-----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, I0dXM77ITt16F0QPbybIfXSBMe1jYnu/ImedoxClUC5qIT0Op0YX66Ogel4cIDTR sA93XbTVATS1YcRvJHbvmA== 0000950170-98-000455.txt : 19980317 0000950170-98-000455.hdr.sgml : 19980317 ACCESSION NUMBER: 0000950170-98-000455 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980316 SROS: NASD 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-K SEC ACT: SEC FILE NUMBER: 333-02980 FILM NUMBER: 98566541 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-K 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, 1997 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 0-28240 EXACTECH, INC. (Exact name of registrant as specified in its charter) FLORIDA 59-2603930 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 4613 NW 6TH STREET GAINESVILLE, FL 32609 (Address of principal executive offices) (352) 377-1140 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None. Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- As of February 20, 1998, the number of shares of the registrant's Common Stock outstanding was 4,904,663. The aggregate market value of the Common Stock held by non-affiliates of the registrant as of February 20, 1998 was approximately $14,019,555, based on a closing sale price of $5.50 for the Common Stock as reported on the NASDAQ National Market System on such date. For purposes of the foregoing computation, all executive officers, directors and 5 percent beneficial owners of the registrant are deemed to be affiliates. Such determination should not be deemed to be an admission that such executive officers, directors or 5 percent beneficial owners are, in fact, affiliates of the registrant. DOCUMENTS INCORPORATED BY REFERENCE The information required by Part III (Items 10, 11, 12 and 13) is incorporated by reference from the registrant's definitive proxy statement for its 1998 Annual Meeting of Shareholders (to be filed pursuant to Regulation 14A). 2
TABLE OF CONTENTS AND CROSS REFERENCE SHEET PAGE NUMBER ----------- PART I Item I. Business Business Overview 4 Products 4 Marketing and Sales 7 Manufacturing and Supply 8 Patents and Proprietary Technology 8 Research and Development 10 Scientific Advisory Board 11 Competition 11 Product Liability and Insurance 11 Government Regulation 12 Employees 14 Executive Officers of the Registrant 15 Glossary 17 Item 2. Properties 19 Item 3. Legal Proceedings 19 Item 4. Submission of Matters to a Vote of Security Holders 20 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 21 Item 6. Selected Financial Data 22 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 23 Item 8. Financial Statements and Supplementary Data 29 Item 9. Changes in and Disagreements with Accountants on 46 Accounting and Financial Disclosure PART III Item 10. Directors and Executive Officers of the Registrant 46 Item 11. Executive Compensation 46 Item 12. Security Ownership of Certain Beneficial Owners and Management 46 Item 13. Certain Relationships and Related Transactions 46 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 47
3 ITEM 1. BUSINESS Certain terms used herein are defined in the Glossary on pages 17 to 19 hereof. Exactech, Inc. (the "Company") develops, manufactures, markets and sells orthopaedic implant devices and related surgical instrumentation to hospitals and physicians in the United States and overseas. Prior to 1995, the Company's revenues were derived primarily from sales of its primary hip replacement systems. During 1995, the Company introduced Optetrak/registered trademark/, a total primary knee replacement system, which had been in development for three years. The Optetrak/registered trademark/ knee system was conceived by the Company in collaboration with members of its Scientific Advisory Board in cooperation with the Hospital for Special Surgery, an internationally known hospital for orthopaedic surgery. The Optetrak/registered trademark/ system represents a highly differentiated product based on precision manufacturing techniques and a design which reduces articular contact stress. The Optetrak/registered trademark/ system is the most modern rendition of a series of knee implants which were first introduced in 1974 and which are still being marketed by certain of the Company's competitors. The Company has entered into an agreement with the Hospital for Special Surgery which gives the Company a non-exclusive option with respect to future knee systems developed at the Hospital for Special Surgery. In order to raise capital, in June 1996, the Company consummated an underwritten initial public offering (the "IPO") of 1,840,000 shares of its common stock, $.01 par value (the "Common Stock"), resulting in net proceeds to the Company of $12,657,910 after deduction of underwriting, legal, accounting and other offering related expenses. The proceeds of the IPO have been and will be used primarily to repay indebtedness, to purchase inventory and equipment, for research and development and for working capital and general corporate purposes. The Company was incorporated under the laws of the State of Florida in November 1985. ORTHOPAEDIC IMPLANT INDUSTRY According to the Orthopedic Network News Volume 8 Number 3, United States sales of orthopaedic implant products were approximately $1.8 billion in 1996, an increase of 3.5% from 1995. During 1996, sales of knee implants were approximately $999 million, an increase of 5.3% from 1995, while sales of hip implants were approximately $793 million, an increase of 1.4% from 1995. The publication reports that there were 532,532 hip and knee joint replacements in the United States in 1996 compared to 504,067 in 1995. The Company expects sales of hip and knee joint replacements in foreign markets to grow more rapidly than in the United States. Management believes that the growth in the industry is due to the increase in the number of people over age 65, an increasingly active population, improvements in technology and increased use of implants in younger patients. According to an industry report, the United States population over 65 years of age continues to grow as a percentage of the population. Longer life spans and the continuing aging of the population increases the number of individuals whose joints will be subject to failure. Furthermore, the "baby-boomers" are approaching the age where arthritis and osteoporosis begin to affect joints, necessitating joint replacement. As this segment of the population continues to age, an increasing demand for joint replacement procedures is anticipated. Finally, the earlier generations of implanted joint replacement prostheses have begun to reach their maximum life and are beginning to fail, resulting in an increased demand for hip and knee revisions. PRODUCTS The Company's orthopaedic implant products are used to replace joints which have deteriorated as a result of injury or diseases such as arthritis. Reconstructive joint surgery involves the modification of the area surrounding the affected joint and the insertion of a set of manufactured implant components to replace or augment the joint. During the surgery, the surgeon removes a portion of the bones that comprise the joint, prepares the remaining bones and surrounding tissue and then installs the implant. Knee implants are either total or unicompartmental. Total knee replacement systems are used to replace the entire knee joint (i.e., the patella, upper portion of the tibia and lower portion of the femur), while unicompartmental systems are used to replace one of the two compartments between the femur and the tibia. 4 Primary knee implant systems are used to replace the natural knee joint, while knee revision systems are used to replace the components of a previously installed primary implant system that has failed. The components of revision systems are specially designed to fill bony voids created by the previous implant. Hip implants are either total or partial. In a total hip implant, the acetabulum is replaced with an acetabular cup. The damaged head of the patient's femur is removed and a stem is inserted into the femur on which a replacement head is mounted. This femoral head is placed into the cup of the acetabulum to recreate the ball and socket joint. In a partial hip implant, the damaged head of a patient's femur is removed and replaced with a head mounted on a stem inserted into the femur. However, the acetabulum is not replaced and the size of the head is larger and more similar to the natural femoral head. Hip implants are designed for either cemented or non-cemented applications. Cemented hip implants are installed by using bone cement to attach the components to a patient's bones, while porous coated hip implants are press-fit without cement. Porous coated implants are designed to promote growth of the patient's remaining bone tissue onto the implant. Primary hip implant systems are used to replace the natural hip joint, while hip revision systems are used to replace a previously installed primary implant system that has failed. KNEE PRODUCTS. The Company believes that its Optetrak/registered trademark/ knee system represents a major advance in knee implant design. The Optetrak/registered trademark/ knee system was developed in collaboration with the Hospital for Special Surgery in New York and a design team consisting of physicians and biomechanists affiliated with major medical facilities and academic institutions. The Company's Optetrak/registered trademark/ system is a modular system designed to maximize stability, to provide increased range of motion and improved patellar tracking and to reduce articular contact stress that leads to implant failure. Laboratory testing performed by the Company and clinical testing performed by the Company's design team members has demonstrated that the system produces substantially lower articular contact stress and improved patellar tracking than other comparable knee implant systems. The Optetrak/registered trademark/ system includes a total primary knee replacement system which is available with either a cruciate ligament sparing femoral component (in both cemented and porous coated designs) or a posterior stabilized femoral component (in both cemented and porous coated designs). These femoral components are made of a cobalt chromium alloy. The system is also available with several alternative tibial components, titanium backed polyethylene tibial components with both finned keel and trapezoid keel with stem augmentation, blocks and full or half wedges, and all polyethylene tibial components, which are cruciate sparing and posterior stabilized. The stem, block and wedge augmentation allow the surgeon to rebuild the ends of the patient's bones to allow fixation of the implant system. The metal components of the Optetrak/registered trademark/ system are fully precision machined resulting in better congruence among components and material performance. The Company's patellar products are made of ultra-high molecular weight polyethylene. Because of variations in human anatomy and differing design preferences among surgeons, knee components are manufactured by the Company in a variety of sizes and configurations. Bone cement is used to affix the implants to the bone. The Optetrak/registered trademark/ system also includes a total knee revision system with respect to which the Company commenced full scale marketing in 1997. The revision system includes a constrained condylar femoral component with enhanced stem and block augmentation and can be used with many components of the primary system. The constrained condylar femoral component was designed to provide greater constraint between the system components to compensate for ligaments weakened or lost due to disease or as a result of the original implant. The Company is also designing a unicompartmental knee with respect to which the Company will be required to obtain Food and Drug Administration ("FDA") clearance to market. HIP PRODUCTS. The Company began marketing a hip implant system in 1987. The Company's line of hip implant products currently consists primarily of three primary total hip implant systems, its Cemented Total Hip System, its MCS/registered trademark/ Porous Coated Total Hip System, and the AuRA/registered trademark/ System, and two primary partial hip implant systems, its unipolar implant and its bipolar implant. All total hip implants produced by the Company consist of a cup, head and stem. Because of variations in human anatomy and differing design preferences among surgeons, hip implants are manufactured by the Company in a variety of head sizes, neck lengths, stem lengths, stem cross-sections and configurations. The Company's total hip replacement systems utilize either titanium alloy or cobalt chromium alloy femoral stem components, which can be final machined from forgings, castings or wrought metal plate depending on the design and material used. 5 The Company's total hip replacement systems also include ultra-high molecular weight polyethylene cups with and without metal backing. The femoral heads are made of either cobalt chromium or zirconia ceramic. The Company's Cemented Total Hip System is intended to provide optimal treatment for patients requiring cemented hip arthroplasty (joint reconstructive surgery) by minimizing failure of the bone cement. The femoral stem utilizes a cross-sectional design to reduce stress on the bone cement used to affix the implant to the patient's remaining bone tissue. The components of the system include a high demand forged cobalt chromium femoral stem or moderate demand Opteon/registered trademark/ forged cobalt chromium femoral stem. The Cemented Total Hip System is a mature product line which the Company intends to phase out with the AuRA/registered trademark/ Hip System over the next few years. The Company scaled up marketing and sales of the AuRA/registered trademark/ Hip System in 1997. AuRA/registered trademark/ is a comprehensive system that provides solutions for a broad range of patient problems. It is specifically designed to support the needs of a maturing generation of more active patients. The AuRA/registered trademark/ Hip System is comprised of a new primary total hip replacement system as well as revision components which include calcar replacement and long stems. It can also be used for fracture and tumor applications. All AuRA/registered trademark/ components have a common proximal geometry which affords the surgeon reproducability of results regardless of which stem is selected. AuRA/registered trademark/ components can be implanted using a single set of surgical instruments which makes the system more cost effective. The Company's MCS/registered trademark/ Porous Coated Total Hip System was designed to minimize thigh pain and abnormal bone remodeling resulting from bone-implant stiffness mismatch. The Company's MCS/registered trademark/ Porous Coated Total Hip System was also designed to avoid unnecessary damage to the bone and its blood supply during femoral preparation. The Company also provides instrumentation that facilitates reproducible implantation of the implant. The system consists of a modular acetabular cup and cup liner, screws for supplemental fixation of the acetabular cup, a modular head and a femoral stem. All of the Company's femoral heads are designed to be used with its femoral stems, including the Ziramic/registered trademark/ (zirconia ceramic) femoral head which was designed to further reduce friction and polyethylene wear, and is also compatible with the AuRA/registered trademark/ Hip System. The system has been cleared by FDA for use without cement. The Company's partial hip products include a bipolar prosthesis and a unipolar prosthesis. The Company's bipolar prosthesis also utilizes one of the stems used in total hip replacements. The bipolar prosthesis is designed for use in more active patients and the unipolar prosthesis is designed for use in less active patients. During 1996, the Company licensed patent technology for a modular revision hip system. The Company commenced product development of the modular revision hip system during 1997. The Company plans to continue product development and to seek FDA clearance to market the system in 1998. The Company plans to commence full scale marketing of the product in 1999. The Company provides its customers with the ACCUMATCH/registered trademark/ Implant Selection System, a computerized matching program that assists medical personnel in determining which of the Company's hip products is most suitable and cost-effective for a specific patient. OTHER COMPANY PRODUCTS AND SERVICES. The Company has designed and received FDA clearance to market a nonmodular shoulder implant system. In 1997, the Company temporarily halted development plans for a modular version of a shoulder implant system. The Company currently believes that other opportunities currently provide a more optimal use of the Company's resources. The Company has acquired an exclusive license for an improved surgical oscillating saw system that significantly reduces vibration, noise, and problems with control in surgery. The Company may develop this product through a separate wholly-owned subsidiary. The Company has licensed certain technology for orthopaedic repairs. This material will be supplied as a service through the Company's current sales organization. The Company plans to commence this service in the second quarter of 1998. 6 MARKETING AND SALES The Company markets its orthopaedic implant products in the United States through 32 independent agencies and two domestic distributors, that act as the Company's sales representatives, and internationally through eight foreign distributors, including one distributor which is 50% owned by the Company. The customers for the Company's products consist of hospitals, surgeons and other physicians and clinics. Traditionally, the surgeon made the ultimate decision which orthopaedic implant to use. As a result of health care reform, the rapid expansion of managed care at the expense of traditional private insurance, the advent of hospital buying groups, and various bidding procedures that have been imposed at many hospitals, sales representatives may also make presentations to hospital administrators, material management personnel, purchasing agents or review committees that may influence the final decision. The Company generally has contractual arrangements with its independent sales agencies pursuant to which the agency is granted the exclusive right to market the Company's products in the specified territory and the agency is required to meet sales quotas to maintain its relationship with the Company. The Company's arrangements with its sales agencies typically do not preclude them from selling competitive products, although the Company believes that most of its agents do not do so. The Company typically pays its sales agencies a commission based on net sales. The Company is highly dependent on the expertise and relationships of its sales agencies with customers. The Company's sales organization, comprised of the Company's independent sales agencies, is supervised by two Regional Managers (West/Midwest and Northeast). The Company has contractual arrangements with its domestic distributors which are similar to its arrangements with its sales agencies, except the Company does not pay the distributors commissions and the distributors purchase inventory from the Company for use in fulfilling customer orders. The Company currently offers its products in 30 states, including Florida, New York, California, Texas, Ohio, Pennsylvania and Illinois. The Company provides inventories of its products to its United States sales agencies until sold or returned for their use in marketing its products and filling customer orders. As the size of the component to be used is frequently not known until surgery has commenced and because surgeons give little or no advance notice of surgery, a minimum of one size of each component in the system to be used must be available to each sales agency at the time of surgery. Accordingly, the Company is required to maintain substantial levels of inventory. The maintenance of relatively high levels of inventory requires the Company to incur significant expenditures of its resources. The failure by the Company to maintain required levels of inventory could have a material adverse effect on the Company's expansion. As a result of the need to maintain substantial levels of inventory, the Company is subject to the risk of inventory obsolescence. In the event that a substantial portion of the Company's inventory becomes obsolete, it would have material adverse effect on the Company. During the years ended December 31, 1995, 1996 and 1997, approximately 10%, 7% and 6%, respectively, of the Company's sales were derived from a major customer. During the years ended December 31, 1995, 1996 and 1997 one distributor, MBA Del Principado, S.p.A., accounted for approximately 5%, 13% and 13%, respectively, of the Company's sales. The Company generally has contractual arrangements with its foreign distributors pursuant to which the distributor is granted the exclusive right to market the Company's products in the specified territory and the distributor is required to meet sales quotas to maintain its relationship with the Company. Foreign distributors typically purchase product inventory and instruments from the Company for their use in marketing and filling customer orders. In 1993, the Company commenced foreign sales through a distributor in Korea. In order to expand its global sales and marketing capabilities, in July 1995, the Company established Techmed, its Italian distributor, in which the Company has a 50% ownership interest. Under the terms of the agreement pursuant to which Techmed was established, the Company has contributed $193,759 in equity to Techmed. During September 1997, the Company wrote off its investment in the subsidiary and reserved for trade receivables deemed uncollectible. The Company currently offers its products in eight countries in addition to the United States: Argentina, Australia, Columbia, Greece, Italy, Korea, Spain and Turkey. For the years ended December 31, 1995, 1996 and 7 1997, foreign sales accounted for $743,700, $2,124,856 and $3,051,151, representing approximately 8.2%, 15.4%, and 17.3%, respectively, of the Company's sales. For the years ended December 31, 1995, 1996 and 1997, gross profit from foreign sales accounted for $257,083, $597,944 and $1,127,455, respectively. The Company intends to expand its sales in foreign markets in which there is increasing demand for orthopaedic implant products. In order to expand its global sales and marketing capabilities, the Company intends to assess the attractiveness of establishing local manufacturing to serve the Italian, Spanish and other EEC markets. The Company intends to continue to expand its international distribution network in 1998. MANUFACTURING AND SUPPLY The Company utilizes third-party vendors for the manufacture of all of its component parts, while performing product design, quality assurance and packaging internally. The Company consults with its vendors in the early stages of the design process of its products. The Company believes that its strategy of using third-party vendors for manufacturing and consulting with such vendors in the design process enables it to efficiently source product requirements while affording it considerable flexibility. Because the Company is able to obtain competitive prices from a number of suitable suppliers with FDA-approved facilities, the Company believes it is able to offer high quality products at cost-effective prices. In order to control its production costs, the Company continually assesses the manufacturing capabilities and cost-effectiveness of its existing and potential vendors. The Company may in the future establish manufacturing strategic alliances to assure itself of continued low-cost production. For the years ended December 31, 1995, 1996 and 1997, the Company purchased approximately 68%, 62% and 72%, respectively, of its component requirements from three manufacturers. The Company does not maintain supply contracts with any of its manufacturers and purchases components pursuant to purchase orders placed from time to time in the ordinary course of business. The Company has several alternative sources for components and does not anticipate that it will encounter problems in obtaining adequate supplies of components. Certain tooling and equipment which are unique to the Company's products are supplied by the Company to its vendors. The Company's assembly, packaging and quality control operation are conducted at its principal offices in Gainesville, Florida. Each component received from its vendors is examined by Company personnel prior to assembly or packaging to ensure that it meets the Company's specifications. The Company plans to engage in limited manufacturing of the components of its products, consisting primarily of final machining of components during 1998. The Company is in the process of completing a new facility to be used by the Company for principal executive offices, research and development laboratories and manufacturing. The Company expects to occupy the new facility in the third quarter of 1998. PATENTS AND PROPRIETARY TECHNOLOGY; LICENSE AND CONSULTING AGREEMENTS The Company holds United States patents covering one of its femoral stem components and its bipolar partial hip implant system and certain surgical instrumentation, has patent applications pending with respect to certain surgical instrumentation and certain implant components and anticipates that it will apply for additional patents it deems appropriate. In addition, the Company holds licenses from third parties to utilize certain patents, including a non-exclusive license (described below) to certain patents, patents pending and technology utilized in the design of the Optetrak/registered trademark/ knee system. As a result of the rapid rate of development of reconstructive products, the Company believes that patents have not been a major factor in the orthopaedic industry to date. However, patents on specific designs and processes can provide a competitive advantage and management believes that patent protection of orthopaedic products will become more important as the industry matures. Although the Company believes that its patents and products do not and will not infringe patents or violate proprietary rights of others, it is possible that its existing patent rights may not be valid or that infringement of existing or future patents or proprietary rights may occur. See "Legal Proceedings" for information concerning a patent infringement claim against the Company. In addition to patents, the Company relies on trade secrets and proprietary know-how and employs various methods to protect its proprietary information, including confidentiality agreements and proprietary information agreements. In connection with the development of its knee implant systems, the Company entered into consulting 8 agreements with certain of its executive officers and design team members, including Dr. William Petty and Dr. Gary J. Miller, who are executive officers, directors and principal shareholders of the Company, and Ivan A. Gradisar, Jr., M.D., and William Murray, M.D. Pursuant to these consulting agreements, such individuals agreed to provide consulting services to the Company in connection with evaluating the design of knee implantation systems and associated instrumentation and are entitled to receive royalties during the term of the agreements aggregating 3% of the Company's net sales of such products in the United States and less than 3% of the Company's net sales of such products outside the United States. During the years ended December 31, 1995, 1996 and 1997, the Company paid royalties aggregating $101,393, $187,773 and $288,759 respectively, pursuant to these consulting agreements. The consulting agreements with Drs. Petty and Miller were superseded by their employment agreements which provide for the continuation of the royalty payments. The Company has entered into consulting agreements with two of the members of its design team in connection with the development of its hip revision system and is negotiating similar agreements with the remaining members of its hip revision design team. The Company anticipates that the members of that team will be entitled to customary royalties. In January 1997, the Company entered into an oral consulting agreement with Albert Burstein, Ph.D., a director of the Company, to provide services regarding many facets of the orthopaedic industry including product design rationale, manufacturing and development techniques and product sales and marketing. During 1997, the Company paid Dr. Burstein $123,750 as compensation under the consulting agreement. From time to time, the Company enters into license agreements with certain unaffiliated third parties under which the Company is granted the right to utilize certain patented products, designs and processes. Pursuant to a license agreement with the Hospital for Special Surgery (the "HSS License Agreement"), the Company obtained a non-exclusive right and license to certain patents, patents pending and technology utilized in the design of the Optetrak/registered trademark/ knee implant system and to manufacture, use and sell total knee prostheses incorporating such patents and technology. The term of the HSS License Agreement continues until the earlier to occur of (i) the expiration of a period of ten years and (ii) the expiration of the licensed patents. In consideration for the grant of the license, the Company agreed to pay to the Hospital for Special Surgery royalties in an amount equal to 5% of net sales of the licensed products. Pursuant to the HSS License Agreement, the Company has the option to acquire a non-exclusive license to use any improvement or invention made or acquired by the Hospital for Special Surgery relating to the licensed products and the option to obtain an exclusive license to any such improvement or invention made jointly by the Hospital for Special Surgery and the Company. As is the case in many license agreements of this nature, the Hospital for Special Surgery did not represent to the Company that the manufacture, use or sale of the Optetrak/registered trademark/ knee implant system will not infringe the intellectual property rights of third parties. During the years ended December 31, 1996 and 1997, the Company recognized royalties to the Hospital for Special Surgery of $307,801 and $474,357, respectively. Pursuant to a License Agreement (the "University License Agreement") between the University of Florida (the "University") and the Company, the Company has been granted the exclusive right and license in perpetuity to make, use and sell a spinal implant device under patents owned by the University. In consideration for the right to utilize the University patents, the Company paid the University an initial license issue fee of $6,000 and, if and when the patented products or processes are utilized in devices or products sold by the Company, the Company will be required to pay the University a royalty in an amount equal to 5% of the Company's net sales of any such products in the United States, up to a maximum royalty of $500,000, and thereafter a royalty of 2% of such net sales. This royalty will be payable by the Company during the period ending 10 years from the Company's first sale of a device utilizing the University patent. In addition, the University License Agreement provides that the Company will remit to the University 75% of all royalties received by the Company for sales outside of the United States under sublicense agreements relating to the patented products or processes. In connection with the University License Agreement, the Company also has agreed to assist the University in developing certain other devices currently being researched and tested which are intended to be patented by the University. To date, the Company has only utilized the University patents in connection with product research and development and accordingly, the Company has paid no royalties to the University under the University License Agreement. The Company has also entered into a sublicense agreement (the "Sublicense Agreement") with Sofamor Danek Properties, Inc. ("SDP") pursuant to which the Company granted SDP the exclusive worldwide right and 9 sublicense to utilize the patents licensed to the Company pursuant to the University License Agreement. The term of the Sublicense Agreement continues until the last of the patents owned by the University and sublicensed to SDP terminates, unless sooner terminated in accordance with the terms of the Sublicense Agreement. Pursuant to the Sublicense Agreement, the Company received an initial sublicense fee of $250,000 and, if and when FDA approves an SDP product utilizing the University patents, the Company will receive an additional $250,000 sublicense fee. Additionally, at such time as a product utilizing the University patent is manufactured and sold by SDP, the Company will be entitled to receive a royalty from SDP in the amount of 5% of SDP's net sales of such products in the United States, up to a maximum of $500,000, and thereafter a royalty of 2% of such net sales. Under the terms of the Sublicense Agreement, the Company received an advance on anticipated royalties in the amount of $l00,000. To date, SDP has not marketed a product utilizing the University patents and, during 1996, SDP was initially denied FDA clearance to market products using the University patents. As a result, the $100,000 was recognized by the Company as sublicense income in 1996 due to the non-refundable nature of the advance. Pursuant to a license agreement between the Company and Accumed, Inc. ("Accumed"), the Company secured a worldwide license to manufacture, use and sell products utilizing Accumed's bipolar hip prosthesis and a license to any rights under any patent that is issued covering Accumed's bipolar hip prosthesis design. The term of this license agreement continues until the expiration of the last patent comprising any part of the Accumed design, unless sooner terminated in accordance with the terms of such agreement. During the period ending on the seventh anniversary of the Company's first sale of a product utilizing the Accumed design, the Company is obligated to pay Accumed an annual royalty of 3.5% of all net receipts from the Company's worldwide sale of products incorporating an Accumed product or design patent licensed to the Company. However, if a patent is not issued within a particular country in which the Company sells products utilizing Accumed's design, the royalty payable is 2% of the Company's net sales of applicable products in such country. During the years ended December 31, 1995, 1996 and 1997, the Company paid royalties to Accumed of approximately $13,412, $11,577 and $11,906, respectively. The Company has also entered into a patent agreement (the "Patent Agreement") with Phillip Cripe, a shareholder of the Company, under which the Company was assigned the patent rights associated with a surgical saw designed by Mr. Cripe and the concepts, techniques and processes embodied in such product. The term of this patent agreement continues until the later of ten years or the expiration of the last patent comprising any part of the surgical saw design unless sooner terminated in accordance with the terms of the Patent Agreement. In connection with the execution of the Patent Agreement, the Company granted Mr. Cripe an option to purchase 7,500 shares of the Company's Common Stock at an exercise price of $6.67 per share. The Company has also agreed to pay Mr. Cripe an annual royalty of 5% of all net receipts from the sale of products incorporating the concepts, techniques and processes embodied in the patented product (but 2% of all net receipts from the sale of associated surgical saw blades) by or on behalf of the Company. To date, the Company has not developed a product utilizing the assigned patent or know how. During October 1996, the Company licensed certain patent technology for development of a modular hip system from Medicine Lodge, Inc. The patent license fees total $360,000, of which $275,000 was paid upon the execution of the agreement and an additional $85,000 is payable at the time of FDA clearance to market the products. During 1997, the Company licensed certain technology. The license fees total $250,000, of which $100,000 was paid upon the execution of the agreement and an additional $150,000 is payable at such time as the licensor produces a developed product. RESEARCH AND DEVELOPMENT During the years ended December 31, 1995, 1996 and 1997, the Company expended $722,118, $750,256 and $937,988 respectively, on research and development and anticipates that research and development expenses will continue to increase. The Company's research and development efforts contributed to the introduction of the revision components of the Company's Optetrak/registered trademark/ knee implant system and the AuRA/registered trademark/ Hip System in 1997. The Company's principal research and development efforts currently relate primarily to the production of enhanced revision components of the Optetrak/registered trademark/ comprehensive knee implant system and the development of the modular hip implant system. 10 SCIENTIFIC ADVISORY BOARD The Company's strategy is to utilize members of its Scientific Advisory Board, consisting of internationally known physicians and biomechanists, in the design process to facilitate the development of high quality products at cost-effective prices. The Scientific Advisory Board assists the Company in identifying new product opportunities, provides evaluation and comments on existing product development and clinical programs, and provides a direct link between the Company and the academic, medical and scientific communities which permits the Company to quickly identify and respond to the demands of orthopaedic surgeons. Members of the Scientific Advisory Board generally meet at least quarterly. In addition, from time to time, the members of the Scientific Advisory Board consult with the Company individually at the request of the Company. The Company has entered into consulting agreements with certain members of the Scientific Advisory Board pursuant to which the Company pays royalties to such members. See "Patents and Proprietary Technology; License and Consulting Agreements." The members of the Scientific Advisory Board in addition to Dr. William Petty and Dr. Gary J. Miller include: Albert H. Burstein, Ph.D., Edmund Chao, Ph.D., Ivan Gradisar, M.D., William Murray, M.D., Raymond Robinson, M.D., Franklin Sim, M.D., Robert Trousdale, M.D. COMPETITION The orthopaedic implant industry is highly competitive and dominated by a number of large companies with substantially greater financial and other resources than the Company and competition is expected to intensify. From time to time, the Company and certain of its competitors have offered significant discounts as a competitive tactic, and may be expected to continue to do so. The Company believes its future operations will depend upon its ability to be responsive to the needs of its customers and to provide high quality products at cost-effective prices. The largest competitors in the orthopaedic hip implant market are DePuy, Inc., Bristol-Myers Squibb Company (Zimmer Inc.), Pfizer Inc. (Howmedica, Inc.), Osteonics, Inc. and Biomet, Inc. who, according to an industry publication, had an estimated aggregate market share of approximately 79% in 1996. The largest competitors in the orthopaedic knee implant market are Bristol-Myers Squibb Company (Zimmer Inc.), Pfizer Inc. (Howmedica, Inc.), Johnson & Johnson, DePuy, Inc. and Osteonics, Inc. who, according to an industry publication, had an estimated aggregate market share of approximately 69% in 1996. Companies in the industry compete on the basis of product features and design, innovation, service, the ability to maintain new product flow, relationships with key orthopaedic surgeons and hospitals, the strength of their distribution network and price. While price, as opposed to surgeon preference, is becoming increasingly important in the hip market, the primary basis of competition in the knee market remains physician preference, which includes ease-of-use, clinical results, price and relationships with sales representatives. Due to health care reform, the rapid expansion of managed care at the expense of traditional private insurance and the advent of hospital buying groups, among other things, management believes that the price of the Company's orthopaedic implant products will continue to become a more important competitive factor. Manufacturers of medical devices, including orthopaedic implants, are increasingly attempting to enter into contracts with hospital chains or hospitals pursuant to which the hospital chains agree to purchase their products exclusively from such manufacturers, usually in exchange for discounted prices. If the Company's competitors are successful in securing such contracts, the Company's ability to compete may be materially adversely affected. Although to date generic products have not been a significant factor in the orthopaedic implant market, price may become even more important if suppliers of generic products enter the market on a larger scale. PRODUCT LIABILITY AND INSURANCE The Company is subject to potential product liability risks which are inherent in the design, marketing and sale of orthopaedic implants and surgical instrumentation. The Company has implemented strict quality control measures and currently maintains product liability insurance in amounts which it believes are typical in the industry for similar companies. 11 GOVERNMENT REGULATION The Company's operations and relationships are subject to extensive, rigorous, expensive, time-consuming and uncertain regulation in the United States and certain other countries. The primary regulatory authority in the United States is the FDA. The development, testing, labeling, distribution, marketing and manufacture of medical devices, including reconstructive devices, are regulated under the Medical Device Amendments of 1976 to the Federal Food, Drug and Cosmetic Act (the "Amendments") and additional regulations promulgated by FDA. In general, these statutes and regulations require that manufacturers adhere to certain standards designed to ensure the safety and effectiveness of medical devices. Under the Amendments, each medical device manufacturer must be a "registered device manufacturer" and must comply with regulations applicable generally to labeling, quality assurance, manufacturing practices and clinical investigations involving humans. FDA is authorized to obtain and inspect devices, their labeling and advertising, and the facilities in which they are manufactured in order to assure that a device is not improperly manufactured or labeled. The Company is registered with FDA and believes that it is in substantial compliance with all applicable material governmental regulations. Under the Amendments, medical devices are classified into one of three classes depending on the degree of risk imparted to patients by the medical device. The Amendments define Class I devices as those for which safety and effectiveness can be guaranteed by adherence to general controls, which include compliance with Good Manufacturing Practices ("GMP"), registration and listing, reporting of adverse medical events, and appropriate truthful and non-misleading labeling. The Amendments define Class II devices as those which require pre-market demonstration of adherence to certain standards or other special controls. Such demonstration is provided through the filing of a 510(k) pre-market notification. The Amendments define a Class III product as a product which has a wholly new intended use or a product for which advances in technology cannot be assessed without clinical study. The Amendments provide that submission and approval of a pre-market application ("PMA") is required before marketing of a Class III product can proceed. The PMA process is more extensive than 510(k) process. In practice, however, FDA has developed a three-tier regulatory approach that does not exactly parallel the classification system. PMAs are currently required of medical devices which have new intended uses and some other products classified as Class III. PMAs have only been required of "old" Class III products (i.e., which were marketed on or prior to the date of enactment of the Amendments on July 28, 1976, or which are substantially equivalent to such previously marketed devices) when FDA has published a "call" for the relevant Class III pre-Amendments device. Generally, therefore, pre-Amendments Class III and almost all Class II products are cleared for marketing by FDA based on a demonstration that the safety and effectiveness of the product is substantially equivalent to a pre-Amendments device or a similar, already-marketed, predicate device that received 510(k) clearance. Finally, Class I products are, and a few Class II products have been exempted, from the requirement to file for 510(k) clearance. The Company's products have been classified by FDA as Class II devices and, currently, all marketed devices hold valid cleared 510(k) premarket notifications, including: its cemented hip implant system, including femoral stem, acetabular cup and femoral heads; bone screws; porous coated cemented femoral stem and acetabular component; bipolar partial hip implant; Zirconia/registered trademark/ (ceramic) femoral heads; Opteon/registered trademark/ femoral stem for cemented and noncemented use; MCS femoral stem and acetabular component for cemented and noncemented use; AuRA/registered trademark/ femoral stem; and the Optetrak/registered trademark/ knee replacement system. New medical device products of the Company will likely be subject to this clearance process, although FDA has gradually enhanced the clinical data requirements applicable to many 510(k) applications over the last few years. The process of obtaining regulatory clearances is lengthy, expensive and uncertain. FDA could choose to reclassify the Company's prosthetic systems as Class III products subject to a PMA under various conditions, such as a determination that the device could not demonstrate substantial equivalence to a predicate device based on a new intended use or because a technological change or modification in the device could not be adequately 12 evaluated for safety and effectiveness without a requirement for a PMA. Further, FDA could choose to impose strict labeling requirements, onerous operator training requirements, post-marketing surveillance, individual patient recipient lifetime tracking, or other requirements as a condition of marketing clearance, any of which could limit the Company's ability to market its products and would have a material adverse effect on the Company's business, financial condition and results of operations. Further, if the Company wishes to modify a product after clearance, including changes in indications manufacturing, or other changes, additional clearance may be required. Failure to receive, or delays in receipt of, FDA clearance, including the need for additional clinical trials or data as a prerequisite, could limit the ability of the Company to market its products and could have a material adverse effect on the Company's business, financial condition and results of operations. The design, manufacturing, labeling, distribution and marketing of the Company's products are subject to extensive and rigorous government regulation in the United States well beyond that encompassed by the requirement to file a 510(k) premarket notification or a PMA application, including additional conditions or requirements that may become a part of FDA clearance or approval. Regulatory clearance may also include significant limitations on the indicated uses for which the Company's products may be marketed. To that end, all marketing materials are subject to exhaustive control. FDA enforcement policy strictly prohibits the marketing of approved or cleared products for unapproved uses. Furthermore, FDA does not provide an opportunity to review and approve such materials but may take action after the production and use of such materials. In addition, the Company's manufacturing processes are required to comply with GMP regulations. These regulations cover the methods of design, testing, production, control, quality assurance, labeling, packaging, shipping, documentation and other requirements. Enforcement of GMP regulations has increased significantly in the last several years, and FDA has publicly stated that compliance will be more strictly scrutinized. New regulations which became effective in 1997 offer additional controls which parallel international standards. The Company's facilities and manufacturing processes, as well as that of certain of the Company's third-party suppliers, are subject to periodic inspections by FDA or other agencies. To date, the Company has successfully undergone two such inspections with only minor deficiencies cited at the exit interview and for which appropriate corrective responses were found acceptable to FDA. Failure to comply with applicable regulatory requirements could result in, among other things, warning letters, fines. injunctions, civil penalties, repairs, replacements, refunds, recalls or seizures of products, total or partial suspensions of production, refusals of FDA to grant future premarket clearances or approvals, withdrawals or suspensions of current clearances or approvals, and criminal prosecution, which could have a material adverse effect on the Company's business, financial condition and results of operations. Prior to 1996, the Company voluntarily initiated and satisfactorily completed two Class III recalls. A Class III recall is defined as a situation in which the use of a violative product is not likely to cause adverse health consequences. One recall involved a partially mislabeled product. The second involved the manufacturing process of a bone screw. FDA reviewed and authorized these two recalls, and concluded that each of the two recalls was conducted and completed properly. During September 1997, the Company voluntarily initiated a Class II recall as the result of the failure of an Opteon/registered trademark/ femoral hip stem. A Class II recall is defined as a situation in which the use of a violative product may cause temporary or medically reversible adverse health consequences or where the probability of serious adverse health consequences is remote. Generally, the Company must obtain export certificates from FDA before it can export any product. While the process for issuance of export certificates has recently been expedited by FDA, and the Company has obtained export certificates under this expedited (and its predecessor) process, there can be no assurance that the issuance of export certificates in the future will not be subject to new restrictions, or that the Company will continue to receive or not be delayed in its receipt of such export certificates. Such future actions could have a material adverse effect on the Company's business, financial condition and results of operations. The Company is required to obtain various licenses and permits from foreign governments and to comply with significant regulations that vary by country in order to market its products in foreign markets. In order to 13 continue marketing its products in Europe after mid-1998, the Company will be required to obtain ISO 9001 certification and receive "CE" mark certification, an international symbol of adherence to quality assurance standards and compliance with applicable European medical device directives. The ISO 9001 certification is one of the prerequisites for CE mark certification. Failure to receive the right to affix the CE mark will prevent the Company from selling its products in member countries of the European Union. The Company is currently in the ISO certification process and plans on applying for both ISO 9001 and CE mark certification during the second quarter of 1998. Certain provisions of the Social Security Act, commonly referred to as the "Anti-kickback Statute," prohibit entities, such as the Company, from offering, paying, soliciting or receiving any form of remuneration in return for the referral of Medicare or state health program patients or patient care opportunities, or in return for the recommendation, arrangement, purchase, lease or order of items or services that are covered by Medicare or state health programs. The Anti-kickback Statute is broad in scope and has been broadly interpreted by courts in many jurisdictions. Read literally, the statute places at risk many business arrangements, potentially subjecting such arrangements to lengthy, expensive investigations and prosecutions initiated by federal and state governmental officials. Many states have adopted similar prohibitions against payments intended to induce referrals of Medicaid and other third party payer patients. Violation of the Anti-kickback Statute is a felony, punishable by fines up to $25,000 per violation and imprisonment for up to five years. In addition, the Department of Health and Human Services may impose civil penalties excluding violators from participation in Medicare or state health programs. In July 1991, in part to address concerns regarding the Anti-kickback Statute, the federal government published regulations that provide exceptions, or "safe harbors," for transactions that will be deemed not to violate the Anti-kickback Statute. Certain of the Company's relationships do not qualify for safe harbor protection. The fact that a relationship does not qualify for safe harbor protection, however, does not mean that it is illegal, and the Company believes that it is not in violation of the Anti-kickback Statute. If the Company's current or future practices are found to be in violation of the statute, such finding could have a material adverse effect on the Company. Any state or federal regulatory review of the Company, regardless of the outcome, would be both costly and time consuming. Significant prohibitions against physician referrals were enacted by Congress in the Omnibus Budget Reconciliation Act of 1993. These prohibitions, commonly known as "Stark II," amended prior physician self-referral legislation known as "Stark I" by dramatically enlarging the field of physician-owned or physician-interested entities to which the referral prohibitions apply. Effective January 1, 1995, Stark II prohibits, subject to certain exemptions, a physician or a member of his immediate family from referring Medicare or Medicaid patients to an entity providing "designated health services" in which the physician has an ownership or investment interest, or with which the physician has entered into a compensation arrangement. The penalties for violating Stark II include a prohibition on payment by these government programs and civil penalties of as much as $15,000 for each violative referral and $100,000 for participation in a "circumvention scheme." The Stark legislation is broad and ambiguous and interpretative regulations clarifying the provisions of Stark II as it would relate to the Company have not been issued. While the Company believes it is in compliance with the Stark legislation, there can be no assurance this is the case or that the government would not take a contrary view. The violation of Stark I or II by the Company could result in significant fines or penalties and exclusion from participation in the Medicare and Medicaid programs. The Company is also subject to regulation by the Occupational Safety and Health Administration and the Environmental Protection Agency and similar state and foreign agencies and authorities. EMPLOYEES As of December 31, 1997, the Company employed 45 full time employees. The Company has no union contracts and believes that its relationship with its employees is good. 14 EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are as follows: NAME AGE POSITION - ---- --- -------- William Petty, M.D. . . . . . . 55 Chairman of the Board and Chief Executive Officer Timothy J. Seese. . . . . . . . 51 President, Chief Operating Officer and Director Gary J. Miller, Ph.D. . . . . . 50 Vice President Research and Development and Director David W. Petty. . . . . . . . . 31 Vice President, Marketing Marc Olarsch. . . . . . . . . . 35 Vice President, Sales Joel C. Phillips . . . . . . . 30 Treasurer Betty Petty . . . . . . . . . . 55 Secretary
