UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
X THE SECURITIES EXCHANGE ACT OF 1934
- ---------
For the quarterly period ended June 30, 1996
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
- ---------
For the transition period from to
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Commission file number 33-69286
WRIGHT MEDICAL TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
Delaware 62-1532765
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5677 Airline Road, Arlington, Tennessee 38002-0100
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (901)867-9971
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 and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
--- ---
Number of shares outstanding of Class A Common Stock, par value
$.001 at August 7, 1996: 9,119,041
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Wright Medical Technology, Inc. & Subsidiaries:
Consolidated Balance Sheets - June 30, 1996
and December 31, 1995.......................................3
Condensed Consolidated Statements of Operations
for the Three and Six Month Periods Ended
June 30, 1996 and June 30, 1995.............................4
Consolidated Statements of Cash Flows for the
Six Month Periods Ended June 30, 1996 and
June 30, 1995...............................................5
Notes to Consolidated Financial Statements..................6
ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.........................9
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WRIGHT MEDICAL TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1996 1995
----------------- ------------------
ASSETS (in thousands) (in thousands)
(unaudited)
Current Assets:
Cash and cash equivalents $ 1,252 $ 1,126
Trade receivables, net 20,927 18,269
Inventories, net 59,800 54,815
Prepaid expenses 1,277 1,353
Other 1,098 1,948
----------------- ------------------
Total Current Assets 84,354 77,511
----------------- ------------------
Property, Plant and Equipment, net 41,031 39,141
Deferred Income Taxes 2,608 2,608
Other Assets 47,088 55,111
----------------- ------------------
$ 175,081 $ 174,371
================= ==================
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current Liabilities:
Current portion of long-term debt $ 1,883 $ 446
Short-term borrowing 9,775 3,900
Accounts payable 7,160 7,769
Accrued expenses 12,406 17,550
Deferred income taxes 2,608 2,608
----------------- ------------------
Total Current Liabilities 33,832 32,273
----------------- ------------------
Long-Term Debt 84,634 84,462
Preferred Stock Dividends 22,079 14,938
Other Liabilities 1,113 570
----------------- ------------------
Total Liabilities 141,658 132,243
----------------- ------------------
Commitments and Contingencies
Mandatorily Redeemable Series B Preferred Stock, $.01 par value, (aggregate
liquidation value of $71.6 million, including accrued and unpaid dividends
of $11.6 million, 800,000 shares authorized, 600,000 shares
issued and outstanding) 47,762 46,757
Redeemable Convertible Series C Preferred Stock, $.01 par value, (aggregate
liquidation value of $38.2 million, including accrued and unpaid dividends
of $3.2 million, 350,000 shares authorized, issued and outstanding) 22,772 20,548
Stockholders' Investment:
Series A preferred stock, $.01 par value, (aggregate liquidation value of
$23.7 million, including accrued and unpaid dividends of $7.2 million),
1,200,000 shares authorized,
915,325 shares issued & outstanding 9 9
Undesignated preferred stock, $.01 par value,
650,000 shares authorized, no shares issued - -
Class A common stock, $.001 par value, 46,000,000 shares authorized,
9,888,171 and 9,791,040 shares issued and outstanding 10 10
Class B common stock, $.01 par value, 1,000,000 shares authorized,
no shares issued - -
Additional capital 53,109 51,470
Accumulated deficit (89,925) (76,557)
Other 725 930
----------------- ------------------
(36,072) (24,138)
Less - Notes receivable from stockholders (1,037) (1,037)
Series A preferred treasury stock, 85,738 shares (1) (1)
Class A common treasury stock, 869,630 shares (1) (1)
----------------- ------------------
Total Stockholders' Investment (37,111) (25,177)
----------------- ------------------
$ 175,081 $ 174,371
================= ==================
The accompanying notes are an integral part of these consolidated balance
sheets.
