UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number 0-28240
EXACTECH, INC.
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(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.)
2320 NW 66TH COURT
GAINESVILLE, FL
32653
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(Address of principal executive offices)
(352) 377-1140
----------------------------------------------------
(Registrant's telephone number, including area code)
4613 N.W. 6TH STREET, GAINESVILLE, FL 32609
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(Former Address)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of the latest practicable date.
Class Outstanding at August 7, 1998
Common Stock, $.01 par value 4,904,663
<PAGE>
<TABLE>
<CAPTION>
EXACTECH, INC.
INDEX
PAGE
NUMBER
------
PART 1. FINANCIAL INFORMATION
<S> <C> <C>
ITEM 1. FINANCIAL STATEMENTS
CONDENSED BALANCE SHEETS AS OF DECEMBER 31, 1997 AND JUNE 30, 1998 2
CONDENSED STATEMENTS OF INCOME FOR THE THREE MONTH AND SIX MONTH 3
PERIODS ENDED JUNE 30, 1997 AND JUNE 30, 1998
CONDENSED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE SIX 4
MONTH PERIOD ENDED JUNE 30, 1998
CONDENSED STATEMENTS OF CASH FLOWS FOR THE SIX MONTH PERIODS ENDED 5
JUNE 30, 1997 AND JUNE 30, 1998
NOTES TO CONDENSED FINANCIAL STATEMENTS FOR THE THREE MONTH AND SIX 6
MONTH PERIODS ENDED JUNE 30, 1997 AND JUNE 30, 1998
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 9
CONDITION AND RESULTS OF OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 14
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 15
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 15
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 15
ITEM 5. OTHER INFORMATION 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 15
SIGNATURES 16
</TABLE>
1
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Item 1. Financial Statements
<TABLE>
<CAPTION>
EXACTECH, INC.
CONDENSED BALANCE SHEETS
(Unaudited)
DECEMBER 31, JUNE 30,
ASSETS 1997 1998
------------ ------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 4,176,293 $ 2,634,157
Short-term investments 1,335,740 --
Trade receivables 3,760,996 5,023,464
Refundable income taxes 259,778 --
Prepaid expenses and other assets 103,646 228,409
Inventories 10,697,879 11,130,359
------------ ------------
Total Current Assets 20,334,332 19,016,389
PROPERTY AND EQUIPMENT
Land 263,301 263,301
Machinery and equipment 1,636,587 2,102,350
Surgical Instruments 4,568,489 5,176,570
Furniture and fixtures 123,014 329,100
Facilities 1,371,545 3,125,125
------------ ------------
Total 7,962,936 10,996,446
Accumulated depreciation (1,984,249) (2,331,285)
------------ ------------
Net property and equipment 5,978,687 8,665,161
OTHER ASSETS 841,817 1,028,238
TOTAL ASSETS $ 27,154,836 $ 28,709,788
============ ============
LIABILITIES AND EQUITY
Current Liabilities
Accounts payable $ 1,611,775 $ 1,327,867
Income taxes payable -- 42,579
Current portion of long-term debt and leases 4,894 160,514
Commissions payable 473,028 683,794
Royalties payable 258,959 338,599
Other liabilities 115,805 400,715
------------ ------------
Total Current Liabilities 2,464,461 2,954,068
Deferred income taxes 433,948 415,273
Long-term debt and capital lease-net of current portion 3,912,835 3,909,827
------------ ------------
Total Liabilities 6,811,244 7,279,168
SHAREHOLDERS' EQUITY:
Common stock 49,047 49,047
Additional paid-in capital 15,002,968 15,002,968
Retained earnings 5,291,577 6,378,605
------------ ------------
Total Shareholders' Equity 20,343,592 21,430,620
------------ ------------
TOTAL LIABILITIES AND EQUITY $ 27,154,836 $ 28,709,788
============ ============
</TABLE>
See notes to condensed financial statements
2
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<TABLE>
<CAPTION>
EXACTECH, INC.
CONDENSED STATEMENTS OF INCOME
(Unaudited)
THREE MONTH PERIOD SIX MONTH PERIOD
ENDED JUNE 30, ENDED JUNE 30,
1997 1998 1997 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET SALES $ 4,234,644 $ 6,375,320 $ 8,334,183 $ 11,692,915
COST OF GOODS SOLD 1,301,735 2,444,535 2,668,421 4,176,943
------------ ------------ ------------ ------------
Gross profit 2,932,909 3,930,785 5,665,762 7,515,972
OPERATING EXPENSES:
Sales and marketing 1,218,181 1,535,707 2,345,352 2,932,643
General and administrative 415,402 520,436 775,188 967,357
Research and development 240,449 294,713 482,404 634,965
Depreciation and amortization 186,321 292,369 351,107 556,705
Royalties 204,904 340,456 393,290 620,331
------------ ------------ ------------ ------------
Total operating expenses 2,265,257 2,983,681 4,347,341 5,712,001
------------ ------------ ------------ ------------
INCOME FROM OPERATIONS 667,652 947,104 1,318,421 1,803,971
OTHER INCOME (EXPENSE)
Interest income (expense) 57,755 (9,688) 140,575 (8,440)
Equity in net loss of subsidiary (10,000) 13,778 (25,000) 13,778
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES 715,407 951,194 1,433,996 1,809,309
PROVISION FOR INCOME TAXES 262,607 370,966 542,962 722,280
------------ ------------ ------------ ------------
NET INCOME $ 452,800 $ 580,228 $ 891,034 $ 1,087,029
============ ============ ============ ============
BASIC EARNINGS PER SHARE $ 0.09 $ 0.12 $ 0.18 $ 0.22
============ ============ ============ ============
DILUTED EARNINGS PER SHARE $ 0.09 $ 0.12 $ 0.18 $ 0.22
============ ============ ============ ============
</TABLE>
See notes to condensed financial statements
3
<PAGE>
<TABLE>
<CAPTION>
EXACTECH, INC.
CONDENSED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
ADDITIONAL TOTAL
COMMON STOCK PAID-IN RETAINED SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1997 4,904,663 $ 49,047 $15,002,968 $ 5,291,577 $20,343,592
Net income 1,087,028 1,087,028
----------- ----------- ----------- ----------- -----------
Balance, June 30, 1998 4,904,663 $ 49,047 $15,002,968 $ 6,378,605 $21,430,620
=========== =========== =========== =========== ===========
</TABLE>
See notes to condensed financial statements
4
<PAGE>
<TABLE>
<CAPTION>
EXACTECH, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
SIX MONTH PERIOD ENDED JUNE 30,
1997 1998
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income $ 891,034 $ 1,087,029
Adjustments to reconcile net income to net
cash (used in) provided by operating activities:
Depreciation and amortization 351,107 556,705
Equity in net loss of subsidiary 25,000 --
Deferred income taxes -- (18,675)
Increase in trade receivables (579,791) (1,262,468)
Increase in inventories (2,229,334) (432,480)
Increase in other prepaids and assets (524,823) (108,554)
Increase in income taxes payable 31,719 302,357
Increase (decrease) in accounts payable 387,837 (283,908)
Increase in other liabilities 11,655 575,316
----------- -----------
Net cash (used in) provided by operating activities (1,635,596) 415,322
----------- -----------
INVESTING ACTIVITIES:
Purchases of property and equipment (978,435) (3,215,497)
Maturities of short-term investments 1,018,998 1,335,740
Purchase of product licenses and designs (106,494) (200,000)
Investment in subsidiary (11,276) --
Cost of patents and trademarks (6,935) (30,312)
----------- -----------
Net cash used in investing activities (84,142) (2,110,069)
----------- -----------
FINANCING ACTIVITIES:
Proceeds from financing of insurance premiums, net -- 154,855
Principal payments on debt (30,848) (2,244)
Proceeds from issuance of common stock 119,079 --
----------- -----------
Net cash provided by financing activities 88,231 152,611
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,631,507) (1,542,136)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,992,442 4,176,293
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,360,935 $ 2,634,157
----------- -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 8,659 $ 97,953
Income taxes 491,798 458,428
Noncash investing and financing activities:
Financing of insurance premiums -- 271,866
</TABLE>
See notes to condensed financial statements
5
<PAGE>
EXACTECH, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 1997 AND 1998
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements, which are
for interim periods, have been prepared in accordance with the rules and
regulations of the Securities and Exchange Commission relating to interim
financial statements. These unaudited condensed financial statements do not
include all disclosures provided in the annual financial statements. The
condensed financial statements should be read in conjunction with the financial
statements and notes thereto contained in the Annual Report on Form 10-K for the
year ended December 31, 1997 of Exactech, Inc. (The "Company"), as filed with
the Securities and Exchange Commission.
All adjustments of a normal recurring nature which, in the opinion of
management, are necessary to present a fair statement of results for the interim
periods have been made. Results of operations for the six month period ended
June 30, 1998 are not necessarily indicative of the results to be expected for
the full year.
2. CHANGE IN ACCOUNTING PRINCIPLE
Effective January 1, 1998, the Company adopted statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130").
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 also requires that an entity classify items
of other comprehensive income by their nature in a financial statement. Examples
include foreign currency translation adjustments, minimum pension liability
adjustments, and unrealized gains and losses on marketable securities classified
as available-for-sale. Adoption of SFAS 130 did not have a material effect on
the Company's financial statements.
3. ASSET PURCHASES
During June 1998, the Company purchased substantially all of the assets
related to Synvasive Technology, Inc.'s ("Synvasive") AcuDriver product line.
The assets included inventory, tooling, fixtures, designs, trademark and future
patent rights. As of June 30, 1998, $100,000 of the purchase price of the assets
remained payable to Synvasive and was included in other liabilities.
4. COMMITMENTS AND CONTINGENCIES
As of June 30, 1998, the Company was committed to approximately
$370,000 in remaining construction costs associated with the completion of its
new headquarters and manufacturing facility. The Company, in the normal course
of business, is also subjected to claims and litigation in the areas of product
and general liability. Management does not believe any of such claims will have
a material impact on the Company's financial position.
