-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, K9YKgdyc7HshEL7VBe6fBmYIt65q6Qu9KEIrLfhRFgSIvJHkPYQgxCIVUJlWlCU8 ikmDODi2dRPx8XT0yz0rMw== 0000950135-96-001640.txt : 19960506 0000950135-96-001640.hdr.sgml : 19960506 ACCESSION NUMBER: 0000950135-96-001640 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960404 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: PACE MEDICAL INC CENTRAL INDEX KEY: 0000814057 STANDARD INDUSTRIAL CLASSIFICATION: 3845 IRS NUMBER: 042867416 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-16257 FILM NUMBER: 96544547 BUSINESS ADDRESS: STREET 1: 391 TOTTEN POND RD CITY: WALTHAM STATE: MA ZIP: 02154 BUSINESS PHONE: 6178905656 MAIL ADDRESS: STREET 1: 391 TOTTEN POND ROAD CITY: WALTHAM STATE: MA ZIP: 02154 10KSB 1 PACE MEDICAL, INC. 1 SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-KSB (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended December 31, 1995 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period to ----------------------- ---------------------- Commission file number 0-16257 PACE MEDICAL, INC. - - -------------------------------------------------------------------------------- (exact name of small business issuer as specified in its charter) Massachusetts 04-2867416 - - -------------------------------------------------------------------------------- (State or other jurisdiction (I.R.S. Employer incorporation or organization) Identification No.) 391 Totten Pond Road Waltham, Massachusetts 02154 - - -------------------------------------------------------------------------------- (Address of principal (Zip Code) executive offices) Issuer's telephone number, including area code (617) 890-5656 -------------- Securities registered under Section 12(b) of the Act: Name of each exchange on Title of each class which registered None ------------------- --------------------------------- Securities registered under Section 12(g) of the Act: Common Stock, par value $.01 per share - - -------------------------------------------------------------------------------- (Title of class) 2 Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ ] State issuer's revenues for its most recent fiscal year. $1,754,242. 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. $2,247,770 as of March 22, 1996. (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. 3,391,770 shares of Common Stock, $.01 par value, as of March 22, 1996. DOCUMENTS INCORPORATED BY REFERENCE If the following documents are incorporated by reference, briefly describe them and identify the part of the Form 10-KSB (e.g., Part I, Part II, etc.) into which the document is incorporated; (1) any annual report to security holders; (2) any proxy or information statement; and (3) any prospectus filed pursuant to Rule 424(b) or (c) of the Securities Act of 1933. None. -2- 3 PART I ITEM 1. DESCRIPTION OF BUSINESS. A. BUSINESS DEVELOPMENT. Pace Medical, Inc. (the "Company") is principally engaged in the design, manufacture and sale of single and dual-chamber temporary cardiac pacemakers, a dual-chamber pacing analyzer, percutaneous lead introducers, heartwires, surgical and temporary pacemaker extension cables, and related accessories. The Company commenced operations effective March 16, 1985 when Ralph E. Hanson, the Company's President and founder, acquired the outstanding capital stock of APC Medical Ltd. ("APC Medical") from American Pacemaker Corporation, a subsidiary of Intermedics, Inc. Unless otherwise specifically referenced herein, the term "Company" includes APC Medical. Mr. Hanson was the founder of American Pacemaker Corporation and served as its president from 1975 until 1985. American Pacemaker Corporation was acquired by Intermedics, Inc. in 1982. The Company was incorporated in Massachusetts on May 29, 1985 and Mr. Hanson transferred the outstanding capital stock of APC Medical to the Company on January 1, 1986. APC Medical is the successor to Devices Limited ("Devices"), a U.K. manufacturer of medical electronic equipment, permanent pacemakers and leads, and temporary pacemakers, which was a pioneer in the pacing industry. After Devices was acquired by Johnson & Johnson Co., it was sold in 1978 to American Pacemaker Corporation and its name was changed to APC Medical Ltd. APC Medical is a U.K. limited company with facilities located in Welwyn Garden City, Herts, England. The Company's acquisition of APC Medical provided the Company with a foreign based manufacturing operation and an international marketing and sales presence through a network of experienced sales representatives and distributors in the U.K., Europe, and other world markets. A portion of the Company's manufacturing continues to be done by APC Medical, and APC Medical markets the Company's products outside the U. S. and Canada under the APC Medical name. The Company is responsible for marketing in the U.S. and Canada and conducts most of its manufacturing and new product development operations in the U.S. B. DESCRIPTION OF BUSINESS OF ISSUER. The Company designs, manufactures and sells single and dual-chamber temporary cardiac pacemakers, a dual-chamber pacing analyzer, percutaneous lead -3- 4 introducers, heartwires, surgical and temporary pacemaker extension cables, and related accessories. The Company is not engaged in the business of designing, manufacturing, or marketing permanent implantable cardiac pacemakers and, due to the high risk of liability associated with such pacemakers, it does not intend to enter this business. Temporary pacemakers involve some risk of liability because they may be life-supporting medical devices, but their ability to be tested, repaired and replaced without surgery diminishes the risks to the patient and the potential of liability in comparison to permanent implantable pacemakers. A pacemaker is an electronic device which stimulates an impaired heart, thereby causing it to beat at a rate which will meet normal bodily demands. A pacemaker consists of two elements, a pulse generator (which provides the power source and the timing circuit) and a pacing lead (which conducts the electrical impulses from the pulse generator to the heart). Temporary pacemakers are made for temporary external applications for short-term electrical conduction and cardiac rhythm disorders and are not implanted in a patient's body. In contrast, permanent pacemakers are implantable and made for longer term applications. All pacemakers, whether temporary or permanent, are connected to the heart by a lead, which consists of an insulated wire and an electrode. Pacemakers - whether temporary or permanent - are also characterized as either asynchronous pacemakers, which supply impulses to the heart at a fixed rate on a continuous basis, or "demand" pacemakers, which supply impulses to the heart on an "as needed" basis only when the natural heartbeat is inadequate. Demand pacemakers are either ventricular demand pacemakers which supply impulses as needed to correct a heart's irregular beating pattern or DDD dual chamber pacemakers, which supply impulses as needed to provide heartbeat regularity and in addition increase the heart's pumping capacity. Pacemakers, permanent or temporary, may also either be programmable or non programmable. Programmable pacemakers may have one or more operational modes and each mode permits the attending physician to program different pacing parameters as dictated by the patient's conditions. Thus, a physician may use one multiple mode pacemaker to treat a variety of patient conditions with appropriate pacing parameters. In this manner, a multiple mode pacemaker offers a physician the versatility to treat changing patient conditions with a single pacemaker. In addition, because temporary pacemakers are reusable external devices, one multiple mode temporary pacemaker can be used repeatedly for different patients experiencing a variety of medical conditions. Pacing leads - whether temporary or permanent - consist of an insulated wire, an electrode, and a connector. The lead is usually inserted through a vein into the interior of the heart. The temporary bipolar ventricular pacing leads are radiopaque, permitting viewing on diagnostic and monitoring equipment and utilize -4- 5 a polyurethane material as the outer insulator, stainless steel wire as the conductor, and are offered in 4, 5 and 6 French sizes. These are compatible with all known temporary pacemakers being sold worldwide at this time. The Company believes, based upon industry publications, that the worldwide market for temporary pacemakers, temporary pacing leads, pacing analyzers, myocardial heartwires, lead introducers, and surgical extension cables is approximately $80 million annually. The Company further believes based upon management's experience that in number of units sold, percent of market and dollar volume, the programmable DDD dual chamber temporary pacemakers will experience the fastest rate of growth of all lines in the temporary pacemaker business during the next five years. CURRENT PRODUCTS The Company has several products now being marketed in the U.S. that have received marketing approval from the U.S. Food and Drug Administration ("FDA"). In general, FDA approval can be obtained by three means: an application for approval under statutory section 510(k), a premarket approval application ("PMA"), or a supplemental premarket approval application ("SPMA"). See "Government Regulation". A 510 (k) approval is the simplest manner in which a manufacturer may bring a new product to market. In granting 510(k) approval, the FDA is allowing the marketing of a product based on its assessment that the product is "substantially equivalent" to devices which are already in the market and presents no new issues involving safety and effectiveness. Approval of a 510(k) application by the FDA is not approval of the device itself as it is not based on an in depth examination of the product. A PMA is the typical means by which a new product is introduced into the market when a 510(k) is not appropriate because: 1) new issues of safety and effectiveness may be involved, 2) there is no comparable pre-enactment, substantially equivalent device for comparison, and 3) the methodologies involved in the design and manufacture of the device may present safety issues of a compelling nature requiring an in depth review by the FDA. If the product is a Class III device, a controlled clinical study to demonstrate safety and effectiveness will likely be required. When the FDA issues its approval of a PMA, it is, in fact, approving the device itself for use in specific approved circumstances. An SPMA is a means by which a new product may be approved by the FDA, when its characteristics and indications for use are similar to a PMA device, and its the methods of design, manufacture and control present no new or unusual safety -5- 6 and effectiveness issues. A controlled clinical study may still be a requirement for an SPMA approval. All new products that are to be introduced to the United States market will require FDA approval prior to being made available for commercial marketing. See "Government Regulation". The products currently marketed by the Company are as follows: TEMPORARY CARDIAC PACEMAKERS. The Company's Model 4553 MICRO-PACE, dual-chamber, temporary cardiac pacemaker, is a programmable ten (10) mode, "state of the art", single and dual-chamber temporary cardiac pacemaker consisting of three (3) atrial modes, AOO, AAI, AAT, three (3) ventricular modes VOO, VVI, VVT, and four (4) dual modes DOO, DVI, DDI, DDD. The MICRO-PACE is a technically advanced dual-chamber temporary cardiac pacemaker which utilizes a copyrighted computer software-based microprocessor design licensed to the Company by Pace Technology, a research and development partnership controlled by the Company's President and the Chairman of the Company's Medical Advisory Board. See "Patents and Licenses". With the MICRO-PACE unit, the physician is able to select the proper physiological parameters in accordance with each individual patient's needs. The MICRO-PACE unit has features that address the typical complications previously associated with advanced dual-chamber pacing modes. The simplified keyboard operation, visual display, built-in safety features, wide selection of parameter and operation modes, size and battery operation are all features that make the MICRO-PACE unit an innovation in temporary cardiac pacing. The Company received FDA approval of the MICRO-PACE unit in September, 1991 based upon the PMA of an OEM customer, and commercial distribution in the U.S. commenced at that time. In addition, the Company received its own independent PMA from the FDA covering the Model 4553 MICRO-PACE unit in March, 1994. The Model 4570 MICRO-PACE, dual-chamber, DDD, temporary cardiac pacemaker is an enhanced version of the Model 4553. This device received FDA SPMA approval in August, 1995. The Model 4570, dual-chamber, temporary pacemaker has the ability to sense, pace and track in the DDD mode at high-rates; thus, allowing cardiologists and surgeons to address the needs of post-operative, open-heart patients, regardless of their age. In particular, the device will greatly assist the recovery of both infants and young children, who have very fast atrial heart rates (180-210 bpm) and have developed temporary heart block, following open-heart surgery. To the Company's knowledge, the Model 4570, dual-chamber, temporary pacemaker is the only device of its kind in the world that has the ability to sense and pace at high rates in the DDD mode; thereby, restoring A-V synchrony and improving cardiac output. -6- 7 The Company also manufactures two (2) types of single-chamber temporary cardiac pacemakers, bedside units (Model 4162 and 4164) and miniature (ambulatory) units (Model