
12.	SHAREHOLDERS’ EQUITY

The following is a reconciliation of the numerators and denominators of the basic and diluted EPS computations for net income and net income available to common shareholders (in thousands, except per share amounts):



	Income (Numerator)		Shares (Denominator)	Per Share		Income (Numerator)		Shares (Denominator)	Per Share
	Three Months Ended					Three Months Ended
	June 30, 2012					June 30, 2011
Net income	$	3,023				$	2,722
Basic EPS:
Net income available to common shareholders	$	3,023	13,178	$	0.23	$	2,722	13,088	$	0.21
Effect of dilutive securities:
Stock options			90					147
Diluted EPS:
Net income available to common shareholders plus assumed conversions	$	3,023	13,268	$	0.23	$	2,722	13,235	$	0.21



	Income (Numerator)		Shares (Denominator)	Per Share		Income (Numerator)		Shares (Denominator)	Per Share
	Six Months Ended					Six Months Ended
	June 30, 2012					June 30, 2011
Net income	$	6,308				$	5,693
Basic EPS:
Net income available to common shareholders	$	6,308	13,167	$	0.48	$	5,693	13,061	$	0.44
Effect of dilutive securities:
Stock options			97					164
Diluted EPS:
Net income available to common shareholders plus assumed conversions	$	6,308	13,264	$	0.48	$	5,693	13,225	$	0.43

For the three months ended June 30, 2012, weighted average options to purchase 1,070,404 shares of common stock were outstanding but were not included in the computation of diluted EPS because the options were antidilutive under the treasury stock method. For the three months ended June 30, 2011, weighted average options to purchase 531,195 shares of common stock were outstanding but were not included in the computation of diluted EPS because the options were antidilutive under the treasury stock method.

For the six months ended June 30, 2012, weighted average options to purchase 782,374 shares of common stock were outstanding but were not included in the computation of diluted EPS because the options were antidilutive under the treasury stock method. For the six months ended June 30, 2011, weighted average options to purchase 507,942 shares of common stock were outstanding but were not included in the computation of diluted EPS because the options were antidilutive under the treasury stock method.

Changes in Stockholders’ Equity:

The following is a summary of the changes in stockholders’ equity for the six months ended June 30, 2012:



	Common Stock			Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)			Total
	Shares	Amount		Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)			Total
Balance December 31, 2011	13,153	$	132	$	60,565	$	98,902	$	(4,272	)	$	155,327
Net income		—		—		6,308		—			6,308
Other comprehensive income (loss), net of tax		—		—		—		(1,886		)	(1,886		)
Exercise of stock options	14	—		157		—		—			157
Issuance of restricted common stock for services	9	—		145		—		—			145
Issuance of common stock under Employee Stock Purchase Plan	21	—		290		—		—			290
Compensation cost of stock options		—		854		—		—			854
Balance June 30, 2012	13,197	$	132	$	62,011	$	105,210	$	(6,158	)	$	161,195

Stock-based Compensation Awards:

We sponsor an Executive Incentive Compensation Plan, which provides for the award of stock-based compensation, including options, stock appreciation rights, restricted stock and other stock-based incentive compensation awards to key employees, directors and independent agents and consultants. We implemented a comprehensive, consolidated incentive compensation plan upon shareholder approval at our Annual Meeting of Shareholders on May 7, 2009, referred to as the 2009 Plan, which replaced the 2003 incentive compensation plan. At our 2011 Annual Meeting of Shareholders, held on June 9, 2011, our shareholders approved an amendment to the 2009 Plan that increased the maximum number of shares issuable under the 2009 Plan from 500,000 to 1,000,000. The maximum number of common shares issuable under the 2009 Plan is 1,000,000 shares plus any remaining shares issuable under the 2003 plan. The terms of the 2009 Plan are substantially similar to the terms of the 2003 Plan. Common stock issued upon exercise of stock options is settled with authorized but unissued shares available. Under the plans, the exercise price of option awards equals the market price of our common stock on the date of grant, and each award has a maximum term of ten years. As of June 30, 2012, there were 529,915 total remaining shares issuable under the 2009 Plan.

