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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, 1999
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.......................13,029,834
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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
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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 ...................................................................3
Fixation Products............................................................3
PEMF Products................................................................5
Other Products...............................................................6
Distribution Products........................................................8
Sales and Distribution.......................................................8
Marketing ...................................................................9
Production..................................................................10
Product Development.........................................................10
Patents, Trade Secrets and Licenses.........................................10
Competition.................................................................11
Government Regulation.......................................................11
Product Liability and Insurance.............................................12
Third Party Payors..........................................................12
Employees ..................................................................13
Year 2000 ..................................................................13
Economic and Monetary Union in the European Union...........................13
Item 2. DESCRIPTION OF PROPERTY...........................................13
Item 3. LEGAL PROCEEDINGS.................................................14
Item 4. CONTROL OF REGISTRANT.............................................16
Item 5. NATURE OF TRADING MARKET..........................................16
Item 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS
AFFECTING SECURITY HOLDERS...................................17
Item 7. TAXATION..........................................................18
Item 8. SELECTED FINANCIAL DATA...........................................18
Item 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..........................19
Item 10. DIRECTORS AND OFFICERS OF REGISTRANT..............................24
Item 11. COMPENSATION OF DIRECTORS AND OFFICERS............................25
Item 12. OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR
SUBSIDIARIES.................................................26
Item 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS....................27
PART II
Item 14. DESCRIPTION OF SECURITIES TO BE REGISTERED........................28
PART III
Item 15. DEFAULT UPON SENIOR SECURITIES.....................................28
Item 16. CHANGES IN SECURITIES AND CHANGES IN SECURITY FOR
REGISTERED SECURITIES........................................28
PART IV
Item 17. FINANCIAL STATEMENTS...............................................28
Item 18. FINANCIAL STATEMENTS...............................................28
Item 19. FINANCIAL STATEMENTS AND EXHIBITS..................................28
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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, 1999 (the "Annual Report"), all
references to the "Company" and "Orthofix" include Orthofix International and
its subsidiaries and affiliates, unless the context otherwise requires. The
principal executive offices of Orthofix International are located at 7 Abraham
de Veerstraat, Curacao, Netherlands Antilles.
The Company publishes its consolidated financial statements in United
States dollars. In this Annual Report, references to "United States dollars",
"dollars", "US$", or "$" are to United States currency, and references to
"lira", "lire" or "Lit." are to the Italian lira (singular) or to Italian lire
(plural).
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PART I
Item 1. DESCRIPTION OF BUSINESS.
General
The business of Orthofix is the design, development, manufacture,
marketing and distribution of medical equipment, principally for the orthopedic
market. The Company's main products are external and internal fixation devices
used in fracture treatment, limb lengthening and bone reconstruction, and pulsed
electromagnetic frequency products used for the non-invasive healing enhancement
of spinal fusions and recalcitrant bone fractures. Other orthopedic products
produced by the Company include devices for the removal of cement in hip
revision procedures, the ultrasonic treatment of musculo-skeletal pain and 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, 100% equity ownership in Novamedix Limited ("Novamedix"), the
subsidiary that developed the A-V Impulse System and 100% equity ownership of
Novamedix Services Limited ("NSL"), a service company which manages the
manufacture of the A-V Image 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% equity ownership
of each of Orthofix Ltd and Novamedix Distribution Limited ("NDL"), which
distribute Orthofix products in certain markets.
Recent Developments
On January 10, 2000, following a ruling of the United States Supreme
Court, an award of $64 million was confirmed in favor of Orthofix in its suit
against Biomet, Inc. After deducting contingent legal fees and reserving for
expenses relating to the case, Orthofix received a net gain of approximately $38
million before income taxes on January 21, 2000. -- See "Item 3. LEGAL
PROCEEDINGS."
On December 10, 1999, Orthofix acquired a further 10% equity interest
in NDL for a cash consideration of $2 million, taking its equity interest in NDL
to 100%. Orthofix had previously acquired a further 10% equity interest in NDL
on 16 April, 1999 for a cash consideration of $1.9 million.
In December 1999 and in September 1999, Orthofix Inc. announced that it
had entered into agreements to complete the development, and for the
distribution of, two new products. The first, an Intramedullary Skeletal Kenetic
Distractor (ISKD), is a patented internal lengthening system used on arms and
legs of unequal length. The ISKD system for external bone lengthening will
supplement Orthofix's external bone lengthening product line. The second product
is a fluidjet-based traumatic wound debridement system being developed in
conjunction with HydroCision, Inc.
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On November 29, 1999 the National Osteoporosis Institute ("NOI") and
Orthofix announced that NOI had received clearance from the United States Food
and Drug Administration ("FDA") to begin a clinical trail with Orthofix's Bone
Growth Stimulator for the treatment of osteoporosis. The trial will evaluate the
safety and efficacy of the Orthofix Bone Growth Stimulator in osteoporotic
patients, measuring improvements in bone mineral density.
On September 24, 1999 Orthofix announced that it had received
Investigational Device Exemption (IDE) approval from the FDA for the clinical
investigation of the Orthofix Cervical-Stim (R), a non-invasive cervical bone
growth stimulator. The approval allows Orthofix to initiate a clinical
evaluation of Cervical-Stim in thirteen centers across the U.S.
On September 9, 1999, Orthofix announced that its subsidiary, Novamedix
had been successful in its motion to open its suit against Kinetic Concepts,
Inc. ("KCI"). The suit, first filed in 1992, alleges KCI's patent infringement,
breach of contract and unfair competition relating to Novamedix's proprietary
medical device, the A-V Impulse System(R). The case has been delayed by KCI's
successive requests to the US Patent and Trademark Office for re-examinations of
the original patents. See "Item 3. LEGAL PROCEEDINGS."
On May 27, 1999 Orthofix announced that it had acquired the remaining
outstanding shares (having previously held 30%) of Neomedics Inc., an
early-stage medical technology company focused on the development of implantable
tissue growth stimulation devices, in an all cash transaction.
On March 5, 1999 Orthofix announced that a Review Committee had
unanimously determined that an Earnout or Bonus of $500,000 plus interest from
August 21, 1995 was payable to the holders of record of American Medical
Electronics, Inc. ("AME") common stock and the options and warrants to such
stock as of August 21, 1995 pursuant to an Agreement and Plan of Merger. The
Earnout is the result of Orthofix Inc.'s sales of bone growth stimulators after
the merger. In addition, the Review Committee determined that Orthofix will pay
the AME Record Holders 12% of the net recovery as and when received from its
judgement against EBI Medical Systems, Inc. ("EBI MS"), Electro-Biology, Inc.,
and Biomet, Inc (collectively, EBI), up to a maximum of $5,500,000.
On December 14, 1998 Tom Hay joined the Company as President,
International Division, 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 Stryker Howmedica,
Inc. ("Stryker"), to license BoneSource, a calcium-based phosphate-based bone
cement for use in the repair of cranial defects. Under the terms of the
agreement, Orthofix will continue to supply BoneSource to Howmedica.
On February 20, 1998 Charles J. Dillman, Ph.D., was appointed Group
Vice President of Research and Development. Dr. Dillman, a Ph.D in Biomechanics,
is a member of the Medical Commission of the International Olympic Committee
(the "IOC"), where he has served as Program Director for the IOC's World
Congress on Sports Sciences. The IOC awarded Dr. Dillman the Olympic Order, its
highest award, for his contributions to the Olympic movement. Mr. Dillman has
served as Vice President of Research and Development for Smith & Nephew
Endoscopy, as Professor of Surgery at the University of Massachusetts Medical
Center, in addition to directing graduate medical programs at the University of
Delaware and Illinois. He has held several appointments with the United States
Olympic Committee and sports medicine foundations in the United States.
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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 non-invasive spinal fusion stimulation
Physio-Stim non-invasive electrical bone growth stimulation
Other Products
Osteogenics BoneSource 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
EZ Brace LSO rigid external brace for spine stabilization
Distribution Products
The Company also has distribution rights in certain countries for the
following products:
Laryngeal Mask maintenance of airway during anesthesia
Cemex bone cement
SEM Prosthetic Devices prostheses
Fixation Products
The Orthofix
For a fracture to heal properly, without malalignment or rotation, the
bone must be set and fixed in the correct position. The bone must be kept
stable, but not absolutely rigid, in order to alleviate pain, maintain the
correct alignment and allow coagulation to produce bone cells that initiate
callus formation. Fractures also benefit from intermittent micromovement and
weight-bearing at the appropriate time in the healing cycle, which further
stimulate callus formation.
Therapeutic Alternatives in Fracture Treatment.
In most fracture cases, physicians use the simplest available
non-surgical procedure, casting. The Company believes, however, that
approximately 15-20% of all fractures require surgical intervention, the most
common forms of which (in order of frequency of usage) are:
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, and more recently the humerus,
have increasingly been treated with intramedullary fixation. This method,
which
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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. In younger
patients, a subsequent surgical procedure is usually 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. 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
1997. Pelvic fractures most typically occur as a result of road traffic
accidents. A new elbow fixator was also launched during 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. Both
the pelvic and elbow fixators have been well received by the market.
The Company's Hybrid External Fixation system, enhanced by the launch
of the Sheffield System in July 1999, has made significant sales progress during
1999. A Hybrid Frame combines "traditional" screw fixation at one end of the
fixator with crossed wires mounted on a ring component at the other end.
Fixation by crossed wires appears to be more reliable than by traditional screws
in cancellous bone (which is found at the ends of long bones, adjacent to
joints) and in osteoporotic bone. The Orthofix Hybrid System requires less
inventory than comparable ring fixators.
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, resulting in a simpler operative
technique. 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 2000.
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During the first quarter of 1999, a radiolucent ankle fixator was
introduced into the U.S. market. It too was met with enthusiastic response. The
radiolucent ankle fixator is scheduled to be introduced to select international
markets during 2000. Both the radiolucent wrist and ankle fixator are
sterile-kit packaged with all of the instruments for surgical use.
The Company has developed a new range of bone screws covered with
Hydroxyapatite ("HA") which it launched 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 one of only two manufacturers to have received
510(k) clearance from the FDA to market HA Coated Screws.