EV4542 and EV4543). The larger bedside units offer ruggedness in construction, ease of operation, ease of viewing, and over a decade of proven performance. The two bedside models being offered provide customers (hospitals/physicians) with a flexibility of choice in selecting those pacing parameters best suited for their patients. The units are battery operated and attach to the bedrail which is convenient for both the patient and the physician. The miniature models attach comfortably to the patient and allow for ambulatory pacing, if required. They are highly desirable due to their small size and they offer a great deal of flexibility with regard to the selection of required pacing parameters. These miniature pacemakers are battery operated and, like the bedside units, have over a decade of reliability and performance. The Company believes based upon management's experience in the market that it is the major manufacturer of bedside pacemakers in the European market and the Company believes based upon the lack of competitive products in the market that APC Medical and its predecessors have supplied the majority of the temporary external pacemakers sold in the United Kingdom. PACING ANALYZER. The Model 4800 AccuPace[TRADEMARK], 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[TRADEMARK], dual-chamber, pacing analyzer in September, 1994. LEAD INTRODUCERS (PEEL-AWAY). The Company's line of disposal percutaneous lead introducers provides for a temporary access to a vein so that a permanent pacing lead can be positioned within the heart. This product line includes seven sizes consisting of 7, 8, 9, 10, 10.5, 11 and 12 French types. MYOCARDIAL HEARTWIRES. The Company's products include a heartwire specifically intended for use as a temporary cardiac pacing lead after open-heart surgery. The disposable heartwire can be used with the Company's present line of temporary pacemakers and other manufacturers' units currently on the market. EXTENSION CABLES. The Company manufactures a wide variety of temporary cardiac pacemaker extension cables and surgical extension cables in order to satisfy the many different applications encountered during patient pacing. The -7- 8 extension cables can be used with most manufacturers' temporary external pacemakers and pacing system analyzers currently being marketed. Many of the cables can be resterilized after use, while others are disposable. NEW AND PROPOSED PRODUCTS The Company generally introduces a new product outside the United States first and, upon the receipt of FDA approval, commences marketing of the product in the United States. Introduction of all of the Company's new products in the United States is subject to FDA approval. See "Current Products" and "Government Regulation". MODEL 5200 MINI-PACE, SINGLE-CHAMBER, TEMPORARY PACEMAKER. The Company intends to file a 510(k) submission with the FDA in the fourth quarter of 1996 covering its new Model 5200 MINI-PACE, single-chamber, temporary pacemaker. This device has many new features over our present Model EV4543 and other competitive devices now on the market. The design encompasses the expressed needs of the medical community from both a user-friendly and performance standpoint. MODEL 4580 SURGI-PACE, DUAL-CHAMBER, TEMPORARY PACEMAKER. The Company intents to submit a SPMA application to the FDA during the fourth quarter of 1996 covering its newly designed dual-chamber, DDD, temporary cardiac pacemaker that combines the basic features of the MICRO-PACE along with having the ability to synchronize an intra-aortic balloon pump to the temporary pacemaker's sensing and pacing action. The SURGI-PACE is the only known dual-chamber, DDD, temporary pacemaker which allows the ventricular channel of the pacemaker to be employed as the trigger to initiate deflation and inflation of the balloon catheter. In addition, many new user friendly design features have been included in the SURGI-PACE to enhance its operation. TEMPORARY PACING LEADS. The Company expects to file a 510(k) submission with the FDA in the fourth quarter of 1996 covering a new line of bipolar temporary pacing leads. These bipolar ventricular and atrial pacing leads are offered in 4, 5 and 6 French sizes and are radiopaque. These new disposable type bipolar temporary pacing leads are for use with the Company's present line of single-chamber bedside and miniature temporary pacemakers and other manufacturers' units currently on the market. They may also be used with the Company's Model 4553 and 4570 MICRO-PACE, dual-chamber, temporary pacemakers. -8- 9 MARKETING The Company's temporary cardiac pacemakers and associated accessories are sold to hospitals both domestically and abroad through factory direct sales specialists, 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. The Company focuses on three major domestic and international selling markets. These markets are as follows: 1. OEMS. Original Equipment Manufacturers (companies currently manufacturing implantable pacemakers) often need a second source of supply and, in many cases, require special types of temporary cardiac pacemakers that they do not manufacture. Purchase of such temporary cardiac pacemakers and leads from the Company enables the OEMs to expand their product lines and offer a more complete service to their customers. -9- 10 2. REPRESENTATIVES/DISTRIBUTORS. In addition to APC Cardiovascular, the Company utilizes representative and distributor organizations in the United States and Canada. Only those who have proven medical sales experience and integrity in making day-to-day calls on hospital purchasing directors and physicians are considered. 3. CONTRACT PURCHASING. This includes, for the most part, annual purchasing contracts and bids that allow the hospitals or purchasing groups involved to receive a quantity discount based on a commitment of purchases scheduled for delivery throughout the year. The Company conducts training and education programs for its sales representatives upon engagement of the representative and upon introduction of new products. The sales representatives, in turn, provide service, training and other assistance to physicians. The Company intends to enter into contracts with its representatives which may be terminated on short notice by either party. The establishment of customer relationships with physicians is an important competitive factor in the industry. Although a company's products themselves must be competitive for a company to compete successfully, an experienced salesperson with established physician rapport may overcome small differences in products. While the Company, therefore, depends upon the sales activities of its representatives, the Company does not believe that the loss of any one sales representative would adversely affect its business. The Company's distributors and sales representatives are not restricted in marketing products that compete with the Company's products. The Company believes that its distributors and sales representatives do not presently market competing temporary cardiac pacemakers, but do presently market competing accessory products. WORKING CAPITAL PRACTICES. In the United States, the Company sells its pacing products through independent sales representatives, OEM accounts, and distributors. The OEM accounts and distributors buy pacemakers directly from the Company and are billed at a discounted rate, 30 days net. Many of the Company's products are sold on a factory direct basis or through sales representatives, and the Company bills the hospitals directly. The Company generally pays the representative its commission during the month following the collection of funds. The Company's practice is to attempt to realize accounts receivable within 30 to 60 days after shipment. The Company believes, based upon management's experience, that the -10- 11 foregoing working capital practices are similar to those of the pacemaker industry in general. Since in most cases an insurance company or government program, including Medicare and Medicaid programs, reimburses the hospital or patient for pacemakers, any future reductions in government funding of health insurance may limit funds available to certain government third-party payors to pay for the Company's products; thereby, adversely affecting the Company's sales. The nature of the Company's pacemaker products requires that sufficient inventories of finished goods and critical components be maintained to insure that the rapid delivery requirements of its customers are met. The Company currently 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. Temporary cardiac pacemakers carry a one year warranty. The Company warrants temporary pacemakers to be free from defects in materials from one (l) 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 leads may be life-supporting medical devices, the Company's liability for any presently unknown product design or manufacturing deficiencies could be substantial and could exceed the limits under existing product liability insurance. The Company maintains product liability coverage outside the United States with annual limits of [pound]500,000 (approximately $776,500 as of December 31, 1995) per occurrence and in the aggregate. The Company does not have product liability insurance in the United States, and any claim could adversely affect the Company's financial condition. The Company believes, based upon management's experience, that its liability exposure is lessened because it does not manufacture or sell permanent implantable cardiac pacemakers or leads. However, the cost of recalling its products upon discovery of any material defects would be substantial and could have an adverse effect on the Company and its financial condition. -11- 12 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 five 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, 1994, and December 31, 1995, the Company expended $325,938 and $267,463, respectively, on research and development. See Item 12, "Certain Relationships and Related Transactions", for a discussion of certain rights the Company has acquired from a research and development partnership controlled by the Company's President and Chief Executive Officer and the Chairman of its Medical Advisory Board. QUALITY ASSURANCE Quality control procedures begin upon the receipt of raw components and materials and continue during production and after final assembly. The Company keeps accurate and concise quality control and production records for each temporary pacemaker and all other products manufactured. The Company's quality control testing of components, sub-assemblies and final products is extensive. Approximately three employees are engaged in inspection and quality control activities. Because of the life-enhancing function pacemakers perform, all pacing system components and related products are manufactured to precise specifications. SOURCES OF SUPPLY Many of the components incorporated by the Company in its pacemaker products are produced to its specifications by various suppliers. However, potentiometers for miniature temporary pacemakers are presently supplied by a single supplier. While it is the Company's policy to qualify a limited number of suppliers of components, the Company maintains a list of alternate sources of supply and intends to maintain a sufficient amount of inventory in order to -12- 13 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 a single contractor. 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 regulations with respect to most of the categories outlined above, including -13- 14 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's MICRO-PACE dual-chamber temporary cardiac pacemaker was not substantially equivalent to any device that was in commercial distribution before May 28, 1976. As a result, commercial distribution of the MICRO-PACE unit was delayed until FDA approval was obtained in September, 1991. The Company is not in a position to make a judgment as to the full impact of the FDA regulations on continuing operations, particularly the pre-market approval procedures, but it expects to have to devote substantial time and significant expense to compliance matters in the foreseeable future. In addition, there is no assurance that changes in governmental regulations will not adversely affect the Company. Where a device is found to be in violation of the requirements of the Act or regulations thereunder, the FDA is authorized to seek an injunction against the further manufacture and distribution of the device and to have the device seized. The FDA may itself administratively restrain a device for up to 30 days pending institution of further regulatory action. In addition to these remedies, the FDA may seek criminal penalties against corporations and individuals who ship or cause the shipment of prohibited devices in interstate commerce or who otherwise violate the Act. Finally, the FDA has developed a "recall" procedure under which a manufacturer or distributor may be requested to remove a product from interstate commerce if that product violates the Act. -14- 15 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. FOREIGN OPERATIONS For the years ended December 31, 1994, and December 31, 1995, revenues from foreign customers, including export sales, totaled $464,053 and $523,657, respectively (approximately 38% and 30%, 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 -15- 16 operating abroad, including currency restrictions, currency adjustments and changes in foreign laws. The Company believes that the changes which took effect in 1994 and 1995 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, 1995, the total number of the Company's full-time employees was 12. APC Medical employed 4 of these employees. The Company believes, based upon management's opinion, that its relations with its employees are satisfactory. PATENTS, TRADEMARKS AND LICENSING In August, 1986, the Company acquired a ten year exclusive license from Pace Technology covering the technology used in the MICRO-PACE series of temporary cardiac pacemakers. The Company has agreed to pay Pace Technology a royalty of 5% on sales of programmable temporary pacemakers incorporating this technology. The license becomes fully paid-up at the end of the ten year term. See Item 12. Certain Relationships and Related Transactions. The Company owns no patents covering the technology incorporated in its products, and the Company is not aware that any of its products infringe on patents owned by others. However, the Company has not conducted a formal patent search to determine whether any of its products so infringe and there can be no assurance that the technology used in the Company's products may not be covered by an existing or future patent owned by others. If it is determined that the Company is infringing, then it is the Company's intention to acquire licenses covering such technology, to the extent that licenses are available under such patents. It is the Company's belief that the payments of additional reasonable royalties would not impair its business. However, if the owner of such a patent refused to grant a license to the Company, then one or more of the Company's products might be at a competitive disadvantage in the market. If the Company should decide to incorporate such technology into its products without first obtaining a license, the Company could be enjoined from marketing the product, which would adversely affect the Company's business. -16- 17 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 1996. 