<PAGE> 1
FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
-----------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ 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 of (I.R.S. Employer
incorporation or organization) identification No.)
391 Totten Pond Road, Waltham, Massachusetts 02154
--------------------------------------------------
(Address of principal executive offices )
(781) 890-5656
---------------------------
(Issuer's telephone number,
including area code)
Indicate by check mark whether the issuer (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of August 13, 1998.
3,390,870 shares of Common Stock, par value $.01 per share
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
a) Consolidated Condensed Balance Sheets
b) Consolidated Condensed Statements of Income
c) Consolidated Condensed Statements of Cash Flows
d) Notes to Consolidated Condensed Financial Statements
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<PAGE> 3
PACE MEDICAL, INC. AND WHOLLY-OWNED SUBSIDIARY
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, 1998 DECEMBER 31, 1997
------------- -----------------
(Unaudited) (See note below)
<S> <C> <C>
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 1,170,797 $ 1,318,652
Accounts receivable 401,877 416,897
Inventories:
Raw materials 309,124 235,464
Work-in-process 195,320 77,061
Finished goods 132,747 117,815
----------- -----------
637,191 430,340
Other current assets 50,301 43,208
----------- -----------
Total current assets 2,260,166 2,209,097
Plant and equipment, net 46,508 41,681
Other assets 38,607 41,080
----------- -----------
TOTAL ASSETS $ 2,345,281 $ 2,291,858
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable $ 168,319 $ 129,509
Due to officer 9,845 7,110
Accrued expenses 14,393 26,619
----------- -----------
Total current liabilities 192,557 163,238
----------- -----------
Shareholders' equity:
Common stock 34,009 34,009
Additional paid-in capital 3,147,151 3,147,151
Cumulative translation
adjustment 100,865 102,899
Accumulated deficit (1,119,614) (1,155,439)
----------- -----------
2,162,411 2,128,620
----------- -----------
Less Treasury Stock, at Cost (9,687) 0
----------- -----------
Total Shareholders' Equity 2,152,724 2,128,620
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 2,345,281 $ 2,291,858
=========== ===========
</TABLE>
Note: The balance sheet at December 31, 1997 has been taken from the audited
financial statements at that date.
See accompanying notes to consolidated condensed financial statements.
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<PAGE> 4
PACE MEDICAL, INC. AND WHOLLY-OWNED SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
For the three months For the six months
ended June 30 ended June 30
---------------------- -------------------------
1998 1997 1998 1997
-------- -------- -------- ----------
<S> <C> <C> <C> <C>
Net Sales $477,971 $683,373 $757,899 $1,145,214
Cost of sales 185,869 329,238 293,685 568,363
-------- -------- -------- ----------
292,102 354,135 464,214 576,851
Other operating expenses 272,489 191,183 451,830 347,123
-------- -------- -------- ----------
Income from operations 19,613 162,952 12,384 229,728
Other income 12,264 10,338 23,441 20,054
-------- -------- -------- ----------
Net income $ 31,877 $173,290 $ 35,825 $ 249,782
======== ======== ======== ==========
Net income per share:
Basic $.01 $.05 $.01 $.07
==== ==== ==== ====
Diluted $.00 $.05 $.01 $.07
==== ==== ==== ====
</TABLE>
See accompanying notes to consolidated condensed financial statements.
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<PAGE> 5
PACE MEDICAL, INC. AND WHOLLY-OWNED SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
----------------------------
JUNE 30
----------------------------
1998 1997
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 35,825 $ 249,782
Adjustments to reconcile
net income to net cash
(Used in) provided by operating activities:
Depreciation and amortization 7,743 53
Change in assets and
liabilities, net: (169,743) (89,511)
---------- ----------
Net cash (used in) provided by
operating activities (126,175) 160,324
CASH FLOWS FROM INVESTING ACTIVITIES -
Purchases of property and equipment (11,993) (35,247)
CASH FLOW FROM FINANCING ACTIVITIES -
Purchase of treasury stock (9,687) (0)
---------- ----------
NET INCREASE IN CASH AND $ (147,855) $ 125,077
CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD $1,318,652 $1,029,666
---------- ----------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $1,770,797 $1,154,743
========== ==========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
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<PAGE> 6
PACE MEDICAL, INC. AND WHOLLY-OWNED SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. The accompanying unaudited consolidated financial statements and these notes
have been condensed and do not contain all disclosures required by generally
accepted accounting principles. See notes to audited consolidated financial
statements contained in the Company's annual report.