Fixation revenues represented 29% of revenues in 1999.
PEMF Products
General. Bone tissue's regenerative power results in most bone
fractures healing naturally within a few months. Frequently, however, fractures
do not heal or heal slowly, resulting in non-unions. Traditionally,
orthopaedists have treated such fracture conditions surgically, often by means
of a bone graft with fracture fixation devices, such as bone plates, screws or
intramedullary rods. This is an example of an "invasive" treatment. The PEMF
products currently marketed by the Company apply bone growth stimulation without
implantation or other surgical procedures.
In the mid-1980s, the Company expanded the application of its bone
growth stimulation technology to the healing enhancement of spinal fusions,
including treatment for pseudoarthrosis of the spine. Spinal fusions are
surgical procedures undertaken to establish bony union between adjacent
vertebrae.
The Company is currently marketing two PEMF product systems,
Spinal-Stim and Physio-Stim, designed to enhance the success rate of spinal
fusions and to treat non-union fractures, respectively. These devices are
portable and are typically used as part of home treatment programs prescribed by
physicians. The attending medical staff instructs the patient regarding
operation of the system and the appropriate duration of daily treatments. The
overall length of treatment is determined by the prescribing physician, but
typically is between three and nine months in duration.
The technology used in the Company's PEMF products involves a
non-surgical process by which a pulsating electric current is used to enhance
the growth of bone tissue following surgery or bone fracture. This technology is
based on a substantial amount of scientific data that indicates that certain
electromagnetic stimuli in the human body produce a biological cellular
response. The Company's PEMF products are used by placing them externally over
the site to be healed. The systems produce pulsed, low-energy electromagnetic
fields that induce low pulsating current flow into living tissue and cells
exposed to the energy field of the device. This pulsating current flow is
believed to change enzyme activities, induce mineralization, enhance vascular
penetration and result in a process resembling normal endochondral ossification,
or bone growth, at the spinal fusion or fracture site.
Spinal-Stim. Spinal-Stim was the first 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
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enhancement as an adjunct to spinal fusion surgery. The recommended minimum
daily treatment time for Spinal-Stim is two hours. The Company has received
approval to begin an IDE study to obtain PMA approval for a cervical spine
indication with the PEMF signal. 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 42% of revenues in 1999.
Other Products
Osteogenics BoneSource
General. Osteogenics 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
Stryker. Pursuant to the agreements, Orthofix will continue to supply BoneSource
to Stryker while Stryker has the right to pursue developmental work relating to,
market, and pursue regulatory approvals for, Bone Source. For a period of two
years from the date of the agreements, Orthofix has the exclusive right to
supply BoneSource to Stryker. Stryker'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.
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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 Stryker, 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
NDL manufactures and distributes under license, the A-V Impulse System
family of foot and hand pumps, a non-invasive method of reducing deep vein
thrombosis and post-operative pain and swelling. The A- V Impulse System
consists of an electronic controller attached to a special inflatable slipper or
glove, or to an inflatable bladder within a cast, which promotes the return of
venous blood from the patient's arms or legs by intermittently impulsing a
plexus of veins in the foot or hand, as the case may be, an action that, in the
case of the feet, occurs naturally when patients walk. Conventionally, in order
to reduce the incidence of deep vein thrombosis, heparin or related
pharmacological products have been administered during and after operations. The
A-V Impulse System has been demonstrated to give prophylactic benefits that are
comparable with the most effective forms of pharmacological treatment, but
without their adverse side effects, the most serious of which is bleeding. In
1997, the International Consensus Statement on the prevention of Deep Vein
Thrombosis, produced by the International Union of Angiology reported that:
"recent data demonstrates that combined foot impulse technology with graduated
elastic compression is effective in reducing the incidence of proximal DVT in
patients having hip and knee surgery. In contrast with pharmacological agents,
mechanical methods are not associated with haemorrhagic complications."
In 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 U.S.. 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 U.S.
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.
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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 launched on an evaluation
basis in the U.S. market by Orthofix Inc. in August 1998. The Company is
currently engaged in the process of setting up distribution in the U.S. through
a network of independent distributors.
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.
EZ Brace
This product, developed by Orthofix Inc., is a lumbosacral orthosis for
patients who require rigid external support for spine stabilization. The product
is designed to be a comfortable, easy on-off rigid external bracing system. EZ
Brace can be used in combination with Spinal-Stim Lite to provide external
stabilization with an external bone growth stimulator to increase the prospects
for spinal fusion success.
Other products represented 16% of revenues in 1999.
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.
Distribution products represented 13% of revenues in 1999.
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 its
products are distributed 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 130 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 South America. To
facilitate distribution into
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the European Union ("EU"), the Company obtained a CE mark for stimulation
products in December 1998. See "- Government Regulation".
The Company has a sales services group, consisting of seven sales and
marketing specialists, who regularly visit the Company's distributors in Europe,
the Far East, Middle East and South America.
In addition to its licensing agreements with Stryker 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 1999 were attended by approximately 750 surgeons
from around the world, include a variety of lectures from renowned specialists
as well as demonstrations and hands- on workshops. Additionally, each year many
of the Company's distributors independently conduct basic courses for surgeons
in the application of Orthofix's products.
PEMF Products. The Company believes that the success of these products
is dependent not only upon the fostering of good relations with the physicians
who employ them but also on being sensitive to the needs and requirements of the
hospitals and third party payors to whom the products are also marketed. Private
insurance companies, workers' compensation carriers, Medicare, self-insured
plans, health maintenance organizations ("HMOs"), and various other state,
federal and private health care payors are the principal sources of payment for
the Company's PEMF Products, although patients usually are responsible for
copayment and deductible amounts.
In addition to providing extensive training to its sales force, the
Company has, since 1994, 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
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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 focussing 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, the Seychelles 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.
In August 1999, the Company formed a Scientific Advisory Committee
composed of eight medical clinicians to further the market opportunities and
additional applications for the Company's proprietary pulsed electromagnetic
field (PEMF) technology. The Company hopes to further its knowledge of PEMF's
influences on specific cellular functions and develop additional applications
for the technology.
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
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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., Stryker, 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, 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
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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 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
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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, 1999, Orthofix had 446 employees of which 293 were
employed within the North American division. The Company's relations with its
Italian employees, who numbered 62 at December 31, 1999, 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."
Year 2000 Experience
The Company's manufacturing processes and other operations are
dependent on technological devices with imbedded chips and computer systems.
These computer systems and other technological devices may not be capable of
accurately recognizing dates beginning on January 1, 2000. This problem could
cause miscalculations, adversely affecting the Company's manufacturing processes
and other operations. Prior to January 1, 2000, the Company spent approximately
$500,000 with a view to resolving any such potential issues, and believes that
it has resolved substantially all of these issues through a comprehensive
compliance process. Subsequent to the year ended December 31, 1999 the Company
experienced no significant events, nor received any significant reports
indicating any material Year 2000 problems. However, it may not fully know the
impact of Year 2000 issue until after a longer operating period following
January 1, 2000.
Economic and Monetary Union in the European Union
Orthofix's European companies, including those in the United Kingdom,
made preparations for the introduction of a single currency (the "Euro") in
certain Member States of the EU in 1999. Preparations include upgrading
information systems, where necessary, and training staff to handle
Euro-denominated transactions, including dual currency transactions during the
transition period between the commencement of economic and monetary union in
1999 and the first issue of Euro notes and coins in 2002. Orthofix does not
expect that, in the short term, the introduction of the Euro will have a
material adverse effect on the Company's financial condition or results of
operations.
Item 2. DESCRIPTION OF PROPERTY
The Company's principal facilities are in the U.S., Italy and the UK.
In the U.S., PEMF Products, Osteogenics BoneSource and EZ Brace 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.
On February 24, 2000 Orthofix Inc. entered into a 10 year lease for the
development of a new 70,000 square foot building in McKinney, Texas. The Company
anticipates moving into the new site and the lease to become effective January
1, 2001. The lease contains an additional five year renewal provision and the
building site is expandable to meet future needs. The Company has initiated
discussions with the current landlord regarding lease termination costs. The new
landlord and community have committed various incentives to offset early
termination costs for the current lease. The new lease will result in future
cost savings for the Company compared to the current lease.
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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.
In the U.K., the Company rents approximately 28,000 square feet for
certain of its manufacturing, sales, marketing and distribution activities.
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 A-V
Impulse System(R) 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 final quarter of
2000, Novamedix is seeking a permanent injunction enjoining further infringement
by KCI. Novamedix also seeks damages relating to past infringement, breach of
contract, and unfair competition. KCI has filed counterclaims alleging that
Novamedix engaged in inequitable conduct before the United States Patent and
Trademark Office and fraud as to KCI and that Novamedix engaged in common law
and statutory unfair competition against KCI. See "Item 1. 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 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
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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 June 28, 1999, the United States Court of Appeals for
the Third Circuit unanimously affirmed the district court's decisions on
liability and compensatory damages. At the same time, however, two of the three
judges, over the dissent of Senior Circuit Judge Leonard I. Garth, reduced the
punitive damages award to $1 million. On January 10, 2000, the United States
Supreme Court declined to review the Third Circuit's decision. On January 21,
2000, defendants Biomet, Inc. and Electro-Biology, Inc. transferred funds in the
amount of $64,174,752.25 to satisfy the judgment in favor of the Orthofix
S.r.l., IMS, and Orthofix Inc. As a result of the Supreme Court's order and the
satisfaction of the judgment, the litigation has been completed.
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
position, results of operations and cash flows.
On December 4, 1998, the special committee (the "Review Committee")
established to determine the amount of any contingent contract rights under the
Merger Agreement dated May 8, 1995 among Orthofix International N.V., Othello
Acquiring Corporation, and American Medical Electronics Inc. ("AME") (the
"Merger Agreement"), in settlement of all claims of the holders of record of AME
common stock and the options and warrants to such stock as of August 21, 1995
(collectively, the "AME Record Holders"), unanimously determined that Orthofix
International N.V. would pay an Earnout of $500,000 plus interest and 12% of the
net recovery received from the judgment against EBI Medical Systems, Inc.,
Electro-Biology, Inc., and Biomet, Inc. The Review Committee has not calculated
the latter amount, but Orthofix International N.V. believes it is between
$5,000,000 and $5,500,000. An arbitrator acting under the auspices of the
American Arbitration Association ("AAA") subsequently entered a Consent Award
based on the Review Committee's determination.
