-----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, F2j8i7BacNR6ae9GXhM9tnDL6+ABXopcPwiyWCs9WuxLLM3QkZQHlIb2RiaMeH2m rmpUHR3owJYTwejHjqKCGQ== 0001021408-02-013924.txt : 20021113 0001021408-02-013924.hdr.sgml : 20021113 20021113162058 ACCESSION NUMBER: 0001021408-02-013924 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20020930 FILED AS OF DATE: 20021113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EXACTECH INC CENTRAL INDEX KEY: 0000913165 STANDARD INDUSTRIAL CLASSIFICATION: ORTHOPEDIC, PROSTHETIC & SURGICAL APPLIANCES & SUPPLIES [3842] IRS NUMBER: 592603930 STATE OF INCORPORATION: FL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 333-02980 FILM NUMBER: 02820296 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 d10q.txt PERIOD ENDING 09/30/2002 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, 2002 ____ 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 11, 2002 Common Stock, $.01 par value 5,437,345 EXACTECH, INC. INDEX
Page Number PART 1. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Balance Sheets as of December 31, 2001 and September 30, 2002 2 Condensed Statements of Income for the Three Month and Nine Month Periods Ended September 30, 2001 and September 30, 2002 3 Condensed Statement of Changes in Shareholders' Equity for the Nine Month Period Ended September 30, 2002 4 Condensed Statements of Cash Flows for the Nine Month Periods Ended September 30, 2001 and September 30, 2002 5 Notes to Condensed Financial Statements for the Three Month and Nine Month Periods Ended September 30, 2001 and September 30, 2002 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Item 3. Quantitative and Qualitative Disclosures About Market Risk 16 Item 4. Controls and Procedures 16 PART II. OTHER INFORMATION Item 1. Legal Proceedings 17 Item 2. Changes in Securities 17 Item 3. Defaults Upon Senior Securities 17 Item 4. Submission of Matters to a Vote of Security Holders 17 Item 5. Other Information 17 Item 6. Exhibits and Reports on Form 8-K 17 Signatures 18 Certifications 19
1 Item 1. Financial Statements EXACTECH, INC. CONDENSED BALANCE SHEETS (in thousands) (Unaudited)
December 31, September 30, ASSETS 2001 2002 ---------------- ---------------- CURRENT ASSETS: Cash and cash equivalents $ 1,001 $ 2,547 Trade receivables, net of allowance of $373 and $514 10,503 11,695 Prepaid expenses and other assets 275 1,251 Inventories 19,598 20,602 Deferred tax assets 289 318 ---------------- ---------------- Total current assets 31,666 36,413 PROPERTY AND EQUIPMENT: Land 463 463 Machinery and equipment 6,524 7,145 Surgical instruments 11,513 12,778 Furniture and fixtures 552 569 Facilities 3,595 3,597 Facilities expansion in progress - 541 ---------------- ---------------- Total 22,647 25,093 Accumulated depreciation (7,861) (9,257) ---------------- ---------------- Net property and equipment 14,786 15,836 OTHER ASSETS: Product licenses and designs, net 273 378 Deferred financing costs, net 108 120 Investment in joint venture 14 77 Advances and deposits 144 19 Patents and trademarks, net 487 474 ---------------- ---------------- Total other assets 1,026 1,068 ---------------- ---------------- TOTAL ASSETS $ 47,478 $ 53,317 ================ ================ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 2,142 $ 3,445 Income taxes payable 18 56 Line of credit 1,386 - Current portion of long-term debt 300 300 Commissions payable 672 1,028 Royalties payable 453 459 Other liabilities 359 351 ---------------- ---------------- Total current liabilities 5,330 5,639 LONG-TERM LIABILITIES: Deferred tax liabilities 1,768 1,806 Long-term debt, net of current portion 3,000 3,531 ---------------- ---------------- Total long-term liabilities 4,768 5,337 ---------------- ---------------- Total liabilities 10,098 10,976 SHAREHOLDERS' EQUITY: Common stock 53 54 Additional paid-in capital 19,101 20,314 Retained earnings 18,226 21,973 ---------------- ---------------- Total shareholders' equity 37,380 42,341 ---------------- ---------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 47,478 $ 53,317 ================ ================
See notes to condensed financial statements 2 EXACTECH, INC. CONDENSED STATEMENTS OF INCOME (in thousands, except per share amounts) (Unaudited)
Three Month Period Nine Month Period Ended September 30, Ended September 30, 2001 2002 2001 2002 -------------- -------------- -------------- --------------- NET SALES $ 11,269 $ 14,523 $ 34,616 $ 43,258 COST OF GOODS SOLD 3,888 4,493 12,188 14,133 ------------- -------------- -------------- -------------- Gross profit 7,381 10,030 22,428 29,125 OPERATING EXPENSES: Sales and marketing 3,024 4,309 9,709 12,896 General and administrative 1,280 1,695 3,787 4,402 Research and development 542 663 1,684 2,013 Depreciation and amortization 703 764 1,984 2,233 Royalties 433 451 1,317 1,481 ------------- -------------- -------------- -------------- Total operating expenses 5,982 7,882 18,481 23,025 ------------- -------------- -------------- -------------- INCOME FROM OPERATIONS 1,399 2,148 3,947 6,100 OTHER INCOME (EXPENSE): Interest income 7 6 30 16 Litigation settlement, net of costs - 206 - 206 Interest expense (92) (35) (359) (117) Loss on disposal of assets - (166) (23) (193) Foreign currency exchange gain (loss) - 4 - (28) Equity in net loss of joint venture (60) (2) (140) (19) ------------- -------------- -------------- -------------- Total other (expense) income (145) 13 (492) (135) ------------- -------------- -------------- -------------- INCOME BEFORE INCOME TAXES 1,254 2,161 3,455 5,965 PROVISION FOR INCOME TAXES 479 817 1,262 2,218 ------------- -------------- -------------- -------------- NET INCOME $ 775 $ 1,344 $ 2,193 $ 3,747 ============= ============== ============== ============== BASIC EARNINGS PER SHARE $ 0.15 $ 0.25 $ 0.42 $ 0.70 ============= ============== ============== ============== DILUTED EARNINGS PER SHARE $ 0.14 $ 0.24 $ 0.40 $ 0.68 ============= ============== ============== ==============
See notes to condensed financial statements 3 EXACTECH, INC. CONDENSED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (in thousands) (Unaudited)
Additional Total Common Stock Paid-In Retained Shareholders' Shares Amount Capital Earnings Equity ------ ------ ------- -------- ------ Balance, December 31, 2001 5,324 $ 53 $ 19,101 $ 18,226 $ 37,380 Exercise of stock options 104 1 882 883 Issuance of common stock under the Company's Employee Stock Purchase Plan 5 - 71 71 Compensation benefit of non-qualified stock options 58 58 Tax benefit from exercise of stock options 202 202 Net income 3,747 3,747 --------- ----------- ----------- --------------- ------------- Balance, September 30, 2002 5,433 $ 54 $ 20,314 $ 21,973 $ 42,341 ========= =========== =========== =============== =============
See notes to condensed financial statements 4 EXACTECH, INC. CONDENSED STATEMENTS OF CASH FLOWS (in thousands) (Unaudited)
Nine Month Period Ended September 30, 2001 2002 --------------- --------------- OPERATING ACTIVITIES: Net income $ 2,193 $ 3,747 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 2,129 2,519 Compensation benefit of non-qualified stock options 7 58 Loss on disposal of assets 23 193 Foreign currency exchange loss - 28 Equity in net loss of joint venture - 19 Tax benefit from exercise of stock options 248 202 Deferred income taxes 246 9 Increase in trade receivables (1,963) (1,192) Decrease (increase) in inventories 262 (1,004) Increase in prepaid expenses and other assets (144) (863) (Decrease) increase in income taxes payable (65) 38 (Decrease) increase in accounts payable (1,301) 1,275 Increase in other liabilities 480 354 --------------- --------------- Net cash provided by operating activities 2,115 5,383 --------------- --------------- INVESTING ACTIVITIES: Purchases of property and equipment (3,218) (3,666) Investment in joint venture (5) (82) Purchases of product licenses and designs (25) (150) Cost of patents and trademarks (30) (38) --------------- --------------- Net cash used in investing activities (3,278) (3,936) --------------- --------------- FINANCING ACTIVITIES: Payments on line of credit, net of borrowing (257) (1,386) Proceeds from commerical construction loan - 531 Proceeds from issuance of common stock 1,869 954 --------------- --------------- Net cash provided by financing activities 1,612 99 --------------- --------------- NET INCREASE IN CASH AND CASH EQUIVALENTS 449 1,546 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 448 1,001 --------------- --------------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 897 $ 2,547 =============== =============== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest $ 93 $ 71 Income taxes 989 2,016
