UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-28240
EXACTECH, INC.
(Exact name of registrant as specified in its charter)
FLORIDA 59-2603930
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2320 NW 66TH COURT
GAINESVILLE, FL
32653
(Address of principal executive offices)
(352) 377-1140
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of February 4, 2000, the number of shares of the registrant's Common Stock
outstanding was 5,008,079. The aggregate market value of the Common Stock held
by non-affiliates of the registrant as of February 4, 2000 was approximately
$31,752,842, based on a closing sale price of $12.75 for the Common Stock as
reported on the NASDAQ National Market System on such date. For purposes of the
foregoing computation, all executive officers, directors and 5 percent
beneficial owners of the registrant are deemed to be affiliates. Such
determination should not be deemed to be an admission that such executive
officers, directors or 5 percent beneficial owners are, in fact, affiliates of
the registrant.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III (Items 10, 11, 12 and 13) is incorporated
by reference from the registrant's definitive proxy statement for its 2000
Annual Meeting of Shareholders (to be filed pursuant to Regulation 14A).
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TABLE OF CONTENTS
AND
CROSS REFERENCE SHEET
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PAGE NUMBER
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PART I Item 1. Business
Business Overview 3
Products 3
Marketing and Sales 6
Manufacturing and Supply 6
Patents and Proprietary Technology 7
Research and Development 9
Scientific Advisory Board 9
Competition 10
Product Liability and Insurance 10
Government Regulation 10
Employees 13
Executive Officers of the Registrant 13
Item 2. Properties 15
Item 3. Legal Proceedings 15
Item 4. Submission of Matters to a Vote of Security Holders 15
PART II Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 16
Item 6. Selected Financial Data 17
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 18
Item 7.A Quantitative and Qualitative Disclosures About Market Risk 23
Item 8. Financial Statements and Supplementary Data 24
Item 9. Changes in and Disagreements with Accountants on 39
Accounting and Financial Disclosure
PART III Item 10. Directors and Executive Officers of the Registrant 39
Item 11. Executive Compensation 39
Item 12. Security Ownership of Certain Beneficial Owners
and Management 39
Item 13. Certain Relationships and Related Transactions 39
PART IV Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 40
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PART I
ITEM 1. BUSINESS
Exactech, Inc. (the "Company", or "Exactech") develops, manufactures,
markets and sells orthopaedic implant devices, related surgical instrumentation,
and distributes biologic materials to hospitals and physicians in the United
States and overseas. The Company was founded by an orthopaedic surgeon in
November 1985, and is incorporated under the laws of the State of Florida. Early
in the Company's history, revenues were principally derived from sales of its
primary hip replacement systems. During 1995, the Company introduced
Optetrak(R), a total primary knee replacement system, which had been in
development for three years. The Optetrak(R) knee system was conceived by the
Company in collaboration with members of its Scientific Advisory Board in
cooperation with the Hospital for Special Surgery, an internationally known
hospital for orthopaedic surgery. The Optetrak(R) system represents a highly
differentiated product based on precision manufacturing techniques and a design
which reduces articular contact stress. The Optetrak(R) system is the most
modern rendition of a series of knee implants which were first introduced in
1974 and which are still being marketed by certain of the Company's competitors.
The Company has entered into an agreement with the Hospital for Special Surgery
which gives the Company a non-exclusive option with respect to future knee
systems developed at the Hospital for Special Surgery. During 1999, the Company
began full domestic distribution of Opteformtm, a bone allograft material.
ORTHOPAEDIC IMPLANT AND BIOLOGICS INDUSTRY
According to the Orthopedic Network News Volume 10 Number 3, United
States sales of orthopaedic implant products were approximately $1.913 billion
in 1998, an increase of 3.1% from 1997. During 1998, sales of knee implants were
approximately $1.07 billion, an increase of 3.0% from 1997, while sales of hip
implants were approximately $847.3 million, an increase of 3.2% from 1997.
Volume 10 Number 4 of this same publication reported that sales of bone graft
and bone substitutes were approximately $225 million in 1998. Projected sales
for 1999 were $275 million.
Management believes that the industry will continue to grow due to the
increase in the number of people over age 65. Longer life spans and the
continuing aging of the population increases the number of individuals whose
joints will be subject to failure. Furthermore, the "baby-boomers" are
approaching the age where arthritis and osteoporosis begin to affect joints,
necessitating joint replacement. As this segment of the population continues to
age, an increasing demand for joint replacement procedures is anticipated.
Finally, the earlier generations of implanted joint replacement prostheses have
begun to reach their maximum life and are beginning to fail, resulting in an
increased demand for hip and knee revisions.
PRODUCTS
The Company's orthopaedic implant products are used to replace joints
which have deteriorated as a result of injury or diseases such as arthritis.
Reconstructive joint surgery involves the modification of the area surrounding
the affected joint and the insertion of a set of manufactured implant components
to replace or augment the joint. During the surgery, the surgeon removes a
portion of the bones that comprise the joint, prepares the remaining bones and
surrounding tissue and then installs the implant.
Knee implants are either total or unicompartmental. Total knee
replacement systems are used to replace the entire knee joint (i.e., the
patella, upper portion of the tibia and lower portion of the femur), while
unicompartmental systems are used to replace one of the two compartments between
the femur and the tibia. Primary knee implant systems are used to replace the
natural knee joint, while knee revision systems are used to replace the
components of a previously installed primary implant system that has failed. The
components of revision systems are specially designed to fill bony voids created
by the previous implant.
Hip implants are either total or partial. In a total hip implant, the
acetabulum is replaced with an acetabular cup. The damaged head of the patient's
femur is removed and a stem is inserted into the femur on which a replacement
head is mounted. This femoral head is placed into the cup of the acetabulum to
recreate the ball and socket joint. In a partial hip implant, the damaged head
of a patient's femur is removed and replaced with a head mounted on a stem
inserted into the femur. However, the acetabulum is not replaced and the size of
the head is larger and more similar to the natural femoral head. Hip implants
are designed for either cemented or non-cemented applications. Cemented hip
implants are installed by using bone cement to attach the components to a
patient's bones, while porous coated hip implants are press-fit without cement.
Porous coated implants are designed to promote growth of the patient's remaining
bone tissue onto the implant. Primary hip implant systems are used to
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replace the natural hip joint, while hip revision systems are used to replace a
previously installed primary implant system that has failed.
KNEE PRODUCTS. The Company believes that its Optetrak(R) knee system
represents a major advance in knee implant design. The Optetrak(R) knee system
was developed in collaboration with the Hospital for Special Surgery in New York
and a design team consisting of physicians and bioengineers affiliated with
major medical facilities and academic institutions. The Company's Optetrak(R)
system is a modular system designed to improve patellar tracking, reduce
articular contact stress that leads to implant failure, and provide increased
range of motion. Laboratory testing performed by the Company and clinical
testing performed by the Company's design team members has demonstrated that the
system produces substantially lower articular contact stress and improved
patellar tracking compared to other knee implant systems.
The Optetrak(R) system includes a total primary knee replacement system
which is available with either a cruciate ligament sparing femoral component (in
both cemented and porous coated designs) or a posterior stabilized femoral
component (in both cemented and porous coated designs). These femoral components
are made of a cobalt chromium alloy. The system is also available with several
alternative tibial components, including titanium tibial tray components with
both finned keel and trapezoid keel with stem augmentation, blocks and full or
half wedges, and all polyethylene tibial components, which are cruciate sparing
or posterior stabilized. The stem and block augmentation allow the surgeon to
rebuild the ends of the patient's bones to allow fixation of the implant system.
The metal components of the Optetrak(R) system are precision machined resulting
in better congruence among components and material performance. The Company's
patellar and tibial insert products are made of compression molded, ultra-high
molecular weight polyethylene. Because of variations in human anatomy and
differing design preferences among surgeons, knee components are manufactured by
the Company in a variety of sizes and configurations. Bone cement is used to
affix the implants to the bone.
The Optetrak(R) system also includes a constrained total knee system
for revision surgery and primary surgery with severe deformities. The Company
commenced full-scale marketing of the constrained system in 1997. The system
includes two types of components: the constrained condylar modular femoral
component and a constrained non-modular femoral component. The modular component
includes enhanced stem and block augmentation and can be used with many
components of the primary system. The constrained condylar femoral component was
designed to provide greater constraint between the system components to
compensate for ligaments weakened or lost due to disease or as a result of the
original implant. The Company is also designing a unicondylar knee system. The
Company will be required to obtain Food and Drug Administration ("FDA")
clearance to market the unicondylar knee system.
HIP PRODUCTS. The Company began marketing a hip implant system in 1987.
Currently, the Company's line of hip implant products includes four total hip
implant systems: AcuMatch(TM) C-Series Cemented Femoral Stem, AuRA(R) Revision
Hip System, MCS(R) Porous Coated Total Hip System, and the Opteon(R) Cemented
Stem System. The AuRA(R) Revision System includes revision long stems and calcar
replacement stems. Additionally, the Company markets two primary partial hip
implant systems, its unipolar and its bipolar implant components.
Because of variations in human anatomy and differing design preferences
among surgeons, hip implants are manufactured by the Company in a variety of
head sizes, neck lengths, stem lengths, stem cross-sections and configurations.
The Company's total hip replacement systems utilize either titanium alloy or
cobalt chromium alloy femoral stem components, which can be final machined from
forgings, castings or wrought metal plate depending on the design and material
used. The Company's total hip replacement systems also include ultra-high
molecular weight polyethylene cups with and without metal backing. The femoral
heads are made of either cobalt chromium or zirconia ceramic.
During October 1999, the Company began full-scale marketing of the
AcuMatch(TM) C-Series Cemented Femoral Stem which was the initial product
release of a comprehensive update to its hip product systems. The AcuMatch(TM)
C-Series stem seeks to improve stability and reduce dislocation complications by
improving head/neck ratio and restoring anatomic offset for patients requiring
cemented hip arthroplasty (joint reconstructive surgery). This forged cobalt
chromium stem will incorporate instrumentation that will be used with additional
AcuMatch(TM) hip product lines scheduled for full-scale marketing during 2000.
The AcuMatch(TM) A-Series Acetabular System will provide an updated design with
a more comprehensive acetabular offering and will replace the existing MCS(R)
Acetabular System. The AcuMatch(TM) P-Series Press Fit Femoral Stem System with
multiple coating options will use integrated instruments and similar neck
geometries as the C-Series and will replace the MCS(R) Porous Coated Total Hip
System. The AcuMatch(TM) L-Series Hip Systems will provide cemented and press
fit alternatives without the premium features found on the C-Series and P-Series
stems.
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During 1996, the Company licensed patented technology for a modular
revision hip system. The Company commenced product development of the modular
revision hip system during 1997. The Company has continued product development
and received FDA clearance to market the system in January 2000. The Company
plans to commence full-scale marketing of this product in 2000 under the trade
name AcuMatch(TM) M-Series Modular Hip System. The AcuMatch(TM) M-Series will be
plasma coated and consist of a three-piece stem that can be used in both primary
and revision surgeries.
Once completed, AcuMatch(TM) will be a comprehensive system that
provides solutions for a broad range of patient indications. The AcuMatch(TM)
Integrated Hip System will be comprised of a new primary total hip replacement
system as well as revision components. It can also be used for fracture and
tumor applications. All AcuMatch(TM) primary stem components have a common
proximal geometry which affords the surgeon reproducability of results
regardless of which series is selected. AcuMatch(TM) P-Series, C-Series and
L-Series components can be implanted using a single set of surgical instruments
which makes the system more cost effective.
The Company also provides a moderate demand femoral stem, the Opteon(R)
forged cobalt chromium femoral stem.
The Company's MCS(R) Porous Coated Total Hip System was designed to
minimize thigh pain and abnormal bone remodeling resulting from bone-implant
stiffness mismatch. The Company's MCS(R) Porous Coated Total Hip System was also
designed to avoid unnecessary damage to the bone and its blood supply during
femoral preparation. The Company also provides instrumentation that facilitates
reproducible implantation of the implant. The system consists of a modular
acetabular cup and cup liner, screws for supplemental fixation of the acetabular
cup, a modular head and a femoral stem. All of the Company's femoral heads are
designed to be used with its femoral stems, including the Ziramic(R) (zirconia
ceramic) femoral head which was designed to further reduce friction and
polyethylene wear. This system will be phased-out in 2000 and 2001 as the
AcuMatch(TM) P-Series and A-Series are released.
The Company's partial hip products include a bipolar prosthesis and a
unipolar prosthesis. The Company's bipolar prosthesis also utilizes one of the
stems used in total hip replacements. The bipolar prosthesis is designed for use
in more active patients and the unipolar prosthesis is designed for use in less
active patients.
OTHER COMPANY PRODUCTS AND SERVICES. The Company has designed and
received FDA clearance to market a nonmodular shoulder implant system. In 1997,
the Company temporarily halted development plans for a modular version of a
shoulder implant system. The Company believes that other opportunities currently
provide a more optimal use of the Company's resources.
The Company has acquired an exclusive license for an improved, and
patented, surgical oscillating saw system that significantly reduces vibration,
noise, and problems with control in surgery. The Company is currently exploring
development options for this product.
The Company has signed a worldwide distribution agreement with
Regeneration Technology Inc., an affiliate of the University of Florida Tissue
Bank, for new bone grafting material technology. The initial material supplied
under this agreement, OpteFORM(TM), includes traditional allograft material
components, and has the unique property of being fully formable at a temperature
of 43(Degree) to 45(Degree)C which is just above body temperature. The material
becomes a resilient solid when its temperature falls to body temperature
(37(Degree)C). Exactech distributes OpteFORM(TM) as a service through the
Company's current domestic distribution. The Company commenced this service in
the fourth quarter of 1998, with full domestic distribution occurring in 1999.
During June 1998, the Company purchased substantially all of the assets
related to Synvasive Technology, Inc.'s ("Synvasive") AcuDriver(TM) product
line. The AcuDriver(TM) Automated Osteotome System is an air-driven impact hand
piece that aids surgeons during joint implant revision procedures by providing
effective cleavage of prosthesis/bone or cement/bone interfaces. The
AcuDriver(TM) accomplishes this by providing the surgeon with precise
positioning without the inconvenience and inconsistency of striking the
osteotome with a mallet.
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MARKETING AND SALES
The Company markets its orthopaedic implant products in the United
States through 52 independent agencies and one domestic distributor that acts as
the Company's sales representatives, and internationally through ten foreign
distributors. The customers for the Company's products consist of hospitals,
surgeons and other physicians and clinics. Traditionally, the surgeon made the
ultimate decision which orthopaedic implant to use. As a result of health care
reform, the rapid expansion of managed care at the expense of traditional
private insurance, the advent of hospital buying groups, and various bidding
procedures that have been imposed at many hospitals, sales representatives may
also make presentations to hospital administrators, material management
personnel, purchasing agents or review committees that may influence the final
decision.