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WRIGHT MEDICAL TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except earnings per share)
(unaudited)
Three Months Ended Six Months Ended
------------------------------- -----------------------------
June 30, 1996 June 30, 1995 June 30, 1996 June 30, 1995
------------- ------------- ------------- -------------
Net sales $ 31,430 $ 31,521 $ 62,137 $ 64,604
Cost of goods sold 10,557 9,140 20,134 17,569
------------ ----------- ------------- ------------
Gross profit 20,873 22,381 42,003 47,035
------------ ----------- ------------- ------------
Operating expenses:
Selling 12,140 10,826 23,195 22,142
General and administrative 4,465 6,640 9,862 13,631
Research and development 3,251 3,143 6,299 6,088
------------ ----------- ------------- ------------
19,856 20,609 39,356 41,861
------------ ----------- ------------- ------------
Operating income 1,017 1,772 2,647 5,174
Interest, net 2,948 2,987 5,913 5,713
Other (income) expense, net (422) 31 (293) 313
------------ ----------- ------------- ------------
Loss before income taxes (1,509) (1,246) (2,973) (852)
Provision for income taxes - 293 25 293
------------ ----------- ------------- ------------
Net loss $ (1,509) $ (1,539) $ (2,998) $ (1,145)
============ =========== ============= ============
Loss applicable to common stock $ (6,688) $ (4,074) $ (13,368) $ (6,483)
============ =========== ============= ============
Loss per share of common stock $ (0.74) $ (0.46) $ (1.49) $ (0.74)
============ =========== ============= ============
Weighted average common shares outstanding 9,016 8,824 8,987 8,730
============ =========== ============= ============
The accompanying notes are an integral part of these statements.
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WRIGHT MEDICAL TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Six Months Ended
------------------------------------------
June 30, June 30,
1996 1995
------------------- ------------------
Cash Flows From Operating Activities:
Net loss $ (2,998) $ (1,145)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation 5,815 5,086
Provision for excess/obsolete inventory (475) (1,565)
Provision for sales returns (109) 248
Amortization of intangible assets 1,446 1,452
Amortization of deferred financing costs 702 431
Loss on disposal/abandonment of equipment 96 46
Other 165 -
Changes in assets and liabilities:
Trade receivables (2,549) (4,558)
Inventories (2,316) (6,456)
Other current assets 926 (708)
Accounts payable 423 3,621
Accrued expenses and other liabilities (3,829) (11,541)
Other assets (283) 94
Deferred income 870 -
------------------- ------------------
Net cash used in operating activities (2,116) (14,995)
------------------- ------------------
Cash Flows From Investing Activities:
Capital expenditures (3,951) (5,076)
Other (61) (581)
------------------- ------------------
Net cash used in investing activities (4,012) (5,657)
------------------- ------------------
Cash Flows From Financing Activities:
Net proceeds from short-term borrowings 5,875 20,500
Proceeds from issuance of stock and stock warrants 633 43
Payments of debt (228) (1,498)
Other (26) (15)
------------------- ------------------
Net cash provided by financing activities 6,254 19,030
------------------- ------------------
Net increase/(decrease) in cash and cash equivalents 126 (1,622)
Cash and cash equivalents, beginning of period 1,126 3,072
------------------- ------------------
Cash and cash equivalents, end of period $ 1,252 $ 1,450
=================== ==================
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest $ 5,205 $ 5,312
=================== ==================
Cash paid for income taxes $ - $ -
=================== ==================
The accompanying notes are an integral part of these statements.
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WRIGHT MEDICAL TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 1 - BASIS OF PRESENTATION
The consolidated financial statements as of June 30, 1996 and for the
three and six month periods ended June 30, 1996 and June 30, 1995 include the
accounts of Wright Medical Technology, Inc. and its wholly-owned domestic and
foreign subsidiaries (the "Company").
The accompanying unaudited financial information, in management's
opinion, includes all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the financial position, results of
operations and cash flows for the periods presented. The results of the periods
presented are not necessarily indicative of the results to be expected for the
full year.
The financial information has been prepared in accordance with the
instructions to Form 10-Q and, therefore, does not include all information and
footnote disclosures necessary for fair presentation of financial statements
prepared in accordance with generally accepted accounting principles. These
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
1995 Annual Report on Form 10-K.
NOTE 2 - INVENTORIES
Components of inventory are as follows (in thousands):
June 30, Dec. 31,
1996 1995
--------------------- -------------------
(unaudited)
Raw materials $ 2,011 $ 3,146
Work in process 9,149 10,971
Finished goods 48,640 40,698
--------------------- -------------------
Total $ 59,800 $ 54,815
===================== ===================
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NOTE 3 - ACCRUED EXPENSES
A detail of accrued expenses is as follows (in thousands):
June 30, Dec. 31,
1996 1995
------------------- -----------------
(unaudited)
Interest $ 4,663 $ 4,619
Employee benefits 1,720 2,350
Research & development 1,300 2,600
Professional fees 836 1,020
Commissions 1,582 1,385
Royalties 455 380
Taxes - other than income 976 1,194
Other 874 4,002
------------------- -----------------
Total $ 12,406 $ 17,550
=================== =================
NOTE 4 - LEGAL PROCEEDINGS
Substantial patent litigation among competitors occurs regularly in the
medical device industry. The Company assumed responsibility for certain patent
litigation in which the Company and/or Dow Corning and/or its former subsidiary,
Dow Corning Wright Corporation (collectively, "DCW") was a party. Those
proceedings in which the Company was a defendant have now been resolved.
