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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, 2002

o            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)

2320 NW 66TH COURT
GAINESVILLE, FL
32653
(Address of principal executive offices)

(352) 377-1140
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

None.

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of Class)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

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. o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2 of the Act).
Yes o No o

As of March 21, 2003, the number of shares of the registrant’s Common Stock outstanding was 10,942,280. The aggregate market value of the Common Stock held by non-affiliates of the registrant as of June 30, 2002 was approximately $44,079,746 based on a closing sale price of $7.66 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 2003 Annual Meeting of Shareholders (to be filed pursuant to Regulation 14A).

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TABLE OF CONTENTS
and
CROSS REFERENCE SHEET

CAUTIONARY STATEMENT RELATING TO FORWARD LOOKING STATEMENTS

This report contain various “forward looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which represent the Company’s expectations or beliefs concerning future events, including, but not limited to, statements regarding growth in sales of the Company’s products, profit margins and the sufficiency of the Company’s cash flow for its future liquidity and capital resource needs. These forward looking statements are further qualified by important factors that could cause actual results to differ materially from those in the forward looking statements. These factors include, without limitation, the effect of competitive pricing, the Company’s dependence on the ability of its third-party manufacturers to produce components on a basis which is cost-effective to the Company, market acceptance of the Company’s products, the outcome of arbitration and litigation, 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.

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PART I

ITEM 1.          BUSINESS

Exactech, Inc. (the “Company”, or “Exactech”) develops, manufactures, markets and sells orthopaedic implant devices, related surgical instrumentation, and distributes biologic materials to hospitals and physicians in the United States and overseas. The Company was founded by an orthopaedic surgeon in November 1985, and is incorporated under the laws of the State of Florida. The Company’s revenues are principally derived from sales of its knee and hip replacement systems. The Company’s Optetrak^® knee replacement system was conceived and designed in collaboration with the Hospital for Special Surgery, an internationally known hospital for orthopaedic surgery. During 1999 and 2000, the Company introduced its comprehensive AcuMatch^® integrated hip system and began full United States distribution of Opteform^®, a bone allograft material, under a distribution agreement with Regeneration Technologies, Inc. (“RTI”). During 2001, the Company began distribution of a bone cement system, Cemex^®, under an exclusive distribution agreement with Italian manufacturer Tecres, S.p.A. In the first quarter of 2002, the Company entered into a distribution agreement with Link America, Inc. and its parent company, Waldemar Link GmbH & Co. (“Link”), a German manufacturer of joint replacement systems, to distribute Link’s orthopaedic products in the United States. Link implants compliment the Company’s total joint systems by expanding clinical indications beyond the design scope of the Company’s products. Late in 2002, the Company acquired the inventory and intellectual property related to a patented total shoulder system from Teknimed, a French manufacturer.

Available Information

The Company’s Internet website address is www.exac.com. The Company makes available free of charge on or through its website its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and amendments to these reports, as soon as reasonably practicable after the Company electronically files such material with, or furnishes such material to, the Securities and Exchange Commission. These reports may be found at http://www.exac.com/company3.htm by selecting the option entitled “SEC FILINGS” in “News-Investor Information”. The Company does not intend for information contained in its web site to be part of this Form 10-K.

Orthopaedic Products Industry

According to The Medical and Healthcare Marketplace Guide 2002-2003, published by Dorland Healthcare Information, the worldwide market for orthopaedic products was nearly $15 billion in 2001, which represented an increase of 13% from 2000. The three market segments in which the Company offers its products and services, reconstructive devices, biologics and other orthopaedic products, experienced 12%, 13% and 9% growth, respectively, during 2001 when compared to 2000. In 2001, the United States market for reconstructive products was $2.8 billion, and the international market was $2.6 billion. The market for biologics (which includes bone graft substitutes, allograft distribution and processing and other tissue based products and services) was $900 million in the United States and $300 million internationally in 2001. Other orthopaedic products, including power equipment, cement and cement delivery systems, experienced United States sales of $2.3 billion and international sales of $1.0 billion in 2001.

