form10q.htm
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 September 30, 2008
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 x Accelerated
filer o
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 November 7, 2008, 17,101,718 shares of common stock were issued
and outstanding.
PART
I FINANCIAL INFORMATION
|
|
Item
1.
|
|
3
|
Item
2.
|
|
23
|
Item
3.
|
|
37
|
Item
4.
|
|
38
|
PART
II OTHER INFORMATION
|
|
Item
1.
|
|
39
|
Item
1A.
|
|
41
|
Item
6.
|
|
43
|
|
|
47
|
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, risks relating to the expected sales of products,
including recently launched products, unanticipated expenditures, changing
relationships with customers, suppliers, strategic partners and lenders,
unfavorable results in litigation matters, risks relating to the protection of
intellectual property, changes to the reimbursement policies of third parties,
changes to and interpretation of 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, corporate development
and marketing development activities, including acquisitions and divestitures,
unexpected costs or operating unit performance related to recent acquisitions,
unexpected difficulties meeting covenants under our senior secured bank credit
facility 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, 2007
and Part II, Item 1A – “Risk Factors” in this Form 10-Q.
Item
1.
|
Condensed Consolidated
Financial Statements
|
CONDENSED
CONSOLIDATED BALANCE SHEETS
(U.S.
Dollars, in thousands except share data)
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
Assets
|
|
(Unaudited)
|
|
|
(Note
2)
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
10,286 |
|
|
$ |
25,064 |
|
Restricted
cash
|
|
|
16,761 |
|
|
|
16,453 |
|
Trade
accounts receivable, net
|
|
|
115,679 |
|
|
|
108,900 |
|
Inventories,
net
|
|
|
97,368 |
|
|
|
93,952 |
|
Deferred
income taxes
|
|
|
11,373 |
|
|
|
11,373 |
|
Prepaid
expenses and other current assets
|
|
|
30,059 |
|
|
|
25,035 |
|
Total
current assets
|
|
|
281,526 |
|
|
|
280,777 |
|
Investments,
at cost
|
|
|
2,095 |
|
|
|
4,427 |
|
Property,
plant and equipment, net
|
|
|
33,154 |
|
|
|
33,444 |
|
Patents
and other intangible assets, net
|
|
|
55,354 |
|
|
|
230,305 |
|
Goodwill
|
|
|
187,353 |
|
|
|
319,938 |
|
Deferred
taxes and other long-term assets
|
|
|
19,305 |
|
|
|
16,773 |
|
Total
assets
|
|
$ |
578,787 |
|
|
$ |
885,664 |
|
Liabilities
and shareholders’ equity
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Bank
borrowings
|
|
$ |
6,197 |
|
|
$ |
8,704 |
|
Current
portion of long-term debt
|
|
|
3,337 |
|
|
|
3,343 |
|
Trade
accounts payable
|
|
|
26,561 |
|
|
|
24,715 |
|
Other
current liabilities
|
|
|
33,361 |
|
|
|
36,544 |
|
Total
current liabilities
|
|
|
69,456 |
|
|
|
73,306 |
|
Long-term
debt
|
|
|
288,370 |
|
|
|
294,588 |
|
Deferred
income taxes
|
|
|
5,475 |
|
|
|
75,908 |
|
Other
long-term liabilities
|
|
|
5,630 |
|
|
|
7,922 |
|
Total
liabilities
|
|
|
368,931 |
|
|
|
451,724 |
|
|
|
|
|
|
|
|
|
|
Contingencies
(Note 18)
|
|
|
|
|
|
|
|
|
Shareholders’
equity:
|
|
|
|
|
|
|
|
|
Common
shares (17,101,718 and 17,038,304 shares issued at September 30, 2008 and
December 31, 2007, respectively)
|
|
|
1,710 |
|
|
|
1,704 |
|
Additional
paid-in capital
|
|
|
166,954 |
|
|
|
157,349 |
|
Retained
earnings
|
|
|
30,364 |
|
|
|
258,201 |
|
Accumulated
other comprehensive income
|
|
|
10,828 |
|
|
|
16,686 |
|
Total
shareholders’ equity
|
|
|
209,856 |
|
|
|
433,940 |
|
|
|
|
|
|
|
|
|
|
Total
liabilities and shareholders’ equity
|
|
$ |
578,787 |
|
|
$ |
885,664 |
|
The
accompanying notes form an integral part of these condensed consolidated
financial statements.
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
(Unaudited,
U.S. Dollars, in thousands except share and per share
data)
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
129,301 |
|
|
$ |
121,120 |
|
|
$ |
387,372 |
|
|
$ |
361,488 |
|
Cost
of sales
|
|
|
47,998 |
|
|
|
30,742 |
|
|
|
117,284 |
|
|
|
94,546 |
|
Gross
profit
|
|
|
81,303 |
|
|
|
90,378 |
|
|
|
270,088 |
|
|
|
266,942 |
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
and marketing
|
|
|
50,210 |
|
|
|
47,055 |
|
|
|
153,652 |
|
|
|
138,949 |
|
General
and administrative
|
|
|
19,293 |
|
|
|
16,908 |
|
|
|
60,252 |
|
|
|
49,619 |
|
Research
and development
|
|
|
6,447 |
|
|
|
5,953 |
|
|
|
19,400 |
|
|
|
18,313 |
|
Amortization
of intangible assets
|
|
|
5,347 |
|
|
|
4,671 |
|
|
|
15,220 |
|
|
|
13,710 |
|
Impairment
of goodwill and certain intangible assets
|
|
|
289,523 |
|
|
|
- |
|
|
|
289,523 |
|
|
|
- |
|
Gain
on sale of Pain Care® operations
|
|
|
- |
|
|
|
- |
|
|
|
(1,570 |
) |
|
|
- |
|
|
|
|
370,820 |
|
|
|
74,587 |
|
|
|
536,477 |
|
|
|
220,591 |
|
Operating
income (loss)
|
|
|
(289,517 |
) |
|
|
15,791 |
|
|
|
(266,389 |
) |
|
|
46,351 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense), net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense, net
|
|
|
(4,249 |
) |
|
|
(5,666 |
) |
|
|
(13,708 |
) |
|
|
(17,200 |
) |
Loss
on refinancing of senior secured term loan
|
|
|
(5,735 |
) |
|
|
- |
|
|
|
(5,735 |
) |
|
|
- |
|
Other,
net
|
|
|
(3,822 |
) |
|
|
519 |
|
|
|
(2,737 |
) |
|
|
234 |
|
|
|
|
(13,806 |
) |
|
|
(5,147 |
) |
|
|
(22,180 |
) |
|
|
(16,966 |
) |
Income
(loss) before income taxes
|
|
|
(303,323 |
) |
|
|
10,644 |
|
|
|
(288,569 |
) |
|
|
29,385 |
|
Income
tax (expense) benefit
|
|
|
66,072 |
|
|
|
(2,616 |
) |
|
|
60,732 |
|
|
|
(7,902 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income
|
|
$ |
(237,251 |
) |
|
$ |
8,028 |
|
|
$ |
(227,837 |
) |
|
$ |
21,483 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per common share - basic
|
|
$ |
(13.87 |
) |
|
$ |
0.48 |
|
|
$ |
(13.33 |
) |
|
$ |
1.30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per common share - diluted
|
|
$ |
(13.87 |
) |
|
$ |
0.48 |
|
|
$ |
(13.33 |
) |
|
$ |
1.27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares -basic
|
|
|
17,101,718 |
|
|
|
16,639,019 |
|
|
|
17,093,133 |
|
|
|
16,546,385 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares - diluted
|
|
|
17,101,718 |
|
|
|
16,889,303 |
|
|
|
17,093,133 |
|
|
|
16,925,084 |
|
The
accompanying notes form an integral part of these condensed consolidated
financial statements.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
(Unaudited,
U.S. Dollars, in thousands)
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
(227,837 |
) |
|
$ |
21,483 |
|
Adjustments
to reconcile net income (loss) to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
22,707 |
|
|
|
21,334 |
|
Amortization
of debt costs
|
|
|
868 |
|
|
|
523 |
|
Provision
for doubtful accounts
|
|
|
4,585 |
|
|
|
3,532 |
|
Deferred
taxes
|
|
|
(76,861 |
) |
|
|
(3,919 |
) |
Share-based
compensation
|
|
|
7,855 |
|
|
|
8,006 |
|
Change
in inventory obsolescence estimate
|
|
|
10,913 |
|
|
|
- |
|
Loss
on refinancing of senior secured term loan
|
|
|
3,660 |
|
|
|
- |
|
Impairment
of goodwill and certain intangible assets
|
|
|
289,523 |
|
|
|
- |
|
Impairment
of investments held at cost
|
|
|
1,500 |
|
|
|
- |
|
Amortization
of step up of fair value in inventory
|
|
|
365 |
|
|
|
2,718 |
|
Gain
on sale of Pain Care® operations
|
|
|
(1,570 |
) |
|
|
- |
|
Other
|
|
|
3,062 |
|
|
|
(1,328 |
) |
Change
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Restricted
cash
|
|
|
(352 |
) |
|
|
(4,270 |
) |
Accounts
receivable
|
|
|
(13,805 |
) |
|
|
(14,829 |
) |
Inventories
|
|
|
(16,703 |
) |
|
|
(19,086 |
) |
Prepaid
expenses and other current assets
|
|
|
(5,250 |
) |
|
|
(5,976 |
) |
Accounts
payable
|
|
|
2,500 |
|
|
|
(2,707 |
) |
Other
current liabilities
|
|
|
(2,739 |
) |
|
|
8,277 |
|
Net
cash provided by operating activities
|
|
|
2,421 |
|
|
|
13,758 |
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Payments
made in connection with acquisitions and investments in subsidiaries, net
of cash acquired
|
|
|
(501 |
) |
|
|
(2,117 |
) |
Capital
expenditures
|
|
|
(15,831 |
) |
|
|
(23,752 |
) |
Proceeds
from sale of investment held at cost
|
|
|
766 |
|
|
|
- |
|
Proceeds
from sale of Pain Care® operations
|
|
|
5,980 |
|
|
|
- |
|
Net
cash used in investing activities
|
|
|
(9,586 |
) |
|
|
(25,869 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Net
proceeds from issuance of common shares
|
|
|
1,734 |
|
|
|
6,799 |
|
Repayments
of long-term debt, net
|
|
|
(6,223 |
) |
|
|
(6,505 |
) |
Proceeds
from (repayments of) bank borrowings, net
|
|
|
(2,377 |
) |
|
|
7,870 |
|
Payment
of refinancing fees
|
|
|
(283 |
) |
|
|
- |
|
Tax
benefit on non-qualified stock options
|
|
|
22 |
|
|
|
1,164 |
|
Net
cash (used in) provided by financing activities
|
|
|
(7,127 |
) |
|
|
9,328 |
|
Effect
of exchange rate changes on cash
|
|
|
(486 |
) |
|
|
464 |
|
Net
decrease in cash and cash equivalents
|
|
|
(14,778 |
) |
|
|
(2,319 |
) |
Cash
and cash equivalents at the beginning of the year
|
|
|
25,064 |
|
|
|
25,881 |
|
Cash
and cash equivalents at the end of the period
|
|
$ |
10,286 |
|
|
$ |
23,562 |
|
The
accompanying notes form an integral part of these condensed consolidated
financial statements.
NOTES
TO THE CONDENSED UNAUDITED 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 devices, 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 nine months ended
September 30, 2008 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2008. The balance sheet at
December 31, 2007 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 the Company’s Annual
Report on Form 10-K for the fiscal year ended December 31,
2007.
NOTE
3:
|
RECENTLY
ISSUED ACCOUNTING STANDARDS
|
In
December 2007, the FASB ratified Emerging Issues Task Force (EITF) Issue No.
07-1, “Accounting for Collaborative Arrangements” (EITF 07-1). EITF 07-1
provides guidance related to the classification of the payments between
participants, the appropriate income statement presentation, as well as
disclosures related to certain collaborative arrangements. EITF 07-1 is
effective for fiscal years beginning after December 15, 2008 and will be adopted
by the Company in the first quarter of 2009. Unless other authoritative guidance
prevails, the Company will apply the guidance included in EITF 07-1 to
collaborative arrangements entered into in 2008.
In May
2008, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards (“SFAS”) No. 162, “The Hierarchy of Generally
Accepted Accounting Principles.” The Statement identified the sources
of accounting principles and the framework for selecting the principles to be
used in the preparation of financial statements that are presented in conformity
with generally accepted accounting principles in the United
States. The Statement is effective 60 days following the SEC’s
approval of the Public Company Accounting Oversight Board amendments to AU
Section 411, “The Meaning of Present Fairly in Conformity With Generally
Accepted Accounting Principles.” We do not anticipate the adoption of
SFAS No. 162 to have a material impact on the Company’s results of operations or
financial position.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value
Measurements.” The Statement defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles
and expands disclosure related to the use of fair value measures in financial
statements. The provisions of SFAS No. 157 were to be effective for
fiscal years beginning after November 15, 2007. On February 6, 2008,
the FASB agreed to defer the effective date of SFAS No. 157 for one year for
certain nonfinancial assets and nonfinancial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually). Effective January 1, 2008, the Company
adopted SFAS No. 157 except as it applies to those nonfinancial assets and
nonfinancial liabilities. The adoption of SFAS No. 157 did not have a
material impact on the Company’s results of operations or financial
position.
Effective
January 1, 2008, the Company adopted SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities – including an amendment of FASB
Statement No. 115.” SFAS No. 159 allows an entity the irrevocable
option to elect fair value for the initial and subsequent measurement of certain
financial assets and liabilities under an instrument-by-instrument
election. Subsequent measurements for the financial assets and
liabilities an entity elects to fair value will be recognized in the results of
operations. SFAS No. 159 also establishes additional disclosure
requirements. The Company did not elect the fair value option under
SFAS No. 159 for any of its financial assets or liabilities upon
adoption. The adoption of SFAS No. 159 did not have a material impact
on the Company’s results of operations or financial position.
In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities, an amendment of FASB Statement No. 133.” SFAS
No. 161 requires entities to provide greater transparency through additional
disclosures about (a) how and why an entity uses derivative instruments, (b) how
derivative instruments and related hedged items are accounted for under SFAS No.
133 “Accounting for Derivative Instruments and Hedging Activities” and its
related interpretations, and (c) how derivative instruments and related hedged
items affect an entity’s financial position, results of operations, and cash
flows. SFAS No. 161 is effective for financial statements issued for
fiscal years and interim periods beginning after November 15, 2008. The Company
is currently evaluating the potential impact of adopting SFAS No. 161 on the
Company’s disclosures of its derivative instruments and hedging
activities.
In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations (revised
2007).” SFAS No. 141(R) amends SFAS No. 141, “Business Combinations,”
and provides revised guidance for recognizing and measuring identifiable assets
and goodwill acquired, liabilities assumed, and any noncontrolling interest in
the acquiree. It also provides disclosure requirements to enable
users of the financial statements to evaluate the nature and financial effects
of the business combination. SFAS No. 141(R) is effective for fiscal
years beginning after December 15, 2008 and is to be applied
prospectively. The Company is currently evaluating the potential
impact of adopting SFAS No. 141(R) on its consolidated financial position and
results of operations.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements, an Amendment of ARB 51,” which establishes
accounting and reporting standards pertaining to ownership interest in
subsidiaries held by parties other than the parent, the amount of net income
attributable to the parent and to the noncontrolling interest, changes in a
parent’s ownership interest, and the valuation of any retained noncontrolling
equity investment when a subsidiary is deconsolidated. SFAS No. 160
also establishes disclosure requirements that clearly identify and distinguish
between the interests of the parent and the interests of the noncontrolling
owners. SFAS No. 160 is effective for fiscal years beginning on or
after December 15, 2008. The Company is currently evaluating the
potential impact of adopting SFAS No. 160 on its consolidated financial position
and results of operations.
NOTE
4:
|
SHARE-BASED
COMPENSATION
|
The
Company accounts for its share-based compensation plans in accordance with SFAS
No. 123(R), “Share-Based Payment”, using the modified prospective transition
method. Under SFAS No. 123(R), all share-based compensation costs are
measured at the grant date, based on the estimated fair value of the award, and
are recognized as expense in the statement of operations over the requisite
service period. Commencing in June 2007, the Company offered
restricted shares in addition to stock options as a form of share-based
compensation.
The
following table shows the detail of share-based compensation by line item in the
Condensed Consolidated Statements of Operations for the three and nine months
ended September 30, 2008 and 2007:
(In
US$ thousands)
|
|
Three
Months Ended
September 30,
|
|
|
Nine
Months Ended
September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
$ |
- |
|
|
$ |
113 |
|
|
$ |
116 |
|
|
$ |
293 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
and marketing (1)
|
|
|
579 |
|
|
|
800 |
|
|
|
1,353 |
|
|
|
1,993 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
2,433 |
|
|
|
1,846 |
|
|
|
5,793 |
|
|
|
4,978 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
186 |
|
|
|
126 |
|
|
|
593 |
|
|
|
742 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
3,198 |
|
|
$ |
2,885 |
|
|
$ |
7,855 |
|
|
$ |
8,006 |
|
(1) There
are no performance requirements and there was no consideration received for
share-based compensation awarded to sales and marketing employees.
