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, 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 August 7, 2000
Common Stock, $.01 par value 5,075,450
<PAGE>
EXACTECH, INC.
INDEX
<TABLE>
<CAPTION>
Page
Number
<S> <C>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of 2
December 31, 1999 and June 30, 2000
Condensed Consolidated Statements of Income for the Three and 3
Six Month Periods Ended June 30, 1999 and June 30, 2000
Condensed Consolidated Statement of Changes in Shareholders' Equity 4
for the Six Month Period Ended June 30, 2000
Condensed Consolidated Statements of Cash Flows for the Six Month 5
Periods Ended June 30, 1999 and June 30, 2000
Notes to Condensed Consolidated Financial Statements for the Three 6
and Six Month Periods Ended June 30, 1999 and June 30, 2000
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 15
Item 2. Changes in Securities 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
</TABLE>
1
<PAGE>
EXACTECH, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
December 31, June 30,
ASSETS 1999 2000
CURRENT ASSETS: ------------ ------------
<S> <C> <C>
Cash and cash equivalents $ 1,641,071 $ 334,690
Trade receivables, net of allowance
of $332,693 and $329,905 7,979,481 9,319,554
Refundable income taxes 22,952 --
Prepaid expenses and other assets 164,910 441,090
Inventories 11,638,895 16,045,184
------------ ------------
Total current assets 21,447,309 26,140,518
PROPERTY AND EQUIPMENT:
Land 462,629 467,759
Machinery and equipment 4,562,503 5,427,727
Surgical instruments 7,085,495 8,759,028
Furniture and fixtures 393,918 456,931
Facilities 3,472,548 3,504,725
------------ ------------
Total 15,977,093 18,616,170
Accumulated depreciation (4,059,413) (4,968,899)
------------ ------------
Net property and equipment 11,917,680 13,647,271
OTHER ASSETS:
Product licenses and designs, net 362,295 333,745
Deferred financing costs, net 123,748 109,269
Advances and deposits 230,872 143,714
Patents and trademarks, net 527,502 512,754
------------ ------------
Total other assets 1,244,417 1,099,482
TOTAL ASSETS $ 34,609,406 $ 40,887,271
============ ============
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,418,502 $ 4,431,572
Income taxes payable -- 52,278
Line of credit -- 999,059
Current portion of long-term debt 300,000 300,000
Commissions payable 396,858 627,252
Royalties payable 417,486 473,160
Other liabilities 61,781 175,677
------------ ------------
Total current liabilities 3,594,627 7,058,998
DEFERRED INCOME TAXES 974,980 1,150,832
LONG-TERM DEBT, NET OF CURRENT PORTION 3,600,000 3,600,000
------------ ------------
Total liabilities 8,169,607 11,809,830
SHAREHOLDERS' EQUITY:
Common stock 50,081 50,651
Additional paid-in capital 15,803,144 16,400,204
Retained earnings 10,586,574 12,626,586
------------ ------------
Total shareholders' equity 26,439,799 29,077,441
TOTAL LIABILITIES AND EQUITY $ 34,609,406 $ 40,887,271
============ ============
</TABLE>
See notes to condensed consolidated financial statements
2
<PAGE>
EXACTECH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Month Period Six Month Period
Ended June 30, Ended June 30,
1999 2000 1999 2000
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET SALES $ 8,816,214 $ 10,915,741 $ 15,984,631 $ 21,220,282
COST OF GOODS SOLD 3,311,981 3,803,997 5,710,062 7,477,156
------------ ------------ ------------ ------------
Gross profit 5,504,233 7,111,744 10,274,569 13,743,126
OPERATING EXPENSES:
Sales and marketing 2,211,590 2,762,427 4,109,145 5,647,849
General and administrative 651,583 867,445 1,268,878 1,757,479
Research and development 410,129 563,965 734,959 1,036,953