See notes to condensed financial statements 5 EXACTECH, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2001 AND 2002 (Unaudited) 1. BASIS OF PRESENTATION The accompanying unaudited condensed financial statements, which are for interim periods, have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission relating to interim financial statements. These unaudited condensed financial statements do not include all disclosures provided in the annual financial statements. The condensed financial statements should be read in conjunction with the financial statements and notes thereto contained in the Annual Report on Form 10-K for the year ended December 31, 2001 of Exactech, Inc. (the "Company"), as filed with the Securities and Exchange Commission. All adjustments of a normal recurring nature which, in the opinion of management, are necessary to present a fair statement of results for the interim periods have been made. Results of operations for the three and nine month periods ended September 30, 2002 are not necessarily indicative of the results to be expected for the full year. 2. NEW ACCOUNTING STANDARDS In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS No. 143 applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or the normal operation of a long-lived asset, except for certain obligations of lessees. The Company will adopt SFAS No. 143 effective January 1, 2003. The Company does not expect the adoption of SFAS No. 143 to have a material impact on the Company's financial position, results of operations or cash flows. In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No. 145 amends FASB Statement No. 13, "Accounting for Leases", to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. This Statement also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. The provisions of SFAS No. 145 related to the rescission of SFAS No. 4 shall be applied in fiscal years beginning after May 15, 2002. Any gain or loss on extinguishment of debt that was classified as an extraordinary item in prior periods presented that does not meet the criteria in Opinion 30 for classification as an extraordinary item shall be reclassified. The provisions related to SFAS No. 13 shall be effective for transactions occurring after May 15, 2002, with early application encouraged. The Company does not expect the adoption of SFAS No. 145 to have a material impact on its financial position, results of operations or cash flows. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." This Statement nullifies Emerging Issues Task Force No. 94-3 and requires that a liability for a cost associated with an exit or disposal activity be recognized only when the liability is incurred. SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002. The Company will adopt the standard effective January 1, 2003. The Company does not expect the adoption of SFAS No. 146 to have a material impact on its financial position, results of operations or cash flows. 6 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. The Company provides significant loaned implant inventory to non-distributor customers. The Company provides an adjustment to inventory based on obsolescence and slow-moving inventory. This adjustment establishes a new cost basis for such impairment that is not subsequently recovered through income. The following table summarizes inventory classification as of December 31, 2001 and September 30, 2002 (in thousands of dollars): - ---------------------------------------------------- 2001 2002 Raw materials $ 2,087 $ 1,331 Work in process 200 133 Finished goods 17,311 19,138 -------------- ------------- $ 19,598 $ 20,602 ============== ============= - ---------------------------------------------------- 4. DEBT Long-term debt consists of the following at December 31, 2001 and September 30, 2002 (in thousands of dollars):
2001 2002 ----------- ----------- Industrial Revenue Bond note payable in annual $ 3,300 $ 3,300 principal installments as follows: $300 per year from 2001-2006; $200 per year from 2007-2013; $100 per year from 2014-2017; monthly interest payments based on adjustable rate as determined by the bonds remarketing agent based on market rate fluctuations (1.80% as of September 30, 2002); proceeds used to finance construction of current facility Commercial construction loan payable in monthly principal - 531 installments of $17.5, beginning October 2003, plus interest based on adjustable rate as determined by one month Libor rate (3.32% as of September 30, 2002); proceeds used to finance expansion of current facility ----------- ----------- Total long-term debt 3,300 3,831 Less current portion (300) (300) ----------- ----------- $ 3,000 $ 3,531 =========== ===========
The following is a schedule of debt maturities as of September 30, 2002 (in thousands of dollars): 2002 $ 300 ................................................... 2003 352 ................................................... 2004 510 ................................................... 2005 510 ................................................... 2006 359 ................................................... Thereafter 1,800 ................................................... ----------- Total $ 3,831 ................................................... =========== 7 5. COMMITMENTS AND CONTINGENCIES Contingencies In the ordinary course of business, the Company is, from time to time, a party to pending and threatened legal proceedings, primarily involving claims for product liability. The Company believes that the outcome of such legal actions and proceedings will not have a material adverse effect on the Company. The Company's insurance policies covering product liability claims must be renewed annually. Effective March 31, 2002, the Company renewed its insurance policies. Although the Company has been able to obtain insurance coverage concerning product liability claims at a cost and on other terms and conditions that are acceptable to the Company, the Company makes no assurances that it will able to procure such policies in the future. The insurance market in general, and the product liability market specifically, has recently experienced significant increases in premiums. For the year ending December 31, 2002, the Company will experience an increase in insurance costs in excess of 150%. The Company has been a party to an arbitration proceeding with Regeneration Technologies, Inc. ("RTI") with respect to its agreement with RTI for the distribution of a bone grafting material technology. In September 2002, the Company entered into a definitive agreement to settle the dispute with RTI and a new distribution agreement as exclusive distributor for bone paste products processed by RTI for non-spinal musculoskeletal orthopaedic procedures. The agreements settled all claims and disputes outlined in the December 2001 arbitration ruling that determined that the Company retained the exclusive distribution rights to a line of moldable bone paste products for use outside the spine produced by RTI. In addition to reaffirming the Company's exclusive distribution rights, the settlement also calls for RTI to pay the Company $1.5 million in damages in six quarterly installments. On August 29, 2002, a complaint was filed against the Company alleging the improper design of a prosthetic device manufactured by the Company. The plaintiff is seeking an unspecified monetary award and damages in an amount to be determined at trial. This case remains in the early stages. The Company is pursuing the defense of this claim vigorously. Commitments The Company has entered into distribution agreements under which the Company is required to purchase a minimum of $3,850,000 of products over the term of the agreements. The Company has entered into an agreement to purchase the land and improvements of an adjacent facility in the Northwood Commercial Park, Gainesville, Florida, for $400,000 cash to accommodate future expansion needs. 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 is for minor sales categories, such as trauma implants, bone cement, 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. 8 Summarized interim reporting information concerning the Company's reportable segments is shown in the following table:
(in thousands) --------------------------------------------------------------------- Tissue Knee Hip Services Other Total - -------------------------------------------------------------------------------------------------------------- Three months ended September 30, 2001 Net Sales $ 6,990 $ 2,741 $ 1,204 $ 334 $ 11,269 Segment income from operations 721 418 169 91 1,399 2002 Net Sales $ 7,619 $ 3,580 $ 2,119 $ 1,205 $ 14,523 Segment income (loss) from operations 1,210 605 558 (225) 2,148 Nine months ended September 30, 2001 Net Sales $ 21,677 $ 8,055 $ 3,915 $ 969 $ 34,616 Segment income from operations 1,981 1,072 606 288 3,947 2002 Net Sales $ 24,620 $ 10,485 $ 5,126 $ 3,027 $ 43,258 Segment income (loss) from operations 3,899 1,794 1,136 (729) 6,100 - --------------------------------------------------------------------------------------------------------------
Total assets not identified with a specific segment (in thousands of dollars) were $19,431 at December 31, 2001 and $23,936 at September 30, 2002. 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:
