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, 1999
____ 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 November 2, 1999
Common Stock, $.01 par value 4,985,874
<PAGE>
EXACTECH, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
<S> <C>
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED BALANCE SHEETS AS OF DECEMBER 31, 1998 AND SEPTEMBER 30, 1999 2
CONDENSED STATEMENTS OF INCOME FOR THE THREE MONTH AND NINE MONTH 3
PERIODS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1999
CONDENSED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE NINE 4
MONTH PERIOD ENDED SEPTEMBER 30, 1999
CONDENSED STATEMENTS OF CASH FLOWS FOR THE NINE MONTH PERIODS ENDED 5
SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1999
NOTES TO CONDENSED FINANCIAL STATEMENTS FOR THE THREE MONTH AND NINE 6
MONTH PERIODS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1999
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 10
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
</TABLE>
1
<PAGE>
Item 1. Financial Statements
EXACTECH, INC.
CONDENSED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
December 31, September 30,
ASSETS 1998 1999
-------------- --------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 662,652 $ 1,589,832
Trade receivables, net of allowance
of $153,958 and $284,605 5,638,810 7,407,410
Refundable income taxes 47,681 -
Prepaid expenses and other assets 173,625 195,811
Inventories 11,532,561 10,837,041
-------------- --------------
Total current assets 18,055,329 20,030,094
PROPERTY AND EQUIPMENT
Land 263,301 462,629
Machinery and equipment 2,604,021 4,583,289
Surgical instruments 5,546,524 6,847,600
Furniture and fixtures 333,134 382,850
Facilities 3,415,590 3,470,023
-------------- --------------
Total 12,162,570 15,746,391
Accumulated depreciation (2,801,971) (3,927,126)
-------------- --------------
Net property and equipment 9,360,599 11,819,265
OTHER ASSETS
Product licenses and designs, net 269,394 376,570
Deferred financing costs, net 133,614 133,753
Unexpended industrial revenue
bond proceeds 856,992 1,579
Advances and deposits 151,758 153,258
Patents and trademarks, net 410,434 551,913
-------------- --------------
Total other assets 1,822,192 1,217,073
-------------- --------------
TOTAL ASSETS $ 29,238,120 $ 33,066,432
============== ==============
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,336,146 $ 1,632,742
Income taxes payable - 456,867
Current portion of long-term debt and leases 6,033 8,384
Commissions payable 340,248 571,468
Royalties payable 342,941 368,087
Other liabilities 162,214 134,490
-------------- --------------
Total current liabilities 2,187,582 3,172,038
Deferred income taxes 660,259 660,259
Long-term debt and capital lease obligations,
net of current portion 3,906,802 3,900,000
-------------- --------------
Total liabilities 6,754,643 7,732,297
SHAREHOLDERS' EQUITY
Common stock 49,072 49,859
Additional paid-in capital 15,015,398 15,603,211
Retained earnings 7,419,007 9,681,065
-------------- --------------
Total shareholders' equity 22,483,477 25,334,135
-------------- --------------
TOTAL LIABILITIES AND EQUITY $ 29,238,120 $ 33,066,432
============== ==============
</TABLE>
See notes to condensed financial statements
2
<PAGE>
EXACTECH, INC.
