- -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington D.C. 20549 FORM 20-F ------------------------ |_| Registration statement pursuant to Section 12(b) or Section 12(g) of the Securities Exchange Act of 1934 or |X| Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 1999 or |_| Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ____________ to ____________ Commission file number 0-19961 ORTHOFIX INTERNATIONAL N.V. (Exact name of Registrant as specified in its charter) Netherlands Antilles (Jurisdiction of incorporation or organization) 7 Abraham de Veerstraat Curacao Netherlands Antilles (Address of principal executive offices) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Shares, US$0.10 par value per Share (Title of Class) Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of the period covered by the annual report: Common Shares, US$0.10 par value per Share.......................13,029,834 ----------------------- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes X No --- --- Indicate by check mark which financial statement item the Registrant has elected to follow: Item 17 Item 18 X --- --- - --------------------------------------------------------------------------------
TABLE OF CONTENTS PART I Item 1. DESCRIPTION OF BUSINESS............................................1 General ...................................................................1 Recent Developments..........................................................1 Products ...................................................................3 Fixation Products............................................................3 PEMF Products................................................................5 Other Products...............................................................6 Distribution Products........................................................8 Sales and Distribution.......................................................8 Marketing ...................................................................9 Production..................................................................10 Product Development.........................................................10 Patents, Trade Secrets and Licenses.........................................10 Competition.................................................................11 Government Regulation.......................................................11 Product Liability and Insurance.............................................12 Third Party Payors..........................................................12 Employees ..................................................................13 Year 2000 ..................................................................13 Economic and Monetary Union in the European Union...........................13 Item 2. DESCRIPTION OF PROPERTY...........................................13 Item 3. LEGAL PROCEEDINGS.................................................14 Item 4. CONTROL OF REGISTRANT.............................................16 Item 5. NATURE OF TRADING MARKET..........................................16 Item 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS...................................17 Item 7. TAXATION..........................................................18 Item 8. SELECTED FINANCIAL DATA...........................................18 Item 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..........................19 Item 10. DIRECTORS AND OFFICERS OF REGISTRANT..............................24 Item 11. COMPENSATION OF DIRECTORS AND OFFICERS............................25 Item 12. OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES.................................................26 Item 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS....................27 PART II Item 14. DESCRIPTION OF SECURITIES TO BE REGISTERED........................28 PART III Item 15. DEFAULT UPON SENIOR SECURITIES.....................................28 Item 16. CHANGES IN SECURITIES AND CHANGES IN SECURITY FOR REGISTERED SECURITIES........................................28 PART IV Item 17. FINANCIAL STATEMENTS...............................................28 Item 18. FINANCIAL STATEMENTS...............................................28 Item 19. FINANCIAL STATEMENTS AND EXHIBITS..................................28
INTRODUCTION Orthofix International N.V. ("Orthofix International") was incorporated under the laws of the Netherlands Antilles in 1987. In this Annual Report on Form 20-F for the fiscal year ended December 31, 1999 (the "Annual Report"), all references to the "Company" and "Orthofix" include Orthofix International and its subsidiaries and affiliates, unless the context otherwise requires. The principal executive offices of Orthofix International are located at 7 Abraham de Veerstraat, Curacao, Netherlands Antilles. The Company publishes its consolidated financial statements in United States dollars. In this Annual Report, references to "United States dollars", "dollars", "US$", or "$" are to United States currency, and references to "lira", "lire" or "Lit." are to the Italian lira (singular) or to Italian lire (plural). --------------
PART I Item 1. DESCRIPTION OF BUSINESS. General The business of Orthofix is the design, development, manufacture, marketing and distribution of medical equipment, principally for the orthopedic market. The Company's main products are external and internal fixation devices used in fracture treatment, limb lengthening and bone reconstruction, and pulsed electromagnetic frequency products used for the non-invasive healing enhancement of spinal fusions and recalcitrant bone fractures. Other orthopedic products produced by the Company include devices for the removal of cement in hip revision procedures, the ultrasonic treatment of musculo-skeletal pain and an oral- maxillofacial bone substitution compound. The Company also produces a device for enhancing venous circulation. Orthofix, which is registered in the Netherlands Antilles, has manufacturing facilities in the United States, the United Kingdom, Italy and the Seychelles. Products are distributed through subsidiary companies in the United States, the United Kingdom and Italy, and affiliates in Mexico, Brazil and France. Elsewhere, distribution is through independent distributors. Orthofix has 100% equity ownership of Orthofix Inc., which is primarily engaged in the development, manufacture and marketing of advanced products using pulsed electromagnetic frequency technology for bone healing, including Spinal-Stim for non-invasive healing enhancement of spinal fusions and Physio-Stim for recalcitrant bone fractures. Osteogenics Inc. ("Osteogenics"), a wholly owned subsidiary of Orthofix Inc., is engaged in the development of bone substitution compounds with a wide variety of potential surgical and orthopedic applications including facial reconstruction, fracture repair and periodontal repair. See "-- Recent Developments" and "-- Products". The Company also has 100% equity ownership of Orthofix S.r.l., which designs, manufactures and distributes external and internal fixation devices. The Company has 70% equity ownership of DMO S.r.l. ("DMO"), the subsidiary that distributes the Company's products in Italy, 100% equity ownership in Novamedix Limited ("Novamedix"), the subsidiary that developed the A-V Impulse System and 100% equity ownership of Novamedix Services Limited ("NSL"), a service company which manages the manufacture of the A-V Image System. Orthofix also has 70% equity ownership of Orthosonics Limited ("Orthosonics"), which markets and distributes bone cement removal systems for use in connection with hip revision surgery, and 52% equity ownership of Intavent Orthofix Limited ("Intavent Orthofix"), which distributes Orthofix products in the United Kingdom. Orthofix also has 100% equity ownership of each of Orthofix Ltd and Novamedix Distribution Limited ("NDL"), which distribute Orthofix products in certain markets. Recent Developments On January 10, 2000, following a ruling of the United States Supreme Court, an award of $64 million was confirmed in favor of Orthofix in its suit against Biomet, Inc. After deducting contingent legal fees and reserving for expenses relating to the case, Orthofix received a net gain of approximately $38 million before income taxes on January 21, 2000. -- See "Item 3. LEGAL PROCEEDINGS." On December 10, 1999, Orthofix acquired a further 10% equity interest in NDL for a cash consideration of $2 million, taking its equity interest in NDL to 100%. Orthofix had previously acquired a further 10% equity interest in NDL on 16 April, 1999 for a cash consideration of $1.9 million. In December 1999 and in September 1999, Orthofix Inc. announced that it had entered into agreements to complete the development, and for the distribution of, two new products. The first, an Intramedullary Skeletal Kenetic Distractor (ISKD), is a patented internal lengthening system used on arms and legs of unequal length. The ISKD system for external bone lengthening will supplement Orthofix's external bone lengthening product line. The second product is a fluidjet-based traumatic wound debridement system being developed in conjunction with HydroCision, Inc. 1
On November 29, 1999 the National Osteoporosis Institute ("NOI") and Orthofix announced that NOI had received clearance from the United States Food and Drug Administration ("FDA") to begin a clinical trail with Orthofix's Bone Growth Stimulator for the treatment of osteoporosis. The trial will evaluate the safety and efficacy of the Orthofix Bone Growth Stimulator in osteoporotic patients, measuring improvements in bone mineral density. On September 24, 1999 Orthofix announced that it had received Investigational Device Exemption (IDE) approval from the FDA for the clinical investigation of the Orthofix Cervical-Stim (R), a non-invasive cervical bone growth stimulator. The approval allows Orthofix to initiate a clinical evaluation of Cervical-Stim in thirteen centers across the U.S. On September 9, 1999, Orthofix announced that its subsidiary, Novamedix had been successful in its motion to open its suit against Kinetic Concepts, Inc. ("KCI"). The suit, first filed in 1992, alleges KCI's patent infringement, breach of contract and unfair competition relating to Novamedix's proprietary medical device, the A-V Impulse System(R). The case has been delayed by KCI's successive requests to the US Patent and Trademark Office for re-examinations of the original patents. See "Item 3. LEGAL PROCEEDINGS." On May 27, 1999 Orthofix announced that it had acquired the remaining outstanding shares (having previously held 30%) of Neomedics Inc., an early-stage medical technology company focused on the development of implantable tissue growth stimulation devices, in an all cash transaction. On March 5, 1999 Orthofix announced that a Review Committee had unanimously determined that an Earnout or Bonus of $500,000 plus interest from August 21, 1995 was payable to the holders of record of American Medical Electronics, Inc. ("AME") common stock and the options and warrants to such stock as of August 21, 1995 pursuant to an Agreement and Plan of Merger. The Earnout is the result of Orthofix Inc.'s sales of bone growth stimulators after the merger. In addition, the Review Committee determined that Orthofix will pay the AME Record Holders 12% of the net recovery as and when received from its judgement against EBI Medical Systems, Inc. ("EBI MS"), Electro-Biology, Inc., and Biomet, Inc (collectively, EBI), up to a maximum of $5,500,000. On December 14, 1998 Tom Hay joined the Company as President, International Division, responsible for the operations of the Company and its affiliate companies outside North America. Before joining Orthofix, Mr. Hay was with C R Bard Inc. for eleven years, ultimately as Managing Director of C R Bard Ltd. and Vice President, C R Bard, Northern Europe. Prior to this, he spent fourteen years with Baxter Healthcare. On July 7, 1998, Orthofix Inc. announced that it had entered into an agreement with the Sofamor Danek Group for the non-exclusive distribution rights in the U.S. for the Spinal Stim Lite, a stimulation device used by patients having undergone a spinal fusion surgery. Sofamor Danek is a market leader in devices for spinal fusions. On April 22, 1998, Orthofix Inc. entered into an agreement with Howmedica, Inc. ("Howmedica"), a wholly-owned subsidiary of Stryker Howmedica, Inc. ("Stryker"), to license BoneSource, a calcium-based phosphate-based bone cement for use in the repair of cranial defects. Under the terms of the agreement, Orthofix will continue to supply BoneSource to Howmedica. On February 20, 1998 Charles J. Dillman, Ph.D., was appointed Group Vice President of Research and Development. Dr. Dillman, a Ph.D in Biomechanics, is a member of the Medical Commission of the International Olympic Committee (the "IOC"), where he has served as Program Director for the IOC's World Congress on Sports Sciences. The IOC awarded Dr. Dillman the Olympic Order, its highest award, for his contributions to the Olympic movement. Mr. Dillman has served as Vice President of Research and Development for Smith & Nephew Endoscopy, as Professor of Surgery at the University of Massachusetts Medical Center, in addition to directing graduate medical programs at the University of Delaware and Illinois. He has held several appointments with the United States Olympic Committee and sports medicine foundations in the United States. 2
Products The Company has three groups of products: Fixation Products, Pulsed Electromagnetic Frequency ("PEMF") Products and Other Products, which are designed, manufactured and marketed under the following trade names: Fixation Products primary application Orthofix external fixation Orthofix internal fixation PEMF Products Spinal-Stim non-invasive spinal fusion stimulation Physio-Stim non-invasive electrical bone growth stimulation Other Products Osteogenics BoneSource bone substitute material (hydroxyapatite cement) A-V Impulse System enhancement of venous circulation OSCAR ultrasonic hip revision bone cement removal Phys-Assist and DuoSon ultrasonic treatment of musculo-skeletal pain EZ Brace LSO rigid external brace for spine stabilization Distribution Products The Company also has distribution rights in certain countries for the following products: Laryngeal Mask maintenance of airway during anesthesia Cemex bone cement SEM Prosthetic Devices prostheses Fixation Products The Orthofix For a fracture to heal properly, without malalignment or rotation, the bone must be set and fixed in the correct position. The bone must be kept stable, but not absolutely rigid, in order to alleviate pain, maintain the correct alignment and allow coagulation to produce bone cells that initiate callus formation. Fractures also benefit from intermittent micromovement and weight-bearing at the appropriate time in the healing cycle, which further stimulate callus formation. Therapeutic Alternatives in Fracture Treatment. In most fracture cases, physicians use the simplest available non-surgical procedure, casting. The Company believes, however, that approximately 15-20% of all fractures require surgical intervention, the most common forms of which (in order of frequency of usage) are: o Plates and Screws. The most common surgical method of fracture treatment is plating. In this procedure, a plate is fastened with screws to the surface of the bone in order to immobilize and maintain stability of the fracture. In some cases, a bone screw is applied without a plate, primarily to realign bone fragments in joint fractures. Disadvantages of plates and screws include a lack of external callus formation as a result of too rigid fixation, a relatively lengthy and invasive surgical procedure to insert the device, the possible need for a second surgical procedure to remove the device, the risk of infection at the fracture site and the possibility of refracture upon removal of the device, all of which have been annotated in published clinical papers. o Intramedullary Fixation. In recent years, long bone fractures, principally those of the femur and tibia, and more recently the humerus, have increasingly been treated with intramedullary fixation. This method, which 3
has a lower rate of infection than plates, requires a surgically complex and invasive insertion of a metal rod into the medullary canal, the central canal of the bone, to maintain bone stability. In younger patients, a subsequent surgical procedure is usually required to remove the device. o External Fixation. External fixation devices are used to immobilize complicated fractures by mounting the fixator outside the fracture site. With this method of fixation, screws are inserted into the bone in a minimally invasive procedure at a safe distance from the fracture and then fixed to the fixator body to immobilize the fracture. Modern fixation devices, improved surgical techniques and increased screw site care have substantially reduced the complications historically associated with external fixation, such as superficial inflammation and infection of the soft tissues around the screws. External fixators are frequently used to lengthen bone or correct bone deformity, whether congenital or as a result of unsuccessful treatment of previous fractures. o Traction. In this method, fractures are held in the correct alignment by special pins that are surgically inserted through the bone and held in position by means of external wires and weights. Treatment typically involves several months of hospitalization and a further period of intensive physical therapy to regain joint mobility. Orthofix initially focused on the production of external fixation equipment, and the establishment of the Orthofix Dynamic Axial Fixator and Orthofix Modulsystem ("The Orthofix") as leading international external fixation brands. The Orthofix is now marketed in over 80 countries worldwide. Since 1995, the Company has manufactured and marketed the ProCallus external fixator, a new generation alternative to Orthofix's previous fixator model, which has certain advantages over its predecessor. Most significantly, the device incorporates an actuator that allows the application of micromotion at a very early stage after fixation. Early application of micromotion has been found to be more beneficial than waiting until later in the healing cycle. The Company also manufactures and markets the Fragment Fixation System, a percutaneous implant for fixing small fragments, usually used for the treatment of fractures near to the joint. A new fixator for pelvic fractures offering the significant advantages of much easier and quicker application in emergency rooms was launched during 1997. Pelvic fractures most typically occur as a result of road traffic accidents. A new elbow fixator was also launched during 1997. This fixator addresses significant difficulties in the treatment of elbow fractures by permitting early mobilization of the elbow while fixing the fracture itself. The new elbow fixator also has applications in the treatment of stiff elbows. Both the pelvic and elbow fixators have been well received by the market. The Company's Hybrid External Fixation system, enhanced by the launch of the Sheffield System in July 1999, has made significant sales progress during 1999. A Hybrid Frame combines "traditional" screw fixation at one end of the fixator with crossed wires mounted on a ring component at the other end. Fixation by crossed wires appears to be more reliable than by traditional screws in cancellous bone (which is found at the ends of long bones, adjacent to joints) and in osteoporotic bone. The Orthofix Hybrid System requires less inventory than comparable ring fixators. Orthofix has also developed and currently markets an intramedullary nailing system for fractures of the tibia and the femur. The Company believes that the Orthofix Nailing System incorporates certain significant advantages over other nailing products currently available on the market. Most importantly, and in contrast with all other locked nails currently on the market, the distal locking screws in the Orthofix Nailing System can be inserted mechanically and without the need for an image intensifier, resulting in a simpler operative technique. Moreover, the locking screws, which form part of the Orthofix Nailing System, provide significantly higher fatigue resistance than similar competing products with the benefit to patients of reduced implant failure rates. The tibial and femoral nails are now available worldwide except in the United States. During the first quarter of 1998, a radiolucent wrist fixator was introduced into the US market, where it has been enthusiastically received. This fixator allows the X ray beam to traverse through it, thereby providing the surgeon with significantly improved X ray vision of the adjacent bone and fracture. This fixator, also launched in Japan in the first quarter of 1999, is expected to be marketed in selected international markets during 2000. 4
