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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, 1997
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.
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(exact name of small business issuer as specified in its charter)
Massachusetts 04-2867416
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(State or other jurisdiction (I.R.S. Employer
incorporation or organization) Identification No.)
391 Totten Pond Road
Waltham, Massachusetts 02154
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(Address of principal (Zip Code)
executive offices)
Issuer's telephone number, including area code (781) 890-5656
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Securities registered under Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
None
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Securities registered under Section 12(g) of the Act:
Common Stock, par value $.01 per share
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(Title of class)
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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. $2,144,699
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.
$2,040,870 as of March 19, 1998.
(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 19, 1998.
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.
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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
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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
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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 $100 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
methods of design, manufacture and control present no new or unusual safety and
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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 4570 MICRO-PACE,
dual-chamber, temporary cardiac pacemaker, is a programmable eleven (11) mode,
"state of the art", single and dual-chamber temporary cardiac pacemaker
consisting of three (3) atrial modes, AOO, AAI, AAT, four (4) ventricular modes
VDD, 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. See
"Licenses and Proprietary Technology". 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 Model 4570 MICRO-PACE, dual-chamber, DDD,
temporary cardiac pacemaker is an enhanced version of the Company's original
MICRO-PACE unit, Model 4553, which received FDA approval in 1991. The Model 4570
received FDA SPMA approval in August, 1995. It 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.
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
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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.
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
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".
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MODEL 5200 SINGLE-CHAMBER, TEMPORARY PACEMAKER. The Company intends to
file a regulatory submission with the FDA during 1998 covering its new Model
5200 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.
OTHER. Several new state-of-the art temporary pacing products are in
development. The Company intends to file additional regulatory submissions with
the FDA covering these devices during the year 1999.
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 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.
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The Company focuses on two 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.
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
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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 payers 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 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 (pounds)500,000 (approximately $825,400 as of
December 31, 1997) 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 and results of operations.
The Company believes, based upon
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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 and results of operations.
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 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, 1996, and December 31, 1997, the
Company expended $292,499 and $190,966, respectively, on product development.
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. While it is
the Company's policy to qualify a limited number of suppliers of components, the
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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 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
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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
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 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
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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
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.
The European Community has recently set forth certain specifications that
medical devices must meet so as to be sold to countries in the European
Community. Companies are required to obtain certification by June 13, 1998 under
the ISO 9000 Registration program in order to establish compliance with such
specification requirements. At the current time, procedures to obtain such
certification are substantially complete and management does not believe that
the Company will fail to meet this deadline.
FOREIGN OPERATIONS
For the years ended December 31, 1996, and December 31, 1997, revenues
from foreign customers, including export sales, totaled $768,609 and $940,164,
respectively (approximately 38% and 44%, 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
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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, 1997, the total number of the Company's full-time
employees was 12. APC Medical employed 5 of these employees. The Company
believes, based upon management's opinion, that its relations with its employees
are satisfactory.
LICENSING AND PROPRIETARY TECHNOLOGY
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 license became fully paid-up on December 31,
1996. See Item 12. Certain Relationships and Related Transactions.
Neither the Company nor Pace Technology owns any patents covering the
technology incorporated in the Company's 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.
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<PAGE> 16
The Company intends to protect the software embodied in its products as a
trade secret and as a copyrighted work. Despite these precautions, it may be
possible to copy or otherwise obtain and use the Company's products and
technology without authorization. While the Company intends to vigorously
prosecute any such unlawful use of its trade secrets or copyrights, there can be
no assurance that it will be successful in any such prosecution.
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 1998.
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 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.
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<PAGE> 17
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 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 (pounds)28,500 ($47,050) or approximately
(pounds)5.70 ($9.41) 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.
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<PAGE> 18
ITEM 3. LEGAL PROCEEDINGS.
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.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is quoted on the National Association of
Securities Dealers, Inc.'s OTC Bulletin Board under the symbol PMDL. 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, 1996 (OTC) CLOSING QUOTE
First Quarter................. $1.125
Second Quarter................ 2.625
Third Quarter................. 2.375
Fourth Quarter................ 1.25
Fiscal Year Ended December 31, 1997 (OTC)
First Quarter................. 1.50
Second Quarter................ .844
Third Quarter................. 1.125
Fourth Quarter................ .875
There are 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.
