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, 1997
____ 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(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate 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 July 31, 1997
Common Stock, $.01 par value 4,886,213
<PAGE>
EXACTECH, INC.
INDEX
PAGE
NUMBER
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED BALANCE SHEETS AS OF DECEMBER 31, 1996 AND JUNE 30, 1997 2
CONDENSED STATEMENTS OF INCOME FOR THE THREE MONTH AND SIX MONTH 4
PERIODS ENDED JUNE 30, 1996 AND JUNE 30, 1997
CONDENSED STATEMENT OF CHANGES IN COMMON SHAREHOLDERS' EQUITY 5
FOR THE SIX MONTH PERIOD ENDED JUNE 30, 1997
CONDENSED STATEMENTS OF CASH FLOWS FOR THE SIX MONTH PERIODS ENDED 6
JUNE 30, 1996 AND JUNE 30, 1997
NOTES TO CONDENSED FINANCIAL STATEMENTS FOR THE THREE MONTH AND 7
SIX MONTH PERIODS ENDED JUNE 30, 1996 AND JUNE 30, 1997
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION 10
AND RESULTS OF OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 16
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 17
ITEM 2. CHANGES IN SECURITIES 17
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 17
ITEM 5. OTHER INFORMATION 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 17
SIGNATURES 18
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
EXACTECH, INC.
CONDENSED BALANCE SHEETS
(UNAUDITED)
December 31, June 30,
1996 1997
------------ --------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 3,992,442 $ 2,360,935
Short-term investments 3,083,788 2,064,790
Trade receivables 2,462,864 3,042,655
Prepaid expenses and other assets 194,009 484,742
Inventories 7,625,756 9,855,090
-------------- ------------
Total Current Assets 17,358,859 17,808,212
PROPERTY AND EQUIPMENT
Machinery and equipment 4,174,394 5,129,161
Furniture and fixtures 115,089 121,645
-------------- ------------
Total 4,289,483 5,250,806
Accumulated depreciation (1,322,392) (1,638,820)
-------------- ------------
Net property and equipment 2,967,091 3,611,986
OTHER ASSETS
Land held for future use 263,301 263,301
Biologic products license 106,494
Investment in subsidiary 100,638 86,914
Deferred financing costs, net 21,296 6,028
Advances and deposits 2,442 251,800
Patents and trademarks (net of amortization) 393,445 382,813
-------------- ------------
Total Other Assets 781,122 1,097,350
-------------- ------------
TOTAL ASSETS $ 21,107,072 $ 22,517,548
============== ============
</TABLE>
See notes to condensed financial statements
2
<PAGE>
<TABLE>
<CAPTION>
EXACTECH, INC.
CONDENSED BALANCE SHEETS
(UNAUDITED)
DECEMBER 31, JUNE 30,
1996 1997
------------ --------
<S> <C> <C>
LIABILITIES AND EQUITY
Current Liabilities
Accounts payable $ 1,430,321 $ 1,818,158
Income taxes payable 40,986 72,705
Current portion of long-term debt and leases 32,861 4,586
Commissions payable 373,900 412,832
Royalties payable 168,387 197,450
Other liabilities 135,823 79,483
------------ ------------
Total Current Liabilities 2,182,278 2,585,214
Deferred income taxes 326,875 326,875
Long-term debt and capital lease-net of current portion 18,144 15,571
------------ ------------
Total Liabilities 2,527,297 2,927,660
COMMON SHAREHOLDERS' EQUITY:
Common stock 48,604 48,862
Additional paid in capital 14,815,588 14,934,409
Retained earnings 3,715,583 4,606,617
------------ ------------
Total Common Shareholders' Equity 18,579,775 19,589,888
------------ ------------
TOTAL LIABILITIES AND EQUITY $ 21,107,072 $ 22,517,548
============ ============
</TABLE>
See notes to condensed financial statements
3
<PAGE>
<TABLE>
<CAPTION>
EXACTECH, INC.
CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTH PERIOD SIX MONTH PERIOD
ENDED JUNE 30, ENDED JUNE 30,
1996 1997 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET SALES $ 3,400,233 $ 4,234,644 $ 6,823,862 $ 8,334,183
COST OF GOODS SOLD 1,216,207 1,301,735 2,483,539 2,668,421
------------ ----------- ------------ ------------
Gross profit 2,184,026 2,932,909 4,340,323 5,665,762
OPERATING EXPENSES:
Sales and marketing 794,283 1,218,181 1,631,492 2,345,352
General and administrative 292,509 415,402 565,785 775,188
Research and development 171,471 240,449 332,525 482,404
Depreciation and amortization 112,895 186,321 228,970 351,107
Royalties 138,034 204,904 282,230 393,290
------------ ----------- ------------ ------------
Total operating expenses 1,509,192 2,265,257 3,041,002 4,347,341
------------ ----------- ------------ ------------
INCOME FROM OPERATIONS 674,834 667,652 1,299,321 1,318,421
OTHER INCOME (EXPENSE)
Interest income (expense) (66,270) 57,755 (170,379) 140,575
Equity in net loss of subsidiary (14,199) (10,000) (32,199) (25,000)
------------ ----------- ------------ ------------
INCOME BEFORE INCOME TAXES 594,365 715,407 1,096,743 1,433,996
PROVISION FOR INCOME TAXES 225,859 262,607 416,762 542,962
------------ ----------- ------------ ------------
NET INCOME 368,506 452,800 679,981 891,034
PREFERRED STOCK DIVIDENDS 4,330 0 10,154 0
------------ ----------- ------------ ------------
NET INCOME AVAILABLE TO $ 364,176 $ 452,800 $ 669,827 $ 891,034
COMMON SHAREHOLDERS ============ =========== ============ ============
NET INCOME PER COMMON AND $ 0.10 $ 0.09 $ 0.20 $ 0.18
COMMON SHARE EQUIVALENT ============ =========== ============ ============
WEIGHTED AVERAGE COMMON 3,677,959 4,935,018 3,355,103 4,943,745
AND COMMON SHARE
EQUIVALENTS OUTSTANDING
</TABLE>
See notes to condensed financial statements
4
<PAGE>
<TABLE>
<CAPTION>
EXACTECH, INC.
CONDENSED STATEMENT OF CHANGES IN COMMON SHAREHOLDERS' EQUITY
(UNAUDITED)
TOTAL
ADDITIONAL COMMON
COMMON STOCK PAID-IN RETAINED SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------ ------ ------- -------- ------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996 4,860,434 $ 48,604 $ 14,815,588 $ 3,715,583 $ 18,579,775
Exercise of stock options 25,779 258 118,821 119,079
Net income 891,034 891,034
--------- -------- ------------ ------------ -------------
Balance, June 30, 1997 4,886,213 $ 48,862 $ 14,934,409 $ 4,606,617 $ 19,589,888
========= ======== ============ ============ =============
</TABLE>
See notes to condensed financial statements
5
<PAGE>
<TABLE>
<CAPTION>
EXACTECH, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTH PERIOD ENDED JUNE 30,
1996 1997
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income $ 679,981 $ 891,034
Adjustments to reconcile net income to net
cash used in operating activities :
Depreciation and amortization 228,970 351,107
Equity in net loss of subsidiary 32,199 25,000
Increase in trade receivables (341,199) (579,791)
Decrease (increase) in inventories 217,165 (2,229,334)
Increase in other prepaids and assets (246,845) (524,823)
(Decrease) increase in income taxes payable (169,964) 31,719
(Decrease) increase in accounts payable (528,378) 387,837
Increase in other liabilities 59,541 11,655
------------ --------------
Net cash used in operating activities (68,530) (1,635,596)
------------ --------------
INVESTING ACTIVITIES:
Purchases of property and equipment, net (1,093,759) (978,435)
Purchases & distributions of short-term investments (3,134,684) 1,018,998
Purchase of biologic product license - (106,494)
Investment in subsidiary (54,014) (11,276)
Cost of patents and trademarks (5,805) (6,935)
------------ --------------
Net cash used in investing activities (4,288,262) (84,142)
------------ --------------
FINANCING ACTIVITIES:
Proceeds under line of credit (1,844,266) -
Proceeds from issuance of debt 284,763
Principal payments on debt (1,250,549) (30,848)
Repayments of subordinated debentures (450,000) -
Proceeds from issuance of common stock 14,725,100 119,079
Payment of offering costs (2,051,181) -
Preferred dividends paid (10,154) -
Repayments of preferred stock (75,960 -
------------ --------------
Net cash provided by financing activities 9,327,753 88,231
------------ --------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 4,970,961 (1,631,507)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 201,979 3,992,442
------------ --------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 5,172,940 $ 2,360,935
------------ --------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 185,313 $ 8,659
Income taxes 588,323 491,798
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 296,106 -
</TABLE>
See notes to condensed financial statements
6
<PAGE>
EXACTECH, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 1996 AND 1997
(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 contained in the Annual Report on Form 10-K for the
year ended December 31, 1996 of Exactech, Inc. (the "Company"), as filed with
the Securities and Exchange Commission.
