-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BT2CPP1DRo6treo54+o5RrmYdwrzzTnqSTBw3b/FC3pfdKpUmGG6VMKFVKttAwnA FIp40uTnU+h4NB2nxT/q1g== 0000947871-04-001329.txt : 20040510 0000947871-04-001329.hdr.sgml : 20040510 20040510163226 ACCESSION NUMBER: 0000947871-04-001329 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20040331 FILED AS OF DATE: 20040510 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ORTHOFIX INTERNATIONAL N V CENTRAL INDEX KEY: 0000884624 STANDARD INDUSTRIAL CLASSIFICATION: SURGICAL & MEDICAL INSTRUMENTS & APPARATUS [3841] IRS NUMBER: 000000000 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-19961 FILM NUMBER: 04793531 BUSINESS ADDRESS: STREET 1: 7 ABRAHAM DE VEERSTRAAT STREET 2: CURACAO CITY: NETHERLANDS ANTILLES STATE: P8 ZIP: 00000 10-Q 1 f10q_050704.txt QUARTERLY REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2004 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from____________ to____________. Commission File Number: 0-19961 ORTHOFIX INTERNATIONAL N.V. (Exact name of registrant as specified in its charter) Netherlands Antilles N/A - ---------------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 7 Abraham de Veerstraat Curacao Netherlands Antilles N/A - ---------------------------------------- ------------------------------------ (Address of principal executive offices) (Zip Code) 599-9-4658525 ---------------------------------------------------- (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.10 par value (Title of Class) 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 at least the past 90 days. Yes [ X ] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ X ] No [ ] As of May 4, 2004, 15,230,962 shares of common stock were issued and outstanding. Table of Contents Page PART I FINANCIAL INFORMATION...............................................3 Item 1. Condensed Financial Statements..................................3 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................................14 Item 3. Quantitative and Qualitative Disclosure About Market Risk..........................................20 Item 4. Controls and Procedures........................................20 PART II OTHER INFORMATION..................................................21 Item 1. Legal Proceedings..............................................21 Item 6. Exhibits and Reports on Form 8-K...............................21 SIGNATURES...................................................................23 Forward-Looking Statements This Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, relating to our business and financial outlook, which are based on our current 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," "predicts," "potential" or "continue" or other comparable terminology. These forward-looking statements are not guarantees of future performance and involve risks, uncertainties, estimates and assumptions that are difficult to predict. Therefore, 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. The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements to encourage companies to provide prospective information about their companies without fear of litigation. We would like to take advantage of the "safe harbor" provisions of the Private Securities Litigation Reform Act in connection with the forward-looking statements included in this document. A number of important factors could cause actual results to differ materially from those indicated by the forward-looking statements, including, but not limited to, the risks described under Item 1 - "Business - Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2003. 2 PART I FINANCIAL INFORMATION Item 1. Condensed Financial Statements CONDENSED CONSOLIDATED BALANCE SHEETS
(U.S. Dollars, in thousands except per share data) March 31, December 31, 2004 2003 ----------------- ---------------- Assets (Unaudited) (Note 2) Current assets: Cash and cash equivalents..................................... $ 40,067 $ 33,559 Trade accounts receivable, net................................ 72,360 70,690 Inventories................................................... 32,054 30,713 Deferred income taxes......................................... 3,978 3,978 Prepaid expenses and other.................................... 11,505 8,928 ----------------- ---------------- Total current assets........................................ 159,964 147,868 Securities and other investments............................... 4,881 5,775 Property, plant and equipment, net............................. 18,181 19,169 Patents and other intangible assets, net....................... 64,433 65,726 Goodwill, net.................................................. 166,092 168,397 Other long-term assets ........................................ 5,441 6,244 ----------------- ---------------- Total assets................................................ $ 418,992 $ 413,179 ================= ================ Liabilities and shareholders' equity Current liabilities: Bank borrowings............................................... $ 1,547 $ 72 Current portion of long-term debt............................. 11,073 11,063 Trade accounts payable........................................ 10,793 11,569 Other current liabilities..................................... 26,233 30,236 ----------------- ---------------- Total current liabilities................................... 49,646 52,940 Long-term debt................................................. 96,362 99,072 Deferred income taxes.......................................... 16,160 16,642 Other long-term liabilities.................................... 3,710 3,749 ----------------- ---------------- Total liabilities........................................... $ 165,878 $ 172,403 Contingencies (Note 14) Shareholders' equity: Common shares (15,182,598 and 14,980,010 shares issued at March 31, 2004 and December 31, 2003, respectively)....... 1,518 1,498 Additional paid-in capital.................................... 86,031 81,960 Retained earnings............................................. 156,267 147,924 Accumulated other comprehensive income........................ 9,298 9,394 ----------------- ---------------- Total shareholders' equity.................................. 253,114 240,776 ----------------- ---------------- Total liabilities and shareholders' equity $ 418,992 $ 413,179 ================= ================
The accompanying notes form an integral part of these condensed consolidated financial statements. 3 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003
(Unaudited, U.S. Dollars, in thousands except share and per share data) 2004 2003 --------------- --------------- Net sales...................................................... $ 70,739 $ 48,181 Cost of sales.................................................. 19,546 12,585 --------------- --------------- Gross profit............................................... 51,193 35,596 Operating expenses Sales and marketing........................................ 26,136 17,600 General and administrative................................. 7,247 4,982 Research and development................................... 3,316 2,131 Amortization of intangible assets.......................... 1,333 278 KCI litigation costs....................................... 372 862 --------------- --------------- 38,404 25,853 --------------- --------------- Total operating income .................................... 12,789 9,743 Interest income (expense), net................................ (1,529) 57 Other income (expense), net................................... 595 (383) --------------- --------------- Income before income tax................................. 11,855 9,417 Income tax expense............................................. (3,511) (3,464) --------------- --------------- Net income ............................................. $ 8,344 $ 5,953 =============== =============== Net income per common share - basic............................ $ 0.55 $ 0.43 =============== =============== Net income per common share - diluted.......................... $ 0.53 $ 0.41 =============== =============== Weighted average number of common shares - basic.............. 15,039,870 13,704,052 Weighted average number of common shares - diluted............. 15,745,473 14,499,614
