-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Voe1ZYTZrZ6yXiVFuQLa7JONruj7p+T3u0h/c/y7VGCT2Ae32P+QYUFtzKiRR0PQ QPm7vEDhWAjXR3uAGm/dsg== 0000950170-00-000380.txt : 20000315 0000950170-00-000380.hdr.sgml : 20000315 ACCESSION NUMBER: 0000950170-00-000380 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000314 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EXACTECH INC CENTRAL INDEX KEY: 0000913165 STANDARD INDUSTRIAL CLASSIFICATION: ORTHOPEDIC, PROSTHETIC & SURGICAL APPLIANCES & SUPPLIES [3842] IRS NUMBER: 592603930 STATE OF INCORPORATION: FL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 333-02980 FILM NUMBER: 568798 BUSINESS ADDRESS: STREET 1: 4613 NW 6TH ST CITY: GAINESVILLE STATE: FL ZIP: 32609 BUSINESS PHONE: 3523771140 MAIL ADDRESS: STREET 1: 4613 N W 6TH STREET CITY: GAINSVILLE STATE: FL ZIP: 32609 10-K405 1 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). TABLE OF CONTENTS AND CROSS REFERENCE SHEET
PAGE NUMBER 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
2 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 3 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. 4 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. 5 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, 6 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 7 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 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 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 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 11 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, 12 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:
NAME AGE POSITION - ---- --- -------- 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
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 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 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 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. 16 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.
YEAR ENDED DECEMBER 31, ------------------------------------------------------------------------------------ 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
* 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 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 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)
----------------------------------------------------------------------------------- DECEMBER 31, 1997 DECEMBER 31, 1998 DECEMBER 31, 1999 UNITS $ % UNITS $ % UNITS $ % ----- - - ----- - - ----- - - 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% =============== =============== ===============
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 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 $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 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 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.
2000 2001 2002 2003 Thereafter Total - ------------------------------------------------------------------------------------------------------------ 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% - ------------------------------------------------------------------------------------------------------------
23 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA TABLE OF CONTENTS
PAGE ---- 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
24 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 EXACTECH, INC.
BALANCE SHEETS DECEMBER 31, 1998 AND 1999 - -------------------------------------------------------------------------------------------------------- ASSETS 1998 1999 ------------ ------------ 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 ============ ============
SEE NOTES TO FINANCIAL STATEMENTS 26 EXACTECH, INC.
STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 - ----------------------------------------------------------------------------------------------- 1997 1998 1999 ------------ ------------ ------------ 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 ============ ============ ============
SEE NOTES TO FINANCIAL STATEMENTS 27 EXACTECH, INC.
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 ----------- ----------- ----------- ----------- ----------- 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 =========== =========== =========== =========== ===========
SEE NOTES TO FINANCIAL STATEMENTS 28 EXACTECH, INC.
STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 - -------------------------------------------------------------------------------------------------------------- 1997 1998 1999 ----------- ----------- ----------- 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
SEE NOTES TO FINANCIAL STATEMENTS 29 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 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 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:
Current: 1997 1998 1999 ---------- ---------- ---------- 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 ========== ========== ==========
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:
1997 1998 1999 ------- ------- ------- 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% ====== ====== ======
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:
1997 1998 1999 ---------- ---------- ---------- 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 ========== ========== ==========
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 EXACTECH, INC. NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 4. DEBT LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS:
1998 1999 ----------- ----------- 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 =========== ===========
The following is a schedule of debt maturities as of December 31, 1999:
Long-Term Debt ----------- 2000 .............................................................. $ 300,000 2001 .............................................................. 300,000 2002 .............................................................. 300,000 2003 .............................................................. 300,000 2004 .............................................................. 300,000 Thereafter .............................................................. 2,400,000 ----------- $ 3,900,000 ===========
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 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 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.
(in thousands) ---------------------------------------------------- Tissue Year ended December 31 Knee Hip Services Other Total --------------------------------------------------------------------------------------------- 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 ---------------------------------------------------------------------------------------------
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 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:
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 -------------------------------- -------------------------------- -------------------------------- 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 ===== ===== =====
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 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:
1997 1998 1999 ----------- ----------- ----------- 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
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 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:
1997 1998 1999 --------------------- --------------------- --------------------- Weighted Weighted Weighted Avg Avg Avg Exercise Exercise Exercise Options Price Options Price Options Price --------------------- --------------------- --------------------- 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
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 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 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 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 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 EXACTECH, INC. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS THREE YEARS ENDED DECEMBER 31, 1999
Balance at Charged to Beginning Costs and Deductions Balance at of Year Expenses (Chargeoffs) End of Year ------- -------- ------------ ----------- 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
43 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 EXHIBIT INDEX EXHIBIT DESCRIPTION - ------- ----------- 11.1 Computation of Earnings Per Share 27.1 Financial Data Schedule EX-11.1 2 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
YEAR ENDED DECEMBER 31, 1997 1998 1999 ---- ---- ---- 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 =======================================
EX-27.1 3 FINANCIAL DATA SCHEDULE
5 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 1,641,071 0 8,312,173 (332,693) 11,638,895 21,447,309 15,977,093 (4,059,413) 34,609,406 3,594,627 3,600,000 0 0 50,081 26,389,718 34,609,406 32,954,283 32,954,283 11,714,276 11,714,276 15,919,528 0 136,893 5,183,586 2,016,019 3,167,567 0 0 0 3,167,567 0.64 0.61
-----END PRIVACY-ENHANCED MESSAGE-----