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, 1997 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 shareholders' 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 July 15, 1997 to July 31, 1997 and yielding from 5.57% to 5.75%. The fair
value of such investments approximated the carrying value at June 30, 1997.
7
<PAGE>
<TABLE>
<CAPTION>
EXACTECH, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 1996 AND JUNE 30, 1997
(UNAUDITED)
3. DEBT
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS: December 31, June 30,
1996 1997
---- ----
<S> <C> <C>
Capitalized lease obligation payable in monthly installments 23,539 20,157
of $611 through July, 2000, collateralized by equipment with a
carrying value of approximately $27,000 as of December 31, 1996
Notes payable to finance company bearing interest 27,466 -
at 7.43% payable in monthly installments through
February 1997; proceeds used to finance insurance policies
------ ------
Total long-term debt and capital lease obligations 51,005 20,157
Less current portion (32,861) (4,586)
--------- --------
$ 18,144 $ 15,571
========= ========
</TABLE>
The following is a schedule of future minimum lease payments under the
capital leases, together with the present value of minimum lease payments as of
June 30, 1997:
Capital Lease
Obligations
-----------
1997..................................................... 3,056
1998..................................................... 7,333
1999..................................................... 7,333
2000..................................................... 7,188
-------
Total .......................................... $24,910
Less interest on capital lease obligations .............. (4,753)
-------
$20,157
=======
4. CONTINGENCIES
On January 28, 1997, a competitor filed a complaint and jury demand for
patent infringement against the Company. Management has examined the patent and
concluded that the structure of the Company's product differs significantly from
the teachings of the patent. In addition, the Company has sought the advice of
patent counsel who believes that the Company's products do not infringe the
competitor's patent.
The Company, in the normal course of business, is also subjected to
claims and litigation in the areas of product and general liability. Management
does not believe any of such claims will have a material impact on the Company's
financial position.
8
<PAGE>
EXACTECH, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 1996 AND 1997
(UNAUDITED)
5. COMMON SHAREHOLDERS' EQUITY
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, 1996 560,199 $2.30-8.80 172,907
------- ----------
Granted 28,000 7.50-9.00
Exercised (25,779) 2.30
Expired (1,125) 6.67
--------- ----------
Outstanding at June 30, 1997 561,295 $2.30-9.00 229,347
======= ==========
</TABLE>
The remaining nonexercisable options as of June 30, 1997 become exercisable as
follows:
1997 26,397
1998 88,002
1999 86,242
2000 85,567
2001 43,590
2002 2,150
-------
331,948
=======
9
<PAGE>
ITEM 2. MANAGEMENT'S 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
Management's Discussion and Analysis of Financial Condition and Results of
Operations included in the Company's Annual Report on Form 10-K for the year
ended December 31, 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>
EXACTECH, INC.
