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SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 20-F
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|_| Registration statement pursuant to Section 12(b) or Section 12(g) of the
Securities Exchange Act of 1934
or
|X| Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the fiscal year ended December 31, 1997
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
(Jurisdiction of incorporation or organization)
7 Abraham de Veerstraat
Curacao
Netherlands Antilles
(Address of principal executive offices)
Securities registered pursuant to Section
12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Shares, US$0.10 par value per Share
(Title of Class)
Securities for which there is a reporting obligation pursuant to
Section 15(d) of the Act:
None
Indicate the number of outstanding shares of each of the issuer's classes
of capital or common stock as of the close of the period covered by the annual
report:
Common Shares, US$0.10 par value per Share....................12,959,700
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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 the past 90 days: Yes X No ___
Indicate by check mark which financial statement item the Registrant has
elected to follow:
Item 17___ Item 18 X
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TABLE OF CONTENTS
PART I
Item 1. DESCRIPTION OF BUSINESS....................................1
General ...........................................................1
Recent Developments.......................................................1
Acquisitions ...........................................................2
Products ...........................................................2
Fixation Products.........................................................3
PEMF Products ...........................................................5
Other Products ...........................................................6
Distribution Products.....................................................8
Sales and Distribution....................................................8
Marketing ...........................................................9
Production ..........................................................10
Product Development......................................................10
Patents, Trade Secrets and Licenses......................................10
Competition ..........................................................11
Government Regulation....................................................11
Health Care Reform.......................................................12
Product Liability and Insurance..........................................13
Third Party Payors.......................................................13
Employees................................................................13
Year 2000................................................................14
Economic and Monetary Union in the European Union........................14
Item 2. DESCRIPTION OF PROPERTY...................................14
Item 3. LEGAL PROCEEDINGS.........................................14
Item 4. CONTROL OF REGISTRANT.....................................16
Item 5. NATURE OF TRADING MARKET..................................17
Item 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS
AFFECTING SECURITY HOLDERS................................17
Item 7. TAXATION..................................................18
Item 8. SELECTED FINANCIAL DATA...................................19
Item 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.............20
Item 10. DIRECTORS AND OFFICERS OF REGISTRANT......................24
Item 11. COMPENSATION OF DIRECTORS AND OFFICERS....................26
Item 12. OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT
OR SUBSIDIARIES...........................................26
Item 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS............28
PART II
Item 14. DESCRIPTION OF SECURITIES TO BE REGISTERED................29
PART III
Item 15. DEFAULT UPON SENIOR SECURITIES............................29
Item 16. CHANGES IN SECURITIES AND CHANGES IN SECURITY FOR
REGISTERED SECURITIES.....................................29
PART IV
Item 17. FINANCIAL STATEMENTS......................................29
Item 18. FINANCIAL STATEMENTS......................................29
Item 19. FINANCIAL STATEMENTS AND EXHIBITS.........................29
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INTRODUCTION
Orthofix International N.V. ("Orthofix International") was incorporated
under the laws of the Netherlands Antilles in 1987. In this Annual Report on
Form 20-F for the fiscal year ended December 31, 1997 (the "Annual Report"), all
references to the "Company" and "Orthofix" include Orthofix International and
its subsidiaries and affiliates, unless the context otherwise requires. The
principal executive offices of Orthofix International are located at 7 Abraham
de Veerstraat, Curacao, Netherlands Antilles.
The Company publishes its consolidated financial statements in United
States dollars. In this Annual Report, references to "United States dollars",
"dollars", "US$", or "$" are to United States currency, and references to
"lira", "lire" or "Lit." are to the Italian lira (singular) or to Italian lire
(plural).
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PART I
Item 1. DESCRIPTION OF BUSINESS.
General
The business of Orthofix is the design, development, manufacture,
marketing and distribution of medical equipment, principally for the orthopedic
market. The Company's main products are external and internal fixation devices
used in fracture treatment, limb lengthening and bone reconstruction, and pulsed
electromagnetic frequency products used for the non-invasive healing enhancement
of spinal fusions and recalcitrant bone fractures. Other orthopedic products
produced by the Company include devices for the removal of cement in hip
revision procedures, the ultrasonic treatment of musculo-skeletal pain and the
anchoring of soft tissue to bone, and an oral-maxillofacial bone substitution
compound. The Company also produces a device for enhancing venous circulation.
Orthofix, which is registered in the Netherlands Antilles, has
manufacturing facilities in the United States, the United Kingdom and Italy.
Products are distributed through subsidiary companies in the United States, the
United Kingdom and Italy. Elsewhere, distribution is through independent
distributors.
Orthofix has 100% equity ownership of Orthofix Inc., which is primarily
engaged in the development, manufacture and marketing of advanced products using
pulsed electromagnetic frequency technology for bone healing, including
Spinal-Stim for non-invasive healing enhancement of spinal fusions and
Physio-Stim for recalcitrant bone fractures, as well as the Ogden Anchor to
anchor sutures to bone to expedite the repair of tendon and ligament damage.
Osteogenics Inc. ("Osteogenics"), a wholly owned subsidiary of Orthofix Inc., is
engaged in the development of bone substitution compounds with a wide variety of
potential surgical and orthopedic applications including facial reconstruction,
fracture repair and periodontal repair. See "-- Recent Developments" and "--
Products" and Note 13 to the Consolidated Financial Statements. The Company also
has 100% equity ownership of Orthofix S.r.l., which designs, manufactures and
distributes external and internal fixation devices. The Company has 70% equity
ownership of DMO S.r.l. ("DMO"), the subsidiary that distributes the Company's
products in Italy, and 100% equity ownership in Novamedix Limited ("Novamedix")
the subsidiary that developed the A-V Impulse System. Orthofix also has 70%
equity ownership of Orthosonics Limited ("Orthosonics"), which markets and
distributes bone cement removal systems for use in connection with hip revision
surgery, and 62% equity ownership of Intavent Orthofix Limited ("Intavent
Orthofix"), which distributes Orthofix products in the United Kingdom. Orthofix
also has 100% and 80% equity ownership of Inter Medical Supplies Limited ("IMS")
and Novamedix Distribution Limited respectively, which distribute Orthofix
products in certain markets.
Recent Developments
On April 22, 1998, Orthofix Inc. entered into an agreement with
Howmedica, Inc. ("Howmedica"), a wholly-owned subsidiary of Pfizer Inc., to
license BoneSource, a calcium-based phosphate-based bone cement for use in the
repair of cranial defects. Under the terms of the agreement, Orthofix will
continue to supply BoneSource to Howmedica.
On February 20, 1998 Charles J. Dillman, Ph.D., was appointed Group
Vice President of Research and Development. Dr. Dillman, a Ph.D in Biomechanics,
is a member of the Medical Commission of the International Olympic Committee
(the "IOC"), where he has served as Program Director for the IOC's World
Congress on Sports Sciences. The IOC awarded Dr. Dillman the Olympic Order, its
highest award, for his contributions to the Olympic movement. Mr. Dillman has
served as Vice President of Research and Development for Smith & Nephew
Endoscopy, as Professor of Surgery at the University of Massachusetts Medical
Center, in addition to directing graduate medical programs at the University of
Delaware and Illinois. He has held several appointments with the United States
Olympic Committee and sports medicine foundations in the United States.
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On June 2, 1997 a jury in a United States federal district court in New
Jersey awarded various Orthofix subsidiaries $48,000,000 of compensatory damages
and $100,600,000 in punitive damages in a verdict against EBI Medical Systems,
Inc. ("EBI MS") in a case arising out of distributorship arrangements for
Orthofix products in the United States. On September 2, 1997, the district court
entered judgment in favor of Orthofix in the amount of $98,875,397. The
defendants have appealed the judgment to the United States Court of Appeals for
the Third Circuit. While the Third Circuit has docketed the appeal, the appeals
process may take two years to complete. See "Item 3. LEGAL PROCEEDINGS."
In July 1997, Orthofix Inc. opened a new research facility in the
Piedmont Triad Research Park in Winston- Salem, North Carolina. The facility is
the result of an agreement with Wake Forest University's Bowman School of
Medicine and will significantly enhance Orthofix's research and development
efforts in orthopedic applications as well as its ability to develop training
programs to instruct surgeons and operating room personnel in new surgical
procedures.
In October, 1996, the Company appointed Mr. Charles Federico to the
position of President of Orthofix Inc., following which a review of all of the
Company's North American activities has taken place. This review has resulted in
a significant restructuring of the Company's business in the United States. The
Company's U.S. sales force, which is now more incentive-based, has been
reorganized to make it more focused on individual business sectors. Orthofix
Inc. has further rationalized its overhead structure including premises, people
and non-essential functions. The restructuring, which was substantially complete
at March 31, 1997, resulted in a one-time charge to net income of $3.2 million.
Approximately $2.2 million, largely rental expense, was expensed in the fourth
quarter of 1996 and $1.0 million, largely employee termination costs, in the
first quarter of 1997.
On February 1, 1996, Orthofix increased its equity ownership of
Novamedix from 80% to 100% at a cost of $200,000.
Acquisitions
Orthofix Inc. On August 21, 1995, pursuant to the terms of an Agreement
and Plan of Merger, dated as of May 8, 1995 (the "Merger Agreement"), among
Orthofix International, Othello Acquiring Corp., a wholly owned subsidiary of
Orthofix International ("Othello") and American Medical Electronics, Inc.
("AME"), AME was merged into and with Othello. Othello, the corporation
surviving the merger, was subsequently renamed Orthofix Inc. Under the Merger
Agreement, holders of AME common stock received consideration in cash for
approximately 57% of such stock outstanding, and Orthofix Common Shares, subject
to the exchange ratio set forth in the Merger Agreement, for approximately 43%
of the shares of AME common stock outstanding. Pursuant to a distribution
agreement between Orthofix and AME, AME (succeeded by Orthofix Inc.) took over
the distribution of Orthofix's external fixation products in the United States
and Canada on June 1, 1995. See "-- Products" and Note 13 to the Consolidated
Financial Statements.
Products
The Company has three groups of products: Fixation Products, Pulsed
Electromagnetic Frequency ("PEMF") Products and Other Products, which are
designed, manufactured and marketed under the following trade names:
Fixation Products primary application
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Orthofix external fixation
Orthofix internal fixation
Ogden Anchor (1) reattachment of soft tissue to bone
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Fixation Products primary application
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PEMF Products
Spinal-Stim (1) non-invasive spinal fusion
stimulation
Physio-Stim (1) non-invasive electrical bone
growth stimulation
Other Products
Osteogenics BoneSource (1) bone substitute material
(hydroxyapatite cement)
A-V Impulse System enhancement of venous circulation
OSCAR ultrasonic hip revision bone
cement removal
Phys-Assist ultrasonic treatment of
musculo-skeletal pain
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(1) Denotes a product which the Company acquired as a result of the acquisition
of AME.
Distribution Products
The Company also has distribution rights in certain countries for the
following products:
Laryngeal Mask maintenance of airway during anesthesia
Cemex bone cement
SEM Prosthetic Devices prostheses
Fixation Products
The Orthofix
For a fracture to heal properly, without malalignment or rotation, the
bone must be set and fixed in the correct position. The bone must be kept
stable, but not absolutely rigid, in order to alleviate pain, maintain the
correct alignment and allow coagulation to produce bone cells that initiate
callus formation. Fractures also benefit from intermittent micromovement and
weight-bearing at the appropriate time in the healing cycle, which further
stimulate callus formation.
Therapeutic Alternatives in Fracture Treatment.
In most fracture cases, physicians use the simplest available
non-surgical procedure, casting. The Company believes, however, that
approximately 15-20% of all fractures require surgical intervention, the most
common forms of which (in order of frequency of usage) are:
Plates and Screws. The most common surgical method of fracture treatment is
plating. In this procedure, a plate is fastened with screws to the surface
of the bone in order to immobilize and maintain stability of the fracture.
In some cases, a bone screw is applied without a plate, primarily to realign
bone fragments in joint fractures. Disadvantages of plates and screws
include a lack of external callus formation as a result of too rigid
fixation, a relatively lengthy and invasive surgical procedure to insert the
device, the possible need for a second surgical procedure to remove the
device, the risk of infection at the fracture site and the possibility of
refracture upon removal of the device, all of which have been annotated in
published clinical papers.
Intramedullary Fixation. In recent years, long bone fractures, principally
those of the femur and tibia, have increasingly been treated with
intramedullary fixation. This method, which has a lower rate of infection
than plates, requires a surgically complex and invasive insertion of a metal
rod into the medullary canal, the central canal of the bone, to maintain
bone stability. A subsequent surgical procedure is required to remove the
device.
External Fixation. External fixation devices are used to immobilize
complicated fractures by mounting the fixator outside the fracture site.
With this method of fixation, screws are inserted into the bone in a
minimally invasive procedure at a safe distance from the fracture and then
fixed to the fixator body to immobilize the
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fracture. Modern fixation devices, improved surgical techniques and
increased screw site care have substantially reduced the complications
historically associated with external fixation, such as superficial
inflammation and infection of the soft tissues around the screws. External
fixators are frequently used to lengthen bone or correct bone deformity,
whether congenital or as a result of unsuccessful treatment of previous
fractures.
Traction. In this method, fractures are held in the correct alignment by
special pins that are surgically inserted through the bone and held in
position by means of external wires and weights. Treatment typically
involves several months of hospitalization and a further period of intensive
physical therapy to regain joint mobility.
Orthofix initially focused on the production of external fixation
equipment, and the establishment of the Orthofix Dynamic Axial Fixator and
Orthofix Modulsystem ("The Orthofix") as leading international external fixation
brands. The Orthofix is now marketed in over 80 countries worldwide. Since 1995,
the Company has manufactured and marketed the ProCallus external fixator, a new
generation alternative to Orthofix's previous fixator model, which has certain
advantages over its predecessor that are expected to result in improved patient
outcomes. Most significantly, the device incorporates an actuator that allows
the application of micromotion at a very early stage after fixation. Early
application of micromotion has been found to be more beneficial than waiting
until later in the healing cycle. The Company also manufactures and markets the
Fragment Fixation System, a percutaneous implant for fixing small fragments,
usually used for the treatment of fractures near to the joint.
A new fixator for pelvic fractures offering the significant advantages
of much easier and quicker application in emergency rooms was launched during
the first quarter of 1997. Pelvic fractures most typically occur as a result of
road traffic accidents. A new elbow fixator was launched during the second
quarter of 1997. This fixator addresses significant difficulties in the
treatment of elbow fractures by permitting early mobilization of the elbow while
fixing the fracture itself. The new elbow fixator also has applications in the
treatment of stiff elbows.
Orthofix has also developed and currently markets an intramedullary
nailing system for fractures of the tibia and the femur. The Company believes
that the Orthofix Nailing System incorporates certain significant advantages
over other nailing products currently available on the market. Most importantly,
and in contrast with all other locked nails currently on the market, the distal
locking screws in the Orthofix Nailing System can be inserted mechanically and
without the need for an image intensifier. The resulting operative technique is
simpler, more effective and safer for the surgeon. Moreover, the locking screws,
which form part of the Orthofix Nailing System, provide significantly higher
fatigue resistance than similar competing products with the benefit to patients
of reduced implant failure rates. Shipments of the tibial nail began in the last
quarter of 1995 and this product is now available worldwide. Shipments of the
femoral nail to all markets other than the United States began in the second
quarter of 1997.
Ogden Anchor
The Company's Ogden Anchor is a titanium metallic, cannulated
cancellous screw designed to facilitate the reattachment of soft tissue to bone.
Soft tissue reattachment devices, commonly called bone anchors, are used for
repair of rotator cuff tears of the shoulder and for reattaching tendons and
ligaments to bone. The introduction of bone anchors has largely eliminated some
of the disadvantages associated with earlier equivalent products that required
the drilling of holes in the bone through which sutures were threaded and then
attached to the torn tissue. These procedures involved large incisions, with
attendant trauma to the patient and postoperative complications such as suture
breakage.
In 1993, the Company acquired the exclusive worldwide license to
manufacture, market and distribute the Ogden Anchor. The FDA has granted
Orthofix permission for the commercial marketing of five sizes of bone anchor
for use in rotator cuff repair and for additional indications, including
reattachment of tendons and ligaments to bone in the shoulder, knee, wrist,
ankle and foot. The Ogden Anchor was formally released to the United States
market in the first quarter of 1994, at which time there was only one size of
bone anchor available. The Company began marketing the Ogden Anchor outside the
United States in the fourth quarter of 1996.
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PEMF Products
General. Bone tissue's regenerative power results in most bone
fractures healing naturally within a few months. Frequently, however, fractures
do not heal or heal slowly, resulting in non-unions. Traditionally,
orthopaedists have treated such fracture conditions surgically, often by means
of a bone graft with fracture fixation devices, such as bone plates, screws or
intramedullary rods. This is an example of an "invasive" treatment. The PEMF
products currently marketed by the Company apply bone growth stimulation without
implantation or other surgical procedures.
In the mid-1980s, the Company expanded the application of its bone
growth stimulation technology to the healing enhancement of spinal fusions,
including treatment for pseudoarthrosis of the spine. Spinal fusions are
surgical procedures undertaken to establish bony union between adjacent
vertebrae.
The Company is currently marketing two PEMF product systems,
Spinal-Stim and Physio-Stim, designed to enhance the success rate of spinal
fusions and to treat non-union fractures, respectively. These devices are
portable and are typically used as part of home treatment programs prescribed by
physicians. The attending medical staff instructs the patient regarding
operation of the system and the appropriate duration of daily treatments. The
overall length of treatment is determined by the prescribing physician, but
typically is between three and nine months in duration.
The technology used in the Company's PEMF products involves a
non-surgical process by which a pulsating electric current is used to enhance
the growth of bone tissue following surgery or bone fracture. This technology is
based on a substantial amount of scientific data that indicates that certain
electromagnetic stimuli in the human body produce a biological cellular
response. The Company's PEMF products are used by placing them externally over
the site to be healed. The systems produce pulsed, low-energy electromagnetic
fields that induce low pulsating current flow into living tissue and cells
exposed to the energy field of the device. This pulsating current flow is
believed to change enzyme activities, induce mineralization, enhance vascular
penetration and result in a process resembling normal endochondral ossification,
or bone growth, at the spinal fusion or fracture site.
Spinal-Stim. The Company believes that Spinal-Stim is currently the
only non-invasive spinal fusion stimulator system commercially available in the
United States. In January 1995, the Company announced the introduction of a
Spinal-Stim model, called Spinal-Stim Soft Wear, that is a flexible,
lightweight, more comfortable version of the previously marketed system,
Spinal-Stim Model 8500. The Company received FDA clearance and introduced a new
model of Spinal-Stim called the 212L or Spinal-Stim Lite at the North American
Spine Society meeting in New York in October 1997. The Spinal-Stim Lite uses
proprietary technology to generate the PEMF signal from a 9 volt battery, thus
eliminating the need for rechargeable battery packs and chargers. This allows
the 212 Lite to be a self contained, light-weight, ergonomic device without the
cords associated with other devices.
