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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, 1998
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....................12,964,055
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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
Products...............................................................2
Fixation Products......................................................3
PEMF Products..........................................................4
Other Products.........................................................5
Distribution Products..................................................7
Sales and Distribution.................................................8
Marketing..............................................................8
Production.............................................................9
Product Development....................................................9
Patents, Trade Secrets and Licenses...................................10
Competition...........................................................10
Government Regulation.................................................11
Product Liability and Insurance.......................................12
Third Party Payors....................................................12
Employees.............................................................12
Year 2000.............................................................12
Economic and Monetary Union in the European Union.....................13
Item 2. DESCRIPTION OF PROPERTY....................................13
Item 3. LEGAL PROCEEDINGS..........................................13
Item 4. CONTROL OF REGISTRANT......................................15
Item 5. NATURE OF TRADING MARKET...................................15
Item 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING
SECURITY HOLDERS...........................................16
Item 7. TAXATION...................................................16
Item 8. SELECTED FINANCIAL DATA....................................17
Item 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS........................17
Item 10. DIRECTORS AND OFFICERS OF REGISTRANT.......................23
Item 11. COMPENSATION OF DIRECTORS AND OFFICERS.....................26
Item 12. OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OF
SUBSIDIARIES...............................................26
Item 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS.............27
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, 1998 (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).
<PAGE>
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 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, Italy and the
Seychelles. Products are distributed through subsidiary companies in the United
States, the United Kingdom and Italy, and affiliates in Mexico, Brazil and
France. 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. 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". 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 52% 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 December 14, 1998 Tom Hay joined the Company as President,
International Division, and, as such, will be responsible for the operations of
the Company and its affiliate companies outside North America. Before joining
Orthofix, Mr. Hay was with C R Bard Inc. for eleven years, ultimately as
Managing Director of C R Bard Ltd. and Vice President, C R Bard, Northern
Europe. Prior to this, he spent fourteen years with Baxter Healthcare.
On July 7, 1998, Orthofix Inc. announced that it had entered into an
agreement with the Sofamor Danek Group for the non-exclusive distribution rights
in the U.S. for the Spinal Stim Lite, a stimulation device used by patients
having undergone a spinal fusion surgery. Sofamor Danek is a market leader in
devices for spinal fusions.
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.
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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.
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. On October 29, 1998, oral argument on the appeal was heard
and a decision is expected in 1999. 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.
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
Orthofix external fixation
Orthofix internal fixation
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 and DuoSon 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
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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:
o 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.
o 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.
o 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 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.
o 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
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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. The tibial and femoral nails are now available
worldwide except in the United States.
During the first quarter of 1998, a radiolucent wrist fixator was
introduced into the US market, where it has been enthusiastically received. This
fixator allows the X ray beam to traverse through it, thereby providing the
surgeon with significantly improved X ray vision of the adjacent bone and
fracture. This fixator, also launched in Japan in the first quarter of 1999, is
expected to be marketed in selected international markets during the third
quarter of 1999.
The Company has developed a new range of bone screws covered with
Hydroxyapatite ("HA") which it expects to launch selectively during the second
quarter of 1999. Due to the "biologic" fixation provided by these screws in
bone, the incidence of superficial inflammation of soft tissue caused by the
present generation of screws is expected to be reduced or eliminated by the
application of these screws. This benefit is perceived to be significant
particularly, although not exclusively, for cases involving limb lengthening and
correction of limb deformities where the external fixator is applied to the bone
for an extended period. Currently, Orthofix is the only manufacturer to have
received 510(k) clearance from the FDA to market HA Coated Screws.
Fixation revenues represented 30% of revenues in 1998.
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
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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, light-
weight, 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 received conditional approval to
begin an IDE study to obtain PMA approval for a cervical spine indication with
the PEMF signal. The Company is working with the FDA to resolve the minor issues
outlined in the conditional approval. The study started in the first quarter of
1999.
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 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.
PEMF revenue represented 41% of revenues in 1998.
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 to sell a license for the Osteogenics BoneSource technology to
Howmedica. 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
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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 a facility 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
and for use as a bone void filler in certain non-load bearing orthopedic
indications. 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.
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, the HA Cement 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
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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 August 1998, a clinical study of 290 patients was published in the
American edition of The Journal of Bone and Joint Surgery. This study compared
the A-V Impulse System with low molecular weight heparin in patients who had had
a hip replacement. The authors concluded that both methods give extremely
effective prophylaxis against deep vein thrombosis with no major proximal
thrombosis in either group and the foot pump group had fewer soft-tissue side
effects.
In December 1997, the Premier group of hospitals which accounts for
approximately 30% of hospital beds in the USA, awarded the footpump supply
contract to the Kendall Company, the Company's exclusive distributor for the A-V
Impulse System in the USA. This contract came into full effect during 1998. In
the final quarter of 1998, Kendall also won the Consorta group of hospitals
supply contract for the A-V Impulse System. Consorta control approximately 3% of
hospital beds in the USA.
OSCAR (Orthosonics System for Cement Arthroscopy Revision)
Orthosonics has developed the Orthosonics System for Cement
Arthroscopy Revision ("OSCAR"), an ultrasonic device designed to soften and
remove the PMMA bone cement used to fix artificial implants within the patient's
bone. 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
selectively elsewhere in 1995. OSCAR is now established as the preferred method
of bone cement removal in the UK and is gaining strong support in other European
countries. Following the receipt of FDA approval in August 1996, and a
successful market appraisal in New York, OSCAR was formally launched on the US
market by Orthofix Inc. in August 1998.
Phys-Assist and DuoSon
This product, developed by Orthosonics, is an ultrasonic device for
the treatment of musculo-skeletal pain employing a new method of ultrasound
therapy known as low frequency longwave ultrasound. The device 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 and is currently undergoing assessment in the
U.S.
Other products represented 17% of revenues in 1998.
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.
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Distribution products represented 12% of revenues in 1998.
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 52% and 70%
- -owned subsidiaries, Intavent Orthofix and Orthosonics. In Mexico, Brazil and
France, Orthofix's products are distributed through its affiliates in which it
owns 47 1/2% , 47 1/2% and 30% equity interests, respectively. 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, together with its non-exclusive distributor, Sofamor
Danek, for the Spinal Stim Lite provide 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 obtained
a CE mark for stimulation products in December 1998. See "- Government
Regulation".
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 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.
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 1998 were attended by approximately 700 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.
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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.
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 and still maintaining rigid quality assurance
standards.
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.
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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 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.
OSCAR and BoneSource compete principally with products produced by
Biomet, Inc. ("Biomet"), and Norian Corporation, respectively.
The Company does not believe that there are any significant
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,
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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.
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 was a
transitional period ending June 13, 1998, after which time European medical
device manufacturers would be required to 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 has received
certification 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.
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
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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, 1998, Orthofix had 409 employees. The Company's
relations with its Italian employees, who numbered 63 at December 31, 1998, 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 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 June 30, 1999. The Company is also
taking measures to coordinate Year 2000 compliance with its business partners,
including suppliers, financial institutions and significant customers and has in
certain instances received written assurances from suppliers regarding the
latter's Year 2000 compliant status. 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. Since January 1, 1997 the Company has spent
$350,000 with a view to ensure Year 2000 compliance of its relevant software and
hardware. The Company intends to spend a further $150,000 in this regard before
the end of 1999. See "Item 9 Management's Discussion and Analysis of Financial
Condition and Results of Operations".
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
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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
The Company's principal facilities are in the U.S. and Italy.
In the U.S., 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.
In Italy, 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.
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 third quarter
of 1999, Novamedix is seeking a permanent injunction enjoining further
infringement, further breach of 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 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. Novamedix and NDM UK are seeking to
agree the amount of the payment to be made and the terms of the payment. See
"Item 1, DESCRIPTION OF BUSINESS -- Patents, Trade Secrets and Licenses".
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
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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 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. On October 29, 1998, the United States Court of Appeals
heard oral argument on the appeal. A decision is expected in 1999. Final
resolution of all appeals by the defendant may take a year or more. 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, 1998 contained a
provision of $840,000 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%
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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 April 30, 1999.
Identity of Amount
Title of Class Person or Group Owned (%)
- -------------- --------------- ------ ---
Common Shares Electra Investment Trust PLC 1,612,000 12.4
Common Shares Fidelity Management & Research 1,678,000 12.9
Common Shares Directors and Officers as a group 1,733,000 13.4
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 OFIX. 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
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..................... 14 11 3/4
Third Quarter...................... 14 11 1/8
Fourth Quarter..................... 14 10 3/8
1999
First Quarter...................... 16 1/2 13
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.
Enforceability of Foreign Judgments
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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.
Item 8. SELECTED FINANCIAL DATA
The following selected consolidated financial data for the years ended
December 31, 1998, 1997, 1996, 1995 and 1994 have been derived from the
Company's audited Consolidated Financial Statements, which have been audited by
PricewaterhouseCoopers, independent auditors. The financial data for the years
ended December 31, 1998, 1997 and 1996 and at December 31, 1998, 1997 and 1996
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").
16
<PAGE>
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(In thousands, except margin, share and per share data)
Consolidated operating results
<S> <C> <C> <C> <C>
Net sales............................................ $104,065 $89,963 $77,221 $52,272 $ 39,634
Gross profit......................................... $74,572 $64,597 $53,770 $33,491 $ 26,543
Gross profit margin.................................. 72% 72% 70% 64% 67%
Total operating income (expense)Notes 1, 2 and 3 .... $11,917 $10,058 $4,530 $(16,872) $ 11,684
Net income (loss).................................... $14,276 $3,069 $(475) $(19,802) $ 9,062
Net income (loss) per Common Share (diluted)......... $1.07 $0.23 $(0.04) $(1.78) $ 0.84
Net income (loss) per Common Share (diluted)
(before non-recurring items)....................... $0.71 $0.28 $0.13 $0.40 $0.84
Consolidated financial position
(at year-end)
Total assets ........................................ $122,400 $112,948 $113,057 $103,958 $56,740
Total debt........................................... $9,585 $20,298 $21,495 $20,517 $2,686
Shareholders' equity................................. $78,736 $65,148 $63,910 $58,660 $43,570
Weighted average number of
Common Shares outstanding (diluted)................. 13,291,988 13,211,397 12,673,319 11,113,604 10,820,078
</TABLE>
- ---------------
Note 1: Operating income for 1996 is after restructuring charges of
$2,211,000 -See Note 2 to the Consolidated Financial Statements.