On January 29, 1999, two couples who owned shares of the common stock
of American Medical Electronics Inc. ("AME") commenced a civil action against
Orthofix Inc. and the Review Committee seeking, inter alia, the Maximum Earnout
and Bonus under the Merger Agreement. Clarence Frere, Louise Frere, Joseph
Mooibroek, and Marla B. Mooibroek, individually and on behalf of all others
similarly situated v. Orthofix Inc., Arthur Schwalm, Robert Gaines Cooper, James
Gero, and John and Jane Does One (1) Through Four (4), No. 99-S-445 (D. Colo.).
In a related action, commenced on June 2, 1999, the same Plaintiffs filed a
motion in the United States District Court for the Southern District of New York
seeking to intervene in the AAA arbitration and vacate the Consent Award.
Clarence Frere, Louise Frere, Joseph Mooibroek, and Marla B. Mooibroek,
individually and on behalf of all others similarly situated v. Orthofix Inc.,
Arthur Schwalm, Robert Gaines Cooper, James Gero, and John and Jane Does One (1)
Through Four (4), No. 99 Civ. 4049 (S.D.N.Y.). On July 2, 1999, Plaintiffs filed
a first amended complaint in the Colorado action seeking to add Orthofix
International N.V. as a defendant, in addition to Orthofix Inc.
Orthofix International N.V. and Orthofix Inc. (collectively,
"Orthofix") are vigorously defending against Plaintiffs' actions. Thus far, the
Colorado action has been transferred to New York (on Orthofix Inc.'s motion);
the individual defendants served in the Colorado action have all been dismissed
for lack of personal jurisdiction (on motion of the individual defendants); and
all discovery has been stayed pending the courts' ruling on Orthofix Inc.'s
dispositive pre-answer motion that Plaintiffs lack standing to challenge the
Review Committee's determination.
15
<PAGE>
Item 4. CONTROL OF REGISTRANT
To the Company's knowledge, the Company is not directly or indirectly
owned or controlled by any corporation or by any government. Set forth below is
a table indicating (i) persons known by the Company to own more than 10% of the
Common Shares, and (ii) the total amount of Common Shares owned by the directors
and officers of the Company as a group, at March 27, 2000.
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 1,687,000 13.0
Common shares Directors and Officers as a group 1,769,000 13.6
Common shares Lord, Abbett & Co. 1,342,000 10.3
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").
16
<PAGE>
The high and low closing prices of the Common Shares on Nasdaq for the
periods indicated, are set forth below:
High Low
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
Second Quarter.................................... 15 1/4 13 7/8
Third Quarter..................................... 15 13
Fourth Quarter.................................... 14 5/8 11 1/2
2000
- ----
First Quarter..................................... 21 11 7/8
*Second Quarter................................... 18 16
* for 2000, through April 12
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
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
17
<PAGE>
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, 1999, 1998, 1997, 1996 and 1995 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, 1999, 1998 and 1997 and at December 31, 1999, 1998 and 1997
should be read in conjunction with, and are qualified in their entirety by
reference to, "Item 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" and the Company's Consolidated Financial
Statements and Notes thereto included elsewhere in this Annual Report on Form
20-F. The Company's Consolidated Financial Statements have been prepared in
accordance with United States generally accepted accounting principles ("U.S.
GAAP").
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(In U.S. $ thousands, except margin, share and per share data)
Consolidated operating results
<S> <C> <C> <C> <C> <C>
Net sales.......................................... 121,284 104,065 89,963 77,221 52,272
Gross profit....................................... 87,733 74,572 64,597 53,770 33,491
Gross profit margin................................ 72% 72% 72% 70% 64%
Total operating income (expense)Notes 1, 2 and 3 .. 23,216 11,917 10,058 4,530 (16,872)
Net income (loss).................................. 12,912 14,276 3,069 (475) (19,802)
Net income (loss) per Common Share (diluted)....... 0.97 1.07 0.23 (0.04) (1.78)
Net income per Common Share (diluted)
(before non-recurring items)..................... 0.97 0.71 0.28 0.13 0.40
Consolidated financial position
(at year-end)
Total assets ...................................... 136,722 122,400 112,948 113,057 103,958
Total debt......................................... 14,248 9,585 20,298 21,495 20,517
Shareholders' equity............................... 89,570 78,736 65,148 63,910 58,660
Weighted average number of
Common Shares outstanding (diluted)............... 13,364,127 13,291,988 13,211,397 12,673,319 11,113,604
</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.
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<PAGE>
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,
--------------------------------------------
1999 1998 1997
% % %
Net sales 100 100 100
Cost of sales 28 28 28
--------------------------------------------
Gross profit 72 72 72
--------------------------------------------
Expenses
Sales and Marketing 35 36 36
General and Administrative(1) 13 15 18
Research and Development 5 6 5
--------------------------------------------
Operating income(2) 19 15 12
--------------------------------------------
Net income (3) 11 9 5
--------------------------------------------
(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.
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 Stryker Howmedica 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 took 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, was 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.
19
<PAGE>
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 sued EBI for, among other matters,
infringement of patents and passing off. On January 21, 2000, defendants Biomet,
Inc. and Electro-Biology, Inc. transferred funds in the amount of $64,174,752.25
to satisfy the judgment in favor of the Orthofix S.r.l., Inter Medical Supplies,
and Orthofix Inc. As a result of the Supreme Court's order and the satisfaction
of the judgment, the litigation has been completed. After deducting contingent
legal fees and reserving for expenses, Orthofix realized approximately $38
million before tax. 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.
1999 compared to 1998
Net sales increased 17% to $121.2 million in 1999 compared to $104.1
million in 1998. Net sales in North America (primarily the United States) in
1999 represented 63% of net sales, or $75.8 million, compared with 61% of net
sales, or $63.6 million in 1998, 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 and the introduction of the EZ Brace. Outside the United States,
there was an increase in net sales of 12% in 1999 compared with 1998, generated
mainly through growth in sales of Orthofix products and the A-V Impulse System.
Sales outside the United States increased 15% on a constant dollar basis.
Sales and marketing expenses which represented 35% of net sales in 1999
and 36% in 1998, increased by $3.9 million in 1999 compared to 1998. In the
U.S., where sales increased by 19% in 1999 compared to 1998, sales and marketing
expenses increased by 12% to $28 million from $25.0 million in 1998. Outside the
U.S., where sales increased by 12%, sales and marketing expenses increased by 8%
to $13.9 million from $12.9 million.
General and administrative expenses, which increased by $795,000 from
$12.0 million in 1998 to $12.8 million in 1999, represented 11% of net sales in
1999 compared to 12% in 1998. General and administrative expenses for 1999 and
1998 included $881,000 and $369,000 of litigation costs, respectively. Exclusive
of such costs, general and administrative expenses represented 10% and 11% of
net sales in 1999 and 1998, respectively. See "Item 3. LEGAL PROCEEDINGS."
Research and Development expenses which represented 5% of net sales in
1999 and 6% in 1998, increased by $528,000 from $5.9 million in 1998 to $6.4
million in 1999.
Amortization of intangible assets was $3.5 million in 1999 compared to
$3.6 million in 1998. The decrease of $80,000, resulted principally from
decreased amortization consequent upon the write off in the second quarter of
1998 of goodwill relating to the BoneSource material, following the licensing
deal with Stryker Howmedica Inc., and of the intangible asset relating to the
Ogden Anchor. See note 2 to the Consolidated Financial Statements.
Net other expense decreased by $735,000 from $1.3 million in 1998 to
$576,000 in 1999. This decrease resulted principally from a reduction in net
interest expense in 1999 of $219,000. In addition, there was an increase in
foreign exchange gains in 1999 over 1998 of $768,000 resulting from the
translation of a loan note between group companies denominated in Italian Lira.
The reduction in net interest payable and the increase in foreign exchange gains
were offset by an increase in net losses of affiliates of $338,000.
In 1999 and 1998, the effective rate of income tax, excluding the net
effect of non-recurring items in 1998, was 35% and 33%, respectively. The main
reason for the increased rate in 1999 was that there were no net
20
<PAGE>
operating loss carry forwards from its United States operation available for
1999, as there were all utilised in 1998.
Net income for 1999 was $12.9 million compared to $9.5 million for 1998
(before the net effect of non- recurring items of $4.8 million) giving diluted
earnings per share of $0.97 on the basis of diluted average shares outstanding
of 13.4 million in 1999 compared with diluted earnings per share of $0.71,
excluding the net effect of non-recurring items, on the basis of diluted average
shares outstanding of 13.3 million in 1998.
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, generated mainly through growth in sales of the
A-V Impulse System and the Laryngeal Mask. Sales outside the United States
increased 14% on a constant dollar basis.
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 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
Stryker Howmedica Inc., 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.
21
<PAGE>
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.
Liquidity and capital resources
Cash and cash equivalents at December 31, 1999 were $9.7 million
compared to $7.0 million at December 31, 1998, an increase of $2.7 million.
Net cash provided by operating activities increased from $6.0 million
in 1998 to $8.4 million in 1999, an increase of $2.4 million. Cash from
operating activities in 1999 was provided by net income, after adjustments for
non-cash items such as depreciation, amortization and provisions, of $21.4
million. The Company invested a net of $13 million of this sum in working
capital resulting in total net cash provided by operating activities of $8.4
million. Of the net $13 million invested in working capital, $9.3 million was
used for trade accounts receivable and $1.0 million was used for inventories and
$2.8 million was used for other current assets, principally advances to
affiliates of $1.0 million and deferred charges of $950,000.
Net cash used by investing activities was $10.8 million in 1999
compared to net cash provided of $8.4 million in 1998. The Company invested $5.5
million in subsidiaries and affiliates and used $5.4 million to purchase
tangible and intangible assets.
Net cash provided by financing activities was $5.2 million in 1999
compared to cash used of $11.7 million in 1998. Cash provided by financing
activities in 1999 consisted principally of a new loan of $10.0 million and
increased borrowings under short-term lines of credit of $1.8 million offset by
loan repayments of $6.6 million. The Company also used $681,000 to repurchase
shares for treasury.