The Company generally has contractual arrangements with its independent
sales agencies pursuant to which the agency is granted the exclusive right to
market the Company's products in the specified territory and the agency is
required to meet sales quotas to maintain its relationship with the Company. The
Company's arrangements with its sales agencies typically do not preclude them
from selling competitive products, although the Company believes that most of
its agencies do not do so. The Company typically pays its sales agencies a
commission based on net sales. The Company is highly dependent on the expertise
and relationships of its sales agencies with customers. The Company's sales
organization, comprised of the Company's independent sales agencies, is
supervised by two Regional Managers (West and East). The Company has contractual
arrangements with its domestic distributors which are similar to its
arrangements with its sales agencies, except the Company does not pay the
distributors commissions and the distributors purchase inventory from the
Company for use in fulfilling customer orders. The Company currently offers its
products in 41 states, including Florida, New York, California, Texas, Ohio,
Pennsylvania, Michigan and Illinois.
The Company provides inventories of its products to its United States
sales agencies until sold or returned for their use in marketing its products
and filling customer orders. As the size of the component to be used is
frequently not known until surgery has commenced and because surgeons give
little or no advance notice of surgery, a minimum of one size of each component
in the system to be used must be available to each sales agency at the time of
surgery. Accordingly, the Company is required to maintain substantial levels of
inventory. The maintenance of relatively high levels of inventory requires the
Company to incur significant expenditures of its resources. The failure by the
Company to maintain required levels of inventory could have a material adverse
effect on the Company's expansion. As a result of the need to maintain
substantial levels of inventory, the Company is subject to the risk of inventory
obsolescence. In the event that a substantial portion of the Company's inventory
becomes obsolete, it would have a material adverse effect on the Company. The
Company maintains a reserve for inventory due to obsolescence and slow moving
items.
During the years ended December 31, 1997, 1998 and 1999, approximately
6%, 7% and 6%, respectively, of the Company's sales were derived from a major
customer. During each of the years ended December 31, 1997, 1998, and 1999, one
distributor, MBA Del Principado, S.p.A., accounted for approximately 13%, 14%,
and 13% respectively, of the Company's sales.
The Company generally has contractual arrangements with its foreign
distributors pursuant to which the distributor is granted the exclusive right to
market the Company's products in the specified territory and the distributor is
required to meet sales quotas to maintain its relationship with the Company.
Foreign distributors typically purchase product inventory and instruments from
the Company for their use in marketing and filling customer orders.
The Company currently offers its products in thirteen countries in
addition to the United States: Argentina, Australia, Belgium, Columbia, Greece,
Japan, Italy, Lebanon, Luxembourg, Portugal, Spain, Turkey, and the United
Kingdom. For the years ended December 31, 1997, 1998 and 1999, foreign sales
accounted for $3,051,151, $5,007,105 and $6,169,250, respectively, representing
approximately 17.3%, 20.8% and 18.7%, respectively, of the Company's sales. For
the years ended December 31, 1997, 1998, and 1999, gross profit from foreign
sales accounted for $1,127,455, $1,871,577 and $2,627,166, respectively. The
Company intends to continue to expand its sales in foreign markets in which
there is increasing demand for orthopaedic implant products. In order to expand
its global sales and marketing capabilities, the Company is assessing the
attractiveness of establishing local manufacturing to serve the EEC and Asian
markets.
MANUFACTURING AND SUPPLY
The Company historically utilized third-party vendors for the
manufacture of all of its component parts,
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while performing product design, quality assurance and packaging internally.
During 1998, the Company began manufacturing some of its components, and during
1999, the Company increased the number of internally manufactured components.
The Company consults with its vendors in the early stages of the design process
of its products. This strategy of using third-party vendors for some
manufacturing and consulting enables the Company to efficiently source product
requirements while affording it considerable flexibility. Because the Company is
able to obtain competitive prices from a number of suitable suppliers with
FDA-approved facilities, the Company believes it is able to offer high quality
products at cost-effective prices. With the increase of internal manufacturing,
the Company anticipates a greater degree of control of production costs. The
Company continually assesses the manufacturing capabilities and
cost-effectiveness of its existing and potential vendors, and may in the future
establish manufacturing strategic alliances to assure itself of continued
low-cost production. For the years ended December 31, 1997, 1998 and 1999, the
Company purchased approximately 72%, 74% and 71% respectively, of its component
requirements from three manufacturers. The Company does not maintain supply
contracts with any of its manufacturers and purchases components pursuant to
purchase orders placed from time to time in the ordinary course of business. The
Company has several alternative sources for components and does not anticipate
that it will encounter problems in obtaining adequate supplies of components.
Certain tooling and equipment which are unique to the Company's products are
supplied by the Company to its vendors.
The Company's internal manufacturing, assembly, packaging and quality
control operation are conducted at its principal offices in Gainesville,
Florida. Each component received from its vendors is examined by Company
personnel prior to assembly or packaging to ensure that it meets the Company's
specifications.
PATENTS AND PROPRIETARY TECHNOLOGY; LICENSE AND CONSULTING AGREEMENTS
The Company holds United States patents covering one of its femoral
stem components, its bipolar partial hip implant system, features of its
Optetrak(R) tibial components, and certain surgical instrumentation, has patent
applications pending with respect to certain surgical instrumentation and
certain implant components and anticipates that it will apply for additional
patents it deems appropriate. In addition, the Company holds licenses from third
parties to utilize certain patents, including an exclusive license to an
oscillating saw technology and a non-exclusive license (described below) to
certain patents, patents pending and technology utilized in the design of the
Optetrak(R) knee system. As a result of the rapid rate of development of
reconstructive products, the Company believes that patents have not been a major
factor in the orthopaedic industry to date. However, patents on specific designs
and processes can provide a competitive advantage and management believes that
patent protection of orthopaedic products will become more important as the
industry matures. Although the Company believes that its patents and products do
not and will not infringe patents or violate proprietary rights of others, it is
possible that its existing patent rights may not be valid or that infringement
of existing or future patents or proprietary rights may occur.
In addition to patents, the Company relies on trade secrets and
proprietary know-how and employs various methods to protect its proprietary
information, including confidentiality agreements and proprietary information
agreements.
In connection with the development of its knee implant systems, the
Company entered into consulting agreements with certain of its executive
officers and design team members, including Dr. William Petty and Dr. Gary J.
Miller, who are executive officers, directors and principal shareholders of the
Company, and Ivan A. Gradisar, Jr., M.D., and William Murray, M.D. Pursuant to
these consulting agreements, such individuals agreed to provide consulting
services to the Company in connection with evaluating the design of knee
implantation systems and associated instrumentation and are entitled to receive
royalties during the term of the agreements aggregating 3% of the Company's net
sales of such products in the United States and less than 3% of the Company's
net sales of such products outside the United States. During the years ended
December 31, 1997, 1998 and 1999, the Company paid royalties aggregating
$288,759, $432,242 and $540,773 respectively, pursuant to these consulting
agreements. The consulting agreements with Drs. Petty and Miller were superseded
by their employment agreements which provide for the continuation of the royalty
payments. The Company has entered into consulting agreements with two members of
its design team in connection with the development of its AuRA(R) and
AcuMatch(TM) hip systems.
In January 1997, the Company entered into an oral consulting agreement
with Albert Burstein, Ph.D., a director of the Company, to provide services
regarding many facets of the orthopaedic industry including product design
rationale, manufacturing and development techniques and product sales and
marketing. During 1997, 1998 and 1999, the Company paid Dr. Burstein $123,750,
$135,000 and $135,000, respectively, as compensation under the consulting
agreement.
From time to time, the Company enters into license agreements with
certain unaffiliated third parties under
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which the Company is granted the right to utilize certain patented products,
designs and processes. Pursuant to a license agreement with the Hospital for
Special Surgery (the "HSS License Agreement"), the Company obtained a
non-exclusive right and license to certain patents, patents pending and
technology utilized in the design of the Optetrak(R) knee implant system and to
manufacture, use and sell total knee prostheses incorporating such patents and
technology. The term of the HSS License Agreement continues until the earlier to
occur of (i) the expiration of a period of ten years and (ii) the expiration of
the licensed patents. In consideration for the grant of the license, the Company
agreed to pay to the Hospital for Special Surgery royalties in an amount equal
to 5% of net sales of the licensed products. Pursuant to the HSS License
Agreement, the Company has the option to acquire a non-exclusive license to use
any improvement or invention made or acquired by the Hospital for Special
Surgery relating to the licensed products and the option to obtain an exclusive
license to any such improvement or invention made jointly by the Hospital for
Special Surgery and the Company. As is the case in many license agreements of
this nature, the Hospital for Special Surgery did not represent to the Company
that the manufacture, use or sale of the Optetrak(R) knee implant system will
not infringe the intellectual property rights of third parties. During the years
ended December 31, 1997, 1998 and 1999, the Company recognized royalties to the
Hospital for Special Surgery of $474,357, $650,548 and $812,832, respectively.
Pursuant to a License Agreement (the "University License Agreement")
between the University of Florida (the "University") and the Company, the
Company has been granted the exclusive right and license in perpetuity to make,
use and sell a spinal implant device under patents owned by the University. In
consideration for the right to utilize the University patents, the Company paid
the University an initial license issue fee of $6,000 and, if and when the
patented products or processes are utilized in devices or products sold by the
Company, the Company will be required to pay the University a royalty in an
amount equal to 5% of the Company's net sales of any such products in the United
States, up to a maximum royalty of $500,000, and thereafter a royalty of 2% of
such net sales. This royalty will be payable by the Company during the period
ending ten years from the Company's first sale of a device utilizing the
University patent. In addition, the University License Agreement provides that
the Company will remit to the University 75% of all royalties received by the
Company for sales outside of the United States under sublicense agreements
relating to the patented products or processes. In connection with the
University License Agreement, the Company also has agreed to assist the
University in developing certain other devices currently being researched and
tested which are intended to be patented by the University. To date, the Company
has only utilized the University patents in connection with product research and
development and accordingly, the Company has paid no royalties to the University
under the University License Agreement.
The Company has also entered into a sublicense agreement (the
"Sublicense Agreement") with Sofamor Danek Properties, Inc. ("SDP") pursuant to
which the Company granted SDP the exclusive worldwide right and sublicense to
utilize the patents licensed to the Company pursuant to the University License
Agreement. The term of the Sublicense Agreement continues until the last of the
patents owned by the University and sublicensed to SDP terminates, unless sooner
terminated in accordance with the terms of the Sublicense Agreement. Pursuant to
the Sublicense Agreement, the Company received an initial sublicense fee of
$250,000 and, if and when FDA approves an SDP product utilizing the University
patents, the Company will receive an additional $250,000 sublicense fee.
Additionally, at such time as a product utilizing the University patent is
manufactured and sold by SDP, the Company will be entitled to receive a royalty
from SDP in the amount of 5% of SDP's net sales of such products in the United
States, up to a maximum of $500,000, and thereafter a royalty of 2% of such net
sales. To date, SDP has not marketed a product utilizing the University patents
and, during 1996, SDP was initially denied FDA clearance to market products
using the University patents.
Pursuant to a license agreement between the Company and Accumed, Inc.
("Accumed"), the Company secured a worldwide license to manufacture, use and
sell products utilizing Accumed's bipolar hip prosthesis and a license to any
rights under any patent that is issued covering Accumed's bipolar hip prosthesis
design. The term of this license agreement continues until the expiration of the
last patent comprising any part of the Accumed design, unless sooner terminated
in accordance with the terms of such agreement. During the period ending on the
seventh anniversary of the Company's first sale of a product utilizing the
Accumed design, the Company was obligated to pay Accumed an annual royalty of
3.5% of all net receipts from the Company's worldwide sale of products
incorporating an Accumed product or design patent licensed to the Company.
However, if a patent is not issued within a particular country in which the
Company sells products utilizing Accumed's design, the royalty payable is 2% of
the Company's net sales of applicable products in such country. Pursuant to the
terms of the agreement, royalty payments ceased on, April 6, 1999, the seventh
anniversary of the Company's first sale. During the years ended December 31,
1997, 1998 and 1999, the Company paid royalties to Accumed of approximately
$11,906, $12,764 and $6,988 respectively.
The Company has also entered into a patent agreement (the "Patent
Agreement") with Phillip Cripe, a
8
<PAGE>
shareholder of the Company, under which the Company was assigned the patent
rights associated with a surgical saw designed by Mr. Cripe and the concepts,
techniques and processes embodied in such product. The term of this patent
agreement continues until the later of ten years or the expiration of the last
patent comprising any part of the surgical saw design unless sooner terminated
in accordance with the terms of the Patent Agreement. In connection with the
execution of the Patent Agreement, the Company granted Mr. Cripe an option to
purchase 7,500 shares of the Company's Common Stock at an exercise price of
$6.67 per share. The Company has also agreed to pay Mr. Cripe an annual royalty
of 5% of all net receipts from the sale of products incorporating the concepts,
techniques and processes embodied in the patented product (but 2% of all net
receipts from the sale of associated surgical saw blades) by or on behalf of the
Company. To date, the Company has not developed a product utilizing the assigned
patent or know how.
During October 1996, the Company licensed certain patent technology for
development of a modular hip system from Medicine Lodge, Inc. The patent license
fees total $360,000, of which $275,000 was paid upon the execution of the
agreement and an additional $85,000 was payable at the time of FDA clearance to
market the products. Additionally, the original agreement required the Company
to issue a stock option for 20,000 shares of the Company's stock. During May
1999, the Company entered into an amendment to this patent agreement. Pursuant
to this amendment, the Company paid the additional $85,000 from the original
agreement and paid $92,188 in lieu of issuing a stock option for 20,000 shares
of the Company's common stock.
During 1997, the Company licensed certain technology. The license fees
total $250,000, of which $100,000 was paid upon the execution of the agreement
and the balance of $150,000 was paid in January 1999.
RESEARCH AND DEVELOPMENT
During the years ended December 31, 1997, 1998 and 1999, the Company
expended $937,988, $1,271,825 and $1,621,175, respectively, on research and
development and anticipates that research and development expenses will continue
to increase. The Company's research and development efforts contributed to the
introduction of the revision components of the Company's Optetrak(R) knee
implant system, the AuRA(R) Hip System in 1997, and the AcuMatch(TM) Cemented
Hip System in 1999. The Company's principal research and development efforts
currently relate to the following new product line offerings: the AcuMatch(TM)
A-Series new primary acetabular system, AcuMatch(TM) M-Series new modular hip
system, AcuMatch(TM) P-Series press-fit hip system, and advanced biologic
materials.