NOTE
5:
|
RECLASSIFICATIONS
|
Certain
prior year amounts have been reclassified to conform to the 2008
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:
|
|
September
30,
|
|
|
December
31,
|
|
(In
US$ thousands)
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Raw
materials
|
|
$ |
9,302 |
|
|
$ |
10,804 |
|
Work-in-process
|
|
|
6,998 |
|
|
|
6,100 |
|
Finished
goods
|
|
|
57,840 |
|
|
|
42,384 |
|
Field
inventory (as described above)
|
|
|
12,368 |
|
|
|
13,997 |
|
Consignment
inventory
|
|
|
33,563 |
|
|
|
30,560 |
|
|
|
|
120,071 |
|
|
|
103,845 |
|
Less
reserve for obsolescence
|
|
|
(22,703 |
) |
|
|
(9,893 |
) |
|
|
$ |
97,368 |
|
|
$ |
93,952 |
|
In the
quarter ended September 30, 2008, due to reduced projections in revenue,
distributor terminations, new products, and the replacement of one product with
a successor product, the Company changed its estimates regarding the inventory
allowance at Blackstone, primarily based on estimated net realizable value using
assumptions about future demand and market conditions. The change in
estimate resulted in an increase in the reserve for obsolescence of
approximately $10.9 million ($7.0 million net of tax or $0.41 per basic and
diluted share).
The
changes in the net carrying value of goodwill by reportable segment for the
period ended September 30, 2008 are as follows:
(In
US$ thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
December 31, 2007
|
|
$ |
31,793 |
|
|
$ |
136,240 |
|
|
$ |
101,322 |
|
|
$ |
50,583 |
|
|
$ |
319,938 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Disposals
(1)
|
|
|
- |
|
|
|
- |
|
|
|
(2,027 |
) |
|
|
- |
|
|
|
(2,027 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
price adjustment (2)
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(248 |
) |
|
|
(248 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment
(3)
|
|
|
- |
|
|
|
(126,873 |
) |
|
|
- |
|
|
|
- |
|
|
|
(126,873 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(3,437 |
) |
|
|
(3,437 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
September 30, 2008
|
|
$ |
31,793 |
|
|
$ |
9,367 |
|
|
$ |
99,295 |
|
|
$ |
46,898 |
|
|
$ |
187,353 |
|
|
(1)
|
Sale
of operations relating to the Pain Care® business at Breg during the first
quarter of 2008.
|
|
(2)
|
Principally
relates to the acquisition of the remaining 38.74% of the minority
interest in the Company’s Mexican subsidiary and the remaining 10.5% of
the minority interest in the Company’s Brazilian subsidiary during the
first and third quarters of 2008,
respectively.
|
|
(3)
|
In
accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” the
Company performed an impairment analysis of indefinite-lived
intangibles. As part of the Company's debt refinancing
completed in September 2008, five year projections were prepared for
Blackstone. Due to the recent trend of decreasing revenues at
Blackstone, the Company evaluated the goodwill at
Blackstone. The fair value of the Blackstone reporting unit was
estimated using a combination of the income approach, which estimates the
fair value of the reporting units based on the expected present value of
future cash flows and the market approach, which estimates the fair value
of the reporting units based on comparable market prices. The
impairment analysis resulted in a goodwill impairment charge of $126.9
million because the carrying value exceeded the implied fair value of
goodwill .
|
NOTE
8:
|
PATENTS
AND OTHER INTANGIBLE ASSETS
|
(In
US$ thousands)
|
|
September
30,
2008
|
|
December
31,
2007
|
|
Cost |
|
|
|
|
|
Patents
and other
|
|
$ |
33,233 |
|
|
$ |
107,235 |
|
Trademarks
– definite lived (subject to amortization)
|
|
|
682 |
|
|
|
714 |
|
Trademarks
– indefinite lived (not subject to amortization)
|
|
|
23,876 |
|
|
|
80,844 |
|
Distribution
networks
|
|
|
44,586 |
|
|
|
98,586 |
|
|
|
|
102,377 |
|
|
|
287,379 |
|
Accumulated
amortization
|
|
|
|
|
|
|
|
|
Patents
and other
|
|
|
(20,826 |
) |
|
|
(28,254 |
) |
Trademarks
– definite lived (subject to amortization)
|
|
|
(657 |
) |
|
|
(559 |
) |
Distribution
networks
|
|
|
(25,540 |
) |
|
|
(28,261 |
) |
|
|
$ |
55,354 |
|
|
$ |
230,305 |
|
Amortization
expense for intangible assets is estimated to be approximately $2.4 million for
the remainder of 2008 and $8.5 million, $7.8 million, $7.2 million, $6.8 million
and $5.9 million for the periods ending December 31, 2009, 2010, 2011, 2012, and
2013 respectively.
During
the third quarter of 2008, the Company determined that a test for impairment of
goodwill in accordance with SFAS No. 142 “Goodwill and Other Intangible Assets,”
was necessary due to Blackstone projections prepared in connection with the
Company’s debt refinancing completed in September 2008, being materially
different than projections used in Blackstone’s original purchase
accounting. The Company evaluated the indefinite-lived intangible
assets which included the Blackstone Trademark acquired during the acquisition
of Blackstone. The impairment analysis resulted in the carrying value
of the Trademark exceeding the fair value for which there is a $57.0 million
impairment charge included in Impairment of Goodwill and Certain Intangible
Assets.
Also,
during the third quarter of 2008, the Company determined that a Triggering Event
as defined by SFAS No. 144 “Accounting for the Impairment or Disposal of
Long-Lived Assets” occurred with respect to the definite-lived intangibles at
Blackstone. Due to the Triggering Event, the Company compared the
expected cash flows to be generated by the definite-lived intangibles on an
undiscounted basis to the carrying value of the intangible asset. The
Company determined the carrying value exceeded the undiscounted cash flow and
impaired the distribution network and technologies at Blackstone to their fair
value which resulted in an impairment charge of $105.7 million which is included
in Impairment of Goodwill and Certain Intangible Assets.
(In
US$ thousands)
|
|
|
|
|
|
|
Borrowings
under line of credit
|
|
$ |
6,197 |
|
|
$ |
8,704 |
|
The
weighted average interest rates on borrowings under lines of credit as of
September 30, 2008 and December 31, 2007 were 6.97% and 4.79%,
respectively.
Borrowings
under lines of credit consist of borrowings in Euros. The Company had
unused available lines of credit of 2.9 million Euros ($4.1 million) and 1.3
million Euros ($2.0 million) at September 30, 2008 and December 31, 2007,
respectively, in its Italian line of credit, which gives the Company the option
to borrow amounts in Italy at rates which are determined at the time of
borrowing. This line of credit is unsecured.
(In
US$ thousands)
|
|
September
30,
2008
|
|
|
December
31,
2007
|
|
|
|
|
|
|
|
|
Long-term
obligations
|
|
$ |
291,525 |
|
|
$ |
297,700 |
|
Other
loans
|
|
|
182 |
|
|
|
231 |
|
|
|
|
291,707 |
|
|
|
297,931 |
|
Less
current portion
|
|
|
(3,337 |
) |
|
|
(3,343 |
) |
|
|
$ |
288,370 |
|
|
$ |
294,588 |
|
On
September 22, 2006 the Company’s wholly-owned U.S. holding company subsidiary,
Orthofix Holdings, Inc. (“Orthofix Holdings”), entered into a senior secured
credit facility with a syndicate of financial institutions to finance the
acquisition of Blackstone. Certain terms of the senior secured credit
facility were amended September 29, 2008. The senior secured credit
facility provides for (1) a seven-year amortizing term loan facility of $330.0
million, the proceeds of which, together with cash balances were used for
payment of the purchase price of Blackstone; and (2) a six-year revolving credit
facility of $45.0 million. As of September 30, 2008, the Company had
no amounts outstanding under the revolving credit facility and $291.5 million
outstanding under the term loan facility. Obligations under the
senior secured credit facility have a floating interest rate of the London
Inter-Bank Offered Rate (“LIBOR”) plus a margin or prime rate plus a
margin. Currently, the term loan is a LIBOR loan, and the margin is
4.50%, which is adjusted quarterly based upon the leverage ratio of the Company
and its subsidiaries. In June 2008, the Company entered into an
interest rate swap agreement to manage its interest rate exposure on LIBOR
borrowings; see Note 16, Derivative Instruments, for further
detail. The effective interest rates as of September 30, 2008 and
December 31, 2007 on the senior secured credit facility were 8.2% and 6.6%,
respectively.
Each of
the domestic subsidiaries of the Company (which includes Orthofix Inc., Breg
Inc., and Blackstone) and Colgate Medical Limited and Victory Medical Limited
(wholly-owned financing subsidiaries of the Company) have guaranteed the
obligations of Orthofix Holdings under the senior secured credit
facility. The obligations of the subsidiaries under their guarantees
are secured by the pledges of their respective assets.
In
conjunction with obtaining the senior secured credit facility, the Company
incurred debt issuance costs of $6.4 million which it has been amortizing over
the life of the facility. A portion of the capitalized debt issuance
costs included in other long-term assets related to the senior secured credit
facility were expensed as a result of the amendment on September 29, 2008, and
are included in the loss on refinancing of senior secured term
loan. In connection with the amendment to the credit facility, the
Company paid additional fees of $2.4 million in the quarter ended September 30,
2008, of which $2.1 million are included in the loss on refinancing of senior
secured term loan.. As of September 30, 2008, $0.8 million of debt
issuance costs which relate to the Company’s revolving credit facility are
included in other long-term assets compared to debt issuance costs related to
the senior secured term loan and the revolving credit facility which were $5.2
million at December 31, 2007.
Certain
subsidiaries of the Company have restrictions on their ability to pay dividends
or make intercompany loan advances pursuant to the Company’s senior secured
credit facility. The net assets of Orthofix Holdings and its
subsidiaries are restricted for distributions to the parent
company. Domestic subsidiaries of the Company as parties to the
credit agreement have access to these net assets for operational
purposes. The amount of restricted net assets of Orthofix Holdings
and its subsidiaries as of September 30, 2008 is $6.4 million compared to $300.7
million at December 31, 2007.
In
addition, the Company’s senior secured credit facility contains certain
financial covenants, including a fixed charge coverage ratio and a leverage
ratio applicable to Orthofix and its subsidiaries on a consolidated
basis. A breach of any of these covenants could result in an event of
default under the credit agreement, which could permit acceleration of the debt
payments under the facility unless such breach is waived by the lenders, who are
a party to the agreement, or the agreement is
amended. Management believes the Company was in compliance with
these financial covenants as measured at September 30, 2008.
For the
nine months ended September 30, 2008, the Company issued 63,414 shares of common
stock upon the exercise of outstanding stock options, vesting of restricted
stock, and shares issued pursuant to its employee stock purchase plan for net
proceeds of $1.7 million.
NOTE
12:
|
COMPREHENSIVE
INCOME (LOSS)
|
Accumulated
other comprehensive income (loss) is comprised of foreign currency translation
adjustments and the effective portion of the gain (loss) for derivatives
designated and accounted for as cash flow hedges. The components of
and changes in other comprehensive income (loss) are as
follows:
(In
US$ thousands)
|
|
Foreign
Currency Translation Adjustments
|
|
|
Fair
Value of Derivatives
|
|
|
Accumulated
Other Comprehensive Income/(Loss)
|
|
Balance
at December 31, 2007
|
|
$ |
15,156 |
|
|
$ |
1,530 |
|
|
$ |
16,686 |
|
Unrealized
loss on derivative instruments, net of tax of $(71)
|
|
|
- |
|
|
|
(76 |
) |
|
|
(76 |
) |
Foreign
currency translation adjustment
|
|
|
(5,782 |
) |
|
|
- |
|
|
|
(5,782 |
) |
Balance
at September 30, 2008
|
|
$ |
9,374 |
|
|
$ |
1,454 |
|
|
$ |
10,828 |
|
(In
US$ thousands)
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income
|
|
$ |
(237,251 |
) |
|
$ |
8,028 |
|
|
$ |
(227,837 |
) |
|
$ |
21,483 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
loss on derivative instrument, net of tax
|
|
|
(1,997 |
) |
|
|
(367 |
) |
|
|
(76 |
) |
|
|
(575 |
) |
Foreign
currency translation adjustment
|
|
|
(5,953 |
) |
|
|
1,227 |
|
|
|
(5,782 |
) |
|
|
2,699 |
|
Total
comprehensive income (loss)
|
|
$ |
(245,201 |
) |
|
$ |
8,888 |
|
|
$ |
(233,695 |
) |
|
$ |
23,607 |
|
NOTE
13:
|
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. The Company is comprised of the following segments:
Domestic
Domestic
(“Domestic”) consists of operations in the United States of Orthofix Inc., which
designs, manufactures and distributes stimulation and orthopedic
products. Domestic uses both direct and distributor sales
representatives to sell Spine and Orthopedic products to hospitals, doctors and
other healthcare providers in the United States market.
Blackstone
Blackstone
(“Blackstone”) consists of Blackstone Medical, Inc., based in Springfield,
Massachusetts and its two subsidiaries, Blackstone GmbH and Goldstone GmbH.
Blackstone specializes in the design, development and marketing of spinal
implant and related human cellular and tissue based products (“HCT/P products”,
often referred to as Biologic products). Blackstone distributes its products
through a network of domestic and international distributors, sales
representatives and affiliates.
Breg
Breg
(“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.
International
International
(“International”) consists of international operations located in Europe,
Mexico, Brazil and Puerto Rico, as well as independent distributors located
outside the United States. International uses both direct and
distributor sales representatives to sell Spine, Orthopedics, Sports Medicine,
Vascular and Other products to hospitals, doctors, and other healthcare
providers.
Group
Activities
Group
Activities are comprised of the Parent’s and Orthofix Holdings’ operating
expenses and identifiable assets.
