UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
___ EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 August 5, 1999
Common Stock, $.01 par value 4,965,217
0
<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 JUNE 30, 1999 2
CONDENSED STATEMENTS OF INCOME FOR THE THREE AND SIX MONTH 3
PERIODS ENDED JUNE 30, 1998 AND JUNE 30, 1999
CONDENSED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE SIX 4
MONTH PERIOD ENDED JUNE 30, 1999
CONDENSED STATEMENTS OF CASH FLOWS FOR THE SIX MONTH PERIODS ENDED 5
JUNE 30, 1998 AND JUNE 30, 1999
NOTES TO CONDENSED FINANCIAL STATEMENTS FOR THE THREE AND SIX 6
MONTH PERIODS ENDED JUNE 30, 1998 AND JUNE 30, 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 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 14
ITEM 5. OTHER INFORMATION 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 14
SIGNATURES 15
</TABLE>
1
<PAGE>
Item 1. Financial Statements
EXACTECH, INC.
CONDENSED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
--------------- -----------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 662,652 $ 1,198,131
Trade receivables, net of allowance
of $153,958 and $240,339 5,638,810 7,369,581
Refundable income taxes 47,681 -
Prepaid expenses and other assets 173,625 224,057
Inventories 11,532,561 10,551,013
--------------- -----------------
Total current assets 18,055,329 19,342,782
PROPERTY AND EQUIPMENT
Land 263,301 265,101
Machinery and equipment 2,604,021 4,373,006
Surgical instruments 5,546,524 6,516,550
Furniture and fixtures 333,134 373,957
Facilities 3,415,590 3,470,023
--------------- -----------------
Total 12,162,570 14,998,637
Accumulated depreciation (2,801,971) (3,484,134)
--------------- -----------------
Net property and equipment 9,360,599 11,514,503
OTHER ASSETS
Product licenses and designs, net 269,394 390,845
Deferred financing costs, net 133,614 113,656
Unexpended industrial revenue
bond proceeds 856,992 -
Advances and deposits 151,758 153,258
Patents and trademarks, net 410,434 565,552
--------------- -----------------
Total other assets 1,822,192 1,223,311
TOTAL ASSETS $ 29,238,120 $ 32,080,596
=============== =================
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,336,146 $ 1,674,188
Income taxes payable - 204,794
Current portion of long-term debt and leases 6,033 5,928
Commissions payable 340,248 657,130
Royalties payable 342,941 439,725
Other liabilities 162,214 143,106
--------------- -----------------
Total current liabilities 2,187,582 3,124,871
Deferred income taxes 660,259 660,259
Long-term debt and capital lease obligations,
net of current portion 3,906,802 3,903,918
--------------- -----------------
Total liabilities 6,754,643 7,689,048
SHAREHOLDERS' EQUITY
Common stock 49,072 49,652
Additional paid-in capital 15,015,398 15,372,341
Retained earnings 7,419,007 8,969,555
--------------- -----------------
Total shareholders' equity 22,483,477 24,391,548
--------------- -----------------
TOTAL LIABILITIES AND EQUITY $ 29,238,120 $ 32,080,596
=============== =================
</TABLE>
See notes to condensed financial statements
2
<PAGE>
EXACTECH, INC.