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<PAGE> 19
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1997, the Company had cash and cash equivalents of
$1,318,652 and working capital of $2,045,859. This contrasts to comparable cash
and working capital positions at December 31, 1996 of $1,029,666 and $1,666,276.
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 1997. The Company's cash flows
have historically tracked its operational results.
In March, 1998, the Company announced a stock repurchase program pursuant
to which the Company is authorized to acquire up to 100,000 shares of its common
Stock. As of March 19, 1998, no shares had been repurchased under the program.
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 1998. 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, 1997 VERSUS YEAR ENDED
DECEMBER 31, 1996
Sales increased by 6% from $2,025,221 in 1996 to $2,144,699 in 1997
primarily due to the increase of new orders for pacing analyzers from the
Company's OEM customers and a number of international customers. 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 revenues in
1997. It is believed that hospital budgetary considerations and the political
health care environment improved considerably during 1997. This had a positive
effect on purchasing decisions.
Gross margins for 1997 were approximately 50%. This approximates the
49% margin the Company experienced in 1996 and is reflective of a relatively
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<PAGE> 20
stable product mix. Management believes margins will remain approximately the
same during 1998.
Operating expenses of $697,923 in 1997 were relatively consistent with
1996 ($738,733). This was attributable to management's cost control measures
being tightly enforced. Management believes that operating expenditures will
increase somewhat during fiscal year 1998, 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
1997 and 1996 because of its ability to utilize net operating loss carry
forwards in both the U.S. and the U.K. Net income was $392,670, or $.11 per
diluted share for the year ended December 31, 1997. This contrasts with 1996 net
income of $284,826 or $.08 per share.
Management believes that inflation has had no impact on either net sales
or income in the previous two years.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
SFAS No. 130, "Reporting Comprehensive Income," establishes standards for
reporting and display of comprehensive income (all changes in equity during a
period except those resulting from investments by and distributions to owners)
and its components in the financial statements. This new standard, which will be
effective for the Company for the year ending December 31, 1998, is not
currently anticipated to significantly change the information presented
regarding changes in the Company's equity.
SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information," which will be effective for the Company for the year ending
December 31, 1998, establishes standards for reporting information about
operating segments in the annual financial statements, selected information
about operating segments in interim financial reports and disclosures about
products and services, geographic areas and major customers. The Company does
not expect the adoption of SFAS No. 131 to significantly change the information
disclosed relating to its operations or major customers.
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
-20-
<PAGE> 21
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. The Company presently believes that
the Year 2000 issue will not pose significant operational problems for the
Company. However, Year 2000 issues could adversely impact the Company if systems
operated by our customers or vendors are not Year 2000 compliant.
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.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
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<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 69 President, Chief Executive
Officer, Treasurer, and
Chairman of Board of
Directors
Derrick Ebden 47 Director
Drusilla F. Hays 48 Vice President and Clerk
George F. Harrington 61 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.
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<PAGE> 23
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
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, 1997, 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.
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<PAGE> 24
ITEM 10. EXECUTIVE COMPENSATION.
1. SUMMARY OF ANNUAL COMPENSATION
The table set forth below shows the annual compensation for the three
fiscal years ended December 31, 1997 paid by the Company to its President and
Chief Executive Officer (the "named executive officer"). No other executive
officer received a total annual salary and bonus in excess of $100,000 in any
such fiscal year.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG TERM
------------------- COMPENSATION
------------
AWARDS
------
NAME AND SECURITIES
PRINCIPAL OTHER ANNUAL UNDERLYING
POSITION YEAR SALARY($) BONUS($) COMPENSATION($) OPTIONS(#))
- -------- ---- --------- -------- --------------- ------------
Ralph E 1997 125,256 -- -- --
Hanson, 1996 121,997 50,000
President, 1995 111,712 -- -- --
Treasurer &
Chief Executive
Officer
- -------------------------------
2. STOCK OPTIONS
The table set forth below shows information regarding the value of
unexercised stock options held by the named executive officer at December 31,
1997.
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 $18,750
- ----------
(1) Represents the fair market value of the Company's Common Stock on
December 31, 1997 ($.875 per share based on the closing quote on such date on
the OTC Bulletin Board) minus the exercise price per share, of the exercisable
options, multiplied by the number of shares subject to the option.
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<PAGE> 25
Mr. Hanson was not granted any options or other equity-based compensation
during the fiscal year ended December 31, 1997 and did not exercise any options
during such fiscal year.
