SEC Company Response from Orthofix Medical Inc. (OFIX) (CIK 0000884624) (OFIX) — Apr 21, 2005
Orthofix Medical Inc. (OFIX) (CIK 0000884624)
Date: April 21, 2005 · CIK: 0000884624 · Accession: 0000947871-05-000831
AI Filing Summary & Sentiment
Letter
April 21, 2005 Via EDGAR and Facsimile ----------------------- Mr. Martin F. James Securities and Exchange Commission Division of Corporation Finance 450 Fifth Street, NW Washington, DC 20549-0404
Re: Orthofix International N.V. Form 10-K for the fiscal year ended December 31, 2004 filed March 15, 2005 Form 8-K dated March 3, 2005 filed March 3, 2005 File No. 0-19961
Dear Mr. James:
On behalf of our client, Orthofix International N.V., a company organized under the laws of the Netherlands Antilles (the "Company"), we submit this letter in response to the comments faxed by you to the Company on Friday, April 8, 2005 concerning the above captioned Form 10-K for the fiscal year ended December 31, 2004 filed by the Company on March 15, 2005, and Form 8-K dated March 3, 2005 filed by the Company on March 3, 2005. The responses set forth below have been organized in the same manner in which the staff's comments were organized.
In addition, as requested by the staff, the Company is also providing separately a written statement acknowledging that:
o the Company is responsible for the adequacy and accuracy of the disclosure in the Form 10-K and the Form 8-K;
o staff comments or changes to disclosure in response to staff comments in the filings reviewed by the staff do not foreclose the Commission from taking any action with respect to the Form 10-K and Form 8-K; and
o the Company may not assert staff comments as a defense in any proceeding initiated by the Commission or any person under the federal securities laws of the United States.
<PAGE>
Note: The Company proposes to add disclosure to the "Acquisition" note to its financial statements in future filings for which disclosure of the Breg acquisition is required. The Company respectfully notes that some of this proposed disclosure has been included in other portions of prior filings made by the Company. In response to the staff's comments 1(a)-(e), the Company has set forth its proposed disclosure as part of its response to these comments. In addition, the Company has set forth on Exhibit A to this letter a complete copy of the "Acquisition" note to its financial statements substantially in the form it proposes to revise this note in response to comments 1(a)-(e).
Form 10-K for the fiscal year ended December 31, 2004
Item 8 - Financial Statements and Supplementary Data - Page 45 --------------------------------------------------------------
Note 2 - Acquisitions - Page F-16 ---------------------------------
Comment No. 1. We note your disclosures relating to the acquisition of Breg, Inc. in December 2003. Please respond to the following:
(a) Revise future filings to provide a brief description of the acquired entity and the reasons for the acquisition, including a description of the factors that contributed to goodwill being recognized. Refer to paragraphs 51(a) and 51(b) of SFAS 141.
Response: The Company will include the proposed disclosure substantially in the form set forth below to the "Acquisition" note to its financial statements in future filings:
"Breg, based in Vista, California, designs, manufactures and distributes orthopedic products for post-operative reconstruction and rehabilitative patient use. Breg's product lines include bracing products, cold therapy products and pain therapy products. Breg generated $68.3 million in net revenues in 2004.
The Company considered this acquisition as a way to fortify and further advance its business strategy to expand in three key sectors in orthopedics: spine, reconstruction and trauma. The acquisition broadened the Company's product lines, reduced reliance on the success of any single product and enlarged channel opportunities for products from both companies.
Factors that contributed to the valuation of Breg included the recognition that Breg was among the top three participants in terms of market share in its key markets of bracing, cold therapy and pain therapy. Further, Breg has a strong brand name and product identity in the orthopedic industry. Breg had a history of sales and earnings growth at rates faster
<PAGE>
than the markets that its three product lines serve. Orthofix valued Breg after reviewing a range of valuation methodologies provided by its financial advisors for the transaction, including comparable publicly-traded companies, comparable precedent transactions, discounted cash flow analysis and comparison to Orthofix's trading multiples. The resulting purchase price of Breg, exceeded the value of the net assets acquired."