2. In the opinion of the Company, the accompanying unaudited condensed financial
statements contain all adjustments, all of which are normal and recurring,
necessary to present fairly the financial position of the Company and its
wholly-owned subsidiary as of June 30, 1998 and the results of their operations
for the three and six months ended June 30, 1998 and June 30, 1997 and their
cash flows for the six months ended June 30, 1998 and June 30, 1997.
3. The Company prepares its financial information using the same accounting
principles as for its annual financial statements except that no physical
inventories were taken during either of the periods ended June 30, 1998 or 1997.
Cost of sales for such periods was calculated primarily using standard cost
methods.
4. The results of operations for the three and six months ended June 30, 1998
are not necessarily indicative of the results to be expected for the full year.
5. The Company has adopted Statement of Financial Accounting Standards (SFAS)
No. 128, "Earnings per Share" for purposes of presenting basic and diluted net
income per share and has restated all periods presented to conform to the new
presentation. The denominator used to determine basic net income per share
includes the weighted average common shares outstanding during the quarter. The
denominator used to determine diluted net income per share includes the shares
used in the calculation of basic net income per share plus the weighted average
options outstanding during the period using the treasury-stock method.
For the three months ended June 30, 1998
Income Shares Per Share
(Numerator) (Denominator) Amount
Net Income $31,877
Weighted-average shares outstanding - 3,390,850
------- ---------
Basic net income per share $31,877 3,390,850 $0.01
=====
Effect of dilutive securities - 96,505
------- ---------
Diluted net income per share $31,877 3,487,355 $0.00
======= ========= =====
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<PAGE> 7
For the three months ended June 30, 1997
Income Shares Per Share
(Numerator) (Denominator) Amount
Net Income $173,290
Weighted-average shares outstanding - 3,400,850
-------- ---------
Basic net income per share $173,290 3,400,850 $0.05
=====
Effect of dilutive securities - 166,053
-------- ---------
Diluted net income per share $173,290 3,566,903 $0.05
======== ========= =====
For the six months ended June 30, 1998
Income Shares Per Share
(Numerator) (Denominator) Amount
Net Income $35,825
Weighted-average shares outstanding - 3,395,517
------- ---------
Basic net income per share $35,825 3,395,517 $0.01
=====
Effect of dilutive securities - 90,883
------- ---------
Diluted net income per share $35,825 3,486,400 $0.01
======= ========= =====
For the six months ended June 30, 1997
Income Shares Per Share
(Numerator) (Denominator) Amount
Net Income $249,782
Weighted-average shares outstanding - 3,400,850
-------- ---------
Basic net income per share $249,782 3,400,850 $0.07
=====
Effect of dilutive securities - 177,488
-------- ---------
Diluted net income per share $249,782 3,578,388 $0.07
======== ========= =====
6. The Company has adopted the provisions of SFAS No. 130," Reporting
Comprehensive Income". Comprehensive income includes net income and foreign
currency translation adjustments. Comprehensive income for the three and six
months ended June 30, 1998 and 1997 is as follows:
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<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- -----------------------
1998 1997 1998 1997
------- -------- ------- --------
<S> <C> <C> <C> <C>
Net Income $31,877 $173,290 $35,825 $249,782
Currency Translation Adjustment 9,689 8,492 (2,034) (15,283)
------- -------- ------- --------
Total $41,566 $181,782 $33,791 $234,499
======= ======== ======= ========
</TABLE>
7. The Company has entered into a three-year employment agreement with its
Chairman that provides for annual compensation of $125,000 - The agreement
expires in June, 2001.
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<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
PACE MEDICAL, INC. AND WHOLLY-OWNED SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
As of June 30, 1998, the Company had cash and cash equivalents of $1,170,797 and
working capital of $2,067,609. Working capital has increased slightly since
December 31, 1997 owing to the profitable operations of the Company over the
first half of the year. The Company's cash position has decreased somewhat over
December 31, 1997 because of increased inventory as a result of lower than
expected sales.
The Company expects to maintain a sound financial base for the balance of fiscal
1998. 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 on-going operations are financed adequately.
