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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, 1999
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 02451
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(Address of principal (Zip Code)
executive offices)
Issuer's telephone number, including area code (781) 890-5656
Securities registered under Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
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NONE NONE
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. $1,799,386
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. $2,475,311 as of March 23, 2000.
(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.
3,375,870 shares of Common Stock, $.01 par value, as of March 23, 2000.
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
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
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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 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
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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 may 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 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
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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 was the first device of its kind in the world
with 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 (ambulatory) units Model EV4542 and EV4543. These 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 have over a decade of reliability
and performance. The Company believes based upon management's experience 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.
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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". Several new state-of-the art temporary pacing products
are in development. The Company intends to file appropriate regulatory
submissions with the FDA covering these devices during the year 2000.
MARKETING
The Company's temporary cardiac pacemakers and associated accessories
are sold to hospitals both domestically and abroad to OEM accounts and through
independent sales representatives and independent distributors.
DOMESTIC SALES (NORTH AMERICA). The Company's domestic sales consist
primarily of single and dual-chamber temporary pacemakers shipped to OEM
accounts under either private labels or the Company's name. The Company also
utilizes manufacturers' representatives and distributors. The Company oversees
and supports the representative and distributor organizations.
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.
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.
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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.
During 1999, 77% of the Company's sales were to three customers. During
1998, 75% of the Company's sales were to two customers.
WORKING CAPITAL PRACTICES.
In the United States, the Company sells its pacing products through
independent sales representatives, OEM accounts, and distributors. The OEM
accounts and distributors buy pacemakers directly from the Company and are
billed at a discounted rate, 30 days net. Many of the Company's products are
sold on a factory direct basis or through sales representatives, and the Company
bills the hospitals directly. The Company generally pays the representative its
commission during the month following the collection of funds. The Company's
practice is to attempt to realize accounts receivable within 30 to 60 days after
shipment. The Company believes, based upon management's experience, that the
foregoing working capital practices are similar to those of the pacemaker
industry in general.
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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 for 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 L500,000 (approximately $807,500 as of December 31,
1999) 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.
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
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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, 1998, and December 31, 1999, the
Company expended $200,355 and $247,376, 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
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 80% 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 primarily 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
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such contractor would disrupt the Company's U.S. production and might adversely
affect the Company's business.
GOVERNMENT REGULATION
Since temporary pacemakers and temporary pacemaker leads are "devices"
as defined by the Federal Food, Drug, and Cosmetic Act, as amended (21 U.S.C.
321 et seq.) (the "Act"), all of the Company's pacemaker products are subject to
the regulatory authority of the United States Food and Drug Administration
("FDA"). This authority was substantially increased by the passage of the
Medical Device Amendments of 1976 in May 1976.
Under the Act, the FDA has authority to: (i) set mandatory performance
standards for medical devices; (ii) classify devices which need premarket
clearance by the FDA to provide reasonable assurances of safety and
effectiveness and require submission of proof of safety and effectiveness prior
to the marketing of such devices; (iii) regulate clinical testing of new
devices; (iv) establish "good manufacturing practices" which must be observed in
the manufacture of devices; (v) require the registration of device manufacturers
and their products; (vi) conduct periodic detailed inspections of device
manufacturing establishments and, for some devices, inspections of records found
in such establishments; (vii) establish record-keeping and reporting
requirements; (viii) require reporting of product defects to the FDA; (ix)
require defect notification and replacement or repair of defective products, or
refund of their purchase price and reimbursement of certain associated cost of
consumers and distributors, without relieving manufactures of tort liability for
any injury resulting from the defect; (x) "ban" a device found to present
substantial deception or an unreasonable or substantial risk of illness or
injury; (xi) require that all labels and labeling for a device be adequate and
truthful; and (xii) regulate the advertising of certain devices. The FDA has
published regulations with respect to most of the categories outlined above,
including regulations establishing good manufacturing practices that apply to
all of the Company's operations, regulations classifying "devices" and
regulations regarding clinical testing of new devices.
