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 September 30, 1998
[ ] 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.)
2320 NW 66TH COURT
GAINESVILLE, FL
32653
(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 October 27, 1998
Common Stock, $.01 par value 4,907,163
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<CAPTION>
EXACTECH, INC.
INDEX
PAGE
NUMBER
<S> <C>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets as of December 31, 1997 and September 30, 1998 2
Condensed Statements of Income for the Three Month and Nine Month 3
Periods Ended September 30, 1997 and September 30, 1998
Condensed Statement of Changes in Shareholders' Equity for the Nine 4
Month Period Ended September 30, 1998
Condensed Statements of Cash Flows for the Nine Month Periods Ended 5
September 30, 1997 and September 30, 1998
Notes to Condensed Financial Statements for the Three Month and Nine 6
Month Periods Ended September 30, 1997 and September 30, 1998
Item 2. Management's Discussion and Analysis of Financial 9
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
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1
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ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
EXACTECH, INC.
CONDENSED BALANCE SHEETS
(UNAUDITED)
DECEMBER 31, SEPTEMBER 30,
ASSETS 1997 1998
--------------- ---------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 4,176,293 $ 2,034,865
Short-term investments 1,335,740 -
Trade receivables 3,760,996 5,081,383
Refundable income taxes 259,778 -
Prepaid expenses and other assets 103,646 170,647
Inventories 10,697,879 11,618,428
--------------- ---------------
Total Current Assets 20,334,332 18,905,323
PROPERTY AND EQUIPMENT
Land 263,301 263,301
Machinery and equipment 1,636,587 2,374,088
Surgical Instruments 4,568,489 5,388,653
Furniture and fixtures 123,014 342,624
Facilities 1,371,545 3,252,031
--------------- ---------------
Total 7,962,936 11,620,697
Accumulated depreciation (1,984,249) (2,594,385)
--------------- ---------------
Net property and equipment 5,978,687 9,026,312
OTHER ASSETS 841,817 997,038
--------------- ---------------
TOTAL ASSETS $ 27,154,836 $ 28,928,673
=============== ===============
LIABILITIES AND EQUITY
Current Liabilities
Accounts payable $ 1,611,775 $ 1,433,399
Income taxes payable - 113,486
Current portion of long-term debt and leases 4,894 93,122
Commissions payable 473,028 402,670
Royalties payable 258,959 280,917
Other liabilities 115,805 349,177
--------------- ---------------
Total Current Liabilities 2,464,461 2,672,771
Deferred income taxes 433,948 415,273
Long-term debt and capital lease-net of current portion 3,912,835 3,908,674
--------------- ---------------
Total Liabilities 6,811,244 6,996,718
SHAREHOLDERS' EQUITY:
Common stock 49,047 49,072
Additional paid-in capital 15,002,968 15,015,147
Retained earnings 5,291,577 6,867,736
--------------- ---------------
Total Shareholders' Equity 20,343,592 21,931,955
--------------- ---------------
TOTAL LIABILITIES AND EQUITY $ 27,154,836 $ 28,928,673
=============== ===============
</TABLE>
See notes to condensed financial statements.
2
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<TABLE>
<CAPTION>
EXACTECH, INC.
CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTH PERIOD NINE MONTH PERIOD
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
1997 1998 1997 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
NET SALES $ 4,242,293 $ 5,569,186 $ 12,576,476 $ 17,262,101
COST OF GOODS SOLD 1,433,809 1,912,150 4,102,230 6,089,093
------------- ------------- ------------- -------------
Gross profit 2,808,484 3,657,036 8,474,246 11,173,008
OPERATING EXPENSES:
Sales and marketing 1,204,897 1,417,841 3,550,248 4,350,485
General and administrative 433,146 488,068 1,208,335 1,455,425
Research and development 234,373 344,336 716,778 979,301
Depreciation and amortization 212,312 303,169 563,419 859,875
Royalties 206,672 268,791 599,962 889,122
------------- ------------- ------------- -------------
Total operating expenses 2,291,400 2,822,205 6,638,742 8,534,208
------------- ------------- ------------- -------------
INCOME FROM OPERATIONS 517,084 834,831 1,835,504 2,638,800
OTHER INCOME (EXPENSE)
Interest income (expense), net 34,739 (27,238) 175,314 (35,678)
Equity in net loss of subsidiary (158,909) - (183,909) 13,778
------------- ------------- ------------- -------------
INCOME BEFORE INCOME TAXES 392,914 807,593 1,826,909 2,616,900
PROVISION FOR INCOME TAXES 149,308 318,461 692,269 1,040,741
------------- ------------- ------------- -------------
NET INCOME $ 243,606 $ 489,132 $ 1,134,640 $ 1,576,159
============= ============= ============= =============
BASIC EARNINGS PER SHARE $ 0.05 $ 0.10 $ 0.23 $ 0.32
============= ============= ============= =============
DILUTED EARNINGS PER SHARE $ 0.05 $ 0.10 $ 0.23 $ 0.32
============= ============= ============= =============
</TABLE>
See notes to condensed financial statements.