Spinal-Stim is designed for treatment of the lower thoracic and lumbar
regions of the spine. The Company's FDA approval to market Spinal-Stim
commercially is for both failed fusions and for healing enhancement as an
adjunct to spinal fusion surgery. The recommended minimum daily treatment time
for Spinal-Stim is two hours. The Company has plans to submit a request to the
FDA for an IDE for clinical trials to gain PMA clearance for a cervical
indication for the PEMF signal; that submission is anticipated in second quarter
of 1998.
Physio-Stim. The Company believes that its Physio-Stim systems
represent the current state of the art in PEMF bone growth stimulation due to
their portability, long-term battery operation, integrated component design,
patient monitoring capabilities and ability to cover a large treatment area
without factory calibration for specific patient application. The new
Physio-Stim Lite models use a proprietary technology to generate the PEMF signal
from a 9 volt battery, thus eliminating the need for rechargeable battery packs
and chargers. The result is a self contained, very light and extremely ergonomic
device that makes the unit significantly easier and more comfortable to use. The
new
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Physio-Stim Lite product line consists of products that treat smaller fracture
sites such as the wrist, hand, arm, lower leg and ankle, the proximal humerus
and the proximal femur.
Technological innovations incorporated since the introduction of
Physio-Stim in 1983 include the first totally portable PEMF bone growth
stimulator that emits a large, uniform magnetic field that eliminates the need
for individual patient fracture site calibration, the first totally integrated
bone growth stimulation system and the first complete patient compliance
monitoring system with print-out.
Other Products
Osteogenics BoneSource
General. Osteogenics is a development-stage company that holds an
exclusive license from the American Dental Association Health Foundation
("ADAHF") for technology for patented hydroxyapatite cement ("HA Cement" or
"Osteogenics BoneSource") formulations. The patented Osteogenics technology
combines calcium-phosphate salts with water to produce a bone substitute
formation that converts to hydroxyapatite, a mineral component of bone, and
promotes new bone growth. The license covers know-how, two United States
patents, applications for patents in the United States and various foreign
countries and future technology developments, whether or not patented, that are
hydroxyapatite cement-related. The license is subject to the rights of the
United States Government under law to use the subject matter of the licensed
patents for governmental purposes. On April 22, 1998, Osteogenics and Orthofix
Inc. entered into agreements with Howmedica to license the Osteogenics
BoneSource technology. Pursuant to the agreements, Orthofix will continue to
supply BoneSource to Howmedica while Howmedica has the right to pursue
developmental work relating to, market, and pursue regulatory approvals for,
Bone Source. For a period of two years from the date of the agreements, Orthofix
has the exclusive right to supply BoneSource to Howmedica. Howmedica's license
remains subject to rights of the United States Government as outlined above and
to the rights of ADAHF pursuant to the original license.
Development. Bone and tooth are highly mineralized tissues with an
extensive matrix structure. Bone tissue perpetually remodels through a process
whereby cells called osteoclasts erode old bone matrix and other cells called
osteoblasts produce new bone matrix. The Company believes that the healing of
bone and tooth defects can be facilitated by the use of implants that provide
temporary mechanical support while serving as a template for the remodelling of
new bone and are subsequently resorbed by the body in the remodelling process.
The natural mineral components of bone, hydroxyapatite and related
calcium-phosphates offer these characteristics and were the subject of research
which resulted in the development of Osteogenics' HA Cement.
Osteogenics' HA Cement is a unique formulation of two specific
calcium-phosphate salts that produce sculptable pastes when mixed with small
volumes of water. The resulting paste hardens over time as a result of the
precipitation of hydroxyapatite crystals that replicate the process of
mineralization or calcification of bone to form a mechanically strong
hydroxyapatite implant. The hydroxyapatite implant is slowly resorbed and
replaced by new bone (remodelled). Based on the relative amounts of the
individual components in the cement mixture, the hardness, setting time and
resorption rate vary. The microporous and microcrystal characteristics of the
implant make it virtually impervious to invasion by bacterial infection.
Osteogenics has established a facility at Orthofix Inc.'s headquarters in
Richardson, Texas at which it produces HA cement.
Products. The current HA Cement formulation, trade named BoneSource,
received 510(k) clearance from the FDA for repair of certain cranial defects in
July 1997. It has also obtained a CE mark for certain maxillofacial indications
in Europe. Osteogenics has given exclusive worldwide rights for marketing the
BoneSource to Howmedica Leibinger Inc., a subsidiary of Pfizer Hospital Products
Group, which currently sells the product both in the United States and Europe.
Orthofix Inc. has initiated the FDA approval process for Osteogenics BoneSource
for orthopedic applications and to commence two clinical studies in the United
States. It has also obtained a CE Mark for
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BoneSource to market the product in Europe for use as a bone void filler in
certain non-load bearing orthopedic indications.
The Company believes that the BoneSource product has many advantages
over competing products such as natural bone obtained from autograft procedures,
allograft demineralized bone and other synthetic alloplastic bone substitutes.
There is a limited quantity of bone available in the body for autogenous
grafting, and the procedures for harvesting bone can result in significant donor
site morbidity, infection and pain, as well as increased anesthesia requirements
and operating time. Unlike other commercially available bone substitutes, such
as sintered and coraline macroporous hydroxyapatites, that are granular or
block, ceramic-oriented products, has a paste-like consistency that allows for
easy sculpting. The paste remains soft and pliable for about 20 minutes,
allowing ample time for sculpting to the desired shape, and converts to
microporous hydroxyapatite at body temperature in just four hours. BoneSource is
resorbable into the body as it is replaced by natural bone and, because it is
microporous, is virtually impervious to bacterial infection.
A-V Impulse System
Novamedix Distribution Limited, an 80%-owned subsidiary of the Company,
has developed, and currently manufactures and distributes under license, the A-V
Impulse System family of foot and hand pumps, a non-invasive method of reducing
deep vein thrombosis and post-operative pain and swelling. The A-V Impulse
System consists of an electronic controller attached to a special inflatable
slipper or glove, or to an inflatable bladder within a cast, which promotes the
return of venous blood from the patient's arms or legs by intermittently
impulsing a plexus of veins in the foot or hand, as the case may be, an action
that, in the case of the feet, occurs naturally when patients walk.
Conventionally, in order to reduce the incidence of deep vein thrombosis,
heparin or related pharmacological products have been administered during and
after operations. The A-V Impulse System has been demonstrated to give
prophylactic benefits that are comparable with the most effective forms of
pharmacological treatment, but without their adverse side effects, the most
serious of which is bleeding. In 1997, the International Consensus Statement on
the prevention of Deep Vein Thrombosis, produced by the International Union of
Angiology reported that: "recent data demonstrates that combined foot impulse
technology with graduated elastic compression is effective in reducing the
incidence of proximal DVT in patients having hip and knee surgery. In contrast
with pharmacological agents, mechanical methods are not associated with
haemorrhagic complications."
In November, 1996, Professor Andrew Nicolaides, Chairman of the
International Consensus Statement on the Prevention of Venous Thromboembolism
and President of the International Union of Angiology, reported on a new
clinical indication to add to the growing range of applications for the A-V
Impulse System. In a study carried out at the Imperial College School of
Medicine at St. Mary's Hospital, London, Professor Nicolaides' research team
investigated a group of patients with chronic intermittent claudication (pain as
a result of walking) and femoral arterial occlusion. The patients were treated
at home for a few hours each day over a period of several months and were
regularly assessed. The patients' average walking distances before the onset of
claudication increased by 2 1/2 times with some patients subsequently able to
walk any distance without any pain. There were also dramatic increases in both
resting and post-exercise popliteal arterial bloodflow. These results open the
prospect of extending the homecare market for the A-V Impulse System. It is
estimated that 1% to 2% of the total population between the ages of 30 and 69
experiences claudication and that above the age of 69 this incidence increases
to 10% of the population.
On February 12, 1996, the A-V Impulse System inflatable handpad,
designed to control pain and swelling following upper extremity trauma and
surgery, received 510(k) approval and marketing clearance from the FDA. Recent
clinical studies have also demonstrated that the system is more effective in the
reduction of pain and swelling than more conservative treatment and cryotherapy.
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OSCAR (Orthosonics System for Cement Arthroscopy Revision)
Orthosonics has developed, and currently sells in Europe, the
Orthosonics System for Cement Arthroscopy Revision ("OSCAR"), an ultrasonic bone
cement removal system designed for hip revision surgery. OSCAR is a specialized
surgical instrument that utilizes ultrasound to soften and remove the acrylic
bone cement that is used to fix certain types of artificial hips. The Company
believes that it offers a significant improvement, both in terms of cost and
patient outcomes, over existing bone cement removal techniques. Existing
techniques involve the use of hand chisels and manual or pneumatic hammers and
drills. These generally increase the risk of femoral shaft fracture with greatly
increased patient trauma and significant cost implications. OSCAR has been
demonstrated to eliminate or greatly reduce femoral fractures while cutting
cement removal times from typically in excess of two hours to approximately 15
to 20 minutes. The product was launched in the United Kingdom in 1994, and sales
in Europe commenced in 1995. Following the receipt of FDA approval in August
1996, the Company embarked on a program of clinical trials and test marketing in
the United States.
Phys-Assist
This product, developed by Orthosonics, is an ultrasonic device for the
treatment of musculo-skeletal pain employing a new method of ultrasound therapy
that uses longwave rather than the shortwave frequencies traditionally used by
physiotherapists. The Company believes that, as a result, the device delivers
deeper penetration and less potentially adverse effects such as thermal damage
to tissue than other ultrasound products currently on the market. Orthosonics
has developed an upgraded device capable of delivering both long- and short-wave
ultrasound. This product, which the Company intends to market as "DuoSon,"
received marketing approval from the FDA in May 1997.
Distribution Products
The Company has the exclusive distribution rights for the Laryngeal
Mask, Cemex bone cement and for the SEM range of prosthetic devices in Italy and
for the Laryngeal Mask in the United Kingdom.
The Laryngeal Mask, a product of The Laryngeal Mask Company Ltd., is an
anesthesia medical device used for establishing and maintaining the patient's
airway during an operation. Cemex, a product of Tecres S.p.A., is a bone cement
used by surgeons to fix hip and knee prostheses once they have been inserted.
The SEM range of prosthetic devices, produced by SEM S.A., offers prostheses for
the hip, knee and shoulder.
Sales and Distribution
Orthofix's products are distributed in the United States through its
100% owned subsidiary, Orthofix Inc., with the exception of the A-V Impulse
system which is distributed by Kendall Healthcare Products, in Italy through its
70%-owned subsidiary, DMO, and in the United Kingdom through its 62% and 70%
- -owned subsidiaries, Intavent Orthofix and Orthosonics. Elsewhere, the Company
sells its products through over 50 independent distributors in over 80
countries.
Orthofix Inc. has approximately 120 representatives made up of a
combination of direct sales people and independent distributors. Orthofix Inc.'s
combined sales force provides representation and distribution of the Company's
Fixation Products and PEMF Products throughout the United States. While the
Company's Fixation Products are sold worldwide, its PEMF Products are generally
available only in the United States. However, the Company is exploring the
possibility of PEMF distributorships in Europe and Latin America. To facilitate
distribution into the European Union ("EU"), the Company has begun the process
of having these PEMF devices CE marked. This is anticipated in third quarter
1998. See "-- Government Regulation."
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The Company has a sales services group, consisting of five sales and
marketing specialists, who regularly visit the Company's distributors in Europe,
the Far East and the Middle East. In 1997, the Company added two field
specialists for Fixation Products in the United States, where they provide
surgeon training and conduct workshops.
In addition to its licensing agreements with Howmedica for BoneSource,
the Company has a licensing arrangement with Howmedica Leibinger GmbH
("Leibinger"), a German-based manufacturer and supplier of surgical products to
neurosurgeons and maxillofacial surgeons, and its United States affiliate,
covering neurological (excluding the spine), oral maxillofacial (excluding
dental) and cranofacial applications of BoneSource worldwide. Pursuant to the
license agreement, the Company manufactures BoneSource for sale to Leibinger and
receives a royalty based on Leibinger's gross revenues from BoneSource sales. In
1997, Orthofix Inc. signed a distribution agreement for the Ogden Anchor with B.
Braun Surgical GmbH of Germany for all countries except the United States,
Canada, Japan and the United Kingdom.
Marketing
General. The Company markets its products principally to medical
professionals who are the primary decision-makers in their patients' treatment.
This focus complements the Company's product development and marketing strategy,
which seeks to encourage and maintain interactive relationships with leading
orthopedic, trauma and other surgeons. These relationships have enabled the
Company to introduce design improvements and create innovative products that
meet the needs of surgeons and patients, thereby expanding the market for the
Company's products.
The Company is aware of the cost constraints currently affecting
healthcare markets and is sensitive to the need to provide products which not
only improve patient outcomes but which also meet the demanding cost
requirements of hospitals, physicians' practices and third party payors.
Fixation Products. The Company seeks to expand awareness of the
advantages of its products primarily by providing training and support to
orthopedic and trauma surgeons.
The Company supports its distributors through specialized basic
training workshops in which surgeons and sales specialists participate. Orthofix
produces relevant marketing materials, including surgical procedures, for its
distributors in a variety of languages in both printed, video and multimedia
formats. To provide additional advanced training for surgeons, the Company
organizes monthly multilingual teaching seminars at its facility in Verona,
Italy. These seminars, which in 1997 were attended by approximately 500 surgeons
from around the world, include a variety of lectures from renowned specialists
as well as demonstrations and hands-on workshops. Additionally, each year many
of the Company's distributors independently conduct basic courses for surgeons
in the application of Orthofix's products.
PEMF Products. The Company believes that the success of these products
is dependent not only upon the fostering of good relations with the physicians
who employ them but also on being sensitive to the needs and requirements of the
hospitals and third party payors to whom the products are also marketed. Private
insurance companies, workers' compensation carriers, Medicare, self-insured
plans, health maintenance organizations ("HMOs"), and various other state,
federal and private health care payors are the principal sources of payment for
the Company's PEMF Products, although patients usually are responsible for
copayment and deductible amounts.
Since 1994, the Company has undertaken a number of marketing-related
initiatives directed at increasing the focus of the Company's sales force on
managed care organizations. As a result of these initiatives, the Company has
been able to enter into a number of contracts with HMOs and other third party
payors that establish pricing and reimbursement criteria for use of the
Company's PEMF Products. The National Accounts department added an appeals
specialist in 1997 in order to keep abreast of changes in the U.S. healthcare
market place and enhance and expand the Company's relationships with third party
payers.
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The Company continues to operate the limited guarantee programs for
Physio-Stim and Spinal-Stim implemented in 1994 to heighten awareness of the
healing enhancement properties of PEMF therapy. These programs provide, in
general, for reimbursement for the full amount of the device's rental fee if
radiographic evidence indicates that healing is not occurring at the fracture or
fusion site when the device is used in accordance with the prescribed treatment
protocol.
Production
The Company generally designs, develops, assembles and tests all its
products, but subcontracts the manufacture of component parts. Through
subcontracting, the Company believes that it gains substantial operating
flexibility in meeting demand while focusing its resources on product
development and marketing.
Although certain of its key raw materials are provided by a single
source, the Company believes that alternate sources for these materials are
available. Adequate raw material inventory supply is maintained to avoid product
flow interruptions. The Company has never experienced any difficulty in
obtaining the materials necessary to meet its production schedule. Nevertheless,
any interruption in supply could have a material adverse effect on the Company.
Orthofix's products are currently manufactured and assembled in the
United States, Italy and the United Kingdom. The Company believes that its
plant, and those of its subsidiaries, comply with the requirements of the FDA
and all relevant regulatory authorities outside the United States. Orthofix
actively monitors the manufacturing and quality standards and the product
specification conformity of each of its subcontractors. See "-- Government
Regulation."
Product Development
Orthofix maintains a continuous interactive relationship with the main
orthopedic centers in the United States, Europe, Japan, and South and Central
America. Several of the products marketed by the Company have been developed
through these collaborations. In addition, the Company regularly receives
suggestions for new products from the scientific and medical community. The
Company also receives a substantial number of requests for the production of
customized items, some of which have resulted in new products. The Company
believes that its policy of accommodating such requests enhances its reputation
in the medical community.
The Company's research and development departments are responsible for
new product development and regularly consult with a group of internal and
designated external experts. The expert group advises such departments on the
long-term scientific planning of research and development and also evaluates the
Company's research programs.
The Company's expenditures for research and development totalled
approximately $3.5 million, $4.9 million and $4.8 million in the fiscal years
ended December 31, 1995, 1996 and 1997, respectively. See "Item 9.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS."
Patents, Trade Secrets and Licenses
Orthofix relies on a combination of patents, trade secrets, license
agreements and non-disclosure agreements to protect its proprietary intellectual
property. Orthofix owns numerous United States and foreign patents and has
numerous pending patent applications and license rights to certain patents held
by third parties. The Company's primary products are patented in all major
markets in which they are sold. There can be no assurance that pending patent
applications will result in issued patents, that patents issued to or licensed
by the Company will not be challenged or circumvented by competitors or that
such patents will be found to be valid or sufficiently broad to protect the
Company's technology or to provide the Company with any competitive advantage.
Third parties might also obtain patents that would require licensing by the
Company for the conduct of the Company's business. The
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Company relies on confidentiality agreements with certain employees, consultants
and other parties, to protect, in part, trade secrets and other proprietary
technology that it seeks to protect. There can be no assurance that these
agreements will not be breached, that the Company will have adequate remedies
for any breach, that others will not independently develop substantially
equivalent proprietary information, that third parties will not otherwise gain
access to the Company's trade secrets and proprietary knowledge, or that the
Company can meaningfully protect its rights in patented proprietary technology.
The Company licenses certain orthopedic products from third parties.
The Company has acquired rights under such licenses in exchange for lump sum
payments or arrangements under which it pays to the licensor a percentage of
sales. The Company believes that its licensing arrangements are important to its
business.
The medical device market is characterized by substantial litigation
regarding patent and other intellectual property rights. The Company does not
believe that any of its fixator products infringe any existing patents but there
can be no assurance that the Company has identified all patents that pose a risk
of infringement. See "Item 3.
LEGAL PROCEEDINGS."
Litigation, which could result in substantial costs to and diversion of
effort by management of the Company, may be necessary to enforce patents issued
to the Company, to protect trade secrets or techniques owned by the Company or
to defend the Company against claimed infringement of the rights of others and
to determine the scope and validity of the patents or other proprietary rights
of other entities. The resolution of these claims generally involves complex
legal and factual questions and is highly uncertain. Adverse determinations in
any litigation could have a material adverse effect on the Company's business,
financial condition and results of operations.
Competition
In the external and internal fixation product area, the Company's
principal competitors include Synthes AG Zimmer, Inc., Howmedica Inc., Smith &
Nephew Richards and EBI MS.
The Company's PEMF Products compete principally with similar products
marketed by EBI MS, Bioelectron, Inc., OrthoLogic Corp., and Exogen, Inc.
The Ogden Anchor, OSCAR and BoneSource compete principally with
products produced by Mitek Surgical Products Inc., Biomet, Inc. ("Biomet"), and
Norian Corporation, respectively.
The Company does not believe that there are any non-pharmacological
products rightfully competing with its A-V Impulse System. See "Item 3. LEGAL
PROCEEDINGS."