(b) Tell us and revise future filings to disclose how you valued the 731,715 shares of Orthofix common stock issued in connection with the acquisition. Refer to paragraph 51(d) of SFAS 141.
Response: The Company will provide a description of how it valued the 731,715 shares of Orthofix common stocked issued in connection with the Breg acquisition by providing the following proposed disclosure in the "Acquisition" note to the financial statements in future filings:
"Pursuant to a voting and subscription agreement dated November 20, 2003 and as amended and restated on December 22, 2003, among the Company and certain shareholders of Breg, such shareholders applied a portion of the proceeds that they received from the acquisition to purchase 731,715 shares of Orthofix common stock at a price of $38.00 per share, for an aggregate purchase price of $27.8 million. The price took into consideration the fair market value as determined by the Nasdaq stock market on or about the date the terms of the acquisition were agreed to and announced (November 20, 2003)."
(c) Revise future filings to provide a condensed balance sheet disclosing the amount assigned to each major asset and liability caption of the acquired entity at the acquisition date. Refer to paragraph 51(e) of SFAS 141.
Response: The Company will include the following proposed disclosure in the "Acquisition" note to the financial statements in future filings:
The final purchase price reflects the following assets acquired and liabilities assumed:
Current assets, other than cash $ 16,768 Fixed assets acquired 5,570 Intangible assets not subject to amortization - registered trademarks 23,900 Intangible assets subject to amortization (10 year weighted average useful life): Distribution network (10 year weighted average useful life) 41,100
<PAGE>
Patents (16 year weighted average useful 401 life) ---------- $ 41,501 Goodwill(indefinite lived intangible asset) 91,762 Other long-term assets 599 ---------- Total assets acquired $ 180,100 ----------
Current liabilities $ (4,996) Deferred tax liability (17,612) Other long-term liability (133) ---------- Total liabilities assumed (22,741) ---------- Net assets acquired (Final purchase price) $157,359 ==========
(d) With respect to the finite lived intangible assets, tell us and revise future filings to disclose the total amounts assigned to each major intangible asset class, the amount of any significant residual value in total and for each major intangible asset class, and the weighted average amortization period, in total and for each major intangible asset class. Refer to paragraph 52(a) of SFAS 141.
Response: A distribution network and patent portfolio are the only two major asset classes of finite lived intangible assets acquired during the Breg acquisition. The Company will include in future filings: (1) a statement disclosing that there are no residual values for any of the intangible assets subject to amortization acquired during the Breg acquisition; and (2) a condensed balance sheet disclosing the amount assigned to each major asset and liability caption of the acquired entity at the acquisition date. Such a balance sheet will include the following line items:
Intangible assets subject to amortization (10 year weighted average useful life): Distribution network (10 year weighted average useful life) $ 41,100 Patents (16 year weighted average useful life) 401 ---------- $ 41,501
(e) With respect to the indefinite lived intangible assets, tell us and revise future filings to disclose the amounts allocated to each major intangible asset class. Refer to paragraph 52(b) of SFAS 141.
Response: Only the registered trademarks acquired during the Breg acquisition have been classified as identifiable indefinite lived intangible assets. The Company will include in future filings a condensed balance sheet disclosing the amount assigned to each major asset and liability caption
<PAGE>
of the acquired entity at the acquisition date the following line item: "Intangible assets not subject to amortization - registered trademarks".
(f) Tell us what factors you considered in concluding these intangible assets are indefinite lived intangible assets. Cite the accounting literature you relied upon in making your determination.
