AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 13, 1996
REGISTRATION NO. 333-02980
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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EXACTECH, INC.
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
FLORIDA 3842 59-2603930
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
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<S> <C>
WILLIAM PETTY, M.D.
CHAIRMAN OF THE BOARD
AND CHIEF EXECUTIVE OFFICER
EXACTECH, INC.
4613 N.W. 6TH STREET 4613 N.W. 6TH STREET
GAINESVILLE, FLORIDA 32609 GAINESVILLE, FLORIDA 32609
(352) 377-1140 (352) 377-1140
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICE) INCLUDING AREA CODE, OF AGENT FOR SERVICE)
</TABLE>
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COPY OF COMMUNICATIONS TO:
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TEDDY D. KLINGHOFFER, ESQ.
CARL D. ROSTON, ESQ.
GARY EPSTEIN, ESQ. STEARNS WEAVER MILLER WEISSLER
GREENBERG, TRAURIG, HOFFMAN, ALHADEFF & SITTERSON, P.A.
LIPOFF, ROSEN & QUENTEL, P.A. MUSEUM TOWER, SUITE 2200
1221 BRICKELL AVENUE 150 WEST FLAGLER STREET
MIAMI, FLORIDA 33131 MIAMI, FLORIDA 33130
(305) 579-0500 (305) 789-3200
(FACSIMILE) (305) 579-0717 (FACSIMILE) (305) 789-3395
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities
Act of 1933, check the following box: [x]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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<PAGE>
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<CAPTION>
EXACTECH, INC.
(Cross Reference Sheet Pursuant to Item 501 of Regulation S-K)
ITEM
NO. Form S-1 Caption Heading in Prospectus
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<S> <C> <C>
1. Forepart of the Registration Statement and
Outside Front Cover Page
of Prospectus Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages
of Prospectus Inside Front and Outside Back Cover Pages
3. Summary Information and Risk Factors Prospectus Summary; Risk Factors
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price Cover Page; Underwriting
6. Dilution Risk Factors; Dilution
7. Selling Security Holders *
8. Plan of Distribution Cover Page; Underwriting
9. Description of Securities to
be Registered Description of Securities; Dividend Pollicy
10. Interests of Named Experts
and Counsel *
11. Information With Respect to the Prospectus Summary; Risk Factors;
Registrant Dividend Policy; Capitalization; Selected
Financial Data; Management's Discussion and
Analysis of Financial Condition and Results of
Operations; Business; Management; Principal
Shareholders; Certain Transactions; Description
of Securities; Shares Eligible for Future Sale;
Financial Statements
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities *
</TABLE>
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* Omitted because response is negative or inapplicable.
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of
any such State.
SUBJECT TO COMPLETION, DATED MAY 13, 1996
P R O S P E C T U S
1,600,000 SHARES
[Logo]
COMMON STOCK
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Exactech, Inc. (the "Company") hereby offers 1,600,000 shares of common
stock, $.01 par value ("Common Stock"). Prior to this offering, there has
been no public market for the Common Stock and there can be no assurance that
any such market will develop. It is anticipated that the initial public
offering price will be between $6.75 and $8.75 per share. See "Underwriting"
for a discussion of the factors considered in determining the initial public
offering price. The Company intends to make an application to include the
Common Stock on the NASDAQ National Market System under the symbol "EXAC."
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THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" ON PAGES 6 THROUGH 14.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
PRICE TO Underwriting Discounts and Proceeds to
PUBLIC Commissions(1) Company(2)(3)
Per Share $ $ $
Total(3) $ $ $
</TABLE>
(1) Excludes additional compensation to First Equity Corporation of Florida,
as representative (the "Representative") of the several underwriters
named herein (the "Underwriters"), in the form of a non-accountable
expense allowance equal to 2% of the gross proceeds of the offering.
Additionally, the Company has agreed to pay certain additional
compensation to the Representative and has agreed to indemnification and
contribution arrangements with the Underwriters. See "Underwriting."
(2) Before deducting expenses of the offering, payable by the Company,
estimated to be $ or $ if the Underwriters' over-allotment option
is exercised in full, including the 2% non-accountable expense allowance
payable to the Representative.
(3) The Company has granted the Underwriters an option to purchase up to an
additional 240,000 shares of Common Stock, upon the same terms as set
forth above, solely to cover over-allotments, if any. See "Underwriting."
If the over-allotment option is exercised in full, the total Price to
Public, Underwriting Discounts and Commissions, and Proceeds to Company
will be $ , $ and $ , respectively.
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The Common Stock is offered by the several Underwriters, subject to prior
sale, when, as, and if delivered to and accepted by them, subject to their
right to reject orders in whole or in part and to certain other conditions.
It is expected that delivery of the shares will be made against payment
therefor on or about ____________, 1996.
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FIRST EQUITY CORPORATION
THE DATE OF THIS PROSPECTUS IS , 1996
<PAGE>
[INSERT GRAPHIC]
Picture of Orthopaedic knee implant.
The Company believes that the Optetrak/registered trademark/ knee system
represents a new generation of knee implants with an advanced design that
provides superior motion and stability.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET. STABILIZING IF
COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
The Company is not currently subject to the reporting requirements of the
Securities Exchange Act of 1934. After consummation of this offering, the
Company intends to furnish its shareholders with annual reports containing
audited financial statements certified by its independent public accountants.
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
MORE DETAILED INFORMATION, AND THE FINANCIAL STATEMENTS AND NOTES THERETO,
APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, ALL SHARE
AND PER SHARE DATA IN THIS PROSPECTUS (I) HAS BEEN ADJUSTED TO REFLECT A 3
FOR 4 REVERSE STOCK SPLIT EFFECTED IN MARCH 1996 AND THE ISSUANCE OF 13,548
SHARES OF COMMON STOCK PURSUANT TO THE AUTOMATIC CONVERSION OF THE SERIES B
PREFERRED STOCK OF THE COMPANY UPON CONSUMMATION OF THIS OFFERING, (II)
ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION, THE
REPRESENTATIVE'S WARRANTS OR OUTSTANDING WARRANTS, OPTIONS OR OTHER
CONVERTIBLE SECURITIES AND (III) ASSUMES AN INITIAL PUBLIC OFFERING PRICE OF
$7.75 PER SHARE. CERTAIN TERMS USED HEREIN ARE DEFINED IN THE GLOSSARY ON
PAGES 54 TO 56 OF THIS PROSPECTUS.
THE COMPANY
Exactech, Inc. (the "Company") develops, manufactures, markets and sells
orthopaedic implant devices and related surgical instrumentation to hospitals
and physicians in the United States and overseas. The Company's orthopaedic
implant products are used to replace joints which have deteriorated as a
result of injury or diseases such as arthritis.
Prior to 1995, the Company's revenues were derived primarily from sales of
its primary hip replacement systems. During 1995, the Company introduced
Optetrak/registered trademark/, a total primary knee replacement system,
which had been in development for three years. The Optetrak/registered
trademark/ knee system was conceived by the Company in collaboration with
members of its Scientific Advisory Board in cooperation with the Hospital for
Special Surgery, an internationally known hospital for orthopaedic surgery.
The Optetrak/registered trademark/ system represents a highly differentiated
product based on precision manufacturing techniques and a design which
reduces articular contact stress. The Optetrak/registered trademark/ system
is the most modern rendition of a series of knee implants which were first
introduced in 1974 and are still being marketed by certain of the Company's
competitors. The Company has entered into an agreement with the Hospital for
Special Surgery which gives the Company a non-exclusive option with respect
to future knee systems developed at the Hospital for Special Surgery. The
Company anticipates the full scale marketing of its existing line of knee
systems in 1996 as well as the development of a shoulder replacement system
for introduction in 1998.
The Company's strategy has been to utilize members of its Scientific
Advisory Board, consisting of physicians and biomechanists affiliated with
major medical facilities and academic institutions, in the design process to
facilitate the development of high quality products at cost-effective prices.
The Company believes this strategy permits the Company to quickly identify
and respond to the demands of orthopaedic surgeons.
The Company was incorporated under the laws of the State of Florida in
November 1985. The Company's principal executive office is located at 4613
N.W. 6th Street, Gainesville, Florida 32609, and its telephone number is
(352) 377-1140.
3
<PAGE>
THE OFFERING
<TABLE>
<CAPTION>
<S> <C>
COMMON STOCK OFFERED .................................... 1,600,000 SHARES
Common Stock Outstanding Prior to this Offering ...... 2,962,149 shares(1)
Common Stock to be Outstanding after this Offering ... 4,575,697 shares(1)(2)
Use of Proceeds ....................................... The Company intends to apply the net proceeds of
this offering for: purchase of inventory,
instruments and equipment; research and
development; repayment of indebtedness; redemption
of preferred stock; and working capital and general
corporate purposes. See "Use of Proceeds."
Risk Factors .......................................... This offering involves a high degree of risk and
immediate substantial dilution. See "Risk Factors"
and "Dilution."
Proposed NASDAQ-National Market System Symbol ........ EXAC
</TABLE>
(1) Does not include (i) 240,000 shares of Common Stock reserved for
issuance upon exercise of the Underwriters' over-allotment option, (ii)
160,000 shares of Common Stock reserved for issuance upon exercise of the
Representative's Warrants, (iii) an aggregate of 406,448 shares of Common
Stock reserved for issuance upon exercise of outstanding options under
the Company's Employee Stock Option and Incentive Plan and Directors'
Stock Option Plan, (iv) an aggregate of 193,552 shares of Common Stock
reserved for issuance upon exercise of options available for future grant
and future grants of restricted stock awards under these Plans, (v)
35,470 shares of Common Stock reserved for issuance upon conversion of
the Company's outstanding 10% Debentures in the principal amount of
$260,000, (vi) 17,576 shares of Common Stock reserved for issuance upon
conversion of the outstanding shares of the Company's Series A Preferred
Stock and (vii) 172,406 shares of Common Stock reserved for issuance upon
exercise of other outstanding options and warrants. Assumes an initial
public offering price of $7.75 per share and the redemption of the
outstanding shares of Series A Preferred Stock of the Company and the
outstanding shares of Series C Preferred Stock of the Company upon
consummation of this offering. See "Management--Stock Option Plans,"
"Certain Transactions," "Description of Securities" and "Underwriting."
(2) Includes 13,548 shares of Common Stock issuable upon consummation of this
offering pursuant to the automatic conversion of the outstanding shares
of Series B Preferred Stock of the Company.
4
<PAGE>
SUMMARY FINANCIAL DATA
The summary financial information set forth below should be read in
conjunction with the financial statements appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
------------------------------------------------------------------------- ----------------------------
1991 1992 1993 1994 1995 1995 1996
------------- ------------- ------------- ------------- ------------- -------------- -----------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Net sales ............ $2,424,056 $3,722,478 $4,675,505 $5,355,804 $9,118,075 $1,688,481 $3,423,629
Cost of goods sold .. 556,135 941,528 1,360,025 1,586,633 2,995,955 445,585 1,267,332
Gross profit ......... 1,867,921 2,780,950 3,315,480 3,769,171 6,122,120 1,242,896 2,156,297
Total operating
expenses ........... 1,323,978 2,042,430 2,641,884 3,088,386 4,642,462 1,013,616 1,531,810
Income from
operations ......... 543,943 738,520 673,596 680,785 1,479,658 229,280 624,487
Net income ........... 306,101 417,660 353,439 346,128 826,928 116,371 311,475
Preferred stock
dividends(1) ....... -- -- 8,194 19,298 22,798 4,824 5,824
Net income applicable
to common
shareholders ....... 306,101 417,660 345,245 326,830 804,130 111,547 305,651
Net income per common
and common
equivalent share ... $ 0.11 $ 0.15 $ 0.12 $ 0.11 $ 0.27 $ 0.04 $ 0.10
</TABLE>
<TABLE>
<CAPTION>
AS OF
DECEMBER 31, AS OF MARCH 31, 1996
1995 -------------------------------
ACTUAL AS ADJUSTED(2)
------------- ----------------
(UNAUDITED)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Total current assets .............. $ 8,326,463 $ 8,727,985 $16,804,919
Total assets ...................... 10,620,750 11,674,597 20,351,531
Total current liabilities ......... 4,476,374 5,283,382 5,025,976
Total liabilities ................. 6,452,479 7,195,675 5,260,829
Total preferred stock ............. 291,220 291,220 --
Total common shareholders' equity 3,877,051 4,187,702 15,090,702
</TABLE>
(1) Upon consummation of this offering, all shares of the Company's
outstanding preferred stock will be redeemed or converted into Common
Stock.
(2) As adjusted to give effect to the sale of the shares of Common Stock
offered hereby at an assumed offering price of $7.75 per share and the
application of the estimated net proceeds therefrom. See "Use of Proceeds."
The Company may determine to use a portion of the net proceeds allocated to
working capital to repay up to approximately $2,500,000 outstanding under a
line of credit which bears interest at a rate equal to the 30-day commercial
paper rate plus 2.65% per annum.
5
<PAGE>
RISK FACTORS
THE SHARES OF COMMON STOCK OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH
DEGREE OF RISK, INCLUDING, BUT NOT NECESSARILY LIMITED TO, THE RISK FACTORS
DESCRIBED BELOW. EACH PROSPECTIVE INVESTOR SHOULD CAREFULLY CONSIDER THE
FOLLOWING RISK FACTORS INHERENT IN AND AFFECTING THE BUSINESS OF THE COMPANY AND
THIS OFFERING BEFORE MAKING AN INVESTMENT DECISION.
EFFECT OF GOVERNMENT REGULATION. The development, testing, labeling,
distribution, marketing and manufacture of medical devices, including
reconstructive implant products, are subject to extensive and rigorous
regulation in the United States and certain other countries. The primary
regulatory authority in the United States is the United States Food and Drug
Administration ("FDA"). The process of obtaining approval or clearance from
FDA for the sale and marketing of new products is time-consuming, expensive
and uncertain. In addition, FDA approval or clearance of products can
subsequently be withdrawn due to failure to comply with regulatory standards
or the occurrence of unforeseen problems following initial marketing. FDA has
the power to ban products manufactured or distributed by the Company as well
as to require the recall, repair, or replacement of or refund for such
products. A significant recall of one or more of its products could have a
material adverse effect on the Company. Further, in recent years, the period
of time required to obtain certain FDA approvals and clearances has
increased. Accordingly, the time it will take for the Company to obtain
approvals and clearances for new products may be lengthened. The Company will
be required to apply for approval or clearance to market new products and
certain modifications to existing products. The Company has applied for
clearance from FDA to market its hip revision (I.E., replacement of existing
implant) system and intends to apply for clearance to market its modular
shoulder replacement system. There can be no assurance that such clearances
will be granted or that FDA review will not involve delays materially
adversely affecting the marketing and sale of the Company's products. Failure
to obtain FDA approvals and clearances for new products and/or modifications
to existing products on a timely basis would likely have a material adverse
effect on the Company. See "Business--Government Regulation."
UNCERTAINTY RELATING TO THIRD-PARTY REIMBURSEMENT. In the United States,
health care providers, including hospitals and physicians, that purchase the
Company's products, generally rely on third-party payors, principally federal
Medicare, state Medicaid and private health insurance plans, to pay for all
or a portion of the cost of joint reconstructive procedures, including the
cost of the Company's products utilized in such procedures. There can be no
assurance that third-party reimbursement for the Company's products will
continue to be available. In addition, certain health care providers have
adopted or are considering a managed care system in which the providers
contract to provide comprehensive health care for a fixed cost per person.
Health care providers may attempt to control the cost of health care by
authorizing fewer elective surgical procedures, including certain joint
reconstructive surgeries, or by requiring the use of the least expensive
implant available. The Company is unable to predict the changes that will be
made in the reimbursement methods or utilization policies utilized by
third-party health care payors or managed care providers. The Company could
be materially adversely affected by changes in reimbursement policies of
governmental or private health care payors that affect reimbursement for
procedures in which the Company's products are used. The Company's quality
specifications limit its ability to compete with the least expensive products
available and, accordingly, requirements of third-party payors that the least
expensive product be used could materially adversely affect the Company. In
addition, market acceptance of the Company's products in international
markets is dependent, in part, upon the availability of reimbursement health
care payment systems. Reimbursement and health care payment systems in
international markets vary significantly by country, and include both
government sponsored health care and private insurance. Failure by
physicians, hospitals and other users of the Company's products to obtain
sufficient reimbursement from health care payors for procedures in which the
Company's products are used or adverse changes in governmental and private
payors' policies toward reimbursement for such procedures would have a
material adverse effect on the Company.
UNCERTAINTY RELATING TO HEALTH CARE REFORM. Political, economic and
regulatory influences are subjecting the health care industry in the United
States to fundamental changes. Reforms under
6
<PAGE>
consideration may include mandated basic health care benefits, controls on
health care spending through limitations on the growth of private health
insurance premiums and Medicare and Medicaid spending, the creation of large
insurance purchasing groups and fundamental changes to the health care
delivery system. The Company anticipates Congress and certain state
legislatures will continue to review and assess alternative health care
delivery systems and payment methods and public debate of these issues will
likely continue in the future. Due to uncertainties regarding the ultimate
features of reform initiatives and their enactment and implementation, the
Company cannot predict which, if any, of such reform proposals will be
adopted, when they may be adopted or what impact they may have on the
Company.
NEED TO MAINTAIN SUBSTANTIAL INVENTORY LEVELS. Because orthopaedic
surgeons require immediate access to a broad range of sizes and types of
reconstructive implant products, the Company is required to maintain
substantial levels of inventory. The maintenance of relatively high levels of
inventory requires the Company to incur significant expenditures of its
resources. There can be no assurance that the Company will be able to
maintain the levels of inventory of such products necessary to support the
expansion of its business. The failure by the Company to maintain required
levels of inventory could have a material adverse effect on the Company's
expansion. As a result of the need to maintain substantial levels of
inventory, the Company is subject to the risk of inventory obsolescence. In
the event that a substantial portion of the Company's inventory becomes
obsolete, it would have a material adverse effect on the Company. See
"Business--Marketing and Sales."
RISKS RELATING TO COMPETITION. The orthopaedic implant industry is highly
competitive and dominated by a number of companies with substantially greater
financial and other resources than the Company and competition is expected to
intensify. Competitive factors consist primarily of product features and
design, innovation, service, the ability to maintain new product flow,
relationships with key orthopaedic surgeons and hospitals, strength of
distribution network and price. While price, as opposed to surgeon
preference, is becoming increasingly important in the hip market, the Company
believes that the primary basis of competition in the knee market remains
physician preference. From time to time, the Company and certain of its
competitors have offered significant discounts as a competitive tactic, and
may be expected to continue to do so. The Company believes that price will
become an increasingly important competitive factor. The Company's quality
specifications limit its ability to compete with the least expensive products
available. The Company's marketing targets surgeons and hospitals.
Traditionally, the surgeon made the decision as to which orthopaedic implant
to use. As a result of health care reform, the rapid expansion of managed
care at the expense of traditional private insurance, the advent of hospital
buying groups, and various bidding procedures that have been imposed at many
hospitals, sales representatives may also make presentations to hospital
administrators, material management personnel, purchasing agents or review
committees that may influence the final decision. Many hospitals restrict
qualified vendors to those with more complete product lines than the Company.
Manufacturers of medical devices, including orthopaedic implants, are
increasingly attempting to enter into contracts with hospital chains or
hospitals pursuant to which the hospital chains or hospitals agree to
purchase their products exclusively from such manufacturers, usually in
exchange for discounted prices. Recently, two of the Company's larger
competitors entered into such an arrangement with a large hospital chain. If
the Company's competitors are successful in securing such contracts, the
Company's ability to compete may be materially adversely affected. In
addition, the Company faces competition for regional sales representatives
within the medical community. There can be no assurance that the Company will
be able to compete successfully. In addition, there can be no assurance that
new medical treatments and products will not be developed that are more
effective or cost-effective than the Company's products or that would render
the Company's products obsolete or uncompetitive. See
"Business--Competition."
POSSIBLE NEED FOR ADDITIONAL FINANCING. The Company's business is capital
intensive and the Company's capital requirements are expected to increase
significantly in connection with its proposed expansion. The Company intends
to use a substantial portion of the proceeds of this offering to implement
its growth strategy. The Company anticipates, based on currently proposed
plans and assumptions relating to its operations (including the costs
associated with, and the timetable for, its
7
<PAGE>
proposed expansion), that the proceeds of this offering, together with
projected cash flow from operations and borrowings under its existing credit
facilities, will be sufficient to satisfy its contemplated cash requirements
for at least 12 months following the consummation of this offering, in the
event of rapid expansion of the Company's business, or for at least 24 months
following the consummation of this offering, in the event of more moderate
expansion of its business. In the event that the Company's plans change or
its assumptions change or prove to be inaccurate, or if the proceeds of this
offering or cash flow prove to be insufficient (due to unanticipated
expenses, lower than anticipated sales or profit margins or otherwise), the
Company may be required to seek additional financing or curtail its growth
activities. To the extent that the Company incurs indebtedness, the Company
will be subject to risks associated with incurring substantial indebtedness,
including the risks that interest rates may fluctuate and cash flow may be
insufficient to pay principal and interest on any such indebtedness. The
Company has no current arrangements with respect to, or sources of,
additional financing and it is not anticipated that existing shareholders
will provide any portion of the Company's future financing requirements or
personal guarantees. There can be no assurance that additional financing will
be available to the Company on acceptable terms, or at all. See "Use of
Proceeds" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
RISKS RELATING TO GROWTH STRATEGY. The Company's growth strategy
contemplates the expansion of its product line and its network of sales
representatives and distributors. The Company has achieved moderate growth to
date and has limited experience in effectuating rapid expansion. The
Company's proposed expansion will be dependent on, among other things, the
Company's ability to obtain governmental clearances for new products,
increase market acceptance, expand its network of domestic sales
representatives and foreign distributors, hire and retain qualified
scientific and technical personnel and successfully manage growth (including
monitoring operations, controlling costs and maintaining effective regulatory
compliance procedures). The Company's operating expenses can be expected to
increase significantly in connection with its efforts to grow, which may have
a negative effect on operating results until such time, if ever, as these
expenses are offset by increased revenues. There can be no assurance that the
Company will be able to implement its growth strategy or that this strategy
will ultimately be successful.
UNCERTAINTY OF MARKET ACCEPTANCE. The Company's ability to successfully
market new and improved products will depend on gaining market acceptance of
such products. The Company has not yet begun marketing its knee revision or
hip revision systems or its shoulder replacement systems. The Company intends
to commence marketing its total knee revision system in the fourth quarter of
1996. In addition, upon receipt of the necessary FDA clearances, the Company
intends to commence marketing its hip revision system. Furthermore, the
Company is currently developing new products, such as a total shoulder
replacement system, as well as improvements to its existing implant products.
There can be no assurance that new or improved products will gain market
acceptance. The failure of the Company's products to gain market acceptance
would be likely to have a material adverse effect on the Company. See
"Business--Products."
RISK OF APPLICABILITY OF ANTI-KICKBACK AND SELF-REFERRAL LAWS. Federal
anti-kickback laws and regulations prohibit any knowing and willful offer,
payment, solicitation or receipt of any form of remuneration, either directly
or indirectly, in return for, or to induce (i) referral of an individual for
a service or product for which payment may be made by Medicare, Medicaid or
another government-sponsored health care program or (ii) purchasing, leasing,
ordering or arranging for, or recommending the purchase, lease or order of,
any service or product for which payment may be made by a
government-sponsored health care program. Federal physician self-referral
laws are applicable to inpatient and outpatient hospital services. Subject to
certain exceptions, these laws prohibit Medicare or Medicaid payments for
services or products furnished by an entity pursuant to a referral by a
physician who has a financial relationship with the entity through ownership,
investment or a compensation arrangement. Possible sanctions for violation of
these anti-kickback and self-referral laws include monetary fines, civil and
criminal penalties, exclusion from Medicare and Medicaid programs and
forfeiture of amounts collected in violation of such prohibitions. Certain
states in which the Company markets its products have similar anti-kickback,
anti-fee splitting and self-referral laws, imposing
8
<PAGE>
substantial penalties for violations. The federal physician self-referral
laws also require investor owned companies which have total retained equity
of less than $75 million to report ownership of any shares of stock held by
physicians or the family members of physicians who may use or refer patients
for the use of the company's products, if such patients eventually seek
reimbursement for such products under the Medicare program. By letter dated
January 26, 1995, Health Care Financing Administrator Vladeck stated that
providers would not be held to reporting requirements until a proper form and
accompanying instruction booklet is developed and issued. The scope and
enforcement of these laws is uncertain and subject to rapid change,
especially in light of the lack of applicable precedent and regulations.
There can be no assurance that federal or state regulatory authorities will
not challenge the Company's current or future activities under these laws and
any such challenge could have a material adverse effect on the Company. Any
state or federal regulatory review of the Company, regardless of the outcome,
would be both costly and time consuming. Additionally, changes in these laws
(whether or not retroactive) and the enforcement of these laws by regulatory
agencies are likely and the Company cannot predict the impact on the Company
of any such changes. See "Business--Government Regulation."
UNCERTAIN PROTECTION OF PATENTS AND PROPRIETARY TECHNOLOGY; RISK OF
INFRINGEMENT. The Company holds United States patents covering one of its
femoral stem components and its bipolar partial hip implant system and
certain surgical instrumentation, has patent applications pending with
respect to certain surgical instrumentation and certain implant components
and anticipates that it will apply for additional patents it deems
appropriate. In addition, the Company holds licenses from third parties to
utilize certain patents, including a non-exclusive license to certain
patents, patents pending and technology utilized in the design of the
Optetrak/registered trademark/ knee system. As a result of the rapid rate of
development of orthopaedic implant products, the Company believes that
patents generally have not been a major factor in the orthopaedic industry to
date. However, patents on specific designs and processes can provide a
competitive advantage and management believes that patent protection of
orthopaedic products will become more important as the industry matures.
There can be no assurance as to the breadth or degree of protection which
existing or future patents, if any, may afford the Company, that any patent
applications will result in issued patents, that patents will not be
circumvented or invalidated or that the Company's competitors will not
commence marketing knee implant systems utilizing certain of the technology
incorporated in the Optetrak/registered trademark/ system for which the
Company has a non-exclusive license. In addition, there can be no assurance
that the parties from whom the Company has licensed or otherwise acquired
patent rights, proprietary rights and technology have full rights to such
patents rights and technology. Furthermore, the Company does not have patents
in any foreign countries where it markets its products. The medical device
industry has been characterized by extensive litigation regarding patents and
other intellectual property rights. It is possible that the Company or rights
licensed by the Company from third parties may infringe on existing or future
patents or proprietary rights of others. If technology, concepts or ideas
developed by consultants, key employees or other third parties are
incorporated into the Company's products, disputes with such persons or other
parties with whom such persons have business relationships may arise as to
the proprietary rights to such technology, concepts or ideas which may not be
resolved in favor of the Company. If the Company is unable to obtain
agreements with each of its consultants pursuant to which they assign all
their intellectual property rights in the products being developed by the
Company to the Company, such inability could have a material adverse effect
on the Company. In the event that the Company's products infringe patents or
proprietary rights of others, the Company may be required to modify the
design of its products or obtain a license. There can be no assurance that
the Company will be able to do so in a timely manner or upon acceptable terms
and conditions or at all. In such event, the failure to modify its products
or obtain a license could have a material adverse effect on the Company. In
addition, there can be no assurance that the Company will have the financial
or other resources necessary to enforce or defend a patent infringement or
proprietary rights violation action. Furthermore, if the Company's products
infringe patents or other proprietary rights of others, the Company could,
under certain circumstances, become liable for damages, which could have a
material adverse effect on the Company.
9
<PAGE>
In addition to patents, the Company relies on trade secrets and
proprietary know-how and employs various methods to protect its proprietary
information, including confidentiality agreements and proprietary information
agreements. However, such methods may not provide adequate protection and
there can be no assurance that such confidential or proprietary information
agreements will not be breached, that the Company would have adequate
remedies for any breach, or that the Company's trade secrets and proprietary
know-how will not otherwise become known to or independently developed by
competitors. The failure to protect its proprietary information could have a
material adverse effect on the Company. See "Business--Patents and
Proprietary Technology; License Agreements."
RISKS RELATED TO OUTSTANDING PATENT LITIGATION. On April 3, 1995, Joint
Medical Products, Inc. ("Joint Medical") commenced an action (the "Action")
against the Company, and many of its competitors, alleging the infringement
of a United States patent held by Joint Medical entitled "Ball and Socket
Bearing for Artificial Joint" (the "Ball and Socket Patent"). As part of the
Action, Joint Medical alleged that the Company's manufacture and sale of
certain orthopaedic implants was an infringement of the Ball and Socket
Patent. The Company and Joint Medical have entered into a Tolling Agreement,
effective as of April 3, 1995, pursuant to which the Action was dismissed
without prejudice as to the Company. The Tolling Agreement further provides
that neither the Company nor Joint Medical will commence any further action
regarding the Company's alleged infringement of the Ball and Socket Patent
until a decision is rendered by the Board of Patent Appeals and Interferences
regarding such alleged patent infringement. A finding that orthopaedic
implants manufactured and sold by the Company infringe upon the Ball and
Socket Patent could materially and adversely affect the Company's business
operations, as well as expose the Company to significant monetary damages. As
of the date hereof, no decision has been rendered by the Board of Patent
Appeals and Interferences regarding this matter. There can be no assurance
that a favorable decision will be rendered in connection with this patent
infringement matter.
SIGNIFICANT ROYALTY OBLIGATIONS. The Company has obligations to make
significant royalty payments in the future. The Company is obligated to pay
royalties under its license agreement with the Hospital for Special Surgery
with respect to sales of its Optetrak knee implant system and under its
license agreement with Accumed, Inc. with respect to sales of its bipolar hip
prosthesis. In addition, the Company has entered into employment and
consulting agreements with certain members of its design team, including
William Petty, M.D. and Gary J. Miller, Ph.D., executive officers, directors
and principal shareholders of the Company, pursuant to which the Company is
obligated to pay royalties equal to specified percentages of net sales of
certain of the Company's products. During the years ended December 31, 1993,
1994 and 1995 and the three months ended March 31, 1996, the Company paid
aggregate royalties of $11,686, $14,767, $210,000 and $144,196, respectively.
There can be no assurance that the Company will have the funds to make such
royalty payments or that the payment of such royalties will not have a
material adverse effect on the Company's results of operation.
RISK OF TERMINATION OF LICENSE AGREEMENT. The Company licenses certain
patents, patents pending and technology utilized in the design of its
Optetrak/registered trademark/ knee implant system pursuant to a license
agreement with the Hospital for Special Surgery. The license agreement
provides that the Hospital for Special Surgery may terminate the license
granted to the Company upon the occurrence of certain events, including the
Company's failure to pay the royalties payable to the hospital thereunder,
the Company's failure to satisfy certain quality specifications or the breach
by the Company of other material terms of the license agreement. The
termination of such license would have a material adverse effect on the
Company.
DEPENDENCE ON THIRD-PARTY SALES AND MARKETING ARRANGEMENTS. The Company is
dependent upon third-party marketing arrangements with independent sales
representatives and distributors for the sale and marketing of its products.
The Company has contractual arrangements with its sales representatives and
distributors that generally grant them the exclusive right to market the
Company's products within their geographic territories. The Company's
arrangements with its sales representatives and distributors typically do not
preclude them from selling competitive products. The Company's success is
dependent
10
<PAGE>
upon the expertise and relationships of its sale representatives with
customers. The failure by the Company to attract and retain sales
representatives would have a material adverse effect on the Company. See
"Business--Marketing and Sales."
DEPENDENCE ON CUSTOMERS. During the years ended December 31, 1994 and
1995, one customer, Shands Hospital, accounted for approximately 11% and 10%,
respectively, of the Company's sales. During the three months ended March 31,
1996, one customer, MBA Del Principado, S.A., accounted for approximately 21%
of the Company's sales. There can be no assurance that the Company will be
able to retain existing customers or attract and retain new customers. The
failure by the Company to attract and retain customers would have a material
adverse effect on the Company. See "Business--Marketing and Sales."
DEPENDENCE ON THIRD-PARTY MANUFACTURING ARRANGEMENTS AND SUPPLIERS; NO
MANUFACTURING EXPERIENCE. The Company is dependent on third-party
arrangements for the manufacture of all of its component parts. For the years
ended December 31, 1993, 1994 and 1995 and the three months ended March 31,
1996, the Company purchased approximately 73%, 66%, 68% and 71.0%,
respectively, of its component requirements from three manufacturers. Failure
by such manufacturers to continue to supply the Company with satisfactory
components on commercially reasonable terms, or at all, in the absence of
readily available alternative sources, would have a material adverse effect
on the Company. The Company is substantially dependent on the ability of its
manufacturers, among other things, to satisfy performance and quality
specifications, to comply with all governmental regulations, to dedicate
sufficient production capacity for components within scheduled delivery times
and to produce components on a basis which is cost-effective to the Company.
There can be no assurance that the Company's suppliers will be able to
satisfy the Company's components requirements. The Company does not maintain
supply contracts with any of its manufacturers and purchases components
pursuant to purchase orders placed from time to time in the ordinary course
of business. The Company is also dependent on the availability at reasonable
prices of the materials used in the manufacture of the component parts of its
products. No assurance can be given that interruptions in supplies of the
materials used in the manufacture of the component parts of the Company's
products will not occur in the future. Any such interruption of supply could
have a material adverse effect on the Company. The Company contemplates that
in the future it may engage in limited manufacturing of the components of its
products, consisting primarily of final machining of components. The Company
has no manufacturing experience and there can be no assurance that the
Company will be successful in manufacturing components on a cost-effective
basis or at all. See "Business--Manufacturing and Supply."
NEED FOR RESEARCH AND DEVELOPMENT; RISK OF RAPID TECHNOLOGICAL CHANGE. The
orthopaedic implant industry is subject to rapid technological change and 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. There can be no assurance that the Company will be successful in
developing competitive new products and/or improving existing products so
that such products remain competitive and avoid obsolescence. There can be no
assurance that any or all of the Company's research and development projects
for new products will result in commercial products, or that, if such
products are successfully designed and launched, they will be profitable.
PRODUCT LIABILITY AND POSSIBLE INSUFFICIENCY OF INSURANCE. The Company is
subject to potential product liability risks which are inherent in the
design, marketing and sale of orthopaedic implants and surgical
instrumentation. No assurance can be given that the Company will not face
claims resulting in substantial liability for which it is not fully insured
or that it will be able to maintain adequate levels of insurance on
acceptable terms. A partially or completely uninsured successful claim
against the Company of sufficient magnitude could have a material adverse
effect on the Company, both in terms of market perception and financial
condition. See "Business--Product Liability and Insurance" and "--Legal
Proceedings."
RISKS RELATING TO FOREIGN DISTRIBUTION. Approximately 8.2% and 21.7% of
the Company's sales during the year ended December 31, 1995 and the three
months ended March 31, 1996, respectively,
11
<PAGE>
were to foreign customers. The Company is required to obtain various licenses
and permits from foreign governments and to comply with significant
regulations that vary by country in order to market its products in foreign
markets. In order to continue marketing its products in Europe after
mid-1998, the Company will be required to obtain ISO 9001 certification and
receive "CE" mark certification, which is an international symbol of quality
and compliance with applicable European medical device directives. There can
be no assurance that the Company will obtain such certifications, that it
will be able to obtain and maintain any necessary licenses and permits or
comply with applicable regulations of foreign governments. The failure by the
Company to obtain or maintain such licenses, permits or certifications, or
comply with such regulations, could have a material adverse effect on the
Company.
OUTSTANDING INDEBTEDNESS; RESTRICTIVE LOAN COVENANTS AND SECURITY
INTERESTS; POSSIBLE LACK OF FUTURE PERSONAL GUARANTEES. The Company has
incurred significant indebtedness in order to finance its operations. At
March 31, 1996, indebtedness of $3,573,058 was outstanding under a loan
agreement with Merrill Lynch Business Financial Services, Inc. (the
"Lender"), consisting of $1,084,799 under a term loan and $2,488,259 under a
line of credit. Substantially all of the Company's assets are pledged to the
Lender as collateral. The Company's loan agreements with the Lender limit or
prohibit the Company from merging or consolidating with another corporation,
selling all or substantially all of its assets, purchasing all or
substantially all of the assets of another entity, permitting or causing any
material change in its controlling ownership or controlling senior management
or operating in any material business other than its existing business. In
the event of a violation by the Company of its loan covenants or other
default by the Company under its obligations, the Lender could declare the
Company's indebtedness to be immediately due and payable and foreclose on the
Company's assets. Assuming an initial public offering price of $7.75 per
share, the Company intends to use a portion of the net proceeds of this
offering to repay the term loan and may use a portion of such proceeds to
repay the line of credit under the loan agreement with the Lender. If the
initial public offering price is less than $7.75 per share, the Company will
have less proceeds available to repay such indebtedness. In addition, at
March 31, 1996, the Company had an aggregate of $760,000 in principal amount
of its subordinated debentures outstanding. The Company intends to redeem
$450,000 of such debentures with a portion of the net proceeds of this
offering. The holders of the remaining $310,000 of such debentures have the
option to convert the debentures into shares of Common Stock or require the
Company to redeem the debentures at any time during the six-month period
following consummation of this offering. In April 1996, the holders of
$50,000 of such debentures elected to convert such debentures into shares of
Common Stock. Furthermore, at March 31, 1996, the Company had $90,047
outstanding under a term loan with a bank which the Company intends to repay
with a portion of the net proceeds of this offering.
The Company's indebtedness to the Lender has been personally guaranteed by
William Petty and Betty Petty, executive officers and principal shareholders
of the Company. Neither of these individuals nor any other person has any
obligation to make personal guarantees available to the Company in the future
and it is not anticipated that such persons will provide personal guarantees
of the Company's obligations following consummation of this offering. The
absence of any such personal guarantees in the future may adversely affect
the Company's ability to borrow. See "Use of Proceeds" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
DEPENDENCE ON KEY PERSONNEL. The Company's success is largely dependent on
the personal efforts of William Petty, its Chairman, Timothy J. Seese, its
President, Gary J. Miller, its Vice President, Research and Development and
other key personnel. The loss of the services of any of these individuals
could have a material adverse effect on the business of the Company. William
Petty and Gary J. Miller have academic positions at the University of Florida
and William Petty maintains a medical practice. Drs. Petty and Miller do not
devote their full business time to the Company. The Company's success is also
dependent on its ability to continue to attract and retain qualified
scientific and technical personnel. Loss of the services of, or failure to
recruit, key scientific and technical personnel could be detrimental to the
Company's product development programs. See "Management."
12
<PAGE>
DEPENDENCE ON SCIENTIFIC ADVISORS. In developing new products and
improving existing products, the Company utilizes consultants who serve as
members of the Company's Scientific Advisory Board. Accordingly, the Company
is dependent, in part, on the efforts of the members of its Scientific
Advisory Board for the development and clinical evaluation of new and
improved products. Scientific advisors devote only a small portion of their
time to the affairs of the Company and have other commitments to, or
consulting or advisory agreements with, other entities which may conflict or
compete with their obligations to the Company. There can be no assurance that
such consultants will devote sufficient time and attention to the development
of the Company's products.
CONTROL BY CURRENT SHAREHOLDERS. Upon the consummation of this offering,
the Company's current shareholders will own approximately 64.7% of the
Company's outstanding Common Stock. In particular, William Petty and the
members of his immediate family will own approximately 43.9% of the
outstanding Common Stock. Accordingly, the current shareholders will be able
to control the Company, elect all of the Company's directors, increase the
authorized capital, dissolve, merge, sell the assets of the Company and
generally direct the affairs of the Company. See "Management" and "Principal
Shareholders."
EFFECT OF ANTI-TAKEOVER LEGISLATION; RISK OF AUTHORIZATION OF PREFERRED
STOCK. The State of Florida has enacted legislation that may deter or
frustrate takeovers of Florida corporations. The Florida Control Share Act
generally provides that shares acquired in excess of certain specified
thresholds will not possess any voting rights unless such voting rights are
approved by a majority vote of a corporation's disinterested shareholders.
