UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 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 0-28240
EXACTECH, INC.
(Exact name of registrant as specified in its charter)
FLORIDA 59-2603930
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4613 NW 6TH STREET
GAINESVILLE, FL
32609
(Address of principal executive offices)
(352) 377-1140
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 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 [ ] No [ X ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of the latest practicable date.
Class Outstanding at August 5, 1996
Common Stock, $.01 par value 4,829,058
<PAGE>
<TABLE>
<CAPTION>
EXACTECH, INC.
INDEX
PAGE
NUMBER
<S> <C>
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED BALANCE SHEETS AS OF DECEMBER 31, 1995 AND JUNE 30, 1996 2
CONDENSED STATEMENTS OF INCOME FOR THE THREE MONTH AND SIX MONTH 4
PERIODS ENDED JUNE 30, 1995 AND JUNE 30, 1996
CONDENSED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY 5
FOR THE SIX MONTH PERIOD ENDED JUNE 30, 1996
CONDENSED STATEMENTS OF CASH FLOWS FOR THE SIX MONTH PERIODS ENDED 6
JUNE 30, 1995 AND JUNE 30, 1996
NOTES TO CONDENSED FINANCIAL STATEMENTS FOR THE THREE AND SIX MONTH 7
PERIODS ENDED JUNE 30, 1995 AND JUNE 30, 1996
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 11
CONDITION AND RESULTS OF OPERATIONS
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 17
SIGNATURES 18
</TABLE>
1
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
EXACTECH, INC.
CONDENSED BALANCE SHEETS
(Unaudited)
December 31, June 30,
1995 1996
------------ ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 201,979 $ 5,172,940
Short-Term Investments 0 3,134,684
Trade receivables 1,802,129 2,143,328
Prepaid expenses and other assets 84,670 373,603
Inventories 6,322,355 6,105,189
------------ ------------
Total Current Assets 8,411,133 16,929,744
PROPERTY AND EQUIPMENT
Machinery and equipment 2,504,130 3,597,889
Furniture and fixtures 101,137 101,137
------------ ------------
Total 2,605,267 3,699,026
Accumulated depreciation (881,747) (1,106,172)
------------ ------------
Net property and equipment 1,723,520 2,592,854
OTHER ASSETS
Land held for future use 263,301 263,301
Investment in Subsidiary 67,987 89,802
Deferred financing costs, net 56,152 14,064
Deferred stock issuance costs 10,000 0
Advances and deposits 2,442 2,442
Patents and trademarks (net of amortization) 86,215 87,482
------------ ------------
Total Other Assets 486,097 457,091
------------ ------------
TOTAL ASSETS $10,620,750 $ 19,979,689
============ ============
2
<PAGE>
<TABLE>
<CAPTION>
EXACTECH, INC.
CONDENSED BALANCE SHEETS
(Unaudited)
December 31, June 30,
1995 1996
------------ ------------
<S> <C> <C>
LIABILITIES AND EQUITY
Current Liabilities
Accounts payable $ 1,439,598 $ 911,220
Borrowings under line of credit 1,844,266 0
Income taxes payable 275,991 106,027
Current portion of long-term debt and leases 266,389 282,362
Commissions payable 351,431 355,551
Royalties payable 232,735 267,809
Other liabilities 65,964 86,311
------------ ------------
Total Current Liabilities 4,476,374 2,009,280
Deferred income taxes 213,796 213,800
Long-term debt and capital lease-net of current portion 1,002,309 20,550
Subordinated debentures-related parties 550,000 100,000
Subordinated debentures-other 210,000 160,000
------------ ------------
Total Liabilities 6,452,479 2,503,630
Mandatorily Redeemable Preferred Stock:
Series A preferred stock 136,220 0
Series C preferred stock 50,000 0
Nonredeemable Preferred Stock:
Series B preferred stock 105,000 0
COMMON SHAREHOLDERS' EQUITY:
Common stock 29,539 48,291
Additional paid in capital 1,676,383 14,586,812
Retained earnings 2,171,129 2,840,956
------------ ------------
Total Common Shareholders' Equity 3,877,051 17,476,059
------------ ------------
TOTAL LIABILITIES AND EQUITY $10,620,750 $19,979,689
============ ============
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
EXACTECH, INC.