SCIENTIFIC ADVISORY BOARD
The Company's strategy is to utilize members of its Scientific Advisory
Board, consisting of internationally known physicians and biomechanists, in the
design process to facilitate the development of high quality products at
cost-effective prices. The Scientific Advisory Board assists the Company in
identifying new product opportunities, provides evaluation and comments on
existing product development and clinical programs, and provides a direct link
between the Company and the academic, medical and scientific communities which
permits the Company to quickly identify and respond to the demands of
orthopaedic surgeons. Members of the Scientific Advisory Board generally meet at
least quarterly. In addition, from time to time, the members of the Scientific
Advisory Board consult with the Company individually at the request of the
Company. The Company has entered into consulting agreements with certain members
of the Scientific Advisory Board pursuant to which the Company pays royalties to
such members. See "Patents and Proprietary Technology; License and Consulting
Agreements." The members of the Scientific Advisory Board in addition to Dr.
William Petty and Dr. Gary J. Miller include: Gordon Allen, M.D., Albert H.
Burstein, Ph.D., Edmund Chao, Ph.D., Charles Cornell, M.D., James Crutcher,
M.D., Ivan Gradisar, M.D., Norm Johansen, M.D., Wayne Moody, M.D., William
Murray, M.D., Charles Nelson, M.D., Raymond Robinson, M.D., Robert Trousdale,
M.D., Richard Vlasak, M.D., and William Wilson, M.D.
9
<PAGE>
COMPETITION
The orthopaedic implant industry is highly competitive and dominated by
a number of large companies with substantially greater financial and other
resources than the Company and competition is expected to intensify. From time
to time, the Company and certain of its competitors have offered significant
discounts as a competitive tactic, and may be expected to continue to do so. The
Company believes its future operations will depend upon its ability to be
responsive to the needs of its customers and to provide high quality products at
cost-effective prices. During 1998, there was a consolidation among a few of the
largest competitors in the industry. Johnson & Johnson, the third largest
company in the industry, in terms of overall market share, acquired the second
largest company, DePuy, Inc., and the fourth largest company, Stryker Corp.,
purchased the fifth largest company, Howmedica, Inc. The largest competitors in
the orthopaedic hip implant market are Bristol-Myers Squibb Company (Zimmer
Inc.), Johnson & Johnson, Stryker Corp., and Biomet, Inc. who, according to an
industry publication, had an estimated aggregate market share of approximately
79.3% in 1998. The largest competitors in the orthopaedic knee implant market
are Bristol-Myers Squibb Company (Zimmer Inc.), Johnson & Johnson, Stryker
Corp., and Biomet, Inc. who, according to an industry publication, had an
estimated aggregate market share of approximately 74.8% in 1998.
Companies in the industry compete on the basis of product features and
design, innovation, service, the ability to maintain new product flow,
relationships with key orthopaedic surgeons and hospitals, the strength of their
distribution network and price. While price is a key factor in the orthopaedic
market, there are other significant factors, including: surgeon preference,
ease-of-use, clinical results, and service provided by the Company and its
representatives. Due to health care reform, the rapid expansion of managed care
at the expense of traditional private insurance and the advent of hospital
buying groups, management believes that the price of the Company's orthopaedic
implant products will continue to become a more important competitive factor.
Manufacturers of medical devices, including orthopaedic implants, are
increasingly attempting to enter into contracts with hospital chains or
hospitals pursuant to which the hospital chains agree to purchase their products
exclusively from such manufacturers, usually in exchange for discounted prices.
If the Company's competitors are successful in securing such contracts, the
Company's ability to compete may be materially adversely affected. Although to
date generic products have not been a significant factor in the orthopaedic
implant market, price may become even more important if suppliers of generic
products enter the market on a larger scale.
PRODUCT LIABILITY AND INSURANCE
The Company is subject to potential product liability risks which are
inherent in the design, marketing and sale of orthopaedic implants and surgical
instrumentation. The Company has implemented strict quality control measures and
currently maintains product liability insurance in amounts which it believes are
typical in the industry for similar companies.
GOVERNMENT REGULATION
The Company's operations and relationships are subject to extensive,
rigorous, expensive, time-consuming and uncertain regulation in the United
States and certain other countries. The primary regulatory authority in the
United States is the FDA. The development, testing, labeling, distribution,
marketing and manufacture of medical devices, including reconstructive devices,
are regulated under the Medical Device Amendments of 1976 to the Federal Food,
Drug and Cosmetic Act (the "Amendments") and additional regulations promulgated
by FDA. In general, these statutes and regulations require that manufacturers
adhere to certain standards designed to ensure the safety and effectiveness of
medical devices.
Under the Amendments, each medical device manufacturer must be a
"registered device manufacturer" and must comply with regulations applicable
generally to labeling, quality assurance, manufacturing practices and clinical
investigations involving humans. FDA is authorized to obtain and inspect
devices, their labeling and advertising, and the facilities in which they are
manufactured in order to assure that a device is not improperly manufactured or
labeled. The Company is registered with FDA and believes that it is in
substantial compliance with all applicable material governmental regulations.
Under the Amendments, medical devices are classified into one of three
classes depending on the degree of risk imparted to patients by the medical
device. The Amendments define Class I devices as those for which safety and
effectiveness can be guaranteed by adherence to general controls, which include
compliance with Good Manufacturing Practices ("GMP"), registration and listing,
reporting of adverse medical events, and appropriate truthful and non-misleading
labeling. The Amendments define Class II devices as those which require
pre-market
10
<PAGE>
demonstration of adherence to certain standards or other special controls. Such
demonstration is provided through the filing of a 510(k) pre-market
notification. The Amendments define a Class III product as a product which has a
wholly new intended use or a product for which advances in technology cannot be
assessed without clinical study. The Amendments provide that submission and
approval of a pre-market application ("PMA") is required before marketing of a
Class III product can proceed. The PMA process is more extensive than 510(k)
process.
In practice, however, FDA has developed a three-tier regulatory
approach that does not exactly parallel the classification system. PMAs are
currently required of medical devices which have new intended uses and some
other products classified as Class III. PMAs have only been required of "old"
Class III products (i.e., which were marketed on or prior to the date of
enactment of the Amendments on July 28, 1976, or which are substantially
equivalent to such previously marketed devices) when FDA has published a "call"
for the relevant Class III pre-Amendments device.
Generally, therefore, pre-Amendments Class III and almost all Class II
products are cleared for marketing by FDA based on a demonstration that the
safety and effectiveness of the product is substantially equivalent to a
pre-Amendments device or a similar, already-marketed, predicate device that
received 510(k) clearance. Finally, Class I products are, and a few Class II
products have been exempted, from the requirement to file for 510(k) clearance.
The Company's products have been classified by FDA as Class II devices
and, currently, all marketed devices hold valid cleared 510(k) pre-market
notifications, including: its cemented hip implant system, including femoral
stem, acetabular cup and femoral heads; bone screws; porous coated cemented
femoral stem and acetabular component; bipolar partial hip implant; Zirconia(R)
(ceramic) femoral heads; Opteon(R) femoral stem for cemented and noncemented
use; MCS femoral stem and acetabular component for cemented and noncemented use;
AuRA(R) femoral stem; the Optetrak(R) knee replacement system; and the
AcuMatch(TM) M-Series femoral stem.
New medical device products of the Company will likely be subject to
this clearance process, although FDA has gradually enhanced the clinical data
requirements applicable to many 510(k) applications over the last few years. The
process of obtaining regulatory clearances is lengthy, expensive and uncertain.
FDA could choose to reclassify the Company's prosthetic systems as Class III
products subject to a PMA under various conditions, such as a determination that
the device could not demonstrate substantial equivalence to a predicate device
based on a new intended use or because a technological change or modification in
the device could not be adequately evaluated for safety and effectiveness
without a requirement for a PMA. Further, FDA could choose to impose strict
labeling requirements, onerous operator training requirements, post-marketing
surveillance, individual patient recipient lifetime tracking, or other
requirements as a condition of marketing clearance, any of which could limit the
Company's ability to market its products and would have a material adverse
effect on the Company's business, financial condition and results of operations.
Further, if the Company wishes to modify a product after clearance,
including changes in indications, manufacturing, or other changes, additional
clearance may be required. Failure to receive, or delays in receipt of, FDA
clearance, including the need for additional clinical trials or data as a
prerequisite, could limit the ability of the Company to market its products and
could have a material adverse effect on the Company's business, financial
condition and results of operations.
The design, manufacturing, labeling, distribution and marketing of the
Company's products are subject to extensive and rigorous government regulation
in the United States well beyond that encompassed by the requirement to file a
510(k) premarket notification or a PMA application, including additional
conditions or requirements that may become a part of FDA clearance or approval.
Regulatory clearance may also include significant limitations on the indicated
uses for which the Company's products may be marketed. To that end, all
marketing materials are subject to exhaustive control. FDA enforcement policy
strictly prohibits the marketing of approved or cleared products for unapproved
uses. Furthermore, FDA does not provide an opportunity to review and approve
such materials but may take action after the production and use of such
materials.
In addition, the Company's manufacturing processes are required to
comply with GMP regulations. These regulations cover the methods of design,
testing, production, control, quality assurance, labeling, packaging, shipping,
documentation and other requirements. Enforcement of GMP regulations has
increased significantly in the last several years, and FDA has publicly stated
that compliance will be more strictly scrutinized. New regulations which became
effective in 1997 offer additional controls which parallel international
standards. The Company's facilities and manufacturing processes, as well as that
of certain of the Company's third-party suppliers, are subject to periodic
inspections by FDA or other agencies. To date, the Company has successfully
undergone
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<PAGE>
three such inspections with only minor deficiencies cited at the exit interview
and for which appropriate corrective responses were found acceptable to FDA.
Failure to comply with applicable regulatory requirements could result
in, among other things, warning letters, fines, injunctions, civil penalties,
repairs, replacements, refunds, recalls or seizures of products, total or
partial suspensions of production, refusals of FDA to grant future premarket
clearances or approvals, withdrawals or suspensions of current clearances or
approvals, and criminal prosecution, which could have a material adverse effect
on the Company's business, financial condition and results of operations.
Prior to 1996, the Company voluntarily initiated and satisfactorily
completed two Class III recalls. A Class III recall is defined as a situation in
which the use of a violative product is not likely to cause adverse health
consequences. One recall involved a partially mislabeled product. The second
involved the manufacturing process of a bone screw. FDA reviewed and authorized
these two recalls, and concluded that each of the two recalls was conducted and
completed properly. During September 1997, the Company voluntarily initiated a
Class II recall as the result of the failure of an Opteon(R) femoral hip stem. A
Class II recall is defined as a situation in which the use of a violative
product may cause temporary or medically reversible adverse health consequences
or where the probability of serious adverse health consequences is remote.
Generally, the Company must obtain export certificates from FDA before
it can export any product. While the process for issuance of export certificates
has been expedited by FDA, and the Company has obtained export certificates
under this expedited (and its predecessor) process, there can be no assurance
that the issuance of export certificates in the future will not be subject to
new restrictions, or that the Company will continue to receive or not be delayed
in its receipt of such export certificates. Such future actions could have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company is required to obtain various licenses and permits from
foreign governments and to comply with significant regulations that vary by
country in order to market its products in foreign markets. In order to continue
marketing its products in Europe after mid-1998, the Company was required to
obtain ISO 9001 certification and receive "CE" mark certification, an
international symbol of adherence to quality assurance standards and compliance
with applicable European medical device directives. The ISO 9001 certification
is one of the prerequisites for CE mark certification. The Company received both
ISO 9001 and CE mark certification in May 1998.
Certain provisions of the Social Security Act, commonly referred to as
the "Anti-kickback Statute," prohibit entities, such as the Company, from
offering, paying, soliciting or receiving any form of remuneration in return for
the referral of Medicare or state health program patients or patient care
opportunities, or in return for the recommendation, arrangement, purchase, lease
or order of items or services that are covered by Medicare or state health
programs. The Anti-kickback Statute is broad in scope and has been broadly
interpreted by courts in many jurisdictions. Read literally, the statute places
at risk many business arrangements, potentially subjecting such arrangements to
lengthy, expensive investigations and prosecutions initiated by federal and
state governmental officials. Many states have adopted similar prohibitions
against payments intended to induce referrals of Medicaid and other third party
payer patients. Violation of the Anti-kickback Statute is a felony, punishable
by fines up to $25,000 per violation and imprisonment for up to five years. In
addition, the Department of Health and Human Services may impose civil penalties
excluding violators from participation in Medicare or state health programs.
In July 1991, in part to address concerns regarding the Anti-kickback
Statute, the federal government published regulations that provide exceptions,
or "safe harbors," for transactions that will be deemed not to violate the
Anti-kickback Statute. Certain of the Company's relationships do not qualify for
safe harbor protection. The fact that a relationship does not qualify for safe
harbor protection, however, does not mean that it is illegal, and the Company
believes that it is not in violation of the Anti-kickback Statute. If the
Company's current or future practices are found to be in violation of the
statute, such finding could have a material adverse effect on the Company. Any
state or federal regulatory review of the Company, regardless of the outcome,
would be both costly and time consuming.
Significant prohibitions against physician referrals were enacted by
Congress in the Omnibus Budget Reconciliation Act of 1993. These prohibitions,
commonly known as "Stark II," amended prior physician self-referral legislation
known as "Stark I" by dramatically enlarging the field of physician-owned or
physician-interested entities to which the referral prohibitions apply.
Effective January 1, 1995, Stark II prohibits, subject to certain exemptions, a
physician or a member of his immediate family from referring Medicare or
Medicaid patients to an entity providing "designated health services" in which
the physician has an ownership or investment interest,
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<PAGE>
or with which the physician has entered into a compensation arrangement. The
penalties for violating Stark II include a prohibition on payment by these
government programs and civil penalties of as much as $15,000 for each violative
referral and $100,000 for participation in a "circumvention scheme." The Stark
legislation is broad and ambiguous and interpretative regulations clarifying the
provisions of Stark II as it would relate to the Company have not been issued.
While the Company believes it is in compliance with the Stark legislation, there
can be no assurance this is the case or that the government would not take a
contrary view. The violation of Stark I or II by the Company could result in
significant fines or penalties and exclusion from participation in the Medicare
and Medicaid programs.
The Company is also subject to regulation by the Occupational Safety
and Health Administration and the Environmental Protection Agency and similar
state and foreign agencies and authorities.
EMPLOYEES
As of December 31, 1999, the Company employed 80 full time employees.