6
<PAGE>
<TABLE>
<CAPTION>
EXACTECH, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 1997 AND JUNE 30, 1998
(UNAUDITED)
5. DEBT
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS: DECEMBER 31, JUNE 30,
1997 1998
------------- ------------
<S> <C> <C>
Capitalized lease obligation payable in monthly installments $ 17,729 $ 15,485
of $611 through July, 2000, collateralized by equipment with a
carrying value of approximately $17,700 as of June 30, 1998
Notes payable to finance company bearing interest - 154,856
at 6.5% payable in eleven monthly installments from April 1998
through February 1999; proceeds used to finance insurance policies
Industrial Revenue Bond note payable in annual 3,900,000 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 (3.7% as of June 30, 1998); proceeds used to finance
construction of new facility ---------- ----------
Total long-term debt and capital lease obligations 3,917,729 4,070,341
Less current portion (4,894) (160,514)
---------- ----------
$3,912,835 $3,909,827
========== ==========
</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 June 30, 1998:
<TABLE>
<CAPTION>
LONG-TERM CAPITAL LEASE
DEBT OBLIGATIONS
------------ -------------
<S> <C> <C>
1998............................................ - $ 3,667
1999............................................ - 7,333
2000............................................ $ 300,000 7,188
2001............................................ 300,000 -
2002............................................ 300,000 -
Thereafter...................................... 3,000,000 -
------------ -------
Total ................................. $ 3,900,000 18,188
===========
Less interest on capital lease obligations ................... (2,703)
-------
$15,485
=======
</TABLE>
During July 1998, the Company renewed and extended the line of credit
with Merrill Lynch Business Financial Services Inc. for an amount of $6,000,000.
The line of credit expires June 30, 2000 and is secured by inventory and
accounts receivable. As of June 30 1998, there was no amount outstanding under
the line of credit.
7
<PAGE>
EXACTECH, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 1997 AND 1998
(UNAUDITED)
6. SHAREHOLDERS' EQUITY
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:
<TABLE>
<CAPTION>
INCOME SHARES PER INCOME SHARES PER
NUMERATOR DENOMINATOR SHARE NUMERATOR DENOMINATOR SHARE
----------------------------------- ------------------------------------
THREE MONTHS ENDED JUNE 30, 1997 THREE MONTHS ENDED JUNE 30, 1998
----------------------------------- ------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net income $452,800 $580,228
BASIC EPS:
Net income available to 452,800 4,878,193 $0.09 580,228 4,904,663 $0.12
common shareholders
Effect of Dilutive Securities:
Stock options 52,557 52,040
Warrants 4,268 6,677
DILUTED EPS:
Net income available to common 452,800 4,935,018 $0.09 580,228 4,963,380 $0.12
shareholders plus assumed
conversions
SIX MONTHS ENDED JUNE 30, 1997 SIX MONTHS ENDED JUNE 30, 1998
------------------------------------- ------------------------------------
Net income $891,034 $1,087,029
BASIC EPS:
Net income available to 891,034 4,869,313 $0.18 1,087,029 4,904,663 $0.22
common shareholders
Effect of Dilutive Securities:
Stock options 67,361 35,499
Warrants 7,072 3,320
DILUTED EPS:
Net income available to common 891,034 4,943,746 $0.18 1,087,029 4,943,482 $0.22
shareholders plus assumed
conversions
</TABLE>
For the three months ended June 30, 1997, options to purchase 364,200 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.
For the three months ended June 30, 1998, options to purchase 336,800 shares of
common stock at prices ranging from $7.88 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.
For the six months ended June 30, 1997, options to purchase 352,200 shares of
common stock at prices ranging from $7.88 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.
For the six months ended June 30, 1998, options to purchase 362,975 shares of
common stock at prices ranging from $7.13 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.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The following discussion should be read in conjunction with the condensed
financial statements and related notes appearing elsewhere herein, and the
Management's Discussion and Analysis of Financial Condition and Results of
Operations included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1997.
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.
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 ($1,000's)
SIX MONTHS ENDED THREE MONTHS ENDED
----------------------------------------------------- -------------------------------------------------
June 30, 1997 June 30, 1998 June 30, 1997 June 30, 1998
Hip Products Units $ % Units $ % Units $ % Units $ %
----- ----- ----- ----- ----- ----- ----- ----- ----- ------ ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Cemented 2,697 1,229 14.8% 2,525 1,183 10.1% 1,500 656 15.5% 1,373 637 10.0%
Porous Coated 2,626 882 10.6% 2,563 905 7.7% 1,400 481 11.3% 1,147 426 6.6%
Bipolar 399 195 2.3% 509 242 2.1% 205 93 2.2% 289 132 2.1%
Revision 16 38 0.5% 77 151 1.3% 7 29 0.7% 53 97 1.5%
------ ----- ---- ------ ----- ---- ----- ----- ---- ----- ----- ----
Total Hip Products 5,738 2,344 28.2% 5,674 2,481 21.2% 3,112 1,259 29.7% 2,862 1,292 20.2%
Knee Products
Cemented Cruciate
Sparing 5,705 2,728 32.7% 8,717 3,536 30.2% 2,872 1,353 32.0% 4,858 1,909 29.9%
Cemented Posterior
Stabilized 2,727 1,822 21.9% 5,097 3,210 27.5% 1,414 955 22.6% 2,820 1,703 26.7%
Porous Coated 778 827 9.9% 929 942 8.1% 322 361 8.5% 523 513 8.0%
Revision 953 327 3.9% 1,760 916 7.8% 385 192 4.5% 1,098 538 8.4%
------ ----- ---- ------ ----- ---- ----- ----- ---- ----- ----- ----
Total Knee Products 10,163 5,704 68.4% 16,503 8,604 73.6% 4,993 2,861 67.6% 9,299 4,663 73.1%
Instrument Sales and
Rental 254 3.0% 434 3.7% 98 2.3% 276 4.3%
Tissue Services - 0.0% 75 0.7% - 0.0% 68 1.1%
Acudriver - 0.0% 48 0.4% - 0.0% 48 0.8%
Miscellaneous 32 0.4% 51 0.4% 17 0.4% 28 0.4%
----- ---- ------ ----- ----- ----- ----- -----
Total 8,334 100.0% 11,693 100.0% 4,235 100.0% 6,375 100.0%
====== ===== ====== ===== ===== ===== ===== =====
</TABLE>
9
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
NET sales increased by $2,140,676, or 51%, to $6,375,320 in the quarter
ended June 30, 1998, from $4,234,644 in the quarter ended June 30, 1997. The
increase in net sales resulted primarily from increased unit volume of the
Company's knee implant products. Sales of knee implant products increased by 86%
on a unit basis and by 63% on a dollar basis from the quarter ended June 30,
1997 to the quarter ended June 30, 1998, as the Company continued to expand its
domestic and international distribution. Sales of hip implant products decreased
by 8% on a unit basis but increased by 3% on a dollar basis from the quarter
ended June 30, 1997, to the quarter ended June 30, 1998. The overall increase in
hip sales and the increase in average unit selling prices was a result of an
increase in AuRA(R) revision hip system sales. AuRA(R) revision component sales
increased 237% to $96,732 in the quarter ended June 30, 1998, from $28,700 in
the quarter ended June 30, 1997. International sales increased 142% to
$1,505,417 in the quarter ended June 30, 1998, from $622,683 in the quarter
ended June 30, 1997 as international distributors continued to enter new
markets. As a percentage of sales, international sales increased to 24% in the
quarter ended June 30, 1998, as compared to 15% in the quarter ended June 30,
1997.
Gross profit increased by $997,876, or 34%, to $3,930,785 in the quarter
ended June 30, 1998, from $2,932,909 in the quarter ended June 30, 1997. As a
percentage of sales, gross profit decreased to 62% in the quarter ended June 30,
1998, from 69% in the quarter ended June 30, 1997. The profit margin decrease
was primarily the result of an increased mix of international sales which are at
lower average unit selling prices.
Total operating expenses increased by $718,424, or 32%, to $2,983,681 in
the quarter ended June 30, 1998, from $2,265,257 in the quarter ended June 30,
1997. Sales and marketing expenses, the largest component of total operating
expenses, increased by $317,526, or 26%, to $1,535,707 in the quarter ended June
30, 1998, from $1,218,181 in the quarter ended June 30, 1997. Sales and
marketing expenses decreased as a percentage of sales to 24% in the quarter
ended June 30, 1998, from 29% in the quarter ended June 30, 1997. The Company's
sales and marketing expenses are largely variable costs based on sales levels,
with the largest component being commissions. Sales and marketing expenses as a
percentage of sales decreased primarily due to the increase in international
sales which do not incur commissions.
General and administrative expenses increased by $105,034, or 25%, to
$520,436 in the quarter ended June 30, 1998, from $415,402 in the quarter ended
June 30, 1997. As a percentage of sales, general and administrative expenses
decreased to 8% in the quarter ended June 30, 1998, from 10% in the quarter
ended June 30, 1997. Total general and administrative expenses increased
primarily as a result of additional legal costs associated with the Company's
ongoing litigation. Legal expenses increased to $149,664 in the quarter ended
June 30, 1998, from $29,247 in the quarter ended June 30, 1997.
Research and development expenses increased by $54,264, or 23%, to
$294,713 in the quarter ended June 30, 1998, from $240,449 in the quarter ended
June 30, 1997. Research and development expenses were 5% and 6% of sales in the
quarters ended June 30, 1998 and 1997, respectively. The Company expects
research and development expenses to increase for the full year of 1998 as
compared to 1997, due to continued development expenses associated with the
modular revision hip system and other product lines.
10
<PAGE>
Depreciation and amortization increased to $292,369 in the quarter ended
June 30, 1998, from $186,321 in the quarter ended June 30, 1997. Depreciation
expenses increased as a result of the increased investment in surgical
instrumentation and depreciation associated with the Company's new facility.
During the quarter ended June 30, 1998, $445,380 of surgical instruments and
$3,125,125 of construction costs were placed in service, resulting in the
increase in depreciation expense.
Royalty expenses increased by $135,552 to $340,456 in the quarter ended
June 30, 1998, from $204,904 in the quarter ended June 30, 1997, primarily as a
result of growth in sales of knee implant products which incur a higher royalty
rate. As a percentage of sales, royalty expenses were 5.3% and 4.8% in the
quarters ended June 30, 1998 and 1997, respectively.
The Company's income from operations increased by $279,452, or 42%, to
$947,104 in the quarter ended June 30, 1998, from $667,652 in the quarter ended
June 30, 1997. The increase was primarily attributable to the increase in sales
and gross profit, partially offset by the increase in operating expenses.