SALES SUMMARY BY PRODUCT LINE ($1,000'S)
SIX MONTHS ENDED THREE MONTHS ENDED
------------------------------------- -------------------------------------
JUNE 30, 1996 JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1997
UNITS $ % UNITS $ % UNITS $ % UNITS $ %
----- --- --- ----- --- --- ----- --- --- ----- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
HIP PRODUCTS
Cemented 2,608 1,169 17.1% 2,697 1,229 14.8% 1,474 613 18.0% 1,500 656 15.5%
Porous Coated 2,792 992 14.6% 2,626 882 10.6% 1,399 440 13.0% 1,400 481 11.3%
Bipolar 391 221 3.2% 399 195 2.3% 210 120 3.5% 205 93 2.2%
Revision - - 0.0% 16 38 0.5% - - 0.0% 7 29 0.7%
----- ----- ---- ----- ----- ---- ----- ----- ---- ----- ----- ----
Total Hip Products 5,791 2,382 34.9% 5,738 2,344 28.2% 3,083 1,173 34.5% 3,112 1,259 29.7%
Knee Products
Cemented Cruciate Sparing 4,521 2,120 31.1% 5,705 2,728 32.7% 2,289 1,106 32.5% 2,872 1,353 32.0%
Cemented Posterior Stabilized 1,652 808 11.8% 2,727 1,822 21.9% 782 399 11.7% 1,414 955 22.6%
Porous Coated 742 922 13.5% 778 827 9.9% 374 444 13.1% 322 361 8.5%
Revision - 0.0% 953 327 3.9% 0.0% 385 192 4.5%
----- ----- ---- ----- ----- ---- ----- ----- ---- ----- ----- ----
Total Knee Products 6,915 3,850 56.4% 10,163 5,704 68.4% 3,445 1,949 57.3% 4,993 2,861 67.6%
Instrument Sales and Rental 556 8.2% 254 3.0% 256 7.5% 98 2.3%
Miscellaneous 36 0.5% 32 0.4% 22 0.7% 17 0.4%
============ ============ ===== ====== ===== =====
Total 6,824 100.0% 8,334 100.0% 3,400 100.0% 4,235 100.0%
</TABLE>
10
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1997, COMPARED TO THREE MONTHS ENDED JUNE 30, 1996
Net sales increased by $834,411, or 24.5%, to $4,234,644 in the quarter
ended June 30, 1997, from $3,400,233 in the quarter ended June 30, 1996. 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
44.9% on a unit basis and by 46.8% on a dollar basis from the quarter ended June
30, 1996 to the quarter ended June 30, 1997, as the Company continued to
penetrate new markets with the Optetrak/Registered trademark/ knee system. Sales
of hip implant products increased by .9% on a unit basis and increased by 7.3%
on a dollar basis from the quarter ended June 30, 1996, to the quarter ended
June 30, 1997 as a result of the initial release of the AuRA primary hip system.
Although the average unit selling price increased in the three months ended June
30, 1997, the Company believes that more competitive pricing throughout the
industry will result in slight selling price reductions for the balance of the
year. Although the Company believes that the competitive pricing will continue,
it does not believe the pricing will have a material adverse effect on its
results of operations because lower average selling prices for existing products
should be partially offset by higher selling prices for newer products including
the AuRA revision hip components.
Gross profit increased by $748,883, or 34.3%, to $2,932,909 in the quarter
ended June 30, 1997, from $2,184,026 in the quarter ended June 30, 1996. As a
percentage of sales, gross profit increased to 69.3% in the quarter ended June
30, 1997, from 64.2% in the quarter ended June 30, 1996. The profit margin
increase as compared to the quarter ended June 30, 1996, was primarily the
result of reduction in costs of the Optetrak/Registered trademark/ knee system
components as production volumes increased.
Total operating expenses increased by $756,065, or 50.1%, to $2,265,257 in
the quarter ended June 30, 1997, from $1,509,192 in the quarter ended June 30,
1996. Sales and marketing expenses, the largest component of total operating
expenses, increased by $423,898, or 53.4%, to $1,218,181 in the quarter ended
June 30, 1997, from $794,283 in the quarter ended June 30, 1996. Sales and
marketing expenses increased as a percentage of sales to 28.8% in the quarter
ended June 30, 1997, from 23.4% in the quarter ended June 30, 1996. The
Company's sales and marketing expenses are largely variable costs based on sales
levels, with the largest component being commissions. The Company's increased
effort to expand the worldwide distribution and marketing network through sales
agent recruitment and other promotions was a factor in the increase of sales and
marketing expenses.
