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, 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 April 27, 1999
Common Stock, $.01 par value 4,926,963
<PAGE>
EXACTECH, INC.
INDEX
PAGE
NUMBER
------
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED BALANCE SHEETS AS OF DECEMBER 31, 1998 AND MARCH 31, 1999 2
CONDENSED STATEMENTS OF INCOME FOR THE THREE MONTH PERIODS ENDED 3
MARCH 31, 1998 AND MARCH 31, 1999
CONDENSED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE THREE 4
MONTH PERIOD ENDED MARCH 31, 1999
CONDENSED STATEMENTS OF CASH FLOWS FOR THE THREE MONTH PERIODS ENDED 5
MARCH 31, 1998 AND MARCH 31, 1999
NOTES TO CONDENSED FINANCIAL STATEMENTS FOR THE THREE MONTH PERIODS 6
ENDED MARCH 31, 1998 AND MARCH 31, 1999
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 9
CONDITION AND RESULTS OF OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 12
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 13
ITEM 2. CHANGES IN SECURITIES 13
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 13
ITEM 5. OTHER INFORMATION 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 14
SIGNATURES 15
1
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
EXACTECH, INC.
CONDENSED BALANCE SHEETS
(UNAUDITED)
DECEMBER 31, MARCH 31,
ASSETS 1998 1999
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents $ 662,652 $ 1,146,150
Trade receivables, net of allowance
of $161,046 and $153,958 5,638,810 6,109,968
Refundable income taxes 47,681 --
Prepaid expenses and other assets, net 173,625 11,779
Inventories 11,532,561 11,286,390
------------ ------------
Total current assets 18,055,329 18,554,287
PROPERTY AND EQUIPMENT:
Land 263,301 263,301
Machinery and equipment 2,604,021 3,138,974
Surgical instruments 5,546,524 5,869,695
Furniture and fixtures 333,134 336,966
Facilities 3,415,590 3,455,278
------------ ------------
Total property and equipment 12,162,570 13,064,214
Accumulated depreciation (2,801,971) (3,114,568)
------------ ------------
Net property and equipment 9,360,599 9,949,646
OTHER ASSETS:
Product licenses and designs, net 269,394 405,120
Deferred financing costs, net 133,614 123,635
Unexpended industrial revenue
bond proceeds 856,992 866,458
Advances and deposits 151,758 153,258
Patents and trademarks, net 410,434 399,834
------------ ------------
Total other assets 1,822,192 1,948,305
------------ ------------
TOTAL ASSETS $ 29,238,120 $ 30,452,238
============ ============
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,336,146 $ 1,243,187
Income taxes payable -- 265,027
Current portion of long-term debt
and leases 6,033 6,224
Commissions payable 340,248 513,229
Royalties payable 342,941 355,871
Other liabilities 162,214 198,273
------------ ------------
Total Current Liabilities 2,187,582 2,581,811
DEFERRED INCOME TAXES 660,259 660,259
LONG-TERM DEBT AND CAPITAL LEASE
OBLIGATIONS, NET OF CURRENT PORTION 3,906,802 3,905,158
------------ ------------
Total Liabilities 6,754,643 7,147,228
COMMON SHAREHOLDERS' EQUITY:
Common stock 49,072 49,263
Additional paid-in capital 15,015,398 15,124,087
Retained earnings 7,419,007 8,131,660
------------ ------------
Total shareholders' equity 22,483,477 23,305,010
------------ ------------
TOTAL LIABILITIES AND EQUITY $ 29,238,120 $ 30,452,238
============ ============
SEE NOTES TO CONDENSED FINANCIAL STATEMENTS
2
<PAGE>
EXACTECH, INC.
CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTH PERIOD
ENDED MARCH 31,
---------------------------
1998 1999
----------- -----------
NET SALES $ 5,317,595 $ 7,168,417
COST OF GOODS SOLD 1,732,409 2,398,081
----------- -----------
Gross profit 3,585,186 4,770,336
OPERATING EXPENSES:
Sales and marketing 1,396,937 1,897,555
General and administrative 446,921 617,295
Research and development 340,252 324,830
Depreciation and amortization 264,336 373,907
Royalties 279,875 347,103
----------- -----------
Total operating expenses 2,728,321 3,560,690
----------- -----------
INCOME FROM OPERATIONS 856,865 1,209,646
OTHER INCOME (EXPENSE)
Interest income (expense), net 1,248 (31,707)
----------- -----------
INCOME BEFORE INCOME TAXES 858,113 1,177,939
PROVISION FOR INCOME TAXES 351,314 465,286
----------- -----------
NET INCOME $ 506,799 $ 712,653
=========== ===========
BASIC EARNINGS PER SHARE $ 0.10 $ 0.14
=========== ===========
DILUTED EARNINGS PER SHARE $ 0.10 $ 0.14
=========== ===========
SEE NOTES TO CONDENSED FINANCIAL STATEMENTS
3
<PAGE>
<TABLE>
<CAPTION>
EXACTECH, INC.