Under the FDA regulations implementing the 1976 Amendments, the
Company's pacing leads and temporary cardiac pacemakers are classified as "Class
III" medical devices. The Act requires "premarket approval" by the FDA of new
"Class III" medical devices as a condition for "commercial distribution" of such
devices and approval of substantial changes in current products prior to the
products being commercially distributed. Obtaining such approval requires the
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
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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 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.
In 1993, member countries of the European Union established minimum
standards for certain medical devices which were to be sold there after June 13,
1998. These
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requirements are set forth in what has become known as the "Medical Device
Directive". Companies manufacturing such devices were required to become
registered as meeting the quality system requirements for the medical products,
a version of ISO 9000, known as EN 46000. Additionally, products to be sold in
the European Union had to be independently certified as meeting the requirements
of the Medical Device Directive on issues involving safety, labeling and
performance. Both of these matters are handled by independent organizations
known as "Notified Bodies". British Standards Institution (BSI) was chosen as
the Company's Notified Body in 1997. The Company was successful in obtaining
registration to EN 46001 (ISO 9001) and in obtaining certification of its
products, all of which now bear the CE Mark.
FOREIGN OPERATIONS
For the years ended December 31, 1998, and December 31, 1999, revenues
from foreign customers, including export sales, totaled $730,169 and $753,969,
respectively (approximately 45% and 42%, respectively, of net sales). APC
Medical assembles a portion of the Company's products in the United Kingdom for
shipment to foreign and domestic customers. APC Medical manufactures temporary
pacemakers, temporary pacemaker extension cables, and surgical extension cables
in its own facility for its foreign customers. See "Notes to Consolidated
Financial Statements".
The Company's operations can be affected by currency fluctuations.
Fluctuations between the pound and the dollar can affect the Company's position
in international competition, with a strengthening of the dollar making its
products less expensive to customers in the United States and a weakening of the
dollar making its products more expensive to customers in the United States. In
addition, the Company's foreign business is subject to the usual risks incident
to operating abroad, including currency restrictions, currency adjustments and
changes in foreign laws.
The Company believes that the "Asian crisis" adversely affected the
sales of the Company's products during the year 1998. Sales to Asia improved
during the year 1999.
EMPLOYEES
At December 31, 1999, 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
The Company does not own any patents covering the technology
incorporated in the Company's products. 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
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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.
The Company is relying on the laws governing trade secrets and
copyright to protect the software embodied in its products. 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 2000.
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.
There are several 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
-14-
<PAGE>
employees of the Company, the Company may have less control over
salesperson/physician relationships than certain of its competitors whose
salespeople are direct employees.
With the rapid progress of medical technology, and in spite of
continuing research and development progress, the Company's products are always
subject to the risk of being rendered obsolete by the introduction of new
products or techniques.
Some of the conditions and diseases which the Company's pacemakers are
designed to treat may, in some cases, also be treated by drug therapy. The
Company does not deem itself to be in direct competition with pharmaceutical
companies because, at present, drug therapy is infrequently a viable alternative
to the use of a pacemaker. However, new drugs and methods of therapy may be
developed by pharmaceutical or other health care companies which might compete
with the Company's products. Most of such companies are larger than the Company
and possess more substantial research facilities and other resources.
ENVIRONMENTAL LAWS
Due to the nature of its activities, the Company does not believe that
compliance with environmental laws and regulations will have a materially
adverse effect on its financial condition or operations.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company occupies approximately 3,500 square feet of space in
Waltham, Massachusetts, which it uses for offices, engineering and inventory
storage. The Company occupies this space pursuant to a lease one-year lease that
expires in May, 2000 with an annual basic rent of approximately $64,750.00 or
approximately $18.50 per square foot. The Company anticipates that this lease
will be renewed for an additional one-year term.
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 L28,500 ($46,000) or approximately L5.70
($9.21) 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.
-15-
<PAGE>
ITEM 3. LEGAL PROCEEDINGS.