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 pacing leads and temporary pacemakers. Foreign manufacturers may receive the benefit of national and local laws protecting them from outside competition. Product characteristics (including reliability, performance and longevity), design (lightness, compactness and contours), salesperson/physician relationships, warranty terms, service and price are all competitive factors in the industry. The Company believes, based upon management's experience, that it maintains a competitive position with respect to most of these elements. Since the Company's salespeople are not direct employees of the Company, the Company may have less control over salesperson/physician relationships than certain of its competitors whose salespeople are direct employees. With the rapid progress of medical technology, and in spite of continuing research and development progress, the Company's products are always subject to the risk of being rendered obsolete by the introduction of new products or techniques. Some of the conditions and diseases which the Company's pacemakers are designed to treat may, in some cases, also be treated by drug therapy. The Company does not deem itself to be in direct competition with pharmaceutical companies because, at present, drug therapy is infrequently a viable alternative to the use of a pacemaker. However, new drugs and methods of therapy may be developed by pharmaceutical or other health care companies which might compete -17- 18 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 [pound]28,500 ($44,175) or approximately [pound]5.70 ($8.85) per square foot. The lease expires in 2006 and contains provisions requiring upward revision of the rent every five years. The Company believes, based upon management's evaluation of its future space needs, that the Company's facilities in Waltham and England are adequate. In addition, in the opinion of the Company's management, the Company's facilities are adequately insured. ITEM 3. LEGAL PROCEEDINGS. As of December 31, 1995, neither the Company nor APC Medical was party to any material legal proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable. -18- 19 PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Company's Common Stock is now quoted on the National Association of Securities Dealers, Inc.'s OTC Bulletin Board under the symbol PMDL. The Company's Common Stock was quoted on the NASDAQ Stock Market under the symbol PMED from July 29, 1987, when it began public trading, until January 14, 1994, when it was delisted because of the Company's failure to meet the $2,000,000 total assets requirement for continued listing. The following table sets forth, for the periods indicated, the closing quote on the OTC Bulletin Board. Such quotations reflect inter-dealer prices, without retail mark-up, mark-down, or commission, and may not reflect actual transactions. Fiscal Year Ended December 31, 1994 (OTC) Closing Quote -------------- First Quarter 1 Second Quarter 3/4 Third Quarter 1 1/8 Fourth Quarter 5/8 Fiscal Year Ended December 31, 1995 (OTC) First Quarter 5/8 Second Quarter 5/8 Third Quarter 3/4 Fourth Quarter 3/4
On March 22, 1996, the closing quoted price for the Common Stock, as reported by the OTC Bulletin Board, was $1.00 per share and there were approximately 107 record holders and approximately 350 beneficial holders of the Common Stock. The Company has never paid any dividends and does not have any intention of paying any dividends in the foreseeable future. -19- 20 ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION. LIQUIDITY AND CAPITAL RECOURCES As of December 31, 1995, the Company had cash and cash equivalents of $772,006 and working capital of $1,336,596. This contrasts to comparable cash and working capital positions at December 31, 1994 of $781,110 and $1,131,820. 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 1995. As is evidenced in its financial statements, the Company's capital commitments are minimal. Management continues to believe that the current level of working capital coupled with the flexibility of the Company's cost structure, should suffice to ensure that its on-going operations are financed adequately in fiscal 1996. 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, 1995 VERSUS YEAR ENDED DECEMBER 31, 1994 Sales increased by 44% from $1,216,446 in 1994 to $1,754,242 in 1995 primarily due to the increase of new orders for temporary cardiac pacemakers and pacing analyzers from the Company's OEM customers and a number of international customers. It is also believed that hospital budgetary considerations and the political health care environment improved considerably during 1995. This had a positive effect on purchasing decisions. During 1994, the Company received a Premarket Approval Application (PMA) from the Food and Drug Administration covering the MICRO-PACE, dual-chamber, temporary pacemaker. Management believes this has put the Company in a much stronger competitive position in the marketplace. The PMA approval enabled the Company to submit a Supplemental Premarket Approval Application (SPMA) to the FDA covering many new design features that enhance the MICRO-PACE's usefulness for cardiac patients. These product enhancements, once approved by the FDA, will provide for additional revenues that should improve the Company's overall operating results. Gross margins for 1995 were approximately 52%. This is consistent with the 52% margin the Company experienced in 1994 and is reflective of a stabilization in the Company's product mix. -20- 21 Operating expenses remained approximately the same at $695,713 in 1995 as compared to $726,145 in 1994. This was attributable to management's cost control measures being tightly enforced. Management continues to believe that operating expenditures will not increase during fiscal year 1996, 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 1995 because of its ability to utilize net operating loss carryforwards in both the U.S. and the U.K. The Company made approximately $246,018 or $.07 per share for the year ended December 31, 1995. This contrasts with a 1994 loss of ($65,306) or ($.02) per share. Management believes that inflation has had no impact on either net sales or income in the previous two years. NEW ACCOUNTING STANDARDS In March 1995, the Financial Accounting Standards Board issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets," which is effective for fiscal years beginning after December 15, 1995. The Company will adopt SFAS No. 121 during fiscal year 1996. The Company is evaluating the impact that implementation of SFAS No. 121 will have on its 1996 financial statements. In October 1995, the Financial Accounting Standards Board issued SFAS No. 123, "Accounting for Stock-Based Compensation," which is effective for fiscal years beginning after December 15, 1995. SFAS No. 123 requires the fair value of stock-based compensation either to be disclosed or recognized in the consolidated financial statements. The Company is evaluating whether or not it will adopt the recognition provisions of SFAS No. 123 and accordingly has not yet determined the effect of such a change. ITEM 7. FINANCIAL STATEMENTS. The Company's financial statements, including i. Independent Auditors' Report ii. Consolidated Balance Sheets iii. Consolidated Statements of Operations iv. Consolidated Statements of Shareholders' Equity v. Consolidated Statements of Cash Flows vi. Notes to Consolidated Financial Statements are set forth below beginning at Page F-1. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. -21- 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 67 President, Chief Executive Officer, Treasurer, and Chairman of Board of Directors Derrick Ebden 45 Director Drusilla F. Hays 46 Vice President and Clerk George F. Harrington 59 Director Anthony W. Bailey 40 Vice President and General Manager
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 -22- 23 management firm, and has been involved in private investment management since 1967. Anthony W. Bailey has been Vice President and General Manager of the Company since September, 1987. 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, 1994, all of these filing requirements were satisfied, except that Mr. Ebden, Mr. Bailey, and Ms. Hays failed to file on a timely basis one report relating to one transaction in December, 1995, and Mr. Harrington failed to file on a timely basis one report relating to two transactions in December, 1995. In making these disclosures, the Company has relied solely on written representations of its directors, executive officers, and ten percent stockholders, and copies of reports that they have filed with the Securities and Exchange Commission. -23- 24 ITEM 10. EXECUTIVE COMPENSATION. 1. SUMMARY OF ANNUAL COMPENSATION The table set forth below shows the annual compensation paid by the Company to its Chief Executive Officer, and to its executive officers while in such capacities, as a group, for the three fiscal years ended December 31, 1995. No executive officer, except for the Chief Executive Officer, received a total annual salary and bonus in excess of $100,000 in any such fiscal year. SUMMARY COMPENSATION TABLE ANNUAL COMPENSATION LONG TERM COMPENSATION ------------------- ---------------------- AWARDS ---------------------- NAME AND SECURITIES PRINCIPAL OTHER ANNUAL UNDERLYING ALL OTHER POSITION YEAR SALARY($) BONUS($) COMPENSATION($) OPTIONS (#))(1) COMPENSATION($)(2)(3) - - -------- ---- ------------------ --------------- --------------- --------------------- Ralph E. 1995 111,712 -- -- -- -- Hanson, 1994 105,908 -- -- -- -- President, 1993 95,641 -- -- -- -- Treasurer & Chief Executive Officer All Executive 1995 269,036 -- -- 50,000 -- Officers as a 1994 260,665 -- -- -- -- Group (3 1993 236,716 -- -- -- 3,750 Persons) - - ---------- (1) Represents shares of Common Stock subject to non-qualified stock options granted during fiscal year 1995. See "Option Grants in Last Fiscal Year". (2) Does not include perquisites and other personal benefits received by the executive officers because the aggregate amount of such compensation, if any, does not exceed the lesser of $50,000 or 10% of the total amount of annual salary and bonus for any named individual. (3) Includes the value realized upon the exercise of options granted under the Company's 1986 Non-Qualified Stock Option Plan.
-24- 25 2. STOCK OPTIONS The table set forth below shows information regarding individual grants of stock options by the Company to its Chief Executive Officer and to its executive officers, as a group, for the fiscal year ended December 31, 1995. OPTION GRANTS IN LAST FISCAL YEAR --------------------------------- % OF TOTAL NUMBER OF SECURITIES OPTIONS GRANTED UNDERLYING OPTIONS TO EMPLOYEES IN EXERCISE EXPIRATION NAME GRANTED (#)(1) FISCAL YEAR PRICE ($)(2) DATE - - ---- -------------------- --------------- ------------ ---------- Ralph E. Hanson 0 -- -- -- All Executive Officers as a Group (3 Persons) 50,000 45% $.50 12/6/00 - - ---------- (1) Represents shares of Common Stock subject to five-year non-qualified options granted in December, 1995. (2) The Board of Directors determined that the fair market value of the Company's Common Stock was $.50 per share on the date of grant.
The table set forth below shows information regarding the value of unexercised stock options held by the Company's Chief Executive Officer and its executive officers, as a group, at December 31, 1995. AGGREGATE OPTION VALUES AT FISCAL YEAR END ------------------------------------------ NUMBER OF SECURITIES UNDERLYING UNEXERCISED VALUE OF OPTIONS AT FY-END (#) UNEXERCISED IN-THE- --------------------- MONEY OPTIONS AT NAME EXERCISABLE UNEXERCISABLE FY-END ($)(1) - - ---- ----------- -------------- ------------- Ralph E. Hanson 0 0 -- All Executive Officers as a Group (3 Persons) 50,000 0 12,500 - - ---------- (1) The closing quote on December 31, 1995 for a share of the Company's Common Stock on the OTC Bulletin Board was $.75.