CONDENSED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Month Period Nine Month Period
Ended September 30, Ended September 30,
1998 1999 1998 1999
----------- ----------- ------------- ---------------
<S> <C> <C> <C> <C>
NET SALES $ 5,569,186 $ 7,927,702 $ 17,262,101 $ 23,912,333
COST OF GOODS SOLD 1,912,150 2,731,207 6,089,093 8,441,269
----------- ----------- ------------- ---------------
Gross profit 3,657,036 5,196,495 11,173,008 15,471,064
OPERATING EXPENSES:
Sales and marketing 1,417,841 2,095,674 4,350,485 6,204,819
General and administrative 488,068 686,139 1,455,425 1,955,017
Research and development 344,336 414,238 979,301 1,149,197
Depreciation and amortization 303,169 439,398 859,875 1,202,806
Royalties 268,791 345,894 889,122 1,118,206
----------- ----------- ------------- ---------------
Total operating expenses 2,822,205 3,981,343 8,534,208 11,630,045
----------- ----------- ------------- ---------------
INCOME FROM OPERATIONS 834,831 1,215,152 2,638,800 3,841,019
OTHER INCOME (EXPENSE)
Interest income (expense), net (27,238) (39,102) (35,678) (102,079)
Equity in net gain of subsidiary - - 13,778 -
----------- ----------- ------------- ---------------
INCOME BEFORE INCOME TAXES 807,593 1,176,050 2,616,900 3,738,940
PROVISION FOR INCOME TAXES 318,461 464,540 1,040,741 1,476,882
----------- ----------- ------------- ---------------
NET INCOME $ 489,132 $ 711,510 $ 1,576,159 $ 2,262,058
=========== =========== ============= ===============
BASIC EARNINGS PER SHARE $ 0.10 $ 0.14 $ 0.32 $ 0.46
=========== =========== ============= ===============
DILUTED EARNINGS PER SHARE $ 0.10 $ 0.14 $ 0.32 $ 0.44
=========== =========== ============= ===============
</TABLE>
See notes to condensed financial statements
3
<PAGE>
EXACTECH, INC.
CONDENSED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Additional Total
Common Stock Paid-In Retained Shareholders'
Shares Amount Capital Earnings Equity
--------- --------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1998 4,907,163 $ 49,072 $ 15,015,398 $ 7,419,007 $ 22,483,477
Issuance of common stock 700 7 6,993 7,000
Exercise of stock options 19,100 191 95,065 95,256
Exercise of warrants 57,029 570 451,354 451,924
Issuance of common stock
under the Company's
Employee Stock Purchase Plan 1,882 19 20,777 20,796
Tax benefit from exercise of
stock options 13,624 13,624
Net income 2,262,058 2,262,058
--------- --------- ------------- ------------ -------------
Balance, September 30, 1999 4,985,874 $ 49,859 $ 15,603,211 $ 9,681,065 $ 25,334,135
========= ========= ============= ============ =============
</TABLE>
See notes to condensed financial statements
4
<PAGE>
EXACTECH, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Month Period Ended September 30,
1998 1999
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 1,576,159 $ 2,262,058
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 859,875 1,253,481
Loss on disposal of equipment - 44,470
Deferred income taxes (18,675) -
Increase in trade receivables (1,320,387) (1,768,600)
(Increase) decrease in inventories (920,549) 695,520
Increase in prepaids and other assets (46,995) (23,874)
Increase in income taxes payable 373,264 504,548
(Decrease) increase in accounts payable (178,376) 296,596
Increase in other liabilities 184,972 224,191
----------- -----------
Net cash provided by operating activities 509,288 3,488,390
----------- -----------
INVESTING ACTIVITIES:
Purchases of property and equipment, net (3,852,415) (3,673,585)
Maturities of short-term investments 1,335,740 -
Purchases of product licenses and designs (200,000) (150,000)
Change in unexpended industrial revenue bond proceeds - 855,413
Cost of patents and trademarks (30,312) (177,187)
----------- -----------
Net cash used in investing activities (2,746,987) (3,145,359)
----------- -----------
FINANCING ACTIVITIES:
Proceeds from financing of insurance premiums, net 87,278 -
Principal payments on debt (3,211) (4,451)
Proceeds from issuance of common stock 12,204 588,600
----------- -----------
Net cash provided by financing activities 96,271 584,149
----------- -----------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (2,141,428) 927,180
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 4,176,293 662,652
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,034,865 $ 1,589,832
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 174,386 $ 161,775
Income taxes 705,186 958,710
Noncash investing and financing activities:
Relief of compensation accrual on issuance of stock - 5,971
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 AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1998 AND 1999
(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, 1998 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, 1999 are not necessarily indicative of the results to be expected
for the full year.
2. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------ --------------
<S> <C> <C>
Capitalized lease obligation payable in monthly installments
of $611 through July, 2000, collateralized by equipment with
a carrying value of approximately $11,433 as of
September 30, 1999 $ 12,835 $ 8,384
Industrial Revenue Bond note payable in annual
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 (3.9% as of
September 30, 1999); proceeds used to finance construction
of new facility 3,900,000 3,900,000
------------ --------------
Total long-term debt and capital lease obligations $ 3,912,835 $ 3,908,384
Less current portion (6,033) (8,384)
------------ --------------
$ 3,906,802 $ 3,900,000
============ ==============
</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, 1999:
Long-Term Capital Lease
Debt Obligations
------------ --------------
1999 ........................................ - $ 1,833
2000 ........................................ $ 300,000 7,188
2001 ........................................ 300,000 -
2002 ........................................ 300,000 -
2003 ........................................ 300,000 -
Thereafter .................................. 2,700,000 -
------------ --------------
Total .................................. $ 3,900,000 9,021
Less interest on capital lease obligations .. (637)
--------------
$ 8,384
==============
6
<PAGE>
EXACTECH, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1998 AND 1999
(UNAUDITED)
3. COMMITMENTS AND CONTINGENCIES
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.
4. SEGMENT INFORMATION
Segment information is reported by the major product lines of the
Company: knee implants, hip implants, and tissue services. The "other" category
is for minor sales categories, such as instrument rental fees and shipping
charges. The Company evaluates the performance of its operating segments based
on income from operations before taxes, interest income and expense, and
nonrecurring items. Intersegment sales and transfers are not significant.
Summarized interim reporting information concerning the Company's
reportable segments is shown in the following table:
<TABLE>
<CAPTION>
(in thousands)
------------------------------------------------
Tissue
Knee Hip License Other Total
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Three months ended September 30,
1998
Net Sales $ 4,063 $ 1,095 $ 118 $ 293 $ 5,569
Segment profit from operations 629 114 24 68 835
1999
Net Sales $ 4,866 $ 1,497 $1,074 $ 491 $ 7,928
Segment profit from operations 663 220 213 119 1,215
Nine months ended September 30,
1998
Net Sales $12,667 $ 3,575 $ 194 $ 826 $ 17,262
Segment profit from operations 1,837 549 6 247 2,639
1999
Net Sales $15,604 $ 4,394 $2,694 $1,220 $ 23,912
Segment profit from operations 2,218 691 593 339 3,841
- -----------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
EXACTECH, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1998 AND 1999
(UNAUDITED)
Total assets not identified with a specific segment (in thousands) are
$12,557 at December 31, 1998 and $16,137 at September 30, 1999. Assets not
identified with a specific segment include cash and cash equivalents, accounts
receivable, refundable income taxes, prepaid expenses, land, facilities, office
furniture and computer equipment, and other assets.
Segment assets are summarized in the following table:
(in thousands)
-------------------------------------------------
Tissue
Knee Hip License Other Total
- ---------------------------------------------------------------------------
December 31, 1998
Total assets, net $10,755 $ 5,427 $ 149 $ 350 $ 16,681
September 30, 1999
Total assets, net $10,802 $ 5,558 $ 248 $ 321 $ 16,929
- ---------------------------------------------------------------------------
8
<PAGE>
EXACTECH, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1998 AND 1999
(UNAUDITED)
5. 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, 1998 Three Months Ended September 30, 1999
------------------------------------- --------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net income $489,132 $711,510
BASIC EPS:
Net income available to
common shareholders 489,132 4,906,135 $0.10 711,510 4,979,036 $0.14
Effect of Dilutive Securities:
Stock options 44,748 250,592
Warrants 5,551 28,117
DILUTED EPS:
Net income available to common
shareholders plus assumed
conversions 489,132 4,956,434 $0.10 711,510 5,257,745 $0.14
<CAPTION>
Nine Months Ended September 30, 1998 Nine Months Ended September 30, 1999
------------------------------------- --------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net income $1,576,159 $2,262,058
BASIC EPS:
Net income available to
common shareholders 1,576,159 4,905,154 $0.32 2,262,058 4,946,852 $0.46
Effect of Dilutive Securities:
Stock options 37,479 227,511
Warrants 4,104 19,524
DILUTED EPS:
Net income available to common
shareholders plus assumed
conversions 1,576,159 4,946,737 $0.32 2,262,058 5,193,887 $0.44
</TABLE>
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 three months ended September 30, 1999, there were no
options to purchase shares of common stock excluded in the computation of
diluted EPS because the options' exercise prices were less 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. For the nine months ended September 30, 1999, there were no
options to purchase shares of common stock excluded in the computation of
diluted EPS because the options' exercise prices were less than the average
market price of the common shares.
