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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 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