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, 2000
[ ] 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 9, 2000
Common Stock, $.01 par value 5,081,906
<PAGE>
EXACTECH, INC.
INDEX
<TABLE>
<CAPTION>
Page
Number
<S> <C>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of December 31, 1999 and
September 30, 2000 2
Condensed Consolidated Statements of Income for the Three Month and
Nine Month Periods Ended September 30, 1999 and September 30, 2000 3
Condensed Consolidated Statement of Changes in Shareholders' Equity
for the Nine Month Period Ended September 30, 2000 4
Condensed Consolidated Statements of Cash Flows for the Nine Month
Periods Ended September 30, 1999 and September 30, 2000 5
Notes to Condensed Consolidated Financial Statements for the Three
Month and Nine Month Periods Ended September 30, 1999 and
September 30, 2000 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 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>
EXACTECH, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
December 31, September 30,
ASSETS 1999 2000
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,641,071 $ 491,712
Trade receivables, net of allowance
of $332,693 and $319,971 7,979,481 8,291,315
Refundable income taxes 22,952 153,007
Prepaid expenses and other assets 164,910 337,405
Inventories 11,638,895 18,043,501
------------ ------------
Total current assets 21,447,309 27,316,940
PROPERTY AND EQUIPMENT:
Land 462,629 462,629
Machinery and equipment 4,562,503 5,658,663
Surgical instruments 7,085,495 9,273,878
Furniture and fixtures 393,918 486,024
Facilities 3,472,548 3,579,787
------------ ------------
Total 15,977,093 19,460,981
Accumulated depreciation (4,059,413) (5,458,700)
------------ ------------
Net property and equipment 11,917,680 14,002,281
OTHER ASSETS:
Product licenses and designs, net 362,295 319,470
Deferred financing costs, net 123,748 129,046
Investment in foreign subsidiary -- 2,616
Advances and deposits 230,872 143,676
Patents and trademarks, net 527,502 498,299
------------ ------------
Total other assets 1,244,417 1,093,107
------------ ------------
TOTAL ASSETS $ 34,609,406 $ 42,412,328
============ ============
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,418,502 $ 3,861,123
Line of credit -- 2,055,178
Current portion of long-term debt 300,000 300,000
Commissions payable 396,858 634,067
Royalties payable 417,486 371,410
Other liabilities 61,781 107,714
------------ ------------
Total current liabilities 3,594,627 7,329,492
DEFERRED INCOME TAXES 974,980 1,263,940
LONG-TERM DEBT, NET OF CURRENT PORTION 3,600,000 3,600,000
------------ ------------
Total liabilities 8,169,607 12,193,432
SHAREHOLDERS' EQUITY:
Common stock 50,081 50,819
Additional paid-in capital 15,803,144 16,580,788
Retained earnings 10,586,574 13,587,289
------------ ------------
Total shareholders' equity 26,439,799 30,218,896
------------ ------------
TOTAL LIABILITIES AND EQUITY $ 34,609,406 $ 42,412,328
============ ============
</TABLE>
See notes to condensed consolidated financial statements
2
<PAGE>
EXACTECH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Month Period Nine Month Period
Ended September 30, Ended September 30,
1999 2000 1999 2000
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET SALES $ 7,927,702 $ 9,820,161 $ 23,912,333 $ 31,040,443
COST OF GOODS SOLD 2,731,207 3,261,003 8,441,269 10,738,159
------------ ------------ ------------ ------------
Gross profit 5,196,495 6,559,158 15,471,064 20,302,284
OPERATING EXPENSES:
Sales and marketing 2,095,674 2,779,309 6,204,819 8,427,158
General and administrative 686,139 701,237 1,955,017 2,458,716
Research and development 414,238 553,934 1,149,197 1,590,887
Depreciation and amortization 439,398 552,811 1,202,806 1,585,796
Royalties 345,894 369,502 1,118,206 1,246,204
------------ ------------ ------------ ------------
Total operating expenses 3,981,343 4,956,793 11,630,045 15,308,761
------------ ------------ ------------ ------------
INCOME FROM OPERATIONS 1,215,152 1,602,365 3,841,019 4,993,523
OTHER INCOME (EXPENSE):
Interest income 14,462 5,071 59,695 42,118
Interest expense 53,564 89,039 161,774 215,881
------------ ------------ ------------ ------------
Total other income (expense) (39,102) (83,968) (102,079) (173,763)
INCOME BEFORE INCOME TAXES 1,176,050 1,518,397 3,738,940 4,819,760
PROVISION FOR INCOME TAXES 464,540 557,694 1,476,882 1,819,045
------------ ------------ ------------ ------------
NET INCOME $ 711,510 $ 960,703 $ 2,262,058 $ 3,000,715
============ ============ ============ ============
BASIC EARNINGS PER SHARE $ 0.14 $ 0.19 $ 0.46 $ 0.59
============ ============ ============ ============
DILUTED EARNINGS PER SHARE $ 0.14 $ 0.18 $ 0.44 $ 0.56
============ ============ ============ ============
</TABLE>
See notes to condensed consolidated financial statements
3
<PAGE>
EXACTECH, INC.
