-----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, SEmmUB8aO5fIvAhcn97EBew+StvLNZsaVQ+lumTvN4p62xUVXqOIuy2jPJykLJFn z05cVat8n08ot3JR8qGdLw== 0000947871-04-002491.txt : 20041105 0000947871-04-002491.hdr.sgml : 20041105 20041105172325 ACCESSION NUMBER: 0000947871-04-002491 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20040930 FILED AS OF DATE: 20041105 DATE AS OF CHANGE: 20041105 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: 041123675 BUSINESS ADDRESS: STREET 1: 7 ABRAHAM DE VEERSTRAAT STREET 2: CURACAO CITY: NETHERLANDS ANTILLES STATE: P8 ZIP: 00000 10-Q 1 f10q_110304.txt FORM 10-Q 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 September 30, 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 November 2, 2004, 15,664,903 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.......................................15 Item 3. Quantitative and Qualitative Disclosure About Market Risk.......25 Item 4. Controls and Procedures.........................................26 PART II OTHER INFORMATION 27 Item 1. Legal Proceedings...............................................27 Item 5. Other Information...............................................27 Item 6. Exhibits........................................................28 SIGNATURES 30 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 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. 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 hereby 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 share data) September 30, December 31, 2004 2003 ----------------- ---------------- Assets (Unaudited) (Note 2) Current assets: Cash and cash equivalents ................................... $38,532 $33,559 Trade accounts receivable, net .............................. 80,801 70,690 Inventories ................................................. 31,912 30,713 Deferred income taxes ....................................... 3,978 3,978 Prepaid expenses and other .................................. 8,477 8,928 ----------------- ---------------- Total current assets .......................................... 163,700 147,868 Securities and other investments .............................. 4,366 5,775 Property, plant and equipment, net ............................ 17,623 19,169 Patents and other intangible assets, net ...................... 71,791 65,726 Goodwill, net ................................................. 166,425 168,397 Other long-term assets ........................................ 5,656 6,244 ----------------- ---------------- Total assets ................................................ $429,561 $413,179 ================ =============== Liabilities and shareholders' equity Current liabilities: Bank borrowings ............................................. $1,434 $72 Current portion of long-term debt ........................... 9,852 11,063 Trade accounts payable ...................................... 8,407 11,569 Other current liabilities ................................... 25,532 30,236 ----------------- ---------------- Total current liabilities ................................... 45,225 52,940 Long-term debt ................................................ 82,524 99,072 Deferred income taxes ......................................... 17,402 16,642 Other long-term liabilities ................................... 3,762 3,749 ----------------- ---------------- Total liabilities ........................................... 148,913 172,403 ----------------- ---------------- Contingencies (Note 16) Shareholders' equity: Common shares (15,641,609 and 14,980,010 shares issued at September 30, 2004 and December 31, 2003, respectively) . 1,564 1,498 Additional paid-in capital .................................. 97,034 81,960 Retained earnings ........................................... 172,560 147,924 Accumulated other comprehensive income ...................... 9,490 9,394 ----------------- ---------------- Total shareholders' equity .................................. 280,648 240,776 ----------------- ---------------- Total liabilities and shareholders' equity .................. $429,561 $413,179 ================= ================
The accompanying notes form an integral part of these condensed consolidated financial statements. 3 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
Three Months Ended Nine Months Ended ------------------------------- ------------------------------- (Unaudited, U.S. Dollars, in thousands except share and per share data) 2004 2003 2004 2003 -------------- ------------- -------------- ------------- Net sales.............................................. $71,488 $51,253 $213,019 $150,999 Cost of sales.......................................... 19,582 12,482 58,825 38,077 -------------- ------------- -------------- ------------- Gross profit....................................... 51,906 38,771 154,194 112,922 Operating expenses Sales and marketing................................ 24,678 20,321 76,452 57,428 General and administrative......................... 7,737 5,039 22,402 15,139 Research and development........................... 2,722 1,721 8,732 5,979 Amortization of intangible assets.................. 1,609 259 4,754 656 Litigation and settlement costs.................... 562 2,605 1,266 4,731 -------------- ------------- -------------- ------------- 37,308 29,945 113,606 83,933 -------------- ------------- -------------- ------------- Total operating income ............................ 14,598 8,826 40,588 28,989 Interest income (expense), net........................ (1,697) (24) (4,596) 54 Other income, net..................................... 324 126 341 349 Loss in joint venture, net............................ (334) (572) (109) (1,175) -------------- ------------- -------------- ------------- Income before income tax.......................... 12,891 8,356 36,224 28,217 Income tax expense..................................... (4,474) (2,914) (11,588) (10,328) -------------- ------------- -------------- ------------- Net income ..................................... $8,417 $5,442 $24,636 $17,889 -------------- ------------- -------------- ------------- Net income per common share - basic.................... $0.54 $0.38 $1.61 $1.28 -------------- ------------- -------------- ------------- Net income per common share - diluted.................. $0.53 $0.37 $1.55 $1.22 -------------- ------------- -------------- ------------- Weighted average number of common shares - basic....... 15,570,313 14,181,847 15,296,717 14,001,981 -------------- ------------- -------------- ------------- Weighted average number of common shares - diluted..... 15,953,268 14,882,747 15,939,801 14,720,139 -------------- ------------- -------------- -------------
The accompanying notes form an integral part of these condensed consolidated financial statements. 4 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(Unaudited, U.S. Dollars, in thousands) 2004 2003 ---------------- ----------------- Cash flows from operating activities: Net income................................................ $24,636 $17,889 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.............................. 10,789 4,776 Provision for doubtful accounts............................ 2,972 3,858 Loss on equity investments................................. 943 1,175 Tax benefit on non-qualified stock options................. 3,548 412 Deferred taxes............................................. (2,322) (173) Gain on sale of assets and investments..................... (1,566) (354) Other ..................................................... 769 1,610 Change in operating assets and liabilities: Accounts receivable..................................... (12,456) (6,368) Inventories............................................. (1,169) 346 Prepaid expenses and other.............................. 487 1,450 Accounts payable........................................ (3,517) (1,717) Current liabilities..................................... (3,065) (2,007) ---------------- ----------------- Net cash provided by operating activities...................... 20,049 20,897 ---------------- ----------------- Cash flows from investing activities: Investments in affiliates and subsidiaries................ (2,081) (23,678) Capital expenditures...................................... (5,199) (3,275) Additions to intangible assets............................ (4,626) (333) Proceeds from sale of joint venture....................... 1,300 -- Proceeds from sale of assets and marketable securities.... 1,578 354 Proceeds from settlement of distributor agreement......... 440 -- ---------------- ----------------- Net cash used in investing activities.......................... (8,588) (26,932) ---------------- ----------------- Cash flows from financing activities: Net proceeds from issuance of common stock................ 11,151 10,863 Repurchase of treasury shares............................. -- (4,395) Payment of debt issuance costs............................ (532) -- Net repayment of loans and borrowings..................... (17,100) (4,280) ---------------- ----------------- Net cash (used in) provided by financing activities............ (6,481) 2,188 ---------------- ----------------- Effect of exchange rate changes on cash........................ (7) 763 ---------------- ----------------- Increase (decrease) in cash and cash equivalents............... 4,973 (3,084) Cash and cash equivalents at the beginning of the year......... 33,559 48,813 ---------------- ----------------- Cash and cash equivalents at the end of the period............. $38,532 $45,729 ---------------- -----------------
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 nine months ended September 30, 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 and our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2004 and June 30, 2004. NOTE 3: INVENTORY Inventories were as follows:
September 30, December 31, (In thousands) 2004 2003 ------------------- ------------------- Raw materials $6,175 $6,153 Work-in-process 2,658 2,453 Finished goods 13,357 13,437 Field inventory 5,292 5,202 Consignment inventory 8,516 7,124 Less reserve for obsolescence (4,086) (3,656) ------------------- ------------------- $31,912 $30,713 =================== ===================
6 NOTE 4: 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 final working capital adjustment and transaction costs. Based on information obtained during 2004, the preliminary purchase price allocation of Breg was adjusted, resulting in a reduction in the carrying amount of goodwill. A preliminary allocation of the purchase price as of September 30, 2004 reflects the following: (In thousands) Working capital, other than cash $10,135 Fixed assets acquired 5,570 Identifiable intangible assets (definite lived) 41,501 Identifiable intangible assets (indefinite lived) 23,900 Deferred tax liability (17,451) Deferred tax assets 1,231 Other long term assets (liabilities), net 516 Goodwill 91,839 ---------------- Total purchase price $157,241 =============== In the first quarter of 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. The operations of the acquired distributor are included in the accompanying consolidated statement of operations from the date of acquisition. NOTE 5: GOODWILL The change in the net carrying value of goodwill for the period ended September 30, 2004 is as follows: (In thousands) Balance at December 31, 2003 $168,397 Acquisitions 532 Adjustments to Breg goodwill (See Note 4) (2,674) Foreign currency effects 170 ---------------- Balance at September 30, 2004 $166,425 ================ 7 NOTE 6: INTANGIBLES During the nine month period ended September 30, 2004, the Company purchased the intellectual property of the Gotfried Percutaneous Compression Plating (PC.C.P) System for approximately $4.0 million. Additions to intangibles also included $6.1 million which was a reallocation of the purchase price from goodwill to definite lived intangible assets related to the distribution network acquired as a part of the Breg acquisition (See Note 4). NOTE 7: LONG TERM DEBT
(In thousands) September 30, December 31, 2003 2004 ----------------- ------------------- Long-term obligations $91,750 $110,000 Other loans 626 135 ---------------- ------------------ 92,376 110,135 Less current portion (9,852) (11,063) ----------------- ------------------- $82,524 $99,072 ================= ===================
Concurrently with the closing of the Breg acquisition, Colgate Medical Limited ("Colgate", or the "Borrower"), a wholly owned subsidiary of the Company, entered into the senior secured bank facility. The original credit agreement stated that this obligation had a floating interest rate of LIBOR or prime rate plus a margin that is adjusted quarterly based on the Borrower's leverage ratio. During the third quarter of 2004, Colgate entered into an amendment of its senior secured term loan facility. The amendment reduces the interest rate applicable to borrowings under the term loan facility by reducing the previous interest rate of LIBOR plus 2.75% to LIBOR plus 2.25%. At the same time as entering into the amendment, the Company made a voluntary prepayment of $10.4 million on the borrowings under the term loan facility. At September 30, 2004, long-term obligations include a senior secured term note for $91.8 million. NOTE 8: COMMON SHARES For the nine months ended September 30, 2004, the Company issued 661,599 shares of common stock upon the exercise of outstanding stock options, warrants and shares purchased pursuant to the Company's employee stock purchase plan for proceeds of $11.2 million. 8 NOTE 9: COMPREHENSIVE INCOME During the three and nine month periods ended September 30, 2003, the Company reclassified $0.2 million and $3.0 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 Nine Months Ended September 30, September 30, --------------------------------- ------------------------------- 2004 2003 2004 2003 -------------- --------------- ------------ -------------- Net income $8,417 $5,442 $24,636 $17,889 Other comprehensive income: Unrealized gain on marketable Securities, net of taxes -- 190 -- 186 Unrealized loss on derivative instrument (See Note 15) (110) -- (40) -- Reclassification adjustment for gains on the sale of marketable securities included in net income -- (341) (341) Foreign currency translation adjustment 944 429 136 6,416 -------------- --------------- ------------ -------------- Total comprehensive income $9,251 $5,720 $24,732 $24,150 ============== =============== ============ ==============
NOTE 10: 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. Presently, 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 as well as independent distribution operations. Group Activities are comprised of the Parent's operating expenses and identifiable assets. For the three month period ended September 30:
External Sales Intersegment Sales -------------- ------------------ (In thousands) 2004 2003 2004 2003 ---- ---- ---- ---- Americas Orthofix $32,075 $29,765 $210 $251 Americas Breg 17,383 -- 131 -- International Orthofix 22,030 21,488 11,855 11,945 ------ ------ ------ ------ Total $71,488 $51,253 $12,196 $12,196 ======= ======= ======= =======
9 For the nine month period ended September 30:
External Sales Intersegment Sales -------------- ------------------ (In thousands) 2004 2003 2004 2003 ---- ---- ---- ---- Americas Orthofix $93,002 $86,127 $1,053 $600 Americas Breg 50,654 -- 224 -- International Orthofix 69,363 64,872 42,401 37,009 Total $213,019 $150,999 $43,678 $37,609 ======== ======== ======= =======
For the three and nine month periods ended September 30:
Three Months Ended Nine Months Ended Operating Income (Expense) September 30, September 30, ------------------------------- ------------------------------- (In thousands) 2004 2003 2004 2003 ------------- -------------- ------------ --------------- Americas Orthofix $7,803 $4,753 $21,310 $18,111 Americas Breg 3,084 -- 7,612 -- International Orthofix 4,197 5,053 14,747 12,970 Group Activities (1,150) (1,086) (3,233) (3,157) Eliminations 664 106 152 1,065 ------------- -------------- ------------ --------------- Total $14,598 $8,826 $40,588 $28,989 ============= ============== ============ ===============
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.