The Company realized net interest expense of $9,688 in the quarter ended
June 30, 1998, as compared to net interest income of $57,755 in the quarter
ended June 30, 1997. The recognition of expense as compared to income was the
result of a reduction of short-term investments while there was increased
borrowing associated with construction of the new facility. Interest expense of
$51,481 for the quarter ended June 30, 1998, was offset by $41,793 of interest
income.
In July 1995, the Company purchased a 50% interest in Techmed S.p.A.
("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. In
April 1998, the Company sold its interest in Techmed S.p.A. As a result, the
Company recognized $13,778 in gains associated with the sale in the quarter
ended June 30, 1998 as compared to the $10,000 loss in the quarter ended June
30, 1997.
Income before provision for income taxes increased by $235,787, or 33%, to
$951,194 in the quarter ended June 30, 1998, from $715,407 in the quarter ended
June 30, 1997. The provision for income taxes was $370,966 in the quarter ended
June 30, 1998, compared to $262,607 in the quarter ended June 30, 1997.
As a result, the Company realized net income of $580,228 in the quarter
ended June 30, 1998, compared to $452,800 in the quarter ended June 30, 1997, a
28% increase. As a percentage of sales, net income decreased to 9% in the
quarter ended June 30, 1998 from 11% in the quarter ended June 30, 1997. The
reduction in net income as a percentage of sales was due to a reduction in the
gross profit margin and the incurring of net interest expense during the quarter
ended June 30, 1998, as compared to recognizing net interest income during the
quarter ended June 30, 1997.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
Net sales increased by $3,358,732, or 40%, to $11,692,915 in the six
months ended June 30, 1998, from $8,334,183 in the six months ended June 30,
1997. Sales of knee implant products increased by 62% on a unit basis and by 51%
on a dollar basis from the six months ended June 30, 1997 to the six months
ended June 30, 1998. Sales of hip implant products decreased by 1% on a unit
basis but increased by 6% on a dollar basis from the six months ended June 30,
1997, to the six months ended June 30, 1998. The increase in hip sales was
primarily the result of an increase in AuRA(R) revision hip
11
<PAGE>
system sales. AuRA(R) revision component sales increased to $150,795 in the six
months ended June 30, 1998, from $38,700 in the six months ended June 30, 1997.
International sales increased 101% to $2,546,928 in the six months ended June
30, 1998, from $1,266,313 in the six months ended June 30, 1997. As a percentage
of sales, international sales increased to 22% in the six months ended June 30,
1998, as compared to 15% in the six months ended June 30, 1997.
Gross profit increased by $1,850,210, or 33%, to $7,515,972 in the six
months ended June 30, 1998, from $5,665,762 in the six months ended June 30,
1997. As a percentage of sales, gross profit decreased to 64% in the six months
ended June 30, 1998, from 68% in the six months ended June 30, 1997. The profit
margin decrease was primarily the result of an increased mix of international
sales which are at lower average unit selling prices.
Total operating expenses increased by $1,364,660, or 31%, to $5,712,001 in
the six months ended June 30, 1998, from $4,347,341 in the six months ended June
30, 1997. Sales and marketing expenses, the largest component of total operating
expenses, increased 25% to $2,932,643 in the six months ended June 30, 1998,
from $2,345,352 in the six months ended June 30, 1997. Sales and marketing
expenses decreased as a percentage of sales to 25% in the six months ended June
30, 1998, from 28% in the six months ended June 30, 1997.
General and administrative expenses increased 25% to $967,357 in the six
months ended June 30, 1998, from $775,188 in the six months ended June 30, 1997.
As a percentage of sales, general and administrative expenses decreased to 8% in
the six months ended June 30, 1998, from 9% in the six months ended June 30,
1997. Research and development expenses increased 32% to $634,965 in the six
months ended June 30, 1998, from $482,404 in the six months ended June 30, 1997.
As a percentage of sales, research and development expenses remained flat at
approximately 5.5% for the six months ended June 30, 1998 and June 30, 1997.
Depreciation and amortization increased to $556,705 in the six months
ended June 30, 1998, from $351,107 in the six months ended June 30, 1997.
Depreciation expenses increased as a result of the increased investment in
surgical instrumentation and depreciation associated with the Company's new
facility. During the six months ended June 30, 1998, $747,559 of surgical
instruments were placed in service.
Royalty expenses increased 58% to $620,331 during the six months ended
June 30, 1998, from $393,290 in the six months ended June 30, 1997.
The Company's income from operations increased 37%, to $1,803,971 in the
six months ended June 30, 1998, from $1,318,421 in the six months ended June 30,
1997. The increase was primarily attributable to the increase in sales and gross
profit, partially offset by the increase in operating expenses.
The Company realized net interest expense of $8,440 in the six months
ended June 30, 1998, as compared to net interest income of $140,575 in the six
months ended June 30, 1997. Interest expense of $115,049 for the six months
ended June 30, 1998, was offset by $106,609 of interest income.
The Company recognized a $13,778 gain associated with the sale of its
interest in Techmed in the six months ended June 30, 1998, as compared to the
$25,000 loss in the six months ended June 30, 1997.
Income before provision for income taxes increased 26%, to $1,809,309 in
the six months ended June 30, 1998, from $1,433,996 in the six months ended June
30, 1997. The provision for income taxes was $722,280 in the six months ended
June 30, 1998, compared to $542,962 in the six months ended June 30, 1997.
12
<PAGE>
As a result, the Company realized net income of $1,087,029 in the six
months ended June 30, 1998, compared to $891,034 in the six months ended June
30, 1997, a 22% increase. As a percentage of sales, net income decreased to 9%
in the six months ended June 30, 1998 from 11% in the six months ended June 30,
1997.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations primarily
through borrowings, the sale of equity securities and cash flow from operations.
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. At June 30, 1998, the Company had working capital of
$16,062,321 compared to $17,869,871 at December 31, 1997. The decrease in
working capital is primarily the result of $2,016,881 in costs associated with
the construction of the Company's new headquarters and manufacturing facility in
the six months ended June 30, 1998. As of June 30, 1998, the Company had
expended $3,125,125 in costs associated with the construction of the facility.
As a result of operating, investing and financing activities, cash and cash
equivalents at June 30, 1998 decreased to $2,634,157 from $4,176,293 at December
31, 1997.
The Company is committed to approximately $370,000 in remaining
construction costs associated with the completion of the new facility as of June
30, 1998. During July 1998, the Company's credit facility with Merrill Lynch
Business Financial Services, Inc. was renewed and increased to $6,000,000. The
credit facility which is secured by accounts receivable and inventory expires in
June 2000. At June 30, 1998, 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.
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 (3.7% as of June 30, 1998). 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.
OPERATING ACTIVITIES
Operating activities provided net cash of $415,322 in the six months ended
June 30, 1998 as compared to using net cash of $1,635,596 in the six months
ended June 30, 1997. The primary reason for the change was the growth in
inventory of $432,480 in the six months ended June 30, 1998, as compared to the
$2,229,334 increase in inventory that occurred in the six months ended June 30,
1997. Cash required as a result of the increase in trade receivables was
$1,262,468, for the six month period ended June 30, 1998, as compared to
$579,791, for the six month period ended June 30, 1997.
13
<PAGE>
INVESTING ACTIVITIES
The Company used net cash in investing activities of $2,110,069 in the
six months ended June 30, 1998, primarily due to the investment of $3,215,497 in
property and equipment for the Company's new facility and $200,000 in designs
associated with the AcuDriver purchase. The Company continues to invest the
remaining proceeds of the IPO in short-term investments. As of June 30, 1998,
$1,910,019 was invested in daily maturing funds and repurchase agreements.
FINANCING ACTIVITIES
Financing activities for the six months ended June 30, 1998 provided
net cash of $152,611 as compared to $88,231 in the six months ended June 30,
1997. The primary reason for the increase in cash provided by financing
activities was the Company's financing of annual insurance premiums in a net
amount of $154,855 during the six month period ended June 30, 1998. The Company
did not finance insurance premiums during the year ended December 31, 1997.
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, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended, 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Currently Required.
14
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Not Applicable
Item 2. Changes in Securities and Use of Proceeds
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>
<CAPTION>
DIRECT OR INDIRECT PAYMENTS DIRECT OR INDIRECT PAYMENTS
TO RELATED PARTIES (1) TO OTHERS
-------------------------- ---------------------------
<S> <C> <C>
Purchase and installation of machinery
and equipment $ - $3,635,634
Repayment of indebtedness $ - $4,942,268
Temporary Investments (2) $ - $ 600,274
Other Purposes (3) $ - $3,479,734
</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 of $600,274.
3- Includes increase of inventory held for sale of $3,237,619.
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
Previously Reported.
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits:
EXHIBIT DESCRIPTION
10.1 WCMA Line of Credit Increase and Extension between the
Company and Merrill Lynch Business Financial Services,
Inc.
10.2 Agreement for Purchase and Sale of Assets between the
Company and Synvasive Technology, Inc.
11 Statement re: computation of per share earnings
27 Financial Data Schedule
b) Reports on Form 8-K
None.
15
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
Exactech, Inc.
Date: August 13, 1998 By: /s/ TIMOTHY J. SEESE
-------------------------
Timothy J. Seese
President and Chief
Operating Officer
Date: August 13, 1998 By: /s/ JOEL C. PHILLIPS
-------------------------
Joel C. Phillips
Chief Financial Officer
16
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
10.1 WCMA Line of Credit Increase and Extension between the Company and
Merrill Lynch Business Financial Services, Inc.
10.2 Agreement for Purchase and Sale of Assets between the Company and
Snyvasive Technology, Inc.
11 Statement re: computation of per share earnings
27 Financial Data Schedule
EXHIBIT 10.1
PRIVATE CLIENT GROUP
MERRILL LYNCH BUSINESS
FINANCIAL SERVICES, INC.
33 West Monroe Street, 22nd Floor
Chicago, Illinois 60603
312/845-1020
FAX 312/845-9093
Exactech, Inc.
2320 NW 66th Court
Gainesville, FL 32653
RE: WCMA LINE OF CREDIT EXTENSION
Ladies And Gentlemen:
This Letter Agreement will serve to confirm certain agreements of Merrill Lynch
Business Financial Services Inc. ("MLBFS") and Exactech, Inc. ("Customer") with
respect to: (I) that certain WCMA AND TERM LOAN AND SECURITY AGREEMENT NO.