The Florida Affiliated Transactions Act generally requires supermajority
approval by disinterested directors or shareholders of certain specified
transactions between a public corporation and holders of more than 10% of the
outstanding voting shares of the corporation (or their affiliates). The
Company's Articles of Incorporation authorize the issuance of 2,000,000
shares of "blank check" Preferred Stock ("Preferred Stock") with such
designations, rights and preferences as may be determined from time to time
by the Board of Directors. Accordingly, the Board of Directors is empowered,
without shareholder approval, to issue Preferred Stock with dividend,
liquidation, conversion, voting or other rights that could adversely affect
the voting power or other rights of the holders of the Common Stock. The
issuance of any series of Preferred Stock having rights superior to those of
the Common Stock may result in a decrease in the value or market price of the
Common Stock. Holders of Preferred Stock to be issued in the future may have
the right to receive dividends and certain preferences in liquidation and
conversion rights. The issuance of such Preferred Stock could make the
possible takeover of the Company or the removal of management of the Company
more difficult, discourage hostile bids for control of the Company in which
shareholders may receive premiums for their Common Stock and adversely affect
the voting and other rights of the holders of the Common Stock. The Company
may in the future issue additional shares of its Preferred Stock. See
"Description of Securities."
NO ASSURANCE OF PUBLIC MARKET; SUBJECTIVE DETERMINATION OF OFFERING PRICE;
POSSIBLE VOLATILITY OF MARKET PRICE. Prior to this offering, there has been
no public trading market for the Common Stock. The initial public offering
price of the Common Stock has been determined by negotiations between the
Company and the Representative and is not necessarily related to the
Company's assets, book value or financial condition, and may not be
indicative of the actual value of the Company. There can be no assurance that
a regular trading market for the Common Stock will develop after this
offering or that, if developed, it will be sustained. The market price for
the Common Stock following this offering could be subject to wide
fluctuations in response to variations in the Company's operating results,
announcements by the Company or others, developments affecting the Company,
and other events or factors. In addition, the stock market has experienced a
high level of price and volume fluctuations in recent years. These
fluctuations have had a substantial effect on the market prices for many
companies, often unrelated to the operating performance of such companies,
and may adversely affect the market price for the Common Stock. See
"Underwriting."
13
<PAGE>
IMMEDIATE AND SUBSTANTIAL DILUTION. Assuming an initial public offering
price of $7.75 per share, purchasers of the Common Stock will experience
immediate and substantial dilution of $4.47 (57.7%) per share between the net
tangible book value per share of Common Stock and the initial public offering
price. See "Dilution."
RISKS ATTENDANT TO SHARES ELIGIBLE FOR FUTURE SALE. All of the 2,962,148
shares of Common Stock outstanding as of the date of this Prospectus are
"restricted securities," as that term is defined under Rule 144 promulgated
under the Securities Act of 1933, as amended (the "Securities Act"). An
aggregate of 2,870,493 of such shares will become eligible for sale under
Rule 144 commencing 90 days after the date of this Prospectus, and the
balance of such shares will become eligible for sale under Rule 144 at
various times commencing in August 1996. All of the Company's officers,
directors and holders of 5% or more of the outstanding shares of Common Stock
have agreed not to sell or otherwise dispose of any of their shares of Common
Stock for a period of 12 months from the date of this Prospectus, without the
prior written consent of the Representative. No prediction can be made as to
the effect, if any, that sales of shares of Common Stock or the availability
of such shares for sale will have on the market prices prevailing from time
to time. Nevertheless, the possibility that substantial amounts of Common
Stock may be sold in the public market may adversely affect prevailing market
prices for the Common Stock and could impair the Company's ability to raise
capital through the sale of its equity securities. See "Shares Eligible for
Future Sale."
ABSENCE OF DIVIDENDS. The Company has not paid any cash dividends on its
Common Stock, and does not expect to declare or pay any cash dividends in the
foreseeable future. See "Dividend Policy."
14
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,600,000 shares of
Common Stock offered hereby are estimated to be approximately $10,748,000
(assuming a public offering price of $7.75 per share) (approximately
$12,412,700 if the Underwriters' over-allotment option is exercised in full).
The Company expects to use such net proceeds as follows:
<TABLE>
<CAPTION>
APPROXIMATE
APPROXIMATE PERCENTAGE OF
APPLICATION OF PROCEEDS DOLLAR AMOUNT NET PROCEEDS
- --------------------------------------------------- ---------------- ----------------
<S> <C> <C>
Purchase of inventory(1) .......................... $ 2,350,000 21.9%
---------------- ----------------
Purchase of instruments(2) ........................ 2,050,000 19.1
---------------- ----------------
Purchase of equipment(3) .......................... 600,000 5.6
---------------- ----------------
Research and development(4) ....................... 650,000 6.0
---------------- ----------------
Repayment of indebtedness(5) ...................... 1,885,000 17.5
---------------- ----------------
Redemption of preferred stock(6) .................. 186,000 1.7
---------------- ----------------
Working capital and general corporate purposes(7) 3,027,000 28.2
---------------- ----------------
Total ........................................... $10,748,000 100.0%
================ ================
</TABLE>
- -----------------------------------------------------------------------------
(1) Represents the estimated cost of acquiring additional inventory of the
components of the Company's primary and revision knee systems, hip
implant systems and shoulder implant system. See "Business--Marketing and
Sales."
(2) Represents the estimated cost of acquiring additional surgical
instruments used in implanting the Company's primary and revision knee
and hip systems and shoulder implant system. See "Business--Marketing and
Sales."
(3) Represents the estimated cost of acquiring tooling and equipment to be
primarily used in the manufacture of the Company's knee revision system,
revision cemented hip system and shoulder implant system. See
"Business--Manufacturing and Supply."
(4) Represents costs to be incurred primarily in connection with the design
and development of a shoulder replacement system and new modular revision
hip systems. See "Business--Products" and "Research and Development."
(5) Represents the repayment of approximately (i) $1,085,000 outstanding
under a term loan which bears interest at a rate equal to the 30-day
commercial paper rate plus 3.05% per annum and a 1% prepayment premium,
(ii) $90,000 outstanding under a term loan which bears interest at a rate
equal to the prime rate plus 1% per annum, (iii) $450,000 of the
Company's outstanding 8% subordinated debentures (the "8% Debentures")
and (iv) $260,000 of outstanding 10% subordinated convertible debentures
(the "10% Debentures"). See "Management's Discussion and Analysis of
Financial Condition and Results of Operation--Liquidity and Capital
Resources."
(6) Represents the redemption price of the outstanding shares of Series A
Preferred Stock and Series C Preferred Stock. See "Description of
Securities--Preferred Stock."
(7) The Company may determine to use a portion of the net proceeds allocated
to working capital to repay up to approximately $2,500,000 outstanding
under a line of credit which bears interest at a rate equal to the 30-day
commercial paper rate plus 2.65% per annum. In addition, the Company may
use a portion of the net proceeds allocated to working capital for the
development of an architectural and engineering plan for a new facility
to be used by the Company for principal executive offices, research and
development laboratories and limited manufacturing. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and "Business--Properties."
Assuming an initial public offering price of $7.75 per share, if the
Underwriters exercise their over-allotment option in full, the Company will
realize additional net proceeds of approximately $1,664,700 which will be
added to the Company's working capital. If the public offering price is less
than
15
<PAGE>
$7.75 per share, the Company intends, first, to reduce the amount to be
repaid under its term loan with the Lender and, second, to reduce the amount
of net proceeds allocated to working capital.
The Company anticipates, based on currently proposed plans and assumptions
relating to its operations (including the costs associated with, and the
timetable for, its proposed expansion), that the proceeds of this offering,
together with projected cash flow from operations and borrowings under its
existing credit facilities, will be sufficient to satisfy its contemplated
cash requirements for at least 12 months following the consummation of this
offering, in the event of rapid expansion of the Company's business, or for
at least 24 months following the consummation of this offering, in the event
of more moderate expansion of the Company's business. In the event that the
Company's plans change or its assumptions change or prove to be inaccurate or
if the proceeds of this offering or cash flow prove to be insufficient (due
to unanticipated expenses, lower than anticipated sales or profit margins or
otherwise), the Company may be required to seek additional financing or
curtail its growth activities. There can be no assurance that additional
financing will be available to the Company on commercially reasonable terms,
or at all.
Proceeds not immediately required for the purposes described above will be
invested principally in United States government securities, short-term
certificates of deposit, money market funds or other short-term
interest-bearing investments.
DIVIDEND POLICY
The Company has not paid any cash dividends on its Common Stock since
inception. The Company intends to retain all future earnings for the
operation and expansion of its business and does not anticipate paying cash
dividends in the foreseeable future. Any future determination as to the
payment of cash dividends will depend upon a number of factors, including
future earnings, results of operations, capital requirements, the Company's
financial condition and any restrictions under credit agreements existing
from time to time, as well as such other factors as the Board of Directors
may deem relevant. No assurance can be given that the Company will pay any
dividends in the future.
DILUTION
The difference between the initial public offering price per share of
Common Stock and the pro forma net tangible book value per share after this
offering constitutes the dilution to investors in this offering. Net tangible
book value per share is determined by dividing the net tangible book value of
the Company (total tangible assets less total liabilities) by the number of
outstanding shares of Common Stock.
At March 31, 1996, the net tangible book value of the Company was
$4,394,980 or $1.49 per share. After giving effect to the sale of the
1,600,000 shares of Common Stock offered hereby at an assumed initial public
offering price of $7.75 per share (less underwriting discounts and
commissions and estimated expenses of this offering), and assuming the
conversion of the outstanding shares of Series B Preferred Stock and the
redemption of the outstanding 10% Debentures, the pro forma net tangible book
value of the Company at March 31, 1996, would have been $15,006,760, or $3.28
per share. This represents an immediate increase in net tangible book value
of $1.79 per share to the existing shareholders and an immediate dilution of
$4.47 per share to new investors. The following table illustrates the
foregoing information with respect to dilution to new investors on a per
share basis:
PUBLIC OFFERING PRICE OF COMMON STOCK ........... $7.75
Net tangible book value before offering ...... $1.49
Increase attributable to new investors ....... 1.79
Pro forma net tangible book value after offering 3.28
--------
Total dilution to new investors ................. $4.47
========
16
<PAGE>
The following table sets forth, at March 31, 1996 with respect to the Company's
existing shareholders and new investors, a comparison of the number of shares
of Common Stock acquired from the Company, the percentage ownership of such
shares, the total consideration paid, the percentage of total consideration
paid and the average price per share of Common Stock, based upon an assumed
initial public offering price of $7.75.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ---------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------------- ---------- --------------- -------- ----------------
<S> <C> <C> <C> <C> <C>
Existing Shareholders 2,954,653(1) 64.6% $1,710,922(3) 12.0% $0.58
================
New Investors ........ 1,600,000 35.0% 12,400,000 86.9% $7.75
---------------- ---------- --------------- ---------- ================
Total .............. 4,575,697(1)(2) 100.0% $14,265,922(4) 100.0%
================ ========== =============== ========
</TABLE>
- -----------------------------------------------------------------------------
(1) Does not include (i) 240,000 shares of Common Stock reserved for issuance
upon exercise of the Underwriters' over-allotment option, (ii) 160,000
shares of Common Stock reserved for issuance upon exercise of the
Representative's Warrants, (iii) an aggregate of 406,448 shares of Common
Stock reserved for issuance upon the exercise of outstanding options
under the Company's Employee Stock Option and Incentive Plan (the
"Employee Stock Option Plan") and Directors' Stock Option Plan (the
"Directors' Plan") (collectively, the "Plans"), (iv) an aggregate of
193,552 shares of Common Stock reserved for issuance upon exercise of
options available for future grant and future grants of restricted stock
awards under the Plans, (v) 98,138 shares of Common Stock reserved for
issuance upon exercise of outstanding options ("Sales Representative
Options") granted to certain sales representatives of the Company, (vi)
9,000 shares of Common Stock reserved for issuance upon exercise of
outstanding options (the "License Options") issued in connection with
certain license agreements, (vii) 8,296 shares of Common Stock reserved
for issuance upon exercise of outstanding warrants (the "Series A
Warrants") issued in connection with the issuance of the Series A
Preferred Stock, $.01 par value (the "Series A Preferred Stock"), of the
Company, (viii) 2,250 shares of Common Stock reserved for issuance upon
exercise of outstanding warrants (the "Series C Warrants") issued in
connection with the issuance of the Series C Preferred Stock, $.01 par
value (the "Series C Preferred Stock"), of the Company, (ix) 3,810 shares
of Common Stock reserved for issuance upon exercise of outstanding
warrants (the "Reid Warrants") issued in connection with the purchase by
the Company of certain software, (x) 457 shares of Common Stock reserved
for issuance upon exercise of warrants (the "ACBI Warrants") issuable
upon consummation of this offering, (xi) 35,470 shares of Common Stock
reserved for issuance upon conversion of the 10% Debentures assuming a
conversion rate of $7.33 per share, (xii) 30,455 shares of Common Stock
reserved for issuance upon exercise of outstanding warrants (the
"Debenture Warrants") issued in connection with the issuance of the
Company's outstanding 8% Debentures, (xiii) 17,576 shares of Common Stock
reserved for issuance upon conversion of the outstanding shares of Series
A Preferred Stock and (xiv) 20,000 shares of Common Stock reserved for
issuance upon exercise of outstanding options (the "Kearney Options")
granted to a director of the Company. Assumes the redemption of the
Company's outstanding shares of Series C Preferred Stock. See
"Management--Stock Option Plans," "Certain Transactions," "Description of
Securities" and "Underwriting."
(2) Includes 13,548 shares of Common Stock issuable upon consummation of this
offering pursuant to the automatic conversion of the outstanding shares
of Series B Preferred Stock, $.01 par value (the "Series B Preferred
Stock"), of the Company and 7,496 shares of Common Stock issued upon
conversion of $50,000 in principal amount of the 10% Debentures converted
in April 1996 at the conversion rate of $6.67 per share.
(3) See "Certain Transactions."
(4) Includes $105,000 for the liquidation value of the outstanding shares of
Series B Preferred Stock which automatically convert into 13,548 shares
of Common Stock upon consummation of this offering and $50,000 for the
principal amount of the 10% Debentures that were converted in April 1996
into 7,496 shares of Common Stock at a conversion rate of $6.67 per
share.
The above table assumes no exercise of the Underwriters' over-allotment
option. If such option is exercised in full, the new investors will have paid
$14,260,000 for 1,840,000 shares of Common Stock, representing 89.3 percent
of the total consideration, for 38.4 percent of the total number of shares of
Common Stock outstanding.
17
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at March
31, 1996, and as adjusted to give effect to the issuance and sale of the
1,600,000 shares of Common Stock offered hereby at an assumed offering price
of $7.75 per share and the application of the net proceeds therefrom.
<TABLE>
<CAPTION>
MARCH 31, 1996
-----------------------------
ACTUAL AS ADJUSTED
------------- --------------
<S> <C> <C>
Short-term debt .............................................................. $3,020,284 $ 2,762,706
============= ==============
Long-term debt, less current portion ......................................... $1,698,493 $ 21,225
------------- --------------
Mandatorily redeemable preferred stock:
Series A preferred stock, $.01 par value; liquidation value $136,220;
13,622 shares authorized, issued and outstanding; and no shares issued and
outstanding, as adjusted(1) .............................................. 136,220 --
Series C preferred stock, $.01 par value; liquidation value $50,000; 5,000
shares authorized, issued and outstanding; and no shares issued and
outstanding, as adjusted(1) .............................................. 50,000 --
Nonredeemable preferred stock:
Series B preferred stock, $.01 par value; liquidation value $105,000;
20,000 shares authorized; 10,500 shares issued and outstanding; and
no shares issued and outstanding, as adjusted(2) ......................... 105,000 --
Common shareholders' equity:
Common Stock, $.01 par value; 15,000,000 shares authorized; 2,954,653
shares issued and outstanding(3); and 4,575,697 shares issued and
outstanding, as adjusted(3)(4) ........................................... 29,546 45,757
Additional paid-in capital ................................................. 1,681,376 12,568,165
Retained earnings .......................................................... 2,476,780 2,476,780
------------- --------------
Total common shareholders' equity .......................................... 4,187,702 15,090,702
------------- --------------
Total capitalization and short-term debt .................................. $9,197,699 $17,874,633
============= ==============
</TABLE>
- --------
(1) As adjusted assumes the redemption of the outstanding shares of Series A
Preferred Stock and Series C Preferred Stock. See "Description of
Securities--Preferred Stock."
(2) As adjusted reflects the automatic conversion of the outstanding
shares of Series B Preferred Stock into shares of Common Stock upon the
consummation of this offering. See "Description of Securities--Preferred
Stock."
(3) Does not include (i) 240,000 shares of Common Stock reserved for
issuance upon exercise of the Underwriters' over-allotment option, (ii)
160,000 shares of Common Stock reserved for issuance upon exercise of the
Representative's Warrants, (iii) an aggregate of 406,448 shares of Common
Stock reserved for issuance upon the exercise of outstanding options under
the Plans, (iv) an aggregate of 193,552 shares of Common Stock reserved for
issuance upon exercise of options available for future grant and future
grants of restricted awards under the Plans, (v) 98,138 shares of Common
Stock reserved for issuance upon exercise of the Sales Representative
Options, (vi) 9,000 shares of Common Stock reserved for issuance upon
exercise of the License Options, (vii) 8,296 shares of Common Stock reserved
for issuance upon exercise of the Series A Warrants, (viii) 2,250 shares of
Common Stock reserved for issuance upon exercise of the Series C Warrants,
(ix) 3,810 shares of Common Stock reserved for issuance upon exercise of the
Reid Warrants, (x) 457 shares of Common Stock reserved for issuance upon
exercise of the ACBI Warrants, (xi) 35,470 shares of Common Stock reserved
for issuance upon conversion of the 10% Debentures assuming a conversion
rate of $7.33 per share, (xii) 30,455 shares of Common Stock reserved for
issuance upon exercise of the Debenture Warrants, (xiii) 17,576 shares of
Common Stock reserved for issuance upon conversion of the outstanding shares
of Series A Preferred Stock and (xiv) 20,000 shares of Common Stock reserved
for issuance upon exercise of the Kearney Options. See "Management--Stock
Option Plans," "Certain Transactions," "Description of Securities" and
"Underwriting."
(4) As adjusted includes 13,548 shares of Common Stock issuable
upon consummation of this offering pursuant to the automatic conversion of
the outstanding shares of Series B Preferred Stock and the April 1996
conversion of $50,000 of 10% Debentures into 7,496 shares of Common Stock at
the conversion rate of $6.67 per share. As adjusted reflects the redemption
of the outstanding shares of Series A Preferred Stock and Series C Preferred
Stock upon consummation of this offering.
18
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data set forth below has been derived from the
financial statements of the Company. The financial statements as of December
31, 1994 and 1995 and for the three years ended December 31, 1995 have been
audited by Deloitte & Touche LLP, independent auditors, and such financial
statements and the report thereon are included in this Prospectus. The
financial statements as of December 31, 1991, 1992 and 1993 and for the two
years ended 1992 have also been audited by Deloitte & Touche LLP and are not
included herein. The financial statements as of March 31, 1995 and 1996 and
for the three months then ended are unaudited. However, in the opinion of
management, all adjustments of a normal recurring nature which are necessary
to present a fair statement of the results for the interim periods have been
made. The unaudited results of operations for the interim periods are not
necessarily indicative of the results for the full year. The Company did not
pay any dividends on the Common Stock during any of the periods covered by
the selected financial data set forth below.
The selected financial information set forth below should be read in
conjunction with the financial statements appearing elsewhere in this
Prospectus, including the notes thereto.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------------------------------------- -----------------------------
1991 1992 1993 1994 1995 1995 1996
------------- ------------- ------------- ------------- ------------- ----------------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Net sales .................. $2,424,056 $3,722,478 $4,675,505 $5,355,804 $9,118,075 $1,688,481 $3,423,629
Cost of goods sold ......... 556,135 941,528 1,360,025 1,586,633 2,995,955 445,585 1,267,332
Gross profit ............... 1,867,921 2,780,950 3,315,480 3,769,171 6,122,120 1,242,896 2,156,297
Operating expenses:
Sales and marketing ....... 721,109 1,101,678 1,405,043 1,500,514 2,326,286 494,337 837,209
General and administrative 327,972 589,369 594,645 750,669 1,033,319 240,038 273,276
Research and
development ............. 183,896 258,738 488,029 597,812 722,118 187,670 161,054
Royalties ................. -- 3,189 11,686 14,767 210,127 20,485 144,196
Depreciation and
amortization ............ 91,001 89,456 142,481 224,624 350,612 71,086 116,075
Total operating expenses .. 1,323,978 2,042,430 2,641,884 3,088,386 4,642,462 1,013,616 1,531,810
Income from operations .... 543,943 738,520 673,596 680,785 1,479,658 229,280 624,487
Other income (expense):
Interest income
(expense), net .......... (102,842) (95,274) (137,448) (158,288) (273,110) (41,584) (104,109)
Income from sub-license
agreement, net .......... -- -- -- -- 170,534 -- --
Equity in net loss of
unconsolidated subsidiary -- -- -- -- (22,361) -- (18,000)
Income before provision for
income taxes ............. 441,101 643,246 536,148 522,497 1,354,721 187,696 502,378
Provision for
income taxes ............. 135,000 225,586 182,709 176,369 527,793 71,325 190,903
Net income ................. 306,101 417,660 353,439 346,128 826,928 116,371 311,475
Preferred stock dividends . -- -- 8,194 19,298 22,798 4,824 5,824
Net income available to
common shareholders ...... 306,101 417,660 345,245 326,830 804,130 111,547 305,651
Net income per
common and common
equivalent share ......... $ 0.11 $ 0.15 $ 0.12 $ 0.11 $ 0.27(1) $ 0.04 $ 0.10(1)
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
AS OF
AS OF DECEMBER 31, MARCH 31,
------------------------------------------------------------------------- -------------
1991 1992 1993 1994 1995 1996
------------- ------------- ------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total current assets .............. $2,660,263 $4,029,368 $4,128,169 $4,781,430 $ 8,411,133 $ 8,727,985
Total assets ...................... 2,955,958 4,423,050 5,035,368 6,296,745 10,620,750 11,674,597
Total current liabilities ......... 1,612,792 1,926,356 1,940,097 1,896,488 4,476,374 5,283,382
Total liabilities ................. 1,630,792 2,485,352 2,509,605 3,210,993 6,452,479 7,195,675
Total preferred stock ............. -- -- 241,220 241,220 291,220 291,220
Total common shareholders' equity.. 1,325,166 1,937,698 2,284,543 2,844,532 3,877,051 4,187,702
</TABLE>
(1) The Company expects to use a portion of the proceeds from this offering
to repay certain outstanding debt and redeem certain outsstanding shares
of preferred stock. Earnings per share, adjusted for the effect of the
expected repayment as if the transaction had occurred at the beginning of
each period, would have been $.28 for the year ended December 31, 1995
and $.10 for the three months ended March 31, 1996.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company develops, manufactures, markets and sells orthopaedic implant
devices and related surgical instrumentation to hospitals and physicians.
Sales of hip implant products historically accounted for most of the
Company's revenues and profits; however, since 1995, sales of knee implant
products have accounted for an increasing portion of its revenues and
profits. The Company anticipates that sales of knee implant products from
which the Company derives larger profit margins than those derived from its
sale of hip implant products will continue to account for an increasing
portion of its revenues and profits. However, there can be no assurance that
sales of knee implant products will continue to increase or that the
Company's profit margins will not be materially adversely affected as a
result of increased price competition or otherwise. Furthermore, the Company
anticipates that overall profit margins in the hip implant market may decline
as a result of increasing price competition.
The following table sets forth for the periods indicated information with
respect to the number of units of the Company's products sold and the dollar
amount and percentages of revenues derived from such sales (dollars in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------- THREE MONTHS ENDED
1993 1994 1995 MARCH 31, 1996
--------------------- ---------------------- --------------------- -----------------------
UNITS $ % UNITS $ % UNITS $ % UNITS $ %
----- ----- ---- ----- ----- ---- ------ ----- ---- ----- ------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
HIP PRODUCTS:
CEMENTED HIP IMPLANTS ........ 2,868 2,277 48.7 3,422 2,554 47.7 3,777 2,567 28.2 1,134 556.4 16.3
POROUS COATED HIP IMPLANTS .. 5,762 1,933 41.3 5,614 1,988 37.1 5,751 1,931 21.2 1,393 551.9 16.1
BIPOLAR PROSTHESIS ........... 720 349 7.5 814 394 7.4 846 460 5.0 181 101.1 3.0
----- ----- ---- ----- ----- ---- ------ ----- ---- ----- ------- ----
TOTAL HIP PRODUCTS .......... 9,350 4,559 97.5 9,850 4,936 92.2 10,374 4,958 54.4 2,708 1,209.4 35.3
KNEE PRODUCTS:
CEMENTED CRUCIATE SPARING
KNEE IMPLANTS .............. 2 1 -- 302 264 4.9 3,207 1,930 21.2 2,232 1,012.9 29.6
CEMENTED POSTERIOR STABILIZED
KNEE IMPLANTS .............. -- -- -- -- -- -- 1,233 550 6.0 870 409.4 12.0
POROUS COATED KNEE IMPLANTS... -- -- -- -- -- -- 571 989 10.8 368 477.9 14.0
----- ----- ---- ----- ----- ---- ------ ----- ---- ----- ------- ----
TOTAL KNEE PRODUCTS ........ 2 1 -- 302 264 4.9 5,011 3,469 38.0 3,470 1,900.2 55.5
INSTRUMENT SALES AND RENTAL... 81 1.7 122 2.3 644 7.1 299.3 8.7
MISCELLANEOUS ................ 34 .8 34 .6 47 .5 14.7 0.4
----- ---- ----- ---- ----- ---- ------- ----
TOTAL ...................... 4,675 100.0 5,356 100.0 9,118 100.0 3,423.6 100.0
===== ===== ===== ===== ===== ===== ======= =====
</TABLE>
RESULTS OF OPERATIONS
QUARTER ENDED MARCH 31, 1996 COMPARED TO QUARTER ENDED MARCH 31, 1995
Net sales increased by $1,735,148, or 102.8%, to $3,423,629 in the quarter
ended March 31, 1996 from $1,688,481 in the quarter ended March 31, 1995. The
increase in net sales resulted primarily from increased unit volume of the
Company's knee implant products and increased sales of knee instrument sets
to sales agents and distributors. Sales of knee implant products increased by
960% on a unit basis and by 520% on a dollar basis from the quarter ended
March 31, 1995 to the quarter ended March 31, 1996, as a result of the
commencement of full-scale marketing of the Optetrak/registered trademark/
knee system. Knee system instrument sales and rentals increased to
approximately $264,000 in the quarter ended March 31, 1996 from $5,400 in the
quarter ended March 31, 1995. Sales of hip implant products decreased by 1.2%
on a unit basis and 9.6% on a dollar basis from the quarter ended March 31,
1995 to the quarter ended March 31, 1996. Sales of the MCS/registered
trademark/ porous coated hip products increased by 35.6% on a unit basis and
21
<PAGE>
11.0% on a dollar basis. Sales of cemented hip implant products decreased by
24.9% on a unit basis and 23.7% on a dollar basis. Sales of the
Opteon/registered trademark/ medium demand cemented stem increased by 6.7% on
a unit basis and decreased by 7.4% on a dollar basis. Sales of the high
demand cemented stem decreased by 40.5% on a unit basis and 41.3% on a dollar
basis. The list price for the Opteon/registered trademark/ stem is $999 and
the list price for the high demand cemented stem is $1,695. Therefore, the
average selling price of total cemented hip implants declined.
Gross profit increased by $913,401, or 73.5%, to $2,156,297 in the quarter
ended March 31, 1996 from $1,242,896 in the quarter ended March 31, 1995. As
a percentage of sales, gross profit decreased to 63.0% in the quarter ended
March 31, 1996 from 73.6% in the quarter ended March 31, 1995. The decrease
was primarily the result of an increased mix of international sales,
instrument sales and Opteon/registered trademark/ stem sales at lower
margins.
Total operating expenses increased by $518,194, or 51.1%, to $1,531,810 in
the quarter ended March 31, 1996 from $1,013,616 in the quarter ended March
31, 1995. Sales and marketing expense, the largest component of total
operating expenses, increased by $342,872, or 69.4%, to $837,209 in the
quarter ended March 31, 1996 from $494,337 in the quarter ended March 31,
1995. Sales and marketing expenses declined as a percentage of sales to 24.5%
in the quarter ended March 31, 1996 from 29.3% in the quarter ended March 31,
1995. The Company's sales and marketing expenses are largely variable costs
based on sales levels, with the largest component being commissions. The
remaining fixed component of these expenses was spread over a larger sales
volume in the quarter ended March 31, 1996, resulting in sales and marketing
expenses constituting a lower percentage of sales.
General and administrative expenses increased by $33,238, or 13.8%, to
$273,276 in the quarter ended March 31, 1996 from $240,038 in the quarter
ended March 31, 1995. Total general and administrative expenses increased
primarily as a result of additional administrative expenses associated with
the expansion of the Company. As a percentage of sales, general and
administrative expenses decreased to 8.0% in the quarter ended March 31, 1996
from 14.2% in the quarter ended March 31, 1995.
Research and development expenses decreased by $26,616, or 14.2%, to
$161,054 in the quarter ended March 31, 1996 from $187,670 in the quarter
ended March 31, 1995, primarily as a result of completion of development of
the primary knee product line and instruments. The Company expects actual
research and development expenses to increase for the full year of 1996 as
compared to 1995, due to development expenses associated with the revision
knee and new hip and shoulder systems. Research and development expenses were
4.7% and 11.1% of sales in the quarters ended March 31, 1996 and 1995,
respectively.
Depreciation and amortization increased to $116,075 in the quarter ended
March 31, 1996 from $71,086 in the quarter ended March 31, 1995, as a result
of the addition of fixed assets.
Royalty expenses increased by $123,711, or 603.9%, to $144,196 in the
quarter ended March 31, 1996 from $20,485 in the quarter ended March 31,
1995, primarily as a result of growth in sales of knee implant products. As a
percentage of sales, royalty expenses were 4.2% and 1.2% in the quarters
ended March 31, 1996 and 1995, respectively.
The Company's income from operations increased by $395,207, or 172.4%, to
$624,487 in the quarter ended March 31, 1996 from $229,280 in the quarter
ended March 31, 1995. The increase was primarily attributable to the increase
in sales and gross profits, partially offset by the increase in operating
expenses.
Interest expense (net) increased to $104,109 in the quarter ended March
31, 1996 from $41,584 in the quarter ended March 31, 1995, as outstanding
indebtedness increased. The outstanding principal balance of the Company's
debt averaged approximately $2,035,000 and $4,347,000 during the quarters
ended March 31, 1995 and 1996, respectively. The weighted average interest
rate on such debt was 8.77% and 9.86% for the quarters ended March 31, 1995
and 1996, respectively.
22
<PAGE>
In July 1995, the Company purchased a 50% interest in Techmed S.p.A.
("Techmed"), its Italian distributor. The investment is accounted for by the
equity method. Included in other expense in the quarter ended March 31, 1996
is equity in the net loss of such subsidiary in the amount of $18,000.
Income before provision for income taxes increased by $314,682, or 167.7%,
to $502,378 in the quarter ended March 31, 1996 from $187,696 in the quarter
ended March 31, 1995. The provision for income taxes was $190,903 in the
quarter ended March 31, 1996 compared to $71,325 in the quarter ended March
31, 1995. The increase resulted from the increase in income before provision
for income taxes.
As a result, the Company had net income of $311,475 in the quarter ended
March 31, 1996 compared to $116,371 in the quarter ended March 31, 1995, a
167.7% increase.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Net sales increased by $3,762,271, or 70.2%, to $9,118,075 in 1995 from
$5,355,804 in 1994. The increase in net sales resulted primarily from
increased unit volume of the Company's knee implant products. Sales of
cemented hip implant products increased by 10.3% on a unit basis and by 0.5%
on a dollar basis from 1994 to 1995. Cemented hip implants increased on a
unit basis largely due to increased sales of the Opteon(Registered Trademark)
moderate demand femoral stem. While overall unit volume of cemented implants
increased, the Opteon(Registered Trademark) stem was substituted by some
customers for the Company's high demand cemented stem. The list price for the
Opteon/registered trademark/ stem is $999 and the list price for the high
demand cemented stem is $1,695. Therefore, the average price of total
cemented hip implant sales declined. The Company expects that this shift in
product mix will continue in the future but at a somewhat slower rate. Sales
of porous coated hip implants increased by 2.4% on a unit basis and decreased
by 2.9% on a dollar basis. Unit sales of porous coated hip implants increased
as the Company reduced prices to penetrate the U.S. and international markets
more effectively. The price reductions typically were granted in response to
competitive quotes. Porous coated hip implant products continue to provide
one of the highest gross profit margins of the Company's products. Sales of
instruments and revenue from rental charges for instruments are included in
net sales and also increased from 1994 to 1995.
Gross profit increased by $2,352,949, or 62.4%, to $6,122,120 in 1995 from
$3,769,171 in 1994. As a percentage of sales, gross profit decreased to 67.1%
in 1995 from 70.4% in 1994. The decrease was primarily due to the increased
proportional sales of cemented hip implants, which have a lower gross profit
margin, and a corresponding decrease in sales of porous coated hip products,
which have a higher gross profit margin. The decrease was also due to
decreased selling prices of porous coated implant products and increased
international sales. International sales are typically at lower gross profit
margins. However, the Company does not incur commission expense on such
sales. The decrease in gross profits from sales of hip implants was partially
offset by increased sales of knee implants, from which the Company typically
realizes higher gross profit margins.
Total operating expenses increased by $1,554,076, or 50.3%, to $4,642,462
in 1995 from $3,088,386 in 1994. Sales and marketing expenses, the largest
component of total operating expenses, increased by $825,772, or 55.0%, to
$2,326,286 in 1995 from $1,500,514 in 1994. Sales and marketing expenses
declined as a percentage of sales to 25.5% in 1995 from 28.0% in 1994. The
Company's sales and marketing expenses are largely variable costs based on
sales levels, with the largest component being commissions. The remaining
fixed component of these expenses was spread over a larger sales volume in
1995, resulting in sales and marketing expenses constituting a lower
percentage of sales.
General and administrative expenses increased by $282,650, or 37.7%, to
$1,033,319 in 1995 from $750,669 in 1994. Total general and administrative
expenses increased primarily as a result of the hiring of additional staff
and increases in administrative expenses associated with the expansion of the
Company. As a percentage of sales, general and administrative expenses
decreased to 11.3% in 1995 from 14.0% in 1994.
23
<PAGE>
Research and development expenses increased by $124,306, or 20.8%, to
$722,118 in 1995 from $597,812 in 1994, primarily as a result of an increase
in project expenses and the addition of a designer-draftsman to support the
expanded number of hip and knee development programs. Research and
development expenses were 7.9% and 11.2% of sales for 1995 and 1994,
respectively.
Depreciation and amortization increased to $350,612 in 1995 from $224,624
in 1994, as a result of the addition of fixed assets.
Royalty expenses increased by $195,360, or 1,323.9%, to $210,127 in 1995
from $14,767 in 1994 primarily as a result of sales of knee implant products.
In 1995, the Company accrued royalty expenses of $89,274 in connection with
the license agreement with the Hospital for Special Surgery and $108,853 in
connection with consulting agreements. As a percentage of sales, royalty
expenses were 2.3% and 0.3% in 1995 and 1994, respectively.
The Company's income from operations increased by $798,873, or 117.3%, to
$1,479,658 in 1995 from $680,785 in 1994. The increase was attributable to
the increase in sales and gross profits, partially offset by the increase in
operating expenses.
Interest expense, net increased to $273,110 in 1995 from $158,288 in 1994
as outstanding indebtedness increased from 1994 to 1995. The outstanding
principal balance of the Company's debt averaged approximately $2,059,000 and
$2,900,000 during 1994 and 1995, respectively. The weighted average interest
rate on such debt was 8.25% and 9.87% for 1994 and 1995, respectively.
The Company entered into a sublicense agreement (the "Sublicense
Agreement") with Sofamor Danek Properties, Inc. ("SDP") pursuant to which the
Company received a $250,000 license fee in 1995. The Company realized income
of $170,534 in 1995 from the Sublicense Agreement, representing the $250,000
license fee net of expenses incurred under the license agreement pursuant to
which the Company obtained the rights to the sublicensed technology.
In July 1995, the Company purchased a 50% interest in Techmed, its Italian
distributor. The investment is accounted for by the equity method. Included
in other expense in 1995 is equity in the net loss of such subsidiary in the
amount of $22,361.
Income before provision for income taxes increased by $832,224, or 159.3%,
to $1,354,721 in 1995 from $522,497 in 1994. The provision for income taxes
was $527,793 in 1995 compared to $176,369 in 1994. The increase resulted from
the increase in income before provision for income taxes and an increase in
the tax rate to 39.0% in 1995 compared to 33.8% in 1994. As a result, the
Company had net income of $826,928 in 1995 compared to $346,128 in 1994.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
Net sales increased by $680,299, or 14.6%, to $5,355,804 in 1994 from
$4,675,505 in 1993. The increase in net sales resulted from increased unit
volume of the Company's porous coated hip implant products, its cemented hip
implant products led by the Opteon/registered trademark/ forged, cobalt
chrome, moderate demand femoral stem and limited sales of its knee implant
system to design team surgeons. Sales of instruments and revenue from rental
charges for instruments which are included in net sales also increased from
1993 to 1994.
Gross profit increased by $453,691, or 13.7%, to $3,769,171 in 1994 from
$3,315,480 in 1993. As a percentage of sales, gross profit decreased slightly
to 70.4% in 1994 from 70.9% in 1993. The Company has offered some discounted
prices in response to competitive conditions in the United States arising
from discounting of prices by its competitors.
Total operating expenses increased by $446,502, or 16.9%, to $3,088,386 in
1994 from $2,641,884 in 1993. As a percentage of sales, total operating
expenses increased to 57.7% in 1994 from 56.5% in 1993.
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Sales and marketing expenses, the largest component of total operating
expenses, increased by $95,471, or 6.8%, to $1,500,514 in 1994 from
$1,405,043 in 1993. Sales and marketing expenses declined as a percentage of
sales to 28.0% in 1994 from 30.1% in 1993. The Company's sales and marketing
expenses are largely variable costs with the largest component being
commissions. The remaining fixed component of these expenses was spread over
a larger sales volume in 1994, as a result of which sales and marketing
expenses constituted a lower percentage of sales.
General and administrative expenses increased by $156,024, or 26.2%, to
$750,669 in 1994 from $594,645 in 1993. Total general and administrative
expenses increased as a result of the hiring of additional staff, including a
regulatory affairs employee hired in 1994, and increases in administrative
expenses associated with the expansion of the Company. As a percentage of
sales, general and administrative expenses increased to 14.0% in 1994 from
12.7% in 1993.
Research and development expenses increased by $109,783, or 22.5%, to
$597,812 in 1994 from $488,029 in 1993, primarily as a result of the hiring
of additional staff and the project expenses associated with the development
of new products. Research and development expenses were 11.2% and 10.4% of
sales in 1994 and 1993, respectively.
Depreciation and amortization increased to $224,624, or 4.2% of sales, in
1994 from $142,481, or 3.0% of sales, in 1993, as a result of the addition of
fixed assets associated with the manufacture of the knee implant system.
Royalty expenses increased by $3,081, or 26.4%, to $14,767 in 1994 from
$11,686 in 1993.
The Company's income from operations increased slightly by $7,189, or
1.1%, to $680,785 in 1994 compared to $673,596 in 1993. The increase was
attributable to the increase in sales and gross profits previously described,
offset by the increase in operating expenses.
Interest expense, net increased slightly to $158,288 in 1994 compared to
$137,448 in 1993 as interest rates increased over the period. The outstanding
principal balance of the Company's debt averaged approximately $2,030,000 and
$2,059,000 during 1993 and 1994, respectively. The weighted average interest
rate on such debt was 7.33% and 8.25% for 1993 and 1994, respectively.