Identifiable Assets September 30, December 31, (In thousands) 2004 2003 ------------------- ----------------- Americas Orthofix $106,641 $103,493 Americas Breg 178,218 181,298 International Orthofix 151,044 137,011 Group activities 6,549 5,036 Eliminations (12,891) (13,659) ------------------- ----------------- Total $429,561 $413,179 =================== =================
10 NOTE 11: 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. The Company's effective tax rate benefited from the tax planning associated with the acquisition of Breg and an increase in earnings in jurisdictions with lower tax rates. NOTE 12: DISPOSITION OF ASSETS In March 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 Mr. Robert Gaines-Cooper, Chairman of the Company's Board of Directors. The fair value of this facility was determined by two independent appraisal firms and the amount paid approximates fair value. NOTE 13: EARNINGS PER SHARE For the three and nine month periods ended September 30, 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 share numbers (the denominators) in computing earnings per share in accordance with Statement of Financial Accounting Standards No. 128, `Earnings Per Share':
Three Months Ended Nine Months Ended September 30, September 30, ------------------------------ -------------------------------- 2004 2003 2004 2003 ------------- ------------- ------------- --------------- Weighted average common shares - basic 15,570,313 14,181,847 15,296,717 14,001,981 Effect of diluted securities: Stock options 382,955 700,900 643,084 718,158 ------------- ------------- ------------- --------------- Weighted average common shares - diluted 15,953,268 14,882,747 15,939,801 14,720,139 ------------- ------------- ------------- ---------------
The Company did not include 221,000 and 200,000 options in the diluted shares outstanding calculation for the three and nine month periods ended September 30, 2004, respectively, because their inclusion would have been antidilutive or because their exercise price exceeded the average market price of our common stock during the period. For the nine month period ended September 30, 2003, the Company did not include in the diluted shares outstanding calculation 97,736 options because their inclusion would have been antidilutive. All options were included in the diluted shares outstanding calculation for the three month period ended September 30, 2003. 11 NOTE 14:.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 and nine month periods ended September 30, 2004, $146,750 and $440,250, respectively, 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 and nine month periods ended September 30, 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 and nine month periods ended September 30, 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 Nine Months Ended September 30, September 30, (In thousands, except per share data) 2004 2003 2004 2003 ------------- ------------- ----------- --------------- Net income As reported $8,417 $5,442 $24,636 $17,889 Add: Stock-based employee compensation expense included in reported net income, net of related tax effects 90 -- 267 -- Less: Total stock-based employee compensation expense determined under fair value method for all awards net of tax (592) (566) (1,880) (1,736) ------------- ------------- ----------- --------------- Pro forma $7,915 $4,876 $23,025 $16,153 Net income per common share - basic As reported $0.54 $0.38 $1.61 $1.28 Pro forma $0.51 $0.34 $1.51 $1.15 Net income per common share - diluted As reported $0.53 $0.37 $1.55 $1.22 Pro forma $0.50 $0.33 $1.44 $1.10
12 NOTE 15: DERIVATIVE INSTRUMENT The Company makes use of interest rate swap agreements to manage its exposure to fluctuations in interest rates. SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities" requires the recognition of all derivatives in the balance sheet as either assets or liabilities measured at fair value. The statement also requires a company to recognize changes in the derivative's fair value currently in earnings unless it meets specific hedge accounting criteria. If the derivative is designated as a cash flow hedge, the effective portions of changes in fair value of the derivative are recorded in other comprehensive earnings and are recognized in the income statement when the hedged item affects earnings. The Company has formally documented the relationship between the hedging instrument and hedged item, as well as its risk-management objective and strategy for undertaking the hedge transaction. In addition, the Company formally assesses (both at the hedge's inception and on an ongoing basis) whether the derivative that is used in the hedging transaction has been effective in offsetting changes in the cash flows of the hedged item and whether such derivative may be expected to remain effective in future periods. If it is determined that a derivative is not (or has ceased to be) effective as a hedge the Company will discontinue the related hedge accounting prospectively. Such a determination would be made (1) when the derivative is no longer effective in offsetting changes in the cash flows of the hedged item; (2) the derivative expires or is sold, terminated, or exercised; or (3) management determines that designating the derivative as a hedging instrument is no longer appropriate. Ineffective portions of changes in the fair value of cash flow hedges are recognized in earnings. During the second quarter of 2004, the Company entered into an interest rate swap agreement (the "Swap") to manage its interest rate exposure related to a portion of the Company's $110 million credit facility entered into on December 30, 2003. The Swap, a three year fully amortizable agreement with a notional amount of $50.0 million, expires on June 27, 2007. The amount outstanding under the Swap as of September 30, 2004 was $45.8 million. Under the Swap, the Company is paying a fixed rate of 3.16% and receiving interest at floating rates based on the three month LIBOR rate at each quarterly re-pricing date until the expiration of the Swap. The Swap is designated as a cash flow hedge and, at September 30, 2004, is determined to be effective. At September 30, 2004, the fair value of the derivative was approximately $70,000 and has been included in other current liabilities. The net unrealized loss of approximately $110,000 and $40,000, respectively, has been included in other comprehensive income for the three and nine months ended September 30, 2004. The fair value of the swap is the estimated amount the Company would pay or receive to terminate the agreement at the reporting date. NOTE 16: 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, a 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 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. Two lawsuits were subsequently initiated disputing the determination of the Review Committee and seeking monetary damages and interest. The lawsuits were entitled 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.); 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.). 13 The federal district court hearing the cases resolved them in favor or the Company on May 21, 2003. The plaintiff's subsequent appeal was denied and the time within which the plaintiffs could have requested further review in the United States Supreme Court expired on June 10, 2004. On August 31, 2004 the Company concluded the above mentioned actions by a final payout pursuant to the Merger Agreement between the Company and AME. The aggregate amount of the payout was $5.6 million, which is the sum of $5.2 million in principal plus $0.4 million in interest from June 30, 2000, to the payout date of August 31, 2004. The final payout was fully reserved and had no impact on the Company's financial results from operations for the three or nine month periods ended September 30, 2004. 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 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 withdrew several of its counterclaims, but continues to assert affirmative defenses contending 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 restored the litigation to active status. A portion of any amounts received by the Company will be payable to former owners of Novamedix under the original purchase agreement. This matter is currently in the pre-trial motions phase. In management's opinion, based upon information available to date, 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. 14 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis addresses our liquidity, financial condition, and the results of our operations for the three and nine months ended September 30, 2004 compared to our results of operations for the three and nine months ended September 30, 2003. These discussions should be read in conjunction with our historical consolidated financial statements and related notes thereto and the other financial information included in this Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2003. 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, Brazil and Puerto Rico. In several of these and other markets, we also distribute our products through independent distributors. Our condensed consolidated financial statements include the financial results of the Company and our wholly owned and majority-owned subsidiaries and entities over which we have control. All intercompany accounts and transactions are eliminated in consolidation. The equity method of accounting is used when 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 seasonal 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. We also have in place an interest rate swap derivative instrument that hedges our exposure to a rise in interest rates. 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. Presently, 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 independent international distributor operations. International Orthofix consists of operations, existing prior to the acquisition of Breg, which are located 15 in the rest of the world as well as independent export distribution operations. Group Activities are comprised of the Parent's operating expenses and identifiable assets. 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, Reconstruction, and Trauma, which together accounted for 93% and 92% of our total net sales in the three and nine months ended September 30, 2004, as compared to 91% of our total net sales in each of the same periods in the prior year. Sales of non-orthopedic products, including the airway management products, woman's care and other products, accounted for 7% and 8% of our total net sales in the three and nine months ended September 30, 2004, as compared to 9% of our total net sales in each of the same periods in the prior year. The following tables display the net sales by geographic destination, net sales by business segment, net of intercompany eliminations, and net sales by each of our Market Sectors for the three and nine months ended September 30, 2004 and 2003. We provide net sales by geographic destination and by Market Sector for informational purposes only. We maintain our books and records by business segment. Geographic Destination:
Three Months Ended September 30, (In thousands) 2004 2003 ------------------------------- --------------------------------- Percent of Percent of Total Net Total Net Net Sales Sales Net Sales Sales ---------- ---------- ---------- ---------- Americas $53,416 75% $35,680 70% International 18,072 25% 15,573 30% ---------- ---------- ---------- ---------- Total $71,488 100 % $51,253 100% ========== ========== ========== ========== Nine Months Ended September 30, (In thousands) 2004 2003 ------------------------------- --------------------------------- Percent of Percent of Total Net Total Net Net Sales Sales Net Sales Sales ---------- ---------- ---------- ---------- Americas (1) $156,234 73% $101,404 67% International (1) 56,785 27% 49,595 33% ---------- ---------- ---------- ---------- Total $213,019 100 % $150,999 100% ========== ========== ========== ==========
- -------------------------------------------------------------------------------- Note 1: The nine months ended September 30, 2004 contain a first and second quarter reclass of $211 and $302, respectively from International to Americas 16 Business Segment:
Three Months Ended September 30, (In thousands) 2004 2003 ------------------------------- --------------------------------- Percent of Percent of Total Net Total Net Net Sales Sales Net Sales Sales ---------- ---------- ---------- ---------- Americas Orthofix $32,075 45% $29,765 58% Americas Breg 17,383 24% -- -- % International Orthofix 22,030 31% 21,488 42% ---------- ---------- ---------- ---------- Total $71,488 100% $51,253 100% ========== ========== ========== ========== Nine Months Ended September 30, (In thousands) 2004 2003 ------------------------------- --------------------------------- Percent of Percent of Total Net Total Net Net Sales Sales Net Sales Sales ---------- ---------- ---------- ---------- Americas Orthofix $93,002 44% $86,127 57% Americas Breg 50,654 24% -- -- % International Orthofix 69,363 32% 64,872 43% ---------- ---------- ---------- ---------- Total $213,019 100% $150,999 100% ========== ========== ========== ==========
Market Sector:
Three Months Ended September 30, (In thousands) 2004 2003 ------------------------------- --------------------------------- Percent of Percent of Total Net Total Net Net Sales Sales Net Sales Sales ---------- ---------- ---------- ---------- Orthopedic Spine $20,397 29% $20,236 39% Reconstruction 30,332 42% 13,054 26% Trauma 15,669 22% 13,291 26% ---------- ---------- ---------- ---------- Total Orthopedic 66,398 93% 46,581 91% Non-Orthopedic 5,090 7% 4,672 9% ---------- ---------- ---------- ---------- Total $71,488 100% $51,253 100% ========== ========== ========== ========== 17 Nine Months Ended September 30, (In thousands) 2004 2003 ------------------------------- --------------------------------- Percent of Percent of Total Net Total Net Net Sales Sales Net Sales Sales ---------- ---------- ---------- ---------- Orthopedic Spine $60,255 28% $58,909 39% Reconstruction (2) 89,586 42% 37,779 25% Trauma (2) 47,107 22% 40,142 27% ---------- ---------- ---------- ---------- Total Orthopedic 196,948 92% 136,830 91% Non-Orthopedic 16,071 8% 14,169 9% ---------- ---------- ---------- ---------- Total $213,019 100% $150,999 100% ========== ========== ========== ==========
- -------------------------------------------------------------------------------- Note 2: The nine months ended September 30, 2004 contain a first quarter reclass of $407 from Trauma to Reconstruction. The following table presents certain items from our statements of operations as a percentage of net sales for the periods indicated:
Three Months Ended Nine Months Ended September 30, September 30, ---------------------------- --------------------------- 2004 2003 2004 2003 ---- ---- ---- ---- (%) (%) (%) (%) Net sales........................... 100 100 100 100 Cost of sales....................... 27 24 28 25 Gross profit........................ 73 76 72 75 Operating expenses Sales and marketing .............. 35 40 36 38 General and administrative........ 11 10 10 10 Research and development.......... 4 3 4 4 Amortization of intangible assets. 2 1 2 1 Litigation and settlement costs.. 1 5 1 3 Total operating income.............. 20 17 19 19 Net income.......................... 12 11 12 12
Nine Months Ended September 30, 2004 Compared to Nine Months Ended September 30, 2003 Sales - Net sales increased 41% to $213.0 million for the first nine months of 2004, which included $50.6 million of net sales attributable to Americas Breg, compared to $151.0 million for the first nine months of 2003. The impact of foreign currency increased sales by $5.1 million during the first nine months of 2004 as compared to the first nine months of 2003. Net sales in Americas Orthofix, primarily within the United States, increased to $93.0 million in the first nine months of 2004 compared to $86.1 million in the first nine months of 2003, an increase of 8%. Americas Orthofix represented 44% of total net sales during the first nine months of 2004 and 57% of total net sales for the same period of 2003. The increase in sales was primarily the result of an increase in sales of stimulators for long bone applications and external fixators used in the reconstruction and trauma markets, along with minimal growth in spine market products as a result of reimbursement issues associated with EZ Brace and Orthotrac and reduced growth of spinal stimulators. 