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 March 31, 1998
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 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 (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
Number of shares outstanding of Class A Common Stock, par value
$.001 at April 30,1998: 9,720,075
Page 1 of 21
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Wright Medical Technology, Inc. & Subsidiaries:
Consolidated Balance Sheets - March 31, 1998
and December 31, 1997..............................................3
Condensed Consolidated Statements of Operations
for the Three Month Periods Ended March 31, 1998
and March 31, 1997.................................................4
Consolidated Statements of Cash Flows for the
Three Month Periods Ended March 31, 1998 and
March 31, 1997.....................................................5
Notes to Consolidated Financial Statements.........................6
ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.................................10
Page 2 of 21
WRIGHT MEDICAL TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1998 1997
-------------------- --------------------
(in thousands) (in thousands)
(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 474 $ 466
Trade receivables, net 19,195 19,040
Inventories, net 57,898 58,890
Prepaid expenses 2,485 1,716
Deferred income taxes 143 143
Other 1,617 1,890
-------------------- --------------------
Total Current Assets 81,812 82,145
-------------------- --------------------
Property, Plant and Equipment, net 24,189 26,732
Investment in Joint Venture 2,094 2,380
Other Assets 40,921 41,826
-------------------- --------------------
$ 149,016 $ 153,083
==================== ====================
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current Liabilities:
Current portion of long-term debt $ 395 $ 322
Short-term borrowing 23,100 18,500
Accounts payable 5,456 6,212
Accrued expenses and other current liabilities 13,117 16,745
-------------------- --------------------
Total Current Liabilities 42,068 41,779
-------------------- --------------------
Long-Term Debt 85,260 85,104
Preferred Stock Dividends 24,601 21,309
Other Liabilities 1,237 1,805
Deferred Income Taxes 143 143
-------------------- --------------------
Total Liabilities 153,309 150,140
-------------------- --------------------
Commitments and Contingencies
Mandatorily Redeemable Series B Preferred Stock, $.01 par value, (aggregate
liquidation value of $85.2 million, including accrued and unpaid dividends of
$5.2 million, 800,000 shares authorized, issued and outstanding) 71,029 70,511
Redeemable Convertible Series C Preferred Stock, $.01 par value, (aggregate
liquidation value of $45.6 million, including accrued and unpaid dividends of
$10.6 million, 350,000 shares authorized, issued and outstanding) 30,553 29,442
Stockholders' Investment:
Series A preferred stock, $.01 par value, (aggregate liquidation value of
$25.2 million, including accrued and unpaid dividends of $8.8 million),
1,200,000 shares authorized, 915,325 shares issued 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,
10,610,200 and 10,585,000 shares issued 11 11
Class B common stock, $.01 par value, 1,000,000 shares authorized,
no shares issued - -
Additional capital 57,623 57,545
Accumulated deficit (161,952) (153,025)
Other (525) (509)
-------------------- --------------------
(104,834) (95,969)
Less - Notes receivable from stockholders (1,039) (1,039)
Series A preferred treasury stock, 86,688 shares (1) (1)
Class A common treasury stock, 889,880 shares (1) (1)
-------------------- --------------------
Total Stockholders' Investment (105,875) (97,010)
-------------------- --------------------
$ 149,016 $ 153,083
==================== ====================
The accompanying notes are an integral part of these consolidated balance sheets.
