- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-28240
EXACTECH, INC.
(Exact name of registrant as specified in its charter)
FLORIDA 59-2603930
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4613 NW 6TH STREET
GAINESVILLE, FL
32609
(Address of principal executive offices)
(352) 377-1140
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
As of February 20, 1998, the number of shares of the registrant's Common Stock
outstanding was 4,904,663. The aggregate market value of the Common Stock held
by non-affiliates of the registrant as of February 20, 1998 was approximately
$14,019,555, based on a closing sale price of $5.50 for the Common Stock as
reported on the NASDAQ National Market System on such date. For purposes of the
foregoing computation, all executive officers, directors and 5 percent
beneficial owners of the registrant are deemed to be affiliates. Such
determination should not be deemed to be an admission that such executive
officers, directors or 5 percent beneficial owners are, in fact, affiliates of
the registrant.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III (Items 10, 11, 12 and 13) is incorporated
by reference from the registrant's definitive proxy statement for its 1998
Annual Meeting of Shareholders (to be filed pursuant to Regulation 14A).
2
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
AND
CROSS REFERENCE SHEET
PAGE NUMBER
-----------
<S> <C> <C> <C>
PART I Item I. Business
Business Overview 4
Products 4
Marketing and Sales 7
Manufacturing and Supply 8
Patents and Proprietary Technology 8
Research and Development 10
Scientific Advisory Board 11
Competition 11
Product Liability and Insurance 11
Government Regulation 12
Employees 14
Executive Officers of the Registrant 15
Glossary 17
Item 2. Properties 19
Item 3. Legal Proceedings 19
Item 4. Submission of Matters to a Vote of Security Holders 20
PART II Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 21
Item 6. Selected Financial Data 22
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 23
Item 8. Financial Statements and Supplementary Data 29
Item 9. Changes in and Disagreements with Accountants on 46
Accounting and Financial Disclosure
PART III Item 10. Directors and Executive Officers of the Registrant 46
Item 11. Executive Compensation 46
Item 12. Security Ownership of Certain Beneficial Owners
and Management 46
Item 13. Certain Relationships and Related Transactions 46
PART IV Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 47
</TABLE>
3
<PAGE>
ITEM 1. BUSINESS
Certain terms used herein are defined in the Glossary on pages 17 to 19
hereof. 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. 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.
In order to raise capital, in June 1996, the Company consummated an
underwritten initial public offering (the "IPO") of 1,840,000 shares of its
common stock, $.01 par value (the "Common Stock"), resulting in net proceeds to
the Company of $12,657,910 after deduction of underwriting, legal, accounting
and other offering related expenses. The proceeds of the IPO have been and will
be used primarily to repay indebtedness, to purchase inventory and equipment,
for research and development and for working capital and general corporate
purposes.
The Company was incorporated under the laws of the State of Florida in
November 1985.
ORTHOPAEDIC IMPLANT INDUSTRY
According to the Orthopedic Network News Volume 8 Number 3, United
States sales of orthopaedic implant products were approximately $1.8 billion in
1996, an increase of 3.5% from 1995. During 1996, sales of knee implants were
approximately $999 million, an increase of 5.3% from 1995, while sales of hip
implants were approximately $793 million, an increase of 1.4% from 1995. The
publication reports that there were 532,532 hip and knee joint replacements in
the United States in 1996 compared to 504,067 in 1995. 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.
4
<PAGE>
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 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 includes 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 Optetrak/registered trademark/ system also includes a total knee
revision system with respect to which the Company commenced full scale marketing
in 1997. The revision system includes a constrained condylar femoral component
with enhanced stem and block augmentation and can be used with many components
of the primary system. 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 also designing a unicompartmental knee with respect to
which the Company will be required to obtain Food and Drug Administration
("FDA") clearance to market.
HIP PRODUCTS. The Company began marketing a hip implant system in 1987.
The Company's line of hip implant products currently consists primarily of three
primary total hip implant systems, its Cemented Total Hip System, its
MCS/registered trademark/ Porous Coated Total Hip System, and the
AuRA/registered trademark/ 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.
5
<PAGE>
The Company's total hip replacement 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 Cemented
Total Hip System is a mature product line which the Company intends to phase out
with the AuRA/registered trademark/ Hip System over the next few years.
The Company scaled up marketing and sales of the AuRA/registered
trademark/ Hip System in 1997. AuRA/registered trademark/ is a comprehensive
system that provides solutions for a broad range of patient problems. It is
specifically designed to support the needs of a maturing generation of more
active patients. The AuRA/registered trademark/ Hip System is comprised of a new
primary total hip replacement system as well as revision components which
include calcar replacement and long stems. It can also be used for fracture and
tumor applications. All AuRA/registered trademark/ components have a common
proximal geometry which affords the surgeon reproducability of results
regardless of which stem is selected. AuRA/registered trademark/ components can
be implanted using a single set of surgical instruments which makes the system
more cost effective.
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 AuRA/registered trademark/ 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.
During 1996, the Company licensed patent technology for a modular
revision hip system. The Company commenced product development of the modular
revision hip system during 1997. The Company plans to continue product
development and to seek FDA clearance to market the system in 1998. The Company
plans to commence full scale marketing of the product in 1999.
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 AND SERVICES. The Company has designed and
received FDA clearance to market a nonmodular shoulder implant system. In 1997,
the Company temporarily halted development plans for a modular version of a
shoulder implant system. The Company currently believes that other opportunities
currently provide a more optimal use of the Company's resources.
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.
The Company has licensed certain technology for orthopaedic repairs.
This material will be supplied as a service through the Company's current sales
organization. The Company plans to commence this service in the second quarter
of 1998.
6
<PAGE>
MARKETING AND SALES
The Company markets its orthopaedic implant products in the United
States through 32 independent agencies and two domestic distributors, that act
as the Company's sales representatives, and internationally through eight
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.
The Company generally has contractual arrangements with its independent
sales 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 two Regional Managers (West/Midwest and Northeast). The Company
has contractual arrangements with its domestic distributors which are similar to
its arrangements with its sales agencies, except the Company does not pay the
distributors commissions and the distributors purchase inventory from the
Company for use in fulfilling customer orders. The Company currently offers its
products in 30 states, including Florida, New York, California, Texas, Ohio,
Pennsylvania and Illinois.
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. Accordingly, 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. 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 material adverse effect on the Company.
During the years ended December 31, 1995, 1996 and 1997, approximately
10%, 7% and 6%, respectively, of the Company's sales were derived from a major
customer. During the years ended December 31, 1995, 1996 and 1997 one
distributor, MBA Del Principado, S.p.A., accounted for approximately 5%, 13% and
13%, respectively, 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 $193,759 in equity
to Techmed. During September 1997, the Company wrote off its investment in the
subsidiary and reserved for trade receivables deemed uncollectible.
The Company currently offers its products in eight countries in
addition to the United States: Argentina, Australia, Columbia, Greece, Italy,
Korea, Spain and Turkey. For the years ended December 31, 1995, 1996 and
7
<PAGE>
1997, foreign sales accounted for $743,700, $2,124,856 and $3,051,151,
representing approximately 8.2%, 15.4%, and 17.3%, respectively, of the
Company's sales. For the years ended December 31, 1995, 1996 and 1997, gross
profit from foreign sales accounted for $257,083, $597,944 and $1,127,455,
respectively. 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
assess the attractiveness of establishing local manufacturing to serve the
Italian, Spanish and other EEC markets. The Company intends to continue to
expand its international distribution network in 1998.
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 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, 1995, 1996 and 1997, the Company
purchased approximately 68%, 62% and 72%, 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.
Certain tooling and equipment which are unique to the Company's products are
supplied by the Company to its vendors.
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
plans to engage in limited manufacturing of the components of its products,
consisting primarily of final machining of components during 1998. The Company
is in the process of completing a new facility to be used by the Company for
principal executive offices, research and development laboratories and
manufacturing. The Company expects to occupy the new facility in the third
quarter of 1998.
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. 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 proprietary information
agreements.
In connection with the development of its knee implant systems, the
Company entered into consulting
8
<PAGE>
agreements with certain of its executive officers and design team members,
including Dr. William Petty and Dr. Gary J. Miller, who are executive officers,
directors and principal shareholders of the Company, and Ivan A. Gradisar, Jr.,
M.D., and William Murray, M.D. Pursuant to these consulting agreements, such
individuals agreed to provide consulting services to the Company in connection
with evaluating 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, 1995, 1996 and
1997, the Company paid royalties aggregating $101,393, $187,773 and $288,759
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.
In January 1997, the Company entered into an oral consulting agreement
with Albert Burstein, Ph.D., a director of the Company, to provide services
regarding many facets of the orthopaedic industry including product design
rationale, manufacturing and development techniques and product sales and
marketing. During 1997, the Company paid Dr. Burstein $123,750 as compensation
under the consulting agreement.
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 represent to the Company that the
manufacture, use or sale of the Optetrak/registered trademark/ knee implant
system will not infringe the intellectual property rights of third parties.
During the years ended December 31, 1996 and 1997, the Company recognized
royalties to the Hospital for Special Surgery of $307,801 and $474,357,
respectively.
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 for 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 assist the
University in developing certain other devices currently being researched and
tested 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 a sublicense agreement (the
"Sublicense Agreement") with Sofamor Danek Properties, Inc. ("SDP") pursuant to
which the Company granted SDP the exclusive worldwide right and
9
<PAGE>
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
$l00,000. To date, SDP has not marketed a product utilizing the University
patents and, during 1996, SDP was initially denied FDA clearance to market
products using the University patents. As a result, the $100,000 was recognized
by the Company as sublicense income in 1996 due to the non-refundable nature of
the advance.
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, 1995, 1996 and 1997, the Company paid royalties to Accumed of
approximately $13,412, $11,577 and $11,906, 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.
During October 1996, the Company licensed certain patent technology for
development of a modular hip system from Medicine Lodge, Inc. The patent license
fees total $360,000, of which $275,000 was paid upon the execution of the
agreement and an additional $85,000 is payable at the time of FDA clearance to
market the products.
During 1997, the Company licensed certain technology. The license fees
total $250,000, of which $100,000 was paid upon the execution of the agreement
and an additional $150,000 is payable at such time as the licensor produces a
developed product.
RESEARCH AND DEVELOPMENT
During the years ended December 31, 1995, 1996 and 1997, the Company
expended $722,118, $750,256 and $937,988 respectively, on research and
development and anticipates that research and development expenses will continue
to increase. The Company's research and development efforts contributed to the
introduction of the revision components of the Company's Optetrak/registered
trademark/ knee implant system and the AuRA/registered trademark/ Hip System in
1997. The Company's principal research and development efforts currently relate
primarily to the production of enhanced revision components of the
Optetrak/registered trademark/ comprehensive knee implant system and the
development of the modular hip implant system.
10
<PAGE>
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 "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: Albert H. Burstein, Ph.D., Edmund
Chao, Ph.D., Ivan Gradisar, M.D., William Murray, M.D., Raymond Robinson, M.D.,
Franklin Sim, M.D., Robert Trousdale, M.D.
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 DePuy, Inc., Bristol-Myers Squibb Company (Zimmer Inc.), Pfizer Inc.
(Howmedica, Inc.), Osteonics, Inc. and Biomet, Inc. who, according to an
industry publication, had an estimated aggregate market share of approximately
79% in 1996. The largest competitors in the orthopaedic knee implant market are
Bristol-Myers Squibb Company (Zimmer Inc.), Pfizer Inc. (Howmedica, Inc.),
Johnson & Johnson, DePuy, Inc. and Osteonics, Inc. who, according to an industry
publication, had an estimated aggregate market share of approximately 69% in
1996.
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. 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.
11
<PAGE>
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 the 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 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;
Zirconia/registered trademark/ (ceramic) femoral heads; Opteon/registered
trademark/ femoral stem for cemented and noncemented use; MCS femoral stem and
acetabular component for cemented and noncemented use; AuRA/registered
trademark/ femoral stem; and the Optetrak/registered trademark/ knee replacement
system.
New medical device 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 reclassify 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
12
<PAGE>
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
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 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. New regulations which became
effective in 1997 offer additional controls which parallel international
standards. 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.
Prior to 1996, 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. During September 1997, the Company voluntarily initiated a
Class II recall as the result of the failure of an Opteon/registered trademark/
femoral hip stem. A Class II recall is defined as a situation in which the use
of a violative product may cause temporary or medically reversible adverse
health consequences or where the probability of serious adverse health
consequences is remote.
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 markets. In order to
13
<PAGE>
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 is currently in
the ISO certification process and plans on applying for both ISO 9001 and CE
mark certification during the second quarter of 1998.
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
payer 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. 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. If the
Company's current or future practices are found to be in violation of the
statute, 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 the Occupational Safety
and Health Administration and the Environmental Protection Agency and similar
state and foreign agencies and authorities.
EMPLOYEES
As of December 31, 1997, the Company employed 45 full time employees.
The Company has no union contracts and believes that its relationship with its
employees is good.
14
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
The executive officers of the Company are as follows:
NAME AGE POSITION
- ---- --- --------
<S> <C>
William Petty, M.D. . . . . . . 55 Chairman of the Board and Chief Executive Officer
Timothy J. Seese. . . . . . . . 51 President, Chief Operating Officer and Director
Gary J. Miller, Ph.D. . . . . . 50 Vice President Research and Development and Director
David W. Petty. . . . . . . . . 31 Vice President, Marketing
Marc Olarsch. . . . . . . . . . 35 Vice President, Sales
Joel C. Phillips . . . . . . . 30 Treasurer
Betty Petty . . . . . . . . . . 55 Secretary
</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 was Associate Professor of Orthopaedic Surgery and
Director of Research and Biomechanics at the University of Florida College of
Medicine from July 1986 through July 1997. Dr. Miller received his B.S. from the
University of Florida, 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 Division since 1982 and
was appointed as an Adjunct Associate Professor in the Department of Aerospace
Engineering, 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.
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.
15
<PAGE>
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.
The Company's officers are elected annually by the Board of Directors and
serve at the discretion of the Board.
16
<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.
ALLOGRAFT- a homograft between allogenic individuals
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.
CALCAR REPLACEMENT STEM-A femoral hip implant component used when there is bone
loss or destruction in the proximal medial area of the femur.
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 ALLAY-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).
17
<PAGE>
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.
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.
HOMOGRAFT- a graft of tissue from the donor of the same species as the recipient
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.
LONG STEM-A femoral hip implant component used when the length of the primary
component does not meet the fixation needs of the surgical situation.
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.
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.
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.
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.
18
<PAGE>
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
ITEM 2. 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 two-year lease which commenced on July 1, 1996.
The lease does not provide for any renewal of the term thereof. The Company's
monthly lease payments are approximately $5,523, for an annual lease payment of
approximately $66,276, 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
is currently constructing a new facility on the land to be used by the Company
for principal executive offices, research and development laboratories and
manufacturing. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Liquidity and Capital Resources".
ITEM 3. 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 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 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 provided that neither the Company nor Joint Medical
would commence any further action regarding the Company's alleged infringement
of the Ball and Socket Patent until the rendering of a decision by the Board of
Patent Appeals and Interferences regarding such alleged patent
19
<PAGE>
infringement. In accordance with the Tolling Agreement, the Action was dismissed
as against the Company, among others, as of July 28, 1995. During 1996, the
Board of Patent Appeals and Interferences ruled in Joint Medical's favor and
allowed the filing of claims to continue. On January 28, 1997, Joint Medical
filed a complaint in the U.S. District Court for the District of Connecticut
against the Company seeking injunctive relief and unspecified monetary damages.
The Company believes, based upon a reasoned opinion of patent counsel, Fish and
Richardson P.C., that Joint Medical's claims are without merit and that its
orthopaedic implants do not infringe upon the Ball and Socket Patent. In
December 1997, the complaint was dismissed without prejudice. The product line
claimed to be in violation of the patent is the MCS/registered trademark/ Porous
Acetabular Shell which represented approximately 11%, 7% and 6% of the Company's
revenues for the years ended December 31, 1995, 1996 and 1997, respectively. A
finding that such product line infringes 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.
On August 21, 1997, Oxford Medical, Inc., a competitor of the Company,
filed a complaint in the United States District Court in New Jersey alleging
that the Company induced several of the competitor's sales agents to breach
their employment agreements when the Company contracted with these agents to
sell the Company's products. The plaintiff is seeking an unspecified monetary
award and punitive damages in the amount to be determined at trial. The
plaintiff also sought to enjoin the Company from soliciting plaintiff's
employees, interfering with their customer relationships and selling products to
their former customers. The Company believes that the allegations are without
merit. At a hearing in the Superior Court of New Jersey on October 8, 1997, the
judge denied the plaintiff's request for injuctive relief. Litigation is
currently proceeding.
In December 1997, Biomet, Inc., a competitor of the Company, filed a
complaint against one of the competitor's former sales agents in the United
States District Court in Oregon. The competitor petitioned the court to include
the Company in the complaint alleging liability for actions of the sales agent
and interference by the Company with a contract between the competitor and the
sales agent. The court refused to allow the Company to be included in the
complaint, but affirmed that the competitor could name the Company in a separate
complaint. Without admitting any wrongdoing, the Company and the agent settled
the dispute through mediation in February 1998, and obtained a release of all
claims. As part of the settlement, the Company agreed to pay $20,000 to the
agent for legal expenses and an additional $55,000 in enhanced sales commissions
to the agent over an indeterminate period of time if the commissions are earned.
The Company also agreed not to hire as a new sales agent any of the competitor's
exclusive distributors or sales representatives whose territory is west of the
Mississippi in the continental United States for a period of four months.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of the fiscal year ended December 31, 1997.
20
<PAGE>
PART II.
- ---------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
The Company's Common Stock has traded on the Nasdaq National Market
under the symbol "EXAC" since May 30, 1996, the date of the IPO. The following
table sets forth, for the periods indicated, the high and low sales price of the
Common Stock, as reported on the Nasdaq National Market:
HIGH LOW
---- ---
1996
- ----
Second Quarter (beginning May 30, 1996) $11.00 $8.00
Third Quarter 8.13 5.00
Fourth Quarter 12.25 7.00
1997
- ----
First Quarter $10.00 $6.50
Second Quarter 7.75 6.00
Third Quarter 7.00 5.56
Fourth Quarter 6.88 3.88
1998
- ----
First Quarter (through February 20, 1998) $ 6.00 $5.00
No cash dividends have been paid to date by the Company on its Common
Stock. The Company intends to retain all future earnings for the operation and
expansion of its business and does not anticipate the payment of 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.
As of February 20, 1998, the Company had approximately 231 stockholders
of record. There are in excess of 2,000 beneficial owners of the Company's
Common Stock.
After deducting expenses of $2,062,090 of the IPO, the Company received
$12,657,910 in net proceeds from the IPO. Set forth below is information
concerning the actual use of such proceeds.
<TABLE>
DIRECT OR INDIRECT PAYMENTS DIRECT OR INDIRECT PAYMENTS
TO RELATED PARTIES (1) TO OTHERS
--------------------------- ---------------------------
<S> <C> <C>
Purchase and installation of machinery
and equipment $ - $2,896,048
Repayment of indebtedness $ - $4,942,268
Temporary Investments (2) $ - $2,044,961
Other Purposes (3) $ - $2,774,633
</TABLE>
1 - Includes direct or indirect payments to directors, officers, general
partners of the Company, or their associates; to persons owning ten percent
or more of any class of equity securities of the Company; and to affiliates
of the Company.
2 - Includes daily maturing fund investments and overnight repurchase agreements
totaling $2,044,961.
3 - Includes increase of inventory held for sale of $2,774,663.
21
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below has been derived from the
audited financial statements of the Company. This data should be read in
conjunction with the financial statements, the notes thereto and Management's
Discussion and Analysis of Results of Operations and Financial Condition
included elsewhere herein.
<TABLE>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C>
Net sales $ 4,675,505 $ 5,355,804 $ 9,118,075 $13,839,976 $17,648,060
Cost of goods sold 1,360,025 1,586,633 2,995,955 4,683,875 5,895,302
Gross profit 3,315,480 3,769,171 6,122,120 9,156,101 11,752,758
Operating expenses
Sales and marketing 1,405,043 1,500,514 2,326,286 3,525,834 4,911,906
General and administrative 594,645 750,669 1,033,319 1,346,304 1,677,878
Research and development 488,029 597,812 722,118 750,256 937,988
Royalties 11,686 14,767 210,127 571,807 855,415
Depreciation and amortization 142,481 224,624 350,612 509,236 813,200
Total operating expenses 2,641,884 3,088,386 4,642,462 6,703,437 9,196,387
Income from operations 673,596 680,785 1,479,658 2,452,664 2,556,371
Other income (expense):
Interest income
(expense), net (137,448) (158,288) (273,110) 12,336 200,720
Income from sub-license
agreement, net - - 170,534 100,000 -
Equity in net loss of
subsidiary - - (22,361) (59,486) (183,909)
Income before provision for
income taxes 536,148 522,497 1,354,721 2,505,514 2,573,182
Provision for income taxes 182,709 176,369 527,793 950,906 997,188
Net income 353,439 346,128 826,928 1,554,608 1,575,994
Preferred stock dividends 8,194 19,298 22,798 10,154 -
Net income available to
common shareholders 345,245 326,830 804,130 1,544,454 1,575,994
Basic earnings per common share * $0.12 $0.11 $0.27 $0.38 $0.32
Diluted earnings per common share * $0.12 $0.11 $0.27 $0.37 $0.32
</TABLE>
<TABLE>
AS OF DECEMBER 31,
------------------------------------------------------------------
BALANCE SHEET DATA: 1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total current assets $4,128,169 $4,781,430 $ 8,411,133 $17,358,859 $20,334,332
Total assets 5,035,368 6,296,745 10,620,750 1,107,072 27,154,836
Total current liabilities 1,940,097 1,896,488 4,476,374 2,182,278 2,464,461
Total long-term debt, net of current portion 10,928 684,903 1,002,309 18,144 3,912,835
Total liabilities 2,509,605 3,210,993 6,452,479 2,527,297 6,811,244
Total preferred stock 241,220 241,220 291,220 - -
Total common shareholders' equity 2,284,543 2,844,532 3,877,051 18,579,775 20,343,592
* Earnings per share for years prior to 1997 have been restated per SFAS 128 "Earnings Per Share"
</TABLE>
22
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The following discussion should be read in conjunction with the
financial statements and related notes appearing elsewhere herein.
The Company develops, manufactures, markets and sells orthopaedic
implant devices and related surgical instrumentation to hospitals and
physicians. Sales of hip implant products historically accounted for most of the
Company's revenues and profits; however, since 1995, sales of knee implant
products have accounted for an increasing portion of its revenues and profits.
The Company anticipates that sales of knee implant products will continue to
account for an increasing portion of its revenues and profits. Furthermore, the
Company anticipates that overall profit margins in the hip implant market may
decline as a result of increasing price competition.
The following table sets forth for the periods indicated information
with respect to the number of units of the Company's products sold and the
dollar amount and percentages of revenues derived from such sales (dollars in
thousands):
<TABLE>
<CAPTION>
EXACTECH, INC.
SALES SUMMARY BY PRODUCT LINE ($'000'S)
YEAR ENDED
----------------------------------------------------------------------------------------
DECEMBER 31, 1995 DECEMBER 31, 1996 DECEMBER 31, 1997
HIP PRODUCTS UNITS$ $ % UNITS $ % UNITS $ %
- ------------ ------ - - ----- - - ----- - -
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Cemented 5,207 2,567 28.2% 5,370 2,339 16.9% 5,117 2,288 13.0%
Porous Coated 4,321 1,931 21.2% 5,354 1,932 14.0% 4,589 1,735 9.8%
Bipolar Prosthesis 846 460 5.0% 835 459 3.3% 890 417 2.4%
Revision - - - 4 9 0.1% 54 126 0.7%
--------------------------- --------------------------- ----------------------------
Total Hip Products 10,374 4,958 54.4% 11,563 4,739 34.3% 10,650 4,566 25.9%
KNEE PRODUCTS
Cemented Cruciate Sparing 3,220 1,932 21.2$ 9,174 4,515 32.6% 12,550 5,652 32.0%
Cemented Posterior Stabilized 1,233 726 7.9% 3,536 1,969 14.2% 7,045 4,411 25.0%
Porous Coated 571 811 8.9% 1,315 1,775 12.8% 1,428 1,502 8.5%
Revision - - - - - - 2,313 847 4.8%
--------------------------- --------------------------- ----------------------------
Total Knee Products 5,024 3,469 38.0% 14,025 8,259 59.6% 23,336 12,412 70.3%
Instrument Sales and Rental 644 7.1% 773 5.6% 602 3.4%
Miscellaneous 47 0.5% 69 0.5% 68 0.4%
=================== ==================== ===================
TOTAL 9,118 100.0% 13,840 100.0% 17,648 100.0%
</TABLE>
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Net sales increased by $3,808,084, or 28%, to $17,648,060 in the year
ended december 31, 1997, from $13,839,976 in the year ended December 31, 1996.
Domestic sales increased 25%, to $14,596,909 in the year ended December 31,
1997, from $11,715,120 in the year ended December 31, 1996. International sales
increased 44%, to $3,051,151 in the year ended December 31, 1997, from
$2,124,856 in the year ended December 31, 1996. As a percentage of sales,
international sales increased from 15% in the year ended December 31, 1996, to
17% in the year ended December 31, 1997. The increase in net sales resulted
primarily from increased unit volume of the company's knee implant products.
Sales of knee implant products for the year ended december 31, 1997, increased
by 66% on a unit basis and by 50% on a dollar basis from the year ended december
31, 1996, as a result of the continued full-scale marketing of the Optetrak
knee system and the release of the revision knee components. Sales of hip
implant products for the year ended december 31, 1997 decreased by 8% on a unit
basis and by 4% on a dollar basis from the year ended december 31, 1996. The
modest average selling price increases in
23
<PAGE>
the hip implant products are the result of sales of the higher priced AuRA hip
system revision components. Hip and knee instrument sales and rentals decreased
to $602,082 in the year ended December 31, 1997, from $772,554 in the year ended
December 31, 1996 as international knee instrument sales decreased.
Gross profit increased by $2,596,657, or 28%, to $11,752,758 in the
year ended December 31, 1997, from $9,156,101 in the year ended December 31,
1996. As a percentage of sales, gross profit increased to 67% in the year ended
December 31, 1997, from 66% in the year ended December 31, 1996. The increase
was primarily the result of a reduction in the unit costs of the company's knee
products as production volumes increased.
Total operating expenses increased by $2,492,950, or 37%, to $9,196,387
in the year ended December 31, 1997, from $6,703,437 in the year ended December
31, 1996. Operating expenses increased as a percentage of sales in the year
ended December 31, 1997, to 52% from 48% in the year ended December 31, 1996.
Sales and marketing expenses increased by $1,386,072, or 39%, to $4,911,906 in
the year ended December 31, 1997, from $3,525,834 in the year ended December 31,
1996. As a percentage of sales, sales and marketing expenses increased to 28% in
the year ended December 31, 1997 as compared to 26% in the year ended December
31, 1996. Sales and marketing expenses increased as a percentage of sales
largely due to enhanced commission programs used to maintain existing and
attract new agents. The Company's sales and marketing expenses are largely
variable costs based on sales levels, with the largest component being
commissions.
General and administrative expenses increased by $331,574, or 25%, to
$1,677,878 in the year ended December 31, 1997, from $1,346,304 in the year
ended December 31, 1996. As a percentage of sales, general and administrative
expenses remained relatively constant at 10% in the years ended December 31,
1996 and 1997. Total general and administrative expenses increased on a dollar
basis during the most recent year as compared to the prior year primarily as a
result of increased legal expenses associated with ongoing legal proceedings.
See "Item 3. Legal Proceedings."
Research and development expenses increased by $187,732, or 25%, to
$937,988 in the year ended December 31, 1997 from $750,256 in the year ended
December 31, 1996, as product development expenses for the revision and modular
hip systems increased. As a percentage of sales, research and development
expenses remained relatively constant at 5% in the years ended December 31, 1996
and 1997.
Depreciation and amortization expenses increased to $813,200 in the
year ended December 31, 1997, from $509,236 in the year ended December 31, 1996.
Depreciation and amortization expenses increased in 1997 as a result of the
increased investment in hip and knee instrumentation. During the year ended
December 31, 1997, $1,951,104 of such instruments were placed in service and
capitalized, resulting in the increase in depreciation and amortization
expenses.
Royalty expenses increased by $283,608, or 50%, to $855,415 in the year
ended December 31, 1997, from $571,807 in the year ended December 31, 1996,
primarily as a result of growth in sales of knee implant products which incur a
higher royalty rate. In 1997, the Company recognized royalty expenses of
$474,357 in connection with the license agreement with the Hospital for Special
Surgery and $381,058 in connection with other consulting and license agreements.
As a percentage of sales, royalty expenses were 5% and 4% in the years ended
December 31, 1997 and 1996, respectively.
The Company's income from operations increased by $103,707, or 4%, to
$2,556,371 in the year ended December 31, 1997, from $2,452,664 in the year
ended December 31, 1996. The increase was primarily attributable to the increase
in sales and gross profits, partially offset by the increase in operating
expenses.
The Company recognized net interest income of $200,720 in the year
ended December 31, 1997, as compared to $12,336 in the year ended December 31,
1996. Interest income of $275,112 for the year ended December 31, 1997, was
offset by $74,392 of interest expense as the proceeds of the Company's IPO
consummated in June 1996 were invested in short-term commercial paper and
government backed securities. The outstanding principal balance of the Company's
debt averaged approximately $510,325 and $1,427,000 during 1997 and 1996,
respectively. The average outstanding balance decreased in 1997 because
approximately $3,900,000 was outstanding on the IRB loan only for a period of a
month and a half, whereas, the Company averaged approximately $3,000,000 in
outstanding debt for the first five months of 1996. The weighted average
interest
24
<PAGE>
rate on such debt was 4.32% and 8.56% for 1997 and 1996, respectively.
In July 1995, the Company purchased a 50% interest in Techmed, its
Italian distributor. Prior to September 1997, the investment in the subsidiary
was accounted for using the equity method with the Company's share of the
subsidiary's net earnings (loss) included as a separate item in the statement of
income. During September 1997, the Company wrote off its investment in the
subsidiary and reserved for trade receivables deemed uncollectible.
Income before provision for income taxes increased by $67,668, or 3%,
to $2,573,182 in the year ended December 31, 1997, from $2,505,514 in the year
ended December 31, 1996. The provision for income taxes was $997,188 in the year
ended December 31, 1997, compared to $950,906 in the year ended December 31,
1996.
All outstanding shares of the Company's preferred stock were either
converted to Common Stock or redeemed in the year ended December 31, 1996. As a
result, there were no preferred stock dividends for the year ended December 31,
1997, as compared to $10,154 in the year ended December 31, 1996. As a result,
the Company had net income of $1,575,994 in the year ended December 31, 1997,
compared to $1,544,454 in the year ended December 31, 1996, a 2% increase.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Net sales increased by $4,721,901, or 52%, to $13,839,976 in the year
ended December 31, 1996, from $9,118,075 in the year ended December 31, 1995.
Domestic sales increased 40%, to $11,715,120 in the year ended December 31,
1996, from $8,374,375 in the year ended December 31, 1995. International sales
increased 186%, to $2,124,856 in the year ended December 31, 1996, from $743,700
in the year ended December 31, 1995. As a percentage of sales, international
sales increased from 8% in the year ended December 31, 1995, to 15% in the year
ended December 31, 1996. The increase in net sales resulted primarily from
increased unit volume of the Company's knee implant products. Sales of knee
implant products for the year ended December 31, 1996, increased by 179% on a
unit basis and by 138% on a dollar basis from the year ended December 31, 1995,
as a result of the continued full-scale marketing of the Optetrak knee system.
Sales of hip implant products for the year ended December 31, 1996 increased by
11.5% on a unit basis and decreased by 4.4% on a dollar basis from the year
ended December 31, 1995. The average selling price reductions in the hip system
are the result of increased unit sales of lower priced products including the
MCS screw and the Opteon medium demand stem. Specifically, the MCS screw
system accounted for 901 units of the 1,189 hip units increase in 1996 sales
while providing only 3% of hip system sales. Hip and knee instrument sales and
rentals increased to $772,554 in the year ended December 31, 1996, from $644,316
in the year ended December 31, 1995 as international knee instrument sales
increased.
Gross profit increased by $3,033,981, or 50%, to $9,156,101 in the year
ended December 31, 1996, from $6,122,120 in the year ended December 31, 1995. As
a percentage of sales, gross profit decreased to 66% in the year ended December
31, 1996, from 67% in the year ended December 31, 1995. The decrease was
primarily the result of an increased mix of international sales. International
sales are typically at lower gross profit margins. However, the Company does not
incur commission expense on such sales.
Total operating expenses increased by $2,060,975, or 44%, to $6,703,437
in the year ended December 31, 1996, from $4,642,462 in the year ended December
31, 1995. Operating expenses decreased as a percentage of sales in the year
ended December 31, 1996, to 48% from 51% in the year ended December 31, 1995.
Sales and marketing expenses increased by $1,199,548, or 52%, to $3,525,834 in
the year ended December 31, 1996, from $2,326,286 in the year ended December 31,
1995. As a percentage of sales, sales and marketing expenses remained relatively
constant between the year ended December 31, 1996 and the year ended December
31, 1995 at 26% and 25%, respectively. The Company's sales and marketing
expenses are largely variable costs based on sales levels, with the largest
component being commissions.
General and administrative expenses increased by $312,985, or 30%, to
$1,346,304 in the year ended December 31, 1996, from $1,033,319 in the year
ended December 31, 1995. As a percentage of sales, general and administrative
expenses decreased to 10% in the year ended December 31, 1996, from 11% in the
year ended December 31, 1995. Total general and administrative expenses
increased on a dollar basis during the most recent
25
<PAGE>
year as compared to the prior year primarily as a result of additional product
liability insurance expense resulting from increased sales and the hiring of
additional staff.
Research and development expenses increased by $28,138, or 4%, to
$750,256 in the year ended December 31, 1996 from $722,118 in the year ended
December 31, 1995, as product development expenses for the revision knee and hip
systems increased while product development expenses for the primary knee
systems decreased. Research and development expenses were 5% and 8% of sales for
1996 and 1995, respectively.
Depreciation and amortization expenses increased to $509,236 in the
year ended December 31, 1996, from $350,612 in the year ended December 31, 1995.
Depreciation and amortization expenses increased in the most recent year as a
result of the increased investment in hip and knee instrumentation. During the
year ended December 31, 1996, $1,332,759 of such instruments were placed in
service and capitalized, resulting in the increase in depreciation and
amortization expenses.
Royalty expenses increased by $361,680, to $571,807 in the year ended
December 31, 1996, from $210,127 in the year ended December 31, 1995, primarily
as a result of growth in sales of knee implant products which incur a higher
royalty rate. In 1996, the Company accrued royalty expenses of $307,801 in
connection with the license agreement with the Hospital for Special Surgery and
$187,773 in connection with consulting agreements. As a percentage of sales,
royalty expenses were 4.1% and 2.3% in the years ended December 31, 1996 and
1995, respectively.
The Company's income from operations increased by $973,006, or 66%, to
$2,452,664 in the year ended December 31, 1996, from $1,479,658 in the year
ended December 31, 1995. The increase was primarily attributable to the increase
in sales and gross profits, partially offset by the increase in operating
expenses.
The Company recognized net interest income of $12,336 in the year ended
December 31, 1996, as compared to net interest expense of $273,110 in the year
ended December 31, 1995. Interest expense of $239,623 for the year ended
December 31, 1996, was offset by $251,959 of interest income as the proceeds of
the Company's IPO consummated in June 1995 were invested in short-term
commercial paper and government backed securities. The outstanding principal
balance of the Company's debt averaged approximately $1,427,000 and $2,900,000
during 1996 and 1995, respectively. The weighted average interest rate on such
debt was 8.56% and 9.87% for 1996 and 1995, respectively.
In July 1995, the Company purchased a 50% interest in Techmed, its
Italian distributor. The investment has been accounted for by the equity method.
Included in other income and expenses for the year ended December 31, 1996, are
$59,486, the Company's equity share in the net loss of Techmed and the
recognition of sublicense income of $100,000.
The Company entered into a sublicense agreement (the "Sublicense
Agreement") with SDP pursuant to which the Company received a $250,000 license
fee in 1995. Under the terms of the sublicense agreement, an advance on
potential royalties in the amount of $100,000 was paid to the Company. The
$100,000 advance is non-refundable to the extent that the sub-licensee does not
receive FDA clearance to market the product. During 1996, the Company was
notified by the sublicensee that initial applications for FDA clearance to
market had been denied. Accordingly, the $100,000 was recognized as sublicense
income because the $100,000 was fully earned by the Company.
Income before provision for income taxes increased by $1,150,793, or
85%, to $2,505,514 in the year ended December 31, 1996, from $1,354,721 in the
year ended December 31, 1995. The provision for income taxes was $950,906 in the
year ended December 31, 1996, compared to $527,793 in the year ended December
31, 1995.
All outstanding shares of the Company's preferred stock were either
converted to Common Stock or redeemed in the year ended December 31, 1996. As a
result, preferred stock dividends for the year ended December 31, 1996,
decreased to $10,154 from $22,798 in the year ended December 31, 1995. As a
result, the Company had net income of $1,544,454 in the year ended December 31,
1996, compared to $804,130 in the year ended December 31, 1995, a 92% increase.
26
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Since inception, the Company financed its operations through
borrowings, the sale of equity securities and cash flow from operations. At
December 31, 1997, the Company had working capital of $17,869,871 compared to
$15,176,581 at December 31, 1996. As a result of operating, investing and
financing activities, cash and cash equivalents at December 31, 1997 increased
to $4,176,293 from $3,992,442 at December 31, 1996. The increase in working
capital is primarily the result of the proceeds from an industrial revenue bond
financing discussed below, the proceeds of which are being used to finance the
Company's new facility. As of December 31, 1997, the Company had expended
$1,371,545 in costs associated with the construction of the facility. The
Company is committed to approximately $2,028,000 in remaining construction costs
associated with the completion of the new facility as of December 31, 1997. The
Company maintains a $3,000,000 credit facility with Merrill Lynch Business
Financial Services, Inc. which is secured by accounts receivable and inventory
and expires in July 1998. At December 31, 1997, there was no amount outstanding
under the line of credit. The Company believes that funds from operations, the
remaining proceeds of the IPO and borrowings under its existing credit
facilities will be sufficient to satisfy its contemplated cash requirements for
the following twelve months.
OPERATING ACTIVITIES
Operating activities used net cash of $1,625,239 in the year ended
December 31, 1997 as compared to providing net cash of $8,951 in the year ended
December 31, 1996. The primary reason for the change was the larger increase in
inventory during 1997 of $3,072,123 as compared to the $1,303,401 increase in
inventory that occurred during 1996. Another factor resulting in more cash being
used in operating activities for the year ended December 31, 1997, was the
growth in trade receivables. Cash required as a result of the increase in trade
receivables was $1,298,132 during 1997, as compared to $660,735 during 1996.
FINANCING ACTIVITIES
In November 1997, the Company entered into a $3,900,000 industrial
revenue bond financing with the City of Gainesville, Florida (the "City"),
pursuant to which the City issued its industrial revenue bonds and loaned the
proceeds to the Company. The bonds are secured by an irrevocable letter of
credit issued by a bank. The $3,900,000 credit facility requires the payment by
the Company of principal installments as follows: $300,000 per year from 2000
through 2006; $200,000 per year from 2007 through 2013; and $100,000 per year
from 2014 through 2017. Monthly interest payments are based on an adjustable
rate as determined by the bonds remarketing agent based on market rate
fluctuations (4.3% as of December 31, 1997). The proceeds of the credit facility
are being used to finance construction of the new facility. The Company's
obligations to the bank issuing the letter of credit are secured by the land and
improvements comprising the facility.
Net cash provided by financing activities decreased from $9,017,468
during the year ended December 31, 1996, to $3,892,522 in the year ended
December 31, 1997. Net Cash provided by financing activities for the year ended
December 31, 1997 reflects the proceeds of from the $3,900,000 industrial
revenue bond financing with the City while net cash provided by financing
activities for the year ended December 31, 1996 reflects the net proceeds of
$12,657,910 from the Company's IPO consummated in June 1996. In 1997, the
Company also paid $118,935 of debt issuance costs associated with the industrial
revenue bond financing which will be recognized as expense over the term of the
loan.
INVESTING ACTIVITIES
The Company invested the remaining proceeds of the industrial revenue
bond financing and the IPO in short-term investments and government backed
securities. As of December 31, 1997, $3,467,072 was invested in commercial paper
and discount notes yielding approximately 5% and $1,763,996 was invested in
Merrill Lynch's Treasury Fund and Money Market Fund comprised of commercial
paper and government backed securities yielding a return of approximately 5%.
During the year ended December 31, 1997, net cash used in investing activities
decreased to $2,083,432 as compared to $5,235,956 in the year ended December 31,
1996. This decrease was primarily due to the maturity of $3,083,788 of short
term investments in 1997 and reduced purchases of short term investments of
$1,335,740 in 1997 as compared to $3,083,788 in 1996.
27
<PAGE>
RECENT ACCOUNTING PRONOUNCEMENTS
- --------------------------------
See Note 2 of Notes to Financial Statements for information concerning
recent accounting pronouncements.
CAUTIONARY STATEMENT RELATING TO FORWARD LOOKING STATEMENTS
- -----------------------------------------------------------
The foregoing Management's Discussion and Analysis contains various
"forward looking statements" within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934 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.
28
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
<S> <C>
Independent Auditors' Report 30
Balance Sheets as of December 31, 1996 and 1997 31
Statements of Income for the Years Ended December 31, 1995, 1996 and 1997 32
Statement of Changes in Shareholders' Equity for the Years Ended
December 31, 1995, 1996 and 1997 33
Statements of Cash Flows for the Years Ended 34
December 31, 1995, 1996 and 1997
Notes to Financial Statements for the Years Ended 35
December 31, 1995, 1996 and 1997
</TABLE>
29
<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, 1996 and 1997, and the related statements of
income, shareholders' equity, and cash flows for each of the three years in the
period ended December 31, 1997. Our audits also included the financial statement
schedule listed in the Index at Item 14. These financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on the 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, 1996 and
1997, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles. Also, 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.
February 13, 1998
30
<PAGE>
EXACTECH, INC.
