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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, 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 August 12, 2002
Common Stock, $.01 par value 5,399,272
EXACTECH, INC.
INDEX
Page
Number
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets as of December 31, 2001 2
and June 30, 2002
Condensed Statements of Income for the Three and 3
Six Month Periods Ended June 30, 2001 and June 30, 2002
Condensed Statement of Changes in Shareholders' Equity 4
for the Six Month Period Ended June 30, 2002
Condensed Statements of Cash Flows for the Six Month 5
Periods Ended June 30, 2001 and June 30, 2002
Notes to Condensed Financial Statements for the Three 6
and Six Month Periods Ended June 30, 2001 and June 30, 2002
Item 2. Management's Discussion and Analysis of Financial 11
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 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
1
Item 1. Financial Statements
EXACTECH, INC.
CONDENSED BALANCE SHEETS
(in thousands)
(Unaudited)
December 31, June 30,
2001 2002
------------ ---------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,001 $ 1,510
Trade receivables, net of allowance
of $373 and $409 10,503 12,493
Prepaid expenses and other assets, net 275 1,682
Inventories 19,598 19,992
Deferred tax assets 289 274
-------- --------
Total current assets 31,666 35,951
PROPERTY AND EQUIPMENT:
Land 463 463
Machinery and equipment 6,524 6,851
Surgical instruments 11,513 13,089
Furniture and fixtures 552 562
Facilities 3,595 3,774
-------- --------
Total property and equipment 22,647 24,739
Accumulated depreciation (7,861) (8,947)
-------- --------
Net property and equipment 14,786 15,792
OTHER ASSETS:
Product licenses and designs, net 273 393
Deferred financing costs, net 108 99
Investment in joint venture 14 79
Advances and deposits 144 144
Patents and trademarks, net 487 491
-------- --------
Total other assets 1,026 1,206
-------- --------
TOTAL ASSETS $ 47,478 $ 52,949
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,142 $ 5,080
Income taxes payable 18 34
Line of credit 1,386 --
Current portion of long-term debt 300 300
Commissions payable 672 1,339
Royalties payable 453 529
Other liabilities 359 427
-------- --------
Total current liabilities 5,330 7,709
LONG-TERM LIABILITIES:
Deferred tax liabilities 1,768 1,814
Long-term debt, net of current portion 3,000 3,000
-------- --------
Total long-term liabilities 4,768 4,814
-------- --------
Total liabilities 10,098 12,523
SHAREHOLDERS' EQUITY:
Common stock 53 54
Additional paid-in capital 19,101 19,744
Retained earnings 18,226 20,628
-------- --------
Total shareholders' equity 37,380 40,426
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 47,478 $ 52,949
======== ========
See notes to condensed financial statements
2
EXACTECH, INC.
CONDENSED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(Unaudited)
Three Month Period Six Month Period
Ended June 30, Ended June 30,
2001 2002 2001 2002
-------- -------- -------- --------
NET SALES $ 11,802 $ 14,980 $ 23,347 $ 28,735
COST OF GOODS SOLD 4,249 4,754 8,300 9,640
-------- -------- -------- --------
Gross profit 7,553 10,226 15,047 19,095
OPERATING EXPENSES:
Sales and marketing 3,507 4,698 6,685 8,588
General and administrative 1,589 1,564 2,507 2,706
Research and development 608 703 1,142 1,350
Depreciation and amortization 650 742 1,281 1,469
Royalties 457 501 884 1,030
-------- -------- -------- --------
Total operating expenses 6,811 8,208 12,499 15,143
-------- -------- -------- --------
INCOME FROM OPERATIONS 742 2,018 2,548 3,952
OTHER INCOME (EXPENSE):
Interest income 14 4 24 9
Interest expense (123) (37) (268) (82)
Loss on disposal of assets (2) (24) (23) (27)
Foreign currency exchange loss -- (32) -- (32)
Equity in net loss of joint venture (44) (3) (80) (17)
-------- -------- -------- --------
Total other income (expense) (155) (92) (347) (149)
INCOME BEFORE INCOME TAXES 587 1,926 2,201 3,803
PROVISION FOR INCOME TAXES 217 725 783 1,401
-------- -------- -------- --------
NET INCOME $ 370 $ 1,201 $ 1,418 $ 2,402
======== ======== ======== ========