CONDENSED STATEMENTS OF INCOME
(Unaudited)
THREE MONTH PERIOD SIX MONTH PERIOD
ENDED JUNE 30, ENDED JUNE 30,
1995 1996 1995 1996
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
NET SALES $ 2,109,045 $ 3,400,233 $3,797,526 $ 6,823,862
COST OF GOODS SOLD 711,803 1,216,20 1,157,387 2,483,539
----------- ----------- ---------- -----------
Gross profit 1,397,242 2,184,026 2,640,139 4,340,323
OPERATING EXPENSES:
Sales and marketing 546,424 794,283 1,040,761 1,631,492
General and administrative 251,651 292,509 491,689 565,785
Research and development 180,341 171,471 368,011 332,525
Depreciation and amortization 75,346 112,895 146,432 228,970
Royalties 34,191 138,034 54,676 282,230
----------- ----------- ---------- -----------
Total operating expenses 1,087,953 1,509,192 2,101,569 3,041,002
----------- ----------- ---------- -----------
INCOME FROM OPERATIONS 309,289 674,834 538,570 1,299,321
OTHER INCOME (EXPENSE)
Interest income (expense) (68,666) (66,270) (110,250) (170,399)
Equity in net loss of subsidiary 0 (14,199) 0 (32,199)
----------- ----------- ---------- -----------
INCOME BEFORE TAXES 240,623 594,365 428,320 1,096,743
PROVISION FOR INCOME TAXES 91,437 225,859 162,762 416,762
----------- ----------- ---------- -----------
NET INCOME AFTER TAXES 149,186 368,506 265,558 679,981
PREFERRED STOCK DIVIDENDS 4,825 4,330 9,649 10,154
----------- ----------- ---------- -----------
NET INCOME AVAILABLE TO $ 144,361 $ 364,176 $ 255,909 $ 669,827
COMMON SHAREHOLDERS =========== =========== ========== ===========
NET INCOME PER COMMON AND $ 0.05 $ 0.10 $ 0.08 $ 0.20
COMMON SHARE EQUIVALENT =========== =========== ========== ===========
WEIGHTED AVERAGE COMMON 3,032,733 3,677,959 3,027,074 3,355,103
AND COMMON SHARE
EQUIVALENTS OUTSTANDING
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
EXACTECH, INC.
CONDENSED STATEMENTS OF CHANGES IN COMMON SHAREHOLDERS' EQUITY
(Unaudited)
TOTAL
ADDITIONAL COMMON
COMMON STOCK PAID-IN RETAINED SHAREHOLDER'S
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------------ --------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 2,953,903 $ 29,539 $ 1,676,383 $ 2,171,129 $ 3,877,051
Issuance of common stock 1,874,405 18,744 14,966,518 14,985,262
Dividends on preferred stock (10,154) (10,154)
Exercise of stock options 750 8 4,992 5,000
Exercise of warrants 100 100
Stock issuance costs (2,061,181) 2,061,181)
Net income 679,981 679,981
------------ --------- ----------- ----------- ------------
BALANCE, JUNE 30, 1996 4,829,058 $ 48,291 $14,586,812 $ 2,840,956 $ 17,476,059
============ ========= =========== =========== ============
</TABLE>
5
<PAGE>
EXACTECH, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
SIX MONTH PERIOD ENDED JUNE 30,
1995 1996
-------------- --------------
OPERATING ACTIVITIES:
Net Income $ 265,558 $ 679,981
Adjustments to reconcile net income to net
cash used in operating activities
Depreciation and amortization 146,432 228,970
Equity in net loss of subsidiary 0 32,199
Deferred income taxes 0 0
Decrease (increase) trade receivables (633,968) (341,199)
Decrease (increase) Inventories (890,986) 217,166
Decrease (increase) in other prepaids and assets (118,300) (246,845)
(Decrease) increase in income taxes payable 158,143 (169,964)
(Decrease) increase in accounts payable 250,272 (528,378)
Increase in other liabilities 182,150 59,541
-------------- --------------
Net cash (used in) operating activities (640,699) (68,530)
-------------- --------------
INVESTING ACTIVITIES:
Purchases of property and equipment, net (375,091) (1,093,759)
Purchases of short-term investments 0 (3,134,684)
Investment in subsidiary 0 (54,014)
Cost of patents and trademarks (24,525) (5,805)
-------------- --------------
Net cash (used in) investing activities (399,616) (4,288,262)
-------------- --------------
FINANCING ACTIVITIES:
Proceeds (repayments) under line of credit 600,000 (1,844,266)
Proceeds from issuance of debt 32,793 284,763
Principal payments on debt (101,086) (1,250,549)
Proceeds (repayments) of subordinated debentures 310,000 (450,000)
Net proceeds from issuance of common stock 104,400 14,725,100
Payment of debt issuance costs (30,851) 0
Payment of offering costs 0 (2,051,181)
Preferred dividends paid (9,649) (10,154)
Proceeds (repayments) of preferred stock 50,000 (75,960)
-------------- --------------
Net cash provided by financing activities 955,607 9,327,753
-------------- --------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (84,708) 4,970,961
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 267,416 201,979
-------------- --------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 182,708 $ 5,172,940
-------------- --------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 110,529 $ 185,313
Income taxes 41,917 588,323
Noncash investing and financing activities:
Conversion of subordinated debt to common stock 50,000
Conversion of preferred stock to common stock 215,260
Financing of insurance premiums 92,690 296,106
6
<PAGE>
EXACTECH, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 1996 AND 1995
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements, which are for
interim periods, have been prepared in accordance with the rules and regulations
of the Securities and Exchange Commission relating to interim financial
statements. These unaudited condensed financial statements do not include all
disclosures provided in the annual financial statements. The condensed financial
statements should be read in conjunction with the financial statements and notes
thereto for the year ended December 31, 1995, included in the Prospectus of
Exactech, Inc. (the "Company") dated May 30, 1996. The balance sheet at December
31, 1995 has been derived from the audited financial statements at that date and
is condensed.
All adjustments of a normal recurring nature which, in the opinion of
management, are necessary to present a fair statement of results for the interim
periods have been made. Results of operations for the six month period ending
June 30, 1996 are not necessarily indicative of the results to be expected for
the full year.
