UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
X THE SECURITIES EXCHANGE ACT OF 1934
- ---------
For the quarterly period ended September 30, 1996
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 33-69286
WRIGHT MEDICAL TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
Delaware 62-1532765
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5677 Airline Road, Arlington, Tennessee 38002-0100
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (901)867-9971
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 and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
Number of shares outstanding of Class A Common Stock, par value
$.001 at November 1, 1996: 9,145,790.
Page 1 of 23
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<TABLE>
PART I - FINANCIAL INFORMATION
<CAPTION>
ITEM 1. FINANCIAL STATEMENTS
Wright Medical Technology, Inc. & Subsidiaries:
<S> <C> <C>
Consolidated Balance Sheets - September 30, 1996
and December 31, 1995.............................................................................3
Condensed Consolidated Statements of Operations
for the Three and Nine Month Periods Ended
September 30, 1996 and September 30, 1995.........................................................4
Consolidated Statements of Cash Flows for the
Nine Month Periods Ended September 30, 1996 and
September 30, 1995................................................................................5
Notes to Consolidated Financial Statements........................................................6
ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..............................................................10
Page 2 of 23
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<TABLE>
WRIGHT MEDICAL TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
September 30, December 31,
1996 1995
-------------- -------------
ASSETS (in thousands) (in thousands)
(unaudited)
Current Assets:
<S> <C> <C>
Cash and cash equivalents $ 1,791 $ 1,126
Trade receivables, net 19,197 18,269
Inventories, net 62,437 54,815
Prepaid expenses 1,481 1,353
Other 991 1,948
-------------- --------------
Total Current Assets 85,897 77,511
-------------- --------------
Property, Plant and Equipment, net 35,031 39,141
Deferred Income Taxes 2,608 2,608
Investment in Joint Venture 3,946 -
Other Assets 47,120 55,111
-------------- --------------
$ 174,602 $ 174,371
============== ==============
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current Liabilities:
Current portion of long-term debt $ 3,332 $ 446
Short-term borrowing 12,650 3,900
Accounts payable 5,136 7,769
Accrued expenses 10,607 17,550
Deferred income taxes 2,608 2,608
-------------- --------------
Total Current Liabilities 34,333 32,273
-------------- --------------
Long-Term Debt 87,784 85,032
Preferred Stock Dividends 25,640 14,938
Other Liabilities 1,592 -
-------------- --------------
Total Liabilities 149,349 132,243
-------------- --------------
Commitments and Contingencies
Mandatorily Redeemable Series B Preferred Stock, $.01 par value, (aggregate
liquidation value of $73.5 million, including accrued and unpaid dividends
of $13.5 million, 800,000 shares authorized, 600,000 shares
issued and outstanding) 48,266 46,757
Redeemable Convertible Series C Preferred Stock, $.01 par value, (aggregate
liquidation value of $39.3 million, including accrued and unpaid dividends
of $4.3 million, 350,000 shares authorized, issued and outstanding) 23,883 20,548
Stockholders' Investment:
Series A preferred stock, $.01 par value, (aggregate liquidation value of
$24.4 million, including accrued and unpaid dividends of $7.9 million),
1,200,000 shares authorized,
915,325 shares issued & outstanding 9 9
Undesignated preferred stock, $.01 par value,
650,000 shares authorized, no shares issued - -
Class A common stock, $.001 par value, 46,000,000 shares authorized,
10,000,670 and 9,791,040 shares issued and outstanding 10 10
Class B common stock, $.01 par value, 1,000,000 shares authorized,
no shares issued - -
Additional capital 53,731 51,470
Accumulated deficit (100,316) (76,557)
Other 709 930
-------------- --------------
(45,857) (24,138)
Less - Notes receivable from stockholders (1,037) (1,037)
Series A preferred treasury stock, 86,688 shares (1) (1)
Class A common treasury stock, 876,880 shares (1) (1)
-------------- --------------
Total Stockholders' Investment (46,896) (25,177)
-------------- --------------
$ 174,602 $ 174,371
============== ==============
The accompanying notes are an integral part of these consolidated balance
sheets.