The accompanying notes form an integral part of these condensed consolidated financial statements. 4 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003
(Unaudited, U.S. Dollars, in thousands) 2004 2003 ---------------- ----------------- Cash flows from operating activities: Net income................................................... $ 8,344 $ 5,953 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization............................. 3,534 1,628 Provision for doubtful accounts........................... 1,344 1,240 Loss on equity investments................................ 428 372 Tax benefit on non-qualified stock options................ 1,057 142 Deferred taxes............................................ (465) -- Gain on sale of assets and investments.................... (1,470) -- Other .................................................... 36 70 Change in operating assets and liabilities: Accounts receivable....................................... (2,616) (176) Inventories............................................... (1,143) 1,353 Prepaid expenses and other................................ (997) 2,241 Accounts payable.......................................... (1,136) (1,716) Current liabilities....................................... 37 202 ---------------- ----------------- Net cash provided by operating activities.............. 6,953 11,309 ---------------- ----------------- Cash flows from investing activities: Investments in affiliates and subsidiaries................ (1,105) (22,071) Capital expenditures...................................... (1,933) (974) Proceeds from sale of investment.......................... 1,300 -- Other..................................................... -- (300) ---------------- ----------------- Net cash used in investing activities.................. (1,738) (23,345) ---------------- ----------------- Cash flows from financing activities: Net proceeds from issuance of common stock................ 3,034 8,385 Repurchase of treasury shares............................. -- (1,880) Payment of debt issuance costs............................ (460) -- Proceeds from loans and borrowings....................... 1,482 39 Repayment of loans and borrowings......................... (2,762) (1,920) ---------------- ----------------- Net cash provided by financing activities.............. 1,294 4,624 Effect of exchange rate changes on cash........................ (1) 151 ---------------- ----------------- Increase (decrease) in cash and cash equivalents............... 6,508 (7,261) Cash and cash equivalents at the beginning of the year......... 33,559 48,813 ---------------- ----------------- Cash and cash equivalents at the end of the period............. $ 40,067 $ 41,552 ================ =================
The accompanying notes form an integral part of these condensed consolidated financial statements. 5 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: BUSINESS Orthofix International N.V. and its subsidiaries (the "Company") is a multinational corporation principally involved in the design, development, manufacture, marketing and distribution of medical equipment, principally for the orthopedic product 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 months ended March 31, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004. The balance sheet at December 31, 2003 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. For further information, refer to the Consolidated Financial Statements and Notes thereto of our Annual Report on Form 10-K for the year ended December 31, 2003. NOTE 3: NEW ACCOUNTING PRONOUCEMENT In December 2003, the FASB issued FASB Interpretation No. ("FIN") 46R, "Consolidation of Variable Interest Entities and Interpretation of ARB No. 51." This interpretation, which replaces FASB Interpretation No. 46, "Consolidation of Variable Interest Entities," clarifies the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. This interpretation is required in financial statements for periods ending after March 15, 2004 for those companies that have yet to adopt the provisions of FIN 46. The Company adopted FIN 46R in January 2004 and the initial adoption did not have a material impact on our consolidated financial statements. NOTE 4: INVENTORY Inventories are as follows: March 31, December 31, (In thousands) 2004 2003 -------------- -------------- Raw materials $ 6,604 $ 6,153 Work-in-process 2,700 2,453 Finished goods 13,578 13,437 Field inventory 5,127 5,202 Consignment inventory 7,867 7,124 Less reserve for obsolescence (3,822) (3,656) -------------- -------------- $32,054 $30,713 ============== ============== 6 NOTE 5: ACQUISITIONS On December 30, 2003, the Company purchased 100% of the stock of Breg, Inc. (Breg) for a purchase price of $150 million plus closing adjustments and acquisition costs. The acquisition and related costs were financed with $110 million of senior secured bank debt, cash on hand and the issuance of 731,715 shares of Orthofix common stock. The acquisition was accounted for using the purchase method in accordance with Statement of Financial Accounting Standards No. 141 "Business Combinations". The allocation of the purchase price has been performed based on assignment of fair values to assets acquired and liabilities assumed. Fair values are based, in part, on appraisals performed by an independent appraisal firm. The purchase price for the acquisition is preliminary and is subject to potential upward or downward adjustments based on the receipt of final asset appraisals and final transaction costs. Based on information obtained during the period, the preliminary purchase price allocation of Breg was adjusted, resulting in a reduction in the carrying amount of goodwill. Additional information including the final appraisal of acquired intangibles is still pending which could result in further adjustments to the purchase price allocation. A preliminary allocation of the purchase price as of March 31, 2004 reflects the following: Working capital, other than cash $14,374 Fixed assets acquired 5,569 Identifiable intangible assets (definite lived) 35,401 Identifiable intangible assets (indefinite lived) 23,900 Deferred tax liability (14,250) Goodwill 91,307 --------------- Total purchase price $156,301 =============== In first quarter 2004, the Company purchased a distributor in Puerto Rico for $1.4 million, which consisted of $1.1 million in cash and $0.3 million of assumed liabilities. The preliminary purchase price included approximately $0.9 million of working capital and $0.5 million of goodwill. NOTE 6: GOODWILL The change