BASIC EARNINGS PER SHARE $ 0.07 $ 0.22 $ 0.27 $ 0.45
======== ======== ======== ========
DILUTED EARNINGS PER SHARE $ 0.07 $ 0.22 $ 0.26 $ 0.43
======== ======== ======== ========
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 55 1 473 474
Issuance of common stock
under the Company's
Employee Stock Purchase Plan 4 0 47 47
Compensation benefit of
non-qualified stock options 39 39
Tax benefit from exercise
of stock options 84 84
Net income 2,402 2,402
------- ------- ------- ------- -------
Balance, June 30, 2002 5,383 $ 54 $19,744 $20,628 $40,426
======= ======= ======= ======= =======
See notes to condensed financial statements
4
EXACTECH, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Six Month Period Ended June 30,
2001 2002
---------- ----------
OPERATING ACTIVITIES:
Net income $ 1,418 $ 2,402
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,373 1,593
Loss on disposal of assets 23 27
Foreign currency exchange loss -- 32
Equity in net loss of joint venture -- 17
Deferred income taxes 151 61
Increase in trade receivables (1,925) (1,990)
Increase in prepaid expenses and other assets (264) (1,398)
Increase in inventories (555) (394)
(Decrease) increase in income taxes payable (265) 16
(Decrease) increase in accounts payable (8) 2,906
Increase in other liabilities 741 811
------- -------
Net cash provided by operating activities 689 4,083
------- -------
INVESTING ACTIVITIES:
Purchases of property and equipment (2,156) (2,562)
Investment in joint venture (65) (82)
Purchase of product licenses and designs (25) (150)
Cost of patents and trademarks (30) (38)
------- -------
Net cash used in investing activities (2,276) (2,832)
------- -------
FINANCING ACTIVITIES:
Payments on line of credit, net of borrowing (344) (1,386)
Proceeds from issuance of common stock 2,035 644
------- -------
Net cash provided by (used in) financing activities 1,691 (742)
------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS 104 509
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 448 1,001
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 552 $ 1,510
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 69 $ 58
Income taxes 813 1,281
See notes to condensed financial statements
5
EXACTECH, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 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 six month
periods ended June 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. 141, "Business
Combinations," SFAS No. 142, "Goodwill and Other Intangible Assets," and SFAS
No. 143, "Accounting for Asset Retirement Obligations." In August 2001, the FASB
issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets." SFAS 141 requires companies to apply the purchase method of accounting
for all business combinations initiated after June 30, 2001 and prohibits the
use of the pooling-of-interest method. SFAS 142 changes the method by which
companies may recognize intangible assets in purchase business combinations and
generally requires identifiable intangible assets to be recognized separately
from goodwill. In addition, it eliminates the amortization of all existing and
newly acquired goodwill on a prospective basis and requires companies to assess
goodwill for impairment, at least annually, based on the fair value of the
reporting unit associated with the goodwill. SFAS 143 addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. SFAS 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. SFAS
144 addresses financial accounting and reporting for the impairment or disposal
of long-lived assets. The Company adopted SFAS 141 on July 1, 2001. The adoption
of SFAS 141 did not have a material effect on the Company's financial position,
results of operations or cash flows. The Company adopted SFAS 142 and SFAS 144
on January 1, 2002. The adoption of SFAS 142 and SFAS 144 did not have a
material effect on the Company's financial position, results of operations or
cash flows. The Company will adopt SFAS 143 effective January 1, 2003. The
adoption of SFAS 143 will not have a material impact on the Company's financial
position, results of operations or cash flows.