During the first quarter of 1999, a radiolucent ankle fixator was introduced into the U.S. market. It too was met with enthusiastic response. The radiolucent ankle fixator is scheduled to be introduced to select international markets during 2000. Both the radiolucent wrist and ankle fixator are sterile-kit packaged with all of the instruments for surgical use. The Company has developed a new range of bone screws covered with Hydroxyapatite ("HA") which it launched during the second quarter of 1999. Due to the "biologic" fixation provided by these screws in bone, the incidence of superficial inflammation of soft tissue caused by the present generation of screws is expected to be reduced or eliminated by the application of these screws. This benefit is perceived to be significant particularly, although not exclusively, for cases involving limb lengthening and correction of limb deformities where the external fixator is applied to the bone for an extended period. Currently, Orthofix is one of only two manufacturers to have received 510(k) clearance from the FDA to market HA Coated Screws. Fixation revenues represented 29% of revenues in 1999. PEMF Products General. Bone tissue's regenerative power results in most bone fractures healing naturally within a few months. Frequently, however, fractures do not heal or heal slowly, resulting in non-unions. Traditionally, orthopaedists 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. This is an example of an "invasive" treatment. The PEMF products currently marketed by the Company apply bone growth stimulation without implantation or other surgical procedures. In the mid-1980s, the Company expanded the application of its bone growth stimulation technology to the healing enhancement of spinal fusions, including treatment for pseudoarthrosis of the spine. Spinal fusions are surgical procedures undertaken to establish bony union between adjacent vertebrae. The Company is currently marketing two PEMF product systems, Spinal-Stim and Physio-Stim, designed to enhance the success rate of spinal fusions and to treat non-union fractures, respectively. These devices are portable and are typically used as part of home treatment programs prescribed by physicians. The attending medical staff instructs the patient regarding operation of the system and the appropriate duration of daily treatments. The overall length of treatment is determined by the prescribing physician, but typically is between three and nine months in duration. The technology used in the Company's PEMF products involves a non-surgical process by which a pulsating electric current is used to enhance the growth of bone tissue following surgery or bone fracture. This technology is based on a substantial amount of scientific data that indicates that certain electromagnetic stimuli in the human body produce a biological cellular response. The Company's PEMF products are used by placing them externally over the site to be healed. The systems produce pulsed, low-energy electromagnetic fields that induce low pulsating current flow into living tissue and cells exposed to the energy field of the device. This pulsating current flow is believed to change enzyme activities, induce mineralization, enhance vascular penetration and result in a process resembling normal endochondral ossification, or bone growth, at the spinal fusion or fracture site. Spinal-Stim. Spinal-Stim was the first non-invasive spinal fusion stimulator system commercially available in the United States. In January 1995, the Company announced the introduction of a Spinal-Stim model, called Spinal-Stim Soft Wear, that is a flexible, light-weight, more comfortable version of the previously marketed system, Spinal-Stim Model 8500. The Company received FDA clearance and introduced a new model of Spinal-Stim called the 212L or Spinal-Stim Lite at the North American Spine Society meeting in New York in October 1997. The Spinal-Stim Lite uses proprietary technology to generate the PEMF signal from a 9 volt battery, thus eliminating the need for rechargeable battery packs and chargers. This allows the 212 Lite to be a self contained, light-weight, ergonomic device without the cords associated with other devices. Spinal-Stim is designed for treatment of the lower thoracic and lumbar regions of the spine. The Company's FDA approval to market Spinal-Stim commercially is for both failed fusions and for healing 5
enhancement as an adjunct to spinal fusion surgery. The recommended minimum daily treatment time for Spinal-Stim is two hours. The Company has received approval to begin an IDE study to obtain PMA approval for a cervical spine indication with the PEMF signal. The study started in the first quarter of 1999. Physio-Stim. The Company believes that its Physio-Stim systems represent the current state of the art in PEMF bone growth stimulation due to their portability, long-term battery operation, integrated component design, patient monitoring capabilities and ability to cover a large treatment area without factory calibration for specific patient application. The new Physio-Stim Lite models use a proprietary technology to generate the PEMF signal from a 9 volt battery, thus eliminating the need for rechargeable battery packs and chargers. The result is a self contained, very light and extremely ergonomic device that makes the unit significantly easier and more comfortable to use. The new Physio-Stim Lite product line consists of products that treat smaller fracture sites such as the wrist, hand, arm, lower leg and ankle, the proximal humerus and the proximal femur. Technological innovations incorporated since the introduction of Physio-Stim in 1983 include the first totally portable PEMF bone growth stimulator that emits a large, uniform magnetic field that eliminates the need for individual patient fracture site calibration, the first totally integrated bone growth stimulation system and the first complete patient compliance monitoring system with print-out. PEMF revenue represented 42% of revenues in 1999. Other Products Osteogenics BoneSource General. Osteogenics holds an exclusive license from the American Dental Association Health Foundation ("ADAHF") for technology for patented hydroxyapatite cement ("HA Cement" or "Osteogenics BoneSource") formulations. The patented Osteogenics technology combines calcium-phosphate salts with water to produce a bone substitute formation that converts to hydroxyapatite, a mineral component of bone, and promotes new bone growth. The license covers know-how, two United States patents, applications for patents in the United States and various foreign countries and future technology developments, whether or not patented, that are hydroxyapatite cement-related. The license is subject to the rights of the United States Government under law to use the subject matter of the licensed patents for governmental purposes. On April 22, 1998, Osteogenics and Orthofix Inc. entered into agreements to sell a license for the Osteogenics BoneSource technology to Stryker. Pursuant to the agreements, Orthofix will continue to supply BoneSource to Stryker while Stryker has the right to pursue developmental work relating to, market, and pursue regulatory approvals for, Bone Source. For a period of two years from the date of the agreements, Orthofix has the exclusive right to supply BoneSource to Stryker. Stryker's license remains subject to rights of the United States Government as outlined above and to the rights of ADAHF pursuant to the original license. Development. Bone and tooth are highly mineralized tissues with an extensive matrix structure. Bone tissue perpetually remodels through a process whereby cells called osteoclasts erode old bone matrix and other cells called osteoblasts produce new bone matrix. The Company believes that the healing of bone and tooth defects can be facilitated by the use of implants that provide temporary mechanical support while serving as a template for the remodelling of new bone and are subsequently resorbed by the body in the remodelling process. The natural mineral components of bone, hydroxyapatite and related calcium-phosphates offer these characteristics and were the subject of research which resulted in the development of Osteogenics' HA Cement. Osteogenics' HA Cement is a unique formulation of two specific calcium-phosphate salts that produce sculptable pastes when mixed with small volumes of water. The resulting paste hardens over time as a result of the precipitation of hydroxyapatite crystals that replicate the process of mineralization or calcification of bone to form a mechanically strong hydroxyapatite implant. The hydroxyapatite implant is slowly resorbed and replaced by new bone (remodelled). Based on the relative amounts of the individual components in the cement mixture, the hardness, setting time and resorption rate vary. The microporous and microcrystal characteristics of the implant make it virtually impervious to invasion by bacterial infection. Osteogenics has a facility in Richardson, Texas at which it produces HA Cement. 6
Products. The current HA Cement formulation, trade named BoneSource, received 510(k) clearance from the FDA for repair of certain cranial defects in July 1997. It has also obtained a CE mark for certain maxillofacial indications and for use as a bone void filler in certain non-load bearing orthopedic indications. Osteogenics has given exclusive worldwide rights for marketing the BoneSource to Howmedica Leibinger Inc., a subsidiary of Stryker, which currently sells the product both in the United States and Europe. The Company believes that the BoneSource product has many advantages over competing products such as natural bone obtained from autograft procedures, allograft demineralized bone and other synthetic alloplastic bone substitutes. There is a limited quantity of bone available in the body for autogenous grafting, and the procedures for harvesting bone can result in significant donor site morbidity, infection and pain, as well as increased anesthesia requirements and operating time. Unlike other commercially available bone substitutes, such as sintered and coraline macroporous hydroxyapatites, that are granular or block, ceramic-oriented products, the HA Cement has a paste-like consistency that allows for easy sculpting. The paste remains soft and pliable for about 20 minutes, allowing ample time for sculpting to the desired shape, and converts to microporous hydroxyapatite at body temperature in just four hours. BoneSource is resorbable into the body as it is replaced by natural bone and, because it is microporous, is virtually impervious to bacterial infection. A-V Impulse System NDL manufactures and distributes under license, the A-V Impulse System family of foot and hand pumps, a non-invasive method of reducing deep vein thrombosis and post-operative pain and swelling. 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 venous blood from the patient's arms or legs by intermittently impulsing a plexus of veins in the foot or hand, as the case may be, an action that, in the case of the feet, occurs naturally when patients walk. Conventionally, in order to reduce the incidence of deep vein thrombosis, heparin or related pharmacological products have been administered during and after operations. The A-V Impulse System has been demonstrated to give prophylactic benefits that are comparable with the most effective forms of pharmacological treatment, but without their adverse side effects, the most serious of which is bleeding. In 1997, the International Consensus Statement on the prevention of Deep Vein Thrombosis, produced by the International Union of Angiology reported that: "recent data demonstrates that combined foot impulse technology with graduated elastic compression is effective in reducing the incidence of proximal DVT in patients having hip and knee surgery. In contrast with pharmacological agents, mechanical methods are not associated with haemorrhagic complications." In August 1998, a clinical study of 290 patients was published in the American edition of The Journal of Bone and Joint Surgery. This study compared the A-V Impulse System with low molecular weight heparin in patients who had had a hip replacement. The authors concluded that both methods give extremely effective prophylaxis against deep vein thrombosis with no major proximal thrombosis in either group and the foot pump group had fewer soft-tissue side effects. In December 1997, the Premier group of hospitals which accounts for approximately 30% of hospital beds in the USA, awarded the footpump supply contract to the Kendall Company, the Company's exclusive distributor for the A-V Impulse System in the U.S.. This contract came into full effect during 1998. In the final quarter of 1998, Kendall also won the Consorta group of hospitals supply contract for the A-V Impulse System. Consorta control approximately 3% of hospital beds in the U.S. OSCAR (Orthosonics System for Cement Arthroscopy Revision) Orthosonics has developed the Orthosonics System for Cement Arthroscopy Revision ("OSCAR"), an ultrasonic device designed to soften and remove the PMMA bone cement used to fix artificial implants within the patient's bone. The Company believes that it offers a significant improvement, both in terms of cost and patient outcomes, over existing bone cement removal techniques. Existing techniques involve the use of hand chisels and manual or pneumatic hammers and drills. These generally increase the risk of femoral shaft fracture with greatly increased patient trauma and significant cost implications. OSCAR has been demonstrated to eliminate or greatly reduce femoral fractures while cutting cement removal times from typically in excess of two hours to approximately 15 to 20 minutes. 7
The product was launched in the United Kingdom in 1994, and selectively elsewhere in 1995. OSCAR is now established as the preferred method of bone cement removal in the UK and is gaining strong support in other European countries. Following the receipt of FDA approval in August 1996, and a successful market appraisal in New York, OSCAR was launched on an evaluation basis in the U.S. market by Orthofix Inc. in August 1998. The Company is currently engaged in the process of setting up distribution in the U.S. through a network of independent distributors. Phys-Assist and DuoSon This product, developed by Orthosonics, is an ultrasonic device for the treatment of musculo-skeletal pain employing a new method of ultrasound therapy known as low frequency longwave ultrasound. The device uses longwave rather than the shortwave frequencies traditionally used by physiotherapists. The Company believes that, as a result, the device delivers deeper penetration and less potentially adverse effects such as thermal damage to tissue than other ultrasound products currently on the market. Orthosonics has developed an upgraded device capable of delivering both long- and short-wave ultrasound. This product, which the Company intends to market as "DuoSon," received marketing approval from the FDA in May 1997 and is currently undergoing assessment in the U.S. EZ Brace This product, developed by Orthofix Inc., is a lumbosacral orthosis for patients who require rigid external support for spine stabilization. The product is designed to be a comfortable, easy on-off rigid external bracing system. EZ Brace can be used in combination with Spinal-Stim Lite to provide external stabilization with an external bone growth stimulator to increase the prospects for spinal fusion success. Other products represented 16% of revenues in 1999. Distribution Products The Company has the exclusive distribution rights for the Laryngeal Mask, Cemex bone cement and for the SEM range of prosthetic devices in Italy and for the Laryngeal Mask in the United Kingdom. The Laryngeal Mask, a product of The Laryngeal Mask Company Ltd., is an anesthesia medical device used for establishing and maintaining the patient's airway during an operation. Cemex, a product of Tecres S.p.A., is a bone cement used by surgeons to fix hip and knee prostheses once they have been inserted. The SEM range of prosthetic devices, produced by SEM S.A., offers prostheses for the hip, knee and shoulder. Distribution products represented 13% of revenues in 1999. Sales and Distribution Orthofix's products are distributed in the United States through its 100% owned subsidiary, Orthofix Inc., with the exception of the A-V Impulse system which is distributed by Kendall Healthcare Products. In Italy its products are distributed through its 70%-owned subsidiary, DMO, and in the United Kingdom through its 52% and 70% -owned subsidiaries, Intavent Orthofix and Orthosonics. In Mexico, Brazil and France, Orthofix's products are distributed through its affiliates in which it owns 47 1/2% , 47 1/2% and 30% equity interests, respectively. Elsewhere, the Company sells its products through over 50 independent distributors in over 80 countries. Orthofix Inc. has approximately 130 representatives made up of a combination of direct sales people and independent distributors. Orthofix Inc.'s combined sales force, together with its non-exclusive distributor, Sofamor Danek, for the Spinal Stim Lite provide representation and distribution of the Company's Fixation Products and PEMF Products throughout the United States. While the Company's Fixation Products are sold worldwide, its PEMF Products are generally available only in the United States. However, the Company is exploring the possibility of PEMF distributorships in Europe and South America. To facilitate distribution into 8
the European Union ("EU"), the Company obtained a CE mark for stimulation products in December 1998. See "- Government Regulation". The Company has a sales services group, consisting of seven sales and marketing specialists, who regularly visit the Company's distributors in Europe, the Far East, Middle East and South America. In addition to its licensing agreements with Stryker for BoneSource, the Company has a licensing arrangement with Howmedica Leibinger GmbH ("Leibinger"), a German-based manufacturer and supplier of surgical products to neurosurgeons and maxillofacial surgeons, and its United States affiliate, covering neurological (excluding the spine), oral maxillofacial (excluding dental) and cranofacial applications of BoneSource worldwide. Pursuant to the license agreement, the Company manufactures BoneSource for sale to Leibinger and receives a royalty based on Leibinger's gross revenues from BoneSource sales. Marketing General. The Company markets its products principally to medical professionals who are the primary decision-makers in their patients' treatment. This focus complements the Company's product development and marketing strategy, which seeks to encourage and maintain interactive relationships with leading orthopedic, trauma and other surgeons. These relationships have enabled the Company to introduce design improvements and create innovative products that meet the needs of surgeons and patients, thereby expanding the market for the Company's products. The Company is aware of the cost constraints currently affecting healthcare markets and is sensitive to the need to provide products which not only improve patient outcomes but which also meet the demanding cost requirements of hospitals, physicians' practices and third party payors. Fixation Products. The Company seeks to expand awareness of the advantages of its products primarily by providing training and support to orthopedic and trauma surgeons. The Company supports its distributors through specialized basic training workshops in which surgeons and sales specialists participate. Orthofix produces relevant marketing materials, including surgical procedures, for its distributors in a variety of languages in both printed, video and multimedia formats. To provide additional advanced training for surgeons, the Company organizes monthly multilingual teaching seminars at its facility in Verona, Italy. These seminars, which in 1999 were attended by approximately 750 surgeons from around the world, include a variety of lectures from renowned specialists as well as demonstrations and hands- on workshops. Additionally, each year many of the Company's distributors independently conduct basic courses for surgeons in the application of Orthofix's products. PEMF Products. The Company believes that the success of these products is dependent not only upon the fostering of good relations with the physicians who employ them but also on being sensitive to the needs and requirements of the hospitals and third party payors to whom the products are also marketed. Private insurance companies, workers' compensation carriers, Medicare, self-insured plans, health maintenance organizations ("HMOs"), and various other state, federal and private health care payors are the principal sources of payment for the Company's PEMF Products, although patients usually are responsible for copayment and deductible amounts. In addition to providing extensive training to its sales force, the Company has, since 1994, undertaken a number of marketing-related initiatives directed at increasing the focus of the Company's sales force on managed care organizations. As a result of these initiatives, the Company has been able to enter into a number of contracts with HMOs and other third party payors that establish pricing and reimbursement criteria for use of the Company's PEMF Products. The National Accounts department added an appeals specialist in 1997 in order to keep abreast of changes in the U.S. healthcare market place and enhance and expand the Company's relationships with third party payers. The Company continues to operate the limited guarantee programs for Physio-Stim and Spinal-Stim implemented in 1994 to heighten awareness of the healing enhancement properties of PEMF therapy. These 9
programs provide, in general, for reimbursement for the full amount of the device's rental fee if radiographic evidence indicates that healing is not occurring at the fracture or fusion site when the device is used in accordance with the prescribed treatment protocol. Production The Company generally designs, develops, assembles and tests all its products, but subcontracts the manufacture of component parts. Through subcontracting, the Company believes that it gains substantial operating flexibility in meeting demand while focussing its resources on product development and marketing and still maintaining rigid quality assurance standards. Although certain of its key raw materials are provided by a single source, the Company believes that alternate sources for these materials are available. Adequate raw material inventory supply is maintained to avoid product flow interruptions. The Company has never experienced any difficulty in obtaining the materials necessary to meet its production schedule. Nevertheless, any interruption in supply could have a material adverse effect on the Company. Orthofix's products are currently manufactured and assembled in the United States, Italy, the Seychelles and the United Kingdom. The Company believes that its plant, and those of its subsidiaries, comply with the requirements of the FDA and all relevant regulatory authorities outside the United States. Orthofix actively monitors the manufacturing and quality standards and the product specification conformity of each of its subcontractors. See "-- Government Regulation." Product Development Orthofix maintains a continuous interactive relationship with the main orthopedic centers in the United States, Europe, Japan, and South and Central America. Several of the products marketed by the Company have been developed through these collaborations. In addition, the Company regularly receives suggestions for new products from the scientific and medical community. The Company also receives a substantial number of requests for the production of customized items, some of which have resulted in new products. The Company believes that its policy of accommodating such requests enhances its reputation in the medical community. The Company's research and development departments are responsible for new product development and regularly consult with a group of internal and designated external experts. The expert group advises such departments on the long-term scientific planning of research and development and also evaluates the Company's research programs. In August 1999, the Company formed a Scientific Advisory Committee composed of eight medical clinicians to further the market opportunities and additional applications for the Company's proprietary pulsed electromagnetic field (PEMF) technology. The Company hopes to further its knowledge of PEMF's influences on specific cellular functions and develop additional applications for the technology. Patents, Trade Secrets and Licenses Orthofix relies on a combination of patents, trade secrets, license agreements and non-disclosure agreements to protect its proprietary intellectual property. Orthofix owns numerous United States and foreign patents and has numerous pending patent applications and license rights to certain patents held by third parties. The Company's primary products are patented in all major markets in which they are sold. There can be no assurance that pending patent applications will result in issued patents, that patents issued to or licensed by the Company will not be challenged or circumvented by competitors or that such patents will be found to be valid or sufficiently broad to protect the Company's technology or to provide the Company with any competitive advantage. Third parties might also obtain patents that would require licensing by the Company for the conduct of the Company's business. The Company relies on confidentiality agreements with certain employees, consultants and other parties, to protect, in part, trade secrets and other proprietary technology that it seeks to protect. There can be no assurance that these agreements will not be breached, that the Company will have adequate remedies for any breach, that others will not independently develop substantially equivalent proprietary 10