General and administrative expenses increased by $122,893, or 42.0%, to
$415,402 in the quarter ended June 30, 1997, from $292,509 in the quarter ended
June 30, 1996. As a percentage of sales, general and administrative expenses
increased to 9.8% in the quarter ended June 30, 1997, from 8.6% in the quarter
ended June 30, 1996. Total general and administrative expenses increased as a
result of additional product liability insurance costs directly relating to the
increase in sales and higher investor relations expenses.
Research and development expenses increased by $68,978, or 40.2%, to
$240,449 in the quarter ended June 30, 1997, from $171,471 in the quarter ended
June 30, 1996, primarily as a result of development and testing costs of the
Optetrak/Registered trademark/ CC Revision knee system. Research and development
expenses were 5.7% and 5.0% of sales in the quarters ended June 30, 1997 and
1996, respectively. The Company expects research and development expenses to
increase for the full year of 1997 as compared to 1996, due to continued
development expenses associated with the revision knee system, the revision hip
system and the biologic products.
Depreciation and amortization increased to $186,321 in the quarter ended
June 30, 1997, from $112,895 in the quarter ended June 30, 1996, as a result of
the continued increase in instrumentation for the hip and
12
<PAGE>
knee systems. During the quarter ended June 30, 1997, $885,804 of knee and hip
instrumentation were placed in service, resulting in the increase in
depreciation expense.
Royalty expenses increased by $66,870 to $204,904 in the quarter ended
June 30, 1997, from $138,034 in the quarter ended June 30, 1996, 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 4.8% and 4.1% in the
quarters ended June 30, 1997 and 1996, respectively.
The Company's income from operations decreased by $7,182, or 1.1%, to
$667,652 in the quarter ended June 30, 1997, from $674,834 in the quarter ended
June 30, 1996. The decrease was attributable to the overall increase in
operating expenses as the company continued to invest in research and
development and the worldwide distribution and marketing network expansion.
The Company realized net interest income of $57,755 in the quarter ended
June 30, 1997, as compared to net interest expense of $66,270 in the quarter
ended June 30, 1996. This change resulted from a reduction in outstanding
indebtedness and an increase of short-term investments as compared to the
quarter ended June 30, 1996. Interest expense of $13,339 for the quarter ended
June 30, 1997, was offset by $71,094 of interest income as the remaining
proceeds of the Company's initial public offering ("IPO") consummated in June
1996 were invested in short-term 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, 1997 is
the Company's equity share in the net loss of such subsidiary in the amount of
$10,000 as compared to the $14,199 loss in the quarter ended June 30, 1996.
Income before provision for income taxes increased by $121,042, or 20.4%,
to $715,407 in the quarter ended June 30, 1997, from $594,365 in the quarter
ended June 30, 1996. The provision for income taxes was $262,607 in the quarter
ended June 30, 1997, compared to $225,859 in the quarter ended June 30, 1996.
As a result of the consummation of the IPO, all outstanding shares of
preferred stock were either converted to common stock or redeemed in the quarter
ended June 30, 1996 therefore there were no preferred stock dividends in the
quarter ended June 30, 1997. Preferred stock dividends for the quarter ended
June 30, 1996 were $4,330.
As a result, the Company had net income available to common shareholders
of $452,800 in the quarter ended June 30, 1997, compared to $364,176 in the
quarter ended June 30, 1996, a 24.3% increase. Net income available to common
shareholders remained constant as a percentage of sales at 10.7% in the quarter
ended June 30, 1997 as compared to the quarter ended June 30, 1996.
