<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period _____________________ to _____________________
Commission file number 0-16257
PACE MEDICAL, INC.
-----------------------------------------------------------------
(exact name of small business issuer as specified in its charter)
Massachusetts 04-2867416
- ------------------------------ -------------------
(State or other jurisdiction (I.R.S. Employer
incorporation or organization) Identification No.)
391 Totten Pond Road
Waltham, Massachusetts 02154
- ----------------------- --------
(Address of principal (Zip Code)
executive offices)
Issuer's telephone number, including area code (617) 890-5656
Securities registered under Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
None
------------------- -------------------------
Securities registered under Section 12(g) of the Act:
Common Stock, par value $.01 per share
--------------------------------------
(Title of class)
<PAGE> 2
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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[ ]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year. $2,025,221
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 90
days.
$3,335,442 as of March 18, 1997.
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
3,400,870 shares of Common Stock, $.01 par value, as of March 18, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
If the following documents are incorporated by reference, briefly describe
them and identify the part of the Form 10-KSB (e.g., Part I, Part II, etc.) into
which the document is incorporated; (1) any annual report to security holders;
(2) any proxy or information statement; and (3) any prospectus filed pursuant to
Rule 424(b) or (c) of the Securities Act of 1933. None.
-2-
<PAGE> 3
PART I
Item 1. Description of Business.
a. Business Development.
Pace Medical, Inc. (the "Company") is principally engaged in the design,
manufacture and sale of single and dual-chamber temporary cardiac pacemakers, a
dual-chamber pacing analyzer, percutaneous lead introducers, heartwires,
surgical and temporary pacemaker extension cables, and related accessories.
The Company commenced operations effective March 16, 1985 when Ralph E.
Hanson, the Company's President and founder, acquired the outstanding capital
stock of APC Medical Ltd. ("APC Medical") from American Pacemaker Corporation, a
subsidiary of Intermedics, Inc. Unless otherwise specifically referenced herein,
the term "Company" includes APC Medical. Mr. Hanson was the founder of American
Pacemaker Corporation and served as its president from 1975 until 1985. American
Pacemaker Corporation was acquired by Intermedics, Inc. in 1982. The Company was
incorporated in Massachusetts on May 29, 1985 and Mr. Hanson transferred the
outstanding capital stock of APC Medical to the Company on January 1, 1986.
APC Medical is the successor to Devices Limited ("Devices"), a U.K.
manufacturer of medical electronic equipment, permanent pacemakers and leads,
and temporary pacemakers, which was a pioneer in the pacing industry. After
Devices was acquired by Johnson & Johnson Co., it was sold in 1978 to American
Pacemaker Corporation and its name was changed to APC Medical Ltd. APC Medical
is a U.K. limited company with facilities located in Welwyn Garden City, Herts,
England. The Company's acquisition of APC Medical provided the Company with a
foreign based manufacturing operation and an international marketing and sales
presence through a network of experienced sales representatives and distributors
in the U.K., Europe, and other world markets. A portion of the Company's
manufacturing continues to be done by APC Medical, and APC Medical markets the
Company's products outside the U. S. and Canada under the APC Medical name. The
Company is responsible for marketing in the U.S. and Canada and conducts most of
its manufacturing and new product development operations in the U.S.
b. Description of Business of Issuer.
The Company designs, manufactures and sells single and dual-chamber
temporary cardiac pacemakers, a dual-chamber pacing analyzer, percutaneous lead
-3-
<PAGE> 4
introducers, heartwires, surgical and temporary pacemaker extension cables, and
related accessories. The Company is not engaged in the business of designing,
manufacturing, or marketing permanent implantable cardiac pacemakers and, due to
the high risk of liability associated with such pacemakers, it does not intend
to enter this business. Temporary pacemakers involve some risk of liability
because they may be life-supporting medical devices, but their ability to be
tested, repaired and replaced without surgery diminishes the risks to the
patient and the potential of liability in comparison to permanent implantable
pacemakers.
A pacemaker is an electronic device which stimulates an impaired heart,
thereby causing it to beat at a rate which will meet normal bodily demands. A
pacemaker consists of two elements, a pulse generator (which provides the power
source and the timing circuit) and a pacing lead (which conducts the electrical
impulses from the pulse generator to the heart). Temporary pacemakers are made
for temporary external applications for short-term electrical conduction and
cardiac rhythm disorders and are not implanted in a patient's body. In contrast,
permanent pacemakers are implantable and made for longer term applications. All
pacemakers, whether temporary or permanent, are connected to the heart by a
lead, which consists of an insulated wire and an electrode.
Pacemakers - whether temporary or permanent - are also characterized as
either asynchronous pacemakers, which supply impulses to the heart at a fixed
rate on a continuous basis, or "demand" pacemakers, which supply impulses to the
heart on an "as needed" basis only when the natural heartbeat is inadequate.
Demand pacemakers are either ventricular demand pacemakers which supply impulses
as needed to correct a heart's irregular beating pattern or DDD dual chamber
pacemakers, which supply impulses as needed to provide heartbeat regularity and
in addition increase the heart's pumping capacity. Pacemakers, permanent or
temporary, may also either be programmable or non programmable. Programmable
pacemakers may have one or more operational modes and each mode permits the
attending physician to program different pacing parameters as dictated by the
patient's conditions. Thus, a physician may use one multiple mode pacemaker to
treat a variety of patient conditions with appropriate pacing parameters. In
this manner, a multiple mode pacemaker offers a physician the versatility to
treat changing patient conditions with a single pacemaker. In addition, because
temporary pacemakers are reusable external devices, one multiple mode temporary
pacemaker can be used repeatedly for different patients experiencing a variety
of medical conditions.
Pacing leads - whether temporary or permanent - consist of an insulated
wire, an electrode, and a connector. The lead is usually inserted through a vein
into the interior of the heart. The temporary bipolar ventricular pacing leads
are radiopaque, permitting viewing on diagnostic and monitoring equipment and
utilize
-4-
<PAGE> 5
a polyurethane material as the outer insulator, stainless steel wire as the
conductor, and are offered in 4, 5 and 6 French sizes. These are compatible with
all known temporary pacemakers being sold worldwide at this time.
The Company believes, based upon industry publications, that the worldwide
market for temporary pacemakers, temporary pacing leads, pacing analyzers,
myocardial heartwires, lead introducers, and surgical extension cables is
approximately $80 million annually. The Company further believes based upon
management's experience that in number of units sold, percent of market and
dollar volume, the programmable DDD dual chamber temporary pacemakers will
experience the fastest rate of growth of all lines in the temporary pacemaker
business during the next five years.
Current Products
The Company has several products now being marketed in the U.S. that have
received marketing approval from the U.S. Food and Drug Administration ("FDA").
In general, FDA approval can be obtained by three means: an application for
approval under statutory section 510(k), a premarket approval application
("PMA"), or a supplemental premarket approval application ("SPMA"). See
"Government Regulation".
A 510 (k) approval is the simplest manner in which a manufacturer may bring
a new product to market. In granting 510(k) approval, the FDA is allowing the
marketing of a product based on its assessment that the product is
"substantially equivalent" to devices which are already in the market and
presents no new issues involving safety and effectiveness. Approval of a 510(k)
application by the FDA is not approval of the device itself as it is not based
on an in depth examination of the product.
A PMA is the typical means by which a new product is introduced into the
market when a 510(k) is not appropriate because: 1) new issues of safety and
effectiveness may be involved, 2) there is no comparable pre-enactment,
substantially equivalent device for comparison, and 3) the methodologies
involved in the design and manufacture of the device may present safety issues
of a compelling nature requiring an in depth review by the FDA. If the product
is a Class III device, a controlled clinical study to demonstrate safety and
effectiveness will likely be required. When the FDA issues its approval of a
PMA, it is, in fact, approving the device itself for use in specific approved
circumstances.
An SPMA is a means by which a new product may be approved by the FDA, when
its characteristics and indications for use are similar to a PMA device, and its
the methods of design, manufacture and control present no new or unusual safety
-5-
<PAGE> 6
and effectiveness issues. A controlled clinical study may still be a requirement
for an SPMA approval.
All new products that are to be introduced to the United States market will
require FDA approval prior to being made available for commercial marketing. See
"Government Regulation".
The products currently marketed by the Company are as follows:
Temporary Cardiac Pacemakers. The Company's Model 4553 MICRO-PACE,
dual-chamber, temporary cardiac pacemaker, is a programmable ten (10) mode,
"state of the art", single and dual-chamber temporary cardiac pacemaker
consisting of three (3) atrial modes, AOO, AAI, AAT, three (3) ventricular modes
VOO, VVI, VVT, and four (4) dual modes DOO, DVI, DDI, DDD. The MICRO-PACE is a
technically advanced dual-chamber temporary cardiac pacemaker which utilizes a
copyrighted computer software-based microprocessor design licensed to the
Company by Pace Technology, a research and development partnership controlled by
the Company's President and the Chairman of the Company's Medical Advisory
Board. See "Patents and Licenses". With the MICRO-PACE unit, the physician is
able to select the proper physiological parameters in accordance with each
individual patient's needs. The MICRO-PACE unit has features that address the
typical complications previously associated with advanced dual-chamber pacing
modes. The simplified keyboard operation, visual display, built-in safety
features, wide selection of parameter and operation modes, size and battery
operation are all features that make the MICRO-PACE unit an innovation in
temporary cardiac pacing. The Company received FDA approval of the MICRO-PACE
unit in September, 1991 based upon the PMA of an OEM customer, and commercial
distribution in the U.S. commenced at that time. In addition, the Company
received its own independent PMA from the FDA covering the Model 4553 MICRO-PACE
unit in March, 1994.