2. INVESTMENT SECURITIES
The Company invests its excess funds in various high-quality and
low-risk investment securities. Debt securities for which the Company has the
positive intent and ability to hold to maturity are classified as held to
maturity and reported at amortized cost. Securities are classified as trading
securities if bought and held principally for the purpose of selling them in the
near future. Securities not classified as held to maturity or trading are
classified as available for sale, and reported at fair value with unrealized
gains and losses excluded from earnings and reported net of tax as a separate
component of stockholder's equity until realized.
No investments are held for trading purposes or are available for sale.
Short-term investments consist of U.S. Treasury Notes with maturities ranging
from June 30, 1997 to July 15, 1997 and yielding from 5.57% to 5.75%. The fair
value of such investments approximated the carrying value at June 30, 1996.
7
<PAGE>
EXACTECH, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 1996 AND 1995
(UNAUDITED)
3. DEBT
<TABLE>
<CAPTION>
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS: DECEMBER 31, JUNE 30,
1995 1996
------------ ----------
<S> <C> <C>
$1,250,000 term loan payable in monthly installments $1,145,833 $ -
of $20,833 plus interest at a variable rate (8.8% as of
December 31, 1995) through August, 1999
$98,000 term loan payable in monthly installments 91,521 88,539
of $1,208 including monthly interest at prime plus
1% (9.50% at December 31, 1995) through September 1999
Capitalized lease obligation payable in monthly installments 26,473 24,937
of $611 through July, 2000, collateralized by equipment with
a carrying value of approximately $27,000 as of December
31, 1995
Capitalized lease obligation payable in monthly installments
of $643 through August, 1996, collateralized by equipment
with a carrying value of approximately $7,000 as of
December 31, 1995 4,871 747
Notes payable to finance company bearing interest
at 7.43% payable in monthly installments through
February 1997; proceeds used to finance insurance policies 188,689
--------- ---------
Total long-term debt and capital obligations 1,268,698 302,912
Less current portion (266,389) (282,362)
--------- ----------
$1,002,309 $ 20,550
========== =========
</TABLE>
The following is a schedule of debt maturities and future minimum lease
payments under the capital leases, together with the present value of minimum
lease payments as of June 30, 1996:
TOTAL CAPITAL LEASE
DEBT OBLIGATIONS
1996............................................ $ 277,228 4,413
1997............................................ - 7,333
1998............................................ - 7,333
1999............................................ - 7,333
2000............................................ - 7,333
Total ................................... $ 277,228 4,278
========= -------
30,690
Less interest on capital lease obligations ...................... (5,006)
-------
$25,684
=======
8
<PAGE>
EXACTECH, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 1996 AND 1995
(UNAUDITED)
3. DEBT-(CONTINUED)
LINE OF CREDIT
The Company repaid the line of credit to Merrill Lynch Business
Financial Services, Inc. during June 1996, with the proceeds of its initial
public offering described in Note 5 below. The Company has negotiated a loan
agreement with Merrill Lynch Business Financial Services which provides for a
$3,000,000 line of credit and removed William Petty and Betty Petty, executive
officers and principal shareholders of the Company as personal guarantors.
SUBORDINATED DEBENTURES
The Company redeemed $450,000 in principal amount of its 8% Subordinated
Debentures held by Michael M. Kearney, a shareholder of the Company, and R.
Wynn Kearney, a director and shareholder of the Company, during June 1996. In
addition, during June 1996; the Company converted to common stock $50,000 in
principal amount of its 10% Subordinated Convertible Debentures ("10%
Debentures"). The remaining $260,000 in principal amount of the 10% Debentures
are payable in full three years from the date of issuance thereof. Interest on
the 10% Debentures accrues at the rate of 10% per annum and is payable
quarterly. As a result of the consummation by the Company of its initial public
offering in June 1996, the 10% Debentures are redeemable, at the option of the
holders thereof until November 30, 1996, at a redemption price equal to the
outstanding principal amount thereof. The 10% Debentures are also convertible,
at the option of the holders thereof, until November 30, 1996, into shares of
common stock at a conversion rate per share equal to $7.33.
4. RELATED PARTY TRANSACTIONS
Effective as of the consummation of the Company's initial public offering
in June 1996, the Company issued options to purchase 20,000 shares of common
stock at $8.00 per share to R. Wynn Kearney, Jr. MD, a director of the company.
The options vest over a period of four years and are valid for a period of ten
years.
9
<PAGE>
EXACTECH, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 1996 AND 1995
(UNAUDITED)
5. COMMON SHAREHOLDER'S EQUITY
COMMON STOCK
In June 1996, the Company completed an underwritten initial public offering
("IPO") of 1,840,000 shares of its common stock at an initial offering price of
$8.00 per share, yielding gross proceeds of $14,720,000. Net proceeds to the
Company as a result of the IPO were $12,658,819 after deduction of underwriting,
legal, accounting and other offering related expenses in the aggregate of
$2,061,181. Upon consummation of the IPO, $50,000 of subordinated debt was
converted to 6,250 shares of common stock. Preferred stock totaling $215,200 was
converted into 26,900 shares of common stock.