SIX MONTHS ENDED JUNE 30, 1997, COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
Net sales increased by $1,510,321, or 22.1%, to $8,334,183 in the six
months ended June 30, 1997, from $6,823,862 in the six months ended June 30,
1996. The increase in net sales resulted primarily from increased unit volume of
the Company's knee implant products. Sales of knee implant products for the six
months ended June 30, 1997 increased by 47.0% on a unit basis and by 48.2% on a
dollar basis as compared to the six months ended June 30, 1997. Sales of hip
implant products decreased by .9% on a unit basis and decreased by 1.6% on a
dollar basis from the six months ended June 30, 1996, to the six months ended
June 30, 1997. While reductions in average selling prices in prior quarters have
been the result of a mix shift to lower priced products, the Company believes
that the average selling price reductions for hip products during
12
<PAGE>
this six month period are the result of more competitive pricing throughout the
industry. The Company believes that while the competitive pricing will continue,
it will not have a material adverse effect on the results of operations of the
Company because lower average selling prices for existing products should be
partially offset by higher selling prices for newer products including the AuRA
revision hip components.
Gross profit increased by $1,325,439, or 30.5%, to $5,665,762 in the six
months ended June 30, 1997, from $4,340,323 in the six months ended June 30,
1996. As a percentage of sales, gross profit increased to 68.0% in the six
months ended June 30, 1997, from 63.6% in the six months ended June 30, 1996.
The profit margin increase as compared to the six months ended June 30, 1996 was
primarily the result of reduction in costs of the Optetrak/Registered trademark/
knee system components as production volumes increased.
Total operating expenses increased by $1,306,339, or 43.0%, to $4,347,341
in the six months ended June 30, 1997, from $3,041,002 in the six months ended
June 30, 1996. Sales and marketing expenses, the largest component of total
operating expenses, increased by $713,860, or 43.8%, to $2,345,352 in the six
months ended June 30, 1997, from $1,631,492 in the six months ended June 30,
1996. General and administrative expenses increased by $209,403, or 37.0%, to
$775,188 in the six months ended June 30, 1997, from $565,785 in the six months
ended June 30, 1996. Research and development expenses increased by $149,879, or
45.1%, to $482,404 in the six months ended June 30, 1997, from $332,525 in the
six months ended June 30, 1996.
Depreciation and amortization increased to $351,107 in the six months
ended June 30, 1997, from $228,970 in the six months ended June 30, 1996.
Royalty expenses increased by $111,060 to $393,290 in the six months ended June
30, 1997, from $282,230 in the six months ended June 30, 1996. The increase in
royalty expenses is attributable to the overall growth in sales and specifically
to the growth in sales of knee implant products which incur a higher royalty
rate.
The Company's income from operations increased by $19,100, or 1.5%, to
$1,318,421 in the six months ended June 30, 1997, from $1,299,321 in the six
months ended June 30, 1996. The Company realized net interest income of $140,575
in the six months ended June 30, 1997, as compared to net interest expense of
$170,379 in the six months ended June 30, 1996.
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 six months ended June 30, 1997
is the Company's equity share in the net loss of such subsidiary in the amount
of $25,000 as compared to the $32,199 loss in the six months ended June 30,
1996.
As a result of the consummation of the IPO, all outstanding shares of
preferred stock were either converted to common stock or redeemed in the six
months ended June 30, 1996 therefore there were no preferred stock dividends in
the six months ended June 30, 1997. Preferred stock dividends for the six months
ended June 30, 1996 were $10,154.
As a result, the Company had net income available to common shareholders
of $891,034 in the six months ended June 30, 1997, compared to $669,827 in the
six months ended June 30, 1996, a 33.0% increase. Net income available to common
shareholders increased as a percentage of sales to 10.7% in the six months ended
June 30, 1997, as compared to 9.8% in the six months ended June 30, 1996.
13
<PAGE>
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, 1997, the Company had working capital of $15,222,998 compared to $15,176,581
at December 31, 1996. As a result of operating, investing and financing
activities, cash and cash equivalents at June 30, 1997 decreased to $2,360,935
from $3,992,442 at December 31, 1996. The reduction in cash and cash equivalents
is primarily the result of the increased investment in instrumentation and
inventory for all of the Company's products to support the expansion of the
worldwide distribution and marketing network. 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
Operating activities used net cash of $1,635,596 in the six months ended
June 30, 1997 compared to $68,530 in the six months ended June 30, 1996. The
primary reason for the change was the $2,229,334 increase in inventory that
occurred in the six months ended June 30, 1997, as compared to the $217,166
reduction in inventory that occurred in the six months ended June 30, 1996. The
significant increase in inventory was a direct result of the Company's plan to
support the expansion of the worldwide distribution and marketing network.