<TABLE>
<CAPTION>
BALANCE SHEETS
DECEMBER 31, 1996 AND 1997
- ----------------------------------------------------------------------------------------------------------------
ASSETS 1996 1997
---- ----
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 3,992,442 $ 4,176,293
Short-term investments 3,083,788 1,335,740
Trade receivables (net of allowance of $37,164 and $161,046) 2,462,864 3,760,996
Refundable income taxes 259,778
Prepaid expenses and other assets 194,009 103,646
Inventories 7,625,756 10,697,879
------------ ------------
Total current assets 17,358,859 20,334,332
PROPERTY AND EQUIPMENT:
Land 263,301 263,301
Machinery and equipment 1,424,134 1,636,587
Surgical instruments 2,750,260 4,568,489
Furniture and fixtures 115,089 123,014
Construction in progress 1,371,545
------------ ------------
Total 4,552,784 7,962,936
Accumulated depreciation (1,322,392) (1,984,249)
------------ ------------
Net property and equipment 3,230,392 5,978,687
OTHER ASSETS:
Biologic products license 106,494
Investment in subsidiary 100,638
Deferred financing costs, net 21,296 136,436
Advances and deposits 2,442 175,752
Patents and trademarks, net of accumulated amortization 393,445 423,135
------------ ------------
Total other assets 517,821 841,817
TOTAL ASSETS $ 21,107,072 $ 27,154,836
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,430,321 $ 1,611,775
Income taxes payable 40,986
Current portion of long-term debt and capital lease obligations 32,861 4,894
Commissions payable 373,900 473,028
Royalties payable 168,387 258,959
Other liabilities 135,823 115,805
------------ ------------
Total current liabilities 2,182,278 2,464,461
DEFERRED INCOME TAXES 326,875 433,948
LONG-TERM DEBTAND CAPITAL LEASE OBLIGATIONS 18,144 3,912,835
NET OF CURRENT PORTION
------------ ------------
Total liabilities 2,527,297 6,811,244
CONTINGENCIES (Notes 5, 6 and 7)
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value; 15,000,000 shares authorized, 48,604 49,047
4,860,434 and 4,904,663 shares issued and outstanding
Additional paid-in capital 14,815,588 15,002,968
Retained earnings 3,715,583 5,291,577
------------ ------------
Total shareholders' equity 18,579,775 20,343,592
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 21,107,072 $ 27,154,836
------------ ------------
</TABLE>
SEE NOTES TO AUDITED FINANCIAL STATEMENTS
31
<PAGE>
EXACTECH, INC.
<TABLE>
<CAPTION>
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
- ---------------------------------------------------------------------------------------
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
NET SALES $ 9,118,075 $ 13,839,976 $ 17,648,060
COST OF GOODS SOLD 2,995,955 4,683,875 5,895,302
------------ ------------ ------------
Gross profit 6,122,120 9,156,101 11,752,758
OPERATING EXPENSES:
Sales and marketing 2,326,286 3,525,834 4,911,906
General and administrative 1,033,319 1,346,304 1,677,878
Research and development 722,118 750,256 937,988
Depreciation and amortization 350,612 509,236 813,200
Royalties 210,127 571,807 855,415
------------ ------------ ------------
Total operating expenses 4,642,462 6,703,437 9,196,387
------------ ------------ ------------
INCOME FROM OPERATIONS 1,479,658 2,452,664 2,556,371
OTHER INCOME (EXPENSE):
Interest income (expense) (273,110) 12,336 200,720
Income from sub-license agreement, net 170,534 100,000
Equity in net loss of subsidiary (22,361) (59,486) (183,909)
------------ ------------ ------------
INCOME BEFORE PROVISION FOR 1,354,721 2,505,514 2,573,182
INCOME TAXES
PROVISION FOR INCOME TAXES
Current 443,599 837,831 890,115
Deferred 84,194 113,075 107,073
------------ ------------ ------------
527,793 950,906 997,188
------------ ------------ ------------
NET INCOME 826,928 1,554,608 1,575,994
PREFERRED STOCK DIVIDENDS 22,798 10,154
------------ ------------ ------------
NET INCOME AVAILABLE TO
COMMON SHAREHOLDERS $ 804,130 $ 1,544,454 $ 1,575,994
============ ============ ============
BASIC EARNINGS
PER COMMON SHARE $ 0.27 $ 0.38 $ 0.32
============ ============ ============
DILUTED EARNINGS
PER COMMON SHARE $ 0.27 $ 0.37 $ 0.32
------------ ------------ ------------
</TABLE>
SEE NOTES TO AUDITED FINANCIAL STATEMENTS
32
<PAGE>
EXACTECH, INC.
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
- -----------------------------------------------------------------------------------------------------------------
ADDITIONAL TOTAL
COMMON STOCK PAID-IN RETAINED SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------ ------ ------- -------- -------
<S> <C> <C> <C> <C> <C>
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 41,640 41,640
of stock options
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
Issuance of common stock 1,840,000 18,400 12,639,510 12,657,910
Issuance of common stock on 38,874 388 279,612 280,000
conversion of subordinated debt
Issuance of common stock on 26,907 269 214,991 215,260
conversion of preferred stock
Dividends on preferred stock (10,154) (10,154)
Exercise of stock options 750 8 4,992 5,000
Exercise of warrants 100 100
Net income 1,554,608 1,554,608
--------- -------- ----------- ------------ -----------
Balance, December 31, 1996 4,860,434 48,604 14,815,588 3,715,583 18,579,775
Exercise of stock options 44,229 443 146,340 146,783
Tax benefit from exercise 41,040 41,040
of stock options
Net income 1,575,994 1,575,994
--------- -------- ----------- ------------ -----------
Balance, December 31, 1997 4,904,663 $ 49,047 $15,002,968 $ 5,291,577 $20,343,592
--------- -------- ----------- ------------ -----------
</TABLE>
SEE NOTES TO AUDITED FINANCIAL STATEMENTS
33
<PAGE>
EXACTECH, INC.
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
- ---------------------------------------------------------------------------------------------------------------
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 826,928 $ 1,554,608 $ 1,575,994
Adjustments to reconcile net income to net
cash (used in) provided by operating activities:
Depreciation and amortiation 350,612 509,236 813,200
Loss on disposal of equipment 50,530
Equity in net loss of subsidiary 22,361 59,486 183,909
Deferred income taxes 84,194 113,075 107,073
Increase in trade receivables (1,107,845) (660,735) (1,298,132)
Increase in inventories (2,636,627) (1,303,401) (3,072,123)
Decrease (increase) in prepaids and other assets 10,509 (74,483) (79,152)
Increase (decrease) in income taxes payable 385,799 (235,005) (300,764)
Increase (decrease) in accounts payable 722,625 (9,277) 181,454
Increase in other liabilities 384,610 55,447 212,772
------------ ------------ ------------
Net cash (used in) provided by operating activities (956,834) 8,951 (1,625,239)
------------ ------------ ------------
INVESTING ACTIVITIES:
Purchase of biologic products license (106,494)
Purchases of property and equipment (842,937) (1,742,768) (3,572,840)
Maturities of short-term investments 3,083,788
Purchases of short-term investments (3,083,788) (1,335,740)
Investment in subsidiary (90,348) (92,137) (83,271)
Cost of patents and trademarks (41,487) (317,263) (68,875)
------------ ------------ ------------
Net cash used in investing activities (974,772) (5,235,956) (2,083,432)
------------ ------------ ------------
FINANCING ACTIVITIES:
Proceeds (repayments) under line of credit 1,144,266 (1,844,266)
Proceeds from issuance of debt 1,300,000 284,763 3,900,000
Principal payments on debt (925,861) (1,521,980) (27,466)
Proceeds (repayments) of subordinated debentures 260,000 (480,000)
Principal payments on capital lease obligations (8,711) (7,945) (5,810)
Proceeds from issuance of common stock 162,020 14,725,100 144,733
Payment of offering costs (10,000) (2,052,090)
Payment of debt issuance costs (82,747) (118,935)
Preferred dividends paid (22,798) (10,154)
Proceeds (repayments) of preferred stock 50,000 (75,960)
------------ ------------ ------------
Net cash provided by financing activities 1,866,169 9,017,468 3,892,522
------------ ------------ ------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (65,437) 3,790,463 183,851
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 267,416 201,979 3,992,442
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 201,979 $ 3,992,442 $ 4,176,293
------------ ------------ ------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 286,081 $ 238,901 $ 75,114
Income taxes 101,264 779,310 1,190,879
Noncash investing and financing activities:
Lease entered into for office equipment 29,101
Relief of compensation accrual on issuance of stock 24,729 43,090
Conversion of subordinated debt to common stock 280,000
Conversion of preferred stock to common stock 215,260
Financing of insurance premiums 296,106
</TABLE>
SEE NOTES TO AUDITED FINANCIAL STATEMENTS
34
<PAGE>
EXACTECH, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
- --------------------------------------------------------------------------------
1. ORGANIZATION
Exactech, Inc. (the "Company") was organized in 1985 to develop and
market orthopedic implant devices. In 1988, the Company began marketing
its first product, a total hip replacement system. In 1994, the Company
began marketing a knee system. The Company's principal market is the
United States; however, international markets represent approximately
seventeen percent of the Company's business.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS - Cash and cash equivalents consist of cash
on deposit in financial institutions, including a money market account,
institutional money funds, overnight repurchase agreements, and other
short-term investments with a maturity of 90 days or less at the time
of purchase.
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.
SHORT TERM INVESTMENTS - The Company invests its excess funds in
various high-quality and low-risk investment securities. Debt
securities for which the Company has the positive intent and ability to
hold to maturity are classified as held to maturity and reported at
amortized cost. Securities are classified as trading securities if
bought and held principally for the purpose of selling them in the near
future. Securities not classified as held to maturity or trading are
classified as available for sale, and reported at fair value with
unrealized gains and losses excluded from earnings and reported net of
tax as a separate component of shareholders' equity until realized. The
fair values of the investments are estimated based on quoted market
prices. Short-term investments at December 31, 1997, classified as held
to maturity, consist of short-term, government backed securities. The
amortized cost of such short-term investments approximates fair value.
INVENTORIES - Inventories are valued at the lower of cost (first-in,
first-out method) or market and include implants provided to customers
and agents. The Company provides significant loaned implant inventory
to non-distributor customers.
PROPERTY AND EQUIPMENT - Property and equipment is stated at cost less
accumulated depreciation. Depreciation expense is computed using the
straight-line method over estimated useful lives of the related assets
ranging from five to seven years. Maintenance and repairs are charged
to expense. Certain instruments utilized in the surgical implant
procedures are loaned to customers and are amortized over an estimated
useful life of seven years. Periodically, management reviews property
and equipment for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Impairment is measured by comparing the carrying amount of
the asset to the sum of expected future cash flows (undiscounted and
without interest charges) resulting from use of the asset and its
eventual disposition.
35
<PAGE>
EXACTECH, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 (CONTINUED)
- --------------------------------------------------------------------------------
REVENUE RECOGNITION - The Company provides inventories of its products
to its United States sales agencies until sold or returned for use in
marketing its products and filling customer orders. In the case of
sales through such sales agencies, sales revenues are generally
recognized when the product is implanted. Distributors typically
purchase product inventory and instruments from the Company for their
use in marketing and filling customer orders. Sales to such
distributors are recognized upon shipment of the product. Estimated
costs of returns and allowances on sales to foreign distributors are
accrued at the time products are shipped.
INVESTMENT IN SUBSIDIARY - In July 1995, the Company purchased a 50%
interest in Techmed, its Italian distributor. Prior to September of
1997, the investment in the subsidiary was accounted for using the
equity method with the Company's share of the subsidiary's net earnings
(loss) included as a separate item in the statement of income. During
September 1997, the Company wrote off its investment in the subsidiary.
PATENTS AND TRADEMARKS - Patents and trademarks are amortized on a
straight-line basis over their 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. These differences primarily relate to property and equipment
costs and research and development expenses. Deferred tax assets and
liabilities are recognized using an asset and liability approach and
are based on differences between financial statement and tax basis of
assets and liabilities using presently enacted tax rates.
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.
OPTIONS AND STOCK AWARDS- The Company has elected to account for its
employee stock compensation plans under the intrinsic value based
method with pro forma disclosures of net earnings and earnings per
share, as if the fair value based method of accounting defined in SFAS
No. 123 "Accounting for Stock Based Compensation" had been applied
(Note 9). Under the intrinsic value based method, compensation cost is
the excess, if any, of the quoted market price of the stock at the
grant date or other measurement date over the amount an employee must
pay to acquire the stock. Under the fair value based method,
compensation cost is measured at the grant date based on the value of
the award and is recognized over the service period, which is usually
the vesting period.
RECLASSIFICATIONS - Certain items in the prior year financial
statements have been reclassified to conform to the 1997 presentation.
36
<PAGE>
EXACTECH, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 (CONTINUED)
- --------------------------------------------------------------------------------
NEW ACCOUNTING STANDARDS - In March 1997, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings per Share" ("SFAS No. 128"). SFAS
No. 128 establishes standards for computing and presenting earnings per
share ("EPS") and applies to all entities with publicly held common
stock or potential common stock. SFAS No. 128 replaces the presentation
of primary EPS and fully diluted EPS with a presentation of basic EPS
and diluted EPS, respectively. Basic EPS excludes dilution and is
computed by dividing earnings available to common stockholders by the
weighted-average number of common shares outstanding for the period.
Similar to fully diluted EPS, diluted EPS reflects the potential
dilution of securities that could share in the earnings. The Company
adopted the requirements of SFAS No. 128 in the year ended December 31,
1997 (Note 9). All periods presented have been restated to conform to
this presentation.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" ("SFAS No. 130"), effective for fiscal years beginning after
December 15, 1997. SFAS No. 130 requires that all items that are
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. SFAS
No. 130 does not require a specific format for that financial statement
but requires that an entity display an amount representing total
comprehensive income for the period in that financial statement. SFAS
No. 130 requires that an entity classify items of other comprehensive
income by their nature in a financial statement. For example, other
comprehensive income may include foreign currency and unrealized gains
and losses on certain investments in debt and equity securities. In
addition, the accumulated balance of other comprehensive income must be
displayed separately from retained earnings and additional paid in
capital in the equity section of a statement of financial position.
Reclassification of financial statements for earlier periods, provided
for comparative purposes, is required. The Company is in the process of
determining the impact that the adoption of SFAS No. 130 will have on
its financial statements. The Company will adopt this accounting
standard on January 1, 1998, as required.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information" ("SFAS No. 131") effective
for fiscal years beginning after December 15, 1997. SFAS No. 131
establishes standards for reporting information about operating
segments in annual financial statements and requires selected
information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas and major
customers. Operating segments are defined as components of an
enterprise about which separate financial information is available that
is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance. SFAS
No. 131 requires reporting of segment profit or loss, certain specific
revenue and expense items and segment assets. It also requires
reconciliations of total segment revenues, total segment profit or
loss, total segment assets, and other amounts disclosed for segments to
corresponding amounts reported in the financial statements. Restatement
of comparative information for earlier periods presented is required in
the initial year of application. Interim information is not required
until the second year of application, at which time comparative
information is required. The Company is in the process of determining
the impact that the adoption of SFAS No. 131 will have on its financial
statement disclosures. The Company will adopt this accounting standard
on January 1, 1998, as required.
37
<PAGE>
EXACTECH, INC.
<TABLE>
<CAPTION>
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997(CONTINUED)
- ----------------------------------------------------------------------------------------------------------
3. INCOME TAXES
The provision for income taxes consists of the following:
Current: 1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Federal $ 345,980 $ 694,796 $ 685,146
State 97,619 143,035 204,969
---------- --------- ---------
Total current 443,599 837,831 890,115
Deferred:
Federal 71,085 98,579 87,723
State 13,109 14,496 19,350
--------- --------- ---------
Total deferred 84,194 113,075 107,073
--------- --------- ---------
Total Provision $ 527,793 $ 950,906 $ 997,188
========= ========= =========
</TABLE>
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, 1995, 1996 and 1997 follows:
<TABLE>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Statutory Federal rate 34% 34% 34%
State income taxes (net of Federal income tax benefit) 3 4 5
Other 2
---- ---- ----
39% 38% 39%
==== ==== ====
</TABLE>
The types of temporary differences and their related tax effects that
give rise to deferred tax assets and liabilities at December 31, 1996
and 1997 are as follows:
<TABLE>
1996 1997
------- -------
<S> <C> <C>
Deferred tax liabilities:
Basis difference in property and equipment $325,139 $565,679
Basis difference in patents 31,219 68,203
Other 25,231 7,523
-------- --------
Gross deferred tax liabilities 381,589 641,405
-------- ---------
Deferred tax assets:
Basis difference in unconsolidated subsidiary 26,134 114,668
Accrued liabilities not currently deductible 28,580 92,789
-------- ---------
Gross deferred tax assets 54,714 207,457
-------- ---------
Net deferred tax liabilities $326,875 $433,948
======== ========
</TABLE>
There was no valuation allowance on deferred tax assets at December 31,
1996 and 1997.
38
<PAGE>
EXACTECH, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 (CONTINUED)
- --------------------------------------------------------------------------------
4. DEBT
<TABLE>
<CAPTION>
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS:
1996 1997
------------ ----------
<S> <C> <C>
Capitalized lease obligation payable in monthly installments $ 23,539 $ 17,729
of $611 through July, 2000, collateralized by equipment with a
carrying value of approximately $18,708 as of
December 31, 1997
Notes payable to finance company bearing interest 27,466
at 7.43%, paid in full during 1997; proceeds used to finance
insurance policies
Industrial Revenue Bond note payable in annual 3,900,000
principal installments as follows: $300,000 per year from 2000-2006;
$200,000 per year from 2007-2013; $100,000 per year from 2014-2017;
monthly interest payments based on adjustable rate as determined by the
bonds remarketing agent based on market rate fluctuations (4.3% as of
December 31, 1997); proceeds used to finance construction of new
facility
------------ ------------
Total long-term debt and capital lease obligations 51,005 3,917,729
Less current portion (32,861) (4,894)
------------ ------------
$ 18,144 $ 3,912,835
============ ===========
</TABLE>
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, 1997:
<TABLE>
LONG-TERM CAPITAL LEASE
DEBT OBLIGATIONS
---- -----------
<S> <C> <C> <C>
1998........................................... $ 6,722
1999........................................... 7,333
2000........................................... $ 300,000 7,188
2001........................................... 300,000
2002........................................... 300,000
Thereafter..................................... 3,000,000
--------- --------
Total ................................ $3,900,000 21,243
==========
Less interest on capital lease obligations .... (3,514)
$ 17,729
========
</TABLE>
39
<PAGE>
EXACTECH, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 (CONTINUED)
- --------------------------------------------------------------------------------
4. DEBT-(CONTINUED)
IRB NOTE PAYABLE
In November 1997, the Company entered into a $3,900,000 industrial
revenue bond financing with the City of Gainesville, Florida (the
"City"), pursuant to which the City issued its industrial revenue bonds
and loaned the proceeds to the Company. The bonds are secured by an
irrevocable letter of credit issued by a bank. The $3,900,000 credit
facility incurs monthly interest based on an adjustable rate as
determined by the bonds remarketing agent based on market rate
fluctuations, (4.3% as of December 31, 1997). Due to the variable
nature of the note, the balance of the note payable approximates fair
value.
LINE OF CREDIT
The Company maintains a $3,000,000 line of credit with Merrill Lynch
Business Financial Services, Inc. There are no amounts outstanding
under this line of credit at December 31, 1997.
SUBORDINATED DEBENTURES
The Company redeemed $450,000 in principal amount of its 8%
Subordinated Debentures held by Michael M. Kearney, a shareholder of
the Company, and R. Wynn Kearney, a director and shareholder of the
Company, during June 1996. During June 1996, the Company converted to
common stock $50,000 in principal amount of its 10% Subordinated
Convertible Debentures ("10% Debentures"). During July 1996, the
Company redeemed $15,000 of its 10% Debentures. During November 1996,
the Company redeemed an additional $15,000 of its 10% Debentures. The
remaining $230,000 in principal amount of the 10% Debentures was
converted to common stock in November 1996, at a conversion rate per
share equal to $7.33.
5. RELATED PARTY TRANSACTIONS
Effective as of the consummation of the Company's initial public
offering in June 1996, the Company issued options to purchase 20,000
shares of common stock at $8.00 per share to R. Wynn Kearney, Jr. MD, a
director of the Company. The options vest over a period of four years
and are valid for a period of ten years.
The Company sells instruments and implants to its unconsolidated
subsidiary, Techmed. Net sales were $99,475 and $10,454 for the years
ended December 31, 1996 and 1997, respectively. Trade receivables from
such unconsolidated subsidiary totaled $148,051 and $146,270 at
December 31, 1996 and 1997, respectively. As of December 31, 1997,
$104,410 of the Techmed receivables were reserved as part of the
allowance for doubtful accounts.
The Company has entered into a purchase agreement with Brighton
Partners, Inc. to purchase raw materials used in the ongoing production
of its products. The agreement requires the purchase of tooling dies in
the amount of $159,000 and provides for special purchasing terms for
the Company. Some of the Company's officers and directors maintain
ownership in Brighton Partners Inc.
40
<PAGE>
EXACTECH, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 (CONTINUED)
- --------------------------------------------------------------------------------
5. RELATED PARTY TRANSACTIONS (CONTINUED)
The Company has entered into consulting agreements with certain of its
executive officers, directors and principal shareholders in connection
with product design which entitles them to royalty payments 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, 1995, 1996 and 1997,
the Company paid royalties aggregating $101,393, $187,773 and $288,759,
respectively, pursuant to these consulting agreements.
6. COMMITMENTS AND CONTINGENCIES
The Company is committed to approximately $2,028,000 in remaining
construction costs associated with the completion of the new facility
as of December 31, 1997.
The Company, in the normal course of business, is 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.
7. MAJOR CUSTOMER AND FOREIGN OPERATIONS
During the years ended December 31, 1995, 1996 and 1997, approximately
10%, 7% and 6%, respectively, of the Company's sales were derived from
a major customer. During the year ended December 31, 1995, 1996 and
1997, approximately 5%, 13% and 13%, respectively, of the Company's
sales were derived from an international distributor of its products.
Revenue and gross profits for the Company's foreign operations for the
three years ended December 31, 1997 were as follows:
1995 1996 1997
---- ---- ----
Revenues $743,700 $2,124,856 $3,051,151
Gross Profit $257,083 $ 597,944 $1,127,455
41
<PAGE>
EXACTECH, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997(CONTINUED)
- --------------------------------------------------------------------------------
8. LICENSE AND SUBLICENSE AGREEMENTS
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
sub-licensed such rights to a third party for the net amount of
approximately $170,000. 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 potential royalties in the
amount of $100,000 was paid to the Company. The $100,000 advance is
non-refundable to the extent that the sub-licensee does not receive FDA
clearance to market the product. During 1996, the Company was notified
by the sublicensee that initial applications for FDA clearance to
market had been denied. Accordingly, the $100,000 was recognized as
sublicense income due to the fact that the $100,000 was fully earned by
the Company.
During October 1996, the Company licensed patent technology for
development of a modular hip system. The patent license fees total
$360,000 with $275,000 being paid at time of agreement and an
additional $85,000 being payable at time of FDA clearance to market the
products.
During 1997, the Company licensed certain technology. The license fees
total $250,000, of which $100,000 was paid upon the execution of the
agreement and an additional $150,000 is payable at such time as the
licensor produces a developed product. The cost of the license
agreement will be amortized over the period of its estimated economic
benefit.
9. COMMON STOCKHOLDERS' EQUITY
COMMON STOCK:
In June 1996, the Company completed an underwritten initial public
offering ("IPO") of 1,840,000 shares of its common stock at an initial
offering price of $8.00 per share, yielding gross proceeds of
$14,720,000. Net proceeds to the Company as a result of the IPO were
$12,657,910 after deduction of underwriting, legal, accounting and
other offering related expenses in the aggregate of $2,062,090. Upon
consummation of the IPO, $50,000 of 10% Debentures were converted to
6,250 shares of common stock.
42
<PAGE>
EXACTECH, INC.
<TABLE>
<CAPTION>
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997(CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE:
The following is a reconciliation of the numerators and denominators of
the basic and diluted EPS computations for net income and net income
available to common shareholders:
1995 1996 1997
---- ---- ----
INCOME SHARES INCOME SHARES INCOME SHARES
(NUMER- (DENOMI- PER (NUMER- (DENOMI- PER (NUMER- (DENOMI- PER
ATOR) NATOR) SHARE ATOR) NATOR) SHARE ATOR) ATOR) SHARE
----- ------ ----- ----- ------ ----- ----- ----- -----
<S> <C> <C> <C>
Net income $ 826,928 $1,554,608 $1,575,994
Less: Preferred stock (22,798) (10,154)
dividends -------- --------
BASIC EPS:
Net income available to 804,130 2,931,081 $ 0.27 1,544,454 4,050,887 $ 0.38 1,575,994 4,878,795 $ 0.32
common shareholders ====== ====== ======
Effect of Dilutive
Securities:
Stock options 64,167 81,054 40,637
Warrants 3,234 6,305 4,319
DILUTED EPS:
Net income available to 804,130 2,998,482 $ 0.27 1,544,454 4,138,246 $ 0.37 1,575,994 4,923,751 $ 0.32
common shareholders plus ====== ====== ======
assumed conversions
</TABLE>
For the year ended December 31, 1996, options to purchase 336,200 shares of
common stock at prices ranging from $8.00 to $8.80 per share were outstanding
but were not included in the computation of diluted EPS because the options'
exercise prices were greater than the average market price of the common shares.
For the year ended December 31, 1997, options to purchase 348,900 shares of
common stock at prices ranging from $7.50 to $9.00 per share were outstanding
but were not included in the computation of diluted EPS because the options'
exercise prices were greater than the average market price of the common shares.
43
<PAGE>
EXACTECH, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997(CONTINUED)
- --------------------------------------------------------------------------------
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 and a Director's Stock Option Plan which provides for
the issuance of stock options to non-employee directors (collectively
the "Plans"). The Company also issues stock options to sales agents and
other individuals. The maximum number of common shares issuable under
the Plans is 600,000 shares.
If compensation cost for stock option grants had been determined based
on the fair value at the grant dates for 1995, 1996 and 1997 consistent
with the method prescribed by SFAS No. 123, the Company's net earnings
and earnings per share on a diluted basis would have been adjusted to
the pro forma amounts indicated below:
<TABLE>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Net earnings As reported $ 804,130 $ 1,544,454 $ 1,575,994
Pro forma 752,090 1,260,323 1,164,702
Earnings per share As reported $ 0.27 $ 0.37 $ 0.32
Pro forma 0.25 0.30 0.24
</TABLE>
Outstanding options, consisting of ten-year non-qualified stock
options, vest and become exercisable over a five year period from date
of grant. The outstanding options expire ten years from the date of
grant or upon retirement from the Company, and are contingent upon
continued employment during the applicable ten-year period.
Under SFAS No. 123, the fair value of each option grant is estimated on
the date of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for grants in 1995, 1996
and 1997, respectively: dividend yield of 0, 0 and 0 percent, expected
volatility of 43, 70 and 42 percent, risk-free interest rates of 5.9,
6.8 and 6.0 percent, and expected lives of 5, 5 and 5 years.
44
<PAGE>
EXACTECH, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997(CONTINUED)
A summary of the status of fixed stock option grants under the
Company's stock-based compensation plans as of December 31, 1995, 1996
and 1997, and changes during the years ending on those dates is
presented below:
<TABLE>
1995 1996 1997
------------------------ ----------------------- ------------------------
WEIGHTED AVG. WEIGHTED AVG. WEIGHTED AVG.
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
------------------------- ------------------------ ------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding - January 1 159,949 $ 3.31 225,386 $ 4.77 560,199 $ 6.81
Granted 90,637 6.67 341,200 8.14 28,000 7.96
Exercised (25,125) 2.30 (750) 6.66 (44,229) 2.34
Expired (75) 6.67 (5,637) 6.21 (20,250) 7.67
-------- ------- --------
Outstanding - December 31 225,386 4.77 560,199 6.81 523,720 7.21
======== ======= ========
Options exercisable 104,167 $ 3.95 172,907 $ 4.65 231,849 $ 6.30
at year end
Weighted average fair value of $279,887 $1,709,468 $ 101,518
options granted during the year
</TABLE>
The following table summarizes information about fixed stock options
outstanding at December 31, 1997:
<TABLE>
EXERCISE OPTIONS OPTIONS WEIGHTED AVERAGE
PRICE OUTSTANDING EXERCISABLE REMAINING LIFE
----- ----------- ----------- --------------
<S> <C> <C> <C> <C>
$ 2.30 7,296 7,296 3.33
3.28 59,649 59,192 4.79
6.25 5,000 1,000 8.54
6.67 102,875 58,981 7.44
7.50 12,000 12,000 9.30
7.88 10,000 9.17
8.00 225,900 66,880 8.42
8.06 25,000 10,000 8.78
8.80 70,000 15,000 8.41
9.00 6,000 1,500 9.00
----- ----- ----
Total 523,720 231,849 7.80
======= ======= ====
</TABLE>
Remaining non-exercisable options as of December 31, 1997 become
exercisable as follows:
1998 83,337
1999 81,577
2000 81,277
2001 43,530
2002 2,150
-------
291,871
=======
45
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth under the caption "Management" in the Company's
definitive Proxy Statement for its 1998 Annual Meeting of Shareholders (the
"Proxy Statement") is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the caption "Executive Compensation" in the
Company's Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information set forth under the caption "Security Ownership" in the
Company's Proxy Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the caption "Certain Transactions" contained in
the Company's Proxy Statement is incorporated herein by reference.
46
<PAGE>
PART IV. OTHER INFORMATION
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Financial Statements
The financial statements filed as part of this report are listed under
Item 8.
(b) Reports on Form 8-K
None
(c) Exhibits:
EXHIBIT DESCRIPTION
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(1) 4.1 Specimen Common Stock Certificate(1)
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(1)
4.4 Specimen Series A Preferred Stock Certificate(1)
4.5 Specimen Series B Preferred Stock Certificate(l)
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(1)
10.1 Registrant's Employee Stock Option and Incentive Plan, as amended(1)
(2)
10.2 Registrant's Directors' Stock Option Plan(1) (2)
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) (2)
10.5 Form of Employment Agreement between the Registrant and Timothy J.
Seese(1) (2)
10.6 Form of Employment Agreement between the Registrant and Gary J. Miller,
Ph.D.(1) (2)
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)
47
<PAGE>
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)
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 Gradisar, Jr., M.D.(1)
10.24 Consulting Agreement, dated January 1, 1993, between the Registrant and
William Murray, M.D.(1)
10.25 Consulting Agreement, dated March 1, 1993, between the Registrant and
Edmund 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, between
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.p.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-Thbbi 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)
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 Ridgeway 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(1)
48
<PAGE>
10.55 Letter agreement, dated November 30, 1993, between the Registrant and
Associated Business Consultants, Inc.(1)
10.56 Letter agreements, dated February 23, 1996, between Merrill Lynch
Business Financial Services Inc. and the Registrant(1)
10.57 Consulting Agreement dated as of June 1, 1993 between the Registrant
and Kim Jun-Man (1)
10.58 Consulting Agreement. dated as of January 1, 1993 between the
Registrant and Professors Luis Lopez Duran and Fernando Marco (1)
10.59 Merrill Lynch WCMA line of credit extension dated July 29, 1996 (3)
10.60 Loan Agreement, dated as of November 1, 1997, between the City of
Gainesville, Florida and the Registrant
10.61 Letter of Credit Agreement, dated as of November 1, 1997, between
SunTrust Bank, North Central Florida ("SunTrust") and the Registrant
10.62 Pledge and Security Agreement, dated as of November 1, 1997 between
SunTrust and the Registrant
10.63 Mortgage and Security Agreement, dated as of November 1, 1997, from the
Registrant to SunTrust
10.64 Settlement agreement between Biomet, Inc., Ella K. Jirka & Associates,
Richard A. Bland, N.W. Medical Products, Inc. and the Registrant dated
February 9, 1998
11.1 Computation of Earnings Per Share
21.1 Subsidiary of the Registrant(1)
27.1 Financial Data Schedule
Copies of the exhibits filed with this Annual Report on Form 10-K or
incorporated herein by reference do not accompany copies hereof for
distribution to shareholders of the Company. The Company will furnish a
copy of any of such exhibits to any shareholder requesting the same.
(1) Incorporated by reference to the exhibit of the same number filed
with the Registrant's Registration Statement on Form S-1 (File No.
333-02980).
(2) Management contract or compensation plan.
(3) Incorporated by reference to exhibit 10 filed with the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996.
(d) Financial Statement Schedules:
Schedule II-Valuation and Qualifying Accounts
49
<PAGE>
<TABLE>
<CAPTION>
EXACTECH, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
THREE YEARS ENDED DECEMBER 31, 1997
BALANCE AT CHARGED TO
BEGINNING COSTS AND DEDUCTIONS BALANCE AT
OF YEAR EXPENSES (CHARGEOFFS) END OF YEAR
------- -------- ------------ -----------
Allowance for doubtful accounts
<S> <C> <C> <C> <C>
1995 $ 5,300 $ 8,200 - $ 13,500
1996 13,500 23,664 - 37,164
1997 37,164 123,882 - 161,046
</TABLE>
50
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
March 5, 1998 EXACTECH, INC.
By: /S/ WILLIAM PETTY
-------------------------
William Petty
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
March 5, 1998 By: /S/ WILLIAM PETTY
-----------------
William Petty
Chairman of the Board and
Chief Executive Officer
(principal executive officer)
March 5, 1998 By: /S/ TIMOTHY J. SEESE
--------------------
Timothy J. Seese
President and Chief
Operating Officer
March 5, 1998 By: /S/ GARY J. MILLER
-------------------
Gary J. Miller
Vice President and Director
March 5, 1998 By: /S/ JOEL C. PHILLIPS
---------------------
Joel C. Phillips
Treasurer (principal financial
and accounting officer)
March 5, 1998 By: /S/ ALBERT BURSTEIN
-------------------
Albert Burstein
Director
March 5, 1998 By: /S/ R. WYNN KEARNEY, JR.
-------------------------
R. Wynn Kearney, Jr.
Director
March 5, 1998 By: /S/ RONALD PICKARD
------------------
Ronald Pickard
Director
March 5, 1998 By: /S/ P. MICHAEL PRINCE
----------------------
P. Michael Prince
Director
51
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
10.60 Loan Agreement, dated as of November 1, 1997, between the City of
Gainesville, Florida and the Registrant
10.61 Letter of Credit Agreement, dated as of November 1, 1997, between Sun
Trust Bank, North Central Florida ("SunTrust") and the Registrant
10.62 Pledge and Security Agreement, dated as of November 1, 1997 between
SunTrust and the Registrant
10.63 Mortgage and Security Agreement, dated as of November 1, 1997, from the
Registrant to SunTrust
10.64 Settlement agreement between Biomet, Inc., Ella K. Jirka & Associates,
Richard A. Bland, N.W. Medical Products, Inc. and the Registrant dated
February 9, 1998
11.1 Computation of Earnings Per Share
27.1 Financial Data Schedule
EXHIBIT 10.60
CITY OF GAINESVILLE, FLORIDA
AND
EXACTECH, INC.
------------------------------------
LOAN AGREEMENT
------------------------------------
Dated as of November 1, 1997
The interest of the City of Gainesville, Florida (the
"Issuer") in this Loan Agreement has been assigned (except for amounts payable
under Sections 4.2(b), 7.2 and 8.4 hereof) pursuant to the Indenture of Trust
dated as of the date hereof from the Issuer to SunTrust Bank, Central Florida,
National Association, as trustee (the "Trustee"), and is subject to the security
interest of the Trustee thereunder.
<PAGE>
LOAN AGREEMENT
TABLE OF CONTENTS
(This Table of Contents is not a part of the Loan Agreement
and is only for convenience of reference.)
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
ARTICLE I
DEFINITIONS
Section 1.1. Definitions....................................................................................... 1
Section 1.2. Uses of Phrases................................................................................... 3
ARTICLE II
REPRESENTATIONS, COVENANTS AND WARRANTIES
Section 2.1. Agreements of the Parties......................................................................... 4
Section 2.2. Representations, Covenants and Warranties of
the Issuer...................................................................................... 4
Section 2.3. Representations, Covenants and Warranties of
the Company..................................................................................... 5
Section 2.4. Notice of Determination of Taxability............................................................. 11
ARTICLE III
ACQUISITION AND CONSTRUCTION OF THE
PROJECT; ISSUANCE OF THE BONDS
Section 3.1. Agreement to Acquire, Construct, Improve and
Equip the Project............................................................................... 11
Section 3.2. Agreement to Issue the Bonds; Application of
Bond Proceeds................................................................................... 12
Section 3.3. Disbursements from the Construction Fund.......................................................... 12
Section 3.4. Furnishing Documents to the Trustee............................................................... 12
Section 3.5. Establishment of Completion Date.................................................................. 12
Section 3.6. Company Required to Pay in Event Construction
Fund Insufficient............................................................................... 13
Section 3.7. Arbitrage; Preservation of Tax-Exemption.......................................................... 14
Section 3.8. Certain Covenants with Respect to Compliance
with Arbitrage Requirements for Investments
in Nonpurpose Investments and Rebate to the
United States of America........................................................................ 14
Section 3.9. Covenants as to Use of Bond Proceeds and Other
Matters, Payback Provision...................................................................... 15
Section 3.10. Damage, Destruction or Loss of Property;
Obligation to Rebuild; Use of Insurance
Proceeds and Condemnation Awards................................................................ 18
Section 3.11. Pursuit of Remedies Against Contractors,
Subcontractors and Sureties..................................................................... 18
Section 3.12. Certain Covenants with Respect to Capital
Expenditures and Use of Proceeds of the Bonds................................................... 19
1
<PAGE>
ARTICLE IV
LOAN PROVISIONS; SUBSTITUTE LETTER OF CREDIT
Section 4.1. Loan of Proceeds.................................................................................. 22
Section 4.2. Amounts Payable................................................................................... 22
Section 4.3. Obligations of Company Unconditional.............................................................. 23
Section 4.4. Substitute Letter of Credit....................................................................... 24
ARTICLE V
PREPAYMENT AND REDEMPTION
Section 5.1. Prepayment and Redemption......................................................................... 25
ARTICLE VI
SPECIAL COVENANTS
Section 6.1. No Warranty of Condition or Suitability by
Issuer.............................................................................. 25
Section 6.2. Access to the Project............................................................................. 25
Section 6.3. Further Assurances and Corrective Instruments..................................................... 25
Section 6.4. Issuer and Company Representatives................................................................ 26
Section 6.5. Financial Reports................................................................................. 26
Section 6.6. Financing Statements.............................................................................. 26
Section 6.7. Maintenance of Project............................................................................ 26
Section 6.8. Undertaking to Provide Ongoing Disclosure......................................................... 27
ARTICLE VII
ASSIGNMENT, SELLING, LEASING;
INDEMNIFICATION; REDEMPTION
Section 7.1. Assignment, Selling and Leasing................................................................... 31
Section 7.2. Release and Indemnification Covenants............................................................. 31
Section 7.3. Issuer to Grant Security Interest to Trustee...................................................... 33
Section 7.4. Indemnification of Trustee........................................................................ 33
ARTICLE VIII
DEFAULTS AND REMEDIES
Section 8.1. Defaults Defined.................................................................................. 33
Section 8.2. Remedies on Default............................................................................... 35
Section 8.3. No Remedy Exclusive............................................................................... 35
Section 8.4. Agreement to Pay Attorneys' Fees and Expenses..................................................... 35
Section 8.5. No Additional Waiver Implied by One Waiver........................................................ 36
ARTICLE IX
MISCELLANEOUS
Section 9.1. Term of Agreement................................................................................. 36
Section 9.2. Notices........................................................................................... 36
Section 9.3. Binding Effect.................................................................................... 37
Section 9.4. Severability...................................................................................... 38
Section 9.5. Amounts Remaining in Funds........................................................................ 38
Section 9.6. Amendments, Changes and Modifications............................................................. 38
2
<PAGE>
Section 9.7. Execution in Counterparts......................................................................... 38
Section 9.8. Applicable Law.................................................................................... 38
Section 9.9. Captions.......................................................................................... 38
EXHIBIT A Project Facilities
EXHIBIT B Form of Requisition
</TABLE>
3
<PAGE>
LOAN AGREEMENT
THIS LOAN AGREEMENT, dated as of November 1, 1997, between the
CITY OF GAINESVILLE, FLORIDA, a municipal corporation of the State of Florida
(the "Issuer") and EXACTECH, INC., a corporation organized and existing under
the laws of the State of Florida (the "Company");
W I T N E S S E T H:
That the parties hereto, intending to be legally bound hereby,
and for and in consideration of the premises and the mutual covenants
hereinafter contained, do hereby covenant, agree and bind themselves as follows:
provided, that any obligation of the Issuer created by or arising out of this
Agreement shall never constitute a debt or a pledge of the faith and credit or
the taxing power of the Issuer or any political subdivision or taxing district
of the State of Florida but shall be payable solely out of the Trust Estate (as
defined in the Indenture), anything herein contained to the contrary by
implication or otherwise notwithstanding:
ARTICLE I
DEFINITIONS
Section 1.1. DEFINITIONS. All capitalized, undefined terms
used herein shall have the same meanings as used in Article I of the hereinafter
defined Indenture. In addition, the following words and phrases shall have the
following meanings:
"Cost" with respect to the Project shall be deemed to include
all items permitted to be financed under the provisions of the Code and the Act.
"Default" means any Default under this Agreement as specified
in and defined by Section 8.1 hereof.
"Indenture" means the Indenture of Trust dated as of this date
between the Issuer and the Trustee, pursuant to which the Bonds are authorized
to be issued, and any amendments and supplements thereto.
"Issuance Costs" shall have the meaning provided in Section
1.150-1(b) of the Income Tax Regulations and means, therefore, costs to the
extent incurred in connection with, and allocable to, the issuance of the Bonds,
including, but not limited to, (a) underwriter's spread (whether realized
directly or derived through purchase of the Bonds at a discount below the price
at which they are expected to be sold to the public); (b) counsel fees
(including bond counsel, underwriter's counsel, Issuer's counsel, Company
counsel, as well as any other specialized counsel fees incurred in connection
with the issuance of the Bonds;
<PAGE>
(c) financial advisory fees incurred in connection with the issuance of the
Bonds; (d) rating agency fees; (e) Trustee fees incurred in connection with the
issuance of the Bonds; (f) paying agent fees; (g) registrar, certification and
authentication fees related to issuance of the Bonds; (h) accounting fees
related to the issuance of the Bonds; (i) printing costs of the Bonds and of the
preliminary and final offering materials; (j) publication costs associated with
the financing proceedings; (k) costs of engineering and feasibility studies
necessary to the issuance of the Bonds; and (l) bond insurance premiums, letter
of credit fees, or other forms of guarantee fees except to the extent such fees
are for qualified guarantees (as defined in Section 1.148-4(f) of the Income Tax
Regulations).