3
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<TABLE>
<CAPTION>
EXACTECH, INC.
CONDENSED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)
ADDITIONAL TOTAL
COMMON STOCK PAID-IN RETAINED SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------ ------ ------- -------- ------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1997 4,904,663 $ 49,047 $ 15,002,968 $ 5,291,577 $ 20,343,592
Exercise of stock options 2,500 25 12,179 12,204
Net income 1,576,159 1,576,159
----------- ---------- ------------ ------------ ---------------
Balance, September 30, 1998 4,907,163 $ 49,072 $ 15,015,147 $ 6,867,736 $ 21,931,955
=========== ========== ============ ============ ===============
</TABLE>
See notes to condensed financial statements.
4
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<TABLE>
<CAPTION>
EXACTECH, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTH PERIOD ENDED SEPTEMBER 30,
1997 1998
------------ -------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income $ 1,134,640 $ 1,576,159
Adjustments to reconcile net income to net
cash (used in) provided by operating activities :
Depreciation and amortization 563,419 859,875
Equity in net loss of subsidiary 183,909 -
Deferred income taxes - (18,675)
Increase in trade receivables (642,185) (1,320,387)
Increase in inventories (2,533,005) (920,549)
Increase in other prepaids and assets (267,114) (46,995)
(Decrease) increase in income taxes payable (34,225) 373,264
Increase (decrease) in accounts payable 352,849 (178,376)
Increase in other liabilities 57,575 184,972
------------ -------------
Net cash (used in) provided by operating activities (1,184,137) 509,288
------------ -------------
INVESTING ACTIVITIES:
Purchases of property and equipment, net (2,251,978) (3,852,415)
Maturities of short-term investments 3,083,788 1,335,740
Purchases of product licenses and designs (106,494) (200,000)
Investment in subsidiary (83,272) -
Cost of patents and trademarks (68,353) (30,312)
------------ -------------
Net cash provided by (used in) investing activities 573,691 (2,746,987)
------------ -------------
FINANCING ACTIVITIES:
Proceeds from financing of insurance premiums, net - 87,278
Principal payments on debt (32,042) (3,211)
Proceeds from issuance of common stock 122,081 12,204
------------ -------------
Net cash provided by financing activities 90,039 96,271
------------ -------------
DECREASE IN CASH AND CASH EQUIVALENTS (520,407) (2,141,428)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,992,442 4,176,293
------------ -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,472,035 $ 2,034,865
============ =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 37,175 $ 174,386
Income taxes 664,556 705,186
Noncash investing and financing activities:
Financing of insurance premiums - 271,866
See notes to condensed financial statements
</TABLE>
5
<PAGE>
EXACTECH, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1998
(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, 1997 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 nine month period ended
September 30, 1998 are not necessarily indicative of the results to be expected
for the full year.
2. CHANGE IN ACCOUNTING PRINCIPLE
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130").
SFAS No. 130 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. SFAS No. 130 also requires that an entity classify items
of other comprehensive income by their nature in a financial statement. Examples
include foreign currency translation adjustments, minimum pension liability
adjustments, and unrealized gains and losses on marketable securities classified
as available-for-sale. Adoption of SFAS No. 130 did not have a material effect
on the Company's financial statements.
3. ASSET PURCHASES
During June 1998, the Company purchased substantially all of the assets
related to Synvasive Technology, Inc.'s ("Synvasive") AcuDriver product line for
$375,000. The assets included inventory, tooling, fixtures, designs, trademark
and future patent rights.
4. COMMITMENTS AND CONTINGENCIES
As of September 30, 1998, the Company was committed to approximately
$190,000 in remaining construction costs associated with the completion of its
new headquarters and manufacturing facility. 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.