During the first six months of 1997, the Company has significantly increased
it's ability to support additional sales agents.
Two other key components in the use of cash for operating activities were
the increase in accounts receivable and prepaid assets. As a result of the
increase in average monthly sales, net trade receivables increased $579,791 for
the period ended June 30, 1997 as compared to $341,199 in the six month period
ended June 30, 1996. During the six month period ended June 30, 1997, the
Company increased the allowance for doubtful accounts from $37,164 to $46,335 as
the overall receivables outstanding increased. Cash required as a result of the
increase in prepaid and other assets was $524,823 for the six month period ended
June 30, 1997, as compared to $246,845 for the six month period ended June 30,
1996.
INVESTING ACTIVITIES
Net cash used by investing activities was $84,142 in the six months
ended June 30, 1997, as compared to $4,288,262 in the six months ended June 30,
1996. The primary change in cash flows between these two periods was the change
in short-term investment activity. During the period ended June 30, 1997,
$1,018,998 in investments matured as compared to the purchase of $3,134,684 in
investments in the six month period ended June 30, 1996. As of June 30, 1997,
$2,064,790 was invested in United States Treasury Notes with maturities ranging
from July 15, 1997 through July 31, 1997 and yielding from 5.57% to 5.75%, and
$2,067,232 was invested in Merrill Lynch's daily maturing Institutional Fund
comprised of commercial paper and government backed securities with a current
yield of 5.4%. Another significant change in investing activities was the
purchase of a biologic products license for $106,494 during the six month period
ending June 30, 1997.
FINANCING ACTIVITIES
Financing activities provided net cash of $88,231 in the six month
period ended June 30, 1997, as compared to $9,327,753 in the period ended June
30, 1996. The primary reason for the change in cash provided by financing
activities was the change in the proceeds from issuance of common stock. During
the six month period ended June 30, 1997, $119,079 in proceeds were received
from issuance of common stock as compared to $14,725,100 in the six month period
ended June 30, 1996 as a result of the IPO.
14
<PAGE>
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share." This
Statement establishes standards for computing and presenting earnings per share
("EPS") and applies to all entities with publicly held common stock or potential
common stock. This Statement replaces the presentation of primary EPS and fully
diluted EPS with a presentation of basic EPS and diluted EPS, respectively.
Basic EPS excludes dilution and is computed by dividing earnings available to
common stockholders by the weighted-average number of common shares outstanding
for the period. Similar to fully diluted EPS, diluted EPS reflects the potential
dilution of securities that could share in the earnings. This Statement is not
expected to have a material effect on the Company's reported EPS amounts. This
Statement is effective for the Company's financial statements for the year ended
December 31, 1997.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," effective for fiscal years beginning after December 15, 1997. This
Statement requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. This Statement does not require a specific format for that
financial statement but requires that an entity display an amount representing
total comprehensive income for the period in that financial statement. This
Statement requires that an entity classify items of other comprehensive income
by their nature in a financial statement. For example, other comprehensive
income may include foreign currency and unrealized gains and losses on certain
investments in debt and equity securities. In addition, the accumulated balance
of other comprehensive income must be displayed separately from retained
earnings and additional paid in capital in the equity section of a statement of
financial position. Reclassification of financial statements for earlier
periods, provided for comparative purposes, is required. The Company has not
determined the impact that the adoption of this new accounting standard will
have on its financial statements. The Company will adopt this accounting
standard on January 1, 1998, as required.