Although the Company's competitors include companies with significantly
greater financial, manufacturing, marketing, distribution and technical
resources, the Company believes that its competitive position is strong with
respect to product features such as speed and ease of use, versatility, cost and
patient acceptability. However, the Company generally does not attempt to
compete for customers primarily seeking the lowest price. Overall cost and
medical effectiveness, innovation, reliability, after-sales service and training
are the most prevalent methods of competition in the markets for the Company's
products, and the Company believes that it competes effectively in all of these
areas, particularly with respect to cost savings resulting from the reduction of
operating time and the avoidance of a second operative procedure for the removal
of treatment devices.
Government Regulation
Sales of orthopedic devices are subject to United States and foreign
regulatory requirements that vary widely from country to country. The time
required to obtain approvals or clearances from regulatory authorities differs
from country to country.
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Orthofix's products are subject to the regulatory powers of the FDA
pursuant to the Medical Device Amendments of 1976 to the Federal Food, Drug and
Cosmetics Act (the "1976 Amendments"), the Safe Medical Devices Act of 1990, and
regulations issued or proposed thereunder. With the exception of its PEMF
Products, the Company's products fall into FDA classifications that require
lesser review by the FDA pursuant to Section 510(k) of the 1976 Amendments. The
Company's PEMF Products are classified as Class III by the FDA, and have been
approved for commercial distribution in the United States following the
submission of the required pre-market approval applications.
The medical devices manufactured and marketed by Orthofix are subject
to rigorous regulation by the FDA and numerous other federal, state and foreign
governmental authorities. The process of obtaining regulatory approvals to
market a medical device, particularly from the FDA, can be costly and
time-consuming, and there can be no assurance that such approvals will be
granted on a timely basis, if at all. While Orthofix believes that it has
obtained all necessary clearances for the manufacture and sale of its products
and that they are generally in compliance with applicable FDA and other material
regulatory requirements, there can be no assurance that the Company will be able
to continue such compliance. If the FDA came to believe that the Company was not
in compliance with applicable law or regulations, it could institute proceedings
to detain or seize the Company's products, issue a recall, impose operating
restrictions, enjoin future violations and assess civil and criminal penalties
against the Company, its officers or its employees and could recommend criminal
prosecution to the Department of Justice. Additionally, the regulatory process
may delay the marketing of new products for lengthy periods and impose
substantial additional costs if the FDA lengthens review times for new devices.
Moreover, foreign governmental authorities have become increasingly
stringent in their regulation of medical devices, and Orthofix's products may
become subject to more rigorous regulation by foreign governmental authorities
in the future. Orthofix cannot predict whether United States or foreign
government regulations may be imposed in the future that may have a material
adverse effect on the Company. The European Commission ("EC") is currently
harmonizing national regulations for the control of medical devices. Although
certain EC regulations became effective on January 1, 1995, there is a
transitional period ending June 13, 1998, after which time European medical
device manufacturers must be in compliance. Under these new regulations,
manufacturing plants must have received CE certification from a "notified body,"
in order to be able to sell products within the member states of the EU.
Certification allows manufacturers to stamp the products of certified plants
with a "CE" mark. Products covered by the EC regulations that do not bear the CE
mark cannot be sold or distributed within the EU. Orthofix expects that
certification will have been received by June 13, 1998 for all currently
existing manufacturing facilities and products.
The Company believes its operations are in material compliance with
applicable law. The Company's ability to operate profitably depends in part upon
the Company and its distributors' obtaining and maintaining all necessary
certificates, permits, approvals and clearances from United States and foreign
regulatory authorities and operating in compliance with applicable regulations.
Health Care Reform
Several health care reform proposals have been discussed in the United
States Congress, although no such legislation has yet been passed. These
proposals generally attempt to maintain health care coverage while reducing
total health care expenditures. Different proposals use various techniques to
achieve these goals. The proposals considered in recent sessions of Congress
include such features as universal health care coverage, mandatory employer
health insurance premiums, global expenditure limits, procedures for the review
of new technologies, portability of insurance coverage and the creation of large
buying groups intended to have considerable purchasing power. In addition to
proposed reforms at the federal level, certain states have already made
significant changes to their Medicaid programs and have adopted health care
reforms. A few other states have reform proposals under consideration.
Implementation of health care reform may limit the price of, or the level at
which reimbursement is provided for, the Company's products. In addition, health
care reform initiatives may accelerate the growing trend
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toward involvement by hospital administrators, purchasing managers and buying
groups in purchasing decisions. This trend is expected to lead to increased
emphasis on the cost-effectiveness of any treatment regimen.
These changes may also cause the marketplace in general to place
increased emphasis on the utilization of minimally invasive surgical products
and the delivery of more cost-effective medical therapies. As Orthofix's
products are generally considered minimally invasive, this trend may have a
beneficial impact on the Company over the long-term. However, certain health
care reform initiatives, if enacted, may lead to increased expenses or reduced
revenue in connection with bringing new products to market, which may create a
disincentive towards technological innovation.
Regardless of whether any additional reform proposals are ultimately
adopted, the trend toward cost controls and the requirement of more efficient
utilization of medical therapies and procedures is expected to continue. Similar
initiatives to limit the growth of health care costs, including price
regulation, are also underway in several other countries in which Orthofix
currently does business. Orthofix is unable at this time to predict whether any
such additional health care initiatives will be enacted or, if enacted, the
final form such reforms would take or when such reforms would be implemented.
Health care reform and the trend towards managed care may adversely affect the
Company's sales.
Product Liability and Insurance
The Company is subject to an inherent risk of product liability and
other liability claims. Although the Company has not experienced any material
product liability claims to date, a substantial product liability claim in the
future could have a material adverse effect on the Company. The Company
maintains product liability insurance coverage in amounts and scope that
management believes are adequate. There can be no assurance that product
liability or other claims will not exceed such insurance coverage limits or that
such insurance will continue to be available on commercially acceptable terms,
or at all.
Third Party Payors
Orthofix's products are sold either directly or to its independent
distributors and purchased by hospitals, doctors and other health care providers
worldwide, who may be reimbursed for the health care services provided to their
patients by third party payors, such as government programs (e.g., Medicare and
Medicaid), private insurance plans and managed care programs. Third party payors
may deny reimbursement if they determine that a device used in a procedure was
not used in accordance with cost-effective treatment methods as determined by
such third party payor, was investigational or was used for an unapproved
indication. Also, third party payors are increasingly challenging the prices
charged for medical products and services. There can be no assurance that the
Company's products will be considered cost-effective by third party payors, that
reimbursement will be available or, if available, that the third party payors'
reimbursement policies will not adversely affect the Company's ability to sell
its products profitably. Although Orthofix and, to its knowledge, its
distributors have not experienced a significant reimbursement problem to date,
there can be no assurance that any of them will not do so in the future.
The Company's products are sold in many countries with publicly funded
healthcare systems. The ability of hospitals supported by such systems to
purchase the Company's products is dependent, in part, upon public budgetary
constraints.
Employees
At December 31, 1997, Orthofix had 355 employees. The Company's
relations with its Italian employees, who numbered 59 at December 31, 1997, are
governed by the provisions of a National Collective Labor Agreement setting
forth mandatory minimum standards for labor relations in the metal mechanic
workers industry. The Company is not otherwise party to any collective
bargaining agreement. The Company believes that it has good
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relations with its employees, many of whom have been granted share options. See
"Item 12. OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES." In
connection with the restructuring of Orthofix Inc., 30 of Orthofix Inc.'s 250
employees were laid off in the first quarter of 1997.
Year 2000
Orthofix has undertaken capital projects with respect to its
information and communication systems, including upgrades of personal computer,
management and accounting systems. The Company has established a procedure to
evaluate and manage any problems that may arise in connection with Year 2000
software failures, that includes working with the manufacturers of the Company's
software programs, with a view to ensuring that all date-sensitive software
programs are identified and corrected by the end of 1998. The Company is also
taking measures to coordinate Year 2000 compliance with its business partners,
including suppliers, financial institutions and significant customers.
Management does not expect that the Company will incur significant operating
expenses in connection with Year 2000 compliance, and does not anticipate any
material disruption to its operations or customer service as a result.
Economic and Monetary Union in the European Union
Orthofix's European companies, including those in the United Kingdom,
are preparing for the introduction of a single currency (the "Euro") in certain
Member States of the EU in 1999. Preparations include upgrading information
systems, where necessary, and training staff to handle Euro-denominated
transactions, including dual currency transactions during the transition period
between the commencement of economic and monetary union in 1999 and the first
issue of Euro notes and coins in 2002. Orthofix does not expect that, in the
short term, the introduction of the Euro will have a material adverse effect on
the Company's financial condition or results of operations.
Item 2. DESCRIPTION OF PROPERTY
Certain of the Company's quality control, assembly, research and
development and teaching facilities for fixation products are located in Verona,
Italy, in a 38,000 square foot facility owned by Orthofix S.r.l., the Company's
Italian subsidiary.
PEMF Products and Osteogenics BoneSource are produced at Orthofix
Inc.'s manufacturing, office and laboratory facility in Richardson, Texas. The
Company leases approximately 96,000 square feet of space at this facility, of
which 42,000 square feet is subleased to a third party. The lease has a current
term expiring December 31, 2001 and provides for renewal options for up to 10
additional years.
The Company believes that its facilities are suitable and adequate for
the Company's purposes.
Item 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company is
a party or of which any of its property is subject, except as described below.
Novamedix filed an action on February 21, 1992 against Kinetic Concepts
Inc. ("KCI") alleging infringement of the patents relating to Novamedix's foot
pump product, breach of contract, and unfair competition. Novamedix Limited v.
Kinetic Concepts Inc., United States District Court for the Western District of
Texas, San Antonio Division, Civil Action No. SA-92-CA-0177. In this action,
trial of which is not expected to begin before the first quarter of 1998,
Novamedix is seeking a permanent injunction enjoining further infringement,
further breach of
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contract, and further unfair competition. 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. See "Item 1.
BUSINESS -- Patents, Trade Secrets and Licenses".
Novamedix filed an action on June 10, 1994 against NDM Acquisition
Corporation ("NDM AC") alleging infringement of the patents relating to
Novamedix's foot pump product. Novamedix Limited v. NDM Acquisition Corporation,
United States District Court for the Southern District of Ohio, Western Division
at Dayton, Civil Action No. C-3-94-251. In this action, Novamedix sought a
permanent injunction against NDM AC's patent infringement as well as monetary
damages. NDM AC counterclaimed alleging the invalidity of the Novamedix patent.
By order dated March 11, 1996, the district court entered a final judgment on
consent finding the Novamedix patents valid and infringed, enjoining NDM from
further acts of infringement and incorporating a settlement agreement between
Novamedix and NDM AC. On May 13, 1996, Novamedix filed motions to enforce the
final judgment and for preliminary injunction against NDM AC. On March 21, 1997,
the district court entered judgment overruling Novamedix's motion to enforce the
final judgment and overruling as moot its motion for a preliminary injunction.
On April 21, 1997, Novamedix filed a notice of appeal. On March 6, 1998, the
appeal was argued before the United States Court of Appeals for the Federal
Circuit. See "Item 1, DESCRIPTION OF BUSINESS -- Patents, Trade Secrets and
Licenses".
Novamedix filed an action in the United Kingdom on October 4, 1994
against NDM (UK) Ltd. ("NDM UK") alleging patent infringement and tortious
"passing off" by the sale and promotion of footpumps by NDM UK. Novamedix
Limited v. NDM (UK) Ltd., Patents County Court in London, Action No. 94PAT0045.
In this action, Novamedix sought a permanent injunction against NDM UK's
infringement of two separate Novamedix patents, a permanent injunction against
NDM UK's passing off, and monetary damages. NDM UK counterclaimed alleging the
invalidity of the two patents. By a written order issued in January 1996, the
trial court held that both patents (one of which was found invalid) were
infringed and that NDM UK had passed off its foot pump, and enjoined such
infringement and passing off and ordered the payment of monetary damages and 90%
of Novamedix's costs (both to be determined by the Court if not agreed). In a
ruling given on June 20, 1997, the Court of Appeal found that both patents had
been infringed, but that both were invalid. NDM UK did not appeal against the
injunction against passing off. The Court of Appeal further ordered that
Novamedix pay two-thirds of NDM UK's costs of the action at first instance and
the appeal and that NDM UK pay to Novamedix the costs of one aspect of the
proceedings. Although Novamedix will have a net liability, this will not equate
to two-thirds of NDM UK's actual costs. NDM UK have not yet started proceedings
to recover any sums which may be due to them or set out with precision the sums
which they believe are owed. The Court also held New Dimensions in Medicine Inc.
("NDM US") jointly and severally liable with NDM UK for the costs of the
litigation. Such costs have now been secured pursuant to written agreements. See
"Item 1, DESCRIPTION OF BUSINESS -- Patents, Trade Secrets and Licenses". An
application has been made by Novamedix to amend one of the patents which was
held by the Court of Appeal to be invalid.
IMS, a subsidiary of the Company, filed an action on November 29, 1995
in the United States District Court for the District of New Jersey against
Biomet and two of its subsidiaries, EBI MS and Electro-biology, Inc. ("EBI")
(collectively, for purposes of this paragraph, "Defendants") alleging the
failure to pay for Orthofix external fixation devices sold and delivered. Inter
Medical Supplies Limited v EBI Medical Systems, Inc., Electro-Biology, Inc., and
Biomet, Inc., United States District Court for the District of New Jersey,
Camden Division, Civil Action No. 95- 6035. Orthofix S.r.l. and Orthofix Inc.
filed an action on December 4, 1995 in the United States District Court for the
Northern District of Texas against the same Defendants alleging, inter alia,
breach of the June 1, 1990 Distributor Agreement between Orthofix S.r.l. and EBI
MS, breach of the 1983 and 1984 Agency Agreements between Orthofix S.r.l. and
EBI MS, tortious interference with existing and prospective economic relations,
trademark infringement, passing off, false advertising, unfair competition, and
defamation. Orthofix Inc. and Orthofix S.r.l. v EBI Medical Systems, Inc.,
Electro-Biology, Inc., and Biomet, Inc., United States District Court for the
Northern District of Texas, Civil Action No. 395-CV2982-X. Those two actions
were consolidated in the New Jersey District Court. On April 7, 1997, trial
commenced before a jury. On June 2, 1997, the jury delivered its verdict. It
determined that EBI MS
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breached the 1983 and 1984 Agency Agreements and the 1990 Distributor Agreement
with Orthofix S.r.l.; that the Defendants tortiously interfered with the
existing and prospective economic relations of Orthofix S.r.l., Orthofix Inc.,
and IMS; that the Defendants infringed Orthofix S.r.l.'s trademark; that the
Defendants passed off medical devices not manufactured by Orthofix S.r.l. as
genuine Orthofix external fixators; that the Defendants advertised their
products falsely and competed unfairly; and that the Defendants defamed Orthofix
S.r.l., Orthofix Inc., and IMS. The jury awarded Orthofix S.r.l., Orthofix Inc.,
and IMS compensatory damages in the amount of $48,000,000 and punitive damages
in the amount of $100,600,000. In addition, the jury determined that EBI MS
breached the sales contracts between IMS and itself and awarded IMS $875,399 in
damages on its claim for goods sold and delivered. The jury rejected the
Defendants' principal counterclaim - that Orthofix S.r.l. violated the New
Jersey Franchise Practices Act. Although it determined that Orthofix S.r.l.
breached the 1990 Distributor Agreement with EBI MS and that Orthofix S.r.l.,
Orthofix Inc., and IMS tortiously interfered with EBI MS's existing and
prospective contractual relationships, it awarded the Defendants compensatory
damages of $1.00 on those claims and rejected the Defendants' request for
punitive damages. In addition, the jury awarded EBI MS $1.00 as a "set off"
against IMS's claim for goods sold and delivered. On August 28, 1997, the
district court denied defendants' motion for judgment as a matter of law and
conditionally granted defendants' motion for a new trial as to punitive damages
unless Orthofix accepted a remittitur of the jury's punitive damages award in
excess of $50,000,000. On September 2, 1997, Orthofix accepted that remittitur.
That same day, the district court entered an amended judgment in favor of
Orthofix and against defendants in the amount of $98,875,397, plus post-judgment
interest and costs. On September 26, 1997, defendants filed a notice of appeal
to the United States Court of Appeals for the Federal Circuit. On February 25,
1998, the Federal Circuit granted Orthofix's motion to transfer the appeal to
the United States Court of Appeals for the Third Circuit. At the time of filing
this annual report on Form 20-F, the Third Circuit has docketed the appeal but
has not issued a briefing schedule. The appeals process may take two years to
complete. The Company's financial statements do not reflect any adjustment for
the jury's award. See "Item 1, DESCRIPTION OF BUSINESS - Patents, Trade Secrets
and Licenses" and Note 19 to the Consolidated Financial Statements.
Orthofix Inc. is a defendant in a lawsuit brought by Joseph Mooibroek,
AME's former President and Chief Executive Officer, alleging wrongful
termination of Mooibroek's employment agreement and various other claims. Joseph
Mooibroek v. American Medical Electronics,et al., No. 94-4983-C, 68th Judicial
District Court, Dallas County, Texas. Following trial in April and May 1997, a
jury found that Mooibroek was entitled to recover $1,479,645 from Orthofix Inc.
and $1,238,179 from the Directors. Before trial Orthofix Inc. indemnified the
Directors against any recovery by Mooibroek. On June 26, 1997, final judgment
was entered reducing the award against Orthofix Inc. to $679,645, which Orthofix
Inc. has paid. The Directors have appealed the final judgment against them, and
Mooibroek has appealed certain findings of the trial court in favor of Orthofix
Inc. and the Directors. Resolution of those appeals may take more than a year.
The Company believes that any liability ultimately resulting from this
litigation will have no material adverse effect on The Company's financial
condition. The Company's balance sheet as of December 31, 1997 contained a
provision of $936,000 against potential liability arising as a result of this
litigation. While there can be no assurance that such provision will cover all
such liability, the Company believes that it will be adequate to cover any
liability of the Company after the appeal process is complete.
Item 4. CONTROL OF REGISTRANT
To the Company's knowledge, the Company is not directly or indirectly
owned or controlled by any corporation or by any government. Set forth below is
a table indicating (i) persons known by the Company to own more than 10% of the
Common Shares, and (ii) the total amount of Common Shares owned by the directors
and officers of the Company as a group, at May 15, 1998.
16
<PAGE>
Identity of Amount
Title of Class Person or Group Owned (%)
- -------------- --------------------------------- ---------- ----
Common Shares Electra Investment Trust PLC 1,697,000 12.8
Common Shares Directors and Officers as a group 1,605,000 12.4
Common Shares Fidelity Management & Research 1,689,270 13.0
The Company does not know of any arrangements the operation of which
may result in a change in its control.
Item 5. NATURE OF TRADING MARKET
The Common Shares are quoted on the Nasdaq National Market under the
symbol OFIXF. The Common Shares were quoted initially in connection with the
Company's Initial Public Offering completed in April 1992 (the "IPO").