The Company has no union contracts and believes that its relationship with its
employees is good.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
William Petty, M.D. .............. 57 Chairman of the Board and Chief Executive Officer
Timothy J. Seese ................. 53 President, Chief Operating Officer and Director
Gary J. Miller, Ph.D. ............ 52 Vice President, Research and Development and Director
David W. Petty ................... 33 Vice President, Marketing
Marc J. Olarsch .................. 38 Vice President, Sales
Joel C. Phillips ................. 32 Chief Financial Officer and Treasurer
Betty Petty ...................... 57 Secretary
</TABLE>
WILLIAM PETTY, M.D. was a founder and has been Chairman of the Board
and Chief Executive Officer of the Company since its inception. Dr. Petty was a
Professor at the University of Florida College of Medicine from 1975 to 1998 and
served as Chairman of the Department of Orthopaedic Surgery at the University of
Florida College of Medicine from July 1981 to January 1996. Dr. Petty has also
served as a member of the Hospital Board of Shands Hospital, Gainesville,
Florida, as an examiner for the American Board of Orthopaedic Surgery, as a
member of the Orthopaedic Residency Review Committee of the American Medical
Association, on the Editorial Board of the JOURNAL OF BONE AND JOINT SURGERY,
and on the Executive Board of the American Academy of Orthopaedic Surgeons. He
holds the Kappa Delta Award for Outstanding Research from the American Academy
of Orthopaedic Surgeons. His book, TOTAL JOINT REPLACEMENT, was published in
1991. Dr. Petty received his B.S., M.S., and M.D. from the University of
Arkansas. He completed his residency in Orthopaedic Surgery at the Mayo Clinic
in Rochester, Minnesota. Dr. Petty continues a limited practice in the surgical
field of total joint arthroplasty. He devotes most (approximately 90%) of his
time to the business affairs of the Company.
TIMOTHY J. SEESE has been President and Chief Operating Officer of the
Company since March 1991 and a Director since April 1991. From October 1987 to
December 1990, Mr. Seese served as President and Chief Executive Officer of
Meritech, Inc., a development stage company involved with infection control
products. From December 1986 to October 1987, he served as President of the
Critical Care Monitoring Division of Becton Dickinson and Company, a
manufacturer and marketer of medical devices upon the acquisition of Deseret
Medical, Inc. by Becton Dickinson and Company. From January 1983 to December
1986, he served as Business Unit Director and Director, Marketing and Sales for
the Critical Care Business of Deseret Medical, Inc. Division of Warner Lambert,
a medical device, pharmaceutical and consumer products company. He received his
B.S. in Metallurgical Engineering from the University of Cincinnati and his
M.B.A. from Harvard University.
GARY J. MILLER, PH.D. was a founder and has been the Vice President,
Research and Development of the Company since October 1986 and a Director since
March 1989. Dr. Miller was Associate Professor of Orthopaedic Surgery and
Director of Research and Biomechanics at the University of Florida College of
Medicine from July 1986 through July 1997. Dr. Miller received his B.S. from the
University of Florida, his M.S. (Biomechanics) from
13
<PAGE>
Massachusetts Institute of Technology, and his Ph.D. in Mechanical Engineering
(Biomechanics) from the University of Florida. He has held an Adjunct Associate
professorship in the College of Veterinary Medicine's Small Animal Surgical
Division since 1982 and was appointed as an Adjunct Associate Professor in the
Department of Aerospace Engineering, Mechanics and Engineering Sciences in 1995.
He was a consultant to FDA from 1989 to 1992 and has served as a consultant to
such companies as Johnson & Johnson Orthopaedics, Dow-Corning Wright and
Orthogenesis.
DAVID W. PETTY has been Vice President, Marketing of the Company since
April 1993. He has been employed by the Company in successive capacities in the
area of Operations and Sales and Marketing for the past ten years, including as
Vice President, Operations from April 1991 until April 1993. Mr. Petty received
his B.A. from The University of Virginia in 1988. Mr. Petty is the son of Dr.
and Ms. Petty.
MARC J. OLARSCH has been Vice President, Sales since July 1993. From
1984 to July 1993, he was employed by Carapace, the United States subsidiary of
Lohmann GmbH & Co., KB, Neuwied, Germany, a manufacturer of orthopaedic casting
material, surgical wound dressings and bandages. During his tenure with
Carapace, he held the positions of Regional Sales Manager and National Sales
Manager. He has extensive experience with group purchasing organizations,
independent manufacturers' representatives, as well as company-employed
territory managers and sales representatives.
JOEL C. PHILLIPS has been Chief Financial Officer since July 1998. Mr.
Phillips has been the Treasurer of the Company since March 1996, prior to which
he was Manager, Accounting and Management Information Systems since April 1993.
From January 1991 to April 1993, Mr. Phillips was employed by Arthur Andersen.
He is responsible for the Company's accounting and control function. Mr.
Phillips received a B.S. and a Masters in Accounting from the University of
Florida and is a certified public accountant.
BETTY PETTY has been Secretary of the Company since its inception and
served as Treasurer and a Director from its inception until March 1996. Ms.
Petty is responsible for the development of all of the Company's literature,
advertising and corporate events and also serves as Human Resources Coordinator
for the Company. Ms. Petty received her B.A. from the University of Arkansas at
Little Rock and her M.A. in English from Vanderbilt University. Ms. Petty is the
wife of Dr. Petty.
The Company's officers are elected annually by the Board of Directors
and serve at the discretion of the Board.
14
<PAGE>
ITEM 2. PROPERTIES
In June 1998, the Company completed construction of a new 38,000 square
foot facility on approximately eight acres of land owned by it in Gainesville,
Florida to be used by the Company for principal executive offices, research and
development laboratories and manufacturing. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources".
In August 1999, the Company acquired approximately three acres of land
nearby to its existing facility for future expansion requirements. See "Notes to
Financial Statements - Note 10 Asset Purchases".
ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of business, the Company is, from time to time,
a party to pending and threatened legal proceedings, primarily involving claims
for product liability. The Company believes that the outcome of such legal
actions and proceedings will not have a material adverse effect on the Company.
On August 21, 1997, a competitor of the Company filed a complaint in
the United States District Court in New Jersey alleging that the Company induced
several of the competitor's sales agents to breach their employment agreements
when the Company contracted with these agents to sell the Company's products.
The plaintiff was seeking an unspecified monetary award and punitive damages in
the amount to be determined at trial. The plaintiff also sought to enjoin the
Company from soliciting plaintiff's employees, interfering with their customer
relationships and selling products to their former customers. At a hearing in
the Superior Court of New Jersey on October 8, 1997, the judge denied the
plaintiff's request for injunctive relief. On December 23, 1998, the Company
settled the lawsuit by agreeing to pay the competitor an unspecified sum for the
release of all claims raised in the lawsuit.
In December 1997, a competitor of the Company filed a complaint against
one of the competitor's former sales agents in the United States District Court
in Oregon. The competitor petitioned the court to include the Company in the
complaint alleging liability for actions of the sales agent and interference by
the Company with a contract between the competitor and the sales agent. The
court refused to allow the Company to be included in the complaint, but affirmed
that the competitor could name the Company in a separate complaint. Without
admitting any wrongdoing, the Company and the agent settled the dispute through
mediation in February 1998, and obtained a release of all claims. As part of the
settlement, the Company agreed to pay $20,000 to the agent for legal expenses
and an additional $55,000 in enhanced sales commissions to the agent over an
indeterminate period of time if the commissions are earned. The Company also
agreed not to hire as a new sales agent any of the competitor's exclusive
distributors or sales representatives whose territory is west of the Mississippi
River in the continental United States for a period of four months.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of the fiscal year ended December 31, 1999.
15
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
The Company's Common Stock has traded on the Nasdaq National Market
under the symbol "EXAC" since May 30, 1996, the date of the initial public
offering (IPO). The following table sets forth, for the periods indicated, the
high and low sales price of the Common Stock, as reported on the Nasdaq National
Market:
HIGH LOW
------------ -------------
1998
- ------------------------------------------
First Quarter $ 7.13 $ 5.13
Second Quarter 8.25 6.75
Third Quarter 8.19 5.88
Fourth Quarter 13.00 5.88
1999
- ------------------------------------------
First Quarter $ 12.00 $ 9.38
Second Quarter 13.44 9.75
Third Quarter 15.88 12.13
Fourth Quarter 13.75 11.00
2000
- ------------------------------------------
First Quarter (through February 4th) $ 13.13 $ 11.06
No cash dividends have been paid to date by the Company on its Common
Stock. The Company intends to retain all future earnings for the operation and
expansion of its business and does not anticipate the payment of dividends in
the foreseeable future. Any future determination as to the payment of cash
dividends will depend upon a number of factors, including future earnings,
results of operations, capital requirements, the Company's financial condition
and any restrictions under credit agreements existing from time to time, as well
as such other factors as the Board of Directors may deem relevant.
As of February 7, 2000, the Company had approximately 225 stockholders
of record. There are in excess of 2,250 beneficial owners of the Company's
Common Stock.
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<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below has been derived from the
audited financial statements of the Company. This data should be read in
conjunction with the financial statements, the notes thereto and Management's
Discussion and Analysis of Financial Condition and Results of Operations
included elsewhere herein.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
STATEMENT OF OPERATIONS DATA:
Net sales $ 9,118,075 $ 13,839,976 $ 17,648,060 $ 24,024,356 $ 32,954,283
Cost of goods sold 2,995,955 4,683,875 5,895,302 8,590,391 11,714,276
Gross profit 6,122,120 9,156,101 11,752,758 15,433,965 21,240,007
Operating expenses:
Sales and marketing 2,326,286 3,525,834 4,911,906 5,968,611 8,445,544
General and administrative 1,033,319 1,346,304 1,677,878 2,184,564 2,665,035
Research and development 722,118 750,256 937,988 1,271,825 1,621,175
Royalties 210,127 571,807 855,415 1,215,956 1,508,098
Depreciation and amortization 350,612 509,236 813,200 1,202,000 1,679,676
Total operating expenses 4,642,462 6,703,437 9,196,387 11,842,956 15,919,528
Income from operations 1,479,658 2,452,664 2,556,371 3,591,009 5,320,479
Other income (expense):
Interest income
(expense), net (273,110) 12,336 200,720 (70,686) (136,893)
Income from sub-license
agreement, net 170,534 100,000 -- -- --
Equity in net gain (loss) of
subsidiary (22,361) (59,486) (183,909) 13,778 --
Income before provision for
income taxes 1,354,721 2,505,514 2,573,182 3,534,101 5,183,586
Provision for income taxes 527,793 950,906 997,188 1,406,671 2,016,019
Net income 826,928 1,554,608 1,575,994 2,127,430 3,167,567
Preferred stock dividends 22,798 10,154 -- -- --
Net income available to
common shareholders 804,130 1,544,454 1,575,994 2,127,430 3,167,567
Basic earnings per common share * $ 0.27 $ 0.38 $ 0.32 $ 0.43 $ 0.64
Diluted earnings per common share * $ 0.27 $ 0.37 $ 0.32 $ 0.43 $ 0.61
------------------------------------------------------------------------------------
BALANCE SHEET DATA: 1995 1996 1997 1998 1999
---- ---- ---- ---- ----
Total current assets $ 8,411,133 $ 17,358,859 $ 16,867,260 $ 18,055,329 $ 21,447,309
Total assets 10,620,750 21,107,072 27,154,836 29,238,120 34,609,406
Total current liabilities 4,476,374 2,182,278 2,464,461 2,187,582 3,594,627
Total long-term debt, net of current portion 1,002,309 18,144 3,912,835 3,906,802 3,600,000
Total liabilities 6,452,479 2,527,297 6,811,244 6,754,643 8,169,607
Total preferred stock 291,220 -- -- -- --
Total common shareholders' equity 3,877,051 18,579,775 20,343,592 22,483,477 26,439,799
</TABLE>
* Earnings per share for years prior to 1997 have been restated in accordance
with Statement of Financial Accounting Standards No.128 "Earnings Per Share".
17
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The following discussion should be read in conjunction with the
financial statements and related notes appearing elsewhere herein.
Exactech, Inc. was founded by an orthopaedic surgeon in November 1985
to develop, manufacture, market and sell orthopaedic implant devices and related
surgical instrumentation to hospitals and physicians in the United States and
overseas. Exactech's high quality devices respond to the cost-conscious demands
of the hospital and surgical community in replacing joints which have
deteriorated as a result of injury or diseases, such as arthritis.
Early in our history, the Company's revenues were principally derived
from sales of its primary hip replacement systems. Currently, the principal
products in Exactech's line of hip implant devices consist of four total hip
implant systems: the Opteon(R) Cemented Hip System, the MCS(R) Porous Coated
Total Hip System, the AuRA(R) Revision Hip System and the AcuMatch(TM) C-Series
Cemented Hip System.
Exactech scaled up marketing and sales of the AuRA(R) Hip System in
1997. The AuRA(R) Hip System was comprised of a cemented primary total hip
replacement system as well as revision components which include calcar
replacement and long stems. Beginning in 1999, the Company began a comprehensive
design project to integrate concepts of cemented and press-fit hips into one
system which would be marketed under the trade name AcuMatch(TM) Hip Systems.
The AuRA(R) primary cemented stem design concepts were incorporated into this
integrated system and the AuRA(R) primary cemented stem was discontinued in
1999. The company continues to promote the long stem and calcar replacement
components of the AuRA(R) system. The AcuMatch(TM) Hip System will include a
cemented primary system (AuRA(R) concepts), a press fit system with multiple
coating options, a modular femoral stem system, cemented and primary lower
demand systems and a new press-fit acetabular system with multiple fixation
options.
During 1999, the Company introduced the AcuMatch(TM) C-Series Cemented
Hip System as the first phase in the complete integration of its hip systems.
This forged cobalt chromium stem is designed to improve stability and reduce the
postoperative complication of dislocation. The AcuMatch(TM) C-Series stem
achieves these goals through an improved head/neck ratio and restoration of the
natural anatomic offset to aid in reestablishing a patient's natural soft tissue
balance. All AcuMatch(TM) primary femoral components are designed to be
implanted using a single set of surgical instruments which will make the system
more cost effective.
During 1995, the Company introduced the primary components of the
comprehensive Optetrak(R) knee system. The Optetrak(R) knee system was conceived
by Exactech in collaboration with members of its Scientific Advisory Board in
cooperation with the Hospital for Special Surgery, an internationally known
hospital for orthopaedic surgery. The Optetrak(R) system represents a highly
differentiated product based on precision manufacturing techniques and a design
which reduces articular contact stress. The Optetrak(R) system is the most
modern rendition of a series of knee implants which were first introduced in
1974 and which are still being marketed by certain of the Company's competitors.
In 1997 the Optetrak(R) constrained condylar components were introduced for
revision and complex primary total knee surgery.
OpteFORMtm, a newly developed biologic material for grafting and
repairing bone defects, supplied by Regeneration Technologies, Inc., was
introduced in 1998. Full-scale domestic distribution of the OpteFORMtm tissue
service began during 1999.