Page 3 of 23
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<TABLE>
WRIGHT MEDICAL TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except earnings per share)
(unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
---------------------------------------- ----------------------------------------
September 30, 1996 September 30, 1995 September 30, 1996 September 30, 1995
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Net sales $ 29,065 $ 28,962 $ 91,202 $ 93,565
Cost of goods sold 11,589 7,926 32,656 25,495
------------------ ------------------ ------------------ ------------------
Gross profit 17,476 21,036 58,546 68,070
------------------ ------------------ ------------------ ------------------
Operating expenses:
Selling 11,194 11,011 33,456 33,153
General and administrative 4,890 5,791 14,752 19,421
Research and development 3,322 3,352 9,621 9,440
Equity in loss of investment 151 - 151 -
------------------ ------------------ ------------------ ------------------
19,557 20,154 57,980 62,014
------------------ ------------------ ------------------ ------------------
Operating income (loss) (2,081) 882 566 6,056
Interest, net 2,910 3,061 8,823 8,774
Other (income) expense, net 203 2 (90) 315
------------------ ------------------ ------------------ ------------------
Loss before income taxes (5,194) (2,181) (8,167) (3,033)
Provision for income taxes 22 16 47 309
------------------ ------------------ ------------------ ------------------
Net loss $ (5,216) $ (2,197) $ (8,214) $ (3,342)
================== ================== ================== ==================
Loss applicable to common stock $ (10,392) $ (4,775) $ (23,760) $ (11,258)
================== ================== ================== ==================
Loss per share of common stock $ (1.14) $ (0.54) $ (2.63) (1.28)
================== ================== ================== ==================
Weighted average common shares outstanding 9,115 8,910 9,030 8,790
================== ================== ================== ==================
The accompanying notes are an integral part of these statements.
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<PAGE>
<TABLE>
WRIGHT MEDICAL TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<CAPTION>
Nine Months Ended
-------------------------------
September 30, September 30,
1996 1995
------------- -------------
Cash Flows From Operating Activities:
<S> <C> <C>
Net loss $ (8,214) $ (3,342)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation 5,341 5,421
Instrument amortization 2,383 2,115
Provision for instrument reserves 2,158 -
Provision for excess/obsolete inventory (111) (2,197)
Provision for sales returns (234) 526
Amortization of intangible assets 2,152 2,800
Amortization of deferred financing costs 1,021 683
Loss on disposal/abandonment of equipment 477 65
Equity in loss of investment 151 -
Other 228 571
Changes in assets and liabilities:
Trade receivables (694) (1,085)
Inventories (4,840) (17,132)
Other current assets 829 (733)
Accounts payable (1,601) 2,282
Accrued expenses and other liabilities (6,255) (14,227)
Other assets (150) (1,431)
Deferred income 1,740 -
------------ ------------
Net cash used in operating activities (5,619) (25,684)
------------ ------------
Cash Flows From Investing Activities:
Capital expenditures (2,545) (5,157)
Other (423) (1,224)
------------ ------------
Net cash used in investing activities (2,968) (6,381)
------------ ------------
Cash Flows From Financing Activities:
Net proceeds from sale of Series C Preferred Stock
and issuance of warrants - 33,775
Net proceeds from short-term borrowings 8,750 -
Proceeds from issuance of stock and stock warrants 1,275 53
Payments of debt (727) (1,724)
Other (46) (460)
------------ ------------
Net cash provided by financing activities 9,252 31,644
------------ ------------
Net increase/(decrease) in cash and cash equivalents 665 (421)
Cash and cash equivalents, beginning of period 1,126 3,072
------------ ------------
Cash and cash equivalents, end of period $ 1,791 $ 2,651
============ ============
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest $ 10,201 $ 10,614
============ ============
Cash paid for income taxes $ - $ -
============ ============
The accompanying notes are an integral part of these statements.
Page 5 of 23
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<PAGE>
WRIGHT MEDICAL TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - BASIS OF PRESENTATION
The consolidated financial statements as of September 30, 1996 and for the
three and nine month periods ended September 30, 1996 and September 30, 1995
include the accounts of Wright Medical Technology, Inc. and its wholly-owned
domestic and foreign subsidiaries (the "Company").
The accompanying unaudited financial information, in management's opinion,
includes all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the financial position, results of operations and
cash flows for the periods presented. The results of the periods presented are
not necessarily indicative of the results to be expected for the full year.
The financial information has been prepared in accordance with the
instructions to Form 10-Q and, therefore, does not include all information and
footnote disclosures necessary for fair presentation of financial statements
prepared in accordance with generally accepted accounting principles. These
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
1995 Annual Report on Form 10-K.
Certain prior year amounts have been reclassified to conform to the 1996
presentation.