Page 3 of 21
WRIGHT MEDICAL TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except earnings per share)
(unaudited)
Three Months Ended
---------------------------------------------------------
March 31, 1998 March 31, 1997
Net sales $ 28,374 $ 32,253
Cost of goods sold 10,827 12,444
-------------------- ---------------------
Gross profit 17,547 19,809
-------------------- ---------------------
Operating expenses:
Selling 11,423 12,250
General and administrative 4,241 4,512
Research and development 2,430 2,937
Equity in loss of joint venture 286 317
-------------------- ---------------------
18,380 20,016
-------------------- ---------------------
Operating loss (833) (207)
Interest, net 3,605 3,074
Other income, net (427) (71)
-------------------- ---------------------
Loss before income taxes (4,011) (3,210)
Provision for income taxes - -
-------------------- ---------------------
Net loss $ (4,011) $ (3,210)
==================== =====================
Loss applicable to common stock $ (8,933) $ (8,560)
==================== =====================
Basic loss per share of common stock $ (0.92) $ (0.93)
==================== =====================
Basic weighted average common shares outstanding 9,718 9,168
==================== =====================
The accompanying notes are an integral part of these statements.
Page 4 of 21
WRIGHT MEDICAL TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three Months Ended
------------------------------------
March 31, March 31,
1998 1997
---------------- ----------------
Cash Flows From Operating Activities:
Net loss $ (4,011) $ (3,210)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation 1,694 1,643
Instrument amortization 1,528 1,385
Provision for instrument reserves 1,089 1,003
Provision for excess/obsolete inventory 823 926
Amortization of intangible assets 725 838
Amortization of deferred financing costs 347 346
Equity in loss of joint venture 286 317
Other 179 (107)
Changes in assets and liabilities, net of effect of
purchases of businesses
Increase in accounts receivables (154) (2,845)
Increase in inventories (1,065) (128)
(Increase) decrease in other current assets (496) 208
Decrease in accounts payable (756) (240)
Decrease in accrued expenses and other liabilities (3,757) (4,836)
(Increase) decrease in other assets (126) 570
---------------- ----------------
Net cash used in operating activities (3,694) (4,130)
---------------- ----------------
Cash Flows From Investing Activities:
Capital expenditures (562) (1,257)
Proceeds from sale-leaseback transaction 304 -
Other - (723)
---------------- ----------------
Net cash used in investing activities (258) (1,980)
---------------- ----------------
Cash Flows From Financing Activities:
Net proceeds from short-term borrowings 4,600 6,460
Payments of debt (643) (78)
Other 3 (60)
---------------- ----------------
Net cash provided by financing activities 3,960 6,322
---------------- ----------------
Net increase in cash and cash equivalents 8 212
Cash and cash equivalents, beginning of period 466 910
---------------- ----------------
Cash and cash equivalents, end of period $ 474 $ 1,122
================ ================
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest $ 5,542 $ 4,922
================ ================
Cash paid for income taxes $ - $ -
================ ================
The accompanying notes are an integral part of these statements.
Page 5 of 21
WRIGHT MEDICAL TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - BASIS OF PRESENTATION
The consolidated financial statements as of March 31, 1998 and for the
three month periods ended March 31, 1998 and March 31, 1997 include the accounts
of Wright Medical Technology, Inc. and its wholly-owned domestic and foreign
subsidiaries and joint ventures ("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
1997 Annual Report on Form 10-K.
Significant Risks and Uncertainties -
Inherent in the accompanying financial statements are certain risks and
uncertainties which include, but are not limited to, the following:
Significant Leverage
The Company is, and will continue to be, highly leveraged. The Company has
incurred substantial indebtedness as a result of its acquisitions, new product
research and development and
Page 6 of 21
operating losses. Earnings were inadequate to cover fixed charges, preferred
dividends and accretion of preferred stock by approximately $8.9 million for the
quarter ended March 31, 1998. The Company's high level of debt may have several
important effects on its future operations, including the following: (i) a
substantial portion of the Company's cash flow from operations must be dedicated
to the payment of interest on its indebtedness; (ii) the financial covenants
contained in its debt facilities will require the Company to meet certain
financial tests and other restrictions which limit its ability to borrow
additional funds or to dispose of assets; and (iii) the Company's ability to
obtain additional financing in the future for working capital, capital
expenditures, acquisitions, general corporate purposes or other purposes may be
impaired. In addition, the Company's ability to meet its debt service
obligations and to reduce its total debt will be dependent upon the Company's
future performance, which will be subject to general economic conditions and to
financial, business and other factors affecting the operations of the Company,
many of which are beyond its control. There can be no assurance that the
Company's future performance will not be adversely affected by such economic
conditions and financial, business and other factors.