The
following tables below present information by reportable segment for the three
and nine month periods ended September 30:
For the
three month period ended September 30:
|
|
External
Sales
|
|
|
|
|
(In
US$ thousands)
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$ |
47,065 |
|
|
$ |
41,971 |
|
|
$ |
1,552 |
|
|
$ |
858 |
|
Blackstone
|
|
|
25,338 |
|
|
|
29,448 |
|
|
|
349 |
|
|
|
1,012 |
|
Breg
|
|
|
22,377 |
|
|
|
21,206 |
|
|
|
1,392 |
|
|
|
1,337 |
|
International
|
|
|
34,521 |
|
|
|
28,495 |
|
|
|
6,240 |
|
|
|
5,958 |
|
Total
|
|
$ |
129,301 |
|
|
$ |
121,120 |
|
|
$ |
9,533 |
|
|
$ |
9,165 |
|
For the
nine month period ended September 30:
|
|
External
Sales
|
|
|
|
|
(In
US$ thousands)
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$ |
138,397 |
|
|
$ |
122,718 |
|
|
$ |
4,856 |
|
|
$ |
3,137 |
|
Blackstone
|
|
|
81,093 |
|
|
|
85,859 |
|
|
|
2,938 |
|
|
|
2,449 |
|
Breg
|
|
|
66,341 |
|
|
|
61,522 |
|
|
|
4,048 |
|
|
|
2,561 |
|
International
|
|
|
101,541 |
|
|
|
91,389 |
|
|
|
19,673 |
|
|
|
22,108 |
|
Total
|
|
$ |
387,372 |
|
|
$ |
361,488 |
|
|
$ |
31,515 |
|
|
$ |
30,255 |
|
The
following table presents operating income (loss) by segment for the three and
nine month periods ended September 30:
Operating
Income (Loss)
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
(In
US$ thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$ |
17,155 |
|
|
$ |
14,050 |
|
|
$ |
47,235 |
|
|
$ |
42,124 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Blackstone
(1)
|
|
|
(309,201 |
) |
|
|
(816 |
) |
|
|
(319,993 |
) |
|
|
(2,164 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Breg
|
|
|
2,206 |
|
|
|
2,686 |
|
|
|
9,273 |
|
|
|
6,013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International
|
|
|
4,741 |
|
|
|
4,230 |
|
|
|
14,451 |
|
|
|
14,824 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Group
Activities
|
|
|
(4,309 |
) |
|
|
(3,735 |
) |
|
|
(16,525 |
) |
|
|
(11,644 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eliminations
|
|
|
(109 |
) |
|
|
(624 |
) |
|
|
(830 |
) |
|
|
(2,802 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
(289,517 |
) |
|
$ |
15,791 |
|
|
$ |
(266,389 |
) |
|
$ |
46,351 |
|
(1) Includes
impairment charges of $289.5 million during the three and nine months ended
September 30, 2008 for goodwill and certain intangible assets
The
following tables present sales by market sector for the three and nine month
periods ended September 30, 2008 and 2007:
|
|
Sales
by Market Sector
for
the three month period ended September 30, 2008
|
|
(In
US$ thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Spine
|
|
$ |
35,340 |
|
|
$ |
25,338 |
|
|
$ |
- |
|
|
$ |
640 |
|
|
$ |
61,318 |
|
Orthopedics
|
|
|
11,725 |
|
|
|
- |
|
|
|
- |
|
|
|
22,099 |
|
|
|
33,824 |
|
Sports
Medicine
|
|
|
- |
|
|
|
- |
|
|
|
22,377 |
|
|
|
1,323 |
|
|
|
23,700 |
|
Vascular
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
4,274 |
|
|
|
4,274 |
|
Other
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
6,185 |
|
|
|
6,185 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
47,065 |
|
|
$ |
25,338 |
|
|
$ |
22,377 |
|
|
$ |
34,521 |
|
|
$ |
129,301 |
|
|
|
Sales
by Market Sector
for
the three month period ended September 30, 2007
|
|
(In
US$ thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Spine
|
|
$ |
31,693 |
|
|
$ |
29,448 |
|
|
$ |
- |
|
|
$ |
168 |
|
|
$ |
61,309 |
|
Orthopedics
|
|
|
10,278 |
|
|
|
|
|
|
|
- |
|
|
|
16,026 |
|
|
|
26,304 |
|
Sports
Medicine
|
|
|
- |
|
|
|
- |
|
|
|
21,206 |
|
|
|
869 |
|
|
|
22,075 |
|
Vascular
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
4,718 |
|
|
|
4,718 |
|
Other
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
6,714 |
|
|
|
6,714 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
41,971 |
|
|
$ |
29,448 |
|
|
$ |
21,206 |
|
|
$ |
28,495 |
|
|
$ |
121,120 |
|
|
|
Sales
by Market Sector
for
the nine month period ended September 30, 2008
|
|
(In
US$ thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Spine
|
|
$ |
104,143 |
|
|
$ |
81,093 |
|
|
$ |
- |
|
|
$ |
1,252 |
|
|
$ |
186,488 |
|
Orthopedics
|
|
|
34,254 |
|
|
|
- |
|
|
|
- |
|
|
|
62,665 |
|
|
|
96,919 |
|
Sports
Medicine
|
|
|
- |
|
|
|
- |
|
|
|
66,341 |
|
|
|
3,871 |
|
|
|
70,212 |
|
Vascular
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
13,391 |
|
|
|
13,391 |
|
Other
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
20,362 |
|
|
|
20,362 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
138,397 |
|
|
$ |
81,093 |
|
|
$ |
66,341 |
|
|
$ |
101,541 |
|
|
$ |
387,372 |
|
|
|
Sales
by Market Sector
for
the nine month period ended September 30, 2007
|
|
(In
US$ thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Spine
|
|
$ |
92,650 |
|
|
$ |
85,859 |
|
|
$ |
- |
|
|
$ |
421 |
|
|
$ |
178,930 |
|
Orthopedics
|
|
|
30,068 |
|
|
|
- |
|
|
|
- |
|
|
|
51,865 |
|
|
|
81,933 |
|
Sports
Medicine
|
|
|
- |
|
|
|
- |
|
|
|
61,522 |
|
|
|
3,033 |
|
|
|
64,555 |
|
Vascular
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
15,217 |
|
|
|
15,217 |
|
Other
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
20,853 |
|
|
|
20,853 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
122,718 |
|
|
$ |
85,859 |
|
|
$ |
61,522 |
|
|
$ |
91,389 |
|
|
$ |
361,488 |
|
The
following table presents identifiable assets by segment, excluding intercompany
balances and investments in consolidated subsidiaries.
Identifiable
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
US$ thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$ |
112,807 |
|
|
$ |
118,178 |
|
|
|
|
|
|
|
|
|
|
Blackstone
(1)
|
|
|
122,828 |
|
|
|
404,788 |
|
|
|
|
|
|
|
|
|
|
Breg
|
|
|
174,911 |
|
|
|
180,157 |
|
|
|
|
|
|
|
|
|
|
International
|
|
|
173,839 |
|
|
|
177,586 |
|
|
|
|
|
|
|
|
|
|
Group
activities
|
|
|
10,198 |
|
|
|
20,063 |
|
|
|
|
|
|
|
|
|
|
Eliminations
|
|
|
(15,796 |
) |
|
|
(15,108 |
) |
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
578,787 |
|
|
$ |
885,664 |
|
(1)
Includes impairment charges related to goodwill and certain intangibles of
$289.5 million recorded as of September 30, 2008
The
difference between the reported benefit for income taxes and the tax benefit
computed by applying the statutory rates applicable to each subsidiary of the
Company is principally related to an impairment charge to goodwill for which the
Company receives no tax benefit. Further, the effective tax rate has been
positively affected by the Company’s European restructuring in 2006 and a
similar transaction in 2002, whereby certain intangible assets were sold between
subsidiaries in order to optimize the Company’s supply chain. Such
assets were sold at estimates of fair value based upon valuations which remain
subject to review by the local taxing authorities. Further, the
effective tax rate has been affected by the generation of un-utilizable net
operating losses in various jurisdictions, and the Section 199 deduction related
to income attributable to production activities occurring in the United
States.
As
of September 30, 2008, the Company’s gross unrecognized tax benefit
was $1.7 million plus $0.5 million accrued
for interest and penalties. The entire $1.7 million of unrecognized
tax benefit would affect the Company’s effective tax rate if
recognized. It is anticipated that the Company will release
approximately $1.0 million in tax reserves within the next twelve months for
uncertain tax positions due to the expiration of certain statutes of
limitations.
The
Company recognizes accrued interest and penalties related to unrecognized tax
benefits within its global operations in income tax expense. To
the extent interest and penalties are not assessed with respect to uncertain tax
positions, amounts accrued will be reduced and reflected as a reduction of the
overall income tax provision. As of September 30, 2008, the
Company had approximately $0.5 million of accrued interest and penalties related
to uncertain tax positions.
The
Company is subject to tax examinations in all major taxing jurisdictions in
which it operates. The Company files a consolidated income tax return
in the U.S. federal jurisdiction and numerous consolidated and separate income
tax returns in many state and foreign jurisdictions. The following table
summarizes these open tax years by major jurisdiction:
|
|
Open
Tax Year
|
|
|
|
Examination
in
|
|
|
Examination
not yet
|
|
Jurisdiction
|
|
Progress
|
|
|
Initiated
|
|
|
|
|
|
|
|
|
United
States
|
|
|
2004-2006
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
Various
States
|
|
|
1996-2005
|
|
|
|
1996-2007
|
|
|
|
|
|
|
|
|
|
|
Brazil
|
|
|
N/A
|
|
|
|
2004-2007
|
|
|
|
|
|
|
|
|
|
|
Cyprus
|
|
|
N/A
|
|
|
|
2005-2007
|
|
|
|
|
|
|
|
|
|
|
France
|
|
|
N/A
|
|
|
|
2002-2007
|
|
|
|
|
|
|
|
|
|
|
Germany
|
|
|
2003-2005
|
|
|
|
2006-2007
|
|
|
|
|
|
|
|
|
|
|
Italy
|
|
|
N/A
|
|
|
|
2003-2007
|
|
|
|
|
|
|
|
|
|
|
Mexico
|
|
|
N/A
|
|
|
|
2000-2007
|
|
|
|
|
|
|
|
|
|
|
Netherlands
|
|
|
N/A
|
|
|
|
2004-2007
|
|
|
|
|
|
|
|
|
|
|
Puerto
Rico
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
Seychelles
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
Switzerland
|
|
|
N/A
|
|
|
|
2004-2007
|
|
|
|
|
|
|
|
|
|
|
United
Kingdom
|
|
|
N/A
|
|
|
|
2005-2007
|
|
NOTE
15:
|
EARNINGS
PER SHARE
|
For the
three and nine months ended September 30, 2008 and 2007, there were no
adjustments to net income for purposes of calculating basic and diluted net
income (loss) per common share. The following table is a
reconciliation of the weighted average shares used in the basic and diluted net
income (loss) per common share computations.
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares - basic
|
|
|
17,101,718 |
|
|
|
16,639,019 |
|
|
|
17,093,133 |
|
|
|
16,546,385 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of dilutive securities
|
|
|
- |
|
|
|
250,284 |
|
|
|
- |
|
|
|
378,699 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares – diluted
|
|
|
17,101,718 |
|
|
|
16,889,303 |
|
|
|
17,093,133 |
|
|
|
16,925,084 |
|
No
adjustment has been made in the three and nine months ended September 30, 2008
for any common stock equivalents because their effects would be
anti-dilutive. For the three and nine month periods ended September
30, 2008, potentially dilutive shares totaled 4,638 and 37,496,
respectively.
For the
three and nine month periods ended September 30, 2007, the Company did not
include 172,218 and 145,218 options, respectively, in the diluted shares
outstanding calculation because their inclusion would have been anti-dilutive or
because their exercise price exceeded the average market price of the Company’s
common stock during the period.
NOTE
16:
|
DERIVATIVE
INSTRUMENTS
|
In June
2008, the Company entered into a three year fully amortizable interest rate swap
agreement (the “Swap”) with a notional amount of $150.0 million and an
expiration date of June 30, 2011. The amount outstanding under the
Swap as of September 30, 2008 was $150.0 million. Under the Swap the
Company will pay a fixed rate of 3.73% and receive interest at floating rates
based on the three month LIBOR rate at each quarterly re-pricing date until the
expiration of the Swap. As of September 30, 2008 the interest rate on
the debt related to the Swap was 8.2% (3.73% plus a margin of 4.50%). Our
overall effective interest rate, including the impact of the Swap, as of
September 30, 2008 on the senior secured debt was 8.2%. The
instrument is designated as a cash flow hedge. The Company recognized
an unrealized loss on the change in fair value of this swap arrangement of $1.0
million and $0.3 million, net of tax, for the three and nine months ended
September 30, 2008, respectively.
In 2006,
the Company entered into a cross-currency swap agreement to manage its foreign
currency exposure related to a portion of the Company’s intercompany receivable
of a U.S. dollar functional currency subsidiary that is denominated in
Euro. The derivative instrument, a ten-year fully amortizable
agreement with a notional amount of $63.0 million is scheduled to expire on
December 30, 2016. The instrument is designated as a cash flow
hedge. The amount outstanding under the agreement as of September 30,
2008 is $59.8 million. Under the agreement, the Company pays Euro and
receives U.S. dollars based on scheduled cash flows in the
agreement. The Company recognized an unrealized loss on the change in
fair value of this swap arrangement of $1.0 million, net of tax, within other
comprehensive income in the three months ended September 30,
2008. The Company recognized an unrealized gain on the change in fair
value of this swap arrangement of $0.2 million, net of tax, within other
comprehensive income in the nine months ended September 30, 2008.
NOTE
17:
|
FAIR
VALUE MEASUREMENTS
|
As
described in Note 3, “Recently Issued Accounting Standards,” the Company adopted
SFAS No. 157 effective January 1, 2008. SFAS No. 157 defines fair
value as the price that would be received for an asset or paid to transfer a
liability (an exit price) in the principal or most advantageous market for the
asset or liability in an orderly transaction between market participants on the
measurement date. SFAS No. 157 also describes three levels of inputs
that may be used to measure fair value:
Level 1 –
quoted prices in active markets for identical assets and
liabilities
Level 2 –
observable inputs other than quoted prices in active markets for identical
assets and liabilities
Level 3 –
unobservable inputs in which there is little or no market data available, which
require the reporting entity to develop its own assumptions
The fair
value of the Company’s financial assets and liabilities measured at fair value
on a recurring basis were as follows:
|
|
Balance
September 30,
2008
|
|
|
|
|
|
|
|
|
|
|
Cash
Equivalents
|
|
$ |
26 |
|
|
$ |
26 |
|
|
$ |
- |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
Financial Instruments(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flow Hedges
|
|
$ |
(2,176 |
) |
|
$ |
- |
|
|
$ |
(2,176 |
) |
|
$ |
- |
|
(1) See
Note 16, “Derivative Instruments”.
Litigation
Effective
October 29, 2007, the Company’s subsidiary, Blackstone, entered into a
settlement agreement with respect to a patent infringement lawsuit captioned
Medtronic Sofamor Danek USA Inc., Warsaw Orthopedic, Inc., Medtronic Puerto Rico
Operations Co., and Medtronic Sofamor Danek Deggendorf, GmbH v. Blackstone
Medical, Inc., Civil Action No. 06-30165-MAP, filed on September 22, 2006 in the
United States District Court for the District of Massachusetts. In that lawsuit,
the plaintiffs had alleged that (i) they were the exclusive licensees of United
States Patent Nos. 6,926,718 B1, 6,936,050 B2, 6,936,051 B2, 6,398,783 B1 and
7,066,961 B2 (the “Patents”), and (ii) Blackstone's making, selling, offering
for sale, and using within the United States of its Blackstone Anterior Cervical
Plate, 3º Anterior Cervical Plate, Hallmark Anterior Cervical Plate and Construx
Mini PEEK VBR System products infringed the Patents, and that such infringement
was willful. The Complaint requested both damages and an injunction
against further alleged infringement of the Patents. Blackstone denied
infringement and asserted that the Patents were invalid. On July 20,
2007, the Company submitted a claim for indemnification from the escrow fund
established in connection with the agreement and plan of merger between the
Company, New Era Medical Corp. and Blackstone, dated as of August 4, 2006 (the
“Merger Agreement”), for any losses to the Company or Blackstone resulting from
this matter. The Company was subsequently notified by legal counsel
for the former shareholders that the representative of the former shareholders
of Blackstone has objected to the indemnification claim and intends to contest
it in accordance with the terms of the Merger Agreement The settlement agreement
is not expected to have a material impact on the Company’s consolidated
financial position, results of operations or cash flows.
On or
about July 23, 2007, Blackstone received a subpoena issued by the Department of
Health and Human Services, Office of Inspector General, under the authority of
the federal healthcare anti-kickback and false claims statutes. The
subpoena seeks documents for the period January 1, 2000 through July 31, 2006,
which is prior to Blackstone’s acquisition by the Company. The
Company believes that the subpoena concerns the compensation of certain
physician consultants and related matters. On September 17, 2007, the
Company submitted a claim for indemnification from the escrow fund established
in connection with the Merger Agreement for any losses to the Company or
Blackstone resulting from this matter. The Company was subsequently
notified by legal counsel for the former shareholders that the representative of
the former shareholders of Blackstone has objected to the indemnification claim
and intends to contest it in accordance with the terms of the Merger
Agreement.
On or
about January 7, 2008, the Company received a federal grand jury subpoena from
the United States Attorney’s Office for the District of
Massachusetts. The subpoena seeks documents for the period January 1,
2000 through July 15, 2007 from the Company, including its
subsidiaries. The Company believes that the subpoena concerns the
compensation of physician consultants and related matters, and further believes
that it is associated with the Department of Health and Human Services, Office
of Inspector General’s investigation of such matters. On September
18, 2008, the Company submitted a claim for indemnification from the escrow fund
established in connection with the Merger Agreement for any losses to the
Company or Blackstone resulting from this matter.
In
connection with the matters described above involving the Department of Health
and Human Services, Office of the Inspector General, and United States
Attorney’s Office for the District of Massachusetts, the Company’s legal counsel
has been informed by representatives of the Department of Justice (“DOJ”) that a
qui tam lawsuit against Blackstone and another affiliate of the Company is
pending in the U.S. District Court for the District of
Massachusetts. The Company believes that the complaint alleges causes
of action under the False Claims Act for alleged inappropriate payments and
other items of value conferred on physician consultants. The Company
further understands that the seal in this qui tam lawsuit has been partially
lifted for the purpose of allowing DOJ to disclose to the Company the existence
of the qui tam lawsuit and discuss the allegations in the complaint, but that
the qui tam lawsuit otherwise remains under seal as required by
law. The Company intends to defend vigorously against this
lawsuit. On September 18, 2008, we submitted a claim for
indemnification from the escrow fund established in connection with the Merger
Agreement for any losses to the Company or Blackstone resulting from this
matter.
On or
about September 27, 2007, Blackstone received a federal grand jury subpoena
issued by the United States’ Attorney’s Office for the District of Nevada
(“USAO-Nevada”). The subpoena seeks documents for the period from January 1999
to the date of issuance of the subpoena. The Company believes that the subpoena
concerns payments or gifts made by Blackstone to certain physicians. On
September 18, 2008, the Company submitted a claim for indemnification from the
escrow fund established in connection with the Merger Agreement for any losses
to the Company or Blackstone resulting from this matter.