information, that third parties will not otherwise gain access to the Company's trade secrets and proprietary knowledge, or that the Company can meaningfully protect its rights in patented proprietary technology. The Company licenses certain orthopedic products from third parties. The Company has acquired rights under such licenses in exchange for lump sum payments or arrangements under which it pays to the licensor a percentage of sales. The Company believes that its licensing arrangements are important to its business. The medical device market is characterized by substantial litigation regarding patent and other intellectual property rights. The Company does not believe that any of its fixator products infringe any existing patents but there can be no assurance that the Company has identified all patents that pose a risk of infringement. See "Item 3. LEGAL PROCEEDINGS." Litigation, which could result in substantial costs to and diversion of effort by management of the Company, may be necessary to enforce patents issued to the Company, to protect trade secrets or techniques owned by the Company or to defend the Company against claimed infringement of the rights of others and to determine the scope and validity of the patents or other proprietary rights of other entities. The resolution of these claims generally involves complex legal and factual questions and is highly uncertain. Adverse determinations in any litigation could have a material adverse effect on the Company's business, financial condition and results of operations. Competition In the external and internal fixation product area, the Company's principal competitors include Synthes AG,. Zimmer, Inc., Stryker, Smith & Nephew Richards and EBI MS. The Company's PEMF Products compete principally with similar products marketed by EBI MS, Bioelectron, Inc., OrthoLogic Corp., and Exogen, Inc. OSCAR and BoneSource compete principally with products produced by Biomet, Inc. ("Biomet"), and Norian Corporation, respectively. The Company does not believe that there are any significant non-pharmacological products rightfully competing with its A-V Impulse System. See "Item 3. LEGAL PROCEEDINGS." Although the Company's competitors include companies with significantly greater financial, manufacturing, marketing, distribution and technical resources, the Company believes that its competitive position is strong with respect to product features such as speed and ease of use, versatility, cost and patient acceptability. However, the Company generally does not attempt to compete for customers primarily seeking the lowest price. Overall cost and medical effectiveness, innovation, reliability, after-sales service and training are the most prevalent methods of competition in the markets for the Company's products, and the Company believes that it competes effectively in all of these areas, particularly with respect to cost savings resulting from the reduction of operating time and the avoidance of a second operative procedure for the removal of treatment devices. Government Regulation Sales of orthopedic devices are subject to United States and foreign regulatory requirements that vary widely from country to country. The time required to obtain approvals or clearances from regulatory authorities differs from country to country. Orthofix's products are subject to the regulatory powers of the FDA pursuant to the Medical Device Amendments of 1976 to the Federal Food, Drug and Cosmetics Act (the "1976 Amendments"), the Safe Medical Devices Act of 1990, and regulations issued or proposed thereunder. With the exception of its PEMF Products, the Company's products fall into FDA classifications that require lesser review by the FDA pursuant to Section 510(k) of the 1976 Amendments. The Company's PEMF Products are classified as Class III by the FDA, and 11
have been approved for commercial distribution in the United States following the submission of the required pre-market approval applications. The medical devices manufactured and marketed by Orthofix are subject to rigorous regulation by the FDA and numerous other federal, state and foreign governmental authorities. The process of obtaining regulatory approvals to 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 Orthofix believes that it has obtained all necessary clearances for the manufacture and sale of its products and that they are generally in compliance with applicable FDA and other material regulatory requirements, there can be no assurance that the Company will be able to continue such compliance. If the FDA came to believe that the Company was not in compliance with applicable law or regulations, it could institute proceedings to detain or seize the Company's products, issue a recall, impose operating restrictions, enjoin future violations and assess civil and criminal penalties against the Company, its officers or its employees and could recommend criminal prosecution to the Department of Justice. Additionally, the regulatory process may delay the marketing of new products for lengthy periods and impose substantial additional costs if the FDA lengthens review times for new devices. Moreover, foreign governmental authorities have become increasingly stringent in their regulation of medical devices, and Orthofix's products may become subject to more rigorous regulation by foreign governmental authorities in the future. Orthofix cannot predict whether United States or foreign government regulations may be imposed in the future that may have a material adverse effect on the Company. The European Commission ("EC") is currently harmonizing national regulations for the control of medical devices. Although certain EC regulations became effective on January 1, 1995, there was a transitional period ending June 13, 1998, after which time European medical device manufacturers would be required to be in compliance. 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 EU. 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 EU. Orthofix has received certification for all currently existing manufacturing facilities and products. The Company believes its operations are in material compliance with applicable law. The Company's ability to operate profitably depends in part upon the Company and its distributors' obtaining and maintaining all necessary certificates, permits, approvals and clearances from United States and foreign regulatory authorities and operating in compliance with applicable regulations. Product Liability and Insurance The Company is subject to an inherent risk of product liability and other liability claims. Although the Company has not experienced any material product liability claims to date, a substantial product liability claim in the future could have a material adverse effect on the Company. The Company maintains product liability insurance coverage in amounts and scope that management believes are adequate. There can be no assurance that product liability or other claims will not exceed such insurance coverage limits or that such insurance will continue to be available on commercially acceptable terms, or at all. Third Party Payors Orthofix's products are sold either directly or to its independent distributors and purchased by hospitals, doctors and other health care providers worldwide, who may be reimbursed for the health care services provided to their patients by third party payors, such as government programs (e.g., Medicare and Medicaid), private insurance plans and managed care programs. Third party payors may deny reimbursement if they determine that a device used in a procedure was not used in accordance with cost-effective treatment methods as determined by such third party payor, was investigational or was used for an unapproved indication. Also, third party payors are increasingly challenging the prices charged for medical products and services. There can be no assurance that the Company's products will be considered cost-effective by third party payors, that reimbursement will be available or, if available, that the third party payors' reimbursement policies will not adversely affect the Company's ability 12
to sell its products profitably. Although Orthofix and, to its knowledge, its distributors have not experienced a significant reimbursement problem to date, there can be no assurance that any of them will not do so in the future. The Company's products are sold in many countries with publicly funded healthcare systems. The ability of hospitals supported by such systems to purchase the Company's products is dependent, in part, upon public budgetary constraints. Employees At December 31, 1999, Orthofix had 446 employees of which 293 were employed within the North American division. The Company's relations with its Italian employees, who numbered 62 at December 31, 1999, 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. The Company is not otherwise party to any collective bargaining agreement. The Company believes that it has good relations with its employees, many of whom have been granted share options. See "Item 12. OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES." Year 2000 Experience The Company's manufacturing processes and other operations are dependent on technological devices with imbedded chips and computer systems. These computer systems and other technological devices may not be capable of accurately recognizing dates beginning on January 1, 2000. This problem could cause miscalculations, adversely affecting the Company's manufacturing processes and other operations. Prior to January 1, 2000, the Company spent approximately $500,000 with a view to resolving any such potential issues, and believes that it has resolved substantially all of these issues through a comprehensive compliance process. Subsequent to the year ended December 31, 1999 the Company experienced no significant events, nor received any significant reports indicating any material Year 2000 problems. However, it may not fully know the impact of Year 2000 issue until after a longer operating period following January 1, 2000. Economic and Monetary Union in the European Union Orthofix's European companies, including those in the United Kingdom, made preparations for the introduction of a single currency (the "Euro") in certain Member States of the EU in 1999. Preparations include upgrading information systems, where necessary, and training staff to handle Euro-denominated transactions, including dual currency transactions during the transition period between the commencement of economic and monetary union in 1999 and the first issue of Euro notes and coins in 2002. Orthofix does not expect that, in the short term, the introduction of the Euro will have a material adverse effect on the Company's financial condition or results of operations. Item 2. DESCRIPTION OF PROPERTY The Company's principal facilities are in the U.S., Italy and the UK. In the U.S., PEMF Products, Osteogenics BoneSource and EZ Brace are produced at Orthofix Inc.'s manufacturing, office and laboratory facility in Richardson, Texas. The Company leases approximately 96,000 square feet of space at this facility, of which 42,000 square feet is subleased to a third party. The lease has a current term expiring December 31, 2001 and provides for renewal options for up to 10 additional years. On February 24, 2000 Orthofix Inc. entered into a 10 year lease for the development of a new 70,000 square foot building in McKinney, Texas. The Company anticipates moving into the new site and the lease to become effective January 1, 2001. The lease contains an additional five year renewal provision and the building site is expandable to meet future needs. The Company has initiated discussions with the current landlord regarding lease termination costs. The new landlord and community have committed various incentives to offset early termination costs for the current lease. The new lease will result in future cost savings for the Company compared to the current lease. 13
In Italy, certain of the Company's quality control, assembly, research and development and teaching facilities for fixation products are located in Verona, Italy, in a 38,000 square foot facility owned by Orthofix S.r.l., the Company's Italian subsidiary. In the U.K., the Company rents approximately 28,000 square feet for certain of its manufacturing, sales, marketing and distribution activities. The Company believes that its facilities are suitable and adequate for the Company's purposes. Item 3. LEGAL PROCEEDINGS There are no material pending legal proceedings to which the Company is a party or of which any of its property is subject, except as described below. Novamedix filed an action on February 21, 1992 against Kinetic Concepts Inc. ("KCI") alleging infringement of the patents relating to Novamedix's A-V Impulse System(R) product, breach of contract, and unfair competition. Novamedix Limited v. Kinetic Concepts Inc., United States District Court for the Western District of Texas, San Antonio Division, Civil Action No. SA-92-CA-0177. In this action, trial of which is not expected to begin before the final quarter of 2000, Novamedix is seeking a permanent injunction enjoining further infringement by KCI. Novamedix also seeks damages relating to past infringement, breach of contract, and unfair competition. KCI has filed counterclaims alleging that Novamedix engaged in inequitable conduct before the United States Patent and Trademark Office and fraud as to KCI and that Novamedix engaged in common law and statutory unfair competition against KCI. See "Item 1. BUSINESS -- Patents, Trade Secrets and Licenses". IMS, a subsidiary of the Company, filed an action on November 29, 1995 in the United States District Court for the District of New Jersey against Biomet and two of its subsidiaries, EBI MS and Electro-biology, Inc. ("EBI") (collectively, for purposes of this paragraph, "Defendants") alleging the failure to pay for Orthofix external fixation devices sold and delivered. Inter Medical Supplies Limited v EBI Medical Systems, Inc., Electro-Biology, Inc., and Biomet, Inc., United States District Court for the District of New Jersey, Camden Division, Civil Action No. 95-6035. Orthofix S.r.l. and Orthofix Inc. filed an action on December 4, 1995 in the United States District Court for the Northern District of Texas against the same Defendants alleging, inter alia, breach of the June 1, 1990 Distributor Agreement between Orthofix S.r.l. and EBI MS, breach of the 1983 and 1984 Agency Agreements between Orthofix S.r.l. and EBI MS, tortious interference with existing and prospective economic relations, trademark infringement, passing off, false advertising, unfair competition, and defamation. Orthofix Inc. and Orthofix S.r.l. v EBI Medical Systems, Inc., Electro-Biology, Inc., and Biomet, Inc., United States District Court for the Northern District of Texas, Civil Action No. 395-CV2982-X. Those two actions were consolidated in the New Jersey District Court. On April 7, 1997, trial commenced before a jury. On June 2, 1997, the jury delivered its verdict. It determined that EBI MS breached the 1983 and 1984 Agency Agreements and the 1990 Distributor Agreement with Orthofix S.r.l.; that the Defendants tortiously interfered with the existing and prospective economic relations of Orthofix S.r.l., Orthofix Inc., and IMS; that the Defendants infringed Orthofix S.r.l.'s trademark; that the Defendants passed off medical devices not manufactured by Orthofix S.r.l. as genuine Orthofix external fixators; that the Defendants advertised their products falsely and competed unfairly; and that the Defendants defamed Orthofix S.r.l., Orthofix Inc., and IMS. The jury awarded Orthofix S.r.l., Orthofix Inc., and IMS compensatory damages in the amount of $48,000,000 and punitive damages in the amount of $100,600,000. In addition, the jury determined that EBI MS breached the sales contracts between IMS and itself and awarded IMS $875,399 in damages on its claim for goods sold and delivered. The jury rejected the Defendants' principal counterclaim - that Orthofix S.r.l. violated the New Jersey Franchise Practices Act. Although it determined that Orthofix S.r.l. breached the 1990 Distributor Agreement with EBI MS and that Orthofix S.r.l., Orthofix Inc., and IMS tortiously interfered with EBI MS's existing and prospective contractual relationships, it awarded the Defendants compensatory damages of $1.00 on those claims and rejected the Defendants' request for punitive damages. In addition, the jury awarded EBI MS $1.00 as a "set off" against IMS's claim for goods sold and delivered. On August 28, 1997, the district court denied defendants' motion for judgment as a matter of law and conditionally granted defendants' motion for a new trial as to punitive damages unless Orthofix accepted a remittitur of the jury's punitive damages award in excess of $50,000,000. On September 2, 1997, Orthofix accepted that remittitur. That same day, the district court entered 14
an amended judgment in favor of Orthofix and against defendants in the amount of $98,875,397, plus post-judgment interest and costs. On September 26, 1997, defendants filed a notice of appeal to the United States Court of Appeals for the Federal Circuit. On February 25, 1998, the Federal Circuit granted Orthofix's motion to transfer the appeal to the United States Court of Appeals for the Third Circuit. On June 28, 1999, the United States Court of Appeals for the Third Circuit unanimously affirmed the district court's decisions on liability and compensatory damages. At the same time, however, two of the three judges, over the dissent of Senior Circuit Judge Leonard I. Garth, reduced the punitive damages award to $1 million. On January 10, 2000, the United States Supreme Court declined to review the Third Circuit's decision. On January 21, 2000, defendants Biomet, Inc. and Electro-Biology, Inc. transferred funds in the amount of $64,174,752.25 to satisfy the judgment in favor of the Orthofix S.r.l., IMS, and Orthofix Inc. As a result of the Supreme Court's order and the satisfaction of the judgment, the litigation has been completed. Orthofix Inc. is a defendant in a lawsuit brought by Joseph Mooibroek, AME's former President and Chief Executive Officer, alleging wrongful termination of Mooibroek's employment agreement and various other claims. Joseph Mooibroek v. American Medical Electronics,et al., No. 94-4983-C, 68th Judicial District Court, Dallas County, Texas. Following trial in April and May 1997, a jury found that Mooibroek was entitled to recover $1,479,645 from Orthofix Inc. and $1,238,179 from the Directors. Before trial Orthofix Inc. indemnified the Directors against any recovery by Mooibroek. On June 26, 1997, final judgment was entered reducing the award against Orthofix Inc. to $679,645, which Orthofix Inc. has paid. The Directors have appealed the final judgment against them, and Mooibroek has appealed certain findings of the trial court in favor of Orthofix Inc. and the Directors. Resolution of those appeals may take more than a year. The Company believes that any liability ultimately resulting from this litigation will have no material adverse effect on the Company's financial position, results of operations and cash flows. On December 4, 1998, the special committee (the "Review Committee") established to determine the amount of any contingent contract rights under the Merger Agreement dated May 8, 1995 among Orthofix International N.V., Othello Acquiring Corporation, and American Medical Electronics Inc. ("AME") (the "Merger Agreement"), in settlement of all claims of the holders of record of AME common stock and the options and warrants to such stock as of August 21, 1995 (collectively, the "AME Record Holders"), unanimously determined that Orthofix International N.V. would pay an Earnout of $500,000 plus interest and 12% of the net recovery received from the judgment against EBI Medical Systems, Inc., Electro-Biology, Inc., and Biomet, Inc. The Review Committee has not calculated the latter amount, but Orthofix International N.V. believes it is between $5,000,000 and $5,500,000. An arbitrator acting under the auspices of the American Arbitration Association ("AAA") subsequently entered a Consent Award based on the Review Committee's determination. On January 29, 1999, two couples who owned shares of the common stock of American Medical Electronics Inc. ("AME") commenced a civil action against Orthofix Inc. and the Review Committee seeking, inter alia, the Maximum Earnout and Bonus under the Merger Agreement. Clarence Frere, Louise Frere, Joseph Mooibroek, and Marla B. Mooibroek, individually and on behalf of all others similarly situated v. Orthofix Inc., Arthur Schwalm, Robert Gaines Cooper, James Gero, and John and Jane Does One (1) Through Four (4), No. 99-S-445 (D. Colo.). In a related action, commenced on June 2, 1999, the same Plaintiffs filed a motion in the United States District Court for the Southern District of New York seeking to intervene in the AAA arbitration and vacate the Consent Award. Clarence Frere, Louise Frere, Joseph Mooibroek, and Marla B. Mooibroek, individually and on behalf of all others similarly situated v. Orthofix Inc., Arthur Schwalm, Robert Gaines Cooper, James Gero, and John and Jane Does One (1) Through Four (4), No. 99 Civ. 4049 (S.D.N.Y.). On July 2, 1999, Plaintiffs filed a first amended complaint in the Colorado action seeking to add Orthofix International N.V. as a defendant, in addition to Orthofix Inc. Orthofix International N.V. and Orthofix Inc. (collectively, "Orthofix") are vigorously defending against Plaintiffs' actions. Thus far, the Colorado action has been transferred to New York (on Orthofix Inc.'s motion); the individual defendants served in the Colorado action have all been dismissed for lack of personal jurisdiction (on motion of the individual defendants); and all discovery has been stayed pending the courts' ruling on Orthofix Inc.'s dispositive pre-answer motion that Plaintiffs lack standing to challenge the Review Committee's determination. 15