in the net carrying value of goodwill for the period ended March 31, 2004 is as follows: (In thousands) Balance at December 31, 2003 $168,397 Acquisitions 532 Adjustments to Breg goodwill (See Note 5) (3,205) Foreign currency effects 368 ---------------- Balance at March 31, 2004 $166,092 ================ NOTE 7: COMMON SHARES For the three months ended March 31, 2004, the Company issued 202,588 shares of common stock upon the exercise of outstanding stock options for proceeds of $3.0 million. NOTE 8: COMPREHENSIVE INCOME 7 Other comprehensive income includes foreign currency translation adjustments and unrealized gains/losses on available-for-sale securities, net of tax. During the three month period ended March 31, 2003, the Company reclassified $1.4 million, respectively, of foreign currency translation impact on goodwill that is denominated in a non-U.S. dollar currency, from comprehensive income to goodwill. These reclassifications had no impact on the results of operations or cash flows of the Company. Total comprehensive income combines reported net income and other comprehensive income. (In thousands) Three Months Ended March 31, ------------------------ 2004 2003 --------- --------- Net income $8,344 $5,953 Other comprehensive income: Unrealized loss on marketable Securities, net of taxes -- (54) Foreign currency translation adjustment (96) 2,077 --------- --------- Total comprehensive income $8,248 $7,976 ========= ========= 8 NOTE 9: BUSINESS SEGMENT INFORMATION Prior to the acquisition of Breg, the Company managed its operations as two geographic business units, the Americas and International plus Group activities. Subsequent to the acquisition, the Company's operations are managed as three business segments (Americas Orthofix, Americas Breg, and International Orthofix) plus Group activities. Americas Orthofix consists of the operations, existing prior to the acquisition of Breg, which are in the United States, Mexico, Brazil, and Puerto Rico. Americas Breg consists of Breg, Inc. which was acquired December 30, 2003. 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 independent distributors. International Orthofix consists of operations, existing prior to the acquisition of Breg, which are located in the rest of the world plus export distribution operations. For the three month period ended March 31:
External Sales Intersegment Sales ------------------------- ------------------------- (In thousands) 2004 2003 2004 2003 -------- -------- -------- -------- Americas Orthofix $29,793 $26,696 $ 413 $ 157 Americas Breg 16,859 -- -- -- International Orthofix 24,087 21,485 16,245 12,543 ------- ------- -------- -------- Total $70,739 $48,181 $16,658 $12,700 ======== ======== ======== ======== Operating Income (Expense) Three Months Ended March 31, ------------------------------ (In thousands) 2004 2003 ---------- ---------- Americas Orthofix $ 6,092 $6,104 Americas Breg 2,304 -- International Orthofix 5,304 5,052 Group activities (1,107) (1,021) Eliminations 196 (392) ---------- ---------- Total $12,789 $9,743 ========== ==========
The following table presents identifiable assets by segment, excluding intercompany balances and investments in consolidated subsidiaries. The December 31, 2003 balances have been reclassified to conform to the current period presentation. 9 Identifiable Assets March 31, December 31, (In thousands) 2004 2003 ------------ ------------ Americas Orthofix $108,016 $103,493 Americas Breg 178,212 181,298 International Orthofix 138,904 137,011 Group activities 7,323 5,036 Eliminations (13,463) (13,659) ------------ ------------ Total $418,992 $413,179 ============ ============ NOTE 10: INCOME TAXES The difference between the reported provision for income taxes and a provision computed by applying the statutory rates applicable to each subsidiary of the Company is primarily attributable to the Company's tax holiday benefit in the Seychelles, tax planning associated with the acquisition of Breg and an increase in earnings in jurisdictions with lower tax rates. NOTE 11: DISPOSITION OF ASSETS During the three month period ended March 31, 2004, the Company sold a portion of its investment in OrthoRx to its partner in the joint venture, Ferrer Freeman & Co. The sale, combined with not electing to participate in the next round of financing, reduced the Company's ownership in OrthoRx to approximately 21%. The Company recorded a gain on the sale of the investment of approximately $0.8 million, which is reported as other income. During the same period, the Company also sold its one-half interest in a property, as part of its plan to consolidate its United Kingdom facilities. The sale resulted in a gain of approximately $0.6 million, which is reported as other income. This facility was purchased by a company owned by Bird Island Trust, of which Mr. Robert Gaines-Cooper, Chairman of Orthofix Board of Directors, is a beneficiary. The amount paid for this facility exceeded the fair value as determined by two independent appraisal firms. NOTE 12: EARNINGS PER SHARE For the three month periods ended March 31, 2004 and 2003, there were no adjustments to net income (the numerators) for purposes of calculating basic and diluted net income per common share. The following table sets forth a reconciliation of the denominators in computing earnings per share in accordance with Statement of Financial Accounting Standards No. 128, `Earnings Per Share': Three Months Ended March 31, ------------------------------- 2004 2003 ------------- -------------- Weighted average common shares - basic 15,039,870 13,704,052 Effect of diluted securities: Stock options 705,603 795,562 ------------- -------------- Weighted average common shares - diluted 15,745,473 14,499,614 ============= ============== All options were included in the diluted shares outstanding calculation for the three month period ended March 31, 2004, as the average market value of our common stock for the period was higher than the exercise prices of all 10 options outstanding for the period. The Company did not include in the diluted shares outstanding calculation 130,333 options for the three month period ended March 31, 2003, because their inclusion would be antidilutive or their exercise price exceeded the average market price of our common stock during the period. NOTE 13: STOCK BASED COMPENSATION The Company accounts for stock based awards to employees under the intrinsic value method in accordance with APB 25 "Accounting for Stock Issued to Employees." For the three month period ended March 31, 2004, $90,000 of compensation expense was recognized relating to options granted at exercise prices lower than the fair market value of the underlying stock on the date of grant. No compensation expense was recorded for the three month period ended March 31, 2003. In accordance with Statement of Financial Accounting Standards (SFAS) No. 148, "Accounting for Stock Based Compensation Transition and Disclosure and Amendment of FASB Statement No. 123", the Company has provided the Company's pro forma net income and net income per common share for the three month periods ended March 31, 2004 and 2003 as if the Company had accounted for its employee stock option plans under the fair value method. The Company used the same pricing model and assumptions that were used in the Annual Report on Form 10-K for the year ended December 31, 2003. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period.