WILLIAM PETTY, M.D. was a founder and has been Chairman of the Board and Chief Executive Officer of the Company since its inception. Dr. Petty has been a Professor at the University of Florida College of Medicine since July 1975 and served as Chairman of the Department of Orthopaedic Surgery at the University of Florida College of Medicine from July 1981 to January 1996. Dr. Petty has also served as a member of the Hospital Board of Shands Hospital, Gainesville, Florida, as an examiner for the American Board of Orthopaedic Surgery, as a member of the Orthopaedic Residency Review Committee of the American Medical Association, on the Editorial Board of the JOURNAL OF BONE AND JOINT SURGERY, and on the Executive Board of the American Academy of Orthopaedic Surgeons. He holds the Kappa Delta Award for Outstanding Research from the American Academy of Orthopaedic Surgeons. His book, TOTAL JOINT REPLACEMENT, was published in 1991. Dr. Petty received his B.S., M.S., and M.D. from the University of Arkansas. He completed his residency in Orthopaedic Surgery at the Mayo Clinic in Rochester, Minnesota. Dr. Petty does not devote his full business time to the affairs of the Company and currently devotes approximately 50% of his business time to the affairs of the Company. TIMOTHY J. SEESE has been President and Chief Operating Officer of the Company since March 1991 and a Director since April 1991. From October 1987 to December 1990, Mr. Seese served as President and Chief Executive Officer of Meritech, Inc., a development stage company involved with infection control products. From December 1986 to October 1987, he served as President of the Critical Care Monitoring Division of Becton Dickinson and Company, a manufacturer and marketer of medical devices upon the acquisition of Deseret Medical, Inc. by Becton Dickinson and Company. From January 1983 to December 1986, he served as Business Unit Director and Director, Marketing and Sales for the Critical Care Business of Deseret Medical, Inc. Division of Warner Lambert, a medical device, pharmaceutical and consumer products company. He received his B.S. in Metallurgical Engineering from the University of Cincinnati and his M.B.A. from Harvard University. GARY J. MILLER, PH.D. was a founder and has been the Vice President, Research and Development of the Company since October 1986 and a Director since March 1989. Dr. Miller was Associate Professor of Orthopaedic Surgery and Director of Research and Biomechanics at the University of Florida College of Medicine from July 1986 through July 1997. Dr. Miller received his B.S. from the University of Florida, his M.S. (Biomechanics) from Massachusetts Institute of Technology, and his Ph.D. in Mechanical Engineering (Biomechanics) from the University of Florida. He has held an Adjunct Associate professorship in the College of Veterinary Medicine's Small Animal Surgical Division since 1982 and was appointed as an Adjunct Associate Professor in the Department of Aerospace Engineering, Mechanics and Engineering Sciences in 1995. He was a consultant to FDA from 1989 to 1992 and has served as a consultant to such companies as Johnson & Johnson Orthopaedics, Dow-Corning Wright and Orthogenesis. DAVID W. PETTY has been Vice President, Marketing of the Company since April 1993. He has been employed by the Company in successive capacities in the area of Operations and Sales and Marketing for the past eight years, including as Vice President, Operations from April 1991 until April 1993. Mr. Petty received his B.A. from The University of Virginia in 1988. Mr. Petty is the son of Dr. and Ms. Petty. 15 MARC OLARSCH has been Vice President, Sales since July 1993. From 1984 to July 1993, he was employed by Carapace, the United States subsidiary of Lohmann GmbH & Co., KB, Neuwied, Germany, a manufacturer of orthopaedic casting material, surgical wound dressings and bandages. During his tenure with Carapace, he held the positions of Regional Sales Manager and National Sales Manager. He has extensive experience with group purchasing organizations, independent manufacturers' representatives, as well as company-employed territory managers and sales representatives. JOEL C. PHILLIPS has been Treasurer of the Company since March 1996 and Manager, Accounting and Management Information Systems since April 1993. From January 1991 to April 1993, Mr. Phillips was employed by Arthur Andersen & Company. He is responsible for the Company's accounting and control function, as well as the computer-based operating and management information systems. Mr. Phillips received a B.S. and a Masters in Accounting from the University of Florida and is a certified public accountant. BETTY PETTY has been Secretary of the Company since its inception and served as Treasurer and a Director from its inception until March 1996. Ms. Petty is responsible for the development of all of the Company's literature, advertising and corporate events and also serves as Human Resources Coordinator for the Company. Ms. Petty received her B.A. from the University of Arkansas at Little Rock and her M.A. in English from Vanderbilt University. Ms. Petty is the wife of Dr. Petty. The Company's officers are elected annually by the Board of Directors and serve at the discretion of the Board. 16 GLOSSARY ACETABULAR COMPONENT-An orthopaedic implant that attaches to the pelvis replacing the diseased or damaged acetabulum in total hip arthroplasty ACETABULAR CUP-An orthopaedic implant which replaces the acetabulum in total hip arthroplasty. ACETABULUM-The hip socket or cup-shaped depression on the external surface of the pelvis, in which the femoral head fits. ALLOGRAFT- a homograft between allogenic individuals ARTHROPLASTY-An operation to restore as far as possible the integrity and functionality of a joint. ARTICULAR CONTACT STRESS-A measure of force where two moving surfaces make contact; in the case of a normal human joint or an artificial joint, a measure of force between the two surfaces in contact. BIPOLAR COMPONENT/BIPOLAR PROSTHESIS-An orthopaedic hip implant used with a femoral stem and a femoral head to repair fractures of the neck of the femoral stem when the acetabulum and acetabular cartilage are in good condition. BONE REMODELING-Reshaping of the bone as a result of stresses applied, sometimes from stresses transferred to the bone by an orthopaedic implant. BONE SCREWS-Screws used to affix an orthopaedic implant to a bone. CALCAR REPLACEMENT STEM-A femoral hip implant component used when there is bone loss or destruction in the proximal medial area of the femur. CEMENT-A nonmetallic material used for filling a cavity and attaching implants to bone in joint arthroplasty. CERAMIC-A glass like material made from metallic oxides used as an alternative to metal in the ball of a ball and socket joint in hip and other large joint orthopaedic implants. COBALT CHROMIUM ALLAY-A substance primarily composed of a mixture of cobalt and chromium used for orthopaedic implants. CONSTRAINED CONDYLAR FEMORAL COMPONENT-A type of knee replacement component typically used in revision surgery which compensates for lack of ligamentous stability in the knee joint. CRUCIATE LIGAMENT SPARING FEMORAL COMPONENT-A total knee replacement component designed specifically for use in situations where the surgeon chooses to maintain a functional or partially functional posterior cruciate ligament (one of the major ligaments in the knee joint). Also called a cruciate retaining femoral component. EXTRAMEDULLARY ALIGNMENT-A method used in setting the alignment for bone preparation in knee arthroplasty. FEMORAL-Pertaining to the femur (large bone in the thigh). FEMORAL HEAD-The ball of the ball and socket hip joint. The artificial ball used to replace the natural ball of a diseased or damaged hip joint. FEMORAL STEM-An orthopaedic implant placed into the femur or thigh bone in total hip arthroplasty. FEMUR-The bone located between the hip and the knee (large bone in the thigh). 17 FINNED KEEL-A shape or geometry of part of a specific design of a tibial component which is implanted into the bone in knee arthroplasty. FIXATION METHODS-Various methods of fixating implant components of artificial joints to human bone. FORGING-A fabrication process whereby a metal is heated and hammered into a final shape resulting in a strong, dense part. HIP ARTHROPLASTY-An operation to restore as far as possible the integrity and functionality of the hip joint. HOMOGRAFT- a graft of tissue from the donor of the same species as the recipient IMPLANT-A device employed in arthroplasty. JOINT REPLACEMENT-An arthroplasty procedure where joint functionality is restored as far as possible by totally substituting an artificial joint orthopaedic implant system for a diseased or damaged joint. KNEE ARTHROPLASTY-An operation to restore as far as possible the integrity and functionality of the knee joint. LONG STEM-A femoral hip implant component used when the length of the primary component does not meet the fixation needs of the surgical situation. MODULAR-Made up of interchangeable parts which, when joined together, comprise an entire orthopaedic implant. NON-CEMENT-Description of a total orthopaedic implant component or procedure in which bone cement is not used and the metal of the component is placed directly against the bone. ORTHOPAEDICS-The medical specialty concerned with the preservation, restoration and development of form and function of the musculoskeletal system, extremities, spine and associated structures by medical, surgical and physical methods. OSTEOARTHRITIS-Degenerative joint disease occurring chiefly in older persons, characterized by degeneration of the cartilage and bone and changes in the synovial membrane. It is accompanied by pain and stiffness, particularly after prolonged activity. PATELLA-A triangular sesamoid bone situated at the front of the knee (knee cap). PATELLA TRACKING-The action of the knee cap or patella gliding over the surface of the end of the femur or thighbone when the knee bends and straightens. Also the action of a patellar component gliding over the surface of a femoral component in a knee with a total knee arthroplasty. POLYETHYLENE-A plastic polymer in the thermoplastic group compatible with tissue in the body. POLYETHYLENE CUP LINER-An ultra-high molecular weight polyethylene insert which provides the articular surface inside an acetabular cup. POROUS COATING-A coating made of metal beads applied by heat and pressure to the metal surface of an orthopaedic implant that promotes bony ingrowth in order to hold the orthopaedic implant in place. POSTERIOR STABILIZED FEMORAL COMPONENT-A knee component which fits on the end of the femur and is used in situations where the surgeon chooses to eliminate the posterior cruciate ligament, one of the major ligaments in the knee joint. The component replaces to some degree the function of the posterior cruciate ligament. PRESS FIT-A method of fixation using a wedge-fit, rather than cement. PRIMARY SYSTEMS-Orthopaedic implants which are designed to replace the natural joint. 18 RECONSTRUCTIVE IMPLANT DEVICES-Orthopaedic implants which are implanted to reconstruct major joints which have been damaged by degenerative bone disease or accident. REVISION SYSTEMS-Orthopaedic implants which are designed to replace a failed orthopaedic implant. TIBIA-The inner and larger bone of the leg below the knee (shin bone). TITANIUM-A metal used primarily in non-cemented applications in joint arthroplasty. TOTAL JOINT ARTHROPLASTY-An operation to replace a diseased or damaged joint of the body with artificial implants usually to reduce pain and restore function in the joint. TOTAL JOINT IMPLANTS-Implants used in total joint arthroplasty. TRAPEZOID KEEL WITH STEM AUGMENTATION-A geometry of a specific design of tibial component that allows for attaching space-filling metal blocks and stems to fill bone defects in the tibia in knee arthroplasty. UNICOMPARTMENTAL IMPLANTS-Implants designed to resurface only one compartment of a human knee. UNIPOLAR PROSTHESIS-A large hemispherical implant component which is attached to a femoral stem in a partial hip arthroplasty ITEM 2. PROPERTIES The Company maintains its corporate headquarters and a warehouse for its business operations, consisting of approximately 12,000 square feet, located in Gainesville, Florida, under a two-year lease which commenced on July 1, 1996. The lease does not provide for any renewal of the term thereof. The Company's monthly lease payments are approximately $5,523, for an annual lease payment of approximately $66,276, which amounts do not include the Company's share of applicable sales taxes related to rental payments, county real estate taxes and public utility charges. The Company also owns a total of approximately eight acres of land in Gainesville, Florida. The Company anticipates that it will require more space in connection with the expansion of its business. The Company is currently constructing a new facility on the land to be used by the Company for principal executive offices, research and development laboratories and manufacturing. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources". ITEM 3. LEGAL PROCEEDINGS In the ordinary course of business, the Company is, from time to time, a party to pending and threatened legal proceedings, primarily involving claims for product liability. The Company believes that the outcome of such legal actions and proceedings will not have a material adverse effect on the Company. On April 3, 1995, Joint Medical Products, Inc. ("Joint Medical") commenced an action (the "Action") against the Company, and many of its competitors, alleging the infringement of a United States patent held by Joint Medical entitled "Ball and Socket Bearing for Artificial Joint" (the "Ball and Socket Patent"). As part of the Action, Joint Medical alleged that the Company's manufacture and sale of certain orthopaedic implants was an infringement of the Ball and Socket Patent. The Company and Joint Medical entered into a Tolling Agreement, effective as of April 3, 1995, pursuant to which the parties agreed that the Action would be dismissed without prejudice as to the Company. The Tolling Agreement further provided that neither the Company nor Joint Medical would commence any further action regarding the Company's alleged infringement of the Ball and Socket Patent until the rendering of a decision by the Board of Patent Appeals and Interferences regarding such alleged patent 19 infringement. In accordance with the Tolling Agreement, the Action was dismissed as against the Company, among others, as of July 28, 1995. During 1996, the Board of Patent Appeals and Interferences ruled in Joint Medical's favor and allowed the filing of claims to continue. On January 28, 1997, Joint Medical filed a complaint in the U.S. District Court for the District of Connecticut against the Company seeking injunctive relief and unspecified monetary damages. The Company believes, based upon a reasoned opinion of patent counsel, Fish and Richardson P.C., that Joint Medical's claims are without merit and that its orthopaedic implants do not infringe upon the Ball and Socket Patent. In December 1997, the complaint was dismissed without prejudice. The product line claimed to be in violation of the patent is the MCS/registered trademark/ Porous Acetabular Shell which represented approximately 11%, 7% and 6% of the Company's revenues for the years ended December 31, 1995, 1996 and 1997, respectively. A finding that such product line infringes upon the Ball and Socket Patent could materially and adversely affect the Company's business operations, as well as expose the Company to significant monetary damages. On August 21, 1997, Oxford Medical, Inc., a competitor of the Company, filed a complaint in the United States District Court in New Jersey alleging that the Company induced several of the competitor's sales agents to breach their employment agreements when the Company contracted with these agents to sell the Company's products. The plaintiff is seeking an unspecified monetary award and punitive damages in the amount to be determined at trial. The plaintiff also sought to enjoin the Company from soliciting plaintiff's employees, interfering with their customer relationships and selling products to their former customers. The Company believes that the allegations are without merit. At a hearing in the Superior Court of New Jersey on October 8, 1997, the judge denied the plaintiff's request for injuctive relief. Litigation is currently proceeding. In December 1997, Biomet, Inc., a competitor of the Company, filed a complaint against one of the competitor's former sales agents in the United States District Court in Oregon. The competitor petitioned the court to include the Company in the complaint alleging liability for actions of the sales agent and interference by the Company with a contract between the competitor and the sales agent. The court refused to allow the Company to be included in the complaint, but affirmed that the competitor could name the Company in a separate complaint. Without admitting any wrongdoing, the Company and the agent settled the dispute through mediation in February 1998, and obtained a release of all claims. As part of the settlement, the Company agreed to pay $20,000 to the agent for legal expenses and an additional $55,000 in enhanced sales commissions to the agent over an indeterminate period of time if the commissions are earned. The Company also agreed not to hire as a new sales agent any of the competitor's exclusive distributors or sales representatives whose territory is west of the Mississippi in the continental United States for a period of four months. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the Company's security holders during the fourth quarter of the fiscal year ended December 31, 1997. 20 PART II. - --------- ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Company's Common Stock has traded on the Nasdaq National Market under the symbol "EXAC" since May 30, 1996, the date of the IPO. The following table sets forth, for the periods indicated, the high and low sales price of the Common Stock, as reported on the Nasdaq National Market: HIGH LOW ---- --- 1996 - ---- Second Quarter (beginning May 30, 1996) $11.00 $8.00 Third Quarter 8.13 5.00 Fourth Quarter 12.25 7.00 1997 - ---- First Quarter $10.00 $6.50 Second Quarter 7.75 6.00 Third Quarter 7.00 5.56 Fourth Quarter 6.88 3.88 1998 - ---- First Quarter (through February 20, 1998) $ 6.00 $5.00 No cash dividends have been paid to date by the Company on its Common Stock. The Company intends to retain all future earnings for the operation and expansion of its business and does not anticipate the payment of dividends in the foreseeable future. Any future determination as to the payment of cash dividends will depend upon a number of factors, including future earnings, results of operations, capital requirements, the Company's financial condition and any restrictions under credit agreements existing from time to time, as well as such other factors as the Board of Directors may deem relevant. As of February 20, 1998, the Company had approximately 231 stockholders of record. There are in excess of 2,000 beneficial owners of the Company's Common Stock. After deducting expenses of $2,062,090 of the IPO, the Company received $12,657,910 in net proceeds from the IPO. Set forth below is information concerning the actual use of such proceeds. DIRECT OR INDIRECT PAYMENTS DIRECT OR INDIRECT PAYMENTS TO RELATED PARTIES (1) TO OTHERS --------------------------- --------------------------- Purchase and installation of machinery and equipment $ - $2,896,048 Repayment of indebtedness $ - $4,942,268 Temporary Investments (2) $ - $2,044,961 Other Purposes (3) $ - $2,774,633
1 - Includes direct or indirect payments to directors, officers, general partners of the Company, or their associates; to persons owning ten percent or more of any class of equity securities of the Company; and to affiliates of the Company. 2 - Includes daily maturing fund investments and overnight repurchase agreements totaling $2,044,961. 3 - Includes increase of inventory held for sale of $2,774,663. 21 ITEM 6. SELECTED FINANCIAL DATA The selected financial data set forth below has been derived from the audited financial statements of the Company. This data should be read in conjunction with the financial statements, the notes thereto and Management's Discussion and Analysis of Results of Operations and Financial Condition included elsewhere herein. YEAR ENDED DECEMBER 31, --------------------------------------------------------------------- 1993 1994 1995 1996 1997 ---- ---- ---- ---- ---- STATEMENT OF OPERATIONS DATA: Net sales $ 4,675,505 $ 5,355,804 $ 9,118,075 $13,839,976 $17,648,060 Cost of goods sold 1,360,025 1,586,633 2,995,955 4,683,875 5,895,302 Gross profit 3,315,480 3,769,171 6,122,120 9,156,101 11,752,758 Operating expenses Sales and marketing 1,405,043 1,500,514 2,326,286 3,525,834 4,911,906 General and administrative 594,645 750,669 1,033,319 1,346,304 1,677,878 Research and development 488,029 597,812 722,118 750,256 937,988 Royalties 11,686 14,767 210,127 571,807 855,415 Depreciation and amortization 142,481 224,624 350,612 509,236 813,200 Total operating expenses 2,641,884 3,088,386 4,642,462 6,703,437 9,196,387 Income from operations 673,596 680,785 1,479,658 2,452,664 2,556,371 Other income (expense): Interest income (expense), net (137,448) (158,288) (273,110) 12,336 200,720 Income from sub-license agreement, net - - 170,534 100,000 - Equity in net loss of subsidiary - - (22,361) (59,486) (183,909) Income before provision for income taxes 536,148 522,497 1,354,721 2,505,514 2,573,182 Provision for income taxes 182,709 176,369 527,793 950,906 997,188 Net income 353,439 346,128 826,928 1,554,608 1,575,994 Preferred stock dividends 8,194 19,298 22,798 10,154 - Net income available to common shareholders 345,245 326,830 804,130 1,544,454 1,575,994 Basic earnings per common share * $0.12 $0.11 $0.27 $0.38 $0.32 Diluted earnings per common share * $0.12 $0.11 $0.27 $0.37 $0.32
AS OF DECEMBER 31, ------------------------------------------------------------------ BALANCE SHEET DATA: 1993 1994 1995 1996 1997 ---- ---- ---- ---- ---- Total current assets $4,128,169 $4,781,430 $ 8,411,133 $17,358,859 $20,334,332 Total assets 5,035,368 6,296,745 10,620,750 1,107,072 27,154,836 Total current liabilities 1,940,097 1,896,488 4,476,374 2,182,278 2,464,461 Total long-term debt, net of current portion 10,928 684,903 1,002,309 18,144 3,912,835 Total liabilities 2,509,605 3,210,993 6,452,479 2,527,297 6,811,244 Total preferred stock 241,220 241,220 291,220 - - Total common shareholders' equity 2,284,543 2,844,532 3,877,051 18,579,775 20,343,592 * Earnings per share for years prior to 1997 have been restated per SFAS 128 "Earnings Per Share"
22 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The following discussion should be read in conjunction with the financial statements and related notes appearing elsewhere herein. The Company develops, manufactures, markets and sells orthopaedic implant devices and related surgical instrumentation to hospitals and physicians. Sales of hip implant products historically accounted for most of the Company's revenues and profits; however, since 1995, sales of knee implant products have accounted for an increasing portion of its revenues and profits. The Company anticipates that sales of knee implant products will continue to account for an increasing portion of its revenues and profits. Furthermore, the Company anticipates that overall profit margins in the hip implant market may decline as a result of increasing price competition. The following table sets forth for the periods indicated information with respect to the number of units of the Company's products sold and the dollar amount and percentages of revenues derived from such sales (dollars in thousands):
EXACTECH, INC. SALES SUMMARY BY PRODUCT LINE ($'000'S) YEAR ENDED ---------------------------------------------------------------------------------------- DECEMBER 31, 1995 DECEMBER 31, 1996 DECEMBER 31, 1997 HIP PRODUCTS UNITS$ $ % UNITS $ % UNITS $ % - ------------ ------ - - ----- - - ----- - - Cemented 5,207 2,567 28.2% 5,370 2,339 16.9% 5,117 2,288 13.0% Porous Coated 4,321 1,931 21.2% 5,354 1,932 14.0% 4,589 1,735 9.8% Bipolar Prosthesis 846 460 5.0% 835 459 3.3% 890 417 2.4% Revision - - - 4 9 0.1% 54 126 0.7% --------------------------- --------------------------- ---------------------------- Total Hip Products 10,374 4,958 54.4% 11,563 4,739 34.3% 10,650 4,566 25.9% KNEE PRODUCTS Cemented Cruciate Sparing 3,220 1,932 21.2$ 9,174 4,515 32.6% 12,550 5,652 32.0% Cemented Posterior Stabilized 1,233 726 7.9% 3,536 1,969 14.2% 7,045 4,411 25.0% Porous Coated 571 811 8.9% 1,315 1,775 12.8% 1,428 1,502 8.5% Revision - - - - - - 2,313 847 4.8% --------------------------- --------------------------- ---------------------------- Total Knee Products 5,024 3,469 38.0% 14,025 8,259 59.6% 23,336 12,412 70.3% Instrument Sales and Rental 644 7.1% 773 5.6% 602 3.4% Miscellaneous 47 0.5% 69 0.5% 68 0.4% =================== ==================== =================== TOTAL 9,118 100.0% 13,840 100.0% 17,648 100.0%
RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996 Net sales increased by $3,808,084, or 28%, to $17,648,060 in the year ended december 31, 1997, from $13,839,976 in the year ended December 31, 1996. Domestic sales increased 25%, to $14,596,909 in the year ended December 31, 1997, from $11,715,120 in the year ended December 31, 1996. International sales increased 44%, to $3,051,151 in the year ended December 31, 1997, from $2,124,856 in the year ended December 31, 1996. As a percentage of sales, international sales increased from 15% in the year ended December 31, 1996, to 17% in the year ended December 31, 1997. The increase in net sales resulted primarily from increased unit volume of the company's knee implant products. Sales of knee implant products for the year ended december 31, 1997, increased by 66% on a unit basis and by 50% on a dollar basis from the year ended december 31, 1996, as a result of the continued full-scale marketing of the Optetrak knee system and the release of the revision knee components. Sales of hip implant products for the year ended december 31, 1997 decreased by 8% on a unit basis and by 4% on a dollar basis from the year ended december 31, 1996. The modest average selling price increases in 23 the hip implant products are the result of sales of the higher priced AuRA hip system revision components. Hip and knee instrument sales and rentals decreased to $602,082 in the year ended December 31, 1997, from $772,554 in the year ended December 31, 1996 as international knee instrument sales decreased. Gross profit increased by $2,596,657, or 28%, to $11,752,758 in the year ended December 31, 1997, from $9,156,101 in the year ended December 31, 1996. As a percentage of sales, gross profit increased to 67% in the year ended December 31, 1997, from 66% in the year ended December 31, 1996. The increase was primarily the result of a reduction in the unit costs of the company's knee products as production volumes increased. Total operating expenses increased by $2,492,950, or 37%, to $9,196,387 in the year ended December 31, 1997, from $6,703,437 in the year ended December 31, 1996. Operating expenses increased as a percentage of sales in the year ended December 31, 1997, to 52% from 48% in the year ended December 31, 1996. Sales and marketing expenses increased by $1,386,072, or 39%, to $4,911,906 in the year ended December 31, 1997, from $3,525,834 in the year ended December 31, 1996. As a percentage of sales, sales and marketing expenses increased to 28% in the year ended December 31, 1997 as compared to 26% in the year ended December 31, 1996. Sales and marketing expenses increased as a percentage of sales largely due to enhanced commission programs used to maintain existing and attract new agents. The Company's sales and marketing expenses are largely variable costs based on sales levels, with the largest component being commissions. General and administrative expenses increased by $331,574, or 25%, to $1,677,878 in the year ended December 31, 1997, from $1,346,304 in the year ended December 31, 1996. As a percentage of sales, general and administrative expenses remained relatively constant at 10% in the years ended December 31, 1996 and 1997. Total general and administrative expenses increased on a dollar basis during the most recent year as compared to the prior year primarily as a result of increased legal expenses associated with ongoing legal proceedings. See "Item 3. Legal Proceedings." Research and development expenses increased by $187,732, or 25%, to $937,988 in the year ended December 31, 1997 from $750,256 in the year ended December 31, 1996, as product development expenses for the revision and modular hip systems increased. As a percentage of sales, research and development expenses remained relatively constant at 5% in the years ended December 31, 1996 and 1997. Depreciation and amortization expenses increased to $813,200 in the year ended December 31, 1997, from $509,236 in the year ended December 31, 1996. Depreciation and amortization expenses increased in 1997 as a result of the increased investment in hip and knee instrumentation. During the year ended December 31, 1997, $1,951,104 of such instruments were placed in service and capitalized, resulting in the increase in depreciation and amortization expenses. Royalty expenses increased by $283,608, or 50%, to $855,415 in the year ended December 31, 1997, from $571,807 in the year ended December 31, 1996, primarily as a result of growth in sales of knee implant products which incur a higher royalty rate. In 1997, the Company recognized royalty expenses of $474,357 in connection with the license agreement with the Hospital for Special Surgery and $381,058 in connection with other consulting and license agreements. As a percentage of sales, royalty expenses were 5% and 4% in the years ended December 31, 1997 and 1996, respectively. The Company's income from operations increased by $103,707, or 4%, to $2,556,371 in the year ended December 31, 1997, from $2,452,664 in the year ended December 31, 1996. The increase was primarily attributable to the increase in sales and gross profits, partially offset by the increase in operating expenses. The Company recognized net interest income of $200,720 in the year ended December 31, 1997, as compared to $12,336 in the year ended December 31, 1996. Interest income of $275,112 for the year ended December 31, 1997, was offset by $74,392 of interest expense as the proceeds of the Company's IPO consummated in June 1996 were invested in short-term commercial paper and government backed securities. The outstanding principal balance of the Company's debt averaged approximately $510,325 and $1,427,000 during 1997 and 1996, respectively. The average outstanding balance decreased in 1997 because approximately $3,900,000 was outstanding on the IRB loan only for a period of a month and a half, whereas, the Company averaged approximately $3,000,000 in outstanding debt for the first five months of 1996. The weighted average interest 24 rate on such debt was 4.32% and 8.56% for 1997 and 1996, respectively. In July 1995, the Company purchased a 50% interest in Techmed, its Italian distributor. Prior to September 1997, the investment in the subsidiary was accounted for using the equity method with the Company's share of the subsidiary's net earnings (loss) included as a separate item in the statement of income. During September 1997, the Company wrote off its investment in the subsidiary and reserved for trade receivables deemed uncollectible. Income before provision for income taxes increased by $67,668, or 3%, to $2,573,182 in the year ended December 31, 1997, from $2,505,514 in the year ended December 31, 1996. The provision for income taxes was $997,188 in the year ended December 31, 1997, compared to $950,906 in the year ended December 31, 1996. All outstanding shares of the Company's preferred stock were either converted to Common Stock or redeemed in the year ended December 31, 1996. As a result, there were no preferred stock dividends for the year ended December 31, 1997, as compared to $10,154 in the year ended December 31, 1996. As a result, the Company had net income of $1,575,994 in the year ended December 31, 1997, compared to $1,544,454 in the year ended December 31, 1996, a 2% increase. YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995 Net sales increased by $4,721,901, or 52%, to $13,839,976 in the year ended December 31, 1996, from $9,118,075 in the year ended December 31, 1995. Domestic sales increased 40%, to $11,715,120 in the year ended December 31, 1996, from $8,374,375 in the year ended December 31, 1995. International sales increased 186%, to $2,124,856 in the year ended December 31, 1996, from $743,700 in the year ended December 31, 1995. As a percentage of sales, international sales increased from 8% in the year ended December 31, 1995, to 15% in the year ended December 31, 1996. The increase in net sales resulted primarily from increased unit volume of the Company's knee implant products. Sales of knee implant products for the year ended December 31, 1996, increased by 179% on a unit basis and by 138% on a dollar basis from the year ended December 31, 1995, as a result of the continued full-scale marketing of the Optetrak knee system. Sales of hip implant products for the year ended December 31, 1996 increased by 11.5% on a unit basis and decreased by 4.4% on a dollar basis from the year ended December 31, 1995. The average selling price reductions in the hip system are the result of increased unit sales of lower priced products including the MCS screw and the Opteon medium demand stem. Specifically, the MCS screw system accounted for 901 units of the 1,189 hip units increase in 1996 sales while providing only 3% of hip system sales. Hip and knee instrument sales and rentals increased to $772,554 in the year ended December 31, 1996, from $644,316 in the year ended December 31, 1995 as international knee instrument sales increased. Gross profit increased by $3,033,981, or 50%, to $9,156,101 in the year ended December 31, 1996, from $6,122,120 in the year ended December 31, 1995. As a percentage of sales, gross profit decreased to 66% in the year ended December 31, 1996, from 67% in the year ended December 31, 1995. The decrease was primarily the result of an increased mix of international sales. International sales are typically at lower gross profit margins. However, the Company does not incur commission expense on such sales. Total operating expenses increased by $2,060,975, or 44%, to $6,703,437 in the year ended December 31, 1996, from $4,642,462 in the year ended December 31, 1995. Operating expenses decreased as a percentage of sales in the year ended December 31, 1996, to 48% from 51% in the year ended December 31, 1995. Sales and marketing expenses increased by $1,199,548, or 52%, to $3,525,834 in the year ended December 31, 1996, from $2,326,286 in the year ended December 31, 1995. As a percentage of sales, sales and marketing expenses remained relatively constant between the year ended December 31, 1996 and the year ended December 31, 1995 at 26% and 25%, respectively. The Company's sales and marketing expenses are largely variable costs based on sales levels, with the largest component being commissions. General and administrative expenses increased by $312,985, or 30%, to $1,346,304 in the year ended December 31, 1996, from $1,033,319 in the year ended December 31, 1995. As a percentage of sales, general and administrative expenses decreased to 10% in the year ended December 31, 1996, from 11% in the year ended December 31, 1995. Total general and administrative expenses increased on a dollar basis during the most recent 25 year as compared to the prior year primarily as a result of additional product liability insurance expense resulting from increased sales and the hiring of additional staff. Research and development expenses increased by $28,138, or 4%, to $750,256 in the year ended December 31, 1996 from $722,118 in the year ended December 31, 1995, as product development expenses for the revision knee and hip systems increased while product development expenses for the primary knee systems decreased. Research and development expenses were 5% and 8% of sales for 1996 and 1995, respectively. Depreciation and amortization expenses increased to $509,236 in the year ended December 31, 1996, from $350,612 in the year ended December 31, 1995. Depreciation and amortization expenses increased in the most recent year as a result of the increased investment in hip and knee instrumentation. During the year ended December 31, 1996, $1,332,759 of such instruments were placed in service and capitalized, resulting in the increase in depreciation and amortization expenses. Royalty expenses increased by $361,680, to $571,807 in the year ended December 31, 1996, from $210,127 in the year ended December 31, 1995, primarily as a result of growth in sales of knee implant products which incur a higher royalty rate. In 1996, the Company accrued royalty expenses of $307,801 in connection with the license agreement with the Hospital for Special Surgery and $187,773 in connection with consulting agreements. As a percentage of sales, royalty expenses were 4.1% and 2.3% in the years ended December 31, 1996 and 1995, respectively. The Company's income from operations increased by $973,006, or 66%, to $2,452,664 in the year ended December 31, 1996, from $1,479,658 in the year ended December 31, 1995. The increase was primarily attributable to the increase in sales and gross profits, partially offset by the increase in operating expenses. The Company recognized net interest income of $12,336 in the year ended December 31, 1996, as compared to net interest expense of $273,110 in the year ended December 31, 1995. Interest expense of $239,623 for the year ended December 31, 1996, was offset by $251,959 of interest income as the proceeds of the Company's IPO consummated in June 1995 were invested in short-term commercial paper and government backed securities. The outstanding principal balance of the Company's debt averaged approximately $1,427,000 and $2,900,000 during 1996 and 1995, respectively. The weighted average interest rate on such debt was 8.56% and 9.87% for 1996 and 1995, respectively. In July 1995, the Company purchased a 50% interest in Techmed, its Italian distributor. The investment has been accounted for by the equity method. Included in other income and expenses for the year ended December 31, 1996, are $59,486, the Company's equity share in the net loss of Techmed and the recognition of sublicense income of $100,000. The Company entered into a sublicense agreement (the "Sublicense Agreement") with SDP pursuant to which the Company received a $250,000 license fee in 1995. Under the terms of the sublicense agreement, an advance on potential royalties in the amount of $100,000 was paid to the Company. The $100,000 advance is non-refundable to the extent that the sub-licensee does not receive FDA clearance to market the product. During 1996, the Company was notified by the sublicensee that initial applications for FDA clearance to market had been denied. Accordingly, the $100,000 was recognized as sublicense income because the $100,000 was fully earned by the Company. Income before provision for income taxes increased by $1,150,793, or 85%, to $2,505,514 in the year ended December 31, 1996, from $1,354,721 in the year ended December 31, 1995. The provision for income taxes was $950,906 in the year ended December 31, 1996, compared to $527,793 in the year ended December 31, 1995. All outstanding shares of the Company's preferred stock were either converted to Common Stock or redeemed in the year ended December 31, 1996. As a result, preferred stock dividends for the year ended December 31, 1996, decreased to $10,154 from $22,798 in the year ended December 31, 1995. As a result, the Company had net income of $1,544,454 in the year ended December 31, 1996, compared to $804,130 in the year ended December 31, 1995, a 92% increase. 26 LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- Since inception, the Company financed its operations through borrowings, the sale of equity securities and cash flow from operations. At December 31, 1997, the Company had working capital of $17,869,871 compared to $15,176,581 at December 31, 1996. As a result of operating, investing and financing activities, cash and cash equivalents at December 31, 1997 increased to $4,176,293 from $3,992,442 at December 31, 1996. The increase in working capital is primarily the result of the proceeds from an industrial revenue bond financing discussed below, the proceeds of which are being used to finance the Company's new facility. As of December 31, 1997, the Company had expended $1,371,545 in costs associated with the construction of the facility. The Company is committed to approximately $2,028,000 in remaining construction costs associated with the completion of the new facility as of December 31, 1997. The Company maintains a $3,000,000 credit facility with Merrill Lynch Business Financial Services, Inc. which is secured by accounts receivable and inventory and expires in July 1998. At December 31, 1997, there was no amount outstanding under the line of credit. The Company believes that funds from operations, the remaining proceeds of the IPO and borrowings under its existing credit facilities will be sufficient to satisfy its contemplated cash requirements for the following twelve months. OPERATING ACTIVITIES Operating activities used net cash of $1,625,239 in the year ended December 31, 1997 as compared to providing net cash of $8,951 in the year ended December 31, 1996. The primary reason for the change was the larger increase in inventory during 1997 of $3,072,123 as compared to the $1,303,401 increase in inventory that occurred during 1996. Another factor resulting in more cash being used in operating activities for the year ended December 31, 1997, was the growth in trade receivables. Cash required as a result of the increase in trade receivables was $1,298,132 during 1997, as compared to $660,735 during 1996. FINANCING ACTIVITIES In November 1997, the Company entered into a $3,900,000 industrial revenue bond financing with the City of Gainesville, Florida (the "City"), pursuant to which the City issued its industrial revenue bonds and loaned the proceeds to the Company. The bonds are secured by an irrevocable letter of credit issued by a bank. The $3,900,000 credit facility requires the payment by the Company of principal installments as follows: $300,000 per year from 2000 through 2006; $200,000 per year from 2007 through 2013; and $100,000 per year from 2014 through 2017. Monthly interest payments are based on an adjustable rate as determined by the bonds remarketing agent based on market rate fluctuations (4.3% as of December 31, 1997). The proceeds of the credit facility are being used to finance construction of the new facility. The Company's obligations to the bank issuing the letter of credit are secured by the land and improvements comprising the facility. Net cash provided by financing activities decreased from $9,017,468 during the year ended December 31, 1996, to $3,892,522 in the year ended December 31, 1997. Net Cash provided by financing activities for the year ended December 31, 1997 reflects the proceeds of from the $3,900,000 industrial revenue bond financing with the City while net cash provided by financing activities for the year ended December 31, 1996 reflects the net proceeds of $12,657,910 from the Company's IPO consummated in June 1996. In 1997, the Company also paid $118,935 of debt issuance costs associated with the industrial revenue bond financing which will be recognized as expense over the term of the loan. INVESTING ACTIVITIES The Company invested the remaining proceeds of the industrial revenue bond financing and the IPO in short-term investments and government backed securities. As of December 31, 1997, $3,467,072 was invested in commercial paper and discount notes yielding approximately 5% and $1,763,996 was invested in Merrill Lynch's Treasury Fund and Money Market Fund comprised of commercial paper and government backed securities yielding a return of approximately 5%. During the year ended December 31, 1997, net cash used in investing activities decreased to $2,083,432 as compared to $5,235,956 in the year ended December 31, 1996. This decrease was primarily due to the maturity of $3,083,788 of short term investments in 1997 and reduced purchases of short term investments of $1,335,740 in 1997 as compared to $3,083,788 in 1996. 27 RECENT ACCOUNTING PRONOUNCEMENTS - -------------------------------- See Note 2 of Notes to Financial Statements for information concerning recent accounting pronouncements. CAUTIONARY STATEMENT RELATING TO FORWARD LOOKING STATEMENTS - ----------------------------------------------------------- The foregoing Management's Discussion and Analysis contains various "forward looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 which represent the Company's expectations or beliefs concerning future events, including, but not limited to, statements regarding growth in sales of the Company's products, profit margins and the sufficiency of the Company's cash flow for its future liquidity and capital resource needs. These forward looking statements are further qualified by important factors that could cause actual results to differ materially from those in the forward looking statements. These factors include, without limitation, the effect of competitive pricing, the Company's dependence on the ability of its third-party manufacturers to produce components on a basis which is cost-effective to the Company, market acceptance of the Company's products and the effects of governmental regulation. Results actually achieved may differ materially from expected results included in these statements as a result of these or other factors. 28 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
TABLE OF CONTENTS PAGE Independent Auditors' Report 30 Balance Sheets as of December 31, 1996 and 1997 31 Statements of Income for the Years Ended December 31, 1995, 1996 and 1997 32 Statement of Changes in Shareholders' Equity for the Years Ended December 31, 1995, 1996 and 1997 33 Statements of Cash Flows for the Years Ended 34 December 31, 1995, 1996 and 1997 Notes to Financial Statements for the Years Ended 35 December 31, 1995, 1996 and 1997
29 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders of Exactech, Inc. Gainesville, Florida We have audited the accompanying balance sheets of Exactech, Inc. (the "Company") as of December 31, 1996 and 1997, and the related statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. Our audits also included the financial statement schedule listed in the Index at Item 14. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of Exactech, Inc. as of December 31, 1996 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. February 13, 1998 30 EXACTECH, INC.
BALANCE SHEETS DECEMBER 31, 1996 AND 1997 - ---------------------------------------------------------------------------------------------------------------- ASSETS 1996 1997 ---- ---- CURRENT ASSETS: Cash and cash equivalents $ 3,992,442 $ 4,176,293 Short-term investments 3,083,788 1,335,740 Trade receivables (net of allowance of $37,164 and $161,046) 2,462,864 3,760,996 Refundable income taxes 259,778 Prepaid expenses and other assets 194,009 103,646 Inventories 7,625,756 10,697,879 ------------ ------------ Total current assets 17,358,859 20,334,332 PROPERTY AND EQUIPMENT: Land 263,301 263,301 Machinery and equipment 1,424,134 1,636,587 Surgical instruments 2,750,260 4,568,489 Furniture and fixtures 115,089 123,014 Construction in progress 1,371,545 ------------ ------------ Total 4,552,784 7,962,936 Accumulated depreciation (1,322,392) (1,984,249) ------------ ------------ Net property and equipment 3,230,392 5,978,687 OTHER ASSETS: Biologic products license 106,494 Investment in subsidiary 100,638 Deferred financing costs, net 21,296 136,436 Advances and deposits 2,442 175,752 Patents and trademarks, net of accumulated amortization 393,445 423,135 ------------ ------------ Total other assets 517,821 841,817 TOTAL ASSETS $ 21,107,072 $ 27,154,836 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 1,430,321 $ 1,611,775 Income taxes payable 40,986 Current portion of long-term debt and capital lease obligations 32,861 4,894 Commissions payable 373,900 473,028 Royalties payable 168,387 258,959 Other liabilities 135,823 115,805 ------------ ------------ Total current liabilities 2,182,278 2,464,461 DEFERRED INCOME TAXES 326,875 433,948 LONG-TERM DEBTAND CAPITAL LEASE OBLIGATIONS 18,144 3,912,835 NET OF CURRENT PORTION ------------ ------------ Total liabilities 2,527,297 6,811,244 CONTINGENCIES (Notes 5, 6 and 7) SHAREHOLDERS' EQUITY: Common stock, $.01 par value; 15,000,000 shares authorized, 48,604 49,047 4,860,434 and 4,904,663 shares issued and outstanding Additional paid-in capital 14,815,588 15,002,968 Retained earnings 3,715,583 5,291,577 ------------ ------------ Total shareholders' equity 18,579,775 20,343,592 ------------ ------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 21,107,072 $ 27,154,836 ------------ ------------
SEE NOTES TO AUDITED FINANCIAL STATEMENTS 31 EXACTECH, INC.
STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 - --------------------------------------------------------------------------------------- 1995 1996 1997 ------------ ------------ ------------ NET SALES $ 9,118,075 $ 13,839,976 $ 17,648,060 COST OF GOODS SOLD 2,995,955 4,683,875 5,895,302 ------------ ------------ ------------ Gross profit 6,122,120 9,156,101 11,752,758 OPERATING EXPENSES: Sales and marketing 2,326,286 3,525,834 4,911,906 General and administrative 1,033,319 1,346,304 1,677,878 Research and development 722,118 750,256 937,988 Depreciation and amortization 350,612 509,236 813,200 Royalties 210,127 571,807 855,415 ------------ ------------ ------------ Total operating expenses 4,642,462 6,703,437 9,196,387 ------------ ------------ ------------ INCOME FROM OPERATIONS 1,479,658 2,452,664 2,556,371 OTHER INCOME (EXPENSE): Interest income (expense) (273,110) 12,336 200,720 Income from sub-license agreement, net 170,534 100,000 Equity in net loss of subsidiary (22,361) (59,486) (183,909) ------------ ------------ ------------ INCOME BEFORE PROVISION FOR 1,354,721 2,505,514 2,573,182 INCOME TAXES PROVISION FOR INCOME TAXES Current 443,599 837,831 890,115 Deferred 84,194 113,075 107,073 ------------ ------------ ------------ 527,793 950,906 997,188 ------------ ------------ ------------ NET INCOME 826,928 1,554,608 1,575,994 PREFERRED STOCK DIVIDENDS 22,798 10,154 ------------ ------------ ------------ NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 804,130 $ 1,544,454 $ 1,575,994 ============ ============ ============ BASIC EARNINGS PER COMMON SHARE $ 0.27 $ 0.38 $ 0.32 ============ ============ ============ DILUTED EARNINGS PER COMMON SHARE $ 0.27 $ 0.37 $ 0.32 ------------ ------------ ------------
SEE NOTES TO AUDITED FINANCIAL STATEMENTS 32 EXACTECH, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 - ----------------------------------------------------------------------------------------------------------------- ADDITIONAL TOTAL COMMON STOCK PAID-IN RETAINED SHAREHOLDERS' SHARES AMOUNT CAPITAL EARNINGS EQUITY ------ ------ ------- -------- ------- Balance, December 31, 1994 2,913,230 $ 29,132 $ 1,448,401 $ 1,366,999 $ 2,844,532 Issuance of common stock 15,548 156 104,244 104,400 Exercise of stock options 25,125 251 82,098 82,349 Tax benefit from exercise 41,640 41,640 of stock options Dividends on preferred stock (22,798) (22,798) Net income 826,928 826,928 --------- -------- ----------- ------------ ----------- Balance, December 31, 1995 2,953,903 29,539 1,676,383 2,171,129 3,877,051 Issuance of common stock 1,840,000 18,400 12,639,510 12,657,910 Issuance of common stock on 38,874 388 279,612 280,000 conversion of subordinated debt Issuance of common stock on 26,907 269 214,991 215,260 conversion of preferred stock Dividends on preferred stock (10,154) (10,154) Exercise of stock options 750 8 4,992 5,000 Exercise of warrants 100 100 Net income 1,554,608 1,554,608 --------- -------- ----------- ------------ ----------- Balance, December 31, 1996 4,860,434 48,604 14,815,588 3,715,583 18,579,775 Exercise of stock options 44,229 443 146,340 146,783 Tax benefit from exercise 41,040 41,040 of stock options Net income 1,575,994 1,575,994 --------- -------- ----------- ------------ ----------- Balance, December 31, 1997 4,904,663 $ 49,047 $15,002,968 $ 5,291,577 $20,343,592 --------- -------- ----------- ------------ -----------
SEE NOTES TO AUDITED FINANCIAL STATEMENTS 33 EXACTECH, INC.
STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 - --------------------------------------------------------------------------------------------------------------- 1995 1996 1997 ------------ ------------ ------------ OPERATING ACTIVITIES: Net income $ 826,928 $ 1,554,608 $ 1,575,994 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Depreciation and amortiation 350,612 509,236 813,200 Loss on disposal of equipment 50,530 Equity in net loss of subsidiary 22,361 59,486 183,909 Deferred income taxes 84,194 113,075 107,073 Increase in trade receivables (1,107,845) (660,735) (1,298,132) Increase in inventories (2,636,627) (1,303,401) (3,072,123) Decrease (increase) in prepaids and other assets 10,509 (74,483) (79,152) Increase (decrease) in income taxes payable 385,799 (235,005) (300,764) Increase (decrease) in accounts payable 722,625 (9,277) 181,454 Increase in other liabilities 384,610 55,447 212,772 ------------ ------------ ------------ Net cash (used in) provided by operating activities (956,834) 8,951 (1,625,239) ------------ ------------ ------------ INVESTING ACTIVITIES: Purchase of biologic products license (106,494) Purchases of property and equipment (842,937) (1,742,768) (3,572,840) Maturities of short-term investments 3,083,788 Purchases of short-term investments (3,083,788) (1,335,740) Investment in subsidiary (90,348) (92,137) (83,271) Cost of patents and trademarks (41,487) (317,263) (68,875) ------------ ------------ ------------ Net cash used in investing activities (974,772) (5,235,956) (2,083,432) ------------ ------------ ------------ FINANCING ACTIVITIES: Proceeds (repayments) under line of credit 1,144,266 (1,844,266) Proceeds from issuance of debt 1,300,000 284,763 3,900,000 Principal payments on debt (925,861) (1,521,980) (27,466) Proceeds (repayments) of subordinated debentures 260,000 (480,000) Principal payments on capital lease obligations (8,711) (7,945) (5,810) Proceeds from issuance of common stock 162,020 14,725,100 144,733 Payment of offering costs (10,000) (2,052,090) Payment of debt issuance costs (82,747) (118,935) Preferred dividends paid (22,798) (10,154) Proceeds (repayments) of preferred stock 50,000 (75,960) ------------ ------------ ------------ Net cash provided by financing activities 1,866,169 9,017,468 3,892,522 ------------ ------------ ------------ NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (65,437) 3,790,463 183,851 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 267,416 201,979 3,992,442 ------------ ------------ ------------ CASH AND CASH EQUIVALENTS, END OF PERIOD $ 201,979 $ 3,992,442 $ 4,176,293 ------------ ------------ ------------ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest $ 286,081 $ 238,901 $ 75,114 Income taxes 101,264 779,310 1,190,879 Noncash investing and financing activities: Lease entered into for office equipment 29,101 Relief of compensation accrual on issuance of stock 24,729 43,090 Conversion of subordinated debt to common stock 280,000 Conversion of preferred stock to common stock 215,260 Financing of insurance premiums 296,106
SEE NOTES TO AUDITED FINANCIAL STATEMENTS 34 EXACTECH, INC. NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 - -------------------------------------------------------------------------------- 1. ORGANIZATION Exactech, Inc. (the "Company") was organized in 1985 to develop and market orthopedic implant devices. In 1988, the Company began marketing its first product, a total hip replacement system. In 1994, the Company began marketing a knee system. The Company's principal market is the United States; however, international markets represent approximately seventeen percent of the Company's business. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CASH AND CASH EQUIVALENTS - Cash and cash equivalents consist of cash on deposit in financial institutions, including a money market account, institutional money funds, overnight repurchase agreements, and other short-term investments with a maturity of 90 days or less at the time of purchase. CONCENTRATION OF CREDIT RISK - The Company's accounts receivable consist primarily of amounts due from hospitals. The Company performs credit evaluations on its customers and generally does not require collateral. SHORT TERM INVESTMENTS - The Company invests its excess funds in various high-quality and low-risk investment securities. Debt securities for which the Company has the positive intent and ability to hold to maturity are classified as held to maturity and reported at amortized cost. Securities are classified as trading securities if bought and held principally for the purpose of selling them in the near future. Securities not classified as held to maturity or trading are classified as available for sale, and reported at fair value with unrealized gains and losses excluded from earnings and reported net of tax as a separate component of shareholders' equity until realized. The fair values of the investments are estimated based on quoted market prices. Short-term investments at December 31, 1997, classified as held to maturity, consist of short-term, government backed securities. The amortized cost of such short-term investments approximates fair value. INVENTORIES - Inventories are valued at the lower of cost (first-in, first-out method) or market and include implants provided to customers and agents. The Company provides significant loaned implant inventory to non-distributor customers. PROPERTY AND EQUIPMENT - Property and equipment is stated at cost less accumulated depreciation. Depreciation expense is computed using the straight-line method over estimated useful lives of the related assets ranging from five to seven years. Maintenance and repairs are charged to expense. Certain instruments utilized in the surgical implant procedures are loaned to customers and are amortized over an estimated useful life of seven years. Periodically, management reviews property and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Impairment is measured by comparing the carrying amount of the asset to the sum of expected future cash flows (undiscounted and without interest charges) resulting from use of the asset and its eventual disposition. 35 EXACTECH, INC. NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 (CONTINUED) - -------------------------------------------------------------------------------- REVENUE RECOGNITION - The Company provides inventories of its products to its United States sales agencies until sold or returned for use in marketing its products and filling customer orders. In the case of sales through such sales agencies, sales revenues are generally recognized when the product is implanted. Distributors typically purchase product inventory and instruments from the Company for their use in marketing and filling customer orders. Sales to such distributors are recognized upon shipment of the product. Estimated costs of returns and allowances on sales to foreign distributors are accrued at the time products are shipped. INVESTMENT IN SUBSIDIARY - In July 1995, the Company purchased a 50% interest in Techmed, its Italian distributor. Prior to September of 1997, the investment in the subsidiary was accounted for using the equity method with the Company's share of the subsidiary's net earnings (loss) included as a separate item in the statement of income. During September 1997, the Company wrote off its investment in the subsidiary. PATENTS AND TRADEMARKS - Patents and trademarks are amortized on a straight-line basis over their estimated useful lives ranging from five to seventeen years. INCOME TAXES - Deferred income taxes are provided on temporary differences which arise from certain transactions being reported for financial statement purposes in different periods than for income tax purposes. These differences primarily relate to property and equipment costs and research and development expenses. Deferred tax assets and liabilities are recognized using an asset and liability approach and are based on differences between financial statement and tax basis of assets and liabilities using presently enacted tax rates. ESTIMATES - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during each reporting period. Actual results could differ from those estimates. OPTIONS AND STOCK AWARDS- The Company has elected to account for its employee stock compensation plans under the intrinsic value based method with pro forma disclosures of net earnings and earnings per share, as if the fair value based method of accounting defined in SFAS No. 123 "Accounting for Stock Based Compensation" had been applied (Note 9). Under the intrinsic value based method, compensation cost is the excess, if any, of the quoted market price of the stock at the grant date or other measurement date over the amount an employee must pay to acquire the stock. Under the fair value based method, compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. RECLASSIFICATIONS - Certain items in the prior year financial statements have been reclassified to conform to the 1997 presentation. 36 EXACTECH, INC. NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 (CONTINUED) - -------------------------------------------------------------------------------- NEW ACCOUNTING STANDARDS - In March 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share" ("SFAS No. 128"). SFAS No. 128 establishes standards for computing and presenting earnings per share ("EPS") and applies to all entities with publicly held common stock or potential common stock. SFAS No. 128 replaces the presentation of primary EPS and fully diluted EPS with a presentation of basic EPS and diluted EPS, respectively. Basic EPS excludes dilution and is computed by dividing earnings available to common stockholders by the weighted-average number of common shares outstanding for the period. Similar to fully diluted EPS, diluted EPS reflects the potential dilution of securities that could share in the earnings. The Company adopted the requirements of SFAS No. 128 in the year ended December 31, 1997 (Note 9). All periods presented have been restated to conform to this presentation. In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"), effective for fiscal years beginning after December 15, 1997. SFAS No. 130 requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. SFAS No. 130 does not require a specific format for that financial statement but requires that an entity display an amount representing total comprehensive income for the period in that financial statement. SFAS No. 130 requires that an entity classify items of other comprehensive income by their nature in a financial statement. For example, other comprehensive income may include foreign currency and unrealized gains and losses on certain investments in debt and equity securities. In addition, the accumulated balance of other comprehensive income must be displayed separately from retained earnings and additional paid in capital in the equity section of a statement of financial position. Reclassification of financial statements for earlier periods, provided for comparative purposes, is required. The Company is in the process of determining the impact that the adoption of SFAS No. 130 will have on its financial statements. The Company will adopt this accounting standard on January 1, 1998, as required. In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS No. 131") effective for fiscal years beginning after December 15, 1997. SFAS No. 131 establishes standards for reporting information about operating segments in annual financial statements and requires selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. SFAS No. 131 requires reporting of segment profit or loss, certain specific revenue and expense items and segment assets. It also requires reconciliations of total segment revenues, total segment profit or loss, total segment assets, and other amounts disclosed for segments to corresponding amounts reported in the financial statements. Restatement of comparative information for earlier periods presented is required in the initial year of application. Interim information is not required until the second year of application, at which time comparative information is required. The Company is in the process of determining the impact that the adoption of SFAS No. 131 will have on its financial statement disclosures. The Company will adopt this accounting standard on January 1, 1998, as required. 37 EXACTECH, INC.
NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997(CONTINUED) - ---------------------------------------------------------------------------------------------------------- 3. INCOME TAXES The provision for income taxes consists of the following: Current: 1995 1996 1997 --------- --------- --------- Federal $ 345,980 $ 694,796 $ 685,146 State 97,619 143,035 204,969 ---------- --------- --------- Total current 443,599 837,831 890,115 Deferred: Federal 71,085 98,579 87,723 State 13,109 14,496 19,350 --------- --------- --------- Total deferred 84,194 113,075 107,073 --------- --------- --------- Total Provision $ 527,793 $ 950,906 $ 997,188 ========= ========= =========
A reconciliation between the amount of reported income tax provision and the amount computed at the statutory Federal income tax rate for the years ended December 31, 1995, 1996 and 1997 follows: 1995 1996 1997 ---- ---- ---- Statutory Federal rate 34% 34% 34% State income taxes (net of Federal income tax benefit) 3 4 5 Other 2 ---- ---- ---- 39% 38% 39% ==== ==== ====
The types of temporary differences and their related tax effects that give rise to deferred tax assets and liabilities at December 31, 1996 and 1997 are as follows: 1996 1997 ------- ------- Deferred tax liabilities: Basis difference in property and equipment $325,139 $565,679 Basis difference in patents 31,219 68,203 Other 25,231 7,523 -------- -------- Gross deferred tax liabilities 381,589 641,405 -------- --------- Deferred tax assets: Basis difference in unconsolidated subsidiary 26,134 114,668 Accrued liabilities not currently deductible 28,580 92,789 -------- --------- Gross deferred tax assets 54,714 207,457 -------- --------- Net deferred tax liabilities $326,875 $433,948 ======== ========
There was no valuation allowance on deferred tax assets at December 31, 1996 and 1997. 38 EXACTECH, INC. NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 (CONTINUED) - -------------------------------------------------------------------------------- 4. DEBT
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS: 1996 1997 ------------ ---------- Capitalized lease obligation payable in monthly installments $ 23,539 $ 17,729 of $611 through July, 2000, collateralized by equipment with a carrying value of approximately $18,708 as of December 31, 1997 Notes payable to finance company bearing interest 27,466 at 7.43%, paid in full during 1997; proceeds used to finance insurance policies Industrial Revenue Bond note payable in annual 3,900,000 principal installments as follows: $300,000 per year from 2000-2006; $200,000 per year from 2007-2013; $100,000 per year from 2014-2017; monthly interest payments based on adjustable rate as determined by the bonds remarketing agent based on market rate fluctuations (4.3% as of December 31, 1997); proceeds used to finance construction of new facility ------------ ------------ Total long-term debt and capital lease obligations 51,005 3,917,729 Less current portion (32,861) (4,894) ------------ ------------ $ 18,144 $ 3,912,835 ============ ===========
The following is a schedule of debt maturities and future minimum lease payments under the capital leases, together with the present value of minimum lease payments as of December 31, 1997: LONG-TERM CAPITAL LEASE DEBT OBLIGATIONS ---- ----------- 1998........................................... $ 6,722 1999........................................... 7,333 2000........................................... $ 300,000 7,188 2001........................................... 300,000 2002........................................... 300,000 Thereafter..................................... 3,000,000 --------- -------- Total ................................ $3,900,000 21,243 ========== Less interest on capital lease obligations .... (3,514) $ 17,729 ========
39 EXACTECH, INC. NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 (CONTINUED) - -------------------------------------------------------------------------------- 4. DEBT-(CONTINUED) IRB NOTE PAYABLE In November 1997, the Company entered into a $3,900,000 industrial revenue bond financing with the City of Gainesville, Florida (the "City"), pursuant to which the City issued its industrial revenue bonds and loaned the proceeds to the Company. The bonds are secured by an irrevocable letter of credit issued by a bank. The $3,900,000 credit facility incurs monthly interest based on an adjustable rate as determined by the bonds remarketing agent based on market rate fluctuations, (4.3% as of December 31, 1997). Due to the variable nature of the note, the balance of the note payable approximates fair value. LINE OF CREDIT The Company maintains a $3,000,000 line of credit with Merrill Lynch Business Financial Services, Inc. There are no amounts outstanding under this line of credit at December 31, 1997. SUBORDINATED DEBENTURES The Company redeemed $450,000 in principal amount of its 8% Subordinated Debentures held by Michael M. Kearney, a shareholder of the Company, and R. Wynn Kearney, a director and shareholder of the Company, during June 1996. During June 1996, the Company converted to common stock $50,000 in principal amount of its 10% Subordinated Convertible Debentures ("10% Debentures"). During July 1996, the Company redeemed $15,000 of its 10% Debentures. During November 1996, the Company redeemed an additional $15,000 of its 10% Debentures. The remaining $230,000 in principal amount of the 10% Debentures was converted to common stock in November 1996, at a conversion rate per share equal to $7.33. 5. RELATED PARTY TRANSACTIONS Effective as of the consummation of the Company's initial public offering in June 1996, the Company issued options to purchase 20,000 shares of common stock at $8.00 per share to R. Wynn Kearney, Jr. MD, a director of the Company. The options vest over a period of four years and are valid for a period of ten years. The Company sells instruments and implants to its unconsolidated subsidiary, Techmed. Net sales were $99,475 and $10,454 for the years ended December 31, 1996 and 1997, respectively. Trade receivables from such unconsolidated subsidiary totaled $148,051 and $146,270 at December 31, 1996 and 1997, respectively. As of December 31, 1997, $104,410 of the Techmed receivables were reserved as part of the allowance for doubtful accounts. The Company has entered into a purchase agreement with Brighton Partners, Inc. to purchase raw materials used in the ongoing production of its products. The agreement requires the purchase of tooling dies in the amount of $159,000 and provides for special purchasing terms for the Company. Some of the Company's officers and directors maintain ownership in Brighton Partners Inc. 40 EXACTECH, INC. NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 (CONTINUED) - -------------------------------------------------------------------------------- 5. RELATED PARTY TRANSACTIONS (CONTINUED) The Company has entered into consulting agreements with certain of its executive officers, directors and principal shareholders in connection with product design which entitles them to royalty payments aggregating 3% of the Company's net sales of such products in the United States and less than 3% of the Company's net sales of such products outside the United States. During the years ended December 31, 1995, 1996 and 1997, the Company paid royalties aggregating $101,393, $187,773 and $288,759, respectively, pursuant to these consulting agreements. 6. COMMITMENTS AND CONTINGENCIES The Company is committed to approximately $2,028,000 in remaining construction costs associated with the completion of the new facility as of December 31, 1997. The Company, in the normal course of business, is subjected to claims and litigation in the areas of product and general liability. Management does not believe any of such claims will have a material impact on the Company's financial position. 7. MAJOR CUSTOMER AND FOREIGN OPERATIONS During the years ended December 31, 1995, 1996 and 1997, approximately 10%, 7% and 6%, respectively, of the Company's sales were derived from a major customer. During the year ended December 31, 1995, 1996 and 1997, approximately 5%, 13% and 13%, respectively, of the Company's sales were derived from an international distributor of its products. Revenue and gross profits for the Company's foreign operations for the three years ended December 31, 1997 were as follows: 1995 1996 1997 ---- ---- ---- Revenues $743,700 $2,124,856 $3,051,151 Gross Profit $257,083 $ 597,944 $1,127,455 41 EXACTECH, INC. NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997(CONTINUED) - -------------------------------------------------------------------------------- 8. LICENSE AND SUBLICENSE AGREEMENTS During 1994, the Company obtained a license under certain patent rights arising from its funding of research by the University of Florida regarding lower-back implantation procedures. In 1995, the Company sub-licensed such rights to a third party for the net amount of approximately $170,000. The license agreement calls for the Company to pay royalties to the University of Florida upon the successful commercial application of the patent rights. Similar royalties are to accrue to the Company under the sublicense agreement. Under the terms of the sublicense agreement, an advance on potential royalties in the amount of $100,000 was paid to the Company. The $100,000 advance is non-refundable to the extent that the sub-licensee does not receive FDA clearance to market the product. During 1996, the Company was notified by the sublicensee that initial applications for FDA clearance to market had been denied. Accordingly, the $100,000 was recognized as sublicense income due to the fact that the $100,000 was fully earned by the Company. During October 1996, the Company licensed patent technology for development of a modular hip system. The patent license fees total $360,000 with $275,000 being paid at time of agreement and an additional $85,000 being payable at time of FDA clearance to market the products. During 1997, the Company licensed certain technology. The license fees total $250,000, of which $100,000 was paid upon the execution of the agreement and an additional $150,000 is payable at such time as the licensor produces a developed product. The cost of the license agreement will be amortized over the period of its estimated economic benefit. 9. COMMON STOCKHOLDERS' EQUITY COMMON STOCK: In June 1996, the Company completed an underwritten initial public offering ("IPO") of 1,840,000 shares of its common stock at an initial offering price of $8.00 per share, yielding gross proceeds of $14,720,000. Net proceeds to the Company as a result of the IPO were $12,657,910 after deduction of underwriting, legal, accounting and other offering related expenses in the aggregate of $2,062,090. Upon consummation of the IPO, $50,000 of 10% Debentures were converted to 6,250 shares of common stock. 42 EXACTECH, INC.
NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997(CONTINUED) - ----------------------------------------------------------------------------------------------------------------------------- EARNINGS PER SHARE: The following is a reconciliation of the numerators and denominators of the basic and diluted EPS computations for net income and net income available to common shareholders: 1995 1996 1997 ---- ---- ---- INCOME SHARES INCOME SHARES INCOME SHARES (NUMER- (DENOMI- PER (NUMER- (DENOMI- PER (NUMER- (DENOMI- PER ATOR) NATOR) SHARE ATOR) NATOR) SHARE ATOR) ATOR) SHARE ----- ------ ----- ----- ------ ----- ----- ----- ----- Net income $ 826,928 $1,554,608 $1,575,994 Less: Preferred stock (22,798) (10,154) dividends -------- -------- BASIC EPS: Net income available to 804,130 2,931,081 $ 0.27 1,544,454 4,050,887 $ 0.38 1,575,994 4,878,795 $ 0.32 common shareholders ====== ====== ====== Effect of Dilutive Securities: Stock options 64,167 81,054 40,637 Warrants 3,234 6,305 4,319 DILUTED EPS: Net income available to 804,130 2,998,482 $ 0.27 1,544,454 4,138,246 $ 0.37 1,575,994 4,923,751 $ 0.32 common shareholders plus ====== ====== ====== assumed conversions
For the year ended December 31, 1996, options to purchase 336,200 shares of common stock at prices ranging from $8.00 to $8.80 per share were outstanding but were not included in the computation of diluted EPS because the options' exercise prices were greater than the average market price of the common shares. For the year ended December 31, 1997, options to purchase 348,900 shares of common stock at prices ranging from $7.50 to $9.00 per share were outstanding but were not included in the computation of diluted EPS because the options' exercise prices were greater than the average market price of the common shares. 43 EXACTECH, INC. NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997(CONTINUED) - -------------------------------------------------------------------------------- OPTIONS AND STOCK AWARDS: The Company sponsors an Employee Stock Option and Incentive Plan which provides for the issuance of stock options and restricted stock awards to key employees and a Director's Stock Option Plan which provides for the issuance of stock options to non-employee directors (collectively the "Plans"). The Company also issues stock options to sales agents and other individuals. The maximum number of common shares issuable under the Plans is 600,000 shares. If compensation cost for stock option grants had been determined based on the fair value at the grant dates for 1995, 1996 and 1997 consistent with the method prescribed by SFAS No. 123, the Company's net earnings and earnings per share on a diluted basis would have been adjusted to the pro forma amounts indicated below: 1995 1996 1997 ---- ---- ---- Net earnings As reported $ 804,130 $ 1,544,454 $ 1,575,994 Pro forma 752,090 1,260,323 1,164,702 Earnings per share As reported $ 0.27 $ 0.37 $ 0.32 Pro forma 0.25 0.30 0.24
Outstanding options, consisting of ten-year non-qualified stock options, vest and become exercisable over a five year period from date of grant. The outstanding options expire ten years from the date of grant or upon retirement from the Company, and are contingent upon continued employment during the applicable ten-year period. Under SFAS No. 123, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1995, 1996 and 1997, respectively: dividend yield of 0, 0 and 0 percent, expected volatility of 43, 70 and 42 percent, risk-free interest rates of 5.9, 6.8 and 6.0 percent, and expected lives of 5, 5 and 5 years. 44 EXACTECH, INC. NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997(CONTINUED) A summary of the status of fixed stock option grants under the Company's stock-based compensation plans as of December 31, 1995, 1996 and 1997, and changes during the years ending on those dates is presented below: 1995 1996 1997 ------------------------ ----------------------- ------------------------ WEIGHTED AVG. WEIGHTED AVG. WEIGHTED AVG. OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE ------------------------- ------------------------ ------------------------ Outstanding - January 1 159,949 $ 3.31 225,386 $ 4.77 560,199 $ 6.81 Granted 90,637 6.67 341,200 8.14 28,000 7.96 Exercised (25,125) 2.30 (750) 6.66 (44,229) 2.34 Expired (75) 6.67 (5,637) 6.21 (20,250) 7.67 -------- ------- -------- Outstanding - December 31 225,386 4.77 560,199 6.81 523,720 7.21 ======== ======= ======== Options exercisable 104,167 $ 3.95 172,907 $ 4.65 231,849 $ 6.30 at year end Weighted average fair value of $279,887 $1,709,468 $ 101,518 options granted during the year
The following table summarizes information about fixed stock options outstanding at December 31, 1997: EXERCISE OPTIONS OPTIONS WEIGHTED AVERAGE PRICE OUTSTANDING EXERCISABLE REMAINING LIFE ----- ----------- ----------- -------------- $ 2.30 7,296 7,296 3.33 3.28 59,649 59,192 4.79 6.25 5,000 1,000 8.54 6.67 102,875 58,981 7.44 7.50 12,000 12,000 9.30 7.88 10,000 9.17 8.00 225,900 66,880 8.42 8.06 25,000 10,000 8.78 8.80 70,000 15,000 8.41 9.00 6,000 1,500 9.00 ----- ----- ---- Total 523,720 231,849 7.80 ======= ======= ====
Remaining non-exercisable options as of December 31, 1997 become exercisable as follows: 1998 83,337 1999 81,577 2000 81,277 2001 43,530 2002 2,150 ------- 291,871 ======= 45 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information set forth under the caption "Management" in the Company's definitive Proxy Statement for its 1998 Annual Meeting of Shareholders (the "Proxy Statement") is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information set forth under the caption "Executive Compensation" in the Company's Proxy Statement is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information set forth under the caption "Security Ownership" in the Company's Proxy Statement is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information set forth under the caption "Certain Transactions" contained in the Company's Proxy Statement is incorporated herein by reference. 46 PART IV. OTHER INFORMATION ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) Financial Statements The financial statements filed as part of this report are listed under Item 8. (b) Reports on Form 8-K None (c) Exhibits: EXHIBIT DESCRIPTION 3.1 Registrant's Articles of Incorporation, as amended(1) 3.2 Registrant's Bylaws(1) 3.3 Forms of Articles of Amendment to Articles of Incorporation(1) 4.1 Specimen Common Stock Certificate(1) 4.2 Shareholders' Agreement, dated as of November 30, 1992, as amended, by and among the Registrant, William Petty, M.D., Betty Petty, David Petty, Mark Petty and Julie Petty(1) 4.3 Form of Underwriter's Warrant(1) 4.4 Specimen Series A Preferred Stock Certificate(1) 4.5 Specimen Series B Preferred Stock Certificate(l) 4.6 Specimen Series C Preferred Stock Certificate(1) 4.7 Form of Amendment to Shareholder's Agreement, dated as of May 1996, by and among the Registrant, William Petty, M.D., Betty Petty, David Petty, Mark Petty and Julie Petty(1) 10.1 Registrant's Employee Stock Option and Incentive Plan, as amended(1) (2) 10.2 Registrant's Directors' Stock Option Plan(1) (2) 10.3 Form of Indemnification Agreement between the Registrant and each of the Registrant's Directors and Executive Officers(1) 10.4 Form of Employment Agreement between the Registrant and William Petty, M.D.(1) (2) 10.5 Form of Employment Agreement between the Registrant and Timothy J. Seese(1) (2) 10.6 Form of Employment Agreement between the Registrant and Gary J. Miller, Ph.D.(1) (2) 10.7 Working Capital Management Account Term Loan and Security Agreement, dated as of June 23, 1995, as amended, between the Registrant and Merrill Lynch Business Financial Services(1) 10.8 Collateral Installment Note, dated as of June 23, 1995, executed by the Registrant in favor of Merrill Lynch Business Financial Services(1) 10.9 Unconditional Guaranty executed by William Petty, M.D. in favor of Merrill Lynch Business Financial Services(1) 10.10 Subordinated Convertible Debenture Agreement, dated April 18, 1995, between the Registrant and Alan Chervitz and related Registration Rights Agreement dated April 18, 1995(1) 10.11 Subordinated Convertible Debenture Agreement, dated April 18, 1995, between the Registrant and E. Marlowe Goble and related Registration Rights Agreement dated April 18, 1995(1) 10.12 Subordinated Convertible Debenture Agreement, dated April 18, 1995, between the Registrant and Marc Richman and related Registration Rights Agreement dated April 18, 1995(1) 10.13 Subordinated Convertible Debenture Agreement, dated April 18, 1995, between the Registrant and David P. Luman and related Registration Rights Agreement dated April 18, 1995(1) 10.14 Subordinated Convertible Debenture Agreement, dated May 2, 1995, between the Registrant and Donna C. Phillips and related Registration Rights Agreement dated May 2, 1995(1) 10.15 Subordinated Convertible Debenture Agreement, dated April 22, 1995, between the Registrant and Peggy S. Wolfe and related Registration Rights Agreement dated April 22, 1995(1) 10.16 Subordinated Convertible Debenture Agreement, dated April 22, 1995, between the Registrant and Joaquin J. Diaz and related Registration Rights Agreement dated April 22, 1995(1) 47 10.17 Letter Agreement, dated December 28, 1992, between the Registrant and Michael Kearney, M.D. regarding purchase of 8% debentures and warrants(1) 10.18 Letter Agreement, dated December 28, 1992, between the Registrant and R. Wynn Kearney, M.D. regarding purchase of 8% debentures and warrants(1) 10.19 First Mortgage Deed and Promissory Note, each dated September 27, 1994, executed by the Registrant in favor of American National Bank of Florida(1) 10.20 Shareholders' Agreement, dated July 19, 1995, between the Registrant and Edoardo Caminita in connection with the formation of Techmed S.p.A.(1) 10.21 Small Business Cooperative Research and Development Agreement, dated December 31, 1995, between the Registrant and The Regents for the University of California, Lawrence Livermore National Laboratory(1) 10.22 Business Lease, dated July 1, 1995, between the Registrant and BCB Partnership(1) 10.23 Consulting Agreement, dated January 1, 1993, between the Registrant and Ivan Gradisar, Jr., M.D.(1) 10.24 Consulting Agreement, dated January 1, 1993, between the Registrant and William Murray, M.D.(1) 10.25 Consulting Agreement, dated March 1, 1993, between the Registrant and Edmund Chao, Ph.D.(1) 10.26 Consulting Agreement, dated January 1, 1993, between the Registrant and William Petty, M.D.(1) 10.27 Consulting Agreement, dated January 1, 1993, between the Registrant and Gary J. Miller, Ph.D.(1) 10.28 Consulting Agreement, dated as of November 1, 1993, between the Registrant and Virginia Mason Clinic (regarding Raymond P. Robinson, M.D.)(1) 10.29 Manufacturers Representative Agreement, dated January 1, 1996, between the Registrant and Prince Medical, Inc.(1) 10.30 Distribution Agreement, dated as of January 1, 1996, between the Registrant and Precision Instruments, Inc.(1) 10.31 Manufacturers Representative Agreement, dated January 31, 1996, between the Registrant and Futur-Tek, Inc.(1) 10.32 Distribution Agreement, dated October 5, 1995, between the Registrant and Techmed S.p.A.(1) 10.33 Distribution Agreement, dated January 1, 1994, between the Registrant and Akaway Medical Co., Ltd.(1) 10.34 Distribution Agreement between the Registrant and MBA Del Principado, S.p.A.(1) 10.35 Distribution Agreement, dated February 1, 1993, between the Registrant and Yu Han Meditech(1) 10.36 Distribution Agreement, dated October 31, 1995, between the Registrant and Buro Ortopedik-Thbbi Malzemeler Ithalat Ihracat Tic. Ltd. (1) 10.37 Technology License Agreement, dated as of August 5, 1991, between the Registrant and Accumed, Inc.(1) 10.38 License Agreement, dated August 20, 1993, between the Registrant and The University of Florida, as amended(1) 10.39 Exclusive Sublicense Agreement dated June 30, 1995, between the Registrant and Sofamor Danek Properties, Inc.(1) 10.40 License Agreement, dated as of January 1, 1996, between the Registrant and The Hospital for Special Surgery(1) 10.41 Assignment of Patent, dated November 20, 1995, executed by Phillip H. Cripe in favor of the Registrant(1) 10.42 United States Patent No.5,190,549 for Locking Surgical Tool Handle System dated March 2, 1993(1) 10.43 United States Patent No.5,190,550 for Locking Surgical Tool Handle System dated March 2, 1993(1) 10.44 Assignment, dated July 28, 1990, of Locking Surgical Tool Handle System patent(1) 10.45 United States Patent No.5,263,988 for Bipolar Endoprosthesis dated November 23, 1993(1) 10.46 United States Patent No.5,152,799 for Prosthetic Femoral Stem dated October 6, 1992(1) 10.47 Assignment, dated October 31, 1991, of Femoral Stem patent(1) 10.48 Application for United States Patent for an Improved Intramedullary Alignment Guide(1) 10.49 Application for United States Patent for Hole Caps for Prosthetic Implants(1) 10.50 Tolling Agreement, dated April 3, 1995, between the Registrant and Joint Medical Products Corporation(1) 10.51 Patent Agreement, dated October 9, 1995, between the Registrant and Phillip H. Cripe(1) 10.52 Letter Agreements dated March 8, 1993 and April 13, 1993 between the Registrant and Ridgeway Construction(1) 10.53 Letter Agreements dated April 12, 1993 between the Registrant and Bosshardt Realty Services, Inc.(1) 10.54 Copyright Assignment and Consulting Agreement, effective as of April 12, 1993, by and between Walter Reid and the Registrant(1) 48 10.55 Letter agreement, dated November 30, 1993, between the Registrant and Associated Business Consultants, Inc.(1) 10.56 Letter agreements, dated February 23, 1996, between Merrill Lynch Business Financial Services Inc. and the Registrant(1) 10.57 Consulting Agreement dated as of June 1, 1993 between the Registrant and Kim Jun-Man (1) 10.58 Consulting Agreement. dated as of January 1, 1993 between the Registrant and Professors Luis Lopez Duran and Fernando Marco (1) 10.59 Merrill Lynch WCMA line of credit extension dated July 29, 1996 (3) 10.60 Loan Agreement, dated as of November 1, 1997, between the City of Gainesville, Florida and the Registrant 10.61 Letter of Credit Agreement, dated as of November 1, 1997, between SunTrust Bank, North Central Florida ("SunTrust") and the Registrant 10.62 Pledge and Security Agreement, dated as of November 1, 1997 between SunTrust and the Registrant 10.63 Mortgage and Security Agreement, dated as of November 1, 1997, from the Registrant to SunTrust 10.64 Settlement agreement between Biomet, Inc., Ella K. Jirka & Associates, Richard A. Bland, N.W. Medical Products, Inc. and the Registrant dated February 9, 1998 11.1 Computation of Earnings Per Share 21.1 Subsidiary of the Registrant(1) 27.1 Financial Data Schedule Copies of the exhibits filed with this Annual Report on Form 10-K or incorporated herein by reference do not accompany copies hereof for distribution to shareholders of the Company. The Company will furnish a copy of any of such exhibits to any shareholder requesting the same. (1) Incorporated by reference to the exhibit of the same number filed with the Registrant's Registration Statement on Form S-1 (File No. 333-02980). (2) Management contract or compensation plan. (3) Incorporated by reference to exhibit 10 filed with the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996. (d) Financial Statement Schedules: Schedule II-Valuation and Qualifying Accounts 49
EXACTECH, INC. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS THREE YEARS ENDED DECEMBER 31, 1997 BALANCE AT CHARGED TO BEGINNING COSTS AND DEDUCTIONS BALANCE AT OF YEAR EXPENSES (CHARGEOFFS) END OF YEAR ------- -------- ------------ ----------- Allowance for doubtful accounts 1995 $ 5,300 $ 8,200 - $ 13,500 1996 13,500 23,664 - 37,164 1997 37,164 123,882 - 161,046
50 SIGNATURES ---------- Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. March 5, 1998 EXACTECH, INC. By: /S/ WILLIAM PETTY ------------------------- William Petty Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. March 5, 1998 By: /S/ WILLIAM PETTY ----------------- William Petty Chairman of the Board and Chief Executive Officer (principal executive officer) March 5, 1998 By: /S/ TIMOTHY J. SEESE -------------------- Timothy J. Seese President and Chief Operating Officer March 5, 1998 By: /S/ GARY J. MILLER ------------------- Gary J. Miller Vice President and Director March 5, 1998 By: /S/ JOEL C. PHILLIPS --------------------- Joel C. Phillips Treasurer (principal financial and accounting officer) March 5, 1998 By: /S/ ALBERT BURSTEIN ------------------- Albert Burstein Director March 5, 1998 By: /S/ R. WYNN KEARNEY, JR. ------------------------- R. Wynn Kearney, Jr. Director March 5, 1998 By: /S/ RONALD PICKARD ------------------ Ronald Pickard Director March 5, 1998 By: /S/ P. MICHAEL PRINCE ---------------------- P. Michael Prince Director 51 EXHIBIT INDEX EXHIBIT DESCRIPTION - ------- ----------- 10.60 Loan Agreement, dated as of November 1, 1997, between the City of Gainesville, Florida and the Registrant 10.61 Letter of Credit Agreement, dated as of November 1, 1997, between Sun Trust Bank, North Central Florida ("SunTrust") and the Registrant 10.62 Pledge and Security Agreement, dated as of November 1, 1997 between SunTrust and the Registrant 10.63 Mortgage and Security Agreement, dated as of November 1, 1997, from the Registrant to SunTrust 10.64 Settlement agreement between Biomet, Inc., Ella K. Jirka & Associates, Richard A. Bland, N.W. Medical Products, Inc. and the Registrant dated February 9, 1998 11.1 Computation of Earnings Per Share 27.1 Financial Data Schedule EX-10.60 2 EXHIBIT 10.60 CITY OF GAINESVILLE, FLORIDA AND EXACTECH, INC. ------------------------------------ LOAN AGREEMENT ------------------------------------ Dated as of November 1, 1997 The interest of the City of Gainesville, Florida (the "Issuer") in this Loan Agreement has been assigned (except for amounts payable under Sections 4.2(b), 7.2 and 8.4 hereof) pursuant to the Indenture of Trust dated as of the date hereof from the Issuer to SunTrust Bank, Central Florida, National Association, as trustee (the "Trustee"), and is subject to the security interest of the Trustee thereunder. LOAN AGREEMENT TABLE OF CONTENTS (This Table of Contents is not a part of the Loan Agreement and is only for convenience of reference.)
PAGE ARTICLE I DEFINITIONS Section 1.1. Definitions....................................................................................... 1 Section 1.2. Uses of Phrases................................................................................... 3 ARTICLE II REPRESENTATIONS, COVENANTS AND WARRANTIES Section 2.1. Agreements of the Parties......................................................................... 4 Section 2.2. Representations, Covenants and Warranties of the Issuer...................................................................................... 4 Section 2.3. Representations, Covenants and Warranties of the Company..................................................................................... 5 Section 2.4. Notice of Determination of Taxability............................................................. 11 ARTICLE III ACQUISITION AND CONSTRUCTION OF THE PROJECT; ISSUANCE OF THE BONDS Section 3.1. Agreement to Acquire, Construct, Improve and Equip the Project............................................................................... 11 Section 3.2. Agreement to Issue the Bonds; Application of Bond Proceeds................................................................................... 12 Section 3.3. Disbursements from the Construction Fund.......................................................... 12 Section 3.4. Furnishing Documents to the Trustee............................................................... 12 Section 3.5. Establishment of Completion Date.................................................................. 12 Section 3.6. Company Required to Pay in Event Construction Fund Insufficient............................................................................... 13 Section 3.7. Arbitrage; Preservation of Tax-Exemption.......................................................... 14 Section 3.8. Certain Covenants with Respect to Compliance with Arbitrage Requirements for Investments in Nonpurpose Investments and Rebate to the United States of America........................................................................ 14 Section 3.9. Covenants as to Use of Bond Proceeds and Other Matters, Payback Provision...................................................................... 15 Section 3.10. Damage, Destruction or Loss of Property; Obligation to Rebuild; Use of Insurance Proceeds and Condemnation Awards................................................................ 18 Section 3.11. Pursuit of Remedies Against Contractors, Subcontractors and Sureties..................................................................... 18 Section 3.12. Certain Covenants with Respect to Capital Expenditures and Use of Proceeds of the Bonds................................................... 19 1 ARTICLE IV LOAN PROVISIONS; SUBSTITUTE LETTER OF CREDIT Section 4.1. Loan of Proceeds.................................................................................. 22 Section 4.2. Amounts Payable................................................................................... 22 Section 4.3. Obligations of Company Unconditional.............................................................. 23 Section 4.4. Substitute Letter of Credit....................................................................... 24 ARTICLE V PREPAYMENT AND REDEMPTION Section 5.1. Prepayment and Redemption......................................................................... 25 ARTICLE VI SPECIAL COVENANTS Section 6.1. No Warranty of Condition or Suitability by Issuer.............................................................................. 25 Section 6.2. Access to the Project............................................................................. 25 Section 6.3. Further Assurances and Corrective Instruments..................................................... 25 Section 6.4. Issuer and Company Representatives................................................................ 26 Section 6.5. Financial Reports................................................................................. 26 Section 6.6. Financing Statements.............................................................................. 26 Section 6.7. Maintenance of Project............................................................................ 26 Section 6.8. Undertaking to Provide Ongoing Disclosure......................................................... 27 ARTICLE VII ASSIGNMENT, SELLING, LEASING; INDEMNIFICATION; REDEMPTION Section 7.1. Assignment, Selling and Leasing................................................................... 31 Section 7.2. Release and Indemnification Covenants............................................................. 31 Section 7.3. Issuer to Grant Security Interest to Trustee...................................................... 33 Section 7.4. Indemnification of Trustee........................................................................ 33 ARTICLE VIII DEFAULTS AND REMEDIES Section 8.1. Defaults Defined.................................................................................. 33 Section 8.2. Remedies on Default............................................................................... 35 Section 8.3. No Remedy Exclusive............................................................................... 35 Section 8.4. Agreement to Pay Attorneys' Fees and Expenses..................................................... 35 Section 8.5. No Additional Waiver Implied by One Waiver........................................................ 36 ARTICLE IX MISCELLANEOUS Section 9.1. Term of Agreement................................................................................. 36 Section 9.2. Notices........................................................................................... 36 Section 9.3. Binding Effect.................................................................................... 37 Section 9.4. Severability...................................................................................... 38 Section 9.5. Amounts Remaining in Funds........................................................................ 38 Section 9.6. Amendments, Changes and Modifications............................................................. 38 2 Section 9.7. Execution in Counterparts......................................................................... 38 Section 9.8. Applicable Law.................................................................................... 38 Section 9.9. Captions.......................................................................................... 38 EXHIBIT A Project Facilities EXHIBIT B Form of Requisition
3 LOAN AGREEMENT THIS LOAN AGREEMENT, dated as of November 1, 1997, between the CITY OF GAINESVILLE, FLORIDA, a municipal corporation of the State of Florida (the "Issuer") and EXACTECH, INC., a corporation organized and existing under the laws of the State of Florida (the "Company"); W I T N E S S E T H: That the parties hereto, intending to be legally bound hereby, and for and in consideration of the premises and the mutual covenants hereinafter contained, do hereby covenant, agree and bind themselves as follows: provided, that any obligation of the Issuer created by or arising out of this Agreement shall never constitute a debt or a pledge of the faith and credit or the taxing power of the Issuer or any political subdivision or taxing district of the State of Florida but shall be payable solely out of the Trust Estate (as defined in the Indenture), anything herein contained to the contrary by implication or otherwise notwithstanding: ARTICLE I DEFINITIONS Section 1.1. DEFINITIONS. All capitalized, undefined terms used herein shall have the same meanings as used in Article I of the hereinafter defined Indenture. In addition, the following words and phrases shall have the following meanings: "Cost" with respect to the Project shall be deemed to include all items permitted to be financed under the provisions of the Code and the Act. "Default" means any Default under this Agreement as specified in and defined by Section 8.1 hereof. "Indenture" means the Indenture of Trust dated as of this date between the Issuer and the Trustee, pursuant to which the Bonds are authorized to be issued, and any amendments and supplements thereto. "Issuance Costs" shall have the meaning provided in Section 1.150-1(b) of the Income Tax Regulations and means, therefore, costs to the extent incurred in connection with, and allocable to, the issuance of the Bonds, including, but not limited to, (a) underwriter's spread (whether realized directly or derived through purchase of the Bonds at a discount below the price at which they are expected to be sold to the public); (b) counsel fees (including bond counsel, underwriter's counsel, Issuer's counsel, Company counsel, as well as any other specialized counsel fees incurred in connection with the issuance of the Bonds; (c) financial advisory fees incurred in connection with the issuance of the Bonds; (d) rating agency fees; (e) Trustee fees incurred in connection with the issuance of the Bonds; (f) paying agent fees; (g) registrar, certification and authentication fees related to issuance of the Bonds; (h) accounting fees related to the issuance of the Bonds; (i) printing costs of the Bonds and of the preliminary and final offering materials; (j) publication costs associated with the financing proceedings; (k) costs of engineering and feasibility studies necessary to the issuance of the Bonds; and (l) bond insurance premiums, letter of credit fees, or other forms of guarantee fees except to the extent such fees are for qualified guarantees (as defined in Section 1.148-4(f) of the Income Tax Regulations). "Net Proceeds" means the proceeds from the sale of the Bonds reduced by any portion thereof deposited in a debt service reserve fund. "Plans and Specifications" means the plans and specifications for the Project submitted to the Bank and the Trustee. "Project" means the Project Site and the Project Facilities. "Project Facilities" means those certain buildings or improvements to buildings and all other facilities and improvements and any items of machinery, equipment, or other tangible property forming a part of the Project to be constructed on the Project Site, all as described generally in Exhibit "A" hereto and all renewals and replacements thereof and substitutions therefor. "Project Site" means the approximately 7.5-acre tract of land located in the Northwest Commercial Park in the City of Gainesville, Florida on which the Project Facilities will be situated, and any other interests in real property, leasehold interests, easements, licenses, and rights in real property hereafter acquired by the Company with proceeds of the Bonds for use in connection with the Project. "Qualified Project Costs" means Costs paid or incurred with respect to the Project: (a) for the acquisition, construction, reconstruction, or improvement (i) of land or (ii) of property that is subject to exhaustion, wear and tear, or obsolescence, that has a useful life in the hands of the Company of more than one year, and that is otherwise of a character subject to the allowance for depreciation under the Code; and 2 (b) that, under the Code, are chargeable to the Project's capital account or would be so chargeable either (i) with a proper election by the Company (for example, under Section 266 of the Code), or (ii) but for a proper election by the Company to deduct such amounts. However, Costs paid prior to December 27, 1996, other than "preliminary expenditures" as defined in Section 1.150-2(f) of the Income Tax Regulations, are not Qualified Project Costs. Further, neither working capital expenditures nor the financing of inventory nor Issuance Costs are Qualified Project Costs. Interest costs accruing during the construction period shall be allocated between Qualified Project Costs and other Costs to be paid from the proceeds of the Bonds. Interest costs accruing after the Construction Period are not Qualified Project Costs. "Requisition" means a written request for a disbursement from the Construction Fund, signed by a Company Representative, substantially in the form attached hereto as Exhibit "B" and satisfactorily completed as contemplated by said form. "State" means the State of Florida. "Substantially All" means ninety-five percent (95%) or more, unless an opinion of Bond Counsel is rendered indicating that such term, as used herein, shall have a different meaning. "Tender Agent Agreement" means the Tender Agent Agreement dated as of November 1, 1997, among the Company, the Trustee and the Tender Agent, and any amendments or supplements thereto. "Term of Agreement" means the term of this Agreement as specified in Section 9.1 hereof. Section 1.2. USES OF PHRASES. Words of the masculine gender shall be deemed and construed to include correlative words of the feminine and neuter genders. Unless the context shall otherwise indicate, the words "Bond," "Bondholder," "registered owner" and "person" shall include the plural as well as the singular number and the word "person" shall include corporations and associations, including public bodies, as well as persons. "Herein," "hereby," "hereunder," "hereof," "hereinbefore," "hereinafter" and other equivalent words refer to this Agreement and not solely to the particular portion thereof in which any such word is used. Any percentage of Bonds, specified herein for any purpose, is to be figured on the unpaid principal amount thereof then outstanding. All references herein to specific Sections of the Code refer to such Sections of the Code and all successor or replacement provisions thereto. 3 ARTICLE II REPRESENTATIONS, COVENANTS AND WARRANTIES Section 2.1. AGREEMENTS OF THE PARTIES. It is hereby agreed by and between the Issuer and the Company that: (a) The Company proposes to acquire, construct and equip the Project. The Issuer proposes to loan money to the Company for the construction and equipping of a manufacturing facility pursuant to the terms and conditions expressed herein, all for the purposes of fostering the industrial and business development of, and improving living conditions in, the City of Gainesville, Florida and otherwise contributing to the welfare of the State of Florida and its inhabitants. (b) To finance a portion of the Cost of the Project, the Issuer proposes to issue the Bonds in the original aggregate principal amount of $3,900,000, and to loan the proceeds of the Bonds to the Company. (c) All of the Bonds will be issued under the Indenture and will mature, bear interest, be redeemable and have the other terms and provisions set forth in the Indenture, pursuant to which the Issuer's interest in this Agreement and the revenues and receipts thereunder derived by the Issuer will be pledged and conveyed to the Trustee as security for payment of the principal of, premium, if any, and interest on the Bonds. Section 2.2. REPRESENTATIONS, COVENANTS AND WARRANTIES OF THE ISSUER. The Issuer represents, covenants and warrants that: (a) The Issuer is a municipal corporation of the State of Florida. The Issuer is authorized to enter into the transactions contemplated by this Agreement and the Indenture and to carry out its obligations hereunder and thereunder. The Issuer has been duly authorized to execute and deliver this Agreement and the Indenture. (b) The Issuer duly adopted its Resolution No. 960876 on February 24, 1997, to induce the Company to acquire, construct and equip the Project in the City of Gainesville, Florida. (c) The Issuer covenants that it will not pledge the amounts derived from this Agreement other than as contemplated by the Indenture. 