Management believes that the industry will continue to grow due to the changing demographics of an aging population in much of the world. Increasing life spans impact the number of individuals with joints subject to failure, thereby increasing demand for joint replacement procedures. In 2001, more than 1.5 million joint replacement procedures were performed. Sixty percent of these were in persons over the age of 65. This age group is expected to grow at three times the rate of the overall population. Additionally, earlier generations of implanted joint replacement prostheses have begun to reach their maximum life and are beginning to fail, resulting in increasing demand for revision procedures.

Products

The Company’s orthopaedic implant products are used to replace joints that 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 damaged cartilage and a portion of the bones that comprise the joint, prepares the remaining bone surfaces and surrounding tissue and then installs the implant. When indicated, the surgeon uses biologic allograft materials to repair bone defects and provide an interface to

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stimulate new bone growth. In many joint replacement procedures, bone cement is used to affix implant components to the prepared bone surfaces. For a table setting forth the net revenue and percentage of net sales for each of the Company’s product lines, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Knee Implants. The Company believes that its Optetrak^® knee system represents a major advance in knee implant design. The Optetrak^® knee system is a modular system designed to improve patellar tracking (the movement of the knee cap), reduce articular contact stress (the force between surfaces in a joint) that leads to implant failure, and provide a functional range of motion. Laboratory testing performed by the Company and clinical testing performed by the Company’s design team members has demonstrated that the system produces substantially lower articular contact stress and improved patellar tracking compared to other knee implant systems.

The Optetrak^® system includes a total primary knee replacement system which is available with either a cruciate ligament sparing femoral components (in both cemented and porous coated designs and used in situations where the surgeon chooses to maintain certain ligaments) or a posterior stabilized femoral component (in both cemented and porous coated designs and used in situations where the surgeon chooses to eliminate certain ligaments). The Optetrak^® system also includes a constrained total knee system for revision surgery and primary surgery with severe deformities. The constrained version includes two types of femoral components: the constrained condylar modular femoral component and a constrained non-modular femoral component. The modular component includes stem and block augmentation to aid in repairing damaged or weakened bone. The constrained condylar femoral component was designed to provide greater constraint between the tibial and femoral components of the system to compensate for ligaments weakened or lost due to disease or as a result of failure of previous treatments.

In March, 2002, the Company commenced distributing Link’s line of implant products which includes the Link^®Endo-Model^TM Rotational Knee, designed to provide stability with controlled rotation for severe joint deterioration with insufficient ligament support and the Link^® Endo-Model^TM Sled Uni-Knee, designed for cases where only a portion of a joint warrants replacement.

Hip Implants. The Company’s line of hip implant products includes three total hip implant systems. The flagship hip product line is the AcuMatch^® comprehensive hip system which is designed to address the vast majority of indications for total hip replacement, including primary and revision needs. The system includes the C-Series cemented femoral stem, the A-Series acetabular components (for the hip socket), the P-Series press-fit femoral stem system, the M-Series modular femoral stem system, the L-Series femoral stem system, bipolar and unipolar partial hip replacement components, a variety of femoral heads and a cemented acetabular component. The AcuMatch^® cemented revision components include revision long stems and calcar replacement stems that were originally part of the AuRA^® Revision Hip System. The Company continues to market its Opteon^® Cemented Stem System, a moderate demand femoral stem system.

The Company’s AcuMatch^® C-Series Cemented Femoral Stem is a forged cobalt chromium stem designed to improve stability and reduce dislocation complications by improving the head/neck ratio and restoring anatomic offset for patients requiring cemented total hip arthroplasty (joint reconstructive surgery). The AcuMatch^® A-Series was designed to provide a comprehensive acetabular offering with maximum polyethylene thickness to help in reducing polyethylene wear debris. The M-Series modular stem system offers completely interchangeable components to optimize fit and enable surgeons to address limb length and offset challenges without adjusting femoral head or diaphyseal stem size. The AcuMatch^® P-Series Press Fit Femoral Stem System has multiple coating options for fixation to bone and features a scientifically sound solution to stiffness mismatch and rotational instability in the bone, potential underlying causes of post-operative residual thigh pain. The AcuMatch^® L-Series hip system features a comprehensive offering of both cemented and press fit femoral components, as well as unipolar and bipolar endoprotheses, prostheses often used for the treatment of hip fractures.

The Link hip implant product lines distributed by the Company include, the Link^® Saddle Prosthesis, designed to meet the surgeon’s needs when a patient’s acetabulum cannot be reconstructed, the Link SPII^® hip stem, the Classic Plus^® hip stem, the Ribbed hip stem, and the MP^TM Reconstruction hip stem, offering surgeons a broad range of options and design philosophy to meet the unique clinical needs of their patients.