3. INVENTORIES
Inventories are valued at the lower of cost (first-in, first-out method) or
market and include implants provided to customers and agents. 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 June 30,
2002 (in thousands of dollars):
2001 2002
Raw materials $ 2,087 $ 2,043
Work in process 200 217
Finished goods 17,311 17,732
------- -------
$19,598 $19,992
======= =======
6
4. DEBT
Long-term debt consists of the following at December 31, 2001 and June 30, 2002
(in thousands of dollars):
2001 2002
--------- ---------
Industrial Revenue Bond note payable in annual $ 3,300 $ 3,300
principal installments as follows: $300,000 per year from
2001-2006; $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 (1.35% as of
June 30, 2002); proceeds used to finance construction
of current facility
------- -------
Total long-term debt 3,300 3,300
Less current portion (300) (300)
------- -------
$ 3,000 $ 3,000
======= =======
The following is a schedule of debt maturities as of June 30, 2002 (in thousands
of dollars):
Long-Term
Debt
------------
2002 ........................................................... $ 300
2003 ........................................................... 300
2004 ........................................................... 300
2005 ........................................................... 300
2006 ........................................................... 300
Thereafter ..................................................... 1,800
------
Total ....................................................... $3,300
======
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. On July 23, 2002, the
Company announced that it had reached an agreement in principle to settle the
dispute with RTI and enter into a new distribution agreement as exclusive
distributor for bone past products processed by RTI for non-spinal
musculoskeletal orthpaedic procedures. The definitive settlement and new license
agreements are expected to be completed by the end of the third quarter of 2002.
The agreement will settle 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
7
Company's exclusive distribution rights, the settlement also calls for RTI to
pay the Company $1.5 million in damages.
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.
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.
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 June 30,
2001
Net Sales $ 7,421 $ 2,731 $ 1,291 $ 359 $ 11,802
Segment income from operations 240 253 160 89 742
2002
Net Sales $ 8,779 $ 3,857 $ 1,536 $ 808 $ 14,980
Segment income (loss) from operations 1,190 683 321 (176) 2,018
Six months ended June 30,
2001
Net Sales $ 14,687 $ 5,314 $ 2,711 $ 635 $ 23,347
Segment income from operations 1,260 654 437 197 2,548
2002
Net Sales $ 17,424 $ 7,017 $ 3,007 $ 1,287 $ 28,735
Segment income (loss) from operations 2,689 1,189 578 (504) 3,952
Total assets not identified with a specific segment (in thousands of
dollars) were $19,431 at December 31, 2001 and $23,733 at June 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.
8
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
June 30, 2002
Total assets, net $ 15,734 $ 10,702 $ 1,653 $ 1,127 $ 29,216
- -------------------------------------------------------------------------------------------------------------------
Geographic distribution of sales are summarized in the following table (in
thousands):
- ---------------------------------------------------------------------------------------
Three months ended June 30, 2001 2002
Domestic sales revenue $ 9,320 $ 12,524
Sales revenue from Spain 1,227 1,462
Other international sales revenue 1,255 994
- ---------------------------------------------------------------------------------------
Six months ended June 30, 2001 2002
Domestic sales revenue $ 18,739 $ 23,940
Sales revenue from Spain 2,305 2,586
Other international sales revenue 2,303 2,209
- ---------------------------------------------------------------------------------------
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 June 30, 2001 Three Months Ended June 30, 2002
------------------------------------- --------------------------------------
Net income $ 370 $ 1,201
Basic EPS:
Net income available to
common shareholders $ 370 5,224 $ 0.07 $ 1,201 5,376 $ 0.22
====== =======
Effect of Dilutive Securities:
Stock options 203 186
Warrants 10 --
------ -----
Diluted EPS:
Net income available to
common shareholders
plus assumed conversions $ 370 5,437 $ 0.07 $ 1,201 5,562 $ 0.22
====== =======
Six Months Ended June 30, 2001 Six Months Ended June 30, 2002
------------------------------------- --------------------------------------
Net income $ 1,418 $ 2,402
Basic EPS:
Net income available to
common shareholders $ 1,418 5,174 $ 0.27 $ 2,402 5,352 $ 0.45
====== =======
Effect of Dilutive Securities:
Stock options 216 181
Warrants 8 --
------ -----
Diluted EPS:
Net income available to
common shareholders
plus assumed conversions $ 1,418 5,398 $ 0.26 $ 2,402 5,533 $ 0.43
====== ======
At June 30, 2001, there were 546,542 options to purchase shares of common
stock at prices ranging from $3.28 to $18.81 per share outstanding. For the
three months ended June 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. At June 30, 2002, there were 525,195 options to
purchase shares of common stock at prices ranging from $3.28 to $18.81 per share
outstanding. For the three months ended June 30, 2002, there were 114,413
options at exercise prices ranging from $17.25 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 six months ended June 30, 2001, there were 107,538 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. For the six months ended
June 30, 2002, there were 118,538 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.
