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 March 31, 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.)
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 May 5, 1998
Common Stock, $.01 par value 4,904,663
<PAGE>
EXACTECH, INC.
INDEX
PAGE
NUMBER
------
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED BALANCE SHEETS AS OF DECEMBER 31, 1997 AND MARCH 31, 1998 2
CONDENSED STATEMENTS OF INCOME FOR THE THREE MONTH PERIODS ENDED 3
MARCH 31, 1997 AND MARCH 31, 1998
CONDENSED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE THREE 4
MONTH PERIOD ENDED MARCH 31, 1998
CONDENSED STATEMENTS OF CASH FLOWS FOR THE THREE MONTH PERIODS ENDED 5
MARCH 31, 1997 AND MARCH 31, 1998
NOTES TO CONDENSED FINANCIAL STATEMENTS FOR THE THREE MONTH PERIODS 6
ENDED MARCH 31, 1997 AND MARCH 31, 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 13
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 14
ITEM 2. CHANGES IN SECURITIES 14
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 15
ITEM 5. OTHER INFORMATION 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 15
SIGNATURES 16
1
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
EXACTECH, INC.
CONDENSED BALANCE SHEETS
(UNAUDITED)
DECEMBER 31, MARCH 31,
1997 1998
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 4,176,293 $ 3,720,958
Short-term investments 1,335,740 --
Trade receivables 3,760,996 4,351,722
Refundable income taxes 259,778 --
Prepaid expenses and other assets 103,646 284,468
Inventories 10,697,879 11,345,705
------------ ------------
Total Current Assets 20,334,332 19,702,853
PROPERTY AND EQUIPMENT
Land 263,301 263,301
Machinery and equipment 1,636,587 1,930,793
Surgical Instruments 4,568,489 4,870,855
Furniture and fixtures 123,014 163,014
Construction in Progress 1,371,545 2,550,513
------------ ------------
Total 7,962,936 9,778,476
Accumulated depreciation (1,984,249) (2,234,744)
------------ ------------
Net property and equipment 5,978,687 7,543,732
OTHER ASSETS
Biologic Products License (net of amortization) 106,494 102,219
Deferred financing costs, net 136,436 118,406
Advances and deposits 175,752 175,752
Patents and trademarks (net of amortization) 423,135 413,569
------------ ------------
Total Other Assets 841,817 809,946
TOTAL ASSETS $ 27,154,836 $ 28,056,531
============ ============
LIABILITIES AND EQUITY
Current Liabilities
Accounts payable $ 1,611,775 $ 1,550,090
Income taxes payable -- 26,710
Current portion of long-term debt and leases 4,894 234,377
Commissions payable 473,028 589,054
Royalties payable 258,959 282,136
Other liabilities 115,805 197,029
------------ ------------
Total Current Liabilities 2,464,461 2,879,396
Deferred income taxes 433,948 415,273
Long-term debt and capital lease-net of current portion 3,912,835 3,911,471
------------ ------------
Total Liabilities 6,811,244 7,206,140
COMMON SHAREHOLDERS' EQUITY:
Common stock 49,047 49,047
Additional paid in capital 15,002,968 15,002,968
Retained earnings 5,291,577 5,798,376
------------ ------------
Total Common Shareholders' Equity 20,343,592 20,850,391
------------ ------------
TOTAL LIABILITIES AND EQUITY $ 27,154,836 $ 28,056,531
============ ============
</TABLE>
SEE NOTES TO CONDENSED FINANCIAL STATEMENTS
2
<PAGE>
EXACTECH, INC.
CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTH PERIOD
ENDED MARCH 31,
---------------------------
1997 1998
----------- -----------
NET SALES $ 4,099,539 $ 5,317,595
COST OF GOODS SOLD 1,366,685 1,732,409
----------- -----------
Gross profit 2,732,854 3,585,186
OPERATING EXPENSES:
Sales and marketing 1,127,172 1,396,937
General and administrative 359,786 446,921
Research and development 241,955 340,252
Depreciation and amortization 164,786 264,336
Royalties 188,386 279,875
----------- -----------
Total operating expenses 2,082,085 2,728,321
----------- -----------
INCOME FROM OPERATIONS 650,769 856,865
OTHER INCOME (EXPENSE)
Interest income (net) 82,820 1,248
Equity in net loss of subsidiary (15,000) --
----------- -----------
INCOME BEFORE INCOME TAXES 718,589 858,113
PROVISION FOR INCOME TAXES 280,354 351,314
----------- -----------
NET INCOME $ 438,235 $ 506,799
=========== ===========
BASIC EARNINGS PER SHARE $ 0.09 $ 0.10
=========== ===========
DILUTED EARNINGS PER SHARE $ 0.09 $ 0.10
=========== ===========
SEE NOTES TO CONDENSED FINANCIAL STATEMENTS
3
<PAGE>
<TABLE>
<CAPTION>
EXACTECH, INC.
CONDENSED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)
TOTAL
COMMON STOCK ADDITIONAL COMMON
-------------------------- 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
Net income 506,799 506,799
----------- ----------- ----------- ----------- -----------
Balance, March 31, 1998 4,904,663 $ 49,047 $15,002,968 $ 5,798,376 $20,850,391
=========== =========== =========== =========== ===========
</TABLE>
SEE NOTES TO CONDENSED FINANCIAL STATEMENTS
4
<PAGE>
<TABLE>
<CAPTION>
EXACTECH, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTH PERIOD ENDED MARCH 31,
----------------------------------
1997 1998
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income $ 438,235 $ 506,799
Adjustments to reconcile net income to net
cash (used in) provided by operating activities:
Depreciation and amortization 164,786 264,336
Equity in net loss of subsidiary 15,000 --
Deferred income taxes -- (18,675)
Increase in trade receivables (519,516) (590,726)
Increase in inventories (1,220,080) (647,826)
Increase in other prepaids and assets (227,079) (162,792)
Increase in income taxes payable 189,778 286,488
Increase (decrease) in accounts payable 253,492 (61,685)
Increase in other liabilities 45,731 220,427
----------- -----------
Net used in operating activities (859,653) (203,654)
----------- -----------
INVESTING ACTIVITIES:
Purchases of property and equipment (76,983) (1,815,540)
Maturities of short-term investments 29,498 1,335,740
Cost of patents and trademarks (5,022) --
----------- -----------
Net cash used in investing activities (52,507) (479,800)
----------- -----------
FINANCING ACTIVITIES:
Proceeds from financing of insurance premiums, net -- 229,325
Principal payments on debt (29,685) (1,206)
----------- -----------
Net cash (used in) provided by financing activities (29,685) 228,119
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (941,845) (455,335)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,992,442 4,176,293
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,050,597 $ 3,720,958
----------- -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 932 $ 45,538
Income taxes 90,576 83,501
Noncash investing and financing activities:
Financing of insurance premiums -- 271,866
</TABLE>
SEE NOTES TO CONDENSED FINANCIAL STATEMENTS
5
<PAGE>
EXACTECH, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE THREE MONTH PERIODS ENDED MARCH 31, 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 three month period ending
March 31, 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 130 did not have a material effect on
the Company's financial statements.