Neither the Company nor APC Medical is a party to any material legal
proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
-16-
<PAGE>
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.
<TABLE>
<CAPTION>
CLOSING QUOTE
--------------
<S> <C>
Fiscal Year Ended December 31, 1998 (OTC)
First Quarter............................... $0.937
Second Quarter.............................. 0.9687
Third Quarter............................... 0.5312
Fourth Quarter.............................. 0.4375
Fiscal Year Ended December 31, 1999 (OTC)
First Quarter............................... 0.600
Second Quarter.............................. 0.640
Third Quarter............................... 1.156
Fourth Quarter.............................. 0.770
</TABLE>
As of March 23, 2000, there were 89 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.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1999, the Company had cash and cash equivalents of
$1,513,514 and working capital of $2,237,931. This contrasts to comparable cash
and working capital positions at December 31, 1998 of $1,257,700 and $2,089,997.
The increase in the Company's liquidity since the beginning of the
fiscal year is primarily attributable to improved cash flow from operations. The
Company's cash flows have historically tracked its operational results.
-17-
<PAGE>
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 15, 2000, 25,000 shares had been repurchased under
the program for $18,687.
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
2000. 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, 1999 VERSUS YEAR ENDED
DECEMBER 31, 1998
Sales increased by 10% from $1,631,167 in 1998 to $1,799,386 in 1999
primarily due to increased orders received from a major OEM customer. 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 1999.
Gross margins for 1999 were approximately 64%. This is slightly higher
than the 54% margin the Company experienced in 1998 due to changes in product
mix, price increases and re-assignment of certain personnel from manufacturing.
Management believes margins will remain approximately the same during 2000.
Operating expenses increased $112,310, or 13% in 1999 to $980,076 from
1998 operating expenses of $867,766. The increase was attributable to costs
incurred to obtain ISO 9001 certification, facility expansion, and increases in
marketing expenses and fees for professional services. Management believes that
operating expenditures will remain essentially unchanged during fiscal year
2000, 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 1999 and 1998 because of its ability to utilize net operating loss carry
forwards in both the U.S. and the U.K. Net income was $208,481 or $.06 per
diluted share for the year ended December 31, 1999. This contrasts with 1998 net
income of $59,440 or $.02 per share. The increase in net income was primarily
due to increased sales.
Management believes that inflation has had no impact on either net
sales or income in the previous two years.
-18-
<PAGE>
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) released
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities," (SFAS No. 133), which the Company will be
required to adopt effective January 1, 2001. SFAS No. 133 establishes standards
for reporting and accounting for derivative instruments, and conforms the
requirements for treatment of hedging activities across the different types of
exposures hedged. The Company has not yet completed its evaluation of SFAS No.
133, and is, therefore, unable to disclose the impact adoption will have on its
consolidated financial position or results of operations.
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
difficulties include, but are not limited to, risks associated with the
introduction of new products, development of markets for new products offered by
the Company, the Company's relationships with distributors and OEM's, the
economic health of such OEM's, government regulation, competition, and general
economic conditions.
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 Changes in Shareholders'
Equity and of Comprehensive Income
v. Consolidated Statements of Cash Flows
vi. Notes to Consolidated Financial Statements are set
forth below.
-19-
<PAGE>
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, 1999 and
1998, and the related consolidated statements of income, changes in
shareholders' equity and of comprehensive income, 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 auditing standards generally accepted
in the United States of America. 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, 1999
and 1998, and the results of its operations and its cash flows for the years
then ended in conformity with accounting principles generally accepted in the
United States of America.