4 (d) After reasonable public notice given by publication in THE GAINESVILLE SUN, a newspaper published and of general circulation in the City of Gainesville, Florida on February 7, 1997, the Issuer held a public hearing concerning the issuance of the Bonds and the nature and location of the Project, and after such hearing, the City Commission, the elected legislative body of the Issuer, approved the issuance of the Bonds by duly adopting Resolution No. 960876. The Issuer has jurisdiction over the entire area in which the Project will be located. (e) As of the date hereof, the Issuer has received from the Division of Bond Finance of the State Board of Administration written confirmation of an allocation to the Bonds of $3,900,000 of the total yearly state allocation of private activity bonds, in accordance with Part VI, Chapter 159, Florida Statutes, as amended. Section 2.3. REPRESENTATIONS, COVENANTS AND WARRANTIES OF THE COMPANY. The Company represents, covenants and warrants that: (a) The Company is a corporation duly organized and validly existing under the laws of the State of Florida. The Company is not in violation of any provision of its Articles of Incorporation, as amended, has the corporate power to enter into and perform this Agreement, and has duly authorized by proper corporate action the execution and delivery of this Agreement, and is qualified to do business and is in good standing under the laws of the State. (b) The Company agrees that during the Term of Agreement it will maintain its existence, will not directly or indirectly (whether in one transaction or a series of transactions), (i) enter into any merger, consolidation or amalgamation; (ii) liquidate, wind up or dissolve itself (or suffer any liquidation or dissolution); (iii) acquire by purchase or otherwise all or substantially all the business or assets, or stock or other evidence of beneficial ownership, of any Person; (iv) sell, transfer or pledge all or substantially all of its assets to any other Person; (v) make any material change in its present method of conducting business; or (vi) enter into any agreement or transaction to do or permit any of the foregoing, unless (A) the survivor of such transaction, if other than the Company, assumes all of the obligations of the Company hereunder, the Company or such other survivor shall immediately upon the conclusion of any such transaction be in compliance with all obligations of the Company hereunder, and such survivor, if other than the Company, shall have a Net Worth at least equal to the Net 5 Worth of the Company immediately preceding such transaction, or (B) the Bank shall have consented thereto in writing, which consent shall not be withheld unreasonably. As used herein, the term "Net Worth" means the aggregate depreciated book value of all assets, both tangible and intangible, less all liabilities, all as determined in accordance with generally accepted accounting principles. (c) Neither the execution and delivery of this Agreement, the Remarketing Agreement, the Credit Agreement, the Tender Agent Agreement or the Pledge Agreement, nor the consummation of the transactions contemplated hereby and thereby, nor the fulfillment of or compliance with the terms and conditions hereof or thereof conflicts with or results in a breach of the articles of incorporation or the bylaws of the Company or the terms, conditions, or provisions of any agreement or instrument to which the Company is now a party or by which the Company is bound, or constitutes a default under any of the foregoing, or results in the creation or imposition of any lien, charge or encumbrance whatsoever upon any of the property or assets of the Company under the terms of any such instrument or agreement, except such liens as are created or imposed by this Agreement, the Remarketing Agreement, the Credit Agreement, the Tender Agent Agreement or the Pledge Agreement. (d) There is no action, suit, proceeding, inquiry or investigation, at law or in equity, before or by any court, public board or body, known to be pending or, to the best knowledge of the Company, threatened against or affecting the Company or any of its officers, nor to the best knowledge of the Company is there any basis therefor, wherein an unfavorable decision, ruling, or finding would materially adversely affect the transactions contemplated by this Agreement or which would adversely affect, in any way, the validity or enforceability of the Bonds, this Agreement, the Pledge Agreement, the Tender Agent Agreement, the Credit Agreement, the Remarketing Agreement, or any agreement or instrument to which the Company is a party, used or contemplated for use in the consummation of the transactions contemplated hereby. (e) The Project is of the type authorized and permitted by the Act, and its estimated Cost is not less than $3,900,000. (f) The Net Proceeds from the sale of the Bonds will be used only for payment of Costs of the Project. None of the Net Proceeds from the sale of the Bonds will be used as working capital or to finance inventory. 6 (g) The Company will use due diligence to cause the Project to be operated in accordance with the laws, rulings, regulations and ordinances of the State and the departments, agencies and political subdivisions thereof. The Company has obtained or will cause to be obtained all requisite approvals of the State and of other federal, state, regional and local governmental bodies for the acquisition, construction, improving and equipping of the Project. (h) The Company will fully and faithfully perform all the duties and obligations which the Issuer has covenanted and agreed in the Indenture to cause the Company to perform, any duties and obligations which the Company is required in the Indenture to perform and any delegable or assignable duties and obligations which the Issuer is required in the Indenture to perform and which have been delegated or assigned to the Company. The foregoing shall not apply to any duty or undertaking of the Issuer which by its nature cannot be delegated or assigned. (i) Except for any architectural, engineering, surveying, soil testing, or similar preliminary activities occurring earlier, the commencement of the acquisition and construction of the Project, and each of the several components thereof, occurred subsequent to December 27, 1996, which is sixty days prior to the date of adoption by the Issuer of Resolution No. 960876. No proceeds of any Bonds will be used to reimburse the Company for amounts paid prior to December 27, 1996, other than for "preliminary expenditures" as defined in Section 1.150-2(f) of the Income Tax Regulations. (j) The Project presently constitutes, and at the completion thereof and until the expiration of the Term of Agreement will constitute, a "project" and a "manufacturing plant" within the meaning of Section 159.27(5), Florida Statutes. (k) The Company has entered into various contracts providing for the acquisition, construction, improvement and equipping of the Project that collectively create a substantial binding commitment on the Company's part to expend at least five percent (5%) of the Net Proceeds of the Bonds on the Project. (l) The Project consists of land and/or property subject to the allowance for depreciation under the Code, and Substantially All of the Net Proceeds of the Bonds, including earnings from the investment thereof, will be used to pay Qualified Project Costs. 7 (m) No changes shall be made in the Project and no actions will be taken by the Company that shall in any way cause interest on the Bonds to be included in gross income for federal income tax purposes. (n) Based on current facts, estimates and circumstances, the Company currently expects: (1) that the acquisition, construction and equipping of the Project and the expenditure of all of the net sale proceeds of the Bonds will be completed by October 31, 1998; (2) to proceed with due diligence toward completion of the Project (the work on which has already commenced) and the expenditure of the Net Proceeds of the Bonds in connection with the Project; (3) the Net Proceeds of the Bonds are needed for the purpose of paying all or a part of the Cost of the Project; and (4) the Project will not be sold or disposed of in a manner producing sale proceeds which, together with accumulated proceeds of the Bonds or earnings thereon, would be sufficient to enable the Company to retire substantially all of the Bonds prior to the maturity of the Bonds. (o) As of the date of execution and delivery of this Agreement, there exists no Default or any condition or event which would constitute, or with the passage of time or the giving of notice, or both, would constitute a Default hereunder. (p) The average maturity of the Bonds does not exceed one hundred twenty percent (120%) of the average reasonably expected economic life of the assets being financed with the proceeds of the Bonds, with the average reasonably expected economic life of each asset being measured from the later of the date of issuance of the Bonds or the date such asset is reasonably expected to be placed in service and by taking into account the respective cost of each asset being financed. The information furnished by the Company and used by the Issuer to verify the average reasonably expected economic life of each asset of the Project to be financed with the proceeds of the Bonds is true, accurate and complete. (q) (i) The payment of principal or interest with 8 respect to the Bonds will not be guaranteed (in whole or in part) by the United States (or any agency or instrumentality thereof); (ii) less than five percent (5%) of the proceeds of the Bonds will be (A) used in making loans the payment of principal and interest with respect to which are to be guaranteed (in whole or in part) by the United States (or any agency or instrumentality thereof), or (B) invested (directly or indirectly) in federally insured deposits or accounts as defined in Section 149(b) of the Code; and (iii) the payment of principal or interest on the Bonds will not otherwise be indirectly guaranteed (in whole or in part) by the United States (or any agency or instrumentality thereof). The foregoing provisions of this subsection shall not apply to proceeds of the Bonds being (u) invested for an initial temporary period until such proceeds are needed for the purpose for which such issue was issued; (v) held in a bona fide debt service fund; (w) held in a debt service reserve fund that meets the requirements of Section 148(d) of the Code with respect to reasonably required reserve or replacement funds; (x) invested in obligations issued by the United States Treasury; or (y) held in a refunding escrow (I.E., a fund containing proceeds of a refunding bond issue established to provide for the payment of principal or interest on one or more prior bond issues); or (z) invested in other investments permitted under regulations promulgated pursuant to Section 149(b)(3)(B) of the Code. (r) Any information has been or will be supplied by the Company that has been or will be relied upon by the Issuer, the Trustee and by Bond Counsel with respect to the eligibility of the Project and the exclusion from gross income for federal income tax purposes of interest on the Bonds is true and correct. (s) All proceeds of the Bonds will be used to pay the "cost" (within the meaning of Section 159.44(5), Florida Statutes) of the Project. (t) The Company shall promptly provide written notice to the Issuer and the Trustee if the Company becomes aware of a Default as such term is used in Section 8.1 hereof. (u) All components of the Project are or will be located wholly within the boundaries of the Project Site, and the Project Site is located completely within the incorporated limits of the City of Gainesville, Florida. (v) This Agreement constitutes a valid and binding obligation of the Company enforceable against the Company in 9 accordance with its terms, except to the extent that enforceability thereof may be limited by bankruptcy, reorganization, insolvency or similar laws relating to enforcement of creditors' rights generally and applicable laws or equitable principles that may affect remedies. (w) There is no other bond or issue of bonds, the interest on which is tax exempt pursuant to Section 144(a) of the Code or Section 103(b)(6) of the Internal Revenue Code of 1954, as amended, part or all of the net proceeds of which are to be used with part or all of the net proceeds of the Bonds with respect to a single building, an enclosed shopping mall, or a strip of offices, stores or warehouses using substantial common facilities, as contemplated by Section 144(a)(9) of the Code. There are no common heating, cooling or other facilities shared by the Project and by any other facility financed with tax-exempt bonds. There are no common entrances, plazas, malls, lobbies, parking, elevators or stairways shared by the Project and any other facility financed with tax-exempt bonds for use by employees or patrons of the Project and such facility. (x) Neither the Company nor persons related (as such term is used in the Code) to the Company are owners or principal users (as such term is used in the Code) of any facility (other than the Project) in the incorporated limits of the City of Gainesville, Florida, or outside of, but contiguous with, the incorporated limits of the City of Gainesville, Florida. (y) The Project is not integrated with any facility located outside of the incorporated limits of the City of Gainesville, Florida. (z)(i) The aggregate authorized face amount of the Bonds allocated to any test-period beneficiary (as such term is used in the Code), when increased by the outstanding tax-exempt facility-related bonds (within the meaning of Section 144(a)(10) of the Code) of such beneficiary, does not exceed $40,000,000. (ii) For purposes of applying subparagraph (i) above, with respect to any issue, the outstanding tax-exempt facility-related bonds of any person who is a test-period beneficiary, as such term is used in the Code, with respect to such issue is the aggregate face amount of all tax-exempt bonds which, within the meaning of Section 144(a)(10)(B)(ii) of the Code, are exempt facility bonds, qualified small issue bonds and qualified redevelopment bonds or industrial development bonds (as defined in Section 103(b)(2) of the Internal Revenue Code of 1954, as in effect on the date before the date of enactment of the Tax Reform Act of 1986) to which 10 Section 141(a) of the Code does not apply: (A) which are allocated to such beneficiary, and (B) which are outstanding on the date of issuance of the Bonds (not including as outstanding any obligation which is to be redeemed from the proceeds of the Bonds). (iii) The amount of any issue shall be allocated so that: (y) except as may otherwise be provided in regulations promulgated under Section 144(a)(10)(C) of the Code, the portion of the face amount of any issue allocated to any test-period beneficiary of the facility financed by the proceeds of such issue (other than an owner of such facility) is an amount which bears the same relationship to the entire face amount of such issue as the portion of such facility used by such beneficiary bears to the entire facility; and (z) except as otherwise provided in regulations promulgated under Section 144(a)(10)(C) of the Code, the portion of the face amount of an issue allocated to any test period beneficiary who is an owner of a facility financed by the proceeds of such issue is an amount which bears the same relationship to the entire face amount of such issue as the portion of such facility owned by such beneficiary bears to the entire facility. (aa) The information furnished by the Company and used by the Issuer in making its election to issue the Bonds pursuant to Section 144(a)(4) of the Code was true and complete as of the date hereof. (bb) No customer of the Company is expected to purchase ten percent (10%) or more of the Company's annual output from the Project during the first three years after the initial issuance of Bonds. (cc) The Project constitutes a "manufacturing facility" within the meaning and contemplation of Section 144(a)(12) of the Code, and any office space included as part of the Project will be (i) located at or within the Project, (ii) directly related to the day-to-day manufacturing operations at the Project, and (iii) DE MINIMIS in size and cost in relation to the size and cost of the Project. Section 2.4. NOTICE OF DETERMINATION OF TAXABILITY. Promptly after the Company first becomes aware of any Determination of Taxability, the Company shall give written notice thereof to the Issuer and the Trustee. 11 ARTICLE III ACQUISITION AND CONSTRUCTION OF THE PROJECT; ISSUANCE OF THE BONDS Section 3.1. AGREEMENT TO ACQUIRE, CONSTRUCT, IMPROVE AND EQUIP THE PROJECT. The Company agrees to make all contracts and do all things necessary for the acquisition, construction, improving, and equipping of the Project, with or without advertising for bids, and the Company agrees that it will cause the Project Facilities to be constructed on the Project Site substantially in accordance with the Plans and Specifications. The Company may make such change orders as it deems necessary or desirable provided, however, that any change orders the cost of which, either individually or in the aggregate, shall exceed $25,000 shall be subject to the prior written approval of the Bank. The Company further agrees that it will acquire, construct, improve, and equip the Project with all reasonable dispatch and use its best efforts to cause acquisition, construction, improving, equipping, and occupancy of the Project to be completed by October 31, 1998, or as soon thereafter as may be practicable, delays caused by FORCE MAJEURE as defined in Section 8.1 hereof only excepted; but if for any reason such acquisition, construction, improving and equipping is not completed by said date there shall be no resulting liability on the part of the Company and no diminution in or postponement of the payments required in Section 4.2 hereof to be paid by the Company. Section 3.2. AGREEMENT TO ISSUE THE BONDS; APPLICATION OF BOND PROCEEDS. In order to provide funds for the payment of the Cost of the Project, the Issuer, concurrently with the execution of this Agreement, will issue, sell, and deliver the Bonds and deposit the net proceeds thereof (after payment of the fees and expenses of the placement agent) with the Trustee in the Construction Fund. Section 3.3. DISBURSEMENTS FROM THE CONSTRUCTION FUND. The Issuer has, in the Indenture, authorized and directed the Trustee to make disbursements from the Construction Fund to pay the Costs of the Project, or to reimburse the Company for any Cost of the Project paid by the Company, or to deposit funds to any debt service reserve fund. The Trustee shall not make any disbursement from the Construction Fund (other than for a deposit to any debt service reserve fund) until the Company shall have provided the Trustee with a Requisition, which Requisition shall be approved by the Bank; provided that the Trustee may transfer amounts from the Construction Fund to the Bond Fund related to the payment of interest on the Bonds through the Completion Date without a Requisition. 12 Section 3.4. FURNISHING DOCUMENTS TO THE TRUSTEE. The Company agrees to cause such Requisitions to be directed to the Trustee as may be necessary to effect payments out of the Construction Fund in accordance with Section 3.3 hereof. Section 3.5. ESTABLISHMENT OF COMPLETION DATE. (a) The Completion Date as to the Project shall be evidenced to the Issuer and the Trustee by a certificate signed by a Company Representative stating that, except for amounts retained by the Trustee at the Company's direction to pay any Cost of the Project not then due and payable, (i) construction of the Project has been completed and all costs of labor, services, materials and supplies used in such construction have been paid, (ii) all equipment for the Project has been installed, such equipment so installed is suitable and sufficient for the operation of the Project, and all costs and expenses incurred in the acquisition and installation of such equipment have been paid, and (iii) all other facilities necessary in connection with the Project have been acquired, constructed, improved, and equipped and all costs and expenses incurred in connection therewith have been paid. Notwithstanding the foregoing, such certificate shall state that it is given without prejudice to any rights against third parties which exist at the date of such certificate or which may subsequently come into being. Forthwith upon completion of the acquisition, construction, improving, and equipping of the Project, the Company agrees to cause such a certificate to be furnished to the Issuer and the Trustee. Upon receipt of such certificate, the Trustee shall retain in the applicable account in the Construction Fund a sum equal to the amounts necessary for payment of the Costs of the Project not then due and payable according to such certificate. If any such amounts so retained are not subsequently used, prior to any transfer of said amounts to the General Account of the Bond Fund as provided below, the Trustee shall give notice to the Company of the failure to apply said funds for payment of the Costs of the Project. Any amount not to be retained in the Construction Fund for payment of the Costs of the Project, and all amounts so retained but not subsequently used, shall be transferred by the Trustee into the General Account of the Bond Fund. (b) If less than Substantially All of the Net Proceeds of the Bonds then Outstanding has been used to pay Qualified Project Costs, any amount (exclusive of amounts retained by the Trustee in the applicable account in the Construction Fund for payment of Costs of the Project not then due and payable) remaining in the Construction Fund shall be transferred by the Trustee into the General Account of the Bond Fund and used by the Trustee (a) to redeem, or to cause the redemption of, Bonds on the earliest redemption date permitted by the Indenture without a premium, (b) to purchase Bonds on the open market prior to such redemption date 13 at prices not in excess of one hundred percent (100%) of the principal amount of such Bonds, or (c) for any other purpose provided that the Trustee is furnished with an opinion of Bond Counsel to the effect that such use is lawful under the Act, if applicable, and will not require that interest on the Bonds be included in gross income for federal income tax purposes. Until used for one or more of the foregoing purposes, such segregated amount may be invested as permitted by the Indenture provided that prior to any such investment, if applicable, the Trustee is provided with an opinion of Bond Counsel to the effect that such investment will not cause interest on the Bonds to be included in gross income for federal income tax purposes. Section 3.6. COMPANY REQUIRED TO PAY IN EVENT CONSTRUCTION FUND INSUFFICIENT. In the event the moneys in the Construction Fund available for payment of the Costs of the Project should not be sufficient to pay the Costs of the Project in full, the Company agrees to complete the Project and to pay that portion of the Costs of the Project in excess of the moneys available therefor in the Construction Fund. The Issuer does not make any warranty, either express or implied, that the moneys paid into the Construction Fund and available for payment of the Costs of the Project will be sufficient to pay all of the Costs of the Project. The Company agrees that if after exhaustion of the moneys in the Construction Fund, the Company should pay any portion of the Costs of the Project pursuant to the provisions of this Section, the Company shall not be entitled to any reimbursement therefor from the Issuer, the Trustee or the Owners of any of the Bonds, nor shall the Company be entitled to any diminution of the amounts payable under Section 4.2 hereof. Section 3.7. ARBITRAGE; PRESERVATION OF TAX-EXEMPTION. The Issuer and the Company each agree and covenant that neither the proceeds of the Bonds nor the funds held by the Trustee under the Indenture will be used in such manner as to cause any Bond to be an "arbitrage bond" within the meaning of Section 148 of the Code, as amended, as implemented by such proposed, temporary and final Regulations as have been or may hereafter be adopted by the United States Treasury Department thereunder. The Company further agrees and covenants not to take any action, the result of which would cause or be likely to cause the interest payable with respect to the Bonds not to be excluded from gross income for federal income tax purposes, other than those Bonds held by any person who, within the meaning of Section 147(a) of the Code, shall be deemed a "substantial user" of the Project or a "related person" to a "substantial user." The Company will comply with the applicable requirements of Section 103 and Part IV of Subchapter B of Chapter 1 of Subtitle A of the Code to the extent necessary to preserve the exclusion of interest on the Bonds from gross income of the Bondholders thereof for federal income tax purposes. 14 Section 3.8. CERTAIN COVENANTS WITH RESPECT TO COMPLIANCE WITH ARBITRAGE REQUIREMENTS FOR INVESTMENTS IN NONPURPOSE INVESTMENTS AND REBATE TO THE UNITED STATES OF AMERICA. Section 148(f) of the Code, as implemented by Section 1.148-1 to 1.148-11 of the Income Tax Regulations (the "Rebate Provisions"), requires that, with certain exceptions, the Issuer pay to the United States of America the Rebate Amount. The Company hereby assumes and agrees to make all payments for deposit into the Rebate Fund, in accordance with the terms of Section 6.13 of the Indenture, to pay the Rebate Amount, consents to the payment of the Rebate Amount by the Trustee in accordance with the terms and provisions of Section 6.13 of the Indenture, and agrees to pay any amounts in addition to the Rebate Amount, including all interest and penalties, if any, related thereto to the extent that funds available therefor held by the Trustee under the Indenture are not sufficient for such purpose. The Company agrees to indemnify, protect and hold harmless the Issuer and the Trustee with respect to any nonpayment of the Rebate Amount and such interest and penalties, and the Trustee with respect to the unavailability or insufficiency of funds with which to make such payments, and with respect to any expenses or costs incurred by the Trustee in complying with the terms of Section 6.13 of the Indenture. The Company hereby agrees to fully and timely comply with the requirements of Section 6.13 of the Indenture. Section 3.9. COVENANTS AS TO USE OF BOND PROCEEDS AND OTHER MATTERS, PAYBACK PROVISION. (a) The Company covenants and agrees that: (i) Substantially All of the Net Proceeds received from the sale of the Bonds actually disbursed from the Construction Fund, and investment earnings thereon, will be used for payment of Qualified Project Costs; (ii) (A) until disbursements from the Construction Fund have been made of all Issuance Costs to be paid from proceeds of the Bonds, the Company will not submit to the Trustee any requisition for a disbursement from the Construction Fund unless the expenditure of such disbursement will either be for Qualified Project Costs or for Issuance Costs; (B) after all Issuance Costs to be paid with proceeds of the Bonds have been requisitioned and until the date on which the aggregate Qualified Project Costs paid as of that date equals or exceeds Substantially All of the Costs of the Project paid as of that date from proceeds of the Bonds, including investment earnings thereon, the Company will not submit to the Trustee any requisition for a disbursement from the Construction Fund 15 unless the expenditure of such disbursement will be for Qualified Project Costs; and (C) after such date, the Company will not submit to the Trustee any requisition for a disbursement from the Construction Fund if, after the expenditure of such disbursement, less than Substantially All of the Net Proceeds of the Bonds and investment earnings thereon actually disbursed to that time would have been used to pay Qualified Project Costs; (iii) the Company will not submit to the Trustee any requisition for a disbursement from the Construction Fund for Issuance Costs if, after the expenditure of such disbursement, more than two percent (2%) of the proceeds of the Bonds actually disbursed to that time would have been used to pay Issuance Costs; (iv) in the event a disbursement from the Construction Fund is made which results in the covenants in paragraphs (i), (ii) or (iii) above being violated, the Company will promptly repay to the Trustee for deposit in the Construction Fund such amount as may be necessary for the Company to again be in compliance with paragraphs (i), (ii) or (iii) above; (v) less than twenty-five percent (25%) of the Net Proceeds of the Bonds shall be used (either directly or indirectly) to acquire land or an interest therein; (vi) no more than twenty-five percent (25%) of the Net Proceeds of the Bonds shall be used (either directly or indirectly) to provide a facility the primary purpose of which is retail food and beverage services, automobile sales or service, or the provision of recreation or entertainment or any combination thereof; (vii) none of the proceeds from the issuance of the Bonds shall be used to provide, any private or commercial golf course, country club, massage parlor, tennis club, skating facility (including roller skating, skateboard and ice skating), racquet sports facility (including any handball or racquetball court), hot tub facility, suntan facility, racetrack, airplane, skybox or other private luxury box, health club facility, any facility primarily used for gambling, or any store the principal business of which is the sale of alcoholic beverages for consumption off premises, or land (or any interest therein) to be used for farming purposes; 16 (viii) less than five percent (5%) of the Net Proceeds of the Bonds shall be used directly or indirectly to provide residential real property for family units; (ix) the Company shall not allow any portion of the Net Proceeds of the Bonds to be used for the acquisition of any property or an interest therein (other than land) unless the first use of such property is pursuant to such acquisition; and provided further, that this covenant shall not apply with respect to any building (and the equipment therefor), if (A) the rehabilitation expenditures, as such term is used in section 147(d)(2) of the Code, with respect to such building equal or exceed (B) fifteen percent (15%) of the portion of the cost of the acquiring such building (and equipment) financed with the proceeds of the Bonds; (x) no "test-period beneficiary" (as defined in Section 144(a)(10) of the Code) with respect to the Bonds has been allocated portions of the face amounts of "tax-exempt facility-related bonds" (as defined in Section 144(a)(10) of the Code) outstanding on the date hereof (but not including any obligations which are to be redeemed from the proceeds of the Bonds), the aggregate amount of which, when increased by the portion of the face amount of the Bonds allocable to that test-period beneficiary, would exceed $40,000,000; (xi) at no time within three years after the later of the date the Bonds are issued or the date the Project is placed in service shall the Company become an owner or a principal user, or permit or suffer a related person (within the meaning of Section 144(a)(3) of the Code) to become an owner or a principal user, or permit or suffer an owner or a principal user of the Project or a related person thereto, to become an owner or principal user of a facility financed with tax-exempt facility-related bonds outstanding on the date of issuance of the Bonds if the sum of (A) the portion allocated to the Company, a related person thereto, or other owner or principal user of the Project (or related person thereto) of the outstanding aggregate amount of the tax-exempt facility-related bonds financing such facility, (B) the portion allocated to the Company, related person thereto, or other owner or principal user of the Project (or related person thereto) on the date of issuance of the Bonds of the aggregate amount of other then-outstanding tax-exempt facility-related bonds, and (C) the portion allocated to the Company, related person thereto, or other owner or principal user of the Project (or related person thereto) 17 of the outstanding aggregate authorized face amount of the Bonds, exceeds $40,000,000, all within the meaning of Section 144(a)(10) of the Code and any Regulations promulgated thereunder; and (xii) at no time within three years after the later of the date the Bonds are issued or the date the Project is placed in service shall the Company become a related person (within the meaning of Section 144(a)(3) of the Code) to an owner or a principal user of a facility financed with tax-exempt facility-related bonds outstanding on the date of issuance of the Bonds or permit or suffer any other owner or principal user of the Project to become a related person to an owner or principal user of such a facility if the sum of (A) the principal allocated to such person of the outstanding aggregate amount of the tax-exempt facility-related bonds financing such facility, (B) the portion allocated to the Company or other owner or principal user of the Project on the date of issuance of the Bonds of the aggregate amount of other then-outstanding tax-exempt facility-related bonds, and (C) the portion allocated to the Company or other owner or principal user of the Project of the outstanding aggregate authorized face amount of the Bonds, exceeds $40,000,000, all within the meaning of Section 144(a)(10) of the Code and any Regulations promulgated thereunder. Section 3.10. DAMAGE, DESTRUCTION OR LOSS OF PROPERTY; OBLIGATION TO REBUILD; USE OF INSURANCE PROCEEDS AND CONDEMNATION AWARDS. If prior to full payment of all Bonds (or provision for payment thereof having been made in accordance with the provisions of the Indenture), the Project, or any part or component of the Project shall be damaged or destroyed, by whatever cause, or shall be taken by any public authority or entity in the exercise of or acquired under the threat of the exercise of its power of eminent domain, there shall be no abatement or reduction in the Loan Installments payable under this Agreement, and the Company will apply any insurance proceeds or condemnation awards resulting from claims for such losses or takings as provided in this Section. If prior to full payment of all Bonds (or provision for payment thereof having been made in accordance with the provisions of the Indenture), the Project, or any part or component of the Project shall be damaged, destroyed, or the Project or any part or component of the Project, the Project Site shall be taken by eminent domain or the threat of exercise of eminent domain, the Company shall promptly give, or cause to be given, written notice thereof to the Issuer, the Bank and the Trustee. All proceeds received from such property insurance with respect to the Project 18 and all condemnation awards with respect to the Project shall be deposited with the Trustee to the credit of the Construction Fund. Following the occurrence of such an event with respect to the Project, the Company shall have the option of (1) continuing to pay all amounts payable hereunder and to the extent permitted below proceeding promptly to repair, rebuild, restore or replace the property damaged, destroyed or taken, with such changes, alterations and modifications (including the substitution and addition of other property) as may be desired by the Company and, with respect to the Project, and as will comply with the limitations contained in this Agreement, and the Trustee will deposit such proceeds to the credit of the Construction Fund and make such disbursements therefrom, in accordance with Section 3.3 hereof, as may be necessary to pay the cost of such repair, rebuilding or restoration, either on completion thereof or as the work progresses or (2) requesting the Issuer to cause the Bonds to be redeemed in accordance with the terms of the Indenture. Section 3.11. PURSUIT OF REMEDIES AGAINST CONTRACTORS, SUBCONTRACTORS AND SURETIES. In the event of default of any contractor or subcontractor, if any, under any contract made by it in connection with the Project, the Company will promptly proceed, either separately or in conjunction with others, to exhaust its remedies against the contractor or subcontractor so in default and against each surety for the performance of such contract. The Company agrees forthwith to take such actions as may be necessary or required to protect the interests of all parties with respect to the Project unless directed to the contrary by the Trustee. Any amounts recovered by way of damages, refunds, adjustments or otherwise in connection with the foregoing that are needed to pay a portion of the cost of the Project shall be paid into the applicable account in the Construction Fund. Section 3.12. CERTAIN COVENANTS WITH RESPECT TO CAPITAL EXPENDITURES AND USE OF PROCEEDS OF THE BONDS. The Issuer is issuing the Bonds pursuant to an election made by it under Section 144(a)(4) of the Code. It is the intention of the parties hereto that the interest on the Bonds be and remain excluded from gross income for federal income tax purposes and to that end the Issuer and the Company hereby agree and covenant with each other, with the Trustee, and the present and each of the future holders of the Bonds, as follows: (a) The Company and the Issuer represent that there have never been issued any bonds with respect to "facilities" described in Section 144(a)(2) of the Code which are located in the City of Gainesville, Florida, or facilities that are located outside of, but contiguous to, the incorporated limits of the City of Gainesville, Florida, or facilities that are located outside of the 19 incorporated limits of the City of Gainesville, Florida, but are integrated with the Project, which bonds would be taken into account in determining the aggregate face amount of the Bonds as provided in Section 144(a)(2) of the Code. (b) The Company further covenants and represents that, for the purposes of Section 144(a)(4) of the Code, the (i) aggregate principal amount of the Bonds being issued, plus capital expenditures with respect to the Project by any person, plus capital expenditures heretofore made (other than those described in Section 144(a)(4)(C) of the Code) by the Company, and any other person who is, or may become, a principal user of the Project, with respect to "facilities" described in Section 144(a)(4)(B) of the Code (of which the Project is one), have not and will not exceed $10,000,000 (or any such larger amount as may hereafter be permitted by the Code without affecting the status of the interest on the Bonds as excluded from gross income for federal income tax purposes) during the six-year period beginning three years before the date of issuance and delivery of the Bonds. (c) The Issuer and the Company further covenant and agree that during the three-year period following the date of issuance and delivery of the Bonds, neither of them shall make or cause or permit to be made any capital expenditures (other than those mentioned in Section 144(a)(4)(C) of the Code) with respect to "facilities" described in Section 144(a)(4)(B) of the Code which would cause the interest on the Bonds to become included in gross income for federal income tax purposes. (d) The Company further covenants that, at no time within three years after the later of the date the Bonds are issued or the date the Project is placed in service, shall the Company become an owner or a principal user, or permit or suffer a related person (within the meaning of Section 144(a)(3) of the Code) to become an owner or a principal user, or permit or suffer an owner or a principal user of the Project or a related person thereto, to become an owner or principal user of "facilities" described in Section 144(a)(4)(B) of the Code, if the sum of (i) the aggregate face amount outstanding on the date of issue of the Bonds of any tax-exempt bonds described in Section 144(a)(2) of the Code issued to finance such facilities, (ii) the capital expenditures that had been made with respect to such "facilities" during the six-year period beginning three 20 years before the date of issuance and delivery of the Bonds, (iii) the aggregate principal amount of the Bonds, and (iv) other capital expenditures taken into account under Section 144(a)(4) of the Code, would exceed $10,000,000. (e) The Company further covenants that, at no time within three years after the later of the date the Bonds are issued or the date the Project is placed in service, shall the Company permit or suffer an owner or a principal user of "facilities" described in Section 144(a)(4)(B) of the Code or a related person thereto (within the meaning of Section 144(a)(3) of the Code) to become an owner or a principal user of the Project if the sum of (i) the aggregate face amount outstanding on the date of issue of the Bonds of any tax-exempt bonds described in Section 144(a)(2) of the Code issued to finance such facilities, (ii) the capital expenditures that had been made with respect to such "facilities" during the six-year period beginning three years before the date of issuance and delivery of the Bonds, (iii) the aggregate principal amount of the Bonds, and (iv) other capital expenditures taken into account under Section 144(a)(4) of the Code, would exceed $10,000,000. (f) The Company further covenants that, at no time within three years after the later of the date the Bonds are issued or the date the Project is placed in service, shall the Company become a related person (within the meaning of Section 144(a)(3) of the Code) to an owner or a principal user of "facilities" described in Section 144(a)(4)(B) of the Code or permit or suffer any other owner or principal user of the Project to become a related person to an owner or principal user of such "facilities" if the sum of (i) the aggregate face amount outstanding on the date of issue of the Bonds of any tax-exempt bonds described in Section 144(a)(2) of the Code issued to finance such facilities, (ii) the capital expenditures that had been made with respect to such "facilities" during the six-year period beginning three years before the date of issuance and delivery of the Bonds, (iii) the aggregate principal amount of the Bonds, and (iv) other capital expenditures taken into account under Section 144(a)(4) of the Code, would exceed $10,000,000. (g) The Company further agrees that should the capital expenditures limitation set forth in Section 144(a)(4) be exceeded during the six-year period referred to therein, and there shall occur a "Determination of 21 Taxability" as defined in Section 3.01(b) of the Indenture, the Company shall promptly comply with the provisions of Section 5.1 hereof. (h) The Company further covenants and agrees that it will furnish to the Trustee a certificate of the Company within ninety (90) days of the first three anniversary dates of closing of the issuance and delivery of the Bonds which will reflect for the period beginning three years prior to the date of issuance and delivery of the Bonds and extending through the applicable date of such certificate, the aggregate amount of capital expenditures (including as capital expenditures for this purpose the principal amount of the Bonds) that have been made or incurred with respect to "facilities" described in Section 144(a)(4)(B) of the Code (of which the Project is one) that must be taken into account in determining whether the $10,000,000 limit applicable to the Bonds pursuant to Section 144(a)(4) of the Code has been exceeded, and that such capital expenditures have not exceeded $10,000,000. (i) The Company represents and warrants that the Company is expected to be the only principal user of the Project, as the term "principal user" is utilized in Section 144(a) of the Code. (j) The Company further covenants that it shall take, or require to be taken, such further actions as are required of a principal user of property financed by an issue of obligations which are subject to the $10,000,000 limitation of Section 144(a)(4) of the Code, which actions are set forth in Section 144(a) of the Code and the regulations thereunder, whether said regulations are now or hereafter adopted, proposed or temporary, including Section 1.103-10(b) of said regulations. (k) The Issuer and the Company further agree and covenant to comply fully, during the term of this Agreement, with all effective rules, rulings, regulations and decisions promulgated by the Department of the Treasury or the Internal Revenue Service, with respect to bonds issued under Section 144(a)(4) of the Code so as to maintain the status of interest on the Bonds as excluded from gross income for federal income tax purposes. 22 ARTICLE IV LOAN PROVISIONS; SUBSTITUTE LETTER OF CREDIT Section 4.1. LOAN OF PROCEEDS. The Issuer agrees, upon the terms and conditions contained in this Agreement and the Indenture, to lend to the Company the proceeds received by the Issuer from the sale of the Bonds. Such proceeds shall be disbursed to or on behalf of the Company as provided in Section 3.3 hereof. Section 4.2. AMOUNTS PAYABLE. (a) The Company hereby covenants and agrees to repay the loan, as follows: on or before any Interest Payment Date for the Bonds or any other date that any payment of interest, premium, if any, or principal or Purchase Price is required to be made in respect of the Bonds pursuant to the Indenture, until the principal of, premium, if any, and interest on the Bonds shall have been fully paid or provision for the payment thereof shall have been made in accordance with the Indenture, in immediately available funds, a sum which, together with any other moneys available for such payment in any account of the Bond Fund, will enable the Trustee to pay the amount payable on such date as Purchase Price or principal of (whether at maturity or upon redemption or acceleration or otherwise), premium, if any, and interest on the Bonds as provided in the Indenture; provided, however, that the obligation of the Company to make any payment hereunder shall be deemed satisfied and discharged to the extent of the corresponding payment made by the Bank to the Trustee under the Letter of Credit. It is understood and agreed that all payments payable by the Company under subsection (a) of this Section 4.2 are assigned by the Issuer to the Trustee for the benefit of the Owners of the Bonds. The Company assents to such assignment. The Issuer hereby directs the Company and the Company hereby agrees to pay to the Trustee at the Principal Office of the Trustee all payments payable by the Company pursuant to this subsection. (b) The Company will also pay the reasonable expenses of the Issuer related to the issuance of the Bonds and any and all ongoing costs and expenses for any continuing duties or obligations of the Issuer related in any respect to the Bonds, this Agreement, the Indenture or any other documents executed in connection therewith after the issuance of the Bonds. (c) The Company will also pay the reasonable fees and expenses of the Trustee under the Indenture and all other amounts which may be payable to the Trustee under Section 10.02 of the 23 Indenture, such amounts to be paid directly to the Trustee for the Trustee's own account as and when such amounts become due and payable. (d) The Company covenants, for the benefit of the Owners of the Bonds, to pay or cause to be paid, to the Tender Agent, such amounts as shall be necessary to enable the Tender Agent to pay the Purchase Price of Bonds delivered to it for purchase, all as more particularly described in Sections 4.01, 4.02 and 4.04 of the Indenture; PROVIDED, however, that the obligation of the Company to make any such payment under this subsection (d) shall be reduced by the amount of moneys available for such payment described in subsection (i) of Section 4.05 of the Indenture; and PROVIDED, FURTHER, that the obligation of the Company to make any payment under this subsection (d) shall be deemed to be satisfied and discharged to the extent of the corresponding payment made by the Bank under the Letter of Credit. (e) In the event the Company should fail to make any of the payments required in this Section 4.2, the item or installment so in default shall continue as an obligation of the Company until the amount in default shall have been fully paid, and the Company agrees to pay the same with interest thereon, to the extent permitted by law, from the date when such payment was due, at the rate of interest borne by the Bonds. Section 4.3. OBLIGATIONS OF COMPANY UNCONDITIONAL. The obligations of the Company to make the payments required in Section 4.2 and to perform and observe the other agreements contained herein shall be absolute and unconditional and shall not be subject to any defense or any right of setoff, counterclaim or recoupment arising out of any breach by the Issuer or the Trustee of any obligation to the Company, whether hereunder or otherwise, or out of any indebtedness or liability at any time owing to the Company by the Issuer or the Trustee, and, until such time as the principal of, premium, if any, and interest on the Bonds shall have been fully paid or provision for the payment thereof shall have been made in accordance with the Indenture, the Company (i) will not suspend or discontinue any payments provided for in Section 4.2 hereof, (ii) will perform and observe all other agreements contained in this Agreement and (iii) except as otherwise provided herein, will not terminate the Term of Agreement for any cause, including, without limiting the generality of the foregoing, failure of the Company to complete the acquisition, construction, improving and equipping of the Project, the occurrence of any acts or circumstances that may constitute failure of consideration, eviction or constructive eviction, destruction of or damage to the Project, the taking by eminent domain of title to or temporary use of any or all of the Project, commercial frustration of purpose, any change in the tax or other laws of the United States of America 24 or of the State or any political subdivision of either thereof or any failure of the Issuer or the Trustee to perform and observe any agreement, whether express or implied, or any duty, liability or obligation arising out of or connected with this Agreement. Nothing contained in this Section shall be construed to release the Issuer from the performance of any of the agreements on its part herein contained, and in the event the Issuer or the Trustee should fail to perform any such agreement on its part, the Company may institute such action against the Issuer or the Trustee as the Company may deem necessary to compel performance so long as such action does not abrogate the obligations of the Company contained in the first sentence of this Section. Section 4.4. SUBSTITUTE LETTER OF CREDIT. The Company may provide for the delivery to the Trustee of a Substitute Letter of Credit. Any Substitute Letter of Credit shall be delivered to the Trustee not less than sixty (60) days prior to the expiration of the Letter of Credit it is being issued to replace, shall be dated as of a date prior to the expiration date of the Letter of Credit for which the same is to be substituted (which date may be subsequent to the date of delivery of such Substitute Letter of Credit, but in all events such Substitute Letter of Credit shall become effective prior to the expiration of the Letter of Credit for which it is substituted), and shall expire on a date which is fifteen days after an Interest Payment Date for the Bonds. On or before the date of such delivery of a Substitute Letter of Credit to the Trustee, the Company shall furnish to the Trustee (a) written evidence from each rating agency by which the Bonds are then rated, to the effect that such rating agency has reviewed the proposed Substitute Letter of Credit and that the substitution of the proposed Substitute Letter of Credit will not, by itself, result in the reduction or withdrawal of the then applicable rating(s) of the Bonds; (b) a written opinion of Bond Counsel stating that the delivery of such Substitute Letter of Credit will not adversely affect the exclusion from gross income of interest on the Bonds for federal income tax purposes; and (c) a written opinion of counsel to the Substitute Bank to the effect that the Substitute Letter of Credit is a legal, valid, binding and enforceable obligation of the Substitute Bank in accordance with its terms. 25 ARTICLE V PREPAYMENT AND REDEMPTION Section 5.1. PREPAYMENT AND REDEMPTION. The Company shall have the option to prepay its obligations hereunder at the times and in the amounts as necessary to exercise its option to cause the Bonds to be redeemed or purchased as set forth in the Indenture and in the Bonds. The Company hereby agrees that it shall prepay its obligations hereunder at the times and in the amounts as necessary to accomplish the mandatory redemption of the Bonds as set forth in the Indenture and in the Bonds. The Issuer, at the request of the Company, shall forthwith take all steps (other than the payment of the money required for such redemption) necessary under the applicable redemption provisions of the Indenture to effect redemption of all or part of the Outstanding Bonds, as may be specified by the Company, on the date established for such redemption. ARTICLE VI SPECIAL COVENANTS Section 6.1. NO WARRANTY OF CONDITION OR SUITABILITY BY ISSUER. THE ISSUER MAKES NO WARRANTY, EITHER EXPRESS OR IMPLIED, AS TO THE PROJECT OR THE CONDITION THEREOF, OR THAT THE PROJECT WILL BE SUITABLE FOR THE PURPOSES OR NEEDS OF THE COMPANY. THE ISSUER MAKES NO REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, THAT THE COMPANY WILL HAVE QUIET AND PEACEFUL POSSESSION OF THE PROJECT. THE ISSUER MAKES NO REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, WITH RESPECT TO THE MERCHANTABILITY, CONDITION OR WORKMANSHIP OF ANY PART OF THE PROJECT OR ITS SUITABILITY FOR THE COMPANY'S PURPOSES. Section 6.2. ACCESS TO THE PROJECT. The Company agrees that the Issuer, the Bank, the Trustee and their duly authorized agents, attorneys, experts, engineers, accountants and representatives shall have the right to inspect the Project at all reasonable times and on reasonable notice. The Issuer, the Bank, the Trustee and their duly authorized agents shall also be permitted, at all reasonable times and upon reasonable notice, to examine the books and records of the Company with respect to the Project. Section 6.3. FURTHER ASSURANCES AND CORRECTIVE INSTRUMENTS. The Issuer and the Company agree that they will, from time to time, execute, acknowledge and deliver, or cause to be executed, acknowledged and delivered, such supplements hereto and 26 such further instruments as may reasonably be required for carrying out the expressed intention of this Agreement. Section 6.4. ISSUER AND COMPANY REPRESENTATIVES. Whenever under the provisions of this Agreement the approval of the Issuer or the Company is required or the Issuer or the Company is required to take some action at the request of the other, such approval or such request shall be given for the Issuer by an Issuer Representative and for the Company by a Company Representative. The Trustee shall be authorized to act on any such approval or request. Section 6.5. FINANCIAL REPORTS. After the Conversion Date, so long as any of the Bonds are Outstanding, the Company shall furnish or cause to be furnished to the Trustee the following information: (a) Within one hundred eighty (180) days after the close of each fiscal year of the Company, a balance sheet of the Company as of the end of such fiscal year and statements of income and retained earnings of the Company for such fiscal year, each prepared in accordance with generally accepted accounting principles consistently applied, in reasonable detail and certified by certified public accountants of recognized standing. (b) Upon request, copies of all such regular or periodic reports, which are available for public inspection which the Company may be required to file with any federal or state department, bureau, commission, or agency. (c) Within one hundred eighty (180) days after the end of each fiscal year, a certificate of a Company Representative stating whether the Company is in compliance with all covenants and agreements made by the Company in this Agreement. Section 6.6. FINANCING STATEMENTS. The Company agrees to execute and file or cause to be executed and filed any and all financing statements or amendments thereof or continuation statements necessary to perfect and continue the perfection of the security interests granted in the Indenture. The Company shall pay all costs of filing such instruments. Section 6.7. MAINTENANCE OF PROJECT. The Company agrees that it will (i) maintain, repair and operate the Project; and (ii) pay, as the same respectively come due, all taxes and governmental charges of any kind whatsoever that may at any time be lawfully assessed or levied against the Company or the Issuer with respect to the Project or any portion thereof or with respect to the original issuance of the Bonds, including, without limiting the generality of the foregoing, any taxes levied against the Company 27 or the Issuer upon or with respect to the income or profits of the Issuer from the Project or a charge on the Loan Installments prior to or on a parity with the charge under the Indenture thereon and the pledge or assignment thereof to be created and made in the Indenture, and including all ad valorem taxes lawfully assessed upon the Project, all utility and other charges incurred in the operation, maintenance, use, occupancy and upkeep of the Project, all assessments and charges lawfully made by any governmental body against the Company or the Issuer on the Loan Installments; provided, however, that nothing in this subsection (ii) shall require the payment of any such tax or charge or make provision for the payment thereof, so long as the validity thereof shall be contested in good faith by the Company by appropriate legal or administrative proceedings, and further provided that, with respect to special assessments or other governmental charges that may lawfully be paid in installments over a period of years, the Company shall be obligated to pay only such installments as are required to be paid during the Agreement Term. Section 6.8. UNDERTAKING TO PROVIDE ONGOING DISCLOSURE. (a) This Section 6.8 constitutes the written undertaking for the benefit of the holders of the Bonds required by Section (b)(5)(i) of Securities and Exchange Commission Rule 15c2-12 under the Securities Exchange Act of 1934, as amended (17 CFR Part 240, ss. 240. 