ORTHOFIX MEDICAL INC.
10-Ks and 10-Qs
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UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
DC 20549
FORM
10-K
T
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
fiscal year ended December 31, 2009
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)
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Netherlands Antilles
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N/A
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(State
or other jurisdiction of incorporation or organization)
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(I.R.S.
Employer Identification No.)
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7 Abraham de Veerstraat
Curaçao
Netherlands Antilles
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N/A
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(Address
of principal executive offices)
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(Zip
Code)
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599-9-4658525
(Registrant’s
telephone number, including area code)
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Securities
registered pursuant to Section 12(b) of the Act:
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Common
Stock, $0.10 par value
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Nasdaq
Global Select Market
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(Title
of Class)
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(Name
of Exchange on Which Registered)
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Securities registered pursuant
to Section 12(g) of the Act
:
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None
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Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Yes
¨
No
T
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes
¨
No
T
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
T
No
¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Yes
¨
No
¨
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “accelerated filer,” “large
accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act. (Check one):
Large
Accelerated filer
¨
Accelerated
filer
T
Non-accelerated
filer
¨
(Do not
check if a smaller reporting company) Smaller reporting company
¨
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes
¨
No
T
The
aggregate market value of registrant’s common stock held by non-affiliates,
based upon the closing price of the common stock on the last business day of the
registrant’s most recently completed second fiscal quarter, June 30, 2009, as
reported by the Nasdaq Global Select Market, was approximately $418
million.
As of
February 26, 2010, 17,509,333 shares of common stock were issued and
outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Certain
sections of the registrant's Definitive Proxy Statement to be filed with the
Commission in connection with the 2010 Annual General Meeting of Shareholders
are incorporated by reference in Part III of this Form 10-K.
Table
of Contents
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Forward-Looking
Statements
This Form
10-K contains forward-looking statements within the meaning of Section 21E of
the Securities Exchange Act of 1934, as amended, relating to our business and
financial outlook, which are based on our current beliefs, assumptions,
expectations, estimates, forecasts and projections. In some cases,
you can identify forward-looking statements by terminology such as “may,”
“will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,”
“projects,” “intends,” “predicts,” “potential” or “continue” or other comparable
terminology. These forward-looking statements are not guarantees of
our future performance and involve risks, uncertainties, estimates and
assumptions that are difficult to predict. Therefore, our actual
outcomes and results may differ materially from those expressed in these
forward-looking statements. You should not place undue reliance on
any of these forward-looking statements. Further, any forward-looking
statement speaks only as of the date on which it is made, and we undertake no
obligation to update any such statement, or the risk factors described in Item
1A under the heading “Risk Factors,” to reflect new information, the occurrence
of future events or circumstances or otherwise.
Factors
that could cause or contribute to such differences may include, but are not
limited to, risks relating to the expected sales of its products, including
recently launched products, unanticipated expenditures, changing relationships
with customers, suppliers, strategic partners and lenders, changes to and the
interpretation of governmental regulations, ongoing governmental investigations
of our businesses which could result in civil or criminal liability or findings
of violations of law (as further described in the “Legal Proceedings” sections
of this Form 10-K and in our quarterly reports on Form 10-Q), risks
relating to the protection of intellectual property, changes to the
reimbursement policies of third parties, the impact of competitive products,
changes to the competitive environment, the acceptance of new products in the
market, conditions of the orthopedic industry, credit markets and the economy,
corporate development and market development activities, including acquisitions
or divestitures, unexpected costs or operating unit performance related to
recent acquisitions, and other risks described in Item 1A under the heading
“Risk Factors” in this Form 10-K.
PAR
T I
In
this Form 10-K, the terms “we”, “us”, “our”, “Orthofix” and “our Company” refer
to the combined operations of all of Orthofix International N.V. and its
respective consolidated subsidiaries and affiliates, unless the context requires
otherwise.
Company
Overview
We are a
diversified orthopedic products company offering a broad line of surgical and
non-surgical products for the Spine, Orthopedics, Sports Medicine and Vascular
market sectors. Our products are designed to address the lifelong bone-and-joint
health needs of patients of all ages, helping them achieve a more active and
mobile lifestyle. We design, develop, manufacture, market and
distribute medical equipment used principally by musculoskeletal medical
specialists for orthopedic applications. Our main products are invasive and
minimally invasive spinal implant products and related human cellular and tissue
based products (“HCT/P products”), non-invasive bone growth stimulation products
used to enhance the success rate of spinal fusions and to treat non-union
fractures, external and internal fixation devices used in fracture treatment,
limb lengthening and bone reconstruction, and bracing products used for ligament
injury prevention, pain management and protection of surgical repair to promote
faster healing. Our products also include a device for enhancing
venous circulation, cold therapy, bone cement and devices for removal of bone
cement used to fix artificial implants and airway management products used in
anesthesia applications.
We have
administrative and training facilities in the United States (“U.S.”) and Italy
and manufacturing facilities in the U.S., the United Kingdom, Italy and
Mexico. We directly distribute our products in the U.S., the United
Kingdom, Italy, Germany, Switzerland, Austria, France, Belgium, Mexico, Brazil
and Puerto Rico. In several other markets we distribute our products
through independent distributors.
Orthofix
International N.V. is a limited liability company, organized under the laws of
the Netherlands Antilles on October 19, 1987. Our principal executive
offices are located at 7 Abraham de Veerstraat, Curaçao, Netherlands Antilles,
telephone number: 599-9-465-8525. Our filings with the Securities and
Exchange Commission (the “SEC”), including our Annual Report on Form 10-K,
Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Annual Proxy
Statement on Schedule 14A and amendments to those reports, are available free of
charge on our website as soon as reasonably practicable after they are filed
with, or furnished to, the SEC. Information on our website or
connected to our website is not incorporated by reference into this Form
10-K. Our Internet website is located at
http://www.orthofix.com
. Our
SEC filings are also available on the SEC Internet website as part of the IDEA
database (
http://www.sec.gov
).
2009
and 2010 Business Highlights
Product
Portfolio Highlights
We
continued to expand our products with several new product developments and
acquisitions. We also continued to expand our global distribution of
our broad product portfolios.
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·
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We
began the full market release of Trinity® Evolution™ in collaboration with
Musculoskeletal Transplant Foundation (“MTF”). Trinity®
Evolution™ is a stem cell-based bone growth matrix designed to advance the
surgical use of allografts by providing characteristics similar to an
allograft in spinal and orthopedic
procedures.
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·
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In
2009, we began the full market release of three of our new products:
PILLAR™ SA spine interbody device, Firebird™ Spinal Fixation System, and
Ascent® LE Posterior Occipital Cervico-Thoracic (“POCT”)
system.
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·
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We
expanded our line of Breg FUSION® function knee braces with the
introduction of the new Lateral OA Brace. The new Lateral OA
Brace is designed to improve comfort and reduce arthritis
pain.
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·
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We
launched Vectra™ Premium Air Walker Boots which are an innovative new line
of foot and ankle products designed to improve comfort and promote
healing.
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·
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We
entered into a license and product development agreement with Stout
Medical Group, LP for the development and marketing of a new expandable
vertebral body replacement and corpectomy device. The initial
term of the agreement is 15 years and gives us exclusive global licensing
rights to the new device which is expected to be introduced during the
second half of 2010.
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·
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In
October 2009, we transitioned out of our agreement to distribute the
Laryngeal Mask product in Italy. We will transition out of our
agreement to distribute the Laryngeal Mask product in the United Kingdom
in June 2010.
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Global
Distribution Highlights
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·
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We
committed $2.0 million in funding to MTF in conjunction with its plans to
significantly increase the production capacity of Trinity® Evolution™, the
new adult stem cell-based bone growth allograft the Company developed with
MTF and launched on July 1, 2009.
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·
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Our
subsidiary, Orthofix Inc., was awarded accreditation status by the
Accreditation Commission for Health Care, Inc. for the provision of
Durable Medical Equipment, Prosthetics, Orthotics, and Supplies
services. This demonstrates our commitment to maintain a higher
level of competency and strive for excellence in our products, services,
and customer satisfaction.
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·
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We
entered into a five year agreement with the MBA Group to expand
distribution of the Company’s spinal implant and biologic devices in the
United Kingdom.
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·
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We
entered into an expanded three-year supply agreement with Novation where
under the terms of the agreement, Breg will continue to supply Novation
with its comprehensive lines of functional, osteoarthritic (“OA”),
patellofemoral and postoperative knee braces. Additionally,
under this new agreement Breg will also provide the Voluntary Hospitals of
America (“VHA”), University Health System Consortium (“UHC”), and Provista
member hospitals with its bracing products for the upper and lower
extremities, including shoulder bracing, walkers, and ankle
bracing.
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Business
Highlights
Key Management Changes –
We
made several key management changes recently. In 2009, we appointed
Kevin L. Unger to the position of President of Orthofix Spinal Implants and Eric
Brown to the position of President, Spine Stimulation. In addition,
Bradley R. Mason transitioned from the position of Group President, North
America and into the role as Strategic Advisor to the Company during
2009.. Also in 2009, we announced Michael Mainelli has joined our
Board of Directors.
Consolidation and Reorganization of
Businesses –
During 2009, we continued our plan to consolidate and
reorganize our spine business which will combine the current operations of our
Spine Implants business in New Jersey and Massachusetts into our Texas facility
which currently houses our spine stimulation and U.S. orthopedics
operations. This initiative is part of our effort to increase our
operating efficiency and reduce expenses.
Business
Strategy
Our
business strategy is to offer innovative products to the Spine, Orthopedics,
Sports Medicine, and Vascular market sectors that reduce both patient suffering
and healthcare costs. Our strategy for growth and profitability
includes the following initiatives by market sector:
Spine:
Provide a portfolio of
non-invasive and implantable products that allow physicians to successfully
treat a variety of spinal conditions. Our main tactics and objectives
are:
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·
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Increase
revenues with market penetration of spine
stimulation;
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·
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Continue
new product introductions of spinal implants and biologics with a focus on
building a strong foundation of competitive core fusion products to ensure
that our product portfolio addresses all aspects of spinal fusion therapy
including degenerative disc disease, deformity and tumor/trauma market
segments;
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·
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Improve
gross margins on spinal implants and biologic products with the efficient
use of research and development resources, increasing operating leverage
with original equipment manufacturer (“OEM”) vendors, and the continued
ramp up and introduction of Trinity® Evolution™;
and
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·
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Decrease
sales and marketing and general and administrative expenses with the
previously mentioned consolidation and reorganization
plan.
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Orthopedics:
Provide a
portfolio of non-invasive and implantable products that allow physicians to
successfully treat a variety of Orthopedic conditions ranging from trauma to
deformity correction. Our main tactics and objectives
are:
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·
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Continue
new product introductions;
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·
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Maintain
focus on sales of internal fixation, external fixation along with
deformity correction devices by expanding sales into the U.S., Latin
America, Europe, and Asia;
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·
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Optimize
product offerings within each of our geographic
markets;
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·
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Focus
on sales of long-bone stimulation and biologics in
U.S.;
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·
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Continue
the ramp up and introduction of Trinity® Evolution™;
and
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·
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Decrease
sales and marketing and general and administrative expenses with the
previously mentioned consolidation and reorganization
plan.
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Sports Medicine:
Provide a
portfolio of non-invasive products that allow physicians and clinicians to treat
a variety of Orthopedic conditions in order to minimize pain and restore
mobility to their patients. Our main tactics and objectives
are:
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·
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Leverage
strong distribution channels with well-established distributor
partners;
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·
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Leverage
strong market share in high growth areas such as Osteoarthritis knee
bracing and cold therapy; and
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·
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Launch
innovative products and services into new and existing market
segments.
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Other
Financial and Business Initiatives:
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·
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Reduce
operating losses and improve cash flow at Spinal Implants and
Biologics;
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·
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Continue
deleveraging the balance sheet;
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·
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Continue
to expand applications for our products by utilizing synergies among our
core technologies;
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·
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Continue
to enhance physician relationships through extensive product education and
training programs; and
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·
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Continue
to strengthen contracting and reimbursement
relationships.
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Business
Segments and Market Sectors
Our
business is divided into four reportable segments: Domestic, Spinal
Implants and Biologics, Breg, and International. Domestic consists of
operations of our subsidiary Orthofix Inc., which uses both direct and
distributor sales representatives to sell Spine and Orthopedic products to
hospitals, doctors, and other healthcare providers in the U.S.
market. Spinal Implants and Biologics consists of Blackstone Medical,
Inc., and its two subsidiaries, Blackstone GmbH and Goldstone
GmbH. Spinal Implants and Biologics specializes in the design,
development and marketing of spinal implant and related HCT/P products. Spinal
Implants and Biologics distributes its products through a network of domestic
and international distributors, sales representatives and
affiliates. Breg designs, manufactures, and distributes orthopedic
products for post-operative reconstruction and rehabilitative patient use and
sells those Sports Medicine products through a network of domestic and
international distributors, sales representatives, and
affiliates. International consists of locations in Europe, Mexico,
Brazil, and Puerto Rico, as well as independent distributors outside the
U.S. International uses both direct and distributor sales
representatives to sell Spine, Orthopedics, Sports Medicine, Vascular, and Other
products to hospitals, doctors and other healthcare providers.
Business
Segment:
|
Year ended December 31,
(US$ in thousands)
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2009
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2008
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2007
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||||||||||||||||||||||
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Net Sales
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Percent of Total Net
Sales
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Net Sales
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Percent of Total Net
Sales
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Net Sales
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Percent of Total Net
Sales
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|||||||||||||||||||
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Domestic
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$ | 210,703 | 38 | % | $ | 188,807 | 36 | % | $ | 166,727 | 34 | % | ||||||||||||
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Spinal
Implants and Biologics
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118,680 | 22 | % | 108,966 | 21 | % | 115,914 | 24 | % | |||||||||||||||
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Breg
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92,188 | 17 | % | 89,478 | 17 | % | 83,397 | 17 | % | |||||||||||||||
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International
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124,064 | 23 | % | 132,424 | 26 | % | 124,285 | 25 | % | |||||||||||||||
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Total
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$ | 545,635 | 100 | % | $ | 519,675 | 100 | % | $ | 490,323 | 100 | % | ||||||||||||
Additional
financial information regarding our business segments can be found in Part II,
Item 7 under the heading “Management’s Discussion and Analysis of Financial
Condition and Results of Operations”, as well as in Part II, Item 8 under the
heading “Financial Statements and Supplementary Data”.
We
maintain our books and records by business segment; however, we use market
sectors to describe our business. The Company’s segment information
is prepared on the same basis that the Company’s management reviews the
financial information for operational decision making
purposes. Market sectors, which categorize our revenues by types of
products, describe the nature of our business more clearly than our business
segments.
Our
market sectors are Spine, Orthopedics, Sports Medicine, Vascular, and
Other.
Market
Sector:
|
Year ended December 31,
(US$ in thousands)
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2009
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2008
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2007
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||||||||||||||||||||||
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Net Sales
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Percent of Total Net
Sales
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Net Sales
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Percent of Total Net
Sales
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Net Sales
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Percent of Total Net
Sales
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|||||||||||||||||||
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Spine
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$ | 279,425 | 51 | % | $ | 252,239 | 49 | % | $ | 243,165 | 49 | % | ||||||||||||
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Orthopedics
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131,310 | 24 | % | 129,106 | 25 | % | 111,932 | 23 | % | |||||||||||||||
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Sports
Medicine
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96,366 | 18 | % | 94,528 | 18 | % | 87,540 | 18 | % | |||||||||||||||
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Vascular
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18,710 | 3 | % | 17,890 | 3 | % | 19,866 | 4 | % | |||||||||||||||
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Other
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19,824 | 4 | % | 25,912 | 5 | % | 27,820 | 6 | % | |||||||||||||||
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Total
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$ | 545,635 | 100 | % | $ | 519,675 | 100 | % | $ | 490,323 | 100 | % | ||||||||||||
Additional
financial information regarding our business segments can be found in Part II,
Item 7 under the heading “Management’s Discussion and Analysis of Financial
Condition and Results of Operations”, as well as in Part II, Item 8 under the
heading “Financial Statements and Supplementary Data”.
Products
Our
revenues are generally derived from the sales of products in four market
sectors, Spine (51%), Orthopedics (24%), Sports Medicine (18%) and Vascular
(3%), which together accounted for 96% of our total net sales in
2009. Sales of Other products, including airway management products
for use during anesthesia, woman’s care and other products, accounted for 4% of
our total net sales in 2009.
The
following table identifies our principal products by trade name and describes
their primary applications:
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Product
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Primary Application
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Spine Products
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||
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Cervical-Stim
®
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Pulsed
electromagnetic field (“PEMF”) non-invasive cervical spine bone growth
stimulator
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Spinal-Stim
®
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PEMF
non-invasive lumbar spine bone growth stimulator
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Alloquent
®
Allografts
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Interbody
devices made of cortical bone that are designed to restore the space that
has been lost between two or more vertebrae due to a degenerated
disc
|
|
|
Trinity
®
Evolution™ Viable Cryopreserved Cellular Bone
Matrix
|
An
adult stem cell-based bone growth matrix used during surgery that is
designed to enhance the success of a spinal fusion
procedure
|
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3
Degree™ / Reliant™ Anterior Cervical Plating Systems
|
Plating
systems implanted during anterior cervical spine fusion
procedures
|
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Hallmark
®
Anterior Cervical Plate System
|
A
cervical plating system implanted during anterior cervical spine fusion
procedures
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Ascent
®
LE Posterior Occipital Cervico-Thoracic (“POCT”) System
|
A
system of pedicle screws and rods implanted during a posterior spinal
fusion procedure involving the stabilization of several degenerated or
deformed cervical vertebrae
|
|
|
NewBridge
®
Laminoplasty Fixation System
|
A
device implanted during a posterior surgical procedure designed to expand
the cervical vertebrae and relieve pressure on the spinal
canal
|
|
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Construx
®
Mini Polyetheretherketones (“PEEK”) Vertebral Body Replacement (“VBR”)
System
|
Smaller,
unibody versions of the Construx PEEK VBR System, implanted during the
replacement of degenerated or deformed spinal vertebrae
|
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Construx
®
PEEK VBR System
|
A
modular device implanted during the replacement of degenerated or deformed
spinal vertebrae to provide additional anterior support
|
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|
NGage
®
Surgical Mesh System
|
A
modular metallic interbody implant placed between two vertebrae designed
to restore disc space and increase stability that has been lost due to
degeneration or deformity
|
|
Product
|
Primary Application
|
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Spine Products (continued)
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||
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PILLAR™
PL & TL PEEK VBR System
|
Interbody
devices for Posterior Lumbar Interbody Fusion (“PLIF”) and Trans-laminar
Lumbar Interbody Fusion (“TLIF”) procedures
|
|
|
PILLAR™
AL PEEK Partial VBR System
|
An
intervertebral body fusion device for Anterior Lumbar Interbody Fusion
(“ALIF”) procedures
|
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PILLAR™
SA PEEK Spacer System
|
An
intervertebral body fusion device that incorporates screw fixation to
optimize implant stability
|
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Firebird™
Spinal Fixation System
|
A
system of rods, crossbars and modular pedicle screws designed to be
implanted during a minimally invasive posterior lumbar spine fusion
procedure
|
|
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ProView™
Minimal Access Portal (“MAP”) System
|
An
instrument system for minimally invasive posterior lumbar spinal fusion,
including tubular and expandable retractors, a percutaneous screw delivery
system and the ONYX™ System for Disc removal and interbody space
preparation
|
|
|
Unity
®
Lumbosacral Fixation System
|
A
plating system implanted during anterior lumbar spine fusion
procedures
|
|
|
Orthopedic Products
|
||
|
Fixation
|
External
fixation and internal fixation, including the Sheffield Ring,
limb-lengthening systems, DAF, ProCallus
®
,
XCaliber™, Contours VPS
®
, VeroNail
®
,
Centronail
®
,
PREFIX
TM
,
and Gotfried PC.C.P
®
|
|
|
Physio-Stim
®
|
PEMF
long bone non-invasive bone growth stimulator
|
|
|
Trinity
®
Evolution™ Viable Cryopreserved Cellular Bone
Matrix
|
An
adult stem cell-based bone growth matrix used during surgery that is
designed to facilitate bone fusion
|
|
|
Eight-Plate
Guided Growth System
®
|
Treatment
for the bowed legs or knock knees of children
|
|
|
ISKD
®
|
Internal
limb-lengthening device
|
|
|
Limb
Reconstruction System (“LRS”) and LRS ADVanced
|
External
fixation for lengthenings and corrections of deformity
|
|
|
TrueLok
TM
|
Ring
fixation system for limb lengthening and deformity
correction
|
|
|
Origen™
DBM with Bioactive Glass
|
A
bone void filler
|
|
|
Cemex
®
|
Bone
cement
|
|
|
OSCAR
|
Ultrasonic
bone cement removal
|
|
Product
|
Primary Application
|
|
|
Sports Medicine Products
|
||
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Breg
®
Bracing
|
Bracing
products which are designed to provide support and protection of limbs,
extremities and back during healing and rehabilitation
|
|
|
Polar
Care
®
and KODIAK
®
|
Cold
therapy products that are designed to reduce swelling, pain and accelerate
the rehabilitation process
|
|
|
Vision
TM
Inventory Management System
|
Web
based inventory system customized to enable efficient management of
orthopedic devices in physician office and remote inventory
locations
|
|
|
Vascular Products
|
||
|
A-V
Impulse System
®
|
Enhancement
of venous circulation, used principally after orthopedic procedures to
prevent deep vein thrombosis
|
|
|
Non-Orthopedic Products
|
||
|
Laryngeal
Mask
|
Maintenance
of airway during anesthesia
|
|
|
Other
|
Several
non-orthopedic products for which various Orthofix subsidiaries hold
distribution rights
|
We have
proprietary rights in all of the above products with the exception of the
Laryngeal Mask, Cemex
®
,
ISKD
®
, and
Eight-Plate Guided Growth System
®
. We
have the exclusive distribution rights for the Cemex
®
in
Italy, for the Laryngeal Mask in the United Kingdom and Ireland through June
2010, and for the ISKD
®
,
Eight-Plate
Guided Growth System
®
and
Contour VPS
®
worldwide.
We have
numerous trademarked products and services including but not limited to the
following: Orthofix
®
,
Blackstone
®
,
Breg
®
,
Spinal-Stim
®
,
Cervical-Stim
®
,
Origen™ DBM, 3 Degree™, Reliant™, Hallmark
®
,
Firebird™, Ascent
®
,
Construx
®
,
Unity
®
,
Ngage
®
,
Newbridge
®
,
Trinity
®
Evolution™, PILLAR™, Alloquent
®
,
ProView™, ProCallus
®
,
XCaliber™, VeroNail
®
,
Centronail
®
,
PREFIX
TM
,
Gotfried PC.C.P
®
,
Physio-Stim
®
,
TrueLok™, Polar Care
®
, and
Fusion
®
.
Spine
Spine
product sales represented 51% of our total net sales in 2009.
Neck and
back pain is a common health problem for many people throughout the world and
often requires surgical or non-surgical intervention for
improvement. Neck and back problems are usually of a degenerative
nature and are generally more prevalent among the older
population. As the population ages, we believe physicians will see an
increasing number of patients with degenerative spine issues who wish to have a
better quality of life than that experienced by previous
generations. Treatment options for spine disorders are expected to
expand to fill the existing gap between conservative pain management and
invasive surgical options, such as spine fusion.
We
believe that our Spine products are positioned to address the needs of spine
patients at many points along the continuum of care, offering non-operative,
pre-operative, operative and post-operative products. Our
products currently address the cervical fusion segment as well as the lumbar
fusion segment which is the largest sub-segment of the spine
market.
Our
Spinal Implants and Biologics division offers a wide array of spinal implants
used during surgical procedures intended to treat a variety of spine
conditions. Many of these surgeries are fusion procedures in the
cervical, thoracic and lumbar spine that utilize Spinal Implants and Biologics’
metal plates, rods and screws, interbody spacers, or vertebral body replacement
devices, and HCT/P, as well as interbody spacers to promote bone
growth.
Additionally,
bone growth stimulators used in spinal applications are designed to enhance the
success rate of certain spinal fusions by stimulating the body’s own natural
healing mechanism post-surgically. These non-invasive portable
devices are intended to be used as part of a home treatment program prescribed
by a physician.
Spinal
Implants
The human
spine is made up of 33 interlocking vertebrae that protect the spinal cord and
provide structural support for the body. The top seven vertebrae make
up the cervical spine, which bears the weight of the skull and provides the
highest range of motion. The next 17 mobile vertebrae encompass the
thoracic and lumbar, or thoracolumbar, sections of the spine. The
thoracic spine (12 vertebrae) helps to protect the organs of the chest cavity by
attaching to the rib cage, and is the least mobile segment of the
spine. The lumbar spine (five vertebrae) carries the greatest portion
of the body’s weight, allowing a degree of flexion, extension and rotation thus
handling the majority of the bending movement. Additionally
five fused vertebrae make up the sacrum (part of the pelvis) and four vertebrae
make up the final part of the spine, the coccyx.
Spinal
bending and rotation are accomplished through the vertebral discs located
between each vertebra. Each disc is made up of a tough fibrous
exterior, called the annulus, which surrounds a soft core called the nucleus.
Excess pressure, deformities, injury or disease can lead to a variety of
conditions affecting the vertebrae and discs that may ultimately require medical
intervention in order to relieve patient pain and restore stability in the
spine.
Spinal
fusion is the permanent union of two or more vertebrae to immobilize and
stabilize the affected portion of the spine. Most fusion surgeries
involve the placement of a bone graft between the affected vertebrae, which is
typically held in place by metal implants that also provide stability to the
spine until the desired growth of new bone can complete the fusion
process. These implants typically consist of some combination of
rods, screws and plates that are designed to remain in the patient even after
the fusion has occurred.
Most
fusion procedures performed on the lumbar area of the spine are done from the
posterior, or back, while the majority of cervical fusions are performed from
the anterior, or front, of the body. However, the growing use of mesh
cages and other interbody devices has resulted in the increasing use of an
anterior, or frontal, approach to many lumbar surgeries. Interbody
devices are small hollow implants typically made of either bone, metal or a
thermoplastic compound called Polyetheretherketones (“PEEK”) that are placed
between the affected vertebrae to restore the space lost by the degenerated
disc. The hollow spaces within these interbody devices are typically
packed with some form of bone grafting material designed to accelerate the
formation of new bone around the graft which ultimately results in the desired
fusion.
Spinal
Implants and Biologics provides a wide array of implants designed for use
primarily in cervical, thoracic and lumbar fusion surgeries. These
implants are made of metal, bone, or PEEK. Additionally, Spinal
Implants and Biologics’ product portfolio includes a unique adult stem
cell-based HCT/P bone grafting product called Trinity
®
Evolution™.
The
majority of implants offered by Spinal Implants and Biologics are made of
titanium metal. This includes the 3 Degree™, Reliant™ and
Hallmark
®
cervical plates. Additionally, the Spinal Fixation System (“SFS”),
the Firebird™ Spinal Fixation Systems, the Ascent
®
and
Ascent® LE POCT Systems are sets of rods, crossbars and screws which are
implanted during posterior fusion procedures. The Firebird™ Modular
and pre-assembled Spinal Fixation System are designed to be used in either open
or minimally-invasive posterior lumbar fusion procedures with Spinal Implants
and Biologics’ ProView™ MAP System. The Company also offers specialty
plates that are used in less common procedures, and as such, are not
manufactured by many device makers. These specialty plates include
the Newbridge
®
Laminoplasty Fixation System that is designed to expand the cervical vertebrae
and relieve pressure on the spinal canal, as well as the Unity
®
plate
which is used in anterior lumbar fusion procedures.
Spinal
Implants and Biologics also offers a variety of devices made of PEEK, including
vertebral body replacements and interbody devices. Vertebral body
replacements are designed to replace a patient’s degenerated or deformed
vertebrae. On the other hand, interbody devices, or cages, are
designed to replace a damaged disc, restoring the space that had been lost
between two vertebrae. Spinal Implants and Biologics also offers the
NGage
®
Surgical Mesh System made of titanium metal.
Spinal
Implants and Biologics is also a distributor of HCT/P products including
interbody implants made of human cadaveric bone that have been harvested from
donors and carved by a machine into a desired shape, and a unique adult stem
cell-based product that is intended to enhance a patient’s ability to quickly
grow new bone around a spinal fusion site. This product contains live
adult stem cells harvested from human cadaveric donors and is intended to be a
safer, simpler alternative to an autograft, which is commonly performed in
connection with a spine fusion procedure. An autograft involves a
separate surgical incision in the patient’s hip area in order to harvest the
patient’s own bone to be used during the fusion procedure. An
autograft procedure adds risk of an additional surgical procedure and related
patient discomfort in conjunction with the spinal fusion.
Spinal
Bone Growth Stimulators
Separate
from Spinal Implants and Biologics, we offer two spinal bone growth stimulation
devices, Spinal-Stim® and Cervical-Stim®, through our subsidiary, Orthofix
Inc. Our stimulation products use a PEMF technology designed to
enhance the growth of bone tissue following surgery and are placed externally
over the site to be healed. Clinical data shows our PEMF signal
enhances the body’s enzyme activities, induces mineralization, encourages new
vascular penetration and results in a process that generates new bone growth at
the spinal fusion site. We have sponsored independent research at the
Cleveland Clinic, where scientists conducted animal and cellular studies to
identify the influence of our PEMF signals on bone cells.
From this effort, a
total of six studies have been published in peer-reviewed
journals. Among other insights, the studies illustrate the positive
effects of PEMF on bone loss, callus formation, and
collagen. Furthermore, we believe that characterization and
visualization of the Orthofix PEMF waveform is paving the way for signal
optimization for a variety of applications and indications.
Spinal-Stim
®
is a
non-invasive spinal fusion stimulator system commercially available in the
U.S. Spinal-Stim
®
is
designed for the treatment of the lower thoracic and lumbar regions of the
spine. Some spine fusion patients are at greater risk of not
generating new bone around the damaged vertebrae after the
operation. These patients typically have one or more risk factors
such as smoking, obesity or diabetes, or their surgery involves the revision of
a previously attempted fusion procedure that failed, or the fusion of multiple
levels of vertebrae in one procedure. For these patients,
post-surgical bone growth stimulation using Spinal-Stim
®
has
been shown to increase the probability of fusion, without the need for
additional surgery. According to internal sales data, more than
288,000 patients have been treated using Spinal-Stim
®
since
the product was introduced in 1990. The device uses proprietary
technology and a wavelength to generate a PEMF signal. Our approval
from the U.S. Food and Drug Administration (“FDA”) to market Spinal-Stim
®
commercially is for both failed fusions and healing enhancement as an adjunct to
initial spinal fusion surgery.
On
December 28, 2004, we received approval from the FDA to market our
Cervical-Stim
®
bone
growth stimulator for use as an adjunct to cervical (upper) spine fusion in
certain high-risk patients.
Orthopedics
Orthopedics
products represented 24% of our total net sales in 2009.
The
medical devices offered in the Company’s Orthopedics market sector are used for
two primary purposes: bone fracture management and bone deformity
correction.
Bone
Fracture Management
Fixation
Our
fracture management products consist of fixation devices designed to stabilize a
broken bone until it can heal, as well as non-invasive post-surgical bone growth
stimulation devices designed to accelerate the body’s formation of new
bone. Our fixation products come in two main types: external devices
and internal devices. With these devices, we can treat both simple
and complex fracture patterns.
External
Fixation
External
fixation devices are used to stabilize fractures from outside the skin with
minimal invasion into the body. These fixation devices use screws
that are inserted into the bone on either side of the fracture site, to which
the fixator body is attached externally. The bone segments are
aligned by manipulating the external device using patented ball joints and, when
aligned, are locked in place for stabilization. We believe that
external fixation allows micromovement at the fracture site, which is beneficial
to the formation of new bone. External fixation may also be used as
temporary devices in complex trauma cases to stabilize the fracture prior to
treating it definitively. We believe that external fixation is among
the most minimally invasive and least complex surgical options for fracture
management.
External
devices are designed in large part to be used for the same types of conditions
that can be treated by internal fixation devices. The difference is
that the external fixator is a monolateral or circular device attached with
screws to the fractured bone from outside the skin of the arm or
leg. The choice of whether to use an internal or external fixation
device is driven in large part by physician preference although it may also be
related to the fracture complexity and anatomical location. Some
patients, however, favor internal fixation devices for aesthetic
reasons.
An
example of one of our external fixation devices is the XCaliber™ fixator, which
is made from a lightweight radiolucent material and provided in three
configurations to cover long bone fractures, fractures near joints and ankle
fractures. The radiolucency of XCaliber™ fixators allows X-rays to
pass through the device and provides the surgeon with improved X-ray
visualization of the fracture and alignment. In addition, these three
configurations cover a broad range of fractures with very little
inventory. The XCaliber™ fixators are provided pre-assembled in
sterile kits to decrease time in the operating room.
Our
proprietary XCaliber™ bone screws are designed to be compatible with our
external fixators and reduce inventory for our customers. Some of
these screws are covered with hydroxyapatite, a mineral component of bone that
reduces superficial inflammation of soft tissue and improves bone
grip. Other screws in this proprietary line do not include the
hydroxyapatite coating, but offer different advantages such as patented thread
designs for better adherence in hard or poor quality bone. We believe
we have a full line of bone screws to meet the demands of the
market.
Another
example of an external fixation device designed for the rapid stabilization of
complex fractures is PREFIX
TM
. PREFIX
TM
offers free pin placement in any desired plane to rapidly create a solid
stabilization using radiolucent components. We believe the
PREFIX
TM
fixator provides the necessary temporary stabilization to allow the surgeon to
reduce the fracture, move the patient or attend to more urgent
matters.
Internal
Fixation
Internal
fixation devices come in various sizes, depending on the bone which requires
treatment, and consist of either long rods, commonly referred to as nails, or
plates that are attached with the use of screws. A nail is inserted
into the medullary canal of a fractured long bone of the human arms and legs,
i.e., humerus, femur and tibia. Alternatively, a plate is attached by
screws to an area such as a broken wrist or hip. Examples of our
internal fixation devices include:
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The
Centronail
®
is a new nailing system designed to stabilize fractures in the femur,
tibia, supracondylar and humerus. We believe that it has all
the attributes of the Orthofix Nailing System but has additional
advantages: it is made of titanium, has improved mechanical distal
targeting and instrumentation and a design which requires significantly
reduced inventory.
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|
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·
|
The
VeroNail
®
marks Orthofix’s entry into the intramedullary hip nailing
market. For use in hip fractures, it provides a
minimally-invasive screw and nail design intended to reduce surgical
trauma and allow patients to begin walking again shortly after the
operation. It uses a dual screw configuration that we believe
provides more stability than previous single screw
designs.
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|
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|
The
Gotfried Percutaneous Compression Plating or Gotfried PC.C.P
®
System is a method of stabilization and fixation for hip-fracture surgery
developed by Y. Gotfried, M.D. that we believe is minimally
invasive. Traditional hip-fracture surgery can require a
5-inch-long incision down the thigh, but the Gotfried PC.C.P
®
System involves two smaller incisions, each less than one inch
long. The Gotfried PC.C.P
®
System then allows a surgeon to work around most muscles and tendons
rather than cutting through them. We believe that major
benefits of this new approach to hip-fracture surgery include (1) a
significant reduction of complications due to a less traumatic operative
procedure; (2) reduced blood loss and less pain (important benefits for
the typically fragile and usually elderly patient population, who often
have other medical problems); (3) faster recovery, with patients often
being able to bear weight a few days after the operation; and (4) improved
post-operative results.
|
Bone
Growth Stimulation
Our
Physio-Stim
®
bone
growth stimulator products use PEMF technology similar to that described
previously in the discussion of our spine stimulators. The primary
difference is that the Physio-Stim
®
physical configuration is designed for use on bones found in areas other than
the spine.
A bone’s
regenerative power results in most fractures healing naturally within a few
months. In certain situations, however, fractures do not heal or heal
slowly, resulting in “non-unions.” Traditionally, orthopedists have
treated such fracture conditions surgically, often by means of a bone graft with
fracture fixation devices, such as bone plates, screws or intramedullary
rods. These are examples of “invasive” treatments. Our
patented bone growth stimulators are designed to use a low level of PEMF signals
to activate the body’s natural healing process. The stimulation
products that we currently market are external and apply bone growth stimulation
without implantation or other surgical procedures.
Our
systems offer portability, rechargeable battery operation, integrated component
design, patient monitoring capabilities and the ability to cover a large
treatment area without factory calibration for specific patient
application. According to internal sales data, more than 159,000
patients have been treated using Physio-Stim
®
for
long bone non-unions since the product was introduced.
Bone
Deformity Correction
In
addition to the treatment of bone fractures, we also design, manufacture and
distribute devices that are intended to treat congenital bone conditions, such
as limb length discrepancies, angular deformities (e.g., bowed legs in
children), or degenerative diseases, as well as conditions resulting from a
previous trauma. Examples of products offered in these areas include
the Eight-Plate Guided Growth System
®
, the
Intramedullary Skeletal Kinetic Distractor, or ISKD
®
, the
Limb Reconstruction System (“LRS”) and TrueLoK™ Ring Fixation
System.
The
ISKD
®
system is a patented, internal limb-lengthening device that uses a magnetic
sensor to monitor limb-lengthening progress on a daily
basis. ISKD
®
is an
expandable tubular device that is completely implanted inside the bone to be
lengthened. The ISKD® system is designed to lengthen the patient’s
bone gradually, and, after lengthening is completed, stabilize the lengthened
bone. ISKD
®
is an
FDA-approved intramedullary bone lengthener on the market, and we have the
exclusive worldwide distribution rights for this product.
LRS uses
callus distraction to lengthen bone in a variety of procedures. It
can be used in monofocal lengthenings and corrections of
deformity. Its multifocal procedures include bone transport,
simultaneous compression and distraction at different sites, bifocal lengthening
and correction of deformities with shortening. In 2009, recent
improvements on size, flexibility and ease of use were implemented for the
release of the LRS ADVanced.
The TrueLoK
TM
Ring Fixation System is a
surgeon-designed, lightweight external fixation system for limb lengthening and
deformity correction. Created with pre-assembled function blocks, we
believe TrueLoK
TM
is a simple, stable, versatile ring
fixation system superior to the traditional Ilizarov ring
system.
Sports
Medicine
Sports
Medicine product sales represented 18% of our total net sales in
2009.
We
believe Breg Inc., one of Orthofix’s wholly-owned subsidiaries, is a market
leader in the sale of orthopedic post-operative reconstruction and
rehabilitative products to hospitals and orthopedic offices. Breg’s
products are grouped primarily into two product categories: Breg
®
Bracing and Polar Care
®
.
Approximately 64% of
Breg’s net revenues were attributable to the sale of bracing products in 2009,
including: (1) functional braces for treatment and prevention of ligament
injuries, (2) load-shifting braces for osteoarthritic pain management, (3)
post-operative braces for protecting surgical repair and (4) foot and ankle
supports that provide an alternative to casting. Approximately 34% of
Breg’s 2009 net revenues came from the sale of cold therapy products used to
minimize the pain and swelling following knee, shoulder, elbow, ankle and back
injuries or surgery. Approximately 2% of Breg’s 2009 net revenues
came from the sale of other rehabilitative products. Breg sells its
products through a network of domestic and international independent
distributors, 15 employee sales representatives and related international
subsidiaries.
Breg
®
Bracing
We
design, manufacture and market a broad range of rigid knee bracing products,
including ligament braces, post-operative braces and osteoarthritic
braces. The rigid knee brace products are either customized braces or
standard adjustable off-the-shelf braces.
Ligament
braces are designed to provide durable support for moderate to severe knee
ligament instabilities and help stabilize the joint so that patients may
successfully complete rehabilitation and resume their daily
activities. The product line includes premium custom braces and
off-the-shelf braces designed for use in all activities. Select
premium ligament braces are also available with a patellofemoral option to
address tracking and subsequent pain of the patellofemoral joint. We
market the ligament product line under the Fusion
®
and
X2K
®
brand
names.
Post-operative
braces are designed to limit a patient’s range of motion after knee surgery and
protect the repaired ligaments and/or joints from stress and
strain. These braces are designed to promote a faster and healthier
healing process. The products within this line provide both
immobilization and/or a protected range of motion. The Breg
post-operative family of braces, featuring the patented Quick-Set hinge, offers
complete range of motion control for both flexion and extension, along with a
simple-to-use drop lock mechanism to lock the patient in full
extension. The release lock mechanism allows for easy conversion to
full range of motion. The straps, integrated through hinge bars,
offer greater support and stability. This hinge bar can be “broken
down” to accommodate later stages of rehabilitation. The Breg
T-Scope
®
is a
premium brace in the post-operative bracing market and has every feature
available offered in our post-operative knee braces, including telescoping bars,
easy application, full range of motion and a drop lock feature.
Osteoarthritic
braces are used to treat patients suffering from osteoarthritis of the
knee. Osteoarthritis (“OA”) is a form of damage to, or degeneration
of, the articular surface of a joint. This line of custom and
off-the-shelf braces is designed to shift the load going through the knee,
provide additional stability and reduce pain. In some cases, this
type of brace may serve as a cost-efficient alternative to total knee
replacement. Breg’s single upright Solus® and lateral offloader which
are based on Fusion® technology, are our newest bracing designs delivering
optimal comfort and pain relief for patients suffering from OA.
Polar Care
®
We
manufacture, market and sell a cold therapy product line, Polar Care
®
. Breg
entered the market for cold therapy products in 1991 when it introduced the
Polar Care
®
500,
a cold therapy device used to reduce swelling, minimize the need for
post-operative pain medications and generally accelerate the rehabilitation
process. Breg’s leading cold therapy offering is the KODIAK® cold
therapy system which uses Intelliflow® technology to customize treatment for
various clinical applications. Today, we believe that cold therapy is
a standard of care with physicians despite limited historical reimbursement by
insurance companies over the years.
The Polar Care
®
product uses a circulation system
designed to provide constant fluid flow rates to ensure safe and effective
treatment. The product consists of a cooler filled with ice and cold
water connected to a pad, which is applied to the affected area of the body; the
device flows cold water through the pad to provide continuous cold therapy for
the relief of pain. Breg’s cold therapy line consists of the Polar
Care
®
500, Kodiak
®
, Polar Care
®
300, Polar Cub and cold gel
packs.
Vascular
Vascular
product sales represented 3% of our total net sales in 2009.
Our
non-invasive post-surgical vascular therapy product, called the A-V Impulse
System
®
, is
primarily used on patients following orthopedic joint replacement procedures. It
is designed to reduce dangerous deep vein thrombosis, or blood clots, and
post-surgery pain and swelling by improving venous blood return and improving
arterial blood flow. For patients who cannot walk or are immobilized,
we believe that this product simulates the effect that would occur naturally
during normal walking or hand flexion with a mechanical method and without the
side effects and complications of medication.
The A-V
Impulse System
®
consists of an electronic controller attached to a special inflatable slipper or
glove, or to an inflatable bladder within a cast, which promotes the return of
blood to the veins and the inflow of blood to arteries in the patient’s arms and
legs. The device operates by intermittently impulsing veins in the
foot, calf or hand, as would occur naturally during normal walking or hand
clenching. The A-V Impulse System
®
is
distributed in the U.S. by Covidien plc. Outside the U.S., the A-V
Impulse System
®
is
sold directly by our distribution subsidiaries in the United Kingdom, Italy and
through selected distributors in the rest of the world.
Other
Products
Other
product sales represented 4% of our total net sales in 2009.
Laryngeal
Mask
The
Laryngeal Mask, a product of The Laryngeal Mask Company Limited, is an
anesthesia medical device designed to establish and maintain the patient’s
airway during an operation. We have exclusive distribution rights for
the Laryngeal Mask in the United Kingdom and Ireland through June
2010.
Other
We hold
distribution rights for several other non-orthopedic products at our
subsidiaries.
Product
Development
Our
research and development departments are responsible for new product
development. We work regularly with certain institutions referred to
below as well as with physicians and other consultants on the long-term
scientific planning and evolution of our research and development
efforts. Our primary research and development facilities are located
in Wayne, New Jersey; Verona, Italy; McKinney, Texas; Vista, California; and
Andover, United Kingdom.
We
maintain interactive relationships with spine and orthopedic centers in the
U.S., Europe, Japan and South and Central America, including research and
development centers such as the Musculoskeletal Transplant Foundation (“MTF”),
the Orthopedic Research and Education Foundation, The University of Medicine and
Dentistry of New Jersey, the National Osteoporosis Institute, the Cleveland
Clinic Foundation, Rutgers University and the University of Verona in
Italy. Several of the products that we market have been developed
through these collaborations. In addition, we regularly receive
suggestions for new products from the scientific and medical community, some of
which result in Orthofix entering into assignment or license agreements with
physicians and third-parties. We also receive a substantial number of
requests for the production of customized items, some of which have resulted in
new products. We believe that our policy of accommodating such
requests enhances our reputation in the medical community.
In 2009,
2008, and 2007 we spent $31.5 million, $30.8 million and $24.2 million,
respectively, on research and development
.