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, 1998.
The Company develops, manufactures, markets and sells orthopaedic implant
devices and related surgical instrumentation as well as provides OpteFORM(TM)
bone graft material 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 a major portion of its revenues
and profits, while service revenue from providing OpteFORM(TM) will continue to
increase as a percentage of sales.
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):
SALES SUMMARY BY PRODUCT LINE
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
------------------------------------------- --------------------------------------------
SEPTEMBER 30, 1998 SEPTEMBER 30, 1999 SEPTEMBER 30, 1998 SEPTEMBER 30, 1999
HIP PRODUCTS UNITS $ % UNITS $ % UNITS $ % UNITS $ %
----- - - ----- - - ----- - - ----- - -
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Cemented 3,748 1,727 10.0% 4,617 2,164 9.0% 1,223 544 9.8% 1,562 712 9.0%
Porous Coated 3,767 1,286 7.4% 4,693 1,691 7.1% 1,204 381 6.8% 1,540 606 7.6%
Bipolar 743 346 2.0% 781 368 1.5% 234 105 1.9% 243 115 1.5%
Revision 101 216 1.3% 85 171 0.7% 24 65 1.2% 31 64 0.8%
-------------------------------------------- --------------------------------------------
Total Hip Products 8,359 3,575 20.7% 10,176 4,394 18.3% 2,685 1,095 19.7% 3,376 1,497 18.9%
Knee Products
Cemented Cruciate Sparing 11,885 5,070 29.4% 13,400 6,024 25.2% 3,168 1,534 27.6% 3,692 1,772 22.4%
Cemented Posterior Stabilized 7,276 4,726 27.4% 8,624 5,685 23.8% 2,179 1,516 27.2% 2,647 1,823 23.0%
Porous Coated 1,243 1,290 7.5% 1,390 1,556 6.5% 314 348 6.2% 396 477 6.0%
Revision 2,908 1,581 9.1% 4,374 2,339 9.8% 1,148 665 11.9% 1,488 794 10.0%
-------------------------------------------- --------------------------------------------
Total Knee Products 23,312 12,667 73.4% 27,788 15,604 65.3% 6,809 4,063 72.9% 8,223 4,866 61.4%
Instrument Sales and Rental 644 3.7% 840 3.5% 210 3.8% 336 4.2%
Tissue Services 194 1.1% 2,694 11.3% 118 2.1% 1,074 13.5%
Acudriver 103 0.6% 218 0.9% 55 1.0% 84 1.1%
Miscellaneous 79 0.5% 162 0.7% 28 0.5% 71 0.9%
------------- -------------- -------------- -------------
Total 17,262 100.0% 23,912 100.0% 5,569 100.0% 7,928 100.0%
============= ============== ============== =============
</TABLE>
10
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1998
Net sales increased by $2,358,516, or 42%, to $7,927,702 in the quarter
ended September 30, 1999 from $5,569,186 in the quarter ended September 30,
1998. The increase in net sales resulted from increases in unit and dollar
volume of all the Company's product lines. Sales of knee implant products
increased by 21% on a unit basis and by 20% on a dollar basis from the quarter
ended September 30, 1998 to the quarter ended September 30, 1999. Hip implant
sales increased by 26% on a unit basis and by 37% on a dollar basis from the
quarter ended September 30, 1998 to the quarter ended September 30, 1999.