On
February 29, 2008, Blackstone received a Civil Investigative Demand (“CID”) from
the Massachusetts Attorney General’s Office, Public Protection and Advocacy
Bureau, Healthcare Division. The Company believes that the CID seeks
documents concerning Blackstone’s financial relationships with certain
physicians and related matters for the period from March 2004 through the date
of issuance of the CID. On September 18, 2008, the Company submitted
a claim for indemnification from the escrow fund established in connection with
the Merger Agreement for any losses to the Company or Blackstone resulting from
this matter.
The Ohio
Attorney General’s Office, Health Care Fraud Section has issued a criminal
subpoena, dated August 8, 2008, to Orthofix, Inc (the “Ohio AG
Subpoena”). The Ohio AG Subpoena seeks documents for the period from
January 1, 2000 through the date of issuance of the subpoena. The
Company believes that the Ohio AG Subpoena arises from a government
investigation that concerns the compensation of physician consultants and
related matters. On September 18, 2008, the Company
submitted a claim for indemnification from the escrow fund established in
connection with the Merger Agreement for any losses to the Company or Blackstone
resulting from this matter.
Blackstone
is cooperating with the government’s request in each of the subpoenas set forth
above and is in the process of responding to the subpoenas. The
Company is unable to predict what actions, if any, might be taken by the
governmental authorities that have issued these subpoenas or what impact, if
any, the outcome of these matters might have on the Company’s consolidated
financial positions, results of operations or cash flows.
By order
entered on January 4, 2007, the United States District Court for the Eastern
District of Arkansas unsealed a qui tam complaint captioned Thomas v. Chan, et
al., 4:06-cv-00465-JLH, filed against Dr. Patrick Chan, Blackstone and other
defendants including another device manufacturer. A qui tam action is
a civil lawsuit brought by an individual for an alleged violation of a federal
statute, in which the U.S. Department of Justice has the right to intervene and
take over the prosecution of the lawsuit at its option. The complaint
alleges causes of action under the False Claims Act for alleged inappropriate
payments and other items of value conferred on Dr. Chan. On December
29, 2006, the U.S. Department of Justice filed a notice of non-intervention in
the case. Plaintiff subsequently amended the complaint to add the
Company as a defendant. On January 3, 2008, Dr. Chan pled guilty to
one count of knowingly soliciting and receiving kickbacks from a medical device
distributor in a criminal matter in which neither the Company nor any of its
business units or employees were defendants. In January 2008, Dr. Chan entered
into a settlement agreement with the plaintiff and certain governmental entities
in the civil qui tam action, and on February 21, 2008, a joint stipulation of
dismissal of claims against Dr. Chan in the action was filed with the court,
which removed him as a defendant in the action. On July 11, 2008, the court
granted a motion to dismiss the Company as a defendant in the action. Blackstone
remains a defendant. The Company believes that Blackstone has meritorious
defenses to the claims alleged and it intends to defend vigorously against this
lawsuit. On September 17, 2007, the Company submitted a claim for
indemnification from the escrow fund established in connection with the Merger
Agreement for any losses to the Company or Blackstone resulting from this
matter. The Company was subsequently notified by legal counsel for
the former shareholders that the representative of the former shareholders of
Blackstone has objected to the indemnification claim and intends to contest it
in accordance with the terms of the Merger Agreement.
Between
January 2007 and May 2007, Blackstone and Orthofix Inc. were named defendants,
along with other medical device manufacturers, in three civil lawsuits alleging
that Dr. Chan had performed unnecessary surgeries in three different
instances. In January 2008, the Company learned that Orthofix Inc.
was named a defendant, along with other medical device manufacturers, in a
fourth civil lawsuit alleging that Dr. Chan had performed unnecessary
surgeries. All four civil lawsuits have been served and were filed in
the Circuit Court of White County, Arkansas. The Company has reached a
settlement in one of these four civil lawsuits, and the court has entered an
order of dismissal. The settlement agreement is not expected to have
a material impact on the Company’s consolidated financial position, results of
operations or cash flows. The Company believes that the Company
and its subsidiaries have meritorious defenses to the claims alleged in the
remaining three lawsuits and the Company and its subsidiaries intend to defend
vigorously against these lawsuits if they are not settled. On September 17,
2007, the Company submitted a claim for indemnification from the escrow fund
established in connection with the Merger Agreement for any losses to the
Company or Blackstone resulting from one of these four civil
lawsuits. The Company was subsequently notified by legal counsel for
the former shareholders that the representative of the former shareholders of
Blackstone has objected to the indemnification claim and intends to contest it
in accordance with the terms of the Merger Agreement.
Of the
total Blackstone purchase price, approximately $50.0 million was placed into an
escrow account. As described in the Agreement and Plan of Merger, the
Company can make claims for reimbursement from the escrow account for certain
defined items relating to the acquisition for which the Company is
indemnified. As described in Note 18, the Company has certain
contingencies arising from the acquisition that management expects will be
reimbursable from the escrow account should the Company have to make a payment
to a third party. The Company records the claims against the escrow
in an escrow receivable account which is included in other current assets on the
consolidated balance sheets. Because the Company believes that the
settlement process of escrow claims is complex and all claims may not be
reimbursed, management has recorded a partial reserve against the escrow
receivable.
The
Company is unable to predict the outcome of each of the escrow claims described
above in the preceding paragraphs or to estimate the amount, if any, that may
ultimately be returned to the Company from the escrow fund and there can be no
assurance that the contingencies will not exceed the amount of the escrow
account.
In
addition to the foregoing claims, the Company has submitted claims for
indemnification from the escrow fund established in connection with the Merger
Agreement for losses that have or may result from certain claims against
Blackstone alleging that plaintiffs and/or claimants were entitled to payments
for Blackstone stock options not reflected in Blackstone's corporate ledger at
the time of Blackstone's acquisition by the Company, or that their shares or
stock options were improperly diluted by Blackstone. To date, the
representative of the former shareholders of Blackstone has not objected to
approximately $1.5 million in such claims
from the escrow fund, with certain claims remaining pending.
The
Company cannot predict the outcome of any of the proceedings or claims made
against the Company or its subsidiaries described above in the preceding
paragraphs and there can be no assurance that the ultimate resolution of any
claim will not have a material adverse impact on its consolidated financial
position, results of operations, or cash flows.
In
addition to the foregoing, in the normal course of our business, the Company is
involved in various lawsuits from time to time and may be subject to certain
other contingencies.
United
Kingdom Payroll Taxes
In 2007,
Intavent Orthofix Limited, the Company’s UK distribution subsidiary, received an
inquiry from H.M. Revenue and Customs (HMRC) relating to the tax treatment of
gains made by UK employees on the exercise of stock options. The
Company is in the process of formulating a response to HMRC. Based on
preliminary calculations, a provision of $0.5 million has been provided, of
which the Company has paid $0.2 million. The Company cannot predict
the ultimate outcome of its discussions with HMRC.
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 fiscal year ended December 31,
2007.
The
following discussion and analysis addresses our liquidity, financial condition,
and the results of our operations for the three and nine months ended September
30, 2008 compared to our results of operations for the three and nine months
ended September 30, 2007. 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 fiscal year ended December 31,
2007.
General
We are a
diversified orthopedic products company offering a broad line of surgical and
non-surgical products for the Spine, Orthopedics, Sports Medicine and Vascular
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
invasive and minimally invasive spinal implant products and related human
cellular and tissue based products (“HCT/P products”), non-invasive bone growth
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, bone cement and devices
for removal of 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 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, 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 its wholly-owned and majority-owned subsidiaries and entities over
which we have control. All intercompany accounts and transactions are
eliminated in consolidation.
Our
reporting currency is the United States Dollar. All balance sheet
accounts, except shareholders’ equity, are translated at 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 component of shareholders’ equity.
Our
financial condition, results of operations and cash flows are not significantly
impacted by seasonality 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. Certain of the
Breg® bracing products experience greater demand in the fall and winter
corresponding with high school and college football schedules and winter
sports. 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. During the first nine months of 2008, we have used
derivative instruments to hedge certain foreign currency fluctuation exposures
as well as interest rate exposure on LIBOR-based borrowings. See Item
3 – “Quantitative and Qualitative Disclosures About Market Risk.”
We manage
our operations as four business segments: Domestic, Blackstone, Breg, and
International. Domestic consists of operations of our subsidiary
Orthofix Inc. Blackstone consists of Blackstone’s domestic and
international operations. Breg consists of Breg Inc.’s domestic
operations and international distributors. International
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 operating expenses and identifiable assets of Orthofix
International N.V. and its U.S. holding company subsidiary, Orthofix Holdings,
Inc.
Segment
and Market Sector Revenues
The
following tables display net sales by business segment and net sales by market
sector. We keep our books and records and account for net sales,
costs of sales and expenses by business segment. We provide net sales
by market sector for information purposes only.
Business
Segment:
|
|
Three
Months Ended September 30,
|
|
(In
US$ thousands)
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
Net
Sales
|
|
|
Percent
of Total Net Sales
|
|
|
Net
Sales
|
|
|
Percent
of Total Net Sales
|
|
|
Growth
|
|
Domestic
|
|
$ |
47,065 |
|
|
|
36 |
% |
|
$ |
41,971 |
|
|
|
35 |
% |
|
|
12 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Blackstone
|
|
|
25,338 |
|
|
|
20 |
% |
|
|
29,448 |
|
|
|
24 |
% |
|
|
(14 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Breg
|
|
|
22,377 |
|
|
|
17 |
% |
|
|
21,206 |
|
|
|
17 |
% |
|
|
6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International
|
|
|
34,521 |
|
|
|
27 |
% |
|
|
28,495 |
|
|
|
24 |
% |
|
|
21 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
129,301 |
|
|
|
100 |
% |
|
$ |
121,120 |
|
|
|
100 |
% |
|
|
7 |
% |
|
|
Nine
Months Ended September 30,
|
|
(In
US$ thousands)
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
Net
Sales
|
|
|
Percent
of Total Net Sales
|
|
|
Net
Sales
|
|
|
Percent
of Total Net Sales
|
|
|
Growth
|
|
Domestic
|
|
$ |
138,397 |
|
|
|
36 |
% |
|
$ |
122,718 |
|
|
|
34 |
% |
|
|
13 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Blackstone
|
|
|
81,093 |
|
|
|
21 |
% |
|
|
85,859 |
|
|
|
24 |
% |
|
|
(6 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Breg
|
|
|
66,341 |
|
|
|
17 |
% |
|
|
61,522 |
|
|
|
17 |
% |
|
|
8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International
|
|
|
101,541 |
|
|
|
26 |
% |
|
|
91,389 |
|
|
|
25 |
% |
|
|
11 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
387,372 |
|
|
|
100 |
% |
|
$ |
361,488 |
|
|
|
100 |
% |
|
|
7 |
% |
Market
Sector:
|
|
Three
Months Ended September 30,
|
|
(In
US$ housands)
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
Net
Sales
|
|
|
Percent
of Total Net Sales
|
|
|
Net
Sales
|
|
|
Percent
of Total Net Sales
|
|
|
Growth
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Spine
|
|
$ |
61,318 |
|
|
|
48 |
% |
|
$ |
61,309 |
|
|
|
51 |
% |
|
|
- |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Orthopedics
|
|
|
33,824 |
|
|
|
26 |
% |
|
|
26,304 |
|
|
|
22 |
% |
|
|
29 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sports
Medicine
|
|
|
23,700 |
|
|
|
18 |
% |
|
|
22,075 |
|
|
|
18 |
% |
|
|
7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vascular
|
|
|
4,274 |
|
|
|
3 |
% |
|
|
4,718 |
|
|
|
4 |
% |
|
|
(9 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
6,185 |
|
|
|
5 |
% |
|
|
6,714 |
|
|
|
5 |
% |
|
|
(8 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
129,301 |
|
|
|
100 |
% |
|
$ |
121,120 |
|
|
|
100 |
% |
|
|
7 |
% |
|
|
Nine
Months Ended September 30,
|
|
(In
US$ thousands)
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
Net
Sales
|
|
|
Percent
of
|
|
|
Net
Sales Total Net Sales
|
|
|
Percent
of Total Net Sales
|
|
|
Growth
|
|
Spine
|
|
$ |
186,488 |
|
|
|
48 |
% |
|
$ |
178,930 |
|
|
|
49 |
% |
|
|
4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Orthopedics
|
|
|
96,919 |
|
|
|
25 |
% |
|
|
81,933 |
|
|
|
23 |
% |
|
|
18 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sports
Medicine
|
|
|
70,212 |
|
|
|
18 |
% |
|
|
64,555 |
|
|
|
18 |
% |
|
|
9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vascular
|
|
|
13,391 |
|
|
|
4 |
% |
|
|
15,217 |
|
|
|
4 |
% |
|
|
(12 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
20,362 |
|
|
|
5 |
% |
|
|
20,853 |
|
|
|
6 |
% |
|
|
(2 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
387,372 |
|
|
|
100 |
% |
|
$ |
361,488 |
|
|
|
100 |
% |
|
|
7 |
% |
The
following table presents certain items from our Condensed Consolidated
Statements of Operations as a percent of total net sales for the periods
indicated:
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
2008
(%)
|
|
|
2007
(%)
|
|
|
2008
(%)
|
|
|
2007
(%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
|
100 |
|
|
|
100 |
|
|
|
100 |
|
|
|
100 |
|
Cost
of
sales
|
|
|
37 |
|
|
|
25 |
|
|
|
30 |
|
|
|
26 |
|
Gross
profit
(1)
|
|
|
63 |
|
|
|
75 |
|
|
|
70 |
|
|
|
74 |
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
and marketing
|
|
|
39 |
|
|
|
39 |
|
|
|
40 |
|
|
|
38 |
|
General
and administrative
|
|
|
15 |
|
|
|
14 |
|
|
|
15 |
|
|
|
14 |
|
Research
and development
|
|
|
5 |
|
|
|
5 |
|
|
|
5 |
|
|
|
5 |
|
Amortization
of intangible assets
|
|
|
4 |
|
|
|
4 |
|
|
|
4 |
|
|
|
4 |
|
Impairment
of goodwill and intangible assets
|
|
|
224 |
|
|
|
- |
|
|
|
75 |
|
|
|
- |
|
Total
operating income (loss)
|
|
|
(224 |
) |
|
|
13 |
|
|
|
(69 |
) |
|
|
13 |
|
Net
income
(loss)
|
|
|
(184 |
) |
|
|
7 |
|
|
|
(59 |
) |
|
|
6 |
|
|
(1)
|
Includes
effect of obsolescence provision representing 8% and 3% points,
respectively for the three and nine months ended September 30,
2008.
|
Three
Months Ended September 30, 2008 Compared to Three Months Ended September 30,
2007
Net sales
increased 7% to $129.3 million for the third quarter of 2008 compared $121.1
million for the same period last year. The impact of foreign currency
increased sales by $2.4 million during the third quarter of 2008 when compared
to the third quarter of 2007.
Sales
by Business Segment:
Net sales
in Domestic increased to $47.1 million in the third quarter of 2008 compared to
$42.0 million for the same period last year, an increase of
12%. Domestic’s net sales represented 36% and 35% of total net sales
during the third quarter of 2008 and 2007, respectively. The increase in
Domestic’s net sales was partially the result of a 12% increase in
sales in our Spine market sector, which was mainly driven by the increase in
sales of our Spinal-Stim® and Cervical-Stim® products. The increase
in Domestic’s net sales was also attributable to the 14% increase in our
Orthopedic market sector which included an increase in sales
of Physio-Stim® products as compared to the prior year period and an
increase in sales of human cellular and tissue based products (“HCT/P products”,
often referred to as Biologic products) used in orthopedic applications for
which there were no comparable sales in the prior year.
Domestic
Sales by Market Sector:
|
|
Net
Sales for the
Three
Months Ended September 30,
|
|
|
|
|
(In
US$ thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Spine
|
|
$ |
35,340 |
|
|
$ |
31,693 |
|
|
|
12 |
% |
Orthopedics
|
|
|
11,725 |
|
|
|
10,278 |
|
|
|
14 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
47,065 |
|
|
$ |
41,971 |
|
|
|
12 |
% |
Net sales
in Blackstone decreased $4.1 million to $25.3 million in the third quarter
of 2008 compared to $29.4 million for the same period last year, a decrease of
14%. Blackstone’s net sales represented 20% and 24% of total net
sales during the third quarter of 2008 and 2007, respectively. During the
integration of Blackstone into our business we have experienced distributor
terminations and government investigations, all of which negatively impacted our
sales during the quarter. Sales may continue to be negatively
impacted until the distributors are established in selling Blackstone products
and scheduled new products are introduced. These decreases have been partially
offset by the increase in sales attributable to our HCT/P
products. All of Blackstone’s sales are recorded in our Spine market
sector.