<TABLE>
NOTE 2 - INVENTORIES
Components of inventory are as follows (in thousands):
<CAPTION>
Sept. 30, Dec. 31,
1996 1995
--------------------- -------------------
(unaudited)
<S> <C> <C>
Raw materials $ 2,325 $ 3,146
Work in process 8,007 10,971
Finished goods 37,940 38,438
Surgical Instruments 14,165 2,260
--------------------- -------------------
Total $ 62,437 $ 54,815
===================== ===================
</TABLE>
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<TABLE>
NOTE 3 - ACCRUED EXPENSES
A detail of accrued expenses is as follows (in thousands):
<CAPTION>
Sept. 30, Dec. 31,
1996 1995
------------------- -----------------
(unaudited)
<S> <C> <C>
Interest $ 2,309 $ 4,619
Employee benefits 2,111 2,350
Commissions 1,617 1,385
Taxes - other than income 1,175 1,194
Professional fees 959 1,020
Royalties 418 380
Research & development - 2,600
Other 2,018 4,002
------------------- -----------------
Total $ 10,607 $ 17,550
=================== =================
</TABLE>
NOTE 4 - LEGAL PROCEEDINGS
Substantial patent litigation among competitors occurs regularly in the
medical device industry. The Company assumed responsibility for certain patent
litigation in which the Company and/or Dow Corning and/or its former subsidiary,
Dow Corning Wright Corporation (collectively, "DCW") was a party. Those
proceedings in which the Company was a defendant have now been resolved.
DCW, pursuant to certain agreements, retains liability for matters arising
from conduct of DCW prior to the Company's acquisition on June 30, 1993, of
substantially all the assets of the large joint orthopaedic implant business of
DCW (the "Acquisition"). As such, DCW has agreed to indemnify the Company
against all liability for all products manufactured prior to the acquisition,
except for products provided under the Company's 1993 agreement with DCW
pursuant to which the Company purchased certain small joint orthopaedic implants
for worldwide distribution. However, the Company was notified in May 1995 that
DCW, which filed for reorganization under Chapter 11 of the U.S. Bankruptcy
Code, would no longer defend the Company in such matters until it received
further direction from the bankruptcy court. Accordingly, there can be no
assurance that DCW will indemnify the Company on any claims in the future.
Although the
Page 7 of 23
<PAGE>
Company does not maintain insurance for claims arising on products sold by DCW,
management does not believe the outcome of any of these matters, either
singularly or in the aggregate, will have a material adverse effect on the
Company's financial position or results of operations.
On October 25, 1996, the Company was notified that it had been sued by
Mitek Surgical Products, Inc. in the United States District Court for the
Northern District of California seeking damages for the alleged infringement of
its patent by the Company's ANCHORLOK(TM) soft tissue anchor. The Company
intends to deny the allegations and defend the action.
On April 3, 1995, the Company (and Orthomet, Inc., a wholly owned
subsidiary at the time that has subsequently been merged with and into the
Company) was notified that it had been sued by Joint Medical Products
Corporation (which was purchased by Johnson & Johnson Professional, Inc.), in
the United States District Court for the District of Connecticut seeking damages
for the alleged infringement of its patent (U.S. Pat. No. 4,678,472, the "'472
Patent") by the Company's EVOLUTION(R) Acetabular Cups and Liners, McCutcheon
Acetabular Cups and Liners and PERFECTA(R) Acetabular Cups and Liners. Pending
the resolution of an interference proceeding in the U.S. Patent and Trademark
Office regarding the '472 Patent by British Technology Group Ltd. ("BTG"), such
complaint was dismissed without prejudice. In early November 1996, the Company
was notified that the interference proceeding was resolved, and that, while the
complaint has not been refiled, BTG has offered the Company a license of the
'472 Patent and a corresponding reissue patent. The Company has not yet
formulated its response to BTG. The Company believes that its has valid defenses
to claims of infringement of the '472 Patent and is currently evaluating
defenses to the reissue patent
The Company is not involved in any other pending litigation of a material
nature or that would have a material adverse effect on the Company's financial
position or results of operations.
NOTE 5 - NEW ACCOUNTING PRONOUNCEMENTS
The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the impairment of long-lived assets and for
long-lived assets to be disposed of." The Company has determined that the
adoption of this statement does not have a material effect on its consolidated
financial position or operating results.
In October 1995, the FASB issued SFAS No. 123, "Accounting for stock-based
compensation." The Company will continue accounting for its stock-based
compensation plan in accordance
Page 8 of 23
<PAGE>
with APB Opinion No. 25. However, pursuant to SFAS No. 123, the Company will
provide pro forma net income and pro forma earnings per share information as if
the fair value based accounting method promulgated by SFAS No. 123 had been
followed. This pro forma information, along with other disclosures regarding the
assumptions used in determining fair value, will be provided, in the financial
statements included in the Company's 1996 annual report to be filed with the
Securities and Exchange Commission on Form 10-K. At this time, management has
not quantified the effect of applying this statement.