6
<PAGE>
EXACTECH, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1998
(UNAUDITED)
5. DEBT
<TABLE>
<CAPTION>
Long-term debt and capital lease obligations: DECEMBER 31, SEPTEMBER 30,
1997 1998
----------- -------------
<S> <C> <C>
Capitalized lease obligation payable in monthly installments $ 17,729 $ 14,518
of $611 through July, 2000, collateralized by equipment with
a carrying value of approximately $17,700 as of September 30, 1998
Notes payable to finance company bearing interest -- 87,278
at 6.5% payable in eleven monthly installments from April 1998
through February 1999; proceeds used to finance insurance policies
Industrial Revenue Bond note payable in annual 3,900,000 3,900,000
principal installments as follows: $300,000 per year from 2000-2006;
$200,000 per year from 2007-2013; $100,000 per year from 2014-2017;
monthly interest payments based on adjustable rate as determined by the
bonds remarketing agent based on market rate fluctuations (4.15% as of
September 30, 1998); proceeds used to finance construction of new
facility ----------- -------------
Total long-term debt and capital lease obligations 3,917,729 4,001,796
Less current portion (4,894) (93,122)
----------- -------------
$ 3,912,835 $ 3,908,674
=========== =============
</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 September 30, 1998:
<TABLE>
<CAPTION>
LONG-TERM CAPITAL LEASE
DEBT OBLIGATIONS
----------- -------------
<S> <C> <C>
1998 ..................................... -- $ 1,833
1999 ..................................... -- 7,333
2000 ..................................... $ 300,000 7,188
2001 ..................................... 300,000 --
2002 ..................................... 300,000 --
Thereafter ............................... 3,000,000 --
---------- ----------
Total .................................... $3,900,000 16,354
========== ==========
Less interest on capital lease
obligations ............................. (1,836)
----------
$ 14,518
==========
</TABLE>
During July 1998, the Company's line of credit facility with Merrill Lynch
Business Financial Services Inc. was renewed and increased to $6,000,000. The
line of credit expires June 30, 2000 and is collateralized by inventory and
accounts receivable. As of September 30, 1998, there was no amount outstanding
under the line of credit.
7
<PAGE>
EXACTECH, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1998
(UNAUDITED)
6. SHAREHOLDERS' EQUITY
Earnings Per Share:
The following is a reconciliation of the numerators and denominators of the
basic and diluted EPS computations for net income and net income available to
common shareholders:
<TABLE>
<CAPTION>
INCOME SHARES PER INCOME SHARES PER
NUMERATOR DENOMINATOR SHARE NUMERATOR DENOMINATOR SHARE
------------------------------------- -------------------------------------
THREE MONTHS ENDED SEPTEMBER 30, 1997 THREE MONTHS ENDED SEPTEMBER 30, 1998
------------------------------------- -------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net income $ 243,606 $ 489,132
BASIC EPS:
Net income available to
common shareholders 243,606 4,886,628 $0.05 489,132 4,906,135 $0.10
Effect of Dilutive Securities:
Stock options 47,778 44,748
Warrants 3,346 5,551
DILUTED EPS:
Net income available to
common shareholders plus
assumed conversions 243,606 4,937,752 $0.05 489,132 4,956,434 $0.10
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1997 NINE MONTHS ENDED SEPTEMBER 30, 1998
------------------------------------- -------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net income $1,134,640 $1,576,159
BASIC EPS:
Net income available to
common shareholders 1,134,640 4,875,085 $0.23 1,576,159 4,905,154 $0.32
Effect of Dilutive Securities:
Stock options 61,007 37,479
Warrants 5,941 4,104
DILUTED EPS:
Net income available to
common shareholders plus
assumed conversions 1,134,640 4,942,033 $0.23 1,576,159 4,946,737 $0.32
</TABLE>
For the three months ended September 30, 1997, options to purchase 364,200
shares of common stock at prices ranging from $7.50 to $9.00 per share were
outstanding but were not included in the computation of diluted EPS because the
options' exercise prices were greater than the average market price of the
common shares. For the three months ended September 30, 1998, options to
purchase 357,975 shares of common stock at prices ranging from $7.50 to $9.00
per share were outstanding but were not included in the computation of diluted
EPS because the options' exercise prices were greater than the average market
price of the common shares.
For the nine months ended September 30, 1997, options to purchase 364,200 shares
of common stock at prices ranging from $7.50 to $9.00 per share were outstanding
but were not included in the computation of diluted EPS because the options'
exercise prices were greater than the average market price of the common shares.