9504550701 between MLBFS and Customer (including any previous amendments and
extensions thereof), and (ii) all other agreements between MLBFS and Customer or
any party who has guaranteed or provided collateral for Customer's obligations
to MLBFS (a "Guarantor") in connection therewith (collectively, the "Loan
Documents"). Capitalized terms used herein and not defined herein shall have the
meaning set forth in the Loan Documents.
Subject to the terms hereof, effective as of the "Effective Date" (as defined
below) the Loan Documents are hereby amended as follows:
(a) Customer's principal office and address is hereby amended to read:
2320 NW 66th Court
Gainesville, FL 32653
Said new location shall now be a "location of Tangible Collateral".
(b) The "Maturity Date" of the WCMA Line of Credit is hereby extended to June
30, 2000.
(c) The "Maximum WCMA Line of Credit" is hereby increased to $6,000,000.00.
(d) The annual "Line Fee" during the period ending June 30, 2000, shall be
$30,000.00. Customer hereby authorizes and directs MLBFS to charge said amount
to WCMA Account No. 750-07R53 on or at any time after the Effective Date, and
again at the expiration of each year of the renewal term.
(e) In addition to existing requirements, within 45 days after the close of each
fiscal quarter of Customer, Customer shall furnish or cause to be furnished to
MLBFS an aging of Accounts and Chattel Paper and an Inventory report for
Customer as of the end of such fiscal quarter, all in reasonable detail and
certified by its chief financial officer.
Except as expressly modified hereby, the Loan Documents shall continue in full
force and effect upon all of their terms and conditions.
17
<PAGE>
EXHIBIT 10.1 (CONT)
By their execution of this Letter Agreement, the below-named Guarantors hereby
consent to the foregoing modifications to the Loan Documents, and hereby agree
that the "Obligations" under their Unconditional Guaranty shall extend to and
include the Obligations of Customer under the Loan Documents, as mended hereby.
Customer and said Guarantors acknowledge, warrants and agree, as a primary
inducement to MLBFS to enter into this Agreement, that: (a) no default or Event
of Default has occurred and is continuing under the Loan Documents; (b) each of
the warranties of Customer in the Loan Documents are true and correct as of the
date hereof; (c) neither Customer nor any of said Guarantors have any claim
against MLBFS or any of its affiliates arising out of or in connection with the
Loan Documents or any other matter whatsoever; and (d) neither Customer nor any
of said Guarantors have any defense to payment of any amounts owing, or any
right of counterclaim for any reason under, the Loan Documents.
Provided that no Event of Default, or event which with the giving of notice,
passage of time, or both, would constitute an Event of Default, shall then have
occurred and be continuing under the terms of the Loan Documents, the amendments
and agreements in this Letter Agreement will become effective on the date (the
"Effective Date") upon which: (a) Customer and the Guarantors shall have
executed and returned the duplicate copy of this Letter Agreement enclosed
herewith; (b) MLBFS shall have received a check made payable to CSC, The United
States Corporation, in the amount of $10,500.00 representing documentary stamp
tax required by Secretary of State, Florida; and (c) an officer of MLBFS shall
have reviewed and approved this Letter Agreement as being consistent in all
respects with the original internally authorization hereof.
Notwithstanding the foregoing, if Customer and the Guarantors do not execute and
return the duplicate copy of this Letter Agreement within 14 days from the date
hereof, or if for any other reason (other than the sole fault of MLBFS) the
Effective Date shall not occur within said 14-day period, then all of said
amendments and agreements herein will, at the sole option of MLBFS, be void.
Very truly yours,
Merrill Lynch Business Financial Services Inc.
By: Hugh E. Johnson
Credit Services Account Manager
Accepted:
Exactech, Inc.
By: Joel C. Phillips 7/18/98
Chief Financial Officer
18
EXHIBIT 10.2 AGREEMENT FOR SALE AND PURCHASE OF ASSETS
STATE OF FLORIDA )
)
COUNTY OF ALACHUA )
AGREEMENT FOR PURCHASE AND SALE OF ASSETS
THIS AGREEMENT FOR PURCHASE AND SALE OF ASSETS (hereinafter referred to
as this "Agreement") entered into this 29th day of May, 1998, by and between
SYNVASIVE TECHNOLOGY, INC., a California Corporation having an office at 4925
Robert J. Mathews Parkway, El Dorado Hills, California, 95762, (hereinafter
referred to as "Seller"), and EXACTECH, INC., a Florida Corporation, having an
office at 4613 N.W. 6th Street, Suite D, Gainesville, Florida 32609,
(hereinafter referred to as "Purchaser").
RECITALS:
WHEREAS, The parties entered into that certain Letter Agreement dated
March 31, 1998, the terms and conditions of which the parties hereby reaffirm;
and
WHEREAS, Purchaser desires to purchase and receive from Seller, and
Seller desires to sell, transfer, assign and deliver to Purchaser all of
Seller's properties, rights, and assets in and to the AcuDriver product and
related product line, as more particularly described below.
NOW, THEREFORE, in consideration of the mutual promises and covenants
herein contained, as well as the promises and covenants contained within the
March 31, 1998 Letter Agreement, and other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, the parties hereby
agree as follows:
1. PURCHASE AND SALE:
A. Subject to the terms and conditions set forth in this Agreement, and as
set forth in that certain Letter Agreement dated March 31, 1998, attached hereto
and incorporated herein as Exhibit "A," Purchaser agrees to purchase from Seller
and Seller agrees to sell, transfer, assign and deliver to Purchaser on the
Closing Date as hereinafter defined, all of Seller's rights, title, and
interests to all properties, rights, and assets comprising the AcuDriver product
and related product line and shall include, but are not limited to, any and all
of the following, (hereinafter collectively referred to as the ("Property"):
(a) All assets of any type and wherever located, existing inventory on
the date of closing, tooling, fixtures, existing and future intellectual
property and rights of all types (patents, trademarks, tradenames, etc.),
product development and existing knowledge and expertise, trade secrets and
product-specific knowledge, designs, drawings, vendor lists, customer lists,
regulatory filings, equipment, work-in-process, development, manufacturing,
production, marketing, distribution and sale rights, and any other properties,
rights and assets, wherever located, which comprise or are reasonably related to
the AcuDriver product and related product line and accessories and apparatus
associated therewith. It is specifically agreed that the existing inventory, and
the inventory on hand on the date of closing, includes the tooling, fixturing
and fixed assets as set forth on Exhibit "C, " the inventory list on Exhibit
"D," the product design and drawings on Exhibit "E," and the AcuDriver hand
piece components as set forth in Exhibit "F" each of such exhibits being
attached hereto and incorporated herein, and which include at least twenty-five
19
<PAGE>
(25) finished handsets and at least twenty-five (25) full osteotome kits, along
with cases and fiber optic light sources, all in finished, saleable form.
(b) To the extent not described in (a) above, any and all personalty
utilized in the AcuDriver product and related product line, which shall include,
but not be limited to, books, records, brochures, technical literature,
associated artwork, electronic or digital files, regulatory files, any and all
raw material, work in process, fixtures, machinery, equipment, inventory and
otherwise, used in connection with the product and related product line;
(c) To the extent not described in (a) or (b), above, any and all
existing and future intellectual property and rights will include research and
development, and any and all developing, pending, and existing patents,
trademarks, tradenames, service marks, copyrights, franchises, franchise rights
or other intellectual property, registrations, including pending applications
(defined as any and all applications filed or otherwise begun prior to the
closing date), and will also include any and all intellectual property
origination or "first in time" and "first date in use" origination dates, and
will further include any and all rights in and to the designs, inventions,
ideas, licenses, sublicenses, formulae, processes, know-how, trade secrets and
other intellectual property, including without limitation the United States and
foreign patents and patent applications along with any modifications, additions
and improvements thereof and thereto, and all drawings, prototypes, protocols,
research materials, testing records and results, FDA 510k filings and all
technical file materials and other technology, information and documentation,
which can or may be reasonably related to the AcuDriver product and related
product line;
(d) Any and all purchase orders, sales orders, and other sales
agreements and/or leads and contacts, contracts, leases, permits, registrations,
permits, conditional sales agreements, equipment and/or manufacturing contracts,
leases, and any leases and licenses as owned, used, or otherwise utilized in the
operation of the subject product and related product line;
(e) All of Seller's interest in the name "AcuDriver" and in any name,
whether internal, external, specific to the AcuDriver product or any related
product line, including slang or colloquial names, and specifically including
all intellectual property rights referenced in (c) above, including trademark,
tradename, and service mark rights, along with any and all existing goodwill,
numerical classifications, and any and all intangible assets used in the
AcuDriver business;
(f) All of Seller's regulatory submissions, approvals (to the extent
assignable) and registrations relating to the subject product and related
product line, including but not limited to those with the United States Food and
Drug Administration;
(g) To the extent in force and in effect on the Closing Date (as
defined below), any and all other contracts, leases and licenses with respect to
which Seller is a party relating to the use or operation (including sales) of
the product and related product line, which are assignable and which are written
or oral and are or were entered into or obtained either prior to or after the
date hereof, in the ordinary course of business;
(h) Any other properties and assets in possession or control of
Seller, tangible or intangible, used in or arising out of or in respect to the
use or operation (including sales) of the product and related product line
referenced above, including, but not limited to, all rights to any and all
contract rights, plans, specifications, documents and instruments except for
cash and as specifically excluded in this Agreement;
20
<PAGE>
B. As referenced in the Letter Agreement, and as set forth below, the
parties understand and agree that the purchasers are not assuming any contract,
obligation, agreement or liability of any kind or nature of Seller.
2. PURCHASE PRICE:
$425,000.00 dollars (US), with such purchase price payable as follows:
$50,000.00 deposit payable by wire transfer or other verifiable method prior to
5:00 p.m. (PST) March 31, 1998; $125,000.00 (US) deposit upon acceptance of the
Letter Agreement; $100,000.00 (US) payable upon all parties' execution of this
Agreement for Purchase and Sale of Assets; $100,000.00 (US) by 5:00 p.m. (PST)
on the date of closing; $50,000.00 (US) upon issuance of the presently pending
patent application. The allocation of the purchase price will be in accordance
with Attachment "B." The parties hereby additionally incorporate such terms as
are included in the March 31, 1998, Letter Agreement, attached hereto and
incorporated herein as Exhibit "A."