Page 9 of 23
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
Over the first nine months of the year, the orthopaedic market experienced
a continuation of the pricing pressures and utilization constraints that have
been hallmarks of the managed care revolution. The effect of these pressures on
the Company and, management believes, many of its competitors, has been to
depress sales growth relative to prior year's performance. While the Company's
sales growth has been disappointing during the first three quarters compared to
expectations, management is optimistic that a number of Company initiatives,
both in new product development and introduction, and in operational
efficiencies, are beginning to yield positive results.
Sales. Total sales for the first three quarters of 1996 were approximately
7.2% below prior year in the first quarter, 0.3% below prior year in the second
quarter, and 0.4% above prior year in the third quarter. On a year to date
basis, international sales were up approximately 4.0% over prior year reflecting
strong sales in France and Japan. Domestic sales were down approximately 4.4%
from prior year due primarily to an approximate 4.8% decline in sales of the
Company's single largest product line (knees). Although unit sales of knees
increased approximately 2.0% over prior year in the first three quarters of
1996, dollar sales declined due to a combination of a shift in the market from
more costly porous coated implants to less costly cemented implants (the latter
can be priced from 25% to 40% less than the former) and, to a lesser extent,
pricing pressures. Management is encouraged by the market reception and growth
rates being achieved by a number of the Company's new products including the
INTERSEAL(TM) Acetabular Cup, the PERFECTA(R) Hip System, the ADVANCE(TM) Knee
System, the WRIGHTLOCK(TM) Spinal System, the QUESTUS(TM) Soft Tissue Anchors,
and OSTEOSET(TM), the Company's recently approved calcium sulfate bone void
filler, although all of these products start from a small sales base. The
Company has also been working actively to increase the number of its sales
representatives both in the U.S. and internationally and to strengthen the
quality of its distributor force throughout the world.
New Products. In 1996, the Company has introduced or will shortly introduce
a number of new products not only in its core knee, hip and small joint
businesses, but also in spine, arthroscopy, and trauma markets in which the
Company previously had no product offerings. In the fourth quarter of 1996, the
Company will introduce its VERSALOK(TM) Spinal System, the Company's first
offering in the lumbar fusion market, and expects to
Page 10 of 23
<PAGE>
introduce an anterior cervical plating system by the second quarter of 1997. The
Company also expects to introduce a number of new trauma products, including a
unique plate for fracture repair and an intermedullary nailing system in the
first quarter of 1997. In addition, in the third quarter of 1996, the Company
received approval from the U.S. Food and Drug Administration to market its first
biological product, OSTEOSET(TM), a calcium sulfate based bone void filler
derived from technology obtained by the Company from the Industrial Division of
United States Gypsum Company ("USG"), a subsidiary of USG Corporation. In the
third quarter of 1996, the Company acquired the bio-materials business of USG,
including its proprietary manufacturing processes and patents and entered into a
materials supply agreement with that company. Pursuant to one or more
initiatives, the Company is also actively developing biological products to
repair articular cartilage, ligaments, tendons and for bone regrowth. Pursuant
to a joint venture with Tissue Engineering, Inc. ("TEI"), a Boston,
Massachusetts based bio-technology company, the Company is involved in
developing products with a broad range of musculoskeletal applications, focusing
particularly on bioabsorbable bone cements, and ligament and tendon repair
products. The Company continues to work with OsteoBiologics, Inc., its San
Antonio, Texas based partner in the development of bio-absorbable scaffolds for
bone and articular cartilage repair. OsteoBiologics expects to have its first
products, an electronic device for mapping the physical characteristics of soft
tissues, and a bone repair product, on the market in 1997.
Expenses. One of the many challenges facing management in 1996 has been how
to more appropriately align its resources with its business needs. Commensurate
with that challenge, the Company continued to critically review its domestic and
international operations, and to make reductions and changes where appropriate.
As a result, operating offices in Australia, Brazil, and Hong Kong were closed
(providing 1996 year-to-date savings of $1.4 million over 1995). Additionally,
expense reductions in domestic operations have resulted in nine month savings
(excluding variable costs such as royalties and commissions) of $3.6 million,
primarily from headcount reductions, sale of the corporate aircraft, reduced
management bonus accruals, reduced legal and other professional fees or
services, as well as some expenses incurred in 1995 associated with the
integration of Orthomet that did not recur in 1996.
Inventory. In addition to the Company's focus on expense control and
reduction, management has also developed and implemented programs to better
manage its investment in inventory.