Ability to Develop, Manufacture and Market New Products
Some of the Company's products are currently under development or have not
yet been approved by the Food and Drug Administration ("FDA") (or other
applicable foreign regulatory bodies). Although management believes these
products will be successfully developed, that the necessary FDA or foreign
approvals will be received and, if developed and approved, a market for these
products will exist, there can be no assurance that such events will happen. In
order for the Company to remain competitive and to retain market share, it must
continually develop new products as well as improve its existing ones.
Accordingly, the Company must devote substantial resources to research and
development. Although the Company intends to devote such resources, there can be
no assurance that the Company will be able to enhance its existing products,
introduce or acquire new products, and maintain or expand its market share.
Page 7 of 21
Patent Protection and Related Litigation
Management considers certain of its patents to be significant to its
business. In the medical device industry, patent litigation among competitors
occurs regularly. Additionally, the process of obtaining and protecting patents,
including defending allegations of patent infringement, can be costly and
time-consuming.
Ability to Forecast and Manage Working Capital Requirements
The Company remains significantly dependent on its revolving credit
facility. Various factors, including delays in new product development and
introductions, new product introduction by competitors, delays in regulatory
approvals and delays in the expansion of sales and distribution channels can
significantly affect management's ability to accurately forecast and manage its
working capital requirements.
NOTE 2 - INVENTORIES
Components of inventory are as follows (in thousands):
March 31, Dec. 31,
1998 1997
-------------------- ------------------
(unaudited)
Raw materials $ 2,660 $ 2,520
Work in process 9,768 10,716
Finished goods 33,524 33,312
Surgical instruments 11,946 12,342
-------------------- ------------------
Total $ 57,898 $ 58,890
==================== ==================
Page 8 of 21
NOTE 3 - ACCRUED EXPENSES
A detail of accrued expenses is as follows (in thousands):
March 31, Dec. 31,
1998 1997
-------------------- -----------------
(unaudited)
Interest $ 2,888 $ 5,205
Employee benefits 1,259 1,123
Joint Venture 1,500 1,500
Commissions 1,537 1,278
Taxes 847 988
Professional fees 1,593 2,731
Other 3,493 3,920
-------------------- -----------------
Total $ 13,117 $ 16,745
==================== =================
NOTE 4 - LEGAL PROCEEDINGS
No material developments occurred in the Company's legal proceedings in the
period covered by this report.
NOTE 5 - COMPREHENSIVE INCOME
The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income", in June 1997. Comprehensive income is defined as the change in equity
during a period related to transitions and other events and circumstances from
nonowner sources. It includes all changes in equity during a period except those
resulting from investments by owners and distributions to owners. Comprehensive
income totaled $4,544 and $3,131 for the three months ended March 31, 1998 and
March 31, 1997 respectively. The difference between net income and comprehensive
income is due primarily to foreign currency translation. This statement is
effective for fiscal years beginning after December 15, 1997.
Page 9 of 21
ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
This discussion includes forecasts and projections that are forward looking
statements based upon management's current expectations of the Company's near
term results and based upon currently available information pertaining to the
Company. Actual future results and trends may differ materially depending on a
variety of factors, including competition in the marketplace, changing market
conditions, demographic trends, product research and development, government
approvals, government reimbursement schedules and other factors. The Company
assumes no obligation for updating any such forward looking statements.
In early 1998, with the introduction of new management, the Company
modified its strategic plan and will focus its resources in its business
segments with the greatest potential for return including its knee and hip
(large joint) business segments, its extremity business (products for the
shoulders, arms, hands and feet) and its growing business related to its
biological product line. Consistent with this plan, the Company will attempt to
divest the assets related to its spine, trauma and arthroscopy businesses. In
March 1998, the Company signed a letter of intent to sell its trauma assets.
