UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
DC 20549
FORM
10-Q
(Mark
One)
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT
OF
1934
|
For
the
quarterly period ended June 30, 2006
OR
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the
transition period from____________ to ____________.
Commission
File Number: 0-19961
ORTHOFIX
INTERNATIONAL N.V.
(Exact
name of registrant as specified in its charter)
|
Netherlands
Antilles
|
|
N/A
|
|
|
(State
or other jurisdiction of incorporation
or organization)
|
|
(I.R.S.
Employer Identification No.)
|
|
|
|
|
|
|
|
7
Abraham de Veerstraat
Curaçao
Netherlands
Antilles
|
|
N/A
|
|
|
(Address
of principal executive offices)
|
|
(Zip
Code)
|
|
599-9-4658525
|
(Registrant’s
telephone number, including area
code)
|
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 o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (check
one):
Large
Accelerated filer o
|
Accelerated
filer x
|
Non-accelerated
filer o
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o
No
x
As
of
August 2, 2006, 16,076,182 shares of common stock were issued and
outstanding.
|
3
|
|
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3
|
|
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19
|
|
|
30
|
|
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30
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31
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|
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31
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|
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31
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33
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34
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37
|
Forward-Looking
Statements
This
Form
10-Q contains forward-looking statements within the meaning of Section 21E
of
the Securities Exchange Act of 1934, which relate to our business and financial
outlook and which are based on our current beliefs, assumptions, expectations,
estimates, forecasts and projections. In some cases, you can identify
forward-looking statements by terminology such as “may,” “will,” “should,”
“expects,” “plans,” “anticipates,” “believes,” “estimates,” “projects”,
“intends”, “predicts,” “potential” or “continue” or other comparable
terminology. These forward-looking statements are not guarantees of our future
performance and involve risks, uncertainties, estimates and assumptions that
are
difficult to predict. Therefore, our actual outcomes and results may differ
materially from those expressed in these forward-looking statements. You should
not place undue reliance on any of these forward-looking statements. Further,
any forward-looking statement speaks only as of the date on which it is made,
and we undertake no obligation to update any such statement to reflect new
information, the occurrence of future events or circumstances or otherwise.
Factors
that could cause actual results to differ materially from those indicated by
the
forward-looking statements or that could contribute to such differences include,
but are not limited to, unanticipated expenditures, changing relationships
with
customers, suppliers and strategic partners, unfavorable results in litigation
matters, risks relating to the protection of intellectual property, changes
to
the reimbursement policies of third parties, changes to governmental regulation
of medical devices, the impact of competitive products, changes to the
competitive environment, the acceptance of new products in the market,
conditions of the orthopedic industry and the economy, currency or interest
rate
fluctuations and the other risks described under Item 1A - “Business - Risk
Factors” in our Annual Report on Form 10-K for the fiscal year ended December
31, 2005.
Item
1. Condensed
Financial Statements
CONDENSED
CONSOLIDATED BALANCE SHEETS
(U.S.
Dollars, in thousands except share data and per share
date)
|
|
June
30,
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
Assets
|
|
(Unaudited)
|
|
(Note
2)
|
|
Current
assets:
|
|
|
|
|
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Cash
and cash equivalents
|
|
$
|
49,961
|
|
$
|
63,786
|
|
Restricted
cash
|
|
|
--
|
|
|
13,762
|
|
Trade
accounts receivable, net
|
|
|
90,228
|
|
|
80,745
|
|
Inventories
|
|
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39,259
|
|
|
32,853
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|
Deferred
income taxes
|
|
|
4,511
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|
|
4,511
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Prepaid
expenses and other current assets
|
|
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14,101
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|
|
11,618
|
|
Total
current assets
|
|
|
198,060
|
|
|
207,275
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|
Securities
and other investments
|
|
|
4,082
|
|
|
4,082
|
|
Property,
plant and equipment, net
|
|
|
19,914
|
|
|
18,987
|
|
Patents
and other intangible assets, net
|
|
|
62,623
|
|
|
65,585
|
|
Goodwill,
net
|
|
|
178,461
|
|
|
174,738
|
|
Deferred
taxes and other long-term assets
|
|
|
9,223
|
|
|
3,194
|
|
Total
assets
|
|
$
|
472,363
|
|
$
|
473,861
|
|
Liabilities
and shareholders’ equity
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Bank
borrowings
|
|
$
|
3,794
|
|
$
|
79
|
|
Current
portion of long-term debt
|
|
|
11
|
|
|
15,187
|
|
Trade
accounts payable
|
|
|
12,145
|
|
|
11,602
|
|
Other
current liabilities
|
|
|
29,196
|
|
|
51,208
|
|
Total
current liabilities
|
|
|
45,146
|
|
|
78,076
|
|
Long-term
debt
|
|
|
37
|
|
|
21
|
|
Deferred
income taxes
|
|
|
24,698
|
|
|
25,652
|
|
Other
long-term liabilities
|
|
|
1,356
|
|
|
1,227
|
|
Total
liabilities
|
|
|
71,237
|
|
|
104,976
|
|
|
|
|
|
|
|
|
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Contingencies
(Note 16)
|
|
|
|
|
|
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Shareholders’
equity:
|
|
|
|
|
|
|
|
Common
shares (16,036,973 and 16,009,249 shares issued at June 30, 2006
and
December 31, 2005, respectively)
|
|
|
1,604
|
|
|
1,602
|
|
Additional
paid-in capital
|
|
|
111,567
|
|
|
106,746
|
|
Retained
earnings
|
|
|
276,449
|
|
|
255,475
|
|
Accumulated
other comprehensive income
|
|
|
11,506
|
|
|
5,062
|
|
Total
shareholders’ equity
|
|
|
401,126
|
|
|
368,885
|
|
Total
liabilities and shareholders’ equity
|
|
$
|
472,363
|
|
$
|
473,861
|
|
The
accompanying notes form an integral part of these condensed consolidated
financial statements.
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME
FOR
THE
THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
(Unaudited,
U.S. Dollars, in thousands except share and per share
data)
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
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Net
sales
|
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$
|
84,735
|
|
$
|
79,540
|
|
$
|
165,851
|
|
$
|
157,228
|
|
Cost
of sales
|
|
|
21,199
|
|
|
20,775
|
|
|
42,658
|
|
|
41,671
|
|
Gross
profit
|
|
|
63,536
|
|
|
58,765
|
|
|
123,193
|
|
|
115,557
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Operating
expenses
|
|
|
|
|
|
|
|
|
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Sales
and marketing
|
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31,920
|
|
|
28,763
|
|
|
62,708
|
|
|
56,225
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|
General
and administrative
|
|
|
12,115
|
|
|
8,652
|
|
|
24,589
|
|
|
17,276
|
|
Research
and development
|
|
|
2,721
|
|
|
2,956
|
|
|
5,685
|
|
|
6,083
|
|
Amortization
of intangible assets
|
|
|
1,709
|
|
|
1,661
|
|
|
3,479
|
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|
3,289
|
|
|
|
|
48,465
|
|
|
42,032
|
|
|
96,461
|
|
|
82,873
|
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Operating
income
|
|
|
15,071
|
|
|
16,733
|
|
|
26,732
|
|
|
32,684
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Interest
income (expense), net
|
|
|
255
|
|
|
(1,251
|
)
|
|
110
|
|
|
(2,561
|
)
|
Other
income (expense), net
|
|
|
344
|
|
|
(608
|
)
|
|
291
|
|
|
1,435
|
|
KCI
settlement, net
|
|
|
-
|
|
|
(163
|
)
|
|
1,093
|
|
|
(505
|
)
|
Income
before income tax
|
|
|
15,670
|
|
|
14,711
|
|
|
28,226
|
|
|
31,053
|
|
Income
tax expense
|
|
|
(2,942
|
)
|
|
(5,306
|
)
|
|
(7,252
|
)
|
|
(10,869
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
12,728
|
|
$
|
9,405
|
|
$
|
20,974
|
|
$
|
20,184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per common share - basic
|
|
$
|
0.79
|
|
$
|
0.59
|
|
$
|
1.31
|
|
$
|
1.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per common share - diluted
|
|
$
|
0.79
|
|
$
|
0.58
|
|
$
|
1.30
|
|
$
|
1.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares - basic
|
|
|
16,037,927
|
|
|
15,872,638
|
|
|
16,029,137
|
|
|
15,828,686
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares - diluted
|
|
|
16,166,241
|
|
|
16,294,098
|
|
|
16,173,679
|
|
|
16,228,849
|
|
The
accompanying notes form an integral part of these condensed consolidated
financial statements.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR
THE
SIX MONTHS ENDED JUNE 30, 2006 AND 2005
(Unaudited,
U.S. Dollars, in thousands)
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
Net
income
|
|
$
|
20,974
|
|
$
|
20,184
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
7,307
|
|
|
7,215
|
|
Deferred
royalty income
|
|
|
--
|
|
|
(2,443
|
)
|
Provision
for doubtful accounts
|
|
|
3,349
|
|
|
2,104
|
|
Tax
benefit on non-qualified stock options
|
|
|
--
|
|
|
1,162
|
|
Deferred
taxes
|
|
|
(7,681
|
)
|
|
(561
|
)
|
Share
based compensation
|
|
|
3,903
|
|
|
294
|
|
Other
|
|
|
305
|
|
|
(189
|
)
|
Change
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Restricted
cash
|
|
|
13,762
|
|
|
4,731
|
|
Accounts
receivable
|
|
|
(10,499
|
)
|
|
(11,637
|
)
|
Inventories
|
|
|
(5,082
|
)
|
|
(1,501
|
)
|
Prepaid
expenses and other
|
|
|
(2,321
|
)
|
|
(2,635
|
)
|
Accounts
payable
|
|
|
4
|
|
|
772
|
|
Current
liabilities
|
|
|
(22,457
|
)
|
|
(4,423
|
)
|
Net
cash provided by operating activities
|
|
|
1,564
|
|
|
13,073
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Investments
in affiliates and subsidiaries
|
|
|
(1,108
|
)
|
|
--
|
|
Capital
expenditures
|
|
|
(4,539
|
)
|
|
(6,101
|
)
|
Net
cash used in investing activities
|
|
|
(5,647
|
)
|
|
(6,101
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Net
proceeds from issuance of common stock
|
|
|
923
|
|
|
3,964
|
|
Tax
benefit on non-qualified stock options
|
|
|
66
|
|
|
--
|
|
Repayment
of loans and borrowings
|
|
|
(15,160
|
)
|
|
(16,153
|
)
|
Proceeds
from loans and borrowings
|
|
|
3,709
|
|
|
59
|
|
Net
cash used in financing activities
|
|
|
(10,462
|
)
|
|
(12,130
|
)
|
Effect
of exchange rate changes on cash
|
|
|
720
|
|
|
(641
|
)
|
Net
decrease in cash and cash equivalents
|
|
|
(13,825
|
)
|
|
(5,799
|
)
|
Cash
and cash equivalents at the beginning of the year
|
|
|
63,786
|
|
|
25,944
|
|
Cash
and cash equivalents at the end of the period
|
|
$
|
49,961
|
|
$
|
20,145
|
|
The
accompanying notes form an integral part of these condensed consolidated
financial statements.
NOTES
TO
THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Orthofix
International N.V. (the “Company”) is a multinational corporation principally
involved in the design, development, manufacture, marketing and distribution
of
medical equipment, principally for the orthopedic products market.