CONDENSED CONSOLIDATED 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, 1999 5,008,079 $ 50,081 $15,803,144 $10,586,574 $26,439,799
Issuance of common stock 922 9 12,306 12,315
Exercise of stock options 8,248 82 46,292 46,374
Exercise of warrants 55,488 555 620,911 621,466
Issuance of common stock
under the Company's
Employee Stock Purchase Plan 9,169 92 95,227 95,319
Compensation accrual on
non-qualified stock options 2,908 2,908
Net income 3,000,715 3,000,715
----------- ----------- ----------- ----------- -----------
Balance, September 30, 2000 5,081,906 $ 50,819 $16,580,788 $13,587,289 $30,218,896
=========== =========== =========== =========== ===========
</TABLE>
See notes to condensed consolidated financial statements
4
<PAGE>
EXACTECH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Month Period
Ended September 30,
1999 2000
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 2,262,058 $ 3,000,715
Adjustments to reconcile net income to net
cash provided by (used in) operating activities :
Depreciation and amortization 1,253,481 1,687,816
Loss on disposal of equipment 44,470 29,762
Deferred income taxes -- 288,960
Increase in trade receivables (1,768,600) (311,834)
Decrease (increase) in inventories 695,520 (6,404,606)
Increase in prepaids and other assets (23,874) (90,597)
Increase (decrease) in income taxes payable 504,548 (130,055)
Increase in accounts payable 296,596 1,442,621
Increase in other liabilities 224,191 237,067
----------- -----------
Net cash provided by (used in) operating activities 3,488,390 (250,151)
----------- -----------
INVESTING ACTIVITIES:
Purchases of property and equipment, net (3,673,585) (3,715,990)
Purchases of product licenses and designs (150,000) --
Change in unexpended industrial revenue bond proceeds 855,413 --
Investment in subsidiary -- (2,616)
Cost of patents and trademarks (177,187) (14,162)
----------- -----------
Net cash used in investing activities (3,145,359) (3,732,768)
----------- -----------
FINANCING ACTIVITIES:
Principal payments on debt (4,451) --
Proceeds from borrowing on line of credit -- 2,055,178
Proceeds from issuance of common stock 588,600 778,382
----------- -----------
Net cash provided by financing activities 584,149 2,833,560
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 927,180 (1,149,359)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 662,652 1,641,071
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,589,832 $ 491,712
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 161,775 $ 215,882
Income taxes 958,710 1,667,926
Noncash investing and financing activities:
Relief of compensation accrual on issuance of stock 5,971 --
</TABLE>
See notes to condensed consolidated financial statements
5
<PAGE>
EXACTECH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1999 AND 2000
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated 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 consolidated 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, 1999 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, 2000 are not necessarily indicative of the results to be expected
for the full year.
2. NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities". In June 2000, the FASB issued
SFAS No. 138, which amends certain provisions of SFAS 133 to clarify four areas
causing difficulties in implementation. The amendment included expanding the
normal purchase and sale exemption for supply contracts, permitting the
offsetting of certain intercompany foreign currency derivatives and thus
reducing the number of third party derivatives, permitting hedge accounting for
foreign-currency denominated assets and liabilities, and redefining interest
rate risk to reduce sources of ineffectiveness. We are in the process of SFAS
133 compliant risk management system and inventorying embedded derivatives and
addressing various other SFAS 133 related issues. We will adopt SFAS 133 and the
corresponding amendments under SFAS 138 on January 1, 2001. SFAS 133, as amended
by SFAS 138, is not expected to have a material impact on the Company's
consolidated results of operations, financial position or cash flows.