Item 4. CONTROL OF REGISTRANT To the Company's knowledge, the Company is not directly or indirectly owned or controlled by any corporation or by any government. Set forth below is a table indicating (i) persons known by the Company to own more than 10% of the Common Shares, and (ii) the total amount of Common Shares owned by the directors and officers of the Company as a group, at March 27, 2000. Identity of Amount |Title of Class Person or Group Owned (%) -------------- --------------- ----- --- Common shares Electra Investment Trust PLC 1,612,000 12.4 Common shares Fidelity Management & Research 1,687,000 13.0 Common shares Directors and Officers as a group 1,769,000 13.6 Common shares Lord, Abbett & Co. 1,342,000 10.3 The Company does not know of any arrangements the operation of which may result in a change in its control. Item 5. NATURE OF TRADING MARKET The Common Shares are quoted on the Nasdaq National Market under the symbol OFIX. The Common Shares were quoted initially in connection with the Company's Initial Public Offering completed in April 1992 (the "IPO"). 16
The high and low closing prices of the Common Shares on Nasdaq for the periods indicated, are set forth below: High Low 1998 - ---- First Quarter..................................... 14 11 Second Quarter.................................... 14 11 3/4 Third Quarter..................................... 14 11 1/8 Fourth Quarter.................................... 14 10 3/8 1999 - ---- First Quarter..................................... 16 1/2 13 Second Quarter.................................... 15 1/4 13 7/8 Third Quarter..................................... 15 13 Fourth Quarter.................................... 14 5/8 11 1/2 2000 - ---- First Quarter..................................... 21 11 7/8 *Second Quarter................................... 18 16 * for 2000, through April 12 Item 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS General Although there are Netherlands Antilles laws which may impose foreign exchange controls on the Company and may affect the payment of dividends, interest or other payments to non-resident holders of the Company's securities, including the Common Shares, the Company has been granted an exemption from such foreign exchange control regulations by the Central Bank of the Netherlands Antilles. Other jurisdictions in which the Company conducts operations may have various currency or exchange controls. In addition, the Company is subject to the risk of changes in political conditions or economic policies which could result in new or additional currency or exchange controls or other restrictions being imposed on the operations of the Company. As to Orthofix's securities, Netherlands Antilles law and Orthofix's Articles of Association impose no limitations on the right of non-resident or foreign owners to hold or vote such securities. Enforceability of Foreign Judgments The Company has been advised by its Netherlands Antilles counsel, Smeets Thesseling Van Bokhorst Spigt, that it is unlikely that (i) the courts of the Netherlands Antilles would enforce judgments entered by United States courts predicated upon the civil liability provisions of the United States Federal securities laws and (ii) actions can be brought in the Netherlands Antilles in relation to liabilities predicated upon the United States Federal securities laws. The Company has also been advised by its Netherlands Antilles counsel as follows: No treaty exists between the Netherlands Antilles and the United States providing for the reciprocal enforcement of foreign judgments. However, the courts of the Netherlands Antilles are generally prepared to accept a foreign judgment as part of the evidence of a debt due. An action may then be commenced in the Netherlands Antilles for recovery of this debt. A Netherlands Antilles court will only accept a foreign judgment as evidence of a debt due if: (i) the judgment is for a liquidated amount in a civil matter; (ii) the judgment is final and conclusive and has not been stayed or satisfied in full; (iii) the judgment is not directly or indirectly for the payment of foreign taxes, penalties, fines or charges of a like nature (in this regard, a Netherlands Antilles court is unlikely to accept a judgment for an amount obtained by doubling, trebling or otherwise multiplying a sum assessed as compensation for the loss or damage sustained by the person in whose favor the judgment was given); (iv) the judgment was not obtained by actual or constructive fraud or duress; (v) the foreign court has taken jurisdiction on grounds that 17
are recognized by the civil law rules as to conflict of laws in the Netherlands Antilles; (vi) the proceedings in which the judgment was obtained were not contrary to natural justice; (vii) the proceedings in which the judgment was obtained, the judgment itself and the enforcement of the judgment are not contrary to the public policy of the Netherlands Antilles; (viii) the person against whom the judgment is given is subject to the jurisdiction of the Netherlands Antilles court; and (ix) the judgment is not on a claim for contribution in respect of damages awarded by a judgment which does not satisfy the foregoing. Enforcement of a foreign judgment in the Netherlands Antilles may also be limited or affected by applicable bankruptcy, insolvency, liquidation, arrangement, moratorium or similar laws relating to or affecting creditors' rights generally and will be subject to a statutory limitation of time within which proceedings may be brought. Item 7. TAXATION Under the laws of the Netherlands Antilles as currently in effect, a holder of Common Shares 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 Common Shares or on gains realized during that year on sale or disposal of such shares; the Netherlands Antilles do not impose a withholding tax on dividends paid by the Company. 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 United States. Item 8. SELECTED FINANCIAL DATA The following selected consolidated financial data for the years ended December 31, 1999, 1998, 1997, 1996 and 1995 have been derived from the Company's audited Consolidated Financial Statements, which have been audited by PricewaterhouseCoopers, independent auditors. The financial data for the years ended December 31, 1999, 1998 and 1997 and at December 31, 1999, 1998 and 1997 should be read in conjunction with, and are qualified in their entirety by reference to, "Item 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and the Company's Consolidated Financial Statements and Notes thereto included elsewhere in this Annual Report on Form 20-F. The Company's Consolidated Financial Statements have been prepared in accordance with United States generally accepted accounting principles ("U.S. GAAP"). <TABLE> <CAPTION> Year ended December 31, ----------------------- 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- (In U.S. $ thousands, except margin, share and per share data) Consolidated operating results <S> <C> <C> <C> <C> <C> Net sales.......................................... 121,284 104,065 89,963 77,221 52,272 Gross profit....................................... 87,733 74,572 64,597 53,770 33,491 Gross profit margin................................ 72% 72% 72% 70% 64% Total operating income (expense)Notes 1, 2 and 3 .. 23,216 11,917 10,058 4,530 (16,872) Net income (loss).................................. 12,912 14,276 3,069 (475) (19,802) Net income (loss) per Common Share (diluted)....... 0.97 1.07 0.23 (0.04) (1.78) Net income per Common Share (diluted) (before non-recurring items)..................... 0.97 0.71 0.28 0.13 0.40 Consolidated financial position (at year-end) Total assets ...................................... 136,722 122,400 112,948 113,057 103,958 Total debt......................................... 14,248 9,585 20,298 21,495 20,517 Shareholders' equity............................... 89,570 78,736 65,148 63,910 58,660 Weighted average number of Common Shares outstanding (diluted)............... 13,364,127 13,291,988 13,211,397 12,673,319 11,113,604 </TABLE> - --------------- Note 1: Operating income for 1996 is after restructuring charges of $2,211,000 -See note 2 to the Consolidated Financial Statements. 2: Operating income for 1997 is after restructuring charges of $1,010,000 - See note 2 to the Consolidated Financial Statements. 3: Operating income for 1998 is after provision for impairment of long-held assets of $3,295,000 - see notes 2 and 8 to the Consolidated Financial Statements. 18
Orthofix International has never paid dividends to holders of its Common Shares. Orthofix International currently intends to retain all of its consolidated earnings to finance the continued growth of its business. Item 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Results of Operations The following table presents certain items in the Company's income statements as a percentage of net sales for the periods indicated: Year ended December 31, -------------------------------------------- 1999 1998 1997 % % % Net sales 100 100 100 Cost of sales 28 28 28 -------------------------------------------- Gross profit 72 72 72 -------------------------------------------- Expenses Sales and Marketing 35 36 36 General and Administrative(1) 13 15 18 Research and Development 5 6 5 -------------------------------------------- Operating income(2) 19 15 12 -------------------------------------------- Net income (3) 11 9 5 -------------------------------------------- (1) Includes amortization of intangible assets. (2) In 1998, before provision for impairment of long-lived assets of $3.3 million. In 1997 and 1996, before restructuring charges of $1.0 and $2.2 million, respectively - see note 2 to the Consolidated Financial Statements. (3) In 1998, before provision for impairment of long-lived assets and net sale proceeds of product license of $3.3 million and $8.1 million , respectively. In 1997 and 1996, before restructuring charges in 1997 of $1.0 and $2.2 million, respectively - see note 2 to the Consolidated, Financial Statements. General In June 1998, Orthofix Inc., following a review of its strategy for the Ogden Anchor in the light of continued disappointing sales, determined that it would not commit further resources to the development and sales and marketing of the product. Orthofix Inc. accordingly re-evaluated the intangible assets in its balance sheet relating to this product in accordance with the provisions of SFAS 121. Based on this evaluation, Orthofix Inc. incurred a write-off of approximately $3.3 million which is classified in operations. In April 1998, Orthofix Inc. announced that it had entered into an agreement to sell a license for BoneSource - Orthofix's calcium phosphate-based bone cement - to Stryker Howmedica Inc. The Company received gross proceeds under the agreement of $12.5 million, of which $2.5 million represented advance royalties. This resulted in a net gain of $9.7 million after costs of $300,000. At the same time, Orthofix Inc., following a revaluation of the goodwill then carried in its balance sheet relating to BoneSource using the undiscounted cashflow method, recognized a write down of $1.6 million in respect of such goodwill. The resulting net gain of $8.1 million on the sale of the license has been recorded as a component of other income in the consolidated income statements for 1998. Following the appointment of Charles Federico in October, 1996, to the position of President of Orthofix Inc., a review of all of the Company's North American activities took place, resulting in a significant restructuring of the Company's business in the United States. The Company's US sales force, which is now more incentive-based, was reorganized to make it more focused on individual business sectors. Orthofix Inc. has further rationalized its overhead structure including premises, people and non-essential functions. The restructuring, which was substantially complete at March 31, 1997, resulted in a one-time charge of $3.2 million. 19
Approximately $2.2 million, largely rental expense, was expensed in the fourth quarter of 1996 and $1.0 million, largely employee termination costs, in the first quarter of 1997. On June 1, 1995, AME replaced EBI as the distributor of Orthofix's, products in the United States upon expiration of EBI's distribution agreement on May 31, 1995. During 1995, EBI began to introduce its own range of external fixators into the United States market, while continuing to sell its existing inventory of Orthofix products. The Company sued EBI for, among other matters, infringement of patents and passing off. On January 21, 2000, defendants Biomet, Inc. and Electro-Biology, Inc. transferred funds in the amount of $64,174,752.25 to satisfy the judgment in favor of the Orthofix S.r.l., Inter Medical Supplies, and Orthofix Inc. As a result of the Supreme Court's order and the satisfaction of the judgment, the litigation has been completed. After deducting contingent legal fees and reserving for expenses, Orthofix realized approximately $38 million before tax. See "Item 3- LEGAL PROCEEDINGS" The Company's financial condition, results of operations and cash flows have not been significantly impacted by seasonality trends. Additionally, the Company does not believe its operations will be significantly affected by inflation or fluctuations in interest rates. 1999 compared to 1998 Net sales increased 17% to $121.2 million in 1999 compared to $104.1 million in 1998. Net sales in North America (primarily the United States) in 1999 represented 63% of net sales, or $75.8 million, compared with 61% of net sales, or $63.6 million in 1998, an increase of 19%. This increase was largely due to the growth in net sales of PEMF products, Orthofix products and the A-V Impulse System and the introduction of the EZ Brace. Outside the United States, there was an increase in net sales of 12% in 1999 compared with 1998, generated mainly through growth in sales of Orthofix products and the A-V Impulse System. Sales outside the United States increased 15% on a constant dollar basis. Sales and marketing expenses which represented 35% of net sales in 1999 and 36% in 1998, increased by $3.9 million in 1999 compared to 1998. In the U.S., where sales increased by 19% in 1999 compared to 1998, sales and marketing expenses increased by 12% to $28 million from $25.0 million in 1998. Outside the U.S., where sales increased by 12%, sales and marketing expenses increased by 8% to $13.9 million from $12.9 million. General and administrative expenses, which increased by $795,000 from $12.0 million in 1998 to $12.8 million in 1999, represented 11% of net sales in 1999 compared to 12% in 1998. General and administrative expenses for 1999 and 1998 included $881,000 and $369,000 of litigation costs, respectively. Exclusive of such costs, general and administrative expenses represented 10% and 11% of net sales in 1999 and 1998, respectively. See "Item 3. LEGAL PROCEEDINGS." Research and Development expenses which represented 5% of net sales in 1999 and 6% in 1998, increased by $528,000 from $5.9 million in 1998 to $6.4 million in 1999. Amortization of intangible assets was $3.5 million in 1999 compared to $3.6 million in 1998. The decrease of $80,000, resulted principally from decreased amortization consequent upon the write off in the second quarter of 1998 of goodwill relating to the BoneSource material, following the licensing deal with Stryker Howmedica Inc., and of the intangible asset relating to the Ogden Anchor. See note 2 to the Consolidated Financial Statements. Net other expense decreased by $735,000 from $1.3 million in 1998 to $576,000 in 1999. This decrease resulted principally from a reduction in net interest expense in 1999 of $219,000. In addition, there was an increase in foreign exchange gains in 1999 over 1998 of $768,000 resulting from the translation of a loan note between group companies denominated in Italian Lira. The reduction in net interest payable and the increase in foreign exchange gains were offset by an increase in net losses of affiliates of $338,000. In 1999 and 1998, the effective rate of income tax, excluding the net effect of non-recurring items in 1998, was 35% and 33%, respectively. The main reason for the increased rate in 1999 was that there were no net 20
operating loss carry forwards from its United States operation available for 1999, as there were all utilised in 1998. Net income for 1999 was $12.9 million compared to $9.5 million for 1998 (before the net effect of non- recurring items of $4.8 million) giving diluted earnings per share of $0.97 on the basis of diluted average shares outstanding of 13.4 million in 1999 compared with diluted earnings per share of $0.71, excluding the net effect of non-recurring items, on the basis of diluted average shares outstanding of 13.3 million in 1998. 1998 compared to 1997 Net sales increased 16% to $104.1 million in 1998 compared to $90.0 million in 1997. Net sales in North America (primarily the United States) in 1998 represented 61% of net sales, or $63.6 million, compared with 60% of net sales, or $53.6 million, in 1997, an increase of 19%. This increase was largely due to the growth in net sales of PEMF products, Orthofix products and the A-V Impulse System. Outside the United States, there was an increase in net sales of 11% in 1998 compared with 1997, generated mainly through growth in sales of the A-V Impulse System and the Laryngeal Mask. Sales outside the United States increased 14% on a constant dollar basis. Sales and marketing expenses which represented 36% of net sales in 1998 and 36% in 1997, increased by $5.4 million in 1998 compared to 1997. In the U.S., where sales increased by 19% in 1998 compared to 1997, sales and marketing expenses increased by 16% to $25.0 million from $21.5 million in 1997. Outside the U.S., where sales increased by 13%, sales and marketing expenses increased by 17% from $11.0 million to $12.9 million, largely as a result of increased spending on fixation products and the Laryngeal Mask. General and administrative expenses, which decreased by $400,000 from $12.4 million in 1997 to $12.0 million in 1998, represented 12% of net sales in 1998 compared to 14% in 1997. General and administrative expenses for 1998 and 1997 included $369,000 and $2.0 million of litigation costs, respectively. Exclusive of such costs, general and administrative expenses represented 11% and 12% of net sales in 1998 and 1997, respectively. See "Item 3. LEGAL PROCEEDINGS." Research and development expenses were $5.9 million in 1998 compared to $4.8 million in 1997. The increase of $1.1 million resulted largely from the inclusion in 1998 for a full year of the costs associated with the joint facility set up by Orthofix Inc. dedicated to advanced research in orthopedic applications and located at Wake Forest University's Bowman School of Medicine in Winston-Salem, North Carolina. Amortization of intangible assets was $3.6 million in 1998 compared to $3.8 million in 1997. The decrease of $200,000 resulted principally from decreased amortization consequent upon the write off in the second quarter of goodwill relating to the BoneSource material, following the licensing deal with Stryker Howmedica Inc., and of the intangible asset relating to the Ogden Anchor. See note 2 to the Consolidated Financial Statements. Net other expense decreased by $700,000 from $2.0 million in 1997 to $1.3 million in 1998. This decrease resulted principally from a reduction in net interest payable in 1998 of $1.0 million following reduced borrowings resulting from improved operating cashflows and the consideration received from the BoneSource licensing agreement. The reduction in net interest payable was offset by an increase in foreign exchange losses in 1998 over 1997 of $426,000 resulting from the translation of a loan note between group companies denominated in Italian Lira. In 1998 and 1997, the effective rate of income tax, excluding the net effect of non-recurring items, was 33% and 45%, respectively. The reasons for the reduced tax rate in 1998 resulted from a reduction in non-deductible litigation expenses of $2.0 million, and a reduction by the Italian Government of statutory income tax rates from 53% to 42%, effective January 1, 1998. The Company's effective tax rate remained high in 1997 principally due to non-deductible litigation expenses of $2.0 million. Excluding such expenses, the Company's effective tax rate would have been 40% in 1997. Based on the weight of the positive evidence from U.S. operations and the expectation of future taxable income in the U.S., the U.S. valuation allowance was released to income in 1998. 21
Net income for 1998 (before the net effect of non-recurring items of $4.8 million) was $9.5 million compared to $3.7 million (before the net effect of non-recurring items of $626,000) in 1997 giving diluted earnings per share of $0.71 on the basis of diluted average shares outstanding of 13.3 million in 1998 compared with diluted earnings per share of $0.28 on the basis of diluted average shares outstanding of 13.2 million in 1997. Liquidity and capital resources Cash and cash equivalents at December 31, 1999 were $9.7 million compared to $7.0 million at December 31, 1998, an increase of $2.7 million. Net cash provided by operating activities increased from $6.0 million in 1998 to $8.4 million in 1999, an increase of $2.4 million. Cash from operating activities in 1999 was provided by net income, after adjustments for non-cash items such as depreciation, amortization and provisions, of $21.4 million. The Company invested a net of $13 million of this sum in working capital resulting in total net cash provided by operating activities of $8.4 million. Of the net $13 million invested in working capital, $9.3 million was used for trade accounts receivable and $1.0 million was used for inventories and $2.8 million was used for other current assets, principally advances to affiliates of $1.0 million and deferred charges of $950,000. Net cash used by investing activities was $10.8 million in 1999 compared to net cash provided of $8.4 million in 1998. The Company invested $5.5 million in subsidiaries and affiliates and used $5.4 million to purchase tangible and intangible assets. Net cash provided by financing activities was $5.2 million in 1999 compared to cash used of $11.7 million in 1998. Cash provided by financing activities in 1999 consisted principally of a new loan of $10.0 million and increased borrowings under short-term lines of credit of $1.8 million offset by loan repayments of $6.6 million. The Company also used $681,000 to repurchase shares for treasury. The Company believes that its current cash balances together with its projected cash flows, and existing lines of credit are sufficient to cover its anticipated capital needs and research and development costs during the next two fiscal years. See "Item 1, DESCRIPTION OF BUSINESS--Recent Developments." The Company has a $10 million term note ("Term Note"). The Term Note are collateralized by substantially all of the assets of Orthofix Inc. and are guaranteed by the Company. In addition, the Company had $7.1 million of unused available lines of credit at December 31, 1999. Certain restrictive covenants pursuant to the Term Note to the bank reside at the Company's reporting level, with other restrictive covenants residing at Orthofix Inc. The most restrictive covenant precludes the transfer to the Company from Orthofix Inc. of an amount exceeding 10% of total assets of the Company in any one year or exceeding 25% of total assets of the Company during the period of the Term Note. At December 31, 1999, the amounts were $13.6 million and $34.2 million, respectively. These restrictions are not expected to have an impact on the Company's ability to meet its obligations. Dividend Policy The Company has no present intention to pay dividends. In the event that the Company decides to pay a dividend to shareholders with dividends received from its subsidiaries, it would, based on prevailing rates of taxation, be required to pay additional withholding and income tax at a combined rate of approximately 10% on such amount. 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 income 22