NOTE
2:
|
BASIS
OF PRESENTATION
|
The
accompanying unaudited Condensed Consolidated Financial Statements have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and with the instructions to
Form 10-Q and Rule 10-01 of Regulation S-X. Pursuant to these rules and
regulations, certain information and note disclosures, normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States, have been condensed or omitted. In the opinion
of
management, all adjustments (consisting of normal recurring items) considered
necessary for a fair presentation have been included. Operating results for
the
three and six months ended June 30, 2006 are not necessarily indicative of
the
results that may be expected for the year ending December 31, 2006. The balance
sheet at December 31, 2005 has been derived from the audited financial
statements at that date but does not include all of the information and
footnotes required by accounting principles generally accepted in the United
States for complete financial statements. For further information, refer to
the
Consolidated Financial Statements and Notes thereto of our Annual Report on
Form
10-K for the year ended December 31, 2005.
NOTE
3:
|
RECENTLY
ISSUED ACCOUNTING STANDARDS
|
In
July 2006, the FASB issued FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes—an interpretation of FASB Statement
No. 109 (“FIN
48”), which clarifies the accounting for uncertainty in income tax positions.
This Interpretation requires that the Company recognize in the consolidated
financial statements the impact of a tax position that is more likely than
not
to be sustained upon examination based on the technical merits of the position.
The provisions of FIN 48 will be effective as of the beginning of the Company’s
2007 fiscal year, with the cumulative effect of the change in accounting
principle recorded as an adjustment to opening retained earnings. The Company
is
currently evaluating the impact of adopting FIN 48 on the consolidated financial
statements.
In
June
2006, the Financial Accounting Standards Board (“FASB”) ratified Emerging Issues
Task Force (EITF) Issue No. 06-3, “How Taxes Collected from Customers and
Remitted to Governmental Authorities Should Be Presented in the Income Statement
(That Is, Gross Versus Net Presentation).” This standard allows companies to
present in their statements of income any taxes assessed by a governmental
authority that are directly imposed on revenue-producing transactions between
a
seller and a customer, such as sales, use, value-added, and some excise taxes,
on either a gross (included in revenue and costs) or a net (excluded from
revenue) basis. This standard is effective for interim and fiscal years
beginning after December 15, 2006. The Company is currently evaluating the
potential impact of this issue on the financial statements, but does not believe
the impact of the adoption of this standard will be material.
In
February 2006, the FASB issued Statement of Financial Accounting Standards
(“SFAS”) No. 155, Accounting for Certain Hybrid Instruments, which is an
amendment to SFAS No. 133 and SFAS No. 140. SFAS No. 155 allows financial
instruments which have embedded derivatives to be accounted for as a whole
(eliminating the need to bifurcate the derivative from its host) if the holder
elects to account for the instrument as a whole instrument on a fair value
basis. This statement is effective for all financial instruments acquired or
issued after the beginning of an entity’s first fiscal year that begins after
September 15, 2006. The Company does not believe the adoption of this statement
will have a material impact on the financial statements.
In
May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error
Corrections, which is a replacement of APB Opinion No. 20, Accounting
Changes, and SFAS No. 3, Reporting Accounting Changes in Interim Financial
Statements. Among other changes, SFAS No. 154 requires that a
voluntary change in accounting principle be applied retrospectively such that
all prior period financial statements are presented in accordance with the
new
accounting principle, unless impracticable to do so. SFAS No. 154 also
provides that (1) a change in method of depreciating or amortizing a
long-lived nonfinancial asset be accounted for as a change in estimate
(prospectively) that was effected by a change in accounting principle, and
(2) correction of errors in previously issued financial statements should
be termed a “restatement”. SFAS No. 154 is effective for accounting
changes and correction of errors made in fiscal years beginning after
December 15, 2005. The adoption of SFAS No. 154 did not have a material
impact on the financial statements.
In
December 2004, the Financial FASB issued SFAS No. 123 (R), “Share-Based
Payment”, a revision of FASB Statement No. 123, “Accounting for Stock-Based
Compensation”. SFAS No. 123 (R) also supersedes APB Opinion No. 25, “Accounting
for Stock Issued to Employees” and amends SFAS No. 95, “Statement of Cash
Flows”. The revision required companies to recognize compensation costs in the
income statement based on the fair value of the equity or liability instruments
issued and to report the benefits of tax deductions in excess of recognized
compensation cost as a financing cash flow rather than as an operating cash
flow
as reported in the accompanying consolidated statements of cash flows. SFAS
No.
123 (R) covers a wide range of share-based compensation arrangements including
share options, restricted share plans, performance-based awards, share
appreciation rights, and employee share purchase plans. The Company adopted
SFAS
No. 123 (R) effective January 1, 2006 using the “modified prospective” method.
Under the modified prospective method, compensation cost is recognized in the
income statement beginning with the effective date, based on the requirements
of
SFAS No. 123 (R) for all share-based payments granted after that date, and
based
on the requirements of SFAS 123 for all unvested awards granted prior to the
effective date of SFAS No.123 (R). The adoption of SFAS No.123 (R)’s fair value
method had a significant impact on the Company’s results of operations, although
it had no impact on the overall financial position. See Note 4 “Stock-Based
Compensation”.
In
November 2004, the FASB issued SFAS No. 151, Inventory Costs, an
amendment of ARB No. 43, which is the result of its efforts to converge
U.S. accounting standards for inventories with International Accounting
Standards. SFAS No. 151 requires idle facility expenses, freight,
handling costs, and wasted material (spoilage) costs to be recognized as
current-period charges. It also requires that the allocation of fixed
production overheads to the costs of conversion be based on the normal capacity
of the production facilities. SFAS No. 151 will be effective for
inventory costs incurred during fiscal years beginning after June 15,
2005. The adoption of SFAS No. 151 did not have a material impact on the
financial statements.
NOTE
4:
|
STOCK-BASED
COMPENSATION
|
Prior
to
January 1, 2006, the Company accounted for stock based compensation plans under
the recognition and measurement provisions of APB Opinion No. 25 “Accounting for
Stock Issued to Employee,” and related Interpretations, as permitted by FASB
Statement (“SFAS”) No. 123, “Accounting for Stock-Based Compensation.”
Stock-based employee compensation expense was recognized relating to options
granted at exercise prices lower than the fair market value of the underlying
stock on the date of the grant.
Effective
January 1, 2006, the Company adopted the fair value recognition provisions
of
FASB Statement No. 123(R), “Share-Based Payment”, using the modified prospective
transition method. Under this transition method, compensation cost recognized
in
the first quarter of 2006 includes: (a) compensation cost for all share-based
payments granted prior to, but not yet vested as of January 1, 2006, based
on
the grant date fair value estimated in accordance with the original provisions
of SFAS No. 123, and (b) compensation cost for all share-based payments granted
subsequent to January 1, 2006, based on the grant-date fair value estimated
in
accordance with the provisions of SFAS No. 123(R). The fair value of stock
options is determined using the Black-Scholes valuation model, which is
consistent with our valuation techniques previously utilized for options in
footnote disclosures required under SFAS No. 123. Such value is recognized
as
expense over the service period net of estimated forfeitures. Results for prior
periods have not been restated. During the six months ended June 30, 2006,
options were valued at risk-free interest rates between 4.35% and 5.07%,
expected volatility of 33.4%, expected term of 4.3 years and a dividend rate
of
zero.
As
a
result of adopting SFAS No. 123(R) on January 1, 2006 the Company’s income
before income taxes and net income for the three months ended June 30, 2006,
are
$1.6 million and $1.3 million lower, respectively, than if it had continued
to
account for share-based compensation under APB 25. For the six month period
ended June 30, 2006, the Company’s income before income taxes and net income are
$3.6 million and $2.5 million lower, respectively, than if it had continued
to
account for share-based compensation under APB 25 or accelerated the vesting
of
stock options associated with senior management transition. Basic and diluted
earnings per share for the three months ended June 30, 2006 would have been
$0.07 and $0.06 higher, respectively, if the Company had not adopted SFAS 123(R)
or accelerated the vesting of stock options associated with senior management
transition. Basic and diluted earnings per share for the six months ended June
30, 2006 would have each been $0.16 and $0.14 higher, respectively, if the
Company had not adopted SFAS 123(R) or accelerated the vesting of stock options
associated with senior management transition. As of June 30, 2006, the
compensation expense relating to options already granted and expected to be
recognized is $16.6 million. This expense is expected to be recognized over
a
weighted average period of 1.69 years.
The
following table shows the detail of stock-based compensation by line item in
the
Condensed Consolidated Statements of Income for the three and six months ended
June 30, 2006:
(In
thousands)
|
|
Three
Months Ended
June
30, 2006
|
|
Six
Months Ended
June
30, 2006
|
|
|
|
|
|
|
|
Cost
of sales
|
|
$
|
37
|
|
$
|
68
|
|
|
|
|
|
|
|
|
|
Sales
and marketing
|
|
|
200
|
|
|
410
|
|
|
|
|
|
|
|
|
|
General
and administrative (1)
|
|
|
1,320
|
|
|
2,948
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
71
|
|
|
183
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,628
|
|
$
|
3,609
|
|
|
(1) |
Amount
includes $656 of stock-based compensation from accelerated vesting
of
options associated with transition of senior management in the
first
quarter of 2006.
|
Prior
to
the adoption of SFAS No. 123(R), the Company presented all tax benefits of
deductions resulting from the exercise of stock options as operating cash flows
in the Statement of Cash Flows. SFAS No. 123(R) requires the cash flows
resulting from the tax benefits resulting from the tax deductions in excess
of
the compensation cost recognized for those options (excess tax benefits) to
be
classified as financing cash flows. The $0.1 million excess tax benefit
classified as a financing cash inflow would have been classified as an operating
cash inflow had the Company not adopted SFAS No. 123(R).
The
following table illustrates the effect on net income and earnings per share
if
the fair value based method had been applied to all stock-based awards granted
for all periods presented.
|
|
Three
Months Ended
June
30,
|
|
Six
Months Ended
June
30,
|
|
(In
thousands, except per share data)
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
12,728
|
|
$
|
9,405
|
|
$
|
20,974
|
|
$
|
20,184
|
|
Add:
Stock-based employee compensation expense included in reported net
income,
net of related tax effects
|
|
|
1,118
|
|
|
87
|
|
|
2,531
|
|
|
174
|
|
Less:
Total stock-based employee compensation expense determined under
fair
value method for all awards net of tax
|
|
|
(1,118
|
)
|
|
(662
|
)
|
|
(2,531
|
)
|
|
(1,282
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro
forma
|
|
$
|
12,728
|
|
$
|
8,830
|
|
$
|
20,974
|
|
$
|
19,076
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per common share - basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
0.79
|
|
$
|
0.59
|
|
$
|
1.31
|
|
$
|
1.28
|
|
Pro
forma
|
|
$
|
0.79
|
|
$
|
0.56
|
|
$
|
1.31
|
|
$
|
1.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per common share - diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
0.79
|
|
$
|
0.58
|
|
$
|
1.30
|
|
$
|
1.24
|
|
Pro
forma
|
|
$
|
0.79
|
|
$
|
0.54
|
|
$
|
1.30
|
|
$
|
1.18
|
|
NOTE
5:
|
RECLASSIFICATIONS
|
Certain
prior year amounts have been reclassified to conform to the 2006 presentation.