The Model 4570 MICRO-PACE, dual-chamber, DDD, temporary cardiac pacemaker
is an enhanced version of the Model 4553. This device received FDA SPMA approval
in August, 1995. The Model 4570, dual-chamber, temporary pacemaker has the
ability to sense, pace and track in the DDD mode at high-rates; thus, allowing
cardiologists and surgeons to address the needs of post-operative, open-heart
patients, regardless of their age. In particular, the device will greatly assist
the recovery of both infants and young children, who have very fast atrial heart
rates (180-210 bpm) and have developed temporary heart block, following
open-heart surgery. To the Company's knowledge, the Model 4570, dual- chamber,
temporary pacemaker is the only device of its kind in the world that has the
ability to sense and pace at high rates in the DDD mode; thereby, restoring A- V
synchrony and improving cardiac output.
-6-
<PAGE> 7
The Company also manufactures two (2) types of single-chamber temporary
cardiac pacemakers, bedside units (Model 4162 and 4164) and miniature
(ambulatory) units (Model EV4542 and EV4543). The larger bedside units offer
ruggedness in construction, ease of operation, ease of viewing, and over a
decade of proven performance. The two bedside models being offered provide
customers (hospitals/physicians) with a flexibility of choice in selecting those
pacing parameters best suited for their patients. The units are battery operated
and attach to the bedrail which is convenient for both the patient and the
physician. The miniature models attach comfortably to the patient and allow for
ambulatory pacing, if required. They are highly desirable due to their small
size and they offer a great deal of flexibility with regard to the selection of
required pacing parameters. These miniature pacemakers are battery operated and,
like the bedside units, have over a decade of reliability and performance. The
Company believes based upon management's experience in the market that it is the
major manufacturer of bedside pacemakers in the European market and the Company
believes based upon the lack of competitive products in the market that APC
Medical and its predecessors have supplied the majority of the temporary
external pacemakers sold in the United Kingdom.
Pacing Analyzer. The Model 4800 AccuPace(TM), dual-chamber pacing analyzer,
combines the benefits of dual-chamber multi-mode, multi-parameter pacing with
testing features that evaluate, display, store, and print out the important
characteristics of the patient's lead system. The temporary pacing feature
allows the physician to perform pre-implant stimulation studies of the basic
pacing parameters and functions on the patient prior to the implantation of a
permanent pulse generator. Considerable attention has been paid in the design of
this product to the "user friendly" aspects of its operation. The Company
received 510(k) approval from the FDA covering the Model 4800 AccuPace(TM),
dual- chamber, pacing analyzer in September, 1994.
Lead Introducers (Peel-Away). The Company's line of disposal percutaneous
lead introducers provides for a temporary access to a vein so that a permanent
pacing lead can be positioned within the heart. This product line includes seven
sizes consisting of 7, 8, 9, 10, 10.5, 11 and 12 French types.
Myocardial Heartwires. The Company's products include a heartwire
specifically intended for use as a temporary cardiac pacing lead after
open-heart surgery. The disposable heartwire can be used with the Company's
present line of temporary pacemakers and other manufacturers' units currently on
the market.
Extension Cables. The Company manufactures a wide variety of temporary
cardiac pacemaker extension cables and surgical extension cables in order to
satisfy the many different applications encountered during patient pacing. The
-7-
<PAGE> 8
extension cables can be used with most manufacturers' temporary external
pacemakers and pacing system analyzers currently being marketed. Many of the
cables can be resterilized after use, while others are disposable.
New and Proposed Products
The Company generally introduces a new product outside the United States
first and, upon the receipt of FDA approval, commences marketing of the product
in the United States. Introduction of all of the Company's new products in the
United States is subject to FDA approval. See "Current Products" and "Government
Regulation".
Model 5200 MINI-PACE, Single-Chamber, Temporary Pacemaker. The Company
intends to file a regulatory submission with the FDA during 1997 covering its
new Model 5200 MINI-PACE, single-chamber, temporary pacemaker. This device has
many new features over our present Model EV4543 and other competitive devices
now on the market. The design encompasses the expressed needs of the medical
community from both a user-friendly and performance standpoint.
Model 4580 SURGI-PACE, Dual-Chamber, Temporary Pacemaker. The Company
intends to file a regulatory submission with the FDA during 1997 covering its
newly designed dual-chamber, DDD, temporary cardiac pacemaker that combines the
basic features of the MICRO-PACE along with having the ability to synchronize an
intra-aortic balloon pump to the temporary pacemaker's sensing and pacing
action. The SURGI-PACE is the only known dual-chamber, DDD, temporary pacemaker
which allows the ventricular channel of the pacemaker to be employed as the
trigger to initiate deflation and inflation of the balloon catheter. In
addition, many new user friendly design features have been included in the
SURGI-PACE to enhance its operation.
Marketing
The Company's temporary cardiac pacemakers and associated accessories are
sold to hospitals both domestically and abroad through independent sales
representatives, independent distributors, and OEM accounts.
The Company believes, based upon management's experience, that the most
feasible and economical plan for short and long-term sales growth is to increase
its worldwide market penetration through the proper selection and utilization of
manufacturers' representative organizations and distributors who are experienced
in selling medical devices. These distribution outlets, combined with the
Company's marketing department, will help to optimize the Company's
-8-
<PAGE> 9
immediate marketing needs. The Company's marketing department will support the
representative and distributor organizations and will be responsible for OEM and
contract purchasing accounts.
International Sales. The Company has entered into a distributor arrangement
with respect to certain international markets with APC Cardiovascular Ltd., an
entity controlled by Derrick Ebden, who is a director of the Company and the
former managing director of APC Medical. APC Cardiovascular sells the Company's
products directly and through a pre-existing network of approximately thirty
(30) distributor organizations extending from Ireland to Japan, which were
formerly associated with APC Medical. APC Cardiovascular and these distributors
are experienced in selling medical (cardiovascular) products and well
established in the territories that they cover.
Domestic Sales (North America). The Company is the distributor for its
products in North America. It utilizes manufacturers' representatives and
distributors. The Company oversees and supports the representative and
distributor organizations. In addition, the Company utilizes OEM accounts to
market single and dual-chamber temporary pacemakers under either private labels
or the Company's name.
The Company focuses on three major domestic and international selling
markets. These markets are as follows:
1. OEMs. Original Equipment Manufacturers (companies currently
manufacturing implantable pacemakers) often need a second source of supply and,
in many cases, require special types of temporary cardiac pacemakers that they
do not manufacture. Purchase of such temporary cardiac pacemakers and leads from
the Company enables the OEMs to expand their product lines and offer a more
complete service to their customers.
2. Representatives/Distributors. In addition to APC Cardiovascular, the
Company utilizes representative and distributor organizations in the United
States and Canada. Only those who have proven medical sales experience and
integrity in making day-to-day calls on hospital purchasing directors and
physicians are considered.
3. Contract Purchasing. This includes, for the most part, annual purchasing
contracts and bids that allow the hospitals or purchasing groups involved to
receive a quantity discount based on a commitment of purchases scheduled for
delivery throughout the year.
-9-
<PAGE> 10
The Company conducts training and education programs for its sales
representatives upon engagement of the representative and upon introduction of
new products. The sales representatives, in turn, provide service, training and
other assistance to physicians. The Company intends to enter into contracts with
its representatives which may be terminated on short notice by either party.
The establishment of customer relationships with physicians is an important
competitive factor in the industry. Although a company's products themselves
must be competitive for a company to compete successfully, an experienced
salesperson with established physician rapport may overcome small differences in
products. While the Company, therefore, depends upon the sales activities of its
representatives, the Company does not believe that the loss of any one sales
representative would adversely affect its business.
The Company's distributors and sales representatives are not restricted in
marketing products that compete with the Company's products. The Company
believes that its distributors and sales representatives do not presently market
competing temporary cardiac pacemakers, but do presently market competing
accessory products.
Working Capital Practices.
In the United States, the Company sells its pacing products through
independent sales representatives, OEM accounts, and distributors. The OEM
accounts and distributors buy pacemakers directly from the Company and are
billed at a discounted rate, 30 days net. Many of the Company's products are
sold on a factory direct basis or through sales representatives, and the Company
bills the hospitals directly. The Company generally pays the representative its
commission during the month following the collection of funds. The Company's
practice is to attempt to realize accounts receivable within 30 to 60 days after
shipment. The Company believes, based upon management's experience, that the
foregoing working capital practices are similar to those of the pacemaker
industry in general.
Since in most cases an insurance company or government program, including
Medicare and Medicaid programs, reimburses the hospital or patient for
pacemakers, any future reductions in government funding of health insurance may
limit funds available to certain government third-party payors to pay for the
Company's products; thereby, adversely affecting the Company's sales.
The nature of the Company's pacemaker products requires that sufficient
inventories of finished goods and critical components be maintained to insure
that the rapid delivery requirements of its customers are met. The Company
currently
-10-
<PAGE> 11
maintains inventories of finished goods and of certain components to meet
foreseeable requirements of several months. See "Sources of Supply".