3. INVENTORIES
Inventories are valued at the lower of cost (first-in, first-out
method) or market and include implants provided to customers and agents, as well
as raw materials used in the manufacture of the Company's products. The
Company's inventories as of December 31, 1999 and September 30, 2000 are
summarized in the following table:
1999 2000
----------- -----------
Raw materials $ 1,363,842 $ 2,833,556
Work in process 481,242 883,885
Finished goods 9,793,811 14,326,060
----------- -----------
$11,638,895 $18,043,501
=========== ===========
6
<PAGE>
4. DEBT
Long-term debt:
December 31, September 30,
1999 2000
----------- -----------
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 (5.7% as of
September 30, 2000); proceeds used to finance
construction of new facility
----------- -----------
Total long-term debt 3,900,000 3,900,000
Less current portion (300,000) (300,000)
----------- -----------
$ 3,600,000 $ 3,600,000
=========== ===========
The following is a schedule of debt maturities as of September 30, 2000:
Long-Term
Debt
-----------
2000 ................................... $ 300,000
2001 ................................... 300,000
2002 ................................... 300,000
2003 ................................... 300,000
2004 ................................... 300,000
Thereafter ................................... 2,400,000
-----------
Total ................................... $ 3,900,000
===========
5. COMMITMENTS AND CONTINGENCIES
The Company, in the normal course of business, is also subject to
claims and litigation in the areas of product and general liability. Management
does not believe any of such claims will have a material impact on the Company's
financial position.
6. SEGMENT INFORMATION
Segment information is reported by the major product lines of the
Company: knee implants, hip implants, and tissue services. The "other" category
consists of minor sales categories, such as instrument rental fees and shipping
charges. Sales of surgical instrumentation are reported within the related
product line for segment reporting purposes; however, these sales are included
in other sales for all other reporting purposes. 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.
7
<PAGE>
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 September 30,
1999
Net Sales $ 4,866 $ 1,497 $ 1,074 $ 491 $ 7,928
Segment profit from operations 663 220 213 119 1,215
2000
Net Sales $ 6,101 $ 2,205 $ 1,333 $ 181 $ 9,820
Segment profit from operations 903 368 260 71 1,602
Nine months ended September 30,
1999
Net Sales $15,604 $ 4,394 $ 2,694 $ 1,220 $23,912
Segment profit from operations 2,218 691 593 339 3,841
2000
Net Sales $20,541 $ 5,818 $ 4,149 $ 532 $31,040
Segment profit from operations 2,992 956 838 207 4,993
-----------------------------------------------------------------------------------------
</TABLE>
Total assets not identified with a specific segment (in thousands) are
$16,670 at December 31, 1999 and $18,860 at September 30, 2000. 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>
December 31, 1999
Total assets, net $11,706 $ 5,213 $ 630 $ 390 $17,939
September 30, 2000
Total assets, net $16,131 $ 8,044 $ 1,151 $ 343 $23,552
-----------------------------------------------------------------------------------------
</TABLE>
Geographic distribution of sales is summarized in the following table:
---------------------------------------------------------------
Three months ended September 30, 1999 2000
Domestic sales revenue $ 6,848,812 $ 8,612,084
Sales revenue from Spain $ 547,124 $ 609,055
Other international sales revenue $ 531,766 $ 599,022
---------------------------------------------------------------
Nine months ended September 30, 1999 2000
Domestic sales revenue $19,731,698 $25,565,355
Sales revenue from Spain $ 2,744,356 $ 3,640,829
Other international sales revenue $ 1,436,279 $ 1,834,259
---------------------------------------------------------------
8
<PAGE>
7. SHAREHOLDERS' EQUITY
The following is a reconciliation of income and shares of the basic and
diluted EPS computations:
<TABLE>
<CAPTION>
Income Shares Per Income Shares Per
Numerator Denominator Share Numerator Denominator Share
-----------------------------------------------------------------------------
Three Months Ended September 30, 1999 Three Months Ended September 30, 2000
------------------------------------- -------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net income $ 711,510 $ 960,703
Basic EPS:
Net income available to
common shareholders 711,510 4,979,036 $ 0.14 960,703 5,074,155 $ 0.19
Effect of Dilutive Securities:
Stock options 250,592 307,088
Warrants 28,117 27,984
Diluted EPS:
Net income available to common
shareholders plus assumed
conversions 711,510 5,257,745 $ 0.14 960,703 5,409,227 $ 0.18
<CAPTION>
Nine Months Ended September 30, 1999 Nine Months Ended September 30, 2000
------------------------------------- -------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net income $2,262,058 $3,000,715
Basic EPS:
Net income available to
common shareholders 2,262,058 4,946,852 $ 0.46 3,000,715 5,051,239 $ 0.59
Effect of Dilutive Securities:
Stock options 227,511 277,604
Warrants 19,524 28,865
Diluted EPS:
Net income available to common
shareholders plus assumed
conversions 2,262,058 5,193,887 $ 0.44 3,000,715 5,357,708 $ 0.56
</TABLE>
For the three months ended September 30, 1999 and September 30, 2000,
there were no options to purchase shares of common stock excluded in the
computation of diluted EPS.