The reclassifications have no effect on previously reported net income or
shareholders’ equity.
Inventories
are valued at the lower of cost or estimated net realizable value, after
provision for excess or obsolete items. Cost is determined on a weighted-average
basis, which approximates the FIFO method. The valuation of work-in-process,
finished goods, field inventory and consignment inventory includes the cost
of
materials, labor and production. Field inventory represents immediately saleable
finished goods inventory that is in the possession of the Company’s direct sales
representatives.
Inventories
were as follows:
|
|
June
30,
|
|
December
31,
|
|
(In
thousands)
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Raw
materials
|
|
$
|
7,066
|
|
$
|
7,242
|
|
Work-in-process
|
|
|
4,773
|
|
|
3,344
|
|
Finished
goods
|
|
|
20,449
|
|
|
11,538
|
|
Field
inventory (as described above)
|
|
|
6,234
|
|
|
7,404
|
|
Consignment
inventory
|
|
|
4,692
|
|
|
6,659
|
|
Less
reserve for obsolescence
|
|
|
(3,955
|
)
|
|
(3,334
|
)
|
|
|
$
|
39,259
|
|
$
|
32,853
|
|
In
February 2006, the Company purchased 52% of International Medical Supplies
Distribution GmbH (“IMES”), a German distributor of Breg products, for
approximately $1.1 million in cash. The preliminary purchase price allocation
included approximately $1.1 million of goodwill. The operations of the acquired
distributor are included in the Company’s statement of operations from the date
of acquisition. Management will complete the purchase price allocation in 2006.
The
change in the net carrying value of goodwill for the period ended June 30,
2006
is as follows:
(In
thousands)
|
|
Americas
Orthofix
|
|
Americas
Breg
|
|
International
Orthofix
|
|
Total
|
|
At
December 31, 2005
|
|
$
|
32,916
|
|
$
|
101,322
|
|
$
|
40,500
|
|
$
|
174,738
|
|
Acquisition
|
|
|
-
|
|
|
-
|
|
|
1,108
|
|
|
1,108
|
|
Foreign
Currency
|
|
|
(57
|
)
|
|
-
|
|
|
2,672
|
|
|
2,615
|
|
At
June 30, 2006
|
|
$
|
32,859
|
|
$
|
101,322
|
|
$
|
44,280
|
|
$
|
178,461
|
|
(In
thousands)
|
|
June
30, 2006
|
|
December
31, 2005
|
|
|
|
|
|
|
|
Long-term
obligations
|
|
$
|
-
|
|
$
|
14,750
|
|
Other
loans
|
|
|
48
|
|
|
458
|
|
|
|
|
48
|
|
|
15,208
|
|
Less
current portion
|
|
|
(11
|
)
|
|
(15,187
|
)
|
|
|
$
|
37
|
|
$
|
21
|
|
As
of
June 30, 2006, the Company had completely repaid and terminated its senior
secured bank facility that related to the long-term obligations that were
outstanding at December 31, 2005.
For
the
six months ended June 30, 2006, the Company issued 27,724 shares of common
stock
upon the exercise of outstanding stock options for proceeds of $0.9 million.
NOTE
11:
|
COMPREHENSIVE
INCOME
|
Accumulated
other comprehensive income (loss) is comprised of foreign currency translation
adjustments and the effective portion of the gain (loss) for derivatives
designated and accounted for as a cash flow hedge. The components of and changes
in other comprehensive income (loss) are as follows:
(In
thousands)
|
|
Accumulated
Other Comprehensive Income/(Loss)
|
|
Balance
at December 31, 2005
|
|
$
|
5,062
|
|
Foreign
currency translation adjustment
|
|
|
6,444
|
|
Balance
at June 30, 2006
|
|
$
|
11,506
|
|
(In
thousands)
|
|
Three
Months Ended
June
30,
|
|
Six
Months Ended
June
30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Net
income
|
|
$
|
12,728
|
|
$
|
9,405
|
|
$
|
20,974
|
|
$
|
20,184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
(loss) gain on derivative instrument
|
|
|
--
|
|
|
(91
|
)
|
|
--
|
|
|
85
|
|
Foreign
currency translation adjustment
|
|
|
4,803
|
|
|
(4,546
|
)
|
|
6,441
|
|
|
(8,006
|
)
|
Total
comprehensive income
|
|
$
|
17,531
|
|
$
|
4,768
|
|
$
|
27,415
|
|
$
|
12,263
|
|
NOTE
12:
|
BUSINESS
SEGMENT INFORMATION
|
The
Company’s segment information is prepared on the same basis that the Company’s
management reviews the financial information for operational decision making
purposes.
Americas
Orthofix
Americas
Orthofix operation (“Americas”) consists of operations in the United States
excluding Breg (as defined below) Mexico, Brazil, and Puerto Rico. Americas,
as
defined, uses both direct and distributor sales representatives to sell to
hospitals, doctors, and other healthcare providers in the Americas
market.
International
Orthofix
International
Orthofix operation (“International”) consists of operations which are located in
the rest of the world as well as independent distributors. International, as
defined, uses both direct and distributor sales representatives to sell Orthofix
and Breg products to hospitals, doctors, and other healthcare
providers.
Americas
Breg
Americas
Breg operation (“Breg”) consists of Breg, Inc. Breg, based in Vista, California,
designs, manufactures, and distributes orthopedic products for post-operative
reconstruction and rehabilitative patient use and sells its products through
a
network of domestic and international distributors, sales representatives and
affiliates.
Group
Activities
Group
Activities are comprised of the Parent’s operating expenses and identifiable
assets.
For
the
three month period ended June 30:
|
|
External
Sales
|
|
Intersegment
Sales
|
|
(In
thousands)
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Americas
Orthofix
|
|
$
|
41,466
|
|
$
|
35,878
|
|
$
|
951
|
|
$
|
534
|
|
Americas
Breg
|
|
|
18,673
|
|
|
17,391
|
|
|
324
|
|
|
89
|
|
International
Orthofix
|
|
|
24,596
|
|
|
26,271
|
|
|
17,960
|
|
|
14,132
|
|
Total
|
|
$
|
84,735
|
|
$
|
79,540
|
|
$
|
19,235
|
|
$
|
14,755
|
|
For
the
six month period ended June 30:
|
|
External
Sales
|
|
Intersegment
Sales
|
|
(In
thousands)
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Americas
Orthofix
|
|
$
|
80,760
|
|
$
|
69,642
|
|
$
|
1,658
|
|
$
|
1,004
|
|
Americas
Breg
|
|
|
37,234
|
|
|
35,385
|
|
|
621
|
|
|
263
|
|
International
Orthofix
|
|
|
47,857
|
|
|
52,201
|
|
|
34,146
|
|
|
28,903
|
|
Total
|
|
$
|
165,851
|
|
$
|
157,228
|
|
$
|
36,425
|
|
$
|
30,170
|
|
For
the
three and six month periods ended June 30:
Operating
Income (Expense)
|
|
Three
Months Ended
June
30,
|
|
Six
Months Ended
June
30,
|
|
(In
thousands)
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Americas
Orthofix
|
|
$
|
9,879
|
|
$
|
9,123
|
|
$
|
18,358
|
|
$
|
16,720
|
|
Americas
Breg
|
|
|
2,076
|
|
|
2,453
|
|
|
3,534
|
|
|
5,347
|
|
International
Orthofix
|
|
|
6,104
|
|
|
6,911
|
|
|
10,746
|
|
|
14,013
|
|
Group
Activities
|
|
|
(2,301
|
)
|
|
(1,511
|
)
|
|
(4,529
|
)
|
|
(2,851
|
)
|
Eliminations
|
|
|
(687
|
)
|
|
(243
|
)
|
|
(1,377
|
)
|
|
(545
|
)
|
Total
|
|
$
|
15,071
|
|
$
|
16,733
|
|
$
|
26,732
|
|
$
|
32,684
|
|
Sales
by Market Sector For Information Purposes Only:
|
|
Sales
by Market Sector
for
the three month period ended June 30, 2006
|
|
(In
thousands)
|
|
Americas
Orthofix
|
|
Americas
Breg
|
|
International
Orthofix
|
|
Total
|
|
Orthopedic
|
|
|
|
|
|
|
|
|
|
Spine
|
|
$
|
29,621
|
|
$
|
-
|
|
$
|
12
|
|
$
|
29,633
|
|
Reconstruction
|
|
|
2,903
|
|
|
18,673
|
|
|
10,906
|
|
|
32,482
|
|
Trauma
|
|
|
8,256
|
|
|
-
|
|
|
8,266
|
|
|
16,522
|
|
Total
Orthopedic
|
|
|
40,780
|
|
|
18,673
|
|
|
19,184
|
|
|
78,637
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Orthopedic
|
|
|
686
|
|
|
-
|
|
|
5,412
|
|
|
6,098
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
41,466
|
|
$
|
18,673
|
|
$
|
24,596
|
|
$
|
84,735
|
|
|
|
Sales
by Market Sector
for
the three month period ended June 30, 2005
|
|
(In
thousands)
|
|
Americas
Orthofix
|
|
Americas
Breg
|
|
International
Orthofix
|
|
Total
|
|
Orthopedic
|
|
|
|
|
|
|
|
|
|
Spine
|
|
$
|
25,263
|
|
$
|
-
|
|
$
|
(40
|
)
|
$
|
25,223
|
|
Reconstruction
|
|
|
2,179
|
|
|
17,391
|
|
|
12,174
|
|
|
31,744
|
|
Trauma
|
|
|
8,059
|
|
|
-
|
|
|
8,513
|
|
|
16,572
|
|
Total
Orthopedic
|
|
|
35,501
|
|
|
17,391
|
|
|
20,647
|
|
|
73,539
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Orthopedic
|
|
|
377
|
|
|
-
|
|
|
5,624
|
|
|
6,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
35,878
|
|
$
|
17,391
|
|
$
|
26,271
|
|
$
|
79,540
|
|
|
|
Sales
by Market Sector
for
the six month period ended June 30, 2006
|
|
(In
thousands)
|
|
Americas
Orthofix
|
|
Americas
Breg
|
|
International
Orthofix
|
|
Total
|
|
Orthopedic
|
|
|
|
|
|
|
|
|
|
Spine
|
|
$
|
57,459
|
|
$
|
-
|
|
$
|
40
|
|
$
|
57,499
|
|
Reconstruction
|
|
|
5,474
|
|
|
37,234
|
|
|
22,045
|
|
|
64,753
|
|
Trauma
|
|
|
16,377
|
|
|
-
|
|
|
15,343
|
|
|
31,720
|
|
Total
Orthopedic
|
|
|
79,310
|
|
|
37,234
|
|
|
37,428
|
|
|
153,972
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Orthopedic
|
|
|
1,450
|
|
|
-
|
|
|
10,429
|
|
|
11,879
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
80,760
|
|
$
|
37,234
|
|
$
|
47,857
|
|
$
|
165,851
|
|
|
|
Sales
by Market Sector
for
the six month period ended June 30, 2005
|
|
(In
thousands)
|
|
Americas
Orthofix
|
|
Americas
Breg
|
|
International
Orthofix
|
|
Total
|
|
Orthopedic
|
|
|
|
|
|
|
|
|
|
Spine
|
|
$
|
48,330
|
|
$
|
-
|
|
$
|
69
|
|
$
|
48,399
|
|
Reconstruction
|
|
|
4,315
|
|
|
35,385
|
|
|
24,675
|
|
|
64,375
|
|
Trauma
|
|
|
16,253
|
|
|
-
|
|
|
16,330
|
|
|
32,583
|
|
Total
Orthopedic
|
|
|
68,898
|
|
|
35,385
|
|
|
41,074
|
|
|
145,357
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Orthopedic
|
|
|
744
|
|
|
-
|
|
|
11,127
|
|
|
11,871
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
69,642
|
|
$
|
35,385
|
|
$
|
52,201
|
|
$
|
157,228
|
|
The
difference between the reported provision for income taxes and a provision
computed by applying the statutory rates applicable to each subsidiary of the
Company is primarily attributable to a non-recurring discreet tax benefit
resulting from the Company’s election to adopt a new tax provision in Italy. The
election allowed the company to increase, for tax purposes only, the value
of
our trademarks in Italy by approximately $15 million. The Company incurred
a tax
liability of $2.7 million from applying a 19% tax rate to the revaluation of
the
trademark value. The Company will receive a future tax benefit of $5.6 million
associated with amortization of that step-up in value which is based on the
current Italian tax rates of approximately 37%. The net of the $5.6 million
deferred tax asset and the $2.7 million tax liability resulted in a $2.9 million
non-recurring discreet tax benefit. Further the effective tax rate has been
affected by non-deductible foreign losses, the generation of unutilizable net
operating losses in various jurisdictions, tax planning associated with the
acquisition of Breg and the Section 199 deduction related to income attributable
to production activities occurring in the United States.