(in thousands) ----------------------------------------------------------- Tissue Knee Hip Services Other Total - --------------------------------------------------------------------------------------------------------- December 31, 2001 Total assets, net $ 15,570 $ 10,848 $ 927 $ 702 $ 28,047 September 30, 2002 Total assets, net $ 15,325 $ 11,883 $ 1,473 $ 700 $ 29,381 - ---------------------------------------------------------------------------------------------------------
Geographic distribution of sales is summarized in the following table: - -------------------------------------------------------------------------------- Three months ended September 30, 2001 2002 Domestic sales revenue $ 9,506 $ 12,871 Sales revenue from Spain 646 671 Other international sales revenue 1,117 981 - -------------------------------------------------------------------------------- Nine months ended September 30, 2001 2002 Domestic sales revenue $ 28,245 $ 36,811 Sales revenue from Spain 2,950 3,257 Other international sales revenue 3,421 3,190 - -------------------------------------------------------------------------------- 9 7. SHAREHOLDERS' EQUITY The following is a reconciliation of the numerators and denominators of the basic and diluted EPS computations for net income and net income available to common shareholders (in thousands, except per share amounts):
Income Shares Income Shares (Numer- (Denom- Per (Numer- (Denom- Per ator) inator) Share ator) inator) Share ------------------------------------------------------------------------------------------ Three Months Ended September 30, 2001 Three Months Ended September 30, 2002 ----------------------------------------- ----------------------------------------- Net income $ 775 $ 1,344 Basic EPS: Net income available to common shareholders $ 775 5,297 $ 0.15 $ 1,344 5,409 $ 0.25 ======== ========= Effect of Dilutive Securities: Stock options 147 153 ------- ------ Diluted EPS: Net income available to common shareholders plus assumed conversions $ 775 5,444 $ 0.14 $ 1,344 5,562 $ 0.24 ======== ========= Nine Months Ended September 30, 2001 Nine Months Ended September 30, 2002 ------------------------------------------ ----------------------------------------- Net income $ 2,193 $ 3,747 Basic EPS: Net income available to common shareholders $ 2,193 5,215 $ 0.42 $ 3,747 5,371 $ 0.70 ======== ========= Effect of Dilutive Securities: Stock options 195 156 Warrants 6 - ------- ------ Diluted EPS: Net income available to common shareholders plus assumed conversions $ 2,193 5,416 $ 0.40 $ 3,747 5,527 $ 0.68 ======== =========
At September 30, 2001, there were 541,097 options to purchase shares of common stock at prices ranging from $3.28 to $18.81 per share outstanding. For the three months ended September 30, 2001, there were 147,538 options at exercise prices ranging from $12.81 to $18.81 per share excluded from the computation of diluted EPS because the options' exercise prices were greater than the average market price of the common shares. At September 30, 2002, there were 499,700 options to purchase shares of common stock at prices ranging from $3.28 to $18.81 per share outstanding. For the three months ended September 30, 2002, there were 120,038 options at exercise prices ranging from $16.40 to $18.81 per share excluded from the computation of diluted EPS because the options' exercise prices were greater than the average market price of the common shares. For the nine months ended September 30, 2001, there were 112,538 options at exercise prices ranging from $16.40 to $18.81 per share excluded from the computation of diluted EPS because the options' exercise prices were greater than the average market price of the common shares. For the nine months ended September 30, 2002, there were 115,038 options at exercise prices ranging from $17.00 to $18.81 per share excluded from the computation of diluted EPS because the options' exercise prices were greater than the average market price of the common shares. 8. RECLASSIFICATIONS Certain amounts in the 2001 financial statements have been reclassified to conform with the 2002 financial statements presentation. 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations General The following discussion should be read in conjunction with the condensed financial statements and related notes appearing elsewhere herein, and 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, 2001. The Company develops, manufactures, markets and sells orthopaedic implant devices, related surgical instrumentation, and biologic products to hospitals and physicians. The Company was incorporated in 1985 and began selling hip products in 1987. Hip products accounted for the majority of the Company's sales from 1987 until 1994. From the introduction of the Optetrak(R) knee system in 1995, sales of knee implant products accounted for an increasing percentage of the Company's revenues and profits. During 1999, the Company commenced full-scale distribution of Opteform(R), a 100% biologic based allograft tissue under an exclusive license agreement with Regeneration Technologies, Inc. During 2000, the Company began the initial release of a comprehensive update of its hip systems under the trade name AcuMatch(R) hip systems. During 2001, the Company began distribution of Cemex(R), a unique bone cement and delivery system under an exclusive U.S. distribution agreement with Tecres, an Italian based company. During the first quarter of 2002, the Company entered into an exclusive distribution agreement with German manufacturer Waldemar Link GmbH & Co. and Link America, Inc. d/b/a Link Orthopaedics to distribute its line of orthopaedic implants and instrumentation in the United States and Canada. During the third quarter of 2002, the Company entered into a new exclusive distribution agreement with Regeneration Technologies, Inc. ("RTI") granting the Company the worldwide rights to distribute all bone paste products for non-spinal musculoskeletal orthopaedic procedures. While the Company anticipates that sales of knee implant products will continue to account for a major portion of its revenues and profits, hip implants, bone restoration materials, and bone cement are an increasingly important part of the Company's product lines. The following table sets forth, for the periods indicated, information with respect to the Company's products and services sold and percentages of revenues derived from such sales: SALES SUMMARY BY PRODUCT LINE (dollars in thousands)
Nine Months Ended Three Months Ended ------------------------------------------------ -------------------------------------------- September 30, 2001 September 30, 2002 September 30, 2001 September 30, 2002 $ % $ % $ % $ % - - - - - - - - Knee Products 20,801 60.1% 24,620 56.9% 6,793 60.3% 7,619 52.5% Hip Products 7,811 22.6% 10,485 24.2% 2,692 23.9% 3,580 24.7% Tissue Services 3,915 11.3% 5,126 11.9% 1,204 10.7% 2,119 14.6% Instrument Sales and Rental 1,186 3.4% 1,138 2.6% 262 2.3% 397 2.7% Bone Cement 198 0.6% 365 0.9% 83 0.7% 123 0.8% Acudriver 184 0.5% 172 0.4% 57 0.5% 50 0.3% Miscellaneous 521 1.5% 1,352 3.1% 178 1.6% 635 4.4% ----------------------- -------------------- --------------------- -------------------- Total 34,616 100.0% 43,258 100.0% 11,269 100.0% 14,523 100.0% ======================= ==================== ===================== ====================
RESULTS OF OPERATIONS Three Months Ended September 30, 2002 Compared to Three Months Ended September 30, 2001 Net sales increased by $3.2 million, or 29%, to $14.5 million for the quarter ended September 30, 2002 from $11.3 million for the quarter ended September 30, 2001. Sales of knee implant products increased 12% during the quarter ended September 30, 2002 to $7.6 million from $6.8 million during the quarter ended September 30, 2001. Sales of hip implant products increased 33% to $3.6 million during the quarter ended September 30, 2002 from $2.7 million during the quarter ended September 30, 2001. Revenue from the distribution of tissue services increased 76% during the quarter ended September 30, 2002 to $2.1 million as compared to $1.2 million during the quarter ended September 30, 2001. Sales of all other product lines increased 108% to $1.2 million from $580,000 during the quarter ended September 30, 2001. During the quarter ended September 30, 2002, domestic sales revenue increased 35% to $12.9 million from $9.5 million in the comparable quarter ended September 30, 2001. International sales decreased 6% to $1.7 million during the quarter ended September 30, 2002 from $1.8 million during the quarter ended September 30, 2001, primarily as a result of timing differences in distributor stocking 11 orders. As a percentage of sales, international sales represented 11% for the quarter ended September 30, 2002, as compared to 16% for the quarter ended September 30, 2001. The decrease in international sales, as a percentage of total sales, is primarily due to the strong increase in domestic sales. Gross profit increased by $2.6 million, or 36%, to $10.0 million for the quarter ended September 30, 2002 from $7.4 million for the quarter ended September 30, 2002. As a percentage of sales, gross profit increased to 69% for the quarter