The high and low sales prices of the Common Shares on Nasdaq for the
periods indicated, are set forth below:
High Low
1996
First Quarter........................................ 10 1/2 5 5/8
Second Quarter....................................... 15 3/4 8 1/2
Third Quarter........................................ 11 1/2 7
Fourth Quarter....................................... 11 1/8 7 5/8
1997
First Quarter........................................ 9 5/8 5 7/8
Second Quarter....................................... 12 3/4 7 1/4
Third Quarter........................................ 14 5/8 8 1/2
Fourth Quarter....................................... 14 1/4 9 1/4
1998
First Quarter........................................ 14 11
Second Quarter (through May 29, 1998)................ 14 11 3/4
Item 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS
General
Although there are Netherlands Antilles laws which may impose foreign
exchange controls on the Company and may affect the payment of dividends,
interest or other payments to non-resident holders of the Company's securities,
including the Common Shares, the Company has been granted an exemption from such
foreign exchange control regulations by the Central Bank of the Netherlands
Antilles. Other jurisdictions in which the Company conducts operations may have
various currency or exchange controls. In addition, the Company is subject to
the risk of changes in political conditions or economic policies which could
result in new or additional currency or exchange controls or other restrictions
being imposed on the operations of the Company. As to Orthofix's securities,
Netherlands Antilles law and Orthofix's Articles of Association impose no
limitations on the right of non-resident or foreign owners to hold or vote such
securities.
17
<PAGE>
Enforceability of Foreign Judgments
The Company has been advised by its Netherlands Antilles counsel,
Smeets Thesseling van Bokhorst Spigt, that it is unlikely that (i) the courts of
the Netherlands Antilles would enforce judgments entered by United States courts
predicated upon the civil liability provisions of the United States Federal
securities laws and (ii) actions can be brought in the Netherlands Antilles in
relation to liabilities predicated upon the United States Federal securities
laws.
The Company has also been advised by its Netherlands Antilles counsel
as follows: No treaty exists between the Netherlands Antilles and the United
States providing for the reciprocal enforcement of foreign judgments. However,
the courts of the Netherlands Antilles are generally prepared to accept a
foreign judgment as part of the evidence of a debt due. An action may then be
commenced in the Netherlands Antilles for recovery of this debt. A Netherlands
Antilles court will only accept a foreign judgment as evidence of a debt due if:
(i) the judgment is for a liquidated amount in a civil matter; (ii) the judgment
is final and conclusive and has not been stayed or satisfied in full; (iii) the
judgment is not directly or indirectly for the payment of foreign taxes,
penalties, fines or charges of a like nature (in this regard, a Netherlands
Antilles court is unlikely to accept a judgment for an amount obtained by
doubling, trebling or otherwise multiplying a sum assessed as compensation for
the loss or damage sustained by the person in whose favor the judgment was
given); (iv) the judgment was not obtained by actual or constructive fraud or
duress; (v) the foreign court has taken jurisdiction on grounds that are
recognized by the civil law rules as to conflict of laws in the Netherlands
Antilles; (vi) the proceedings in which the judgment was obtained were not
contrary to natural justice; (vii) the proceedings in which the judgment was
obtained, the judgment itself and the enforcement of the judgment are not
contrary to the public policy of the Netherlands Antilles; (viii) the person
against whom the judgment is given is subject to the jurisdiction of the
Netherlands Antilles court; and (ix) the judgment is not on a claim for
contribution in respect of damages awarded by a judgment which does not satisfy
the foregoing.
Enforcement of a foreign judgment in the Netherlands Antilles may also
be limited or affected by applicable bankruptcy, insolvency, liquidation,
arrangement, moratorium or similar laws relating to or affecting creditors'
rights generally and will be subject to a statutory limitation of time within
which proceedings may be brought.
Item 7. TAXATION
Under the laws of the Netherlands Antilles as currently in effect, a
holder of Common Shares who is not a resident of, and during the taxable year
has not engaged in trade or business through a permanent establishment in, the
Netherlands Antilles will not be subject to Netherlands Antilles income tax on
dividends paid with respect to the Common Shares or on gains realized during
that year on sale or disposal of such shares; the Netherlands Antilles do not
impose a withholding tax on dividends paid by the Company. There are no gift or
inheritance taxes levied by the Netherlands Antilles when at the time of such
gift or at the time of death, the relevant holder of Common Shares was not
domiciled in the Netherlands Antilles. No reciprocal tax treaty presently exists
between the Netherlands Antilles and the United States. Although the former tax
treaty between the Netherlands Antilles and the United States has been
abrogated, Article VIII and the ancillary provisions of said treaty remained in
effect. Article VIII relates to the United States withholding tax on interest
payments to the Netherlands Antilles, which, pursuant to such provision and for
so long as the applicable treaty provision remains in force, is reduced from 30%
to 0%, provided that election is made to be taxed in the Netherlands Antilles at
the higher Netherlands Antilles tax rates on the interest received. The United
States and the Netherlands Antilles have executed a protocol that would
terminate Article VIII on the date upon which instruments of ratification are
exchanged, which exchange occurred on December 30, 1996. After December 30,
1996, Article VIII continues to apply only to interest payments on debt
instruments issued by a U.S. person on or prior to October 15, 1984 to a related
controlled foreign corporation that was in existence prior to October 15, 1984.
This exception does not apply to the Company.
18
<PAGE>
Item 8. SELECTED FINANCIAL DATA
The following selected consolidated financial data for the years ended
December 31, 1997, 1996, 1995, 1994 and 1993 have been derived from the
Company's audited Consolidated Financial Statements, which have been audited by
Coopers & Lybrand, independent auditors. The financial data for the years ended
December 31, 1997, 1996 and 1995 and at December 31, 1997, 1996 and 1995 should
be read in conjunction with, and are qualified in their entirety by reference
to, "Item 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS" and the Company's Consolidated Financial Statements and
Notes thereto included elsewhere in this Annual Report on Form 20-F. The
Company's Consolidated Financial Statements have been prepared in accordance
with United States generally accepted accounting principles ("U.S. GAAP").
<TABLE>
<CAPTION>
Year ended December 31,
1997 1996 1995 1994 1993
(In thousands, except margin, share and per share data)
<S> <C> <C> <C> <C> <C>
Consolidated operating results
Net sales........................................ $ 89,963 $ 77,221 $ 52,272 $ 39,634 $ 31,423
Gross profit..................................... $ 64,597 $ 53,770 $ 33,491 $ 26,543 $ 21,872
Gross profit margin.............................. 72% 70% 64% 67% 70%
Total operating income (expense)Notes 1, 2 and 3 $ 10,058 $ 4,530 $ (16,872) $ 11,684 $ 10,686
Net income (loss)................................ $ 3,069 $ (475) $ (19,802) $ 9,062 $ 7,673
Net income (loss) per Common Share (diluted)..... $ 0.23 $ (0.04) $ (1.78) $ 0.84 $ 0.71
Consolidated financial position
(at year-end)
Total assets .................................... $ 112,948 $ 113,057 $ 103,958 $ 56,740 $ 48,117
Total debt....................................... $ 20,298 $ 21,495 $ 20,517 $ 2,686 $ 2,770
Shareholders' equity............................. $ 65,148 $ 63,910 $ 58,660 $ 43,570 $ 35,249
Weighted average number of
Common Shares outstanding (diluted)............. 13,211,397 12,673,319 11,113,604 10,820,078 10,798,029
<FN>
- ---------------
Note 1: Operating (expense) for 1995 is after non-recurring charges of $24,300,000 -See Note 13 to the Consolidated Financial
Statements.
2: Operating income for 1996 is after restructuring charges of $2,211,000 -See Note 12 to the Consolidated Financial
Statements.
3: Operating income for 1997 is after restructuring charges of $1,010,000 -See Note 12 to the Consolidated Financial
Statements.
</FN>
</TABLE>
Orthofix International has never paid dividends to holders of its
Common Shares. Orthofix International currently intends to retain all of its
consolidated earnings to finance the continued growth of its business.
19
<PAGE>
Item 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
Results of Operations
The following table presents certain items in the Company's income statements as
a percentage of net sales for the periods indicated:
Year ended December 31
----------------------
1997 1996 1995
% % %
- ---------------------------------------------------------------------------
Net sales 100 100 100
Cost of sales 28 30 36
- ---------------------------------------------------------------------------
Gross profit 72 70 64
- ---------------------------------------------------------------------------
Expenses
Sales and marketing 36 38 27
General and administrative (1) 18 17 16
Research and development 5 6 7
- ---------------------------------------------------------------------------
Operating income (2) 12 9 13
- ---------------------------------------------------------------------------
Net income (2) 5 2 9
- ---------------------------------------------------------------------------
(1) Includes amortization of intangible assets.
(2) Before restructuring charges in 1997 and 1996 of $1.0 and $2.2 million,
respectively, and non-recurring charges in 1995 of $24.3 million - see
Notes 12 and 13 to the Consolidated Financial Statements.
General
On June 1, 1995, AME replaced EBI as the distributor of Orthofix's
products in the United States upon expiry of EBI's distribution agreement on May
31, 1995. After June 1, 1995, EBI began to introduce its own range of external
fixators into the United States market, while continuing to sell its existing
inventory of Orthofix products. The Company has sued EBI for, among other
matters, infringement of patents and passing off. On June 2, 1997, the jury in
the trial of this case awarded Orthofix S.r.l. and Orthofix Inc. compensatory
damages in the amount of $48,000,000 and punitive damages in the amount of
$100,600,000. On August 28, 1997, the United States District Court for the
District of New Jersey upheld the jury verdict as a matter of law and reduced
the punitive damages to $50,000,000. On September 26, 1997, the defendants filed
a Notice of Appeal. The appeal process may take up to two years to complete. See
"Item 3 - LEGAL PROCEEDINGS".
The acquisition of AME was consummated on August 21, 1995. The total
purchase price for all issued and outstanding common shares of AME was $81.2
million, consisting of $47.7 million in cash and $33.5 million in common shares
of the Company. The results of operations of AME, renamed Orthofix Inc., have
accordingly been consolidated with those of the Company with effect from August
21, 1995.
Following the appointment of Charles Federico in October, 1996, to the
position of President of Orthofix Inc., a review of all of the Company's North
American activities has taken place. This review has resulted in a significant
restructuring of the Company's business in the United States. The Company's US
sales force, which is
20
<PAGE>
now more incentive-based, has been reorganized to make it more focused on
individual business sectors. Orthofix Inc. has further rationalized its overhead
structure including premises, people and non-essential functions. The
restructuring, which was substantially complete at March 31, 1997, resulted in a
one-time charge of $3.2 million. Approximately $2.2 million, largely rental
expense, was expensed in the fourth quarter of 1996 and $1.0 million, largely
employee termination costs, in the first quarter of 1997.
1997 compared to 1996
Net sales increased 17% to $90.0 million in 1997 compared to $77.2
million in 1996. Net sales in the United States in 1997 represented 60% of net
sales, or $53.6 million, compared with 57% of net sales, or $44.0 million, in
1996. Outside the United States, there was an increase in net sales of 10% in
1997 compared with 1996, caused mainly by growth in sales of fixation products,
the A-V Impulse System and the Laryngeal Mask. Sales outside the United States
would have shown an increase of 13% if translated at 1996 exchange rates. In
1997, net sales of PEMF products and the A-V Impulse System increased by 19% and
21%, respectively.
Sales and marketing, which represented 36% of net sales in 1997
compared to 38% in 1996, increased by $3.5 million in 1997 compared to 1996.
This increase was largely due to increased costs resulting from the
implementation of Orthofix Inc.'s plan following the restructuring, including an
approximately 50% increase in its sales force.
General and administrative expenses, which increased by $3.1 million
from $9.3 million in 1996 to $12.4 million in 1997, represented 14% of net sales
in 1997 compared to 12% in 1996. The increase of $3.1 million included
litigation costs of $2.0 million expensed during the year. Exclusive of such
costs, general and administrative expenses represented 12% of net sales in 1997.
See "Item 3. LEGAL PROCEEDINGS."
Research and development expenses were $4.8 million in 1997 compared to
$4.9 million in 1996. In the second half of 1997, Orthofix Inc. successfully set
up a joint facility dedicated to advanced research in orthopedic applications
located at Wake Forest University's Bowman School of Medicine in Winston-Salem,
North Carolina.
Amortization of intangible assets was $3.8 million in 1997 compared to
$3.8 million in 1996. See Note 13 to the Consolidated Financial Statements.
In the first quarter of 1997, the Company expensed $1.0 million,
largely termination costs, resulting from a reorganization of Orthofix Inc.,
which appointed a new President in October 1996. In the fourth quarter of 1996,
the Company expensed $2.2 million resulting from the reorganization of Orthofix
Inc.
Net other expense increased from $1.3 million in 1996 to $2.0 million
in 1997. This increase resulted principally from exchange profits in 1996 of
$352,000 resulting primarily from the translation of current assets and
liabilities from local currencies into dollars compared to exchange losses of
$106,000 in 1997. Orthofix manages its exchange rate exposure by seeking to
balance its non-dollar income and expenditure. The Company does not use
derivatives to hedge foreign exchange exposure. A 1% change in interest would
result in an increase (decrease) in annual interest charges of approximately
$203,000.
In 1997 and 1996, the effective rate of income tax, excluding
restructuring charges of $1.0 million and $2.2 million, was 45% and 51%,
respectively. The Company's effective tax rate remained high in 1997 principally
due to non-deductible litigation expenses of $2.0 million. Excluding such
expenses, the Company's effective tax rate would have been 40%. The Italian
government has reduced statutory income tax rates from 53% to 41%, effective
January 1, 1998.
Net income for 1997 (before the restructuring charge of $1.0 million)
was $4.1 million compared to $1.7 million (before the restructuring charge of
$2.2 million) in 1996 giving diluted earnings per share of $0.31 on the basis
21
<PAGE>
of diluted average shares outstanding of 13.2 million in 1997 compared with
diluted earnings per share of $0.13 on the basis of diluted average shares
outstanding of 12.7 million in 1996.
1996 compared to 1995
Net sales increased 48% to $77.2 million in 1996 compared to $52.3
million in 1995. Excluding sales of products introduced as a result of the
Merger, the Company's net sales in 1996 would have been $45.4 million, an
increase over 1995 of 7%. Sales of the Company's Fixation Products in the United
States continued to be adversely affected by the transfer of distribution from
EBI to AME with the result that sales of such products in the United States
decreased by $5.7 million in 1996 compared to 1995. Net sales in the United
States in 1996 represented 57% of net sales, or $44 million, compared with 47%
of net sales, or $24.6 million, in 1995. Outside the United States, there was an
increase in net sales of 15% in 1996 compared with 1995, caused mainly by growth
in sales of external fixation products, the A-V Impulse System and the Laryngeal
Mask.
Sales and marketing represented 38% of net sales in 1996 compared to
27% in 1995. This increase was caused principally by the inclusion for the first
time of a full year's results of Orthofix Inc. whose sales and marketing
expenses have historically been higher as a percentage of sales than the
comparable expenses of the Company prior to the Merger. Additionally, commission
and royalty payments increased by a total of $1 million largely due to increased
revenues generated by DMO and Novamedix. General and administrative expenses
increased by $2.4 million from $6.9 million in 1995 to $9.3 million in 1996.
This increase was due principally to the inclusion for the first time of the
results of Orthofix Inc. for a full year. Research and development expenses
increased by $1.4 million from $3.5 million in 1995 to $4.9 million in 1996.
This increase was due principally to the inclusion for the first time of the
results of Orthofix Inc. for a full year.
Amortization of intangible assets increased from $1.4 million in 1995
to $3.8 million in 1996 largely due to the inclusion for the first time of a
full year's amortization of goodwill of $30.6 million created and other assets
purchased of $4.3 million following the Merger. Additionally, goodwill of $7.1
million was created following the payment on July 2, 1996 of deferred
consideration related to the acquisition of Osteogenics by Orthofix Inc. in
December 1994.
In the fourth quarter of 1996, the Company expensed $2.2 million
resulting from a reorganization of Orthofix Inc., which appointed a new
President in October 1996. In the third quarter of 1995, at the time of the
Merger, the Company expensed research and development costs carried at the time
in the balance sheet of Orthofix Inc. The amount expensed, totalling $24.3
million, related entirely to Osteogenics and its principal product, the
BoneSource material.
Net other income decreased from net income of $280,000 in 1995 to a net
expense of $1.3 million in 1996 largely resulting from the effect on the
Company's cash position of the Merger. In 1995, the Company's effective tax rate
(before non-recurring charges of $24.3 million) was 34%. In 1996, the rate
increased to 51% (before restructuring charges of $2.2 million) principally due
to the inclusion for the first time of a full year's results of Orthofix Inc.
which reported losses for the period during which its results were consolidated.
The Company's diluted net income and diluted net income per common share was
$0.13 (before restructuring charges of $2.2 million) in 1996 compared to $0.40
in 1995 (before non-recurring charges of $24.3 million).
Liquidity and capital resources
Cash and cash equivalents at December 31, 1997 were $4.1 million
compared to $3.6 million at December 31, 1996, an increase of $527,000.
Net cash provided by operating activities increased from $2.2 million
in 1996 to $4.6 million in 1997, an increase of $2.4 million. Cash from
operating activities in 1997 was provided by net income, after adjustments for
22
<PAGE>
non-cash items such as depreciation, amortization and provisions, of $12.8
million. The Company invested a net $8.2 million of this sum in working capital
resulting in total net cash provided by operating activities of $4.6 million. Of
the net $8.4 million invested in working capital, $7.0 million was used for
trade accounts receivable.
Net cash used for investing activities was $3.3 million in 1997
compared to $3.7 million in 1996. The Company used $2.7 million to purchase
tangible assets and $731,000 to purchase intangible assets, principally patents.
Net cash used for financing activities was $816,000 in 1997 compared to
$1.9 million provided by financing activities in 1996. Cash used by financing
activities in 1997 consisted principally of repayment of long-term debt of $3.4
million offset by increased borrowings under short-term lines of credit of $3.1
million.
The Company believes that its current cash balances together with its
projected cash flows, including net cash receivable in connection with the
BoneSource licensing agreement with Howmedica, and existing lines of credit are
sufficient to cover its anticipated capital needs and research and development
costs during the next two fiscal years. See "Item 1, DESCRIPTION OF BUSINESS --
Recent Developments."
Dividend Policy
The Company has no present intention to pay dividends.
In the event that the Company decides to pay a dividend to shareholders
with dividends received from its subsidiaries, it would, based on prevailing
rates of taxation, be required to pay additional withholding and income tax at a
combined rate of approximately 10% on such amount.
Inflation
Inflation has not had a significant effect on the Company's results for
the three years ended December 31, 1997.