During June 1998, the Company began offering the AcuDriver(TM)
Automated Osteotome System, which is an air-driven power tool that aids surgeons
during joint implant revision procedures by providing effective cleavage of
prosthesis/bone or cement/bone interfaces. The AcuDriver(TM) accomplishes this
by providing the surgeon with precise positioning without the inconvenience and
inconsistency of striking the osteotome with a mallet.
To market our orthopaedic implant products in the United States,
Exactech utilizes a network of independent agencies and domestic distributors,
that act as the Company's sales representatives. Internationally, the Company's
products are marketed through distributors.
18
<PAGE>
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):
SALES SUMMARY BY PRODUCT LINE ($'000'S)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------
DECEMBER 31, 1997 DECEMBER 31, 1998 DECEMBER 31, 1999
UNITS $ % UNITS $ % UNITS $ %
----- - - ----- - - ----- - -
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
HIP PRODUCTS
Cemented 5,117 2,288 13.0% 5,154 2,385 9.9% 6,219 2,855 8.7%
Porous Coated 4,589 1,735 9.8% 5,239 1,747 7.3% 6,532 2,335 7.1%
Bipolar Prosthesis 890 417 2.4% 1,037 475 2.0% 1,055 504 1.5%
Revision 54 126 0.7% 133 297 1.2% 114 234 0.7%
------------------------- ------------------------- -------------------------
Total Hip Products 10,650 4,566 25.9% 11,563 4,904 20.4% 13,920 5,928 18.0%
KNEE PRODUCTS
Cemented Cruciate Sparing 12,550 5,652 32.0% 15,802 6,711 27.9% 18,461 8,006 24.3%
Cemented Posterior Stabilized 7,045 4,411 25.0% 10,023 6,428 26.8% 12,151 7,777 23.6%
Porous Coated 1,428 1,502 8.5% 1,642 1,694 7.0% 1,999 2,165 6.6%
Revision 2,313 847 4.8% 4,689 2,451 10.2% 6,272 3,311 10.0%
------------------------- ------------------------- -------------------------
Total Knee Products 23,336 12,412 70.3% 32,156 17,284 71.9% 38,883 21,259 64.5%
Instrument Sales and Rental 602 3.4% 953 4.0% 1,171 3.6%
Tissue Services 608 2.5% 4,053 12.3%
Acudriver 160 0.7% 284 0.8%
Miscellaneous 68 0.4% 115 0.5% 259 0.8%
--------------- --------------- ---------------
TOTAL 17,648 100.0% 24,024 100.0% 32,954 100.0%
=============== =============== ===============
</TABLE>
SALES AND EARNINGS
Net sales increased by $8,929,927, or 37%, to $32,954,283 in the year
ended December 31, 1999, from $24,024,356 in the year ended December 31, 1998.
Net sales for the year ended December 31, 1998 increased $6,376,296, or 36% from
$17,648,060 in the year ended December 31, 1997. Domestic sales increased 41% to
$26,785,033 in the year ended December 31, 1999, from $19,017,251 in the year
ended December 31, 1998. During the year ended December 31, 1998, domestic sales
increased 30%, to $19,017,251 from $14,596,909 in the year ended December 31,
1997. International sales increased 23%, to $6,169,250 in the year ended
December 31, 1999, from $5,007,105 in the year ended December 31, 1998. For the
year ended December 31, 1998, international sales increased 64%, to $5,007,105,
from $3,051,151 in the year ended December 31, 1997. As a percentage of sales,
international sales decreased to 19% for the year ended December 31, 1999 from
21% for the year ended December 31, 1998, after increasing from 17% for the year
ended December 31, 1997. The increase in net sales in 1999 resulted from growth
in all of the Company's product lines, both in terms of units and dollars. The
increase in net sales in 1998 resulted primarily from increased unit volume of
the Company's knee implant products. Sales of hip implant products for the year
ended December 31, 1999, increased by 20% on a unit basis and by 21% on a dollar
basis when compared to the year ended December 31, 1998, which had increased by
9% on a unit basis and by 7% on a dollar basis when compared to the year ended
December 31, 1997. The increase in hip sales is primarily due to an increased
marketing focus on the Company's primary and revision cemented hip systems.
Sales of knee implant products for the year ended December 31, 1999, increased
by 21% on a unit basis and by 23% on a dollar basis, when compared to the year
ended December 31, 1998, which had increased by 38%, on a unit basis and by 39%
on a dollar basis when compared to the year ended December 31, 1997. These
increases represented a continued expansion of the Company's sales and marketing
distribution network. Hip and knee instrument sales and rentals increased 23% to
$1,170,436 in the year ended December 31, 1999 from $952,909 in the year ended
December 31, 1998, compared to a 58% increase from $602,082 in the year ended
December 31, 1997.
Gross profit increased by $5,806,042, or 38%, to $21,240,007 in the
year ended December 31, 1999, from $15,433,965 in the year ended December 31,
1998, as compared to an increase of $3,681,208, or 31%, from $11,752,758 in the
year ended December 31, 1997. As a percentage of sales, gross profit increased
slightly to 65% in the year ended December 31, 1999 compared to 64% in the year
ended December 31, 1998, which had decreased
19
<PAGE>
from 67% in the year ended December 31, 1997. The increase in the year ended
December 31, 1999 was primarily due to the increase in domestic sales, as a
percentage of total sales. The decrease for the year ended December 31, 1998 was
primarily due to the increase in international sales, as a percentage of total
sales, which are at lower margins, from the year ended December 31, 1997.
Total operating expenses increased by $4,076,572, or 34%, to
$15,919,528 in the year ended December 31, 1999, after an increase of
$2,646,570, or 29%, to $11,842,956 in the year ended December 31, 1998, from
$9,196,387 in the year ended December 31, 1997. Operating expenses decreased as
a percentage of sales for the year ended December 31, 1999, to 48%, from 49% for
the year ended December 31, 1998 and from 52% for the year ended December 31,
1997. Sales and marketing expenses increased by $2,476,933, or 41%, to
$8,445,544 in the year ended December 31, 1999, from $5,968,611 in the year
ended December 31, 1998, as compared to an increase of $1,056,705, or 22% from
1997 to 1998. As a percentage of sales, sales and marketing expenses in 1999
increased to 26% as compared to 25% in 1998, which represented a decrease
compared to 28% in 1997. The Company's sales and marketing expenses are largely
variable costs based on sales levels, with the largest component being
commissions. During 1999, sales and marketing expenses increased as a percentage
of sales, in large part due to the increase in domestic sales, as a percentage
of total sales, which carry higher commission rates. In comparison, during 1998,
sales and marketing expenses decreased, as a percentage of sales, due to the
increased percentage of international sales, as a percentage of total sales,
with their lower commission structure.
General and administrative expenses increased by $480,471, or 22%, to
$2,665,035, in the year ended December 31, 1999, from $2,184,564, in the year
ended December 31, 1998, as compared to a 30% increase during 1998 from
$1,677,878 in the year ended December 31, 1997. For the year ended December 31,
1999, as a percentage of sales, general and administrative expenses decreased to
8% after decreasing to 9% for the year ended December 31, 1998, from 10% during
1997. Total general and administrative expenses increased on a dollar basis
during 1999 as compared to 1998 primarily as a result of costs associated with
implementation of MFG/PRO, an Enterprise Resource Planning (ERP) software and
increased investor relations efforts. The increase, on a dollar basis, during
1998 as compared to 1997 was primarily a result of additional costs associated
with litigation that was settled during December 1998.
Research and development expenses increased by $349,350, or 28%, to
$1,621,175 in the year ended December 31, 1999, from $1,271,825 in the year
ended December 31, 1998, which was an increase of $333,837, or 36%, from
$937,988 in the year ended December 31, 1997. Product development expenses
continued for an integrated primary hip and modular hip systems. As a percentage
of sales, research and development expenses have remained constant at 5% in the
years ended December 31, 1999, 1998 and 1997.
Depreciation and amortization expenses increased 40% to $1,679,676 in
the year ended December 31, 1999, from $1,202,000 in the year ended December 31,
1998, which was an increase of $388,800, or 48%, from $813,200 in the year ended
December 31, 1997. Depreciation and amortization expenses increased in 1999
primarily due to the addition of manufacturing equipment and surgical
instrumentation. During 1999, $3,299,255 of equipment and instruments were
placed in service. The increase in 1998 was primarily due to the completion of
the Company's new facility and the installation of furniture, fixtures, and
equipment associated with the facility. During 1998, $4,199,634 of facility,
furniture, fixtures, equipment, and instruments were placed in service.
Royalty expenses increased by $292,142, or 24%, to $1,508,098 in the
year ended December 31, 1999, from $1,215,956 in the year ended December 31,
1998, as compared to a 42% increase in 1998 from $855,415 in 1997. During 1999,
the smaller percentage increase in royalty expenses was primarily the result of
growth in sales of hip implants and tissue services which incur a lower, or no,
royalty rate. During 1999, the Company recognized royalty expenses of $812,832
as compared to $650,548 in 1998 and $474,357 in 1997 in connection with the
license agreement with the Hospital for Special Surgery. Also during 1999, the
Company recognized royalty expenses of $695,266 compared to $565,408 in 1998 and
$381,058 in 1997 in connection with other consulting and license agreements. As
a percentage of sales, royalty expenses remained constant at 5% for the years
ended December 31, 1999, 1998 and 1997.
The Company's income from operations increased by $1,729,470, or 48%,
to $5,320,479 in the year ended December 31, 1999 from $3,591,009 in the year
ended December 31, 1998, which represented an increase of $1,034,638, or 41%,
from $2,556,371 in the year ended December 31, 1997. For the years ended
December 31, 1998 and 1999, the increase was principally due to an increase in
sales combined with a reduction in operating expenses, as a percentage of sales.
The Company recognized net interest expense of $136,893 in the year
ended December 31, 1999 and
20
<PAGE>
$70,686 in the year ended December 31, 1998, as compared to net interest income
of $200,720 in the year ended December 31, 1997. For the years ended December
31, 1998 and 1999, 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
$220,321 for the year ended December 31, 1999 was partially offset by $83,428 of
interest income. Interest expense of $233,099 for the year ended December 31,
1998 was partially offset by $162,413 of interest income. Interest income of
$275,112 for the year ended December 31, 1997, was offset by $74,392 of interest
expense as the proceeds of the Company's initial public offering (IPO)
consummated in June 1996 were invested in short-term commercial paper and
government backed securities. The outstanding principal balance of the Company's
debt averaged approximately $3,906,418, $3,914,156, and $510,325 during 1999,
1998 and 1997, respectively. The average outstanding balance decreased in 1999
due to the payments of principal on capital leases, as compared to an increase
in 1998 because approximately $3,900,000 was outstanding on the industrial
revenue bond (IRB) loan for the full year, whereas $3,900,000 was outstanding
for only a month and a half in 1997. The weighted average interest rate on such
debt was 3.44%, 4.37%, and 4.32% for 1999, 1998 and 1997, respectively.
In July 1995, the Company purchased a 50% interest in Techmed S.p.A.,
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 gain associated with the sale.
Income before provision for income taxes increased by $1,649,485, or
47%, to $5,183,586 in the year ended December 31, 1999, from $3,534,101 in the
year ended December 31, 1998, as compared to an increase in 1998 of $960,919, or
37%, from $2,573,182 in the year ended December 31, 1997. The provision for
income taxes increased 43% to $2,016,019 in the year ended December 31, 1999,
from $1,406,671 in the year ended December 31, 1998, and $997,188 in the year
ended December 31, 1997. The Company realized net income of $3,167,567 in the
year ended December 31, 1999, a 49% increase, as compared to $2,127,430 in the
year ended December 31, 1998. Net income for the year ended December 31, 1998
increased 35% from $1,575,994 in the year ended December 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations through
borrowings, the sale of equity securities and cash flow from operations. At
December 31, 1999, the Company had working capital of $17,852,682 as compared to
$15,867,747 at December 31, 1998 and $14,402,799 at December 31, 1997. As a
result of operating, investing and financing activities, cash and cash
equivalents at December 31, 1999 increased $978,419 to $1,641,071 from $662,652
at December 31, 1998. For the year ended December 31, 1998, cash and cash
equivalents decreased $46,569 to $662,652 from $709,221 at December 31, 1997.
For the year ended December 31, 1999, the increase in working capital is
primarily the result of increases in net sales and income while managing the
increase in inventory. For the year ended December 31, 1998, the decrease in
working capital was primarily the result of costs associated with completing,
furnishing, and equipping the new facility. During 1998, the Company expended
$2,044,045 in costs on the completion of the new facility. In June 1998, the
Company's line of credit facility with Merrill Lynch Business Financial
Services, Inc. was renewed and increased to $6,000,000. The credit facility,
which is collateralized by accounts receivable and inventory, expires in June
2000. At December 31, 1999, there was no amount outstanding under the line of
credit. The Company believes that funds from operations and borrowings under its
existing credit facilities will be sufficient to satisfy its contemplated cash
requirements for the following twelve months.
OPERATING ACTIVITIES
Operating activities provided net cash of $4,022,610 in the year ended
December 31, 1999 and $854,614 in the year ended December 31, 1998 and used net
cash of $1,625,239 in the year ended December 31, 1997. Operating activities
provided cash due to the increase in net income, which increased to $3,167,567
in the year ended December 31, 1999, from $2,127,430 in the year ended December
31, 1998 and $1,575,994 in the year ended December 31, 1997, as well as a
smaller increase in total inventories of $106,334 during 1999 as compared to
$834,682 during 1998 and $3,072,123 during 1997. Cash required as a result of
the increase in trade receivables was $2,340,671 during 1999, as compared to
$1,877,814 during 1998 and $1,298,132 in 1997.
21
<PAGE>
FINANCING ACTIVITIES
For the year ended December 31, 1999, financing activities provided net
cash to the Company of $775,920, as compared to $7,561 in the year ended
December 31, 1998 and $3,892,522 in the year ended December 31, 1997.
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 (5.65% as of December 31, 1999). The proceeds of the credit
facility were used to finance construction of the new facility. The Company's
obligations to the bank issuing the letter of credit are secured by the land and
improvements comprising the facility.
Net cash provided by financing activities for the year ended December
31, 1997 reflects the proceeds from the $3,900,000 industrial revenue bond
financing with the City. In 1997, the Company also paid $118,935 of debt
issuance costs associated with the industrial revenue bond financing which is
being recognized as expense over the term of the loan.
INVESTING ACTIVITIES
As of December 31, 1999, $1,268,874 was invested in Merrill Lynch's
Treasury Fund and Institutional Fund comprised of commercial paper and
government backed securities yielding a return of approximately 4.9%, as
compared to $284,794 at December 31, 1998, and $1,763,996 at December 31, 1997.