2: Operating income for 1997 is after restructuring charges of $1,010,000
- See Note 2 to the Consolidated Financial Statements.
3: Operating income for 1998 is after provision for impairment of
long-held assets of $3,295,000 - see Notes 2 and 8 to the
Consolidated Financial Statements.
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.
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,
-------------------------------------------
1998 1997 1996
% % %
Net sales 100 100 100
Cost of sales 28 28 30
-------------------------------------------
Gross profit 72 72 70
-------------------------------------------
Expenses
Sales and Marketing 36 36 38
General and Administrative(1) 15 18 17
Research and Development 6 5 6
-------------------------------------------
Operating income(2) 15 12 9
-------------------------------------------
Net income (3) 9 5 2
-------------------------------------------
(1) Includes amortization of intangible assets.
(2) In 1998, before provision for impairment of long-lived assets of $3.3
million. In 1997 and 1996, before restructuring charges of $1.0 and
$2.2 million, respectively - see Note 2 to the Consolidated Financial
Statements.
(3) In 1998, before provision for impairment of long-lived assets and net
sale proceeds of product license of $3.3 million and $8.1 million ,
respectively. In 1997 and 1996, before restructuring charges in 1997
of $1.0 and $2.2 million, respectively - see Note 2 to the
Consolidated Financial Statements.
17
<PAGE>
General
In June 1998, Orthofix Inc., following a review of its strategy for
the Ogden Anchor in the light of continued disappointing sales, determined that
it would not commit further resources to the development and sales and marketing
of the product. Orthofix Inc. accordingly re-evaluated the intangible assets in
its balance sheet relating to this product in accordance with the provisions of
SFAS 121. Based on this evaluation, Orthofix Inc. incurred a write-off of
approximately $3.3 million which is classified in operations.
In April 1998, Orthofix Inc. announced that it had entered into an
agreement to sell a license for BoneSource - Orthofix's calcium phosphate-based
bone cement - to Homedica Inc. The Company received gross proceeds under the
agreement of $12.5 million, of which $2.5 million represented advance royalties.
This resulted in a net gain of $9.7 million after costs of $300,000. At the same
time, Orthofix Inc., following a revaluation of the goodwill then carried in its
balance sheet relating to BoneSource using the undiscounted cashflow method,
recognized a write down of $1.6 million in respect of such goodwill. The
resulting net gain of $8.1 million on the sale of the license has been recorded
as a component of other income in the consolidated income statements for 1998.
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, resulting in a significant restructuring of
the Company's business in the United States. The Company's US 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 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 June 1, 1995, AME replaced EBI as the distributor of Orthofix's,
products in the United States upon expiration of EBI's distribution agreement on
May 31, 1995. During 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 plus interest from June 2, 1997. 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 was heard on
October 29, 1998 and the company has been advised to expect a decision in 1999.
The appeals process, however, may still take a year or more. See "Item 3- LEGAL
PROCEEDINGS".
The Company's financial condition, results of operations and cash
flows have not been significantly impacted by seasonality trends. Additionally,
the Company does not believe its operations will be significantly affected by
inflation or fluctuations in interest rates.
1998 compared to 1997
Net sales increased 16% to $104.1 million in 1998 compared to $90.0
million in 1997. Net sales in North America (primarily the United States) in
1998 represented 61% of net sales, or $63.6 million, compared with 60% of net
sales, or $53.6 million, in 1997, an increase of 19%. This increase was largely
due to the growth in net sales of PEMF products, Orthofix products and the A-V
Impulse System. Outside the United States, there was an increase in net sales of
11% in 1998 compared with 1997, caused mainly by growth in sales of the A-V
Impulse System and the Laryngeal Mask. Sales outside the United States would
have shown an increase of 14% if translated at 1997 exchange rates.
Sales and marketing expenses which represented 36% of net sales in
1998 and 36% in 1997, increased by $5.4 million in 1998 compared to 1997. In the
U.S., where sales increased by 19% in 1998 compared to 1997, sales and
18
<PAGE>
marketing expenses increased by 16% to $25.0 million from $21.5 million in 1997.
Outside the U.S., where sales increased by 13%, sales and marketing expenses
increased by 17% from $11.0 million to $12.9 million, largely as a result of
increased spending on fixation products and the Laryngeal Mask.
General and administrative expenses, which decreased by $400,000 from
$12.4 million in 1997 to $12.0 million in 1998, represented 12% of net sales in
1998 compared to 14% in 1997. General and administrative expenses for 1998 and
1997 included $369,000 and $2.0 million of litigation costs, respectively.
Exclusive of such costs, general and administrative expenses represented 11% and
12% of net sales in 1998 and 1997, respectively. See "Item 3. LEGAL
PROCEEDINGS."
Research and development expenses were $5.9 million in 1998 compared
to $4.8 million in 1997. The increase of $1.1 million resulted largely from the
inclusion in 1998 for a full year of the costs associated with the joint
facility set up by Orthofix Inc. dedicated to advanced research in orthopedic
applications and located at Wake Forest University's Bowman School of Medicine
in Winston-Salem, North Carolina.
Amortization of intangible assets was $3.6 million in 1998 compared to
$3.8 million in 1997. The decrease of $200,000 resulted principally from
decreased amortization consequent upon the write off in the second quarter of
goodwill relating to the BoneSource material, following the licensing deal with
Howmedica, and of the intangible asset relating to the Ogden Anchor. See Note 2
to the Consolidated Financial Statements.
Net other expense decreased by $700,000 from $2.0 million in 1997 to
$1.3 million in 1998. This decrease resulted principally from a reduction in net
interest payable in 1998 of $1.0 million following reduced borrowings resulting
from improved operating cashflows and the consideration received from the
BoneSource licensing agreement. The reduction in net interest payable was offset
by an increase in foreign exchange losses in 1998 over 1997 of $426,000
resulting from the translation of a loan note between group companies
denominated in Italian Lira.
In 1998 and 1997, the effective rate of income tax, excluding the net
effect of non-recurring items, was 33% and 45%, respectively. The reasons for
the reduced tax rate in 1998 resulted from a reduction in non-deductible
litigation expenses of $2.0 million, and a reduction by the Italian Government
of statutory income tax rates from 53% to 42%, effective January 1, 1998. 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% in 1997. Based on the weight of
the positive evidence from U.S. operations and the expectation of future taxable
income in the U.S., the U.S. valuation allowance was released to income in 1998.
Net income for 1998 (before the net effect of non-recurring items of
$4.8 million) was $9.5 million compared to $3.7 million (before the net effect
of non-recurring items of $626,000) in 1997 giving diluted earnings per share of
$0.71 on the basis of diluted average shares outstanding of 13.3 million in 1998
compared with diluted earnings per share of $0.28 on the basis of diluted
average shares outstanding of 13.2 million in 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.
19
<PAGE>
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.
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 Notes 8 and 9 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. 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.
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 42%, effective
January 1, 1998.
Net income for 1997 was $3.7 million (before the effect of
non-recurring items) compared to $1.7 million (before the effect of
non-recurring items) in 1996 giving diluted earnings per share of $0.28 on the
basis 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.
Liquidity and capital resources
Cash and cash equivalents at December 31, 1998 were $7.0 million
compared to $4.1 million at December 31, 1997, an increase of $2.9 million.
Net cash provided by operating activities increased from $4.6 million
in 1997 to $6.0 million in 1998, an increase of $1.4 million. Cash from
operating activities in 1998 was provided by net income, after adjustments for
non-cash items such as depreciation, amortization and provisions, of $16.1
million. The Company invested a net $10.1 million of this sum in working capital
resulting in total net cash provided by operating activities of $6.0 million. Of
the net $10.1 million invested in working capital, $7.5 million was used for
trade accounts receivable and $3.6 million was used for inventories offset by
$1.2 million provided by trade accounts payable.
Net cash provided by investing activities was $8.4 million in 1998
compared to net cash used of $3.3 million in 1997. The Company realized $12.2
million, net of expenses of $300,000, from the sale of the BoneSource license
and used $2.9 million to purchase tangible assets, $499,000 to purchase
intangible assets, principally patents, and $437,000 for investments.
Net cash used for financing activities was $ 11.7 million in 1998
compared to $816,000 in 1997. Cash used by financing activities in 1998
consisted principally of repayment of long-term debt of $11.0 million offset by
increased borrowings under short-term lines of credit of $895,000. The Company
also used $1.9 million to repurchase common shares for Treasury.
20
<PAGE>
The Company believes that its current cash balances together with its
projected cash flows, 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."
The Company has an $18 million credit arrangement comprising a $15
million term note ("Term Note") and a $3 million revolving credit facility (the
"Revolver"). 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 pursuant to the note payable to the bank
reside at the Company's reporting level, with other restrictive covenants
residing at 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, 1998, the amounts were $12.2
million and $30.6 million, respectively. These restrictions are not expected to
have an impact on the Company's ability to meet its obligations.
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.