and expenditure. The Company does not use derivatives to hedge foreign exchange exposure. The Company's interest exposure is primarily related to $4.4 million of fixed rate loan note with a group company denominated in Italian Lira. A 10% unfavorable movement in exchange rates would result in a $440,000 loss on exchange upon conversion of this debt Year 2000 Issues The Company's manufacturing processes and other operations are dependent on technological devices with embedded chips and computer systems. These computer systems and other technological devices may not be capable of accurately recognizing dates beginning on January 1, 2000. This problem could cause miscalculations, adversely affecting the Company's manufacturing processes and other operations. Prior to January 1, 2000, the Company spent approximately $500,000, of which approximately $150,000 was incurred in fiscal year 1999, with a view to resolving any such potential issues. The Company believes that it has resolved substantially all of these issues through a comprehensive compliance process. To date, there have been no material malfunctions of the Company's systems or activities due to Year 2000 issues. However, there can be no assurance that unanticipated events still will not occur or that the Company was able to identify all Year 2000 issues before problems arise. In addition, the Company has no assurance that third party suppliers or customers have or had the ability to identify and solve all or substantially all their Year 2000 issues. Therefore, there can be no assurance that the Year 2000 issue still will not have a material adverse effect on the Company's consolidated financial position, cash flows or results of operations. Euro Conversion As part of the European Economic and Monetary Union (EMU), a single currency (the "Euro") will replace the national currencies of most European countries in which we conduct business. The conversion rates between the Euro and the participating nation's currencies was fixed irrevocably as of December 31, 1998, with the participating national currencies being removed from circulation between January 1 and June 30, 2002 and replaced by Euro notes and coins. During the "transition Period" from January 1, 1999 through December 31, 2001, public and private entities as well as individuals may pay for goods and services using checks, drafts or wire transfers denominated in Euro or the participating country's national currency. Under the regulations governing the transition to a single currency, there is a "no compulsion, no prohibition" rule which states that no one is obliged to use the Euro until the notes and coins have been introduced on January 1, 2002. The migration to Euro compliant systems is a key IT strategy. The Company believes that it has been Euro compliant in the affected countries (that is, able to receive Euro-denominated payments and able to invoice in Euros as requested by vendors and suppliers, respectively) since January 1, 1999. It expects to complete full conversion of all affected country operations to the Euro by the time national currencies are removed from circulation. The Company does not expect the cost of software and business process conversion to be material. In addition, it does not expect conversion to the Euro to have significant impact on its competitive strategies in the effected countries, nor does it expect the Euro to have a significant effect on its foreign exchange hedging policies. Recently Issued Accounting Standards During 1999, various new accounting pronouncements were issued which may impact the Company's financial statements. (See note 1 to the Consolidated financial statements) 23
Item 10. DIRECTORS AND OFFICERS OF REGISTRANT. Directors and Executive Officers The directors and executive officers of the Company are as follows: Name Age Position ---- --- -------- Robert Gaines Cooper 62 Chairman of the Board of Directors Edgar Wallner 63 President, Chief Executive Officer and Director Peter Clarke 58 Executive Vice President, Chief Financial Officer, Secretary and Director Charles Federico 51 Senior Vice President, President, North America and Director Tom Hay 54 Senior Vice President and President, International Division Vittorio Pietropoli 59 Senior Vice President and Director Robert Sentance 53 Controller Jerry Benjamin (2) 59 Director Alberto d'Abreu de Paulo 61 Director Frederik Hartsuiker 59 Director Peter Hewett 64 Deputy Chairman and Director John Littlechild (1) 48 Director James Gero (1) 55 Director (1) Member of the Compensation and Benefits Committee (2) Member of the Audit Committee Mr Julian Knott resigned from the Board of Directors in April 2000 after twelve years of greatly appreciated service. The Board will be seeking to fill the vacancy on the Audit Committee resulting from Mr Knott's resignation. All directors hold office until the next annual general meeting of shareholders of Orthofix and until their successors have been elected and qualified. Officers of Orthofix serve at the discretion of the Board of Directors. There are no family relationships among any of the directors or executive officers of Orthofix. Mr. Gaines Cooper became Chairman of Orthofix in March 1992 and has been a Director of Orthofix since its formation in 1987. He is Managing Director of Chelle Plastics Ltd-Seychelles. Mr. Gaines Cooper is also Chairman of LMA International S.A., Jersey, Channel Islands. See "Item 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS". Mr. Wallner became a Director and President and Chief Executive Officer of Orthofix in March 1992 and has been President of Orthofix S.r.l. since its formation in 1987. From 1978 until 1987, he was Vice President of European Operations for EBI, now a subsidiary of Biomet. From 1973 until 1978, he was Vice President of Marketing for Hydron Europe Inc., a soft contact lens manufacturer. Prior to 1973, Mr. Wallner spent 15 years with The Boots Company Ltd., a multinational pharmaceutical company. See "Item 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS". Mr. Clarke became a Director and Executive Vice President, Secretary and Chief Financial Officer of Orthofix in March 1992 and has been the Chief Financial Officer of Orthofix since January 1988. From 1985 to 1987, he was Finance Controller of EBI Medical Systems Ltd., a United Kingdom subsidiary of EBI. See "Item 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS". Mr. Federico became a Director of Orthofix in October, 1996 and has been the President of Orthofix Inc. since October 1996. From 1985 to 1996, Mr. Federico was the President of Smith & Nephew Endoscopy (formerly Dyonics, Inc.). From 1981 to 1985 Mr. Federico served as Vice President of Dyonics, initially as Director of Marketing and subsequently as General Manager. Previously, he held manufacturing and marketing positions with General Foods Corporation, Air Products Corporation, Puritan Bennett Corporation and LSE Corporation. Mr. Hay became President, International Division, in December 1998. Before joining Orthofix, Mr. Hay was with C R Bard Inc. for eleven years, ultimately as Managing Director of C R Bard Ltd. and Vice President, C R Bard, Northern Europe. Prior to this, he spent fourteen years with Baxter Healthcare. 24
Mr. Pietropoli became a Director of Orthofix and Senior Vice President in March 1992 and has been the General Director of Orthofix S.r.l since 1987. From 1985 to 1987, he was a Management Consultant for the Banca Popolare di Verona. Mr. Sentance joined Orthofix as Financial Controller in January 1991. From 1989 until 1990, Mr. Sentance was acting Finance Director of Downland Estates Plc. From 1983 until 1989, he was Finance Director of Colefax & Fowler Group Plc. Mr. Benjamin became a non-executive Director of Orthofix in March 1992. He has been a General Partner of Advent Venture Partners, a venture capital management firm in London since 1985. Mr. Benjamin is a Director of Professional Staff plc and a number of private health care companies. Mr. d'Abreu de Paulo became a non-executive Director of Orthofix in March 1992 and has been associated with Orthofix since its formation in 1987 as the President and Managing Director of First Independent Trust (Curacao) N.V., a director of Orthofix until February 28, 1992. Mr. d'Abreu de Paulo is a tax attorney in private practice and a member of the Audit Court of the Netherlands Antilles. Mr. Hartsuiker became a non-executive Director of Orthofix in March 1992 and has been a Director of Orthofix International B.V. since 1987. Mr. Hartsuiker is a Director of New Amsterdam Cititrust B.V. in The Netherlands. Mr. Hewett became the Deputy Group Chairman of Orthofix and Chairman of the Board of Orthofix Inc. in March 1998. He has been a non-executive Director of Orthofix since March 1992. Previously, Mr. Hewett served as the Managing Director of Caradon Plc, Chairman of the Engineering Division, Chairman and President of Caradon Inc., Caradon Plc's United States subsidiary and a member of the Board of Directors of Caradon Plc of England. In addition, he was responsible for Caradon Plc's worldwide human resources function, and the development of its acquisition opportunities. Mr. Littlechild became a non-executive Director of Orthofix in 1987 and a Director of Orthofix Inc. in 1995. He has served as a General Partner of the General Partner funds of each of the HealthCare Partners, a United States venture capital fund, since 1991. From 1985 to 1991, he was a Senior Vice President of Advent International Corporation. Mr. Littlechild is a Director of Avant Immunotherapeutics, Inc. and Diacrin, Inc. as well as other privately held HealthCare companies. Mr. Gero became a non-executive Director of Orthofix in February 1998. Mr. Gero became a Director of AME in 1990 and served subsequently as a Director of Orthofix Inc. He is the Chairman and Chief Executive Officer of each of Sierra Technologies Inc. and Sierra Networks Inc. and a Director of each of, Leslie Building Products Inc., Drew Industries Inc., and Chairman of Thayer Aerospace. In 1992, the Board of Directors established a Compensation and Benefits Committee. The Board of Directors does not maintain a Nominating Committee or a committee performing similar functions. The Compensation and Benefits Committee establishes salaries, incentives and other forms of compensation for directors, officers and other employees of the Company, administers the Company's share option plans and recommends policies relating to incentive compensation and benefit plans. The Audit Committee reviews the need for internal auditing procedures and the adequacy of internal controls and meets periodically with management and the independent auditors. The Board of Directors may establish additional committees from time to time. Item 11. COMPENSATION OF DIRECTORS AND OFFICERS. During 1999, an aggregate amount of approximately $2.4 million was paid by Orthofix to its directors and executive officers as a group (14 persons) for services rendered in all capacities. This amount includes $36,000 paid by Orthofix in 1999 to provide pension, retirement or similar benefits for all directors and officers. Orthofix anticipates that for 2000 the aggregate compensation to be paid to its directors and executive officers as a group (13 persons) will be approximately $2.5 million. 25
No director or executive officer of the Company has an employment contract that binds the Company for a notice period longer than one year. Item 12. OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES. The total amount of Common Shares called for by all outstanding options held by directors and officers as a group as of March 15, 2000 was 2,011,750. Share Option Plans The following is a summary description of certain provisions of the Company's share option plans. Staff Share Option Plan. Pursuant to the Company's Staff Share Option Plan (the "Staff Plan"), the Company's employees, including the Company's directors and executive officers, and certain other persons directly or indirectly related to the Company's business, have been granted options to purchase an aggregate of 1,648,751 Common Shares (representing approximately 12.7% of the Common Shares outstanding) at prices ranging from $1.43 to $14.88 per Common Share. Of these, options for 789,426 Common Shares have been exercised or cancelled as of March 15, 2000. Option grants under the Staff Plan were made in 1988, 1989, 1990, 1991, 1995, 1996, 1997, 1998 and 1999. 263,274 Common Shares remain available for grant under this Plan. Options under the Staff Plan are currently exercisable with respect to 51% of the total number of Common Shares subject to option. The Board of Directors has the authority to accelerate the exercise date of options, or make such other adjustments as it considers appropriate, in the event of a change in control of the Company. Options are not transferable except by will or pursuant to applicable laws of descent and distribution upon death of the employee. Staff Plan options generally expire ten years after date of grant, or earlier in certain circumstances. Executive Share Option Plan. The Company's Executive Share Option Plan (the "Executive Plan") was adopted by the Board of Directors and approved by the shareholders in March 1992. An aggregate 1,945,000 Common Shares have been reserved for issuance under the Executive Plan. The Executive Plan is administered by the Board of Directors. No Common Shares remain available for future grants under the Executive Plan. Options covering an aggregate of 1,945,000 Common Shares have been awarded by the Board of Directors to executive and non-executive officers of the Company. All Executive Plan options have a per share exercise price of $14.40 (120% of the offering price in the Initial Public Offering). Fifty percent of each grant of Executive Plan options are characterized as "Service Options" which generally vest in 20% increments on the first through fifth anniversaries of the date of grant, provided the option holder is employed by Company at such anniversary date. The remaining Executive Plan options are characterized as "Performance Options" which will vest on the tenth anniversary of the date of grant, provided the option holder remains in the employ of the Company at such anniversary date. Performance Options will vest earlier, however, upon the satisfaction of a performance condition linked to the market price of the Common Shares. Specifically, Performance Options will vest in 25% increments each time the average price of the Common Shares on the Nasdaq National Market System over a period of 180 days (the "Average Price") attains a whole number multiple of $12.00, the public offering price of the Common Shares in the IPO. Thus, 25% of the outstanding Performance Options will vest if the Average Price equals or exceeds $24.00, another 25% will vest if the Average Price equals or exceeds $36.00, and so on. This performance-based vesting, however, is qualified by the condition that an employee can vest in Performance Options covering no more than 25% of the total number of Performance Options granted to him for each full or partial year of service with the Company from April 24, 1992. Both Service Options and Performance Options will expire on the twelfth anniversary of the Initial Public Offering. AME Incentive Stock Option Plans. All options on AME Common Stock outstanding under AME's 1983 Incentive Stock Option Plan (the "1983 Plan") and 1990 Incentive Plan (the "1990 Plan") immediately 26
prior to the merger of AME with Othello were assumed by Orthofix and converted into options to purchase Common Shares. Options under the 1983 Plan have a weighted average exercise price of approximately $23.07 per Common Share at prices ranging from $15.52 to $24.57 per Common Share; options under the 1990 Plan have a weighted average exercise price of approximately $18.93 per Common Share at prices ranging from $9.49 to $28.24 per Common Share. The exercise prices of all such options were adjusted to take account of the merger. Options granted under both the 1983 Plan and the 1990 Plan expire ten years after the date of grant unless earlier exercised. The last options granted under the 1983 Plan are scheduled to expire in 2002, while the last options granted under the 1990 Plan are scheduled to expire in 2005. Currently, 4,380 options are outstanding under the 1983 Plan, all of which are exercisable, and 34,764 options are outstanding under the 1990 Plan, all of which are exercisable. AME Warrants. Warrants to purchase 320,000 shares of AME Common Stock (the "AME Warrants") were also assumed by Orthofix pursuant to the merger of AME with Othello and became exercisable for Common Shares after adjustment to take account of the merger. At March 31, 2000, AME Warrants to purchase 115,994 Common Shares were currently exercisable, and expire on various dates through December 2003. The exercise price for the AME Warrants ranges from $18.10 to $30.60 per Common Share. Item 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS Certain directors of Orthofix own beneficial interests in LMA International S.A. ("LMA"). In 1992, LMA, which owns the distribution rights in Italy to the Laryngeal Mask (used to administer anaesthesia) produced by The Laryngeal Mask Company Ltd., awarded the distribution rights for the Laryngeal Mask in Northern Italy to DMO. With effect from January 1, 1995, such rights were extended to the whole of Italy. A trust, of which Mr. Gaines Cooper is settlor, owns a 40% interest in LMA. In exchange for the award of distribution rights to DMO, LMA was permitted to purchase a 20% beneficial interest in DMO. On October 27, 1993, Orthofix International B.V. acquired a 62% interest , and Intavent Limited a 38% interest, in Intavent Orthofix. Mr. Gaines Cooper is the settlor of a trust that owns a 30% interest in Intavent Limited. Intavent Orthofix distributes the Laryngeal Mask, supplied by Intavent Limited, in the United Kingdom. In connection with this transaction, Orthofix International B.V. extended an interest-free loan to Intavent Orthofix in the amount of approximately $2,600,000, all of which has been repaid. In addition, Intavent Orthofix issued an interest-bearing unsecured convertible loan note in the amount of approximately $625,000 to Intavent Limited. On April 22, 1998, Intavent Ltd converted the loan note into shares in Intavent Orthofix Ltd, thereby increasing its equity interest in the latter to 48%. In the event that an offer is accepted by shareholders to sell more than 50% of the outstanding Intavent Orthofix shares, Intavent Limited may acquire an additional 200 shares of Intavent Orthofix from Orthofix for approximately $390 per share, bringing its interest in Intavent Orthofix to 50%. Arrow Medical Limited ("Arrow") supplies impads for use with the A-V Impulse System to Novamedix Distribution Limited. Mr. Gaines Cooper is the settlor of a trust which owns 40% of LMA. Mr. Gaines Cooper is Chairman of LMA, which owns a 30% interest in Arrow. Mr. Wallner is the settlor of a trust which owns a 10% interest in Arrow. Inter Medical Supplies, a wholly owned subsidiary which manufactures Orthofix products, rents facilities from LMA under a three year lease which started in 1999. The annual rent paid to LMA is $77,000. Inter Medical Supplies has paid LMA $207,000 as a contribution towards the setting up cost of this facility. Since its inception, the Company has maintained a policy that all transactions among the Company and its officers, directors and other affiliates (i) be approved by the Company's Board of Directors and (ii) be on terms no less favorable to the Company than could be obtained from unaffiliated third parties. In addition, the Company adopted in March 1992 a policy that all transactions among the Company and its officers, directors and other affiliates must be approved by a majority of the disinterested members of the Company's Board of Directors. 27
PART II Item 14. DESCRIPTION OF SECURITIES TO BE REGISTERED Not applicable. PART III Item 15. DEFAULT UPON SENIOR SECURITIES None. Item 16. CHANGES IN SECURITIES AND CHANGES IN SECURITY FOR REGISTERED SECURITIES None. PART IV Item 17. FINANCIAL STATEMENTS Not applicable. Item 18. FINANCIAL STATEMENTS The Consolidated Financial Statements and related Notes thereto, as required by this Item, are contained at pages F-1 through F-25 hereof. Item 19. FINANCIAL STATEMENTS AND EXHIBITS The following financial statements and related schedule, together with the report of PricewaterhouseCoopers are filed as part of this Annual Report on Form 20-F in Item 18: Report of the Independent Auditors Consolidated Balance Sheets as of December 31, 1999 and 1998. Consolidated Statements of Operations for each of the three years in the period ended December 31, 1999. Consolidated Statements of Changes in Shareholders' Equity for each of the three years in the period ended December 31, 1999. Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 1999. Notes to Consolidated Financial Statements. Schedule 1 - Condensed Financial Information of Registrant Schedule 2 - Valuation and Qualifying Accounts The Company agrees to furnish to the Securities and Exchange Commission, upon request, copies of any instruments that define the rights of holders of long-term debt of the Company that are not filed as exhibits to this Annual Report on Form 20-F. 28
ORTHOFIX INTERNATIONAL N.V. SIGNATURES Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the Registrant certifies that it meets all of the requirements for filing on Form 20-F and has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized. ORTHOFIX INTERNATIONAL N.V. By: /s/ Peter Clark ----------------------------------------------- Name: Peter Clarke Title: Executive Vice President, Chief Financial Officer Secretary and Director Date: May 19, 2000 29