During the third quarter of 1996, the Company completed a six-month effort
in changing the manner in which instruments are made available to its domestic
customers. In the United States,
Page 11 of 23
<PAGE>
the primary customers for its instruments are the independent distributor
networks, who purchase the instruments and in turn provide them to surgeons for
use during the implant surgery (a practice common in the industry). In order to
encourage an increase in the purchase of instruments (and hopefully
corresponding increases in implant sales) and discourage a burgeoning demand for
loaned Company instrument kits, effective April 1, 1996 instruments were made
available to distributors at dramatically discounted prices. Concurrent with
implementing this program, and in anticipation of an increase in sales volume,
most of the Company's instruments were reclassified from property, plant and
equipment to inventory as product available for sale.
Additionally, much attention and effort have been focused toward
accomplishing a clear and specific 1996 corporate objective of zero growth in
inventory. One of the initiatives implemented in this regard was an incentive
program designed to effect a one-time return of products from field inventory
stock that the Company could then use to fulfill customer demand without
replacement. Related to this, the Company has increased the emphasis on its
Wright Express(R) program. This program is designed to deliver inventory on a
"just-in-time" basis to distributors. As part of this program, implant kits are
maintained at the Company and are air-freighted to surgery on an as-needed
basis. The utilization of the WRIGHT EXPRESS(R) program has doubled since the
beginning of 1996 from approximately 1,400 kit shipments per month to
approximately 3,500 shipments per month as of September 1996. This has permitted
the Company to reduce inventory in the field, achieve more efficient use of
product and to better manage and monitor inventory turnover. As a result of
these and other initiatives, and excluding the above mentioned reclass of
instruments from property, plant, and equipment, management is confident that it
will accomplish its zero growth objective.
Cash. Primarily as a result of the Company's focus on expenses and
inventory, cash used in operations has improved versus 1995. Cash from
operations was sufficient to cover substantially all operating requirements for
the first nine months of 1996, except interest payments on the Company's senior
notes. These interest payments primarily resulted in the $8.8 million increase
in short-term borrowings. Management continues to aggressively focus on its cash
flows, not only by lowering expenses and controlling inventory, but also by
lowering capital expenditures, spending $2.6 million less through September 1996
than in the same period in the prior year.
Other Initiatives. A number of other accomplishments have occurred in the
third quarter of 1996 that management believes will benefit the Company in the
future. First, a $25 million revolving credit facility was successfully
negotiated with Sanwa
Page 12 of 23
<PAGE>
Business Credit Corporation ("Sanwa") at rates more favorable than the facility
provided by Heller Financial, Inc. Second, as mentioned above, the Company
entered into a joint venture with TEI for the development and distribution of
products for musculoskeletal applications, such as collagen-based scaffolds used
for ligament and tendon reconstruction, for cartilage regeneration, and for use
with calcium sulfate or calcium phosphate as a bone graft substitute. And
finally, the Company purchased the bio-materials business from USG. With the
acquisition, the Company will continue to purchase the medical grade calcium
sulfate raw material (used in its commercial OSTEOSET(TM) product) from USG, but
will own the proprietary process, patents and technology necessary to create
calcium sulfate products for biomedical applications.
Results of Operations
Sales
For the three months ended September 30, 1996, the Company's net sales were
$29.1 million as compared to $29.0 million for the same period in 1995. Net
sales for the nine months ended September 30, 1996 were $91.2 million
representing a decrease in sales of $2.4 million compared to the same period in
1995. Although total sales for the third quarter 1996 were essentially flat as
compared to third quarter 1995, new product line sales increased compared to
prior year sales for the period in ADVANCE(TM) Knee ($0.9 million), trauma ($0.1
million), spine ($0.1 million) and arthroscopy ($0.3 million), offset by sales
declines in knees, other than ADVANCE(TM) ($0.6 million) and hips ($0.8
million). For the nine month period ended September 30, 1996, net sales
decreased by $2.4 million as compared to the same period in 1995 due mainly to
decreases in domestic sales of knees of $4.2 million, hips of $0.4 million and
small joint products of $0.5 million, offset by increases in sales of trauma
($0.7 million), spine ($0.1 million), arthroscopy ($0.7 million) and shoulder
($0.1 million). International sales for this same nine month period increased by
$0.8 million in 1996 versus 1995 mainly due to knees ($1.3 million) and
arthroscopy ($0.2 million) offset by decreases in hips ($0.6 million) and small
joint products ($0.2 million).
Selling
Selling expenses for the three months ended September 30, 1996 were $11.2
million, or $0.2 million higher than the same period in 1995. This increase is
primarily due to higher commissions and royalties by $0.2 million in the third
quarter of 1996 as compared to 1995.