Three Months Ended March 31, (In thousands, except per share data) 2004 2003 -------------- -------------- Net income As reported $8,344 $5,953 Add: Stock-based employee compensation expense included in reported net income, net of related tax effects 90 -- Less: Total stock-based employee compensation expense determined under fair value method for all awards net of tax (671) (586) -------------- -------------- Pro forma $7,763 $5,367 Net income per common share - basic As reported $0.55 $0.43 Pro forma $0.52 $0.39 Net income per common share - diluted As reported $0.53 $0.41 Pro forma $0.49 $0.37
11 NOTE 14: CONTINGENCIES Litigation The Company, in the normal course of its business, is involved in various lawsuits from time to time. In addition, the Company is subject to certain other contingencies discussed below: On December 4, 1998, the special committee, or the Review Committee, established to determine the amount of any contingent contract rights under the Merger Agreement, dated May 8, 1995, between Orthofix International and American Medical Electronics, or AME, in settlement of all claims of the holders of record of AME common stock and the options and warrants to acquire such stock as of August 21, 1995, unanimously determined that Orthofix International would pay to the AME record holders an earnout of $500,000 plus interest and 12% of the net recovery received from the resolution in 2000 of a litigation against Biomet, Inc. and Electro Biology, Inc., up to a maximum of $5,500,000, plus interest. The Review Committee has not calculated the amount of the capped figure, but Orthofix International believes it is between $5.0 million and $5.5 million. An arbitrator acting under the auspices of the American Arbitration Association, or AAA, subsequently entered a consent award based on the Review Committee's determination. On January 29, 1999, two couples who owned shares of AME common stock commenced a civil action in Colorado federal court against Orthofix Inc. and the members of the Review Committee and sought, among other relief, the maximum earnout and bonus under the Merger Agreement of $18 million plus interest. The plaintiffs also sought to represent all AME record holders. Clarence Frere, Louise Frere, Joseph Mooibroek, and Marla B. Mooibroek, individually and on behalf of all others similarly situated v. Orthofix Inc., Arthur Schwalm, Robert Gaines-Cooper, James Gero, and John and Jane Does One (1) Through Four (4), No. 99-S-445 (D. Colo.). In a related action, commenced on June 2, 1999, the same plaintiffs filed a motion in the United States District Court for the Southern District of New York and sought to intervene in the AAA arbitration and vacate the consent award. Clarence Frere, Louise Frere, Joseph Mooibroek, and Marla B. Mooibroek, individually and on behalf of all others similarly situated v. Orthofix Inc., Arthur Schwalm, Robert Gaines-Cooper, James Gero, and John and Jane Does One (1) Through Four (4), No. 99 Civ. 4049 (S.D.N.Y.). The two actions were consolidated in New York and Orthofix International was added as a party. The New York federal courts resolved the two consolidated actions in favor of the Company and its subsidiary. On July 12, 2002, the trial court denied the plaintiffs' motion to vacate the consent award. On May 21, 2003, the trial court denied plaintiffs' motion for leave to file a second amended complaint and dismissed the earnout and bonus action in its entirety with prejudice. On appeal, on March 12, 2004, the United States Court of Appeals for the Second Circuit summarily affirmed the judgment in favor of the Company and its subsidiary. A request for further review in the United States Supreme Court is currently due no later than June 10, 2004. If Plaintiffs do not seek or the Supreme Court does not grant further review, the Company anticipates that the Review Committee will calculate the settlement payment and that it will pay the appropriate amount. The Company has previously reserved approximately $5.2 million plus accrued interest for the settlement of this matter. Novamedix, a subsidiary of the Company, filed an action on February 21, 1992 against Kinetic Concepts Inc ("KCI") alleging infringement of the patents relating to Novamedix's A-V Impulse System product, breach of contract, and unfair competition. In this action, Novamedix is seeking a permanent injunction enjoining further infringement by KCI. Novamedix also seeks damages relating to past infringement, breach of contract, and unfair competition. KCI has filed counterclaims alleging that Novamedix engaged in inequitable conduct before the United States Patent and Trademark Office and fraud as to KCI and that Novamedix engaged in common law and statutory unfair competition against KCI. KCI seeks a declaratory judgment that the patents are invalid, unenforceable, and not infringed. KCI also seeks monetary damages, injunctive relief, costs, attorney's fees, and other unspecified relief. During 2002, the United States Patent and Trademark Office issued re-examination certificates validating four U.S. vascular patents owned by us. The U.S. District Court in San Antonio, Texas has restored the litigation to active status, and has provided a Scheduling Order that will govern this matter. KCI has sought to add a charge of infringement against Novamedix under a recently issued KCI patent but that request was denied on a procedural basis. KCI retains the right to seek enforcement of its patent in a separate proceeding. A portion of any amounts received will be payable to former owners of Novamedix under the original purchase 12 agreement. In late April, several motions were ruled on by the Magistrate Judge. In these rulings, the Magistrate in part granted and denied in part KCI's motion. Both parties indicate that they plan to object to portions of the Magistrate Judge's rulings. In management's opinion, the Company is not currently involved in any other legal proceeding, individually or in the aggregate, that will have a material effect on the financial position, liquidity or operating results of the Company. Concentrations of credit risk There have been no material changes from the information provided in the Company's Annual Report on Form 10-K for the year ended December 31, 2003. NOTE 15: SUBSEQUENT EVENTS In April 2004, the Company purchased the intellectual property of the Gotfried Percutaneous Compression Plating (PC.C.P) System for approximately $4.0 million. As a result of this new agreement, the previous agreement which included a license and worldwide marketing rights for this product was terminated. 13 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis addresses the results of our operations for the three months ended March 31, 2004, as compared to our results of operations for the three months ended March 31, 2003. The discussion and analysis also addresses our liquidity and financial condition and other matters. General We are a diversified orthopedic products company offering a broad line of minimally invasive surgical, as well as non-surgical, products for the spine, reconstruction and trauma Market Sectors. Our products are designed to address the lifelong bone-and-joint health needs of patients of all ages, helping them achieve a more active and mobile lifestyle. We design, develop, manufacture, market and distribute medical equipment used principally by musculoskeletal medical specialists for orthopedic applications. Our main products are external and internal fixation devices used in fracture treatment, limb lengthening and bone reconstruction, non-invasive stimulation products used to enhance the success rate of spinal fusions and to treat non-union fractures, and bracing products used for ligament injury prevention, pain management and protection of surgical repair