Revenue from providing OpteFORM/trademark/ tissue service increased by $955,610
to $1,073,870 in the quarter ended September 30, 1999 from $118,260 in the
quarter ended September 30, 1998. Sales of AcuDriver/trademark/ increased by
$28,137, or 51%, to $83,749 in the quarter ended September 30, 1999 from $55,612
in the quarter ended September 30, 1998. The overall increase in knee sales
resulted from growth in all areas. Optetrak/registered trademark/ component
sales increased 20% to $4,866,257 in the quarter ended September 30, 1999, from
$4,062,323 in the quarter ended September 30, 1998. The overall increase in hip
sales is primarily the result increases in sales of MCS/registered trademark/
porous coated hip system which increase $224,842, or 59%, to $605,705 in the
quarter ended September 30, 1999 from $380,863 in the quarter ended September
30, 1998. International sales increased 18% to $1,078,890 in the quarter ended
September 30, 1999, from $919,327 in the quarter ended September 30, 1998 as
international distributors continued to enter new markets. In the quarter ended
September 30, 1999, the Company entered the Lebanese market. As a percentage of
sales, international sales decreased to 14% in the quarter ended September 30,
1999, as compared to 17% in the quarter ended September 30, 1998. The decrease
is primarily due to the growth in domestic sales, coupled with the initial
stocking order for the Company's Japanese distributor which occurred in the
comparable quarter ended September 30, 1998.
Gross profit increased by $1,539,459, or 42%, to $5,196,495 in the
quarter ended September 30, 1999, from $3,657,036 in the quarter ended September
30, 1998. As a percentage of sales, gross profit remained constant at 66% in the
quarter ended September 30, 1999 as compared to the quarter ended September 30,
1998.
Total operating expenses increased by $1,159,138, or 41%, to $3,981,343
in the quarter ended September 30, 1999 from $2,822,205 in the quarter ended
September 30, 1998. Sales and marketing expenses, the largest component of total
operating expenses, increased by $677,833, or 48%, to $2,095,674 in the quarter
ended September 30, 1999 from $1,417,841 in the quarter ended September 30,
1998. Sales and marketing expenses, as a percentage of sales, remained 26% in
the quarters ended September 30, 1999 and September 30, 1998. 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 $198,071, or 41%, to
$686,139 in the quarter ended September 30, 1999 from $488,068 in the quarter
ended September 30, 1998. As a percentage of sales, general and administrative
expenses remained constant at 9% in the quarters ended September 30, 1999 and
September 30, 1998. Total general and administrative expenses increased in the
quarter ended September 30, 1999 primarily as a result of costs associated with
implementation of computer software improvements and legal fees.
Research and development expenses increased by $69,902, or 20%, to
$414,238 in the quarter ended September 30, 1999 from $344,336 in the quarter
ended September 30, 1998. As a percentage of sales, research and development
expenses decreased from 6.2% of sales in the quarter ended September 30, 1998 to
5.2% in the quarter ended September 30, 1999. Although overall expenditures
increased, research and development expenses decreased as a percentate of sales
due to the overall increase in sales.
Depreciation and amortization increased to $439,398 in the quarter
ended September 30, 1999, from $303,169 in the quarter ended September 30, 1998.
Depreciation expenses increased as a result of the increased investment in
surgical instrumentation and computer systems investments. During the quarter
ended September 30, 1999, $359,872 of surgical instruments and $105,026 of
computer systems and software were placed in service, resulting in the increase
in depreciation expense.
Royalty expenses increased by $77,103 to $345,894 in the quarter ended
September 30, 1999, from $268,791 in the quarter ended September 30, 1998,
primarily as a result of growth in sales of knee implant products. As a
percentage of sales, royalty expenses decreased to 4.4% in the quarter ended
September 30, 1999, as compared to 4.8% in the quarter ended September 30, 1998.
This decrease, as a percentage of sales, is principally due to the cessation of
royalty payments on the Company's bipolar product line and a lower percentage of
sales from the knee product line, which incurs a higher royalty rate.