FINANCIAL RESULTS - THREE MONTHS ENDED JUNE 30, 1998 VERSUS THREE MONTHS ENDED
JUNE 30, 1997
Sales in the second quarter of 1998 decreased 30% from the sales posted in the
second quarter of 1997. The decrease in sales reflects a decrease in OEM sales
to a distributor.
The Company's margins in the second quarter increased over those seen in 1997
(from 51% in 1997 to 61% in 1998). This occurred due to a change in the product
mix. It should be noted that pricing is continuing to remain firm on all
products.
Operating expenses were higher in the three months ended June 30, 1998 versus
the three months ended June 30, 1997 due to increased advertising and marketing
and ISO 9001 certification related expenditures. Management anticipates some
increase in its operating expenditures during the balance of 1998. This level
will also suffice to maintain the Company's research and development efforts in
developing new products in the temporary pacing field.
No tax provision was recorded for the three months ended June 30, 1998 owing to
the Company's ability to use net operating loss carryforwards in both the U.S.
and
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<PAGE> 10
U.K.
Net income for the quarter was $31,877 or $.01 per share. This is substantially
lower than that seen in the second quarter of 1997 and reflects the decrease in
OEM sales.
FINANCIAL RESULTS - SIX MONTHS ENDED JUNE 30, 1998 VERSUS SIX MONTHS ENDED JUNE
30, 1997
Sales in the six months ended June 30, 1998 decreased from the amount posted in
the six months ended in June 30, 1997. This decrease is attributable to the
Company's decrease in OEM sales to a distributor.
The Company's margins for the year-to-date period are slightly more than those
of last year. This occurred due to a change in the product mix.
Operating expenses were higher for the six months ended June 30, 1998 versus the
six months ended June 30, 1997 due to increased advertising and marketing and
ISO 9001 certification related expenditures. Management anticipates some
increase in its operating expenditures during the balance of 1998. This level
will also suffice to maintain the Company's research and development efforts in
developing new products in the temporary pacing field.
No tax provision was recorded for the six months ended June 30, 1998 owing to
the Company's ability to use net operating loss carryforwards in both the U.S.
and U.K.
Net income for the six months was $ 35,825 or $.01 per share, representing a
decrease of 86% from the comparable period in 1997. This is a substantial
reduction from the earnings in the first six months of 1997 and is attributable
to the factors described above.
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FACTORS THAT MAY AFFECT FUTURE RESULTS
From time to time, information provided by the Company or statements made by its
employees may contain "forward-looking" information which involves risks and
uncertainties. In particular, statements contained in this report which are not
historical facts (including but not limited to the Company's expectations
regarding business strategy, pricing, anticipated operating results, operating
expenses and anticipated working capital) may be "forward-looking" statements.
The Company's actual results may differ from those stated in any forward-looking
statements. Factors that may cause such differences include, but are not limited
to, risks associated with the introduction of new products, development of
markets for new products offered by the Company, government regulation,
competition and general economic conditions.
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<PAGE> 12
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Stockholders held on May 21, 1998,
the following members were elected to the Board of Directors:
- --------------------------------------------------------------------------------
Votes Votes
For Withheld
- --------------------------------------------------------------------------------
Ralph E. Hanson 2,963,229 14,000
George F. Harrington 2,963,229 14,000
Derrick Ebden 2,963,229 14,000
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: 10.1. Employment Agreement with Ralph Hanson
10.2 Non Qualified Stock Option Agreement with Drusilla
F. Hays
27. Financial Data Schedule
(b) Reports on Form 8-K: None
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<PAGE> 13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PACE MEDICAL, INC.
--------------------------------
(Registrant)
Date: August 19, 1998 /s/ Ralph E. Hanson
--------------- --------------------------------
Ralph E. Hanson, President
and Chief Executive Officer
(principal executive officer)
Date: August 19, 1998 /s/ Ralph E. Hanson
--------------- -------------------------------
Ralph E. Hanson, Chief
Financial Officer
(principal financial officer)
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<PAGE> 1
Exhibit 10.1
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT dated as of June 1, 1998 by and between PACE MEDICAL,
INC., a Massachusetts corporation with a usual place of business at 391 Totten
Pond Road, Waltham, Massachusetts (the "Company"), and RALPH E. HANSON of
Arlington, Massachusetts (the "Employee").