For the nine months ended September 30, 1999 and September 30, 2000,
there were no options to purchase shares of common stock excluded in the
computation of diluted EPS.
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 consolidated 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, 1999.
The Company develops, manufactures, markets and sells orthopaedic
implant devices, related surgical instrumentation, and biologic products to
hospitals and physicians. From the introduction of the Optetrak(R) knee system
in 1995 through 1998, sales of knee implant products accounted for an increasing
portion of the Company's revenues and profits. During 1999, the Company
commenced full-scale distribution of Opteform(TM), a 100% biologic based
allograft tissue. During 2000, the Company has begun initial release of a
comprehensive update of its hip systems under the trade name AcuMatch(TM) hip
systems. The Company anticipates that sales of knee implant products will
continue to account for a major portion of its revenues and profits, although
hip and biologic products are expected to become an increasingly important part
of 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):
EXACTECH, INC.
SALES SUMMARY BY PRODUCT LINE
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
---------------------------------------------- ------------------------------------------
September 30, 1999 September 30, 2000 September 30, 1999 September 30, 2000
Hip Products Units $ % Units $ % Units $ % Units $ %
------ ------ ----- ------ ----- ---- ----- ----- ---- ------ ----- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Cemented 4,617 2,164 9.0% 4,998 2,414 7.8% 1,562 712 9.0% 1,781 816 8.3%
Porous Coated 4,693 1,691 7.1% 6,298 2,328 7.5% 1,540 606 7.6% 2,335 882 9.0%
Bipolar 781 368 1.5% 826 388 1.3% 243 115 1.5% 277 127 1.3%
Revision 85 171 0.7% 555 605 1.9% 31 64 0.8% 323 315 3.2%
---------------------- --------------------- ------------------- -------------------
Total Hip Products 10,176 4,394 18.3% 12,677 5,735 18.3% 3,376 1,497 18.9% 4,716 2,140 21.8%
Knee Products
Cemented Cruciate Sparing 13,400 6,024 25.2% 16,538 7,322 23.6% 3,692 1,772 22.4% 4,762 2,329 23.7%
Cemented Posterior Stabilized 8,624 5,685 23.8% 11,221 7,246 23.3% 2,647 1,823 23.0% 3,335 2,194 22.3%
Porous Coated 1,390 1,556 6.5% 1,566 1,925 6.2% 396 477 6.0% 338 457 4.7%
Revision 4,374 2,339 9.8% 6,479 3,204 10.3% 1,488 794 10.0% 1,643 934 9.5%
---------------------- --------------------- ------------------- --------------------
Total Knee Products 27,788 15,604 65.3% 35,804 19,697 65.3% 8,223 4,866 61.4% 10,078 5,914 60.2%
Instrument Sales and Rental 840 3.5% 969 3.1% 336 4.2% 272 2.8%
Tissue Services 2,694 11.3% 4,149 13.4% 1,074 13.5% 1,333 13.6%
Acudriver 218 0.9% 163 0.5% 84 1.1% 50 0.5%
Miscellaneous 162 0.7% 327 1.1% 71 0.9% 111 1.1%
-------------- ------------- ------------ ------------
Total 23,912 100.0% 31,040 100.0% 7,928 100.0% 9,820 100.0%
============== ============= ============ ============
</TABLE>
RESULTS OF OPERATIONS
Three Months Ended September 30, 2000 Compared to Three Months Ended September
30, 1999
Net sales increased by $1,892,459, or 24%, to $ 9,820,161 in the
quarter ended September 30, 2000 from $7,927,702 in the quarter ended September
30, 1999. The increase in net sales was the result of increases in all of the
Company's major product lines. Sales of knee implant products increased by 23%
on a unit basis and by 22% on a dollar basis from the quarter ended September
30, 1999 to the quarter ended September 30, 2000 as the Company experienced
growth in both domestic and international markets. For the quarter ended
September 30, 2000, sales of knee implants grew 22% domestically and 17%