Product Warranties
Temporary Cardiac Pacemakers and Pacing Analyzers. Temporary cardiac
pacemakers and pacing analyzers carry a one year warranty. The Company warrants
these products to be free from defects in materials from one (1) year from the
date of delivery when operated in accordance with the written operating
instructions which accompany the instrument. The Company's obligations under
this warranty are limited to repair or replacement of parts found to be
defective during the warranty period. Expendable items, such as batteries,
straps, and extension cables are not covered in this warranty. The Company
believes, based upon management's experience, that these warranty items are
consistent with practice in the pacemaker industry in general.
Product Liability and Limits of Insurance Coverage
Because the Company's temporary cardiac pacemakers and pacing analyzers may
be life-supporting medical devices, the Company's liability for any presently
unknown product design or manufacturing deficiencies could be substantial and
could exceed the limits under existing product liability insurance. The Company
maintains product liability coverage outside the United States with annual
limits of (pound)500,000 (approximately $857,000 as of December 31, 1996) per
occurrence and in the aggregate. The Company does not have product liability
insurance in the United States, and any claim could adversely affect the
Company's financial condition. The Company believes, based upon management's
experience, that its liability exposure is lessened because it does not
manufacture or sell permanent implantable cardiac pacemakers or leads. However,
the cost of recalling its products upon discovery of any material defects would
be substantial and could have an adverse effect on the Company and its financial
condition.
Research and Product Development
The Company continually engages in programs of product improvement and new
product development. Research and development activities are carried on in the
Company's own laboratories by the equivalent of three full time employees. These
technically trained employees also devote part of their time to clinical
evaluation and operational activities with respect to existing products. In
addition, the Company utilizes, when needed, independent high technology,
engineering consultants for new product development projects. The acquisition of
new products and/or technology transfer is also available through licensing
arrangements with other firms. See "Patents and Licenses". The Company also
-11-
<PAGE> 12
has a Medical Advisory Board consisting of two physicians specializing in
cardiology and surgery and utilizes its individual members for advice and
consultation on development and improvement of the Company's products.
During the years ended December 31, 1995, and December 31, 1996, the
Company expended $267,463 and $292,499, respectively, on product development.
See Item 12, "Certain Relationships and Related Transactions", for a discussion
of certain rights the Company has acquired from a research and development
partnership controlled by the Company's President and Chief Executive Officer
and the Chairman of its Medical Advisory Board.
Quality Assurance
Quality control procedures begin upon the receipt of raw components and
materials and continue during production and after final assembly. The Company
keeps accurate and concise quality control and production records for each
temporary pacemaker and all other products manufactured.
The Company's quality control testing of components, sub-assemblies and
final products is extensive. Approximately three employees are engaged in
inspection and quality control activities. Because of the life-enhancing
function pacemakers perform, all pacing system components and related products
are manufactured to precise specifications.
Sources of Supply
Many of the components incorporated by the Company in its pacemaker
products are produced to its specifications by various suppliers. However,
potentiometers for miniature temporary pacemakers are presently supplied by a
single supplier. While it is the Company's policy to qualify a limited number of
suppliers of components, the Company maintains a list of alternate sources of
supply and intends to maintain a sufficient amount of inventory in order to
minimize disruptions if conditions require selecting substitute vendors. The
Company believes, based upon management's experience, that alternate sources of
supply for most components could be qualified within sufficient time to avoid
production delays. The Company purchases approximately 90% of its component
parts in the United States with the remainder being purchased in Europe. The
failure to obtain necessary quantities of materials or components in a timely
fashion from vendors who are sole suppliers would have an adverse effect on the
Company.
The Company's products, which are manufactured in the U.S., are assembled
on a contract basis by outside contractors. The Company believes that
-12-
<PAGE> 13
alternate contractors would be available if such contractor were to cease
operation, which the Company does not anticipate happening. However, any
cessation of operations by such contractor would disrupt the Company's U.S.
production and might adversely affect the Company's business.
Government Regulation
Since temporary pacemakers and temporary pacemaker leads are "devices" as
defined by the Federal Food, Drug, and Cosmetic Act, as amended (21 U.S.C. 321
et seq.) (the "Act"), all of the Company's pacemaker products are subject to the
regulatory authority of the United States Food and Drug Administration ("FDA").
This authority was substantially increased by the passage of the Medical Device
Amendments of 1976 in May 1976.
Under the Act, the FDA has authority to: (i) set mandatory performance
standards for medical devices; (ii) classify devices which need premarket
clearance by the FDA to provide reasonable assurances of safety and
effectiveness and require submission of proof of safety and effectiveness prior
to the marketing of such devices; (iii) regulate clinical testing of new
devices; (iv) establish "good manufacturing practices" which must be observed in
the manufacture of devices; (v) require the registration of device manufacturers
and their products; (vi) conduct periodic detailed inspections of device
manufacturing establishments and, for some devices, inspections of records found
in such establishments; (vii) establish record-keeping and reporting
requirements; (viii) require reporting of product defects to the FDA; (ix)
require defect notification and replacement or repair of defective products, or
refund of their purchase price and reimbursement of certain associated cost of
consumers and distributors, without relieving manufactures of tort liability for
any injury resulting from the defect; (x) "ban" a device found to present
substantial deception or an unreasonable or substantial risk of illness or
injury; (xi) require that all labels and labeling for a device be adequate and
truthful; and (xii) regulate the advertising of certain devices. The FDA has
published regulations with respect to most of the categories outlined above,
including regulations establishing good manufacturing practices that apply to
all of the Company's operations, regulations classifying "devices" and
regulations regarding clinical testing of new devices.
Under the FDA regulations implementing the 1976 Amendments, the Company's
pacing leads and temporary cardiac pacemakers are classified as "Class III"
medical devices. The Act requires "premarket approval" by the FDA of new "Class
III" medical devices as a condition for "commercial distribution" of such
devices and approval of substantial changes in current products prior to the
products being commercially distributed. Obtaining such approval requires the
-13-
<PAGE> 14
filing of applications with the FDA containing proof that the products are safe
and effective. This process can be both costly and time consuming.
Medical devices which are "substantially equivalent" to devices marketed in
interstate commerce prior to May 28, 1976 may be sold commercially upon FDA
determination of such substantial equivalence. The Company has obtained
favorable FDA determination letters with respect to many of its current
pacemaker products. The Company will be seeking similar FDA determination of
substantial equivalence on other products. See "Business-New and Proposed
Products". The Company's MICRO-PACE dual-chamber temporary cardiac pacemaker was
not substantially equivalent to any device that was in commercial distribution
before May 28, 1976. As a result, commercial distribution of the MICRO-PACE unit
was delayed until FDA approval was obtained in September, 1991.
The Company is not in a position to make a judgment as to the full impact
of the FDA regulations on continuing operations, particularly the pre-market
approval procedures, but it expects to have to devote substantial time and
significant expense to compliance matters in the foreseeable future. In
addition, there is no assurance that changes in governmental regulations will
not adversely affect the Company.
Where a device is found to be in violation of the requirements of the Act
or regulations thereunder, the FDA is authorized to seek an injunction against
the further manufacture and distribution of the device and to have the device
seized. The FDA may itself administratively restrain a device for up to 30 days
pending institution of further regulatory action. In addition to these remedies,
the FDA may seek criminal penalties against corporations and individuals who
ship or cause the shipment of prohibited devices in interstate commerce or who
otherwise violate the Act. Finally, the FDA has developed a "recall" procedure
under which a manufacturer or distributor may be requested to remove a product
from interstate commerce if that product violates the Act.
Pursuant to its regulatory authority, the FDA has conducted routine
inspections of the Company's manufacturing facilities, none of which has
resulted in any action by the FDA to impose administrative or judicial sanctions
against the Company, or in any interruption of commercial distribution of the
Company's products.
The FDA's regulatory authority over devices continues after the product is
approved for marketing, and the FDA may pursue its remedies described above if
it finds that the device proves to be unsafe or ineffective. To date, the FDA
has made no such determination with respect to any of the Company's products and
the Company has no reason to believe that the FDA will do so in the future. If
-14-
<PAGE> 15
there should be substantial failures in any of the Company's products presently
being sold, it is likely that such products would have to be taken off the
market either pursuant to FDA action, or otherwise, and the Company's business
would be adversely affected.
Certain states may also regulate medical devices, but such state
regulation, if different from federal requirements, must have prior FDA
approval. The company's products are also subject to various regulations by
governments outside the United States. Many foreign countries have regulations
similar to the FDA that must be adhered to. Also the Department of Health and
Social Security in the U.K. carefully monitors the performance of U.K.
manufacturing companies. The Company believes that its products are in
compliance with such other regulations.
Foreign Operations
For the years ended December 31, 1995, and December 31, 1996, revenues from
foreign customers, including export sales, totaled $523,657 and $768,609,
respectively (approximately 30% and 38%, respectively, of net sales). APC
Medical assembles a portion of the Company's products in the United Kingdom for
shipment to foreign and domestic customers. APC Medical manufactures temporary
pacemakers, temporary pacemaker extension cables, and surgical extension cables
in its own facility for its foreign customers. See "Notes to Consolidated
Financial Statements".
The Company's operations can be affected by currency fluctuations.
Fluctuations between the pound and the dollar can affect the Company's position
in international competition, with a strengthening of the dollar making its
products less expensive to customers in the United States and a weakening of the
dollar making its products more expensive to customers in the United States. In
addition, the Company's foreign business is subject to the usual risks incident
to operating abroad, including currency restrictions, currency adjustments and
changes in foreign laws.
The Company believes that the changes which took effect in 1995 and 1996 in
the European Economic Community ("EEC") have not had any material adverse effect
on the Company's business because of the Company's established presence in the
EEC market through APC Medical.