WHEREAS, the Company wishes to assure itself of the Employee's services in
the capacity and during the periods specified herein; and
WHEREAS, the Employee wishes to enter into an Employment Agreement with the
Company upon the terms and conditions set forth herein;
NOW THEREFORE, in consideration of the mutual covenants and agreements
hereinafter set forth, the parties hereto do hereby mutually agree as follows:
1. The Company hereby employs the Employee and the Employee hereby accepts
employment by the Company for the period June 1, 1998 through May 31, 2001,
subject to the terms and conditions hereinafter set forth.
2. The Employee will serve the Company as its President and Chief Executive
Officer. Nothing contained herein shall limit the right of the Employee to
engage in personal investments and other activities to the extent they do not
interfere with the Employee's performance under this Agreement. The Company
shall have no interest in any of the benefits generated by any of said
investments or other activities.
3. For the services to be rendered by the Employee under this Agreement,
the Company shall pay to the Employee such rate of salary as shall be fixed,
from time to time, by the Board of Directors of the Company, but in no event
less than One Hundred Twenty-five Thousand Dollars ($125,000.00) per year
payable in equal installments, such installments to be paid monthly or more
frequently. The Employee shall be entitled to such fringe benefits as are
generally made available to employees of the Company and shall be entitled to
reimbursement of all reasonable out-of-pocket expenses actually incurred by him
on behalf of the Company.
4. During the Employee's period of employment, or at any time thereafter,
he will not reveal to any person unless authorized in writing by the Company, or
use against the best interests of the Company any information concerning the
Company's inventions, trade secrets, processes and in general any of its
business affairs of a confidential nature.
5. The Employee will disclose to the Company all inventions, discoveries,
<PAGE> 2
and improvements which he may make during his employment by the Company, whether
during working hours or at any other time, and he will, on demand, assign to the
Company all of his interests and do any acts which the Company may consider
necessary to secure to it or to its successors or assigns any and all rights
relating to such inventions, discoveries, and improvements, including patents in
the United States and foreign countries.
6. The Employee agrees that so long as he is employed by the Company and
for a period of six months thereafter, he will not in the United States or
Canada, engage in any competitive activities (as hereafter defined) with the
Company, or any successor or assign of the Company, nor will he own or control
an interest (other than as a holder of a non-controlling investment in a company
whose securities are listed on a national stock exchange or quoted in the Nasdaq
National Market) in any entity which engages or will engage in such competitive
activities. As used herein, "competitive activities" shall mean the
manufacturer, sale or service of (a) cardiac pacers or (b) any other product or
product line manufactured by the Company, sales from which other product or
product line constitute 25% or more of the gross revenues of the Company during
its current or any of its preceding two fiscal years. It is expressly covenanted
and agreed that in the event of breach by the Employee of any of the covenants
herein contained damage suffered by the Company will be extremely difficult to
ascertain and the remedy at law for any breach or threatened breach will be by
its nature inadequate; therefore, in the event of breach, in addition to such
other remedies which may be provided by law, the Company (or any successor to
the Company) shall be entitled to injunctive and other appropriate equitable
relief and shall be entitled to the same in any court of competent jurisdiction.
7. This Agreement shall be binding upon and inure to the benefit of the
parties hereto, their heirs, successors and assigns including without limitation
any successor who acquires all or substantially all of the assets of the
Company.
IN WITNESS WHEREOF, the parties hereto have signed this Agreement as of the
day and year first above written.
PACE MEDICAL, INC.
By /s/ Drusilla F. Hays
---------------------------------
Drusilla F. Hays, Vice President
/s/ Ralph E. Hanson
---------------------------------
Ralph E. Hanson - Employee
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<PAGE> 1
Exhibit 10.2
10,000 SHARES
PACE MEDICAL, INC.
NON-QUALIFIED STOCK OPTION AGREEMENT
NON-QUALIFIED STOCK OPTION AGREEMENT dated as of May 1, 1998 by and between
PACE MEDICAL, INC., a Massachusetts corporation (hereinafter called the
"Corporation"), and DRUSILLA F. HAYS (hereinafter called the "Optionee").
