired, trained and equipped. The PC.C.P
product was launched in the International market in the second quarter and on a
limited basis in the United States in the third quarter. In connection with the
launch of the PC.C.P product, we conducted a large training seminar for surgeons
in Verona, Italy and a training seminar for U.S. surgeons in Chicago. Further we
conducted training meetings for the sales force in Europe and the United States.
General and Administrative Expense - General and administrative expense
increased $1.8 million for the first nine months of 2003 to $15.1 million from
$13.3 million in the same period of 2002. The expense remained constant as a
percentage of net sales at 10% during both periods. We incurred additional
expenses associated with becoming a U.S. SEC registrant and with building
administrative support in our direct sales organizations in Europe and Mexico.
Research and Development Expense - Research and development expense increased
$0.1 million to $6.0 million for the first nine months in 2003 from $5.9 million
for the same period in 2002. The expense as a percentage of net sales was 4.0%
and 4.4% for the first nine month of 2003 and 2002, respectively. Research and
development expensed decreased as a percent of net sales during the period as a
result of a decrease in clinical study spending in our International unit.
Amortization of Intangible Assets - Amortization of intangible assets was $0.7
million in the first nine months of 2003 compared to $0.5 million for the same
period of 2002. The amortization consists principally of the amortization of
patents and trademarks.
Litigation and Settlement Costs - Based on an assessment of the merits of the
Kinetic Concepts Inc. ("KCI") case (further described in Note 11 "Contingencies"
of Item 1. "Condensed Financial Statements"), we incurred $3.0 million in
litigation costs in the first nine months of 2003 compared to no expense for the
same period of the 2002. Further, in the first nine months of 2003, we incurred
$1.7 million of settlement cost to conclude the investigation by the Office of
Inspector General into the appropriateness of claims made to federal health care
programs for the off-label use of our FDA approved pulsed electronic magnetic
field device, and billing and coding for its off-label use.
- 17 -
Other Income (Expense), Net - Other expense, net was $0.8 million in the first
nine months of 2003 compared to an expense of $1.8 million for the same period
of 2002. The decrease in expense was the result of the following items: (i)
losses on foreign exchange transactions in 2003 of $0.1 million, compared with
losses in 2002 of $0.4 million, resulting in a net improvement of $0.3 million;
and (ii) our share of losses in the OrthoRx joint venture, which totaled $1.2
million for the first nine months of 2003, an improvement of $0.4 million from
the $1.6 million loss in the same period of 2002. Interest income, net of
interest expense remained constant for the first nine months of 2003 compared to
the same period of 2002. Further, during the first nine months of 2003, we
realized a gain of $0.4 million from the sale of available-for-sale marketable
securities.
Income Tax Expense - In the first nine months of 2003 and 2002, the effective
tax rate was 36.6% and 31.7%, respectively. The effective tax rate in the first
nine months of 2003 was negatively impacted by 3.1% as a result of the KCI
litigation expenses, which are incurred in a low tax jurisdiction, for the
period.
Net Income - Net income for the first nine months of 2003 was $17.9 million,
including $4.0 million of litigation and settlement cost, net of tax, or $1.28
per basic share and $1.22 per diluted share, compared to $19.3 million, or $1.48
per basic share and $1.30 per diluted share, for the same period of 2002. The
weighted number of basic common shares outstanding was 14,001,981 and 13,091,124
during the first nine months of 2003 and 2002, respectively. The weighted number
of diluted common shares outstanding was 14,720,139 and 14,915,615 during the
first nine months of 2003 and 2002, respectively.
Three Months Ended September 30, 2003 Compared to Three Months Ended September
30, 2002
Sales - Net sales increased 15% to $51.3 million for the third quarter of
2003 compared to $44.5 million for the third quarter of 2002. The impact of
foreign currency increased sales by $1.1 million during the third quarter of
2003 as compared to the same period of the prior year.
Net sales in the Americas (primarily the United States) increased to $35.7
million in the third quarter of 2003 compared to $31.2 million in the third
quarter of 2002, an increase of 14%. The Americas represented 70% of total net
sales during the third quarter of 2003 and 67% of total net sales for the same
period of 2002. The increase in sales was primarily the result of increased
volume of stimulators sold, a contract increase, and a moderate growth in
orthopedic devices.
Net sales in International increased 17% to $15.6 million in the third
quarter of 2003 compared to $13.3 million in 2002. The primary contributors were
increased sales of orthopedic devices, vascular products and the Laryngeal Mask
product. The impact of foreign currency increased International sales for the
quarter by $1.2 million.
All product groups experienced growth in the third quarter of 2003 compared
to the third quarter of 2002. Sales of orthopedic devices grew 11% to $14.9
million in 2003 from $13.4 million in 2002. The increase was primarily due to
increased sales of our external and internal fixation products. Sales of
stimulation products grew 20% to $24.0 million in 2003 from $20.1 million in
2002. The increase in sales was primarily due to an increase in sales of
stimulators, resulting from an increase in volume of stimulators sold and the
renewal of our distribution agreement with Medtronic Sofamor Danek. The revised
agreement increased sales by $2.3 million in the third quarter. Stimulation
products are sold almost exclusively in the United States, although we are
undertaking to expand distribution for stimulation products to Europe and
Mexico. Approximately 85% of the sales from vascular products are classified as
from orthopedic applications, while 15% are classified as from non-orthopedic
applications.
