FORM 10-QSB SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 (Mark One) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended SEPTEMBER 30, 1999 --------------------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to . Commission file number 0-16257 ----------------------------------------- PACE MEDICAL, INC. ----------------------------------------------------------------- (Exact name of small business issuer as specified in its charter) MASSACHUSETTS 04-2867416 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) identification No.) 391 TOTTEN POND ROAD, WALTHAM, MASSACHUSETTS 02451 -------------------------------------------------- (Address of principal executive offices) (781) 890-5656 --------------------------- (Issuer's telephone number, including area code) Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of November 10, 1999. 3,375,870 shares of Common Stock, par value $.01 per share PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. a) Condensed Consolidated Balance Sheets b) Condensed Consolidated Statements of Operations c) Condensed Consolidated Statements of Cash Flows d) Notes to Condensed Consolidated Financial Statements -2- PACE MEDICAL, INC. AND WHOLLY-OWNED SUBSIDIARY CONDENSED CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 1999 DECEMBER 31, 1998 ------------------ ----------------- (Unaudited) (See note below) ASSETS - ------ Current assets: Cash and cash equivalents $1,403,513 $1,257,700 Accounts receivable 498,822 350,916 Inventories: Raw materials 190,489 255,821 Work-in-process 204,831 176,999 Finished goods 122,769 160,125 ----------- ----------- 518,089 592,945 Other current assets 44,335 43,749 ----------- ----------- Total current assets 2,464,759 2,245,310 Plant and equipment, net 120,722 46,130 Other assets 3,371 35,183 ----------- ----------- TOTAL ASSETS $2,588,852 $2,326,623 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------ Current liabilities: Accounts payable $132,524 $114,823 Accrued expenses 30,400 40,490 ----------- ----------- Total current liabilities 162,924 155,313 ----------- ----------- Shareholders' equity: Common stock 34,009 34,009 Additional paid-in capital 3,147,151 3,147,151 Cumulative translation adjustment 104,595 104,836 Accumulated deficit (841,140) (1,095,999) ----------- ----------- 2,444,615 2,189,997 ----------- ----------- Less Treasury Stock, at Cost (18,687) (18,687) ----------- ----------- Total Shareholders' Equity 2,425,928 2,171,310 ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,588,852 $2,326,623 ========== ========== Note: The balance sheet at December 31, 1998 has been taken from the audited financial statements at that date. See accompanying notes to condensed consolidated financial statements. -3- PACE MEDICAL, INC. AND WHOLLY-OWNED SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) For the Three Months For the Nine Months Ended September 30 Ended September 30 ------------------------ ------------------ 1999 1998 1999 1998 ---- ---- ---- ---- Net Sales $500,975 $403,139 $1,452,119 $1,161,038 Cost of sales 215,572 204,439 553,963 498,122 --------- --------- ---------- ---------- 285,403 196,702 898,156 662,916 Other operating expenses 245,313 213,413 675,426 665,243 --------- --------- ---------- ---------- Income (loss) from operations 40,090 (14,711) 222,730 (2,327) Other income 10,996 12,241 32,129 35,682 --------- --------- ---------- ---------- Net income (loss) $51,086 $ (2,470) $254,859 $ 33,355 ========= ========= ========== ========== Net income (loss) per share: Basic $ .02 $ .00 $ .08. $ .01 ========= ========= ========== ========== Diluted $ .01 $ .00 $ .07 $ .01 ========= ========= ========== ========== See accompanying notes to condensed consolidated financial statements. -4- PACE MEDICAL, INC. AND WHOLLY-OWNED SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) NINE MONTHS ENDED ------------------- SEPTEMBER 30 ------------------- 1999 1998 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $254,859 $33,355 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 12,301 19,588 Change in assets and liabilities, net: (31,856) (200,883) ----------- --------- Net cash (used in) provided by operating activities 235,304 (147,940) CASH FLOWS FROM INVESTING ACTIVITIES - Purchases of property and equipment (89,491) (16,221) CASH FLOW FROM FINANCING ACTIVITIES - Purchase of treasury stock - (18,687) ---------- ---------- NET INCREASE (DECREASE) IN CASH 145,813 (182,848) AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,257,700 1,318,652 ---------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $1,403,513 $1,135,804 ========== ========== See accompanying notes to condensed consolidated financial statements. -5- PACE MEDICAL, INC. AND WHOLLY-OWNED SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. The accompanying unaudited consolidated financial statements and these notes have been condensed and do not contain all disclosures required by generally accepted accounting principles. See notes to audited consolidated financial statements contained in the Company's annual report. 