OPTIONS AND STOCK AWARDS:
The Company sponsors an Employee Stock Option and Incentive Plan which
provides for the issuance of stock options and restricted stock awards to key
employees and a Director's Stock Option Plan which provides for the issuance of
stock options to non-employee directors (collectively the "Plans"). The Company
also issues stock options to sales agents and other individuals. The maximum
number of common shares issuable under the Plans is 600,000 shares. A summary of
stock option activity follows:
<TABLE>
NUMBER OF OPTION NUMBER OF
SHARES PRICE SHARES
UNDER OPTION PER SHARE EXERCISABLE
<S> <C> <C> <C>
Outstanding at December 31, 1995 225,386 2.30- 6.67 104,167
------- -------------
Granted 311,200 8.00-8.80
Exercised (750) 6.67
Expired (1,137) 3.28- 6.67
--------- -------------
Outstanding at June 30, 1996 534,699 $2.30 - 8.80 135,956
======= ============
</TABLE>
The remaining nonexercisable options as of June 30, 1996 become exercisable as
follows:
1996 27,851
1997 95,466
1998 85,227
1999 82,717
2000 82,042
2001 25,440
--------
398,743
10
<PAGE>
ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The following discussion should be read in conjunction with the condensed
financial statements and related notes appearing elsewhere herein, and the
Managements's Discussion and Analysis of Financial Condition and Results of
Operations included in the Company's Prospectus dated May 30, 1996.
The Company develops, manufactures, markets and sells orthopaedic implant
devices and related surgical instrumentation to hospitals and physicians. Sales
of hip implant products historically accounted for most of the Company's
revenues and profits; however, since 1995, sales of knee implant products have
accounted for an increasing portion of its revenues and profits. The Company
anticipates that sales of knee implant products will continue to account for an
increasing portion of its revenues and profits.
The following table sets forth for the periods indicated information with
respect to the number of units of the Company's products sold and the dollar
amount and percentages of revenues derived from such sales (dollars in
thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
---------------------------------------------------------
JUNE 30, 1995 JUNE 30, 1996
<S> <C> <C> <C> <C> <C> <C>
HIP PRODUCTS UNITS $ % UNITS $ %
------------------------- -------------------------
Cemented 2,710 1,345 35.4% 2,608 1,169 17.1%
Porous Coated 2,217 987 26.0% 2,792 992 14.5%
Bipolar Prosthesis 432 234 6.2% 391 221 3.2%
------------------------- -------------------------
Total Hip Products 5,359 2,566 67.6% 5,791 2,382 34.9%
KNEE PRODUCTS
Cemented Cruciate Sparing 999 638 16.8% 4,521 2,120 31.1%
Cemented Posterior Stabilized 164 151 4.0% 1,652 808 11.8%
Porous Coated 188 231 6.1% 742 922 13.5%
------------------------- -------------------------
Total Knee Products 1,351 1,020 26.9% 6,915 3,850 56.4%
Instrument Sales and Rental 190 5.0% 556 8.1%
Miscellaneous 22 0.6% 36 0.5%
============= ===============
TOTAL 3,798 100.0% 6,824 100.0%
THREE MONTHS ENDED
---------------------------------------------------------
JUNE 30, 1995 JUNE 30, 1996
HIP PRODUCTS UNITS $ % UNITS $ %
------------------------- -------------------------
Cemented 1,258 1,345 35.4% 1,474 613 18.0%
Porous Coated 1,133 987 26.0% 1,399 440 12.9%
Bipolar Prosthesis 226 234 6.2% 210 120 3.5%
------------------------- -------------------------
Total Hip Products 2,617 2,566 67.6% 3,083 1,173 34.5%
KNEE PRODUCTS
Cemented Cruciate Sparing 732 441 20.9% 2,289 1,106 32.5%
Cemented Posterior Stabilized 158 147 7.0% 782 399 11.7%
Porous Coated 134 126 6.0% 374 444 113.7
------------------------- -------------------------
Total Knee Products 1,024 714 33.9% 3,445 1,949 57.3%
Instrument Sales and Rental 155 7.3% 256 7.5%
Miscellaneous 11 0.5% 22 0.6%
============= ===============
TOTAL 2,109 100.0% 3,400 100.0%
</TABLE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1996, COMPARED TO THREE MONTHS ENDED JUNE 30, 1995
Net sales increased by $1,291,188, or 61%, to $3,400,233 in the quarter
ended June 30, 1996, from $2,109,045 in the quarter ended June 30, 1995. The
increase in net sales resulted primarily from increased unit volume of the
Company's knee implant products and increased sales of knee instrument sets to
international distributors. Sales of knee implant products increased by 236% on
a unit basis and by 173% on a dollar basis from the quarter ended June 30, 1995
to the quarter ended June 30, 1996, resulting from commencement of full-scale
marketing of the Optetrak /registered mark/ knee system. Knee system instrument
sales and rentals increased to approximately $213,000 in the quarter ended June
30, 1996, from $136,000 in the quarter ended June 30, 1995. Sales of hip implant
products increased by 17.8% on a unit basis and decreased by 4.6% on a dollar
basis from the quarter ended June 30, 1995, to the quarter ended June 30, 1996.