DCW, pursuant to certain agreements, retains liability for matters
arising from conduct of DCW prior to the Company's acquisition on June 30, 1993,
of substantially all the assets of the large joint orthopaedic implant business
of DCW (the "Acquisition"). As such, DCW has agreed to indemnify the Company
against all liability for all products manufactured prior to the acquisition,
except for products provided under the Company's 1993 agreement with DCW
pursuant to which the Company purchased certain small joint orthopaedic implants
for worldwide distribution. However, the Company was notified in May 1995 that
DCW, which filed for reorganization under Chapter 11 of the U.S. Bankruptcy
Code, would no longer defend the Company in such matters until it received
further direction from the bankruptcy court. Accordingly, there can be no
assurance that DCW will indemnify the Company on any claims in the future.
Although the Company does not maintain insurance for claims arising on products
sold by DCW, management does not believe the outcome of any of these matters,
either singularly or in the aggregate, will have a material adverse effect on
the Company's financial position or results of operations.
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The Company is not involved in any other pending litigation of a
material nature or that would have a material adverse effect on the Company's
financial position or results of operations.
NOTE 5 - NEW ACCOUNTING PRONOUNCEMENTS
The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the impairment of long-lived assets and for
long-lived assets to be disposed of." The Company has determined that the
adoption of this statement does not have a material effect on its consolidated
financial position or operating results.
In October 1995, the FASB issued SFAS No. 123, "Accounting for
stock-based compensation." The Company will continue accounting for its
stock-based compensation plan in accordance with APB Opinion No. 25. However,
pursuant to SFAS No. 123, the Company will provide pro forma net income and pro
forma earnings per share information as if the fair value based accounting
method promulgated by SFAS No. 123 had been followed. This pro forma
information, along with other disclosures regarding the assumptions used in
determining fair value, will be provided, in the financial statements included
in the Company's 1996 annual report to be filed with the Securities and Exchange
Commission on Form 10-K. At this time, management has not quantified the effect
of applying this statement.
SUBSEQUENT EVENTS
On July 5, 1996, the Company received the second and final payment of
$1.5 million from Century Medical, Inc. in exchange for an additional 30,000
shares of Class A common stock and exclusive distribution rights in Japan.
On July 12, 1996, the Company entered into a joint venture with Tissue
Engineering, Inc. ("TEI") for the purpose of commercializing products for use in
the treatment of musculoskeletal problems. The Company will have an exclusive
world-wide distribution right to the products developed by the joint venture.
This joint venture was capitalized through a $1.5 million promissory note from
the Company in exchange for 49 percent of the joint venture's capital stock and
TEI contributed the license for the technology in exchange for 51 percent of the
joint venture's capital stock.
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ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
For the three months ended June 30, 1996, the Company's net sales were
$31.4 million as compared to $31.5 million for the same period in 1995. Net
sales for the six months ended June 30, 1996 were $62.1 million representing a
decrease in sales of $2.5 million compared to the same period in 1995. Although
total sales for the second quarter 1996 were essentially flat as compared to
second quarter 1995, new product line sales increased compared to prior year
sales for the period in trauma ($0.3 million), spine ($0.2 million) and
arthroscopy ($0.2 million), offset by sales declines in knees ($0.7 million) and
hips ($0.3 million). For the six month period ended June 30, 1996, net sales
decreased by $2.5 million as compared to the same period in 1995 due to
decreases in domestic sales of knees of $3.9 million and small joint products of
$0.5 million offset by increases in domestic sales of hips ($0.5 million),
trauma ($0.6 million), spine ($0.3 million), and arthroscopy ($0.5 million).
International sales for this same six month period increased by $0.1 million in
1996 versus 1995.
Selling
Selling expenses for the three months ended June 30, 1996, were $1.3
million (or approximately 12.1%) more than for the same period in 1995.