6
<PAGE>
<TABLE>
<CAPTION>
EXACTECH, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE THREE MONTH PERIODS ENDED MARCH 31, 1997 AND MARCH 31, 1998
(Unaudited)
3. DEBT
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS: DECEMBER 31, MARCH 31,
1997 1998
------------ ----------
<S> <C> <C>
Capitalized lease obligation payable in monthly installments 17,729 16,523
of $611 through July, 2000, collateralized by equipment with a
carrying value of approximately $17,700 as of March 31, 1998
Notes payable to finance company bearing interest at 6.5% payable in -- 229,325
eleven monthly installments from April 1998 through February 1999;
proceeds used to finance insurance policies
Industrial Revenue Bond note payable in annual principal installments 3,900,000 3,900,000
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 (3.8% as of March 31, 1998); proceeds
used to finance construction of new facility
---------- ----------
Total long-term debt and capital lease obligations 3,917,729 4,145,848
Less current portion (4,894) (234,377)
---------- ----------
$3,912,835 $3,911,471
========== ==========
</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 March 31, 1998:
LONG-TERM CAPITAL LEASE
DEBT OBLIGATIONS
---------- -------------
1998 ................. $ 4,889
1999 ................. $ 7,333
2000 ................. $ 300,000 7,188
2001 ................. 300,000 --
2002 ................. 300,000 --
Thereafter ........... 3,000,000 --
---------- -------
Total ....... $3,900,000 19,410
==========
Less interest on capital lease obligations .... (2,887)
-------
$16,523
=======
7
<PAGE>
EXACTECH, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE THREE MONTH PERIODS ENDED MARCH 31, 1997 AND 1998
(UNAUDITED)
4. COMMITMENTS AND CONTINGENCIES
As of March 31, 1998, the Company was committed to approximately
$843,000 in remaining construction costs associated with the completion of the
new 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.
5. COMMON 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>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 1997 MARCH 31, 1998
-------------------------------- ----------------------------------
INCOME SHARES PER INCOME SHARES PER
NUMERATOR DENOMINATOR SHARE NUMERATOR DENOMINATOR SHARE
--------- ----------- ----- --------- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
Net income $ 438,235 $ 506,799
BASIC EPS:
Net income available to 438,235 4,860,434 $ 0.09 506,799 4,904,663 $ 0.10
common shareholders ====== ======
Effect of Dilutive Securities:
Stock options 111,734 30,382
Warrants 9,361 -
DILUTED EPS:
Net income available to common 438,235 4,981,529 $ 0.09 506,799 4,935,045 $ 0.10
shareholders plus assumed conversions ====== ======
</TABLE>
For the three months ended March 31, 1997, options to purchase 101,000 shares of
common stock at prices ranging from $8.80 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 March 31, 1998, options to purchase 456,600 shares of
common stock at prices ranging from $6.25 to $9.00 per share were outstanding
but were not included in the computation of diluted EPS because the options'
exercise prices were greater than the average market price of the common shares.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The following discussion should be read in conjunction with the condensed
financial statements and related notes appearing elsewhere herein, and the
Management's Discussion and Analysis of Financial Condition and Results of
Operations included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1997.
The Company develops, manufactures, markets and sells orthopaedic implant
devices and related surgical instrumentation to hospitals and physicians. Sales
of hip implant products historically accounted for most of the Company's
revenues and profits; however, since 1995, sales of knee implant products have
accounted for an increasing portion of its revenues and profits. The Company
anticipates that sales of knee implant products will continue to account for an
increasing portion of its revenues and profits.
The following table sets forth for the periods indicated information with
respect to the number of units of the Company's products sold and the dollar
amount and percentages of revenues derived from such sales (dollars in
thousands):
<TABLE>
<CAPTION>
EXACTECH, INC.