Sales for the first quarter of 1998 were below the same period of the prior
year due primarily to softened global knee implant sales of the Company's
ADVANTIM(R) knee system and continued significant discounting. The ADVANTIM(R)
knee system, which has a 16 year successful clinical history, is considered by
the Company to be a superior system in the market place. All other major product
lines including the Company's new ADVANCE(R) knee system and its hip and
extremity products were above prior year. The Company believes that the
ADVANCE(R) knee will play a critical role in its future growth. Full commercial
launch of the very unique medial pivot product is expected in third quarter
1998. Sales of OSTEOSET(R), a bone graft substitute, continued to
Page 10 of 21
exceed the Company's expectations.
The Company recently implemented cost saving plan began to have an impact
as the Company realized operating expense savings of 8% or $1.6 million when
compared to the same period in the prior year. Further, the first quarter
included $0.5 million of severance, outplacement, and legal expenses which are
considered non recurring.
Results of Operations
The Company's net sales for the quarter ended March 31, 1998 were $28.4
million as compared to $32.3 million for the same period in the prior year.
Sales of knees were $5.6 million lower for the quarter ended March 31, 1998 when
compared to the same period in the previous year primarily attributable to a
decline in ADVANTIM(R) Knee sales. Sales of the ADVANCE(R) knee, OSTEOSET(R),
hips, SJO and spine increased when compared to the same period in 1997.
International sales were $7.0 million for the first quarter of 1998, which
was a decrease of $2.2 million when compared to the first quarter of 1997. The
international sales decrease was mainly attributable to the 1997 first quarter
change of the Company's Australian distribution from a consignment to a stocking
distributor.
Domestic sales declined by $1.7 million for the period ended March 31, 1998
when compared to the same period for the prior year. The Company's domestic
sales decline was primarily due to decreases in the ADVANTIM(R) knee systems
offset by increases in ADVANCE(R) knee systems and OSTEOSET(R) products.
Cost of Sales
Cost of sales for the three month period ended March 31, 1998 decreased by
$1.6 million when compared to the same period in 1997. The cost of sales
decrease was primarily attributable to the decline in trade sales. Gross margins
improved marginally from 61.4% to approximately 61.8% of sales.
Page 11 of 21
Selling, G & A
Selling expenses of $11.4 million decreased in 1998 by $0.8 million when
compared to the same period in 1997 while general and administrative expenses
for the three month period ended March 31, 1998 were $4.2 million, down $0.3
million from the same period in 1997 primarily as a result of lower salaries,
wages and benefits expenses.
Research and Development
Research and development expenses were $2.4 million for the first quarter
of 1998 down $0.5 million when compared to the first quarter of 1997. This
decrease was primarily attributable to decreases in salaries, wages and
benefits.
Other
Equity in loss of investment of $0.3 million represented the Company's 50%
share of expenses incurred by its joint venture with Tissue Engineering, Inc.
for the quarter ended March 31, 1998. The joint venture continues to develop a
collagen based tissue patch, a collagen and calcium phosphate based bone cement,
and a collagen based ligament prosthesis.
Interest expense, net of interest income, was $3.6 million for the period
ended March 31, 1998 representing an increase of $0.5 million when compared to
the same period in 1997. This increase was primarily due to the higher interest
rate charged on the Series D Senior Secured Step-Up Notes and an increased
balance on the Company's line of credit.
Other income/expense increased to $0.4 million in income for the period
ended March 31, 1998 from $0.1 million in income for the same period in 1997.
This favorable swing was primarily due to the reversal of a product liability
reserve associated with the purchase of Orthomet.
Page 12 of 21
For the three month periods ended March 31, 1998 and 1997 earnings before
interest, taxes, depreciation, and amortization ("EBITDA") are detailed in the
table below.