Market risk
In the ordinary course of business, the Company is exposed to the
impact of changes in interest rates and foreign currency fluctuations. The
Company's objective is to limit the impact of such movements on earnings and
cash flows. In order to achieve this objective the Company seeks to balance its
non-dollar income and expenditure. The Company does not use derivatives to hedge
foreign exchange exposure. The Company's interest exposure is primarily related
to $5 million of fixed rate loan note with a group company denominated in
Italian Lira. A 10% unfavorable movement in exchange rates would result in a
$515,000 loss on exchange upon conversion of this debt
Year 2000 Issues
Many computer systems and software products accept only two digit
entries in the date code field. These date code fields will need to accept four
digit entries to distinguish 21st century dates from 20th century dates. As a
result, computer systems and software used by many companies will need to be
upgraded to comply with this "Year 2000" requirement. Systems that do not
properly recognize such information could generate erroneous data or fail.
Significant uncertainty exists in the software industry concerning the potential
effects associated with non-compliance.
To minimize the risks associated with the millennium date change, the
Company is actively pursuing a comprehensive Year 2000 compliance program to
ensure that its computer, network and facilities infrastructure are ready for
that date change. The Company has set up a Year 2000 project closely supervised
by executive management to manage the compliance program and ensure business
continuity. The program includes assessment, implementation, validation testing
and contingency planning. Senior members of staff who are directly accountable
to their respective management boards are leading the project. The Company does
not expect the Year 2000 project to defer other significant Information
Technology projects.
The Company has completed a detailed risk assessment and developed a
program methodology and risk management plan to ensure that each aspect of its
global operations potentially affected by the millennium date change is
addressed and a program of corrective measures is implemented and thoroughly
tested. The Company recognizes that
21
<PAGE>
the risk to operations may be material and has, accordingly, focused significant
efforts in the areas of software testing, suppliers, customers and contingency
planning.
The software and hardware used internally by the Company has been
updated and replaced to comply with Year 2000 requirements, and the Company's
principle suppliers and customers have advised us that they are doing the same.
However, no assurances can be given that the Company will not experience
serious, unanticipated negative consequences, including material costs caused by
undetected errors or defects in the technology used in its internal systems. The
occurrence of any of the foregoing could have a material adverse effect on the
Company's business, operating results or financial condition.
The Company has tested software obtained from third parties that is
incorporated into its operations, and is seeking assurances from vendors that
licensed software is Year 2000 compliant. Despite testing and assurances from
developers of these products, they may contain undetected errors or defects
associated with Year 2000 date functions. Unknown errors or defects may result
in delay or loss of revenue, diversion of development resources, damage to the
Company's reputation or increased service and warranty costs. The occurrence of
any of the foregoing could materially adversely affect the Company's business,
operating results, or financial condition.
The possible consequences of the Company or its key business partners
not being fully Year 2000 compliant by January 1, 2000 include, among other
things, delays in the delivery of goods, delays in the receipt of supplies or
invoice and collection errors. The Company's business and results operations
could be materially adversely affected by a temporary inability to conduct its
business in the ordinary course for a period of time after January 1, 2000.
However, the Company believes that its Year 2000 readiness program, including
its contingency planning discussed below, should significantly reduce the
adverse effect any such disruption may have.
The Company is developing contingency plans which will be implemented
as necessary to identify and correct any Year 2000 problems which might arise
and expects to complete these plans by June 30, 1999. Depending on the nature of
the problem, these plans could include the accelerated replacement of affected
equipment or software, use of backup equipment or software and increased work
hours for Company personnel or the use of contract personnel to provide manual
solutions. Implementation of any contingency plans could have a material adverse
impact on the Company's financial condition and results of operations.
The Company estimates that the aggregate cost of addressing these Year
2000 issues was approximately $350,000 to December 31, 1998 and will be
approximately $150,000 in the year to December 31, 1999. The Company is
expensing these costs as they are incurred and is funding them from operating
cash flow. Of the costs incurred to date, approximately $200,000 relate to
replacing problem hardware, $125,000 relate to replacing problem software and
$25,000 relate to repairing problem software.
The Year 2000 project is an ongoing process and the estimates of costs
and completion dates for various components of the Year 2000 readiness program
described above are subject to change as work continues.
The discussion of the Company's efforts, and management's
expectations, relating to Year 2000 compliance are forward-looking statements.
The Company's ability to achieve Year 2000 compliance and the level of
associated incremental costs could be adversely impacted by, among other things,
the availability and cost of programming and testing resources, vendor's ability
to modify proprietary software and unanticipated problems identified in the
ongoing compliance review.
Euro Conversion
As part of the European Economic and Monetary Union (EMU), a single
currency (the "Euro") will replace the national currencies of most European
countries in which we conduct business. The conversion rates between the Euro
and the participating nation's currencies was fixed irrevocably as of December
31, 1998, with the participating national currencies being removed from
circulation between January 1 and June 30, 2002 and replaced by Euro notes and
coins.
22
<PAGE>
During the "transition Period" from January 1, 1999 through December 31, 2001,
public and private entities as well as individuals may pay for goods and
services using checks, drafts or wire transfers denominated in Euro or the
participating country's national currency.
Under the regulations governing the transition to a single currency,
there is a "no compulsion, no prohibition" rule which states that no one is
obliged to use the Euro until the notes and coins have been introduced on
January 1, 2002. The migration to Euro compliant systems is a key IT strategy.
The Company believes that it has been Euro compliant in the affected countries
(that is, able to receive Euro-denominated payments and able to invoice in Euros
as requested by vendors and suppliers, respectively) since January 1, 1999. It
expects to complete full conversion of all affected country operations to the
Euro by the time national currencies are removed from circulation. The Company
does not expect the cost of software and business process conversion to be
material. In addition, it does not expect conversion to the Euro to have
significant impact on its competitive strategies in the effected countries, nor
does it expect the Euro to have a significant effect on its foreign exchange
hedging policies.
Recently Issued Accounting Standards
During 1998, various new accounting pronouncements were issued which
may impact the Company's financial statements. (See Note 1 to the Consolidated
financial statements)
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 61 Chairman of the Board of Directors
Edgar Wallner 62 President, Chief Executive Officer and
Director
Peter Clarke 57 Executive Vice President, Chief Financial
Officer, Secretary and Director
Charles Federico 50 Senior Vice President, President, North
America and Director
Tom Hay 53 Senior Vice President and President,
International Division
Vittorio Pietropoli 58 Senior Vice President and Director
Robert Sentance 52 Controller
Jerry Benjamin (1)(2) 58 Director
Alberto d'Abreu de Paulo 60 Director
Frederik Hartsuiker 58 Director
Peter Hewett (1) 63 Deputy Chairman and Director
Julian Knott (1)(2) 48 Director
John Littlechild 47 Director
James Gero 54 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.
23
<PAGE>
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
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. 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. Hay became President, International Division, in December 1998.
Before joining Orthofix, Mr. Hay was with C R Bard Inc. for eleven years,
ultimately as Managing Director of C R Bard Ltd. and Vice President, C R Bard,
Northern Europe. Prior to this, he spent fourteen years with Baxter Healthcare.
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. 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,
24
<PAGE>
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
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
Avant Immunotherapeutics, 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., Drew Industries Inc., and Chairman of
Thayer Aerospace.
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 1998, an aggregate amount of approximately $2.3 million was paid
by Orthofix to its directors and executive officers as a group (14 persons) for
services rendered in all capacities. This amount includes $21,000 paid by
Orthofix in 1998 to provide pension, retirement or similar benefits for all
directors and officers. Orthofix anticipates that for 1999 the aggregate
compensation to be paid to its directors and executive officers as a group (14
persons) will be approximately $2.9 million.
No director or executive officer of the Company has an employment
contract that binds the Company for a notice 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
held by directors and officers as a group as of April 30, 1999 was 1,994,750.
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 1,509,501 Common Shares
25
<PAGE>
(representing approximately 11.6% of the Common Shares outstanding) at prices
ranging from $1.43 to $13.50 per Common Share. Of these, options for 688,626
Common Shares have been exercised or cancelled as of April 30, 1999. Option
grants under the Staff Plan were made in 1988, 1989, 1990, 1991, 1995, 1996,
1997 and 1998. 156,275 Common Shares remain available for grant under this Plan.
Options under the Staff Plan are currently exercisable with respect to
41% 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 generally expire ten years after date of grant, 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 1,945,000 Common Shares have been
reserved for issuance under the Executive Plan. The Executive Plan is
administered by the Board of Directors. No Common Shares remain available for
future grants under the Executive Plan.
Options covering an aggregate of 1,945,000 Common Shares have been
awarded by the Board of Directors to executive and non-executive officers 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.
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 $23.07 per Common Share at prices ranging from $15.52 to
$24.57 per Common Share; options under the 1990 Plan have a weighted average
exercise price of approximately $18.93 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, 4,380
options are outstanding under the 1983 Plan, all of which are exercisable, and
34,764 options are outstanding under the 1990 Plan, all of which are
exercisable.
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 April 30, 1999, AME Warrants to purchase 115,994
Common
26
<PAGE>
Shares were currently exercisable, and expire on various dates through December
2003. The exercise price for the AME Warrants ranges from $18.10 to $30.60 per
Common Share.
Item 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS
Certain directors of Orthofix own beneficial interests in LMA
International S.A. ("LMA"). In 1992, LMA, which owns the distribution rights in
Italy to the Laryngeal Mask (used to administer anaesthesia) produced by The
Laryngeal Mask Company Ltd., 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. In exchange for the award of distribution
rights to DMO, LMA 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 30% 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, all of which 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. On April 22, 1998,
Intavent Ltd converted the loan note into shares in Intavent Orthofix Ltd,
thereby increasing its equity interest in the latter to 48%. In the event that
an offer is accepted by shareholders to sell more than 50% of the outstanding
Intavent Orthofix shares, Intavent Limited may acquire an additional 200 shares
of Intavent Orthofix from Orthofix for approximately $390 per share, bringing
its interest in Intavent Orthofix to 50%.
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.