internationally. Hip implant sales increased by 40% on a unit basis and by 43%
on a dollar basis from the quarter ended September 30, 1999 to the quarter ended
September 30, 2000, primarily as a result of the increase in sales of revision
components at higher average sale prices. Sales of revision hip implant
components increased 392% in the quarter ended September 30, 2000 from the
comparable quarter in 1999. The growth in hip sales was driven by the continuing
release of components of the
10
<PAGE>
Company's AcuMatch(TM) hip system. Revenue from providing Opteform(TM) tissue
service increased by $259,106 to $1,332,976 in the quarter ended September 30,
2000 from $1,073,870 in the quarter ended September 30, 1999.
International sales increased 12% to $1,208,077 in the quarter ended
September 30, 2000, from $1,078,890 in the quarter ended September 30, 1999 as
international distributors continued to expand their marketing and distribution
efforts. As a percentage of sales, international sales decreased to 12% in the
quarter ended September 30, 2000, as compared to 14% in the quarter ended
September 30, 1999. The decrease is primarily due to the growth in domestic
sales, which outpaced growth in international sales.
Gross profit increased by $1,362,663, or 26%, to $6,559,158 in the
quarter ended September 30, 2000, from $5,196,495 in the quarter ended September
30, 1999. As a percentage of sales, gross profit increased to 67% in the quarter
ended September 30, 2000 as compared to 66% in the quarter ended September 30,
1999. This increase was primarily the result of increased efficiencies achieved
through increased internal manufacturing operations coupled with a lower percent
of international sales. International sales are typically at lower average sales
prices and result in lower gross margins, although, these sales are subject to
lower commission charges.
Total operating expenses increased by $975,450, or 25%, to $4,956,793
in the quarter ended September 30, 2000, from $3,981,343 in the quarter ended
September 30, 1999. Sales and marketing expenses, the largest component of total
operating expenses, increased by $683,635, or 33%, to $2,779,309 in the quarter
ended September 30, 2000 from $2,095,674 in the quarter ended September 30,
1999. Sales and marketing expenses, as a percentage of sales, increased to 28%
in the quarter ended September 30, 2000, as compared to 26% in the quarter ended
September 30, 1999. The Company's sales and marketing expenses are largely
variable costs based on sales levels, with the largest component being
commissions. The increase, as a percentage of sales, was primarily the result of
a continuing commitment to expand the Company's sales and distribution network,
coupled with the increase in domestic sales.
General and administrative expenses increased by $15,098, or 2%, to
$701,237 in the quarter ended September 30, 2000 from $686,139 in the quarter
ended September 30, 1999. As a percentage of sales, general and administrative
expenses decreased to 7% in the quarter ended September 30, 2000, from 9% in the
quarter ended September 30, 1999. Total general and administrative expenses
decreased, as a percentage of sales, in the quarter ended September 30, 2000
primarily as a result of lower legal fees.
Research and development expenses increased by $139,696, or 34%, to
$553,934 in the quarter ended September 30, 2000 from $414,238 in the quarter
ended September 30, 1999. As a percentage of sales, research and development
expenses increased to 6% in the quarter ended September 30, 2000 from 5% in the
quarter ended September 30, 1999. The increase was the result of continued
expenditures on enhancements to the Company's hip and knee product lines, as
well as, advanced products research.