Income before provision for income taxes decreased $13,651, or 2.5%, to
$522,497 in 1994 from $536,148 in 1993. The provision for income taxes was
$176,369 in 1994 compared to $182,709 in 1993 due to the decrease in income
before provision for income taxes.
As a result, the Company had net income of $346,128 in 1994 compared to
$353,439 in 1993.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1996, the Company had working capital of $3,444,603 compared
to $3,934,759 at December 31, 1995. Since inception, the Company has financed
its operations primarily through borrowings, the sale of equity securities
and cash flow from operations.
The Company has entered into a loan agreement with the Lender which
provides for a term loan in the amount of $1,250,000 and a $3,000,000 line of
credit. At March 31, 1996, $1,084,799 was outstanding under the term loan and
$2,488,259 was outstanding under the line of credit. The term loan bears
interest at a variable rate equal to the 30-day commercial paper rate plus
3.05% per annum (8.8% at March 31, 1996), is payable in monthly installments
of principal and interest and is due in August 1999. The line of credit bears
interest at a variable rate equal to the 30-day commercial paper rate plus
2.65% per annum (8.4% at March 31, 1996) and expires in June 1996. Borrowings
under the line of credit are available to the extent of 80% of eligible
receivables plus 50% of eligible inventory. At March 31, 1996, $365,211 was
available for borrowing under the line of credit. Assuming a public offering
price of $7.75, the Company intends to use a portion of the net proceeds of
this offering to repay the term loan in full.
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In addition, the Company may determine to use a portion of the net proceeds
allocated to working capital to repay the outstanding balance under the line
of credit. If the initial public offering price is less than $7.75, the
Company intends to reduce the amount to be repaid under the term loan.
Substantially all of the Company's assets are pledged to the Lender as
collateral. The Company's loan agreements with the Lender limit or prohibit
the Company from merging or consolidating with another corporation, selling
all or substantially all of its assets, purchasing all or substantially all
of the assets of another entity, permitting or causing any material change in
its controlling ownership or controlling senior management or operating in
any material business other than its existing business. William Petty and
Betty Petty, executive officers and principal shareholders of the Company,
have guaranteed the repayment of the Company's obligations under the loan
agreement with the Lender. It is not anticipated that such persons will
provide personal guarantees of the Company's obligations following
consummation of this offering.
The Company also has a term loan with a bank secured by certain of the
Company's real property. At March 31, 1996, $90,047 was outstanding under the
term loan. The term loan bears interest at the prime rate plus 1% per annum
and is payable in monthly installments of principal and interest through
September 1999. The Company intends to use a portion of the net proceeds of
this offering to repay this term loan in full.
The Company has issued an aggregate of $500,000 in principal amount of its
8% Debentures to Michael M. Kearney, a shareholder of the Company, and R.
Wynn Kearney, a director and shareholder of the Company, of which $450,000
were outstanding at December 31, 1995. Interest on the 8% Debentures accrues
at the rate of 8% per annum and is payable quarterly. The Company may redeem
the 8% Debentures in full, at its option, upon the consummation of this
offering, at a redemption price equal to the outstanding principal amount
thereof. In connection with the issuance of the 8% Debentures, the Company
issued to the holders thereof the Debenture Warrants to purchase a number of
shares of Common Stock equal to two-thirds of 1% of the number of shares of
the Common Stock outstanding upon consummation of this offering, at an
exercise price per share equal to 75% of the initial public offering price of
the Common Stock. The Debenture Warrants are exercisable during the
three-year period commencing on the date of consummation of this offering.
The Company intends to use a portion of the net proceeds of this offering to
redeem the 8% Debentures in full. In addition, in April and May 1995, the
Company issued an aggregate of $310,000 in principal amount of its 10%
Debentures, of which $100,000 was issued to Alan Chervitz, a shareholder of
the Company. The 10% Debentures are payable in full three years from the date
of issuance thereof. Interest on the 10% Debentures accrues at the rate of
10% per annum and is payable quarterly. The 10% Debentures are redeemable, in
full, at the option of the holders thereof, upon the consummation of this
offering and for six months thereafter, at a redemption price equal to the
outstanding principal amount thereof. The 10% Debentures are also
convertible, at the option of the holders thereof, during the period from the
date of the issuance thereof until the end of the sixth month following the
consummation of this offering and at the maturity thereof, into shares of
Common Stock at a conversion rate per share equal to the lower of (i) the
initial public offering price of the Common Stock or (ii) (a) $6.67, if such
conversion occurs during the first year following the date of issuance, (b)
$7.33, if such conversion occurs during the second year following the date of
issuance and (c) $8.67, if such conversion occurs during the third year
following the date of issuance. In April 1996, the holders of $50,000 of 10%
Debentures elected to convert such debentures into shares of Common Stock.
The Company had net cash provided by operating activities of $324,421 in
the quarter ended March 31, 1996 compared to net cash used in operating
activities of $543,923 in the quarter ended March 31, 1995. The primary
reasons for the change were the increase in sales of the Company's implant
products and the related decrease in inventory levels in the amount of
approximately $319,000. Net cash used in investing activities was $853,910
and $49,150 in the quarters ended March 31, 1996 and 1995, respectively,
representing the purchase of knee system instrumentation in the amount of
approximately $827,000. Net cash provided by financing activities was
$543,434 and $357,279 in the quarters ended March 31, 1996 and 1995,
respectively. At March 31, 1996, the Company had cash and cash equivalents of
$215,924 compared to $31,622 at March 31, 1995.
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The Company used net cash in operating activities of $956,834 in 1995
compared to net cash provided by operating activities of $714,001 in 1994,
primarily as a result of increased accounts receivable and inventories. The
primary reasons for the increase in accounts receivables were an overall
increase in the Company's sales, especially an increase in foreign sales. The
Company offers its domestic customers 30 day terms, while it offers its
foreign customers 60 to 90 day terms. The primary reason for the increase in
inventory was the commencement of full-scale marketing of the Company's
Optetrak/registered trademark/ knee system. Net cash used in investing
activities was $974,772 and $934,173 in 1995 and 1994, respectively,
representing primarily the purchase of instruments, property and equipment
and an investment in Techmed, an unconsolidated subsidiary. Net cash provided
by financing activities was $1,866,169 and $315,100 in 1995 and 1994,
respectively. At December 31, 1995, the Company had cash and cash equivalents
of $201,979 compared to $267,416 at December 31, 1994.
The Company had net cash provided by operating activities of $714,001 in
1994 compared to net cash used in operating activities of $4,402 in 1993. The
primary reason for the increase was a reduction in the increase in inventory
and a substantial increase in accounts payable. Net cash used in investing
activities was $934,173 and $383,188 in 1994 and 1993, respectively,
representing primarily the purchase of instruments, property and equipment.
Net cash provided by financing activities was $315,100 in 1994 compared to
net cash used in financing activities of $14,256 in 1993 as the Company
issued stock and received funds under the term loan with the Lender. At
December 31, 1994, the Company had cash and cash equivalents of $267,416
compared to $172,488 at December 31, 1993.
The Company's principal working capital requirements have been for the
purchase and maintenance of inventory, research and development and the
extension of credit to customers. The Company's accounts receivable, less
allowances for doubtful accounts, were $2,047,801 at March 31, 1996,
$1,802,129, at December 31, 1995, and $694,284 at December 31, 1994. The
Company's accounts receivable are primarily due from hospitals. At March 31,
1996, the Company had an allowance for doubtful accounts, which the Company
believes is currently adequate for the size and nature of its receivables.
Nevertheless, delays in collection or uncollectibility of accounts receivable
could have an adverse impact on the Company's liquidity and working capital
position and could require the Company to increase its allowance for doubtful
accounts.
The Company's capital expenditures have typically been for the purchase of
tooling and equipment and instruments utilized in joint reconstructive
surgery.
The Company believes that funds from operations and financing activities,
borrowings under its existing credit facilities and the net proceeds from
this offering will be sufficient to satisfy its contemplated cash
requirements for at least 12 months following the consummation of this
offering, in the event of rapid expansion of the Company's business, or for
at least 24 months following the consummation of this offering, in the event
of more moderate expansion of its business.
The foregoing Management's Discussion and Analysis contains various
"forward looking statements" within the meaning of Section 27A of the
Securities Act 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
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.
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BUSINESS
The Company develops, manufactures, markets and sells orthopaedic implant
devices and related surgical instrumentation to hospitals and physicians in
the United States and overseas. Prior to 1995, the Company's revenues were
derived primarily from sales of its primary hip replacement systems. During
1995, the Company introduced Optetrak/registered trademark/, a total primary
knee replacement system, which had been in development for three years. The
Optetrak/registered trademark/ knee system was conceived by the Company in
collaboration with members of its Scientific Advisory Board in cooperation
with the Hospital for Special Surgery, an internationally known hospital for
orthopaedic surgery. The Optetrak/registered trademark/ system represents a
highly differentiated product based on precision manufacturing techniques and
a design which reduces articular contact stress. The Optetrak/registered
trademark/ system is the most modern rendition of a series of knee implants
which were first introduced in 1974 and which are still being marketed by
certain of the Company's competitors. The Company has entered into an
agreement with the Hospital for Special Surgery which gives the Company a
non-exclusive option with respect to future knee systems developed at the
Hospital for Special Surgery. The Company anticipates the full scale
marketing of its existing line of knee systems in 1996 as well as the
development of a shoulder replacement program for introduction in 1998.
According to industry sources, United States sales of orthopaedic implant
products were approximately $1.6 billion in 1994, an increase of 5.6% from
1993. During 1994, sales of knee implants were approximately $818 million, an
increase of 8.9% from 1993, while sales of hip implants were approximately
$722 million, an increase of 1.0% from 1993. The Company estimates that there
were approximately 428,000 hip and knee joint replacements in the United
States in 1995 compared to approximately 345,000 in 1990. The Company expects
sales of hip and knee joint replacements in foreign markets to grow more
rapidly than in the United States.
Management believes that the growth in the industry is due to the increase
in the number of people over age 65, an increasingly active population,
improvements in technology and increased use of implants in younger patients.
According to an industry report, the United States population over 65 years
of age continues to grow as a percentage of the population. Longer life spans
and the continuing aging of the population increases the number of
individuals whose joints will be subject to failure. Furthermore, the
"baby-boomers" are approaching the age where arthritis and osteoporosis begin
to affect joints, necessitating joint replacement. As this segment of the
population continues to age, an increasing demand for joint replacement
procedures is anticipated. Finally, the earlier generations of implanted
joint replacement prostheses have begun to reach their maximum life and are
beginning to fail, resulting in an increased demand for hip and knee
revisions.
PRODUCTS
The Company's orthopaedic implant products are used to replace joints
which have deteriorated as a result of injury or diseases such as arthritis.
Reconstructive joint surgery involves the modification of the area
surrounding the affected joint and the insertion of a set of manufactured
implant components to replace or augment the joint. During the surgery, the
surgeon removes a portion of the bones that comprise the joint, prepares the
remaining bones and surrounding tissue and then installs the implant.
Knee implants are either total or unicompartmental. Total knee replacement
systems are used to replace the entire knee joint (I.E., the patella, upper
portion of the tibia and lower portion of the femur), while unicompartmental
systems are used to replace one of the two compartments between the femur and
the tibia. Primary knee implant systems are used to replace the natural knee
joint, while knee revision systems are used to replace the components of a
previously installed primary implant system that has failed. The components
of revision systems are specially designed to fill bony voids created by the
previous implant.
Hip implants are either total or partial. In a total hip implant, the
acetabulum is replaced with an acetabular cup. The damaged head of the
patient's femur is removed and a stem is inserted into the
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femur on which a replacement head is mounted. This femoral head is placed
into the cup of the acetabulum to recreate the ball and socket joint. In a
partial hip implant, the damaged head of a patient's femur is removed and
replaced with a head mounted on a stem inserted into the femur. However, the
acetabulum is not replaced and the size of the head is larger and more
similar to the natural femoral head. Hip implants are designed for either
cemented or non-cemented applications. Cemented hip implants are installed by
using bone cement to attach the components to a patient's bones, while porous
coated hip implants are press-fit without cement. Porous coated implants are
designed to promote growth of the patient's remaining bone tissue onto the
implant. Primary hip implant systems are used to replace the natural hip
joint, while hip revision systems are used to replace a previously installed
primary implant system that has failed.
KNEE PRODUCTS. The Company believes that its Optetrak/registered
trademark/ knee system represents a major advance in knee implant design. The
Optetrak/registered trademark/ knee system was developed in collaboration
with the Hospital for Special Surgery in New York and a design team
consisting of physicians and biomechanists affiliated with major medical
facilities and academic institutions. The Company's Optetrak/registered
trademark/ system is a modular system designed to maximize stability, to
provide increased range of motion and improved patellar tracking and to
reduce articular contact stress that leads to implant failure. Laboratory
testing performed by the Company and clinical testing performed by the
Company's design team members has demonstrated that the system produces
substantially lower articular contact stress and improved patellar tracking
than other comparable knee implant systems.
The Optetrak/registered trademark/ system is a total primary knee
replacement system which is available with either a cruciate ligament sparing
femoral component (in both cemented and porous coated designs) or a posterior
stabilized femoral component (in both cemented and porous coated designs).
These femoral components are made of a cobalt chromium alloy. The system is
also available with several alternative tibial components, titanium backed
polyethylene tibial components with both finned keel and trapezoid keel with
stem augmentation, blocks and full or half wedges, and all polyethylene
tibial components, which are cruciate sparing and posterior stabilized. The
stem, block and wedge augmentation allow the surgeon to rebuild the ends of
the patient's bones to allow fixation of the implant system. The metal
components of the Optetrak/registered trademark/ system are fully precision
machined resulting in better congruence among components and material
performance. The Company's patellar products are made of ultra-high molecular
weight polyethylene. Because of variations in human anatomy and differing
design preferences among surgeons, knee components are manufactured by the
Company in a variety of sizes and configurations. Bone cement is used to
affix the implants to the bone.
The Company has designed an Optetrak/registered trademark/ total knee
revision system that has received FDA clearance and is currently in
production. The system includes a constrained condylar femoral component with
enhanced stem and block augmentation. The constrained condylar femoral
component was designed to provide greater constraint between the system
components to compensate for ligaments weakened or lost due to disease or as
a result of the original implant. The Company is currently proceeding with
production of the components of this system and intends to commence marketing
this system in the last quarter of 1996. The Company is also designing a
unicompartmental knee with respect to which the Company will be required to
obtain FDA approval.
HIP PRODUCTS. The Company began marketing a hip implant system in 1987.
The Company's line of hip implant products currently consists primarily of
two primary total hip implant systems, its Cemented Total Hip System and its
MCS/registered trademark/ Porous Coated Total Hip System, and two primary
partial hip implant systems, its unipolar implant and its bipolar implant.
All total hip implants produced by the Company consist of a cup, head and
stem. Because of variations in human anatomy and differing design preferences
among surgeons, hip implants are manufactured by the Company in a variety of
head sizes, neck lengths, stem lengths, stem cross-sections and
configurations. The Company's total hip replacement systems utilize either
titanium alloy or cobalt chromium alloy femoral stem components, which can be
final machined from forgings, castings or wrought metal plate depending on
the design and material used. The Company's total hip replacement
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systems also include ultra-high molecular weight polyethylene cups with and
without metal backing. The femoral heads are made of either cobalt chromium
or zirconia ceramic.
The Company's Cemented Total Hip System is intended to provide optimal
treatment for patients requiring cemented hip arthroplasty (joint
reconstructive surgery) by minimizing failure of the bone cement. The femoral
stem utilizes a cross-sectional design to reduce stress on the bone cement
used to affix the implant to the patient's remaining bone tissue. The
components of the system include a high demand forged cobalt chromium femoral
stem or moderate demand Opteon(Registered Trademark) forged cobalt chromium
femoral stem.
The Company's MCS/registered trademark/ Porous Coated Total Hip System was
designed to minimize thigh pain and abnormal bone remodeling resulting from
bone-implant stiffness mismatch. The Company's MCS/registered trademark/
Porous Coated Total Hip System was also designed to avoid unnecessary damage
to the bone and its blood supply during femoral preparation. The Company also
provides instrumentation that facilitates reproducible implantation of the
implant. The system consists of a modular acetabular cup and cup liner,
screws for supplemental fixation of the acetabular cup, a modular head and a
femoral stem. All of the Company's femoral heads are designed to be used with
its femoral stems, including the Ziramic/registered trademark/ (zirconia
ceramic) femoral head which was designed to further reduce friction and
polyethylene wear, and is also compatible with the Cemented Total Hip System.
The system has been cleared by FDA for use without cement.
The Company's partial hip products include a bipolar prosthesis and a
unipolar prosthesis. The Company's bipolar prosthesis also utilizes one of
the stems used in total hip replacements. The bipolar prosthesis is designed
for use in more active patients and the unipolar prosthesis is designed for
use in less active patients.
The Company has also developed a new revision hip system which it intends
to begin marketing upon receipt of FDA clearance.
The Company provides its customers with the ACCUMATCH/registered
trademark/ Implant Selection System, a computerized matching program that
assists medical personnel in determining which of the Company's hip products
is most suitable and cost-effective for a specific patient.
OTHER COMPANY PRODUCTS
The Company has designed and received FDA clearance to market a nonmodular
shoulder implant system. The Company is currently planning the development of
a modular version of a shoulder implant system for planned introduction in
1998. The Company plans to introduce both the modular and nonmodular systems
to the market simultaneously.
The Company has acquired an exclusive license for an improved surgical
oscillating saw system that significantly reduces vibration, noise, and
problems with control in surgery. The Company may develop this product
through a separate wholly-owned subsidiary.
MARKETING AND SALES
The Company markets its orthopaedic implant products in the United States
through 29 independent agencies, that act as the Company's sales
representatives, and internationally through five foreign distributors,
including one distributor which is 50% owned by the Company. The customers
for the Company's products consist of hospitals, surgeons and other
physicians and clinics. Traditionally, the surgeon made the ultimate decision
which orthopaedic implant to use. As a result of health care reform, the
rapid expansion of managed care at the expense of traditional private
insurance, the advent of hospital buying groups, and various bidding
procedures that have been imposed at many hospitals, sales representatives
may also make presentations to hospital administrators, material management
personnel, purchasing agents or review committees that may influence the
final decision.
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The Company generally has contractual arrangements with its independent
sale agencies pursuant to which the agency is granted the exclusive right to
market the Company's products in the specified territory and the agency is
required to meet sales quotas to maintain its relationship with the Company.
The Company's arrangements with its sales agencies typically do not preclude
them from selling competitive products, although the Company believes that
most of its agents do not do so. The Company typically pays its sales
agencies a commission based on net sales. The Company is highly dependent on
the expertise and relationships of its sales agencies with customers. The
Company's sales organization, comprised of the Company's independent sales
agencies, is supervised by its Vice President-Sales, who is resident at the
Gainesville home office and manages all territories east of the Mississippi,
and its Western Regional Sales Manager, who manages all territories west of
the Mississippi River from Phoenix. The Company currently offers its products
in 28 states, including Florida, New York, California, Texas, Ohio,
Pennsylvania and Illinois, and has been solicited by agents who wish to
represent the Company in several additional states.
The Company provides inventories of its products to its United States
sales agencies until sold or returned for their use in marketing its products
and filling customer orders. As the size of the component to be used is
frequently not known until surgery has commenced and because surgeons give
little or no advance notice of surgery, a minimum of one size of each
component in the system to be used must be available to each sales agency at
the time of surgery. The Company's geographic expansion has been limited by
the costs of maintaining inventories in new regions. Accordingly, the
Company's expansion is materially dependent on its ability to increase its
inventory to facilitate its market penetration. The Company intends to use a
portion of the net proceeds of this offering to build additional inventory of
the primary components of its Optetrak/registered trademark/ total primary
and revision knee implant, hip implant and shoulder implant systems.
During the years ended December 31, 1994 and 1995, one customer, Shands
Hospital, accounted for approximately 11% and 10%, respectively, of the
Company's sales. During the three months ended March 31, 1996, one customer,
MBA Del Principado, S.A., accounted for approximately 21% of the Company's
sales.
The Company generally has contractual arrangements with its foreign
distributors pursuant to which the distributor is granted the exclusive right
to market the Company's products in the specified territory and the
distributor is required to meet sales quotas to maintain its relationship
with the Company. Foreign distributors typically purchase product inventory
and instruments from the Company for their use in marketing and filling
customer orders.
In 1993, the Company commenced foreign sales through a distributor in
Korea. In order to expand its global sales and marketing capabilities, in
July 1995, the Company established Techmed, its Italian distributor, in which
the Company has a 50% ownership interest. Under the terms of the agreement
pursuant to which Techmed was established, the Company has contributed
$106,195 in equity to Techmed and is obligated to fund its initial operations
in an amount of up to an additional $150,000, either through convertible
loans or through favorable pricing arrangements.
The Company currently offers its products in six countries in addition to
the United States: Korea, Italy, Spain, Argentina, Greece and Turkey. For the
years ended December 31, 1993, 1994 and 1995 and the three months ended March
31, 1996, foreign sales accounted for $421,984, $316,115, $743,700 and
$743,184, representing approximately 9.0%, 5.9%, 8.2% and 21.7%,
respectively, of the Company's sales. The Company intends to expand its sales
in foreign markets in which there is increasing demand for orthopaedic
implant products. In order to expand its global sales and marketing
capabilities, the Company intends to further develop Techmed, and assess the
attractiveness of establishing local manufacturing to serve the Italian,
Spanish and other EEC markets. The Company also intends to expand its
international distribution network.
MANUFACTURING AND SUPPLY
The Company utilizes third-party vendors for the manufacture of all of its
component parts, while performing product design, quality assurance and
packaging internally. The Company consults with its
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vendors in the early stages of the design process of its products. The
Company believes that its strategy of using third-party vendors for
manufacturing and consulting with such vendors in the design process enables
it to efficiently source product requirements while affording it considerable
flexibility. Because the Company is able to obtain competitive prices from a
number of suitable suppliers with FDA-approved facilities, the Company
believes it is able to offer high quality products at cost-effective prices.
In order to control its production costs, the Company continually assesses
the manufacturing capabilities and cost-effectiveness of its existing and
potential vendors. The Company may in the future establish manufacturing
strategic alliances to assure itself of continued low-cost production. For
the years ended December 31, 1993, 1994 and 1995 and the three months ended
March 31, 1996, the Company purchased approximately 73%, 66%, 68% and 71%,
respectively, of its component requirements from three manufacturers. The
Company does not maintain supply contracts with any of its manufacturers and
purchases components pursuant to purchase orders placed from time to time in
the ordinary course of business. The Company has several alternative sources
for components and does not anticipate that it will encounter problems in
obtaining adequate supplies of components. Although the materials used in the
manufacture of the component parts of the Company's products, including
titanium and cobalt chromium, have been generally available at reasonable
prices, no assurance can be given that interruptions in supplies will not
occur in the future.
The Company's assembly, packaging and quality control operation are
conducted at its principal offices in Gainesville, Florida. Each component
received from its vendors is examined by Company personnel prior to assembly
or packaging to ensure that it meets the Company's specifications. The
Company contemplates that in the future it may engage in limited
manufacturing of the components of its products, consisting primarily of
final machining of components. The Company may use a portion of the net
proceeds of this offering allocated to working capital for the development of
an architectural and engineering plan for a new facility to be used by the
Company for principal executive offices, research and development
laboratories and limited manufacturing.
Certain tooling and equipment which are unique to the Company's products
are supplied by the Company to its vendors. The Company intends to use a
portion of the net proceeds of this offering for the purchase of additional
tooling and equipment used in the manufacture of its knee, hip and shoulder
implant systems.
PATENTS AND PROPRIETARY TECHNOLOGY; LICENSE AND CONSULTING AGREEMENTS
The Company holds United States patents covering one of its femoral stem
components and its bipolar partial hip implant system and certain surgical
instrumentation, has patent applications pending with respect to certain
surgical instrumentation and certain implant components and anticipates that
it will apply for additional patents it deems appropriate. In addition, the
Company holds licenses from third parties to utilize certain patents,
including a non-exclusive license (described below) to certain patents,
patents pending and technology utilized in the design of the
Optetrak/registered trademark/ knee system. As a result of the rapid rate of
development of reconstructive products, the Company believes that patents
have not been a major factor in the orthopaedic industry to date. However,
patents on specific designs and processes can provide a competitive advantage
and management believes that patent protection of orthopaedic products will
become more important as the industry matures. There can be no assurance as
to the breadth or degree of protection which existing or future patents, if
any, may afford the Company, that any patent applications will result in
issued patents, that patents will not be circumvented or invalidated or that
the Company's competitors will not commence marketing knee implant systems
utilizing certain of the technology incorporated in the Optetrak/registered
trademark/ system for which the Company has a non-exclusive license. Although
the Company believes that its patents and products do not and will not
infringe patents or violate proprietary rights of others, it is possible that
its existing patent rights may not be valid or that infringement of existing
or future patents or proprietary rights may occur. See "Legal Proceedings"
for information concerning a patent infringement claim against the Company.
In addition to patents, the Company relies on trade secrets and
proprietary know-how and employs various methods to protect its proprietary
information, including confidentiality agreements and
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proprietary information agreements. However, such methods may not provide
adequate protection and there can be no assurance that such confidential or
proprietary information agreements will not be breached, that the Company
would have adequate remedies for any breach, or that the Company's trade
secrets and proprietary know-how will not otherwise become known to or
independently developed by competitors.
In connection with the development of its knee implant systems, the
Company entered into consulting agreements with certain of its executive
officers and design team members, including Dr. Petty and Dr. Miller, who are
executive officers, directors and principal shareholders of the Company, and
Edmund Chao, Ph.D, Ivan A. Gradisar, Jr., M.D., William Murray, M.D. Pursuant
to these consulting agreements, such individuals agreed to provide consulting
services to the Company in connection with the design of knee implantation
systems and associated instrumentation and are entitled to receive royalties
during the term of the agreements aggregating 3% of the Company's net sales
of such products in the United States and less than 3% of the Company's net
sales of such products outside the United States. During the years ended
December 31, 1993, 1994 and 1995 and the three months ended March 31, 1996,
the Company paid royalties aggregating $0, $1,934, $101,393 and $58,601,
respectively, pursuant to these consulting agreements. The consulting
agreements with Drs. Petty and Miller were superseded by their employment
agreements which provide for the continuation of the royalty payments. The
Company has entered into consulting agreements with two of the members of its
design team in connection with the development of its hip revision system and
is negotiating similar agreements with the remaining members of its hip
revision design team. The Company anticipates that the members of that team
will be entitled to customary royalties.
From time to time, the Company enters into license agreements with certain
unaffiliated third parties under which the Company is granted the right to
utilize certain patented products, designs and processes. Pursuant to a
license agreement with the Hospital for Special Surgery (the "HSS License
Agreement"), the Company obtained a non-exclusive right and license to
certain patents, patents pending and technology utilized in the design of the
Optetrak/registered trademark/ knee implant system and to manufacture, use
and sell total knee prostheses incorporating such patents and technology. The
term of the HSS License Agreement continues until the earlier to occur of (i)
the expiration of a period of ten years and (ii) the expiration of the
licensed patents. In consideration for the grant of the license, the Company
agreed to pay to the Hospital for Special Surgery royalties in an amount
equal to 5% of net sales of the licensed products. Pursuant to the HSS
License Agreement, the Company has the option to acquire a non-exclusive
license to use any improvement or invention made or acquired by the Hospital
for Special Surgery relating to the licensed products and the option to
obtain an exclusive license to any such improvement or invention made jointly
by the Hospital for Special Surgery and the Company. As is the case in many
license agreements of this nature, the Hospital for Special Surgery did not
make representations to the Company as to its rights to the licensed
technology. In connection with the execution of the HSS License Agreement,
the Company paid an initial royalty to the Hospital for Special Surgery in
the amount of $133,600. During the three months ended March 31, 1996, the
Company paid royalties to the Hospital for Special Surgery of $82,610.
Pursuant to a License Agreement (the "University License Agreement")
between the University of Florida (the "University") and the Company, the
Company has been granted the exclusive right and license in perpetuity to
make, use and sell a spinal implant device under patents owned by the
University. In consideration for the right to utilize the University patents,
the Company paid the University an initial license issue fee of $6,000 and,
if and when the patented products or processes are utilized in devices or
products sold by the Company, the Company will be required to pay the
University a royalty in an amount equal to 5% of the Company's net sales of
any such products in the United States, up to a maximum royalty of $500,000,
and thereafter a royalty of 2% of such net sales. This royalty will be
payable by the Company during the period ending 10 years from the Company's
first sale of a device utilizing the University patent. In addition, the
University License Agreement provides that the Company will remit to the
University 75% of all royalties received by the Company from sales outside of
the United States under sublicense agreements relating to the patented
products or processes. In connection with the University License Agreement,
the Company also has agreed to
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assist the University in developing certain other devices currently being
researched and tested and which are intended to be patented by the
University. To date, the Company has only utilized the University patents in
connection with product research and development and accordingly, the Company
has paid no royalties to the University under the University License
Agreement.
The Company has also entered into the Sublicense Agreement with SDP
pursuant to which the Company granted SDP the exclusive worldwide right and
sublicense to utilize the patents licensed to the Company pursuant to the
University License Agreement. The term of the Sublicense Agreement continues
until the last of the patents owned by the University and sublicensed to SDP
terminates, unless sooner terminated in accordance with the terms of the
Sublicense Agreement. Pursuant to the Sublicense Agreement, the Company
received an initial sublicense fee of $250,000 and, if and when FDA approves
an SDP product utilizing the University patents, the Company will receive an
additional $250,000 sublicense fee. Additionally, at such time as a product
utilizing the University patent is manufactured and sold by SDP, the Company
will be entitled to receive a royalty from SDP in the amount of 5% of SDP's
net sales of such products in the United States, up to a maximum of $500,000,
and thereafter a royalty of 2% of such net sales. Under the terms of the
Sublicense Agreement, the Company received an advance on anticipated
royalties in the amount of $100,000. To date, SDP has not marketed a product
utilizing the University patents.
Pursuant to a license agreement between the Company and Accumed, Inc.
("Accumed"), the Company secured a worldwide license to manufacture, use and
sell products utilizing Accumed's bipolar hip prosthesis and a license to any
rights under any patent that is issued covering Accumed's bipolar hip
prosthesis design. The term of this license agreement continues until the
expiration of the last patent comprising any part of the Accumed design,
unless sooner terminated in accordance with the terms of such agreement.
During the period ending on the seventh anniversary of the Company's first
sale of a product utilizing the Accumed design, the Company is obligated to
pay Accumed an annual royalty of 3.5% of all net receipts from the Company's
worldwide sale of products incorporating an Accumed product or design patent
licensed to the Company. However, if a patent is not issued within a
particular country in which the Company sells products utilizing Accumed's
design, the royalty payable is 2% of the Company's net sales of applicable
products in such country. During the years ended December 31, 1993, 1994 and
1995 and the three months ended March 31, 1996, the Company paid royalties to
Accumed of approximately $11,686, $12,524, $13,412 and $2,987, respectively.
The Company has also entered into a patent agreement (the "Patent
Agreement") with Phillip Cripe, a shareholder of the Company, under which the
Company was assigned the patent rights associated with a surgical saw
designed by Mr. Cripe and the concepts, techniques and processes embodied in
such product. The term of this patent agreement continues until the later of
ten years or the expiration of the last patent comprising any part of the
surgical saw design, unless sooner terminated in accordance with the terms of
the Patent Agreement. In connection with the execution of the Patent
Agreement, the Company granted Mr. Cripe an option to purchase 7,500 shares
of the Company's Common Stock at an exercise price of $6.67 per share. The
Company has also agreed to pay Mr. Cripe an annual royalty of 5% of all net
receipts from the sale of products incorporating the concepts, techniques and
processes embodied in the patented product (but 2% of all net receipts from
the sale of associated surgical saw blades) by or on behalf of the Company.
To date, the Company has not developed a product utilizing the assigned
patent or know how.
RESEARCH AND DEVELOPMENT
During the years ended December 31, 1993, 1994 and 1995 and the three
months ended March 31, 1996, the Company expended $488,029, $597,812,
$722,118 and $161,054, respectively, on research and development and
anticipates that research and development expenses will continue to increase,
subject to the availability of funds. The Company's research and development
efforts contributed to the introduction in 1995 of the Company's
Optetrak/registered trademark/ knee implant system. The Company's principal
research and development efforts currently relate primarily to the production
of the revision components of the Optetrak/registered trademark/
comprehensive knee implant system and to development of additional cemented
primary hip implant systems and a revision hip implant system.
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COMPETITION
The orthopaedic implant industry is highly competitive and dominated by a
number of large companies with substantially greater financial and other
resources than the Company and competition is expected to intensify. From
time to time, the Company and certain of its competitors have offered
significant discounts as a competitive tactic, and may be expected to
continue to do so. The Company believes its future operations will depend
upon its ability to be responsive to the needs of its customers and to
provide high quality products at cost-effective prices. The largest
competitors in the orthopaedic hip implant market are Boehringer Mannheim
Corp. (DePuy), Bristol-Myers Squibb Company (Zimmer Inc.), Pfizer Inc.
(Howmedica, Inc.), Stryker Corporation and Biomet, Inc. who, according to an
industry publication, had an estimated aggregate market share of
approximately 82% in 1994. The largest competitors in the orthopaedic knee
implant market are Bristol-Myers Squibb Company (Zimmer Inc.), Pfizer Inc.
(Howmedica, Inc.), Johnson & Johnson, Boehringer Mannheim Corp. (DePuy) and
Sulzermedica who, according to an industry publication, had an estimated
aggregate market share of approximately 72% in 1994.
Companies in the industry compete on the basis of product features and
design, innovation, service, the ability to maintain new product flow,
relationships with key orthopaedic surgeons and hospitals, the strength of
their distribution network and price. While price, as opposed to surgeon
preference, is becoming increasingly important in the hip market, the primary
basis of competition in the knee market remains physician preference, which
includes ease-of-use, clinical results, price and relationships with sales
representatives. Due to health care reform, the rapid expansion of managed
care at the expense of traditional private insurance and the advent of
hospital buying groups, among other things, management believes that the
price of the Company's orthopaedic implant products will continue to become a
more important competitive factor. Manufacturers of medical devices,
including orthopaedic implants, are increasingly attempting to enter into
contracts with hospital chains or hospitals pursuant to which the hospital
chains agree to purchase their products exclusively from such manufacturers,
usually in exchange for discounted prices. Recently, two of the Company's
larger competitors entered into such an arrangement with a large hospital
chain. If the Company's competitors are successful in securing such
contracts, the Company's ability to compete may be materially adversely
affected. Although to date generic products have not been a significant
factor in the orthopaedic implant market, price may become even more
important if suppliers of generic products enter the market on a larger
scale.
PRODUCT LIABILITY AND INSURANCE
The Company is subject to potential product liability risks which are
inherent in the design, marketing and sale of orthopaedic implants and
surgical instrumentation. The Company has implemented strict quality control
measures and currently maintains product liability insurance in amounts which
it believes are typical in the industry for similar companies. See "Legal
Proceedings" for information concerning a product liability claim against the
Company.
GOVERNMENT REGULATION
The Company's operations and relationships are subject to extensive,
rigorous, expensive, time-consuming and uncertain regulation in the United
States and certain other countries. The primary regulatory authority in the
United States is FDA. The development, testing, labeling, distribution,
marketing and manufacture of medical devices, including reconstructive
devices, are regulated under the Medical Device Amendments of 1976 to the
Federal Food, Drug and Cosmetic Act (the "Amendments") and additional
regulations promulgated by FDA. In general, these statutes and regulations
require that manufacturers adhere to certain standards designed to ensure the
safety and effectiveness of medical devices.
Under the Amendments, each medical device manufacturer must be a
"registered device manufacturer" and must comply with regulations applicable
generally to labeling, quality assurance, manufacturing practices and
clinical investigations involving humans. FDA is authorized to obtain and
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inspect devices, their labeling and advertising, and the facilities in which
they are manufactured in order to assure that a device is not improperly
manufactured or labeled. The Company is registered with FDA and believes that
it is in substantial compliance with all applicable material governmental
regulations.
Under the Amendments, medical devices are classified into one of three
classes depending on the degree of risk imparted to patients by the medical
device. The Amendments define Class I devices as those for which safety and
effectiveness can be guaranteed by adherence to general controls, which
include compliance with Good Manufacturing Practices ("GMP"), registration
and listing, reporting of adverse medical events, and appropriate truthful
and non-misleading labeling. The Amendments define Class II devices as those
which require pre-market demonstration of adherence to certain standards or
other special controls. Such demonstration is provided through the filing of
a 510(k) pre-market notification. The Amendments define a Class III product
as a product which has a wholly new intended use or a product for which
advances in technology cannot be assessed without clinical study. The
Amendments provide that submission and approval of a pre-market application
("PMA") is required before marketing of a Class III product can proceed. The
PMA process is more extensive than 510(k) process.
In practice, however, FDA has developed a three-tier regulatory approach
that does not exactly parallel the classification system. PMAs are currently
required of medical devices which have new intended uses and some other
products classified as Class III. PMAs have only been required of "old" Class
III products (I.E., which were marketed on or prior to the date of enactment
of the Amendments on July 28, 1976, or which are substantially equivalent to
such previously marketed devices) when FDA has published a "call" for the
relevant Class III pre-Amendments device.
Generally, therefore, pre-Amendments Class III and almost all Class II
products are cleared for marketing by FDA based on a demonstration that the
safety and effectiveness of the product is substantially equivalent to a
pre-Amendments device or a similar, already-marketed, predicate device that
received 510(k) clearance. Finally, Class I products are, and a few Class II
products have been exempted, from the requirement to file for 510(k)
clearance.
The Company's products have been classified by FDA as Class II devices
and, currently, all marketed devices hold valid cleared 510(k) premarket
notifications, including: its cemented hip implant system, including femoral
stem, acetabular cup and femoral heads; bone screws; porous coated cemented
femoral stem and acetabular component; bipolar partial hip implant;
nonmodular shoulder prostheses (humeral and glenoid); Zirconia (ceramic)
femoral heads; Opteon(Registered Trademark) femoral stem for cemented and
non-cemented use; MCS femoral stem and acetabular component for cemented and
noncemented use; and knee replacement system.
All new products of the Company will likely be subject to this clearance
process, although FDA has gradually enhanced the clinical data requirements
applicable to many 510(k) applications over the last few years. The process
of obtaining regulatory clearances is lengthy, expensive and uncertain. FDA
could choose to re-classify the Company's prosthetic systems as Class III
products subject to a PMA under various conditions, such as a determination
that the device could not demonstrate substantial equivalence to a predicate
device based on a new intended use or because a technological change or
modification in the device could not be adequately evaluated for safety and
effectiveness without a requirement for a PMA. Further, FDA could choose to
impose strict labeling requirements, onerous operator training requirements,
post-marketing surveillance, individual patient recipient lifetime tracking,
or other requirements as a condition of marketing clearance, any of which
could limit the Company's ability to market its products and would have a
material adverse effect on the Company's business, financial condition and
results of operations.
Further, if the Company wishes to modify a product after clearance,
including changes in indications, manufacturing, or other changes, additional
clearance may be required. Failure to receive, or delays in receipt of, FDA
clearance, including the need for additional clinical trials or data as a
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prerequisite, could limit the ability of the Company to market its products
and could have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company has licensed and sublicensed a spinal implant system which FDA
had heretofore viewed as a Class III product based on the use of pedicular
screws which FDA concluded were not substantially equivalent to any known
predicate or pre-Amendments device. On October 4, 1995, FDA promulgated
proposed regulations to reclassify spinal implant systems such as the
Company's as Class II devices. The comment period closed on March 4, 1996. If
these regulations do not become final, the Company may have to develop
clinical data to support a PMA under an Investigational Device Exemption.