ended September 30, 2002 as compared to 66% for the quarter ended September 30, 2001, primarily due to strong domestic sales growth, including growth in distribution revenue for tissue services as a result of the new distribution agreement with Regeneration Technologies, Inc. Total operating expenses increased by $1.9 million, or 32%, to $7.9 million for the quarter ended September 30, 2002 from $6.0 million in the quarter ended September 30, 2001. Sales and marketing expenses increased by $1.3 million, or 42%, to $4.3 million for the quarter ended September 30, 2002 from $3.0 million in the quarter ended September 30, 2001. Sales and marketing expenses, as a percentage of sales, increased to 30% for the quarter ended September 30, 2002 as compared to 27% in the quarter ended September 30, 2001. The Company's sales and marketing expenses are largely variable costs based on sales levels, with the largest component being payments to independent sales representatives for their services to hospitals and surgeons on the Company's behalf. For the quarter ended September 30, 2002, sales and marketing expenses increased primarily due to strong domestic sales growth with its accompanying commission expense. General and administrative expenses increased by $415,000, or 32%, to $1.7 million for the quarter ended September 30, 2002 from $1.3 million in the quarter ended September 30, 2001. As a percentage of sales, general and administrative expenses increased to 12% for the quarter ended September 30, 2002 from 11% in the quarter ended September 30, 2001. The increase in general and administrative expenses for the quarter ended September 30, 2002 is primarily the result of significant increases in product liability insurance due to insurance market conditions. Insurance premiums increased by $302,000 for the quarter ended September 30, 2002 from the quarter ended September 30, 2001. Similar increases in product liability insurance premiums will occur through the fourth quarter of the current year and the first quarter of next year. The Company expects that the insurance market for product liability insurance will continue to experience upward pressure on premiums beyond the first quarter of 2003. Research and development expenses increased by $121,000, or 22%, to $663,000 for the quarter ended September 30, 2002, as compared to $542,000 for the quarter ended September 30, 2001. As a percentage of sales, research and development expenses remained constant at 5% for the each of the quarters ended September 30, 2002 and September 30, 2001. Development efforts have continued to focus on line extensions of the Company's knee and hip implant products, resulting in the overall increase in research and development expenses. Depreciation and amortization increased 9% to $764,000 for the quarter ended September 30, 2002 from $703,000 for the quarter ended September 30, 2001. Depreciation expenses increased primarily as a result of investment in surgical instrumentation. During the quarter ended September 30, 2002, $452,000 of surgical instruments was placed in service, contributing to the increase in depreciation expense. Royalty expenses increased by $18,000 to $451,000 for the quarter ended September 30, 2002 from $433,000 for the quarter ended September 30, 2001. As a percentage of sales, royalty expenses decreased to 3% for the quarter ended September 30, 2002 from 4% for the quarter ended September 30, 2001. The expiration of certain royalty agreements resulted in the reduction, as a percent of sales, of royalty expenses even though royalty expenses increased on a dollar basis, as a result of sales increases of the Company's implant product lines. The Company's income from operations increased by $749,000, or 54%, to $2.1 million for the quarter ended September 30, 2002 from $1.4 million for the quarter ended September 30, 2001. The increase was primarily due to the increase in sales revenue and gross margin improvement from strong domestic sales growth. The Company incurred net interest expense of $29,000 for the quarter ended September 30, 2002, as compared to $85,000 for the quarter ended September 30, 2001. The decrease in net interest expense was primarily the result of a reduction in interest incurred on borrowings under the Company's existing line of credit. For the quarter ended September 30, 2002, the Company incurred a loss on the disposal of property and equipment of $166,000. For the quarter ended September 30, 2002, the Company realized non-operating income of $206,000, net of legal costs of $44,000, related to the settlement agreement with RTI. The Company expects to realize similar quarterly non-operating income through the year ending December 31, 2003. The Company's share of the net loss in 12 its joint venture for the quarter ended September 30, 2002 was $2,000, as compared to $60,000 for the quarter ended September 30, 2001. During the quarter ended September 30, 2002, the Company realized a foreign currency exchange gain of $4,000 as a result of Euro denominated accounts payable related to purchases of inventory. See "Item 3: Quantitative and Qualitative Disclosures About Market Risk" in this report. Income before provision for income taxes increased by $907,000, or 72%, to $2.2 million for the quarter ended September 30, 2002 from $1.3 million for the quarter ended September 30, 2001. The provision for income taxes was $817,000 for the quarter ended September 30, 2002 compared to $479,000 in the quarter ended September 30, 2001. The effective tax rate in the quarter ended September 30, 2002 was 37.8%, as compared to 38.2% in the quarter ended September 30, 2001. As a result, the Company realized net income of $1.3 million for the quarter ended September 30, 2002, compared to $775,000 for the quarter ended September 30, 2001, a 73% increase. As a percentage of sales, net income increased to 9.3% for the quarter ended September 30, 2002 from 6.9% for the quarter ended September 30, 2001. Earnings per share on a diluted basis were $0.24 for the quarter ended September 30, 2002 as compared to $0.14 for the quarter ended September 30, 2001. Nine Months Ended September 30, 2002 Compared to Nine Months Ended September 30, 2001 Net sales increased by $8.7 million, or 25%, to $43.3 million for the nine months ended September 30, 2002 from $34.6 million for the nine months ended September 30, 2001. Sales of the knee implant products increased 18% to $24.6 million for the nine months ended September 30, 2002 from $20.8 million for the nine months ended September 30, 2001. Sales of hip implant products increased 34% to $10.5 million for the nine months ended September 30, 2002 from $7.8 million for the nine months ended September 30, 2001. Revenue from the distribution of tissue services increased 31% to $5.1 million for the nine months ended September 30, 2002 from $3.9 million for the nine months ended September 30, 2001. Sales of all other product lines increased 45% to $3.0 million for the nine months ended September 30, 2002 from $2.1 million for the nine months ended September 30, 2001. Domestic sales revenue increased 30% to $36.8 million for the nine months ended September 30, 2002 as compared to $28.2 million for the nine months ended September 30, 2001. For the nine months ended September 30, 2002, international sales increased 1% to $6.5 million compared to $6.4 million for the nine months ended September 30, 2001. As a percentage of sales, international sales decreased to 15% for the nine months ended September 30, 2002 as compared to 18% for the nine months ended September 30, 2001, primarily to due strong domestic sales growth. Gross profit increased by $6.7 million, or 30%, to $29.1 million for the nine months ended September 30, 2002 from $22.4 million for the nine months ended September 30, 2001. As a percentage of sales, gross profit increased to 67% for the nine months ended September 30, 2002 from 65% for the nine months ended September 30, 2001, as the Company experienced strong domestic sales growth, along with a reduction in manufacturing costs achieved through internal production efficiencies. Total operating expenses increased by $4.5 million, or 25%, to $23.0 million for the nine months ended September 30, 2002 from $18.5 million for the nine months ended September 30, 2001. Sales and marketing expenses increased 33% to $12.9 million for the nine months ended September 30, 2002, as compared to $9.7 million for the nine months ended September 30, 2001. As a percentage of sales, sales and marketing expenses increased to 30% for the nine months ended September 30, 2002 from 28% for the nine months ended September 30, 2002, primarily as a result of increases in independent representative service payments associated with the Company's growth in domestic sales revenue. General and administrative expenses increased 16% to $4.4 million for the nine months ended September 30, 2002 from $3.8 million for the nine months ended September 30, 2001. For the nine months ended September 30, 2002, general and administrative expenses increased primarily as a result of increases in premiums for product liability insurance coverage. As a percentage of sales, general and administrative expenses decreased to 10% for the nine months ended September 30, 2002 from 11% for the nine months ended September 30, 2001. Research and development expenses increased 20% to $2.0 million for the nine months ended September 30, 2002 from $1.7 million for the nine months ended September 30, 2001. As a percentage of sales, research and development expenses remained constant at 5% for the nine months ended September 30, 2002 and September 30, 2001. The Company's continued development efforts on product line extensions and new technology have kept pace with sales growth. 