11
<PAGE>
The Company's income from operations increased by $380,321, or 46%, to
$1,215,152 in the quarter ended September 30, 1999, from $834,831 in the quarter
ended September 30, 1998. The increase was primarily due to the increase in
sales and gross profit, which outpaced the increase in operating expenses.
The Company realized net interest expense of $39,102 in the quarter
ended September 30, 1999, as compared to $27,238 in the quarter ended September
30, 1998. The increase was the result of lower interest income from unexpended
revenue bond proceeds, which offset interest charges associated with the
industrial revenue bond (IRB) debt financing for construction of the Company's
facility. Interest expense of $53,564 for the quarter ended September 30, 1999
was partially offset by $14,462 of interest income.
Income before provision for income taxes increased by $368,457, or 46%,
to $1,176,050 in the quarter ended September 30, 1999, from $807,593 in the
quarter ended September 30, 1998. The provision for income taxes was $464,540 in
the quarter ended September 30, 1999, compared to $318,461 in the quarter ended
September 30, 1998.
As a result, the Company realized net income of $711,510 in the quarter
ended September 30, 1999, compared to $489,132 in the quarter ended September
30, 1998, a 46% increase. As a percentage of sales, net income remained constant
at 9% in the quarters ended September 30, 1999 and September 30, 1998.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1998
Net sales increased by $6,650,232, or 39%, to $23,912,333 in the nine
months ended September 30, 1999, from $17,262,101 in the nine months ended
September 30, 1998. Sales of knee implant products increased by 19% on a unit
basis and by 23% on a dollar basis from the nine months ended September 30, 1998
to the nine months ended September 30, 1999. Sales of the Optetrak/registered
trademark/ knee system increased by $2,937,189, or 23%, to $15,603,925 in the
nine months ended September 30, 1999, from $12,666,736 in the nine months ended
September 30, 1998. Sales of hip implant products increased by 22% on a unit
basis and by 23% on a dollar basis from the nine months ended September 30,
1998, to the nine months ended September 30, 1999. The increase in hip sales was
primarily the result of an increase in MCS/registered trademark/ porous coated
hip system sales which increased to $1,690,926 in the nine months ended
September 30, 1999, from $1,285,937 in the nine months ended September 30, 1998.
Tissue service revenue from OpteFORM/trademark/ increased to $2,693,700 for the
nine months ended September 30, 1999, as compared to $193,755 in the nine months
ended September 30, 1998. Sales of AcuDriver/trademark/ increased to $217,450
for the nine months ended September 30, 1999, from $103,203 in the nine months
ended September 30, 1998. International sales increased 21% to $4,179,854 in the
nine months ended September 30, 1999, from $3,466,747 in the nine months ended
September 30, 1998. As a percentage of sales, international sales decreased to
17% in the nine months ended September 30, 1999, as compared to 20% in the nine
months ended September 30, 1998.
Gross profit increased by $4,298,056, or 38%, to $15,471,064 in the
nine months ended September 30, 1999, from $11,173,008 in the nine months ended
September 30, 1998. As a percentage of sales, gross profit remained constant at
65% in the nine months ended September 30, 1998 and September 30, 1999.
Total operating expenses increased by $3,095,837, or 36%, to
$11,630,045 in the nine months ended September 30, 1999, from $8,534,208 in the
nine months ended September 30, 1998. Sales and marketing expenses, the largest
component of total operating expenses, increased 43% to $6,204,819 in the nine
months ended September 30, 1999, from $4,350,485 in the nine months ended
September 30, 1998. The increase in sales and marketing expenses is primarily a
result of the increase in commissions associated with the increase in sales. As
a percentage of sales, sales and marketing expenses increased slightly to 25.9%
in the nine months ended September 30, 1999, from 25.2% in the nine months ended
September 30, 1998.