-25- 26 Neither Mr. Hanson nor any executive officer of the Company exercised any options during the fiscal year ended December 31, 1995. 3. EMPLOYMENT CONTRACTS On June 1, 1995, the Company entered into a three year employment agreement with Mr. Hanson. Under the terms of this agreement, Mr. Hanson will serve as the Company's President and Chief Executive Officer at salary of not less than $105,000 per annum, and will be eligible for such fringe benefits as are generally made available by the Company by its employees. In addition, the agreement also imposes upon Mr. Hanson certain confidentiality requirements and certain restrictions regarding his ability to compete with the Company following his employment. 4. DIRECTOR COMPENSATION The Company's directors receive no cash compensation in consideration for serving on the Board of Directors. However, in December, 1995, the Company granted to each of George F. Harrington and Derrick Ebden a five year non-qualified stock option to purchase 25,000 shares of Common Stock at an exercise price of $.50 per share, which was determined by the Board of Directors to be the fair market value of the Company's Common Stock on the date of grant. The closing quote on December 31, 1995 for a share of the Company's Common Stock on the OTC Bulletin Board was $.75. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. 1. CERTAIN BENEFICIAL OWNERS. As of March 22, 1996, the only stockholders known to the Company to be the beneficial owners of more than 5% of the Company's outstanding shares of Common Stock were Ralph E. Hanson, who is a director, Paul J. LaRaia, M.D. of 45 Ravine Road, Wellesley, Massachusetts 02181, who is the beneficial owner of 301,000 shares of Common Stock or 8.9% of the outstanding Common Stock, and LifeSciences Technology Partners, L.P., 2317 20th Street, N.W., Washington, D.C. 20009, and Diversified Strategies Fund, L.P., 1230 Hurstbourne Lane, Suite 215, Louisville, Kentucky 40222, which as a group are the beneficial owners of 190,000 shares of Common Stock or 5.6% 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. -26- 27 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 22, PERCENTAGE THE COMPANY 1996 OF CLASS ----------- ---- -------- Ralph E. Hanson 900,000(1) 26.5% 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 117,000(3) 3.4% Boston Equity Management Co. 6 Tucker Street Marblehead, MA 01945 Director of the Company Directors and Officers as a Group 1,294,000(4) 36.5% - - ---------- (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.
-27- 28 (4) Includes 150,000 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 26.5% of the outstanding Common Stock of the Company, Chairman of the Company's Board of Directors, and the Company's founder, may be deemed a controlling person of the Company under the Securities Exchange Act of 1934. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Ralph E. Hanson, the President, Chief Executive Officer, and a Director of the Company, and Paul J. LaRaia, M.D., who is the owner of 8.9% of the Company's Common Stock, are equal partners in Pace Technology, a Massachusetts general partnership, which owns certain technology incorporated in the Company's MICRO-PACE series of temporary pacemakers. Such technology was exclusively licensed to the Company in 1986 for ten years under a license agreement providing for royalties of 5%. After such time, the license will be fully paid-up and irrevocable, and no further royalties will be payable by the Company. The Company accrued royalties to Pace Technology of $39,748 during 1995 and $30,467 during 1994. In March, 1990, the Company entered into an Agreement with APC Cardiovascular Ltd., ("Cardiovascular"), a company in which Derrick Ebden, a Director of the Company, is Managing Director and a principal stockholder, pursuant to which Cardiovascular was appointed the sole distributor of the Company's products outside of North and South America on normal trade terms. Such agreement does not have a fixed term, but is terminable by either party upon one year's advance written notice. Prior to leaving the employment of the Company in March, 1990 in connection with the Company's downsizing of its operations in the United Kingdom, Mr. Ebden had been in charge of the Company's marketing efforts outside of North and Central America through APC Medical. The Company made sales to Cardiovascular of $447,759 during 1995 and $434,892 during 1994. 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. -28- 29 B. EXHIBITS. 1.1 Selling Agreement. 1.1.1 Agreement dated December 7, 1990 with Culverwell & Co., Inc. regarding Selling Agreement. 1.2 Additional Selling Agent Agreement. 1.3 Escrow Agreement. 3.1 Restated Articles of Organization of the Registrant. 3.2 By-laws of the Registrant, as amended. 4.1 Specimen Certificate for shares of Common Stock, $.01 par value. 4.2 Specimen Warrant Certificate (also included in Exhibit 4.4). 4.3 Unit Purchase Warrant Certificate. 4.3.1 Unit Purchase Warrant Certificate, as amended. 4.3.2 Amended Unit Purchase Warrant Certificate. 4.4 Warrant Agreement. 4.4.1 First Amendment to Warrant Agreement. 4.4.2 Second Amendment to Warrant Agreement. 10.1 License Agreement dated August 1, 1986 between the Registrant and Pace Technology.* 10.1.1 Amendment to License Agreement dated as of August 4, 1986.* 10.2 1986 Non-Qualified Stock Option Plan, as amended.* 10.3 Form of Non-Qualified Stock Option Agreement.* 10.4 Lease dated December 16, 1986 between Totten Pond Realty Trust and the Registrant. 10.5.1 License to Assign Lease among The John Laing Pension Trust Limited, Data Design Techniques Limited and D.D.T. Maintenance Limited, and APC Medical Ltd. - previously filed as an exhibit to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1989 (the "1989 Form 10-K") and incorporated herein by this reference. 10.8 Consulting Agreement dated August 4, 1986 between the Registrant and Abraham Azulay, M.D. 10.10 Consulting Agreement dated August 4, 1986 between the Registrant and G. Edgar Sowton, M.D. 10.11 Agreement for Purchase and Sale of Stock dated as of May 1, 1985 between Ralph E. Hanson and American Pacemaker Corporation. 10.12 Agreement dated as of March 15, 1985 between APC Medical Ltd. and American Pacemaker Corporation. 10.13 Security Agreement dated as of March 15, 1985 between APC Medical Ltd. and American Pacemaker Corporation. 10.14 Indemnification Agreement dated May 1, 1987 between the Registrant and American Pacemaker Corporation. 10.15 Form of Escrow Agreement between the Registrant and its stockholders.
-29- 30 10.16 Supply Agreement dated February 19, 1988 with Siemens-Pacesetter, Inc. - previously filed as an exhibit to the 1989 Form 10-K and incorporated herein by this reference. 10.17 Agreement dated April 16, 1990 with Fechtor, Detwiler & Co., Inc. 10.18 Common Stock Purchase Warrant Certificate dated May 31, 1990 in the name of Fechtor, Detwiler & Co., Inc. 10.19 Common Stock Purchase Warrant Certificate dated May 31, 1990 in the name of Fechtor, Detwiler & Co., Inc. 10.19.1 Letter dated June 12, 1992 extending such Common Stock Purchase Warrant Certificate - previously filed as an exhibit to the Registrant's Annual Report on Form 10-KSB for the year ended December 31, 1992 (the "1992 Form 10-KSB") and incorporated herein by this reference. 10.20 Common Stock Purchase Warrant Certificate dated May 31, 1990 in the name of Lynch, Brewer, Hoffman & Sands. 10.20.1 Letter dated June 12, 1992 extending such Common Stock Purchase Warrant Certificate - previously filed as an exhibit to the 1992 Form 10-KSB and incorporated herein by this reference. 10.21 Common Stock Purchase Warrant dated January 23, 1988 in the name of The Equity Group, Inc. 10.22 Agreement dated October 25, 1989 with Allen & Company Incorporated. 10.23 Distributor Agreement dated as of March 12, 1990 with APC Cardiovascular Ltd.* 10.24 Agreement dated August 28, 1989 with the Defense Logistics Agency of the U.S. Government, as amended. 10.25 Agreement dated December 7, 1990 with Culverwell &Co., Inc. 10.26 Common Stock Purchase Warrant Certificate dated December 7, 1990 in the name of Culverwell & Co., Inc. 10.26.1 Letter dated December 1, 1992 extending such Common Stock Purchase Warrant Certificate - previously filed as an exhibit to the 1992 Form 10- KSB and incorporated herein by this reference. 10.27 Common Stock Purchase Warrant Certificate dated October 1, 1991 in the name of Leonardo G. Zangani - previously filed as an exhibit to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1991 (the "1991 Form 10-K") and incorporated herein by this reference. 10.28 Common Stock Purchase Warrant Certificate dated January 1, 1992 in the name of Leonardo G. Zangani - previously filed as an exhibit to the 1991 Form 10-K and incorporated herein by this reference. 10.29 Form of Notice of Redemption of Common Stock Purchase Warrants dated January 13, 1992 and Letter of Transmittal - previously filed as an exhibit to the Registrant's Current Report on Form 8-K dated January 20, 1992 and incorporated herein by this reference.
-30- 31 10.30 Common Stock Purchase Warrant Certificate dated July 14, 1992 in the name of Culverwell & Co., Inc. - previously filed as an exhibit to the 1992 Form 10-KSB and incorporated herein by this reference. 10.31 Common Stock Purchase Warrant Certificate dated March 1, 1994 in the name of Leonardo G. Zangani - previously filed as an exhibit to the Registrant's Annual Report on Form 10-KSB for the year ended December 31, 1993 (the "1993 Form 10-KSB") and incorporated herein by this reference. 10.32 Common Stock Purchase Warrant Certificate dated March 1, 1994 in the name of Lynch, Brewer, Hoffman & Sands - previously filed as an exhibit to the 1993 Form 10-KSB and incorporated herein by this reference. 10.33 Form of Non-Qualified Stock Option Agreement - filed herewith.* 10.34 Form of Common Stock Purchase Warrant Certificate issued to Lynch, Brewer, Hoffman & Sands, Culverwell & Co., Inc., Fechtor, Detwiler & Co., Inc., and Leonardo G. Zangani during fiscal 1995 - filed herewith. 10.35 Employment Agreement dated as of June 1, 1995 with Ralph E. Hanson - filed herewith.* 11.1 Computation of Net Income per Common Share - filed herewith. 22.1 Subsidiaries. 27.1 Financial Data Schedule - filed herewith.