Depreciation and amortization increased to $552,811 in the quarter
ended September 30, 2000 from $439,398 in the quarter ended September 30, 1999.
Depreciation expenses increased as a result of the increased investment in
surgical instrumentation, computer systems investments, and facility expansion.
During the quarter ended September 30, 2000, $624,895 of surgical instruments,
$155,938 of computer systems and software, and $75,065 of leasehold improvements
were placed in service, resulting in the increase in depreciation expense.
Royalty expenses increased by $23,608 to $369,502 in the quarter ended
September 30, 2000 from $345,894 in the quarter ended September 30, 1999. As a
percentage of sales, royalty expenses decreased to 3.8% in the quarter ended
September 30, 2000, as compared to 4.4% in the quarter ended September 30, 1999.
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.
The Company's income from operations increased by $387,213, or 32%, to
$1,602,365 in the quarter ended September 30, 2000 from $1,215,152 in the
quarter ended September 30, 1999. The increase was primarily due to the increase
in sales and gross profit, which outpaced the increase in operating expenses.
The Company incurred net interest expense of $83,968 in the quarter
ended September 30, 2000, as compared to $39,102 in the quarter ended September
30, 1999. The increase was the result of lower interest income from daily
maturing investments to offset interest charges associated with the industrial
revenue bond (IRB) debt financing and new borrowings under lines of credit.
Interest expense of $89,039 for the quarter ended September 30, 2000 was
partially offset by $5,071 of interest income.
11
<PAGE>
Income before provision for income taxes increased by $342,347, or 29%,
to $1,518,397 in the quarter ended September 30, 2000 from $1,176,050 in the
quarter ended September 30, 1999. The provision for income taxes was $557,694 in
the quarter ended September 30, 2000, compared to $464,540 in the quarter ended
September 30, 1999. The effective tax rate in the quarter ended September 30,
2000 was 36.7%, as compared to 39.5% in the quarter ended September 30, 1999,
the decrease was primarily as the result of sales revenues from regions with
lower tax rates.
As a result, the Company realized net income of $960,703 in the quarter
ended September 30, 2000, compared to $711,510 in the quarter ended September
30, 1999, a 35% increase. As a percentage of sales, net income increased to 9.8%
in the quarter ended September 30, 2000 from 9.0% in the quarter ended September
30, 1999.
Nine Months Ended September 30, 2000 Compared to Nine Months Ended September 30,
1999
Net sales increased by $7,128,110, or 30%, to $31,040,443 in the nine
months ended September 30, 2000, from $23,912,333 in the nine months ended
September 30, 1999. Sales of the Optetrak(R) knee system increased by 26% on a
dollar basis, or $4,093,394, to $19,697,319 in the nine months ended September
30, 2000, from $15,603,925 in the nine months ended September 30, 1999. For the
same period, knee implant sales increased by 29% on a unit basis, as a result of
discounts offered to customers, both domestic and international, to increase
market penetration. Hip implant system sales increased by $1,341,014, or 31%, to
$5,735,080 in the nine months ended September 30, 2000, from $4,394,066 in the
nine months ended September 30, 1999, while increasing 25%, on a unit basis,
over the same period. The increase in hip sales was the result of the continuing
rollout of the new AcuMatch(TM) hip product lines, including the AcuMatch(TM)
M-Series. Revision hip system sales increased 253% to $605,091 in the nine
months ended September 30, 2000 from $171,245 in the nine months ended September
30, 1999. Tissue service revenue from Opteform(TM) increased to $4,149,200 for
the nine months ended September 30, 2000, from $2,693,700 for the nine months
ended September 30, 1999.
International sales increased 31% to $5,475,088 in the nine months
ended September 30, 2000 from $4,180,635 in the nine months ended September 30,
1999. As a percentage of sales, international sales increased slightly to 17.6%
in the nine months ended September 30, 2000 from 17.4% in the nine months ended
September 30, 1999.
Gross profit increased by $4,831,220, or 31%, to $20,302,284 in the
nine months ended September 30, 2000 from $15,471,064 in the nine months ended
September 30, 1999. As a percentage of sales, gross profit increased slightly to
65.4% in the nine months ended September 30, 2000 from 64.7% in the nine months
ended September 30, 1999, as the Company has continued to take advantage of the
improved efficiencies of expanded internal manufacturing that has reduced the
costs of a number of components.