CONDENSED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTH PERIOD SIX MONTH PERIOD
ENDED JUNE 30, ENDED JUNE 30,
1998 1999 1998 1999
----------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
NET SALES $ 6,375,320 $ 8,816,214 $ 11,692,915 $ 15,984,631
COST OF GOODS SOLD 2,444,535 3,311,981 4,176,943 5,710,062
----------------- ---------------- ---------------- ----------------
Gross profit 3,930,785 5,504,233 7,515,972 10,274,569
OPERATING EXPENSES:
Sales and marketing 1,535,707 2,211,590 2,932,643 4,109,145
General and administrative 520,436 651,583 967,357 1,268,878
Research and development 294,713 410,129 634,965 734,959
Depreciation and amortization 292,369 389,501 556,705 763,408
Royalties 340,456 425,209 620,331 772,312
----------------- ---------------- ---------------- ----------------
Total operating expenses 2,983,681 4,088,012 5,712,001 7,648,702
----------------- ---------------- ---------------- ----------------
INCOME FROM OPERATIONS 947,104 1,416,221 1,803,971 2,625,867
OTHER INCOME (EXPENSE)
Interest expense (9,688) (31,270) (8,440) (62,977)
Equity in gain of subsidiary 13,778 - 13,778 -
----------------- ---------------- ---------------- ----------------
INCOME BEFORE INCOME TAXES 951,194 1,384,951 1,809,309 2,562,890
PROVISION FOR INCOME TAXES 370,966 547,056 722,280 1,012,342
----------------- ---------------- ---------------- ----------------
NET INCOME $ 580,228 $ 837,895 $ 1,087,029 $ 1,550,548
================= ================ ================ ================
BASIC EARNINGS PER SHARE $ 0.12 $ 0.17 $ 0.22 $ 0.31
================= ================ ================ ================
DILUTED EARNINGS PER SHARE $ 0.12 $ 0.16 $ 0.22 $ 0.30
================= ================ ================ ================
</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 38,254 382 241,261 241,643
Tax benefit from exercise
of stock options 13,624 13,624
Net income 1,550,548 1,550,548
-------------- ------------ ---------------- --------------- ------------------
Balance, June 30, 1999 4,965,217 $ 49,652 $ 15,372,341 $ 8,969,555 $ 24,391,548
============== ============ ================ =============== ==================
</TABLE>
See notes to condensed financial statements
4
<PAGE>
EXACTECH, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTH PERIOD ENDED JUNE 30,
1998 1999
--------------- -----------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 1,087,029 $ 1,550,548
Adjustments to reconcile net income to net
cash provided by operating activities :
Depreciation and amortization 556,705 763,408
Loss on disposal of equipment - 30,626
Deferred income taxes (18,675) -
Increase in trade receivables (1,262,468) (1,730,771)
(Increase) decrease in inventories (432,480) 981,548
Increase in prepaids and other assets (108,554) (31,974)
Increase in income taxes payable 302,357 252,475
(Decrease) increase in accounts payable (283,908) 338,042
Increase in other liabilities 575,316 394,558
--------------- -----------------
Net cash provided by operating activities 415,322 2,548,460
--------------- -----------------
INVESTING ACTIVITIES:
Purchases of property and equipment (3,215,497) (2,897,320)
Maturities of short-term investments 1,335,740 -
Purchase of product licenses and designs (200,000) (150,000)
Change in unexpended industrial revenue bond proceeds 2,157,327 856,992
Cost of patents and trademarks (30,312) (177,187)
--------------- -----------------
Net cash used in investing activities 47,258 (2,367,515)
--------------- -----------------
FINANCING ACTIVITIES:
Proceeds from financing of insurance premiums, net 154,855 -
Principal payments on debt (2,244) (2,989)
Proceeds from issuance of common stock - 357,523
--------------- -----------------
Net cash provided by financing activities 152,611 354,534
--------------- -----------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS 615,191 535,479
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 709,221 662,652
--------------- -----------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,324,412 $ 1,198,131
=============== =================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 97,953 $ 108,210
Income taxes 458,428 788,932
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 SIX MONTH PERIODS ENDED JUNE 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 six month period ended
June 30, 1999 are not necessarily indicative of the results to be expected for
the full year.
2. DEBT
<TABLE>
<CAPTION>
Long-term debt and capital lease obligations: DECEMBER 31, JUNE 30,
1998 1999
--------------- --------------
<S> <C> <C>
Capitalized lease obligation payable in monthly installments $ 12,835 $ 9,846
of $611 through July, 2000, collateralized by equipment with
a carrying value of approximately $12,472 as of
June 30, 1999
Industrial Revenue Bond note payable in annual 3,900,000 3,900,000
principal installments as follows: $300,000 per year from
2000-2006; $200,000 per year from 2007-2013; $100,000 per
year from 2014-2017; monthly interest payments based on
adjustable rate as determined by the bonds remarketing
agent based on market rate fluctuations (3.8% as of
June 30, 1999); proceeds used to finance construction
of new facility
--------------- --------------
Total long-term debt and capital lease obligations $ 3,912,835 $ 3,909,846
Less current portion (6,033) (5,928)
--------------- --------------
$ 3,906,802 $ 3,903,918
=============== ==============
</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 June 30, 1999:
<TABLE>
<CAPTION>
LONG-TERM CAPITAL LEASE
DEBT OBLIGATIONS
--------------- --------------
<S> <C> <C>
1999 ................................................................. $ 3,963
2000 ................................................................. $ 300,000 7,188
2001 ................................................................. 300,000
2002 ................................................................. 300,000
2003 ................................................................. 300,000
Thereafter .............................................................. 2,700,000
--------------- --------------
Total .......................................................... $ 3,900,000 11,151
===============
Less interest on capital lease obligations .............................. (1,305)
--------------
$ 9,846
==============
</TABLE>
6
<PAGE>
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.