There can be no assurance that FDA will act favorably or quickly with respect
to either allowing an Investigational Device Exemption or the determination
of whether to grant a PMA for this system. Furthermore, the cost and results
of such a clinical study could delay or preclude the Company from receiving
any royalties with respect to this product.
The design, manufacturing, labeling, distribution and marketing of the
Company's products are subject to extensive and rigorous government
regulation in the United States well beyond that encompassed by the
requirement to file a 510(k) premarket notification or a PMA application,
including additional conditions or requirements that may become a part of FDA
clearance or approval. Regulatory clearance may also include significant
limitations on the indicated uses for which the Company's products may be
marketed. To that end, all marketing materials are subject to exhaustive
control. FDA enforcement policy strictly prohibits the marketing of approved
or cleared products for unapproved uses. Furthermore, FDA does not provide an
opportunity to review and approve such materials but may take action after
the production and use of such materials.
In addition, the Company's manufacturing processes are required to comply
with GMP regulations. These regulations cover the methods of design, testing,
production, control, quality assurance, labeling, packaging, shipping,
documentation and other requirements. Enforcement of GMP regulations has
increased significantly in the last several years, and FDA has publicly
stated that compliance will be more strictly scrutinized. The Company's
facilities and manufacturing processes, as well as that of certain of the
Company's third-party suppliers, are subject to periodic inspections by FDA
or other agencies. To date, the Company has successfully undergone two such
inspections with only minor deficiencies cited at the exit interview and for
which appropriate corrective responses were found acceptable to FDA.
Failure to comply with applicable regulatory requirements could result in,
among other things, warning letters, fines, injunctions, civil penalties,
repairs, replacements, refunds, recalls or seizures of products, total or
partial suspensions of production, refusals of FDA to grant future premarket
clearances or approvals, withdrawals or suspensions of current clearances or
approvals, and criminal prosecution, which could have a material adverse
effect on the Company's business, financial condition and results of
operations.
The Company voluntarily initiated and satisfactorily completed two Class
III recalls. A Class III recall is defined as a situation in which the use of
a violative product is not likely to cause adverse health consequences. One
recall involved a partially mislabeled product. The second involved the
manufacturing process of a bone screw. FDA reviewed and authorized these two
recalls, and concluded that each of the two recalls was conducted and
completed properly.
Generally, the Company must obtain export certificates from FDA before it
can export any product. While the process for issuance of export certificates
has recently been expedited by FDA, and the Company has obtained export
certificates under this expedited (and its predecessor) process, there can be
no assurance that the issuance of export certificates in the future will not
be subject to new restrictions, or that the Company will continue to receive
or not be delayed in its receipt of such export certificates. Such future
actions could have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company is required to obtain various licenses and permits from
foreign governments and to comply with significant regulations that vary by
country in order to market its products in foreign
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markets. In order to continue marketing its products in Europe after
mid-1998, the Company will be required to obtain ISO 9001 certification and
receive "CE" mark certification, an international symbol of adherence to
quality assurance standards and compliance with applicable European medical
device directives. The ISO 9001 certification is one of the prerequisites for
CE mark certification. Failure to receive the right to affix the CE mark will
prevent the Company from selling its products in member countries of the
European Union. The Company intends to apply for both ISO 9001 and CE mark
certification.
Certain provisions of the Social Security Act, commonly referred to as the
"Anti-kickback Statute," prohibit entities, such as the Company, from
offering, paying, soliciting or receiving any form of remuneration in return
for the referral of Medicare or state health program patients or patient care
opportunities, or in return for the recommendation, arrangement, purchase,
lease or order of items or services that are covered by Medicare or state
health programs. The Anti-kickback Statute is broad in scope and has been
broadly interpreted by courts in many jurisdictions. Read literally, the
statute places at risk many business arrangements, potentially subjecting
such arrangements to lengthy, expensive investigations and prosecutions
initiated by federal and state governmental officials. Many states have
adopted similar prohibitions against payments intended to induce referrals of
Medicaid and other third party payor patients. Violation of the Anti-kickback
Statute is a felony, punishable by fines up to $25,000 per violation and
imprisonment for up to five years. In addition, the Department of Health and
Human Services may impose civil penalties excluding violators from
participation in Medicare or state health programs.
In July 1991, in part to address concerns regarding the Anti-kickback
Statute, the federal government published regulations that provide
exceptions, or "safe harbors," for transactions that will be deemed not to
violate the Anti-kickback Statute. Proposed amendments to clarify these safe
harbors were published in July 1994 which, if adopted, would cause
substantive retroactive changes to the 1991 regulations. Certain of the
Company's relationships do not qualify for safe harbor protection. The fact
that a relationship does not qualify for safe harbor protection, however,
does not mean that it is illegal, and the Company believes that it is not in
violation of the Anti-kickback Statute. Nevertheless, there can be no
assurance that the Company's current or future practices will not be found to
be in violation of the statute, and any such finding could have a material
adverse effect on the Company. Any state or federal regulatory review of the
Company, regardless of the outcome, would be both costly and time consuming.
Significant prohibitions against physician referrals were enacted by
Congress in the Omnibus Budget Reconciliation Act of 1993. These
prohibitions, commonly known as "Stark II," amended prior physician
self-referral legislation known as "Stark I" by dramatically enlarging the
field of physician-owned or physician-interested entities to which the
referral prohibitions apply. Effective January 1, 1995, Stark II prohibits,
subject to certain exemptions, a physician or a member of his immediate
family from referring Medicare or Medicaid patients to an entity providing
"designated health services" in which the physician has an ownership or
investment interest, or with which the physician has entered into a
compensation arrangement. The penalties for violating Stark II include a
prohibition on payment by these government programs and civil penalties of as
much as $15,000 for each violative referral and $100,000 for participation in
a "circumvention scheme." The Stark legislation is broad and ambiguous and
interpretative regulations clarifying the provisions of Stark II as it would
relate to the Company have not been issued. While the Company believes it is
in compliance with the Stark legislation, there can be no assurance this is
the case or that the government would not take a contrary view. The violation
of Stark I or II by the Company could result in significant fines or
penalties and exclusion from participation in the Medicare and Medicaid
programs.
The Company is also subject to regulation by OSHA and the EPA and similar
state and foreign agencies and authorities.
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PROPERTIES
The Company maintains its corporate headquarters and a warehouse for its
business operations, consisting of approximately 12,000 square feet, located
in Gainesville, Florida, under a one-year lease which commenced on July 1,
1995. The lease does not provide for any renewal of the term thereof. The
Company's monthly lease payments are approximately $5,260, for an annual
lease payment of approximately $63,119, which amounts do not include the
Company's share of applicable sales taxes related to rental payments, county
real estate taxes and public utility charges. The Company also owns a total
of approximately eight acres of land in Gainesville, Florida. The Company
anticipates that it will require more space in connection with the expansion
of its business. The Company may use a portion of the net proceeds of this
offering allocated to working capital for the development of an architectural
and engineering plan for a new facility to be built on a portion of such land
and to be used by the Company for principal executive offices, research and
development laboratories and limited manufacturing.
EMPLOYEES
As of March 31, 1996, the Company employed 30 full time employees. The
Company has no union contracts and believes that its relationship with its
employees is good.
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.
On December 13, 1994, a products liability action was commenced by Marilyn
Evans and Phillips Evans against the Company in the Circuit Court for
Pinellas County, Florida regarding the acetabular components of the Company's
total hip replacement system. As part of this action, the plaintiffs have
alleged that following total hip replacement surgery the plaintiff suffered
personal injury as a result of the deterioration of the Company's implanted
acetabular components. The plaintiffs are seeking unspecified monetary
damages against the Company as a result of its alleged breach of warranty
respecting the total hip replacement system. The Company is currently being
represented by its insurance carrier in this action. Although the Company
believes that the action is without merit and that its available insurance is
adequate to cover any ultimate liability, there can be no assurance that the
Company will not be found liable or that such insurance will be adequate to
cover any damages awarded. Any monetary award in excess of the Company's
insurance coverage could have a material adverse affect on the Company's
business and results of operations.
On April 3, 1995, Joint Medical commenced the Action against the Company,
and many of its competitors, alleging the infringement of the Ball and Socket
Patent. As part of the Action, Joint Medical alleged that the Company's
manufacture and sale of certain orthopaedic implants was an infringement of
the Ball and Socket Patent. The Company and Joint Medical have entered into a
Tolling Agreement, effective as of April 3, 1995, pursuant to which the
parties agreed that the Action would be dismissed without prejudice as to the
Company. The Tolling Agreement further provides that neither the Company nor
Joint Medical will commence any further action regarding the Company's
alleged infringement of the Ball and Socket Patent until a decision is
rendered by the Board of Patent Appeals and Interferences regarding such
alleged patent infringement. In accordance with the Tolling Agreement, the
Action was dismissed as against the Company, among others, as of July 28,
1995. The Company believes, based upon a reasoned opinion of patent counsel,
Spensley Horn Jubas & Lubitz, that Joint Medical's claims are without merit
and that its orthopaedic implants do not infringe upon the Ball and Socket
Patent. As of the date hereof, no decision has been rendered by the Board of
Patent Appeals and Interferences regarding this matter. There can be no
assurance that a favorable decision will be rendered in connection with this
patent infringement matter.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------------------------------------------
<S> <C> <C>
William Petty, M.D. ........ 53 Chairman of the Board and Chief Executive Officer
Timothy J. Seese ........... 49 President, Chief Operating Officer and Director
Gary J. Miller, Ph.D. ..... 48 Vice President, Research and Development and Director
David W. Petty ............. 29 Vice President, Marketing
Martha Miller .............. 50 Vice President, Regulatory Affairs
Marc Olarsch ............... 34 Vice President, Sales
Joel C. Phillips ........... 28 Treasurer
Betty Petty ................ 53 Secretary
Albert Burstein, Ph.D. .... 58 Director
R. Wynn Kearney, Jr., M.D. 52 Director
Ronald Pickard ............. 48 Director
P. Michael Prince .......... 39 Director
</TABLE>
WILLIAM PETTY, M.D. was a founder and has been Chairman of the Board and
Chief Executive Officer of the Company since its inception. Dr. Petty has
been a Professor at the University of Florida College of Medicine since July
1975 and served as Chairman of the Department of Orthopaedic Surgery at the
University of Florida College of Medicine from July 1981 to January 1996. Dr.
Petty has also served as a member of the Hospital Board of Shands Hospital,
Gainesville, Florida, as an examiner for the American Board of Orthopaedic
Surgery, as a member of the Orthopaedic Residency Review Committee of the
American Medical Association, on the Editorial Board of the JOURNAL OF BONE
AND JOINT SURGERY, and on the Executive Board of the American Academy of
Orthopaedic Surgeons. He holds the Kappa Delta Award for Outstanding Research
from the American Academy of Orthopaedic Surgeons. His book, TOTAL JOINT
REPLACEMENT, was published in 1991. Dr. Petty received his B.S., M.S., and
M.D. from the University of Arkansas. He completed his residency in
Orthopaedic Surgery at the Mayo Clinic in Rochester, Minnesota. Dr. Petty
does not devote his full business time to the affairs of the Company and
currently devotes approximately 50% of his business time to the affairs of
the Company.
TIMOTHY J. SEESE has been President and Chief Operating Officer of the
Company since March 1991 and a Director since April 1991. From October 1987
to December 1990, Mr. Seese served as President and Chief Executive Officer
of Meritech, Inc., a development stage company involved with infection
control products. From December 1986 to October 1987, he served as President
of the Critical Care Monitoring Division of Becton Dickinson and Company, a
manufacturer and marketer of medical devices, upon the acquisition of Deseret
Medical, Inc. by Becton Dickinson and Company. From January 1983 to December
1986, he served as Business Unit Director and Director, Marketing and Sales
for the Critical Care Business of Deseret Medical, Inc. Division of Warner
Lambert, a medical device, pharmaceutical and consumer products company. He
received his B.S. in Metallurgical Engineering from the University of
Cincinnati and his M.B.A. from Harvard University.
GARY J. MILLER, PH.D. was a founder and has been the Vice President,
Research and Development of the Company since October 1986 and a Director
since March 1989. Dr. Miller has been Associate Professor of Orthopaedic
Surgery and Director of Research and Biomechanics at the University of
Florida College of Medicine since July 1986. Dr. Miller received his B.S.
from the University of Florida,
40
<PAGE>
his M.S. (Biomechanics) from Massachusetts Institute of Technology, and his
Ph.D. in Mechanical Engineering (Biomechanics) from the University of
Florida. He has held an Adjunct Associate Professorship in the College of
Veterinary Medicine's Small Animal Surgical Sciences Division since 1982 and
was appointed as an Adjunct Associate Professor in the Department of
Aerospace, Mechanics and Engineering Sciences in 1995. He was a consultant to
FDA from 1989 to 1992 and has served as a consultant to such companies as
Johnson & Johnson Orthopaedics, Dow-Corning Wright and Orthogenesis. Dr.
Miller does not devote his full business time to the affairs of the Company
and currently devotes approximately 70% of his business time to the affairs
of the Company.
DAVID W. PETTY has been Vice President, Marketing of the Company since
April 1993. He has been employed by the Company in successive capacities in
the area of Operations and Sales and Marketing for the past eight years,
including as Vice President, Operations from April 1991 until April 1993. Mr.
Petty received his B.A. from the University of Virginia in 1988. Mr. Petty is
the son of Dr. and Ms. Petty.
MARTHA MILLER has been Vice President, Regulatory Affairs of the Company
since March 1996 and served as Director of Regulatory Affairs from April 1994
until March 1996. Ms. Miller joined the Company after fifteen years at Smith
& Nephew and Bristol-Myers Squibb, where she specialized in FDA compliance
and other governmental regulations. Ms. Miller received her degree in nursing
from Methodist Hospital School of Nursing.
MARC OLARSCH has been Vice President, Sales since July 1993. From 1984 to
July 1993, he was employed by Carapace, the United States subsidiary of
Lohmann GmbH & Co., KB, Neuwied, Germany, a manufacturer of orthopaedic
casting material, surgical wound dressings and bandages. During his tenure
with Carapace, he held the positions of Regional Sales Manager and National
Sales Manager. He has extensive experience with group purchasing
organizations, independent manufacturers' representatives, as well as
company-employed territory managers and sales representatives.
JOEL C. PHILLIPS has been Treasurer of the Company since March 1996 and
Manager, Accounting and Management Information Systems since April 1993. From
January 1991 to April 1993, Mr. Phillips was employed by Arthur Andersen &
Company. He is responsible for the Company's accounting and control function,
as well as the computer-based operating and management information systems.
Mr. Phillips received a B.S. and a Masters in Accounting from the University
of Florida and is a certified public accountant.
BETTY PETTY has been Secretary of the Company since its inception and
served as Treasurer and a Director from its inception until March 1996. Ms.
Petty is responsible for the development of all of the Company's literature,
advertising and corporate events and also serves as Human Resources
Coordinator for the Company. Ms. Petty received her B.A. from the University
of Arkansas at Little Rock and her M.A. in English from Vanderbilt
University. Ms. Petty is the wife of Dr. Petty.
ALBERT BURSTEIN, PH.D., has been a director of the Company since March
1996. Since 1976, Dr. Burstein has been Senior Scientist, Department of
Research and Associate Attending Orthopaedic Surgeon (Biomechanical
Engineering) at the Hospital for Special Surgery, New York, New York and
Adjunct Associate Professor of Mechanical Engineering at the Sibley School of
Mechanical and Aerospace Engineering, Cornell University, Ithaca, New York.
In addition, he has been Professor of Applied Biomechanics (in surgery) at
Cornell University Medical College, New York, New York since 1978. From 1976
until 1992, he served as Director, Department of Biomechanics, Research
Division, at the Hospital for Special Surgery. Since 1980, he has served as
Deputy Editor for Research, THE JOURNAL OF BONE AND JOINT SURGERY. Dr.
Burstein is an author of six textbooks on Orthopaedic Biomechanics. He holds
the Shands Award of the Orthopaedic Research Society for outstanding career
contributions to Orthopaedic Research and is a Past President of the American
Society of Biomechanics. Dr. Burstein holds twelve patents for orthopaedic
devices.
R. WYNN KEARNEY, JR., M.D. has been a Director of the Company since
September 1989. Dr. Kearney, an orthopaedic surgeon for 23 years, is engaged
in the private practice of orthopaedic surgery.
41
<PAGE>
He is presently a member of the Committee of Ethics and Medical/Legal Affairs
of the Minnesota Medical Association. He also serves as a member of the
Medical Services Review Board of the State of Minnesota. Dr. Kearney received
his M.D. from Northwestern University and completed residency training in
orthopaedic surgery at the Mayo Clinic in Rochester, Minnesota. In addition
to his medical practice, Dr. Kearney is general partner in several limited
partnerships for subsidized housing and a managing partner in a number of
real estate partnerships. He also serves as a consultant in real estate
investment.
RONALD PICKARD has been a director of the Company since March 1996. He has
served as Chairman of the Board and Chief Executive Officer of Sofamor Danek
Group, Inc. since May 1994. He was President and Chief Operating Officer of
that company from August 1991 until April 1994 when he became President and
Chief Executive Officer and a director. From 1986 until joining Sofamor
Danek, he was employed by Richards Medical Company in various capacities
including Director of Manufacturing (1975-78), Group Director of
Manufacturing (1979-81), Vice President, Manufacturing (1982-85), and
President, Orthopedics Division (1986-90).
P. MICHAEL PRINCE has been a Director of the Company since April 1989. Mr.
Prince has been President of Prince Medical, Inc., a medical sales
representative organization, since June 1989. From October 1989 until
December 1994, Mr. Prince was associated with the Company as Regional Sales
Manager for the eastern United States. For the prior 11 years he was a sales
associate with Zimmer Inc., manufacturer of orthopaedic implants.
The Company's officers are elected annually by the Board of Directors and
serve at the discretion of the Board. The Company's directors hold office
until the next annual meeting of shareholders and until their successors have
been duly elected and qualified. The Company will reimburse all directors for
their expenses in connection with their activities as directors of the
Company. Each director who is not an employee will receive options under the
Directors Plan. Directors of the Company who are also employees of the
Company will not receive additional compensation for their services as
directors.
The Company has two committees, the Audit Committee which consists of
William Petty, R. Wynn Kearney, Jr. and Ronald Pickard, and the Compensation
and Stock Option and Incentive Plan Committee, which consists of Timothy J.
Seese, Ronald Pickard, Albert Burstein and P. Michael Prince.
The Company has granted to the Representative, for a period of three years
after the date of this Prospectus, the right to designate for election to the
Company's Board of Directors one person, which individual may be a director,
officer, employee or affiliate of the Representative.
SCIENTIFIC ADVISORY BOARD
The Company's strategy is to utilize members of its Scientific Advisory
Board, consisting of internationally known physicians and biomechanists, in
the design process to facilitate the development of high quality products at
cost-effective prices. The Scientific Advisory Board assists the Company in
identifying new product opportunities, provides evaluation and comments on
existing product development and clinical programs, and provides a direct
link between the Company and the academic, medical and scientific communities
which permits the Company to quickly identify and respond to the demands of
orthopaedic surgeons. Members of the Scientific Advisory Board generally meet
at least quarterly. In addition, from time to time, the members of the
Scientific Advisory Board consult with the Company individually at the
request of the Company. The Company has entered into consulting agreements
with certain members of the Scientific Advisory Board pursuant to which the
Company pays royalties to such members. See "Business--Patents and
Proprietary Technology; License and Consulting Agreements." The members of
the Scientific Advisory Board in addition to Dr. William Petty and Dr. Gary
J. Miller include:
/bullet/ ALBERT H. BURSTEIN, PH.D., is Professor of Applied Biomechanics
at Cornell University Medical College and Senior Scientist,
Department of Research and past Director, Department of
Biomechanics at the Hospital for Special Surgery.
42
<PAGE>
/bullet/ EDMUND CHAO, PH.D., is Professor of Orthopaedic Surgery and
Biomechanics at Johns Hopkins University.
/bullet/ IVAN GRADISAR, M.D., is Professor of Orthopaedic Surgery at
Northeastern Ohio University College of Medicine.
/bullet/ WILLIAM MURRAY, M.D., is Professor and Chairman Emeritus at
University of California at San Francisco.
/bullet/ RAYMOND ROBINSON, M.D., F.A.C.S., is Assistant Clinical Professor
of Orthopaedics at University of Washington School of Medicine.
/bullet/ FRANKLIN SIM, M.D., is Professor and Consultant at Mayo Medical
School.
/bullet/ ROBERT TROUSDALE, M.D., is Senior Associate Consultant at Mayo
Medical School.
EXECUTIVE COMPENSATION
The following table sets forth the total compensation paid or accrued by
the Company, for services rendered during 1995, to the Company's Chief
Executive Officer and each of the Company's other executive officers whose
total 1995 salary and bonus exceeded $100,000 (collectively the "Named
Officers"). The Company did not grant any stock options or restricted stock
awards or make any long-term incentive plan payments to the Named Officers
during the fiscal year ended December 31, 1995.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION(1)
--------------------------------------
OTHER ANNUAL
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION
- ---------------------------------------- ---------- --------- ---------------
$ $
<S> <C> <C> <C>
William Petty .......................... -- -- $15,966(3)
Chairman of the Board and
Chief Executive Officer(2)
Timothy J. Seese ....................... 127,236 10,603 --
President and Chief Operating Officer
Marc Olarsch ........................... 89,904 14,333 --
Vice President, Sales
</TABLE>
- -----------------------------------------------------------------------------
(1) The aggregate amount of perquisites and other personal benefits provided
to each Named Officer is less than 10% of the total annual salary and
bonus of such officer.
(2) Dr. Petty does not devote his full business time to the affairs of the
Company.
(3) Consists of royalties paid pursuant to a consulting agreement between the
Company and Dr. Petty which was superseded by his employment agreement
which provides for the continuation of such royalties. All members of the
design team receive similar royalties. See "Certain Transactions."
AGGREGATED OPTION EXERCISES IN 1995 AND YEAR-END OPTION VALUES
The following table sets forth information with respect to (i) exercises
of options by the Named Officers during the year ended December 31, 1995,
(ii) the number of unexercised options held by the Named Officers as of
December 31, 1995 and (iii) the value of unexercised in-the-money options
held by the Named Officers as of December 31, 1995.
43
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
DECEMBER 31, 1995(#) DECEMBER 31, 1995($)(1)
-------------------------------- --------------------------------
SHARES ACQUIRED VALUE
NAME ON EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------ ---------------- ------------- -------------- ---------------- -------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
William Petty ... -- -- -- -- -- --
Timothy J. Seese 25,125 $110,048 40,407 18,288 $177,622 $80,528
Marc Olarsch ..... -- -- 3,659 5,486 -- --
</TABLE>
- -----------------------------------------------------------------------------
(1) The value of each unexercised, in-the-money option was determined by
multiplying (i) the difference between (a) the fair market value of the
Common Stock issuable upon exercise of the option using a value of $6.67,
the price at which the Company's Board of Directors most recently granted
options during the year ended December 31, 1995, and (b) the exercise
price of the option, by (ii) the number of shares subject to the option.
EMPLOYMENT AGREEMENTS
In March 1996, the Company entered into five-year employment agreements
with each of William Petty, Timothy J. Seese and Gary J. Miller, which
provide for annual base salaries of $38,000, $137,415 and $66,000,
respectively, and, in the case of Timothy J. Seese, an annual bonus of
$11,451. The employment agreements with Dr. Petty and Dr. Miller provide for
the termination of their consulting agreements with the Company and the
continuation by the Company of the royalty payments required under such
consulting agreements. Pursuant to the terms of their employment agreements,
Dr. Petty and Dr. Miller are not required to devote their full business time
to the affairs of the Company. If any of these executives is terminated for
cause, as defined in his employment agreement, the executive is not entitled
to receive severance pay. If the executive is terminated without cause, he is
entitled to receive his then current salary for the remaining term of the
employment agreement. The employment agreements contain a provision that the
executive will not compete or engage in a business competitive with the
current or anticipated business of the Company for the term of the agreement
and for one year thereafter if the executive is terminated for cause or the
executive terminates his employment. In addition, pursuant to the employment
agreements, each executive agreed not to disclose confidential information of
the Company during the term of his employment or thereafter and agreed that
all work, research and results thereof, including inventions, processes or
formulas conceived or developed by the executive during the term of
employment which are related to the business, research and development work,
or field of operation of the Company is the property of the Company, other
than in the case of Drs. Petty and Miller to the extent that such rights
belong to the University of Florida by virtue of their relationship with such
University.
STOCK OPTION PLANS
Under the Employee Stock Option Plan and the Directors Plan, 565,000
shares of Common Stock and 35,000 shares of Common Stock, respectively, are
reserved for issuance upon exercise of options and grants of restricted stock
awards. The Plans are designed to serve as an incentive for retaining
qualified and competent employees and directors.
The Company's Board of Directors, or a committee thereof, administers and
interprets the Employee Stock Option Plan and is authorized, in its
discretion, to grant options thereunder to all eligible employees of the
Company (currently 30 individuals), including officers and directors (whether
or not employees) of the Company. The Employee Stock Option Plan provides for
the granting of both "incentive stock options" (as defined in Section 422A of
the Internal Revenue Code) and nonstatutory stock options. Options can be
granted under the Employee Stock Option Plan on such terms and at such prices
as determined by the Board, or a committee thereof, except that the per share
exercise price of options will not be less than the fair market value of the
Common Stock on the date of grant, and, in the case of an incentive stock
option granted to a 10% shareholder, the per share exercise price will not
44
<PAGE>
be less than 110% of such fair market value. The aggregate fair market value
of the shares covered by incentive stock options granted under the Plans that
become exercisable by a grantee for the first time in any calendar year is
subject to a $100,000 limit.
In addition to options granted under the Employee Stock Option Plan, the
Board of Directors, or a committee thereof, is authorized to grant restricted
stock awards ("Stock Awards") under such plan to eligible employees. The
recipient of a Stock Award has the right to vote the shares subject to the
Stock Award and to receive dividends and other distributions in respect
thereof, if any. Stock Awards granted under the Employee Stock Option Plan
are subject to restrictions for a period of 10 years from the date of grant
which prohibit the recipient's sale, transfer, exchange or other disposition
of its Stock Awards until the termination of the restricted period. If during
the restricted period the recipient's employment is terminated for any
reason, including death or disability, the Stock Awards granted to such
recipient are forfeited and returned to the Company. The Board of Directors,
or the committee appointed to administer the Employee Stock Option Plan, have
the discretion to accelerate the time at which the restrictions lapse or to
remove any restrictions.
Only nonemployee directors are eligible to receive options under the
Directors Plan. The Directors Plan provides for an automatic grant of an
option to purchase 5,000 shares of Common Stock upon a person's election as a
director of the Company and an automatic grant of 3,000 shares of Common
Stock upon such person's re-election as a director of the Company.
Options granted under the Employee Stock Option Plan will be exercisable
after the period or periods specified in the option agreement, and options
granted under the Directors Plan are exercisable after one year from the date
of grant. Options granted under the Plans are not exercisable after the
expiration of five years from the date of grant and are not transferable
other than by will or by the laws of descent and distribution. The Plans also
authorize the Company to make loans to optionees to enable them to exercise
their options.
As of March 1, 1996, options to purchase an aggregate of 128,248 shares of
Common Stock were outstanding under the Employee Stock Option Plan and no
options were outstanding under the Directors Plan. Effective as of the date
of this Prospectus, the Company has granted additional options pursuant to
the Plans to purchase an aggregate of 262,200 shares of Common Stock. Of such
options, 192,200 were granted at an exercise price equal to the initial
public offering price of the Common Stock offered hereby and 70,000 were
granted at an exercise price equal to 110% of the initial public offering
price. Of such options, options to purchase 50,000, 62,500 and 15,000 shares
were granted to William Petty, Timothy J. Seese and Marc Olarsch,
respectively.
401(K) PLAN
The Company plans to implement a 401(k) pension plan in the second quarter
of 1996. The Company currently intends to match employee contributions at the
rate of $.25 for each dollar of employee contributions subject to the
availability of funds. The Company is not required to match employee
contributions in the future. The plan will be administered by and offer the
funds of a national mutual fund company which has yet to be selected. The
Company match may be made in the Company's Common Stock.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation and Stock Option and Incentive Plan Committee is
responsible for determining salaries, incentives and other forms of
compensation for officers of the Company. Timothy J. Seese, President of the
Company, is a member of such committee.
45
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth, as of the date of this Prospectus and as
adjusted to reflect the sale of 1,600,000 shares of Common Stock offered
hereby, information with respect to the beneficial ownership of the Common
Stock by (i) each person known by the Company to be the beneficial owner of
more than 5% of the outstanding shares of Common Stock, (ii) each director of
the Company, (iii) each of the Named Officers and (iv) all directors and
executive officers of the Company as a group.
<TABLE>
<CAPTION>
PERCENTAGE OF
OUTSTANDING SHARES
OWNED(1)
------------------------
AMOUNT AND NATURE OF
NAME AND ADDRESS OF BENEFICIAL BENEFICIAL BEFORE AFTER
OWNER(2) OWNERSHIP(3) OFFERING OFFERING
- ------------------------------------- ---------------------- ------------ -----------
<S> <C> <C> <C>
William Petty, M.D. ................. 1,323,271(4) 44.6% 28.9%
Betty Petty ......................... 1,323,271(4) 44.6 28.9
Timothy J. Seese .................... 86,868(5) 2.9 1.9
Gary J. Miller, Ph.D. ............... 285,002(6) 9.6 6.2
Marc Olarsch ........................ 4,409(7) * *
David W. Petty ...................... 263,652(8) 8.9 5.8
Albert H. Burstein Ph.D. ............ -- -- --
R. Wynn Kearney, Jr., M.D. .......... 147,777(9) 4.9 3.2
Ronald Pickard ...................... -- -- --
P. Michael Prince ................... 26,289(10) 1.0 *
Mark A. Petty ....................... 213,360 7.2 4.7
Julie A. Petty ...................... 213,360 7.2 4.7
All directors and executive officers
as a group (11) persons ............ 2,141,108(11) 69.4 45.6
</TABLE>
- -----------------------------------------------------------------------------
* Less than 1%.
(1) A person is deemed to be the beneficial owner of securities that can be
acquired by such person within 60 days from the date of this Prospectus
upon the exercise of outstanding options, warrants and convertible
securities. Each beneficial owner's percentage ownership is determined
by assuming that options, warrants and convertible securities that are
held by such person (but not those held by any other person) and that
are exercisable within 60 days from the date of this Prospectus have
been exercised.
(2) Unless otherwise indicated, the address of each of the beneficial owners
identified is 4613 N.W. 6th Street, Gainesville, Florida 32609.
(3) Unless otherwise noted, the Company believes that all persons named in
the table have sole voting and investment power with respect to all
shares of Common Stock beneficially owned by them.
(4) Consists of (i) 1,318,699 shares of Common Stock held by William Petty,
M.D. and Betty Petty as joint tenants with rights of survivorship and
(ii) 4,572 shares of Common Stock issuable upon the exercise of options
granted to Betty Petty which are currently exercisable.
(5) Includes 55,647 shares of Common Stock issuable upon the exercise of
options granted to Mr. Seese which are currently exercisable.
(6) Includes 5,305 shares of Common Stock issuable upon the exercise of
options granted to Dr. Miller which are currently exercisable.
(7) Includes 3,659 shares of Common Stock issuable upon the exercise of
options granted to Mr. Olarsch which are currently exercisable.
(8) Includes 4,572 shares of Common Stock issuable upon the exercise of
options granted to Mr. Petty which are currently exercisable.
(9) Includes 24,364 shares of Common Stock issuable upon the exercise of the
Debenture Warrants held by Dr. Kearney.
(10) Includes 20,638 shares of Common Stock issuable upon the exercise of
options granted to Mr. Prince which are currently exercisable.
(11) Includes (i) 97,933 shares of Common Stock issuable upon the exercise of
options which are currently exercisable and (ii) 24,364 shares of Common
Stock issuable upon the exercise of the Debenture Warrants.
46
<PAGE>
CERTAIN TRANSACTIONS
CONSULTING AGREEMENTS WITH PRINCIPALS OF THE COMPANY
The Company had entered into seven-year consulting agreements with each of
William Petty, M.D., the Chairman of the Board, Chief Executive Officer and a
principal shareholder of the Company, and Gary J. Miller, Ph.D., a Vice
President, director and principal shareholder of the Company, pursuant to
which Drs. Petty and Miller agreed to provide consulting services to the
Company in connection with the design of knee implantation systems and
associated instrumentation to be utilized by the Company. The consulting
agreements were terminated pursuant to the employment agreements entered into
in March 1996 by the Company and each of Drs. Petty and Miller. The
employment agreements provide for the continuation by the Company of the
royalty payments required under such consulting agreements. As compensation
for the consulting services provided to the Company by Drs. Petty and Miller,
during the term of the agreements, Drs. Petty and Miller were each entitled
to receive royalties equal to one-half of one percent of the Company's net
sales of implanted knee prostheses in the United States and one-quarter of
one percent of the Company's sales of such products outside of the United
States. For the year ended December 31, 1995, the Company paid Drs. Petty and
Miller royalties of $15,965 and $17,645, respectively. No royalties were paid
to Drs. Petty and Miller for prior periods. The Company believes that the
terms of the consulting agreements were no less favorable to the Company than
those available from unaffiliated third parties.
ISSUANCES OF SECURITIES TO DIRECTORS
The Company has issued an aggregate of $500,000 of 8% Debentures to
Michael M. Kearney, M.D., a shareholder of the Company, and R. Wynn Kearney,
M.D., a director and shareholder of the Company, of which $450,000 are
currently outstanding. Interest on the 8% Debentures accrues at the rate of
8% per annum and is payable quarterly. For the years ended December 31, 1994
and 1995, aggregate interest paid to Dr. Michael Kearney was $8,000 and
$8,000, respectively, and to Dr. R. Wynn Kearney was $32,000 and $30,222.21,
respectively. In connection with the issuance of the 8% Debentures, the
Company also issued to Dr. Michael Kearney and Dr. R. Wynn Kearney the
Debenture Warrants to purchase a number of shares of Common Stock equal to
two-thirds of 1% of the number of shares of the Company's Common Stock
outstanding upon consummation of this offering, at an exercise price per
share equal to 75% of the initial public offering price. In addition, in May
1996, the Company issued to Dr. R. Wynn Kearney, Jr. the Kearney Options to
purchase 20,000 shares of Common Stock at the initial public offering price.
The Company intends to use a portion of the net proceeds of this offering to
redeem the 8% Debentures. See "Description of Securities."
COMMISSION PAYMENTS TO PRINCE MEDICAL
The Company has entered into a sales agency agreement with Prince Medical,
Inc. ("Prince Medical"), a medical product sales agency of which Michael
Prince, a director of the Company, is President and sole shareholder.
Pursuant to this agreement, Prince Medical serves as the Company's sales
agent in the State of Florida. As compensation for its services, the Company
pays Prince Medical a commission based on Prince Medical's sales of the
Company's products. For the years ended December 31, 1993, 1994 and 1995, the
Company paid commissions to Prince Medical of approximately $466,136,
$138,883 and $160,089, respectively. Such commissions are comparable to those
commissions paid to the Company's other sales agencies. In addition,
effective as of the date of this Prospectus, the Company granted options to
Michael Prince to purchase 10,000 shares of Common Stock at the initial
public offering price.
ADVANCES BY PRINCIPAL SHAREHOLDER
From time to time, William Petty, M.D., the Chairman of the Board, Chief
Executive Officer and a principal shareholder of the Company, advanced funds
to the Company for operations. The Company
47
<PAGE>
paid Dr. Petty interest on such advances at a rate equal to the rate paid by
Dr. Petty to his bank lender. In 1995, all of such advances in the aggregate
amount of $46,353, together with any accrued interest, were repaid by the
Company.
SHAREHOLDERS AGREEMENT
The Company has entered into a shareholders agreement with William Petty,
M.D., Betty Petty, David Petty, Julie Petty and Mark Petty, principal
shareholders of the Company. Pursuant to the shareholders agreement, in the
event of the death or incapacity of any such shareholder, the Company has the
right to purchase the shares of Common Stock owned by such shareholder.
DESCRIPTION OF SECURITIES
GENERAL
The Company is authorized to issue 15,000,000 shares of Common Stock, par
value $.01 per share, and 2,000,000 shares of Preferred Stock, par value $.01
per share.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share held
of record on all matters to be voted on by shareholders. There is no
cumulative voting with respect to the election of directors, with the result
that the holders of more than 50 percent of the shares voted for the election
of directors can elect all of the directors. The holders of Common Stock are
entitled to receive dividends when as and if declared by the Board of
Directors out of funds legally available therefor. In the event of
liquidation, dissolution or winding up of the Company, the holders of Common
Stock are entitled to share ratably in all assets remaining available for
distribution to them after payment of liabilities and after provision has
been made for each class of stock, if any, having preference over the Common
Stock. Holders of shares of Common Stock, as such, have no conversion,
preemptive or other subscription rights, and there are no redemption
provisions applicable to the Common Stock. All of the outstanding shares of
Common Stock are, and the shares of Common Stock offered hereby, when issued
against the consideration set forth in this Prospectus, will be, fully paid
and nonassessable.
PREFERRED STOCK
The Company is authorized to issue Preferred Stock with such designations,
rights and preferences as may be determined from time to time by the Board of
Directors. Accordingly, the Board of Directors is empowered, without
shareholder approval, to issue Preferred Stock with dividend, liquidation,
conversion, voting or other rights that could adversely affect the value or
market price of the Common Stock and voting power or other rights of the
holders of the Common Stock. In the event of issuance, the preferred stock
could be utilized, under certain circumstances, as a method of discouraging,
delaying or preventing a change in control of the Company.
The Board of Directors has authorized the issuance of 13,622 shares of
Series A Preferred Stock, all of which are outstanding, 20,000 shares of
Series B Preferred Stock, of which 10,500 shares are outstanding, and 5,000
shares of Series C Preferred Stock, all of which are outstanding. All of the
issued and outstanding Preferred Stock will be redeemed or converted into
Common Stock within 15 days following the consummation of this offering. The
terms of each such series of Preferred Stock are as follows:
The Series A Preferred Stock accrues dividends at a rate of 8% per annum,
payable quarterly. During the 15 day period following the consummation of
this offering, the holders of shares of Series A Preferred Stock may elect to
convert such shares into shares of Common Stock. Each share of Series A
48
<PAGE>
Preferred Stock will be convertible into a number of shares of Common Stock
determined by dividing $10 by the initial public offering price. The Company
is obligated to redeem any shares of Series A Preferred Stock which have not
been converted into Common Stock upon the earlier to occur of July 13, 1996
or the 15th day following the consummation of this offering, at a redemption
price of $10 per share. Each share of Series A Preferred Stock has a
liquidation preference of $10 plus all accrued and unpaid dividends. Except
as otherwise provided by law, the holders of the Series A Preferred Stock
have no voting rights.
The Series B Preferred Stock accrues dividends at a rate of 8% per annum,
payable quarterly. Upon consummation of this offering, each share of Series B
Preferred Stock will be converted automatically into a number of shares of
Common Stock determined by dividing $10 by the initial public offering price.
Assuming an initial public offering price of $7.75 per share, upon
consummation of this offering, the outstanding shares of Series B Preferred
Stock will be converted automatically into 13,548 shares of Common Stock.
Except as otherwise provided by law, the Series B Preferred Stock has no
voting rights.
The Series C Preferred Stock accrues dividends at a rate of 8% per annum,
payable quarterly. Upon consummation of this offering, the Company is
obligated to redeem the Series C Preferred Stock at a redemption price of $10
per share. Except as otherwise provided by law, the Series C Preferred Stock
has no voting rights.
SUBORDINATED DEBENTURES
The Company has issued an aggregate of $500,000 in principal amount of its
8% Debentures, of which $450,000 were outstanding at December 31, 1995.