3. NON-ASSUMPTION OF LIABILITIES:
It is understood and agreed by the parties hereto that, Exactech (as
Purchaser) is not assuming and is therefore purchasing the properties, rights
and assets exclusive and otherwise free from any and all debts, liabilities, and
obligations, of the Seller, and the Seller shall remain responsible for the
payment and performances of and shall pay and perform all debts, liabilities,
and obligations, arising out of the conduct of its business prior to the date of
closing, even if such Obligations are first manifested after the date of
closing, and regardless of whether they are known or unknown, accrued, absolute,
contingent or otherwise, including, but not limited to, any negligence or
products liability claims, infringement claims, claims of creditors, any pending
orders and any and all tax obligations imposed by any taxing authority, or any
other liability to which the Seller is subject arising out of events which took
place in connection with its business prior to the date of closing. The
Purchaser shall be responsible for all obligations which arise after the date of
closing in connection with the conduct by the Purchaser of its business relating
to the assets being purchased.
4. CLOSING MATTERS INCLUDING COSTS AND DOCUMENTS:
(a) The Closing of the sale and purchase of the properties, rights and
assets shall take place at the offices of Greenberg, Traurig, Hoffman, Lipoff,
Rosen & Quentel, P.A., 101 East College Avenue, Tallahassee, Florida 32301, on
or before fifteen (15) business days from the date of the final execution by all
parties of this Agreement, or on such later date as may be postponed pursuant to
the terms and conditions of this Agreement, pursuant to the terms and conditions
of the Letter Agreement, or unless extended by mutual agreement of the parties,
such agreement not to be unreasonably withheld. Upon closing, the transfer shall
be effective upon closing being completed, and, unless notified otherwise in
writing, the transfer shall be effective at 12:01 a.m. (EST) on the date
immediately following the date of closing. Purchaser shall receive possession of
the property at closing.
(b) On the Closing Date, upon and simultaneously with the performance
by Purchaser and Seller of all the covenants to be performed by them hereunder
and the satisfaction of all conditions precedent, the Property shall be
conveyed, transferred and assigned to Purchaser by execution and delivery of the
following:
(i) Seller will deliver to Purchaser such deeds, bills of sale,
endorsements, lease and contract assignments, intellectual property transfers,
regulatory transfers, permit transfers and other documents and materials
necessary to effectuate Closing in form and content satisfactory to Purchaser's
counsel and containing full warranties of title as shall be effective to vest in
Purchaser good,
21
<PAGE>
absolute and marketable title to all the Property being purchased, free and
clear of all liens, charges and encumbrances and restrictions whatsoever.
(ii) A separate assignment for each of the proprietary rights,
trademarks, tradenames, service marks (or otherwise) and regulatory approvals,
as required by the Purchaser, in such form as may be reasonably required by
Purchaser in order to record such assignment with any applicable governmental
authorities or offices, together with any other necessary or desirable notices
or documents required for the transfer of rights thereto to the Purchaser.
(iii) A certified copy of an authorizing resolution executed by
the directors of Seller authorizing its performance of the transactions
contemplated by this Agreement and the Seller Documents.
(iv) A Certificate of Good Standing for Seller dated within
ninety (90) days of the date hereof issued by the State of California;
(v) Such other instruments of transfer necessary or desirable to
assign, transfer and convey to the Purchaser valid title to all of the Assets.
(vi) Seller will deliver to Purchaser all the inventory,
equipment, fixtures, contracts, agreements, commitments and rights as referenced
above;
(vii) Simultaneous with such delivery, the Seller will take all
such steps as may be requisite to put Purchaser in actual possession, operation
and control of the Property transferred hereunder, including an agreement for
future compliance that will survive the closing. Purchaser shall take possession
immediately following the Closing and shall be entitled to all revenues incurred
on or after April 1, 1998; and
(c) At closing, Seller will, on behalf of Synvasive, its agents,
employees, officers, directors, representatives, or affiliates, enter into a
separate non-disclosure and non-compete agreement regarding the properties,
rights and assets being purchased. Specific senior management personnel of
Synvasive, to be designated by mutual agreement of the parties, will
additionally enter into the non-disclosure and non-compete agreement at closing.
Such agreement will be substantially similar to and in accordance with the
non-disclosure and non-compete agreement attached hereto and incorporated herein
as Exhibit "F."
(d) At closing, the cost of documentary stamps, transfer taxes or
fees, if any, shall be paid by Purchaser, and Purchaser shall be responsible for
paying any recording charges and any other costs of Closing including
Purchaser's attorney fees. Seller's attorney fees and concomitant costs will be
the responsibility of Seller.
(e) At Closing all taxes and recurring registration fees, including
property and tangible and intangible personal property taxes, if any, will be
pro rated;
(f) Seller and Purchaser previously entered into a March 31, 1998,
Letter Agreement as to this purchase and sale of assets. Such Letter Agreement
is hereby incorporated herein and attached hereto as Exhibit "A." All provisions
therein carry forward into this agreement and certain provisions survive the
closing.
22
<PAGE>
5. TRANSITION:
As set forth in the letter agreement, the parties agree to a transition
period from the date of acceptance of the letter agreement through December 31,
1998. The transition period exists to effectuate compliance as outlined in
paragraph 6 of the letter agreement, and includes certain specifics, as follows:
(a) Sales to current distributors during the transition period will be
booked to Exactech upon execution of this agreement, and Synvasive will
administer and service the business with current Synvasive agents, including
billing and collection of receivables, all of which are to be delivered to
Exactech. Exactech will pay to Synvasive the amount of 2 percent of gross sales
for such services, and Exactech will additionally pay a royalty fee of 5 percent
of gross sales on all such sales. Such royalty fee is to be paid only regarding
sales to current distributors and will not include any separate sales to
non-Synvasive distributors nor to any new or future distributors;
(b) Synvasive will sell osteotomes to Exactech at the costs set forth
in the letter agreement with minimum quantities of ten units during the
transition period (or afterwards by mutual agreement);
(c) Synvasive will provide repairs for any and all repairs through the
transition period, including AcuDriver products and related products sold prior
to closing or sold after closing but during the transition period, at no charge
to Exactech for any and all such repairs, with the exception of hoses and fiber
optics. Synvasive will process any and all returns of AcuDriver products and
related products sold prior to the date of closing;
(d) Synvasive will provide consultation to Exactech for twelve (12)
calendar months from the date of closing, for the purpose of the transfer of the
properties, rights and assets referenced herein, for preparation and filing for
additional patents or other intellectual property protection, and for
manufacturing, regulatory filings and documents, including necessary
intellectual and regulatory filings and to resolve business issues as such
issues arise. The consultation will be provided during the transition period, at
no charge with the exception of travel and living expenses, and the consultation
will be provided during the period of time from the expiration of the transition
period to the end of the twelve (12) calendar month period for a reasonable
charge including travel and living expenses.
6. PRE-CLOSING MATTERS:
(a) Before Closing, Seller shall perform the following:
(i) Within five (5) days after execution of this Agreement (or
such other date as may be specifically agreed upon between the parties), Seller
shall provide to Purchaser an asset list and inventory of all assets and items
described in paragraph 1 above, including an itemized and detailed list of any
and all intellectual property filings, registrations, applications, or any items
or documents of whatever nature or source relevant to the intellectual property
and rights as well as personal property, fixtures and equipment, along with a
reconciliation of sales on or after April 1, 1998, as well as provide to
Purchaser copies of any and all existing leases, contracts, deposits, orders and
any other document(s) related to the ongoing day to day business operations;
(b) Before Closing, Purchaser shall perform the following:
(i) Purchaser may, at its expense and upon its option,
participate in verification of the asset list and inventory preparation outlined
under paragraph 6(a), above, and,
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additionally, is entitled to conduct the due diligence investigation as
referenced in the March 31, 1998, Letter Agreement;
(c) Before closing, Seller and purchaser shall each perform any and
all conditions as outlined in the March 31, 1998, Letter Agreement, including
any and all conditions specifically outlined in paragraph 6 of such agreement.
7. POST CLOSING ASSURANCES TO PURCHASER:
(a) From time to time after the Closing, at the request of Purchaser,
the Seller will execute and deliver to Purchaser such other instruments of
conveyance and transfer and take such other action as Purchaser may reasonably
require to effectively convey, transfer to and vest in Purchaser, and to put
Purchaser in possession of any of the Property being sold, conveyed,
transferred, and delivered to Purchaser, or its assigns hereunder. Without
limiting the generality of the foregoing, Seller agrees to provide and execute
any documents reasonably necessary.
(b) The parties specifically agree that Exactech is not purchasing nor
otherwise assuming nor agreeing to any debts, financial obligations, liabilities
nor other obligations for returns, credits, warranty or warranty costs of any
type existing on the date of closing, including corporate or individual debts,
nor purchasing or assuming any known or unknown liabilities or obligations
arising from the AcuDriver product and related product line. Synvasive hereby
indemnifies, and will restate at closing, an indemnification of Exactech for any
and all such liability or obligation. This provision survives the closing.
8. REPRESENTATIONS AND WARRANTIES OF SELLER.
As a material inducement to Purchaser to execute and perform its
obligations under this Agreement, the Seller hereby represents and warrants to
Purchaser with respect to the product and related product line being purchased
as of the date hereof and will represent on the Closing Date the following:
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(a) To its knowledge, Purchaser has been and will continue to be,
granted any and all requested access and ability to conduct the due diligence
referenced herein and referenced in the Letter Agreement;
(b) Between the Acceptance Date of the Letter Agreement and the
Closing Date, Seller adhere to all conditions as set forth in the Letter
Agreement, and of this Agreement, and additionally shall not:
(i) Incur any obligations or liabilities, absolute, accrued,
contingent, or otherwise, except current liabilities incurred in the ordinary
course of business;
(ii) Mortgage, pledge, subject to lien, charge, or encumbrance,
or grant a security interest in, any assets, tangible or intangible being
conveyed to Purchaser;
(iii) Cancel any debt or claim or sale or transfer any assets or
properties, except sales out of inventory in the ordinary course of business;
(iv) Suffer any damage, destruction or loss (whether or not
covered by insurance) affecting the properties, business or prospects, or waive
any rights of substantial value; or
(v) Enter into any transaction other than in the ordinary course
of business.
(c) To the best of Seller's knowledge, there are no actions, suits, or
proceedings pending or threatened against Seller or affecting any of the
Property or rights, at law or in equity, or before any federal, state,
municipal, or other governmental agency or instrumentality, domestic or foreign,
nor is Seller aware of any facts to which its knowledge might result in any such
action, suit or proceedings. Purchaser does not assume responsibility nor
liability for such pending or threatened complaint. The Seller is not in default
with respect to any order or decree of any court or of any such governmental
agency or instrumentality.
