1 FORM 10-QSB SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 (Mark One) /X/ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1996 ------------------------ OR / / TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to . ------------------- -------------------- Commission file number 0-16257 ------------------------------------------------ Pace Medical, Inc. ----------------------------------------------------------------- (Exact name of small business issuer as specified in its charter) Massachusetts 04-2867416 ------------------------------ ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) identification No.) 391 Totten Pond Road, Waltham, Massachusetts 02154 -------------------------------------------------- (Address of principal executive offices) (617) 890-5656 -------------------------- (Issuer's telephone number, including area code) Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of August 14, 1996. 3,401,770 shares of Common Stock, par value $.01 per share 2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. a) Consolidated Condensed Balance Sheets b) Consolidated Condensed Statements of Operations c) Consolidated Condensed Statements of Cash Flows d) Notes to Consolidated Condensed Financial Statements -2- 3 PACE MEDICAL, INC. AND WHOLLY-OWNED SUBSIDIARY CONSOLIDATED CONDENSED BALANCE SHEETS JUNE 30, 1996 DECEMBER 31, 1995 ------------- ----------------- (Unaudited) (See note below) ASSETS - ------ Current assets: Cash and cash equivalents $1,001,113 $ 772,006 Accounts receivable 389,676 380,781 Inventories: Raw materials 220,219 297,247 Work-in-process 185,297 96,782 Finished goods 84,553 114,039 ---------- ---------- 490,069 508,068 Other current assets 47,150 45,489 ---------- ---------- Total current assets 1,928,008 1,706,344 Plant and equipment, net 63,685 25,534 Other assets 6,764 47,832 ---------- ---------- TOTAL ASSETS $1,998,457 $1,779,710 ========== ========== <FN> Note: The balance sheet at December 31, 1995 has been taken from the audited financial statements at that date. See accompanying notes to consolidated condensed financial statements. -3- 4 PACE MEDICAL, INC. AND WHOLLY-OWNED SUBSIDIARY CONSOLIDATED CONDENSED BALANCE SHEETS JUNE 30, 1996 DECEMBER 31, 1995 ------------- ----------------- (Unaudited) (See note below) LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------ Current liabilities: Accounts payable $ 156,221 $ 149,450 Accrued expenses 42,138 54,634 Accrued royalties 186,660 165,664 ----------- ----------- Total current liabilities 385,019 369,748 Excess of acquired net assets over purchase price 7,330 14,656 Shareholders' equity: Common stock 33,909 33,809 Additional paid-in capital 3,142,250 3,137,351 Cumulative translation adjustment 60,678 57,081 Accumulated deficit (1,630,729) (1,832,935) ----------- ----------- 1,606,108 1,395,306 ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,998,457 $ 1,779,710 =========== =========== <FN> Note: The balance sheet at December 31, 1995 has been taken from the audited financial statements at that date. See accompanying notes to consolidated condensed financial statements. -4- 5 PACE MEDICAL, INC. AND WHOLLY-OWNED SUBSIDIARY CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED) For the three months For the six months ended June 30 ended June 30 ---------------------- ------------------ 1996 1995 1996 1995 ---- ---- ---- ---- Net Sales $519,698 $416,006 $1,116,779 $780,466 Cost of sales 257,812 189,509 566,410 359,405 -------- -------- ---------- -------- 261,886 226,497 550,369 421,061 Other operating expenses 198,467 161,009 363,929 320,627 -------- -------- ---------- -------- Income from operations 63,419 65,488 186,440 100,434 Other income (7,762) (7,590) (15,766) (14,307) -------- -------- ---------- -------- Net income $ 71,181 $ 73,078 $ 202,206 $114,741 ======== ======== ========== ======== Net income per common and common equivalent share $ .02 $ .02 $ .06 $ .03 ======== ======== ========== ======== Average number of common shares and common equivalent shares outstanding 3,647,389 3,387,600 3,598,141 3,387,600 See accompanying notes to consolidated condensed financial statements. -5- 6 PACE MEDICAL, INC. AND WHOLLY-OWNED SUBSIDIARY CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) SIX MONTHS ENDED ---------------- JUNE 30 ------- 1996 1995 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 202,206 $ 114,741 Adjustments to reconcile net income (loss) to net cash used in operations: Depreciation and amortization (1,643) 495 Change in assets and liabilities, net: 66,906 (149,677) ---------- --------- Net cash provided by (used in) operating activities 267,469 (34,441) CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property and equipment 43,361 12,255 ---------- --------- Net cash used in investing activities 43,361 12,255 CASH FLOW FROM FINANCING ACTIVITIES: Proceeds from exercise of options and warrants 4,999 -- ---------- --------- Net cash provided by financing activities 4,999 -- NET INCREASE (DECREASE) IN CASH 229,107 (46,696) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD $ 772,006 $ 781,110 CASH AND CASH EQUIVALENTS AT END OF PERIOD $1,001,113 $ 734,414 ========== ========= See accompanying notes to consolidated condensed financial statements. -6- 7 PACE MEDICAL, INC. AND WHOLLY-OWNED SUBSIDIARY NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS 1. The accompanying unaudited consolidated financial statements and these notes have been condensed and do not contain all disclosures required by generally accepted accounting principles. See notes to audited consolidated financial statements contained in the Company's annual report. 