During May 1999, the Company executed a contract to purchase two
parcels of land in Northwood Industrial Park, Gainesville, Florida for the
purchase price of $197,540. As of June 30, 1999, a deposit of $1,000 has been
paid with the remaining purchase price of the real estate payable at closing.
The closing on the purchase is scheduled for the third quarter of 1999.
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>
THREE MONTHS ENDED JUNE 30
1998
Net Sales $ 4,663 $ 1,292 $ 68 $ 352 $ 6,375
Segment profit (loss) from operations 548 180 (16) 235 947
1999
Net Sales $ 5,913 $ 1,482 $ 931 $ 490 $ 8,816
Segment profit from operations 675 274 223 244 1,417
SIX MONTHS ENDED JUNE 30
1998
Net Sales $ 8,604 $ 2,481 $ 75 $ 533 $ 11,693
Segment profit (loss) from operations 1,208 435 (18) 179 1,804
1999
Net Sales $ 10,866 $ 2,904 $ 1,619 $ 596 $ 15,985
Segment profit from operations 1,554 473 379 220 2,627
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
Total assets not identified with a specific segment (in thousands) are $12,557
at December 31, 1998 and $15,382 at June 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:
<TABLE>
<CAPTION>
(IN THOUSANDS)
------------------------------------------------------------------------------
TISSUE
KNEE HIP SERVICES OTHER TOTAL
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1998
Total assets, net 10,755 5,427 149 350 16,681
JUNE 30, 1999
Total assets, net 10,617 5,436 271 375 16,699
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
5. SHAREHOLDERS' EQUITY
The following is a reconciliation of income and shares of the basic and
diluted EPS computations:
<TABLE>
<CAPTION>
PER PER
INCOME SHARES SHARE INCOME SHARES SHARE
-------------------------------------------------------------------------------
THREE MONTHS ENDED JUNE 30, 1998 THREE MONTHS ENDED JUNE 30, 1999
------------------------------------- -------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BASIC EPS:
Net income $ 580,228 4,904,663 $ 0.12 $ 837,895 4,939,652 $ 0.17
Effect of Dilutive Securities:
Stock options 52,040 194,498
Warrants 6,677 14,610
DILUTED EPS:
Net income plus assumed
conversions $ 580,228 4,963,380 $ 0.12 $ 837,895 5,148,760 $ 0.16
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1998 SIX MONTHS ENDED JUNE 30, 1999
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BASIC EPS:
Net income $ 1,087,029 4,904,663 $ 0.22 $ 1,550,548 4,930,462 $ 0.31
Effect of Dilutive Securities:
Stock options 35,499 178,833
Warrants 3,320 11,693
DILUTED EPS:
Net income plus assumed
conversions $ 1,087,029 4,943,482 $ 0.22 $ 1,550,548 5,120,988 $ 0.30
</TABLE>
For the three months ended June 30, 1998, options to purchase 336,800
shares of common stock at prices ranging from $7.88 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 June 30, 1999, options to purchase
27,280 shares of common stock at a price of $11.69 per share were outstanding
but were not included in the computation of diluted EPS because the options'
exercise price was greater than the average market price of the common shares.
For the six months ended June 30, 1998, options to purchase 362,975
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 six months ended June 30, 1999, options to purchase
27,280 shares of common stock at a price of $11.69 per share were outstanding
but were not included in the computation of diluted EPS because the options'
exercise price was 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, 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):
EXACTECH, INC.