13 Depreciation and amortization increased 13% to $2.2 million for the nine months ended September 30, 2002 from $2.0 million for the nine months ended September 30, 2001. Depreciation expenses increased primarily as a result of the increased investment in surgical instrumentation and manufacturing equipment. During the nine months ended September 30, 2002, $2.5 million of surgical instruments and $225,000 of manufacturing equipment were placed in service. Royalty expenses increased 12% to $1.5 million for the nine months ended September 30, 2002 from $1.3 million for the nine months ended September 30, 2001, as a result of the overall increase in sales. As a percentage of sales, royalty expenses decreased slightly to 3.4% for the nine months ended September 30, 2002 from 3.8% for the nine months ended September 30, 2001, as certain royalty agreements expired early in the quarter ended September 30, 2002. The Company's income from operations increased 55% to $6.1 million for the nine months ended September 30, 2002 from $3.9 million for the nine months ended September 30, 2001. The increase was primarily attributable to sales growth, coupled with improvement in manufacturing costs and growth in expenses that were consistent with top line sales growth. The Company incurred net interest expense of $101,000 for the nine months ended September 30, 2002, as compared to $329,000 for the nine months ended September 30, 2001. The decrease in net interest expense was primarily the result of a reduction in interest incurred on borrowings under the Company's existing line of credit. For the nine months ended September 30, 2002, the Company incurred a loss on the disposal of property and equipment of $193,000, as compared to $23,000 for the nine months ended September 30, 2001. For the nine months ended September 30, 2002, the Company realized non-operating income of $206,000, net of legal costs of $44,000, on the settlement agreement with RTI. The Company's share of the net loss in its joint venture for the nine months ended September 30, 2002 was $19,000, as compared to $140,000 for the nine months ended September 30, 2001. During the nine months ended September 30, 2002, the Company incurred a foreign currency exchange loss of $28,000 as a result of Euro denominated accounts payable related to purchases of inventory. See "Item 3: Quantitative and Qualitative Disclosures About Market Risk" in this report. Income before provision for income taxes increased 73% to $6.0 million for the nine months ended September 30, 2002 from $3.5 million for the nine months ended September 30, 2001. The provision for income taxes was $2.2 million for the nine months ended September 30, 2002, as compared to $1.3 million for the nine months ended September 30, 2001. The effective tax rate for the nine months ended September 30, 2002 was 37.2%, as compared to 36.5% in the nine months ended September 30, 2001. The increase in the effective tax rate for the nine months ended September 30, 2002 resulted from strong domestic sales growth. As a result, the Company realized net income of $3.7 million for the nine months ended September 30, 2002, as compared to $2.2 million for the nine months ended September 30, 2001, an increase of 71%. As a percentage of sales, net income increased to 8.7% for the nine months ended September 30, 2002 as compared to 6.3% for the nine months ended September 30, 2001. Earnings per share on a diluted basis were $0.68 for the nine months ended September 30, 2002 as compared to $0.40 for the nine months ended September 30, 2001. 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, 2002, the Company had working capital of $30.8 million compared to $26.3 million at December 31, 2001. The increase in working capital was primarily the result of a decrease in the amount outstanding under the line of credit and increases in cash, accounts receivable, prepaid expenses, and inventory partially offset by an increase in accounts payable. As a result of operating, investing and financing activities, cash and cash equivalents at September 30, 2002 increased to $2.5 million from $1.0 million at December 31, 2001. The Company maintains a 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 80% of the value of accounts receivable less than 90 days old, plus the lesser of 50% of the value of inventory (excluding raw materials and work-in-process inventory) and 25% of inventory on consignment or $6,000,000. The credit line was renewed in June 2002 for a term of two years, expiring June 30, 2004. At September 30, 2002, there were no outstanding balances under the line of credit. In November 1997, the Company entered into a $3,900,000 industrial revenue bond financing with the 14 City of Gainesville, Florida (the "City"), pursuant to which the City issued its industrial revenue bonds and loaned the proceeds to the Company. The bonds are secured by an irrevocable letter of credit issued by a bank. The $3,900,000 credit facility requires the payment by the Company of principal installments as follows: $300,000 per year from 2000 through 2006; $200,000 per year from 2007 through 2013; and $100,000 per year from 2014 through 2017. Monthly interest payments are based on an adjustable rate as determined by the bonds remarketing agent based on market rate fluctuations (1.80% as of September 30, 2002). The proceeds of the credit facility were used to finance construction of the Company's current facility. The Company's obligations to the bank issuing the letter of credit are secured by the land and improvements comprising the facility. The Company has initiated an expansion of its existing corporate headquarters and manufacturing facility in Gainesville, Florida. The expansion has an estimated cost of $4.2 million and is financed through a long-term commercial loan. The commercial loan calls for monthly interest payments determined by the one month Libor rate plus 1.5% (3.32% as of September 30, 2002), along with principal payments of $17,500 commencing October 2003 continuing for a period of ten years with the remaining principal balance due in one balloon payment at the end of the term. At September 30, 2002, the balance outstanding on the loan was $531,000. The Company's obligation to the bank issuing the loan is secured by the land and improvements comprising the facility. The Company has entered into an agreement to purchase the land and improvements of an adjacent facility in the Northwood Commercial Park, Gainesville, Florida, for $400,000 cash to accommodate future expansion needs. The Company has entered into distribution agreements under which the Company is required to purchase a minimum of $3,850,000 of products over the term of the agreements. The Company believes that funds from operations and borrowings under its existing credit facilities will be sufficient to satisfy its contemplated cash requirements for the following twelve months. Operating Activities Operating activities provided net cash of $5.4 million for the nine months ended September 30, 2002, as compared to $2.1 million for the nine months ended September 30, 2001. The primary reasons for the change were growth in net income for the nine months ended September 30, 2002, which increased $1.5 million as compared to the nine months ended September 30, 2001, and the increase in accounts payable of $1.3 million for the nine months ended September 30, 2002, when compared to the decrease in accounts payable of $1.3 million for the nine months ended September 30, 2001. Depreciation and amortization totaled $2.5 million for the nine months ended September 30, 2002, as compared to $2.1 million for the nine months ended September 30, 2001. The increase in accounts receivable used cash of $1.2 million for the nine months ended September 30, 2002 and $2.0 million for the nine months ended September 30, 2001. For the nine months ended September 30, 2002, an increase in inventory used net cash of $1.0 million as compared to a decrease providing net cash of $262,000 for the nine months ended September 30, 2001. Cash required as a result of increases in prepaid expenses and other assets was $863,000 for the nine months ended September 30, 2002, as compared to $144,000 in the nine months ended September 30, 2001 primarily due to the prepayment of annual insurance premiums. Investing Activities The Company used net cash in investing