General and administrative expenses increased 34% to $1,955,017 in the
nine months ended September 30, 1999, from $1,455,425 in the nine months ended
September 30, 1998. As a percentage of sales, general and administrative
expenses decreased to 8.2% in the nine months ended September 30, 1999, from
8.4% in the nine months ended September 30, 1998. Research and development
expenses increased 17% to $1,149,197 in the nine months ended September 30,
1999, from $979,301 in the nine months ended September 30, 1998. As a percentage
of sales, research and development expenses decreased to 4.8% for the nine
months ended September 30, 1999, from 5.7% for the nine months ended September
30, 1998.
12
<PAGE>
Depreciation and amortization increased to $1,202,806 in the nine
months ended September 30, 1999, from $859,875 in the nine months ended
September 30, 1998. Depreciation expenses increased as a result of the increased
investment in surgical instrumentation, production equipment, and computer
systems. During the nine months ended September 30, 1999, $1,329,899 of surgical
instruments, $1,437,752 of production equipment, and $589,645 of computer
systems and software were placed in service.
Royalty expenses increased 26% to $1,118,206 during the nine months
ended September 30, 1999, from $889,122 in the nine months ended September 30,
1998, primarily as a result of growth in sales on knee implants. As a percentage
of sales, royalty expenses decreased to 4.7% in the nine months ended September
30, 1999 from 5.2% in the nine months ended September 30, 1998.
The Company's income from operations increased 46%, to $3,841,019 in
the nine months ended September 30, 1999, from $2,638,800 in the nine months
ended September 30, 1998. The increase was primarily attributable to the
increase in sales and gross profit, which increased more than operating
expenses.
The Company realized net interest expense of $102,079 in the nine
months ended September 30, 1999, as compared to $35,678 in the nine months ended
September 30, 1998. Interest expense of $161,774 for the nine months ended
September 30, 1999, was partially offset by $59,695 of interest income.
The Company recognized a $13,778 gain associated with the sale of its
interest in Techmed, its Italian distributor, in the nine months ended September
30, 1998. There were no gains or losses in the nine months ended September 30,
1999.
Income before provision for income taxes increased 43%, to $3,738,940
in the nine months ended September 30, 1999, from $2,616,900 in the nine months
ended September 30, 1998. The provision for income taxes was $ 1,476,882 in the
nine months ended September 30, 1999, as compared to $1,040,741 in the nine
months ended September 30, 1998.
As a result, the Company realized net income of $2,262,058 in the nine
months ended September 30, 1999, compared to $1,576,159 in the nine months ended
September 30, 1998, a 44% increase. As a percentage of sales, net income
increased to 9.5% in the nine months ended September 30, 1999 as compared to
9.1% in the nine months ended September 30, 1998.
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 September 30, 1999, the Company had working capital of $16,858,056 compared
to $15,867,747 at December 31, 1998. The increase in working capital is
primarily the result of an increase in cash and accounts receivable. As a result
of operating, investing and financing activities, cash and cash equivalents at
September 30, 1999 increased to $1,589,832 from $662,652 at December 31, 1998.
The Company maintains a $6,000,000 credit facility with Merrill Lynch Business
Financial Services, Inc. which is secured by accounts receivable and inventory
and expires in June 2000. At September 30, 1999, there were no amounts
outstanding under the line of credit. The Company believes that funds from
operations 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 net cash of $3,488,390 in the nine months
ended September 30, 1999 as compared to $509,288 in the nine months ended
September 30, 1998. The primary reason for the change was the decrease in
inventory of $695,520 in the nine months ended September 30, 1999, as compared
to the $920,549 increase in inventory in the nine months ended September 30,
1998. Income taxes payable, accounts payable and other liabilities increased
$1,025,335 in the nine months ended September 30, 1999, as compared to an
increase of $379,860 in the nine months ended September 30, 1998. Cash required
as a result of the increase in trade receivables was $1,768,600 for the nine
month period ended September 30, 1999, as compared to $1,320,387, for the nine
month period ended September 30, 1998.