(d) Seller is not in violation of any terms or provisions of any
charter, bylaw, mortgage, indenture, contract, agreement, instrument, judgment,
decree, order, statute, rule, or regulations, and the execution, delivery,
performance and compliance with this Agreement will not result in the violation
of or be in conflict with or constitute a default under any such term or
provision or result in the creation of any mortgage, lien, encumbrance, or
charge, upon any of the Property of the Seller pursuant to any such term or
provision.
(e) The sale and transfer of the Property provided for in this
Agreement, has been approved and consented to by the Board of Directors of
Synvasive Technology, Inc., and all action required by any applicable law or
otherwise by the Board of Directors with respect to such sale, and the transfer
of the Property, has been appropriately authorized and accomplished, and
certified copies of the resolutions of the Board of Directors approving said
sale of assets shall be provided to the Purchaser at or prior to Closing.
(f) The Seller warrants that it is vested with good and marketable
title to all of the assets and property being sold, including any and all
intellectual property rights, regulatory certificates and/or permits, or
otherwise, and further warrants that it is able to transfer and convey such
property at closing free and clear of any and all competing or superceding
rights, any and all liens and/or financial restrictions, and free and clear of
any account and/or debts payable.
(g) The Seller has no knowledge of any claim or reason to believe that
it is or may be infringing or otherwise acting adversely to the rights of any
person under or in respect of any patent, trademark, service mark, trade name,
copyright, license or other similar intangible right. With the exception
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of the royalty payments made by Synvasive to Dr. Hedley, the Seller is not
obligated or under any liability whatsoever to make any payments by way of
royalties, fees or otherwise to any owner or license of or other claimant to any
patent, trademark, trade name, copyright, or other intangible asset with respect
to use thereof, or in connection with the conduct of business or otherwise.
(h) Seller is not in default in any respect under any of the
Contracts, Leases and Licenses or other documents and commitments to which it is
a party or otherwise bound to transfer or assign with respect to this Agreement.
To the best of Seller's knowledge, all Contracts, Leases, Licenses,
registrations and regulatory filings are true and complete, and the copies
furnished to Purchaser are true and complete and the same are in full force and
effect as of the date hereof and are enforceable in accordance with their terms.
(i) Seller warrants that there has not been any adverse change in, or
event or condition adversely affecting the condition (financial or otherwise) of
the Liabilities, business operations, or purchased assets of Seller. Should
there be any material change in any of the aforementioned items before the
Closing Date, Seller will immediately notify Purchaser in writing.
(j) No representation or warranty by the Seller in this Agreement or
in any writing attached hereto, contains or will contain any untrue or
misleading statement of material fact or omits or will omit to state any
material fact (of which the Seller has knowledge or notice).
(k) Seller has duly filed all federal, state, county and municipal
income, excise and other tax returns and reports required to be filed up to the
date hereof and up to the Closing Date with respect to or affecting the
Property. All such returns are to the best of Seller's knowledge and belief true
and correct and Seller has paid (or provided for) all taxes, interest and
penalties shown on such returns or reports to be due to any federal, state,
county and municipal or other taxing authority. In the event Seller has failed
to file any tax returns or Purchaser is assessed with taxes, either federal,
state or local with respect to the Property and such assessment is for time
periods before the Closing Date, Seller agrees to indemnify and hold Purchaser
harmless for those taxes and all interest or penalties and costs incurred in
maintaining any actions or settlements of any tax assessments. Seller agrees to
execute any affidavits, documents or other evidence satisfactory to Purchaser's
counsel demonstrating that no taxes are outstanding and that Seller agrees to
indemnify Purchaser as stated above.
(l) Seller will satisfy at or prior to Closing any debts not to be
assumed or paid by Purchaser under the terms of this Agreement.
9. REPRESENTATIONS AND WARRANTIES OF PURCHASER.
As a material inducement to Seller to execute and to perform its
obligations under this Agreement, the Purchaser hereby represents and warrants
to Seller as follows:
(a) To its knowledge, Purchaser has been and will continue to be
granted any requested access and ability to conduct the due diligence referenced
herein and referenced in the Letter Agreement;
(b) Purchaser is a validly created Florida corporation, and has full
power and authority to enter into and perform this Agreement in accordance with
its terms.
10. CONDITIONS PRECEDENT TO THE CLOSING BY PURCHASER
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The obligation of Purchaser to consummate this Agreement is subject to and
conditioned upon the satisfaction, at or prior to Closing, of each of the
following conditions:
(a) All the terms and conditions of the Letter Agreement and this
Agreement to be complied with and performed by the Seller on or before the
Closing Date, including the timely delivery to Purchaser of all Closing
documents, and instruments required to be delivered to Purchaser under this
Agreement, shall have been complied with and performed.
(b) All documents to be delivered by Seller at Closing shall be in
form and substance satisfactory to Purchaser's counsel.
(c) The representations and warranties of purchaser shall be deemed to
have been made again on the Closing Date and then be true and correct, subject
to any changes contemplated by this Agreement and Seller is not in default.
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11. CONDITIONS PRECEDENT TO CLOSING BY SELLER.
The obligation of Seller to consummate this Agreement is subject to and
conditioned upon the satisfaction, at or prior to Closing, of each of the
following conditions:
(a) All the terms and conditions of the Letter Agreement and this
Agreement to be complied with and performed by the Purchaser on or before the
Closing Date, including the timely delivery to Seller of all Closing documents
and instruments required to be delivered to Seller by this Agreement shall have
been complied with and performed.
(b) All documents to be delivered by Purchaser at Closing shall be in
form and substance satisfactory to Seller's counsel.
12. NATURE OF REPRESENTATIONS AND WARRANTIES.
(a) The representations and warranties contained herein and made
pursuant to this Agreement shall survive the execution and delivery of this
Agreement and the Closing hereof so as to allow the parties to enforce their
rights, as well as their obligations hereunder.
(b) Survival of Representation. All statements contained in any
certificate, instrument, or document delivered by or on behalf of any of the
parties pursuant to this Agreement and the transaction contemplated hereby shall
be deemed representations and warranties by the respective parties hereunder.
All representations and warranties made by the parties in this Agreement and
pursuant hereto shall survive the consummation of the transaction contemplated
by this Agreement, except to the extent waived in writing by all such parties,
notwithstanding any investigation heretofore or hereafter made by either of them
or on behalf of either of them.
13. LIQUIDATED DAMAGES:
The $50,000.00 (US) deposit paid by Exactech on March 31, 1998, will
constitute "liquidated damages" by and between the parties, and thereby limit
any damages by either party for failure to close. During the due diligence
period, as defined in the Letter Agreement, if a "material difference" arises or
is discovered, and based upon such material difference Exactech chooses to
cancel or otherwise not fulfill or complete the purchase, any amount paid to
Synvasive by Exactech including the $50,000.00 amount, will be refunded to
Exactech within ten (10) days from the date of notice being given to Synvasive.
Upon expiration of the due diligence period, and upon acceptance of this fully
executed Agreement, failure of either party to close based upon the conditions
of the Letter Agreement, and based upon the conditions, as set forth in this
Agreement, will entitle Buyer or Seller to terminate the Letter Agreement and/or
this Agreement and the $50,000.00 deposit will be provided to the requesting
party and any amount paid to Synvasive by Exactech in excess of $50,000.00 will
be refunded to Exactech, within ten (10) days from the date of notice. A
"material difference" is stipulated to be a difference between any
representations made to Exactech by Synvasive during the discussions and
negotiations leading up to this Agreement. If a dispute arises as to whether a
difference is "material," the parties agree to resolve such dispute between
themselves, but, if unable to resolve such dispute, then to allow a mutually
agreed upon mediator to resolve such dispute. Both parties, however, reserve
their rights based upon fraud or related torts.
14. DEFAULT AND REMEDIES.
(a) In the event that Seller has fulfilled all of its obligations set
forth in the Letter Agreement and in this Agreement and in the further event
that Purchaser fails to perform its obligations on the Closing Date set forth in
this Agreement, then Purchaser shall be deemed in default, and Seller may (i)
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provide notice regarding the liquidated damages referenced in paragraph 13,
above, and Purchaser will be reimbursed and/or refunded any sums on excess of
$50,000.00 paid to Synvasive pursuant to the Letter Agreement, or (ii) postpone
closing until the default can be cured by Purchaser.
(b) With the exception of those conditions set forth in the Letter
Agreement in the event Purchaser has performed all of its obligations set forth
in this Agreement and stands ready, willing and able to consummate the
transactions set forth herein as of the Closing Date, and in the further event
Seller for any reason, fails to perform its obligations on or before the Closing
Date, Seller shall be deemed in default and Purchaser may (i) provide notice
regarding the liquidated damages referenced in paragraph 13, above, and be
reimbursed and/or refunded any sums in excess of $50,000.00 paid to Synvasive
pursuant to the Letter Agreement, or (ii) postpone closing until the default can
be cured by Seller.
(c) In the event of any litigation between the parties arising out of
or relating to this Agreement, the prevailing party shall be entitled to recover
all incurred costs, expenses and reasonable attorney's fees.
15. MISCELLANEOUS PROVISIONS.
(a) Nothing in this Agreement, express or implied, is intended to
confer upon any person, other than the parties hereto or their successors or
assigns, any rights or remedies under or by reason of this Agreement. This
Agreement is not assignable by either party unless agreed to in writing by both
parties;
(b) Each of the parties shall bear all individual expenses including
attorney fees and accounting fees incurred in connection with the closing and in
the consummation of the transaction contemplated hereby and in the preparation
thereof, with the exception of costs and expenses incurred as part of the
closing and as set forth herein;
(c) Section Headings in this Agreement are for the sole purpose of
convenient reference and in no way define, limit or prescribe the scope or
intent of this Agreement or any part thereof and such headings shall not be
considered in interpreting or construing this Agreement;
(d) It is understood and agreed by the parties hereto that all
understandings and agreements heretofore between the parties are merged in this
Agreement which alone fully and completely expresses their agreement;
(e) Both parties agree that no brokers or dealers have been involved
with consummating the transactions under this Agreement and in the event of
liability will agree to indemnify the other party for any actions arising out of
such representation for all costs incurred to settle such issues.