15c2-12) (the "Rule"), and shall apply when and if the Company exercises the Conversion Option. It is the Company's express intention that this Section 6.8 be assigned pursuant to and in accordance with the terms of the Indenture to the Trustee for the benefit of the Bondholders and that the Trustee and each Bondholder be a beneficiary of this Section 6.8 with the right to enforce this Section 6.8 directly against the Company. Capitalized terms used in this Section 6.8 and not otherwise defined in this Agreement shall have the meanings assigned such terms in subsection (d) hereof. (b) The Company, as an "obligated person" within the meaning of the Rule, undertakes to provide the following information as provided in this Section 6.8: (1) Annual Financial Information; (2) Financial Statements, if any; and (3) Material Event Notices. (c) (1) Subject to the terms of this Section 6.8, the Company shall while any Bonds are Outstanding provide the Annual Financial Information to the Trustee on or before July 1 of each year after the election of the Conversion Option 28 (the "Submission Date"), and the Trustee shall provide to the Issuer and to each then existing NRMSIR and the SID, if any, such Annual Financial Information on or before July 1 of each year (the "Report Date") while any Bonds are Outstanding or, if not received by the Trustee by the Submission Date, then within fifteen (15) Business Days of its receipt by the Trustee. The Company shall include with each submission of Annual Financial Information to the Trustee and the Issuer a written representation addressed to the Trustee and the Issuer to the effect that the Annual Financial Information is the Annual Financial Information required by this Section 6.8 and that it complies with the applicable requirements of this Section 6.8. The Company may adjust the Submission Date and the Report Date if the Company changes its fiscal year by providing written notice of the change of fiscal year and the new Submission Date and Report Date to the Trustee, the Issuer, each then existing NRMSIR and the SID, if any; provided that the new Report Date shall be one hundred eighty (180) days after the end of the new fiscal year and the new Submission Date shall be thirty (30) days prior to the Report Date, and provided further that the period between the final Report Date relating to the former fiscal year and the initial Report Date relating to the new fiscal year shall not exceed one year in duration. It shall be sufficient if the Company provides to the Trustee and the Issuer and the Trustee provides to each then existing NRMSIR and the SID, if any, the Annual Financial Information by specific reference to documents previously provided to each NRMSIR and the SID, if any, or filed with the Securities and Exchange Commission and, if such a document is a final official statement within the meaning of the Rule, available from the Municipal Securities Rulemaking Board. (2) If not provided as part of the Annual Financial Information, the Company shall provide Financial Statements to the Trustee when and if available while Bonds are Outstanding and the Trustee shall then promptly provide the Issuer, each then existing NRMSIR and the SID, if any, with such Financial Statements. (3) (i) If a Material Event occurs while any Bonds are Outstanding, the Company shall provide a Material Event Notice to the Trustee in a timely manner and the Trustee shall promptly provide to the Issuer, the Municipal Securities Rulemaking Board and the SID, if any, such Material Event Notice. Each Material Event Notice shall be so captioned and shall prominently state the date, title and CUSIP numbers of the Bonds. (ii) The Trustee shall promptly advise the Company 29 whenever, in the course of performing its duties as Trustee under the Indenture, the Trustee identifies an occurrence which, if material, would require the Company to provide a Material Event Notice pursuant to clause (2)(i); provided that the failure of the Trustee so to advise the Company shall not constitute a breach by the Trustee of any of its duties and responsibilities hereunder. (4) The Trustee shall, without further direction or instruction from the Company, provide in a timely manner to the Municipal Securities Rulemaking Board and to the SID, if any, notice of any failure while any Bonds are Outstanding by the Trustee to provide to each then existing NRMSIR and the SID, if any, Annual Financial Information on or before the Report Date (whether caused by failure of the Company to provide such information to the Trustee by the Submission Date or for any other reason). For the purposes of determining whether information received from the Company is Annual Financial Information, the Trustee shall be entitled conclusively to rely on the Company's written representation made pursuant to clause (c)(1) of this Section 6.8. (5) If the Company provides to the Trustee information relating to the Company or the Bonds, which information is not designated as a Material Event Notice, and directs the Trustee to provide such information to information repositories, the Trustee shall provide such information in a timely manner to the Issuer, the Municipal Securities Rulemaking Board and the SID, if any. (d) The following are the definitions of the capitalized terms used in this Section and not otherwise defined in this Agreement. (1) "Annual Financial Information" means the financial information (which shall be based on financial statements prepared in accordance with generally accepted accounting principles ("GAAP")) or operating data with respect to the Company, provided at least annually, of the type included in the official statement or other offering document utilized in connection with the remarketing of Bonds after the Conversion Option, which Annual Financial Information shall include Financial Statements. (2) "Financial Statements" means the Company's annual financial statements, prepared in accordance with GAAP, and if audited, accompanied by the report of the auditing certified public account. (3) "Material Event" means any of the following events, 30 if material, with respect to the Bonds. (i) Principal and interest payment delinquencies; (ii) Non-payment related defaults; (iii) Unscheduled draws on debt service reserves reflecting financial difficulties; (iv) Unscheduled draws on credit enhancements reflecting financial difficulties; (v) Substitution of credit or liquidity providers, or their failure to perform; (vi) Adverse tax opinions or events affecting the tax-exempt status of the security; (vii) Modifications to rights of security holders; (viii) Bond calls; (ix) Defeasances; (x) Release, substitution, or sale of property securing repayment of the securities; and (xi) Rating changes. (4) "Material Event Notice" means written or electronic notice of a Material Event. (5) "NRMSIR" means a nationally recognized municipal securities information repository, as recognized from time to time by the Securities and Exchange Commission for the purposes referred to in the Rule; the NRMSIRs as of the date of this Agreement being as follows: Bloomberg Municipal Repository Thomson NRMSIR Kenny Information Systems, Inc. Donnelley Financial Municipal Securities Disclosure Archive DPC Data Inc. (6) "SID" means a state information depository as operated or designated by the State as such for the purposes referred to in the Rule. (As of the date hereof, no SID is in existence in the State.) 31 (e) Unless otherwise required by law and subject to technical and economic feasibility, the Company and the Trustee shall employ such methods of information transmission as shall be requested or recommended by the designated recipients of the Company's information. (f) The continuing obligation hereunder of the Company to provide Annual Financial Information and Material Event Notices and the Trustee's obligations under this Section 6.8 shall terminate immediately once the Bonds no longer are Outstanding. This Section 6.8, or any provision hereof, shall be null and void in the event that the Company delivers to the Trustee and the Issuer an opinion of nationally recognized bond counsel to the effect that those portions of the Rule which require this Section 6.8, or any such provisions, are invalid, have been repealed retroactively or otherwise do not apply to the Bonds; provided that the Trustee shall have provided notice of such delivery and the cancellation of this Section 6.8 to each then existing NRMSIR and the SID, if any. This Section 6.8 may be amended without the consent of the Bondholders, but only upon the delivery by the Company to the Trustee and the Issuer of the proposed amendment and an opinion of nationally recognized bond counsel to the effect that such amendment, and giving effect thereto, will not adversely affect the compliance of this Section and by the Company with the Rule; provided that the Trustee shall have provided notice of such delivery and of the amendment to each then existing NRMSIR and the SID, if any. (g) Any failure by the Company to perform in accordance with this Section 6.8 shall not constitute an "Event of Default" under Article VIII hereof, and the rights and remedies provided by Article VIII upon the occurrence of an "Event of Default" shall not apply to any such failure. Neither the Issuer nor the Trustee shall have any power or duty to enforce this Section 6.8. (h) The Company shall reimburse the Trustee for any reasonable expenses incurred by the Trustee in complying with the requirements of this Section 6.8. 32 ARTICLE VII ASSIGNMENT, SELLING, LEASING; INDEMNIFICATION; REDEMPTION Section 7.1. ASSIGNMENT, SELLING AND LEASING. This Agreement may be assigned and the Project may be sold or leased, as a whole or in part, with the prior written consent of the Bank, but without the necessity of obtaining the consent of either the Issuer or the Trustee; PROVIDED, however, that no such assignment, sale or lease shall, in the opinion of Bond Counsel, result in interest on any of the Bonds becoming includable in gross income for federal income tax purposes, or shall otherwise violate any provisions of the Act; PROVIDED FURTHER, however, that no such assignment, sale or lease shall relieve the Company of any of its obligations under this Agreement and the Company shall remain fully liable thereon. Section 7.2. RELEASE AND INDEMNIFICATION COVENANTS. (a) The Company shall and hereby agrees to indemnify and save the Issuer and the Trustee harmless against and from all claims by or on behalf of any person, firm, corporation or other legal entity arising from the conduct or management of, or from any work or thing done on, the Project during the Term of Agreement, including without limitation, (i) any condition of the Project, (ii) any breach or default on the part of the Company in the performance of any of its obligations under this Agreement, (iii) any act or negligence of the Company or of any of its agents, contractors, servants, employees or licensees or (iv) any act or negligence of any assignee or lessee of the Company, or of any agents, contractors, servants, employees or licensees of any assignee or lessee of the Company. The Company shall indemnify and save the Issuer and the Trustee harmless from any such claim arising as aforesaid, or in connection with any action or proceeding brought thereon, and upon notice from the Issuer or the Trustee, the Company shall defend them or either of them in any such action or proceeding. (b) Notwithstanding the fact that it is the intention of the parties hereto that the Issuer shall not incur any pecuniary liability by reason of the terms of this Agreement or the undertakings required of the Issuer hereunder, by reason of the issuance of the Bonds, by reason of the execution of the Indenture or by reason of the performance of any act requested of the Issuer by the Company, including all claims, liabilities or losses arising in connection with the violation of any statutes or regulation pertaining to the foregoing; nevertheless, if the Issuer should incur any such pecuniary liability, then in such event the Company 33 shall indemnify and hold the Issuer harmless against all claims, demands or causes of action whatsoever, by or on behalf of any person, firm or corporation or other legal entity arising out of the same or out of any offering statement or lack of offering statement in connection with the sale or resale of the Bonds and all costs and expenses incurred in connection with any such claim or in connection with any action or proceeding brought thereon, and upon notice from the Issuer, the Company shall defend the Issuer in any such action or proceeding. All references to the Issuer in this Section 7.2 shall be deemed to include its directors, officers, employees, attorneys and agents. Notwithstanding anything to the contrary contained herein, the Company shall have no liability to indemnify the Issuer against claims or damages resulting from the Issuer's own gross negligence or willful misconduct or to indemnify the Trustee against claims or damages resulting from the Trustee's own negligence or willful misconduct. In case any action shall be brought against one or more of the Trustee, the Issuer, or the directors, officers, agents, attorneys or employees of either (the "Indemnified Parties") based upon any of the above and in respect of which indemnity may be sought against the Company, such Indemnified Party shall promptly notify the Company in writing, enclosing a copy of all papers served, but the omission so to notify the Company of any such action shall not relieve it of any liability which it may have to any Indemnified Party otherwise than under this Section. In case any such action for which indemnification is sought shall be brought against any Indemnified Party and it shall notify the Company of the commencement thereof, the Company shall be entitled to participate in and, to the extent that it shall wish, to assume the defense thereof with counsel reasonably satisfactory to such Indemnified Party. The Indemnified Party shall have the right to employ its own counsel in any such action but the fees and expenses of such counsel shall be at the expense of such Indemnified Party unless (i) the employment of counsel by such Indemnified Party has been authorized by the Company, (ii) the Indemnified Party shall have reasonably concluded, based upon an opinion of counsel reasonably satisfactory to the Company, that there may be a conflict of interest between the Company and the Indemnified Party in the conduct of the defense of such action (in which case the Company shall not have the right to direct the defense of such action on behalf of the Indemnified Party), or (iii) the Company shall not in fact have employed counsel reasonably satisfactory to the Indemnified Party to assume the defense of such action. The Company shall not be liable for any settlement of any action or claim effected without its consent. Section 7.3. ISSUER TO GRANT SECURITY INTEREST TO 34 TRUSTEE. The parties hereto agree that pursuant to the Indenture, the Issuer shall assign to the Trustee, in order to secure payment of the Bonds, all of the Issuer's right, title, and interest in and to this Agreement, except for the Issuer's rights under Sections 4.2(b), 7.2 and 8.4 hereof. Section 7.4. INDEMNIFICATION OF TRUSTEE. The Company shall and hereby agrees to indemnify the Trustee for, and hold the Trustee harmless against, any loss, liability or expense (including the costs and expenses of defending against any claim of liability) incurred without negligence or willful misconduct by the Trustee and arising out of or in connection with its acting as Trustee under the Indenture. ARTICLE VIII DEFAULTS AND REMEDIES Section 8.1. DEFAULTS DEFINED. The following shall be "Defaults" under this Agreement and the term "Default" shall mean, whenever it is used in this Agreement, any one or more of the following events: (a) Failure by the Company to pay any amount required to be paid under subsection (a) or (d) of Section 4.2 hereof. (b) Failure by the Company to observe and perform any covenant, condition or agreement on its part to be observed or performed, other than as referred to in Section 8.1(a), for a period of thirty (30) days after written notice specifying such failure and requesting that it be remedied shall have been given to the Company by the Issuer or the Trustee, unless the Issuer and the Trustee shall agree in writing to an extension of such time prior to its expiration; PROVIDED, however, if the failure stated in the notice cannot be corrected within the applicable period, the Issuer and the Trustee will not unreasonably withhold their consent to an extension of such time if corrective action is instituted by the Company within the applicable period and diligently pursued until such failure is corrected. (c) The dissolution or liquidation of the Company, except as authorized by Section 2.2 hereof, or the voluntary initiation by the Company of any proceeding under any federal or state law relating to bankruptcy, insolvency, arrangement, reorganization, readjustment of debt or any other form of debtor relief, or the initiation against the Company of any such proceeding which shall remain undismissed for one hundred twenty (120) days, or failure by the Company to promptly have discharged any execution, garnishment or attachment of such consequence as 35 would impair the ability of the Company to carry on its operations at the Project, or assignment by the Company for the benefit of creditors, or the entry by the Company into an agreement of composition with its creditors or the failure generally by the Company to pay its debts as they become due. (d) The occurrence of a Default under the Indenture. The provisions of subsection (b) of this Section are subject to the following limitation: if by reason of FORCE MAJEURE the Company is unable in whole or in part to carry out any of its agreements contained herein (other than its obligations contained in Article IV hereof), the Company shall not be deemed in Default during the continuance of such inability. The term "FORCE MAJEURE" as used herein shall mean, without limitation, the following: acts of God; strikes or other industrial disturbances; acts of public enemies; orders or restraints of any kind of the government of the United States of America or of the State or of any of their departments, agencies or officials, or of any civil or military authority; insurrections; riots; landslides; earthquakes; fires; storms; droughts; floods; explosions; breakage or accident to machinery, transmission pipes or canals; and any other cause or event not reasonably within the control of the Company. The Company agrees, however, to remedy with all reasonable dispatch the cause or causes preventing the Company from carrying out its agreement, provided that the settlement of strikes and other industrial disturbances shall be entirely within the discretion of the Company and the Company shall not be required to settle strikes, lockouts and other industrial disturbances by acceding to the demands of the opposing party or parties when such course is in the judgment of the Company unfavorable to the Company. Section 8.2. REMEDIES ON DEFAULT. Whenever any Default referred to in Section 8.1 hereof shall have happened and be continuing, the Trustee, or the Issuer with the written consent of the Trustee, may take one or any combination of the following remedial steps: (a) If the Trustee has declared the Bonds immediately due and payable pursuant to Section 9.02 of the Indenture, by written notice to the Company, declare an amount equal to all amounts then due and payable on the Bonds, whether by acceleration of maturity (as provided in the Indenture) or otherwise, to be immediately due and payable as liquidated damages under this Agreement and not as a penalty, whereupon the same shall become immediately due and payable; (b) Have reasonable access to and inspect, examine and make copies of the books and records and any and all accounts, data and income tax and other tax returns of the Company during regular 36 business hours of the Company if reasonably necessary in the opinion of the Trustee; or (c) Take whatever action at law or in equity may appear necessary or desirable to collect the amounts then due and thereafter to become due, or to enforce performance and observance of any obligation, agreement or covenant of the Company under this Agreement. Any amounts collected pursuant to action taken under this Section shall be paid into the Bond Fund and applied in accordance with the provisions of the Indenture. Section 8.3. NO REMEDY EXCLUSIVE. Subject to Section 9.02 of the Indenture, no remedy herein conferred upon or reserved to the Issuer or the Trustee is intended to be exclusive of any other available remedy or remedies, but each and every such remedy shall be cumulative and shall be in addition to every other remedy given under this Agreement or now or hereafter existing at law or in equity. No delay or omission to exercise any right or power accruing upon any Default shall impair any such right or power or shall be construed to be a waiver thereof, but any such right or power may be exercised from time to time and as often as may be deemed expedient. In order to entitle the Issuer or the Trustee to exercise any remedy reserved to it in this Article, it shall not be necessary to give any notice, other than such notice as may be required in this Article. Such rights and remedies as are given the Issuer hereunder shall also extend to the Trustee, and the Trustee and the Owners of the Bonds, subject to the provisions of the Indenture, shall be entitled to the benefit of all covenants and agreements herein contained. Section 8.4. AGREEMENT TO PAY ATTORNEYS' FEES AND EXPENSES. In the event the Company should default under any of the provisions of this Agreement and the Issuer should employ attorneys or incur other expenses for the collection of payments required hereunder or the enforcement of performance or observance of any obligation or agreement on the part of the Company herein contained, the Company agrees that it will on demand therefor pay to the Issuer the reasonable fee of such attorneys and such other reasonable expenses so incurred by the Issuer. Section 8.5. NO ADDITIONAL WAIVER IMPLIED BY ONE WAIVER. In the event any agreement contained in this Agreement should be breached by either party and thereafter waived by the other party, such waiver shall be limited to the particular breach so waived and shall not be deemed to waive any other breach hereunder. 37 ARTICLE IX MISCELLANEOUS Section 9.1. TERM OF AGREEMENT. This Agreement shall remain in full force and effect from the date hereof to and including November 1, 2016 or until such time as all of the Bonds and the fees and expenses of the Issuer and the Trustee and all amounts payable to the Bank under the Credit Agreement shall have been fully paid or provision made for such payments, whichever is later; PROVIDED, however, that this Agreement may be terminated prior to such date pursuant to Article V of this Agreement, but in no event before all of the obligations and duties of the Company hereunder have been fully performed, including, but not limited to, the payment of all costs and fees mandated hereunder. Section 9.2. NOTICES. All notices, certificates or other communications hereunder shall be sufficiently given and shall be deemed given when delivered or mailed by registered mail, postage prepaid, addressed as follows: If to the Issuer: City of Gainesville, Florida 200 E. University Ave., 4th Floor Gainesville, Florida 32601 Attention: City Attorney If to the Trustee: SunTrust Bank, Central Florida, National Association 225 E. Robinson St., Suite 250 Orlando, Florida 32801 Attention: Corporate Trust Dept. If to the Company: Exactech, Inc. 4613 NW 6th Street Gainesville, Florida 32609-1781 Attention: Chief Operating Officer If to the Bank: SunTrust Bank, North Central Florida 411 North Main Street Gainesville, Florida 32601 Attention: Commercial Real Estate Department (Richard J. Blahauvietz) with a copy to: SunTrust Bank, North Central Florida 203 East Silver Springs Boulevard Ocala, Florida 34470 Attention: Corporate Lending 38 (Christine Thibodeau) If to the issuer of a Its address designated in Substitute Letter of Credit: writing to the Trustee If to the Remarketing Agent: Its Principal Office If to the Tender Agent: SunTrust Bank, Central Florida, National Association 225 E. Robinson St., Suite 250 Orlando, Florida 32801 Attention: Corporate Trust Department If to Moody's: Moody's Investors Service, Inc. 99 Church Street New York, New York 10007 Attention: Corporate Department, Structured Finance Group If to S&P: Standard & Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc. 25 Broadway New York, New York 10004 Attention: Corporate Finance Department A duplicate copy of each notice, certificate or other communication given hereunder by the Issuer or the Company shall also be given to the Trustee and the Bank. The Issuer, the Company, the Trustee, and the Bank may, by written notice given hereunder, designate any further or different addresses to which subsequent notices, certificates or other communications shall be sent. Section 9.3. BINDING EFFECT. This Agreement shall inure to the benefit of and shall be binding upon the Issuer, the Company, the Bank, the Trustee, the Owners of Bonds and their respective successors and assigns, subject, however, to the limitations contained in Section 2.3(b) hereof. Section 9.4. SEVERABILITY. In the event any provision of this Agreement shall be held invalid or unenforceable by any court of competent jurisdiction, such holding shall not invalidate or render unenforceable any other provision hereof. Section 9.5. AMOUNTS REMAINING IN FUNDS. Subject to the provisions of Section 6.11 of the Indenture, it is agreed by the parties hereto that any amounts remaining in any account of the 39 Bond Fund, the Construction Fund, or any other fund (other than the Rebate Fund) created under the Indenture upon expiration or earlier termination of this Agreement, as provided in this Agreement, after payment in full of the Bonds (or provision for payment thereof having been made in accordance with the provisions of the Indenture) and the fees and expenses of the Trustee in accordance with the Indenture, shall belong to and be paid to the Company by the Trustee. Moneys remaining in the Rebate Fund after all payments to the United States of America required by the terms of Section 6.13 of the Indenture shall also be paid over to the Company. Section 9.6. AMENDMENTS, CHANGES AND MODIFICATIONS. Subsequent to the issuance of Bonds and prior to their payment in full (or provision for the payment thereof having been made in accordance with the provisions of the Indenture), and except as otherwise herein expressly provided, this Agreement may not be effectively amended, changed, modified, altered or terminated without the written consent of the Trustee and, prior to the Letter of Credit Termination Date and payment of all amounts payable to the Bank under the Credit Agreement, the consent of the Bank, in accordance with the provisions of the Indenture. Section 9.7. EXECUTION IN COUNTERPARTS. This Agreement may be simultaneously executed in several counterparts, each of which shall be an original and all of which shall constitute but one and the same instrument. Section 9.8. APPLICABLE LAW. This Agreement shall be governed by and construed in accordance with the laws of the State. Section 9.9. CAPTIONS. The captions and headings in this Agreement are for convenience only and in no way define, limit or describe the scope or intent of any provisions or Sections of this Agreement. 40 IN WITNESS WHEREOF, the Issuer and the Company have caused this Agreement to be executed in their respective corporate names and their respective corporate seals to be hereunto affixed and attested by their duly authorized officers, all as of the date first above written. CITY OF GAINESVILLE, FLORIDA (SEAL) By:__________________________ Mayor-Commissioner ATTEST: - --------------------------- Clerk of the Commission EXACTECH, INC. By:___________________________ President and Chief Operating Officer ATTEST: By:________________________ Secretary 41 EXHIBIT A PROJECT FACILITIES The acquisition, construction and equipping on the Project Site of a facility for the manufacture of orthopedic implants. A-1 EXHIBIT B REQUISITION NO. ___ CITY OF GAINESVILLE, FLORIDA INDUSTRIAL DEVELOPMENT REVENUE BONDS (Exactech, Inc. Project), Series 1997 REQUISITION FOR PAYMENT Exactech, Inc., referred to herein and in the Loan Agreement (the "Agreement") dated as of November 1, 1997, between the City of Gainesville, Florida (the "Issuer") and Exactech, Inc., as the Company (the "Company"), does hereby make application to SunTrust Bank, Central Florida, National Association, as trustee (the "Trustee") under the Indenture of Trust (the "Indenture") between the Issuer and the Trustee, dated as of November 1, 1997, for reimbursement or payment of advances, payments and obligations made or incurred by the Company in connection with the acquisition, construction and equipping of the Project (as defined in the Agreement) and the issuance, delivery and sale of the $3,900,000 City of Gainesville, Florida Industrial Development Revenue Bonds (Exactech, Inc. Project), Series 1997, as provided for or contemplated in the Agreement and the Indenture. All capitalized terms used herein and not otherwise defined shall have the meanings ascribed to them in the Agreement and the Indenture. The Company does hereby request disbursement of the amounts as set forth on Exhibit A attached to this certificate, for reimbursement to the Company for payments made to, or incurred for, the contractors or payees listed on Exhibit A or for direct payment to the payees listed on Exhibit A, all as provided on Exhibit A. The undersigned further certifies that: (i) the obligations described in Exhibit A (which includes a description of the purpose and circumstances of such obligations in reasonable detail and the name and address of the persons to whom such obligations are owed and which is accompanied by bills, invoices, or statements of account for, or other written evidence of, such obligations) in the stated amounts have been incurred in connection with the issuance and sale of the Bonds or the financing, planning, design, acquisition, construction, equipping and/or installation of the Project; (ii) such obligations are permitted Costs of the Project, are proper charges against the account in the B-1 Construction Fund noted on Exhibit A hereto and have not been the basis for any previous disbursement from any account in the Construction Fund; (iii) no item in Exhibit A represents any portion of an obligation which the Company is, as of the date hereof, entitled to retain under any retained percentage agreement; (iv) insofar as any obligation described in Exhibit A was incurred for labor, services, materials, supplies or equipment (i) such labor and services were actually performed in a satisfactory manner in connection with the acquisition, construction and equipping of the Project and (ii) such materials, supplies and equipment were actually used in connection with the acquisition, construction and equipping of the Project or were delivered to the Project Site (and remain at the Project Site) for that purpose; (v) all sums previously advanced by the Trustee have been used solely for purposes permitted by the Indenture and the specific items which are the subject of this requisition will be so used; (vi) there has not been recorded or filed with or served upon the Company, notice of any lien, right to lien or attachment upon or claim affecting the right to receive payment of, any moneys payable to any of the persons or firms named in this requisition, which has not been released or will not be released simultaneously with the payment of such obligation; (vii) each item in Exhibit A is or was appropriate in connection with the financing, acquisition, construction and equipping of the Project, as noted in Exhibit A; (viii) the use of the disbursements requested hereunder will not result in the covenants made by the Company in Section 3.9 (a) and (b) of the Agreement being violated. Accordingly, one of the following statements applies to the requested disbursement: (a) If all disbursements from the Construction Fund to be used to pay Issuance Costs have not yet been made, the disbursement requested hereunder will be used only to pay either Qualified Project Costs or Issuance Costs. (b) If all Issuance Costs to be paid with proceeds of the Bonds have previously been requisitioned but the aggregate Qualified Project Costs paid with B-2 previous disbursements and to be paid with the disbursement requested hereunder do not equal or exceed Substantially All of the Costs of the Project paid (or to be paid) with the requested and all previous disbursements, the disbursement requested hereunder will be used only for Qualified Project Costs. (c) If all Issuance Costs to be paid with proceeds of the Bonds have previously been requisitioned and the aggregate Qualified Project Costs paid with previous disbursements equals or exceeds Substantially All of the Costs of the Project paid with those previous disbursements, the disbursement requested hereunder, when added to all disbursements under previous requisitions, will not result in less than Substantially All of the total of such disbursements having been used to pay Qualified Project Costs; (ix) all disbursements related to Issuance Costs of the Bonds, requested hereunder, when added to all disbursements for such Issuance Costs under previous requisitions, will not result in more than two percent (2%) of the proceeds of the Bonds having been drawn from the Construction Fund or otherwise used to pay such Issuance Costs; (x) no Event of Default under the Indenture has occurred and is continuing and there exists no event or condition which, with the giving of notice or the passage of time would constitute an Event of Default under the Indenture; and (xi) after payment of such disbursement, sufficient amounts will remain in the Construction Fund, taking into account investment earnings thereon, to pay all remaining unpaid costs of the Project. Dated as of ___________, 199_. ______________________________________________ APPROVED BY: SUNTRUST BANK, NORTH CENTRAL FLORIDA By:_________________________________ Authorized Representative B-3 EX-10.61 3 EXHIBIT 10.61 LETTER OF CREDIT AGREEMENT Dated as of November 1, 1997 By and Between EXACTECH, INC. and SUNTRUST BANK, NORTH CENTRAL FLORIDA -------------------------- relating to City of Gainesville, Florida Industrial Development Revenue Bonds (Exactech, Inc. Project), Series 1997 --------------------------
TABLE OF CONTENTS (Not Part of Agreement) PAGE 1. DEFINITIONS............................................................................................ 1 1A. General Definitions.................................................................................... 1 1B. Other Accounting Definitions........................................................................... 6 2. ISSUANCE OF LETTER OF CREDIT; FEES..................................................................... 6 2A. Amount and Terms of Letter of Credit................................................................... 6 2B. Letter of Credit Fee................................................................................... 6 2C. Drawing Fees........................................................................................... 7 2D. Transfer Fees.......................................................................................... 7 2E. Additional Payments.................................................................................... 7 2F. Capital Adequacy....................................................................................... 8 2G. Interest on Overdue Payments........................................................................... 8 3. AGREEMENT TO REPAY LETTER OF CREDIT DRAWINGS; PLEDGED BONDS............................................ 8 3A. Reimbursement.......................................................................................... 8 3B. Pledge of Bonds........................................................................................ 9 3C. Reinstatement of Letter of Credit...................................................................... 10 3D. Credit for Amount Paid on Bonds........................................................................ 10 3E. Computation of Interest; Place of Payment.............................................................. 10 4. CONDITIONS PRECEDENT TO ISSUANCE OF THE LETTER OF CREDIT............................................... 11 4A. Delivery of the Bonds and Operative Documents.......................................................... 11 4B. No Default............................................................................................. 11 4C. Representations and Warranties......................................................................... 11 4D. Opinions of Counsel.................................................................................... 11 4E. Certificates of Compliance............................................................................. 11 4F. Opinion of Bond Counsel................................................................................ 12 4G. Other Documents........................................................................................ 12 4H. Documentation and Proceedings.......................................................................... 12 5. CHARACTER OF OBLIGATIONS HEREUNDER..................................................................... 12 6. REPRESENTATIONS AND WARRANTIES......................................................................... 12 7. AFFIRMATIVE COVENANTS.................................................................................. 16 8. NEGATIVE COVENANTS..................................................................................... 22 9. EVENTS OF DEFAULT...................................................................................... 24 10. NATURE OF BANK'S DUTIES; INDEMNIFICATION............................................................... 27 1 11. MISCELLANEOUS.......................................................................................... 29 11A. Amendments............................................................................................. 29 11B. Survival of Representations and Warranties............................................................. 29 11C. Expenses............................................................................................... 29 11D. Notices................................................................................................ 30 11E. Satisfaction Requirement............................................................................... 30 11F. Binding Effect; Assignment............................................................................. 30 11G. Governing Law.......................................................................................... 30 11H. Counterparts........................................................................................... 31 11I. Incorporation of Preambles and Annexes................................................................. 31 Annex I .........Irrevocable Letter of Credit Annex II .........Pledge and Security Agreement Annex III.........Pending Litigation Annex IV .........Information Regarding ERISA Plans Annex V .........Permitted Liens
2 LETTER OF CREDIT AGREEMENT THIS LETTER OF CREDIT AGREEMENT (the "Agreement"), dated as of November 1, 1997, by and between EXACTECH, INC., a Florida corporation (the "Company") and SUNTRUST BANK, NORTH CENTRAL FLORIDA, a Florida banking corporation (the "Bank"); W I T N E S S E T H: WHEREAS, the Company has requested that the City of Gainesville, Florida (the "Issuer") issue its Industrial Development Revenue Bonds (Exactech, Inc. Project), Series 1997 (the "Bonds"), which shall be outstanding in a principal amount of $3,900,000, pursuant to an Indenture of Trust, dated as of November 1, 1997 (the "Indenture"), by and between the Issuer and SunTrust Bank, Central Florida, National Association, as trustee (the "Trustee"), and to lend the proceeds of the sale of the Bonds to the Company in order to enable the Company to finance, in whole or in part, the cost of an orthopedic implants manufacturing facility; and WHEREAS, as security for the payment of the Bonds, the Company has requested that the Bank issue its irrevocable letter of credit in the form of Annex I attached hereto (the "Letter of Credit"); and WHEREAS, it is a condition of the obligation of the Bank to execute and deliver the Letter of Credit that this Agreement shall have been executed and delivered by the Company; NOW, THEREFORE, in consideration of the mutual promises contained herein and other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. DEFINITIONS. 1A. GENERAL DEFINITIONS. For the purpose of this Agreement, in addition to terms defined elsewhere herein, including in the preamble hereto (capitalized terms not otherwise defined below shall have the meanings provided in the Indenture), the following terms shall have the following meanings: "A Drawing" shall have the meaning specified in the Letter of Credit which shall be a drawing in respect of the payment of the portion of the purchase price of Bonds corresponding to principal of the respective series of Bonds. "ADA" shall mean, collectively, the Americans with Disabilities Act of 1990 and the Florida Americans with Disabilities Accessibility Implementation Act. "Affiliate" shall mean, as to any Person, any other Person, directly or indirectly controlling (including all directors, officers and employees of such Person), directly or indirectly controlled by or under direct or indirect common control with such Person. "Assignment" shall mean the Collateral Assignment of Rents, Contracts and Leases dated as of November 1, 1997, from the Company to the Bank. "B Drawing" shall have the meaning specified in the Letter of Credit which shall be a drawing in respect of the payment of principal of the respective series of Bonds. "Business Day" shall mean a day on which commercial banks located in Orlando, Florida, Gainesville, Florida and Atlanta, Georgia are required or permitted by law or executive order to be open for the purpose of conducting a commercial banking business. "C Drawing" shall have the meaning specified in the Letter of Credit which shall be a drawing in respect of the payment of interest, or the portion of the purchase price corresponding to interest, on the respective series of Bonds. "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time, including, when appropriate, the statutory predecessor of the Code, and all applicable regulations thereunder whether proposed, temporary or final, including regulations issued and proposed pursuant to the statutory predecessor of the Code, and, in addition, all official rulings and judicial determinations applicable to the Bonds under the Code and under the statutory predecessor of the Code and any successor provisions to the relevant provisions of the Code or regulations. "Construction Agreement" shall mean the Construction Disbursement Agreement dated as of November 1, 1997, between the Bank and the Company. "Current Assets" means, as to any Person, the current assets of such Person determined in accordance with GAAP. "Current Liabilities" means, as to any Person, the current liabilities of such Person, including the current portion of Long Term Debt, determined in accordance with GAAP. "Current Ratio" means, as to any person, the ratio of the amount of Current Assets to the amount of Current Liabilities. "Date of Issuance" shall mean the date of issuance and delivery of the Letter of Credit. 2 "Debt to Net Worth Ratio" means, as to any Person, the ratio of the amount of Indebtedness to the amount of Net Worth. "Default" shall mean any event which with notice or lapse of time, or both, would become an Event of Default. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as the same may be amended from time to time. "ERISA Affiliate" shall mean each trade or business (whether or not incorporated) which, together with the Company, is treated as a single employer under Section 414(b), (c), (m) or (o) of the Code. "Event of Default" shall have the meaning specified in Paragraph 9. "GAAP" shall mean generally accepted accounting principles as defined by the Financial Accounting Standards Board as from time to time in effect that are consistently applied and, when used with respect to the Company, that are consistent with the accounting practice of the Company, reflected in the financial statements for the Company, with such changes as may be approved by an independent public accountant satisfactory to the Bank. "Hazardous Materials" shall mean any petroleum product, and any hazardous, toxic or dangerous waste, substance or material defined as such in Hazardous Materials Law. "Hazardous Materials Laws" shall mean, collectively, all federal, state and local laws, ordinances or regulations, now or hereafter in effect, relating to environmental conditions or Hazardous Materials, including, without limitation, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, 42 U.S.C. ss. 9601, ET SEQ., the Resource Conservation and Recovery Act, 42 U.S.C. ss. 6901, ET SEQ., (the "RCRA"), the Clean Air Act, 42 U.S.C. ss. 7401, ET SEQ. (the "CAA"), the Toxic Substances Control Act, 15 U.S.C. ss.ss. 2601 through 2929 (the "TSCA"), and all similar federal, state and local laws and ordinances, together with all regulations now or hereafter adopted, published or promulgated pursuant thereto. "Indebtedness" shall mean, as to any Person (a) all indebtedness for borrowed money or for notes, debentures, on other debt securities, (b) notes payable and drafts accepted representing extensions of credit whether or not representing obligations for borrowed money, (c) liabilities for all or any part of the deferred purchase price of property or services, (d) liabilities secured by any Lien on any property or asset owned or held by such Person regardless of whether the indebtedness secured thereby shall have 3 been assumed by or is a primary liability of such Person, and (e) capitalized lease obligations. "Interest Component" shall mean that portion of the Stated Amount of a Letter of Credit equal to the sum of 50 days' interest on the Bonds secured by such Letter of Credit, computed at the rate of 13% per annum, notwithstanding the actual rate of interest borne by the Bonds. "Lien" shall mean, as to any asset, (a) any lien, charge, claim, mortgage, security interest, pledge or other encumbrance of any kind with respect to such asset, (b) any interest of a vendor or lessor under any conditional sale agreement, capitalized lease or other title retention agreement relating to such asset, (c) any reservation, exception, encroachment, easement, right-of-way, covenant, condition, restriction, lease or other title exception affecting such asset, or (d) any preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever (including, without limitation, any conditional sale or other title retention agreement, any financing lease having substantially the same economic effect as any of the foregoing, and the filing of any financing statement under the Uniform Commercial Code or comparable law of any jurisdiction). "Long Term Debt" shall mean Indebtedness payable more than one year after the creation thereof. "Mortgage" shall mean the Mortgage and Security Agreement dated as of November 1, 1997, between the Company, as mortgagor, and the Bank, as mortgagee. "Net Worth" means, as of any date and as to any Person, the aggregate depreciated book value of all assets of such Person, both tangible and intangible, less the Total Liabilities of such Person, all as determined in accordance with GAAP. "Operative Documents" shall have the meaning specified in Paragraph 4A hereof. "PBGC" shall mean the Pension Benefit Guaranty Corporation and any successor thereto. "Person" shall mean an individual, corporation, partnership, joint venture, trust, unincorporated organization or any other juridical entity, or a foreign state or any agency or political subdivision thereof. "Plan" shall mean any employee benefit plan, program, arrangement, practice or contract, maintained by or on behalf of the Company or an ERISA Affiliate, which provides benefits or 4 compensation to or on behalf of employees or former employees, whether formal or informal, whether or not written, including but not limited to the following types of plans: (i) EXECUTIVE ARRANGEMENTS - any bonus, incentive compensation, stock option, deferred compensation, commission, severance, "golden parachute", "rabbi trust", or other executive compensation plan, program, contract, arrangement or practice; (ii) ERISA PLANS - any "employee benefit plan" as defined in Section 3(3) of ERISA), including, but not limited to, any defined benefit pension plan, profit sharing plan, money purchase pension plan, savings or thrift plan, stock bonus plan, employee stock ownership plan, Multiemployer Plan, or any plan, fund, program, arrangement or practice providing for medical (including post-retirement medical), hospitalization, accident, sickness, disability, or life insurance benefits; (iii) OTHER EMPLOYEE FRINGE BENEFITS - any stock purchase, vacation, scholarship, day care, prepaid legal services, severance pay or other fringe benefit plan, program, arrangement, contract or practice. "Prime Rate" shall mean the rate of interest per annum designated from time to time by SunTrust Banks of Florida, Inc., or its successors or assigns, at its principal office in Orlando, Florida, to be its prime rate, which rate of interest is only a benchmark, is purely discretionary and may not be the lowest or best rate available to customers of the Bank, any change in such Prime Rate to be effective on the day any such change is announced. "Principal Component" shall mean that portion of the Stated Amount of the Letter of Credit equal to the principal amount outstanding of the series of Bonds secured by such Letter of Credit. "Project" shall mean a facility for the manufacture of orthopedic implants. "Property" shall mean the site of the Project. "Remarketing Agreement" shall mean the Remarketing Agreement dated as of the date hereof between the Company and the Remarketing Agent, as defined in the Indenture. "Stated Amount," shall have the meaning specified in the Letter of Credit. "Subsidiaries" shall mean, as to any Person, col- 5 lectively, (a) a corporation of which shares of stock having ordinary voting power (other than stock having such power only by reason of the occurrence of a contingency) to elect a majority of the board of directors or other managers of which are at the time owned, or the management of which is otherwise controlled, directly or indirectly, through one or more intermediaries, or both, by such Person or (b) a partnership in which such Person is a general partner or the management of which is otherwise controlled, directly or indirectly, through one or more intermediaries or both, by such Person. "Tender Agent" shall have the meaning specified in the Indenture. "Tender Agent Agreement" shall mean the Tender Agent Agreement dated as of the date hereof among the Company, the Trustee and the Tender Agent. "Termination Date" shall mean the date the Letter of Credit expires in accordance with its terms. "Total Liabilities" means, as to any Person, all Indebtedness and all other liabilities that in accordance with GAAP are required to be shown as liabilities on a balance sheet. "Working Capital" means, as to any Person, the excess of such Person's Current Assets over Current Liabilities. 1B. OTHER ACCOUNTING DEFINITIONS. All accounting terms not specifically defined in Paragraph 1A shall have the meanings normally given them by GAAP, which principles will be applied on a basis consistent with those applied to the reporting requirements specified in Paragraph 7(i) of this Agreement. 2. ISSUANCE OF LETTER OF CREDIT; FEES. 2A. AMOUNT AND TERMS OF LETTER OF CREDIT. The Bank agrees, on the terms and subject to the conditions hereinafter set forth, to issue the Letter of Credit to the Trustee with a Principal Component equal to $3,900,000 initially and with an initial Interest Component of $70,417. The Letter of Credit shall expire on November 16, 2002, unless otherwise terminated or extended. Commencing 240 days prior to the stated expiration of the Letter of Credit, the Company shall submit a request to the Bank for an extension of such term and the Bank shall provide a written response as to whether it will or will not extend such term with 60 days of its receipt of such submission. 2B. LETTER OF CREDIT FEE. (1) The Company hereby agrees to pay to the Bank a non-refundable letter of credit fee for the 6 period from and including the Date of Issuance until the Termination Date, computed at the rate of one percent (1.0%) per annum, calculated as a percentage of the Stated Amount of the Letter of Credit (as the same may be reduced from time to time but including, in any event, the principal amount allocable to any Pledged Bonds) on the date of payment of such letter of credit fee. Amounts payable under the immediately preceding sentence shall be payable in advance, based on a 365- or 366-day year, actual number of days elapsed, in immediately available funds, on the Date of Issuance and quarterly thereafter on the first day of each February, May, August, and November during the term of the Letter of Credit. (2) The Company hereby agrees to pay to the Bank a non-refundable annual administration fee for the period from and including the Date of Issuance until the Termination Date, computed at the rate of one-tenth of one percent (0.10%) per annum, calculated as a percentage of the Stated Amount of the Letter of Credit (as the same may be reduced from time to time but including, in any event, the principal amount allocable to any Pledged Bonds) on the date of the payment of such fee. Amounts payable under the immediately preceding sentence shall be payable in advance, in immediately available funds, on the Date of Issuance and annually thereafter on each anniversary of the Date of Issuance. (3) The Company agrees to pay to the Bank an origination fee equal to one-quarter of one percent (0.25%), calculated as a percentage of the Stated Amount of the Letter of Credit, one-half of which has heretofore been paid by the Company to the Bank and the remainder of which is payable on the Date of Issuance. 2C. DRAWING FEES. The Company hereby agrees to pay to the Bank, upon each drawing by the Trustee under the Letter of Credit, the sum of $100. 2D. TRANSFER FEES. The Company hereby agrees to pay to the Bank, upon each transfer of the Letter of Credit in accordance with its terms, the sum of $1,500 or such other amount as shall at the time of such transfer be the charge which the Bank is making for transfers of similar letters of credit. 2E. ADDITIONAL PAYMENTS. If any change in any law or regulation or in the interpretation thereof by any court or administrative or governmental authority charged with the administration thereof, or any change in generally accepted accounting principles which shall be mandated and not optionally elected by the Bank, shall either (i) impose, modify or deem applicable any reserve, special deposit or similar requirement against letters of credit issued by the Bank or (ii) impose on the Bank any other condition relating, directly or indirectly, to this 7 Agreement or the Letter of Credit, and the result of any event referred to in the preceding clause (i) or (ii) shall be to increase the cost to the Bank of issuing or maintaining the Letter of Credit, then, upon demand by the Bank, the Company hereby agrees to pay promptly to the Bank, from time to time as specified by the Bank, such additional amounts as shall be sufficient to compensate the Bank for such increased cost. A certificate of the Bank claiming compensation under this subsection and setting forth the additional amount or amounts to be paid to it hereunder, setting forth the reason for such compensation and the methodology for computation of the amount due, shall be conclusive absent manifest error and notice shall be furnished to the Company at least thirty (30) days prior to any adjustment of the Bank's compensation pursuant to this Section 2E, and no such adjustment shall take effect until such thirty-day period has expired. In determining any such amount, the Bank may use any reasonable averaging and attribution methods. 