18 Net sales in Americas Breg for the first nine months of 2004 were $50.7 million, which represented 24% of total net sales during the first nine months of 2004. Breg was acquired on December 30, 2003; therefore there are no sales for Americas Breg for the comparable period of the prior year. However, on a pro forma year-over-year basis, Americas Breg sales grew 12% in the first nine months of 2004 compared to the first nine months of 2003. Net sales in International Orthofix increased 7% to $69.4 million in the first nine months of 2004 compared to $64.9 million in the first nine months of 2003. The primary factors that led to this increase were increased sales of external fixation products, strong start-up sales of the PC.C.P hip fracture fixation system and growth of non-orthopedic airway management products; these were partially offset by a decrease in sales of the A-V Impulse system, primarily the Impad component. The decrease in A-V Impulse system sales is due to a combination of lower contract pricing, a more competitive environment and inventory balancing in the second quarter by our primary customer in the United States. The impact of foreign currency increased International Orthofix sales for the first nine months of 2004 by $5.2 million as compared to the same period of the prior year. By Market Sector, sales of spine products increased 2% to $60.3 million in the first nine months of 2004 compared to $58.9 million in the first nine months of 2003. Sales of stimulation products for spine applications, the main component of our Spine Market Sector, increased 4%. This Market Sector was negatively impacted by reimbursement issues relating to our Orthotrac and EZ Brace products. A change in the reimbursement for the EZ Brace product has had a negative impact on the period-over-period sales for this product. Reimbursement issues, emerging new technologies and increased competitive activity for spinal stimulators could negatively impact growth, while the pending approval of a stimulator for cervical applications could positively impact growth in this Market Sector in future periods. Sales of our reconstruction products increased 137% to $89.6 million in the first nine months of 2004 compared to $37.8 million in the first nine months of 2003. This increase is primarily attributable to the sales of Breg products, classified as reconstruction products, which totaled $50.7 million in the first nine months of 2004. Sales of our external fixation products used in reconstruction applications increased 32%, which also contributed to the period-over-period growth in this Market Sector. Growth in this Market Sector was negatively impacted in the first nine months of 2004 compared to 2003 by a decrease of 13% in the A-V Impulse systems sales as discussed above. Sales of our trauma products increased 17% to $47.1 million in the first nine months of 2004 compared to $40.1 million in the first nine months of 2003. This Market Sector benefited from a 12% growth in sales of external fixation products used for trauma applications, a 21% growth in sales of stimulation products used for long bone applications, and strong start-up sales of the PC.C.P hip fracture fixation system. Sales of our non-orthopedic products grew 13% to $16.1 million in the first nine months of 2004 compared to $14.2 million in the first nine months of 2003. This Market Sector continues to be driven by the airway management products, including a new single-use version which we distribute in the United Kingdom, Ireland and Italy. Gross Profit - Our gross profit increased 37% to $154.2 million in the first nine months of 2004, compared to $112.9 million in the first nine months of 2003. The increase was primarily due to an increase of 41% in net sales, including the addition of Breg sales. Gross profit as a percent of net sales in the first nine months of 2004 was 72.4% compared to 74.8% in the first nine months of 2003, reflecting the impact of the inclusion of Breg with lower gross profit margins relative to pre-Breg gross profit margins, purchase accounting and foreign currency. Although currency contributed $5.1 million to sales growth, the year-over-year appreciation of the Euro and the Great Britain Pound against the U.S. Dollar has been detrimental to our gross profit and gross profit margin in those situations where we produce products whose costs are denominated in Euros or Pounds and are sold 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 expenses increased $19.0 million to $76.5 million in the first nine months of 2004 from $57.4 million in the first nine months of 2003, an increase of 33% on a net sales increase of 41% over the same period. The incremental increase is primarily the result of the addition of Breg marketing and sales costs, for which there are no comparable costs in the first nine months of the prior year, and the impact of foreign currency. Sales and marketing expense as a percent of net sales 19 decreased to 35.9% in the first nine months of 2004 from 38.0% in the same period of 2003. The decrease as a percent of net sales is primarily associated with our new Breg segment, which carries a lower sales and marketing expense as a percent of net sales than the Company has experienced in prior years. General and Administrative Expense - General and administrative expense increased $7.3 million in the first nine months of 2004 to $22.4 million compared to $15.1 million in the first nine months of 2003. This increase is primarily attributable to the addition of general and administrative expenses of Breg for which there are no comparable costs in the same period of the prior year, purchase accounting adjustments from the acquisition of Breg for the depreciation of step-up in the value of fixed assets acquired, and the acquisition of a Puerto Rico distributor, for which there are also no comparable costs in the same period of the prior year. We have also incurred incremental costs in the first nine months of 2004 associated with our efforts to comply with Section 404 of the Sarbanes-Oxley Act of 2002. Research and Development Expense - Research and development expense increased $2.8 million in the first nine months of 2004 to $8.7 million compared to $6.0 million in the first nine months of 2003 and remained constant as a percent of net sales at 4%. Approximately $2.3 million of this increase is attributable to expenses related to Breg , for which there were no comparable expenses for the same period of 2003. Amortization of Intangible Assets - Amortization of intangible assets was $4.8 million in the first nine months of 2004 compared to $0.7 million for the same period of 2003. The increase in amortization expense of approximately $3.8 million was due to the amortization recorded for the distribution network acquired in the Breg acquisition. Litigation and Settlement Costs - Based on an assessment of the merits of the Kinetics Concepts Inc. (KCI) case (further described in Note 16 "Contingencies" of Item 1, "Condensed Financial Statements"), we incurred $1.3 million in litigation costs in the first nine months of 2004, compared to $3.0 million in the same period of 2003. Further, in the first nine months of 2003, we incurred $1.7 million in settlement costs to conclude the investigation by the Office of Inspector General into the appropriateness of claims made to federal health care programs for the off-label use of our FDA approved pulsed electronic magnetic field device, and for billing and coding for its off-label use. Interest Income (Expense), net - Interest income (expense), net was an expense of $4.6 million in the first nine months of 2004 compared to income of $0.1 million in the first nine months of 2003. We incurred interest expense on borrowings under our senior secured term loan of approximately $4.5 million which included the amortization of debt costs. Additional interest expense of $0.3 million was incurred on borrowings under a line of credit in Italy, partially offset by interest income on cash deposits of $0.2 million. Other Income, net - Other income, net was income of $0.3 million in the first nine months of 2004 and 2003. In the first nine months of 2004, other income was generated by the sale of a facility that resulted in a gain of approximately $0.6 million. The sale of this facility was part of our consolidation plan in the United Kingdom. We also experienced foreign exchange losses of $0.3 million during the first nine months of 2004. For the same period of the prior year, other income was generated by a sale of marketable securities that resulted in a gain of $0.4 million that was partially offset by foreign exchange losses of $0.1 million. Foreign exchange losses for both periods were a result of foreign currency movements on the carrying value of current assets and current liabilities held by foreign subsidiaries that were denominated in foreign currencies. Loss in Joint Venture, net - Loss in joint venture, net was a loss of $0.1 million in the first nine months of 2004. During the first nine months of 2004, we sold part of our ownership in the OrthoRx joint venture to our partner Ferrer Freedman & Company; this sale resulted in a gain of approximately $0.8 million. This gain was offset by our portion of the joint venture's operating losses for the first nine months of 2004 of approximately $0.9 million, which resulted in a net loss associated with OrthoRx of $0.1 million for the first nine months of 2004 compared to a net loss of $1.2 million for the same period of the prior year. Income Tax Expense - In the first nine months of 2004 and 2003, the effective tax rates were 32.0% and 36.6%, respectively. The effective tax rate in the first nine months of 2004 was reduced by 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 20 jurisdiction); and (iii) inherent tax benefits resulting from the financing structure of our senior secured term loan obtained in conjunction with the Breg acquisition. Net Income - Net income for the first nine months of 2004 was $24.6 million, or $1.61 per basic share and $1.55 per diluted share, compared to $17.9 million, or $1.28 per basic share and $1.22 per diluted share, for the first nine months of 2003, an increase in net income of 37%. The weighted average number of basic common shares outstanding was 15,296,717 and 14,001,981 during the first nine months of 2004 and 2003, respectively. The weighted average number of diluted common shares outstanding was 15,939,801 and 14,720,139 during the first nine months of 2004 and 2003, respectively. Three Months Ended September 30, 2004 Compared to Three Months Ended September 30, 2003 Sales - Net sales increased 39% to $71.5 million for the third quarter of 2004 compared to $51.3 million for the third quarter of 2003. The impact of foreign currency increased sales by $1.3 million during the third quarter of 2004 as compared to the same period of the prior year. Net sales in Americas Orthofix, primarily in the United States, increased to $32.1 million in the third quarter of 2004 compared to $29.8 million in the third quarter of 2003, an increase of 8%. Americas Orthofix represented 45% of total net sales during the third quarter of 2004 and 58% of total net sales for the same period of 2003. The increase in sales was primarily the result of an increase in sales of stimulators used for long bone applications and external fixators used in the reconstruction and trauma markets. Net sales in spine market products included a 2% growth in stimulators used in spinal applications in the third quarter of 2004 as compared to the same period of the prior year and decreases in our EZ Brace and Orthotrac products as a result of reimbursement issues. Net sales in Americas Breg for the third quarter of 2004 were $17.4 million, which represented 24% of total net sales for the third quarter of 2004. Breg was acquired on December 30, 2003; therefore there are no sales for Americas Breg for the comparable period of 2003. However, on a pro forma year-over-year basis, Americas Breg sales grew 13% in the third quarter of 2004 compared to the same period in 2003. Net sales in International Orthofix increased 2% to $22.0 million in the third quarter of 2004 compared to $21.5 million in 2003. International Orthofix experienced growth in its external fixation products PC.C.P hip fracture fixation system and non-orthopedic airway management products, but experienced a decrease of 20% in sales of its A-V Impulse system, primarily the Impad component. The impact of foreign currency increased International Orthofix sales by $1.4 million during the third quarter of 2004 as compared to the same period of the prior year. By Market Sector, sales of spine products increased 1% to $20.4 million in the third quarter of 2004 compared to $20.2 million in the third quarter of 2003. Sales of stimulation products for spine applications, the main component of our Spine Market Sector, increased 2%. This Market Sector was negatively impacted by reimbursement issues relating to our Orthotrac and EZ Brace products. Reimbursement issues, emerging new technologies and increased competitive activity for spinal stimulators could negatively impact growth, while the pending approval of a stimulator for cervical applications could positively impact the growth in this Market Sector in future periods. Sales of our reconstruction products increased 132% to $30.3 million in the third quarter of 2004 compared to $13.1 million in the third quarter of 2003. This increase is primarily attributable to the sales of Breg products, classified as reconstruction products, which totaled $17.4 million in the third quarter of 2004. Sales of our external fixation products used in reconstruction applications increased 27%, which also contributed to the period-over-period growth of this Market Sector. Growth in this Market Sector was negatively impacted in the third quarter of 2004 compared to 2003 by a decrease of 20% in A-V Impulse system sales as discussed above. Sales of our trauma products increased 18% to $15.7 million in the third quarter of 2004, compared to $13.3 million in the third quarter of 2003. This Market Sector was positively impacted from a 15% growth in sales of external fixation products, an 18% growth in sales of stimulation products used for long bone applications and strong start-up sales of the PC.C.P hip fracture fixation system. 21 Sales of our non-orthopedic products grew 9% to $5.1 million in the third quarter of 2004 compared to $4.7 million in the third quarter of 2003. The increase was primarily due to the growth in sales of airway management products, including a new single-use version, which we distribute in the United Kingdom, Ireland and Italy. Gross Profit - Our gross profit increased 34% to $51.9 million in the third quarter of 2004, from $38.8 million in the third quarter of 2003. The increase was primarily due to the increase of 39% in net sales including the addition of Breg sales. Gross profit as a percent of net sales in the third quarter 2004 was 72.6% compared to 75.6% in 2003, reflecting the inclusion of Breg with lower gross profit margins and product mix, primarily lower spinal stimulation and A-V Impulse Impad sales, as a percent of net sales in the third quarter of 2004 compared to the same period of 2003. Although the impact of foreign currency contributed $1.3 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 whose costs are denominated in Euros or Pounds and sold 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 $4.4 million to $24.7 million in the third quarter of 2004 compared to $20.3 million in the third quarter of 2003, an increase of 21% on a net sales increase of 39% over the same period. The incremental increase is primarily the result of the addition of Breg marketing and sales costs, for which there are no comparable costs in the third quarter of the prior year, and foreign currency. Sales and marketing expense as a percent of net sales decreased to 34.5% in the third quarter of 2004 from 39.6% in the same period of 2003. The decrease as a percent of net sales is primarily associated with our new Breg segment, which carries a lower sales and marketing expense as a percent of net sales than the Company has experienced in prior years. General and Administrative Expense - General and administrative expense increased $2.7 million in the third quarter of 2004 to $7.7 million compared to $5.0 million in the third quarter of 2003. This increase is primarily attributable to the addition of general and administrative expenses of Breg, for which there are no comparable costs in the same period of the prior year, purchase accounting adjustments from the acquisition of Breg for the depreciation of step-up in the value of fixed assets acquired, and the acquisition of a Puerto Rico distributor, for which there are also no comparable costs in the same period of the prior year. We have also incurred incremental costs in the third quarter of 2004 associated with our efforts to comply with Section 404 of the Sarbanes-Oxley Act of 2002. General and administrative expense as a percent of net sales was 11% for the third quarter of 2004 compared to 10% for the third quarter of 2003. Research and Development Expense - Research and development expense increased $1.0 million in the third quarter of 2004 to $2.7 million compared to $1.7 million in the third quarter of 2003 and remained constant as a percent of net sales at 4%. The incremental increase is attributable to expenses related to Breg, for which there were no comparable expenses for the same period of 2003. Amortization of Intangible Assets - Amortization of intangible assets was $1.6 million in the third quarter of 2004 compared to $0.3 million for the same period of 2003. The increase in amortization expense of approximately $1.3 million was due to the amortization recorded for the distribution network acquired in the Breg acquisition. Litigation and Settlement Costs - Based on an assessment of the merits of the Kinetics Concepts Inc. (KCI) case (further described in Note 16 "Contingencies" of Item 1, "Condensed Financial Statements"), we incurred $0.6 million in litigation costs in the third quarter of 2004, compared to $0.9 million in the same period of 2003. Further, in the third quarter of 2003, we incurred $1.7 million in settlement costs to conclude the investigation by the Office of Inspector General into the appropriateness of claims made to federal health care programs for the off-label use of our FDA approved pulsed electronic magnetic field device, and for billing and coding for its off-label use. 22 Interest Income (Expense), net - Interest income (expense), net was an expense of $1.7 million in the third quarter of 2004 compared to expense of $24,000 in the third quarter of 2003. We incurred interest expense on borrowings under our senior secured term loan of approximately $1.7 million which included the amortization of debt costs. Additional interest expense of $0.1 million was incurred on borrowings under a line of credit in Italy. Interest expense was partially offset by interest income on cash deposits of $0.1 million. Other Income, net - Other income, net was income of $0.3 million in the third quarter of 2004 compared to income of $0.1 million in the third quarter of 2003. Other income for the third quarter of 2004 was attributable to foreign exchange gains on the revaluation of current assets and current liabilities held by foreign subsidiaries. For the same period of the prior year, other income was generated by a sale of marketable securities that resulted in a gain of $0.4 million partially offset by foreign exchange losses of $0.3 million. Loss in Joint Venture - Loss in joint venture, net was a loss of $0.3 million in the third quarter of 2004 compared to a loss of $0.6 million for the same period of 2003, primarily as a result of our reduced ownership in the OrthoRx joint venture. Income Tax Expense - In the third quarters of 2004 and 2003, the effective tax rates were 34.7% and 34.8%, respectively. The higher effective tax rate in the third quarter of 2004 of 34.7% as compared to the year-to-date rate of 32% is the result of: i) higher spending on the KCI case (which occurs in a low tax jurisdiction); ii) higher non-tax deductible loss in our OrthoRx investment; and iii) higher taxable income in our U.S. subsidiaries which carry a higher statutory tax rate than our overall effective tax rate. Net Income - Net income for the third quarter of 2004 was $8.4 million, or $0.54 per basic share and $0.53 per diluted share, compared to $5.4 million, or $0.38 per basic share and $0.37 per diluted share, for the third quarter of 2003, an increase in net income of 55%. The