Deloitte & Touche LLP
Boston, Massachusetts
March 3, 2000
-20-
<PAGE>
PACE MEDICAL, INC. AND WHOLLY OWNED SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,513,514 $ 1,257,700
Accounts receivable 148,352 231,721
Accounts receivable - related party 172,732 119,195
Inventories:
Raw materials 211,026 255,821
Work in process 78,038 176,999
Finished goods 218,981 160,125
Prepaid expenses 42,775 43,749
----------- -----------
Total current assets 2,385,418 2,245,310
----------- -----------
PROPERTY AND EQUIPMENT:
Machinery and equipment 83,644 151,896
Office furniture, equipment and improvements 36,187 45,184
Computer equipment 56,034 53,873
----------- -----------
Total property and equipment 175,865 250,953
Less accumulated depreciation
and amortization (122,515) (204,823)
----------- -----------
Property and equipment - net 53,350 46,130
----------- -----------
OTHER ASSETS - Net 73,280 35,183
----------- -----------
TOTAL ASSETS $ 2,512,048 $ 2,326,623
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 77,788 $ 114,823
Accrued expenses 69,699 40,490
----------- -----------
Total current liabilities 147,487 155,313
----------- -----------
COMMITMENTS AND CONTINGENCIES
(Notes 1 and 3)
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value; authorized,
5,000,000 shares; issued and outstanding,
3,400,850 shares in 1999 and 1998 34,009 34,009
Additional paid-in capital 3,147,151 3,147,151
Accumulated other comprehensive income 89,606 104,836
Accumulated deficit (887,518) (1,095,999)
----------- -----------
Subtotal 2,383,248 2,189,997
Treasury stock, at cost (25,000 shares) (18,687) (18,687)
----------- -----------
Total shareholders' equity 2,364,561 2,171,310
----------- -----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 2,512,048 $ 2,326,623
=========== ===========
</TABLE>
See notes to consolidated financial statements.
-21-
<PAGE>
PACE MEDICAL, INC. AND WHOLLY OWNED SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1999 AND 1998
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
NET SALES:
Customers $1,098,675 $ 963,900
Related party 700,711 667,267
---------- ----------
Total net sales 1,799,386 1,631,167
COST OF SALES 651,433 750,621
---------- ----------
GROSS PROFIT 1,147,953 880,546
OPERATING EXPENSES:
Selling, general and administrative 732,700 667,411
Engineering/development 247,376 200,355
---------- ----------
INCOME FROM OPERATIONS 167,877 12,780
OTHER INCOME, Primarily interest 40,604 46,660
---------- ----------
NET INCOME $ 208,481 $ 59,440
========== ==========
NET INCOME PER SHARE:
Basic $ 0.06 $ 0.02
========== ==========
Diluted $ 0.06 $ 0.02
========== ==========
</TABLE>
See notes to consolidated financial statements.
-22-
<PAGE>
PACE MEDICAL, INC. AND WHOLLY OWNED SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
AND OF COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 1999 AND 1998
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER TOTAL
------------------- PAID-IN ACCUMULATED COMPREHENSIVE COMPREHENSIVE TREASURY SHAREHOLDERS'
SHARES VALUE CAPITAL DEFICIT INCOME INCOME STOCK EQUITY
--------- ------- ---------- ----------- ----------- -------------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES, JANUARY 1, 1998 3,400,850 $34,009 $3,147,151 $(1,155,439) $ 102,899 $ -- $2,128,620
Purchases of treasury stock -- -- -- -- -- (18,687) (18,687)
Net income -- -- -- 59,440 $ 59,440 -- -- 59,440
Cumulative translation
adjustments -- -- -- -- 1,937 1,937 -- 1,937
--------- ------- ---------- ----------- ----------- -------------- -------- ------------
Comprehensive income $ 61,377
=========
BALANCES, DECEMBER 31, 1998 3,400,850 34,009 3,147,151 (1,095,999) 104,836 (18,687) 2,171,310
Net income -- -- -- 208,481 $ 208,481 -- -- 208,481
Cumulative translation
adjustments -- -- -- -- (15,230) (15,230) -- (15,230)
--------- ------- ---------- ----------- ----------- -------------- -------- ------------
Comprehensive income $ 193,251
=========
BALANCES, DECEMBER 31, 1999 3,400,850 $34,009 $3,147,151 $ (887,518) $ 89,606 $(18,687) $2,364,561
========= ======= ========== =========== ========= ========= ==========
</TABLE>
See notes to consolidated financial statements
-23-
<PAGE>
PACE MEDICAL, INC. AND WHOLLY OWNED SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999 AND 1998
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 208,481 $ 59,440
Adjustments to reconcile net income to cash provided by
(used for) operating activities:
Depreciation and amortization 20,584 23,361
Write-off of patent costs -- 3,300