Depreciation and amortization 389,501 545,070 763,408 1,032,985
Royalties 425,209 472,072 772,312 876,702
------------ ------------ ------------ ------------
Total operating expenses 4,088,012 5,210,979 7,648,702 10,351,968
------------ ------------ ------------ ------------
INCOME FROM OPERATIONS 1,416,221 1,900,765 2,625,867 3,391,158
OTHER INCOME (EXPENSE):
Interest income 22,877 13,921 45,233 37,047
Interest expense 54,147 71,258 108,210 126,842
------------ ------------ ------------ ------------
Total other income (expense) (31,270) (57,337) (62,977) (89,795)
INCOME BEFORE INCOME TAXES 1,384,951 1,843,428 2,562,890 3,301,363
PROVISION FOR INCOME TAXES 547,056 728,154 1,012,342 1,261,351
------------ ------------ ------------ ------------
NET INCOME $ 837,895 $ 1,115,274 $ 1,550,548 $ 2,040,012
============ ============ ============ ============
BASIC EARNINGS PER SHARE $ 0.17 $ 0.22 $ 0.31 $ 0.40
============ ============ ============ ============
DILUTED EARNINGS PER SHARE $ 0.16 $ 0.21 $ 0.30 $ 0.38
============ ============ ============ ============
</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 6,120 61 30,739 30,800
Exercise of warrants 44,000 440 492,360 492,800
Issuance of common stock
under the Company's
Employee Stock Purchase Plan 6,018 60 61,655 61,715
Net income 2,040,012 2,040,012
----------- ----------- ----------- ----------- -----------
Balance, June 30, 2000 5,065,139 $ 50,651 $16,400,204 $12,626,586 $29,077,441
=========== =========== =========== =========== ===========
</TABLE>
See notes to condensed consolidated financial statements
4
<PAGE>
EXACTECH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Month Period Ended June 30,
1999 2000
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 1,550,548 $ 2,040,012
Adjustments to reconcile net income to net
cash provided by (used in) operating activities :
Depreciation and amortization 763,408 1,100,998
Loss on disposal of equipment 30,626 23,377
Deferred income taxes -- 175,852
Increase in trade receivables (1,730,771) (1,340,073)
Decrease (increase) in inventories 981,548 (4,406,289)
Increase in prepaids and other assets (31,975) (174,543)
Increase in income taxes payable 252,475 75,230
Increase in accounts payable 338,042 2,014,070
Increase in other liabilities 394,559 399,964
----------- -----------
Net cash provided by (used in) operating activities 2,548,460 (91,402)
----------- -----------
INVESTING ACTIVITIES:
Purchases of property and equipment (2,897,320) (2,796,506)
Purchase of product licenses and designs (150,000) --
Change in unexpended industrial revenue bond proceeds 856,992 --
Cost of patents and trademarks (177,187) (14,162)
----------- -----------
Net cash used in investing activities (2,367,515) (2,810,668)
----------- -----------
FINANCING ACTIVITIES:
Principal payments on debt (2,989) --
Proceeds from borrowing on line of credit -- 998,059
Proceeds from issuance of common stock 357,523 597,630
----------- -----------
Net cash provided by financing activities 354,534 1,595,689
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 535,479 (1,306,381)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 662,652 1,641,071
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,198,131 $ 334,690
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 108,210 $ 126,843
Income taxes 788,932 1,018,056
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 SIX MONTH PERIODS ENDED JUNE 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 six month period ended
June 30, 2000 are not necessarily indicative of the results to be expected for
the full year.
