UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One) FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
X THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 June 30,1998: 9,729,575
Page 1 of 20
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Wright Medical Technology, Inc. & Subsidiaries:
Consolidated Balance Sheets - June 30, 1998
and December 31, 1997..........................................3
Condensed Consolidated Statements of Operations
for the Three and Six Month Periods Ended
June 30, 1998 and June 30, 1997................................4
Consolidated Statements of Cash Flows for the
Six Month Periods Ended June 30, 1998 and
June 30, 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 20
WRIGHT MEDICAL TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1998 1997
-------------- -------------
(in thousands) (in thousands)
(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 600 $ 466
Trade receivables, net 18,322 19,040
Inventories, net 57,281 58,890
Prepaid expenses 1,807 1,716
Deferred income taxes 143 143
Other 1,623 1,890
----------- -----------
Total Current Assets 79,776 82,145
----------- -----------
Property, Plant and Equipment, net 23,791 26,732
Investment in Joint Venture 1,792 2,380
Other Assets 39,969 41,826
----------- -----------
$ 145,328 $ 153,083
=========== ============
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current Liabilities:
Current portion of long-term debt $ 647 $ 322
Short-term borrowing 19,250 18,500
Accounts payable 6,339 6,212
Accrued expenses and other current liabilities 15,832 16,745
----------- -----------
Total Current Liabilities 42,068 41,779
----------- -----------
Long-Term Debt 85,649 85,104
Preferred Stock Dividends 28,942 21,309
Other Liabilities 1,060 1,805
Deferred Income Taxes 143 143
----------- -----------
Total Liabilities 157,862 150,140
----------- -----------
Commitments and Contingencies
Mandatorily Redeemable Series B Preferred Stock, $.01 par value, (aggregate
liquidation value of $87.4 million, including accrued and unpaid dividends of
$7.4 million, 800,000 shares authorized, issued and outstanding) 71,547 70,511
Redeemable Convertible Series C Preferred Stock, $.01 par value, (aggregate
liquidation value of $46.6 million, including accrued and unpaid dividends of
$11.6 million, 350,000 shares authorized, issued and outstanding) 31,665 29,442
Stockholders' Investment:
Series A preferred stock, $.01 par value, (aggregate liquidation value of
$26.3 million, including accrued and unpaid dividends of $9.9 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,
10,620,200 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 57,729 57,545
Accumulated deficit (172,077) (153,025)
Other (377) (509)
----------- -----------
(114,705) (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, 890,630 shares (1) (1)
----------- -----------
Total Stockholders' Investment (115,746) (97,010)
----------- -----------
$ 145,328 $ 153,083
=========== ===========
The accompanying notes are an integral part of these consolidated balance sheets.
Page 3 of 20
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, 1998 June 30, 1997 June 30, 1998 June 30, 1997
Net sales $ 28,898 $ 32,130 $ 57,272 $ 64,383
Cost of goods sold 12,084 11,080 22,912 23,524
---------------- ----------------- ----------------- ----------------
Gross profit 16,814 21,050 34,360 40,859
---------------- ----------------- ----------------- ----------------
Operating expenses:
Selling 10,446 13,494 21,868 25,744
General and administrative 4,010 4,590 8,251 9,102
Research and development 2,394 3,235 4,824 6,172
Equity in loss of joint venture 302 275 588 592
---------------- ----------------- ----------------- ----------------
17,152 21,594 35,531 41,610
---------------- ----------------- ----------------- ----------------
Operating loss (338) (544) (1,171) (751)
Interest, net 3,636 3,153 7,241 6,227
Other expense (income), net 180 196 (247) 125
---------------- ----------------- ----------------- ----------------
Loss before income taxes (4,154) (3,893) (8,165) (7,103)
Provision for income taxes - - - -
---------------- ----------------- ----------------- ----------------
Net loss $ (4,154) $ (3,893) $ (8,165) $ (7,103)
================ ================= ================= ================
Loss applicable to common stock $ (10,125) $ (9,257) $ (19,057) $ (17,816)
================ ================= ================= ================
Basic loss per share of common stock $ (1.04) $ (1.01) $ (1.96) $ (1.94)
================ ================= ================= ================
Basic weighted average common shares outstanding 9,725 9,198 9,721 9,167
================ ================= ================= ================
The accompanying notes are an integral part of these statements.