Sales of our non-orthopedic products grew 15% to $5.8 million from $5.1
million in 2002. The increase was primarily due to the growth in sales of the
Laryngeal Mask product, including a new single use version, which we distribute
in the United Kingdom, Ireland and Italy.
Gross Profit - Our gross profit increased 16% to $38.8 million in the third
quarter of 2003, from $33.6 million in the third quarter of 2002. The increase
was primarily due to the increase of 15% in net sales and a slight increase in
gross profit margin. Gross profit as a percent of net sales in the third quarter
2003 was 75.6% compared to 75.4% in 2002, reflecting the positive impact of
product mix of stimulation product, including the renewal of our distribution
agreement with Medtronic Sofamor Danek, partially offset by negative foreign
currency impacts. Although
- 18 -
currency contributed $1.1 million to sales growth, the year-over-year
appreciation of the Euro and the Great Britain Pound against the U.S. Dollar
increased the production costs of external fixation and vascular products, which
was detrimental to our gross profit margin in those situations where we sell
these products in U.S. Dollars.
Sales and Marketing Expenses - Sales and marketing expenses, which include
commissions, royalties and bad debt provision, generally increase and decrease
in relation to sales. Sales and marketing expense increased $3.7 million to
$20.3 million in the third quarter of 2003 from $16.6 million in the third
quarter of 2002, an increase of 23% on a net sales increase of 15% over the same
period. Sales and marketing expense as a percent of net sales increased to 39.6%
in the third quarter of 2003 from 37.2% in the third quarter of 2002. The 2.4%
increase in the third quarter of 2003 compared to the same period of 2002
reflects the negative impact of currency on operating expenses, higher
commissions on stimulation sales resulting from our renewed distribution
agreement with Medtronic Sofamor Danek and additional costs to support the
hiring of additional sales people and the launch of new products. In 2003,
additional new sales people have been hired, trained and equipped. The PC.C.P
product was launched in the International market in the second quarter and on a
limited basis in the United States in the third quarter. In connection with the
launch of the PC.C.P product, we conducted a large training seminar for surgeons
in Verona, Italy and a training seminar for U.S. surgeons in Chicago. Further we
conducted training meetings for the sales force in Europe and the United States.
General and Administrative Expense - General and administrative expense
increased $0.5 million in the third quarter of 2003 to $5.0 million from $4.5
million in the third quarter of 2002. The expense, as a percentage of net sales,
declined from 10.2% in the third quarter of 2002 to 9.8% in the third quarter
2003, even as we continued to build administrative support in our direct sales
organizations, primarily in Europe and Mexico.
Research and Development Expense - Research and development expense as a percent
of net sales decreased from 3.9% in the third quarter 2002 to 3.4% in the third
quarter 2003. Research and development expensed decreased as a percent of net
sales during the period as a result of a decrease in clinical study spending in
the International unit.
Amortization of Intangible Assets - Amortization of intangible assets was $0.3
million in the third quarter of 2003 compared to $0.2 million for the same
period of 2002. The amortization consists principally of the amortization of
patents and trademarks.
Litigation and Settlement Costs - Based on an assessment of the merits of the
KCI case (further described in Note 11 "Contingencies" of Item 1. "Condensed
Financial Statements"), we incurred $0.9 million in litigation costs in the
third quarter of 2003 compared to no expense in the same period of 2002.
Further, in the third quarter of 2003 we incurred $1.7 million of settlement
cost to conclude the investigation by the Office of Inspector General into the
appropriateness of claims made to federal health care programs for the off-label
use of our FDA-approved pulsed electronic magnetic field device, and billing and
coding for its off-label use.
Other Income (Expense), Net - Other expense, net was $0.5 million in the third
quarter of 2003 compared to an expense of $0.9 million in the third quarter of
2002. The decrease in expense was principally the result of a realized gain of
$0.4 million on the sale of available-for-sale marketable securities. Our share
of losses in the OrthoRx joint venture totaled $0.6 million in the third quarter
of 2003 and 2002. Interest income net of interest expense remained constant in
the third quarter of 2003 as compared to the same period of the prior year.
Income Tax Expense - In the third quarter of 2003 and 2002, the effective tax
rate was 34.9% and 33.8%, respectively. The effective tax rate in the third
quarter of 2003 was negatively impacted by 3% as a result of the KCI litigation
expenses, which are incurred in a low tax jurisdiction, for the period,
partially offset by a tax benefit for long-term capital gains on the sale of
marketable securities.
Net Income - Net income for the third quarter of 2003 was $5.4 million,
including $2.0 million of litigation and settlement cost, net of tax, or $0.38
per basic share and $0.37 per diluted share, compared to $6.0 million, or $0.44
per basic share and $0.41 per diluted share, for the third quarter of 2002. The
weighted number of basic common shares outstanding was 14,181,847 and 13,444,245
during the third quarter of 2003 and 2002, respectively. The weighted number of
diluted common shares outstanding was 14,882,747 and 14,717,983 during the third
quarter of 2003 and 2002, respectively.