NOTE
14:
|
EARNINGS
PER SHARE
|
For
the
three and six month periods ended June 30, 2006 and 2005, there were no
adjustments to net income (the numerators) for purposes of calculating basic
and
diluted net income per common share. The following table sets forth a
reconciliation of the share numbers (the denominators) in computing earnings
per
share in accordance with Statement of Financial Accounting Standards No. 128,
Earnings Per Share:
|
|
Three
Months Ended
June
30,
|
|
Six
Months Ended
June
30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares - basic
|
|
|
16,037,927
|
|
|
15,872,638
|
|
|
16,029,137
|
|
|
15,828,686
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of SFAS No. 123 (R)
|
|
|
(169,126
|
)
|
|
--
|
|
|
(177,943
|
)
|
|
--
|
|
Stock
options outstanding
|
|
|
297,440
|
|
|
421,460
|
|
|
322,485
|
|
|
400,163
|
|
Weighted
average common shares - diluted
|
|
|
16,166,241
|
|
|
16,294,098
|
|
|
16,173,679
|
|
|
16,228,849
|
|
The
Company did not include 816,000 and 691,000 options in the treasury method
for
calculating the diluted shares calculation for the three and six month periods
ended June 30, 2006 because their inclusion would have been antidilutive or
because their exercise price exceeded the average market price of our common
stock during the period. For the three and six month periods ended June 30,
2005, the Company did not include 200,000 and 550,000 options in the treasury
method for calculating the diluted shares outstanding because their inclusion
would have been antidilutive or because their exercise price exceeded the
average market price for our common stock during the period.
NOTE
15:
|
DERIVATIVE
INSTRUMENT
|
The
Company utilizes foreign currency forward contracts to manage its foreign
currency exposure related to a portion of the Company’s accounts receivable that
are denominated in Euros. The strategy of the foreign currency contracts is
to
neutralize the foreign currency impact on earnings when converting 5.0 million
Euros of accounts receivable into U.S. dollars. The conversion of the underlying
exposure and the forward contracts offset and had no net impact on earnings
in
the three and six month periods ended June 30, 2006. All foreign currency
forward contracts entered into in the second quarter or six months of 2006
have
been accounted for as fair value hedges in accordance with SFAS No. 133 and
the
related gains were recorded in other income and the related tax amounts in
taxation. The Company paid cash of $242,500 and $385,000 to settle forward
contracts for the three and six months ended June 30, 2006, respectively. On
June 30, 2006, the Company entered into a new forward currency contract to
sell
5.0 million Euro at an all-in rate of 1.2695 which was outstanding at June
30,
2006 and will terminate or settle on September 29, 2006.
Litigation
The
Company, in the normal course of its business, is involved in various lawsuits
from time to time and may be subject to certain other
contingencies.
In
management’s opinion, based upon information available to date, the Company is
not currently involved in any legal proceeding, individually or in the
aggregate, that will have a material effect on the financial position, liquidity
or operating results of the Company.
Concentrations
of credit risk
There
have been no material changes from the information provided in the Company’s
Annual Report on Form 10-K for the year ended December 31, 2005.
Item
2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
The
following discussion and analysis addresses our liquidity, financial condition,
and the results of our operations for the three and six months ended June 30,
2006 compared to our results of operations for the three and six months ended
June 30, 2005. These discussions should be read in conjunction with our
historical consolidated financial statements and related notes thereto and
the
other financial information included in this Form 10-Q and in our Annual Report
on Form 10-K for the year ended December 31, 2005.
General
We
are a
diversified orthopedic products company offering a broad line of minimally
invasive surgical, as well as non-surgical, products for the Spine,
Reconstruction and Trauma market sectors. Our products are designed to address
the lifelong bone-and-joint health needs of patients of all ages, helping them
achieve a more active and mobile lifestyle. We design, develop, manufacture,
market and distribute medical equipment used principally by musculoskeletal
medical specialists for orthopedic applications. Our main products are
non-invasive stimulation products used to enhance the success rate of spinal
fusions and to treat non-union fractures, external and internal fixation devices
used in fracture treatment, limb lengthening and bone reconstruction, and
bracing products used for ligament injury prevention, pain management and
protection of surgical repair to promote faster healing. Our products also
include a device for enhancing venous circulation, cold therapy, other pain
management products, bone cement used to fix artificial implants and airway
management products used in anesthesia applications.
We
have
administrative and training facilities in the United States, the United Kingdom
and Italy and manufacturing facilities in the United States, the United Kingdom,
Italy, and Mexico. We directly distribute our products in the United States,
the
United Kingdom, Ireland, Italy, Germany, Switzerland, Austria, France, Belgium,
Mexico, Brazil and Puerto Rico. In several of these and other markets, we also
distribute our products through independent distributors.
Our
condensed consolidated financial statements include the financial results of
the
Company and our wholly-owned and majority-owned subsidiaries and entities over
which we have control. All intercompany accounts and transactions are eliminated
in consolidation. The equity method of accounting is used when we have
significant influence over significant operating decisions but do not hold
control. Under the equity method, original investments are recorded at cost
and
adjusted by our share of undistributed earnings or losses of these companies.
All material intercompany transactions and profits are eliminated in
consolidation.
Our
reporting currency is the United States dollar. All balance sheet accounts,
except shareholders’ equity, are translated at the period end exchange rates,
and revenue and expense items are translated at weighted average rates of
exchange prevailing during the period. Gains and losses resulting from foreign
currency transactions are included in other income (expense). Gains and losses
resulting from the translation of foreign currency financial statements are
recorded in the accumulated other comprehensive income (loss) component of
shareholders’ equity.
Our
financial condition, results of operations and cash flows are not significantly
impacted by seasonal trends. However, sales associated with products for
elective procedures appear to be influenced by the somewhat lower level of
such
procedures performed in the late summer. In addition, we do not believe our
operations will be significantly affected by inflation. However, in the ordinary
course of business, we are exposed to the impact of changes in interest rates
and foreign currency fluctuations. Our objective is to limit the impact of
such
movements on earnings and cash flows. In order to achieve this objective, we
seek to balance non-dollar income and expenditures. We also use derivative
instruments from time to time to hedge foreign currency fluctuation exposures.
See Item 3 - “Quantitative and Qualitative Disclosures About Market Risk.”
We
manage
our operations as three business segments: Americas Orthofix, Americas Breg
and
International Orthofix. Americas Orthofix consists of operations in the United
States excluding the operations of Breg, as well as operations in Mexico, Brazil
and Puerto Rico. Americas Breg consists of Breg’s domestic and independent
international distributor operations. International Orthofix consists of
operations which are located in the rest of the world as well as independent
export distribution operations. Group Activities are comprised of the Parent’s
operating expenses and identifiable assets.
Segment
and Market Sector Revenues
Our
revenues are generally derived from two primary sources: sales of orthopedic
and
non-orthopedic products. Orthopedic products are sold into three market sectors,
Spine, Reconstruction, and Trauma, which together accounted for 93% of our
total
net sales in the three and six months ended June 30, 2006 and 2005. Sales of
non-orthopedic products, including the Laryngeal Mask product, woman’s care and
other products, accounted for 7% of our total net sales in the three and six
months ended June 30, 2006 and 2005.
The
following tables display the net sales by business segment and net sales by
market sectors for the three and six months ended June 30, 2006 and 2005. We
provide net sales by market sector for information purposes only. We keep our
books and records and account for net sales, cost of sales and expenses by
business segment.