Response: Only the registered trademarks acquired during the Breg acquisition have been classified as identifiable indefinite lived intangible assets. The Company considered the criteria prescribed by paragraphs 11 (a), (c), (e) and (f) of SFAS 142 in determining that registered trademarks acquired during the Breg acquisition have an indefinite life. The Company determined that this portfolio of registered trademarks is expected to be used indefinitely by the entity. The primary trademark in this portfolio is the "Breg" name. Further, the Company is not aware of any legal, regulatory, or contractual provisions that limit the useful lives of these registered trademarks. The Company does not believe the effects of obsolescence, demand, competition, or other economic factors will cause the useful lives of these registered trademarks to be limited. The Company concluded that no legal, regulatory, contractual, competitive, economic, or other factors limit the useful life of the registered trademarks to the Company, and therefore the useful lives of the registered trademarks are considered to be indefinite.
Note 3 - Inventories - Page F-18 --------------------------------
Comment No. 2. Supplementally describe to us the assets included in the line item "field inventory." Please explain why you have classified these assets as inventory. Cite the accounting literature you relied upon in making your classification determination.
Response: "Field inventory" is immediately saleable finished goods inventory that is in the possession of the Company's direct sales representatives to immediately service patients. The only distinguishing feature of field inventory from finished goods inventory is the location at which the inventory is stored. That is, field inventory is in the possession of a direct sales representative and finished goods inventory is in the Company's warehouse. In accordance with Accounting Research Bulletin 43 Chapter 3 Section A, the term current assets is used to designate cash and other assets or resources commonly identified as those which are reasonably expected to be realized in cash or sold or consumed during the normal operating cycle of the business. Thus the term comprehends in general, among other things, such resources which include inventories of merchandise, raw materials, goods in process, finished goods, operating supplies, and ordinary maintenance material and parts. The Company has determined to separately disclose field inventory as it represents more than 5% of total inventory. The Company will include the proposed disclosure substantially in the form set forth below in the "Significant accounting policies" note to the financial
<PAGE>
statements in future filings: "Field inventory represents immediately saleable finished goods inventory that is in the possession of the Company's direct sales representatives."
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[LETTERHEAD OF SHEARMAN & STERLING LLP]
April 21, 2005
Via EDGAR and Facsimile
-----------------------
Mr. Martin F. James
Securities and Exchange Commission
Division of Corporation Finance
450 Fifth Street, NW
Washington, DC 20549-0404
Re: Orthofix International N.V.
Form 10-K for the fiscal year ended December 31, 2004 filed March 15,
2005 Form 8-K dated March 3, 2005 filed March 3, 2005
File No. 0-19961
Dear Mr. James:
On behalf of our client, Orthofix International N.V., a company organized
under the laws of the Netherlands Antilles (the "Company"), we submit this
letter in response to the comments faxed by you to the Company on Friday, April
8, 2005 concerning the above captioned Form 10-K for the fiscal year ended
December 31, 2004 filed by the Company on March 15, 2005, and Form 8-K dated
March 3, 2005 filed by the Company on March 3, 2005. The responses set forth
below have been organized in the same manner in which the staff's comments were
organized.
In addition, as requested by the staff, the Company is also providing
separately a written statement acknowledging that:
o the Company is responsible for the adequacy and accuracy of the
disclosure in the Form 10-K and the Form 8-K;
o staff comments or changes to disclosure in response to staff comments in
the filings reviewed by the staff do not foreclose the Commission from
taking any action with respect to the Form 10-K and Form 8-K; and
o the Company may not assert staff comments as a defense in any proceeding
initiated by the Commission or any person under the federal securities
laws of the United States.
<PAGE>
Note: The Company proposes to add disclosure to the "Acquisition" note to
its financial statements in future filings for which disclosure of the Breg
acquisition is required. The Company respectfully notes that some of this
proposed disclosure has been included in other portions of prior filings made by
the Company. In response to the staff's comments 1(a)-(e), the Company has set
forth its proposed disclosure as part of its response to these comments. In
addition, the Company has set forth on Exhibit A to this letter a complete copy
of the "Acquisition" note to its financial statements substantially in the form
it proposes to revise this note in response to comments 1(a)-(e).