"Net Proceeds" means the proceeds from the sale of the Bonds
reduced by any portion thereof deposited in a debt service reserve fund.
"Plans and Specifications" means the plans and specifications
for the Project submitted to the Bank and the Trustee.
"Project" means the Project Site and the Project Facilities.
"Project Facilities" means those certain buildings or
improvements to buildings and all other facilities and improvements and any
items of machinery, equipment, or other tangible property forming a part of the
Project to be constructed on the Project Site, all as described generally in
Exhibit "A" hereto and all renewals and replacements thereof and substitutions
therefor.
"Project Site" means the approximately 7.5-acre tract of land
located in the Northwest Commercial Park in the City of Gainesville, Florida on
which the Project Facilities will be situated, and any other interests in real
property, leasehold interests, easements, licenses, and rights in real property
hereafter acquired by the Company with proceeds of the Bonds for use in
connection with the Project.
"Qualified Project Costs" means Costs paid or incurred with
respect to the Project:
(a) for the acquisition, construction, reconstruction, or
improvement (i) of land or (ii) of property that is subject to exhaustion, wear
and tear, or obsolescence, that has a useful life in the hands of the Company of
more than one year, and that is otherwise of a character subject to the
allowance for depreciation under the Code; and
2
<PAGE>
(b) that, under the Code, are chargeable to the Project's
capital account or would be so chargeable either (i) with a proper election by
the Company (for example, under Section 266 of the Code), or (ii) but for a
proper election by the Company to deduct such amounts.
However, Costs paid prior to December 27, 1996, other than "preliminary
expenditures" as defined in Section 1.150-2(f) of the Income Tax Regulations,
are not Qualified Project Costs. Further, neither working capital expenditures
nor the financing of inventory nor Issuance Costs are Qualified Project Costs.
Interest costs accruing during the construction period shall be allocated
between Qualified Project Costs and other Costs to be paid from the proceeds of
the Bonds. Interest costs accruing after the Construction Period are not
Qualified Project Costs.
"Requisition" means a written request for a disbursement from
the Construction Fund, signed by a Company Representative, substantially in the
form attached hereto as Exhibit "B" and satisfactorily completed as contemplated
by said form.
"State" means the State of Florida.
"Substantially All" means ninety-five percent (95%) or more,
unless an opinion of Bond Counsel is rendered indicating that such term, as used
herein, shall have a different meaning.
"Tender Agent Agreement" means the Tender Agent Agreement
dated as of November 1, 1997, among the Company, the Trustee and the Tender
Agent, and any amendments or supplements thereto.
"Term of Agreement" means the term of this Agreement as
specified in Section 9.1 hereof.
Section 1.2. USES OF PHRASES. Words of the masculine gender
shall be deemed and construed to include correlative words of the feminine and
neuter genders. Unless the context shall otherwise indicate, the words "Bond,"
"Bondholder," "registered owner" and "person" shall include the plural as well
as the singular number and the word "person" shall include corporations and
associations, including public bodies, as well as persons. "Herein," "hereby,"
"hereunder," "hereof," "hereinbefore," "hereinafter" and other equivalent words
refer to this Agreement and not solely to the particular portion thereof in
which any such word is used. Any percentage of Bonds, specified herein for any
purpose, is to be figured on the unpaid principal amount thereof then
outstanding. All references herein to specific Sections of the Code refer to
such Sections of the Code and all successor or replacement provisions thereto.
3
<PAGE>
ARTICLE II
REPRESENTATIONS, COVENANTS AND WARRANTIES
Section 2.1. AGREEMENTS OF THE PARTIES. It is hereby agreed by
and between the Issuer and the Company that:
(a) The Company proposes to acquire, construct and equip the
Project. The Issuer proposes to loan money to the Company for the
construction and equipping of a manufacturing facility pursuant to the
terms and conditions expressed herein, all for the purposes of
fostering the industrial and business development of, and improving
living conditions in, the City of Gainesville, Florida and otherwise
contributing to the welfare of the State of Florida and its
inhabitants.
(b) To finance a portion of the Cost of the Project, the
Issuer proposes to issue the Bonds in the original aggregate principal
amount of $3,900,000, and to loan the proceeds of the Bonds to the
Company.
(c) All of the Bonds will be issued under the Indenture and
will mature, bear interest, be redeemable and have the other terms and
provisions set forth in the Indenture, pursuant to which the Issuer's
interest in this Agreement and the revenues and receipts thereunder
derived by the Issuer will be pledged and conveyed to the Trustee as
security for payment of the principal of, premium, if any, and interest
on the Bonds.
Section 2.2. REPRESENTATIONS, COVENANTS AND WARRANTIES OF THE
ISSUER. The Issuer represents, covenants and warrants that:
(a) The Issuer is a municipal corporation of the State of
Florida. The Issuer is authorized to enter into the transactions
contemplated by this Agreement and the Indenture and to carry out its
obligations hereunder and thereunder. The Issuer has been duly
authorized to execute and deliver this Agreement and the Indenture.
(b) The Issuer duly adopted its Resolution No. 960876 on
February 24, 1997, to induce the Company to acquire, construct and
equip the Project in the City of Gainesville, Florida.
(c) The Issuer covenants that it will not pledge the amounts
derived from this Agreement other than as contemplated by the
Indenture.
4
<PAGE>
(d) After reasonable public notice given by publication in THE
GAINESVILLE SUN, a newspaper published and of general circulation in
the City of Gainesville, Florida on February 7, 1997, the Issuer held a
public hearing concerning the issuance of the Bonds and the nature and
location of the Project, and after such hearing, the City Commission,
the elected legislative body of the Issuer, approved the issuance of
the Bonds by duly adopting Resolution No. 960876. The Issuer has
jurisdiction over the entire area in which the Project will be located.
(e) As of the date hereof, the Issuer has received from the
Division of Bond Finance of the State Board of Administration written
confirmation of an allocation to the Bonds of $3,900,000 of the total
yearly state allocation of private activity bonds, in accordance with
Part VI, Chapter 159, Florida Statutes, as amended.
Section 2.3. REPRESENTATIONS, COVENANTS AND WARRANTIES OF THE
COMPANY. The Company represents, covenants and warrants that:
(a) The Company is a corporation duly organized and validly
existing under the laws of the State of Florida. The Company is not in
violation of any provision of its Articles of Incorporation, as
amended, has the corporate power to enter into and perform this
Agreement, and has duly authorized by proper corporate action the
execution and delivery of this Agreement, and is qualified to do
business and is in good standing under the laws of the State.
(b) The Company agrees that during the Term of Agreement it
will maintain its existence, will not directly or indirectly (whether
in one transaction or a series of transactions), (i) enter into any
merger, consolidation or amalgamation; (ii) liquidate, wind up or
dissolve itself (or suffer any liquidation or dissolution); (iii)
acquire by purchase or otherwise all or substantially all the business
or assets, or stock or other evidence of beneficial ownership, of any
Person; (iv) sell, transfer or pledge all or substantially all of its
assets to any other Person; (v) make any material change in its present
method of conducting business; or (vi) enter into any agreement or
transaction to do or permit any of the foregoing, unless (A) the
survivor of such transaction, if other than the Company, assumes all of
the obligations of the Company hereunder, the Company or such other
survivor shall immediately upon the conclusion of any such transaction
be in compliance with all obligations of the Company hereunder, and
such survivor, if other than the Company, shall have a Net Worth at
least equal to the Net
5
<PAGE>
Worth of the Company immediately preceding such transaction, or (B)
the Bank shall have consented thereto in writing, which consent shall
not be withheld unreasonably. As used herein, the term "Net Worth"
means the aggregate depreciated book value of all assets, both
tangible and intangible, less all liabilities, all as determined in
accordance with generally accepted accounting principles.
(c) Neither the execution and delivery of this Agreement, the
Remarketing Agreement, the Credit Agreement, the Tender Agent Agreement
or the Pledge Agreement, nor the consummation of the transactions
contemplated hereby and thereby, nor the fulfillment of or compliance
with the terms and conditions hereof or thereof conflicts with or
results in a breach of the articles of incorporation or the bylaws of
the Company or the terms, conditions, or provisions of any agreement or
instrument to which the Company is now a party or by which the Company
is bound, or constitutes a default under any of the foregoing, or
results in the creation or imposition of any lien, charge or
encumbrance whatsoever upon any of the property or assets of the
Company under the terms of any such instrument or agreement, except
such liens as are created or imposed by this Agreement, the Remarketing
Agreement, the Credit Agreement, the Tender Agent Agreement or the
Pledge Agreement.
(d) There is no action, suit, proceeding, inquiry or
investigation, at law or in equity, before or by any court, public
board or body, known to be pending or, to the best knowledge of the
Company, threatened against or affecting the Company or any of its
officers, nor to the best knowledge of the Company is there any basis
therefor, wherein an unfavorable decision, ruling, or finding would
materially adversely affect the transactions contemplated by this
Agreement or which would adversely affect, in any way, the validity or
enforceability of the Bonds, this Agreement, the Pledge Agreement, the
Tender Agent Agreement, the Credit Agreement, the Remarketing
Agreement, or any agreement or instrument to which the Company is a
party, used or contemplated for use in the consummation of the
transactions contemplated hereby.
(e) The Project is of the type authorized and permitted by the
Act, and its estimated Cost is not less than $3,900,000.
(f) The Net Proceeds from the sale of the Bonds will be used
only for payment of Costs of the Project. None of the Net Proceeds from
the sale of the Bonds will be used as working capital or to finance
inventory.
6
<PAGE>
(g) The Company will use due diligence to cause the Project to
be operated in accordance with the laws, rulings, regulations and
ordinances of the State and the departments, agencies and political
subdivisions thereof. The Company has obtained or will cause to be
obtained all requisite approvals of the State and of other federal,
state, regional and local governmental bodies for the acquisition,
construction, improving and equipping of the Project.
(h) The Company will fully and faithfully perform all the
duties and obligations which the Issuer has covenanted and agreed in
the Indenture to cause the Company to perform, any duties and
obligations which the Company is required in the Indenture to perform
and any delegable or assignable duties and obligations which the Issuer
is required in the Indenture to perform and which have been delegated
or assigned to the Company. The foregoing shall not apply to any duty
or undertaking of the Issuer which by its nature cannot be delegated or
assigned.
(i) Except for any architectural, engineering, surveying, soil
testing, or similar preliminary activities occurring earlier, the
commencement of the acquisition and construction of the Project, and
each of the several components thereof, occurred subsequent to December
27, 1996, which is sixty days prior to the date of adoption by the
Issuer of Resolution No. 960876. No proceeds of any Bonds will be used
to reimburse the Company for amounts paid prior to December 27, 1996,
other than for "preliminary expenditures" as defined in Section
1.150-2(f) of the Income Tax Regulations.
(j) The Project presently constitutes, and at the completion
thereof and until the expiration of the Term of Agreement will
constitute, a "project" and a "manufacturing plant" within the meaning
of Section 159.27(5), Florida Statutes.
(k) The Company has entered into various contracts providing
for the acquisition, construction, improvement and equipping of the
Project that collectively create a substantial binding commitment on
the Company's part to expend at least five percent (5%) of the Net
Proceeds of the Bonds on the Project.
(l) The Project consists of land and/or property subject to
the allowance for depreciation under the Code, and Substantially All of
the Net Proceeds of the Bonds, including earnings from the investment
thereof, will be used to pay Qualified Project Costs.
7
<PAGE>
(m) No changes shall be made in the Project and no actions
will be taken by the Company that shall in any way cause interest on
the Bonds to be included in gross income for federal income tax
purposes.
(n) Based on current facts, estimates and circumstances, the
Company currently expects:
(1) that the acquisition, construction and equipping
of the Project and the expenditure of all of the net sale
proceeds of the Bonds will be completed by October 31, 1998;
(2) to proceed with due diligence toward completion
of the Project (the work on which has already commenced) and
the expenditure of the Net Proceeds of the Bonds in connection
with the Project;
(3) the Net Proceeds of the Bonds are needed for the
purpose of paying all or a part of the Cost of the Project;
and
(4) the Project will not be sold or disposed of in a
manner producing sale proceeds which, together with
accumulated proceeds of the Bonds or earnings thereon, would
be sufficient to enable the Company to retire substantially
all of the Bonds prior to the maturity of the Bonds.
(o) As of the date of execution and delivery of this
Agreement, there exists no Default or any condition or event which
would constitute, or with the passage of time or the giving of notice,
or both, would constitute a Default hereunder.
(p) The average maturity of the Bonds does not exceed one
hundred twenty percent (120%) of the average reasonably expected
economic life of the assets being financed with the proceeds of the
Bonds, with the average reasonably expected economic life of each asset
being measured from the later of the date of issuance of the Bonds or
the date such asset is reasonably expected to be placed in service and
by taking into account the respective cost of each asset being
financed. The information furnished by the Company and used by the
Issuer to verify the average reasonably expected economic life of each
asset of the Project to be financed with the proceeds of the Bonds is
true, accurate and complete.
(q) (i) The payment of principal or interest with
8
<PAGE>
respect to the Bonds will not be guaranteed (in whole or in part) by
the United States (or any agency or instrumentality thereof); (ii)
less than five percent (5%) of the proceeds of the Bonds will be (A)
used in making loans the payment of principal and interest with
respect to which are to be guaranteed (in whole or in part) by the
United States (or any agency or instrumentality thereof), or (B)
invested (directly or indirectly) in federally insured deposits or
accounts as defined in Section 149(b) of the Code; and (iii) the
payment of principal or interest on the Bonds will not otherwise be
indirectly guaranteed (in whole or in part) by the United States (or
any agency or instrumentality thereof).
The foregoing provisions of this subsection shall not apply to
proceeds of the Bonds being (u) invested for an initial temporary
period until such proceeds are needed for the purpose for which such
issue was issued; (v) held in a bona fide debt service fund; (w) held
in a debt service reserve fund that meets the requirements of Section
148(d) of the Code with respect to reasonably required reserve or
replacement funds; (x) invested in obligations issued by the United
States Treasury; or (y) held in a refunding escrow (I.E., a fund
containing proceeds of a refunding bond issue established to provide
for the payment of principal or interest on one or more prior bond
issues); or (z) invested in other investments permitted under
regulations promulgated pursuant to Section 149(b)(3)(B) of the Code.
(r) Any information has been or will be supplied by the
Company that has been or will be relied upon by the Issuer, the Trustee
and by Bond Counsel with respect to the eligibility of the Project and
the exclusion from gross income for federal income tax purposes of
interest on the Bonds is true and correct.
(s) All proceeds of the Bonds will be used to pay the "cost"
(within the meaning of Section 159.44(5), Florida Statutes) of the
Project.
(t) The Company shall promptly provide written notice to the
Issuer and the Trustee if the Company becomes aware of a Default as
such term is used in Section 8.1 hereof.
(u) All components of the Project are or will be located
wholly within the boundaries of the Project Site, and the Project Site
is located completely within the incorporated limits of the City of
Gainesville, Florida.
(v) This Agreement constitutes a valid and binding obligation
of the Company enforceable against the Company in
9
<PAGE>
accordance with its terms, except to the extent that enforceability
thereof may be limited by bankruptcy, reorganization, insolvency or
similar laws relating to enforcement of creditors' rights generally and
applicable laws or equitable principles that may affect remedies.
(w) There is no other bond or issue of bonds, the interest on
which is tax exempt pursuant to Section 144(a) of the Code or Section
103(b)(6) of the Internal Revenue Code of 1954, as amended, part or all
of the net proceeds of which are to be used with part or all of the net
proceeds of the Bonds with respect to a single building, an enclosed
shopping mall, or a strip of offices, stores or warehouses using
substantial common facilities, as contemplated by Section 144(a)(9) of
the Code. There are no common heating, cooling or other facilities
shared by the Project and by any other facility financed with
tax-exempt bonds. There are no common entrances, plazas, malls,
lobbies, parking, elevators or stairways shared by the Project and any
other facility financed with tax-exempt bonds for use by employees or
patrons of the Project and such facility.
(x) Neither the Company nor persons related (as such term is
used in the Code) to the Company are owners or principal users (as such
term is used in the Code) of any facility (other than the Project) in
the incorporated limits of the City of Gainesville, Florida, or outside
of, but contiguous with, the incorporated limits of the City of
Gainesville, Florida.
(y) The Project is not integrated with any facility located
outside of the incorporated limits of the City of Gainesville, Florida.
(z)(i) The aggregate authorized face amount of the Bonds
allocated to any test-period beneficiary (as such term is used in the
Code), when increased by the outstanding tax-exempt facility-related
bonds (within the meaning of Section 144(a)(10) of the Code) of such
beneficiary, does not exceed $40,000,000. (ii) For purposes of
applying subparagraph (i) above, with respect to any issue, the
outstanding tax-exempt facility-related bonds of any person who is a
test-period beneficiary, as such term is used in the Code, with
respect to such issue is the aggregate face amount of all tax-exempt
bonds which, within the meaning of Section 144(a)(10)(B)(ii) of the
Code, are exempt facility bonds, qualified small issue bonds and
qualified redevelopment bonds or industrial development bonds (as
defined in Section 103(b)(2) of the Internal Revenue Code of 1954, as
in effect on the date before the date of enactment of the Tax Reform
Act of 1986) to which
10
<PAGE>
Section 141(a) of the Code does not apply: (A) which are allocated to
such beneficiary, and (B) which are outstanding on the date of issuance
of the Bonds (not including as outstanding any obligation which is to
be redeemed from the proceeds of the Bonds). (iii) The amount of any
issue shall be allocated so that: (y) except as may otherwise be
provided in regulations promulgated under Section 144(a)(10)(C) of the
Code, the portion of the face amount of any issue allocated to any
test-period beneficiary of the facility financed by the proceeds of
such issue (other than an owner of such facility) is an amount which
bears the same relationship to the entire face amount of such issue as
the portion of such facility used by such beneficiary bears to the
entire facility; and (z) except as otherwise provided in regulations
promulgated under Section 144(a)(10)(C) of the Code, the portion of the
face amount of an issue allocated to any test period beneficiary who is
an owner of a facility financed by the proceeds of such issue is an
amount which bears the same relationship to the entire face amount of
such issue as the portion of such facility owned by such beneficiary
bears to the entire facility.
(aa) The information furnished by the Company and used by the
Issuer in making its election to issue the Bonds pursuant to Section
144(a)(4) of the Code was true and complete as of the date hereof.
(bb) No customer of the Company is expected to purchase ten percent
(10%) or more of the Company's annual output from the Project during
the first three years after the initial issuance of Bonds.
(cc) The Project constitutes a "manufacturing facility" within the
meaning and contemplation of Section 144(a)(12) of the Code, and any
office space included as part of the Project will be (i) located at or
within the Project, (ii) directly related to the day-to-day
manufacturing operations at the Project, and (iii) DE MINIMIS in size
and cost in relation to the size and cost of the Project.
Section 2.4. NOTICE OF DETERMINATION OF TAXABILITY. Promptly
after the Company first becomes aware of any Determination of Taxability, the
Company shall give written notice thereof to the Issuer and the Trustee.
11
<PAGE>
ARTICLE III
ACQUISITION AND CONSTRUCTION OF THE
PROJECT; ISSUANCE OF THE BONDS
Section 3.1. AGREEMENT TO ACQUIRE, CONSTRUCT, IMPROVE AND
EQUIP THE PROJECT. The Company agrees to make all contracts and do all things
necessary for the acquisition, construction, improving, and equipping of the
Project, with or without advertising for bids, and the Company agrees that it
will cause the Project Facilities to be constructed on the Project Site
substantially in accordance with the Plans and Specifications. The Company may
make such change orders as it deems necessary or desirable provided, however,
that any change orders the cost of which, either individually or in the
aggregate, shall exceed $25,000 shall be subject to the prior written approval
of the Bank.
The Company further agrees that it will acquire, construct,
improve, and equip the Project with all reasonable dispatch and use its best
efforts to cause acquisition, construction, improving, equipping, and occupancy
of the Project to be completed by October 31, 1998, or as soon thereafter as may
be practicable, delays caused by FORCE MAJEURE as defined in Section 8.1 hereof
only excepted; but if for any reason such acquisition, construction, improving
and equipping is not completed by said date there shall be no resulting
liability on the part of the Company and no diminution in or postponement of the
payments required in Section 4.2 hereof to be paid by the Company.
Section 3.2. AGREEMENT TO ISSUE THE BONDS; APPLICATION OF BOND
PROCEEDS. In order to provide funds for the payment of the Cost of the Project,
the Issuer, concurrently with the execution of this Agreement, will issue, sell,
and deliver the Bonds and deposit the net proceeds thereof (after payment of the
fees and expenses of the placement agent) with the Trustee in the Construction
Fund.
Section 3.3. DISBURSEMENTS FROM THE CONSTRUCTION FUND. The
Issuer has, in the Indenture, authorized and directed the Trustee to make
disbursements from the Construction Fund to pay the Costs of the Project, or to
reimburse the Company for any Cost of the Project paid by the Company, or to
deposit funds to any debt service reserve fund. The Trustee shall not make any
disbursement from the Construction Fund (other than for a deposit to any debt
service reserve fund) until the Company shall have provided the Trustee with a
Requisition, which Requisition shall be approved by the Bank; provided that the
Trustee may transfer amounts from the Construction Fund to the Bond Fund related
to the payment of interest on the Bonds through the Completion Date without a
Requisition.
12
<PAGE>
Section 3.4. FURNISHING DOCUMENTS TO THE TRUSTEE. The Company
agrees to cause such Requisitions to be directed to the Trustee as may be
necessary to effect payments out of the Construction Fund in accordance with
Section 3.3 hereof.
Section 3.5. ESTABLISHMENT OF COMPLETION DATE.
(a) The Completion Date as to the Project shall be evidenced
to the Issuer and the Trustee by a certificate signed by a Company
Representative stating that, except for amounts retained by the Trustee at the
Company's direction to pay any Cost of the Project not then due and payable, (i)
construction of the Project has been completed and all costs of labor, services,
materials and supplies used in such construction have been paid, (ii) all
equipment for the Project has been installed, such equipment so installed is
suitable and sufficient for the operation of the Project, and all costs and
expenses incurred in the acquisition and installation of such equipment have
been paid, and (iii) all other facilities necessary in connection with the
Project have been acquired, constructed, improved, and equipped and all costs
and expenses incurred in connection therewith have been paid. Notwithstanding
the foregoing, such certificate shall state that it is given without prejudice
to any rights against third parties which exist at the date of such certificate
or which may subsequently come into being. Forthwith upon completion of the
acquisition, construction, improving, and equipping of the Project, the Company
agrees to cause such a certificate to be furnished to the Issuer and the
Trustee. Upon receipt of such certificate, the Trustee shall retain in the
applicable account in the Construction Fund a sum equal to the amounts necessary
for payment of the Costs of the Project not then due and payable according to
such certificate. If any such amounts so retained are not subsequently used,
prior to any transfer of said amounts to the General Account of the Bond Fund as
provided below, the Trustee shall give notice to the Company of the failure to
apply said funds for payment of the Costs of the Project. Any amount not to be
retained in the Construction Fund for payment of the Costs of the Project, and
all amounts so retained but not subsequently used, shall be transferred by the
Trustee into the General Account of the Bond Fund.
(b) If less than Substantially All of the Net Proceeds of the
Bonds then Outstanding has been used to pay Qualified Project Costs, any amount
(exclusive of amounts retained by the Trustee in the applicable account in the
Construction Fund for payment of Costs of the Project not then due and payable)
remaining in the Construction Fund shall be transferred by the Trustee into the
General Account of the Bond Fund and used by the Trustee (a) to redeem, or to
cause the redemption of, Bonds on the earliest redemption date permitted by the
Indenture without a premium, (b) to purchase Bonds on the open market prior to
such redemption date
13
<PAGE>
at prices not in excess of one hundred percent (100%) of the principal amount of
such Bonds, or (c) for any other purpose provided that the Trustee is furnished
with an opinion of Bond Counsel to the effect that such use is lawful under the
Act, if applicable, and will not require that interest on the Bonds be included
in gross income for federal income tax purposes. Until used for one or more of
the foregoing purposes, such segregated amount may be invested as permitted by
the Indenture provided that prior to any such investment, if applicable, the
Trustee is provided with an opinion of Bond Counsel to the effect that such
investment will not cause interest on the Bonds to be included in gross income
for federal income tax purposes.
Section 3.6. COMPANY REQUIRED TO PAY IN EVENT CONSTRUCTION
FUND INSUFFICIENT. In the event the moneys in the Construction Fund available
for payment of the Costs of the Project should not be sufficient to pay the
Costs of the Project in full, the Company agrees to complete the Project and to
pay that portion of the Costs of the Project in excess of the moneys available
therefor in the Construction Fund. The Issuer does not make any warranty, either
express or implied, that the moneys paid into the Construction Fund and
available for payment of the Costs of the Project will be sufficient to pay all
of the Costs of the Project. The Company agrees that if after exhaustion of the
moneys in the Construction Fund, the Company should pay any portion of the Costs
of the Project pursuant to the provisions of this Section, the Company shall not
be entitled to any reimbursement therefor from the Issuer, the Trustee or the
Owners of any of the Bonds, nor shall the Company be entitled to any diminution
of the amounts payable under Section 4.2 hereof.
Section 3.7. ARBITRAGE; PRESERVATION OF TAX-EXEMPTION. The
Issuer and the Company each agree and covenant that neither the proceeds of the
Bonds nor the funds held by the Trustee under the Indenture will be used in such
manner as to cause any Bond to be an "arbitrage bond" within the meaning of
Section 148 of the Code, as amended, as implemented by such proposed, temporary
and final Regulations as have been or may hereafter be adopted by the United
States Treasury Department thereunder. The Company further agrees and covenants
not to take any action, the result of which would cause or be likely to cause
the interest payable with respect to the Bonds not to be excluded from gross
income for federal income tax purposes, other than those Bonds held by any
person who, within the meaning of Section 147(a) of the Code, shall be deemed a
"substantial user" of the Project or a "related person" to a "substantial user."
The Company will comply with the applicable requirements of Section 103 and Part
IV of Subchapter B of Chapter 1 of Subtitle A of the Code to the extent
necessary to preserve the exclusion of interest on the Bonds from gross income
of the Bondholders thereof for federal income tax purposes.
14
<PAGE>
Section 3.8. CERTAIN COVENANTS WITH RESPECT TO COMPLIANCE WITH
ARBITRAGE REQUIREMENTS FOR INVESTMENTS IN NONPURPOSE INVESTMENTS AND REBATE TO
THE UNITED STATES OF AMERICA. Section 148(f) of the Code, as implemented by
Section 1.148-1 to 1.148-11 of the Income Tax Regulations (the "Rebate
Provisions"), requires that, with certain exceptions, the Issuer pay to the
United States of America the Rebate Amount. The Company hereby assumes and
agrees to make all payments for deposit into the Rebate Fund, in accordance with
the terms of Section 6.13 of the Indenture, to pay the Rebate Amount, consents
to the payment of the Rebate Amount by the Trustee in accordance with the terms
and provisions of Section 6.13 of the Indenture, and agrees to pay any amounts
in addition to the Rebate Amount, including all interest and penalties, if any,
related thereto to the extent that funds available therefor held by the Trustee
under the Indenture are not sufficient for such purpose. The Company agrees to
indemnify, protect and hold harmless the Issuer and the Trustee with respect to
any nonpayment of the Rebate Amount and such interest and penalties, and the
Trustee with respect to the unavailability or insufficiency of funds with which
to make such payments, and with respect to any expenses or costs incurred by the
Trustee in complying with the terms of Section 6.13 of the Indenture. The
Company hereby agrees to fully and timely comply with the requirements of
Section 6.13 of the Indenture.
Section 3.9. COVENANTS AS TO USE OF BOND PROCEEDS AND OTHER
MATTERS, PAYBACK PROVISION. (a) The Company covenants and agrees that:
(i) Substantially All of the Net Proceeds received from the
sale of the Bonds actually disbursed from the Construction Fund, and
investment earnings thereon, will be used for payment of Qualified
Project Costs;
(ii) (A) until disbursements from the Construction Fund have been
made of all Issuance Costs to be paid from proceeds of the Bonds, the
Company will not submit to the Trustee any requisition for a
disbursement from the Construction Fund unless the expenditure of such
disbursement will either be for Qualified Project Costs or for Issuance
Costs;
(B) after all Issuance Costs to be paid with proceeds
of the Bonds have been requisitioned and until the date on which the
aggregate Qualified Project Costs paid as of that date equals or
exceeds Substantially All of the Costs of the Project paid as of that
date from proceeds of the Bonds, including investment earnings thereon,
the Company will not submit to the Trustee any requisition for a
disbursement from the Construction Fund
15
<PAGE>
unless the expenditure of such disbursement will be for Qualified
Project Costs; and
(C) after such date, the Company will not submit to
the Trustee any requisition for a disbursement from the Construction
Fund if, after the expenditure of such disbursement, less than
Substantially All of the Net Proceeds of the Bonds and investment
earnings thereon actually disbursed to that time would have been used
to pay Qualified Project Costs;
(iii) the Company will not submit to the Trustee any requisition for
a disbursement from the Construction Fund for Issuance Costs if, after
the expenditure of such disbursement, more than two percent (2%) of the
proceeds of the Bonds actually disbursed to that time would have been
used to pay Issuance Costs;
(iv) in the event a disbursement from the Construction Fund is made
which results in the covenants in paragraphs (i), (ii) or (iii) above
being violated, the Company will promptly repay to the Trustee for
deposit in the Construction Fund such amount as may be necessary for
the Company to again be in compliance with paragraphs (i), (ii) or
(iii) above;
(v) less than twenty-five percent (25%) of the Net Proceeds of
the Bonds shall be used (either directly or indirectly) to acquire land
or an interest therein;
(vi) no more than twenty-five percent (25%) of the Net Proceeds of
the Bonds shall be used (either directly or indirectly) to provide a
facility the primary purpose of which is retail food and beverage
services, automobile sales or service, or the provision of recreation
or entertainment or any combination thereof;
(vii) none of the proceeds from the issuance of the Bonds shall be
used to provide, any private or commercial golf course, country club,
massage parlor, tennis club, skating facility (including roller
skating, skateboard and ice skating), racquet sports facility
(including any handball or racquetball court), hot tub facility, suntan
facility, racetrack, airplane, skybox or other private luxury box,
health club facility, any facility primarily used for gambling, or any
store the principal business of which is the sale of alcoholic
beverages for consumption off premises, or land (or any interest
therein) to be used for farming purposes;
16
<PAGE>
(viii) less than five percent (5%) of the Net Proceeds of the Bonds
shall be used directly or indirectly to provide residential real
property for family units;
(ix) the Company shall not allow any portion of the Net Proceeds of
the Bonds to be used for the acquisition of any property or an interest
therein (other than land) unless the first use of such property is
pursuant to such acquisition; and provided further, that this covenant
shall not apply with respect to any building (and the equipment
therefor), if (A) the rehabilitation expenditures, as such term is used
in section 147(d)(2) of the Code, with respect to such building equal
or exceed (B) fifteen percent (15%) of the portion of the cost of the
acquiring such building (and equipment) financed with the proceeds of
the Bonds;
(x) no "test-period beneficiary" (as defined in Section
144(a)(10) of the Code) with respect to the Bonds has been allocated
portions of the face amounts of "tax-exempt facility-related bonds"
(as defined in Section 144(a)(10) of the Code) outstanding on the date
hereof (but not including any obligations which are to be redeemed
from the proceeds of the Bonds), the aggregate amount of which, when
increased by the portion of the face amount of the Bonds allocable to
that test-period beneficiary, would exceed $40,000,000;
(xi) at no time within three years after the later of the date the
Bonds are issued or the date the Project is placed in service shall the
Company become an owner or a principal user, or permit or suffer a
related person (within the meaning of Section 144(a)(3) of the Code) to
become an owner or a principal user, or permit or suffer an owner or a
principal user of the Project or a related person thereto, to become an
owner or principal user of a facility financed with tax-exempt
facility-related bonds outstanding on the date of issuance of the Bonds
if the sum of (A) the portion allocated to the Company, a related
person thereto, or other owner or principal user of the Project (or
related person thereto) of the outstanding aggregate amount of the
tax-exempt facility-related bonds financing such facility, (B) the
portion allocated to the Company, related person thereto, or other
owner or principal user of the Project (or related person thereto) on
the date of issuance of the Bonds of the aggregate amount of other
then-outstanding tax-exempt facility-related bonds, and (C) the portion
allocated to the Company, related person thereto, or other owner or
principal user of the Project (or related person thereto)
17
<PAGE>
of the outstanding aggregate authorized face amount of the Bonds,
exceeds $40,000,000, all within the meaning of Section 144(a)(10) of
the Code and any Regulations promulgated thereunder; and
(xii) at no time within three years after the later of the date the
Bonds are issued or the date the Project is placed in service shall the
Company become a related person (within the meaning of Section
144(a)(3) of the Code) to an owner or a principal user of a facility
financed with tax-exempt facility-related bonds outstanding on the date
of issuance of the Bonds or permit or suffer any other owner or
principal user of the Project to become a related person to an owner or
principal user of such a facility if the sum of (A) the principal
allocated to such person of the outstanding aggregate amount of the
tax-exempt facility-related bonds financing such facility, (B) the
portion allocated to the Company or other owner or principal user of
the Project on the date of issuance of the Bonds of the aggregate
amount of other then-outstanding tax-exempt facility-related bonds, and
(C) the portion allocated to the Company or other owner or principal
user of the Project of the outstanding aggregate authorized face amount
of the Bonds, exceeds $40,000,000, all within the meaning of Section
144(a)(10) of the Code and any Regulations promulgated thereunder.
Section 3.10. DAMAGE, DESTRUCTION OR LOSS OF PROPERTY;
OBLIGATION TO REBUILD; USE OF INSURANCE PROCEEDS AND CONDEMNATION AWARDS. If
prior to full payment of all Bonds (or provision for payment thereof having been
made in accordance with the provisions of the Indenture), the Project, or any
part or component of the Project shall be damaged or destroyed, by whatever
cause, or shall be taken by any public authority or entity in the exercise of or
acquired under the threat of the exercise of its power of eminent domain, there
shall be no abatement or reduction in the Loan Installments payable under this
Agreement, and the Company will apply any insurance proceeds or condemnation
awards resulting from claims for such losses or takings as provided in this
Section.
If prior to full payment of all Bonds (or provision for
payment thereof having been made in accordance with the provisions of the
Indenture), the Project, or any part or component of the Project shall be
damaged, destroyed, or the Project or any part or component of the Project, the
Project Site shall be taken by eminent domain or the threat of exercise of
eminent domain, the Company shall promptly give, or cause to be given, written
notice thereof to the Issuer, the Bank and the Trustee. All proceeds received
from such property insurance with respect to the Project
18
<PAGE>
and all condemnation awards with respect to the Project shall be deposited with
the Trustee to the credit of the Construction Fund. Following the occurrence of
such an event with respect to the Project, the Company shall have the option of
(1) continuing to pay all amounts payable hereunder and to the extent permitted
below proceeding promptly to repair, rebuild, restore or replace the property
damaged, destroyed or taken, with such changes, alterations and modifications
(including the substitution and addition of other property) as may be desired by
the Company and, with respect to the Project, and as will comply with the
limitations contained in this Agreement, and the Trustee will deposit such
proceeds to the credit of the Construction Fund and make such disbursements
therefrom, in accordance with Section 3.3 hereof, as may be necessary to pay the
cost of such repair, rebuilding or restoration, either on completion thereof or
as the work progresses or (2) requesting the Issuer to cause the Bonds to be
redeemed in accordance with the terms of the Indenture.
Section 3.11. PURSUIT OF REMEDIES AGAINST CONTRACTORS,
SUBCONTRACTORS AND SURETIES. In the event of default of any contractor or
subcontractor, if any, under any contract made by it in connection with the
Project, the Company will promptly proceed, either separately or in conjunction
with others, to exhaust its remedies against the contractor or subcontractor so
in default and against each surety for the performance of such contract. The
Company agrees forthwith to take such actions as may be necessary or required to
protect the interests of all parties with respect to the Project unless directed
to the contrary by the Trustee. Any amounts recovered by way of damages,
refunds, adjustments or otherwise in connection with the foregoing that are
needed to pay a portion of the cost of the Project shall be paid into the
applicable account in the Construction Fund.
Section 3.12. CERTAIN COVENANTS WITH RESPECT TO CAPITAL
EXPENDITURES AND USE OF PROCEEDS OF THE BONDS. The Issuer is issuing the Bonds
pursuant to an election made by it under Section 144(a)(4) of the Code. It is
the intention of the parties hereto that the interest on the Bonds be and remain
excluded from gross income for federal income tax purposes and to that end the
Issuer and the Company hereby agree and covenant with each other, with the
Trustee, and the present and each of the future holders of the Bonds, as
follows:
(a) The Company and the Issuer represent that there have never
been issued any bonds with respect to "facilities" described in Section
144(a)(2) of the Code which are located in the City of Gainesville,
Florida, or facilities that are located outside of, but contiguous to,
the incorporated limits of the City of Gainesville, Florida, or
facilities that are located outside of the
19
<PAGE>
incorporated limits of the City of Gainesville, Florida, but are
integrated with the Project, which bonds would be taken into account
in determining the aggregate face amount of the Bonds as provided in
Section 144(a)(2) of the Code.
(b) The Company further covenants and represents that, for the
purposes of Section 144(a)(4) of the Code, the (i) aggregate principal
amount of the Bonds being issued, plus capital expenditures with
respect to the Project by any person, plus capital expenditures
heretofore made (other than those described in Section 144(a)(4)(C) of
the Code) by the Company, and any other person who is, or may become, a
principal user of the Project, with respect to "facilities" described
in Section 144(a)(4)(B) of the Code (of which the Project is one), have
not and will not exceed $10,000,000 (or any such larger amount as may
hereafter be permitted by the Code without affecting the status of the
interest on the Bonds as excluded from gross income for federal income
tax purposes) during the six-year period beginning three years before
the date of issuance and delivery of the Bonds.
(c) The Issuer and the Company further covenant and agree that
during the three-year period following the date of issuance and
delivery of the Bonds, neither of them shall make or cause or permit to
be made any capital expenditures (other than those mentioned in Section
144(a)(4)(C) of the Code) with respect to "facilities" described in
Section 144(a)(4)(B) of the Code which would cause the interest on the
Bonds to become included in gross income for federal income tax
purposes.
(d) The Company further covenants that, at no time within
three years after the later of the date the Bonds are issued or the
date the Project is placed in service, shall the Company become an
owner or a principal user, or permit or suffer a related person (within
the meaning of Section 144(a)(3) of the Code) to become an owner or a
principal user, or permit or suffer an owner or a principal user of the
Project or a related person thereto, to become an owner or principal
user of "facilities" described in Section 144(a)(4)(B) of the Code, if
the sum of (i) the aggregate face amount outstanding on the date of
issue of the Bonds of any tax-exempt bonds described in Section
144(a)(2) of the Code issued to finance such facilities, (ii) the
capital expenditures that had been made with respect to such
"facilities" during the six-year period beginning three
20
<PAGE>
years before the date of issuance and delivery of the Bonds,
(iii) the aggregate principal amount of the Bonds, and (iv) other
capital expenditures taken into account under Section 144(a)(4) of the
Code, would exceed $10,000,000.
(e) The Company further covenants that, at no time within
three years after the later of the date the Bonds are issued or the
date the Project is placed in service, shall the Company permit or
suffer an owner or a principal user of "facilities" described in
Section 144(a)(4)(B) of the Code or a related person thereto (within
the meaning of Section 144(a)(3) of the Code) to become an owner or a
principal user of the Project if the sum of (i) the aggregate face
amount outstanding on the date of issue of the Bonds of any tax-exempt
bonds described in Section 144(a)(2) of the Code issued to finance such
facilities, (ii) the capital expenditures that had been made with
respect to such "facilities" during the six-year period beginning three
years before the date of issuance and delivery of the Bonds, (iii) the
aggregate principal amount of the Bonds, and (iv) other capital
expenditures taken into account under Section 144(a)(4) of the Code,
would exceed $10,000,000.
(f) The Company further covenants that, at no time within
three years after the later of the date the Bonds are issued or the
date the Project is placed in service, shall the Company become a
related person (within the meaning of Section 144(a)(3) of the Code) to
an owner or a principal user of "facilities" described in Section
144(a)(4)(B) of the Code or permit or suffer any other owner or
principal user of the Project to become a related person to an owner or
principal user of such "facilities" if the sum of (i) the aggregate
face amount outstanding on the date of issue of the Bonds of any
tax-exempt bonds described in Section 144(a)(2) of the Code issued to
finance such facilities, (ii) the capital expenditures that had been
made with respect to such "facilities" during the six-year period
beginning three years before the date of issuance and delivery of the
Bonds, (iii) the aggregate principal amount of the Bonds, and (iv)
other capital expenditures taken into account under Section 144(a)(4)
of the Code, would exceed $10,000,000.
(g) The Company further agrees that should the capital
expenditures limitation set forth in Section 144(a)(4) be exceeded
during the six-year period referred to therein, and there shall occur a
"Determination of
21
<PAGE>
Taxability" as defined in Section 3.01(b) of the Indenture, the
Company shall promptly comply with the provisions of Section 5.1
hereof.
(h) The Company further covenants and agrees that it will
furnish to the Trustee a certificate of the Company within ninety (90)
days of the first three anniversary dates of closing of the issuance
and delivery of the Bonds which will reflect for the period beginning
three years prior to the date of issuance and delivery of the Bonds and
extending through the applicable date of such certificate, the
aggregate amount of capital expenditures (including as capital
expenditures for this purpose the principal amount of the Bonds) that
have been made or incurred with respect to "facilities" described in
Section 144(a)(4)(B) of the Code (of which the Project is one) that
must be taken into account in determining whether the $10,000,000 limit
applicable to the Bonds pursuant to Section 144(a)(4) of the Code has
been exceeded, and that such capital expenditures have not exceeded
$10,000,000.
