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 March 31, 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 [ ]
As of May 2, 2005, 15,811,196 shares of common stock were issued and
outstanding.
Table of Contents
Page
----
PART I FINANCIAL INFORMATION............................................... 3
Item 1. Condensed Financial Statements...................................3
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................15
Item 3. Quantitative and Qualitative Disclosure About Market Risk.......22
Item 4. Controls and Procedures.........................................22
PART II OTHER INFORMATION...................................................23
Item 1. Legal Proceedings...............................................23
Item 6. Exhibits........................................................24
SIGNATURES....................................................................26
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) March 31, December 31,
2005 2004
----------------- ----------------
Assets (Unaudited) (Note 2)
Current assets:
Cash and cash equivalents.................................... $ 26,021 $ 25,944
Restricted cash.............................................. 10,940 14,302
Trade accounts receivable, net............................... 79,101 75,321
Inventories.................................................. 32,291 32,895
Deferred income taxes........................................ 3,948 4,130
Prepaid expenses and other................................... 11,655 10,000
----------------- ----------------
Total current assets........................................... 163,956 162,592
Securities and other investments............................... 4,082 4,082
Property, plant and equipment, net............................. 18,385 18,326
Patents and other intangible assets, net....................... 69,129 70,627
Goodwill, net.................................................. 168,347 169,329
Other long-term assets ........................................ 5,234 6,144
----------------- ----------------
Total assets................................................. $ 429,133 $ 431,100
================= ================
Liabilities and shareholders' equity
Current liabilities:
Bank borrowings.............................................. $ 74 $ 76
Current portion of long-term debt............................ 10,230 10,057
Trade accounts payable....................................... 9,214 9,507
Other current liabilities.................................... 25,583 25,745
----------------- ----------------
Total current liabilities.................................... 45,101 45,385
Long-term debt................................................. 59,058 67,249
Deferred income taxes.......................................... 17,323 17,555
Other long-term liabilities.................................... 1,313 3,739
----------------- ----------------
Total liabilities............................................ 122,795 133,928
----------------- ----------------
Contingencies (Note 16)
Shareholders' equity:
Common shares (15,796,723 and 15,711,943 shares issued
at March 31, 2005 and December 31, 2004, respectively)...... 1,580 1,572
Additional paid-in capital................................... 100,052 98,388
Retained earnings............................................ 192,852 182,073
Accumulated other comprehensive income....................... 11,854 15,139
----------------- ----------------
Total shareholders' equity................................... 306,338 297,172
----------------- ----------------
Total liabilities and shareholders' equity $ 429,133 $ 431,100
================= ================
The accompanying notes form an integral part of these condensed consolidated
financial statements.
3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004
(Unaudited, U.S. Dollars, in thousands except share and per share data) 2005 2004
------------------ ----------------
Net sales...................................................... $ 77,688 $ 70,739
Cost of sales.................................................. 20,896 19,546
------------------ ----------------
Gross profit................................................. 56,792 51,193
Operating expenses
Sales and marketing.......................................... 27,598 26,136
General and administrative................................... 8,676 7,247
Research and development..................................... 2,938 3,316
Amortization of intangible assets............................ 1,627 1,333
KCI litigation costs......................................... 342 372
------------------ ----------------
41,181 38,404
------------------ ----------------
Total operating income ...................................... 15,611 12,789
Interest expense, net......................................... (1,319) (1,529)
Other income, net............................................. 2,053 189
Gain in joint venture, net.................................... -- 406
------------------ ----------------
Income before income tax.................................... 16,345 11,855
Income tax expense............................................. (5,566) (3,511)
------------------ ----------------
Net income ................................................. $ 10,779 $ 8,344
------------------ ----------------
Net income per common share - basic............................ $ 0.68 $ 0.55
------------------ ----------------
Net income per common share - diluted.......................... $ 0.67 $ 0.53
------------------ ----------------
Weighted average number of common shares - basic............... 15,784,245 15,039,870
------------------ ----------------
Weighted average number of common shares - diluted............. 16,157,395 15,745,473
------------------ ----------------
The accompanying notes form an integral part of these condensed consolidated
financial statements.