Page 4 of 20
WRIGHT MEDICAL TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Six Months Ended
----------------------------------
June 30, June 30,
1998 1997
--------------- ----------------
Cash Flows From Operating Activities:
Net loss $ (8,165) $ (7,103)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation 3,241 3,328
Instrument amortization 2,204 2,881
Provision for instrument reserves 2,178 1,874
Provision for excess/obsolete inventory 1,911 1,471
Amortization of intangible assets 1,444 1,760
Amortization of deferred financing costs 694 694
Equity in loss of joint venture 588 592
Other 564 (838)
Changes in assets and liabilities
(Increase) Decrease in accounts receivable 668 (4,634)
Increase in inventories (2,735) (1,579)
Decrease in other current assets 175 349
Increase in accounts payable 128 480
Decrease in accrued expenses and other liabilities (829) (689)
Increase in other assets (120) (799)
--------------- ----------------
Net cash provided by (used in) in operating activities 1,946 (2,213)
--------------- ----------------
Cash Flows From Investing Activities:
Capital expenditures (2,288) (2,708)
Proceeds from sale-leaseback transaction 904 0
Other (1) (119)
--------------- ----------------
Net cash used in investing activities (1,385) (2,827)
--------------- ----------------
Cash Flows From Financing Activities:
Net proceeds from short-term borrowings 750 7,385
Payments of debt (1,181) (1,964)
Other 4 (57)
--------------- ----------------
Net cash provided by (used in) financing activities (427) 5,364
--------------- ----------------
Net increase in cash and cash equivalents 134 324
Cash and cash equivalents, beginning of period 466 910
--------------- ----------------
Cash and cash equivalents, end of period $ 600 $ 1,234
=============== ================
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest $ 6,213 $ 5,399
=============== ================
Cash paid for income taxes $ - $ -
=============== ================
The accompanying notes are an integral part of these statements.
Page 5 of 20
WRIGHT MEDICAL TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The consolidated financial statements as of June 30, 1998 and for the
three and six month periods ended June 30, 1998 and 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 20
operating losses. Earnings were inadequate to cover fixed charges, preferred
dividends and accretion of preferred stock by approximately $19.0 million for
the six months ended June 30, 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 20
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):
June 30, Dec. 31,
1998 1997
-------------------- ------------------
(unaudited)
Raw materials $ 2,858 $ 2,520
Work in process 9,402 10,716
Finished goods 32,441 33,312
Surgical instruments 12,580 12,342
-------------------- ------------------
Total $ 57,281 $ 58,890
==================== ==================
Page 8 of 20
NOTE 3 - ACCRUED EXPENSES
A detail of accrued expenses and other current liabilities is as
follows (in thousands):
June 30, Dec. 31,
1998 1997
-------------------- -----------------
(unaudited)
Interest $ 5,413 $ 5,205
Employee benefits 1,496 1,123
Joint Venture 1,229 1,500
Commissions 1,358 1,278
Taxes 900 988
Professional fees 1,854 2,731
Other 3,582 3,920
-------------------- -----------------
Total $ 15,832 $ 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
losses totaled $8.5 million and $7.8 million for the six months ended June 30,
1998 and 1997 respectively. The difference between net income and comprehensive
income is due primarily to foreign currency translation.
Page 9 of 20
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.
Results for the second quarter of 1998 were slightly below expectations
due to softer sales of the Company's ADVANTIM(R) knee products and despite
increases in the sales of the Company's new ADVANCE(R) Knee. Launch quantities
of the new cemented primary components of the ADVANCE(R) Knee were released in
the last week of the quarter and should begin to add revenue in the third and
fourth quarters. For both the second quarter and the first six months of 1998,
sales of the Company's core hip, extremity and biologics business increased
significantly over the prior year period. Sales of products in the spine and
arthroscopy businesses declined slightly in the second quarter (and for the
first six months) after the Company announced its intention to divest those
product lines. The Company expects to close the sale of its trauma business in
the third quarter.
The Company also continued to gain efficiencies and reduce costs as
operating expenses dropped 20% or $4.4 million for the second quarter and 15% or
$6.0 million in the first six months compared to the prior year periods.
Expenses were reduced in all areas of the business.
Page 10 of 20
Results of Operations
The Company's net sales for the quarter ended June 30, 1998 were $28.9
million as compared to $32.1 million for the same period in the prior year.
Sales of knees were $4.4 million lower for the quarter ended June 30, 1998 when
compared to the same period in the previous year primarily attributable to
softness in ADVANTIM(R) knee sales. Sales of the ADVANCE(R) knee, OSTEOSET(R),
and hip products increased when compared to the same period in 1997.
International sales were $9.3 million for the second quarter of 1998, up
slightly over the second quarter of 1997.
Domestic sales declined by $3.4 million for the quarter ended June 30,
1998 when compared to the same quarter for the prior year.