(i) The Company represents and warrants that the Company is
expected to be the only principal user of the Project, as the term
"principal user" is utilized in Section 144(a) of the Code.
(j) The Company further covenants that it shall take, or
require to be taken, such further actions as are required of a
principal user of property financed by an issue of obligations which
are subject to the $10,000,000 limitation of Section 144(a)(4) of the
Code, which actions are set forth in Section 144(a) of the Code and the
regulations thereunder, whether said regulations are now or hereafter
adopted, proposed or temporary, including Section 1.103-10(b) of said
regulations.
(k) The Issuer and the Company further agree and covenant to
comply fully, during the term of this Agreement, with all effective
rules, rulings, regulations and decisions promulgated by the Department
of the Treasury or the Internal Revenue Service, with respect to bonds
issued under Section 144(a)(4) of the Code so as to maintain the status
of interest on the Bonds as excluded from gross income for federal
income tax purposes.
22
<PAGE>
ARTICLE IV
LOAN PROVISIONS; SUBSTITUTE LETTER OF CREDIT
Section 4.1. LOAN OF PROCEEDS. The Issuer agrees, upon the
terms and conditions contained in this Agreement and the Indenture, to lend to
the Company the proceeds received by the Issuer from the sale of the Bonds. Such
proceeds shall be disbursed to or on behalf of the Company as provided in
Section 3.3 hereof.
Section 4.2. AMOUNTS PAYABLE.
(a) The Company hereby covenants and agrees to repay the loan,
as follows: on or before any Interest Payment Date for the Bonds or any other
date that any payment of interest, premium, if any, or principal or Purchase
Price is required to be made in respect of the Bonds pursuant to the Indenture,
until the principal of, premium, if any, and interest on the Bonds shall have
been fully paid or provision for the payment thereof shall have been made in
accordance with the Indenture, in immediately available funds, a sum which,
together with any other moneys available for such payment in any account of the
Bond Fund, will enable the Trustee to pay the amount payable on such date as
Purchase Price or principal of (whether at maturity or upon redemption or
acceleration or otherwise), premium, if any, and interest on the Bonds as
provided in the Indenture; provided, however, that the obligation of the Company
to make any payment hereunder shall be deemed satisfied and discharged to the
extent of the corresponding payment made by the Bank to the Trustee under the
Letter of Credit.
It is understood and agreed that all payments payable by the
Company under subsection (a) of this Section 4.2 are assigned by the Issuer to
the Trustee for the benefit of the Owners of the Bonds. The Company assents to
such assignment. The Issuer hereby directs the Company and the Company hereby
agrees to pay to the Trustee at the Principal Office of the Trustee all payments
payable by the Company pursuant to this subsection.
(b) The Company will also pay the reasonable expenses of the
Issuer related to the issuance of the Bonds and any and all ongoing costs and
expenses for any continuing duties or obligations of the Issuer related in any
respect to the Bonds, this Agreement, the Indenture or any other documents
executed in connection therewith after the issuance of the Bonds.
(c) The Company will also pay the reasonable fees and expenses
of the Trustee under the Indenture and all other amounts which may be payable to
the Trustee under Section 10.02 of the
23
<PAGE>
Indenture, such amounts to be paid directly to the Trustee for the Trustee's own
account as and when such amounts become due and payable.
(d) The Company covenants, for the benefit of the Owners of
the Bonds, to pay or cause to be paid, to the Tender Agent, such amounts as
shall be necessary to enable the Tender Agent to pay the Purchase Price of Bonds
delivered to it for purchase, all as more particularly described in Sections
4.01, 4.02 and 4.04 of the Indenture; PROVIDED, however, that the obligation of
the Company to make any such payment under this subsection (d) shall be reduced
by the amount of moneys available for such payment described in subsection (i)
of Section 4.05 of the Indenture; and PROVIDED, FURTHER, that the obligation of
the Company to make any payment under this subsection (d) shall be deemed to be
satisfied and discharged to the extent of the corresponding payment made by the
Bank under the Letter of Credit.
(e) In the event the Company should fail to make any of the
payments required in this Section 4.2, the item or installment so in default
shall continue as an obligation of the Company until the amount in default shall
have been fully paid, and the Company agrees to pay the same with interest
thereon, to the extent permitted by law, from the date when such payment was
due, at the rate of interest borne by the Bonds.
Section 4.3. OBLIGATIONS OF COMPANY UNCONDITIONAL. The
obligations of the Company to make the payments required in Section 4.2 and to
perform and observe the other agreements contained herein shall be absolute and
unconditional and shall not be subject to any defense or any right of setoff,
counterclaim or recoupment arising out of any breach by the Issuer or the
Trustee of any obligation to the Company, whether hereunder or otherwise, or out
of any indebtedness or liability at any time owing to the Company by the Issuer
or the Trustee, and, until such time as the principal of, premium, if any, and
interest on the Bonds shall have been fully paid or provision for the payment
thereof shall have been made in accordance with the Indenture, the Company (i)
will not suspend or discontinue any payments provided for in Section 4.2 hereof,
(ii) will perform and observe all other agreements contained in this Agreement
and (iii) except as otherwise provided herein, will not terminate the Term of
Agreement for any cause, including, without limiting the generality of the
foregoing, failure of the Company to complete the acquisition, construction,
improving and equipping of the Project, the occurrence of any acts or
circumstances that may constitute failure of consideration, eviction or
constructive eviction, destruction of or damage to the Project, the taking by
eminent domain of title to or temporary use of any or all of the Project,
commercial frustration of purpose, any change in the tax or other laws of the
United States of America
24
<PAGE>
or of the State or any political subdivision of either thereof or any failure of
the Issuer or the Trustee to perform and observe any agreement, whether express
or implied, or any duty, liability or obligation arising out of or connected
with this Agreement. Nothing contained in this Section shall be construed to
release the Issuer from the performance of any of the agreements on its part
herein contained, and in the event the Issuer or the Trustee should fail to
perform any such agreement on its part, the Company may institute such action
against the Issuer or the Trustee as the Company may deem necessary to compel
performance so long as such action does not abrogate the obligations of the
Company contained in the first sentence of this Section.
Section 4.4. SUBSTITUTE LETTER OF CREDIT. The Company may
provide for the delivery to the Trustee of a Substitute Letter of Credit. Any
Substitute Letter of Credit shall be delivered to the Trustee not less than
sixty (60) days prior to the expiration of the Letter of Credit it is being
issued to replace, shall be dated as of a date prior to the expiration date of
the Letter of Credit for which the same is to be substituted (which date may be
subsequent to the date of delivery of such Substitute Letter of Credit, but in
all events such Substitute Letter of Credit shall become effective prior to the
expiration of the Letter of Credit for which it is substituted), and shall
expire on a date which is fifteen days after an Interest Payment Date for the
Bonds. On or before the date of such delivery of a Substitute Letter of Credit
to the Trustee, the Company shall furnish to the Trustee (a) written evidence
from each rating agency by which the Bonds are then rated, to the effect that
such rating agency has reviewed the proposed Substitute Letter of Credit and
that the substitution of the proposed Substitute Letter of Credit will not, by
itself, result in the reduction or withdrawal of the then applicable rating(s)
of the Bonds; (b) a written opinion of Bond Counsel stating that the delivery of
such Substitute Letter of Credit will not adversely affect the exclusion from
gross income of interest on the Bonds for federal income tax purposes; and (c) a
written opinion of counsel to the Substitute Bank to the effect that the
Substitute Letter of Credit is a legal, valid, binding and enforceable
obligation of the Substitute Bank in accordance with its terms.
25
<PAGE>
ARTICLE V
PREPAYMENT AND REDEMPTION
Section 5.1. PREPAYMENT AND REDEMPTION. The Company shall have
the option to prepay its obligations hereunder at the times and in the amounts
as necessary to exercise its option to cause the Bonds to be redeemed or
purchased as set forth in the Indenture and in the Bonds. The Company hereby
agrees that it shall prepay its obligations hereunder at the times and in the
amounts as necessary to accomplish the mandatory redemption of the Bonds as set
forth in the Indenture and in the Bonds. The Issuer, at the request of the
Company, shall forthwith take all steps (other than the payment of the money
required for such redemption) necessary under the applicable redemption
provisions of the Indenture to effect redemption of all or part of the
Outstanding Bonds, as may be specified by the Company, on the date established
for such redemption.
ARTICLE VI
SPECIAL COVENANTS
Section 6.1. NO WARRANTY OF CONDITION OR SUITABILITY BY
ISSUER. THE ISSUER MAKES NO WARRANTY, EITHER EXPRESS OR IMPLIED, AS TO THE
PROJECT OR THE CONDITION THEREOF, OR THAT THE PROJECT WILL BE SUITABLE FOR THE
PURPOSES OR NEEDS OF THE COMPANY. THE ISSUER MAKES NO REPRESENTATION OR
WARRANTY, EXPRESS OR IMPLIED, THAT THE COMPANY WILL HAVE QUIET AND PEACEFUL
POSSESSION OF THE PROJECT. THE ISSUER MAKES NO REPRESENTATION OR WARRANTY,
EXPRESS OR IMPLIED, WITH RESPECT TO THE MERCHANTABILITY, CONDITION OR
WORKMANSHIP OF ANY PART OF THE PROJECT OR ITS SUITABILITY FOR THE COMPANY'S
PURPOSES.
Section 6.2. ACCESS TO THE PROJECT. The Company agrees that
the Issuer, the Bank, the Trustee and their duly authorized agents, attorneys,
experts, engineers, accountants and representatives shall have the right to
inspect the Project at all reasonable times and on reasonable notice. The
Issuer, the Bank, the Trustee and their duly authorized agents shall also be
permitted, at all reasonable times and upon reasonable notice, to examine the
books and records of the Company with respect to the Project.
Section 6.3. FURTHER ASSURANCES AND CORRECTIVE INSTRUMENTS.
The Issuer and the Company agree that they will, from time to time, execute,
acknowledge and deliver, or cause to be executed, acknowledged and delivered,
such supplements hereto and
26
<PAGE>
such further instruments as may reasonably be required for carrying out the
expressed intention of this Agreement.
Section 6.4. ISSUER AND COMPANY REPRESENTATIVES. Whenever
under the provisions of this Agreement the approval of the Issuer or the Company
is required or the Issuer or the Company is required to take some action at the
request of the other, such approval or such request shall be given for the
Issuer by an Issuer Representative and for the Company by a Company
Representative. The Trustee shall be authorized to act on any such approval or
request.
Section 6.5. FINANCIAL REPORTS. After the Conversion Date, so
long as any of the Bonds are Outstanding, the Company shall furnish or cause to
be furnished to the Trustee the following information:
(a) Within one hundred eighty (180) days after the close of
each fiscal year of the Company, a balance sheet of the Company as of the end of
such fiscal year and statements of income and retained earnings of the Company
for such fiscal year, each prepared in accordance with generally accepted
accounting principles consistently applied, in reasonable detail and certified
by certified public accountants of recognized standing.
(b) Upon request, copies of all such regular or periodic
reports, which are available for public inspection which the Company may be
required to file with any federal or state department, bureau, commission, or
agency.
(c) Within one hundred eighty (180) days after the end of each
fiscal year, a certificate of a Company Representative stating whether the
Company is in compliance with all covenants and agreements made by the Company
in this Agreement.
Section 6.6. FINANCING STATEMENTS. The Company agrees to
execute and file or cause to be executed and filed any and all financing
statements or amendments thereof or continuation statements necessary to perfect
and continue the perfection of the security interests granted in the Indenture.
The Company shall pay all costs of filing such instruments.
Section 6.7. MAINTENANCE OF PROJECT. The Company agrees that
it will (i) maintain, repair and operate the Project; and (ii) pay, as the same
respectively come due, all taxes and governmental charges of any kind whatsoever
that may at any time be lawfully assessed or levied against the Company or the
Issuer with respect to the Project or any portion thereof or with respect to the
original issuance of the Bonds, including, without limiting the generality of
the foregoing, any taxes levied against the Company
27
<PAGE>
or the Issuer upon or with respect to the income or profits of the Issuer from
the Project or a charge on the Loan Installments prior to or on a parity with
the charge under the Indenture thereon and the pledge or assignment thereof to
be created and made in the Indenture, and including all ad valorem taxes
lawfully assessed upon the Project, all utility and other charges incurred in
the operation, maintenance, use, occupancy and upkeep of the Project, all
assessments and charges lawfully made by any governmental body against the
Company or the Issuer on the Loan Installments; provided, however, that nothing
in this subsection (ii) shall require the payment of any such tax or charge or
make provision for the payment thereof, so long as the validity thereof shall be
contested in good faith by the Company by appropriate legal or administrative
proceedings, and further provided that, with respect to special assessments or
other governmental charges that may lawfully be paid in installments over a
period of years, the Company shall be obligated to pay only such installments as
are required to be paid during the Agreement Term.
Section 6.8. UNDERTAKING TO PROVIDE ONGOING DISCLOSURE.
(a) This Section 6.8 constitutes the written undertaking for
the benefit of the holders of the Bonds required by Section (b)(5)(i) of
Securities and Exchange Commission Rule 15c2-12 under the Securities Exchange
Act of 1934, as amended (17 CFR Part 240, ss. 240. 15c2-12) (the "Rule"), and
shall apply when and if the Company exercises the Conversion Option. It is the
Company's express intention that this Section 6.8 be assigned pursuant to and in
accordance with the terms of the Indenture to the Trustee for the benefit of the
Bondholders and that the Trustee and each Bondholder be a beneficiary of this
Section 6.8 with the right to enforce this Section 6.8 directly against the
Company. Capitalized terms used in this Section 6.8 and not otherwise defined in
this Agreement shall have the meanings assigned such terms in subsection (d)
hereof.
(b) The Company, as an "obligated person" within the meaning
of the Rule, undertakes to provide the following information as provided in this
Section 6.8:
(1) Annual Financial Information;
(2) Financial Statements, if any; and
(3) Material Event Notices.
(c) (1) Subject to the terms of this Section 6.8, the Company
shall while any Bonds are Outstanding provide the Annual Financial
Information to the Trustee on or before July 1 of each year after the
election of the Conversion Option
28
<PAGE>
(the "Submission Date"), and the Trustee shall provide to the
Issuer and to each then existing NRMSIR and the SID, if any, such
Annual Financial Information on or before July 1 of each year (the
"Report Date") while any Bonds are Outstanding or, if not received by
the Trustee by the Submission Date, then within fifteen (15) Business
Days of its receipt by the Trustee. The Company shall include with
each submission of Annual Financial Information to the Trustee and the
Issuer a written representation addressed to the Trustee and the
Issuer to the effect that the Annual Financial Information is the
Annual Financial Information required by this Section 6.8 and that it
complies with the applicable requirements of this Section 6.8. The
Company may adjust the Submission Date and the Report Date if the
Company changes its fiscal year by providing written notice of the
change of fiscal year and the new Submission Date and Report Date to
the Trustee, the Issuer, each then existing NRMSIR and the SID, if
any; provided that the new Report Date shall be one hundred eighty
(180) days after the end of the new fiscal year and the new Submission
Date shall be thirty (30) days prior to the Report Date, and provided
further that the period between the final Report Date relating to the
former fiscal year and the initial Report Date relating to the new
fiscal year shall not exceed one year in duration. It shall be
sufficient if the Company provides to the Trustee and the Issuer and
the Trustee provides to each then existing NRMSIR and the SID, if any,
the Annual Financial Information by specific reference to documents
previously provided to each NRMSIR and the SID, if any, or filed with
the Securities and Exchange Commission and, if such a document is a
final official statement within the meaning of the Rule, available
from the Municipal Securities Rulemaking Board.
(2) If not provided as part of the Annual Financial
Information, the Company shall provide Financial Statements to the
Trustee when and if available while Bonds are Outstanding and the
Trustee shall then promptly provide the Issuer, each then existing
NRMSIR and the SID, if any, with such Financial Statements.
(3) (i) If a Material Event occurs while any Bonds are
Outstanding, the Company shall provide a Material Event Notice to the
Trustee in a timely manner and the Trustee shall promptly provide to
the Issuer, the Municipal Securities Rulemaking Board and the SID, if
any, such Material Event Notice. Each Material Event Notice shall be so
captioned and shall prominently state the date, title and CUSIP numbers
of the Bonds.
(ii) The Trustee shall promptly advise the Company
29
<PAGE>
whenever, in the course of performing its duties as Trustee under the
Indenture, the Trustee identifies an occurrence which, if material,
would require the Company to provide a Material Event Notice pursuant
to clause (2)(i); provided that the failure of the Trustee so to advise
the Company shall not constitute a breach by the Trustee of any of its
duties and responsibilities hereunder.
(4) The Trustee shall, without further direction or
instruction from the Company, provide in a timely manner to the
Municipal Securities Rulemaking Board and to the SID, if any, notice of
any failure while any Bonds are Outstanding by the Trustee to provide
to each then existing NRMSIR and the SID, if any, Annual Financial
Information on or before the Report Date (whether caused by failure of
the Company to provide such information to the Trustee by the
Submission Date or for any other reason). For the purposes of
determining whether information received from the Company is Annual
Financial Information, the Trustee shall be entitled conclusively to
rely on the Company's written representation made pursuant to clause
(c)(1) of this Section 6.8.
(5) If the Company provides to the Trustee information
relating to the Company or the Bonds, which information is not
designated as a Material Event Notice, and directs the Trustee to
provide such information to information repositories, the Trustee shall
provide such information in a timely manner to the Issuer, the
Municipal Securities Rulemaking Board and the SID, if any.
(d) The following are the definitions of the capitalized terms
used in this Section and not otherwise defined in this Agreement.
(1) "Annual Financial Information" means the financial
information (which shall be based on financial statements prepared in
accordance with generally accepted accounting principles ("GAAP")) or
operating data with respect to the Company, provided at least annually,
of the type included in the official statement or other offering
document utilized in connection with the remarketing of Bonds after the
Conversion Option, which Annual Financial Information shall include
Financial Statements.
(2) "Financial Statements" means the Company's annual
financial statements, prepared in accordance with GAAP, and if audited,
accompanied by the report of the auditing certified public account.
(3) "Material Event" means any of the following events,
30
<PAGE>
if material, with respect to the Bonds.
(i) Principal and interest payment delinquencies;
(ii) Non-payment related defaults;
(iii) Unscheduled draws on debt service reserves reflecting
financial difficulties;
(iv) Unscheduled draws on credit enhancements reflecting financial
difficulties;
(v) Substitution of credit or liquidity providers, or their
failure to perform;
(vi) Adverse tax opinions or events affecting the tax-exempt
status of the security;
(vii) Modifications to rights of security holders;
(viii) Bond calls;
(ix) Defeasances;
(x) Release, substitution, or sale of property securing repayment
of the securities; and
(xi) Rating changes.
(4) "Material Event Notice" means written or electronic notice
of a Material Event.
(5) "NRMSIR" means a nationally recognized municipal
securities information repository, as recognized from time to time by
the Securities and Exchange Commission for the purposes referred to in
the Rule; the NRMSIRs as of the date of this Agreement being as
follows:
Bloomberg Municipal Repository
Thomson NRMSIR
Kenny Information Systems, Inc.
Donnelley Financial Municipal Securities
Disclosure Archive
DPC Data Inc.
(6) "SID" means a state information depository as operated or
designated by the State as such for the purposes referred to in the
Rule. (As of the date hereof, no SID is in existence in the State.)
31
<PAGE>
(e) Unless otherwise required by law and subject to technical
and economic feasibility, the Company and the Trustee shall employ such methods
of information transmission as shall be requested or recommended by the
designated recipients of the Company's information.
(f) The continuing obligation hereunder of the Company to
provide Annual Financial Information and Material Event Notices and the
Trustee's obligations under this Section 6.8 shall terminate immediately once
the Bonds no longer are Outstanding. This Section 6.8, or any provision hereof,
shall be null and void in the event that the Company delivers to the Trustee and
the Issuer an opinion of nationally recognized bond counsel to the effect that
those portions of the Rule which require this Section 6.8, or any such
provisions, are invalid, have been repealed retroactively or otherwise do not
apply to the Bonds; provided that the Trustee shall have provided notice of such
delivery and the cancellation of this Section 6.8 to each then existing NRMSIR
and the SID, if any. This Section 6.8 may be amended without the consent of the
Bondholders, but only upon the delivery by the Company to the Trustee and the
Issuer of the proposed amendment and an opinion of nationally recognized bond
counsel to the effect that such amendment, and giving effect thereto, will not
adversely affect the compliance of this Section and by the Company with the
Rule; provided that the Trustee shall have provided notice of such delivery and
of the amendment to each then existing NRMSIR and the SID, if any.
(g) Any failure by the Company to perform in accordance with
this Section 6.8 shall not constitute an "Event of Default" under Article VIII
hereof, and the rights and remedies provided by Article VIII upon the occurrence
of an "Event of Default" shall not apply to any such failure. Neither the Issuer
nor the Trustee shall have any power or duty to enforce this Section 6.8.
(h) The Company shall reimburse the Trustee for any reasonable
expenses incurred by the Trustee in complying with the requirements of this
Section 6.8.
32
<PAGE>
ARTICLE VII
ASSIGNMENT, SELLING, LEASING;
INDEMNIFICATION; REDEMPTION
Section 7.1. ASSIGNMENT, SELLING AND LEASING. This Agreement
may be assigned and the Project may be sold or leased, as a whole or in part,
with the prior written consent of the Bank, but without the necessity of
obtaining the consent of either the Issuer or the Trustee; PROVIDED, however,
that no such assignment, sale or lease shall, in the opinion of Bond Counsel,
result in interest on any of the Bonds becoming includable in gross income for
federal income tax purposes, or shall otherwise violate any provisions of the
Act; PROVIDED FURTHER, however, that no such assignment, sale or lease shall
relieve the Company of any of its obligations under this Agreement and the
Company shall remain fully liable thereon.
Section 7.2. RELEASE AND INDEMNIFICATION COVENANTS.
(a) The Company shall and hereby agrees to indemnify and save
the Issuer and the Trustee harmless against and from all claims by or on behalf
of any person, firm, corporation or other legal entity arising from the conduct
or management of, or from any work or thing done on, the Project during the Term
of Agreement, including without limitation, (i) any condition of the Project,
(ii) any breach or default on the part of the Company in the performance of any
of its obligations under this Agreement, (iii) any act or negligence of the
Company or of any of its agents, contractors, servants, employees or licensees
or (iv) any act or negligence of any assignee or lessee of the Company, or of
any agents, contractors, servants, employees or licensees of any assignee or
lessee of the Company. The Company shall indemnify and save the Issuer and the
Trustee harmless from any such claim arising as aforesaid, or in connection with
any action or proceeding brought thereon, and upon notice from the Issuer or the
Trustee, the Company shall defend them or either of them in any such action or
proceeding.
(b) Notwithstanding the fact that it is the intention of the
parties hereto that the Issuer shall not incur any pecuniary liability by reason
of the terms of this Agreement or the undertakings required of the Issuer
hereunder, by reason of the issuance of the Bonds, by reason of the execution of
the Indenture or by reason of the performance of any act requested of the Issuer
by the Company, including all claims, liabilities or losses arising in
connection with the violation of any statutes or regulation pertaining to the
foregoing; nevertheless, if the Issuer should incur any such pecuniary
liability, then in such event the Company
33
<PAGE>
shall indemnify and hold the Issuer harmless against all claims, demands or
causes of action whatsoever, by or on behalf of any person, firm or corporation
or other legal entity arising out of the same or out of any offering statement
or lack of offering statement in connection with the sale or resale of the Bonds
and all costs and expenses incurred in connection with any such claim or in
connection with any action or proceeding brought thereon, and upon notice from
the Issuer, the Company shall defend the Issuer in any such action or
proceeding. All references to the Issuer in this Section 7.2 shall be deemed to
include its directors, officers, employees, attorneys and agents.
Notwithstanding anything to the contrary contained herein, the
Company shall have no liability to indemnify the Issuer against claims or
damages resulting from the Issuer's own gross negligence or willful misconduct
or to indemnify the Trustee against claims or damages resulting from the
Trustee's own negligence or willful misconduct.
In case any action shall be brought against one or more of the
Trustee, the Issuer, or the directors, officers, agents, attorneys or employees
of either (the "Indemnified Parties") based upon any of the above and in respect
of which indemnity may be sought against the Company, such Indemnified Party
shall promptly notify the Company in writing, enclosing a copy of all papers
served, but the omission so to notify the Company of any such action shall not
relieve it of any liability which it may have to any Indemnified Party otherwise
than under this Section. In case any such action for which indemnification is
sought shall be brought against any Indemnified Party and it shall notify the
Company of the commencement thereof, the Company shall be entitled to
participate in and, to the extent that it shall wish, to assume the defense
thereof with counsel reasonably satisfactory to such Indemnified Party. The
Indemnified Party shall have the right to employ its own counsel in any such
action but the fees and expenses of such counsel shall be at the expense of such
Indemnified Party unless (i) the employment of counsel by such Indemnified Party
has been authorized by the Company, (ii) the Indemnified Party shall have
reasonably concluded, based upon an opinion of counsel reasonably satisfactory
to the Company, that there may be a conflict of interest between the Company and
the Indemnified Party in the conduct of the defense of such action (in which
case the Company shall not have the right to direct the defense of such action
on behalf of the Indemnified Party), or (iii) the Company shall not in fact have
employed counsel reasonably satisfactory to the Indemnified Party to assume the
defense of such action. The Company shall not be liable for any settlement of
any action or claim effected without its consent.
Section 7.3. ISSUER TO GRANT SECURITY INTEREST TO
34
<PAGE>
TRUSTEE. The parties hereto agree that pursuant to the Indenture, the Issuer
shall assign to the Trustee, in order to secure payment of the Bonds, all of the
Issuer's right, title, and interest in and to this Agreement, except for the
Issuer's rights under Sections 4.2(b), 7.2 and 8.4 hereof.
Section 7.4. INDEMNIFICATION OF TRUSTEE. The Company shall and
hereby agrees to indemnify the Trustee for, and hold the Trustee harmless
against, any loss, liability or expense (including the costs and expenses of
defending against any claim of liability) incurred without negligence or willful
misconduct by the Trustee and arising out of or in connection with its acting as
Trustee under the Indenture.
ARTICLE VIII
DEFAULTS AND REMEDIES
Section 8.1. DEFAULTS DEFINED. The following shall be
"Defaults" under this Agreement and the term "Default" shall mean, whenever it
is used in this Agreement, any one or more of the following events:
(a) Failure by the Company to pay any amount required to be
paid under subsection (a) or (d) of Section 4.2 hereof.
(b) Failure by the Company to observe and perform any
covenant, condition or agreement on its part to be observed or performed, other
than as referred to in Section 8.1(a), for a period of thirty (30) days after
written notice specifying such failure and requesting that it be remedied shall
have been given to the Company by the Issuer or the Trustee, unless the Issuer
and the Trustee shall agree in writing to an extension of such time prior to its
expiration; PROVIDED, however, if the failure stated in the notice cannot be
corrected within the applicable period, the Issuer and the Trustee will not
unreasonably withhold their consent to an extension of such time if corrective
action is instituted by the Company within the applicable period and diligently
pursued until such failure is corrected.
(c) The dissolution or liquidation of the Company, except as
authorized by Section 2.2 hereof, or the voluntary initiation by the Company of
any proceeding under any federal or state law relating to bankruptcy,
insolvency, arrangement, reorganization, readjustment of debt or any other form
of debtor relief, or the initiation against the Company of any such proceeding
which shall remain undismissed for one hundred twenty (120) days, or failure by
the Company to promptly have discharged any execution, garnishment or attachment
of such consequence as
35
<PAGE>
would impair the ability of the Company to carry on its operations at the
Project, or assignment by the Company for the benefit of creditors, or the entry
by the Company into an agreement of composition with its creditors or the
failure generally by the Company to pay its debts as they become due.
(d) The occurrence of a Default under the Indenture.
The provisions of subsection (b) of this Section are subject to the following
limitation: if by reason of FORCE MAJEURE the Company is unable in whole or in
part to carry out any of its agreements contained herein (other than its
obligations contained in Article IV hereof), the Company shall not be deemed in
Default during the continuance of such inability. The term "FORCE MAJEURE" as
used herein shall mean, without limitation, the following: acts of God; strikes
or other industrial disturbances; acts of public enemies; orders or restraints
of any kind of the government of the United States of America or of the State or
of any of their departments, agencies or officials, or of any civil or military
authority; insurrections; riots; landslides; earthquakes; fires; storms;
droughts; floods; explosions; breakage or accident to machinery, transmission
pipes or canals; and any other cause or event not reasonably within the control
of the Company. The Company agrees, however, to remedy with all reasonable
dispatch the cause or causes preventing the Company from carrying out its
agreement, provided that the settlement of strikes and other industrial
disturbances shall be entirely within the discretion of the Company and the
Company shall not be required to settle strikes, lockouts and other industrial
disturbances by acceding to the demands of the opposing party or parties when
such course is in the judgment of the Company unfavorable to the Company.
Section 8.2. REMEDIES ON DEFAULT. Whenever any Default
referred to in Section 8.1 hereof shall have happened and be continuing, the
Trustee, or the Issuer with the written consent of the Trustee, may take one or
any combination of the following remedial steps:
(a) If the Trustee has declared the Bonds immediately due and
payable pursuant to Section 9.02 of the Indenture, by written notice to the
Company, declare an amount equal to all amounts then due and payable on the
Bonds, whether by acceleration of maturity (as provided in the Indenture) or
otherwise, to be immediately due and payable as liquidated damages under this
Agreement and not as a penalty, whereupon the same shall become immediately due
and payable;
(b) Have reasonable access to and inspect, examine and make
copies of the books and records and any and all accounts, data and income tax
and other tax returns of the Company during regular
36
<PAGE>
business hours of the Company if reasonably necessary in the opinion of the
Trustee; or
(c) Take whatever action at law or in equity may appear
necessary or desirable to collect the amounts then due and thereafter to become
due, or to enforce performance and observance of any obligation, agreement or
covenant of the Company under this Agreement.
Any amounts collected pursuant to action taken under this
Section shall be paid into the Bond Fund and applied in accordance with the
provisions of the Indenture.
Section 8.3. NO REMEDY EXCLUSIVE. Subject to Section 9.02 of
the Indenture, no remedy herein conferred upon or reserved to the Issuer or the
Trustee is intended to be exclusive of any other available remedy or remedies,
but each and every such remedy shall be cumulative and shall be in addition to
every other remedy given under this Agreement or now or hereafter existing at
law or in equity. No delay or omission to exercise any right or power accruing
upon any Default shall impair any such right or power or shall be construed to
be a waiver thereof, but any such right or power may be exercised from time to
time and as often as may be deemed expedient. In order to entitle the Issuer or
the Trustee to exercise any remedy reserved to it in this Article, it shall not
be necessary to give any notice, other than such notice as may be required in
this Article. Such rights and remedies as are given the Issuer hereunder shall
also extend to the Trustee, and the Trustee and the Owners of the Bonds, subject
to the provisions of the Indenture, shall be entitled to the benefit of all
covenants and agreements herein contained.
Section 8.4. AGREEMENT TO PAY ATTORNEYS' FEES AND EXPENSES. In
the event the Company should default under any of the provisions of this
Agreement and the Issuer should employ attorneys or incur other expenses for the
collection of payments required hereunder or the enforcement of performance or
observance of any obligation or agreement on the part of the Company herein
contained, the Company agrees that it will on demand therefor pay to the Issuer
the reasonable fee of such attorneys and such other reasonable expenses so
incurred by the Issuer.
Section 8.5. NO ADDITIONAL WAIVER IMPLIED BY ONE WAIVER. In
the event any agreement contained in this Agreement should be breached by either
party and thereafter waived by the other party, such waiver shall be limited to
the particular breach so waived and shall not be deemed to waive any other
breach hereunder.
37
<PAGE>
ARTICLE IX
MISCELLANEOUS
Section 9.1. TERM OF AGREEMENT. This Agreement shall remain in
full force and effect from the date hereof to and including November 1, 2016 or
until such time as all of the Bonds and the fees and expenses of the Issuer and
the Trustee and all amounts payable to the Bank under the Credit Agreement shall
have been fully paid or provision made for such payments, whichever is later;
PROVIDED, however, that this Agreement may be terminated prior to such date
pursuant to Article V of this Agreement, but in no event before all of the
obligations and duties of the Company hereunder have been fully performed,
including, but not limited to, the payment of all costs and fees mandated
hereunder.
Section 9.2. NOTICES. All notices, certificates or other
communications hereunder shall be sufficiently given and shall be deemed given
when delivered or mailed by registered mail, postage prepaid, addressed as
follows:
If to the Issuer: City of Gainesville, Florida
200 E. University Ave., 4th Floor
Gainesville, Florida 32601
Attention: City Attorney
If to the Trustee: SunTrust Bank, Central Florida,
National Association
225 E. Robinson St., Suite 250
Orlando, Florida 32801
Attention: Corporate Trust Dept.
If to the Company: Exactech, Inc.
4613 NW 6th Street
Gainesville, Florida 32609-1781
Attention: Chief Operating Officer
If to the Bank: SunTrust Bank, North Central Florida
411 North Main Street
Gainesville, Florida 32601
Attention: Commercial Real Estate
Department
(Richard J. Blahauvietz)
with a copy to:
SunTrust Bank, North Central Florida
203 East Silver Springs Boulevard
Ocala, Florida 34470
Attention: Corporate Lending
38
<PAGE>
(Christine Thibodeau)
If to the issuer of a Its address designated in
Substitute Letter of Credit: writing to the Trustee
If to the Remarketing Agent: Its Principal Office
If to the Tender Agent: SunTrust Bank, Central Florida,
National Association
225 E. Robinson St., Suite 250
Orlando, Florida 32801
Attention: Corporate Trust
Department
If to Moody's: Moody's Investors Service, Inc.
99 Church Street
New York, New York 10007
Attention: Corporate Department,
Structured Finance Group
If to S&P: Standard & Poor's Ratings Services,
a division of The McGraw-Hill
Companies, Inc.
25 Broadway
New York, New York 10004
Attention: Corporate Finance
Department
A duplicate copy of each notice, certificate or other communication given
hereunder by the Issuer or the Company shall also be given to the Trustee and
the Bank. The Issuer, the Company, the Trustee, and the Bank may, by written
notice given hereunder, designate any further or different addresses to which
subsequent notices, certificates or other communications shall be sent.
Section 9.3. BINDING EFFECT. This Agreement shall inure to the
benefit of and shall be binding upon the Issuer, the Company, the Bank, the
Trustee, the Owners of Bonds and their respective successors and assigns,
subject, however, to the limitations contained in Section 2.3(b) hereof.
Section 9.4. SEVERABILITY. In the event any provision of this
Agreement shall be held invalid or unenforceable by any court of competent
jurisdiction, such holding shall not invalidate or render unenforceable any
other provision hereof.
Section 9.5. AMOUNTS REMAINING IN FUNDS. Subject to the
provisions of Section 6.11 of the Indenture, it is agreed by the parties hereto
that any amounts remaining in any account of the
39
<PAGE>
Bond Fund, the Construction Fund, or any other fund (other than the Rebate Fund)
created under the Indenture upon expiration or earlier termination of this
Agreement, as provided in this Agreement, after payment in full of the Bonds (or
provision for payment thereof having been made in accordance with the provisions
of the Indenture) and the fees and expenses of the Trustee in accordance with
the Indenture, shall belong to and be paid to the Company by the Trustee. Moneys
remaining in the Rebate Fund after all payments to the United States of America
required by the terms of Section 6.13 of the Indenture shall also be paid over
to the Company.
Section 9.6. AMENDMENTS, CHANGES AND MODIFICATIONS. Subsequent
to the issuance of Bonds and prior to their payment in full (or provision for
the payment thereof having been made in accordance with the provisions of the
Indenture), and except as otherwise herein expressly provided, this Agreement
may not be effectively amended, changed, modified, altered or terminated without
the written consent of the Trustee and, prior to the Letter of Credit
Termination Date and payment of all amounts payable to the Bank under the Credit
Agreement, the consent of the Bank, in accordance with the provisions of the
Indenture.
Section 9.7. EXECUTION IN COUNTERPARTS. This Agreement may be
simultaneously executed in several counterparts, each of which shall be an
original and all of which shall constitute but one and the same instrument.
Section 9.8. APPLICABLE LAW. This Agreement shall be governed
by and construed in accordance with the laws of the State.
Section 9.9. CAPTIONS. The captions and headings in this
Agreement are for convenience only and in no way define, limit or describe the
scope or intent of any provisions or Sections of this Agreement.
40
<PAGE>
IN WITNESS WHEREOF, the Issuer and the Company have caused
this Agreement to be executed in their respective corporate names and their
respective corporate seals to be hereunto affixed and attested by their duly
authorized officers, all as of the date first above written.
CITY OF GAINESVILLE, FLORIDA
(SEAL)
By:__________________________
Mayor-Commissioner
ATTEST:
- ---------------------------
Clerk of the Commission
EXACTECH, INC.
By:___________________________
President and Chief
Operating Officer
ATTEST:
By:________________________
Secretary
41
<PAGE>
EXHIBIT A
PROJECT FACILITIES
The acquisition, construction and equipping on the Project Site of a
facility for the manufacture of orthopedic implants.
A-1
<PAGE>
EXHIBIT B
REQUISITION NO. ___
CITY OF GAINESVILLE, FLORIDA
INDUSTRIAL DEVELOPMENT REVENUE BONDS
(Exactech, Inc. Project),
Series 1997
REQUISITION FOR PAYMENT
Exactech, Inc., referred to herein and in the Loan Agreement
(the "Agreement") dated as of November 1, 1997, between the City of Gainesville,
Florida (the "Issuer") and Exactech, Inc., as the Company (the "Company"), does
hereby make application to SunTrust Bank, Central Florida, National Association,
as trustee (the "Trustee") under the Indenture of Trust (the "Indenture")
between the Issuer and the Trustee, dated as of November 1, 1997, for
reimbursement or payment of advances, payments and obligations made or incurred
by the Company in connection with the acquisition, construction and equipping of
the Project (as defined in the Agreement) and the issuance, delivery and sale of
the $3,900,000 City of Gainesville, Florida Industrial Development Revenue Bonds
(Exactech, Inc. Project), Series 1997, as provided for or contemplated in the
Agreement and the Indenture.
All capitalized terms used herein and not otherwise defined
shall have the meanings ascribed to them in the Agreement and the Indenture.
The Company does hereby request disbursement of the amounts as
set forth on Exhibit A attached to this certificate, for reimbursement to the
Company for payments made to, or incurred for, the contractors or payees listed
on Exhibit A or for direct payment to the payees listed on Exhibit A, all as
provided on Exhibit A.
The undersigned further certifies that:
(i) the obligations described in Exhibit A (which includes
a description of the purpose and circumstances of such obligations in
reasonable detail and the name and address of the persons to whom such
obligations are owed and which is accompanied by bills, invoices, or
statements of account for, or other written evidence of, such
obligations) in the stated amounts have been incurred in connection
with the issuance and sale of the Bonds or the financing, planning,
design, acquisition, construction, equipping and/or installation of the
Project;
(ii) such obligations are permitted Costs of the Project,
are proper charges against the account in the
B-1
<PAGE>
Construction Fund noted on Exhibit A hereto and have not been the basis
for any previous disbursement from any account in the Construction
Fund;
(iii) no item in Exhibit A represents any portion of an
obligation which the Company is, as of the date hereof, entitled to
retain under any retained percentage agreement;
(iv) insofar as any obligation described in Exhibit A was
incurred for labor, services, materials, supplies or equipment (i) such
labor and services were actually performed in a satisfactory manner in
connection with the acquisition, construction and equipping of the
Project and (ii) such materials, supplies and equipment were actually
used in connection with the acquisition, construction and equipping of
the Project or were delivered to the Project Site (and remain at the
Project Site) for that purpose;
(v) all sums previously advanced by the Trustee have been
used solely for purposes permitted by the Indenture and the specific
items which are the subject of this requisition will be so used;
(vi) there has not been recorded or filed with or served
upon the Company, notice of any lien, right to lien or attachment upon
or claim affecting the right to receive payment of, any moneys payable
to any of the persons or firms named in this requisition, which has not
been released or will not be released simultaneously with the payment
of such obligation;
(vii) each item in Exhibit A is or was appropriate in
connection with the financing, acquisition, construction and equipping
of the Project, as noted in Exhibit A;
(viii) the use of the disbursements requested hereunder will
not result in the covenants made by the Company in Section 3.9 (a) and
(b) of the Agreement being violated. Accordingly, one of the following
statements applies to the requested disbursement:
(a) If all disbursements from the Construction Fund
to be used to pay Issuance Costs have not yet been made, the
disbursement requested hereunder will be used only to pay either
Qualified Project Costs or Issuance Costs.
(b) If all Issuance Costs to be paid with proceeds of
the Bonds have previously been requisitioned but the aggregate
Qualified Project Costs paid with
B-2
<PAGE>
previous disbursements and to be paid with the disbursement requested
hereunder do not equal or exceed Substantially All of the Costs of the
Project paid (or to be paid) with the requested and all previous
disbursements, the disbursement requested hereunder will be used only
for Qualified Project Costs.
(c) If all Issuance Costs to be paid with proceeds of
the Bonds have previously been requisitioned and the aggregate
Qualified Project Costs paid with previous disbursements equals or
exceeds Substantially All of the Costs of the Project paid with those
previous disbursements, the disbursement requested hereunder, when
added to all disbursements under previous requisitions, will not result
in less than Substantially All of the total of such disbursements
having been used to pay Qualified Project Costs;
(ix) all disbursements related to Issuance Costs of the
Bonds, requested hereunder, when added to all disbursements for such
Issuance Costs under previous requisitions, will not result in more
than two percent (2%) of the proceeds of the Bonds having been drawn
from the Construction Fund or otherwise used to pay such Issuance
Costs;
(x) no Event of Default under the Indenture has occurred
and is continuing and there exists no event or condition which, with
the giving of notice or the passage of time would constitute an Event
of Default under the Indenture; and
(xi) after payment of such disbursement, sufficient amounts
will remain in the Construction Fund, taking into account investment
earnings thereon, to pay all remaining unpaid costs of the Project.
Dated as of ___________, 199_.