weighted average number of basic common shares outstanding was 15,570,313 and 14,181,847 during the third quarter of 2004 and 2003, respectively. The weighted average number of diluted common shares outstanding was 15,953,268 and 14,882,747 during the third quarter of 2004 and 2003, respectively. Liquidity and Capital Resources Cash and cash equivalents were $38.5 million at September 30, 2004 compared to $33.6 million at December 31, 2003, an increase of $4.9 million. Net cash provided by operating activities was $20.0 million for the first nine months of 2004 compared to $20.9 million for the first nine months of 2003, a decrease of $0.9 million. Net cash provided by operating activities is comprised of net income, non-cash items and changes in working capital. Net income increased approximately $6.7 million to $24.6 million in the first nine months of 2004 from $17.9 million in the first nine months of 2003. Non-cash items increased $3.8 million in the first nine months of 2004 compared to the first nine months 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 $19.7 million of cash in the first nine months of 2004 compared to the use of $8.3 million in cash during the same period of 2003. The principal uses of cash for working capital in the first nine months of 2004 were for increases in accounts receivable overall from increased year-over-year sales, increases in International accounts receivable and the final payout pursuant to the Agreement and Plan of Merger among the Company and American Medical Electronics, Inc. (See Part II, Item 1, "Legal Proceedings"). The aggregate amount of the payout was $5.6 million which had previously been fully reserved. Increases in International accounts receivable stem principally from the increase in Italian receivables between periods in which we factor accounts receivable and from the timing of payments by our U.S. distributor for A-V Impulse system products. In the first 15 days of October we received a significant payment from our U.S. distributor of A-V Impulse system products returning their account to credit terms. Our Italian accounts receivable are consistent with published DSO statistics for Italian healthcare suppliers. We expect to factor Italian receivables in the fourth quarter of approximately $5.0 million. In the interim, Italian DSO will reflect the published norm. Overall performance indicators of our two primary working capital accounts, accounts receivable and inventory, reflect days sales in receivables of 104 days at September 30, 2004 compared to 23 105 days at September 30, 2003 and inventory turnover of 2.5 times at September 30, 2004 compared to 2.1 times at September 30, 2003. Net cash used in investing activities was $8.6 million during the first nine months of 2004, compared to $26.9 million during the first nine months of 2003. During the first nine months of 2004, we paid $1.1 million as part of the consideration for the purchase of a Puerto Rican distributor, invested $5.2 million in capital expenditures and $4.6 million in intangible assets, including a payment of $4.0 million to purchase the technology of the PC.C.P hip fracture fixation system. Further, in the first nine months of 2004 we paid $1.0 million for transactions fees associated with the acquisition of Breg. During the first nine months of 2004 we received $1.3 million from the sale of shares in the OrthoRx joint venture, $1.6 million from the sale of a facility in the UK, and $0.4 million from a contract settlement in Mexico. During the first nine months of 2003, we purchased the remaining 48% minority interest in our UK distribution company for $20.6 million, invested $1.5 million to take an equity interest in Innovative Spinal Technologies (IST), invested an additional $1.5 million in the OrthoRx joint venture and invested $3.6 million in capital expenditures. Net cash used in financing activities was $6.5 million in the first nine months of 2004 compared to cash provided by financing activities of $2.2 million for the same period in 2003. In the first nine months of 2004, we received proceeds of $11.2 million from the issuance of 661,599 shares of our common stock upon the exercise of stock options, warrants and shares purchased pursuant to our employee stock purchase plan. In the first nine months of 2004, we also had net borrowings of $1.4 million on a line of credit in Italy used to finance working capital. Further, we repaid approximately $18.2 million against the principal of the senior secured term loan obtained to help finance the Breg acquisition, paid $0.3 million against other outstanding debt 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 $110.0 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 $15.0 million. As of September 30, 2004 and as of November 5, 2004, we had no amounts outstanding under the revolving credit facility and $91.8 million outstanding under the term loan facility. Obligations under the senior secured bank facility have a floating interest rate of LIBOR or prime rate plus a margin, currently 2.25%, which is adjusted quarterly based on Colgate's leverage ratio. In May 2004 we entered into a three year fully amortizable interest rate swap agreement (the "Swap") with a notional amount of $50.0 million and an expiration date of June 27, 2007. The amount outstanding under the Swap as of September 30, 2004 was $45.8 million. Under the Swap we will pay a fixed rate of 3.16% 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, 2004 the interest rate on the debt related to the Swap was 5.41% (3.16% plus a margin of 2.25%). Our overall effective interest rate, including the impact of the Swap, as of September 30, 2004 on our senior secured debt was 4.82%. 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 pledges 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. As of September 30, 2004, Colgate entered into an amendment of the term loan facility. The amendment reduces the interest rate applicable to borrowings under the term loan facility by reducing the previous interest rate of LIBOR plus 2.75% to LIBOR plus 2.25%. At the same time as entering into the amendment, we made a voluntary prepayment of $10.4 million on the borrowings under the term loan facility. We anticipate the amendment and the prepayment will reduce our interest rate further upon delivering our third quarter compliance report to the lender's administrative agent evidencing our attainment of a leverage ratio threshold that reduces the interest rate to LIBOR plus 2.0%. 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, mergers and the sale 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 24 basis, and a leverage ratio applicable to Orthofix and its subsidiaries on a consolidated basis. We have assessed our compliance with the financial covenants as of September 30, 2004, on a pro forma basis, as required by the credit agreement, and note that we are in compliance with all financial covenants. At September 30, 2004, we had outstanding borrowings of $1.4 million and unused available lines of credit of approximately $9.1 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 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 The following chart sets forth changes to our contractual obligations that have occurred since December 31, 2003:
- -------------------------------------- Payments Due By Period Contractual Obligations - --------------------------------------- ------------------------------------------------------------------------------ (Dollars in thousands) Total Less Than 1 to 3 4 to 5 Over 5 1 Year Years Years Years Senior secured term loan: As of December 31, 2003 $110,000 $11,000 $22,000 $77,000 - As of September 30, 2004 $91,750 $9,600 $20,000 $62,150 -
In addition to scheduled contractual obligations of the debt as set forth above, 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 or equity issuances, excluding the exercise of stock options, by any of the Credit Parties (as defined in the credit agreement), (c) the net cash proceeds of asset dispositions over a minimum threshold or (d) unless reinvested, insurance proceeds or condemnation awards. Other than described above there were no material changes in the contractual obligations specified in our Annual Report on Form 10-K for the year ended December 31, 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. 25 Item 4. Controls and Procedures As of September 30, 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. 26 PART II OTHER INFORMATION Item 1. Legal Proceedings On December 4, 1998, a 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 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. Two lawsuits were subsequently initiated disputing the determination of the Review Committee and seeking monetary damages and interest. The lawsuits were entitled 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.); 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 federal district court hearing the cases resolved them in favor or the Company on May 21, 2003. The plaintiff's subsequent appeal was denied and the time within which the plaintiffs could have requested further review in the United States Supreme Court expired on June 10, 2004. On August 31, 2004 the Company concluded the above mentioned actions by a final payout pursuant to the Merger Agreement between the Company and AME. The aggregate amount of the payout was $5.6 million, which is the sum of $5.2 million in principal plus $0.4 million in interest from June 30, 2000, to the payout date of August 31, 2004. The final payout was fully reserved and had no impact on the Company's financial results from operations for the three or nine month periods ended September 30, 2004. Item 5. Other Information On November 5, 2004, the Company amended and restated its Long-Term Incentive Plan to include limitations with respect to minimum vesting requirements and awards to non-employee directors. A copy of the Amended and Restated Long Term Incentive Plan is attached as Exhibit 10.5 to this quarterly report on Form 10-Q. 27 Item 6. Exhibits (a) Exhibits -------- Exhibit Number Description ------ ----------- 3.1 Certificate of Incorporation of the Company (filed as an exhibit to the Company's annual report on Form 20-F dated June 29, 2001 and incorporated herein by reference). 3.2* Articles of Association of the Company as Amended. 10.1 Orthofix Inc. Employee Stock Purchase Plan (filed as an exhibit to the Company's annual report on Form 10-K for the fiscal year ended December 31, 2002 and incorporated herein by reference). 10.2 Orthofix International N.V. Staff Share Option Plan (filed as an exhibit to the Company's annual report on Form 10-K for the fiscal year ended December 31, 2002 and incorporated herein by reference). 10.3 Form of Performance Accelerated Stock Option under the Staff Share Option Plan (filed as an exhibit to the Company's annual report on Form 10-K for the fiscal year ended December 31, 2002 and incorporated herein by reference). 10.4 Form of Performance Accelerated Stock Option Inducement Agreement (filed as an exhibit to the Company's annual report on Form 10-K for the fiscal year ended December 31, 2003 and incorporated here in by reference). 10.5* Orthofix International N.V. 2004 Long Term Incentive Plan. 10.6 Employment Agreement, dated as of July 1, 2001, between Orthofix International N.V. and Charles W. Federico (filed as an exhibit to the Company's annual report on Form 10-K for the fiscal year ended December 31, 2002 and incorporated herein by reference). 10.7 Employment Agreement, dated as of March 1, 2003, between the Company and Thomas Hein (filed as an exhibit to the Company's annual report on Form 10-K for the fiscal year ended December 31, 2002 and incorporated herein by reference). 10.8 Employment Agreement, dated as of March 1, 2003, between the Company and Gary D. Henley (filed as an exhibit to the Company's annual report on Form 10-K for the fiscal year ended December 31, 2002 and incorporated herein by reference). 10.9 Employment Agreement, dated as of November 20, 2003, between Orthofix International N.V. and Bradley R. Mason (filed as an exhibit to the Company's annual report on Form 10-K for the fiscal year ended December 31, 2003 and incorporated herein by reference). 10.10 Full Recourse Promissory Note between Orthofix International N.V. and Charles W. Federico dated January 10, 2002 (filed as an exhibit to the Company's annual report on Form 10-K for the fiscal year ended December 31, 2002 and incorporated herein by reference). 10.11 Full Recourse Promissory Note between Orthofix International N.V. and Gary D. Henley dated January 10, 2002 (filed as an exhibit to the Company's annual report on Form 10-K for the fiscal year ended December 31, 2002 and incorporated herein by reference). 10.12 Share Purchase Agreement, dated as of March 20, 2003, between Orthofix International N.V. and Intavent Limited (filed as an exhibit to the Company's quarterly report of Form 10-Q for the quarter ended June 30, 2003 and incorporated herein by reference). 10.13 Acquisition Agreement dated as of November 20, 2003, among Orthofix International 28 N.V., Trevor Acquisition, Inc., Breg, Inc. and Bradley R. Mason, as shareholders' representative (filed as an exhibit to the Company's current report on Form 8-K filed January 8, 2004 and incorporated herein by reference). 10.14 Voting and Subscription Agreement dated as of November 20, 2003, among Orthofix International N.V. and the significant shareholders of Breg, Inc. identified on the signature pages thereto (filed as an exhibit to the Company's current report on Form 8-K filed January 8, 2004 and incorporated herein by reference). 10.15 Credit Agreement dated as of December 30, 2003, among Colgate Medical Limited, as borrower, and Orthofix International N.V and certain subsidiaries of the borrower, as guarantors, certain limited guarantors party thereto, the lenders parties thereto, Wachovia Bank, National Association, as administrative agent, and Wachovia Capital Markets, LLC, as sole lead arranger and book manager (filed as an exhibit to the Company's current report on Form 8-K filed January 8, 2004 and incorporated herein by reference). 10.16 The First Amendment dated as of September 30, 2004 of the Credit Agreement dated as of December 30, 2003, among Colgate Medical Limited, as borrower, and Orthofix International N.V and certain subsidiaries of the borrower, as guarantors, certain limited guarantors party thereto, the lenders parties thereto, Wachovia Bank, National Association, as administrative agent, and Wachovia Capital Markets, LLC, as sole lead arranger and book manager (filed as an exhibit to the Company's current report on Form 8-K filed October 6, 2004 and incorporated herein by reference). 14.1 Code of Ethics of the Company (filed as an exhibit to the Company's annual report on Form 10-K for the fiscal year ended December 31, 2003 and incorporated herein by reference). 21.1* Subsidiaries of the Company. 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. 29 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: November 5, 2004 By: /s/ CHARLES W. FEDERICO --------------------------------------- Name: Charles W. Federico Title: Chief Executive Officer and President Date: November 5, 2004 By: /s/ THOMAS HEIN --------------------------------------- Name: Thomas Hein Title: Chief Financial Officer 30 EX-3.2 2 ex3-2_110304.txt ARTICLES OF ASSOCIATION AS AMENDED Exhibit 3.2 "ORTHOFIX INTERNATIONAL N.V." a limited liability corporation organized under the laws of the Netherlands Antilles, with statutory seat in Curacao, Netherlands Antilles and with registered address Abraham De Veerstraat 7, Curacao, Netherlands Antilles (the "Company"), has been legally incorporated under the name: "Ortofix International Investments N.V.", by deed executed before Johannes Wilhelmus Maria Thesseling, at that time a Civil-Law Notary of Curacao, Netherlands Antilles, on the nineteenth day of October nineteen hundred and eighty-seven, such according to a draft of the aforementioned deed of incorporation, upon which the at that time required declaration of no-objection was granted by ministerial decree of the nineteenth day of October ninteen hundred eighty-seven, under number 2250/N.V. The articles of incorporation have lastly been amended by deed of amendment executed before notary G.C.A. Smeets, aforementioned, on the twenty-second day of August nineteen hundred and ninety-five, such according to a draft of the aforementioned deed of amendment, upon which the at that time required declaration of no-objection was granted by ministerial decree of the twenty-second day of August nineteen hundred and ninety-five, under number 2001/N.V. It was decided by the general meeting of shareholders of the Company held on the twenty-ninth day of June two thousand and four to amend the articles of incorporation of the Company, such under assignment of the appearer, aforementioned, to execute and sign the deed of amendment of the articles of incorporation. In performance of the aforesaid resolution the appearer declared to amend the articles of incorporation of the aforesaid limited liability company and to restate the articles of incorporation in their entirety, as follows: NAME AND DOMICILE ARTICLE 1 1.1 The name of the Company is: "ORTHOFIX INTERNATIONAL N.V.". 