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 agreed
to serve as the Company's President and Chief Executive Officer at salary of not
less than $105,000 per annum, and the Company agreed that he would be eligible
for such fringe benefits as are generally made available by the Company to 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 the termination of 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
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.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
1. CERTAIN BENEFICIAL OWNERS.
As of March 17, 1998, 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, and Paul J. LaRaia, M.D. of 45
Ravine Road, Wellesley, Massachusetts 02181, who is the beneficial owner of
331,000 shares of Common Stock or 9.7% 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.
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<PAGE> 26
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 20, PERCENTAGE
THE COMPANY 1998 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.
(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.
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<PAGE> 27
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, who is the President, Chief Executive Officer, and a
Director of the Company, and Paul J. LaRaia, M.D., who is the beneficial owner
of 9.7% of the Company's Common Stock, are 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%. The Company accrued royalties to Pace
Technology of $22,458 during 1996. This license became fully paid-up and
irrevocable in accordance with its terms on December 31, 1996, and as of such
date, no further royalties were payable by the Company thereunder.
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 the Company's
subsidiary, APC Medical Ltd. The Company made sales to Cardiovascular of
approximately $862,539 during 1997 and $661,912 during 1996. 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.
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<PAGE> 28
B. EXHIBITS.
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.
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 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.
10.5* Distributor Agreement dated as of March 12, 1990 with APC
Cardiovascular Ltd.
10.6* 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
10.7* 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 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.
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<PAGE> 29
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: /s/ RALPH E. HANSON
---------------------------------------
Ralph E. Hanson, President
Date March 27, 1998
--------------------------------
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.
/s/ RALPH E. HANSON
--------------------------------------
Ralph E. Hanson, Director, Principal
Executive, Financial, and Accounting
Officer
Date March 27, 1998
-----------------------------------
/s/ GEORGE F. HARRINGTON
----------------------------------------
George F. Harrington, Director
Date March 27, 1998
------------------------------------
/s/ DERRICK EBDEN
----------------------------------------
Derrick Ebden, Director
Date March 27, 1998
-----------------------------------
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<PAGE> 30
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 (the "Company") as of December 31, 1997 and
1996, 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 as of December 31, 1997
and 1996, and the results of its operations and its cash flows for the years
then ended in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
March 5, 1998
<PAGE> 31
PACE MEDICAL, INC. AND WHOLLY OWNED SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
ASSETS 1997 1996
CURRENT ASSETS:
Cash and cash equivalents $ 1,318,652 $ 1,029,666
Accounts receivable 199,366 265,704
Accounts receivable - related party 217,531 156,065
Inventories:
Raw materials 235,464 254,238
Work in process 77,061 175,003
Finished goods 117,815 151,300
Prepaid expenses 43,208 48,418
----------- -----------
Total current assets 2,209,097 2,080,394
----------- -----------
PROPERTY AND EQUIPMENT:
Machinery, equipment and tooling 96,593 83,940
Office furniture and equipment 138,640 138,360
Leasehold improvements 48,559 43,296
----------- -----------
283,792 265,596
Less accumulated depreciation
and amortization (242,111) (236,183)
----------- -----------
Property and equipment - net 41,681 29,413
----------- -----------
OTHER ASSETS - Net 41,080 48,987
----------- -----------
TOTAL $ 2,291,858 $ 2,158,794
=========== ===========
LIABILITIES AND SHAREHOLDERS' 1997 1996
EQUITY
CURRENT LIABILITIES:
Accounts payable $ 129,509 $ 167,602
Accrued expenses 26,619 48,712
Due to officer 7,110 6,872
Accrued royalties -- 193,932
----------- -----------
Total current liabilities 163,238 417,118
----------- -----------
COMMITMENTS
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value; authorized,
5,000,000 shares; issued and outstanding,
3,400,850 in 1997 and 1996 34,009 34,009
Additional paid-in capital 3,147,151 3,147,151
Cumulative translation adjustment 102,899 108,625
Accumulated deficit (1,155,439) (1,548,109)
----------- -----------
Total shareholders' equity 2,128,620 1,741,676
----------- -----------
TOTAL $ 2,291,858 $ 2,158,794
=========== ===========
See notes to consolidated financial statements.