Impact of Recently Issued Accounting Pronouncements
In February 1997, the Financial and Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 128 "Earnings per share"
("SFAS 128") which specifies computation, presentation and disclosure
requirements which are intended to increase the comparability of earnings per
share data provided under United States generally accepted accounting principles
with that provided on an international basis. Earnings per share ("EPS") under
SFAS 128 are described as Basic EPS and Diluted EPS, as compared with the
previous terminology of Primary EPS and Fully-diluted EPS. SFAS 128 is effective
for accounting periods ending after December 15, 1997 and the Company has,
therefore, adopted SFAS 128 during the year ended December 31, 1997. The
adoption of SFAS 128 has not had a material impact on the Company's results of
operations reported in the Consolidated Financial Statements.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and display of comprehensive
income and its components in a financial statement with the same prominence as
other financial statements. Comprehensive income is defined as net income
adjusted for changes in stockholders' equity resulting from events other than
net income or transactions relating to an entity's capital instruments. Orthofix
is required to adopt SFAS 130 effective January 1, 1998, with reclassification
of financial statements for earlier years required. Orthofix is currently
considering what impact, if any, SFAS 130 will have on its disclosure of
comprehensive income.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information," which establishes standards for
reporting information about operating segments. Generally, SFAS 131
23
<PAGE>
requires that financial information be reported on the basis that is used
internally for evaluating performance. Orthofix is required to adopt SFAS 131
effective January 1, 1998, and comparative information for earlier years must be
restated. This statement does not need to be applied to interim financial
statements in the initial year of application. Orthofix is currently considering
what impact, if any, SFAS 131 will have on its current segment reporting
structure.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits," which revises current
disclosure requirements for employers' pension and other retiree benefits. SFAS
132 does not change the measurement or recognition of pension or other
postretirement benefit plans. The Company is required to adopt SFAS 132
effective January 1, 1998, with restatement of disclosures for earlier years
required. Orthofix is currently considering what impact, if any, SFAS 132 will
have on its disclosure of pension and other postretirement benefits.
Item 10. DIRECTORS AND OFFICERS OF REGISTRANT.
Directors and Executive Officers
The directors and executive officers of the Company are as follows:
Name Age Position
- ------------------------ --- -------------------------------------------
Robert Gaines Cooper (1) 60 Chairman of the Board of Directors
Edgar Wallner 61 President, Chief Executive Officer and
Director
Peter Clarke 56 Executive Vice President, Chief Financial
Officer, Secretary and Director
Vittorio Pietropoli 57 Senior Vice President and Director
Charles Federico 49 Senior Vice President and Director
Robert Sentance 51 Controller
Jerry Benjamin (1)(2) 57 Director
Alberto d'Abreu de Paulo 59 Director
Frederik Hartsuiker 57 Director
Peter Hewett 62 Deputy Chairman and Director
Julian Knott (1)(2) 47 Director
John Littlechild 46 Director
James Gero 53 Director
(1) Member of the Compensation and Benefits Committee
(2) Member of the Audit Committee
All directors hold office until the next annual general meeting of
shareholders of Orthofix and until their successors have been elected and
qualified. Officers of Orthofix serve at the discretion of the Board of
Directors. There are no family relationships among any of the directors or
executive officers of Orthofix.
Mr. Gaines Cooper became Chairman of Orthofix in March 1992 and has
been a Director of Orthofix since its formation in 1987. He is Managing Director
of Chelle Plastics Ltd-Seychelles. Mr. Gaines Cooper is also Chairman of LMA
International S.A., Jersey, Channel Islands. See "Item 13. INTEREST OF
MANAGEMENT IN CERTAIN TRANSACTIONS".
Mr. Wallner became a Director and President and Chief Executive Officer
of Orthofix in March 1992 and has been President of Orthofix S.r.l. since its
formation in 1987. From 1978 until 1987, he was Vice President of
24
<PAGE>
European Operations for EBI, now a subsidiary of Biomet. From 1973 until 1978,
he was Vice President of Marketing for Hydron Europe Inc., a soft contact lens
manufacturer. Prior to 1973, Mr. Wallner spent 15 years with The Boots Company
Ltd., a multinational pharmaceutical company. See "Item 13. INTEREST OF
MANAGEMENT IN CERTAIN TRANSACTIONS".
Mr. Clarke became a Director and Executive Vice President, Secretary
and Chief Financial Officer of Orthofix in March 1992 and has been the Chief
Financial Officer of Orthofix since January 1988. From 1985 to 1987, he was
Finance Controller of EBI Medical Systems Ltd., a United Kingdom subsidiary of
EBI. See "Item 13.
INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS".
Mr. Pietropoli became a Director of Orthofix and Senior Vice President
in March 1992 and has been the General Director of Orthofix S.r.l since 1987.
From 1985 to 1987, he was a Management Consultant for the Banca Popolare di
Verona.
Mr. Federico became a Director of Orthofix in October, 1996 and has
been the President of Orthofix Inc. since October 1996. From 1985 to 1996, Mr.
Federico was the President of Smith & Nephew Endoscopy (formerly Dyonics, Inc.).
From 1981 to 1985 Mr. Federico served as Vice President of Dyonics, initially as
Director of Marketing and subsequently as General Manager. Previously, he held
manufacturing and marketing positions with General Foods Corporation, Air
Products Corporation, Puritan Bennett Corporation and LSE Corporation.
Mr. Sentance joined Orthofix as Financial Controller in January 1991.
From 1989 until 1990, Mr. Sentance was acting Finance Director of Downland
Estates Plc. From 1983 until 1989, he was Finance Director of Colefax & Fowler
Group Plc.
Mr. Benjamin became a non-executive Director of Orthofix in March 1992.
He has been a General Partner of Advent Limited, a venture capital management
firm in London since 1985. Mr. Benjamin is a Director of Professional Staff plc
and a number of private health care companies.
Mr. d'Abreu de Paulo became a non-executive Director of Orthofix in
March 1992 and has been associated with Orthofix since its formation in 1987 as
the President and Managing Director of First Independent Trust (Curacao) N.V., a
director of Orthofix until February 28, 1992. Mr. d'Abreu de Paulo is a tax
attorney in private practice and a member of the Audit Court of the Netherlands
Antilles.
Mr. Hartsuiker became a non-executive Director of Orthofix in March
1992 and has been a Director of Orthofix International B.V. since 1987. Mr.
Hartsuiker is a director of New Amsterdam Cititrust B.V. in The Netherlands.
Mr. Hewett became the Deputy Group Chairman of Orthofix and Chairman of
the Board of Orthofix Inc. in March 1998. He has been a non-executive Director
of Orthofix since March 1992. Previously, Mr. Hewett served as the Managing
Director of Caradon Plc, Chairman of the Engineering Division, Chairman and
President of Caradon Inc., Caradon Plc's United States subsidiary and a member
of the Board of Directors of Caradon Plc of England. In addition, he was
responsible for Caradon Plc's worldwide human resources function, and the
development of its acquisition opportunities.
Mr. Knott became a non-executive Director of Orthofix in March 1992.
From 1987 to 1993, Mr. Knott was a Director of Orthofix International B.V. He is
a Director of Electra Fleming Limited, an international private equity house
based in London whose principal client is Electra Investment Trust Plc. Prior to
1987, he was a Vice President of Citibank, N.A.
Mr. Littlechild became a non-executive Director of Orthofix in 1987 and
a Director of Orthofix Inc. in 1995. He has served as a General Partner of the
General Partner funds of each of the HealthCare Partners, a United States
25
<PAGE>
venture capital fund, since 1991. From 1985 to 1991, he was a Senior Vice
President of Advent International Corporation. Mr. Littlechild is a Director of
Virus Research Institute, Inc., LeukoSite Inc. and Diacrin, Inc. as well as
other privately held HealthCare companies.
Mr. Gero became a non-executive Director of Orthofix in February 1998.
Mr. Gero became a Director of AME in 1990 and served subsequently as a Director
of Orthofix Inc. He is the Chairman and Chief Executive Officer of each of
Sierra Technologies Inc. and Sierra Networks Inc. and a Director of each of Spar
Limited, Leslie Building Products Inc. and Drew Industries Inc.
In 1992, the Board of Directors established a Compensation and Benefits
Committee. The Board of Directors does not maintain a Nominating Committee or a
committee performing similar functions. The Compensation and Benefits Committee
establishes salaries, incentives and other forms of compensation for directors,
officers and other employees of the Company, administers the Company's share
option plans and recommends policies relating to incentive compensation and
benefit plans. The Audit Committee reviews the need for internal auditing
procedures and the adequacy of internal controls and meets periodically with
management and the independent auditors. The Board of Directors may establish
additional committees from time to time.
Item 11. COMPENSATION OF DIRECTORS AND OFFICERS.
During 1997, an aggregate amount of approximately $1.5 million was paid
by Orthofix to its directors and executive officers as a group (13 persons) for
services rendered in all capacities. This amount includes $16,000 paid by
Orthofix in 1997 to provide pension, retirement or similar benefits for all
directors and officers. Orthofix anticipates that for 1998 the aggregate
compensation to be paid to its directors and executive officers as a group (13
persons) will be approximately $1.8 million.
Mr. Wallner's employment contract with Orthofix International N.V.
expired in March 1995. As of May 15, 1998, Mr. Wallner continues to work without
a new contract, but on the terms of his expired employment agreement. No
director or executive officer of the Company has an employment contract that
binds the Company for a period longer than one year.
Item 12. OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES.
The total amount of Common Shares called for by all outstanding options
and options subject to shareholder ratification held by directors and officers
as a group as of May 15, 1998 was 1,922,750.
Share Option Plans
The following is a summary description of certain provisions of the
Company's share option plans.
Staff Share Option Plan. Pursuant to the Company's Staff Share Option
Plan (the "Staff Plan"), the Company's employees, including the Company's
directors and executive officers, and certain other persons directly or
indirectly related to the Company's business, have been granted options to
purchase an aggregate of 1,288,000 Common Shares (representing approximately
10 % of the Common Shares outstanding) at a weighted average exercise price of
approximately $5.61 per Common Share. Of these, options for 411,800 Common
Shares have been exercised as of May 15, 1998. Option grants under the Staff
Plan were made in 1988, 1989, 1990, 1991, 1995, 1996 and 1997. The Board of
Directors intends to seek the approval of the shareholders for an increase in
the size of the Staff Plan at the Annual General Meeting to be held in the third
quarter of 1998.
26
<PAGE>
Options under the Staff Plan are currently exercisable with respect to
54% of the total number of Common Shares subject to option. The Board of
Directors has the authority to accelerate the exercise date of options, or make
such other adjustments as it considers appropriate, in the event of a change in
control of the Company. Options are not transferable except by will or pursuant
to applicable laws of descent and distribution upon death of the employee. Staff
Plan options will expire on June 30, 2002, or earlier in certain circumstances.
Executive Share Option Plan. The Company's Executive Share Option Plan
(the "Executive Plan") was adopted by the Board of Directors and approved by the
shareholders in March 1992. An aggregate 1,845,000 Common Shares have been
reserved for issuance under the Executive Plan. The Executive Plan is
administered by the Board of Directors.
Options covering an aggregate of 1,575,000 Common Shares were awarded
by the Board of Directors in March 1992 to three executive officers of the
Company. Options covering an aggregate of 370,000 Common Shares have since been
awarded by the Board of Directors to certain employees and non-executive
directors of the Company. All Executive Plan options have a per share exercise
price of $14.40 (120% of the offering price in the Initial Public Offering).
Fifty percent of each grant of Executive Plan options are characterized
as "Service Options" which generally vest in 20% increments on the first through
fifth anniversaries of the date of grant, provided the option holder is employed
by Company at such anniversary date. The remaining Executive Plan options are
characterized as "Performance Options" which will vest on the tenth anniversary
of the date of grant, provided the option holder remains in the employ of the
Company at such anniversary date. Performance Options will vest earlier,
however, upon the satisfaction of a performance condition linked to the market
price of the Common Shares. Specifically, Performance Options will vest in 25%
increments each time the average price of the Common Shares on the Nasdaq
National Market System over a period of 180 days (the "Average Price") attains a
whole number multiple of $12.00, the public offering price of the Common Shares
in the IPO. Thus, 25% of the outstanding Performance Options will vest if the
Average Price equals or exceeds $24.00, another 25% will vest if the Average
Price equals or exceeds $36.00, and so on. This performance-based vesting,
however, is qualified by the condition that an employee can vest in Performance
Options covering no more than 25% of the total number of Performance Options
granted to him for each full or partial year of service with the Company from
April 24, 1992.
Both Service Options and Performance Options will expire on the twelfth
anniversary of the Initial Public Offering.
No Common Shares remain available for future grants under the Executive
Plan. The Board of Directors intends to seek the approval of the shareholders of
an increase in the size of the Executive Plan at the Annual General Meeting to
be held in the third quarter of August, 1998.
AME Incentive Stock Option Plans. All options on AME Common Stock
outstanding under AME's 1983 Incentive Stock Option Plan (the "1983 Plan") and
1990 Incentive Plan (the "1990 Plan") immediately prior to the merger of AME
with Othello were assumed by Orthofix and converted into options to purchase
Common Shares. Options under the 1983 Plan have a weighted average exercise
price of approximately $21.27 per Common Share at prices ranging from $3.45 to
$24.57 per Common Share; options under the 1990 Plan have a weighted average
exercise price of approximately $17.63 per Common Share at prices ranging from
$9.49 to $28.24 per Common Share. The exercise prices of all such options were
adjusted to take account of the merger.
Options granted under both the 1983 Plan and the 1990 Plan expire ten
years after the date of grant unless earlier exercised. The last options granted
under the 1983 Plan are scheduled to expire in 2002, while the last options
granted under the 1990 Plan are scheduled to expire in 2005. Currently, 5,192
options are outstanding under the 1983 Plan, all of which are exercisable, and
65,234 options are outstanding under the 1990 Plan, all of which are
exercisable.
27
<PAGE>
AME Warrants. Warrants to purchase 320,000 shares of AME Common Stock
(the "AME Warrants") were also assumed by Orthofix pursuant to the merger of AME
with Othello and became exercisable for Common Shares after adjustment to take
account of the merger. At May 15, 1998, AME Warrants to purchase 185,592 Common
Shares were currently exercisable, and expire on various dates through December
2003. The exercise price for the AME Warrants ranges from $11.85 to $30.60 per
Common Share.
Item 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS
Certain directors of Orthofix own beneficial interests in Aida Prodotti
Medicali S.r.l ("Aida"). Aida owns the distribution rights in Italy to the
Laryngeal Mask (used to administer anaesthesia) produced by The Laryngeal Mask
Company Ltd., and in 1992 Aida awarded the distribution rights for the Laryngeal
Mask in Northern Italy to DMO. With effect from January 1, 1995, such rights
were extended to the whole of Italy. A trust, of which Mr. Gaines Cooper is
settlor, owns a 40% interest in LMA International S.A. ("LMA") , which owns 100%
of Aida. Until November 1995, when they sold their interests, Mr. Wallner and
Mr. Clarke held 10% and 5% beneficial interests in Aida, respectively. In
exchange for the award of distribution rights to DMO, Aida was permitted to
purchase a 20% beneficial interest in DMO.
On October 27, 1993, Orthofix International B.V. acquired a 62%
interest , and Intavent Limited a 38% interest, in Intavent Orthofix. Mr. Gaines
Cooper is the settlor of a trust that owns a 33% interest in Intavent Limited.
Intavent Orthofix distributes the Laryngeal Mask, supplied by Intavent Limited,
in the United Kingdom. In connection with this transaction, Orthofix
International B.V. extended an interest-free loan to Intavent Orthofix in the
amount of approximately $2,600,000. Of this amount, $2,229,079 has been repaid.
In addition, Intavent Orthofix issued an interest-bearing unsecured convertible
loan note in the amount of approximately $625,000 to Intavent Limited. In the
event that an offer is accepted by shareholders to sell more than 50% of the
outstanding Intavent Orthofix shares, Intavent Limited may convert the note into
additional Intavent Orthofix shares (at approximately $390 per share) to
increase its ownership interest to 48% of Intavent Orthofix and may also acquire
an additional 200 shares of Intavent Orthofix from Orthofix for approximately
$390 per share, bringing its interest in Intavent Orthofix to 50%. Beginning
January 1, 1998, Intavent Limited may at any time prior to January 1, 2008
convert the note into Intavent Orthofix shares as described above.
Arrow Medical Limited ("Arrow") supplies impads for use with the A-V
Impulse System to Novamedix Distribution Limited. Mr. Gaines Cooper is the
settlor of a trust which owns 40% of LMA. Mr. Gaines Cooper is Chairman of LMA,
which owns a 30% interest in Arrow. Mr. Wallner is the settlor of a trust which
owns a 10% interest in Arrow.
Since its inception, the Company has maintained a policy that all
transactions among the Company and its officers, directors and other affiliates
(i) be approved by the Company's Board of Directors and (ii) be on terms no less
favorable to the Company than could be obtained from unaffiliated third parties.
In addition, the Company adopted in March 1992 a policy that all transactions
among the Company and its officers, directors and other affiliates must be
approved by a majority of the disinterested members of the Company's Board of
Directors.
28
<PAGE>
PART II
Item 14. DESCRIPTION OF SECURITIES TO BE REGISTERED
Not applicable.
PART III
Item 15. DEFAULT UPON SENIOR SECURITIES
None.
Item 16. CHANGES IN SECURITIES AND CHANGES IN SECURITY FOR REGISTERED
SECURITIES
None.
PART IV
Item 17. FINANCIAL STATEMENTS
Not applicable.
Item 18. FINANCIAL STATEMENTS
The Consolidated Financial Statements and related Notes thereto, as
required by this Item, are contained at pages F-1 through F-31 hereof.
Item 19. FINANCIAL STATEMENTS AND EXHIBITS
The following financial statements and related schedule, together with
the report of Coopers & Lybrand are filed as part of this Annual Report on Form
20-F in Item 18:
Report of the Independent Auditors
Consolidated Balance Sheets as of December 31, 1997 and 1996.
Consolidated Statements of Operations for the three years ended
December 31, 1997.
Consolidated Statements of Changes in Shareholders' Equity for the
three years ended December 31, 1997.
Consolidated Statements of Cash Flows for the three years ended
December 31, 1997.
Notes to Consolidated Financial Statements.
Schedule 1 - Condensed Financial Information of Registrant
29
<PAGE>
The Company agrees to furnish to the Securities and Exchange
Commission, upon request, copies of any instruments that define the rights of
holders of long-term debt of the Company that are not filed as exhibits to this
Annual Report on Form 20-F.
30
<PAGE>
ORTHOFIX INTERNATIONAL N.V.
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the Registrant certifies that it meets all of the requirements for
filing on Form 20-F and has duly caused this Annual Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ORTHOFIX INTERNATIONAL N.V.
By: /s/ PETER CLARKE
----------------------------------
Name: Peter Clarke
Title: Secretary
Date: 11th June, 1998
<PAGE>
ORTHOFIX INTERNATIONAL N.V.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Index
Page
Report of the independent accountants F-2
Consolidated balance sheets at December 31, 1997 and 1996 F-3
Consolidated statements of operations for the three years
ended December 31, 1997 F-5
Consolidated statements of changes in shareholders' equity
for the three years ended December 31, 1997 F-6
Consolidated statements of cash flows for the three years
ended December 31, 1997 F-7
Notes to the consolidated financial statements F-9
Schedule 1 - condensed financial information of registrant S-1
F-1
<PAGE>
ORTHOFIX INTERNATIONAL N.V.
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Shareholders
Orthofix International N.V.
We have audited the accompanying consolidated balance sheets of Orthofix
International N.V. and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of operations, changes in shareholders' equity
and cash flows for each of the three years in the period ended December 31, 1997
listed in the index on page F-1 of this Form 20-F. Our audit also included
Schedule I on S-1. These financial statements and the financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and the financial
statement schedule based on our audits.
We conducted our audits in accordance with United States generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatements. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Orthofix
International N.V. and subsidiaries as of December 31, 1997 and 1996 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with United
States generally accepted accounting principles. In addition, in our opinion,
the financial statement schedule referred to above, when considered in relation
to the basic financial statements taken as a whole, presents fairly, in all
material respects, the information required to be included therein.