Patents,
Trade Secrets, Assignments and Licenses
We rely
on a combination of patents, trade secrets, assignment and license agreements as
well as non-disclosure agreements to protect our proprietary intellectual
property. We own numerous U.S. and foreign patents and have numerous
pending patent applications and license rights under patents held by third
parties. Our primary products are patented in major markets in which
they are sold. There can be no assurance that pending patent
applications will result in issued patents, that patents issued or assigned to
or licensed by us will not be challenged or circumvented by competitors or that
such patents will be found to be valid or sufficiently broad to protect our
technology or to provide us with any competitive advantage or
protection. Third parties might also obtain patents that would
require assignments to or licensing by us for the conduct of our
business. We rely on confidentiality agreements with key employees,
consultants and other parties to protect, in part, trade secrets and other
proprietary technology.
We obtain
assignments or licenses of varying durations for certain of our products from
third parties. We typically acquire rights under such assignments or
licenses in exchange for lump-sum payments or arrangements under which we pay to
the licensor a percentage of sales. However, while assignments or
licenses to us generally are irrevocable, there is no assurance that these
arrangements will continue to be made available to us on terms that are
acceptable to us, or at all. The terms of our license and assignment
agreements vary in length from a specified number of years to the life of
product patents or the economic life of the product. These agreements
generally provide for royalty payments and termination rights in the event of a
material breach.
Corporate
Compliance and Government Regulation
Corporate
Compliance and Ethics Program
The
Company began implementation of its enhanced compliance program, which it
branded the
Integrity
Advantage™
Program
,
in February 2008 at its
Spinal Implants and Biologics division. In June 2008, the Company
hired a Chief Compliance Officer to oversee implementation of the
Integrity Advantage™
Program
throughout the Company. It is a fundamental policy of the Company to
conduct business in accordance with the highest ethical and legal
standards.
Our
corporate compliance and ethics program is designed to promote legal compliance
and ethical business practices throughout the Company’s domestic and
international businesses.
The
Company's
Integrity
Advantage™
Program is designed to meet U.S. Sentencing Commission
Guidelines for effective organizational compliance and ethics programs and to
prevent and detect violations of applicable federal, state and local
laws. Key elements of the
Integrity Advantage™
Program
include:
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|
Organizational
oversight by senior-level personnel responsible for the compliance
function within the Company;
|
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·
|
Written
standards and procedures, including a Corporate Code of Business
Conduct;
|
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·
|
Methods
for communicating compliance concerns, including anonymous reporting
mechanisms;
|
|
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·
|
Investigation
and remediation measures to ensure prompt response to reported matters and
timely corrective action;
|
|
|
·
|
Compliance
education and training for employees and
agents;
|
|
|
·
|
Auditing
and monitoring controls to promote compliance with applicable laws and
assess program effectiveness;
|
|
|
·
|
Disciplinary
guidelines to enforce compliance and address
violations;
|
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·
|
Exclusion
Lists screening of employees, agents and distributors;
and
|
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·
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Risk
assessment to identify areas of regulatory compliance
risk.
|
Government
Regulation
Our
research, development and clinical programs, as well as our manufacturing and
marketing operations, are subject to extensive regulation in the U.S. and other
countries. Most notably, all of our products sold in the U.S. are subject to the
Federal Food, Drug, and Cosmetic Act (the “FDCA”) as implemented and enforced by
the U.S. Food and Drug Administration (the “FDA”). The regulations
that cover our products and facilities vary widely from country to
country. The amount of time required to obtain approvals or
clearances from regulatory authorities also differs from country to
country.
Unless an
exemption applies, each medical device that we wish to commercially distribute
in the U.S. will require either premarket notification (“510(k)”) clearance or
approval of a premarket approval application (“PMA”) from the
FDA. The FDA classifies medical devices into one of three
classes. Devices deemed to pose lower risks are placed in either
class I or II, which typically requires the manufacturer to submit to the FDA a
premarket notification requesting permission to commercially distribute the
device. This process is generally known as 510(k)
clearance. Some low risk devices are exempted from this
requirement. Devices deemed by the FDA to pose the greatest risks,
such as life-sustaining, life-supporting or implantable devices, or devices
deemed not substantially equivalent to a previously cleared 510(k) device, are
placed in class III, requiring approval of a PMA.
Manufacturers
of most class II medical devices are required to obtain 510(k) clearance prior
to marketing their devices. To obtain 510(k) clearance, a company
must submit a premarket notification demonstrating that the proposed device is
“substantially equivalent” in intended use and in technological and performance
characteristics to another legally marketed 510(k)-cleared “predicate
device.” By regulation, the FDA is required to clear or deny a 510(k)
premarket notification within 90 days of submission of the application. As a
practical matter, clearance may take longer. The FDA may require
further information, including clinical data, to make a determination regarding
substantial equivalence. After a device receives 510(k) clearance,
any modification that could significantly affect its safety or effectiveness, or
that would constitute a major change in its intended use, requires a new 510(k)
clearance or could require a PMA approval. With certain
exceptions, most of our products are subject to the 510(k) clearance
process. On January 27, 2010, the FDA announced that it is requesting
comments on actions that the FDA’s Center for Devices and Radiological Health
(“CDRH”) can consider taking to strengthen the 510(k) review process conducted
by the CDRH.
Class III
medical devices are required to undergo the PMA approval process in which the
manufacturer must establish the safety and effectiveness of the device to the
FDA’s satisfaction. A PMA application must provide extensive
preclinical and clinical trial data and also information about the device and
its components regarding, among other things, device design, manufacturing and
labeling. Also during the review period, an advisory panel of experts
from outside the FDA may be convened to review and evaluate the application and
provide recommendations to the FDA as to the approvability of the
device. In addition, the FDA will typically conduct a preapproval
inspection of the manufacturing facility to ensure compliance with quality
system regulations. By statute, the FDA has 180 days to review the
PMA application, although, generally, review of the application can take between
one and three years, or longer. Once approved, a new PMA or a PMA
Supplement is required for modifications that affect the safety or effectiveness
of the device, including, for example, certain types of modifications to the
device's indication for use, manufacturing process, labeling and
design. Our bone growth stimulation products are classified as Class
III by the FDA, and have been approved for commercial distribution in the U.S.
through the PMA process. We also have under development an artificial
cervical disk product which is currently classified as FDA Class
III. Under such a classification, in order for the product to be
approved for commercial distribution in the U.S., compliance with the FDA PMA
approval process, including a human clinical trial, will be
required. We also have under development other products designed to
treat degenerative spinal disc disease but which allow greater post-surgical
mobility than standard surgical approaches involving spinal fusion
techniques. If certain of these products are classified as FDA Class
III, in order for them to be approved for commercial distribution in the U.S.,
compliance with the FDA PMA approval process, including a human clinical trial,
will be required.
In
addition, our Spinal Implants and Biologics division is a distributor of a
product for bone repair and reconstruction under the brand name Trinity
®
Evolution™ Viable Cryopreserved Cellular Bone Matrix which is an allogeneic,
cancellous, bone matrix containing viable stem cells. We believe that
Trinity
®
Evolution™ is properly classified under FDA’s Human Cell, Tissues and
Cellular and Tissue-Based Products, or HCT/P, regulatory paradigm and not as a
medical device or as a biologic or as a drug. We believe it is
regulated under Section 361 of the Public Health Service Act and C.F.R. Part
1271. Spinal Implants and Biologics also distributes certain surgical
implant products known as “allograft” products which are derived from human
tissues and which are used for bone reconstruction or repair and are surgically
implanted into the human body. We believe that these products are
properly classified by the FDA as minimally-manipulated tissue and are covered
by FDA’s “Good Tissues Practices” regulations, which cover all stages of
allograft processing. There can be no assurance that our suppliers of
the Trinity
®
Evolution™ and allograft products will continue to meet applicable regulatory
requirements or that those requirements will not be changed in ways that could
adversely affect our business. Further, there can be no assurance
that these products will continue to be made available to us or that applicable
regulatory standards will be met or remain unchanged. Moreover,
products derived from human tissue or bone are from time to time subject to
recall for certain administrative or safety reasons and we may be affected by
one or more such recalls. For a description of these risks, see Item
1A “Risk Factors.”
The
medical devices that we develop, manufacture, distribute and market are subject
to rigorous regulation by the FDA and numerous other federal, state and foreign
governmental authorities. The process of obtaining FDA clearance and
other regulatory approvals to develop and market a medical device, particularly
from the FDA, can be costly and time-consuming, and there can be no assurance
that such approvals will be granted on a timely basis, if at
all. While we believe that we have obtained all necessary clearances
and approvals for the manufacture and sale of our products and that they are in
material compliance with applicable FDA and other material regulatory
requirements, there can be no assurance that we will be able to continue such
compliance. After a device is placed on the market, numerous
regulatory requirements continue to apply. Those regulatory
requirements include: product listing and establishment registration; Quality
System Regulation (“QSR”) which require manufacturers, including third-party
manufacturers, to follow stringent design, testing, control, documentation and
other quality assurance procedures during all aspects of the manufacturing
process; labeling regulations and FDA prohibitions against the promotion of
products for uncleared, unapproved or off-label uses or indications; clearance
of product modifications that could significantly affect safety or efficacy or
that would constitute a major change in intended use of one of our cleared
devices; approval of product modifications that affect the safety or
effectiveness of one of our PMA approved devices; Medical Device Reporting
regulations, which require that manufacturers report to FDA if their device may
have caused or contributed to a death or serious injury, or has malfunctioned in
a way that would likely cause or contribute to a death or serious injury if the
malfunction of the device or a similar device were to recur; post-approval
restrictions or conditions, including post-approval study commitments;
post-market surveillance regulations, which apply when necessary to protect the
public health or to provide additional safety and effectiveness data for the
device; the FDA's recall authority, whereby it can ask, or under certain
conditions order, device manufacturers to recall from the market a product that
is in violation of governing laws and regulations; regulations pertaining to
voluntary recalls; and notices of corrections or removals.
We and
certain of our suppliers also are subject to announced and unannounced
inspections by the FDA to determine our compliance with FDA’s QSR and other
regulations. If the FDA were to find that we or certain of our
suppliers have failed to comply with applicable regulations, the agency could
institute a wide variety of enforcement actions, ranging from a public warning
letter to more severe sanctions such as: fines and civil penalties against us,
our officers, our employees or our suppliers; unanticipated expenditures to
address or defend such actions; delays in clearing or approving, or refusal to
clear or approve, our products; withdrawal or suspension of approval of our
products or those of our third-party suppliers by the FDA or other regulatory
bodies; product recall or seizure; interruption of production; operating
restrictions; injunctions; and criminal prosecution. The FDA also has
the authority to request repair, replacement or refund of the cost of any
medical device manufactured or distributed by us. Any of those
actions could have a material adverse effect on our development of new
laboratory tests, business strategy, financial condition and results of
operations.
Moreover,
governmental authorities outside the U.S. have become increasingly stringent in
their regulation of medical devices, and our products may become subject to more
rigorous regulation by non-U.S. governmental authorities in the
future. U.S. or non-U.S. government regulations may be imposed in the
future that may have a material adverse effect on our business and
operations. The European Commission (‘EC”) has harmonized national
regulations for the control of medical devices through European Medical Device
Directives with which manufacturers must comply. Under these new
regulations, manufacturing plants must have received CE certification from a
“notified body” in order to be able to sell products within the member states of
the European Union. Certification allows manufacturers to stamp the
products of certified plants with a “CE” mark. Products covered by
the EC regulations that do not bear the CE mark cannot be sold or distributed
within the European Union. We have received certification for all
currently existing manufacturing facilities and products.
Our
products may be reimbursed by third-party payors, such as government programs,
including Medicare, Medicaid, and Tricare or private insurance plans and
healthcare networks. Third-party payors may deny reimbursement if they determine
that a device provided to a patient or used in a procedure does not meet
applicable payment criteria or if the policy holder’s healthcare insurance
benefits are limited. Also, third-party payors are increasingly
challenging the prices charged for medical products and services. The
Medicare program is expected to continue to implement a new payment mechanism
for certain items of durable medical equipment, prosthetic, orthotic supplies
(“DMEPOS”) via the implementation of its competitive bidding
program. The initial implementation was terminated shortly after it
began in 2008 and the Centers for Medicare and Medicaid Services (“CMS”) are
required to and did start the rebid process in 2009 (“Round 1
Rebid”). Payment rates for certain DMEPOS items included in the Round
1 Rebid product categories, which categories do not currently include our
products, will be determined based on bid prices rather than the current
Medicare DMEPOS fee schedule.
Orthofix
Inc., a subsidiary of the Company, received accreditation status by the
Accreditation Commission for Health Care, Inc. (“ACHC”) for the services of
DMEPOS. ACHC, a private, not-for-profit corporation, which is
certified to ISO 9001:2000 standards, was developed by home care and
community-based providers to help companies improve business operations and
quality of patient care. Although accreditation is generally a
voluntary activity where healthcare organizations submit to peer review their
internal policies, processes and patient care delivery against national
standards, CMS required DMEPOS suppliers to become accredited. By
attaining accreditation, Orthofix Inc. has demonstrated its commitment to
maintain a higher level of competency and strive for excellence in its products,
services, and customer satisfaction.
Our sales
and marketing practices are also subject to a number of U.S. laws regulating
healthcare fraud and abuse such as the federal Anti-Kickback Statute and the
federal Physician Self-Referral Law (known as the “Stark Law”), the Civil False
Claims Act and the Health Insurance Portability and Accountability Act of 1996
(“HIPAA”) as well as numerous state laws regulating healthcare and
insurance. These laws are enforced by the Office of Inspector General
within the U.S. Department of Health and Human Services, the U.S. Department
of
Justice, and other
federal, state and local agencies. Among other things, these laws and
others generally: (1) prohibit the provision of anything of value in exchange
for the referral of patients for, or the purchase, order, or recommendation of,
any item or service reimbursed by a federal healthcare program, (including
Medicare and Medicaid); (2) require that claims for payment submitted to federal
healthcare programs be truthful; (3) prohibit the transmission of protected
healthcare information to persons not authorized to receive that information;
and (4) require the maintenance of certain government licenses and
permits.
In
addition, U.S. federal and state laws protect the confidentiality of certain
health information, in particular individually identifiable information such as
medical records and restrict the use and disclosure of that protected
information. At the federal level, the Department of Health and Human
Services promulgated health information privacy and security rules under
HIPAA. These rules protect health information by regulating its use
and disclosure, including for research and other purposes. Failure of
a HIPAA “covered entity” to comply with HIPAA regarding such “protected health
information” could constitute a violation of federal law, subject to civil and
criminal penalties. Covered entities include healthcare providers
(including those that sell devices or equipment) that engage in particular
electronic transactions, including, as we do, the transmission of claims to
health plans. Consequently, health information that we access,
collect, analyze, and otherwise use and/or disclose includes protected health
information that is subject to HIPAA.
As noted above, many
state laws also pertain to the confidentiality of health
information. Such laws are not necessarily preempted by HIPAA, in
particular those state laws that afford greater privacy protection to the
individual than HIPAA. These state laws typically have their own
penalty provisions, which could be applied in the event of an unlawful action
affecting health information.
Sales,
Marketing and Distribution
General
Trends
We
believe that demographic trends, principally in the form of a better informed,
more active and aging population in the major healthcare markets of the U.S.,
Western Europe and Japan, together with opportunities in emerging markets such
as the Asia-Pacific Region (including China) and Latin America, as well as our
focus on innovative products, will continue to have a positive effect on the
demand for our products.
Primary
Markets
In 2009,
Domestic accounted for 38% of total net sales, Spinal Implants and Biologics
accounted for 22% of total net sales, Breg accounted for 17% of total net sales,
and International accounted for 23% of total net sales. No single
non-governmental customer accounted for greater than 5% of total net
sales. Sales to customers were broadly distributed.
Our
products sold in the U.S. are either prescribed by medical professionals for the
care of their patients or selected by physicians, sold to hospitals, clinics,
surgery centers, independent distributors or other healthcare providers, all of
whom may be primarily reimbursed for the healthcare products provided to
patients by third-party payors, such as government programs, including Medicare
and Medicaid, private insurance plans and managed care programs. Our
products are also sold in many other countries, such as the United Kingdom,
France and Italy, which have publicly funded healthcare systems as well as
private insurance plans. See Item 1A “Risk Factors”, page 28 for a
table of estimated revenue by payor type. For additional information
about geographic areas, see Item 8 “Financial Statements and Supplementary
Data.”
Sales,
Marketing and Distributor Network
We have
established a broad distribution network comprised of direct sales
representatives and distributors. This established distribution
network provides us with a platform to introduce new products and expand sales
of existing products. We distribute our products through a sales and
marketing force of approximately 633
sales and marketing
representatives. Worldwide we also have approximately 274 independent
distributors for our products in approximately 63 countries. The
table below highlights the makeup of our sales, marketing and distribution
network at December 31, 2009.
|
Direct Sales
& Marketing
Headcount
|
Distributors
|
|||||||||||||||||||||||
|
U.S.
|
International
|
Total
|
U.S.
|
International
|
Total
|
|||||||||||||||||||
|
Domestic
|
340 | - | 340 | 37 | 1 | 38 | ||||||||||||||||||
|
Spinal
Implants and Biologics
|
35 | 4 | 39 | 49 | 33 | 82 | ||||||||||||||||||
|
Breg
|
90 | 1 | 91 | 33 | 48 | 81 | ||||||||||||||||||
|
International
|
6 | 157 | 163 | 2 | 71 | 73 | ||||||||||||||||||
|
Total
|
471 | 162 | 633 | 121 | 153 | 274 | ||||||||||||||||||
In our
largest market, the U.S., our sales, marketing and distribution network is
separated between several distinct sales forces addressing different market
sectors. The Spine market sector is addressed primarily by a direct
sales force for spinal bone growth stimulation products and HCT/P products and a
distribution network for spinal implant products. The Orthopedic
market sector is addressed by a hybrid distribution network of predominately
direct sales supplemented by distributors. The Sports Medicine market
sector is addressed primarily by a distribution network for Breg
products.
Outside
the U.S., we employ both direct sales representatives and distributors within
our international sales subsidiaries. We also utilize independent
distributors in Europe, the Far East, the Middle East and Central and South
America in countries where we do not have subsidiaries. In order to
provide support to our independent distribution network, we have a group of
sales and marketing specialists who regularly visit independent distributors to
provide training and product support.
Marketing
and Product Education
We seek
to market our products principally to medical professionals and group purchasing
organizations (“GPOs”)
,
which are hospital organizations that buy on a large scale. We
believe there is a developing focus on selling to GPOs and large national
accounts that reflects a trend toward large scale procurement efforts in the
healthcare industry.
We
support our sales force and distributors through specialized training workshops
in which surgeons and sales specialists participate. We also produce
marketing materials, including materials outlining surgical procedures, for our
sales force and distributors in a variety of languages using printed, video and
multimedia formats. To provide additional advanced training for
surgeons, we organize monthly
,
multilingual
,
teaching seminars at our
facility in Verona, Italy, and in various locations in the U.S. and Latin
America. The Verona and U.S. product education seminars, which in
2009 were attended by over 800 surgeons and over 300 distributor representatives
and sales representatives from around the world, include a variety of lectures
from specialists as well as demonstrations and hands-on
workshops. Each year many of our sales representatives and
distributors independently conduct basic courses in product application for
local surgeons. We also provide sales training at our training
centers in McKinney, Texas, our Breg training center in Vista, California, and
in regional locations throughout the world. Additionally, we have
implemented a web-based sales training program, which provides ongoing education
for our sales representatives.
Competition
Our bone
growth stimulation products compete principally with similar products marketed
by Biomet Spine a business unit of Biomet, Inc, DJO Incorporated, and Exogen,
Inc., a subsidiary of Smith & Nephew plc. Our spinal implant and
HCT/P products, and Trinity
®
Evolution™, an HCT/P product from which we derive marketing fees, compete with
products marketed by Medtronic, Inc., De Puy, a division of Johnson and Johnson,
Synthes AG, Stryker Corp., Zimmer, Inc., Nuvasive, Biomet Spine and various
smaller public and private companies. For external and internal
fixation devices, our principal competitors include Synthes AG, Zimmer, Inc.,
Stryker Corp., Smith & Nephew plc and Biomet Orthopedics, a business unit of
Biomet, Inc. The principal non-pharmacological products competing
with our A-V Impulse System
®
are
manufactured by Huntleigh Technology PLC and Kinetic Concepts,
Inc. The principal competitors for the Breg bracing and cold therapy
products include DJO Incorporated, Biomet, Inc., Ossur Lf. and various smaller
private companies.
We
believe that we enhance our competitive position by focusing on product features
such as innovation, ease of use, versatility, cost and patient
acceptability. We attempt to avoid competing based solely on
price. Overall cost and medical effectiveness, innovation,
reliability, after-sales service and training are the most prevalent methods of
competition in the markets for our products, and we believe that we compete
effectively.
Manufacturing
and Sources of Supply
We
generally design, develop, assemble, test and package our stimulation and
orthopedic products, and subcontract the manufacture of a substantial portion of
the component parts. We design and develop our spinal implant and
Alloquent
®
Allograft HCT/P products but subcontract their manufacture and
packaging. Through subcontracting, we attempt to maintain operating
flexibility in meeting demand while focusing our resources on product
development, education and marketing as well as quality assurance
standards. In addition to designing, developing, assembling, testing
and packaging its products, Breg also manufactures a substantial portion of the
component parts used in its products. Although certain of our key raw
materials are obtained from a single source, we believe that alternate sources
for these materials are available. Further, we believe that an
adequate inventory supply is maintained to avoid product flow
interruptions. We have not experienced difficulty in obtaining the
materials necessary to meet our production schedules.
Trinity
®
Evolution™, an HCT/P product for which we have exclusive marketing rights, is an
allograft tissue form that is supplied to customers by MTF in accordance with
orders received directly from customers and from the Company. MTF
sources, processes and packages the tissue form and is the sole supplier of
Trinity
®
Evolution™ to our customers.
Our
products are currently manufactured and assembled in the U.S., Italy, the United
Kingdom, and Mexico. We believe that our plants comply in all
material respects with the requirements of the FDA and all relevant regulatory
authorities outside the United States. For a description of the laws
to which we are subject, see Item 1 – “Business – Corporate Compliance and
Government Regulation.” We actively monitor each of our
subcontractors in order to maintain manufacturing and quality standards and
product specification conformity.
Our
business is generally not seasonal in nature. However, sales
associated with products for elective procedures appear to be influenced by the
somewhat lower level of such procedures performed in the late
summer. Certain of the Breg
®
bracing products experience greater demand in the fall and winter corresponding
with high school and college football schedules and winter sports. In
addition, we do not consider the backlog of firm orders to be
material.
Capital
Expenditures
We had
tangible and intangible capital expenditures in the amount of $22.0 million,
$20.2 million and $27.2 million in 2009, 2008 and 2007, respectively,
principally for computer software and hardware, patents, licenses, plant and
equipment, tooling and molds and product instrument sets. In 2009, we
invested $22.0 million in capital expenditures of which (1) $8.1 million related
to Spinal Implants and Biologics’ instrumentation for the new Firebird™ Spinal
Fixation Systems and other systems introduced in 2009; (2) $5.9 million related
to new software applications and computer licensing within our Domestic and
International segments; and (3) $1.1 million related to the initial construction
phase of our new facility in Lewisville, TX. We currently plan to
invest approximately $29.6 million in capital expenditures during 2010 to
support the planned expansion of our business. We expect these
capital expenditures to be financed principally with cash generated from
operations.
Employees
At
December 31, 2009, we had 1,484 employees worldwide. Of these, 541
were employed at Domestic, 87 were employed at Spinal Implants and Biologics,
500 were employed at Breg and 356 were employed at International. Our
relations with our Italian employees, who numbered 124 at December 31, 2009, are
governed by the provisions of a National Collective Labor Agreement setting
forth mandatory minimum standards for labor relations in the metal mechanic
workers industry. We are not a party to any other collective
bargaining agreement. We believe that we have good relations with our
employees. Of our 1,484 employees, 633 were employed in sales and
marketing functions, 237 in general and administrative, 491 in production and
123 in research and development.
In addition to the other information
contained in the Form 10-K and the exhibits hereto, you should carefully
consider the risks described below. These risks are not the only ones
that we may face. Additional risks not presently known to us or that
we currently consider immaterial may also impair our business
operations. This Form 10-K also contains forward-looking statements
that involve risks and uncertainties. Our actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including the risks faced by us described below or
elsewhere in this Form 10-K.
The
global recession and further adverse changes in general economic or credit
market conditions could adversely impact our sales and operating
results.
The
direction and strength of the U.S. and global economy has been uncertain due to
the recent downturn in the economy and difficulties in the credit
markets. If economic growth in the U.S. and other countries continues
to remain low, or if the credit markets continue to be difficult to access, our
distributors, suppliers and other business partners could experience significant
disruptions to their businesses and operations which, in turn, could negatively
impact our business operations and financial performance. In
addition, continued weak consumer financial strength and demand could cause a
substantial reduction in the sale of our products.
Our
acquisition of Blackstone Medical Inc. could continue to present challenges for
us.
On
September 22, 2006, we completed the acquisition of Blackstone Medical Inc.
(“Blackstone”). The acquisition has presented several challenges to
our business. In 2008, we recorded several expenses from the
impairment of goodwill and intangible assets related to the Blackstone business,
including a $57.0 million impairment loss related to the Blackstone trademark, a
$126.9 million goodwill impairment loss, and a $105.7 million impairment charge
related to the distribution network and technologies at
Blackstone. We have also received several subpoenas related to the
Blackstone business, including from the U.S. Department of Health and Human
Services, Office of the Inspector General. These subpoenas and
related government investigations have required the use of significant
management time and resources.
We
continue to integrate the operations of Blackstone into our business, however,
we may not be able to successfully integrate Blackstone’s operations into our
business and achieve the benefits that we originally anticipated at the time of
the acquisition. The continued integration of Blackstone’s operations
into our business involves numerous risks, including:
|
|
·
|
difficulties
in incorporating Blackstone’s product lines, sales personnel and marketing
operations into our business;
|
|
|
·
|
the
diversion of our resources and our management’s attention from other
business concerns;
|
|
|
·
|
the
loss of any key distributors;
|
|
|
·
|
the
loss of any key employees; and
|
|
|
·
|
the
assumption of unknown liabilities, such as the costs and expenses related
to the current inquiries by the Department of Health and Human Service
Office of Inspector General, as described in Item 3, Legal
Proceedings.
|
In
addition, Blackstone’s business is subject to many of the same risks and
uncertainties that apply to our other business operations, such as risks
relating to the protection of Blackstone’s intellectual property and proprietary
rights, including patents that it owns or licenses. If Blackstone’s
intellectual property and proprietary rights are challenged, or if third parties
claim that Blackstone infringes on their proprietary rights, our business could
be adversely affected.
Failure
to overcome these risks or any other problems encountered in connection with the
acquisition of Blackstone could adversely affect our business, prospects and
financial condition. In addition, if Blackstone’s operations and
financial results do not meet our expectations, we may not realize synergies,
operating efficiencies, market position, or revenue growth we originally
anticipated from the acquisition.
We
may be subject to federal and state health care fraud and abuse laws, and could
face substantial penalties if we are determined not to have fully complied with
such laws.
Health
care fraud and abuse regulation by federal and state governments impact our
business. Health care fraud and abuse laws potentially applicable to
our operations include:
|
|
·
|
the
Federal Health Care Programs Anti-Kickback Law, which constrains our
marketing practices, educational programs, pricing and discounting
policies, and relationships with health care practitioners and providers,
by prohibiting, among other things, soliciting, receiving, offering or
paying remuneration, in exchange for or to induce the purchase or
recommendation of an item or service reimbursable under a federal health
care program (such as the Medicare or Medicaid
programs);
|
|
|
·
|
federal
false claims laws which prohibit, among other things, knowingly
presenting, or causing to be presented, claims for payment from Medicare,
Medicaid, or other federal government payers that are false or fraudulent;
and
|
|
|
·
|
state
laws analogous to each of the above federal laws, such as anti-kickback
and false claims laws that may apply to items or services reimbursed by
non-governmental third party payers, including commercial
insurers.
|
Due to
the breadth of some of these laws, there can be no assurance that we will not be
found to be in violation of any of such laws, and as a result we may be subject
to penalties, including civil and criminal penalties, damages, fines, the
curtailment or restructuring of our operations or the exclusion from
participation in federal or state healthcare programs. Any penalties
could adversely affect our ability to operate our business and our financial
results. Any action against us for violation of these laws, even if
we successfully defend against them, could cause us to incur significant legal
expenses and divert our management’s attention from the operation of our
business.
In
particular, as more fully described under Item 3, “Legal Proceedings”, the
Company has received subpoenas requesting information from governmental
authorities, including the U.S. Department of Health and Human Services, Office
of Inspector General, and two separate federal grand jury subpoenas, related to
our Blackstone subsidiary, which we acquired in 2006. In addition, on
or about April 10, 2009, the Company received a HIPAA subpoena issued by the
U.S. Attorney’s Office for the District of Massachusetts (the “Boston
USAO”). The Boston USAO subsequently informed the Company that it is
investigating possible criminal and civil violations of federal law related to
the Company’s promotion and marketing of its bone growth stimulator
devices. Any adverse outcome in either of these inquiries could have
a material adverse effect on our business and financial position.
In
addition, it is possible that one or more private insurers with whom we do
business may attempt to use any penalty we might be assessed or any exclusion
from federal or state healthcare program business as a basis to cease doing
business with us. If this were to occur, it could also have a
material adverse effect on our business and financial position.
Expensive
litigation and government investigations, and difficulties recouping disputed
amounts currently being held in escrow in connection with the Blackstone
acquisition, may reduce our earnings.
As more
fully described directly above and under Item 3, "Legal Proceedings", we are
named as a defendant in a number of lawsuits and have received several subpoenas
requesting information from various governmental authorities. We are
complying with the subpoenas and intend to cooperate with any related government
investigations. The outcome of these and any other lawsuits brought
against us, and these and other investigations of us, are inherently uncertain,
and adverse developments or outcomes could result in significant monetary
damages, penalties or injunctive relief against us that could significantly
reduce our earnings and cash flows. In addition, we may continue to
incur significant legal expenses in connection with these matters in the future,
which expenses could affect our future earnings.
As also
described under Item 3, “Legal Proceedings,” in connection with those lawsuits
and investigations that relate to our Blackstone subsidiary, we may have rights
to indemnification under the merger agreement for the Blackstone acquisition for
losses incurred in connection with some or all of these matters, and we have
submitted several claims for indemnification from the escrow fund established in
connection with the merger agreement. However, the representative of
the former shareholders of Blackstone has objected to many of these
indemnification claims and expressed an intent to contest them in accordance
with the terms of the merger agreement. There can be no assurance
that we will ultimately be successful in seeking indemnification in connection
with any of these matters.
In the
event certain of these matters result in significant settlement costs or
judgments against us and, as applicable, we are not able to successfully recoup
such amounts from the escrow fund, these matters could have a significant
negative effect on our operations and financial performance.
We
may not be able to successfully introduce new products to the
market.
During
2009, we introduced several new products to the market, including the Firebird™
Spinal Fixation System, the PILLAR™ SA interbody device and Trinity
®
Evolution™, among others. We intend to introduce several new
products to the market in 2010. Despite our planning, the process of
developing and introducing new products is inherently complex and uncertain and
involves risks, including the ability of such new products to satisfy customer
needs and gain broad market acceptance, which can depend on the product
achieving broad clinical acceptance, the level of third-party reimbursement and
the introduction of competing technologies.
We
contract with third-party manufacturers to produce most of our products, like
many other companies in the medical device industry. If we or any
such manufacturer fails to meet production and delivery schedules, it can have
an adverse impact on our ability to sell such products. Further,
whether we directly manufacture a product or utilize a third-party manufacturer,
shortages and spoilage of materials, labor stoppages, product recalls,
manufacturing defects and other similar events can delay production and inhibit
our ability to bring a new product to market in timely fashion. For
example, the supply of Trinity® Evolution™ is derived from human cadaveric
donors, and our ability to distribute the product depends on our supplier
continuing to have access to donated human cadaveric tissue, as well as, the
maintenance of high standards by the supplier in its processing
methodology. The supply of such donors is inherently unpredictable
and can fluctuate over time. Further, because Trinity® Evolution™ is
classified as an HCT/P product, it could from time to time be subject to recall
for safety or administrative reasons.
We
depend on our ability to protect our intellectual property and proprietary
rights, but we may not be able to maintain the confidentiality, or assure the
protection, of these assets.
Our
success depends, in large part, on our ability to protect our current and future
technologies and products and to defend our intellectual property
rights. If we fail to protect our intellectual property adequately,
competitors may manufacture and market products similar to, or that compete
directly with, ours. Numerous patents covering our technologies have
been issued to us, and we have filed, and expect to continue to file, patent
applications seeking to protect newly developed technologies and products in
various countries, including the U.S. Some patent applications in the
U.S. are maintained in secrecy until the patent is issued. Because
the publication of discoveries tends to follow their actual discovery by several
months, we may not be the first to invent, or file patent applications on any of
our discoveries. Patents may not be issued with respect to any of our
patent applications and existing or future patents issued to, or licensed by us
and may not provide adequate protection or competitive advantages for our
products. Patents that are issued may be challenged, invalidated or
circumvented by our competitors. Furthermore, our patent rights may
not prevent our competitors from developing, using or commercializing products
that are similar or functionally equivalent to our products.
We also
rely on trade secrets, unpatented proprietary expertise and continuing
technological innovation that we protect, in part, by entering into
confidentiality agreements with assignors, licensees, suppliers, employees and
consultants. These agreements may be breached and there may not be
adequate remedies in the event of a breach. Disputes may arise
concerning the ownership of intellectual property or the applicability or
enforceability of confidentiality agreements. Moreover, our trade
secrets and proprietary technology may otherwise become known or be
independently developed by our competitors. If patents are not issued
with respect to our products arising from research, we may not be able to
maintain the confidentiality of information relating to these
products. In addition, if a patent relating to any of our products
lapses or is invalidated, we may experience greater competition arising from new
market entrants.
Third
parties may claim that we infringe on their proprietary rights and may prevent
us from manufacturing and selling certain of our products.
There has
been substantial litigation in the medical device industry with respect to the
manufacture, use and sale of new products. These lawsuits relate to
the validity and infringement of patents or proprietary rights of third
parties. We may be required to defend against allegations relating to
the infringement of patent or proprietary rights of third
parties. Any such litigation could, among other things:
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require
us to incur substantial expense, even if we are successful in the
litigation;
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require
us to divert significant time and effort of our technical and management
personnel;
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result
in the loss of our rights to develop or make certain products;
and
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require
us to pay substantial monetary damages or royalties in order to license
proprietary rights from third parties or to satisfy judgments or to settle
actual or threatened litigation.
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Although
patent and intellectual property disputes within the orthopedic medical devices
industry have often been settled through assignments, licensing or similar
arrangements, costs associated with these arrangements may be substantial and
could include the long-term payment of royalties. Furthermore, the
required assignments or licenses may not be made available to us on acceptable
terms. Accordingly, an adverse determination in a judicial or
administrative proceeding or a failure to obtain necessary assignments or
licenses could prevent us from manufacturing and selling some products or
increase our costs to market these products.
Reimbursement
policies of third parties, cost containment measures and healthcare reform could
adversely affect the demand for our products and limit our ability to sell our
products.
Our
products are sold either directly by us or by independent sales representatives
to customers or to our independent distributors and purchased by hospitals,
doctors and other healthcare providers. These products may be reimbursed by
third-party payors, such as government programs, including Medicare, Medicaid
and Tricare, or private insurance plans and healthcare
networks. Third-party payors may deny reimbursement if they determine
that a device provided to a patient or used in a procedure does not meet
applicable payment criteria or if the policy holder’s healthcare insurance
benefits are limited. Also, third-party payors are increasingly
challenging the prices charged for medical products and
services. Limits put on reimbursement could make it more difficult
for people to buy our products and reduce, or possibly eliminate, the demand for
our products. In addition, should governmental authorities enact
additional legislation or adopt regulations that affect third-party coverage and
reimbursement, demand for our products and coverage by private or public
insurers may be reduced with a consequential material adverse effect on our
sales and profitability.
Third-party
payors, whether private or governmental entities, also may revise coverage or
reimbursement policies that address whether a particular product, treatment
modality, device or therapy will be subject to reimbursement and, if so, at what
level of payment.
The
Centers for Medicare and Medicaid Services (“CMS”), in its ongoing
implementation of the Medicare program has obtained a related technical
assessment of the medical study literature to determine how the literature
addresses spinal fusion surgery in the Medicare population. The
impact that this information will have on Medicare coverage policy for the
Company’s products is currently unknown, but we cannot provide assurances that
the resulting actions would not restrict Medicare coverage for our
products. It is also possible that the government’s focus on coverage
of off-label uses of the FDA-approved devices could lead to changes in coverage
policies regarding off-label uses by TriCare, Medicare and/or
Medicaid. There can be no assurance that we or our distributors will
not experience significant reimbursement problems in the future related to these
or other proceedings. Our products are sold in many countries, such
as the United Kingdom, France, and Italy, with publicly funded healthcare
systems. The ability of hospitals supported by such systems to
purchase our products is dependent, in part, upon public budgetary
constraints. Any increase in such constraints may have a material
adverse effect on our sales and collection of accounts receivable from such
sales.
As
required by law, CMS has continued efforts to implement a competitive bidding
program for durable medical equipment paid for by the Medicare program. CMS
conducted an initial implementation of the competitive bidding program in 2008
which was terminated in that same year. CMS is required to and began the rebid
process in 2009. The implementation date of the rebid round is currently
scheduled for January 2011. The Company’s products are not yet
included in the competitive bidding process. We believe that the competitive
bidding process will principally affect products sold by our Sports Medicine
business. We cannot predict which products from any of our businesses will
ultimately be affected or when the competitive bidding process will be extended
to our businesses. The competitive bidding process is projected to be expanded
further in 2011, yet final decisions concerning which products and areas will be
affected have not been announced. While some of our products are designated by
the Food and Drug Administration as Class III medical devices and thus are not
included within the competitive bidding program, some of our products may be
encompassed within the program at varying times. There can be no assurance that
the implementation of the competitive bidding program will not have an adverse
impact on the sales of some of our products.
We
estimate that our revenue by payor type is:
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Direct
(hospital)
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36%
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Third
Party Insurance
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22%
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Independent
Distributors
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19%
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U.S.
Government – Medicare, Medicaid,
TriCare
10%
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International
Public Healthcare Systems
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9%
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Self-payand
other
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4%
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We and certain of our suppliers may
be subject to extensive government regulation that increases our costs and could
limit our ability to market or sell our products.
The
medical devices we manufacture and market are subject to rigorous regulation by
the FDA and numerous other federal, state and foreign governmental
authorities. These authorities regulate the development, approval,
classification, testing, manufacturing, labeling, marketing and sale of medical
devices. Likewise, our use and disclosure of certain categories of
health information may be subject to federal and state laws, implemented and
enforced by governmental authorities that protect health information privacy and
security. For a description of these regulations, see Item 1 –
“Business – Government Regulation.”
The
approval or clearance by governmental authorities, including the FDA in the
U.S., is generally required before any medical devices may be marketed in the
U.S. or other countries. We cannot predict whether in the future, the
U.S. or foreign governments may impose regulations that have a material adverse
effect on our business, financial condition or results of
operations. The process of obtaining FDA clearance and other
regulatory clearances or approvals to develop and market a medical device can be
costly and time-consuming, and is subject to the risk that such approvals will
not be granted on a timely basis if at all. The regulatory process
may delay or prohibit the marketing of new products and impose substantial
additional costs if the FDA lengthens review times for new
devices. The FDA has the ability to change the regulatory
classification of a cleared or approved device from a higher to a lower
regulatory classification which could materially adversely impact our ability to
market or sell our devices
.
We and
certain of our suppliers also are subject to announced and unannounced
inspections by the FDA to determine our compliance with FDA’s Quality System
Regulation (“QSR”)
and other
regulations. If the FDA were to find that we or certain of our
suppliers have failed to comply with applicable regulations, the agency could
institute a wide variety of enforcement actions, ranging from a public warning
letter to more severe sanctions such as: fines and civil penalties against us,
our officers, our employees or our suppliers; unanticipated expenditures to
address or defend such actions; delays in clearing or approving, or refusal to
clear or approve, our products; withdrawal or suspension of approval of our
products or those of our third-party suppliers by the FDA or other regulatory
bodies; product recall or seizure; interruption of production; operating
restrictions; injunctions; and criminal prosecution. The FDA also has
the authority to request repair, replacement or refund of the cost of any
medical device manufactured or distributed by us. Any of those
actions could have a material adverse effect on our development of new
laboratory tests, business strategy, financial condition and results of
operations.
Our
allograft and mesenchymal stem cell products could expose us to certain risks
which could disrupt our business.
Our
Spinal Implants and Biologics division distributes a product under the brand
name Trinity® Evolution™. Trinity® Evolution™ is derived from human
cadaveric donors, and our ability to distribute the product depends on our
supplier continuing to have access to donated human cadaveric tissue, as well
as, the maintenance of high standards by the supplier in its processing
methodology. The supply of such donors is inherently unpredictable
and can fluctuate over time. We believe that Trinity® Evolution™ is
properly classified under the FDA’s Human Cell, Tissues and Cellular and
Tissue-Based Products (“HCT/P”) regulatory paradigm and not as a medical device
or as a biologic or drug. There can be no assurance that the FDA
would agree that this category of regulatory classification applies to Trinity®
Evolution™ and the reclassification of this product from a human tissue to a
medical device could have adverse consequences for us or for the supplier of
this product and make it more difficult or expensive for us to conduct this
business by requiring premarket clearance or approval as well as compliance with
additional postmarket regulatory requirements. The success of our
Trinity® Evolution™ product will depend on these products achieving broad market
acceptance which can depend on the product achieving broad clinical acceptance,
the level of third-party reimbursement and the introduction of competing
technologies. Because Trinity® Evolution™ is classified as an HCT/P
product, it can from time to time be subject to recall for safety or
administrative reasons.
Spinal
Implants and Biologics also distributes allograft products which are also
derived from human tissue harvested from cadavers and which are used for bone
reconstruction or repair and which are surgically implanted into the human
body. We believe that these allograft products are properly
classified as HCT/P products and not as a medical device or a biologic or
drug. There can be no assurance that the FDA would agree that this
regulatory classification applies to these products and any regulatory
reclassification could have adverse consequences for us or for the suppliers of
these products and make it more difficult or expensive for us to conduct this
business by requiring premarket clearance or approval and compliance with
additional postmarket regulatory requirements. Moreover, the supply
of these products to us could be interrupted by the failure of our suppliers to
maintain high standards in performing required donor screening and infectious
disease testing of donated human tissue used in producing allograft
implants. Our allograft implant business could also be adversely
affected by shortages in the supply of donated human tissue or negative
publicity concerning methods of recovery of tissue and product liability actions
arising out of the distribution of allograft implant products.
We
may be subject to product liability claims that may not be covered by insurance
and could require us to pay substantial sums.
We are
subject to an inherent risk of, and adverse publicity associated with, product
liability and other liability claims, whether or not such claims are
valid. We maintain product liability insurance coverage in amounts
and scope that we believe is reasonable and adequate. There can be no
assurance, however, that product liability or other claims will not exceed our
insurance coverage limits or that such insurance will continue to be available
on reasonable commercially acceptable terms, or at all. A successful
product liability claim that exceeds our insurance coverage limits could require
us to pay substantial sums and could have a material adverse effect on our
financial condition.
Fluctuations
in insurance expense could adversely affect our profitability.
We hold a
number of insurance policies, including product liability insurance, directors’
and officers’ liability insurance, property insurance and workers’ compensation
insurance. If the costs of maintaining adequate insurance coverage
should increase significantly in the future, our operating results could be
materially adversely impacted.
Our
quarterly operating results may fluctuate.
Our
operating results have fluctuated significantly in the past on a quarterly
basis. Our operating results may fluctuate significantly from quarter
to quarter in the future and we may experience losses in the future depending on
a number of factors, including the extent to which our products continue to gain
or maintain market acceptance, the rate and size of expenditures incurred as we
expand our domestic and establish our international sales and distribution
networks, the timing and level of reimbursement for our products by
third-party payors, the extent to which we are subject to government regulation
or enforcement and other factors, many of which are outside our
control.
New
developments by others could make our products or technologies non-competitive
or obsolete.
The
orthopedic medical device industry in which we compete is undergoing, and is
characterized by rapid and significant technological change. We
expect competition to intensify as technological advances are
made. New technologies and products developed by other companies are
regularly introduced into the market, which may render our products or
technologies non-competitive or obsolete.
Our
ability to market products successfully depends, in part, upon the acceptance of
the products not only by consumers, but also by independent third
parties.
Our
ability to market orthopedic products successfully depends, in part, on the
acceptance of the products by independent third parties (including hospitals,
doctors, other healthcare providers and third-party payors) as well as
patients. Unanticipated side effects or unfavorable publicity
concerning any of our products could have an adverse effect on our ability to
maintain hospital approvals or achieve acceptance by prescribing physicians,
managed care providers and other retailers, customers and patients.
The
industry in which we operate is highly competitive.
The
medical devices industry is highly competitive. We compete with a
large number of companies, many of which have significantly greater financial,
manufacturing, marketing, distribution and technical resources than we
do. Many of our competitors may be able to develop products and
processes competitive with, or superior to, our own. Furthermore, we
may not be able to successfully develop or introduce new products that are less
costly or offer better performance than those of our competitors, or offer
purchasers of our products payment and other commercial terms as favorable as
those offered by our competitors. For more information regarding our
competitors, see Item 1 – “Business – Competition.”