Interest on the 8% Debentures accrues at the rate of 8% per annum and is
payable quarterly. The Company may redeem the 8% Debentures in full, at its
option, upon the consummation of this offering, at a redemption price equal
to the outstanding principal amount thereof. The Company intends to use a
portion of the net proceeds of this offering to redeem the 8% Debentures in
full. In addition, the Company has issued an aggregate of $310,000 in
principal amount of its 10% Debentures, of which $100,000 was issued to Alan
Chervitz, a shareholder of the Company. The 10% Debentures are payable in
full three years from the date of issuance thereof. Interest on the 10%
Debentures accrues at the rate of 10% per annum and is payable quarterly. The
10% Debentures are redeemable, in full, at the option of the holders thereof,
upon the consummation of this offering and for six months thereafter, at a
redemption price equal to the outstanding principal amount thereof. The 10%
Debentures are also convertible, at the option of the holders thereof, during
the period from the date of the issuance thereof until the end of the sixth
month following the consummation of this offering and at the maturity
thereof, into shares of Common Stock at a conversion rate per share equal to
the lower of (i) the initial public offering price of the Common Stock or
(ii) (a) $6.67, if such conversion occurs during the first year following the
date of issuance, (b) $7.33, if such conversion occurs during the second year
following the date of issuance and (c) $8.67, if such conversion occurs
during the third year following the date of issuance. In April 1996, the
holders of $50,000 of 10% Debentures elected to convert such Debentures into
shares of Common Stock.
In connection with the issuance of the 10% Debentures, the Company entered
into registration rights agreements (the "Registration Rights Agreements")
with the holders thereof. Pursuant to the Registration Rights Agreements, the
holders of the 10% Debentures have the right to include the shares of Common
Stock issuable upon conversion of the 10% Debentures in certain registrations
of the Company's securities under the Securities Act occurring after this
offering.
WARRANTS
In connection with the issuance of the Series A Preferred Stock, the
Company issued the Series A Warrants to the holders thereof which entitle
them to purchase a number of shares of Common Stock equal to .1816% of the
Company's outstanding shares of Common Stock immediately following
consummation of this offering at an exercise price equal to the initial
public offering price. The Series A Warrants are exercisable during the
two-year period commencing on the date of consummation of this offering.
49
<PAGE>
In connection with the issuance of the Series C Preferred Stock, the
Company issued the Series C Warrants to the holder thereof to purchase 2,250
shares of the Common Stock, at the initial public offering price. The Series
C Warrants are exercisable during the three-year period commencing on the
date of consummation of this offering.
In connection with the issuance of the 8% Debentures, the Company issued
to the holders thereof the Debenture Warrants to purchase a number of shares
of Common Stock equal to two-thirds of 1% of the number of shares of the
Common Stock outstanding upon the consummation of this offering, at an
exercise price equal to 75% of the initial public offering price of the
Common Stock. The Debenture Warrants are exercisable during the three-year
period commencing on the date of consummation of this offering.
In connection with the purchase by the Company of certain software, the
Company issued to Walter Reid the Reid Warrants to purchase 3,810 shares of
Common Stock at the initial public offering price. In addition, the ACBI
Warrants to purchase 457 shares of Common Stock at the initial public
offering price have been issued to Associated Business Consultants, Inc.
OPTIONS
In addition to options granted pursuant to the Plans, from time to time,
the Company grants options to purchase shares of Common Stock to its sales
representatives. As of the date of this Prospectus, Sales Representative
Options to purchase an aggregate of 88,138 shares of Common Stock have been
granted at an exercise price of $6.67 per share, and options to purchase
10,000 shares of Common Stock at the initial public offering price have been
granted to Michael Prince effective upon the consummation of this offering.
In addition, the Company has issued to R. Wynn Kearney, M.D. the Kearney
Options to purchase 20,000 shares of Common Stock at the initial public
offering price.
The Company has also issued to Phillip Cripe License Options to purchase
7,500 shares of Common Stock and to Michael MacMillan License Options to
purchase 1,500 shares of Common Stock, at an exercise price of $6.67 per
share, in connection with certain license agreements.
CERTAIN FLORIDA LEGISLATION
The State of Florida has enacted legislation that may deter or frustrate
takeovers of Florida corporations. The Florida Control Share Act generally
provides that shares acquired in excess of certain specified thresholds will
not possess any voting rights unless such voting rights are approved by a
majority vote of a corporation's disinterested shareholders. The Florida
Affiliated Transactions Act generally requires supermajority approval by
disinterested directors or shareholders of certain specified transactions
between a public corporation and holders of more than 10% of the outstanding
voting shares of the corporation (or their affiliates). Florida law permits
and the Company's Articles of Incorporation require the Company to indemnify
the Company's directors, officers, employees and agents. Pursuant to such
authorization, the Company has entered into an agreement with each of its
directors and certain of its officers providing for indemnification to the
fullest extent allowed by law.
TRANSFER AGENT
The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company.
50
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon the consummation of this offering, the Company anticipates that it
will have 4,575,696 shares of Common Stock outstanding. Of these shares, the
1,600,000 shares sold in this offering will be freely tradeable without
restriction or further registration under the Securities Act, except for any
shares purchased by an "affiliate" of the Company (in general, a person who
has a control relationship with the Company) which will be subject to the
limitations of Rule 144 adopted under the Securities Act. All of the
remaining 2,975,696 shares are deemed to be "restricted securities," as that
term is defined under Rule 144 promulgated under the Securities Act, in that
such shares were issued and sold by the Company in private transactions not
involving a public offering. Of such remaining shares, 2,870,493 will become
eligible for sale under Rule 144 ninety days from the date of this
Prospectus.
In general, under Rule 144 as currently in effect, subject to the
satisfaction of certain other conditions, a person, including an affiliate of
the Company (or other persons whose shares are aggregated), who has owned
restricted shares of Common Stock beneficially for at least two years is
entitled to sell, within any three-month period, a number of shares that does
not exceed the greater of one percent of the total number of outstanding
shares of the same class or the average weekly trading volume during the four
calendar weeks preceding the sale. A person who has not been an affiliate of
the Company for at least the three months immediately preceding the sale and
who has beneficially owned shares of Common Stock for at least three years is
entitled to sell such shares under Rule 144 without regard to any of the
limitations described above.
All of the Company's officers, directors and holders of more than 5% of
the outstanding shares of Common Stock have agreed not to sell or otherwise
dispose of any of their shares of Common Stock for a period of 12 months from
the date of this Prospectus without the prior written consent of the
Representative.
Prior to this offering, there has been no market for the Common Stock and
no prediction can be made as to the effect, if any, that market sales of
shares of Common Stock or the availability of such shares for sale will have
on the market prices prevailing from time to time. Nevertheless, the
possibility that substantial amounts of Common Stock may be sold in the
public market may adversely affect prevailing market prices for the Common
Stock and could impair the Company's ability to raise capital through the
sale of its equity securities. See "Description of Securities" for
information concerning outstanding warrants and convertible securities.
51
<PAGE>
UNDERWRITING
The Underwriters named below, for whom First Equity Corporation of Florida
is acting as Representative, have severally agreed, subject to the terms and
conditions of the Underwriting Agreement (a copy of which is filed as an
exhibit to the Registration Statement, of which this Prospectus is a part),
to purchase the number of shares of Common Stock from the Company set forth
opposite their respective names below:
<TABLE>
<CAPTION>
NAME NUMBER OF SHARES
- ------------------------------------- -----------------
<S> <C>
First Equity Corporation of Florida
-----------------
Total ............................. 1,600,000
=================
</TABLE>
The Common Stock is being sold on a firm commitment basis. The
Underwriting Agreement provides, however, that the obligations of the several
Underwriters are subject to certain conditions precedent. The Underwriters
are committed to purchase all the shares of Common Stock offered hereby
(other than those covered by the over-allotment option described below), if
any are purchased. The Representative has informed the Company that it does
not expect sales to discretionary accounts by the Underwriters to exceed %
of the total number of shares of Common Stock offered hereby.
The Representative has advised the Company that the Underwriters propose
initially to offer the shares of Common Stock to the public at the initial
public offering price set forth on the cover page of this Prospectus and to
certain dealers at such price less concessions of not in excess of $0. per
share, of which amount a sum not in excess of $0. per share may in turn be
allowed by such dealers to other dealers. After the initial public offering,
the public offering price, the concessions and the reallowances may be
changed by the Representative.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute
to payments the Underwriters may be required to make. The Company has also
agreed to pay all expenses in connection with qualifying the Common Stock
offered hereby for sale under applicable state securities laws. The Company
has agreed to pay the Representative a non-accountable expense allowance
equal to 2% of the gross proceeds of this offering, $25,000 of which has been
paid to date.
The Company has granted to the Underwriters an option, exercisable during
the 45-day period from the date of this Prospectus, to purchase from the
Company at the public offering price, less underwriting discounts and the
expense allowance, up to 240,000 additional shares of Common Stock for the
sole purpose of covering over-allotments, if any. To the extent the
Underwriters exercise such option, each Underwriter will have a firm
commitment, subject to certain conditions, to purchase the number of the
additional shares of Common Stock proportionate to such Underwriter's initial
commitment.
In connection with this offering, the Company has agreed to sell to the
Representative, for nominal consideration, warrants to purchase from the
Company 160,000 shares of Common Stock (the "Representative's Warrants"). The
Representative's Warrants are initially exercisable at a price of $ per
share and are exercisable for a period of four years, commencing one year
from the effective date of the Registration Statement of which the Prospectus
is a part. The Representative's Warrants contain provisions providing for
adjustment of the exercise price and the number and type of
52
<PAGE>
securities issuable upon exercise of the Representative's Warrants upon the
occurrence of certain events. The Representative's Warrants will be
restricted from sale, transfer, assignment or hypothecation (other than to
officers of the Representative or to other Underwriters, selected dealers or
their officers or partners) for one year following the date of this
Prospectus. The Representative's Warrants grant to the holders thereof
certain registration rights for the securities issuable upon the exercise
thereof.
The Company has granted to the Representative, for a period of three years
after the date of this Prospectus, the right to designate for election to the
Company's Board of Directors one person, which individual may be a director,
officer, employee or affiliate of the Representative.
The Company's 5% shareholders, directors and executive officers have
agreed not to sell, transfer or otherwise dispose of any beneficial interest
in any shares of Common Stock owned by them, other than gifts and
intra-family transfers (so long as the holders remain subject to the
restrictions), without the prior written consent of the Company and the
Representative for a period of 12 months following the date of this
Prospectus.
Prior to this offering, there has been no public market for the Common
Stock. The initial public offering price of the Common Stock will be
determined by negotiation between the Company and the Representative, does
not necessarily bear any relationship to the Company's assets, book value,
revenues or other established criteria of value, and should not be considered
indicative of the actual value of the shares of Common Stock. Factors
considered in determining such public offering price, in addition to
prevailing market conditions, include the history of and prospects for the
industry in which the Company competes, an assessment of the Company's
management, its past and present operations, the prospects of the Company and
such other factors as were deemed relevant.
LEGAL MATTERS
The legality of the shares of Common Stock offered hereby will be passed
upon for the Company by Greenberg, Traurig, Hoffman, Lipoff, Rosen & Quentel,
P.A., Miami, Florida. Stearns Weaver Miller Weissler Alhadeff & Sitterson,
P.A. has acted as counsel for the Underwriters in connection with this
offering.
EXPERTS
The financial statements as of December 31, 1994 and 1995 and for each of
the three years in the period ended December 31, 1995 included in this
Prospectus and the related financial statement schedule included elsewhere in
the registration statement have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their reports appearing herein and
elsewhere in the registration statement, and have been so included in
reliance upon the reports of such firm given upon their authority as experts
in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 (the "Registration
Statement") under the Securities Act with respect to the Common Stock offered
by this Prospectus. This Prospectus does not contain all of the information
set forth in the Registration Statement. For further information with respect
to the Company and the Common Stock offered hereby, reference is made to the
Registration Statement, including the exhibits filed therewith, which may be
inspected without charge at the Commission's principal office at 450 Fifth
Street, N.W., Washington, D.C. 20549. Copies of the Registration Statement
may be obtained from the Commission at its principal office upon payment of
prescribed fees. Statements contained in this Prospectus as to the contents
of any contract or other document are not necessarily complete and, where the
contract or other document has been filed as an exhibit to the Registration
Statement, each such statement is qualified in all respects by reference to
the applicable document filed with the Commission.
53
<PAGE>
GLOSSARY
ACETABULAR COMPONENT--An orthopaedic implant that attaches to the pelvis
replacing the diseased or damaged acetabulum in total hip arthroplasty.
ACETABULAR CUP--An orthopaedic implant which replaces the acetabulum in
total hip arthroplasty.
ACETABULUM--The hip socket or cup-shaped depression on the external
surface of the pelvis, in which the femoral head fits.
ARTHROPLASTY--An operation to restore as far as possible the integrity and
functionality of a joint.
ARTICULAR CONTACT STRESS--A measure of force where two moving surfaces
make contact; in the case of a normal human joint or an artificial joint, a
measure of force between the two surfaces in contact.
BIPOLAR COMPONENT/BIPOLAR PROSTHESIS--An orthopaedic hip implant used with
a femoral stem and a femoral head to repair fractures of the neck of the
femoral stem when the acetabulum and acetabular cartilage are in good
condition.
BONE REMODELING--Reshaping of the bone as a result of stresses applied,
sometimes from stresses transferred to the bone by an orthopaedic implant.
BONE SCREWS--Screws used to affix an orthopaedic implant to a bone.
CEMENT--A nonmetallic material used for filling a cavity and attaching
implants to bone in joint arthroplasty.
CERAMIC--A glass like material made from metallic oxides used as an
alternative to metal in the ball of a ball and socket joint in hip and other
large joint orthopaedic implants.
COBALT CHROMIUM ALLOY--A substance primarily composed of a mixture of
cobalt and chromium used for orthopaedic implants.
CONSTRAINED CONDYLAR FEMORAL COMPONENT--A type of knee replacement
component typically used in revision surgery which compensates for lack of
ligamentous stability in the knee joint.
CRUCIATE LIGAMENT SPARING FEMORAL COMPONENT--A total knee replacement
component designed specifically for use in situations where the surgeon
chooses to maintain a functional or partially functional posterior cruciate
ligament (one of the major ligaments in the knee joint). Also called a
cruciate retaining femoral component.
EXTRAMEDULLARY ALIGNMENT--A method used in setting the alignment for bone
preparation in knee arthroplasty.
FEMORAL--Pertaining to the femur (large bone in the thigh).
FEMORAL HEAD--The ball of the ball and socket hip joint. The artificial
ball used to replace the natural ball of a diseased or damaged hip joint.
FEMORAL STEM--An orthopaedic implant placed into the femur or thigh bone
in total hip arthroplasty.
FEMUR--The bone located between the hip and the knee (large bone in the
thigh).
FINNED KEEL--A shape or geometry of part of a specific design of a tibial
component which is implanted into the bone in knee arthroplasty.
54
<PAGE>
FIXATION METHODS--Various methods of fixating implant components of
artificial joints to human bone.
FORGING--A fabrication process whereby a metal is heated and hammered into
a final shape resulting in a strong, dense part.
HIP ARTHROPLASTY--An operation to restore as far as possible the integrity
and functionality of the hip joint.
IMPLANT--A device employed in arthroplasty.
JOINT REPLACEMENT--An arthroplasty procedure where joint functionality is
restored as far as possible by totally substituting an artificial joint
orthopaedic implant system for a diseased or damaged joint.
KNEE ARTHROPLASTY--An operation to restore as far as possible the
integrity and functionality of the knee joint.
MODULAR--Made up of interchangeable parts which, when joined together,
comprise an entire orthopaedic implant.
NON-CEMENT--Description of a total orthopaedic implant component or
procedure in which bone cement is not used and the metal of the component is
placed directly against the bone.
NON-POROUS COATING--Uniform rough coatings applied to metal parts.
ORTHOPAEDICS--The medical specialty concerned with the preservation,
restoration and development of form and function of the musculoskeletal
system, extremities, spine and associated structures by medical, surgical and
physical methods.
OSTEOARTHRITIS--Degenerative joint disease occurring chiefly in older
persons, characterized by degeneration of the cartilage and bone and changes
in the synovial membrane. It is accompanied by pain and stiffness,
particularly after prolonged activity.
PATELLA--A triangular sesamoid bone situated at the front of the knee
(knee cap).
PATELLA TRACKING--The action of the knee cap or patella gliding over the
surface of the end of the femur or thighbone when the knee bends and
straightens. Also the action of a patellar component gliding over the surface
of a femoral component in a knee with a total knee arthroplasty.
POLYETHYLENE--A plastic polymer in the thermoplastic group compatible with
tissue in the body.
POLYETHYLENE CUP LINER--An ultra-high molecular weight polyethylene insert
which provides the articular surface inside an acetabular cup.
POLYMETHYLMETHACRYLATE--A polymer compound used as orthopaedic cement.
Also used to mold the cemented stem centralizer.
POROUS COATING--A coating made of metal beads applied by heat and pressure
to the metal surface of an orthopaedic implant that promotes bony ingrowth in
order to hold the orthopaedic implant in place.
POSTERIOR STABILIZED FEMORAL COMPONENT--A knee component which fits on the
end of the femur and is used in situations where the surgeon chooses to
eliminate the posterior cruciate ligament, one of the major ligaments in the
knee joint. The component replaces to some degree the function of the
posterior cruciate ligament.
55
<PAGE>
PRESS-FIT--A method of fixation using a wedge-fit, rather than cement.
PRIMARY SYSTEMS--Orthopaedic implants which are designed to replace the
natural joint.
RECONSTRUCTIVE IMPLANT DEVICES--Orthopaedic implants which are implanted
to reconstruct major joints which have been damaged by degenerative bone
disease or accident.
REVISION SYSTEMS--Orthopaedic implants, which are designed to replace a
failed orthopaedic implant.
TIBIA--The inner and larger bone of the leg below the knee (shin bone).
TITANIUM--A metal used primarily in non-cemented applications in joint
arthroplasty.
TOTAL JOINT ARTHROPLASTY--An operation to replace a diseased or damaged
joint of the body with artificial implants usually to reduce pain and restore
function in the joint.
TOTAL JOINT IMPLANTS--Implants used in total joint arthroplasty.
TRAPEZOID KEEL WITH STEM AUGMENTATION--A geometry of a specific design of
tibial component that allows for attaching space-filling metal blocks and
stems to fill bone defects in the tibia in knee arthroplasty.
UNICOMPARTMENTAL IMPLANTS--Implants designed to resurface only one
compartment of a human knee.
UNIPOLAR PROSTHESIS--A large hemispherical implant component which is
attached to a femoral stem in a partial hip arthroplasty.
56
<PAGE>
F-
EXACTECH, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Independent Auditors' Report ............................ F-2
Balance Sheets .......................................... F-3
Statements of Income .................................... F-4
Statements of Changes in Common Shareholders' Equity ... F-5
Statements of Cash Flows ................................ F-6
Notes to Financial Statements ........................... F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
of Exactech, Inc.
Gainesville, Florida
We have audited the accompanying balance sheets of Exactech, Inc. (the
"Company") as of December 31, 1994 and 1995, and the related statements of
income, shareholders' equity, and cash flows for each of the three years in
the period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Exactech, Inc. as of December 31, 1994
and 1995, and the results of its operations and its cash flows for each of
the three years ended December 31, 1995 in conformity with generally accepted
accounting principles.
Deloitte & Touche LLP
Jacksonville, Florida
January 19, 1996
(May 8, 1996 as to Note 14)
F-2
<PAGE>
EXACTECH, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- MARCH 31,
1994 1995 1996
---------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ......................................... $ 267,416 $ 201,979 $ 215,924
Trade receivables (net of allowance for
doubtful accounts of $5,300, $13,500 and $13,500) ............... 694,284 1,802,129 2,047,801
Refundable income taxes ........................................... 68,168 -- --
Prepaid expenses and other assets ................................. 65,834 84,670 461,809
Inventories ....................................................... 3,685,728 6,322,355 6,002,451
---------- ----------- ------------
Total current assets ............................................ 4,781,430 8,411,133 8,727,985
PROPERTY AND EQUIPMENT:
Machinery and equipment ........................................... 1,712,064 2,504,130 3,330,905
Furniture and fixtures ............................................ 52,483 101,137 101,137
---------- ----------- ------------
Total ........................................................... 1,764,547 2,605,267 3,432,042
Accumulated depreciation .......................................... (571,547) (881,747) (995,551)
---------- ----------- ------------
Net property and equipment ...................................... 1,193,000 1,723,520 2,436,491
OTHER ASSETS:
Land held for future use .......................................... 263,301 263,301 263,301
Investment in subsidiary .......................................... -- 67,987 77,121
Deferred financing costs, net ..................................... -- 56,152 38,858
Deferred stock issuance costs ..................................... -- 10,000 44,457
Deposits .......................................................... 5,191 2,442 2,442
Patents and trademarks, net of
accumulated amortization ......................................... 53,823 86,215 83,942
---------- ----------- ------------
Total other assets .............................................. 322,315 486,097 510,121
TOTAL ASSETS ....................................................... $6,296,745 $10,620,750 $11,674,597
========== =========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable--trade ........................................... $ 716,973 $ 1,439,598 $ 1,342,128
Borrowings under line of credit ................................... 700,000 1,844,266 2,488,259
Income taxes payable .............................................. -- 275,991 173,368
Current portion of long-term debt and
capital lease obligations ....................................... 189,266 266,389 532,025
Commissions payable ............................................... 188,037 351,431 331,499
Royalties payable ................................................. -- 232,735 294,290
Other liabilities ................................................. 102,212 65,964 121,813
---------- ----------- ------------
Total current liabilities ....................................... 1,896,488 4,476,374 5,283,382
DEFERRED INCOME TAXES .............................................. 129,602 213,796 213,800
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS--
net of current portion ............................................ 684,903 1,002,309 938,493
SUBORDINATED DEBENTURES--related parties ........................... 500,000 550,000 550,000
SUBORDINATED DEBENTURES--other ..................................... -- 210,000 210,000
---------- ----------- ------------
Total liabilities ............................................... 3,210,993 6,452,479 7,195,675
COMMITMENTS AND CONTINGENCIES (Notes 5 and 8)
MANDATORILY REDEEMABLE PREFERRED STOCK:
Series A Preferred Stock, $.01 par value;
13,622 shares authorized, issued and
outstanding; liquidation value $136,220 ......................... 136,220 136,220 136,220
Series C Preferred Stock, $.01 par value;
5,000 shares authorized, issued and
outstanding; liquidation value $50,000 ........................... -- 50,000 50,000
NONREDEEMABLE PREFERRED STOCK:
Series B Preferred Stock, $.01 par value;
20,000 shares authorized; 10,500 shares
issued and outstanding; liquidation value $105,000 .............. 105,000 105,000 105,000
COMMON SHAREHOLDERS' EQUITY:
Common stock, $.01 par value; 15,000,000
shares authorized; 2,913,230, 2,953,903 and
2,954,653 shares issued and outstanding ......................... 29,132 29,539 29,546
Additional paid-in capital ........................................ 1,448,401 1,676,383 1,681,376
Retained earnings ................................................. 1,366,999 2,171,129 2,476,780
---------- ----------- ------------
Total common shareholders' equity ............................... 2,844,532 3,877,051 4,187,702
---------- ----------- ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ......................... $6,296,745 $10,620,750 $11,674,597
========== =========== ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
F-3
<PAGE>
EXACTECH, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------------------- ----------------------------
1993 1994 1995 1995 1996
------------- ------------- ------------- ------------- ----------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
NET SALES ............................ $4,675,505 $5,355,804 $9,118,075 $1,688,481 $3,423,629
COST OF GOODS SOLD ................... 1,360,025 1,586,633 2,995,955 445,585 1,267,332
------------- ------------- ------------- ------------- ----------------
Gross profit ...................... 3,315,480 3,769,171 6,122,120 1,242,896 2,156,297
OPERATING EXPENSES:
Sales and marketing ................. 1,405,043 1,500,514 2,326,286 494,337 837,209
General and administrative .......... 594,645 750,669 1,033,319 240,038 273,276
Research and development ............ 488,029 597,812 722,118 187,670 161,054
Depreciation and amortization ...... 142,481 224,624 350,612 71,086 116,075
Royalties ........................... 11,686 14,767 210,127 20,485 144,196
------------- ------------- ------------- ------------- ----------------
Total operating expenses .......... 2,641,884 3,088,386 4,642,462 1,013,616 1,531,810
------------- ------------- ------------- ------------- ----------------
INCOME FROM OPERATIONS ............... 673,596 680,785 1,479,658 229,280 624,487
OTHER INCOME (EXPENSE):
Interest expense .................... (137,448) (158,288) (273,110) (41,584) (104,109)
Income from sub-license agreement,
net ............................... -- -- 170,534 -- --
Equity in net loss of unconsolidated
subsidiary ........................ -- -- (22,361) -- (18,000)
------------- ------------- ------------- ------------- ----------------
(137,448) (158,288) (124,937) (41,584) (122,109)
------------- ------------- ------------- ------------- ----------------
INCOME BEFORE PROVISION FOR
INCOME TAXES ....................... 536,148 522,497 1,354,721 187,696 502,378
PROVISION FOR INCOME TAXES ........... 182,709 176,369 527,793 71,325 190,903
------------- ------------- ------------- ------------- ----------------
NET INCOME ........................... 353,439 346,128 826,928 116,371 311,475
PREFERRED STOCK DIVIDENDS ............ 8,194 19,298 22,798 4,824 5,824
------------- ------------- ------------- ------------- ----------------
NET INCOME AVAILABLE TO COMMON
SHAREHOLDERS ....................... $ 345,245 $ 326,830 $ 804,130 $ 111,547 $ 305,651
============= ============= ============= ============= =============
NET INCOME PER COMMON AND COMMON
SHARE EQUIVALENT ................... $ 0.12 $ 0.11 $ 0.27 $ 0.04 $ 0.10
============= ============= ============= ============= =============
WEIGHTED AVERAGE COMMON AND COMMON
SHARE EQUIVALENTS OUTSTANDING ...... 2,946,048 2,975,252 3,022,735 3,028,596 3,060,971
============= ============= ============= ============= =============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
F-4
<PAGE>
EXACTECH, INC.
STATEMENTS OF COMMON SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND THREE MONTH PERIOD ENDED MARCH 31, 1996
<TABLE>
<CAPTION>
COMMON STOCK
------------------------
TOTAL
ADDITIONAL COMMON
PAID-IN RETAINED SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
--------- ------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1993 ................... 2,849,825 $28,498 $1,215,876 $ 694,924 $1,939,298
Dividends on
preferred stock ......................... (8,194) (8,194)
Net income ................................ 353,439 353,439
--------- ------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 1993 ................. 2,849,825 28,498 1,215,876 1,040,169 2,284,543
Issuance of
common stock ............................ 63,405 634 422,065 422,699
Dividends on
preferred stock ......................... (19,298) (19,298)
Stock issuance costs ...................... (189,540) (189,540)
Net income ................................ 346,128 346,128
--------- ------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 1994 ................. 2,913,230 29,132 1,448,401 1,366,999 2,844,532
Issuance of
common stock ............................ 15,548 156 104,244 104,400
Exercise of stock options ................. 25,125 251 82,098 82,349
Tax benefit from exercise of stock options 41,640 41,640
Dividends on
preferred stock ......................... (22,798) (22,798)
Net income ................................ 826,928 826,928
--------- ------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 1995 ................. 2,953,903 29,539 1,676,383 2,171,129 3,877,051
--------- ------- ---------- ---------- ----------
Exercise of stock options (unaudited) .... 750 7 4,993 5,000
Dividends on preferred stock
(unaudited) ............................. (5,824) (5,824)
Net income (unaudited) .................... 311,475 311,475
--------- ------- ---------- ---------- ----------
BALANCE, MARCH 31, 1996 (unaudited) ....... 2,954,653 $29,546 $1,681,376 $2,476,780 $4,187,702
========= ======= ========== ========== ==========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
F-5
<PAGE>
EXACTECH, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------------- ----------------------
1993 1994 1995 1995 1996
--------- --------- ----------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 353,439 $ 346,128 $ 826,928 $ 116,371 $ 311,475
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization 142,481 224,624 350,612 71,086 116,077
Equity in net loss of unconsolidated subsidiary -- -- 22,361 -- 18,000
Deferred income taxes 16,161 71,022 84,194 -- 4
Decrease (increase) in trade receivables 31,178 (170,420) (1,107,845) (232,886) (245,672)
Decrease (increase) in inventories (531,825) (253,911) (2,636,627) (712,543) 319,904
(Decrease) increase in income taxes payable (79,732) (43,792) 385,799 30,128 (102,623)
(Decrease) increase in other prepaid expenses
and other assets 5,555 (8,546) 10,509 12,126 (92,747)
Increase (decrease) in accounts payable--trade 15,469 490,003 722,625 152,374 (97,470)
Increase in other liabilities 42,872 58,893 384,610 19,421 97,473
--------- --------- ----------- --------- ---------
Net cash (used in) provided by operating activities (4,402) 714,001 (956,834) (543,923) 324,421
--------- --------- ----------- --------- ---------
INVESTING ACTIVITIES:
Purchases of property and equipment (368,509) (905,585) (842,937) (24,626) (826,776)
Investment in unconsolidated subsidiary -- -- (90,348) -- (27,134)
Cost of patents and trademarks (14,679) (28,588) (41,487) (24,524) --
--------- --------- ----------- --------- ---------
Net cash used in investing activities (383,188) (934,173) (974,772) (49,150) (853,910)
--------- --------- ----------- --------- ---------
FINANCING ACTIVITIES:
Proceeds from issuance of debt 30,000 750,000 1,560,000 -- --
Principal payments on debt (20,000) (41,138) (925,861) (32,352) (62,508)
(Repayments) proceeds of advances under lines of credit -- (719,813) 1,144,266 300,000 643,993
Principal payments on capital lease obligations (4,893) (5,579) (8,711) (1,545) (2,770)
Proceeds from issuance of common stock 1,600 422,699 162,020 46,000 5,000
Proceeds from issuance of preferred stock 105,000 -- 50,000 50,000 --
Payment of debt issuance costs -- -- (82,747) -- --
Payment of common stock issuance costs (117,769) (71,771) (10,000) -- (34,457)
Preferred dividends paid (8,194) (19,298) (22,798) (4,824) (5,824)
--------- --------- ----------- --------- ---------
Net cash (used in) provided by financing activities (14,256) 315,100 1,866,169 357,279 543,434
--------- --------- ----------- --------- ---------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (401,846) 94,928 (65,437) (235,794) 13,945
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 574,334 172,488 267,416 267,416 201,979
--------- --------- ----------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 172,488 $ 267,416 $ 201,979 $ 31,622 $ 215,924
========= ========= =========== ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Interest paid $ 148,800 $ 169,896 $ 286,081 $ 44,637 $ 96,148
Income taxes paid 246,280 150,941 101,264 10,256 295,123
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Series A Preferred Stock issued for land $ 136,220 -- -- -- --
Note issued for land -- $ 98,000 -- -- --
Lease entered into for office equipment -- -- $ 29,101 -- --
Relief of compensation accrual upon issuance of
common stock -- -- 24,729 -- --
Financing of insurance premiums -- -- -- -- $ 296,106
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
F-6
<PAGE>
EXACTECH, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND THREE MONTH PERIODS ENDED MARCH 31, 1995 AND 1996
1. ORGANIZATION
Exactech, Inc. (the "Company") develops, markets and sells orthopaedic
implant devices and related surgical instrumentation to hospitals and
physicians in the United States and overseas.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INTERIM PERIODS--All adjustments of a normal recurring nature which, in
the opinion of management, are necessary to present a fair statement of the
results for the interim periods have been made. The unaudited results of
operations for the three month periods ended March 31, 1995 and 1996, are not
necessarily indicative of the results for the full year.
CASH AND CASH EQUIVALENTS--Cash and cash equivalents consist of cash on
deposit in financial institutions, including a money market account and
overnight repurchase agreements, with original maturities of three months or
less.
CONCENTRATION OF CREDIT RISK--The Company's accounts receivable consist
primarily of amounts due from hospitals. The Company performs credit
evaluations on its customers and generally does not require collateral.
INVENTORIES--Inventories are valued at the lower of cost (first-in,
first-out method) or market. Substantially all of the Company's inventory is
finished goods.
PROPERTY AND EQUIPMENT--Property and equipment are stated at cost less
accumulated depreciation. Depreciation expense is computed using the
straight-line method over estimated useful lives of the related assets.
Certain instruments utilized in the surgical implant procedures are loaned to
customers and are amortized over an estimated useful life of seven years. The
machinery and equipment, and furniture and fixtures have estimated useful
lives of five to seven and seven years, respectively. Maintenance and repairs
are charged to expense.
INVESTMENT IN SUBSIDIARY--In July 1995, the Company purchased a 50%
interest in Techmed S.p.A, its Italian distributor. Under terms of the
shareholders' agreement, in addition to its equity investments, the Company
has committed to fund the initial operations of Techmed SpA in amounts not to
exceed approximately $150,000, either through convertible loans or through
favorable pricing arrangements described therein. The investment in the
subsidiary is accounted for by the equity method, and the Company's share of
the subsidiary's net loss is included as a separate item in the statement of
income. Intercompany profits on sales to such subsidiary have been deferred
to the extent the subsidiary holds inventory. All transactions with the
subsidiary have been denominated in U.S. Dollars and therefore there are no
transaction gains or losses. As the functional currency of the subsidiary is
the local currency, net assets are translated at year-end rates while income
and expense accounts are translated at average translation rates.
PATENTS AND TRADEMARKS--Patents and trademarks are amortized on a
straight-line basis over estimated useful lives ranging from five to
seventeen years.
INCOME TAXES--Deferred income taxes are provided on temporary differences
which arise from certain transactions being reported for financial statement
purposes in different periods than for income tax purposes. Deferred tax
assets and liabilities are recognized using an asset and liability approach
and are based on differences between the financial statement and tax basis of
assets and liabilities using presently enacted tax rates.
F-7
<PAGE>
EXACTECH, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND THREE MONTH PERIODS ENDED MARCH 31, 1995 AND 1996
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-(CONTINUED)
ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during each reporting period. Actual results could differ from those
estimates.
NEW ACCOUNTING STANDARD--In October 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123). SFAS 123 establishes a
fair value based method of accounting for stock-based employee compensation
plans; however, it also allows companies to continue to measure cost for such
plans using the method of accounting prescribed by Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25).
Companies that elect to continue with the accounting under APB 25 must
provide certain pro forma disclosures of net income, as if SFAS 123 had been
applied. The accounting and disclosure requirements of SFAS 123 are effective
for the Company for transactions entered into in fiscal 1996. The Company is
currently evaluating its alternatives under SFAS 123, and its impact on
operating results when initially adopted is not presently known.
3. INCOME TAXES
A reconciliation between the amount of reported income tax provision and
the amount computed at the statutory Federal income tax rate for the years
ended December 31, 1993, 1994 and 1995 follows:
<TABLE>
<CAPTION>
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Statutory Federal rate ................ 35% 35% 35%
State income taxes (net of Federal
income tax benefit) .................. 3 3 3
Other ................................. (4) (4) 1
--------- --------- ---------
34% 34% 39%
========= ========= =========
</TABLE>
The types of temporary differences and their related tax effects that give
rise to deferred tax assets and liabilities at December 31, 1994 and 1995 are
as follows:
<TABLE>
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
Deferred tax liabilities:
Basis difference in property and equipment ... $ 43,140 $188,790
Basis difference in patents ................... 81,980 32,762
Other ......................................... 10,032 18,419
----------- -----------
Gross deferred tax liabilities ............... 135,152 239,971
----------- -----------
Deferred tax assets:
Basis difference in unconsolidated subsidiary -- 8,497
Accrued liabilities not currently deductible . 5,550 17,678
----------- -----------
Gross deferred tax assets .................... 5,550 26,175
----------- -----------
Net deferred tax liabilities ................. $129,602 $213,796
=========== ===========
</TABLE>
There was no valuation allowance on deferred tax assets at December 31,
1994 and 1995.
F-8
<PAGE>
EXACTECH, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND THREE MONTH PERIODS ENDED MARCH 31, 1995 AND 1996
4. DEBT
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ MARCH 31,
1994 1995 1996
--------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
$1,250,000 term loan payable in monthly installments
of $20,833 plus interest at a variable rate (8.8% as
of December 31, 1995) through August 1999 ............. -- $1,145,833 $1,084,799
$750,000 term loan payable in monthly installments of
$15,480 including interest at 8.75%, repaid in 1995 .. $ 720,246 -- --
$98,000 term loan payable in monthly installments
of $1,208 including monthly interest at prime
plus 1% (9.50% at December 31, 1995) through September
1999 .................................................. 96,616 91,521 90,047
Unsecured note payable to shareholder on demand;
interest payable monthly at prime plus 1.1%,
repaid in 1995 ........................................ 46,353 -- --
Capitalized lease obligation payable in monthly
installments of $611 through July 2000, collateralized
by equipment with a carrying value of approximately
$27,000 as of December 31, 1995 ....................... -- 26,473 25,474
Capitalized lease obligation payable in monthly
installments of $643 through August 1996,
collateralized by equipment with a carrying value
of approximately $7,000 as of December 31, 1995 ...... 10,954 4,871 3,099
Notes payable to finance company bearing interest
at 7.43% payable in monthly installments
through February 1997; proceeds used to
finance insurance policies ............................ -- -- 267,099
--------- ---------- ----------
Total long-term debt and capital lease obligations .. 874,169 1,268,698 1,470,518
--------- ---------- ----------
Less current portion ................................. (189,266) (266,389) (532,025)
--------- ---------- ----------
$ 684,903 $1,002,309 $ 938,493
========= ========== ==========
</TABLE>
F-9
<PAGE>
EXACTECH, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND THREE MONTH PERIODS ENDED MARCH 31, 1995 AND 1996
4. DEBT-(CONTINUED)
The following is a schedule of debt maturities and future minimum lease
payments under the capital leases, together with the present value of minimum
lease payments as of December 31, 1995:
<TABLE>
<CAPTION>
LONG-TERM CAPITAL LEASE
DEBT OBLIGATIONS
------------- ----------------
<S> <C> <C>
1996 ............................... $ 257,406 $12,476
1997 ............................... 258,062 7,332
1998 ............................... 258,774 7,332
1999 ............................... 317,279 7,332
2000 ............................... 145,833 4,277
------------- ----------------
Total ............................ $1,237,354 38,749
=============
Less amount representing interest
on capital lease obligations ..... (7,405)
----------------
$31,344
================
</TABLE>
LINE OF CREDIT:
In 1995, the Company renewed and consolidated previous borrowings under a
working capital agreement which includes a $1,250,000 term loan payable in
installments through August 1999 and a $2,500,000 line of credit expiring
June 30, 1996, both of which are collateralized by the Company's accounts
receivable, inventory, furniture, fixtures and equipment. Borrowings under
the notes are guaranteed by the Company's Chief Executive Officer and
Secretary-Treasurer, both of whom are significant shareholders. Borrowings
under the line of credit are available to the extent of 80% of net
non-affiliated accounts receivable less than 90 days old plus 50% of
inventory, not to exceed $2,500,000. Additional availability under the line
of credit was approximately $650,000 as of December 31, 1995. Interest on the
line of credit is payable monthly at the 30-day commercial paper rate as
published in The Wall Street Journal plus 2.65% (8.4% as of December 31,
1995).
Because the interest rates on the Company's borrowings are generally
variable and the debts are of relatively short maturities, management
believes that the carrying values of such borrowings as of December 31, 1995,
are reasonable approximations of their fair values.
SUBORDINATED DEBENTURES:
Two of the Company's shareholders hold subordinated debentures having an
aggregate outstanding balance of $500,000 and $450,000 at December 31, 1994
and 1995, respectively, which bear interest at 8% payable quarterly. The
Company may redeem the subordinated debentures in full at such time as funds
become available upon the occurrence of an initial public offering. In
addition, the holders of the subordinated debentures hold warrants which
entitle them to purchase common shares totaling two thirds of 1% of the
Company's outstanding shares of common stock immediately following such an
initial public offering. Such shares may be purchased at a discount of 25% of
the initial public offering price. The warrants expire three years from the
date of an initial public offering. No portion of the proceeds from the
issuance of these securities was allocated to the warrants due to the
insignificance of their estimated fair value at the time of issuance.