Inter Medical Supplies, a wholly owned subsidiary which manufactures and
distributes Orthofix products, rents a facility from LMA under a two year lease
which started in 1997. The annual rent paid to LMA is $60,000. During 1998,
Inter Medical Supplies, paid LMA $90,000 as a contribution towards the setting
up cost of this facility.
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.
27
<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, 1998 and 1997.
Consolidated Statements of Operations for the three years ended
December 31, 1998.
Consolidated Statements of Changes in Shareholders' Equity for the
three years ended December 31, 1998.
Consolidated Statements of Cash Flows for the three years ended
December 31, 1998.
Notes to Consolidated Financial Statements.
Schedule 1 - Condensed Financial Information of Registrant
Schedule 2 - Valuation and Qualifying Accounts
28
<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.
29
<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:
--------------------------------------
Name: Peter Clarke
Title: Secretary
Date: 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, 1998 and 1997 F-3
Consolidated statements of operations for the three years ended
December 31, 1998 F-5
Consolidated statements of changes in shareholders' equity for the
three years ended December 31, 1998 F-6
Consolidated statements of cash flows for the three years ended
December 31, 1998 F-7
Notes to the consolidated financial statements F-9
Report of Independent Accountants on Financial Statement Schedules S-1
Schedule 1 - condensed financial information of registrant S-2
Schedule 2 - valuation and qualifying accounts S-6
F- 1
<PAGE>
ORTHOFIX INTERNATIONAL N.V.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Orthofix International N.V.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, changes in shareholders' equity and cash
flows present fairly, in all material respects, the financial position of
Orthofix International N.V. and its subsidiaries (the "Company") at December 31,
1998 and 1997, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
London, England
March 2, 1999
F-2
<PAGE>
<TABLE>
<CAPTION>
ORTHOFIX INTERNATIONAL N.V.
CONSOLIDATED BALANCE SHEETS
as of December 31, 1998 and 1997
December 31
(U.S. Dollars, in thousands except share and per share data) 1998 1997
- ------------------------------------------------------------ ---- ----
Assets
<S> <C> <C>
Current assets:
Cash and cash equivalents..................................................... $ 6,970 $ 4,131
Restricted cash............................................................... 839 780
Trade accounts receivable, less allowance for doubtful accounts of
$4,516 and $4,199 at December 31, 1998 and 1997, respectively................. 32,713 27,046
Inventories..................................................................... 15,839 11,874
Deferred income taxes........................................................... 3,106 -
Other current assets............................................................ 4,030 4,632
------- -------
Total current assets.......................................................... 63,497 48,463
Investments 437 -
Property, plant and equipment, net.............................................. 9,056 8,951
Patents and other intangible assets, net........................................ 2,448 6,042
Goodwill, net................................................................... 45,067 49,492
Deferred income taxes - non-current............................................. 1,895 -
------ -------
Total assets.................................................................. $ 122,400 $ 112,948
====== ======
</TABLE>
The accompanying notes form an integral part of these consolidated financial
statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
ORTHOFIX INTERNATIONAL N.V.
CONSOLIDATED BALANCE SHEETS (continued)
as of December 31, 1998 and 1997
December 31
(U.S. Dollars, in thousands except share and per share data) 1998 1997
- ------------------------------------------------------------ ---- ----
<S> <C> <C>
Liabilities and shareholders' equity
Current liabilities:
Bank borrowings................................................. $ 3,073 $ 7,309
Current portion of long-term debt............................... 2,344 3,550
Trade accounts payable.......................................... 7,777 6,259
Other current liabilities....................................... 12,854 13,195
--------- ----------
Total current liabilities....................................... 26,048 30,313
Long-term debt.................................................... 4,168 9,439
Deferred income taxes............................................. 1,516 1,313
Deferred income................................................... 2,500 -
Long-term rental liabilities, net................................. 1,085 1,296
Deferred compensation............................................. 850 724
Minority interests................................................ 7,497 4,715
--------- ----------
Total liabilities............................................... 43,664 47,800
--------- ----------
Commitments and contingencies (notes 14 and 18)
Shareholders' equity
Common shares $0.10 par value
Authorized: 30,000,000 (1997: 30,000,000)
Issued: 13,271,898 (1997: 13,120,040)........... 1,327 1,312
Outstanding 12,964,055 (1997: 12,959,700)
Additional paid-in capital................................................... 63,176 63,332
Less: 307,840 Treasury shares, at cost (1997: 160,340)..................... (3,303) (1,387)
--------- ----------
61,200 63,257
Retained earnings............................................................ 18,589 4,313
Accumulated other comprehensive income....................................... (1,053) (2,422)
--------- ----------
Total shareholders' equity..................................................... 78,736 65,148
--------- ----------
Total liabilities and shareholders' equity..................................... $ 122,400 $ 112,948
========= ==========
</TABLE>
The accompanying notes form an integral part of these consolidated financial
statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
ORTHOFIX INTERNATIONAL N.V.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31, 1998, 1997 and 1996
(U.S. Dollars, in thousands, except share and per share data) 1998 1997 1996
- ------------------------------------------------------------- ---- ---- ----
<S> <C> <C> <C>
Net sales...................................................... $ 104,065 $ 89,963 $ 77,221
Cost of sales.................................................. 29,493 25,366 23,451
------- ------- -------
Gross profit................................................... 74,572 64,597 53,770
Operating expenses
Sales and marketing........................................ 37,949 32,538 29,025
General and administrative................................. 11,987 12,365 9,346
Research and development................................... 5,875 4,840 4,883
Amortization of intangible assets.......................... 3,549 3,786 3,775
Impairment of long-lived assets............................ 3,295 - -
Restructuring charges...................................... - 1,010 2,211
--------- ------- -------
62,655 54,539 49,240
------ ------ ------
Total operating income .................................... 11,917 10,058 4,530
Other income
Interest income............................................ 326 117 238
Interest expense on bank loans............................. (1,135) (1,962) (1,765)
Other (expense) income..................................... (502) (113) 220
------- ------- -------
Net other expense.......................................... (1,311) (1,958) (1,307)
Gain on sale of product license................................ 8,100 - -
------- --------- --------
Net income before income taxes and minority interests...... 18,706 8,100 3,223
Income tax expense............................................. (2,687) (4,081) (2,785)
------- ------- -------
Net income before minority interests....................... 16,019 4,019 438
Minority interests............................................. (1,743) (950) (913)
------- ------- -------
Net income (loss).............................................. $14,276 $ 3,069 $ (475)
====== ====== ======
Net income (loss) per common share - basic..................... $ 1.10 $ 0.24 $(0.04)
====== ====== ======
Net income (loss) per common share - diluted................... $ 1.07 $ 0.23 $(0.04)
====== ====== ======
Weighted average number of common shares - basic............... 12,966,830 12,932,807 12,673,319
========== ========== ==========
Weighted average number of common shares - diluted............. 13,291,988 13,211,397 12,673,319
========== ========== ==========
</TABLE>
The accompanying notes form an integral part of these consolidated financial
statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
ORTHOFIX INTERNATIONAL N.V.
CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY
For the years ended December 31, 1998, 1997 and 1996
Number of Accumulated
Common Additional Treasury other Total
(U.S. Dollars, in thousands, shares Common paid-in shares Retained comprehensive shareholders'
except share data) Outstanding Shares capital (at cost) earnings income equity
- ------------------ ----------- ------ ------- --------- -------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
At December 31, 1995............... 12,477,455 1,264 58,777 (1,387) 1,719 (1,713) 58,660
410,253 common shares issued....... 410,253 41 4,207 - - - 4,248
Net loss........................... - - - - (475) - (475)
Other comprehensive income
Translation adjustment........ - - - - - 1,477 1,477
----------
Comprehensive income............... 1,002
------------- --------- ----------- ------------- ----------- -------------- --------------
At December 31, 1996............... 12,887,708 1,305 62,984 (1,387) 1,244 (236) 63,910
71,992 common shares issued........ 71,992 7 348 - - - 355
Net income......................... - - - - 3,069 - 3,069
Other comprehensive income
Translation adjustment........ - - - - - (2,186) (2,186)
-----------
Comprehensive income............... 883
------------- --------- ----------- ------------- ----------- -------------- --------------
At December 31, 1997............... 12,959,700 1,312 63,332 (1,387) 4,313 (2,422) 65,148
151,855 common shares issued....... 151,855 15 525 - - - 540
Repurchase of warrants............. - - (174) - - - (174)
Conversion of loan note............ - - (507) - - - (507)
147,500 common shares
purchased for treasury............ (147,500) - - (1,916) - - (1,916)
Net income......................... - - - - 14,276 14,276
Other comprehensive income
Translation adjustment - - - - - 1,369 1,369
----------
Comprehensive income............... 15,645
------------- --------- ----------- ------------- ----------- -------------- --------------
At December 31, 1998............... 12,964,055 1,327 63,176 (3,303) 18,589 (1,053) 78,736
========= ===== ====== ====== ====== ====== ======
</TABLE>
The accompanying notes form an integral part of these consolidated financial
statements.