2F. CAPITAL ADEQUACY. If, after the date of this Agreement, the Bank shall have determined that the adoption or implementation of any applicable law, rule or regulation regarding capital adequacy, or any change therein, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by the Bank with any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has the effect of reducing the rate of return on the Bank's capital, on this credit facility or otherwise, as a consequence of its obligations hereunder and under the Letter of Credit to a level below that which the Bank could have achieved but for such adoption, change or compliance (taking into consideration the Bank's policies with respect to capital adequacy) by an amount deemed by the Bank to be material, then from time to time, promptly upon demand by the Bank, the Company hereby agrees to pay the Bank such additional amount or amounts as will compensate the Bank for such reduction. A certificate of the Bank claiming compensation under this subsection and setting forth the additional amount or amounts to be paid to it hereunder, setting forth the reason for such compensation and the methodology for computation of the amount due, shall be conclusive absent manifest error and notice shall be furnished to the Company at least thirty (30) days prior to any adjustment of the Bank's compensation pursuant to this Section 2F, and no such adjustment shall take effect until such thirty-day period has expired. In determining any such amount, the Bank may use any reasonable averaging and attribution methods. 2G. INTEREST ON OVERDUE PAYMENTS. The Company hereby agrees to pay to the Bank interest on any and all amounts required to be paid as provided in this Section 2 from and after the due 8 date thereof until payment in full, payable on demand, at the Prime Rate plus two percent (2%) per annum (but in no event in excess of the maximum rate permitted by applicable law). 3. AGREEMENT TO REPAY LETTER OF CREDIT DRAWINGS; PLEDGED BONDS. 3A. REIMBURSEMENT. The Company hereby agrees as follows: (i) to pay to the Bank (1) within 90 days after payment is made under the Letter of Credit pursuant to any "A Drawing" to pay the portion of the Purchase Price of Bonds corresponding to principal, an amount equal to the amount of such "A Drawing" under the Letter of Credit; and (2) interest on each such amount from the date of drawing of such amount under the Letter of Credit until payment in full thereof, at the Prime Rate (but in no event in excess of the maximum rate permitted by applicable law), such interest payable on the first day of each month and on the date of payment of any such amount; (ii) to pay to the Bank immediately after any payment is made under the Letter of Credit pursuant to any "B Drawing" or "C Drawing" to pay principal of or interest (or the portion of the Purchase Price of Bonds corresponding to interest) on the Bonds, an amount equal to such amount so paid under the Letter of Credit; and (iii) to pay to the Bank interest on any and all amounts required to be paid as provided in this Paragraph 3A from and after the due date thereof until payment in full, payable on demand, at the Prime Rate plus two percent (2%) per annum (but in no event in excess of the maximum rate permitted by applicable law). If any payment under the Letter of Credit with respect to an "A Drawing", a "B Drawing" or a "C Drawing" shall be reimbursed to the Bank on the same date such payment is made by the Bank, no interest shall be payable on the reimbursed amount. 3B. PLEDGE OF BONDS. As security for the payment of the obligations of the Company pursuant to Paragraph 3A(i) above, the Company will pledge to the Bank, and grant to the Bank a security interest in, its right, title and interest in and to Bonds delivered to the Bank in connection with "A Drawings" (herein called "Pledged Bonds"), pursuant to a pledge and security agreement in the form of Annex II attached hereto (the "Pledge Agreement"). Any amounts from time to time owing to the Bank pursuant to paragraph 3A(i) above may be paid (i) at any time by the Company on one Business Day's notice stating the amount to be 9 paid (which shall be $5,000 or an integral multiple thereof) and (ii) at any time on behalf of the Company on one Business Day's notice from the Company directing the Bank to deliver (or to cause the Tender Agent to deliver) a specified principal amount of Pledged Bonds held by or on behalf of the Bank for sale pursuant to Section 4.07(b) of the Indenture (but in all events, in principal amounts equivalent to authorized denominations of Bonds under the terms of the Indenture). Upon payment to the Bank of the amount to be paid pursuant to clause (i) or (ii) above, together with accrued interest as set forth in clause (2) of Paragraph 3A(i), to the date of such payment on the amount to be paid, the outstanding obligations of the Company under Paragraph 3A(i) above shall be reduced by the amount of such payment, interest shall cease to accrue on the amount paid and the Bank shall release (or shall be deemed to have released) from the pledge and security interest created by the Pledge Agreement a principal amount of Pledged Bonds equal to the amount of such payment, provided that prior to such release from the pledge and security interest created by the Pledge Agreement of Bonds delivered to or for the benefit of the Bank in connection with an "A Drawing", the Company shall have paid to the Bank the amount owing in respect of the "C Drawing", if any, made in conjunction with such "A Drawing". Such Bonds shall be delivered to the Company on payment to the Bank as aforesaid or to the Tender Agent for sale pursuant to Section 4.08(b) of the Indenture, as appropriate. Notwithstanding the foregoing, no payment of amounts owing to the Bank pursuant to Paragraph 3A(i) may be made, and no Pledged Bonds shall be released, during the period commencing two Business Days prior to an Interest Payment Date with respect to the Bonds and ending at the close of business on such Interest Payment Date. 3C. REINSTATEMENT OF LETTER OF CREDIT. After any "C Drawing", the obligation of the Bank to honor demands for payment under the Letter of Credit with respect to payment of interest, or the portion of Purchase Price of the applicable series of Bonds corresponding to interest, on the applicable series of Bonds will automatically be reinstated up to the total amount specified therein, upon the terms and conditions set forth in the Letter of Credit. Upon release by or on behalf of the Bank pursuant to Paragraph 3B hereof of any Pledged Bonds, the obligation of the Bank to honor demands for payment under the Letter of Credit with respect to payment of the principal, or the portion of Purchase Price of the Bonds corresponding to principal, of such Bonds will be automatically reinstated up to the total amount specified therein upon the terms and conditions set forth in the Letter of Credit. 3D. CREDIT FOR AMOUNT PAID ON BONDS. The Company shall (i) receive a credit against the obligation to pay interest pursuant to clause (2) of Paragraph 3A(i) above to the extent of 10 any amounts actually paid by the Issuer to the Bank in respect of the interest due on any Pledged Bonds and (ii) receive a credit against its reimbursement obligation pursuant to clause (1) of Paragraph 3A(i) above to the extent of any amounts actually paid by the Issuer to the Bank in respect of the principal due on any Pledged Bonds. 3E. COMPUTATION OF INTEREST; PLACE OF PAYMENT. Interest payable hereunder shall be computed on the basis of a 365- or 366-day year, actual number of days elapsed. All payments by the Company to the Bank hereunder shall be made in lawful currency of the United States and in immediately available funds at the Bank's office at 411 North Main Street, Gainesville, Florida 32601, Attention: Commercial Real Estate Department. In the event the date specified for any payment hereunder is not a Business Day, such payment shall be made on the next following Business Day and interest shall be paid at the rate provided for herein on any such payment to the Business Day on which such payment is made. 4. CONDITIONS PRECEDENT TO ISSUANCE OF THE LETTER OF CREDIT. This Agreement shall become effective, and the Bank will issue the Letter of Credit, on the date the Bonds are issued and sold to the purchaser(s) thereof, provided that all of the following conditions are met: 4A. DELIVERY OF THE BONDS AND OPERATIVE DOCUMENTS. This Agreement, the Loan Agreement, the Indenture, the Pledge Agreement, the Remarketing Agreement, the Tender Agent Agreement, the Mortgage, the Construction Agreement and the Assignment (collectively, the "Operative Documents"), a mortgagee title insurance commitment or policy naming the Bank and its successors and/or assigns as the insured and continuing such affirmative coverages and endorsements and only such exceptions as shall be acceptable to the Bank, UCC-1 Financing Statements, a Level One or Phase One environmental assessment of the sites of the Project, in form and substance acceptable to the Bank, a boundary survey of the Property, certified within 90 days of the Date of Issuance by a registered land surveyor acceptable to the Bank, shall have been delivered to the Bank, and such other documents as the Bank shall reasonably require, and the Bonds shall have been executed and delivered by the parties thereto, each in form and substance satisfactory to the Bank. The Bank shall have received an executed or conformed copy of each of the Operative Documents. 4B. NO DEFAULT. On the Date of Issuance and after giving effect to the issuance of the Letter of Credit, there shall exist no Default or Event of Default. 4C. REPRESENTATIONS AND WARRANTIES. On the Date of Issuance and after giving effect to the issuance of the Letter of 11 Credit, all representations and warranties of the Company contained herein, in the other Operative Documents or otherwise made in writing in connection herewith shall be true and correct with the same force and effect as though such representations and warranties had been made on and as of such date. 4D. OPINIONS OF COUNSEL. There shall have been delivered to the Bank an opinion of Greenberg Traurig Hoffman Lipoff Rosen & Quentel, P.A., in its capacity as counsel to the Company, dated the Date of Issuance, which opinion shall be in form and substance satisfactory to the Bank and shall cover such matters as the Bank may reasonably request. 4E. CERTIFICATES OF COMPLIANCE. There shall have been delivered to the Bank certificates of duly authorized officers of the Company, dated the Date of Issuance, to the effect that all of the conditions specified in Paragraphs 4B and 4C have been satisfied as of such date and covering such additional matters as the Bank may reasonably request. 4F. OPINION OF BOND COUNSEL. There shall have been delivered to the Bank an opinion (or a signed copy of such opinion together with a satisfactory reliance letter) of Holland & Knight LLP, in its capacity as Bond Counsel, dated the Date of Issuance and in form and substance satisfactory to the Bank, to the effect that the Bonds are legal, valid and binding obligations of the Issuer and that as of the Date of Issuance interest on the Bonds issued on such date is not includable in gross income for federal income tax purposes under existing statutes, regulations and rulings, and covering such other matters as the Bank may reasonably request. 4G. OTHER DOCUMENTS. There shall have been delivered to the Bank such other information, documents, instruments, approvals (and if requested by the Bank, certified duplicates of executed copies thereof) or opinions as the Bank or its counsel may reasonably request. 4H. DOCUMENTATION AND PROCEEDINGS. All corporate and legal proceedings and all instruments in connection with the transactions contemplated by this Agreement and the other Operative Documents shall be satisfactory in form and substance to the Bank and its counsel and the Bank shall have received all information and copies of all documents, including records of corporate proceedings, governmental approvals and incumbency certificates which it may have reasonably requested in connection with the transactions contemplated by this Agreement and the other Operative Documents, such documents where appropriate to be certified by proper officers. 12 5. CHARACTER OF OBLIGATIONS HEREUNDER. The obligations of the Company under this Agreement are primary, absolute, independent, irrevocable and unconditional. The Company understands and agrees that no payment by it under any other agreement (whether voluntary or involuntary or pursuant to court order or otherwise) shall constitute a defense to the several obligations hereunder except to the extent that the Bank has been indefeasibly paid in full. 6. REPRESENTATIONS AND WARRANTIES. The Company represents and warrants as follows: (a) CORPORATE EXISTENCE. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Florida, has all requisite corporate power and legal authority to conduct its business, to own its properties and to execute and deliver and to perform all of its obligations under the Operative Documents and is duly qualified to do business in every jurisdiction in which the nature of its business or property makes such qualification necessary, except where failure to be so qualified would not have a material adverse effect on the operations or financial condition of the Company. (b) AUTHORIZATION; NO CONFLICT. The execution, delivery and performance by the Company of this Agreement and each other Operative Document and the consummation of the transactions contemplated hereby and thereby are within the Company's corporate powers, have been duly authorized by all necessary corporate action, and do not and will not (i) conflict with, contravene or violate any provision of any law, rule, regulation, order, writ, judgment, injunction, decree, determination or award presently in effect having applicability to the Company or of the Articles of Incorporation or bylaws of the Company, including all amendments thereto, which violation would have a material adverse effect on the Company, (ii) result in a breach of or constitute a default under any material indenture or loan or credit agreement or any other agreement, lease or instrument to which the Company is a party or by which it or its properties may be bound or affected except for breaches that would not have or create a material adverse effect on the operations or financial condition of the Company or in its execution, delivery or performance hereof or of any of the documents or transactions contemplated hereby, or (iii) except as provided in or contemplated by the Operative Documents, result in or require the creation of any material lien, security interest or other charge or encumbrance upon or with respect to any of the Company's properties. (c) APPROVALS. No consent of any person and no authorization or approval or other action by, and no notice to or filing with, any governmental authority or regulatory body is 13 required for the valid or due execution, delivery and performance by the Company of any Operative Document, other than such consents, authorizations, approvals or actions as have already been obtained or which cannot be obtained on the date hereof and are not required to be obtained on the date hereof. The Company is in compliance with all of the terms and conditions of each such consent, authorization, approval or action already obtained, has applied for each such consent, authorization, approval or action that may be applied for at this time and has met or has made provisions adequate for meeting all requirements for each such consent, authorization, approval or action not yet obtained. (d) BINDING OBLIGATIONS. Each of the Operative Documents is a legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or other laws or equitable principles relating to or limiting creditors' rights generally. (e) FINANCIAL INFORMATION. Audited financial statements as of December 31, 1994, 1995 and 1996 of the Company for the 12-month periods then ended, prepared by Deloitte & Touche LLP, true copies of which have been previously delivered to the Bank, are complete and fairly present the financial condition of the Company as at the respective dates thereof, in accordance with generally accepted accounting principles applied on a consistent basis. Since December 31, 1996, there has been no material adverse change in the financial condition, properties, business results or operations of the Company. (f) LITIGATION. Except as set forth on Annex III attached hereto, there is no action, suit or proceeding or any governmental investigation or any arbitration, in each case pending or, to the knowledge of the Company, threatened against or affecting the Company or the properties of the Company before any court or arbitrator or governmental department, commission, board, bureau, agency or instrumentality which, if determined adversely to the Company would (i) have a material adverse effect on the business, properties, condition (financial or otherwise) or operations of the Company, (ii) adversely affect the ability of the Company to perform its obligations under the Operative Documents, or (iii) question the validity or enforceability of any Operative Document or any action taken or to be taken pursuant thereto. (g) MARGIN STOCK. The Company is not engaged principally or as one of its important activities in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulations G, X or U of the Board of Governors of the Federal Reserve System). The execution, delivery and performance of this Agreement and the use of the 14 proceeds of the Bonds or any extension of credit hereunder, do not and will not constitute a violation of said regulations. (h) PUBLIC UTILITY HOLDING COMPANY. The Company is not (i) a "holding company," or (ii) a "subsidiary company" of a "holding company," or (iii) an "affiliate" of a "holding company" or a "subsidiary company" of a "holding company," within the meaning of the Public Utility Holding Company Act of 1935, as amended. (i) NO DEFAULTS. The Company is not in violation of any statute or other law or in default under any order, regulation or ruling of any court or other tribunal or governmental or administrative authority or agency, or in default under its Articles of Incorporation or bylaws, any material indenture, agreement, lease, instrument or other undertaking to which the Company is a party or by which it or its property or assets may be bound or affected, which has a material adverse effect on the business or operations of the Company. (j) NO MATERIAL RESTRICTIONS. The Company is not subject to any charter, corporate or other legal restriction, or any contract, lease or other agreement, or any judgment, decree, order, law, rule or regulation which in the judgment of the Company has or is expected in the future to have a materially adverse effect on the business, assets or financial condition of the Company or on its ability to carry out its obligations under the Operative Documents, except as otherwise reflected in adequate reserves. (k) INFORMATION. No certificate, report or other paper furnished by the Company to the Bank or any other Person in connection with the Operative Documents contains as of its effective date any material misstatement of fact or fails to state a material fact or any fact necessary to make the statements contained therein not misleading in any material respect as of such date, and all of the information contained therein is true, accurate and complete in all material respects as of such date. (l) ERISA. Except as disclosed on Annex IV attached hereto: (i) IDENTIFICATION OF PLANS. Neither the Company nor any ERISA Affiliate maintains or contributes to, or has maintained or contributed to, any Plan that is an ERISA Plan or has maintained or contributed to, any Plan that is an executive arrangement within the meaning of ERISA; (ii) COMPLIANCE. Each Plan has at all times been maintained by its terms and in operation, in accordance with all applicable laws, except such noncompliance (when taken as a whole) 15 that will not have a materially adverse effect on the Company, or upon its financial condition, assets, business, operations, liabilities or prospects; (iii) LIABILITIES. The Company is not currently or will not become subject to any liability (including withdrawal liability), tax or penalty whatsoever to any person whomsoever with respect to any Plan including, but not limited to, any tax, penalty or liability arising under Title I or Title IV of ERISA or Chapter 43 of the Code, except such liabilities (when taken as a whole) as will not have a materially adverse effect on the Company, or upon its financial condition, assets, business, operations, liabilities or prospects; and (iv) FUNDING. The Company and each ERISA Affiliate have made full and timely payment of all amounts (A) required to be contributed under the terms of each Plan and applicable law and (B) required to be paid as expenses of each Plan. No Plan has or would have an "amount of unfunded benefit liabilities (as defined in Section 4001(a)(18) of ERISA) if such Plan were terminated as of this date. (m) MORTGAGE. The Mortgage creates, as security for the Company's reimbursement obligations to the Bank hereunder, a valid and enforceable first-priority lien on the property noted therein, subject to no other liens other than the liens disclosed on Annex V attached hereto. (n) TAXES. The Company has filed all required federal, state and local tax returns and has paid all taxes due pursuant to such returns or pursuant to any assessment received by the Company or has provided adequate reserves for the payment thereof. (o) NOT AN INVESTMENT COMPANY. The Company is not an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended. (p) SUBSIDIARIES. The Company has no subsidiaries. (q) TITLE TO REAL PROPERTY AND OTHER ASSETS. The Company has good and marketable title (or good and marketable leasehold interest with respect to leased property) to all its real property and other assets and all personal property assets and fixtures used in connection therewith subject to no liens other than permitted liens noted on Annex V attached hereto. The Company does, however, have assets which it holds in trust, the use or application of which may be restricted by the trust instrument. (r) ENVIRONMENTAL MATTERS. The Company is in compliance 16 in all material respects with all federal, state and local environmental laws, rules, regulations, ordinances and other requirements including, without limitation, all Hazardous Materials Laws. Operation of the Project in the manner contemplated by the plans and specifications therefor will not cause the Company to violate any state, local or federal environmental laws, rules, regulations and other requirements. (s) HAZARDOUS SUBSTANCES. The Property has not in the past been used by the Company and, to the knowledge of the Company, any other Person, and is not presently being used by the Company or any other Person for the handling, storage, transportation or disposal of Hazardous Materials or toxic materials in contravention of applicable state, federal or local law or regulation nor have such materials ever been present on the Property in contravention of applicable state, federal or local law or regulation. 7. AFFIRMATIVE COVENANTS. The Company shall, unless the Bank shall otherwise consent in writing, observe and perform the following covenants and agreements: (a) PRESERVATION OF LEGAL EXISTENCE. The Company shall preserve and maintain its legal existence, rights, franchises and privileges as a corporation in the State of Florida. (b) COMPLIANCE WITH LAWS. The Company shall comply in all material respects with all applicable laws, rules, regulations and orders of any governmental authority, including specifically all Hazardous Materials Law, noncompliance with which would materially and adversely affect the business or condition of the Company, such compliance to include, without limitation, paying before the same become delinquent all material taxes, assessments and governmental charges imposed upon it or upon its property; provided, however, that nothing in this subsection (b) shall require the payment of any such tax or charge or make provision for the payment thereof, so long as the validity thereof shall be contested in good faith by the Company by appropriate legal or administrative proceedings, and further provided that, with respect to special assessments or other governmental charges that may lawfully be paid in installments over a period of years, the Company shall be obligated to pay only such installments as are required to be paid during the term hereof. (c) MAINTENANCE OF INSURANCE. The Company shall cause to be maintained, with responsible and reputable insurance companies or associations, casualty, public liability and other insurance in such amounts and covering such risks as are reasonably satisfactory to the Bank, and, at the written request of the Bank, shall provide evidence of compliance with this covenant to the Bank in the form of certificates of insurance and endorsements. All 17 such insurance policies and loss payable clauses will provide that they may not be cancelled, amended or terminated unless the Bank is given at least thirty days prior written notice. (d) VISITATION RIGHTS. At any reasonable time and as often as the Bank may reasonably request upon reasonable notice, the Company shall permit the Bank or any agents or representatives of the Bank to examine and make copies of and take abstracts from the records and books of account of, and visit and inspect any of the properties of, the Company and discuss the general business affairs of the Company with its officers. (e) RECORDS AND ACCOUNTS. The Company shall keep true records and books of account containing complete and accurate entries of all financial and business transactions of the Company in accordance with GAAP consistently applied and will maintain accounts and reserves adequate in the opinion of the Company for all taxes (including income taxes), all depreciation, depletion, obsolescence and amortization of its properties, all other contingencies and all other proper reserves. (f) PAYMENT OF DEBTS AND TAXES. The Company shall pay, or cause to be paid, all of its debts and perform, or cause to be performed, all of its obligations promptly and in accordance with the respective terms thereof, and promptly pay and discharge, or cause to be paid and discharged, all taxes, assessments and governmental charges or levies imposed upon it, upon its income or receipts or upon any of its assets or properties before the same shall become in default, as well as pay all lawful claims for labor, materials and supplies or otherwise that, if not so paid, could or would result in the imposition of a lien or charge upon such assets or properties or any part thereof; provided, however, that it shall not constitute an Event of Default hereunder if the Company fails to perform any such obligation or to pay any such debt (except for any Indebtedness owing under or in respect of any Operative Document), tax, assessment, or governmental or other charge, levy or claim that is being contested in good faith and by proper proceedings diligently pursued, if the effect of such failure to pay or perform has not been to accelerate the maturity thereof or of any other material debt or obligation of the Company or to subject any part of the assets and properties of the Company to forfeiture, and if the Company has obtained therefor an adequate bond or adequate insurance or established therefor a reserve of an adequate amount. (g) FURTHER ASSURANCES. The Company shall execute and deliver to the Bank such further instruments, provide it with such further data and information and take such further action as the Bank may reasonably request or as may be necessary further to effect the purposes of the Operative Documents. 18 (h) MAINTENANCE OF PROPERTIES. The Company shall cause all of its properties used or useful in the conduct of its business as it relates to the Project to be maintained and kept in good condition, repair and working order and supplied with all necessary equipment and will cause to be made all necessary repairs, renewals, replacements, betterments and improvements thereof, all as in the judgment of the Company may be necessary so that the business carried on in connection therewith may be properly and advantageously conducted at all times. (i) FINANCIAL INFORMATION. The Company shall deliver to the Bank: (i) as soon as practicable and in any event within 60 days after the end of each quarterly period (other than the last quarterly period) in each fiscal year, internally-generated financial statements of the Company, including, without limitation, a statement of results of operations and statement of cash flows of the Company for the period from the beginning of the current fiscal year to the end of such quarterly period, a report of accounts receivable, and a balance sheet of the Company as at the end of such quarterly period, setting forth in each case figures for the corresponding period in the preceding fiscal year, all in reasonable detail and certified by an authorized financial officer of the Company, subject to changes resulting from year-end adjustments; (ii) as soon as practicable and in any event within 120 days after the end of each fiscal year, audited financial statements, including a statement of results of operations and statement of cash flows of the Company for such year, and a balance sheet of the Company as at the end of such year, setting forth in each case corresponding figures from the preceding annual audit, all in reasonable detail and satisfactory in scope to the Bank and certified to the Company by independent certified public accountants of recognized standing selected by the Company whose report shall be in scope and substance reasonably satisfactory to the Bank, and a certificate of an authorized financial officer of the Company demonstrating compliance with Section 7(l) hereof; (iii) as soon as practicable and in any event within 30 days after the filing thereof, copies of the federal and state income tax returns of the Company; (iv) promptly upon receipt thereof, a copy of each other report submitted to the Company by independent 19 accountants in connection with any annual, interim or special audit made by them of the books of the Company; and (v) with reasonable promptness, such other financial data as the Bank may reasonably request. Together with each delivery of financial statements required by clause (ii) above, the Company will deliver to the Bank an officer's certificate stating that there exists no Event of Default hereunder or default under any other obligation by the Company and/or any Subsidiary to the Bank, or, if any such Event of Default or default exists, specifying the nature thereof, the period of existence thereof and what action the Company or such Subsidiary proposes to take with respect thereto. The Company also covenants that forthwith upon the President or chief financial officer of the Company obtaining knowledge of an Event of Default, it will deliver to the Bank an officer's certificate specifying the nature thereof, the period of existence thereof, and what action the Company proposes to take with respect thereto. The Bank is hereby authorized to deliver a copy of any financial statement delivered to the Bank pursuant to this Paragraph 7(i) to any regulatory body having jurisdiction over the Bank. (j) LITIGATION/NOTICE OF CLAIMS. The Company shall promptly notify the Bank after the occurrence thereof of the institution of, or any material adverse development in, any action, suit or proceeding or any governmental investigation or any arbitration against the Company or any of its property involving a claim or claims for relief, including specifically any claim or action involving any Hazardous Materials, which might have a material adverse effect on the financial condition, results of operations, properties or business of the Company or receipt by the Company of actual knowledge of the threat of any such action, suit, proceeding, investigation or arbitration. (k) ERISA. The Company shall deliver to the Bank: (i) Promptly after the occurrence thereof with respect to any Plan, or any trust established thereunder, notice of (A) a "reportable event" described in Section 4043 of ERISA and the regulations issued from time to time thereunder (other than a "reportable event" not subject to the provisions for 30-day notice to the PBGC under such regulations), or (B) any other event which could subject the Company or any ERISA Affiliate to any material tax, penalty or liability under Title I or Title IV of ERISA or Chapter 43 of the Code; (ii) At the same time and in the same manner as such 20 notice must be provided to the PBGC, or to a Plan participant, beneficiary or alternative payee, any notice required under Section 101(d), 302(f)(4), 303, 307, 4041(b)(1)(A)s or 4041(c)(1)(A) of ERISA or under Section 401(a)(29) or 412 of the Code with respect to any Plan; (iii) Upon the request of the Bank, (A) true and complete copies of any and all documents, government reports and determination or opinion letters for any Plan, or (B) a current statement of withdrawal liability for each Multiemployer Plan. (l) FINANCIAL COVENANTS AND RATIOS. The Company shall, during the term of this Letter of Credit Agreement, maintain the following financial covenants or ratios, each of which shall be met annually (as demonstrated by the financial statements delivered pursuant to Section 7.1(i)(ii) hereof): (i) The maximum Debt to Net Worth Ratio of the Company during the term of this Letter of Credit Agreement shall be 1.0:1.0. (ii) The minimum Current Ratio of the Company during the term of this Letter of Credit Agreement shall be 2.5:1. (iii) The minimum Net Worth of the Company shall be $18,000,000 on the Date of Issuance and shall increase by at least $1,000,000 each year during the term hereof. (iv) The minimum Working Capital of the Company during the term hereof shall be $7,500,000. (m) HAZARDOUS SUBSTANCES. The Property will not in the future be used for the handling, storage, transportation or disposal of Hazardous Materials or toxic materials in contravention of applicable state, federal or local law or regulation. The Company agrees to indemnify, defend, and hold the Bank harmless from and against any loss to the Bank, including without limitation, attorneys' fees incurred by the Bank as a result of such past, present or future use, handling, storage, transportation or disposal of hazardous or toxic materials, or their presence on the Property in contravention of applicable state, federal or local law or regulation. The Company shall, if requested by the Bank, execute and deliver to the Bank an Environmental Indemnification Agreement, on the Bank's standard form, which Agreement shall survive the termination of the Letter of Credit. In case any action shall be brought against the Bank based upon any of the above and in respect of which indemnity may be sought against the Company, the Bank shall promptly notify the Company in writing, 21 enclosing a copy of all papers served, but the omission so to notify the Company of any such action shall not relieve it of any liability which it may have to the Bank otherwise than under this Section. In case any such action for which indemnification is sought shall be brought against the Bank and it shall notify the Company of the commencement thereof, the Company shall be entitled to participate in and, to the extent that it shall wish, to assume the defense thereof with counsel reasonably satisfactory to the Bank. The Bank shall have the right to employ its own counsel in any such action but the fees and expenses of such counsel shall be at the expense of the Bank unless (i) the employment of counsel by the Bank has been authorized by the Company, (i) the Bank shall have reasonably concluded, based upon an opinion of counsel reasonably satisfactory to the Company, that there may be a conflict of interest between the Company and the Bank in the conduct of the defense of such action (in which case the Company shall not have the right to direct the defense of such action on behalf of the Bank), or (iii) the Company shall not in fact have employed counsel reasonably satisfactory to the Bank to assume the defense of such action. The Company shall not be liable for any settlement of any action or claim effected without its consent. (n) ADA. The Company will comply with the ADA and any and all regulations and guidelines issued thereunder. The Company agrees to indemnify, defend, and hold the Bank harmless from and against any loss to the Bank, including without limitation, attorneys' fees incurred by the Bank as a result of the Company's noncompliance with the ADA or the failure of the Improvements to comply therewith. The Company shall, if requested by the Bank, execute and deliver to the Bank an agreement to comply with the ADA, on the Bank's standard form, which Agreement shall survive the termination of the Letter of Credit. In case any action shall be brought against the Bank based upon any of the above and in respect of which indemnity may be sought against the Company, the Bank shall promptly notify the Company in writing, enclosing a copy of all papers served, but the omission so to notify the Company of any such action shall not relieve it of any liability which it may have to the Bank otherwise than under this Section. In case any such action for which indemnification is sought shall be brought against the Bank and it shall notify the Company of the commencement thereof, the Company shall be entitled to participate in and, to the extent that it shall wish, to assume the defense thereof with counsel reasonably satisfactory to the Bank. The Bank shall have the right to employ its own counsel in any such action but the fees and expenses of such counsel shall be at the expense of the Bank unless (i) the employment of counsel by the Bank has been authorized by the Company, (i) the Bank shall have reasonably concluded, based upon an opinion of counsel reasonably satisfactory to the Company, that there may be a conflict of interest between the Company and the Bank in the conduct of the defense of such 22 action (in which case the Company shall not have the right to direct the defense of such action on behalf of the Bank), or (iii) the Company shall not in fact have employed counsel reasonably satisfactory to the Bank to assume the defense of such action. The Company shall not be liable for any settlement of any action or claim effected without its consent. 8. NEGATIVE COVENANTS. The Company covenants and agrees that it shall not, during the term hereof: (a) LIMITATION ON LIENS. Create, incur, assume or suffer to exist, any lien upon real or personal property, fixtures, revenues or other assets whatsoever, whether now owned or hereafter acquired, of the Company, except: i. Liens existing on the date hereof and set out on Annex V hereto; ii. Liens for taxes not yet due or which are being contested in good faith and by appropriate proceedings and for which adequate reserves in accordance with generally accepted accounting principles have been established on the books of the Company; iii. Statutory liens of landlords and liens of carriers, warehousemen, mechanics, materialmen and other liens imposed by law created in the ordinary course of business for amounts not yet due or which are being contested in good faith by appropriate proceedings and with respect to which adequate reserves are being maintained; iv. Liens (other than any lien imposed by ERISA) incurred or deposits made in the ordinary course of business in connection with workers' compensation, unemployment, insurance and other types of social security; and v. Easements, reservations, exceptions, rights-of-way, covenants, conditions, restrictions and other similar encumbrances incurred in the ordinary course of business which, in the aggregate, are not substantial in amount, and which do not in any case materially detract from the value of the property subject thereto or interfere with the ordinary conduct of its business. (b) PROHIBITION OF FUNDAMENTAL CHANGES. (i) Directly or indirectly (whether in one transaction or a series of transactions), (I) enter into any merger, consolidation or amalgamation; (II) acquire by purchase or otherwise all or substantially all the business or assets, or stock or other evidence of beneficial ownership, of any Person; (III) enter into any agreement or transaction to do or permit any of the foregoing, unless (A) if the 23 survivor of such transaction is the Company, the Company shall immediately upon the conclusion of any such transaction be in compliance with all obligations of the Company under the Operative Documents, and immediately after such transaction, the Company shall have a Net Worth at least equal to the Net Worth of the Company immediately preceding such transaction, or (B) the Bank shall have consented thereto in writing, which consent shall not be withheld unreasonably, and (ii) without the prior written consent of the Bank, which consent shall not be unreasonably withheld, directly or indirectly (whether in one transaction or a series of transactions), (I) liquidate, wind up or dissolve itself (or suffer any liquidation or dissolution), (II) sell, transfer or pledge all or substantially all of its assets to any other Person, or (III) make any material change in its present method of conducting business. (c) PROHIBITION ON SALE OF ASSETS. Sell, lease, assign, transfer or otherwise dispose of any of its assets (including the stock of Subsidiaries) except for: (i) the disposition of obsolete or worn out equipment or other property no longer required by or useful to the Company in connection with the operation of its business; (ii) the leasing of portions of the Project in the ordinary course of business, (iii) the disposition of inventory in the ordinary course of business or investment securities held by the Company for its own account or in trust for others, (iv) transactions expressly permitted by the terms of the Mortgage, (v) transactions expressly permitted by the terms of Section 8(b) above, or (vi) transactions otherwise consented to by the Bank in writing, which consent shall not be withheld unreasonably. Notwithstanding the foregoing, the Company may sell any or all of the shares of Techmed, its Italian distributor, presently owned by the Company, without the prior written consent of the Bank. (d) COMPLIANCE WITH ERISA. Take or fail to take, nor permit any ERISA Affiliate to take or fail to take, any action with respect to a Plan including but not limited to, (i) establishing any Plan, (ii) amending any Plan, (iii) terminating or withdrawing from any Plan, or (iv) incurring an amount of unfunded benefit liabilities, as defined in Section 4001(a)(18) of ERISA, or any withdrawal liability under Title IV of ERISA, where such action or failure could have a material adverse effect on the Company, result in a lien on the property of the Company, or require the Company to provide any security. (e) RESTRICTED PAYMENTS. (i) Declare, pay or make any dividends or other distributions with respect to or make any payment on account of its capital stock or on account of any warrants, options, or other rights in respect of its capital stock; or (ii) set apart assets for, a sinking or any analogous fund for 24 the purchase, redemption or retirement or other acquisition of, any shares of the Company's capital stock or any warrant rights or options to purchase capital stock; provided, however, that nothing in this paragraph (e) shall be deemed to prohibit or restrict the Company from splitting its stock. (f) TRANSACTIONS WITH AFFILIATES. Enter into any transaction, including, without limitation, any purchase, sale, lease or exchange of property or the rendering of any service, with any Affiliate or employee, except transactions which are in the ordinary course of the Company's business and which are upon fair and reasonable terms no less favorable to the Company than they would obtain in a comparable arm's length transaction with a Person not an Affiliate and except for employment contracts approved by a majority of the Board of Directors of the Company who are not parties to, or related to parties to, or receiving personal benefits from such contracts. (g) SALES/LEASE-BACKS. Enter into any arrangements, directly or indirectly, with any Persons whereby the Company shall sell or transfer any property, whether now owned or hereafter acquired, used or useful in its business, in connection with the rental or lease by the Company of the property so sold or transferred or of other property which the Company intends to use for substantially the same purpose or purposes as the property so sold or transferred. (h) ADDITIONAL BONDS. Permit the issuance of Additional Bonds without the advance written consent of the Bank. (i) CONVERSION OF REDEMPTION. Convert a redemption of Bonds to a purchase by the Company pursuant to Section 3.09 of the Indenture without the prior written consent of the Bank. 9. EVENTS OF DEFAULT. Upon the occurrence of any of the following events (herein referred to as an "Event of Default"), unless waived by the Bank: (i) the occurrence of a "Default" or an "Event of Default" as described and defined in any of the Operative Documents; (ii) failure of the Company to pay any amount when due under the terms of this Agreement, and the continuation of such failure for a period of three (3) days; (iii) failure on the part of the Company to perform or observe any other term, covenant or agreement contained in this Agreement or in any of the Operative Documents to which it is a party on its part to be performed or observed and (a) 25 with respect to any such term, covenant or agreement contained herein, any such failure remains unremedied for 30 days after the earlier of its discovery by the Company or written notice thereof to the Company by the Bank; and (b) with respect to any such term, covenant or agreement contained in any of the other Operative Documents to which the Company is a party, any such failure remains unremedied after any applicable grace period specified in such Operative Documents; provided, however, if the failure stated in the notice cannot be corrected within the applicable period, the Bank will not unreasonably withhold its consent to an extension of such time if it is possible to correct such failure and corrective action is instituted by the Company within the applicable period and diligently pursued until the failure is corrected; or in the case of any such failure which can be cured with due diligence but not within the 30-day period, the Company's failure to proceed promptly to cure such default and thereafter prosecute the curing of such default with due diligence; (iv) a default or event of default shall occur under any loan agreement, line of credit or other loan document or contract between the Company and the Bank and the Company shall not cure the same within any cure period provided therein; (v) any warranty, representation or other written statement made by or on behalf of the Company contained herein, in any of the other Operative Documents to which it is a party or in any instrument furnished in compliance with or in reference to this Agreement is false or misleading in any material respect on the date as of which made; (vi) the Company shall fail to pay its debts generally as they come due, or shall file any petition or action for relief under any bankruptcy, reorganization, insolvency or moratorium law, or any other law or laws for the relief of, or relating to, debtors; (vii) an involuntary petition shall be filed under any bankruptcy statute against the Company, or a custodian, receiver, trustee, assignee for the benefit of creditors (or other similar official) shall be appointed to take possession, custody, or control of the properties of the Company, unless such petition or appointment is set aside or withdrawn or ceases to be in effect within one hundred twenty (120) days from the date of said filing or appointment; or (viii) any default shall occur under any other agreement involving the material borrowing of money or the material extension of credit under which the Company may be obligated 26 as borrower or guarantor, if such default consists of the failure to pay any indebtedness when due of if such default causes the acceleration of any indebtedness or the termination of any commitment to lend, or if such default permits, or would permit with notice and/or the passage of time, the holder of any such obligation to accelerate any indebtedness or to terminate any commitment to lend; then, and in any such event, the Bank may, in its sole discretion, but shall not be obligated to, (1) by notice to the Company, declare all amounts payable by the Company hereunder (including, without limitation, amounts payable pursuant to Paragraph 3A hereof) to be forthwith due and payable, and the same shall thereupon become due and payable without demand, presentment, protest or further notice of any kind, all of which are hereby expressly waived, and/or (2) exercise all of its rights and remedies under the Operative Documents and/or (3) by notice to the Trustee, require the Trustee to accelerate payment of all Bonds and interest accrued thereon as provided in Section 9.02 of the Indenture. No remedy herein conferred or reserved is intended to be exclusive of any other available remedy or remedies, but each and every such remedy shall be cumulative and shall be in addition to every other remedy given under this Agreement or any other Operative Document or now or hereafter existing at law or in equity or by statute. No delay or omission to exercise any right or power accruing upon any default, omission or failure of performance hereunder shall impair any such right or power or shall be construed to be a waiver thereof, but any such right or power may be exercised from time to time and as often as may be deemed expedient. In order to exercise any remedy reserved to the Bank in this Agreement, it shall not be necessary to give any notice, other than such notice as may be herein expressly required. In the event any provision contained in this Agreement should be breached by any party and thereafter duly waived by the other party so empowered to act, such waiver shall be limited to the particular breach so waived and shall not be deemed to waive any other breach hereunder. No waiver, amendment, release or modification of this Agreement shall be established by conduct, custom or course of dealing, but solely by an instrument in writing duly executed by the parties thereunto duly authorized by this Agreement. 10. NATURE OF BANK'S DUTIES; INDEMNIFICATION. As between the Company and the Bank, the Company shall assume all risks of the acts, omissions or misuse of the Letter of Credit by the Trustee. The Bank shall not be responsible: (i) for the form, validity, sufficiency, accuracy, genuineness or legal effect of any document submitted by any party in connection with the application for and issuance of the Letter of Credit, even if it should in fact prove to be in any or all respects invalid, insufficient, 27 inaccurate, fraudulent or forged; (ii) for the validity or sufficiency of any instrument transferring or assigning or purporting to transfer or assign the Letter of Credit or the rights or benefits thereunder or proceeds thereof, in whole or in part, which may prove to be invalid or ineffective for any reason; (iii) for failure of the Trustee to comply fully with conditions required in order to draw upon the Letter of Credit; (iv) for errors, omissions, interruptions or delays in transmission or delivery of any messages, by mail, cable, telegraph, telex, or otherwise, whether or not they be in cipher; (v) for errors in interpretation of technical terms; (vi) for any loss or delay in the transmission or otherwise of any document or draft required in order to make a draw under the Letter of Credit or of proceeds thereof; and (vii) for any consequences arising from causes beyond the control of the Bank. None of the above shall affect, impair, or prevent the vesting of any of the Bank's rights or powers hereunder. In furtherance and extension and not in limitation of the specific provisions hereinabove set forth, any action taken or omitted by the Bank, under or in connection with the Letter of Credit or the related drafts or document(s), if taken or omitted in good faith, shall be binding upon the Company and shall not put the Bank under any resulting liability to the Company. The Company hereby agrees at all times to protect, indemnify and save harmless the Bank from and against any and all claims, actions, suits and other legal proceedings, and from and against any and all losses, claims, demands, liabilities, damages, costs, charges, counsel fees and other expenses which the Bank may, at any time, sustain or incur by reason of or in consequence of or arising out of (i) the issuance of the Letter of Credit, (ii) any breach by any party (other than the Bank or an affiliate of the Bank) of any warranty, covenant, term or condition in, or the occurrence of any default under, this Agreement, any other Operative Document or the Bonds, together with all reasonable expenses resulting from the compromise or defense of any claims or liabilities arising as a result of any such breach or default, and (iii) defense against any legal action commenced to challenge the validity of any of the above referred to instruments, it being the intention of the parties that this Agreement shall be construed and applied to protect and indemnify the Bank against any and all risks involved in the issuance of the Letter of Credit, all of which risks are hereby assumed by the Company, including, without limitation, any and all risks of the acts or omissions, whether rightful or wrongful, of any present or future DE JURE or DE FACTO government or governmental authority (all such acts and omissions, herein called "Government Acts"). The Bank shall not, in any way, be liable for any failure by the Bank or anyone else to pay any draft under the Letter of Credit as a result of any Government Acts or any other cause beyond the control of the Bank. The obligations 28 of the Company under this Paragraph 10 shall survive the payment of the Bonds and the termination of this Agreement. The Company further agrees to indemnify, protect and hold harmless the Bank and all successors and assigns of the Bank (whether following the foreclosure of the Mortgage or otherwise) from and against any and all damages, losses, cleanup costs, liabilities, disabilities, fines, penalties, costs or expenses (including reasonable attorneys' and paralegals' fees and expenses) incurred or to be incurred, whether absolute, fixed or contingent, civil or criminal, and whether arising under federal, state or local law, incurred or to be incurred (i) in connection with the handling, storage, transportation or disposal by anyone (other than the Bank or its successors or assigns) of (A) "hazardous waste," as defined in the Resource Conservation and Recovery Act and Section 403.703(21, FLORIDA STATUTES, (B) "hazardous substance," as defined in the Comprehensive Environmental Response, Compensation and Liability Act, and/or (C) petroleum products or by-products or natural gas, or (ii) otherwise on account of any violation by the Company of the Hazardous Materials Laws. Notwithstanding anything to the contrary contained in this Paragraph 10, the Company shall not have any obligation to indemnify the Bank in respect of any liability incurred by the Bank arising solely out of the gross negligence or willful misconduct of the Bank or out of the wrongful dishonor by the Bank of a proper demand for payment made under the Letter of Credit. In case any action shall be brought against the Bank based upon any of the above and in respect of which indemnity may be sought against the Company, the Bank shall promptly notify the Company in writing, enclosing a copy of all papers served, but the omission so to notify the Company of any such action shall not relieve it of any liability which it may have to the Bank otherwise than under this Section. In case any such action for which indemnification is sought shall be brought against the Bank and it shall notify the Company of the commencement thereof, the Company shall be entitled to participate in and, to the extent that it shall wish, to assume the defense thereof with counsel reasonably satisfactory to the Bank. The Bank shall have the right to employ its own counsel in any such action but the fees and expenses of such counsel shall be at the expense of the Bank unless (i) the employment of counsel by the Bank has been authorized by the Company, (i) the Bank shall have reasonably concluded, based upon an opinion of counsel reasonably satisfactory to the Company, that there may be a conflict of interest between the Company and the Bank in the conduct of the defense of such action (in which case the Company shall not have the right to direct the defense of such action on behalf of the Bank), or (iii) the Company shall not in fact have employed counsel reasonably satisfactory to the Bank to assume the defense of such action. The Company shall not be liable for any 29 settlement of any action or claim effected without its consent. 11. MISCELLANEOUS. 11A. AMENDMENTS. This Agreement may be amended, and the Company may take any action herein prohibited, or omit to perform any act herein required to be performed by it, if the Company shall obtain the written consent of the Bank. No course of dealing between the Company and the Bank, nor any delay in exercising any rights hereunder shall operate as a waiver of any rights of the Bank hereunder. 11B. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations and warranties contained herein or made in writing by the Company in connection herewith shall survive the execution and delivery of this Agreement, regardless of any investigation made by the Bank or on its behalf. 