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 a $10 million term note ("Term Note"). The Term Note
are collateralized by substantially all of the assets of Orthofix Inc. and are
guaranteed by the Company. In addition, the Company had $7.1 million of unused
available lines of credit at December 31, 1999.
Certain restrictive covenants pursuant to the Term Note 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, 1999, the amounts were $13.6
million and $34.2 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
22
<PAGE>
and expenditure. The Company does not use derivatives to hedge
foreign exchange exposure. The Company's interest exposure is primarily related
to $4.4 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
$440,000 loss on exchange upon conversion of this debt
Year 2000 Issues
The Company's manufacturing processes and other operations are
dependent on technological devices with embedded chips and computer systems.
These computer systems and other technological devices may not be capable of
accurately recognizing dates beginning on January 1, 2000. This problem could
cause miscalculations, adversely affecting the Company's manufacturing processes
and other operations. Prior to January 1, 2000, the Company spent approximately
$500,000, of which approximately $150,000 was incurred in fiscal year 1999, with
a view to resolving any such potential issues. The Company believes that it has
resolved substantially all of these issues through a comprehensive compliance
process. To date, there have been no material malfunctions of the Company's
systems or activities due to Year 2000 issues. However, there can be no
assurance that unanticipated events still will not occur or that the Company was
able to identify all Year 2000 issues before problems arise. In addition, the
Company has no assurance that third party suppliers or customers have or had the
ability to identify and solve all or substantially all their Year 2000 issues.
Therefore, there can be no assurance that the Year 2000 issue still will not
have a material adverse effect on the Company's consolidated financial position,
cash flows or results of operations.
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. 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 1999, various new accounting pronouncements were issued which
may impact the Company's financial statements. (See note 1 to the Consolidated
financial statements)
23
<PAGE>
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 62 Chairman of the Board of Directors
Edgar Wallner 63 President, Chief Executive Officer
and Director
Peter Clarke 58 Executive Vice President, Chief
Financial Officer, Secretary and
Director
Charles Federico 51 Senior Vice President, President,
North America and Director
Tom Hay 54 Senior Vice President and President,
International Division
Vittorio Pietropoli 59 Senior Vice President and Director
Robert Sentance 53 Controller
Jerry Benjamin (2) 59 Director
Alberto d'Abreu de Paulo 61 Director
Frederik Hartsuiker 59 Director
Peter Hewett 64 Deputy Chairman and Director
John Littlechild (1) 48 Director
James Gero (1) 55 Director
(1) Member of the Compensation and Benefits Committee
(2) Member of the Audit Committee
Mr Julian Knott resigned from the Board of Directors in April 2000
after twelve years of greatly appreciated service. The Board will be seeking to
fill the vacancy on the Audit Committee resulting from Mr Knott's resignation.
All directors hold office until the next annual general meeting of
shareholders of Orthofix and until their successors have been elected and
qualified. Officers of Orthofix serve at the discretion of the Board of
Directors. There are no family relationships among any of the directors or
executive officers of Orthofix.
Mr. Gaines Cooper became Chairman of Orthofix in March 1992 and has
been a Director of Orthofix since its formation in 1987. He is Managing Director
of Chelle Plastics Ltd-Seychelles. Mr. Gaines Cooper is also Chairman of LMA
International S.A., Jersey, Channel Islands. See "Item 13. INTEREST OF
MANAGEMENT IN CERTAIN TRANSACTIONS".
Mr. Wallner became a Director and President and Chief Executive Officer
of Orthofix in March 1992 and has been President of Orthofix S.r.l. since its
formation in 1987. From 1978 until 1987, he was Vice President of 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.
24
<PAGE>
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 Venture Partners, a venture capital
management firm in London since 1985. Mr. Benjamin is a Director of Professional
Staff plc and a number of private health care companies.
Mr. d'Abreu de Paulo became a non-executive Director of Orthofix in
March 1992 and has been associated with Orthofix since its formation in 1987 as
the President and Managing Director of First Independent Trust (Curacao) N.V., a
director of Orthofix until February 28, 1992. Mr. d'Abreu de Paulo is a tax
attorney in private practice and a member of the Audit Court of the Netherlands
Antilles.
Mr. Hartsuiker became a non-executive Director of Orthofix in March
1992 and has been a Director of Orthofix International B.V. since 1987. Mr.
Hartsuiker is a Director of New Amsterdam Cititrust B.V. in The Netherlands.
Mr. Hewett became the Deputy Group Chairman of Orthofix and Chairman of
the Board of Orthofix Inc. in March 1998. He has been a non-executive Director
of Orthofix since March 1992. Previously, Mr. Hewett served as the Managing
Director of Caradon Plc, Chairman of the Engineering Division, Chairman and
President of Caradon Inc., Caradon Plc's United States subsidiary and a member
of the Board of Directors of Caradon Plc of England. In addition, he was
responsible for Caradon Plc's worldwide human resources function, and the
development of its acquisition opportunities.
Mr. 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,
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 1999, an aggregate amount of approximately $2.4 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 $36,000 paid by
Orthofix in 1999 to provide pension, retirement or similar benefits for all
directors and officers. Orthofix anticipates that for 2000 the aggregate
compensation to be paid to its directors and executive officers as a group (13
persons) will be approximately $2.5 million.
25
<PAGE>
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 March 15, 2000 was 2,011,750.
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 1,648,751 Common Shares (representing approximately
12.7% of the Common Shares outstanding) at prices ranging from $1.43 to $14.88
per Common Share. Of these, options for 789,426 Common Shares have been
exercised or cancelled as of March 15, 2000. Option grants under the Staff Plan
were made in 1988, 1989, 1990, 1991, 1995, 1996, 1997, 1998 and 1999. 263,274
Common Shares remain available for grant under this Plan.
Options under the Staff Plan are currently exercisable with respect to
51% 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
26
<PAGE>
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 March 31, 2000, AME Warrants to purchase 115,994
Common 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
Orthofix products, rents facilities from LMA under a three year lease which
started in 1999. The annual rent paid to LMA is $77,000. Inter Medical Supplies
has paid LMA $207,000 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-25 hereof.
Item 19. FINANCIAL STATEMENTS AND EXHIBITS
The following financial statements and related schedule, together with
the report of PricewaterhouseCoopers 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, 1999 and 1998.
Consolidated Statements of Operations for each of the three years in
the period ended December 31, 1999.
Consolidated Statements of Changes in Shareholders' Equity for each of
the three years in the period ended December 31, 1999. Consolidated
Statements of Cash Flows for each of the three years in the period
ended December 31, 1999.
Notes to Consolidated Financial Statements.
Schedule 1 - Condensed Financial Information of Registrant
Schedule 2 - Valuation and Qualifying Accounts
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.
28
<PAGE>
ORTHOFIX INTERNATIONAL N.V.
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the Registrant certifies that it meets all of the requirements for
filing on Form 20-F and has duly caused this Annual Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ORTHOFIX INTERNATIONAL N.V.
By: /s/ Peter Clark
-----------------------------------------------
Name: Peter Clarke
Title: Executive Vice President,
Chief Financial Officer
Secretary and Director
Date: May 19, 2000
29
<PAGE>
ORTHOFIX INTERNATIONAL N.V.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Report of the Independent Accountants F-2
Consolidated balance sheets as of December 31, 1999 and 1998 F-3
Consolidated statements of operations for each of the three years in the period
ended December 31, 1999 F-4
Consolidated statements of changes in shareholders' equity for each of the three years in
the period ended December 31, 1999 F-5
Consolidated statements of cash flows for each of the three years in the period ended
December 31, 1999 F-6
Notes to the consolidated financial statements F-7
Schedule 1 - condensed financial information of registrant S-1
Schedule 2 - valuation and qualifying accounts S-5
</TABLE>
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,
1999 and 1998, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States. 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
auditing standards generally accepted in the United States 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
April 20, 2000
F-2
<PAGE>
<TABLE>
<CAPTION>
ORTHOFIX INTERNATIONAL N.V.
CONSOLIDATED BALANCE SHEETS
as of December 31, 1999 and 1998
December 31
-----------
(U.S. Dollars, in thousands except share and per share data) 1999 1998
- ------------------------------------------------------------ ---- ----
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 9,724 $ 6,970
Restricted cash 880 839
Trade accounts receivable, less allowance for doubtful
accounts of $6,176 and $4,912 at December 31, 1999
and 1998, respectively 39,755 32,713
Inventories 15,633 15,839
Deferred income taxes 3,739 3,106
Other current assets 5,901 4,030
-------- --------
Total current assets 75,632 63,497
Securities and other investments 525 437
Property, plant and equipment, net 9,568 9,056
Patents and other intangible assets, net 2,476 2,448
Goodwill, net 46,584 45,067
Deferred income taxes - non-current 1,937 1,895
-------- --------
Total assets $136,722 $122,400
======== ========
Liabilities and shareholders' equity Current liabilities:
Bank borrowings $ 4,349 $ 3,073
Current portion of long-term debt 4,520 2,344
Trade accounts payable 7,228 7,777
Other current liabilities 12,309 12,854
-------- --------
Total current liabilities 28,406 26,048
Long-term debt 5,379 4,168
Deferred income taxes 1,763 1,516
Deferred income 2,500 2,500
Long-term rental liabilities, net 658 1,085
Deferred compensation 817 850
-------- --------
Total liabilities 39,523 36,167
======== ========
Minority interests $ 7,629 $ 7,497
Commitments and contingencies (notes 14 and 18 to the Consolidated Financial
Statements)
Shareholders' equity
Common shares $0.10 par value
Authorized: 30,000,000 (1998: 30,000,000)
Issued: 13,369,580 (1998: 13,271,895) 1,337 1,327
Outstanding 13,029,834 (1998: 12,964,055)
Additional paid-in capital 63,893 63,176
Less: 339,746 Treasury shares, at cost (1998: 307,840) (3,783) (3,303)
-------- --------
61,447 61,200
Retained earnings 31,501 18,589
Accumulated other comprehensive income (3,378) (1,053)
-------- --------
Total shareholders' equity 89,570 78,736
-------- --------
Total liabilities and shareholders' equity $136,722 $122,400
======== ========
The accompanying notes form an integral part of these
consolidated financial statements.