SALES SUMMARY BY PRODUCT LINE ($1,000's)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
---------------------------------------------------
JUNE 30, 1998 JUNE 30, 1999
HIP PRODUCTS UNITS $ % UNITS $ %
----- - - ----- - -
<S> <C> <C> <C> <C> <C> <C>
Cemented 2,525 1,183 10.1% 3,055 1,452 9.1%
Porous Coated 2,563 905 7.7% 3,153 1,085 6.8%
Bipolar Prosthesis 509 242 2.1% 538 253 1.6%
Revision 77 151 1.3% 54 107 0.7%
------------------------ ------------------------
Total Hip Products 5,674 2,481 21.2% 6,800 2,897 18.2%
KNEE PRODUCTS
Cemented Cruciate Sparing 8,717 3,536 30.2% 9,708 4,252 26.6%
Cemented Posterior Stabilized 5,097 3,210 27.5% 5,977 3,862 24.2%
Porous Coated 929 942 8.1% 994 1,079 6.7%
Revision 1,760 916 7.8% 2,886 1,545 9.7%
------------------------ ------------------------
Total Knee Products 16,503 8,604 73.6% 19,565 10,738 67.2%
Instrument Sales and Rental 434 3.7% 504 3.1%
Tissue Services 75 0.7% 1,620 10.1%
Acudriver 48 0.4% 134 0.8%
Miscellaneous 51 0.4% 92 0.6%
-------------- --------------
Total 11,693 100.0% 15,985 100.0%
============== ==============
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------
JUNE 30, 1998 JUNE 30, 1999
HIP PRODUCTS UNITS $ % UNITS $ %
----- - - ----- - -
<S> <C> <C> <C> <C> <C> <C>
Cemented 1,373 637 10.0% 1,484 709 8.0%
Porous Coated 1,147 426 6.7% 1,829 587 6.7%
Bipolar Prosthesis 289 132 2.1% 294 133 1.5%
Revision 53 97 1.5% 30 54 0.6%
------------------------ ------------------------
Total Hip Products 2,862 1,292 20.3% 3,637 1,483 16.8%
KNEE PRODUCTS
Cemented Cruciate Sparing 4,858 1,909 29.9% 5,461 2,175 24.7%
Cemented Posterior Stabilized 2,820 1,703 26.7% 3,504 2,181 24.7%
Porous Coated 523 513 8.1% 634 672 7.6%
Revision 1,098 538 8.4% 1,758 886 10.1%
------------------------ ------------------------
Total Knee Products 9,299 4,663 73.1% 11,357 5,914 67.1%
Instrument Sales and Rental 276 4.3% 357 4.1%
Tissue Services 68 1.1% 932 10.6%
Acudriver 48 0.8% 82 0.9%
Miscellaneous 28 0.4% 48 0.5%
-------------- --------------
Total 6,375 100.0% 8,816 100.0%
============== ==============
</TABLE>
9
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998
Net sales increased by $2,440,894, or 38%, to $8,816,214 in the quarter
ended June 30, 1999, from $6,375,320 in the quarter ended June 30, 1998. The
increase in net sales resulted from increases in all major product lines. Sales
of knee implant products increased by 22% on a unit basis and by 27% on a dollar
basis from the quarter ended June 30, 1998 to the quarter ended June 30, 1999,
as the Company continued expansion of its domestic and international
distribution. Sales of hip implant products increased by 27% on a unit basis and
by 15% on a dollar basis from the quarter ended June 30, 1998 to the quarter
ended June 30, 1999. The overall increase in hip sales was primarily the result
of an increase in MCS(R) porous coated hip system sales. MCS(R) component sales
increased 38% to $587,057 in the quarter ended June 30, 1999, from $426,112 in
the quarter ended June 30, 1998. International sales increased 33% to $2,009,332
in the quarter ended June 30, 1999, from $1,505,417 in the quarter ended June
30, 1998 as international distributors continued to enter new markets. As a
percentage of sales, international sales decreased to 23% in the quarter ended
June 30, 1999, as compared to 24% in the quarter ended June 30, 1998.
Gross profit increased by $1,573,448, or 40%, to $5,504,233 in the
quarter ended June 30, 1999, from $3,930,785 in the quarter ended June 30, 1998.