/s/ Coopers & Lybrand
COOPERS & LYBRAND
London, England
March 31, 1998 except for note 22, as to which the date is May 15, 1998.
F-2
<PAGE>
ORTHOFIX INTERNATIONAL N.V.
CONSOLIDATED BALANCE SHEETS
as of December 31, 1997 and 1996
December 31
(U.S. Dollars, in thousands) 1997 1996
- ---------------------------------------------- ---- ----
Assets
Current assets:
Cash and cash equivalents $ 4,131 $ 3,604
Restricted cash 780 -
Trade accounts receivable, less allowance
for doubtful accounts of $4,199 and
$4,110 at December 31, 1997
and 1996, respectively 27,046 24,005
Inventories 11,874 12,261
Other current assets 4,632 4,673
--------- ---------
Total current assets 48,463 44,543
Property, plant and equipment, net 8,951 9,534
Patents and other intangible assets, net 6,042 6,434
Goodwill, net 49,492 52,546
--------- ---------
Total assets $ 112,948 $ 113,057
========= =========
The accompanying notes form an integral part of these consolidated financial
statements.
F-3
<PAGE>
ORTHOFIX INTERNATIONAL N.V.
CONSOLIDATED BALANCE SHEETS (continued)
as of December 31, 1997 and 1996
December 31
(U.S. Dollars, in thousands, except share data) 1997 1996
- ------------------------------------------------- ------------ ---------
Liabilities and shareholders' equity
Current liabilities:
Bank borrowings $ 7,309 $ 5,013
Current portion of long-term debt 3,550 3,561
Trade accounts payable 6,259 6,255
Other current liabilities 13,195 13,645
--------- --------
Total current liabilities 30,313 28,474
Long-term debt 9,439 12,921
Deferred income taxes 1,313 1,747
Long-term rental liabilities, net 1,296 1,553
Deferred compensation 724 686
Minority interests 4,715 3,766
--------- --------
Total liabilities 47,800 49,147
--------- --------
Commitments and contingencies (notes 14 and 19)
Shareholders' equity:
Common shares $0.10 par value
Authorized: 30,000,000 (1996: 30,000,000)
Issued: 13,120,040 (1996: 13,048,048) 1,312 1,305
Outstanding: 12,959,700 (1996: 12,887,708)
Additional paid-in capital 63,332 62,984
Less: 160,340 Treasury shares, at cost (1996: 160,340) (1,387) (1,387)
--------- --------
63,257 62,902
Retained earnings 4,313 1,244
Cumulative currency translation adjustments (2,422) (236)
--------- --------
Total shareholders' equity 65,148 63,910
--------- --------
Total liabilities and shareholders' equity $ 112,948 $ 113,057
========= =========
The accompanying notes form an integral part of these consolidated financial
statements.
F-4
<PAGE>
ORTHOFIX INTERNATIONAL N.V.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31, 1997, 1996 and 1995
(U.S. Dollars, in thousands,
except share and per share data) 1997 1996 1995
- --------------------------------------------------- --------- ----------- -----------
<S> <C> <C> <C>
Net sales $ 89,963 $ 77,221 $ 52,272
Cost of sales 25,366 23,451 18,781
---------- ---------- ----------
Gross profit 64,597 53,770 33,491
Operating expenses
Sales and marketing 32,538 29,025 14,264
General and administrative 12,365 9,346 6,872
Research and development 4,840 4,883 3,521
Amortization of intangible assets 3,786 3,775 1,406
Non-recurring charges - - 24,300
Restructuring charges 1,010 2,211 -
---------- ---------- ----------
54,539 49,240 50,363
---------- ---------- ----------
Total operating income (expense) 10,058 4,530 (16,872)
Other income (expense)
Interest income 117 238 1,161
Interest expense on bank loans (1,962) (1,765) (862)
Foreign exchange gain (loss) (106) 352 13
Loss on disposal (7) (132) (32)
---------- ---------- ----------
Net other income (expense) (1,958) (1,307) 280
Equity in net loss of affiliate - - (62)
---------- ---------- ----------
Net income (loss) before income taxes and
minority interests 8,100 3,223 (16,654)
Income tax expense (4,081) (2,785) (2,564)
---------- ---------- ----------
Net income (loss) before minority interests 4,019 438 (19,218)
Minority interests (950) (913) (584)
---------- ---------- ----------
Net income (loss) $ 3,069 $ (475) $ (19,802)
========== ========== ==========
Net income (loss) per common share - basic $ 0.24 $ (0.04) $ (1.78)
========== ========== ==========
Net income (loss) per common share - diluted $ 0.23 $ (0.04) $ (1.78)
========== ========== ==========
Weighted average number of common shares - basic 12,932,807 12,673,319 11,113,604
========== ========== ==========
Weighted average number of common shares - diluted 13,211,397 12,673,319 11,113,604
========== ========== ==========
The accompanying notes form an integral part of these consolidated financial
statements.
</TABLE>
F-5
<PAGE>
ORTHOFIX INTERNATIONAL N.V.
CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY
For the years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Cumulative
Number of Treasury currency
(U.S. Dollars, in thousands, Outstanding Common Additional shares Retained translation
except share data) Common shares shares paid-in capital (at cost) earnings adjustments Total
- ------------------ ------------- ------ --------------- ---------- -------- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
At December 31, 1994 10,275,400 $1,043 $24,327 $(1,387) $21,521 $(1,934) $43,570
Net loss - - - - (19,802) - (19,802)
Translation adjustment - - - - - 221 221
2,202,055 common shares
issued 2,202,055 221 34,450 - - - 34,671
--------- ------ ------ ------- -------- --------- -------
At December 31, 1995 12,477,455 1,264 58,777 (1,387) 1,719 (1,713) 58,660
Net loss - - - - (475) - (475)
Translation adjustment - - - - - 1,477 1,477
410,253 common shares
issued 410,253 41 4,207 - - - 4,248
---------- ------ ------- ------- -------- -------- -------
At December 31, 1996 12,887,708 1,305 62,984 (1,387) 1,244 (236) 63,910
Net income - - - - 3,069 - 3,069
Translation adjustment - - - - - (2,186) (2,186)
71,992 common shares
issued 71,992 7 348 - - - 355
---------- ------ ------- ------- -------- -------- -------
At December 31, 1997 12,959,700 $1,312 $63,332 $(1,387) $4,313 $(2,422) $65,148
========== ====== ======= ======== ======== ======== =======
The accompanying notes form an integral part of these consolidated financial
statements.
</TABLE>
F-6
<PAGE>
ORTHOFIX INTERNATIONAL N.V.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
(U.S. Dollars, in thousands) 1997 1996 1995
- ------------------------------------------------------------------ ------ ----- -----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $3,069 $ (475) $ (19,802)
----- ------ ------
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Non-recurring charges - - 24,300
Depreciation and amortization 6,493 6,169 2,157
Provision for deferred compensation 144 137 106
Provision for losses on inventories - 599 1,356
Provision for losses on trade accounts receivable 2,336 1,863 624
Provision for restructuring costs - 2,072 -
Loss on sale of fixed assets 41 132 32
Deferred taxes (205) 311 255
Minority interest in net income of consolidated subsidiaries 950 913 584
Equity in net loss of affiliate - - 62
Changes in operating assets and liabilities:
Increase in accounts receivable (6,964) (5,487) (1,007)
Increase in inventories (531) (3,041) (2,638)
(Increase) decrease in other current assets (59) 1,409 (179)
Increase in trade accounts payable 492 203 1,607
Decrease in other current liabilities (1,119) (2,653) (2,781)
------- ------- -------
Total adjustments 1,578 2,627 24,478
------- ------- -------
Net cash provided by operating activities 4,647 2,152 4,676
------- ------- -------
Cash flows from investing activities:
Acquisition of subsidiaries, net of cash acquired - (487) (34,376)
Capital expenditure (3,394) (3,237) (2,869)
Proceeds from sale of equipment 51 53 130
Proceeds from sale of product lines - - 2,200
------- -------- -------
Net cash used for investing activities $ (3,343) $ (3,671) $(34,915)
------- -------- -------
The accompanying notes form an integral part of these consolidated financial
statements.
</TABLE>
F-7
<PAGE>
ORTHOFIX INTERNATIONAL N.V.
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
For the years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
(U.S. Dollars, in thousands) 1997 1996 1995
- ------------------------------------------------------- ------ ----- -----
<S> <C> <C> <C>
Cash flows from financing activities:
Net proceeds from issue of common shares $ 355 $ 216 $ 1,173
Repayment of loans (3,444) (4,735) (3,006)
Proceeds from borrowings 3,053 2,356 18,677
Restricted cash (780) 214 (8)
------ ------ ------
Net cash provided by (used in) financing activities (816) (1,949) 16,836
------ ------ ------
Effect of exchange rate changes on cash 39 26 (42)
------ ------ ------
Net (decrease) increase in cash and cash equivalents 527 (3,442) (13,445)
Cash and cash equivalents at the beginning of the year 3,604 7,046 20,491
------ ------ ------
Cash and cash equivalents at the end of the year $ 4,131 $ 3,604 $ 7,046
====== ====== ======
Supplemental disclosure of cash flow information
Cash paid during the year for:
Interest $ 1,625 $ 1,333 $ 696
Income taxes $ 3,431 $ 3,912 $ 3,045
</TABLE>
Supplemental schedule of non-cash investing and financing activities
On August 21, 1995 the Company purchased all of the capital stock of American
Medical Electronics, Inc. ("AME") for $81.2 million. In conjunction with the
acquisition, part of the purchase consideration was financed through the
issuance of common shares for $33.5 million (see note 13).
On September 12, 1995, the Company purchased a further 16% of the shares of
Novamedix Limited (an affiliate) through the issuance of a loan note for $1.5
million (see note 13).
On July 2, 1996, the Company issued common shares, loan notes, warrants and
other non-cash instruments in settlement of deferred consideration due under the
December 1994 Osteogenics acquisition agreement (see note 13):
Issuance of equity $ 4,032
Assumption of debt 3,029
Expenses related 81
-----------
Goodwill recognized $ 7,142
---------
The accompanying notes form an integral part of these consolidated financial
statements.
F-8
<PAGE>
ORTHOFIX INTERNATIONAL N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Description of business
The Company and subsidiaries are principally involved in the development,
manufacture, marketing and distribution of advanced products for bone-healing
and less invasive medical devices.
1 Accounting policies
(a) Basis of consolidation
The consolidated financial statements include the financial statements
of the Company and its directly and indirectly wholly-owned and
majority-owned subsidiaries as follows:
Orthofix International B.V. (The Netherlands)
Orthofix Inc. (U.S.A.)
Osteogenics Inc. (U.S.A.)
Orthofix S.r.l. (Italy)
Orthofix Limited (United Kingdom)
Inter Medical Supplies Limited (Cyprus)
Novamedix Limited (United Kingdom)
Novamedix Services Limited (United Kingdom)
Orthosonics Limited (United Kingdom) 70%
Intavent Orthofix Limited (United Kingdom) 62%
Colgate Medical Limited (United Kingdom) 62%
Novamedix Distribution Limited (Cyprus) 80%
D.M.O. S.r.l. (Italy) 70%
The equity method of accounting is used when the Company has a 20% to
50% interest in other companies. 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 significant
intercompany transactions, profits and balances have been eliminated in
the consolidated financial statements.
The results of subsidiaries acquired or disposed of during the year are
included in the consolidated statements of operations from the date of
their acquisition or up to the date of their disposal.
(b) Foreign currency translation
The accounts of the Company's foreign subsidiaries are recorded using
the local currency as the functional currency. The Company applies
Statement of Financial Accounting Standards No. 52, "Foreign Currency
Translation" relative to the translation of foreign currency financial
statements into US dollars and accounting for foreign currency
transactions. Under this statement, all balance sheet accounts, except
shareholders' equity, are translated at year end exchange rates and
revenue and expense items are translated at weighted average, rates of
exchange prevailing during the year. Gains and losses resulting from
foreign currency transactions are included in operations. Gains and
losses resulting from the translation of foreign currency financial
statements are accumulated directly in the cumulative currency
translation adjustments component of shareholders' equity.
(c) Inventories
Inventories are valued at the lower of cost or estimated net realizable
value, after provision for obsolete items (refurbishment and lost
field-items). Cost is determined on a weighted-average basis which
approximates the FIFO method. The valuation of work-in-progress and
finished goods includes the cost of materials, labour and production.
Demo inventory is expensed when provided to sales representatives.
F-9
<PAGE>
ORTHOFIX INTERNATIONAL N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
1 Accounting policies (continued)
(d) Reporting currency
The reporting currency is the United States Dollar.
(e) Property, plant and equipment
Property, plant and equipment is stated at cost less accumulated
depreciation, except for land which is not depreciated. Depreciation is
computed on a straight-line basis over the estimated useful lives of
the assets which are as follows:
Years
-----
Buildings 25 to 33-1/3
Plant and equipment 4 to 10
Furniture and fixtures 5 to 8
Other 5
Expenditures for maintenance and repairs and minor renewals and
improvements which do not extend the life of the respective assets are
expensed. All other expenditures for renewals and improvements are
capitalized. The assets and related accumulated depreciation are
adjusted for property retirements and disposals, with the resulting
gain or loss included in operations. Fully depreciated assets remain in
the accounts until retired from service.
(f) Intangible assets
Intangible assets consist of goodwill, patents and other assets.
Goodwill represents the excess of the cost of acquired businesses over
the fair market value of the net assets acquired and is amortized using
the straight-line method over twenty years. Management continually
re-evaluates the propriety of the carrying value of goodwill and other
intangibles as well as the amortization period to determine whether
current events and circumstances warrant adjustments to the carrying
value and/or revisions of estimated useful lives. In determining any
impairment of goodwill, the Company assesses the projected future
cashflows from each intangible asset on a non-discounted basis. Any
impairments would be recognised in operating results if a diminution in
value were to occur. Acquired patents are recorded at fair value based
on an independent appraisal and are amortized over the shorter of the
economic life or ten years. Other assets consist primarily of assets
acquired in the August 1995 acquisition of Orthofix Inc. and are
amortized over 12 years. The costs of internally developed intangible
assets are expensed as incurred.
(g) Revenue recognition
Sales are recognized as income in the period in which the products are
delivered. Sales exclude any value added or other local taxes,
intercompany sales and trade discounts. Revenues are reduced for
estimated returns under the Company's limited guarantee programs and
estimated cancellations at the time the products are shipped. Revenues
related to customer co-payments are recognized when received.
F-10
<PAGE>
ORTHOFIX INTERNATIONAL N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
1 Accounting policies (continued)
(h) Research and development costs
Expenditures for research and development are expensed as they are
incurred.
(i) Income taxes
The consolidated financial statements have been prepared in accordance
with the provisions of Statement of Financial Accounting Standard No.
109, "Accounting for Income Taxes" (SFAS 109). Under SFAS 109, tax
rates are applied to cumulative temporary differences based on when and
how they are expected to affect the tax return. Deferred tax assets and
liabilities are recognized for differences between the book values and
the tax basis of the assets and liabilities and are adjusted for tax
law and rate changes.
(j) Concentration of credit risk
The Company performs on-going credit evaluations of its customers and
generally does not require collateral. The Company maintains reserves
for potential credit losses and such losses have been within
management's expectations.
The Company invests its excess cash in deposits with major banks. The
Company has not experienced any losses on its deposits.
(k) Net income per common share
Net income (loss) per common share is calculated in accordance with
Statement of Financial Accounting Standard No. 128 ("SFAS 128"),
"Earnings per Share". Net income (loss) per common share - basic is
based on the weighted average number of common shares outstanding
during each of the respective years. Net income (loss) per common share
- diluted is based on the weighted average number of common and common
equivalent shares outstanding during each of the respective years.
Common equivalent shares represent the dilutive effect of the assumed
exercise of certain outstanding share options (see note 21).
The weighted average number of shares - basic used in the computation
of the net income (loss) per share were 12,932,807, 12,673,319 and
11,113,604 for 1997, 1996 and 1995, respectively.
The weighted average number of common shares - diluted used in the
computation of the net income (loss) per share were 13,211,397,
12,673,319 and 11,113,604 for 1997, 1996 and 1995, respectively.
Differences between basic and diluted shares result solely from the
assumed exercise of certain outstanding share options.
F-11
<PAGE>
ORTHOFIX INTERNATIONAL N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
1 Accounting policies (continued)
(l) Cash and cash equivalents
For purposes of the statements of cash flows, the Company considers all
highly liquid investments with an original maturity of three months or
less at the date of purchase to be cash equivalents.
(m) Use of estimates in preparation of financial statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
dates of the financial statements and the reported amounts of revenues
and expenses during the reporting periods. Actual results could differ
from these estimates.
(n) Financial Instruments
All of the financial instruments, as defined by Statement of Financial
Accounting Standard No. 107, "Disclosures about fair value of Financial
Instruments" (SFAS 107), are stated at carrying values which
approximate their fair values at the balance sheet dates.
(o) Impact of recently issued pronouncements
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 128 "Earnings
per share" ("SFAS 128") which specifies computation, presentation and
disclosure requirements which are intended to increase the
comparability of earnings per share data provided under United States
generally accepted accounting principles with that provided on an
international basis. In general, earnings per share ("EPS") under SFAS
128 are described as Basic EPS and Diluted EPS, as compared with the
former terminology of Primary EPS and Fully-diluted EPS. SFAS 128 is
effective for accounting periods ending after December 15, 1997 and
will require restatement of earnings per share data presented in
respect of previous years. Management estimates that there are no
significant differences between Basic and Diluted EPS data as
calculated in accordance with SFAS 128 and the 1996 and 1995 EPS
amounts formerly disclosed in the consolidated financial statements.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income", which establishes standards for reporting and display of
comprehensive income and its components in a financial statement with
the same prominence as other financial statements. Comprehensive income
is defined as net income adjusted for changes in stockholders' equity
resulting from events other than net income or transactions related to
an entity's capital instruments. The Company is required to adopt SFAS
130 effective January 1, 1998, with reclassification of financial
statements for earlier years required. The Company is currently
considering what impact, if any, SFAS 130 will have on its disclosure
of comprehensive income.
F-12
<PAGE>
ORTHOFIX INTERNATIONAL N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
1 Accounting policies (continued)
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information," which establishes standards
for reporting information about operating segments. Generally SFAS 131
requires that financial information be reported on the basis that is
used internally for evaluating performance. The Company is required to
adopt SFAS 131 effective January 1, 1998, and comparative information
for earlier years must be restated. The Company is currently
considering what impact, if any, SFAS 131 will have on its current
segment reporting structure.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Post-retirement Benefits," which revises
current disclosure requirements for employers' pension and other
retiree benefits. SFAS 132 does not change the measurement or
recognition of pension or other post-retirement benefit plans. The
Company is required to adopt SFAS 132 effective January 1, 1998, with
restatement of disclosures for earlier years required. The Company is
currently considering what impact, if any, SFAS 132 will have on its
disclosure of pension and other post-retirement benefits.
(p) Reclassifications
Certain 1996 and 1995 amounts have been reclassified to conform to the
1997 presentation.