For the nine months ended September 30, 1998, options to purchase 371,975 shares
of common stock at prices ranging from $7.13 to $9.00 per share were outstanding
but were not included in the computation of diluted EPS because the options'
exercise prices were greater than the average market price of the common shares.
8
<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, 1997.
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>
SALES SUMMARY BY PRODUCT LINE ($1,000's)
NINE MONTHS ENDED
------------------------------------------------------
SEPTEMBER 30, 1997 SEPTEMBER 30, 1998
Hip Products UNITS $ % UNITS $ %
------ ------- ------ ------ ----- -----
<S> <C> <C> <C> <C> <C> <C>
Cemented 4,012 1,770 14.1% 3,748 1,727 10.0%
Porous Coated 3,761 1,335 10.6% 3,767 1,286 7.4%
Bipolar 655 312 2.5% 743 346 2.0%
Revision 27 68 0.5% 101 216 1.3%
-------------------------- -------------------------
Total Hip Products 8,455 3,485 27.7% 8,359 3,575 20.7%
Knee Products
Cemented Cruciate Sparing 8,588 4,118 32.7% 11,885 5,070 29.4%
Cemented Posterior Stabilized 4,480 2,918 23.2% 7,276 4,726 27.4%
Porous Coated 1,060 1,115 8.9% 1,243 1,290 7.5%
Revision 1,477 514 4.1% 2,908 1,581 9.1%
-------------------------- -------------------------
Total Knee Products 15,605 8,665 68.9% 23,312 12,667 73.4%
Instrument Sales and Rental 376 3.0% 644 3.7%
Tissue Services 0.0% 194 1.1%
Acudriver 0.0% 103 0.6%
Miscellaneous 50 0.4% 79 0.5%
---------------- ---------------
Total 12,576 100.0% 17,262 100.0%
================ ===============
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------
SEPTEMBER 30, 1997 SEPTEMBER 30, 1998
<S> <C> <C> <C> <C> <C> <C>
Hip Products UNITS $ % UNITS $ %
------ ------- ------ ----- ----- -----
Cemented 1,315 541 12.7% 1,223 544 9.3%
Porous Coated 1,135 452 10.7% 1,204 381 6.8%
Bipolar 256 117 2.8% 234 105 1.9%
Revision 11 31 0.7% 24 65 1.2%
-------------------------- -------------------------
Total Hip Products 2,717 1,141 26.9% 2,685 1,095 19.7%
Knee Products
Cemented Cruciate Sparing 2,883 1,391 32.8% 3,168 1,534 27.6%
Cemented Posterior Stabilized 1,753 1,095 25.8% 2,179 1,516 27.2%
Porous Coated 282 288 6.8% 314 348 6.2%
Revision 482 187 4.4% 1,148 665 11.9%
-------------------------- -------------------------
Total Knee Products 5,400 2,961 69.8% 6,809 4,063 72.9%
Instrument Sales and Rental 122 2.9% 210 3.8%
Tissue Services - 0.0% 118 2.1%
Acudriver - 0.0% 55 1.0%
Miscellaneous 18 0.4% 28 0.5%
---------------- ---------------
Total 4,242 100.0% 5,569 100.0%
================ ===============
</TABLE>
9
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998
COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1997
Net sales increased by $1,326,893, or 31%, to $5,569,186 in the quarter
ended September 30, 1998, from $4,242,293 in the quarter ended September 30,
1997. 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
26% on a unit basis and by 37% on a dollar basis from the quarter ended
September 30, 1997 to the quarter ended September 30, 1998, as the Company
continued to expand its domestic and international distribution. The overall
increase in knee sales and the increase in average unit selling prices was
primarily the result of an increase in revision knee system sales.
Optetrak/registered trademark/ revision component sales increased 256% to
$664,777 in the quarter ended September 30, 1998, from $186,607 in the quarter
ended September 30, 1997. Sales of hip implant products decreased by 1% on a
unit basis and by 4% on a dollar basis from the quarter ended September 30,
1997, to the quarter ended September 30, 1998. International sales increased 64%
to $919,327 in the quarter ended September 30, 1998, from $560,879 in the
quarter ended September 30, 1997 as international distributors continued to
enter new markets and the Company completed an initial stocking order to its
Japanese distributor. As a percentage of sales, international sales increased to
17% in the quarter ended September 30, 1998, as compared to 13% in the quarter
ended September 30, 1997.