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
ORTHOFIX INTERNATIONAL N.V.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31, 1999, 1998 and 1997
(U.S. Dollars, in thousands, except share and per share data) 1999 1998 1997
- ------------------------------------------------------------- ---- ---- ----
<S> <C> <C> <C>
Net sales $ 121,284 $ 104,065 $ 89,963
Cost of sales 33,551 29,493 25,366
--------- ---------- ---------
Gross profit 87,733 74,572 64,597
Operating expenses
Sales and marketing 41,863 37,949 32,538
General and administrative 12,782 11,987 12,365
Research and development 6,403 5,875 4,840
Amortization of intangible assets 3,469 3,549 3,786
Impairment of long-lived assets - 3,295 -
Restructuring charges - - 1,010
--------- ---------- ---------
64,517 62,655 54,539
--------- ---------- ---------
Total operating income 23,216 11,917 10,058
Other income (expense)
Interest income 614 326 117
Interest expense on bank loans (1,204) (1,135) (1,962)
Other income (expense) net 14 (502) (113)
--------- ---------- ---------
Net other expense (576) (1,311) (1,958)
Gain on sale of product license - 8,100 -
--------- ---------- ---------
Net income before income taxes and
minority interests 22,640 18,706 8,100
Income tax expense (7,914) (2,687) (4,081)
--------- ---------- ---------
Net income before minority interests 14,726 16,019 4,019
Minority interests (1,814) (1,743) (950)
--------- ---------- ---------
Net income $ 12,912 $ 14,276 $ 3,069
========= ========= ========
Net income per common share - basic $ 0.99 $ 1.10 $ 0.24
====== ====== ======
Net income per common share - diluted $ 0.97 $ 1.07 $ 0.23
====== ====== ======
Weighted average number of common shares - basic 13,020,320 12,966,830 12,932,807
========== ========== ==========
Weighted average number of common shares - diluted 13,364,127 13,291,988 13,211,397
========== ========== ==========
</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 CHANGES IN
SHAREHOLDERS' EQUITY
For the years ended December 31, 1999, 1998 and 1997
Number of Accumulated
Common Treasury other Total
(U.S. Dollars, in thousands, shares Common Additional Shares Retained comprehensive shareholders'
except share data) Outstanding Shares paid-in capital (at cost) Earnings income equity
- ----------------------------- ----------- ------ --------------- --------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
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)
-------
Total 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
-------
Total Comprehensive income 15,645
---------- ------ ------- -------- ------ -------- -------
At December 31, 1998 12,964,055 $1,327 $63,176 $(3,303) $18,589 $(1,053) $78,736
97,685 common shares issued 97,685 10 659 - - - 669
50,000 shares purchased for
treasury (50,000) - - (681) - - (681)
18,094 common shares issued
from treasury 18,094 - 58 201 - - 259
Net income - - - - 12,912 - 12,912
Other comprehensive income
Unrealized gain on
marketable securities (net of tax) - - - - - 292 292
Translation adjustment - - - - - (2,617) (2,617)
-------
Total Comprehensive income 10,587
---------- ------ ------- -------- ------ -------- -------
At December 31, 1999 13,029,834 $1,337 $63,893 $(3,783) $31,501 $(3,378) $89,570
========== ====== ======= ======== ======= ======== =======
</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 CASH FLOWS
For the years ended December 31, 1999, 1998 and 1997
(U.S. Dollars, in thousands) 1999 1998 1997
- ---------------------------- ---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 12,912 $ 14,276 $ 3,069
------ ------ -----
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 6,833 6,521 6,493
(Profit)/Loss on sale of fixed assets (79) 428 41
Gain on sale of product license - (8,100) -
Loss on impairment of long-lived assets - 3,295 -
Deferred taxes (169) (5,001) (205)
Minority interest in net income of consolidated subsidiaries 1,814 1,743 950
Other 94 261 144
Changes in operating assets and liabilities:
Increase in accounts receivable (9,326) (4,794) (4,628)
Increase in inventories (1,003) (3,599) (531)
Increase in other current assets (2,844) (7) (59)
Increase in trade accounts payable 55 1,193 492
Increase (decrease) in other current liabilities 163 (188) (1,119)
------ ------ -----
Net cash provided by operating activities 8,450 6,028 4,647
------ ------ -----
Cash flows from investing activities:
Investments in affiliates and subsidiaries (5,474) (437) -
Capital expenditure (5,446) (3,401) (3,394)
Proceeds from sale of equipment 126 63 51
Net proceeds from sale of product license - 12,200 -
------ ------ -----
Net cash (used in) provided by investing activities $ (10,794) $ 8,425 $ (3,343)
-------- ----- --------
Cash flows from financing activities:
Net proceeds from issue of common shares $ 669 $ 540 $ 355
Acquisition of Treasury shares (681) (1,916) -
Repurchase of warrants - (174) -
Repayment of loans (6,581) (11,031) (3,444)
Proceeds from loan 10,000 - -
Proceeds from borrowings 1,748 895 3,053
Restricted cash - - (780)
------ ------ -----
Net cash provided by (used in) financing activities 5,155 (11,686) (816)
------ ------ -----
Effect of exchange rates changes on cash (57) 72 39
Net increase in cash and cash equivalents 2,754 2,839 527
Cash and cash equivalents at the beginning of the year 6,970 4,131 3,604
------ ------ -----
Cash and cash equivalents at the end of the year $ 9,724 $ 6,970 $ 4,131
======= ======= =======
Supplemental disclosure of cash flow information Cash paid during the year for:
Interest $ 812 $ 1,206 $ 1,625
Income taxes $ 8,219 $ 8,082 $ 3,431
</TABLE>
Supplemental schedule of non-cash investing and financing activities
On April 5, 1999, $259,000 of the Earnout payment (note 13 to the Consolidated
Financial Statements) was satisfied by way of issuing 18,094 shares of treasury
stock
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-6
<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 after elimination of all material
intercompany accounts and transactions.
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, labor and production.
Demo inventory is expensed when provided to sales representatives.
(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 $4.4 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
$440,000 loss on exchange upon conversion of this debt.
F-7
<PAGE>
ORTHOFIX INTERNATIONAL N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
1 Accounting policies (continued)
(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 2 to 10
Furniture and fixtures 5 to 8
Other 4 to 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.
(g) 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 ten to 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. The costs
of internally developed intangible assets are expensed as incurred.
(h) 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 to the Consolidated Financial Statements).
(i) 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.
F-8
<PAGE>
ORTHOFIX INTERNATIONAL N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
1 Accounting policies (continued)
(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.
(m) Net income per common share
Net income per common share is calculated in accordance with Statement
of Financial Accounting Standard No. 128 ("SFAS 128), "Earnings per
Share". Net income per common share - basic is based on the weighted
average number of common shares outstanding during each of the
respective years. Net income 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 to the Consolidated Financial
Statements).
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) Securities and Other Investments
Marketable equity securities are classified as available-for-sale. Such
securities are carried at fair value, with the unrealized gains and
losses, net of income taxes, reported as a component of shareholders'
equity. Any gains or losses from the sale of these securities are
recognized using the specific identification method. (See note 6 to the
Consolidated Financial Statements).
(p) 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.
F-9
<PAGE>
ORTHOFIX INTERNATIONAL N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
1 Accounting policies (continued)
(q) 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.
(r) Reclassifications
Certain 1998 and 1997 amounts have been reclassified to conform to the
1999 presentation.
(s) 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. Issuance of treasury shares are accounted for based on their
average cost.
(t) 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 adoption of this pronouncement in 1999
did 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 was effective for
financial statements for years beginning after December 15, 1998. The
adoption of this pronouncement in 1999 did 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. In
July 1999, the FASB issued SFAS No 137. "Accounting for Derivative
Instruments and Hedging Activities - Deferral f the Effective date of
SFAS No 133 - an amendment of FASB Statement No 133". Citing concerns
about companies' ability to modify their information systems in time to
apply SFAS 133, the FASB, through issuing SFAS 137, delayed its
effective date for one year, to fiscal years beginning after June 15,
2000 (January 1, 2001 for the Company). Management continues to
evaluate the effects of SFAS 133 on the Company's financial statements.
F-10
<PAGE>
ORTHOFIX INTERNATIONAL N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
2 Impairment of assets and restructuring
Impairment of long-lived assets
During 1998, 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 to the Consolidated Financial Statements).
In April 1998, Orthofix Inc. entered into an agreement with Stryker 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
Stryker Howmedica Inc.. The write down of $1.6 million was classified within
other income as an offset to the $9.7 million gain on sale of product license.
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 was charged to operating costs in 1998.
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 $451,000, $294,000 and $263,000 and the long-term portions are
$658,000, $1,085,000 and $1,296,000 as of December 31, 1999, 1998 and 1997
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 $0 and $300,000 as of
December 31, 1999 and 1998 respectively. There were no additional restructuring
charges in either 1998 or 1999.
3 Restricted cash
December 31
-----------
(In thousands) 1999 1998
- ------------------------------------- ---- ----
Restricted cash $ 880 $ 839
===== ====
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 to the Consolidated
Financial Statements). Interest income of $41,000 and $59,000 was earned on this
bond in 1999 and 1998 respectively.
4 Inventories
December 31
-----------
(In thousands) 1999 1998
- ------------------------------------- ---- ----
Raw materials $ 2,360 $ 3,215
Work-in-process 2,201 2,227
Finished goods 6,899 6,903
Field inventory 5,663 4,971
Less reserve for refurbishment and obsolescence (1,490) (1,477)
------- -------
$ 15,633 $ 15,839
======= =======
F-11
<PAGE>
ORTHOFIX INTERNATIONAL N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
5 Other current assets
December 31
-----------
(In thousands) 1999 1998
- ------------------------------------- ---- ----
Refundable sales tax $ 807 $ 812
Prepaid income taxes 2,073 1,811
Prepayments 1,154 1,220
Advances to affiliates 1,020 -
Other 847 187
------- -------
$ 5,901 $ 4,030
====== ======
6 Securities and other investments
In 1998 the company acquired a 30% minority interest in Neomedics Inc. for
$119,000. In 1999 the Company's ownership interest in Neomedics Inc. was
increased from 30% to 100% at a cost of $750,000, including accrued acquisition
costs. Additional goodwill associated with the increase in ownership stake was
$793,000 (see note 9 to the Consolidated Financial Statements). In accordance
with the Company's accounting policies, the financial results of Neomedics Inc.
were included in the consolidated statements of operations from the date of the
increase in ownership stake.