Net sales
in Breg increased $1.2 million to $ 22.4 million in the third quarter of
2008 compared to $21.2 million for the same period last year, an increase of 6%.
Breg’s net sales represented 17% of total net sales during both third quarter of
2008 and 2007. The increase in Breg’s net sales was primarily due to
an 18% increase in sales of our cold therapy products when compared to the same
period in the prior year which is due to the recent launch of our new Kodiak®
cold therapy products. Further, sales of our Breg® bracing products
increased 8% from the third quarter of 2007, primarily as a result of the sales
of our Fusion XT™ and other new products. These increases were
partially offset by a decrease in sales of our pain therapy products as a result
of the sale of operations related to our Pain Care® line of ambulatory infusion
pumps during March 2008. All of Breg’s sales are recorded in our
Sports Medicine market sector.
Net sales
in International increased 21% to $34.5 million in the third quarter of 2008
compared to $28.5 million for the same period last
year. International’s net sales represented 27% and 24% of our total
net sales in the third quarter of 2008 and 2007, respectively. The impact of
foreign currency increased International net sales by 7% or $2.1 million, during
the third quarter of 2008 as compared to the third quarter of
2007. International net sales were positively impacted by an increase
in sales of our Orthopedic products which increased by 38% as compared to the
third quarter of 2007 primarily as a result of the sales of our internal
fixation products including the eight-Plate Guided Growth System®, which
increased 149% as well as a 29% increase in sales of our external fixation
products. These increases were a result of higher than normal sales to a few
international distributors that increased their inventory levels to accommodate
higher demand for certain products. Further, sales of Breg
products within International included in the Sports Medicine sector, increased
52% when compared to third quarter of 2007. Offsetting these increases,
International sales in our Vascular sector, which consists of the A-V Impulse
System®, decreased $0.4 million or 9% from the third quarter of
2007. Sales are expected to return to higher historic levels in the
remainder of 2008. Sales of distributed products, which includes the
Laryngeal Mask, also decreased approximately $0.5 million or 8% from the third
quarter of 2007.
International
Sales by Market Sector:
|
|
Net
Sales for the
Three
Months Ended September 30,
|
|
|
|
|
(In
US$ thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Spine
|
|
$ |
640 |
|
|
$ |
168 |
|
|
|
281 |
% |
Orthopedics
|
|
|
22,099 |
|
|
|
16,026 |
|
|
|
38 |
% |
Sports
Medicine
|
|
|
1,323 |
|
|
|
869 |
|
|
|
52 |
% |
Vascular
|
|
|
4,274 |
|
|
|
4,718 |
|
|
|
(9 |
)% |
Other
|
|
|
6,185 |
|
|
|
6,714 |
|
|
|
(8 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
34,521 |
|
|
$ |
28,495 |
|
|
|
21 |
% |
Sales
by Market Sector:
Sales of
our Spine products remained constant at approximately $61.3 million in the third
quarters of both 2008 and 2007. Sales of our Cervical- Stim® and
Spinal-Stim® products increased 16% and 9%, respectively from the third quarter
of 2007 compared to the third quarter of 2008. These increases were offset by a
13% decrease in sales of Blackstone products from the third quarter of 2007 as a
result of substantial turnover of distributors in Blackstone as previously
discussed. Spine product sales were 48% and 51% of our total net
sales in the third quarters of both 2008 and 2007,
respectively.
Sales of
our Orthopedic products increased 29% to $33.8 million in the third quarter of
2008 compared to $26.3 million for the same period last year. The
increase of $7.5 million can be primarily attributed to a 91% increase in sales
of our internal fixation devices including the eight-Plate Guided Growth System®
as well as a 24% increase in sales of our external fixation
devices. Also contributing to the increase was an 8% increase in
sales of our Physio-Stim® products as compared to the prior year period and an
increase in sales of HCT/P products used in orthopedic applications for which
there were no comparable sales in the prior year. Orthopedic product
sales were 26% and 22% of our total net sales in the third quarter of 2008 and
2007, respectively.
Sales of
our Sports Medicine products increased 7% to $23.7 million in the third quarter
of 2008 compared to $22.1 million for the same period last year. As
discussed above, the increase of $1.6 million is primarily due to sales of our
Breg® cold therapy and bracing products, offset by a decrease in our pain
therapy products, which is principally attributable to the sale of operations
relating to our Pain Care® line in March 2008. Sports Medicine
product sales were 18% of our total net sales in both the third quarter of 2008
and the third quarter of 2007.
Sales of
our Vascular products, which consist of our A-V Impulse System®, decreased 9% to
$4.3 million in the third quarter of 2008 compared to $4.7 million for the same
period last year. Vascular product sales were 3% and 4% of
our total net sales in the third quarter of 2008 and 2007,
respectively.
Sales of
our Other products, which include the sales of our Laryngeal Mask as well as our
Woman’s Care line, decreased 8% to $6.2 million in the third quarter of 2008
when compared to $6.7 million for the same period last year. Other product sales
were 5% of our total net sales in both third quarter of 2008 and
2007.
Gross Profit - Our gross
profit decreased 10% to $81.3 million in the third quarter of 2008, compared to
$90.4 million for the same period last year. In the quarter ended
September 30, 2008, due to reduced projections in revenue, distributor
terminations, new products, and the replacement of one of our products with a
successor product, the Company changed its estimates regarding the inventory
allowance at Blackstone, primarily based on estimated net realizable value using
assumptions about future demand and market conditions. The change in
estimate resulted in an increase in the reserve for obsolescence of
approximately $10.9 million. In addition, the Company recorded
approximately $0.6 million of expense related to Blackstone instrumentation
equipment, also as a result of the replacement of one of our products with a
successor product. Gross profit as a percent of net sales in
the third quarter of 2008 was 62.9% compared to 74.6% in the third quarter of
2007. Gross profit, excluding the additional reserve recorded at
Blackstone was 71.8% in the quarter ended September 30, 2008. Gross
profit was also negatively impacted principally by changes in product and
geographic mix.
Sales and Marketing Expense -
Sales and marketing expense, which includes commissions, royalties and the bad
debt provision, generally increase and decrease in relation to
sales. Sales and marketing expense increased $3.2 million, or 7%, to $50.2 million in
the third quarter of 2008 compared to $47.1 million in the third quarter of
2007. Included in sales and marketing expense in the third quarter of
2008 was approximately $0.7 million of corporate reorganization
expenses. As a percent of sales, sales and marketing expense was
38.8% in the third quarters of both 2008 and 2007.
General and Administrative
Expense – General and administrative expense increased $2.4 million, or
14%, in the third quarter of 2008 to $19.3 million compared to $16.9 million in
the third quarter of 2007. This increase is primarily a result of
approximately $1.7 million of corporate reorganization
expenses. General and administrative expense as a percent of sales
was 14.9% in the third quarter of 2008 compared to 14.0% for the same period
last year.
Research and Development
Expense - Research and development expense increased $0.5 million in the
third quarter of 2008 to $6.4 million compared to $6.0 million for the same
period last year. This increase is primarily a result of approximately $0.5
million of expenses incurred related to the collaborative arrangement with
Musculoskeletal Transplant Foundation (“MTF”). As a percent of sales,
research and development expense was 5.0% in the third quarter of 2008 compared
to 4.9% for the same period last year. For the remainder of 2008,
research and development expenses are expected to increase as a result of the
agreements we entered into with MTF and Intelligent Implant Systems, LLC
(“IIS”). We expect to incur up to $3.5 million of expense related to
these agreements in 2008; see Liquidity and Capital Resources for further
detail.
Amortization of Intangible
Assets – Amortization of intangible assets increased $0.7 million, or
14%, in the third quarter of 2008 to $5.3 million compared to $4.7 million for
the same period last year. This increase can be primarily attributed
to an increase in the rate of amortization at Blackstone associated with
definite-lived intangible assets obtained in the Blackstone acquisition in
September 2006.
Impairment of Goodwill and Certain
Intangible Assets – In the third quarter of 2008, we incurred $289.5
million of expense related to the impairment of goodwill and certain intangible
assets. In accordance with SFAS No. 142, “Goodwill and Other
Intangible Assets,” we performed an impairment analysis of indefinite-lived
intangibles. We determined that the Blackstone trademark, an
indefinite-lived intangible asset, was impaired by $57.0 million. As
part of our debt refinancing completed in September 2008, five year projections
were prepared for Blackstone. Due to the recent trend of decreasing
revenues at Blackstone, we evaluated the fair value of goodwill at
Blackstone. The fair value was estimated using the expected present
value of future cash flows. We determined that the carrying amount of
goodwill related to Blackstone exceeded its implied fair value, and recognized a
goodwill impairment loss of $126.9 million. In addition, in
accordance with SFAS No. 144 “Accounting for the Impairment or Disposal of
Long-Lived Assets” we determined that a Triggering Event had occurred with
respect to the definite-lived intangible assets at Blackstone. We
compared the expected cash flows to be generated by the definite lived
intangible on an undiscounted basis to the carrying value of the intangible
asset. We determined the carrying value exceed the undiscounted cash
flow and impaired the distribution network and technologies at Blackstone to the
fair value which resulted in a impairment charge of $105.7
million. There is no comparable cost in the third quarter of
2007.
Interest Income (Expense),
net – Interest expense, net was $4.2 million for the third quarter of
2008 compared to $5.7 million for the same period last year. Interest
expense for the third quarters of 2008 and 2007 included interest expense of
$3.3 million and $5.6 million, respectively, related to the senior secured term
loan used to finance the Blackstone acquisition. This decrease can be
mainly attributed to a lower interest rate as well as less principal from the
comparable period in the prior year.
Loss on Refinancing of Senior
Secured Term Loan – In the third quarter of 2008, we incurred $5.7
million of expense related to the refinancing of the senior secured term loan
which was originally used to finance the Blackstone acquisition. This
included a $3.7 million non-cash write-off of previously capitalized debt
placement costs and $2.0 million of fees associated with the amendment. We anticipated that
we would not remain in compliance with certain financial covenants included in
the senior secured credit facility and consequently negotiated an amendment of
our debt covenants, among other things, with our lenders effective September 29,
2008.
Other, net – Other, net was
expense of $3.8 million for the third quarter of 2008 compared to income of $0.5
million for the same period last year. The decrease can be mainly
attributed to the effect of foreign exchange. During the third quarter, notably
in September, we recorded foreign exchange losses of $2.2 million principally as
a result of a rapid strengthening of the US Dollar against various foreign
currencies including the Euro, Pound, Peso and Brazilian Real. Several of our
foreign subsidiaries hold trade payables or receivables in currencies (most
notably the US Dollar) other than their functional (local) currency which
results in foreign exchange gains or losses when there is relative movement
between those currencies. In October, the US Dollar has continued to
strengthen relative to the currencies noted above which could result in further
foreign exchange losses in our fourth quarter.
Income Tax Expense (Benefit)
– Our
estimated worldwide effective tax rates were a benefit of 21.8% and an expense
of 24.6% during the third quarters of 2008 and 2007, respectively. The effective tax
benefit for the third quarter included an unfavorable discrete item resulting
from the impairment of goodwill for which we receive no tax
benefit. The effective tax rate for the third quarter of 2007
included a favorable discrete item which was a tax credit for research and
development expense related to 2003. Excluding these discrete items in the third
quarters of 2008 and 2007, our effective tax rate was a 38.8% benefit and a
26.7% tax rate, respectively. The increase in the effective tax rate
excluding discrete items, compared to the effective tax rate excluding discrete
items in the third quarter of 2007, was due to the termination of tax planning
associated with the acquisition of Breg and lower pre-tax income for which
deductions could not be realized.
Net Income (Loss) – Net loss
for the third quarter of 2008 was $(237.3) million, or $(13.87) per basic and diluted
share, compared to net income of $8.0 million, or $0.48 per basic and diluted
share, for the same period last year. The weighted average number of
basic common shares outstanding was 17,101,718 and 16,639,019 during the third
quarters of 2008 and 2007, respectively. The weighted average number of diluted
common shares outstanding was 17,101,718 and 16,889,303 during the third
quarters of 2008 and 2007, respectively.
Nine
Months Ended September 30, 2008 Compared to Nine Months Ended September 30,
2007
Net sales
increased 7% to $387.4 million for the nine months ended September 30, 2008
compared to $361.5 million for the same period last year. The impact
of foreign currency increased sales by $7.6 million during the nine months ended
September 30, 2008 as compared to the same period of 2007.
Sales
by Business Segment:
Net sales
in Domestic increased to $138.4 million for the nine months ended September 30,
2008 compared to $122.7 million for the same period last year, an increase of
13%. Domestic’s net sales represented 36% and 34% of total net sales
for the nine months ended September 30, 2008 and 2007, respectively. The
increase in Domestic’s net sales was partially the result of a 12% increase in
sales in our Spine market sector, which was mainly driven by the increase in
sales of our Spinal-Stim® and Cervical-Stim® products. The increase
in Domestic’s net sales was also attributable to an increase in our
Orthopedic market sector which included an increase in sales
of Physio-Stim® products as compared to the prior year period and an
increase in sales of human cellular and tissue based products (“HCT/P products”,
often referred to as Biologic products) used in orthopedic applications for
which there were no comparable sales in the prior year. These increases were
partially offset by a 5% decrease in sales of external fixation products
compared to the same period last year.
Domestic
Sales by Market Sector:
|
|
Net
Sales for the
Nine
Months Ended September 30,
|
|
|
|
|
(In
US$ thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Spine
|
|
$ |
104,143 |
|
|
$ |
92,650 |
|
|
|
12 |
% |
Orthopedics
|
|
|
34,254 |
|
|
|
30,068 |
|
|
|
14 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
138,397 |
|
|
$ |
122,718 |
|
|
|
13 |
% |
Net sales
in Blackstone decreased 6% to $81.1 million for the nine months ended September
30, 2008 compared to $85.9 million for the same period last
year. Blackstone’s net sales represented 21% and 24% of total net
sales during the nine months ended September 30, 2008 and 2007, respectively.
During the integration of Blackstone into our business we have experienced
distributor terminations, government investigations and the replacement of one
of our products with a successor product, all of which negatively impacted our
sales during the nine months ended September 30, 2008. Our sales may
continue to be negatively impacted by this turnover until the distributors are
established in selling Blackstone products and new products are introduced.
These decreases in sales have been partially offset by the increase in sales of
our HCT/P products. All of Blackstone’s sales are recorded in our
Spine market sector.
Net sales
in Breg increased $4.8 million to $66.3 million for the nine months ended
September 30, 2008 compared to $61.5 million for the same period last year, an
increase of 8%. Breg’s net sales represented 17% of total net sales during both
nine months ended September 30, 2008 and 2007. The increase in Breg’s
net sales was primarily due to an increase in the sales of our Breg® bracing
products which increased 12% compared to the nine months ended September 30,
2007, caused primarily by increased sales of our Fusion XT™ and other new
products. Further, sales of our cold therapy products increased 16%
when compared to the same period last year which is due to the recent launch of
our new Kodiak® cold therapy products. These increases were partially
offset by a decrease in sales of our pain therapy products as a result of the
sale of operations related to our Pain Care® line of ambulatory infusion pumps
during March 2008. All of Breg’s sales are recorded in our Sports
Medicine market sector.
Net sales
in International increased 11% to $101.5 million for the nine months ended
September 2008 compared to $91.4 million for the same period last
year. International’s net sales represented 26% and 25% of our total
net sales for the nine months ended September 30, 2008 and 2007, respectively.
The impact of foreign currency increased International net sales by 8% or $7.1
million, during the nine months ended September 30, 2008 as compared to the same
period last year. The sales of our Orthopedic products increased 21%
when compared to the nine months ended September 30, 2007 primarily as a result
of increased sales of our internal fixation products including the eight-Plate
Guided Growth System®, which increased 75% as well as a 12% increase in sales of
our external fixation products. Further, sales of Breg products
within International, included in the Sports Medicine sector increased 28% when
compared to the nine months ended September 30, 2007. International
sales in our Vascular sector, which consists of the A-V Impulse System®,
decreased $1.8 million or 12% compared to the nine months ended
September 30, 2007. Sales are expected to return to higher historic
levels in the remainder of 2008. Sales of distributed products, which
include the Laryngeal Mask, decreased approximately 2%.
International
Sales by Market Sector:
Sales
by Market Sector:
|
|
Net
Sales for the
Nine
Months Ended September 30,
|
|
|
|
|
(In
US$ thousands)
|
|
|
|
|
|
|
|
|
|
Spine
|
|
$ |
1,252 |
|
|
$ |
421 |
|
|
|
197 |
% |
Orthopedics
|
|
|
62,665 |
|
|
|
51,865 |
|
|
|
21 |
% |
Sports
Medicine
|
|
|
3,871 |
|
|
|
3,033 |
|
|
|
28 |
% |
Vascular
|
|
|
13,391 |
|
|
|
15,217 |
|
|
|
(12 |
)% |
Other
|
|
|
20,362 |
|
|
|
20,853 |
|
|
|
(2 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
101,541 |
|
|
$ |
91,389 |
|
|
|
11 |
% |
Sales of
our Spine products increased 4% to $186.5 million for the nine months ended
September 30, 2008 compared to $178.9 million for the same period last
year. The increase of $7.6 million is primarily due to a 13% increase
in sales of spinal stimulation products in the United States. Spine
product sales were 48% and 49% of our total net sales in the nine months ended
September 30, 2008 and 2007, respectively.