Gross profit increased by $848,552, or 30%, to $3,657,036 in the quarter
ended September 30, 1998, from $2,808,484 in the quarter ended September 30,
1997. As a percentage of sales, gross profit remained flat at 66% in the quarter
ended September 30, 1998 as compared to the quarter ended September 30, 1997.
Total operating expenses increased by $530,805, or 23%, to $2,822,205 in
the quarter ended September 30, 1998, from $2,291,400 in the quarter ended
September 30, 1997. Sales and marketing expenses, the largest component of total
operating expenses, increased by $212,944, or 18%, to $1,417,841 in the quarter
ended September 30, 1998, from $1,204,897 in the quarter ended September 30,
1997. Sales and marketing expenses decreased as a percentage of sales to 26% in
the quarter ended September 30, 1998, from 28% in the quarter ended September
30, 1997. The Company's sales and marketing expenses are largely variable costs
based on sales levels, with the largest component being commissions. Sales and
marketing expenses as a percentage of sales decreased primarily due to the
increase in international sales which do not incur commissions.
General and administrative expenses increased by $54,922, or 13%, to
$488,068 in the quarter ended September 30, 1998, from $433,146 in the quarter
ended September 30, 1997. As a percentage of sales, general and administrative
expenses decreased to 9% in the quarter ended September 30, 1998, from 10% in
the quarter ended September 30, 1997. Total general and administrative expenses
decreased as a percentage of sales primarily as a result of reduced insurance
costs. Liability and general insurance expenses decreased to $62,563 in the
quarter ended September 30, 1998, from $89,836 in the quarter ended September
30, 1997.
Research and development expenses increased by $109,963, or 47%, to
$344,336 in the quarter ended September 30, 1998, from $234,373 in the quarter
ended September 30, 1997. Research and development expenses were 6.2% and 5.5%
of sales in the quarters ended September 30, 1998 and 1997, respectively. The
Company expects research and development expenses to increase for the full year
of 1998 as compared to 1997, due to continued development expenses associated
with the modular revision hip system and other product lines.
10
<PAGE>
Depreciation and amortization increased to $303,169 in the quarter ended
September 30, 1998, from $212,312 in the quarter ended September 30, 1997.
Depreciation expenses increased as a result of the increased investment in
surgical instrumentation and machinery and equipment associated with the
Company's new facility. During the quarter ended September 30, 1998, $237,418 of
surgical instruments and $198,233 of machinery and equipment were placed in
service, resulting in the increase in depreciation expense.
Royalty expenses increased by $62,119 to $268,791 in the quarter ended
September 30, 1998, from $206,672 in the quarter ended September 30, 1997,
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 remained flat at
5% in the quarters ended September 30, 1998 and 1997.
The Company's income from operations increased by $317,747, or 61%, to
$834,831 in the quarter ended September 30, 1998, from $517,084 in the quarter
ended September 30, 1997. The increase was primarily attributable to the
increase in sales and gross profit, partially offset by the increase in
operating expenses.
The Company realized net interest expense of $27,238 in the quarter ended
September 30, 1998, as compared to net interest income of $34,739 in the quarter
ended September 30, 1997. The recognition of expense as compared to income was
the result of a reduction of short-term investments while there was increased
borrowing associated with construction of the new facility. Interest expense of
$57,038 for the quarter ended September 30, 1998, was partially offset by
$29,800 of interest income.
In July 1995, the Company purchased a 50% interest in Techmed S.p.A.
("Techmed"), its Italian distributor. Prior to September 1997, the investment in
the subsidiary was accounted for using the equity method with the Company's
share of the subsidiary's net earnings (loss) included as a separate item in the
statement of income. During September 1997, the Company wrote off its investment
in the subsidiary and reserved for trade receivables deemed uncollectible. In
April 1998, the Company sold its interest in Techmed and recognized $13,778 in
gains associated with the sale. There was no gain or loss associated with
Techmed in the quarter ended September 30, 1998 as compared to the $158,909 loss
in the quarter ended September 30, 1997.
Income before provision for income taxes increased by $414,679, or 106%, to
$807,593 in the quarter ended September 30, 1998, from $392,914 in the quarter
ended September 30, 1997. The provision for income taxes was $318,461 in the
quarter ended September 30, 1998, compared to $149,308 in the quarter ended
September 30, 1997.