2. 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 June 30,2000 are summarized in
the following table:
------------------------------------------------------------------
1999 2000
Raw materials $ 1,363,842 $ 3,152,697
Work in process 481,242 623,074
Finished goods 9,793,811 12,269,413
----------- -----------
$ 11,638,895 $16,045,184
============ ===========
------------------------------------------------------------------
3. DEBT
Long-term debt:
<TABLE>
<CAPTION>
December 31, June 30,
1999 2000
--------------- ---------------
<S> <C> <C>
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 (4.9% as of
June 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
=============== ===============
</TABLE>
6
<PAGE>
The following is a schedule of debt maturities as of June 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
===========
The Company maintains a $6,000,000 credit facility with Merrill Lynch
Business Financial Services, Inc., which is secured by accounts receivable and
inventory. This credit line is limited to the lesser of 80% of the Company's
domestic receivables, excluding amounts over 90 days past due, plus 50% of
inventory, or $6,000,000. Interest on the line of credit is variable, based on
the thirty-day commercial paper rate, plus 2.65%. As of June 30, 2000, this rate
was 9.25%. The credit line was renewed in June 2000 for a term of two years, at
a variable rate based on the thirty-day commercial paper rate, plus 2.45%,
expiring June 30, 2002.
4. 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 or results of operations.
5. 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: Total assets not identified
with a specific segment (in thousands) are $16,670 at December 31, 1999 and
$17,335 at June 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:
7
<PAGE>
<TABLE>
<CAPTION>
(in thousands)
---------------------------------------------------
Tissue
Knee Hip Services Other Total
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Three months ended June 30,
1999
Net Sales $ 5,913 $ 1,482 $ 931 $ 490 $ 8,816
Segments profit (loss) from operations 675 274 223 244 1,416
2000
Net Sales $ 7,423 $ 1,889 $ 1,420 $ 184 $10,916
Segments profit from operations 1,150 328 347 76 1,901
Six months ended June 30,
1999
Net Sales $10,866 $ 2,904 $ 1,619 $ 596 $15,985
Segments profit (loss) from operations 1,554 473 379 220 2,626
2000
Net Sales $14,440 $ 3,613 $ 2,816 $ 351 $21,220
Segments profit from operations 2,089 588 578 136 3,391
---------------------------------------------------------------------------------------------
<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
June 30, 2000
Total assets, net $14,845 $ 7,311 $ 1,024 $ 372 $23,552
---------------------------------------------------------------------------------------------
</TABLE>
Geographic distribution of sales are summarized in the following table:
---------------------------------------------------------------
Three months ended June 30, 1999 2000
Domestic sales revenue $ 6,806,882 $ 8,704,853
Sales revenue from Spain $ 1,458,464 $ 1,504,573
Other international sales revenue $ 550,868 $ 706,315
---------------------------------------------------------------
Six months ended June 30, 1999 2000
Domestic sales revenue $12,882,886 $16,953,271
Sales revenue from Spain $ 2,197,232 $ 3,031,774
Other international sales revenue $ 904,513 $ 1,235,237
---------------------------------------------------------------
8
<PAGE>
6. 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, 1999 Three Months Ended June 30, 2000
----------------------------------- ------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS:
Net income $ 837,895 4,939,652 $ 0.17 $ 1,115,274 5,058,745 $ 0.22
Effect of Dilutive Securities:
Stock options 194,498 265,840
Warrants 14,610 22,372
Diluted EPS:
Net income plus assumed
conversions $ 837,895 5,148,760 $ 0.16 $ 1,115,274 5,346,957 $ 0.21
<CAPTION>
Six Months Ended June 30, 1999 Six Months Ended June 30, 2000
----------------------------------- -------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS:
Net income $1,550,548 4,930,462 $ 0.31 $ 2,040,012 5,039,720 $ 0.40
Effect of Dilutive Securities:
Stock options 178,833 262,774
Warrants 11,693 25,449
Diluted EPS:
Net income plus assumed
conversions $1,550,548 5,120,988 $ 0.30 $ 2,040,012 5,327,943 $ 0.38
</TABLE>
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
three months ended June 30, 2000, there were no options to purchase shares of
common stock excluded from the computation of diluted EPS.
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. For the
six months ended June 30, 2000, there were no options to purchase shares of
common stock excluded from the computation of diluted EPS.
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.