In June 1997, the FASB issued SFAS No. 13 1, "Disclosures about
Segments of an Enterprise and Related Information" effective for fiscal years
beginning after December 15, 1997. This Statement establishes standards for
reporting information about operating segments in annual financial statements
and requires selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and in
assessing performance. This Statement requires reporting segment profit or loss,
certain specific revenue and expense items and segment assets. It also requires
reconciliations of total segment revenues, total segment profit or loss, total
segment assets, and other amounts disclosed for segments to corresponding
amounts reported in the financial statements. Restatement of comparative
information for earlier periods presented is required in the initial year of
application. Interim information is not required until the second year of
application, at which time comparative information is required. The Company has
not determined the impact that the adoption of this new accounting standard will
have on its financial statement disclosures. The Company will adopt this
accounting standard on January 1, 1998, as required.
15
<PAGE>
CAUTIONARY STATEMENT RELATING TO FORWARD LOOKING STATEMENTS
The foregoing Management's Discussion and Analysis contains various
"forward looking statements" within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934 which
represent the Company's expectations or beliefs concerning future events,
including, but not limited to, statements regarding growth in sales of the
Company's products, profit margins and the sufficiency of the Company's cash
flow for its future liquidity and capital resource needs. These forward looking
statements are further qualified by important factors that could cause actual
results to differ materially from those in the forward looking statements. These
factors include, without limitation, the effect of competitive pricing, the
Company's dependence on the ability of its third-party manufacturers to produce
components on a basis which is cost-effective to the Company, market acceptance
of the Company's products and the effects of governmental regulation. Results
actually achieved may differ materially from expected results included in these
statements as a result of these or other factors.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Currently Required.
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
Not Applicable
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.
<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: July 31, 1997 By: /s/ TIMOTHY J. SEESE
--------------------------
Timothy J. Seese
President and Chief
Operating Officer
Date: July 31, 1997 By: /s/ JOEL C. PHILLIPS
--------------------------
Joel C. Phillips
Treasurer
18
<PAGE>
EXHIBIT INDEX
EXHIBIT
-------
11 Statement re: computation of per share earnings
27 Financial Data Schedule
Exhibit 11
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
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1996 1997 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Primary:
Weighted average common shares outstanding 3,593,186 4,878,193 3,278,134 4,869,313
Effect of shares issuable under stock option plans 78,842 52,557 72,321 67,361
using the treasury stock method
Effect of shares issuable upon exercise of warrants 5,931 4,268 4,648 7,071
using the treasury stock method
----------------------- -----------------------
Shares used in computing primary earnings per share 3,677,959 4,935,018 3,355,103 4,943,745
======================= =======================
Primary Earnings Per Share $0.09 $0.18
========== ==========
Fully Diluted:
Weighted average common and common equivalent 3,677,959 4,935,018 3,355,103 4,943,745
shares outstanding
Effect of period end market price over average price for 13,796 22,152
common stock equivalents
Effect of shares contingently issuable under warrants 34,403 34,403
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 3,761,629 4,935,018 3,447,129 4,943,745
======================= =======================
Increase in net income available to common shareholders
due to above assumed repayment and redemption $ 5,970 $ -- $ 13,324 $ --
======================= =======================
Fully Diluted Earnings Per Share $0.09 $0.18
========== ==========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 2,360,935
<SECURITIES> 2,064,790
<RECEIVABLES> 3,042,655
<ALLOWANCES> (46,335)
<INVENTORY> 9,855,090
<CURRENT-ASSETS> 17,808,212
<PP&E> 5,250,806
<DEPRECIATION> (1,638,820)
<TOTAL-ASSETS> 22,517,548
<CURRENT-LIABILITIES> 2,585,214
<BONDS> 0
0
0
<COMMON> 48,862
<OTHER-SE> 19,541,026
<TOTAL-LIABILITY-AND-EQUITY> 22,517,548
<SALES> 4,234,644
<TOTAL-REVENUES> 4,234,644
<CGS> 1,301,735
<TOTAL-COSTS> 1,301,735
<OTHER-EXPENSES> 2,265,257
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (57,755)
<INCOME-PRETAX> 715,407
<INCOME-TAX> 262,607
<INCOME-CONTINUING> 452,800
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 452,800
<EPS-PRIMARY> 0.09
<EPS-DILUTED> 0.09
</TABLE>