F-10
<PAGE>
EXACTECH, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND THREE MONTH PERIODS ENDED MARCH 31, 1995 AND 1996
4. DEBT-(CONTINUED)
In April and May 1995, the Company issued $310,000 ($100,000 to a
shareholder) of subordinated debentures which bear interest at 10% payable
quarterly and mature three years from the date of issuance. The holders of
these subordinated debentures have the right to demand that the Company
redeem the debentures at any time during the six month period following an
initial public offering. In addition, the subordinated debentures are
convertible to common stock at the option of the holders based on the
following prices per share of common stock:
0-12 months from issuance... $6.67
13-24 months from issuance... $7.33
25-36 months from issuance... $8.67
In the event of an initial public offering below these prices, the
debentures would be convertible at the public offering price.
As of December 31, 1995, management was not able to practically estimate
the fair value of the subordinated debentures due to the limited
marketability of such debentures to other than related parties.
5. COMMITMENTS
Future minimum lease commitments as of December 31, 1995 for all
noncancellable operating leases are as follows:
1996 ... $35,000
1997 ... 2,000
1998 ... 2,000
----------
$39,000
==========
Rental expense under all operating leases was approximately $39,000,
$39,000 and $53,000 for the years ended December 31, 1993, 1994 and 1995,
respectively.
6. CONTINGENCIES
On April 3, 1995, a competitor filed an action for patent infringement
against the Company. The patent at issue has been subject to an interference
proceeding in the U.S. Patent Office to determine the true owner of the
patented subject matter. The above action against the Company has been
dismissed without prejudice pending the final decision on the interference
proceeding. Management has examined the patent and concluded that the
structure of the Company's product differs significantly from the teachings
of the patent. In addition, the Company has sought the advice of patent
counsel and believes that the Company's products do not infringe the
competitor's patent.
The Company, in the normal course of business, is also subjected to claims
and litigation in the areas of product and general liability. Management does
not believe any of such claims will have a material impact on the Company's
financial position, liquidity or results of operations.
7. CONCENTRATION OF RISK
During the years ended December 31, 1993, 1994 and 1995, approximately
13%, 11% and 10% of the Company's sales were derived from a major customer.
During the three month period ended March 31, 1996, approximately 21% of the
Company's sales were derived from one major customer.
F-11
<PAGE>
EXACTECH, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND THREE MONTH PERIODS ENDED MARCH 31, 1995 AND 1996
7. CONCENTRATION OF RISK-(CONTINUED)
The Company currently offers its products in six countries in addition to
the United States: Korea, Italy, Spain, Argentina, Greece and Turkey. For the
years ended December 31, 1993, 1994 and 1995 and the three months ended March
31, 1996, foreign sales accounted for $421,984, $316,115, $743,700 and
$743,184, representing approximately 9.0%, 5.9%, 8.2% and 21.7%,
respectively, of the Company's sales.
8. CONSULTING, LICENSE AND SUBLICENSE AGREEMENTS
In connection with the development of its knee implant system, the Company
entered into consulting agreements with certain of its executive officers and
design team members, including two who are directors and shareholders.
Pursuant to these consulting agreements, such individuals are entitled to
receive royalties during the term of the agreements aggregating 3% of the
Company's net sales of such products in the United States and less than 3% of
the Company's sales of such products outside the United States. During the
years ended December 31, 1993, 1994 and 1995, the Company paid royalties
aggregating $0, $1,934 and $101,393, respectively, pursuant to these
consulting agreements. These agreements expire December 31, 1999.
The Company has also entered into consulting agreements with two members
of its design team in connection with the development of its hip revision
system and is negotiating similar agreements with the remaining members of
the design team. No sales of the hip revision system have occurred as of
December 31, 1995.
The Company has entered into license agreements which grant the Company
the right to utilize certain patented products, designs and processes. In
August 1991, the Company entered into a license agreement with Accumed, Inc.
to manufacture, use and sell products utilizing Accumed's biopolar hip
prosthesis design. Under the terms of the agreement, the Company must pay
royalties of 3.5% of all net receipts for sales of products incorporating
Accumed's design in countries in which the design is patented and 2% of net
receipts for sales in all other countries. During the years ended December
31, 1993, 1994 and 1995, the Company paid royalties to Accumed of $11,616,
$12,524 and $13,412, respectively.
In January 1996, the Company entered into a license agreement with the
Hospital for Special Surgery ("HSS") to obtain a non-exclusive right to
certain patents, patents pending and technology utilized in its knee implant
system. The agreement provides for royalties equal to 5% of net sales of the
licensed products. The Company paid an initial royalty of $133,600. The
agreement expires December 31, 2006.
In November 1995, the Company entered into a license agreement with a
shareholder under which the Company was assigned patent rights associated
with a surgical saw and the concepts, techniques, and processes embodied in
such product. In connection with the execution of this agreement, the Company
granted the shareholder an option to purchase 7,500 shares of the Company's
common stock at an exercise price of $6.67 per share and agreed to pay an
annual royalty of 5% of all net receipts from the sale of products
incorporating the design. The Company has not developed a product utilizing
the assigned patent or know how. The agreement expires November 2005.
During 1994, the Company obtained a license under certain patent rights
arising from its funding of research by the University of Florida regarding
lower-back implantation procedures. In 1995, the Company sublicensed such
rights to a third party for the net amount of approximately $170,000. Certain
F-12
<PAGE>
EXACTECH, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND THREE MONTH PERIODS ENDED MARCH 31, 1995 AND 1996
8. CONSULTING, LICENSE AND SUBLICENSE AGREEMENTS-(CONTINUED)
additional amounts will accrue to the Company in the event that regulatory
approvals for commercial products are obtained. The license agreement calls
for the Company to pay royalties to the University of Florida upon the
successful commercial application of the patent rights. Similar royalties are
to accrue to the Company under the sublicense agreement. Under the terms of
the sublicense agreement, an advance on anticipated royalties in the amount
of $100,000 was paid to the Company and is included within accrued
liabilities at December 31, 1995 in the accompanying balance sheet as no such
royalties have yet been earned.
9. RELATED PARTY TRANSACTIONS
The Company sells surgical instrumentation and implant devices to its
unconsolidated subsidiary. Total sales were approximately $100,000 for the
year ended December 31, 1995, which amounts are included in accounts
receivable at December 31, 1995.
During the year ended December 31, 1995, the Company paid fees in the
aggregate amount of approximately $34,000 to two of its principal
shareholders under consulting agreements discussed in Note 8. Additionally,
the Company paid commissions totalling approximately $466,000, $139,000 and
$160,000 during 1993, 1994 and 1995 to a sales agency owned by a director.
10. MANDATORILY REDEEMABLE PREFERRED STOCK
SERIES A PREFERRED STOCK--The non-voting Series A Preferred Stock was
issued in April 1993 in exchange for land valued at $136,220 and accrues
dividends at a rate of 8%, payable quarterly. The Company shall redeem the
Series A Preferred Stock at the time the funds from the initial public
offering become available, or on April 13, 1996, whichever comes first. Upon
the consummation of a public offering occurring prior to such redemption, the
holders have a right to elect to convert the Series A Preferred Stock into
$136,220 of common stock at the initial public offering price. The holders of
the Series A Preferred Stock were issued warrants which entitle them to
purchase common shares totaling .1816% of the Company's outstanding shares of
common stock immediately following an initial public offering. Such shares
may be purchased at the initial public offering price. The warrants expire
two years from the initial public offering date.
SERIES C PREFERRED STOCK--In February 1995, the Company issued 5,000
shares of non-voting Series C Preferred Stock at $10.00 per share. The Series
C Preferred Stock accrues dividends at a rate of 8%, payable quarterly. In
the event of a public offering, the holder may elect to redeem the Series C
Preferred Stock thirty days after cash is available from the offering.
Otherwise, the stock is redeemable on February 1, 2000. The holder of Series
C Preferred Stock was issued warrants which entitle him to purchase 2,250
shares of the Company's common stock immediately following an initial public
offering. Such shares may be purchased at the initial public offering price.
The warrants expire three years from the initial public offering date.
11. NONREDEEMABLE PREFERRED STOCK
SERIES B PREFERRED STOCK --The non-voting Series B Preferred Stock was
issued in April 1993 for cash and accrues dividends at a rate of 8%, payable
quarterly. In the event of a public offering, the Series B Preferred Stock
will be automatically converted into $105,000 of common stock at the initial
offering stock price.
F-13
<PAGE>
EXACTECH, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND THREE MONTH PERIODS ENDED MARCH 31, 1995 AND 1996
12. COMMON SHAREHOLDERS' EQUITY
COMMON STOCK:
During 1994, the Company filed limited investment offering circulars in
several states in which identified potential subscribers reside. Through
December 31, 1995, the Company issued 77,753 shares at $6.67 per share under
such offerings.
OPTIONS AND STOCK AWARDS:
The Company sponsors an Employee Stock Option and Incentive Plan which
provides for the issuance of stock options and restricted stock awards to key
employees. The maximum number of common shares issuable under the Plan is
304,800 shares. The Company also issues stock options to sales agents and
other individuals. A summary of stock option activity follows:
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
SHARES OPTION PRICE SHARES
UNDER OPTION PER SHARE EXERCISABLE
--------------- --------------- --------------
<S> <C> <C> <C>
Outstanding at December 31, 1992 135,849 $2.30-$3.28 16,430
Granted ......................... 13,118 6.67
--------------- ---------------
Outstanding at December 31, 1993 148,967 2.30-6.67 51,210
Granted ......................... 12,694 6.67
Expired ......................... (1,712) 2.30-6.67
--------------- ---------------
Outstanding at December 31, 1994 159.949 2.30-6.67 88.064
Granted ......................... 90,637 6.67
Exercised ....................... (25,125) 2.30
Expired ......................... (75) 6.67
--------------- ---------------
Outstanding at December 31, 1995 225,386 $2.30-$6.67 104,167
=============== ===============
</TABLE>
The remaining nonexercisable options as of December 31, 1995 become
exercisable as follows:
1996 ... 44,204
1997 ... 27,023
1998 ... 18,613
1999 ... 16,027
2000 ... 15,352
---------
121,219
=========
Among the stock options above is a nonqualified stock option to the
Company's President granted in 1991 to purchase 76,200 shares of common stock
at the exercise price of $2.30 per share. The fair market value of the
Company's common stock at the date of grant was $3.28 per share. The Company
recognizes compensation expense each year as such options vest and become
exercisable. In 1995, 25,125 shares of common stock were issued upon the
exercise of such option. All other options have been granted at exercise
prices which were equal to the fair market value of shares at the dates of
the respective grants.
EARNINGS PER SHARE:
The number of shares used in computing net income per common and common
equivalent share includes the effect of shares issuable under stock option
plans using the treasury stock method and the
F-14
<PAGE>
EXACTECH, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND THREE MONTH PERIODS ENDED MARCH 31, 1995 AND 1996
12. COMMON SHAREHOLDERS' EQUITY-(CONTINUED)
effect of shares issued and options granted in 1995 at prices below the
estimated initial public offering price using the treasury stock method.
Fully diluted earnings per common and common equivalent shares are not
presented as such amounts are the same as primary earnings per share.
The Company expects to use a portion of the proceeds from its initial
public offering to repay certain outstanding debt and preferred stock.
Earnings per share adjusted for the effect of the expected repayment of this
debt and preferred stock and the issuance of additional shares of common
stock for the year ended December 31, 1995, as if this transaction occurred
on January 1, 1995, would have been $.28 on a primary and fully diluted
basis.
13. PENSION PLAN
Through December 31, 1995, the Company maintained a Simplified Employee
Pension Plan that allowed for employee pre-tax contributions of up to 15% of
compensation. No employer contributions were made to the Plan. The Company
terminated the Plan effective December 31, 1995 and plans to establish a
401(k) Plan.
14. SUBSEQUENT EVENTS
On March 28, 1996, the Company's board of directors authorized the
following: (i) a 3-for-4 reverse stock split, (ii) an increase in the maximum
number of shares issuable under its Employee Stock Option and Incentive Plan
to an aggregate of 565,000 shares, (iii) the establishment of a Directors'
Stock Option Plan with a maximum of 35,000 shares issuable under the Plan,
(iv) the grant of additional options to employees to purchase an aggregate of
262,200 common shares under the Employee Stock Option and Incentive Plan at
an exercise price equal to the initial public offering price or, in the case
of options granted to 10% shareholders, 110% of the initial public offering
price, (v) the grant of options to a sales agent to purchase 10,000 shares of
common stock at an exercise price equal to the initial public offering price
and (vi) an increase in authorized shares of common stock from 10,000,000 to
15,000,000 shares. The weighted average number of shares outstanding, per
share amounts and stock option data have been adjusted to reflect the reverse
stock split on a retroactive basis. In addition, the number of authorized
shares of common stock has been adjusted on a retroactive basis.
On February 23, 1996, the Company's line of credit disclosed in Note 4 was
increased from $2,500,000 to $3,000,000.
On April 12, 1996, the provisions of the Series A Preferred Stock were
amended to (1) extend the redemption date from April 13, 1996 to July 13,
1996 and (2) provide the holder the option to convert the shares of Series A
Preferred Stock into shares of the Company's common stock during the fifteen
day period following the consummation of an initial public offering of the
Company's common stock.
In April 1996, the holders of $50,000 of the 10% subordinated debentures
elected to convert such debentures into shares of common stock.
In May 1996, the Company issued an additional option to a director and
shareholder to purchase 20,000 shares of common stock at the initial public
offering price.
The Company is in process of an initial public offering of 1,600,000
shares of common stock at an estimated proposed selling price of $7.75 per
share.
F-15
<PAGE>
(Inside Back Cover)
Picture of Femoral Stem.
The Company began marketing its hip implant system in 1987. The Company believes
that MCS/registered trademark/ Femoral Stem represents a new standard of
excellence in porous hip design.
<PAGE>
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, OR THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR SOLICITATION OF AN OFFER
TO BUY ANY SECURITIES BY ANY JURISDICTION IN WHICH SUCH OFFER TO OR
SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, IMPLY THAT THE
INFORMATION HEREIN CONTAINED IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
OF THIS PROSPECTUS.
- -----------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary ................. 3
Risk Factors ....................... 6
Use of Proceeds .................... 15
Dividend Policy .................... 16
Dilution ........................... 16
Capitalization ..................... 18
Selected Financial Data ............ 19
Management's Discussion and
Analysis of Financial Condition
and Results of Operations .......... 21
Business ........................... 28
Management ......................... 40
Principal Shareholders ............. 46
Certain Transactions ............... 47
Description of Securities .......... 48
Shares Eligible for Future Sale ... 51
Underwriting ....................... 52
Legal Matters ...................... 53
Experts ............................ 53
Additional Information ............. 53
Glossary ........................... 54
Index to Financial Statements ..... F-1
</TABLE>
- -----------------------------------------------------------------------------
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
<PAGE>
1,600,000 SHARES
[LOGO]
- -----------------------------------------------------------------------------
P R O S P E C T U S
- -----------------------------------------------------------------------------
FIRST EQUITY CORPORATION
, 1996
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The Registrant estimates that expenses in connection with the offering
described in this registration statement, excluding the Underwriter's
non-accountable expense allowance, will be as follows:
Securities and Exchange Commission registration fee ...... $ 6,132
NASD filing fee .......................................... 2,110
Printing expenses ........................................ 70,000
Accounting fees and expenses ............................. 75,000
Legal fees and expenses .................................. 125,000
Listing fees ............................................. 25,000
Fees and expenses (including legal fees)
for qualifications under state securities laws.......... 30,000
Transfer agent's fees and expenses ....................... 5,000
Miscellaneous ............................................ 11,758
--------
Total .................................................... $350,000
========
All amounts except the Securities and Exchange Commission registration fee
and the NASD filing fee are estimated.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Registrant has authority under Section 607.0850 of the Florida
Business Corporation Act to indemnify its directors and officers to the
extent provided for in such statute. The Registrant's Articles of
Incorporation provide that the Registrant shall indemnify and may insure its
officers and directors to the fullest extent not prohibited by law. The
Registrant has also entered into an agreement (the form of which is filed as
Exhibit 10.3 hereto) with each of its directors and executive officers
wherein it has agreed to indemnify each of them to the fullest extent
permitted by law. In general, Florida law permits a Florida corporation to
indemnify its directors, officers, employees and agents, and persons serving
at the corporation's request in such capacities for another enterprise,
against liabilities arising from conduct that such persons reasonably
believed to be in, or not opposed to, the best interests of the corporation
and, with respect to any criminal action or proceeding, had no reasonable
cause to believe their conduct was unlawful.
Pursuant to the Underwriting Agreement filed as Exhibit 1.1 to this
Registration Statement, the Underwriter has agreed to indemnify the
directors, officers and controlling persons of the Registrant against certain
civil liabilities that may be incurred in connection with the offering,
including certain liabilities under the Securities Act of 1933, as amended.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Set forth below are the dates, number of shares and purchase prices per
share of all shares of capital stock sold by the Company during the past
three years:
<TABLE>
<CAPTION>
SHARES PRICE
SHAREHOLDER ISSUE DATE SECURITIES ISSUED PER SHARE
- -------------------------------- ----------- ------------------------- --------- ------------
<S> <C> <C> <C> <C>
Robert Van Hoose 6/04/94 Common Stock 7,500 $6.67
H. Chester Boston, Jr. 6/04/94 Common Stock 7,500 $6.67
William J. Bose 6/04/94 Common Stock 1,500 $6.67
Mark W. Coleman 6/04/94 Common Stock 1,500 $6.67
Richard H. Turner 6/04/94 Common Stock 1,500 $6.67
Michael Zeide 6/04/94 Common Stock 1,500 $6.67
James Averett, Jr. 6/04/94 Common Stock 750 $6.67
II-1
<PAGE>
SHARES PRICE
SHAREHOLDER ISSUE DATE SECURITIES ISSUED PER SHARE
- -------------------------------- ----------- ------------------------- --------- ------------
Robert E. Dyer 6/04/94 Common Stock 750 $ 6.67
Joaquin Jose Diaz 6/04/94 Common Stock 750 $ 6.67
Roger Cloutier 6/04/94 Common Stock 400 $ 6.67
John R. Chase 6/04/94 Common Stock 400 $ 6.67
Cynthia R. Harding 6/04/94 Common Stock 350 $ 6.67
Charles Mead 6/04/94 Common Stock 150 $ 6.67
Philip H. Cripe 6/22/94 Common Stock 1,125 $ 6.67
Michael Levine 6/23/94 Common Stock 750 $ 6.67
Mark E. Fahey 7/10/94 Common Stock 300 $ 6.67
John Ray, Sr. 7/14/94 Common Stock 150 $ 6.67
Salvadore & Carol Riggal 7/15/94 Common Stock 1,500 $ 6.67
Max J. Williams 7/15/94 Common Stock 600 $ 6.67
Angus W. Graham, III 7/15/94 Common Stock 30 $ 6.67
Michael Jermane 7/21/94 Common Stock 750 $ 6.67
Michael & Meghan Lerner 8/10/94 Common Stock 375 $ 6.67
Richard Tavernetti 8/16/94 Common Stock 1,500 $ 6.67
Clay Farrar 8/17/94 Common Stock 750 $ 6.67
John Fraser 8/29/94 Common Stock 7,500 $ 6.67
Lerner Associates 8/29/94 Common Stock 375 $ 6.67
Leonel Saenz 9/06/94 Common Stock 1,500 $ 6.67
Chip Christian 9/13/94 Common Stock 3,750 $ 6.67
Carol R. Bosshardt 9/14/94 Common Stock 750 $ 6.67
William H. Laney 10/20/94 Common Stock 7,500 $ 6.67
Gordon Bainbridge 10/20/94 Common Stock 3,750 $ 6.67
Albert L. Rhoton, Jr. 10/20/94 Common Stock 1,875 $ 6.67
Sheri Chandler 10/20/94 Common Stock 750 $ 6.67
Joyce Rhoton 11/02/94 Common Stock 1,200 $ 6.67
Michael J. Christie 12/31/94 Common Stock 1,500 $ 6.67
Marc Olarsch 12/31/94 Common Stock 750 $ 6.67
Vince Palermo 12/31/94 Common Stock 750 $ 6.67
Jody & Lonnie Phillips 12/31/94 Common Stock 300 $ 6.67
Marshall B. Capps 12/31/94 Common Stock 75 $ 6.67
Charles G. Norton, Jr. 12/31/94 Common Stock 75 $ 6.67
Randall P. Frazier 1/16/95 Common Stock 3,000 $ 6.67
Spencer Medical 1/16/95 Common Stock 1,125 $ 6.67
Michael Pentopoulos 1/16/95 Common Stock 750 $ 6.67
John Ray, Jr. 2/09/95 Common Stock 300 $ 6.67
P. Heath Brockwell 2/09/95 Common Stock 150 $ 6.67
Ana Puig 2/09/95 Common Stock 75 $ 6.67
Francis R. Doyle 3/15/95 Common Stock 1,500 $ 6.67
David C. Ozzello 4/05/95 Common Stock 2,250 $ 6.67
Dan Mosher 4/05/95 Common Stock 975 $ 6.67
Steven J. Benson 4/05/95 Common Stock 750 $ 6.67
Jeffrey A. Hildenbrand 4/18/95 Common Stock 1,500 $ 6.67
Michael Jermane 4/20/95 Common Stock 750 $ 6.67
William J. Bose 5/02/95 Common Stock 750 $ 6.67
John N. Pena 5/02/95 Common Stock 120 $ 6.67
Jose Ortiz 5/02/95 Common Stock 52 $ 6.67
Timothy J. Seese 10/20/95 Common Stock 25,125 $ 2.29
Gary M. Reed 1/22/96 Common Stock 750 $ 6.67
Ridgway Construction, Inc. 4/13/93 Series A Preferred Stock 11,026 $10.00
Bosshardt Realty Services, Inc. 4/13/93 Series A Preferred Stock 1,371 $10.00
II-2
<PAGE>
SHARES PRICE
SHAREHOLDER ISSUE DATE SECURITIES ISSUED PER SHARE
- -------------------------------- ----------- ------------------------- --------- ------------
Bosshardt Realty Services, Inc. 4/13/93 Series A Preferred Stock 1,225 $10.00
Michael B. Hawkins 5/03/93 Series B Preferred Stock 3,500 $10.00
Richard Woodall 5/03/93 Series B Preferred Stock 3,000 $10.00
Kathryn Vanderbeck 5/03/93 Series B Preferred Stock 3,000 $10.00
Revocable Living Trust
Grace R. Hawkins 5/03/93 Series B Preferred Stock 1,000 $10.00
Ivan A. Gradisar 2/15/95 Series C Preferred Stock 5,000 $10.00
</TABLE>
The aggregate offering price for the shares of (i) Common Stock was
$452,420, (ii) Series A Preferred Stock was $136,220, (iii) Series B
Preferred Stock was $105,000 and (iv) Series C Preferred Stock was $50,000.
The aforementioned issuances and sales were made in reliance upon the
exemption from the registration provisions of the 1933 Act afforded by
Sections 4(2) and/or 4(6) thereof and/or Regulation D promulgated thereunder,
as transactions by an issuer not involving a public offering. The purchasers
of the securities described above acquired them for their own account and not
with a view to any distribution thereof to the public. The certificates
evidencing the securities bear legends stating that the shares may not be
offered, sold or transferred other than pursuant to an effective registration
statement under the 1933 Act, or an exemption from such registration
requirements. The Company will place stop transfer instructions with its
transfer agent with respect to all such securities.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<S> <C>
1.1 Form of Underwriting Agreement(1)
1.2 Form of Agreement Among Underwriters(1)
1.3 Form of Selected Dealers Agreement(1)
3.1 Registrant's Articles of Incorporation, as amended(1)
3.2 Registrant's Bylaws(1)
3.3 Forms of Articles of Amendment to Articles of Incorporation
4.1 Specimen Common Stock Certificate
4.2 Shareholders' Agreement, dated as of November 30, 1992, as amended, by and among the Registrant, William
Petty, M.D., Betty Petty, David Petty, Mark Petty and Julie Petty(1)
4.3 Form of Underwriter's Warrant
4.4 Specimen Series A Preferred Stock Certificate(1)
4.5 Specimen Series B Preferred Stock Certificate(1)
4.6 Specimen Series C Preferred Stock Certificate(1)
4.7 Form of Amendment to Shareholder's Agreement, dated as of May 1996, by and among the Registrant, William
Petty, M.D., Betty Petty, David Petty, Mark Petty and Julie Petty
5.1 Opinion of Greenberg, Traurig, Hoffman, Lipoff, Rosen & Quentel, P.A. as to the validity of the Common
Stock being registered
10.1 Registrant's Employee Stock Option and Incentive Plan, as amended(1)
10.2 Registrant's Directors' Stock Option Plan(1)
II-3
<PAGE>
EXHIBIT
NO. DESCRIPTION
------- -----------
10.3 Form of Indemnification Agreement between the Registrant and each of the Registrant's Directors and
Executive Officers(1)
10.4 Form of Employment Agreement between the Registrant and William Petty, M.D.(1)
10.5 Form of Employment Agreement between the Registrant and Timothy J. Seese(1)
10.6 Form of Employment Agreement between the Registrant and Gary J. Miller, Ph.D.(1)
10.7 Working Capital Management Account Term Loan and Security Agreement, dated as of June 23, 1995, as
amended, between the Registrant and Merrill Lynch Business Financial Services(1)
10.8 Collateral Installment Note, dated as of June 23, 1995, executed by the Registrant in favor of Merrill
Lynch Business Financial Services(1)
10.9 Unconditional Guaranty executed by William Petty, M.D. in favor of Merrill Lynch Business Financial
Services(1)
10.10 Subordinated Convertible Debenture Agreement, dated April 18, 1995, between the Registrant and Alan
Chervitz and related Registration Rights Agreement dated April 18, 1995(1)
10.11 Subordinated Convertible Debenture Agreement, dated April 18, 1995, between the Registrant and E. Marlowe
Goble and related Registration Rights Agreement dated April 18, 1995(1)
10.12 Subordinated Convertible Debenture Agreement, dated April 18, 1995, between the Registrant and Marc
Richman and related Registration Rights Agreement dated April 18, 1995(1)
10.13 Subordinated Convertible Debenture Agreement, dated April 18, 1995, between the Registrant and David
P. Luman and related Registration Rights Agreement dated April 18, 1995(1)
10.14 Subordinated Convertible Debenture Agreement, dated May 2, 1995, between the Registrant and Donna C.
Phillips and related Registration Rights Agreement dated May 2, 1995(1)
10.15 Subordinated Convertible Debenture Agreement, dated April 22, 1995, between the Registrant and Peggy
S. Wolfe and related Registration Rights Agreement dated April 22, 1995(1)
10.16 Subordinated Convertible Debenture Agreement, dated April 22, 1995, between the Registrant and Joaquin
J. Diaz and related Registration Rights Agreement dated April 22, 1995(1)
10.17 Letter Agreement, dated December 28, 1992, between the Registrant and Michael Kearney, M.D. regarding
purchase of 8% debentures and warrants(1)
10.18 Letter Agreement, dated December 28, 1992, between the Registrant and R. Wynn Kearney, M.D. regarding
purchase of 8% debentures and warrants(1)
10.19 First Mortgage Deed and Promissory Note each, dated September 27, 1994, executed by the Registrant
in favor of American National Bank of Florida(1)
10.20 Shareholders' Agreement, dated July 19, 1995, between the Registrant and Edoardo Caminita in connection
with the formation of Techmed s.p.a.(1)
10.21 Small Business Cooperative Research and Development Agreement, dated December 31, 1995, between the
Registrant and The Regents for the University of California, Lawrence Livermore National Laboratory(1)
II-4
<PAGE>
EXHIBIT
NO. DESCRIPTION
------- -----------
10.22 Business Lease, dated July 1, 1995, between the Registrant and BCB Partnership(1)
10.23 Consulting Agreement, dated January 1, 1993, between the Registrant and Ivan A. Gradisar, Jr., M.D.(1)
10.24 Consulting Agreement, dated January 1, 1993, between the Registrant and William R. Murray, M.D.(1)
10.25 Consulting Agreement, dated March 1, 1993, between the Registrant and Edmund Y.S. Chao, Ph.D.(1)
10.26 Consulting Agreement, dated January 1, 1993, between the Registrant and William Petty, M.D.(1)
10.27 Consulting Agreement, dated January 1, 1993, between the Registrant and Gary J. Miller, Ph.D.(1)
10.28 Consulting Agreement, dated as of November 1, 1993, between the Registrant and Virginia Mason Clinic
(regarding Raymond P. Robinson, M.D.)(1)
10.29 Manufacturers Representative Agreement, dated January 1, 1996, between the Registrant and Prince Medical,
Inc.(1)
10.30 Distribution Agreement, dated as of January 1, 1996, between the Registrant and Precision Instruments,
Inc.(1)
10.31 Manufacturers Representative Agreement, dated January 31, 1996, beween the Registrant and Futur-Tek,
Inc.(1)
10.32 Distribution Agreement, dated October 5, 1995, between the Registrant and Techmed s.p.a.(1)
10.33 Distribution Agreement, dated January 1, 1994, between the Registrant and Akaway Medical Co., Ltd.(1)
10.34 Distribution Agreement between the Registrant and MBA Del Principado, S.A.(1)
10.35 Distribution Agreement, dated February 1, 1993, between the Registrant and Yu Han Meditech(1)
10.36 Distribution Agreement, dated October 31, 1995, between the Registrant and Buro Ortopedik--Tibbi Malzemeler
Ithalat Ihracat Tic. Ltd.(1)
10.37 Technology License Agreement, dated as of August 5, 1991, between the Registrant and Accumed, Inc.(1)
10.38 License Agreement, dated August 20, 1993, between the Registrant and The University of Florida, as
amended(1)
10.39 Exclusive Sublicense Agreement, dated June 30, 1995, between the Registrant and Sofamor Danek Properties,
Inc.(1)
10.40 License Agreement, dated as of January 1, 1996, between the Registrant and The Hospital for Special
Surgery(1)
10.41 Assignment of Patent, dated November 20, 1995, executed by Phillip H. Cripe in favor of the Registrant(1)
10.42 United States Patent No. 5,190,549 for Locking Surgical Tool Handle System dated March 2, 1993(1)
II-6
<PAGE>
EXHIBIT
NO. DESCRIPTION
------- -----------
10.43 United States Patent No. 5,190,550 for Locking Surgical Tool Handle System dated March 2, 1993(1)
10.44 Assignment, dated July 28, 1990, of Locking Surgical Tool Handle System patent(1)
10.45 United States Patent No. 5,263,988 for Bipolar Endoprosthesis dated November 23, 1993(1)
10.46 United States Patent No. 5,152,799 for Prosthetic Femoral Stem dated October 6, 1992(1)
10.47 Assignment, dated October 31, 1991, of Femoral Stem patent(1)
10.48 Application for United States Patent for an Improved Intramedullary Alignment Guide(1)
10.49 Application for United States Patent for Hole Caps for Prosthetic Implants(1)
10.50 Tolling Agreement, dated April 3, 1995, between the Registrant and Joint Medical Products Corporation(1)
10.51 Patent Agreement, dated October 9, 1995, between the Registrant and Phillip H. Cripe(1)
10.52 Letter Agreements dated March 8, 1993 and April 13, 1993 between the Registrant and Ridgway Construction(1)
10.53 Letter Agreements dated April 12, 1993 between the Registrant and Bosshardt Realty Services, Inc.(1)
10.54 Copyright Assignment and Consulting Agreement, effective as of April 12, 1993, by and between Walter
Reid and the Registrant
10.55 Letter agreement, dated November 30, 1993, between the Registrant and Associated Business Consultants,
Inc.
10.56 Letter agreements, dated February 23, 1996, between Merrill Lynch Business Financial Services Inc.
and the Registrant
11.1 Computation of Earnings Per Share
21.1 Subsidiary of the Registrant
23.1 Consent of Greenberg, Traurig, Hoffman, Lipoff, Rosen & Quentel, P.A. (included in its opinion filed
as Exhibit 5.1)
23.2 Consent of Deloitte & Touche LLP
24.1 Reference is made to the Signatures section of this Registration Statement for the Power of Attorney
contained herein(1)
</TABLE>
- -----------------------------------------------------------------------------
(1) Previously filed
(b) Financial Statement Schedules:
Schedule II--Valuation and Qualifying Accounts
ITEM 17. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
II-6
<PAGE>
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement;
(iii) To include any additional or changed material information with
respect to the plan of distribution not previously disclosed in the
registration statement; and
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination
of the offering.
(b) The undersigned registrant hereby undertakes to provide to the
Underwriter at the closing specified in the Underwriting Agreement
certificates in such denominations and registered in such names as required
by the Underwriter to permit prompt delivery to each purchaser.
(c) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions,
or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer
or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(d) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of the
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each posteffective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 2 to the Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Gainesville, State of Florida, on May 10, 1996.
EXACTECH, INC.
By: /s/ WILLIAM PETTY
William Petty
Chairman of the Board
and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to the Registration Statement has been signed by the following persons
in the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- -------------------------------------------------------------------------------------
<S> <C> <C>
/s/ WILLIAM PETTY Chairman of the Board and May 10, 1996
William Petty Chief Executive Officer
/s/ TIMOTHY J. SEESE President, Chief Operating Officer May 10, 1996
Timothy J. Seese and Director
/s/ GARY J. MILLER* Vice President and Director May 10, 1996
Gary J. Miller
/s/ JOEL C. PHILLIPS Treasurer (principal financial May 10, 1996
Joel C. Phillips and accounting officer)
/s/ ALBERT BURSTEIN* Director May 10, 1996
Albert Burstein
/s/ R. WYNN KEARNEY, JR.* Director May 10, 1996
R. Wynn Kearney, Jr.
/s/ RONALD PICKARD* Director May 10, 1996
Ronald Pickard
/s/ P. MICHAEL PRINCE* Director May 10, 1996
P. Michael Prince
* By: /s/ WILLIAM PETTY
William Petty,
as Attorney-in-Fact
</TABLE>
II-8
<PAGE>
EXACTECH, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
THREE YEARS ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO
BEGINNING COSTS AND DEDUCTIONS BALANCE AT
OF YEAR EXPENSES (CHARGEOFFS) END OF YEAR
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts 1993 $3,400 $2,550 $(2,550) $ 3,400
1994 3,400 1,900 5,300
1995 5,300 8,200 13,500
</TABLE>
S-1
EXHIBIT 3.3
ARTICLES OF AMENDMENT
TO
ARTICLES OF INCORPORATION
OF
EXACTECH, INC.
Pursuant to the provisions of Section 607.1006 of the Florida Business
Corporation Act (the "Act"), the undersigned corporation adopts the following
Articles of Amendment to its Articles of Incorporation:
1. The name of the corporation is EXACTECH, INC. (the
"Corporation"), Charter #H85101, filed on November 13, 1985, effective
November 8, 1985.
2. The Amendment to the Articles of Incorporation of the
Corporation set forth below (the "Amendment") was adopted by all of the
Directors of the Corporation as of __________, 1996, and by the Shareholders of
the Corporation, the number of votes cast being sufficient for approval, as
of __________, 1996, in the manner prescribed by Section 607.1003 of the Act:
3. The text of the Amendment is as follows: Section F of
Article III of the Articles of Incorporation of the Corporation shall be
amended and restated in its entirety to read as follows:
F. The Board of Directors of the Corporation, pursuant to the
authority expressly vested in it as aforesaid, adopted the
following resolution creating a Series A issue of Preferred
Shares on November 19, 1993:
RESOLVED, that pursuant to the authority conferred upon the
Board of Directors of this Corporation by Article III of the
Articles of Incorporation of this Corporation, as amended,
there is hereby established a series of authorized preferred
shares of this Corporation having a par value of $0.01 per
share, which series shall be designated as 8% Cumulative
Convertible Preferred Stock (Series A) (hereinafter referred
to as "Series A Preferred Stock"), shall consist of 13,622
shares, which number of shares may not be increased, and shall
have the following dividend rights, conversion rights,
redemption and retirement rights, rights upon liquidation and
dissolution, voting rights and preemptive rights:
<PAGE>
(a) DIVIDENDS. The holders of Series A Preferred
Stock shall be entitled to receive, out of the funds
legally available therefor, cumulative dividends at
the annual rate of 8% or $0.80 per share, and no
more, payable in cash quarter-annually on the
last days of March, June, September and
December in each year, beginning on December
31, 1993.
(b) CONVERSION RIGHTS. In the event, at any time
subsequent to the date the Series A Preferred
Stock is issued, that this Corporation
consummates an underwritten initial public
offering of its common stock pursuant to a
registration statement ("Registration Statement")
under the Securities Act of 1933, as amended
(the "Act"), which Registration Statement is
declared effective pursuant to the Act ("Public
Offering"), the holders of any one or more shares
of the Series A Preferred Stock may, at their
option, at any time during the fifteen (15) day
period commencing on the date of consummation
of the Public Offering, elect to convert such share
or shares of Series A Preferred Stock, on the
terms and conditions set forth in this paragraph
(B), into fully paid and nonassessable shares of
common stock of this Corporation, as such
common stock shall be constituted at the date of
conversion. Each share of Series A Preferred
Stock shall be convertible into a number of
shares of common stock determined by dividing
$10.00 by the price at which the shares of
common stock are issued pursuant to the Public
Offering. For purposes hereof, a Public Offering
shall be deemed to have been consummated upon
the receipt by the Company of the proceeds from
the sale of the shares offered pursuant to such
offering.
Upon surrender to the Corporation at its principal
office in the City of Gainesville, Florida, or at
such other place or places, if any, as the Board of
Directors of this Corporation may determine, of
certificates, duly endorsed to this Corporation or in
blank, for shares of Series A
- 2 -
<PAGE>
Preferred Stock to be converted, together with
instructions in writing to this Corporation to
convert such shares specifying the name and address
of the person, corporation, firm or other entity to
whom such shares are to be issued, this Corporation
will issue as of the time of such surrender the
number of full shares of common stock issuable on
conversion thereof and cash for any remaining
fraction of a share and as promptly as practicable
thereafter will deliver certificates for such shares
of common stock.
Shares of Series A Preferred Stock converted into
shares of common stock as hereinbefore provided shall
be retired and restored to the status of authorized
and unissued shares.
(c) REDEMPTION AND RETIREMENT. In the event the
shares of Series A Preferred Stock are not
converted pursuant to paragraph (B) above, the
shares of Series A Preferred Stock shall be
redeemed by this Corporation, as a whole, at a
cash price per share of $10 per share, plus all
dividends which on the redemption date have
accrued on the shares to be redeemed and have
not been paid, on the earlier of (i) July 13, 1996,
or (ii) the fifteenth (15th) day following the date
of consummation of the Public Offering. Notice
of any redemption under this paragraph (C) shall
be mailed not less than five (5) nor more than
thirty (30) days prior to the date fixed for
redemption to the holders of record of the shares
of the Series A Preferred Stock to be redeemed
at their respective addresses as the same shall
appear upon the books of this Corporation; but
no defect in the publication or mailing of such
notice shall affect the validity of the proceedings
for the redemption of any shares of Series A
Preferred Stock.
If notice of redemption shall have been mailed as
hereinbefore provided and if on or before the
redemption date specified in such notice all funds
necessary for such redemption shall have been set
apart so as to be available therefor and only
- 3 -
<PAGE>
therefor, then on and after the date fixed for
redemption the shares of Series A Preferred Stock so
called for redemption, notwithstanding that any
certificate therefor shall not have been surrendered
or canceled, shall no longer be deemed outstanding
and all rights with respect to such shares shall
forthwith cease and terminate except only the right
of the holders thereof to receive upon surrender of
certificates therefor the amount payable upon
redemption thereof, but without interest.
All shares of Series A Preferred Stock redeemed shall
be retired and shall be restored to the status of
authorized and unissued preferred shares.