F-13
<PAGE>
ORTHOFIX INTERNATIONAL N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
2 Restricted cash
December 31
(In thousands) 1997 1996
- -------------------------------------------- -------------------
Restricted cash $ 780 $ -
===== =====
In September 1996, the sum of $214,000 pledged as collateral for the bank
overdraft of Novamedix Limited, a subsidiary in the United Kingdom, was
redeemed. In August 1997, Orthofix Inc. purchased a bond for the sum of $780,000
to be used in settlement of the directors judgement in the lawsuit brought by
AME's former president and chief executive officer (see Note 19).
3 Inventories
December 31
(In thousands) 1997 1996
- -------------------------------------------- -------------------
Raw materials $ 1,222 $ 1,635
Work-in-process 1,315 2,189
Finished goods 6,990 8,013
Field inventory 3,581 1,658
Less reserve for refurbishment, obsolescence and
lost field units (1,234) (1,234)
------ ------
$ 11,874 $ 12,261
====== ======
Demo inventory expense for 1997, 1996 and 1995 was $373,000, $72,000
and $443,000, respectively.
4 Other current assets
December 31
(In thousands) 1997 1996
- -------------------------------------------- -------------------
Refundable sales tax $ 908 $ 794
Prepaid income taxes 1,954 2,607
Prepayments 1,343 781
Other receivables 427 491
----- -----
$ 4,632 $ 4,673
===== =====
F-14
<PAGE>
ORTHOFIX INTERNATIONAL N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
5 Investment in and advances to affiliate
In 1995, the Company acquired a further 36% of the issued share capital of
Novamedix Limited (NL), increasing its holding to 80% of the outstanding shares.
Accordingly, the Company's interest in NL changed from an equity investment to a
majority owned subsidiary. The consolidated financial statements reflect the
appropriate accounting implications of this change.
In 1996, the Company purchased the remaining 20% of NL's outstanding share
capital and, as of December 31, 1997 and 1996, held 100% of the issued share
capital of NL.
6 Property, plant and equipment
December 31
(In thousands) 1997 1996
- ----------------------------------------------------------------
Cost
Building $ 3,101 $ 3,321
Plant and equipment 8,946 8,534
Furniture and fixtures 3,321 2,633
------ -----
15,368 14,488
Accumulated depreciation 6,417 4,954
----- -----
$ 8,951 $ 9,534
===== =====
At December 31, 1997, 1996 and 1995 the Term Note and Revolver described in note
11 are collateralized by substantially all of the assets of Orthofix Inc. and
are guaranteed by the Company.
Depreciation expenses for 1997, 1996 and 1995 were $2,691,000, $2,393,000 and
$1,346,000, respectively.
F-15
<PAGE>
ORTHOFIX INTERNATIONAL N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
7 Patents and other intangible assets
December 31
(In thousands) 1997 1996
- -------------------------------------------- -------------------------
Cost
Patents $ 12,600 $ 13,739
Other 4,700 4,784
------ ------
17,300 18,523
Accumulated amortization
Patents 10,275 11,484
Other 983 605
------ ------
$ 6,042 $ 6,434
====== ======
8 Goodwill
December 31
(In thousands) 1997 1996
- -------------------------------------------- -----------------------
Goodwill - cost $ 58,762 $ 58,577
Accumulated amortization 9,270 6,031
------ ------
$ 49,492 $ 52,546
====== ======
In 1996, the payment of deferred consideration relating to the earlier
acquisition of Osteogenics resulted in the recognition of additional goodwill of
$7.1 million which is being amortized over 20 years.
F-16
<PAGE>
ORTHOFIX INTERNATIONAL N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
9 Bank borrowings
December 31
(In thousands) 1997 1996
- -------------------------------------------- -------------------
Borrowings under lines of credit $ 5,309 $ 5,013
Borrowings under revolving credit facility 2,000 -
------ ------
$ 7,309 $ 5,013
====== ======
Weighted average interest rate at year end: 1997 1996
--------- ----------
% %
Bank borrowings 8.62 9.42
Current maturity long term debt 7.68 7.75
In addition to the $5.0 million revolving credit facility described in note 11,
of which $2.0 million had been drawn down at December 31, 1997 (1996: $0), the
Company had unused lines of credit of $6.1 million (1996: $5.2 million). The
terms of these lines of credit give the Company the option to borrow amounts in
Italy at rates to be determined individually and from time to time with the
banks concerned.
10 Other current liabilities
December 31
(In thousands) 1997 1996
- -------------------------------------------- -------------------
Accrued expenses $ 5,777 $ 6,928
Salaries and related taxes payable 2,520 1,519
Other payables 3,053 3,137
Income taxes payable 1,733 2,042
Deferred income taxes 112 19
------ ------
$ 13,195 $ 13,645
====== ======
F-17
<PAGE>
ORTHOFIX INTERNATIONAL N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
11 Long-term debt
December 31
(In thousands) 1997 1996
- -------------------------------------------- -------------------
Note payable to bank $ 8,211 $ 10,947
Long term obligations, net of an
unamortized discount of $832 (1996: $893) 3,996 4,692
Loan repayable in instalments commencing in 1995.
The original interest rate of 2.2%
increased to 8.76% in 1996. 157 197
Loannote in favor of related party (see note 18)
repayable at par on January 1, 2008. The
interest rate is LIBOR which was approximately
7.75% at December 31, 1997 (1996: 7.06%). 625 625
Other - 21
------ ------
12,989 16,482
Less current portion (3,550) (3,561)
------ ------
$ 9,439 $ 12,921
====== ======
Note payable to bank consists of a drawdown under a $20 million credit
arrangement comprising a $15 million term note (the "Term Note"). The Company
also has a $5 million revolving credit facility (the "Revolver"). The Term Note
bears interest at either the current prime rate, at December 31, 1997, or the
London Inter Bank Offered Rate (LIBOR). The Term Note and Revolver are
collateralized by substantially all of the assets of Orthofix Inc. and are
guaranteed by the Company.
Certain restrictive covenants reside at the Company's reporting level, with
other restrictive covenants residing with Orthofix Inc. The most restrictive
covenant precludes the transfer to the Company from Orthofix Inc. of an amount
exceeding 10% of total assets of the Company in any one year or exceeding 25% of
total assets of the Company during the period of the Term Note. At December 31,
1997 the amounts were $11.3 million (1996: $11.3 million) and $28.2 million
(1996: $28.3 million), respectively.
F-18
<PAGE>
ORTHOFIX INTERNATIONAL N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
11 Long-term debt (continued)
Borrowings of $8,211,000 and $10,947,000 under the Term Note bearing interest at
7.44% were outstanding as of December 31, 1997 and 1996, respectively. Annual
maturities of the Term Note are $2,736,000 due in quarterly instalments
beginning in March 1996. As of December 31, 1997, there were $2,000,000 in
borrowings under the revolving credit facility bearing interest at 7.72%. The
credit arrangement matures on August 21, 2000.
At December 31, 1996 the Company was in technical default under the terms of the
credit arrangement. As of May 22, 1997, the Company obtained a waiver for the
violations which occurred in the year ended December 31, 1996. In addition,
effective May 22, 1997, certain financial covenants within the credit agreement
were amended including a decrease in minimum EBITDA requirements and fixed
charge coverage requirements and a decrease in current ratio requirements.
Long-term obligations include a note for $2.3 million (1996: $2.8 million) and
consulting/noncompete agreements for $1.1 million (1996: $1.4 million) issued in
connection with the acquisition of Osteogenics in December 1994. These
obligations have aggregate annual maturities of approximately $800,000 through
1999 and bear interest at 8.5%. In 1995, the Company issued a loan note in
connection with the acquisition of 16% of the share capital of Novamedix
Limited. This loan note of $1,480,000 is redeemable by December 31, 2010 if not
redeemed earlier upon the occurrence of certain conditions and has been
discounted at 6.75%.
The aggregate maturities of long-term debt for the five years after December 31,
1997 are $3,554,500, $3,556,000, $691,000, $348,000 and $0 respectively.
12 Long term rental liabilities, net
During the latter part of 1996, the Company reviewed all of its activities at
Orthofix Inc. resulting in a 1996 restructuring charge of $2.2 million of which
$1.8 million relates to rental liabilities. Additionally, further restructuring
charges, covering severance payments of approximately $1.0 million, were
incurred in the first quarter of 1997.
December 31
(In thousands) 1997 1996
- -------------------------------------------- -------------------
Long term rental liabilities, net $ 1,559 $ 1,754
Less: Current portion (263) (201)
------ ------
$ 1,296 $ 1,553
====== ======
F-19
<PAGE>
ORTHOFIX INTERNATIONAL N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
13 Acquisition of subsidiaries
There were no acquisitions of subsidiaries in 1997.
Effective February 1, 1996, the Company acquired the remaining 20% of the issued
share capital of Novamedix Limited for $200,000. On January 28, 1996 the Company
acquired 100% of the issued share capital of Novamedix Services Limited for
$76,000.
On August 21, 1995 (the acquisition date), 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
totalling approximately $33.5 million. Additionally, the Merger Agreement
provides for contingent payments of an Earnout of up to $6 million and Bonus of
up to $12 million to be paid on a pro rata basis to holders of AME stock, or
certain other rights to receive AME stock, as of July 14, 1995. Paid or not the
Earnout payments are contingent upon the attainment of certain thresholds by the
Company in 1995 (including AME prior to the acquisition date), 1996 and/or 1997,
including: (i) gross revenues, (ii) gross revenues derived from sales of AME
products (as defined in the Merger Agreement), or (iii) net income. Payment of
the Bonus is contingent on the exceeding of certain gross revenue thresholds by
the Company in 1995 (including AME prior to the acquisition date), 1996 and/or
1997. The Earnout and Bonus, if paid, would be paid in cash, common stock of the
Parent or a combination thereof on a Payout Date defined in the Merger
Agreement. The contingent consideration described above, if paid, would have
resulted in the Company recording additional goodwill. No amounts have been paid
as of December 31, 1997.
The acquisition of Orthofix Inc. generated a one-time charge to earnings for the
cost of purchased research and development projects of approximately $24.3
million in the period from the acquisition date to December 31, 1995. The
technological feasibility of these research and development projects had not
been established.
A summary of the purchase price allocation for the 1995 purchase of Orthofix
Inc. is as follows:
(In thousands)
Working Capital, other than cash $ 3,304
Intangible assets 4,823
Furniture and equipment 4,664
Goodwill 54,859
Other liabilities (933)
------
Purchase price, net of cash received $ 66,717
======
The acquisitions have been accounted for by the purchase method of accounting,
and accordingly the purchase prices have been allocated to the assets acquired
and the liabilities assumed based on the estimated fair values at the dates of
acquisition. The excess of purchase price over the estimated fair values of the
net assets acquired has been recorded as goodwill which is being amortized over
20 years. The results of operations of acquired subsidiaries have been included
in the statement of operations from the dates of acquisition.
F-20
<PAGE>
ORTHOFIX INTERNATIONAL N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
13 Acquisition of subsidiaries (continued)
In December 1994, AME acquired all of the outstanding common stock of
Osteogenics, Inc., a development stage company that holds an exclusive license
from the American Dental Association Health Foundation for technology to develop
patented calcium phosphate formulations. The Company obtained U.S. Food and Drug
Administration (FDA) clearance in July 1996 to market formulations for
craniofacial reconstruction applications. With the attainment of FDA approval,
additional consideration was paid as follows: 338,622 shares of common stock of
the Company valued at approximately $3,725,000; warrants to purchase up to
92,796 shares of the Company at exercise prices between $18.11 and $30.61 per
share; additional liabilities of $3,077,000 relating to a note and a consulting
agreement issued in connection with the acquisition; and cash payments of
approximately $81,500. The attainment of FDA approval resulted in the Company
recording additional goodwill of approximately $7,150,000 in the year ended
December 31, 1996.
The following table represents the results of operations for the year ended
December 31, 1995 as though Orthofix Inc. and Novamedix Limited had been
acquired at January 1, 1995.
<TABLE>
<CAPTION>
The Orthofix Novamedix Combined
(In thousands, except per share data) Company Inc. Limited Adjustments Total
- ------------------------------------- ------- ----------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Net Sales $ 52,272 $ 32,815 $ 4,486 $ (18,517) $ 71,056
Net Income (loss) $ (19,802) $ (28,941) $ (155) $ 26,062 $(22,836)
Net Income (loss) per common share $ (1.78) N/A N/A N/A $ (2.05)
</TABLE>
F-21
<PAGE>
ORTHOFIX INTERNATIONAL N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
14 Lease commitments
Orthofix Inc. has entered into certain operating leases for facilities and
equipment. The primary operating lease is for the Company's facility in
Richardson, Texas. The lease has a remaining term of four years and provides
renewal options of up to ten additional years. Orthofix Inc. is responsible for
insurance, taxes and maintenance for the majority of its leases.
Rent expense under the Company's operating leases for the year ended December
31, 1997 and 1996 and the period from August 21, 1995 to December 31, 1995 was
approximately $1,029,000, $1,075,000 and $445,000 respectively. Future minimum
lease payments as of December 31, 1997 under all operating leases are as
follows:
(In thousands)
- ------------------------------
1998 $ 1,357
1999 1,363
2000 1,307
2001 1,307
2002 and later years 112
------
Total $ 5,446
=====
During the latter part of 1996, Orthofix Inc. implemented a restructuring
program which resulted in recognition of $1,754,000 of rental obligations. The
current portions are $263,000 and $201,000 and the long-term portions are
$1,296,000 and $1,553,000 as of December 31, 1997 and 1996, respectively.
15 Net sales
Analysis of net sales by geographic destination:
Year ended December 31
(In thousands) 1997 1996 1995
- --------------------- --------- -------- ----------
North America $ 53,114 $ 44,238 $ 24,220
Europe 29,721 26,909 23,459
Other 7,128 6,074 4,593
------ ------ ------
Total net sales $ 89,963 $ 77,221 $ 52,272
====== ====== ======
In 1995, 9% of net sales was made to a United States distributor.
F-22
<PAGE>
ORTHOFIX INTERNATIONAL N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
16 Business segment information
The Company and its subsidiaries operate in one business segment, the
manufacture and sale of medical equipment.
Net sales and operating income, and identifiable assets net of intercompany
accounts, as of and for the three years ended December 31, 1997 of the Company
and its subsidiaries according to their geographic location are:
<TABLE>
<CAPTION>
Net sales Operating income/(expense) Identifiable assets
(In thousands) 1997 1996 1995 1997 1996 1995 1997 1996 1995
---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Europe
- -U.K. $ 15,655 $ 15,745 $ 11,416 $ 1,016 $ 1,130 $ 1,060 $ 12,984 $ 12,418 $ 17,595
- -Italy 24,832 24,640 21,853 5,609 5,500 5,409 25,867 25,142 18,757
- -Cyprus 19,673 24,023 24,123 3,992 9,191 9,913 35,289 31,357 3,657
U.S.A. 44,155 36,499 11,051 2,271 (8,274) (31,951) 41,456 43,808 57,563
Netherlands and
Netherlands
Antilles -- -- -- (2,830) (3,017) (1,303) (2,648) 332 6,386
Intercompany
sales (14,352) (23,686) (16,171) -- -- -- -- -- --
Total $ 89,963 $ 77,221 $ 52,272 $10,058 $ 4,530 $(16,872) $ 112,948 $ 113,057 $ 103,958
=================================================================================================================
There are no sales made by the Netherlands Antilles company.
</TABLE>
17 Income tax expense
The Company and each of its subsidiaries are taxed at the rates applicable
within each respective company's jurisdictions. The composite income tax rate
will vary according to the jurisdictions in which profits arise.
Income tax expense comprises:
Year ended December 31
(In thousands) 1997 1996 1995
- --------------------------------- --------- -------- ----------
Italy - Current $ 3,267 $ 1,265 $ 1,263
- Deferred (195) 311 277
Cyprus - Current 190 218 371
U.K. - Current 819 991 674
- Deferred - - (22)
Other - Current - - 1
------ ------ ------
$ 4,081 $ 2,785 $ 2,564
========= ======== ==========
Deferred income taxes arise because of differences in the treatment of income
and expense items for financial reporting and income tax purposes.
F-23
<PAGE>
ORTHOFIX INTERNATIONAL N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
17 Income tax expense (continued)
The tax effects of the significant temporary differences which comprise the
deferred tax liabilities and assets are as follows:
December 31
(In thousands)
1997 1996
---- ----
Deferred tax liabilities
Goodwill $ (350) $ (577)
Patents (479) (576)
Inventories (275) (362)
Depreciation (547) (542)
Other (232) (272)
------ ------
(1,883) (2,329)
------ ------
Deferred tax assets
Compensation 215 717
Inventories and related reserves 2,645 3,642
Allowance for doubtful accounts 991 748
Accrued expenses 345 320
Net operating loss carry forwards 971 263
Restructuring charges 576 738
Other 824 584
------ ------
6,567 7,012
Valuation allowance (5,997) (6,449)
------ ------
570 563
------ ------
Net deferred tax liability $ (1,313) $ (1,766)
------ ------
The deferred tax provisions in respect of goodwill arise in a foreign subsidiary
and relate to tax effects of the amortization of goodwill which is deductible
for income tax purposes over a period of five years and which is charged against
operating results over a period of twenty years. At December 31, 1997 and
December 31, 1996, the Company has net operating loss carry forwards from its
United States operations of approximately $1,192,000 and $692,000 respectively
that will expire on December 31, 2012 and 2011, respectively.
Income tax expense differs from the amount computed by applying the respective
statutory income tax rates in each jurisdiction to the income of each group
company due to the following:
Year ended December 31
(In thousands) 1997 1996 1995
- ----------------------------- --------- -------- ----------
Statutory tax:
Italy (53%) $ 2,867 $ 2,570 $ 2,850
Cyprus (4%) 160 381 456
U.K. (33%)* 675 1,050 510
------ ------ ------
3,702 4,001 3,816
Other differences 379 (1,216) (1,252)
------ ------ ------
Income tax expense $ 4,081 $ 2,785 $ 2,564
========= ======== ==========
* The statutory tax rate in the UK was reduced from 33% to 31% from March 31,
1997. The income tax expense for UK subsidiaries has been calculated on a
weighted average tax rate for the year.
F-24
<PAGE>
ORTHOFIX INTERNATIONAL N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
17 Income tax expense (continued)
Income tax charged during the year on inter-group stock profits arising from the
sale of inventories from one subsidiary to another and which have not been sold
to third parties at the year end has been deferred (written back) in the twelve
months ended December 31, 1997, 1996 and 1995, this amounted to $(566,000),
$1,178,000 and $1,166,000 respectively.
Since the Company plans to continue to finance foreign operations and expansion
through reinvestment of undistributed earnings of its foreign subsidiaries
(approximately $55.7 million at December 31, 1997) no provisions are made for
United States or additional foreign taxes on such earnings. When the Company
identifies exceptions to the general reinvestment policy, additional taxes are
provided.
18 Related Parties
The following related party balances and transactions as of and for the three
years ended December 31, 1997 between the Company and affiliated companies,
between the Company and other companies in which executive directors have an
interest, and between the Company and a principal owner of the Company, are
reflected in the consolidated financial statements.