Sales of
our Orthopedic products increased 18% to $96.9 million for the nine months ended
September 2008 compared to $81.9 million for the same period last
year. The increase of $15.0 million can be mainly attributed to a 51%
increase in sales of our internal fixation devices including the eight-Plate
Guided Growth System® as well as an 8% increase in sales of our external
fixation devices. Also attributing to the increase in sales was an
11% increase in sales of our Physio-Stim® products as compared to the prior year
period and an increase in sales of HCT/P products used in orthopedic
applications for which there were no comparable sales in the prior year.
Orthopedic product sales were 25% and 23% of our total net sales for the nine
months ended September 30, 2008 and 2007, respectively.
Sales of
our Sports Medicine products increased 9% to $70.2 million for the nine months
ended September 30, 2008 compared to $64.6 million for the same period last
year. As discussed above, the increase of $5.7 million is primarily
due to sales of our Breg® bracing products as well as our cold therapy products,
offset by a decrease in our pain therapy products, which can be mainly
attributed to the sale of operations relating to our Pain Care® line in March
2008. Sports Medicine product sales were 18% of our total net sales
for both nine months ended September 30, 2008 and 2007.
Sales of
our Vascular products, which consist of our A-V Impulse System®, decreased 12%
to $13.4 million for the nine months ended September 30, 2008 compared to $15.2
million for the same period last year. Sales are expected to return to higher
historic levels in the remainder of 2008. Vascular product sales were
4% of our total net sales for both nine months ended September 30, 2008 and
2007.
Sales of
our Other products, which include the sales of our Laryngeal Mask as well as our
Woman’s Care line, decreased 2% to $20.4 million for the nine months ended
September 30, 2008 compared to $20.9 million for the same period last
year. Other product sales were 5% and 6% of our total net sales
for the nine months ended September 30, 2008 and 2007,
respectively.
Gross Profit - Our gross
profit increased 1% to $270.1 million for the nine months ended September 30,
2008, compared to $266.9 million for the same period last year. In the nine
months ended September 30, 2008, due to reduced projections in revenue,
distributor terminations, new products, and the replacement of one of our
products with a successor product, the Company changed its estimates regarding
the inventory allowance at Blackstone, primarily based on estimated net
realizable value using assumptions about future demand and market conditions. In
addition, the Company recorded approximately $0.6 million of expense related to
Blackstone instrumentation equipment, also as a result of the replacement of one
of our products with a successor product. During the nine months ended
September 30, 2007, we recorded a charge of $2.7 million for amortization of the
step-up in inventory associated with the Blackstone
acquisition. Since the step-up in the Blackstone inventory from
purchase accounting was fully amortized during 2007, no such amortization was
recorded during the nine months ended September 30, 2008. Gross profit as a
percent of net sales for the nine months ended September 30, 2008 and 2007 was
69.7% and 73.8%, respectively. Gross profit, excluding the additional
reserve recorded at Blackstone was 72.7% in the quarter ended September 30,
2008. The lower margin is principally the result of changes in
product and geographic mix.
Sales and Marketing Expense -
Sales and marketing expense, which includes commissions, royalties and the bad
debt provision, generally increase and decrease in relation to
sales. Sales and marketing expense increased $14.7 million, or 11%,
to $153.7 million for the nine months ended September 30, 2008 compared to
$138.9 million for the same period last year. This increase is
attributed to increased expense in order to support increased sales activity,
including higher commissions on higher sales as well as approximately $0.7
million of expense related to corporate reorganizations. In addition,
sales and marketing expense increased due to costs incurred related to the
completed exploration of the potential divestiture of our orthopedic fixation
business. As a percent of sales, sales and marketing expense was
39.7% and 38.4% for the nine months ended September 30, 2008 and 2007,
respectively.
General and Administrative
Expense – General and administrative expense increased $10.6 million, or
21%, for the nine months ended September 30, 2008 to $60.3 million compared to
$49.6 million for the same period last year. The increase was primarily
attributable to a charge of $2.8 million recorded during the nine months ended
September 30, 3008 related to the completed exploration of the potential
divestiture of our orthopedic fixation business, as well as increased audit fees
and headcount, especially at our Brazilian and Blackstone
subsidiaries. We also incurred approximately $1.7 million of expense
in the third quarter of 2008 related to corporate reorganizations. General and
administrative expense as a percent of sales was 15.5% and 13.7% for the nine
months ended September 30, 2008 and 2007, respectively.
Research and Development
Expense - Research and development expense increased $1.1 million to
$19.4 million for the nine months ended September 30, 2008 compared to $18.3
million for the same period last year. In the nine months ended
September 30, 2008, we incurred $0.5 million in expenses as a result of the
agreement we entered into with MTF. For the remainder of 2008, research and
development expenses are expected to increase as a result of the agreements we
entered into with MTF and IIS. We expect to incur up to $3.5 million
of expense related to these agreements in 2008; see Liquidity and Capital
Resources for further detail. As a percent of sales, research and
development expense was 5.0% for both the nine months ended September 30, 2008
and the nine months ended September 30, 2007.
Amortization of Intangible
Assets – Amortization of intangible assets increased approximately $1.5
million, or 11%, for the first nine months ended September 30, 2008 to $15.2
million compared to $13.7 million for the same period last year. This
increase can be primarily attributed to an increase in the rate of amortization
at Blackstone associated with definite-lived intangible assets obtained in the
Blackstone acquisition in September 2006.
Impairment of Goodwill and Certain
Intangible Assets – In the nine months ended September 30, 2008, we
incurred $289.5 million of expense related to the impairment of goodwill and
certain intangible assets. In accordance with SFAS No. 142, “Goodwill
and Other Intangible Assets,” we performed an impairment analysis of
indefinite-lived intangibles. We determined that the Blackstone
trademark, an indefinite-lived intangible asset, was impaired by $57.0
million. As part of our debt refinancing completed in September 2008,
five year projections were prepared for Blackstone. Due to the recent
trend of decreasing revenues at Blackstone, we evaluated the fair value of
goodwill at Blackstone. The fair value of Blackstone was estimated
using the expected present value of future cash flows. We determined
that the carrying amount of goodwill related to Blackstone exceeded its implied
fair value, and recognized a goodwill impairment loss of $126.9 million. In addition, in
accordance with SFAS No. 144 “Accounting for the Impairment or Disposal of
Long-Lived Assets” we determined that a Triggering Event had occurred with
respect to the definite-lived intangible assets at Blackstone. We
compared the expected cash flows to be generated by the definite lived
intangible on an undiscounted basis to the carrying value of the intangible
asset. We determined the carrying value exceed the undiscounted cash
flow and impaired the distribution network and technologies at Blackstone to the
fair value which resulted in a impairment charge of $105.7
million. There is no comparable cost in the first nine months of
2007.
Gain on Sale of Pain Care®
Operations – Gain on sale of Pain Care® operations was $1.6 million for
the nine months ended September 30, 2008 and represented the gain on the sale of
operations related to our Pain Care® line of ambulatory infusion pumps during
March 2008. No such gain was recorded in the same period of
2007.
Interest Income (Expense),
net – Interest expense, net was $13.7 million for the nine months ended
September 30, 2008 compared to $17.2 million for the same period last
year. Interest expense for the nine months ended September 30, 2008
and 2007 included interest expense of $11.5 million and $16.8 million,
respectively, related to the senior secured term loan used to finance the
Blackstone acquisition. This decrease can be mainly attributed to a
lower interest rate as well as less principal from the comparable period in the
prior year.
Loss on Refinancing of Senior
Secured Term Loan – In the nine months ended September 30, 2008, we
incurred $5.7 million of expense related to the refinancing of the senior
secured term loan used to finance the Blackstone acquisition. This
included a $3.7 million non-cash write-off of previously capitalized debt
placement costs and $2.0 million of fees associated with the amendment. We anticipated that
we would not remain in compliance with certain financial covenants included in
the senior secured credit facility and, consequently negotiated an amendment of
our financial covenants, among other things, with our lenders effective
September 29, 2008.
Other, net – Other, net was expense of $2.7
million for the nine months ended September 30, 2008 compared to income of $0.2
million for the same period last year. The decrease can be mainly attributed to
the effect of foreign exchange. During the third quarter, notably in September,
we recorded foreign exchange losses of $2.2 million principally as a result of a
rapid strengthening of the US Dollar against various foreign currencies
including the Euro, Pound, Peso and Brazilian Real. Several of our foreign
subsidiaries hold trade payables or receivables in currencies (most notably the
US Dollar) other than their functional (local) currency which results in foreign
exchange gains or losses when there is relative movement between those
currencies. In October, the US Dollar has continued to strengthen
relative to the currencies noted above which could result in further foreign
exchange losses in our fourth quarter.
Income Tax Expense (Benefit)
– Our estimated
worldwide effective tax rates were a benefit of 21.0% and expense of 26.9%
during the nine months ended September 30, 2008 and 2007, respectively. The
effective tax benefit for the nine months ended September 2008 included
unfavorable discrete items resulting from the impairment of goodwill for which
we receive no tax benefit and the sale of operations related to our Pain Care®
operations. Excluding these discrete
items, our effective tax benefit rate was 39.5%. The effective tax rate
for the nine months ended September 30, 2007 included a tax credit for research
and development expense related to 2003. Without discrete items our estimated
worldwide effective tax rate for the nine months ended September 30, 2007 was
27.5% due to the positive effects of our European restructuring, research and
development tax credits, tax planning associated with the acquisition of Breg,
non-deductible foreign losses, and an increase in the domestic production
deduction which were partially offset by the generation of net operating losses
in various jurisdictions that were not benefitted.
Net Income (Loss) – Net loss
for the nine months ended September 30, 2008 was $(227.8) million, or $(13.33)
per basic and diluted share, compared to net income of $21.5 million, or $1.30
per basic share and $1.27 per diluted share, for the same period last
year. The weighted average number of basic common shares outstanding
was 17,093,133 and 16,546,385 during the nine months ended September 30, 2008
and 2007, respectively. The weighted average number of diluted common
shares outstanding was 17,093,133 and 16,925,084 during the nine months ended
September 30, 2008 and 2007, respectively.
Liquidity
and Capital Resources
Cash and
cash equivalents at September 30, 2008 were $27.0 million, of which $16.8
million was subject to certain restrictions under the senior secured credit
agreement described below. This compares to cash and cash equivalents
of $41.5 million at December 31, 2007, of which $16.5 million was
restricted.
Net cash
provided by operating activities was $2.4 million for the nine months ended
September 30, 2008 compared to $13.8 million for the same period last
year. Net cash provided by operating activities is comprised of net
income (loss), non-cash items (including share-based compensation, inventory
provisions and non-cash purchase accounting items from the Blackstone and Breg
acquisitions) and changes in working capital, including changes in restricted
cash. Net income (loss) decreased $249.3 million to a net loss of
$227.8 million for the nine months ended September 30, 2008 from net income of
$21.5 million for the comparable period in the prior year. Non-cash items for
the nine months ended September 30, 2008 increased $235.7 million compared to
the same period last year primarily as a result of the impairment of goodwill
and intangible assets of $289.5 million, the change in
estimate for inventory provisions of $10.9 million and the loss on refinancing
of senior secured term loan of $3.7 million which was partially offset by the
change in deferred taxes of $76.9 million, primarily attributable to the
intangibles impairment, and the $1.6 million gain on the sale of the operations
related to the Breg Pain Care® line. Working capital accounts
consumed $36.3 million of cash in the nine months ended September 30, 2008
compared to $38.6 million for the same period last year. The
principal uses of cash for working capital can be mainly attributable to
increases in accounts receivable and inventory to support additional sales and
certain operational initiatives. Specifically, increases in inventory
at Blackstone were approximately $18.3 million which included significant
purchases of Trinity® bone growth matrix due, in part, to the pending expiration
of a related supply agreement. Overall performance indicators for our
two primary working capital accounts, accounts receivable and inventory, reflect
days sales in receivables of 82 days at September 30, 2008 compared to 90 days
at September 30, 2007 and inventory turns of 2.0 times at September
30, 2008 compared to 1.4 times at September 30, 2007. The higher inventory turns
and resultant lower inventory balances reflect an additional reserve recorded in
the three months ended September 30, 2008 for inventory obsolescence at
Blackstone. Also included in the uses of working capital were $6.0
million in payments related to strategic initiatives with MTF and IIS, $4.7
million in payments related to the potential divestiture of certain orthopedic
fixation assets and $5.2 million in costs related to matters occurring at
Blackstone prior to the acquisition and for which we are seeking reimbursement
from the applicable escrow fund.
Net cash
used in investing activities was $9.6 million during the nine months ended
September 30, 2008 compared to $25.9 million used in investing activities during
the same period last year. During the nine months ended September 30,
2008, we sold the operations of our Pain Care® line of ambulatory infusion
pumps for net proceeds of $6.0 million. During the nine months ended September
30, 2008, we also sold a portion of our ownership in OPED AG, a German based
bracing company, for net proceeds of $0.8 million. In the nine months
ended September 30, 2008, we invested $15.8 million in capital expenditures, of
which $7.6 million were related to Blackstone and included the acquisition of
intellectual property and related technology for a next generation spinal
fixation system from IIS. During the nine months ended September 30,
2007, we invested $23.8 million in capital expenditures of which $13.4 million
were related to Blackstone. In the nine months ended September 30,
2007, we also invested $2.1 million in subsidiaries and affiliates which was a
result of adjustments in purchase accounting related to Blackstone and a
purchase of a minority interest in our subsidiary in Mexico.
Net cash
used in financing activities was $7.1 million for the nine months ended
September 30, 2008 compared to $9.3 million provided by financing activities the
same period last year. During the nine months ended September 30, 2008, we
repaid approximately $6.2 million against the principal on our senior secured
term loan and repaid $2.4 million related to borrowings by our Italian
subsidiary. In addition, we received proceeds of $1.7 million from
the issuance of 51,052 shares of our common stock upon the exercise of stock
options and shares issued pursuant to the employee stock purchase
plan. During the nine months ended September 30, 2007, we repaid $6.5
million against the principal on our senior secured term loan and borrowed $7.9
million to support working capital in our Italian subsidiary. In
addition, we received proceeds of $6.8 million from the issuance of 230,894
shares of our common stock upon the exercise of stock options.
On
September 22, 2006 our wholly-owned U.S. holding company subsidiary, Orthofix
Holdings, Inc. (“Orthofix Holdings”), entered into a senior secured credit
facility with a syndicate of financial institutions to finance the acquisition
of Blackstone. Certain terms of the senior secured credit facility
were amended September 29, 2008. The senior secured credit facility
provides for (1) a seven-year amortizing term loan facility of $330.0 million,
the proceeds of which, together with cash balances were used for payment of the
purchase price of Blackstone; and (2) a six-year revolving credit facility of
$45.0 million. As of September 30, 2008 we had no amounts outstanding
under the revolving credit facility and $291.5 million outstanding under the
term loan facility. Obligations under the senior secured credit
facility have a floating interest rate of the London Inter-Bank Offered Rate
(“LIBOR”) plus a margin or prime rate plus a margin. Currently, the
term loan is a LIBOR loan, and the margin is 4.50%, which is adjusted quarterly
based upon the leverage ratio of the Company and its subsidiaries. In
June 2008, we entered into a three year fully amortizable interest rate swap
agreement (the “Swap”) with a notional amount of $150.0 million and an
expiration date of June 30, 2011. The amount outstanding under the
Swap as of September 30, 2008 was $150.0 million. Under the Swap we
will pay a fixed rate of 3.73% and receive interest at floating rates based on
the three month LIBOR rate at each quarterly re-pricing date until the
expiration of the Swap. As of September 30, 2008 the interest rate on
the debt related to the Swap was 8.2% (3.73% plus a margin of 4.50%). Our
overall effective interest rate, including the impact of the Swap, as of
September 30, 2008 on our senior secured debt was 8.2%.
Our
senior secured credit facility contains certain financial covenants, including a
fixed charge coverage ratio and a leverage ratio applicable to Orthofix and our
subsidiaries on a consolidated basis. A breach of any of these
covenants could result in an event of default under the credit agreement, which
could permit acceleration of the debt payments under the facility unless such
breach is waived by the lenders, who are a party to the agreement, or the
agreement is amended. Management believes we are in compliance
with these financial covenants as measured at September 30, 2008.