We
depend on our senior management team.
Our
success depends upon the skill, experience and performance of members of our
senior management team, who have been critical to the management of our
operations and the implementation of our business strategy. We do not
have key man insurance on our senior management team, and the loss of one or
more key executive officers could have a material adverse effect on our
operations and development.
In
order to compete, we must attract, retain and motivate key employees, and our
failure to do so could have an adverse effect on our results of
operations.
In order
to compete, we must attract, retain and motivate executives and other key
employees, including those in managerial, technical, sales, marketing and
support positions. Hiring and retaining qualified executives, engineers,
technical staff and sales representatives are critical to our business, and
competition for experienced employees in the medical device industry can be
intense. To attract, retain and motivate qualified
employees, we utilize
stock-based incentive
awards such as employee stock options. If the value of such stock awards does
not appreciate as measured by the performance of the price of our common stock
and ceases to be viewed as a valuable benefit, our ability to attract, retain
and motivate our employees could be adversely impacted, which could negatively
affect our results of operations and/or require us to increase the amount we
expend on cash and other forms of compensation.
Termination
of our existing relationships with our independent sales representatives or
distributors could have an adverse effect on our business.
We sell
our products in many countries through independent
distributors. Generally, our independent sales representatives and
our distributors have the exclusive right to sell our products in their
respective territories and are generally prohibited from selling any products
that compete with ours. The terms of these agreements vary in length,
generally from one to ten years. Under the terms of our distribution
agreements, each party has the right to terminate in the event of a material
breach by the other party and we generally have the right to terminate if the
distributor does not meet agreed sales targets or fails to make payments on
time. Any termination of our existing relationships with independent
sales representatives or distributors could have an adverse effect on our
business unless and until commercially acceptable alternative distribution
arrangements are put in place.
We
are party to numerous contractual relationships.
We are
party to numerous contracts in the normal course of our business. We
have contractual relationships with suppliers, distributors and agents, as well
as service providers. In the aggregate, these contractual
relationships are necessary for us to operate our business. From time
to time, we amend, terminate or negotiate our contracts. We are also
periodically subject to, or make claims of breach of contract, or threaten legal
action relating to our contracts. These actions may result in
litigation. At any one time, we have a number of negotiations under
way for new or amended commercial agreements. We devote substantial
time, effort and expense to the administration and negotiation of contracts
involved in our business. However, these contracts may not continue
in effect past their current term or we may not be able to negotiate
satisfactory contracts in the future with current or new business
partners.
We
face risks related to foreign currency exchange rates.
Because
some of our revenue, operating expenses, assets and liabilities are denominated
in foreign currencies, we are subject to foreign exchange risks that could
adversely affect our operations and reported results. To the extent
that we incur expenses or earn revenue in currencies other than the U.S. dollar,
any change in the values of those foreign currencies relative to the U.S. dollar
could cause our profits to decrease or our products to be less competitive
against those of our competitors. To the extent that our current
assets denominated in foreign currency are greater or less than our current
liabilities denominated in foreign currencies, we have potential foreign
exchange exposure. We have substantial activities outside of the U.S.
that are subject to the impact of foreign exchange rates. The
fluctuations of foreign exchange rates during 2009 have had a negative impact of
$11.1 million on net sales outside of the U.S. Although we seek to
manage our foreign currency exposure by matching non-dollar revenues and
expenses, exchange rate fluctuations could have a material adverse effect on our
results of operations in the future. To minimize such exposures, we
enter into currency hedges from time to time. At December 31, 2009,
we had outstanding a currency swap to hedge a 38.3 million Euro foreign
currency exposure.
We
are subject to differing tax rates in several jurisdictions in which we
operate.
We have
subsidiaries in several countries. Certain of our subsidiaries sell
products directly to other Orthofix subsidiaries or provide marketing and
support services to other Orthofix subsidiaries. These intercompany
sales and support services involve subsidiaries operating in jurisdictions with
differing tax rates. Tax authorities in these jurisdictions may
challenge our treatment of such intercompany transactions. If we are
unsuccessful in defending our treatment of intercompany transactions, we may be
subject to additional tax liability or penalty, which could adversely affect our
profitability.
We
are subject to differing customs and import/export rules in several
jurisdictions in which we operate.
We import
and export our products to and from a number of different countries around the
world. These product movements involve subsidiaries and third-parties
operating in jurisdictions with different customs and import/export rules and
regulations. Customs authorities in such jurisdictions may challenge
our treatment of customs and import/export rules relating to product shipments
under aspects of their respective customs laws and treaties. If we
are unsuccessful in defending our treatment of customs and import/export
classifications, we may be subject to additional customs duties, fines or
penalties that could adversely affect our profitability.
Provisions
of Netherlands Antilles law may have adverse consequences to our
shareholders.
Our
corporate affairs are governed by our Articles of Association and the corporate
law of the Netherlands Antilles as laid down in Book 2 of the Civil Code
(“CCNA”). Although some of the provisions of the CCNA resemble some
of the provisions of the corporation laws of a number of states in the U.S.,
principles of law relating to such matters as the validity of corporate
procedures, the fiduciary duties of management and the rights of our
shareholders may differ from those that would apply if Orthofix were
incorporated in a jurisdiction within the U.S. For example, there is
no statutory right of appraisal under Netherlands Antilles corporate law nor is
there a right for shareholders of a Netherlands Antilles corporation to sue a
corporation derivatively. In addition, we have been advised by
Netherlands Antilles counsel that it is unlikely that (1) the courts of the
Netherlands Antilles would enforce judgments entered by U.S. courts predicated
upon the civil liability provisions of the U.S. federal securities laws and (2)
actions can be brought in the Netherlands Antilles in relation to liabilities
predicated upon the U.S. federal securities laws.
Our
business is subject to economic, political, regulatory and other risks
associated with international sales and operations.
Since we
sell our products in many different countries, our business is subject to risks
associated with conducting business internationally. Net sales
outside the U.S. represented 23% of our total net sales in 2009. We
anticipate that net sales from international operations will continue to
represent a substantial portion of our total net sales. In addition,
a number of our manufacturing facilities and suppliers are located outside the
U.S. Accordingly, our future results could be harmed by a variety of
factors, including:
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changes
in foreign currency exchange rates;
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changes
in a specific country’s or region’s political or economic
conditions;
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trade
protection measures and import or export licensing requirements or other
restrictive actions by foreign
governments;
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consequences
from changes in tax or customs
laws;
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difficulty
in staffing and managing widespread
operations;
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differing
labor regulations;
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differing
protection of intellectual
property;
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unexpected
changes in regulatory requirements;
and
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application
of the U.S. Foreign Corrupt Practices Act (“FCPA”) and other anti-bribery
or anti-corruption laws to our
operations.
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We
may incur costs and undertake new debt and contingent liabilities in a search
for acquisitions.
We
continue to search for viable acquisition candidates that would expand our
market sector or global presence. We also seek additional products
appropriate for current distribution channels. The search for an
acquisition of another company or product line by us could result in our
incurrence of costs from such efforts as well as the undertaking of new debt and
contingent liabilities from such searches or acquisitions. Such
costs may be incurred at any time and may vary in size depending on the scope of
the acquisition or product transactions and may have a material impact on our
results of operations.
We
may incur significant costs or retain liabilities associated with disposition
activity.
We may
from time to time sell, license, assign or otherwise dispose of or divest
assets, the stock of subsidiaries or individual products, product lines or
technologies which we determine are no longer desirable for us to own, some of
which may be material. Any such activity could result in our
incurring costs and expenses from these efforts, some of which could be
significant, as well as retaining liabilities related to the assets or
properties disposed of even though, for instance, the income generating assets
have been disposed of. These costs and expenses may be incurred at
any time and may have a material impact on our results of
operations.
Our
subsidiary Orthofix Holdings, Inc.'s senior secured bank credit facility
contains significant financial and operating restrictions, including financial
covenants that we may be unable to satisfy in the future.
When we
acquired Blackstone on September 22, 2006, one of our wholly-owned subsidiaries,
Orthofix Holdings, Inc. (“Orthofix Holdings”), entered into a senior secured
bank credit facility with a syndicate of financial institutions to finance the
transaction. Orthofix and certain of Orthofix Holdings’ direct and indirect
subsidiaries, including Orthofix Inc., Breg, and Blackstone have guaranteed the
obligations of Orthofix Holdings under the senior secured bank facility. The
senior secured bank facility provides for (1) a seven-year amortizing term loan
facility of $330.0 million of which $252.4 million and $280.7 million was
outstanding at December 31, 2009 and 2008, respectively, and (2) a six-year
revolving credit facility of $45.0 million upon which we had $44.7 million
available to be drawn as of December 31, 2009.
On
September 29, 2008, we entered into an amendment to the credit
agreement. The credit agreement, as amended, contains negative
covenants applicable to Orthofix and its subsidiaries, including restrictions on
indebtedness, liens, dividends and mergers and sales of assets. The credit
agreement also contains certain financial covenants, including a fixed charge
coverage ratio and a leverage ratio applicable to Orthofix and its subsidiaries
on a consolidated basis. A breach of any of these covenants could result in an
event of default under the credit agreement, which could permit acceleration of
the debt payments under the facility. Management believes the Company
was in compliance with these financial covenants as measured at December 31,
2009. The Company further believes that it should be able to meet
these financial covenants in future fiscal quarters, however, there can be no
assurance that it will be able to do so, and failure to do so could result in an
event of default under the credit agreement, which could have a material adverse
effect on our financial position.
The
senior secured bank credit facility requires mandatory prepayments that may have
an adverse effect on our operations and limit our ability to grow our
business.
Further,
in addition to scheduled debt payments, the credit agreement, as
amended, requires us to make mandatory prepayments with (a) the
excess cash flow (as defined in the credit agreement) of Orthofix and its
subsidiaries, in an amount equal to 50% of the excess annual cash flow beginning
with the year ending December 31, 2007, provided, however, if the leverage ratio
(as defined in the credit agreement) is less than or equal to 1.75 to 1.00, as
of the end of any fiscal year, there will be no mandatory excess cash flow
prepayments, with respect to such fiscal year, (b) 100% of the net cash proceeds
of any debt issuances by Orthofix or any of its subsidiaries or 50% of the net
cash proceeds of equity issuances by any such party, excluding the exercise of
stock options, provided, however, if the leverage ratio is less than or equal to
1.75 to 1.00 at the end of the preceding fiscal year, Orthofix Holdings shall
not be required to prepay the loans with the proceeds of any such debt or equity
issuance, (c) the net cash proceeds of asset dispositions over a minimum
threshold, or (d) unless reinvested, insurance proceeds or condemnation awards.
These mandatory prepayments could limit our ability to reinvest in our
business.
The
conditions of the U.S. and international capital and credit markets may
adversely affect our ability to draw on our current revolving credit facility or
obtain future short-term or long-term lending.
Global
market and economic conditions have been, and continue to be, disrupted and
volatile. In particular, the cost and availability of funding for
many companies has been and may continue to be adversely affected by illiquid
credit markets and wider credit spreads. These forces reached
unprecedented levels in 2008, resulting in the bankruptcy or acquisition of, or
government assistance to, several major domestic and international financial
institutions. These events have significantly diminished overall
confidence in the financial and credit markets. There can be no
assurances that recent government responses to the disruptions in the financial
and credit markets will restore consumer confidence, stabilize the markets or
increase liquidity and the availability of credit.
We
continue to maintain a six-year revolving credit facility of $45.0 million upon
which we had $44.7 million available to be drawn as of December 31,
2009. However, to the extent our business requires us to access the
credit markets in the future and we are not able to do so, including in the
event that lenders cease to lend to us, or cease to be capable of lending, for
any reason, we could experience a material and adverse impact on our financial
condition and ability to borrow additional funds. This might impair
our ability to obtain sufficient funds for working capital, capital
expenditures, acquisitions, research and development and other corporate
purposes.
The
conditions of the U.S. and international capital and credit markets may
adversely affect our interest expense under our existing credit
facility.
Our
senior bank facility provides for a seven-year amortizing term loan facility of
$330.0 million for which $252.4 million was outstanding as of December 31,
2009. Obligations under the senior secured credit facility have a
floating interest rate of the London Inter-Bank Offered Rate (“LIBOR”) plus a
margin or prime rate plus a margin. Currently, the term loan is a
$252.4 million prime rate loan plus a margin of 3.5%. In June 2008,
we entered into a three year fully amortizable interest rate swap agreement (the
“Swap”) with a notional amount of $150.0 million and an expiration date of June
30, 2011. The amount outstanding under the Swap as of December 31,
2009 was $150.0 million. Under the Swap we will pay a fixed rate of
3.73% and receive interest at floating rates based on the three month LIBOR rate
at each quarterly re-pricing date until the expiration of the
Swap. As of December 31, 2009 the interest rate on the debt related
to the Swap was 10.2%. Our overall effective interest rate, including
the impact of the Swap, as of December 31, 2009 on our senior secured debt was
8.8%. Although the Swap reduces the impact of interest rate
increases, our interest expense that we incur under our term loan could increase
if there are increases in LIBOR rates. (See Item 7A, Quantitative and
Qualitative Disclosures about Market Risk in this Form
10-K.) Further, in the event that our counterparties under the Swap
were to cease to be able to satisfy their obligations under the Swap for any
reason, our interest expense could be further increased.
Our
results of operations could vary as a result of the methods, estimates and
judgments we use in applying our accounting policies.
The
methods, estimates and judgments we use in applying our accounting policies have
a significant impact on our results of operations (see “Critical Accounting
Policies and Estimates” in Part II, Item 7 of this Form 10-K). Such methods,
estimates and judgments are, by their nature, subject to substantial risks,
uncertainties and assumptions, and factors may arise over time that leads us to
change our methods, estimates and judgments. Changes in those methods, estimates
and judgments could significantly affect our results of operations.
Goodwill and other identified
intangibles could
generate future asset impairments,
which would be recorded as operating
losses.
The
Financial Accounting Standards Board’s (“FASB”) Accounting Standards
Codification (“ASC”) Topic 350 – Intangibles – Goodwill and Other (formerly
known as Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill
and Other Intangible Assets”) requires that goodwill, including the goodwill
included in the carrying value of investments accounted for using the equity
method of accounting, and other intangible assets deemed to have indefinite
useful lives, such as trademarks, cease to be amortized. ASC Topic 350 requires
that goodwill and intangible assets with indefinite lives be tested at least
annually for impairment. If Orthofix finds that the carrying value of goodwill
or a certain intangible asset exceeds its fair value, it will reduce the
carrying value of the goodwill or intangible asset to the fair value, and
Orthofix will recognize an impairment loss. Any such impairment losses are
required to be recorded as non-cash operating losses.
During
the third quarter of 2008, as a result of decreasing revenues, we evaluated the
fair value of our indefinite-lived trademarks and goodwill at
Blackstone. As a result, we recorded an impairment charge of $57.0
million related to these trademarks. We determined that the carrying
amount of goodwill related to Blackstone exceeded its implied fair value, and
recognized a goodwill impairment loss of $126.9 million.
In
addition, ASC Topic 360 – Property, Plant and Equipment (formerly known as SFAS
No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets”)
requires that intangible assets with definite lives, such as Orthofix’s
developed technologies and distribution network assets, be tested for impairment
if indicators of impairment, as defined in the standard,
exist. During the third quarter of 2008, we determined that an
indicator of impairment existed with respect to the definite-lived intangible
assets at Blackstone. We compared the expected cash flows to be
generated by the definite lived intangible assets on an undiscounted basis to
the carrying value of the intangible asset. We determined the
carrying value exceeded the undiscounted cash flow and impaired the distribution
network and developed technologies at Blackstone which resulted in an impairment
charge of $105.7 million.
Certain
of the impairment tests require Orthofix to make an estimate of the fair value
of goodwill and other intangible assets, which are primarily determined using
discounted cash flow methodologies, research analyst estimates, market
comparisons and a review of recent transactions. Since a number of factors may
influence determinations of fair value of intangible assets, Orthofix is unable
to predict whether impairments of goodwill or other indefinite lived intangibles
will occur in the future.
None.
Our
principal facilities are:
|
Facility
|
Location
|
Approx.
Square
Feet
|
Ownership
|
|||
|
Manufacturing,
warehousing, distribution and research and development facility for Spine
and Orthopedics Products and administrative facility for the Domestic and
Spinal Implants and Biologics segments
|
McKinney,
TX
|
70,000
|
Leased
|
|||
|
Tooling
and model shop for Spinal Implants and Biologics
|
Springfield,
MA
|
19,000
|
Leased
|
|||
|
Research
and development office for Spinal Implants and Biologics
|
Wayne,
NJ
|
16,548
|
Leased
|
|||
|
Research
and development, component manufacturing, quality control and training
facility for fixation products and sales management, distribution and
administrative facility for Italy
|
Verona,
Italy
|
38,000
|
Owned
|
|||
|
International
Distribution Center for Orthofix products
|
Verona,
Italy
|
18,000
|
Leased
|
|||
|
Administrative
offices for Orthofix International N.V.
|
Boston,
MA
|
7,488
|
Leased
|
|||
|
Administrative
offices for Orthofix International N.V.
|
Huntersville,
NC
|
7,225
|
Leased
|
|||
|
Sales
management, distribution and administrative offices
|
Florham
Park, NJ
|
2,700
|
Leased
|
|||
|
Sales
management, distribution and administrative offices
|
South
Devon, England
|
2,500
|
Leased
|
|||
|
Sales
management, distribution and administrative offices for A-V Impulse
®
System and fixation products
|
Andover,
England
|
9,001
|
Leased
|
|||
|
Sales
management, distribution and administrative facility for United
Kingdom
|
Maidenhead,
England
|
9,000
|
Leased
|
|||
|
Sales
management, distribution and administrative facility for
Mexico
|
Mexico
City, Mexico
|
3,444
|
Leased
|
|||
|
Sales
management, distribution and administrative facility for
Brazil
|
Alphaville,
Brazil
|
4,690
|
Leased
|
|||
|
Sales
management, distribution and administrative facility for
Brazil
|
São
Paulo, Brazil
|
1,184
|
Leased
|
|
Facility
|
Location
|
Approx.
Square
Feet
|
Ownership
|
|||
|
Sales
management, distribution and administrative facility for
France
|
Gentilly,
France
|
3,854
|
Leased
|
|||
|
Sales
management, distribution and administrative facility for
Germany
|
Valley,
Germany
|
3,000
|
Leased
|
|||
|
Sales
management, distribution and administrative facility for
Switzerland
|
Steinhausen,
Switzerland
|
1,180
|
Leased
|
|||
|
Administrative,
manufacturing, warehousing, distribution and research and development
facility for Breg
|
Vista,
California
|
104,832
|
Leased
|
|||
|
Manufacturing
facility for Breg products, including the A-V Impulse System
®
Impads
|
Mexicali,
Mexico
|
63,000
|
Leased
|
|||
|
Sales
management, distribution and administrative facility for Puerto
Rico
|
Guaynabo,
Puerto Rico
|
4,400
|
Leased
|
On or
about July 23, 2007, our subsidiary, Blackstone Medical Inc. (“Blackstone”)
received a subpoena issued by the Department of Health and Human Services,
Office of Inspector General, under the authority of the federal healthcare
anti-kickback and false claims statutes. The subpoena seeks documents for the
period January 1, 2000 through July 31, 2006, which is prior to Blackstone’s
acquisition by the Company. The Company believes that the subpoena concerns the
compensation of physician consultants and related matters. On September 17,
2007, the Company submitted a claim for indemnification from the escrow fund
established in connection with the agreement and plan of merger between the
Company, New Era Medical Corp. and Blackstone, dated as of August 4, 2006 (the
“Blackstone Merger Agreement”), for any losses to us resulting from this matter.
(The Company’s indemnification rights under the Blackstone Merger Agreement are
described further below). The Company was subsequently notified by legal counsel
for the former shareholders that the representative of the former shareholders
of Blackstone has objected to the indemnification claim and intends to contest
it in accordance with the terms of the Blackstone Merger Agreement.
On or
about January 7, 2008, the Company received a federal grand jury subpoena from
the U.S. Attorney’s Office for the District of Massachusetts. The subpoena seeks
documents from the Company for the period January 1, 2000 through July 15, 2007.
The Company believes that the subpoena concerns the compensation of physician
consultants and related matters, and further believes that it is associated with
the Department of Health and Human Services, Office of Inspector General’s
investigation of such matters. On September 18, 2008, the Company submitted a
claim for indemnification from the escrow fund established in connection with
the Blackstone Merger Agreement for any losses to the Company resulting from
this matter. On or about April 29, 2009, counsel for the Company received a
HIPAA subpoena issued by the U.S. Department of Justice. The subpoena seeks
documents from the Company for the period January 1, 2000 through July 15, 2007.
The Company believes that the subpoena concerns the compensation of physician
consultants and related matters, and further believes that it is associated with
the Department of Health and Human Services, Office of Inspector General’s
investigation of such matters, as well as the January 7, 2008 federal grand jury
subpoena. On or about February 25, 2010, counsel for Orthofix Inc. and
Blackstone sent to the U.S. Attorney’s Office for the District of Massachusetts
a tolling agreement (the “Tolling Agreement”) executed by Orthofix Inc.
and Blackstone, that extends an agreement tolling the statute of limitations
applicable to any criminal, civil, or administrative proceedings that the
government might later initiate. Upon execution by the U.S. Attorney's
Office for the District of Massachusetts, the Tolling Agreement will
extend the period tolling the statute of limitations to include the period
from December 1, 2008 through and including March 31, 2010.
On or
about December 5, 2008, the Company obtained a copy of a qui tam complaint filed
by Susan Hutcheson and Philip Brown against Blackstone and the Company in the
U.S. District Court for the District of Massachusetts. A qui tam action is a
civil lawsuit brought by an individual for an alleged violation of a federal
statute, in which the U.S. Department of Justice has the right to intervene and
take over the prosecution of the lawsuit at its option. On November 21, 2008,
the U.S. Department of Justice filed a notice of non-intervention in the case.
The complaint was served on Blackstone on or about March 24, 2009. Counsel for
the plaintiffs filed an amended complaint on June 4, 2009. The amended complaint
sets forth a cause of action against Blackstone under the False Claims Act for
alleged inappropriate payments and other items of value conferred on physician
consultants; Orthofix is not named as a defendant in the amended complaint. The
Company believes that this lawsuit is related to the matters described above
involving the Department of Health and Human Services, Office of the Inspector
General, and the U.S. Attorney’s Office for the District of Massachusetts, and
the U.S. Department of Justice. The Company intends to defend vigorously against
this lawsuit. On September 18, 2008, after being informed of the existence of
the lawsuit by representatives of the U.S. Department of Justice and prior to
the unsealing of the complaint (which was unsealed by the court on or about
November 24, 2008), the Company submitted a claim for indemnification from the
escrow fund established in connection with the Blackstone Merger Agreement for
any losses to us resulting from this matter.
On or
about September 27, 2007, Blackstone received a federal grand jury subpoena
issued by the U.S. Attorney’s Office for the District of Nevada (“USAO-Nevada
subpoena”). The subpoena seeks documents for the period from January 1999 to the
date of issuance of the subpoena. The Company believes that the subpoena
concerns payments or gifts made by Blackstone to certain physicians. On February
29, 2008, Blackstone received a Civil Investigative Demand (“CID”) from the
Massachusetts Attorney General’s Office, Public Protection and Advocacy Bureau,
Healthcare Division. The CID seeks documents for the period from
March 2004 through the date of issuance of the CID, and the Company believes
that the CID concerns Blackstone’s financial relationships with certain
physicians and related matters. The Ohio Attorney General’s Office,
Health Care Fraud Section has issued a criminal subpoena, dated August 8, 2008,
to Orthofix, Inc. (the “Ohio AG subpoena”). The Ohio AG subpoena seeks documents
for the period from January 1, 2000 through the date of issuance of the
subpoena. The Company believes that the Ohio AG subpoena arises from a
government investigation that concerns the compensation of physician consultants
and related matters. On September 18, 2008, the Company submitted a claim for
indemnification from the escrow fund established in connection with the
Blackstone Merger Agreement for any losses to us resulting from the USAO-Nevada
subpoena, the Massachusetts CID and the Ohio AG subpoena.
By order
entered on January 4, 2007, the U.S. District Court for the Eastern District of
Arkansas unsealed a qui tam complaint captioned Thomas v. Chan, et al.,
4:06-cv-00465-JLH, filed against Dr. Patrick Chan, Blackstone and other
defendants including another device manufacturer. The amended complaint in the
Thomas action alleges causes of action under the False Claims Act for alleged
inappropriate payments and other items of value conferred on Dr. Chan and
another provider. The Company believes that Blackstone has meritorious defenses
to the claims alleged and the Company intends to defend vigorously against this
lawsuit. On September 17, 2007, the Company submitted a claim for
indemnification from the escrow fund established in connection with the
Blackstone Merger Agreement for any losses to us resulting from this matter. The
Company was subsequently notified by legal counsel for the former shareholders
that the representative of the former shareholders of Blackstone has objected to
the indemnification claim and intends to contest it in accordance with the terms
of the Blackstone Merger Agreement.
Under the
Blackstone Merger Agreement, the former shareholders of Blackstone have agreed
to indemnify the Company for breaches of representations and warranties under
the agreement as well as certain other specified matters. These post-closing
indemnification obligations of the former Blackstone shareholders are limited to
a cumulative aggregate amount of $66.6 million. At closing, an escrow fund was
established pursuant to the terms of the Blackstone Merger Agreement to fund
timely submitted indemnification claims. The initial amount of the escrow fund
was $50.0 million. As of December 31, 2009, the escrow fund, which has
subsequently accrued interest, contained $52.0 million. The Company is also
entitled to seek direct personal recourse against certain principal shareholders
of Blackstone after all monies on deposit in the escrow fund have been paid out
or released or are the subject of pending or unresolved indemnification claims
but only for a period of six years from the closing date of the merger and only
up to an amount equal to $66.6 million less indemnification claims previously
paid.
In
addition to the foregoing claims, the Company has submitted claims for
indemnification from the escrow fund for losses that have resulted or may result
from certain civil actions filed against Blackstone as well as certain claims
against Blackstone alleging rights to payments for Blackstone stock options not
reflected in Blackstone’s corporate ledger at the time of its acquisition by the
Company, or that the shares or stock options subject to those claims were
improperly diluted by Blackstone. To date, the representative of the
former shareholders of Blackstone has not objected to approximately $1.5 million
in such claims from the escrow fund, with certain claims remaining
pending.
The
Company is unable to predict the outcome of each of the escrow claims described
above in the preceding paragraphs or to estimate the amount, if any, that may
ultimately be returned to the Company from the escrow fund and there can be no
assurance that losses to the Company from these matters will not exceed the
amount of the escrow fund. Expenses incurred by the Company relating to the
above matters are recorded as an escrow receivable in the Company’s financial
statements to the extent the Company believes, among other things, that
collection of the claims is reasonably assured. Expenditures related to such
matters for which the Company believes collection is doubtful are recognized in
earnings when incurred. As of December 31, 2009 and December 31, 2008, included
in Prepaid expenses and other current assets is approximately $12.9 million and
$8.3 million, respectively, of escrow receivable balances related to the
Blackstone matters described above. These amounts include, among other things,
attorneys’ fees and costs related to the government investigations manifested by
the subpoenas described above, the stock option-related claims described above,
and costs related to the qui-tam action described above. As described above,
some of these reimbursement claims are being contested by the representative of
the former shareholders of Blackstone. To mitigate the risk that some
reimbursement claims will not be collected, the Company records a reserve
against the escrow receivable during the period in which reimbursement claims
are recognized. During 2009, the Company received approximately $1.0
million of proceeds from the escrow fund which represented a portion of the
escrow claims that had been previously submitted by the Company.
Effective
October 29, 2007, Blackstone entered into a settlement agreement of a patent
infringement lawsuit brought by certain affiliates of Medtronic Sofamor Danek
USA Inc. In that lawsuit, the Medtronic plaintiffs had alleged that they were
the exclusive licensees of certain U.S. patents and that Blackstone’s making,
selling, offering for sale, and using its Blackstone Anterior Cervical Plate, 3º
Anterior Cervical Plate, Hallmark Anterior Cervical Plate, Reliant Cervical
Plate, Pillar PEEK and Construx Mini PEEK VBR System products within the U.S.
willfully infringed the subject patents. Blackstone denied infringement and
asserted that the patents were invalid. The settlement agreement is not expected
to have a material impact on the Company’s consolidated financial position,
results of operations or cash flows. On July 20, 2007, the Company submitted a
claim for indemnification from the escrow fund established in connection with
the Blackstone Merger Agreement for any losses to us resulting from this matter.
The Company was subsequently notified by legal counsel of the former
shareholders that the representative of the former shareholders of Blackstone
has objected to the indemnification claim and intends to contest it in
accordance with the terms of the Blackstone Merger Agreement.
On or
about April 10, 2009, the Company received a HIPAA subpoena (“HIPAA subpoena”)
issued by the U.S. Attorney’s Office for the District of Massachusetts (the
“Boston USAO”). The subpoena sought documents concerning, among other things,
the Company’s promotion and marketing of its bone growth stimulator devices. The
Boston USAO issued a supplemental subpoena in this matter dated July 23, 2009,
requiring testimony. That office later excused performance with the July 23,
2009 subpoena indefinitely. The Boston USAO also issued supplemental subpoenas
in this matter, dated September 21, 2009 and December 16, 2009, respectively,
seeking documents. The subpoenas seek documents for the period January 1, 1995
through the date of the respective subpoenas. Document production in response to
the subpoenas is ongoing. On December 21, 2009, the Boston USAO provided the
Company with grand jury subpoenas for the testimony of certain current employees
in connection with its ongoing investigation. The Company intends to cooperate
with the government’s requests. In meetings with the Company and its attorneys
regarding this matter, the Boston USAO has informed the Company that it is
investigating possible criminal and civil violations of federal law related to
the Company’s promotion and marketing of its bone growth stimulator
devices.
On or
about April 14, 2009, the Company obtained a copy of a qui tam complaint filed
by Jeffrey J. Bierman in the U.S. District Court for the District of
Massachusetts against Orthofix, Inc., the Company, and other companies that have
allegedly manufactured bone growth stimulation devices, including Orthologic
Corp., DJO Incorporated, Reable Therapeutics, Inc., the Blackstone Group, L.P.,
Biomet, Inc., EBI, L.P., EBI Holdings, Inc., EBI Medical Systems, Inc.,
Bioelectron, Inc., LBV Acquisition, Inc., and Smith & Nephew, Inc. By order
entered on March 24, 2009, the court unsealed the case. The amended complaint
alleges various causes of action under the federal False Claims Act and state
and city false claims acts premised on the contention that the defendants
improperly promoted the sale, as opposed to the rental, of bone growth
stimulation devices. The amended complaint also includes claims against the
defendants for, among other things, allegedly misleading physicians and
purportedly causing them to file false claims and for allegedly violating the
Anti-kickback Act by providing free products to physicians, waiving patients’
insurance co-payments, and providing inducements to independent sales agents to
generate business. The Company believes that this lawsuit is related to the
matter described above involving the HIPAA subpoena. The Company and Orthofix,
Inc. were served on or about September 8, 2009. The Company intends to defend
vigorously against this lawsuit.
On or
about July 2, 2009, the Company obtained a copy of a qui tam complaint filed by
Marcus Laughlin that is pending in the U.S. District Court for the District of
Massachusetts against the Company. This complaint has been consolidated with the
complaint described in the immediately preceding paragraph, and was unsealed on
June 30, 2009. The complaint alleges violations of the False Claims Act,
fraudulent billing, illegal kickbacks and wrongful termination based on
allegations that the Company promoted the sale rather than the rental of bone
growth stimulation devices, systematically overcharged for these products,
provided physicians kickbacks in the form of free units, referral fees, and
fitting fees, and that the defendant and its competitors discussed together
strategies to encourage higher government pricing for the products. The
complaint also alleges that TRICARE has been reimbursing the Company for its
Cervical Stim
®
product without approval to do so. An amended complaint alleges
conspiracy and violations of the Sherman Anti-Trust Act in connection with the
same alleged conduct. The Company was served with the complaint on or about
September 9, 2009. The Company intends to defend vigorously against
this lawsuit.
On June
18, 2008, a lawsuit against the Company was filed for unpaid royalties under an
agreement terminated by the Company in 2007. The Company has
counterclaimed for the overpayment of commissions previously paid under the
agreement. The plaintiffs are seeking approximately $3.7
million. The Company’s counterclaim exceeds this
amount. The outcome of this matter is uncertain.
Our
subsidiary, Breg, Inc., was engaged in the manufacturing and sale of local
infusion pumps for pain management from 1999 to 2008, when the product line was
divested. As between 2008 and present, numerous product liability
cases have been filed in the United States alleging that the local anesthetic,
when dispensed by such infusion pumps inside a joint, causes a rare arthritic
condition called “chondrolysis.” The Company believes that
meritorious defenses exist to these claims and Breg, Inc. intends to vigorously
defend these cases.
The
Company cannot predict the outcome of any proceedings or claims made against the
Company or its subsidiaries described in the preceding paragraphs and there can
be no assurance that the ultimate resolution of any claim will not have a
material adverse impact on our consolidated financial position, results of
operations, or cash flows.
In
addition to the foregoing, in the normal course of our business, the Company is
involved in various lawsuits from time to time and may be subject to certain
other contingencies. To the extent losses related to these
contingencies are both probable and estimable, the Company provides appropriate
amounts in the accompanying financial statements.
The
following table sets forth certain information about the persons who serve as
our executive officers.
|
Name
|
Age
|
Position
|
|
Alan
W. Milinazzo
|
50
|
Chief
Executive Officer, President and Director
|
|
Robert
S. Vaters
|
49
|
Executive
Vice President and Chief Financial Officer
|
|
Michael
Simpson
|
48
|
President,
Orthopedics North America
|
|
Kevin
Unger
|
38
|
President,
Orthofix Spinal Implants
|
|
Brad
Lee
|
44
|
President,
Breg, Orthofix Sports Medicine
|
|
Luigi
Ferrari
|
42
|
President,
Orthofix International Orthopedic Fixation
|
|
Eric
Brown
|
53
|
President,
Spine Stimulation
|
|
Michael
M. Finegan
|
46
|
Vice
President, Corporate Development and President,
Biologics
|
|
Raymond
C. Kolls
|
47
|
Senior
Vice President, General Counsel and Corporate
Secretary
|
______________
Our
officers serve at the discretion of the Board of Directors. There are
no family relationships among any of our directors or executive
officers. The following is a summary of the background of each
executive officer.
Alan W.
Milinazzo.
Mr. Milinazzo joined Orthofix International N.V. in
2005 as Chief Operating Officer and succeeded to the position of Chief Executive
Officer effective as of April 1, 2006. From 2002 to 2005, Mr.
Milinazzo was Vice President of Medtronic, Inc.’s Vascular business as well as
Vice President and General Manager of Medtronic’s Coronary and Peripheral
businesses. Prior to his time with Medtronic, Mr. Milinazzo spent 12
years as an executive with Boston Scientific Corporation in numerous roles,
including Vice President of Marketing for SCIMED Europe. Mr.
Milinazzo brings more than two and a half decades of experience in the
management and marketing of medical device businesses, including positions with
Aspect Medical Systems and American Hospital Supply. He earned a
bachelor’s degree, cum laude, at Boston College in 1981.
Robert S.
Vaters.
Mr. Vaters became Executive Vice President and Chief
Financial Officer of Orthofix International N.V. on September 7,
2008. Mr. Vaters joined the Company after almost four years as a
senior executive at Inamed Corporation, where he was Executive Vice President,
Chief Financial Officer and Head of Strategy and Corporate
Development. Inamed Corporation, a global medical device company was
acquired by Allergan Inc. in March of 2006. Since 2006, Mr. Vaters
has been General Partner of a health care private equity firm, which he
co-founded, and serves on the Board of Reliable Biopharmaceutical Corporation, a
private health care company.
Michael
Simpson
. Mr. Simpson became President, Orthopedics North
America in 2008. From 2002 to 2006, Mr. Simpson was Vice President of
Operations for Orthofix Inc. In 2006, Mr. Simpson was promoted to Senior Vice
President of Global Operations and General Manager, Orthofix Inc. responsible
for world wide manufacturing and distribution. With more than 20 years of
experience in a broad spectrum of industries he has held the following
positions: Chief Operating Officer, Business Unit Vice President, Vice President
of Operations, Vice President of Sales, Plant Manager, Director of Finance and
Director of Operations. His employment history includes the following companies:
Texas Instruments, Boeing, McGaw/IVAX, Mark IV Industries, Intermec and
Unilever.
Kevin Unger.
Mr.
Unger joined Orthofix as President, Orthofix Spinal Implants in August 2009.
Prior to joining Orthofix, he held the position of Vice President and General
Manager for MedSurg Divisions at Stryker. While with Stryker, Mr. Unger held
roles with increasing responsibility in marketing and sales, during which he
built sales organizations, was head of a global marketing department and led
business development initiatives. He brings with him more than 15 years of
medical device experience, specifically in the orthopedic and minimally invasive
surgical markets. Mr. Unger attended college at Miami University (Oxford, OH)
receiving his BS in Business Administration and furthered his Pre-Med studies at
Indiana University Medical School.
Brad Lee.
Mr. Lee
became President, BREG, Orthofix Sports Medicine in July 2008. He joined
Orthofix in 2005 as Director of Business Development, and in early 2008, became
Vice President and General Manager of the BREG Sports Medicine Division. Prior
to joining the Orthofix team, Mr. Lee was Vice President of Marketing for LMA
North America.
Luigi Ferrari.
Mr.
Ferrari became President, Orthofix International Orthopedic Fixation in October
2009 and manages the Orthopedics International, MedSurg and European Spine
businesses. Previously, he was President of Orthopedics International and was
responsible for the development, manufacturing and sales of fixation systems in
international markets. From 2006 to 2008, he was Vice President of Europe and
oversaw Orthofix activities in these key geographic markets. He serves also as
General Manager of Orthofix Srl, Italy. Mr. Ferrari graduated with a
degree in Management Engineering from Politecnico di Milano University in
1992.
Eric
Brown
.
Mr.
Brown was named President, Spine Stimulation in 2009. Prior to that,
he was Senior Vice President, Sales and Marketing for Orthofix Inc. His
long-standing career with Orthofix began in 1990. He has held various sales and
marketing positions, including Region Manager, Director of Sales and Vice
President of Sales. Before joining Orthofix, Mr. Brown spent eight years at
Medtronic Neurological. He received his BS in Business Administration from
Michigan State University.
Michael M.
Finegan.
Mr. Finegan joined Orthofix International N.V. in
June 2006 as Vice President of Corporate Development. Mr. Finegan was
named President, Biologics in March 2009. Prior to joining Orthofix,
Mr. Finegan spent sixteen years as an executive with Boston Scientific in a
number of different operating and strategic roles, most recently as Vice
President of Corporate Sales. Earlier in his career, Mr. Finegan held
sales and marketing roles with Marion Laboratories and spent three years in
banking with First Union Corporation (Wachovia). Mr. Finegan earned a
BA in Economics from Wake Forest University.
Raymond C. Kolls,
J.D.
Mr. Kolls became Vice President, General Counsel and
Corporate Secretary of Orthofix International N.V. on July 1, 2004. Mr. Kolls
was named Senior Vice President, General Counsel and Corporate Secretary
effective October 1, 2006. From 2001 to 2004, Mr. Kolls was Associate
General Counsel for CSX Corporation. Mr. Kolls began his legal career
as an attorney in private practice with the law firm of Morgan, Lewis &
Bockius. Mr. Kolls will be ceasing his employment with the Company
effective as of March 31, 2010.
PAR
T II
Item
5.
Market for Registrant’s
Common Equity, Related Stockholder Matters
and Issuer Purchases of
Equity Securities
Market
for Our Common Stock
Our
common stock is traded on the Nasdaq
®
Global Select Market under the symbol “OFIX.” The following table
shows the quarterly range of high and low sales prices for our common stock as
reported by Nasdaq
®
for
each of the two most recent fiscal years ended December 31, 2009. As
of February 26, 2010 we had 489 holders of record of our common
stock. The closing price of our common stock on February 26, 2010 was
$34.09.
|
High
|
Low
|
|||||||
|
2008
|
||||||||
|
First
Quarter
|
$ | 59.96 | $ | 35.50 | ||||
|
Second
Quarter
|
40.29 | 28.46 | ||||||
|
Third
Quarter
|
29.83 | 17.07 | ||||||
|
Fourth
Quarter
|
20.03 | 8.65 | ||||||
|
2009
|
||||||||
|
First
Quarter
|
$ | 19.99 | $ | 13.43 | ||||
|
Second
Quarter
|
27.24 | 16.10 | ||||||
|
Third
Quarter
|
30.47 | 22.03 | ||||||
|
Fourth
Quarter
|
33.49 | 28.43 | ||||||
Dividend
Policy
We have
not paid dividends to holders of our common stock in the past. We
currently intend to retain all of our consolidated earnings to finance credit
agreement obligations and to finance the continued growth of our
business. We have no present intention to pay dividends in the
foreseeable future.
In the
event that we decide to pay a dividend to holders of our common stock in the
future with dividends received from our subsidiaries, we may, based on
prevailing rates of taxation, be required to pay additional withholding and
income tax on such amounts received from our subsidiaries.
Recent
Sales of Unregistered Securities
There
were no securities sold by us during 2009 that were not registered under the
Securities Act.
Exchange
Controls
Although
there are Netherlands Antilles laws that may impose foreign exchange controls on
us and that may affect the payment of dividends, interest or other payments to
nonresident holders of our securities, including the shares of common stock, we
have been granted an exemption from such foreign exchange control regulations by
the Bank of the Netherlands Antilles. Other jurisdictions in which we
conduct operations may have various currency or exchange controls. In
addition, we are subject to the risk of changes in political conditions or
economic policies that could result in new or additional currency or exchange
controls or other restrictions being imposed on our operations. As to
our securities, Netherlands Antilles law and our Articles of Association impose
no limitations on the rights of persons who are not residents in or citizens of
the Netherlands Antilles to hold or vote such securities.
Taxation
Under the
laws of the Netherlands Antilles as currently in effect, a holder of shares of
common stock who is not a resident of, and during the taxable year has not
engaged in trade or business through a permanent establishment in, the
Netherlands Antilles will not be subject to Netherlands Antilles income tax on
dividends paid with respect to the shares of common stock or on gains realized
during that year on sale or disposal of such shares; the Netherlands Antilles
does not impose a withholding tax on dividends paid by us. There are
no gift or inheritance taxes levied by the Netherlands Antilles when, at the
time of such gift or at the time of death, the relevant holder of common shares
was not domiciled in the Netherlands Antilles. No reciprocal tax
treaty presently exists between the Netherlands Antilles and the
U.S.
Performance
Graph
The
following performance graph in this Item 5 of this Annual Report on Form 10-K is
not deemed to be “soliciting material” or to be "filed" with the SEC or subject
to Regulation 14A or 14C under the Securities Exchange Act of 1934 or to the
liabilities of Section 18 of the Securities Exchange Act of 1934, and will not
be deemed to be incorporated by reference into any filing under the Securities
Act of 1933 or the Securities Exchange Act of 1934, except to the extent we
specifically incorporate it by reference into such a filing.
The graph
below compares the five-year total return to shareholders for Orthofix common
stock with comparable return of two indexes: the NASDAQ Stock Market and NASDAQ
stocks for surgical, medical, and dental instruments and supplies.
The graph
assumes that you invested $100 in Orthofix Common Stock and in each of the
indexes on December 31, 2004. Points on the graph represent the
performance as of the last business day of each of the years
indicated.