Unless otherwise specified, all of the foregoing exhibits were filed as exhibits to the Company's Registration Statement on Form S-18, No. 33-13927-B, as amended, and are incorporated herein by this reference. *Management contract or compensatory plan or arrangement. -31- 32 SIGNATURES In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. (Registrant) PACE MEDICAL, INC. By: RALPH E. HANSON ------------------------------------ Ralph E. Hanson, President Date March 27, 1996 ------------------------------------ In accordance with the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. By RALPH E. HANSON ------------------------------------ Ralph E. Hanson, Director, Principal Executive, Financial, and Accounting Officer Date March 27, 1996 ------------------------------------ By GEORGE F. HARRINGTON ------------------------------------ George F. Harrington, Director Date March 27, 1996 ------------------------------------ By DERRICK EBDEN ------------------------------------ Derrick Ebden, Director Date March 27, 1996 ------------------------------------ -32- 33 DELOITTE & TOUCHE LLP - - ------------ --------------------------------------------------------- [LOGO] 125 Summer Street Telephone:(617)261-8000 Boston, Massachusetts 02110-1617 Fascimile:(617)261-8111 INDEPENDENT AUDITORS' REPORT To the Shareholders and Board of Directors Pace Medical, Inc. Waltham, Massachusetts We have audited the accompanying consolidated balance sheets of Pace Medical, Inc. and its wholly owned subsidiary as of December 31, 1995 and 1994, and the related consolidated statements of operations, shareholders' equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company and its wholly owned subsidiary as of December 31, 1995 and 1994, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. /S/DELOITTE & TOUCHE LLP March 25, 1996 --------------- Deloitte Touche Tohmatsu International --------------- 34 PACE MEDICAL, INC. AND WHOLLY OWNED SUBSIDIARY CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1995 AND 1994 - - -------------------------------------------------------------------------------
ASSETS 1995 1994 CURRENT ASSETS: Cash and cash equivalents $ 772,006 $ 781,110 Accounts receivable (no allowance for doubtful accounts considered necessary) 279,607 167,660 Accounts receivable-related party 101,174 102,281 Inventories: Raw materials 297,247 201,320 Work in process 96,782 101,894 Finished goods 114,039 93,768 Prepaid expenses 45,489 46,851 ---------- ---------- Total current assets 1,706,344 1,494,884 ---------- ---------- PROPERTY AND EQUIPMENT - At cost: Machinery, equipment and tooling 200,400 197,656 Office furniture and equipment 12,201 13,610 Leasehold improvements 23,250 23,400 ---------- ---------- 235,851 234,666 Less accumulated depreciation and amortization (210,317) (203,134) ---------- ---------- 25,534 31,532 ---------- ---------- OTHER ASSETS 47,832 18,144 ---------- ---------- TOTAL $1,779,710 $1,544,560 ========== ==========
LIABILITIES AND SHAREHOLDERS' 1995 1994 EQUITY CURRENT LIABILITIES: Accounts payable $ 149,450 161,528 Accrued expenses 54,634 61,114 Due to officer - 14,506 Accrued royalties 165,664 125,916 ----------- ----------- Total current liabilities 369,748 363,064 ----------- ----------- EXCESS OF ACQUIRED NET ASSETS OVER PURCHASE PRICE 14,656 29,314 ----------- ----------- SHAREHOLDERS' EQUITY: Common stock, $.01 par value; authorized 5,000,000 shares; issued and outstanding, 3,380,850 shares in 1995 and 1994 33,809 33,809 Additional paid-in capital 3,137,351 3,137,351 Cumulative translation adjustment 57,081 59,975 Accumulated deficit (1,832,935) (2,078,953) ----------- ----------- 1,395,306 1,152,182 ----------- ----------- TOTAL $ 1,779,710 $ 1,544,560 =========== ===========
See notes to consolidated financial statements. -2- 35 PACE MEDICAL, INC. AND WHOLLY OWNED SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1995 AND 1994 - - -------------------------------------------------------------------------------
1995 1994 NET SALES (Note 7) $1,754,242 $1,216,446 COST OF SALES 842,394 585,257 ---------- ---------- GROSS PROFIT 911,848 631,189 OPERATING EXPENSES: Selling, general and administrative expenses 428,250 400,207 Research and development expenses 267,463 325,938 ---------- ---------- INCOME (LOSS) FROM OPERATIONS 216,135 (94,956) ---------- ---------- OTHER INCOME (EXPENSE): Exchange gains (losses), net (814) 9,003 Other income, primarily interest 30,697 20,647 ---------- ---------- 29,883 29,650 ---------- ---------- NET INCOME (LOSS) $ 246,018 $ (65,306) ========== ========== NET INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE $ 0.07 $ (0.02) ========== ========== AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING 3,380,850 3,387,600 ========== ==========
See notes to consolidated financial statements. -3- 36 PACE MEDICAL, INC. AND WHOLLY OWNED SUBSIDIARY CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1995 AND 1994 - - ---------------------------------------------------------------------------------------------------------------------------
ADDITIONAL CUMULATIVE TOTAL COMMON STOCK PAID-IN TRANSLATION ACCUMULATED SHAREHOLDERS' SHARES VALUE CAPITAL ADJUSTMENT DEFICIT EQUITY BALANCES, JANUARY 1, 1994 3,389,850 $33,899 $3,141,761 $57,187 $(2,013,647) $1,219,200 Return of compensating stock award (9,000) (90) (4,410) - - (4,500) Net loss - - - - (65,306) (65,306) Aggregate translation adjustments - - - 2,788 - 2,788 --------- ------- ---------- ------- ----------- ---------- BALANCES, DECEMBER 31, 1994 3,380,850 33,809 3,137,351 59,975 (2,078,953) 1,152,182 Net income - - - - 246,018 246,018 Aggregate translation adjustments - - - (2,894) - (2,894) --------- ------- ---------- ------- ----------- ---------- BALANCES, DECEMBER 31, 1995 3,380,850 $33,809 $3,137,351 $57,081 $(1,832,935) $1,395,306 ========= ======= ========== ======= =========== ==========
See notes to consolidated financial statements. -4- 37 PACE MEDICAL, INC. AND WHOLLY OWNED SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1995 AND 1994 - - --------------------------------------------------------------------------------
1995 1994 CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 246,018 $ (65,306) Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization 13,912 16,589 Return of compensatory stock award - (4,500) Changes in assets and liabilities: Accounts receivable (114,941) (153,257) Prepaid expenses (1,424) (19,851) Inventories (111,889) 22,336 Accounts payable (7,766) (24,162) Accrued royalties and expenses 34,091 62,654 Other (59,807) (18,969) --------- --------- Net cash used in operating activities (1,806) (184,466) CASH FLOWS USED IN INVESTING ACTIVITIES - Additions to property and equipment (7,012) (2,416) EFFECT OF EXCHANGE RATE CHANGES ON CASH (286) 3,157 --------- --------- NET DECREASE IN CASH AND CASH EQUIVALENTS (9,104) (183,725) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 781,110 964,835 --------- --------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 772,006 $ 781,110 ========= =========
See notes to consolidated financial statements. -5- 38 PACE MEDICAL, INC. AND WHOLLY OWNED SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1995 AND 1994 - - -------------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONSOLIDATION - The consolidated financial statements include the accounts of Pace Medical, Inc. ("Pace" or the "Company") and its wholly owned subsidiary, APC Medical Ltd. ("APC"), a United Kingdom ("UK") company. The Company manufactures and sells temporary external pacemakers, related accessories and temporary heart pacemaker leads. All intercompany transactions, balances and profits are eliminated. USE OF ESTIMATES - The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. SALES - Sales are recorded upon shipment of goods. INVENTORIES - Inventories are stated at the lower of cost (first-in, first-out) or market. PROPERTY AND EQUIPMENT - Property and equipment is stated at cost. Depreciation is recorded under the straight-line method based on the estimated useful lives of the related assets. Depreciation expense approximated $10,000 and $12,000 for the years ended December 31, 1995 and 1994, respectively. 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. EXCESS OF ACQUIRED NET ASSETS OVER PURCHASE PRICE - The excess of acquired net assets over the purchase price is being amortized over ten years from the date of acquisition. INCOME TAXES - The Company computes income taxes in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." This standard requires current and deferred tax assets and liabilities to be determined based on tax rates and laws enacted as of the balance sheet date rather than historical tax rates. No deferred taxes have been recorded because of the inability of the Company to use tax carryforwards against future reversals of temporary differences. WARRANTY - The Company warrants its temporary cardiac pacemakers for one year. Reserves for warranties are provided at the time of sale. -6- 39 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) INCOME (LOSS) PER COMMON SHARE - Primary income (loss) per common share is computed on the basis of weighted average number of shares outstanding plus the common stock equivalents (if dilutive) that would arise from the exercise of stock options and warrants. 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. RECENTLY ISSUED ACCOUNTING STANDARDS - The Financial Accounting Standards Board ("FASB") has issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This statement, which will be required for the fiscal year ending December 31, 1996, requires that long-lived assets to be held and used by an entity be reviewed for impairment whenever circumstances indicate that the carrying amount of an asset may not be recoverable. It also requires that long-lived assets to be disposed of be reported at the lower of carrying amount or fair value less cost to sell. The FASB has also issued SFAS No. 123, "Accounting for Stock-Based Compensation." This statement, which will be required for the fiscal year ending December 31, 1996, establishes financial accounting and reporting standards for stock-based employee compensation plans. The Company has not yet determined the effect of implementing these two statements on its financial position and results of operations in any future period. 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 in exchange for a negotiated royalty (5% of net sales). Royalty expense was $39,748 in 1995 and $30,467 in 1994. Payables to Pace Technology totaled $165,664 and $125,916 at December 31, 1995 and 1994, respectively. This license expires in 1996 at which time the license will be considered fully paid-up and irrevocable and no further royalties will be payable by the Company. 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 $447,759 and $434,892 in 1995 and 1994, respectively. Receivables from Cardiovascular at December 31, 1995 and 1994 were $101,174 and $102,281, 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 (pound)28,500 ($44,175 at December 31, 1995) per year and that it may be revised every five years commencing in 1996. The lease also requires payment of a pro rata share of insurance and maintenance costs in addition to the rental payment. Future minimum rental payments under operating leases with a term of over one year total approximately $50,000 in each of the next five years and $300,000 in the aggregate thereafter. Rental expense for all operating leases, including leases with terms of less than one year, amounted to $85,644 and $87,464 in 1995 and 1994, respectively. CONTRACTS - The Company entered into a three-year employment agreement with its chairman that provides for annual compensation of $105,000. The agreement expires in June 1998. -7- 40 4. INCOME TAXES There was no tax expense recorded in 1995 and 1994 owing to either operating losses or the use of net operating loss carryforwards. The Company has $992,709 and $1,144,719 of deferred tax assets fully reserved at December 31, 1995 and 1994, respectively, the components of which follow:
1995 1994 Net operating loss carryforwards $732,234 $ 904,880 Research and development credits 159,449 152,388 Inventory 21,602 26,208 Royalty accruals 66,266 50,366 Other 13,158 10,877 -------- ---------- $992,709 $1,144,719 ======== ==========
As noted above, the deferred tax assets have been fully reserved. The net change in the valuation allowance in 1995 was ($152,010). Pace has federal income tax loss carryforwards for financial and tax reporting purposes of approximately $1,150,000 which begin expiring in years 2003 through 2009. APC has approximately (pound)548,555 ($866,717 at December 31, 1995) of tax loss carryforwards available in the UK at December 31, 1995. 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. In addition, during 1995 the Board of Directors authorized and options were granted to purchase 135,000 shares of common stock under nonqualified stock option agreements. Options may be granted at not less than fair market value on the date of grant and are of a five-year duration. A summary of stock option activity related to the Company's stock option plan is as follows:
NUMBER OF OPTION SHARES PER SHARE Outstanding at January 1, 1994 and 1995 30,000 $.25 to $1.25 Granted 161,000 $ 0.50 ------- Outstanding at December 31, 1995 191,000 $.50 to $1.25 =======
There was no stock option activity in 1994. The Company has also issued 260,000 warrants to its attorneys and underwriters exercisable at prices between $0.50 and $1.00 per share, expiring in 1997. -8- 41 6. GEOGRAPHIC SEGMENTS Geographic area results were:
UNITED UNITED STATES KINGDOM ELIMINATIONS CONSOLIDATED 1995 Sales and transfers $1,325,311 $606,199 $(177,268) $1,754,242 Net operating income 102,023 101,444 12,668 216,135 Identifiable assets 1,452,589 327,121 - 1,779,710 1994 Sales and transfers $ 858,867 $518,234 $(160,655) $1,216,446 Net operating income (loss) (139,399) 27,635 16,808 (94,956) Identifiable assets 1,225,344 319,216 - 1,544,560
Transfers between areas are valued at cost plus a markup. There were no direct sales to foreign customers from domestic operations. 7. SIGNIFICANT CUSTOMERS In 1995 and 1994, there were sales to major customers that exceeded 10% of total net sales. Sales to these customers were:
1995 Customer A $648,820 37% Customer B 447,759 26 Customer C 285,585 16 Customer D 239,140 14 1994 Customer A $347,107 29% Customer B 434,892 36 Customer C 169,246 14 Customer D - -
* * * * * * -9- EX-10.33 2 NON QUALIFIED STOCK OPTION AGREEMENT 1 EXHIBIT 10.33 _________ SHARES PACE MEDICAL, INC. NON-QUALIFIED STOCK OPTION AGREEMENT NON-QUALIFIED STOCK OPTION AGREEMENT dated as of __________, 1996 by and between PACE MEDICAL, INC., a Massachusetts corporation (hereinafter called the "Corporation"), and ______________ (hereinafter called the "Optionee"). WHEREAS, the Corporation desires to afford the Optionee the opportunity to purchase shares of its Common Stock; NOW, THEREFORE, in consideration of the premises and of the mutual covenants and agreements hereinafter set forth, the parties hereby mutually covenant and agree as follows: 1. GRANT OF OPTION. Subject to the terms and conditions set forth herein, the Corporation grants to the Optionee the right and option to purchase from the Corporation at a price of $.50 per share up to but not exceeding in the aggregate ____________________ (__________) shares of the Corporation's Common Stock, par value $.01 per share (the "Common Stock"). 2. TERM. This Agreement and the option granted hereby shall terminate five (5) years from the date hereof but shall be subject to earlier termination as herein provided. Upon termination, the option granted hereby shall thereupon expire and thereafter shall not be exercisable. 3. EXERCISE OF OPTION. (a) The option hereby granted may be exercised at any time or from time to time in whole or in part during the term hereof. 2 (b) Upon any one exercise of the option granted hereby, the Optionee or his legal representative may purchase all or any part of the shares of Common Stock as to which such option is then exercisable, provided however, that no less than one hundred (100) shares may be purchased upon any one exercise of such option unless the number of shares purchased at such time is the total number of shares in respect of which such option is then exercisable. (c) The option hereby granted shall be exercised by the Optionee delivering to the Clerk of the Corporation, from time to time, on any business day, written notice specifying the number of shares the Optionee then desires to purchase, together with cash or a certified or bank cashier's check to the order of the Corporation for an amount in United States dollars equal to the option price of such shares. (d) Upon each such exercise, a certificate representing the number of shares purchased shall be issued in the name of the person or persons exercising the option granted hereby and delivered to the Optionee. 4. RESTRICTIONS ON ISSUANCE OF SHARES. (a) Notwithstanding the provisions of Section 2 hereof, the Corporation may delay the issuance of shares covered by the exercise of the option granted hereby and the delivery of a certificate for such shares until (i) one of the following conditions shall be satisfied: (A) the shares with respect to which the option granted hereby has been exercised are at the time of the issuance - 2 - 3 of such shares effectively registered under the Securities Act of 1933 as now in force or hereafter amended; or (B) a no-action letter in respect to the issuance of such shares shall have been obtained by the Corporation from the Securities and Exchange Commission; or (C) counsel for the Corporation shall have given an opinion, which opinion shall not be unreasonably conditioned or withheld, that such shares are exempt from registration under the Securities Act of 1933 as now in force or hereafter amended; and (ii) one of the following conditions shall be satisfied: (A) approval shall have been obtained from such federal and state governmental agencies, other than the Securities and Exchange Commission, as may be required under any applicable law, rule or regulation; or (B) counsel for the Corporation shall have given an opinion, which opinion shall not be unreasonably conditioned or withheld, that no such approval is required. (b) It is intended that all exercises of the option granted hereby shall be effective, and the Corporation shall use its best efforts to bring about compliance with the above conditions within a reasonable time, except that the Corporation shall be under no obligation to cause a registration statement or a post-effective amendment to any registration statement to be prepared at its expense or to comply with Regulation A or any other exemption under the Securities Act of 1933 as now in force or hereafter amended, solely for the purpose of covering the issuance of shares in respect of which the option granted hereby may be exercised. Therefore, the Optionee shall not be entitled to any - 3 - 4 rights in any shares of Common Stock to be issued under the option granted hereby until delivery of a certificate therefor by the Corporation. 5. PURCHASE FOR INVESTMENT. (a) Unless the shares to be issued upon exercise of the option granted hereby have been effectively registered under the Securities Act of 1933 as now in force or hereafter amended, the Corporation shall be under no obligation to issue any shares covered by such option unless the person who exercises such option, in whole or in part, shall give a written representation to the Corporation satisfactory in form and scope to the Corporation's counsel and upon which, in the opinion of such counsel the Corporation may reasonably rely, that he/she is acquiring the shares issued to him pursuant to such exercise of such option as an investment and not with a view to, or for sale in connection with, the distribution of any such shares. (b) The certificate for each share of Common Stock issued pursuant to such exercise of the option granted hereby may bear a reference to the investment representation made in accordance with this Section 4 and to the fact that no registration statement has been filed with the Securities and Exchange Commission in respect to such shares. (c) In the event that the Corporation shall nevertheless, deem it necessary or desirable to register under the Securities Act of 1933 or other applicable statutes any shares with respect to which the option granted hereby shall have been exercised, or to qualify any such shares for exemption from the Securities Act of 1933 or other applicable statutes, then the Corporation shall take - 4 - 5 such action at its own expense and may require from the Optionee such information in writing for use in any registration statement, prospectus, preliminary prospectus or offering circular as is reasonably necessary for such purpose and may require reasonable indemnity to the Corporation and its officers and directors from such holder against all losses, claims, damages, and liabilities arising from such use of the information so furnished and caused by any untrue statement of any material fact therein or caused by the omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances under which they were made. 6. TERMINATION OF EMPLOYMENT. (a) The option hereby granted shall terminate and be of no force or effect upon the termination of the Optionee's employment with the Corporation (whether as an employee, consultant, officer or director) for any reason, provided however, that in the event of the termination of the Optionee's employment such option may be exercised (to the extent exercisable by the Optionee at the date of such termination) at any time within three (3) months after the date of such termination, but in any event not later than five (5) years from the date hereof and provided further, however, that if the termination of the Optionee's employment shall result from the Optionee's death, such option may be exercised (to the extent exercisable by the Optionee at the date of his death) by the Optionee's personal representative or by the person or persons to whom such option shall have been transferred by will or by the laws of descent and distribution, at any time within three (3) months after the date of the Optionee's - 5 - 6 death but in any event not later than five (5) years from the date hereof. (b) Employment by the Corporation shall be deemed to include employment of the Optionee by, and to continue during any period in which the Optionee is in the employment of, any corporation in which the Corporation has a proprietary interest by reason of stock ownership or otherwise including any corporation in which the Corporation acquires a proprietary interest after the date hereof (but only if the Corporation owns, directly or indirectly, stock possessing not less than 50% of the total combined voting power of all classes of stock in such corporation). (c) Whenever the word "Optionee" is used in any provision of this Agreement under circumstances where the provision should logically be construed to apply to the estate, personal representative, or beneficiary to whom this option may be transferred by will or by the laws of descent and distribution, it shall be deemed to include such person. 7. ASSIGNABILITY. The option granted hereby is not assignable or transferable by the Optionee otherwise than by will or the laws of descent and distribution and is exercisable during the Optionee's lifetime only by him. No assignment or transfer of such option, or of the right represented thereby, whether voluntary or involuntary, by operation of law or otherwise, except by will or the laws of descent and distribution, shall vest in the assignee or transferee any interest or right herein whatsoever, and immediately upon any attempt to assign or transfer such option the same shall terminate and be of no force or effect. - 6 - 7 8. LIMITATION ON RIGHTS. (a) The Optionee shall not be deemed for any purpose to be a shareholder of the Corporation with respect to any shares as to which the option granted hereby shall not have been exercised and payment and issuance made as herein provided. Nothing herein shall confer on the Optionee any right to continue in the employ of the Corporation or its subsidiaries, nor affect the right of the Corporation or its subsidiaries to terminate the Optionee's employment at any time without liability to the Corporation. (b) The existence of the option granted hereby shall not affect in any way the right or power of the Corporation or its shareholders to make or authorize any or all adjustments, recapitalizations, reorganizations or other changes in the Corporation's capital structure or its business, or any merger or consolidation of the Corporation, or any issue of bonds, debentures, preferred or prior preference stocks ahead of or convertible into, or otherwise affecting the Common Stock or the rights thereof, or the dissolution or liquidation of the Corporation, or any sale or transfer of all or any part of its assets or business, or any other corporate act or proceeding, whether of a similar character or otherwise. 9. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION. (a) The shares with respect to which the option granted hereby is granted are shares of the Common Stock as constituted on the date of this Agreement, but if and whenever, prior to the delivery by the Corporation of all of the shares of Common Stock with respect to which this option is granted, the Corporation shall effect a subdivision or consolidation of shares, or other capital readjustment, or the payment of a stock - 7 - 8 dividend, or other increase or decrease of the number of shares of Common Stock outstanding, without receiving compensation therefor in money, services or property, then (i) in the event of any increase in the number of such shares outstanding, the number of shares of Common Stock then remaining subject to option hereunder shall be proportionately increased (except that any fraction of a share resulting from any such adjustment shall be excluded from the operation of this Agreement), and the cash consideration payable per share shall be proportionately reduced, and (ii) in the event of a reduction in the number of such shares outstanding, the number of shares of Common Stock then remaining subject to option hereunder shall be proportionately reduced (except that any fractional shares resulting from any such adjustment shall be excluded from the operation of this Agreement), and the cash consideration payable per share shall be proportionately increased. (b) In the event of (i) any merger of one or more other corporations into the Corporation or any consolidation of the Corporation and one or more other corporations in which the Corporation is not the surviving or resulting corporation or (ii) any merger of one or more other corporations into the Corporation or any consolidation of the Corporation and one or more other corporations in which the Corporation shall be the surviving or resulting corporation and the then issued and outstanding shares of Common Stock shall be converted into and/or exchanged for cash and/or any securities of any other corporation, then, in any such case and without the need for any further action by the Corporation or its stockholders, this Agreement and the option granted hereby shall terminate as of the effective time of the merger or consolidation and thereupon be of no force or effect, and the holder - 8 - 9 hereof shall, at no additional cost, be entitled solely to receive (at such effective time and otherwise in the form and manner provided by the terms of the agreement of merger or consolidation) an amount of the consideration payable under the terms of such agreement equal to the excess of (i) the aggregate consideration (valued in accordance with the terms thereof) to which the holder hereof would have been entitled pursuant to the terms of such agreement if, immediately prior to such effective time, the holder hereof had been the holder of record of a number of shares of Common Stock equal to the aggregate number of shares of Common Stock as to which this Agreement was exercisable immediately prior to such effective time over (ii) the aggregate exercise price payable hereunder with respect to such number of shares. In the event of any other merger or consolidation in which the Corporation is the surviving or resulting corporation, this Agreement and the option granted hereby shall remain in full force and effect in accordance with its terms. In the event of any dissolution or liquidation of the Corporation, this Agreement and the option granted hereby shall terminate and thereupon be of no force or effect. 