______________________________________________
APPROVED BY:
SUNTRUST BANK, NORTH CENTRAL FLORIDA
By:_________________________________
Authorized Representative
B-3
EXHIBIT 10.61
LETTER OF CREDIT AGREEMENT
Dated as of November 1, 1997
By and Between
EXACTECH, INC.
and
SUNTRUST BANK, NORTH CENTRAL FLORIDA
--------------------------
relating to
City of Gainesville, Florida
Industrial Development Revenue Bonds
(Exactech, Inc. Project),
Series 1997
--------------------------
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
(Not Part of Agreement)
PAGE
<S> <C> <C>
1. DEFINITIONS............................................................................................ 1
1A. General Definitions.................................................................................... 1
1B. Other Accounting Definitions........................................................................... 6
2. ISSUANCE OF LETTER OF CREDIT; FEES..................................................................... 6
2A. Amount and Terms of Letter of Credit................................................................... 6
2B. Letter of Credit Fee................................................................................... 6
2C. Drawing Fees........................................................................................... 7
2D. Transfer Fees.......................................................................................... 7
2E. Additional Payments.................................................................................... 7
2F. Capital Adequacy....................................................................................... 8
2G. Interest on Overdue Payments........................................................................... 8
3. AGREEMENT TO REPAY LETTER OF CREDIT DRAWINGS; PLEDGED BONDS............................................ 8
3A. Reimbursement.......................................................................................... 8
3B. Pledge of Bonds........................................................................................ 9
3C. Reinstatement of Letter of Credit...................................................................... 10
3D. Credit for Amount Paid on Bonds........................................................................ 10
3E. Computation of Interest; Place of Payment.............................................................. 10
4. CONDITIONS PRECEDENT TO ISSUANCE OF THE LETTER OF CREDIT............................................... 11
4A. Delivery of the Bonds and Operative Documents.......................................................... 11
4B. No Default............................................................................................. 11
4C. Representations and Warranties......................................................................... 11
4D. Opinions of Counsel.................................................................................... 11
4E. Certificates of Compliance............................................................................. 11
4F. Opinion of Bond Counsel................................................................................ 12
4G. Other Documents........................................................................................ 12
4H. Documentation and Proceedings.......................................................................... 12
5. CHARACTER OF OBLIGATIONS HEREUNDER..................................................................... 12
6. REPRESENTATIONS AND WARRANTIES......................................................................... 12
7. AFFIRMATIVE COVENANTS.................................................................................. 16
8. NEGATIVE COVENANTS..................................................................................... 22
9. EVENTS OF DEFAULT...................................................................................... 24
10. NATURE OF BANK'S DUTIES; INDEMNIFICATION............................................................... 27
1
<PAGE>
11. MISCELLANEOUS.......................................................................................... 29
11A. Amendments............................................................................................. 29
11B. Survival of Representations and Warranties............................................................. 29
11C. Expenses............................................................................................... 29
11D. Notices................................................................................................ 30
11E. Satisfaction Requirement............................................................................... 30
11F. Binding Effect; Assignment............................................................................. 30
11G. Governing Law.......................................................................................... 30
11H. Counterparts........................................................................................... 31
11I. Incorporation of Preambles and Annexes................................................................. 31
Annex I .........Irrevocable Letter of Credit
Annex II .........Pledge and Security Agreement
Annex III.........Pending Litigation
Annex IV .........Information Regarding ERISA Plans
Annex V .........Permitted Liens
</TABLE>
2
<PAGE>
LETTER OF CREDIT AGREEMENT
THIS LETTER OF CREDIT AGREEMENT (the "Agreement"), dated as of
November 1, 1997, by and between EXACTECH, INC., a Florida corporation (the
"Company") and SUNTRUST BANK, NORTH CENTRAL FLORIDA, a Florida banking
corporation (the "Bank");
W I T N E S S E T H:
WHEREAS, the Company has requested that the City of
Gainesville, Florida (the "Issuer") issue its Industrial Development Revenue
Bonds (Exactech, Inc. Project), Series 1997 (the "Bonds"), which shall be
outstanding in a principal amount of $3,900,000, pursuant to an Indenture of
Trust, dated as of November 1, 1997 (the "Indenture"), by and between the Issuer
and SunTrust Bank, Central Florida, National Association, as trustee (the
"Trustee"), and to lend the proceeds of the sale of the Bonds to the Company in
order to enable the Company to finance, in whole or in part, the cost of an
orthopedic implants manufacturing facility; and
WHEREAS, as security for the payment of the Bonds, the Company
has requested that the Bank issue its irrevocable letter of credit in the form
of Annex I attached hereto (the "Letter of Credit"); and
WHEREAS, it is a condition of the obligation of the Bank to
execute and deliver the Letter of Credit that this Agreement shall have been
executed and delivered by the Company;
NOW, THEREFORE, in consideration of the mutual promises
contained herein and other valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties hereto agree as follows:
1. DEFINITIONS.
1A. GENERAL DEFINITIONS. For the purpose of this Agreement, in
addition to terms defined elsewhere herein, including in the preamble hereto
(capitalized terms not otherwise defined below shall have the meanings provided
in the Indenture), the following terms shall have the following meanings:
"A Drawing" shall have the meaning specified in the Letter of
Credit which shall be a drawing in respect of the payment of the portion of the
purchase price of Bonds corresponding to principal of the respective series of
Bonds.
"ADA" shall mean, collectively, the Americans with
Disabilities Act of 1990 and the Florida Americans with Disabilities
Accessibility Implementation Act.
<PAGE>
"Affiliate" shall mean, as to any Person, any other Person,
directly or indirectly controlling (including all directors, officers and
employees of such Person), directly or indirectly controlled by or under direct
or indirect common control with such Person.
"Assignment" shall mean the Collateral Assignment of Rents,
Contracts and Leases dated as of November 1, 1997, from the Company to the Bank.
"B Drawing" shall have the meaning specified in the Letter of
Credit which shall be a drawing in respect of the payment of principal of the
respective series of Bonds.
"Business Day" shall mean a day on which commercial banks
located in Orlando, Florida, Gainesville, Florida and Atlanta, Georgia are
required or permitted by law or executive order to be open for the purpose of
conducting a commercial banking business.
"C Drawing" shall have the meaning specified in the Letter of
Credit which shall be a drawing in respect of the payment of interest, or the
portion of the purchase price corresponding to interest, on the respective
series of Bonds.
"Code" shall mean the Internal Revenue Code of 1986, as
amended from time to time, including, when appropriate, the statutory
predecessor of the Code, and all applicable regulations thereunder whether
proposed, temporary or final, including regulations issued and proposed pursuant
to the statutory predecessor of the Code, and, in addition, all official rulings
and judicial determinations applicable to the Bonds under the Code and under the
statutory predecessor of the Code and any successor provisions to the relevant
provisions of the Code or regulations.
"Construction Agreement" shall mean the Construction
Disbursement Agreement dated as of November 1, 1997, between the Bank and the
Company.
"Current Assets" means, as to any Person, the current assets
of such Person determined in accordance with GAAP.
"Current Liabilities" means, as to any Person, the current
liabilities of such Person, including the current portion of Long Term Debt,
determined in accordance with GAAP.
"Current Ratio" means, as to any person, the ratio of the
amount of Current Assets to the amount of Current Liabilities.
"Date of Issuance" shall mean the date of issuance and
delivery of the Letter of Credit.
2
<PAGE>
"Debt to Net Worth Ratio" means, as to any Person, the ratio
of the amount of Indebtedness to the amount of Net Worth.
"Default" shall mean any event which with notice or lapse of
time, or both, would become an Event of Default.
"ERISA" shall mean the Employee Retirement Income Security Act
of 1974, as the same may be amended from time to time.
"ERISA Affiliate" shall mean each trade or business (whether
or not incorporated) which, together with the Company, is treated as a single
employer under Section 414(b), (c), (m) or (o) of the Code.
"Event of Default" shall have the meaning specified in
Paragraph 9.
"GAAP" shall mean generally accepted accounting principles as
defined by the Financial Accounting Standards Board as from time to time in
effect that are consistently applied and, when used with respect to the Company,
that are consistent with the accounting practice of the Company, reflected in
the financial statements for the Company, with such changes as may be approved
by an independent public accountant satisfactory to the Bank.
"Hazardous Materials" shall mean any petroleum product, and
any hazardous, toxic or dangerous waste, substance or material defined as such
in Hazardous Materials Law.
"Hazardous Materials Laws" shall mean, collectively, all
federal, state and local laws, ordinances or regulations, now or hereafter in
effect, relating to environmental conditions or Hazardous Materials, including,
without limitation, the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended, 42 U.S.C. ss. 9601, ET SEQ., the Resource
Conservation and Recovery Act, 42 U.S.C. ss. 6901, ET SEQ., (the "RCRA"), the
Clean Air Act, 42 U.S.C. ss. 7401, ET SEQ. (the "CAA"), the Toxic Substances
Control Act, 15 U.S.C. ss.ss. 2601 through 2929 (the "TSCA"), and all similar
federal, state and local laws and ordinances, together with all regulations now
or hereafter adopted, published or promulgated pursuant thereto.
"Indebtedness" shall mean, as to any Person (a) all
indebtedness for borrowed money or for notes, debentures, on other debt
securities, (b) notes payable and drafts accepted representing extensions of
credit whether or not representing obligations for borrowed money, (c)
liabilities for all or any part of the deferred purchase price of property or
services, (d) liabilities secured by any Lien on any property or asset owned or
held by such Person regardless of whether the indebtedness secured thereby shall
have
3
<PAGE>
been assumed by or is a primary liability of such Person, and (e) capitalized
lease obligations.
"Interest Component" shall mean that portion of the Stated
Amount of a Letter of Credit equal to the sum of 50 days' interest on the Bonds
secured by such Letter of Credit, computed at the rate of 13% per annum,
notwithstanding the actual rate of interest borne by the Bonds.
"Lien" shall mean, as to any asset, (a) any lien, charge,
claim, mortgage, security interest, pledge or other encumbrance of any kind with
respect to such asset, (b) any interest of a vendor or lessor under any
conditional sale agreement, capitalized lease or other title retention agreement
relating to such asset, (c) any reservation, exception, encroachment, easement,
right-of-way, covenant, condition, restriction, lease or other title exception
affecting such asset, or (d) any preference, priority or other security
agreement or preferential arrangement of any kind or nature whatsoever
(including, without limitation, any conditional sale or other title retention
agreement, any financing lease having substantially the same economic effect as
any of the foregoing, and the filing of any financing statement under the
Uniform Commercial Code or comparable law of any jurisdiction).
"Long Term Debt" shall mean Indebtedness payable more than one
year after the creation thereof.
"Mortgage" shall mean the Mortgage and Security Agreement
dated as of November 1, 1997, between the Company, as mortgagor, and the Bank,
as mortgagee.
"Net Worth" means, as of any date and as to any Person, the
aggregate depreciated book value of all assets of such Person, both tangible and
intangible, less the Total Liabilities of such Person, all as determined in
accordance with GAAP.
"Operative Documents" shall have the meaning specified in
Paragraph 4A hereof.
"PBGC" shall mean the Pension Benefit Guaranty Corporation
and any successor thereto.
"Person" shall mean an individual, corporation, partnership,
joint venture, trust, unincorporated organization or any other juridical entity,
or a foreign state or any agency or political subdivision thereof.
"Plan" shall mean any employee benefit plan, program,
arrangement, practice or contract, maintained by or on behalf of the Company or
an ERISA Affiliate, which provides benefits or
4
<PAGE>
compensation to or on behalf of employees or former employees, whether formal or
informal, whether or not written, including but not limited to the following
types of plans:
(i) EXECUTIVE ARRANGEMENTS - any bonus, incentive
compensation, stock option, deferred compensation, commission,
severance, "golden parachute", "rabbi trust", or other executive
compensation plan, program, contract, arrangement or practice;
(ii) ERISA PLANS - any "employee benefit plan" as defined in
Section 3(3) of ERISA), including, but not limited to, any defined
benefit pension plan, profit sharing plan, money purchase pension plan,
savings or thrift plan, stock bonus plan, employee stock ownership
plan, Multiemployer Plan, or any plan, fund, program, arrangement or
practice providing for medical (including post-retirement medical),
hospitalization, accident, sickness, disability, or life insurance
benefits;
(iii) OTHER EMPLOYEE FRINGE BENEFITS - any stock purchase, vacation,
scholarship, day care, prepaid legal services, severance pay or other
fringe benefit plan, program, arrangement, contract or practice.
"Prime Rate" shall mean the rate of interest per annum
designated from time to time by SunTrust Banks of Florida, Inc., or its
successors or assigns, at its principal office in Orlando, Florida, to be its
prime rate, which rate of interest is only a benchmark, is purely discretionary
and may not be the lowest or best rate available to customers of the Bank, any
change in such Prime Rate to be effective on the day any such change is
announced.
"Principal Component" shall mean that portion of the Stated
Amount of the Letter of Credit equal to the principal amount outstanding of the
series of Bonds secured by such Letter of Credit.
"Project" shall mean a facility for the manufacture of
orthopedic implants.
"Property" shall mean the site of the Project.
"Remarketing Agreement" shall mean the Remarketing Agreement
dated as of the date hereof between the Company and the Remarketing Agent, as
defined in the Indenture.
"Stated Amount," shall have the meaning specified in the
Letter of Credit.
"Subsidiaries" shall mean, as to any Person, col-
5
<PAGE>
lectively, (a) a corporation of which shares of stock having ordinary voting
power (other than stock having such power only by reason of the occurrence of a
contingency) to elect a majority of the board of directors or other managers of
which are at the time owned, or the management of which is otherwise controlled,
directly or indirectly, through one or more intermediaries, or both, by such
Person or (b) a partnership in which such Person is a general partner or the
management of which is otherwise controlled, directly or indirectly, through one
or more intermediaries or both, by such Person.
"Tender Agent" shall have the meaning specified in the
Indenture.
"Tender Agent Agreement" shall mean the Tender Agent Agreement
dated as of the date hereof among the Company, the Trustee and the Tender Agent.
"Termination Date" shall mean the date the Letter of Credit
expires in accordance with its terms.
"Total Liabilities" means, as to any Person, all Indebtedness
and all other liabilities that in accordance with GAAP are required to be shown
as liabilities on a balance sheet.
"Working Capital" means, as to any Person, the excess of such
Person's Current Assets over Current Liabilities.
1B. OTHER ACCOUNTING DEFINITIONS. All accounting terms not
specifically defined in Paragraph 1A shall have the meanings normally given them
by GAAP, which principles will be applied on a basis consistent with those
applied to the reporting requirements specified in Paragraph 7(i) of this
Agreement.
2. ISSUANCE OF LETTER OF CREDIT; FEES.
2A. AMOUNT AND TERMS OF LETTER OF CREDIT. The Bank agrees, on
the terms and subject to the conditions hereinafter set forth, to issue the
Letter of Credit to the Trustee with a Principal Component equal to $3,900,000
initially and with an initial Interest Component of $70,417. The Letter of
Credit shall expire on November 16, 2002, unless otherwise terminated or
extended. Commencing 240 days prior to the stated expiration of the Letter of
Credit, the Company shall submit a request to the Bank for an extension of such
term and the Bank shall provide a written response as to whether it will or will
not extend such term with 60 days of its receipt of such submission.
2B. LETTER OF CREDIT FEE. (1) The Company hereby agrees to pay
to the Bank a non-refundable letter of credit fee for the
6
<PAGE>
period from and including the Date of Issuance until the Termination Date,
computed at the rate of one percent (1.0%) per annum, calculated as a percentage
of the Stated Amount of the Letter of Credit (as the same may be reduced from
time to time but including, in any event, the principal amount allocable to any
Pledged Bonds) on the date of payment of such letter of credit fee. Amounts
payable under the immediately preceding sentence shall be payable in advance,
based on a 365- or 366-day year, actual number of days elapsed, in immediately
available funds, on the Date of Issuance and quarterly thereafter on the first
day of each February, May, August, and November during the term of the Letter of
Credit.
(2) The Company hereby agrees to pay to the Bank a
non-refundable annual administration fee for the period from and including the
Date of Issuance until the Termination Date, computed at the rate of one-tenth
of one percent (0.10%) per annum, calculated as a percentage of the Stated
Amount of the Letter of Credit (as the same may be reduced from time to time but
including, in any event, the principal amount allocable to any Pledged Bonds) on
the date of the payment of such fee. Amounts payable under the immediately
preceding sentence shall be payable in advance, in immediately available funds,
on the Date of Issuance and annually thereafter on each anniversary of the Date
of Issuance.
(3) The Company agrees to pay to the Bank an origination fee
equal to one-quarter of one percent (0.25%), calculated as a percentage of the
Stated Amount of the Letter of Credit, one-half of which has heretofore been
paid by the Company to the Bank and the remainder of which is payable on the
Date of Issuance.
2C. DRAWING FEES. The Company hereby agrees to pay to the
Bank, upon each drawing by the Trustee under the Letter of Credit, the sum
of $100.
2D. TRANSFER FEES. The Company hereby agrees to pay to the
Bank, upon each transfer of the Letter of Credit in accordance with its terms,
the sum of $1,500 or such other amount as shall at the time of such transfer be
the charge which the Bank is making for transfers of similar letters of credit.
2E. ADDITIONAL PAYMENTS. If any change in any law or
regulation or in the interpretation thereof by any court or administrative or
governmental authority charged with the administration thereof, or any change in
generally accepted accounting principles which shall be mandated and not
optionally elected by the Bank, shall either (i) impose, modify or deem
applicable any reserve, special deposit or similar requirement against letters
of credit issued by the Bank or (ii) impose on the Bank any other condition
relating, directly or indirectly, to this
7
<PAGE>
Agreement or the Letter of Credit, and the result of any event referred to in
the preceding clause (i) or (ii) shall be to increase the cost to the Bank of
issuing or maintaining the Letter of Credit, then, upon demand by the Bank, the
Company hereby agrees to pay promptly to the Bank, from time to time as
specified by the Bank, such additional amounts as shall be sufficient to
compensate the Bank for such increased cost. A certificate of the Bank claiming
compensation under this subsection and setting forth the additional amount or
amounts to be paid to it hereunder, setting forth the reason for such
compensation and the methodology for computation of the amount due, shall be
conclusive absent manifest error and notice shall be furnished to the Company at
least thirty (30) days prior to any adjustment of the Bank's compensation
pursuant to this Section 2E, and no such adjustment shall take effect until such
thirty-day period has expired. In determining any such amount, the Bank may use
any reasonable averaging and attribution methods.
2F. CAPITAL ADEQUACY. If, after the date of this Agreement,
the Bank shall have determined that the adoption or implementation of any
applicable law, rule or regulation regarding capital adequacy, or any change
therein, or any change in the interpretation or administration thereof by any
governmental authority, central bank or comparable agency charged with the
interpretation or administration thereof, or compliance by the Bank with any
request or directive regarding capital adequacy (whether or not having the force
of law) of any such authority, central bank or comparable agency, has the effect
of reducing the rate of return on the Bank's capital, on this credit facility or
otherwise, as a consequence of its obligations hereunder and under the Letter of
Credit to a level below that which the Bank could have achieved but for such
adoption, change or compliance (taking into consideration the Bank's policies
with respect to capital adequacy) by an amount deemed by the Bank to be
material, then from time to time, promptly upon demand by the Bank, the Company
hereby agrees to pay the Bank such additional amount or amounts as will
compensate the Bank for such reduction. A certificate of the Bank claiming
compensation under this subsection and setting forth the additional amount or
amounts to be paid to it hereunder, setting forth the reason for such
compensation and the methodology for computation of the amount due, shall be
conclusive absent manifest error and notice shall be furnished to the Company at
least thirty (30) days prior to any adjustment of the Bank's compensation
pursuant to this Section 2F, and no such adjustment shall take effect until such
thirty-day period has expired. In determining any such amount, the Bank may use
any reasonable averaging and attribution methods.
2G. INTEREST ON OVERDUE PAYMENTS. The Company hereby agrees to
pay to the Bank interest on any and all amounts required to be paid as provided
in this Section 2 from and after the due
8
<PAGE>
date thereof until payment in full, payable on demand, at the Prime Rate plus
two percent (2%) per annum (but in no event in excess of the maximum rate
permitted by applicable law).
3. AGREEMENT TO REPAY LETTER OF CREDIT DRAWINGS;
PLEDGED BONDS.
3A. REIMBURSEMENT. The Company hereby agrees as follows:
(i) to pay to the Bank (1) within 90 days after payment is
made under the Letter of Credit pursuant to any "A Drawing" to pay the
portion of the Purchase Price of Bonds corresponding to principal, an
amount equal to the amount of such "A Drawing" under the Letter of
Credit; and (2) interest on each such amount from the date of drawing
of such amount under the Letter of Credit until payment in full
thereof, at the Prime Rate (but in no event in excess of the maximum
rate permitted by applicable law), such interest payable on the first
day of each month and on the date of payment of any such amount;
(ii) to pay to the Bank immediately after any payment is made under
the Letter of Credit pursuant to any "B Drawing" or "C Drawing" to pay
principal of or interest (or the portion of the Purchase Price of Bonds
corresponding to interest) on the Bonds, an amount equal to such amount
so paid under the Letter of Credit; and
(iii) to pay to the Bank interest on any and all amounts required to
be paid as provided in this Paragraph 3A from and after the due date
thereof until payment in full, payable on demand, at the Prime Rate
plus two percent (2%) per annum (but in no event in excess of the
maximum rate permitted by applicable law). If any payment under the
Letter of Credit with respect to an "A Drawing", a "B Drawing" or a "C
Drawing" shall be reimbursed to the Bank on the same date such payment
is made by the Bank, no interest shall be payable on the reimbursed
amount.
3B. PLEDGE OF BONDS. As security for the payment of the
obligations of the Company pursuant to Paragraph 3A(i) above, the Company will
pledge to the Bank, and grant to the Bank a security interest in, its right,
title and interest in and to Bonds delivered to the Bank in connection with "A
Drawings" (herein called "Pledged Bonds"), pursuant to a pledge and security
agreement in the form of Annex II attached hereto (the "Pledge Agreement"). Any
amounts from time to time owing to the Bank pursuant to paragraph 3A(i) above
may be paid (i) at any time by the Company on one Business Day's notice stating
the amount to be
9
<PAGE>
paid (which shall be $5,000 or an integral multiple thereof) and (ii) at any
time on behalf of the Company on one Business Day's notice from the Company
directing the Bank to deliver (or to cause the Tender Agent to deliver) a
specified principal amount of Pledged Bonds held by or on behalf of the Bank for
sale pursuant to Section 4.07(b) of the Indenture (but in all events, in
principal amounts equivalent to authorized denominations of Bonds under the
terms of the Indenture). Upon payment to the Bank of the amount to be paid
pursuant to clause (i) or (ii) above, together with accrued interest as set
forth in clause (2) of Paragraph 3A(i), to the date of such payment on the
amount to be paid, the outstanding obligations of the Company under Paragraph
3A(i) above shall be reduced by the amount of such payment, interest shall cease
to accrue on the amount paid and the Bank shall release (or shall be deemed to
have released) from the pledge and security interest created by the Pledge
Agreement a principal amount of Pledged Bonds equal to the amount of such
payment, provided that prior to such release from the pledge and security
interest created by the Pledge Agreement of Bonds delivered to or for the
benefit of the Bank in connection with an "A Drawing", the Company shall have
paid to the Bank the amount owing in respect of the "C Drawing", if any, made in
conjunction with such "A Drawing". Such Bonds shall be delivered to the Company
on payment to the Bank as aforesaid or to the Tender Agent for sale pursuant to
Section 4.08(b) of the Indenture, as appropriate. Notwithstanding the foregoing,
no payment of amounts owing to the Bank pursuant to Paragraph 3A(i) may be made,
and no Pledged Bonds shall be released, during the period commencing two
Business Days prior to an Interest Payment Date with respect to the Bonds and
ending at the close of business on such Interest Payment Date.
3C. REINSTATEMENT OF LETTER OF CREDIT. After any "C Drawing",
the obligation of the Bank to honor demands for payment under the Letter of
Credit with respect to payment of interest, or the portion of Purchase Price of
the applicable series of Bonds corresponding to interest, on the applicable
series of Bonds will automatically be reinstated up to the total amount
specified therein, upon the terms and conditions set forth in the Letter of
Credit. Upon release by or on behalf of the Bank pursuant to Paragraph 3B hereof
of any Pledged Bonds, the obligation of the Bank to honor demands for payment
under the Letter of Credit with respect to payment of the principal, or the
portion of Purchase Price of the Bonds corresponding to principal, of such Bonds
will be automatically reinstated up to the total amount specified therein upon
the terms and conditions set forth in the Letter of Credit.
3D. CREDIT FOR AMOUNT PAID ON BONDS. The Company shall (i)
receive a credit against the obligation to pay interest pursuant to clause (2)
of Paragraph 3A(i) above to the extent of
10
<PAGE>
any amounts actually paid by the Issuer to the Bank in respect of the interest
due on any Pledged Bonds and (ii) receive a credit against its reimbursement
obligation pursuant to clause (1) of Paragraph 3A(i) above to the extent of any
amounts actually paid by the Issuer to the Bank in respect of the principal due
on any Pledged Bonds.
3E. COMPUTATION OF INTEREST; PLACE OF PAYMENT. Interest
payable hereunder shall be computed on the basis of a 365- or 366-day year,
actual number of days elapsed. All payments by the Company to the Bank hereunder
shall be made in lawful currency of the United States and in immediately
available funds at the Bank's office at 411 North Main Street, Gainesville,
Florida 32601, Attention: Commercial Real Estate Department. In the event the
date specified for any payment hereunder is not a Business Day, such payment
shall be made on the next following Business Day and interest shall be paid at
the rate provided for herein on any such payment to the Business Day on which
such payment is made.
4. CONDITIONS PRECEDENT TO ISSUANCE OF THE LETTER OF CREDIT.
This Agreement shall become effective, and the Bank will issue the Letter of
Credit, on the date the Bonds are issued and sold to the purchaser(s) thereof,
provided that all of the following conditions are met:
4A. DELIVERY OF THE BONDS AND OPERATIVE DOCUMENTS. This
Agreement, the Loan Agreement, the Indenture, the Pledge Agreement, the
Remarketing Agreement, the Tender Agent Agreement, the Mortgage, the
Construction Agreement and the Assignment (collectively, the "Operative
Documents"), a mortgagee title insurance commitment or policy naming the Bank
and its successors and/or assigns as the insured and continuing such affirmative
coverages and endorsements and only such exceptions as shall be acceptable to
the Bank, UCC-1 Financing Statements, a Level One or Phase One environmental
assessment of the sites of the Project, in form and substance acceptable to the
Bank, a boundary survey of the Property, certified within 90 days of the Date of
Issuance by a registered land surveyor acceptable to the Bank, shall have been
delivered to the Bank, and such other documents as the Bank shall reasonably
require, and the Bonds shall have been executed and delivered by the parties
thereto, each in form and substance satisfactory to the Bank. The Bank shall
have received an executed or conformed copy of each of the Operative Documents.
4B. NO DEFAULT. On the Date of Issuance and after giving
effect to the issuance of the Letter of Credit, there shall exist no Default or
Event of Default.
4C. REPRESENTATIONS AND WARRANTIES. On the Date of Issuance
and after giving effect to the issuance of the Letter of
11
<PAGE>
Credit, all representations and warranties of the Company contained herein, in
the other Operative Documents or otherwise made in writing in connection
herewith shall be true and correct with the same force and effect as though such
representations and warranties had been made on and as of such date.
4D. OPINIONS OF COUNSEL. There shall have been delivered to
the Bank an opinion of Greenberg Traurig Hoffman Lipoff Rosen & Quentel, P.A.,
in its capacity as counsel to the Company, dated the Date of Issuance, which
opinion shall be in form and substance satisfactory to the Bank and shall cover
such matters as the Bank may reasonably request.
4E. CERTIFICATES OF COMPLIANCE. There shall have been
delivered to the Bank certificates of duly authorized officers of the Company,
dated the Date of Issuance, to the effect that all of the conditions specified
in Paragraphs 4B and 4C have been satisfied as of such date and covering such
additional matters as the Bank may reasonably request.
4F. OPINION OF BOND COUNSEL. There shall have been delivered
to the Bank an opinion (or a signed copy of such opinion together with a
satisfactory reliance letter) of Holland & Knight LLP, in its capacity as Bond
Counsel, dated the Date of Issuance and in form and substance satisfactory to
the Bank, to the effect that the Bonds are legal, valid and binding obligations
of the Issuer and that as of the Date of Issuance interest on the Bonds issued
on such date is not includable in gross income for federal income tax purposes
under existing statutes, regulations and rulings, and covering such other
matters as the Bank may reasonably request.
4G. OTHER DOCUMENTS. There shall have been delivered to the
Bank such other information, documents, instruments, approvals (and if requested
by the Bank, certified duplicates of executed copies thereof) or opinions as the
Bank or its counsel may reasonably request.
4H. DOCUMENTATION AND PROCEEDINGS. All corporate and legal
proceedings and all instruments in connection with the transactions contemplated
by this Agreement and the other Operative Documents shall be satisfactory in
form and substance to the Bank and its counsel and the Bank shall have received
all information and copies of all documents, including records of corporate
proceedings, governmental approvals and incumbency certificates which it may
have reasonably requested in connection with the transactions contemplated by
this Agreement and the other Operative Documents, such documents where
appropriate to be certified by proper officers.
12
<PAGE>
5. CHARACTER OF OBLIGATIONS HEREUNDER. The obligations of the
Company under this Agreement are primary, absolute, independent, irrevocable and
unconditional. The Company understands and agrees that no payment by it under
any other agreement (whether voluntary or involuntary or pursuant to court order
or otherwise) shall constitute a defense to the several obligations hereunder
except to the extent that the Bank has been indefeasibly paid in full.
6. REPRESENTATIONS AND WARRANTIES. The Company represents and
warrants as follows:
(a) CORPORATE EXISTENCE. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Florida, has all requisite corporate power and legal authority to conduct its
business, to own its properties and to execute and deliver and to perform all of
its obligations under the Operative Documents and is duly qualified to do
business in every jurisdiction in which the nature of its business or property
makes such qualification necessary, except where failure to be so qualified
would not have a material adverse effect on the operations or financial
condition of the Company.
(b) AUTHORIZATION; NO CONFLICT. The execution, delivery and
performance by the Company of this Agreement and each other Operative Document
and the consummation of the transactions contemplated hereby and thereby are
within the Company's corporate powers, have been duly authorized by all
necessary corporate action, and do not and will not (i) conflict with,
contravene or violate any provision of any law, rule, regulation, order, writ,
judgment, injunction, decree, determination or award presently in effect having
applicability to the Company or of the Articles of Incorporation or bylaws of
the Company, including all amendments thereto, which violation would have a
material adverse effect on the Company, (ii) result in a breach of or constitute
a default under any material indenture or loan or credit agreement or any other
agreement, lease or instrument to which the Company is a party or by which it or
its properties may be bound or affected except for breaches that would not have
or create a material adverse effect on the operations or financial condition of
the Company or in its execution, delivery or performance hereof or of any of the
documents or transactions contemplated hereby, or (iii) except as provided in or
contemplated by the Operative Documents, result in or require the creation of
any material lien, security interest or other charge or encumbrance upon or with
respect to any of the Company's properties.
(c) APPROVALS. No consent of any person and no authorization
or approval or other action by, and no notice to or filing with, any
governmental authority or regulatory body is
13
<PAGE>
required for the valid or due execution, delivery and performance by the Company
of any Operative Document, other than such consents, authorizations, approvals
or actions as have already been obtained or which cannot be obtained on the date
hereof and are not required to be obtained on the date hereof. The Company is in
compliance with all of the terms and conditions of each such consent,
authorization, approval or action already obtained, has applied for each such
consent, authorization, approval or action that may be applied for at this time
and has met or has made provisions adequate for meeting all requirements for
each such consent, authorization, approval or action not yet obtained.
(d) BINDING OBLIGATIONS. Each of the Operative Documents is a
legal, valid and binding obligation of the Company, enforceable against the
Company in accordance with its terms, except as such enforceability may be
limited by bankruptcy, insolvency, reorganization, moratorium or other laws or
equitable principles relating to or limiting creditors' rights generally.
(e) FINANCIAL INFORMATION. Audited financial statements as of
December 31, 1994, 1995 and 1996 of the Company for the 12-month periods then
ended, prepared by Deloitte & Touche LLP, true copies of which have been
previously delivered to the Bank, are complete and fairly present the financial
condition of the Company as at the respective dates thereof, in accordance with
generally accepted accounting principles applied on a consistent basis. Since
December 31, 1996, there has been no material adverse change in the financial
condition, properties, business results or operations of the Company.
(f) LITIGATION. Except as set forth on Annex III attached
hereto, there is no action, suit or proceeding or any governmental investigation
or any arbitration, in each case pending or, to the knowledge of the Company,
threatened against or affecting the Company or the properties of the Company
before any court or arbitrator or governmental department, commission, board,
bureau, agency or instrumentality which, if determined adversely to the Company
would (i) have a material adverse effect on the business, properties, condition
(financial or otherwise) or operations of the Company, (ii) adversely affect the
ability of the Company to perform its obligations under the Operative Documents,
or (iii) question the validity or enforceability of any Operative Document or
any action taken or to be taken pursuant thereto.
(g) MARGIN STOCK. The Company is not engaged principally or as
one of its important activities in the business of extending credit for the
purpose of purchasing or carrying margin stock (within the meaning of
Regulations G, X or U of the Board of Governors of the Federal Reserve System).
The execution, delivery and performance of this Agreement and the use of the
14
<PAGE>
proceeds of the Bonds or any extension of credit hereunder, do not and will not
constitute a violation of said regulations.
(h) PUBLIC UTILITY HOLDING COMPANY. The Company is not (i) a
"holding company," or (ii) a "subsidiary company" of a "holding company," or
(iii) an "affiliate" of a "holding company" or a "subsidiary company" of a
"holding company," within the meaning of the Public Utility Holding Company Act
of 1935, as amended.
(i) NO DEFAULTS. The Company is not in violation of any
statute or other law or in default under any order, regulation or ruling of any
court or other tribunal or governmental or administrative authority or agency,
or in default under its Articles of Incorporation or bylaws, any material
indenture, agreement, lease, instrument or other undertaking to which the
Company is a party or by which it or its property or assets may be bound or
affected, which has a material adverse effect on the business or operations of
the Company.
(j) NO MATERIAL RESTRICTIONS. The Company is not subject to
any charter, corporate or other legal restriction, or any contract, lease or
other agreement, or any judgment, decree, order, law, rule or regulation which
in the judgment of the Company has or is expected in the future to have a
materially adverse effect on the business, assets or financial condition of the
Company or on its ability to carry out its obligations under the Operative
Documents, except as otherwise reflected in adequate reserves.
(k) INFORMATION. No certificate, report or other paper
furnished by the Company to the Bank or any other Person in connection with the
Operative Documents contains as of its effective date any material misstatement
of fact or fails to state a material fact or any fact necessary to make the
statements contained therein not misleading in any material respect as of such
date, and all of the information contained therein is true, accurate and
complete in all material respects as of such date.
(l) ERISA. Except as disclosed on Annex IV attached hereto:
(i) IDENTIFICATION OF PLANS. Neither the Company nor any ERISA
Affiliate maintains or contributes to, or has maintained or contributed to, any
Plan that is an ERISA Plan or has maintained or contributed to, any Plan that is
an executive arrangement within the meaning of ERISA;
(ii) COMPLIANCE. Each Plan has at all times been maintained by its
terms and in operation, in accordance with all applicable laws, except such
noncompliance (when taken as a whole)
15
<PAGE>
that will not have a materially adverse effect on the Company, or upon its
financial condition, assets, business, operations, liabilities or prospects;
(iii) LIABILITIES. The Company is not currently or will not become
subject to any liability (including withdrawal liability), tax or penalty
whatsoever to any person whomsoever with respect to any Plan including, but not
limited to, any tax, penalty or liability arising under Title I or Title IV of
ERISA or Chapter 43 of the Code, except such liabilities (when taken as a whole)
as will not have a materially adverse effect on the Company, or upon its
financial condition, assets, business, operations, liabilities or prospects; and
(iv) FUNDING. The Company and each ERISA Affiliate have made full
and timely payment of all amounts (A) required to be contributed under the terms
of each Plan and applicable law and (B) required to be paid as expenses of each
Plan. No Plan has or would have an "amount of unfunded benefit liabilities (as
defined in Section 4001(a)(18) of ERISA) if such Plan were terminated as of this
date.
(m) MORTGAGE. The Mortgage creates, as security for the
Company's reimbursement obligations to the Bank hereunder, a valid and
enforceable first-priority lien on the property noted therein, subject to no
other liens other than the liens disclosed on Annex V attached hereto.
(n) TAXES. The Company has filed all required federal, state
and local tax returns and has paid all taxes due pursuant to such returns or
pursuant to any assessment received by the Company or has provided adequate
reserves for the payment thereof.
(o) NOT AN INVESTMENT COMPANY. The Company is not an
"investment company" or a company "controlled" by an "investment company" within
the meaning of the Investment Company Act of 1940, as amended.
(p) SUBSIDIARIES. The Company has no subsidiaries.
(q) TITLE TO REAL PROPERTY AND OTHER ASSETS. The Company has
good and marketable title (or good and marketable leasehold interest with
respect to leased property) to all its real property and other assets and all
personal property assets and fixtures used in connection therewith subject to no
liens other than permitted liens noted on Annex V attached hereto. The Company
does, however, have assets which it holds in trust, the use or application of
which may be restricted by the trust instrument.
(r) ENVIRONMENTAL MATTERS. The Company is in compliance
16
<PAGE>
in all material respects with all federal, state and local environmental laws,
rules, regulations, ordinances and other requirements including, without
limitation, all Hazardous Materials Laws. Operation of the Project in the manner
contemplated by the plans and specifications therefor will not cause the Company
to violate any state, local or federal environmental laws, rules, regulations
and other requirements.
(s) HAZARDOUS SUBSTANCES. The Property has not in the past
been used by the Company and, to the knowledge of the Company, any other Person,
and is not presently being used by the Company or any other Person for the
handling, storage, transportation or disposal of Hazardous Materials or toxic
materials in contravention of applicable state, federal or local law or
regulation nor have such materials ever been present on the Property in
contravention of applicable state, federal or local law or regulation.
7. AFFIRMATIVE COVENANTS. The Company shall, unless the Bank
shall otherwise consent in writing, observe and perform the following covenants
and agreements:
(a) PRESERVATION OF LEGAL EXISTENCE. The Company shall
preserve and maintain its legal existence, rights, franchises and privileges as
a corporation in the State of Florida.
(b) COMPLIANCE WITH LAWS. The Company shall comply in all
material respects with all applicable laws, rules, regulations and orders of any
governmental authority, including specifically all Hazardous Materials Law,
noncompliance with which would materially and adversely affect the business or
condition of the Company, such compliance to include, without limitation, paying
before the same become delinquent all material taxes, assessments and
governmental charges imposed upon it or upon its property; provided, however,
that nothing in this subsection (b) shall require the payment of any such tax or
charge or make provision for the payment thereof, so long as the validity
thereof shall be contested in good faith by the Company by appropriate legal or
administrative proceedings, and further provided that, with respect to special
assessments or other governmental charges that may lawfully be paid in
installments over a period of years, the Company shall be obligated to pay only
such installments as are required to be paid during the term hereof.
(c) MAINTENANCE OF INSURANCE. The Company shall cause to be
maintained, with responsible and reputable insurance companies or associations,
casualty, public liability and other insurance in such amounts and covering such
risks as are reasonably satisfactory to the Bank, and, at the written request of
the Bank, shall provide evidence of compliance with this covenant to the Bank in
the form of certificates of insurance and endorsements. All
17
<PAGE>
such insurance policies and loss payable clauses will provide that they may not
be cancelled, amended or terminated unless the Bank is given at least thirty
days prior written notice.
(d) VISITATION RIGHTS. At any reasonable time and as often as
the Bank may reasonably request upon reasonable notice, the Company shall permit
the Bank or any agents or representatives of the Bank to examine and make copies
of and take abstracts from the records and books of account of, and visit and
inspect any of the properties of, the Company and discuss the general business
affairs of the Company with its officers.
(e) RECORDS AND ACCOUNTS. The Company shall keep true records
and books of account containing complete and accurate entries of all financial
and business transactions of the Company in accordance with GAAP consistently
applied and will maintain accounts and reserves adequate in the opinion of the
Company for all taxes (including income taxes), all depreciation, depletion,
obsolescence and amortization of its properties, all other contingencies and all
other proper reserves.
(f) PAYMENT OF DEBTS AND TAXES. The Company shall pay, or
cause to be paid, all of its debts and perform, or cause to be performed, all of
its obligations promptly and in accordance with the respective terms thereof,
and promptly pay and discharge, or cause to be paid and discharged, all taxes,
assessments and governmental charges or levies imposed upon it, upon its income
or receipts or upon any of its assets or properties before the same shall become
in default, as well as pay all lawful claims for labor, materials and supplies
or otherwise that, if not so paid, could or would result in the imposition of a
lien or charge upon such assets or properties or any part thereof; provided,
however, that it shall not constitute an Event of Default hereunder if the
Company fails to perform any such obligation or to pay any such debt (except for
any Indebtedness owing under or in respect of any Operative Document), tax,
assessment, or governmental or other charge, levy or claim that is being
contested in good faith and by proper proceedings diligently pursued, if the
effect of such failure to pay or perform has not been to accelerate the maturity
thereof or of any other material debt or obligation of the Company or to subject
any part of the assets and properties of the Company to forfeiture, and if the
Company has obtained therefor an adequate bond or adequate insurance or
established therefor a reserve of an adequate amount.
(g) FURTHER ASSURANCES. The Company shall execute and deliver
to the Bank such further instruments, provide it with such further data and
information and take such further action as the Bank may reasonably request or
as may be necessary further to effect the purposes of the Operative Documents.
18
<PAGE>
(h) MAINTENANCE OF PROPERTIES. The Company shall cause all of
its properties used or useful in the conduct of its business as it relates to
the Project to be maintained and kept in good condition, repair and working
order and supplied with all necessary equipment and will cause to be made all
necessary repairs, renewals, replacements, betterments and improvements thereof,
all as in the judgment of the Company may be necessary so that the business
carried on in connection therewith may be properly and advantageously conducted
at all times.