Business
Segment:
|
|
Three
Months Ended June 30,
|
|
(In
thousands)
|
|
2006
|
|
2005
|
|
|
|
Net
Sales
|
|
Percent
of Total Net Sales
|
|
Net
Sales
|
|
Percent
of Total Net Sales
|
|
Americas
Orthofix
|
|
$
|
41,466
|
|
|
49
|
%
|
$
|
35,878
|
|
|
45
|
%
|
Americas
Breg
|
|
|
18,673
|
|
|
22
|
%
|
|
17,391
|
|
|
22
|
%
|
International
Orthofix
|
|
|
24,596
|
|
|
29
|
%
|
|
26,271
|
|
|
33
|
%
|
Total
|
|
$
|
84,735
|
|
|
100
|
%
|
$
|
79,540
|
|
|
100
|
%
|
|
|
Six
Months Ended June 30,
|
|
(In
thousands)
|
|
2006
|
|
2005
|
|
|
|
Net
Sales
|
|
Percent
of Total Net Sales
|
|
Net
Sales
|
|
Percent
of Total Net Sales
|
|
Americas
Orthofix
|
|
$
|
80,760
|
|
|
49
|
%
|
$
|
69,642
|
|
|
44
|
%
|
Americas
Breg
|
|
|
37,234
|
|
|
22
|
%
|
|
35,385
|
|
|
23
|
%
|
International
Orthofix
|
|
|
47,857
|
|
|
29
|
%
|
|
52,201
|
|
|
33
|
%
|
Total
|
|
$
|
165,851
|
|
|
100
|
%
|
$
|
157,228
|
|
|
100
|
%
|
Market
Sector:
|
|
Three
Months Ended June 30,
|
|
(In
thousands)
|
|
2006
|
|
2005
|
|
|
|
Net
Sales
|
|
Percent
of
Total
Net
Sales
|
|
Net
Sales
|
|
Percent
of
Total
Net Sales
|
|
Orthopedic
|
|
|
|
|
|
|
|
|
|
Spine
|
|
$
|
29,633
|
|
|
35
|
%
|
$
|
25,223
|
|
|
32
|
%
|
Reconstruction
|
|
|
32,482
|
|
|
38
|
%
|
|
31,744
|
|
|
40
|
%
|
Trauma
|
|
|
16,522
|
|
|
20
|
%
|
|
16,572
|
|
|
21
|
%
|
Total
Orthopedic
|
|
|
78,637
|
|
|
93
|
%
|
|
73,539
|
|
|
93
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Orthopedic
|
|
|
6,098
|
|
|
7
|
%
|
|
6,001
|
|
|
7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
84,735
|
|
|
100
|
%
|
$
|
79,540
|
|
|
100
|
%
|
|
|
Six
Months Ended June 30,
|
|
(In
thousands)
|
|
2006
|
|
2005
|
|
|
|
Net
Sales
|
|
Percent
of
Total
Net Sales
|
|
Net
Sales
|
|
Percent
of
Total
Net Sales
|
|
Orthopedic
|
|
|
|
|
|
|
|
|
|
Spine
|
|
$
|
57,499
|
|
|
35
|
%
|
$
|
48,399
|
|
|
31
|
%
|
Reconstruction
|
|
|
64,753
|
|
|
39
|
%
|
|
64,375
|
|
|
41
|
%
|
Trauma
|
|
|
31,720
|
|
|
19
|
%
|
|
32,583
|
|
|
21
|
%
|
Total
Orthopedic
|
|
|
153,972
|
|
|
93
|
%
|
|
145,357
|
|
|
93
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Orthopedic
|
|
|
11,879
|
|
|
7
|
%
|
|
11,871
|
|
|
7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
165,851
|
|
|
100
|
%
|
$
|
157,228
|
|
|
100
|
%
|
The
following table presents certain items from our statements of income as a
percentage of net sales for the periods indicated:
|
|
Three
Months Ended June 30,
|
|
Six
Months Ended June 30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
|
(%)
|
|
(%)
|
|
(%)
|
|
(%)
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
|
100
|
|
|
100
|
|
|
100
|
|
|
100
|
|
Cost
of sales
|
|
|
25
|
|
|
26
|
|
|
26
|
|
|
27
|
|
Gross
profit
|
|
|
75
|
|
|
74
|
|
|
74
|
|
|
73
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
and marketing
|
|
|
38
|
|
|
36
|
|
|
38
|
|
|
36
|
|
General
and administrative
|
|
|
14
|
|
|
11
|
|
|
15
|
|
|
11
|
|
Research
and development
|
|
|
3
|
|
|
4
|
|
|
3
|
|
|
4
|
|
Amortization
of intangible assets
|
|
|
2
|
|
|
2
|
|
|
2
|
|
|
2
|
|
Total
operating income
|
|
|
18
|
|
|
21
|
|
|
16
|
|
|
20
|
|
Net
income
|
|
|
15
|
|
|
12
|
|
|
13
|
|
|
13
|
|
Three
Months Ended June 30, 2006 Compared to Three Months Ended June 30,
2005
Net
sales
increased 6.5% to $84.7 million for the second quarter of 2006 compared to
$79.5
million for the second quarter of 2005. The impact of foreign currency decreased
sales by $0.3 million during the second quarter of 2006 as compared to the
second quarter of 2005.
Sales
by Business Segment:
Net
sales
in Americas Orthofix (the “Americas”), primarily in the United States, increased
to $41.5 million in the second quarter of 2006 compared to $35.9 million in
the
second quarter of 2005, an increase of 16%. The Americas represented 49% of
total net sales during the second quarter of 2006 and 45% of total net sales
for
the second quarter of 2005. The increase in sales was primarily the result
of a
17% increase in sales in the Spine market sector attributable to increased
demand for our Spinal-Stim® and Cervical-Stim® products.
Americas
Orthofix Sales by Market Sector:
|
|
Net
Sales for the
Three
Months Ended June 30,
|
|
|
|
(In
US$ thousands)
|
|
2006
|
|
2005
|
|
Growth
|
|
Orthopedic
|
|
|
|
|
|
|
|
Spine
|
|
$
|
29,621
|
|
$
|
25,263
|
|
|
17
|
%
|
Reconstruction
|
|
|
2,903
|
|
|
2,179
|
|
|
33
|
%
|
Trauma
|
|
|
8,256
|
|
|
8,059
|
|
|
2
|
%
|
Total
Orthopedic
|
|
|
40,780
|
|
|
35,501
|
|
|
15
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Non-Orthopedic
|
|
|
686
|
|
|
377
|
|
|
82
|
%
|
Americas
Orthofix
|
|
$
|
41,466
|
|
$
|
35,878
|
|
|
16
|
%
|
Net
sales
in Americas Breg (“Breg”), increased $1.3 million to $18.7 million for the
second quarter of 2006 compared to $17.4 million for the second quarter of
2005,
an increase of 7%. The increase in sales was primarily due to the sale of Breg
bracing products which increased 16% from the second quarter of 2005. Our new
Fusion XT™ knee brace, which experienced positive market response upon its
introduction, contributed to this increase. This increase was partially offset
by a 10% decrease in sales for pain therapy products resulting in part from
delayed introduction of new pain therapy products. All of Breg’s sales are
recorded in our Reconstruction market sector.
Net
sales
in International Orthofix (“International”) decreased 6% to $24.6 million in the
second quarter of 2005 compared to $26.3 million in second quarter of 2005.
International net sales represented 29% and 33% of our total net sales in the
second quarter of 2006 and the second quarter of 2005, respectively.
International sales in the second quarter of 2006 were negatively impacted
by a
23% decrease in constant currency sales of the A-V Impulse product.
International sales were also negatively impacted in the Reconstruction and
Trauma market sectors by a continued shift towards internal fixation from
external fixation products. We have added new internal fixation products to
our
product offering which resulted in an increase in internal fixation of 53%
for
the second quarter of 2006 as compared to the second quarter of 2005. Sales
of
Non-Orthopedic products, principally the Laryngeal Mask sold in the United
Kingdom and Italy, were down 6% when compared to the same period of the prior
year.
International
Orthofix Sales by Market Sector:
|
|
Net
Sales for the
Three
Months Ended June 30,
|
|
|
|
(In
US$ thousands)
|
|
2006
|
|
2005
|
|
Growth
|
|
Orthopedic
|
|
|
|
|
|
|
|
Spine
|
|
$
|
12
|
|
$
|
(40
|
)
|
|
--
|
|
Reconstruction
|
|
|
10,906
|
|
|
12,174
|
|
|
(10
|
)%
|
Trauma
|
|
|
8,266
|
|
|
8,513
|
|
|
(3
|
)%
|
Total
Orthopedic
|
|
|
19,184
|
|
|
20,647
|
|
|
(7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
Non-Orthopedic
|
|
|
5,412
|
|
|
5,624
|
|
|
(4
|
)%
|
International
Orthofix
|
|
$
|
24,596
|
|
$
|
26,271
|
|
|
(6
|
)%
|
Sales
by Market Sector:
Net
sales
of spine products increased 17% to $29.6 million in the second quarter of 2006
compared to $25.2 million in the second quarter of 2005. As discussed above,
the
increase is primarily due to sales of our Spinal-Stim and Cervical-Stim products
attributable to increased demand in the United States. The Cervical-Stim
continues to be the only FDA-approved device for the enhancement of fusion
in
the cervical spine.
Sales
of
our reconstruction products increased 2% to $32.5 million in the second quarter
of 2006 compared to $31.7 million in the second quarter of 2005. The increase
of
$0.8 million in this market sector was attributable to sales of the Breg
products which increased 10%, sales of internal fixation, including ISKD™, which
increased 85% and sales of external fixation products used in reconstruction
applications which increased 5%. The majority of these increases were offset
by
sales of A-V Impulse which decreased 23% as discussed above.
Sales
of
our trauma products were nearly flat at $16.5 million in the second quarter
of
2006, compared to $16.6 million in the second quarter of 2005. This market
sector was negatively impacted from an 8% decline in sales of external fixation
products due to the market demand for internal fixation products as discussed
above. This negative growth was offset by increased sales of internal fixation
products and a 9% increase in sales of our Physio-Stim® product.
Sales
of
our non-orthopedic products grew 2% to $6.1 million in the second quarter of
2006 compared to $6.0 million in the second quarter of 2005. The increase was
primarily due to an increase in sales of woman’s care and other products which
was partially offset by a decrease in sales of airway management products.
Gross
Profit
- Our
gross profit increased 8% to $63.5 million in the second quarter of 2006, from
$58.8 million in the second quarter of 2005. The increase was primarily due
to
the increase of 6.5% in net sales. Gross profit as a percent of net sales in
the
second quarter 2006 was 75.0% compared to 73.9% in the second quarter of 2005,
which was a result of a favorable product mix resulting from higher sales of
higher margin stimulation products.
Sales
and Marketing Expenses
- Sales
and marketing expenses, which include commissions, royalties and bad debt
provision, generally increase and decrease in relation to sales. Sales and
marketing expense increased $3.1 million to $31.9 million in the second quarter
of 2006 compared to $28.8 million in the second quarter of 2005, an increase
of
11% on a net sales increase of 6.5% over the same period. Sales and marketing
expense as a percent of net sales increased to 37.7% in the second quarter
of
2006 as compared to 36.2% in second quarter of 2005. The increase in sales
and
marketing expense is primarily due to higher commissions on higher sales, higher
marketing service costs related to our Danek relationship, increased bad debt
expense, an increase in market development expense and share-based compensation
cost related to the adoption of SFAS No. 123 (R) for which there was no
comparable cost in the prior year. The increase in the rate of sales and
marketing as a percent of sales included all of these same factors plus the
impact from a generally fixed sales compensation structure on lower sales in
International.
General
and Administrative Expense
-
General and administrative expense increased $3.4 million in the second quarter
of 2006 to $12.1 million compared to $8.7 million in the second quarter of
2005.
This increase is primarily attributable to additional share-based compensation
costs related to the adoption of SFAS No. 123 (R) of $1.3 million for which
there was no comparable cost in the prior year, additional corporate development
costs of $0.5 million, additional legal costs of $0.7 million, and additional
market development costs of $0.3 million.
Research
and Development Expense
-
Research and development expense decreased $0.2 million in the second quarter
of
2006 to $2.7 million compared to $2.9 million in the second quarter of 2005
and
also decreased to 3% of net sales in second quarter of 2006 as compared to
4% of
net sales in the second quarter of 2005. Share-based compensation costs related
to the adoption of SFAS No. 123 (R) in the second quarter of 2006 was $0.1
million for which there was no comparable cost in the prior year.
Amortization
of Intangible Assets
-
Amortization of intangible assets was $1.7 million in both the second quarter
of
2006 and the second quarter of 2005.
Interest
Income (Expense), net - Interest
income was $0.3 million in the second quarter of 2006 compared to $1.3 million
of interest expense in the second quarter of 2005. The reduction in interest
expense in the second quarter of 2006 when compared to the same period of 2005
is the result of the complete repayment of our senior secured term loan.
Other
Income (Expense), net - Other
income was of $0.3 million in the second quarter of 2006 compared to
other expense of $0.6 million in the second quarter of 2005. The other income
in
the second quarter 2006 was due to foreign exchange gains resulting from the
weakening during the quarter of the U.S. Dollar as contrasted to the opposite
effect in the second quarter of 2005.
KCI
Settlement, Net of Related Costs
- Costs
associated with the KCI litigation in the second quarter of 2005 was $0.2
million for which there was no comparable cost in the second quarter of 2006
following the final settlement in the first quarter of 2006.