Employees
At December 31, 1996, the total number of the Company's full-time employees
was 13. APC Medical employed 5 of these employees. The Company
-15-
<PAGE> 16
believes, based upon management's opinion, that its relations with its employees
are satisfactory.
Patents, Trademarks and Licensing
In August, 1986, the Company acquired a ten year exclusive license from
Pace Technology covering the technology used in the MICRO-PACE series of
temporary cardiac pacemakers. The Company has agreed to pay Pace Technology a
royalty of 5% on sales of programmable temporary pacemakers incorporating this
technology. The license became fully paid-up on December 31, 1996. See Item 12.
Certain Relationships and Related Transactions.
The Company owns no patents covering the technology incorporated in its
products, and the Company is not aware that any of its products infringe on
patents owned by others. However, the Company has not conducted a formal patent
search to determine whether any of its products so infringe and there can be no
assurance that the technology used in the Company's products may not be covered
by an existing or future patent owned by others. If it is determined that the
Company is infringing, then it is the Company's intention to acquire licenses
covering such technology, to the extent that licenses are available under such
patents. It is the Company's belief that the payments of additional reasonable
royalties would not impair its business. However, if the owner of such a patent
refused to grant a license to the Company, then one or more of the Company's
products might be at a competitive disadvantage in the market. If the Company
should decide to incorporate such technology into its products without first
obtaining a license, the Company could be enjoined from marketing the product,
which would adversely affect the Company's business.
Competition
In the temporary pacemaker market, the Company is in competition with
approximately four (4) companies.
The manufacturers of temporary pacemakers market their products on a direct
basis, through manufacturers' representatives and distributors, or to OEM
implantable pacemaker manufacturers. The Company intends to expand its share of
this OEM market during 1997.
Many of the Company's competitors use direct sales people who are
controlled by, and sell pacemakers and other medical products exclusively for,
their employers, unlike the Company's independent sales representatives and
distributors who direct their own activities and sell medical products
manufactured by other companies. Due to its limited resources, the Company has
not to date
-16-
<PAGE> 17
been able to render specialized customer services equivalent to those provided
by such manufacturers.
In addition to the major competitors, there are other domestic and foreign
manufacturers developing and marketing temporary pacemakers. Foreign
manufacturers may receive the benefit of national and local laws protecting them
from outside competition.
Product characteristics (including reliability, performance and longevity),
design (lightness, compactness and contours), salesperson/physician
relationships, warranty terms, service and price are all competitive factors in
the industry. The Company believes, based upon management's experience, that it
maintains a competitive position with respect to most of these elements. Since
the Company's salespeople are not direct employees of the Company, the Company
may have less control over salesperson/physician relationships than certain of
its competitors whose salespeople are direct employees.
With the rapid progress of medical technology, and in spite of continuing
research and development progress, the Company's products are always subject to
the risk of being rendered obsolete by the introduction of new products or
techniques.
Some of the conditions and diseases which the Company's pacemakers are
designed to treat may, in some cases, also be treated by drug therapy. The
Company does not deem itself to be in direct competition with pharmaceutical
companies because, at present, drug therapy is infrequently a viable alternative
to the use of a pacemaker. However, new drugs and methods of therapy may be
developed by pharmaceutical or other health care companies which might compete
with the Company's products. Most of such companies are larger than the Company
and possess more substantial research facilities and other resources.
Environmental Laws
Due to the nature of its activities, the Company does not believe that
compliance with environmental laws and regulations will have a materially
adverse effect on its financial condition or operations.
Item 2. Description of Property.
The Company occupies approximately 2,600 square feet of space in Waltham,
Massachusetts, which it uses for offices, engineering and inventory storage. The
Company occupies this space as a tenant at will with an annual basic rent of
approximately $37,000 or approximately $14.23 per square foot. As
-17-
<PAGE> 18
a tenant at will, the Company's occupancy of this space may be terminated by the
Company or the landlord upon thirty days prior notice. The Company believes,
based upon management's knowledge of the local real estate market, that
termination of its occupancy of this space would not have a material adverse
effect on the Company's business because comparable space at no less favorable
terms is readily available in the Waltham area. The Company does not presently
anticipate terminating its occupancy of this space.
In addition, APC Medical leases approximately 5,000 square feet of
manufacturing and office space located in Welwyn Garden City, Herts, England at
a current annual rent of approximately (pound)28,500 ($48,849) or approximately
(pound)5.70 ($9.77) per square foot. The lease expires in 2006 and contains
provisions requiring upward revision of the rent every five years.
The Company believes, based upon management's evaluation of its future
space needs, that the Company's facilities in Waltham and England are adequate.
In addition, in the opinion of the Company's management, the Company's
facilities are adequately insured.
Item 3. Legal Proceedings.
As of December 31, 1996, neither the Company nor APC Medical was party to
any material legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
-18-
<PAGE> 19
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
The Company's Common Stock is now quoted on the National Association of
Securities Dealers, Inc.'s OTC Bulletin Board under the symbol PMDL. The
Company's Common Stock was quoted on the NASDAQ Stock Market under the symbol
PMED from July 29, 1987, when it began public trading, until January 14, 1994,
when it was delisted because of the Company's failure to meet the $2,000,000
total assets requirement for continued listing. The following table sets forth,
for the periods indicated, the closing quote on the OTC Bulletin Board. Such
quotations reflect inter-dealer prices, without retail mark-up, mark-down, or
commission, and may not reflect actual transactions.
Fiscal Year Ended December 31, 1995 (OTC) Closing Quote
-------------
First Quarter ............................ .625
Second Quarter ........................... .625
Third Quarter ............................ .75
Fourth Quarter ........................... .75
Fiscal Year Ended December 31, 1996 (OTC)
First Quarter ............................ 1.125
Second Quarter ........................... 2.625
Third Quarter ............................ 2.375
Fourth Quarter ........................... 1.25
On March 18, 1997, the closing quoted price for the Common Stock, as
reported by the OTC Bulletin Board, was $1.406 ($113/32) per share and there
were approximately 107 record holders and approximately 350 beneficial holders
of the Common Stock.
The Company has never paid any dividends and does not have any intention of
paying any dividends in the foreseeable future.
-19-
<PAGE> 20
Item 6. Management's Discussion and Analysis or Plan of Operation.
Liquidity and Capital Resources
As of December 31, 1996, the Company had cash and cash equivalents of
$1,029,666 and working capital of $1,666,276. This contrasts to comparable cash
and working capital positions at December 31, 1995 of $772,006 and $1,336,596.
The increase in the Company's liquidity since the beginning of the fiscal
year is attributable to it experiencing a positive operating cash flow resulting
from profitable operations during fiscal year 1996. As is evidenced in its
financial statements, the Company's capital commitments are minimal.
Management continues to believe that the current level of working capital
coupled with the flexibility of the Company's cost structure, should suffice to
ensure that its on-going operations are financed adequately in fiscal 1997. On
this basis, management has no immediate plans to seek additional financing. In
the long term, however, additional equity financing may be sought to continue to
fund research and development and to expand the Company's marketing operation.
Results of Operations - Year Ended December 31, 1996 versus Year Ended
December 31, 1995
Sales increased by 15% from $1,754,242 in 1995 to $2,025,221 in 1996
primarily due to the increase of new orders for pacing analyzers from the
Company's OEM customers and a number of international customers. This increase
more than compensated for the decline in shipments of temporary cardiac
pacemakers. It is also believed that hospital budgetary considerations and the
political health care environment improved considerably during 1996. This had a
positive effect on purchasing decisions.
Over the past several years, the Company has received FDA approval for
several key products - the Model 4800 dual chamber pacing analyzer and the Model
4570 dual-chamber temporary pacemaker. These products contributed substantially
to the revenue mentioned above. The Company plans to file with the FDA
additional regulatory submissions for new products during 1997. Management
believes that these products will also allow the Company to further penetrate
the marketplace worldwide.
Gross margins for 1996 were approximately 49%. This is slightly lower than
the 52% margin the Company experienced in 1995 and is reflective of a change in
product mix from temporary pacemakers to analyzers. Management believes
-20-
<PAGE> 21
margins will increase during 1997 as production efficiencies on the analyzers
are realized.
Operating of $738,733 in 1996 were relatively consistent with 1995
($695,713). This was attributable to management's cost control measures being
tightly enforced. Management continues to believe that operating expenditures
will not increase during fiscal year 1997, yet will be sufficient to maintain
the Company's research and development efforts.
The Company has reflected no tax provision on its financial statements for
1996 and 1995 because of its ability to utilize net operating loss carry
forwards in both the U.S. and the U.K. The Company made approximately $284,826
or $.08 per share for the year ended December 31, 1996. This contrasts with a
1995 profit of $246,018 or $.07 per share.
Management believes that inflation has had no impact on either net sales or
income in the previous two years.
Item 7. Financial Statements.
The Company's financial statements, including
i. Independent Auditors' Report
ii. Consolidated Balance Sheets
iii. Consolidated Statements of Income
iv. Consolidated Statements of Shareholders' Equity
v. Consolidated Statements of Cash Flows
vi. Notes to Consolidated Financial Statements
are set forth below beginning at Page F-1.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
-21-
<PAGE> 22
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act.