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. 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)
Six Months Ended Three Months Ended
------------------------------------- -------------------------------------
June 30, 2001 June 30, 2002 June 30, 2001 June 30, 2002
$ % $ % $ % $ %
--- --- --- --- --- --- --- ---
Knee Products 14,008 60.0% 17,001 59.2% 7,090 60.1% 8,603 57.4%
Hip Products 5,119 21.9% 6,905 24.0% 2,667 22.6% 3,831 25.6%
Tissue Services 2,711 11.6% 3,007 10.5% 1,291 10.9% 1,536 10.3%
Instrument Sales and Rental 924 4.0% 741 2.6% 426 3.6% 354 2.4%
Bone Cement 115 0.5% 242 0.8% 111 0.9% 110 0.7%
Acudriver 127 0.5% 122 0.4% 56 0.5% 68 0.4%
Miscellaneous 343 1.5% 717 2.5% 161 1.4% 478 3.2%
--------------- ---------------- ---------------- ---------------
Total 23,347 100.0% 28,735 100.0% 11,802 100.0% 14,980 100.0%
=============== ================ ================ ===============
11
RESULTS OF OPERATIONS
Three Months Ended June 30, 2002 Compared to Three Months Ended June 30, 2001
Net sales increased by $3.2 million, or 27%, to $15.0 million in the
quarter ended June 30, 2002 from $11.8 million in the quarter ended June 30,
2001. Sales of hip implant products increased by 44% to $3.8 million in the
quarter ended June 30, 2002, from $2.7 million in the quarter ended June 30,
2001. Sales of knee implant products increased 21% to $8.6 million in the
quarter ended June 30, 2002, from $7.1 million in the quarter ended June 30,
2001. Tissue services revenue increased 19% to $1.5 million in the quarter ended
June 30, 2002, from $1.3 million in the quarter ended June 30, 2001. Sales of
all other product lines increased 34% to $1.0 million in the quarter ended June
30, 2002, as compared to $754,000 in the quarter ended June 30, 2001. Domestic
sales grew to $12.5 million in the quarter ended June 30, 2002, an increase of
34%, from $9.3 million in the quarter ended June 30, 2001. International sales
revenue was $2.5 million in each of the quarters ended June 30, 2002 and 2001.
Gross profit increased by $2.6 million, or 35%, to $10.2 million in the
quarter ended June 30, 2002 from $7.6 million in the quarter ended June 30,
2001. As a percentage of sales, gross profit increased to 68% in the quarter
ended June 30, 2002 from 64% in the quarter ended June 30, 2001. This increase
was primarily the result of strong growth in domestic sales, which result in a
higher margin than comparable international sales, and the reduction of negative
manufacturing variances. During the quarter ended June 30, 2001, the Company
incurred production costs associated with a repackaging of some its products as
part of the Company's continuous improvement programs.
Total operating expenses increased by $1.4 million, or 21%, to $8.2 million
in the quarter ended June 30, 2002, from $6.8 million in the quarter ended June
30, 2001. Sales and marketing expenses, the largest component of total operating
expenses, increased by $1.2 million, or 34%, to $4.7 million in the quarter
ended June 30, 2002 from $3.5 million in the quarter ended June 30, 2001. As a
percentage of sales, sales and marketing expenses increased to 31% in the
quarter ended June 30, 2002 from 30% in the quarter ended June 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 June 30, 2002, sales and marketing expenses
increased primarily due to strong domestic sales growth with its accompanying
commission expense.
General and administrative expenses remained constant at $1.6 million in
each of the quarters ended June 30, 2002 and 2001. During the quarter ended June
30, 2001, general and administrative expenses included significant expenses
associated with litigation and arbitration issues that were much lower in the
quarter ended June 30, 2002. Included in general and administrative expenses for
the quarter ended June 30, 2002 are significant increases in product liability
insurance due to insurance market conditions. As a percentage of sales, general
and administrative expenses decreased to 10% in the quarter ended June 30, 2002,
from 13% in the quarter ended June 30, 2001.