activities of $3.9 million for the nine months ended September 30, 2002, as compared to $3.3 million for the nine months ended September 30, 2001. The use of cash for the nine months ended September 30, 2002 was due to the investment of $3.7 million in property and equipment, $38,000 for the costs of patents, $150,000 for the purchase of licenses, and $82,000 in Exactech Asia. Financing Activities Financing activities for the nine months ended September 30, 2002 provided net cash of $99,000, as compared to $1.6 million in the nine months ended September 30, 2001. During the nine months ended September 30, 2002, proceeds from the exercise of outstanding stock options provided cash of $1.0 million, while net activity under the line of credit facility with Merrill Lynch used cash of $1.4 million. For the nine months ended September 30, 2002, borrowing on the commercial construction loan to finance the Company's facility expansion provided net cash of $531,000. During the nine month period ended September 30, 2001, cash provided by the exercise of outstanding stock options and warrants was $1.9 million, while net activity under the line of credit facility with Merrill Lynch used cash of $257,000. CAUTIONARY STATEMENT RELATING TO FORWARD LOOKING STATEMENTS Certain matters discussed with this report contain various "forward looking statements" within the meaning 15 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, the outcome of arbitration and litigation, 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, including those factors discussed in "Risk Factors" in the Company's 2001 Annual Report on Form 10-K. Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company is exposed to market risk from interest rates. For its cash and cash equivalents, a change in interest rates effects the amount of interest income that can be earned. For its debt instruments, changes in interest rates effect the amount of interest expense incurred. 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, 2002 (in thousands, except percentages):
2002 2003 2004 2005 Thereafter Total - ----------------------------------------------------------------------------------------------------------------- Cash and cash equivalents Overnight repurchase account at variable interest rate $ 2,545 $ 2,545 Weighted average interest rate 1.1% Liabilities Industrial Revenue Bond at variable interest rate $ 300 $ 300 $ 300 $ 300 $ 2,100 $ 3,300 Weighted average interest rate 1.5% Commercial Construction Loan at variable interest rate $ - $ 52 $ 210 $ 210 $ 59 $ 531 Weighted average interest rate 3.3% - -----------------------------------------------------------------------------------------------------------------
The Company invoices and receives payment from international distributors in U. S. Dollars and is not subject to risk associated with foreign currency exchange rates on accounts receivable. In connection with certain distribution agreements, the Company is subject to risk associated with foreign currency exchange rates on purchases of inventory payable in Euros. The Company does not invest in foreign currency derivatives. The U.S. dollar is considered the primary currency for the Company and transactions that are completed in a foreign currency are translated into U.S. dollars and recorded in the financial statements. Translation gains or losses were not material in any of the periods presented and the Company does not believe it is currently exposed to any material risk of loss on this basis. Item 4. Controls and Procedures (a) Evaluation of disclosure controls and procedures. Based on their evaluation as of a date within 90 days of the filing date of this Form 10-Q, the Company's principal executive officer and principal financial officer have concluded that the Company's disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934 (the "Exchange Act") are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. (b) Changes in internal control. There were no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation described above. 16 PART II. OTHER INFORMATION Item 1. Legal Proceedings In the ordinary course of business, the Company is, from time to time, a party to pending and threatened legal proceedings, primarily involving claims for product liability. The Company believes that the outcome of such legal actions and proceedings will not have a material adverse effect on the Company. The Company has been a party to an arbitration proceeding with Regeneration Technologies, Inc. ("RTI") with respect to its agreement with RTI for the distribution of a bone grafting material technology. In September 2002, the Company entered into a definitive agreement and a new distribution agreement as exclusive distributor for bone paste products processed by RTI for non-spinal musculoskeletal orthopaedic procedures. The agreements settled all claims and disputes outlined in the December 2001 arbitration ruling that determined that the Company retained the exclusive distribution rights to a line of moldable bone paste products for use outside the spine produced by RTI. In addition to reaffirming the Company's exclusive distribution rights, the settlement also calls for RTI to pay the Company $1.5 million in damages in six quarterly installments. On August 29, 2002, a complaint was filed against the Company alleging the improper design of a prosthetic device manufactured by the Company. The plaintiff is seeking an unspecified monetary award and damages in an amount to be determined at trial. This case remains in the early stages. The Company is pursuing the defense of this claim vigorously. The Company's insurance policies covering product liability claims must be renewed annually. Although the Company has been able to obtain insurance coverage concerning product liability claims at a cost and on other terms and conditions that are acceptable to the Company, the Company makes no assurances that it will able to procure such policies in the future. Item 2. Changes in Securities None Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K a) Exhibits 10.70 Loan Agreement, dated September 20, 2002, between SunTrust Bank and the Registrant 99.1 Certification of Chief Executive Officer pursuant to 18 USC Section 1350 99.2 Certification of Chief Financial Officer pursuant to 18 USC Section 1350 b) Reports on Form 8-K None 17 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 11, 2002 By: /s/ R. William Petty ----------------------------------- R. William Petty, M.D. President, Chief Executive Officer and Chairman of the Board Date: November 11, 2002 By: /s/ Joel C. Phillips ----------------------------------- Joel C. Phillips Treasurer and Chief Financial Officer 18 CERTIFICATIONS I, R. William Petty, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Exactech, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors: a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 11, 2002 /s/ R. William Petty -------------------- R. William Petty, M.D. President, Chief Executive Officer, and Chairman of the Board 19 I, Joel C. Phillips, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Exactech, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors: a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 11, 2002 /s/ Joel C. Phillips -------------------- Joel C. Phillips Chief Financial Officer 20 Exhibit Index Exhibit Number Description 10.70 Loan Agreement, dated September 20, 2002, between SunTrust Bank and the Registrant 99.1 Certification of Chief Executive Officer pursuant to 18 USC Section 1350 99.2 Certification of Chief Financial Officer pursuant to 18 USC Section 1350 EX-10.70 3 dex1070.txt LOAN AGREEMENT, DATED SEPTEMBER 20,2002 Exhibit 10.70 SUNTRUST BANK LOAN AGREEMENT THIS AGREEMENT, entered into this 20th day of September, 2002, by and between SunTrust Bank, hereinafter referred to as "Lender", Exactech, Inc., a Florida corporation, hereinafter referred to as "Borrower". WITNESSETH WHEREAS, Borrower and Lender entered into a Loan Agreement and other Loan Documents dated November 1, 1997; and, WHEREAS, Borrower and Lender desire to enter into this Loan Agreement to evidence the terms of their agreement for the modification of the terms for the loan. NOW, THEREFORE, for and in consideration of the sum of Ten and No/100 Dollars ($10.00) and other valuable consideration paid by each to the other, the receipt of which is hereby acknowledged, the parties agree as follows: 1. Borrower desires to borrow the additional sum of $4,200,000.00 for the purpose of completing the expansion of the plant and office complex located at 2320 N.W. 66/th/ Court, Gainesville, Alachua County, Florida The loan will be secured by a first mortgage filed and perfected security interests as recorded in O.R. Book 2140, at Pages 1860, 1883, 1893 and 1902; and in O.R. Book 2141, at Pages 1994, 2017, 2027 and 2036; all references being to the Public Records of Alachua County, Florida, and by UCC-1 Financing Statement filed with the Secretary of State on November 18, 1997, under filing acknowledgment #970000260452, encumbering