Primarily contributing to this increase were commissions that were $0.5 million
higher due to greater incentives and guarantees paid in 1996, and sales and
marketing expenses that were $0.6 million higher during the second quarter of
1996 due mainly to salaries and benefits ($0.2 million), instrument amortization
($0.6 million), and the distributor assistance program ($0.1 million) offset by
lower spending for international sales and marketing ($0.4 million) and less
travel and entertainment ($0.1 million). Selling expenses for the six months
ended June 30, 1996, as compared to the six months ended June 30, 1995, were
$1.1 million, or approximately 4.8%, higher. This increase was caused by several
factors including higher commission expense due to guarantees and incentives
exceeding those paid in the first half of 1995 by $0.9 million, and larger sales
and marketing expenses due to salaries and benefits ($0.4 million), and
instrument amortization ($0.6 million), offset by favorable variances in travel
and entertainment ($0.2 million), international sales and marketing ($0.4
million), and spending at the annual surgeon meeting in 1996 ($0.3 million).
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Cost of Sales
Cost of goods sold for the three months and six months ended June 30,
1996, increased $1.4 million (or approximately 15.5%) and $2.6 million (or
approximately 14.6%), respectively, over the same periods in the prior year. The
major contributor to the 1996 increase was a higher level of sales of fully
reserved products in 1995, that was not expected to recur and in fact did not
recur during the three and six months ended June 30, 1996. In 1994, reserves
were established for certain products that the Company did not expect to remain
viable in 1995 due to the acquisition of Orthomet, Inc. However, some of these
products continued to be sold in 1995 resulting in the reversal of inventory
reserves. Partially offsetting this was a decrease in 1996 cost of sales
resulting from the decreased level of sales in 1996.
General and Administrative
General and administrative expenses for the three months ended June 30,
1996, decreased $2.2 million, or approximately 32.8%, from the same period on
1995. For the six months ended June 30, 1996, general and administrative
expenses decreased $3.8 million, or approximately 27.7%. The decrease in the
second quarter expenses of 1996 as compared to 1995 is attributable to lower
management bonus accruals ($0.6 million), renegotiated (reduced) insurance costs
($0.3 million), reduced legal expenses associated with litigation and patent
applications ($0.1 million), decreased travel expenses ($0.9 million), lower
international administrative expenses ($0.3 million) and lower intangible
amortization expense ($0.3 million), offset by the Managed Care Division of the
Company ($0.4 million). The six month decrease of $3.8 million was due to
decreased travel expenses ($1.1 million), lower management bonus accruals ($1.0
million), lower intangible amortization expense ($0.6 million), renegotiated
insurance costs ($0.6 million), reduced international administrative expenses
($0.4 million) and reduced legal expenses ($0.4 million), which was offset by
the Managed Care Division ($0.8 million).
Research and Development
Research and development expenses of $3.3 million for the second
quarter of 1996 remained relatively flat compared to the second quarter of 1995.
The slight increase in the second quarter of 1996 was due mainly to higher
expenditures on research grants. For the six months ended June 30, 1996,
expenses were $6.3 million compared to $6.1 million in 1995. The increase of
$0.2 million was due to higher expenditures on research grants and
development efforts for a new hip prosthesis in France.
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Other
Other (income) expense for the three months and six months ended June
30, 1996, decreased $0.5 million and $0.6 million, respectively, over the same
periods in 1995. The change in both of these periods is due principally to a
gain on the sale of the corporate jet.
Interest expense increased $0.2 million, or approximately 3.5%, for the
six months ended June 30, 1996. The increase is due to the amortization of the
debt issuance cost incurred in issuing the Series C Preferred Stock. Also
affecting interest was a decrease in interest paid on funds under the Company's
$30 million revolving line of credit agreement with Heller Financial, Inc. (the
"Heller Agreement"), since borrowings were lower in the current year. This
benefit was offset by a reduced interest income related to a distributor
instrument program that was in place in 1995 but not in 1996. Although interest
expense for the three months ended June 30, 1996, decreased only slightly in
total compared to the same period in the prior year, the same factors affecting
the year-to-date increase also impacted the second quarter's expense but netted
to a minimal change.
For the three months and six months ended June 30, 1996, earnings
before interest, taxes, depreciation, and amortization ("EBITDA") is detailed in
the table below.