The
following selected consolidated financial data for the years ended December 31,
2009, 2008, 2007, 2006 and 2005 have been derived from our audited consolidated
financial statements. The financial data as of December 31, 2009 and
2008 and for the years ended December 31, 2009, 2008 and 2007 should be read in
conjunction with, and are qualified in their entirety by, reference to Item 7
under the heading “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” and our consolidated financial statements and notes
thereto included elsewhere in this Form 10-K. Our consolidated
financial statements have been prepared in accordance with accounting principles
generally accepted in the U.S. (“US GAAP”).
|
Year ended December
31,
|
||||||||||||||||||||
|
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
|
(US$
in thousands, except margin and per share data)
|
||||||||||||||||||||
|
Consolidated
operating results
|
||||||||||||||||||||
|
Net
sales
|
$ | 545,635 | $ | 519,675 | $ | 490,323 | $ | 365,359 | $ | 313,304 | ||||||||||
|
Gross
profit
(5)
|
407,185 | 367,661 | 361,291 | 271,734 | 229,516 | |||||||||||||||
|
Gross
profit margin
(5)
|
75 | % | 71 | % | 74 | % | 74 | % | 73 | % | ||||||||||
|
Total
operating income (loss)
|
63,875 | (256,949 | ) | 38,057 | 9,946 | 99,795 | ||||||||||||||
|
Net
income (loss)
(1) (2)
(3) (4)
|
24,472 | (228,554 | ) | 10,968 | (7,042 | ) | 73,402 | |||||||||||||
|
Net
income (loss) per share of common stock (basic)
|
1.43 | (13.37 | ) | 0.66 | (0.44 | ) | 4.61 | |||||||||||||
|
Net
income (loss) per share of common stock (diluted)
|
1.42 | (13.37 | ) | 0.64 | (0.44 | ) | 4.51 | |||||||||||||
_______________
|
(1)
|
The
Company has not paid any dividends in any of the years
presented.
|
|
(2)
|
Net
loss for 2006 includes $40.0 million after tax earnings charge related to
in-process research and development costs related to the Blackstone
acquisition.
|
|
(3)
|
Net
income for 2007 includes $12.8 million after tax earnings charge related
to impairment of certain intangible
assets.
|
|
(4)
|
Net
loss for 2008 includes $237.7 million after tax charge related to
impairment of goodwill and certain intangible
assets.
|
|
(5)
|
Gross
profit includes effect of obsolescence provision representing 2% points
for the year ended December 31,
2008.
|
|
Consolidated
financial position
|
As of December 31,
|
|||||||||||||||||||
|
(at
year-end)
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||
|
(US$
in thousands, except share data)
|
||||||||||||||||||||
|
Total
assets
|
$ | 590,473 | $ | 561,215 | $ | 885,664 | $ | 862,285 | $ | 473,861 | ||||||||||
|
Total
debt
|
254,673 | 282,769 | 306,635 | 315,467 | 15,287 | |||||||||||||||
|
Shareholders’
equity
|
240,269 | 202,061 | 433,940 | 392,635 | 368,885 | |||||||||||||||
|
Weighted
average number of shares of common stock outstanding
(basic)
|
17,119,474 | 17,095,416 | 16,638,873 | 16,165,540 | 15,913,475 | |||||||||||||||
|
Weighted
average number of shares of common stock outstanding
(diluted)
|
17,202,943 | 17,095,416 | 17,047,587 | 16,165,540 | 16,288,975 | |||||||||||||||
The
following discussion and analysis addresses the results of our operations which
are based upon the consolidated financial statements included herein, which have
been prepared in accordance with US GAAP. This discussion should be read in
conjunction with “Forward-Looking Statements” and our consolidated financial
statements and notes thereto appearing elsewhere in this Form 10-K
.
This discussion
and analysis also addresses our liquidity and financial condition and other
matters.
General
We are a
diversified orthopedic products company offering a broad line of surgical and
non-surgical products for the Spine, Orthopedics, Sports Medicine and Vascular
market sectors. Our products are designed to address the lifelong bone-and-joint
health needs of patients of all ages, helping them achieve a more active and
mobile lifestyle. We design, develop, manufacture, market and
distribute medical equipment used principally by musculoskeletal medical
specialists for orthopedic applications. Our main products are invasive and
minimally invasive spinal implant products and related human cellular and tissue
based products (“HCT/P products”), non-invasive bone growth stimulation products
used to enhance the success rate of spinal fusions and to treat non-union
fractures, external and internal fixation devices used in fracture treatment,
limb lengthening and bone reconstruction; and bracing products used for ligament
injury prevention, pain management and protection of surgical repair to promote
faster healing. Our products also include a device for enhancing
venous circulation, cold therapy, bone cement and devices for removal of bone
cement used to fix artificial implants and airway management products used in
anesthesia applications.
In 2009,
our publicly stated financial goals were primarily related to improvements in
the operating performance of the Spinal Implants & Biologics segment,
including:
|
|
·
|
An
acceleration in the growth of
revenue;
|
|
|
·
|
An
increase of the gross profit margin;
and
|
|
|
·
|
A
reduction in operating expenses as a percentage of net
sales
|
The
acceleration of revenue growth was driven by the introduction of a number of key
new products in 2009, including the Trinity® Evolution™ allograft, the Firebird™
pedicle screw system, the PILLAR™ SA interbody device, and the Ascent
®
LE
posterior cervical spine system.
Our gross
profit margin increased as a result of the introduction of the key new products
indicated above, primarily Trinity® Evolution™. While we record 70%
of the sales price of Trinity® Evolution™ allograft versus recording 100% of the
sales price of the old Trinity® product, we recognize a 100% gross profit margin
from the marketing fees earned from the sales of this allograft, compared to
approximately 50% gross profit margin on our previous Trinity®
product. This is due to the fact that we are not required to purchase
inventory of Trinity® Evolution™, whereas, previously, we were required to
purchase inventory of the old Trinity® product and record the associated cost of
sales.
Our
operating expenses decreased as a percentage of net sales as we leveraged our
operating infrastructure against the increase in net sales noted
above. Additionally, we initiated a reorganization and consolidation
plan, during the fourth quarter of 2008, to reduce operating expenses by
eliminating redundancies and increasing operating efficiency. This
plan includes the consolidation of operations in our Springfield, MA and Wayne,
NJ locations into the Company’s operations in the Dallas, TX
area. For a further discussion about this reorganization and
consolidation plan, please refer to the explanation provided in our Liquidity
and Capital Resources section of this Management Discussion and
Analysis.
We have
administrative and training facilities in the U.S. and Italy and manufacturing
facilities in the U.S., the United Kingdom, Italy and Mexico. We
directly distribute our products in the U.S., the United Kingdom, Italy,
Germany, Switzerland, Austria, France, Belgium, Mexico, Brazil, and Puerto Rico.
In several of these and other markets, we also distribute our products through
independent distributors.
Our
consolidated financial statements include the financial results of the Company
and its wholly-owned and majority-owned subsidiaries and entities over which we
have control. All intercompany accounts and transactions are
eliminated in consolidation.
Our
reporting currency is the U.S. Dollar. All balance sheet accounts,
except shareholders’ equity, are translated at year-end exchange rates, and
revenue and expense items are translated at weighted average rates of exchange
prevailing during the year. Gains and losses resulting from foreign
currency transactions are included in other income (expense). Gains
and losses resulting from the translation of foreign currency financial
statements are recorded in the accumulated other comprehensive income component
of shareholders’ equity.
Our
financial condition, results of operations and cash flows are not significantly
impacted by seasonality trends. However, sales associated with
products for elective procedures appear to be influenced by the somewhat lower
level of such procedures performed in the late summer. Certain of the
Breg
®
bracing products experience greater demand in the fall and winter corresponding
with high school and college football schedules and winter sports. In
addition, we do not believe our operations will be significantly affected by
inflation. However, in the ordinary course of business, we are
exposed to the impact of changes in interest rates and foreign currency
fluctuations. Our objective is to limit the impact of such movements
on earnings and cash flows. In order to achieve this objective, we
seek to balance non-dollar denominated income and
expenditures. During the year, we have used derivative instruments to
hedge foreign currency fluctuation exposures. See Item 7A –
“Quantitative and Qualitative Disclosures About Market Risk.”
We manage
our operations as four business segments: Domestic, Spinal Implants &
Biologics, Breg, and International. Domestic consists of operations
of our subsidiary Orthofix Inc. Spinal Implants and Biologics consist
of our Blackstone subsidiary and its domestic and international
operations. Breg consists of Breg Inc.’s operations and domestic and
international distributors. International consists of operations which are
located in the rest of the world as well as independent export distribution
operations. Group Activities are comprised of the operating expenses and
identifiable assets of Orthofix International N.V. and its U.S. holding company
subsidiary, Orthofix Holdings, Inc.
Critical
Accounting Policies and Estimates
Our
discussion of operating results is based upon the consolidated financial
statements and accompanying notes to the consolidated financial statements
prepared in conformity with US GAAP. The preparation of these
statements necessarily requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amount of revenues and expenses during the reporting
period. These estimates and assumptions form the basis for the
carrying values of assets and liabilities. On an ongoing basis, we
evaluate these estimates, including those related to allowance for doubtful
accounts, sales allowances and adjustments, inventories, intangible assets and
goodwill, income taxes, derivatives and litigation and
contingencies. We base our estimates on historical experience and
various other assumptions. Actual results may differ from these
estimates. We have reviewed our critical accounting policies with the
Audit Committee of the Board of Directors.
Revenue
Recognition
Revenue
is generally recognized as income in the period in which title passes and the
products are delivered. Revenues exclude any value added or other
local taxes, intercompany sales and trade discounts. Shipping and
handling costs are included in cost of sales. Royalty revenues are
recognized when the royalty is earned.
For bone
growth stimulation and certain bracing products that are prescribed by a
physician, the Company recognizes revenue when the product is placed on or
implanted in and accepted by the patient. For domestic spinal implant
and HCT/P products, revenues are recognized when the product has been utilized
and a confirming purchase order has been received from the
hospital. For sales to commercial customers, including hospitals and
distributors, revenues are recognized at the time of shipment unless contractual
agreements specify that title passes on delivery. Revenues for
inventory delivered on consignment are recognized as the product is used by the
consignee.
In 2008,
the Company entered into an agreement with the Musculoskeletal Transplant
Foundation (“MTF”) to develop and commercialize a new stem cell-based bone
growth biologic matrix. With the development process completed in
2009, the Company and MTF operate under the terms of a separate
commercialization agreement. Under the terms of this 10-year
agreement, MTF sources the tissue, processes it to create the bone growth
matrix, and packages and delivers it in accordance with orders received directly
from customers and from the Company. The Company has exclusive global
marketing rights for the new allograft and receives a marketing fee from MTF
based on total sales. This marketing fee is recorded on a net basis
within net sales.
The
Company derives a significant amount of revenues in the U.S. from third-party
payors, including commercial insurance carriers, health maintenance
organizations, preferred provider organizations and governmental payors such as
Medicare. Amounts paid by these third-party payors are generally
based on fixed or allowable reimbursement rates. These revenues are
recorded at the expected or pre-authorized reimbursement rates, net of any
contractual allowances or adjustments. Certain billings are subject
to review by the third-party payors and may be subject to
adjustment.
Allowance
for Doubtful Accounts and Contractual Allowances
The
process for estimating the ultimate collection of accounts receivable involves
significant assumptions and judgments. Historical collection and
payor reimbursement experience is an integral part of the estimation process
related to reserves for doubtful accounts and the establishment of contractual
allowances. Accounts receivable are analyzed on a quarterly basis to
assess the adequacy of both reserves for doubtful accounts and contractual
allowances. Revisions in allowances for doubtful accounts estimates
are recorded as an adjustment to bad debt expense within sales and marketing
expenses. Revisions to contractual allowances are recorded as an
adjustment to net sales. In the judgment of management,
adequate allowances have been provided for doubtful accounts and contractual
allowances. Our estimates are periodically tested against actual
collection experience.
Inventory
Allowances
We write
down our inventory for inventory excess and obsolescence by an amount equal to
the difference between the cost of the inventory and the estimated net
realizable value based upon assumptions about future demand and market
conditions. Inventory is analyzed to assess the adequacy of inventory
excess and obsolescence provisions. Reserves in excess and
obsolescence provisions are recorded as adjustments to cost of goods
sold. If conditions or assumptions used in determining the market
value change, additional inventory adjustments in the future may be
necessary.
Goodwill
and Other Intangible Assets
In
accordance with ASC Topic 360 – Property, Plant and Equipment (formerly known as
SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets”),
intangible assets with definite lives, such as Orthofix’s developed technologies
and distribution network assets, are tested for impairment if any adverse
conditions exist or change in circumstances has occurred that would indicate
impairment or a change in the remaining useful life. If an impairment
indicator exists, the Company tests the intangible asset for
recoverability. For purposes of the recoverability test, the Company
groups its intangible assets with other assets and liabilities at the lowest
level of identifiable cash flows if the intangible asset does not generate cash
flows independent of other assets and liabilities. If the carrying
value of the intangible asset (asset group) exceeds the undiscounted cash flows
expected to result from the use and eventual disposition of the intangible asset
(asset group), the Company will write the carrying value down to the fair value
in the period identified.
The
Company generally calculates fair value of intangible assets as the present
value of estimated future cash flows the Company expects to generate from the
asset using a risk-adjusted discount rate. In determining the
estimated future cash flows associated with intangible assets, the Company uses
estimates and assumptions about future revenue contributions, cost structures
and remaining useful lives of the asset (asset group). The use of
alternative assumptions, including estimated cash flows, discount rates, and
alternative estimated remaining useful lives could result in different
calculations of impairment
The
Company tests goodwill and certain trademarks at least annually. The
Company tests more frequently if indicators are present or changes in
circumstances suggest that impairment may exist. These indicators
include, among others, declines in sales, earnings or cash flows, or the
development of a material adverse change in the business climate. The
Company assesses goodwill for impairment at the reporting unit level, which is
defined as an operating segment or one level below an operating segment,
referred to as a component. Consistent with prior years, the Company
has identified four reporting units, which are consistent with the Company’s
reporting segments; Domestic, Spinal Implants and Biologics, Breg and
International.
In
performing the annual impairment test, the Company utilizes the two-step
approach prescribed under ASC Topic 350 – Intangibles – Goodwill and Other
(formerly known as SFAS No. 142, “Goodwill and Other Intangible
Assets”). The first step requires a comparison of each reporting
unit’s carrying value to the fair value of the respective unit. If
the carrying value exceeds the fair value, a second step is performed to measure
the amount of impairment loss, if any.
Carrying
Value
In order
to calculate the respective carrying values, the Company records goodwill based
on the purchase price allocation performed at the time of
acquisition. Corporate assets and liabilities that directly relate to
a reporting unit’s operations are ascribed directly to that reporting unit.
Corporate assets and liabilities that are not directly related to a specific
reporting unit, but from which the reporting unit benefits, are allocated based
on the respective revenue contribution of each reporting unit.
Fair
Value – Income Approach
The fair
value of each reporting unit is estimated, entirely or predominantly, using an
income based approach. This income approach utilizes a discounted
cash flow (“DCF”), which estimates after-tax cash flows on a debt free basis,
discounted to present value using a risk-adjusted discount rate.
The
Company believes the DCF generally provides the most meaningful fair value as it
appropriately measures the Company’s income producing assets. The Company may
consider using a cost approach but generally believes it is not appropriate,
given the inability to replicate the value of the specific technology-based
assets within our reporting units. In circumstances when the DCF
indicator of fair value is not sufficiently conclusive to support the carrying
value of a reporting unit, or when other measures provide a more appropriate
indicator, we may consider a market approach in our determination of the
reporting unit’s fair value.
In
performing a DCF calculation, the Company is required to make assumptions about
the amount and timing of future expected cash flows, terminal value growth rates
and appropriate discount rates and in connection therewith considers the
following:
|
|
·
|
The
determination of expected cash flows is based on the Company’s strategic
plans and long-range planning forecasts which, to the extent reasonably
possible, reflect anticipated changes in the economy and the
industry. Revenue growth rates represent estimates based on
current and forecasted market conditions. The profit margin
assumptions are projected by each reporting unit based on historical
margins, the current cost structure and anticipated net cost
reductions.
|
|
|
·
|
The
terminal value growth rate is used to calculate the value of cash flows
beyond the last projected period in the DCF. This rate reflects
the Company’s estimates for stable, perpetual growth for each reporting
unit.
|
|
|
·
|
The
discount rates are based on the reporting unit’s risk-adjusted weighted
average cost of capital, using assumptions consistent with publicly traded
guideline companies operating within the medical device industry as well
as Company specific risk factors for each reporting
unit.
|
These
inputs represent the Company’s best estimate, however, different cash flows,
growth and discount rate assumptions could generate different fair values,
potentially impacting the Company’s impairment assessment.
Domestic,
Breg and International Reporting Units
The fair
value of the Domestic, Breg and International reporting units have been
established using a DCF method. These DCF results concluded the fair
value of the Domestic, Breg and International reporting units exceeded the
respective carrying values at December 31, 2009 and December 31,
2008. The assumptions used in the December 31, 2009 DCF results were
consistent with the DCF results used in the prior year, reflecting appropriate
adjustments for changes in the economic climate.
Spinal
Implants and Biologics Reporting Unit
During
the third quarter of 2008, the Company indentified indicators of impairment with
respect to the Spinal Implants and Biologics reporting unit, prompting an
interim impairment test. The determination of the Spinal Implants and
Biologics fair value was calculated using a combination of income and market
approaches, weighted based on guidance provided by an independent appraisal
firm. The income approach was based on a DCF model. The
market approach was based on the guideline transaction method, which derived
applicable market multiples from the prices at which comparable companies have
been acquired in the marketplace. The Company applied a weighted
average percentage of 75% - 25%, placing greater weight on the income approach,
which provided a lower fair value. This calculation resulted in a
$126.9 million impairment loss, reducing the related goodwill balance to $9.4
million as of December 31, 2008.
The
Company used a DCF to determine the fair value of the Spinal Implants and
Biologics reporting unit as of December 31, 2009. This resulted in no
significant changes to the Spinal Implants and Biologics fair value
assumptions. Accordingly, the annual impairment test as of December
31, 2009 resulted in no further impairment of the Spinal Implants and Biologics
reporting unit.
Derivatives
We manage
our exposure to fluctuations in interest rates and foreign exchange within the
consolidated financial statements according to our hedging policy. Under the
policy, we may engage in non-leveraged transactions involving various financial
derivative instruments to manage exposed positions. The policy
requires us to formally document the relationship between the hedging instrument
and hedged item, as well as its risk-management objective and strategy for
undertaking the hedge transaction. For instruments designated as a
cash flow hedge, we 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, we will discontinue the related hedge accounting
prospectively. Such a determination would be made when (1) 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.
We follow
ASC Topic 815 – Derivatives and Hedging (“ASC Topic 815”) (formerly known as
SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”),
which requires that all derivatives be recorded as either assets or liabilities
on the balance sheet at their respective fair values. For a cash flow
hedge, the effective portion of the derivative’s change in fair value (i.e.,
gains or losses) is initially reported as a component of other comprehensive
income, net of related taxes, and subsequently reclassified into net earnings
when the hedged exposure affects net earnings.
We
utilize a cross currency swap to manage our foreign currency exposure related to
a portion of our intercompany receivable of a U.S. dollar functional currency
subsidiary that is denominated in Euro. The cross currency swap has
been accounted for as a cash flow hedge in accordance with ASC Topic
815.
Litigation
and Contingent Liabilities
From time
to time, we are parties to or targets of lawsuits, investigations and
proceedings, including product liability, personal injury, patent and
intellectual property, health and safety and employment and healthcare
regulatory matters, which are handled and defended in the ordinary course of
business. These lawsuits, investigations or proceedings could involve
a substantial number of claims and could also have an adverse impact on our
reputation and customer base. Although we maintain various liability
insurance programs for liabilities that could result from such lawsuits,
investigations or proceedings, we are self-insured for a significant portion of
such liabilities. We accrue for such claims when it is probable that
a liability has been incurred and the amount can be reasonably
estimated. The process of analyzing, assessing and establishing
reserve estimates for these types of claims involves
judgment. Changes in the facts and circumstances associated with a
claim could have a material impact on our results of operations and cash flows
in the period that reserve estimates are revised. We believe that
present insurance coverage and reserves are sufficient to cover currently
estimated exposures, but we cannot give any assurance that we will not incur
liabilities in excess of recorded reserves or our present insurance
coverage.
As part
of the total Blackstone purchase price, approximately $50.0 million was placed
into an escrow account, against which we can make claims for reimbursement for
certain defined items relating to the acquisition for which we are
indemnified. The Company has certain contingencies arising from the
acquisition that we expect will be reimbursable from the escrow account should
we have to make a payment to a third party, including legal fees incurred
related to the matter. We believe that the amount that we will be
required to pay relating to the contingencies will not exceed the amount of the
escrow account; however, there can be no assurance that the contingencies will
not exceed the amount of the escrow account.
Tax
Matters
We and
each of our subsidiaries are taxed at the rates applicable within each of their
respective jurisdictions. The composite income tax rate, tax
provisions, deferred tax assets and deferred tax liabilities will vary according
to the jurisdiction in which profits arise. Further, certain of our
subsidiaries sell products directly to our other subsidiaries or provide
administrative, marketing and support services to our other
subsidiaries. These intercompany sales and support services involve
subsidiaries operating in jurisdictions with differing tax rates. The
tax authorities in such jurisdictions may challenge our treatments under
residency criteria, transfer pricing provisions, or other aspects of their
respective tax laws, which could affect our composite tax rate and
provisions.
We
adopted the provisions of ASC Topic 740 – Income Taxes (formerly known as FASB
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an
interpretation of FASB Statement No. 109” (“FIN 48”)), on January 1,
2007. As such, we determine whether it is more likely than not that
our tax positions will be sustained based on the technical merits of each
position. At December 31, 2009, we have $0.4 million of unrecognized
tax benefits compared with $0.7 million of unrecognized tax benefits at December
31, 2008 and accrued interest and penalties of $0.4 million and $0.4 million at
December 31, 2009 and 2008, respectively.
Share-based
Compensation
The
Company recognizes share-based compensation in accordance with ASC Topic 718 –
Compensation – Stock Compensation (“ASC Topic 718”) (formerly known as SFAS No.
123(R) (revised 2004), “Share-Based Payment”). The fair value of
stock options is determined using the Black-Scholes valuation model. Such value
is recognized as expense over the service period net of estimated
forfeitures.
The
expected term of options granted is estimated based on a number of factors,
including the vesting term of the award, historical employee exercise behavior
for both options that are currently outstanding and options that have been
exercised or are expired, the expected volatility of the Company’s common stock
and an employee’s average length of service. The risk-free interest rate is
determined based upon a constant U.S. Treasury security rate with a contractual
life that approximates the expected term of the option
award. Management estimates expected volatility based on the
historical volatility of the Company’s stock. The compensation expense
recognized for all equity-based awards is net of estimated forfeitures.
Forfeitures are estimated based on an analysis of actual option
forfeitures.
Selected
Financial Data
The
following table presents certain items in our statements of operations as a
percent of net sales for the periods indicated:
|
Year ended December
31,
|
||||||||||||
|
2009
(%)
|
2008
(%)
|
2007
(%)
|
||||||||||
|
Net
sales
|
100 | 100 | 100 | |||||||||
|
Cost
of sales
|
25 | 29 | 26 | |||||||||
|
Gross
profit
(1)
|
75 | 71 | 74 | |||||||||
|
Operating
expenses
|
||||||||||||
|
Sales
and marketing
|
40 | 40 | 38 | |||||||||
|
General
and administrative
|
16 | 16 | 15 | |||||||||
|
Research
and development
|
6 | 6 | 5 | |||||||||
|
Amortization
of intangible assets
|
1 | 3 | 4 | |||||||||
|
Impairment
of certain intangible assets
|
- | 56 | 4 | |||||||||
|
Total
operating income (loss)
|
12 | (49 | ) | 8 | ||||||||
|
Net
income (loss)
(1)
|
4 | (44 | ) | 2 | ||||||||
(1)
Includes
effect of obsolescence provision representing 2% in the year ended December 31,
2008.
Segment
and Market Sector Revenue
The
following tables display net sales by business segment and net sales by market
sector. We maintain our books and records and account for net sales,
costs of sales and expenses by business segment. We provide net sales
by market sector for information purposes only.
Business
Segment:
|
Year ended December 31,
(US$ in thousands)
|
||||||||||||||||||||||||
|
2009
|
2008
|
2007
|
||||||||||||||||||||||
|
Net Sales
|
Percent of Total Net
Sales
|
Net Sales
|
Percent of Total Net
Sales
|
Net Sales
|
Percent of Total Net
Sales
|
|||||||||||||||||||
|
Domestic
|
$ | 210,703 | 38 | % | $ | 188,807 | 36 | % | $ | 166,727 | 34 | % | ||||||||||||
|
Spinal
Implants and Biologics
|
118,680 | 22 | % | 108,966 | 21 | % | 115,914 | 24 | % | |||||||||||||||
|
Breg
|
92,188 | 17 | % | 89,478 | 17 | % | 83,397 | 17 | % | |||||||||||||||
|
International
|
124,064 | 23 | % | 132,424 | 26 | % | 124,285 | 25 | % | |||||||||||||||
|
Total
|
$ | 545,635 | 100 | % | $ | 519,675 | 100 | % | $ | 490,323 | 100 | % | ||||||||||||
Our
revenues are derived from sales of products in the market sectors of Spine,
Orthopedics, Sports Medicine, Vascular and Other.
Market
Sector:
|
Year ended December 31,
(US$ in thousands)
|
||||||||||||||||||||||||
|
2009
|
2008
|
2007
|
||||||||||||||||||||||
|
Net Sales
|
Percent of Total Net
Sales
|
Net Sales
|
Percent of Total Net
Sales
|
Net Sales
|
Percent of Total Net
Sales
|
|||||||||||||||||||
|
Spine
|
$ | 279,425 | 51 | % | $ | 252,239 | 49 | % | $ | 243,165 | 49 | % | ||||||||||||
|
Orthopedics
|
131,310 | 24 | % | 129,106 | 25 | % | 111,932 | 23 | % | |||||||||||||||
|
Sports
Medicine
|
96,366 | 18 | % | 94,528 | 18 | % | 87,540 | 18 | % | |||||||||||||||
|
Vascular
|
18,710 | 3 | % | 17,890 | 3 | % | 19,866 | 4 | % | |||||||||||||||
|
Other
|
19,824 | 4 | % | 25,912 | 5 | % | 27,820 | 6 | % | |||||||||||||||
|
Total
|
$ | 545,635 | 100 | % | $ | 519,675 | 100 | % | $ | 490,323 | 100 | % | ||||||||||||
2009
Compared to 2008
Net sales
increased 5% to $545.6 million in 2009 compared to $519.7 million in
2008. The impact of foreign currency decreased sales by $11.1 million
in 2009 when compared to 2008.
Sales
by Business Segment:
Net sales
in Domestic increased to $210.7 million in 2009 compared to $188.8 million in
2008, an increase of 12%. Domestic’s net sales represented 38% and
36% of our total net sales in 2009 and 2008, respectively. The increase in
Domestic’s net sales was partially the result of a 12% increase in sales in our
Spine market sector, which was mainly driven by increased sales of our
Spinal-Stim® and Cervical-Stim® products. The increase in Domestic’s
net sales was also attributable to a 10% increase in our Orthopedics market
sector which included a 14% increase in sales of Physio-Stim® products, an 8%
increase in sales of our external fixation products as compared to 2008 and a
36% increase in sales of our HCT/P products, specifically Trinity®
Evolution™. During the year ended December 31, 2009, Domestic
generated $1.5 million in revenues of Trinity® Evolution™.
Domestic
Sales by Market Sector:
|
(US$ in thousands)
|
2009
|
2008
|
Growth
|
|||||||||
|
Spine
|
$ | 158,908 | $ | 141,753 | 12 | % | ||||||
|
Orthopedics
|
51,795 | 47,054 | 10 | % | ||||||||
|
Total
|
$ | 210,703 | $ | 188,807 | 12 | % | ||||||
Net sales
in Spinal Implants & Biologics increased $9.7 million to $118.7 million
in 2009 compared to $109.0 million in 2008, an increase of 9%. Spinal
Implants & Biologics’ net sales represented 22% and 21% of our total net
sales in 2009 and 2008, respectively. The increase in sales was primarily
related to a 16% increase in our thoracolumbar product sales due to the
introduction of the new Firebird™ pedicle screw system during the second quarter
of 2009. Sales of our interbody and cervical products in 2009
increased by 4% and 10%, respectively, when compared to 2008. These
sales increases were partially offset by a 4% sales decrease in our biologics
products when compared to the same period last year as a result of our
replacement of the Trinity® product line with Trinity®
Evolution™. Although biologics sales decreased, the quantity of
product sold increased in 2009 compared to 2008 because, under the terms of the
agreement, we recognized marketing fees of 70% of the end-user sales price of
Trinity® Evolution™ compared to 100% of the end-user sales price of
Trinity®. All of Spinal Implants & Biologics’ sales are recorded
in our Spine market sector.
Net sales
in Breg increased $2.7 million to $92.2 million in 2009 compared to
$89.5 million in 2008, an increase of 3%. Breg’s net sales
represented
17%
of our total net sales
during both years ended December 31, 2009 and 2008. Net sales in Breg
would have been $93.7 million in 2009, or an increase of 5% compared to 2008,
had it not been for a reclassification of certain commissions which are
reflected as a reduction of revenue, but were originally recorded in operating
expenses. The increase in Breg’s net sales was primarily due to an 8%
increase in sales of our Breg bracing products when compared to the prior year,
primarily as a result of the sales of our new products which include spine
bracing. Further, sales of our cold therapy products increased 6% in
2009 compared to 2008 which is due to the recent introduction of our Kodiak®
cold therapy products. These increases were partially offset by a
decrease in sales of our pain therapy products as a result of the sale of
operations related to our Pain Care® line of ambulatory infusion pumps during
March 2008. All of Breg’s sales are recorded in our Sports Medicine
market sector.
Net sales
in International decreased 6% to $124.1 million in 2009 compared to $132.4
million in 2008. International’s net sales represented 23% and 26% of
our total net sales in 2009 and 2008, respectively. The impact of foreign
currency decreased International net sales by $10.9 million when compared to
2008. On a constant currency basis, Orthopedics sales in our International
segment increased 22% and 5%, respectively, in 2009 when compared to 2008.
Within the Orthopedics sector, external fixation, stimulation, and deformity
correction sales increased 7%, 20% and 23%, respectively, on a constant currency
basis, in 2009 when compared to 2008. Sales in our Vascular sector,
which consist of the A-V® Impulse System, increased 8% on a constant currency
basis, while our Other distributed products, primarily the Laryngeal Mask,
decreased 12% on a constant currency basis when compared to
2008.
International
Sales by Market Sector:
|
(US$ in thousands)
|
2009
|
2008
|
Growth
|
Constant Currency
Growth
|
||||||||||||
|
Spine
|
$ | 1,837 | $ | 1,520 | 21 | % | 22 | % | ||||||||
|
Orthopedics
|
79,515 | 82,052 | -3 | % | 5 | % | ||||||||||
|
Sports
Medicine
|
4,178 | 5,050 | -17 | % | -8 | % | ||||||||||
|
Vascular
|
18,710 | 17,890 | 5 | % | 8 | % | ||||||||||
|
Other
|
19,824 | 25,912 | -23 | % | -12 | % | ||||||||||
|
Total
|
$ | 124,064 | $ | 132,424 | -6 | % | 2 | % | ||||||||
Sales
by Market Sector:
Sales of
our Spine products increased 11% to $279.4 million in 2009 compared to $252.2
million for 2008. Sales of our Cervical-Stim® and Spinal-Stim®
products increased 10% and 14%, respectively, in 2009 compared to
2008. In addition, sales of our Spinal Implants and Biologics
products increased 9% over the same period in the prior year primarily due to
sales in our Biologics products
which included sales from
the full market release of the Trinity® Evolution™ stem cell-based
allograft. Spine product sales were 51% and 49% of our total net
sales in the years ended December 31, 2009 and 2008, respectively.
Sales of
our Orthopedics products increased $2.2 million to $131.3 million in 2009
compared to $129.1 million in 2008. On a constant currency basis,
sales increased 7% in 2009 compared to 2008 due to increased sales of our Physio
Stim®, external fixation, and deformity correction products. Orthopedic product
sales were 24% and 25% of our total net sales for the year ended December 31,
2009 and 2008, respectively.
Sales of
our Sports Medicine products increased 2% to $96.4 million in 2009 compared to
$94.5
million in
2008. As previously mentioned, net sales of our Sports Medicine
products would have increased 4% to $97.9 million in 2009 compared to 2008 had
it not been for a revenue recognition change netting commission expenses against
gross revenues at one of our distributors. As discussed above, the
increase of $1.8 million is primarily due to sales of our Breg bracing and cold
therapy products, offset by a decrease in our pain therapy products, which
is
principally
attributable to the sale of operations relating to our Pain Care® line in March
2008. Sports Medicine product sales were 18% of our total net sales
in 2009 and 2008, respectively.
Sales of
our Vascular products, which consist of our A-V Impulse System®
,
increased 5% to $18.7 million
in 2009 compared to $17.9 million in 2008. On a constant currency
basis, sales increased 8% compared to the prior period. Vascular
product sales were 3% of our total net sales in 2009 and 2008,
respectively.
Sales of
our Other products, which include the sales of our Laryngeal Mask as well as our
Woman’s Care line, decreased 23% to $19.8 million for the year ended December
31, 2009 from $25.9 million for the year ended December 31, 2008. On
a constant currency basis, sales of our Other products decreased 12% in 2009
when compared to 2008. During 2009, we distributed the Laryngeal Mask
product in the United Kingdom and Italy. In October 2009, we
transitioned out of our agreement to distribute the Laryngeal Mask product in
Italy. We will transition out of our agreement to distribute the
Laryngeal Mask product in the United Kingdom in June 2010. Other
product sales were 4% and 5% of our total net sales in 2009 and 2008,
respectively.
Gross Profit
– Our gross
profit increased 11% to $407.2 million for the year ended December 31, 2009,
compared to $367.7 million for the year ended December 31, 2008. Gross
profit as a percent of net sales in 2009 was 74.6% compared to 70.7% in
2008. In the year ended December 31, 2008, due to reduced projections
in revenue, distributor terminations, new products, and the replacement of one
of our products with a successor product, the Company changed its estimates
regarding the inventory allowance at Spinal Implants and Biologics, primarily
based on estimated net realizable value using assumptions about future demand
and market conditions. The change in estimate resulted in an increase
in the reserve for obsolescence of approximately $10.9 million. In
addition, the Company recorded approximately $0.6 million of expense related to
Spinal Implants and Biologics instrumentation equipment, also as a result of the
replacement of one of our products with a successor product. Gross profit,
excluding the additional reserve recorded at Spinal Implants and Biologics was
73.0% for the year ended December 31, 2008. Excluding the negative
impacts in the prior year, the increase in the gross profit is primarily due to
the increased sales of higher margin stimulation products and Spinal Implants
& Biologics products. The gross margin in the year ended December
31, 2009 was unfavorably impacted by a $1.8 million increase in our inventory
reserve, which related primarily to the remaining supply of Trinity® allograft
on hand at the expiration of the Company’s distribution agreement on June 30,
2009.
Sales and Marketing Expense
–
Sales and marketing expense, which includes commissions, certain royalties and
the bad debt provision, generally increases and decreases in relation to
sales. Sales and marketing expense increased $9.0 million
,
or 4%, to $215.9
million in 2009 compared
to $206.9 million in 2008. As a percent of sales, sales and marketing
expense was 39.6% and 39.8% for 2009 and 2008, respectively. During
the year ended December 31, 2008, the Company recorded an increase in sales tax
expenses of $1.6 million resulting from an audit that covered a period of 43
months.
General and Administrative
Expense
– General and administrative expense increased $7.1 million, or
9%, in 2009 to $88.9 million compared to $81.8 million in 2008.
The increase is
primarily due to a $3.6 million restructuring charge to consolidate
substantially all of Blackstone’s operations previously conducted in Wayne, NJ
and Springfield, MA into the same facility housing its spine stimulation and
U.S. orthopedics business in the Dallas, TX area. In addition, the
Company also incurred legal and other professional services associated with a
proxy contest with one of the Company’s shareholders. The contest was
settled in a special shareholder meeting on April 2, 2009. As a
result, the Company does not anticipate incurring any expenses associated with
this matter going forward. The Company also recorded an $0.8 million
accrual during 2009 for potential royalties payable in connection with
litigation. In addition, general and administrative expenses were
also higher compared with the prior year due to infrastructure increases in some
faster growing international markets. General and administrative
expense as a percent of sales was 16.3% in 2009 compared to 15.7% in
2008.
Research and Development
Expense
– Research and development expense increased $0.6 million in 2009
to $31.5 million compared to $30.8 million in 2008. During 2009, we
incurred research and development expenses on two collaborative arrangements
with Musculoskeletal Transplant Foundation (“MTF”) and Intelligent Implant
Systems, LLC (“IIS”). We incurred approximately $3.9 million and $1.8
million in expenses as a result of our collaboration with MTF and IIS,
respectively, in 2009. As a percent of sales, research and development expense
was 5.8% in 2009 compared to 5.9% for the same period last year. We
expect to incur a milestone payment of $1.0 million to IIS in early 2010 and a
milestone payment of $0.5 million to Stout Medical Group in 2010. See
Liquidity and Capital Resources for further detail.
Amortization of Intangible
Assets
– Amortization of intangible assets decreased $10.1 million for
the year ended December 31, 2009 to $7.0 million compared to $17.1 million for
the year ended December 31, 2008. This decrease is primarily
attributed to the impairment of $105.7 million of definite-lived intangible
assets at Blackstone during 2008.
Impairment of Goodwill and Certain
Intangible Assets
– During the year ended December 31, 2008, we incurred
$289.5 million of expense related to the impairment of goodwill and certain
intangible assets. As part of our debt refinancing completed in
September 2008, five year projections were prepared for
Blackstone. These projections provided an indication of
impairment. Accordingly, an interim impairment test was performed in
accordance with ASC Topic 350 – Intangibles – Goodwill and
Other. Based on this interim test, we determined that the Blackstone
trademark, an indefinite-lived intangible asset, was impaired by $57.0
million. In addition, we determined that the carrying amount of
goodwill related to Blackstone exceeded its implied fair value, and recognized a
goodwill impairment loss of $126.9 million.
In
accordance with ASC Topic 360 – Property, Plant and Equipment, we determined
that a triggering event had occurred with respect to the definite-lived
intangible assets at Blackstone. We compared the expected cash flows
to be generated by the definite lived intangible on an undiscounted basis to the
carrying value of the intangible asset. We determined the carrying
value exceeded the undiscounted cash flow and impaired the distribution network
and technologies at Blackstone to the fair value which resulted in an impairment
charge of $105.7 million.
Gain on Sale of Pain Care®
Operations
– Gain on sale of Pain Care® operations was $1.6 million for
the year ended December 31, 2008 and represented the gain on the sale of
operations related to our Pain Care® line of ambulatory infusion pumps during
March 2008. No such gain was recorded in the same period of
2009.
Interest Expense, net
–
Interest expense, net was $24.6 million in 2009 compared to $19.7 million in
2008. Included in interest expense, net for the year ended December
31, 2009 and 2008 was interest expense of $23.5 million and $18.2 million
related to the senior secured term loan used to finance the Blackstone
acquisition. Although our overall senior secured term loan balance
has decreased when compared to the same period in the prior year, our effective
interest rate has increased which is generating the additional interest
expense.
Loss on Refinancing of Senior
Secured Term Loan
– In the year ended December 31, 2008, we incurred $5.7
million of expense related to the refinancing of the senior secured term loan
used to finance the Blackstone acquisition. This included a $3.7
million non-cash write-off of previously capitalized debt placement costs and
$2.0 million of fees associated with the amendment
.
We
anticipated that we would not remain in compliance with certain financial
covenants included in the senior secured credit facility and, consequently,
negotiated an amendment of our financial covenants, among other things, with our
lenders effective September 29, 2008.
Unrealized Non-cash Gain (Loss) on
Interest Rate Swap
– In June 2008, the Company entered into a three-year
fully amortizable interest rate swap agreement (the “Swap”) with a notional
amount of $150.0 million and an expiration date of June 30, 2011. During the
fourth quarter of 2008, the Company recognized in earnings an unrealized,
non-cash loss of approximately $(8.0) million when it was determined that the
Swap was no longer deemed highly effective. Therefore, special hedge
accounting is no longer applied and mark-to-market adjustments are required to
be reported in current earnings through the expiration of the swap in June 2011.
For the year ended December 31, 2009, the Company recorded an unrealized
non-cash gain of $1.9 million on the consolidated statements of
operations.
Other Income (Expense), net –
Other income (expense), net was ($1.1 million) in 2009 compared to ($4.7
million) in 2008. The decrease can be mainly attributed to the effect
of foreign exchange. During the year ended December 31, 2008, we recorded
foreign exchange losses of $2.7 million principally as a result of a
strengthening of the U.S. Dollar against various foreign currencies including
the Euro, Pound, Peso and Brazilian Real. Several of our foreign subsidiaries
hold trade payables or receivables in currencies (most notably the U.S. Dollar)
other than their functional (local) currency which results in foreign exchange
gains or losses when there is relative movement between those
currencies.
Income Tax Benefit
(Expense)
–
Our worldwide effective tax rate was 38.9% at December 31, 2009 as compared to a
tax benefit of 22.5% as of December 31, 2008. The 2009 effective tax
rate is impacted by a mix of earnings among tax jurisdictions, state taxes and
other items. The effective tax rate for 2008 reflected discrete items
resulting from the impairment of goodwill for which we receive no tax benefit,
the sale of operations related to our Pain Care® operations and the lapse of an
ASC Topic 740 – Income Taxes reserve item. Excluding these discrete
items, our effective tax rate for 2008 would have been 36.5%. The
increase in the effective tax rate in 2009 as compared to 2008, excluding
discrete items, primarily relates to a benefit recorded in 2008 related to the
release of tax reserves as a result of the expiration of the statute of
limitations.
Net Income (Loss)
–
Net income in 2009 was $24.5
million, or $1.43
per basic share and
$1.42 per diluted share, compared to a net loss of $(228.6) million, or $(13.37)
per basic and diluted share for 2008. The weighted average number of
basic common shares outstanding was 17,119,474 and 17,095,416 during the years
ended December 31, 2009 and 2008, respectively. The weighted average
number of diluted common shares outstanding was 17,202,943 and 17,095,416 during
the years ended December 31, 2009 and 2008, respectively.
2008
Compared to 2007
Net sales
increased 6% to $519.7 million in 2008 compared to $490.3 million in
2007. The impact of foreign currency increased sales by $4.2 million
in 2008 when compared to 2007.
Sales
by Business Segment:
Net sales
in Domestic increased to $188.8 million in 2008 compared to $166.7 million in
2007, an increase of 13%. Domestic represented 36% and 34% of our
total net sales in 2008 and 2007, respectively. The increase in
Domestic’s net sales was primarily the result of a 12% increase in sales in the
Spine market sector which was attributable to increased demand for both our
Spinal-Stim® and Cervical-Stim® products. The increase in Domestic’s net sales
was also attributable to a 17% increase in our Orthopedics market sector which
included a 15% increase in sales of Physio-Stim® products as compared to the
prior year period and an increase in sales of HCT/P products used in orthopedic
applications for which there were no comparable sales in the prior
year.
Domestic
Sales by Market Sector:
|
(US$
in thousands)
|
2008
|
2007
|
Growth
|
|||||||||
|
Spine
|
$ | 141,753 | $ | 126,626 | 12 | % | ||||||
|
Orthopedics
|
47,054 | 40,101 | 17 | % | ||||||||
|
Total
|
$ | 188,807 | $ | 166,727 | 13 | % | ||||||
Net sales
in Spinal Implants and Biologics decreased $6.9 million to $109.0 million in
2008 compared to $115.9 million in 2007, a decrease of 6%. Spinal
Implants and Biologics’s net sales represented 21% and 24% of our total net
sales in 2008 and 2007, respectively. During the integration of
Spinal Implants and Biologics into our business we have experienced distributor
terminations, government investigations and the replacement of one of our
products with a successor product, all of which negatively impacted our sales
during the year ended December 31, 2008. These decreases in sales
have been partially offset by the increase in sales of our HCT/P
products. All of Spinal Implants and Biologics’s sales are
recorded in our Spine market sector.
Net sales
in Breg increased $6.1 million to $89.5 million in 2008 compared to $83.4
million in 2007, an increase of 7%. Breg’s net sales represented 17%
of our total net sales during both years ended December 31, 2008 and
2007. The increase in Breg’s net sales was primarily attributable to
a 12% increase in sales of Breg bracing products primarily as a result of
increased sales of our Fusion XT™ and other new products. Further,
sales of our cold therapy products increased 16% when compared to the prior year
due to the recent launch of our new Kodiak® cold therapy products. These
increases were partially offset by a decrease in sales of our pain therapy
products as a result of the sale of operations related to our Pain Care® line of
ambulatory infusion pumps during March 2008. All of Breg’s sales are recorded in
our Sports Medicine market sector.
Net sales
in International increased 7% to $132.4 million in 2008 compared to $124.3
million in 2007. International net sales represented 26% and 25% of
our total net sales in 2008 and 2007, respectively. The impact of
foreign currency increased International sales by 3% or $4.0 million when
compared to 2007. On a constant currency basis, Spine and Orthopedics
sales in our International segment increased 140% and 9%, respectively, in 2008
when compared to 2007. Within the Orthopedics sector, external fixation,
stimulation, and deformity correction sales increased 2%, 1% and 40%,
respectively, on a constant currency basis, in 2008 when compared to
2007. Sales in our Vascular sector, which consist of the A-V® Impulse
System, decreased 10% on a constant currency basis, while our Other distributed
products, primarily the Laryngeal Mask, decreased 6% on a constant currency
basis when compared to 2007.
International
Sales by Market Sector:
|
(US$ in thousands)
|
2008
|
2007
|
Growth
|
Constant Currency
Growth
|
||||||||||||
|
Spine
|
$ | 1,520 | $ | 625 | 143 | % | 141 | % | ||||||||
|
Orthopedics
|
82,052 | 71,831 | 14 | % | 9 | % | ||||||||||
|
Sports
Medicine
|
5,050 | 4,143 | 22 | % | 17 | % | ||||||||||
|
Vascular
|
17,890 | 19,866 | -10 | % | -10 | % | ||||||||||
|
Other
|
25,912 | 27,820 | -7 | % | -6 | % | ||||||||||
|
Total
|
$ | 132,424 | $ | 124,285 | 7 | % | 3 | % | ||||||||
Sales
by Market Sector:
Sales of
our Spine products grew 4% to $252.2 million in 2008 compared to $243.2 million
in 2007. The increase of $9.1 million is primarily due to a 12% increase in
sales of spinal stimulation products in the U.S. This increase was
partially offset by a decrease in sales of Spinal Implants and Biologics’
products as a result of distributor terminations, government investigations and
the replacement of one of our products with a successor product, all of which
negatively impacted our sales during the year ended December 31,
2008. Spine product sales were 49% of our total net sales in both
years ended December 31, 2008 and 2007, respectively.