CONDENSED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)
COMMON STOCK ADDITIONAL TOTAL
-------------------- 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
Exercise of stock
options 19,100 191 95,065 95,256
Tax benefit from
exercise of
stock options 13,624 13,624
Net income 712,653 712,653
--------- ------- ----------- ---------- -----------
Balance, March 31, 1999 4,926,263 $49,263 $15,124,087 $8,131,660 $23,305,010
========= ======= =========== ========== ===========
</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,
-------------------------------
1998 1999
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 506,799 $ 712,653
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Depreciation and amortization 264,336 368,099
Loss on disposal of equipment -- 30,626
Deferred income taxes (18,675) --
Increase in trade receivables (590,726) (471,158)
(Increase) decrease in inventories (647,826) 246,171
(Increase) decrease in prepaids and
other assets (162,792) 170,325
Increase in income taxes payable 286,488 312,708
Decrease in accounts payable (61,685) (92,959)
Increase in other liabilities 220,427 221,972
----------- -----------
Net cash provided by (used in) operating
activities (203,654) 1,498,437
----------- -----------
INVESTING ACTIVITIES:
Purchase of product licenses and designs -- (150,000)
Purchases of property and equipment (1,815,540) (972,365)
Maturities of short-term investments 1,335,740 --
----------- -----------
Net cash used in investing activities (479,800) (1,122,365)
----------- -----------
FINANCING ACTIVITIES:
Proceeds from financing of insurance premiums, net 229,325 --
Principal payments on capital lease obligations (1,206) (1,453)
Proceeds from issuance of common stock -- 108,879
----------- -----------
Net cash provided by financing activities 228,119 107,426
----------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (455,335) 483,498
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 4,176,293 662,652
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,720,958 $ 1,146,150
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 45,538 $ 54,063
Income taxes 83,501 138,954
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 MONTH PERIODS ENDED MARCH 31, 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 three month period ending
March 31, 1999 are not necessarily indicative of the results to be expected for
the full year.
2. DEBT
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS: DECEMBER 31, MARCH 31
1998 1999
------------ ----------
Capitalized lease obligation payable in monthly
installments of $611 through July, 2000,
collateralized by equipment with a carrying
value of approximately $13,511 as of
March 31, 1999 $ 12,835 $ 11,382
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 (3.0% as of March 31, 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 $3,911,382
Less current portion (6,033) (6,224)
---------- ----------
$3,906,802 $3,905,158
========== ==========
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, 1999:
LONG-TERM CAPITAL LEASE
DEBT OBLIGATIONS
---------- -------------
1999 .............................................. $ 5,499
2000 .............................................. $ 300,000 7,188
2001 .............................................. 300,000
2002 .............................................. 300,000
Thereafter ........................................ 3,000,000
----------- -------
Total....................................... $3,900,000 12,687
==========
Less interest on capital lease obligations ........ (1,305)
-------
$11,382
=======
6
<PAGE>
EXACTECH, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE THREE MONTH PERIODS ENDED MARCH 31, 1998 AND 1999
(UNAUDITED)
3. COMMITMENTS AND CONTINGENCIES
The Company, in the normal course of business, is 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 SERVICES OTHER TOTAL
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
THREE MONTHS ENDED MARCH 31
1998
Net Sales $4,097 $1,178 $ 7 $ 36 $ 5,318
Segment profit
(loss) from
operations 660 255 (2) (56) 857
1999
Net Sales $4,953 $1,422 $ 688 $ 105 $ 7,168
Segment profit
(loss) from
operations 879 199 156 (24) 1,210
- ------------------------------------------------------------------------------------
</TABLE>
Total assets not identified with a specific segment (in thousands of
dollars) are $12,557 for the year ended December 31, 1998 and $13,582 for the
three months ended March 31, 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.