Total operating expenses increased by $3,678,716, or 32%, to
$15,308,761 in the nine months ended September 30, 2000 from $11,630,045 in the
nine months ended September 30, 1999. Sales and marketing expenses, the largest
component of total operating expenses, increased 36% to $8,427,158 in the nine
months ended September 30, 2000 from $6,204,819 in the nine months ended
September 30, 1999. As a percentage of sales, sales and marketing expenses
increased to 27% in the nine months ended September 30, 2000 from 26% in the
nine months ended September 30, 1999, primarily as a result of the increase in
domestic sales, which carry higher commission rates than international sales.
General and administrative expenses increased 26% to $2,458,716 in the
nine months ended September 30, 2000 from $1,955,017 in the nine months ended
September 30, 1999, primarily as the result of expenditures associated with
personnel and infrastructure required to support growth. As a percentage of
sales, general and administrative expenses decreased to 7.9% in the nine months
ended September 30, 2000 from 8.2% in the nine months ended September 30, 1999,
primarily as a result of lower legal costs.
Research and development expenses increased 38% to $1,590,887 in the
nine months ended September 30, 2000 from $1,149,197 in the nine months ended
September 30, 1999. As a percentage of sales, research and development expenses
increased to 5.1% for the nine months ended September 30, 2000 from 4.8% for the
nine months ended September 30, 1999.
Depreciation and amortization increased to $1,585,796 in the nine
months ended September 30, 2000 from $1,202,806 in the nine months ended
September 30, 1999. Depreciation expenses increased primarily as a result of the
increased investment in surgical instrumentation and computer systems. During
the nine months ended
12
<PAGE>
September 30, 2000, $2,445,023 of surgical instruments and $440,805 of computer
systems and software were placed in service.
Royalty expenses increased 11% to $1,246,204 in the nine months ended
September 30, 2000 from $1,118,206 during the nine months ended September 30,
1999, primarily as a result of growth in sales of knee implants. As a percentage
of sales, royalty expenses decreased to 4.0% in the nine months ended September
30, 2000 from 4.7% in the nine months ended September 30, 1999.
The Company's income from operations increased 30% to $4,993,523 in the
nine months ended September 30, 2000 from $3,841,019 in the nine months ended
September 30, 1999. The increase was primarily attributable to the increase in
sales and gross profit, which continued to increase at a rate slightly less than
operating expenses.
The Company incurred net interest expense of $173,763 in the nine
months ended September 30, 2000, as compared to $102,079 in the nine months
ended September 30, 1999, primarily as a result of new borrowings under existing
lines of credit. Interest expense of $215,881 for the nine months ended
September 30, 2000, was partially offset by $42,118 of interest income.
Income before provision for income taxes increased 29% to $4,819,760 in
the nine months ended September 30, 2000 from $3,738,940 in the nine months
ended September 30, 1999. The provision for income taxes was $1,819,045 in the
nine months ended September 30, 2000, as compared to $1,476,882 in the nine
months ended September 30, 1999. The effective tax rate for the nine months
ended September 30, 2000 was 37.7%, as compared to 39.5% in the nine months
ended September 30, 1999. The reduction in the effective rate for the nine
months ended September 30, 2000 was primarily the result of sales revenue from
regions with lower tax rates, along with a favorable adjustment of the prior
year's income tax provision to the actual 1999 tax returns of $42,086.
As a result, the Company realized net income of $3,000,715 in the nine
months ended September 30, 2000, compared to $2,262,058 in the nine months ended
September 30, 1999, a 33% increase. As a percentage of sales, net income
increased to 9.7% in the nine months ended September 30, 2000 as compared to
9.5% in the nine months ended September 30, 1999.
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, 2000, the Company had working capital of $19,987,448 compared
to $17,852,682 at December 31, 1999. The increase in working capital is
primarily the result of an increase in inventory in support of new product
lines. As a result of operating, investing and financing activities, cash and
cash equivalents at September 30, 2000 decreased to $491,712 from $1,641,071 at
December 31, 1999. The Company maintains a $6,000,000 credit facility with
Merrill Lynch Business Financial Services, Inc., which is secured by accounts
receivable and inventory. The credit line is limited to the lesser of 100% of
accounts receivable less than 90 days old, or 50% of inventory. The credit line
was renewed in June 2000 for a term of two years, expiring June 30, 2002. At
September 30, 2000, $2,055,178 was 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.