During the year ended December 31, 1999, net cash used in investing activities
increased to $3,820,111, as compared to $908,744 during the year ended December
31, 1998, which was a decrease from $5,550,504 during the year ended December
31, 1997. The increase in 1999 was primarily the result of purchases of
manufacturing equipment and surgical instrumentation, as compared to the
decrease in 1998, which was primarily due to the change in unexpended IRB
proceeds that were utilized to purchase property and equipment, including the
Company's new facility, manufacturing equipment, product licenses and
instrumentation.
YEAR 2000
The inability of computers, software and other equipment utilizing
microprocessors to recognize and properly process data fields containing a
2-digit year is commonly referred to as the Year 2000 Compliance issue.
The Company identified all significant applications that required
modification to ensure Year 2000 Compliance. Internal and external resources
were used to make the required modifications and test Year 2000 Compliance. The
modification process and testing of all significant applications was completed
by November 30, 1999.
The Company communicated with suppliers with whom it does significant
business to determine their Year 2000 Compliance readiness and the extent to
which the Company was potentially vulnerable to any third party Year 2000
issues. The Company received acceptable responses from these suppliers as to
their readiness. To date, the Company has not experienced any material adverse
effects.
The total cost to the Company of its Year 2000 Compliance activities
was less than $10,000.
RECENT ACCOUNTING PRONOUNCEMENTS
See Note 2 of Notes to Financial Statements for information concerning
recent accounting pronouncements.
CAUTIONARY STATEMENT RELATING TO FORWARD LOOKING STATEMENTS
The foregoing Management's Discussion and Analysis contains various
"forward looking statements" within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934 which
represent the Company's expectations or beliefs concerning future events,
including, but not limited to, statements regarding growth in sales of the
Company's products, profit margins, the adequacy of the Company's
22
<PAGE>
year 2000 compliance program, 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 7.A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rates. For
its cash and cash equivalents, a change in interest rates effects the amount of
interest income that can be earned. For its debt instruments, changes in
interest rates effect the amount of interest expense incurred.
The following table provides information about the Company's financial
instruments that are sensitive to changes in interest rates.
<TABLE>
<CAPTION>
2000 2001 2002 2003 Thereafter Total
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH AND CASH EQUIVALENTS
Overnight repurchase account
at variable interest rate $ 604,000 604,000
Weighted average interest rate 4.3%
Short-term money funds
at variable interest rate $ 1,268,874 1,268,874
Weighted average interest rate 4.9%
LIABILITIES
Line of credit at variable - -
interest rate
Weighted average interest rate 8.6%
Industrial Revenue Bond at
variable interest rate $ 3,900,000 3,900,000
Weighted average interest rate 3.4%
- ------------------------------------------------------------------------------------------------------------
</TABLE>
23
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report 25
Balance Sheets as of December 31, 1998 and 1999 26
Statements of Income for the Years Ended December 31, 1997, 1998 and 1999 27
Statement of Changes in Shareholders' Equity for the Years Ended
December 31, 1997, 1998 and 1999 28
Statements of Cash Flows for the Years Ended 29
December 31, 1997, 1998 and 1999
Notes to Financial Statements for the Years Ended 30
December 31, 1997, 1998 and 1999
</TABLE>
24
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
of Exactech, Inc.
Gainesville, Florida
We have audited the accompanying balance sheets of Exactech, Inc. (the
"Company") as of December 31, 1998 and 1999, and the related statements of
income, changes in shareholders' equity, and cash flows for each of the three
years in the period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Exactech, Inc. as of December 31, 1998 and
1999, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1999 in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
February 4, 2000
Jacksonville, Florida
25
<PAGE>
EXACTECH, INC.
<TABLE>
<CAPTION>
BALANCE SHEETS
DECEMBER 31, 1998 AND 1999
- --------------------------------------------------------------------------------------------------------
ASSETS 1998 1999
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 662,652 $ 1,641,071
Trade receivables (net of allowance of $153,958 and $332,693) 5,638,810 7,979,481
Refundable income taxes 47,681 22,952
Prepaid expenses and other assets, net 173,625 164,910
Inventories 11,532,561 11,638,895
------------ ------------
Total current assets 18,055,329 21,447,309
PROPERTY AND EQUIPMENT:
Land 263,301 462,629
Machinery and equipment 2,604,021 4,562,503
Surgical instruments 5,546,524 7,085,495
Furniture and fixtures 333,134 393,918
Facilities 3,415,590 3,472,548
------------ ------------
Total property and equipment 12,162,570 15,977,093
Accumulated depreciation (2,801,971) (4,059,413)
------------ ------------
Net property and equipment 9,360,599 11,917,680
OTHER ASSETS:
Product licenses and designs, net 269,394 362,295
Deferred financing costs, net 133,614 123,748
Unexpended industrial revenue
bond proceeds 856,992 --
Advances and deposits 151,758 230,872
Patents and trademarks, net 410,434 527,502
------------ ------------
Total other assets 1,822,192 1,244,417
------------ ------------
TOTAL ASSETS $ 29,238,120 $ 34,609,406
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,336,146 $ 2,418,502
Current portion of long-term debt and capital lease obligations 6,033 300,000
Commissions payable 340,248 396,858
Royalties payable 342,941 417,486
Other liabilities 162,214 61,781
------------ ------------
Total current liabilities 2,187,582 3,594,627
DEFERRED INCOME TAXES 660,259 974,980
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS,
NET OF CURRENT PORTION 3,906,802 3,600,000
------------ ------------
Total liabilities 6,754,643 8,169,607
COMMITMENTS AND CONTINGENCIES (Notes 5 and 6)
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value; 15,000,000 shares authorized,
4,907,163 and 5,008,079 shares issued and outstanding 49,072 50,081
Additional paid-in capital 15,015,398 15,803,144
Retained earnings 7,419,007 10,586,574
------------ ------------
Total shareholders' equity 22,483,477 26,439,799
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 29,238,120 $ 34,609,406
============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
26
<PAGE>
EXACTECH, INC.
<TABLE>
<CAPTION>
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
- -----------------------------------------------------------------------------------------------
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
NET SALES $ 17,648,060 $ 24,024,356 $ 32,954,283
COST OF GOODS SOLD 5,895,302 8,590,391 11,714,276
------------ ------------ ------------
Gross profit 11,752,758 15,433,965 21,240,007
OPERATING EXPENSES:
Sales and marketing 4,911,906 5,968,611 8,445,544
General and administrative 1,677,878 2,184,564 2,665,035
Research and development 937,988 1,271,825 1,621,175
Depreciation and amortization 813,200 1,202,000 1,679,676
Royalties 855,415 1,215,956 1,508,098
------------ ------------ ------------
Total operating expenses 9,196,387 11,842,956 15,919,528
------------ ------------ ------------
INCOME FROM OPERATIONS 2,556,371 3,591,009 5,320,479
OTHER INCOME (EXPENSE):
Interest income (expense) 200,720 (70,686) (136,893)
Equity in net (loss) gain of subsidiary (183,909) 13,778 --
------------ ------------ ------------
INCOME BEFORE PROVISION FOR
INCOME TAXES 2,573,182 3,534,101 5,183,586
PROVISION FOR INCOME TAXES
Current 890,115 1,180,360 1,701,298
Deferred 107,073 226,311 314,721
------------ ------------ ------------
997,188 1,406,671 2,016,019
------------ ------------ ------------
NET INCOME $ 1,575,994 $ 2,127,430 $ 3,167,567
============ ============ ============
BASIC EARNINGS
PER COMMON SHARE $ 0.32 $ 0.43 $ 0.64
============ ============ ============
DILUTED EARNINGS
PER COMMON SHARE $ 0.32 $ 0.43 $ 0.61
============ ============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
27
<PAGE>
EXACTECH, INC.
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
- ---------------------------------------------------------------------------------------------------------------
ADDITIONAL TOTAL
COMMON STOCK PAID-IN RETAINED SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996 4,860,434 $ 48,604 $14,815,588 $ 3,715,583 $18,579,775
Exercise of stock options 44,229 443 146,340 146,783
Tax benefit from exercise
of stock options 41,040 41,040
Net income 1,575,994 1,575,994
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1997 4,904,663 49,047 15,002,968 5,291,577 20,343,592
Exercise of stock options 2,500 25 8,187 8,212
Tax benefit from exercise
of stock options 4,243 4,243
Net income 2,127,430 2,127,430
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1998 4,907,163 49,072 15,015,398 7,419,007 22,483,477
Issuance of common stock 700 7 6,993 7,000
Exercise of stock options 28,620 286 151,709 151,995
Exercise of warrants 67,029 670 563,254 563,924
Issuance of common stock
under the Company's
Employee Stock Purchase Plan 4,567 46 47,709 47,755
Tax benefit from exercise of
stock options 18,081 18,081
Net income 3,167,567 3,167,567
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1999 5,008,079 $ 50,081 $15,803,144 $10,586,574 $26,439,799
=========== =========== =========== =========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
28
<PAGE>
EXACTECH, INC.
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
- --------------------------------------------------------------------------------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 1,575,994 $ 2,127,430 $ 3,167,567
Adjustments to reconcile net income to net
cash (used in) provided by operating activities :
Depreciation and amortization 813,200 1,202,000 1,754,370
Loss on disposal of equipment 50,530 120,453 155,683
Equity in net loss of subsidiary 183,909
Deferred income taxes 107,073 226,311 314,721
Increase in trade receivables (1,298,132) (1,877,814) (2,340,671)
Increase in inventories (3,072,123) (834,682) (106,334)
Increase in prepaids and other assets (79,152) (43,163) (60,533)
(Decrease) increase in income taxes payable (300,764) 212,097 24,729
Increase (decrease) in accounts payable 181,454 (275,629) 1,082,356
Increase (decrease) in other liabilities 212,772 (2,389) 30,722
----------- ----------- -----------
Net cash (used in) provided by operating activities (1,625,239) 854,614 4,022,610
----------- ----------- -----------
INVESTING ACTIVITIES:
Purchase of product licenses and designs (106,494) (200,000) (150,000)
Purchases of property and equipment (3,572,840) (4,624,252) (4,349,916)
Change in unexpended industrial revenue bond proceeds (3,467,072) 2,610,080 856,992
Maturities of short-term investments 3,083,788 1,335,740
Purchases of short-term investments (1,335,740)
Investment in subsidiary (83,271)
Cost of patents and trademarks (68,875) (30,312) (177,187)
----------- ----------- -----------
Net cash used in investing activities (5,550,504) (908,744) (3,820,111)
----------- ----------- -----------
FINANCING ACTIVITIES:
Proceeds from issuance of debt 3,900,000
Principal payments on debt (27,466)
Principal payments on capital lease obligations (5,810) (4,894) (12,835)
Proceeds from issuance of common stock 144,733 12,455 788,755
Payment of debt issuance costs (118,935)
----------- ----------- -----------
Net cash provided by financing activities 3,892,522 7,561 775,920
----------- ----------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (3,283,221) (46,569) 978,419
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,992,442 709,221 662,652
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 709,221 $ 662,652 $ 1,641,071
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 75,114 $ 249,294 $ 220,322
Income taxes 1,190,879 968,264 1,658,488
Noncash investing and financing activities:
Relief of compensation accrual on issuance of stock 43,090 2,461 5,971
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
29
<PAGE>
EXACTECH, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
- --------------------------------------------------------------------------------
1. ORGANIZATION
Exactech, Inc. (the "Company") was organized in 1985 to develop and
market orthopaedic implant devices. In 1987, the Company began
marketing its first product, a total hip replacement system. In 1995,
the Company began marketing a knee system. In 1999, the Company began
full domestic distribution of a licensed tissue service. The Company's
principal market is the United States; however, international markets
represent approximately nineteen percent of the Company's business.
During 1999, Exactech International, Inc., a Foreign Sales Corporation,
was founded to act as agent on behalf of Exactech for international
sales transactions.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS - Cash and cash equivalents consist of cash
on deposit in financial institutions, including a money market account,
institutional money funds, overnight repurchase agreements, and other
short-term investments with a maturity of 90 days or less at the time
of purchase.
CONCENTRATION OF CREDIT RISK - The Company's accounts receivable
consist primarily of amounts due from hospitals. The Company performs
credit evaluations on its customers and generally does not require
collateral.
INVENTORIES - Inventories are valued at the lower of cost (first-in,
first-out method) or market and include implants provided to customers
and agents. The Company provides significant loaned implant inventory
to non-distributor customers. The Company recognizes an inventory
reserve based on obsolescence and slow-moving inventory.
PROPERTY AND EQUIPMENT - Property and equipment is stated at cost less
accumulated depreciation. Depreciation expense is computed using the
straight-line method over estimated useful lives of the related assets
ranging from five to thirty-nine years. Maintenance and repairs are
charged to expense. Certain instruments utilized in the surgical
implant procedures are loaned to customers and are amortized over an
estimated useful life of seven years. Periodically, management reviews
property and equipment for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Impairment is measured by comparing the carrying amount of
the asset to the sum of expected future cash flows (undiscounted and
without interest charges) resulting from use of the asset and its
eventual disposition.
REVENUE RECOGNITION - The Company provides inventories of its products
to its United States sales agencies until sold or returned for use in
marketing its products and filling customer orders. In the case of
sales through such sales agencies, sales revenues are generally
recognized when the product is implanted. Distributors typically
purchase product inventory and instruments from the Company for their
use in marketing and filling customer orders. Sales to such
distributors are recognized upon shipment of the product. Estimated
costs of returns and allowances on sales to foreign distributors are
accrued at the time products are shipped.
DEFERRED FINANCING COSTS - Deferred financing costs are stated net of
accumulated amortization of $39,186. These costs are amortized to
interest expense over the expected life of the underlying debt.
PATENTS AND TRADEMARKS - Patents and trademarks are amortized on a
straight-line basis over their estimated useful lives ranging from five
to seventeen years.
30
<PAGE>
EXACTECH, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
- --------------------------------------------------------------------------------
INCOME TAXES - Deferred income taxes are provided on temporary
differences which arise from certain transactions being reported for
financial statement purposes in different periods than for income tax
purposes. Deferred tax assets and liabilities are recognized using an
asset and liability approach and are based on differences between
financial statement and tax basis of assets and liabilities using
presently enacted tax rates.
ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during each reporting period. Actual results
could differ from those estimates.
OPTIONS AND STOCK AWARDS - The Company has elected to account for its
employee stock compensation plans under the intrinsic value based
method with pro forma disclosures of net earnings and earnings per
share, as if the fair value based method of accounting defined in SFAS
No. 123 "Accounting for Stock Based Compensation" had been applied
(Note 11). Under the intrinsic value based method, compensation cost is
the excess, if any, of the quoted market price of the stock at the
grant date or other measurement date over the amount an employee must
pay to acquire the stock. Under the fair value based method,
compensation cost is measured at the grant date based on the value of
the award and is recognized over the service period, which is usually
the vesting period.