WHEREAS, the Corporation desires to afford the Optionee the opportunity to
purchase shares of its Common Stock;
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants and agreements hereinafter set forth, the parties hereby mutually
covenant and agree as follows:
1. GRANT OF OPTION. Subject to the terms and conditions set forth herein,
the Corporation grants to the Optionee the right and option to purchase from the
Corporation at a price of $.75 per share up to but not exceeding in the
aggregate Ten Thousand (10,000) shares of the Corporation's Common Stock, par
value $.01 per share (the "Common Stock").
2. TERM. This Agreement and the option granted hereby shall terminate five
(5) years from the date hereof but shall be subject to earlier termination as
herein provided. Upon termination, the option granted hereby shall thereupon
expire and thereafter shall not be exercisable.
3. EXERCISE OF OPTION. (a) The option hereby granted may be exercised at
any time or from time to time in whole or in part during the term hereof.
<PAGE> 2
(b) Upon any one exercise of the option granted hereby, the Optionee
or her legal representative may purchase all or any part of the shares of Common
Stock as to which such option is then exercisable, provided however, that no
less than one hundred (100) shares may be purchased upon any one exercise of
such option unless the number of shares purchased at such time is the total
number of shares in respect of which such option is then exercisable.
(c) The option hereby granted shall be exercised by the Optionee
delivering to the Clerk of the Corporation, from time to time, on any business
day, written notice specifying the number of shares the Optionee then desires to
purchase, together with cash or a certified or bank cashier's check to the order
of the Corporation for an amount in United States dollars equal to the option
price of such shares.
(d) Upon each such exercise, a certificate representing the number of
shares purchased shall be issued in the name of the person or persons exercising
the option granted hereby and delivered to the Optionee.
4. RESTRICTIONS ON ISSUANCE OF SHARES. (a) Notwithstanding the
provisions of Section 2 hereof, the Corporation may delay the issuance of
shares covered by the exercise of the option granted hereby and the delivery of
a certificate for such shares until
(i) one of the following conditions shall be satisfied:
(A) the shares with respect to which the option granted
hereby has been exercised are at the time of the
issuance
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<PAGE> 3
of such shares effectively registered under the
Securities Act of 1933 as now in force or hereafter
amended; or
(B) a no-action letter in respect to the issuance of such
shares shall have been obtained by the Corporation from
the Securities and Exchange Commission; or
(C) counsel for the Corporation shall have given an
opinion, which opinion shall not be unreasonably
conditioned or withheld, that such shares are exempt
from registration under the Securities Act of 1933 as
now in force or hereafter amended; and
(ii) one of the following conditions shall be satisfied:
(A) approval shall have been obtained from such federal and
state governmental agencies, other than the Securities
and Exchange Commission, as may be required under any
applicable law, rule or regulation; or
(B) counsel for the Corporation shall have given an
opinion, which opinion shall not be unreasonably
conditioned or withheld, that no such approval is
required.
(b) It is intended that all exercises of the option granted
hereby shall be effective, and the Corporation shall use its best efforts to
bring about compliance with the above conditions within a reasonable time,
except that the Corporation shall be under no obligation to cause a registration
statement or a post-effective amendment to any registration statement to be
prepared at its expense or to comply with Regulation A or any other exemption
under the Securities Act of 1933 as now in force or hereafter amended, solely
for the purpose of covering the issuance of shares in respect of which the
option granted hereby may be exercised. Therefore, the Optionee shall not be
entitled to any
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<PAGE> 4
rights in any shares of Common Stock to be issued under the option granted
hereby until delivery of a certificate therefor by the Corporation.
5. PURCHASE FOR INVESTMENT. (a) Unless the shares to be issued upon
exercise of the option granted hereby have been effectively registered under the
Securities Act of 1933 as now in force or hereafter amended, the Corporation
shall be under no obligation to issue any shares covered by such option unless
the person who exercises such option, in whole or in part, shall give a written
representation to the Corporation satisfactory in form and scope to the
Corporation's counsel and upon which, in the opinion of such counsel the
Corporation may reasonably rely, that he/she is acquiring the shares issued to
him or her pursuant to such exercise of such option as an investment and not
with a view to, or for sale in connection with, the distribution of any such
shares.
(b) The certificate for each share of Common Stock issued pursuant to
such exercise of the option granted hereby may bear a reference to the
investment representation made in accordance with this Section 5 and to the fact
that no registration statement has been filed with the Securities and Exchange
Commission in respect to such shares.