the plant and office complex being expanded that is located at 2320 N.W. 66/th/ Court, Gainesville, Alachua County, Florida, and a collateral assignment of and perfected security interest in all furniture, fixtures, furnishings, machinery, equipment, moveable trade fixtures, accessories, all building improvement and construction materials, supplies and articles of personal property, all funds on deposit with Secured Party and its affiliates; and all general intangibles; as well as all parts, replacements, additions, substitutions, profits, rents, leases, contract rights, plans, specifications, permits, licenses, products and cash and non-cash proceeds of the foregoing (including insurance and condemnation proceeds payable by reason of condemnation of or loss of damage thereto) in any form and wherever located. The foregoing Collateral is located at or affixed to or pertains to real property known as Exactech located at 2320 N.W. 66th Court, Gainesville, Alachua County, Florida, and is more particularly described in the attached Exhibit AA@, wherein the record owner is Exactech, Inc. Borrower shall execute a future advance promissory note, future advance receipt, mortgage modification and other loan documents for the loan. Interest will accrue at the rate equal to 2 the One Month LIBOR index, to change on the day the One Month LIBOR index may change, plus 150 basis points (1.50%), and be payable interest only monthly on sums drawn for a one (1) year construction period first due on October 20, 2002, and continuing to be due on the 20th day of each month thereafter until September 20, 2003. On October 20, 2003, the loan shall commence monthly amortization payments of principal in sum of $17,500.00, together with accrued but unpaid interest, which shall continue to be due on the 20th day of each month thereafter until September 20, 2012, at which time the loan shall balloon and all unpaid sums of principal and interest shall be due and payable in full. The loan amount sum of $4,058,954.50 shall be reserved in a separate LIP account with the sums available to fund the renovations and further improvements in the periodic construction progress payment draws. The LIP account shall be disbursed and the Borrower shall contribute further equity, if needed, in accordance with a Use Of Proceeds Sheet that Lender an Borrower have agreed to prior to closing. In the event that Borrower contributes further equity, the Borrower shall pay in the further equity by paying the first sums due to the contractor. The sum of $95,000.00 shall be reserved to pay interest. In the event that an unfunded balance remains in the interest reserve at the end of the one (1) year construction period, the unfunded balance will be canceled and never advanced. 2. Borrower shall provide certain documents to Lender relating to the improvements to be constructed, some of which documents may be itemized in the applicable Construction Loan Agreement of even date herewith. The documents to be provided shall include but not be limited to, surveys, building permit, proof of builder's risk insurance, cost breakdown, specs and plans, and signed construction contract with a company acceptable to Lender. Prior to any disbursements to fund improvements, the Lender shall have first received: a. A letter of acceptable evidence showing availability of water and sewer and all other necessary utility services to the subject property provided by the Borrower. b. Borrower shall provide written evidence (and/or copies of) that all required licenses, permits and approvals of governmental authorities for the intended use for the project have unconditionally and validly been issued and obtained. c. Written evidence that the project is finally and properly zoned for its contemplated use. 4. Construction contract(s) with a company or companies approved by the Lender. The Lender shall approve Perry Construction without requiring Borrower to secure and pay for a full performance and payment bond as a condition of approval. In addition, Lender shall not be obligated to make disbursements unless and until the following 3 conditions are satisfied: a. There shall be no default under this agreement, the Note or Mortgage. b. Lender or its designated agent shall have received a completed request for disbursement of the value of the work in place on standard AIA forms. A 10% holdback of the construction funds will be withheld until completion of the project and compliance with Chapter 713 of the Florida Statutes and all loan conditions are met. Lender shall not be required to disburse hereunder sooner than ten (10) days after the receipt of such requests. Such request shall be accompanied by: i. Proof as to paid and unpaid construction bills for materialmen and subcontractors which show full payment (except for holdbacks) of such bills then due and payable except those covered under the current draw request. ii. The general contractor's partial waiver of lien and lien waivers for all work and materials as required by the title insurance company for the issuance of endorsements, except that are covered by the current requests. iii. Any inspection reports or architectural certificates with respect to the stage of completion of the improvements, and such other proof as Lender may reasonably require to establish that development or construction progress has been made in compliance with the plans and specifications. iv. If the current status of the general contractor is in default under its contract with owner, then the current status of accounts of subcontractors, materialmen and laborers furnishing labor, materials, or services in the construction of the improvements. v. Advice from Lender or inspector that the construction of the improvements by the general contractor theretofore performed is in full compliance with the plans and specifications. vi. If requested by Lender, additional advice from the title insurance company that a search of the public records discloses no change in the condition to the title to the property which is unacceptable to Lender. vii. If the stage of construction is such that the foundation of the improvements has been substantially completed, and Lender has not heretofore received it, a foundation survey certified to lender and in form and scope satisfactory to Lender. viii. In the case of the last disbursement Lender shall also have received: 4 a. Approval by local government authorities having jurisdiction of the construction and improvements that the same have been completed in accordance with all applicable laws, rules ordinances and regulations. b. Advice from Lender or inspector to the effect that the improvements by the general contractor have been completed in accordance with the plans and specifications. c. Two prints of a final survey showing the completed improvements certified to the satisfaction of Lender, and otherwise satisfactory to Lender. d. Final lien waivers and owner's and contractor's affidavits which may be required under Florida construction lien law. The Lender shall not be obligated to make disbursements unless and until the following conditions are satisfied by the Borrower. The following documents shall be provided in the order indicated: First Draw -Notice of Commencement - recorded copy -Building Permit - copy -Builder's Risk Insurance - original -Improvement Spot Survey - 2 original prints under Seal -Lender's inspection Final Draw -Certificate of Occupancy - copy -Final Inspection - Original -Final Survey - 2 original prints under Seal, certified and acceptable to Lender -Final Lien Waivers and Releases signed by General Contractors, all material suppliers and all Subcontractors, Owner's Affidavit and "Clean" Final Contractor's Affidavit. -Hazard and Liability Insurance with full replacement cost coverage listing Lender as Mortgagee/Loss Payee. Borrower understands that the project costs could exceed the costs which the Borrower has budgeted. Borrower represents and warrants that it has sufficient cash to cover any such cost overruns if they materialize out of its own equity understanding that Lender will not increase its loan amount. 3. Borrower will provide hazard, builder's risk, flood, liability, business interruption, workmen's compensation and other insurances that the Lender may require in form and issued by companies acceptable to Lender naming Lender an additional insured and/or loss payee. 4. Borrower will provide a mortgage title insurance policy for the loan amount on an ALTA form, issued by a title company or issuing agent acceptable to Lender, insuring Lender's disbursements and mortgage as a first lien, and showing the title to the property to be vested in the Borrower, free of exceptions, except such that shall be acceptable to Lender and its counsel. 5. Borrower shall provide current and up to date improvements location and final land surveys 5 showing all site improvements, abutting public road right of ways, easements, setback lines, and encroachments affecting the property acceptable to Lender, its counsel and the title company. 