4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004
(Unaudited, U.S. Dollars, in thousands) 2005 2004
---------------- -----------------
Cash flows from operating activities:
Net income.................................................... $ 10,779 $ 8,344
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization................................. 3,590 3,534
Deferred royalty income....................................... (2,443) --
Provision for doubtful accounts............................... 1,167 1,344
Loss on equity investments.................................... -- 428
Tax benefit on non-qualified stock options.................... 25 1,057
Deferred taxes................................................ (110) (465)
Gain on sale of assets and investments........................ -- (1,470)
Other ........................................................ 492 36
Change in operating assets and liabilities:
Restricted cash............................................. 3,362 (15,012)
Accounts receivable......................................... (5,977) (2,616)
Inventories................................................. 30 (1,143)
Prepaid expenses and other.................................. (1,557) (913)
Accounts payable............................................ (95) (1,136)
Current liabilities......................................... 244 37
--------------- ----------------
Net cash provided by (used in) operating activities............. 9,507 (7,975)
--------------- ----------------
Cash flows from investing activities:
Investments in affiliates and subsidiaries.................... -- (1,105)
Capital expenditures.......................................... (2,624) (1,933)
Proceeds from sale of joint venture........................... -- 1,300
--------------- ----------------
Net cash used in investing activities........................... (2,624) (1,738)
--------------- ----------------
Cash flows from financing activities:
Net proceeds from issuance of common stock.................... 1,500 3,034
Payment of debt issuance costs................................ -- (460)
Net repayment of loans and borrowings......................... (8,020) (1,280)
--------------- ----------------
Net cash (used in) provided by financing activities............. (6,520) 1,294
--------------- ----------------
Effect of exchange rate changes on cash......................... (286) (1)
--------------- ----------------
Increase (decrease) in cash and cash equivalents................ 77 (8,420)
Cash and cash equivalents at the beginning of the year.......... $ 25,944 $ 31,356
--------------- ----------------
Cash and cash equivalents at the end of the period.............. $ 26,021 $ 22,936
--------------- ----------------
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 months ended March 31, 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 year 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. 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 123R. The new rule allows for companies to adopt the
provisions of SFAS 123R 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.
6
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 represents
immediately saleable finished goods inventory that is in the possession of the
Company's direct sales representatives.
Inventories were as follows:
March 31, December 31,
(In thousands) 2005 2004
------------------- -------------------
Raw materials $6,480 $6,456
Work-in-process 2,731 2,445
Finished goods 14,224 14,823
Field inventory (as described above) 5,074 5,346
Consignment inventory 8,104 7,835
Less reserve for obsolescence (4,322) (4,010)
------------------- -------------------
$32,291 $32,895
=================== ===================
NOTE 6: GOODWILL
The change in the net carrying value of goodwill for the period ended March
31, 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 - - (982) (982)
------------ ------------- --------------- -------------
At March 31, 2005 $32,952 $91,762 $43,633 $168,347
============ ============= =============== =============
7
NOTE 7: LONG TERM DEBT
March 31, December 31,
(In thousands) 2005 2004
----------------- -------------------
Long-term obligations $68,750 $76,750
Other loans 538 556
----------------- -------------------
69,288 77,306
Less current portion (10,230) (10,057)
----------------- -------------------
$59,058 $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 March 31, 2005 and
December 31, 2004 this senior secured bank facility had outstanding borrowing,
included in long-term obligations, of $68.8 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 March 31, 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 March 31, 2005 the interest rate on the debt related to the Swap was
5.16% (3.16% plus a margin of 2.00%). The effective interest rate, including the
impact of the Swap, as of March 31, 2005 on the senior secured debt was 5.13%.
In conjunction with obtaining the senior secured bank facility and the
amendment thereto, the Company incurred debt issuance costs of $3.6 million. As
of March 31, 2005, $2.7 million of unamortized debt issuance costs was recorded
in other assets.
NOTE 8: COMMON SHARES
For the three months ended March 31, 2005, the Company issued 84,780 shares
of common stock upon the exercise of outstanding stock options and warrants for
proceeds of $1.5 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:
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 $75 -- 176 176
Foreign currency translation (3,461) -- (3,461)
adjustment -------------- --------------- -----------------
Balance at March 31, 2005 $11,586 $268 $11,854
============== =============== =================
(In thousands) Three Months Ended
March 31,
---------------------------------
2005 2004
-------------- ---------------
Net income $10,779 $8,344
Other comprehensive income:
Unrealized gain on derivative
instrument, net of taxes of
$75 (see Note 15) 176 --
Foreign currency translation
adjustment (3,461) (96)
-------------- ---------------
Total comprehensive income $7,494 $8,248
============== ===============
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.