Income
Tax Expense -
Our
estimated worldwide effective tax rate was 18.8% and 36.1% during the second
quarter of 2006 and 2005, respectively. The decrease in the effective tax rate
is due to a one-time tax benefit of $2.9 million resulting from our election
to
adopt a new tax provision in Italy. The election allowed us to increase, for
tax
purposes only, the value of our trademarks in Italy by approximately $15
million. We incurred a tax liability of $2.7 million from applying a 19% tax
rate to the revaluation of the trademark value. We will receive a future tax
benefit of $5.6 million associated with amortization of that step-up in value
which is based on the current Italian tax rates of approximately 37%. The net
of
the $5.6 million deferred tax asset and the $2.7 million tax liability resulted
in a $2.9 million non-recurring discreet tax benefit. Without this discreet
item, our estimated worldwide effective tax rate for the second quarter ended
June 30, 2006 was 37.1% as a result of a higher proportion of pre-tax income
being earned in the United States, a higher tax jurisdiction, in 2006 when
compared to the same period of the prior year.
Net
Income
-
Net
income for the second quarter of 2006 was $12.7 million, or $0.79 per basic
share and per diluted share, compared to $9.4 million, or $0.59 per basic share
and $0.58 per diluted share, for the second quarter of 2005, an increase in
net
income of 35%. The weighted average number of basic common shares outstanding
was 16,037,927 and 15,872,638 during the second quarter of 2006 and 2005,
respectively. The weighted average number of diluted common shares outstanding
was 16,166,241 and 16,294,098 during the second quarter of 2006 and 2005,
respectively.
Six
Months Ended June 30, 2006 Compared to Six Months Ended June 30,
2005
Sales
by Business Segment:
Net
sales
increased 5.5% to $165.9 million for the first six months of 2006 compared
to
$157.2 million for the first six months of 2005. The impact of foreign currency
decreased sales by $1.8 million, or 1.1%, during the first six months of 2006
as
compared to the first six months of 2005.
Net
sales
in the Americas, primarily in the United States, increased to $80.8 million
in
the first six months of 2006 compared to $69.6 million in the first six months
of 2005, an increase of 16%. The Americas represented 49% of total net sales
during the first six months of 2006 and 44% of total net sales for the first
six
months of 2005. The increase in sales was primarily the result of a 19% increase
in sales in the Spine market sector which was attributable to increased demand
for our Spinal-Stim® and Cervical-Stim® products. The Reconstruction market
sector also experienced a 27% increase in sales which was attributable to growth
in sales of newer internal reconstruction products such as the eight-Plate™ and
ISKD. In the Americas Trauma market sector, external fixation devices are
sharing the market for treatment of difficult fractures with alternatives such
as plating and nailing. Recognizing this trend, we have introduced the Contours
VPS for distal radius fractures, the PC.C.P. for hip fractures, and on a limited
release the CentroNail™. Growth from these products together with growth from
the Physio-Stim for long-bone non-unions enabled us to offset a negative 4%
growth for external fixation and show an overall 1% growth in Trauma for the
first six months of 2006 compared to 2005.
Americas
Orthofix Sales by Market Sector:
|
|
Net
Sales for the
Six
Months Ended June 30,
|
|
|
|
(In
US$ thousands)
|
|
2006
|
|
2005
|
|
Growth
|
|
Orthopedic
|
|
|
|
|
|
|
|
Spine
|
|
$
|
57,459
|
|
$
|
48,330
|
|
|
19
|
%
|
Reconstruction
|
|
|
5,474
|
|
|
4,315
|
|
|
27
|
%
|
Trauma
|
|
|
16,377
|
|
|
16,253
|
|
|
1
|
%
|
Total
Orthopedic
|
|
|
79,310
|
|
|
68,898
|
|
|
15
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Non-Orthopedic
|
|
|
1,450
|
|
|
744
|
|
|
95
|
%
|
Americas
Orthofix
|
|
$
|
80,760
|
|
$
|
69,642
|
|
|
16
|
%
|
Net
sales
in Breg increased 5% to $37.2 million for the first six months of 2006
compared to $35.4 million for the first six months of 2005. The increase in
sales was primarily due to the sale of Breg bracing products which increased
12%
from the first six months of 2005. Our new Fusion™ XT knee brace was the primary
contributor to the increase. This increase was partially offset by a 10%
decrease in sales for pain therapy products resulting from delayed introduction
of new pain therapy products. All of Breg’s sales are recorded in our
Reconstruction market sector. Breg net sales represented 22% and 23% of our
total net sales in the six months of 2006 and 2005, respectively.
Net
sales
in International decreased 8% to $47.9 million in the first six months of
2006 compared to $52.2 million in first six months of 2005. International net
sales represented 29% and 33% of our total net sales in the first six months
of
2006 and 2005, respectively. The impact of foreign currency decreased
International sales by 4%, or $2.2 million, during the first six months of
2006
as compared to the first six months of 2005. International sales in the first
six months of 2006 were also negatively impacted by a 19% decrease in constant
currency sales of the A-V Impulse product. International sales were also
negatively impacted in the Reconstruction and Trauma market sectors by a
continued shift towards internal fixation from external fixation products.
In
recognizing this market preference, we have added new internal fixation products
to our product offering, which have increased 58% in the first six months as
compared to the first six months of 2005. Sales of Non-Orthopedic products,
principally the Laryngeal Mask sold in the United Kingdom and Italy, were down
6% when compared to the same period of the prior year.
International
Orthofix Sales by Market Sector:
|
|
Net
Sales for the
Six
Months Ended June 30,
|
|
|
|
(In
US$ thousands)
|
|
2006
|
|
2005
|
|
Growth
|
|
Orthopedic
|
|
|
|
|
|
|
|
Spine
|
|
$
|
40
|
|
$
|
69
|
|
|
(42
|
)%
|
Reconstruction
|
|
|
22,045
|
|
|
24,675
|
|
|
(11
|
)%
|
Trauma
|
|
|
15,343
|
|
|
16,330
|
|
|
(6
|
)%
|
Total
Orthopedic
|
|
|
37,428
|
|
|
41,074
|
|
|
(9
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
Non-Orthopedic
|
|
|
10,429
|
|
|
11,127
|
|
|
(6
|
)%
|
International
Orthofix
|
|
$
|
47,857
|
|
$
|
52,201
|
|
|
(8
|
)%
|
Sales
by Market Sector:
Net
sales
of spine products increased 19% to $57.5 million in the six months of 2006
compared to $48.4 million in the first six months of 2005. As discussed above,
the increase is primarily due to sales of our Spinal-Stim and Cervical-Stim
products attributable to increased demand in the United States.
Sales
of
our reconstruction products increased 1% to $64.8 million in the first six
months of 2006 compared to $64.4 million in the first six months of 2005. The
increase in this market sector was attributable to increased sales of the Breg
products which increased 8% worldwide together with increased sales of internal
fixation products. The majority of this growth was offset by decreased sales
of
our A-V Impulse products as discussed above and decreased sales in other
reconstruction due to the discontinuation of certain distributed products in
the
International market.
Sales
of
our trauma products decreased 3% to $31.7 million in the first six months of
2006, compared to $32.6 million in the first six months of 2005. This market
sector was negatively impacted from a 10% decline in sales of external fixation
products which was due to fluctuations of foreign currency and decreased demand
for external fixation products partially offset by increased demand for internal
fixation and Physio-Stim products.
Sales
of
our non-orthopedic products remained constant at $11.9 million in the first
six
months of 2006 compared to the same period in 2005. Sales of woman’s care and
other products increased; however, this increase was offset by a decrease in
sales of airway management products.
Gross
Profit
- Our
gross profit increased 7% to $123.2 million in the first six months of 2006,
from $115.6 million in the first six months of 2005. The increase was primarily
due to the increase of 5.5% in net sales. Gross profit as a percent of net
sales
in the first six months of 2006 was 74.3% compared to 73.5% in the first six
months of 2005. The higher gross profit margin was a result of a favorable
product mix, resulting from the sales of higher margin stimulation products
as
well as ongoing operational improvement initiatives. Share-based compensation
costs related to the adoption of SFAS No. 123(R) in the first six months of
2006
was $0.1 million for which there was no comparable cost in the prior
year.
Sales
and Marketing Expenses
- Sales
and marketing expenses, which include commissions, royalties and bad debt
provision, generally increase and decrease in relation to sales. Sales and
marketing expense increased $6.5 million to $62.7 million in the first six
months of 2006 compared to $56.2 million in the first six months of 2005, an
increase of 12% on a net sales increase of 5.5% over the same period. Sales
and
marketing expense as a percent of net sales increased to 37.8% in the first
six
months of 2006 from 35.8% in the first six months of 2005. The increase in
sales
and marketing expense is primarily due to higher commissions on higher sales,
higher marketing service costs related to our Danek relationship, increased
bad
debt expense, an increase in on going market development expenses, and
share-based compensation costs related to the adoption of SFAS No. 123(R).
Share-based compensation costs related to the adoption of SFAS No. 123(R) in
the
first six months of 2006 was $0.4 million for which there was no comparable
cost
in the prior year. The increase in the rate of sales and marketing expenses
as a
percent of sales included all of these same factors plus the impact from a
generally fixed sales compensation structure on lower sales in International.
General
and Administrative Expense
-
General and administrative expense increased $7.3 million in the first six
months of 2006 to $24.6 million compared to $17.4 million in the first six
months of 2005. This increase is primarily attributable to management transition
costs of $1.7 million, which included $0.7 million of non-cash share-based
compensation, additional share-based compensation related to the adoption of
SFAS No. 123(R) of $2.3 million for which there is no comparable cost in the
prior year, additional corporate development costs of $0.7 million, additional
legal costs of $0.7 million, and market development activities of $0.2
million.
Research
and Development Expense
-
Research and development expense decreased $0.4 million in the first six months
of 2006 to $5.7 million compared to $5.8 million in the first six months of
2005
and decreased as a percent of net sales to 3% for the first six months of 2006
compared to 4% for the first six months of 2005. Share-based compensation costs
related to the adoption of SFAS No. 123(R) in the first six months of 2006
was
$0.2 million for which there was no comparable cost in the prior year.
Amortization
of Intangible Assets
-
Amortization of intangible assets was $3.5 million in the first six months
of
2006 compared to $3.3 million for the first six months of 2005.
Interest
Income
(Expense), net - Interest
income was $0.1 million in the first six months of 2006 compared to an expense
of $2.6 million in the first six months of 2005. The reduction in interest
expense in the first six months of 2006 when compared to the same period in
2005
is the result of the complete repayment of our senior secured term loan.
Other
Income (Expense), net - Other
income was $0.3 million in the first six months of 2006 as a result of
foreign currency gains compared to other income of $1.4 million in the first
six
months of 2005 which was primarily attributable to $2.4 million of deferred
royalty income resulting from the conclusion of the BoneSource agreement with
Stryker which was partially offset by $0.9 million of foreign currency losses.
KCI
Settlement, Net of Related Costs -
In the
first six months of 2006, we entered into final agreements with certain former
owners of Novamedix, which established the portion of the proceeds we were
required to disburse in connection with the KCI settlement. In the first six
months of 2006, we recorded a gain of $1.1 million which was the difference
between what we had reserved to disburse at December 31, 2005 and the amount
of
the final settlement obligations. This gain compares to $0.5 million of expense
in the first six months of 2005 which relates to costs associated with the
KCI
litigation.
