-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TmJcAmkg36tZxiITHX1uv7FxvcxgE7aa5FDCRB10txt8iai+CcV66bHftU7YMaBF 00jKfuf3LedivgnFJvVD/Q== /in/edgar/work/20000814/0000950170-00-001330/0000950170-00-001330.txt : 20000921 0000950170-00-001330.hdr.sgml : 20000921 ACCESSION NUMBER: 0000950170-00-001330 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EXACTECH INC CENTRAL INDEX KEY: 0000913165 STANDARD INDUSTRIAL CLASSIFICATION: [3842 ] IRS NUMBER: 592603930 STATE OF INCORPORATION: FL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 333-02980 FILM NUMBER: 699502 BUSINESS ADDRESS: STREET 1: 4613 NW 6TH ST CITY: GAINESVILLE STATE: FL ZIP: 32609 BUSINESS PHONE: 3523771140 MAIL ADDRESS: STREET 1: 4613 N W 6TH STREET CITY: GAINSVILLE STATE: FL ZIP: 32609 10-Q 1 0001.txt 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 EXACTECH, INC. INDEX
Page Number 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
1 EXACTECH, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
December 31, June 30, ASSETS 1999 2000 CURRENT ASSETS: ------------ ------------ 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 ============ ============
See notes to condensed consolidated financial statements 2 EXACTECH, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Month Period Six Month Period Ended June 30, Ended June 30, 1999 2000 1999 2000 ------------ ------------ ------------ ------------ 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 ============ ============ ============ ============
See notes to condensed consolidated financial statements 3 EXACTECH, INC. CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited)
Additional Total Common Stock Paid-In Retained Shareholders' Shares Amount Capital Earnings Equity ------ ------ ------- -------- ------ 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 =========== =========== =========== =========== ===========
See notes to condensed consolidated financial statements 4 EXACTECH, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Six Month Period Ended June 30, 1999 2000 ----------- ----------- 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 --
See notes to condensed consolidated financial statements 5 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:
December 31, June 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 (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 =============== ===============
6 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
(in thousands) --------------------------------------------------- Tissue Knee Hip Services Other Total - --------------------------------------------------------------------------------------------- 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 - --------------------------------------------------------------------------------------------- (in thousands) --------------------------------------------------- Tissue Knee Hip Services Other Total - --------------------------------------------------------------------------------------------- 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 - ---------------------------------------------------------------------------------------------
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 6. SHAREHOLDERS' EQUITY The following is a reconciliation of income and shares of the basic and diluted EPS computations:
Per Per Income Shares Share Income Shares Share ---------------------------------------------------------------------------- Three Months Ended June 30, 1999 Three Months Ended June 30, 2000 ----------------------------------- ------------------------------------ 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 Six Months Ended June 30, 1999 Six Months Ended June 30, 2000 ----------------------------------- ------------------------------------- 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
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 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)
Six Months Ended ---------------------------------------------------- June 30, 1999 June 30, 2000 Hip Products Units $ % Units $ % ----- - - ----- - - 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% ================= ================
Three Months Ended ----------------------------------------------------- June 30, 1999 June 30, 2000 Hip Products Units $ % Units $ % ----- - - ----- - - 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% ================= =================
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 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 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 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 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.
2000 2001 2002 2003 2004 Thereafter Total - ---------------------------------------------------------------------------------------------------------------------------------- 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% - -----------------------------------------------------------------------------------------------------------------------------------
14 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 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 Exhibit Index Exhibit No. Exhibit Description - ----------- ------------------- 27 Financial Data Schedule EX-27 2 0002.txt
5 6-MOS DEC-31-2000 JAN-01-2000 JUN-30-2000 334,690 0 9,649,459 (329,905) 16,045,184 26,140,518 18,616,170 (4,968,899) 40,887,271 7,058,998 3,600,000 0 0 50,651 29,026,790 40,887,271 21,220,282 21,220,282 7,477,156 7,477,156 10,351,968 0 (37,047) 3,301,363 1,261,351 2,040,012 0 0 0 2,040,012 0.40 0.38
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