to promote faster healing. Our products also include a device for enhancing venous circulation, cold therapy, other pain management products, bone cement and devices for removal of the bone cement used to fix artificial implants, a bone substitute compound and airway management products. We have administrative and training facilities in the United States, the United Kingdom and Italy and manufacturing facilities in the United States, the United Kingdom, Italy, Mexico and the Seychelles. We directly distribute our products in the United States, the United Kingdom, Ireland, Italy, Germany, Switzerland, Austria, France, Belgium, Mexico and Brazil. In several of these and other markets, we also distribute our products through independent distributors. Our condensed consolidated financial statements include the financial results of the company and our wholly owned and majority-owned subsidiaries and entities over which we have control. All intercompany accounts and transactions are eliminated in consolidation. The equity method of accounting is used when a company has influence over significant operating decisions but does not hold control. Under the equity method, original investments are recorded at cost and adjusted by the company's share of undistributed earnings or losses of these companies. All material intercompany transactions and profits associated with the equity investees are eliminated in consolidation. Our reporting currency is the United States dollar. All balance sheet accounts, except shareholders' equity, are translated at the period end exchange rates, and revenue and expense items are translated at weighted average rates of exchange prevailing during the period. Gains and losses resulting from foreign currency transactions are included in other income (expense). Gains and losses resulting from the translation of foreign currency financial statements are recorded in the accumulated other comprehensive income (loss) component of the shareholders' equity. Our financial condition, results of operations and cash flows are not significantly impacted by seasonality trends. In addition, we do not believe our operations will be significantly affected by inflation. However, in the ordinary course of business, we are exposed to the impact of changes in interest rates and foreign currency fluctuations. Our objective is to limit the impact of such movements on earnings and cash flows. In order to achieve this objective, we seek to balance non-dollar income and expenditures. We do not ordinarily use derivative instruments to hedge foreign exchange exposure. Prior to the acquisition of Breg, Inc. ("Breg") in December 2003, we managed our operations as two geographic business units, the Americas and International plus Group activities. Subsequent to the acquisition, our operations are managed as three business segments (Americas Orthofix, Americas Breg and International Orthofix) plus Group activities. Americas Orthofix consists of the operations, existing prior to the acquisition of Breg, which are in the United States, Mexico, Brazil, and Puerto Rico. Americas Breg consists of Breg's domestic and international 14 operations. International Orthofix consists of operations, existing prior to the acquisition of Breg, which are located in the rest of the world plus export distribution operations. Revenues Our revenues are generally derived from two primary sources: sales of orthopedic and non-orthopedic products. Sales of orthopedic products are made into three Market Sectors, Spine (28%), Reconstruction (42%) and Trauma (22%), which together accounted for 92% of our total net sales in the three months ended March 31, 2004, as compared to 90% of our total net sales for the same period in the prior year. Sales of non-orthopedic products, including the airway management products, woman's care and other products, accounted for 8% of our total net sales in the three months ended March 31, 2004, as compared to 10% of our total net sales for the same period in the prior year. The following tables display the net sales by geographic destination and net sales by business segment, net of intercompany eliminations, for each of our geographic markets and by each of our Market Sectors for the three months ended March 31, 2004 and 2003. We provide net sales by geographic destination and by Market Sector for information purposes only. We maintain our books and records by business segment. Geographic Destination:
Three Months Ended March 31, (In thousands) 2004 2003 ------------------------- ------------------------------- Percent of Percent of Total Net Total Net Net Sales Sales Net Sales Sales --------- ---------- --------- ----------- Americas $51,308 73% $31,202 65% International 19,431 27% 16,979 35% --------- ---------- --------- ----------- Total $70,739 100% $48,181 100% ========= ========== ========= =========== Business Segment: Three Months Ended March 31, (In thousands) 2004 2003 ------------------------- ------------------------------- Percent of Percent of Total Net Total Net Net Sales Sales Net Sales Sales --------- ---------- --------- ----------- Americas Orthofix $29,793 42% $26,696 55% Americas Breg 16,859 24% -- --% International Orthofix 24,087 34% 21,485 45% --------- ---------- --------- ----------- Total $70,739 100% $48,181 100% ========= ========== ========= ===========
15
Market Sector: Three Months Ended March 31, (In thousands) 2004 2003 ------------------------- -------------------------- Percent of Percent of Total Net Total Net Net Sales Sales Net Sales Sales --------- ------------- --------- ------------ Orthopedic Spine $19,620 28% $18,312 38% Reconstruction 29,697 42% 12,384 26% Trauma 15,710 22% 12,614 26% --------- ------------- --------- ------------ Total Orthopedic 65,027 92% 43,310 90% Non-Orthopedic 5,712 8% 4,871 10% --------- ------------- --------- ------------ Total $70,739 100% $48,181 100% ========= ============= ========= ============
Three Months Ended March 31, 2004 Compared to Three Months Ended March 31, 2003 The following table presents certain items in our statements of operations as a percentage of net sales for the periods indicated: Three Months Ended March 31, --------------------------------------- 2004 2003 ---- ---- (%) (%) Net sales........................... 100 100 Cost of sales....................... 28 26 Gross profit........................ 72 74 Operating expenses Sales and marketing .............. 37 37 General and administrative........ 10 10 Research and development.......... 5 4 Amortization of intangible assets. 2 1 Litigation costs................. -- 2 Total operating income.............. 18 20 Net income.......................... 