F-6
<PAGE>
<TABLE>
<CAPTION>
ORTHOFIX INTERNATIONAL N.V.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1998, 1997 and 1996
(U.S. Dollars, in thousands) 1998 1997 1996
- ---------------------------- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................................................. $ 14,276 $ 3,069 $ (475)
------- ------- --------
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization..................................... 6,521 6,493 6,169
Provision for losses on trade accounts receivable................. 2,719 2,336 1,863
Provision for restructuring costs................................. - - 2,072
Loss on sale of fixed assets...................................... 428 41 132
Gain on sale of product license................................... (8,100) - -
Loss on impairment of long-lived assets........................... 3,295 - -
Deferred taxes.................................................... (5,001) (205) 311
Minority interest in net income of consolidated subsidiaries...... 1,743 950 913
Other............................................................. 261 144 137
Changes in operating assets and liabilities:
Increase in accounts receivable................................... (7,513) (6,964) (5,487)
Increase in inventories........................................... (3,599) (531) (2,442)
(Increase) decrease in other current assets....................... (7) (59) 1,409
Increase in trade accounts payable................................ 1,193 492 203
Decrease in other current liabilities............................. (188) (1,119) (2,653)
------- ------- -------
Total adjustments..................................................... (8,248) 1,578 2,627
------- ------- -------
Net cash provided by operating activities............................. 6,028 4,647 2,152
------ ------ ------
Cash flows from investing activities:
Investments....................................................... (437) - -
Acquisition of subsidiaries, net of cash acquired................. - - (487)
Capital expenditure............................................... (3,401) (3,394) (3,237)
Proceeds from sale of equipment................................... 63 51 53
Proceeds from sale of product license, net of
expenses of $300................................................. 12,200 - -
------- --------- --------
Net cash provided by (used in) investing activities................... $ 8,425 $ (3,343) $ (3,671)
------- ---------- ----------
</TABLE>
The accompanying notes form an integral part of these consolidated financial
statements.
F-7
<PAGE>
<TABLE>
<CAPTION>
ORTHOFIX INTERNATIONAL N.V.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1998, 1997 and 1996
(U.S. Dollars, in thousands 1998 1997 1996
- --------------------------- ---- ---- ----
<S> <C> <C> <C>
Cash flows from financing activities:
Net proceeds from issue of common shares......................... $ 540 $ 355 $ 216
Acquisition of Treasury shares................................... (1,916) - -
Repurchase of warrants........................................... (174) - -
Repayment of loans............................................... (11,031) (3,444) (4,735)
Proceeds from borrowings......................................... 895 3,053 2,356
Restricted cash.................................................. - (780) 214
--------- ------- -------
Net cash used in financing activities................................ (11,686) (816) (1,949)
-------- ------- -------
Effect of exchange rates changes on cash............................. 72 39 26
-------- --------- --------
Net (decrease) increase in cash and cash equivalents................. 2,839 527 (3,442)
Cash and cash equivalents at the beginning of the year............... 4,131 3,604 7,046
------- ------- -------
Cash and cash equivalents at the end of the year..................... $ 6,970 $ 4,131 $ 3,604
======= ======= =======
Supplemental disclosure of cash flow information Cash paid during
the year for:
Interest........................................................... $ 1,206 $ 1,625 $ 1,333
Income taxes....................................................... $ 8,082 $ 3,431 $ 3,912
</TABLE>
Supplemental schedule of non-cash investing and financing activities
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:
Issuance of equity $ 4,032
Assumption of debt 3,029
Expenses related 81
----------
Goodwill recognized $ 7,142
----------
On April 22, 1998 the loan note of $625,000 issued by Intavent Orthofix Limited
in connection with its acquisition of Colgate Medical Limited was converted by
the loan note holder into shares in Intavent Orthofix Limited.
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 its 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' the principal ones of which are as follows:
Orthofix Inc. (U.S.A)
Orthofix S.r.l. (Italy)
Inter Medical Supplies Limited (Cyprus) Novamedix Services Limited
(United Kingdom) Orthosonics Limited (United Kingdom) 70% Intavent
Orthofix Limited (United Kingdom) 52% 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 U.S. dollars and accounting for foreign currency
translations. Under this statement, all balance sheet accounts, except
shareholders' equity and investments, 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 other
income (expense). Gains and losses resulting from the translation of
foreign currency financial statements are accumulated directly in the
accumulated other comprehensive income 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) Market risk
In the ordinary course of business, the Company is exposed to the
impact of changes in interest rates and foreign currency fluctuations.
The Company's objective is to limit the impact of such movements on
earnings and cash flows. In order to achieve this objective the
Company seeks to balance its non-dollar income and expenditure. The
Company does not use derivatives to hedge foreign exchange exposure.
The Company's exchange rate exposure is primarily related to $5
million of fixed rate loan note with a group company denominated in
Italian Lira. A 10% unfavourable movement in exchange rates would
result in a $515,000 loss on exchange upon conversion of this debt.
(f) 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 useful lives of the
assets which are as follows:
Years
-----
Buildings 25 to 33
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.
(h) 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. 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.
F-10
<PAGE>
ORTHOFIX INTERNATIONAL N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
1 Accounting policies (continued)
(i) Long-Lived Assets
In accordance with the provisions of SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of " the Company reviews
long-lived assets and certain identifiable intangibles held
and used for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset
may not be recoverable. In general, this statement requires
recognition of an impairment loss when the sum of
undiscounted expected future cash flow is less than the
carrying amount of such assets. The measurement for such
impairment loss is then based on the fair value of the asset.
(See Note 2).
(j) Revenue recognition
Revenues are recognized as income in the period in which the products
are delivered. Revenues 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.
(j) Research and development costs
Expenditures for research and development are expensed as they are
incurred.
(k) 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 enacted by law 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.
(l) 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.
F-11
<PAGE>
ORTHOFIX INTERNATIONAL N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
1 Accounting policies (continued)
(m) 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 20).
Differences between basic and diluted shares result solely from the
assumed exercise of certain outstanding share options.
(n) 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.
(o) 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.
(p) 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.
(q) Reclassifications
Certain 1997 and 1996 amounts have been reclassified to conform to the
1998 presentation.
(r) Acquisition of Treasury stock
Treasury stock is acquired at cost. It is the Company's policy, where
appropriate, to buy in its own shares in order to enhance shareholder
value.
F-12
<PAGE>
ORTHOFIX INTERNATIONAL N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
1 Accounting policies (continued)
(s) Recently issued Accounting Standards
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued SOP 98-1, "Accounting for the Costs of Computer
Software Developed Or Obtained For Internal Use." SOP 98-1 provides
guidance on costs to be capitalized and when capitalization of such
costs should commence. SOP 98-1 applies to costs incurred after
adoption, including costs for software projects that are in progress
at the time of the adoption. The Company has evaluated the impact of
this SOP on its financial position and results of operations and will
implement SOP 98-1 for fiscal years beginning after December 15, 1998.
The adoption of this pronouncement will not have a material effect on
the Company's financial statements.
In April 1998, the AICPA issued SOP 98-5, "Accounting for the Costs of
Start-up Activities". SOP 98-5 requires all costs of start-up
activities to be expensed as incurred. SOP 98-5 is effective for
financial statements for years beginning after December 15, 1998. The
adoption of this pronouncement will not have a material effect on the
Company's financial statements.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Standard ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities", which establishes
accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred as derivatives), and for hedging activities.
This statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. In the opinion of management SFAS No.
133 will not have a significant impact on the results of operations of
the Company.
F- 13
<PAGE>
ORTHOFIX INTERNATIONAL N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
2 Restructuring and impairment of assets
Restructuring
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 related to rental liabilities. The current portions of these rental
liabilities are $294,000, $263,000 and $201,000 and the long-term portions are
$1,085,000, $1,296,000 and $1,553,000 as of December 31, 1998, 1997 and 1996
respectively.
Additionally, further restructuring charges, covering severance payments of
approximately $1.0 million, were incurred in the first quarter of 1997. The
Company's liabilities for these severance payments were approximately $300,000
as of December 31, 1998 and 1997. There were no additional restructuring charges
in 1998.
Impairment of long-lived assets
During the year, the Company re-evaluated the recoverability of certain goodwill
and intangible asset balances at Orthofix Inc. in accordance with its policy on
long-lived assets (see note 1).
In April 1998, Orthofix Inc. entered into an agreement with Howmedica Inc. to
modify the license agreement for BoneSource. At the same time, Orthofix Inc.
re-evaluated the goodwill on its balance sheet relating to BoneSource and
recognized a write down of $1.6 million in respect of such goodwill. The write
down became necessary based on the new terms of the license agreement with
Howmedica Inc. The write down of $1.6 million is classified within other income
as an offset to the $9.7 million gain on sale of product license. The carrying
value of BoneSource goodwill at December 31, 1998 is $4.7 million.
o In June 1998, the Company, following a review of its strategy
for the Ogden Anchor in the light of continued disappointing
sales and changing market specifications for the Ogden Anchor
product, determined that it would not commit further
resources to the development and sales and marketing of the
product. Orthofix Inc. re-evaluated the intangible assets in
its balance sheet relating to its Ogden Anchor product in
accordance with the provisions of SFAS 121. Based on this
evaluation Orthofix Inc. incurred a write-off of
approximately $3.3 million which is classified in operations.
3 Restricted cash
December 31
-----------
(In thousands) 1998 1997
- -------------- ---- ----
Restricted cash............................. $ 839 $ 780
===== =====
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 18).
F-14
<PAGE>
ORTHOFIX INTERNATIONAL N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
4 Inventories
December 31
-----------
(In thousands) 1998 1997
- -------------- ---- ----
Raw materials.................................... $ 3,215 $ 1,342
Work-in-progress................................. 2,227 1,680
Finished goods................................... 6,903 6,906
Field inventory.................................. 4,971 7,373
Less reserve for refurbishment, obsolescence
and lost field units........................... (1,477) (5,427)
-------- --------
$15,839 $11,874
======= =======
5 Other current assets
December 31
-----------
(In thousands) 1998 1997
- -------------- ---- ----
Refundable sales tax............................. $ 812 $ 908
Prepaid income taxes............................. 1,811 1,954
Prepayments...................................... 1,220 1,343
Other receivable................................. 187 427
-------- -------
$4,030 $4,632
====== ======
6 Investment in and advances to affiliate
During 1998, the Company acquired 47.5% shareholdings in Promeca S.A., Mexico
and Orthofix do Brasil, for $80,000 and $238,000, respectively. In addition, a
minority interest was acquired in Neomedics Inc., for $119,000.