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 may not be 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%.
Research and development expenses increased by $95,000, or 16%, to $703,000
in the quarter ended June 30, 2002, from $608,000 in the quarter ended June 30,
2001. Research and development expenses were 5% of sales in each of the quarters
ended June 30, 2002 and 2001 as the Company continued to invest in product
development at a rate supported by revenue growth.
Depreciation and amortization increased by $92,000, or 14%, to $742,000 in
the quarter ended June 30, 2002, from $650,000 in the quarter ended June 30,
2001. Depreciation expenses increased primarily as a result of the increased
investment in surgical instrumentation. During the quarter ended June 30, 2002,
$838,000 of surgical instruments were placed in service, resulting in the
increase in depreciation expense.
Royalty expenses increased by $44,000, or 10%, to $501,000 in the quarter
ended June 30, 2002, from
12
$457,000 in the quarter ended June 30, 2002, primarily as a result of growth in
sales of knee implant products, which carry higher royalty rates than other
product lines. As a percentage of sales, royalty expenses decreased to 3% in the
quarter ended June 30, 2002, from 4% in the quarter ended June 30, 2001,
primarily as a result of the expiration of certain royalty agreements.
The Company's income from operations increased by $1.3 million, or 172%, to
$2.0 million in the quarter ended June 30, 2002, from $742,000 in the quarter
ended June 30, 2001. The increase was attributable to the growth in total
revenue as well as the reduction of litigation and arbitration expenses as
compared to the quarter ended June 30, 2001.
The Company incurred net interest expense of $33,000 in the quarter ended
June 30, 2002, as compared to $109,000 in the quarter ended June 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.
Interest expense for the quarter ended June 30, 2002 of $37,000 was partially
offset by interest income of $4,000. Interest expense for the quarter ended June
30, 2001 of $123,000 was partially offset by interest income of $14,000. For the
quarter ended June 30, 2002, the Company incurred a loss of $24,000 on the
disposal of property and equipment, as compared to $2,000 in the quarter ended
June 30, 2001. During the quarter ended June 30, 2002, the Company incurred a
net loss of $3,000 in its joint venture, Exactech Asia Limited Co., as compared
to a loss of $44,000 in the quarter ended June 30, 2001.
During the quarter ended June 30, 2002, the Company incurred a foreign
currency exchange loss of $32,000 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 $1.3 million, or
228%, to $1.9 million in the quarter ended June 30, 2002, from $587,000 in the
quarter ended June 30, 2001. The provision for income taxes was $725,000 in the
quarter ended June 30, 2002 as compared to $217,000 in the quarter ended June
30, 2001. The effective tax rate for the quarter ended June 30, 2002 was 37.6%
as compared to 37.0% in the quarter ended June 30, 2001.
As a result, the Company realized net income of $1.2 million in the quarter
ended June 30, 2002, compared to $370,000 in the quarter ended June 30, 2001, an
increase of 225%. As a percentage of sales, net income was 8% in the quarter
ended June 30, 2002 as compared to 3% in the quarter ended June 30, 2001.
Earnings per share on a diluted basis were $0.22 for the quarter ended June 30,
2002 as compared to $0.07 for the quarter ended June 30, 2001.
Six Months Ended June 30, 2002 Compared to Six Months Ended June 30, 2001
Net sales increased by $5.4 million, or 23%, to $28.7 million in the six
months ended June 30, 2002 from $23.3 million in the six months ended June 30,
2001. Net sales increased in all major product lines. Sales of hip implant
products increased by 35% to $6.9 million in the six months ended June 30, 2002,
from $5.1 million in the six months ended June 30, 2001. Sales of knee implant
products increased 21% to $17.0 million in the six months ended June 30, 2002,
from $14.0 million in the six months ended June 30, 2001. Tissue services
revenue increased 11% to $3.0 million in the six months ended June 30, 2002,
from $2.7 million in the six months ended June 30, 2001. Sales of all other
product lines increased 21% to $1.8 million in the six months ended June 30,
2002, as compared to $1.5 million in the six months ended June 30, 2001.