Unrealized foreign exchange transaction losses (5,401) (600)
Changes in assets and liabilities:
Accounts receivable 26,428 67,081
Prepaid expenses (168) (322)
Inventories 81,389 (161,951)
Accounts payable (36,867) (14,737)
Accrued expenses 29,854 13,762
Due to officer -- (7,110)
----------- -----------
Cash provided by (used for) operating activities 324,300 (17,776)
CASH FLOWS USED IN INVESTING ACTIVITIES - Purchases of
property and equipment (66,643) (25,089)
CASH FLOWS USED IN FINANCING ACTIVITIES - Purchases of
treasury stock -- (18,687)
EFFECT OF EXCHANGE RATE CHANGES ON CASH (1,843) 600
----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 255,814 (60,952)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,257,700 1,318,652
----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 1,513,514 $ 1,257,700
=========== ===========
</TABLE>
See notes to consolidated financial statements.
-24-
<PAGE>
PACE MEDICAL, INC. AND WHOLLY OWNED SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998
- -------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION - The consolidated financial statements include the accounts
of Pace Medical, Inc. and its wholly owned subsidiary, APC Medical Ltd.
("APC"), a United Kingdom company ("Pace" or the "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 L500,000 (approximately $807,500 as of December 31, 1999) per
occurrence and in the aggregate. The Company does not have product
liability insurance in the United States. 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. Management does not expect that any potential claims would have
a material impact on the financial condition or the results of operations.
No provision has been made in the consolidated financial statements for
this matter.
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 highly
liquid investments with remaining maturities 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 are stated at cost.
Depreciation is recorded under the straight-line method based on the
estimated useful lives of the related assets, ranging from three to seven
years. Repairs and maintenance are expensed as incurred, while costs of
betterments are capitalized. Depreciation expense approximated $15,900 and
$16,800 for the years ended December 31, 1999 and 1998, respectively.
-25-
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
OTHER ASSETS - Other assets consist of patent and deferred tooling costs,
which are amortized using the straight-line method, primarily over ten and
five years, respectively. Amortization expense for 1999 and 1998
aggregated approximately $4,700 and $9,900, respectively. Accumulated
amortization aggregated $30,900 and $26,200 at December 31, 1999 and 1998,
respectively. During 1998, the Company wrote off certain patent costs
aggregating approximately $3,300.
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.
TRANSLATION OF FOREIGN CURRENCIES - 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 (generally the average rate for the period). Differences
due to changing exchange rates are charged or credited to accumulated
other comprehensive income in shareholders' equity. Gains and losses from
foreign currency transactions are included in net income.
INCOME TAXES - Deferred taxes are provided for temporary differences
between book and tax bases of the Company's assets and liabilities and
loss and credit carryforwards based on tax rates and laws enacted as of
the balance sheet date. The Company has provided a valuation allowance
against net deferred tax assets due to uncertainty regarding the
recoverability of tax carryforwards and other 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 determines basic net income per share using
the weighted-average common shares outstanding for the year. The shares
used to determine diluted net income per share include the shares used in
the calculation of basic net income per share plus dilutive
weighted-average options and warrants outstanding during the year using
the treasury stock method.
COMPREHENSIVE INCOME - Comprehensive income includes net income and
foreign currency translation adjustments.
STOCK-BASED COMPENSATION - Compensation expense associated with awards of
stock or options to employees is measured using the intrinsic value
method. Compensation expense associated with awards to nonemployees is
measured using the fair value method.
CONCENTRATION OF CREDIT RISK - The Company sells its products primarily to
a limited number of distributors (see Note 7). The Company generally
requires no collateral from its distributors.