The directors and executive officers of the Company are as follows:
Name Age Position
---- --- --------
Ralph E. Hanson 68 President, Chief Executive
Officer, Treasurer, and
Chairman of Board of
Directors
Derrick Ebden 46 Director
Drusilla F. Hays 47 Vice President and Clerk
George F. Harrington 60 Director
Each Director is elected to hold office until the next annual meeting of
stockholders and until his successor is elected and qualified. Except as noted
below, no officer holds his/her office for a fixed term and the Board of
Directors may terminate any officer's term of office. No family relationships
exist among the Company's Directors and executive officers.
Ralph E. Hanson is the Company's founder and has been its President,
Treasurer, Chief Executive Officer and a Director since the Company's
incorporation in 1985. Mr. Hanson is a general partner in Pace Technology, a
general partnership which has licensed certain technology to the Company. See
Item 12. Certain Relationships and Related Transactions.
Derrick Ebden has been a Director of the Company since its incorporation in
1985. Mr. Ebden has been the Managing Director of APC Cardiovascular Ltd., a
distributor of medical devices, since March, 1990. See Item 12. Certain
Relationships and Related Transactions. Prior to that time, Mr. Ebden served as
the Managing Director of the Company's subsidiary, APC Medical Ltd., since 1982
and had been a Vice President of the Company since its incorporation.
Drusilla F. Hays has been a Vice President and Clerk of the Company since
its incorporation in 1985.
George F. Harrington has been a Director of the Company since January,
1986. He is President of Boston Equity Management Co., a private investment
management firm, and has been involved in private investment management since
1967.
-22-
<PAGE> 23
Anthony W. Bailey served as Vice President and General Manager of the
Company from September, 1987 to February, 1997.
Under the federal securities laws, the Company's directors and executive
officers and any other persons holding more than ten percent of the Company's
Common Stock are required to report their initial ownership of the Company's
Common Stock and any subsequent changes in their ownership to the Securities and
Exchange Commission. During the fiscal year ended December 31, 1996, all of
these filing requirements were satisfied. In making these disclosures, the
Company has relied solely on written representations of its directors, executive
officers, and ten percent stockholders, and copies of reports that they have
filed with the Securities and Exchange Commission.
-23-
<PAGE> 24
Item 10. Executive Compensation.
1. Summary of Annual Compensation
The table set forth below shows the annual compensation paid by the Company
to its Chief Executive Officer, its other most highly compensated executive
officer, and its executive officers (including its Chief Executive Officer and
such officer) while in such capacities, as a group, for the three fiscal years
ended December 31, 1995. Except as noted in such table, no executive officer
received a total annual salary and bonus in excess of $100,000 in any such
fiscal year.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
------------------- ----------------------
Awards
------
Name and Securities
Principal Other Annual Underlying All Other
Position Year Salary($) Bonus($) Compensation($) Options(#))(1) Compensation($)(2)
- -------- ---- --------- ------------------------ -------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Ralph E 1996 121,997 50,000
Hanson, 1995 111,712 -- -- -- --
President, 1994 105,908 -- -- -- --
Treasurer &
Chief Executive
Officer
Anthony W 1996 108,341 -- -- -- --
Bailey, Vice 1995 97,964 -- -- 25,000 --
President 1994 96,964 -- -- -- --
All Executive 1996 294,381 50,000
Officers as a 1995 269,036 -- -- 50,000 --
Group (3 1994 260,665 -- -- -- --
Persons)
</TABLE>
- ----------
(1) Represents shares of Common Stock subject to non-qualified stock options
granted during applicable fiscal year. See "Option Grants in Last Fiscal
Year".
(2) Does not include perquisites and other personal benefits received by the
executive officers because the aggregate amount of such compensation, if
any, does not exceed the lesser of $50,000 or 10% of the total amount of
annual salary and bonus for any named individual.
-24-
<PAGE> 25
2. Stock Options
The table set forth below shows information regarding individual grants of
stock options by the Company to its Chief Executive Officer, its other most
highly compensated executive officer, and its executive officers (including its
Chief Executive Officer and such officer), as a group, for the fiscal year ended
December 31, 1996.
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
% of Total
Number of Securities Options Granted
Underlying Options to Employees in Exercise Expiration
Name Granted (#)(1) Fiscal Year Price ($)(2) Date
- ---- --------------------- ---------------- ---------- ---------
<S> <C> <C> <C> <C>
Ralph E. Hanson 50,000 100% $.50 2/1/01
Anthony W
Bailey -- -- -- --
All Executive
Officers as a
Group (3
Persons) 50,000 100% $.50 2/1/01
</TABLE>
- ----------
(1) Represents shares of Common Stock subject to a five-year non-qualified
option granted in February, 1996.
(2) The Board of Directors determined that the fair market value of the
Company's Common Stock was $.50 per share on the date of grant.
-25-
<PAGE> 26
The table set forth below shows information regarding the value of
unexercised stock options held by the Company's Chief Executive Officer, its
other most highly compensated executive officer, and its executive officers
(including its Chief Executive Officer and such officer), as a group, at
December 31, 1996.
Aggregate Option Values At Fiscal Year End
Number of Securities
Underlying Unexercised Value of
Options at FY-End (#) Unexercised In-the-
--------------------------- Money Options at
Name Exercisable Unexercisable FY-End ($)(1)
- ---- ----------- -------------- -------------
Ralph E. Hanson 50,000 0 37,500
Anthony W. Bailey 25,000 0 18,750
All Executive
Officers as a
Group (3 Persons) 100,000 0 75,000
- ----------
(1) The closing quote on December 31, 1996 for a share of the Company's Common
Stock on the OTC Bulletin Board was $1.25.
Neither Mr. Hanson, Mr. Bailey, nor any executive officer of the Company
exercised any options during the fiscal year ended December 31, 1996.
3. Employment Contracts
On June 1, 1995, the Company entered into a three year employment agreement
with Mr. Hanson. Under the terms of this agreement, Mr. Hanson will serve as the
Company's President and Chief Executive Officer at salary of not less than
$105,000 per annum, and will be eligible for such fringe benefits as are
generally made available by the Company by its employees. In addition, the
agreement also imposes upon Mr. Hanson certain confidentiality requirements and
certain restrictions regarding his ability to compete with the Company following
his employment.
4. Director Compensation
The Company's directors receive no cash compensation in consideration for
serving on the Board of Directors. However, in December, 1995, the Company
-26-
<PAGE> 27
granted to each of George F. Harrington and Derrick Ebden a five year
non-qualified stock option to purchase 25,000 shares of Common Stock at an
exercise price of $.50 per share, which was determined by the Board of Directors
to be the fair market value of the Company's Common Stock on the date of grant.
The closing quote on December 31, 1996 for a share of the Company's Common Stock
on the OTC Bulletin Board was $1.25.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
1. Certain Beneficial Owners.
As of March 18, 1997, the only stockholders known to the Company to be the
beneficial owners of more than 5% of the Company's outstanding shares of Common
Stock were Ralph E. Hanson, who is a director, Paul J. LaRaia, M.D. of 45 Ravine
Road, Wellesley, Massachusetts 02181, who is the beneficial owner of 301,000
shares of Common Stock or 8.9% of the outstanding Common Stock. The number of
shares owned beneficially by Mr. Hanson and the percentage of the outstanding
Common Stock represented by such shares is set forth in tabular form below.
-27-
<PAGE> 28
2. Beneficial Ownership of Management.
Each of the persons named in the following table has furnished the
respective information shown:
Shares
Beneficially
Name, Address, & Owned as of
Offices Held with March 18, Percentage
the Company 1997 of Class
----------- ---- --------
Ralph E. Hanson .............................. 855,000(1) 24.8%
Pace Medical, Inc.
391 Totten Pond Road
Waltham, MA 02154
President, Chief Executive
Officer, Treasurer, and
Chairman of the Company
Derrick Ebden ................................ 99,000(2) 2.9%
APC Cardiovascular Ltd.
18 Macon Court
Macon Way
Crewe
Cheshire CW1 1EA, England
Managing Director of APC
Cardiovascular Ltd.
George F. Harrington ......................... 102,000(3) 3.0%
Boston Equity Management Co.
6 Tucker Street
Marblehead, MA 01945
Director of the Company
Directors and Officers as a Group ............ 1,154,000(4) 32.7%
- ----------
(1) Includes 50,000 shares of Common Stock which Mr. Hanson has a right to
acquire within 60 days pursuant to the exercise of options.
(2) Includes 25,000 shares of Common Stock which Mr. Ebden has a right to
acquire within 60 days pursuant to the exercise of options.
(3) Includes 25,000 shares of Common Stock which Mr. Harrington has a right
to acquire within 60 days pursuant to the exercise of options.
-28-
<PAGE> 29
(4) Includes 125,000 shares of Common Stock which officers and directors
have a right to acquire within 60 days pursuant to the exercise of options.
Mr. Hanson, as beneficial owner of 24.8% of the outstanding Common Stock of
the Company, Chairman of the Company's Board of Directors, and the Company's
founder, may be deemed a controlling person of the Company under the Securities
Exchange Act of 1934.
Item 12. Certain Relationships and Related Transactions.
Ralph E. Hanson, the President, Chief Executive Officer, and a Director of
the Company, and Paul J. LaRaia, M.D., who is the owner of 8.9% of the Company's
Common Stock, are equal partners in Pace Technology, a Massachusetts general
partnership, which owns certain technology incorporated in the Company's
MICRO-PACE series of temporary pacemakers. Such technology was exclusively
licensed to the Company in 1986 for ten years under a license agreement
providing for royalties of 5%. After such time, the license will be fully
paid-up and irrevocable, and no further royalties will be payable by the
Company. The Company accrued royalties to Pace Technology of $22,458 during 1996
and $39,748 during 1995. The license became fully paid-up on December 31, 1996.