<TABLE>
<CAPTION>
(IN THOUSANDS)
------------------------------------------------------
TISSUE
KNEE HIP SERVICES OTHER TOTAL
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
THREE MONTHS ENDED MARCH 31
1998
Total assets, net 10,755 5,427 149 350 16,681
THREE MONTHS ENDED MARCH 31
1999
Total assets, net 10,892 5,365 283 330 16,870
- ------------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
EXACTECH, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE THREE MONTH PERIODS ENDED MARCH 31, 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>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 1998 MARCH 31, 1999
INCOME SHARES INCOME SHARES
(NUMER- (DENOM- PER (NUMER- (DENOM- PER
ATOR) INATOR) SHARE ATOR) INATOR) SHARE
------------------------------ -----------------------------
<S> <C> <C> <C> <C> <C> <C>
Net income $506,799 $712,653
BASIC EPS:
Net income available to
common shareholders $506,799 $4,904,663 $0.10 $712,653 4,921,257 $0.14
===== =====
Effect of dilutive
securities:
Stock options 30,382 161,928
Warrants 0 13,971
DILUTED EPS:
Net income available to
common shareholders
plus assumed conversions $506,799 4,935,045 $0.10 $712,653 5,097,156 $0.14
===== =====
</TABLE>
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.
For the three months ended March 31, 1999, there were 531,358 options to
purchase shares of common stock at prices ranging from $3.28 to $9.00 per share
outstanding. All of the options were included in the computation of diluted EPS
because all of the options' exercise prices were less 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
OVERVIEW
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, with OpteFORM(TM) becoming increasingly important in the Company's
product lines.
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 ($1,000'S)
THREE MONTHS ENDED
--------------------------------------------------
MARCH 31, 1998 MARCH 31, 1999
UNITS $ % UNITS $ %
----- - - ----- - -
HIP PRODUCTS
Cemented 1,152 546 10.3% 1,571 742 10.4%
Porous Coated 1,416 479 9.0% 1,324 498 6.9%
Bipolar Prosthesis 220 110 2.1% 244 120 1.7%
Revision 24 54 1.0% 24 54 0.8%
---------------------- ----------------------
Total Hip Products 2,812 1,189 22.4% 3,163 1,414 19.8%
KNEE PRODUCTS
Cemented Cruciate
Sparing 3,859 1,627 30.6% 4,247 2,077 29.0%
Cemented Posterior
Stabilized 2,277 1,508 28.4% 2,473 1,681 23.4%
Porous Coated 406 429 8.0% 360 407 5.7%
Revision 662 377 7.1% 1,128 659 9.2%
---------------------- ----------------------
Total Knee Products 7,204 3,941 74.1% 8,208 4,824 67.3%
Instrument Sales and Rental 157 2.9% 147 2.0%
Tissue Services 7 0.1% 688 9.6%
Acudriver 52 0.7%
Miscellaneous 24 0.5% 43 0.6%
============= ==============
TOTAL 5,318 100.0% 7,168 100.0%
============= ==============
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
Net sales increased by $1,850,822, or 35%, to $7,168,417 in the quarter
ended March 31, 1999, from $5,317,595 in the quarter ended March 31, 1998. The
increase in net sales resulted from increased unit and dollar volume of both the
Company's knee and hip implant products, as well as strong growth in tissue
service revenue from the OpteFORM(TM) bone grafting material. Sales of knee
implant products increased by 14% on a unit basis and by 22% on a dollar basis
from the quarter ended March 31, 1998 to the quarter ended March 31, 1999. Sales
of hip
9
<PAGE>
implant products increased by 13% on a unit basis and by 19% on a dollar basis
from the quarter ended March 31, 1998, to the quarter ended March 31, 1999. The
Company believes that the increase in hip sales is a result of its continuing
focus on the marketing of its hip product lines, specifically the AuRA(R)
comprehensive cemented hip system. International sales comprised 15% of the
Company's total sales in the first quarter of 1999 as compared to 20% in the
quarter ended March 31, 1998.
Gross profit increased by $1,185,150, or 33%, to $4,770,336 in the quarter
ended March 31, 1999, from $3,585,186 in the quarter ended March 31, 1998,
primarily as a result of an increase in total sales. As a percentage of sales,
gross profit decreased slightly to 66.5% in the quarter ended March 31, 1999,
from 67.4% in the quarter ended March 31, 1998. The profit margin decrease was
primarily the result of an increase, as a percentage of total revenue, of
OpteFORM(TM) which is distributed at a slightly lower margin than the Company's
implant products.