During 1999, the Company acquired a 30% ownership stake in the voting share
capital of Collin S.A., France for $68,000. During 1998, the Company acquired a
47.5% ownership stake in the voting share capital of both Promeca S.A., Mexico
and Orthofix do Brazil, for $80,000 and $238,000, respectively.
An amount of $475,000 related to marketable equity securities has been included
in the consolidated statements of financial position as Securities and Other
Investments. These securities made up part of the assets of AME that was
acquired in 1995 as described in note 13 to the Consolidated Financial
Statements. The original cost of the securities as stated in the books of AME
was approximately $100,000. At the time of acquisition, the investment was
written down to $0 as part of the Company's fair value exercise as its
recoverability was not determinable at the time. Subsequent to this exercise,
the company to which the securities related affected a public offering of its
shares in the United States. Consequently, the Company in 1999 has accounted for
the investment in accordance with SFAS 115 "Accounting for Certain Investments
in Debt and Equity Securities". The unrealized gain of $292,000 (net of $183,000
in taxes) has been recorded as a component of Shareholders equity.
7 Property, plant and equipment
December 31
-----------
(In thousands) 1999 1998
- ------------------------------------- ---- ----
Cost
Building $ 2,995 $ 3,225
Plant and equipment 16,341 10,650
Furniture and fixtures 5,147 4,270
-------- --------
24,483 18,145
Accumulated depreciation 14,915 9,089
-------- ---------
$ 9,568 $ 9,056
====== ======
Depreciation expense for 1999, 1998 and 1997 was $3,364,000, $2,972,000 and
$2,691,000 respectively.
F-12
<PAGE>
ORTHOFIX INTERNATIONAL N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
8 Patents and other intangible assets
December 31
-----------
(In thousands) 1999 1998
- ------------------------------------- ---- ----
Cost
Patents $ 12,376 $ 13,698
Other 498 173
----------- ----------
12,874 13,871
Accumulated amortization
Patents 10,285 11,391
Other 113 32
---------- ----------
$ 2,476 $ 2,448
========== ==========
During 1998, the Company wrote off a net book value amount of approximately $3.3
million of other intangible assets (see note 2 to the Consolidated Financial
Statements).
9 Goodwill
December 31
-----------
(In thousands) 1999 1998
- ------------------------------------- ---- ----
Cost $ 61,726 $ 57,343
Accumulated amortization 15,142 12,276
---------- ----------
$ 46,584 $ 45,067
========== ==========
On April 20, 1999, the Company paid $1.9 million to the shareholders in
Novamedix Distribution Limited (NDL) for an additional 10% equity interest,
following exercise by such shareholders of their put option over such shares,
thereby raising the Company's ownership of NDL from 80% to 90%. In December
1999, the Company acquired the remaining 10% of the issued share capital of NDL
for $2 million. These increases in ownership stake resulted in additional
goodwill of $3.5 million.
During 1998, the Company wrote down approximately $1.6 million of goodwill
related to one of its product lines (see note 2 to the Consolidated Financial
Statements).
10 Bank borrowings
December 31
-----------
(In thousands) 1999 1998
- ------------------------------------- ---- ----
Borrowings under lines of credit $ 4,349 $ 3,073
======= =======
Weighted average interest rate at year end: 1999 1998
---- ----
% %
Bank borrowings 4.17 7.84
Current maturity long-term debt 8.25 7.48
F-13
<PAGE>
ORTHOFIX INTERNATIONAL N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
10 Bank borrowings ( continued)
Borrowings under lines of credit consist of borrowings of the Company's Italian
subsidiaries. Of the $4.3 million of borrowings under lines of credit, $3.8
million is collateralized by the net assets of Orthofix Srl. The Company had
unused available lines of credit of $7.1 million at December 31, 1999 (1998:
$2.8 million). The terms of these lines of credit give the Company the option to
borrow amounts in Italy at rates to be determined individually and from time to
time with the banks concerned.
11 Other current liabilities
December 31
-----------
(In thousands) 1999 1998
- ------------------------------------- ---- ----
Accrued expenses $ 4,533 $ 5,423
Salaries and related taxes payable 3,111 2,960
Other payables 3,688 2,927
Income taxes payable 952 1,492
Deferred income taxes 25 52
--------- ---------
$ 12,309 $ 12,854
========= =========
12 Long-term debt
<TABLE>
<CAPTION>
December 31
-----------
(In thousands) 1999 1998
- ------------------------------------- ---- ----
<S> <C> <C>
Note payable to bank $ 8,004 $ 3,074
Long-term obligations, net of an unamortized discount of $0 $ 1,777 3,285
(1998: $788)
Loan repayable in instalments commencing in 1996
The original interest rate of 2.2% increased to 8.76% in 1996. 118 153
--------- ---------
9,899 6,512
Less current portion (4,520) (2,344)
--------- ---------
$ 5,379 $ 4,168
========= =========
</TABLE>
Note payable to bank consists of an $10 million credit arrangement in the form
of a Term note (the "Term Note"). The Term Note bears interest at either the
current prime rate plus 0.75% or the London Inter Bank Offered Rate (LIBOR) plus
1.75%. The Term Note is collateralized by substantially all of the assets of
Orthofix Inc. and is guaranteed by the Company.
Borrowings of $8,004,000 and $3,074,000 under the Term Note bearing interest at
7.93% and 6.94% were outstanding as of December 31, 1999 and 1998, respectively.
Annual maturities of the Term Note are $4 million, due in quarterly instalments
of $1 million. In August 1999, the Working Capital component of the Credit
Agreement, having an outstanding balance of $1,500,000, was paid off and
canceled as part of an Assignment and Assumption Agreement and Amendment to the
Credit Agreement. As of December 31, 1999, there was $0 in borrowings under the
Working Capital Facility. The credit arrangement matures on December 31, 2001.
F-14
<PAGE>
ORTHOFIX INTERNATIONAL N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
12 Long-term debt (continued)
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, 1999 the amounts were $13.6 million
(1998: $12.2 million) and $34.2 million (1998: $30.6 million), respectively.
Long-term obligations include a note for $1.8 million (1998: $2.6 million)
issued in connection with the acquisition of Osteogenics in December 1994. These
obligations have aggregate annual maturities of approximately $500,000 in 2000
and $500,000 thereafter through 2002 with the balance of $277,000 payable in
2003. The obligations bear interest at 8.23%.
The aggregate maturities of long-term debt for the five years after December 31,
1999 are $4,520,000, $4,517,000, $518,000, $297,000 and $23,000 respectively.
Aggregate maturities of long term debt thereafter is $24,000.
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 was
redeemable by December 31, 2010 if not redeemed earlier upon the occurrence of
certain conditions and had been discounted at 6.75%. On April 20, 1999 the
Company redeemed the loan note in full. The carry value of the loan note at
April 20, 1999 prior to repayment was $703,000 net of unamortised discount of
$777,000. At December 31, 1998 the carrying value of the loan note was $692,000
net of unamortised discount at $788,000.
13 Acquisition of subsidiaries
Other than the increase in the Company's ownership state in Neomedics as
previously mentioned in note 6 to the Consolidated Financial Statements, there
were no acquisitions of subsidiaries in either 1999 or 1998.
On August 21, 1995 the Company acquired substantially all the outstanding stock
of AME and merged AME into Orthofix Inc. Prior to the merger, Orthofix Inc. had
no operating activity. The principal terms of the acquisition included cash
payments of approximately $47.5 million and the issuance of approximately 1.95
million shares of the Company's common stock totaling approximately $33.5
million. Additionally, the Merger Agreement provided 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 were contingent upon the
attainment of certain thresholds by the Company in 1995, 1996 and/or 1997 and
were not compensatory in nature. Payment of the Bonus was contingent on the
exceeding of certain gross revenue thresholds by the Company in 1995, 1996
and/or 1997. The Earnout and Bonus, if paid, were to be paid in cash, common
stock of the Parent or a combination thereof on a Payout Date defined in the
Merger Agreement.
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 of $102,000 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. The Earnout was satisfied by way of cash ($343,000) and the issuance of
treasury shares ($259,000).
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. An arbitrator acting
under the auspices of the American Arbitration Association ("AAA") subsequently
entered a Consent Award based on the Review Committee's determination. However,
the Company will make no further payments pending the outcome of related
litigation. (See note 18 to the Consolidated Financial Statements).