Tissue Services. The Company is the exclusive, worldwide distributor of bone paste products processed by RTI for use in non-spinal musculoskeletal orthopaedic procedures. These unique allograft materials are distributed

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as Opteform^® and Optefil^®and are clinically proven for effectively repairing bone and filling bone defects. During 2002, the Company obtained the distribution rights to Optefil^® as part of the settlement of its arbitration with RTI (See Legal Proceedings).

Other Products. The AcuDriver^® Automated Osteotome System is an air-driven impact hand piece that aids surgeons during joint implant revision procedures by providing effective removal of failed prostheses and bone cement. The AcuDriver^® accomplishes this by providing the surgeon with precise positioning without the inconvenience and inconsistency of striking the osteotome with a mallet.

The Link^® S.T.A.R.^TM ankle is distributed under terms of a Food and Drug Administration (“FDA”) approved Investigational Device Exemption (“IDE”). If this product is found to be safe and effective, it should provide an alternative to fusion which maintains motion and pain relief in arthritic patients with the appropriate indications. The Company also distributes Link surgical instrumentation which can be used in various orthopaedic procedures including shoulder, knee, spine, foot, ankle and hip arthroplasty.

The Cemex^® bone cement system features a unique self-contained delivery system that has been clinically proven in Europe for more than a decade. By integrating bone cement powder and liquid into a sealed mixing system, Cemex^® is designed to offer surgeons and operating room personnel simplicity, safety and reliability in bone cement. The Company distributes Cemex^® in the United States under an exclusive distribution agreement with the Italian manufacturer, Tecres S.p.A.

Late in 2002, the Company acquired a patented total shoulder system from Teknimed, a French manufacturer of orthopaedic implants and processor of biological products. Teknimed will continue to manufacture and distribute the shoulder system in Europe for the Company while Exactech establishes appropriate manufacturing and engineering support infrastructure and receives marketing clearance from the FDA for United States distribution.

Marketing and Sales

The Company markets its orthopaedic implant products in the United States through fifty-five independent sales agencies and one domestic distributor that serve as the Company’s sales representatives. Internationally, the Company markets its products through eighteen foreign distributors that distribute products in twenty-three countries. The customers for the Company’s products are hospitals, surgeons and other physicians and clinics. These constituencies most commonly make the decisions collaboratively regarding which company’s products will be used.

The Company generally has contractual arrangements with its independent sales agencies whereby the agency is granted the exclusive right to market the Company’s products in the specified territory. In turn, the agency is required to meet sales quotas to maintain its relationship with the Company. The Company’s arrangements with its sales agencies typically do not preclude them from selling competitive products, although the Company believes that most of its agencies do not do so. The Company typically pays its sales agencies a commission based on net sales. The Company is highly dependent on the expertise and relationships of its sales agencies with customers. The Company’s sales organization is supervised by five Regional Directors of Sales (East, Central, Midwest, Southeast and West). The Company has a contractual arrangement with its domestic distributor that is similar to its arrangements with its sales agencies, except the Company does not pay the distributor commissions and the distributor purchases inventory from the Company for use in fulfilling customer orders. The Company currently offers its products in all fifty states, and the District of Columbia.

The Company provides inventories of its products to its United States sales agencies until sold or returned. These inventories are necessary for sales agents to market the Company’s products and fill customer orders. The size of the component to be used for a specific patient is typically not known with certainty until the time of surgery. Due to this uncertainty, a minimum of one size of each component in the system to be used must be available to each sales agency at the time of surgery. Accordingly, the Company is required to maintain substantial levels of inventory. The maintenance of relatively high levels of inventory requires the Company to incur significant expenditures of its resources. The failure by the Company to maintain required levels of inventory could have a material adverse effect on the Company’s expansion. As a result of the need to maintain substantial levels of inventory, the Company is subject to the risk of inventory obsolescence. In the event that a substantial portion of the Company’s inventory becomes obsolete, it would have a material adverse effect on the Company. The Company maintains a reserve for inventory due to obsolescence and slow moving items.