SALES SUMMARY BY PRODUCT LINE ($'000'S)
THREE MONTHS ENDED
----------------------------------------------------
MARCH 31, 1997 MARCH 31, 1998
----------------------- ------------------------
UNITS $ % UNITS $ %
------ ----- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
HIP PRODUCTS
Cemented 1,194 565 13.8% 1,152 546 10.3%
Porous Coated 1,226 401 9.8% 1,416 479 9.0%
Bipolar Prosthesis 193 102 2.5% 220 110 2.1%
Revision 9 17 0.4% 24 54 1.0%
----- ----- ----- ----- ----- ----
Total Hip Products 2,622 1,085 26.5% 2,812 1,189 22.4%
KNEE PRODUCTS
Cemented Cruciate Sparing 2,831 1,376 33.5% 3,859 1,627 30.6%
Cemented Posterior Stabilized 1,311 867 21.1% 2,277 1,508 28.4%
Porous Coated 456 466 11.4% 406 429 8.0%
Revision 568 135 3.3% 662 377 7.1%
----- ----- ----- ----- ----- ----
5,166 2,844 69.3% 7,204 3,941 74.1%
Instrument Sales and Rental 156 3.8% 157 2.9%
Tissue Services -- 0.0% 7 0.1%
Miscellaneous 15 0.4% 24 0.5%
===== ===== ===== =====
TOTAL 4,100 100.0% 5,318 100.0%
</TABLE>
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
Net sales increased by $1,218,056, or 30%, to $5,317,595 in the quarter
ended March 31, 1998, from $4,099,539 in the quarter ended March 31, 1997. The
increase in net sales resulted from increased unit volume of both the Company's
knee and hip implant products. Sales of knee implant products increased by 39%
on a unit basis and by 39% on a dollar basis from the quarter ended March 31,
1997 to the quarter ended March 31, 1998, as the Company continued to expand its
international distribution. International sales comprised 26% of the Company's
total knee sales in the first quarter of 1998. The decreases in the average unit
selling prices of knee components was the result of sales to international
distributors at discounts to list prices [but are not subject to sales
commissions]. Sales of hip implant products increased by 7% on a unit basis and
by 10% on a dollar basis from the quarter ended March 31, 1997, to the quarter
ended March 31, 1998. The Company believes that the increase in hip sales is a
result of its continued focus on the marketing of its hip product lines,
specifically the AuRA(R) hip system.
Gross profit increased by $852,332, or 31%, to $3,585,186 in the
quarter ended March 31, 1998, from $2,732,854 in the quarter ended March 31,
1997. As a percentage of sales, gross profit increased to 67.4% in the quarter
ended March 31, 1998, from 66.7% in the quarter ended March 31, 1997. The profit
margin increase was primarily the result of a reduction in product manufacturing
costs per unit as the Company continues to manufacture larger volumes of knee
components.
Total operating expenses increased by $646,236, or 31%, to $2,728,321
in the quarter ended March 31, 1998, from $2,082,085 in the quarter ended March
31, 1997. Sales and marketing expenses, the largest component of total operating
expenses, increased by $269,765, or 24%, to $1,396,937 in the quarter ended
March 31, 1998, from $1,127,172 in the quarter ended March 31, 1997. Sales and
marketing expenses decreased as a percentage of sales to 26% in the quarter
ended March 31, 1998, from 28% in the quarter ended March 31, 1997. The
Company's sales and marketing expenses are largely variable costs based on sales
levels, with the largest component being commissions.
General and administrative expenses increased by $87,135, or 24%, to
$446,921 in the quarter ended March 31, 1998, from $359,786 in the quarter ended
March 31, 1997. As a percentage of sales, general and administrative expenses
decreased to 8.4% in the quarter ended March 31, 1998, from 8.8% in the quarter
ended March 31, 1997. Total general and administrative expenses increased
primarily as a result of additional legal costs associated with the Company's
ongoing defense costs.
Research and development expenses increased by $98,297, or 41%, to
$340,252 in the quarter ended March 31, 1998, from $241,955 in the quarter ended
March 31, 1997, primarily as a result of development and testing costs
associated with the Company's current and in-development hip implant products.
Research and development expenses were 6.4% and 5.9% of sales in the quarters
ended March 31, 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.
Depreciation and amortization increased to $264,336 in the quarter
ended March 31, 1998, from $164,786 in the quarter ended March 31, 1997,
primarily as a result of the increased investment in surgical instrumentation.
During the quarter ended March 31, 1998, $783,875 of such surgical instruments
were placed in service, resulting in the increase in depreciation expense.
Royalty expenses increased by $91,489 to $279,875 in the quarter ended
March 31, 1998, from
10
<PAGE>
$188,386 in the quarter ended March 31, 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 were 5.3% and 4.6% in the quarters ended
March 31, 1998 and 1997, respectively.