9
<PAGE>
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, 1999 June 30, 2000
Hip Products Units $ % Units $ %
----- - - ----- - -
<S> <C> <C> <C> <C> <C> <C>
Cemented 3,055 1,452 9.1% 3,217 1,598 7.5%
Porous Coated 3,153 1,085 6.8% 3,963 1,446 6.9%
Bipolar Prosthesis 538 253 1.6% 549 261 1.2%
Revision 54 107 0.7% 232 290 1.4%
-------------------------- -------------------------
Total Hip Products 6,800 2,897 18.2% 7,961 3,595 17.0%
Knee Products
Cemented Cruciate Sparing 9,708 4,252 26.6% 11,776 4,993 23.5%
Cemented Posterior Stabilized 5,977 3,862 24.2% 7,886 5,052 23.8%
Porous Coated 994 1,079 6.8% 1,228 1,468 6.9%
Revision 2,886 1,545 9.7% 4,836 2,270 10.7%
-------------------------- -------------------------
Total Knee Products 19,565 10,738 67.2% 25,726 13,783 64.9%
Instrument Sales and Rental 504 3.1% 697 3.3%
Tissue Services 1,620 10.1% 2,816 13.3%
Acudriver 134 0.8% 113 0.5%
Miscellaneous 92 0.6% 216 1.0%
----------------- ----------------
Total 15,985 100.0% 21,220 100.0%
================= ================
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------------------
June 30, 1999 June 30, 2000
Hip Products Units $ % Units $ %
----- - - ----- - -
<S> <C> <C> <C> <C> <C> <C>
Cemented 1,484 710 8.0% 1,665 839 7.7%
Porous Coated 1,829 587 6.7% 2,125 734 6.7%
Bipolar Prosthesis 294 133 1.5% 282 129 1.2%
Revision 30 54 0.6% 156 179 1.6%
-------------------------- --------------------------
Total Hip Products 3,637 1,485 16.8% 4,228 1,881 17.2%
Knee Products
Cemented Cruciate Sparing 5,461 2,175 24.7% 6,344 2,623 24.0%
Cemented Posterior Stabilized 3,504 2,181 24.7% 4,205 2,668 24.5%
Porous Coated 634 672 7.6% 669 749 6.9%
Revision 1,758 886 10.1% 2,144 1,083 9.9%
-------------------------- --------------------------
Total Knee Products 11,357 5,914 67.1% 13,362 7,123 65.3%
Instrument Sales and Rental 357 4.1% 325 3.0%
Tissue Services 932 10.6% 1,420 13.0%
Acudriver 82 0.9% 58 0.5%
Miscellaneous 48 0.5% 109 1.0%
----------------- -----------------
Total 8,817 100.0% 10,916 100.0%
================= =================
</TABLE>
RESULTS OF OPERATIONS
Three Months Ended June 30, 2000 Compared to Three Months Ended June 30, 1999
Net sales increased by $2,099,527, or 24%, to $10,915,741 in the
quarter ended June 30, 2000, from $8,816,214 in the quarter ended June 30, 1999.
The increase in net sales resulted from increases in all major product lines.
Sales of knee implant products increased by 18% on a unit basis and by 20% on a
dollar basis from the quarter ended June 30, 1999 to the quarter ended June 30,
2000 as the Company experienced higher growth rates in domestic sales than in
international distribution. For the quarter ended June 30, 2000, domestic sales
of knee implant products increased 24%, while international sales increased 12%
from the comparable quarter ended June 30, 1999. Sales of hip implant products
increased by 16% on a unit basis and by 27% on a dollar basis from the quarter
ended June 30, 1999 to the quarter ended June 30, 2000, primarily due to the
increase, as a percent of total hip sales, of revision components at higher
average sale prices. As a percent of total hip sales, revision components were
10% in the quarter ended June 30, 2000, as compared to 4% in the quarter ended
June 30, 1999. The overall increase in hip sales was paced by the preliminary
introduction of components of the Company's AcuMatch(TM) hip system.