Page 13 of 23
<PAGE>
For the nine month period, 1996 selling expenses were $33.5 million, or
$0.3 million higher when compared to the same period in 1995. Commissions
increased ($1.0 million) due mainly to higher guarantees and incentives
exceeding those paid in the first nine months of 1995 by $0.9 million and
royalties increased ($0.3 million) due to payments on sales of small joint
products offset by lower spending in 1996 versus 1995 in the areas of U.S. sales
and marketing ($0.1 million) and international sales and marketing ($0.9
million) due to personnel changes at the Company's headquarters and the
transition, in France, to a non-employee sales force.
Cost of Sales
Cost of sales for the three months and nine months ended September 30,
1996, increased $3.7 million and $7.2 million respectively, over the same
periods in the prior year. For the three month period the higher cost of sales
in 1996 was due to the accelerated write-off of instruments of $1.2 million,
which resulted from the Company's revised instrument program designed to give
the Company's independent distributors better access to these instruments (see
"Overview - Inventory" above), increased manufacturing variance charged to cost
of sales of $0.6 million, a reduction of the sales return reserve of $0.5
million in 1996, and an increase of $0.9 million in standard cost of sales due
largely to knee sales (primarily due to higher unit sales periodover-period).
For the nine month period, 1996 cost of sales increased compared to the
same period in the prior year due to accelerated instrument write-off ($2.9
million), increased manufacturing variance charged to cost of sales ($1.9
million), decreased sales return reserve ($0.5 million), scrap ($0.4 million), a
higher level of sales of fully reserved products in 1995 resulting in the
reversal of inventory reserves ($0.9 million), and France increased amortization
of standards change ($0.7).
General and Administrative
General and administrative expenses for the three months ended September
30, 1996, decreased $0.9 million, or approximately 15.6%, from the same period
in 1995. For the nine months ended September 30, 1996, general and
administrative expenses decreased $4.7 million, or approximately 24.0%. The
decrease in the 1996 third quarter expenses as compared to 1995 was attributable
to lower management bonus accruals ($0.2 million), reduced legal expenses
associated with litigation and patent applications ($0.1 million), decreased
travel expenses ($0.6 million), and lower international administrative expenses
($0.1 million) offset by higher spending in the Managed Care
Page 14 of 23
<PAGE>
division ($0.2 million). The nine month decrease of $4.7 million was due
primarily to decreased travel expenses ($1.8 million) principally due to the
sale of the Company jet, lower management bonus accruals ($0.9 million), lower
intangible amortization expense ($0.7 million), lower salaries ($0.2), lower
advertising ($0.1), lower insurance costs ($0.3 million), reduced international
administrative expenses ($0.5 million) due mainly to the shut down of offices in
Australia, Brazil and Hong Kong, lower outside services ($0.2 million), lower
professional fees ($0.3 million), and reduced legal expenses ($0.5 million)
offset by higher spending in Managed Care ($1.1 million) due to a full nine
months of ongoing operations in 1996 compared to the Company's late 1995
establishment of a Managed Care effort.
Research and Development
Research and development expenses of $3.3 million for the third quarter of
1996 remained flat compared to the third quarter of 1995. For the nine months
ended September 30, 1996, expenses were $9.6 million compared to $9.4 million in
1995. The increase of $0.2 million for the nine months ended September 30, 1996
versus prior year was due to higher expenditures on research grants and
development efforts for a new hip prosthesis in France.
Other
Equity in loss of investment represents the Company's 50% share of the
expenses incurred related to the joint venture with TEI discussed previously in
"Overview - New Products".
Other (income) expense for the three and nine month period ended September
30, 1996, increased $0.2 million and decreased $0.4 million, respectively,
versus the same periods in 1995. The $0.2 million increase in the third quarter
was due primarily to equipment disposals in the United States. The $0.4 million
yearover-year decrease was due to the sale of the Company jet earlier in 1996
which offset the higher third quarter spending.
Interest expense remained relatively flat for the nine months ended
September 30, 1996 when compared to the same period in the prior year. For the
third quarter of 1996 interest expense decreased by $0.2 million due to lower
borrowings on the Company's revolving line of credit in 1996.
Page 15 of 23
<PAGE>
For the three and nine month periods ended September 30, 1996, earnings
before interest, taxes, depreciation, amortization, and other non-cash
transactions ("EBITDA") is detailed in the table below.