- 19 -
Liquidity and Capital Resources
Cash and cash equivalents were $45.7 million at September 30, 2003 compared
to $48.8 million at December 31, 2002, a decrease of $3.1 million.
Net cash provided by operating activities was $20.9 million for the first
nine months of 2003, compared to $19.3 million for the same period of 2002, an
increase of $1.6 million. Net cash provided by operating activities is comprised
of net income, non-cash items and changes in working capital. Net income
decreased approximately $1.4 million to $17.9 million for the first nine months
of 2003, including the $2.9 million impact of legal expenses incurred for
pending patent infringement claims against KCI and $1.1 million in after-tax
settlement costs associated with the Office of Inspector General investigation,
from $19.3 million for the same period of the prior year. We expect to incur
additional legal expenses for KCI litigation of approximately $0.6 million over
the remaining period of 2003. The decrease in net income was offset by a $0.8
million increase in non-cash items. Working capital accounts consumed $8.3
million of cash during the first nine months of 2003 compared to a use of $10.5
million during the same period of the prior year, an overall improvement of $2.2
million.
We invested $27.3 million during the first nine months of 2003 compared to
$12.9 million for the same period of the prior year for investments in
subsidiaries and affiliates and capital expenditures. During the first nine
months of 2003, we purchased the remaining 48% minority interest of our U.K.
distribution company, Intavent Orthofix Ltd. for $20.6 million and an equity
interest in Innovative Spinal Technologies (IST) for $1.5 million. In addition,
during the first nine months of 2003, we invested $3.6 million in capital
expenditures and $1.5 million in the OrthoRx joint venture. See Note 4
"Acquisitions and Investments" of Item 1. "Condensed Financial Statements" for
further information of investments made during the period. During the first nine
months of 2003, we generated $0.4 million from the sale of marketable securities
compared to no comparable activity for the same period in 2002.
Net cash provided by financing activities was $2.2 million for the first
nine months of 2003 compared to a use of $1.7 million in the same period of
2002, respectively. Proceeds of $10.9 million were generated from the issuance
of 720,983 shares of our common stock upon the exercise of options and warrants.
During the first nine months of 2003, we purchased 157,000 shares of our common
stock in the open market for $4.4 million. Our Board of Directors has authorized
the purchase of shares of our common stock up to a total of 50% of the number of
shares of our common stock issued from the exercise of options. We also repaid
$4.4 million of loans and borrowings on a line of credit upon the sale of
accounts receivable without recourse in Italy to a third party.
We believe that current cash balances together with projected cash flows
from operating activities, the exercise of stock options and available debt
capacity are sufficient to cover anticipated operating capital needs and
research and development costs over the near term.
Item 3. Quantitative and Qualitative Disclosure About Market 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, 2002.
Item 4. Controls and Procedures
As of September 30, 2003, we performed an evaluation under the supervision
and with the participation of Company's management, including the Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures. Based
on the evaluation, the Company's management, including the Chief Executive
Officer and Chief Financial Officer, concluded that the Company's disclosure
controls and procedures were adequate and effective as of the end of the period
covered by this report. During the quarterly period covered by this report,
there were no changes in the Company's internal controls over financial
reporting that have materially affected, or are reasonably likely to materially
affect, the Company's internal control over financial reporting.
- 20 -
PART II OTHER INFORMATION
Item 2. Legal Proceedings
On August 18, 2003, the Company announced that it settled a two-year-long
investigation by the Office of Inspector General of its billings to federal and
state health care programs for the off-label use of its FDA approved pulsed
electronic magnetic field device. Without admitting any wrong doing, the Company
agreed to pay CHAMPUS/Tricare $1.7 million ($1.1 million after-tax) in order to
avoid protracted litigation and related legal costs, and placing this government
inquiry into our billings to federal programs firmly in the past.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description
------ -----------
31.1* Statement Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 of Chief Executive Officer
dated November 11, 2003.
31.2* Statement Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 of Chief Financial Officer
dated November 11, 2003.
32.1* Statement Pursuant to 18 U.S.C. Section 1350 of Chief
Executive Officer dated November 11, 2003.
32.2* Statement Pursuant to 18 U.S.C. Section 1350 of Chief
Financial Officer dated November 11, 2003.
----------------------------
* Filed herewith.
(b) Reports on Form 8-K
On August 19, 2003, the Company filed a current report on Form 8-K
(Date of Report: August 18, 2003) reporting under Item 5 that it had
settled an investigation by the Office of Inspector General regarding
off-label use of its FDA approved pulsed electronic field device, and
attaching a press release regarding the same.
- 21 -
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 12, 2003 By: /s/ CHARLES W. FEDERICO
-------------------------------------
Name: Charles W. Federico
Title: Chief Executive Officer
and President
Date: November 12, 2003 By: /s/ THOMAS HEIN
-------------------------------------
Name: Thomas Hein
Title: Chief Financial Officer
- 22 -