(i) FINANCIAL INFORMATION. The Company shall deliver to the
Bank:
(i) as soon as practicable and in any event within 60
days after the end of each quarterly period (other than the
last quarterly period) in each fiscal year,
internally-generated financial statements of the Company,
including, without limitation, a statement of results of
operations and statement of cash flows of the Company for the
period from the beginning of the current fiscal year to the
end of such quarterly period, a report of accounts receivable,
and a balance sheet of the Company as at the end of such
quarterly period, setting forth in each case figures for the
corresponding period in the preceding fiscal year, all in
reasonable detail and certified by an authorized financial
officer of the Company, subject to changes resulting from
year-end adjustments;
(ii) as soon as practicable and in any event within 120
days after the end of each fiscal year, audited financial
statements, including a statement of results of operations and
statement of cash flows of the Company for such year, and a
balance sheet of the Company as at the end of such year,
setting forth in each case corresponding figures from the
preceding annual audit, all in reasonable detail and
satisfactory in scope to the Bank and certified to the Company
by independent certified public accountants of recognized
standing selected by the Company whose report shall be in
scope and substance reasonably satisfactory to the Bank, and a
certificate of an authorized financial officer of the Company
demonstrating compliance with Section 7(l) hereof;
(iii) as soon as practicable and in any event within 30
days after the filing thereof, copies of the federal and state
income tax returns of the Company;
(iv) promptly upon receipt thereof, a copy of each other
report submitted to the Company by independent
19
<PAGE>
accountants in connection with any annual, interim or
special audit made by them of the books of the Company; and
(v) with reasonable promptness, such other financial
data as the Bank may reasonably request.
Together with each delivery of financial statements required by clause (ii)
above, the Company will deliver to the Bank an officer's certificate stating
that there exists no Event of Default hereunder or default under any other
obligation by the Company and/or any Subsidiary to the Bank, or, if any such
Event of Default or default exists, specifying the nature thereof, the period of
existence thereof and what action the Company or such Subsidiary proposes to
take with respect thereto. The Company also covenants that forthwith upon the
President or chief financial officer of the Company obtaining knowledge of an
Event of Default, it will deliver to the Bank an officer's certificate
specifying the nature thereof, the period of existence thereof, and what action
the Company proposes to take with respect thereto. The Bank is hereby authorized
to deliver a copy of any financial statement delivered to the Bank pursuant to
this Paragraph 7(i) to any regulatory body having jurisdiction over the Bank.
(j) LITIGATION/NOTICE OF CLAIMS. The Company shall promptly
notify the Bank after the occurrence thereof of the institution of, or any
material adverse development in, any action, suit or proceeding or any
governmental investigation or any arbitration against the Company or any of its
property involving a claim or claims for relief, including specifically any
claim or action involving any Hazardous Materials, which might have a material
adverse effect on the financial condition, results of operations, properties or
business of the Company or receipt by the Company of actual knowledge of the
threat of any such action, suit, proceeding, investigation or arbitration.
(k) ERISA. The Company shall deliver to the Bank:
(i) Promptly after the occurrence thereof with
respect to any Plan, or any trust established thereunder,
notice of (A) a "reportable event" described in Section 4043
of ERISA and the regulations issued from time to time
thereunder (other than a "reportable event" not subject to the
provisions for 30-day notice to the PBGC under such
regulations), or (B) any other event which could subject the
Company or any ERISA Affiliate to any material tax, penalty or
liability under Title I or Title IV of ERISA or Chapter 43 of
the Code;
(ii) At the same time and in the same manner as such
20
<PAGE>
notice must be provided to the PBGC, or to a Plan participant,
beneficiary or alternative payee, any notice required under
Section 101(d), 302(f)(4), 303, 307, 4041(b)(1)(A)s or
4041(c)(1)(A) of ERISA or under Section 401(a)(29) or 412 of
the Code with respect to any Plan;
(iii) Upon the request of the Bank, (A) true and complete
copies of any and all documents, government reports and
determination or opinion letters for any Plan, or (B) a
current statement of withdrawal liability for each
Multiemployer Plan.
(l) FINANCIAL COVENANTS AND RATIOS. The Company shall, during
the term of this Letter of Credit Agreement, maintain the following financial
covenants or ratios, each of which shall be met annually (as demonstrated by the
financial statements delivered pursuant to Section 7.1(i)(ii) hereof):
(i) The maximum Debt to Net Worth Ratio of the
Company during the term of this Letter of Credit Agreement
shall be 1.0:1.0.
(ii) The minimum Current Ratio of the Company during the
term of this Letter of Credit Agreement shall be 2.5:1.
(iii) The minimum Net Worth of the Company shall be
$18,000,000 on the Date of Issuance and shall increase by at
least $1,000,000 each year during the term hereof.
(iv) The minimum Working Capital of the Company during the
term hereof shall be $7,500,000.
(m) HAZARDOUS SUBSTANCES. The Property will not in the future
be used for the handling, storage, transportation or disposal of Hazardous
Materials or toxic materials in contravention of applicable state, federal or
local law or regulation. The Company agrees to indemnify, defend, and hold the
Bank harmless from and against any loss to the Bank, including without
limitation, attorneys' fees incurred by the Bank as a result of such past,
present or future use, handling, storage, transportation or disposal of
hazardous or toxic materials, or their presence on the Property in contravention
of applicable state, federal or local law or regulation. The Company shall, if
requested by the Bank, execute and deliver to the Bank an Environmental
Indemnification Agreement, on the Bank's standard form, which Agreement shall
survive the termination of the Letter of Credit. In case any action shall be
brought against the Bank based upon any of the above and in respect of which
indemnity may be sought against the Company, the Bank shall promptly notify the
Company in writing,
21
<PAGE>
enclosing a copy of all papers served, but the omission so to notify the Company
of any such action shall not relieve it of any liability which it may have to
the Bank otherwise than under this Section. In case any such action for which
indemnification is sought shall be brought against the Bank and it shall notify
the Company of the commencement thereof, the Company shall be entitled to
participate in and, to the extent that it shall wish, to assume the defense
thereof with counsel reasonably satisfactory to the Bank. The Bank shall have
the right to employ its own counsel in any such action but the fees and expenses
of such counsel shall be at the expense of the Bank unless (i) the employment of
counsel by the Bank has been authorized by the Company, (i) the Bank shall have
reasonably concluded, based upon an opinion of counsel reasonably satisfactory
to the Company, that there may be a conflict of interest between the Company and
the Bank in the conduct of the defense of such action (in which case the Company
shall not have the right to direct the defense of such action on behalf of the
Bank), or (iii) the Company shall not in fact have employed counsel reasonably
satisfactory to the Bank to assume the defense of such action. The Company shall
not be liable for any settlement of any action or claim effected without its
consent.
(n) ADA. The Company will comply with the ADA and any and all
regulations and guidelines issued thereunder. The Company agrees to indemnify,
defend, and hold the Bank harmless from and against any loss to the Bank,
including without limitation, attorneys' fees incurred by the Bank as a result
of the Company's noncompliance with the ADA or the failure of the Improvements
to comply therewith. The Company shall, if requested by the Bank, execute and
deliver to the Bank an agreement to comply with the ADA, on the Bank's standard
form, which Agreement shall survive the termination of the Letter of Credit. In
case any action shall be brought against the Bank based upon any of the above
and in respect of which indemnity may be sought against the Company, the Bank
shall promptly notify the Company in writing, enclosing a copy of all papers
served, but the omission so to notify the Company of any such action shall not
relieve it of any liability which it may have to the Bank otherwise than under
this Section. In case any such action for which indemnification is sought shall
be brought against the Bank and it shall notify the Company of the commencement
thereof, the Company shall be entitled to participate in and, to the extent that
it shall wish, to assume the defense thereof with counsel reasonably
satisfactory to the Bank. The Bank shall have the right to employ its own
counsel in any such action but the fees and expenses of such counsel shall be at
the expense of the Bank unless (i) the employment of counsel by the Bank has
been authorized by the Company, (i) the Bank shall have reasonably concluded,
based upon an opinion of counsel reasonably satisfactory to the Company, that
there may be a conflict of interest between the Company and the Bank in the
conduct of the defense of such
22
<PAGE>
action (in which case the Company shall not have the right to direct the defense
of such action on behalf of the Bank), or (iii) the Company shall not in fact
have employed counsel reasonably satisfactory to the Bank to assume the defense
of such action. The Company shall not be liable for any settlement of any action
or claim effected without its consent.
8. NEGATIVE COVENANTS. The Company covenants and agrees that
it shall not, during the term hereof:
(a) LIMITATION ON LIENS. Create, incur, assume or suffer to
exist, any lien upon real or personal property, fixtures, revenues or other
assets whatsoever, whether now owned or hereafter acquired, of the Company,
except:
i. Liens existing on the date hereof and set out on Annex V
hereto;
ii. Liens for taxes not yet due or which are being contested in
good faith and by appropriate proceedings and for which adequate reserves in
accordance with generally accepted accounting principles have been established
on the books of the Company;
iii. Statutory liens of landlords and liens of carriers,
warehousemen, mechanics, materialmen and other liens imposed by law created in
the ordinary course of business for amounts not yet due or which are being
contested in good faith by appropriate proceedings and with respect to which
adequate reserves are being maintained;
iv. Liens (other than any lien imposed by ERISA) incurred or
deposits made in the ordinary course of business in connection with workers'
compensation, unemployment, insurance and other types of social security; and
v. Easements, reservations, exceptions, rights-of-way,
covenants, conditions, restrictions and other similar encumbrances incurred in
the ordinary course of business which, in the aggregate, are not substantial in
amount, and which do not in any case materially detract from the value of the
property subject thereto or interfere with the ordinary conduct of its business.
(b) PROHIBITION OF FUNDAMENTAL CHANGES. (i) Directly or
indirectly (whether in one transaction or a series of transactions), (I) enter
into any merger, consolidation or amalgamation; (II) acquire by purchase or
otherwise all or substantially all the business or assets, or stock or other
evidence of beneficial ownership, of any Person; (III) enter into any agreement
or transaction to do or permit any of the foregoing, unless (A) if the
23
<PAGE>
survivor of such transaction is the Company, the Company shall immediately upon
the conclusion of any such transaction be in compliance with all obligations of
the Company under the Operative Documents, and immediately after such
transaction, the Company shall have a Net Worth at least equal to the Net Worth
of the Company immediately preceding such transaction, or (B) the Bank shall
have consented thereto in writing, which consent shall not be withheld
unreasonably, and (ii) without the prior written consent of the Bank, which
consent shall not be unreasonably withheld, directly or indirectly (whether in
one transaction or a series of transactions), (I) liquidate, wind up or dissolve
itself (or suffer any liquidation or dissolution), (II) sell, transfer or pledge
all or substantially all of its assets to any other Person, or (III) make any
material change in its present method of conducting business.
(c) PROHIBITION ON SALE OF ASSETS. Sell, lease, assign,
transfer or otherwise dispose of any of its assets (including the stock of
Subsidiaries) except for: (i) the disposition of obsolete or worn out equipment
or other property no longer required by or useful to the Company in connection
with the operation of its business; (ii) the leasing of portions of the Project
in the ordinary course of business, (iii) the disposition of inventory in the
ordinary course of business or investment securities held by the Company for its
own account or in trust for others, (iv) transactions expressly permitted by the
terms of the Mortgage, (v) transactions expressly permitted by the terms of
Section 8(b) above, or (vi) transactions otherwise consented to by the Bank in
writing, which consent shall not be withheld unreasonably. Notwithstanding the
foregoing, the Company may sell any or all of the shares of Techmed, its Italian
distributor, presently owned by the Company, without the prior written consent
of the Bank.
(d) COMPLIANCE WITH ERISA. Take or fail to take, nor permit
any ERISA Affiliate to take or fail to take, any action with respect to a Plan
including but not limited to, (i) establishing any Plan, (ii) amending any Plan,
(iii) terminating or withdrawing from any Plan, or (iv) incurring an amount of
unfunded benefit liabilities, as defined in Section 4001(a)(18) of ERISA, or any
withdrawal liability under Title IV of ERISA, where such action or failure could
have a material adverse effect on the Company, result in a lien on the property
of the Company, or require the Company to provide any security.
(e) RESTRICTED PAYMENTS. (i) Declare, pay or make any
dividends or other distributions with respect to or make any payment on account
of its capital stock or on account of any warrants, options, or other rights in
respect of its capital stock; or (ii) set apart assets for, a sinking or any
analogous fund for
24
<PAGE>
the purchase, redemption or retirement or other acquisition of, any shares of
the Company's capital stock or any warrant rights or options to purchase capital
stock; provided, however, that nothing in this paragraph (e) shall be deemed to
prohibit or restrict the Company from splitting its stock.
(f) TRANSACTIONS WITH AFFILIATES. Enter into any transaction,
including, without limitation, any purchase, sale, lease or exchange of property
or the rendering of any service, with any Affiliate or employee, except
transactions which are in the ordinary course of the Company's business and
which are upon fair and reasonable terms no less favorable to the Company than
they would obtain in a comparable arm's length transaction with a Person not an
Affiliate and except for employment contracts approved by a majority of the
Board of Directors of the Company who are not parties to, or related to parties
to, or receiving personal benefits from such contracts.
(g) SALES/LEASE-BACKS. Enter into any arrangements, directly
or indirectly, with any Persons whereby the Company shall sell or transfer any
property, whether now owned or hereafter acquired, used or useful in its
business, in connection with the rental or lease by the Company of the property
so sold or transferred or of other property which the Company intends to use for
substantially the same purpose or purposes as the property so sold or
transferred.
(h) ADDITIONAL BONDS. Permit the issuance of Additional Bonds
without the advance written consent of the Bank.
(i) CONVERSION OF REDEMPTION. Convert a redemption of Bonds to
a purchase by the Company pursuant to Section 3.09 of the Indenture without the
prior written consent of the Bank.
9. EVENTS OF DEFAULT. Upon the occurrence of any of the
following events (herein referred to as an "Event of Default"), unless waived by
the Bank:
(i) the occurrence of a "Default" or an "Event of Default"
as described and defined in any of the Operative Documents;
(ii) failure of the Company to pay any amount when due under the
terms of this Agreement, and the continuation of such failure for a
period of three (3) days;
(iii) failure on the part of the Company to perform or observe any
other term, covenant or agreement contained in this Agreement or in any
of the Operative Documents to which it is a party on its part to be
performed or observed and (a)
25
<PAGE>
with respect to any such term, covenant or agreement contained
herein, any such failure remains unremedied for 30 days after the
earlier of its discovery by the Company or written notice thereof to
the Company by the Bank; and (b) with respect to any such term,
covenant or agreement contained in any of the other Operative
Documents to which the Company is a party, any such failure remains
unremedied after any applicable grace period specified in such
Operative Documents; provided, however, if the failure stated in the
notice cannot be corrected within the applicable period, the Bank will
not unreasonably withhold its consent to an extension of such time if
it is possible to correct such failure and corrective action is
instituted by the Company within the applicable period and diligently
pursued until the failure is corrected; or in the case of any such
failure which can be cured with due diligence but not within the
30-day period, the Company's failure to proceed promptly to cure such
default and thereafter prosecute the curing of such default with due
diligence;
(iv) a default or event of default shall occur under any loan
agreement, line of credit or other loan document or contract between
the Company and the Bank and the Company shall not cure the same within
any cure period provided therein;
(v) any warranty, representation or other written statement
made by or on behalf of the Company contained herein, in any of the
other Operative Documents to which it is a party or in any instrument
furnished in compliance with or in reference to this Agreement is false
or misleading in any material respect on the date as of which made;
(vi) the Company shall fail to pay its debts generally as they come
due, or shall file any petition or action for relief under any
bankruptcy, reorganization, insolvency or moratorium law, or any other
law or laws for the relief of, or relating to, debtors;
(vii) an involuntary petition shall be filed under any bankruptcy
statute against the Company, or a custodian, receiver, trustee,
assignee for the benefit of creditors (or other similar official) shall
be appointed to take possession, custody, or control of the properties
of the Company, unless such petition or appointment is set aside or
withdrawn or ceases to be in effect within one hundred twenty (120)
days from the date of said filing or appointment; or
(viii) any default shall occur under any other agreement involving
the material borrowing of money or the material extension of credit
under which the Company may be obligated
26
<PAGE>
as borrower or guarantor, if such default consists of the failure
to pay any indebtedness when due of if such default causes the
acceleration of any indebtedness or the termination of any commitment
to lend, or if such default permits, or would permit with notice
and/or the passage of time, the holder of any such obligation to
accelerate any indebtedness or to terminate any commitment to lend;
then, and in any such event, the Bank may, in its sole discretion, but shall not
be obligated to, (1) by notice to the Company, declare all amounts payable by
the Company hereunder (including, without limitation, amounts payable pursuant
to Paragraph 3A hereof) to be forthwith due and payable, and the same shall
thereupon become due and payable without demand, presentment, protest or further
notice of any kind, all of which are hereby expressly waived, and/or (2)
exercise all of its rights and remedies under the Operative Documents and/or (3)
by notice to the Trustee, require the Trustee to accelerate payment of all Bonds
and interest accrued thereon as provided in Section 9.02 of the Indenture.
No remedy herein conferred or reserved is intended to be
exclusive of any other available remedy or remedies, but each and every such
remedy shall be cumulative and shall be in addition to every other remedy given
under this Agreement or any other Operative Document or now or hereafter
existing at law or in equity or by statute. No delay or omission to exercise any
right or power accruing upon any default, omission or failure of performance
hereunder shall impair any such right or power or shall be construed to be a
waiver thereof, but any such right or power may be exercised from time to time
and as often as may be deemed expedient. In order to exercise any remedy
reserved to the Bank in this Agreement, it shall not be necessary to give any
notice, other than such notice as may be herein expressly required. In the event
any provision contained in this Agreement should be breached by any party and
thereafter duly waived by the other party so empowered to act, such waiver shall
be limited to the particular breach so waived and shall not be deemed to waive
any other breach hereunder. No waiver, amendment, release or modification of
this Agreement shall be established by conduct, custom or course of dealing, but
solely by an instrument in writing duly executed by the parties thereunto duly
authorized by this Agreement.
10. NATURE OF BANK'S DUTIES; INDEMNIFICATION. As between the
Company and the Bank, the Company shall assume all risks of the acts, omissions
or misuse of the Letter of Credit by the Trustee. The Bank shall not be
responsible: (i) for the form, validity, sufficiency, accuracy, genuineness or
legal effect of any document submitted by any party in connection with the
application for and issuance of the Letter of Credit, even if it should in fact
prove to be in any or all respects invalid, insufficient,
27
<PAGE>
inaccurate, fraudulent or forged; (ii) for the validity or sufficiency of any
instrument transferring or assigning or purporting to transfer or assign the
Letter of Credit or the rights or benefits thereunder or proceeds thereof, in
whole or in part, which may prove to be invalid or ineffective for any reason;
(iii) for failure of the Trustee to comply fully with conditions required in
order to draw upon the Letter of Credit; (iv) for errors, omissions,
interruptions or delays in transmission or delivery of any messages, by mail,
cable, telegraph, telex, or otherwise, whether or not they be in cipher; (v) for
errors in interpretation of technical terms; (vi) for any loss or delay in the
transmission or otherwise of any document or draft required in order to make a
draw under the Letter of Credit or of proceeds thereof; and (vii) for any
consequences arising from causes beyond the control of the Bank. None of the
above shall affect, impair, or prevent the vesting of any of the Bank's rights
or powers hereunder.
In furtherance and extension and not in limitation of the
specific provisions hereinabove set forth, any action taken or omitted by the
Bank, under or in connection with the Letter of Credit or the related drafts or
document(s), if taken or omitted in good faith, shall be binding upon the
Company and shall not put the Bank under any resulting liability to the Company.
The Company hereby agrees at all times to protect, indemnify
and save harmless the Bank from and against any and all claims, actions, suits
and other legal proceedings, and from and against any and all losses, claims,
demands, liabilities, damages, costs, charges, counsel fees and other expenses
which the Bank may, at any time, sustain or incur by reason of or in consequence
of or arising out of (i) the issuance of the Letter of Credit, (ii) any breach
by any party (other than the Bank or an affiliate of the Bank) of any warranty,
covenant, term or condition in, or the occurrence of any default under, this
Agreement, any other Operative Document or the Bonds, together with all
reasonable expenses resulting from the compromise or defense of any claims or
liabilities arising as a result of any such breach or default, and (iii) defense
against any legal action commenced to challenge the validity of any of the above
referred to instruments, it being the intention of the parties that this
Agreement shall be construed and applied to protect and indemnify the Bank
against any and all risks involved in the issuance of the Letter of Credit, all
of which risks are hereby assumed by the Company, including, without limitation,
any and all risks of the acts or omissions, whether rightful or wrongful, of any
present or future DE JURE or DE FACTO government or governmental authority (all
such acts and omissions, herein called "Government Acts"). The Bank shall not,
in any way, be liable for any failure by the Bank or anyone else to pay any
draft under the Letter of Credit as a result of any Government Acts or any other
cause beyond the control of the Bank. The obligations
28
<PAGE>
of the Company under this Paragraph 10 shall survive the payment of the Bonds
and the termination of this Agreement.
The Company further agrees to indemnify, protect and hold
harmless the Bank and all successors and assigns of the Bank (whether following
the foreclosure of the Mortgage or otherwise) from and against any and all
damages, losses, cleanup costs, liabilities, disabilities, fines, penalties,
costs or expenses (including reasonable attorneys' and paralegals' fees and
expenses) incurred or to be incurred, whether absolute, fixed or contingent,
civil or criminal, and whether arising under federal, state or local law,
incurred or to be incurred (i) in connection with the handling, storage,
transportation or disposal by anyone (other than the Bank or its successors or
assigns) of (A) "hazardous waste," as defined in the Resource Conservation and
Recovery Act and Section 403.703(21, FLORIDA STATUTES, (B) "hazardous
substance," as defined in the Comprehensive Environmental Response, Compensation
and Liability Act, and/or (C) petroleum products or by-products or natural gas,
or (ii) otherwise on account of any violation by the Company of the Hazardous
Materials Laws.
Notwithstanding anything to the contrary contained in this
Paragraph 10, the Company shall not have any obligation to indemnify the Bank in
respect of any liability incurred by the Bank arising solely out of the gross
negligence or willful misconduct of the Bank or out of the wrongful dishonor by
the Bank of a proper demand for payment made under the Letter of Credit. In case
any action shall be brought against the Bank based upon any of the above and in
respect of which indemnity may be sought against the Company, the Bank shall
promptly notify the Company in writing, enclosing a copy of all papers served,
but the omission so to notify the Company of any such action shall not relieve
it of any liability which it may have to the Bank otherwise than under this
Section. In case any such action for which indemnification is sought shall be
brought against the Bank and it shall notify the Company of the commencement
thereof, the Company shall be entitled to participate in and, to the extent that
it shall wish, to assume the defense thereof with counsel reasonably
satisfactory to the Bank. The Bank shall have the right to employ its own
counsel in any such action but the fees and expenses of such counsel shall be at
the expense of the Bank unless (i) the employment of counsel by the Bank has
been authorized by the Company, (i) the Bank shall have reasonably concluded,
based upon an opinion of counsel reasonably satisfactory to the Company, that
there may be a conflict of interest between the Company and the Bank in the
conduct of the defense of such action (in which case the Company shall not have
the right to direct the defense of such action on behalf of the Bank), or (iii)
the Company shall not in fact have employed counsel reasonably satisfactory to
the Bank to assume the defense of such action. The Company shall not be liable
for any
29
<PAGE>
settlement of any action or claim effected without its consent.
11. MISCELLANEOUS.
11A. AMENDMENTS. This Agreement may be amended, and the
Company may take any action herein prohibited, or omit to perform any act herein
required to be performed by it, if the Company shall obtain the written consent
of the Bank. No course of dealing between the Company and the Bank, nor any
delay in exercising any rights hereunder shall operate as a waiver of any rights
of the Bank hereunder.
11B. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All
representations and warranties contained herein or made in writing by the
Company in connection herewith shall survive the execution and delivery of this
Agreement, regardless of any investigation made by the Bank or on its behalf.
11C. EXPENSES. The Company hereby agrees to pay promptly all
costs and expenses in connection with the preparation, issuance, delivery,
filing, recording and administration of the Letter of Credit, this Agreement,
the other Operative Documents, the Bonds and any other documents which may be
delivered in connection with this Agreement, including, without limitation, the
fees and expenses of Holland & Knight LLP, and all costs and expenses (including
reasonable counsel fees and expenses) in connection with (i) the transfer,
drawing upon, change in terms, maintenance, renewal or cancellation of the
Letter of Credit, (ii) any and all amounts which the Bank has paid relative to
the Bank's curing of any Event of Default resulting from the acts or omissions
of the Company under this Agreement, any other Operative Document or the Bonds,
(iii) the enforcement of this Agreement or any other Operative Document, or (iv)
any action or proceeding relating to a court order, injunction or other process
or decree restraining or seeking to restrain the Bank from paying any amount
under the Letter of Credit. In addition, the Company hereby agrees to pay any
and all stamp and other taxes and fees payable or determined to be payable in
connection with the execution, delivery, filing and recording of the Letter of
Credit, this Agreement, the Mortgage, the Assignment, any other Operative
Document or the Bonds, or any other documents which may be delivered in
connection with this Agreement, and agrees to save the Bank harmless from and
against any and all liabilities with respect to or resulting from any delay in
paying or omission to pay such taxes and fees. Notwithstanding the foregoing, no
payment shall be required under this Paragraph 11C in respect of any cost or
expense the Bank has incurred because of its gross negligence or willful
misconduct.
11D. NOTICES. Except as otherwise specified herein, all
notices hereunder shall be given by United States certified or
30
<PAGE>
registered mail or by telecommunication device capable of creating written
record of such notice and its receipt. Notices hereunder shall be effective when
received and shall be addressed as follows:
If to the Bank, to: SunTrust Bank, North Central Florida
411 North Main Street
Gainesville, Florida 32601
Attn: Commercial Real Estate
Department
(Richard J. Blahauvietz)
with a copy to: SunTrust Bank, North Central Florida
203 East Silver Springs Boulevard
Ocala, Florida 34470
Attn: Corporate Lending
(Christine Thibodeau)
If to the Company, to: Exactech, Inc.
4613 NW 6th Street
Gainesville, Florida 32609-1781
Attn: Chief Operating Officer
11E. SATISFACTION REQUIREMENT. If any agreement, certificate
or other writing, or any action taken or to be taken, is by the terms of this
Agreement required to be satisfactory to the Bank, the determination of such
satisfaction shall be made by the Bank in its sole and exclusive judgment
exercised in good faith.
11F. BINDING EFFECT; ASSIGNMENT. This Agreement is a
continuing obligation and shall (i) be binding upon the Company and its
successors, transferees and assigns and (ii) inure to the benefit of and be
enforceable by the Bank and its successors, transferees and assigns; provided,
however, that the Company may not assign all or any part of this Agreement
without the prior written consent of the Bank. The Bank may assign, negotiate,
pledge or otherwise hypothecate all or any portion of this Agreement, or grant
participations herein, in the Letter of Credit or in any of its rights or
security hereunder, including, without limitation, the instruments securing the
Company's obligations hereunder. No such assignment or participation by the
Bank, however, will relieve the Bank of its obligation under the Letter of
Credit. In connection with any assignment or participation, the Bank may
disclose to the proposed assignee or participant any information that the
Company is required to deliver to the Bank pursuant to this Agreement.
11G. GOVERNING LAW. This Agreement is being delivered and is
intended to be performed in the State of Florida, and shall be construed and
enforced in accordance with, and the rights of the parties shall be governed by,
the laws of such State.
31
<PAGE>
11H. COUNTERPARTS. This Agreement may be executed
simultaneously in two or more counterparts, each of which shall be deemed an
original, and it shall not be necessary in making proof of this Agreement to
produce or account for more than one such counterpart.
11I. INCORPORATION OF PREAMBLES AND ANNEXES. The preambles
appearing at the beginning of this Agreement and all annexes to this Agreement
are hereby incorporated into this Agreement by reference.
[Signature page follows]
32
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed and delivered by their respective duly authorized
officers as of the day and year first above written.
EXACTECH, INC.
(CORPORATE SEAL)
By:
Title: President and Chief Operating
Officer
Attest:
By:_________________________
Title: Secretary
SUNTRUST BANK, NORTH CENTRAL FLORIDA
By:
Title:
(CORPORATE SEAL)
33
<PAGE>
ANNEX I
IRREVOCABLE LETTER OF CREDIT
IRREVOCABLE LETTER OF CREDIT
SUNTRUST BANK, NORTH CENTRAL FLORIDA
411 North Main Street
Gainesville, Florida 32601
November 13, 1997
IRREVOCABLE LETTER OF CREDIT NO. 4044
SunTrust Bank, Central Florida,
National Association, as Trustee
225 E. Robinson Street, Suite 250
Orlando, Florida 32801
Attention: Corporate Trust Department
At the request and on the instructions of our customer,
Exactech, Inc., a Florida corporation (the "Company") we hereby establish in
your favor for the benefit of the bondholders, as Trustee under the Indenture of
Trust, dated as of November 1, 1997 (the "Indenture") between the City of
Gainesville, Florida (the "Issuer") and you pursuant to which $3,900,000.00 in
aggregate principal amount of the Issuer's Industrial Development Revenue Bonds
(Exactech, Inc. Project), Series 1997 (the "Bonds") may be issued, this
Irrevocable Letter of Credit in the initial amount of $3,970,417 (hereinafter,
as reduced from time to time in accordance with the provisions hereof, the
"Stated Amount") of which (i) an amount not exceeding $3,900,000.00 (as reduced
from time to time in accordance with the terms hereof (the "Principal
Component"), may be drawn upon with respect to payment of the unpaid principal
amount or the portion of Purchase Price corresponding to principal of the Bonds,
and (ii) an amount not exceeding $70,417 (as reduced from time to time in
accordance with the terms hereof, the "Interest Component") may be drawn upon
with respect to payment of interest accrued or the portion of Purchase Price
corresponding to interest accrued on the Bonds on or prior to their stated
maturity date, effective immediately and expiring on November 16, 2002, unless
terminated earlier in accordance with the provisions hereof or unless otherwise
renewed or extended. All drawings under this Letter of Credit will be paid with
our own funds.
Funds under this Letter of Credit will be made available
I-1
<PAGE>
to you against receipt by us of the following items at the time required below:
(A) if the drawing is being made with respect to the payment of the portion of
the Purchase Price of Bonds delivered to the Tender Agent (as defined in the
Indenture) pursuant to Section 2.02(c), 3.09, 4.01, 4.02 or 4.04 of the
Indenture, corresponding to the principal thereof (an "A Drawing"), receipt by
us of your written certificate in the form of Exhibit A attached hereto
appropriately completed and signed by an Authorized Officer; (B) if the drawing
is being made with respect to the payment of principal of the Bonds (a "B
Drawing"), receipt by us of your written certificate in the form of Exhibit B
attached hereto appropriately completed and signed by an Authorized Officer; and
(C) if the drawing is being made with respect to the payment of interest, or the
portion of Purchase Price corresponding to interest, on the Bonds (a "C
Drawing"), receipt by us of your written certificate in the form of Exhibit C
attached hereto appropriately completed and signed by an Authorized Officer.
Presentation of such certificate(s) shall be made at our office located at
SunTrust Bank, North Central Florida, 411 North Main Street, Gainesville,
Florida 32601, Attention: Commercial Real Estate Department (Richard J.
Blahauvietz), with a copy to SunTrust Bank, North Central Florida, 203 East
Silver Springs Boulevard, Ocala, Florida 34470, Attention: Corporate Lending
(Christine Thibodeau), or at any other office or offices which may be designated
by us by written notice delivered to you.
If a drawing is made by you hereunder at or prior to 4:00
P.M., New York City time, on a Business Day, and provided that the requirements
set forth above have been strictly satisfied and that such drawing and the
documents presented in connection therewith conform to the terms and conditions
hereof, payment shall be made to you, or to your designee, of the amount
specified in immediately available funds, not later than 12:00 Noon, New York
City time, on the next succeeding Business Day or not later than 12:00 Noon, New
York City time, on such later Business Day as you may specify. If requested by
you, payment under this Letter of Credit will be made by deposit of immediately
available funds into a designated account that you maintain with us. If a demand
for payment made by you hereunder does not, in any instance, conform to the
terms and conditions of this Letter of Credit, we shall give you prompt notice
that the demand for payment was not effected in accordance with the terms and
conditions of this Letter of Credit, stating the reasons therefor and that we
will upon your instructions hold any documents at your disposal or return the
same to you. Upon being notified that the demand for payment was not effected in
conformity with this Letter of Credit, you may attempt to correct any such
non-conforming demand for payment to the extent that you are entitled to do so.
As used herein, the term "Business Day" shall mean a day on which the corporate
trust office of the Trustee and commercial banks located in Orlando, Florida,
Gainesville,
I-2
<PAGE>
Florida and Atlanta, Georgia are required or permitted by law to be open for the
purpose of conducting a commercial banking business.
Demands for payment hereunder honored by us shall not, in the
aggregate, exceed the Stated Amount, as the Stated Amount may have been
reinstated by us as provided in the next paragraph. Subject to the preceding
sentence, each "A Drawing" and each "B Drawing" honored by the Bank hereunder
shall PRO TANTO reduce the Principal Component, and each "C Drawing" honored by
the Bank hereunder shall PRO TANTO reduce the Interest Component; any such
reduction shall result in a corresponding reduction in the Stated Amount, it
being understood that after the effectiveness of any such reduction you shall no
longer have any right to make a drawing hereunder in respect of the amount of
such principal and/or interest on the Bonds or the payment of Purchase Price
corresponding thereto.
Upon release by us or on our behalf of any "Pledged Bonds" (as
defined in the Indenture), the Principal Component shall be reinstated
automatically by the principal amount of such Pledged Bonds. In addition, (i) if
you shall not have received, within ten Business Days after any payment in
respect of a "C Drawing", written notice from us that the Interest Component
will not be reinstated, the Interest Component shall be reinstated
automatically, as of the close of business on such tenth Business Day,
including, if the Interest Period (as defined in the Indenture) is three months
or six months in duration, with respect to any Pledged Bonds (unless the
Interest Component previously has been reinstated with respect to such "C
Drawing"), by the amount of such "C Drawing" and (ii) upon the release by us or
on our behalf of any Pledged Bonds, the Interest Component shall be reinstated
automatically by the amount of the "C Drawing" made to pay the portion of the
Purchase Price corresponding to interest on such Pledged Bonds (unless the
Interest Component previously has been reinstated with respect to such "C
Drawing"); provided, however, that in no event shall the Interest Component be
reinstated to an amount in excess of 50 days' interest (such amount computed as
set forth in the second succeeding paragraph) on the sum of the then applicable
Principal Component plus the aggregate principal amount of any Pledged Bonds.
Only you or your successor as Trustee may make a drawing under
this Letter of Credit. Upon the payment to you, to your designee or to your
account of the amount demanded hereunder, we shall be fully discharged on our
obligation under this Letter of Credit with respect to such demand for payment
and we shall not thereafter be obligated to make any further payments under this
Letter of Credit in respect of such demand for payment to you or any other
person who may have made to you or makes to you a demand for payment of
principal of, Purchase Price of, or interest on, any Bond. By paying to you an
amount demanded in accordance herewith, we make no representation as to the
correctness of the amount
I-3
<PAGE>
demanded.
This Letter of Credit applies only to the payment of principal
or the portion of Purchase Price of the Bonds corresponding to principal, and up
to 50 days' interest accruing on the Bonds (computed at a rate of 13% per
annum), from the Date of Issuance through the Termination Date (computed on the
basis of (i) actual days elapsed in a 365- or 366-day year, as the case may be,
so long as the Interest Period is one week or one month in duration, and (ii) a
360-day year comprised of twelve 30-day months, so long as the Interest Period
is three months or six months in duration, and does not apply to any interest
that may accrue thereon or any principal, premium or other amounts which may be
payable with respect to the Bonds subsequent to the expiration of this Letter of
Credit.
Upon the earliest of (i) the honoring by us of the final
drawing available to be made hereunder, (ii) receipt of a certificate signed by
an Authorized Officer and a duly authorized officer of the Company stating that:
"(a) the conditions precedent to the acceptance of a Substitute Letter of Credit
(as defined in the Indenture) have been satisfied, (b) the Trustee has accepted
the Substitute Letter of Credit and (c) on the effective date of the Substitute
Letter of Credit, and after receipt by SunTrust Bank, North Central Florida of
this certificate, SunTrust Bank North Central Florida Irrevocable Letter of
Credit No. 4044 shall terminate" (iii) receipt of a certificate signed by an
Authorized Officer stating that no Bonds remain Outstanding (as defined in the
Indenture), (iv) fifteen days after the Conversion Date (as defined in the
Indenture) and (v) the stated expiration date hereof, this Letter of Credit
shall automatically terminate and be delivered to us for cancellation.
Communications with respect to this Letter of Credit shall be
in writing and shall be addressed to us at SunTrust Bank, North Central Florida,
411 North Main Street, Gainesville, Florida 32601, Attention: Commercial Real
Estate Department (Richard J. Blahauvietz), with a copy to SunTrust Bank, North
Central Florida, 203 East Silver Springs Boulevard, Ocala, Florida 34470,
Attention: Corporate Lending (Christine Thibodeau), specifically referring
thereon to this Letter of Credit by number.
We agree to issue a substitute letter of credit to any
successor trustee (and to successively replace any such substitute letter of
credit) upon the return to us for cancellation of the original of the letter of
credit to be replaced, accompanied by a request relating to such letter of
credit, which (i) shall be substantially in the form of Exhibit D attached
hereto with the blanks appropriately completed, (ii) shall be signed by an
Authorized Officer, (iii) shall specify where indicated therein
I-4
<PAGE>
the same letter of credit number as the number of the letter of credit to be
replaced and (iv) shall state the name and address of the successor trustee.
Each substitute letter of credit will be in substantially the form of this
Letter of Credit except for the date and letter of credit number.
As used herein (a) "Authorized Officer" shall mean any person
signing as one of your Vice Presidents, Assistant Vice Presidents, Trust
Officers or Assistant Trust Officers; and (b) all other capitalized terms used
herein and not otherwise defined shall have the respective meanings assigned to
such terms in the above-mentioned Indenture.
This Letter of Credit sets forth in full our undertaking, and
such undertaking shall not in any way be modified, amended, amplified or limited
by reference to any document, instrument or agreement referred to herein
(including, without limitation, the Bonds), except only the certificate(s)
referred to herein; and any such reference shall not be deemed to incorporate
herein by reference any document, instrument or agreement except for such
certificate(s).
This credit is subject to the Uniform Customs and Practice for
Documentary Credits (1993 Revision), International Chamber of Commerce,
Publication No. 500 (the "Uniform Customs"). This Letter of Credit shall be
deemed to be a contract made under the laws of the State of Florida and shall,
as to matters not governed by the Uniform Customs, be governed by and construed
in accordance with the laws of such State.
Very truly yours,
SUNTRUST BANK, NORTH CENTRAL FLORIDA
By:_________________________________
Title: Senior Vice President
I-5
<PAGE>
EXHIBIT A
CERTIFICATE FOR "A DRAWING"
[Date]
SunTrust Bank, North Central Florida
411 North Main Street
Gainesville, Florida 32601
Attention: Commercial Real Estate Department
(Richard J. Blahauvietz)
SunTrust Bank, North Central Florida
203 East Silver Springs Boulevard
Ocala, Florida 34470
Attention: Corporate Lending
(Christine Thibodeau)
RE: IRREVOCABLE LETTER OF CREDIT NO. 4044
The undersigned, a duly authorized officer of SunTrust Bank,
Central Florida, National Association (the "Trustee"), hereby certifies to
SunTrust Bank, North Central Florida, (the "Bank") that:
(1) The undersigned is the Trustee under the Indenture (as
hereinafter defined) for the holders of the Bonds.
(2) The undersigned, in its capacity as Trustee, is making a
drawing under the above-referenced Letter of Credit in the amount of
$3,900,000 with respect to payment of the portion of the purchase price
of Bonds corresponding to the principal amount thereof, which Bonds are
to be purchased pursuant to Section [2.02(c)] or [3.09] or [4.01] or
[4.02] or [4.04] of the Indenture (as hereinafter defined).
(3) The amount demanded hereby does not exceed the amount
available on the date hereof to be drawn under the above-referenced
Letter of Credit in respect of the portion of the Purchase Price of
Bonds corresponding to the principal amount thereof.
(4) The amount demanded hereby does not include any amount in
respect of the purchase of any Pledged Bonds.
(5) Upon receipt by the undersigned of the amount
I-A-1
<PAGE>
demanded hereby, (a) the undersigned will apply the same directly to
the payment when due of the principal amount owing on account of the
purchase of Bonds pursuant to the Indenture (as hereinafter defined)
and, upon receipt of written request by the Bank, will cause the
Tender Agent to deliver promptly to the Bank Pledged Bonds in an
aggregate principal amount equal to the amount demanded hereby
(together with any and all due bills for interest due on the next
succeeding interest payment date delivered pursuant to Section 4.04 of
the Indenture (as hereinafter defined) in respect of such Pledged
Bonds), (b) no portion of said amount shall be applied by the
undersigned for any other purpose and (c) no portion of said amount
shall be commingled with other funds held by the undersigned.
(6) With respect to any drawing hereunder pursuant to Section
3.09 of the Indenture, the undersigned certifies that the Trustee has
received a copy of your written consent to the purchase of Bonds
pursuant to said Section 3.09.
Any capitalized terms used herein and not otherwise defined
shall have the respective meanings assigned to such terms in the Indenture of
Trust, dated as of November 1, 1997 between the City of Gainesville, Florida and
the undersigned, as Trustee (the "Indenture").
IN WITNESS WHEREOF, the Trustee has executed and delivered
this Certificate as of the ____ day of ___________, ____.
SUNTRUST BANK, CENTRAL FLORIDA,
NATIONAL ASSOCIATION, as Trustee
By:______________________________
Title:
I-A-2
<PAGE>
EXHIBIT B
CERTIFICATE FOR "B DRAWING"
[Date]
SunTrust Bank, North Central Florida
411 North Main Street
Gainesville, Florida 32601
Attention: Commercial Real Estate Department
(Richard J. Blahauvietz)
SunTrust Bank, North Central Florida
203 East Silver Springs Boulevard
Ocala, Florida 34470
Attention: Corporate Lending
(Christine Thibodeau)
RE: IRREVOCABLE LETTER OF CREDIT NO. 4044
The undersigned, a duly authorized officer of SunTrust Bank,
Central Florida, National Association (the "Trustee"), hereby certifies to
SunTrust Bank, North Central Florida (the "Bank") that:
(1) The undersigned is the Trustee under the Indenture (as
hereinafter defined) for the holders of the Bonds.