Cost of Sales
Cost of sales for the three months ended June 30, 1998 increased by
$1.0 million when compared to the same period in 1997. Cost of sales for the six
months ended June 30, 1998 decreased by $0.6 million when compared to the same
period in 1997. Global gross margins decreased 3.5% for the six months ended
June 30, 1998 due primarily to additional inventory reserving.
Selling, G & A
Selling expenses for the three months ended June 30, 1998 were $10.4
million representing a decrease of $3.0 million when compared to the same period
in 1997 while general and administrative expenses for the three month period
ended June 30, 1998 were $4.0 million, a decrease of $0.6 million from the same
period in 1997. Decreases were a result of lower salaries, wages and benefits
expenses as well as reduced travel expenses. Further, reduced instrument
amortization as well as the termination of the Outcome Medical, Inc. Asset
Purchase Agreement ("OMI") attributed to the favorable variance in selling
expenses. Reduced intangible amortization contributed to the favorable variance
in general and administrative expenses.
Page 11 of 20
Research and Development
Research and development expenses were $2.4 million for the second
quarter of 1998 down $0.8 million when compared to the second quarter of 1997.
This decrease was primarily attributable to decreases in salaries, wages and
benefits, outside services expense and depreciation expense.
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 June 30, 1998. The joint venture continues to develop
collagen based products.
Interest expense, net of interest income, was $3.6 million for the
quarter ended June 30, 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.
For the three and six month periods ended June 30, 1998 earnings before
interest, taxes, depreciation, and amortization ("EBITDA") are detailed in the
table below.
Three Six
Months Months
Ended Ended
June 30, June 30,
1998 1998
-------------- ---------------
Operating Loss $ (337) $ (1,171)
Depreciation and Instrument Amortization 2,223 5,445
Provision for Instrument Reserves 1,089 2,178
Provision for Excess/Obsolete Inventory 1,088 1,911
Amortization of Intangibles/Other Assets 852 1,711
Stock Contribution 208 427
Other Non Cash Addbacks 104 179
-------------- ---------------
EBITDA after Certain Adjustments $ 5,227 $ 10,680
============== ===============
Page 12 of 20
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 with Sanwa Business Credit Corporation (the "Credit Agreement").
Under the Credit Agreement, the Company has available to it a $30
million revolving line of credit which provided an eligible borrowing base at
June 30, 1998 of $26.7 million. Effective July 1, 1998 the terms of the Credit
Agreement were modified to provide an eligible borrowing base of $28.8 million
and to reduce the fixed charge cover ratio through the third quarter. As of June
30, 1998, the Company had drawn $19.2 million against this line of credit. The
Company's operating cash flow for the first half of 1998, net of its semi-annual
interest obligation paid on January 2, 1998, was positive. The Company's
interest obligations to the holders of the senior debt securities have resulted
in a continued dependence on the Credit Agreement and other funding sources to
meet working capital needs. During the first half of 1998, borrowing under the
Sanwa Agreement reached a high of $25.2 million on April 16, 1998.
Since inception, the Company has incurred significant operating
deficits which are anticipated to continue 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 $160.3 million including accrued but unpaid dividends of $28.9 million
at June 30, 1998. These
Page 13 of 20
securities currently bear interest or dividend rates ranging from 10.0% to
21.0%.
At June 30, 1998, the Company had spent approximately $2.3 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 June 30, 1998, the Company had net working capital (current
assets less current liabilities) of $37.7 million, compared with $40.4 million
as of December 31, 1997. The $2.7 million decline includes $0.8 million growth
in short term borrowings against the Company's line of credit, $0.3 million
increase in current portion of long term debt, $0.7 million decrease in trade
receivables, $1.6 million decrease in inventory, $0.3 million decrease in other
current assets, offset by $0.9 million decrease in accrued expenses and other
current liabilities.
Page 14 of 20
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 17.
B) No reports on Form 8-K were filed during the
quarter for which this report on Form 10-Q is
filed.
Page 15 of 20
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 11, 1998 /s/Thomas M. Patton
Thomas M. Patton
President and Chief Executive Officer
Date: August 11, 1998 /s/Greg K. Butler
Greg K. Butler
Executive Vice President and
Chief Financial Officer
Page 16 of 20
Exhibit Index
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT PAGE
11.1 Statement regarding Computation of 18
Earnings Per Share
12.1 Statement regarding Computation of Ratio 19
of Earnings to Fixed Charges and
Preferred Dividends
27.1 Financial Data Schedule 20
Page 17 of 20