As of September 30, 2000, The Company had commitments to purchase
$244,005 of manufacturing tooling and $86,529 of office furniture and equipment.
Operating Activities
Operating activities used net cash of $250,151 in the nine months ended
September 30, 2000, as compared to providing net cash of $3,488,390 in the nine
months ended September 30, 1999. The primary reason for the change was the
increase in inventory of $6,404,606 in the nine months ended September 30, 2000,
as compared to the $695,520 decrease in inventory in the nine months ended
September 30, 1999. The primary factor for the inventory increase in the nine
months ended September 30, 2000, was an increase in finished goods inventory of
$4,532,249 to support roll-out of new hip product lines. Income taxes payable,
accounts payable and other liabilities increased $1,549,633 in the nine months
ended September 30, 2000, as compared to an increase of $1,025,335 in the nine
months ended September 30, 1999. Cash required as a result of the increase in
trade receivables was $311,834 for the nine month period ended September 30,
2000, as compared to $1,768,600, for the nine month period ended September 30,
1999.
13
<PAGE>
Investing Activities
The Company used net cash in investing activities of $3,732,768 in the
nine months ended September 30, 2000, as compared to $3,145,359 in the nine
month period ended September 30, 1999. The use of cash was primarily due to the
investment of $3,715,990 in property and equipment.
Financing Activities
Financing activities for the nine months ended September 30, 2000
provided net cash of $2,833,560 as compared to $584,149 in the nine months ended
September 30, 1999. During the nine months ended September 30, 2000, proceeds
from the exercise of outstanding stock options and warrants provided cash of
$778,382, while borrowing against the line of credit facility with Merrill Lynch
provided cash of $2,055,178. During the nine month period ended September 30,
1999, cash provided by the exercise of outstanding stock options and warrants
was $588,600, and there were no borrowings under the line of credit.
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
affect the amount of interest expense incurred.
The Company invoices and receives payment from international
distributors in United States Dollars and is not subject to risk associated with
foreign currency exchange rates.
The following table provides information about the Company's financial
instruments that are sensitive to changes in interest rates. The amounts
presented approximate the financial instruments' fair market value as of
September 30, 2000.
<TABLE>
<CAPTION>
2000 2001 2002 2003 2004 Thereafter Total
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and cash equivalents
Overnight repurchase account
at variable interest rate $ 490,000 $ 490,000
Weighted average interest rate 4.50%
Liabilities
Line of credit at variable
interest rate $ 2,055,178 $ 2,055,178
Weighted average interest rate 8.81%
Industrial Revenue Bond at
variable interest rate $ 3,900,000 $ 3,900,000
Weighted average interest rate 4.33%
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
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
None
Item 5. Other Information
The Company signed an exclusive distribution agreement with
Berlin-based Aap Implantate, AG and aap Implants, Inc., Aap Implantate's United
States subsidiary, on September 11, 2000. Under this agreement, Exactech will be
the exclusive distributor for aap Implant's products in the United States for an
initial term of five years, renewable for successive five year periods.
Initially, the Company will distribute aap Implant's hip compression
screw system, an extensive range of large and small cannulated screws and the
Bioriged Tibial Nail.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits:
Exhibit Description
------- -----------
10.66 Letter Agreement dated June 22, 2000, between Merrill
Lynch Business Financial Services Inc. and the
Registrant
10.67 Distribution Agreement, dated September 11, 2000,
between Aap Implantate, AG, aap Implants, Inc. and
the Registrant.
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 9, 2000 By: /S/ Timothy J. Seese
--------------------------------
Timothy J. Seese
President and Chief
Operating Officer
Date: November 9, 2000 By: /S/ Joel C. Phillips
--------------------------------
Joel C. Phillips
Chief Financial Officer
17
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
------- -----------
10.66 Letter Agreement dated June 22, 2000, between Merrill
Lynch Business Financial Services Inc. and the
Registrant
10.67 Distribution Agreement, dated September 11, 2000,
between Aap Implantate, AG, aap Implants, Inc. and
the Registrant.
27 Financial Data Schedule