Prior to the acquisition of Breg, the Company's segments were identified by
geographic areas. In 2004, management identified Breg as a reportable segment
because Breg's customer type differed from the previous type of Orthofix
customer.
Americas Orthofix
Americas Orthofix operation ("Americas") consists of operations in the
United States existing prior to the acquisition of Breg, as well as, 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.
International Orthofix
International Orthofix operation ("International") consists of operations,
existing prior to the acquisition of Breg, 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.
9
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.
Group Activities
Group Activities are comprised of the Parent's operating expenses and
identifiable assets.
For the three month period ended March 31:
External Sales Intersegment Sales
----------------------------- -- --------------------------------
(In thousands) 2005 2004 2005 2004
------------- ------------ ------------- --------------
Americas Orthofix $33,764 $29,793 $470 $413
Americas Breg 17,994 16,859 174 --
International Orthofix 25,930 24,087 14,771 16,245
------------- ------------ ------------- --------------
Total $77,688 $70,739 $15,415 $16,658
============= ============ ============= ==============
For the three month periods ended March 31:
Operating Income (Expense)
-------------------------------
(In thousands) 2005 2004
------------- --------------
Americas Orthofix $7,597 $6,092
Americas Breg 2,894 2,304
International Orthofix 6,760 5,304
Group Activities (1,340) (1,107)
Eliminations (300) 196
----------- -----------
Total $15,611 $12,789
=========== ===========
10
Sales by Market Sector
for the three month period ended March 31, 2005
------------------------------------------------------------------------------
Americas International
(In thousands) Orthofix Americas Breg Orthofix Total
----------------- --------------- ------------------ ---------------
Orthopedic
Spine $23,067 $ - $109 $23,176
Reconstruction 2,093 17,994 12,501 32,588
Trauma 8,237 - 7,817 16,054
----------------- --------------- ------------------ ---------------
Total Orthopedic 33,397 17,994 20,427 71,818
Non-Orthopedic 367 - 5,503 5,870
----------------- --------------- ------------------ ---------------
Total $33,764 $17,994 $25,930 $77,688
================= =============== ================== ===============
Sales by Market Sector
for the three month period ended March 31, 2004
------------------------------------------------------------------------------
Americas International
(In thousands) Orthofix Americas Breg Orthofix Total
----------------- --------------- ------------------ ---------------
Orthopedic
Spine $19,587 $ - $33 $19,620
Reconstruction 1,715 16,660 11,729 30,104
Trauma 8,315 199 6,789 15,303
----------------- --------------- ------------------ ---------------
Total Orthopedic 29,617 16,859 18,551 65,027
Non-Orthopedic 176 - 5,536 5,712
----------------- --------------- ------------------ ---------------
Total $29,793 $16,859 $24,087 $70,739
================= =============== ================== ===============
- --------------------------------------------------------------------------------
Note: The three months ended March 31, 2004 contains a reclass from the 1st
Quarter 2004 Form 10-Q, of $407 from Trauma to Reconstruction.
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 unutilizable net
operating losses in various jurisdictions, the Company's tax holiday benefit in
the Seychelles, tax planning associated with the acquisition of Breg and the new
Section 199 deduction related to income attributable to production activities
occurring in the United States. This deduction was enacted as part of the
American Jobs Creation Act of 2004.
11
NOTE 13: EARNINGS PER SHARE
For the three month periods ended March 31, 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
March 31,
----------------------------------
2005 2004
--------------- ---------------
Weighted average common shares - basic 15,784,245 15,039,870
Effect of diluted securities:
Stock options 373,150 705,603
--------------- ---------------
Weighted average common shares - diluted 16,157,395 15,745,473
=============== ===============
The Company did not include 249,000 options in the diluted shares
outstanding calculation for the three month period ended March 31, 2005 because
their inclusion would have been antidilutive or because their exercise price
exceeded the average market price of our common stock during the period. For the
three month period ended March 31, 2004, all options were included in the
diluted shares outstanding calculation as the average market value of the
Company's common stock for the period was higher than the exercise prices of all
options outstanding for the period.