2. In the opinion of the Company, the accompanying unaudited condensed financial statements contain all adjustments, all of which are normal and recurring, necessary to present fairly the financial position of the Company and its wholly-owned subsidiary as of September 30, 1999 and the results of their operations for the three and nine months ended September 30, 1999 and September 30, 1998 and their cash flows for the nine months ended September 30, 1999 and September 30, 1998. 3. The Company prepares its financial information using the same accounting principles as for its annual financial statements except that no physical inventories were taken during either of the periods ended September 30, 1999 or 1998. Cost of sales for such periods was calculated primarily using standard cost methods. 4. The results of operations for the three and nine months ended September 30, 1999 are not necessarily indicative of the results to be expected for the full year. 5. The denominator used to determine basic net income (loss) per share includes the weighted average common shares outstanding during the quarter. The denominator used to determine diluted net income per share includes the shares used in the calculation of basic net income per share plus the weighted average options outstanding during the period using the treasury-stock method. The diluted net loss per share for the three months ended September 30, 1998 does not include the weighted average options outstanding for the period, since inclusion of these options would be antidilutive. Therefore, basic and diluted net loss per share for the three months ended September 30, 1998 are the same. Three Months Ended Nine Months Ended September 30 September 30 ------------ ------------ 1999 1998 1999 1998 ---- ---- ---- ---- Net Income (loss) $51,086 $ (2,470) $254,859 $ 33,355 ======= ========== ======== ========== Weighted-average shares outstanding 3,375,870 3,388,567 3,375,870 3,393,166 Effect of dilutive securities 76,929 57,913 77,255 ---------- --------------- ---------- ----------- Total shares 3,452,799 3,388,567 3,433,783 3,470,421 ========= ========= ========= ========= Basic net income (loss) per share $ 0.02 $ (0.00) $ 0.08 $ 0.01 ========= ============ ========= =========== Diluted net income (loss) per share $ 0.01 $ (0.00) $ 0.07 $ 0.01 ========= ============ ========= =========== 6. The Company has adopted the provisions of SFAS No. 130," Reporting Comprehensive Income". Comprehensive income includes net income (loss) and foreign currency translation adjustments. -6- Comprehensive income for the three and nine months ended September 30, 1999 and 1998 is as follows: Three Months Ended Nine Months Ended September 30, September 30, ------------- ------------- 1999 1998 1999 1998 ---- ---- ---- ---- Net Income (loss) $51,086 $(2,470) $254,859 $ 33,355 Currency Translation Adjustment 27,830 9,722 (241) 7,688 ------- ------ -------- ------- Total $78,916 $7,252 $254,618 $41,043 ======= ====== ======== ======= -7- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. PACE MEDICAL, INC. AND WHOLLY-OWNED SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL CONDITION As of September 30, 1999, the Company had cash and cash equivalents of $1,403,513 and working capital of $2,301,835. Working capital has increased slightly since December 31, 1998 owing to the profitable operations of the Company over the first nine months of the year. The Company expects to maintain a sound financial base for the balance of fiscal 1999. Management continues to believe that the current level of working capital, coupled with the flexibility of the Company's cost structure, should suffice to ensure that on-going operations are financed adequately. FINANCIAL RESULTS - THREE MONTHS ENDED SEPTEMBER 30, 1999 VERSUS THREE MONTHS ENDED SEPTEMBER 30, 1998 Sales in the third quarter of 1999 increased 24% from the sales posted in the third quarter of 1998. The increase in sales was due to an increase in our OEM business. The Company's margins in the third quarter increased from those seen in 1998 (from 49% in 1998 to 57% in 1999). This occurred due to a change in the product mix. It should be noted that pricing is continuing to remain firm on all products. Operating expenses were higher in the three months ended September 30, 1999 versus the three months ended September 30, 1998 due to increased legal and marketing related expenses. Management anticipates some increase in its operating expenditures during the balance of 1999. This level will also suffice to maintain the Company's research and development efforts in developing new products in the temporary pacing field. No tax provision was recorded for the three months ended September 30, 1999 owing to the Company's ability to use net operating loss carryforwards in both the U.S. and United Kingdom. Net income for the quarter was $51,086 or $.02 per share. This represents a substantial increase in profitability over the results achieved in the third quarter of 1998. FINANCIAL RESULTS - NINE MONTHS ENDED SEPTEMBER 30, 1999 VERSUS NINE MONTHS ENDED SEPTEMBER 30, 1998 Sales in the nine months ended September 30, 1999 increased 25% from the amount posted in the nine months ended in September 30, 1998. This increase is attributable to our receiving increased orders from our OEM accounts. -8- The Company's margins for the year-to-date period increased 5% over those of last year (from 57% in 1998 to 62% in 1999). This occurred due to a change in the product mix. Operating expenses were slightly higher for the nine months ended September 30, 1999 versus the nine months ended September 30, 1998 due to increased legal, marketing and ISO 9001 certification related expenditures. Management anticipates some increase in its operating expenditures during the balance of 1999. This level will also suffice to maintain the Company's research and development efforts in developing new products in the temporary pacing field. No tax provision was recorded for the nine months ended September 30, 1999 owing to the Company's ability to use net operating loss carryforwards in both the U.S. and U.K. Net income for the nine months was $254,859 or $.08 per share, representing an increase of 664% from the comparable period in 1998. FACTORS THAT MAY AFFECT FUTURE RESULTS From time to time, information provided by the Company or statements made by its employees may contain "forward-looking" information which involves risks and uncertainties. In particular, statements contained in this report which are not historical facts (including but not limited to the Company's expectations regarding business strategy, pricing, anticipated operating results, operating expenses and anticipated working capital) may be "forward-looking" statements. The Company's actual results may differ from those stated in any forward-looking statements. Factors that may cause such differences include, but are not limited to, risks associated with the introduction of new products, development of markets for new products offered by the Company, the Company's relationships with distributors and OEM's, the economic health of such OEM's, government regulation, competition and general economic conditions. YEAR 2000 The Year 2000 presents potential concerns for businesses. The consequences of this issue may include systems failures and business process interruption due to calculation problems with the use of 2-digit date formats as the year changes from 1999 to 2000. The Company's products do not use date fields, therefore, the Year 2000 issue should not affect the Company's products. All organizations dealing with the Year 2000 must address the effect this issue will have on their third-party supply chain. The Company has undertaken steps to identify its vendors and to formulate a system of working with key third parties to understand their ability to continue providing services and products through the change to 2000. The Company will work directly with its key vendors and distributors to avoid any business interruptions in 2000. The Year 2000 issue also affects the Company's internal systems, including information technology (IT) and non-IT systems. The Company has assessed the readiness of its systems for handling the Year 2000. Management currently believes that all material systems are Year 2000 compliant; the costs to address Year 2000 compliance were not material. -9- Currently, the Company does not plan to develop a contingency plan for Year 2000 compliant internal systems or for continuing to do business with key third parties since the Company believes its internal systems and those of its key vendors will not be adversely affected by the change to the Year 2000. The impact of the Year 2000 on future revenue is difficult to discern but is a risk to be considered. -10- PART II - OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the Company's Annual Meeting of Stockholders held on August 8, 1999, the following members were elected to the Board of Directors: - -------------------------------------------------------------------------- Votes Votes For Withheld - -------------------------------------------------------------------------- Ralph E. Hanson 3,155,122 0 George F. Harrington 3,155,122 0 Derrick Ebden 3,155,122 0 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 27. Financial Data Schedule (b) Reports on Form 8-K: None -11- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PACE MEDICAL, INC. ------------------------------ (Registrant) Date: November 12, 1999 /s/ Ralph E. Hanson ----------------- ------------------------------ Ralph E. Hanson, President and Chief Executive Officer (principal executive officer) Date: November 12, 1999 /s/ Ralph E. Hanson ----------------- ------------------------------ Ralph E. Hanson, Chief Financial Officer (principal financial officer) -12-