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During the years ended December 31, 2002, 2001 and 2000, approximately 4%, 4% and 5%, respectively, of the Company’s sales were derived from a major hospital customer. During each of the years ended December 31, 2002, 2001, and 2000, one international distributor accounted for approximately 8%, 9% and 11%, 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.

For the years ended December 31, 2002, 2001 and 2000, foreign sales accounted for $9,441,000, $8,391,000, and $7,582,000, respectively, representing approximately 16%, 18% and 18%, respectively, of the Company’s sales. Although, international sales continued to rise in 2002, the total percentage of sales represented by international activity decreased primarily due to the impact of U.S. only distribution agreements for Link and Cemex products. The Company intends to continue to expand its sales in foreign markets in which there is increasing demand for orthopaedic implant products.

Manufacturing and Supply

Early in its history, the Company utilized third-party vendors for the manufacture of all of its component parts, while internally performing product design, quality assurance and packaging. At present, the Company manufactures approximately 30% of its components in its manufacturing and headquarters facility in Gainesville, Florida. The Company has continued to increase the number of internally manufactured components. With the increase of internal manufacturing, the Company has experienced a greater degree of control of production costs, and it expects this trend to continue. The Company continually assesses the manufacturing capabilities and cost-effectiveness of its existing and potential vendors in its attempts to secure its supply chain and decrease dependency on a few suppliers. For the years ended December 31, 2002, 2001 and 2001, the Company purchased approximately 69%, 59% and 69%, respectively, of its externally sourced component requirements from its top three manufacturers. The Company does not maintain supply contracts with any of its manufacturers and purchases components pursuant to purchase orders placed from time to time in the ordinary course of business. The Company has several alternative sources for components and does not anticipate that it will encounter problems in obtaining adequate supplies of components. Certain tooling and equipment which are unique to the Company’s products are supplied by the Company to its vendors.

The Company’s internal manufacturing, assembly, packaging and quality control operations are conducted at its principal offices in Gainesville, Florida. Components received from its vendors are examined by Company personnel prior to assembly or packaging to ensure that the Company’s specifications and standards are maintained.

Patents and Proprietary Technology; License and Consulting Agreements

The Company holds United States patents covering several of its implant components and some of its surgical instrumentation. The Company believes that patents and intellectual property will continue to be important in the orthopaedic industry. In this regard, the Company defends its intellectual property rights and believes that its patents and products do not and will not infringe patents or violate proprietary rights of others, although it is possible that its existing patent rights may not be valid or that infringement of existing or future patents or proprietary rights may occur. In the event certain of the Company’s intellectual property and agreements relating to its knee and hip implant products are deemed invalid, such action could have a material adverse effect on the Company’s financial position and results of operations.

In connection with the development of its knee implant systems, the Company had entered into consulting agreements with Dr. William Petty and Dr. Gary J. Miller, who are executive officers, directors and principal shareholders of the Company. 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. The consulting agreements were terminated pursuant to employment agreements entered into in May 1996 between the Company and each of Drs. Petty and Miller. New employment agreements entered into between the Company and each of Drs. Petty and Miller on January 1, 2003 provide for the continuation by the Company of the royalty payments required

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under these consulting agreements.

The Company has entered into a 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 the year ended December 31, 2002, the Company paid Dr. Burstein $135,000 as compensation under this consulting agreement.

Research and Development

During the years ended December 31, 2002, 2001 and 2000, the Company expended $2,803,000, $2,210,000 and $2,138,000, 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 successful integration of the AcuMatch^® hip systems, line extensions of the Optetrak^® knee system and design improvements targeted to improving internal manufacturing efficiency. The Company’s research and development efforts continue to focus on implant product line extensions, advanced biologic materials, extremity joint reconstruction and alternative bearing surfaces.

As an important part of its research and development efforts, the Company has developed strategic partnerships through agreements with Genzyme Biosurgery and Diamicron Corporation to bring expertise in advanced materials to the Company’s products. The agreement with Genzyme is for the development of polymer-based synthetic biomaterials that when delivered with other biologic products support the growth of new bone. Through its agreement with Diamicron, the Company will apply Diamicron’s polycrystalline diamond compact (PDC) technology to its hip implants. This diamond technology holds the promise of improved mechanical and wear characteristics over currently available technology. This technology will likely require a number of years of development and regulatory clearance prior to the release of products for sale.