As a percentage of sales, gross profit remained constant at 62% in each of the
quarters ended June 30, 1999 and June 30, 1998.
Total operating expenses increased by $1,104,331, or 37%, to $4,088,012
in the quarter ended June 30, 1999, from $2,983,681 in the quarter ended June
30, 1998. Sales and marketing expenses, the largest component of total operating
expenses, increased by $675,883, or 44%, to $2,211,590 in the quarter ended June
30, 1999, from $1,535,707 in the quarter ended June 30, 1998. Sales and
marketing expenses increased as a percentage of sales to 25% in the quarter
ended June 30, 1999, from 24% in the quarter ended June 30, 1998. The Company's
sales and marketing expenses are largely variable costs based on sales levels,
with the largest component being commissions. Sales and marketing expenses as a
percentage of sales increased primarily as a result of the ongoing investment in
the Company's sales and distribution network.
General and administrative expenses increased by $131,147, or 25%, to
$651,583 in the quarter ended June 30, 1999, from $520,436 in the quarter ended
June 30, 1998. As a percentage of sales, general and administrative expenses
decreased to 7% in the quarter ended June 30, 1999, from 8% in the quarter ended
June 30, 1998. Total general and administrative expenses increased primarily as
a result of costs associated with the Company's expanded shareholder relations
efforts and information systems improvements.
Research and development expenses increased by $115,416, or 39%, to
$410,129 in the quarter ended June 30, 1999, from $294,713 in the quarter ended
June 30, 1998. Research and development expenses were 5% of sales in each of the
quarters ended June 30, 1999 and 1998. The increase in research and development
expenses is primarily due to the continued development of the modular revision
hip system and enhancements to other hip product lines.
Depreciation and amortization increased to $389,501 in the quarter
ended June 30, 1999, from $292,369 in the quarter ended June 30, 1998.
Depreciation expenses increased as a result of the increased investment in
surgical instrumentation and manufacturing equipment. During the quarter ended
June 30, 1999, $646,854 of surgical instruments and $940,822 of manufacturing
equipment was placed in service, resulting in the increase in depreciation
expense.
Royalty expenses increased by $84,753 to $425,209 in the quarter ended
June 30, 1999, from $340,456 in the quarter ended June 30, 1998, primarily as a
result of growth in sales of knee implant products. As a percentage of sales,
royalty expenses were 5% in each of the quarters ended June 30, 1999 and June
30, 1998.
The Company's income from operations increased by $469,117, or 50%, to
$1,416,221 in the quarter ended June 30, 1999, from $947,104 in the quarter
ended June 30, 1998. The increase was primarily attributable to the increase in
sales and gross profit, which surpassed the increase in operating expenses.
The Company realized net interest expense of $31,270 in the quarter
ended June 30, 1999, as compared to $9,688 in the quarter ended June 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
10
<PAGE>
financing for construction of the Company's new facility. For the quarter ended
June 30, 1999, interest income of $22,877 was offset by $54,147 of interest
expense.
In April 1998, the Company sold its interest in Techmed S.p.A., its
Italian distributor. As a result, the Company recognized $13,778 in gains
associated with the sale in the quarter ended June 30, 1998.
Income before provision for income taxes increased by $433,757, or 46%,
to $1,384,951 in the quarter ended June 30, 1999, from $951,194 in the quarter
ended June 30, 1998. The provision for income taxes was $547,056 in the quarter
ended June 30, 1999, compared to $370,966 in the quarter ended June 30, 1998.
As a result, the Company realized net income of $837,895 in the quarter
ended June 30, 1999, compared to $580,228 in the quarter ended June 30, 1998, a
44% increase.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
Net sales increased by $4,291,716, or 37%, to $15,984,631 in the six
months ended June 30, 1999, from $11,692,915 in the six months ended June 30,
1998. Sales of knee implant products increased by 19% on a unit basis and by 25%
on a dollar basis from the six months ended June 30, 1998 to the six months
ended June 30, 1999. Sales of hip implant products increased by 20% on a unit
basis and by 17% on a dollar basis from the six months ended June 30, 1998, to
the six months ended June 30, 1999. The increase in hip sales ocurred in both
the cemented and porous coated product lines. Cemented hip system sales,
consisting primarily of the AuRA(R) and Opteon(TM) hip systems, increased 23% to
$1,451,116 in the six months ended June 30, 1999, from $1,183,104 in the six
months ended June 30, 1998. Porous coated hip system sales, consisting of the
MCS(R) porous coated hip system, increased 20% to $1,085,220 in the six months
ended June 30, 1999, from $905,074 in the six months ended June 30, 1998. Knee
revision sales increased by $629,862, or 69%, to $1,545,393 in the six months
ended June 30, 1999 from $915,862 in the six months ended June 30, 1998.