NEW ACCOUNTING PRONOUNCEMENTS - During 1998, the Financial Accounting
Standards Board ("FASB") released Statement of Financial Accounting
Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and
Hedging Activities." SFAS No. 133 requires that the Company implement this
statement in fiscal year 2001. Management has not completed its evaluation
of SFAS No. 133 and is therefore unable to disclose the impact adoption
will have on its consolidated financial position or results of operations.
-26-
<PAGE>
2. RELATED-PARTY TRANSACTIONS
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 United Kingdom. A
director of Cardiovascular is also a director of Pace. Sales to
Cardiovascular amounted to $700,711 and $667,257 in 1999 and 1998,
respectively (Customer A, see Note 7). Receivables from Cardiovascular at
December 31, 1999 and 1998 were $172,732 and $119,195, respectively.
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 L28,500 ($46,000 at December 31, 1999) 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
$90,000 in the aggregate thereafter. Pace leases a facility in the United
States on a tenant-at-will basis at an annual rate of approximately
$57,000.
Rental expense for all operating leases, including leases with terms of
less than one year, amounted to approximately $103,000 and $93,400 in 1999
and 1998, respectively.
CONTRACTS - The Company has entered into a three-year employment agreement
with its chairman that provides for annual compensation of $125,000. The
agreement expires on May 31, 2001.
4. INCOME TAXES
There was no tax expense recorded in 1999 and 1998 due to the application
of net operating loss carryforwards previously reserved against current
period taxable income. The components of the tax provision are as follows
for the year ended December 31:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Deferred expense (benefit):
Federal $(15,000) $(47,700)
State (4,700) (15,000)
Foreign 65,000 65,000
Decrease in valuation allowance, net (45,300) (2,300)
------- ------
Income tax expense $ -- $ --
======== ========
</TABLE>
-27-
<PAGE>
4. INCOME TAXES (CONTINUED)
Deferred tax assets and liabilities at December 31 were as follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Net operating loss carryforwards $ 509,000 $ 537,000
Research and development credits 175,000 177,000
Inventory 19,000 17,600
Depreciation and amortization (3,400) (3,600)
Other 900 1,300
--------- ---------
$ 700,500 $ 729,300
========= =========
</TABLE>
Deferred tax assets have been fully reserved. The net change in the
valuation allowance in 1999 and 1998 of $(45,300) and $(2,300),
respectively, was due to the utilization of certain net operating loss
carryforwards in the United Kingdom and the expiration of certain tax
credits in the United States.
At December 31, 1998, Pace has federal income tax loss carryforwards for
financial and tax reporting purposes of approximately $1,359,000, which
will expire in the years 2004 through 2013, and state income tax
carryforwards of approximately $389,000, which will expire in the years
1999 through 2003. Pace also has certain state and federal tax credits
aggregating $177,000, which will expire in varying amounts through 2011.
5. SHAREHOLDERS' EQUITY
STOCK OPTIONS AND WARRANTS - 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. In addition,
during 1999 and 1998, the Board of Directors authorized and options were
granted to purchase 20,000 and 35,000 shares, respectively, 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 and
December 31, 1998 226,000 $ 0.50
Granted 20,000 0.50$ .49
Exercised --
Expired --
---------
Outstanding and exercisable, December 31, 1999 246,000 0.50
=========
</TABLE>
At December 31, 1999, the options outstanding and exercisable had an
exercise and weighted-average exercise price of $.50 and weighted-average
remaining contractual lives of 1.49 years.
-28-
<PAGE>
5. SHAREHOLDERS' EQUITY (CONTINUED)
The fair value of options on their grant date for stock options was
measured using the Black-Scholes option pricing model. Key assumptions
used to apply this pricing model are as follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Risk-free interest rate 5.0% 5.70%
Expected life of option grants 4.5 years 4.5 years
Expected volatility of underlying stock 93% 91%
Expected dividend payment rate -- --
</TABLE>
The option pricing model used was designed to value readily tradeable
stock options with relatively short lives. The options are not tradeable
with contractual lives of up to five years. However, management believes
that the assumptions used to value the options and the model applied yield
a reasonable estimate of the fair value of the grants made under the
circumstances.