The Company believes that the purchase of intellectual property and product line assets augmented by additional development provides a cost-effective and efficient way to bring products to market and expects to continue to do so in the future to complement its internal product development.

Competition

The orthopaedic industry is highly competitive and dominated by a number of large companies with substantially greater financial and other resources than the Company. The largest competitors in the orthopaedic market are DePuy, Inc., a division of Johnson and Johnson, Zimmer, Inc., a subsidiary of Zimmer Holdings, Inc., Stryker Howmedica Osteonics, a subsidiary of Stryker Corp., Smith and Nephew plc, Sulzer Orthopaedics, Inc., a subsidiary of Centerpulse AG (formerly Sulzer Medica AG), and Biomet Orthopaedics, a subsidiary of Biomet, Inc. These six companies, according to The Medical and Healthcare Marketplace Guide 2002-2003, had an estimated aggregate market share of approximately 85% in 2001.

Companies in the industry compete on the basis of product features and design, innovation, service, the ability to maintain new product flow, relationships with key orthopaedic surgeons and hospitals, the strength of their distribution network and price. While price is a key factor in the orthopaedic market, there are other significant factors, including: surgeon preference, ease of use, clinical results, and service provided by the company and its representatives. Due to health care reform, the rapid expansion of managed care at the expense of traditional private insurance and the advent of hospital buying groups, management believes that the price of the Company’s orthopaedic implant products will continue to become a more important competitive factor. Manufacturers of medical devices, including orthopaedic implants, are increasingly attempting to enter into contracts with hospital chains or hospitals pursuant to which the hospital chains or hospitals 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.

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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. During 2002, the Company experienced substantial increases in insurance premiums primarily due to the conditions of the insurance market in general and specifically the medical device insurance market. The Company is currently evaluating its levels of product liability insurance, as well as the amount of retention carried compared to other companies in the industry. Due to the volatility of the insurance marketplace, the value of the product liability insurance products delivered and the decreasing number of providers of these products, there can be no guarantees as to whether the Company will elect or be able to secure such coverage in the future.

Government Regulation

The Company’s operations and relationships are subject to government regulation in the United States and other countries in which it distributes its products and services. 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.

The Company is required to obtain various licenses and permits from foreign governments and to comply with significant regulations that vary by country in order to market its products in foreign markets. In order to continue marketing its products in Europe after mid-1998, the Company was required to obtain ISO 9001 certification and receive “CE” mark certification, an international symbol of adherence to quality assurance standards and compliance with applicable European medical device directives. The ISO 9001 certification is one of the prerequisites for CE mark certification. The Company received both ISO 9001 and CE mark certification in May 1998, and is required to undergo an annual quality system audit to maintain its certification.

Employees

As of December 31, 2002, the Company employed 133 full time employees. The Company has no union contracts and believes that its relationship with its employees is good.

Executive Officers of the Registrant

The executive officers of the Company, and their ages as of March 6, 2003, are as follows:

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 also became President of the Company upon the departure of former president Timothy Seese on January 31, 2002. Dr. Petty was a Professor at the University of Florida College of Medicine from July 1975 to September 1998. Dr. Petty also served as Chairman of the Department of Orthopaedic

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Surgery at the University of Florida College of Medicine from July 1981 to January 1996. Dr. Petty has 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. degrees from the University of Arkansas. He completed his residency in Orthopaedic Surgery at the Mayo Clinic in Rochester, Minnesota.

Gary J. Miller, Ph.D. was a founder and has been Executive Vice President, Research and Development of the Company since February 2000. He was Vice President, Research and Development from 1986 until 2000 and has been 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 until August 1996. Dr. Miller received his B.S. from the University of Florida, his M.S. (Biomechanics) from the 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 Sciences Division since 1982 and was appointed as an Adjunct Associate Professor in the Department of Aerospace, Mechanics and Engineering Sciences in 1995. He was a consultant to the 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 Executive Vice President, Sales and Marketing since February 2000. He has been employed by the Company in successive capacities in the areas of Operations and Sales and Marketing for the past thirteen years, serving as Vice President, Operations from April 1991 until April 1993 and Vice President, Marketing from 1993 until 2000. He also served as a Director from March of 1989 until March 1996. He was appointed to the Board of Directors on January 31, 2002 to fill the vacancy created by the resignation of Timothy Seese and was elected to the Board in May 2002. Mr. Petty received his B.A. from the University of Virginia in 1988 and completed The Executive Program of the Darden School of Business in 1999. He is the son of Dr. and Ms. Petty.