2. In the opinion of the Company, the accompanying unaudited condensed financial statements contain all adjustments, all of which are normal and recurring, necessary to present fairly the financial position of the Company and its wholly-owned subsidiary as of June 30, 1996 and the results of their operations for the three and six months ended June 30, 1996 and June 30, 1995 and their cash flows for the six months ended June 30, 1996 and June 30, 1995. 3. The Company prepares its financial information using the same accounting principles as for its annual financial statements with the following modifications: a. No physical inventories were taken during either of the periods ended June 30, 1996 or 1995. Cost of sales for such periods was calculated primarily using standard cost methods. 4. The Company has adopted SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", in the current quarter. This adoption had no impact on the current quarter's financial statements. The Company has also elected to continue to apply the measurement provisions of APB 25, "Accounting for Stock Issued to Employees", in lieu of adopting those described in SFAS 123, "Accounting for Stock-Based Compensation". 5. The results of operations for the three and six months ended June 30, 1996 are not necessarily indicative of the results to be expected for the full year. -7- 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. PACE MEDICAL, INC. AND WHOLLY OWNED SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL CONDITION As of June 30, 1996, the Company had cash and cash equivalents of $1,001,113 and working capital of $1,542,989. Working capital has increased since December 31, 1995 owing to the profitable operations of the Company over the first half of the year. The Company's cash position has also increased significantly over December 31, 1995 because of these profitable operations. The Company still maintains a sound financial base for fiscal 1996. Management continues to believe that the current level of working capital, coupled with the flexibility of the Company's cost structure, should suffice to ensure that on-going operations are financed adequately. FINANCIAL RESULTS - THREE MONTHS ENDED JUNE 30, 1996 VERSUS THREE MONTHS ENDED JUNE 30, 1995 Sales in the second quarter of 1996 increased 25% over the sales posted in the second quarter of 1995. The continued increase in sales reflects an increase in market penetration by the Company's distributors and OEM accounts. A broader base of products and increased customer awareness of the product offerings is allowing this to happen. The Company's margins in the second quarter decreased over those seen in 1995 (from 54% in 1995 to 50% in 1996). This occurred due to a change in the product mix to the more sophisticated Pacing Analyzer, which is in a production start-up phase. The analyzer margin is expected to increase as production efficiency improves. It should be noted that pricing is continuing to remain firm on all products. Operating expenses were higher in the three months ended June 30, 1996 versus the three months ended June 30, 1995. Management does not anticipate any significant increases in its operating expenditures during the balance of 1996. This level will also suffice to maintain the Company's research and development efforts in developing new products in the temporary pacing field. -8- 9 No tax provision was recorded for the three months ended June 30, 1996 owing to the Company's ability to use net operating loss carryforwards for federal, state and foreign sourced income. Net income for the quarter was $71,181 or $.02 per share. This is essentially equivalent to that seen in the second quarter of 1995 and reflects the continued demand for the Company's products. FINANCIAL RESULTS - SIX MONTHS ENDED JUNE 30, 1996 VERSUS SIX MONTHS ENDED JUNE 30, 1995 Sales in the six months ended June 30, 1996 increased 43% over those seen in the six months ended in June 30, 1995. This increase is attributable to the Company being able to maintain a consistent level of sales in 1996. In 1995, the Company experienced a significant sales short-fall in the first three months of the year. The Company's margins for the year-to-date period are slightly less than those of last year. This occurred due to a change in the product mix to the more sophisticated Pacing Analyzer, which is in a production start-up phase. The Analyzer margin is expected to increase as production efficiency improves. Operating expenses were higher for the six months ended June 30, 1996 versus the six months ended June 30, 1995. Management also does not anticipate any significant increases in its operating expenditures during the balance of 1996. This level will also suffice to maintain the Company's research and development efforts in developing new products in the temporary pacing field. No tax provision was recorded for the six months ended June 30, 1996 owing to the Company's ability to use net operating loss carryforwards for federal, state and foreign sourced income. Net income for the six months was $202,206 or $.06 per share. This is a substantial improvement over the first six months of 1995 and is attributable to the factors described above. -9- 10 PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 11. Statement re: computation of per share earnings 27. Financial Data Schedule (b) Reports on Form 8-K: None SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PACE MEDICAL, INC. --------------------------------- (Registrant) Date: August 19, 1996 RALPH E. HANSON -------------------- --------------------------------- Ralph E. Hanson, President and Principal Executive Officer Date: August 19, 1996 RALPH E. HANSON -------------------- --------------------------------- Ralph E. Hanson, Principal Financial Officer -10-