NEW ACCOUNTING STANDARDS - In June 1997, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting
Standards ("SFAS") No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS No. 131") effective for
fiscal years beginning after December 15, 1997. SFAS No. 131
establishes standards for reporting information about operating
segments in annual financial statements and in interim financial
reports issued to shareholders. It also establishes standards for
related disclosures about products and services, geographic areas and
major customers. The Company adopted this accounting standard on
January 1, 1998, as required (Note 7).
RECENT ACCOUNTING PRONOUNCEMENTS - The Company intends to adopt SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities"
(`SFAS No. 133") as of the beginning of its fiscal year 2000. SFAS No.
133 will require the Company to recognize all derivatives on the
balance sheet at fair value. Derivatives that are not hedges must be
adjusted to fair value through income. If the derivative is a hedge,
depending on the nature of the hedge, changes in the fair value of
derivatives will either be offset against the change in fair value of
the hedged assets, liabilities or firm commitments through earnings, or
recognized in other comprehensive income until the hedged item is
recognized in earnings. The change in a derivative's fair value related
to the ineffective portion of a hedge, if any, will be immediately
recognized in earnings. The effect of adopting SFAS No. 133 is
currently being evaluated but is not expected to have a material effect
on the Company's financial position.
31
<PAGE>
EXACTECH, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
- --------------------------------------------------------------------------------
3. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
Current: 1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Federal $ 685,146 $ 949,334 $1,318,286
State 204,969 231,026 383,012
---------- ---------- ----------
Total Current 890,115 1,180,360 1,701,298
Deferred:
Federal 87,723 178,248 243,219
State 19,350 48,063 71,502
---------- ---------- ----------
Total Deferred 107,073 226,311 314,721
---------- ---------- ----------
Total Provision $ 997,188 $1,406,671 $2,016,019
========== ========== ==========
</TABLE>
A reconciliation between the amount of reported income tax provision
and the amount computed at the statutory Federal income tax rate for
the years ended December 31, 1997, 1998 and 1999 follows:
<TABLE>
<CAPTION>
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Statutory Federal rate 34.0% 34.0% 34.0%
State income taxes (net of Federal income tax benefit) 5.0% 5.0% 5.3%
Other 0.8% -0.4%
------ ------ ------
39.0% 39.8% 38.9%
====== ====== ======
</TABLE>
The types of temporary differences and their related tax effects that
give rise to deferred tax assets and liabilities at December 31, 1997,
1998, and 1999 are as follows:
<TABLE>
<CAPTION>
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Deferred tax liabilities:
Basis difference in property and equipment $ 565,679 $ 847,287 $1,111,392
Basis difference in patents 68,203 39,171 25,059
Other 7,523
---------- ---------- ----------
Gross deferred tax liabilities 641,405 886,458 1,136,451
---------- ---------- ----------
Deferred tax assets:
Capital loss carryover 114,668 114,668 82,313
Valuation allowance of capital loss carryover (58,745)
Accrued liabilities not currently deductible 92,789 111,531 137,903
---------- ---------- ----------
Gross deferred tax assets 207,457 226,199 161,471
---------- ---------- ----------
Net deferred tax liabilities $ 433,948 $ 660,259 $ 974,980
========== ========== ==========
</TABLE>
During the year ended December 31, 1998, the Company generated a
capital loss carryover of $294,399 which is available to offset future
taxable capital gains. During 1999, a valuation allowance was charged
against this deferred tax asset. This valuation assumed that $60,000 of
the loss would be able to be realized by offsetting future taxable
capital gains prior to the capital loss carryover expiration in 2003.
32
<PAGE>
EXACTECH, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
4. DEBT
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS:
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
Capitalized lease obligation collateralized by equipment with $ 12,835 $ --
a carrying value of approximately $14,550 as of
December 31, 1998
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 (5.65% as of
December 31, 1999); proceeds used to finance construction
of new facility
----------- -----------
Total long-term debt and capital lease obligations $ 3,912,835 $ 3,900,000
Less current portion (6,033) (300,000)
----------- -----------
$ 3,906,802 $ 3,600,000
=========== ===========
</TABLE>
The following is a schedule of debt maturities as of December 31, 1999:
<TABLE>
<CAPTION>
Long-Term
Debt
-----------
<S> <C>
2000 .............................................................. $ 300,000
2001 .............................................................. 300,000
2002 .............................................................. 300,000
2003 .............................................................. 300,000
2004 .............................................................. 300,000
Thereafter .............................................................. 2,400,000
-----------
$ 3,900,000
===========
</TABLE>
INDUSTRIAL REVENUE BOND NOTE PAYABLE
In November 1997, the Company entered into a $3,900,000 industrial
revenue bond financing with the City of Gainesville, Florida (the
"City"), pursuant to which the City issued its industrial revenue bonds
and loaned the proceeds to the Company. The bonds are secured by an
irrevocable letter of credit issued by a bank. Due to the variable
nature of the note, the balance of the note payable approximates fair
value.
LINE OF CREDIT
During July 1998, the Company renewed and increased a $6,000,000 line
of credit with Merrill Lynch Business Financial Services, Inc. There
were no amounts outstanding under this line of credit at December 31,
1999.
33
<PAGE>
EXACTECH, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
- --------------------------------------------------------------------------------
5. RELATED PARTY TRANSACTIONS
The Company has entered into a purchase agreement with Brighton
Partners, Inc. to purchase raw materials and equipment used in the
ongoing production of its products. In 1998, the agreement required the
purchase of tooling dies in the amount of $159,000. An additional
agreement signed in 1999 included the purchase of tooling dies in the
amount of $91,250 and provided for special purchasing terms for the
Company. In addition, the agreement calls for the purchase of testing
equipment for approximately $278,000, as well as licensing of certain
technology for $187,500. Some of the Company's officers and directors
maintain ownership in Brighton Partners, Inc. Purchases associated with
these agreements totaled $116,058 and $418,625 in 1998 and 1999,
respectively.
The Company has entered into consulting agreements with certain of its
executive officers, directors and principal shareholders in connection
with product design which entitles them to royalty payments aggregating
3% of the Company's net sales of such products in the United States and
less than 3% of the Company's net sales of such products outside the
United States. During the years ended December 31, 1997, 1998 and 1999,
the Company paid royalties aggregating $288,759, $436,242, and
$540,773, respectively, pursuant to these consulting agreements.
6. COMMITMENTS AND CONTINGENCIES
The Company, in the normal course of business, is subject to claims and
litigation in the areas of product and general liability. Management
does not believe any of such claims will have a material impact on the
Company's financial position.
7. SEGMENT INFORMATION
Segment information is reported by the major product lines of the
Company: knee implants, hip implants, and tissue services. The "other"
category is for minor sales categories, such as instrument rental fees
and shipping charges. The accounting policies of the reportable
segments are the same as those described in Note 2. The Company
evaluates the performance of its operating segments based on income
from operations before taxes, interest income and expense, and
nonrecurring items. Intersegment sales and transfers are not
significant.
Total assets not identified with a specific segment (in thousands of
dollars) were $11,932, $12,557, and $16,670 for the years ended
December 31, 1997, 1998, and 1999, respectively. Assets not identified
with a specific segment include cash and cash equivalents, accounts
receivable, refundable income taxes, prepaid expenses, land,
facilities, office furniture and computer equipment, and other assets.
34
<PAGE>
EXACTECH, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
- --------------------------------------------------------------------------------
Summarized financial information concerning the Company's reportable
segments is shown in the following table.
<TABLE>
<CAPTION>
(in thousands)
----------------------------------------------------
Tissue
Year ended December 31 Knee Hip Services Other Total
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997
Net Sales $12,412 $ 4,566 $ $ 670 $17,648
Segment profit (loss) from operations 1,274 924 (5) 364 2,556
Total assets, net 9,104 5,893 174 52 15,223
Capital expenditures 3,341 2,177 74 24 5,616
Depreciation and amortization 481 318 5 9 813
1998
Net Sales $17,284 $ 4,904 $ 608 $ 1,228 $24,024
Segment profit (loss) from operations 2,089 766 125 611 3,591
Total assets, net 10,755 5,427 149 350 16,681
Capital expenditures 2,251 347 106 306 3,010
Depreciation and amortization 746 376 32 48 1,202
1999
Net Sales $21,259 $ 5,928 $ 4,053 $ 1,714 $32,954
Segment profit (loss) from operations 2,970 1,018 994 338 5,320
Total assets, net 11,706 5,213 630 390 17,939
Capital expenditures 1,783 798 509 107 3,197
Depreciation and amortization 1,028 476 84 92 1,680
---------------------------------------------------------------------------------------------
</TABLE>
MAJOR CUSTOMER AND FOREIGN OPERATIONS
During the years ended December 31, 1997, 1998, and 1999, approximately
6%, 7% and 6%, respectively, of the Company's sales were derived from a
major customer. During the years ended December 31, 1997, 1998, and
1999, approximately 13% of the Company's sales were derived from an
international distributor of its products. Revenue and gross profits
for the Company's foreign operations for the three years ended December
31, 1999 were as follows:
1997 1998 1999
---------- ---------- ----------
Revenues $3,051,151 $5,007,105 $6,169,250
Gross profit $1,127,455 $1,871,577 $2,627,166
35
<PAGE>
EXACTECH, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
- --------------------------------------------------------------------------------
8. PENSION PLAN
The Company currently sponsors a defined contribution 401(k) plan for
its employees. The Company provides matching contributions of 100% on
the first 3% of salary deferral by employees. The Company's total
contribution to this plan during 1998 and 1999 was $12,896 and $56,329,
respectively.
9. LICENSE AND SUBLICENSE AGREEMENTS
During 1997, the Company licensed certain technology. The license fees
total $250,000, of which $100,000 was paid upon the execution of the
agreement and an additional $150,000 was paid during 1999 at the time
the licensor produced a developed product. The cost of the license
agreement is being amortized over fifteen years, the period of its
estimated economic benefit.
10. ASSET PURCHASES
During June 1998, the Company purchased substantially all of the assets
related to Synvasive Technology, Inc.'s ("Synvasive") AcuDriver(TM)
product line for $375,000. The assets included inventory, tooling,
fixtures, designs, trademark and future patent rights.
During August 1999, the Company purchased approximately three acres of
land near its current facility to be held for future expansion
requirements for $199,328.
11. COMMON STOCKHOLDERS' EQUITY
EARNINGS PER SHARE:
The following is a reconciliation of the numerators and denominators of
the basic and diluted EPS computations for net income:
<TABLE>
<CAPTION>
1997 1998 1999
INCOME SHARES INCOME SHARES INCOME SHARES
(NUMER- (DENOM- PER (NUMER- (DENOM- PER (NUMER- (DENOM- PER
ATOR) INATOR) SHARE ATOR) INATOR) SHARE ATOR) INATOR) SHARE
-------------------------------- -------------------------------- --------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net income $1,575,994 $2,127,430 $3,167,567
BASIC EPS:
Net income $1,575,994 4,878,795 $0.32 $2,127,430 4,905,656 $0.43 $3,167,567 4,960,220 $0.64
===== ===== =====
Effect of dilutive
securities:
Stock options 40,637 42,634 199,103
Warrants 4,319 5,206 18,874
DILUTED EPS:
Net income plus
assumed conversions $1,575,994 4,923,751 $0.32 $2,127,430 4,953,496 $0.43 $3,167,567 5,178,197 $0.61
===== ===== =====
</TABLE>
For the years ended December 31, 1997, 1998 and 1999, options to
purchase 348,900, 376,700 and 5,000 shares of common stock,
respectively, at prices ranging from $7.50 to $13.06 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.
36
<PAGE>
EXACTECH, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
- --------------------------------------------------------------------------------
EMPLOYEE STOCK PURCHASE PLAN:
The Company sponsors an Employee Stock Purchase Plan which allows
participants to purchase shares of the Company's common stock at a
discount via payroll deduction. This plan became effective July 1,
1999, 125,000 shares are reserved for issuance under the plan. For the
year ended December 31, 1999, 4,567 shares were purchased by employees
in this plan.
OPTIONS AND STOCK AWARDS:
The Company sponsors an Employee Stock Option and Incentive Plan which
provides for the issuance of stock options and restricted stock awards
to key employees and a Directors Stock Option Plan which provides for
the issuance of stock options to non-employee directors (collectively
the "Plans"). The Company also issues stock options to sales agents and
other individuals. The maximum number of common shares issuable under
the Plans is 830,000 shares.
If compensation cost for stock option grants had been determined based
on the fair value at the grant dates for 1997, 1998 and 1999 consistent
with the method prescribed by SFAS No. 123, the Company's net earnings
and earnings per share on a diluted basis would have been adjusted to
the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Net earnings As reported $ 1,575,994 $ 2,127,430 $ 3,167,567
Pro forma 1,164,702 1,700,406 2,645,565
Earnings per share As reported
Basic $ 0.32 $ 0.43 $ 0.64
Diluted 0.32 0.43 0.61
Pro forma
Basic $ 0.24 $ 0.35 $ 0.53
Diluted 0.24 0.34 0.51
</TABLE>
Outstanding options, consisting of ten-year non-qualified stock
options, vest and become exercisable over a five year period from the
date of grant. The outstanding options expire ten years from the date
of grant or upon retirement from the Company, and are contingent upon
continued employment during the applicable ten-year period.
Under SFAS No. 123, the fair value of each option grant is estimated on
the date of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for grants in 1997, 1998
and 1999, respectively: dividend yield of 0, 0 and 0 percent, expected
volatility of 70, 41 and 64 percent, risk-free interest rates of 6.0,
5.1 and 6.2 percent, and expected lives of 5, 5 and 5 years.
37
<PAGE>
EXACTECH, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
- --------------------------------------------------------------------------------
A summary of the status of fixed stock option grants under the
Company's stock-based compensation plans as of December 31, 1997, 1998
and 1999, and changes during the years ending on those dates is
presented below:
<TABLE>
<CAPTION>
1997 1998 1999
--------------------- --------------------- ---------------------
Weighted Weighted Weighted
Avg Avg Avg
Exercise Exercise Exercise
Options Price Options Price Options Price
--------------------- --------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding - January 1 560,199 $ 6.81 523,720 $ 7.21 557,945 $ 7.27
Granted 28,000 7.96 48,075 7.60 80,086 11.14
Exercised (44,229) 2.34 (2,500) 2.30 (29,107) 5.07
Expired (20,250) 7.67 (11,350) 7.08 (41,750) 7.76
------- ------- -------
Outstanding - December 31 523,720 7.21 557,945 7.27 567,174 7.89
======= ======= =======
Options exercisable 231,849 $ 6.30 318,601 $ 6.75 372,695 $ 7.30
at year end
Weighted average fair value of $ 101,518 $ 156,900 $ 507,218
options granted during the year
</TABLE>
The following table summarizes information about fixed stock options
outstanding at December 31, 1999:
Exercise Options Options Weighted Average
Price Range Outstanding Exercisable Remaining Life
-------------- -------------- ------------ --------------------
$ 3.28 - 7.88 194,288 150,636 5.04
8.00 216,800 154,780 6.11
8.80 - 13.06 156,086 67,279 4.44
-------------- ------------ --------------------
Total 567,174 372,695 5.28
============== ============ ====================
Remaining non-exercisable options as of December 31, 1999 become
exercisable as follows:
2000 108,744
2001 52,130
2002 23,090
2003 8,970
2004 1,545
-----------
194,479
===========
38
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth under the caption "Management" in the Company's
definitive Proxy Statement for its 2000 Annual Meeting of Shareholders (the
"Proxy Statement") is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the caption "Executive Compensation" in the
Company's Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information set forth under the caption "Security Ownership" in the
Company's Proxy Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the caption "Certain Transactions" in the
Company's Proxy Statement is incorporated herein by reference.