12 12 Sales - Net sales increased 47% to $70.7 million for the first three months of 2004, which included $16.9 million of net sales attributable to Americas Breg, compared to $48.2 million for the first three months of 2003. The impact of foreign currency increased sales by $2.4 million during the first quarter of 2004 as compared to the first quarter of 2003. Net sales in Americas Orthofix, primarily the United States, increased to $29.8 million in the first quarter of 2004 compared to $26.7 million in the first quarter of 2003, an increase of 12%. Americas Orthofix represented 42% of total net sales during the first quarter of 2004 and 55% of total net sales for the same period of 2003. The increase in sales was primarily the result of increased volume of stimulators and external fixators sold together with a strong start-up of PC.C.P hip fracture system sales. Net sales in Americas Breg for the first quarter of 2004 were $16.9 million, which represented 24% of total net sales during the first quarter of 2004. Breg was acquired on December 30, 2003; therefore there are no sales for 16 Breg Americas for the comparable period of the prior year. However, on a year over year basis, Americas Breg sales grew 14% in the first quarter of 2004 compared to the first quarter of 2003. Net sales in International Orthofix increased 12% to $24.1 million in the first quarter of 2004 compared to $21.5 million in the first quarter of 2003. The primary contributors were increased sales of external fixation products, strong start-up sales of the PC.C.P hip fracture system and strong growth of non-orthopedic airway management products. The impact of foreign currency increased International Orthofix sales for the quarter by $2.1 million. Sales of our spine products increased 7% to $19.6 million in the first quarter of 2004 compared to $18.3 million in the first quarter of 2003. Sales of stimulation products for spine applications, the main component of our Spine Market Sector, increased 11%, which included the impact of the renewed Medtronic Sofamor Danek distribution agreement. This Market Sector was negatively impacted by reimbursement issues relating to our Orthotrac and EZ Brace products. A change in the reimbursement code of the EZ Brace product in the second quarter of 2003 had a negative impact of approximately $0.5 million on quarter-over-quarter sales in this Market Sector. These reimbursement issues and the pending approval of a stimulator for cervical applications could impact the growth of this Market Sector in future periods. Sales of our reconstruction products increased 140% to $29.7 million in the first quarter of 2004 compared to $12.4 million in the first quarter of 2003. This increase is primarily attributable to the sales of Breg products, all of which are classified as reconstruction products, which totaled $16.9 million in the first quarter of 2004. Sales of our trauma products increased 25% to $15.7 million in the first quarter of 2004 compared to $12.7 million in 2003. This Market Sector benefited from a strong 20% growth in sales of external fixation products, a 26% growth in sales of stimulation products used for long bone applications, and strong start-up sales of the PC.C.P hip fracture system. Sales of our non-orthopedic products grew 17% to $5.7 million in the first quarter of 2004 compared to $4.9 million in the first quarter of 2003. This Market Sector continues to be driven by the airway management products we distribute in the United Kingdom, Ireland and Italy. Gross Profit - Our gross profit increased 44% to $51.2 million in the first quarter of 2004, from $35.6 million in the first quarter of 2003. The increase was primarily due to an increase of 47% in net sales offset by lower gross profit levels of the Breg business, which included a non-recurring charge of $0.5 million for the purchase accounting of the step-up in value of the acquired Breg inventory. Gross profit as a percent of net sales in the first quarter 2004 was 72.4% compared to 73.9% in the first quarter of 2003, reflecting the impacts of lower Breg gross profit margins, purchase accounting and foreign currency. Although currency contributed $2.4 million to sales growth, the year over year appreciation of the Euro and the Great Britain Pound against the U.S. Dollar was detrimental to our gross profit and gross profit margin in those situations where we produce products in Euros or Pounds and sell them in U.S. Dollars. Sales and Marketing Expenses - Sales and marketing expenses, which include commissions, royalties and bad debt provision, generally increase and decrease in relation to sales. Sales and marketing expense increased $8.5 million to $26.1 million in the first quarter of 2004 from $17.6 million in the first quarter of 2003, an increase of 48% on a net sales increase of 47% over the same period. The increase is primarily the result of additional costs associated with the Breg acquisition, for which there are no comparable costs in the first quarter of the prior year, and foreign currency. Sales and marketing expense as a percent of net sales increased slightly to 36.9% in the first quarter of 2004 from 36.5% in the first quarter of 2003. General and Administrative Expense - General and administrative expense increased $2.2 million in the first quarter of 2004 to $7.2 million from $5.0 million in the first quarter of 2003. This increase is primarily attributable to the costs associated with the acquisition of Breg, purchase accounting adjustments for the depreciation of the step-up in value of fixed assets acquired and foreign currency. The expense remained constant as a percent of net sales at 10% both quarters. Research and Development Expense - Research and development expense increased $1.2 million in the first quarter of 2004 to $3.3 million from $2.1 million in the first quarter of 2003 and increased slightly as a percent of net sales 17 to 4.7% from 4.4%. Approximately $0.8 million of this increase is attributable to the Breg acquisition, for which there were no comparable expenses for the same period of 2003. We also incurred additional cost of $0.1 million in the first quarter of 2004 to close our research and development location in Winston-Salem. Amortization of Intangible Assets - Amortization of intangible assets was $1.3 million in the first quarter of 2004 compared to $0.3 million for the same period of 2003. The increase in amortization expense of approximately $1.1 million was due to the amortization recorded for the distribution network acquired in the Breg acquisition. KCI Litigation Expense - Based on an assessment of the merits of the Kinetics Concepts Inc. (KCI) case (further described in Note 14 "Contingencies" of Item 1. "Condensed Financial Statements"), we incurred $0.4 million in litigation costs in the first quarter of 2004, compared to $0.9 million in the same period of 2003. Interest Income (Expense), net - Interest income (expense), net was an expense of $1.5 million in the first quarter of 2004 compared to income of $0.1 million in the first quarter 2003. We incurred interest expense on our borrowings under our senior secured term loan of approximately $1.5 million which included the amortization of debt costs. Other Income (Expense), Net - Other income (expense), net was income of $0.6 million in the first quarter of 2004 compared to an expense of $0.4 million in the first quarter of 2003. The change is attributable to various income and expense items that occurred during the first quarter of 2004 for which there was no comparable activity for the same quarter of the prior year. We sold part of our ownership in the OrthoRx joint venture to our partner Ferrer Freedman & Company that resulted in a gain of approximately $0.8 million. This gain was partially offset by our portion of the joint venture's operating losses for the first quarter of 2004 of approximately $0.4 million, which resulted in a net gain associated with OrthoRx of $0.4 million for the first quarter of 2004 compared to a net loss of $0.4 million for the same period of the prior year. Further, in the first quarter of 2004, we sold our interest in a property as part of our plan to consolidate our United Kingdom facilities that resulted in a gain of approximately $0.6 million. We also incurred foreign exchange losses of $0.4 million in the first quarter of 2004 compared to a gain of $0.1 million in the same period of 2003, principally as a result of the impact of foreign currency movements on the value of current assets and current liabilities held by foreign subsidiaries. Income Tax Expense - In the first quarters of 2004 and 2003, the effective tax rate was 29.6% and 36.8%, respectively. The effective tax rate in the first quarter of 2004 benefited from the following: i) the non-taxable gain recorded on our sale of OrthoRx; ii) lower spending on the KCI case (which occurs in a low tax jurisdiction); and iii) tax planning