(2) The undersigned, in its capacity as Trustee, is making a
drawing under the above-referenced Letter of Credit in the amount of
$__________ with respect to the payment of principal of the Bonds,
which amount has, or will, on the Business Day immediately following
the date hereof, become due and payable pursuant to the Indenture (as
hereinafter defined), upon maturity or as a result of acceleration or
redemption of the Bonds.
(3) The amount demanded hereby does not include any amount in
respect of the principal amount of any Pledged Bonds.
(4) The amount demanded hereby, together with the aggregate of
all prior payments made pursuant to "B Drawings" under the
above-referenced Letter of Credit, does not exceed $3,900,000.
(5) The amount demanded hereby does not exceed the amount
available on the date hereof to be drawn under the
I-B-1
<PAGE>
above-referenced Letter of Credit in respect of the principal of
the Bonds.
(6) Upon receipt by the undersigned of the amount demanded
hereby, (a) the undersigned will apply the same directly to the payment
when due of the principal amount owing on account of the Bonds pursuant
to the Indenture (as hereinafter defined), (b) no portion of said
amount shall be applied by the undersigned for any other purpose and
(c) no portion of said amount shall be commingled with other funds held
by the undersigned.
Any capitalized terms used herein and not otherwise defined
shall have the respective meanings assigned to such terms in the Indenture of
Trust, dated as of November 1, 1997 between the City of Gainesville, Florida and
the undersigned, as Trustee (the "Indenture").
IN WITNESS WHEREOF, the Trustee has executed and delivered
this Certificate as of the ______ day of _________, ____.
SUNTRUST BANK, CENTRAL FLORIDA,
NATIONAL ASSOCIATION, as Trustee
By:______________________________
Title:
I-B-2
<PAGE>
EXHIBIT C
CERTIFICATE FOR "C DRAWING"
[Date]
SunTrust Bank, North Central Florida
411 North Main Street
Gainesville, Florida 32601
Attention: Commercial Real Estate Department
(Richard J. Blahauvietz)
SunTrust Bank, North Central Florida
203 East Silver Springs Boulevard
Ocala, Florida 34470
Attention: Corporate Lending
(Christine Thibodeau)
RE: IRREVOCABLE LETTER OF CREDIT NO. 4044
The undersigned, a duly authorized officer of SunTrust Bank,
Central Florida, National Association (the "Trustee"), hereby certifies to
SunTrust Bank, North Central Florida, (the "Bank") that:
(1) The undersigned is the Trustee under the Indenture (as
hereinafter defined) for the holders of the Bonds.
(2) The undersigned, in its capacity as Trustee, is making a
drawing under the above-referenced Letter of Credit in the amount of
$___________ with respect to payment of [the portion of the purchase
price of $___________ in principal amount of the Bonds corresponding to
the accrued interest thereon, which Bonds are to be purchased pursuant
to [Section 3.09 or 4.04] of the Indenture (as hereinafter defined)]
[interest on the Bonds, which amount has accrued and become due and
payable pursuant to the Indenture (as hereinafter defined), upon a
stated interest payment date or as a result of acceleration or
redemption of the Bonds]1 [interest on the Bonds, which has accrued or
will accrue during the calendar month for which this drawing is being
submitted]1.
(3) The amount demanded hereby does not exceed the amount
___________________________
1 For use when Interest Period is three months or six months in durationn.
I-C-1
<PAGE>
available on the date hereof to be drawn under the above-referenced
Letter of Credit in respect of interest on the Bonds.
(4) If the Interest Period is one week or one month in
duration, the amount demanded hereby does not include any amount in
respect of the interest on any Pledged Bonds.
(5) Upon receipt by the undersigned of the amount demanded
hereby, (a) the undersigned will apply the same directly to the payment
when due of the [interest owing on account of the Bonds pursuant to the
Indenture (as hereinafter defined)] [portion of the Purchase Price of
Bonds pursuant to [Section 3.09 or 4.04, as applicable] of the
Indenture (as hereinafter defined) corresponding to accrued interest
thereon], (b) no portion of said amount shall be applied by the
undersigned for any other purpose and (c) no portion of said amount
shall be commingled with other funds held by the undersigned.
(6) With respect to any drawing hereunder pursuant to Section
3.09 of the Indenture, the undersigned certifies that the Trustee has
received a copy of your written consent to the purchase of Bonds
pursuant to said Section 3.09.
Any capitalized terms used herein and not otherwise defined
shall have the respective meanings assigned to such terms in the Indenture of
Trust, dated as of November 1, 1997 between the City of Gainesville, Florida and
the undersigned, as Trustee (the "Indenture").
IN WITNESS WHEREOF, the Trustee has executed and delivered
this Certificate as of the ____ day of _________, ____.
SUNTRUST BANK, CENTRAL FLORIDA,
NATIONAL ASSOCIATION, as Trustee
By:______________________________
Title:
I-C-2
<PAGE>
EXHIBIT D
INSTRUCTION TO ISSUE SUBSTITUTE LETTER OF CREDIT
[Date]
SunTrust Bank, North Central Florida
411 North Main Street
Gainesville, Florida 32601
Attention: Commercial Real Estate Department
(Richard J. Blahauvietz)
SunTrust Bank, North Central Florida
203 East Silver Springs Boulevard
Ocala, Florida 34470
Attention: Corporate Lending
(Christine Thibodeau)
RE: IRREVOCABLE LETTER OF CREDIT NO. 4044
Ladies and Gentlemen:
Reference is made to (i) the above-referenced letter of credit
(the "Old Letter of Credit") and (ii) the Indenture of Trust dated as of
November 1, 1997 (the "Indenture") between the City of Gainesville, Florida and
us.
[Name and address of successor trustee] (the "Successor
Trustee") has been appointed successor trustee under the Indenture. The
Successor Trustee has been properly appointed and qualified pursuant to Article
X of the Indenture. You are hereby requested to issue, in accordance with the
terms of the Old Letter of Credit, a new letter of credit to the Successor
Trustee having the same terms and providing for the same Stated Amount as the
Old Letter of Credit.
We submit herewith for cancellation the original of the Old
Letter of Credit.
The individual signing below on our behalf hereby represents
that he or she is duly authorized to so sign on our behalf.
Very truly yours,
SUNTRUST BANK, CENTRAL FLORIDA,
NATIONAL ASSOCIATION, as Trustee
By:______________________________
Title:
I-D-1
<PAGE>
ANNEX II
PLEDGE AND SECURITY AGREEMENT
PLEDGE AND SECURITY AGREEMENT dated as of November 1, 1997 and
made by EXACTECH, INC., a Florida corporation (the "Borrower"), to SUNTRUST
BANK, NORTH CENTRAL FLORIDA (the "Bank") pursuant to the Letter of Credit
Agreement dated as of November 1, 1997, between the Borrower and the Bank
(hereinafter, as the same may from time to time be amended or supplemented,
called the "Credit Agreement");
W I T N E S S E T H:
WHEREAS, the City of Gainesville, Florida (the "Issuer") is
issuing its Industrial Development Revenue Bonds (Exactech, Inc. Project),
Series 1997 (the "Bonds") under an Indenture of Trust dated as of November 1,
1997 (the "Indenture") between the Issuer and SunTrust Bank, Central Florida,
National Association, as trustee (in such capacity, the "Trustee"), the proceeds
of which are being loaned by the Issuer to the Borrower; and
WHEREAS, the Indenture requires the Trustee to purchase Bonds
under certain circumstances as set forth in Section 2.02(c), 4.01, 4.02 or 4.04
of the Indenture (the "Purchased Bonds") from the holders thereof; and
WHEREAS, in connection with the issuance of the Bonds, the
Borrower has entered into the Credit Agreement in order to cause the Bank to
issue a letter of credit thereunder (the "Letter of Credit") which may be used,
INTER ALIA, to pay the purchase price of the Purchased Bonds (to the extent
moneys drawn under the Letter of Credit are used to purchase Purchased Bonds,
such Purchased Bonds are hereinafter referred to as "Pledged Bonds"); and
WHEREAS, it is the intent of the parties hereto that the
Purchased Bonds, when purchased with amounts drawn under the Letter of Credit,
not be deemed to be redeemed, but remain outstanding under the Indenture; and
WHEREAS, it is a condition precedent to the obligation of the
Bank to enter into the Credit Agreement that the Borrower shall have executed
and delivered this Pledge Agreement to the Bank;
NOW, THEREFORE, in consideration of the premises and in order
to induce the Bank to enter into the Credit Agreement and issue the Letter of
Credit thereunder and for other good and valuable consideration, receipt of
which is hereby acknowledged, the Borrower hereby agrees with the Bank as
follows:
1. DEFINED TERMS. Unless otherwise defined herein, terms
defined in the Credit Agreement shall have such defined meanings when used
herein.
<PAGE>
2. PLEDGE. The Borrower hereby pledges, assigns, hypothecates,
transfers, and delivers to the Bank all its right, title and interest to the
Pledged Bonds as the same may be from time to time delivered to the Trustee or
Tender Agent by the holders thereof and hereby grants to the Bank a first lien
on, and security interest in, its right, title and interest in and to the
Pledged Bonds, the interest thereon and all proceeds thereof, as collateral
security for the prompt and complete payment when due of all amounts due in
respect of the obligations of the Borrower set forth in Paragraph 3A of the
Credit Agreement (the "Obligations"). Notwithstanding anything herein to the
contrary, if the Bonds are held in the DTC Book-Entry Only System (as defined in
the Indenture), Pledged Bonds shall be held by the Tender Agent in its
participant account with DTC (as defined in the Indenture) for the benefit of
the Bank. The Tender Agent shall mark its records to indicate that such Pledged
Bonds are so held for the benefit of the Bank. In the event that the Pledged
Bonds are held as provided in this paragraph, the Tender Agent and the Trustee
shall, promptly following a written request from the Bank, take such steps as
are necessary to cause such Pledged Bonds to be converted to physical form and
delivered to or at the direction of the Bank.
3. PAYMENTS ON THE BONDS. If, while this Pledge Agreement is
in effect, the Borrower shall become entitled to receive or shall receive any
principal or interest payment in respect of the Pledged Bonds, the Borrower
agrees to accept the same as the Bank's agent and to hold the same in trust on
behalf of the Bank and to deliver the same forthwith to the Bank. All sums of
money so paid in respect of the Pledged Bonds which are received by the Borrower
and paid to the Bank shall be credited against the obligations of the Borrower
to the Bank in the manner set forth in Paragraph 3 of the Credit Agreement. So
long as no Default or Event of Default has occurred and is continuing, any
amounts received by the Bank in respect of the stated interest on any Pledged
Bonds in excess of the amounts then owing the Bank pursuant to Paragraph
3A(i)(2) of the Credit Agreement shall be remitted to the Borrower.
4. COLLATERAL. All property at any time pledged to the Bank
hereunder (whether specifically described herein or not) and all income
therefrom and proceeds thereof, are herein collectively sometimes called the
"Collateral."
5. RELEASE OF PLEDGED BONDS. If the Borrower makes or causes
to be made to the Bank a payment in respect of its reimbursement obligation
under Paragraph 3A(i) of the Credit Agreement pursuant to clause (i) of
Paragraph 3B thereof or such a payment is made on behalf of the Borrower
pursuant to clause (ii) of Paragraph 3B thereof, the Bank agrees to release from
the lien of this Pledge Agreement and deliver to the Borrower or the Trustee for
resale in accordance with Section 4.07 of the Indenture, as the case may be,
Pledged Bonds of the applicable series in a principal amount equal to the amount
of the payment so made or to the principal amount of Pledged Bonds so purchased.
Notwithstanding the
II-2
<PAGE>
foregoing, no payment of amounts owing to the Bank pursuant to Paragraph 3A(i)
of the Credit Agreement may be made, and no Pledged Bonds shall be released,
during the period commencing two Business Days prior to an interest payment date
with respect to the Bonds and ending on such interest payment date.
6. RIGHTS OF THE BANK. The Bank shall not be liable for
failure to collect or realize upon the Obligations or any collateral security or
guarantee therefor, or any part thereof, or for any delay in so doing nor shall
it be under any obligation to take any action whatsoever with regard thereto. If
an Event of Default has occurred and is continuing, the Bank may thereafter,
without notice, exercise all rights, privileges or options pertaining to any
Pledged Bonds as if it were the absolute owner thereof, upon such terms and
conditions as it may determine, all without liability except to account for
property actually received by it, but the Bank shall have no duty to exercise
any of the aforesaid rights, privileges or options and shall not be responsible
for any failure to do so or delay in so doing.
7. REMEDIES. In the event that any portion of the Obligations
has been declared due and payable pursuant to the Credit Agreement, the Bank,
without demand of performance or other demand, advertisement or notice of any
kind (except the notice specified below of time and place of public or private
sale) to or upon the Borrower or any other person (all and each of which
demands, advertisements and/or notices are hereby expressly waived), may
forthwith collect, receive, appropriate and realize upon the Collateral, or any
part thereof, and/or may forthwith sell, assign, give option or options to
purchase, contract to sell or otherwise dispose of and deliver said Collateral,
or any part thereof, in one or more parcels at public or private sale or sales,
at any exchange, broker's board or at any of the Bank's offices or elsewhere
upon such terms and conditions as it may deem advisable and at such prices as it
may deem best available, for cash or on credit or for future delivery without
assumption of any credit risk, with the right to the Bank upon any such sale or
sales, public or private, to purchase the whole or any part of said Collateral
so sold, free of any right or equity of redemption in the Borrower, which right
or equity is hereby expressly waived or released. The Bank shall apply the net
proceeds of any such collection, recovery, receipt, appropriation, realization
or sale, after deducting all reasonable costs and expenses of every kind
incurred therein or incidental to the care, safekeeping or otherwise of any and
all of the Collateral or in any way relating to the rights of the Bank
hereunder, including reasonable attorney's fees and legal expenses, to the
payment, in whole or in part, of the Obligations in such order as the Bank may
elect, the Borrower remaining liable for any deficiency remaining unpaid after
such application, and only after so applying such net proceeds and after the
payment by the Bank of any other amount required to be paid by any provision of
law, including, without limitation, Section 679.504(1)(c), Florida Statutes,
need the Bank account for the surplus, if any, to the Borrower. The
II-3
<PAGE>
Borrower agrees that the Bank need not give more than ten days' notice of the
time and place of any public sale or of the time after which a private sale or
other intended disposition is to take place and that such notice is reasonable
notification of such matters. No notification need be given to the Borrower if
it has signed after default a statement renouncing or modifying any right to
notification of sale or other intended disposition. In addition to the rights
and remedies granted to it in this Pledge Agreement and in any other instrument
or agreement securing, evidencing or relating to any of the Obligations, the
Bank shall have all the rights and remedies of a secured party under the Uniform
Commercial Code of the State of Florida. The Borrower shall be liable for the
deficiency if the proceeds of any sale or other disposition of the Collateral
are insufficient to pay all amounts to which the Bank is entitled, and the fees
of any attorneys employed by the Bank to collect such deficiency.
8. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE BORROWER.
The Borrower represents and warrants that:
(a) on the date of delivery to the Bank of any Pledged Bonds
described herein, neither the Remarketing Agent (as defined in the Indenture)
nor the Trustee will have any right, title or interest in and to the Pledged
Bonds;
(b) it has, and on the date of delivery to the Bank of any
Pledged Bonds will have, full power, authority and legal right to pledge all of
its right, title and interest in and to the Pledged Bonds pursuant to this
Pledge Agreement;
(c) this Pledge Agreement has been duly authorized, executed
and delivered by the Borrower and constitutes a legal, valid and binding
obligation of the Borrower enforceable in accordance with its terms;
(d) no consent of any other party (including, without
limitation, creditors of the Borrower) and no consent, license, permit, approval
or authorization of, exemption by, notice or report to, or registration, filing
or declaration with, any governmental authority, domestic or foreign is required
to be obtained by the Borrower in connection with the execution, delivery or
performance of this Pledge Agreement;
(e) the execution, delivery and performance of this Pledge
Agreement will not violate any provision of any applicable law or regulation or
of any order, judgment, writ, award or decree of any court, arbitrator or
governmental authority, domestic or foreign, or of any mortgage, indenture,
lease, contract, or other agreement, instrument or undertaking to which the
Borrower is a party or which purports to be binding upon the Borrower or upon
its assets and will not result in the creation or imposition of any lien, charge
or encumbrance on or security interest in any of the assets of the Borrower
except as contemplated by this Pledge
II-4
<PAGE>
Agreement; and
(f) the pledge, assignment and delivery of such Pledged Bonds
pursuant to this Pledge Agreement will create a lien on and a security interest
in, all right, title or interest of the Borrower in or to such Pledged Bonds,
and the proceeds thereof, subject to no prior pledge, lien, mortgage,
hypothecation, security interest, charge, option or encumbrance or to any
agreement purporting to grant to any third party a security interest in the
property or assets of the Borrower which would include the Pledged Bonds. The
Borrower covenants and agrees that it will defend the Bank's right, title and
security interest in and to the Pledged Bonds and the proceeds thereof against
the claims and demands of all persons whomsoever; and covenants and agrees that
it will have like title to and right to pledge any other property at any time
hereafter pledged to the Bank as collateral hereunder and will likewise defend
the Bank's right thereto and security interest therein.
9. NO DISPOSITION, ETC. Without the prior written consent of
the Bank, the Borrower agrees that it will not sell, assign, transfer, exchange,
or otherwise dispose of, or grant any option with respect to, the Collateral,
nor will it create, incur or permit to exist any pledge, lien, mortgage,
hypothecation, security interest, charge, option or any other encumbrance with
respect to any of the Collateral, or any interest therein, or any proceeds
thereof, except for the lien and security interest provided for by this Pledge
Agreement and sale of the Pledged Bonds pursuant to Section 4.07(b) of the
Indenture.
10. FURTHER ASSURANCES. The Borrower agrees that at any time
and from time to time upon the written request of the Bank, the Borrower will
execute and deliver such further documents and do such further acts and things
as the Bank may reasonably request in order to effect the purposes of this
Pledge Agreement and to maintain the lien of this Pledge Agreement on the
Pledged Bonds as a first lien.
11. SEVERABILITY. Any provision of this Pledge Agreement which
is prohibited or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof, and any
such prohibition or unenforceability in any jurisdiction shall not invalidate or
render unenforceable such provision in any such jurisdiction.
12. NO WAIVER; REMEDIES CUMULATIVE. The Bank shall not by any
act, delay, omission or otherwise be deemed to have waived any of its rights or
remedies hereunder and no waiver shall be valid unless in writing, signed by the
Bank, and then only to the extent therein set forth. A waiver by the Bank of any
right or remedy hereunder on any one occasion shall not be construed as a bar to
any right or remedy which the Bank would otherwise have on any future occasion.
No failure to exercise nor any delay in exercising on the part of the Bank, any
right, power or privilege hereunder, shall
II-5
<PAGE>
operate as a waiver thereof; nor shall any single or partial exercise of any
right, power or privilege hereunder preclude any other or further exercise
thereof or the exercise of any other right, power or privilege. The rights and
remedies herein provided are cumulative and may be exercised singly or
concurrently, and are not exclusive of any rights or remedies provided by law.
13. WAIVERS, AMENDMENTS; APPLICABLE LAW. None of the terms or
provisions of this Pledge Agreement may be waived, altered, modified or amended
except by an instrument in writing, duly executed by the Bank. This Pledge
Agreement and all obligations of the Borrower hereunder shall be binding upon
the successors and assigns of the Borrower, and shall, together with the rights
and remedies of the Bank hereunder, inure to the benefit of the Bank and its
successors and assigns. This Pledge Agreement shall be governed by, and be
construed and interpreted in accordance with, the laws of the State of Florida.
14. LITIGATION. Notwithstanding anything herein to the
contrary, in the event any legal proceedings are instituted between the parties
hereto concerning this Pledge Agreement, the prevailing party in such
proceedings shall be entitled to recover its costs of suit, including reasonable
attorneys' fees, at both trial and appellate levels.
IN WITNESS WHEREOF, the Borrower has caused this Pledge
Agreement to be duly executed as of the day and year first above written.
EXACTECH, INC.
By:_____________________________
Title: President
By:________________________
Title: Secretary
II-6
<PAGE>
ANNEX III
PENDING LITIGATION
On January 28, 1997, a competitor filed a complaint and jury
demand for patent infringement against the Company. 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 who believes that the Company's products do
not infringe the Competitor's patent.
On August 21, 1997, a sales organization in the northeast
filed a complaint alleging that the Company induced several of their sales
agents to breach their employment agreements when the Company contracted with
these agents to sell its products. The plaintiff is seeking an unspecified
monetary award and punitive damages in the amount to be determined at trial. The
plaintiff also asked that the Company be enjoined from soliciting plaintiff's
employees, interfering with their customer relationships and selling products to
their former customers. The Company denies the allegations. At a hearing in the
Superior Court of New Jersey on October 8, 1997, the judge refused to grant any
of the above injunctions sought by the plaintiff.
III-1
<PAGE>
ANNEX IV
INFORMATION REGARDING ERISA PLANS
The Company implemented a 401(k) pension plan (the "Plan") in
the second quarter of 1996. The Company is the administrator of the Plan, and
the trustees of the Plan are the following officers of the Company. Joel C.
Phillips, Betty Petty and Timothy J. Seese. The Company currently matches
employee contributions at the rate of $0.25 for each dollar of employee
contributions, subject to the availability of funds. The Plan does not require
the Company to match future employee contributions. Investment vehicles offered
by the Plan are: (i) five mutual funds managed by Merrill Lynch (including a
money market fund), (ii) the Alliance Growth Fund and (iii) the Colonial Newport
Tiger Fund.
IV-1
<PAGE>
ANNEX V
PERMITTED LIENS
(All references to public records of Alachua County, Florida)
1. Easement granted to City of Gainesville, dated December 3, 1974, filed
December 17, 1974 in Official Records Book 920, at Page 58.
2. Declaration of Restrictive Covenants, Reservations, Conditions and
Easements of Northwood Commercial Park, which creates easements and
establishes private charges or assessments filed October 20, 1975, in
Official Records Book 969, at Page 620, as amended and supplemented in
Official Records Book 1279, at Page 625, Official Records Book 1334, at
Page 886, Official Records Book 1380, at Page 699 and Official Records Book
1462, at Page 323, and as affected by the conveyance of ingress and egress
easements to the City of Gainesville by Deed filed in Official Records Book
2102, at Page 1507.
3. Easement granted to N.W. Inc., dated April 21, 1980, filed April 23, 1980
in Official Records Book 1274, at Page 434.
4. Easement granted to Turkey Creek, Inc., dated October 21, 1981, filed
October 23, 1981 in Official Records Book 1378, at Page 655.
5. Resolutions of the Board of County Commissioners of Alachua County filed in
Official Records Book 1929, at Page 839 and Official Records Book 2078, at
Page 1999.
6. Easement granted to City of Gainesville, dated September 9, 1997, filed
September 22, 1997, in Official Records Book 2132, at Page 963.
1 For use when Interest Period (as defined in Indenture) is seven days or
one month in duration.
EXHIBIT 10.62
PLEDGE AND SECURITY AGREEMENT
PLEDGE AND SECURITY AGREEMENT dated as of November 1, 1997 and
made by EXACTECH, INC., a Florida corporation (the "Borrower"), to SUNTRUST
BANK, NORTH CENTRAL FLORIDA (the "Bank") pursuant to the Letter of Credit
Agreement dated as of November 1, 1997, between the Borrower and the Bank
(hereinafter, as the same may from time to time be amended or supplemented,
called the "Credit Agreement");
W I T N E S S E T H:
WHEREAS, the City of Gainesville, Florida (the "Issuer") is
issuing its Industrial Development Revenue Bonds (Exactech, Inc. Project),
Series 1997 (the "Bonds") under an Indenture of Trust dated as of November 1,
1997 (the "Indenture") between the Issuer and SunTrust Bank, Central Florida,
National Association, as trustee (in such capacity, the "Trustee"), the proceeds
of which are being loaned by the Issuer to the Borrower; and
WHEREAS, the Indenture requires the Trustee to purchase Bonds
under certain circumstances as set forth in Section 2.02(c), 4.01, 4.02 or 4.04
of the Indenture (the "Purchased Bonds") from the holders thereof; and
WHEREAS, in connection with the issuance of the Bonds, the
Borrower has entered into the Credit Agreement in order to cause the Bank to
issue a letter of credit thereunder (the "Letter of Credit") which may be used,
INTER ALIA, to pay the purchase price of the Purchased Bonds (to the extent
moneys drawn under the Letter of Credit are used to purchase Purchased Bonds,
such Purchased Bonds are hereinafter referred to as "Pledged Bonds"); and
WHEREAS, it is the intent of the parties hereto that the
Purchased Bonds, when purchased with amounts drawn under the Letter of Credit,
not be deemed to be redeemed, but remain outstanding under the Indenture; and
WHEREAS, it is a condition precedent to the obligation of the
Bank to enter into the Credit Agreement that the Borrower shall have executed
and delivered this Pledge Agreement to the Bank;
NOW, THEREFORE, in consideration of the premises and in order
to induce the Bank to enter into the Credit Agreement and issue the Letter of
Credit thereunder and for other good and valuable consideration, receipt of
which is hereby acknowledged, the Borrower hereby agrees with the Bank as
follows:
1. DEFINED TERMS. Unless otherwise defined herein, terms
defined in the Credit Agreement shall have such defined
<PAGE>
meanings when used herein.
2. PLEDGE. The Borrower hereby pledges, assigns, hypothecates,
transfers, and delivers to the Bank all its right, title and interest to the
Pledged Bonds as the same may be from time to time delivered to the Trustee or
Tender Agent by the holders thereof and hereby grants to the Bank a first lien
on, and security interest in, its right, title and interest in and to the
Pledged Bonds, the interest thereon and all proceeds thereof, as collateral
security for the prompt and complete payment when due of all amounts due in
respect of the obligations of the Borrower set forth in Paragraph 3A of the
Credit Agreement (the "Obligations"). Notwithstanding anything herein to the
contrary, if the Bonds are held in the DTC Book-Entry Only System (as defined in
the Indenture), Pledged Bonds shall be held by the Tender Agent in its
participant account with DTC (as defined in the Indenture) for the benefit of
the Bank. The Tender Agent shall mark its records to indicate that such Pledged
Bonds are so held for the benefit of the Bank. In the event that the Pledged
Bonds are held as provided in this paragraph, the Tender Agent and the Trustee
shall, promptly following a written request from the Bank, take such steps as
are necessary to cause such Pledged Bonds to be converted to physical form and
delivered to or at the direction of the Bank.
3. PAYMENTS ON THE BONDS. If, while this Pledge Agreement is
in effect, the Borrower shall become entitled to receive or shall receive any
principal or interest payment in respect of the Pledged Bonds, the Borrower
agrees to accept the same as the Bank's agent and to hold the same in trust on
behalf of the Bank and to deliver the same forthwith to the Bank. All sums of
money so paid in respect of the Pledged Bonds which are received by the Borrower
and paid to the Bank shall be credited against the obligations of the Borrower
to the Bank in the manner set forth in Paragraph 3 of the Credit Agreement. So
long as no Default or Event of Default has occurred and is continuing, any
amounts received by the Bank in respect of the stated interest on any Pledged
Bonds in excess of the amounts then owing the Bank pursuant to Paragraph
3A(i)(2) of the Credit Agreement shall be remitted to the Borrower.
4. COLLATERAL. All property at any time pledged to the Bank
hereunder (whether specifically described herein or not) and all income
therefrom and proceeds thereof, are herein collectively sometimes called the
"Collateral."
5. RELEASE OF PLEDGED BONDS. If the Borrower makes or causes
to be made to the Bank a payment in respect of its reimbursement obligation
under Paragraph 3A(i) of the Credit Agreement pursuant to clause (i) of
Paragraph 3B thereof or such a payment is made on behalf of the Borrower
pursuant to clause
2
<PAGE>
(ii) of Paragraph 3B thereof, the Bank agrees to release from the lien of this
Pledge Agreement and deliver to the Borrower or the Trustee for resale in
accordance with Section 4.07 of the Indenture, as the case may be, Pledged Bonds
of the applicable series in a principal amount equal to the amount of the
payment so made or to the principal amount of Pledged Bonds so purchased.
Notwithstanding the foregoing, no payment of amounts owing to the Bank pursuant
to Paragraph 3A(i) of the Credit Agreement may be made, and no Pledged Bonds
shall be released, during the period commencing two Business Days prior to an
interest payment date with respect to the Bonds and ending on such interest
payment date.
6. RIGHTS OF THE BANK. The Bank shall not be liable for
failure to collect or realize upon the Obligations or any collateral security or
guarantee therefor, or any part thereof, or for any delay in so doing nor shall
it be under any obligation to take any action whatsoever with regard thereto. If
an Event of Default has occurred and is continuing, the Bank may thereafter,
without notice, exercise all rights, privileges or options pertaining to any
Pledged Bonds as if it were the absolute owner thereof, upon such terms and
conditions as it may determine, all without liability except to account for
property actually received by it, but the Bank shall have no duty to exercise
any of the aforesaid rights, privileges or options and shall not be responsible
for any failure to do so or delay in so doing.
7. REMEDIES. In the event that any portion of the Obligations
has been declared due and payable pursuant to the Credit Agreement, the Bank,
without demand of performance or other demand, advertisement or notice of any
kind (except the notice specified below of time and place of public or private
sale) to or upon the Borrower or any other person (all and each of which
demands, advertisements and/or notices are hereby expressly waived), may
forthwith collect, receive, appropriate and realize upon the Collateral, or any
part thereof, and/or may forthwith sell, assign, give option or options to
purchase, contract to sell or otherwise dispose of and deliver said Collateral,
or any part thereof, in one or more parcels at public or private sale or sales,
at any exchange, broker's board or at any of the Bank's offices or elsewhere
upon such terms and conditions as it may deem advisable and at such prices as it
may deem best available, for cash or on credit or for future delivery without
assumption of any credit risk, with the right to the Bank upon any such sale or
sales, public or private, to purchase the whole or any part of said Collateral
so sold, free of any right or equity of redemption in the Borrower, which right
or equity is hereby expressly waived or released. The Bank shall apply the net
proceeds of any such collection, recovery, receipt, appropriation, realization
or sale, after deducting all reasonable costs and expenses of every kind
incurred therein or incidental to the care, safekeeping or otherwise of any and
all of the Collateral or in any way relating
3
<PAGE>
to the rights of the Bank hereunder, including reasonable attorney's fees and
legal expenses, to the payment, in whole or in part, of the Obligations in such
order as the Bank may elect, the Borrower remaining liable for any deficiency
remaining unpaid after such application, and only after so applying such net
proceeds and after the payment by the Bank of any other amount required to be
paid by any provision of law, including, without limitation, Section
679.504(1)(c), Florida Statutes, need the Bank account for the surplus, if any,
to the Borrower. The Borrower agrees that the Bank need not give more than ten
days' notice of the time and place of any public sale or of the time after which
a private sale or other intended disposition is to take place and that such
notice is reasonable notification of such matters. No notification need be given
to the Borrower if it has signed after default a statement renouncing or
modifying any right to notification of sale or other intended disposition. In
addition to the rights and remedies granted to it in this Pledge Agreement and
in any other instrument or agreement securing, evidencing or relating to any of
the Obligations, the Bank shall have all the rights and remedies of a secured
party under the Uniform Commercial Code of the State of Florida. The Borrower
shall be liable for the deficiency if the proceeds of any sale or other
disposition of the Collateral are insufficient to pay all amounts to which the
Bank is entitled, and the fees of any attorneys employed by the Bank to collect
such deficiency.
8. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE BORROWER.
The Borrower represents and warrants that:
(a) on the date of delivery to the Bank of any Pledged Bonds
described herein, neither the Remarketing Agent (as defined in the Indenture)
nor the Trustee will have any right, title or interest in and to the Pledged
Bonds;
(b) it has, and on the date of delivery to the Bank of any
Pledged Bonds will have, full power, authority and legal right to pledge all of
its right, title and interest in and to the Pledged Bonds pursuant to this
Pledge Agreement;
(c) this Pledge Agreement has been duly authorized, executed
and delivered by the Borrower and constitutes a legal, valid and binding
obligation of the Borrower enforceable in accordance with its terms;
(d) no consent of any other party (including, without
limitation, creditors of the Borrower) and no consent, license, permit, approval
or authorization of, exemption by, notice or report to, or registration, filing
or declaration with, any governmental authority, domestic or foreign is required
to be obtained by the Borrower in connection with the execution, delivery or
performance of this Pledge Agreement;
4
<PAGE>
(e) the execution, delivery and performance of this Pledge
Agreement will not violate any provision of any applicable law or regulation or
of any order, judgment, writ, award or decree of any court, arbitrator or
governmental authority, domestic or foreign, or of any mortgage, indenture,
lease, contract, or other agreement, instrument or undertaking to which the
Borrower is a party or which purports to be binding upon the Borrower or upon
its assets and will not result in the creation or imposition of any lien, charge
or encumbrance on or security interest in any of the assets of the Borrower
except as contemplated by this Pledge Agreement; and
(f) the pledge, assignment and delivery of such Pledged Bonds
pursuant to this Pledge Agreement will create a lien on and a security interest
in, all right, title or interest of the Borrower in or to such Pledged Bonds,
and the proceeds thereof, subject to no prior pledge, lien, mortgage,
hypothecation, security interest, charge, option or encumbrance or to any
agreement purporting to grant to any third party a security interest in the
property or assets of the Borrower which would include the Pledged Bonds. The
Borrower covenants and agrees that it will defend the Bank's right, title and
security interest in and to the Pledged Bonds and the proceeds thereof against
the claims and demands of all persons whomsoever; and covenants and agrees that
it will have like title to and right to pledge any other property at any time
hereafter pledged to the Bank as collateral hereunder and will likewise defend
the Bank's right thereto and security interest therein.
9. NO DISPOSITION, ETC. Without the prior written consent of
the Bank, the Borrower agrees that it will not sell, assign, transfer, exchange,
or otherwise dispose of, or grant any option with respect to, the Collateral,
nor will it create, incur or permit to exist any pledge, lien, mortgage,
hypothecation, security interest, charge, option or any other encumbrance with
respect to any of the Collateral, or any interest therein, or any proceeds
thereof, except for the lien and security interest provided for by this Pledge
Agreement and sale of the Pledged Bonds pursuant to Section 4.07(b) of the
Indenture.
10. FURTHER ASSURANCES. The Borrower agrees that at any time
and from time to time upon the written request of the Bank, the Borrower will
execute and deliver such further documents and do such further acts and things
as the Bank may reasonably request in order to effect the purposes of this
Pledge Agreement and to maintain the lien of this Pledge Agreement on the
Pledged Bonds as a first lien.
11. SEVERABILITY. Any provision of this Pledge Agreement which
is prohibited or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of
5
<PAGE>
such prohibition or unenforceability without invalidating the remaining
provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
such jurisdiction.
12. NO WAIVER; REMEDIES CUMULATIVE. The Bank shall not by any
act, delay, omission or otherwise be deemed to have waived any of its rights or
remedies hereunder and no waiver shall be valid unless in writing, signed by the
Bank, and then only to the extent therein set forth. A waiver by the Bank of any
right or remedy hereunder on any one occasion shall not be construed as a bar to
any right or remedy which the Bank would otherwise have on any future occasion.
No failure to exercise nor any delay in exercising on the part of the Bank, any
right, power or privilege hereunder, shall operate as a waiver thereof; nor
shall any single or partial exercise of any right, power or privilege hereunder
preclude any other or further exercise thereof or the exercise of any other
right, power or privilege. The rights and remedies herein provided are
cumulative and may be exercised singly or concurrently, and are not exclusive of
any rights or remedies provided by law.
13. WAIVERS, AMENDMENTS; APPLICABLE LAW. None of the terms or
provisions of this Pledge Agreement may be waived, altered, modified or amended
except by an instrument in writing, duly executed by the Bank. This Pledge
Agreement and all obligations of the Borrower hereunder shall be binding upon
the successors and assigns of the Borrower, and shall, together with the rights
and remedies of the Bank hereunder, inure to the benefit of the Bank and its
successors and assigns. This Pledge Agreement shall be governed by, and be
construed and interpreted in accordance with, the laws of the State of Florida.
14. LITIGATION. Notwithstanding anything herein to the
contrary, in the event any legal proceedings are instituted between the parties
hereto concerning this Pledge Agreement, the prevailing party in such
proceedings shall be entitled to recover its costs of suit, including reasonable
attorneys' fees, at both trial and appellate levels.
[Signature page follows]
6
<PAGE>
IN WITNESS WHEREOF, the Borrower has caused this Pledge
Agreement to be duly executed as of the day and year first above written.
EXACTECH, INC.
By:____________________________
Title: President and Chief
Operating Officer
By:________________________
Title: Secretary
7
EXHIBIT 10.63
This instrument prepared by (and return to):
Edward W. Vogel III
HOLLAND & KNIGHT LLP
92 Lake Wire Drive
P. O. Box 32092
Lakeland, FL 33802-2092
MORTGAGE AND SECURITY AGREEMENT
FOR RECORDER'S USE ONLY
This is a Mortgage and Security Agreement dated as of the 1st
day of November, 1997, executed by Exactech, Inc., a Florida corporation, 4613
NW 6th Street, Gainesville, Florida 32609-1781, as Mortgagor, and delivered to
SunTrust Bank, North Central Florida, 411 North Main Street, Gainesville,
Florida 32601, as Mortgagee.
1. DEFINITIONS. The Mortgagor and the Mortgagee agree that,
unless the context otherwise specifies or requires, the following terms shall
have the meanings herein specified, such definitions to be applicable equally to
the singular and the plural forms of such terms. Unless defined below, all terms
used herein in capitalized form shall have the meanings ascribed to those terms
by the Agreement, as that term is hereinafter defined.
"Agreement" means the Letter of Credit Agreement dated as of
November 1, 1997 between the Mortgagor (therein designated the "Company") and
the Mortgagee (therein designated the "Bank").
"Aggregate Removal Amount" means $200,000.
"Annual Removal Amount" means $25,000.
"Bond Documents" means the Bonds, the Agreement, this
Mortgage, and any other document executed and delivered in order to carry out
the intent of each and all of the foregoing.
"Bonds" means the City of Gainesville, Florida Industrial
Development Revenue Bonds (Exactech, Inc. Project), Series 1997 originally
issued in the principal amount of $3,900,000.
No intangible taxes or documentary stamp taxes are due hereon pursuant to
Sections 159.31 and 159.50, Florida Statutes.
<PAGE>
"Collateral" means all machinery, equipment, furniture and
fixtures now or hereafter owned by the Mortgagor of every kind and description
that is either located on the Mortgaged Property or purchased with the proceeds
of the Bonds.
"Indebtedness" means the Indebtedness secured by this Mortgage
consisting of (i) all existing and future obligations of the Mortgagor pursuant
to this Mortgage and the Agreement, including without limitation, the
Mortgagor's obligations under all of the provisions of paragraph 3 of the
Agreement; and (ii) all of the Mortgagor's obligations to the Mortgagee under
any other loan agreement or extensions of credit by the Mortgagee to the
Mortgagor.
"Letter of Credit" means the Irrevocable Letter of Credit
dated November 13, 1997, issued by the Mortgagee to secure the Bonds, as the
same may be hereafter amended, and any successor or substitute letter of credit.
"Maximum Principal Indebtedness" means the Indebtedness in the
amount of the Letters of Credit, together with future advances that may be
secured hereby, but in no event to exceed $10,000,000.
"Mortgage" means this Mortgage and Security Agreement.
"Mortgaged Property" means the Mortgagor's interest in the
Project Site, the buildings, fixtures, furnishings, and improvements now or
hereafter thereon, the Collateral, including the Project as herein defined, and
all rents, receipts, issues, profits, proceeds (including insurance proceeds and
condemnation awards) and products thereof, and all substitutions therefor or
renewals or replacements thereof, together with all property described in
Section 2 hereof.
"Mortgagee" means SunTrust Bank, North Central Florida, and
its successors or assigns or any other entity issuing a Letter of Credit to
secure the Bonds.
"Mortgagee's Address" means 411 North Main Street,
Gainesville, Florida 32601.
"Mortgagor" means Exactech, Inc., a Florida corporation.
"Mortgagor's Address" means 4613 NW 6th Street, Gainesville,
Florida 32609-1781.
2
<PAGE>
"Permitted Encumbrances" means and shall include the
following:
(a) those liens, charges and encumbrances listed in Exhibit
"C" attached hereto to which the Mortgagor's title to the Project Site
or the Project is subject;
(b) liens for taxes and special assessments not delinquent or
which are being contested in good faith by or on behalf of the
Mortgagor in accordance with the terms and provisions of Section 15
hereof;
(c) mechanic's, workmen's, repairmen's or carrier's liens or
other similar liens, provided that the same shall be discharged by the
Mortgagor in the ordinary course of business and without undue delay or
the validity of the same shall be contested in good faith by or on
behalf of the Mortgagor in accordance with the provisions of Section 15
hereof; and
(d) the Agreement and the documents contemplated hereby,
including this Mortgage.
"Project" means, collectively, the structures, fixtures,
improvements and equipment described in Exhibit "A" attached hereto, to be
located on the Project Site, together with all substitutions therefor or
renewals or replacements thereof, as they may exist at any time.
"Project Site" means the real property in Orange County,
Florida described in Exhibit "B" attached hereto, together with all easements
and rights of way and other rights or interests pertaining thereto.
2. MORTGAGE. In consideration of the premises and in order to
secure the Indebtedness and the performance and observance of all the provisions
of the Agreement and this Mortgage, the Mortgagor hereby mortgages, grants,
bargains, sells, liens, remises, releases, conveys, assigns, transfers,
hypothecates, pledges, delivers, sets over, warrants and confirms to the
Mortgagee the following described real and personal property, rights, titles,
interests and estates:
(a) The Mortgaged Property, including, but not limited to, the
Project Site, the Project and all structures, buildings, improvements,
machinery, furnishings, equipment, fixtures, and other tangible
personal property constituting part of the Project, and all components
and parts thereof, the electrical, heating, cooling, ventilating, gas
distribution, compressed air, air conditioning, water, sewer and waste
disposed, elevator and sprinkler systems incorporated into the Project,
and
3
<PAGE>
all fixtures and improvements described in Exhibit "A" hereto,
together with all substitutions therefor or renewals or replacements
thereof or accessions thereto, whether now existing or hereafter
arising, and all architectural plans and drawings, all building permits
and other permits and construction contracts used in and about the
Project, the property described in paragraph 7 hereof, and the proceeds
of any of the foregoing.