Sales of MCS /registered mark/ porous coated hip implant products increased by
23.5% on a unit basis and decreased by 10.2% on a dollar basis. Sales of
cemented hip implant products increased by 17.2% on a unit basis and decreased
by 0.5% on a dollar basis.
11
<PAGE>
These average selling price reductions are the result of increased unit
sales of lower priced products. Specifically, the MCS /registered mark/
products unit increase of 23.5% is primarily the result of a 69.2% increase in
sales of the MCS/registered mark/ screw which is a lower priced product as
compared to other MCS /registered mark / components. Similarly, the cemented
product group unit increase of 17.2% and dollar decrease of 0.5% is a direct
result of the shift in product mix to the lower priced Opteon/registered mark/
medium demand stem. Sales of the Opteon /registered mark/ stem increased by
36.1% on a unit basis while sales of the high demand cemented stem decreased by
22.1% . The list price for the Opteon /registered mark/ stem is $999 and the
list price for the high demand cemented stem is $1,695. Therefore, the average
selling price of total cemented hip implants declined.
Gross profit increased by $786,784, or 56.3%, to $2,184,026 in the quarter
ended June 30, 1996, from $1,397,242 in the quarter ended June 30, 1995. As a
percentage of sales, gross profit decreased to 64.2% in the quarter ended June
30, 1996, from 66.2% in the quarter ended June 30, 1995. The decrease was
primarily the result of an increased mix of international sales, instrument
sales and Opteon /registered mark/ stem sales at lower margins.
Total operating expenses increased by $421,239, or 38.7%, to $1,509,192 in
the quarter ended June 30, 1996, from $1,087,953 in the quarter ended June 30,
1995. Sales and marketing expense, the largest component of total operating
expenses, increased by $247,859, or 45.4%, to $794,283 in the quarter ended June
30, 1996, from $546,424 in the quarter ended June 30, 1995. Sales and marketing
expenses declined as a percentage of sales to 23.4% in the quarter ended June
30, 1996, from 25.9% in the quarter ended June 30, 1995. The Company's sales and
marketing expenses are largely variable costs based on sales levels, with the
largest component being commissions. The remaining fixed component of these
expenses was spread over a larger sales volume in the quarter ended June 30,
1996, resulting in sales and marketing expenses constituting a lower percentage
of sales.
General and administrative expenses increased by $40,858, or 16.2%, to
$292,509 in the quarter ended June 30, 1996, from $251,651 in the quarter ended
June 30, 1995. Total general and administrative expenses increased primarily as
a result of additional product liability insurance costs directly relating to
the increase in sales. As a percentage of sales, general and administrative
expenses decreased to 8.6% in the quarter ended June 30, 1996, from 11.9% in the
quarter ended June 30, 1995.
Research and development expenses decreased by $8,870, or 4.9%, to $171,471
in the quarter ended June 30, 1996, from $180,341 in the quarter ended June 30,
1995, primarily as a result of reduced product testing costs due to the
completion of testing of the Optetrak /registered mark/ knee system. The
Company expects actual research and development expenses to increase for the
full year of 1996 as compared to 1995, due to development expenses associated
with the revision knee and revision hip systems. Research and development
expenses were 5.0% and 8.5% of sales in the quarters ended June 30, 1996 and
1995, respectively.
Depreciation and amortization increased to $112,895 in the quarter ended
June 30, 1996, from $75,346 in the quarter ended June 30, 1995, as a result of
the continued investment in knee and hip system instrumentation. The Company
capitalizes hip and knee instruments that are provided to its domestic sales
agencies. During the first six months of 1996, $1,015,859 of such instruments
were capitalized, resulting in the increase in depreciation and amortization
expenses.
Royalty expenses increased by $103,843 to $138,034 in the quarter ended
June 30, 1996, from $34,191 in the quarter ended June 30, 1995, primarily as a
result of growth in sales of knee implant products which incur a higher royalty
rate. As a percentage of sales, royalty expenses were 4.1% and 1.6% in the
quarters ended June 30, 1996 and 1995, respectively.
The Company's income from operations increased by $365,545, or 118.2%, to
$674,834 in the quarter ended June 30, 1996, from $309,289 in the quarter ended
June 30, 1995. The increase was primarily attributable
12
<PAGE>
to the increase in sales and gross profits, partially offset by the increase in
operating expenses.
Interest expense, net of interest income, decreased to $66,270 in the
quarter ended June 30, 1996, from $68,666 in the quarter ended June 30, 1995, as
a result of the reduction in outstanding indebtedness during the current
quarter. Interest expense of $103,247 for the quarter ended June 30, 1996, was
offset by $36,976 of interest income as the proceeds of the Company's initial
public offering consummated in June 1996 were invested in short-term commercial
paper and government backed securities.
In July 1995, the Company purchased a 50% interest in Techmed S.p.A.
("Techmed"), its Italian distributor. The investment is accounted for by the
equity method. Included in other expense in the quarter ended June 30, 1996 is
the Company's equity share in the net loss of such subsidiary in the amount of
$14,199.
Income before provision for income taxes increased by $353,742, or 147%, to
$594,365 in the quarter ended June 30, 1996, from $240,623 in the quarter ended
June 30, 1995. The provision for income taxes was $225,859 in the quarter ended
June 30, 1996, compared to $91,437 in the quarter ended June 30, 1995. The
increase resulted from the increase in income before provision for income taxes.