(d) RIGHTS UPON LIQUIDATION OR DISSOLUTION. The
amounts payable to the holders of Series A
Preferred Stock in the event of any voluntary or
involuntary liquidation, dissolution or winding up
of this Corporation, before any payment shall be
made to the holders of common shares, shall be
$10 per share plus all dividends thereon which
shall have accrued at the time of such liquidation,
dissolution or winding up and shall have not been
paid. The holders of Series A Preferred Stock
shall be entitled to no further participation in any
remaining assets of this Corporation. Neither the
consolidation or merger of this Corporation with
or into any other corporation or corporations, nor
the sale or lease of all or substantially all of the
assets of this Corporation shall be deemed to be
a liquidation, dissolution or winding up of this
Corporation within the meaning of any of the
provisions of this paragraph (d).
(e) VOTING RIGHTS. The holders of Series A Preferred
Stock shall not have any voting rights other than
any voting rights expressly provided by law.
(f) PREEMPTIVE RIGHTS. The holders of Series A
Preferred Stock shall not have any preemptive
rights.
- 4 -
<PAGE>
4. Except as hereby amended, the Articles of Incorporation of
the Corporation shall remain the same.
* * * * *
- 5 -
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused these Articles of
Amendment to Articles of Incorporation to be signed in its name by its
President as of the ____ day of May, 1996.
EXACTECH, INC.,
a Florida corporation
BY:
----------------------
Timothy J. Seese
- 6 -
<PAGE>
ARTICLES OF AMENDMENT
TO
ARTICLES OF INCORPORATION
OF
EXACTECH, INC.
Pursuant to the provisions of Section 607.1006 of the Florida Business
Corporation Act (the "Act"), the undersigned corporation adopts the following
Articles of Amendment to its Articles of Incorporation:
1. The name of the corporation is EXACTECH, INC. (the
"Corporation"), Charter #H85101, filed on November 13, 1985, effective
November 8, 1985.
2. The Amendment to the Articles of Incorporation of the
Corporation set forth below (the "Amendment") was adopted by all of the
Directors of the Corporation on March 28, 1996, and by the Shareholders of the
Corporation, the number of votes cast being sufficient for approval, on
March 28, 1996, in the manner prescribed by Section 607.1003 of the Act:
3. The text of the Amendment is as follows: Article III of the
Articles of Incorporation of the Corporation shall be amended and restated in
its entirety to read as follows:
"ARTICLE III
CAPITAL STOCK
A. This corporation is authorized to issue Fifteen Million
(15,000,000) shares of Common Stock having a par value of
one-hundredth of a dollar ($0.01) per share, which shares
shall be and are hereby designated as "Common Shares" and Two
Million (2,000,000) shares of Preferred Stock having a par
value of one-hundredth of a dollar ($.01) per share, which
shares shall be and hereby are designated as "Preferred
Shares." Without action by the stockholders, any or all of
the authorized shares may be issued by the Corporation from
time to time for such consideration as may be fixed by the
Board of Directors of this Corporation.
B. On the date of filing these Articles of Amendment to Articles
of Incorporation with the Department of State of the State of
<PAGE>
Florida, each issued and outstanding share of the
Corporation's previously authorized Common Shares, par value
$0.01 per share (the "Old Common Shares"), shall thereby and
thereupon be classified and converted into three-fourths
(3/4) of one validly issued, fully paid and nonassessable
Common Share reflecting a three (3) for four (4) reverse
stock split. Each certificate that heretofore represented Old
Common Shares shall now represent the number of Common Shares
into which the Old Common Shares represented by such
certificate were reclassified and converted; provided,
however, that each person holding of record a stock
certificate or certificates that represented Old Common
Shares shall receive, upon surrender of each such certificate
of certificates, a new certificate or certificates evidencing
and representing the number of Common Shares to which person
is entitled.
C. Preferred Shares.
(1) The Preferred Shares may be issued in one or more series
as shall from time to time be created and authorized to be
issued by the Board of Directors as hereinafter provided.
(2) The Board of Directors is hereby expressly authorized, by
resolution or resolutions from time to time adopted providing
for the issuance of shares of Preferred Shares, to fix and
state, to the extent permitted by law and to the extent not
fixed or otherwise limited by the provisions herein set forth,
the designations, preferences, limitations and relative rights
of each series of Preferred Shares.
(3) Each share of each series of Preferred Shares shall have
the same relative rights and be identical in all respects with
all other shares of the same series.
(4) Before the Corporation shall issue any shares of Preferred
Shares of any series authorized as hereinabove provided, a
certificate setting forth a copy of the resolution or
resolutions with respect to such series adopted by the Board
of Directors pursuant to the foregoing authority vested in
said board shall be made, filed and recorded in accordance
with the then applicable requirements, if any, of the laws of
the State of Florida, or, if no certificate is then so
required, such certificate shall be signed and acknowledged on
behalf of the Corporation by its president or a vice president
and its corporate seal shall be affixed thereto and attested
by its secretary or assistant
- 2 -
<PAGE>
secretary, and such certificate shall be filed and
kept on file at the principal office of the Corporation and in
such other place or places, if any, as the Board of Directors
shall designate and shall be considered an amendment to these
Articles of Incorporation.
(5) Shares of any series of Preferred Shares which shall be
issued and thereafter acquired by the Corporation through
purchase, redemption, conversion or otherwise, may, as
provided by resolution or resolutions of the Board of
Directors and upon compliance with applicable law, be returned
to the status of authorized but unissued shares of Preferred
Shares, undesignated as to series, or to the status of
authorized but unissued shares of Preferred Shares of the same
series.
(6) Unless otherwise provided in the resolution or resolutions
of the Board of Directors providing for the issue of a series
of Preferred Shares, the number of authorized shares of
Preferred Shares of any such series may be increased or
decreased (but not below the number of shares thereof then
outstanding) by resolution or resolutions of the Board of
Directors, and the filing and recording of a certificate,
setting forth that such increase or decrease has been
authorized by the Board of Directors in accordance with
applicable law. In case the number of shares of any such
series of Preferred Shares shall be decreased in accordance
with the last sentence, the shares representing such decrease
shall, unless otherwise provided in the resolution or
resolutions of the Board of Directors providing for such
decrease, resume the status of authorized but unissued shares
of Preferred Shares, undesignated as to series.
D. Each share of Common Shares shall have one vote on all
matters coming before any meeting of the shareholders or
otherwise to be acted upon by shareholders.
E. (1) The authority of the Board of Directors to provide for
the issuance of any shares of the Corporation's capital stock
shall include, but shall not be limited to, authority to
issue shares of capital stock of the Corporation for any
purpose and in any manner (including issuance pursuant to
rights, warrants or other options) permitted by law, for
delivery as all or part of the consideration for or in
connection with the acquisition of all or part of the
outstanding securities of another corporation or enterprise
or of all or part of the assets of another corporation or
enterprise, irrespective of the amount by which the issuance
- 3 -
<PAGE>
of such capital stock shall increase the number of shares
outstanding (but not in excess of the number of shares
authorized).
(2) No holder of any share or shares of any class of capital
stock of the Corporation shall have any preemptive right to
subscribe for any shares of capital stock of any class of the
Corporation now or hereafter authorized or for any securities
convertible into or carrying any optional rights to purchase
or subscribe for any shares of capital stock of any class of
the Corporation now or hereafter authorized; provided,
however, that no provision of these Articles of Incorporation
shall be deemed to deny to the Board of Directors the right,
in its sole discretion, to grant to the holders of shares of
any class of capital stock or any other securities of the
Corporation now or hereafter authorized at such prices and
upon such other terms and conditions as the Board of
Directors, in its discretion, may fix.
(3) Dividends respecting any shares of capital stock of the
Corporation shall be payable only out of earnings or assets of
the Corporation legally available for the payment of such
dividends and only as and when declared by the Board of
Directors.
F. The Board of Directors of the Corporation, pursuant to the
authority expressly vested in it as aforesaid, adopted the
following resolution creating a Series A issue of Preferred
Shares on November 19, 1993:
RESOLVED, that pursuant to the authority conferred upon the
Board of Directors of this Corporation by Article III of the
Articles of Incorporation of this Corporation, as amended,
there is hereby established a series of authorized preferred
shares of this Corporation having a par value of $0.01 per
share, which series shall be designated as 8% Cumulative
Convertible Preferred Stock (Series A) (hereinafter referred
to as "Series A Preferred Stock"), shall consist of 13,622
shares, which number of shares may not be increased, and shall
have the following dividend rights, conversion rights,
redemption and retirement rights, rights upon liquidation and
dissolution, voting rights and preemptive rights:
(a) DIVIDENDS. The holders of Series A Preferred
Stock shall be entitled to receive, out of the funds
- 4 -
<PAGE>
legally available therefor, cumulative dividends at
the annual rate of 8% or $0.80 per share, and no
more, payable in cash quarter-annually on the
last days of March, June, September and
December in each year, beginning on December
31, 1993.
(b) CONVERSION RIGHTS. In the event, at any time
subsequent to the date the Series A Preferred
Stock is issued, that this Corporation
consummates an offering of its common stock
which is not exempt from registration under the
Securities Act of 1933 and for which a
Registration Statement is filed and becomes
effective pursuant to such Act ("Public Offering"),
the holders of any one or more shares of the
Series A Preferred Stock may, at their option,
convert such share or shares, on the terms and
conditions set forth in this paragraph (b), into
fully paid and nonassessable common shares of
this Corporation, as such common shares shall be
constituted at the date of conversion. Each share
of Series A Preferred Stock shall be convertible
into a number of common shares determined by
dividing $10.00 by the price at which the common
shares are issued pursuant to the Public Offering.
Upon surrender to the Corporation at its principal
office in the City of Gainesville, Florida, or at
such other place or places, if any, as the Board of
Directors of this Corporation may determine, of
certificates, duly endorsed to this Corporation or in
blank, for shares of Series A Preferred Stock to be
converted, together with instructions in writing to
this Corporation to convert such shares specifying
the name and address of the person, corporation, firm
or other entity to whom such shares are to be issued,
this Corporation will issue as of the time of such
surrender the number of full common shares issuable
on conversion thereof and cash for any remaining
fraction of a share and as promptly as practicable
thereafter will deliver certificates for such common
shares.
- 5 -
<PAGE>
Shares of Series A Preferred Stock converted into
common shares as hereinbefore provided shall be
retired and restored to the status of authorized and
unissued shares.
(c) REDEMPTION AND RETIREMENT. In the event the
shares of Series A Preferred Stock are not
converted pursuant to subparagraph (b) above,
the shares of Series A Preferred Stock shall be
redeemed by this Corporation, as a whole, at a
cash price per share of $10 per share, plus all
dividends which on the redemption date have
accrued on the shares to be redeemed and have
not been paid, on the earlier of (i) April 13, 1996,
or (ii) the date on which the funds from the
Public Offering become available, as determined
by the Board of Directors. Notice of any
redemption under this paragraph (c) shall be
mailed not less than five (5) nor more than thirty
(30) days prior to the date fixed for redemption
to the holders of record of the shares of the
Series A Preferred Stock to be redeemed at their
respective addresses as the same shall appear
upon the books of this Corporation; but no defect
in the publication or mailing of such notice shall
affect the validity of the proceedings for the
redemption of any shares of Series A Preferred
Stock.
If notice of redemption shall have been mailed as
hereinbefore provided and if on or before the
redemption date specified in such notice all funds
necessary for such redemption shall have been set
apart so as to be available therefor and only
therefor, then on and after the date fixed for
redemption the shares of Series A Preferred Stock so
called for redemption, notwithstanding that any
certificate therefor shall not have been surrendered
or canceled, shall no longer be deemed outstanding
and all rights with respect to such shares shall
forthwith cease and terminate except only the right
of the holders thereof to receive upon surrender of
certificates therefor the amount payable upon
redemption thereof, but without interest.
- 6 -
<PAGE>
All shares of Series A Preferred Stock redeemed shall
be retired and shall be restored to the status of
authorized and unissued preferred shares.
(d) RIGHTS UPON LIQUIDATION OR DISSOLUTION. The
amounts payable to the holders of Series A
Preferred Stock in the event of any voluntary or
involuntary liquidation, dissolution or winding up
of this Corporation, before any payment shall be
made to the holders of common shares, shall be
$10 per share plus all dividends thereon which
shall have accrued at the time of such liquidation,
dissolution or winding up and shall have not been
paid. The holders of Series A Preferred Stock
shall be entitled to no further participation in any
remaining assets of this Corporation. Neither the
consolidation or merger of this Corporation with
or into any other corporation or corporations, nor
the sale or lease of all or substantially all of the
assets of this Corporation shall be deemed to be
a liquidation, dissolution or winding up of this
Corporation within the meaning of any of the
provisions of this paragraph (d).
(e) VOTING RIGHTS. The holders of Series A Preferred
Stock shall not have any voting rights other than
any voting rights expressly provided by law.
(f) PREEMPTIVE RIGHTS. The holders of Series A
Preferred Stock shall not have any preemptive
rights.
G. The Board of Directors of the Corporation, pursuant to the
authority expressly vested in it as aforesaid, adopted the
following resolution creating a Series B issue of Preferred
Stock on November 19, 1993:
RESOLVED, that pursuant to the authority conferred upon the
Board of Directors of this Corporation by Article III of the
Articles of Incorporation of this Corporation, as amended,
there is hereby established a series of authorized preferred
shares of this Corporation having a par value of $0.01 per
share, which series shall be designated as 8% Cumulative
Convertible Preferred Stock (Series B) (hereinafter referred
to as "Series B Preferred Stock"), which shall consist of
20,000 shares, which
- 7 -
<PAGE>
number of shares may not be increased, and shall have
the following dividend rights, conversion rights, rights upon
liquidation and dissolution, voting rights and preemptive
rights:
(a) DIVIDENDS. The holders of Series B Preferred
Stock shall be entitled to receive, out of the funds
legally available therefor, cumulative dividends at
the annual rate of 8% or $0.80 per share, and no
more, payable in cash quarter-annually on the
last days of March, June, September and
December in each year, beginning on June 30,
1993.
- 8 -
<PAGE>
(b) CONVERSION RIGHTS.
In the event, at any time subsequent to the date the
Series B Preferred Stock is issued, that this
Corporation consummates an offering of its common
shares which is not exempt from registration under
the Securities Act of 1933 and for which a
Registration Statement is filed and becomes effective
pursuant to such Act ("Public Offering"), the shares
of the Series B Preferred Stock shall be converted on
the terms and conditions set forth in this paragraph
(b), into fully paid and nonassessable common shares
of this Corporation, as such common shares shall be
constituted at the date of conversion. Each share of
Series B Preferred Stock shall be convertible into a
number of common shares determined by dividing $10.00
by the price at which the common shares are issued
pursuant to the Public Offering.
Notice ("Notice") of any conversion under this
paragraph (b) shall be mailed not less than
forty-five (45) nor more than sixty (60) days prior
to the date fixed for conversion to the holders of
record of the shares of the Series B Preferred Stock
at their respective addressees as the same shall
appear upon the books of this Corporation; but no
defect in the publication or mailing of such notice
shall affect the validity of the proceedings for the
conversion of any shares of Series B Preferred Stock.
Within fifteen (15) days after receipt of such
Notice, the holders of Series B Preferred Stock shall
surrender to the Corporation at its principal office
in the City of Gainesville, Florida, or at such other
place or places, if any, as the Board of Directors of
this Corporation may determine, the certificates,
duly endorsed to this Corporation or in blank,
representing their shares of Series B Preferred
Stock. Upon such surrender of such certificates, this
Corporation will issue and deliver certificates
representing the number of full common shares
issuable on the conversion and cash for any remaining
fraction of a share.
- 9 -
<PAGE>
If notice of conversion shall have been mailed as
hereinbefore provided, then on and after the date
fixed for conversion the shares of Series B Preferred
Stock so called for conversion, notwithstanding that
any certificate therefor shall not have been
surrendered or canceled, shall no longer be deemed
outstanding and all rights with respect to such
shares shall forthwith cease and terminate except
only the right of the holders thereof to receive upon
surrender of certificates therefor the certificates
of common stock pursuant to the conversion.
The shares of Series B Preferred Stock converted into
common shares as hereinbefore provided shall be
retired and restored to the status of authorized and
unissued preferred shares.
(c) RIGHTS UPON LIQUIDATION OR DISSOLUTION. The
amounts payable to the holders of Series B
Preferred Stock in the event of any voluntary or
involuntary liquidation, dissolution or winding up
of this Corporation, before any payment shall be
made to the holders of common shares, shall be
$10 per share plus all dividends thereon which
shall have accrued at the time of such liquidation,
dissolution or winding up and shall have not been
paid. The holders of Series B Preferred Stock
shall be entitled to no further participation in any
remaining assets of this Corporation. Neither the
consolidation or merger of this Corporation with
or into any other corporation or corporations, nor
the sale or lease of all or substantially all of the
assets of this Corporation shall be deemed to be
a liquidation, dissolution or winding up of this
Corporation within the meaning of any of the
provisions of this paragraphs (c).
(d) VOTING RIGHTS. The holders of Series B Preferred
Stock shall not have any voting rights other than
any voting rights expressly provided by law.
(e) PREEMPTIVE RIGHTS. The holders of Series B
Preferred Stock shall not have any preemptive
rights.
- 10 -
<PAGE>
H. The Board of Directors of the Corporation, pursuant to the
authority expressly vested in it as aforesaid, adopted the
following resolution creating a Series C issue of Preferred
Stock on April 28, 1995:
RESOLVED, that pursuant to the authority conferred upon the
Board of Directors of this Corporation by Article III of the
Articles of Incorporation of this Corporation, as amended,
there is hereby established a series of the authorized
preferred shares of this Corporation having a par value of
$0.01 per share, which series shall be designated as 8%
Cumulative Preferred Stock (Series C) (hereinafter referred to
as "Series C Preferred Stock"), which shall consist of 5,000
shares and shall have the designations, preferences,
limitations and relative rights:
(a) Dividends. The holders of shares of Series C
Preferred Stock shall be entitled to receive, out
of the funds legally available therefor, cumulative
dividends at the annual rate of 8% or $0.80 per
share, and no more, payable in cash quarter-
annually on the last days of March, June,
September and December in each year, beginning
on the later of March 31, 1995 or the last day of
the calendar quarter immediately following the
calendar quarter in which the shares upon which
dividends are being paid were issued.
(b) REDEMPTION AND RETIREMENT. The shares of
Series C Preferred Stock shall be redeemed by
this Corporation, as a whole, at a cash price per
share of $10, plus all dividends which on the
redemption date have accrued on the shares to
be redeemed and have not been paid, on the
earlier of (i) February 1, 2000, or (ii) 30 days
following the date on which the net proceeds
become available from an initial public offering
commenced by the Company, as determined by
the Board of Directors. Notice of any
redemption under this paragraph (b) shall be
mailed not less than five (5) nor more than thirty
(30) days prior to the date fixed for redemption
to the holders of record of the shares of the
Series C Preferred Stock to be redeemed at their
respective addresses as the same shall appear
upon the books of this Corporation; but no defect
- 11 -
<PAGE>
in the publication or mailing of such notice shall
affect the validity of the proceedings for the
redemption of any shares of Series C Preferred Stock.
If notice of redemption shall have been mailed as
hereinbefore provided and if on or before the
redemption date specified in such notice all funds
necessary for such redemption shall have been set
apart so as to be available therefor and only
therefor, then on and after the date fixed for
redemption the shares of Series C Preferred Stock so
called for redemption, notwithstanding that any
certificate therefor shall not have been surrendered
or canceled, shall no longer be deemed outstanding
and all rights with respect to such shares shall
forthwith cease and terminate except only the right
of the holders thereof to receive upon surrender of
certificates therefor the amount payable upon
redemption thereof, but without interest.
All shares of Series C Preferred Stock redeemed shall
be retired and shall be restored to the status of
authorized and unissued preferred shares.
(c) RIGHTS UPON LIQUIDATION OR DISSOLUTION. The
amounts payable to the holders of Series C
Preferred Stock in the event of any voluntary or
involuntary liquidation, dissolution or winding up
of this Corporation, before any payment shall be
made to the holders of common shares, shall be
$10 per share plus all dividends thereon which
shall have accrued at the time of such liquidation,
dissolution or winding up and shall have not been
paid. The holders of Series C Preferred Stock
shall be entitled to no further participation in any
remaining assets of this Corporation. Neither the
consolidation or merger of this Corporation with
or into any other corporation or corporations, nor
the sale or lease of all or substantially all of the
assets of this Corporation shall be deemed to be
a liquidation, dissolution or winding up of this
Corporation within the meaning of any of the
provisions of this paragraph (d).
- 12 -
<PAGE>
(d) VOTING RIGHTS. The holders of Series C Preferred
Stock shall not have any voting rights other than
any voting rights expressly provided by law.
(e) PREEMPTIVE RIGHTS. The holders of Series C
Preferred Stock shall not have any preemptive
rights or any right to convert their shares into
common stock or any other security of the
Corporation.
4. Except as hereby amended, the Articles of Incorporation of the
Corporation shall remain the same.
* * * * *
IN WITNESS WHEREOF, the Corporation has caused these Articles of
Amendment to Articles of Incorporation to be signed in its name by its President
as of the ____ day of April, 1996.
EXACTECH, INC.,
a Florida corporation
BY:
----------------------
Timothy J. Seese
- 13 -
EXACTECH LOGO
COMMON STOCK COMMON STOCK
NUMBER SHARES
EXACTECH, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF FLORIDA
COMMON STOCK
SEE REVERSE FOR
CERTAIN DEFINITIONS
CUSIP
This Certifies that
Is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK, PAR VALUE $.01 EACH OF
EXACTECH, INC.
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney upon surrender of this Certificate properly
endorsed. This Certificate is not valid until countersigned by the Transfer
Agent.
WITNESS the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
Dated:
SECRETARY PRESIDENT
EXACTECH, INC.
CORPORATE
SEAL
1985
FLORIDA
COUNTERSIGNED:
AMERICAN STOCK TRANSFER & TRUST COMPANY
BY TRANSFER AGENT
AUTHORIZED SIGNATURE
<PAGE>
EXACTECH, INC.
The Corporation will furnish to any shareholder upon request and without
charge a full statement of: (a) the designations, preferences, limitations, and
relative rights of the shares of each class or series of capital stock
authorized to be issued; (b) the variations in the relative rights, preferences
and limitations between the shares of each such series; and (c) the authority of
the Board of Directors to fix and determine variations for future series.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C> <C>
TEN COM -- as tenants in common UNIF GIFT MIN ACT -- ............ Custodian ...........
TEN ENT -- as tenants by the (Cust) (Minor)
entireties
JT TEN -- as joint tenants with right of under Uniform Gifts to Minors Act ........
survivorship and not as (State)
tenants in common
COM PROP -- as community property
</TABLE>
Additional abbreviations may also be used though not in the above list.
For Value Received, ______________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE ______________________________________________
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
_________________________________________________________________________ Shares
of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint _____________________________________________
Attorney to transfer the said stock on the books of the within named
Corporation with full power of substitution in the premises.
Dated: _______________________________________
____________________________________________________________
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND
WITH THE NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN
EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY
CHANGE WHATEVER.
WARRANTS TO PURCHASE
160,000 SHARES OF COMMON STOCK OF
EXACTECH, INC.
THE WARRANTS evidenced by this certificate (the "Certificate") have
been issued in accordance with the terms of the Underwriting Agreement entered
into by and between First Equity Corporation of Florida, a Florida corporation
("First Equity"), and Exactech, Inc., a corporation organized and existing under
the laws of the State of Florida (the "Company"), in connection with the sale by
the Company of up to 1,840,000 shares of Common Stock, $.01 par value (the
"Common Stock"), of the Company to certain underwriters named in Schedule I to
the Underwriting Agreement (the "Underwriters") and the public offering thereof
pursuant to a registration statement filed with the Securities and Exchange
Commission (the "SEC") on Form S-1, as amended, File No. 33-_______ (the
"Registration Statement"). In consideration of the payment of $100 by First
Equity, First Equity or its registered assigns (sometimes hereinafter referred
to as the "Warrantholder" or collectively as "Warrantholders") hereby is granted
the right to purchase at any time during the period beginning upon __________,
1997 (the "Beginning Date") (the Beginning Date is the date that is one year
after the date upon which the Registration Statement first became effective
under the Securities Act of 1933, as amended (the "Act")), and ending at 5:00
P.M., Miami time, on __________, 2001 (the "Expiration Date") (such period is
hereinafter referred to as the "Exercise Period"), 160,000 shares of Common
Stock of the Company in accordance with the terms and conditions set forth
herein.
1. METHOD OF EXERCISE; PAYMENT; ISSUANCE OF NEW WARRANT; TRANSFER AND
EXCHANGE; EXECUTION. The Warrants evidenced by this Certificate (the "Warrants")
may be exercised by the Warrantholder at any time and from time to time during
the Exercise Period, in whole or in part, by the surrender of this Certificate,
together with the exercise form attached hereto as EXHIBIT A (the "Exercise
Form") duly filled in and signed, at the principal office of the Company, and by
payment to the Company by cashier's check of the Warrant Price, as hereinafter
defined. For the purposes of this Certificate, the term "Warrant Price" shall
mean [120% OF IPO PRICE] per share of Common Stock, or such other price as shall
result from the adjustments specified in Section 3 hereof. Such shares of Common
Stock shall be deemed by the Company to be issued to the Warrantholder as of the
close of business on the date on which this Warrant shall have been surrendered
and payment made for the Common Stock. The Company will, or will direct its
transfer agent to, issue, as soon as practicable after any exercise of this
Warrant, and in any event within five business days thereafter, at the Company's
expense (including the payment by it of any applicable issue taxes), in the name
or names of and deliver to the Warrantholder, a certificate or certificates for
the number of fully paid and nonassessable shares of Common Stock as to which
this Warrant is so exercised. The stock certificates so delivered shall be in
denominations of 100 shares each or such other denomination as may be specified
by the Warrantholder and shall be issued in the name of the Warrantholder. If
the Warrants are not exercised in full, a new Certificate for the number of
shares as to which the Warrants were not exercised shall be issued to the
exercising Warrantholder.
<PAGE>
The Warrants shall be transferable only on the books of the Company
maintained at its principal office upon delivery thereof by the holder or by its
duly authorized attorney or representative, or accompanied by proper evidence of
succession, assignment or authority to transfer, together with the form of the
assignment, attached hereto as EXHIBIT B (the "Assignment Form"), duly filled in
and signed. Notwithstanding the foregoing, for a period of one (1) year after
the date hereof, the Warrants may not be sold, transferred, assigned,
hypothecated or otherwise disposed of, in whole or in part, except to officers
or partners of First Equity or to an Underwriter or an officer or partner of an
Underwriter).
This Warrant is executed on behalf of the Company by the manual
signature of a duly authorized officer of the Company. In case any officer of
the Company who shall have signed this Warrant shall cease to be such officer of
the Company prior to issuance or any exercise hereof, this Warrant may
nevertheless be issued and delivered or exercised with the same force and effect
as though the persons who signed the same all continued as such officers of the
Company. This Warrant may be signed on behalf of the Company by any person who
at the date of execution of this Warrant was such proper officer of the Company,
whether or not at the date of this Warrant any such person is such officer of
the Company. This Warrant shall be dated as of the original issue date (whether
on initial issuance, transfer or exchange or in lieu of a mutilated, lost,
stolen or destroyed Warrant). The Company shall keep or cause to be kept a
register of the Warrantholders.
2. STOCK FULLY PAID; RESERVATION OF SHARES; DIVISIBILITY OF WARRANT.
The Company covenants and agrees that all Common Stock shall, upon issuance, be
fully paid and non-assessable and free from all taxes, liens and charges with
respect to the issue thereof. The Company further covenants and agrees that,
during the Exercise Period, the Company shall at all times have authorized and
reserved, for the purpose of the issue upon exercise of the Warrants, at least
the maximum number of shares of Common Stock as are issuable upon the exercise
of the Warrants and shall, at its expense, expeditiously procure the listing
thereof (subject to issuance or notice of issuance) on all stock exchanges or
stock markets on which such Common Stock is then listed. This Warrant may be
divided into warrants representing one share of Common Stock or multiples
thereof, upon surrender at the principal office of the Company on any business
day, without charge to any Warrantholder, except as provided below. Upon any
such division, and in accordance with the provisions of Section 1 hereof, the
Warrants may be transferred of record to a name other than that of the
Warrantholder of record; PROVIDED, HOWEVER, that the Warrantholder shall be
required to pay any and all transfer taxes with respect thereto.
3. ADJUSTMENT OF WARRANT PRICE AND NUMBER OF SHARES. The number and
kind of securities purchasable upon the exercise of each Warrant and the Warrant
Price shall be subject to adjustment from time to time as follows:
(a) If the Company shall (i) pay a dividend or make a
distribution in Common Stock, (ii) subdivide its outstanding Common Stock, (iii)
combine its outstanding Common Stock into a smaller number of shares, (iv) issue
by reclassification of its Common Stock any shares or other securities of the
Company, or (v) effectuate any similar transaction, then, in each such event,
the number of shares of Common Stock purchasable upon exercise of each Warrant
immediately prior
-2-
<PAGE>
thereto, shall be adjusted so that the Warrantholder shall be entitled to
receive the kind and number of shares of Common Stock or other securities of the
Company which the Warrantholder would have owned or have been entitled to
receive after the happening of any of the events described above, had such
Warrant been exercised immediately prior to the happening of such event (or any
record date with respect thereto). Such adjustment shall be made whenever any of
the events listed above shall occur. An adjustment made pursuant to this
paragraph (a) shall become effective immediately after the effective date of the
event retroactive to the record date, if any, for the event.
(b) No adjustment in the number of shares of Common Stock
purchasable under the Warrants shall be required unless the adjustment would
require an increase or decrease of at least one tenth of one percent in the
number of shares of Common Stock purchasable upon the exercise of each Warrant.
Any adjustments which by reason of this paragraph (b) are not required to be
made shall be carried forward and taken into account in any subsequent
adjustment. All calculations under this Section 3 shall be made to the nearest
one-hundredth of a share or to the nearest cent, as the case may be.
(c) Whenever the number of shares of Common Stock purchasable
upon the exercise of each Warrant is adjusted, the Warrant Price per share of
Common Stock payable upon exercise of each Warrant shall be adjusted by
multiplying such Warrant Price immediately prior to such adjustment by a
fraction, the numerator of which shall be the number of shares of Common Stock
purchasable upon the exercise of each Warrant immediately prior to such
adjustment, and the denominator of which shall be the number of shares of Common
Stock purchasable immediately after such adjustment.
(d) Whenever the number of shares of Common Stock purchasable
upon the exercise of each Warrant or the Warrant Price of such Common Stock is
adjusted, the Company shall promptly send each Warrantholder notice of such
adjustment or adjustments, together with a certificate setting forth the number
of shares of Common Stock purchasable upon the exercise of each Warrant and the
Warrant Price of the Common Stock after the adjustment, a brief statement of the
facts requiring such an adjustment, and the computation by which such adjustment
was made.
(e) For the purpose of this Section 3, the term "Common Stock"
means the Common Stock of the Company of the class authorized at the date of
this Certificate and stock of any other class into which such presently
authorized Common Stock may be changed and any other shares of stock of the
Company which do not have priority in the payment of dividends or upon
liquidation over any other class of stock. In the event that at any time, as a
result of an adjustment made pursuant to this Section 3, any Warrantholder
becomes entitled to purchase any shares or other securities of the Company other
than Common Stock, thereafter the number of such other shares or other
securities so purchasable upon exercise of each Warrant and the Warrant Price of
such shares or other securities shall be subject to adjustment from time to time
in a manner and on terms as nearly equivalent as practicable to the provisions
with respect to the shares contained in this Section 3 and the provisions of
this Section 3 and all other applicable sections of this Warrant shall apply on
like terms to any such other shares or securities.
-3-
<PAGE>
(f) The Company shall notify each Warrantholder of any
distribution of cash or property at least 10 days prior to the record date
therefor. Except as provided in this Section 3, no adjustment for any dividends
shall be made during the term of a Warrant or upon the exercise of a Warrant.
(g) In case the Company shall issue rights, options, warrants
or convertible securities to all holders of the Common Stock entitling them to
subscribe for or purchase Common Stock or securities convertible into Common
Stock at a price per share less than the current value of the Common Stock on
the record date for the issuance of such securities, instruments or rights or
the granting of such securities, options or warrants, as the case may be, the
Warrant Price to be in effect after the record date for the issuance of such
rights or the granting of such options or warrants shall be determined by
multiplying the Warrant Price in effect immediately prior to such record date by
a fraction, the numerator of which shall be (i) the sum of (a) the number of
shares of Common Stock outstanding immediately prior to such sale and (b) the
number of shares of Common Stock which could be purchased at the current value
of the Common Stock with the consideration received by the Company upon such
sale, and the denominator of which shall be the total number of shares of Common
Stock that would be outstanding immediately after such sale if the full amount
of convertible securities, options, rights, or warrants were exercised
immediately after the sale. Additionally, the number of shares of Common Stock
purchasable upon exercise of each Warrant shall simultaneously be adjusted by
multiplying the number of shares of Common Stock issuable upon exercise of each
Warrant by the Warrant Price in effect immediately prior to the adjustment made
and under this Section 3(j) and dividing the product so obtained by the Warrant
Price in effect immediately after the adjustment. In the event such securities,
instruments or rights shall change or expire, or such convertible securities
shall not be converted, any adjustment previously made hereunder shall be
readjusted to such as would have obtained on the basis of the rights as modified
by such change or expiration.
(h) In case of any capital reorganization, or any
reclassification of the Common Stock (other than a reclassification outlined by
paragraph (a)(iv) above) of the Company, or in case of the consolidation or
merger of the Company with or into any other corporation or the sale, lease,
conveyance or other disposition of all or substantially all of the properties
and assets of the Company to any other corporation, the Company or such
successor or purchasing corporation, as the case may be, shall execute with each
Warrantholder an agreement to the effect that each Warrant shall, after such
capital reorganization, reclassification, consolidation, merger or sale, lease,
conveyance or other disposition, be exercisable into the kind and amount of
shares of stock or other securities or property (including cash) to which the
holder of the number of shares of Common Stock deliverable (immediately prior to
the happening of such capital reorganization, reclassification, consolidation,
merger, sale, lease, conveyance or other disposition) upon exercise of a Warrant
would have been entitled upon the happening of such event; and, in any case, if
necessary, appropriate adjustment shall be made in the application of the
provisions set forth in this Section 3 with respect to the rights and interests
thereafter of each Warrantholder, to the end that the provisions set forth in
this Section 3 shall thereafter correspondingly be made applicable, as may be
reasonable, to the securities or property thereafter deliverable on exercise of
the Warrants. The Company shall send to each Warrantholder, a notice of any
event (and all pertinent details with respect thereto) requiring such
-4-
<PAGE>
agreement at least 30 days prior to the effective date of such event. Such
agreement shall provide for all appropriate adjustments, which shall be as
nearly equivalent as may be practicable to the adjustments provided for in this
Section 3. The provisions of this paragraph (__) shall also apply to successive
reorganizations, reclassifications, consolidations, mergers, sales, leases,
conveyances and other dispositions.
(i) Irrespective of any adjustments in the Warrant Price or
the number or kind of shares or other securities purchasable upon the exercise
of the Warrants, the Warrants theretofore or thereafter issued may continue to
express the same price and number and kind of shares of Common Stock as are
stated in the Warrants initially issuable pursuant to this Agreement.
(j) The Company shall not be required to issue fractional
shares of Common Stock on the exercise of Warrants. If more than one Warrant is
presented for exercise in full at the same time by the same holder, the number
of full shares of Common Stock which shall be issuable upon the exercise thereof
shall be computed on the basis of the aggregate number of shares of Common Stock
represented by the Warrants presented. If any fraction of a share would, except
for the provisions of this Section 3, be issuable on the exercise of any Warrant
(or specified portion thereof), the Company shall pay an amount in cash equal to
the current market price per share of Common Stock, multiplied by such fraction.
For the purpose of any computation under this Section 3 (j), the current market
price per share of Common Stock at any date shall be deemed to be the average of
the daily closing prices for the 20 consecutive trading days, commencing 30 days
before the date of computation. The closing price for each day shall be (i) if
the Common Stock is listed or admitted to trading on a principal national
securities exchange or the National Market System of NASDAQ, the last reported
sales price on the principal national securities exchange on which the Common
Stock is listed or admitted to trading or on the National Market System of
NASDAQ or (ii) if the Common Stock is not listed or admitted to trading on any
such exchange, the average of the highest bid and lowest asked prices, as
reported on the Automated Quotation System of the National Quotations Bureau,
Incorporated or an equivalent, generally accepted reporting service.
4. REQUIRED REGISTRATION RIGHTS. As used herein, the term "Warrant
Shares" includes all shares of Common Stock and other securities which may be
issued by the Company upon exercise of the Warrants and which may thereafter be
issued by the Company in respect of any such Common Stock, by means of any stock
splits, stock dividends, recapitalizations or the like, and as otherwise
adjusted pursuant to Section 3 hereof. As used in this Section 4, the term
"Holder" shall mean any Warrantholders, any holders of any of the securities
underlying the Warrants and any other warrants issued to the Warrantholders.
(a) If the Company, at any time during the period commencing
on the date hereof and ending two years after the Expiration Date, proposes to
register any of its securities under the Act, other than a registration effected
solely to implement any employee benefit plan, a transaction in which such
securities will be issued only for noncash consideration or a transaction to
which Rule 145 of the SEC under the Act is applicable, it shall each such time
give written notice to all Holders of its intention to do so, at least 45 days
prior to filing any registration statement or post-effective amendment to
registration statement with the SEC. Upon the written request of any Holder
given
-5-
<PAGE>
within 20 days after receipt by any of such Holder of any such notice from the
Company (which request shall state the number of Warrant Shares to be included
in the registration statement or post-effective amendment to registration
statement), the Company shall cause all such Warrant Shares to be included in
such registration statement and shall use its best efforts to effect promptly
the registration of the Warrant Shares so included under the Act and to cause
such registration statement or post-effective amendment to remain in effect for
a period of at least 18 months after the date thereof (the "Effective Period").
(b) At any time during the Exercise Period, upon written
demand of the Holders representing a majority of the Warrant Shares and of the
shares already issued pursuant to the Warrants, the Company shall prepare and
file with the SEC a post-effective amendment to the registration statement or a
new registration statement, if then required, and such other documents,
including an amended or supplemented prospectus, as may be necessary in the
opinion of both counsel for the Company and counsel for Warrantholders, in order
to comply with the provisions of the Act so as to permit a public offering and
registration of Warrant Shares for nine consecutive months by such Holders
notifying the Company within five days after receiving notice from the Company
of such request; provided however, that in no event shall the Company be
required to register securities pursuant to this Section 4(b) more than once.
Should this registration or the effectiveness thereof be delayed by the failure
of the Company to use reasonable diligence, the exercisability of the Warrants
shall be extended for a period of time equal to the delay in such registration.
Moreover, if the Company fails to comply with the provisions of this Section
4(b), the Company shall, in addition to any other equitable or other relief
available to the Holders of Registrable Securities, be liable for any and all
damages due to loss of profits sustained by such Holders. The Holders of
Registrable Securities representing a majority of the Warrant Shares and of the
shares already issued pursuant to the Warrants being registered under this
Section 4(b) shall have the right to select the investment bankers and managers
to administer such offering, which investment bankers and managers shall be
reasonably satisfactory to the Company.
(c) The Company covenants and agrees to give written notice of
any registration request under subsection (b) of this Section 4 to all other
Holders within ten days from the date of the receipt of any such registration
request.
(d) If the registration of which the Company gives notice
pursuant to paragraph (a) or (b) above is for a registered public offering
involving an underwriting, the Company shall so advise the Holders as part of
the written notice of the proposed registration.