(b) Any and all rights and appurtenances belonging, incident
or appertaining to said real property, improvements, fixtures,
machinery, furnishings, equipment and other personal property described
in subparagraph (a) above, or any part thereof.
(c) Any and all rights of the Mortgagor under any leases or
subleases of or use agreements related to the Mortgaged Property,
heretofore or hereafter entered into, and all right, title and interest
of the Mortgagor thereunder, including, without limitation, cash or
securities deposited thereunder pursuant to said leases, subleases, or
use agreements, and all rents, issues, proceeds and profits accruing
from conversion, voluntary or involuntary, of any of the foregoing into
cash or liquidated claims, including, without limitation, proceeds of
insurance and condemnation awards. From and after an Event of Default,
the Mortgagor does hereby empower and authorize the Mortgagee, or its
agents or attorneys, to collect, sue for, settle or compromise all of
the rents that may become due under any lease or sublease pertaining to
the Mortgaged Property and avail themselves of and pursue all remedies
for the enforcement of any such lease or sublease as the Mortgagor
might have pursued but for this Mortgage.
TO HAVE AND TO HOLD, the same unto Mortgagee.
PROVIDED, HOWEVER, that if Mortgagor shall promptly pay or
cause to be paid to Mortgagees all Indebtedness secured hereby at the times and
in the manner stipulated under the Agreement, then this Mortgage, and all the
properties, interests and rights hereby granted, conveyed and assigned shall
cease and be void, but shall
4
<PAGE>
otherwise remain in full force and effect.
3. SECURED INDEBTEDNESS; FUTURE ADVANCES; MAXIMUM AMOUNT AND
TIME. This Mortgage shall secure the Indebtedness as specified above, and such
future advances, whether such advances are obligatory or are to be made at the
option of the Mortgagee, or otherwise, as are made within twenty (20) years from
the date hereof, to the same extent as is such future advances were made on the
date of execution of this Mortgage. The total amount of Indebtedness secured
hereby may decrease or increase from time to time, but the total unpaid balance
so secured at any one time shall not exceed the Maximum Principal Indebtedness,
plus (i) interest thereon, (ii) any disbursements made for the payment of taxes,
levies and insurance on the Mortgaged Property, and (iii) payments made for
repair, maintenance, protection or preservation of the Mortgaged Property. This
Mortgage shall not secure any future advances made more than twenty (20) years
from the date hereof.
4. PERFORMANCE AND PAYMENT. Taking into account all grace and
cure periods, if any, the Mortgagor shall perform, observe and comply with all
of its obligations under each of the Bond Documents, and shall pay or cause to
be paid all Indebtedness, including, without limitation, all and singular the
principal of, premium, if any, and interest on and other sums of money payable
under the Agreement and shall pay or cause to be paid all other sums secured
hereby promptly on the days respectively the same severally become due, whether
in due course or upon acceleration.
5. TITLE COVENANTS. The Mortgagor covenants that the Mortgaged
Property is free from all encumbrances, other than Permitted Encumbrances, that
lawful seisin of and good right to encumber the Mortgaged Property is vested in
the Mortgagor, and that the Mortgagor hereby fully warrants the title to the
Mortgaged Property and will defend the same against the lawful claims of all
persons whomsoever. The mortgage and security interest granted to Mortgagee
herein is senior to all obligations except Permitted Encumbrances.
6. CONDITIONS TO CHANGES IN PROPERTY. The right of the
Mortgagor to make any material changes to the Mortgaged Property in the manner
hereinafter provided is expressly subject to the condition that such changes
will not impair the structural soundness, usefulness or market value of the
Mortgaged Property or significantly alter the character or purpose or detract
from the operating efficiency of the Mortgaged Property, impair its revenue-
producing capacity, or otherwise materially and adversely affect its operation
or otherwise materially and adversely affect the
5
<PAGE>
purposes of this Mortgage and, to the extent that such changes will modify the
nature, scope or purpose of the Project, the Mortgagor must obtain consent of
the Mortgagee and shall deliver to the Mortgagee (i) a certificate of an
independent architect that such change will not materially alter or generally
change the character of the Project as improvements to land and a capital
project under the Internal Revenue Code of 1986, as amended, and a "project"
within the meaning of Part II of Chapter 159, Florida Statutes, and (ii) an
opinion addressed to the Mortgagee of counsel nationally recognized on the
subject of municipal bonds or other counsel acceptable to the Mortgagee, that
such changes will not result in the interest on the Bonds becoming included in
gross income for federal income tax purposes.
7. AFTER-ACQUIRED PROPERTY. All buildings, structures,
improvements, fixtures, furnishings, machinery, equipment or other property now
or hereafter acquired, constructed or installed, whether or not financed with
the proceeds of the Bonds, on the Project Site, and all substitutions or
replacements for or accessions to such property, are subject to the terms and
conditions of this Mortgage and the security interest created hereby.
8. REMOVAL FREE OF NOTICE. The Mortgagor may, from time to
time at its own cost and expense, without notice to and without obtaining the
approval of the Mortgagee and free of any obligation to make any replacement
thereof, demolish, remove or dispose of any structure, fixture or other
improvements now or hereafter existing as part of the Mortgaged Property,
provided the fair market value of the property so demolished or removed at the
time of its demolition or removal does not exceed the Annual Removal Amount in
any one fiscal year or the Aggregate Removal Amount in the aggregate during the
term of this Mortgage, and the conditions of paragraph 6 hereof, which may
require the Mortgagee's approval, are complied with, and such property
thereafter shall not constitute a part of the Mortgaged Property. The Mortgagee
shall, at the Mortgagor's written request, join in the execution of any
instruments necessary to release the lien on such property created by this
Mortgage.
9. REMOVAL WITH NOTICE; REPLACEMENTS AND SUBSTITUTIONS SUBJECT
TO MORTGAGE. If the Mortgagor in its sole discretion determines that any
personal property constituting a part of the Mortgaged Property has become
inadequate, obsolete, worn out, unsuitable, undesirable or unnecessary and if
the conditions of paragraph 6 hereof are complied with, the Mortgagor may give
written notice thereof to the Mortgagee, and the Mortgagor may then remove such
property from the Mortgaged Property and may, to the
6
<PAGE>
extent permitted by law, sell, trade in, exchange or otherwise dispose of same,
in whole or in part, provided that the Mortgagor shall, at its own cost and
expense, acquire, construct or install replacement or substitute personal
property having a fair market value and usefulness to the operations of the
Mortgaged Property (but not necessarily the same function) at least equal to the
fair market value and usefulness, prior to demolition, removal or disposal, of
the property demolished, removed or disposed of, and provided further, however,
that all such real property, structures, fixtures or other improvements
constructed or installed in replacement or substitution thereof shall be free of
all liens and encumbrances, other than Permitted Encumbrances, and shall become
a part of the Mortgaged Property. The Mortgagee shall, at the Mortgagor's
written request, join in the execution of any instruments necessary to release
the lien created by this Mortgage on property permitted to be released by this
Section.
10. COVENANT AGAINST UNAUTHORIZED REMOVAL. Except as otherwise
provided above or as permitted by the Agreement, the Mortgagor shall not remove,
sell, transfer, convey, lease or otherwise dispose of any of the Mortgaged
Property or any part thereof.
11. NO ABATEMENT OF OBLIGATIONS. The sale, demolition,
substitution or removal of any of the Mortgaged Property shall not result in any
abatement or diminution of the Indebtedness secured by this Mortgage. The
Mortgagor shall pay all costs incurred or damages resulting from any sale,
demolition, substitution or removal of any property pursuant to the provisions
of this Mortgage.
12. FURTHER ASSURANCES. The Mortgagor shall, at its expense,
promptly and duly execute, acknowledge and deliver to the Mortgagee such further
documents, instruments, financing and similar statements and assurances and take
such further action as may from time to time be reasonably required or requested
by the Mortgagee in order to more effectively carry out the intent and purposes
of this Mortgage and the Agreement issued thereunder and other instruments
contemplated thereby or hereby. The Mortgagor shall deliver to the Mortgagee
copies of all material documents, notices and other communications received by
it relating to the Mortgaged Property. The Mortgagee, upon reasonable notice,
may enter upon and inspect the Mortgaged Property at all reasonable times.
13. TAXES, ATTORNEYS' FEES, EXPENSES. The Mortgagor shall
maintain the Mortgaged Property, pay all lawful taxes,
7
<PAGE>
assessments and charges thereon and pay any reasonable attorneys' fees and
expenses required pursuant to the Agreement, all as more particularly provided
below. Mortgagor shall reimburse and hold harmless the Mortgagee for and on
account of all excise taxes, sales and use taxes, documentary stamp taxes and
other similar taxes or impositions (including any penalties and interest for
failure to pay such taxes or impositions) levied against the Mortgagee with
respect to this Mortgage and the Agreement, or the amounts payable by the
Mortgagor hereunder or thereunder or any assignment of the rights of any such
persons. This provision shall survive payment in full of the Indebtedness and
termination of this Mortgage.
14. MAINTENANCE AND REPAIR. The Mortgagor agrees that until
payment of the Indebtedness due and payable shall have been made, it will, at
its own expense, keep or cause to be kept the Mortgaged Property (i) in safe
operating condition and (ii) in good repair and in good operating condition and
make from time to time all necessary repairs thereto and renewals and
replacements thereof. The Mortgagor shall not permit or suffer others to commit
a nuisance in or about the Mortgaged Property or itself commit a nuisance in
connection with its use or occupancy thereof.
15. TAXES, OTHER GOVERNMENTAL CHARGES AND UTILITY CHARGES. The
Mortgagor shall pay or cause to be paid, as the same shall become due, all fees,
taxes, charges, assessments and governmental charges of any kind whatsoever that
may at any time be lawfully assessed or levied against the Mortgagor with
respect to the Mortgaged Property or any portion thereof or with respect to the
original issuance of the Bonds, including without limiting the generality of the
foregoing, any taxes levied against the Mortgagor upon or with respect to the
income or profits of the Mortgagor from the Project, and including all ad
valorem taxes lawfully assessed upon the Mortgaged Property, all utility and
other charges incurred in the operation, maintenance, use, occupancy and upkeep
of the Mortgaged Property, all assessments and charges lawfully made by any
governmental body against the Mortgagor for or on account of the Mortgaged
Property; provided, however, that nothing in this Section 15 shall require the
payment thereof, so long as the validity thereof shall be contested in good
faith by the Mortgagor by appropriate legal proceedings in accordance with the
terms set forth below; and further provided that, with respect to special
assessments or other governmental charges that may lawfully be paid in
installments over a period of years, the Mortgagor shall be obligated to pay
only such installments as are required to be paid during the term hereof.
8
<PAGE>
The Mortgagor represents and warrants that, as of the date of
execution of this Mortgage, there exists no lien, charge or encumbrance other
than the Permitted Encumbrances, upon the Mortgaged Property, prior to the
security interest of the Mortgagee. Except as otherwise permitted by the
provisions of this Mortgage, the Mortgagor will not create or suffer to be
created any lien, encumbrance or charge upon the Mortgaged Property, other than
the Permitted Encumbrances, and subject to the provisions of this section
relating to permitted contests, the Mortgagor will satisfy or cause to be
discharged, or will make adequate provision to satisfy and discharge, within
sixty (60) days after the Mortgagor is notified or becomes aware of the same,
all lawful claims and demands for labor, materials, supplies or other items
which, if not satisfied, might by law become a lien upon the Mortgaged Property.
If any such lien shall be filed or asserted against the Mortgaged Property by
reason of work, labor, services or materials supplied or claimed to have been
supplied the Mortgagor shall, subject to the provisions of this section relating
to permitted contests, within thirty (30) days after the Mortgagor receives
notice of the filing thereof or the assertion thereof, cause the same to be
discharged of record, or effectively prevent the enforcement or foreclosure
thereof against the Mortgagor by contest, payment, deposit, bond, order of court
or otherwise.
The Mortgagor shall not be required to pay any tax, charge,
assessment or imposition referred to in this section so long as the Mortgagor
shall contest or there shall be contested on the Mortgagor's behalf , in good
faith and at the Mortgagor's own cost and expense, the amount or validity
thereof, in an appropriate manner or by appropriate proceedings which shall
operate during the pendency thereof to prevent the collection of or other
realization upon the tax, assessment, levy, fee, rent, charge, lien or
encumbrance so contested, and the sale, forfeiture, or loss of the Mortgaged
Property or any part thereof or interest therein, to satisfy the same; provided,
that no such contest shall subject the Mortgagee to the risk of any liability.
Each such contest shall be promptly prosecuted to final conclusion (subject to
the right of the Mortgagor to settle any such contest), and in any event the
Mortgagor will save the Mortgagee harmless against all losses, judgments,
decrees and costs (including attorneys' fees and expenses in connection
therewith) and will, promptly after the final determination of such contest or
settlement thereof, pay and discharge the amounts which shall be levied,
assessed or imposed or determined to be payable therein, together with all
penalties, fines, interest, costs and expenses thereon or in connection
therewith. The Mortgagor shall give the Mortgagee prompt written notice of any
such contest.
9
<PAGE>
If the Mortgagee shall notify the Mortgagor that, in
Mortgagee's determination (which may be based upon advice of counsel), by
nonpayment of any of the foregoing items, the Mortgaged Property, or any
substantial part thereof, will be materially endangered, subjected to imminent
loss or forfeiture or the obligations of the Mortgagor under this Mortgage or
the Agreement shall be materially impaired, then the Mortgagor shall promptly
pay all such unpaid items or otherwise cause them to be satisfied and discharged
and not be liens or encumbrances upon the Mortgaged Property.
The Mortgagor shall furnish the Mortgagee, upon request, with
proof of payment of any taxes, governmental charges, insurance premiums or other
charges required to be paid by the Mortgagor under this Mortgage.
16. CASUALTY INSURANCE. The Mortgagor shall during the term of
this Mortgage keep the Mortgaged Property continuously insured against such
risks as are customarily insured against in connection with the operation of
similar facilities of like size, type and location, paying as the same become
due and payable all premiums with respect thereto. Such insurance shall include,
without intending to limit the foregoing: (a) "all risk" hazard insurance
(including builder's risk), on a non-reporting completed value basis with the
Mortgagee named as loss payee, in an amount sufficient to preclude any
co-insurance; (b) insurance against damage by fire and other casualty on a
non-reporting basis with a uniform standard extended coverage endorsement on a
repair or replacement basis in an amount not less than one hundred percent
(100%) of the then actual cost of replacement (excluding costs of replacing
excavations and foundations, but without deduction for depreciation) of the
Mortgaged Property; (c) general comprehensive liability insurance, with the
Mortgagee named as an additional insured, against claims for bodily injury,
death or property damage occurring on, in or about the Mortgaged Property (such
coverage to include provisions waiving subrogation against the Mortgagee) in
amounts not less than $1 million with respect to bodily injury to any one
person, $2 million with respect to bodily injury to two or more persons in any
one accident and $1 million with respect to property damage resulting from any
one occurrence; and (d) if the Mortgaged Property, or any portion thereof, is
located in a flood-prone or flood hazard area as described in the Flood Disaster
Protection Act of 1973, flood insurance in the maximum amount available required
by Florida and/or law. Each insurance policy required by this section (i) shall
be issued or written by such insurer (or insurers) selected by the Mortgagor as
is financially responsible, and is authorized to do business in the State of
10
<PAGE>
Florida, (ii) shall be in such form and with such provisions (including, without
limitation and where applicable, New York standard mortgage and loss payable
clauses payable to the Mortgagee, waiver of subrogation clauses, provisions
relieving the insurer of liability to the extent of minor claims and designation
of the named insureds) as are generally considered standard for the type of
insurance involved and (iii) shall prohibit cancellation or substantial
modification without at least thirty (30) days prior written notice to the
Mortgagee. All insurance policies carried pursuant to the foregoing shall name
the Mortgagee as a party insured thereunder as the interest of such party may
appear, and proceeds thereunder shall be made payable and shall be applied as
provided in paragraph 17 below. A certificate of, or copies of each such policy
shall be filed with the Mortgagee.
The Mortgagor shall pay all premiums and charges for the
maintenance and renewal of the insurance and shall furnish the Mortgagee with
receipts and proofs thereof before the expiration thereof, without notice or
demand from each Mortgagee. If the Mortgagor fails to do so, then the Mortgagee,
without waiving the option to foreclose or exercise any other remedy hereunder,
may, after written notice to the Mortgagor, (but shall not be required to)
obtain such insurance for the protection of the Mortgagee, and any expenses
reasonably incurred by the Mortgagee in so doing shall become part of the
Indebtedness secured hereby, shall become immediately due and payable, and shall
bear interest at the maximum lawful rate. In the event of foreclosure of this
Mortgage or transfer of the Mortgaged Property in full or partial satisfaction
of the Indebtedness secured hereby, all interest of the Mortgagor in the policy
or policies of insurance (including any claim to proceeds attributable to losses
theretofore occurring but not yet paid to Mortgagor) shall pass to the
purchaser, grantee or transferee, subject, however, to the terms and provisions
of this Mortgage. Any insurance policy shall contain a provision requiring
thirty (30) days written notice of cancellation prior to such cancellation.
The Mortgagor shall provide to its insurers all reports or
notices of change in value of the Mortgaged Property so as to maintain the
insurance coverage required by the terms of this Section 16.
17. INSURANCE PROCEEDS AND CONDEMNATION AWARDS. If, prior to
the payment in full or satisfaction of the Indebtedness (or provisions for
payment thereof having been made in accordance with the provisions hereof and of
the Agreement) the Mortgaged Property, or any part or component thereof, shall
be damaged, lost
11
<PAGE>
or destroyed, by whatever cause, except as provided in paragraphs 8 and 9
hereof, or if any public authority or entity, in the exercise of its power of
eminent domain, takes or damages the Mortgaged Property, or any part or
component thereof, there shall be no abatement or reduction in the amounts
payable by the Mortgagor under the Agreement, or the Indebtedness payable under
this Mortgage, and all of the insurance proceeds (whether payable from the
policies of insurance described in paragraph 16 above or from other policies of
insurance carried by the Mortgagor or third parties), and any award or
compensation resulting from such taking or damage by condemnation shall be
applied to the repair, rebuilding, replacement or restoration of the Project or,
at the Mortgagor's election and with the prior written approval of the
Mortgagee, the redemption of Bonds.
All such replacements, repairs, rebuilding or restorations so
made, whether or not requiring the expenditure of the Mortgagor's own funds,
shall automatically become part of the Project and subject to the lien of this
Mortgage without the necessity of filing any further documents or instruments.
This Mortgage extends to and shall encumber any insurance
proceeds payable on account of the Mortgaged Property and any judgments, awards,
damages and settlements hereafter rendered or paid and resulting from
condemnation proceedings with respect to the Mortgaged Property, or any portion
thereof, or the taking of the Mortgaged Property, or any portion thereof, under
the power of eminent domain.
18. NOTICES OF DAMAGE, ETC. In case of any material damage to
or destruction of all or any part of the Mortgaged Property, or notice of a
default (or alleged default) under the Lease Agreement or any event which would
materially adversely affect Mortgagor's rights in the Mortgaged Property, the
Mortgagor shall give prompt written notice thereof to the Mortgagee. In case of
a taking or proposed taking of all or any part of the Mortgaged Property or any
right therein by eminent domain, the party upon which notice of such taking is
served shall give prompt notice to the other parties to this Mortgage. Each such
notice shall describe generally the nature and extent of such damage,
destruction, taking, loss, proceedings or negotiations.
19. NON-DISTURBANCE. From the date hereof and throughout the
term of this Mortgage, the parties hereto agree that, so long as the Mortgagor
is not in default hereunder, the Mortgagor shall possess, occupy, use, enjoy and
operate the Mortgaged Property. Such possession, occupation, use, enjoyment
12
<PAGE>
and operation of the Mortgaged Property shall be exclusive and the Mortgagee
agrees that, so long as no Event of Default has occurred, it will permit no
other use of the Project by anyone other than the Mortgagor during the term of
this Mortgage without the written consent of the Mortgagor.
20. EVENTS OF DEFAULT. The occurrence of any one or more of
the following events shall constitute an Event of Default hereunder:
(a) a default by the Mortgagor in the due and punctual payment
of any amounts payable by virtue of the Agreement or this Mortgage
after the expiration of all grace or cure periods, if any; or
(b) a default or event of default under or with respect to any
other loan agreement, line of credit agreement or any other type of
credit extension document between the Mortgagee and the Mortgagor shall
occur and continue thereunder beyond any grace period granted
thereunder; or
(c) a default in the performance or observance of any other of
the covenants agreements or conditions on the part of the Mortgagor
contained in this Mortgage or the Agreement; provided, however, that no
Event of Default shall be deemed to have occurred under this subsection
(c) if, in the reasonable opinion of the Mortgagee, corrective action
has been instituted by the Mortgagor and is being diligently pursued;
provided, however, that the additional period for pursuit of such
corrective action shall in no event exceed thirty (30) days; or
(d) this Mortgage shall cease to be first priority mortgage
and/or security agreement (subject only to Permitted Encumbrances) or
shall be invalid or unenforceable in any material respect.
21. REMEDIES. Upon the occurrence of any Event of Default,
THEN AND THEREUPON, the Mortgagee may do any one or more of the following at its
election:
(1) Declare all Indebtedness and other amounts
payable under the Agreement for the remainder of the term of this
Mortgage to be immediately due and payable, whereupon the same shall
immediately become due and
13
<PAGE>
payable.
(2) Foreclose on this Mortgage, enter into possession
of the Mortgaged Property or any part thereof without notice or demand
and sell or lease the Mortgaged Property or any part thereof for the
account of the Mortgagor, holding the Mortgagor liable for the
difference between the amounts received and the amounts payable by the
Mortgagor.
(3) Collect and apply to the Indebtedness all rents
and profits from the Mortgaged Property.
(4) Take such steps to protect and enforce its rights
whether by action, suit or proceeding in equity or at law for the
specific performance of any covenant, condition or agreement in the
Agreement or in this Mortgage, or in aid of the execution of any power
herein granted, or for any foreclosure hereunder, or for the
enforcement of any other appropriate legal or equitable remedy or
otherwise as the Mortgagee shall elect.
(5) Apply, on motion to any court of competent
jurisdiction, for the appointment of a receiver to take charge of,
manage, preserve, protect, complete construction of and operate the
Mortgaged Property; to collect the rents, issues, profits and income
therefrom; to make all necessary and needed repairs to the Mortgaged
Property; to pay all taxes and assessments against the Mortgaged
Property and insurance premiums for insurance thereon; and after the
payment of the expense of the receivership, including reasonable
attorney's fees to the Mortgagee's attorney, and after compensation to
the receiver for management and completion of the Mortgaged Property,
to apply the net proceeds derived therefrom in reduction of the
Indebtedness secured hereby or in such manner as such court shall
direct. The appointment of such receiver shall be a matter of strict
right to the Mortgagee, regardless of the value of the security for the
Indebtedness secured hereby or of the solvency of any party bound for
the payment of such indebtedness. All expenses, fees and compensation
incurred pursuant to a receivership approved by any such court shall be
secured by the lien of this Mortgage until paid. The receiver and the
receiver's agents shall be entitled to enter upon and take possession
of any and all of the Mortgaged Property, together with any and all
business assets used
14
<PAGE>
in conjunction therewith or thereon, or any part or parts
thereof, and operate and conduct such business or businesses to the
same extent and in the same manner as any owner of such property might
lawfully do. The receiver, personally or through his agents, may
exclude any parties entitled thereto pursuant to the Agreement wholly
from the Mortgaged Property, and have, hold, use, operate, manage and
control the same and each and every part thereof, and may, in the name
of the Mortgagor exercise all of the Mortgagor's rights and powers and
maintain, restore, insure and keep insured, the Mortgaged Property as
the receiver may deem judicious. Such receivership shall, at the
option of the Mortgagee, continue until full payment of all sums
secured hereby, or until title to the Mortgaged Property shall have
passed by foreclosure sale under this Mortgage.
(6) Take or exercise all rights and remedies granted
a secured party by the Florida Uniform Commercial Code.
22. RIGHTS CUMULATIVE AND CONTINUING. The rights of the
Mortgagee granted and arising under this Mortgage, the Agreement or any other
instrument or agreement existing between the Mortgagor and the Mortgagee shall
be separate, distinct, and cumulative of other powers and rights herein granted
and of all other rights which the Mortgagee may have in law or equity, and the
exercise of any one or more of them shall not be construed as an election to
proceed under any one provision herein, or under the Agreement, or under any
such other instrument or agreement, to the exclusion of any other provisions, or
an election of remedies to the bar of any other remedy allowed in law or equity.
No waiver of any obligation hereunder or of any obligation secured hereby shall
at any time thereafter be held to be a waiver of the terms hereof or of the
terms of any other instrument or agreement. No delay or omission by the
Mortgagee to exercise any right, power or remedy accruing upon any default shall
exhaust or impair any such right, power or remedy or shall be construed to be a
waiver of any such default or acquiescence therein. Every right, power and
remedy given by this Mortgage to the Mortgagee may be exercised from time to
time and as often as may be deemed expedient by the Mortgagee. Each and every
right, power and remedy shall be in addition to any other right, power or remedy
given hereunder or now or hereafter existing at law or in equity or by Statute.
23. CURING OF DEFAULTS BY MORTGAGEE. The Mortgagee shall,
after giving notice to the other parties to this Mortgage,
15
<PAGE>
have the right to pay, or cause to be paid, any sums required to be paid and to
take, or cause to be taken, any other action deemed by the Mortgagee to be
necessary or convenient to cure any Event of Default of the Mortgagor under the
Agreement or hereunder. Any and all sums expended or expenses incurred by the
Mortgagee in so curing an Event of Default shall become immediately due and
payable by the Mortgagor to the Mortgagee and, together with interest from date
of disbursement, shall be secured by the lien of this Mortgage. The Mortgagee
shall be subrogated to the interest of any lien holder paid out of sums secured
by this Mortgage. No payment by the Mortgagee under this section or any other
provisions contained herein or in the Agreement shall be deemed to cure or waive
any default or Event of Default.
24. APPLICATION OF MONEYS. Anything in this Mortgage to the
contrary notwithstanding, the moneys realized by the Mortgagee in the
enforcement of this Mortgage shall be applied as follows:
First: To the payment of the reasonable costs and expenses of
any enforcement of this Mortgage or the Indebtedness, including any sale of the
Mortgaged Property, including reasonable compensation to the Mortgagee, its
agents and counsel, and of any judicial proceedings wherein the same may be
made, and of all expenses, liabilities and advances made or incurred by the
Mortgagee under the Agreement or this Mortgage, including reasonable attorneys'
fees and expenses and reasonable fees for paralegal services and expert
witnesses through any appeal and any bankruptcy or insolvency proceedings,
together with all taxes or assessments, except any taxes, assessments or other
charges subject to which the Mortgaged Property shall have been sold.
Second: To the Mortgagee to be applied to the payment of the
amounts due, owing or unpaid under the Agreement, and any late charges thereon.
Third: To the payment of any other Indebtedness, including
sums required to be paid by the Mortgagor pursuant to any provision of the
Agreement or this Mortgage.
Fourth: To the payment of the surplus, if any, to whosoever
may be lawfully entitled to receive the same.
25. NOTICE. Every provision for notice and demand or request
hereunder shall be deemed fulfilled by written notice and demand or request if
the same is mailed by depositing it in any United States post office station or
letter box, enclosed in a
16
<PAGE>
postpaid envelope registered or certified mail, return receipt requested,
addressed as provided below and shall be deemed effective when received: if to
the Mortgagor, at the Mortgagor's Address, if to the Mortgagee, at the
Mortgagee's Address.
The Mortgagor and the Mortgagee may, by notice given
hereunder, designate any further or different addresses from time to time.
26. SEVERABILITY. If any provision of this Mortgage or the
Agreement or of any other instrument or agreement existing between the Mortgagor
and the Mortgagee, shall to any extent be finally found by a court of competent
jurisdiction to be invalid or unenforceable, neither the remainder of the
instrument in which such provision is contained, nor the application of the
provision to other persons, entities, or circumstances nor any other instrument
referred to herein, shall be affected thereby, but instead shall be enforced to
the maximum extent permitted in law or equity.
27. MODIFICATIONS. The rights of the Mortgagee may not be
changed, waived, discharged or terminated orally, but only by an instrument in
writing executed by the Mortgagor and the Mortgagee. Any agreement hereafter
made by the Mortgagee and Mortgagor relating to this Mortgage shall be superior
to the rights of the holder of any intervening lien or encumbrance affecting the
Mortgaged Property.
28. NO ILLEGAL INTEREST TO BE CHARGED. All agreements between
the Mortgagor and the Mortgagee under this Mortgage or the Agreement are
expressly limited so that in no contingency or event whatsoever shall the amount
paid or agreed to be paid to the Mortgagee or its successors or assigns for the
use, forbearance or detention of the money to be advanced to the Mortgagor
exceed the highest rate permissible under law applicable thereto by a court of
competent jurisdiction. If, from any circumstances whatever, fulfillment of any
provisions of this Mortgage or the Agreement or of any other agreement existing
between the Mortgagor and the Mortgagee, at the time performance of such
provision shall be due, shall involve payment of interest at a rate which
exceeds the highest lawful rate as so determined, then IPSO FACTO the obligation
to be fulfilled shall be reduced to such highest lawful rate. If from any
circumstances whatsoever, the Mortgagee or its successors or assigns shall ever
receive interest, the amount of which would exceed such highest lawful rate, the
portion thereof which would be excessive interest shall be reimbursed to the
Mortgagor by the party receiving such excess, together with
17
<PAGE>
interest on such excess at the highest lawful rate of interest (or 25% if there
is then no maximum lawful rate). Provided, however, that nothing contained
herein or in the Agreement shall be deemed to create a defense, contractual or
otherwise, to any sums due or to become due or coming due under this Mortgage or
the Agreement secured hereby or under any other agreement existing among the
Mortgagor and the Mortgagee, where no such defense exists at law, as for
example, where corporations are barred from asserting the defense of usury or in
a case wherein no limit exists upon the rate of interest which may be charged.
29. HEADINGS. Caption headings are for convenience of
reference only and in no way limit the scope or intent of any provision or
section of this Mortgage.
30. SUCCESSORS AND ASSIGNS. All covenants and stipulations in
these presents contained shall bind the successors and assigns of the Mortgagor
and the Mortgagee and shall inure to the benefit of and be available to the
successors (including any substitute letter of credit) and assigns of the
Mortgagor and the Mortgagee.
31. GOVERNING LAW. The terms and provisions of this Mortgage
are to be governed by the laws of the State of Florida.
32. COUNTERPARTS. This Mortgage may be executed in any number
of counterparts and each of such counterparts shall for all purposes be deemed
to be an original; and all such counterparts shall together constitute but one
and the same mortgage.
33. OTHER TERMS. The Agreement prohibits or restricts, among
other things, the transfer, lease, further encumbrance or other disposition of
the Mortgaged Property, which provisions are incorporated herein by reference.
34. GREATER ESTATE. In the event the Mortgagor is the owner of
a leasehold estate with respect to any portion of the Mortgaged Property and,
prior to the satisfaction of the Indebtedness and the cancellation of this
Mortgage of record, the Mortgagor obtains a fee estate in such portion of the
Mortgaged Property, then, such fee estate shall automatically, and without
further action of any kind on the part of the Mortgagor, be and become subject
to the security lien of this Mortgage.
35. WAIVER OF JURY TRIAL. THE MORTGAGOR AND THE MORTGAGEE
HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE THE RIGHT TO A TRIAL BY
JURY IN RESPECT OF ANY LITIGATION BASED HEREON,
18
<PAGE>
OR ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS MORTGAGE AND ANY AGREEMENT
CONTEMPLATED TO BE EXECUTED IN CONJUNCTION HEREWITH, OR ANY COURSE OF CONDUCT,
COURSE OF DEALINGS, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF THE
PARTIES. THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE PARTIES CARRYING OUT
THE TRANSACTIONS CONTEMPLATED HEREBY.
19
<PAGE>
IN WITNESS WHEREOF, the Mortgagor has duly signed, sealed and
executed this document as of the date first above stated.
EXACTECH, INC., a Florida
corporation
(SEAL)
By:______________________________
Name: TIMOTHY J. SEESE
Title: PRESIDENT AND CHIEF
OPERATING OFFICER
ATTEST: Address: 4613 NW 6TH STREET
GAINESVILLE, FL 32609-1781
By:________________________
Name: BETTY PETTY
Title: SECRETARY
Address: 4613 NW 6TH STREET
GAINESVILLE, FL 32609-1781
STATE OF FLORIDA
COUNTY OF ALACHUA
The foregoing instrument was acknowledged before me this _____
day of November, 1997, by Timothy J. Seese and Betty Petty, as President and
Chief Operating Officer and Secretary, respectively, of Exactech, Inc., a
Florida corporation, on behalf of the corporation. They are personally known to
me or have produced a drivers license as identification.
(SEAL)
___________________________________________
Printed/Typed Name:________________________
Notary Public-State of Florida
Commission Number:
20
<PAGE>
EXHIBIT "A"
PROJECT
Construction and equipping of a manufacturing facility located on a 7.5
acre tract of land for the manufacture of orthopedic implants.
<PAGE>
EXHIBIT "B"
PROJECT SITE
<PAGE>
EXHIBIT "C"
PERMITTED ENCUMBRANCES
(All references to public records of Alachua County, Florida)
1. Easement granted to City of Gainesville, dated December 3, 1974, filed
December 17, 1974 in Official Records Book 920, at Page 58.
2. Declaration of Restrictive Covenants, Reservations, Conditions and
Easements of Northwood Commercial Park, which creates easements and
establishes private charges or assessments filed October 20, 1975, in
Official Records Book 969, at Page 620, as amended and supplemented in
Official Records Book 1279, at Page 625, Official Records Book 1334, at
Page 886, Official Records Book 1380, at Page 699 and Official Records
Book 1462, at Page 323, and as affected by the conveyance of ingress
and egress easements to the City of Gainesville by Deed filed in
Official Records Book 2102, at Page 1507.
3. Easement granted to N.W. Inc., dated April 21, 1980, filed April 23,
1980 in Official Records Book 1274, at Page 434.
4. Easement granted to Turkey Creek, Inc., dated October 21, 1981, filed
October 23, 1981 in Official Records Book 1378, at Page 655.
5. Resolutions of the Board of County Commissioners of Alachua County
filed in Official Records Book 1929, at Page 839 and Official Records
Book 2078, at Page 1999.
6. Easement granted to City of Gainesville, dated September 9, 1997, filed
September 22, 1997, in Official Records Book 2132, at Page 963.
EXHIBIT 10.64
SETTLEMENT AGREEMENT
I. PARTIES
Biomet, Inc. ("Biomet")
Richard A. Bland ("Bland")
Ella K. Jirka ("Jirka")
Ella K. Jirka & Associates ("EKJ")
N.W. Medical Products, Inc. ("N.W. Medical")
(Collectively, "Defendants")
Exactech, Inc. ("Exactech")
II. SETTLEMENT OF ACTION.
This settlement agreement resolves all disputes between the
parties related to BIOMET, INC. V. BLAND ET AL., U.S. District No. CV 97-1633 PA
("Action").
III. RELEASES.
Biomet hereby provides defendants, their past and present
agents, employees, officers, and attorneys, with a complete and general release
of all claims and counterclaims, causes of action of any kind, known or unknown,
suspected or unsuspected. Defendants hereby provide Biomet, Inc. and its past
and present agents, employees, officers and attorneys with a complete and
general release of all claims and counterclaims, causes of action of any kind,
known or unknown, suspected or unsuspected. Biomet and Exactech give each other
and their past and present agents, employees, officers and attorneys a complete
and mutual release with respect to all events directly related to the Action,
including events that occurred in any state or location, known or unknown,
suspected or unsuspected, provided such events relate directly to the Action.
Each of the above releases includes claims for fraudulent inducement of this
Agreement.
IV. NO HIRE AGREEMENT.
From the date of this Agreement forward, Exactech agrees not
to hire as a new agent for Exactech any of Biomet's exclusive distributors or
sales representatives whose current territory is located west of the Mississippi
in the continental U.S. (which does not include Alaska and Hawaii), for a period
of four months following the date of this Agreement.
V. CONFIDENTIAL AGREEMENT BETWEEN BIOMET AND DEFENDANTS.
Upon execution of this Agreement, Biomet and defendants shall
execute a confidential separate written agreement between them, attached as
exhibit A. Exactech shall not receive a copy of exhibit A. John Barker shall
receive a confidential copy of exhibit A.
VI. CONFIDENTIAL AGREEMENT BETWEEN EXACTECH AND JIRKA
Upon execution of this Agreement Exactech and Jirka shall
execute a Confidential separate written agreement between them, attached as
exhibit B. Biomet shall not receive a copy of exhibit B. John Barker shall
receive a confidential copy of exhibit B.
VII. CONFIDENTIALITY
This Agreement, which indludes the two side agreements
referred to in paragraphs V and VI, shall be confidential The parties further
agree that the Agreement, as defined above, is confidential pursuant to ORS
36.220(2)(b). The Court's rulings in the Action are not subject to this
provision. Mr. Bland and Ms. Jirka may also consult with a Portland area tax
accountant or tax attorney who shall be informed of these confidentiality terms
and shall agree to honor them before any disclosure to the attorney or
accountant. Any claim for breach of paragraphs V, VI, and VII shall be
arbitrated by John Barker in Portland.
VIII. BINDING AGREEMENT
This agreement is binding on the parties' successors, heirs,
and assigns. Each party represents and warrants that there has been no
assignment of the released claims.
IX. ARBITRATION
<PAGE>
Any disagreement about the terms or enforcement of this
Agreement, which includes Exhibits A and B, shall be arbitrated by John Barker
in Portland, including enforcement of confidentiality, with the prevailing party
to receive its costs and attorney fees. All confidentiality remains binding at
all times. Arbitration shall be binding and governed by Oregon law.
X. NO ADMISSION OF LIABILITY
No party admits liability or fault of any kind and this
Agreement shall not be admissible in any proceeding, except to enforce its
terms.
XI. NOTICE OF COURT.
Upon execution, the parties shall notify the Court and ask it
to issue no further orders or opinions.
XII. INTEGRATION.
This Agreement, including the two side agreements described in
paragraphs V and VI, contains the entire agreement of the parties. Any
modifications must be in writing signed by all parties. All prior agreements or
discussions are superseded by this Agreement. The Agreement is not effective
until this agreement and side agreements described in paragraphs V and VI, have
been completely executed.
XIII. LAW OF OREGON.
This agreement shall be governed by the laws of the State of
Oregon.
XIV. DISMISSAL, RETURN OF DOCUMENTS.
Upon execution, the parties shall dismiss their claims and
counterclaims in the Action with prejudice, with each side to bear its costs and
fees. After dismissal, each side shall return all documents provided to the
other, and shall return documents received from Exactech to Exactech. This
provision does not apply to documents that have been attached as exhibits to
court filings or depositions, which counsel may retain. This provision does
apply to copies made of such douments. Documents and copies shall be returned
within 30 days of the date of this Agreement.
XV. COUNTERPARTS
This Agreement and the two side agreements may be executed by
faxed counterparts, which taken together will contitute a binding and fully
executed agreement after all required signatures have been received by Ball
Janik LLP. After receipt, Ball Janik LLP shall distribute copies of fully
executed documents to the required parties and to John Barker, pursuant to the
provisions of paragraphs V and VI.
Biomet, Inc. N.W. Medical Products, Inc.
By:/S/ DANIEL P. HANN By:/S/ RICHARD A. BLAND
------------------ --------------------
Its: Vice President & General Counsel Its: President
Dated: 2/9/1998 Dated: 2/9/1998
Ella K. Jirka & Associates Exactech, Inc.
By:/S/ ELLA K. JIRKA By:/S/ TIMOTHY J. SEESE
----------------- --------------------
Its: Owner Its: President
Dated: 2/9/1998 Dated: 2/9/1998
Richard A. Bland
By:/S/ RICHARD A. BLAND
--------------------
Dated: 2/9/1998
EXHIBIT 11.1
EARNINGS PER SHARE COMPUTATIONS
The table below details the number of common shares and common stock equivalents
used in the computation of primary and fully diluted earnings per share
<TABLE>
YEAR ENDED
DECEMBER 31,
1996 1997
---- ----
<S> <C> <C>
Basic:
Weighted average common shares outstanding
used in computing basic earnings per share 4,050,887 4,878,795
=============================
Basic Earnings Per Share $0.32
=========
Diluted:
Weighted average common and common equivalent 4,050,887 4,878,795
shares outstanding
Effect of shares issuable under stock under stock plans 81,054 40,637
using the treasury method
Effect of shares contingently issuable under warrants 6,305 4,319
issued with the 8% subordinated debentures using
the treasury stock method
-----------------------------
Share used in computing diluted earnings per share 4,138,246 4,923,751
=============================
Diluted Earnings Per Share $0.32
=========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000913165
<NAME> EXACTECH, INC.
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,044,961
<SECURITIES> 3,467,072
<RECEIVABLES> 3,760,966
<ALLOWANCES> (161,046)
<INVENTORY> 10,697,879
<CURRENT-ASSETS> 20,334,332
<PP&E> 7,962,936
<DEPRECIATION> (1,984,249)
<TOTAL-ASSETS> 27,154,836
<CURRENT-LIABILITIES> 2,464,461
<BONDS> 3,912,835
0
0
<COMMON> 49,047
<OTHER-SE> 20,294,545
<TOTAL-LIABILITY-AND-EQUITY> 27,154,836
<SALES> 17,648,060
<TOTAL-REVENUES> 17,648,060
<CGS> 5,895,302
<TOTAL-COSTS> 5,895,302
<OTHER-EXPENSES> 9,196,387
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (200,720)
<INCOME-PRETAX> 2,573,182
<INCOME-TAX> 997,188
<INCOME-CONTINUING> 1,575,994
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,575,994
<EPS-PRIMARY> 0.32
<EPS-DILUTED> 0.32
</TABLE>