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<PAGE> 32
PACE MEDICAL, INC. AND WHOLLY OWNED SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
1997 1996
NET SALES:
Customers $ 1,282,160 $ 1,363,309
Related party 862,539 661,912
----------- -----------
Total net sales 2,144,699 2,025,221
COST OF SALES 1,067,602 1,026,717
----------- -----------
GROSS PROFIT 1,077,097 998,504
OPERATING EXPENSES:
Selling, general and administrative 506,957 446,234
Engineering/development 190,966 292,499
----------- -----------
INCOME FROM OPERATIONS 379,174 259,771
----------- -----------
OTHER INCOME (EXPENSE):
Exchange losses, net (27,314) (7,834)
Other income, primarily interest 40,810 32,889
----------- -----------
13,496 25,055
----------- -----------
NET INCOME $ 392,670 $ 284,826
=========== ===========
NET INCOME PER SHARE:
Basic $ 0.12 $ 0.08
=========== ===========
Diluted $ 0.11 $ 0.08
=========== ===========
See notes to consolidated financial statements.
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<PAGE> 33
PACE MEDICAL, INC. AND WHOLLY OWNED SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
<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, 1996 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
Cumulative 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
Net income -- -- -- -- 392,670 392,670
Cumulative translation adjustments -- -- -- (5,726) -- (5,726)
--------- ------- ---------- --------- ----------- -----------
BALANCES, DECEMBER 31, 1997 3,400,850 $34,009 $3,147,151 $ 102,899 $(1,155,439) $ 2,128,620
========= ======= ========== ========= =========== ===========
</TABLE>
See notes to consolidated financial statements.
-4-
<PAGE> 34
PACE MEDICAL, INC. AND WHOLLY OWNED SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 392,670 $ 284,826
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 20,357 13,838
Unrecognized transaction loss 13,660 --
Changes in assets and liabilities:
Accounts receivable (796) 16,944
Prepaid expenses 3,463 1,532
Inventories 144,115 (95,555)
Accounts payable (37,624) 26,180
Accrued royalties and expenses (214,968) 10,437
Other 238 (7,786)
---------- ----------
Net cash provided by operating activities 321,115 250,416
CASH FLOWS USED IN INVESTING ACTIVITIES -
Additions to property and equipment (25,030) (18,130)
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES -
Common stock issued under stock option plan -- 10,000
EFFECT OF EXCHANGE RATE CHANGES ON CASH (7,099) 15,374
---------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 288,986 257,660
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,029,666 772,006
---------- ----------
CASH AND CASH EQUIVALENTS, END OF YEAR $1,318,652 $1,029,666
========== ==========
See notes to consolidated financial statements.
-5-
<PAGE> 35
PACE MEDICAL, INC. AND WHOLLY OWNED SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
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 to various customers
throughout the world. 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
(pounds)500,000 (approximately $825,400 as of December 31, 1997) 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 and results of operations. 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 and results of
operations.
REVENUE RECOGNITION - Sales are recorded upon shipment of goods. Historical
experience has been such that no allowances for sales returns or bad debts
are currently provided.
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.
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, ranging from 5 to 7 years.
Repairs and maintenance are expensed as incurred, while costs of betterments
are capitalized. Depreciation expense approximated $12,000 and $9,000 for
the years ended December 31, 1997 and 1996, respectively.
-6-
<PAGE> 36
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
OTHER ASSETS - Other assets consist of patent and deferred tooling costs,
which are amortized under the straight-line method, primarily over 10 and 5
years, respectively. Amortization expense for 1997 and 1996 aggregated
approximately $8,000 and $5,000, respectively. Accumulated amortization
aggregated $46,528 and $38,621 in 1997 and 1996, respectively.
LONG-LIVED ASSETS - Upon occurrence of certain events or changes in
circumstances, the Company reviews its long-lived assets to determine if
impairment has occurred. The Company reports long-lived assets to be
disposed at the lower of carrying amount or fair value less cost to sell. No
impairment events occurred during either 1997 or 1996.
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.
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 current assessment by management
that the Company is not more likely than not 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 SHARE - The Company has adopted the provisions of 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 for the year.