12
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 month periods ended March 31, 2005 and 2004, $87,000
and $90,000, 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. 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 month periods ended March 31, 2005 and March 31, 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
March 31,
(In thousands, except per share data) 2005 2004
------------- -------------
Net income $10,779 $8,344
As reported
Add: Stock-based employee
compensation expense included in
reported net income, net of related
tax effects 87 90
Less: Total stock-based employee
compensation expense determined
under fair value method for all
awards net of tax (621) (442)
------------- -------------
Pro forma $10,245 $7,992
Net income per common share - basic
As reported $0.68 $0.55
Pro forma $0.65 $0.53
Net income per common share - diluted
As reported $0.67 $0.53
Pro forma $0.63 $0.51
13
NOTE 15: DERIVATIVE INSTRUMENT
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 March 31,
2005 was $37.5 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 March 31, 2005, is
determined to be effective. At March 31, 2005, the fair value of the derivative
was approximately $383,000 and has been included in other current assets. The
net unrealized gain of approximately $176,000, net of tax of $75,000, has been
included in other comprehensive income for the three month period ended March
31, 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.
NOTE 16: CONTINGENCIES
Litigation
The Company, in the normal course of its business, is involved in various
lawsuits from time to time. In addition, the Company is subject to certain other
contingencies discussed below:
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
seeking damages relating to past infringement, breach of contract, and unfair
competition. KCI has filed counterclaims alleging that Novamedix engaged in
inequitable conduct before the United States Patent and Trademark Office and
fraud as to KCI and that Novamedix engaged in common law and statutory unfair
competition against KCI. KCI withdrew several of its counterclaims, but
continues to assert affirmative defenses contending that the patents are
invalid, unenforceable, and not infringed. KCI also seeks monetary damages,
injunctive relief, costs, attorney's fees, and other unspecified relief. During
2002, the United States Patent and Trademark Office issued re-examination
certificates validating four U.S. vascular patents owned by the Company. The
U.S. District Court in San Antonio, Texas restored the litigation to active
status. A portion of any amounts received by the Company will be payable to
former owners of Novamedix under the original purchase agreement. This matter is
currently in the pre-trial motions phase.
On September 29, 2004, Triage Medical Inc. ("Triage") filed an action
against Orthofix International N.V. That action, which the Company removed to
federal court, is entitled Triage Medical Inc. vs. Orthofix International N.V.,
Case No: SACV04-1377 JVS and is pending in the United States District Court for
the Central District of California. Triage further contends that the Company
agreed to negotiate an acquisition of Triage, and as a part of the acquisition
process, to make an unconditional $2.0 million escrow payment to Triage. Triage
contends the Company terminated the acquisition process and failed to make the
payment as a result of which, Triage has been damaged. The Company has answered
the complaint denying any liability and pleading certain defenses. The Company
believes this case is without merit and intends to vigorously defend this
action.
In management's opinion, based upon information available to date, the
Company is not currently involved in any other legal proceeding, individually or
in the aggregate, that will have a material effect on the financial position,
liquidity or operating results of the Company.
Concentrations of credit risk
There have been no material changes from the information provided in the
Company's Annual Report on Form 10-K for the year ended December 31, 2004.
14
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis addresses our liquidity, financial
condition, and the results of our operations for the three months ended March
31, 2005 compared to our results of operations for the three months ended March
31, 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 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. Under the equity method, original investments are recorded at cost and
adjusted by our share of undistributed earnings or losses of these companies.
All material intercompany transactions and profits associated with the equity
investees are eliminated in consolidation.
Our reporting currency is the United States dollar. All balance sheet
accounts, except shareholders' equity, are translated at the period end exchange
rates, and revenue and expense items are translated at weighted average rates of
exchange prevailing during the period. Gains and losses resulting from foreign
currency transactions are included in other income (expense). Gains and losses
resulting from the translation of foreign currency financial statements are
recorded in the accumulated other comprehensive income (loss) component of the
shareholders' equity.
Our financial condition, results of operations and cash flows are not
significantly impacted by seasonal trends. In addition, we do not believe our
operations will be significantly affected by inflation. However, in the ordinary
course of business, we are exposed to the impact of changes in interest rates
and foreign currency fluctuations. Our objective is to limit the impact of such
movements on earnings and cash flows. In order to achieve this objective, we
seek to balance non-dollar income and expenditures. We have in place an interest
rate swap derivative instrument to hedge our exposure to interest rate
fluctuation. We do not ordinarily use derivative instruments to hedge foreign
exchange exposure.
We manage our operations as three business segments: Americas Orthofix,
Americas Breg and International Orthofix. Americas Orthofix consists of the
operations in the United States, existing prior to the acquisition of 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, existing prior to the acquisition
of Breg, 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.