6. This loan is subject to an appraisal prepared for the Lender by an appraiser approved by the Lender. The appraised value is subject to review by the Lender. 7. The Borrower hereby agrees to pay the property taxes on the subject property when they become due. Failure to pay the taxes on the loan property by the due date will result in a default of the loan according to the terms of the mortgage to be signed at closing. The Lender reserves the right, at any time during the term of this loan, to require the Borrower to escrow the property taxes monthly with the Lender. 8. Borrower will provide business (all entities owned or controlled by Borrower) financial statements, within sixty (60) days of quarter end and annual audited financial statements within one hundred twenty (120) days after year end, or sooner upon request from Lender, in a format acceptable to the Lender. 9. All loan documents are subject to review by Lender's counsel. At all times during the pendency of the loan, Borrower agree to execute or provide such documents as are requested by Lender to properly perfect Lenders lien and/or security interest in the collateral. 10. Borrower shall pay all closing costs associated with the loan closing. And, the Lender reserves the right to require the services of an independent consulting engineer and/or architect to be engaged by the Lender at the cost and expense of the Borrower to perform construction inspection services for the Lender prior to disbursing any draw proceeds. 11. Borrower will permit Lender to publicize its involvement in the property, and will permit Lender to place and keep its "financed by" signs upon the property at all times during the construction phase of the Loan. 12. Borrower shall maintain its primary depository account for its receipts with Lender at all times that the loan remains unpaid. 13. Borrower hereby represent and warrant that: a. All necessary actions have been taken to authorize the execution and delivery of all loan documents and the transactions contemplated thereby. b. There is no litigation or similar proceeding threatened or pending against Borrower which may materially affect their ability to perform their obligations hereunder. c. There exists no event or circumstance which, with notice or lapse of time, or both, would constitute grounds for termination of the loan commitment, if any was issued for this loan. d. There are no outstanding or unpaid judgments against Borrower, and all federal, state 6 and local taxes, assessments or fees imposed upon Borrower or the property have been paid. e. No consent, approval or other authorization is required with respect to this transaction from any person not a party to this transaction under any document by which Borrower is obligated or bound. f. All warranties and representations contained in the loan documents are true and correct. g. Past and current uses of the subject property comply with all federal, state and local environmental statutes, regulations and ordinances. h. The Borrower has not received a citation, notice of violation or formal complaint from any federal, state or local environmental agency for noncompliance. i. The Borrower has no knowledge of any threatened environmental agency for noncompliance. j. The Borrower has no knowledge of any threatened environmental enforcement actions. k. The Borrower will covenant to comply with all present and future environmental laws and take remedial action upon the discovery of contamination. l. The Borrower will indemnify and hold harmless the Lender against any and all damages, claims or causes of action arising from the previous, present or ongoing usage of the subject property (including any improvements thereon) relating to the presence of, release or discharge of toxic or hazardous substances, petroleum or petroleum products, chemicals, pollutants, or other contaminants on the subject property. 14. In order to evaluate the environmental risks associated with this transaction, the Borrower will, upon request by Lender only if Lender has reasonable cause to so require, give permission to the Lender and its agents and contractors to enter the subject property for the purpose of conducting its own environmental assessment or hydrogeologic study of the property including soil borings, installation of piezometers, the collection of soil and surface water samples, geophysical or geotechnical testing, soil vapor surveys and the installation and sampling of groundwater monitoring wells. All such assessments studies, inspections and investigations deemed necessary by the Lender shall be conducted at Borrower's expense. 15. The occurrence of any of the following events shall be a default under this Loan Agreement, the Mortgage, the Promissory Note and all other loan documents, entitling the Lender to the remedies as set 7 forth therein: a. Borrower's admission in writing of their inability to pay its debts as they become due, the filing of a petition of bankruptcy or being adjudicated a bankrupt or insolvent or filing a petition seeking any reorganization, arrangement, composition, readjustment, liquidation, dissolution, receivership or similar relief under any present or future statute law or regulation. b. If any statement or representation made by Borrower in this agreement or in support of the loan application shall prove untrue. c. Default by Borrower in the performance of any other covenant, condition or agreement contained in any of the loan documents. d. Default by Borrower under any other loan or extension of credit by Lender to Borrower. 16. All of the terms and conditions of the Commitment Letter for this loan dated September 11, 2002, are by reference incorporated herein and made part hereof. Inasmuch as the said Commitment Letter provides for an interest rate swap option, the Borrower and the Lender agree to the following definitions: AObligations@ shall mean any indebtedness, liabilities, or obligations, now existing or hereafter arising, due or to become due, absolute or contingent, of the Borrower to the Lender under any Financial Contract permitted hereunder. AFinancial Contract@ shall mean (1) an agreement (including terms and conditions incorporated by reference therein) which is a rate swap agreement, basis swap, forward rate agreement, commodity swap, commodity option, equity or equity index swap, bond option, interest rate option, foreign exchange agreement, rate cap agreement, rate floor agreement, rate collar agreement, currency swap agreement, cross-currency rate swap agreement, currency option, any other similar agreement (including any option to enter into any of the foregoing); (2) any combination of the foregoing; or (3) a master agreement for any of the foregoing together with all supplements. And, inasmuch as the said Commitment Letter provides for an interest rate swap option, the mortgage, commercial security agreement, assignment of rents and all other security instruments are hereby amended so that as amended all security will be pledged and encumbered to secure the prompt and complete payment and performance of not only the specific obligation therein described (whether at the stated maturity, by acceleration, or otherwise) but also all Financial Contracts and Obligations made by and between the Borrower 8 and the Lender. 17 The said Loan Agreement and all of the other Loan Documents dated November 1, 1997, remain in full force and effect except as modified. IN WITNESS WHEREOF, the parties hereto have set their hands and seals the day and year first written above. LENDER: SunTrust Bank BY: /s/ Ronald A. Brame, Jr. ------------------------ Ronald A. Brame, Jr., Vice President BORROWER(S): Exactech, Inc., a Florida corporation BY: /s/ Gary J. Miller (CORPORATE SEAL) ------------------ Gary J. Miller, Its Vice President EX-99.1 4 dex991.txt CERTIFICATION OF CHIEF EXECUTIVE OFFICER Exhibit 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report on Form 10-Q of Exactech, Inc. (the "Company") for the period ended September 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, R. William Petty, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. (S) 1350, as adopted pursuant to (S) 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly present, in all material respects, the financial condition and result of operations of the Company. /s/ R. William Petty - -------------------- R. William Petty, M. D. Chief Executive Officer November 11, 2002 EX-99.2 5 dex992.txt CERTIFICATION OF CHIEF FINANCIAL OFFICER Exhibit 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report on Form 10-Q of Exactech, Inc. (the "Company") for the period ended September 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, R. William Petty, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. (S) 1350, as adopted pursuant to (S) 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly present, in all material respects, the financial condition and result of operations of the Company. /s/ Joel C. Phillips - -------------------- Joel C. Phillips Chief Financial Officer November 11, 2002 -----END PRIVACY-ENHANCED MESSAGE-----