International sales increased 22% to $3,100,964 in the six months ended June 30,
1999, from $2,546,928 in the six months ended June 30, 1998. As a percentage of
sales, international sales decreased to 19% in the six months ended June 30,
1999, as compared to 22% in the six months ended June 30, 1998.
Gross profit increased by $2,758,597, or 37%, to $10,274,569 in the six
months ended June 30, 1999, from $7,515,972 in the six months ended June 30,
1998. As a percentage of sales, gross profit remained 64% in the six months
ended June 30, 1999 and June 30, 1998.
Total operating expenses increased by $1,936,701, or 34%, to $7,648,702
in the six months ended June 30, 1999, from $5,712,001 in the six months ended
June 30, 1998. Sales and marketing expenses, the largest component of total
operating expenses, increased 40% to $4,109,145 in the six months ended June 30,
1999, from $2,932,643 in the six months ended June 30, 1998. Sales and marketing
expenses increased as a percentage of sales to 26% in the six months ended June
30, 1999, from 25% in the six months ended June 30, 1998.
General and administrative expenses increased 31% to $1,268,878 in the
six months ended June 30, 1999, from $967,357 in the six months ended June 30,
1998. As a percentage of sales, general and administrative expenses remained
constant at 8% in the six months ended June 30, 1999 and June 30, 1998.
Research and development expenses increased 16% to $734,959 in the six
months ended June 30, 1999, from $634,965 in the six months ended June 30, 1998.
As a percentage of sales, research and development expenses remained constant at
5% for the six months ended June 30, 1999 and June 30, 1998.
Depreciation and amortization increased to $763,408 in the six months
ended June 30, 1999, from $556,705 in the six months ended June 30, 1998.
Depreciation expenses increased as a result of the increased investment in
surgical instrumentation and manufacturing equipment. During the six months
ended June 30, 1999, $970,026 of surgical instruments and $1,276,382 of
manufacturing equipment was placed in service.
Royalty expenses increased 25% to $772,312 during the six months ended
June 30, 1999, from $620,331 in the six months ended June 30, 1998. As a percent
of sales, royalty expense was constant at 5% for the six months ended June 30,
1999 and June 30, 1998.
The Company's income from operations increased 46%, to $2,625,867 in
the six months ended June 30, 1999, from $1,803,971 in the six months ended June
30, 1998. The increase was primarily attributable to the
11
<PAGE>
increase in sales and gross profit, which increased at a greater rate than
operating expenses.
The Company realized net interest expense of $62,977 in the six months
ended June 30, 1999, as compared to $8,440 in the six months ended June 30,
1998. Interest expense of $108,210 for the six months ended June 30, 1999, was
partially offset by $45,233 of interest income.
The Company did not have a subsidiary gain or loss in the six months
ended June 30, 1999, as compared to a recognition of a $13,778 gain associated
with the sale of its interest in Techmed in the six months ended June 30, 1998.
Income before provision for income taxes increased 42%, to $2,562,890
in the six months ended June 30, 1999, from $1,809,309 in the six months ended
June 30, 1998. The provision for income taxes was $1,012,342 in the six months
ended June 30, 1999, compared to $722,280 in the six months ended June 30, 1998.