13
<PAGE>
INVESTING ACTIVITIES
The Company used net cash in investing activities of $3,145,359 in the
nine months ended September 30, 1999, primarily due to the investment of
$3,673,585 in property and equipment, and $327,187 for the purchase of product
licenses and patents. The Company redeemed the balance of the remaining proceeds
of the Industrial Revenue Bond (IRB) debt financing for a portion of the
property and equipment purchased. As of September 30, 1999, $1,496,421 was
invested in daily maturing funds and repurchase agreements.
FINANCING ACTIVITIES
Financing activities for the nine months ended September 30, 1999
provided net cash of $584,149 as compared to $96,271 in the nine months ended
September 30, 1998. Proceeds from the exercise of outstanding stock options and
warrants provided cash of $588,600 during the nine month period ended September
30, 1999, as compared to the financing of insurance premiums during the nine
months ended September 30, 1998, which provided cash of $87,278.
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, as part of the Company's
Year 2000 Compliance Plan. Internal and external resources were used to make the
required modifications and test Year 2000 Compliance. The modification and
testing processes of all significant applications were completed in the second
quarter of 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. The Company received acceptable responses from these suppliers as to
their readiness; 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.
The total cost to the Company of these Year 2000 Compliance activities
has not been material to its financial position or results of operations in any
given year. Costs specifically identified with this activity were less than
$10,000.
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.
14
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from interest rates. For its cash
and cash equivalents, a change in interest rates affects the amount of interest
income that can be earned. For its debt instruments, changes in interest rates
effect the amount of interest expense incurred.
Since the year ended December 31, 1998, there have not been any
material changes in the Company's financial instruments that are sensitive to
changes in interest rates.
15
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
Previously Reported
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits:
EXHIBIT DESCRIPTION
------- -----------
11.1 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 12, 1999 By: /s/ TIMOTHY J. SEESE
----------------------------
Timothy J. Seese
President and Chief
Operating Officer
Date: November 12, 1999 By: /s/ JOEL C. PHILLIPS
----------------------------
Joel C. Phillips
Chief Financial Officer
17
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
11.1 Statement 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1999 1998 1999
---------------------- -----------------------
<S> <C> <C> <C> <C>
Basic:
Weighted average common shares outstanding
used in computing basic earnings per share 4,906,135 4,979,036 4,905,154 4,946,852
====================== =======================
Basic Earnings Per Share $0.14 $0.46
========= =========
Diluted:
Weighted average common and common equivalent 4,906,135 4,979,036 4,905,154 4,946,852
shares outstanding
Effect of shares issuable under stock plans
using the treasury method 44,748 250,592 37,479 227,511
Effect of shares contingently issuable under warrants
issued with the 8% subordinated debentures using
the treasury stock method 5,551 - 4,104 8,918
Effect of shares contingently issuable under warrants
issued with the Initial Public Offering (IPO) using
the treasury stock method 28,117 10,606
---------------------- -----------------------
Shares used in computing diluted earnings per share 4,956,434 5,257,745 4,946,737 5,193,887
====================== =======================
Diluted Earnings Per Share $0.14 $0.44
========= =========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 1,589,832
<SECURITIES> 0
<RECEIVABLES> 7,692,015
<ALLOWANCES> (284,605)
<INVENTORY> 10,837,041
<CURRENT-ASSETS> 20,030,094
<PP&E> 15,746,391
<DEPRECIATION> (3,927,126)
<TOTAL-ASSETS> 33,066,432
<CURRENT-LIABILITIES> 3,172,038
<BONDS> 0
0
0
<COMMON> 49,859
<OTHER-SE> 25,284,276
<TOTAL-LIABILITY-AND-EQUITY> 33,066,432
<SALES> 23,912,333
<TOTAL-REVENUES> 23,912,333
<CGS> 8,441,269
<TOTAL-COSTS> 8,441,269
<OTHER-EXPENSES> 11,630,045
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 102,079
<INCOME-PRETAX> 3,738,940
<INCOME-TAX> 1,476,882
<INCOME-CONTINUING> 2,262,058
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,262,058
<EPS-BASIC> 0.46
<EPS-DILUTED> 0.44
</TABLE>