F-15
<PAGE>
ORTHOFIX INTERNATIONAL N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
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, 1999, 1998 and 1997 was approximately $2,040,000, $1,631,000 and $1,503,000
respectively. Future minimum lease payments under operating leases as of
December 31, 1999 are as follows:
In thousands
- ------------
2000 2,281
2001 1,910
2002 1,314
2003 1,119
2004 and later years 1,218
-----
Total 7,842
=====
F-16
<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, 1999 for the operating segments of the Company and its
subsidiaries are as follows: -
<TABLE>
<CAPTION>
Net Sales Operating income/(expense) Identifiable assets
--------- -------------------------- -------------------
(In thousands) 1999 1998 1997 1999 1998 1997 1999 1998 1997
- -------------- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
International $ 76,874 $ 76,481 $ 60,160 $ 18,248 $ 18,780 $ 10,232 $ 100,915 $ 89,794 $ 74,571
North America $ 62,901 $ 53,183 44,155 7,412 1,040 1,034 58,212 48,610 45,412
--------- --------- --------- -------- -------- -------- --------- --------- ---------
Segment total 139,775 129,664 104,315 25,660 19,820 11,266 159,127 138,404 119,983
Group activities -- -- -- (2,959) (3,203) (2,829) 58,820 61,426 65,272
Intercompany and
investment (18,491) (25,599) (14,352) 515 (4,700) 1,621 (81,225) (77,430) (72,307)
eliminations --------- --------- --------- -------- -------- -------- --------- --------- ---------
Total $ 121,284 $ 104,065 $ 89,963 $ 23,216 $ 11,917 $ 10,058 $ 136,722 $ 122,400 $ 112,948
========= ========= ========= ======== ======== ======== ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
Depreciation and amortization Income taxes expense (benefit) Other income (expense)
------------------------------ ------------------------------ ----------------------
(In thousands) 1999 1998 1997 1999 1998 1997 1999 1998 1997
- -------------- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
International $ 3,827 $ 3,234 $ 2,933 $ 4,297 $ 3,354 $ 4,081 $ (539) $ (125) $ (754)
North America 3,006 3,287 3,560 3,617 (667) - (37) (1,186) (1,204)
------- ------- ------- -------- ------- ------- ------- -------- --------
Total $ 6,833 $ 6,521 $ 6,493 $ 7,914 $ 2,687 $ 4,081 $ (576) $(1,311) $(1,958)
======= ======= ======= ======== ======= ======= ======= ======== ========
</TABLE>
Geographical information
Analysis of net sales by geographic destination:
(In thousands) 1999 1998 1997
- -------------------- ---- ---- ----
U.S. $ 75,790 $ 63,671 $ 53,607
U.K. 16,817 15,432 12,450
Italy 11,134 9,347 8,951
Others 17,543 15,615 14,955
-------- -------- --------
$121,284 $104,065 $ 89,963
======== ======== ========
There are no sales in the Netherlands Antilles.
F-17
<PAGE>
ORTHOFIX INTERNATIONAL N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
15 Business segment information (continued)
Geographical information
Analysis of long-lived assets by geographic area:
(In thousands) 1999 1998 1997
- --------------------- ---- ---- ----
U.S. $ 36,238 $ 35,885 $ 42,616
Others 22,913 21,123 21,869
-------- -------- --------
$ 59,151 $ 57,008 $ 64,485
======== ======== ========
There are no long-lived assets in the Netherlands Antilles company.
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) 1999 1998 1997
- --------------------------- ---- ---- ----
Italy - Current $ 2,850 $ 2,367 $ 3,267
- Deferred 21 (72) (195)
Cyprus - Current 323 327 190
- Deferred (4) (106) -
U.K. - Current 1,101 802 819
U.S. - Current 3,882 4,977 -
- Deferred (265) (5,644) -
Other - Current 6 36 -
------- ------- -------
$ 7,914 $ 2,687 $ 4,081
======= ======= =======
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) 1999 1998 1997
- ---------------------- ---- ---- ----
U.S. $ 7,150 $ 7,953 $ (170)
Non U.S. 15,490 10,753 8,270
------- ------- -------
$22,640 $18,706 $ 8,100
------- ------- -------
F-18
<PAGE>
ORTHOFIX INTERNATIONAL N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
16 Income tax expense (continued)
The tax effects of the significant temporary differences, which comprise the
deferred tax liabilities and assets are as follows:
(In thousands) 1999 1998
- --------------------- ---- ----
Deferred tax liabilities
Goodwill $ (260) $ (338)
Patents (534) (586)
Inventories (125) (154)
Depreciation (249) (149)
Other (620) (854)
--------- ---------
(1,788) (2,081)
--------- ---------
Deferred tax assets
Compensation 309 512
Inventories and related reserves 1,707 1,521
Allowance for doubtful accounts 2,129 1,706
Accrued expenses - 238
Restructuring charges 413 519
Deferred royalties 934 964
Other 118 106
Depreciation 66 -
-------- --------
5,676 5,566
----------- -----------
3,888 $ 3,485
=========== ===========
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 had net operating loss carry forwards from its
United States operations of approximately $3,142,000, all of which was utilized
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) 1999 1998 1997
- --------------------------- ---- ---- ----
Statutory tax:
Italy (42.3%) $ 2,827 $ 2,787 $ 2,867
Cyprus (3.93%) 319 392 160
U.K. (31%)* 1,097 937 675
U.S. (35%) 2,582 2,777 -
----------- ----------- ----------
6,825 6,893 3,702
Goodwill 790 2,260 -
Valuation allowance movements - (5,997) -
Other differences 299 (469) 379
-------- -------- --------
Income tax expense $ 7,914 $ 2,687 $ 4,081
====== ====== ======
* 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-19
<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, 1999, 1998 and 1997, this amounted to $102,000,
$625,000, and $(566,000), respectively.
Since the Company plans to continue to finance foreign operations and expansion
through reinvestment of undistributed earnings of its foreign subsidiaries
(approximately $69.8 million at December 31, 1999), 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, 1999, 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) 1999 1998 1997
- -------------- ---- ---- ----
Revenues $ 936 $ 1,444 $ 794
Purchases $ 9,629 $ 8,864 $ 10,636
Accounts payable $ 572 $ 396 $ 1,227
Accounts receivable $ 188 $ 1,207 $ 206
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.
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.
F-20
<PAGE>
ORTHOFIX INTERNATIONAL N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
18 Commitments and contingencies (continued)
Litigation
The Company and its subsidiaries are involved in legal proceedings, claims
litigation and tax matters arising in the ordinary course of business. In the
opinion of management, the outcome of such current legal proceedings, claims
litigation and tax matters, if decided adversely, could have a material effect
on quarterly or annual operating results or cash flows in a future period.
However, in the opinion of management, these matters will not materially affect
the Company's consolidated position.
In addition, the Company is subject to certain other contingencies discussed
below:
On January 29, 1999, two couples who owned shares of the common stock of
American Medical Electronics Inc, ("AME") commenced a civil action against the
Company and one of it's subsidiaries and the Review Committee seeking, inter
alia, the maximum Earnous and Bonus under the merger agreement. The Company is
vigorously defending against that action (see note 13 to the Consolidated
Financial Statements).
Novamedix Ltd. ("Novamedix") filed an action on February 21, 1992 against
Kinetic Concepts Inc. ("KCI") alleging infringement of the patents relating to
Novamedix's A-V Impulse System(R) product, breach of contract, and unfair
competition. In this action, trial of which is not expected to begin before the
final quarter of 2000, Novamedix is seeking a permanent injunction enjoining
further infringement by KCI. Novamedix also seeks damages relating to past
infringement, breach of contract, and unfair competition. KCI has filed
counterclaims alleging that Novamedix engaged in inequitable conduct before the
United States Patent and Trademark Office and fraud as to KCI and that Novamedix
engaged in common law and statutory unfair competition against KCI. On September
9, 1999 the Company announced that Novamedix was successful in its motion to
open its suit against KCI.
On November 29, 1995 Inter Medical 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. On June 28,
1999 the United States Court of Appeals for the Third Circuit unanimously
affirmed the district court's decisions on liability and damages. At the same
time, the sharply divided court reduced the punitive damages award to $1m. As of
December 31, 1999 management are of the opinion that there existed sufficient
doubt as to the potential outcome of the EBI case and accordingly had deferred
recognition of the gain until such outcome was verified and all avenues of
appeal were exhausted (see note 21 to the Consolidated Financial Statements).
Orthofix Inc. is a defendant in a lawsuit brought by AME's former president and
chief executive officer (the "Plaintiff") related to the termination of his
employment with AME. On May 19, 1997, the jury in such trial found that AME had
failed to comply with the employment agreement and awarded damages of $1,479,645
against Orthofix Inc. The jury also found that certain directors of AME had
tortiously interfered with the employment agreement and awarded damages of
$1,238,179 against the directors. On September 12, 1997, the trial court entered
judgment that the Plaintiff recover $679,645 plus prejudgment interest from
Orthofix Inc., which has been paid and $1,238,179 plus prejudgment interest from
the directors. An appeal of the judgment against the directors is currently
pending. The Company believes that any liability resulting from this litigation
will have no material adverse effect on the Company's financial condition.
In management's opinion, the Company is not currently involved in any other
legal proceeding, individually or in the aggregate, that will have a material
effect on the financial position, liquidity or operating results of the Company.
Concentrations of credit risk
F-21
<PAGE>
ORTHOFIX INTERNATIONAL N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
18 Commitments and contingencies (continued)
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.
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 1999, 1998 and 1997 were approximately $114,000,
$101,000, and $76,000 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 1999,
1998 and 1997 were approximately $50,000, $50,000 and $45,000 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 $41,000
during 1999, and $38,000 in both 1998 and 1997.
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, 1999, 1998 and 1997, expenses incurred relating to the 401(k) Plan,
including matching contributions, were approximately $441,000, $438,000 and
$338,000 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 1999, 1998 and 1997 were approximately
$181,000, $169,000 and $165,000 respectively. Deferred compensation payments of
$95,000, $100,000 and $25,000 were made in 1999, 1998 and 1997, 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, 1999, 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 and net income per common share for the
years ended December 31, 1999, 1998 and 1997 would have been equal to the pro
forma amounts indicated below:
F-22
<PAGE>
ORTHOFIX INTERNATIONAL N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
20 Staff and executive share option plans and warrants (continued)
(In thousands except per share data) 1999 1998 1997
- ------------------------------------ ---- ---- ----
Net income
As reported $ 12,912 $ 14,276 $ 3,069
Pro forma $ 11,973 $ 13,560 $ 2,529
Net income per common share - basic
As reported $ 0.99 $ 1.10 $ 0.24
Pro forma $ 0.92 $ 1.05 $ 0.20
Net income per common share - diluted
As reported $ 0.97 $ 1.07 $ 0.23
Pro forma $ 0.90 $ 1.02 $ 0.19
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 1999, 1998 and 1997 respectively: divided yield
of 0%, 0% and 0%; expected volatility of 55%, 55% and 45%; risk-free interest
rates of 5.76%, 5.00% and 6.32%; and expected lives of 4.50, 4.50 and 4.71
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 1,760,000 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 totaled 624,794, of which 234,290 remained
outstanding. Options granted under the AME Plans expire ten years after date of
grant.
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 and 1999 at prices ranging from $18.10
to $30.60 per common share and expiring on various dates through December 2003.