39
<PAGE>
PART IV. OTHER INFORMATION
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Financial Statements
The financial statements filed as part of this report are listed under
Item 8.
(b) Reports on Form 8-K
None
(c) Exhibits:
EXHIBIT DESCRIPTION
- ------- -----------
3.1 Registrant's Articles of Incorporation, as amended(1)
3.2 Registrant's Bylaws(1)
3.3 Forms of Articles of Amendment to Articles of Incorporation(1)
4.1 Specimen Common Stock Certificate(1)
4.2 Shareholders' Agreement, dated as of November 30, 1992, as amended, by
and among the Registrant, William Petty, M.D., Betty Petty, David
Petty, Mark Petty and Julie Petty(1)
4.3 Form of Underwriter's Warrant(1)
4.4 Specimen Series A Preferred Stock Certificate(1)
4.5 Specimen Series B Preferred Stock Certificate(l)
4.6 Specimen Series C Preferred Stock Certificate(1)
4.7 Form of Amendment to Shareholder's Agreement, dated as of May 1996, by
and among the Registrant, William Petty, M.D., Betty Petty, David
Petty, Mark Petty and Julie Petty(1)
10.1 Registrant's Employee Stock Option and Incentive Plan, as amended(1)
(2)
10.2 Registrant's Directors' Stock Option Plan(1) (2)
10.3 Form of Indemnification Agreement between the Registrant and each of
the Registrant's Directors and Executive Officers(1)
10.4 Form of Employment Agreement between the Registrant and William Petty,
M.D.(1) (2)
10.5 Form of Employment Agreement between the Registrant and Timothy J.
Seese(1) (2)
10.6 Form of Employment Agreement between the Registrant and Gary J. Miller,
Ph.D.(1) (2)
10.7 Working Capital Management Account Term Loan and Security Agreement,
dated as of June 23, 1995, as amended, between the Registrant and
Merrill Lynch Business Financial Services(1)
10.8 Collateral Installment Note, dated as of June 23, 1995, executed by the
Registrant in favor of Merrill Lynch Business Financial Services(1)
10.9 Unconditional Guaranty executed by William Petty, M.D. in favor of
Merrill Lynch Business Financial Services(1)
10.10 Subordinated Convertible Debenture Agreement, dated April 18, 1995,
between the Registrant and Alan Chervitz and related Registration
Rights Agreement dated April 18, 1995(1)
10.11 Subordinated Convertible Debenture Agreement, dated April 18, 1995,
between the Registrant and E. Marlowe Goble and related Registration
Rights Agreement dated April 18, 1995(1)
10.12 Subordinated Convertible Debenture Agreement, dated April 18, 1995,
between the Registrant and Marc Richman and related Registration Rights
Agreement dated April 18, 1995(1)
10.13 Subordinated Convertible Debenture Agreement, dated April 18, 1995,
between the Registrant and David P. Luman and related Registration
Rights Agreement dated April 18, 1995(1)
10.14 Subordinated Convertible Debenture Agreement, dated May 2, 1995,
between the Registrant and Donna C. Phillips and related Registration
Rights Agreement dated May 2, 1995(1)
10.15 Subordinated Convertible Debenture Agreement, dated April 22, 1995,
between the Registrant and Peggy S. Wolfe and related Registration
Rights Agreement dated April 22, 1995(1)
10.16 Subordinated Convertible Debenture Agreement, dated April 22, 1995,
between the Registrant and Joaquin J. Diaz and related Registration
Rights Agreement dated April 22, 1995(1)
10.17 Letter Agreement, dated December 28, 1992, between the Registrant and
Michael Kearney, M.D. regarding purchase of 8% debentures and
warrants(1)
10.18 Letter Agreement, dated December 28, 1992, between the Registrant and
R. Wynn Kearney, M.D. regarding purchase of 8% debentures and
warrants(1)
10.19 First Mortgage Deed and Promissory Note, each dated September 27, 1994,
executed by the Registrant in favor of American National Bank of
Florida(1)
40
<PAGE>
10.20 Shareholders' Agreement, dated July 19, 1995, between the Registrant
and Edoardo Caminita in connection with the formation of Techmed
S.p.A.(1)
10.21 Small Business Cooperative Research and Development Agreement, dated
December 31, 1995, between the Registrant and The Regents for the
University of California, Lawrence Livermore National Laboratory(1)
10.22 Business Lease, dated July 1, 1995, between the Registrant and BCB
Partnership(1)
10.23 Consulting Agreement, dated January 1, 1993, between the Registrant and
Ivan Gradisar, Jr., M.D.(1)
10.24 Consulting Agreement, dated January 1, 1993, between the Registrant and
William Murray, M.D.(1)
10.25 Consulting Agreement, dated March 1, 1993, between the Registrant and
Edmund Chao, Ph.D.(1)
10.26 Consulting Agreement, dated January 1, 1993, between the Registrant and
William Petty, M.D.(1)
10.27 Consulting Agreement, dated January 1, 1993, between the Registrant and
Gary J. Miller, Ph.D.(1)
10.28 Consulting Agreement, dated as of November 1, 1993, between the
Registrant and Virginia Mason Clinic (regarding Raymond P. Robinson,
M.D.)(1)
10.29 Manufacturers Representative Agreement, dated January 1, 1996, between
the Registrant and Prince Medical, Inc.(1)
10.30 Distribution Agreement, dated as of January 1, 1996, between the
Registrant and Precision Instruments, Inc.(1)
10.31 Manufacturers Representative Agreement, dated January 31, 1996, between
the Registrant and Futur-Tek, Inc.(1)
10.32 Distribution Agreement, dated October 5, 1995, between the Registrant
and Techmed S.p.A.(1)
10.33 Distribution Agreement, dated January 1, 1994, between the Registrant
and Akaway Medical Co., Ltd.(1)
10.34 Distribution Agreement between the Registrant and MBA Del Principado,
S.p.A.(1)
10.35 Distribution Agreement, dated February 1, 1993, between the Registrant
and Yu Han Meditech(1)
10.36 Distribution Agreement, dated October 31, 1995, between the Registrant
and Buro Ortopedik-Thbbi Malzemeler Ithalat Ihracat Tic. Ltd. (1)
10.37 Technology License Agreement, dated as of August 5, 1991, between the
Registrant and Accumed, Inc.(1)
10.38 License Agreement, dated August 20, 1993, between the Registrant and
The University of Florida, as amended(1)
10.39 Exclusive Sublicense Agreement dated June 30, 1995, between the
Registrant and Sofamor Danek Properties, Inc.(1)
10.40 License Agreement, dated as of January 1, 1996, between the Registrant
and The Hospital for Special Surgery(1)
10.41 Assignment of Patent, dated November 20, 1995, executed by Phillip H.
Cripe in favor of the Registrant(1)
10.42 United States Patent No.5,190,549 for Locking Surgical Tool Handle
System dated March 2, 1993(1)
10.43 United States Patent No.5,190,550 for Locking Surgical Tool Handle
System dated March 2, 1993(1)
10.44 Assignment, dated July 28, 1990, of Locking Surgical Tool Handle System
patent(1)
10.45 United States Patent No.5,263,988 for Bipolar Endoprosthesis dated
November 23, 1993(1)
10.46 United States Patent No.5,152,799 for Prosthetic Femoral Stem dated
October 6, 1992(1)
10.47 Assignment, dated October 31, 1991, of Femoral Stem patent(1)
10.48 Application for United States Patent for an Improved Intramedullary
Alignment Guide(1)
10.49 Application for United States Patent for Hole Caps for Prosthetic
Implants(1)
10.50 Tolling Agreement, dated April 3, 1995, between the Registrant and
Joint Medical Products Corporation(1)
10.51 Patent Agreement, dated October 9, 1995, between the Registrant and
Phillip H. Cripe(1)
10.52 Letter Agreements dated March 8, 1993 and April 13, 1993 between the
Registrant and Ridgeway Construction(1)
10.53 Letter Agreements dated April 12, 1993 between the Registrant and
Bosshardt Realty Services, Inc.(1)
10.54 Copyright Assignment and Consulting Agreement, effective as of April
12, 1993, by and between Walter Reid and the Registrant(1)
41
<PAGE>
10.55 Letter agreement, dated November 30, 1993, between the Registrant and
Associated Business Consultants, Inc.(1)
10.56 Letter agreements, dated February 23, 1996, between Merrill Lynch
Business Financial Services Inc. and the Registrant(1)
10.57 Consulting Agreement dated as of June 1, 1993 between the Registrant
and Kim Jun-Man(1)
10.58 Consulting Agreement. dated as of January 1, 1993 between the
Registrant and Professors Luis Lopez Duran and Fernando Marco(1)
10.59 Merrill Lynch WCMA line of credit extension dated July 29, 1996(3)
10.60 Loan Agreement, dated as of November 1, 1997, between the City of
Gainesville, Florida and the Registrant(4)
10.61 Letter of Credit Agreement, dated as of November 1, 1997, between
SunTrust Bank, North Central Florida ("SunTrust") and the Registrant(4)
10.62 Pledge and Security Agreement, dated as of November 1, 1997 between
SunTrust and the Registrant(4)
10.63 Mortgage and Security Agreement, dated as of November 1, 1997, from the
Registrant to SunTrust(4)
10.64 Settlement agreement between Biomet, Inc., Ella K. Jirka & Associates,
Richard A. Bland, N.W. Medical Products, Inc. and the Registrant dated
February 9, 1998(4)
10.65 Letter Agreement dated June 18, 1998, between Merrill Lynch Business
Financial Services Inc. and the Registrant(5)
11.1 Computation of Earnings Per Share
21.1 Subsidiary of the Registrant(1)
27.1 Financial Data Schedule
Copies of the exhibits filed with this Annual Report on Form 10-K or
incorporated herein by reference do not accompany copies hereof for
distribution to shareholders of the Company. The Company will furnish a
copy of any of such exhibits to any shareholder requesting the same.
(1) Incorporated by reference to the exhibit of the same number
filed with the Registrant's Registration Statement on Form S-1
(File No. 333-02980).
(2) Management contract or compensation plan.
(3) Incorporated by reference to exhibit 10 filed with the
Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1996.
(4) Incorporated by reference to the exhibit of the same number
filed with the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1997.
(5) Incorporated by reference to exhibit 10 filed with the
Registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1998.
(d) Financial Statement Schedules:
Schedule II-Valuation and Qualifying Accounts
42
<PAGE>
EXACTECH, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
THREE YEARS ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
Balance at Charged to
Beginning Costs and Deductions Balance at
of Year Expenses (Chargeoffs) End of Year
------- -------- ------------ -----------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts
1997 37,164 123,882 161,046
1998 161,046 (7,088) 153,958
1999 153,958 178,735 332,693
</TABLE>
43
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
March 14, 2000 EXACTECH, INC.
By: /S/ WILLIAM PETTY
------------------------------
William Petty
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
March 14, 2000 By: /S/ WILLIAM PETTY
------------------------------
William Petty
Chairman of the Board and
Chief Executive Officer
(principal executive officer)
March 14, 2000 By: /S/ TIMOTHY J. SEESE
------------------------------
Timothy J. Seese
President and Chief
Operating Officer
March 14, 2000 By: /S/ GARY J. MILLER
------------------------------
Gary J. Miller
Vice President and Director
March 14, 2000 By: /S/ JOEL C. PHILLIPS
------------------------------
Joel C. Phillips
Chief Financial Officer
March 14, 2000 By: /S/ ALBERT H. BURSTEIN
------------------------------
Albert H. Burstein
Director
March 14, 2000 By: /S/ R. WYNN KEARNEY, JR.
------------------------------
R. Wynn Kearney, Jr.
Director
March 14, 2000 By: /S/ E. RONALD PICKARD
------------------------------
E. Ronald Pickard
Director
March 14, 2000 By: /S/ PAUL E. METTS
------------------------------
Paul E. Metts
Director
44
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
11.1 Computation of Earnings Per Share
27.1 Financial Data Schedule
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>
YEAR ENDED
DECEMBER 31,
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Basic:
Weighted average common shares outstanding
used in computing basic earnings per share 4,878,795 4,905,656 4,960,220
=======================================
Basic Earnings Per Share $ 0.32 $ 0.43 $ 0.64
=======================================
Diluted:
Weighted average common and common equivalent 4,878,795 4,905,656 4,960,220
shares outstanding
Effect of shares issuable under stock under stock plans
using the treasury method 40,637 42,634 199,103
Effect of shares contingently issuable under warrants
issued with the 8% subordinated debentures using
the treasury stock method 4,319 5,206 6,835
Effect of shares contingently issuable under warrants
issued with the Initial Public Offering (IPO) using
the treasury stock method 12,039
---------------------------------------
Shares used in computing diluted earnings per share 4,923,751 4,953,496 5,178,197
=======================================
Diluted Earnings Per Share $ 0.32 $ 0.43 $ 0.61
=======================================
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,641,071
<SECURITIES> 0
<RECEIVABLES> 8,312,173
<ALLOWANCES> (332,693)
<INVENTORY> 11,638,895
<CURRENT-ASSETS> 21,447,309
<PP&E> 15,977,093
<DEPRECIATION> (4,059,413)
<TOTAL-ASSETS> 34,609,406
<CURRENT-LIABILITIES> 3,594,627
<BONDS> 3,600,000
0
0
<COMMON> 50,081
<OTHER-SE> 26,389,718
<TOTAL-LIABILITY-AND-EQUITY> 34,609,406
<SALES> 32,954,283
<TOTAL-REVENUES> 32,954,283
<CGS> 11,714,276
<TOTAL-COSTS> 11,714,276
<OTHER-EXPENSES> 15,919,528
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 136,893
<INCOME-PRETAX> 5,183,586
<INCOME-TAX> 2,016,019
<INCOME-CONTINUING> 3,167,567
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,167,567
<EPS-BASIC> 0.64
<EPS-DILUTED> 0.61
</TABLE>