As a result, the Company realized net income of $489,132 in the quarter
ended September 30, 1998, compared to $243,606 in the quarter ended September
30, 1997, a 101% increase. As a percentage of sales, net income increased to 9%
in the quarter ended September 30, 1998 from 6% in the quarter ended September
30, 1997. The increase in net income as a percentage of sales was primarily due
to the absence of a subsidiary loss in the quarter ended September 30, 1998, as
compared to the $158,909 loss in the quarter ended September 30, 1997.
NINE MONTHS ENDED SEPTEMBER 30, 1998
COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1997
Net sales increased by $4,685,625, or 37%, to $17,262,101 in the nine
months ended September 30, 1998, from $12,576,476 in the nine months ended
September 30, 1997. Sales of knee implant products increased by 49% on a unit
basis and by 46% on a dollar basis from the nine months ended September 30, 1997
to the nine months ended September 30, 1998. Sales of hip implant products
11
<PAGE>
decreased by 1% on a unit basis but increased by 3% on a dollar basis from
the nine months ended September 30, 1997, to the nine months ended September 30,
1998. The increase in hip sales on a dollar basis was primarily the result of an
increase in AuRA/registered trademark/ revision hip system sales.
AuRA/registered trademark/ revision component sales increased to $216,225 in the
nine months ended September 30, 1998, from $68,225 in the nine months ended
September 30, 1997. International sales increased 90% to $3,466,747 in the nine
months ended September 30, 1998, from $1,827,193 in the nine months ended
September 30, 1997. As a percentage of sales, international sales increased to
20% in the nine months ended September 30, 1998, as compared to 15% in the nine
months ended September 30, 1997.
Gross profit increased by $2,698,762, or 32%, to $11,173,008 in the nine
months ended September 30, 1998, from $8,474,246 in the nine months ended
September 30, 1997. As a percentage of sales, gross profit decreased to 65% in
the nine months ended September 30, 1998, from 67% in the nine months ended
September 30, 1997. The profit margin decrease was primarily the result of an
increased mix of international sales which are at lower average unit selling
prices.
Total operating expenses increased by $1,895,466, or 29%, to $8,534,208 in
the nine months ended September 30, 1998, from $6,638,742 in the nine months
ended September 30, 1997. Sales and marketing expenses, the largest component of
total operating expenses, increased 23% to $4,350,485 in the nine months ended
September 30, 1998, from $3,550,248 in the nine months ended September 30, 1997.
The increase in sales and marketing expenses is primarily a result of the
increase in commissions associated with the increase in sales. Sales and
marketing expenses decreased as a percentage of sales to 25% in the nine months
ended September 30, 1998, from 28% in the nine months ended September 30, 1997.
General and administrative expenses increased 20% to $1,455,425 in the nine
months ended September 30, 1998, from $1,208,335 in the nine months ended
September 30, 1997. As a percentage of sales, general and administrative
expenses decreased to 8% in the nine months ended September 30, 1998, from 10%
in the nine months ended September 30, 1997. Research and development expenses
increased 37% to $979,301 in the nine months ended September 30, 1998, from
$716,778 in the nine months ended September 30, 1997. As a percentage of sales,
research and development expenses remained flat at 6% for the nine months ended
September 30, 1998 and September 30, 1997.
Depreciation and amortization increased to $859,875 in the nine months
ended September 30, 1998, from $563,419 in the nine months ended September 30,
1997. Depreciation expenses increased as a result of the increased investment in
surgical instrumentation and depreciation associated with the Company's new
facility. During the nine months ended September 30, 1998, $1,084,976 of
surgical instruments and $737,501 of machinery and equipment were placed in
service.
Royalty expenses increased 48% to $889,122 during the nine months ended
September 30, 1998, from $599,962 in the nine months ended September 30, 1997.
The Company's income from operations increased 44%, to $2,638,800 in the
nine months ended September 30, 1998, from $1,835,504 in the nine months ended
September 30, 1997. The increase was primarily attributable to the increase in
sales and gross profit, partially offset by the increase in operating expenses.
The Company realized net interest expense of $35,678 in the nine months
ended September 30, 1998, as compared to net interest income of $175,314 in the
nine months ended September 30, 1997. Interest expense of $172,087 for the nine
months ended September 30, 1998, was partially offset by $136,409 of
12
<PAGE>
interest income.
The Company recognized a $13,778 gain associated with the sale of its
interest in Techmed in the nine months ended September 30, 1998, as compared to
the $183,909 loss in the nine months ended September 30, 1997.