Total operating expenses increased by $832,369, or 31%, to $3,560,690 in the
quarter ended March 31, 1999, from $2,728,321 in the quarter ended March 31,
1998. Sales and marketing expenses, the largest component of total operating
expenses, increased by $500,618, or 36%, to $1,897,555 in the quarter ended
March 31, 1999, from $1,396,937 in the quarter ended March 31, 1998. Sales and
marketing expenses, as a percentage of sales, remained steady at 26% in the
quarters ended March 31, 1999 and March 31, 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 $170,374, or 38%, to
$617,295 in the quarter ended March 31, 1999, from $446,921 in the quarter ended
March 31, 1998, primarily as a result of additional costs associated with the
Company's increased shareholder relations efforts and information systems
improvements. As a percentage of sales, general and administrative expenses were
8.6% and 8.4% in the quarters ended March 31, 1999 and 1998, respectively.
Research and development expenses decreased by $15,422, or 4.5%, to $324,830
in the quarter ended March 31, 1999, from $340,252 in the quarter ended March
31, 1998, primarily as a result of the timing of costs associated with ongoing
research projects. As a percentage of sales, research and development expenses
were 4.5% and 6.4% in the quarters ended March 31, 1999 and 1998, respectively.
Depreciation and amortization increased to $373,907 in the quarter ended
March 31, 1999, from $264,336 in the quarter ended March 31, 1998, primarily as
a result of the increased investment in manufacturing equipment, surgical
instrumentation, and information technology. During the quarter ended March 31,
1999, $906,048 of such equipment was placed in service, resulting in the
increase in depreciation expense.
Royalty expenses increased by $67,228 to $347,103 in the quarter ended March
31, 1999, from $279,875 in the quarter ended March 31, 1998, primarily as a
result of growth in sales. As a percentage of sales, royalty expenses were 4.8%
and 5.3% in the quarters ended March 31, 1999 and 1998, respectively.
The Company's income from operations increased by $352,781, or 41%, to
$1,209,646 in the quarter ended March 31, 1999, from $856,865 in the quarter
ended March 31, 1998, primarily as a result of increase in sales, which outpaced
the growth in operating expenses.
The Company incurred net interest expense of $31,707 in the quarter ended
March 31, 1999, as compared to $1,248 of interest income in the quarter ended
March 31, 1998. The increase was the result of lower interest income from
unexpended revenue bond proceeds to offset charges associated with industrial
revenue bond (IRB) debt financing for construction of the Company's new
facility. For the quarter ended March 31, 1999, interest income of $22,356 was
offset by $54,063 of interest expense.
Income before provision for income taxes increased by $319,826, or 37%, to
$1,177,939 in the quarter ended March 31, 1999, from $858,113 in the quarter
ended March 31, 1998. The provision for income taxes was $465,286 in the quarter
ended March 31, 1999, compared to $351,314 in the quarter ended March 31, 1998.
As a result, the Company realized net income of $712,653 in the quarter
ended March 31, 1999, compared to $506,799 in the quarter ended March 31, 1998,
a 41% increase.
10
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations primarily through
borrowings, the sale of equity securities and cash flow from operations. At
March 31, 1999, the Company had working capital of $15,974,120 compared to
$15,867,747 at December 31, 1998. The increase in working capital is primarily
the result of an increase in sales with the associated reduction in inventory.
As a result of operating, investing and financing activities, cash and cash
equivalents at March 31, 1999 increased to $1,146,150 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 March 31, 1999, there was no amount
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 $1,498,437 in the three months
ended March 31, 1999 as compared to using net cash of $203,654 in the three
months ended March 31, 1998. The primary reason for the change was the $246,171
decrease in inventory in the three months ended March 31, 1999, as compared to
the $647,826 increase in inventory that occurred in the three months ended March
31, 1998. Prepaid expenses decreased $172,825 for the three months ended March
31, 1999 from an increase of $162,792 in the three months ended March 31, 1998.
Another reason for the change was a larger increase in depreciation and
amortization to $368,099 in the three months ended March 31, 1999 from $264,336
in the three months ended March 31, 1998. Cash required as a result of the
increase in trade receivables was $471,158, for the three month period ended
March 31, 1999, as compared to $590,726, for the three month period ended March
31, 1998.
INVESTING ACTIVITIES
The Company used net cash in investing activities of $1,122,365 in the three
months ended March 31, 1999, primarily due to the investment of $962,898 in
property and equipment, and the final payment of $150,000 for the purchase of a
product license. As of March 31, 1999, the remaining proceeds of $866,458 from
the Company's Industrial Revenue Bond (IRB) were invested in short-term
maturities with an average yield of 4.4%.
FINANCING ACTIVITIES
Financing activities for the three months ended March 31, 1999 provided
net cash of $107,426 as compared to $228,119 in the three months ended March 31,
1998. The primary reason for the decrease 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 period ended March 31,
1999. Proceeds from the exercise of outstanding stock options provided cash of
$108,879 for the quarter ended March 31, 1999.