associated with the Breg acquisition. Net Income - Net income for the first quarter of 2004 was $8.4 million (including the KCI litigation expenses of $0.4 million), or $0.55 per basic share and $0.53 per diluted share, compared to $6.0 million, or $0.43 per basic share and $0.41 per diluted share, for the first quarter of 2003, an increase in net income of 40%. The weighted number of basic common shares outstanding was 15,039,870 and 13,704,052 during the first quarter of 2004 and 2003, respectively. The weighted number of diluted common shares outstanding was 15,745,473 and 14,499,614 during the first quarter of 2004 and 2003, respectively. Liquidity and Capital Resources Cash and cash equivalents were $40.1 million at March 31, 2004 compared to $33.6 million at December 31, 2003, an increase of $6.5 million. Net cash provided by operating activities was $7.0 million for the first quarter of 2004 compared to $11.3 million for the first quarter of 2003, a decrease of $4.3 million. Net cash provided by operating activities is comprised of net income, non-cash items and changes in working capital. Net income increased approximately $2.4 million to $8.3 million in the first quarter of 2004 from $6.0 million in the first quarter of 2003. Non-cash items increased $1.0 million from in the first quarter of 2004 compared to the first quarter of 2003, primarily as a result of the increased depreciation and amortization expense associated with the application of purchase accounting to the assets acquired in the Breg acquisition. Working capital accounts consumed $5.9 million of cash in the first quarter of 2004, principally as a result of increases in accounts receivable and inventory to support additional sales, 18 compared to a generation of cash of $1.9 million during the same period of 2003. Key performance indicators of our two primary working capital accounts, accounts receivable and inventory, reflect days sales in receivables of 93 days at March 31, 2004 compared to 101 days at March 31, 2003 and inventory turnover of 2.4 times at March 31, 2004 compared to 2.1 times at March 31, 2003. Net cash used in investing activities was $1.7 million during the first quarter of 2004, compared to $23.3 million during the first quarter of 2003. During the first quarter of 2004, we paid $1.1 million as part of the consideration for the purchase of a Puerto Rican distributor, invested $1.9 million in capital expenditures and received $1.3 million from the sale of shares in the OrthoRx joint venture. During the first quarter of 2003, we purchased the remaining 48% minority interest in our UK distribution company for $20.6 million and invested $1.0 million in capital expenditures. Net cash provided by financing activities was $1.3 million in the first quarter of 2004 compared to $4.6 million for the same period in 2003. In the first quarter of 2004, we received proceeds of $3.0 million from the issuance of 202,588 shares of our common stock upon the exercise of options and warrants. In the first quarter of 2004, we also had net borrowings of $1.5 million on a line of credit in Italy used to finance working capital. Further, in the first quarter 2004, we repaid approximately $2.8 million against the principal of the senior secured term loan obtained to help finance the Breg acquisition, and paid $0.5 million for costs associated with obtaining the senior secured term loan, which will be amortized over the term of the credit facility. When we acquired Breg on December 30, 2003, one of our wholly owned subsidiaries, Colgate Medical Limited ("Colgate"), entered into a new senior secured bank credit facility with a syndicate of financial institutions to finance the transaction. The senior secured bank facility provides for (1) a five-year amortizing term loan facility of $110 million, the proceeds of which were used for partial payment of the purchase price of Breg, and (2) a five-year revolving credit facility of $15 million. As of March 31, 2004 and as of May 4, 2004, we had no amounts outstanding under the revolving credit facility. Obligations under the senior secured bank facility have a floating interest rate of LIBOR or prime rate plus a margin that is adjusted quarterly based on Colgate's leverage ratio. The effective interest rate as of March 31, 2004 was 3.84%. Orthofix and each of Colgate's direct and indirect subsidiaries, including Orthofix Inc. and Breg, have guaranteed the obligations of Colgate under the senior secured bank facility. The obligations of Colgate under the senior secured bank facility and Colgate's subsidiaries under their guarantees are secured by the pledge of their respective assets. Certain of our other subsidiaries have also guaranteed the obligations of Colgate under the senior secured bank facility on a limited recourse basis. In addition to scheduled debt repayments of $11.0 million in 2004, our senior secured bank facility requires us to make mandatory prepayments with (a) the excess cash flow (as defined in the credit agreement) of Colgate and its subsidiaries in an amount initially equal to 75% of the excess annual cash flow of Colgate and its subsidiaries, reducing to 50% upon the attainment of a leverage ratio of less than or equal to 1.50 to 1.00, (b) the net cash proceeds of any debt issuance by Colgate and its subsidiaries or any equity issuance by us or Colgate or any of its subsidiaries, (c) the net cash proceeds of asset dispositions over a minimum threshold or (d) unless reinvested, insurance proceeds or condemnation awards. The credit agreement relating to the senior secured bank facility contains customary negative covenants applicable to Colgate 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, an interest coverage ratio and a leverage ratio applicable to Colgate and its subsidiaries on a consolidated basis, and a leverage ratio applicable to Orthofix and its subsidiaries on a consolidated basis. The Company has assessed its compliance with the financial covenants as of March 31, 2004, on a pro forma basis, as required by the credit agreement, noting it is in compliance with all financial covenants. At March 31, 2004, we had outstanding borrowings of $1.5 million and unused available lines of credit of approximately $9.0 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 gives us the option to borrow amounts in Italy at rates determined at the time of borrowing. 19 We continue to search for viable acquisition candidates that expand our worldwide presence as well as additional products appropriate for current distribution channels. An acquisition of another company or product line by us could result in our incurrence of additional debt and contingent liabilities. We believe that current cash balances together with projected cash flows from operating activities, the unused revolving credit facility and available Italian line of credit, the exercise of stock options, and our remaining available debt capacity are sufficient to cover anticipated operating capital needs and research and development costs over the near term. Contractual Obligations During the three month period ended March 31, 2004, there were no material changes in the contractual obligations specified in our Annual Report on Form 10-K for the year ended December 31, 2003. Item 3. Quantitative and Qualitative Disclosure About Market Risk There have been no material changes from the information provided in our Annual Report on Form 10-K for the year ended December 31, 2003. Item 4. Controls and Procedures As of March 31, 2004, we performed an evaluation under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the evaluation, our management, including the Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were adequate and effective as of the end of the period covered by this report. During the