F-23
<PAGE>
ORTHOFIX INTERNATIONAL N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
20 Staff and executive share option plans and warrants (continued)
Executive Share Option Plan
Under the Executive Share Option Plan ("Executive Plan"), approved by
shareholders in March, 1992, 1,945,000 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,
1999, 1998 and 1997 and changes during the years ended on those dates are
presented below:
<TABLE>
<CAPTION>
1999 1998 1997
---------------- -------------- -------------- -------------- -------------- --------------
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 2,957,662 $ 13.12 2,926,560 $ 12.42 2,758,556 $ 12.76
Granted 124,750 $ 12.90 249,500 $ 12.12 374,500 9.71
Exercised (70,200) $ 5.15 (125,550) $ 2.82 (65,629) 4.69
Forfeited (12,750) $ 9.87 (92,848) $ 11.73 (140,867) 18.25
-------- -------- --------- -------- --------- --------
Outstanding at end of year 2,999,462 $ 13.30 2,957,662 $ 13.12 2,926,560 $ 12.42
=========== ======== ========= ======== ========= ========
Options exercisable at end of year 1,496,612 1,450,712 1,387,618
Weighted average fair value of
options granted during the year $ 6.47 $ 6.06 $ 3.83
at market value
Weighted average fair value of
options granted during the year in - $1.27 $ 2.48
excess of market values
</TABLE>
F-24
<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 31/12/99
- ----------------------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
- ------------------------- ---------------------------------------- --- ------------- ------ -------------------------------
Range of Number Weighted Weighted Number Weighted
Exercise Outstanding at Average Average Exercisable Average
Prices 31/12/99 Remaining Exercise at 31/12/99 Exercise
Contractual Life Price Price
- ------------------------- ------------------- --------------------- ---- ------------- ------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
$1.430 - $ 8.500 396,200 5.31 $6.24 223,350 $4.86
$9.060 - $14.188 484,900 6.50 $11.44 170,401 $10.58
$14.400 - $14.400 1,945,000 4.31 $14.40 954,500 $14.40
$14.440 - $30.610 173,362 3.83 $23.01 148,361 $24.38
-------- -------- -------- -------- --------
$1.430 - $30.610 2,999,462 4.77 $13.34 1,496,612 $13.53
========= ====== ======== ========= ========
</TABLE>
21 Subsequent events
Settlement of EBI lawsuit:
On January 10, 2000 the United States Supreme Court declined to review the Third
Circuit's decision referred to in note 18 of the Consolidated Financial
Statements. As a direct result of the Supreme Court's order and the satisfaction
of the judgement, the litigation was settled in the Company's 2000 fiscal year.
On January 21, 2000 EBI wired $64,174,752 to satisfy the judgement in favour of
the Company. The net gain of approximately $38 million before tax is to be
recorded in the Company's first quarter 2000 results.
New lease commitment:
On February 24, 2000 the Company entered into an operating lease for a new
manufacturing facility to be used in its US operations. The lease begins on
January 1, 2001 and expires in December 2010. Annual minimum lease payments
under the new lease agreement are $746,000, $870,000, and $882,000 in the years
2001, 2002 and 2003, and $6,844,000 thereafter.
F-25
<PAGE>
ORTHOFIX INTERNATIONAL N.V.
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 April 20, 2000 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 20-F. 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
April 20, 2000
<PAGE>
ORTHOFIX INTERNATIONAL N.V.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Orthofix International N.V. ("the Company") holds an investment in a wholly
owned subsidiary, Orthofix Inc. and its subsidiaries. In accordance with rule
12-04 of Regulation S-X, the following condensed financial information has been
presented as the restricted net assets of Orthofix Inc. and its subsidiaries
exceed 25% of the condensed net assets of the Company. Refer to note 12 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, 1999 and 1998
December 31
-----------
(In thousands) 1999 1998
- --------------------- ---- ----
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 885 $ 2,069
Restricted cash 880 839
Accounts receivable, (net of allowance for doubtful
accounts of $5,711 and $4,432 respectively) 17,140 11,215
Inventory (1) 13,625 15,283
Deferred income taxes receivable and other current assets 4,781 3,536
------- ------
Total current assets 37,311 32,942
Securities and other investments 475 119
Fixed assets and intangibles (net of accumulated depreciation and
amortization of $7,754 and $5,692 respectively) 4,848 4,329
Goodwill (net of accumulated amortization of $7,981 and $6,064
respectively) 30,915 31,437
Deferred tax asset 1,819 1,789
-------- -------
Total assets $75,368 $70,616
======= =======
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable $ 1,324 $ 580
Accounts payable - intercompany 12,535 16,781
Accrued expenses 6,347 6,307
Current portion of long-term debt (2) 4,504 2,328
Other current liabilities 459 147
-------- -------
Total current liabilities 25,169 26,143
Long term debt (2) 5,277 3,315
Other long term liabilities 3,751 3,661
Loan note payable - intercompany 4,402 5,155
------- -------
Total liabilities 38,599 38,274
------ -------
Shareholder's equity
Additional capital in excess of par 59,133 58,531
Accumulated deficit (22,656) (26,189)
Accumulated other comprehensive income net of tax 292 -
-------- --------
Total shareholders' equity 36,769 32,342
------ --------
Total liabilities and shareholder's equity $75,368 $70,616
======= =======
</TABLE>
S-1
<PAGE>
ORTHOFIX INTERNATIONAL N.V.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (continued)
Orthofix Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
December 31, 1999 and 1998
(In thousands)
- ----------------------------
December 31
-----------
(1) Inventory 1999 1998
---- ----
Raw materials $ 1,028 $ 1,458
Work-in-progress 222 332
Finished goods 6,632 8,739
Field inventory 10,063 8,687
Less reserve for refurbishment and obsolescence (4,320) (3,933)
------- -------
$ 13,625 $ 15,283
========= =========
The inventory of Orthofix Inc. includes intercompany profits of $8,772,000 and
$9,844,000 for December 31, 1999 and 1998 respectively.
(In thousands)
- ----------------------
December 31
-----------
(2) Long-term debt - five year maturity 1999
----
2000 $ 4,504
2001 4,500
2002 500
2003 277
---------
$ 9,781
=========
There are no long term obligations that mature beyond 2003.
S-2
<PAGE>
ORTHOFIX INTERNATIONAL N.V.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (continued)
Orthofix Inc. and Subsidiaries
Condensed Consolidated Income Statements
for the year ended December 31, 1999, 1998 and 1997
(In thousands) 1999 1998 1997
- -------------- ---- ---- ----
Net sales $62,901 $53,183 $44,161
Cost of sales 17,836 14,861 12,555
------ ------ ------
45,065 38,322 31,606
Selling, general and administrative expense 31,059 27,289 23,810
Research and development expense 3,813 3,261 2,177
Depreciation and amortization expense 3,006 3,287 3,560
----- ----- -----
Operating income 7,187 4,485 2,059
Other expense (37) (1,186) (1,204)
One-time gain (charges) - 4,654 (1,025)
-------- ----- -------
Net income (loss) before taxes 7,150 7,953 (170)
Income tax (expense) benefit (3,617) 667 0
----- ------ --------
Net income ( loss ) $ 3,533 $ 8,620 $ (170)
======= ======= =======
Orthofix Inc. and Subsidiaries
Condensed Consolidated Statements
of Comprehensive Income
for the year ended December 31, 1999, 1998 and 1997
(In thousands) 1999 1998 1997
- -------------- ---- ---- ----
Net income (loss) $3,533 $8,620 $(170)
Other comprehensive income, net of tax:
Unrealised holding gains on securities
arising during the period (net
of tax expense of $183 in 1999) 292 - -
-------- ------- ------
Total comprehensive income (loss) $ 3,825 $ 8,620 $ (170)
======= ======= =======
S-3
<PAGE>
ORTHOFIX INTERNATIONAL N.V.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (continued)
Orthofix Inc. and Subsidiaries
Condensed Consolidated Statements of changes in Financial Position
for the year ended December 31, 1999, 1998 and 1997
(In thousands) 1999 1998 1997
- -------------- ---- ---- ----
Funds (used in) provided by:
operations $ (2,026) $(799) $2,000
Investing activities:
Cash paid for equity method investments (119) -
Cash paid for acquisition (700) - -
Purchase of furniture and equipment (2,185) (2,015) (1,428)
Purchase of intangibles (370) - (76)
Proceeds from sale of assets - - 44
Proceeds from sale of product
license, net of expenses of $450 - 12,200 -
--------- ------ -------
Net cash (used in) provided by investing activities (3,255) 10,066 (1,460)
Financing activities:
Other (41) (59) 182
Repayments of bank note (5,862) (8,437) (3,537)
Borrowings 10,000 500 2,000
------ ------ -------
Net cash provided by (used in) financing activities 4,097 (7,996) (1,355)
------- ------ -------
(Decrease) increase in cash and cash equivalents (1,184) 1,271 (815)
Cash and cash equivalents at beginning of period 2,069 798 1,613
------ ------ -------
Cash and cash equivalents at end of period $ 885 $2,069 $ 798
======== ====== =======
S-4
<PAGE>
ORTHOFIX INTERNATIONAL N.V.
SCHEDULE 2 - VALUATION AND QUALIFYING ACCOUNTS
For the years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
In thousands Additions
- ------------- ----------------------------
Provisions from assets to which Balance at Charged to Charged to
they apply: beginning cost and other Deductions/ Balance at
of year expenses accounts Other (1) end of year
------- -------- -------- --------- -----------
1999
- ----
<S> <C> <C> <C> <C> <C>
Allowance for doubtful debts 4,912 3,227 121 (2,084) 6,176
Inventory provisions 1,477 124 - (111) 1,490
Provisions for deferred
compensation 850 172 - (205) 817
Restructuring provisions 1,641 - - (532) 1,109
1998
- ----
Allowance for doubtful debts 4,199 2,839 276 (2,402) 4,912
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 2,336 502 (2,749) 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
</TABLE>
(1) Includes payments charged against reserves and amounts written off against
gross asset values.
S-5
<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 authorised.
ORTHOFIX INTERNATIONAL N.V.
By: /s/ PETER CLARKE
-----------------------------
Name: Peter Clarke
Title: Executive Vice President,
Chief Financial Officer,
Secretary and Director
Date: May 19, 2000