In March, 1990, the Company entered into an Agreement with APC
Cardiovascular Ltd., ("Cardiovascular"), a company in which Derrick Ebden, a
Director of the Company, is Managing Director and a principal stockholder,
pursuant to which Cardiovascular was appointed the sole distributor of the
Company's products outside of North and South America on normal trade terms.
Such agreement does not have a fixed term, but is terminable by either party
upon one year's advance written notice. Prior to leaving the employment of the
Company in March, 1990 in connection with the Company's downsizing of its
operations in the United Kingdom, Mr. Ebden had been in charge of the Company's
marketing efforts outside of North and Central America through APC Medical. The
Company made sales to Cardiovascular of $661,912 during 1996 and $447,759 during
1995. All such sales were made on normal trade terms.
Item 13. Exhibits and Reports on Form 8-K.
a. Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during the last quarter of
the period covered by this Annual Report on Form 10-KSB.
-29-
<PAGE> 30
b. Exhibits.
1.1 Selling Agreement.
1.1.1 Agreement dated December 7, 1990 with Culverwell & Co., Inc.
regarding Selling Agreement.
1.2 Additional Selling Agent Agreement.
1.3 Escrow Agreement.
3.1 Restated Articles of Organization of the Registrant.
3.2 By-laws of the Registrant, as amended.
4.1 Specimen Certificate for shares of Common Stock, $.01 par value.
4.2 Specimen Warrant Certificate (also included in Exhibit 4.4).
4.3 Unit Purchase Warrant Certificate.
4.3.1 Unit Purchase Warrant Certificate, as amended.
4.3.2 Amended Unit Purchase Warrant Certificate.
4.4 Warrant Agreement.
4.4.1 First Amendment to Warrant Agreement.
4.4.2 Second Amendment to Warrant Agreement.
10.1 License Agreement dated August 1, 1986 between the Registrant and
Pace Technology.*
10.1.1 Amendment to License Agreement dated as of August 4, 1986.*
10.2 1986 Non-Qualified Stock Option Plan, as amended.*
10.3 Form of Non-Qualified Stock Option Agreement.*
10.4 Lease dated December 16, 1986 between Totten Pond Realty Trust and
the Registrant.
10.5.1 License to Assign Lease among The John Laing Pension Trust
Limited, Data Design Techniques Limited and D.D.T. Maintenance
Limited, and APC Medical Ltd. - previously filed as an exhibit
to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1989 (the "1989 Form 10-K") and incorporated
herein by this reference.
10.8 Consulting Agreement dated August 4, 1986 between the Registrant and
Abraham Azulay, M.D.
10.10 Consulting Agreement dated August 4, 1986 between the Registrant and
G. Edgar Sowton, M.D.
10.11 Agreement for Purchase and Sale of Stock dated as of May 1, 1985
between Ralph E. Hanson and American Pacemaker Corporation.
10.12 Agreement dated as of March 15, 1985 between APC Medical Ltd. and
American Pacemaker Corporation.
10.13 Security Agreement dated as of March 15, 1985 between APC Medical
Ltd. and American Pacemaker Corporation.
10.14 Indemnification Agreement dated May 1, 1987 between the Registrant
and American Pacemaker Corporation.
10.15 Form of Escrow Agreement between the Registrant and its stockholders.
-30-
<PAGE> 31
10.16 Supply Agreement dated February 19, 1988 with Siemens-Pacesetter,
Inc.- previously filed as an exhibit to the 1989 Form 10-K and
incorporated herein by this reference.
10.17 Agreement dated April 16, 1990 with Fechtor, Detwiler & Co., Inc.
10.18 Common Stock Purchase Warrant Certificate dated May 31, 1990 in the
name of Fechtor, Detwiler & Co., Inc.
10.19 Common Stock Purchase Warrant Certificate dated May 31, 1990 in the
name of Fechtor, Detwiler & Co., Inc.
10.19.1 Letter dated June 12, 1992 extending such Common Stock Purchase
Warrant Certificate - previously filed as an exhibit to the
Registrant's Annual Report on Form 10-KSB for the year ended
December 31, 1992 (the "1992 Form 10-KSB") and incorporated
herein by this reference.
10.20 Common Stock Purchase Warrant Certificate dated May 31, 1990 in the
name of Lynch, Brewer, Hoffman & Sands.
10.20.1 Letter dated June 12, 1992 extending such Common Stock Purchase
Warrant Certificate - previously filed as an exhibit to the 1992
Form 10-KSB and incorporated herein by this reference.
10.21 Common Stock Purchase Warrant dated January 23, 1988 in the name of
The Equity Group, Inc.
10.22 Agreement dated October 25, 1989 with Allen & Company Incorporated.
10.23 Distributor Agreement dated as of March 12, 1990 with APC
Cardiovascular Ltd.*
10.24 Agreement dated August 28, 1989 with the Defense Logistics Agency of
the U.S. Government, as amended.
10.25 Agreement dated December 7, 1990 with Culverwell &Co., Inc.
10.26 Common Stock Purchase Warrant Certificate dated December 7, 1990 in
the name of Culverwell & Co., Inc.
10.26.1 Letter dated December 1, 1992 extending such Common Stock
Purchase Warrant Certificate - previously filed as an exhibit to
the 1992 Form 10- KSB and incorporated herein by this reference.
10.27 Common Stock Purchase Warrant Certificate dated October 1, 1991
in the name of Leonardo G. Zangani - previously filed as an
exhibit to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1991 (the "1991 Form 10-K") and
incorporated herein by this reference.
10.28 Common Stock Purchase Warrant Certificate dated January 1, 1992
in the name of Leonardo G. Zangani - previously filed as an
exhibit to the 1991 Form 10-K and incorporated herein by this
reference.
10.29 Form of Notice of Redemption of Common Stock Purchase Warrants
dated January 13, 1992 and Letter of Transmittal - previously
filed as an exhibit to the Registrant's Current Report on Form
8-K dated January 20, 1992 and incorporated herein by this
reference.
-31-
<PAGE> 32
10.30 Common Stock Purchase Warrant Certificate dated July 14, 1992 in
the name of Culverwell & Co., Inc.- previously filed as an
exhibit to the 1992 Form 10-KSB and incorporated herein by this
reference.
10.31 Common Stock Purchase Warrant Certificate dated March 1, 1994 in
the name of Leonardo G. Zangani - previously filed as an exhibit
to the Registrant's Annual Report on Form 10-KSB for the year
ended December 31, 1993 (the "1993 Form 10-KSB") and
incorporated herein by this reference.
10.32 Common Stock Purchase Warrant Certificate dated March 1, 1994 in
the name of Lynch, Brewer, Hoffman & Sands - previously filed as
an exhibit to the 1993 Form 10-KSB and incorporated herein by
this reference.
10.33 Form of Non-Qualified Stock Option Agreement - previously filed
as an exhibit to the Registrant's Annual Report on Form 10-KSB
for the year ended December 31, 1995 (the "1995 Form 10-KSB")
and incorporated herein by this reference*
10.34 Form of Common Stock Purchase Warrant Certificate issued to
Lynch, Brewer, Hoffman & Sands, Culverwell & Co., Inc., and
Leonardo G. Zangani during fiscal 1995 - previously filed as an
exhibit to the 1995 Form 10-KSB and incorporated herein by this
reference.
10.35 Employment Agreement dated as of June 1, 1995 with Ralph E.
Hanson previously filed as an exhibit to the 1995 Form 10-KSB
and incorporated herein by this reference
11.1 Computation of Net Income per Common Share - filed herewith.
22.1 Subsidiaries.
27.1 Financial Data Schedule - filed herewith.
Unless otherwise specified, all of the foregoing exhibits were filed as
exhibits to the Company's Registration Statement on Form S-18, No. 33-13927-B,
as amended, and are incorporated herein by this reference.
*Management contract or compensatory plan or arrangement.
-32-
<PAGE> 33
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
(Registrant) PACE MEDICAL, INC.
By: RALPH E. HANSON
---------------------------
Ralph E. Hanson, President
Date March 31, 1997
In accordance with 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.
By RALPH E. HANSON
---------------------------
Ralph E. Hanson, Director,
Principal Executive, Financial,
and Accounting Officer
Date March 31, 1997
By GEORGE F. HARRINGTON
---------------------------
George F. Harrington, Director
Date March 31, 1997
By DERRICK EBDEN
---------------------------
Derrick Ebden, Director
Date March 31, 1997
-33-
<PAGE> 34
-------------------------------------------
Pace Medical,.Inc. and
Wholly Owned Subsidiary
Consolidated Financial Statements for the
Years Ended December 31, 1996 and 1995
and Independent Auditors' Report
<PAGE> 35
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors
Pace Medical, Inc.
Waltham, Massachusetts
We have audited the accompanying consolidated balance sheets of Pace Medical,
Inc. and its wholly owned subsidiary as of December 31, 1996 and 1995, and the
related consolidated statements of income, shareholders' equity, and cash flows
for the years then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
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 consolidated financial statements present fairly, in all
material respects, the financial position of the Company and its wholly owned
subsidiary as of December 31, 1996 and 1995, and the results of their operations
and their cash flows for the years then ended in conformity with generally
accepted accounting principles.