Joel C. Phillips, CPA has been Chief Financial Officer of the Company since July 1998 and Treasurer since March 1996. Mr. Phillips was Manager, Accounting and Management Information Systems from April 1993 to June 1998. From January 1991 to April 1993, Mr. Phillips was employed by Arthur Andersen. Mr. Phillips received a B.S. and a Masters in Accounting from the University of Florida and is a certified public accountant.

Betty Petty was a founder and has been Vice President, Human Resources and Administration since February 2000. She has also been Secretary of the Corporation since its inception and served as Treasurer and a Director until March 1996. Ms. Petty served in the dual capacities of Human Resources Coordinator and Director of Marketing Communications from the founding of the Company until 2000. She 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.

ITEM 2.          PROPERTIES

The Company’s principal executive offices, research and development laboratories and manufacturing facility is a 39,000 square foot building on approximately eight acres of land owned by it in Gainesville, Florida. In 2002, the Company began a project to expand its principal facility by constructing a 37,000 square foot addition. The expansion is expected to be complete by June 30, 2003. The Company leases a 9,500 square foot distribution facility in Gainesville, Florida. The lease is for an initial term of three years at an annual rate of $42,000, expiring July 31, 2003. The Company owns approximately four and one half acres of land nearby to its existing facility in Gainesville, Florida for future expansion requirements.

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ITEM 3.          LEGAL PROCEEDINGS

The Company had been a party to an arbitration proceeding with Regeneration Technologies, Inc. (“RTI”) with respect to its agreement with RTI for the distribution of a bone grafting material technology. On September 23, 2002, the Company settled the dispute with RTI and entered into a new distribution agreement as exclusive distributor for bone paste products processed by RTI for non-spinal musculoskeletal orthopaedic procedures. The settlement agreement calls for RTI to pay the Company $1.5 million in damages in quarterly installments over a period of one and one-half years from the date of the agreement. As of December 31, 2002, the Company has received $438,000 of the settlement from RTI, net of costs of $62,000.

On December 16, 2002, Centerpulse Orthopedics, Inc. filed a lawsuit in the Civil Court in the Eighth Judicial Circuit, Alachua County, Florida, against the Company and one of the Company’s employees. The complaint filed in this action seeks damages in an undisclosed amount alleging that the Company’s employee who is a former employee of Centerpulse, breached a noncompete and confidentiality agreement, and that the Company is liable for tortious interference with that agreement. The Company has filed a response and intends to vigorously defend against all allegations made in the complaint. The Company believes the suit is without merit; however, the Company is unable to predict the outcome of the litigation.

There are various other claims, lawsuits, disputes with third parties and pending actions involving various allegations against the Company incident to the operation of its business, principally product liability cases. Each of these matters is subject to various uncertainties, and it is possible that some of these matters may be resolved unfavorably to the Company. The Company, based on the advice of counsel, does not anticipate that the adverse outcome of these matters will have a material adverse effect on the Company, its results of operations, financial position or its future business operations. The Company establishes accruals for losses that are deemed to be probable and subject to reasonable estimate.

The Company’s insurance policies covering product liability claims must be renewed annually. Although the Company has been able to obtain insurance coverage concerning product liability claims at a cost and on other terms and conditions that are acceptable to the Company, the Company may not be able to procure acceptable policies in the future.

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, 2002.

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PART II

ITEM 5.          MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Company’s Common Stock trades on the Nasdaq National Market under the symbol “EXAC”. 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.

On January 29, 2003, the Company announced a two-for-one split of its Common Stock (the “stock split”). The stock split was effective February 28, 2003 for all common shareholders of record as of February 14, 2003. The share prices in the following table have been adjusted to reflect the stock split:

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 cash 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 March 14, 2003, the Company had approximately 211 shareholders of record. There are in excess of 2,533 beneficial owners of the Company’s Common Stock.

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ITEM 6.          SELECTED FINANCIAL DATA

The selected financial data set forth below has been derived from the audited financial statements of the Company. This data should be read in conjunction with the financial statements, the notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations included elsewhere herein.