Income before provision for income taxes increased 43%, to $2,616,900 in
the nine months ended September 30, 1998, from $1,826,909 in the nine months
ended September 30, 1997. The provision for income taxes was $1,040,741 in the
nine months ended September 30, 1998, compared to $692,269 in the nine months
ended September 30, 1997.
As a result, the Company realized net income of $1,576,159 in the nine
months ended September 30, 1998, compared to $1,134,640 in the nine months ended
September 30, 1997, a 39% increase. As a percentage of sales, net income
remained flat at 9% in the nine months ended September 30, 1998 as compared to
the nine months ended September 30, 1997.
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.
In order to raise capital, in June 1996, the Company consummated an underwritten
initial public offering (the "IPO") of 1,840,000 shares of its common stock,
$.01 par value (the "Common Stock"), resulting in net proceeds to the Company of
$12,657,910 after deduction of underwriting, legal, accounting and other
offering related expenses. At September 30, 1998, the Company had working
capital of $16,232,552 compared to $17,869,871 at December 31, 1997. The
decrease in working capital is primarily the result of $2,100,096 in costs
associated with the construction of, and the purchase of equipment related to,
the Company's new headquarters and manufacturing facility in the nine months
ended September 30, 1998. As of September 30, 1998, the Company had expended
$3,252,031 in costs associated with the construction of the facility. As a
result of operating, investing and financing activities, cash and cash
equivalents at September 30, 1998 decreased to $2,034,865 from $4,176,293 at
December 31, 1997.
The Company is committed to approximately $190,000 in remaining
construction costs associated with the completion of the new facility as of
September 30, 1998. During July 1998, the Company's line of credit facility with
Merrill Lynch Business Financial Services, Inc. was renewed and increased to
$6,000,000. The credit facility, which is collateralized by accounts receivable
and inventory, expires in June 2000. At September 30, 1998, there was no amount
outstanding under the line of credit. The Company believes that funds from
operations, the remaining proceeds of the IPO and borrowings under its existing
credit facilities will be sufficient to satisfy its contemplated cash
requirements for the following twelve months.
In November 1997, the Company entered into a $3,900,000 industrial
revenue bond financing with the City of Gainesville, Florida (the "City"),
pursuant to which the City issued its industrial revenue bonds and loaned the
proceeds to the Company. The bonds are secured by an irrevocable letter of
credit issued by a bank. The $3,900,000 credit facility requires the payment by
the Company of principal installments as follows: $300,000 per year from 2000
through 2006; $200,000 per year from 2007 through 2013; and $100,000 per year
from 2014 through 2017. Monthly interest payments are based on an adjustable
rate as determined by the bonds remarketing agent based on market rate
fluctuations (4.15% as of September 30, 1998). The proceeds of the credit
facility are being used to finance construction of the new facility. The
Company's obligations to the bank issuing the letter of credit are
13
<PAGE>
secured by the land and improvements comprising the facility.
OPERATING ACTIVITIES
Operating activities provided net cash of $509,289 in the nine months ended
September 30, 1998 as compared to using net cash of $1,184,137 in the nine
months ended September 30, 1997. The primary reason for the change was the
growth in inventory of $920,549 in the nine months ended September 30, 1998, as
compared to the $2,533,005 increase in inventory that occurred in the nine
months ended September 30, 1997. Cash required as a result of the increase in
trade receivables was $1,320,387, for the nine month period ended September 30,
1998, as compared to $642,185 for the nine month period ended September 30,
1997.
INVESTING ACTIVITIES
The Company used net cash in investing activities of $2,746,987 in the
nine months ended September 30, 1998, primarily due to the investment of
$3,852,415 in property and equipment for the Company's new facility and $200,000
in designs associated with the AcuDriver purchase. The Company continues to
invest the remaining proceeds of the IPO in short-term investments. As of
September 30, 1998, $2,026,218 was invested in daily maturing funds and
repurchase agreements.
FINANCING ACTIVITIES
Financing activities for the nine months ended September 30, 1998
provided net cash of $96,271 as compared to $90,039 in the nine months ended
September 30, 1997. The primary reason for the increase in cash provided by
financing activities was the Company's financing of annual insurance premiums in
a net amount of $87,278 during the nine month period ended September 30, 1998.
The Company did not finance insurance premiums during the year ended December
31, 1997.
YEAR 2000
The inability of computers, software and other equipment utilizing
microprocessors to recognize and properly process data fields containing a 2
digit year is commonly referred to as the Year 2000 Compliance issue. As the
year 2000 approaches, such systems may be unable to accurately process certain
date-based information.