11C. EXPENSES. The Company hereby agrees to pay promptly all costs and expenses in connection with the preparation, issuance, delivery, filing, recording and administration of the Letter of Credit, this Agreement, the other Operative Documents, the Bonds and any other documents which may be delivered in connection with this Agreement, including, without limitation, the fees and expenses of Holland & Knight LLP, and all costs and expenses (including reasonable counsel fees and expenses) in connection with (i) the transfer, drawing upon, change in terms, maintenance, renewal or cancellation of the Letter of Credit, (ii) any and all amounts which the Bank has paid relative to the Bank's curing of any Event of Default resulting from the acts or omissions of the Company under this Agreement, any other Operative Document or the Bonds, (iii) the enforcement of this Agreement or any other Operative Document, or (iv) any action or proceeding relating to a court order, injunction or other process or decree restraining or seeking to restrain the Bank from paying any amount under the Letter of Credit. In addition, the Company hereby agrees to pay any and all stamp and other taxes and fees payable or determined to be payable in connection with the execution, delivery, filing and recording of the Letter of Credit, this Agreement, the Mortgage, the Assignment, any other Operative Document or the Bonds, or any other documents which may be delivered in connection with this Agreement, and agrees to save the Bank harmless from and against any and all liabilities with respect to or resulting from any delay in paying or omission to pay such taxes and fees. Notwithstanding the foregoing, no payment shall be required under this Paragraph 11C in respect of any cost or expense the Bank has incurred because of its gross negligence or willful misconduct. 11D. NOTICES. Except as otherwise specified herein, all notices hereunder shall be given by United States certified or 30 registered mail or by telecommunication device capable of creating written record of such notice and its receipt. Notices hereunder shall be effective when received and shall be addressed as follows: If to the Bank, to: SunTrust Bank, North Central Florida 411 North Main Street Gainesville, Florida 32601 Attn: Commercial Real Estate Department (Richard J. Blahauvietz) with a copy to: SunTrust Bank, North Central Florida 203 East Silver Springs Boulevard Ocala, Florida 34470 Attn: Corporate Lending (Christine Thibodeau) If to the Company, to: Exactech, Inc. 4613 NW 6th Street Gainesville, Florida 32609-1781 Attn: Chief Operating Officer 11E. SATISFACTION REQUIREMENT. If any agreement, certificate or other writing, or any action taken or to be taken, is by the terms of this Agreement required to be satisfactory to the Bank, the determination of such satisfaction shall be made by the Bank in its sole and exclusive judgment exercised in good faith. 11F. BINDING EFFECT; ASSIGNMENT. This Agreement is a continuing obligation and shall (i) be binding upon the Company and its successors, transferees and assigns and (ii) inure to the benefit of and be enforceable by the Bank and its successors, transferees and assigns; provided, however, that the Company may not assign all or any part of this Agreement without the prior written consent of the Bank. The Bank may assign, negotiate, pledge or otherwise hypothecate all or any portion of this Agreement, or grant participations herein, in the Letter of Credit or in any of its rights or security hereunder, including, without limitation, the instruments securing the Company's obligations hereunder. No such assignment or participation by the Bank, however, will relieve the Bank of its obligation under the Letter of Credit. In connection with any assignment or participation, the Bank may disclose to the proposed assignee or participant any information that the Company is required to deliver to the Bank pursuant to this Agreement. 11G. GOVERNING LAW. This Agreement is being delivered and is intended to be performed in the State of Florida, and shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the laws of such State. 31 11H. COUNTERPARTS. This Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed an original, and it shall not be necessary in making proof of this Agreement to produce or account for more than one such counterpart. 11I. INCORPORATION OF PREAMBLES AND ANNEXES. The preambles appearing at the beginning of this Agreement and all annexes to this Agreement are hereby incorporated into this Agreement by reference. [Signature page follows] 32 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by their respective duly authorized officers as of the day and year first above written. EXACTECH, INC. (CORPORATE SEAL) By: Title: President and Chief Operating Officer Attest: By:_________________________ Title: Secretary SUNTRUST BANK, NORTH CENTRAL FLORIDA By: Title: (CORPORATE SEAL) 33 ANNEX I IRREVOCABLE LETTER OF CREDIT IRREVOCABLE LETTER OF CREDIT SUNTRUST BANK, NORTH CENTRAL FLORIDA 411 North Main Street Gainesville, Florida 32601 November 13, 1997 IRREVOCABLE LETTER OF CREDIT NO. 4044 SunTrust Bank, Central Florida, National Association, as Trustee 225 E. Robinson Street, Suite 250 Orlando, Florida 32801 Attention: Corporate Trust Department At the request and on the instructions of our customer, Exactech, Inc., a Florida corporation (the "Company") we hereby establish in your favor for the benefit of the bondholders, as Trustee under the Indenture of Trust, dated as of November 1, 1997 (the "Indenture") between the City of Gainesville, Florida (the "Issuer") and you pursuant to which $3,900,000.00 in aggregate principal amount of the Issuer's Industrial Development Revenue Bonds (Exactech, Inc. Project), Series 1997 (the "Bonds") may be issued, this Irrevocable Letter of Credit in the initial amount of $3,970,417 (hereinafter, as reduced from time to time in accordance with the provisions hereof, the "Stated Amount") of which (i) an amount not exceeding $3,900,000.00 (as reduced from time to time in accordance with the terms hereof (the "Principal Component"), may be drawn upon with respect to payment of the unpaid principal amount or the portion of Purchase Price corresponding to principal of the Bonds, and (ii) an amount not exceeding $70,417 (as reduced from time to time in accordance with the terms hereof, the "Interest Component") may be drawn upon with respect to payment of interest accrued or the portion of Purchase Price corresponding to interest accrued on the Bonds on or prior to their stated maturity date, effective immediately and expiring on November 16, 2002, unless terminated earlier in accordance with the provisions hereof or unless otherwise renewed or extended. All drawings under this Letter of Credit will be paid with our own funds. Funds under this Letter of Credit will be made available I-1 to you against receipt by us of the following items at the time required below: (A) if the drawing is being made with respect to the payment of the portion of the Purchase Price of Bonds delivered to the Tender Agent (as defined in the Indenture) pursuant to Section 2.02(c), 3.09, 4.01, 4.02 or 4.04 of the Indenture, corresponding to the principal thereof (an "A Drawing"), receipt by us of your written certificate in the form of Exhibit A attached hereto appropriately completed and signed by an Authorized Officer; (B) if the drawing is being made with respect to the payment of principal of the Bonds (a "B Drawing"), receipt by us of your written certificate in the form of Exhibit B attached hereto appropriately completed and signed by an Authorized Officer; and (C) if the drawing is being made with respect to the payment of interest, or the portion of Purchase Price corresponding to interest, on the Bonds (a "C Drawing"), receipt by us of your written certificate in the form of Exhibit C attached hereto appropriately completed and signed by an Authorized Officer. Presentation of such certificate(s) shall be made at our office located at SunTrust Bank, North Central Florida, 411 North Main Street, Gainesville, Florida 32601, Attention: Commercial Real Estate Department (Richard J. Blahauvietz), with a copy to SunTrust Bank, North Central Florida, 203 East Silver Springs Boulevard, Ocala, Florida 34470, Attention: Corporate Lending (Christine Thibodeau), or at any other office or offices which may be designated by us by written notice delivered to you. If a drawing is made by you hereunder at or prior to 4:00 P.M., New York City time, on a Business Day, and provided that the requirements set forth above have been strictly satisfied and that such drawing and the documents presented in connection therewith conform to the terms and conditions hereof, payment shall be made to you, or to your designee, of the amount specified in immediately available funds, not later than 12:00 Noon, New York City time, on the next succeeding Business Day or not later than 12:00 Noon, New York City time, on such later Business Day as you may specify. If requested by you, payment under this Letter of Credit will be made by deposit of immediately available funds into a designated account that you maintain with us. If a demand for payment made by you hereunder does not, in any instance, conform to the terms and conditions of this Letter of Credit, we shall give you prompt notice that the demand for payment was not effected in accordance with the terms and conditions of this Letter of Credit, stating the reasons therefor and that we will upon your instructions hold any documents at your disposal or return the same to you. Upon being notified that the demand for payment was not effected in conformity with this Letter of Credit, you may attempt to correct any such non-conforming demand for payment to the extent that you are entitled to do so. As used herein, the term "Business Day" shall mean a day on which the corporate trust office of the Trustee and commercial banks located in Orlando, Florida, Gainesville, I-2 Florida and Atlanta, Georgia are required or permitted by law to be open for the purpose of conducting a commercial banking business. Demands for payment hereunder honored by us shall not, in the aggregate, exceed the Stated Amount, as the Stated Amount may have been reinstated by us as provided in the next paragraph. Subject to the preceding sentence, each "A Drawing" and each "B Drawing" honored by the Bank hereunder shall PRO TANTO reduce the Principal Component, and each "C Drawing" honored by the Bank hereunder shall PRO TANTO reduce the Interest Component; any such reduction shall result in a corresponding reduction in the Stated Amount, it being understood that after the effectiveness of any such reduction you shall no longer have any right to make a drawing hereunder in respect of the amount of such principal and/or interest on the Bonds or the payment of Purchase Price corresponding thereto. Upon release by us or on our behalf of any "Pledged Bonds" (as defined in the Indenture), the Principal Component shall be reinstated automatically by the principal amount of such Pledged Bonds. In addition, (i) if you shall not have received, within ten Business Days after any payment in respect of a "C Drawing", written notice from us that the Interest Component will not be reinstated, the Interest Component shall be reinstated automatically, as of the close of business on such tenth Business Day, including, if the Interest Period (as defined in the Indenture) is three months or six months in duration, with respect to any Pledged Bonds (unless the Interest Component previously has been reinstated with respect to such "C Drawing"), by the amount of such "C Drawing" and (ii) upon the release by us or on our behalf of any Pledged Bonds, the Interest Component shall be reinstated automatically by the amount of the "C Drawing" made to pay the portion of the Purchase Price corresponding to interest on such Pledged Bonds (unless the Interest Component previously has been reinstated with respect to such "C Drawing"); provided, however, that in no event shall the Interest Component be reinstated to an amount in excess of 50 days' interest (such amount computed as set forth in the second succeeding paragraph) on the sum of the then applicable Principal Component plus the aggregate principal amount of any Pledged Bonds. Only you or your successor as Trustee may make a drawing under this Letter of Credit. Upon the payment to you, to your designee or to your account of the amount demanded hereunder, we shall be fully discharged on our obligation under this Letter of Credit with respect to such demand for payment and we shall not thereafter be obligated to make any further payments under this Letter of Credit in respect of such demand for payment to you or any other person who may have made to you or makes to you a demand for payment of principal of, Purchase Price of, or interest on, any Bond. By paying to you an amount demanded in accordance herewith, we make no representation as to the correctness of the amount I-3 demanded. This Letter of Credit applies only to the payment of principal or the portion of Purchase Price of the Bonds corresponding to principal, and up to 50 days' interest accruing on the Bonds (computed at a rate of 13% per annum), from the Date of Issuance through the Termination Date (computed on the basis of (i) actual days elapsed in a 365- or 366-day year, as the case may be, so long as the Interest Period is one week or one month in duration, and (ii) a 360-day year comprised of twelve 30-day months, so long as the Interest Period is three months or six months in duration, and does not apply to any interest that may accrue thereon or any principal, premium or other amounts which may be payable with respect to the Bonds subsequent to the expiration of this Letter of Credit. Upon the earliest of (i) the honoring by us of the final drawing available to be made hereunder, (ii) receipt of a certificate signed by an Authorized Officer and a duly authorized officer of the Company stating that: "(a) the conditions precedent to the acceptance of a Substitute Letter of Credit (as defined in the Indenture) have been satisfied, (b) the Trustee has accepted the Substitute Letter of Credit and (c) on the effective date of the Substitute Letter of Credit, and after receipt by SunTrust Bank, North Central Florida of this certificate, SunTrust Bank North Central Florida Irrevocable Letter of Credit No. 4044 shall terminate" (iii) receipt of a certificate signed by an Authorized Officer stating that no Bonds remain Outstanding (as defined in the Indenture), (iv) fifteen days after the Conversion Date (as defined in the Indenture) and (v) the stated expiration date hereof, this Letter of Credit shall automatically terminate and be delivered to us for cancellation. Communications with respect to this Letter of Credit shall be in writing and shall be addressed to us at SunTrust Bank, North Central Florida, 411 North Main Street, Gainesville, Florida 32601, Attention: Commercial Real Estate Department (Richard J. Blahauvietz), with a copy to SunTrust Bank, North Central Florida, 203 East Silver Springs Boulevard, Ocala, Florida 34470, Attention: Corporate Lending (Christine Thibodeau), specifically referring thereon to this Letter of Credit by number. We agree to issue a substitute letter of credit to any successor trustee (and to successively replace any such substitute letter of credit) upon the return to us for cancellation of the original of the letter of credit to be replaced, accompanied by a request relating to such letter of credit, which (i) shall be substantially in the form of Exhibit D attached hereto with the blanks appropriately completed, (ii) shall be signed by an Authorized Officer, (iii) shall specify where indicated therein I-4 the same letter of credit number as the number of the letter of credit to be replaced and (iv) shall state the name and address of the successor trustee. Each substitute letter of credit will be in substantially the form of this Letter of Credit except for the date and letter of credit number. As used herein (a) "Authorized Officer" shall mean any person signing as one of your Vice Presidents, Assistant Vice Presidents, Trust Officers or Assistant Trust Officers; and (b) all other capitalized terms used herein and not otherwise defined shall have the respective meanings assigned to such terms in the above-mentioned Indenture. This Letter of Credit sets forth in full our undertaking, and such undertaking shall not in any way be modified, amended, amplified or limited by reference to any document, instrument or agreement referred to herein (including, without limitation, the Bonds), except only the certificate(s) referred to herein; and any such reference shall not be deemed to incorporate herein by reference any document, instrument or agreement except for such certificate(s). This credit is subject to the Uniform Customs and Practice for Documentary Credits (1993 Revision), International Chamber of Commerce, Publication No. 500 (the "Uniform Customs"). This Letter of Credit shall be deemed to be a contract made under the laws of the State of Florida and shall, as to matters not governed by the Uniform Customs, be governed by and construed in accordance with the laws of such State. Very truly yours, SUNTRUST BANK, NORTH CENTRAL FLORIDA By:_________________________________ Title: Senior Vice President I-5 EXHIBIT A CERTIFICATE FOR "A DRAWING" [Date] SunTrust Bank, North Central Florida 411 North Main Street Gainesville, Florida 32601 Attention: Commercial Real Estate Department (Richard J. Blahauvietz) SunTrust Bank, North Central Florida 203 East Silver Springs Boulevard Ocala, Florida 34470 Attention: Corporate Lending (Christine Thibodeau) RE: IRREVOCABLE LETTER OF CREDIT NO. 4044 The undersigned, a duly authorized officer of SunTrust Bank, Central Florida, National Association (the "Trustee"), hereby certifies to SunTrust Bank, North Central Florida, (the "Bank") that: (1) The undersigned is the Trustee under the Indenture (as hereinafter defined) for the holders of the Bonds. (2) The undersigned, in its capacity as Trustee, is making a drawing under the above-referenced Letter of Credit in the amount of $3,900,000 with respect to payment of the portion of the purchase price of Bonds corresponding to the principal amount thereof, which Bonds are to be purchased pursuant to Section [2.02(c)] or [3.09] or [4.01] or [4.02] or [4.04] of the Indenture (as hereinafter defined). (3) The amount demanded hereby does not exceed the amount available on the date hereof to be drawn under the above-referenced Letter of Credit in respect of the portion of the Purchase Price of Bonds corresponding to the principal amount thereof. (4) The amount demanded hereby does not include any amount in respect of the purchase of any Pledged Bonds. (5) Upon receipt by the undersigned of the amount I-A-1 demanded hereby, (a) the undersigned will apply the same directly to the payment when due of the principal amount owing on account of the purchase of Bonds pursuant to the Indenture (as hereinafter defined) and, upon receipt of written request by the Bank, will cause the Tender Agent to deliver promptly to the Bank Pledged Bonds in an aggregate principal amount equal to the amount demanded hereby (together with any and all due bills for interest due on the next succeeding interest payment date delivered pursuant to Section 4.04 of the Indenture (as hereinafter defined) in respect of such Pledged Bonds), (b) no portion of said amount shall be applied by the undersigned for any other purpose and (c) no portion of said amount shall be commingled with other funds held by the undersigned. (6) With respect to any drawing hereunder pursuant to Section 3.09 of the Indenture, the undersigned certifies that the Trustee has received a copy of your written consent to the purchase of Bonds pursuant to said Section 3.09. Any capitalized terms used herein and not otherwise defined shall have the respective meanings assigned to such terms in the Indenture of Trust, dated as of November 1, 1997 between the City of Gainesville, Florida and the undersigned, as Trustee (the "Indenture"). IN WITNESS WHEREOF, the Trustee has executed and delivered this Certificate as of the ____ day of ___________, ____. SUNTRUST BANK, CENTRAL FLORIDA, NATIONAL ASSOCIATION, as Trustee By:______________________________ Title: I-A-2 EXHIBIT B CERTIFICATE FOR "B DRAWING" [Date] SunTrust Bank, North Central Florida 411 North Main Street Gainesville, Florida 32601 Attention: Commercial Real Estate Department (Richard J. Blahauvietz) SunTrust Bank, North Central Florida 203 East Silver Springs Boulevard Ocala, Florida 34470 Attention: Corporate Lending (Christine Thibodeau) RE: IRREVOCABLE LETTER OF CREDIT NO. 4044 The undersigned, a duly authorized officer of SunTrust Bank, Central Florida, National Association (the "Trustee"), hereby certifies to SunTrust Bank, North Central Florida (the "Bank") that: (1) The undersigned is the Trustee under the Indenture (as hereinafter defined) for the holders of the Bonds. (2) The undersigned, in its capacity as Trustee, is making a drawing under the above-referenced Letter of Credit in the amount of $__________ with respect to the payment of principal of the Bonds, which amount has, or will, on the Business Day immediately following the date hereof, become due and payable pursuant to the Indenture (as hereinafter defined), upon maturity or as a result of acceleration or redemption of the Bonds. (3) The amount demanded hereby does not include any amount in respect of the principal amount of any Pledged Bonds. (4) The amount demanded hereby, together with the aggregate of all prior payments made pursuant to "B Drawings" under the above-referenced Letter of Credit, does not exceed $3,900,000. (5) The amount demanded hereby does not exceed the amount available on the date hereof to be drawn under the I-B-1 above-referenced Letter of Credit in respect of the principal of the Bonds. (6) Upon receipt by the undersigned of the amount demanded hereby, (a) the undersigned will apply the same directly to the payment when due of the principal amount owing on account of the Bonds pursuant to the Indenture (as hereinafter defined), (b) no portion of said amount shall be applied by the undersigned for any other purpose and (c) no portion of said amount shall be commingled with other funds held by the undersigned. Any capitalized terms used herein and not otherwise defined shall have the respective meanings assigned to such terms in the Indenture of Trust, dated as of November 1, 1997 between the City of Gainesville, Florida and the undersigned, as Trustee (the "Indenture"). IN WITNESS WHEREOF, the Trustee has executed and delivered this Certificate as of the ______ day of _________, ____. SUNTRUST BANK, CENTRAL FLORIDA, NATIONAL ASSOCIATION, as Trustee By:______________________________ Title: I-B-2 EXHIBIT C CERTIFICATE FOR "C DRAWING" [Date] SunTrust Bank, North Central Florida 411 North Main Street Gainesville, Florida 32601 Attention: Commercial Real Estate Department (Richard J. Blahauvietz) SunTrust Bank, North Central Florida 203 East Silver Springs Boulevard Ocala, Florida 34470 Attention: Corporate Lending (Christine Thibodeau) RE: IRREVOCABLE LETTER OF CREDIT NO. 4044 The undersigned, a duly authorized officer of SunTrust Bank, Central Florida, National Association (the "Trustee"), hereby certifies to SunTrust Bank, North Central Florida, (the "Bank") that: (1) The undersigned is the Trustee under the Indenture (as hereinafter defined) for the holders of the Bonds. (2) The undersigned, in its capacity as Trustee, is making a drawing under the above-referenced Letter of Credit in the amount of $___________ with respect to payment of [the portion of the purchase price of $___________ in principal amount of the Bonds corresponding to the accrued interest thereon, which Bonds are to be purchased pursuant to [Section 3.09 or 4.04] of the Indenture (as hereinafter defined)] [interest on the Bonds, which amount has accrued and become due and payable pursuant to the Indenture (as hereinafter defined), upon a stated interest payment date or as a result of acceleration or redemption of the Bonds]1 [interest on the Bonds, which has accrued or will accrue during the calendar month for which this drawing is being submitted]1. (3) The amount demanded hereby does not exceed the amount ___________________________ 1 For use when Interest Period is three months or six months in durationn. I-C-1 available on the date hereof to be drawn under the above-referenced Letter of Credit in respect of interest on the Bonds. (4) If the Interest Period is one week or one month in duration, the amount demanded hereby does not include any amount in respect of the interest on any Pledged Bonds. (5) Upon receipt by the undersigned of the amount demanded hereby, (a) the undersigned will apply the same directly to the payment when due of the [interest owing on account of the Bonds pursuant to the Indenture (as hereinafter defined)] [portion of the Purchase Price of Bonds pursuant to [Section 3.09 or 4.04, as applicable] of the Indenture (as hereinafter defined) corresponding to accrued interest thereon], (b) no portion of said amount shall be applied by the undersigned for any other purpose and (c) no portion of said amount shall be commingled with other funds held by the undersigned. (6) With respect to any drawing hereunder pursuant to Section 3.09 of the Indenture, the undersigned certifies that the Trustee has received a copy of your written consent to the purchase of Bonds pursuant to said Section 3.09. Any capitalized terms used herein and not otherwise defined shall have the respective meanings assigned to such terms in the Indenture of Trust, dated as of November 1, 1997 between the City of Gainesville, Florida and the undersigned, as Trustee (the "Indenture"). IN WITNESS WHEREOF, the Trustee has executed and delivered this Certificate as of the ____ day of _________, ____. SUNTRUST BANK, CENTRAL FLORIDA, NATIONAL ASSOCIATION, as Trustee By:______________________________ Title: I-C-2 EXHIBIT D INSTRUCTION TO ISSUE SUBSTITUTE LETTER OF CREDIT [Date] SunTrust Bank, North Central Florida 411 North Main Street Gainesville, Florida 32601 Attention: Commercial Real Estate Department (Richard J. Blahauvietz) SunTrust Bank, North Central Florida 203 East Silver Springs Boulevard Ocala, Florida 34470 Attention: Corporate Lending (Christine Thibodeau) RE: IRREVOCABLE LETTER OF CREDIT NO. 4044 Ladies and Gentlemen: Reference is made to (i) the above-referenced letter of credit (the "Old Letter of Credit") and (ii) the Indenture of Trust dated as of November 1, 1997 (the "Indenture") between the City of Gainesville, Florida and us. [Name and address of successor trustee] (the "Successor Trustee") has been appointed successor trustee under the Indenture. The Successor Trustee has been properly appointed and qualified pursuant to Article X of the Indenture. You are hereby requested to issue, in accordance with the terms of the Old Letter of Credit, a new letter of credit to the Successor Trustee having the same terms and providing for the same Stated Amount as the Old Letter of Credit. We submit herewith for cancellation the original of the Old Letter of Credit. The individual signing below on our behalf hereby represents that he or she is duly authorized to so sign on our behalf. Very truly yours, SUNTRUST BANK, CENTRAL FLORIDA, NATIONAL ASSOCIATION, as Trustee By:______________________________ Title: I-D-1 ANNEX II PLEDGE AND SECURITY AGREEMENT PLEDGE AND SECURITY AGREEMENT dated as of November 1, 1997 and made by EXACTECH, INC., a Florida corporation (the "Borrower"), to SUNTRUST BANK, NORTH CENTRAL FLORIDA (the "Bank") pursuant to the Letter of Credit Agreement dated as of November 1, 1997, between the Borrower and the Bank (hereinafter, as the same may from time to time be amended or supplemented, called the "Credit Agreement"); W I T N E S S E T H: WHEREAS, the City of Gainesville, Florida (the "Issuer") is issuing its Industrial Development Revenue Bonds (Exactech, Inc. Project), Series 1997 (the "Bonds") under an Indenture of Trust dated as of November 1, 1997 (the "Indenture") between the Issuer and SunTrust Bank, Central Florida, National Association, as trustee (in such capacity, the "Trustee"), the proceeds of which are being loaned by the Issuer to the Borrower; and WHEREAS, the Indenture requires the Trustee to purchase Bonds under certain circumstances as set forth in Section 2.02(c), 4.01, 4.02 or 4.04 of the Indenture (the "Purchased Bonds") from the holders thereof; and WHEREAS, in connection with the issuance of the Bonds, the Borrower has entered into the Credit Agreement in order to cause the Bank to issue a letter of credit thereunder (the "Letter of Credit") which may be used, INTER ALIA, to pay the purchase price of the Purchased Bonds (to the extent moneys drawn under the Letter of Credit are used to purchase Purchased Bonds, such Purchased Bonds are hereinafter referred to as "Pledged Bonds"); and WHEREAS, it is the intent of the parties hereto that the Purchased Bonds, when purchased with amounts drawn under the Letter of Credit, not be deemed to be redeemed, but remain outstanding under the Indenture; and WHEREAS, it is a condition precedent to the obligation of the Bank to enter into the Credit Agreement that the Borrower shall have executed and delivered this Pledge Agreement to the Bank; NOW, THEREFORE, in consideration of the premises and in order to induce the Bank to enter into the Credit Agreement and issue the Letter of Credit thereunder and for other good and valuable consideration, receipt of which is hereby acknowledged, the Borrower hereby agrees with the Bank as follows: 1. DEFINED TERMS. Unless otherwise defined herein, terms defined in the Credit Agreement shall have such defined meanings when used herein. 2. PLEDGE. The Borrower hereby pledges, assigns, hypothecates, transfers, and delivers to the Bank all its right, title and interest to the Pledged Bonds as the same may be from time to time delivered to the Trustee or Tender Agent by the holders thereof and hereby grants to the Bank a first lien on, and security interest in, its right, title and interest in and to the Pledged Bonds, the interest thereon and all proceeds thereof, as collateral security for the prompt and complete payment when due of all amounts due in respect of the obligations of the Borrower set forth in Paragraph 3A of the Credit Agreement (the "Obligations"). Notwithstanding anything herein to the contrary, if the Bonds are held in the DTC Book-Entry Only System (as defined in the Indenture), Pledged Bonds shall be held by the Tender Agent in its participant account with DTC (as defined in the Indenture) for the benefit of the Bank. The Tender Agent shall mark its records to indicate that such Pledged Bonds are so held for the benefit of the Bank. In the event that the Pledged Bonds are held as provided in this paragraph, the Tender Agent and the Trustee shall, promptly following a written request from the Bank, take such steps as are necessary to cause such Pledged Bonds to be converted to physical form and delivered to or at the direction of the Bank. 3. PAYMENTS ON THE BONDS. If, while this Pledge Agreement is in effect, the Borrower shall become entitled to receive or shall receive any principal or interest payment in respect of the Pledged Bonds, the Borrower agrees to accept the same as the Bank's agent and to hold the same in trust on behalf of the Bank and to deliver the same forthwith to the Bank. All sums of money so paid in respect of the Pledged Bonds which are received by the Borrower and paid to the Bank shall be credited against the obligations of the Borrower to the Bank in the manner set forth in Paragraph 3 of the Credit Agreement. So long as no Default or Event of Default has occurred and is continuing, any amounts received by the Bank in respect of the stated interest on any Pledged Bonds in excess of the amounts then owing the Bank pursuant to Paragraph 3A(i)(2) of the Credit Agreement shall be remitted to the Borrower. 4. COLLATERAL. All property at any time pledged to the Bank hereunder (whether specifically described herein or not) and all income therefrom and proceeds thereof, are herein collectively sometimes called the "Collateral." 5. RELEASE OF PLEDGED BONDS. If the Borrower makes or causes to be made to the Bank a payment in respect of its reimbursement obligation under Paragraph 3A(i) of the Credit Agreement pursuant to clause (i) of Paragraph 3B thereof or such a payment is made on behalf of the Borrower pursuant to clause (ii) of Paragraph 3B thereof, the Bank agrees to release from the lien of this Pledge Agreement and deliver to the Borrower or the Trustee for resale in accordance with Section 4.07 of the Indenture, as the case may be, Pledged Bonds of the applicable series in a principal amount equal to the amount of the payment so made or to the principal amount of Pledged Bonds so purchased. Notwithstanding the II-2 foregoing, no payment of amounts owing to the Bank pursuant to Paragraph 3A(i) of the Credit Agreement may be made, and no Pledged Bonds shall be released, during the period commencing two Business Days prior to an interest payment date with respect to the Bonds and ending on such interest payment date. 6. RIGHTS OF THE BANK. The Bank shall not be liable for failure to collect or realize upon the Obligations or any collateral security or guarantee therefor, or any part thereof, or for any delay in so doing nor shall it be under any obligation to take any action whatsoever with regard thereto. If an Event of Default has occurred and is continuing, the Bank may thereafter, without notice, exercise all rights, privileges or options pertaining to any Pledged Bonds as if it were the absolute owner thereof, upon such terms and conditions as it may determine, all without liability except to account for property actually received by it, but the Bank shall have no duty to exercise any of the aforesaid rights, privileges or options and shall not be responsible for any failure to do so or delay in so doing. 7. REMEDIES. In the event that any portion of the Obligations has been declared due and payable pursuant to the Credit Agreement, the Bank, without demand of performance or other demand, advertisement or notice of any kind (except the notice specified below of time and place of public or private sale) to or upon the Borrower or any other person (all and each of which demands, advertisements and/or notices are hereby expressly waived), may forthwith collect, receive, appropriate and realize upon the Collateral, or any part thereof, and/or may forthwith sell, assign, give option or options to purchase, contract to sell or otherwise dispose of and deliver said Collateral, or any part thereof, in one or more parcels at public or private sale or sales, at any exchange, broker's board or at any of the Bank's offices or elsewhere upon such terms and conditions as it may deem advisable and at such prices as it may deem best available, for cash or on credit or for future delivery without assumption of any credit risk, with the right to the Bank upon any such sale or sales, public or private, to purchase the whole or any part of said Collateral so sold, free of any right or equity of redemption in the Borrower, which right or equity is hereby expressly waived or released. The Bank shall apply the net proceeds of any such collection, recovery, receipt, appropriation, realization or sale, after deducting all reasonable costs and expenses of every kind incurred therein or incidental to the care, safekeeping or otherwise of any and all of the Collateral or in any way relating to the rights of the Bank hereunder, including reasonable attorney's fees and legal expenses, to the payment, in whole or in part, of the Obligations in such order as the Bank may elect, the Borrower remaining liable for any deficiency remaining unpaid after such application, and only after so applying such net proceeds and after the payment by the Bank of any other amount required to be paid by any provision of law, including, without limitation, Section 679.504(1)(c), Florida Statutes, need the Bank account for the surplus, if any, to the Borrower. The II-3 Borrower agrees that the Bank need not give more than ten days' notice of the time and place of any public sale or of the time after which a private sale or other intended disposition is to take place and that such notice is reasonable notification of such matters. No notification need be given to the Borrower if it has signed after default a statement renouncing or modifying any right to notification of sale or other intended disposition. In addition to the rights and remedies granted to it in this Pledge Agreement and in any other instrument or agreement securing, evidencing or relating to any of the Obligations, the Bank shall have all the rights and remedies of a secured party under the Uniform Commercial Code of the State of Florida. The Borrower shall be liable for the deficiency if the proceeds of any sale or other disposition of the Collateral are insufficient to pay all amounts to which the Bank is entitled, and the fees of any attorneys employed by the Bank to collect such deficiency. 8. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE BORROWER. The Borrower represents and warrants that: (a) on the date of delivery to the Bank of any Pledged Bonds described herein, neither the Remarketing Agent (as defined in the Indenture) nor the Trustee will have any right, title or interest in and to the Pledged Bonds; (b) it has, and on the date of delivery to the Bank of any Pledged Bonds will have, full power, authority and legal right to pledge all of its right, title and interest in and to the Pledged Bonds pursuant to this Pledge Agreement; (c) this Pledge Agreement has been duly authorized, executed and delivered by the Borrower and constitutes a legal, valid and binding obligation of the Borrower enforceable in accordance with its terms; (d) no consent of any other party (including, without limitation, creditors of the Borrower) and no consent, license, permit, approval or authorization of, exemption by, notice or report to, or registration, filing or declaration with, any governmental authority, domestic or foreign is required to be obtained by the Borrower in connection with the execution, delivery or performance of this Pledge Agreement; (e) the execution, delivery and performance of this Pledge Agreement will not violate any provision of any applicable law or regulation or of any order, judgment, writ, award or decree of any court, arbitrator or governmental authority, domestic or foreign, or of any mortgage, indenture, lease, contract, or other agreement, instrument or undertaking to which the Borrower is a party or which purports to be binding upon the Borrower or upon its assets and will not result in the creation or imposition of any lien, charge or encumbrance on or security interest in any of the assets of the Borrower except as contemplated by this Pledge II-4 Agreement; and (f) the pledge, assignment and delivery of such Pledged Bonds pursuant to this Pledge Agreement will create a lien on and a security interest in, all right, title or interest of the Borrower in or to such Pledged Bonds, and the proceeds thereof, subject to no prior pledge, lien, mortgage, hypothecation, security interest, charge, option or encumbrance or to any agreement purporting to grant to any third party a security interest in the property or assets of the Borrower which would include the Pledged Bonds. The Borrower covenants and agrees that it will defend the Bank's right, title and security interest in and to the Pledged Bonds and the proceeds thereof against the claims and demands of all persons whomsoever; and covenants and agrees that it will have like title to and right to pledge any other property at any time hereafter pledged to the Bank as collateral hereunder and will likewise defend the Bank's right thereto and security interest therein. 9. NO DISPOSITION, ETC. Without the prior written consent of the Bank, the Borrower agrees that it will not sell, assign, transfer, exchange, or otherwise dispose of, or grant any option with respect to, the Collateral, nor will it create, incur or permit to exist any pledge, lien, mortgage, hypothecation, security interest, charge, option or any other encumbrance with respect to any of the Collateral, or any interest therein, or any proceeds thereof, except for the lien and security interest provided for by this Pledge Agreement and sale of the Pledged Bonds pursuant to Section 4.07(b) of the Indenture. 10. FURTHER ASSURANCES. The Borrower agrees that at any time and from time to time upon the written request of the Bank, the Borrower will execute and deliver such further documents and do such further acts and things as the Bank may reasonably request in order to effect the purposes of this Pledge Agreement and to maintain the lien of this Pledge Agreement on the Pledged Bonds as a first lien. 11. SEVERABILITY. Any provision of this Pledge Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any such jurisdiction. 12. NO WAIVER; REMEDIES CUMULATIVE. The Bank shall not by any act, delay, omission or otherwise be deemed to have waived any of its rights or remedies hereunder and no waiver shall be valid unless in writing, signed by the Bank, and then only to the extent therein set forth. A waiver by the Bank of any right or remedy hereunder on any one occasion shall not be construed as a bar to any right or remedy which the Bank would otherwise have on any future occasion. No failure to exercise nor any delay in exercising on the part of the Bank, any right, power or privilege hereunder, shall II-5 operate as a waiver thereof; nor shall any single or partial exercise of any right, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided are cumulative and may be exercised singly or concurrently, and are not exclusive of any rights or remedies provided by law. 13. WAIVERS, AMENDMENTS; APPLICABLE LAW. None of the terms or provisions of this Pledge Agreement may be waived, altered, modified or amended except by an instrument in writing, duly executed by the Bank. This Pledge Agreement and all obligations of the Borrower hereunder shall be binding upon the successors and assigns of the Borrower, and shall, together with the rights and remedies of the Bank hereunder, inure to the benefit of the Bank and its successors and assigns. This Pledge Agreement shall be governed by, and be construed and interpreted in accordance with, the laws of the State of Florida. 14. LITIGATION. Notwithstanding anything herein to the contrary, in the event any legal proceedings are instituted between the parties hereto concerning this Pledge Agreement, the prevailing party in such proceedings shall be entitled to recover its costs of suit, including reasonable attorneys' fees, at both trial and appellate levels. IN WITNESS WHEREOF, the Borrower has caused this Pledge Agreement to be duly executed as of the day and year first above written. EXACTECH, INC. By:_____________________________ Title: President By:________________________ Title: Secretary II-6 ANNEX III PENDING LITIGATION On January 28, 1997, a competitor filed a complaint and jury demand for patent infringement against the Company. Management has examined the patent and concluded that the structure of the Company's product differs significantly from the teachings of the patent. In addition, the Company has sought the advice of patent counsel who believes that the Company's products do not infringe the Competitor's patent. On August 21, 1997, a sales organization in the northeast filed a complaint alleging that the Company induced several of their sales agents to breach their employment agreements when the Company contracted with these agents to sell its products. The plaintiff is seeking an unspecified monetary award and punitive damages in the amount to be determined at trial. The plaintiff also asked that the Company be enjoined from soliciting plaintiff's employees, interfering with their customer relationships and selling products to their former customers. The Company denies the allegations. At a hearing in the Superior Court of New Jersey on October 8, 1997, the judge refused to grant any of the above injunctions sought by the plaintiff. III-1 ANNEX IV INFORMATION REGARDING ERISA PLANS The Company implemented a 401(k) pension plan (the "Plan") in the second quarter of 1996. The Company is the administrator of the Plan, and the trustees of the Plan are the following officers of the Company. Joel C. Phillips, Betty Petty and Timothy J. Seese. The Company currently matches employee contributions at the rate of $0.25 for each dollar of employee contributions, subject to the availability of funds. The Plan does not require the Company to match future employee contributions. Investment vehicles offered by the Plan are: (i) five mutual funds managed by Merrill Lynch (including a money market fund), (ii) the Alliance Growth Fund and (iii) the Colonial Newport Tiger Fund. IV-1 ANNEX V PERMITTED LIENS (All references to public records of Alachua County, Florida) 1. Easement granted to City of Gainesville, dated December 3, 1974, filed December 17, 1974 in Official Records Book 920, at Page 58. 2. Declaration of Restrictive Covenants, Reservations, Conditions and Easements of Northwood Commercial Park, which creates easements and establishes private charges or assessments filed October 20, 1975, in Official Records Book 969, at Page 620, as amended and supplemented in Official Records Book 1279, at Page 625, Official Records Book 1334, at Page 886, Official Records Book 1380, at Page 699 and Official Records Book 1462, at Page 323, and as affected by the conveyance of ingress and egress easements to the City of Gainesville by Deed filed in Official Records Book 2102, at Page 1507. 3. Easement granted to N.W. Inc., dated April 21, 1980, filed April 23, 1980 in Official Records Book 1274, at Page 434. 4. Easement granted to Turkey Creek, Inc., dated October 21, 1981, filed October 23, 1981 in Official Records Book 1378, at Page 655. 5. Resolutions of the Board of County Commissioners of Alachua County filed in Official Records Book 1929, at Page 839 and Official Records Book 2078, at Page 1999. 6. Easement granted to City of Gainesville, dated September 9, 1997, filed September 22, 1997, in Official Records Book 2132, at Page 963. 1 For use when Interest Period (as defined in Indenture) is seven days or one month in duration. EX-10.62 4 EXHIBIT 10.62 PLEDGE AND SECURITY AGREEMENT PLEDGE AND SECURITY AGREEMENT dated as of November 1, 1997 and made by EXACTECH, INC., a Florida corporation (the "Borrower"), to SUNTRUST BANK, NORTH CENTRAL FLORIDA (the "Bank") pursuant to the Letter of Credit Agreement dated as of November 1, 1997, between the Borrower and the Bank (hereinafter, as the same may from time to time be amended or supplemented, called the "Credit Agreement"); W I T N E S S E T H: WHEREAS, the City of Gainesville, Florida (the "Issuer") is issuing its Industrial Development Revenue Bonds (Exactech, Inc. Project), Series 1997 (the "Bonds") under an Indenture of Trust dated as of November 1, 1997 (the "Indenture") between the Issuer and SunTrust Bank, Central Florida, National Association, as trustee (in such capacity, the "Trustee"), the proceeds of which are being loaned by the Issuer to the Borrower; and WHEREAS, the Indenture requires the Trustee to purchase Bonds under certain circumstances as set forth in Section 2.02(c), 4.01, 4.02 or 4.04 of the Indenture (the "Purchased Bonds") from the holders thereof; and WHEREAS, in connection with the issuance of the Bonds, the Borrower has entered into the Credit Agreement in order to cause the Bank to issue a letter of credit thereunder (the "Letter of Credit") which may be used, INTER ALIA, to pay the purchase price of the Purchased Bonds (to the extent moneys drawn under the Letter of Credit are used to purchase Purchased Bonds, such Purchased Bonds are hereinafter referred to as "Pledged Bonds"); and WHEREAS, it is the intent of the parties hereto that the Purchased Bonds, when purchased with amounts drawn under the Letter of Credit, not be deemed to be redeemed, but remain outstanding under the Indenture; and WHEREAS, it is a condition precedent to the obligation of the Bank to enter into the Credit Agreement that the Borrower shall have executed and delivered this Pledge Agreement to the Bank; NOW, THEREFORE, in consideration of the premises and in order to induce the Bank to enter into the Credit Agreement and issue the Letter of Credit thereunder and for other good and valuable consideration, receipt of which is hereby acknowledged, the Borrower hereby agrees with the Bank as follows: 1. DEFINED TERMS. Unless otherwise defined herein, terms defined in the Credit Agreement shall have such defined meanings when used herein. 2. PLEDGE. The Borrower hereby pledges, assigns, hypothecates, transfers, and delivers to the Bank all its right, title and interest to the Pledged Bonds as the same may be from time to time delivered to the Trustee or Tender Agent by the holders thereof and hereby grants to the Bank a first lien on, and security interest in, its right, title and interest in and to the Pledged Bonds, the interest thereon and all proceeds thereof, as collateral security for the prompt and complete payment when due of all amounts due in respect of the obligations of the Borrower set forth in Paragraph 3A of the Credit Agreement (the "Obligations"). Notwithstanding anything herein to the contrary, if the Bonds are held in the DTC Book-Entry Only System (as defined in the Indenture), Pledged Bonds shall be held by the Tender Agent in its participant account with DTC (as defined in the Indenture) for the benefit of the Bank. The Tender Agent shall mark its records to indicate that such Pledged Bonds are so held for the benefit of the Bank. In the event that the Pledged Bonds are held as provided in this paragraph, the Tender Agent and the Trustee shall, promptly following a written request from the Bank, take such steps as are necessary to cause such Pledged Bonds to be converted to physical form and delivered to or at the direction of the Bank. 3. PAYMENTS ON THE BONDS. If, while this Pledge Agreement is in effect, the Borrower shall become entitled to receive or shall receive any principal or interest payment in respect of the Pledged Bonds, the Borrower agrees to accept the same as the Bank's agent and to hold the same in trust on behalf of the Bank and to deliver the same forthwith to the Bank. All sums of money so paid in respect of the Pledged Bonds which are received by the Borrower and paid to the Bank shall be credited against the obligations of the Borrower to the Bank in the manner set forth in Paragraph 3 of the Credit Agreement. So long as no Default or Event of Default has occurred and is continuing, any amounts received by the Bank in respect of the stated interest on any Pledged Bonds in excess of the amounts then owing the Bank pursuant to Paragraph 3A(i)(2) of the Credit Agreement shall be remitted to the Borrower. 4. COLLATERAL. All property at any time pledged to the Bank hereunder (whether specifically described herein or not) and all income therefrom and proceeds thereof, are herein collectively sometimes called the "Collateral." 5. RELEASE OF PLEDGED BONDS. If the Borrower makes or causes to be made to the Bank a payment in respect of its reimbursement obligation under Paragraph 3A(i) of the Credit Agreement pursuant to clause (i) of Paragraph 3B thereof or such a payment is made on behalf of the Borrower pursuant to clause 2 (ii) of Paragraph 3B thereof, the Bank agrees to release from the lien of this Pledge Agreement and deliver to the Borrower or the Trustee for resale in accordance with Section 4.07 of the Indenture, as the case may be, Pledged Bonds of the applicable series in a principal amount equal to the amount of the payment so made or to the principal amount of Pledged Bonds so purchased. Notwithstanding the foregoing, no payment of amounts owing to the Bank pursuant to Paragraph 3A(i) of the Credit Agreement may be made, and no Pledged Bonds shall be released, during the period commencing two Business Days prior to an interest payment date with respect to the Bonds and ending on such interest payment date. 6. RIGHTS OF THE BANK. The Bank shall not be liable for failure to collect or realize upon the Obligations or any collateral security or guarantee therefor, or any part thereof, or for any delay in so doing nor shall it be under any obligation to take any action whatsoever with regard thereto. If an Event of Default has occurred and is continuing, the Bank may thereafter, without notice, exercise all rights, privileges or options pertaining to any Pledged Bonds as if it were the absolute owner thereof, upon such terms and conditions as it may determine, all without liability except to account for property actually received by it, but the Bank shall have no duty to exercise any of the aforesaid rights, privileges or options and shall not be responsible for any failure to do so or delay in so doing. 7. REMEDIES. In the event that any portion of the Obligations has been declared due and payable pursuant to the Credit Agreement, the Bank, without demand of performance or other demand, advertisement or notice of any kind (except the notice specified below of time and place of public or private sale) to or upon the Borrower or any other person (all and each of which demands, advertisements and/or notices are hereby expressly waived), may forthwith collect, receive, appropriate and realize upon the Collateral, or any part thereof, and/or may forthwith sell, assign, give option or options to purchase, contract to sell or otherwise dispose of and deliver said Collateral, or any part thereof, in one or more parcels at public or private sale or sales, at any exchange, broker's board or at any of the Bank's offices or elsewhere upon such terms and conditions as it may deem advisable and at such prices as it may deem best available, for cash or on credit or for future delivery without assumption of any credit risk, with the right to the Bank upon any such sale or sales, public or private, to purchase the whole or any part of said Collateral so sold, free of any right or equity of redemption in the Borrower, which right or equity is hereby expressly waived or released. The Bank shall apply the net proceeds of any such collection, recovery, receipt, appropriation, realization or sale, after deducting all reasonable costs and expenses of every kind incurred therein or incidental to the care, safekeeping or otherwise of any and all of the Collateral or in any way relating 3 to the rights of the Bank hereunder, including reasonable attorney's fees and legal expenses, to the payment, in whole or in part, of the Obligations in such order as the Bank may elect, the Borrower remaining liable for any deficiency remaining unpaid after such application, and only after so applying such net proceeds and after the payment by the Bank of any other amount required to be paid by any provision of law, including, without limitation, Section 679.504(1)(c), Florida Statutes, need the Bank account for the surplus, if any, to the Borrower. The Borrower agrees that the Bank need not give more than ten days' notice of the time and place of any public sale or of the time after which a private sale or other intended disposition is to take place and that such notice is reasonable notification of such matters. No notification need be given to the Borrower if it has signed after default a statement renouncing or modifying any right to notification of sale or other intended disposition. In addition to the rights and remedies granted to it in this Pledge Agreement and in any other instrument or agreement securing, evidencing or relating to any of the Obligations, the Bank shall have all the rights and remedies of a secured party under the Uniform Commercial Code of the State of Florida. The Borrower shall be liable for the deficiency if the proceeds of any sale or other disposition of the Collateral are insufficient to pay all amounts to which the Bank is entitled, and the fees of any attorneys employed by the Bank to collect such deficiency. 8. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE BORROWER. The Borrower represents and warrants that: (a) on the date of delivery to the Bank of any Pledged Bonds described herein, neither the Remarketing Agent (as defined in the Indenture) nor the Trustee will have any right, title or interest in and to the Pledged Bonds; (b) it has, and on the date of delivery to the Bank of any Pledged Bonds will have, full power, authority and legal right to pledge all of its right, title and interest in and to the Pledged Bonds pursuant to this Pledge Agreement; (c) this Pledge Agreement has been duly authorized, executed and delivered by the Borrower and constitutes a legal, valid and binding obligation of the Borrower enforceable in accordance with its terms; (d) no consent of any other party (including, without limitation, creditors of the Borrower) and no consent, license, permit, approval or authorization of, exemption by, notice or report to, or registration, filing or declaration with, any governmental authority, domestic or foreign is required to be obtained by the Borrower in connection with the execution, delivery or performance of this Pledge Agreement; 4 (e) the execution, delivery and performance of this Pledge Agreement will not violate any provision of any applicable law or regulation or of any order, judgment, writ, award or decree of any court, arbitrator or governmental authority, domestic or foreign, or of any mortgage, indenture, lease, contract, or other agreement, instrument or undertaking to which the Borrower is a party or which purports to be binding upon the Borrower or upon its assets and will not result in the creation or imposition of any lien, charge or encumbrance on or security interest in any of the assets of the Borrower except as contemplated by this Pledge Agreement; and (f) the pledge, assignment and delivery of such Pledged Bonds pursuant to this Pledge Agreement will create a lien on and a security interest in, all right, title or interest of the Borrower in or to such Pledged Bonds, and the proceeds thereof, subject to no prior pledge, lien, mortgage, hypothecation, security interest, charge, option or encumbrance or to any agreement purporting to grant to any third party a security interest in the property or assets of the Borrower which would include the Pledged Bonds. The Borrower covenants and agrees that it will defend the Bank's right, title and security interest in and to the Pledged Bonds and the proceeds thereof against the claims and demands of all persons whomsoever; and covenants and agrees that it will have like title to and right to pledge any other property at any time hereafter pledged to the Bank as collateral hereunder and will likewise defend the Bank's right thereto and security interest therein. 