15
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 92% of our total net sales in the three months ended March 31,
2005 and 2004. Sales of non-orthopedic products, including the airway management
products for use during anesthesia, woman's care and other products, accounted
for 8% of our total net sales in the three months ended March 31, 2005 and 2004.
The following tables display the net sales by business segment and net
sales by Market Sectors for the three months ended March 31, 2005 and 2004. We
provide net sales by Market Sector for informational 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 March 31,
(In US$ thousands) 2005 2004
-------------------------------- -----------------------------------
Percent of Percent of
Total Net Total Net
Net Sales Sales Net Sales Sales
--------------- ---------------- ---------------- ------------------
Americas Orthofix $33,764 44% $29,793 42%
Americas Breg 17,994 23% 16,859 24%
International Orthofix 25,930 33% 24,087 34%
--------------- ---------------- ---------------- ------------------
Total $77,688 100% $70,739 100%
=============== ================ ================ ==================
Market Sector:
Three Months Ended March 31,
(In US$ thousands) 2005 2004(1)
-------------------------------- -----------------------------------
Percent of Percent of
Total Net Total Net
Net Sales Sales Net Sales Sales
--------------- ---------------- ---------------- ------------------
Orthopedic
Spine $23,176 30% $19,620 28%
Reconstruction 32,588 42% 30,104 42%
Trauma 16,054 20% 15,303 22%
--------------- ---------------- ---------------- ------------------
Total Orthopedic 71,818 92% 65,027 92%
Non-Orthopedic 5,870 8% 5,712 8%
--------------- ---------------- ---------------- ------------------
Total $77,688 100% $70,739 100%
=============== ================ ================ ==================
- --------------------------------------------------------------------------------
(1) The three months ended March 31, 2004 contains a reclass from the 1st
Quarter 2004 Form 10-Q, of $407 from Trauma to Reconstruction.
16
The following table presents certain items from our statements of
operations as a percentage of net sales for the periods indicated:
Three Months Ended
March 31,
---------------------------
2005 2004
---- ----
(%) (%)
Net sales........................... 100 100
Cost of sales....................... 27 28
Gross profit........................ 73 72
Operating expenses
Sales and marketing .............. 36 37
General and administrative........ 11 10
Research and development.......... 4 5
Amortization of intangible assets. 2 2
KCI litigation costs............. -- --
Total operating income.............. 20 18
Net income.......................... 14 12
Three Months Ended March 31, 2005 Compared to Three Months Ended March 31,
2004
Sales by Business Segment:
Net sales increased 10% to $77.7 million for the first three months (the
first quarter) of 2005 compared to $70.7 million for the first three months of
2004. The impact of foreign currency increased sales by $1.1 million, or 1.4%,
during the first quarter of 2005 as compared to the first quarter of 2004.
Net sales in Americas Orthofix (the "Americas"), primarily in the United
States, increased to $33.8 million in the first quarter of 2005 compared to
$29.8 million in the first quarter of 2004, an increase of 13%. The Americas
represented 43% of total net sales during the first quarter of 2005 and 42% of
total net sales for the first quarter of 2004. The increase in sales was
primarily the result of an 18% increase in sales in the spine Market Sector
which was attributable to sales of Cervical-Stim(R) which was approved by the
FDA in December 2004. The following table illustrates net sales by market sector
in the Americas:
Net Sales for the
Three Months Ended March 31,
---------------------------------------
(In US$ thousands) 2005 2004 Growth
-------------------- ------------------ --------------------
Orthopedic
Spine $23,067 $19,587 18%
Reconstruction 2,093 1,715 21%
Trauma 8,237 8,315 (1)%
-------------------- ------------------
Total Orthopedic 33,397 29,617 13%
Non-Orthopedic 367 176 109%
-------------------- ------------------
Americas Orthofix $33,764 $29,793 13%
==================== ==================
Net sales in Americas Breg ("Breg"), increased $1.1 million to $18.0
million for the first quarter of 2005 compared to $16.9 million for the first
quarter 2004, an increase of 7%. The increase in sales was primarily due to the
sale of Breg bracing products which increased 10% from the first quarter of
2005. During the first quarter 2005, Breg experienced a delay in the
introduction of new pain and cold therapy products, which had a combined growth
rate of 3% and hindered Breg's overall sales growth rate for the comparative
periods.