Sales of
our Orthopedics products increased $17.2 million to $129.1 million in 2008
compared to $111.9 million in 2007. The increase can be mainly attributed to a
45% increase in sales of our internal fixation devices including the Eight-Plate
Guided Growth System® as well as a 6% increase in sales of our external fixation
devices. Also attributing to the sale increase was a 14% increase in
sales of our Physio-Stim® products as compared to the prior year and an increase
in sales of HCT/P products used in orthopedic applications for which there were
no comparable sales in the prior year. Orthopedic product sales were
25% and 23% of our total net sales for the years ended December 31, 2008 and
2007, respectively.
Sales of
our Sports Medicine products increased 8% to $94.5 million in 2008 compared to
$87.5 million in 2007. As discussed above, the increase of $7.0 million is
primarily due to sales of our Breg bracing products as well as our cold therapy
products, offset by a decrease in our pain therapy products, which can be mainly
attributed to the sale of operations relating to our Pain Care® line in March
2008. Sports Medicine product sales were 18% of our total net sales
for both years ended December 31, 2008 and 2007.
Sales of
our Vascular products, which consist of our A-V Impulse System®, decreased 10%
to $17.9 million in 2008, compared to $19.9 million in 2007. Vascular
product sales were 3% and 4% of our total net sales for the years ended December
31, 2008 and 2007, respectively.
Sales of
our Other products, which include the sales of our Laryngeal Mask as well as our
woman’s care line, decreased 7% to $25.9 million. Other product sales
were 5% and 6% of our total net sales for the years ended December 31, 2008 and
2007, respectively.
Gross Profit —
Our gross
profit increased 2% to $367.7 million in 2008 compared to $361.3 million in
2007. In the year ended December 31, 2008, due to reduced projections
in revenue, distributor terminations, new products, and the replacement of one
of our products with a successor product, the Company changed its estimates
regarding the inventory allowance at Spinal Implants and Biologics, primarily
based on estimated net realizable value using assumptions about future demand
and market conditions. The change in estimate resulted in an increase in the
reserve for inventory obsolescence of approximately $10.9
million. During the year ended December 31, 2007, we recorded a
charge of $2.7 million for amortization of the step-up in inventory associated
with the Blackstone acquisition. Since the step-up in the Blackstone
inventory from purchase accounting was fully amortized during 2007, no such
amortization was recorded during the year ended December 31, 2008. Gross
profit, as a percent of net sales, in 2008 was 70.7% compared to 73.7% in
2007. Gross profit, excluding the additional reserve recorded at
Blackstone, was 73.0% in the year ended December 31, 2008. The lower
margin is principally the result of changes in product and geographic
mix.
Sales and Marketing Expenses —
Sales and marketing expense, which includes commissions, royalties and
bad debt provisions generally increase and decrease in relation to
sales. Sales and marketing expense increased $19.9 million to $206.9
million in 2008 from $187.0 million in 2007. The increase is
attributed to increased expense in order to support increased sales activity,
including higher commissions on higher sales. In addition sales and
marketing expense included approximately $2.0 million of costs incurred related
to the completed exploration of the potential divestiture of our orthopedic
fixation business. Sales and marketing expense as a percent of net
sales for 2008 and 2007 were 39.8% and 38.1%, respectively.
General and Administrative Expenses
—
General and administrative expenses increased $8.9 million, or 12%, to
$81.8 million in 2008 from $72.9 million in 2007. The increase is due primarily
to approximately $4.4 million of costs incurred in connection with the Company’s
potential divestiture of certain orthopedic fixation assets and other strategic
transaction costs during the first and second quarters of 2008. The
Company also incurred approximately $3.8 million of corporate reorganization
expenses in the third and fourth quarters of 2008. General and
administrative expenses as a percent of net sales were 15.7% and 14.9% in 2008
and 2007, respectively.
Research and Development
Expenses
– Research and development expenses increased $6.6 million to
$30.8 million in 2008 compared to $24.2 million in 2007. In 2008, we
incurred $6.1 million in expenses related to the Company’s collaboration with
MTF on the development and commercialization of Trinity® Evolution™. Research
and development expenses as a percent of net sales were 5.9% in 2008 and 4.9% in
2007.
Amortization of Intangible
Assets
— Amortization of intangible assets was $17.1 million in 2008
compared to $18.2 million in 2007. This decrease can be primarily
attributed to the impairment of certain intangible assets at Blackstone in the
third quarter of 2008.
Impairment of Goodwill and Certain
Intangible Assets
– In 2008, we incurred $289.5 million of expense
related to the impairment of goodwill and certain intangible
assets. As part of our debt refinancing completed in September 2008,
five year projections were prepared for Blackstone. These projections
provided an indication of impairment. Accordingly, an interim
impairment test was performed in accordance with ASC Topic 350. Based
on this interim test, we determined that the Blackstone trademark, an
indefinite-lived intangible asset, was impaired by $57.0 million. In
addition, we determined that the carrying amount of goodwill related to
Blackstone exceeded its implied fair value, due to the recent trend of
decreasing revenues at Blackstone. We recognized a goodwill
impairment loss of $126.9 million.
In
accordance with ASC Topic 360, we determined that a triggering event had
occurred with respect to the definite-lived intangible assets at
Blackstone. We compared the expected cash flows to be generated by
the definite lived intangible on an undiscounted basis to the carrying value of
the intangible asset. We determined the carrying value exceeded the
undiscounted cash flow and impaired the distribution network and technologies at
Blackstone to the fair value which resulted in an impairment charge of $105.7
million. In 2007, as part of our annual impairment test under ASC
Topic 350, we determined that the Blackstone trademark, an indefinite-lived
intangible asset, was impaired by $21.0 million because the book value exceeded
the fair value.
Gain on Sale of Pain Care®
Operations
– Gain on sale of Pain Care® operations was $1.6 million and
represented the gain on the sale of operations related to our Pain Care® line of
ambulatory infusion pumps during March 2008. No such gain was
recorded in the same period of 2007.
Interest Expense, net
–
Interest expense, net was $19.7 million in 2008 compared to $23.7 million in
2007. Interest expense, net in 2008 and 2007 included interest
expense of $18.2 million and $22.4 million, respectively, related to the senior
secured term loan used to finance the Blackstone acquisition. This
decrease can be mainly attributed to less outstanding principal from the
comparable period in the prior year.
Unrealized Non-cash Loss on Interest
Rate Swap
– In the fourth quarter of 2008, the Company incurred an
unrealized non-cash loss of approximately $8.0 million which resulted from
changes in the fair value of the Company’s interest rate swap. Due to
declining interest rates and a LIBOR floor in our amended credit facility, the
effectiveness of the swap was no longer deemed highly effective; therefore
changes in the fair value of the swap agreement are required to be reported in
earnings through the expiration of the swap in June 2011.
Loss on Refinancing of Senior
Secured Term Loan
– In the third quarter of 2008, we incurred $5.7
million of expense related to the refinancing of the senior secured term loan
used to finance the Blackstone acquisition. This included a $3.7
million non-cash write-off of previously capitalized debt placement costs and
$2.0 million of fees associated with the amendment
.
We
anticipated that we would not remain in compliance with certain financial
covenants included in the senior secured credit facility and, consequently,
negotiated an amendment of our financial covenants, among other things, with our
lenders effective September 29, 2008. There was no comparable charge in
2007.
Other Income (Expense), net –
Other income (expense), net was an expense of $(4.7) million in 2008
compared to income of $0.4 million in 2007. The decrease can be mainly
attributed to the effect of foreign exchange. During 2008, we recorded foreign
exchange losses of $3.0 million principally as a result of a rapid strengthening
of the US Dollar against various foreign currencies including the Euro, Pound,
Peso and Brazilian Real. Several of our foreign subsidiaries hold
trade or intercompany payables or receivables in currencies (most notably the
U.S. Dollar) denominated in other than their functional (local) currency which
results in foreign exchange gains or losses when there is relative movement
between those currencies.
Income Tax Benefit (Expense)
– Our effective tax rate was a benefit of 22.5% and a benefit of 25.5%
during 2008 and 2007, respectively. The effective tax rate for 2008 reflected
discrete items resulting from the impairment of goodwill for which we receive no
tax benefit, the sale of operations related to our Pain Care® operations and the
lapse of an ASC Topic 740 – Income Taxes reserve item. Excluding
these discrete items, our effective tax rate would have been
(36.5%). The effective tax rate for 2007 included a tax credit for
research and development expense related to 2003 thru 2006. Without the benefit
for the research and development tax credits our estimated worldwide effective
tax rate for 2007 would have been (31.6%). The increase in the
effective tax rate, excluding discrete items, primarily relates to the
expiration of the Company’s intercompany deferred consideration agreement in the
first quarter of 2008.
Net Income (Loss)
–
Net loss for 2008 was $228.6
million, or ($13.37) per basic and diluted share, compared to net income of
$11.0 million, or $0.66 per basic share and $0.64 per diluted share in
2007. The weighted average number of basic common shares outstanding
was 17,095,416 and 16,638,873 during 2008 and 2007, respectively. The
weighted average number of diluted common shares outstanding was 17,095,416 and
17,047,587 during 2008 and 2007, respectively.
Liquidity
and Capital Resources
Cash and
cash equivalents at December 31, 2009 were $25.0 million, of which $11.6 million
is subject to certain restrictions under the senior secured credit agreement
described below. This compares to cash and cash equivalents of $25.6
million at December 31, 2008, of which $11.0 million was subject to certain
restrictions under the senior secured credit agreement described
below.
Net cash
provided by operating activities was $50.0 million in 2009 compared to $26.8
million in 2008, an increase of $23.2 million. Net cash provided by
operating activities is comprised of net income (loss), non-cash items
(including depreciation and amortization, provision for doubtful accounts and
inventory obsolescence, share-based compensation, deferred taxes, change in the
fair value of the interest rate swap, impairment of goodwill and certain
intangible assets, loss on refinancing of senior secured term loan and gain on
the sale of Pain Care® operations) and changes in working capital, including
changes in restricted cash. Net income increased $253.0 million to a
net income of $24.5 million in 2009 compared to net loss of $(228.6) million in
2008. Non-cash items for 2009 decreased $236.9 million to $45.7
million compared to $282.6 in 2008 primarily as a result of the impairment of
goodwill and certain intangible assets of $289.5 million in 2008 that did not
exist in 2009, a decrease in the fair value of the interest rate swap of $9.8
million, and a decrease in depreciation and amortization of $8.9 million, offset
by an increase in the change in deferred taxes of $74.7
million. Working capital accounts consumed $20.2 million of cash in
2009 compared to $27.3 million in 2008. The principal change in
working capital can be mainly attributable to an increase in the current
liabilities position of $16.0 million mainly the result of restructuring costs
previously mentioned, increases in accrued payroll, bonuses and related payroll
taxes, increased commissions to distributors and the timing of inventory
receipts. Overall performance indicators for our two primary working
capital accounts, accounts receivable and inventory, reflect days sales in
receivables of 83 days at December 31, 2009 compared to 77 days at December 31,
2008 and inventory turns of 1.6 times at December 31, 2009 compared to 1.5 times
at December 31, 2008. Also included in cash used in working capital
in 2009 were $6.1 million in costs related to matters occurring at Blackstone
prior to the acquisition and for which we are seeking reimbursement from the
applicable escrow fund.
Net cash
used in investing activities was $22.3 million in 2009 compared to $13.4 million
in 2008. During the first quarter of 2008, we sold the operations of
our Pain Care
®
line of
ambulatory infusion pumps for net proceeds of $6.0 million. During
the year ended December 31, 2009 and 2008, we invested $22.0 million and $20.2
million in capital expenditures, respectively. During the year ended
December 31, 2009, we made a loan in connection with our collaborative
arrangement with MTF for $2.0 million. In 2009, we sold our remaining
ownership in OPED AG, a German based bracing company, for net proceeds of $1.7
million. In 2008, we sold a portion of our ownership in OPED AG for
net proceeds of $0.8 million.
Net cash
used in financing activities was $29.3 million for the year ended December 31,
2009 compared to $22.8 million for the year ended December 31,
2008. During 2009, we repaid approximately $28.3 million against the
principal on our senior secured term loan compared to $17.1 million in
2008. In 2009, we borrowed $0.2 million on our line of credit through
our Italian subsidiary compared to a 2008 repayment on that same line of credit
of $6.7 million. During the year ended December 31, 2009, we used
approximately $1.1 million to purchase an additional 32% minority interest in
our Breg distributor in Germany. During the year ended December 31,
2008, we received proceeds of $1.7 million from the issuance of
51,052 shares of our
common stock upon the exercise of stock options.
On
September 22, 2006 the Company’s wholly-owned U.S. holding company subsidiary,
Orthofix Holdings, Inc. (“Orthofix Holdings”), entered into a senior secured
credit facility with a syndicate of financial institutions to finance the
acquisition of Blackstone. Certain terms of the senior secured credit
facility were amended in September 29, 2008. The senior secured
credit facility provides for (1) a seven-year amortizing term loan facility of
$330.0 million and (2) a six-year revolving credit facility of $45.0
million. As of December 31, 2009, the Company had $0.3 million of
letters of credit outstanding under the revolving credit facility and $252.4
million outstanding under the term loan facility. Obligations under
the senior secured credit facility can have a floating interest rate of the
London Inter-Bank Offered Rate (“LIBOR”) plus a margin, with a LIBOR floor of
3.0%, or prime rate plus a margin. As of December 31, 2009, the
entire term loan obligation of $252.4 million is at the prime rate plus a margin
of 3.50%.
In June
2008, we entered into a three-year fully amortizable interest rate swap
agreement (the “Swap”) with a notional amount of $150.0 million and an
expiration date of June 30, 2011. The amount outstanding under the
Swap as of December 31, 2009 was $150.0 million. Under the Swap we
will pay a fixed rate of 3.73% and receive interest at floating rates based on
the three month LIBOR rate at each quarterly re-pricing date until the
expiration of the Swap. As of December 31, 2009, the effective
interest rate on the debt related to the Swap was 10.2%. Our overall effective
interest rate, including the impact of the Swap as of December 31, 2009 on our
senior secured debt was 8.8%.
The
credit agreement contains certain financial covenants, including a fixed charge
coverage ratio and a leverage ratio applicable to Orthofix and its subsidiaries
on a consolidated basis. A breach of any of these covenants could result in an
event of default under the credit agreement, which could permit acceleration of
the debt payments under the facility. The Company was in compliance
with these financial covenants as measured at December 31, 2009. As
defined in the senior secured credit facility, our leverage ratio can not exceed
3.25 and our fixed charge ratio must be greater than or equal to 1.30 at
December 31, 2009. Our leverage and fixed charge ratios were 2.60 and
1.61, respectively, at December 31, 2009.
The
leverage ratio the Company can not exceed, as defined in the senior secured
credit facility, will be 2.85 for the first quarter of 2010, 2.75 for the second
quarter of 2010 and 2.50 thereafter. Effective January 1, 2010, the
fixed charge coverage ratio must be greater than 1.375 and it will remain at
that rate for the remaining life of the senior secured credit
facility. Based on the Company’s projected earnings, we believe that
the Company should be able to meet these financial covenants in future fiscal
quarters, however, there can be no assurance that it will be able to do so, and
failure to do so could result in an event of default under the credit agreement,
which could have a material adverse effect on our financial
position.
Each of
the domestic subsidiaries of the Company (which includes Orthofix Inc., Breg
Inc., and Blackstone) and Colgate Medical Limited and Victory Medical Limited
(wholly-owned financing subsidiaries of the Company) has guaranteed the
obligations of Orthofix Holdings under the senior secured credit
facility. The obligations of the subsidiaries under their guarantees
are secured by the pledges of their respective assets.
Certain
subsidiaries of the Company have restrictions on their ability to pay dividends
or make intercompany loan advances pursuant to the Company’s senior secured
credit facility. The net assets of Orthofix Holdings and its
subsidiaries are restricted for distributions to the parent
company. Domestic subsidiaries of the Company, as parties to the
credit agreement, have access to these net assets for operational
purposes. The amount of restricted net assets of Orthofix Holdings
and its subsidiaries as of December 31, 2009 is $143.1 million compared to
$111.3 million at December 31, 2008. In addition, the senior secured
credit facility restricts the Company and subsidiaries that are not parties to
the credit facility from access to cash held by Colgate Medical Limited and its
subsidiaries. All credit party subsidiaries have access to this cash
for operational and debt repayment purposes. The amount of restricted cash of
the Company as of December 31, 2009 is $11.6 million compared to $11.0 million
at December 31, 2008.
At
December 31, 2009, we had outstanding borrowings of $2.2 million and unused
available lines of credit of approximately 5.8 million Euro ($8.2 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.
In the
fourth quarter of 2008, as part of the Company’s strategic plan to strengthen
the business, the Company initiated a restructuring plan to improve operations
and reduce costs at Blackstone. The plan involves the consolidation
of substantially all of Blackstone’s operations previously conducted in Wayne,
NJ and Springfield, MA into the same facility housing its spine stimulation and
U.S. orthopedics business in the Dallas, TX area. The Company plans
to complete the restructuring and consolidation by the second quarter of 2010,
at which time the Company anticipates a total restructuring expense of $3.6
million. During the year ended December 31, 2009, the Company
recorded net restructuring charges of $3.6
million, which were
primarily related to severance costs and accelerated depreciation costs related
to shortening lives of assets which will be disposed. These restructuring costs
are recorded in general and administrative expense and are classified in the
Spinal Implants & Biologics segment.
The
following table presents changes in the restructuring liability, which is
included within Other Current Liabilities in the Company’s consolidated balance
sheets as of December 31, 2009 and December 31, 2008:
|
(US$ in thousands)
|
Severance
|
Assets Abandoned
|
Total
|
|||||||||
|
Balance
at December 31, 2008
|
$ | 548 | $ | - | $ | 548 | ||||||
|
Charges
|
2,565 | 1,020 | 3,585 | |||||||||
|
Cash
Payments
|
(1,287 | ) | - | (1,287 | ) | |||||||
|
Non-cash
Items
|
- | (1,020 | ) | (1,020 | ) | |||||||
|
Balance
at December 31, 2009
|
$ | 1,826 | $ | - | $ | 1,826 | ||||||
On July
24, 2008, we entered into an agreement with MTF to collaborate on the
development and commercialization of a new stem cell-based bone growth biologic
matrix. Under the terms of the agreement, we invested $10.0 million
to develop the new stem cell-based bone growth biologic matrix that provides the
beneficial properties of an autograft in spinal and orthopedic
surgeries. The new matrix was launched with a full market release in
the U.S. effective on July 1, 2009. Expenditures related to
collaborative arrangements are expensed to research and development based on the
terms of the related agreements. A total of $3.9 million of expenses
was recognized under the terms of the agreement and included in research and
development expense for the year ended December 31, 2009.
As
previously announced in 2008, we entered into an agreement with Intelligent
Implant Systems (“IIS”) for the acquisition and development of a next-generation
pedicle screw system for our spinal implants division. Under the
agreement, we purchased $2.5 million of intellectual property and related
technology. During the year ended December 31, 2009, IIS met their
first development milestone and under the terms of the agreement the Company
paid IIS $1.0 million. Also in 2009, the Company and IIS amended the
existing agreement and the Company paid IIS an additional $0.8 million for
partially meeting its next milestone. The Company has recorded these
payments totaling $1.8 million for the year ended December 31, 2009 as research
and development expense. IIS will continue to perform research and
development functions related to the technology and under the agreement and
amended agreement we will pay IIS an additional amount up to $2.7 million for
research and development performance milestones.
We
believe that current cash balances together with projected cash flows from
operating activities, the availability of the $44.7 million revolving credit
facility, the available Italian line of credit, and our debt capacity are
sufficient to cover anticipated working capital and capital expenditure needs
including research and development costs and research and development projects
formerly mentioned, over the near term.
Contractual
Obligations
The
following chart sets forth our contractual obligations as of December 31,
2009:
|
Contractual
Obligations
|
Payments Due by
Period
|
|||||||||||||||||||
|
(US$ in thousands)
|
Total
|
2010
|
2011-2013 | 2014-2015 |
2016 and thereafter
|
|||||||||||||||
|
Senior
secured term loan
|
$ | 252,400 | $ | - | $ | 252,400 | $ | - | $ | - | ||||||||||
|
Estimated
interest on senior secured term loan
(1)
|
58,435 | 17,037 | 41,398 | - | - | |||||||||||||||
|
Other
borrowings
|
97 | 32 | 65 | - | - | |||||||||||||||
|
Purchase
obligations
(2)
|
2,417 | 1,000 | 1,417 | - | - | |||||||||||||||
|
Operating
leases
|
24,697 | 5,621 | 9,208 | 3,180 | 6,688 | |||||||||||||||
|
Total
|
$ | 338,046 | $ | 23,690 | $ | 304,488 | $ | 3,180 | $ | 6,688 | ||||||||||
|
|
(1)
|
Estimated
interest on senior secured term loan excludes any potential effects of the
interest rate swap agreement and assumes payments are made in accordance
with the scheduled payments as defined in the
agreement. Interest payments are estimated using rates in
effect at December 31, 2009.
|
|
|
(2)
|
In
addition to the unconditional purchase obligations stated above, the
Company also has inventory purchase agreements that, if terminated, would
require the Company to purchase an additional $1.1 million of
inventory.
|
We may be
required to make cash outlays related to our unrecognized tax
benefits. However, due to the uncertainty of the timing of future
cash flows associated with our unrecognized tax benefits, we are unable to make
reasonably reliable estimates of the period of cash settlement, if any, with the
respective taxing authorities. Accordingly, unrecognized tax benefits
of $0.4 million as of December 31, 2009 have been excluded from the contractual
obligations table above. For further information on unrecognized tax
benefits, see Note 14 to the consolidated financial statements included in this
Report
The
aggregate maturities of long-term debt after December 31, 2009 are as
follows: 2010 – $0, 2011 – $0, 2012 – $35.4 million, and 2013 –
$217.0 million.
In
addition to scheduled contractual payment obligations on the debt as set forth
above, our credit agreement requires us to make mandatory prepayments with (a)
the excess cash flow (as defined in the credit agreement) of Orthofix
International N.V. and its subsidiaries, in an amount equal to 50% of the excess
annual cash flow beginning with the year ending December 31, 2007, provided,
however, if the leverage ratio (as defined in the credit agreement) is less than
or equal to 1.75 to 1.00, as of the end of any fiscal year, there will be no
mandatory excess cash flow prepayment, with respect to such fiscal year, (b)
100% of the net cash proceeds of any debt issuances by Orthofix International
N.V. or any of its subsidiaries or 50% of the net cash proceeds of equity
issuances by any such party, excluding the exercise of stock options, provided,
however, if the leverage ratio is less than or equal to 1.75 to 1.00 at the end
of the preceding fiscal year, Orthofix Holdings shall not be required to prepay
the loans with the proceeds of any such debt or equity issuance in the
immediately succeeding fiscal year, (c) the net cash proceeds of asset
dispositions over a minimum threshold, or (d) unless reinvested, insurance
proceeds or condemnation awards.
Off-balance
Sheet Arrangements
As of
December 31, 2009, we did not have any off-balance sheet arrangements that have
or are reasonably likely to have a current or future effect on our financial
condition, changes in financial condition, revenues or expenses, results of
operations, cash flows, liquidity, capital expenditures or capital resources
that are material to investors.
We are
exposed to certain market risks as part of our ongoing business
operations. Primary exposures include changes in interest rates and
foreign currency fluctuations. These exposures can vary sales, cost of sales,
costs of operations, and the cost of financing and yields on cash and short-term
investments. We use derivative financial instruments, where
appropriate, to manage these risks. However, our risk
management policy does not allow us to hedge positions we do not hold nor do we
enter into derivative or other financial investments for trading or speculative
purposes. As of December 31, 2009, we had a currency swap in place to
minimize foreign currency exchange risk related to a 38.3 million
Euro intercompany note.
We are
exposed to interest rate risk in connection with our senior secured term loan
and borrowings under our revolving credit facility (if any), which bear interest
at floating rates based on LIBOR or the prime rate plus an applicable borrowing
margin. Therefore, interest rate changes generally do not affect the fair market
value of the debt, but do impact future earnings and cash flows, assuming other
factors are held constant. We had an interest rate swap in place as of December
31, 2009 to minimize interest rate risk related to our LIBOR-based
borrowings.
As of
December 31, 2009, we had $252.4 million of variable rate term debt represented
by borrowings under our senior secured term loan which can have a floating
interest rate of LIBOR plus a margin, with a LIBOR floor of 3.0%, or the prime
rate plus a margin. As of December 31, 2009, the entire term loan
obligation of $252.4 million is at the prime rate plus a margin of 3.50%, which
is adjusted based upon the credit rating of the Company and its
subsidiaries. In June 2008, we entered into a Swap with a notional
amount of $150.0 million and an expiration date of June 30, 2011. The
amount outstanding under the Swap as of December 31, 2009 was $150.0
million. Under the Swap we will pay a fixed rate of 3.73% and receive
interest at floating rates based on the three month LIBOR rate at each quarterly
re-pricing date until the expiration of the Swap. As of December 31,
2009, the effective interest rate on the debt related to the Swap was 10.2%. As
of December 31, 2009, our overall effective interest rate, including the impact
of the Swap, on our senior secured debt was 8.8%. Based on the balance
outstanding under the senior secured term loan combined with the Swap as of
December 31, 2009, an immediate change of one percentage point in the applicable
interest rate on the variable rate debt would cause a change in interest expense
of approximately $2.5 million on an annual basis.
Our
foreign currency exposure results from fluctuating currency exchange rates,
primarily the U.S. Dollar against the Euro, Great Britain Pound, Mexican Peso
and Brazilian Real. We are subject to cost of goods currency exposure
when we produce products in foreign currencies such as the Euro or Great Britain
Pound and sell those products in U.S. Dollars. We are subject to
transactional currency exposures when foreign subsidiaries (or the Company
itself) enter into transactions denominated in a currency other than their
functional currency. As of December 31, 2009, we had an un-hedged
intercompany receivable denominated in Euro of approximately 23.3 million ($33.4
million). We recorded a foreign currency gain during the year ended
December 31, 2009 of $0.8 million, which resulted from the strengthening of the
Euro against the U.S. dollar during the period.
We also
are subject to currency exposure from translating the results of our global
operations into the U.S. dollar at exchange rates that have fluctuated from the
beginning of the period. The U.S. dollar equivalent of international sales
denominated in foreign currencies was unfavorably impacted during the year ended
December 31, 2009 by foreign currency exchange rate fluctuations with the
strengthening of the U.S. dollar against the local foreign currency during this
period. During the year ended December 31, 2008, the U.S. dollar
equivalent of international sales denominated in foreign currencies was
favorably impacted by foreign currency exchange rate fluctuations with the
weakening of the U.S. dollar against the local foreign currency during this
period. As we continue to distribute and manufacture our products in
selected foreign countries, we expect that future sales and costs associated
with our activities in these markets will continue to be denominated in the
applicable foreign currencies, which could cause currency fluctuations to
materially impact our operating results.
See
“Index to Consolidated Financial Statements” on page F-1 of this Form
10-K.
None.
Disclosure
Controls and Procedures
Under the
supervision and with the participation of our management, including our Chief
Executive Officer and our Chief Financial Officer, we performed an evaluation of
the effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Exchange Act Rule 13a - 15(e) or 15d – 15 (e)) as of
the end of the period covered by this report. Based upon that
evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that, as of the end of the period covered by this report, our disclosure
controls and procedures were effective.
Changes
in Internal Control over Financial Reporting
On July
1, 2009, we implemented an Enterprise Resource Planning (“ERP”) system at our
Spinal Implants and Biologics division. The ERP system, developed by
Oracle, improves and enhances internal controls over financial
reporting. This ERP system materially changes how transactions are
processed within this division.
Except
for the conversion to the ERP system, there have not been any changes in our
internal control over financial reporting during the year ended December 31,
2009 that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
Our
management’s assessment regarding the Company’s internal control over financial
reporting can be found immediately prior to the financial statements in a
section entitled “Management’s Report on Internal Control over Financial
Reporting” in this Form 10-K.
Not
applicable.
PA
RT III
Information
required by Items 10, 11, 12, 13 and 14 of Form 10-K is omitted from this annual
report and will be filed in a definitive proxy statement or by an amendment to
this annual report not later than 120 days after the end of the fiscal year
covered by this annual report.
We will
provide information that is responsive to this Item 10 regarding executive
compensation in our definitive proxy statement or in an amendment to this annual
report not later than 120 days after the end of the fiscal year covered by this
annual report, in either case under the caption “Information About Directors,”
“Section 16(a) Beneficial Ownership Reporting Compliance” and others possibly
elsewhere therein. That information is incorporated in this Item 10
by reference.
We will
provide information that is responsive to this Item 11 regarding executive
compensation in our definitive proxy statement or in an amendment to this annual
report not later than 120 days after the end of the fiscal year covered by this
annual report, in either case under the caption “Executive Compensation,” and
possibly elsewhere therein. That information is incorporated in this
Item 11 by reference.
We will
provide information that is responsive to this Item 12 regarding ownership of
our securities by certain beneficial owners and our directors and executive
officers, as well as information with respect to our equity compensation plans,
in our definitive proxy statement or in an amendment to this annual report not
later than 120 days after the end of the fiscal year covered by this annual
report, in either case under the captions “Security Ownership of Certain
Beneficial Owners and Management and Related Stockholders” and “Equity
Compensation Plan Information,” and possibly elsewhere therein. That
information is incorporated in this Item 12 by reference.
We will
provide information that is responsive to this Item 13 regarding transactions
with related parties and director independence in our definitive proxy statement
or in an amendment to this annual report not later than 120 days after the end
of the fiscal year covered by this annual report, in either case under the
caption “Certain Relationships and Related Transactions,” and possibly elsewhere
therein. That information is incorporated in this Item 13 by
reference.
We will
provide information that is responsive to this Item 14 regarding principal
accountant fees and services in our definitive proxy statement or in an
amendment to this annual report not later than 120 days after the end of the
fiscal year covered by this annual report, in either case under the caption
“Principal Accountant Fees and Services,” and possibly elsewhere
therein. That information is incorporated in this Item 14 by
reference.
PA
RT IV
|
(a)
|
Documents
filed as part of report on Form
10-K
|
The
following documents are filed as part of this report on Form 10-K:
|
|
1.
|
Financial
Statements
|
See
“Index to Consolidated Financial Statements” on page F-1 of this Form
10-K.
|
|
2.
|
Financial
Statement Schedules
|
See
“Index to Consolidated Financial Statements” on page F-1 of this Form
10-K.
|
|
3.
|
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 (filed as an exhibit to the
Company's quarterly report on Form 10-Q for the quarter ended June 30,
2008 and incorporated herein by reference).
|
|
|
10.1
|
Orthofix
International N.V. Amended and Restated Stock Purchase Plan, as amended
(filed as an exhibit to the Company’s quarterly report on Form 10-Q for
the quarter ended June 30, 2009 and incorporated herein by
reference).
|
|
|
10.2
|
Orthofix
International N.V. Amended and Restated 2004 Long Term Incentive Plan
(filed as an exhibit to the Company’s quarterly report on Form 10-Q for
the quarter ended June 30, 2009 and incorporated herein by
reference).
|
|
|
10.3
|
Orthofix
International N.V. Staff Share Option Plan, as amended through April 22,
2003 (filed as an exhibit to the Company’s annual report on Form 10-K for
the fiscal year ended December 31, 2007 and incorporated herein by
reference).
|
|
|
10.4
|
Form
of Employee Non-Qualified Stock Option Agreement (post-2008 grants) (filed
as an exhibit to the Company's current report on Form 8-K filed July 7,
2009 and incorporated herein by reference).
|
|
|
10.5
|
Form
of Non-Employee Director Non-Qualified Stock Option Agreement (post-2008
grants) (filed as an exhibit to the Company's current report on Form 8-K
filed July 7, 2009 and incorporated herein by
reference).
|
|
|
10.6
|
Form
of Nonqualified Stock Option Agreement under the Orthofix International
N.V. Amended and Restated 2004 Long Term Incentive Plan (pre-2009 grants
-- vesting over 3 years) (filed as an exhibit to the Company's current
report on Form 8-K filed June 20, 2008 and incorporated herein by
reference).
|
|
|
10.7
|
Form
of Nonqualified Stock Option Agreement under the Orthofix International
N.V. Amended and Restated 2004 Long Term Incentive Plan (pre-2009 grants
-- 3 year cliff vesting) (filed as an exhibit to the Company's current
report on Form 8-K filed June 20, 2008 and incorporated herein by
reference).
|
|
10.8
|
Form
of Restricted Stock Grant Agreement under the Orthofix International N.V.
Amended and Restated 2004 Long Term Incentive Plan (vesting over 3 years)
(filed as an exhibit to the Company's current report on Form 8-K filed
June 20, 2008 and incorporated herein by reference).
|
|
|
10.9
|
Form
of Restricted Stock Grant Agreement under the Orthofix International N.V.
Amended and Restated 2004 Long Term Incentive Plan (3 year cliff vesting)
(filed as an exhibit to the Company's current report on Form 8-K filed
June 20, 2008 and incorporated herein by reference).
|
|
|
10.10
|
Amended
and Restated Orthofix Deferred Compensation Plan (filed as an exhibit to
the Company’s current report on Form 8-K filed January 7, 2009, and
incorporated herein by reference).
|
|
|
10.11
|
Acquisition
Agreement dated as of November 20, 2003, among Orthofix International
N.V., Trevor Acquisition, Inc., Breg, Inc. and Bradley R. Mason, as
shareholders’ representative (filed as an exhibit to the Company’s current
report on Form 8-K filed January 8, 2004 and incorporated herein by
reference).
|
|
|
10.12
|
Amended
and Restated Voting and Subscription Agreement dated as of December 22,
2003, among Orthofix International N.V. and the significant shareholders
of Breg, Inc. identified on the signature pages thereto (filed as an
exhibit to the Company’s current report on Form 8-K filed on January 8,
2004 and incorporated herein by reference).
|
|
|
10.13
|
Amendment
to Employment Agreement dated December 29, 2005 between Orthofix Inc. and
Charles W. Federico (filed as an exhibit to the Company’s current report
on Form 8-K filed December 30, 2005 and incorporated herein by
reference).
|
|
|
10.14
|
Form
of Indemnity Agreement (filed as an exhibit to the Company’s annual report
on Form 10-K for the fiscal year ended December 31, 2008 and incorporated
herein by reference).
|
|
|
10.16
|
Amended
and Restated Employment Agreement, dated December 6, 2007, between
Orthofix Inc. and Raymond C. Kolls (filed as an exhibit to the Company’s
annual report on Form 10-K for the fiscal year ended December 31, 2007, as
amended, and incorporated herein by reference).
|
|
|
10.17
|
Letter
Agreement, dated July 25, 2009, between Orthofix Inc. and Raymond C. Kolls
(filed as an exhibit to the Company's quarterly report on Form 10-Q for
the quarter ended September 30, 2009 and incorporated herein by
reference).
|
|
|
Credit
Agreement, dated as of September 22, 2006, among Orthofix Holdings, Inc.,
Orthofix International N.V., certain domestic subsidiaries of Orthofix
International N.V., Colgate Medical Limited, Victory Medical Limited,
Swiftsure Medical Limited, Orthofix UK Ltd, the several banks and other
financial institutions as may from time to time become parties thereunder,
and Wachovia Bank, National Association.
|
||
|
10.19
|
First
Amendment to Credit Agreement, dated September 29, 2008, by and among
Orthofix Holdings, Inc., Orthofix International N.V., certain domestic
subsidiaries of Orthofix International N.V., Colgate Medical Limited,
Victory Medical Limited, Swiftsure Medical Limited, Orthofix UK Ltd, and
Wachovia Bank, National Association, as administrative agent on behalf of
the Lenders under the Credit Agreement (filed as an exhibit to the
Company’s current report on Form 8-K filed September 29, 2008 and
incorporated herein by
reference).
|
|
10.20
|
Agreement
and Plan of Merger, dated as of August 4, 2006, among Orthofix
International N.V., Orthofix Holdings, Inc., New Era Medical Limited,
Blackstone Medical, Inc. and William G. Lyons, III, as Equityholders’
Representative (filed as an exhibit to the Company's current report on
Form 8-K filed August 7, 2006 and incorporated herein by
reference).
|
|
|
10.25
|
Description
of Director Fee Policy (filed as an exhibit to the Company's quarterly
report on Form 10-Q for the quarter ended March 31, 2009 and incorporated
herein by reference).
|
|
|
10.26
|
Summary
of Orthofix International N.V. Annual Incentive Program (filed as an
exhibit to the Company's quarterly report on Form 10-Q for the quarter
ended March 31, 2009 and incorporated herein by
reference).
|
|
|
10.27
|
Employment
Agreement between Orthofix Inc. and Thomas Hein dated as of April 11, 2008
(filed as an exhibit to the Company's quarterly report on Form 10-Q for
the quarter ended March 31, 2008 and incorporated herein by
reference).
|
|
|
10.28
|
Nonqualified
Stock Option Agreement under the Orthofix International N.V. Amended and
Restated 2004 Long-Term Incentive Plan, dated April 11, 2008, between
Orthofix International N.V. and Thomas Hein (filed as an exhibit to the
Company's quarterly report on Form 10-Q for the quarter ended March 31,
2008 and incorporated herein by reference).
|
|
|
10.29
|
Summary
of Consulting Arrangement between Orthofix International N.V. and Peter
Hewett (filed as an exhibit to the Company's quarterly report on Form 10-Q
for the quarter ended March 31, 2008 and incorporated herein by
reference).
|
|
|
10.31
|
Form
of Inducement Grant Nonqualified Stock Option Agreement between Orthofix
International N.V. and Robert S. Vaters (filed as an exhibit to the
current report on Form 8-K of Orthofix International N.V dated September
10, 2008 and incorporated herein by reference).
|
|
|
10.32+
|
Letter
Agreement between Orthofix Inc. and Oliver Burckhardt dated August 28,
2008 (filed as an exhibit to the Company’s quarterly report on Form 10-Q
for the quarter ended September 30, 2008 and incorporated herein by
reference).
|
|
|
10.33
|
Notice
of Termination from Orthofix Inc. to Oliver Burckhardt dated August 27,
2008 (filed as an exhibit to the Company’s quarterly report on Form 10-Q
for the quarter ended September 30, 2008 and incorporated herein by
reference).
|
|
|
10.34
|
Second
Amended and Restated Performance Accelerated Stock Options Agreement
between Orthofix International N.V. and Bradley R. Mason dated October 14,
2008 (filed as an exhibit to the Company’s current report on Form 8-K
filed October 15, 2008 and incorporated herein by
reference).
|
|
|
10.35
|
Nonqualified
Stock Option Agreement between Orthofix International N.V. and Bradley R.
Mason dated October 14, 2008 (filed as an exhibit to the Company’s current
report on Form 8-K filed October 15, 2008 and incorporated herein by
reference).
|
|
|
10.36
|
Amended
and Restated Employment Agreement, entered into and effective as of July
1, 2009, by and between Orthofix Inc. and Alan W. Milinazzo (filed as an
exhibit to the Company's current report on Form 8-K filed July 7, 2009 and
incorporated herein by
reference).
|
|
10.37
|
Amendment
No. 1 to Amended and Restated Employment Agreement, dated July 30, 2009,
by and between Orthofix Inc. and Alan W. Milinazzo (filed as an exhibit to
the Company's quarterly report on Form 10-Q for the quarter ended
September 30, 2009 and incorporated herein by
reference).
|
|
|
10.38
|
Amended
and Restated Employment Agreement, entered into and effective as of July
1, 2009, by and between Orthofix Inc. and Robert S. Vaters (filed as an
exhibit to the Company's current report on Form 8-K filed July 7, 2009 and
incorporated herein by reference).
|
|
|
10.39
|
Amendment
No. 1 to Amended and Restated Employment Agreement, dated July 30, 2009,
by and between Orthofix Inc. and Robert S. Vaters (filed as an exhibit to
the Company's quarterly report on Form 10-Q for the quarter ended
September 30, 2009 and incorporated herein by
reference).
|
|
|
10.40
|
Amended
and Restated Employment Agreement, entered into and effective as of July
1, 2009, by and between Orthofix Inc. and Bradley R. Mason (filed as an
exhibit to the Company's current report on Form 8-K filed July 7, 2009 and
incorporated herein by reference).
|
|
|
10.41
|
Amendment
No. 1 to Amended and Restated Employment Agreement, dated July 31, 2009,
by and between Orthofix Inc. and Bradley R. Mason (filed as an exhibit to
the Company's quarterly report on Form 10-Q for the quarter ended
September 30, 2009 and incorporated herein by
reference).
|
|
|
10.42
|
Amended
and Restated Employment Agreement, entered into on October 23, 2009 and
effective as of November 1, 2009, by and between Orthofix Inc. and Bradley
R. Mason (filed as an exhibit to the Company's quarterly report on Form
10-Q for the quarter ended September 30, 2009 and incorporated herein by
reference).
|
|
|
10.43
|
Amended
and Restated Employment Agreement, entered into and effective as of July
1, 2009, by and between Orthofix Inc. and Michael M. Finegan (filed as an
exhibit to the Company's current report on Form 8-K filed July 7, 2009 and
incorporated herein by reference).
|
|
|
10.44
|
Amendment
No. 1 to Amended and Restated Employment Agreement, dated August 4, 2009,
by and between Orthofix Inc. and Michael M. Finegan (filed as an exhibit
to the Company's quarterly report on Form 10-Q for the quarter ended
September 30, 2009 and incorporated herein by
reference).
|
|
|
10.45
|
Form
of Amendment to Stock Option Agreements (for Alan W. Milinazzo, Robert S.
Vaters, Bradley R. Mason, Michael M. Finegan and Michael Simpson) (filed
as an exhibit to the Company's current report on Form 8-K filed July 7,
2009 and incorporated herein by reference).
|
|
|
10.46
|
Inducement
Stock Option Agreement between Orthofix International N.V. and Kevin L.
Unger, dated August 17, 2009 (filed as an exhibit to the Company’s current
report on Form 8-K filed August 17, 2009 and incorporated herein by
reference).
|
|
|
10.47
|
Amended
and Restated Employment Agreement, entered into on September 4, 2009, by
and between Orthofix Inc. and Michael Simpson (filed as an exhibit to the
Company’s current report on Form 8-K filed September 11, 2009 and
incorporated herein by
reference).
|
|
Amended
and Restated Employment Agreement, entered into on July 1, 2009, by and
between Orthofix Inc. and Eric Brown.
|
||
|
Amended
and Restated Employment Agreement, entered into on November 16, 2009, by
and between Breg Inc. and Brad Lee.
|
||
|
Notice
of Termination from Orthofix Inc. to Ray Kolls dated January 29,
2010.
|
||
|
Matrix
Commercialization Collaboration Agreement, entered into July 24, 2008, by
and between Orthofix Holdings, Inc. and Musculoskeletal Transplant
Foundation.
|
||
|
List
of Subsidiaries.
|
||
|
Consent
of Ernst & Young LLP.
|
||
|
Rule
13a-14(a)/15d-14(a) Certification of Chief Executive
Officer.
|
||
|
Rule
13a-14(a)/15d-14(a) Certification of Chief Financial
Officer.
|
||
|
Section
1350 Certification of Chief Executive Officer.
|
||
|
Section
1350 Certification of Chief Financial
Officer.
|
|
*
|
Filed
herewith.
|
+
Certain confidential portions of this exhibit were
omitted by means of redacting a portion of the text. This exhibit has
been filed separately with the Secretary of the Commission without redactions
pursuant to our Application Requesting Confidential Treatment under the
Securities Exchange Act of 1934.
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) 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.
|
|||
|
Dated: March
1, 2010
|
By:
|
/s/ Alan W. Milinazzo
|
|
|
Name:
|
Alan
W. Milinazzo
|
||
|
Title:
|
Chief
Executive Officer and President
|
||
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
|
Name
|
Title
|
Date
|
|
|
/s/ Alan w. Milinazzo
|
Chief
Executive Officer,
|
March
1, 2010
|
|
|
Alan
W. Milinazzo
|
President
and Director
|
||
|
/s/ Robert S. vaters
|
Executive
Vice President and
|
March
1, 2010
|
|
|
Robert
S. Vaters
|
Chief
Financial Officer
|
||
|
/s/ james f. gero
|
Chairman
of the Board of Directors
|
March
1, 2010
|
|
|
James
F. Gero
|
|||
|
/s/ jerry c. benjamin
|
Vice
Chairman of the Board of
|
March
1, 2010
|
|
|
Jerry
C. Benjamin
|
Directors
|
||
|
/s/ walter von
wartburg
|
Director
|
March
1, 2010
|
|
|
Walter
von Wartburg
|
|||
|
/s/ thomas j. kester
|
Director
|
March
1, 2010
|
|
|
Thomas
J. Kester
|
|||
|
/s/ Charles w.
federico
|
Director
|
March
1, 2010
|
|
|
Charles
W. Federico
|
|||
|
/s/ guy jordan
|
Director
|
March
1, 2010
|
|
|
Guy
Jordan
|
|||
|
/s/ kenneth r.
weisshaar
|
Director
|
March
1, 2010
|
|
|
Kenneth
R. Weisshaar
|
|||
|
/s/ maria sainz
|
Director
|
March
1, 2010
|
|
|
Maria
Sainz
|
|||
|
/s/ michael mainelli
|
Director
|
March
1, 2010
|
|
|
Michael
Mainelli
|
ORTHOFIX
INTERNATIONAL N.V.