Domestic sales grew to $23.9 million in the six months ended June 30, 2002, an
increase of 28%, from $18.7 million in the six months ended June 30, 2001.
International sales increased by 4% to $4.8 million in the six months ended June
30, 2002, as compared to $4.6 million in the six months ended June 30, 2001.
Gross profit increased by $4.1 million, or 27%, to $19.1 million in the six
months ended June 30, 2002 from $15.0 million in the six months ended June 30,
2001. As a percentage of sales, gross profit increased to 67% in the six months
ended June 30, 2002, from 64% in the six months ended June 30, 2001. This
increase was primarily due to strong domestic sales growth and a decrease in
negative manufacturing variances.
Total operating expenses increased by $2.6 million, or 21%, to $15.1
million in the six months ended June 30, 2002, from $12.5 million in the six
months ended June 30, 2001. Sales and marketing expenses increased 28% to $8.6
million in the six months ended June 30, 2002, from $6.7 million in the six
months ended June 30, 2001. Sales and marketing expenses increased, as a
percentage of sales, to 30% in the six months ended June 30, 2002,
13
from 29% in the six months ended June 30, 2001, 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 8% to $2.7 million in the six
months ended June 30, 2002, from $2.5 million in the six months ended June 30,
2001. For the six months ended June 30, 2002, general and administrative
expenses increased primarily as a result of increases in premiums for product
liability insurance coverage beginning in the second quarter of 2002. As a
percentage of sales, general and administrative expenses were 9% in the six
months ended June 30, 2002, as compared to 11% in the six months ended June 30,
2001.
Research and development expenses increased 18% to $1.4 million in the six
months ended June 30, 2002, from $1.1 million in the six months ended June 30,
2001 as the Company continued to invest in product development at levels
supported by revenue growth. As a percentage of sales, research and development
expenses remained constant at 5% for the six months ended June 30, 2002 and June
30, 2001.
Depreciation and amortization increased by $188,000, or 15%, to $1.5
million in the six months ended June 30, 2002, from $1.3 million in the six
months ended June 30, 2001. Depreciation expenses increased primarily as a
result of the increased investment in surgical instrumentation. During the six
months ended June 30, 2002, $2.0 million of surgical instruments were placed in
service.
Royalty expenses increased 17% to $1.0 million in the six months ended June
30, 2002, as compared to $884,000 in the six months ended June 30, 2001.
Royalties increased primarily as a result of the increase of sales of knee
implants. As a percentage of sales, royalty expense was 4% for the six months
ended June 30, 2002 and June 30, 2001.
The Company's income from operations increased 55% to $4.0 million in the
six months ended June 30, 2000, from $2.5 million in the six months ended June
30, 2001. The increase resulted from increases in sales revenue and a reduction
of litigation and arbitration costs.
The Company incurred net interest expense of $73,000 in the six months
ended June 30, 2002, as compared to $244,000 in the six months ended June 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. Interest expense for the six months ended June 30, 2002 of $82,000
was partially offset by interest income of $9,000. Interest expense for the six
months ended June 30, 2001 of $268,000 was partially offset by interest income
of $24,000. For the six months ended June 30, 2002, the Company incurred a loss
of $27,000 on the disposal of property and equipment, as compared to $23,000 in
the six months ended June 30, 2001. During the six months ended June 30, 2002,
the Company incurred a net loss of $17,000 in its joint venture, Exactech Asia
Limited Co., as compared to a loss of $80,000 in the six months ended June 30,
2001.
During the six months ended June 30, 2002, the Company incurred a foreign
currency exchange loss of $32,000 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 $3.8 million in
the six months ended June 30, 2002, from $2.2 million in the six months ended
June 30, 2001. The provision for income taxes was $1.4 million in the six months
ended June 30, 2002, compared to $783,000 in the six months ended June 30, 2001.
The effective tax rate for the six months ended June 30, 2002, was 36.8%, as
compared to an effective rate of 35.6% for the six months ended June 30, 2001.
The increase in the effective tax rate was primarily the result of strong
domestic sales growth.