Income
Tax Expense -
Our
estimated worldwide effective tax rate was 25.7% and 35.0% during the first
six
months of 2006 and 2005, respectively. The decrease in the effective tax rate
is
due to a one-time tax benefit of $2.9 million resulting from our election to
adopt a new tax provision in Italy. The election allowed us to increase, for
tax
purposes only, the value of our trademarks in Italy by approximately $15
million. We
incurred a tax liability of $2.7 million from applying a 19% tax rate to the
revaluation of the trademark value. We will receive a future tax benefit of
$5.6
million associated with amortization of that step-up in value which is based
on
the current Italian tax rates of approximately 37%. The
net
of the $5.6 million deferred tax asset and the $2.7 million tax liability
resulted in a $2.9 million non-recurring discreet tax benefit. Without this
discreet item, our estimated worldwide effective tax rate for the six months
ended June 30, 2006 was 35.8% as a result of a higher proportion of pre-tax
income being earned in the United States, a higher tax jurisdiction, in 2006
when compared to the same period of the prior year.
Net
Income
-
Net
income for the first six months of 2006 was $21.0 million, or $1.31 per basic
share and $1.30 per diluted share, compared to $20.2 million, or $1.28 per
basic
share and $1.24 per diluted share, for the first six months of 2005, an increase
in net income of 4%. The weighted average number of basic common shares
outstanding was 16,029,137 and 15,828,686 during the first six months of 2006
and 2005, respectively. The weighted average number of diluted common shares
outstanding was 16,173,679 and 16,228,849 during the first six months of 2006
and 2005, respectively.
Liquidity
and Capital Resources
Cash
was
$50.0 million at June 30, 2006. This compares to $77.5 million at December
31,
2005, of which $13.8 million was subject to certain restrictions under the
senior secured credit agreement. Further, $26.2 million was provided for in
an
accrual to be paid as part of the KCI settlement. As of June 30, 2006, the
senior secured credit facility had been repaid and cancelled; therefore no
cash
on hand is subject to restrictions and the KCI settlement had been paid and
concluded.
Net
cash
provided by operating activities was $1.6 million for the first six months
of
2006 compared to $13.1 million for the first six months of 2005. Net cash
provided by operating activities is comprised of net income, non-cash items
(including share-based compensation) and changes in working capital. Net income
increased approximately $0.8 million to $21.0 million in the first six months
of
2006 from $20.2 million in the first six months of 2006. Non-cash items
decreased $1.0 million in the first six months of 2006 compared to the first
six
months of 2005. Changes in working capital accounts consumed $11.3 million
of
cash in the first six months of 2006 compared to the first six months of 2005.
The principal uses of cash for working capital in the first six months of 2006
were increases in accounts receivable to support additional sales, increases
in
inventory and reduction in current liabilities related to the KCI settlement.
Overall, performance indicators for our two primary working capital accounts,
accounts receivable and inventory, reflect days sales in receivables of 97
days
at June 30, 2006 compared to 94 days at June 30, 2005 and inventory turnover
of
2.2 times at June 30, 2006 compared to 2.5 times at June 30, 2005.
Net
cash
used in investing activities was $5.6 million during the first six months of
2006, compared to $6.1 million during the first six months of 2005. During
the
first six months of 2006, we invested $4.5 million in capital expenditures
and
we paid $1.1 million to purchase of 52% of International Medical Supplies
Distribution GmbH (“IMES”), a distributor of Breg products in Germany. During
the first six months of 2005, we invested $6.1 million in capital expenditures.
Net
cash
used in financing activities was $11.5 million in the first six months of 2006
compared to $16.1 million for the first six months in 2005. In the first six
months of 2006, we repaid the remaining $14.8 million of the principal of the
senior secured term loan, which was obtained to help finance the Breg
acquisition and received proceeds from the Italian line of credit of $3.3
million. In addition, we received proceeds of $0.9 million from the issuance
of
27,724 shares of our common stock upon the exercise of stock options. In the
first six months of 2005, we
repaid
approximately $16.1 million of the principal of the senior secured term loan
and
we received proceeds of $4.0 million from the issuance of 214,508 shares of
our
common stock upon the exercise of stock options
and
warrants.
At
June
30, 2006, we had outstanding borrowings of 3.0 million Euro ($3.8 million)
and
unused available lines of credit of approximately 3.0 million Euro ($3.8
million) under a line of credit established in Italy to finance the working
capital of our Italian operations. The terms of the line of credit give us
the
option to borrow amounts in Italy at rates determined at the time of
borrowing.
We
continue to search for viable acquisition candidates that would expand our
global presence as well as additional products appropriate for current
distribution channels. An acquisition of another company or product line by
us
could result in our incurrence of additional debt and contingent liabilities.
We
believe that current cash balances together with projected cash flows from
operating activities, the available Italian line of credit, the exercise of
stock options, and our available debt capacity are sufficient to cover
anticipated working capital and capital expenditure needs including research
and
development costs over the near term.
Contractual
Obligations
The
following chart sets forth changes to our contractual obligations that have
occurred since December 31, 2005:
Contractual
Obligations
|
|
Payments
Due By Period
|
|
(Dollars
in thousands)
|
|
Total
|
|
Less
Than 1 Year
|
|
1
to 3 Years
|
|
4
to 5 Years
|
|
Over
5 Years
|
|
Senior
secured term loan:
|
|
|
|
|
|
|
|
|
|
|
|
As
of December 31, 2005
|
|
$
|
14,750
|
|
$
|
14,750
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of June 30, 2006
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
borrowings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of December 31, 2005
|
|
$
|
458
|
|
$
|
437
|
|
$
|
21
|
|
$
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of June 30, 2006
|
|
$
|
3,842
|
|
$
|
3,842
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
Other
than described above there were no material changes in the contractual
obligations specified in our Annual Report on Form 10-K for the year ended
December 31, 2005.
Item
3. Quantitative
and Qualitative Disclosures About Market
Risk
There
have been no material changes from the information provided in our Annual Report
on Form 10-K for the year ended December 31, 2005 with the exception of the
termination of the senior secured term loan which was subject to fluctuation
in
interest rates.
Item
4. Controls and Procedures
As
of
June 30, 2006, we performed an evaluation under the supervision and with the
participation of our management, including the Chief Executive Officer and
Chief
Financial Officer, of the effectiveness of our disclosure controls and
procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) of the Securities
Exchange Act of 1934). Based on the evaluation, our management, including the
Chief Executive Officer and Chief Financial Officer, concluded that our
disclosure controls and procedures were adequate and effective as of the end
of
the period covered by this report. During
the quarterly period covered by this report, there were no changes in our
internal controls over financial reporting that have materially affected, or
are
reasonably likely to materially affect, our internal control over financial
reporting.
We
continued our effort to standardize our worldwide accounting systems and move
to
one global chart of accounts, by converting a number of our subsidiaries, most
notably Orthofix, Inc., to the global Oracle database system and chart of
accounts in April 2006. The conversion brings both Breg, Inc and Orthofix,
Inc.,
our two largest subsidiaries together with several small subsidiaries including
Orthofix International N.V., the parent holding company, Orthofix International
B.V, Orthofix Holdings Inc, Swiftsure Medical Limited, Victory Medical Limited,
Orthofix US LLC, Orthofix UK Limited, Orthofix II B.V., onto the same Oracle
database.
Item
1. Legal Proceedings
There
have been no material changes from the information provided in Part I, “Item 3,
Legal Proceedings” in our Annual Report on Form 10-K for the year ended December
31, 2005.
Other
than as set forth below, there have been no material changes to our risk factors
from the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual
Report on Form 10-K for the year ended December 31, 2005.
In
order to compete, we must attract, retain and motivate key employees, and our
failure to do so could have an adverse effect on our results of operations.
In
order
to compete, we must attract, retain and motivate executives and other key
employees, including those in managerial, technical, sales, marketing and
support positions. Hiring and retaining qualified executives, engineers,
technical staff and sales representatives are critical to our business, and
competition for experienced employees in the medical device industry can be
intense. To attract, retain and motivate qualified employees, we utilize
stock-based incentive awards such as employee stock options. If the value of
such stock awards does not appreciate as measured by the performance of the
price of our common stock and ceases to be viewed as a valuable benefit, our
ability to attract, retain and motivate our employees could be adversely
impacted, which could negatively affect our results of operations and/or require
us to increase the amount we expend on cash and other forms of compensation.
In
addition, our adoption of Statement of Financial Accounting Standards (“SFAS”)
No. 123(R), “Share-Based Payment,” during our first quarter of 2006 will
result in significant additional compensation expense compared to prior
periods.
Our
results of operations could vary as a result of the methods, estimates and
judgments we use in applying our accounting policies.
The
methods, estimates and judgments we use in applying our accounting policies
have
a significant impact on our results of operations (see “Critical Accounting
Estimates” in Part II, Item 7 of our Annual Report filed on
Form 10-K). Such methods, estimates and judgments are, by their nature,
subject to substantial risks, uncertainties and assumptions, and factors may
arise over time that leads us to change our methods, estimates and judgments.
Changes in those methods, estimates and judgments could significantly affect
our
results of operations. In particular, beginning in our first quarter of 2006,
the calculation of share-based compensation expense under
SFAS No. 123(R) will require us to use valuation methodologies (which
were not developed for use in valuing employee stock options) and a number
of
assumptions, estimates and conclusions regarding matters such as expected
forfeitures, expected volatility of our share price, the expected dividend
rate
with respect to our common stock and the exercise behavior of our employees.
Furthermore, there are no means, under applicable accounting principles, to
compare and adjust our expense if and when we learn of additional information
that may affect the estimates that we previously made, with the exception of
changes in expected forfeitures of share-based awards. Factors may arise over
time that leads us to change our estimates and assumptions with respect to
future share-based compensation arrangements, resulting in variability in our
share-based compensation expense over time. Changes in forecasted share-based
compensation expense could impact our gross margin percentage; research and
development expenses; sales and marketing expenses; general and administrative
expenses; and our tax rate.
We
may be subject to extensive government regulation that increases our costs
and
could limit our ability to market or sell our products.
The
medical devices we manufacture and market are subject to rigorous regulation
by
the Food and Drug Administration, or FDA, and numerous other federal, state
and
foreign governmental authorities. These authorities regulate the development,
approval, classification, testing, manufacture, labeling, marketing and sale
of
medical devices. For a description of these regulations, see Item 1 -
“Business - Government Regulation” in our Annual Report on Form 10-K for the
year ended December 31, 2005.
The
approval by governmental authorities, including the FDA in the United States,
is
generally required before any medical devices may be marketed in the United
States or other countries. We cannot predict whether in the future, the U.S.
or
foreign governments may impose regulations that have a material adverse effect
on our business, financial condition or results of operations. The process
of
obtaining FDA and other regulatory approvals to develop and market a medical
device can be costly and time-consuming, and is subject to the risk that such
approvals will not be granted on a timely basis if at all. The regulatory
process may delay or prohibit the marketing of new products and impose
substantial additional costs if the FDA lengthens review times for new devices.
The FDA has the ability to change the regulatory classification of an approved
device from a higher to a lower regulatory classification which could materially
adversely impact our ability to market or sell our devices. Our subsidiary,
Orthofix, Inc. is currently involved in a proceeding before the FDA addressing
whether the FDA classification of our Physio-Stim and Spinal-Stim bone growth
stimulation products should be reclassified from FDA Class III to FDA Class
II.