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
Sept 30,1996 Sept 30,1996
------------------- ---------------------
<S> <C> <C>
Operating Income $ (2,081) $ 566
Depreciation & Instrument Amort. 2,851 7,747
Instrument Reserves 1,225 2,161
Intangibles Amortization 709 2,159
Amortization of Other Assets 91 274
Other Non-Cash Transactions 613 734
------------------- ---------------------
EBITDA $ 3,408 $ 13,641
=================== =====================
</TABLE>
Liquidity and Capital Resources
Since the DCW Acquisition, the Company's strategy has been to position
itself for the future through new product development and acquisition of new
technologies through license agreements, joint ventures and purchases of other
companies in the orthopaedic field. As anticipated, the Company's substantial
need for working capital has been funded through the sale of $85 million of
senior debt securities and $15 million of equity at the time of the DCW
Acquisition, through the issuance of Series B Preferred Stock in 1994 to the
California Public Employees' Retirement System ($60 million), through the
issuance of Series C Preferred Stock to the Princes Gate purchasers in September
of 1995 ($35 million) (see Note 8 of the Company's 1995 annual report on Form
10-K), and through borrowings on the Company's revolving line of credit.
The Company had available to it a $30 million revolving line of credit
under the Heller Agreement that expired in September, 1996. The Company's
projected cash flow requirements for 1996 due to continued growth, indicated
that a similar revolving credit agreement was needed to fund the working capital
needs of the Company going forward. Management negotiated with several financial
institutions and on September 13, 1996 finalized and closed an agreement for a
loan and security agreement with Sanwa Business Credit Corporation for a $25
million revolving line of credit which expires in September, 1999. As of
September 30, 1996 this agreement provided an eligible borrowing base of $21.4
million. As of November 1, 1996, the Company had drawn $12.6 million under this
agreement. During the first nine months of
Page 16 of 23
<PAGE>
1996, borrowings under the Heller and Sanwa Agreements averaged $12.6 million
with a maximum amount borrowed of $16.1 million, as compared to the first nine
months of 1995 when borrowing reached a high of $29.0 million.
The Company's capitalization includes senior debt securities of $84.4
million and various series of preferred stock with an aggregate liquidation
value of $112.8 million at September 30, 1996. These securities currently bear
interest or dividend rates ranging from 10 3/4% to 12.1% and, in certain
circumstances, these rates can increase to 21.4%. As a result of the Company's
obligations to establish a sinking fund for its senior debt securities beginning
in July 1998 and its obligation to issue additional warrants to acquire common
stock in the event that the Series C Preferred Stock is not redeemed or there
has not otherwise been a qualified initial public offering on or before March
1999, the management believes that the Company will be required to effect an
initial public offering of its common stock or some other form of a
recapitalization plan to satisfy these future obligations. There can be no
assurance that the Company will be able to effect such an offering or
recapitalization on favorable terms, if at all.
At September 30, 1996, the Company had approximately $1.3 million in
outstanding capital commitments, of its total 1996 budgeted expenditures of
approximately $3.4 million for the purchase of machinery and related capital
equipment.
As of September 30, 1996, the Company had net working capital of $51.6
million, compared with $45.2 million as of December 31, 1995. This $6.4 million
increase in working capital is primarily due to the $7.9 million of surgical
instruments in the 1995 property, plant and equipment balance being reclassed to
inventory, offset primarily by the $1.0 million short-term receivable that was
reclassed to property, plant and equipment due to the repurchase of distributor
instruments.
Page 17 of 23
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
See Note 4. in the "NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS" On Page 7.
ITEM 2. CHANGES IN SECURITIES.
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
ITEM 5. OTHER INFORMATION.
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
A) See Exhibit Index at page 20.
B) Report on Form 8-K: Form 8-K, Item 5, plus exhibits dated
September 13, 1996, regarding the Company's replacement of
the revolving Credit Agreement between Heller Financial,
Inc. and the Company with a Loan and Security Agreement
with Sanwa Business Credit Corporation, was filed on
September 27, 1996.
Page 18 of 23
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 13, 1996 /s/Richard D. Nikolaev
Richard D. Nikolaev
President and Chief Executive Officer
Date: November 13, 1996 /s/George G. Griffin
George G. Griffin
Executive Vice President and
Chief Financial Officer
Page 19 of 23
<PAGE>
<TABLE>
Exhibit Index
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT PAGE
<S> <C> <C> <C>
11.1 Statement regarding Computation of Earnings
Per Share 21
12.1 Statement regarding Computation of Ratio of
Earnings to Fixed Charges and Preferred
Dividends 22
27.1 Financial Data Schedule 23
Page 20 of 23
</TABLE>
<TABLE>
WRIGHT MEDICAL TECHNOLOGY, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
(in thousands, except loss per share)
(unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
----------------------------------------- ------------------------------------------
September 30, 1996 September 30, 1995 September 30, 1996 September 30, 1995
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Net loss $ (5,216) $ (2,197) $ (8,214) $ (3,342)
Dividends on preferred stock (3,561) (2,171) (10,702) (6,695)
Accretion of preferred stock discount (1,615) (407) (4,844) (1,221)
------------------ ------------------ ------------------ ------------------
Net loss applicable to common
and common equivalent shares $ (10,392) $ (4,775) $ (23,760) $ (11,258)
================== ================== ================== ==================
Weighted average shares of
common stock outstanding (a) 9,115 8,910 9,030 8,790
================== ================== ================== ==================
Loss per share of common stock $ (1.14) $ (0.54) $ (2.63) $ (1.28)
================== ================== ================== ==================
(a) Because of the net loss applicable to common stock for the three and nine
months ended September 30, 1996 and September 30, 1995, the assumed
exercise of common stock equivalents has not been included in the
computation of weighted average shares outstanding because their effect
would be anti-dilutive.