March 31,
--------------------------------------
1998 1997
--------------- ----------------
Operating Income $ (833) $ (207)
Depreciation and Instrument Amortization 3,222 3,028
Provision for Instrument Reserves 1,089 1,003
Provision for Excess/Obsolete Inventory 823 926
Amortization of Intangibles 725 838
Amortization of Other Assets 133 133
Stock Contribution 219 -
Other Non Cash Addbacks 75 104
--------------- ----------------
EBITDA after Certain Adjustments $ 5,453 $ 5,825
=============== ================
Liquidity and Capital Resources
Since the DCW Acquisition, the Company's strategy has been to position
itself for growth through new product development and the 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 of Series C Preferred Stock to the Princes Gate purchasers in September
1995 ($35 million), and through borrowings on the Company's revolving line of
credit.
Under the Sanwa Agreement, the Company has available to it a $30 million
revolving line of credit which provided an eligible borrowing base at March 31,
1998 of $29.0 million. As of March 31, 1998, the Company had drawn $23.1 million
against this line of credit. The Company's operating cash flow for the first
Page 13 of 21
quarter of 1998, net of its semi-annual interest obligation paid on January 2,
1998, was positive. The Company's strategy and its interest obligations to its
noteholders have resulted in a continued dependence on the Sanwa Agreement and
other funding sources to meet working capital needs. During the first quarter,
borrowing under the Sanwa Agreement reached $27.4 million compared to the same
period in 1997 when borrowings reached $16.8 million.
Since the inception of the Company, a deficit has been recognized and is
anticipated during 1998. Additionally, the Company's projected working capital
requirements for 1998 indicate a continued reliance on its revolving credit
facility.
The Company's capitalization includes senior debt securities of $84.6
million and various series of preferred stock with an aggregate liquidation
value of $156.1 million including accrued but unpaid dividends of $24.6 million
at March 31, 1998. These securities currently bear interest or dividend rates
ranging from 10.0% to 21.0%.
At March 31, 1998, the Company had spent approximately $0.6 million in
capital expenditures, and has budgeted expenditures for 1998 of approximately
$4.5 million for the acquisition of machinery and related capital equipment.
In assessing the impact of the "Year 2000" on the Company's information
systems, as well as other information system needs, management has signed a
software license and services agreement with PeopleSoft, Inc. First, management
will upgrade its current system. This will mitigate any Year 2000 issues
allowing time for a proper transition to PeopleSoft. Currently, management
estimates the cost of new information system software to approximate $1.75
million, the majority of which will be incurred in 1999.
As of March 31, 1998, the Company had net working capital (current assets
less current liabilities) of $39.7 million, compared with $40.4 million as of
December 31, 1997. The $0.7 million decline includes $4.6 million growth in
short term borrowings against the Company's line of credit, $1.0 million
decrease in inventory, $0.3 million decrease in other current assets, offset by
$3.6 million decrease in accrued expenses and
Page 14 of 21
other current liabilities, $0.8 million increase in prepaid expenses and $0.8
million decrease in accounts payable.
Page 15 of 21
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
No material developments occurred in the Company's
legal proceedings in the period covered by this
report.
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 18.
B) No reports on Form 8-K were filed during the
quarter for which this report on Form 10-Q is
filed.
Page 16 of 21
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: May 4, 1998 /s/Thomas M. Patton
Thomas M. Patton
President and Chief Executive Officer
Date: May 4, 1998 /s/Greg K. Butler
Greg K. Butler
Executive Vice President and
Chief Financial Officer
Page 17 of 21
Exhibit Index
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT PAGE
11.1 Statement regarding Computation of 19
Earnings Per Share
12.1 Statement regarding Computation of Ratio 20
of Earnings to Fixed Charges and
Preferred Dividends
27.1 Financial Data Schedule 21
Page 18 of 21