10. MISCELLANEOUS. (a) This Agreement is the sole and only agreement between the parties hereto with respect to the subject matter hereof and may not be modified or amended except by a subsequent written agreement duly executed by the parties hereto. (b) The Corporation shall at all times during the term of the option granted hereby reserve and keep available such number of shares of Common - 9 - 10 Stock as will be sufficient to satisfy the requirements of such option. (c) Any notice which either party hereto may be required or permitted to give to the other shall be in writing, and may be delivered personally or by mail, postage prepaid, addressed as follows: To the Corporation (Attention to the Clerk), at its principal office at 391 Totten Pond Road, Waltham, Massachusetts 02154, or at such other address as the Corporation, by notice to the Optionee, may designate in writing from time to time; and to the Optionee at his address as the Optionee, by notice to the Clerk of the Corporation, may designate in writing from time to time. (d) This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts. IN WITNESS WHEREOF, the Corporation has caused this Non-Qualified Stock Option Agreement to be executed by its duly-authorized officer, and the Optionee has hereunto set his hand and seal, all on the day and year first above written. PACE MEDICAL, INC. By --------------------------------- Drusilla F. Hays, President --------------------------------- Ralph E. Hanson - Optionee -10- EX-10.34 3 COMMON STOCK PURCHASE WARRANT CERTIFICATE 1 EXHIBIT 10.34 THE SECURITIES REPRESENTED BY THIS CERTIFICATE, AND THE SHARES OF STOCK ISSUABLE UPON ITS EXERCISE, HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR QUALIFIED UNDER APPLICABLE STATE SECURITIES LAWS. SUCH SECURITIES AND STOCK MAY NOT BE SOLD, TRANSFERRED, PLEDGED OR HYPOTHECATED EXCEPT (A) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND QUALIFICATION UNDER SUCH STATE SECURITIES LAWS OR (B) PURSUANT TO AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH TRANSACTION IS EXEMPT FROM THE REGISTRATION REQUIREMENTS OF SUCH ACT AND THE QUALIFICATION REQUIREMENTS OF SUCH STATE SECURITIES LAWS. _______________ WARRANTS COMMON STOCK PURCHASE WARRANT CERTIFICATE TO SUBSCRIBE FOR AND PURCHASE ____________ SHARES OF COMMON STOCK OF PACE MEDICAL, INC. VOID AFTER OCTOBER 31, 1997 THIS CERTIFIES THAT for value received ___________________ is entitled, subject to the provisions and upon the terms and conditions hereinafter set forth, at any time during the period beginning the date hereof to and including the close of business on October 31, 1997, but not thereafter, to subscribe for and purchase from PACE MEDICAL, INC., a corporation organized and existing under the laws of the Commonwealth of Massachusetts (hereinafter called the "Company"), an aggregate of _____________________ (_________) fully paid and nonassessable shares of the Company's Common Stock, par value $.01 per share, at the price of $1.00 per share; subject, however, to adjustment from time to time both as to such number of shares and such price as hereinafter set forth (such price per share, as it may be so adjusted, being herein called the "Purchase Price"). This certificate represents the number of Warrants set forth above and the term "Warrant" as used herein shall refer to the aggregate number of Warrants set forth above. The Warrant is subject to the following terms and conditions: SECTION 1. DEFINITION OF COMMON STOCK. For the purposes of this Warrant, the term "Common Stock" shall mean shares of the Common Stock, par value $.01 per share, of the Company as constituted on the date hereof. 2 SECTION 2. RESTRICTIONS ON TRANSFER; NEGOTIABILITY. (a) This Warrant has not been registered under the Securities Act of 1933, as amended (the "Act"), or qualified under applicable state securities laws and this Warrant is not assignable or transferable except (i) pursuant to an effective registration statement under the Act and qualification under such state securities laws or (ii) pursuant to an opinion of counsel satisfactory to the Company that such transaction is exempt from the registration requirements of the Act and the qualification requirements of such state securities laws. (b) Subject to the foregoing and the provisions of Section 4, this Warrant may be transferred in whole or in part by endorsement (by the holder hereof executing the form of assignment attached hereto) and delivery. Any person in possession of this Warrant properly endorsed is authorized to represent himself as absolute owner hereof and is granted power to transfer absolute title hereto by endorsement and delivery hereof. Until this warrant is transferred on the books of the Company, the Company may treat the registered holder of this Warrant as absolute owner hereof for all purposes without being affected by any notice to the contrary. SECTION 3. PURCHASE FOR INVESTMENT. The holder hereof represents that it has acquired this Warrant for investment purposes only and not with a view to distribution, except in compliance with applicable securities laws, and that any shares of Common Stock issued upon exercise of this Warrant will have been acquired for investment purposes only and not with a view to distribution, except in compliance with applicable securities laws. SECTION 4. EXCHANGES OF WARRANT. Subject to the provisions of Section 3 hereof, upon surrender for exchange of any Warrant or Warrants (in negotiable form, if not surrendered by the holder named on the face hereof) to the Company at its principal office, the Company at its expense will issue and deliver a new Warrant or Warrants of like tenor, calling in the aggregate on their face for the same number of shares of Common Stock, in the denomination or denominations requested, to or on the order of such holder and in the name of such holder or as such holder (upon payment by such holder of any applicable transfer taxes) may direct; provided that, in case the Warrant or Warrants so surrendered shall not have been registered under the Act, the Company shall not be obligated to issue and deliver any Warrant or Warrants to or in the name of any person other than the holder of the Warrant or Warrants so surrendered or in denominations other than the denominations of the Warrant or Warrants so surrendered unless, in the opinion of counsel for the holder hereof reasonably satisfactory to the Company, such Warrant or Warrants may be so issued and delivered without registration under the Act and qualification under applicable state securities laws. -2- 3 SECTION 5. EXERCISE OF WARRANT. (a) The purchase rights represented by this Warrant are exercisable by the registered holder hereof, in whole or in part, at any time or from time to time during the period beginning the date hereof and ending on the close of business on October 31, 1997. (b) The purchase rights represented by this Warrant shall be exercisable by the registered holder hereof by the surrender of this Warrant and a duly executed Subscription Form substantially in the form of that attached hereto at the principal office of the Company and upon payment of the Purchase Price of the shares of Common Stock thereby purchased. The Purchase Price may be paid by cash, by certified check or bank draft payable to the order of the Company or by a combination thereof. The Company agrees that if at the time of such surrender and purchase the registered holder of this Warrant shall be entitled to exercise it, the shares of Common Stock so purchased shall be and be deemed to be issued to such holder as the record owner of such shares, as of the close of business on the date on which this Warrant shall have been exercised as aforesaid. Certificates for shares of Common Stock purchased hereunder shall be delivered to the holder of this Warrant within a reasonable time, not exceeding thirty (30) days, after this Warrant shall have been exercised as aforesaid; provided that, in case such shares or other securities at the time of exercise of this Warrant or any time thereafter shall not be the subject of an effective registration statement under the Act, the Company shall not be obligated to issue and deliver upon exercise of this Warrant or at any time thereafter any certificate for Common Stock to or in the name of any person other than the holder of this Warrant unless, in the opinion of counsel for the holder hereof reasonably satisfactory to the Company, such certificate may be so issued and delivered without registration under such Act and qualification under applicable state securities laws. (c) The Company covenants that all shares of Common Stock which may be issued upon the exercise of this Warrant will, upon issuance, be validly issued, fully paid, non-assessable and free from all taxes, liens and charges in respect of the issue thereof. (d) In the event of the purchase of less than all the shares purchasable under this Warrant, the Company shall make an appropriate notation reflecting such purchase on a register or other books maintained for such purpose. The holder hereof irrevocably authorizes the Company to make such notation or notations from time to time and agrees that the balance of shares purchasable hereunder, as recorded by the Company in such register or books, shall constitute presumptive evidence of such balance. SECTION 6. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION. -3- 4 6.1 SUBDIVISION OR CONSOLIDATION OF SHARES. The shares with respect to which the rights granted herein are granted are shares of the Common Stock as constituted on the date of this Warrant, but if and whenever, prior to the delivery by the Company of all of the shares of Common Stock with respect to which this Warrant is granted, the Company shall effect a subdivision or consolidation of shares, or other capital readjustment, or the payment of a stock dividend, or other increase or decrease of the number of shares of Common Stock outstanding, without receiving compensation therefor in money, services or property, then (a) in the event of any increase in the number of such shares outstanding, the number of shares of Common Stock then remaining subject to purchase hereunder shall be proportionately increased (except that any fraction of a share resulting from any such adjustment shall be excluded from the operation hereof), and the cash consideration payable per share shall be proportionately reduced, and (b) in the event of a reduction in the number of such shares outstanding, the number of shares of Common Stock then remaining subject to purchase hereunder shall be proportionately reduced (except that any fractional shares resulting from any such adjustment shall be excluded from the operation hereof), and the cash consideration payable per share shall be proportionately increased. 6.2 EFFECT OF MERGER, CONSOLIDATION, DISSOLUTION, OR LIQUIDATION. In the event of (i) any merger of one or more other corporations into the Company or any consolidation of the Company and one or more other corporations in which the Company is not the surviving or resulting corporation or (ii) any merger of one or more other corporations into the Company or any consolidation of the Company and one or more other corporations in which the Company shall be the surviving or resulting corporation and the then issued and outstanding shares of Common Stock shall be converted into and/or exchanged for cash and/or any securities of any other corporation, then, in any such case and without the need for any further action by the Company or its stockholders, this Warrant shall terminate as of the effective time of the merger or consolidation and thereupon be of no force or effect, and the holder hereof shall, at no additional cost, be entitled solely to receive (at such effective time and otherwise in the form and manner provided by the terms of the agreement of merger or consolidation) an amount of the consideration payable under the terms of such agreement equal to the excess of (i) the aggregate consideration (valued in accordance with the terms thereof) to which the holder hereof would have been entitled pursuant to the terms of such agreement if, immediately prior to such effective time, the holder hereof had been the holder of record of a number of shares of Common Stock equal to the aggregate number of shares of Common Stock as to which this Warrant was -4- 5 exercisable immediately prior to such effective time over (ii) the aggregate exercise price payable hereunder with respect to such number of shares. In the event of any other merger or consolidation in which the Company is the surviving or resulting corporation, this Warrant shall remain in full force and effect in accordance with its terms. In the event of any dissolution or liquidation of the Company, this Warrant granted hereby shall terminate and thereupon be of no force or effect. 