International sales increased 9% to $2,210,888 in the quarter ended
June 30, 2000, from $2,009,332 in the quarter ended June 30, 1999, as
international distributors expanded their markets. As a percentage of total
sales, international sales decreased to 20% in the quarter ended June 30, 2000,
as compared to 23% in the quarter ended June 30, 1999.
Gross profit increased by $1,607,511, or 29%, to $7,111,744 in the
quarter ended June 30, 2000, from $5,504,233 in the quarter ended June 30, 1999.
As a percentage of sales, gross profit increased to 65% in the quarter ended
June 30, 2000, from 62% in the quarter ended June 30, 1999, as a result of
increased efficiencies achieved through increased internal manufacturing
operations and 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 $1,122,967, or 27%, to $5,210,979
in the quarter ended June 30,
10
<PAGE>
2000, from $4,088,012 in the quarter ended June 30, 1999. Sales and marketing
expenses, the largest component of total operating expenses, increased by
$550,837, or 25%, to $2,762,427 in the quarter ended June 30, 2000, from
$2,211,590 in the quarter ended June 30, 1999. As a percentage of sales, sales
and marketing expenses remained constant at 25% in the quarters ended June 30,
2000 and 1999. 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, remained steady as a result of
the Company's continuing commitment to expand its sales and distribution
network.
General and administrative expenses increased by $215,862, or 33%, to
$867,445 in the quarter ended June 30, 2000, from $651,583 in the quarter ended
June 30, 1999. As a percentage of sales, general and administrative expenses
increased to 8% in the quarter ended June 30, 2000, from 7% in the quarter ended
June 30, 1999. Total general and administrative expenses increased primarily as
a result of legal costs.
Research and development expenses increased by $153,836, or 38%, to
$563,965 in the quarter ended June 30, 2000, from $410,129 in the quarter ended
June 30, 1999. Research and development expenses were 5% of sales in each of the
quarters ended June 30, 2000 and 1999. The increase in research and development
expenses is due to the continued enhancements to the Company's hip and knee
product lines, as well as, other advanced product research.
Depreciation and amortization increased to $545,070 in the quarter
ended June 30, 2000, from $389,501 in the quarter ended June 30, 1999.
Depreciation expenses increased primarily as a result of the increased
investment in surgical instrumentation and manufacturing equipment. During the
quarter ended June 30, 2000, $1,147,396 of surgical instruments and $651,509 of
manufacturing equipment was placed in service, resulting in the increase in
depreciation expense.
Royalty expenses increased by $46,863 to $472,072 in the quarter ended
June 30, 2000, from $425,209 in the quarter ended June 30, 1999, primarily as a
result of growth in sales of knee implant products and AcuMatch(TM) hip
products. As a percentage of sales, royalty expenses decreased to 4% in the
quarter ended June 30, 2000, from 5% in the quarter ended June 30, 1999, as a
result of the satisfaction and subsequent expiration of certain royalty
agreements.
The Company's income from operations increased by $484,544, or 34%, to
$1,900,765 in the quarter ended June 30, 2000, from $1,416,221 in the quarter
ended June 30, 1999. The increase was primarily attributable to the increase in
gross profit, which surpassed the increase in operating expenses.
The Company realized net interest expense of $57,337 in the quarter
ended June 30, 2000, as compared to $31,270 in the quarter ended June 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 borrowing on lines of credit. For the quarter
ended June 30, 2000, interest income of $13,921 was offset by $71,258 of
interest expense.
Income before provision for income taxes increased by $458,477, or 33%,
to $1,843,428 in the quarter ended June 30, 2000, from $1,384,951 in the quarter
ended June 30, 1999. The provision for income taxes was $728,154 in the quarter
ended June 30, 2000 as compared to $547,056 in the quarter ended June 30, 1999.
The effective tax rate for the quarters ended June 30, 2000 and 1999 was 39.5%.
As a result, the Company realized net income of $1,115,274 in the
quarter ended June 30, 2000, compared to $837,895 in the quarter ended June 30,
1999, a 33% increase.
Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999
Net sales increased by $5,235,651, or 33%, to $21,220,282 in the six
months ended June 30, 2000, from $15,984,631 in the six months ended June 30,
1999. Knee sales increased by $3,045,320, or 28%, to $13,782,988 in the six
months ended June 30, 2000 from $10,737,668 in the six months ended June 30,
1999. Sales of knee implant products increased by 31% on a unit basis and by 28%
on a dollar basis from the six months ended June 30, 1999 to the six months
ended June 30, 2000, due to continuing market penetration in both domestic and
international markets. Sales of hip implant products increased by 17% on a unit
basis and by 24% on a dollar basis from the six months ended June 30, 1999, to
the six months ended June 30, 2000. The primary increase in hip sales occurred
in the porous coated and revision product lines. Porous coated hip system sales,
consisting of the MCS(R) porous coated
11
<PAGE>
hip system and the acetabular components of the AcuMatch(TM) A-Series hip
system, increased 33% to $1,446,490 in the six months ended June 30, 2000, from
$1,085,220 in the six months ended June 30, 1999. Revision hip system sales,
consisting of the AuRa(R) revision hip system and the new AcuMatch(TM) M-Series
modular hip system, increased to $290,068, or 171%, in the six months ended June
30, 2000, from $107,184 in the six months ended June 30, 1999.
International sales increased 38% to $4,267,011 in the six months ended
June 30, 2000, from $3,101,745 in the six months ended June 30, 1999. As a
percentage of sales, international sales increased to 20% in the six months
ended June 30, 2000, as compared to 19% in the six months ended June 30, 1999.
Gross profit increased by $3,468,557, or 34%, to $13,743,126 in the six
months ended June 30, 2000, from $10,274,569 in the six months ended June 30,
1999. As a percentage of sales, gross profit increased to 65% in the six months
ended June 30, 2000, as compared to 64% in the six months ended June 30, 1999,
as the Company has begun to take advantage of the improved efficiencies of
expanded internal manufacturing and has reduced the costs of a number of
components.
Total operating expenses increased by $2,703,266, or 35%, to
$10,351,968 in the six months ended June 30, 2000, from $7,648,702 in the six
months ended June 30, 1999. Sales and marketing expenses, the largest component
of total operating expenses, increased 37% to $5,647,849 in the six months ended
June 30, 2000, from $4,109,145 in the six months ended June 30, 1999. Sales and
marketing expenses increased, as a percentage of sales, to 27% in the six months
ended June 30, 2000, from 26% in the six months ended June 30, 1999.
General and administrative expenses increased 39% to $1,757,479 in the
six months ended June 30, 2000, from $1,268,878 in the six months ended June 30,
1999, as a result of increased expenditures for legal and infrastructure costs.
As a percentage of sales, general and administrative expenses remained constant
at 8% in the six months ended June 30, 2000 and June 30, 1999.
Research and development expenses increased 41% to $1,036,953 in the
six months ended June 30, 2000, from $734,959 in the six months ended June 30,
1999. As a percentage of sales, research and development expenses remained
constant at 5% for the six months ended June 30, 2000 and June 30, 1999.
Depreciation and amortization increased to $1,032,985 in the six months
ended June 30, 2000, from $763,408 in the six months ended June 30, 1999.
Depreciation expenses increased primarily as a result of the increased
investment in surgical instrumentation and manufacturing equipment. During the
six months ended June 30, 2000, $1,820,128 of surgical instruments and $860,645
of manufacturing equipment was placed in service.
Royalty expenses increased 14% to $876,702 during the six months ended
June 30, 2000, from $772,312 in the six months ended June 30, 1999. As a percent
of sales, royalty expense was 4% for the six months ended June 30, 2000 and 5%
for the six months ended June 30, 1999.