9. NO DISPOSITION, ETC. Without the prior written consent of the Bank, the Borrower agrees that it will not sell, assign, transfer, exchange, or otherwise dispose of, or grant any option with respect to, the Collateral, nor will it create, incur or permit to exist any pledge, lien, mortgage, hypothecation, security interest, charge, option or any other encumbrance with respect to any of the Collateral, or any interest therein, or any proceeds thereof, except for the lien and security interest provided for by this Pledge Agreement and sale of the Pledged Bonds pursuant to Section 4.07(b) of the Indenture. 10. FURTHER ASSURANCES. The Borrower agrees that at any time and from time to time upon the written request of the Bank, the Borrower will execute and deliver such further documents and do such further acts and things as the Bank may reasonably request in order to effect the purposes of this Pledge Agreement and to maintain the lien of this Pledge Agreement on the Pledged Bonds as a first lien. 11. SEVERABILITY. Any provision of this Pledge Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of 5 such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any such jurisdiction. 12. NO WAIVER; REMEDIES CUMULATIVE. The Bank shall not by any act, delay, omission or otherwise be deemed to have waived any of its rights or remedies hereunder and no waiver shall be valid unless in writing, signed by the Bank, and then only to the extent therein set forth. A waiver by the Bank of any right or remedy hereunder on any one occasion shall not be construed as a bar to any right or remedy which the Bank would otherwise have on any future occasion. No failure to exercise nor any delay in exercising on the part of the Bank, any right, power or privilege hereunder, shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided are cumulative and may be exercised singly or concurrently, and are not exclusive of any rights or remedies provided by law. 13. WAIVERS, AMENDMENTS; APPLICABLE LAW. None of the terms or provisions of this Pledge Agreement may be waived, altered, modified or amended except by an instrument in writing, duly executed by the Bank. This Pledge Agreement and all obligations of the Borrower hereunder shall be binding upon the successors and assigns of the Borrower, and shall, together with the rights and remedies of the Bank hereunder, inure to the benefit of the Bank and its successors and assigns. This Pledge Agreement shall be governed by, and be construed and interpreted in accordance with, the laws of the State of Florida. 14. LITIGATION. Notwithstanding anything herein to the contrary, in the event any legal proceedings are instituted between the parties hereto concerning this Pledge Agreement, the prevailing party in such proceedings shall be entitled to recover its costs of suit, including reasonable attorneys' fees, at both trial and appellate levels. [Signature page follows] 6 IN WITNESS WHEREOF, the Borrower has caused this Pledge Agreement to be duly executed as of the day and year first above written. EXACTECH, INC. By:____________________________ Title: President and Chief Operating Officer By:________________________ Title: Secretary 7 EX-10.63 5 EXHIBIT 10.63 This instrument prepared by (and return to): Edward W. Vogel III HOLLAND & KNIGHT LLP 92 Lake Wire Drive P. O. Box 32092 Lakeland, FL 33802-2092 MORTGAGE AND SECURITY AGREEMENT FOR RECORDER'S USE ONLY This is a Mortgage and Security Agreement dated as of the 1st day of November, 1997, executed by Exactech, Inc., a Florida corporation, 4613 NW 6th Street, Gainesville, Florida 32609-1781, as Mortgagor, and delivered to SunTrust Bank, North Central Florida, 411 North Main Street, Gainesville, Florida 32601, as Mortgagee. 1. DEFINITIONS. The Mortgagor and the Mortgagee agree that, unless the context otherwise specifies or requires, the following terms shall have the meanings herein specified, such definitions to be applicable equally to the singular and the plural forms of such terms. Unless defined below, all terms used herein in capitalized form shall have the meanings ascribed to those terms by the Agreement, as that term is hereinafter defined. "Agreement" means the Letter of Credit Agreement dated as of November 1, 1997 between the Mortgagor (therein designated the "Company") and the Mortgagee (therein designated the "Bank"). "Aggregate Removal Amount" means $200,000. "Annual Removal Amount" means $25,000. "Bond Documents" means the Bonds, the Agreement, this Mortgage, and any other document executed and delivered in order to carry out the intent of each and all of the foregoing. "Bonds" means the City of Gainesville, Florida Industrial Development Revenue Bonds (Exactech, Inc. Project), Series 1997 originally issued in the principal amount of $3,900,000. No intangible taxes or documentary stamp taxes are due hereon pursuant to Sections 159.31 and 159.50, Florida Statutes. "Collateral" means all machinery, equipment, furniture and fixtures now or hereafter owned by the Mortgagor of every kind and description that is either located on the Mortgaged Property or purchased with the proceeds of the Bonds. "Indebtedness" means the Indebtedness secured by this Mortgage consisting of (i) all existing and future obligations of the Mortgagor pursuant to this Mortgage and the Agreement, including without limitation, the Mortgagor's obligations under all of the provisions of paragraph 3 of the Agreement; and (ii) all of the Mortgagor's obligations to the Mortgagee under any other loan agreement or extensions of credit by the Mortgagee to the Mortgagor. "Letter of Credit" means the Irrevocable Letter of Credit dated November 13, 1997, issued by the Mortgagee to secure the Bonds, as the same may be hereafter amended, and any successor or substitute letter of credit. "Maximum Principal Indebtedness" means the Indebtedness in the amount of the Letters of Credit, together with future advances that may be secured hereby, but in no event to exceed $10,000,000. "Mortgage" means this Mortgage and Security Agreement. "Mortgaged Property" means the Mortgagor's interest in the Project Site, the buildings, fixtures, furnishings, and improvements now or hereafter thereon, the Collateral, including the Project as herein defined, and all rents, receipts, issues, profits, proceeds (including insurance proceeds and condemnation awards) and products thereof, and all substitutions therefor or renewals or replacements thereof, together with all property described in Section 2 hereof. "Mortgagee" means SunTrust Bank, North Central Florida, and its successors or assigns or any other entity issuing a Letter of Credit to secure the Bonds. "Mortgagee's Address" means 411 North Main Street, Gainesville, Florida 32601. "Mortgagor" means Exactech, Inc., a Florida corporation. "Mortgagor's Address" means 4613 NW 6th Street, Gainesville, Florida 32609-1781. 2 "Permitted Encumbrances" means and shall include the following: (a) those liens, charges and encumbrances listed in Exhibit "C" attached hereto to which the Mortgagor's title to the Project Site or the Project is subject; (b) liens for taxes and special assessments not delinquent or which are being contested in good faith by or on behalf of the Mortgagor in accordance with the terms and provisions of Section 15 hereof; (c) mechanic's, workmen's, repairmen's or carrier's liens or other similar liens, provided that the same shall be discharged by the Mortgagor in the ordinary course of business and without undue delay or the validity of the same shall be contested in good faith by or on behalf of the Mortgagor in accordance with the provisions of Section 15 hereof; and (d) the Agreement and the documents contemplated hereby, including this Mortgage. "Project" means, collectively, the structures, fixtures, improvements and equipment described in Exhibit "A" attached hereto, to be located on the Project Site, together with all substitutions therefor or renewals or replacements thereof, as they may exist at any time. "Project Site" means the real property in Orange County, Florida described in Exhibit "B" attached hereto, together with all easements and rights of way and other rights or interests pertaining thereto. 2. MORTGAGE. In consideration of the premises and in order to secure the Indebtedness and the performance and observance of all the provisions of the Agreement and this Mortgage, the Mortgagor hereby mortgages, grants, bargains, sells, liens, remises, releases, conveys, assigns, transfers, hypothecates, pledges, delivers, sets over, warrants and confirms to the Mortgagee the following described real and personal property, rights, titles, interests and estates: (a) The Mortgaged Property, including, but not limited to, the Project Site, the Project and all structures, buildings, improvements, machinery, furnishings, equipment, fixtures, and other tangible personal property constituting part of the Project, and all components and parts thereof, the electrical, heating, cooling, ventilating, gas distribution, compressed air, air conditioning, water, sewer and waste disposed, elevator and sprinkler systems incorporated into the Project, and 3 all fixtures and improvements described in Exhibit "A" hereto, together with all substitutions therefor or renewals or replacements thereof or accessions thereto, whether now existing or hereafter arising, and all architectural plans and drawings, all building permits and other permits and construction contracts used in and about the Project, the property described in paragraph 7 hereof, and the proceeds of any of the foregoing. (b) Any and all rights and appurtenances belonging, incident or appertaining to said real property, improvements, fixtures, machinery, furnishings, equipment and other personal property described in subparagraph (a) above, or any part thereof. (c) Any and all rights of the Mortgagor under any leases or subleases of or use agreements related to the Mortgaged Property, heretofore or hereafter entered into, and all right, title and interest of the Mortgagor thereunder, including, without limitation, cash or securities deposited thereunder pursuant to said leases, subleases, or use agreements, and all rents, issues, proceeds and profits accruing from conversion, voluntary or involuntary, of any of the foregoing into cash or liquidated claims, including, without limitation, proceeds of insurance and condemnation awards. From and after an Event of Default, the Mortgagor does hereby empower and authorize the Mortgagee, or its agents or attorneys, to collect, sue for, settle or compromise all of the rents that may become due under any lease or sublease pertaining to the Mortgaged Property and avail themselves of and pursue all remedies for the enforcement of any such lease or sublease as the Mortgagor might have pursued but for this Mortgage. TO HAVE AND TO HOLD, the same unto Mortgagee. PROVIDED, HOWEVER, that if Mortgagor shall promptly pay or cause to be paid to Mortgagees all Indebtedness secured hereby at the times and in the manner stipulated under the Agreement, then this Mortgage, and all the properties, interests and rights hereby granted, conveyed and assigned shall cease and be void, but shall 4 otherwise remain in full force and effect. 3. SECURED INDEBTEDNESS; FUTURE ADVANCES; MAXIMUM AMOUNT AND TIME. This Mortgage shall secure the Indebtedness as specified above, and such future advances, whether such advances are obligatory or are to be made at the option of the Mortgagee, or otherwise, as are made within twenty (20) years from the date hereof, to the same extent as is such future advances were made on the date of execution of this Mortgage. The total amount of Indebtedness secured hereby may decrease or increase from time to time, but the total unpaid balance so secured at any one time shall not exceed the Maximum Principal Indebtedness, plus (i) interest thereon, (ii) any disbursements made for the payment of taxes, levies and insurance on the Mortgaged Property, and (iii) payments made for repair, maintenance, protection or preservation of the Mortgaged Property. This Mortgage shall not secure any future advances made more than twenty (20) years from the date hereof. 4. PERFORMANCE AND PAYMENT. Taking into account all grace and cure periods, if any, the Mortgagor shall perform, observe and comply with all of its obligations under each of the Bond Documents, and shall pay or cause to be paid all Indebtedness, including, without limitation, all and singular the principal of, premium, if any, and interest on and other sums of money payable under the Agreement and shall pay or cause to be paid all other sums secured hereby promptly on the days respectively the same severally become due, whether in due course or upon acceleration. 5. TITLE COVENANTS. The Mortgagor covenants that the Mortgaged Property is free from all encumbrances, other than Permitted Encumbrances, that lawful seisin of and good right to encumber the Mortgaged Property is vested in the Mortgagor, and that the Mortgagor hereby fully warrants the title to the Mortgaged Property and will defend the same against the lawful claims of all persons whomsoever. The mortgage and security interest granted to Mortgagee herein is senior to all obligations except Permitted Encumbrances. 6. CONDITIONS TO CHANGES IN PROPERTY. The right of the Mortgagor to make any material changes to the Mortgaged Property in the manner hereinafter provided is expressly subject to the condition that such changes will not impair the structural soundness, usefulness or market value of the Mortgaged Property or significantly alter the character or purpose or detract from the operating efficiency of the Mortgaged Property, impair its revenue- producing capacity, or otherwise materially and adversely affect its operation or otherwise materially and adversely affect the 5 purposes of this Mortgage and, to the extent that such changes will modify the nature, scope or purpose of the Project, the Mortgagor must obtain consent of the Mortgagee and shall deliver to the Mortgagee (i) a certificate of an independent architect that such change will not materially alter or generally change the character of the Project as improvements to land and a capital project under the Internal Revenue Code of 1986, as amended, and a "project" within the meaning of Part II of Chapter 159, Florida Statutes, and (ii) an opinion addressed to the Mortgagee of counsel nationally recognized on the subject of municipal bonds or other counsel acceptable to the Mortgagee, that such changes will not result in the interest on the Bonds becoming included in gross income for federal income tax purposes. 7. AFTER-ACQUIRED PROPERTY. All buildings, structures, improvements, fixtures, furnishings, machinery, equipment or other property now or hereafter acquired, constructed or installed, whether or not financed with the proceeds of the Bonds, on the Project Site, and all substitutions or replacements for or accessions to such property, are subject to the terms and conditions of this Mortgage and the security interest created hereby. 8. REMOVAL FREE OF NOTICE. The Mortgagor may, from time to time at its own cost and expense, without notice to and without obtaining the approval of the Mortgagee and free of any obligation to make any replacement thereof, demolish, remove or dispose of any structure, fixture or other improvements now or hereafter existing as part of the Mortgaged Property, provided the fair market value of the property so demolished or removed at the time of its demolition or removal does not exceed the Annual Removal Amount in any one fiscal year or the Aggregate Removal Amount in the aggregate during the term of this Mortgage, and the conditions of paragraph 6 hereof, which may require the Mortgagee's approval, are complied with, and such property thereafter shall not constitute a part of the Mortgaged Property. The Mortgagee shall, at the Mortgagor's written request, join in the execution of any instruments necessary to release the lien on such property created by this Mortgage. 9. REMOVAL WITH NOTICE; REPLACEMENTS AND SUBSTITUTIONS SUBJECT TO MORTGAGE. If the Mortgagor in its sole discretion determines that any personal property constituting a part of the Mortgaged Property has become inadequate, obsolete, worn out, unsuitable, undesirable or unnecessary and if the conditions of paragraph 6 hereof are complied with, the Mortgagor may give written notice thereof to the Mortgagee, and the Mortgagor may then remove such property from the Mortgaged Property and may, to the 6 extent permitted by law, sell, trade in, exchange or otherwise dispose of same, in whole or in part, provided that the Mortgagor shall, at its own cost and expense, acquire, construct or install replacement or substitute personal property having a fair market value and usefulness to the operations of the Mortgaged Property (but not necessarily the same function) at least equal to the fair market value and usefulness, prior to demolition, removal or disposal, of the property demolished, removed or disposed of, and provided further, however, that all such real property, structures, fixtures or other improvements constructed or installed in replacement or substitution thereof shall be free of all liens and encumbrances, other than Permitted Encumbrances, and shall become a part of the Mortgaged Property. The Mortgagee shall, at the Mortgagor's written request, join in the execution of any instruments necessary to release the lien created by this Mortgage on property permitted to be released by this Section. 10. COVENANT AGAINST UNAUTHORIZED REMOVAL. Except as otherwise provided above or as permitted by the Agreement, the Mortgagor shall not remove, sell, transfer, convey, lease or otherwise dispose of any of the Mortgaged Property or any part thereof. 11. NO ABATEMENT OF OBLIGATIONS. The sale, demolition, substitution or removal of any of the Mortgaged Property shall not result in any abatement or diminution of the Indebtedness secured by this Mortgage. The Mortgagor shall pay all costs incurred or damages resulting from any sale, demolition, substitution or removal of any property pursuant to the provisions of this Mortgage. 12. FURTHER ASSURANCES. The Mortgagor shall, at its expense, promptly and duly execute, acknowledge and deliver to the Mortgagee such further documents, instruments, financing and similar statements and assurances and take such further action as may from time to time be reasonably required or requested by the Mortgagee in order to more effectively carry out the intent and purposes of this Mortgage and the Agreement issued thereunder and other instruments contemplated thereby or hereby. The Mortgagor shall deliver to the Mortgagee copies of all material documents, notices and other communications received by it relating to the Mortgaged Property. The Mortgagee, upon reasonable notice, may enter upon and inspect the Mortgaged Property at all reasonable times. 13. TAXES, ATTORNEYS' FEES, EXPENSES. The Mortgagor shall maintain the Mortgaged Property, pay all lawful taxes, 7 assessments and charges thereon and pay any reasonable attorneys' fees and expenses required pursuant to the Agreement, all as more particularly provided below. Mortgagor shall reimburse and hold harmless the Mortgagee for and on account of all excise taxes, sales and use taxes, documentary stamp taxes and other similar taxes or impositions (including any penalties and interest for failure to pay such taxes or impositions) levied against the Mortgagee with respect to this Mortgage and the Agreement, or the amounts payable by the Mortgagor hereunder or thereunder or any assignment of the rights of any such persons. This provision shall survive payment in full of the Indebtedness and termination of this Mortgage. 14. MAINTENANCE AND REPAIR. The Mortgagor agrees that until payment of the Indebtedness due and payable shall have been made, it will, at its own expense, keep or cause to be kept the Mortgaged Property (i) in safe operating condition and (ii) in good repair and in good operating condition and make from time to time all necessary repairs thereto and renewals and replacements thereof. The Mortgagor shall not permit or suffer others to commit a nuisance in or about the Mortgaged Property or itself commit a nuisance in connection with its use or occupancy thereof. 15. TAXES, OTHER GOVERNMENTAL CHARGES AND UTILITY CHARGES. The Mortgagor shall pay or cause to be paid, as the same shall become due, all fees, taxes, charges, assessments and governmental charges of any kind whatsoever that may at any time be lawfully assessed or levied against the Mortgagor with respect to the Mortgaged Property or any portion thereof or with respect to the original issuance of the Bonds, including without limiting the generality of the foregoing, any taxes levied against the Mortgagor upon or with respect to the income or profits of the Mortgagor from the Project, and including all ad valorem taxes lawfully assessed upon the Mortgaged Property, all utility and other charges incurred in the operation, maintenance, use, occupancy and upkeep of the Mortgaged Property, all assessments and charges lawfully made by any governmental body against the Mortgagor for or on account of the Mortgaged Property; provided, however, that nothing in this Section 15 shall require the payment thereof, so long as the validity thereof shall be contested in good faith by the Mortgagor by appropriate legal proceedings in accordance with the terms set forth below; and further provided that, with respect to special assessments or other governmental charges that may lawfully be paid in installments over a period of years, the Mortgagor shall be obligated to pay only such installments as are required to be paid during the term hereof. 8 The Mortgagor represents and warrants that, as of the date of execution of this Mortgage, there exists no lien, charge or encumbrance other than the Permitted Encumbrances, upon the Mortgaged Property, prior to the security interest of the Mortgagee. Except as otherwise permitted by the provisions of this Mortgage, the Mortgagor will not create or suffer to be created any lien, encumbrance or charge upon the Mortgaged Property, other than the Permitted Encumbrances, and subject to the provisions of this section relating to permitted contests, the Mortgagor will satisfy or cause to be discharged, or will make adequate provision to satisfy and discharge, within sixty (60) days after the Mortgagor is notified or becomes aware of the same, all lawful claims and demands for labor, materials, supplies or other items which, if not satisfied, might by law become a lien upon the Mortgaged Property. If any such lien shall be filed or asserted against the Mortgaged Property by reason of work, labor, services or materials supplied or claimed to have been supplied the Mortgagor shall, subject to the provisions of this section relating to permitted contests, within thirty (30) days after the Mortgagor receives notice of the filing thereof or the assertion thereof, cause the same to be discharged of record, or effectively prevent the enforcement or foreclosure thereof against the Mortgagor by contest, payment, deposit, bond, order of court or otherwise. The Mortgagor shall not be required to pay any tax, charge, assessment or imposition referred to in this section so long as the Mortgagor shall contest or there shall be contested on the Mortgagor's behalf , in good faith and at the Mortgagor's own cost and expense, the amount or validity thereof, in an appropriate manner or by appropriate proceedings which shall operate during the pendency thereof to prevent the collection of or other realization upon the tax, assessment, levy, fee, rent, charge, lien or encumbrance so contested, and the sale, forfeiture, or loss of the Mortgaged Property or any part thereof or interest therein, to satisfy the same; provided, that no such contest shall subject the Mortgagee to the risk of any liability. Each such contest shall be promptly prosecuted to final conclusion (subject to the right of the Mortgagor to settle any such contest), and in any event the Mortgagor will save the Mortgagee harmless against all losses, judgments, decrees and costs (including attorneys' fees and expenses in connection therewith) and will, promptly after the final determination of such contest or settlement thereof, pay and discharge the amounts which shall be levied, assessed or imposed or determined to be payable therein, together with all penalties, fines, interest, costs and expenses thereon or in connection therewith. The Mortgagor shall give the Mortgagee prompt written notice of any such contest. 9 If the Mortgagee shall notify the Mortgagor that, in Mortgagee's determination (which may be based upon advice of counsel), by nonpayment of any of the foregoing items, the Mortgaged Property, or any substantial part thereof, will be materially endangered, subjected to imminent loss or forfeiture or the obligations of the Mortgagor under this Mortgage or the Agreement shall be materially impaired, then the Mortgagor shall promptly pay all such unpaid items or otherwise cause them to be satisfied and discharged and not be liens or encumbrances upon the Mortgaged Property. The Mortgagor shall furnish the Mortgagee, upon request, with proof of payment of any taxes, governmental charges, insurance premiums or other charges required to be paid by the Mortgagor under this Mortgage. 16. CASUALTY INSURANCE. The Mortgagor shall during the term of this Mortgage keep the Mortgaged Property continuously insured against such risks as are customarily insured against in connection with the operation of similar facilities of like size, type and location, paying as the same become due and payable all premiums with respect thereto. Such insurance shall include, without intending to limit the foregoing: (a) "all risk" hazard insurance (including builder's risk), on a non-reporting completed value basis with the Mortgagee named as loss payee, in an amount sufficient to preclude any co-insurance; (b) insurance against damage by fire and other casualty on a non-reporting basis with a uniform standard extended coverage endorsement on a repair or replacement basis in an amount not less than one hundred percent (100%) of the then actual cost of replacement (excluding costs of replacing excavations and foundations, but without deduction for depreciation) of the Mortgaged Property; (c) general comprehensive liability insurance, with the Mortgagee named as an additional insured, against claims for bodily injury, death or property damage occurring on, in or about the Mortgaged Property (such coverage to include provisions waiving subrogation against the Mortgagee) in amounts not less than $1 million with respect to bodily injury to any one person, $2 million with respect to bodily injury to two or more persons in any one accident and $1 million with respect to property damage resulting from any one occurrence; and (d) if the Mortgaged Property, or any portion thereof, is located in a flood-prone or flood hazard area as described in the Flood Disaster Protection Act of 1973, flood insurance in the maximum amount available required by Florida and/or law. Each insurance policy required by this section (i) shall be issued or written by such insurer (or insurers) selected by the Mortgagor as is financially responsible, and is authorized to do business in the State of 10 Florida, (ii) shall be in such form and with such provisions (including, without limitation and where applicable, New York standard mortgage and loss payable clauses payable to the Mortgagee, waiver of subrogation clauses, provisions relieving the insurer of liability to the extent of minor claims and designation of the named insureds) as are generally considered standard for the type of insurance involved and (iii) shall prohibit cancellation or substantial modification without at least thirty (30) days prior written notice to the Mortgagee. All insurance policies carried pursuant to the foregoing shall name the Mortgagee as a party insured thereunder as the interest of such party may appear, and proceeds thereunder shall be made payable and shall be applied as provided in paragraph 17 below. A certificate of, or copies of each such policy shall be filed with the Mortgagee. The Mortgagor shall pay all premiums and charges for the maintenance and renewal of the insurance and shall furnish the Mortgagee with receipts and proofs thereof before the expiration thereof, without notice or demand from each Mortgagee. If the Mortgagor fails to do so, then the Mortgagee, without waiving the option to foreclose or exercise any other remedy hereunder, may, after written notice to the Mortgagor, (but shall not be required to) obtain such insurance for the protection of the Mortgagee, and any expenses reasonably incurred by the Mortgagee in so doing shall become part of the Indebtedness secured hereby, shall become immediately due and payable, and shall bear interest at the maximum lawful rate. In the event of foreclosure of this Mortgage or transfer of the Mortgaged Property in full or partial satisfaction of the Indebtedness secured hereby, all interest of the Mortgagor in the policy or policies of insurance (including any claim to proceeds attributable to losses theretofore occurring but not yet paid to Mortgagor) shall pass to the purchaser, grantee or transferee, subject, however, to the terms and provisions of this Mortgage. Any insurance policy shall contain a provision requiring thirty (30) days written notice of cancellation prior to such cancellation. The Mortgagor shall provide to its insurers all reports or notices of change in value of the Mortgaged Property so as to maintain the insurance coverage required by the terms of this Section 16. 17. INSURANCE PROCEEDS AND CONDEMNATION AWARDS. If, prior to the payment in full or satisfaction of the Indebtedness (or provisions for payment thereof having been made in accordance with the provisions hereof and of the Agreement) the Mortgaged Property, or any part or component thereof, shall be damaged, lost 11 or destroyed, by whatever cause, except as provided in paragraphs 8 and 9 hereof, or if any public authority or entity, in the exercise of its power of eminent domain, takes or damages the Mortgaged Property, or any part or component thereof, there shall be no abatement or reduction in the amounts payable by the Mortgagor under the Agreement, or the Indebtedness payable under this Mortgage, and all of the insurance proceeds (whether payable from the policies of insurance described in paragraph 16 above or from other policies of insurance carried by the Mortgagor or third parties), and any award or compensation resulting from such taking or damage by condemnation shall be applied to the repair, rebuilding, replacement or restoration of the Project or, at the Mortgagor's election and with the prior written approval of the Mortgagee, the redemption of Bonds. All such replacements, repairs, rebuilding or restorations so made, whether or not requiring the expenditure of the Mortgagor's own funds, shall automatically become part of the Project and subject to the lien of this Mortgage without the necessity of filing any further documents or instruments. This Mortgage extends to and shall encumber any insurance proceeds payable on account of the Mortgaged Property and any judgments, awards, damages and settlements hereafter rendered or paid and resulting from condemnation proceedings with respect to the Mortgaged Property, or any portion thereof, or the taking of the Mortgaged Property, or any portion thereof, under the power of eminent domain. 18. NOTICES OF DAMAGE, ETC. In case of any material damage to or destruction of all or any part of the Mortgaged Property, or notice of a default (or alleged default) under the Lease Agreement or any event which would materially adversely affect Mortgagor's rights in the Mortgaged Property, the Mortgagor shall give prompt written notice thereof to the Mortgagee. In case of a taking or proposed taking of all or any part of the Mortgaged Property or any right therein by eminent domain, the party upon which notice of such taking is served shall give prompt notice to the other parties to this Mortgage. Each such notice shall describe generally the nature and extent of such damage, destruction, taking, loss, proceedings or negotiations. 19. NON-DISTURBANCE. From the date hereof and throughout the term of this Mortgage, the parties hereto agree that, so long as the Mortgagor is not in default hereunder, the Mortgagor shall possess, occupy, use, enjoy and operate the Mortgaged Property. Such possession, occupation, use, enjoyment 12 and operation of the Mortgaged Property shall be exclusive and the Mortgagee agrees that, so long as no Event of Default has occurred, it will permit no other use of the Project by anyone other than the Mortgagor during the term of this Mortgage without the written consent of the Mortgagor. 20. EVENTS OF DEFAULT. The occurrence of any one or more of the following events shall constitute an Event of Default hereunder: (a) a default by the Mortgagor in the due and punctual payment of any amounts payable by virtue of the Agreement or this Mortgage after the expiration of all grace or cure periods, if any; or (b) a default or event of default under or with respect to any other loan agreement, line of credit agreement or any other type of credit extension document between the Mortgagee and the Mortgagor shall occur and continue thereunder beyond any grace period granted thereunder; or (c) a default in the performance or observance of any other of the covenants agreements or conditions on the part of the Mortgagor contained in this Mortgage or the Agreement; provided, however, that no Event of Default shall be deemed to have occurred under this subsection (c) if, in the reasonable opinion of the Mortgagee, corrective action has been instituted by the Mortgagor and is being diligently pursued; provided, however, that the additional period for pursuit of such corrective action shall in no event exceed thirty (30) days; or (d) this Mortgage shall cease to be first priority mortgage and/or security agreement (subject only to Permitted Encumbrances) or shall be invalid or unenforceable in any material respect. 21. REMEDIES. Upon the occurrence of any Event of Default, THEN AND THEREUPON, the Mortgagee may do any one or more of the following at its election: (1) Declare all Indebtedness and other amounts payable under the Agreement for the remainder of the term of this Mortgage to be immediately due and payable, whereupon the same shall immediately become due and 13 payable. (2) Foreclose on this Mortgage, enter into possession of the Mortgaged Property or any part thereof without notice or demand and sell or lease the Mortgaged Property or any part thereof for the account of the Mortgagor, holding the Mortgagor liable for the difference between the amounts received and the amounts payable by the Mortgagor. (3) Collect and apply to the Indebtedness all rents and profits from the Mortgaged Property. (4) Take such steps to protect and enforce its rights whether by action, suit or proceeding in equity or at law for the specific performance of any covenant, condition or agreement in the Agreement or in this Mortgage, or in aid of the execution of any power herein granted, or for any foreclosure hereunder, or for the enforcement of any other appropriate legal or equitable remedy or otherwise as the Mortgagee shall elect. (5) Apply, on motion to any court of competent jurisdiction, for the appointment of a receiver to take charge of, manage, preserve, protect, complete construction of and operate the Mortgaged Property; to collect the rents, issues, profits and income therefrom; to make all necessary and needed repairs to the Mortgaged Property; to pay all taxes and assessments against the Mortgaged Property and insurance premiums for insurance thereon; and after the payment of the expense of the receivership, including reasonable attorney's fees to the Mortgagee's attorney, and after compensation to the receiver for management and completion of the Mortgaged Property, to apply the net proceeds derived therefrom in reduction of the Indebtedness secured hereby or in such manner as such court shall direct. The appointment of such receiver shall be a matter of strict right to the Mortgagee, regardless of the value of the security for the Indebtedness secured hereby or of the solvency of any party bound for the payment of such indebtedness. All expenses, fees and compensation incurred pursuant to a receivership approved by any such court shall be secured by the lien of this Mortgage until paid. The receiver and the receiver's agents shall be entitled to enter upon and take possession of any and all of the Mortgaged Property, together with any and all business assets used 14 in conjunction therewith or thereon, or any part or parts thereof, and operate and conduct such business or businesses to the same extent and in the same manner as any owner of such property might lawfully do. The receiver, personally or through his agents, may exclude any parties entitled thereto pursuant to the Agreement wholly from the Mortgaged Property, and have, hold, use, operate, manage and control the same and each and every part thereof, and may, in the name of the Mortgagor exercise all of the Mortgagor's rights and powers and maintain, restore, insure and keep insured, the Mortgaged Property as the receiver may deem judicious. Such receivership shall, at the option of the Mortgagee, continue until full payment of all sums secured hereby, or until title to the Mortgaged Property shall have passed by foreclosure sale under this Mortgage. (6) Take or exercise all rights and remedies granted a secured party by the Florida Uniform Commercial Code. 22. RIGHTS CUMULATIVE AND CONTINUING. The rights of the Mortgagee granted and arising under this Mortgage, the Agreement or any other instrument or agreement existing between the Mortgagor and the Mortgagee shall be separate, distinct, and cumulative of other powers and rights herein granted and of all other rights which the Mortgagee may have in law or equity, and the exercise of any one or more of them shall not be construed as an election to proceed under any one provision herein, or under the Agreement, or under any such other instrument or agreement, to the exclusion of any other provisions, or an election of remedies to the bar of any other remedy allowed in law or equity. No waiver of any obligation hereunder or of any obligation secured hereby shall at any time thereafter be held to be a waiver of the terms hereof or of the terms of any other instrument or agreement. No delay or omission by the Mortgagee to exercise any right, power or remedy accruing upon any default shall exhaust or impair any such right, power or remedy or shall be construed to be a waiver of any such default or acquiescence therein. Every right, power and remedy given by this Mortgage to the Mortgagee may be exercised from time to time and as often as may be deemed expedient by the Mortgagee. Each and every right, power and remedy shall be in addition to any other right, power or remedy given hereunder or now or hereafter existing at law or in equity or by Statute. 23. CURING OF DEFAULTS BY MORTGAGEE. The Mortgagee shall, after giving notice to the other parties to this Mortgage, 15 have the right to pay, or cause to be paid, any sums required to be paid and to take, or cause to be taken, any other action deemed by the Mortgagee to be necessary or convenient to cure any Event of Default of the Mortgagor under the Agreement or hereunder. Any and all sums expended or expenses incurred by the Mortgagee in so curing an Event of Default shall become immediately due and payable by the Mortgagor to the Mortgagee and, together with interest from date of disbursement, shall be secured by the lien of this Mortgage. The Mortgagee shall be subrogated to the interest of any lien holder paid out of sums secured by this Mortgage. No payment by the Mortgagee under this section or any other provisions contained herein or in the Agreement shall be deemed to cure or waive any default or Event of Default. 24. APPLICATION OF MONEYS. Anything in this Mortgage to the contrary notwithstanding, the moneys realized by the Mortgagee in the enforcement of this Mortgage shall be applied as follows: First: To the payment of the reasonable costs and expenses of any enforcement of this Mortgage or the Indebtedness, including any sale of the Mortgaged Property, including reasonable compensation to the Mortgagee, its agents and counsel, and of any judicial proceedings wherein the same may be made, and of all expenses, liabilities and advances made or incurred by the Mortgagee under the Agreement or this Mortgage, including reasonable attorneys' fees and expenses and reasonable fees for paralegal services and expert witnesses through any appeal and any bankruptcy or insolvency proceedings, together with all taxes or assessments, except any taxes, assessments or other charges subject to which the Mortgaged Property shall have been sold. Second: To the Mortgagee to be applied to the payment of the amounts due, owing or unpaid under the Agreement, and any late charges thereon. Third: To the payment of any other Indebtedness, including sums required to be paid by the Mortgagor pursuant to any provision of the Agreement or this Mortgage. Fourth: To the payment of the surplus, if any, to whosoever may be lawfully entitled to receive the same. 25. NOTICE. Every provision for notice and demand or request hereunder shall be deemed fulfilled by written notice and demand or request if the same is mailed by depositing it in any United States post office station or letter box, enclosed in a 16 postpaid envelope registered or certified mail, return receipt requested, addressed as provided below and shall be deemed effective when received: if to the Mortgagor, at the Mortgagor's Address, if to the Mortgagee, at the Mortgagee's Address. The Mortgagor and the Mortgagee may, by notice given hereunder, designate any further or different addresses from time to time. 26. SEVERABILITY. If any provision of this Mortgage or the Agreement or of any other instrument or agreement existing between the Mortgagor and the Mortgagee, shall to any extent be finally found by a court of competent jurisdiction to be invalid or unenforceable, neither the remainder of the instrument in which such provision is contained, nor the application of the provision to other persons, entities, or circumstances nor any other instrument referred to herein, shall be affected thereby, but instead shall be enforced to the maximum extent permitted in law or equity. 27. MODIFICATIONS. The rights of the Mortgagee may not be changed, waived, discharged or terminated orally, but only by an instrument in writing executed by the Mortgagor and the Mortgagee. Any agreement hereafter made by the Mortgagee and Mortgagor relating to this Mortgage shall be superior to the rights of the holder of any intervening lien or encumbrance affecting the Mortgaged Property. 28. NO ILLEGAL INTEREST TO BE CHARGED. All agreements between the Mortgagor and the Mortgagee under this Mortgage or the Agreement are expressly limited so that in no contingency or event whatsoever shall the amount paid or agreed to be paid to the Mortgagee or its successors or assigns for the use, forbearance or detention of the money to be advanced to the Mortgagor exceed the highest rate permissible under law applicable thereto by a court of competent jurisdiction. If, from any circumstances whatever, fulfillment of any provisions of this Mortgage or the Agreement or of any other agreement existing between the Mortgagor and the Mortgagee, at the time performance of such provision shall be due, shall involve payment of interest at a rate which exceeds the highest lawful rate as so determined, then IPSO FACTO the obligation to be fulfilled shall be reduced to such highest lawful rate. If from any circumstances whatsoever, the Mortgagee or its successors or assigns shall ever receive interest, the amount of which would exceed such highest lawful rate, the portion thereof which would be excessive interest shall be reimbursed to the Mortgagor by the party receiving such excess, together with 17 interest on such excess at the highest lawful rate of interest (or 25% if there is then no maximum lawful rate). Provided, however, that nothing contained herein or in the Agreement shall be deemed to create a defense, contractual or otherwise, to any sums due or to become due or coming due under this Mortgage or the Agreement secured hereby or under any other agreement existing among the Mortgagor and the Mortgagee, where no such defense exists at law, as for example, where corporations are barred from asserting the defense of usury or in a case wherein no limit exists upon the rate of interest which may be charged. 29. HEADINGS. Caption headings are for convenience of reference only and in no way limit the scope or intent of any provision or section of this Mortgage. 30. SUCCESSORS AND ASSIGNS. All covenants and stipulations in these presents contained shall bind the successors and assigns of the Mortgagor and the Mortgagee and shall inure to the benefit of and be available to the successors (including any substitute letter of credit) and assigns of the Mortgagor and the Mortgagee. 31. GOVERNING LAW. The terms and provisions of this Mortgage are to be governed by the laws of the State of Florida. 32. COUNTERPARTS. This Mortgage may be executed in any number of counterparts and each of such counterparts shall for all purposes be deemed to be an original; and all such counterparts shall together constitute but one and the same mortgage. 33. OTHER TERMS. The Agreement prohibits or restricts, among other things, the transfer, lease, further encumbrance or other disposition of the Mortgaged Property, which provisions are incorporated herein by reference. 34. GREATER ESTATE. In the event the Mortgagor is the owner of a leasehold estate with respect to any portion of the Mortgaged Property and, prior to the satisfaction of the Indebtedness and the cancellation of this Mortgage of record, the Mortgagor obtains a fee estate in such portion of the Mortgaged Property, then, such fee estate shall automatically, and without further action of any kind on the part of the Mortgagor, be and become subject to the security lien of this Mortgage. 35. WAIVER OF JURY TRIAL. THE MORTGAGOR AND THE MORTGAGEE HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE THE RIGHT TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, 18 OR ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS MORTGAGE AND ANY AGREEMENT CONTEMPLATED TO BE EXECUTED IN CONJUNCTION HEREWITH, OR ANY COURSE OF CONDUCT, COURSE OF DEALINGS, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF THE PARTIES. THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE PARTIES CARRYING OUT THE TRANSACTIONS CONTEMPLATED HEREBY. 19 IN WITNESS WHEREOF, the Mortgagor has duly signed, sealed and executed this document as of the date first above stated. EXACTECH, INC., a Florida corporation (SEAL) By:______________________________ Name: TIMOTHY J. SEESE Title: PRESIDENT AND CHIEF OPERATING OFFICER ATTEST: Address: 4613 NW 6TH STREET GAINESVILLE, FL 32609-1781 By:________________________ Name: BETTY PETTY Title: SECRETARY Address: 4613 NW 6TH STREET GAINESVILLE, FL 32609-1781 STATE OF FLORIDA COUNTY OF ALACHUA The foregoing instrument was acknowledged before me this _____ day of November, 1997, by Timothy J. Seese and Betty Petty, as President and Chief Operating Officer and Secretary, respectively, of Exactech, Inc., a Florida corporation, on behalf of the corporation. They are personally known to me or have produced a drivers license as identification. (SEAL) ___________________________________________ Printed/Typed Name:________________________ Notary Public-State of Florida Commission Number: 20 EXHIBIT "A" PROJECT Construction and equipping of a manufacturing facility located on a 7.5 acre tract of land for the manufacture of orthopedic implants. EXHIBIT "B" PROJECT SITE EXHIBIT "C" PERMITTED ENCUMBRANCES (All references to public records of Alachua County, Florida) 1. Easement granted to City of Gainesville, dated December 3, 1974, filed December 17, 1974 in Official Records Book 920, at Page 58. 2. Declaration of Restrictive Covenants, Reservations, Conditions and Easements of Northwood Commercial Park, which creates easements and establishes private charges or assessments filed October 20, 1975, in Official Records Book 969, at Page 620, as amended and supplemented in Official Records Book 1279, at Page 625, Official Records Book 1334, at Page 886, Official Records Book 1380, at Page 699 and Official Records Book 1462, at Page 323, and as affected by the conveyance of ingress and egress easements to the City of Gainesville by Deed filed in Official Records Book 2102, at Page 1507. 3. Easement granted to N.W. Inc., dated April 21, 1980, filed April 23, 1980 in Official Records Book 1274, at Page 434. 4. Easement granted to Turkey Creek, Inc., dated October 21, 1981, filed October 23, 1981 in Official Records Book 1378, at Page 655. 5. Resolutions of the Board of County Commissioners of Alachua County filed in Official Records Book 1929, at Page 839 and Official Records Book 2078, at Page 1999. 6. Easement granted to City of Gainesville, dated September 9, 1997, filed September 22, 1997, in Official Records Book 2132, at Page 963. EX-10.64 6 EXHIBIT 10.64 SETTLEMENT AGREEMENT I. PARTIES Biomet, Inc. ("Biomet") Richard A. Bland ("Bland") Ella K. Jirka ("Jirka") Ella K. Jirka & Associates ("EKJ") N.W. Medical Products, Inc. ("N.W. Medical") (Collectively, "Defendants") Exactech, Inc. ("Exactech") II. SETTLEMENT OF ACTION. This settlement agreement resolves all disputes between the parties related to BIOMET, INC. V. BLAND ET AL., U.S. District No. CV 97-1633 PA ("Action"). III. RELEASES. Biomet hereby provides defendants, their past and present agents, employees, officers, and attorneys, with a complete and general release of all claims and counterclaims, causes of action of any kind, known or unknown, suspected or unsuspected. Defendants hereby provide Biomet, Inc. and its past and present agents, employees, officers and attorneys with a complete and general release of all claims and counterclaims, causes of action of any kind, known or unknown, suspected or unsuspected. Biomet and Exactech give each other and their past and present agents, employees, officers and attorneys a complete and mutual release with respect to all events directly related to the Action, including events that occurred in any state or location, known or unknown, suspected or unsuspected, provided such events relate directly to the Action. Each of the above releases includes claims for fraudulent inducement of this Agreement. IV. NO HIRE AGREEMENT. From the date of this Agreement forward, Exactech agrees not to hire as a new agent for Exactech any of Biomet's exclusive distributors or sales representatives whose current territory is located west of the Mississippi in the continental U.S. (which does not include Alaska and Hawaii), for a period of four months following the date of this Agreement. V. CONFIDENTIAL AGREEMENT BETWEEN BIOMET AND DEFENDANTS. Upon execution of this Agreement, Biomet and defendants shall execute a confidential separate written agreement between them, attached as exhibit A. Exactech shall not receive a copy of exhibit A. John Barker shall receive a confidential copy of exhibit A. VI. CONFIDENTIAL AGREEMENT BETWEEN EXACTECH AND JIRKA Upon execution of this Agreement Exactech and Jirka shall execute a Confidential separate written agreement between them, attached as exhibit B. Biomet shall not receive a copy of exhibit B. John Barker shall receive a confidential copy of exhibit B. VII. CONFIDENTIALITY This Agreement, which indludes the two side agreements referred to in paragraphs V and VI, shall be confidential The parties further agree that the Agreement, as defined above, is confidential pursuant to ORS 36.220(2)(b). The Court's rulings in the Action are not subject to this provision. Mr. Bland and Ms. Jirka may also consult with a Portland area tax accountant or tax attorney who shall be informed of these confidentiality terms and shall agree to honor them before any disclosure to the attorney or accountant. Any claim for breach of paragraphs V, VI, and VII shall be arbitrated by John Barker in Portland. VIII. BINDING AGREEMENT This agreement is binding on the parties' successors, heirs, and assigns. Each party represents and warrants that there has been no assignment of the released claims. IX. ARBITRATION Any disagreement about the terms or enforcement of this Agreement, which includes Exhibits A and B, shall be arbitrated by John Barker in Portland, including enforcement of confidentiality, with the prevailing party to receive its costs and attorney fees. All confidentiality remains binding at all times. Arbitration shall be binding and governed by Oregon law. X. NO ADMISSION OF LIABILITY No party admits liability or fault of any kind and this Agreement shall not be admissible in any proceeding, except to enforce its terms. XI. NOTICE OF COURT. Upon execution, the parties shall notify the Court and ask it to issue no further orders or opinions. XII. INTEGRATION. This Agreement, including the two side agreements described in paragraphs V and VI, contains the entire agreement of the parties. Any modifications must be in writing signed by all parties. All prior agreements or discussions are superseded by this Agreement. The Agreement is not effective until this agreement and side agreements described in paragraphs V and VI, have been completely executed. XIII. LAW OF OREGON. This agreement shall be governed by the laws of the State of Oregon. XIV. DISMISSAL, RETURN OF DOCUMENTS. Upon execution, the parties shall dismiss their claims and counterclaims in the Action with prejudice, with each side to bear its costs and fees. After dismissal, each side shall return all documents provided to the other, and shall return documents received from Exactech to Exactech. This provision does not apply to documents that have been attached as exhibits to court filings or depositions, which counsel may retain. This provision does apply to copies made of such douments. Documents and copies shall be returned within 30 days of the date of this Agreement. XV. COUNTERPARTS This Agreement and the two side agreements may be executed by faxed counterparts, which taken together will contitute a binding and fully executed agreement after all required signatures have been received by Ball Janik LLP. After receipt, Ball Janik LLP shall distribute copies of fully executed documents to the required parties and to John Barker, pursuant to the provisions of paragraphs V and VI. Biomet, Inc. N.W. Medical Products, Inc. By:/S/ DANIEL P. HANN By:/S/ RICHARD A. BLAND ------------------ -------------------- Its: Vice President & General Counsel Its: President Dated: 2/9/1998 Dated: 2/9/1998 Ella K. Jirka & Associates Exactech, Inc. By:/S/ ELLA K. JIRKA By:/S/ TIMOTHY J. SEESE ----------------- -------------------- Its: Owner Its: President Dated: 2/9/1998 Dated: 2/9/1998 Richard A. Bland By:/S/ RICHARD A. BLAND -------------------- Dated: 2/9/1998 EX-11.1 7 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, 1996 1997 ---- ---- Basic: Weighted average common shares outstanding used in computing basic earnings per share 4,050,887 4,878,795 ============================= Basic Earnings Per Share $0.32 ========= Diluted: Weighted average common and common equivalent 4,050,887 4,878,795 shares outstanding Effect of shares issuable under stock under stock plans 81,054 40,637 using the treasury method Effect of shares contingently issuable under warrants 6,305 4,319 issued with the 8% subordinated debentures using the treasury stock method ----------------------------- Share used in computing diluted earnings per share 4,138,246 4,923,751 ============================= Diluted Earnings Per Share $0.32 =========
EX-27.1 8
5 0000913165 EXACTECH, INC. 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 2,044,961 3,467,072 3,760,966 (161,046) 10,697,879 20,334,332 7,962,936 (1,984,249) 27,154,836 2,464,461 3,912,835 0 0 49,047 20,294,545 27,154,836 17,648,060 17,648,060 5,895,302 5,895,302 9,196,387 0 (200,720) 2,573,182 997,188 1,575,994 0 0 0 1,575,994 0.32 0.32
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