6.3 NOTICE OF CERTAIN ACTIONS. In case at any time: 6.3.1 the Company shall declare any dividend upon its Common Stock payable in stock; or 6.3.2 there shall be any subdivision or consolidation of shares of the Common Stock, other capital readjustment by the Company, a consolidation or merger of the Company with another corporation, or the dissolution or liquidation of the Company; then, in any one or more of said cases, the Company shall give written notice, by first class mail, postage prepaid, to the registered holder hereof, of the date such subdivision or consolidation of shares, capital readjustment, merger or consolidation, or dissolution or liquidation shall take place, as the case may be. Such written notice shall be given at least twenty (20) days prior to the action in question. 6.4 RESERVATION OF SHARES. The Company will at all times reserve and keep available out of its authorized shares of Common Stock, solely for the purpose of issue upon the exercise of the Warrant as herein provided, such number of shares of Common Stock as shall then be issuable upon the exercise of all outstanding Warrants, and the Company will take all action required to increase the number of its authorized shares of Common Stock, if necessary for this purpose. The Company covenants that all shares of Common Stock which shall be so issuable shall, upon issuance, be duly and validly issued by the Company and be fully paid and non-assessable and free from all taxes, liens and charges with respect to the issue thereof. 6.5 FRACTIONAL SHARES. In no event shall any fractional shares of Common Stock or other securities be issued upon exercise of this Warrant and all adjustments in the number of shares of Common Stock or other securities issuable upon the exercise of this Warrant shall be calculated to the nearest full share. SECTION 7. COMPLIANCE WITH SECURITIES LAWS. This Warrant and the shares of Common Stock issuable upon its exercise, may not be transferred or assigned -5- 6 to any party except in compliance with the Act and applicable state securities laws. SECTION 8. REPLACEMENT OF WARRANTS. Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant, and (in case of loss, theft or destruction) of indemnity satisfactory to it, and upon reimbursement to the Company of all reasonable expenses incidental thereto, and upon surrender and cancellation of this Warrant, if mutilated, the Company will make and deliver a new Warrant of like tenor in lieu of this Warrant. SECTION 9. NO STOCKHOLDER RIGHTS. This Warrant shall not entitle the holder to any rights of a stockholder of the Company, either at law or in equity, including, without limitation, the right to vote, to receive dividends and other distributions, to exercise any pre-emptive rights or to receive any notice of meetings of stockholders of the Company. SECTION 10. COMMUNICATIONS AND NOTICES. All communications and notices hereunder must be in writing and shall be sent by first class mail and, if to the Company, shall be addressed to it at 391 Totten Pond Road, Waltham, Massachusetts 02154, or at such other address as the Company may hereafter designate in writing by notice to the registered holder of this Warrant, and, if to such registered holder, addressed to him/her at the address of such holder as shown on the books of the Company. Any such notice sent by registered or certified mail, if mailed in the United States of America, shall be and be deemed to be duly and sufficiently given on the date of mailing thereof. SECTION 11. SUNDAYS, HOLIDAYS, ETC. If the last or appointed day for the taking of any action or the expiration of any right required or granted herein shall fall on Saturday, Sunday or on a day which shall be a legal holiday in the Commonwealth of Massachusetts or a day on which banking institutions are authorized by law to remain closed, then such action may be taken or right may be exercised on the next succeeding day not a Saturday, Sunday, legal holiday in the Commonwealth of Massachusetts or a day on which banking institutions in the Commonwealth of Massachusetts are authorized by law to remain closed. SECTION 12. MISCELLANEOUS. This Warrant shall be binding upon any successors or assigns of the Company. This Warrant shall constitute a contract under the laws of the Commonwealth of Massachusetts and for all purposes shall be construed in accordance with and governed by the laws of said Commonwealth. This Warrant shall be wholly void and of no effect after the close of business on October 31, 1997. -6- 7 IN WITNESS WHEREOF, Pace Medical, Inc. has caused this Warrant to be executed by its officers thereunto duly authorized. Dated: November 1, 1995 PACE MEDICAL, INC. (Corporate Seal) By -------------------------- Ralph E. Hanson, President ATTEST: - - ----------------------- Drusilla F. Hays, Clerk -7- 8 FORM OF SUBSCRIPTION (To be signed only upon exercise of Warrant) The undersigned, the holder of the within Warrant, hereby irrevocably elects to exercise the purchase right represented by such Warrant for, and to purchase thereunder * shares of Common Stock of PACE MEDICAL, INC. and herewith makes payment of $ therefor, and requests that the certificates for such shares be issued in the name of, and be delivered to,_________________ ____________________________________whose address is___________________________ _______________________________________________. Dated: ------------------------------- ------------------------------------- (Signature must conform in all respects to name of holder as specified on the face of the Warrant) ------------------------------------- Address *Insert here all or such portion of the number of shares called for on the face of the within Warrant with respect to which the holder desires to exercise the purchase right represented thereby. -8- 9 FORM OF ASSIGNMENT (to be signed only upon permitted transfer of Warrant) FOR VALUE RECEIVED, the undersigned hereby sells, assigns, and transfers unto ________________________________________________ the right represented by the within Warrant to purchase the shares of the Common Stock of PACE MEDICAL, INC. to which the within Warrant related, and appoints __________________________________ attorney to transfer such right on the books of PACE MEDICAL, INC. with full power of substitution in the premises. Dated: -------------------------- ---------------------------------------- (Signature must conform in all respects to name of holder as specified on the face of the Warrant) ------------------------------------- Address -9- EX-10.35 4 EMPLOYMENT AGREEMENT 1 EXHIBIT 10.35 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT dated as of June 1, 1995 by and between PACE MEDICAL, INC., a Massachusetts corporation with a usual place of business at 391 Totten Pond Road, Waltham, Massachusetts (the "Company"), and RALPH E. HANSON of Arlington, Massachusetts (the "Employee"). WHEREAS, the Company wishes to assure itself of the Employee's services in the capacity and during the periods specified herein; and WHEREAS, the Employee wishes to enter into an Employment Agreement with the Company upon the terms and conditions set forth herein; NOW THEREFORE, in consideration of the mutual covenants and agreements hereinafter set forth, the parties hereto do hereby mutually agree as follows: 1. The Company hereby employs the Employee and the Employee hereby accepts employment by the Company for the period June 1, 1995 through May 31, 1998, subject to the terms and conditions hereinafter set forth. 2. The Employee will serve the Company as its President and Chief Executive Officer. Nothing contained herein shall limit the right of the Employee to engage in personal investments and other activities to the extent they do not interfere with the Employee's performance under this Agreement. The Company shall have no interest in any of the benefits generated by any of said investments or other activities. 3. For the services to be rendered by the Employee under this Agreement, the Company shall pay to the Employee such rate of salary as shall be fixed, from time to time, by the Board of Directors of the Company, but in no event less than One Hundred Five Thousand Dollars ($105,000.00) per year payable in equal installments, such installments to be paid monthly or more frequently. The Employee shall be entitled to such fringe benefits as are generally made available to employees of the Company and shall be entitled to reimbursement of all reasonable out-of-pocket expenses actually incurred by him on behalf of the Company. 4. During the Employee's period of employment, or at any time thereafter, he will not reveal to any person unless authorized in writing by the Company, or use against the best interests of the Company any information concerning the Company's inventions, trade secrets, processes and in general any of its business affairs of a confidential nature. 2 5. The Employee will disclose to the Company all inventions, discoveries, and improvements which he may make during his employment by the Company, whether during working hours or at any other time, and he will, on demand, assign to the Company all of his interests and do any acts which the Company may consider necessary to secure to it or to its successors or assigns any and all rights relating to such inventions, discoveries, and improvements, including patents in the United States and foreign countries. 6. The Employee agrees that so long as he is employed by the Company and for a period of six months thereafter, he will not in the United States or Canada, engage in any competitive activities (as hereafter defined) with the Company, or any successor or assign of the Company, nor will he own or control an interest (other than as a holder of a non-controlling investment in a company listed on a national stock exchange or in a company whose capital stock is quoted in the NASDAQ National Market System) in any entity which engages or will engage in such competitive activities. As used herein, "competitive activities" shall mean the manufacturer, sale or service of (a) cardiac pacers or (b) any other product or product line manufactured by the Company, sales from which other product or product line constitute 25% or more of the gross revenues of the Company during its current or any of its preceding two fiscal years. It is expressly covenanted and agreed that in the event of breach by the Employee of any of the covenants herein contained damage suffered by the Company will be extremely difficult to ascertain and the remedy at law for any breach or threatened breach will be by its nature inadequate; therefore, in the event of breach, in addition to such other remedies which may be provided by law, the Company (or any successor to the Company) shall be entitled to injunctive and other appropriate equitable relief and shall be entitled to the same in any court of competent jurisdiction. 7. This Agreement shall be binding upon and inure to the benefit of the parties hereto, their heirs, successors and assigns including without limitation any successor who acquires all or substantially all of the assets of the Company. IN WITNESS WHEREOF, the parties hereto have signed this Agreement as of the day and year first above written. PACE MEDICAL, INC. By -------------------------------- Drusilla F. Hays, Vice President -------------------------------- Ralph E. Hanson - Employee -2- EX-11 5 STATEMENT OF PRIMARY EARNINGS PER SHARE 1 EXHIBIT 11 PACE MEDICAL, INC. AND WHOLLY OWNED SUBSIDIARY STATEMENT RECOMPUTATION OF PER SHARE EARNINGS - - ------------------------------------------------------------------------------- CALCULATION OF PRIMARY EARNINGS PER SHARE
1995 1994 NET INCOME (LOSS) $ 246,018 $ (65,306) ========== ========== NUMBER OF SHARES Weighted average shares outstanding 3,380,850 3,387,600 Incremental shares for outstanding stock options and warrants - (a) - (a) ---------- ---------- Total shares outstanding for purpose of earnings per share computation 3,380,850 3,387,600 ========== ========== INCOME (LOSS) PER SHARE AS CALCULATED $ 0.07 $ (0.02) ========== ========== CALCULATION OF FULLY DILUTED EARNINGS PER SHARE NET INCOME (LOSS) $ 246,018 $ (65,306) ========== ========== NUMBER OF SHARES Weighted average shares outstanding 3,380,850 3,387,600 Incremental shares for outstanding stock options and warrants - (a) - (a) ---------- ---------- Total shares outstanding for purpose of earnings per share computation 3,380,850 3,387,600 ========== ========== INCOME (LOSS) PER SHARE AS CALCULATED $ 0.07 $ (0.02) ========== ========== (a) Incremental shares are excluded from calculation because either their impact on the calculation of loss per share or weighted average shares outstanding is anti-dilutive.
EX-27 6 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1 US DOLLARS YEAR YEAR DEC-31-1995 DEC-31-1994 JAN-01-1995 JAN-01-1994 DEC-31-1995 DEC-31-1994 1 1 772,006 781,110 0 0 380,781 269,941 0 0 508,068 396,982 1,706,344 1,494,884 235,851 234,666 (210,317) (203,134) 1,779,710 1,544,560 369,748 363,064 0 0 33,809 33,809 0 0 0 0 1,361,497 1,118,373 1,779,710 1,544,560 1,754,242 1,216,446 1,754,242 1,216,446 842,394 585,257 842,394 585,257 267,463 325,938 0 0 0 0 246,018 (65,306) 0 0 246,018 (65,306) 0 0 0 0 0 0 246,018 (65,306) .07 (.02) .07 (.02)
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