7 Property, plant and equipment
December 31
-----------
(In thousands) 1998 1997
- -------------- ---- ----
Cost......................................... $ 3,225 $ 3,101
Building..................................... 10,650 8,946
Plant and equipment.......................... 4,270 3,321
-------- -------
18,145 15,368
Accumulated depreciation..................... 9,089 6,417
------- -------
$9,056 $8,951
====== ======
At December 31, 1998, 1997 and 1996, the Term Note and Revolver described in
note 12 are collateralized by substantially all of the assets of Orthofix Inc.
and are guaranteed by the Company.
Depreciation expenses for 1998, 1997 and 1996 were $2,972,000, $2,691,000 and
$2,393,000 respectively.
F-15
<PAGE>
ORTHOFIX INTERNATIONAL N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
8 Patents and other intangible assets
December 31
-----------
(In thousands) 1998 1997
- -------------- ---- ----
Cost
Patents........................................ $13,698 $12,600
Other.......................................... 173 4,700
-------- --------
13,871 17,300
Accumulated amortization
Patents........................................ 11,391 10,275
Other.......................................... 32 983
-------- ---------
$ 2,448 $ 6,042
======= =======
During the year, the Company wrote off a net book value amount of approximately
$3.3 million of other intangible assets (see note 2).
9 Goodwill
December 31
-----------
(In thousands) 1998 1997
- -------------- ---- ----
Cost.......................................... $ 57,343 $ 58,762
Accumulated amortisation...................... 12,276 9,270
------- --------
$ 45,067 $ 49,492
======= ========
During the year, the Company wrote down approximately $1.6 million of goodwill
related to one of its product lines (see note 2).
10 Bank borrowings
December 31
-----------
(In thousands) 1998 1997
- -------------- ---- ----
Borrowings under lines of credit............... $ 3,073 $ 5,309
Borrowings under revolving credit facility..... - 2,000
-------- --------
$ 3,073 $ 7,309
======= =======
Weighted average interest at year end: 1998 1997
---- ----
% %
Bank borrowings...................... 7.84 8.62
Current maturity long-term debt...... 7.48 7.68
F-16
<PAGE>
ORTHOFIX INTERNATIONAL N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
10 Bank borrowings ( continued)
Borrowings under lines of credit consist of borrowings from the Company's
Italian subsidiaries. Of the $3.1 million of borrowings under lines of credit,
$2.3 million is collaterized by the net assets of Orthofix Srl. In addition to
the $3 million revolving credit facility described in note 12, of which $0
million had been drawn down
At December 31, 1998 (1997: $2.0 million), the Company had unused available
lines of credit of $2.8 million (1997: $368,000). 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.
11 Other current liabilities
December 31
-----------
(In thousands) 1998 1997
- -------------- ---- ----
Accrued expenses.......................... $ 5,423 $ 5,777
Salaried and related taxes payable........ 2,960 2,520
Other payables............................ 2,927 3,053
Income taxes payable...................... 1,492 1,733
Deferred income taxes..................... 52 112
---------- ---------
$12,854 $13,195
======= =======
12 Long-term debt
<TABLE>
<CAPTION>
December 31
-----------
(In thousands) 1998 1997
- -------------- ---- ----
<S> <C> <C>
Note payable to bank.............................................................. $ 3,074 $ 8,211
Long-term obligations, net of an unamortized discount of $788
(1997:$832)....................................................................... 3,285 3,996
Loan repayable in instalments commencing in 1996
The original interest rate of 2.2% increased to 8.76% in 1996..................... 153 157
Loan note in favor of related party (see note 17) repayable at part on January
1, 2008. The interest rate at December 31, 1997 was 7.75%........................ - 625
----------- ---------
6,512 12,989
Less current portion.............................................................. (2,344) (3,550)
--------- ---------
$ 4,168 $ 9,439
======= =======
</TABLE>
Note payable to bank consists of an $18 million credit arrangement comprising a
$15 million term note (the "Term Note") and a $3 million revolving credit
facility (the "Revolver"). The Term Note bears interest at either the current
prime rate 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.
Borrowings of $3,074,000 and $8,211,000 under the Term Note bearing interest at
6.94% and 7.44% were outstanding as of December 31, 1998 and 1997, respectively.
Annual maturities of the Term Note are due in quarterly instalments.
F-17
<PAGE>
ORTHOFIX INTERNATIONAL N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
12 Long-term debt (continued)
As of December 31, 1998, there were $0 in borrowings under the revolving credit
facility. 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 December 31, 2000.
Certain restrictive covenants pursuant to the note payable to the bank 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, 1998 the amounts were $12.2 million
(1997: $11.3 million) and $30.6 million (1997: $28.2 million), respectively.
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, fixed charge
coverage requirements and current ratio requirements. Since the amendment, the
Company has been in compliance with the terms of the credit arrangement.
Long-term obligations include a note for $2.6 million (1997: $3.3 million)
issued in connection with the acquisition of Osteogenics in December 1994. These
obligations have aggregate annual maturities of approximately $800,000 in 1999
and $500,000 thereafter through 2003 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 for $1,480,000. This loan note is
redeemable by December 31, 2010 if not redeemed earlier upon the occurrence of
certain conditions and has been discounted at 6.75%. The carrying value at
December 31, 1998 is $692,000, net of unamortized discount of $788,000.
The aggregate maturities of long-term debt for the five years after December 31,
1998 are $2,350,000, $2,062,000, $526,000, $527,000 and $356,000, respectively.
13 Acquisition of subsidiaries
There were no acquisitions of subsidiaries in 1998 or 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 August 21, 1995. 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
F-18
<PAGE>
ORTHOFIX INTERNATIONAL N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
13 Acquisition of subsidiaries (continued)
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, 1998.
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.
14 Lease commitments
The Company 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 three 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, 1998, 1997 and 1996 was approximately $1,631,000, $1,503,000 and $1,533,000,
respectively. Future minimum lease payments as of December 31, 1998 under all
operating leases are as follows:
In thousands
- ------------
1999 $1,883
2000 1,836
2001 1,464
2002 134
2003 and later years 344
------
Total $5,661
======
F-19
<PAGE>
ORTHOFIX INTERNATIONAL N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
15 Business segment information
The Company and its subsidiaries operate in two business segments, North America
and International, which reflect the Company's management structure: North
American and International operations are the responsibility of their respective
Presidents, each of whom reports to the Company's President, Edgar Wallner. Both
segments are engaged in the design, manufacture and sale of medical equipment.
The North American segment is comprised of Orthofix Inc. and its operations. The
International segment comprises the remainder of the operations. Transactions
between reporting segments are carried out on commercial terms.
Net sales, operating income, and identifiable assets as of and for the three
years ended December 31, 1998 for the operating segments of the Company and its
subsidiaries are as follows: -
<TABLE>
<CAPTION>
Net Sales Operating income/(expense) Identifiable assets
--------- -------------------------- -------------------
(In thousands) 1998 1997 1996 1998 1997 1996 1998 1997 1996
- -------------- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
International $ 76,481 $ 60,160 $ 64,408 $ 18,780 $ 10,232 $ 15,903 $ 89,794 $ 74,571 $ 68,906
North America $ 53,183 44,155 36,499 1,040 1,034 (4,994) 48,610 45,412 49,975
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Segment total 129,664 104,315 100,907 19,820 11,266 10,909 138,404 119,983 118,881
Group activities -- -- -- (3,203) (2,829) (2,128) 61,426 65,272 66,310
Intercompany (25,599) (14,352) (23,686) (4,700) 1,621 (4,251) (77,430) (72,307) (72,134)
and investment
eliminations
Total $ 104,065 $ 89,963 $ 77,221 $ 11,917 $ 10,058 $ 4,530 $ 122,400 $ 112,948 $ 113,057
========= ========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
Depreciation and amortization Income taxes expense (benefit) Other income (expense)
----------------------------- ------------------------------ ----------------------
(In thousands) 1998 1997 1996 1998 1997 1996 1998 1997 1996
- -------------- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
International $ 3,234 $ 2,933 $ 2,911 $ 3,354 $ 4,081 $ 2,785 $ (125) $ (754) $ 148
North America 3,287 3,560 3,258 (667) -- -- (1,186) (1,204) (1,455)
------- ------- ------- ------- ------- ------- ------- ------- -------
Segment total 6,521 6,493 6,169 2,687 4,081 2,785 (1,311) (1,958) (1,307)
Group activities -- -- -- -- -- -- -- -- --
Intercompany -- -- -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------- -------
eliminations
Total $ 6,521 $ 6,493 $ 6,169 $ 2,687 $ 4,081 $ 2,785 $(1,311) $(1,958) $(1,307)
======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
F-20
<PAGE>
ORTHOFIX INTERNATIONAL N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
Geographical information
Analysis of net sales by geographic destination:
(In thousands) 1998 1997 1996
- -------------- ---- ---- ----
U.S................ $ 63,671 $ 53,607 $ 44,374
U.K................ 15,432 12,450 10,895
Italy.............. 9,347 8,951 7,965
Others............. 15,615 14,955 13,987
---------- --------- ---------
$104,065 $ 89,963 $ 77,221
--------- --------- ---------
There are no sales in the Netherlands Antilles.
15 Business segment information (continued)
Geographical information
Analysis of long-lived assets by geographic area:
(In thousands) 1998 1997 1996
- -------------- ---- ---- ----
U.S................. $ 35,885 $ 42,616 $ 45,711
Others.............. 21,123 21,869 22,803
---------- --------- ----------
$ 57,008 $ 64,485 $ 68,514
-------- -------- --------
There are no long-lived assets in the Netherlands Antilles company.
F-21
<PAGE>
ORTHOFIX INTERNATIONAL N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
16 Income tax expense
The Company and each of its subsidiaries are taxed at the rates applicable
within each respective company's jurisdiction. The composite income tax rate
will vary according to the jurisdictions in which profits arise.