11
<PAGE>
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 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 June 30, 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 and is not anticipated to be material to its financial position or
results of operations in any given year. These costs, estimated to be less than
$10,000, 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
The Company is exposed to market risk from interest rates. For its cash
and cash equivalents, a change in interest rates effects 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.
12
<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
a) The Annual Meeting of Shareholders (the "Meeting") of the Company
was held on April 22, 1999
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 22, 1999, 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:
<TABLE>
<CAPTION>
NAME FOR ABSTENTIONS NON-VOTES
---- --------- ----------- ---------
<S> <C> <C> <C>
William Petty, M.D. 4,492,198 9,331 0
Timothy J. Seese 4,492,198 9,331 0
Gary J. Miller, Ph. D. 4,492,198 9,331 0
Albert H. Burstein, Ph. D. 4,492,198 9,331 0
R. Wynn Kearney, Jr., M.D. 4,492,198 9,331 0
E. Ronald Pickard 4,491,448 10,081 0
Paul Metts 4,492,198 9,331 0
</TABLE>
(ii) A proposal to increase by 185,000 shares the number of shares of
Common Stock reserved for issuance pursuant to the Company's
Employee Stock Option and Incentive Plan, as amended. 3,363,222
shares were voted in favor of such proposal, 66,271 shares were
voted against the proposal and 15,640 votes abstained from
voting on such proposal. There were 1,056,396 shares broker
non-votes with respect to such proposal.
(iii) A proposal to increase by 45,000 shares the number of shares of
Common Stock reserved for issuance pursuant to the Company's
Directors Stock Option Plan. 3,130,477 shares were voted in
favor of such proposal, 298,816 shares were voted against the
proposal and 15,840 votes abstained from voting on such
proposal. There were 1,056,396 shares broker non-votes with
respect to such proposal.
(iv) A proposal to approve the Company's 1999 Employee Stock Purchase
Plan. 3,402,982 shares were voted in favor of such proposal,
29,551 shares were voted against the proposal and 12,600 votes
abstained from voting on such proposal. There were 1,056,396
shares broker non-votes with respect to such proposal.
(v) A proposal to ratify the selection of Deloitte & Touche LLP to
serve as the Company's independent auditors for the fiscal year
ending December 31, 1999. 4,491,493 shares were voted in favor
of such proposal, 6,476 shares were voted against the proposal
and 3,560 votes abstained from voting on such proposal. There
were 0 shares broker non-votes with respect to such proposal
13
<PAGE>
Item 5. Other Information
None
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.
14
<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 14, 1999 By: /s/ TIMOTHY J. SEESE
-----------------------
Timothy J. Seese
President and Chief
Operating Officer
Date: May 14, 1999 By: /s/ JOEL C. PHILLIPS
-----------------------
Joel C. Phillips
Treasurer and Chief
Financial Officer
15
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
11 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 basic and diluted earnings per share
THREE MONTHS ENDED
MARCH 31,
1998 1999
-------- --------
Basic:
Weighted average common shares outstanding
used in computing basic earnings per share 4,904,663 4,921,257
=====================
Basic Earnings Per Share $0.14
=========
Diluted:
Weighted average common and common equivalent 4,904,663 4,921,257
shares outstanding
Effect of shares issuable under stock plans 30,382 161,928
using the treasury method
Effect of shares contingently issuable under warrants - 13,971
issued with the 8% subordinated debentures using
the treasury stock method
=====================
Shares used in computing diluted earnings per share 4,935,045 5,097,156
=====================
Diluted Earnings Per Share $0.14
=========
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,146,150
<SECURITIES> 0
<RECEIVABLES> 6,263,926
<ALLOWANCES> (153,958)
<INVENTORY> 11,286,390
<CURRENT-ASSETS> 18,554,287
<PP&E> 13,064,214
<DEPRECIATION> (3,114,568)
<TOTAL-ASSETS> 30,452,238
<CURRENT-LIABILITIES> 2,581,811
<BONDS> 0
0
0
<COMMON> 49,263
<OTHER-SE> 23,255,747
<TOTAL-LIABILITY-AND-EQUITY> 30,452,238
<SALES> 7,168,417
<TOTAL-REVENUES> 7,168,417
<CGS> 2,398,081
<TOTAL-COSTS> 2,398,081
<OTHER-EXPENSES> 3,560,690
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 31,707
<INCOME-PRETAX> 1,177,939
<INCOME-TAX> 465,286
<INCOME-CONTINUING> 712,653
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 712,653
<EPS-PRIMARY> 0.14
<EPS-DILUTED> 0.14
</TABLE>