The Company's income from operations increased by $206,096, or 32%, to
$856,865 in the quarter ended March 31, 1998, from $650,769 in the quarter ended
March 31, 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 income of $1,248 in the quarter ended
March 31, 1998, as compared to $82,820 in the quarter ended March 31, 1997. The
decrease was the result of a reduction of short-term investments. Interest
income of $64,816 for the quarter ended March 31, 1998, was offset by $63,568 of
interest expense.
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. As a
result, there were no earnings or losses relating to Techmed included in other
expense in the quarter ended March 31, 1998 as compared to the $15,000 loss in
the quarter ended March 31, 1997. The Company has entered into an agreement to
sell its interest in Techmed for approximately $14,000.
Income before provision for income taxes increased by $139,524, or 19%,
to $858,113 in the quarter ended March 31, 1998, from $718,589 in the quarter
ended March 31, 1997. The provision for income taxes was $351,314 in the quarter
ended March 31, 1998, compared to $280,354 in the quarter ended March 31, 1997.
As a result, the Company realized net income of $506,799 in the quarter
ended March 31, 1998, compared to $438,235 in the quarter ended March 31, 1997,
a 16% increase.
11
<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.
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 March 31, 1998, the Company had working capital of
$16,341,948 compared to $17,869,871 at December 31, 1997. The decrease in
working capital is primarily the result of $1,178,968 in costs associated with
the construction of the Company's new headquarters and manufacturing facility in
the quarter ended March 31, 1998. As of March 31, 1998, the Company had expended
$2,550,513 in costs associated with the construction of the facility. As a
result of operating, investing and financing activities, cash and cash
equivalents at March 31, 1998 decreased to $3,720,958 from $4,176,293 at
December 31, 1997. The Company is committed to approximately $843,000 in
remaining construction costs associated with the completion of the new facility
as of March 31, 1998. On March 31, 1998, the Company entered into a letter
agreement to purchase certain inventory, tooling and patent technology for
$425,000. The Company maintains a $3,000,000 credit facility with Merrill Lynch
Business Financial Services, Inc. which is secured by accounts receivable and
inventory and expires in July 1998. At March 31, 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.
OPERATING ACTIVITIES
Operating activities provided used net cash of $203,654 in the three
months ended March 31, 1998 as compared to $859,653 in the three months ended
March 31, 1997. The primary reason for the change was the $647,826 increase in
inventory in the three months ended March 31, 1998, as compared to the
$1,220,080 increase in inventory that occurred in the period ended March 31,
1997. Another factor in the change was a larger increase in income taxes payable
from $189,778 in the three months ended March 31, 1997 to $286,488 in the three
months ended March 31, 1998. Cash required as a result of the increase in trade
receivables was $590,726, for the three month period ended March 31, 1998, as
compared to $519,516, for the three month period ended March 31, 1997.
INVESTING ACTIVITIES
The Company used net cash in investing activities of $479,800 in the
three months ended March 31, 1998, primarily due to the investment of $1,815,540
in property and equipment. The Company continues to invest the remaining
proceeds of the IPO in short-term investments primarily comprised of government-
backed securities. As of March 31, 1998, $2,418,804 was invested in commercial
paper and discount notes yielding approximately 5% and $1,287,769 was invested
in Merrill Lynch's Treasury Fund and Money Market Fund comprised of commercial
paper and government backed securities yielding a return of approximately 5%.
12
<PAGE>
FINANCING ACTIVITIES
Financing activities for the three months ended March 31, 1998 provided
net cash of $228,119 as compared to using cash of $29,685 in the three months
ended March 31, 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 $229,325 during the three month period ended March 31, 1998. The
Company did not finance insurance premiums during the year ended December 31,
1997.
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.