Page 21 of 23
</TABLE>
<TABLE>
WRIGHT MEDICAL TECHNOLOGY, INC. AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED DIVIDENDS
(in thousands, except ratios)
(unaudited)
<CAPTION>
June 30,
Nine Months Ended 1993
-------------------- Year Ended Year Ended through
Sept. 30, Sept. 30 Dec. 31, Dec. 31, Dec. 31,
1996 1995 1995 1994 1993
--------- --------- ---------- ----------- ---------
Earnings:
<S> <C> <C> <C> <C> <C>
Loss before income taxes $ (8,167) $ (3,033) $ (4,873) $ (57,261) $ (2,560)
Add back: Interest expense 7,891 8,530 10,899 9,311 4,721
Amortization of debt issuance cost 1,021 683 1,036 829 364
Portion of rent expense representative
of interest factor 349 327 451 349 97
--------- --------- ---------- ----------- ---------
Earnings (loss) as adjusted $ 1,094 $ 6,507 $ 7,513 $ (46,772) 2,622
========= ========= ========== =========== =========
Fixed charges:
Interest expense $ 7,891 $ 8,530 $ 10,899 $ 9,311 4,721
Amortization of debt issuance cost 1,021 683 1,036 829 364
Portion of rent expense representative of interest factor 349 327 451 349 97
--------- --------- ---------- ------------ ---------
$ 9,261 $ 9,540 $ 12,386 $ 10,489 5,182
========= ========= ========== ============ =========
Preferred dividends (grossed up to pretax equivalent basis): $ 17,261 $ 10,798 $ 16,863 $ 3,997 1,036
Accretion of preferred stock (grossed up to pretax equivalent basis): 7,812 1,969 4,573 394 -
--------- --------- ---------- ------------ --------
$ 25,073 $ 12,767 $ 21,436 $ 4,391 1,036
========= ========= ========== ============ =========
Ratio of earnings to fixed charges (a) (a) (a) (a) (a)
========= ========= ========== ============ =========
Ratio of earnings to fixed charges, preferred dividends and accretion
of preferred stock (b) (b) (b) (b) (b)
========= ========= ========== ============ =========
(a) Earnings were inadequate to cover fixed charges by $8.2 million, $3.0
million, $4.9 million, $57.3 million and $2.6 million, respectively, for
the nine months ended September 30, 1996 and September 30, 1995, for the
years ended December 31, 1995, December 31, 1994, and for the period from
June 30, 1993 through December 31, 1993.
(b) Earnings were inadequate to cover fixed charges, preferred dividends and
accretion of preferred stock by $33.2 million, $15.8 million, $26.3
million, $61.7 million and $3.6 million, respectively, for the nine months
ended September 30, 1996 and September 30, 1995, for the years ended
December 31, 1995, December 31, 1994 and for the period from June 30, 1993
through December 31, 1993. Certain of the preferred dividends are, at the
option of the Company, payable in kind.
Page 22 of 23
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<CASH> 1,791
<SECURITIES> 0
<RECEIVABLES> 20,059
<ALLOWANCES> 862
<INVENTORY> 62,437
<CURRENT-ASSETS> 85,897
<PP&E> 56,730
<DEPRECIATION> 7,747
<TOTAL-ASSETS> 174,602
<CURRENT-LIABILITIES> 34,333
<BONDS> 84,387
72,149
9
<COMMON> 10
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 174,602
<SALES> 91,202
<TOTAL-REVENUES> 91,202
<CGS> 32,656
<TOTAL-COSTS> 32,656
<OTHER-EXPENSES> 57,980
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,891
<INCOME-PRETAX> (8,167)
<INCOME-TAX> 47
<INCOME-CONTINUING> (8,214)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,214)
<EPS-PRIMARY> (2.63)
<EPS-DILUTED> (2.63)
</TABLE>