Each of
the domestic subsidiaries of the Company (which includes Orthofix Inc., Breg
Inc., and Blackstone) and Colgate Medical Limited and Victory Medical Limited
(wholly-owned financing subsidiaries of the Company) have guaranteed the
obligations of Orthofix Holdings under the senior secured credit
facility. The obligations of the subsidiaries under their guarantees
are secured by the pledges of their respective assets.
At
September 30, 2008, we had outstanding borrowings of $6.2 million and unused
available lines of credit of approximately 2.9 million Euro ($4.1 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 add 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 if capacity under the financial covenents is available.
On July
24, 2008, we entered into an agreement with Musculoskeletal Transplant
Foundation (“MTF”) to collaborate on the development and commercialization of a
new stem cell-based bone growth biologic matrix. Under the terms of
the agreement, we will invest up to $10.0 million in the development of the new
stem cell-based bone growth biologic matrix that will be designed to provide the
beneficial properties of an autograft in spinal and orthopedic
surgeries. After the completion of the development process, the
Company and MTF will operate under the terms of a separate commercialization
agreement. Under the terms of this 10-year agreement, MTF will source
the tissue, process it to create the bone growth matrix, and package and deliver
it in accordance with orders received directly from customers and from the
Company. The Company will have exclusive global marketing rights for
the new allograft and will receive a marketing fee from MTF based on total
sales. We account for this collaborative arrangements under guidance
included in Emerging Issues Task Force Issue No. 07-1 “Accounting for
Collaborative Arrangements.” We currently plan for the new matrix to
be launched in the U.S. during 2009. Approximately $0.5 million of
expenses incurred under the terms of the agreement are included in research and
development expense in the three and nine months ended September 30,
2008. We have also entered into an agreement with IIS, as mentioned
above, where we have purchased $2.5 million of intellectual property and related
technology. IIS will continue to perform research and development
functions related to the technology and under the agreement, we will pay IIS an
additional amount, up to $4.5 million for research and development performance
milestones.
We
believe that current cash balances together with projected cash flows from
operating activities, the unused availability of the $45.0 million revolving
credit facility, the available Italian line of credit, and our debt capacity are
sufficient to cover anticipated working capital and capital expenditure needs
including research and development costs and research and development projects
formerly mentioned, over the near term.
We are
exposed to certain market risks as part of our ongoing business
operations. Primary exposures include changes in interest rates and
foreign currency fluctuations. These exposures can vary sales, cost of sales,
costs of operations, and the cost of financing and yields on cash and short-term
investments. We use derivative financial instruments, where
appropriate, to manage these risks. However, our risk
management policy does not allow us to hedge positions we do not hold nor do we
enter into derivative or other financial investments for trading or speculative
purposes. As of September 30, 2008, we had a currency swap in place
to minimize foreign currency exchange risk related to a 43.0 million Euro
intercompany note foreign currency exposure.
We are
exposed to interest rate risk in connection with our senior secured term loan
and borrowings under our revolving credit facility, which bear interest at
floating rates based on LIBOR or the prime rate plus an applicable borrowing
margin. Therefore, interest rate changes generally do not affect the fair market
value of the debt, but do impact future earnings and cash flows, assuming other
factors are held constant. We had an interest rate swap in
place as of September 30, 2008 to minimize interest rate risk related to our
LIBOR-based borrowings.
As of
September 30, 2008, we had $291.5 million of variable rate term debt represented
by borrowings under our senior secured term loan at a floating interest rate of
LIBOR plus a margin or the prime rate plus a margin, currently LIBOR plus 4.50%,
which is adjusted quarterly based upon the leverage ratio of the Company and its
subsidiaries. In June 2008, we entered into a Swap with a notional
amount of $150.0 million and an expiration date of June 30, 2011. The
amount outstanding under the Swap as of September 30, 2008 was $150.0
million. Under the Swap we will pay a fixed rate of 3.73% and receive
interest at floating rates based on the three month LIBOR rate at each quarterly
re-pricing date until the expiration of the Swap. As of September 30,
2008 the interest rate on the debt related to the Swap was 8.2% (3.73% plus a
margin of 4.50%). Our overall effective interest rate, including the impact of
the Swap, as of September 30, 2008 on our senior secured debt was
8.2%. Based on the balance outstanding under the senior secured term
loan combined with the Swap as of September 30, 2008, an immediate change of one
percentage point in the applicable interest rate on the variable rate debt would
cause an increase or decrease in interest expense of approximately $1.4 million
on an annual basis.
Our
foreign currency exposure results from fluctuating currency exchange rates,
primarily the U.S. Dollar against the Euro, Great Britain Pound, Mexican Peso
and Brazilian Real. We are subject to cost of goods currency exposure
when we produce products in foreign currencies such as the Euro or Great Britain
Pound and sell those products in U.S. Dollars. We are subject to
transactional currency exposures when foreign subsidiaries (or the Company
itself) enter into transactions denominated in a currency other than their
functional currency. As of September 30, 2008, we had an uncovered
intercompany receivable denominated in Euro for approximately $16.6
million. We recorded a foreign currency loss during the nine
months ended September 30, 2008 of $0.6 million which resulted from the
weakening of the Euro against the U.S. dollar during the period.
We also
are subject to currency exposure from translating the results of our global
operations into the U.S. dollar at exchange rates that have fluctuated from the
beginning of the period. The U.S. dollar equivalent of international
sales denominated in foreign currencies was favorably impacted during
the nine months ended September 30, 2008 and 2007 by foreign currency exchange
rate fluctuations with the weakening of the U.S dollar against the local foreign
currency during these periods. The U.S. dollar equivalent of the
related costs denominated in these foreign currencies was unfavorably impacted
during these periods. As we continue to distribute and manufacture
our products in selected foreign countries, we expect that future sales and
costs associated with our activities in these markets will continue to be
denominated in the applicable foreign currencies, which could cause currency
fluctuations to materially impact our operating results.
Disclosure
Controls and Procedures
Under the
supervision and with the participation of our management, including our Chief
Executive Officer and our Chief Financial Officer, we performed an evaluation of
the effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Exchange Act Rule 13a - 15(e) or 15d – 15 (e)) as of
the end of the period covered by this report. Based upon that
evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that, as of the end of the period covered by this report, our disclosure
controls and procedures were effective.
Changes
in Internal Control over Financial Reporting
There
have not been any changes in our internal control over financial reporting
during the fiscal quarter ended September 30, 2008 that have materially affected
or are reasonably likely to materially affect, our internal control over
financial reporting.
PART
II OTHER
INFORMATION
Effective
October 29, 2007, our subsidiary, Blackstone, entered into a settlement
agreement with respect to a patent infringement lawsuit captioned Medtronic
Sofamor Danek USA Inc., Warsaw Orthopedic, Inc., Medtronic Puerto Rico
Operations Co., and Medtronic Sofamor Danek Deggendorf, GmbH v. Blackstone
Medical, Inc., Civil Action No. 06-30165-MAP, filed on September 22, 2006 in the
United States District Court for the District of Massachusetts. In that lawsuit,
the plaintiffs had alleged that (i) they were the exclusive licensees of United
States Patent Nos. 6,926,718 B1, 6,936,050 B2, 6,936,051 B2, 6,398,783 B1 and
7,066,961 B2 (the “Patents”), and (ii) Blackstone's making, selling, offering
for sale, and using within the United States of its Blackstone Anterior Cervical
Plate, 3º Anterior Cervical Plate, Hallmark Anterior Cervical Plate and Construx
Mini PEEK VBR System products infringed the Patents, and that such infringement
was willful. The Complaint requested both damages and an injunction
against further alleged infringement of the Patents. Blackstone denied
infringement and asserted that the Patents were invalid. On July 20,
2007, we submitted a claim for indemnification from the escrow fund established
in connection with the agreement and plan of merger between the Company, New Era
Medical Corp. and Blackstone, dated as of August 4, 2006 (the “Merger
Agreement”), for any losses to us resulting from this matter. We were
subsequently notified by legal counsel for the former shareholders that the
representative of the former shareholders of Blackstone has objected to the
indemnification claim and intends to contest it in accordance with the terms of
the Merger Agreement. The settlement agreement is not expected to have a
material impact on our consolidated financial position, results of operations or
cash flows.
On or
about July 23, 2007, Blackstone received a subpoena issued by the Department of
Health and Human Services, Office of Inspector General, under the authority of
the federal healthcare anti-kickback and false claims statutes. The
subpoena seeks documents for the period January 1, 2000 through July 31, 2006,
which is prior to Blackstone’s acquisition by the Company. We believe
that the subpoena concerns the compensation of physician consultants and related
matters. On September 17, 2007, we submitted a claim for
indemnification from the escrow fund established in connection with the Merger
Agreement for any losses to us resulting from this matter. We were
subsequently notified by legal counsel for the former shareholders that the
representative of the former shareholders of Blackstone has objected to the
indemnification claim and intends to contest it in accordance with the terms of
the Merger Agreement
On or
about January 7, 2008, the Company received a federal grand jury subpoena from
the United States Attorney’s Office for the District of
Massachusetts. The subpoena seeks documents for the period January 1,
2000 through July 15, 2007 from us. We believe that the subpoena
concerns the compensation of physician consultants and related matters, and
further believe that it is associated with the Department of Health and Human
Services, Office of Inspector General’s investigation of such
matters. On September 18, 2008, we submitted a claim for
indemnification from the escrow fund established in connection with the Merger
Agreement for any losses to us resulting from this matter.
In
connection with the matters described above involving the Department of Health
and Human Services, Office of the Inspector General, and United States
Attorney’s Office for the District of Massachusetts, our legal counsel has been
informed by representatives of the Department of Justice (“DOJ”) that a qui tam lawsuit against
Blackstone and another affiliate of the Company is pending in the U.S. District
Court for the District of Massachusetts. We believe that the
complaint alleges causes of action under the False Claims Act for alleged
inappropriate payments and other items of value conferred on physician
consultants. We further understand that the seal in this qui tam lawsuit has been
partially lifted for the purpose of allowing DOJ to disclose to us the existence
of the qui tam lawsuit
and discuss the allegations in the complaint, but that the qui tam lawsuit otherwise
remains under seal as required by law. We intend to defend vigorously
against this lawsuit. On September 18, 2008, we submitted a claim for
indemnification from the escrow fund established in connection with the Merger
Agreement for any losses to us resulting from this matter.
On or
about September 27, 2007, Blackstone received a federal grand jury subpoena
issued by the United States Attorney’s Office for the District of Nevada
(“USAO-Nevada”). The subpoena seeks documents for the period from January 1999
to the date of issuance of the subpoena. We believe that the subpoena concerns
payments or gifts made by Blackstone to certain physicians. On September 18,
2008, we submitted a claim for indemnification from the escrow fund established
in connection with the Merger Agreement for any losses to us resulting from this
matter.
On
February 29, 2008, Blackstone received a Civil Investigative Demand (“CID”) from
the Massachusetts Attorney General’s Office, Public Protection and Advocacy
Bureau, Healthcare Division. We believe that the CID seeks documents
concerning Blackstone’s financial relationships with certain physicians and
related matters for the period from March 2004 through the date of issuance of
the CID. On September 18, 2008, we submitted a claim for
indemnification from the escrow fund established in connection with the Merger
Agreement for any losses to us resulting from this matter.
The Ohio
Attorney General’s Office, Health Care Fraud Section has issued a criminal
subpoena, dated August 8, 2008, to Orthofix, Inc (the “Ohio AG
Subpoena”). The Ohio AG Subpoena seeks documents for the period from
January 1, 2000 through the date of issuance of the subpoena. We
believe that the Ohio AG Subpoena arises from a government investigation that
concerns the compensation of physician consultants and related
matters. On September 18, 2008, we submitted a claim for
indemnification from the escrow fund established in connection with the Merger
Agreement for any losses to us resulting from this matter.
Blackstone
is cooperating with the government’s request in each of the subpoenas set forth
above and is in the process of responding to the subpoenas. The
Company is unable to predict what actions, if any, might be taken by the
governmental authorities that have issued these subpoenas or what impact, if
any, the outcome of these matters might have on the Company’s consolidated
financial position, results of operations or cash flows.
By order
entered on January 4, 2007, the United States District Court for the Eastern
District of Arkansas unsealed a qui tam complaint captioned Thomas v. Chan, et
al., 4:06-cv-00465-JLH, filed against Dr. Patrick Chan, Blackstone and other
defendants including another device manufacturer. A qui tam action is
a civil lawsuit brought by an individual for an alleged violation of a federal
statute, in which the U.S. Department of Justice has the right to intervene and
take over the prosecution of the lawsuit at its option. The complaint
alleges causes of action under the False Claims Act for alleged inappropriate
payments and other items of value conferred on Dr. Chan. On December
29, 2006, the U.S. Department of Justice filed a notice of non-intervention in
the case. Plaintiff subsequently amended the complaint to add
Orthofix International N.V. as a defendant. On January 3, 2008, Dr.
Chan pled guilty to one count of knowingly soliciting and receiving kickbacks
from a medical device distributor in a criminal matter in which neither the
Company nor any of its business units or employees were
defendants. In January 2008, Dr. Chan entered into a settlement
agreement with the plaintiff and certain governmental entities in the civil qui
tam action, and on February 21, 2008, a joint stipulation of dismissal of claims
against Dr. Chan in the action was filed with the court, which removed him as a
defendant in the action. On July 11, 2008, the court granted a motion
to dismiss the Company as a defendant in the action. Blackstone
remains a defendant. The Company believes that Blackstone has
meritorious defenses to the claims alleged and we intend to defend vigorously
against this lawsuit. On September 17, 2007, we submitted a claim for
indemnification from the escrow fund established in connection with the Merger
Agreement for any losses to us resulting from this matter. We were
subsequently notified by legal counsel for the former shareholders that the
representative of the former shareholders of Blackstone has objected to the
indemnification claim and intends to contest it in accordance with the terms of
the Merger Agreement.
Between
January 2007 and May 2007, Blackstone and Orthofix Inc. were named defendants,
along with other medical device manufacturers, in three civil lawsuits alleging
that Dr. Chan had performed unnecessary surgeries in three different
instances. In January 2008, we learned that Orthofix Inc. was named a
defendant, along with other medical device manufacturers, in a fourth civil
lawsuit alleging that Dr. Chan had performed unnecessary
surgeries. All four civil lawsuits have been served and were filed in
the Circuit Court of White County, Arkansas. We have reached a settlement in one
of these four civil lawsuits, and the court has entered an order of
dismissal. The settlement agreement is not expected to have a
material impact on our consolidated financial position, results of operations or
cash flows. We believe that we have meritorious defenses to the claims alleged
in the remaining three lawsuits, and we intend to defend vigorously against
these lawsuits if they are not settled. On September 17, 2007, we
submitted a claim for indemnification from the escrow fund established in
connection with the Merger Agreement for any losses to us resulting from one of
these four civil lawsuits. We were subsequently notified by legal
counsel for the former shareholders that the representative of the former
shareholders of Blackstone has objected to the indemnification claim and intends
to contest it in accordance with the terms of the Merger
Agreement.
We are
unable to predict the outcome of each of the escrow claims described above in
the preceding paragraphs or to estimate the amount, if any, that may ultimately
be returned to us from the escrow fund and there can be no assurance that losses
to us from these matters will not exceed the amount of the escrow
account.
In
addition to the foregoing claims, we have submitted claims for indemnification
from the escrow fund established in connection with the Merger Agreement for
losses that have or may result from certain claims against Blackstone alleging
that plaintiffs and/or claimants were entitled to payments for Blackstone stock
options not reflected in Blackstone's corporate ledger at the time of
Blackstone's acquisition by the Company, or that their shares or stock options
were improperly diluted by Blackstone. To date, the representative of
the former shareholders of Blackstone has not objected to approximately $1.5
million in such claims from the escrow fund, with certain claims remaining
pending.
The
company cannot predict the outcome of any proceedings or claims made against the
Company or its subsidiaries described in the preceding paragraphs and there can
be no assurance that the ultimate resolution of any claim will not have a
material adverse impact on our consolidated financial position, results of
operations, or cash flows.
In
addition to the foregoing, in the normal course of our business, the Company is
involved in various lawsuits from time to time and may be subject to certain
other contingencies.
The
following risk factor should be read in conjunction with the other risk factors
discussed in Part 1, “Item 1A. Risk Factors” in our Annual Report on Form 10-K
for the fiscal year ended December 31, 2007 (the “Form 10-K), there have been no
material changes to our risk factors from the factors discussed in our Form
10-K.
Our
subsidiary Orthofix Holdings, Inc.'s senior secured bank credit facility
contains significant financial and operating restrictions, including financial
covenants that we may be unable to satisfy in the future.