Preferred stock dividends for the quarter ended June 30, 1996 decreased to
$4,330 from $4,825 in the quarter ended June 30, 1995. All outstanding shares of
preferred stock were either converted to common stock or redeemed by the end of
the current quarter.
As a result, the Company had net income of $364,176 in the quarter ended
June 30, 1996, compared to $144,361 in the quarter ended June 30, 1995, a 152.3%
increase.
SIX MONTHS ENDED JUNE 30, 1996, COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
Net sales increased by $3,026,336, or 80%, to $6,823,862 in the six months
ended June 30, 1996, from $3,797,526 in the six months ended June 30, 1995. The
increase in net sales resulted primarily from increased unit volume of the
Company's knee implant products. Sales of knee implant products increased by
412% on a unit basis and by 277% on a dollar basis from the six months ended
June 30, 1995, to the six months ended June 30, 1996, resulting from the
commencement of full-scale marketing of the Optetrak /registered mark/ knee
system. Sales of hip implant products increased by 8.1% on a unit basis and
decreased by 7.1% on a dollar basis from the six months ended June 30, 1995, to
the six months ended June 30, 1996. As discussed above in the quarterly
comparison, these average selling price reductions in the hip system are the
result of increased unit sales of lower priced products including the MCS
/registered mark/ screw and the Opteon /registered mark/ medium demand stem.
Hip and knee instrument sales and rentals increased to $555,567 in the six
months ended June 30, 1996, from $189,955 in the six months ended June 30, 1995
as international knee instrument sales increased.
Gross profit increased by $1,700,184, or 64.4%, to $4,340,323 in the six
months ended June 30, 1996, from $2,640,139 in the six months ended June 30,
1995. As a percentage of sales, gross profit decreased to 63.6% in the six
months ended June 30, 1996, from 69.5% in the six months ended June 30, 1995.
The decrease was primarily the result of an increased mix of international
sales, instrument sales and Opteon /registered mark/ stem sales at lower
margins.
Total operating expenses increased by $939,433, or 44.7%, to $3,041,002 in
the six months ended June 30, 1996, from $2,101,569 in the six months ended June
30, 1995. Operating expenses decreased as a percentage of sales in the six
months ended June 30, 1996, to 44.6% from 55.3% in the six months ended June 30,
1995. Sales and marketing expenses increased by $590,731, or 56.8%, to
$1,631,492 in the six months ended June 30,
13
<PAGE>
1996, from $1,040,761 in the six months ended June 30, 1995. General and
administrative expenses increased by $74,096, or 15.1%, to $565,785 in the six
months ended June 30, 1996, from $491,689 in the six months ended June 30, 1995.
Total general and administrative expenses increased during the most recent six
month period as compared to the prior period primarily as a result of additional
product liability insurance expense resulting from increased sales and expenses
relating to the hiring of additional staff.
Depreciation and amortization increased to $228,970 in the six months ended
June 30, 1996, from $146,432 in the six months ended June 30, 1995. Royalty
expenses increased by $227,554, to $282,230 in the six months ended June 30,
1996, from $54,676 in the six months ended June 30, 1995, primarily as a result
of growth in sales of knee implant products which incur a higher royalty rate.
As a percentage of sales, royalty expenses were 4.1% and 1.4% in the six month
periods ended June 30, 1996 and 1995, respectively.
The Company's income from operations increased by $760,751, or 141.3%, to
$1,299,321 in the six months ended June 30, 1996, from $538,570 in the six
months ended June 30, 1995. The increase was primarily attributable to the
increase in sales and gross profits, partially offset by the increase in
operating expenses.
Interest expense, net of interest income, increased to $170,379 in the six
months ended June 30, 1996, from $110,250 in the six months ended June 30, 1995,
as the average indebtedness for the most recent six months was significantly
higher. Included in other expense for the six months ended June 30, 1996, is the
Company's equity share in the net loss of Techmed in the amount of $32,199.
Income before provision for income taxes increased by $668,423, or 56.1%,
to $1,096,743 in the six months ended June 30, 1996, from $428,320 in the six
months ended June 30, 1995. The provision for income taxes was $416,762 in the
six months ended June 30, 1996, compared to $162,762 in the six months ended
June 30, 1995.
Preferred stock dividends for the six months ended June 30, 1996, increased
to $10,154 from $9,649 in the six months ended June 30, 1995.
As a result, the Company had net income of $669,827 in the six months ended
June 30, 1996, compared to $255,909 in the six months ended June 30, 1995, a
161.7% increase.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations primarily through
borrowings, the sale of equity securities and cash flow from operations. At June
30, 1996, the Company had working capital of $14,920,464 compared to $3,934,759
at December 31, 1995. As a result of operating, investing and financing
activities, cash and cash equivalents at June 30, 1996 increased to $5,172,940
from $182,708 at June 30, 1995. In June 1996, the Company consummated an
underwritten initial public offering (the "IPO") of 1,840,000 shares of its
common stock resulting in net proceeds to the Company of $12,658,819 after
deduction of underwriting, legal, accounting and other offering related
expenses. The significant increase in working capital is primarily the result of
the proceeds from the IPO. The proceeds of the IPO have been used to date to
repay outstanding debt and increase investment in product inventory and
instrumentation. The Company projects that the current working capital will be
sufficient to fund operations and expand the business for at least the next
twelve months.