The aggregate compensation cost that has been charged against income for the 2009 Plan and 2009 Employee Stock Purchase Plan, referred to as the 2009 ESPP, was $0.9 million and $0.7 million and income tax benefit of $0.2 million and $0.2 million for the six months ended June 30, 2012 and 2011, respectively. As of June 30, 2012, total unrecognized compensation cost related to unvested awards was $1.4 million and is expected to be recognized over a weighted-average period of 2.03 years .

Stock Options:

A summary of the status of stock option activity under our stock-based compensation plans as of June 30, 2012 and changes during the year to date is presented below:



	2012
	Options		Weighted Avg Exercise Price		Weighted Avg Remaining Contractual Term	Aggregate Intrinsic Value (In thousands)
Outstanding - January 1	1,339,485		$	16.41
Granted	289,200		16.33
Exercised	(14,297	)	10.96			67
Forfeited or Expired	(4,008	)	18.36
Outstanding - June 30	1,610,380		$	16.44	3.14	$	2,000
Exercisable - June 30	1,174,969		$	16.30	2.18	$	1,864

Weighted average fair value per share of options granted during the period			$	7.56

Outstanding options, consisting of five-year to ten-year incentive stock options, vest and become exercisable ratably over a three to five year period from the date of grant. The outstanding options expire from five to ten years from the date of grant or upon separation from Exactech, and are contingent upon continued employment during the applicable option term. Certain non-qualified stock options are granted to non-employee sales agents and consultants, and they typically vest ratably over a period of three to four years from the date of grant and expire in five years or less from the date of grant, or upon termination of the agent or consultant’s contract with Exactech. Stock options for 289,200 and 74,700 shares of common stock were granted during the six months ended June 30, 2012 and 2011, respectively.

Restricted Stock Awards:

Under the plans, we may grant restricted stock awards to eligible employees, directors, and independent agents and consultants. Restrictions on transferability, risk of forfeiture and other restrictions are determined by the Compensation Committee of the Board of Directors, or the Committee, at the time of the award. During February 2012, the Committee approved equity compensation to the five outside members of the Board of Directors for their service on the Board of Directors. The compensation for each director was for the grant of stock awards with an annual market value of $60,000, payable in the form of four equal quarterly grants of common stock based on the market price at the respective dates of grant. The summary information of the restricted stock grants for the first half of 2012 is presented below:



Grant date	February 29, 2012		May 31, 2012
Aggregate shares of restricted stock granted	4,715		4,303
Grant date fair value	$	75,000	$	70,000
Weighted average fair value per share	$	15.89	$	16.26

During March 2011, the Committee approved equity compensation to the six outside members of the Board of Directors for their service on the Board of Directors. The compensation for each director was for the grant of stock awards with an annual market value of $50,000, payable in the form of four equal quarterly grants of common stock based on the market price at the respective dates of grant. The summary information of the restricted stock grants for the first half of 2011 is presented below:



Grant date	March 4, 2011		May 31, 2011
Aggregate shares of restricted stock granted	4,044		3,990
Grant date fair value	$	75,000	$	75,000
Weighted average fair value per share	$	18.53	$	18.78

All of the restricted stock awards in 2012 and 2011 were fully vested at each of the grant dates. The restricted stock awards require no service period and thus contain no risk or provision for forfeiture.

Employee Stock Purchase Plan:

On February 18, 2009, our board of directors adopted the 2009 ESPP, and our shareholders approved the 2009 ESPP at our Annual Meeting of Shareholders on May 7, 2009. Under the 2009 ESPP, employees are allowed to purchase shares of our common stock at a fifteen percent (15%) discount via payroll deduction. There are four offering periods during an annual period. At our 2012 Annual Meeting of Shareholders, held on May 3, 2012 , our shareholders approved an amendment to the 2009 ESPP that increased the maximum number of shares issuable under the 2009 ESPP from 300,000 to 450,000. As of June 30, 2012, 179,155 shares remain available to purchase under this 2009 ESPP. The fair value of the employees' purchase rights is estimated using the Black-Scholes model. Purchase information and fair value assumptions are presented in the following table:



Six Months Ended June 30,	2012	2011
Shares purchased	20,970	19,912
Dividend yield	—	—
Expected life	1 year	1 year
Expected volatility	52%	40%
Risk free interest rates	1.2%	2.9%
Weighted average per share fair value	$4.23	$4.21