When we
acquired Blackstone on September 22, 2006, one of our wholly-owned subsidiaries,
Orthofix Holdings, Inc. (Orthofix Holdings), entered into a senior secured bank
credit facility with a syndicate of financial institutions to finance the
transaction. Orthofix and certain of Orthofix Holdings’ direct and indirect
subsidiaries, including Orthofix Inc., Breg, and Blackstone have guaranteed the
obligations of Orthofix Holdings under the senior secured bank facility. The
senior secured bank facility provides for (1) a seven-year amortizing term loan
facility of $330.0 million for which $291.5 million was outstanding at September
30, 2008, and (2) a six-year revolving credit facility of $45.0 million upon
which we had not drawn as of September 30, 2008. On
September 29, 2008, we entered into an amendment to the credit
agreement.
The
credit agreement, as amended, contains negative covenants applicable to Orthofix
and its subsidiaries, including restrictions on indebtedness, liens, dividends
and mergers and sales of assets. The credit agreement also contains certain
financial covenants, including a fixed charge coverage ratio and a leverage
ratio applicable to Orthofix and its subsidiaries on a consolidated basis. A
breach of any of these covenants could result in an event of default under the
credit agreement, which could permit acceleration of the debt payments under the
facility. Management believes the Company was in compliance with these financial
covenants as measured at September 30, 2008. The Company further
believes that it should be able to meet these financial covenants in future
fiscal quarters, however, there can be no assurance that it will be able to do
so, and failure to do so could result in an event of default under the credit
agreement, which could have a material adverse effect on our financial
position.
The
senior secured bank credit facility requires mandatory prepayments that may have
an adverse effect on our operations and limit our ability to grow our
business
Further,
in addition to scheduled debt payments, the credit agreement, as
amended, requires us to make mandatory prepayments with (a) the
excess cash flow (as defined in the credit agreement) of Orthofix and its
subsidiaries, in an amount equal to 50% of the excess annual cash flow beginning
with the year ending December 31, 2007, provided, however, if the leverage ratio
(as defined in the credit agreement) is less than or equal to 1.75 to 1.00, as
of the end of any fiscal year, there will be no mandatory excess cash flow
prepayments, with respect to such fiscal year (b) 100% of the net cash proceeds
of any debt issuances by Orthofix or any of its subsidiaries or 50% of the net
cash proceeds of equity issuances by any such party, excluding the exercise of
stock options, provided, however, if the leverage ratio is less than or equal to
1.75 to 1.00 at the end of the preceding fiscal year, Orthofix Holdings shall
not be required to prepay the loans with the proceeds of any such debt or equity
issuance, (c) the net cash proceeds of asset dispositions over a minimum
threshold, or (d) unless reinvested, insurance proceeds or condemnation awards.
These mandatory prepayments could limit our ability to reinvest in our
business.
The
conditions of the U.S. and international capital and credit markets may
adversely affect our ability to draw on our current revolving credit facility or
obtain future short-term or long-term lending.
Global
market and economic conditions have been, and continue to be, disrupted and
volatile, and in recent months the volatility has reached unprecedented
levels. In particular, the cost and availability of funding for many
companies has been and may continue to be adversely affected by illiquid credit
markets and wider credit spreads. These forces reached unprecedented
levels in September and October 2008, resulting in the bankruptcy or acquisition
of, or government assistance to, several major domestic and international
financial institutions. These events have significantly diminished
overall confidence in the financial and credit markets. There can be
no assurances that recent government responses to the disruptions in the
financial and credit markets will restore consumer confidence, stabilize the
markets or increase liquidity and the availability of credit.
We
continue to maintain a six-year revolving credit facility of $45.0 million upon
which we have not drawn as of September 30, 2008. However, to the
extent our business requires us to access the credit markets in the future and
we are not able to do so, including in the event that lenders cease to lend to
us, or cease to be capable of lending, for any reason, we could experience a
material and adverse impact on our financial condition and ability to borrow
additional funds. This might impair our ability to obtain sufficient
funds for working capital, capital expenditures, acquisitions, research and
development and other corporate purposes.
The
conditions of the U.S. and international capital and credit markets may
adversely affect our interest expense under our existing credit
facility.
Our
senior bank facility provides for a seven-year amortizing term loan facility of
$330.0 million for which $291.5 was outstanding as of September 30,
2008. Obligations under the senior secured credit facility have a
floating interest rate of the London Inter-Bank Offered Rate (“LIBOR”) plus a
margin or prime rate plus a margin. Currently, the term loan is a
LIBOR loan, and the margin is 4.50%. In June 2008, we entered into a
three year fully amortizable interest rate swap agreement (the “Swap”) with a
notional amount of $150.0 million and an expiration date of June 30,
2011. The amount outstanding under the Swap as of September 30, 2008
was $150.0 million. Under the Swap we will pay a fixed rate of 3.73%
and receive interest at floating rates based on the three month LIBOR rate at
each quarterly re-pricing date until the expiration of the Swap. As
of September 30, 2008 the interest rate on the debt related to the Swap was 8.2%
(3.73% plus a margin of 4.50%). Our overall effective interest rate,
including the impact of the Swap, as of September 30, 2008 on our senior secured
debt was 8.2%.
In recent
months, LIBOR rates have experienced unprecedented short-term volatility due to
disruptions occurring in global financial and credit markets. During
this period, LIBOR rates have experienced substantial short-term
increases. As described above, although the Swap reduces the impact
of these increases on us, increases in LIBOR rates increase the interest expense
that we incur under our term loan. (See Item 3, Quantitative and
Qualitative Disclosures about Market Risk in this Form
10-Q.) Further, in the event that our counterparties under the Swap
were to cease to be able to satisfy their obligations under the Swap for any
reason, our interest expense could be further increased.
Adverse
changes in general economic or credit market conditions in any of the major
countries in which we do business could adversely impact our operating
results.
The
direction and strength of the U.S. and global economy has recently been
increasingly uncertain due to a turndown in the economy and difficulties in the
credit markets. If economic growth in the United States and other
countries is slowed significantly, or if the credit markets continue to be
difficult to access, our distributors, suppliers and other business partners
could experience significant disruptions to their businesses and operations
which, in turn, could negatively impact our business operations and financial
performance.
(a)
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Exhibits |
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Exhibit
Number
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Description
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3.1
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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).
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3.2
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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 June 30,
2008 and incorporated herein by reference).
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10.1
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Orthofix
International N.V. Amended and Restated Stock Purchase Plan (filed as an
exhibit to the Company's quarterly report on Form 10-Q for the quarter
ended June 30, 2008 and incorporated herein by
reference).
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10.2
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Orthofix
International N.V. Staff Share Option Plan, as amended through April 22,
2003 (filed as an exhibit to the Company’s annual report on Form 10-K for
the fiscal year ended December 31, 2007 and incorporated herein by
reference).
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10.3
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Orthofix
International N.V. Amended and Restated 2004 Long Term Incentive Plan
(filed as an exhibit to the Company’s current report on Form 8-K filed
June 26, 2007 and incorporated herein by reference).
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|
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10.4
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Amendment
No. 1 to the Orthofix International N.V. Amended and Restated 2004
Long-Term Incentive Plan (filed as an exhibit to the Company's current
report on Form 8-K filed June 20, 2008 and incorporated herein by
reference).
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10.5
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Form
of Nonqualified Stock Option Agreement under the Orthofix International
N.V. Amended and Restated 2004 Long Term Incentive Plan (vesting over 3
years) (filed as an exhibit to the Company's current report on Form 8-K
filed June 20, 2008 and incorporated herein by
reference).
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10.6
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Form
of Nonqualified Stock Option Agreement under the Orthofix International
N.V. Amended and Restated 2004 Long Term Incentive Plan (3 year cliff
vesting) (filed as an exhibit to the Company's current report on Form 8-K
filed June 20, 2008 and incorporated herein by
reference).
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10.7
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Form
of Restricted Stock Grant Agreement under the Orthofix International N.V.
Amended and Restated 2004 Long Term Incentive Plan (vesting over 3 years)
(filed as an exhibit to the Company's current report on Form 8-K filed
June 20, 2008 and incorporated herein by reference).
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|
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10.8
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Form
of Restricted Stock Grant Agreement under the Orthofix International N.V.
Amended and Restated 2004 Long Term Incentive Plan (3 year cliff vesting)
(filed as an exhibit to the Company's current report on Form 8-K filed
June 20, 2008 and incorporated herein by
reference).
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10.9
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Orthofix
Deferred Compensation Plan (filed as an exhibit to the Company’s annual
report on Form 10-K for the fiscal year ended December 31, 2006, as
amended, and incorporated herein by reference).
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10.10
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Employment
Agreement, dated as of April 15, 2005, between the Company 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).
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10.11
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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).
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10.12
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Amended
and Restated Voting and Subscription Agreement dated as of December 22,
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 on January 8,
2004 and incorporated herein by reference).
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10.13
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Amendment
to Employment Agreement dated December 29, 2005 between Orthofix Inc. 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).
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10.14
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Form
of Indemnity Agreement (filed as an exhibit to the Company’s annual report
on Form 10-K filed December 31, 2005 and incorporated herein by
reference).
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10.15
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Settlement
Agreement dated February 23, 2006, between Intavent Orthofix Limited, a
wholly-owed subsidiary of Orthofix International N.V. and Galvin Mould
(filed as an exhibit to the Company’s annual report on Form 8-K filed on
April 17, 2006 and incorporated herein by reference).
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10.16
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Amended
and Restated Employment Agreement, dated December 6, 2007, between
Orthofix Inc. and Alan W. Milinazzo (filed as an exhibit to the Company’s
annual report on Form 10-K for the fiscal year ended December 31, 2007, as
amended, and incorporated herein by reference).
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10.17
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Amended
and Restated Employment Agreement, dated December 6, 2007,
between Orthofix Inc. and Raymond C. Kolls (filed as an exhibit to the
Company’s annual report on Form 10-K for the fiscal year ended December
31, 2007, as amended, and incorporated herein by
reference).
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10.18
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Amended
and Restated Employment Agreement, dated December 6, 2007, between
Orthofix Inc. and Michael M. Finegan. (filed as an exhibit to the
Company’s annual report on Form 10-K for the fiscal year ended December
31, 2007, as amended, and incorporated herein by
reference).
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10.19
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Credit
Agreement, dated as of September 22, 2006, among Orthofix Holdings, Inc.,
Orthofix International N.V., certain domestic subsidiaries of Orthofix
International N.V., Colgate Medical Limited, Victory Medical Limited,
Swiftsure Medical Limited, Orthofix UK Ltd, the several banks and other
financial institutions as may from time to time become parties thereunder,
and Wachovia Bank, National Association (filed as an exhibit to the
Company’s current report on Form 8-K filed September 27, 2006 and
incorporated herein by
reference).
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10.20
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First
Amendment to Credit Agreement, dated September 29, 2008, by and among
Orthofix Holdings, Inc., Orthofix International N.V., certain domestic
subsidiaries of Orthofix International N.V., Colgate Medical Limited,
Victory Medical Limited, Swiftsure Medical Limited, Orthofix UK Ltd, and
Wachovia Bank, National Association, as administrative agent on behalf of
the Lenders under the Credit Agreement (filed as an exhibit to the
Company’s current report on Form 8-K filed September 29, 2008 and
incorporated herein by reference).
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10.21
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Agreement
and Plan of Merger, dated as of August 4, 2006, among Orthofix
International N.V., Orthofix Holdings, Inc., New Era Medical Limited,
Blackstone Medical, Inc. and William G. Lyons, III, as Equityholders’
Representative (filed as an exhibit to the Company's current report on
Form 8-K filed August 7, 2006 and incorporated herein by
reference).
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10.22
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Employment
Agreement, dated as of September 22, 2006, between Blackstone Medical,
Inc. and Matthew V. Lyons (filed as an exhibit to the Company’s annual
report on Form 10-K for the fiscal year ended December 31, 2006, as
amended, and incorporated herein by reference).
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10.23
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Amended
and Restated Employment Agreement dated December 6, 2007 between Orthofix
Inc. and Timothy M. Adams (filed as an exhibit to the Company’s annual
report on Form 10-K for the fiscal year ended December 31, 2007, as
amended, and incorporated herein by reference).
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10.24
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Nonqualified
Stock Option Agreement between Timothy M. Adams and Orthofix International
N.V. dated November 19, 2007 (filed as an exhibit to the Company’s current
report on Form 8-K filed November 21, 2007 and incorporated herein by
reference).
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10.25
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Employment
Agreement between Orthofix Inc. and Scott Dodson, dated as of December 10,
2007 (filed as an exhibit to the Company’s annual report on Form 10-K for
the fiscal year ended December 31, 2007, as amended, and incorporated
herein by reference).
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10.26
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Employment
Agreement between Orthofix Inc. and Michael Simpson, dated as of December
6, 2007 (filed as an exhibit to the Company’s annual report on Form 10-K
for the fiscal year ended December 31, 2007, as amended, and incorporated
herein by reference).
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10.27
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Description
of Director Fee Policy (filed as an exhibit to the Company’s annual report
on Form 10-K for the fiscal year ended December 31, 2007, as amended, and
incorporated herein by
reference).
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10.28
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Summary
of Orthofix International N.V. Annual Incentive Program (filed as an
exhibit to the Company’s current report on Form 8-K filed April 11, 2008,
and incorporated herein by reference).
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10.29
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Employment
Agreement between Orthofix Inc. and Thomas Hein dated as of April 11, 2008
(filed as an exhibit to the Company's quarterly report on Form 10-Q for
the quarter ended March 31, 2008 and incorporated herein by
reference).
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10.30
|
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Nonqualified
Stock Option Agreement under the Orthofix International N.V. Amended and
Restated 2004 Long-Term Incentive Plan, dated April 11, 2008, between
Orthofix International N.V. and Thomas Hein (filed as an exhibit to the
Company's quarterly report on Form 10-Q for the quarter ended March 31,
2008 and incorporated herein by reference).
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10.31
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Summary
of Consulting Arrangement between Orthofix International N.V. and Peter
Hewett (filed as an exhibit to the Company's quarterly report on Form 10-Q
for the quarter ended March 31, 2008 and incorporated herein by
reference).
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10.32
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Employment
Agreement between Orthofix Inc. and Denise E. Pedulla dated as of June 9,
2008 (filed as an exhibit to the company’s quarterly report on Form 10-Q
for the quarter ended June 30, 2008 and incorporated herein by
reference).
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10.33
|
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Form
of Inducement Grant Nonqualified Stock Option Agreement between Orthofix
International N.V. and Robert S. Vaters (filed as an exhibit to the
current report on Form 8-K of Orthofix International N.V dated September
10, 2008 and incorporated herein by
reference).
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10.34
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Employment
Agreement between Orthofix Inc. and Robert S. Vaters effective September
7, 2008 (filed as an exhibit to the company’s current report on Form 8-K
filed September 10, 2008 and incorporated herein by
reference).
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10.35
|
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Offer
Letter from Orthofix International N.V. to Robert S. Vaters dated
September 5, 2008 (filed as an exhibit to the Company’s current report on
Form 8-K filed September 10, 2008 and incorporated herein by
reference).
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Letter
Agreement between Orthofix Inc. and Oliver Burckhardt dated August 28,
2008.
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Notice
of Termination from Orthofix Inc. to Oliver Burckhardt dated August 27,
2008.
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10.38
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Employment
Agreement between Orthofix Inc. and Bradley R. Mason dated October 14,
2008 (filed as an exhibit to the Company's current report on Form 8-K
filed October 15, 2008 and incorporated herein by
reference).
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10.39
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Second
Amended and Restated Performance Accelerated Stock Options Agreement
between Orthofix International N.V. and Bradley R. Mason dated October 14,
2008 (filed as an exhibit to the Company's current report on Form 8-K
filed October 15, 2008 and incorporated herein by
reference).
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10.40
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Nonqualified
Stock Option Agreement between Orthofix International N.V. and Bradley R.
Mason dated October 14, 2008 (filed as an exhibit to the Company's current
report on Form 8-K filed October 15, 2008 and incorporated herein by
reference).
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Rule
13a-14(a)/15d-14(a) Certification of Chief Executive
Officer.
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Rule
13a-14(a)/15d-14(a) Certification of Chief Financial
Officer.
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Section
1350 Certification of Chief Executive Officer.
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Section
1350 Certification of Chief Financial
Officer.
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*
Filed herewith.
+
|
Certain
confidential portions of this exhibit were omitted by means of redacting a
portion of the text. This exhibit has been filed separately with the
Secretary of the Commission without the redactions pursuant to our
Application Requesting Confidential Treatment under the Securities
Exchange Act of 1934.
|
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.
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ORTHOFIX
INTERNATIONAL N.V.
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|
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Date: November
10, 2008
|
By:
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/s/ Alan W. Milinazzo
|
|
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Name: Alan
W. Milinazzo
|
|
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Title: Chief
Executive Officer and President
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Date: November
10, 2008
|
By:
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/s/ Robert S.Vaters
|
|
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Name:
Robert S.Vaters
|
|
|
Title: Executive
Vice President and Chief Financial
Officer
|