ORTHOFIX INTERNATIONAL N.V. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS <TABLE> <CAPTION> Page <S> <C> Report of the Independent Accountants F-2 Consolidated balance sheets as of December 31, 1999 and 1998 F-3 Consolidated statements of operations for each of the three years in the period ended December 31, 1999 F-4 Consolidated statements of changes in shareholders' equity for each of the three years in the period ended December 31, 1999 F-5 Consolidated statements of cash flows for each of the three years in the period ended December 31, 1999 F-6 Notes to the consolidated financial statements F-7 Schedule 1 - condensed financial information of registrant S-1 Schedule 2 - valuation and qualifying accounts S-5 </TABLE> F-1
ORTHOFIX INTERNATIONAL N.V. REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of Orthofix International N.V.: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, changes in shareholders' equity and cash flows present fairly, in all material respects, the financial position of Orthofix International N.V. and its subsidiaries (the "Company") at December 31, 1999 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. London, England April 20, 2000 F-2
<TABLE> <CAPTION> ORTHOFIX INTERNATIONAL N.V. CONSOLIDATED BALANCE SHEETS as of December 31, 1999 and 1998 December 31 ----------- (U.S. Dollars, in thousands except share and per share data) 1999 1998 - ------------------------------------------------------------ ---- ---- <S> <C> <C> Assets Current assets: Cash and cash equivalents $ 9,724 $ 6,970 Restricted cash 880 839 Trade accounts receivable, less allowance for doubtful accounts of $6,176 and $4,912 at December 31, 1999 and 1998, respectively 39,755 32,713 Inventories 15,633 15,839 Deferred income taxes 3,739 3,106 Other current assets 5,901 4,030 -------- -------- Total current assets 75,632 63,497 Securities and other investments 525 437 Property, plant and equipment, net 9,568 9,056 Patents and other intangible assets, net 2,476 2,448 Goodwill, net 46,584 45,067 Deferred income taxes - non-current 1,937 1,895 -------- -------- Total assets $136,722 $122,400 ======== ======== Liabilities and shareholders' equity Current liabilities: Bank borrowings $ 4,349 $ 3,073 Current portion of long-term debt 4,520 2,344 Trade accounts payable 7,228 7,777 Other current liabilities 12,309 12,854 -------- -------- Total current liabilities 28,406 26,048 Long-term debt 5,379 4,168 Deferred income taxes 1,763 1,516 Deferred income 2,500 2,500 Long-term rental liabilities, net 658 1,085 Deferred compensation 817 850 -------- -------- Total liabilities 39,523 36,167 ======== ======== Minority interests $ 7,629 $ 7,497 Commitments and contingencies (notes 14 and 18 to the Consolidated Financial Statements) Shareholders' equity Common shares $0.10 par value Authorized: 30,000,000 (1998: 30,000,000) Issued: 13,369,580 (1998: 13,271,895) 1,337 1,327 Outstanding 13,029,834 (1998: 12,964,055) Additional paid-in capital 63,893 63,176 Less: 339,746 Treasury shares, at cost (1998: 307,840) (3,783) (3,303) -------- -------- 61,447 61,200 Retained earnings 31,501 18,589 Accumulated other comprehensive income (3,378) (1,053) -------- -------- Total shareholders' equity 89,570 78,736 -------- -------- Total liabilities and shareholders' equity $136,722 $122,400 ======== ======== The accompanying notes form an integral part of these consolidated financial statements. </TABLE> F-3
<TABLE> <CAPTION> ORTHOFIX INTERNATIONAL N.V. CONSOLIDATED STATEMENTS OF OPERATIONS For the years ended December 31, 1999, 1998 and 1997 (U.S. Dollars, in thousands, except share and per share data) 1999 1998 1997 - ------------------------------------------------------------- ---- ---- ---- <S> <C> <C> <C> Net sales $ 121,284 $ 104,065 $ 89,963 Cost of sales 33,551 29,493 25,366 --------- ---------- --------- Gross profit 87,733 74,572 64,597 Operating expenses Sales and marketing 41,863 37,949 32,538 General and administrative 12,782 11,987 12,365 Research and development 6,403 5,875 4,840 Amortization of intangible assets 3,469 3,549 3,786 Impairment of long-lived assets - 3,295 - Restructuring charges - - 1,010 --------- ---------- --------- 64,517 62,655 54,539 --------- ---------- --------- Total operating income 23,216 11,917 10,058 Other income (expense) Interest income 614 326 117 Interest expense on bank loans (1,204) (1,135) (1,962) Other income (expense) net 14 (502) (113) --------- ---------- --------- Net other expense (576) (1,311) (1,958) Gain on sale of product license - 8,100 - --------- ---------- --------- Net income before income taxes and minority interests 22,640 18,706 8,100 Income tax expense (7,914) (2,687) (4,081) --------- ---------- --------- Net income before minority interests 14,726 16,019 4,019 Minority interests (1,814) (1,743) (950) --------- ---------- --------- Net income $ 12,912 $ 14,276 $ 3,069 ========= ========= ======== Net income per common share - basic $ 0.99 $ 1.10 $ 0.24 ====== ====== ====== Net income per common share - diluted $ 0.97 $ 1.07 $ 0.23 ====== ====== ====== Weighted average number of common shares - basic 13,020,320 12,966,830 12,932,807 ========== ========== ========== Weighted average number of common shares - diluted 13,364,127 13,291,988 13,211,397 ========== ========== ========== </TABLE> The accompanying notes form an integral part of these consolidated financial statements. F-4
<TABLE> <CAPTION> ORTHOFIX INTERNATIONAL N.V. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY For the years ended December 31, 1999, 1998 and 1997 Number of Accumulated Common Treasury other Total (U.S. Dollars, in thousands, shares Common Additional Shares Retained comprehensive shareholders' except share data) Outstanding Shares paid-in capital (at cost) Earnings income equity - ----------------------------- ----------- ------ --------------- --------- -------- ------------- ------------- <S> <C> <C> <C> <C> <C> <C> <C> At December 31, 1996 12,887,708 $1,305 $62,984 $(1,387) $1,244 $(236) $63,910 71,992 common shares issued 71,992 7 348 - - - 355 Net income - - - - 3,069 - 3,069 Other comprehensive income Translation adjustment - - - - - (2,186) (2,186) ------- Total Comprehensive income 883 ---------- ------ ------- -------- ------ -------- ------- At December 31, 1997 12,959,700 $1,312 $63,332 $(1,387) $4,313 $(2,422) $65,148 151,855 common shares issued 151,855 15 525 - - - 540 Repurchase of warrants - - (174) - - - (174) Conversion of loan note - - (507) - - - (507) 147,500 common shares purchased for treasury (147,500) - - (1,916) - - (1,916) Net income - - - - 14,276 14,276 Other comprehensive income Translation adjustment - - - - - 1,369 1,369 ------- Total Comprehensive income 15,645 ---------- ------ ------- -------- ------ -------- ------- At December 31, 1998 12,964,055 $1,327 $63,176 $(3,303) $18,589 $(1,053) $78,736 97,685 common shares issued 97,685 10 659 - - - 669 50,000 shares purchased for treasury (50,000) - - (681) - - (681) 18,094 common shares issued from treasury 18,094 - 58 201 - - 259 Net income - - - - 12,912 - 12,912 Other comprehensive income Unrealized gain on marketable securities (net of tax) - - - - - 292 292 Translation adjustment - - - - - (2,617) (2,617) ------- Total Comprehensive income 10,587 ---------- ------ ------- -------- ------ -------- ------- At December 31, 1999 13,029,834 $1,337 $63,893 $(3,783) $31,501 $(3,378) $89,570 ========== ====== ======= ======== ======= ======== ======= </TABLE> The accompanying notes form an integral part of these consolidated financial statements. F-5
<TABLE> <CAPTION> ORTHOFIX INTERNATIONAL N.V. CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended December 31, 1999, 1998 and 1997 (U.S. Dollars, in thousands) 1999 1998 1997 - ---------------------------- ---- ---- ---- <S> <C> <C> <C> Cash flows from operating activities: Net income $ 12,912 $ 14,276 $ 3,069 ------ ------ ----- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 6,833 6,521 6,493 (Profit)/Loss on sale of fixed assets (79) 428 41 Gain on sale of product license - (8,100) - Loss on impairment of long-lived assets - 3,295 - Deferred taxes (169) (5,001) (205) Minority interest in net income of consolidated subsidiaries 1,814 1,743 950 Other 94 261 144 Changes in operating assets and liabilities: Increase in accounts receivable (9,326) (4,794) (4,628) Increase in inventories (1,003) (3,599) (531) Increase in other current assets (2,844) (7) (59) Increase in trade accounts payable 55 1,193 492 Increase (decrease) in other current liabilities 163 (188) (1,119) ------ ------ ----- Net cash provided by operating activities 8,450 6,028 4,647 ------ ------ ----- Cash flows from investing activities: Investments in affiliates and subsidiaries (5,474) (437) - Capital expenditure (5,446) (3,401) (3,394) Proceeds from sale of equipment 126 63 51 Net proceeds from sale of product license - 12,200 - ------ ------ ----- Net cash (used in) provided by investing activities $ (10,794) $ 8,425 $ (3,343) -------- ----- -------- Cash flows from financing activities: Net proceeds from issue of common shares $ 669 $ 540 $ 355 Acquisition of Treasury shares (681) (1,916) - Repurchase of warrants - (174) - Repayment of loans (6,581) (11,031) (3,444) Proceeds from loan 10,000 - - Proceeds from borrowings 1,748 895 3,053 Restricted cash - - (780) ------ ------ ----- Net cash provided by (used in) financing activities 5,155 (11,686) (816) ------ ------ ----- Effect of exchange rates changes on cash (57) 72 39 Net increase in cash and cash equivalents 2,754 2,839 527 Cash and cash equivalents at the beginning of the year 6,970 4,131 3,604 ------ ------ ----- Cash and cash equivalents at the end of the year $ 9,724 $ 6,970 $ 4,131 ======= ======= ======= Supplemental disclosure of cash flow information Cash paid during the year for: Interest $ 812 $ 1,206 $ 1,625 Income taxes $ 8,219 $ 8,082 $ 3,431 </TABLE> Supplemental schedule of non-cash investing and financing activities On April 5, 1999, $259,000 of the Earnout payment (note 13 to the Consolidated Financial Statements) was satisfied by way of issuing 18,094 shares of treasury stock On April 22, 1998, the loan note of $625,000 issued by Intavent Orthofix Limited in connection with its acquisition of Colgate Medical Limited was converted by the loan note holder into shares in Intavent Orthofix Limited. The accompanying notes form an integral part of these consolidated financial statements. F-6
ORTHOFIX INTERNATIONAL N.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Description of business The Company and its subsidiaries are principally involved in the development, manufacture, marketing and distribution of advanced products for bone-healing and less invasive medical devices. 1 Accounting policies (a) Basis of consolidation The consolidated financial statements include the financial statements of the Company and its directly and indirectly wholly owned and majority-owned subsidiaries after elimination of all material intercompany accounts and transactions. The equity method of accounting is used when the Company has a 20% to 50% interest in other companies. Under the equity method, original investments are recorded at cost and adjusted by the Company's share of undistributed earnings or losses of these companies. All significant intercompany transactions, profits and balances have been eliminated in the consolidated financial statements. The results of subsidiaries acquired or disposed of during the year are included in the consolidated statements of operations from the date of their acquisition or up to the date of their disposal. (b) Foreign currency translation The accounts of the Company's foreign subsidiaries are recorded using the local currency as the functional currency. The Company applies Statement of Financial Accounting Standards No. 52, "Foreign Currency Translation" relative to the translation of foreign currency financial statements into U.S. dollars and accounting for foreign currency translations. Under this statement, all balance sheet accounts, except shareholders' equity and investments, 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 accumulated directly in the accumulated other comprehensive income component of shareholders' equity. (c) Inventories Inventories are valued at the lower of cost or estimated net realizable value, after provision for obsolete items, refurbishment and lost field-items. Cost is determined on a weighted-average basis which approximates the FIFO method. The valuation of work-in-progress and finished goods includes the cost of materials, labor and production. Demo inventory is expensed when provided to sales representatives. (d) Reporting currency The reporting currency is the United States 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 income and expenditure. The Company does not use derivatives to hedge foreign exchange exposure. The Company's exchange rate exposure is primarily related to $4.4 million of fixed rate loan note with a group company denominated in Italian Lira. A 10% unfavorable movement in exchange rates would result in a $440,000 loss on exchange upon conversion of this debt. F-7
ORTHOFIX INTERNATIONAL N.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) 1 Accounting policies (continued) (f) Property, plant and equipment Property, plant and equipment is stated at cost less accumulated depreciation, except for land which is not depreciated. Depreciation is computed on a straight-line basis over the useful lives of the assets which are as follows: Years Buildings 25 to 33 Plant and equipment 2 to 10 Furniture and fixtures 5 to 8 Other 4 to 5 Expenditures for maintenance and repairs and minor renewals and improvements which do not extend the life 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. (g) Intangible assets Intangible assets consist of goodwill, patents and other assets. Goodwill represents the excess of the cost of acquired businesses over the fair market value of the net assets acquired and is amortized using the straight- line method over ten to twenty years. Acquired patents are recorded at fair value based on an independent appraisal and are amortized over the shorter of the economic life or ten years. The costs of internally developed intangible assets are expensed as incurred. (h) Long-lived Assets In accordance with the provisions of SFAS No. 121, "Accounting for the Impairment of long-lived Assets and for long-lived Assets to Be Disposed Of " the Company reviews long-lived assets and certain identifiable intangibles held and used for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In general, this statement requires recognition of an impairment loss when the sum of undiscounted expected future cash flow is less than the carrying amount of such assets. The measurement for such impairment loss is then based on the fair value of the asset. (See note 2 to the Consolidated Financial Statements). (i) Revenue recognition Revenues are recognized as income in the period in which the products are delivered. Revenues exclude any value added or other local taxes, intercompany sales and trade discounts. Revenues are reduced for estimated returns under the Company's limited guarantee programs and estimated cancellations at the time the products are shipped. Revenues related to customer co-payments are recognized when received. (j) Research and development costs Expenditures for research and development are expensed as they are incurred. F-8
ORTHOFIX INTERNATIONAL N.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) 1 Accounting policies (continued) (k) Income taxes The consolidated financial statements have been prepared in accordance with the provisions of Statement of Financial Accounting Standard No. 109, "Accounting for income Taxes" (SFAS 109). Under SFAS 109, tax rates enacted by law are applied to cumulative temporary differences based on when and how they are expected to affect the tax return. Deferred tax assets and liabilities are recognized for differences between the book values and the tax basis of the assets and liabilities and are adjusted for tax law and rate changes. (l) Concentration of credit risk The Company performs on-going credit evaluations of its customers and generally does not require collateral. The Company maintains reserves for potential credit losses and such losses have been within management's expectations. The Company invests its excess cash in deposits with major banks. The Company has not experienced any losses on its deposits. (m) Net income per common share Net income per common share is calculated in accordance with Statement of Financial Accounting Standard No. 128 ("SFAS 128), "Earnings per Share". Net income per common share - basic is based on the weighted average number of common shares outstanding during each of the respective years. Net income per common share - diluted is based on the weighted average number of common and common equivalent shares outstanding during each of the respective years. Common equivalent shares represent the dilutive effect of the assumed exercise of certain outstanding share options (see note 20 to the Consolidated Financial Statements). Differences between basic and diluted shares result solely from the assumed exercise of certain outstanding share options. (n) Cash and cash equivalents For purposes of the statements of cash flows, 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. (o) Securities and Other Investments Marketable equity securities are classified as available-for-sale. Such securities are carried at fair value, with the unrealized gains and losses, net of income taxes, reported as a component of shareholders' equity. Any gains or losses from the sale of these securities are recognized using the specific identification method. (See note 6 to the Consolidated Financial Statements). (p) Use of estimates in preparation of financial statements The preparation of financial statements in conformity with generally accepted accounting principles 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 dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates. F-9
ORTHOFIX INTERNATIONAL N.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) 1 Accounting policies (continued) (q) Financial Instruments All of the financial instruments, as defined by Statement of Financial Accounting Standard No. 107, "Disclosures about fair value of Financial Instruments" (SFAS 107), are stated at carrying values which approximate their fair values at the balance sheet dates. (r) Reclassifications Certain 1998 and 1997 amounts have been reclassified to conform to the 1999 presentation. (s) Acquisition of Treasury stock Treasury stock is acquired at cost. It is the Company's policy, where appropriate, to buy in its own shares in order to enhance shareholder value. Issuance of treasury shares are accounted for based on their average cost. (t) Recently issued Accounting Standards In March 1998, the American Institute of Certified Public Accountants ("AICPA") issued SOP 98-1, "Accounting for the Costs of Computer Software Developed Or Obtained For Internal Use." SOP 98-1 provides guidance on costs to be capitalized and when capitalization of such costs should commence. SOP 98-1 applies to costs incurred after adoption, including costs for software projects that are in progress at the time of the adoption. The adoption of this pronouncement in 1999 did not have a material effect on the Company's financial statements. In April 1998, the AICPA issued SOP 98-5, "Accounting for the Costs of Start-up Activities". SOP 98-5 requires all costs of start-up activities to be expensed as incurred. SOP 98-5 was effective for financial statements for years beginning after December 15, 1998. The adoption of this pronouncement in 1999 did not have a material effect on the Company's financial statements. In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Standard ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities", which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred as derivatives), and for hedging activities. In July 1999, the FASB issued SFAS No 137. "Accounting for Derivative Instruments and Hedging Activities - Deferral f the Effective date of SFAS No 133 - an amendment of FASB Statement No 133". Citing concerns about companies' ability to modify their information systems in time to apply SFAS 133, the FASB, through issuing SFAS 137, delayed its effective date for one year, to fiscal years beginning after June 15, 2000 (January 1, 2001 for the Company). Management continues to evaluate the effects of SFAS 133 on the Company's financial statements. F-10
ORTHOFIX INTERNATIONAL N.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) 2 Impairment of assets and restructuring Impairment of long-lived assets During 1998, the Company re-evaluated the recoverability of certain goodwill and intangible asset balances at Orthofix Inc. in accordance with its policy on long-lived assets (see note 1 to the Consolidated Financial Statements). In April 1998, Orthofix Inc. entered into an agreement with Stryker Howmedica Inc. to modify the license agreement for BoneSource. At the same time, Orthofix Inc. re-evaluated the goodwill on its balance sheet relating to BoneSource and recognized a write down of $1.6 million in respect of such goodwill. The write down became necessary based on the new terms of the license agreement with Stryker Howmedica Inc.. The write down of $1.6 million was classified within other income as an offset to the $9.7 million gain on sale of product license. In June 1998, the Company, following a review of its strategy for the Ogden Anchor in the light of continued disappointing sales and changing market specifications for the Ogden Anchor product, determined that it would not commit further resources to the development and sales and marketing of the product. Orthofix Inc. re- evaluated the intangible assets in its balance sheet relating to its Ogden Anchor product in accordance with the provisions of SFAS 121. Based on this evaluation Orthofix Inc. incurred a write-off of approximately $3.3 million which was charged to operating costs in 1998. Restructuring During the latter part of 1996, the Company reviewed all of its activities at Orthofix Inc. resulting in a 1996 restructuring charge of $2.2 million of which $1.8 million related to rental liabilities. The current portions of these rental liabilities are $451,000, $294,000 and $263,000 and the long-term portions are $658,000, $1,085,000 and $1,296,000 as of December 31, 1999, 1998 and 1997 respectively. Additionally, further restructuring charges, covering severance payments of approximately $1.0 million, were incurred in the first quarter of 1997. The Company's liabilities for these severance payments were $0 and $300,000 as of December 31, 1999 and 1998 respectively. There were no additional restructuring charges in either 1998 or 1999. 3 Restricted cash December 31 ----------- (In thousands) 1999 1998 - ------------------------------------- ---- ---- Restricted cash $ 880 $ 839 ===== ==== In August 1997, Orthofix Inc. purchased a bond for the sum of $780,000 to be used in settlement of the directors judgement in the lawsuit brought by AME's former president and chief executive officer (see note 18 to the Consolidated Financial Statements). Interest income of $41,000 and $59,000 was earned on this bond in 1999 and 1998 respectively. 4 Inventories December 31 ----------- (In thousands) 1999 1998 - ------------------------------------- ---- ---- Raw materials $ 2,360 $ 3,215 Work-in-process 2,201 2,227 Finished goods 6,899 6,903 Field inventory 5,663 4,971 Less reserve for refurbishment and obsolescence (1,490) (1,477) ------- ------- $ 15,633 $ 15,839 ======= ======= F-11