Year ended December 31
----------------------
(In thousands) 1998 1997 1996
- -------------- ---- ---- ----
Italy - Current $ 2,367 $ 3,267 $ 1,265
- Deferred (72) (195) 311
Cyprus - Current 327 190 218
- Deferred (106) - -
U.K. - Current 802 819 991
US - Current 4,977 - -
- Deferred (5,644) - -
Other - Current 36 - -
------- ------- -------
$ 2,687 $ 4,081 $2,785
======= ======= ======
Deferred income taxes arise because of differences in the treatment of income
and expense items for financial reporting and income tax purposes.
Income from continuing operations before provision for income taxes consisted
of:
Year ended December 31
----------------------
(In thousands) 1998 1997 1996
- ---------------------------- ---- ---- ----
U.S............................. $ 7,953 $ (170) $ (5,702)
Non U.S......................... 10,753 8,270 8,925
------- ------- ---------
$18,706 $ 8,100 $ 3,223
------- ------- ---------
The tax effects of the significant temporary differences, which comprise the
deferred tax liabilities and assets are as follows:
(In thousands) 1998 1997
- -------------- ---- ----
Deferred tax liabilities
Goodwill................................... $ (338) $ (350)
Patents.................................... (586) (479)
Inventories................................ (154) (275)
Depreciation............................... (149) (547)
Other...................................... (854) (232)
-------- --------
(2,081) (1,883)
F-22
<PAGE>
ORTHOFIX INTERNATIONAL N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
16 Income tax expense
Deferred tax assets
Compensation............................ 512 215
Inventories and related reserves........ 1,521 2,645
Allowance for doubtful accounts......... 1,706 991
Accrued expenses........................ 238 345
Net operating loss carry forwards....... 0 971
Restructuring charges................... 519 576
Deferred royalties...................... 964 -
Other................................... 106 824
5,566 6,567
------------ ----------
Valuation allowance..................... 0 (5,997)
5,566 570
------------ ----------
Net deferred tax asset (liability)...... $ 3,485 $ (1,313)
------------ ----------
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, the
Company has net operating loss carry forwards from its United States operations
of approximately $3,142,000, all of which was utilised during 1998.
For the year ended December 31, 1998 the Company released its valuation
allowance related to the deferred tax asset from operations in the United
States. Based on the weight of the positive evidence and the expectation of
future taxable income in the United States, the valuation allowance was
reversed.
Year ended December 31
----------------------
(In thousands) 1998 1997 1996
- -------------- ---- ---- ----
Statutory tax:
Italy (42%)...................... 2,787 $ 2,867 $ 2,570
Cyprus (4%)....................... 392 160 381
U.K. (31%)*...................... 937 675 1,050
U.S. (35%)........................ 2,777 - -
-------- ---------- ----------
6,893 3,702 4,001
Goodwill 2,260 - -
Valuation allowance movements (5,997) - -
Other differences (469) 379 (1,216)
---------- ----------- ----------
Income tax expense $ 2,687 $ 4,081 $ 2,785
====== ====== ======
* 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-23
<PAGE>
ORTHOFIX INTERNATIONAL N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
16 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, 1998, 1997 and 1996, this amounted to $625,000,
$(566,000) and $1,178,000, respectively.
Since the Company plans to continue to finance foreign operations and expansion
through reinvestment of undistributed earnings of its foreign subsidiaries
(approximately $55.3 million at December 31, 1998), no provision is 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.
17 Related Parties
The following related party balances and transactions as of and for the three
years ended December 31, 1998, 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) 1998 1997 1996
- -------------- ---- ---- ----
Revenues................. $ 1,444 $ 794 $ 115
Purchases................ $ 8,864 $ 10,636 $ 6,119
Accounts payable......... $ 396 $ 1,227 $ 1,103
Accounts receivable...... $ 1,207 $ 206 $ 67
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 30% interest in Intavent Limited.
On April 22, 1998, the loan note holders converted the loan note to shares in
Intavent Orthofix Limited. The conversion reduced the Company's ownership of
Intavent Orthofix Limited to 52%.
18 Commitments and contingencies
As of July 26, 1997, Orthofix International N.V. has been granted a four year
option to purchase a further 15% of the shares of 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 Orthosonics
Limited in the twelve month period preceding the exercise date.
The stockholders of Novamedix Distribution Limited have the option, exercisable
at any time until June 30, 1999, to require the Company to purchase from them a
further 10% interest at a price 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.
F-24
<PAGE>
ORTHOFIX INTERNATIONAL N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
18 Commitments and contingencies (continued)
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 affected 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, to 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 tortuous 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 punitive damages in the amount of $100,600,000 plus
interest from June 2, 1997. On July 15, 1997, the trial judge rendered a
judgment in favor of the Company in the amount of $149,475,399, and subsequently
entered into an amended judgment in favor of the Company in the amount of
$98,875,397. EBI filed a notice of appeal on September 26, 1997. The appeal was
heard on October 29, 1998 and the Company has been advised to expect a decision
in 1999. The appeals process, however, may still take a year or more. 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
tortuously 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.
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 collectability of all accounts receivable.
F-25
<PAGE>
ORTHOFIX INTERNATIONAL N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
18 Commitments and contingencies (continued)
The Company sells via a direct sales force and distributors. None of the
distributors have accounted for greater than 10% of net sales in any of the
periods presented.
19 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 1998, 1997 and 1996 were approximately $101,000,
$76,000 and $64,000 respectively.
Novamedix Services Limited contributes to defined contribution pension plans for
certain employees meeting minimum service requirements. The company makes
contributions to the plans based on annual determinations by the Board of
Directors. The company's expenses for the pension contributions during 1998,
1997 and 1996 were approximately $50,000, $45,000 and $44,000 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 were approximately $38,000
during 1998, 1997 and 1996.
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, 1998, 1997 and 1996, expenses incurred relating to the 401(k) Plan,
including matching contributions, were approximately $438,000, $338,000 and
$323,000 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
employee's 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 1998, 1997 and 1996 were approximately
$169,000, $165,000 and $157,000, respectively. Deferred compensation payments of
$100,000, $25,000 and $20,000 were made in 1998, 1997 and 1996, respectively.
The year-end balance represents the amount which would be payable if all the
employees and agents had terminated employment at that date.
20 Staff and executive share option plans and warrants
At December 31, 1998, 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, 1998, 1997 and 1996 would have been equal
to the pro forma amounts indicated below:
F-26
<PAGE>
ORTHOFIX INTERNATIONAL N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
20 Staff and executive share option plans and warrants (continued)
<TABLE>
<CAPTION>
(In thousands except per share data) 1998 1997 1996
- ------------------------------------ ---- ---- ----
<S> <C> <C> <C>
Net income (loss)
As reported................................................ $ 14,276 $ 3,069 $ (475)
Pro forma.................................................. $ 13,560 $ 2,529 $ (1,060)
Net income (loss) per common share - basic
As reported................................................ $ 1.10 $ 0.24 $ (0.04)
Pro forma.................................................. $ 1.05 $ 0.20 $ (0.08)
Net income (loss) per common share - diluted
As reported................................................ $ 1.07 $ 0.23 $ (0.04)
Pro forma.................................................. $ 1.02 $ 0.19 $ (0.08)
</TABLE>
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 1998, 1997 and 1996 respectively: divided yield
of 0%, 0% and 0%; expected volatility of 55%, 45% and 45%; risk-free interest
rates of 5.00%, 6.32% and 6.07%; and expected lives of 4.50, 4.71 and 4.37
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 1,510,600 shares of common stock at the estimated
fair market value of such options at the date of grant. Options generally 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
or ten years after date of grant.
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 Plans expire ten years after date of
grant.
F-27
<PAGE>
ORTHOFIX INTERNATIONAL N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
20 Staff and executive share option plans and warrants (continued)
AME Warrants
At the time of the merger with AME, warrants to purchase 320,000 shares of AME
common stock (the "AME warrants") were outstanding. These were assumed by the
Company pursuant to the Merger Agreement. After adjustment to take account of
the exchange ratio, 185,592 common stock warrants were outstanding. During 1998,
the Company bought back 69,598 warrants from the holders leaving 115,994
warrants exercisable at December 31, 1998 at prices ranging from $18.10 to
$30.60 per common share and expiring on various dates through December 2003.
Executive Share Option Plan
Under the Executive Share Option Plan ("Executive Plan"), approved by
shareholders in March, 1992, 1,945,000 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.
Summaries of the status of the Company's stock option plans as of December 31,
1998, 1997 and 1996 and changes during the years ended on those dates are
presented below:
<TABLE>
<CAPTION>
1998 1997 1996
------- -------------- --------- -------------- --------- -----------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Fixed Options & Warrants Shares Price Shares Price Shares Price
- -------------------------------------- ------- -------------- --------- -------------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 2,926,560 $ 12.42 2,758,55$ 12.76 2,748,062 $ 12.84
Granted 249,500 $ 12.12 374,500 9.71 204,500 11.42
Exercised (125,550) $ 2.82 (65,629) 4.69 (80,694) 3.63
Forfeited (92,848) $ 11.73 (140,867) 18.25 (113,312) 12.82
--------- -------- --------- -------- --------- ---------
Outstanding at end of year 2,957,662 $ 13.12 2,926,560 $ 12.42 2,758,556 $ 12.76
========= ======== ========== ======== ========== =========
Options exercisable at end of year 1,450,712 1,387,618 1,277,705
Weighted average fair value of
options granted during the year at $6.06 $3.83 $3.06
market value
Weighted average fair value of
options granted during the year in $1.27 $2.48 $2.20
excess of market values
</TABLE>
F-28
<PAGE>
ORTHOFIX INTERNATIONAL N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
20 Staff and executive share option plans and warrants (continued)
<TABLE>
<CAPTION>
Outstanding and exercisable by price range as of 31/12/98
- --------------------------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
- -------------------------- -------------------------------------------------------------- --------------------------------
Range of Number Weighted Weighted Number Weighted
Exercise Outstanding at Average Average Exercisable Average
Prices 31/12/98 Remaining Exercise at 31/12/98 Exercise
Contractual Life Price Price
- -------------------------- ------------------- --------------------- ------------------ --------------- ----------------
<S> <C> <C> <C>
$1.430 - $8.500 447,800 6.11 $5.93 224,750 $3.81
$9.060 - $13.500 416,500 6.83 $11.10 129,500 $10.33
$14.400 - $14.400 1,945,000 5.31 $14.40 948,500 $14.40
$14.440 - $30.610 148,362 3.86 $24.38 148,361 $24.38
$1.430 - $30.610 2,957,662 5.57 $13.15 1,450,712 $13.42
=========== ==== ====== ========= ======
</TABLE>
21 Subsequent events
On April 9, 1999, the Company redeemed the loan note for $1,480,000 issued in
1995 to shareholders of Novamedix Limited. On April 20, 1999, the Company paid
$1.9 million to the shareholders in Novamedix Distribution Limited for a 10%
equity interest in the latter company, following exercise by such shareholders
of their put option over such shares.