As a result, the Company realized net income of $1,550,548 in the six
months ended June 30, 1999, compared to $1,087,029 in the six months ended June
30, 1998, a 43% increase. As a percentage of sales, net income increased to 10%
in the six months ended June 30, 1999 from 9% in the six months ended June 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 June 30, 1999, the Company had working capital of $16,217,911 compared to
$15,867,747 at December 31, 1998. The increase in working capital is primarily
the result of an increase in sales and a resulting decrease in inventory. As a
result of operating, investing and financing activities, cash and cash
equivalents at June 30, 1999 increased to $1,198,131 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 June 30, 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 $2,548,460 in the six months
ended June 30, 1999 as compared to $415,322 in the six months ended June 30,
1998. The primary reason for the change was the decrease in inventory of
$981,548 in the six months ended June 30, 1999, as compared to the $432,480
increase in inventory in the six months ended June 30, 1998. Income taxes
payable, accounts payable and other liabilities increased $985,075 in the six
months ended June 30, 1999, as compared to an increase of $593,765 in the six
months ended June 30, 1998. Cash required as a result of the increase in trade
receivables was $1,730,771 for the six month period ended June 30, 1999, as
compared to $1,262,468, for the six month period ended June 30, 1998.
INVESTING ACTIVITIES
The Company used net cash in investing activities of $2,367,515 in the
six months ended June 30, 1999, primarily due to the investment of $2,897,320 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 June 30, 1999, $1,197,039 was invested in daily
maturing funds and repurchase agreements.
12
<PAGE>
FINANCING ACTIVITIES
Financing activities for the six months ended June 30, 1999 provided
net cash of $354,535 as compared to $152,611 in the six months ended June 30,
1998. Proceeds from the exercise of outstanding stock options and warrants
provided cash of $357,523 during the six month period ended June 30, 1999, as
compared to the financing of insurance premiums during the six months ended June
30, 1998, which provided cash of $154,855.
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 is complete.
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, 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 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.
13
<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 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: August 13, 1999 By: /S/ TIMOTHY J. SEESE
---------------------------------
Timothy J. Seese
President and Chief
Operating Officer
Date: August 13, 1999 By: /S/ JOEL C. PHILLIPS
---------------------------------
Joel C. Phillips
Treasurer and Chief
Financial Officer
15
<PAGE>
EXHIBIT INDEX
EXHIBITS DESCRIPTION
- -------- -----------
11 Statement re: computation of per share earnings.
27 Financial Data Schedule.
EXHIBIT 11
EARNINGS PER SHARE COMPUTATIONS
The table below details the number of common shares and common stock equivalents
used in the computation of primary and fully diluted earnings per share
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1998 1999 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic:
Weighted average common shares outstanding
used in computing basic earnings per share 4,904,663 4,939,652 4,904,663 4,930,462
=========================== ============================
Basic Earnings Per Share $ 0.17 $ 0.31
============ ============
Diluted:
Weighted average common and common equivalent
shares outstanding 4,904,663 4,939,652 4,904,663 4,930,462
Effect of shares issuable under stock plans
using the treasury method 52,040 194,498 35,499 178,833
Effect of shares contingently issuable under warrants
issued with the 8% subordinated debentures using
the treasury stock method 6,677 4,174 3,320 11,693
Effect of shares contingently issuable under warrants
issued with the Initial Public Offering (IPO) using
the treasury stock method 10,436
=========================== ============================
Shares used in computing diluted earnings per share 4,963,380 5,148,760 4,943,482 5,120,988
=========================== ============================
Diluted Earnings Per Share $ 0.16 $ 0.30
============ ============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 1,198,131
<SECURITIES> 0
<RECEIVABLES> 7,609,920
<ALLOWANCES> (240,339)
<INVENTORY> 10,551,013
<CURRENT-ASSETS> 19,342,782
<PP&E> 14,998,637
<DEPRECIATION> (3,484,134)
<TOTAL-ASSETS> 32,080,596
<CURRENT-LIABILITIES> 3,124,871
<BONDS> 0
0
0
<COMMON> 49,652
<OTHER-SE> 24,341,896
<TOTAL-LIABILITY-AND-EQUITY> 32,080,596
<SALES> 15,984,631
<TOTAL-REVENUES> 15,984,631
<CGS> 5,710,062
<TOTAL-COSTS> 5,710,062
<OTHER-EXPENSES> 7,648,702
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 62,977
<INCOME-PRETAX> 2,562,890
<INCOME-TAX> 1,012,342
<INCOME-CONTINUING> 1,550,548
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,550,548
<EPS-BASIC> 0.31
<EPS-DILUTED> 0.30
</TABLE>