OPERATING ACTIVITIES
The Company used net cash in operating activities of $68,530 in the six
months ended June 30, 1996 compared to $640,699 in the six months ended June 30,
1995. The primary reason for the change was the $217,166 decrease in inventory
that occurred in the first six months of 1996 as compared to the $890,986
14
<PAGE>
increase in inventory that occurred in the first six months of 1995. Another
factor resulting in less cash being used in operating activities for the six
month period ended June 30, 1996 was reduced growth in trade receivables. Cash
required as a result of the increase in trade receivables was $341,199, for the
first six months of 1996, as compared to $633,968, for the first six months of
1995.
FINANCING ACTIVITIES
The Company had entered into a loan agreement with Merrill Lynch Business
Financial Services, Inc. (the "Lender") which provided for a term loan in the
amount of $1,250,000 and a $3,000,000 line of credit which expired in June 1996.
In June 1996, the Company used a portion of the net proceeds of the IPO to repay
the $1,047,825 outstanding under the term loan and the $2,826,712 outstanding
balance under the line of credit in full. William Petty and Betty Petty,
executive officers and principal shareholders of the Company, had personally
guaranteed the repayment of the Company's obligations under the loan agreement
with the Lender. The Company has negotiated a new loan agreement with the Lender
providing for a $3,000,000 line of credit and the elimination of the personal
guarantees of William Petty and Betty Petty.
The Company also has a term loan with a lender secured by certain of the
Company's real property. At June 30, 1996, $88,539 was outstanding under the
term loan. The term loan bears interest at the prime rate plus 1% per annum and
is payable in monthly installments of principal and interest through September
1999. The Company intends to repay this term loan in full during the next
quarter.
The Company had issued an aggregate of $500,000 in principal amount of its
8% Subordinated Debentures (the "8% Debentures) to Michael M. Kearney, a
shareholder of the Company, and R. Wynn Kearney, a director and shareholder of
the Company, of which $450,000 was outstanding at March 31, 1996. Interest on
the 8% Debentures accrued at the rate of 8% per annum and was payable quarterly.
The Company redeemed the 8% Debentures in full on June 19, 1996, at a redemption
price equal to the outstanding principal amount thereof. In connection with the
issuance of the 8% Debentures, the Company issued to the holders thereof
warrants (the "Debenture Warrants") to purchase 32,194 shares of Common Stock at
an exercise price per share equal to $6.00 (75% of the initial public offering
price of the Common Stock-$8.00). The Debenture Warrants are exercisable during
the three-year period commencing on the date of the IPO (June 4, 1996). In
addition, in April and May 1995, the Company issued an aggregate of $310,000 in
principal amount of its 10% Subordinated Convertible Debentures (the "10%
Debentures"), of which $100,000 was issued to Alan Chervitz, a shareholder of
the Company. The 10% Debentures are payable in full three years from the date of
issuance thereof. Interest on the 10% Debentures accrues at the rate of 10% per
annum and is payable quarterly. As a result of the IPO, the 10% Debentures are
redeemable, at the option of the holders thereof until November 30, 1996, at a
redemption price equal to the outstanding principal amount thereof. The 10%
Debentures are also convertible, at the option of the holders thereof, until
November 30, 1996, into shares of common stock at a conversion rate per share
equal to $7.33. In April 1996, the holders of $50,000 of the 10% Debentures
elected to convert such debentures into shares of Common Stock at the then
conversion rate of $6.67 per share.
Net cash provided by financing activities increased from $955,607 in the
first six months of 1995, to $9,327,753 in the first six months of 1996. The
primary reason for the increase in cash provided by financing activities was the
net proceeds derived from the Company's IPO.
INVESTING ACTIVITIES
The Company has invested the remaining proceeds of the IPO in short-term
investments. As of June 30, 1996, $2,959,650 was invested in 90 day commercial
paper rated A1/P1 with a maturity date of September 19, 1996, yielding 5.38%,
$3,129,305 was invested in United States Treasury Notes with maturities ranging
from June 30,1997 through July 30, 1997 and yielding from 5.57% to 5.75%,and
$1,990,069 was invested in Merrill
15
<PAGE>
Lynch's Institutional Investment Fund comprised of commercial paper and
government backed securities with a current yield of 5.16%. During the first six
months of 1996, net cash used in investing activities increased significantly as
compared to the first six months of 1995, from $399,616 to $4,288,262. This
increase was primarily due to the increased investment in knee instruments and
the purchase of short term investments of $3,134,684 during the first six months
of 1996.
16
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Not Applicable
Item 2. Changes in Securities
Not Applicable
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
Pursuant to a Written Consent of the Board of Directors and shareholders of
the Company, dated April 26, 1996, the holders of a majority of the outstanding
shares of Common Stock, the holders of a majority of the outstanding shares of
the Company's Series A Preferred Stock, par value $.01 per share (the "Series A
Preferred Stock"), the holders of a majority of the outstanding shares of the
Company's Series B Preferred Stock, par value $.01 per share, the holders of a
majority of the outstanding shares of the Company's Series C Preferred Stock,
and all of the members of the Company's Board of Directors, approved certain
amendments to the Company's Articles of Incorporation for the purpose of
amending the terms of the Series A Preferred Stock.