We are actively participating in this proceeding and maintain that the current
FDA Class III classification is correct. A meeting was held on June 2, 2006
before the FDA’s Orthopedic and Rehabilitation Devices panel for the purpose of
gathering information to allow the panel to recommend to the FDA whether
reclassification is appropriate. At the conclusion of the meeting, the Panel
determined that the present FDA Class III classification for the products at
issue is proper. We do not know when or whether the FDA will reach a
determination on this classification issue or whether any such determination
would adversely impact our ability to market or sell these
products.
Our
profitability depends, in part, upon the ability of the Company, our sales
representatives, and our distributors to obtain and maintain all necessary
certificates, permits, approvals and clearances from U.S. and foreign regulatory
authorities and to operate in compliance with applicable regulations. If the
FDA
or other U.S. or foreign regulatory authority determines that we were not in
compliance with applicable law or regulations, it could institute proceedings
to
detain or seize our products, issue a recall, impose operating restrictions,
enjoin future violations and assess civil and criminal penalties against us,
our
officers or our employees and could recommend criminal prosecution to the
Department of Justice. Any such consequences could have a material adverse
effect on our business, financial condition or results of
operations.
Item
4. Submission of Matters to a Vote of Security
Holders
The
Annual General Meeting of Shareholders of the Company was held on June 27,
2006.
The total number of common shares eligible to vote as of the record date, May
2,
2006, was 16,036,142 and pursuant to the Company’s Articles of Association,
8,018,071 constituted a quorum. The total number of common shares actually
voted
was 11,877,023.
At
the
Annual General Meeting:
|
1. |
The
following persons were elected by a plurality of the votes cast
at the
meeting as Directors of the Company for a one year term expiring
at the
Annual General Meeting in
2007:
|
Name
|
|
Votes
For
|
|
Votes
Withheld
|
|
|
|
|
|
Jerry
Benjamin
|
|
11,015,493
|
|
851,530
|
Robert
Gaines-Cooper
|
|
10,661,172
|
|
1,215,851
|
Charles
W. Federico
|
|
10,653,545
|
|
1,223,478
|
James
F. Gero
|
|
10,959,745
|
|
917,278
|
Peter
J. Hewett
|
|
10,597,256
|
|
1,279,767
|
Guy
J. Jordan
|
|
11,763,364
|
|
113,659
|
Thomas
J. Kester
|
|
11,780,921
|
|
96,102
|
Walter
P. Von Wartburg
|
|
11,780,221
|
|
96,802
|
Kenneth
R. Weisshaar
|
|
11,781,271
|
|
95,752
|
Stefan
Widensohler
|
|
11,780,871
|
|
96,152
|
|
2. |
An
amendment to the Articles of Association of the Company so as to
provide
for greater flexibility with regard to the authority of the Board
of
Directors granting the Board of Directors express authority (1)
to declare
dividends out of the profits of the preceding fiscal year or years
then
available for distribution and (2) to declare and make distributions
out
of retained earnings reserves or out of the contributed surplus
capital
reserves was adopted and approved by a vote of 9,008,870 in favor,
921,976
against and 1,946,177
abstaining;
|
|
3. |
The
audited Financial Statements for the year ended December 31, 2005
were
adopted and approved by a vote of 11,800,294 in favor, 8,759 against
and
67,970 abstaining;
and
|
|
4. |
The
selection of Ernst & Young LLP to act as independent auditors for the
Company and its subsidiaries for the fiscal year ending December
31, 2006
was ratified by a vote of 11,811,783 in favor, 59,662 against and
5,578
abstaining.
|
Exhibit
Number
|
|
Description
|
|
|
|
3.1
|
|
Certificate
of Incorporation of the Company (filed as an exhibit to the Company’s
annual report on Form 20-F dated June 29, 2001 and incorporated herein
by
reference).
|
|
|
|
3.2
|
|
Articles
of Association of the Company as Amended (filed as an exhibit to
the
Company’s quarterly report on Form 10-Q for the quarter ended September
30, 2004 and incorporated herein by reference).
|
|
|
|
10.1
|
|
Orthofix
Inc. Employee Stock Purchase Plan (filed as an exhibit to the Company’s
annual report on Form 10-K for the fiscal year ended December 31,
2002 and
incorporated herein by reference).
|
|
|
|
10.2
|
|
Orthofix
International N.V. Staff Share Option Plan (filed as an exhibit to
the
Company’s annual report on Form 10-K for the fiscal year ended December
31, 2002 and incorporated herein by reference).
|
|
|
|
10.3
|
|
Form
of Performance Accelerated Stock Option under the Staff Share Option
Plan
(filed as an exhibit to the Company’s annual report on Form 10-K for the
fiscal year ended December 31, 2002 and incorporated herein by
reference).
|
|
|
|
10.4
|
|
Form
of Performance Accelerated Stock Option Inducement Agreement (filed
as an
exhibit to the Company’s annual report on Form 10-K for the fiscal year
ended December 31, 2003 and incorporated here in by
reference).
|
|
|
|
10.5
|
|
Orthofix
International N.V. 2004 Long Term Incentive Plan, as amended (filed
as an
exhibit to the Company’s quarterly report on Form 10-Q for the quarter
ended September 30, 2004 and incorporated herein by
reference).
|
|
|
|
10.6
|
|
Form
of Nonqualified Stock Option Agreement Under the Orthofix International
N.V. 2004 Long Term Incentive Plan (filed as an exhibit to the Company’s
current report on Form 8-K filed April 17, 2006 and incorporated
herein by
reference)
|
|
|
|
10.7
|
|
Form
of Nonqualified Stock Option Agreement for Non-Employee Directors
under
the Orthofix International N.V. 2004 Long Term Incentive Plan (filed
as an
exhibit to the Company’s annual report on Form 10-K for the fiscal year
ended December 31, 2004 and incorporated herein by
reference).
|
|
|
|
10.8
|
|
Employment
Agreement, dated as of April 15, 2005, between Orthofix International
N.V.
and Charles W. Federico (filed as an exhibit to the Company’s current
report on Form 8-K filed April 18, 2005 and incorporated herein by
reference).
|
|
|
|
10.9
|
|
Employment
Agreement, dated as of July 13, 2006, between the Company and Thomas
Hein
(filed as an exhibit to the Company’s current report on Form 8-K filed
July 18, 2006 and incorporated herein by reference).
|
|
|
|
10.10
|
|
Employment
Agreement, dated as of November 20, 2003, between Orthofix International
N.V. and Bradley R. Mason (filed as an exhibit to the Company’s annual
report on Form 10-K for the fiscal year ended December 31, 2003 and
incorporated herein by reference).
|
|
|
|
10.11
|
|
Change
of Control Agreement, dated as of February 18, 2005, between Orthofix
Inc.
and Raymond C. Kolls (filed as an exhibit to the Company’s current report
on Form 8-K filed February 22, 2005 and incorporated herein by
reference).
|
10.12
|
|
Change
of Control Agreement, dated as of September 1, 2005, between Orthofix
Inc.
and Alan W. Milinazzo (filed as an exhibit to the Company’s current report
on Form 8-K filed September 8, 2005 and incorporated herein by
reference).
|
|
|
|
10.13
|
|
Full
Recourse Promissory Note between Orthofix International N.V. and
Charles
W. Federico dated January 10, 2002 (filed as an exhibit to the Company’s
annual report on Form 10-K for the fiscal year ended December 31,
2002 and
incorporated herein by reference).
|
|
|
|
10.14
|
|
Full
Recourse Promissory Note between Orthofix International N.V. and
Gary D.
Henley dated January 10, 2002 (filed as an exhibit to the Company’s annual
report on Form 10-K for the fiscal year ended December 31, 2002 and
incorporated herein by reference).
|
|
|
|
10.15
|
|
Acquisition
Agreement dated as of November 20, 2003, among Orthofix International
N.V., Trevor Acquisition, Inc., Breg, Inc. and Bradley R. Mason,
as
shareholders’ representative (filed as an exhibit to the Company’s current
report on Form 8-K filed January 8, 2004 and incorporated herein
by
reference).
|
|
|
|
10.16
|
|
Voting
and Subscription Agreement dated as of November 20, 2003, among Orthofix
International N.V. and the significant shareholders of Breg, Inc.
identified on the signature pages thereto (filed as an exhibit to
the
Company’s current report on Form 8-K filed January 8, 2004 and
incorporated herein by reference).
|
|
|
|
10.17
|
|
Employee
Agreement, as amended, dated December 29, 2005 between Orthofix
International N.V. and Charles W. Federico (filed as an exhibit to
the
Company’s current report on Form 8-K filed December 30, 2005 and
incorporated herein by reference).
|
|
|
|
10.18
|
|
Form
of Indemnity Agreement (filed as an exhibit to the Company’s annual report
on Form 10-K for the fiscal year ended December 31, 2005 and incorporated
herein by reference).
|
|
|
|
10.19
|
|
Settlement
Agreement, dated February 23, 2006, between Intavent Orthofix Limited,
a
wholly-owned subsidiary of Orthofix International N.V. and Galvin
Mould
(filed as an exhibit to the Company’s current report on Form 8-K filed on
April 17, 2006 and incorporated herein by reference).
|
|
|
|
10.20
|
|
Employment
Agreement, dated July 13, 2006, between Orthofix, Inc. and Alan W.
Milinazzo (filed as an exhibit to the Company’s current report on Form 8-K
filed July 18, 2006 and incorporated herein by reference). |
|
|
|
10.21
|
|
Employment
Agreement, dated July 13, 2006, between Orthofix, Inc. and Raymond
C.
Kolls (filed as an exhibit to the Company’s current report on Form 8-K
filed July 18, 2006 and incorporated herein by reference). |
|
|
|
10.22
|
|
Employment
Agreement, dated July 13, 2006, between Orthofix, Inc. and Michael
M.
Finegan (filed as an exhibit to the Company’s current report on Form 8-K
filed July 18, 2006 and incorporated herein by reference). |
|
|
|
14.1
|
|
Code
of Ethics of the Company (filed as an exhibit to the Company’s annual
report on Form 10-K for the fiscal year ended December 31, 2003 and
incorporated herein by reference).
|
|
|
|
21.1
|
|
Subsidiaries
of the Company (filed as an exhibit to the Company’s annual report on Form
10-K for the fiscal year ended December 31, 2005 and incorporated
herein
by reference).
|
|
|
Rule
13a-14(a)/15d-14(a) Certification of Chief Executive
Officer.
|
|
|
|
|
|
Rule
13a-14(a)/15d-14(a) Certification of Chief Financial
Officer.
|
|
|
|
|
|
Section
1350 Certification of Chief Executive Officer.
|
|
|
|
|
|
Section
1350 Certification of Chief Financial
Officer.
|
* Filed
herewith.
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant
has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
ORTHOFIX
INTERNATIONAL N.V.
|
|
|
|
|
|
|
Date:
August 3, 2006
|
By:
|
/s/
ALAN
W. MILINAZZO
|
|
|
Name: Alan
W. Milinazzo
|
|
|
Title: Chief
Executive Officer and President
|
|
|
|
Date:
August 3, 2006
|
By:
|
/s/
THOMAS
HEIN
|
|
|
Name: Thomas
Hein
|
|
|
Title: Chief
Financial Officer
|
37