/s/ Deloitte & Touche LLP
- ---------------------------
Boston, Massachusetts
March 14, 1997
<PAGE> 36
PACE MEDICAL, INC. AND WHOLLY OWNED SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
- --------------------------------------------------------------------------------
ASSETS 1996 1995
CURRENT ASSETS:
Cash and cash equivalents $ 1,029,666 $ 772,006
Accounts receivable (no allowance for
doubtful accounts considered necessary) 265,704 279,607
Accounts receivable - related party 156,065 101,174
Inventories:
Raw materials 254,238 297,247
Work in process 175,003 96,782
Finished goods 151,300 114,039
Prepaid expenses 48,418 45,489
----------- -----------
Total current assets 2,080,394 1,706,344
----------- -----------
PROPERTY AND EQUIPMENT - At cost:
Machinery, equipment and tooling 83,940 200,400
Office furniture and equipment 138,360 12,201
Leasehold improvements 43,296 23,250
----------- -----------
265,596 235,851
Less accumulated depreciation and
amortization (236,183) (210,317)
----------- -----------
29,413 25,534
----------- -----------
OTHER ASSETS 48,987 47,832
----------- -----------
TOTAL $ 2,158,794 $ 1,779,710
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 167,602 $ 149,450
Accrued expenses 48,712 54,634
Due to officer 6,872 --
Accrued royalties 193,932 165,664
----------- -----------
Total current liabilities 417,118 369,748
----------- -----------
EXCESS OF ACQUIRED NET ASSETS
OVER PURCHASE PRICE -- 14,656
----------- -----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value; authorized
5,000,000 shares; 3,400,850 and
3,380,850 shares issued and outstanding
in 1996 and 1995, respectively 34,009 33,809
Additional paid-in capital 3,147,151 3,137,351
Cumulative translation adjustment 108,625 57,081
Accumulated deficit (1,548,109) (1,832,935)
----------- -----------
1,741,676 1,395,306
----------- -----------
TOTAL $ 2,158,794 $ 1,779,710
=========== ===========
See notes to consolidated financial statements.
-2-
<PAGE> 37
PACE MEDICAL, INC. AND WHOLLY OWNED SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1996 AND 1995
- --------------------------------------------------------------------------------
1996 1995
NET SALES (Note 7) $2,025,221 $1,754,242
COST OF SALES 1,026,717 842,394
---------- ----------
GROSS PROFIT 998,504 911,848
OPERATING EXPENSES:
Selling, general and administrative expenses 446,234 428,250
Engineering/development expenses 292,499 267,463
---------- ----------
INCOME FROM OPERATIONS 259,771 216,135
---------- ----------
OTHER INCOME (EXPENSE):
Exchange losses, net (7,834) (814)
Other income, primarily interest 32,889 30,697
---------- ----------
25,055 29,883
---------- ----------
NET INCOME $ 284,826 $ 246,018
========== ==========
NET INCOME PER COMMON AND COMMON
EQUIVALENT SHARE $ 0.08 $ 0.07
========== ==========
AVERAGE NUMBER OF COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 3,631,275 3,380,850
========== ==========
See notes to consolidated financial statements.
-3-
<PAGE> 38
PACE MEDICAL, INC. AND WHOLLY OWNED SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996 AND 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Additional Cumulative Total
Common Stock Paid-in Translation Accumulated Shareholders'
Shares Value Capital Adjustment Deficit Equity
<S> <C> <C> <C> <C> <C> <C>
BALANCES, JANUARY 1, 1995 3,380,850 $ 33,809 $3,137,351 $ 59,975 $(2,078,953) $1,152,182
Net income -- -- -- -- 246,018 246,018
Aggregate translation adjustments -- -- -- (2,894) -- (2,894)
--------- --------- ---------- -------- ----------- ----------
BALANCES, DECEMBER 31, 1995 3,380,850 33,809 3,137,351 57,081 (1,832,935) 1,395,306
Common stock issued under stock option plan 20,000 200 9,800 -- -- 10,000
Net income -- -- -- -- 284,826 284,826
Aggregate translation adjustments -- -- -- 51,544 -- 51,544
--------- --------- ---------- -------- ----------- ----------
BALANCES, DECEMBER 31, 1996 3,400,850 $ 34,009 $3,147,151 $108,625 $(1,548,109) $1,741,676
========= ========= ========== ======== =========== ==========
</TABLE>
See notes to consolidated financial statements.
-4-
<PAGE> 39
PACE MEDICAL, INC. AND WHOLLY OWNED SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1995
- --------------------------------------------------------------------------------
1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 284,826 $ 246,018
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 13,838 13,912
Changes in assets and liabilities:
Accounts receivable 16,944 (114,941)
Prepaid expenses 1,532 (1,424)
Inventories (95,555) (111,889)
Accounts payable 26,180 (7,766)
Accrued royalties and expenses 10,437 34,091
Other (7,786) (59,807)
---------- ---------
Net cash provided by (used in)
operating activities 250,416 (1,806)
CASH FLOWS USED IN INVESTING ACTIVITIES -
Additions to property and equipment (18,130) (7,012)
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES -
Common stock issued under stock option plan 10,000 --
EFFECT OF EXCHANGE RATE CHANGES ON CASH 15,374 (286)
---------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 257,660 (9,104)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 772,006 781,110
---------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR $1,029,666 $ 772,006
========== =========
See notes to consolidated financial statements.
-5-
<PAGE> 40
PACE MEDICAL, INC. AND WHOLLY OWNED SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation - The consolidated financial statements include the accounts
of Pace Medical, Inc. ("Pace" or the "Company") and its wholly owned
subsidiary, APC Medical Ltd. ("APC"), a United Kingdom ("UK") company. The
Company manufactures and sells temporary external pacemakers, related
accessories and temporary heart pacemaker leads. All intercompany
transactions, balances and profits are eliminated.
Use of Estimates - The preparation of consolidated 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 consolidated financial statements and the
reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
Product Liability and Limits of Insurance Coverage - Because the Company's
temporary cardiac pacemakers and pacing analyzers may be life-supporting
medical devices, the Company's liability for any presently unknown product
design or manufacturing deficiencies could be substantial and could exceed
the limits under existing product liability insurance. The Company
maintains product liability coverage outside the United States with annual
limits of L500,000 (approximately $857,000 as of December 31, 1996) per
occurrence and in the aggregate. The Company does not have product
liability insurance in the United States, and any claim could adversely
affect the Company's financial condition. The Company believes, based upon
management's experience, that its liability exposure is lessened because it
does not manufacture or sell permanent implantable cardiac pacemakers or
leads. However, the cost of recalling its products upon discovery of any
material defects would be substantial and could have an adverse effect on
the Company and its financial condition.
Sales - Sales are recorded upon shipment of goods.
Inventories - Inventories are stated at the lower of cost (first-in,
first-out) or market.
Property and Equipment - Property and equipment is stated at cost.
Depreciation is recorded under the straight-line method based on the
estimated useful lives of the related assets. Depreciation expense
approximated $9,000 and $10,000 for the years ended December 31, 1996 and
1995, respectively. The Company regularly reviews property and equipment to
determine that the carrying values have not been impaired.
Translation of Foreign Currencies - All assets and liabilities of APC are
translated at exchange rates in effect on reporting dates, while income and
expenses are translated at rates which approximate those in effect on
transaction dates. Differences due to changing translation rates are
charged or credited to the cumulative translation adjustment in
shareholders' equity. Gains and losses from foreign currency transactions
are included in net income.
-6-
<PAGE> 41
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Excess of Acquired Net Assets Over Purchase Price - The excess of acquired
net assets over the purchase price is first used to reduce noncurrent
assets to zero and any remaining amount is amortized over ten years from
the date of acquisition.
Income Taxes - The Company computes income taxes in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting
for Income Taxes." This standard requires current and deferred tax assets
and liabilities to be determined based on tax rates and laws enacted as of
the balance sheet date rather than historical tax rates. No net deferred
tax assets have been recorded because of the inability of the Company to
use tax carryforwards against future reversals of temporary differences.
Warranty - The Company warrants its temporary cardiac pacemakers for one
year. Historical loss experience has been such that no reserves for
warranties are currently provided.
Income Per Common Share - Primary income per common share is computed on
the basis of weighted average number of shares outstanding plus the common
stock equivalents (if dilutive) that would arise from the exercise of stock
options and warrants.
Stock-Based Compensation - Compensation expense associated with awards of
stock or options to employees is measured using the intrinsic value method.
Compensation expense associated with awards to nonemployees is measured
using a fair value method.
Cash and Cash Equivalents - Cash and cash equivalents include all highly
liquid investments with a remaining maturity of three months or less at
date of purchase.
Changes in Accounting Principles - In 1996, the Company adopted the
provisions SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of." This Statement
requires that long-lived assets to be held and used by an entity be
reviewed for impairment whenever circumstances indicate that the carrying
amount of an asset may not be recoverable. It also requires that long-lived
assets to be disposed of be reported at the lower of carrying amount or
fair value less cost to sell. No impairment loss was recognized in 1996.
2. RELATED-PARTY TRANSACTIONS
The Chairman and a shareholder are the owners of Pace Technology. Pace
Technology has developed the MICRO-PACE series of temporary cardiac
pacemakers. Pace Technology licenses its designs to Pace, who manufactures
and sells the products in exchange for a negotiated royalty (5% of net
sales). Royalty expense was $22,458 in 1996 and $39,748 in 1995. Payables
to Pace Technology totaled $193,932 and $165,664 at December 31, 1996 and
1995, respectively. Pursuant to the agreement, royalties will not be
accrued subsequent to December 31, 1996. The Company will continue to have
the right to manufacture products under the original licensing agreement.