(f) Heading to paragraphs of this agreement are to facilitate
reference only, do not form a part of this agreement, and shall not in any way
affect the interpretation thereof.
(g) In the event of any suit or controversy arising by virtue of this
agreement, the prevailing party shall be entitled to an award of all court
costs, litigation expenses and attorneys fees including those incurred at
pre-suit pre-trial, trial and appellate levels.
(h) This agreement is made, executed, and delivered in the State of
Florida and is intended to be performed in the State of Florida and shall be
construed and enforced in accordance with the laws of the State of Florida.
Exclusive venue for any controversy relating to this agreement shall be in
Alachua County, Florida, whether in state or federal court.
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(i) This agreement and attachment is the entire agreement between the
parties. This Agreement can be altered only in writing by unanimous consent of
all parties, and any verbal or oral statements prior to the agreement are merged
herein and any verbal or oral changed will hereafter have no effect.
(j) Any notice shall be deemed to have been properly given when
deposited in the United States mail, certified, or other reliable delivery
service with comparable evidence of delivery such as Federal Express, and
addressed to the party's address as set forth below:
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As to Exactech: With a copy to:
Exactech, Inc. Lorence Jon Bielby
Tim Seese, President Greenberg, Traurig, Hoffman, Lipoff
4613 NW 6th Street Rosen & Quentel, P.A.
Gainesville, Florida 32609 101 East College Avenue
Tallahassee, Florida 32301
As to Synvasive: With a copy to:
Synvasive Technology, Inc.
Michael G. Fisher, President
4925 Robert J. Mathews Parkway
El Dorado Hills, California 95762
IN WITNESS WHEREOF, the parties have executed this Agreement, the day
and year first above set forth.
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SELLER:
SYNVASIVE TECHNOLOGY, INC.
By: /s/ MICHAEL G. FISHER
---------------------
Title: PRESIDENT AND CEO
(Corporate Seal)
STATE OF CALIFORNIA
COUNTY OF EL DORADO
The foregoing instrument was acknowledged before me this 30TH day of MAY,
1998, by MICHAEL G. FISHER, who is personally known to me or has produced CDL as
identification.
NOTARY PUBLIC
/s/ JOSEPH R. HENDERSON
-----------------------
Name: Joseph R. Henderson
STATE OF CALIFORNIA, AT LARGE
Commission Number: 1108661
My Commission Expires: Aug 18, 2000
(Seal)
PURCHASER:
EXACTECH, INC.
By: /s/ TIMOTHY J. SEESE
---------------------
Title: PRESIDENT
STATE OF FLORIDA
COUNTY OF ALACHUA
The foregoing instrument was acknowledged before me this 29TH day of
MAY, 1998, by TIMOTHY J. SEESE, who is personally known to me.
NOTARY PUBLIC
/s/ CYNTHIA D. REGEN
--------------------
Name: Cynthia D. Regen
STATE OF FLORIDA, AT LARGE
Commission Number: CC737199
My Commission Expires: June 6, 2002
(Seal)
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ADDENDUM I
A. TRADE SECRETS: The parties each acknowledge that certain tangible and
intangible items used in the AcuDriver product and related product line are
secret, confidential, unique, and highly valuable, and that such business
knowledge has been developed by Synvasive and is being transferred to Exactech,
and that disclosure of any of such items to anyone other than Exactech, or its
authorized Representatives will cause Exactech irreparable injury. Such items
include, but are not limited to:
(a) Techniques, management, product knowledge, research and
development knowledge, computer software, data files, memoranda,
records, notes, lists, customer lists, tabulations, compilations,
and other customer information no matter how stored, kept, or
maintained;
(b) Operating processes and procedures;
(c) Confidential data and trade secrets developed by Synvasive or
which may be developed by Exactech or with which Exactech may
become familiar, including, but not limited to, customer
information, business methods and proprietary information; and
(d) Such other information as to which Synvasive had, or which
Exactech has a reasonable expectation of confidentiality or which
are defined by Section 688.002(4), FLORIDA STATUTES, or other
applicable Federal or Florida Law.
B. AGREEMENT NOT TO DISCLOSE INFORMATION: At all times subsequent to the
execution of the Letter Agreement, Synvasive and its agents, employees,
officers, directors, representatives, or affiliates have not, and do hereby
covenant and specifically agree not to disclose to anyone (unless otherwise
directed in writing by Exactech) any proprietary documents or information,
including but not limited to the items listed in this agreement, whether
developed before or after the date of the Letter Agreement. Each party further
covenants and agrees that this agreement not to disclose information shall be
binding during the term of the Purchase and Sale Agreement, and is renewed at
closing and continuing thereafter and be binding at all times following closing.
C. COVENANT NOT TO COMPETE: Synvasive, its agents, officers, directors,
representatives, or affiliates:
(i) hereby covenant and specifically agree that they are selling
for sufficient and adequate consideration the properties, rights and assets
outlined and described in the Purchase and Sale Agreement, including trade
secrets and confidential information but also including such valuable
confidential business or professional information that otherwise may not qualify
as trade secrets, including substantial relationships with specific prospective
or existing customers, as well as, client goodwill, and further including
certain intellectual property including trade names, trademarks, service marks,
or "trade dress," as well as extraordinary or specialized training;
(ii) hereby covenant and agree that they shall not, without
written consent of Exactech, during the term of this agreement and continuing
for a period of five (5) years after the date of the Letter Agreement:
(a) Be engaged in any business, anywhere in the world, which
competes in any way with the properties, rights and assets
being purchased and described in this agreement;
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(b) Solicit, divert, employ or attempt to employ, or
contact, directly or indirectly, for itself or for or on
behalf of any other person, firm, corporation, partnership,
association or other entity, anywhere in the world, any of
Exactech customers, officers, employees, agents, or
representatives, wherever located, employed, or assigned.
D. BINDING: This covenant not to compete shall be independent of any other
provisions of the Purchase and Sale Agreement and of the closing itself, and
shall survive the closing. Therefore, the existence of any claim of any
individual party against any other party or their affiliated companies, whether
based on the Purchase and Sale Agreement or otherwise, shall not constitute a
defense to the enforcement of this Addendum and shall not discharge Synvasive,
its agents, officers, directors, representatives, or affiliates, from this
covenant not to compete. In furtherance hereof, Synvasive, its agents, officers,
directors, representatives, or affiliates expressly waive the right to contest
enforcement or to contest the validity of the covenant not to compete, and
further waive the right to contest the enforceability of this covenant not to
compete and agree that such covenant is reasonably necessary to protect the
legitimate business interest or interests justifying the restriction. Synvasive,
its agents, officers, directors, representatives, or affiliates stipulate and
agree that the covenant is not overbroad, overlong, and is reasonably necessary
to protect, and is supported by, a legitimate business interest.
E. SCOPE: If any party challenges the reasonability of the temporal or
geographic scope of the covenant, not to compete, the parties specifically
authorize any court of competent jurisdiction, upon a finding that the scope of
the covenant not to compete exceeds the legitimate business interests of any
party, to reform the scope to comply with maximum limits permitted by applicable
law.
F. RELEASE: Exactech agrees to consider, in good faith, any written request
by Synvasive, its agents, officers, directors, representatives, or affiliates to
be released from the constraints of this covenant not to compete, providing,
however, that Synvasive, its agents, officers, directors, representatives, or
affiliates has not violated the covenant prior to such time, and further
providing that in the event of a release from the covenant, the released party
shall not disclose any of the items listed above [trade secrets], of this
agreement, whether developed before or after the date of this Addendum, and also
shall not solicit, divert, or wrongfully contact, directly or indirectly, any of
Exactech's or their affiliated companies past, present or future customers,
employees, agents, representatives or consultants.
G. ENFORCEMENT: The parties acknowledge that the protection of trade
secrets and the restrictions on competition contained herein is a reasonable
protection of legitimate business interests of Exactech, and that Synvasive
acknowledges irreparable harm to Exactech if the trade secrets and non-compete
portions of this agreement are breached by virtue of any one party's access to
or disclosure of the valuable, special, and unique information described or
outlined herein. Therefore, in the event of a breach or threatened breach, of
this agreement, Exactech shall be entitled to an injunction to enforce the
breaching party's compliance with the provisions of those paragraphs. Nothing
herein, however, shall prohibit Exactech nor any of its affiliated companies,
from pursuing any additional remedy available to them for such breach or
threatened breach, including recovery of damages, direct and indirect, from the
breaching party, together with the costs and attorney fees incurred by the
non-breaching party.
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EXHIBIT A
March 31, 1998
Synvasive Technology, Inc.
4925 Robert J. Matthews Parkway
El Dorado Hills, CA 95762
Attention: Michael G. Fisher
President & Chief Executive Officer
RE: PURCHASE AND SALE OF ACUDRIVER
Dear Mr. Fisher:
EXACTECH, Inc. [hereinafter "EXACTECH"], hereby proposes to purchase,
and therefore provides Synvasive Technology, Inc. [hereinafter "Synvasive"],
with this letter agreement regarding the purchase of all of the properties,
rights, and assets in and to the AcuDriver product and related product line
presently owned by Synvasive. The forthcoming contract, referenced below, will
include the specifics of the transaction, and will supercede and replace this
letter agreement with the exception of specific provisions herein. A summary of
the essential terms of the agreement are as follows:
1. PURCHASED ASSETS AND PROPERTY: Synvasive will sell, and EXACTECH will
purchase, all properties, rights, and assets comprising the AcuDriver product
and related product line (subject to specific asset identification and
verification). Such properties, rights, and assets being purchased include, but
are not limited to, all assets of any type, existing inventory on the contract
date, tooling, fixtures, existing and future intellectual property and rights of
all types (patents, trademarks, trade names, etc.), product development and
existing knowledge and expertise, trade secrets and product-specific knowledge,
designs, drawings, vendor lists, customer lists, regulatory filings, equipment,
work-in-process, all production, marketing, and sale rights, and any other
properties, rights, and assets, wherever located, which comprise or are
reasonably related to the AcuDriver product and related product line. It is
specifically agreed that the existing inventory, and the inventory on hand on
the date of closing, has an approximate cost value of $90,000.00 dollars (US),
and will consist of at least twenty-five (25) finished handsets, at least
twenty-five (25) full osteotome kits, along with cases and fiber optic light
sources.