(In thousands) 1997 1996 1995
- --------------------- --------- -------- ----------
Revenues $ 794 $ 115 $ 29
Purchases $ 11,530 $ 6,778 $ 5,475
Accounts payable $ 1,428 $ 1,221 $ 910
Accounts receivable $ 206 $ 67 $ 8
On October 27, 1993 Intavent Orthofix Limited (IOL) acquired 100% of the issued
share capital of Colgate Medical Limited for $6,448,000. As part of the purchase
consideration of $6,448,000, IOL issued an unsecured convertible loan note of
$625,000 bearing interest of 6.25% per annum to Intavent Limited. Mr Gaines
Cooper is the settlor of a trust which owns a 33% interest in Intavent Limited.
Subject to certain conditions being met, the loan note holders may convert to
shares in Intavent Orthofix Limited at any time between January 1, 1998 and
January 1, 2008.
F-25
<PAGE>
ORTHOFIX INTERNATIONAL N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
19 Commitments and contingencies
A line of credit of $7.7 million (Lit. 13.7 billion) is collateralized by the
net assets of a subsidiary. Outstanding advances under this line of credit at
December 31, 1997 and 1996 were $4.7 million (Lit. 8.4 billion) and $4.4 million
(Lit. 6.8 billion) respectively.
As of July 26, 1997, Orthofix International N.V. has been granted a four year
option to purchase a further 15% of the shares in Orthosonics Limited. As of the
same date, the original vendors have been granted a four year option to request
Orthofix International N.V. to purchase the remaining 15% of the shares. The
purchase price for both Orthofix International N.V. and the original vendors is
based on a multiple (equal to half of the Company's average price earnings ratio
in the 180 days preceding the exercise date) of the net income of Novamedix
Distribution Limited in the twelve month period preceding the exercise date.
As a result of IRS audits for the year end of December 31, 1992-August 21, 1995,
Orthofix Inc. has paid taxes in the amount of $825,000 and related interest
expense of $130,000. Those liabilities are the result of pre-merger activities,
and are therefore items that have effected the purchase price allocation of
goodwill. Interest due on the outstanding liability prior to the merger is a
component of goodwill. Interest accrued from August 21, 1995, the date of the
final payment of December 12, 1997 is an operating expense.
Litigation
The Company, in the normal course of its business, is involved in various
lawsuits from time to time. Novamedix Services Limited is currently pursuing an
action against Kinetic Concepts Inc. for patent infringement in the United
States. On November 29, 1995 Intermedical Supplies Limited filed an action
against Biomet Inc. ("Biomet") and against EBI Medical Systems Inc. ("EBI MS")
and Electro-Biology Inc. ("EBI"), both subsidiaries of Biomet, alleging breach
of contract. Orthofix S.r.l. and Orthofix Inc. also filed an action against
Biomet, EBI and EBI MS alleging breach of contract, violations of trade secrets,
patent and trademark infringement, fraud and tortious interference with
contract. EBI filed a counterclaim against the Company. On June 2, 1997, the
jury in such trial found, among other things, that EBI had breached its
distributor agreement with Orthofix S.r.l. and awarded the Company's
subsidiaries that were plaintiffs in the action a total of $48,875,399 in
compensatory damages and $100,600,000 in punitive damages. On July 15, 1997, the
trial judge rendered a judgment in favour of the Company in the amount of
$149,475,399, and subsequently entered into an amended judgment in favour of the
Company in the amount of $98,875,397. EBI filed a notice of appeal on September
26, 1997. The jury verdict remains subject to appeal, a process that may take
more than a year. Management cannot estimate the ultimate outcome of these
proceedings or the impact it will have on the financial statements of the
Company. Accordingly, no recognition has been made in the financial statements
for such award.
Orthofix Inc. is a defendant in a lawsuit brought by AME's former president and
chief executive officer (The Plaintiff) related to the termination of his
employment with AME. On May 19, 1997, the jury in such trial found that AME had
failed to comply with the employment agreement and awarded damages of $1,479,645
against Orthofix Inc. The jury also found that certain directors of AME had
tortiously interfered with the employment agreement and awarded damages of
$1,238,179 against the directors. On September 12, 1997, the trial court entered
judgment that the Plaintiff recover $679,645 plus prejudgment interest from
Orthofix Inc., which has been paid and $1,238,179 plus prejudgment interest from
the directors. An appeal of the judgment against the directors is currently
pending. The Company believes that any liability resulting from this litigation
will have no material adverse effect on the Company's financial condition.
In management's opinion, 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.
F-26
<PAGE>
ORTHOFIX INTERNATIONAL N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
19 Commitments and contingencies (continued)
Concentrations of credit risk
Financial instruments which potentially subject the Company to concentrations of
credit risk are primarily cash investments and accounts receivable. Cash
investments are primarily in money market funds. Concentrations of credit risk
with respect to accounts receivable are limited due to the large number of
individuals comprising the Company's customer base. Certain of these customers
rely on third party healthcare payers, such as private insurance companies, to
make payments to the Company on their behalf. The Company maintains an allowance
for losses based on the expected collectibility of all accounts receivable.
20 Pensions and deferred compensation
Orthofix Limited and Intavent Orthofix Limited contribute to defined
contribution pension plans for all employees meeting minimum age and service
requirements. The companies make contributions to the plans based on annual
determinations by the Board of Directors. The companies' expenses for the
pension contributions during 1997, 1996 and 1995 were approximately $76,000,
$64,000 and $89,000 respectively.
Orthofix S.r.l. contributes to a defined contribution pension plan for all
employees meeting minimum service requirements. The contributions are fixed by
statute and are calculated as a percentage of gross annual salary costs. The
Company's expenses for these pension contributions during 1997, 1996 and 1995
were approximately $38,000, $38,000 and $53,000 respectively.
Orthofix Inc. sponsors a defined contribution benefit plan (the "401(k) Plan")
covering substantially all full time employees. The 401(k) Plan allows for
participants to contribute up to 15% of their pre-tax compensation, subject to
certain limitations, with the Company matching 100% of the first 2% of the
employee's base compensation and 50% of the next 4% of the employee's base
compensation if contributed to the 401(k) Plan. During the years ended December
31, 1997, 1996 and the period from August 21, 1995 to December 31, 1995,
expenses incurred relating to the 401(k) Plan, including matching contributions,
were approximately $338,000, $323,000 and $109,000, respectively.
Under Italian Law, Orthofix S.r.l. and D.M.O. S.r.l. accrue, on behalf of their
employees, deferred compensation which is paid on termination of employment.
Each year's provision for deferred compensation is based on a percentage of the
employees' current annual remuneration plus an annual charge. Deferred
compensation is also accrued for the leaving indemnity payable to agents in case
of dismissal which is regulated by a national contract and is equal to
approximately 3.5% of total commissions earned from the Company. The Company's
expenses for deferred compensation during 1997, 1996, and 1995 were
approximately $165,000, $157,000 and $134,000, respectively. Deferred
compensation payments of $25,000, $20,000 and $28,000 were made in 1997, 1996
and 1995, respectively. The year-end balance represents the amount which would
be payable if all the employees and agents had terminated employment at that
date.
F-27
<PAGE>
ORTHOFIX INTERNATIONAL N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
21 Staff and executive share option plans and warrants
At December 31, 1997, the Company had four stock-based compensation plans, which
are described below. The Company applies APB 25 and related Interpretations in
accounting for these plans. Accordingly, no compensation cost has been
recognized for stock options issued under these plans. Had compensation charges
for stock-based compensation under these four plans been determined consistent
with SFAS 123, the Company's net income (loss) and net income (loss) per common
share for the years ended December 31, 1997, 1996 and 1995 would have been equal
to the pro forma amounts indicated below:
1997 1996 1995
------- -------- --------
(In thousands except per share data)
Net income (loss)
As reported $ 3,069 $ (475) $(19,802)
Pro forma $ 2,529 $ (1,060) $(20,375)
Net income (loss) per common share - basic
As reported $ 0.24 $ (0.04) $ (1.78)
Pro forma $ 0.20 $ (0.08) $ (1.83)
Net income (loss) per common share - diluted
As reported $ 0.23 $ (0.04) $ (1.78)
Pro forma $ 0.19 $ (0.08) $ (1.83)
The fair value of each option under the Plans is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 1997, 1996 and 1995 respectively: dividend yield
of 0%, 0% and 0%; expected volatility of 45%, 45% and 45%; risk-free interest
rates of 6.32%, 6.07% and 6.58%; and expected lives of 4.71, 4.37 and 4.57
years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. Option valuation models require the input of highly subjective
assumptions including the expected price volatility. Because the Company's
employee stock options have characteristics significantly different from those
of traded options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair value of
its employee stock options.
Staff Share Option Plan
The Staff Stock Option Plan ("Staff Plan") is a fixed stock option plan which
was adopted in April, 1992. Under the Staff Plan, the Company may grant options
to its employees for up to 1,068,600 shares of common stock at the estimated
fair market value of such options at the date of grant. Options vest based on
years of service with all options to be fully vested within five years from date
of grant. Options granted under the Staff Plan expire on June 30, 2002 unless
earlier exercised. At December 31, 1997, 103,100 of the share options granted in
1997 are subject to shareholders' ratification at the Annual General Meeting.
AME 1983 and 1990 Plans
Under the terms of the Merger Agreement in which the Company acquired AME, all
options for AME common stock still outstanding under the 1983 Plan and the 1990
Plan (hereinafter collectively referred to as the "AME Plan") were assumed at
the effective time of the Merger by the Company and are exercisable for common
shares in accordance with their terms and after adjustment to reflect the
exchange ratio. After such adjustment immediately following the Merger, options
granted under the AME Plan totalled 624,794, of which 234,290 remained
outstanding. Options granted under the AME Plan expire ten years after date of
grant unless earlier exercised.
F-28
<PAGE>
ORTHOFIX INTERNATIONAL N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
21 Staff and executive share option plans and warrants (continued)
Executive Share Option Plan
Under the Executive Share Option Plan ("Executive Plan"), approved by
shareholders in March, 1992, 1,845,000 shares have been reserved for issuance to
certain executive officers. The grant price, determined by the Board, cannot be
less than the fair market value at the time of grant or $14.40, the equivalent
of 120% of the price in the initial public offering price of $12.00. Fifty
percent of options granted vest automatically on the tenth anniversary of the
date of grant, or earlier on the satisfaction of a performance keyed to the
market price of the common shares and a service condition. The remaining fifty
percent vest in 20% increments on the first through fifth anniversaries of the
date of grant. Options granted under the Executive Share Option Plan expire on
May 1, 2004 unless earlier exercised. At December 31, 1997, 70,000 of the share
options granted in 1997 are subject to shareholders' ratification at the Annual
General Meeting.
Summaries of the status of the Company's stock option plans as of December 31,
1997, 1996 and 1995 and changes during the years ended on those dates are
presented below:
Staff Plan and AME Plan
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- --------- ---------- ---------- ----------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Fixed Options Shares Price Shares Price Shares Price
- --------------------------- ---------- ---------- --------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 732,964 $ 8.08 822,470 $ 8.23 582,600 $ 2.32
Granted 299,500 8.54 104,500 8.57 206,300 10.34
AME Plan Conversion -- -- -- -- 234,920 15.78
Exercised (65,629) 4.69 (80,694) 3.63 (201,350) 2.08
Forfeited (140,867) 18.25 (113,312) 12.82 -- --
-------- ----- -------- ----- -------- -----
Outstanding at end of year 825,968 $ 7.38 732,964 $ 8.08 822,740 $ 8.23
======== ======= ======== ====== ======== ======
Options exercisable at
end of year 442,118 541,705 601,288
Weighted average fair
value of options
granted during the year $ 3.83 $ 3.06 $ 4.52
</TABLE>
F-29
<PAGE>
ORTHOFIX INTERNATIONAL N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
21 Staff and executive share option plans and warrants (continued)
Executive Plan
<TABLE>
<CAPTION>
1997 1996 1995
-------------------- ------------------- ----------------------
Weighted Weighted
Average Average
Exercise Exercise
Fixed Options Shares Price Shares Price Shares
- ------------------------ ------- ---------- -------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 1,840,000 $ 14.40 1,740,000 $ 14.40 1,635,000 $ 14.40
Granted 75,000 14.40 100,000 14.40 200,000 14.40
Exercised -- -- -- -- -- --
Forfeited -- -- -- -- (95,000) 14.40
--------- ------- --------- ------- --------- -------
Outstanding at end of
year 1,915,000 $ 14.40 1,840,000 $ 14.40 1,740,000 $ 14.40
========== ======= ========= ======= ========= =======
Options exercisable at
end of year 945,500 736,000 522,000
Weighted average fair
value of options
granted during the year $ 2.48 $ 2.20 $ 7.38
</TABLE>
The following tables summarize information about share options outstanding at
December 31, 1997:
Staff Plan and AME Plan
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------------- ----------------------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Outstanding Contractual Exercise Exercisable Exercise
Range of Exercise Prices at 12/31/97 Life Price at 12/31/97 Price
- ------------------------------------------ ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
$1.43 to $2.14 156,200 4.50 years $ 1.89 156,200 $ 1.89
$2.86 to $4.29 129,500 4.50 $ 3.08 129,500 $ 3.08
$6.88 to $10.00 449,850 4.58 $ 8.65 87,600 $ 9.00
$11.00 to $15.52 69,388 4.28 $ 13.86 47,788 $ 14.03
$21.99 to $28.24 21,030 4.37 $ 25.78 21,030 $ 25.78
</TABLE>
F-30
<PAGE>
ORTHOFIX INTERNATIONAL N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
21 Staff and executive share option plans and warrants (continued)
Executive Plan
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------------- ----------------------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Outstanding Contractual Exercise Exercisable Exercise
Range of Exercise Prices at 12/31/97 Life (years) Price at 12/31/97 Price
- -------------------------- ---------------- ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
$14.40 1,915,000 6.33 $14.40 945,500 $14.40
</TABLE>
AME Warrants
At the time of the merger with AME, warrants to purchase 320,000 shares of AME
(the "AME warrants") were outstanding. These were assumed by the Company
pursuant to the Merger Agreement. After adjusting to take account of the
exchange ratio, 185,592 warrants were outstanding all of which were exercisable
at December 31, 1997 at prices ranging from $11.85 to $30.60 per common share
and expiring on various dates through December 2003.
22 Subsequent events
On April 22, 1998 Osteogenics Inc., a wholly-owned subsidiary of the Company,
entered into an agreement ("the Agreement") with Howmedica, Inc. ("Howmedica"),
a wholly-owned subsidiary of Pfizer Inc., to license BoneSource(R), the
Company's calcium-based bone cement for use in the repair of cranial defects.
The Agreement stipulates that the following consideration be paid to the Company
for the rights granted to Howmedica: (i) $12.5 million cash upon execution of
the Agreement, and (ii) an ongoing royalty on net sales of the BoneSource(R)
product. The Agreement is effective from April 22, 1998 until the later of (i)
the expiration dates of certain patents, future patents and trademarks or (ii)
April 22, 2008.
On April 22, 1998, the loan note of $625,000 issued by Intavent Orthofix Limited
in connection with its acquisition of Colgate Medical Limited (see note 18) was
converted by the loan note holder into shares in Intavent Orthofix Limited.
Following conversion, the Company's interest in Intavent Orthofix Limited was
diluted from 62% to 52%.
F-31
<PAGE>
ORTHOFIX INTERNATIONAL N.V.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Orthofix International N.V. ("the Company") holds an investment in a wholly
owned subsidiary, Orthofix Inc. and its subsidiaries. In accordance with rule
12-04 of Regulation S-X, the following condensed financial information has been
presented as the restricted net assets of Orthofix Inc. and its subsidiaries
exceed 25% of the condensed net assets of the Company. Refer to note 11 of the
Company's consolidated financial statements for disclosure of the long-term debt
obligations and related covenants which restrict the net assets of Orthofix Inc.
and its subsidiaries.
<TABLE>
<CAPTION>
Orthofix Inc. and Subsidiaries
Condensed Balance Sheets
December 31, 1997 and 1996
(In thousands) 1997 1996
- -------------- -------- ---------
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 798 $ 1,613
Accounts receivable, (net of allowance for
doubtful accounts of $3,843 and $3,766 respectively) 8,928 7,262
Inventory 9,385 10,523
Income taxes receivable and other current assets 494 -
-------- ---------
Total current assets 19,605 19,398
Fixed assets and intangibles (net of accumulated depreciation and
amortization of $4,022 and $1,906 respectively) 8,540 8,137
Goodwill (net of accumulated amortization of $4,170 and $2,208
respectively) 34,939 37,656
-------- ---------
Total assets $ 63,084 $ 65,191
======== =========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable $ 564 $ 793
Accounts payable - related party 17,730 15,403
Accrued expenses 6,218 8,521
Other current liabilities 5,536 3,536
-------- ---------
Total current liabilities 30,048 28,253
Long term debt 7,751 10,968
Other long term liabilities 1,567 2,082
-------- ---------
39,366 41,303
Shareholder's equity
Common stock - -
Additional capital in excess of par 58,531 58,531
Accumulated deficit (34,813) (34,643)
--------- ----------
Total shareholder's equity 23,718 23,888
======== =========
Total liabilities and shareholder's equity $ 63,084 $ 65,191
======== =========
</TABLE>
S-1
<PAGE>
ORTHOFIX INTERNATIONAL N.V.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (continued)
Orthofix Inc. and Subsidiaries
Condensed Income Statements
for the year ended December 31, 1997, 1996 and the period from August 21,
1995 to December 31, 1995
(In thousands)
- -------------- 1997 1996 1995
--------- -------- ---------
Net sales $ 44,161 $ 36,500 $ 11,051
Cost of sales 12,555 13,411 6,184
--------- -------- ---------
31,606 23,089 4,867
Selling, general and administrative expense 23,810 19,652 6,843
Research and development expense 2,177 2,354 1,199
Purchased research and development - - 24,300
Depreciation and amortization expense 3,560 3,258 996
--------- -------- ---------
Loss from 2,059 (2,175) (28,471)
Other income (expense) (1,204) (1,455) (470)
One-time charges (1,025) (2,072) -
---------- --------- ---------
Net loss $ (170) $ (5,702) $ (28,941)
========== ========= =========
S-2
<PAGE>
ORTHOFIX INTERNATIONAL N.V.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (continued)
Orthofix Inc. and Subsidiaries
Condensed Statements of changes in Financial Position for the
year ended December 31, 1997, 1996 and the period
from August 21, 1995 to December 31, 1995
(In thousands) 1997 1996 1995
- ----------------------------------- ------- -------- --------
Funds provided (used) by operations $ 2,000 $ 3,100 $(3,035)
Investing activities:
Purchase of furniture and equipment (1,428) (959) (306)
Purchase of intangibles (76) (286) -
Proceeds from sale of assets 44 - 2,200
-------- -------- -------
Net cash (used in) provided by investing activities (1,460) (1,245) 1,894
Financing activities:
Other long-term liabilities 182 (222) -
Repayments of bank note (3,537) (4,603) (2,730)
Borrowings 2,000 - -
Net cash used in financing activities (1,355) (4,825) (2,730)
Decrease in cash and cash equivalents (815) (2,970) (3,871)
Cash and cash equivalents at beginning of period 1,613 4,583 8,454
-------- -------- -------
Cash and cash equivalents at end of period $ 798 $ 1,613 $ 4,583
======== ======== =======
S-3