quarterly period covered by this report, there were no changes in our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 20 PART II OTHER INFORMATION Item 1. Legal Proceedings On December 4, 1998, the special committee, or the Review Committee, established to determine the amount of any contingent contract rights under the Merger Agreement, dated May 8, 1995, between Orthofix International and American Medical Electronics, or AME, in settlement of all claims of the holders of record of AME common stock and the options and warrants to acquire such stock as of August 21, 1995, unanimously determined that Orthofix International would pay to the AME record holders an earnout of $500,000 plus interest and 12% of the net recovery received from the resolution in 2000 of a litigation against Biomet, Inc. and Electro Biology, Inc., up to a maximum of $5,500,000, plus interest. The Review Committee has not calculated the amount of the capped figure, but Orthofix International believes it is between $5.0 million and $5.5 million. An arbitrator acting under the auspices of the American Arbitration Association, or AAA, subsequently entered a consent award based on the Review Committee's determination. On January 29, 1999, two coupls who owned shares of AME common stock commenced a civil action in Colorado federal court against Orthofix Inc. and the members of the Review Committee and sought, among other relief, the maximum earnout and bonus under the Merger Agreement of $18 million plus interest. The plaintiffs also sought to represent all AME record holders. Clarence Frere, Louise Frere, Joseph Mooibroek, and Marla B. Mooibroek, individually and on behalf of all others similarly situated v. Orthofix Inc., Arthur Schwalm, Robert Gaines-Cooper, James Gero, and John and Jane Does One (1) Through Four (4), No. 99-S-445 (D. Colo.). In a related action, commenced on June 2, 1999, the same plaintiffs filed a motion in the United States District Court for the Southern District of New York and sought to intervene in the AAA arbitration and vacate the consent award. Clarence Frere, Louise Frere, Joseph Mooibroek, and Marla B. Mooibroek, individually and on behalf of all others similarly situated v. Orthofix Inc., Arthur Schwalm, Robert Gaines-Cooper, James Gero, and John and Jane Does One (1) Through Four (4), No. 99 Civ. 4049 (S.D.N.Y.). The two actions were consolidated in New York and Orthofix International was added as a party. The New York federal courts resolved the two consolidated actions in favor of the Company and its subsidiary. On July 12, 2002, the trial court denied the plaintiff's motion to vacate the consent award. On May 21, 2003, the trial court denied plaintiffs' motion for leave to file a second amended complaint and dismissed the earnout and bonus action in its entirety with prejudice. On appeal, on March 12, 2004, the United States Court of Appeals for the Second Circuit summarily affirmed the judgment in favor of the Company and its subsidiary. A request for further review in the United States Supreme Court is currently due no later than June 10, 2004. If Plaintiffs do not seek or the Supreme Court does not grant further review, we anticipate that the Review Committee will calculate the settlement payment and that it will pay the appropriate amount. We have previously reserved approximately $5.2 million plus accrued interest for the settlement of this matter. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit Number Description -------- ----------- 31.1* Rule 13a - 14(a)/15d - 14(a) Certification of Chief Executive Officer. 31.2* Rule 13a - 14(a)/15d - 14(a) Certification of Chief Financial Officer. 32.1* Section 1350 Certification of Chief Executive Officer. 32.2* Section 1350 Certification of Chief Financial Officer. ---------------------------- * Filed herewith. 21 (b) Reports on Form 8-K On January 8, 2004, we filed a current report on Form 8-K (Date of Report: January 7, 2004) reporting under Item 2 that we had completed the acquisition of Breg, Inc. pursuant to an acquisition agreement among Orthofix, Trevor Acquisition, Inc., an acquisition subsidiary of Orthofix, Breg and a representative of the shareholders of Breg, and that, concurrently with the closing of the acquisition, Colgate Medical Limited, an indirect wholly owned subsidiary of Orthofix, had entered into a new senior secured bank facility with a syndicate of financial institutions arranged by Wachovia Securities. The report on Form 8-K attached as exhibits under Item 7 the acquisition agreement, the related amended and restated voting and subscription agreement, the credit agreement and also attached a press release regarding the same. On March 12, 2004, we filed an amended current report on Form 8-K (Date of Report: March 12, 2004) reporting under Item 2 that were amending our current report on Form 8-K dated January 7, 2004 regarding the completion of the Breg acquisition to report and attach under Item 7 the required financial statements and pro forma information. 22 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ORTHOFIX INTERNATIONAL N.V. Date: May 10, 2004 By: /s/ CHARLES W. FEDERICO -------------------------------------------- Name: Charles W. Federico Title: Chief Executive Officer and President Date: May 10, 2004 By: /s/ THOMAS HEIN -------------------------------------------- Name: Thomas Hein Title: Chief Financial Officer 23 EX-31.1 2 ex31-1_050704.txt CERTIFICATION OF CHIEF EXECUTIVE OFFICER Exhibit 31.1 CERTIFICATION I, Charles W. Federico, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Orthofix International N.V.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 10, 2004 /s/ CHARLES W. FEDERICO ------------------------------------ Name: Charles W. Federico Title: Chief Executive Officer, President and Director EX-31.2 3 ex31-2_050704.txt CERTIFICATION OF CHIEF FINANCIAL OFFICER Exhibit 31.2 CERTIFICATION I, Thomas Hein, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Orthofix International N.V.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 10, 2004 /s/ THOMAS HEIN ------------------------------- Name: Thomas Hein Title: Chief Financial Officer EX-32.1 4 ex32-1_050704.txt SEC. 1350 CERT. OF CHIEF EXECUTIVE OFFICER Exhibit 32.1 SECTION 1350 CERTIFICATION In connection with the Quarterly Report of Orthofix International N.V. ("Orthofix") on Form 10-Q for the period ended March 31, 2004 (the "Quarterly Report"), as filed with the Securities and Exchange Commission on the date hereof, I, Charles W. Federico, Chief Executive Officer, President and Director of Orthofix, certify, pursuant to 18 U.S.C. Section 1350, that to the best of my knowledge: 1. The Quarterly Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Quarterly Report fairly presents, in all material respects, the financial condition and results of operations of Orthofix. Dated: May 10, 2004 /s/ CHARLES W. FEDERICO --------------------------------- Name: Charles W. Federico Title: Chief Executive Officer, President and Director EX-32.2 5 ex32-2_050704.txt SEC. 1350 CERT. OF CHIEF FINANCIAL OFFICER Exhibit 32.2 SECTION 1350 CERTIFICATION In connection with the Quarterly Report of Orthofix International N.V. ("Orthofix") on Form 10-Q for the period ended March 31, 2004 (the "Quarterly Report"), as filed with the Securities and Exchange Commission on the date hereof, I, Thomas Hein, Chief Financial Officer of Orthofix, certify, pursuant to 18 U.S.C. Section 1350, that to the best of my knowledge: 1. The Quarterly Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Quarterly Report fairly presents, in all material respects, the financial condition and results of operations of Orthofix. Dated: May 10, 2004 /s/ THOMAS HEIN ------------------------------- Name: Thomas Hein Title: Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----