(c) In the event that the Corporation shall nevertheless, deem it
necessary or desirable to register under the Securities Act of 1933 or other
applicable statutes any shares with respect to which the option granted hereby
shall have been exercised, or to qualify any such shares for exemption from the
Securities Act of 1933 or other applicable statutes, then the Corporation shall
take
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<PAGE> 5
such action at its own expense and may require from the Optionee such
information in writing for use in any registration statement, prospectus,
preliminary prospectus or offering circular as is reasonably necessary for such
purpose and may require reasonable indemnity to the Corporation and its officers
and directors from such holder against all losses, claims, damages, and
liabilities arising from such use of the information so furnished and caused by
any untrue statement of any material fact therein or caused by the omission to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances under which
they were made.
6. TERMINATION OF BUSINESS RELATIONSHIP. (a) The option hereby granted
shall terminate and be of no force or effect in the event the Optionee ceases to
serve as an employee, consultant, officer or director of the Corporation or any
subsidiary of the Corporation (such service is described herein as maintaining
or being involved in a "Business Relationship with the Corporation") for any
reason, provided however, that in the event of the termination of the Optionee's
employment such option may be exercised (to the extent exercisable by the
Optionee at the date of such termination) at any time within three (3) months
after the date of such termination, but in any event not later than five (5)
years from the date hereof and provided further, however, that if the
termination of the Optionee's Business Relationship with the Corporation shall
result from the Optionee's death, such option may be exercised (to the extent
exercisable by the Optionee at the date of her death) by the Optionee's personal
representative or by the person or persons
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<PAGE> 6
to whom such option shall have been transferred by will or by the laws of
descent and distribution, at any time within three (3) months after the date of
the Optionee's death but in any event not later than five (5) years from the
date hereof.
(b) As used herein, the term "subsidiary" shall mean any present or
future corporation which would be a "subsidiary corporation" of the Corporation,
as the term is defined in Section 424 of the Internal Revenue Code of 1986.
(c) Whenever the word "Optionee" is used in any provision of this
Agreement under circumstances where the provision should logically be construed
to apply to the estate, personal representative, or beneficiary to whom this
option may be transferred by will or by the laws of descent and distribution, it
shall be deemed to include such person.
7. ASSIGNABILITY. The option granted hereby is not assignable or
transferable by the Optionee otherwise than by will or the laws of descent and
distribution and is exercisable during the Optionee's lifetime only by her. No
assignment or transfer of such option, or of the right represented thereby,
whether voluntary or involuntary, by operation of law or otherwise, except by
will or the laws of descent and distribution, shall vest in the assignee or
transferee any interest or right herein whatsoever, and immediately upon any
attempt to assign or transfer such option the same shall terminate and be of no
force or effect.
8. LIMITATION ON RIGHTS. (a) The Optionee shall not be deemed for any
purpose to be a shareholder of the Corporation with respect to any shares as to
which the option granted hereby shall not have been exercised and payment and
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<PAGE> 7
issuance made as herein provided. Nothing herein shall confer on the Optionee
any right to continue in the employ of the Corporation or its subsidiaries, nor
affect the right of the Corporation or its subsidiaries to terminate the
Optionee's employment at any time without liability to the Corporation.
(b) The existence of the option granted hereby shall not affect in any
way the right or power of the Corporation or its shareholders to make or
authorize any or all adjustments, recapitalizations, reorganizations or other
changes in the Corporation's capital structure or its business, or any merger or
consolidation of the Corporation, or any issue of bonds, debentures, preferred
or prior preference stocks ahead of or convertible into, or otherwise affecting
the Common Stock or the rights thereof, or the dissolution or liquidation of the
Corporation, or any sale or transfer of all or any part of its assets or
business, or any other corporate act or proceeding, whether of a similar
character or otherwise.
9. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION. (a) The shares with respect
to which the option granted hereby is granted are shares of the Common Stock as
constituted on the date of this Agreement, but if and whenever, prior to the
delivery by the Corporation of all of the shares of Common Stock with respect to
which this option is granted, the Corporation shall effect a subdivision or
consolidation of shares, or other capital readjustment, or the payment of a
stock dividend, or other increase or decrease of the number of shares of Common
Stock outstanding, without receiving compensation therefor in money, services or
property, then
- 7 -
<PAGE> 8
(i) in the event of any increase in the number of such shares
outstanding, the number of shares of Common Stock then remaining
subject to option hereunder shall be proportionately increased
(except that any fraction of a share resulting from any such
adjustment shall be excluded from the operation of this
Agreement), and the cash consideration payable per share shall be
proportionately reduced, and
(ii) in the event of a reduction in the number of such shares
outstanding, the number of shares of Common Stock then remaining
subject to option hereunder shall be proportionately reduced
(except that any fractional shares resulting from any such
adjustment shall be excluded from the operation of this
Agreement), and the cash consideration payable per share shall be
proportionately increased.
(b) In the event of (i) any merger of one or more other corporations
with the Corporation or any consolidation of the Corporation and one or more
other corporations in which the Corporation is not the surviving or resulting
corporation or (ii) any merger of one or more other corporations with the
Corporation or any consolidation of the Corporation and one or more other
corporations in which the Corporation shall be the surviving or resulting
corporation and the then issued and outstanding shares of Common Stock shall be
converted into and/or exchanged for cash and/or any securities of any other
corporation, then, in any such case and without the need for any further action
by the Corporation or its stockholders, this Agreement and the option granted
hereby shall terminate as of the effective time of the merger or consolidation
and thereupon be of no force or effect, and the holder hereof shall, at no
additional cost, be entitled solely to receive (at such effective time and
otherwise in the form and manner provided by the terms of the agreement of
merger or consolidation) an amount of the consideration payable under the terms
- 8 -
<PAGE> 9
of such agreement equal to the excess of (i) the aggregate consideration (valued
in accordance with the terms thereof) to which the holder hereof would have been
entitled pursuant to the terms of such agreement if, immediately prior to such
effective time, the holder hereof had been the holder of record of a number of
shares of Common Stock equal to the aggregate number of shares of Common Stock
as to which this Agreement was exercisable immediately prior to such effective
time over (ii) the aggregate exercise price payable hereunder with respect to
such number of shares. In the event of any other merger or consolidation in
which the Corporation is the surviving or resulting corporation, this Agreement
and the option granted hereby shall remain in full force and effect in
accordance with its terms. In the event of any dissolution or liquidation of the
Corporation, this Agreement and the option granted hereby shall terminate and
thereupon be of no force or effect.
10. MISCELLANEOUS. (a) This Agreement is the sole and only agreement
between the parties hereto with respect to the subject matter hereof and may not
be modified or amended except by a subsequent written agreement duly executed by
the parties hereto.
(b) The Corporation shall at all times during the term of the option
granted hereby reserve and keep available such number of shares of Common Stock
as will be sufficient to satisfy the requirements of such option.
(c) Any notice which either party hereto may be required or permitted
to give to the other shall be in writing, and may be delivered personally or by
mail,
- 9 -
<PAGE> 10
postage prepaid, addressed as follows: To the Corporation (Attention to the
Clerk), at its principal office at 391 Totten Pond Road, Waltham, Massachusetts
02154, or at such other address as the Corporation, by notice to the Optionee,
may designate in writing from time to time; and to the Optionee at her address
as the Optionee, by notice to the Clerk of the Corporation, may designate in
writing from time to time.
(d) This Agreement shall be governed by and construed in accordance
with the laws of the Commonwealth of Massachusetts.
IN WITNESS WHEREOF, the Corporation has caused this Non-Qualified
Stock Option Agreement to be executed by its duly-authorized officer, and the
Optionee has hereunto set her hand and seal, all on the day and year first above
written.
PACE MEDICAL, INC.
By /s/ Ralph E. Hanson
-------------------------------
Ralph E. Hanson, President
/s/ Drusilla F. Hays
-------------------------------
Drusilla F. Hays - Optionee
- 10 -
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
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<SECURITIES> 0
<RECEIVABLES> 401,877
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<INVENTORY> 637,191
<CURRENT-ASSETS> 2,260,116
<PP&E> 295,785
<DEPRECIATION> 249,277
<TOTAL-ASSETS> 2,345,281
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0
0
<COMMON> 34,009
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<TOTAL-LIABILITY-AND-EQUITY> 2,345,281
<SALES> 757,899
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<INCOME-PRETAX> 35,825
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