The denominator used to determine diluted net income per share includes the
shares used in the calculation of basic net income per share plus dilutive
weighted average options and warrants outstanding during the period using
the treasury-stock method.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
<S> <C> <C> <C>
Net income $ 392,670 --
Weighted-average shares outstanding -- 3,400,850
--------- ---------
Basic net income per share 392,670 3,400,850 $0.12
=====
Effect of dilutive securities -- 129,457
--------- ---------
Diluted net income per share $ 392,670 3,530,307 $0.11
========= ========= =====
</TABLE>
-7-
<PAGE> 37
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
<S> <C> <C> <C>
Net income $284,826 -
Weighted-average shares outstanding - 3,395,850
------- ---------
Basic net income per share 284,826 3,395,850 $0.08
=====
Effect of dilutive securities - 236,019
------- ---------
Diluted net income per share $284,826 3,631,869 $0.08
======= ========= =====
</TABLE>
STOCK-BASED COMPENSATION - Compensation expense associated with awards of
stock or options to employees is measured using the intrinsic value method
set forth in Accounting Principles Board Statement No. 25. Compensation
expense associated with awards to nonemployees is measured using a fair
value method.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS - SFAS No. 130, "Reporting
Comprehensive Income," establishes standards for reporting and display of
comprehensive income (all changes in equity during a period except those
resulting from investments by and distributions to owners) and its
components in the financial statements. This new standard, which will be
effective for the Company for the year ending December 31, 1998, is not
currently anticipated to significantly change the information presented
regarding changes in the Company's equity.
SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information," which will be effective for the Company for the year ending
December 31, 1998, establishes standards for reporting information about
operating segments in the annual financial statements, selected information
about operating segments in interim financial reports and disclosures about
products and services, geographic areas and major customers. The Company
does not expect the adoption of SFAS No. 131 to significantly change the
information disclosed relating to its operations or major customers.
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, which manufactures
and sells the products in exchange for a negotiated royalty (5% of net
sales). Royalty expense was $22,458 in 1996. Payables to Pace Technology
totaled $193,932 at December 31, 1996. The license was considered, by
contract, to be fully paid at the end of 1996. Accordingly, royalties have
not been accrued subsequent to December 31, 1996. The Company continues 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 $862,539 and $661,912
in 1997 and 1996, respectively (Customer B, Note 7). Receivables from
Cardiovascular at December 31, 1997 and 1996 were $217,531 and $156,065,
respectively.
-8-
<PAGE> 38
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 (pounds)28,500 ($47,048 at December 31, 1997) 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 the
lease total approximately $50,000 in each of the next five years and
$200,000 in the aggregate thereafter.
Pace leases a facility on a tenant-at-will basis at an annual rate of
approximately $37,000. Rental expense for all operating leases, including
leases with terms of less than one year, amounted to $87,634 and $82,180 in
1997 and 1996, 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 1997 and 1996 due to the use of net
operating loss carryforwards for financial reporting purposes.
The Company has $784,000 and $931,000 of deferred tax assets fully reserved
at December 31, 1997 and 1996, respectively, the components of which
approximated the following:
1997 1996
Net operating loss carryforwards $586,000 $651,000
Research and development credits 177,000 171,000
Inventory 19,000 26,000
Royalty accruals - 75,000
Other 2,000 8,000
-------- --------
$784,000 $931,000
======== ========
Deferred tax assets have been fully reserved. The net change in the
valuation allowance in 1997 was $147,000 due to the utilization of certain
net operating loss carryforwards in the U.K.
Pace has federal income tax loss carryforwards for financial and tax
reporting purposes of approximately $1,216,000, which begin expiring in the
years 2000 through 2011, and state income tax carryforwards of approximately
$575,000, which begin expiring in the years 1998 through 2001. Pace also has
certain state and federal tax credits aggregating $177,000, which expire in
varying amounts through 2011.
APC has approximately (pounds)205,000 ($338,000) at December 31, 1997 of tax
loss carryforwards available in the UK at December 31, 1997.