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>
1999 1998
<S> <C> <C>
Net income:
As reported $208,481 $59,440
Pro forma 198,164 47,036
</TABLE>
If the Company had used the fair value method, basic and diluted net
income per share would have been $0.06 and $0.01 for the years ended
December 31, 1999 and 1998, respectively.
STOCK REPURCHASE PROGRAM - 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 December 31, 1999, 25,000
shares had been repurchased under the program for $18,687.
-29-
<PAGE>
6. NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted net
income per share:
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998
<S> <C> <C>
Net income $ 208,481 $ 59,440
=========== =========
Weighted-average shares outstanding 3,375,850 3,388,466
Effect of dilutive securities 80,746 59,063
---------- --------
Total shares 3,456,596 3,447,529
========== ========
Basic net income per share $ 0.06 $ 0.02
========== ========
Diluted net income per share $ 0.06 $ 0.02
========== ========
</TABLE>
7. GEOGRAPHIC, SEGMENT AND CUSTOMER DATA
The Company primarily manages its business based on geographic regions
consisting of the United States and the United Kingdom through which it
sells its external pacing devices and accessories. Geographic and segment
data is set forth in the following table:
<TABLE>
<CAPTION>
United United
States Kingdom Eliminations Consolidated
<S> <C> <C> <C> <C>
1999
Sales and transfers $ 1,186,228 $ 891,461 $ (278,303) $ 1,799,386
Depreciation and amortization 10,893 9,691 -- 20,584
Net operating income (loss) (65,812) 230,717 2,972 167,877
Other income, primarily interest 37,434 3,170 -- 40,604
Capital expenditures 44,958 21,685 -- 66,643
Long-lived assets 87,415 39,215 -- 126,630
Total assets 1,717,708 798,063 (3,723) 2,512,048
1998
Sales and transfers $ 993,586 $ 814,839 $ (177,258) $ 1,631,167
Depreciation and amortization 12,631 10,730 -- 23,361
Net operating income (loss) (195,694) 197,047 11,427 12,780
Other income, primarily interest 40,222 6,486 -- 46,708
Capital expenditures 9,314 15,775 -- 25,089
Long-lived assets 53,349 27,964 -- 81,313
Total assets 1,781,020 547,130 (1,527) 2,326,623
</TABLE>
Transfers between areas are valued at cost plus a markup. Direct sales to
foreign customers from domestic operations were not material.
-30-
<PAGE>
7. GEOGRAPHIC, SEGMENT AND CUSTOMER DATA (CONTINUED)
Sales to major customers were as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998
Amount Percent Amount Percent
<S> <C> <C> <C> <C>
Customer A (related party) $ 700,711 39% $ 667,257 41%
Customer B 353,600 20 560,000 34
Customer C 323,000 18 78,000 5
</TABLE>
* * * * * *
-31-
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
-32-
<PAGE>
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:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Ralph E. Hanson 71 President, Chief Executive
Officer, Treasurer, and
Chairman of Board of
Directors
Derrick Ebden 49 Director
Drusilla F. Hays 50 Vice President and Clerk
George F. Harrington 63 Director
</TABLE>
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.
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.
-33-
<PAGE>
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,
1999, 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.
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, 1999 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 $100,000 in any
such fiscal year.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION
-------------------------------------------- ----------------------
AWARDS
NAME AND SECURITIES
PRINCIPAL OTHER ANNUAL UNDERLYING
POSITION YEAR SALARY($) BONUS($) COMPENSATION($) OPTIONS (#))
- --------- ---- --------- -------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Ralph E. 1999 127,688 -- -- --
Hanson, 1998 121,401 -- -- --
Chief Executive 1997 125,256 -- -- --
Officer
</TABLE>
-34-
<PAGE>
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,
1999.