(e) Whenever the Company is to effect the registration of
any Warrant Shares under the Act, as provided herein, the Company shall:
(i) Cause a registration statement or post-effective
amendment to be filed with the SEC as soon as practicable (and in any
event within 90 days) on an appropriate form with respect to such
Warrant Shares and to become and remain effective as provided herein;
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<PAGE>
(ii) Prepare and file with the SEC such amendments and
supplements to such registration statement or post-effective amendment
to registration statement and the prospectus used in connection
therewith as may be necessary to keep such registration statement or
post-effective amendment to registration statement effective and to
comply with the provisions of the Act and regulations of the SEC
thereunder with respect to the sale or other disposition of all Warrant
Shares covered by such registration statement or post-effective
amendment, and including such amendments and supplements as may be
necessary to reflect the intended method of disposition from time to
time or the prospective seller or sellers of such Warrant Shares;
(iii) Provide the Holders or persons designated by them
such reasonable number of copies of such prospectuses in preliminary
and definitive form or supplements thereto in conformity with the
requirements of the Act as may be reasonably required and such other
documents as such Holders may reasonably request or to facilitate the
public sale or disposition of the Warrant Shares by such Holder or
Holders; and take such other acts as such Holders may reasonably
request or to facilitate the public sale or disposition of the Warrant
Shares by such Holder or Holders; and
(iv) Register or qualify the Warrant Shares covered by
such registration statement or post-effective amendment to registration
statement under such other securities or blue sky or other applicable
laws of such jurisdiction within the United States as each of the
Holders shall reasonably request to enable such Holder or Holders to
consummate the public sale or other disposition in such jurisdiction of
such Warrant Shares by such Holder or Holders.
(f) All expenses incurred in effecting any registration of the
Warrant Shares and including, without limitation, all registration and filing
fees, printing expenses, expenses of compliance with blue sky laws, fees and
disbursements of counsel for the Company, and expenses of any audits incidental
to or required by any such registration (including any audits of the financial
statements of the Company) shall be borne by the Company, except underwriting
discounts or commissions attributable to the sale of the Warrant Shares and
expenses incurred by the Holders for their own counsel or accountants.
(g) The Company's obligations to register the Warrant Shares
under this Section 4 shall continue for the periods hereinabove specified until
(i) under paragraph 4(a) a registration statement or post-effective amendment to
registration statement under the Act shall have included the total number of
Warrant Shares covered by the Warrants requested for inclusion therein and shall
have become effective and the public sale or other disposition of such total
number of Warrants Shares shall have been consummated, in which case the Holders
shall have no further rights under paragraph 4(a); and (ii) under paragraph 4(b)
a registration statement or post-effective amendment to registration statement
under the Act shall have included the total number of Warrant Shares requested
for inclusion by the Holders and shall have become effective and the public sale
or other disposition of all Warrant Shares requested to be included therein
shall have been consummated, in which case the Holders shall have no further
rights under paragraph 4(b).
-7-
<PAGE>
(h) The Company shall furnish to each Holder participating in
any of the foregoing offerings, a signed counterpart, addressed to such Holder,
of an opinion of counsel to the Company, dated the effective date of such
registration statement (and, if such registration involves an underwritten
public offering, an opinion dated the date of the closing under any underwriting
agreement related thereto). The opinion shall cover substantially the same
matters with respect to such registration statement (and the prospectus included
therein) as are customarily covered in opinions of issuer's counsel delivered to
underwriters in underwritten public offerings of securities. The Company shall
also deliver promptly to each Holder participating in the offering requesting
the correspondence and memoranda described below copies of all correspondence
between the SEC and the Company, its counsel or auditors and all memoranda
relating to discussions with the SEC or its staff with respect to the
registration statement and permit each Holder and underwriter to do such
investigation, upon reasonable advance notice, with respect to information
contained in or omitted from the registration statement as it deems reasonably
necessary to comply with applicable securities laws or rules of the National
Association of Securities Dealers, Inc. Such investigation shall include access
to books, records and properties and opportunities to discuss the business of
the Company with its officers and independent auditors, all to such reasonable
extent and at such reasonable times and as often as any such Holder shall
reasonably request.
(i) The Company shall enter into an underwriting agreement
with the managing underwriter(s) selected by any Holders whose Registrable
Securities are being registered pursuant to Section ____. Such agreement shall
be reasonably satisfactory in form and substance to the Company, each Holder and
such managing underwriters, and shall contain such representations, warranties
and covenants by the Company and such other terms as are customarily contained
in agreements of that type used by the managing underwriter. The Holders shall
be parties to any underwriting agreement relating to an underwritten sale of
their Registrable Securities and may, at their option, require that any or all
the representations, warranties and covenants of the Company to or for the
benefit of such underwriters shall also be made to and for the benefit of such
Holders. Such Holders shall not be required to make any representations or
warranties to or agreements with the Company or the underwriters except as they
may relate to such Holders and their intended methods of distribution.
5. INDEMNIFICATION.
(a) Upon the effectiveness of the Registration Statement with
respect to the Warrant Shares, and in the event that any new registration
statement or post-effective amendment to the Registration Statement or any
registration statement is filed with the SEC and becomes effective with respect
to Warrant Shares as provided for in Section 4 herein, the Company agrees to
indemnify and hold harmless each Holder and each person, if any, who controls
such Holder within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act (as defined below) and each and all of them from and against any
and all losses, claims, demands, damages, costs, expenses, or liabilities, joint
or several, to which they or any of them may become subject under the Act, the
Securities Exchange Act of 1934 (the "Exchange Act"), or any other statute or at
common law or otherwise arising in connection with such registration statement
or the sale of any securities in connection therewith. Except as hereinafter
provided, the Company agrees to reimburse each of the
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<PAGE>
Holders and each such controlling person for any legal or other expenses
reasonably incurred by each of them in connection with investigating or
defending any actions, whether or not resulting in any liability. However, such
reimbursement shall only apply insofar as such losses, claims, demands, damages,
costs, expenses, liabilities, or actions arise out of or are based upon any
untrue statement or alleged untrue statement of a material fact contained in
such Registration Statement, new registration statement or such post-effective
amendment to registration statement or in the prospectus contained therein (as
from time to time amended or supplemented by the Company), or arise out of or
are based upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading. Notwithstanding the foregoing, such indemnity and reimbursement
shall not be made if such untrue statement or alleged untrue statement or
omission or alleged omission was made in such Registration Statement, new
registration statement or such post-effective amendment to registration
statement or the prospectus contained therein in reliance upon and in conformity
with information furnished in writing to the Company in connection therewith by
such Holder expressly for use therein. This indemnity agreement shall be in
addition to any liability which the Company may otherwise have, and shall
survive for the longest period permitted by applicable law.
(b) Upon the effectiveness of the Registration Statement with
respect to the Warrant Shares, and in the event that any new registration
statement or post-effective amendment to the Registration Statement or any
registration statement is filed with the SEC and becomes effective with respect
to Warrant Shares as provided for in Section 4 herein, each such Holder,
severally but not jointly, shall indemnify and hold harmless the Company, each
of its directors and officers who shall have signed any such new registration
statement or post-effective amendment to the registration statement with respect
to Warrant Shares, and each person, if any, who controls the Company within the
meaning of Section 15 of the Act or Section 20 of the Exchange Act, from and
against any and all losses, claims, demands, damages, costs, expenses, or
liabilities, to which they or any of them may become subject under the Act, the
Exchange Act, or any other statute or at common law or otherwise arising in
connection with such registration statement or the sale of any securities in
connection therewith, and except as hereinafter provided, to reimburse the
Company and each such director, officer, or controlling person for any legal or
other expenses reasonably incurred by each of them in connection with
investigating or defending any actions, whether or not resulting in any
liability. However, such reimbursement shall only be made insofar as such
losses, claims, demands, damages, costs, expenses, liabilities, or actions arise
out of or are based upon any untrue statement or alleged untrue statement of a
material fact contained in such Registration Statement, new registration
statement or such post-effective amendment to the registration statement or in
the prospectus contained therein (as from time to time amended or supplemented
by the Company), or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading. Notwithstanding the foregoing, such
indemnity and reimbursement shall not be made unless such untrue statement or
alleged untrue statement or omission or alleged omission was in such
Registration Statement, new registration statement or such post-effective
amendment to registration statement or the prospectus contained therein in
reliance upon and in conformity with information furnished in writing to the
Company in connection therewith
-9-
<PAGE>
by such Holder expressly for use therein. This indemnity agreement shall be in
addition to any liability which such Holder may otherwise have, and shall
survive for the longest period permitted by applicable law.
(c) Promptly after receipt by an indemnified party pursuant to
the provisions of paragraph (a) or (b) of this Section 5 of notice of the
commencement of any action involving the subject matter of the foregoing
indemnity provisions, such indemnified party shall, if a claim thereof is made
against the indemnified party pursuant to the provisions of said paragraph (a)
or (b), notify the indemnifying party of the commencement thereof; but the
failure of the indemnified party to notify the indemnifying party shall not
relieve it from any liability which it may have to any indemnified party
otherwise than hereunder. In case such action is brought against any indemnified
party and it notifies the indemnifying party of the commencement thereof, the
indemnifying party, upon request of the indemnified party, shall retain counsel
selected by the indemnified party to represent the indemnified party and any
others the indemnifying party may designate in such proceeding and shall pay the
fees and disbursements of such counsel related to such proceeding. In any such
proceeding, any indemnified party shall have the right to retain its own
counsel, but the fees and disbursements of such counsel shall be at the expense
of such indemnified party unless (i) the indemnifying party shall have failed to
retain counsel for the indemnified party as aforesaid, (ii) the indemnifying
party and such indemnified party shall have mutually agreed to the retention of
such counsel, or (iii) representation of such indemnified party by the counsel
retained by the indemnifying party would be inappropriate due to actual or
potential differing interests between such indemnified party and any other party
represented by such counsel in such proceeding or due to the availability of
different or additional legal defenses to such indemnified party.
6. NO SHAREHOLDER RIGHTS. The Warrants shall not entitle the holder
hereof to any voting rights or other rights as a shareholder of the Company,
until the Warrants shall have been exercised. The Company shall provide each
Warrantholder with all communications with its shareholders in the same manner
as it provides such notices to such shareholders.
7. GENDER AND NUMBER. As used herein, the use of any of the masculine,
feminine, or neuter gender and the use of singular or plural numbers shall
include any or all of the other, wherever and whenever appropriate in the
context.
8. NOTICES. Except as otherwise provided herein, any notice pursuant to
this Certificate by the Company or any Holder of the Warrants shall be in
writing and shall be deemed to have been duly given if personally delivered or
when mailed by certified mail, return receipt requested, postage prepaid (a) if
to the Company, to 4613 N.W. 6th Street, Gainesville, Florida 32609, Attention:
President and (b) if to the holders of Warrants or Holders, to their addresses
on the books of the Company. Each party hereto may from time to time change the
address to which notices to it are to be delivered or mailed hereunder by notice
in writing to the other party.
9. BENEFITS OF THIS CERTIFICATE. Nothing in this Certificate shall be
construed to give to any person or corporation other than the Company and the
Warrantholders and Holders any legal or
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<PAGE>
equitable right, remedy, or claim under this Certificate; but this Certificate
shall be for the sole and exclusive benefit of the Company and the holders of
these Warrants and Holders.
10. EXCHANGE, LOSS OR DESTRUCTION OF WARRANT. Upon surrender of this
Warrant to the Company with a duly executed instrument of assignment and funds
sufficient to pay any transfer tax, the Company shall, without charge, execute
and deliver a new Warrant of like tenor in the name of the assignee named in
such instrument of assignment and this Warrant shall promptly be cancelled. Upon
receipt by the Company of evidence reasonably satisfactory to it of the loss,
theft, destruction or mutilation of this Warrant, and, in the case of loss,
theft or destruction, of such bond or indemnity as the Company may reasonably
require, and, in the case of such mutilation, upon surrender and cancellation of
this Warrant, the Company will execute and deliver a new Warrant of like tenor
in lieu of such lost, stolen, destroyed or mutilated Warrant.
11. CAPTIONS. The captions of the sections and subsections of this
Certificate have been inserted for convenience only and shall have no
substantive effect.
12. APPLICABLE LAW. This Certificate and the Warrants evidenced hereby
shall for all purposes be construed and interpreted in accordance with the laws
of the State of Florida.
DATED as of __________, 1996 EXACTECH, INC.
By: _____________________________________
_________________________, ____________
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<PAGE>
EXHIBIT A
EXERCISE FORM
(To be Executed by the Registered Holder
in order to Exercise the Warrant)
The undersigned hereby irrevocably elects to exercise the right to
purchase _____ shares of Common Stock covered by this Warrant according to the
conditions hereof and herewith makes payment of the Warrant Price of such shares
in full.
_______________________________
Signature
_______________________________
Address
Dated: _______________, 199_
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<PAGE>
EXHIBIT B
ASSIGNMENT
FOR VALUE RECEIVED, the undersigned ________________________
hereby sells, assigns and transfers unto ________________________
the _____ Warrants represented by the within Warrant Certificate, together with
all rights, title and interest therein, and does hereby irrevocably constitute
and appoint the Company, attorney, to transfer said Warrant Certificate on the
books of such Company with full power of substitution in the premises.
Dated: _____________, 199_
Name of Warrantholder: __________________________________________
Social Security or Federal ID Number: ___________________________
Address: ________________________________________________________
Signature: _____________________________
-13-
EXHIBIT 4.7
AMENDMENT TO SHAREHOLDERS AGREEMENT
THIS AMENDMENT TO SHAREHOLDERS AGREEMENT (the "Amendment") is made and
entered into this ____ day of May 1996, by and among R. William Petty, M.D.,
Betty B. Petty, David William Petty, Mark Aaron Petty, Julie Alison Petty
(collectively, the "Shareholders") and Exactech, Inc., a Florida corporation
(the "Company").
RECITALS:
WHEREAS, the Shareholders and the Company are parties to a certain
Shareholders Agreement dated as of November 30, 1992 (the "Shareholders
Agreement"); and
WHEREAS, the Shareholders Agreement places certain restrictions on each
of the Shareholder's ability to sell or otherwise dispose of his or her shares
of common stock, par value $.01 per share (the "Stock"), of the Company and
contains certain other provisions regarding the disposition of the Stock owned
by the Shareholders; and
WHEREAS, the Shareholders and the Company desire to delete and/or amend
certain provisions of the Shareholders Agreement.
NOW THEREFORE, in consideration of the mutual covenants and conditions
hereinafter contained, the parties hereto mutually agree as follows:
A. Section 4 of the Shareholders Agreement is hereby
deleted in its entirety and shall be of no further force and effect.
B. Section 5 of the Shareholders Agreement is hereby
deleted in its entirety and the following shall be inserted as new Section 5 of
the Shareholders Agreement:
5. PURCHASE PRICE. Unless the purchase price
for shares of Stock subject to a Disposition is otherwise
provided for herein, the price per share shall be determined
as follows:
(a) The price per share shall be equal to
the "Closing Price" of the Stock on the business day
immediately preceding the date the election to
purchase is exercised (the "Election Date") by the
purchasing party or parties (a "Purchasing Party").
For purposes of this Section 5(a), the "Closing
Price" of the Stock on any business day shall be (i)
if the Stock is listed or admitted for trading on any
United States national securities exchange, or if
actual
<PAGE>
transactions are otherwise reported on a consolidated
transaction reporting system, the last reported sale
price of Stock on such exchange or reporting system,
as reported in any newspaper of general circulation,
(ii) if the Stock is quoted on the National
Association of Securities Dealers Automated
Quotations System ("NASDAQ"), or any similar system
of automated dissemination of quotations of
securities prices in common use, the mean between the
closing high bid and low asked quotations for such
day of Stock on such system, or (iii) if neither
clause (i) or (ii) is applicable, the mean between
the high bid and low asked quotations for the Stock
as reported by the National Quotation Bureau,
Incorporated if at least two securities dealers have
inserted both bid and asked quotations for the Stock
on at least five of the ten preceding days.
(b) If the provisions of Section 5(a) above
are inapplicable for purposes of calculating the
purchase price, the purchase price per share shall be
calculated by dividing the fair market value of the
Company, as determined in accordance with the
provisions set forth below, by the number of the
issued and outstanding shares of Stock of the
Company. The Purchasing Party and the disposing
Shareholder shall endeavor in good faith to agree
upon the fair market value of the Company. If the
Purchasing Party and the disposing Shareholder do not
so agree within ten (10) days after the Election
Date, the fair market value shall be determined by an
appraiser familiar by experience with similarly
situated companies (by capitalization or otherwise)
agreed upon by the Purchasing Party and the disposing
Shareholder (or his personal representative or
successor). If the disposing Shareholder and the
Purchasing Party fail to agree upon the appointment
of an appraiser within twenty (20) days of the
Election Date, then the certified public accountant
engaged by the Company on the Election Date shall
name an appraiser within ten (10) days after the
expiration of such twenty-day period by sending
notification of such
<PAGE>
selection to the Company, the disposing Shareholder
and the Purchasing Party. The appraiser so selected
shall determine the fair market value of the Company
by means generally accepted within the appraisal
industry. The appraiser's valuation shall be made
within forty-five (45) days of appointment unless
otherwise agreed among the parties (including the
appraiser). The fair market value of the Company
determined pursuant to this Section 5(b) shall be
final and binding on all parties. The cost of any
valuation undertaken pursuant to the terms of this
Section 5(b) shall be paid equally by the Purchasing
Party and the disposing Shareholder.
(c) Unless otherwise provided in the
applicable Section hereof or the agreement of the
parties hereto, any closing pursuant to Section 5(a)
hereof shall be held within sixty (60) days of the
Election Date. Any closing pursuant to Section 5(b)
hereof shall be held within sixty (60) days following
the appraiser's determination of the fair market
value of the disposing Shareholder's Stock.
(d) If the disposing Shareholder fails at
the closing to tender certificates representing the
Stock being transferred, the Company shall treat such
transfer as completed if the Purchasing Party
delivers to the Secretary of the Company, for the
benefit of the disposing Shareholder, a certified
check payable to the order of the disposing
Shareholder in the amount of the purchase price
payable at the closing. The Company shall deliver
such check to the disposing Shareholder at such time
as the appropriate Stock certificates have been
delivered to the Company for cancellation. Upon
completion of such transfer, the disposing
Shareholder shall no longer have any right, title or
interest in the Stock so transferred.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
of the date first written above.
--------------------------------------
R. William Petty, M.D.
--------------------------------------
Betty B. Petty
--------------------------------------
David William Petty
--------------------------------------
Mark Aaron Petty
--------------------------------------
Julie Alison Petty
EXACTECH, INC.
By: ----------------------------------
Timothy J. Seese, President
EXHIBIT 5.1
GREENBERG TRAURIG
[LETTERHEAD]
May 10, 1996
Exactech, Inc.
4613 N.W. 6th Street
Gainesville, Florida 32609
RE: Exactech, Inc.
Gentlemen:
On March 29, 1996, Exactech, Inc., a Florida corporation (the "Company"),
filed with the Securities and Exchange Commission a Registration Statement on
Form S-1 (No. 333-02980) (the "Registration Statement") under the Securities Act
of 1933, as amended (the "Act"). Such Registration Statement relates to the sale
by the Company of up to 2,000,000 shares (the "Shares") of the Company's Common
Stock, par value $0.01 per share (the "Common Stock"). We have acted as counsel
to the Company in connection with the preparation and filing of the Registration
Statement.
In connection therewith, we have examined and relied upon copies of (i) the
Company's Articles of Incorporation, as amended, and Bylaws; (ii) resolutions of
the
<PAGE>
Company's Board of Directors authorizing the offering and the issuance of the
shares to be sold by the Company and related matters; (iii) the Registration
Statement and all amendments and exhibits thereto; and (iv) such other documents
and instruments as we have deemed necessary for the expression of opinions
herein contained. In making the foregoing examinations, we have assumed the
genuineness of all signatures and the authenticity of all documents submitted
to us as originals, and the conformity to original documents of all documents
submitted to us as certified or photostatic copies. As to various questions of
fact material to this opinion, we have relied, to the extent we deemed
reasonably appropriate, upon representations or certificates of officers or
directors of the Company, without independently verifying the accuracy of such
documents, records and instruments.
Based upon the foregoing examination, we are of the opinion that the Shares
have been duly and validly authorized and, when issued and delivered in
accordance with the terms of the Underwriting Agreement filed as Exhibit 1.1 to
the Registration Statement, will be validly issued, fully paid and
nonassessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to our name under the caption
"Legal Matters" in the prospectus comprising a part of the Registration
Statement. In giving such consent, we do not thereby admit that we are included
within the category of persons whose consent is required under Section 7 of the
Securities Act of 1933, as amended, or the rules and regulations promulgated
thereunder.
Sincerely,
GREENBERG, TRAURIG, HOFFMAN,
LIPOFF, ROSEN & QUENTEL, P.A.
By: /s/ FERN S. WATTS
--------------------------
Fern S. Watts
Exhibit 10.54
COPYRIGHT ASSIGNMENT AND CONSULTING AGREEMENT
THIS AGREEMENT is effective as of the 12th day of April, 1993 by and
between WALTER REID, maintaining an office at 4291 Parish Trace, Marietta, GA
30066 (hereinafter referred to as "Reid") and EXACTECH, INC. having an office at
4613 N.W. 6th Street, Suite D, Gainesville, Florida 32609 (hereinafter referred
to as the "Company").
WHEREAS, the Company wishes to obtain the copyrights and ownership of
the Clinical Software Package (the "Software") and the ownership of any forms,
technique and knowhow related to the Patient Typing System (the "Typing System")
and desires to engage the services of Reid to obtain assistance in the
refinement of the Software and the development and implementation of a marketing
plan for the Software and the Typing System; and,
WHEREAS, Reid is the owner of the copyrights embodied in the Software
and the owner of other forms, techniques and knowhow associated with the use of
the Typing System and wishes to assist the Company in the refinement of the
Software and the development and implementation of a marketing plan for the
Software and the Typing System and is free of any obligation which would prevent
him from entering into this Agreement;
NOW THEREFORE, in consideration of the mutual covenants and agreements
herein contained, it is agreed by and between the parties as follows:
ARTICLE I
DEFINITIONS
The following terms as used in this Agreement shall have the meaning
set forth in this Article I.
1.1 The Software shall mean the software package known as the Clinical
Software Package including all software code, and all algorithms contained in
the software, including all derivatives and enhancements thereto during the term
hereof.
1.2 The Typing System shall mean the Software system and any other
knowhow, including, but not limited to, forms, techniques and systems involved
in using the Software system.
1.3 Net Sales shall mean the gross sales of the Software by the
Company, less discounts allowed on a uniform basis in a manner consistent with
other products sold by the Company, less credits for returns and allowances,
prepaid freight, and less taxes and other governmental charges added to the
face of the invoices therefore and paid by the Company.
<PAGE>
1.4 Confidential Information shall mean technical data and information,
knowhow, patentable and unpatentable inventions, and trade secrets and
confidential information relating to the businesses of the Company and Reid.
ARTICLE II
SERVICES
2.1 Reid agrees to provide for the Company reasonable consulting
services on a part-time basis from time to time to refine the Software and
develop and implement a marketing plan for same.
2.2 Reid shall spend up to eleven (11) days per calendar year for
purposes of delivering lectures and training regarding the Software beginning on
May 12, 1993.
ARTICLE III
GRANT
3.1 Reid hereby transfers and assigns to the Company all copyrights
embodied in the Software and all rights to the Typing System including forms,
techniques and systems involved in using the Software including any refinements
and developments made by Reid in the course of his consulting work for the
Company. Reid agrees to execute any and all documents necessary to effect this
transfer and assignment.
ARTICLE IV
PAYMENTS
4.1 In consideration for the transfer and assignment of the copyrights
and the performance of the Services, the Company agrees to pay Reid as follows:
(a) A sum of $60,000 payable on the basis of $30,000 at
closing with the remaining balance of $30,000 to be payable in three equal
installments on October 1, 1993, January 1, 1994 and April 1, 1994. Reid may
change the payment schedule in the event a third-party total joint manufacturer
with which Reid has a contractual relationship for the sale of its products
terminates such relationship with Reid prior to January 1, 1994. In the event
of such a termination, Reid shall have the option exercisable in his sole
discretion by written notice to change the payment schedule. Under the new
payment schedule, the
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<PAGE>
Company shall pay the balance due in $5,000 installments on the 5th day of each
month after receipt of Notice from Reid, until paid in full.
(b) A royalty payment of seven (7) percent of the Company's
Net Sales of Software for a term of seven (7) years from the initial sale of
product but in no event less than (i) $35 per licensed user for physicians and
fellows, or (ii) $100 per licensed user for hospitals. After the seven (7) year
period expires no further payments will be made to Reid.
(c) The Company shall deliver to Reid at the closing of the
acquisition of the Software, warrants granting the right to purchase 1,250
shares of the Company's common stock, in the event of an Initial Public Offering
("IPO") at the IPO price for three (3) years from the date of the IPO. The
warrants shall be split in the same proportion as any stock split declared by
the Company prior to exercise of the warrants.
4.2 The royalty payments payable hereunder shall be paid not later than
thirty (30) days after the end of each calendar quarter for Net Sales by the
Company in the United States during such previously ended calendar quarter and
not later than sixty (60) days after the end of the calendar quarter for Net
Sales by the Company outside the United States. The Company shall furnish to
Reid, with each payment, a statement specifying the number of Software systems
sold during such calendar quarter and the aggregated Net Sales.
4.3 The Company agrees to keep proper and complete records of its sale
and distribution of the Software and to permit the duly authorized
representative of Reid to inspect such records at reasonable intervals during
the regular business hours of the Company. This right to inspect can be
exercised once during any calendar year for the sales made during the calendar
year in which the inspection takes place or for the previous calendar year.
4.4 Reid agrees not to engage in consulting activities for the purpose
of creating or marketing similar Software or Typing Systems for another company
for the life of the Agreement.
4.5 The Company will reimburse Reid for reasonable travel and living
expenses incurred in attending meetings and performing the Services requested by
the Company.
4.6 Nothing in this agreement shall impose upon the Company the
obligation to maximize sales of the Software. Nothing herein shall in any way
limit the Company's exclusive right to determine, in its sole discretion, the
timing or manner of marketing the Software, the manner of manufacturing the
Software or the manner of advertising the Software so long as such marketing,
manufacturing, or advertising is in compliance with applicable laws and
regulations.
-3-
<PAGE>
ARTICLE V
TERM
5.1 This Agreement shall continue for a period of seven (7) years from
the effective date thereof. After the said period expires no further royalty
payments shall be made to Reid and the Company may continue indefinitely to
make, have made, use and sell the Software as the owner of the Software.
5.2 Notwithstanding the foregoing comment the Company shall have the
right at any time during this Agreement, upon ninety (go) days written notice,
to terminate its manufacture, sales, and distribution of the Software covered by
this Agreement.
ARTICLE VI
WARRANTY
6.1 Reid hereby warrants that he has the right to enter into this
Agreement and has right and title to the Software and Typing System and has not
made nor will, during the term of this Agreement, make, without the written
consent of the Company any agreement with others dealing with the Software in
conflict with the rights granted hereby or take any action which would interfere
with the rights granted to the Company herein.
6.2 Any obligation of Reid to make any payment to a third party based
on this Agreement or a preexisting agreement will be undertaken by Reid and the
Company's obligation will be limited to the payments set forth herein.
ARTICLE VII
CONFIDENTIALITY
7.1 For a ten (10) year period from the date of disclosure of
Confidential Information, each party shall maintain in confidence and shall not
disclose to any third party any such Confidential Information received pursuant
to this Agreement, without the prior written consent of the disclosing party.
The foregoing obligation shall not apply to:
(a) information that is known to the receiving party or
independently developed by the receiving party prior to the time of disclosure,
in each case, to the extent evidenced by written records.
- 4 -
<PAGE>
(b) information disclosed to the receiving party by a third
party that has a right to make such disclosure.
(c) information that becomes published or otherwise part of
the public domain as a result of acts by the disclosing party or a third person
obtaining such information as a matter of right; or
(d) information that is required to be disclosed by order of
the U.S. Food and Drug Administration or similar authority or a court of
competent jurisdiction; provided that the parties shall use their best efforts
to obtain confidential treatment of such information by the agency or court.
7.2 Each party will take all reasonable steps to protect the
Confidential Information of the other party with the same degree of care such
party uses to protect its own confidential or proprietary information. Without
limiting the foregoing, each party shall ensure that all of its employees having
access to the Confidential Information of the other party are obligated to abide
by such party's obligations hereunder.
ARTICLE VIII
GENERAL PROVISIONS
8.1 No waiver, amendment, or modification of this Agreement shall be
effective unless in writing and signed by the party against whom the waiver,
amendment, or modification is sought to be enforced. No failure or delay by
either party in exercising any right, power, or remedy under this Agreement
shall operate as a waiver of the right, power or remedy. No waiver of any term,
condition, or breach of this Agreement shall be construed as a waiver of any
other term, condition, or breach.
8.2 This Agreement is intended to benefit and is binding on (1) the
successors and assigns of the Company, and (2) the heirs and legal successors of
Reid.
8.3 The validity, construction, and performance of this Agreement is
governed by the laws of the State of Florida.
- 5 -
<PAGE>
ARTICLE IX
NOTICE
9.1 All notices shall be sent by first class mail addressed as follows:
To Walter Reid: 4291 Parish Trace
Marietta, GA 30066
To the Company: Exactech, Inc.
4613 N.W. 6th Street, Suite D
Gainesville, Florida, 32609
9.2 Either party may at any time designate a change of address by
giving written notice to the other party.
IN WITNESS WHEREOF the parties that cause these instruments to be duly
executed as of the day and year first above written.
EXACTECH, INC.
By: /s/ Timothy J. Seese
---------------------
Title: President
/s/ Walter Reid
----------------------
WALTER REID
- 6 -
Exhibit 10.55
November 30, 1993
Michael P. Harkins, President
Associated Business Consultants, Inc.
43 North Main Street
Medford, NJ 08055
Dear Mike:
Per our agreement for your work in recruiting Melvin Lowdermilk, this
document grants Associated Business Consultants, Inc. (ABCI), Michael P.
Harkins, President, warrants to purchase one hundred-fifty (150) shares of the
common stock of EXACTECH/Registered trademark/ as of the closing date of an
offering of the Corporation's common stock which is not exempt from registration
under the Securities Act of 1933 and for which a Registration Statement is filed
and becomes effective pursuant to such Act ("Public Offering"), such warrants to
be exercisable for a period of two years following the closing date of the
Public Offering at the Public Offering price.
ABCI and EXACTECH/Registered trademark/ further agreee that the
warrants and all associated rights to purchase 150 shares will be forfeited if
Lowdermilk's Sales Representative Agreement is terminated on or before his
first-year anniversary.
Please confirm that the above is in accordance with your understanding
by executing this letter and returning a copy to me at your earliest
convenience, whereupon it will become an agreement between EXACTECH/Registered
trademark/, Inc. and ABCI.
Sincerely,
/s/ Timothy J. Seese
---------------------
Timothy J. Seese
President
/s/ Michael P. Harkins
- ---------------------- 12/15/93
Michael P. Harkins, President Date
Associated Business Consultants, Inc.
Exhibit 10.56
Exactech, Inc.
4613 NW 6th Street, Suite D:
Gainesville, FL 32609
Attn: Jody Phillips
Re: WCMA: Line of Credit Increase
Ladies and Gentlemen:
This Letter Agreement will serve to confirm certain assets of Merrill
Lynch Business Financial Services Inc. ("MLBFS") and Exactech, Inc. ("Customer")
with respect to:" (i) that certain WCMA AND TERM LOAN AND SECURITY AGREEMENT NO.
9504550701 between MLBFS and Customer (including any previous amendment and
extensions thereof)l and (ii) all other agreements between MLBFS and Customer or
any party who has guaranteed or provided collateral for Customer's obligations
to MLBFS (a "Guarantor") in connection therewith (collectively, the "Loan
Documents"). Capitalized terms used herein and not defined herein shall have the
meaning set forth in the Loan Documents.
Subject to the terms hereof, effective as of the "Effective Date" the
Loan Documents are hereby amended as follows:
1. The term "Maximum WCMA Line of Credit" shall mean an amount equal to
the lesser of: (A) 80% of Customer's Domestic Accounts and Chattel Paper, as
shown on its regular books and records (excluding Accounts over 90 days old,
Chattel Paper with installments or other sums more than 90 days past due, and
Accounts and Chattel Paper directly or indirectly due from any shareholder,
officer ore employee of Customer or any affiliated entity) plus 50% of
Customer's inventory (not to exceed $3,000,000), as shown on its regular books
and records, less the outstanding balance on Term Loan 9504550701, or (B)
$3,000,000.
2. The "Line Fee" for the period ending June 30, 1996, is hereby
increased to $27,500.00, of which $5,0000.00 (the "Additional Fee") is now due
and owing. Customer hereby authorizes and directs $5,000.00 (the "Additional
Fee") is now due and owing. Customer hereby authorizes and directs MLBFS to
charge the Additional Fee to WCMA Account NO. 750-07R53 on or at any time after
the Effective Date.
3. Within 30 days after the close of each monthly period of Customer,
Customer shall furnish or cause to be furnished to MLBFS: (i) a statement of
profit and loss for the monthly period then ended and (ii) a balance sheet of
Customer as at the close of such monthly period; all in reasonable detail and
certified by its chief financial officer.
<PAGE>
Except as expressly modified hereby, the Loan Documents shall continue
in full force and effect upon all of their terms and conditions. Nothing herein
shall be deemed to extend the Maturity Date of the WCMA Line of Credit.
By this execution of this Letter Agreement, the below-named Guarantor
hereby consents to the foregoing modifications to the Loan Documents, and hereby
agrees that the "Obligations" under his Unconditional Guaranty shall extend to
and include the Obligations of Customer under the Loan Documents as amended
hereby.
Customer and said Guarantor acknowledge, warrant and agree, as a
primary inducement to MLBFS to enter into this Agreement, that: (i) no default
or Event of Default has occurred and is continuing under the Loan Documents;
(ii) each of the warranties of Customer in the Loan Documents are true and
correct as of the date hereof and shall be deemed remade as of the date hereof;
(iii) neither Customer nor said Guarantor have any claim against MLBFS or any of
its affiliates arising out of or in connection with the Loan Documents or any
other matter whatsoever; and (iv) neither Customer nor said Guarantor have any
defense to payment of any amounts owing, or any right of counterclaim for any
reason under, the Loan Documents.
The amendments and agreements in this Letter Agreement will become
effective on the date (the "Effective Date") upon which (i) Customer and the
Guarantor shall have executed and returned the duplicate copy of this Letter
Agreement enclosed herewith; (ii) Customer has provided to MLBFS evidence of
product liability coverage of at least $2MM per case, (iii) MLBFS must receive
and be satisfied with Customer's final audited 1995 financial statements and a
current personal financial statement of William Petty, MD, (iv) Termination of
UCC Filing no. 95000117364 by Southtrust Bank of Alabama initially filed June
12, 1995, (v) an officer of MLBFS shall have reviewed and approved this Letter
Agreement as being consistent in all respects with the original internal
authorization hereof; and (vi) to the extent applicable, MLBFS shall have
entered such amendments and agreements in it computer system (which MLBFS agrees
to do promptly after the receipt of such executed duplicate copy).
Notwithstanding the foregoing, if for any reason other than the sole fault of
MLBFS the Effective Date shall not occur within 28 days from the date of this
Letter Agreement, then all of said amendments and agreements herein will, at the
sole option of MLBFS, be void.
Very truly yours,
Merrill Lynch Business
Financial Services, Inc.
By: /s/ Hugh E. Johnson
----------------------
Hugh E. Johnson
Credit Services Account Manager
<PAGE>
Accepted:
Exactech, Inc.
By: /s/ Timothy J. Seese
----------------------
Printed Name: Timothy J. Seese
Title: President
Approved:
/s/ William R. Petty
- -------------------------
William R. Petty, M.D.
STATE OF GEORGIA:
COUNTY OF LOUNDES:
On the 18th day of March 1996, before me personally came Timothy J.
Seese known to me to be the individual who executed the foregoing instrument,
and who, being sworn by me, did depose and say that the individual is an officer
of the Customer herein, and that the individual executed the foregoing
instrument for the Customer herein, and that the individual had the authority to
sign the same, and acknowledged that the individual executed the same as the act
and deed of said Customer.
/s/ NOT READABLE
----------------------
Notary Public
(NOTARIAL SEAL)
EXHIBIT 11.1
EARNINGS PER SHARE COMPUTATIONS
The following table details the number of common shares and common stock
equivalents used in the computation of primary and fully diluted earnings per
share.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
---------------------------------------- --------------------------
1993 1994 1995 1995 1996
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Primary:
Weighted average common shares outstanding ........... 2,849,786 2,876,752 2,931,136 2,917,797 2,954,472
Effect of shares issuable under stock option plans
using the treasury stock method .................... 77,963 80,201 73,300 79,424 75,124
Effect of shares issued and options granted in 1995
at prices below the initial public offering price
using the treasury stock method .................... 18,299 18,299 18,299 31,375 31,375
--------- --------- --------- --------- ---------
Shares used in computing primary earnings per share . 2,946,048 2,975,252 3,022,735 3,028,596 3,060,971
========= ========= ========= ========= =========
Fully Diluted:
Weighted average common and common equivalent shares
outstanding(1) ..................................... 2,946,048 2,975,252 3,022,735 3,028,596 3,071,401
Effect of shares contingently issuable under warrants
issued with the 8% subordinated debentures using
the treasury stock method .......................... 3,566 3,566 3,566 3,910 7,629
--------- --------- --------- --------- ---------
Shares used in computing fully diluted earnings
per share .......................................... 2,949,614 2,978,818 3,026,301 3,032,506 3,079,030
========= ========= ========= ========= =========
</TABLE>
The following table details the number of common shares and common stock
equivalents used in the computation of primary and fully diluted earnings per
share on a pro forma basis to reflect the effect of the issuance of
additional shares of common stock and the related repayment of debt and
redemption of preferred stock as contemplated under this offering.
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
1995 1996
--------------- ------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Primary:
Shares used in computing actual primary earnings per share ......... 3,022,735 3,060,971
Effect of assumed repayment of debt and redemption of preferred
stock described in "Use of Proceeds" .............................. 264,175 256,109
---------- ----------
Shares used in computing primary earnings per share ................. 3,286,910 3,317,080
========== ==========
Increase in net income available to common shareholders due to above
assumed repayment and redemption .................................. $ 104,692 $ 20,463
========== ==========
Fully Diluted: .......................................................
Shares used in computing actual fully diluted earnings per share ... 3,026,301 3,079,030
Effect of assumed repayment of debt and redemption of preferred
stock described in "Use of Proceeds" .............................. 264,175 256,109
---------- ----------
Shares used in computing fully diluted earnings per share .......... 3,290,476 3,335,139
========== ==========
Increase in net income available to common shareholders due to above
assumed repayment and redemption .................................. $ 104,692 $ 20,463
========== ==========
<FN>
Note(1): The end of period prices and average prices for the Company's common
stock was substantially the same for these periods. Accordingly,
there are no differences in the number of weighted average common
and common equivalent shares outstanding for primary and fully
diluted bases.
</FN>
</TABLE>
EXHIBIT 21.1
SUBSIDIARY OF THE REGISTRANT: Techmed S.p.A (50% equity interest)
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT AND REPORT
ON SCHEDULE
To the Board of Directors and Shareholders of
Exactech, Inc.
Gainesville, Florida
We consent to the use in this Amendment No. 2 to the Registration
Statement for 1,600,000 shares of common stock of Exactech, Inc. on Form S-1
of our report dated January 19, 1996 (May 8, 1996 as to Note 14), appearing
in the Prospectus, which is a part of this Registration Statement, and to the
references to us under the headings "Selected Financial Data" and "Experts"
in such Prospectus.
Our audits of the financial statements referred to in our aforementioned
report also included the financial statement schedule of Exactech, Inc.
listed in Item 16. This financial statement schedule is the responsibility of
the Corporation's management. Our responsibility is to express an opinion
based on our audits. In our opinion, such financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
Deloitte & Touche LLP
Jacksonville, Florida
May 10, 1996