The Company has identified all significant applications that will
require modification to ensure Year 2000 Compliance. Internal and external
resources are being used to make the required modifications and test Year 2000
Compliance. The modification process of all significant applications is
substantially complete. The Company plans on completing the testing process of
all significant applications by March 31, 1999.
In addition, the Company has communicated with suppliers with whom it
does significant business to determine their Year 2000 Compliance readiness and
the extent to which the Company is vulnerable to any third party Year 2000
issues. However, there can be no guarantee that the systems of other companies
on which the Company's systems rely will be timely converted, or that a failure
to convert by another company, or a conversion that is incompatible with the
Company's systems, would not have a material adverse effect on the Company.
14
<PAGE>
The total cost to the Company of these Year 2000 Compliance activities
has not been and is not anticipated to be material to its financial position or
results of operations in any given year. These costs and the date on which the
Company plans to complete the Year 2000 modification and testing processes are
based on management's best estimates, which were derived utilizing numerous
assumptions of future events including the continued availability of certain
resources, third party modification plans and other factors. However, there can
be no guarantee that these estimates will be achieved and actual results could
differ from those plans.
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, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended, 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.
15
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Not Applicable
Item 2. Changes in Securities and Use of Proceeds
After deducting expenses of $2,062,090 of the IPO, the Company
received $12,657,910 in net proceeds from the IPO. Set forth below is
information concerning the actual use of such proceeds.
<TABLE>
<CAPTION>
DIRECT OR INDIRECT PAYMENTS DIRECT OR INDIRECT PAYMENTS
TO RELATED PARTIES (1) TO OTHERS
------------------------------ ---------------------------
<S> <C> <C>
Purchase and installation of
machinery and equipment $ - $3,873,052
Repayment of indebtedness $ - $4,942,268
Temporary Investments (2) $ - $ 577,999
Other Purposes (3) $ - $3,264,591
</TABLE>
1- Includes direct or indirect payments to directors, officers,
general partners of the Company, or their associates; to persons
owning ten percent or more of any class of equity securities of
the Company; and to affiliates of the Company.
2- Includes daily maturing fund investments of $577,999.
3- Includes increase of inventory held for sale of $3,264,591.
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.
16
<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.
Exactech, Inc.
Date: November 11, 1998 By: /s/ TIMOTHY J. SEESE
---------------------------------
Timothy J. Seese
President and Chief
Operating Officer
Date: November 11, 1998 By: /s/ JOEL C. PHILLIPS
---------------------------------
Joel C. Phillips
Chief Financial Officer
17
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
------- -----------
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
1997 1998 1997 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Basic:
Weighted average common shares
outstanding used in computing
basic earnings per share 4,886,628 4,906,135 4,875,085 4,905,154
======================= =======================
Basic Earnings Per Share $0.10 $0.32
========= =========
Diluted
Weighted average common and
common equivalent shares
outstanding 4,886,628 4,906,135 4,875,085 4,905,154
Effect on shares issuable under
stock plans using the
treasury method 47,778 44,748 61,007 37,479
Effect of shares contingently
issuable under warrants
issued with the 8%
subordinated debentures
using the treasury
stock method 3,346 5,551 5,941 4,104
----------------------- -----------------------
Shares used in computing
diluted earnings per share 4,937,752 4,956,434 4,942,033 4,946,737
======================= =======================
Diluted Earnings Per Share $0.10 $0.32
========= =========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 2,034,865
<SECURITIES> 0
<RECEIVABLES> 5,081,383
<ALLOWANCES> (179,729)
<INVENTORY> 11,618,428
<CURRENT-ASSETS> 18,905,323
<PP&E> 11,620,697
<DEPRECIATION> (2,594,385)
<TOTAL-ASSETS> 28,928,673
<CURRENT-LIABILITIES> 2,672,771
<BONDS> 0
0
0
<COMMON> 49,072
<OTHER-SE> 21,882,883
<TOTAL-LIABILITY-AND-EQUITY> 28,928,673
<SALES> 17,262,101
<TOTAL-REVENUES> 17,262,101
<CGS> 6,089,093
<TOTAL-COSTS> 6,089,093
<OTHER-EXPENSES> 8,534,208
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 35,678
<INCOME-PRETAX> 2,616,900
<INCOME-TAX> 1,040,741
<INCOME-CONTINUING> 1,576,159
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,576,159
<EPS-PRIMARY> 0.32
<EPS-DILUTED> 0.32
</TABLE>