<TABLE>
<CAPTION>
AGGREGATE OPTION VALUES AT FISCAL YEAR END
------------------------------------------------------
NUMBER OF SECURITIES VALUE OF
UNDERLYING UNEXERCISED UNEXERCISED IN-THE-
OPTIONS AT FY-END (#) MONEY OPTIONS AT
NAME EXERCISABLE UNEXERCISABLE FY-END (1)
- ---- ----------- ------------- --------------------
<S> <C> <C> <C>
Ralph E. Hanson 50,000 0 13,500
</TABLE>
(1) Represents the fair market value of the Company's Common Stock on
December 31, 1999 ($.0.77 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.
Mr. Hanson was not granted any options or other equity-based
compensation during the fiscal year ended December 31, 1999 and did not exercise
any options during such fiscal year.
3. EMPLOYMENT CONTRACTS
On June 1, 1998, 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 $125,000 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.
-35-
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
1. CERTAIN BENEFICIAL OWNERS.
As of March 15, 2000, 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 02481, 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.
2. BENEFICIAL OWNERSHIP OF MANAGEMENT.
Each of the persons named in the following table has furnished the
respective information shown:
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY
NAME, ADDRESS, & OWNED AS OF
OFFICES HELD WITH MARCH 15, PERCENTAGE
THE COMPANY 2000 OF CLASS
- -------------------- ----------------- ------------
<S> <C> <C>
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.
13 Waldron Court
Marblehead, MA 01945
Director of the Company
Directors and Officers as a Group... 1,164,000(4) 32.7%
</TABLE>
(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.
-36-
<PAGE>
(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 135,000 shares of Common Stock which officers and
directors have a right to acquire within 60 days pursuant to the exercise of
options.
Mr. Hanson, as beneficial owner of 24.8% of the outstanding Common
Stock of the Company, Chairman of the Company's Board of Directors, and the
Company's founder, may be deemed a controlling person of the Company under the
Securities Exchange Act of 1934.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
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 $700,711 during 1999 and $667,257 during 1998. All such sales were
made on normal trade terms.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
a. EXHIBITS.
<TABLE>
<S> <C>
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 * 1986 Non-Qualified Stock Option Plan, as amended.
10.2 * Form of Non-Qualified Stock Option Agreement.
10.3 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 and incorporated herein by this reference.
10.4 Distributor Agreement dated as of March 12, 1990 with APC Cardiovascular Ltd.
</TABLE>
-37-
<PAGE>
10.5 * 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 and incorporated herein by this
reference
10.6 * Employment Agreement dated as of June 1, 1998 with Ralph E. Hanson
previously filed as an exhibit to the Registrant's Quarterly Report
on Form 10-QSB for the quarter ended June 30, 1998 and incorporated
herein by this reference.
22 Subsidiaries of the Registrant.
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.
b. 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.
-38-
<PAGE>
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 30, 2000
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 30, 2000
/s/ GEORGE F. HARRINGTON
-----------------------------------
George F. Harrington, Director
Date March 30, 2000
/s/ DERRICK EBDEN
-----------------------------------
Derrick Ebden, Director
Date March 30, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,513,514
<SECURITIES> 0
<RECEIVABLES> 148,352
<ALLOWANCES> 0
<INVENTORY> 508,045
<CURRENT-ASSETS> 2,385,418
<PP&E> 175,865
<DEPRECIATION> 122,515
<TOTAL-ASSETS> 2,512,048
<CURRENT-LIABILITIES> 147,487
<BONDS> 0
0
0
<COMMON> 34,009
<OTHER-SE> 2,330,552
<TOTAL-LIABILITY-AND-EQUITY> 2,512,048
<SALES> 1,799,386
<TOTAL-REVENUES> 1,799,386
<CGS> 651,433
<TOTAL-COSTS> 980,076
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 208,481
<INCOME-TAX> 0
<INCOME-CONTINUING> 208,481
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 208,481
<EPS-BASIC> 0.06
<EPS-DILUTED> 0.06
</TABLE>