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2. PRICE: $425,000.00 dollars (US), with such purchase price payable as
follows: $50,000.00 deposit payable by wire transfer or other verifiable method
prior to 5:00 p.m. (PST) March 31, 1998; $125,000.00 (US) deposit upon
acceptance of the letter agreement; $100,000.00 (US) payable upon all parties'
execution of a contractual agreement; $100,000.00 (US) by 5:00 p.m. (PST) on
June 26, 1998; $50,000.00 (US) upon issuance of the presently pending patent
application.
3. CONTRACT AND CLOSING: Within a reasonable time from acceptance by
Synvasive of this letter agreement, the parties will endeavor to finalize and
execute a contract for the purchase and sale of the described assets and items
with the contract superceding and replacing this letter agreement with the
exception of specific provisions herein. The intent of the parties is to
finalize a contract within 45 days of the date of acceptance of this letter
agreement, unless extended by EXACTECH to complete its due diligence. The date
of closing will be scheduled for 15 days from the date of contract finalization,
or on such later date as may be postponed pursuant to the terms and conditions
of the contract, or unless extended by mutual agreement of the parties, such
agreement not to be unreasonably withheld.
4. LIQUIDATED DAMAGES: The $50,000.00 (US) deposit paid by EXACTECH on
March 31, 1998, will constitute "liquidated damages" by and between the parties,
and thereby limit any damages by either party for failure to close. During the
due diligence period, as defined below, if a "material difference" arises or is
discovered, and based upon such material difference EXACTECH chooses to cancel
or otherwise not fulfill or complete the purchase, any amount paid to Synvasive
by EXACTECH will be refunded to EXACTECH within ten (10) days from the date of
notice being given to Synvasive. Upon expiration of the due diligence period,
and acceptance of a fully executed contract, failure of either party to close
based upon the conditions of agreement, as set forth below and as set forth in
the contract, will entitle buyer or seller to terminate this letter agreement
and/or the contract and any amount paid to Synvasive by EXACTECH in excess of
$50,000.00 will be refunded to EXACTECH within ten (10) days from the date of
notice. A "material difference" is stipulated to be a difference between any
representations made to EXACTECH by Synvasive during the discussions and
negotiations leading up to this letter agreement. If a dispute arises as to
whether a difference is "material," the parties agree to resolve such dispute
between themselves, but, if unable to resolve such dispute, then to allow a
mutually agreed upon mediator to resolve such dispute, subject to paragraph 9
below. Both parties, however, reserve their rights based upon fraud or related
torts.
5. DUE DILIGENCE: The time period between acceptance of the letter
agreement and all parties' acceptance of the contract shall constitute the "due
diligence period." Such period however, and any due diligence investigation
conducted by EXACTECH during such period, will not preclude nor prevent EXACTECH
from further investigation nor from withdrawal or termination of the contract
due to a material difference, or due to non-performances of a condition, as set
forth herein. This provision will survive the letter agreement.
6. CONDITIONS OF AGREEMENT THAT SURVIVE THE LETTER AGREEMENT:
(a) Between the acceptance date of this letter agreement, and the date
of closing, EXACTECH will be provided with complete and total access
to all books, records, brochures, literature, and financial records,
as well as any other materials and/or documents related to or relevant
to the AcuDriver product and related product line, and on the date of
closing any and all such books, records, or other documents, including
brochures, technical literature, associated artwork or electronic or
digital files, will be transferred to EXACTECH, including any and all
regulatory files and 510 K documents and files.
36
<PAGE>
(b) Synvasive agrees that there will be no material changes in the
sales, marketing, expenses, profit, losses, and financial condition
for the AcuDriver product and related product lines and business
during the period between the date of the acceptance of the letter
agreement and the date of closing. Synvasive will continue to operate
and otherwise maintain the AcuDriver product and related product line
business in a fiduciary capacity for or on behalf of EXACTECH during
the due diligence period and up to and including the date of closing.
(c) Synvasive and its principals (to be designated and mutually agreed
upon prior to entry of the contract) will enter into a non-disclosure
of trade secrets agreement and a non-compete agreement with EXACTECH,
with the exception of the current Synvasive OEM Osteotome business
with Othy, Inc.;
(d) On or after the date of the contract, EXACTECH will have the right
to immediately establish new sales agents or distributors worldwide
for the AcuDriver product and related products.
(e) On the date of closing, EXACTECH has the right to appoint or
otherwise contract with one or more of Synvasive's then-existing sales
agents, at EXACTECH'S option, but is not bound or otherwise required
to retain any then-existing Synvasive sales agents.
(f) The parties will agree to a transition period within which each
party agrees to provide full and complete compliance to honor the
intent of the parties in conveying the AcuDriver product and related
product line and to effectuate this transaction from the date of the
acceptance of this letter agreement through December 31, 1998. The
parties will include as a provision of the contract a compliance
agreement regarding the execution and deliverance of any instruments
of conveyance and/or transfer and to take any such other action as
reasonably deemed necessary to effectively convey, transfer to, and
vest in EXACTECH any and all of the property to be conveyed and
delivered in accordance with the contract. Such agreement will survive
the closing and have no expiration date.
(g) Sales to current distributors from the date of the acceptance of
this letter agreement forward will be booked to EXACTECH upon
execution of the purchase contract. Synvasive will administer and
service the business with current Synvasive agents, including billing
and collection of receivables, to be delivered to EXACTECH. EXACTECH
agrees to pay a reasonable service fee to Synvasive for such services,
with such fee to be agreed upon and a part of the contract.
(h) Synvasive agrees to sell osteotomes to EXACTECH at the cost set
forth in Exhibit "B" attached hereto with minimum quantities of ten
units during the transition period (or afterwards by mutual
agreement).
(i) Synvasive agrees to provide repairs through the transition period,
as referenced above, at no charge to EXACTECH for any and all repairs,
with the exception of hoses and fiber optics.
(j) Synvasive agrees to provide consultation to EXACTECH, at no charge
with the exception of travel and living expenses, for the purpose of
the transfer of the properties, rights and assets referenced herein,
for preparation and filing for additional patents or other
intellectual property protection, and for manufacturing, regulatory
files and documents, including necessary regulatory filings, and to
resolve other business issues.
(k) Synvasive agrees to assist EXACTECH in completing a technical file
for the CE mark.
37
<PAGE>
(l) Synvasive agrees to assign and otherwise transfer to EXACTECH the
existing consultation agreement it holds with Dr. Hedley. Synvasive
agrees to provide a reasonable amount of Ken Carlson's time (to be
determined in the contract) for sales and marketing support through
the transition period.
(m) Synvasive will transfer and otherwise assign any and all existing
and future intellectual property rights to the AcuDriver product and
related product line, including patents, trade name, trademark, or
other such rights. Synvasive will, during the due diligence period and
up to the date of the contract and beyond, continue all efforts to
pursue any intellectual property applications. Any and all costs
associated with the pursuit of such intellectual property rights will
be borne by Synvasive up to the date of closing.
7. WARRANTY: Synvasive warrants that it is vested with good and marketable
title to all of the assets and property being sold, including any and all
intellectual property rights, regulatory certificates and/or permits, or
otherwise, and further warrants that it is able to transfer and convey such
property at closing free and clear of any and all competing or superceding
rights, any and all liens and/or financial restrictions, and free of any account
and/or debts payable.
8. INDEMNIFICATION AND DISCLAIMER: EXACTECH is not purchasing nor otherwise
assuming nor agreeing to any debts, financial obligations, liabilities nor other
obligations for returns, credits, warranty or warranty costs of any type
existing on the date of closing, including corporate or individual debts, nor
purchasing or assuming any known or unknown liabilities or obligations arising
from the AcuDriver product and related product line. Synvasive hereby
indemnifies, and will restate in the contract and at closing, an indemnification
of EXACTECH for any and all such liability or obligation. This provision
survives the letter agreement.
9. FLORIDA LAW AND VENUE: Florida Law is applicable and will control any
dispute regarding this letter agreement, as well as any dispute regarding the
forthcoming contract. The parties agree to Florida venue and jurisdiction
regarding any dispute or litigation of any type, and the prevailing party is
entitled to seek reasonable attorney fees and costs. This provision survives the
letter agreement.
38
<PAGE>
Thank you for your consideration and continued good faith cooperation.
Sincerely,
/s/ TIMOTHY J. SEESE
--------------------
Timothy J. Seese
President
ACKNOWLEDGED AND AGREED FOR
PURPOSES OF AGREEMENT TO SELL:
SYNVASIVE TECHNOLOGY, INC.
/s/ MICHAEL G. FISHER
- ---------------------
By: Michael G. Fisher
Its: President & Chief Executive Officer
39
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>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1997 1998 1997 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Basic:
Weighted average common shares outstanding
used in computing basic earnings per share 4,878,193 4,904,663 4,869,313 4,904,663
========= ========= ========= =========
Basic Earnings Per Share $0.12 $0.22
========= =========
Diluted:
Weighted average common and common equivalent 4,878,193 4,904,663 4,869,313 4,904,663
shares outstanding
Effect of shares issuable under stock plans 52,557 52,040 67,361 35,499
using the treasury method
Effect of shares contingently issuable under warrants 4,268 6,677 7,072 3,320
issued with the 8% subordinated debentures using
the treasury stock method
--------- --------- --------- ---------
Shares used in computing diluted earnings per share 4,935,018 4,963,380 4,943,746 4,943,482
========= ========= ========= =========
Diluted Earnings Per Share $0.12 $0.22
========= =========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 2,634,157
<SECURITIES> 0
<RECEIVABLES> 5,023,464
<ALLOWANCES> (179,729)
<INVENTORY> 11,130,359
<CURRENT-ASSETS> 19,016,389
<PP&E> 10,996,446
<DEPRECIATION> (2,331,285)
<TOTAL-ASSETS> 28,709,788
<CURRENT-LIABILITIES> 2,954,068
<BONDS> 0
0
0
<COMMON> 49,047
<OTHER-SE> 21,381,573
<TOTAL-LIABILITY-AND-EQUITY> 28,709,788
<SALES> 11,692,915
<TOTAL-REVENUES> 11,692,915
<CGS> 4,176,943
<TOTAL-COSTS> 4,176,943
<OTHER-EXPENSES> 5,712,001
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,440
<INCOME-PRETAX> 1,809,309
<INCOME-TAX> 722,280
<INCOME-CONTINUING> 1,087,029
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,087,029
<EPS-PRIMARY> 0.22
<EPS-DILUTED> 0.22
</TABLE>