1.2 In transactions in foreign countries, the name "Orthofix International Inc." may be used. 1.3 The Company is domiciled in Curarao and may have branches and/or branch offices elsewhere. PURPOSE ARTICLE 2 2.1 The purpose of the Company is: (a) to act as a diversified orthopedic products company manufacturing, marketing and selling a broad line of minimally invasive surgical, as well as non-surgical, products for the spine, reconstruction and trauma market sectors, including but not limited to external and internal fixation devices used in fracture treatment, limb lengthening and bone reconstruction, noninvasive stimulation products, bracing products and pain management products and to engage in any business related thereto; (b) to manufacture, buy, sell and use any and all products made from wood, metal, plastic or other material or materials or combinations thereof and to engage in manufacturing generally; (c) to enter into and carry on any mercantile business in any country and to receive by assignment or purchase or to otherwise acquire any accounts receivable, bank accounts, securities, bills of exchange, notes, bonds, letters of credit, stocks or other instruments of value or documents of title in any country and to collect and hold the proceeds thereof; (d) to undertake, conduct, assist, promote or engage in any research and development; (e) to organize and to own, directly or indirectly, and to operate, under the laws of any state or other government, domestic or foreign, corporations and other organizations; to subscribe for any such corporation or organization; and to dissolve, liquidate, wind up, reorganize, merge or consolidate any such corporation or organization; (f) to invest its assets in securities, including shares and other certificates of participation and bonds, as well as other claims for interest bearing debts, however denominated, and in any and all forms, the borrowing of money and the issuance of evidences of indebtedness therefor, as well as the lending of money; (g) to acquire considerations paid for technical assistance; (h) to invest its assets directly or indirectly in real property and right, to acquire, own, hire, let, lease, rent, divide, drain, reclaim, develop, improve, cultivate, build on, sell or otherwise alienate, mortgage or otherwise encumber real property and to construct infrastructure work, like roads, pipes and similar works on real estate; (i) to obtain income from the disposition or grant of rights to use copyrights, patents, designs, secret processes and formulae, trademarks and other analogous property, from royalties (including rentals) for the use of industrial, commercial or scientific equipment, and from compensation or other consideration received for technical assistance or services; (j) to establish, participate in and manage limited liability and other companies or other undertakings of every kind or nature whatsoever, and to engage in industry and trade; (k) to guarantee or otherwise secure, and to transfer ownership, to mortgage, to pledge or otherwise to encumber assets as security for the obligations of the Company and for the obligations of third parties, with or without consideration; (1) to borrow moneys upon the issuance of its bonds, debentures, notes or other obligations and to give security therefor; and 2 (m) to place in trust all or any of its properties, including securities. 2.2 The Company is entitled to do all that may be useful or necessary for the attainment of the above purposes or that is connected therewith in the widest sense, including the participation in and the management of any other venture or corporation. DURATION ARTICLE 3 The Company shall have perpetual existence. CAPITAL AND SHARES ARTICLE 4 4.1 The capital of the Company is divided into Common Shares with a par value of ten United States cents (US $0.10) per share (the "Common Shares"), with a maximum of fifty million (50,000,000) Common Shares. 4.2 Common Shares shall be issued pursuant to a deed between the Company and the prospective shareholder at such times, under such conditions and for such consideration as may be determined by, or on behalf of, the Board of Directors, provided that such consideration shall not be less than par value. 4.3 The Board of Directors is competent, without instruction of the General Meeting of Shareholders, to redeem Common Shares with due observance of the provisions applicable thereto of these Articles of Association and subsequently cancel them. The redemption price per Common Share so redeemed shall be calculated in accordance with generally accepted accounting principles as being the value that would be payable on such Common Shares were the Company liquidated or dissolved. 4.4 Options to subscribe for Common Shares in the Company may be issued to directors, officers and other persons employed by the Company and/or its subsidiaries or whose services are otherwise contracted by the Company, for such consideration and on such terms as determined from time to time by, or on behalf of, the Board of Directors, provided that the exercise price of such options shall not be below the net asset value of the relevant Common Shares as calculated in accordance with generally accepted accounting principles at the time of issuance of the relevant options. 4.5 The options will be issued by the Board of Directors in registered form only, and shall be entered in a register, which shall be kept by, or on behalf of, the Board of Directors. 4.6 At the request of a holder of options, certificates may be issued for the options held by him. Option certificates shall be signed by a director, which signature may be in facsimile. ARTICLE 5 No holder of Common Shares of the Company shall have as such shareholder any preferential or preemptive right to purchase or subscribe for any Common Shares or any securities convertible into or exchangeable for shares which the Company may issue. ARTICLE 6 6.1 The Company may, with due observance of the provisions of article 114 of Book 2 Civil Code Netherlands Antilles for its own account and for valuable consideration from time to time, acquire fully paid Common Shares. The authority to make any 3 such acquisition is vested in the Board of Directors. Any Common Shares so acquired may be cancelled by the Board of Directors. 6.2 The Company shall not acquire any voting rights by reason of ownership of its Common Shares, and, in connection with any General Meeting of Shareholders, Common Shares owned by the Company shall not be counted as outstanding, or as present or represented, for the purpose of determining a quorum or for any other purpose. ARTICLE 7 7.1 The Common Shares shall be in registered form. 7.2 Share certificates for the Common Shares may be issued at the request of the shareholder. 7.3 The Common Shares shall be entered into a register (the "Register") which is kept by the Board of Directors or by a registrar designated thereto by the Board of Directors (the "Registrar"). Each entry shall mention the name of the shareholder, his residence or his elected domicile, the date of acquisition and the quantity of his Common Shares and the numbers of the share certificates, if any, representing such Common Shares and such further information as is mentioned in article 109 Book 2 Civil Code Netherlands Antilles. The Register shall not be open for inspection by third parties or shareholders with respect to Common Shares other than those registered in their name, except with respect to Common Shares that have not been paid in full and except further, with respect to the Registrar, if said Registrar has been requested, or if demand of said Registrar has been made, to disclose any piece of information in the Register and failure to disclose such information would lead to liability of the Registrar. 7.4 Every transfer and devolution of a Common Share shall be entered in the Register and every such entry shall be signed by a director or by the Registrar or by a transfer agent (a "Transfer Agent") designated thereto by the Board of Directors. 7.5 If any shareholder shall establish to the satisfaction of the Board of Directors that his share certificate has been lost or destroyed, then, at his request, a duplicate may be issued under such conditions and guarantees (which, if required by the Board of Directors, may include the provision of an indemnity bond issued by an insurance company) as the Board of Directors shall determine. By the issuance of the new share certificates on which shall be recorded that it is a duplicate, the old certificate in place of which the new one has been issued shall become null and void. The Board of Directors may authorize the exchange of new share certificates for mutilated share certificates. In such case the mutilated share certificates shall be delivered to the Company and shall be cancelled immediately. The cost of a duplicate or new certificate and any proper expenses incurred by the Company in connection with the issuance thereof may, at the option of the Board of Directors, be charged to the shareholder. 7.6 (a) The transfer of Common Shares shall be effected by a deed of transfer between the transferor and the transferee and serving of that deed upon the Company or by written acknowledgement of the transfer by the Company. If share certificates have been issued, parties may make an appropriate declaration on the certificate, which then counts as a deed of transfer and the acknowledgment by the Company can take place by an annotation on the share certificate. 4 (b) As long as the Common Shares are listed on a stock exchange, transfer of shares may also be effected in accordance with the system commonly applied by such stock exchange. 7.7 The entry in the Register provided for in paragraphs 3 and 4 of this Article shall have the effect of a written acknowledgement of the transfer by the Company in the event no share certificate(s) has (have) been issued. MANAGEMENT ARTICLE 8 8.1 The management of all the affairs, property and business of the Company shall be vested in a Board of Directors, who shall have and may exercise all powers except such as are exclusively conferred upon the shareholders by law or by these Articles of Association, as from time to time amended. 8.2 With respect to the issuance of Common Shares, the Board of Directors, or persons acting pursuant to authority granted by the Board of Directors, may enter into and conclude agreements without the necessity of any action by the General Meeting of Shareholders: (a) imposing special obligations upon the Company in connection with the subscription for Common Shares; (b) concerning the issue of Common Shares on a basis other than that on which participation in the Company is open to the public; or (c) providing for the payment for Common Shares by means other than by legal tender of the Netherlands Antilles. 8.3 Save as set out in article 8.5, the directors shall be elected at a General Meeting of Shareholders by a plurality of votes cast, in person or by proxy, by the shareholders. The number of persons constituting the whole Board of Directors shall be not less than seven nor more than fifteen, as fixed and elected by the General Meeting of Shareholders. The number of persons constituting the whole Board of Directors shall, until changed at any succeeding General Meeting of Shareholder, be the number so fixed and elected. Directors may be removed or suspended at any time by the General Meeting of Shareholders. At any General Meeting of Shareholders at which action is taken to increase the number of the whole Board of Directors or to remove a director, or at any subsequent General Meeting of Shareholders, the shareholders may fill any vacancy or vacancies created by such action. 8.4 Each director shall be elected to serve until the next annual General Meeting of Shareholders and until his successor shall be elected and qualified, or until his death, resignation, retirement or removal. 8.5 In the event that one or more of the directors resigns or is prevented from or is incapable of acting as director, the remaining directors (or the remaining director, if there should be only one) may appoint one or more persons to fill the vacancy or vacancies thereby created on the Board of Directors until the next General Meeting of Shareholders, provided that if at any time the number of directors then in office shall be reduced to less than two, the remaining directors or director shall forthwith call a General Meeting of Shareholders for the purpose of filling the vacancies in the Board of Directors, and provided further that in the event that all of the directors are prevented from or are incapable of acting as directors, the Company shall be temporarily managed by any person or persons previously appointed by 5 the Board of Directors so to act who shall forthwith call a General Meeting of Shareholders for the purpose of electing a Board of Directors. If no such General Meeting of Shareholders shall be called, and if no such person shall have been appointed, any person or persons holding in the aggregate at least twenty-five per cent (25%) of the outstanding Common Shares of the Company may call a General Meeting of Shareholders for the purpose of electing a Board of Directors. 8.6 A regular meeting of the Board of Directors shall be held at such place, at such time and on such notice as the Board of Directors shall determine from time to time, and a special meeting shall be held as and when the Chairman or Vice Chairman of the Board of Directors shall call the same. Notice of the time and place of a special meeting shall be given: (a) not less than ninety-six (96) hours before such meeting, by written notice mailed to each director, or (b) not later than the calendar day immediately preceding the date of such meeting, by personal delivery, or by telephone call or by sending an email or telefax to each director. A waiver of notice of any such meeting signed by all of the directors, whether before, at or after the time of such meeting, shall be deemed equivalent to notice of the meeting. 8.7 A majority of the whole Board of Directors shall constitute a quorum for the conduct of any business and the action of the majority of the directors present, in person or by proxy as hereinafter provided, at a meeting at which a quorum is so present, shall constitute the action of the Board of Directors. In the absence of a quorum, one director may adjourn any meeting from time to time until a quorum shall be present and no notice of the adjourned meeting need be given if the time and place are fixed at the meeting adjourned and if the period of adjournment does not exceed ten days in any one adjournment. 8.8 Meetings of the Board of Directors may be held through conference telephone calls or other communication equipment allowing all persons participating in the meeting to hear each other or through any other device permitted by then applicable law, and participation in a meeting through any such lawful device or arrangement shall constitute presence at such meeting. 8.9 When action by the Board of Directors is required or permitted to be taken, action at a meeting may be dispensed with if all the directors shall consent in writing to such action taken or being taken. Directors may by e-mail, telefax, or other writing appoint a proxy to act at any meeting of the Board of Directors, such proxy to be restricted, however, to the particular meeting specified therein. Such proxy must be another director of the Company. ARTICLE 9 9.1 The Board of Directors, by resolution adopted by a majority of the entire Board of Directors, may appoint an Executive Committee (and may discontinue the same at any time) to consist of two or more directors of the Company to hold office at the pleasure of the Board of Directors. Additional members of the Executive Committee may, but are not required to, be directors. The Executive Committee shall, subject to the provisions laid down in these Articles of Association, have and may exercise all the powers and authority delegated to it by the Board of Directors 6 regarding the management of the business and affairs of the Company. The Executive Committee shall not have the power or authority to: (a) recommend to the shareholders to amend the Articles of Association; (b) recommend to the shareholders the sale, lease or exchange of all or substantially all of the Company's property and assets; (c) recommend to the shareholders the dissolution and liquidation of the Company; (d) amend the By-laws, as defined in paragraph 6 of Article 10 of these Articles of Association (in Dutch: "reglement"), if any; (e) declare interim dividends; or (f) authorize the issuance of Common Shares; for as much as such powers are within the authority of the entire Board of Directors or the General Meeting of Shareholders. 9.2 Meetings of the Executive Committee may be called at any time by the Chairman of the Board of Directors or the Chairman of the Executive Committee or any two members of the Executive Committee. Two members of the Executive Committee shall constitute a quorum for the transaction of business, except that when the Executive Committee consist of one member, then one member shall constitute a quorum. 9.3 The Board of Directors by resolution passed by a majority of the entire Board of Directors may appoint such other Committees as may be deemed advisable and may terminate any such Committee at any time. Each Committee shall have two or more members who may, but are not required to, be directors and who shall serve at the pleasure of the Board of Directors and shall have such powers as may be provided by resolution of the Board of Directors. Two members of each of such Committee shall constitute a quorum for the transaction of business except that when such an additional Committee consists of one member, then one member shall constitute a quorum. ARTICLE 10 10.1 The Board of Directors annually shall elect or appoint the following officers: a Chairman, a President, a Secretary and a Treasurer, each to serve until his successor is elected and qualified. The Board of Directors from time to time also may elect or appoint a Chairman of the Executive Committee, one or more Vice Chairmen of the Board of Directors, one or more Vice Presidents (who may have such additional descriptive designations as the Board of Directors may determine), a Controller, one or more Assistant Treasurers, Assistant Controllers and any such other officers and agents as it determines proper, all of whom shall hold office at the pleasure of the Board of Directors. The same person may hold any two or more of the aforesaid offices but no officer shall execute, acknowledge or verify an instrument in more than one capacity if such instrument is required by law or by these Articles of Association to be executed, acknowledged or verified by two or more officers. The Chairman and the Vice Chairman of the Executive Committee shall be chosen from among the Board of Directors, but the other officers of the Company need not be members of the Board of Directors. 10.2 The Company shall be represented at law and otherwise, and shall be bound with respect to third parties by: 7 (a) those directors authorized by the Board of Directors to represent the Company, who shall have the following titles and occupy the following offices: (i) Chairman; or (ii) Vice Chairman; (b) persons, who may, but are not required to, be directors, authorized by the Board of Directors to represent the Company, who shall have the following titles and occupy the following offices: (i) President; (ii) one or more Vice Presidents; (iii) Chief Executive Officer; (iv) Chief Operating Officer; (v) Controller; (vi) Treasurer; or (vii) Secretary. The Board of Directors may also from time to time authorize other persons, who may or may not be directors, to represent the Company, who shall have such titles and occupy such additional offices as the Board of Directors may determine. 