Three Months Six Months
Ended Ended
June 30,1996 June 30,1996
------------ ------------
Operating Income $ 1,017 $ 2,647
Depreciation and
Instrument Amortization 3,319 5,815
Amortization of Intangibles 709 1,446
Amortization of Other Assets 92 183
------------ ------------
EBITDA $ 5,137 $ 10,091
============ ============
Liquidity and Capital Resources
Since the DCW Acquisition, the Company's strategy has been to position
itself for the future through new product development and acquisition of new
technologies through license agreements, joint ventures and purchases of other
companies in the orthopaedic field. As anticipated, the Company's substantial
needs for working capital have been funded through the sale of $85 million of
senior debt securities and $15 million of equity at the time of the DCW
Acquisition, through the issuance of Series B Preferred Stock in 1994 to the
California Public Employees' Retirement System ($60 million), through the
issuance
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of Series C Preferred Stock to the Princes Gate purchasers in September of 1995
($35 million) (see Note 8 of the Company's 1995 annual report on Form 10-K), and
through borrowings on the Company's revolving line of credit, that are discussed
below.
The Company has available to it a $30 million revolving line of credit
under the Heller Agreement that provided an eligible borrowing base at June 30,
1996, of $28.0 million. As of August 7, 1996, the Company had drawn $12.6
million under this agreement. The Company's continued growth has resulted in an
increase in its capital requirements and the Company has been dependent upon the
Heller Agreement and other funding sources to meet working capital needs. During
the first half of 1996, borrowings under the Heller Agreement averaged $11.8
million with the maximum borrowed of $14.4 million, as compared to 1995 first
half of the year when borrowing reached a high of $22.6 million.
The Heller Agreement expires in September, 1996. The Company's projected
cash flow requirements for 1996 indicate that this or a similar revolving credit
agreement will again be needed to fund working capital needs. Management is in
the process of negotiating with several financial institutions, has received
several proposals as of August 7, and believes it will be successful in securing
a revolving credit arrangement that will meet the working capital needs of the
Company for the remainder of 1996. Although there can be no assurance that the
Company will be able to secure such financing on favorable terms, management
believes that based on the proposals it has received and the due diligence
conducted to date by these financial institutions the Company will be successful
in securing a revolving credit agreement to replace the Heller Agreement.
The Company's capitalization includes senior debt securities of $84.3
million and various series of preferred stock with an aggregate liquidation
value of $109.8 million at June 30, 1996. These securities currently bear
interest or dividend rates ranging from 10 3/4% to 12.1% and, in certain
circumstances, these rates can increase to 21.4%. As a result of the Company's
obligations to establish a sinking fund for its senior debt securities beginning
in July 1998 and its obligation to issue additional warrants to acquire common
stock in the event that the Series C Preferred Stock is not redeemed or there
has not otherwise been a qualified initial public offering on or before March
1999, the Company believes that it will be required to effect an initial public
offering of its common stock or some other form of a recapitalization plan to
satisfy these future obligations. There can be no assurance that the Company
will be able to effect such an offering or recapitalization on favorable terms,
if at all.
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At June 30, 1996, the Company had approximately $1.8 million in
outstanding capital commitments, of its total 1996 budgeted expenditures of
approximately $3.4 million for the purchase of machinery and related capital
equipment. Additionally, management expects to require additional capital to
fund the production of new or additional instruments, which is budgeted at $5.3
million for the remainder of 1996.
As of June 30, 1996, the Company had net working capital of $50.5 million,
compared with $45.2 million as of December 31, 1995. Of this $5.3 million growth
in working capital, $5.1 million is attributed to the decrease in accrued
liabilities. This decrease was due mainly to payments to OsteoBiologics, Inc.,
Dr. Leo Whiteside (per the Company's settlement agreement) and cost containment
measures initiated in 1996. There was a $5.0 million increase in inventory due
primarily to a reclassification from property, plant and equipment of $3.8
million of instruments built over the last two years for sale to distributors.
The increase in inventory is offset by the net of a $5.9 million increase in
short-term borrowings and a $0.6 million decrease in accounts payable.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
See Note 4. in the "NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS" On Page 7.
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) See Exhibit Index at page 16.
B) No reports on Form 8-K were filed during the quarter
for which this report on Form 10-Q is filed.
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 12, 1996 /s/Richard D. Nikolaev
------------------ -------------------------------------
Richard D. Nikolaev
President and Chief Executive Officer
Date: August 12, 1996 /s/George G. Griffin
------------------ -------------------------------------
George G. Griffin
Executive Vice President and
Chief Financial Officer
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Exhibit Index
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT PAGE
11.1 Statement regarding Computation of Earnings 17
Per Share
12.1 Statement regarding Computation of Ratio of 18
Earnings to Fixed Charges and Preferred
Dividends
27.1 Financial Data Schedule 19
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