17
Net sales in International Orthofix ("International") increased 8% to $25.9
million in the first quarter of 2005 compared to $24.1 million in first quarter
of 2004. The primary factors that led to this increase were currency, increased
sales of external fixation products and continued strength in sales of the
PC.C.P hip fracture fixation system; these sales gains were partially offset by
a decrease in sales of the A-V Impulse system, primarily the impad component,
and of the non-orthopedic airway management products. The impact of foreign
currency increased International Orthofix sales by $1.0 million during the first
quarter of 2005 as compared to the first quarter of 2004. The following table
illustrates net sales by market sector in International:
Net Sales for the
Three Months Ended March 31,
---------------------------------------
(In US$ thousands) 2005 2004 Growth
-------------------- ------------------ --------------------
Orthopedic
Spine $109 $33 230%
Reconstruction 12,501 11,729 7%
Trauma 7,817 6,789 15%
-------------------- ------------------
Total Orthopedic 20,427 18,551 10%
Non-Orthopedic 5,503 5,536 (1)%
-------------------- ------------------
International Orthofix $25,930 $24,087 8%
==================== ==================
Sales by Market Sector:
Net sales of spine products increased 18% to $23.2 million in the first
quarter of 2005 compared to $19.6 million in the first 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.
Sales of our reconstruction products increased 8% to $32.6 million in the
first quarter of 2005 compared to $30.1 million in the first quarter of 2004.
The increase in this market sector was attributable to sales of our external
fixation products used in reconstruction applications which increased 21% and to
sales of the Breg products which increased 9%. Growth in this Market Sector was
negatively impacted in the first quarter of 2005 compared to 2004 by a decrease
of 5% in A-V Impulse system sales as discussed above.
Sales of our trauma products increased 5% to $16.1 million in the first
quarter of 2005, compared to $15.3 million in the first quarter of 2004. This
Market Sector was positively impacted from an 8% growth in sales of external
fixation products. Growth in this Market Sector was negatively impacted by a
decrease of 2% in sales of stimulation products used for long bone applications.
Sales of our non-orthopedic products grew 3% to $5.9 million in the first
quarter of 2005 compared to $5.7 million in the first quarter of 2004. The
increase was primarily due to an increase in sales of woman's care and other
products. This increase was partially 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 $56.8 million in the first
quarter of 2005, from $51.2 million in the first quarter of 2004. The increase
was primarily due to the increase of 10% in net sales. Gross profit as a percent
of net sales in the first quarter 2005 was 73.1% compared to 72.4% in 2004,
which was a result of a favorable product mix resulting from sales of higher
margin stimulation products and higher gross margins at Breg as a result of
moving manufacturing facilities to Mexico. Gross profit in the first three
months of 2004 was negatively impacted by a non-recurring charge of $0.5 million
from purchase accounting for the step-up in value of the acquired Breg
inventory.
18
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 $1.5 million to
$27.6 million in the first quarter of 2005 compared to $26.1 million in the
first quarter of 2004, an increase of 6% on a net sales increase of 10% over the
same period. Sales and marketing expense as a percent of net sales decreased to
35.5% in the first quarter of 2005 from 36.9% in the first quarter of 2004.
Sales and marketing expense as a percent of net sales benefited from a product
mix that included higher stimulation sales in the first quarter of 2005 when
compared to the first quarter of 2004. Stimulation sales generally incur less
commission expense than our other key products. We also experienced an increase
in the collectibility of doubtful accounts for the first quarter of 2005 when
compared to the same period of the prior year which reduced bad debt expense as
a percent of net sales for the current period.
General and Administrative Expense - General and administrative expense
increased $1.4 million in the first quarter of 2005 to $8.7 million compared to
$7.2 million in the first quarter of 2004. This increase is primarily
attributable to costs associated with Section 404 of the Sarbanes-Oxley Act of
2002, legal costs, and higher employee benefit costs in the United States.
General and administrative expense as a percent of net sales was 11% for the
first quarter of 2005 compared to 10% for the first quarter of 2004.
Research and Development Expense - Research and development expense decreased
$0.4 million in the first quarter of 2005 to $2.9 million compared to $3.3
million in the first quarter of 2004 and decreased as a percent of net sales at
4% in 2005 compared to 5% in 2004.
Amortization of Intangible Assets - Amortization of intangible assets was $1.6
million in the first quarter of 2005 compared to $1.3 million for the first
quarter of 2004. The increase in amortization expense of approximately $0.3
million is due to higher amortization expense for the distribution network of
Breg and the PC.C.P patents which were acquired in the second quarter of 2004.