The Company's income from operations increased 29%, to $3,391,158 in
the six months ended June 30, 2000, from $2,625,867 in the six months ended June
30, 1999. The increase was primarily attributable to the increase in sales and
gross profit, which increased at a rate slightly less than operating expenses.
The Company realized net interest expense of $89,795 in the six months
ended June 30, 2000, as compared to $62,977 in the six months ended June 30,
1999. Interest expense of $126,842 for the six months ended June 30, 2000, was
partially offset by $37,047 of interest income.
Income before provision for income taxes increased 29%, to $3,301,363
in the six months ended June 30, 2000, from $2,562,890 in the six months ended
June 30, 1999. The provision for income taxes was $1,261,351 in the six months
ended June 30, 2000, compared to $1,012,342 in the six months ended June 30,
1999. The effective tax rate for the six months ended June 30, 2000, was 38.2%,
as compared to an effective rate of 39.5% for the six months ended June 30,
1999. The reduction in the effective tax rate to 38.2% in the six months ended
June 30, 2000 resulted from a favorable true-up 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 $2,040,012 in the six
months ended June 30, 2000, compared to $1,550,548 in the six months ended June
30, 1999, a 32% increase. As a percentage of sales, net income remained constant
at 10% in the six months ended June 30, 2000 and 1999.
12
<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 June 30, 2000, the Company had working capital of $19,081,520 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 June 30, 2000 decreased to $334,690 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 was renewed in June 2000 for a term of two years,
expiring June 30, 2002. At June 30, 2000, there was $999,059 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 used net cash of $91,402 in the six months ended
June 30, 2000, as compared to providing net cash of $2,548,460 in the six months
ended June 30, 1999. The primary reason for the change was the increase in
inventory of $4,406,289 in the six months ended June 30, 2000, as compared to
the $981,548 decrease in inventory in the six months ended June 30, 1999. Income
taxes payable, accounts payable and other liabilities increased $2,489,264 in
the six months ended June 30, 2000, as compared to an increase of $985,076 in
the six months ended June 30, 1999. Cash required as a result of the increase in
trade receivables was $1,340,073 for the six-month period ended June 30, 2000,
as compared to $1,730,771 for the six-month period ended June 30, 1999.
Investing Activities
The Company used net cash in investing activities of $2,810,668 in the
six months ended June 30, 2000, as compared to $2,367,515 in the six months
ended June 30, 1999. The use of cash was due to the investment of $2,796,506 in
property and equipment, and $14,162 for the costs of patents.
Financing Activities
Financing activities for the six months ended June 30, 1999 provided
net cash of $1,595,689 as compared to $354,535 in the six months ended June 30,
1999. During the six months ended June 30, 2000, proceeds from the exercise of
outstanding stock options and warrants provided cash of $597,630, while
borrowing against the line of credit facility with Merrill Lynch provided cash
of $998,059. During the six month period ended June 30, 1999, cash provided by
the exercise of outstanding stock options and warrants was $357,523, 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.
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.
13
<PAGE>
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 June
30, 2000.
<TABLE>
<CAPTION>
2000 2001 2002 2003 2004 Thereafter Total
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents
Overnight repurchase account
at variable interest rate $ 333,000 $ 507,000
Weighted average interest rate 5.50%
Liabilities
Line of credit at variable
interest rate $ 998,059 $ 998,059
Weighted average interest rate 9.25%
Industrial Revenue Bond at
variable interest rate $ 3,900,000 $3,900,000
Weighted average interest rate 4.24%
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
14
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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
------- -----------
27 Financial Data Schedule
b) Reports on Form 8-K
None.
15
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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 11, 2000 By: /s/ Timothy J. Seese
---------------------
Timothy J. Seese
President and Chief
Operating Officer
Date: August 11, 2000 By: /s/ Joel C. Phillips
----------------------
Joel C. Phillips
Treasurer and Chief
Financial Officer
16
<PAGE>
Exhibit Index
Exhibit No. Exhibit Description
----------- -------------------
27 Financial Data Schedule