As a result, the Company realized net income of $2.4 million in the six
months ended June 30, 2002, as compared to $1.4 million in the six months ended
June 30, 2001, an increase of 69%. As a percentage of sales, net income was 8%
in the six months ended June 30, 2002 as compared to 6% for the comparable
period ended June 30, 2001. Earnings per share on a diluted basis were $0.43 for
the six months ended June 30, 2002 as compared to $0.26 for the six months ended
June 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 June
30, 2002, the Company had working capital of $28.2 million
14
compared to $26.3 million at December 31, 2001. The increase in working capital
was primarily the result of increases in accounts receivable and prepaid
expenses offset by an increase in accounts payable. As a result of operating,
investing and financing activities, cash and cash equivalents at June 30, 2002
increased to $1.5 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 June 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 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 (1.35% as of June 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
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 initiated an expansion of its existing corporate headquarters
and manufacturing facility in Gainesville, Florida. The expansion has an
estimated cost of $4.0 million which is expected to be financed through a
long-term commercial loan. 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 $4.1 million in the six months
ended June 30, 2002, as compared to $689,000 in the six months ended June 30,
2001. The primary reasons for the change were strong growth in net income for
the six months ended June 30, 2002, which increased $1.0 million as compared to
the six months ended June 30, 2001, and an increase in accounts payable of $2.9
million in the six months ended June 30, 2002. Depreciation and amortization
totaled $1.6 million in the six months ended June 30, 2002, as compared to $1.4
million in the six months ended June 30, 2001. Cash required as a result of the
increase in trade receivables was $2.0 million in the six months ended June 30,
2002, as compared to $1.9 million in the six months ended June 30, 2001. Cash
required as a result of the increase in inventory was $394,000 in the six months
ended June 30, 2002, as compared to $555,000 in the six months ended June 30,
2001. Cash required as a result of increases in prepaid expenses and other
assets was $1.4 million in the six months ended June 30, 2002, as compared to
$264,000 in the six months ended June 30, 2001 primarily due to the prepayment
of annual insurance premiums.
Investing Activities
The Company used net cash in investing activities of $2.8 million in the
six months ended June 30, 2002, as compared to $2.3 million in the six months
ended June 30, 2001. The use of cash in the six months ended June 30, 2002 was
due to the investment of $2.6 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 six months ended June 30, 2002 used net cash
of $742,000, as compared to providing net cash of $1.7 million in the six months
ended June 30, 2001. During the six months ended June 30, 2002, proceeds from
the exercise of outstanding stock options provided cash of $644,000, while net
activity under the line of credit facility with Merrill Lynch used cash of $1.4
million. During the six month period ended June 30, 2001, cash provided by the
exercise of outstanding stock options and warrants was $2.0 million, while net
activity under the line of credit facility with Merrill Lynch used cash of
$344,000.
CAUTIONARY STATEMENT RELATING TO FORWARD LOOKING STATEMENTS
Certain matters discussed with this report contain 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,
15
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 June
30, 2002 (in thousands, except percentages):
2002 2003 2004 2005 Thereafter Total
- -------------------------------------------------------------------------------------------------------
Cash and cash equivalents
Overnight repurchase account
at variable interest rate $ 1,509 $ 1,509
Weighted average interest rate 0.9%
Liabilities
Industrial Revenue Bond at
variable interest rate $ 300 $ 300 $ 300 $ 300 $ 2,100 $ 3,300
Weighted average interest rate 1.5%
- -------------------------------------------------------------------------------------------------------
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.
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. On July 23, 2002, the
Company announced that it had reached an agreement in principle to settle the
dispute with RTI and enter into a new distribution agreement as exclusive
distributor for bone past products processed by RTI for non-spinal
musculoskeletal orthpaedic procedures. The definitive settlement and new license
agreements are expected to be completed by the end of the third quarter of 2002.
The agreement will settle 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.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
Previously reported in the Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 2002.
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
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: August 12, 2002 By: /s/ R. William Petty
-----------------------------------
R. William Petty
President, Chief Executive Officer
and Chairman of the Board
Date: August 12, 2002 By: /s/ Joel C. Phillips
-----------------------------------
Joel C. Phillips
Treasurer and Chief
Financial Officer
18
Exhibit Index
Exhibit Number Exhibit Description
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