13
<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 $ - $3,190,254
Repayment of indebtedness $ - $4,942,268
Temporary Investments (2) $ - $1,287,769
Other Purposes (3) $ - $3,237,619
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 and overnight
repurchase agreements totaling $1,287,769.
3- Includes increase of inventory held for sale of $3,237,619.
</TABLE>
Item 3. Defaults Upon Senior Securities
Not Applicable
14
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
a) The Annual Meeting of Shareholders (the "Meeting") of the Company
was held on April 6, 1998
b) Not applicable because
(i) Proxies for the Meeting were solicited pursuant to
Regulation 14 under the Securities Exchange Act of 1934.
(ii) There was no solicitation in opposition to management's
nominees as listed in the Company's proxy statement
dated March 17, 1998, and
(iii) All such nominees were elected
c) The matters voted on at the Meeting consisted of the following:
(i) The election of seven members to the Company's Board of
Directors. The name of each nominee for election and the
number of shares voted for and against such nominee, as
well as the number of abstentions and broker non-votes
with respect to such nominee, are set forth below:
NAME FOR ABSTENTIONS NON-VOTES
---- --- ----------- ---------
William Petty, M.D. 4,529,594 1,600 0
Timothy J. Seese 4,530,894 300 0
Gary J. Miller, Ph. D. 4,530,894 300 0
Albert H. Burstein, Ph. D. 4,530,894 300 0
R. Wynn Kearney, Jr., M.D. 4,530,894 300 0
Ronald Pickard 4,530,894 300 0
Paul Metts 4,530,894 300 0
(ii) A proposal to ratify the selection of Deloitte & Touche
LLP as the Company's independent auditors for the year ending
December 31, 1998. 4,519,894 shares were voted in favor of
such proposal, 800 shares were voted against the proposal and
10,500 votes abstained from voting on such proposal. There
were 0 shares broker non-votes with respect to such proposal.
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.
15
<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: May 11, 1998 By: /s/ TIMOTHY J. SEESE
------------------------
Timothy J. Seese
President and Chief
Operating Officer
Date: May 11, 1998 By: /s/ JOEL C. PHILLIPS
------------------------
Joel C. Phillips
Treasurer
16
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
11 Statements Re: Computation of Per Share Earnings
27 Financial Data Schedule
Exhibit 11.1
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
MARCH 31,
---------------------
1997 1998
--------- ---------
<S> <C> <C>
Basic:
Weighted average common shares outstanding
used in computing basic earnings per share 4,860,434 4,904,663
========= =========
Basic Earnings Per Share $ 0.10
=========
Diluted:
Weighted average common and common equivalent 4,860,434 4,904,663
shares outstanding
Effect of shares issuable under stock under stock plans 111,734 30,382
using the treasury method
Effect of shares contingently issuable under warrants 9,361 --
issued with the 8% subordinated debentures using
the treasury stock method
========= =========
Shares used in computing diluted earnings per share 4,981,529 4,935,045
========= =========
Diluted Earnings Per Share $ 0.10
=========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 3,720,958
<SECURITIES> 0
<RECEIVABLES> 4,351,722
<ALLOWANCES> (161,046)
<INVENTORY> 11,345,705
<CURRENT-ASSETS> 19,702,853
<PP&E> 9,778,476
<DEPRECIATION> (2,234,744)
<TOTAL-ASSETS> 28,056,531
<CURRENT-LIABILITIES> 2,879,396
<BONDS> 0
0
0
<COMMON> 49,047
<OTHER-SE> 20,801,344
<TOTAL-LIABILITY-AND-EQUITY> 28,056,531
<SALES> 5,317,595
<TOTAL-REVENUES> 5,317,595
<CGS> 1,732,409
<TOTAL-COSTS> 1,732,409
<OTHER-EXPENSES> 2,728,321
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,248)
<INCOME-PRETAX> 858,113
<INCOME-TAX> 351,314
<INCOME-CONTINUING> 506,799
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 506,799
<EPS-PRIMARY> 0.10
<EPS-DILUTED> 0.10
</TABLE>