Form 10-K for the fiscal year ended December 31, 2004
Item 8 - Financial Statements and Supplementary Data - Page 45
--------------------------------------------------------------
Note 2 - Acquisitions - Page F-16
---------------------------------
Comment No. 1. We note your disclosures relating to the acquisition of Breg,
Inc. in December 2003. Please respond to the following:
(a) Revise future filings to provide a brief description of the acquired
entity and the reasons for the acquisition, including a description of
the factors that contributed to goodwill being recognized. Refer to
paragraphs 51(a) and 51(b) of SFAS 141.
Response: The Company will include the proposed disclosure
substantially in the form set forth below to the
"Acquisition" note to its financial statements in future
filings:
"Breg, based in Vista, California, designs, manufactures and
distributes orthopedic products for post-operative
reconstruction and rehabilitative patient use. Breg's
product lines include bracing products, cold therapy
products and pain therapy products. Breg generated $68.3
million in net revenues in 2004.
The Company considered this acquisition as a way to fortify
and further advance its business strategy to expand in three
key sectors in orthopedics: spine, reconstruction and
trauma. The acquisition broadened the Company's product
lines, reduced reliance on the success of any single product
and enlarged channel opportunities for products from both
companies.
Factors that contributed to the valuation of Breg included
the recognition that Breg was among the top three
participants in terms of market share in its key markets of
bracing, cold therapy and pain therapy. Further, Breg has a
strong brand name and product identity in the orthopedic
industry. Breg had a history of sales and earnings growth at
rates faster
2
<PAGE>
than the markets that its three product lines serve.
Orthofix valued Breg after reviewing a range of valuation
methodologies provided by its financial advisors for the
transaction, including comparable publicly-traded companies,
comparable precedent transactions, discounted cash flow
analysis and comparison to Orthofix's trading multiples. The
resulting purchase price of Breg, exceeded the value of the
net assets acquired."
(b) Tell us and revise future filings to disclose how you valued the
731,715 shares of Orthofix common stock issued in connection with the
acquisition. Refer to paragraph 51(d) of SFAS 141.
Response: The Company will provide a description of how it valued the
731,715 shares of Orthofix common stocked issued in
connection with the Breg acquisition by providing the
following proposed disclosure in the "Acquisition" note to
the financial statements in future filings:
"Pursuant to a voting and subscription agreement dated
November 20, 2003 and as amended and restated on December
22, 2003, among the Company and certain shareholders of
Breg, such shareholders applied a portion of the proceeds
that they received from the acquisition to purchase 731,715
shares of Orthofix common stock at a price of $38.00 per
share, for an aggregate purchase price of $27.8 million. The
price took into consideration the fair market value as
determined by the Nasdaq stock market on or about the date
the terms of the acquisition were agreed to and announced
(November 20, 2003)."
(c) Revise future filings to provide a condensed balance sheet disclosing
the amount assigned to each major asset and liability caption of the
acquired entity at the acquisition date. Refer to paragraph 51(e) of
SFAS 141.
Response: The Company will include the following proposed disclosure
in the "Acquisition" note to the financial statements in
future filings:
The final purchase price reflects the following assets
acquired and liabilities assumed:
Current assets, other than cash $ 16,768
Fixed assets acquired 5,570
Intangible assets not subject to
amortization - registered trademarks 23,900
Intangible assets subject to amortization
(10 year weighted average useful life):
Distribution network (10 year weighted
average useful life) 41,100
3
<PAGE>
Patents (16 year weighted average useful 401
life) ----------
$ 41,501
Goodwill(indefinite lived intangible asset) 91,762
Other long-term assets 599
----------
Total assets acquired $ 180,100
----------
Current liabilities $ (4,996)
Deferred tax liability (17,612)
Other long-term liability (133)
----------
Total liabilities assumed (22,741)
----------
Net assets acquired (Final purchase price) $157,359
==========
(d) With respect to the finite lived intangible assets, tell us and revise
future filings to disclose the total amounts assigned to each major
intangible asset class, the amount of any significant residual value
in total and for each major intangible asset class, and the weighted
average amortization period, in total and for each major intangible
asset class. Refer to paragraph 52(a) of SFAS 141.