Index
to Consolidated Financial Statements
|
Page
|
|
|
Index
to Consolidated Financial Statements
|
F-1
|
|
Statement of Management’s Responsibility for
Financial Statements
|
F-2
|
|
Management’s Report on Internal Control over
Financial Reporting
|
F-3
|
|
Report of Independent Registered Public Accounting
Firm
|
F-4
|
|
Consolidated Balance Sheets as of December 31,
2009 and 2008
|
F-6
|
|
Consolidated Statements of Operations for the
years ended December 31, 2009, 2008 and 2007
|
F-7
|
|
Consolidated Statements of Changes in
Shareholders’ Equity for the years ended December 31, 2009, 2008 and
2007
|
F-8
|
|
Consolidated Statements of Cash Flows for the
years ended December 31, 2009, 2008 and 2007
|
F-9
|
|
Notes
to the Consolidated Financial Statements
|
F-10
|
|
Schedule
1 — Condensed Financial Information of Registrant Orthofix International
N.V.
|
S-1
|
|
Schedule
2 — Valuation and Qualifying Accounts
|
S-5
|
All other
schedules for which provision is made in the applicable accounting regulation of
the Securities and Exchange Commission are not required under the related
instructions or are inapplicable and therefore have been
omitted.
ORTHOFIX
INTERNATIONAL N.V.
Statement
of Management’s Responsibility for Financial Statements
To the
Shareholders of Orthofix International N.V.:
Management
is responsible for the preparation of the consolidated financial statements and
related information that are presented in this report. The
consolidated financial statements, which include amounts based on management’s
estimates and judgments, have been prepared in conformity with accounting
principles generally accepted in the United States. Other financial
information in the report to shareholders is consistent with that in the
consolidated financial statements.
The
Company maintains accounting and internal control systems to provide reasonable
assurance at a reasonable cost that assets are safeguarded against loss from
unauthorized use or disposition, and that the financial records are reliable for
preparing financial statements and maintaining accountability for
assets. These systems are augmented by written policies, an
organizational structure providing division of responsibilities and careful
selection and training of qualified personnel.
The
Company engaged Ernst & Young LLP independent registered public accountants
to audit and render an opinion on the consolidated financial statements in
accordance with auditing standards of the Public Company Accounting Oversight
Board (United States). These standards include an assessment of the
systems of internal controls and test of transactions to the extent considered
necessary by them to support their opinion.
The Board
of Directors, through its Audit Committee consisting solely of outside directors
of the Company, meets periodically with management and our independent
registered public accountants to ensure that each is meeting its
responsibilities and to discuss matters concerning internal controls and
financial reporting. Ernst & Young LLP has full and free access
to the Audit Committee.
James
F. Gero
Chairman
of the Board of Directors
Alan
W. Milinazzo
President,
Chief Executive Officer and Director
Robert
S. Vaters
Executive
Vice President and Chief Financial Officer
ORTHOFIX
INTERNATIONAL N.V.
Management’s
Report on Internal Control over Financial Reporting
Management
of the Company is responsible for establishing and maintaining adequate internal
control over financial reporting (as such term is defined in Rule 13a-15f under
the Exchange Act). The Company’s internal control over financial
reporting includes those policies and procedures that (i) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the Company; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the Company are
being made only in accordance with authorizations of management and directors of
the Company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
Company’s assets that could have a material effect on the financial
statements.
Internal
control over financial reporting is designed to provide reasonable assurance to
the Company’s management and board of directors regarding the preparation of
reliable financial statements for external purposes in accordance with generally
accepted accounting principles. Internal control over financial
reporting includes self-monitoring mechanisms and actions taken to correct
deficiencies as they are identified. Because of the inherent
limitations in any internal control, no matter how well designed, misstatements
may occur and not be prevented or detected. Accordingly, even
effective internal control over financial reporting can provide only reasonable
assurance with respect to financial statement preparation. Further,
the evaluation of the effectiveness of internal control over financial reporting
was made as of a specific date, and continued effectiveness in future periods is
subject to the risks that controls may become inadequate because of changes in
conditions or that the degree of compliance with the policies and procedures may
decline.
Management
conducted an evaluation of the effectiveness of the Company’s system of internal
control over financial reporting as of December 31, 2009 based on the framework
set forth in “Internal Control – Integrated Framework” issued by the Committee
of Sponsoring Organizations of the Treadway Commission. Based on its
evaluation, management concluded that, as of December 31, 2009, the Company’s
internal control over financial reporting is effective based on the specified
criteria.
The
Company’s internal control over financial reporting has been audited by the
Company’s Independent Registered Public Accounting Firm, Ernst & Young LLP,
as stated in their reports at pages F-4 and F-5 herein.
James
F. Gero
Chairman
of the Board of Directors
Alan
W. Milinazzo
President,
Chief Executive Officer and Director
Robert
S. Vaters
Executive
Vice President and Chief Financial Officer
Report
of Independent Registered Public Accounting Firm
The
Board of Directors and Shareholders of Orthofix International N.V.
We have
audited the accompanying consolidated balance sheets of Orthofix International
N.V. as of December 31, 2009 and 2008 and the related consolidated statements of
operations, shareholders’ equity, and cash flows for each of the three years in
the period ended December 31, 2009. Our audits also included the
financial statement schedules listed in the index at Item
15(a). These financial statements and schedules are the
responsibility of the Company’s management. Our responsibility is to
express an opinion on these financial statements and schedules based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Orthofix International
N.V. at December 31, 2009 and 2008, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2009 in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial statement
schedules, when considered in relation to the basic consolidated financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Orthofix International N.V.’s internal control
over financial reporting as of December 31, 2009, based on criteria established
in Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated March 1, 2010
expressed an unqualified opinion thereon.
/s/ Ernst
& Young LLP
Boston,
Massachusetts
March 1,
2010
Report
of Independent Registered Public Accounting Firm
The
Board of Directors and Shareholders of Orthofix International N.V.
We have
audited Orthofix International N.V.’s internal control over financial reporting
as of December 31, 2009 based on criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (the COSO criteria). Orthofix International N.V.’s
management is responsible for maintaining effective internal control over
financial reporting, and for its assessment of the effectiveness of internal
control over financial reporting included in the accompanying Management’s
Report on Internal Control over Financial Reporting. Our
responsibility is to express an opinion on the Company’s internal control over
financial reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness
of internal control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
In our
opinion, Orthofix International N.V. maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2009,
based on the COSO criteria.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Orthofix
International N.V. as of December 31, 2009 and 2008, and the related
consolidated statements of operations, shareholders’ equity, and cash flows for
each of the three years in the period ended December 31, 2009 of Orthofix
International N.V. and our report dated March 1, 2010 expressed an unqualified
opinion thereon.
/s/ Ernst
& Young LLP
Boston,
Massachusetts
March 1,
2010
ORTHOFIX
INTERNATIONAL N.V.
Consolidated
Balance Sheets as of December 31, 2009 and 2008
|
(U.S.
Dollars, in thousands except share and per share data)
|
2009
|
2008
|
||||||
|
Assets
|
||||||||
|
Current
assets:
|
||||||||
|
Cash
and cash equivalents
|
$ | 13,328 | $ | 14,594 | ||||
|
Restricted
cash
|
11,630 | 10,998 | ||||||
|
Trade
accounts receivable, less allowances of $7,205 and $6,473 at December 31,
2009 and 2008, respectively
|
129,777 | 110,720 | ||||||
|
Inventories,
net
|
94,624 | 91,185 | ||||||
|
Deferred
income taxes
|
20,286 | 17,543 | ||||||
|
Prepaid
expenses
|
4,868 | 6,923 | ||||||
|
Other
current assets
|
24,981 | 22,687 | ||||||
|
Total
current assets
|
299,494 | 274,650 | ||||||
|
Investments,
at cost
|
345 | 2,095 | ||||||
|
Property,
plant and equipment, net
|
38,694 | 32,660 | ||||||
|
Patents
and other intangible assets, net
|
47,628 | 53,546 | ||||||
|
Goodwill
|
185,175 | 182,581 | ||||||
|
Deferred
taxes and other long-term assets
|
19,137 | 15,683 | ||||||
|
Total
assets
|
$ | 590,473 | $ | 561,215 | ||||
|
Liabilities
and shareholders’ equity
|
||||||||
|
Current
liabilities:
|
||||||||
|
Bank
borrowings
|
$ | 2,209 | $ | 1,907 | ||||
|
Current
portion of long-term debt
|
3,332 | 3,329 | ||||||
|
Trade
accounts payable
|
21,821 | 22,179 | ||||||
|
Accounts
payable to related parties
|
1,481 | 1,686 | ||||||
|
Other
current liabilities
|
59,210 | 45,894 | ||||||
|
Total
current liabilities
|
88,053 | 74,995 | ||||||
|
Long-term
debt
|
249,132 | 277,533 | ||||||
|
Deferred
income taxes
|
6,115 | 4,509 | ||||||
|
Other
long-term liabilities
|
6,904 | 2,117 | ||||||
|
Total
liabilities
|
350,204 | 359,154 | ||||||
|
Contingencies
(Note 16)
|
||||||||
|
Shareholders’
equity
|
||||||||
|
Common
shares $0.10 par value; 50,000,000 shares authorized; 17,141,710
and 17,103,142 issued and outstanding as of December 31, 2009 and
2008, respectively
|
1,714 | 1,710 | ||||||
|
Additional
paid-in capital
|
177,246 | 167,818 | ||||||
|
Retained
earnings
|
54,119 | 29,647 | ||||||
|
Accumulated
other comprehensive income
|
7,190 | 2,886 | ||||||
|
Total
shareholders’ equity
|
240,269 | 202,061 | ||||||
|
Total
liabilities and shareholders’ equity
|
$ | 590,473 | $ | 561,215 | ||||
The
accompanying notes form an integral part of these consolidated financial
statements.
ORTHOFIX
INTERNATIONAL N.V.
|
(U.S.
Dollars, in thousands, except share and per share data)
|
2009
|
2008
|
2007
|
|||||||||
|
Net
sales
|
$ | 545,635 | $ | 519,675 | $ | 490,323 | ||||||
|
Cost
of sales
|
138,450 | 152,014 | 129,032 | |||||||||
|
Gross
profit
|
407,185 | 367,661 | 361,291 | |||||||||
|
Operating
expenses (income)
|
||||||||||||
|
Sales
and marketing
|
215,943 | 206,913 | 186,984 | |||||||||
|
General
and administrative
|
88,866 | 81,806 | 72,902 | |||||||||
|
Research
and development
|
31,460 | 30,844 | 24,220 | |||||||||
|
Amortization
of intangible assets
|
7,041 | 17,094 | 18,156 | |||||||||
|
Impairment
of goodwill and certain intangible assets
|
– | 289,523 | 20,972 | |||||||||
|
Gain
on sale of Pain Care® operations
|
– | (1,570 | ) | – | ||||||||
| 343,310 | 624,610 | 323,234 | ||||||||||
|
Operating
income (loss)
|
63,875 | (256,949 | ) | 38,057 | ||||||||
|
Other
income (expense), net
|
||||||||||||
|
Interest
income
|
193 | 542 | 1,043 | |||||||||
|
Interest
expense
|
(24,820 | ) | (20,216 | ) | (24,720 | ) | ||||||
|
Unrealized
non-cash gain (loss) on interest rate swap
|
1,852 | (7,975 | ) | – | ||||||||
|
Loss
on refinancing of senior secured term loan
|
– | (5,735 | ) | – | ||||||||
|
Other
income (expense), net
|
(1,079 | ) | (4,702 | ) | 355 | |||||||
| (23,854 | ) | (38,086 | ) | (23,322 | ) | |||||||
|
Income
(loss) before income taxes
|
40,021 | (295,035 | ) | 14,735 | ||||||||
|
Income
tax (expense) benefit
|
(15,549 | ) | 66,481 | (3,767 | ) | |||||||
|
Net
income (loss)
|
$ | 24,472 | $ | (228,554 | ) | $ | 10,968 | |||||
|
Net
income (loss) per common share - basic
|
$ | 1.43 | $ | (13.37 | ) | $ | 0.66 | |||||
|
Net
income (loss) per common share - diluted
|
$ | 1.42 | $ | (13.37 | ) | $ | 0.64 | |||||
|
Weighted
average number of common shares - basic
|
17,119,474 | 17,095,416 | 16,638,873 | |||||||||
|
Weighted
average number of common shares - diluted
|
17,202,943 | 17,095,416 | 17,047,587 | |||||||||
The
accompanying notes form an integral part of these consolidated financial
statements.
ORTHOFIX
INTERNATIONAL N.V.
Consolidated
Statements of Changes in Shareholders’ Equity for the years ended December 31,
2009, 2008 and 2007
|
(U.S.
Dollars, in thousands, except share data)
|
Number of Common Shares
Outstanding
|
Common Shares
|
Additional Paid-in
Capital
|
Retained Earnings
|
Accumulated Other Comprehensive
Income
|
Total Shareholders’
Equity
|
||||||||||||||||||
|
At
December 31, 2006
|
16,445,859 | $ | 1,645 | $ | 128,297 | $ | 248,433 | $ | 14,260 | $ | 392,635 | |||||||||||||
|
Cumulative
effect adjustment for the adoption of FIN 48
|
– | – | – | (1,200 | ) | – | (1,200 | ) | ||||||||||||||||
|
Net
income
|
– | – | – | 10,968 | – | 10,968 | ||||||||||||||||||
|
Other
comprehensive income:
|
||||||||||||||||||||||||
|
Unrealized
gain on derivative instrument (net of taxes of $586)
|
– | – | – | – | 1,585 | 1,585 | ||||||||||||||||||
|
Translation
adjustment
|
– | – | – | – | 841 | 841 | ||||||||||||||||||
|
Total
comprehensive income
|
12,194 | |||||||||||||||||||||||
|
Tax
benefit on exercise of stock options
|
– | – | 2,145 | – | – | 2,145 | ||||||||||||||||||
|
Share-based
compensation expense
|
– | – | 11,913 | – | – | 11,913 | ||||||||||||||||||
|
Common
shares issued
|
592,445 | 59 | 14,994 | – | – | 15,053 | ||||||||||||||||||
|
At
December 31, 2007
|
17,038,304 | 1,704 | 157,349 | 258,201 | 16,686 | 433,940 | ||||||||||||||||||
|
Net
loss
|
– | – | – | (228,554 | ) | – | (228,554 | ) | ||||||||||||||||
|
Other
comprehensive income:
|
||||||||||||||||||||||||
|
Unrealized
gain on derivative instrument (net of taxes of $609)
|
– | – | – | – | 1,567 | 1,567 | ||||||||||||||||||
|
Translation
adjustment
|
– | – | – | – | (15,367 | ) | (15,367 | ) | ||||||||||||||||
|
Total
comprehensive loss
|
(242,354 | ) | ||||||||||||||||||||||
|
Tax
benefit on exercise of stock options
|
– | – | 22 | – | – | 22 | ||||||||||||||||||
|
Reclassification
adjustment for tax benefit on exercise of stock options
|
– | – | (1,870 | ) | (1,870 | ) | ||||||||||||||||||
|
Share-based
compensation expense
|
– | – | 10,589 | – | – | 10,589 | ||||||||||||||||||
|
Common
shares issued
|
64,838 | 6 | 1,728 | – | – | 1,734 | ||||||||||||||||||
|
At
December 31, 2008
|
17,103,142 | 1,710 | 167,818 | 29,647 | 2,886 | 202,061 | ||||||||||||||||||
|
Net
income
|
– | – | – | 24,472 | – | 24,472 | ||||||||||||||||||
|
Other
comprehensive income:
|
||||||||||||||||||||||||
|
Unrealized
loss on derivative instrument (net of taxes of $1,050)
|
– | – | – | – | (2,702 | ) | (2,702 | ) | ||||||||||||||||
|
Translation
adjustment
|
– | – | – | – | 7,006 | 7,006 | ||||||||||||||||||
|
Total
comprehensive income
|
28,776 | |||||||||||||||||||||||
|
Purchase
of minority interest in subsidiary
|
– | – | (1,143 | ) | – | – | (1,143 | ) | ||||||||||||||||
|
Repurchase
of equity
|
– | – | (220 | ) | – | – | (220 | ) | ||||||||||||||||
|
Tax
benefit on exercise of stock options
|
– | – | 25 | – | – | 25 | ||||||||||||||||||
|
Share-based
compensation expense
|
– | – | 10,752 | – | – | 10,752 | ||||||||||||||||||
|
Common
shares issued
|
38,568 | 4 | 14 | – | – | 18 | ||||||||||||||||||
|
At
December 31, 2009
|
17,141,710 | $ | 1,714 | $ | 177,246 | $ | 54,119 | $ | 7,190 | $ | 240,269 | |||||||||||||
The
accompanying notes form an integral part of these consolidated financial
statements.
ORTHOFIX
INTERNATIONAL N.V.
|
(U.S.
Dollars, in thousands)
|
2009
|
2008
|
2007
|
|||||||||
|
Cash
flows from operating activities:
|
||||||||||||
|
Net
income (loss)
|
$ | 24,472 | $ | (228,554 | ) | $ | 10,968 | |||||
|
Adjustments
to reconcile net income (loss) to net cash provided by operating
activities:
|
||||||||||||
|
Depreciation
and amortization
|
22,344 | 31,279 | 28,531 | |||||||||
|
Amortization
of debt costs
|
248 | 911 | 1,085 | |||||||||
|
Provision
for doubtful accounts
|
7,335 | 7,261 | 7,326 | |||||||||
|
Deferred
taxes
|
(4,409 | ) | (79,158 | ) | (12,168 | ) | ||||||
|
Share-based
compensation
|
10,752 | 10,589 | 11,913 | |||||||||
|
Provision
for inventory obsolescence
|
8,760 | 10,913 | – | |||||||||
|
Loss
on refinancing of senior secured term loan
|
– | 3,660 | – | |||||||||
|
Impairment
of goodwill and certain intangible assets
|
– | 289,523 | 20,972 | |||||||||
|
Change
in fair value of interest rate swap
|
(1,852 | ) | 7,975 | – | ||||||||
|
Impairment
of investments held at cost
|
– | 1,500 | – | |||||||||
|
Amortization
of step up of fair value in inventory
|
– | 493 | 2,718 | |||||||||
|
Gain
on sale of Pain Care® operations
|
– | (1,570 | ) | – | ||||||||
|
Minority
interest
|
34 | – | – | |||||||||
|
Other
|
2,507 | (743 | ) | (5,816 | ) | |||||||
|
Changes
in operating assets and liabilities:
|
||||||||||||
|
Restricted
cash
|
(612 | ) | 5,444 | (9,153 | ) | |||||||
|
Accounts
receivable
|
(23,858 | ) | (13,182 | ) | (8,685 | ) | ||||||
|
Inventories
|
(8,941 | ) | (13,731 | ) | (22,745 | ) | ||||||
|
Prepaid
expenses and other current assets
|
(12 | ) | (5,046 | ) | (5,855 | ) | ||||||
|
Accounts
payable
|
(1,310 | ) | 675 | 303 | ||||||||
|
Other
current liabilities
|
14,512 | (1,469 | ) | 2,102 | ||||||||
|
Net
cash provided by operating activities
|
49,970 | 26,770 | 21,496 | |||||||||
|
Cash
flows from investing activities:
|
||||||||||||
|
Capital
expenditures for property, plant and equipment
|
(20,915 | ) | (15,600 | ) | (18,537 | ) | ||||||
|
Capital
expenditures for intangible assets
|
(1,083 | ) | (4,592 | ) | (8,692 | ) | ||||||
|
Investment
related to collaborative arrangement
|
(2,000 | ) | – | – | ||||||||
|
Proceeds
from sale of investments held at cost
|
1,711 | 769 | – | |||||||||
|
Proceeds
from sale of Pain Care® operations
|
– | 5,980 | – | |||||||||
|
Net
cash used in investing activities
|
(22,287 | ) | (13,443 | ) | (27,229 | ) | ||||||
|
Cash
flows from financing activities:
|
||||||||||||
|
Net
proceeds from issuance of common shares
|
70 | 1,734 | 15,053 | |||||||||
|
Payment
of refinancing fees and debt issuance costs
|
– | (283 | ) | (184 | ) | |||||||
|
Repayments
of long-term debt
|
(28,323 | ) | (17,069 | ) | (17,458 | ) | ||||||
|
Cash
payment for purchase of minority interest in subsidiary
|
(1,143 | ) | (500 | ) | (3,142 | ) | ||||||
|
Tax
benefit on non-qualified stock options
|
25 | 22 | 2,145 | |||||||||
|
Repurchase
of equity
|
(220 | ) | – | – | ||||||||
|
Proceeds
from (repayment of) bank borrowings, net
|
248 | (6,721 | ) | 8,131 | ||||||||
|
Net
cash provided by (used in) financing activities
|
(29,343 | ) | (22,817 | ) | 4,545 | |||||||
|
Effect
of exchange rates changes on cash
|
394 | (980 | ) | 371 | ||||||||
|
Net
decrease in cash and cash equivalents
|
(1,266 | ) | (10,470 | ) | (817 | ) | ||||||
|
Cash
and cash equivalents at the beginning of the year
|
14,594 | 25,064 | 25,881 | |||||||||
|
Cash
and cash equivalents at the end of the year
|
$ | 13,328 | $ | 14,594 | $ | 25,064 | ||||||
|
Supplemental
disclosure of cash flow information
|
||||||||||||
|
Cash
paid during the year for:
|
||||||||||||
|
Interest
|
$ | 26,724 | $ | 19,311 | $ | 27,477 | ||||||
|
Income
taxes
|
$ | 17,665 | $ | 12,602 | $ | 15,908 | ||||||
The accompanying
notes form an integral part of these consolidated financial
statements
.
ORTHOFIX
INTERNATIONAL N.V.
Notes
to the consolidated financial statements
Description
of business
Orthofix
International N.V. (the “Company”) is a multinational corporation principally
involved in the design, development, manufacture, marketing and distribution of
medical equipment, principally for the Orthopedics products
market. The Company is comprised of four reportable segments:
Domestic, Spinal Implants and Biologics (formerly referred to as “Blackstone”),
Breg and International. See Note 13 for a description of each
segment.
|
1.
|
Summary
of significant accounting policies
|
|
(a)
|
Basis
of consolidation
|
The
consolidated financial statements include the financial statements of the
Company and its wholly-owned and majority-owned subsidiaries and entities over
which the Company has control.
The
results of acquired businesses are included in the consolidated statements of
operations from the date of their acquisition. All intercompany
accounts, transactions and profits are eliminated in the consolidated financial
statements. The Company’s investments in which it does not have significant
influence or control are accounted for under the cost method of
accounting.
|
(b)
|
Foreign
currency
translation
|
Foreign
currency translation is performed in accordance with Accounting Standards
Codification (“ASC”) Topic 830 – Foreign Currency Matters (“ASC Topic 830”)
(formerly known as Statement of Financial Accounting Standards (“SFAS”) No. 52,
“Foreign Currency Translation”). All balance sheet accounts, except
shareholders’ equity, are translated at year end exchange rates and revenue and
expense items are translated at weighted average rates of exchange prevailing
during the year. Gains and losses resulting from the translation of
foreign currency are recorded in the accumulated other comprehensive income
component of shareholders’ equity. Transactional foreign currency
gains and losses, including intercompany transactions that are not long-term
investing in nature, are included in other income (expense), net and were $(0.5)
million, $(2.7) million and $0.8 million for the years ended December 31, 2009,
2008 and 2007, respectively.
|
(c)
|
Inventories
|
Inventories
are valued at the lower of cost or estimated net realizable value, after
provision for excess or obsolete items. Cost is determined on a
weighted-average basis, which approximates the FIFO method. The
valuation of work-in-process, finished products, field inventory and consignment
inventory includes the cost of materials, labor and production. Field
inventory represents immediately saleable finished products inventory that is in
the possession of the Company’s direct sales representatives.
|
(d)
|
Reporting
currency
|
The
reporting currency is the United States (“U.S.”) Dollar.
|
(e)
|
Market
risk
|
In the
ordinary course of business, the Company is exposed to the impact of changes in
interest rates and foreign currency fluctuations. The Company’s
objective is to limit the impact of such movements on earnings and cash
flows. In order to achieve this objective the Company seeks to
balance its non-dollar denominated income and expenditures. During
2008, the Company executed an interest rate swap agreement to manage the cash
flow exposure generated from interest rate fluctuations. During 2009,
2008, and 2007, the Company made use of a foreign currency swap agreement
entered into in December 2006 to manage cash flow exposure generated from
foreign currency fluctuations. See Note 10 for additional
information.
ORTHOFIX
INTERNATIONAL N.V.
Notes
to the consolidated financial statements (cont.)
|
(f)
|
Long-lived
assets
|
Property,
plant and equipment is stated at cost less accumulated
depreciation. Plant and equipment also includes
instrumentation. Depreciation is computed on a straight-line basis
over the useful lives of the assets, except for land, which is not
depreciated. Depreciation of leasehold improvements is computed over
the shorter of the lease term or the useful life of the asset. The
useful lives are as follows:
|
Years
|
|
|
Buildings
|
25
to 33
|
|
Plant,
equipment
|
2
to 10
|
|
Instrumentation
|
3
to 4
|
|
Furniture
and fixtures
|
4
to 8
|
Expenditures
for maintenance and repairs and minor renewals and improvements, which do not
extend the lives of the respective assets, are expensed. All other
expenditures for renewals and improvements are capitalized. The
assets and related accumulated depreciation are adjusted for property
retirements and disposals, with the resulting gain or loss included in
operations. Fully depreciated assets remain in the accounts until
retired from service.
Patents
and other intangible assets are recorded at cost, or when acquired as a part of
a business combination, at estimated fair value. These assets
primarily include patents and other technology agreements (“developed
technologies”), certain trademarks and distribution
networks. Identifiable intangible assets which are considered
definite lived are generally amortized over their useful lives using a method of
amortization that reflects the pattern in which the economic benefit of the
intangible assets is consumed. The Company’s weighted average
amortization period for developed technologies and distribution networks is 11
and 10 years, respectively.
ASC Topic
360 – Property, Plant and Equipment (“ASC Topic 360”) (formerly known as SFAS
No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets”)
requires that intangible assets with definite lives, such as Orthofix’s
developed technologies and distribution network assets, be tested for impairment
if any adverse conditions exist or change in circumstances has occurred that
would indicate impairment or a change in the remaining useful
life. If an impairment indicator exists, the Company tests the
intangible asset for recoverability. For purposes of the
recoverability test, the Company groups its intangible assets with other assets
and liabilities at the lowest level of identifiable cash flows if the intangible
asset does not generate cash flows independent of other assets and
liabilities. If the carrying value of the intangible asset (asset
group) exceeds the undiscounted cash flows expected to result from the use and
eventual disposition of the intangible asset (asset group), the Company will
write the carrying value down to the fair value in the period
identified.
The
Company generally calculates fair value of intangible assets as the present
value of estimated future cash flows the Company expects to generate from the
asset using a risk-adjusted discount rate. In determining the
estimated future cash flows associated with intangible assets, the Company uses
estimates and assumptions about future revenue contributions, cost structures
and remaining useful lives of the asset (asset group). The use of
alternative assumptions, including estimated cash flows, discount rates, and
alternative estimated remaining useful lives could result in different
calculations of impairment
The
Company tests goodwill and certain trademarks at least annually. The
Company tests more frequently if indicators are present or changes in
circumstances suggest that impairment may exist. These indicators
include, among others, declines in sales, earnings or cash flows, or the
development of a material adverse change in the business climate. The
Company assesses goodwill for impairment at the reporting unit level, which is
defined as an operating segment or one level below an operating segment,
referred to as a component. Consistent with prior years, the Company
has identified four reporting units, which are consistent with the Company’s
reporting segments; Domestic, Spinal Implants and Biologics, Breg and
International (see Note 13 for additional information).
In
performing the annual impairment test, the Company utilizes the two-step
approach prescribed under ASC Topic 350 – Intangibles – Goodwill and Other (“ASC
Topic 350”) (formerly known as SFAS No. 142, “Goodwill and Other Intangible
Assets”). The first step requires a comparison of each reporting
unit’s carrying value to the fair value of the respective unit. If
the carrying value exceeds the fair value, a second step is performed to measure
the amount of impairment loss, if any.
ORTHOFIX
INTERNATIONAL N.V.
Notes
to the consolidated financial statements (cont.)
Carrying
Value
In order
to calculate the respective carrying values, the Company records goodwill based
on the purchase price allocation performed at the time of
acquisition. Corporate assets and liabilities that directly relate to
a reporting unit’s operations are ascribed directly to that reporting unit.
Corporate assets and liabilities that are not directly related to a specific
reporting unit, but from which the reporting unit benefits, are allocated based
on the respective revenue contribution of each reporting unit.
Fair
Value – Income Approach
The fair
value of each reporting unit is estimated, entirely or predominantly, using an
income based approach. This income approach utilizes a discounted
cash flow (“DCF”), which estimates after-tax cash flows on a debt free basis,
discounted to present value using a risk-adjusted discount rate.
The
Company believes the DCF generally provides the most meaningful fair value as it
appropriately measures the Company’s income producing assets. The Company may
consider using a cost approach but generally believes it is not appropriate,
given the inability to replicate the value of the specific technology-based
assets within our reporting units. In circumstances when the DCF
indicator of fair value is not sufficiently conclusive to support the carrying
value of a reporting unit, or when other measures provide a more appropriate
indicator, we may consider a market approach in our determination of the
reporting unit’s fair value.
In
performing a DCF calculation, the Company is required to make assumptions about
the amount and timing of future expected cash flows, terminal value growth rates
and appropriate discount rates and in connection therewith considers the
following:
|
|
·
|
The
determination of expected cash flows is based on the Company’s strategic
plans and long-range planning forecasts which, to the extent reasonably
possible, reflect anticipated changes in the economy and the
industry. Revenue growth rates represent estimates based on
current and forecasted market conditions. The profit margin
assumptions are projected by each reporting unit based on historical
margins, the current cost structure and anticipated net cost
reductions.
|
|
|
·
|
The
terminal value growth rate is used to calculate the value of cash flows
beyond the last projected period in the DCF. This rate reflects
the Company’s estimates for stable, perpetual growth for each reporting
unit.
|
|
|
·
|
The
discount rates are based on the reporting unit’s risk-adjusted weighted
average cost of capital, using assumptions consistent with publicly traded
guideline companies operating within the medical device industry as well
as Company specific risk factors for each reporting
unit.
|
These
inputs represent the Company’s best estimate, however, different cash flows,
growth and discount rate assumptions could generate different fair values,
potentially impacting the Company’s impairment assessment.
Domestic,
Breg and International Reporting Units
The fair
value of the Domestic, Breg and International reporting units have been
established using a DCF method. These DCF results concluded the fair
value of the Domestic, Breg and International reporting units exceeded the
respective carrying values at December 31, 2009 and December 31,
2008. The assumptions used in the December 31, 2009 DCF results were
consistent with the DCF results used in the prior year, reflecting appropriate
adjustments for changes in the economic climate.
ORTHOFIX
INTERNATIONAL N.V.
Notes
to the consolidated financial statements (cont.)
Spinal
Implants and Biologics Reporting Unit
During
the third quarter of 2008, the Company indentified indicators of impairment with
respect to the Spinal Implants and Biologics reporting unit, prompting an
interim impairment test. The determination of the Spinal Implants and
Biologics fair value was calculated using a combination of income and market
approaches, weighted based on guidance provided by an independent appraisal
firm. The income approach was based on a DCF model. The
market approach was based on the guideline transaction method, which derived
applicable market multiples from the prices at which comparable companies have
been acquired in the marketplace. The Company applied a weighted
average percentage of 75% - 25%, placing greater weight on the income approach,
which provided a lower fair value. This calculation resulted in a
$126.9 million impairment loss, reducing the related goodwill balance to $9.4
million as of December 31, 2008.
The
Company used a DCF to determine the fair value of the Spinal Implants and
Biologics reporting units as of December 31, 2009. This resulted in
no significant changes to the Spinal Implants and Biologics fair value
assumptions. Accordingly, the annual impairment test as of December
31, 2009 resulted in no further impairment of the Spinal Implants and Biologics
reporting unit.
|
(g)
|
Revenue
recognition and accounts receivable
|
Revenue
is generally recognized as income in the period in which title passes and the
products are delivered. Revenues exclude any value added or other
local taxes, intercompany sales and trade discounts. Shipping and
handling costs are included in cost of sales. Royalty revenues are
recognized when the royalty is earned.
For bone
growth stimulation and certain bracing products that are prescribed by a
physician, the Company recognizes revenue when the product is placed on or
implanted in and accepted by the patient. For domestic spinal implant
and human cellular and tissue based products (“HCT/P products”), revenues are
recognized when the product has been utilized and a confirming purchase order
has been received from the hospital. For sales to commercial
customers, including hospitals and distributors, revenues are recognized at the
time of shipment unless contractual agreements specify that title passes on
delivery. Revenues for inventory delivered on consignment are
recognized as the product is used by the consignee.
In 2008,
the Company entered into an agreement with the Musculoskeletal Transplant
Foundation (“MTF”) to develop and commercialize a new stem cell-based bone
growth biologic matrix. With the development process completed in
2009, the Company and MTF operate under the terms of a separate
commercialization agreement. Under the terms of this 10-year
agreement, MTF sources the tissue, processes it to create the bone growth
matrix, and packages and delivers it in accordance with orders received directly
from customers and from the Company. The Company has exclusive global
marketing rights for the new allograft and receives a marketing fee from MTF
based on total sales. This marketing fee is recorded on a net basis
within net sales.
The
Company derives a significant amount of revenues in the U.S. from third-party
payors, including commercial insurance carriers, health maintenance
organizations, preferred provider organizations and governmental payors such as
Medicare. Amounts paid by these third-party payors are generally
based on fixed or allowable reimbursement rates. These revenues are
recorded at the expected or pre-authorized reimbursement rates, net of any
contractual allowances or adjustments. Certain billings are subject
to review by the third-party payors and may be subject to
adjustment.
The
process for estimating the ultimate collection of accounts receivable involves
significant assumptions and judgments. Historical collection and
payor reimbursement experience is an integral part of the estimation process
related to reserves for doubtful accounts and the establishment of contractual
allowances. Accounts receivable are analyzed on a quarterly basis to
assess the adequacy of both reserves for doubtful accounts and contractual
allowances. Revisions in allowances for doubtful accounts estimates
are recorded as an adjustment to bad debt expense within sales and marketing
expenses. Revisions to contractual allowances are recorded as an
adjustment to net sales. In the judgment of management,
adequate allowances have been provided for doubtful accounts and contractual
allowances. Our estimates are periodically tested against actual
collection experience.
ORTHOFIX
INTERNATIONAL N.V.
Notes
to the consolidated financial statements (cont.)
|
(h)
|
Research
and development costs
|
Expenditures
for research and development are expensed as incurred. Expenditures
related to collaborative arrangements are expensed based on the terms of the
related agreements. On July 24, 2008, the Company entered into an
agreement with MTF to collaborate on the development and commercialization of a
new stem cell-based bone growth biologic matrix. Under the terms of
the agreement, the Company invested $10.0 million to develop the new stem
cell-based bone growth biologic matrix that provides the beneficial properties
of an autograft in spinal and orthopedic surgeries. The new matrix
was launched with a full market release in the U.S. effective on July 1,
2009. A total of $6.1 million and $3.9 million of expenses was
recognized under the terms of the agreement and are included in research and
development expense for the years ended December 31, 2009 and 2008,
respectively.
As
previously announced in 2008, the Company entered into an agreement with
Intelligent Implant Systems (“IIS”) for the acquisition and development of a
next-generation pedicle screw system for the spinal implants
division. Under the agreement the Company purchased $2.5 million of
intellectual property and related technology. During the year ended
December 31, 2009, IIS met their first development milestone and under the terms
of the agreement the Company paid IIS $1.0 million. Also in 2009, the
Company and IIS amended the existing agreement and the Company paid IIS an
additional $0.8 million for partially meeting its next milestone. The
Company has recorded these payments totaling $1.8 million for the year ended
December 31, 2009 as research and development expense. IIS will
continue to perform research and development functions related to the technology
and under the agreement and amended agreement we will pay IIS an additional
amount up to $2.7 million for research and development performance
milestones.
|
(i)
|
Income
taxes
|
The
Company accounts for income taxes in accordance with ASC Topic 740 – Income
Taxes (“ASC Topic 740”). The Company is subject to income taxes in
both the United States and foreign jurisdictions, and uses estimates in
determining the provision for income taxes. The Company accounts for
income taxes using the asset and liability method for accounting and reporting
for income taxes. Under this method, deferred tax assets and
liabilities are recognized based on temporary differences between the financial
reporting and income tax bases of assets and liabilities using statutory rates.
This process requires that the Company project the current tax liability and
estimate the deferred tax assets and liabilities, including net operating loss
and tax credit carryforwards. In assessing the need for a valuation
allowance, the Company has considered the recent operating results, future
taxable income projections and all prudent and feasible tax planning
strategies.
ASC Topic
740 also provides criteria for the recognition, measurement, presentation and
disclosures of uncertain tax positions. A tax benefit from an
uncertain tax position may be recognized if it is “more likely than not” that
the position is sustainable based solely on its technical merits. The
Company recognized $1.2 million in additional tax liability, inclusive of
interest, which was accounted for as a reduction of retained earnings at the
date of implementation of January 1, 2007. As of December 31, 2008
and December 31, 2009, the Company had $1.1 million and $0.8 million,
respectively, including interest, of unrecognized tax benefits.
|
(j)
|
Net
income (loss) per common share
|
Net
income per common share is computed in accordance with ASC Topic 260 – Earnings
per Share (formerly known as SFAS No. 128, “Earnings per Share”). Net
income per common share – basic is computed using the weighted average number of
common shares outstanding during each of the respective years. Net
income per common share – diluted is computed using the weighted average number
of common and common equivalent shares outstanding during each of the respective
years using the “treasury stock” method. Common equivalent shares
represent the dilutive effect of the assumed exercise of outstanding share
options (see Note 19) and the only differences between basic and diluted shares
result solely from the assumed exercise of certain outstanding share options and
warrants. In 2008, the effect of options was not included in the
calculation because the inclusion would have been
anti-dilutive.
ORTHOFIX
INTERNATIONAL N.V.
Notes
to the consolidated financial statements (cont.)
|
(k)
|
Cash
and cash equivalents
|
The
Company considers all highly liquid investments with an original maturity of
three months or less at the date of purchase to be cash
equivalents.
|
(l)
|
Restricted
cash
|
Restricted
cash consists of cash held at certain subsidiaries, the distribution or transfer
of which to Orthofix International N.V. (the “Parent”) or other subsidiaries
that are not parties to the credit facility described in Note 9 is
restricted. The senior secured credit facility restricts the Parent
and subsidiaries that are not parties to the facilities from access to cash held
by Colgate Medical Limited and its subsidiaries. All credit party
subsidiaries have access to this cash for operational and debt repayment
purposes.
|
(m)
|
Sale
of accounts receivable
|
The
Company follows the provisions of ASC Topic 860 – Transfers and Servicing
(formerly known as SFAS No. 140, “Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities”). Trade accounts
receivables sold without recourse are removed from the balance sheet at the time
of sale. The Company generally does not require collateral on trade
receivables.
|
(n)
|
Use
of estimates in preparation of financial
statements
|
The
preparation of financial statements in conformity with accounting principles
generally accepted in the U.S. requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. On an ongoing basis, the Company evaluates its
estimates including those related to contractual allowances, doubtful accounts,
inventories, taxes and potential goodwill and intangible asset
impairment. Actual results could differ from these
estimates.
|
(o)
|
Reclassifications
|
Certain
prior year amounts have been reclassified to conform to the 2009
presentation. The reclassifications have no effect on previously
reported net earnings or shareholders’ equity.
|
(p)
|
Share-based
compensation
|
The
Company recognizes share-based compensation in accordance with ASC Topic 718 –
Compensation – Stock Compensation (“ASC Topic 718”) (formerly known as SFAS No.
123(R) (revised 2004), “Share-Based Payment”). The fair value of
stock options is determined using the Black-Scholes valuation model. Such value
is recognized as expense over the service period net of estimated
forfeitures.
The
expected term of options granted is estimated based on a number of factors,
including the vesting term of the award, historical employee exercise behavior
for both options that are currently outstanding and options that have been
exercised or are expired, the expected volatility of the Company’s common stock
and an employee’s average length of service. The risk-free interest rate is
determined based upon a constant U.S. Treasury security rate with a contractual
life that approximates the expected term of the option
award. Management estimates expected volatility based on the
historical volatility of the Company’s stock. The compensation expense
recognized for all equity-based awards is net of estimated forfeitures.
Forfeitures are estimated based on an analysis of actual option
forfeitures.
|
(q)
|
Advertising
costs
|
The
Company expenses all advertising costs as incurred. Advertising
expense for the years ended December 31, 2009, 2008 and 2007 was $0.7 million,
$1.1 million and $1.8 million, respectively.
ORTHOFIX
INTERNATIONAL N.V.
Notes
to the consolidated financial statements (cont.)
|
(r)
|
Derivative
instruments
|
The
Company manages its exposure to fluctuating cash flows resulting from changes in
interest rates and foreign exchange within the consolidated financial statements
according to its hedging policy. Under the policy, the Company may engage in
non-leveraged transactions involving various financial derivative instruments to
manage exposed positions. The policy requires the Company to formally
document the relationship between the hedging instrument and hedged item, as
well as its risk-management objective and strategy for undertaking the hedge
transaction. For instruments designated as a cash flow hedge, 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 when (1)
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.
The
Company follows ASC Topic 815 – Derivatives and Hedging (“ASC Topic 815”)
(formerly known as SFAS No. 133, “Accounting for Derivative Instruments and
Hedging Activities” as amended and interpreted), which requires that all
derivatives be recorded as either assets or liabilities on the balance sheet at
their respective fair values. For a cash flow hedge, the effective
portion of the derivative’s change in fair value (i.e. gains or losses) is
initially reported as a component of other comprehensive income, net of related
taxes, and subsequently reclassified into net earnings when the hedged exposure
is no longer effective.
The
Company utilizes a cross currency swap to manage its foreign currency exposure
related to a portion of the Company’s intercompany receivable of a U.S. dollar
functional currency subsidiary that is denominated in Euro. The cross
currency swap has been accounted for as a cash flow hedge in accordance with ASC
Topic 815.
See Note
10 for a description of the types of derivative instruments the Company
utilizes.
|
(s)
|
Accumulated
other comprehensive income
|
Accumulated
other comprehensive income is comprised of foreign currency translation
adjustments and the effective portion of the gain (loss) for the Company’s
cross-currency swap which is designated and accounted for as a cash flow hedge
(refer to Note 10). The components of and changes in accumulated other
comprehensive income are as follows:
|
(US$ in thousands)
|
Foreign Currency Translation
Adjustments
|
Fair Value of Cross -Currency
Swap
|
Accumulated Other Comprehensive
Income/(Loss)
|
|||||||||
|
Balance
at December 31, 2008
|
$ | (211 | ) | $ | 3,097 | $ | 2,886 | |||||
|
Unrealized
loss on cross-currency swap, net of tax of $(1,050)
|
- | (2,702 | ) | (2,702 | ) | |||||||
|
Foreign
currency translation adjustment
(1)
|
7,006 | - | 7,006 | |||||||||
|
Balance
at December 31, 2009
|
$ | 6,795 | $ | 395 | $ | 7,190 | ||||||
(1) As
the cash remains permanently invested in the foreign subsidiaries, no deferred
taxes are recognized on the related foreign currency translation
adjustment.
ORTHOFIX
INTERNATIONAL N.V.
Notes
to the consolidated financial statements (cont.)
|
(t)
|
Recently
Issued Accounting Standards
|
In
January 2009, the Company adopted the Financial Accounting Standards Board
("FASB") ASC Topic 808 – Collaborative Arrangements (“ASC Topic 808”)
(formerly known as Emerging Issues Task Force (“EITF”) 07-1 “Accounting for
Collaborative Arrangements”). ASC Topic 808 provides information
related to the classification of the payments between participants, the
appropriate income statement presentation, as well as disclosures related to
certain collaborative arrangements. The adoption of ASC Topic 808 did
not have a material impact on the Company’s results of operations or financial
position, as the Company had applied this guidance since there was no prevailing
authority previously.