Orthofix now has a 90% interest in Novamedix Distribution Limited.
On April 1, 1999, the Company agreed a short-term $2 million facility, not to
exceed two months, with NatWest Bank. The facility is secured on the cash
balances of Intavent Orthofix and guaranteed by Orthofix.
On March 4, 1999, the Company announced that the Review Committee established to
determine if an Earnout or Bonus is payable under the Agreement and Plan of
Merger relating to the acquisition of AME had unanimously determined that an
Earnout of $500,000 plus interest from August 21, 1995 should be paid to holders
of record of AME common stock and the options and warrants to such stock as of
August 21, 1995. Payment was made by the Company on April 5, 1999. In addition,
the Review Committee determined that Orthofix will pay the AME Record Holders
12% of the net recovery, if any, received from its judgement against Biomet, EBI
and EBI MS up to a maximum of $5,500,000. The total maximum paid under the
Review Committee's determination will not exceed $6 million, including the
Earnout of $500,000, but excluding interest.
F-29
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULES
To the Board of Directors and Shareholders
Orthofix International N.V.:
Our audits of the consolidated financial statements referred to in our report
dated March 2, 1999 appearing on page F-2 of the Form 20F of Orthofix
International N.V. also included an audit of the financial statement schedules
listed in the index on pages S-1 to S-5 of this Form 20F. In our opinion, these
financial statement schedules present fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements.
London, England
March 2, 1999
S-1
<PAGE>
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, 1998 and 1997
December 31
---------------------------
(In thousands) 1998 1997
- -------------- ---- ----
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents............................................. $ 2,069 $ 798
Restricted cash................................................... 839 780
Accounts receivable, (net of allowance for doubtful
accounts of $4,432 and $3,843 respectively)........................... 11,215 8,928
Inventory (1)......................................................... 15,283 9,385
Deferred income taxes receivable and other current assets............. 3,536 494
--------- --------
Total current assets......................................... 32,942 20,385
Investments in affiliates....................................................... 119 -
Fixed assets and intangibles (net of accumulated depreciation and
amortization of $3,125 and $4,022 respectively)................................. 4,329 7,760
Goodwill (net of accumulated amortization of $6,064 and $4,170
respectively)................................................................... 31,437 34,939
Deferred tax asset.............................................................. 1,789 -
--------- --------
Total assets................................................. $ 70,616 $ 63,084
========= ========
LIABILITIES AND SHAREHOLDER'S EQUITY Current liabilities:
Accounts payable...................................................... $ 580 $ 564
Accounts payable - intercompany....................................... 16,781 17,730
Accrued expenses...................................................... 6,307 6,218
Current portion of long-term debt (2)............................. 2,328 3,236
Other current liabilities............................................. 147 2,300
--------- --------
Total current liabilities.................................... 26,143 30,048
Long term debt (2).................................................... 3,315 7,751
Other long term liabilities........................................... 3,661 1,567
Loan note payable - intercompany...................................... 5,155 -
--------- --------
38,274 39,366
--------- --------
Shareholder's equity
Additional capital in excess of par................................... 58,531 58,531
Accumulated deficit................................................... (26,189) (34,813)
--------- --------
Total shareholder's equity................................... $ 32,342 $ 23,718
========= ========
Total liabilities and shareholder's equity................... $ 70,616 $ 63,084
========= ========
</TABLE>
S-2
<PAGE>
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (continued)
Orthofix Inc. and Subsidiaries
Condensed Balance Sheets
December 31, 1998 and 1997
<TABLE>
<CAPTION>
(In thousands)
December 31
-----------------------
1. Inventory 1998 1997
---- ----
<S> <C> <C>
Raw materials .................................................................. $ 1,458 $ 950
Work-in-progress................................................................ 332 554
Finished goods.................................................................. 8,739 5,086
Field inventory................................................................. 8,687 10,974
Less reserve for refurbishment, obsolescence and lost field units............... (3,933) (8,179)
--------- --------
$ 15,283 $9,385
========= ========
</TABLE>
The inventory of Orthofix Inc. includes intercompany profits of $9,844,000 and
$5,332,000 for December 31, 1998 and 1997 respectively.
(In thousands)
December 31
-----------
2. Long- term debt - five year maturity 1998
----
1999 $ 2,328
2000 2,038
2001 500
2002 500
2003 and later years 277
---------
$ 5,643
=========
S-3
<PAGE>
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (continued)
Orthofix Inc. and Subsidiaries
Condensed Income Statements
for the year ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
(In thousands) 1998 1997 1996
- -------------- ---- ---- ----
<S> <C> <C> <C>
Net sales............................................................ $53,183 $44,161 $36,500
Cost of sales........................................................ 14,861 12,555 13,411
- ------- ------- --------
38,322 31,606 23,089
Selling, general and administrative expense.......................... 27,289 23,810 19,652
Research and development expense..................................... 3,261 2,177 2,354
Depreciation and amortization expense................................ 3,287 3,560 3,258
- ------- ------- --------
Operating income (expense)........................................... 4,485 2,059 (2,175)
Other expense........................................................ (1,186) (1,204) (1,455)
One-time gain/(charges).............................................. 4,654 (1,025) (2,072)
- ------- ------- --------
Net income (loss) before taxes....................................... 7,953 (170) (5,702)
- ------- ------- --------
Income tax benefit................................................... 667 0 0
- ------- ------- --------
Net income ( loss ).................................................. $ 8,620 $ (170) $ (5,702)
======= ======= ========
</TABLE>
S-4
<PAGE>
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, 1998, 1997 and 1996
<TABLE>
<CAPTION>
(In thousands) 1998 1997 1996
- -------------- ---- ---- ----
<S> <C> <C> <C>
Funds provided (used) by operations.................................. (799) $ 2,000 $ 3,100
Investing activities:................................................
Cash paid for equity method investments.............................. (119) - -
Purchase of furniture and equipment.................................. (2,015) (1,428) (959)
Purchase of intangibles.............................................. - (76) (286)
Proceeds from sale of assets......................................... - 44 -
Proceeds from sale of product license, net of expenses of $300....... 12,200 - -
---------- -------- --------
Net cash provided by (used in) investing activities................. 10,066 (1,460) (1,245)
Financing activities:................................................
Other ............................................................... (59) 182 (222)
Repayments of bank note............................................. (8,437) (3,537) (4,603)
Borrowings........................................................... 500 2,000 -
---------- -------- --------
Net cash used in financing activities................................ (7,996) (1,355) (4,825)
---------- -------- --------
Increase (decrease) in cash and cash equivalents..................... 1,271 (815) (2,970)
Cash and cash equivalents at beginning of period..................... 798 1,613 4,583
---------- -------- --------
Cash and cash equivalents at end of period........................... $ 2,069 $ 798 $ 1,613
========== ======== ========
</TABLE>
S-5
<PAGE>
SCHEDULE 2 - VALUATION AND QUALIFYING ACCOUNTS
For the years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
(In thousands) Additions
---------
Balance at Charged to Charged to
Provisions from assets to which beginning cost and other Deductions/ Balance at
they apply: of year expenses accounts Other (1) end of year
------- -------- -------- --------- -------
1998
- ----
<S> <C> <C> <C> <C> <C>
Allowance for doubtful debts......... 4,199 2,719 - (2,402) 4,516
Inventory provisions................. 5,427 - - (3,950) 1,477
Provisions for deferred 724 169 - (43) 850
compensation.........................
Restructuring provisions............. 1,852 - - (211) 1,641
Valuation allowance.................. 5,997 - - (5,997) -
1997
- ----
Allowance for doubtful debts......... 4,110 2,336 - (2,247) 4,199
Inventory provisions................. 8,741 - - (3,314) 5,427
Provisions for deferred 686 165 - (127) 724
compensation.........................
Restructuring provisions............. 1,817 1,175 - (1,140) 1,852
Valuation allowance.................. 6,449 - - (452) 5,997
1996
- ----
Allowance for doubtful debts......... 3,611 1,863 - (1,364) 4,110
Inventory provisions................. 8,142 691 - (92) 8,741
Provisions for deferred 546 157 - (17) 686
compensation.........................
Restructuring provisions............. - 1,817 - - 1,817
Valuation allowance.................. 4,242 2,207 - - 6,449
</TABLE>
(1) Includes payments charged against reserves and amounts written off against
gross asset values.
S-6
<PAGE>
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 authorised.
ORTHOFIX INTERNATIONAL N.V.
By: /s/ PETER CLARKE
------------------------------------
Name: Peter Clarke
Title: Secretary
Date:
S-7