The amortization schedules for these assets are based on the expected economic
benefit per year over the expected useful life.
KCI Litigation Costs - Litigation costs for our case against Kinetics Concepts
Inc. ("KCI") (further described in Note 16 "Contingencies" of Item 1, "Condensed
Financial Statements"), was $0.3 million in the first quarter of 2005, compared
to $0.4 million in the first quarter of 2004.
Interest Expense, net - Interest expense was $1.3 million in the first quarter
of 2005 compared to $1.5 million in the first quarter of 2004. We incurred
interest expense on borrowings under our senior secured term loan of
approximately $1.3 million which included the amortization of debt costs. The
reduction in interest expense in the first 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.
Other Income, net - Other income, net was income of $2.1 million in the first
quarter of 2005 compared to income of $0.2 million in the first quarter of 2004.
Other income for the first quarter of 2005 was attributable to $2.4 million of
deferred royalty income resulting from the conclusion of the BoneSource
agreement with Stryker. For the first quarter of 2004, other income was
generated by the sale of a facility in the United Kingdom that resulted in a
gain of approximately $0.6 million which was partially offset by foreign
exchange losses of $0.4 million.
Gain in Joint Venture, net - No gain or loss in the joint venture was recorded
in the first quarter of 2005 compared to a gain of $0.4 million in the first
quarter 2004 which was a result of the sale of our ownership in the OrthoRx
joint venture partially offset by our portion of losses from the quarter. We
have not recorded a gain or loss in the joint venture during 2005 because at
December 31, 2004, our investment in OrthoRx, which is accounted for using the
equity method of accounting, had been reduced to zero.
19
Income Tax Expense - Our estimated worldwide effective tax rate was 34% and 30%
during the first quarter of 2005 and 2004, respectively. The increase in
expected effective tax rates is due primarily to the non-recurrence of a
non-taxable gain on the sale of OrthoRx shares in 2004 and a higher proportion
of pretax income being earned in the United States, a higher tax jurisdiction.
Net Income - Net income for the first quarter of 2005 was $10.8 million, or
$0.68 per basic share and $0.67 per diluted share, compared to $8.3 million, or
$0.55 per basic share and $0.53 per diluted share, for the first quarter of
2004, an increase in net income of 29%. The weighted average number of basic
common shares outstanding was 15,784,245 and 15,039,870 during the first quarter
of 2005 and 2004, respectively. The weighted average number of diluted common
shares outstanding was 16,157,395 and 15,745,473 during the first quarter of
2005 and 2004, respectively.
Liquidity and Capital Resources
Cash was $37.0 million at March 31, 2005, of which $10.9 million was
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, a decrease of $3.2 million.
Net cash provided by operating activities was $9.5 million for the first
three months of 2005 compared to cash used in operating activities of $8.0
million for the first three 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 $2.5 million to $10.8 million in the
first three months of 2005 from $8.3 million in the first three months of 2004.
Non-cash items decreased $1.7 million in the first three months of 2005 compared
to the first three months of 2004, primarily as a result of the settlement
agreement with Stryker relating to the termination of the parties' BoneSource
agreement which reduced deferred royalties. Working capital accounts consumed
$4.0 million of cash in the first three months of 2005 compared to the use of
$20.8 million in cash during the first three months of 2004 of which $15.0
million resulted from the reclassification of cash as restricted cash. The
principal uses of cash for working capital in the first three months of 2005
were increases in accounts receivable to support additional sales and increases
in other assets. These uses of cash were partially offset by a decrease in
restricted cash and an increase in other current liabilities. Overall
performance indicators of our two primary working capital accounts, accounts
receivable and inventory, reflect days sales in receivables of 92 days at March
31, 2005 compared to 94 days at March 31, 2004 and inventory turnover of 2.6
times at March 31, 2005 compared to 2.4 times at March 31, 2004.
Net cash used in investing activities was $2.6 million during the first
three months of 2005, compared to $1.7 million during the first three months of
2004. During the first three months of 2005, we invested $2.6 million in capital
expenditures. During the first three months of 2004, we paid $1.1 million as
part of the consideration for the purchase of a Puerto Rican distributor,
invested $1.9 million in capital expenditures and received $1.3 million from the
sale of shares in the OrthoRx joint venture.