ORTHOFIX INTERNATIONAL N.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) 5 Other current assets December 31 ----------- (In thousands) 1999 1998 - ------------------------------------- ---- ---- Refundable sales tax $ 807 $ 812 Prepaid income taxes 2,073 1,811 Prepayments 1,154 1,220 Advances to affiliates 1,020 - Other 847 187 ------- ------- $ 5,901 $ 4,030 ====== ====== 6 Securities and other investments In 1998 the company acquired a 30% minority interest in Neomedics Inc. for $119,000. In 1999 the Company's ownership interest in Neomedics Inc. was increased from 30% to 100% at a cost of $750,000, including accrued acquisition costs. Additional goodwill associated with the increase in ownership stake was $793,000 (see note 9 to the Consolidated Financial Statements). In accordance with the Company's accounting policies, the financial results of Neomedics Inc. were included in the consolidated statements of operations from the date of the increase in ownership stake. During 1999, the Company acquired a 30% ownership stake in the voting share capital of Collin S.A., France for $68,000. During 1998, the Company acquired a 47.5% ownership stake in the voting share capital of both Promeca S.A., Mexico and Orthofix do Brazil, for $80,000 and $238,000, respectively. An amount of $475,000 related to marketable equity securities has been included in the consolidated statements of financial position as Securities and Other Investments. These securities made up part of the assets of AME that was acquired in 1995 as described in note 13 to the Consolidated Financial Statements. The original cost of the securities as stated in the books of AME was approximately $100,000. At the time of acquisition, the investment was written down to $0 as part of the Company's fair value exercise as its recoverability was not determinable at the time. Subsequent to this exercise, the company to which the securities related affected a public offering of its shares in the United States. Consequently, the Company in 1999 has accounted for the investment in accordance with SFAS 115 "Accounting for Certain Investments in Debt and Equity Securities". The unrealized gain of $292,000 (net of $183,000 in taxes) has been recorded as a component of Shareholders equity. 7 Property, plant and equipment December 31 ----------- (In thousands) 1999 1998 - ------------------------------------- ---- ---- Cost Building $ 2,995 $ 3,225 Plant and equipment 16,341 10,650 Furniture and fixtures 5,147 4,270 -------- -------- 24,483 18,145 Accumulated depreciation 14,915 9,089 -------- --------- $ 9,568 $ 9,056 ====== ====== Depreciation expense for 1999, 1998 and 1997 was $3,364,000, $2,972,000 and $2,691,000 respectively. F-12
ORTHOFIX INTERNATIONAL N.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) 8 Patents and other intangible assets December 31 ----------- (In thousands) 1999 1998 - ------------------------------------- ---- ---- Cost Patents $ 12,376 $ 13,698 Other 498 173 ----------- ---------- 12,874 13,871 Accumulated amortization Patents 10,285 11,391 Other 113 32 ---------- ---------- $ 2,476 $ 2,448 ========== ========== During 1998, the Company wrote off a net book value amount of approximately $3.3 million of other intangible assets (see note 2 to the Consolidated Financial Statements). 9 Goodwill December 31 ----------- (In thousands) 1999 1998 - ------------------------------------- ---- ---- Cost $ 61,726 $ 57,343 Accumulated amortization 15,142 12,276 ---------- ---------- $ 46,584 $ 45,067 ========== ========== On April 20, 1999, the Company paid $1.9 million to the shareholders in Novamedix Distribution Limited (NDL) for an additional 10% equity interest, following exercise by such shareholders of their put option over such shares, thereby raising the Company's ownership of NDL from 80% to 90%. In December 1999, the Company acquired the remaining 10% of the issued share capital of NDL for $2 million. These increases in ownership stake resulted in additional goodwill of $3.5 million. During 1998, the Company wrote down approximately $1.6 million of goodwill related to one of its product lines (see note 2 to the Consolidated Financial Statements). 10 Bank borrowings December 31 ----------- (In thousands) 1999 1998 - ------------------------------------- ---- ---- Borrowings under lines of credit $ 4,349 $ 3,073 ======= ======= Weighted average interest rate at year end: 1999 1998 ---- ---- % % Bank borrowings 4.17 7.84 Current maturity long-term debt 8.25 7.48 F-13
ORTHOFIX INTERNATIONAL N.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) 10 Bank borrowings ( continued) Borrowings under lines of credit consist of borrowings of the Company's Italian subsidiaries. Of the $4.3 million of borrowings under lines of credit, $3.8 million is collateralized by the net assets of Orthofix Srl. The Company had unused available lines of credit of $7.1 million at December 31, 1999 (1998: $2.8 million). The terms of these lines of credit give the Company the option to borrow amounts in Italy at rates to be determined individually and from time to time with the banks concerned. 11 Other current liabilities December 31 ----------- (In thousands) 1999 1998 - ------------------------------------- ---- ---- Accrued expenses $ 4,533 $ 5,423 Salaries and related taxes payable 3,111 2,960 Other payables 3,688 2,927 Income taxes payable 952 1,492 Deferred income taxes 25 52 --------- --------- $ 12,309 $ 12,854 ========= ========= 12 Long-term debt <TABLE> <CAPTION> December 31 ----------- (In thousands) 1999 1998 - ------------------------------------- ---- ---- <S> <C> <C> Note payable to bank $ 8,004 $ 3,074 Long-term obligations, net of an unamortized discount of $0 $ 1,777 3,285 (1998: $788) Loan repayable in instalments commencing in 1996 The original interest rate of 2.2% increased to 8.76% in 1996. 118 153 --------- --------- 9,899 6,512 Less current portion (4,520) (2,344) --------- --------- $ 5,379 $ 4,168 ========= ========= </TABLE> Note payable to bank consists of an $10 million credit arrangement in the form of a Term note (the "Term Note"). The Term Note bears interest at either the current prime rate plus 0.75% or the London Inter Bank Offered Rate (LIBOR) plus 1.75%. The Term Note is collateralized by substantially all of the assets of Orthofix Inc. and is guaranteed by the Company. Borrowings of $8,004,000 and $3,074,000 under the Term Note bearing interest at 7.93% and 6.94% were outstanding as of December 31, 1999 and 1998, respectively. Annual maturities of the Term Note are $4 million, due in quarterly instalments of $1 million. In August 1999, the Working Capital component of the Credit Agreement, having an outstanding balance of $1,500,000, was paid off and canceled as part of an Assignment and Assumption Agreement and Amendment to the Credit Agreement. As of December 31, 1999, there was $0 in borrowings under the Working Capital Facility. The credit arrangement matures on December 31, 2001. F-14
ORTHOFIX INTERNATIONAL N.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) 12 Long-term debt (continued) Certain restrictive covenants pursuant to the note payable to the bank reside at the Company's reporting level, with other restrictive covenants residing with Orthofix Inc. The most restrictive covenant precludes the transfer to the Company from Orthofix Inc. of an amount exceeding 10% of total assets of the Company in any one year or exceeding 25% of total assets of the Company during the period of the Term Note. At December 31, 1999 the amounts were $13.6 million (1998: $12.2 million) and $34.2 million (1998: $30.6 million), respectively. Long-term obligations include a note for $1.8 million (1998: $2.6 million) issued in connection with the acquisition of Osteogenics in December 1994. These obligations have aggregate annual maturities of approximately $500,000 in 2000 and $500,000 thereafter through 2002 with the balance of $277,000 payable in 2003. The obligations bear interest at 8.23%. The aggregate maturities of long-term debt for the five years after December 31, 1999 are $4,520,000, $4,517,000, $518,000, $297,000 and $23,000 respectively. Aggregate maturities of long term debt thereafter is $24,000. In 1995, the Company issued a loan note in connection with the acquisition of 16% of the share capital of Novamedix Limited for $1,480,000. This loan note was redeemable by December 31, 2010 if not redeemed earlier upon the occurrence of certain conditions and had been discounted at 6.75%. On April 20, 1999 the Company redeemed the loan note in full. The carry value of the loan note at April 20, 1999 prior to repayment was $703,000 net of unamortised discount of $777,000. At December 31, 1998 the carrying value of the loan note was $692,000 net of unamortised discount at $788,000. 13 Acquisition of subsidiaries Other than the increase in the Company's ownership state in Neomedics as previously mentioned in note 6 to the Consolidated Financial Statements, there were no acquisitions of subsidiaries in either 1999 or 1998. On August 21, 1995 the Company acquired substantially all the outstanding stock of AME and merged AME into Orthofix Inc. Prior to the merger, Orthofix Inc. had no operating activity. The principal terms of the acquisition included cash payments of approximately $47.5 million and the issuance of approximately 1.95 million shares of the Company's common stock totaling approximately $33.5 million. Additionally, the Merger Agreement provided for contingent payments of an Earnout of up to $6 million and Bonus of up to $12 million to be paid on a pro rata basis to holders of AME stock, or certain other rights to receive AME stock, as of August 21, 1995. The Earnout payments were contingent upon the attainment of certain thresholds by the Company in 1995, 1996 and/or 1997 and were not compensatory in nature. Payment of the Bonus was contingent on the exceeding of certain gross revenue thresholds by the Company in 1995, 1996 and/or 1997. The Earnout and Bonus, if paid, were to be paid in cash, common stock of the Parent or a combination thereof on a Payout Date defined in the Merger Agreement. On March 4, 1999, the Company announced that the Review Committee established to determine if an Earnout or Bonus is payable under the Agreement and Plan of Merger relating to the acquisition of AME had unanimously determined that an Earnout of $500,000 plus interest of $102,000 from August 21, 1995 should be paid to holders of record of AME common stock and the options and warrants to such stock as of August 21, 1995. Payment was made by the Company on April 5, 1999. The Earnout was satisfied by way of cash ($343,000) and the issuance of treasury shares ($259,000). In addition, the Review Committee determined that Orthofix will pay the AME Record Holders 12% of the net recovery, if any, received from its judgement against Biomet, EBI and EBI MS up to a maximum of $5,500,000. The total maximum paid under the Review Committee's determination will not exceed $6 million, including the Earnout of $500,000, but excluding interest. An arbitrator acting under the auspices of the American Arbitration Association ("AAA") subsequently entered a Consent Award based on the Review Committee's determination. However, the Company will make no further payments pending the outcome of related litigation. (See note 18 to the Consolidated Financial Statements). F-15
ORTHOFIX INTERNATIONAL N.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) 14 Lease commitments The Company has entered into certain operating leases for facilities and equipment. The primary operating lease is for the Company's facility in Richardson, Texas. The lease has a remaining term of three years and provides renewal options of up to ten additional years. Orthofix Inc. is responsible for insurance, taxes and maintenance for the majority of its leases. Rent expense under the Company's operating leases for the year ended December 31, 1999, 1998 and 1997 was approximately $2,040,000, $1,631,000 and $1,503,000 respectively. Future minimum lease payments under operating leases as of December 31, 1999 are as follows: In thousands - ------------ 2000 2,281 2001 1,910 2002 1,314 2003 1,119 2004 and later years 1,218 ----- Total 7,842 ===== F-16
ORTHOFIX INTERNATIONAL N.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) 15 Business segment information The Company and its subsidiaries operate in two business segments, North America and International, which reflect the Company's management structure: North American and International operations are the responsibility of their respective Presidents, each of whom reports to the Company's President, Edgar Wallner. Both segments are engaged in the design, manufacture and sale of medical equipment. The North American segment is comprised of Orthofix Inc. and its operations. The International segment comprises the remainder of the operations. Transactions between reporting segments are carried out on commercial terms. Net sales, operating income, and identifiable assets as of and for the three years ended December 31, 1999 for the operating segments of the Company and its subsidiaries are as follows: - <TABLE> <CAPTION> Net Sales Operating income/(expense) Identifiable assets --------- -------------------------- ------------------- (In thousands) 1999 1998 1997 1999 1998 1997 1999 1998 1997 - -------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> International $ 76,874 $ 76,481 $ 60,160 $ 18,248 $ 18,780 $ 10,232 $ 100,915 $ 89,794 $ 74,571 North America $ 62,901 $ 53,183 44,155 7,412 1,040 1,034 58,212 48,610 45,412 --------- --------- --------- -------- -------- -------- --------- --------- --------- Segment total 139,775 129,664 104,315 25,660 19,820 11,266 159,127 138,404 119,983 Group activities -- -- -- (2,959) (3,203) (2,829) 58,820 61,426 65,272 Intercompany and investment (18,491) (25,599) (14,352) 515 (4,700) 1,621 (81,225) (77,430) (72,307) eliminations --------- --------- --------- -------- -------- -------- --------- --------- --------- Total $ 121,284 $ 104,065 $ 89,963 $ 23,216 $ 11,917 $ 10,058 $ 136,722 $ 122,400 $ 112,948 ========= ========= ========= ======== ======== ======== ========= ========= ========= </TABLE> <TABLE> <CAPTION> Depreciation and amortization Income taxes expense (benefit) Other income (expense) ------------------------------ ------------------------------ ---------------------- (In thousands) 1999 1998 1997 1999 1998 1997 1999 1998 1997 - -------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> International $ 3,827 $ 3,234 $ 2,933 $ 4,297 $ 3,354 $ 4,081 $ (539) $ (125) $ (754) North America 3,006 3,287 3,560 3,617 (667) - (37) (1,186) (1,204) ------- ------- ------- -------- ------- ------- ------- -------- -------- Total $ 6,833 $ 6,521 $ 6,493 $ 7,914 $ 2,687 $ 4,081 $ (576) $(1,311) $(1,958) ======= ======= ======= ======== ======= ======= ======= ======== ======== </TABLE> Geographical information Analysis of net sales by geographic destination: (In thousands) 1999 1998 1997 - -------------------- ---- ---- ---- U.S. $ 75,790 $ 63,671 $ 53,607 U.K. 16,817 15,432 12,450 Italy 11,134 9,347 8,951 Others 17,543 15,615 14,955 -------- -------- -------- $121,284 $104,065 $ 89,963 ======== ======== ======== There are no sales in the Netherlands Antilles. F-17
ORTHOFIX INTERNATIONAL N.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) 15 Business segment information (continued) Geographical information Analysis of long-lived assets by geographic area: (In thousands) 1999 1998 1997 - --------------------- ---- ---- ---- U.S. $ 36,238 $ 35,885 $ 42,616 Others 22,913 21,123 21,869 -------- -------- -------- $ 59,151 $ 57,008 $ 64,485 ======== ======== ======== There are no long-lived assets in the Netherlands Antilles company. 16 Income tax expense The Company and each of its subsidiaries are taxed at the rates applicable within each respective company's jurisdiction. The composite income tax rate will vary according to the jurisdictions in which profits arise. Year ended December 31 ---------------------- (In thousands) 1999 1998 1997 - --------------------------- ---- ---- ---- Italy - Current $ 2,850 $ 2,367 $ 3,267 - Deferred 21 (72) (195) Cyprus - Current 323 327 190 - Deferred (4) (106) - U.K. - Current 1,101 802 819 U.S. - Current 3,882 4,977 - - Deferred (265) (5,644) - Other - Current 6 36 - ------- ------- ------- $ 7,914 $ 2,687 $ 4,081 ======= ======= ======= Deferred income taxes arise because of differences in the treatment of income and expense items for financial reporting and income tax purposes. Income from continuing operations before provision for income taxes consisted of: Year ended December 31 ---------------------- (In thousands) 1999 1998 1997 - ---------------------- ---- ---- ---- U.S. $ 7,150 $ 7,953 $ (170) Non U.S. 15,490 10,753 8,270 ------- ------- ------- $22,640 $18,706 $ 8,100 ------- ------- ------- F-18
ORTHOFIX INTERNATIONAL N.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) 16 Income tax expense (continued) The tax effects of the significant temporary differences, which comprise the deferred tax liabilities and assets are as follows: (In thousands) 1999 1998 - --------------------- ---- ---- Deferred tax liabilities Goodwill $ (260) $ (338) Patents (534) (586) Inventories (125) (154) Depreciation (249) (149) Other (620) (854) --------- --------- (1,788) (2,081) --------- --------- Deferred tax assets Compensation 309 512 Inventories and related reserves 1,707 1,521 Allowance for doubtful accounts 2,129 1,706 Accrued expenses - 238 Restructuring charges 413 519 Deferred royalties 934 964 Other 118 106 Depreciation 66 - -------- -------- 5,676 5,566 ----------- ----------- 3,888 $ 3,485 =========== =========== The deferred tax provisions in respect of goodwill arise in a foreign subsidiary and relate to tax effects of the amortization of goodwill which is deductible for income tax purposes over a period of five years and which is charged against operating results over a period of twenty years. At December 31, 1997, the Company had net operating loss carry forwards from its United States operations of approximately $3,142,000, all of which was utilized during 1998. For the year ended December 31, 1998 the Company released its valuation allowance related to the deferred tax asset from operations in the United States. Based on the weight of the positive evidence and the expectation of future taxable income in the United States, the valuation allowance was reversed. Year ended December 31 ---------------------- (In thousands) 1999 1998 1997 - --------------------------- ---- ---- ---- Statutory tax: Italy (42.3%) $ 2,827 $ 2,787 $ 2,867 Cyprus (3.93%) 319 392 160 U.K. (31%)* 1,097 937 675 U.S. (35%) 2,582 2,777 - ----------- ----------- ---------- 6,825 6,893 3,702 Goodwill 790 2,260 - Valuation allowance movements - (5,997) - Other differences 299 (469) 379 -------- -------- -------- Income tax expense $ 7,914 $ 2,687 $ 4,081 ====== ====== ====== * The statutory tax rate in the UK was reduced from 33% to 31% from March 31, 1997. The income tax expense for UK subsidiaries has been calculated on a weighted average tax rate for the year. F-19
ORTHOFIX INTERNATIONAL N.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) 16 Income tax expense (continued) Income tax charged during the year on inter-group stock profits arising from the sale of inventories from one subsidiary to another and which have not been sold to third parties at the year end has been deferred (written back). In the twelve months ended December 31, 1999, 1998 and 1997, this amounted to $102,000, $625,000, and $(566,000), respectively. Since the Company plans to continue to finance foreign operations and expansion through reinvestment of undistributed earnings of its foreign subsidiaries (approximately $69.8 million at December 31, 1999), no provision is made for United States or additional foreign taxes on such earnings. When the Company identifies exceptions to the general reinvestment policy, additional taxes are provided. 17 Related Parties The following related party balances and transactions as of and for the three years ended December 31, 1999, between the Company and affiliated companies, between the Company and other companies in which executive directors have an interest, and between the Company and a principal owner of the Company, are reflected in the consolidated financial statements. (In thousands) 1999 1998 1997 - -------------- ---- ---- ---- Revenues $ 936 $ 1,444 $ 794 Purchases $ 9,629 $ 8,864 $ 10,636 Accounts payable $ 572 $ 396 $ 1,227 Accounts receivable $ 188 $ 1,207 $ 206 On October 27, 1993, Intavent Orthofix Limited (IOL) acquired 100% of the issued share capital of Colgate Medical Limited for $6,448,000. As part of the purchase consideration of $6,448,000, IOL issued an unsecured convertible loan note of $625,000 bearing interest of 6.25% per annum to Intavent Limited. Mr Gaines Cooper is the settlor of a trust which owns a 30% interest in Intavent Limited. On April 22, 1998, the loan note holders converted the loan note to shares in Intavent Orthofix Limited. The conversion reduced the Company's ownership of Intavent Orthofix Limited to 52%. 18 Commitments and contingencies As of July 26, 1997, Orthofix International N.V. has been granted a four year option to purchase a further 15% of the shares of Orthosonics Limited. As of the same date, the original vendors have been granted a four year option to request Orthofix International N.V. to purchase the remaining 15% of the shares. The purchase price for both Orthofix International N.V. and the original vendors is based on a multiple (equal to half of the Company's average price earnings ratio in the 180 days preceding the exercise date) of the net income of Orthosonics Limited in the twelve month period preceding the exercise date. As a result of IRS audits for the year end of December 31, 1992-August 21, 1995, Orthofix Inc. has paid taxes in the amount of $825,000 and related interest expense of $130,000. Those liabilities are the result of pre-merger activities, and are therefore items that have affected the purchase price allocation of goodwill. Interest due on the outstanding liability prior to the merger is a component of goodwill. Interest accrued from August 21, 1995, to the date of the final payment of December 12, 1997, is an operating expense. F-20