10.3 The General Meeting of Shareholders may grant specific authority to the Chairman, the President or any member of the Board of Directors to represent the Company with respect to any particular matter as specified by such General Meeting of Shareholders. 10.4 The persons holding the above-mentioned offices or any other offices which the Board of Directors may from time to time authorize as herein provided shall, respectively, have such power and authority as the Board of Directors may from time to time grant to the holders of the offices held by them. 10.5 The Board of Directors may grant general or specific authority to additional agents or to committees, giving such agents or committees such general or limited powers or duties as it may deem appropriate. 10.6 The Board of Directors may adopt and may amend and repeal such rules and regulations as it may deem appropriate for the conduct of the affairs and the management of the Company, including rules, regulations and resolutions setting forth the specific powers and duties of the holders of the above-mentioned offices and other persons authorized by the Board of Directors to represent the Company (the "By-laws"). Such rules, regulations and resolutions must be consistent with these Articles of Association. 10.7 The directors, the holders of the above-mentioned offices and other persons authorized by the Board of Directors to represent the Company shall receive such compensation as the Board of Directors may from time to time prescribe. ARTICLE 11 11.1 The Company shall have the power to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Company) by reason of the fact that he is or was a director, officer, employee or agent of the Company, or is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise or entity, against 8 expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company, and with respect to any criminal action or proceeding, had no reasonable cause to believe that his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Company. 11.2 The Company shall have the power to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Company to procure a judgment in its favor by reason of the fact that he is or was a director, officer, employee or agent of the Company, or is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise or entity, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been finally adjudged to be liable to the Company for improper conduct unless and only to the extent that the court in which such action or suit was brought or any other court having appropriate jurisdiction shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses, judgments, fines and amounts paid in settlement which the court in which the action or suit was brought or such other court having appropriate jurisdiction shall deem proper. 11.3 To the extent that a director, officer, employee or agent of the Company has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in paragraphs I and 2 of this Article, or in defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith. 11.4 Any indemnification under paragraphs 1 and 2 of this Article (unless ordered by a court) shall be made by the Company only as authorized by contract approved, or by-laws, resolution or other action adopted or taken, by the Board of Directors or by the shareholders. 11.5 Expenses incurred in defending a civil or criminal action, suit or proceeding shall be paid by the Company in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of the director, officer, employee or agent to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the Company as authorized by this Article. 11.6 The indemnification and advancement of expenses provided by or granted pursuant to the other paragraphs of this Article shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any law, by-law, agreement, vote of shareholders or disinterested 9 directors, or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of the estate of such a person. 11.7 The Company shall have power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Company, or is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the Company would have the power to indemnify him against such liability under the provisions of this Article. 11.8 For purposes of this Article, reference to the Company shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger, and which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under the provisions of this Article with respect to the resulting or surviving corporation if its separate existence had continued. GENERAL MEETING OF SHAREHOLDERS ARTICLE 12 12.1 All General Meetings of Shareholders shall be held in Curacao. 12.2 The annual General Meeting of Shareholders shall be held within nine months after the end of the preceding fiscal year on a date determined from year to year by the Board of Directors. At such annual General Meeting: a. the Board of Directors shall report on the business of the Company and the administration thereof conducted during the preceding fiscal year; b. the annual accounts including the balance sheet and the profit and loss statement with an explanatory statement setting forth the standards by which the properties of the Company have been valued (the "Annual Accounts") will be submitted by the Board of Directors for approval; c. members of the Board of Directors will be elected; d. the appointment of the accountants will be ratified as referred to in article 117 of Book 2 Civil Code of the Netherlands Antilles; and e. the Board of Directors shall introduce any related items of business deemed necessary for discussion by the Board of Directors or General Meeting of Shareholders. 12.3 Special General Meetings of Shareholders may be called at any time only upon the direction of the Chairman, the Vice Chairman, or by resolution of the Board of Directors. 12.4 Notice of General Meetings of Shareholders, whether annual General Meetings or special General Meetings, stating the time and place of the meeting, shall be given to the shareholders not less than fifteen (15) or more than sixty (60) days prior to 10 the date of the meeting in question by mailing a written notice, postage prepaid to each shareholder at the address thereof appearing in the Register. 12.5 All notices of General Meetings of Shareholders shall state the matters to be considered at the meeting. In the event a General Meeting of Shareholders is to consider an amendment to these Articles of Association, then such shall be stated in a notice and the full text of such amendments shall be filed at the offices of the Company for inspection by every shareholder until the conclusion of the General Meeting of Shareholders. ARTICLE 13 13.1 Every shareholder has the right to attend any General Meeting of Shareholders in person or by proxy, and to address the meeting. 13.2 Each holder of Common Shares shall be entitled to one vote for each Common Share held on all matters to be voted on, including the election of directors. ARTICLE 14 For the purpose of determining shareholders entitled to notice of and/or to vote at any General Meeting of Shareholders, or entitled to receive payment of any dividend, or in order to make a determination of shareholders for any other proper purpose, the Board of Directors of the Company may provide that the Register shall be closed for a stated period not to exceed, in any case, fifty (50) days. If the share transfer books shall be closed for the purpose of determining shareholders entitled to notice of or to vote at a General Meeting of Shareholders, such books shall be closed for at least ten (10) days immediately preceding such meeting. In lieu of closing the Register, the Board of Directors may fix in advance a date as the record date for any such determination of shareholders, such date in any case to be not more than fifty (50) days and, in case of a General Meeting of Shareholders, not less than ten (10) days prior to the date on which the particular action requiring such determination of shareholders is to be taken. If the share transfer books are not closed and no record date is fixed for the determination of shareholders entitled to notice of or to vote at a General Meeting of Shareholders, or shareholders entitled to receive payment of a dividend, the date on which notice of the meeting is mailed or the date on which the resolution of the Board of Directors declaring such dividend is adopted, as the case may be, shall be the record date for such determination of shareholders. When a determination of shareholders entitled to vote at any General Meeting of Shareholders has been made as herein provided, such determination shall apply to any adjournment thereof except where the determination has been made through the closing of share transfer books and the stated period of closing has expired. ARTICLE 15 15.1 Except as otherwise provided herein, no action may be taken at any General Meeting of Shareholders unless a quorum consisting of the holders of at least one half of the outstanding Common Shares are present at such meeting in person or by proxy. 15.2 If a quorum is not present in person or by proxy at any General Meeting of Shareholders a second general meeting shall be called in the same manner as such original meeting of Shareholders, to be held within two months, at which second meeting, regardless of the number of Common Shares represented (but subject to the provisions of Articles 19, 20 and 21), valid resolutions may be adopted with respect to any matter stated in the notice of the original meeting and also in the 11 notice of such second meeting or which by law is required to be brought before the shareholders despite the absence of a quorum. 15.3 Subject to the provisions of Articles 19, 20 and 21, a majority of the votes cast shall be necessary to adopt any resolution at any General Meeting of Shareholders. 15.4 The Chairman of the Board of Directors or in his absence the Vice Chairman or a person designated by the Board of Directors shall preside at General Meetings of Shareholders. 15.5 At any General Meeting of Shareholders, a shareholder may vote upon all matters before the meeting, even if the decision to be taken would grant him, in a capacity other than as a shareholder, any right against the Company or would in such other capacity relieve him of any obligation to the Company. DISTRIBUTION OF PROFITS ARTICLE 16 16.1 All profits may be reserved at the discretion of the Board of Directors. The profits so reserved shall be reflected on the Company's annual balance sheet in a Common Share Retained Earnings Account. No profits reserved by the Board of Directors pursuant to a duly adopted resolution shall be distributed to the holders of Common Shares, unless the Board of Directors has first recommended in writing to the General Meeting of Shareholders that such a distribution be made and the General Meeting of Shareholders has duly adopted a subsequent resolution confirming the recommendation of the Board of Directors. Any such written recommendation of the Board of Directors shall specify the amount of the distribution and the date on which it is to be paid. Once profits have been reserved, the Board of Directors shall be under no obligation to recommend within any specific period of time that a distribution be made to the holders of Common Shares; instead, such written recommendations may be made at such times and in such amounts as the Board of Directors determines in its sole discretion. 16.2 In the event that the profit and loss account shows a loss for any given year, which cannot be covered by the reserves or compensated in another manner, no profit shall be distributed in any subsequent year, as long as the loss has not been recovered. 16.3 The Board of Directors may at any time resolve to distribute one or more interim dividends, if justified by the anticipated profits of the Company, as an advance payment of the dividend expected to be declared by the General Meeting of Shareholders. FISCAL YEAR ARTICLE 17 The fiscal year of the Company shall be the calendar year. BALANCE SHEET AND PROFIT AND LOSS ACCOUNT ARTICLE 18 Each year within eight months (8) from the end of the fiscal year of the Company subject to the General Meeting of Shareholders possibly extending this period by up to six (6) months on grounds of special circumstances, the Board of Directors shall prepare the Annual Accounts as referred to in Article 12 hereof. The Annual Accounts drawn up shall be signed by all of the directors; should a signature be lacking then a reason therefore shall be stated. The Annual Accounts shall be submitted to the shareholders for inspection and to the General Meeting of Shareholders for approval. From the date at which the notice 12 of the annual General Meeting of Shareholders is sent until the close of the annual General Meeting of Shareholders, the Annual Accounts shall be available for inspection by the shareholders at the office of the Company, and at any additional place, if specified in the notice of such meeting. DISPOSITION OF ASSETS ARTICLE 19 Notwithstanding any provision of Article 15, any sale or other disposition of all or substantially all of the assets of the Company, whether for cash, property, stock or other securities of another company, or for any other consideration, shall be made only pursuant to a resolution duly adopted at a General Meeting of Shareholders by the holder or holders of at least a majority of the Common Shares of the Company at the time outstanding, the notice of which meeting shall have specified the terms of such proposed sale or other disposition; provided, however, the foregoing shall not apply to any reorganization or rearrangement of the Company, or of any of its subsidiaries or of any of its assets in any transaction whereby there shall be no diminution of the beneficial interest of the shareholders of the Company in such assets. DISSOLUTION ARTICLE 20 20.1 Notwithstanding any provision of Article 15, any resolution providing for the dissolution, liquidation or winding up of the Company shall be valid only if duly adopted at a General Meeting of Shareholders by the holder or holders of at least a majority of the Common Shares of the Company at the time outstanding, the notice of which meeting shall have specified the nature of any such resolution to be voted upon at such meeting. 20.2 In the event of dissolution of the Company, the liquidation shall be effected under such provisions as the General Meeting of Shareholders shall, without prejudice to the provisions of this Article, decide. 20.3 If the profit and loss account covering the fiscal year, closing as of the date of the dissolution of the Company, shows a profit balance, this balance shall be divided in conformity with the provisions of Article 16 of these Articles of Association. 20.4 The distributions of the liquidation proceeds shall be paid to the holders of Common Shares in proportion to their share holding. 20.5 During ten years after the end of the liquidation, the books and records of the Company shall remain in the custody of the liquidator or of the custodian designated thereto by the Courts in the Netherlands Antilles at the request of the liquidator. AMENDMENTS ARTICLE 21 Notwithstanding any provisions of Article 15, these Articles of Association may be amended only pursuant to a resolution duly adopted at a General Meeting of Shareholders by the holder or holders of at least an absolute majority of the Common Shares of the Company at the time outstanding, the notice of which meeting shall have set forth the exact text of the proposed amendment or amendments or shall have stated that a copy of such text has been deposited at the office of the Company in Curacao for inspection by the shareholders of the Company, and will remain available for inspection until the conclusion of said meeting. EX-10.5 3 ex10-5_110304.txt AMENDED & RESTATED 2004 LONG-TERM INCENTIVE PLAN Exhibit 10.5 ORTHOFIX INTERNATIONAL N.V. AMENDED AND RESTATED 2004 LONG-TERM INCENTIVE PLAN adopted by the Board: April 15, 2004 approved by shareholders: June 29, 2004 amended and restated: November 5, 2004 1. Purposes of the Plan The purposes of the Plan are to provide an incentive to certain officers, employees, directors and consultants of the Company and its Subsidiaries to increase their interest in the Company's success by offering them an opportunity to obtain a proprietary interest in the Company through the grant of equity-based awards. 