-9-
<PAGE> 39
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 the
Board of Directors authorized and options were granted to purchase 50,000
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 all stock option activity is as follows:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
NUMBER AVERAGE AVERAGE
OF EXERCISE FAIR
OPTIONS PRICE VALUE
<S> <C> <C> <C>
Outstanding and exercisable, January 1, 1996 191,000 $0.58
Granted 50,000 .50 $.54
Exercised (20,000) .50
Expired (20,000) .88
--------
Outstanding and exercisable, December 31, 1996 and 1997 201,000 .54
========
</TABLE>
The following table sets forth information regarding options outstanding and
exercisable at December 31, 1997:
WEIGHTED
WEIGHTED AVERAGE
AVERAGE REMAINING
NUMBER OF OPTIONS EXERCISE EXERCISE CONTRACTUAL
PRICE PRICE LIFE (YEARS)
191,000 $0.50 $0.50 2.92
10,000 1.25 1.25 0.50
-10-
<PAGE> 40
5. SHAREHOLDERS' EQUITY (CONTINUED)
The Company had also issued 260,000 warrants to its attorneys and
underwriters, the activity for which is as follows:
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
WARRANTS PRICE
Outstanding and exercisable, January 1, 1996 260,000 $0.95
Terminated (50,000) 1.00
-------
Outstanding and exercisable, December 31, 1996 210,000 0.94
Terminated (210,000) 0.94
-------
Outstanding and exercisable, December 31, 1997 -
=======
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:
1997 1996
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.
-11-
<PAGE> 41
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. If the Company had used the fair value method for all options to
measure compensation, reported net income and earnings per share would have
been as follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Net income:
As reported $392,670 $284,826
Pro forma 392,670 261,755
</TABLE>
If the Company had used the fair value method, basic and diluted net income
per share would be the same as that reported.
6. GEOGRAPHIC SEGMENTS
Geographic area results were:
<TABLE>
<CAPTION>
UNITED UNITED
STATES KINGDOM ELIMINATIONS CONSOLIDATED
1997
<S> <C> <C> <C> <C>
Sales and transfers $1,352,044 $994,246 $(201,591) $2,144,699
Net operating income 57,845 320,550 779 379,174
Identifiable assets 1,918,838 503,734 (130,714) 2,291,858
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
</TABLE>
Transfers between areas are valued at cost plus a markup. Direct sales to
foreign customers from domestic operations were not material.
-12-
<PAGE> 42
7. SIGNIFICANT CUSTOMERS
In 1997 and 1996, there were sales to major customers that exceeded 10% of
total net sales. Sales to these customers were:
<TABLE>
<CAPTION>
AMOUNT PERCENT
1997
<S> <C> <C>
Customer A $ 582,385 27%
Customer B (related party) 862,539 40
Customer C 498,260 23
1996
Customer A $ 692,215 34%
Customer B (related party) 661,912 33
Customer C 357,750 18
</TABLE>
* * * * * *
-13-
<PAGE> 1
EXHIBIT 11.1
PACE MEDICAL, INC. AND WHOLLY OWNED SUBSIDIARY
STATEMENT RE COMPUTATION OF PER SHARE NET INCOME
- --------------------------------------------------------------------------------
CALCULATION OF BASIC NET INCOME PER SHARE
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
NET INCOME $ 392,670 $ 284,826
========= =========
NUMBER OF SHARES
Weighted average shares outstanding 3,400,850 3,395,850
Total shares outstanding for purpose of
earnings per share computation 3,400,850 3,395,850
========== =========
INCOME PER SHARE AS CALCULATED $ 0.12 $ 0.08
========== =========
CALCULATION OF DILUTED NET INCOME PER SHARE
NET INCOME $ 392,670 $ 284,826
========== =========
NUMBER OF SHARES
Weighted average shares outstanding 3,400,850 3,395,850
Incremental shares for outstanding stock
options and warrants 129,457 236,019
--------- ---------
Total shares outstanding for purpose of
earnings per share computation 3,530,307 3,631,869
========== =========
INCOME PER SHARE AS CALCULATED $ 0.11 $ 0.08
========== =========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 1,318,652
<SECURITIES> 0
<RECEIVABLES> 416,897
<ALLOWANCES> 0
<INVENTORY> 430,340
<CURRENT-ASSETS> 2,209,097
<PP&E> 283,792
<DEPRECIATION> 242,111
<TOTAL-ASSETS> 2,291,858
<CURRENT-LIABILITIES> 163,238
<BONDS> 0
0
0
<COMMON> 34,009
<OTHER-SE> 2,094,611
<TOTAL-LIABILITY-AND-EQUITY> 2,291,858
<SALES> 2,144,699
<TOTAL-REVENUES> 2,144,699
<CGS> 1,067,602
<TOTAL-COSTS> 1,067,602
<OTHER-EXPENSES> 697,923
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 392,670
<INCOME-TAX> 0
<INCOME-CONTINUING> 392,670
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 392,670
<EPS-PRIMARY> 0.12
<EPS-DILUTED> 0.11
</TABLE>