Response: A distribution network and patent portfolio are the only two
major asset classes of finite lived intangible assets
acquired during the Breg acquisition. The Company will
include in future filings: (1) a statement disclosing that
there are no residual values for any of the intangible
assets subject to amortization acquired during the Breg
acquisition; and (2) a condensed balance sheet disclosing
the amount assigned to each major asset and liability
caption of the acquired entity at the acquisition date. Such
a balance sheet will include the following line items:
Intangible assets subject to amortization
(10 year weighted average useful life):
Distribution network (10 year weighted
average useful life) $ 41,100
Patents (16 year weighted average useful life) 401
----------
$ 41,501
(e) With respect to the indefinite lived intangible assets, tell us and
revise future filings to disclose the amounts allocated to each major
intangible asset class. Refer to paragraph 52(b) of SFAS 141.
Response: Only the registered trademarks acquired during the Breg
acquisition have been classified as identifiable indefinite
lived intangible assets. The Company will include in future
filings a condensed balance sheet disclosing the amount
assigned to each major asset and liability caption
4
<PAGE>
of the acquired entity at the acquisition date the following
line item: "Intangible assets not subject to amortization -
registered trademarks".
(f) Tell us what factors you considered in concluding these intangible
assets are indefinite lived intangible assets. Cite the accounting
literature you relied upon in making your determination.
Response: Only the registered trademarks acquired during the Breg
acquisition have been classified as identifiable indefinite
lived intangible assets. The Company considered the criteria
prescribed by paragraphs 11 (a), (c), (e) and (f) of SFAS
142 in determining that registered trademarks acquired
during the Breg acquisition have an indefinite life. The
Company determined that this portfolio of registered
trademarks is expected to be used indefinitely by the
entity. The primary trademark in this portfolio is the
"Breg" name. Further, the Company is not aware of any legal,
regulatory, or contractual provisions that limit the useful
lives of these registered trademarks. The Company does not
believe the effects of obsolescence, demand, competition, or
other economic factors will cause the useful lives of these
registered trademarks to be limited. The Company concluded
that no legal, regulatory, contractual, competitive,
economic, or other factors limit the useful life of the
registered trademarks to the Company, and therefore the
useful lives of the registered trademarks are considered to
be indefinite.
Note 3 - Inventories - Page F-18
--------------------------------
Comment No. 2. Supplementally describe to us the assets included in the line
item "field inventory." Please explain why you have classified these assets as
inventory. Cite the accounting literature you relied upon in making your
classification determination.
Response: "Field inventory" is immediately saleable finished goods
inventory that is in the possession of the Company's direct
sales representatives to immediately service patients. The
only distinguishing feature of field inventory from finished
goods inventory is the location at which the inventory is
stored. That is, field inventory is in the possession of a
direct sales representative and finished goods inventory is
in the Company's warehouse. In accordance with Accounting
Research Bulletin 43 Chapter 3 Section A, the term current
assets is used to designate cash and other assets or
resources commonly identified as those which are reasonably
expected to be realized in cash or sold or consumed during
the normal operating cycle of the business. Thus the term
comprehends in general, among other things, such resources
which include inventories of merchandise, raw materials,
goods in process, finished goods, operating supplies, and
ordinary maintenance material and parts. The Company has
determined to separately disclose field inventory as it
represents more than 5% of total inventory. The Company will
include the proposed disclosure substantially in the form
set forth below in the "Significant accounting policies"
note to the financial
5
<PAGE>
statements in future filings: "Field inventory represents
immediately saleable finished goods inventory that is in the
possession of the Company's direct sales representatives."