2. Definitions and Rules of Construction (a) Definitions. For purposes of the Plan, the following capitalized words shall have the meanings set forth below: "Award" means an Option, Restricted Share Unit, Performance Share Unit, Stock Appreciation Right or Other Award granted by the Committee pursuant to the terms of the Plan. "Award Document" means an agreement, certificate or other type or form of document or documentation approved by the Committee which sets forth the terms and conditions of an Award. An Award Document may be in written, electronic or other media, may be limited to a notation on the books and records of the Company and, unless the Committee requires otherwise, need not be signed by a representative of the Company or a Participant. "Board" means the Board of Directors of the Company. "CEO" means the Chief Executive Officer of the Company. "Code" means the Internal Revenue Code of 1986, as amended. "Committee" means the Compensation Committee of the Board or such other committee appointed by the Board to administer the Plan. "Common Shares" means the Common Shares of the Company, par value $0.10 per share, or such other class of shares or other securities as may be applicable under Section 13(b) of the Plan. "Company" means Orthofix International N.V. or any successor to substantially all of its business. "Discounted Option" means a Nonqualified Stock Option or a Stock Appreciation Right with an exercise price that is below Fair Market Value per share on the date of grant (or, if the exercise price is not fixed on the date of grant, on such date as the exercise price is fixed). "Effective Date" means the date on which the Plan is approved by the shareholders of the Company. "Eligible Individual" means an individual described in Section 4(a) of the Plan. "Exchange Act" means the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder. "Fair Market Value" means, with respect to a Common Share, the fair market value thereof as of the relevant date of determination, as determined in accordance with a valuation methodology approved by the Committee. "Incentive Stock Option" means an Option that is intended to comply with the requirements of Section 422 of the Code or any successor provision thereto. "Nonqualified Stock Option" means an Option that is not intended to comply with the requirements of Section 422 of the Code or any successor provision thereto. "Option" means an Incentive Stock Option or Nonqualified Stock Option granted pursuant to Section 7 of the Plan. "Other Award" means any form of Award other than an Option, Restricted Share Unit, Performance Share Unit or Stock Appreciation Right granted pursuant to Section 11 of the Plan. "Participant" means an Eligible Individual who has been granted an Award under the Plan. "Performance Period" means the period established by the Committee and set forth in the applicable Award Document over which Performance Targets are measured. "Performance Share Unit" means a right to receive a Target Number of Common Shares (or cash, if applicable) payable at the end of a Performance Period, subject to the Participant's continued employment and the achievement of the applicable Performance Targets, granted pursuant to Section 9 of the Plan. "Performance Target" means the targets established by the Committee and set forth in the applicable Award Document. "Plan" means the Orthofix International N.V. Amended and Restated 2004 Long-Term Incentive Plan as described herein. "Prior Plan" means the Orthofix International N.V. Staff Share Option Plan. "Restricted Share Unit" means a right to receive a Common Share (or cash, if applicable) in the future, subject to time vesting and the Participant's continued employment with the Company, granted pursuant to Section 8 of the Plan. "Stock Appreciation Right" means a right to receive all or some portion of the appreciation on Common Shares granted pursuant to Section 10 of the Plan. "Subsidiary" means (i) a domestic or foreign corporation or other entity with respect to which the Company, directly or indirectly, has the power, whether through the ownership of voting securities, by contract or otherwise, to elect at least a majority of the members of such corporation's board of directors or analogous governing body or (ii) any other domestic or foreign corporation or other entity in which the Company, directly or indirectly, has an equity or similar interest and which the Committee designates as a Subsidiary for purposes of the Plan. For 2 purposes of determining eligibility for the grant of Incentive Stock Options under the Plan, the term "Subsidiary" shall be defined in the manner required by Section 424(f) of the Code. "Target Number" means the target number of Common Shares established by the Committee and set forth in the applicable Award Document. (b) Rules of Construction. The masculine pronoun shall be deemed to include the feminine pronoun and the singular form of a word shall be deemed to include the plural form, unless the context requires otherwise. Unless the text indicates otherwise, references to sections are to sections of the Plan. 3. Administration (a) Committee. The Plan shall be administered by the Committee, which shall have full power and authority, subject to the express provisions hereof, to: (i) select the Participants from the Eligible Individuals; (ii) grant Awards in accordance with the Plan; (iii) determine the number of Common Shares subject to each Award or the cash amount payable in connection with an Award; (iv) determine the terms and conditions of each Award, including, without limitation, those related to term, vesting, forfeiture, payment, settlement, exercisability, Performance Periods, Performance Targets, Target Numbers, and the effect, if any, of a Participant's termination of employment with the Company or any of its Subsidiaries or a change in control of the Company, and including the authority to amend the terms and conditions of an Award after the granting thereof to a Participant in a manner that is not, without the consent of the Participant, prejudicial to the rights of such Participant in such Award; (v) specify and approve the provisions of the Award Documents delivered to Participants in connection with their Awards; (vi) construe and interpret any Award Document delivered under the Plan; (vii) prescribe, amend and rescind rules and procedures relating to the Plan; (viii) employ such legal counsel, independent auditors and consultants as it deems desirable for the administration of the Plan and to rely upon any opinion or computation received therefrom; (ix) vary the terms of Awards to take account of tax, securities law and other regulatory requirements of foreign jurisdictions; and (x) make all other determinations and take any other action desirable or necessary to interpret, construe or implement properly the provisions of the Plan or any Award Document. (b) Plan Construction and Interpretation. The Committee shall have full power and authority, subject to the express provisions hereof, to construe and interpret the Plan. 3 (c) Determinations of Committee Final and Binding. All determinations by the Committee in carrying out and administering the Plan and in construing and interpreting the Plan shall be final, binding and conclusive for all purposes and upon all persons interested herein. (d) Delegation of Authority. The Committee may designate one or more of its members or persons other than its members to carry out its responsibilities under such conditions or limitations as it may set, except that the Committee may not delegate its authority with regard to Awards (including decisions concerning the timing, pricing and amount of Common Shares subject to an Award) granted to Eligible Individuals (i) who are officers or directors for purposes of Section 16(b) of the Exchange Act or (ii) whose compensation for such fiscal year may be subject to the limit on deductible compensation pursuant to Section 162(m) of the Code. (e) Liability of Committee. No member of the Board or Committee, the CEO, or any officer or employee of the Company to whom any duties or responsibilities are delegated hereunder shall be liable for any action or determination made in connection with the operation, administration or interpretation of the Plan and the Company shall indemnify, defend and hold harmless each such person from any liability arising from or in connection with the Plan, except where such liability results directly from such person's fraud, willful misconduct or failure to act in good faith. In the performance of its responsibilities with respect to the Plan, the Committee shall be entitled to rely upon information and advice furnished by the Company's officers, the Company's accountants, the Company's counsel and any other party the Committee deems necessary, and no member of the Committee shall be liable for any action taken or not taken in reliance upon any such advice. (f) Action by the Board. Anything in the Plan to the contrary notwithstanding, any authority or responsibility that, under the terms of the Plan, may be exercised by the Committee may alternatively be exercised by the Board. 4. Eligibility (a) Eligible Individuals. Awards may be granted to officers, employees, directors and consultants of the Company or any of its Subsidiaries. The Committee shall have the authority to select the persons to whom Awards may be granted and to determine the number and terms of Awards to be granted to each such Participant. Under this Plan, references to "employment," "employed," etc. include Participants who are consultants of the Company or its Subsidiaries. (b) Grants to Participants. The Committee shall have no obligation to grant any Eligible Individual an Award or to designate an Eligible Individual as a Participant solely by reason of such Eligible Individual having received a prior Award or having been previously designated as a Participant. The Committee may grant more than one Award to a Participant and may designate an Eligible Individual as a Participant for overlapping periods of time. 5. Common Shares Subject to the Plan (a) Plan Limit. The maximum number of shares of Common Shares that may be awarded for all purposes under the Plan shall be the aggregate of: (i) 2,000,000 shares; (ii) the number of shares previously authorized but not reserved for options under the Prior Plan as of the date the Plan is approved; and 4 (iii) any shares corresponding to an award, or portion thereof, under the Prior Plan that are forfeited or expire for any reason without having been exercised or settled after the date the Plan is approved (collectively, the "Plan Limit"). Shares issued upon exercise of Awards may be either authorized and unissued shares or shares held by the Company in its treasury. (b) Rules Applicable to Determining Shares Available for Issuance. For purposes of determining the number of Common Shares that remain available for issuance under the Plan, the number of Common Shares corresponding to Awards under the Plan that are forfeited or expire for any reason without having been exercised or settled, the number of Common Shares tendered or withheld to pay the exercise price of an Award and the number of shares withheld from any Award to satisfy a Participant's tax withholding obligations shall be added back to the Plan Limit and again be available for the grant of Awards. (c) Special Limits. Anything to the contrary in Section 5(a) above notwithstanding, but subject to Section 13(b), the following special limits shall apply to Common Shares available for Awards under the Plan: (i) the maximum number of Common Shares that, in the aggregate, may be subject to Discounted Options, Restricted Stock Units payable in Common Shares, Performance Share Units payable in Common Shares, and Other Awards payable in Common Shares shall equal 400,000 shares; provided, however, that in no event shall the number of Common Shares subject to Discounted Options and Other Awards payable in Common Shares exceed 200,000 shares; (ii) the maximum number of Common Shares that may be subject to Options granted to any Eligible Individual in any calendar year shall equal 200,000 shares, plus any shares which were available under this Section 5(c)(ii) for Awards to such Eligible Individual in any prior calendar year but which were not covered by such Awards; and (iii) the maximum number of Common Shares that may be subject to Restricted Share Units, Performance Share Units, Stock Appreciation Rights or Other Awards granted to any Eligible Individual in any calendar year shall equal 200,000 shares, plus any shares which were available under this Section 5(c)(iii) for Awards to such Eligible Individual in any prior calendar year but which were not covered by such Awards. 6. Awards in General (a) Types of Awards. Awards under the Plan may consist of Options, Restricted Share Units, Performance Share Units, Stock Appreciation Rights and Other Awards. Any Award described in Sections 7 through 11 of the Plan may be granted singly or in combination or tandem with any other Awards, as the Committee may determine. Awards under the Plan may be made in combination with, in replacement of, or as alternatives to awards or rights under any other compensation or benefit plan of the Company, including the plan of any acquired entity. (b) Terms Set Forth in Award Document. The terms and conditions of each Award shall be set forth in an Award Document in a form approved by the Committee for such Award, which shall contain terms and conditions not inconsistent with the Plan. The terms of Awards may vary among Participants and the Plan does not impose upon the Committee any requirement to make Awards subject to uniform terms. Accordingly, the terms of individual Award Documents may vary. 5 (c) Minimum Vesting Requirements. All Awards shall be subject to the following minimum vesting requirements: (i) An Award that is not intended to be "performance-based compensation" (as described below in Section 6(g)) shall vest or the restrictions applicable to such Award shall lapse, as the case may be, no sooner than a rate of thirty three and one-third percent (33 1/3%) per year on each of the first (1st), second (2nd) and third (3rd) anniversaries of the date of grant; provided, however, that the exercisability of any portion of an Award relating to a fractional share shall be deferred until such time, if any, that such portion can be exercised as a whole Common Share; provided further, that in no event shall the number of Common Shares underlying all Awards granted to a member of the Board who is not an employee of the Company or its Subsidiaries that vest or with respect to which restrictions lapse, as the case may be, during any fiscal year of the Company exceed 6,000 Common Shares. (ii) An Award that is intended to be "performance-based compensation" (as described below in Section 6(g)) shall vest or the restrictions applicable to such Award shall lapse, as the case may be, no sooner than twelve (12) months following the date of grant; provided further, that in no event shall the number of Common Shares underlying all Awards granted to a member of the Board who is not an employee of the Company or its Subsidiaries that vest or with respect to which restrictions lapse, as the case may be, during any fiscal year of the Company exceed 6,000 Common Shares. Notwithstanding any of the foregoing, the Committee may, in its sole discretion, accelerate the vesting or the lapse of restrictions of an Award in the event of a Participant's termination of employment or a Change in Control of the Company in accordance with Section 6(d). (d) Termination of Employment and Change in Control. The Committee shall specify at or after the time of grant of an Award the provisions governing the disposition of an Award in the event of a Participant's termination of employment with the Company or any of its Subsidiaries. In connection with a Participant's termination of employment, the Committee shall have the discretion to accelerate the vesting, exercisability or settlement of, eliminate the restrictions and conditions applicable to, or extend the post-termination exercise period of an outstanding Award, which provisions may be specified in the applicable Award Document or determined at a subsequent time. Similarly, the Committee shall have full authority to determine the effect, if any, of a change in control of the Company on the vesting, exercisability, settlement, payment or lapse of restrictions applicable to an Award, which effect may be specified in the applicable Award Document or determined at a subsequent time. (e) Dividends and Dividend Equivalents. The Committee may provide Participants with the right to receive dividends or payments equivalent to dividends or interest with respect to an outstanding Award, which payments can either be paid currently or deemed to have been reinvested in Common Shares, and can be made in Common Shares, cash or a combination thereof, as the Committee shall determine. (f) Rights of a Shareholder. A Participant shall have no rights as a shareholder with respect to Common Shares covered by an Award until the date the Participant or his nominee becomes the holder of record of such shares. No adjustment shall be made for dividends or other rights for which the record date is prior to such date, except as provided in Section 13(b). (g) Performance-Based Awards. The Committee may determine whether any Award under the Plan is intended to be "performance-based compensation" as that term is used in Section 162(m) of the Code. Any such Awards designated to be "performance-based compensation" shall be 6 conditioned on the achievement of one or more Performance Targets, to the extent required by Section 162(m) of the Code. The Performance Targets that may be used by the Committee for such Awards will be based on measurable and attainable financial goals for the Company, one or more of its operating divisions or Subsidiaries or any combination of the above such as net income, net revenue, cash flow, operating margin, operating revenue, pre-tax income, pre-tax operating income, operating income growth, return on assets, total shareholder return, share price, return on equity, diluted earnings per share or earnings per share growth, or a combination thereof as selected by the Committee, and quantifiable non-financial goals. Each Participant is assigned a Target Number payable if Performance Targets are achieved. If a Participant's performance exceeds such Participant's Performance Targets, Awards may be greater than the Target Number, but may not exceed 200% of such Participant's Target Number. The Committee retains the right to reduce any Award if it believes that individual performance does not warrant the Award calculated by reference to the result. In the event that all members of the Committee are not "outside directors" as that term is defined in Section 162(m) of the Code, the grant and terms of Awards intended to qualify as "performance-based compensation" will be made by a subcommittee of the Committee consisting of two or more "outside directors" for purposes of Section 162(m) of the Code. (h) Awards to Non-Employee Directors. The Committee may grant Awards to members of the Board who are not employees of the Company or its Subsidiaries; provided, however, that the number of Common Shares underlying Awards granted to each non-employee director shall not exceed 30,000 Common Shares during any consecutive sixty (60)-month period; provided further, that the vesting requirements set forth in Section 6(c) above are satisfied. 