ORTHOFIX INTERNATIONAL N.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) 18 Commitments and contingencies (continued) Litigation The Company and its subsidiaries are involved in legal proceedings, claims litigation and tax matters arising in the ordinary course of business. In the opinion of management, the outcome of such current legal proceedings, claims litigation and tax matters, if decided adversely, could have a material effect on quarterly or annual operating results or cash flows in a future period. However, in the opinion of management, these matters will not materially affect the Company's consolidated position. In addition, the Company is subject to certain other contingencies discussed below: On January 29, 1999, two couples who owned shares of the common stock of American Medical Electronics Inc, ("AME") commenced a civil action against the Company and one of it's subsidiaries and the Review Committee seeking, inter alia, the maximum Earnous and Bonus under the merger agreement. The Company is vigorously defending against that action (see note 13 to the Consolidated Financial Statements). Novamedix Ltd. ("Novamedix") filed an action on February 21, 1992 against Kinetic Concepts Inc. ("KCI") alleging infringement of the patents relating to Novamedix's A-V Impulse System(R) product, breach of contract, and unfair competition. In this action, trial of which is not expected to begin before the final quarter of 2000, Novamedix is seeking a permanent injunction enjoining further infringement by KCI. Novamedix also seeks damages relating to past infringement, breach of contract, and unfair competition. KCI has filed counterclaims alleging that Novamedix engaged in inequitable conduct before the United States Patent and Trademark Office and fraud as to KCI and that Novamedix engaged in common law and statutory unfair competition against KCI. On September 9, 1999 the Company announced that Novamedix was successful in its motion to open its suit against KCI. On November 29, 1995 Inter Medical Supplies Limited filed an action against Biomet Inc. ("Biomet") and against EBI Medical Systems Inc. ("EBI MS") and Electro-Biology Inc. ("EBI"), both subsidiaries of Biomet, alleging breach of contract. Orthofix S.r.l. and Orthofix Inc. also filed an action against Biomet, EBI and EBI MS alleging breach of contract, violations of trade secrets, patent and trademark infringement, fraud and tortuous interference with contract. EBI filed a counterclaim against the Company. On June 2, 1997, the jury in such trial found, among other things, that EBI had breached its distributor agreement with Orthofix S.r.l. and awarded the Company's subsidiaries that were plaintiffs in the action a total of $48,875,399 in compensatory damages and punitive damages in the amount of $100,600,000 plus interest from June 2, 1997. On July 15, 1997, the trial judge rendered a judgment in favor of the Company in the amount of $149,475,399, and subsequently entered into an amended judgment in favor of the Company in the amount of $98,875,397. EBI filed a notice of appeal on September 26, 1997. The appeal was heard on October 29, 1998. On June 28, 1999 the United States Court of Appeals for the Third Circuit unanimously affirmed the district court's decisions on liability and damages. At the same time, the sharply divided court reduced the punitive damages award to $1m. As of December 31, 1999 management are of the opinion that there existed sufficient doubt as to the potential outcome of the EBI case and accordingly had deferred recognition of the gain until such outcome was verified and all avenues of appeal were exhausted (see note 21 to the Consolidated Financial Statements). Orthofix Inc. is a defendant in a lawsuit brought by AME's former president and chief executive officer (the "Plaintiff") related to the termination of his employment with AME. On May 19, 1997, the jury in such trial found that AME had failed to comply with the employment agreement and awarded damages of $1,479,645 against Orthofix Inc. The jury also found that certain directors of AME had tortiously interfered with the employment agreement and awarded damages of $1,238,179 against the directors. On September 12, 1997, the trial court entered judgment that the Plaintiff recover $679,645 plus prejudgment interest from Orthofix Inc., which has been paid and $1,238,179 plus prejudgment interest from the directors. An appeal of the judgment against the directors is currently pending. The Company believes that any liability resulting from this litigation will have no material adverse effect on the Company's financial condition. In management's opinion, the Company is not currently involved in any other legal proceeding, individually or in the aggregate, that will have a material effect on the financial position, liquidity or operating results of the Company. Concentrations of credit risk F-21
ORTHOFIX INTERNATIONAL N.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) 18 Commitments and contingencies (continued) 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. Concentrations of credit risk with respect to accounts receivable are limited due to the large number of individuals comprising the Company's customer base. Certain of these customers rely on third party healthcare payers, such as private insurance companies, to make payments to the Company on their behalf. The Company maintains an allowance for losses based on the expected collectability of all accounts receivable. The Company sells via a direct sales force and distributors. None of the distributors have accounted for greater than 10% of net sales in any of the periods presented. 19 Pensions and deferred compensation Orthofix Limited and Intavent Orthofix Limited contribute to defined contribution pension plans for all employees meeting minimum age and service requirements. The companies make contributions to the plans based on annual determinations by the Board of Directors. The companies' expenses for the pension contributions during 1999, 1998 and 1997 were approximately $114,000, $101,000, and $76,000 respectively. Novamedix Services Limited contributes to defined contribution pension plans for certain employees meeting minimum service requirements. The company makes contributions to the plans based on annual determinations by the Board of Directors. The company's expenses for the pension contributions during 1999, 1998 and 1997 were approximately $50,000, $50,000 and $45,000 respectively. Orthofix S.r.l. contributes to a defined contribution pension plan for all employees meeting minimum service requirements. The contributions are fixed by statute and are calculated as a percentage of gross annual salary costs. The Company's expenses for these pension contributions were approximately $41,000 during 1999, and $38,000 in both 1998 and 1997. Orthofix Inc. sponsors a defined contribution benefit plan (the "401(k) Plan") covering substantially all full time employees. The 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 401(k) Plan. During the years ended December 31, 1999, 1998 and 1997, expenses incurred relating to the 401(k) Plan, including matching contributions, were approximately $441,000, $438,000 and $338,000 respectively. Under Italian Law, Orthofix S.r.l. and D.M.O. S.r.l. accrue, on behalf of their 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 expenses for deferred compensation during 1999, 1998 and 1997 were approximately $181,000, $169,000 and $165,000 respectively. Deferred compensation payments of $95,000, $100,000 and $25,000 were made in 1999, 1998 and 1997, respectively. The year-end balance represents the amount which would be payable if all the employees and agents had terminated employment at that date. 20 Staff and executive share option plans and warrants At December 31, 1999, the Company had four stock-based compensation plans, which are described below. The Company applies APB 25 and related Interpretations in accounting for these plans. Accordingly, no compensation cost has been recognized for stock options issued under these plans. Had compensation charges for stock-based compensation under these four plans been determined consistent with SFAS 123, the Company's net income and net income per common share for the years ended December 31, 1999, 1998 and 1997 would have been equal to the pro forma amounts indicated below: F-22
ORTHOFIX INTERNATIONAL N.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) 20 Staff and executive share option plans and warrants (continued) (In thousands except per share data) 1999 1998 1997 - ------------------------------------ ---- ---- ---- Net income As reported $ 12,912 $ 14,276 $ 3,069 Pro forma $ 11,973 $ 13,560 $ 2,529 Net income per common share - basic As reported $ 0.99 $ 1.10 $ 0.24 Pro forma $ 0.92 $ 1.05 $ 0.20 Net income per common share - diluted As reported $ 0.97 $ 1.07 $ 0.23 Pro forma $ 0.90 $ 1.02 $ 0.19 The fair value of each option under the Plans is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in 1999, 1998 and 1997 respectively: divided yield of 0%, 0% and 0%; expected volatility of 55%, 55% and 45%; risk-free interest rates of 5.76%, 5.00% and 6.32%; and expected lives of 4.50, 4.50 and 4.71 years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. Option valuation models require the input of highly subjective assumptions including the expected price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. Staff Share Option Plan The Staff Stock Option Plan ("Staff Plan") is a fixed stock option plan which was adopted in April, 1992. Under the Staff Plan, the Company may grant options to its employees for up to 1,760,000 shares of common stock 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 on June 30, 2002 or ten years after date of grant. AME 1983 and 1990 Plans Under the terms of the Merger Agreement in which the Company acquired AME, all options for AME common stock still outstanding under the 1983 Plan and the 1990 Plan (hereinafter collectively referred to as the "AME Plan") were assumed at the effective time of the Merger by the Company and are exercisable for common shares in accordance with their terms and after adjustment to reflect the exchange ratio. After such adjustment immediately following the Merger, options granted under the AME Plan totaled 624,794, of which 234,290 remained outstanding. Options granted under the AME Plans expire ten years after date of grant. AME Warrants At the time of the merger with AME, warrants to purchase 320,000 shares of AME common stock (the "AME warrants") were outstanding. These were assumed by the Company pursuant to the Merger Agreement. After adjustment to take account of the exchange ratio, 185,592 common stock warrants were outstanding. During 1998, the Company bought back 69,598 warrants from the holders leaving 115,994 warrants exercisable at December 31, 1998 and 1999 at prices ranging from $18.10 to $30.60 per common share and expiring on various dates through December 2003. F-23
ORTHOFIX INTERNATIONAL N.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) 20 Staff and executive share option plans and warrants (continued) Executive Share Option Plan Under the Executive Share Option Plan ("Executive Plan"), approved by shareholders in March, 1992, 1,945,000 shares have been reserved for issuance to certain executive officers. The grant price, determined by the Board, cannot be less than the fair market value at the time of grant or $14.40, the equivalent of 120% of the price in the initial public offering price of $12.00. Fifty percent of options granted vest automatically on the tenth anniversary of the date of grant, or earlier on the satisfaction of a performance keyed to the market price of the common shares and a service condition. The remaining fifty percent vest in 20% increments on the first through fifth anniversaries of the date of grant. Options granted under the Executive Share Option Plan expire on May 1, 2004. Summaries of the status of the Company's stock option plans as of December 31, 1999, 1998 and 1997 and changes during the years ended on those dates are presented below: <TABLE> <CAPTION> 1999 1998 1997 ---------------- -------------- -------------- -------------- -------------- -------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Fixed Options & Warrants Shares Price Shares Price Shares Price - ------------------------------------- ---------------- -------------- -------------- -------------- -------------- -------------- <S> <C> <C> <C> <C> <C> <C> Outstanding at beginning of year 2,957,662 $ 13.12 2,926,560 $ 12.42 2,758,556 $ 12.76 Granted 124,750 $ 12.90 249,500 $ 12.12 374,500 9.71 Exercised (70,200) $ 5.15 (125,550) $ 2.82 (65,629) 4.69 Forfeited (12,750) $ 9.87 (92,848) $ 11.73 (140,867) 18.25 -------- -------- --------- -------- --------- -------- Outstanding at end of year 2,999,462 $ 13.30 2,957,662 $ 13.12 2,926,560 $ 12.42 =========== ======== ========= ======== ========= ======== Options exercisable at end of year 1,496,612 1,450,712 1,387,618 Weighted average fair value of options granted during the year $ 6.47 $ 6.06 $ 3.83 at market value Weighted average fair value of options granted during the year in - $1.27 $ 2.48 excess of market values </TABLE> F-24
ORTHOFIX INTERNATIONAL N.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) 20 Staff and executive share option plans and warrants (continued) <TABLE> <CAPTION> Outstanding and exercisable by price range as of 31/12/99 - ---------------------------------------------------------------------------------------------------------------------- Options Outstanding Options Exercisable - ------------------------- ---------------------------------------- --- ------------- ------ ------------------------------- Range of Number Weighted Weighted Number Weighted Exercise Outstanding at Average Average Exercisable Average Prices 31/12/99 Remaining Exercise at 31/12/99 Exercise Contractual Life Price Price - ------------------------- ------------------- --------------------- ---- ------------- ------- --------------- ---------------- <S> <C> <C> <C> <C> <C> $1.430 - $ 8.500 396,200 5.31 $6.24 223,350 $4.86 $9.060 - $14.188 484,900 6.50 $11.44 170,401 $10.58 $14.400 - $14.400 1,945,000 4.31 $14.40 954,500 $14.40 $14.440 - $30.610 173,362 3.83 $23.01 148,361 $24.38 -------- -------- -------- -------- -------- $1.430 - $30.610 2,999,462 4.77 $13.34 1,496,612 $13.53 ========= ====== ======== ========= ======== </TABLE> 21 Subsequent events Settlement of EBI lawsuit: On January 10, 2000 the United States Supreme Court declined to review the Third Circuit's decision referred to in note 18 of the Consolidated Financial Statements. As a direct result of the Supreme Court's order and the satisfaction of the judgement, the litigation was settled in the Company's 2000 fiscal year. On January 21, 2000 EBI wired $64,174,752 to satisfy the judgement in favour of the Company. The net gain of approximately $38 million before tax is to be recorded in the Company's first quarter 2000 results. New lease commitment: On February 24, 2000 the Company entered into an operating lease for a new manufacturing facility to be used in its US operations. The lease begins on January 1, 2001 and expires in December 2010. Annual minimum lease payments under the new lease agreement are $746,000, $870,000, and $882,000 in the years 2001, 2002 and 2003, and $6,844,000 thereafter. F-25
ORTHOFIX INTERNATIONAL N.V. REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULES To the Board of Directors and Shareholders Orthofix International N.V.: Our audits of the consolidated financial statements referred to in our report dated April 20, 2000 appearing on page F-2 of the Form 20F of Orthofix International N.V. also included an audit of the financial statement schedules listed in the index on pages S-1 to S-5 of this Form 20-F. In our opinion, these financial statement schedules present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. London, England April 20, 2000
ORTHOFIX INTERNATIONAL N.V. SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT Orthofix International N.V. ("the Company") holds an investment in a wholly owned subsidiary, Orthofix Inc. and its subsidiaries. In accordance with rule 12-04 of Regulation S-X, the following condensed financial information has been presented as the restricted net assets of Orthofix Inc. and its subsidiaries exceed 25% of the condensed net assets of the Company. Refer to note 12 of the Company's consolidated financial statements for disclosure of the long-term debt obligations and related covenants which restrict the net assets of Orthofix Inc. and its subsidiaries. <TABLE> <CAPTION> Orthofix Inc. and Subsidiaries Condensed Balance Sheets December 31, 1999 and 1998 December 31 ----------- (In thousands) 1999 1998 - --------------------- ---- ---- ASSETS <S> <C> <C> Current Assets: Cash and cash equivalents $ 885 $ 2,069 Restricted cash 880 839 Accounts receivable, (net of allowance for doubtful accounts of $5,711 and $4,432 respectively) 17,140 11,215 Inventory (1) 13,625 15,283 Deferred income taxes receivable and other current assets 4,781 3,536 ------- ------ Total current assets 37,311 32,942 Securities and other investments 475 119 Fixed assets and intangibles (net of accumulated depreciation and amortization of $7,754 and $5,692 respectively) 4,848 4,329 Goodwill (net of accumulated amortization of $7,981 and $6,064 respectively) 30,915 31,437 Deferred tax asset 1,819 1,789 -------- ------- Total assets $75,368 $70,616 ======= ======= LIABILITIES AND SHAREHOLDER'S EQUITY Current liabilities: Accounts payable $ 1,324 $ 580 Accounts payable - intercompany 12,535 16,781 Accrued expenses 6,347 6,307 Current portion of long-term debt (2) 4,504 2,328 Other current liabilities 459 147 -------- ------- Total current liabilities 25,169 26,143 Long term debt (2) 5,277 3,315 Other long term liabilities 3,751 3,661 Loan note payable - intercompany 4,402 5,155 ------- ------- Total liabilities 38,599 38,274 ------ ------- Shareholder's equity Additional capital in excess of par 59,133 58,531 Accumulated deficit (22,656) (26,189) Accumulated other comprehensive income net of tax 292 - -------- -------- Total shareholders' equity 36,769 32,342 ------ -------- Total liabilities and shareholder's equity $75,368 $70,616 ======= ======= </TABLE> S-1
ORTHOFIX INTERNATIONAL N.V. SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (continued) Orthofix Inc. and Subsidiaries Condensed Consolidated Balance Sheets December 31, 1999 and 1998 (In thousands) - ---------------------------- December 31 ----------- (1) Inventory 1999 1998 ---- ---- Raw materials $ 1,028 $ 1,458 Work-in-progress 222 332 Finished goods 6,632 8,739 Field inventory 10,063 8,687 Less reserve for refurbishment and obsolescence (4,320) (3,933) ------- ------- $ 13,625 $ 15,283 ========= ========= The inventory of Orthofix Inc. includes intercompany profits of $8,772,000 and $9,844,000 for December 31, 1999 and 1998 respectively. (In thousands) - ---------------------- December 31 ----------- (2) Long-term debt - five year maturity 1999 ---- 2000 $ 4,504 2001 4,500 2002 500 2003 277 --------- $ 9,781 ========= There are no long term obligations that mature beyond 2003. S-2
ORTHOFIX INTERNATIONAL N.V. SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (continued) Orthofix Inc. and Subsidiaries Condensed Consolidated Income Statements for the year ended December 31, 1999, 1998 and 1997 (In thousands) 1999 1998 1997 - -------------- ---- ---- ---- Net sales $62,901 $53,183 $44,161 Cost of sales 17,836 14,861 12,555 ------ ------ ------ 45,065 38,322 31,606 Selling, general and administrative expense 31,059 27,289 23,810 Research and development expense 3,813 3,261 2,177 Depreciation and amortization expense 3,006 3,287 3,560 ----- ----- ----- Operating income 7,187 4,485 2,059 Other expense (37) (1,186) (1,204) One-time gain (charges) - 4,654 (1,025) -------- ----- ------- Net income (loss) before taxes 7,150 7,953 (170) Income tax (expense) benefit (3,617) 667 0 ----- ------ -------- Net income ( loss ) $ 3,533 $ 8,620 $ (170) ======= ======= ======= Orthofix Inc. and Subsidiaries Condensed Consolidated Statements of Comprehensive Income for the year ended December 31, 1999, 1998 and 1997 (In thousands) 1999 1998 1997 - -------------- ---- ---- ---- Net income (loss) $3,533 $8,620 $(170) Other comprehensive income, net of tax: Unrealised holding gains on securities arising during the period (net of tax expense of $183 in 1999) 292 - - -------- ------- ------ Total comprehensive income (loss) $ 3,825 $ 8,620 $ (170) ======= ======= ======= S-3
ORTHOFIX INTERNATIONAL N.V. SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (continued) Orthofix Inc. and Subsidiaries Condensed Consolidated Statements of changes in Financial Position for the year ended December 31, 1999, 1998 and 1997 (In thousands) 1999 1998 1997 - -------------- ---- ---- ---- Funds (used in) provided by: operations $ (2,026) $(799) $2,000 Investing activities: Cash paid for equity method investments (119) - Cash paid for acquisition (700) - - Purchase of furniture and equipment (2,185) (2,015) (1,428) Purchase of intangibles (370) - (76) Proceeds from sale of assets - - 44 Proceeds from sale of product license, net of expenses of $450 - 12,200 - --------- ------ ------- Net cash (used in) provided by investing activities (3,255) 10,066 (1,460) Financing activities: Other (41) (59) 182 Repayments of bank note (5,862) (8,437) (3,537) Borrowings 10,000 500 2,000 ------ ------ ------- Net cash provided by (used in) financing activities 4,097 (7,996) (1,355) ------- ------ ------- (Decrease) increase in cash and cash equivalents (1,184) 1,271 (815) Cash and cash equivalents at beginning of period 2,069 798 1,613 ------ ------ ------- Cash and cash equivalents at end of period $ 885 $2,069 $ 798 ======== ====== ======= S-4
ORTHOFIX INTERNATIONAL N.V. SCHEDULE 2 - VALUATION AND QUALIFYING ACCOUNTS For the years ended December 31, 1999, 1998 and 1997 <TABLE> <CAPTION> In thousands Additions - ------------- ---------------------------- Provisions from assets to which Balance at Charged to Charged to they apply: beginning cost and other Deductions/ Balance at of year expenses accounts Other (1) end of year ------- -------- -------- --------- ----------- 1999 - ---- <S> <C> <C> <C> <C> <C> Allowance for doubtful debts 4,912 3,227 121 (2,084) 6,176 Inventory provisions 1,477 124 - (111) 1,490 Provisions for deferred compensation 850 172 - (205) 817 Restructuring provisions 1,641 - - (532) 1,109 1998 - ---- Allowance for doubtful debts 4,199 2,839 276 (2,402) 4,912 Inventory provisions 5,427 - - (3,950) 1,477 Provisions for deferred 724 169 - (43) 850 compensation Restructuring provisions 1,852 - - (211) 1,641 Valuation allowance 5,997 - - (5,997) - 1997 - ---- Allowance for doubtful debts 4,110 2,336 502 (2,749) 4,199 Inventory provisions 8,741 - - (3,314) 5,427 Provisions for deferred 686 165 - (127) 724 compensation Restructuring provisions 1,817 1,175 - (1,140) 1,852 Valuation allowance 6,449 - - (452) 5,997 </TABLE> (1) Includes payments charged against reserves and amounts written off against gross asset values. S-5
ORTHOFIX INTERNATIONAL N.V. SIGNATURES Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the Registrant certifies that it meets all of the requirements for filing on Form 20-F and has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorised. ORTHOFIX INTERNATIONAL N.V. By: /s/ PETER CLARKE ----------------------------- Name: Peter Clarke Title: Executive Vice President, Chief Financial Officer, Secretary and Director Date: May 19, 2000