In
January 2009, the Company adopted ASC Topic 810 - Consolidations (“ASC Topic
810”) (formerly known as SFAS No. 160, “Non-controlling Interests in
Consolidated Financial Statements, an Amendment of ARB 51”). ASC
Topic 810 establishes accounting and reporting standards pertaining to ownership
interest in subsidiaries held by parties other than the parent, the amount of
net income attributable to the parent and to the non-controlling interest,
changes in a parent’s ownership interest, and the valuation of any retained
non-controlling equity investment when a subsidiary is
deconsolidated. ASC Topic 810 also establishes disclosure
requirements that clearly identify and distinguish between the interests of the
parent and the interests of the non-controlling owners. ASC Topic 810
and its adoption changed the method in which the Company accounted for a
minority interest acquisition during the first quarter of 2009. It
also requires the excess purchase price over the minority interest liability (at
the time of the acquisition) to be recorded as a capital
transaction. The disclosure requirements of ASC Topic 810 did not
have an impact on the Company’s financial reporting as the remaining minority
interest liability is immaterial.
In May
2009, the FASB issued ASC Topic 855 – Subsequent Events (“ASC Topic 855”)
(formerly known as SFAS No. 165, “Subsequent Events”). ASC Topic 855
provides authoritative accounting literature for a topic that was previously
addressed only in auditing literature (AICPA AU Section 560, Subsequent
Events). The guidance in ASC Topic 855 is largely similar to the
current guidance in the auditing literature with some exceptions that are not
intended to result in significant changes in practice. Two
modifications to the subsequent events guidance in AU Section 560 are: 1) to
name the two types of subsequent events either as recognized subsequent events
(currently referred to in practice as Type I subsequent events) or
non-recognized subsequent events (currently referred to in practice as Type II
subsequent events) and 2) to modify the definition of subsequent events to
refer to events or transactions that occur after the balance sheet date, but
before the financial statements are issued for public entities. ASC
Topic 855 is effective for interim or annual financial periods ending after June
15, 2009. On February 24, 2010, the FASB issued Accounting Standards
Updated ("ASU") 2010-09 to amend ASC Topic 855. In preparation of the December
31, 2009 financial statements, the Company has performed all related procedures
required by ASC Topic 855.
ORTHOFIX
INTERNATIONAL N.V.
Notes
to the consolidated financial statements (cont.)
|
2.
|
Inventories
|
|
December 31,
|
||||||||
|
(US$ in thousands)
|
2009
|
2008
|
||||||
|
Raw
materials
|
$ | 11,777 | $ | 9,314 | ||||
|
Work-in-process
|
6,687 | 8,829 | ||||||
|
Finished
products
|
59,812 | 57,151 | ||||||
|
Field
inventory
|
14,955 | 13,633 | ||||||
|
Consignment
inventory
|
25,274 | 23,426 | ||||||
| 118,505 | 112,353 | |||||||
|
Less
reserve for obsolescence
|
(23,881 | ) | (21,168 | ) | ||||
| $ | 94,624 | $ | 91,185 | |||||
Field
inventory represents immediately saleable finished products inventory that is in
the possession of the Company’s direct sales representatives
|
3.
|
Investments
|
The
Company had total investments held at cost of $0.3 million and $2.1 million as
of December 31, 2009 and 2008, respectively. In August 2008, Orthofix
entered into an agreement with Oped AG to liquidate a portion of the Company’s
investment in Oped AG. During the third quarter of 2008, the Company
received net proceeds of $0.8 million for the sale of a portion of its ownership
in OPED AG. In 2009, Orthofix modified its agreement with Oped AG and
sold 100% of its remaining investment to them in the third quarter of 2009 for
the net proceeds of $1.7 million. The Company’s investments at
December 31, 2009 reflect its ownership in Biowave Corporation, a pain therapy
company. The Company has assessed these cost investments as of
December 31, 2009 and 2008, noting no impairment in carrying value.
The
Company also has an investment in OrthoRx which was reduced to zero in
2004.
|
4.
|
Property,
plant and equipment
|
|
December
31,
|
||||||||
|
(US$ in thousands)
|
2009
|
2008
|
||||||
|
Cost
|
||||||||
|
Buildings
|
$ | 3,611 | $ | 3,340 | ||||
|
Plant,
equipment and instrumentation
|
94,927 | 76,827 | ||||||
|
Furniture
and fixtures
|
11,613 | 10,638 | ||||||
| 110,151 | 90,805 | |||||||
|
Accumulated
depreciation
|
(71,457 | ) | (58,145 | ) | ||||
| $ | 38,694 | $ | 32,660 | |||||
Depreciation
expense for the years ended December 31, 2009, 2008 and 2007 was $15.3 million,
$14.2 million and $10.4 million, respectively.
ORTHOFIX
INTERNATIONAL N.V.
Notes
to the consolidated financial statements (cont.)
|
5.
|
Patents
and other intangible assets
|
|
December
31,
|
||||||||
|
(US$ in thousands)
|
2009
|
2008
|
||||||
|
Cost
|
||||||||
|
Patents
and developed technologies
|
$ | 27,961 | $ | 25,602 | ||||
|
Trademarks
– definite lived (subject to amortization)
|
119 | 105 | ||||||
|
Trademarks
– indefinite lived (not subject to amortization)
|
23,542 | 23,382 | ||||||
|
Distribution
networks
|
44,586 | 44,586 | ||||||
| 96,208 | 93,675 | |||||||
|
Accumulated
amortization
|
||||||||
|
Patents
and developed technologies
|
(17,499 | ) | (13,194 | ) | ||||
|
Trademarks
– definite lived (subject to amortization)
|
(107 | ) | (105 | ) | ||||
|
Distribution
networks
|
(30,974 | ) | (26,830 | ) | ||||
|
Patents
and other intangible assets, net
|
$ | 47,628 | $ | 53,546 | ||||
Amortization expense for intangible
assets is estimated to be approximately $6.0 million, $5.9 million, $4.7
million, $1.6 million, $1.6 million and $4.3 million for the periods ending
December 31, 2010, 2011, 2012, 2013, 2014 and 2015 and thereafter,
respectively.
During
the third quarter of 2008, the Company determined that a test for impairment of
indefinite lived assets at Blackstone in accordance with ASC Topic 350 was
necessary due to decreasing revenues at Blackstone, among other
matters. The Company evaluated the indefinite-lived intangible assets
which included the Blackstone trademark acquired during the acquisition of
Blackstone. The impairment analysis resulted in the carrying value,
as adjusted for an impairment charge recognized in the fourth quarter of 2007,
of the trademark exceeding the fair value for which the Company recognized a
$57.0 million impairment charge included in Impairment of Goodwill and Certain
Intangible Assets in the year ended December 31, 2008.
Also,
during the third quarter of 2008, the Company determined that an impairment
indicator as described in ASC Topic 360 occurred with respect to the
definite-lived intangibles at Spinal Implants and Biologics. Due to
the impairment indicator, the Company compared the expected cash flows to be
generated by the Spinal Implants and Biologics reporting unit, which represented
the lowest level at which cash flows are specifically identifiable, on an
undiscounted basis to the carrying value of the reporting unit’s assets,
including goodwill. The Company determined the carrying value of the
Spinal Implants and Biologics reporting unit exceeded the related undiscounted
cash flows, which determination resulted in the impairment of the distribution
network and technologies at Spinal Implants and Biologics based on their fair
values. The resulting impairment charge of $105.7 million is included in
Impairment of Goodwill and Certain Intangible Assets.
|
6.
|
Goodwill
|
During
the third quarter of 2008, due to the matters described in Note 5 above, the
Company performed an impairment analysis of the goodwill at Spinal Implants and
Biologics. The impairment analysis resulted in a goodwill impairment
charge of $126.9 million because the carrying value exceeded the implied fair
value of goodwill. For a discussion of how the Company tests to determine if
goodwill is impaired, see Note 2.
ORTHOFIX
INTERNATIONAL N.V.
Notes
to the consolidated financial statements (cont.)
The
following table presents the changes in the net carrying value of goodwill by
reportable segment:
|
(US$ in thousands)
|
Domestic
|
Spinal Implants and
Biologics
|
Breg
|
International
|
Total
|
|||||||||||||||
|
At
December 31, 2007
|
$ | 31,793 | $ | 136,240 | $ | 101,322 | $ | 50,583 | $ | 319,938 | ||||||||||
|
Disposals
(1)
|
- | - | (2,027 | ) | - | (2,027 | ) | |||||||||||||
|
Purchase
of additional minority interest
(2)
|
- | - | - | (365 | ) | (365 | ) | |||||||||||||
|
Impairment
(3)
|
- | (126,873 | ) | - | - | (126,873 | ) | |||||||||||||
|
Foreign
currency
|
- | - | - | (8,092 | ) | (8,092 | ) | |||||||||||||
|
At
December 31, 2008
|
31,793 | 9,367 | 99,295 | 42,126 | 182,581 | |||||||||||||||
|
Foreign
currency
|
- | - | - | 2,594 | 2,594 | |||||||||||||||
|
At
December 31, 2009
|
$ | 31,793 | $ | 9,367 | $ | 99,295 | $ | 44,720 | $ | 185,175 | ||||||||||
(1) Sale
of operations relating to the Pain Care® business at Breg during the first
quarter of 2008.
(2) Purchase
of the remaining 38.74% of the minority interest in Mexican subsidiary and 4.00%
of the minority interest in Brazilian subsidiary.
(3) The
impairment analysis resulted in a goodwill impairment charge of $126.9 million
because the carrying value exceeded the implied fair value of
goodwill.
As of
December 31, 2009, the Company performed its annual impairment review of all its
reporting units and determined there was no additional impairment of
goodwill.
|
7.
|
Bank
borrowings
|
|
December
31,
|
||||||||
|
(US$ in thousands)
|
2009
|
2008
|
||||||
|
Borrowings
under line of credit
|
$ | 2,209 | $ | 1,907 | ||||
The
weighted average interest rate on borrowings under lines of credit as of
December 31, 2009 and 2008 was 5.15% and 5.86%, respectively.
Borrowings
under the line of credit consist of borrowings in Euros. The Company
had an unused available line of credit of 5.8 million Euros ($8.2 million) and
5.2 million Euros ($7.3 million) at December 31, 2009 and 2008, respectively, in
its Italian line of credit. This line of credit provides the Company
the option to borrow amounts in Italy at rates which are determined at the time
of borrowing. This line of credit is unsecured.
ORTHOFIX
INTERNATIONAL N.V.
Notes
to the consolidated financial statements (cont.)
|
8.
|
Other
current liabilities
|
|
December
31,
|
||||||||
|
(US$ in thousands)
|
2009
|
2008
|
||||||
|
Accrued
expenses
|
$ | 15,240 | $ | 9,652 | ||||
|
Salaries,
bonuses, commissions and related taxes payable
|
30,779 | 20,919 | ||||||
|
Interest
rate swap
|
6,123 | 7,975 | ||||||
|
Income
taxes payable
|
1,510 | 2,833 | ||||||
|
Other
payables
|
5,558 | 4,515 | ||||||
| $ | 59,210 | $ | 45,894 | |||||
|
9.
|
|
|
December
31,
|
||||||||
|
(US$ in thousands)
|
2009
|
2008
|
||||||
|
Long-term
obligations
|
$ | 252,400 | $ | 280,700 | ||||
|
Other
loans
|
64 | 162 | ||||||
| 252,464 | 280,862 | |||||||
|
Less
current portion
|
(3,332 | ) | (3,329 | ) | ||||
| $ | 249,132 | $ | 277,533 | |||||
On
September 22, 2006 the Company’s wholly-owned U.S. holding company subsidiary,
Orthofix Holdings, Inc. (“Orthofix Holdings”), entered into a senior secured
credit facility with a syndicate of financial institutions to finance the
acquisition of Blackstone Medical Inc. (“Blackstone”). Certain terms
of the senior secured credit facility were amended September 29,
2008. The senior secured credit facility provides for (1) a
seven-year amortizing term loan facility of $330.0 million and (2) a six-year
revolving credit facility of $45.0 million. As of December 31, 2009,
the Company had $0.3 million of letters of credit outstanding under the
revolving credit facility and $252.4 million outstanding under the term loan
facility. Obligations under the senior secured credit facility have a
floating interest rate of the London Inter-Bank Offered Rate (“LIBOR”) plus a
margin, with a LIBOR floor of 3.0%, or prime rate plus a margin. As
of December 31, 2009, the entire term loan obligation of $252.4 million is at
the prime rate plus a margin of 3.50%. The effective interest rates
on the senior secured credit facility, including the impact of an interest rate
swap (see Note 10), as of December 31, 2009 and December 31, 2008 were 8.8% and
8.4%, respectively.
Each of
the domestic subsidiaries of the Company (which includes Orthofix Inc., Breg
Inc., and Blackstone) and Colgate Medical Limited and Victory Medical Limited
(wholly-owned financing subsidiaries of the Company) has guaranteed the
obligations of Orthofix Holdings under the senior secured credit
facility. The obligations of the subsidiaries under their guarantees
are secured by the pledges of their respective assets.
Certain
subsidiaries of the Company have restrictions on their ability to pay dividends
or make intercompany loan advances pursuant to the Company’s senior secured
credit facility. The net assets of Orthofix Holdings and its
subsidiaries are restricted for distributions to the parent
company. Domestic subsidiaries of the Company, as parties to the
credit agreement, have access to these net assets for operational
purposes. The amount of restricted net assets of Orthofix Holdings
and its subsidiaries as of December 31, 2009 is $143.0 million compared to
$111.3 million at December 31, 2008. In addition, the senior secured
credit facility restricts the Company and subsidiaries that are not parties to
the credit facility from access to cash held by Colgate Medical Limited and its
subsidiaries. All credit party subsidiaries have access to this cash
for operational and debt repayment purposes.
As a
result of the Company prepaying $25.0 million of its long-term debt in 2009, the
aggregate maturities of long-term debt under contractual obligations after
December 31, 2009 are as follows: 2010 - $0, 2011 - $0, 2012 - $35.4
million, and 2013 - $217.0 million. However, the Company’s intentions
are to follow the original agreed upon payment schedule under the senior secured
credit facility and therefore, the aggregate maturities after December 31, 2009
are as follows: 2010 - $3.3 million, 2011 - $3.3 million, 2012 - $80.0 million
and 2013 - $165.8 million.
ORTHOFIX
INTERNATIONAL N.V.
Notes
to the consolidated financial statements (cont.)
In
conjunction with obtaining the senior secured credit facility, the Company
incurred debt issuance costs of $6.4 million which it has been amortizing over
the life of the facility. A portion of the capitalized debt issuance
costs included in other long-term assets related to the senior secured credit
facility were expensed as a result of the amendment on September 29, 2008, and
are included in the loss on refinancing of senior secured term loan for the year
ended December 31, 2008. In connection with the amendment to the
credit facility, the Company paid additional fees of $2.4 million in the year
ended December 31, 2008, of which $2.1 million are included in the loss on
refinancing of senior secured term loan.
As of December 31, 2009
and 2008, $0.2 million and $0.8 million, respectively, of debt issuance costs
which relate to the Company’s revolving credit facility are included in other
long-term assets.
|
10.
|
Derivative
instruments
|
In 2006,
the Company entered into a cross-currency swap agreement to manage its cash
flows related to foreign currency exposure for a portion of the Company’s
intercompany receivable of a U.S. dollar functional currency subsidiary that is
denominated in Euro. The derivative instrument, a ten-year fully
amortizable agreement with an initial notional amount of $63.0 million, is
scheduled to expire on December 30, 2016. The instrument is
designated as a cash flow hedge. The amount outstanding under the
agreement as of December 31, 2009 and December 31, 2008 was $53.5 million and
$56.7 million, respectively. Under the agreement, the Company pays
Euro and receives U.S. dollars based on scheduled cash flows in the agreement.
The Company recognized an unrealized gain (loss) on the change in fair value of
this swap arrangement of $(2.7) million and $1.6 million, net of tax, within
other comprehensive income for the year ended December 31, 2009 and December 31,
2008, respectively.
In June
2008, the Company entered into a three-year fully amortizable interest rate swap
agreement (the “Swap”) with a notional amount of $150.0 million and an
expiration date of June 30, 2011. During the second and third
quarters of 2008, the interest rate Swap was accounted for as a cash flow hedge,
and changes in its value were recorded as part of accumulated other
comprehensive income on the balance sheet. Due to declining interest
rates and a LIBOR floor in the Company's amended credit facility, the Swap was
no longer deemed highly effective. Therefore, during the fourth
quarter of 2008, the Company recognized in earnings an unrealized, non-cash loss
of approximately $8.0 million which resulted from changes in the fair value of
the Company’s interest rate Swap. Special hedge accounting is no longer applied
and fair value adjustments are expected to be reported in current earnings
through the expiration of the Swap in June 2011. For the year ended
December 31, 2009, the Company recorded an unrealized gain of $1.9
million in unrealized
non-cash gain (loss) on interest rate swap on the statement of
operations. The Swap continues to provide an economic hedge against
fluctuating interest rate exposure on the $150.0 million portion of outstanding
debt it covers, should the LIBOR interest rate rise above 3.73%.
As
required by ASC Topic 815 – Derivatives and Hedging (formerly known as SFAS No.
161 “Disclosures about Derivative Instruments and Hedging Activities”), the
tables below disclose the types of derivative instruments the Company owns, the
classifications and fair values of these instruments within the balance sheet,
and the amount of gain (loss) recognized in other comprehensive income (loss)
(“OCI”) or income (loss).
|
(US$ in thousands)
As of December 31,
2009
|
Fair value: favorable
(unfavorable)
|
Balance sheet
location
|
Amount of gain (loss) recognized in
OCI
|
||||||
|
Cross-currency
swap
|
$ | (4,737 | ) |
Other
long-term liabilities
|
$ | (2,702 | ) | ||
|
Interest
rate swap
|
$ | (6,123 | ) |
Other
current liabilities
|
$ | - | |||
|
As of December 31,
2008
|
|||||||||
|
Cross-currency
swap
|
$ | 681 |
Other
long-term assets
|
$ | 1,567 | ||||
|
Interest
rate swap
|
$ | (7,975 | ) |
Other
current liabilities
|
$ | - | |||
ORTHOFIX
INTERNATIONAL N.V.
Notes
to the consolidated financial statements (cont.)
|
(US$
in thousands)
|
For the year ended
December 31,
|
|||||||
|
Amount of gain (loss) recognized in income
(loss)
|
2009
|
2008
|
||||||
|
Interest
rate swap
|
$ | 1,852 | $ | (7,975 | ) | |||
|
11.
|
Fair
value measurements
|
The
Company adopted the accounting guidance for fair value measurements on January
1, 2008. Fair value is defined as the price that would be received
for an asset or paid to transfer a liability (an exit price) in the principal or
most advantageous market for the asset or liability in an orderly transaction
between market participants on the measurement date. Non-financial
assets and liabilities of the Company measured at fair value include any
long-lived assets or equity method investments that are impaired in a currently
reported period. The authoritative guidance also describes three
levels of inputs that may be used to measure fair value:
Level 1 –
quoted prices in active markets for identical assets and
liabilities
Level 2 –
observable inputs other than quoted prices in active markets for identical
assets and liabilities
Level 3 –
unobservable inputs in which there is little or no market data available, which
require the reporting entity to develop its own assumptions
As of
December 31, 2009, the Company held certain items that are required to be
measured at fair value on a recurring basis. These included cash
equivalents, restricted cash, accounts receivable, short-term bank borrowings,
accounts payable, long-term secured debt, an interest rate derivative contract,
and a cross currency derivative contract. Cash equivalents consist of
short-term, highly liquid, income-producing investments, all of which have
original maturities of 90 days or less, including money market
funds. Restricted cash, accounts receivable, short-term bank
borrowings and accounts payable approximate fair value due to the short-term
maturities of these instruments. The Company’s long-term secured debt
carries a floating rate of interest and therefore, the carrying value is
considered to approximate the fair value. The derivative instruments
are related to the Company’s interest rate and foreign currency
hedges.
The
Company’s interest rate derivative instrument is an over-the-counter (“OTC”)
swap contract. The inputs used to determine the fair value of this
contract are obtained in quoted public markets. Therefore, the
Company has categorized the swap contract as Level 2. The
Company also considers counterparty credit risk and its own credit risk in its
determination of all estimated fair values. The Company has
consistently applied these valuation techniques in all periods
presented.
The
Company’s cross currency derivative instrument is an OTC contract, which is not
traded on a public exchange. The fair value of the swap
contract is determined based on inputs that are readily available in public
markets or can be derived from information available in publicly quoted
markets. Therefore, the Company has categorized the swap contract as
a Level 2 derivative financial instrument. The Company also
considers counterparty credit risk and its own credit risk in its determination
of all estimated fair values. The Company has consistently applied
these valuation techniques in all periods presented.
The fair
value of the Company’s financial assets and liabilities on a recurring basis
were as follows:
|
(US$ in thousands)
|
Balance December 31,
2009
|
Level 1
|
Level 2
|
Level 3
|
||||||||||||
|
Derivative
Financial Instruments
(1)
|
||||||||||||||||
|
Cash
Flow Hedges
|
||||||||||||||||
|
Interest
rate hedge
|
$ | (6,123 | ) | $ | - | $ | (6,123 | ) | $ | - | ||||||
|
Cross
currency hedge
|
$ | (4,737 | ) | $ | - | $ | (4,737 | ) | $ | - | ||||||
(1)
See
Note 10, “Derivative Instruments”.
ORTHOFIX
INTERNATIONAL N.V.
Notes
to the consolidated financial statements (cont.)
|
12.
|
Commitments
|
Leases
The
Company has entered into operating leases for facilities and
equipment. These leases are non-cancellable and typically do not
contain renewal options. Certain leases contain rent escalation
clauses for which the Company recognizes the expense on a straight-line
basis. Rent expense under the Company’s operating leases for the
years ended December 31, 2009, 2008 and 2007 was approximately $6.2 million,
$5.6 million and $5.2 million, respectively. Future minimum
lease payments under operating leases as of December 31, 2009 are as
follows:
|
(US$ in thousands)
|
||||
|
2010
|
$ | 5,621 | ||
|
2011
|
4,363 | |||
|
2012
|
2,883 | |||
|
2013
|
1,963 | |||
|
2014
|
1,567 | |||
|
Thereafter
|
8,300 | |||
|
Total
|
$ | 24,697 | ||
In
February 2009, as part of the consolidation and reorganization of the Company’s
spine business from New Jersey and Massachusetts into the Texas facility, the
Company entered into a ten year operating lease in Lewisville,
Texas. The future minimum lease payments of $1.5 million per year for
the first five years and $1.6 million per year for the following five years are
included in the table above. This lease will commence upon the
earlier of occupancy or completion of improvements, which is expected to occur
in the second quarter of 2010.
|
13.
|
Business
segment information
|
The
Company’s segment information is prepared on the same basis that the Company’s
management reviews the financial information for operational decision making
purposes. The Company is comprised of the following segments:
Domestic
Domestic
(“Domestic”) consists of the operations of Orthofix Inc. within the
U.S. Domestic designs, manufactures and distributes stimulation,
orthopedic and biologics products. Domestic uses both direct and
distributor sales representatives to sell Spine and Orthopedic products to
hospitals, doctors and other healthcare providers in the U.S.
market.
Spinal
Implants and Biologics (previously referred to as “Blackstone”)
Spinal
Implants and Biologics (“Spinal Implants and Biologics”) consists of Blackstone
and its two subsidiaries, Blackstone GmbH and Goldstone GmbH. Spinal
Implants and Biologics specializes in the design, development and marketing of
spinal implant and related HCT/P products. Spinal Implants and Biologics
distributes its products through a network of domestic and international
distributors, sales representatives and affiliates.
ORTHOFIX
INTERNATIONAL N.V.
Notes
to the consolidated financial statements (cont.)
Breg
Breg,
Inc. (“Breg”), based in Vista, California, designs, manufactures, and
distributes orthopedic products for post-operative reconstruction and
rehabilitative patient use and sells its products through a network of domestic
and international distributors, sales representatives and
affiliates.
International
International
(“International”) consists of international operations located in Europe,
Mexico, Brazil and Puerto Rico, as well as independent distributors located
outside the U.S. International uses both direct and distributor sales
representatives to sell Spine, Orthopedics, Sports Medicine, Vascular and Other
products to hospitals, doctors, and other healthcare providers.
Group
Activities
Group
activities are comprised of the operating expenses of Orthofix International
N.V. and its U.S. holding company subsidiary, Orthofix Holdings,
Inc.
The
tables below present information by reportable segment:
|
External Sales
|
Intersegment Sales
|
|||||||||||||||||||||||
|
(US$ in thousands)
|
2009
|
2008
|
2007
|
2009
|
2008
|
2007
|
||||||||||||||||||
|
Domestic
|
$ | 210,703 | $ | 188,807 | $ | 166,727 | $ | 4,516 | $ | 5,871 | $ | 4,090 | ||||||||||||
|
Spinal
Implants and Biologics
|
118,680 | 108,966 | 115,914 | 2,335 | 3,999 | 5,925 | ||||||||||||||||||
|
Breg
|
92,188 | 89,478 | 83,397 | 5,521 | 5,583 | 3,780 | ||||||||||||||||||
|
International
|
124,064 | 132,424 | 124,285 | 23,116 | 24,914 | 27,893 | ||||||||||||||||||
|
Total
|
$ | 545,635 | $ | 519,675 | $ | 490,323 | $ | 35,488 | $ | 40,367 | $ | 41,688 | ||||||||||||
|
Operating
Income (Loss)
|
Year Ended
December 31,
|
|||||||||||
|
(US$ in thousands)
|
2009
|
2008
|
2007
|
|||||||||
|
Domestic
|
|
$ | 67,831 | $ | 64,301 | $ | 55,297 | |||||
|
Spinal
Implants and Biologics
|
(1) (2)
(3)
|
(14,045 | ) | (330,755 | ) | (26,110 | ) | |||||
|
Breg
|
13,061 | 12,393 | 9,717 | |||||||||
|
International
|
17,664 | 18,664 | 19,973 | |||||||||
|
Group
Activities
|
(21,156 | ) | (20,812 | ) | (19,003 | ) | ||||||
|
Eliminations
|
520 | (740 | ) | (1,817 | ) | |||||||
|
Total
|
$ | 63,875 | $ | (256,949 | ) | $ | 38,057 | |||||
|
|
(1)
|
Includes
$5.7 million of research and development expense from collaborative
arrangements and $3.6
million of
restructuring charges for the year ended December 31,
2009.
|
|
|
(2)
|
Includes
impairment charges on goodwill and certain intangible assets of $289.5
million and $20.0 million during the years ended December 31, 2008 and
2007, respectively.
|
|
|
(3)
|
Includes
an increase in the reserve for obsolescence of $10.9 million during the
year ended December 31, 2008, due to reduced projections in revenue,
distributor terminations, new products, and the replacement of one product
with a successor product.
|
ORTHOFIX
INTERNATIONAL N.V.
Notes
to the consolidated financial statements (cont.)
The
following table presents identifiable assets by segment, excluding intercompany
balances and investments in consolidated subsidiaries.
|
Identifiable
Assets
|
||||||||
|
(US$ in thousands)
|
2009
|
2008
|
||||||
|
Domestic
|
$ | 116,376 | $ | 110,981 | ||||
|
Spinal
Implants and Biologics
|
134,446 | 121,508 | ||||||
|
Breg
|
164,236 | 172,398 | ||||||
|
International
|
161,457 | 146,444 | ||||||
|
Group
activities
|
13,438 | 10,624 | ||||||
|
Eliminations
|
520 | (740 | ) | |||||
|
Total
|
$ | 590,473 | $ | 561,215 | ||||
The
following table presents depreciation and amortization, income tax expense
(benefit) and other income (expense) by segment:
|
Depreciation and
amortization
|
Income tax
expense (benefit)
|
Other income
(expense)
|
||||||||||||||||||||||||||||||||||
|
(US$ in thousands)
|
2009
|
2008
|
2007
|
2009
|
2008
|
2007
|
2009
|
2008
|
2007
|
|||||||||||||||||||||||||||
|
Domestic
|
$ | 2,519 | $ | 2,674 | $ | 2,831 | $ | 29,427 | $ | 25,457 | $ | 21,803 | $ | (20 | ) | $ | (1,414 | ) | $ | 69 | ||||||||||||||||
|
Spinal
Implants and Biologics
|
7,500 | 15,837 | 13,975 | (12,725 | ) | (86,857 | ) | (16,186 | ) | 179 | 73 | 475 | ||||||||||||||||||||||||
|
Breg
|
6,964 | 7,750 | 8,048 | 3,749 | 2,676 | 1,799 | (209 | ) | (119 | ) | (89 | ) | ||||||||||||||||||||||||
|
International
|
5,087 | 4,794 | 3,497 | 1,398 | (222 | ) | (520 | ) | 45 | (7,460 | ) | 6,178 | ||||||||||||||||||||||||
|
Group
activities
|
274 | 224 | 180 | (6,300 | ) | (7,535 | ) | (3,129 | ) | (23,849 | ) | (29,166 | ) | (29,955 | ) | |||||||||||||||||||||
|
Total
|
$ | 22,344 | $ | 31,279 | $ | 28,531 | $ | 15,549 | $ | (66,481 | ) | $ | 3,767 | $ | (23,854 | ) | $ | (38,086 | ) | $ | (23,322 | ) | ||||||||||||||
Capital
expenditures of tangible and intangible assets for each segment are as
follows:
|
(US$ in thousands)
|
2009
|
2008
|
2007
|
|||||||||
|
Domestic
|
$ | 4,569 | $ | 1,813 | $ | 2,936 | ||||||
|
Spinal
Implants and Biologics
|
9,442 | 10,355 | 15,278 | |||||||||
|
Breg
|
1,898 | 3,071 | 2,706 | |||||||||
|
International
|
5,975 | 4,757 | 6,309 | |||||||||
|
Group
activities
|
114 | 196 | - | |||||||||
|
Total
|
$ | 21,998 | $ | 20,192 | $ | 27,229 | ||||||
ORTHOFIX
INTERNATIONAL N.V.
Notes
to the consolidated financial statements (cont.)
Geographical
information
Analysis
of net sales by geographic destination:
|
(US$ in thousands)
|
2009
|
2008
|
2007
|
|||||||||
|
U.S.
|
$ | 415,356 | $ | 381,016 | $ | 359,007 | ||||||
|
International:
|
||||||||||||
|
U.K.
|
19,407 | 27,465 | 33,109 | |||||||||
|
Italy
|
19,679 | 26,075 | 25,175 | |||||||||
|
Other
|
91,193 | 85,119 | 73,032 | |||||||||
|
Total
international
|
130,279 | 138,659 | 131,316 | |||||||||
|
Total
net sales
|
$ | 545,635 | $ | 519,675 | $ | 490,323 | ||||||
There are
no sales in the Netherlands Antilles.
Analysis
of property, plant and equipment and investments by geographic
area:
|
(US$ in thousands)
|
2009
|
2008
|
||||||
|
U.S.
|
$ | 25,245 | $ | 21,409 | ||||
|
Italy
|
7,567 | 6,540 | ||||||
|
U.K.
|
2,415 | 2,044 | ||||||
|
Others
|
3,812 | 4,762 | ||||||
|
Total
|
$ | 39,039 | $ | 34,755 | ||||
There are
no long-lived assets in the Netherlands Antilles.
|
Sales by Market Sector for the year ended December
31, 2009
|
||||||||||||||||||||
|
(US$ in thousands)
|
Domestic
|
Spinal Implants and
Biologics
|
Breg
|
International
|
Total
|
|||||||||||||||
|
Spine
|
$ | 158,908 | $ | 118,680 | $ | - | $ | 1,837 | $ | 279,425 | ||||||||||
|
Orthopedics
|
51,795 | - | - | 79,515 | 131,310 | |||||||||||||||
|
Sports
Medicine
|
- | - | 92,188 | 4,178 | 96,366 | |||||||||||||||
|
Vascular
|
- | - | - | 18,710 | 18,710 | |||||||||||||||
|
Other
|
- | - | - | 19,824 | 19,824 | |||||||||||||||
|
Total
|
$ | 210,703 | $ | 118,680 | $ | 92,188 | $ | 124,064 | $ | 545,635 | ||||||||||
ORTHOFIX
INTERNATIONAL N.V.
Notes
to the consolidated financial statements (cont.)
|
Sales by Market Sector for the year ended December
31, 2008
|
||||||||||||||||||||
|
(US$ in thousands)
|
Domestic
|
Spinal Implants and
Biologics
|
Breg
|
International
|
Total
|
|||||||||||||||
|
Spine
|
$ | 141,753 | $ | 108,966 | $ | - | $ | 1,520 | $ | 252,239 | ||||||||||
|
Orthopedics
|
47,054 | - | - | 82,052 | 129,106 | |||||||||||||||
|
Sports
Medicine
|
- | - | 89,478 | 5,050 | 94,528 | |||||||||||||||
|
Vascular
|
- | - | - | 17,890 | 17,890 | |||||||||||||||
|
Other
|
- | - | - | 25,912 | 25,912 | |||||||||||||||
|
Total
|
$ | 188,807 | $ | 108,966 | $ | 89,478 | $ | 132,424 | $ | 519,675 | ||||||||||
|
Sales by Market Sector for the year ended December
31, 2007
|
||||||||||||||||||||
|
(US$ in thousands)
|
Domestic
|
Spinal Implants and
Biologics
|
Breg
|
International
|
Total
|
|||||||||||||||
|
Spine
|
$ | 126,626 | $ | 115,914 | $ | - | $ | 625 | $ | 243,165 | ||||||||||
|
Orthopedics
|
40,101 | - | - | 71,831 | 111,932 | |||||||||||||||
|
Sports
Medicine
|
- | - | 83,397 | 4,143 | 87,540 | |||||||||||||||
|
Vascular
|
- | - | - | 19,866 | 19,866 | |||||||||||||||
|
Other
|
- | - | - | 27,820 | 27,820 | |||||||||||||||
|
Total
|
$ | 166,727 | $ | 115,914 | $ | 83,397 | $ | 124,285 | $ | 490,323 | ||||||||||
|
14.
|
Income
taxes
|
Income
(loss) before provision (benefit) for income taxes consisted of:
|
Year Ended
December 31,
|
||||||||||||
|
(US$ in thousands)
|
2009
|
2008
|
2007
|
|||||||||
|
U.S.
|
$ | 28,542 | $ | (304,542 | ) | $ | 551 | |||||
|
Non-U.S.
|
11,479 | 9,507 | 14,184 | |||||||||
| $ | 40,021 | $ | (295,035 | ) | $ | 14,735 | ||||||
ORTHOFIX
INTERNATIONAL N.V.
Notes
to the consolidated financial statements (cont.)
The
provision for (benefit from) income taxes in the accompanying consolidated
statements of operations consists of the following:
|
Year Ended
December 31,
|
||||||||||||
|
(US$ in thousands)
|
2009
|
2008
|
2007
|
|||||||||
|
U.S.
|
||||||||||||
|
-Current
|
$ | 17,929 | $ | 12,697 | $ | 10,501 | ||||||
|
-Deferred
|
(6,698 | ) | (81,661 | ) | (10,817 | ) | ||||||
|
Non-U.S.
|
||||||||||||
|
-Current
|
2,029 | (53 | ) | 2,134 | ||||||||
|
-Deferred
|
2,289 | 2,536 | 1,949 | |||||||||
|
Total
tax expense
|
$ | 15,549 | $ | (66,481 | ) | $ | 3,767 | |||||
The tax
effects of the significant temporary differences, which comprise the deferred
tax assets and liabilities and assets, are as follows:
|
(US$ in thousands)
|
2009
|
2008
|
||||||
|
Goodwill
|
$ | (1,029 | ) | $ | (901 | ) | ||
|
Patents,
trademarks and other intangible assets
|
(12,181 | ) | (12,760 | ) | ||||
|
Property,
plant and equipment
|
(4,297 | ) | (2,172 | ) | ||||
|
Other
current
|
(6,115 | ) | (4,509 | ) | ||||
|
Inventories
and related reserves
|
11,065 | 9,108 | ||||||
|
Accrued
compensation
|
14,296 | 10,669 | ||||||
|
Allowance
for doubtful accounts
|
4,306 | 4,254 | ||||||
|
Interest
|
12,254 | 9,284 | ||||||
|
Net
operating loss carryforwards
|
18,664 | 15,320 | ||||||
|
Other
long-term
|
6,195 | 7,383 | ||||||
|
Valuation
allowance
|
(17,239 | ) | (14,370 | ) | ||||
|
Net
deferred tax asset (liability)
|
$ | 25,919 | $ | 21,306 | ||||
The
valuation allowance as of December 31, 2009 and 2008 was $17.2 million and $14.4
million, respectively. The net increase in the valuation
allowance of $2.8 million during the year relates to current period foreign
losses not benefitted. The valuation allowance is attributable to net
operating loss carryforwards in certain foreign jurisdictions, the benefit for
which is dependent upon the generation of future taxable income in that
location. In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that some portion or all
of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of future
taxable income during the periods in which those temporary differences become
deductible. Management considers the scheduled reversal of deferred
tax liabilities, projected future taxable income and tax planning strategies in
making this assessment. Based upon the level of historical taxable
income and projections for future taxable income over the periods in which the
deferred tax assets are deductible, management believes it is more likely than
not the Company will realize the benefits of these deductible differences, net
of the existing valuation allowances at December 31, 2009.
The
Company has tax net operating loss carryforwards in various taxing jurisdictions
of approximately $67.3 million with the majority of the losses related to the
Company’s Netherlands operations expiring in various amounts in tax years
beginning in 2010. The Company has provided a valuation allowance
against a significant portion of these net operating loss carryforwards since it
does not believe that this deferred tax asset can be realized prior to
expiration.
ORTHOFIX
INTERNATIONAL N.V.
Notes
to the consolidated financial statements (cont.)
The rate
reconciliation presented below is based on the U.S. federal income tax rate,
rather than the parent company’s country of domicile tax
rate. Management believes, given the large proportion of taxable
income earned in the United States, such disclosure is more
meaningful.
|
(US$ in thousands, except
percentages)
|
2009
|
2008
|
2007
|
|||||||||||||||||||||
|
Amount
|
Percent
|
Amount
|
Percent
|
Amount
|
Percent
|
|||||||||||||||||||
|
Statutory
U.S. federal income tax rate
|
$ | 14,007 | 35 | % | $ | (103,263 | ) | 35 | % | $ | 5,179 | 35 | % | |||||||||||
|
State
taxes, net
|
1,574 | 3.9 | % | (4,798 | ) | 1.6 | % | 317 | 2.1 | % | ||||||||||||||
|
Foreign
rate differential
|
(1,401 | ) | (3.5 | )% | (1,422 | ) | 0.5 | % | (2,504 | ) | (17.0 | )% | ||||||||||||
|
Valuation
allowance – foreign losses
|
2,861 | 7.2 | % | 3,031 | (1.0 | )% | 2,665 | 18.0 | % | |||||||||||||||
|
Italy
step-up amortization
|
(2,573 | ) | (6.4 | )% | (2,527 | ) | 0.9 | % | (2,115 | ) | (14.3 | )% | ||||||||||||
|
Blackstone
purchased research and development
|
- | 0.0 | % | (165 | ) | 0.1 | % | (1,320 | ) | (8.9 | )% | |||||||||||||
|
Domestic
manufacturing deduction
|
(839 | ) | (2.1 | )% | (741 | ) | 0.3 | % | (453 | ) | (3.1 | )% | ||||||||||||
|
Reserves,
net
|
172 | 0.4 | % | (1,093 | ) | 0.4 | % | 372 | (2.5 | )% | ||||||||||||||
|
Goodwill
impairment
|
- | 0.0 | % | 44,406 | (15.2 | )% | - | 0.0 | % | |||||||||||||||
|
Permanent
items
|
935 | 2.4 | % | 900 | (0.3 | )% | 451 | 3.0 | % | |||||||||||||||
|
Tax
rate changes
|
- | 0.0 | % | (2,320 | ) | 0.8 | % | 1,266 | 8.6 | % | ||||||||||||||
|
Other
items, net
|
813 | 2.0 | % | 1,511 | (0.6 | )% | (91 | ) | (0.4 | )% | ||||||||||||||
|
Income
tax expense/effective rate
|
$ | 15,549 | 38.9 | % | $ | (66,481 | ) | 22.5 | % | $ | 3,767 | 25.5 | % | |||||||||||
The
Company’s gross unrecognized tax benefit was $0.4 million and $0.7 million for
the years ended December 31, 2009 and 2008, respectively. The Company
recognizes potential accrued interest and penalties related to unrecognized tax
benefits within its global operations in income tax expenses. The
Company had approximately $0.4 million and $0.4 million accrued for payment of
interest and penalties as of December 31, 2009 and 2008,
respectively.
The
entire amount of unrecognized tax benefits, including interest, would favorably
impact the Company’s effective tax rate if recognized. As of December
31, 2009, the Company does not expect the amount of unrecognized tax benefits to
change significantly over the next twelve months.
A
reconciliation of the gross unrecognized tax benefits (excluding interest) for
the years ended December 31, 2009 and December 31, 2008 follows:
|
(US$ in thousands)
|
2009
|
2008
|
||||||
|
Balance
as of January 1,
|
$ | 707 | $ | 1,707 | ||||
|
Additions
for current year tax positions
|
- | - | ||||||
|
Additions
for prior year tax positions
|
338 | - | ||||||
|
Expiration
of statutes
|
- | (1,000 | ) | |||||
|
Audit
settlements
|
(603 | ) | - | |||||
|
Balance
as of December 31,
|
$ | 442 | $ | 707 | ||||
The
Company files a consolidated income tax return in the U.S. federal jurisdiction
and numerous consolidated and separate income tax returns in many state and
foreign jurisdictions. The statute of limitations with respect to federal tax
authorities is closed for years prior to December 31, 2006. The
statute of limitations for the various state tax filings is closed in most
instances for the years prior to December 31, 2006. There are certain
state tax statutes open for years from 1997 forward due to current
examinations. The statute of limitations with respect to the major
foreign tax filing jurisdictions is closed for years prior to December 31,
2005.
ORTHOFIX
INTERNATIONAL N.V.
Notes
to the consolidated financial statements (cont.)
The
Company’s intention is to reinvest the total amount of its unremitted foreign
earnings (residing outside the Netherland Antilles) in the local jurisdiction,
to the extent they are generated and available, or to repatriate the earnings
only when tax-effective. As such, the Company has not provided tax expense on
$276.1 million of the unremitted earnings of its foreign
subsidiaries. It is not practicable to determine the amounts of net
additional income tax that may be payable if such earnings were
repatriated.
|
15.
|
Related
parties
|
The
following related party balances and transactions as of and for the three years
ended December 31, 2009, among the Company and other companies in which
directors and/or executive officers have an interest are reflected in the
consolidated financial statements. The Company buys components
related to the A-V Impulse
®
System and buys the Laryngeal Mask from companies in which a former board member
has a beneficial minority interest. OrthoPro, Inc., an independent
distributor for Breg, Inc., is owned by the son of one of the Company’s current
board members. The Company sells bracing products to OrthoRx, an
entity in which the Company has a minority interest equity ownership, accounted
for under the cost method.
|
Year Ended
December 31,
|
||||||||||||
|
(US$ in thousands)
|
2009
|
2008
|
2007
|
|||||||||
|
Sales
|
$ | 4,043 | $ | 2,278 | $ | 1,478 | ||||||
|
Purchases
|
$ | 11,901 | $ | 12,681 | $ | 13,207 | ||||||
|
Accounts
payable
|
$ | 1,481 | $ | 1,686 | $ | 2,189 | ||||||
|
Accounts
receivable
|
$ | 563 | $ | 460 | $ | 7 | ||||||
|
16.
|
Contingencies
|
Litigation
On or
about July 23, 2007, our subsidiary, Blackstone Medical Inc. (“Blackstone”)
received a subpoena issued by the Department of Health and Human Services,
Office of Inspector General, under the authority of the federal healthcare
anti-kickback and false claims statutes. The subpoena seeks documents for the
period January 1, 2000 through July 31, 2006, which is prior to Blackstone’s
acquisition by the Company. The Company believes that the subpoena concerns the
compensation of physician consultants and related matters. On September 17,
2007, the Company submitted a claim for indemnification from the escrow fund
established in connection with the agreement and plan of merger between the
Company, New Era Medical Corp. and Blackstone, dated as of August 4, 2006 (the
“Blackstone Merger Agreement”), for any losses to us resulting from this matter.
(The Company’s indemnification rights under the Blackstone Merger Agreement are
described further below). The Company was subsequently notified by legal counsel
for the former shareholders that the representative of the former shareholders
of Blackstone has objected to the indemnification claim and intends to contest
it in accordance with the terms of the Blackstone Merger Agreement.
On or
about January 7, 2008, the Company received a federal grand jury subpoena from
the U.S. Attorney’s Office for the District of Massachusetts. The subpoena seeks
documents from the Company for the period January 1, 2000 through July 15, 2007.
The Company believes that the subpoena concerns the compensation of physician
consultants and related matters, and further believes that it is associated with
the Department of Health and Human Services, Office of Inspector General’s
investigation of such matters. On September 18, 2008, the Company submitted a
claim for indemnification from the escrow fund established in connection with
the Blackstone Merger Agreement for any losses to the Company resulting from
this matter. On or about April 29, 2009, counsel for the Company received a
HIPAA subpoena issued by the U.S. Department of Justice. The subpoena seeks
documents from the Company for the period January 1, 2000 through July 15, 2007.