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits:
EXHIBIT DESCRIPTION
------- -----------
11 Statement re: computation of per share earnings
27 Financial Data Schedule
b) Reports on Form 8-K
None.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 5, 1996 By: /s/ TIMOTHY J. SEESE
----------------------
Timothy J. Seese
President and Chief
Operating Officer
Date: August 5, 1996 By: /s/ JOEL C. PHILLIPS
-------------------------
Joel C. Phillips
Treasurer
18
EXHIBIT 11
<TABLE>
<CAPTION>
EARNINGS PER SHARE COMPUTATIONS
The table below details the number of common shares and common stock equivalents
used in the computation of primary and fully diluted earnings per share
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1995 1996 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Primary:
Weighted average common shares outstanding 2,926,341 3,593,186 2,922,107 3,278,134
Effect of shares issuable under stock option plans 75,017 78,842 73,592 72,321
using the treasury stock method
Effect of shares issued and options granted in 1995 at 31,375 31,375
prices below the initial public offering price using
the treasury stock method
Effect of shares issuable upon exercise of warrants 5,931 4,648
using the treasury stock method
--------------------- ----------------------
Shares used in computing primary earnings per share 3,032,733 3,677,959 3,027,074 3,355,103
===================== ======================
Fully Diluted:
Weighted average common and common equivalent 3,032,733 3,677,959 3,027,074 3,355,103
shares outstanding
Effect of period end market price over average price for 13,796 22,152
common stock equivalents (1)
Effect of shares issued upon conversion on subordinated 34,403 34,403
debentures and preferred stock as of the beginning of
the period
Effect of shares contingently issuable under warrants 3,886 3,886
issued with the 8% subordinated debentures using
the treasury stock method
Effect of assumed conversion of convertible subordinated 35,471 35,471
debentures using if converted method
--------------------- ----------------------
Shares used in computing fully diluted earnings per share 3,036,619 3,761,629 3,030,960 3,447,129
===================== ======================
Increase in net income available to common shareholders due $ 5,970 $ 13,324
to above assumed repayment and redemption ===================== ======================
</TABLE>
THE FOLLOWING TABLE DETAILS THE NUMBER OF COMMON SHARES AND COMMON STOCK
EQUIVALENTS USED IN THE COMPUTATION OF PRIMARY AND FULLY DILUTED EARNINGS PER
SHARE ON A PRO FORMA BASIS TO REFLECT THE EFFECT OF THE ISSUANCE OF ADDITIONAL
SHARES OF COMMON STOCK AND THE RELATED REPAYMENT OF DEBT AND REDEMPTION OF
PREFERRED STOCK AS CONTEMPLATED UNDER THE COMPANY'S INITIAL PUBLIC OFFERING IN
JUNE, 1996.
<TABLE>
<S> <C> <C>
Primary:
Shares used in computing actual primary earnings per share 3,677,959 3,355,103
Effect of assumed repayment of debt and redemption of preferred stock 255,919 255,919
--------- ---------
Shares used in computing primary earnings per share 3,933,878 3,611,022
========= =========
Increase in net income available to common shareholders due to above $ 11,624 $ 39,545
========= =========
assumed repayment and redemption
Pro forma Primary Earnings Per Share $ 0.10 $ 0.20
========= =========
Fully Diluted:
Shares used in computing actual fully diluted earnings per share 3,761,629 3,447,129
Effect of assumed repayment of debt and redemption of preferred stock 255,919 255,919
--------- ---------
Shares used in computing fully diluted earnings per share 4,017,548 3,703,048
========= =========
Increase in net income available to common shareholders due to above $ 11,624 $ 39,545
========= =========
assumed repayment and redemption
Pro forma Fully Diluted Earnings Per Share $ 0.10 $ 0.20
========= =========
Note (1): The end of period prices and average prices for the Company's
common stock was substantially the same for the periods ended June
30, 1995. Accordingly, there are no differences in the number of
weighted average common and common equivalent shares outstanding
for primary and fully diluted bases for th 1995 periods.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 5,172,940
<SECURITIES> 3,134,684
<RECEIVABLES> 2,159,381
<ALLOWANCES> (16,053)
<INVENTORY> 6,105,189
<CURRENT-ASSETS> 16,929,744
<PP&E> 3,699,026
<DEPRECIATION> (1,106,172)
<TOTAL-ASSETS> 19,979,689
<CURRENT-LIABILITIES> 2,009,280
<BONDS> 348,539
0
0
<COMMON> 48,291
<OTHER-SE> 17,427,768
<TOTAL-LIABILITY-AND-EQUITY> 19,979,689
<SALES> 6,823,862
<TOTAL-REVENUES> 6,823,862
<CGS> 2,483,539
<TOTAL-COSTS> 2,483,539
<OTHER-EXPENSES> 3,041,002
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 170,379
<INCOME-PRETAX> 1,096,743
<INCOME-TAX> 416,762
<INCOME-CONTINUING> 669,827
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 669,827
<EPS-PRIMARY> .20
<EPS-DILUTED> .20
</TABLE>