In March 1990, the Company entered into an agreement with APC
Cardiovascular Ltd. ("Cardiovascular"). This agreement specified that
Cardiovascular would act as Pace's distributor in the UK. A director of
Cardiovascular is also a director of Pace. Sales to Cardiovascular amounted
to $661,912 and $447,759 in 1996 and 1995, respectively (Customer B, Note
7). Receivables from Cardiovascular at December 31, 1996 and 1995 were
$156,065 and $101,174, respectively.
-7-
<PAGE> 42
3. COMMITMENTS
Lease Obligations - APC leases its plant and office facility under an
operating lease which expires in 2006. The lease agreement specifies that
the rent will be (pound)28,500 ($48,849 at December 31, 1996) per year and
that it may be revised every five years commencing in 1996. The lease also
requires payment of a pro rata share of insurance and maintenance costs in
addition to the rental payment.
Future minimum rental payments under operating leases with a term of over
one year total approximately $50,000 in each of the next five years and
$250,000 in the aggregate thereafter.
Rental expense for all operating leases, including leases with terms of
less than one year, amounted to $82,180 and $85,644 in 1996 and 1995,
respectively.
Contracts - The Company has entered into a three-year employment agreement
with its chairman that provides for annual compensation of $105,000. The
agreement expires in June 1998.
4. INCOME TAXES
There was no tax expense recorded in 1996 and 1995 due to the use of net
operating loss carryforwards for financial reporting purposes.
The Company has $931,000 and $993,000 of deferred tax assets fully reserved
at December 31, 1996 and 1995, respectively, the components of which
approximated the following:
1996 1995
Net operating loss carryforwards $651,000 $732,000
Research and development credits 171,000 160,000
Inventory 26,000 22,000
Royalty accruals 75,000 66,000
Other 8,000 13,000
-------- --------
$931,000 $993,000
======== ========
Deferred tax assets have been fully reserved. The net change in the
valuation allowance in 1996 was ($62,000) due to the expiration of certain
net operating loss carryforwards.
Pace has federal income tax loss carryforwards for financial and tax
reporting purposes of approximately $1,135,000 which begin expiring in the
years 2003 through 2009 and state income tax carryforwards of approximately
$494,000 which begin expiring in 1997 through 1999.
APC has approximately (pound)394,900 ($676,900) at December 31, 1996 of tax
loss carryforwards available in the UK at December 31, 1996.
-8-
<PAGE> 43
5. SHAREHOLDERS' EQUITY
The Company's nonqualified stock option plan was established in 1986 and
provides for the granting of options for up to 200,000 shares of its common
stock (shares have been reserved for the same amount). To date, options
totaling 200,000 shares have been granted pursuant to this plan and no
further options may be granted under this plan. In addition, during 1996
and 1995 the Board of Directors authorized and options were granted to
purchase 50,000 and 135,000 shares of common stock under nonqualified stock
option agreements. Options may be granted at not less than fair market
value of the Company's common stock on the date of grant, vest at the date
of grant and are of a five-year duration. A summary of stock option
activity under both plans is as follows:
Weighted Weighted
Number Average Average
of Exercise Fair
Options Price Value
Outstanding and exercisable,
January 1, 1995 30,000 $ 1.00
Granted 161,000 .50 .46
Exercised -- --
Expired -- --
-------
Outstanding and exercisable,
December 31, 1995 191,000 .58
Granted 50,000 .50 .54
Exercised (20,000) .50
Expired (20,000) .88
-------
Outstanding and exercisable,
December 31, 1996 201,000 .54
=======
The following table sets forth information regarding options outstanding at
December 31, 1996:
Weighted Weighted
Average Average
Exercise Exercise Remaining
Number of Options Price Price Life (Years)
Outstanding and exercisable
191,000 $0.50 $0.50 3.92
10,000 1.25 1.25 1.50
-9-
<PAGE> 44
5. SHAREHOLDERS' EQUITY (CONTINUED)
The Company has also issued 260,000 warrants to its attorneys and
underwriters, the activity for which is as follows:
<TABLE>
<CAPTION>
Weighted Weighted
Average Average
Number of Exercise Fair
Warrants Price Value
<S> <C> <C> <C>
Outstanding and exercisable, January 1, 1995 -- $ -- $ --
Granted 260,000 0.95 0.52
-------
Outstanding and exercisable, December 31, 1995 260,000 0.95
Terminated (50,000) 1.00
-------
Outstanding and exercisable, December 31, 1996 210,000 .94
=======
</TABLE>
The following table sets forth information regarding warrants outstanding
at December 31, 1996:
Weighted Weighted
Average Average
Exercise Exercise Remaining
Number of Warrants Price Price Life (Years)
Outstanding and exercisable
25,000 $0.50 $0.50 0.33
185,000 1.00 1.00 0.83
The fair value of options on their grant date for stock options and
warrants was measured using the Black-Scholes option pricing model. Key
assumptions used to apply this pricing model are as follows:
1996 1995
Risk free interest rate 5.00% 5.00%
Expected life of option grants 4.5 years 4.5 years
Expected life of warrant grants 2 years 2 years
Expected volatility of underlying stock 118% 118%
Expected dividend payment rate, as a
percentage of the stock
price on the date of grant -- --
The option pricing model used was designed to value readily tradeable stock
options and warrants with relatively short lives. The options and warrants
are not tradeable with contractual lives of up to five years. However,
management believes that the assumptions used to value the options and
warrants and the model applied yield a reasonable estimate of the fair
value of the grants made under the circumstances.
-10-
<PAGE> 45
5. SHAREHOLDERS' EQUITY (CONTINUED)
As described in Note 1, the Company uses the intrinsic value method to
measure compensation expense associated with grants of stock options to
employees. Had the Company used the fair value method for all options to
measure compensation, reported net income and earnings per share would have
been as follows:
1996 1995
Net income:
As reported $ 284,826 $ 246,018
Pro forma 261,755 23,171
Net income per common share:
As reported 0.08 0.07
Pro forma 0.07 0.01
6. GEOGRAPHIC SEGMENTS
Geographic area results were:
<TABLE>
<CAPTION>
United United
States Kingdom Eliminations Consolidated
<S> <C> <C> <C> <C>
1996
Sales and transfers $ 1,385,949 $ 822,133 $ (182,861) $ 2,025,221
Net operating income (loss) (7,807) 251,461 16,117 259,771
Identifiable assets 2,092,591 561,541 (495,338) 2,158,794
1995
Sales and transfers $ 1,325,311 $ 606,199 $ (177,268) $ 1,754,242
Net operating income 102,023 101,444 12,668 216,135
Identifiable assets 1,452,589 327,121 - 1,779,710
</TABLE>
Transfers between areas are valued at cost plus a markup. Direct sales to
foreign customers from domestic operations were not material.
7. SIGNIFICANT CUSTOMERS
In 1996 and 1995, there were sales to major customers that exceeded 10% of
total net sales. Sales to these customers were:
1996
Customer A $ 692,215 34 %
Customer B 661,912 33
Customer C 357,750 18
Customer D - -
1995
Customer A $ 239,140 14 %
Customer B 447,759 26
Customer C 648,820 37
Customer D 285,585 16
* * * * * *
-11-
<PAGE> 1
EXHIBIT 11
PACE MEDICAL, INC. AND WHOLLY OWNED SUBSIDIARY
STATEMENT RECOMPUTATION OF PER SHARE EARNINGS
- -------------------------------------------------------------------------------
CALCULATION OF PRIMARY EARNINGS PER SHARE
1996 1995
Net income $ 284,826 $ 246,018
========== ===========
Number of Shares
Weighted average shares outstanding 3,395,850 3,380,850
Incremental shares for outstanding stock
options and warrants 235,425 -- (a)
---------- -----------
Total shares outstanding for purpose of
earnings per share computation 3,631,275 $ 3,380,850
========== ===========
Income per share as calculated $ 0.08 $ 0.07
========== ===========
CALCULATION OF FULLY DILUTED EARNINGS
PER SHARE
Net income $ 284,826 $ 246,018
========== ===========
Number of Shares
Weighted average shares outstanding 3,395,850 $ 3,380,850
Incremental shares for outstanding stock
options and warrants 235,425 -- (a)
---------- -----------
Total shares outstanding for purpose of
earnings per share computation 3,631,275 $ 3,380,850
========== ===========
Income per share as calculated $ 0.08 $ 0.07
========== ===========
(a) Incremental shares are excluded from calculation because either their
impact on the calculation of income per share or weighted average shares
outstanding is anti-dilutive.
-12-
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S.DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 1,029,666
<SECURITIES> 0
<RECEIVABLES> 421,769
<ALLOWANCES> 0
<INVENTORY> 580,541
<CURRENT-ASSETS> 2,080,394
<PP&E> 265,596
<DEPRECIATION> 236,183
<TOTAL-ASSETS> 2,158,794
<CURRENT-LIABILITIES> 417,118
<BONDS> 0
0
0
<COMMON> 34,009
<OTHER-SE> 1,707,667
<TOTAL-LIABILITY-AND-EQUITY> 2,158,794
<SALES> 2,025,221
<TOTAL-REVENUES> 2,058,110
<CGS> 1,026,717
<TOTAL-COSTS> 1,026,717
<OTHER-EXPENSES> 746,567
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 284,826
<INCOME-TAX> 0
<INCOME-CONTINUING> 284,826
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 284,826
<EPS-PRIMARY> .08
<EPS-DILUTED> .08
</TABLE>