The Company believes that the subpoena concerns the compensation of physician
consultants and related matters, and further believes that it is associated with
the Department of Health and Human Services, Office of Inspector General’s
investigation of such matters, as well as the January 7, 2008 federal grand jury
subpoena. On or about February 25, 2010, counsel for Orthofix Inc. and
Blackstone sent to the U.S. Attorney’s Office for the District of Massachusetts
a tolling agreement (the “Tolling Agreement”) executed by Orthofix Inc.
and Blackstone, that extends an agreement tolling the statute of limitations
applicable to any criminal, civil, or administrative proceedings that the
government might later initiate. Upon execution by the U.S. Attorney's
Office for the District of Massachusetts, the Tolling Agreement will
extend the period tolling the statute of limitations to include the period
from December 1, 2008 through and including March 31, 2010.
ORTHOFIX
INTERNATIONAL N.V.
Notes
to the consolidated financial statements (cont.)
On or
about December 5, 2008, the Company obtained a copy of a qui tam complaint filed
by Susan Hutcheson and Philip Brown against Blackstone and the Company in the
U.S. District Court for the District of Massachusetts. A qui tam action is a
civil lawsuit brought by an individual for an alleged violation of a federal
statute, in which the U.S. Department of Justice has the right to intervene and
take over the prosecution of the lawsuit at its option. On November 21, 2008,
the U.S. Department of Justice filed a notice of non-intervention in the case.
The complaint was served on Blackstone on or about March 24, 2009. Counsel for
the plaintiffs filed an amended complaint on June 4, 2009. The amended complaint
sets forth a cause of action against Blackstone under the False Claims Act for
alleged inappropriate payments and other items of value conferred on physician
consultants; Orthofix is not named as a defendant in the amended complaint. The
Company believes that this lawsuit is related to the matters described above
involving the Department of Health and Human Services, Office of the Inspector
General, and the U.S. Attorney’s Office for the District of Massachusetts, and
the U.S. Department of Justice. The Company intends to defend vigorously against
this lawsuit. On September 18, 2008, after being informed of the existence of
the lawsuit by representatives of the U.S. Department of Justice and prior to
the unsealing of the complaint (which was unsealed by the court on or about
November 24, 2008), the Company submitted a claim for indemnification from the
escrow fund established in connection with the Blackstone Merger Agreement for
any losses to us resulting from this matter.
On or
about September 27, 2007, Blackstone received a federal grand jury subpoena
issued by the U.S. Attorney’s Office for the District of Nevada (“USAO-Nevada
subpoena”). The subpoena seeks documents for the period from January 1999 to the
date of issuance of the subpoena. The Company believes that the subpoena
concerns payments or gifts made by Blackstone to certain physicians. On February
29, 2008, Blackstone received a Civil Investigative Demand (“CID”) from the
Massachusetts Attorney General’s Office, Public Protection and Advocacy Bureau,
Healthcare Division. The CID seeks documents for the period from
March 2004 through the date of issuance of the CID, and the Company believes
that the CID concerns Blackstone’s financial relationships with certain
physicians and related matters. The Ohio Attorney General’s Office,
Health Care Fraud Section has issued a criminal subpoena, dated August 8, 2008,
to Orthofix, Inc. (the “Ohio AG subpoena”). The Ohio AG subpoena seeks documents
for the period from January 1, 2000 through the date of issuance of the
subpoena. The Company believes that the Ohio AG subpoena arises from a
government investigation that concerns the compensation of physician consultants
and related matters. On September 18, 2008, the Company submitted a claim for
indemnification from the escrow fund established in connection with the
Blackstone Merger Agreement for any losses to us resulting from the USAO-Nevada
subpoena, the Massachusetts CID and the Ohio AG subpoena.
By order
entered on January 4, 2007, the U.S. District Court for the Eastern District of
Arkansas unsealed a qui tam complaint captioned Thomas v. Chan, et al.,
4:06-cv-00465-JLH, filed against Dr. Patrick Chan, Blackstone and other
defendants including another device manufacturer. The amended complaint in the
Thomas action alleges causes of action under the False Claims Act for alleged
inappropriate payments and other items of value conferred on Dr. Chan and
another provider. The Company believes that Blackstone has meritorious defenses
to the claims alleged and the Company intends to defend vigorously against this
lawsuit. On September 17, 2007, the Company submitted a claim for
indemnification from the escrow fund established in connection with the
Blackstone Merger Agreement for any losses to us resulting from this matter. The
Company was subsequently notified by legal counsel for the former shareholders
that the representative of the former shareholders of Blackstone has objected to
the indemnification claim and intends to contest it in accordance with the terms
of the Blackstone Merger Agreement.
ORTHOFIX
INTERNATIONAL N.V.
Notes
to the consolidated financial statements (cont.)
Under the
Blackstone Merger Agreement, the former shareholders of Blackstone have agreed
to indemnify the Company for breaches of representations and warranties under
the agreement as well as certain other specified matters. These post-closing
indemnification obligations of the former Blackstone shareholders are limited to
a cumulative aggregate amount of $66.6 million. At closing, an escrow fund was
established pursuant to the terms of the Blackstone Merger Agreement to fund
timely submitted indemnification claims. The initial amount of the escrow fund
was $50.0 million. As of December 31, 2009, the escrow fund, which has
subsequently accrued interest, contained $52.0 million. The Company is also
entitled to seek direct personal recourse against certain principal shareholders
of Blackstone after all monies on deposit in the escrow fund have been paid out
or released or are the subject of pending or unresolved indemnification claims
but only for a period of six years from the closing date of the merger and only
up to an amount equal to $66.6 million less indemnification claims previously
paid.
In
addition to the foregoing claims, the Company has submitted claims for
indemnification from the escrow fund for losses that have resulted or may result
from certain civil actions filed against Blackstone as well as certain claims
against Blackstone alleging rights to payments for Blackstone stock options not
reflected in Blackstone’s corporate ledger at the time of its acquisition by the
Company, or that the shares or stock options subject to those claims were
improperly diluted by Blackstone. To date, the representative of the
former shareholders of Blackstone has not objected to approximately $1.5 million
in such claims from the escrow fund, with certain claims remaining
pending.
The
Company is unable to predict the outcome of each of the escrow claims described
above in the preceding paragraphs or to estimate the amount, if any, that may
ultimately be returned to the Company from the escrow fund and there can be no
assurance that losses to the Company from these matters will not exceed the
amount of the escrow fund. Expenses incurred by the Company relating to the
above matters are recorded as an escrow receivable in the Company’s financial
statements to the extent the Company believes, among other things, that
collection of the claims is reasonably assured. Expenditures related to such
matters for which the Company believes collection is doubtful are recognized in
earnings when incurred. As of December 31, 2009 and December 31, 2008, included
in Prepaid expenses and other current assets is approximately $12.9 million and
$8.3 million, respectively, of escrow receivable balances related to the
Blackstone matters described above. These amounts include, among other things,
attorneys’ fees and costs related to the government investigations manifested by
the subpoenas described above, the stock option-related claims described above,
and costs related to the qui-tam action described above. As described above,
some of these reimbursement claims are being contested by the representative of
the former shareholders of Blackstone. To mitigate the risk that some
reimbursement claims will not be collected, the Company records a reserve
against the escrow receivable during the period in which reimbursement claims
are recognized. During 2009, the Company received approximately $1.0
million of proceeds from the escrow fund which represented a portion of the
escrow claims that had been previously submitted by the Company.
Effective
October 29, 2007, Blackstone entered into a settlement agreement of a patent
infringement lawsuit brought by certain affiliates of Medtronic Sofamor Danek
USA Inc. In that lawsuit, the Medtronic plaintiffs had alleged that they were
the exclusive licensees of certain U.S. patents and that Blackstone’s making,
selling, offering for sale, and using its Blackstone Anterior Cervical Plate, 3º
Anterior Cervical Plate, Hallmark Anterior Cervical Plate, Reliant Cervical
Plate, Pillar PEEK and Construx Mini PEEK VBR System products within the U.S.
willfully infringed the subject patents. Blackstone denied infringement and
asserted that the patents were invalid. The settlement agreement is not expected
to have a material impact on the Company’s consolidated financial position,
results of operations or cash flows. On July 20, 2007, the Company submitted a
claim for indemnification from the escrow fund established in connection with
the Blackstone Merger Agreement for any losses to us resulting from this matter.
The Company was subsequently notified by legal counsel of the former
shareholders that the representative of the former shareholders of Blackstone
has objected to the indemnification claim and intends to contest it in
accordance with the terms of the Blackstone Merger Agreement.
ORTHOFIX
INTERNATIONAL N.V.
Notes
to the consolidated financial statements (cont.)
On or
about April 10, 2009, the Company received a HIPAA subpoena (“HIPAA subpoena”)
issued by the US Attorney’s Office for the District of Massachusetts (the
“Boston USAO”). The subpoena sought documents concerning, among other things,
the Company’s promotion and marketing of its bone growth stimulator devices. The
Boston USAO issued a supplemental subpoena in this matter dated July 23, 2009,
requiring testimony. That office later excused performance with the July 23,
2009 subpoena indefinitely. The Boston USAO also issued supplemental subpoenas
in this matter, dated September 21, 2009 and December 16, 2009, respectively,
seeking documents. The subpoenas seek documents for the period January 1, 1995
through the date of the respective subpoenas. Document production in response to
the subpoenas is ongoing. On December 21, 2009, the Boston USAO provided the
Company with grand jury subpoenas for the testimony of certain current employees
in connection with its ongoing investigation. The Company intends to cooperate
with the government’s requests. In meetings with the Company and its attorneys
regarding this matter, the Boston USAO has informed the Company that it is
investigating possible criminal and civil violations of federal law related to
the Company’s promotion and marketing of its bone growth stimulator
devices.
On or
about April 14, 2009, the Company obtained a copy of a qui tam complaint filed
by Jeffrey J. Bierman in the U.S. District Court for the District of
Massachusetts against Orthofix, Inc., the Company, and other companies that have
allegedly manufactured bone growth stimulation devices, including Orthologic
Corp., DJO Incorporated, Reable Therapeutics, Inc., the Blackstone Group, L.P.,
Biomet, Inc., EBI, L.P., EBI Holdings, Inc., EBI Medical Systems, Inc.,
Bioelectron, Inc., LBV Acquisition, Inc., and Smith & Nephew, Inc. By order
entered on March 24, 2009, the court unsealed the case. The amended complaint
alleges various causes of action under the federal False Claims Act and state
and city false claims acts premised on the contention that the defendants
improperly promoted the sale, as opposed to the rental, of bone growth
stimulation devices. The amended complaint also includes claims against the
defendants for, among other things, allegedly misleading physicians and
purportedly causing them to file false claims and for allegedly violating the
Anti-kickback Act by providing free products to physicians, waiving patients’
insurance co-payments, and providing inducements to independent sales agents to
generate business. The Company believes that this lawsuit is related to the
matter described above involving the HIPAA subpoena. The Company and Orthofix,
Inc. were served on or about September 8, 2009. The Company intends to defend
vigorously against this lawsuit.
On or
about July 2, 2009, the Company obtained a copy of a qui tam complaint filed by
Marcus Laughlin that is pending in the U.S. District Court for the District of
Massachusetts against the Company. This complaint has been consolidated with the
complaint described in the immediately preceding paragraph, and was unsealed on
June 30, 2009. The complaint alleges violations of the False Claims Act,
fraudulent billing, illegal kickbacks and wrongful termination based on
allegations that the Company promoted the sale rather than the rental of bone
growth stimulation devices, systematically overcharged for these products,
provided physicians kickbacks in the form of free units, referral fees, and
fitting fees, and that the defendant and its competitors discussed together
strategies to encourage higher government pricing for the products. The
complaint also alleges that TRICARE has been reimbursing the Company for its
Cervical Stim
®
product without approval to do so. An amended complaint alleges conspiracy and
violations of the Sherman Anti-Trust Act in connection with the same alleged
conduct. The Company was served with the complaint on or about September 9,
2009. The Company intends to defend vigorously against this
lawsuit.
On June
18, 2008, a lawsuit against the Company was filed for unpaid royalties under an
agreement terminated by the Company in 2007. The Company has
counterclaimed for the overpayment of commissions previously paid under the
agreement. The plaintiffs are seeking approximately $3.7
million. The Company’s counterclaim exceeds this
amount. The outcome of this matter is uncertain.
ORTHOFIX
INTERNATIONAL N.V.
Notes
to the consolidated financial statements (cont.)
Our
subsidiary, Breg, Inc., was engaged in the manufacturing and sale of local
infusion pumps for pain management from 1999 to 2008, when the product line was
divested. As between 2008 and present, numerous product liability
cases have been filed in the United States alleging that the local anesthetic,
when dispensed by such infusion pumps inside a joint, causes a rare arthritic
condition called “chondrolysis.” The Company believes that
meritorious defenses exist to these claims and Breg, Inc. intends to vigorously
defend these cases.
The
Company cannot predict the outcome of any proceedings or claims made against the
Company or its subsidiaries described in the preceding paragraphs and there can
be no assurance that the ultimate resolution of any claim will not have a
material adverse impact on our consolidated financial position, results of
operations, or cash flows.
In
addition to the foregoing, in the normal course of our business, the Company is
involved in various lawsuits from time to time and may be subject to certain
other contingencies. To the extent losses related to these
contingencies are both probable and estimable, the Company provides appropriate
amounts in the accompanying financial statements.
Concentrations
of credit risk
Financial
instruments which potentially subject the Company to concentrations of credit
risk are primarily cash investments and accounts receivable. Cash
investments are primarily in money market funds deposited with major financial
center banks. Concentrations of credit risk with respect to accounts
receivable are limited due to the large number of entities comprising the
Company’s customer base. The Company performs ongoing credit
evaluations of its customers and generally does not require
collateral. Certain of these customers rely on third party healthcare
payers, such as private insurance companies and governments, to make payments to
the Company on their behalf. Accounts receivable in countries where
the government funds medical spending are primarily located in North Africa,
Middle East, South America, Asia and Europe. The Company has
considered special situations when establishing allowances for potentially
uncollectible accounts receivable in such countries as India, Egypt and
Turkey. The Company also records reserves for bad debts for all other
customers based on a variety of factors, including the length of time the
receivables are past due, the financial condition of the customer, macroeconomic
conditions and historical experiences. The Company maintains reserves
for potential credit losses and such losses have been within management’s
expectations.
The
Company sells via a direct sales force and distributors. There were
no customers that accounted for 5% or more of net sales in 2009, 2008 or
2007.
|
17.
|
Pensions
and deferred compensation
|
Orthofix
Inc. sponsors a defined contribution plan (the “Orthofix Inc. 401(k) Plan”)
covering substantially all full time employees. The Orthofix Inc.
401(k) Plan allows for participants to contribute up to 15% of their pre-tax
compensation, subject to certain limitations, with the Company matching 100% of
the first 2% of the employee’s base compensation and 50% of the next 4% of the
employee’s base compensation if contributed to the Orthofix Inc. 401(k)
Plan. Breg also sponsors a 401(k) plan (the “Breg 401(k)
plan”). The Breg 401(k) Plan allows for participants to contribute up
to 100% of their compensation, subject to certain limitations, with the Company
matching 100% of the first $1,000 deferred. Blackstone also sponsors
a 401(k) plan (the “Blackstone 401(k) Plan”). The Blackstone 401(k)
Plan allows for participants to contribute up to 75% of their compensation,
subject to certain limitations, with the Company matching 50% of the first 6% of
the employee’s compensation deferred. In 2010, the Blackstone 401(k)
Plan will be merged into the Orthofix Inc. 401(k) Plan. During the
years ended December 31, 2009, 2008 and 2007, expenses incurred relating to
401(k) Plans, including matching contributions, were approximately $1.9 million,
$1.8 million and $1.5 million, respectively.
ORTHOFIX
INTERNATIONAL N.V.
Notes
to the consolidated financial statements (cont.)
The
Company operates defined contribution pension plans for its other International
employees not described above meeting minimum service
requirements. The Company’s expenses for such pension contributions
during 2009, 2008 and 2007 were approximately $1.0 million in each
year.
Under
Italian Law, Orthofix S.r.l. accrues, on behalf of its employees, deferred
compensation, which is paid on termination of employment. Each year’s
provision for deferred compensation is based on a percentage of the employee’s
current annual remuneration plus an annual charge. Deferred
compensation is also accrued for the leaving indemnity payable to agents in case
of dismissal which is regulated by a national contract and is equal to
approximately 3.5% of total commissions earned from the Company. The
Company’s expense for deferred compensation during 2009, 2008 and 2007 was
approximately $0.6 million, $0.5 million and $0.4 million,
respectively. Deferred compensation payments of $0.6 million, $0.5
million and $0.3 million were made in 2009, 2008 and 2007,
respectively. The balance as of December 31, 2009 and 2008 of $1.7
million represents the amount which would be payable if all the employees and
agents had terminated employment at that date and is included in other long-term
liabilities.
The
Orthofix Deferred Compensation Plan (the “Plan”), administered by the Board of
Directors of Orthofix, effective January 1, 2007, and as amended and restated
effective January 1, 2009, is a plan intended to allow a select group of key
management and highly compensated employees of Orthofix to defer the receipt of
compensation that would otherwise be payable to them. The terms of
this plan are intended to comply in all respects with the provisions of Code
Section 409A and Code Section 457A. Under the Plan, employees of
Orthofix and its subsidiaries are eligible to participate if the employee is in
management or a highly compensated employee and is named by the Board of
Directors to be a participant in the Plan. All directors were
eligible to participate in the Plan, but effective January 1, 2009, they were
prohibited from further participation, unless a director performs services as an
employee attributable, for tax purposes, to any U.S. subsidiary of the
Company. An eligible employee may elect to enter into a salary
deferral commitment and/or a director’s fees deferral commitment with respect to
any plan year by submitting a participation agreement to the plan administrator
by December 31 of the calendar year immediately preceding the plan
year. Further, an eligible employee may elect to enter into a bonus
deferral commitment with respect to bonus compensation earned during any plan
year by submitting a participation agreement to the plan administrator by
December 31 of the calendar year immediately preceding the plan
year. Deferral commitments can be stated as a percentage or a flat
dollar amount as allowed by the plan administrator. A participant’s
participation agreement will remain in effect only for the immediately
succeeding plan year. Distributions are made in accordance with the
requirements of Code Section 409A.
ORTHOFIX
INTERNATIONAL N.V.
Notes
to the consolidated financial statements (cont.)
|
18.
|
Share-based
compensation plans
|
At
December 31, 2009, the Company had three stock option and award plans and one
stock purchase plan which are described below.
2004
Long Term Incentive Plan
The 2004
Long Term Incentive Plan (the “2004 LTIP Plan”) is a long term incentive plan
that was originally adopted in April 2004. The 2004 LTIP Plan was
approved by shareholders on June 29, 2004 and 2.0 million shares were reserved
for issuance under this plan (in addition to shares (i) available for future
awards as of June 29, 2004 under prior plans or (ii) that become available for
future issuance upon the expiration or forfeiture after June 29, 2004 of awards
upon prior plans). Awards generally vest on years of service with all
awards fully vesting within three years from the date of grant for employees and
either three or five years from the date of grant for non-employee
directors. Awards can be in the form of a stock option, restricted
stock, restricted share unit, performance share unit, or other award form
determined by the Board of Directors. Awards granted under the 2004
LTIP Plan expire no later than 10 years after the date of the
grant. On June 20, 2007, the Company’s shareholders approved
amendments and a restatement of the 2004 LTIP Plan, providing for the following
major changes: an increase in the number of shares available for
grant from 2.0 million shares to 2.8 million shares, a specific allowance for
grants of restricted stock awards, and a provision for fixed awards to
non-employee directors on the date of their first election to the Board and on
each subsequent re-election.
On June
19, 2008, the Company’s shareholders approved further amendments to the 2004
LTIP Plan to increase the number of shares available for grant from 2.8 million
shares to 3.1 million shares, to increase the annual grant to non-employee
directors from 3,000 shares to 5,000 shares, and to limit in the future the
number of shares that may be awarded under the plan as full value awards to
100,000 shares.
At
December 31, 2009, there were 2,948,798 options outstanding under the 2004 LTIP
Plan, of which 1,501,982 were exercisable; in addition, there were 62,161 shares
of restricted stock outstanding, none of which were vested.
Staff
Share Option Plan
The Staff
Stock Option Plan (the “Staff Plan”) is a fixed stock option plan which was
adopted in April 1992. Under the Staff Plan, the Company granted
options to its employees at the estimated fair market value of such options at
the date of grant. Options generally vest based on years of service
with all options to be fully vested within five years from date of
grant. Options granted under the Staff Plan expire ten years after
the date of grant. There are no options left to be granted under the
Staff Plan. At December 31, 2009, there were 128,825 options
outstanding and exercisable under the Staff Plan.
Performance
Accelerated Stock Option Inducement Grants
On
December 30, 2003, the Company granted inducement stock option awards to two key
executives of Breg, in conjunction with the acquisition of Breg. The
exercise price was fixed at $38.00 per share on November 20, 2003, when the
Company announced it had entered into an agreement to acquire
Breg. The inducement grants included both service-based and
performance-based vesting provisions. The inducement grants became
100% vested on the fourth anniversary of the grant date but are subject to
certain exercisability limitations. Following vesting on December 30,
2007, the original inducement grants limited the executives’ ability to exercise
specific numbers of options during the years 2008 – 2012. Prior to
the options fully vesting and as an inducement for the executives to extend the
term of their employment agreements for one year, in November 2007 the Company
entered into amended award agreements with the two executives. The
amended agreements did not change the vesting date of the options, but provided
that the options granted thereunder will only be exercisable during the fixed
period beginning January 1, 2009 and ending on December 31, 2009
.
In December 2008, in order to meet certain requirements
of Code Section 409A and the Treasury Regulations promulgated thereunder, and
fulfill the Company’s desire to extend each of the executives’ terms of
employment with the Company, the Company and the executives entered into second
amended and restated award agreements. The second amended agreements
provided for the election by the executives of respective periods during which
they can exercise options. Bradley Mason has elected to exercise
50,000 options in each of the following periods: April 1, 2010 through December
31, 2010, January 1, 2011 through December 31, 2011 and January 1, 2012 through
December 31, 2012. William Hopson has elected to exercise his 50,000
options in the period between January 1, 2011 and December 31, 2011.
Subject
to certain termination of employment provisions and notwithstanding any other
provisions of the second amended agreements, any portion of the options that are
not exercised during their respective exercise periods will not be exercisable
thereafter and will lapse and be cancelled. At December 31, 2009,
there were 200,000 options outstanding and exercisable under the inducement
grants.
ORTHOFIX
INTERNATIONAL N.V.
Notes
to the consolidated financial statements (cont.)
Inducement
Stock Option Agreement
In the
years ended December 31, 2009 and 2008, 50,000 stock options and 150,000 stock
options, respectively, were granted pursuant to standalone inducement stock
option agreements, on terms substantially the same as grants made under the
Company’s Amended and Restated 2004 Long Term Incentive Plan. These
stock option grants vest in one-third increments annually.
Stock
Purchase Plan
The
Orthofix International N.V. Amended and Restated Stock Purchase Plan (the “Stock
Purchase Plan”) provides for the issuance of shares of the Company’s common
stock to eligible employees and directors of the Company and its subsidiaries
that elect to participate in the plan and acquire shares of common stock through
payroll deductions (including executive officers). On June 20, 2008,
the Company’s shareholders approved an amendment and restatement of the plan,
providing for the following major change: (i) to
allow officers and directors of Orthofix Inc. to
participate in the plan on the same basis as our other employees, (ii) to
provide that the Company will assume and adopt the plan, as amended, in lieu of
Orthofix Inc. acting as sponsor of the plan, (iii) to allow non-employee
directors of the Company to participate in the plan, (iv) to increase by 500,000
shares the maximum number of shares available for issuance under the plan, and
(v) to provide that the determination of the value of common stock under the
plan will be determined either on the first or last day of the plan year,
whichever date renders the lower value. These changes were generally
effective for the plan year starting January 1, 2009. In June 2009,
the Company’s shareholders approved a further amendment to the Stock Purchase
Plan to increase the number of shares available for grant from 950,000 shares to
1,400,000 shares.
During
each purchase period, eligible employees may designate between 1% and 25% of
their compensation to be deducted for the purchase of common stock under the
plan
(up to 25% for employees working in
North America, South America and Asia, and up to 15% for employees working in
Europe). For eligible directors, the designated percentage will be an
amount equal to his or her annual or other director compensation paid in cash
for the current plan year
. The purchase price of the shares
under the plan is equal to 85% of the fair market value on the first day of the
plan year (which is a calendar year, running from January 1
st
to
December 31
st
) or,
if lower, on the last day of the plan year. The aggregate number of
shares reserved for issuance under the Employee Stock Purchase Plan is
1,400,000
shares. As of
December 31, 2009, 429,688 shares had been issued under the Stock Purchase
Plan.
ORTHOFIX
INTERNATIONAL N.V.
Notes
to the consolidated financial statements (cont.)
Share-Based
Compensation:
As of
December 31, 2009, the unamortized compensation expense relating to options
granted and expected to be recognized was $7.6 million. This amount
is expected to be recognized over a weighted average period of 1.24
years.
The
following table shows the detail of share-based compensation by line item in the
consolidated statements of operations for the years ended December 31, 2009,
2008 and 2007 and the assumptions for each of these years:
|
Year
Ended December 31,
|
Year
Ended December 31,
|
Year
Ended December 31,
|
||||||||||
|
(US$ in thousands, except
assumptions)
|
2009
|
2008
|
2007
|
|||||||||
|
Cost
of sales
|
$ | 677 | $ | 175 | $ | 403 | ||||||
|
Sales
and marketing
|
3,045 | 1,890 | 2,749 | |||||||||
|
General
and administrative
|
6,467 | 7,731 | 7,884 | |||||||||
|
Research
and development
|
563 | 793 | 877 | |||||||||
|
Total
|
$ | 10,752 | $ | 10,589 | $ | 11,913 | ||||||
|
Assumptions:
|
||||||||||||
|
Expected
term
|
4.00
years
|
3.92
years
|
3.94
years
|
|||||||||
|
Expected
volatility
|
45.0% - 48.7 | % | 28.4 | % | 30.3 | % | ||||||
|
Risk
free interest rate
|
1.60% - 2.57 | % | 1.52% - 3.49 | % | 3.49% - 5.03 | % | ||||||
|
Dividend
rate
|
- | - | - | |||||||||
|
Weighted
average fair value of options granted during the year
|
$ | 9.29 | $ | 7.51 | $ | 15.09 | ||||||
The
Company has chosen to use the “short-cut method” to determine the pool of
windfall tax benefits as of the adoption of ASC Topic 718.
During
the year ended December 31, 2008, the Company granted to employees 83,434 shares
of restricted stock, which vest at various dates through December
2011. The compensation expense, which represents the fair value of
the stock measured at the market price at the date of grant, less estimated
forfeitures, is recognized on a straight-line basis over the vesting
period. Unamortized compensation expense related to restricted stock
amounted to $1.4 million at December 31, 2009. No shares of
restricted stock were granted in 2009.
Stock
Option Activity:
Summaries
of the status of the Company’s stock option plans as of December 31, 2009 and
2008 and changes during the year ended December 31, 2009 are presented
below:
|
2009
|
||||||||
|
Options
|
Weighted Average Exercise
Price
|
|||||||
|
Outstanding
at beginning of year
|
3,150,020 | $ | 35.30 | |||||
|
Granted
|
792,500 | $ | 23.51 | |||||
|
Exercised
|
(10,768 | ) | $ | 23.89 | ||||
|
Forfeited
|
(454,129 | ) | $ | 39.45 | ||||
|
Outstanding
at end of year
|
3,477,623 | $ | 32.09 | |||||
|
Options
exercisable at end of year
|
1,880,807 | |||||||
ORTHOFIX
INTERNATIONAL N.V.
Notes
to the consolidated financial statements (cont.)
No
options were granted during 2009 at less than market value.
|
Outstanding
and exercisable by price range as of December 31, 2009
|
|||||||||||||||||||||
|
Options Outstanding
|
Options Exercisable
|
||||||||||||||||||||
|
Range of Exercise
Prices
|
Number Outstanding
|
Weighted Average Remaining Contractual
Life
|
Weighted Average Exercise
Price
|
Number Exercisable
|
Weighted Average Exercise
Price
|
||||||||||||||||
| $10.42 - $23.58 | 511,766 | 8.68 | $ | 18.50 | 63,612 | $ | 13.61 | ||||||||||||||
| $24.01 - $25.01 | 361,100 | 9.09 | $ | 24.98 | 20,434 | $ | 24.84 | ||||||||||||||
| $25.05 - $28.50 | 257,000 | 8.55 | $ | 25.83 | 68,000 | $ | 25.96 | ||||||||||||||
| $28.95 - $28.95 | 538,860 | 8.37 | $ | 28.95 | 179,631 | $ | 28.95 | ||||||||||||||
| $29.17 - $37.76 | 515,690 | 5.88 | $ | 34.57 | 418,861 | $ | 35.26 | ||||||||||||||
| $38.00 - $38.11 | 540,224 | 5.49 | $ | 38.07 | 540,224 | $ | 38.07 | ||||||||||||||
| $38.40 - $43.04 | 460,800 | 5.74 | $ | 41.50 | 408,803 | $ | 41.56 | ||||||||||||||
| $43.26 - $50.15 | 282,683 | 7.32 | $ | 45.46 | 174,908 | $ | 45.50 | ||||||||||||||
| $50.50 - $50.50 | 2,000 | 7.01 | $ | 50.50 | 1,334 | $ | 50.50 | ||||||||||||||
| $50.99 - $50.99 | 7,500 | 7.04 | $ | 50.99 | 5,000 | $ | 50.99 | ||||||||||||||
| 3,477,623 | 7.25 | $ | 32.09 | 1,880,807 | $ | 36.66 | |||||||||||||||
The
weighted average remaining contractual life of exercisable options was 5.98
years at December 31,
2009. The total intrinsic value of options exercised was $67,000,
$88,000 and $14.6 million for the years ended December 31, 2009, 2008 and 2007,
respectively. The aggregate intrinsic value of options outstanding
and options exercisable as of December 31, 2009 is calculated as the difference
between the exercise price of the underlying options and the market price of the
Company’s common stock for the shares that had exercise prices that were lower
than the $30.93 closing price of the Company’s stock on December 31,
2009. The aggregate intrinsic value of options outstanding was $10.9
million, $0.5 million and $38.1 million for the years ended December 31, 2009,
2008 and 2007, respectively. The aggregate intrinsic value of options
exercisable was $1.9 million, $10,000, and $19.4 million for the years ended
December 31, 2009, 2008 and 2007, respectively.
Restricted
Stock:
A summary
of the status of our restricted stock as of December 31, 2009 and 2008 and
changes during the year ended December 31, 2009 are presented
below:
|
Shares
|
Weighted Average Grant Date Fair
Value
|
|||||||
|
Non-vested
as of December 31, 2008
|
118,993 | $ | 37.49 | |||||
|
Granted
|
- | $ | - | |||||
|
Vested
|
(42,978 | ) | $ | 37.91 | ||||
|
Cancelled
|
(13,854 | ) | $ | 36.86 | ||||
|
Non-vested
as of December 31, 2009
|
62,161 | $ | 37.40 | |||||
ORTHOFIX
INTERNATIONAL N.V.
Notes
to the consolidated financial statements (cont.)
|
19.
|
Earnings
per share
|
For each
of the three years in the period ended December 31, 2009, there were no
adjustments to net income (loss) for purposes of calculating basic and diluted
net income (loss) available to common shareholders. The following is
a reconciliation of the weighted average shares used in the basic and diluted
net income (loss) per common share computations.
|
Year Ended December
31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Weighted
average common shares-basic
|
17,119,474 | 17,095,416 | 16,638,873 | |||||||||
|
Effect
of diluted securities:
|
||||||||||||
|
Unexercised
stock options net of treasury share repurchase
|
83,469 | - | 408,714 | |||||||||
|
Weighted
average common share-diluted
|
17,202,943 | 17,095,416 | 17,047,587 | |||||||||
For the
year ended December 31, 2008, the effects of all potentially dilutive options
were excluded from the computation of diluted earnings per share because the
Company had a net loss and, therefore, the effect would have been
anti-dilutive. Options to purchase shares of common stock with
exercise prices in excess of the average market price of common shares are not
included in the computation of diluted earnings per share. There were 3,220,357
outstanding options not included in the diluted earnings per share computation
for the fiscal year ended December 31, 2009, because the inclusion of these
options was anti-dilutive. There were 309,651 outstanding options not
included in the diluted earnings per share computation for the fiscal year ended
December 31, 2007, because the inclusion of these options was
anti-dilutive.
|
20.
|
Restructuring
charges
|
In the
fourth quarter of 2008, as part of the Company’s strategic plan to strengthen
the business, the Company initiated a restructuring plan to improve operations
and reduce costs at Blackstone. The plan involves the consolidation
of substantially all of Blackstone’s operations previously conducted in Wayne,
NJ and Springfield, MA into the same facility housing its spine stimulation and
U.S. orthopedics business in the Dallas, TX area. The Company plans
to complete the restructuring and consolidation by the second quarter of 2010,
at which time the Company anticipates a total restructuring expense of $3.6
million. During the year ended December 31, 2009, the Company
recorded net restructuring charges of $3.6
million which were
primarily related to severance costs and accelerated depreciation costs related
to shortening lives of assets which will be disposed. These
restructuring costs are recorded in general and administrative expense and are
classified in the Spinal Implants and Biologics segment.
ORTHOFIX
INTERNATIONAL N.V.
Notes
to the consolidated financial statements (cont.)
The
following table presents changes in the restructuring liability for the activity
discussed above, which is included within Other Current Liabilities in the
Company’s consolidated balance sheets as of December 31, 2009 and December 31,
2008:
|
(US$ in thousands)
|
Severance
|
Assets Abandoned
|
Total
|
|||||||||
|
Balance
at December 31, 2008
|
$ | 548 | $ | - | $ | 548 | ||||||
|
Charges
|
2,565 | 1,020 | 3,585 | |||||||||
|
Cash
Payments
|
(1,287 | ) | - | (1,287 | ) | |||||||
|
Non-cash
Items
|
- | (1,020 | ) | (1,020 | ) | |||||||
|
Balance
at December 31, 2009
|
$ | 1,826 | $ | - | $ | 1,826 | ||||||
|
21.
|
Quarterly
financial data (unaudited)
|
(U.S.
Dollars, in thousands, except per share data)
|
1
st
Quarter
|
2
nd
Quarter
|
3
rd
Quarter
|
4
th
Quarter
|
Year
|
||||||||||||||||
|
2009
|
||||||||||||||||||||
|
Net
sales
|
$ | 128,975 | $ | 137,546 | $ | 135,098 | $ | 144,016 | $ | 545,635 | ||||||||||
|
Gross
profit
|
96,168 | 100,637 | 103,113 | 107,267 | 407,185 | |||||||||||||||
|
Net
income (loss)
|
2,879 | 5,944 | 6,188 | 9,461 | 24,472 | |||||||||||||||
|
Net
income (loss) per common share:
|
||||||||||||||||||||
|
Basic
|
$ | 0.17 | $ | 0.35 | $ | 0.36 | $ | 0.55 | $ | 1.43 | ||||||||||
|
Diluted
|
$ | 0.17 | $ | 0.35 | $ | 0.36 | $ | 0.55 | $ | 1.42 | ||||||||||
|
2008
|
||||||||||||||||||||
|
Net
sales
|
$ | 128,032 | $ | 130,039 | $ | 129,301 | $ | 132,303 | $ | 519,675 | ||||||||||
|
Gross
profit
|
93,794 | 94,991 | 81,303 | 97,573 | 367,661 | |||||||||||||||
|
Net
income (loss)
|
3,606 | 5,808 | (237,251 | ) | (717 | ) | (228,554 | ) | ||||||||||||
|
Net
income (loss) per common share:
|
||||||||||||||||||||
|
Basic
|
$ | 0.21 | $ | 0.34 | $ | (13.87 | ) | $ | (0.04 | ) | $ | (13.37 | ) | |||||||
|
Diluted
|
$ | 0.21 | $ | 0.34 | $ | (13.87 | ) | $ | (0.04 | ) | $ | (13.37 | ) | |||||||
The sum
of per share earnings by quarter may not equal earnings per share for the year
due to the change in average share calculations. This is in
accordance with prescribed reporting requirements.
Orthofix
International N.V.
Schedule
1 — Condensed Financial Information of Registrant Orthofix International
N.V.
Condensed
Balance Sheets
|
December 31,
|
December 31,
|
|||||||
|
(US$ in thousands)
|
2009
|
2008
|
||||||
|
Assets
|
||||||||
|
Current
assets:
|
||||||||
|
Cash
and cash equivalents
|
$ | 403 | $ | 623 | ||||
|
Prepaid
expenses and other current assets
|
488 | 484 | ||||||
|
Total
current assets
|
891 | 1,107 | ||||||
|
Other
long term assets
|
279 | 274 | ||||||
|
Investments
in and amounts due from subsidiaries and affiliates
|
247,530 | 207,125 | ||||||
|
Total
assets
|
$ | 248,700 | $ | 208,506 | ||||
|
Liabilities
and shareholder’s equity
|
||||||||
|
Current
liabilities
|
$ | 1,996 | $ | 1,669 | ||||
|
Long-term
liabilities
|
6,435 | 4,776 | ||||||
|
Shareholder’s
equity:
|
||||||||
|
Common
stock
|
1,714 | 1,710 | ||||||
|
Additional
paid in capital
|
177,246 | 167,818 | ||||||
|
Accumulated
earnings
|
54,119 | 29,647 | ||||||
|
Accumulated
other comprehensive income
|
7,190 | 2,886 | ||||||
| 240,269 | 202,061 | |||||||
|
Total
liabilities and shareholder’s equity
|
$ | 248,700 | $ | 208,506 | ||||
See
accompanying notes to condensed financial statements.
Orthofix
International N.V.
Schedule
1 — Condensed Financial Information of Registrant Orthofix International
N.V.
Condensed
Statements of Operations
|
Year
Ended December 31,
|
Year
Ended December 31,
|
Year
Ended December 31,
|
||||||||||
|
(US$ in thousands)
|
2009
|
2008
|
2007
|
|||||||||
|
(Expenses)
income:
|
||||||||||||
|
General
and administrative
|
$ | (10,444 | ) | $ | (11,945 | ) | $ | (10,172 | ) | |||
|
Equity
in earnings of investments in subsidiaries and affiliates
|
36,592 | (215,310 | ) | 22,334 | ||||||||
|
Other,
net
|
301 | 481 | 653 | |||||||||
|
Income
(loss) before income taxes
|
26,449 | (226,774 | ) | 12,815 | ||||||||
|
Income
tax expense
|
(1,977 | ) | (1,780 | ) | (1,847 | ) | ||||||
|
Net
income (loss)
|
$ | 24,472 | $ | (228,554 | ) | $ | 10,968 | |||||
See
accompanying notes to condensed financial statements.
Orthofix
International N.V.
Schedule
1 — Condensed Financial Information of Registrant Orthofix International
N.V.
Condensed
Statement of Cash Flows
|
Year
Ended December 31,
|
Year
Ended December 31,
|
Year
Ended December 31,
|
||||||||||
|
(US$ in thousands)
|
2009
|
2008
|
2007
|
|||||||||
|
Net
income (loss)
|
$ | 24,472 | $ | (228,554 | ) | $ | 10,968 | |||||
|
Equity
in earnings of investments in subsidiaries and affiliates
|
(36,592 | ) | 215,310 | (22,334 | ) | |||||||
|
Cash
provided by (used in) other operating activities
|
3,574 | 2,350 | (772 | ) | ||||||||
|
Net
cash used in operating activities
|
(8,546 | ) | (10,894 | ) | (12,138 | ) | ||||||
|
Cash
flows from investing activities:
|
||||||||||||
|
Distributions
and amounts received from subsidiaries
|
13,237 | 11,074 | 21,991 | |||||||||
|
Capital
expenditures
|
(114 | ) | (196 | ) | - | |||||||
|
Net
cash provided by investing activities
|
13,123 | 10,878 | 21,991 | |||||||||
|
Cash
flows from financing activities:
|
||||||||||||
|
Net
proceeds from issuance of common stock
|
70 | 1,734 | 17,198 | |||||||||
|
Contributions
to subsidiaries and affiliates
|
(4,672 | ) | (11,165 | ) | (27,748 | ) | ||||||
|
Repurchase
of equity
|
(220 | ) | - | - | ||||||||
|
Tax
benefit on exercise of stock options
|
25 | 22 | - | |||||||||
|
Net
cash used in financing activities
|
(4,797 | ) | (9,409 | ) | (10,550 | ) | ||||||
|
Net
decrease in cash and cash equivalents
|
(220 | ) | (9,425 | ) | (697 | ) | ||||||
|
Cash
and cash equivalents at the beginning of the year
|
623 | 10,048 | 10,745 | |||||||||
|
Cash
and cash equivalents at the end of the year
|
$ | 403 | $ | 623 | $ | 10,048 | ||||||
See
accompanying notes to condensed financial statements.
Orthofix
International N.V.
Schedule
1 — Condensed Financial Information of Registrant Orthofix International
N.V.
Notes
to Condensed Financial Statements
|
1.
|
Background
and basis of presentation
|
These
condensed parent company financial statements have been prepared in accordance
with Rule 12-04, Schedule 1 of Regulation S-X, as the restricted net assets of
Orthofix Holdings, Inc. and its subsidiaries exceed 25% of the consolidated net
assets of Orthofix International N.V. and its subsidiaries (the
“Company”). This information should be read in conjunction with the
Company’s consolidated financial statements included elsewhere in this
filing.
|
2.
|
Restricted
net assets of subsidiaries
|
Certain
of the Company’s subsidiaries have restrictions, with an effective date of
September 22, 2006, on their ability to pay dividends or make intercompany loans
and advances pursuant to their financing arrangements. The amount of
restricted net assets the Company’s subsidiaries held at December 31, 2009 and
2008 was approximately $143.0 million and $111.3 million,
respectively. Such restrictions are on net assets of Orthofix
Holdings, Inc. and its subsidiaries.
|
3.
|
Commitments,
contingencies and long-term
obligations
|
For a
discussion of the Company’s commitments, contingencies and long term obligations
under its senior secured credit facility, see Note 9, Note 12 and Note 16 of the
Company’s consolidated financial statements.
|
4.
|
Dividends
from subsidiaries
|
Cash
dividends received by Orthofix International N.V. from its consolidated
subsidiaries accounted for by the equity method were $13.2 million, $11.1
million and $22.0 million for the years ended December 31, 2009, 2008 and 2007,
respectively.
Orthofix
International N.V.
Schedule
2 — Valuation and Qualifying Accounts
For the
years ended December 31, 2009, 2008 and 2007:
|
(US$ in thousands)
|
Additions
|
|||||||||||||||||||
|
Provisions from assets to which they
apply:
|
Balance at beginning of
year
|
Charged to cost and
expenses
|
Charged (credited) to other
accounts
|
Deductions/ Other
|
Balance at end of
year
|
|||||||||||||||
|
2009
|
||||||||||||||||||||
|
Allowance
for doubtful accounts receivable
|
$ | 6,473 | $ | 7,335 | $ | (70 | ) | $ | (6,533 | ) | $ | 7,205 | ||||||||
|
Inventory
provisions
|
21,168 | 8,760 | - | (6,047 | ) | 23,881 | ||||||||||||||
|
Deferred
tax valuation allowance
|
14,370 | 2,869 | - | - | 17,239 | |||||||||||||||
|
2008
|
||||||||||||||||||||
|
Allowance
for doubtful accounts receivable
|
$ | 6,441 | $ | 7,261 | $ | (133 | ) | $ | (7,096 | ) | $ | 6,473 | ||||||||
|
Inventory
provisions
(1)
|
9,893 | 14,858 | (22 | ) | (3,561 | ) | 21,168 | |||||||||||||
|
Deferred
tax valuation allowance
|
11,377 | 2,993 | - | - | 14,370 | |||||||||||||||
|
2007
|
||||||||||||||||||||
|
Allowance
for doubtful accounts receivable
|
$ | 6,265 | $ | 7,431 | $ | 44 | $ | (7,299 | ) | $ | 6,441 | |||||||||
|
Inventory
provisions
|
7,213 | 3,472 | 52 | (844 | ) | 9,893 | ||||||||||||||
|
Deferred
tax valuation allowance
|
9,428 | 2,665 | (716 | ) | - | 11,377 | ||||||||||||||
(1) In
the year ended December 31, 2008, due to reduced projections in revenue,
distributor terminations, new products, and the replacement of one product with
a successor product, the Company changed its estimates regarding the inventory
allowance at Spinal Implants and Biologics, primarily based on estimated net
realizable value using assumptions about future demand and market
conditions. The change in estimate resulted in an increase in the
reserve for obsolescence of approximately $10.9 million.
S-5
TABLE OF CONTENTS
Item 1. BusinessItem 1A. Risk FactorsItem 1B. Unresolved Staff CommentsItem 2. PropertiesItem 3. Legal ProceedingsItem X. Executive Officers Of The RegistrantItem 4. (reserved)Item 5. Market For Registrant S Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity SecuritiesItem 6. Selected Financial DataItem 7. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary DataItem 9 . Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9B . Other InformationItem 10. Directors, Executive Officers and Corporate GovernanceItem 10. Directors, Executive OfficersItem 11. Executive CompensationItem 12 . Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13 . Certain Relationships and Related Transactions , and Director IndependenceItem 14. Principal Accountant Fees and ServicesItem 15. Exhibits and Financial Statement Schedules