7. Terms and Conditions of Options (a) General. The Committee, in its discretion, may grant Options to eligible Participants subject to the terms and conditions herein and shall determine whether such Options shall be Incentive Stock Options or Nonqualified Stock Options. Each Option shall be evidenced by an Award Document that shall expressly identify the Option as an Incentive Stock Option or Nonqualified Stock Option, and be in such form and contain such provisions as the Committee shall from time to time deem appropriate. (b) Exercise Price. The exercise price of an Option shall be fixed by the Committee at the time of grant or shall be determined by a method specified by the Committee at the time of grant; provided, however, that the exercise price of an Option shall not be less than 100% of the Fair Market Value per share on the date of grant unless, subject to the limitations on Discounted Options set forth in Section 5(c)(i), the Committee elects to set the exercise price below Fair Market Value on the date of grant (or, if the exercise price is not fixed on the date of grant, on such date as the exercise price is fixed). Payment of the exercise price of an Option shall be made in any form approved by the Committee at the time of grant. (c) Term. An Option shall be effective for such term as shall be determined by the Committee and as set forth in the Award Document relating to such Option, and the Committee may extend the term of an Option after the time of grant; provided, however, that the term of an Option may in no event extend beyond the tenth anniversary of the date of grant of such Option. (d) Incentive Stock Options. The exercise price per share of an Incentive Stock Option may not be less than 100% of the Fair Market Value per share on the date of grant. No Incentive Stock Option may be issued pursuant to the Plan to any individual who, at the time the Incentive Stock Option is granted, owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or any of its Subsidiaries, unless (i) the exercise price determined as of the date of grant is at least 110% of the Fair Market Value on the date of grant of the Common Shares subject to 7 such Incentive Stock Option and (ii) the Incentive Stock Option is not exercisable more than five years from the date of grant thereof. No Participant shall be granted any Incentive Stock Option which would result in such Participant receiving a grant of Incentive Stock Options that would have an aggregate Fair Market Value in excess of $100,000, determined as of the time of grant, that would be exercisable for the first time by such Participant during any calendar year. The terms of any Incentive Stock Option granted under the Plan shall comply in all respects with the provisions of Section 422 of the Code, or any successor provision thereto, and any regulations promulgated thereunder. 8. Terms and Conditions of Restricted Share Units The Committee is authorized to grant Restricted Share Units to Eligible Individuals subject to the terms and conditions herein. A Restricted Share Unit shall entitle a Participant to receive, subject to the terms, conditions and restrictions set forth in the Plan and applicable Award Document, one or more Common Shares in consideration of the Participant's employment with the Company or any of its Subsidiaries. If and when the forfeiture provisions lapse, the Restricted Share Units shall become Common Shares owned by the corresponding Participant or, at the sole discretion of the Committee, cash, or a combination of cash and Common Shares, with a value equal to the Fair Market Value of the shares at the time of payment. 9. Terms and Conditions of Performance Share Units The Committee is authorized to grant Performance Share Units to Eligible Individuals subject to the terms and conditions herein. A Performance Share Unit shall entitle a Participant to receive, subject to the terms, conditions and restrictions set forth in the Plan and applicable Award Document, a Target Number of Common Shares based upon the achievement of Performance Targets over the applicable Performance Period. At the sole discretion of the Committee, Performance Share Units shall be settled through the delivery of Common Shares or cash, or a combination of cash and Common Shares, with a value equal to the Fair Market Value of the Common Shares as of the last day of the applicable Performance Period. 10. Stock Appreciation Rights (a) General. The Committee is authorized to grant Stock Appreciation Rights to Eligible Individuals subject to the terms and conditions herein. A Stock Appreciation Right shall entitle a Participant to receive, upon satisfaction of the conditions to payment specified in the applicable Award Document, an amount equal to the excess, if any, of the Fair Market Value on the exercise date of the number of Common Shares for which the Stock Appreciation Right is exercised, over the exercise price for such Stock Appreciation Right specified in the applicable Award Document. The exercise price per share of Common Shares covered by a Stock Appreciation Right shall be fixed by the Committee at the time of grant or, alternatively, shall be determined by a method specified by the Committee at the time of grant, provided, however, that the exercise price of a Stock Appreciation Right shall not be less than 100% of the Fair Market Value per share on the date of grant unless, subject to the limitations on Discounted Options set forth in Section 5(c)(i), the Committee elects to set the exercise price below Fair Market Value on the date of grant (or, if the exercise price is not fixed on the date of grant, on such date as the exercise price is fixed). At the sole discretion of the Committee, payments to a Participant upon exercise of a Stock Appreciation Right may be made in cash or Common Shares, or in a combination of cash and Common Shares, having an aggregate Fair Market Value as of the date of exercise equal to such cash amount. (b) Stock Appreciation Rights in Tandem with Options. A Stock Appreciation Right granted in tandem with an Option may be granted either at the same time as such Option or subsequent 8 thereto. If granted in tandem with an Option, a Stock Appreciation Right shall cover the same number of Common Shares as covered by the Option (or such lesser number of shares as the Committee may determine) and shall be exercisable only at such time or times and to the extent the related Option shall be exercisable, and shall have the same term and exercise price as the related Option (which, in the case of a Stock Appreciation Right granted after the grant of the related Option, may be less than the Fair Market Value per share on the date of grant of the tandem Stock Appreciation Right). Upon exercise of a Stock Appreciation Right granted in tandem with an Option, the related Option shall be canceled automatically to the extent of the number of shares covered by such exercise; conversely, if the related Option is exercised as to some or all of the shares covered by the tandem grant, the tandem Stock Appreciation Right shall be canceled automatically to the extent of the number of shares covered by the Option exercise. 11. Other Awards Subject to the terms and conditions herein, the Committee shall have the authority to specify the terms and provisions of other forms of equity-based or equity-related Awards not described above that the Committee determines to be consistent with the purpose of the Plan and the interests of the Company, which Awards may provide for cash payments based in whole or in part on the value or future value of Common Shares, for the acquisition or future acquisition of Common Shares, or any combination thereof. 12. Certain Restrictions (a) Transfers. Unless the Committee determines otherwise on or after the date of grant, no Award shall be transferable other than by will or by the laws of descent and distribution or pursuant to a domestic relations order; provided, however, that the Committee may, in its discretion and subject to such terms and conditions as it shall specify, permit the transfer of an Award for no consideration to a Participant's family members or to one or more trusts or partnerships established in whole or in part for the benefit of one or more of such family members (collectively, "Permitted Transferees"). Any Award transferred to a Permitted Transferee shall be further transferable only by will or the laws of descent and distribution or, for no consideration, to another Permitted Transferee of the Participant. The Committee may in its discretion permit transfers of Awards other than those contemplated by this Section 12(a). (b) Award Exercisable Only by Participant. During the lifetime of a Participant, an Award shall be exercisable only by the Participant or by a Permitted Transferee to whom such Award has been transferred in accordance with Section 12(a). The grant of an Award shall impose no obligation on a Participant to exercise or settle the Award. 13. Recapitalization or Reorganization (a) Authority of the Company and Stockholders. The existence of the Plan, the Award Documents and the Awards granted hereunder shall not affect or restrict in any way the right or power of the Company or the shareholders of the Company to make or authorize any adjustment, recapitalization, reorganization or other change in the Company's capital structure or business, any merger or consolidation of the Company, any issue of stock or of options, warrants or rights to purchase stock or of bonds, debentures, preferred or prior preference stocks whose rights are superior to or affect the Common Shares or the rights thereof or which are convertible into or exchangeable for Common Shares, or the dissolution or liquidation of the Company, or any sale or transfer of all or any part of its assets or business, or any other corporate act or proceeding, whether of a similar character or otherwise. 9 (b) Change in Capitalization. Notwithstanding any provision of the Plan or any Award Document, the number and kind of shares authorized for issuance under Section 5, including the maximum number of shares available under the special limits provided for in Section 5(c), may be equitably adjusted in the sole discretion of the Committee in the event of a stock split, stock dividend, recapitalization, reorganization, merger, consolidation, extraordinary dividend, split-up, spin-off, combination, exchange of shares, warrants or rights offering to purchase Common Shares at a price substantially below Fair Market Value or other similar corporate event affecting the Common Shares in order to preserve, but not increase, the benefits or potential benefits intended to be made available under the Plan. In addition, upon the occurrence of any of the foregoing events, the number of outstanding Awards and the number and kind of shares subject to any outstanding Award and the exercise price per share, if any, under any outstanding Award may be equitably adjusted (including by payment of cash to a Participant) in the sole discretion of the Committee in order to preserve the benefits or potential benefits intended to be made available to Participants granted Awards. Such adjustments shall be made by the Committee, in its sole discretion, whose determination as to what adjustments shall be made, and the extent thereof, shall be final. Unless otherwise determined by the Committee, such adjusted Awards shall be subject to the same restrictions and vesting or settlement schedule to which the underlying Award is subject. 14. Term of the Plan Unless earlier terminated pursuant to Section 16, the Plan shall terminate on the 10th anniversary of the Effective Date, except with respect to Awards then outstanding. No Awards may be granted under the Plan after the 10th anniversary of the Effective Date. 15. Effective Date The Plan shall become effective on the Effective Date; provided, however, that, if the Plan is not approved by the shareholders upon submission to them for approval, the Plan shall be void ab initio and of no further force and effect. 16. Amendment and Termination Notwithstanding anything herein to the contrary, the Board may, at any time, terminate or, from time to time, amend, modify or suspend the Plan; provided, however, that no termination, amendment, modification or suspension of the Plan shall materially and adversely alter or impair the rights of a Participant in any Award previously made under the Plan without the consent of the holder thereof and no amendment which (i) increases the Plan Limit or (ii) permits a reduction in the exercise price of Options or Stock Appreciation Rights under circumstances other than in connection with a transaction or event described in Section 13(b), shall be effective without shareholder approval. 17. Miscellaneous (a) Tax Withholding. The Company or a Subsidiary, as appropriate, may require any individual entitled to receive a payment in respect of an Award to remit to the Company, prior to such payment, an amount sufficient to satisfy any applicable tax withholding requirements. In the case of an Award payable in Common Shares, the Company or a Subsidiary, as appropriate, may permit such individual to satisfy, in whole or in part, such obligation to remit taxes by directing the Company to withhold shares that would otherwise be received by such individual or to repurchase shares that were issued to such individual to satisfy the minimum statutory withholding rates for any applicable tax withholding purposes, in accordance with all applicable laws and pursuant to such rules as the Committee may establish from time to time. The Company or a Subsidiary, as appropriate, shall also have the right 10 to deduct from all cash payments made to a Participant (whether or not such payment is made in connection with an Award) any applicable taxes required to be withheld with respect to such payments. (b) No Right to Awards or Employment. No person shall have any claim or right to receive Awards under the Plan. Neither the Plan, the grant of Awards under the Plan, nor any action taken or omitted to be taken under the Plan shall be deemed to create or confer on any Eligible Individual any right to be retained in the employ of the Company or any Subsidiary or other affiliate thereof, or to interfere with or to limit in any way the right of the Company or any Subsidiary or other affiliate thereof to terminate the employment of such Eligible Individual at any time. (c) Section 16(b) of the Exchange Act. The Plan is intended to comply in all respects with Section 16(b) of the Exchange Act. Notwithstanding anything contained in the Plan or any Award Document under the Plan to the contrary, if the consummation of any transaction under the Plan, or the taking of any action by the Committee in connection with a change in control of the Company, would result in the possible imposition of liability on a Participant pursuant to Section 16(b) of the Exchange Act, the Committee shall have the right, in its sole discretion, but shall not be obligated, to defer such transaction or the effectiveness of such action to the extent necessary to avoid such liability, but in no event for a period longer than 180 days. (d) Section 162(m) of the Code. The Plan is intended to comply in all respects with Section 162(m) of the Code. (e) Awards to Individuals Subject to Non-U.S. Jurisdictions. To the extent that Awards under the Plan are awarded to individuals who are domiciled or resident outside of the United States or to persons who are domiciled or resident in the United States but who are subject to the tax laws of a jurisdiction outside of the United States, the Committee may adjust the terms of the Awards granted hereunder to such persons (i) to comply with the laws of such jurisdiction and (ii) to permit the grant of the Award not to be a taxable event to the Participant. The authority granted under the previous sentence shall include the discretion for the Committee to adopt, on behalf of the Company, one or more sub-plans applicable to separate classes of Eligible Individuals who are subject to the laws of jurisdictions outside of the United States. (f) Securities Law Restrictions. An Award may not be exercised or settled and no Common Shares may be issued in connection with an Award unless the issuance of such shares has been registered under the Securities Act of 1933, as amended, and qualified under applicable state "blue sky" laws and any applicable foreign securities laws, or the Company has determined that an exemption from registration and from qualification under such state "blue sky" laws is available. The Committee may require each Participant purchasing or acquiring Common Shares pursuant to an Award under the Plan to represent to and agree with the Company in writing that such Eligible Individual is acquiring the Common Shares for investment purposes and not with a view to the distribution thereof. All certificates for Common Shares delivered under the Plan shall be subject to such stock-transfer orders and other restrictions as the Committee may deem advisable under the rules, regulations, and other requirements of the Securities and Exchange Commission, any exchange upon which the Common Shares are then listed, and any applicable securities law, and the Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions. (g) Award Document. In the event of any conflict or inconsistency between the Plan and any Award Document, the Plan shall govern and the Award Document shall be interpreted to minimize or eliminate any such conflict or inconsistency. 11 (h) Application of Funds. The proceeds received by the Company from the sale of Common Shares pursuant to Awards will be used for general corporate purposes. (i) Governing Law. The Plan and all agreements entered into under the Plan shall be construed in accordance with and governed by the laws of the State of New York and without giving effect to principles of conflicts of laws. 12 EX-21.1 4 ex21-1_110304.txt LIST OF SUBSIDIARIES OF THE COMPANY EXHIBIT 21.1 The following is a list of our significant subsidiaries: Country of Company Incorporation ------- ------------- Orthofix Inc. United States Breg, Inc. United States Orthofix Holdings, Inc. United States Orthofix US LLC United States Orthofix S.r.l. Italy Novamedix Services Limited U.K. Orthosonics Limited U.K. Intavent Orthofix Limited U.K. Orthofix Limited U.K. Orthofix UK Limited U.K. Colgate Medical Limited U.K. Novamedix Distribution Limited Cyprus Inter Medical Supplies Limited Cyprus Inter Medical Supplies Limited Seychelles Orthofix AG Switzerland Orthofix GmbH Germany Orthofix International B.V. Holland Orthofix II B.V. Holland Orthofix do Brasil Brazil Orthofix S.A. France Promeca S.A. de C.V. Mexico Implantes Y Sistemas Medicos Puerto Rico EX-31.1 5 ex31-1_110304.txt EXHIBIT 31.1 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: November 5, 2004 /S/ CHARLES W. FEDERICO -------------------------------------------- Name: Charles W. Federico Title: Chief Executive Officer, President and Director EX-31.2 6 ex31-2_110304.txt EXHIBIT 31.2 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: November 5, 2004 /S/ THOMAS HEIN -------------------------------------------- Name: Thomas Hein Title: Chief Financial Officer EX-32.1 7 ex32-1_110304.txt EXHIBIT 32.1 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 September 30, 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: November 5, 2004 /S/ CHARLES W. FEDERICO ------------------------ Name: Charles W. Federico Title: Chief Executive Officer, President and Director EX-32.2 8 ex32-2_110304.txt EXHIBIT 32.2 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 September 30, 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: November 5, 2004 /S/ THOMAS HEIN ------------------ Name: Thomas Hein Title: Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----