Net cash used in financing activities was $6.5 million in the first three
months of 2005 compared to cash provided by financing activities of $1.3 million
for the first three months in 2004. In the first three months of 2005, we repaid
approximately $8.0 million of the principal of the senior secured term loan,
which was obtained to help finance the Breg acquisition. In the first three
months of 2005, we received proceeds of $1.5 million from the issuance of 84,780
shares of our common stock upon the exercise of stock options and warrants. In
the first three months of 2004, we received proceeds of $3.0 million from the
issuance of 202,588 shares of our common stock upon the exercise of stock
options and warrants. In the first quarter of 2004, we also had net borrowings
of $1.5 million on a line of credit in Italy used to finance working capital.
Further, in the first quarter 2004, we repaid approximately $2.8 million against
the principal of the senior secured term loan obtained to help finance the Breg
acquisition and paid $0.5 million for costs associated with obtaining the senior
secured term loan, which will be amortized over the term of the credit facility.
20
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 bank facility provides for (1) a five-year
amortizing term loan facility of $110.0 million, the proceeds of which were used
for partial payment of the purchase price of Breg; and (2) a five-year revolving
credit facility of $15.0 million. As of March 31, 2005 and as of May 2, 2005, we
had no amounts outstanding under the revolving credit facility and $68.8 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 March 31, 2005 was $37.5 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 March 31, 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 March 31, 2005 on our senior secured
debt was 5.1%. Orthofix and each of Colgate's direct and indirect subsidiaries,
including Orthofix Inc. and Breg, have guaranteed the obligations of Colgate
under the senior secured bank facility. The obligations of Colgate under the
senior secured bank facility and Colgate's subsidiaries under their guarantees
are secured by the pledges of their respective assets. Certain of our other
subsidiaries have also guaranteed the obligations of Colgate under the senior
secured bank facility on a limited recourse basis.
The credit agreement relating to the senior secured bank facility
contains customary negative covenants applicable to Colgate and its
subsidiaries, including restrictions on indebtedness, liens, dividends, mergers
and the sale of assets. The credit agreement also contains certain financial
covenants, including a fixed charge coverage ratio, an interest coverage ratio
and a leverage ratio applicable to Colgate and its subsidiaries on a
consolidated 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 March 31, 2005, as required by the credit agreement,
and note that we are in compliance with all financial covenants.
At March 31, 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 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.
21
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
- ----------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) Less Than 1 to 3 4 to 5 Over 5
Total 1 Year Years Years Years
-------- ---------- -------- ------- -------
Senior secured term loan:
As of December 31, 2004 $76,750 $9,700 $67,050 - -
As of March 31, 2005 $68,750 $9,800 $58,950 - -
In addition to scheduled contractual obligations of the debt as set forth
above, our senior secured bank facility requires us to make mandatory
prepayments with (a) the excess cash flow (as defined in the credit agreement)
of Colgate and its subsidiaries in an amount initially equal to 75% of the
excess annual cash flow of Colgate and its subsidiaries, reducing to 50% upon
the attainment of a leverage ratio of less than or equal to 1.50 to 1.00, (b)
the net cash proceeds of any debt or equity issuances, excluding the exercise of
stock options, by any of the Credit Parties (as defined in the credit
agreement), (c) the net cash proceeds of asset dispositions over a minimum
threshold or (d) unless reinvested, insurance proceeds or condemnation awards.
Other than described above there were no material changes in the
contractual obligations specified in our Annual Report on Form 10-K for the year
ended December 31, 2004.
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
interest floating rates based on 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 March 31, 2005, we had $68.8 million of variable rate debt
represented by borrowings under our senior secured term loans at an interest
rate of 5.10% of which $37.5 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 March 31, 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 $0.3 million
on an annual basis. The fair value of the interest rate swap agreement was $0.4
million at March 31, 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 March 31, 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 quarterly period
covered by this report, there were no changes in our internal controls over
financial reporting that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
22
PART II OTHER INFORMATION
Item 1. Legal Proceedings
- --------------------------
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.
23
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 September 30, 2004 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 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).
10.14 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).
10.15 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).
24
10.16 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).
10.17 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).
10.18 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).
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.
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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: May 4, 2005 By: /s/ CHARLES W. FEDERICO
-----------------------------------
Name: Charles W. Federico
Title: Chief Executive Officer and
President
Date: May 4, 2005 By: /s/ THOMAS HEIN
-----------------------------------
Name: Thomas Hein
Title: Chief Financial Officer
26