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 March 31, 1997 -------------------------------------------- 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 registrant 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 ---------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (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 --- --- APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes X No --- --- APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of May 12, 1997. 3,400,870 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 Income 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 MARCH 31, 1997 DECEMBER 31, 1996 -------------- ----------------- (Unaudited) (See note below) ASSETS - ------ Current assets: Cash and cash equivalents $1,089,580 $1,029,666 Accounts receivable 374,448 421,769 Inventories: Raw materials 219,298 254,238 Work-in-process 160,054 175,003 Finished goods 168,071 151,300 ---------- ---------- 547,423 580,541 Other current assets 53,622 48,418 ---------- ---------- Total current assets 2,065,073 2,080,394 Plant and equipment, net 67,498 29,413 Other assets 6,049 48,987 ---------- ---------- TOTAL ASSETS $2,138,621 $2,158,794 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------ Current liabilities: Accounts payable $ 109,108 $ 167,602 Due to officer 3,689 6,872 Accrued expenses 45,111 48,712 Accrued royalties 186,319 193,932 ---------- ---------- Total current liabilities 344,228 417,118 Excess of acquired net assets over purchase price 0 0 -3- 4 PACE MEDICAL, INC. AND WHOLLY-OWNED SUBSIDIARY CONSOLIDATED CONDENSED BALANCE SHEETS MARCH 31, 1997 DECEMBER 31, 1996 -------------- ----------------- (Unaudited) (See note below) Shareholders' equity: Common stock 34,009 34,009 Additional paid-in capital 3,147,151 3,147,151 Cumulative translation adjustment 84,850 108,625 Accumulated deficit (1,471,617) (1,548,109) ----------- ----------- 1,794,394 1,741,676 ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,138,621 $ 2,158,794 =========== =========== Note: The balance sheet at December 31, 1996 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 INCOME (UNAUDITED) FOR THE THREE MONTHS ENDED MARCH 31 -------------------------- 1997 1996 ---------- ---------- Net Sales $ 461,841 $ 597,081 Cost of sales 239,125 308,598 ---------- ---------- 222,716 288,483 Other operating expenses 155,940 165,462 ---------- ---------- Income from operations 66,776 123,021 Other income (9,716) (8,004) ---------- ---------- Net income before taxes 76,492 131,025 Provision for income taxes 0 0 ---------- ---------- Net income $ 76,492 $ 131,025 ========== ========== Net income per common and common equivalent share $ .02 $ .04 ========== ========== Average number of common and common equivalent shares outstanding 3,589,668 3,467,382 ========== ========== See accompanying notes to consolidated condensed financial statements. -5- 6 PACE MEDICAL, INC. AND WHOLLY-OWNED SUBSIDIARY CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) THREE MONTHS ENDED MARCH 31 1997 1996 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 76,492 $131,025 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization (5,207) (3,743) Change in assets and liabilities, net: 21,507 (56,302) ---------- -------- Net cash provided by operating activities 92,792 70,980 CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property and equipment (32,878) (22,338) ---------- -------- Net cash used in investing activities (32,878) (22,338) CASH FLOW FROM FINANCING ACTIVITIES: Proceeds from exercise of options and warrants 0 4,999 ---------- -------- Net cash provided by financing activities 0 4,999 NET INCREASE IN CASH $ 59,914 $ 53,641 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD $1,029,666 $772,006 CASH AND CASH EQUIVALENTS AT END OF PERIOD $1,089,580 $825,647 ========== ======== 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 March 31, 1997 and March 31, 1996, and the results of their operations for the three months ended March 31, 1997 and March 31, 1996, and their cash flows for the three months ended March 31, 1997 and March 31, 1996. 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 the periods ended March 31, 1997 or 1996. Cost of sales for such periods was calculated primarily using standard cost methods. 4. In February, 1997, the Financial Accounting Standards Board released Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share", which the Company will adopt in the fourth quarter of 1997. Had SFAS No. 128 been effective for the quarters ended March 31, 1997 and March 31, 1996, basic and diluted earnings per share under SFAS 128 would have been the same as the reported income per share. 5. The results of operations for the three months ended March 31, 1997 and 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 March 31, 1997, the Company had cash and cash equivalents of $1,089,580 and working capital of $1,720,845. This reflects an increase over the figures seen at December 31, 1996 and reflects the impact of the profit realized in the first quarter of 1997. The Company expects to maintain a sound financial base for the balance of fiscal 1997. 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. RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 1997 VERSUS THREE MONTHS ENDED MARCH 31, 1996 Sales in the first quarter of 1997 decreased 22% from the prior corresponding period of 1996 due to lower sales to OEM accounts. Management anticipates that the current sales level will improve as recent changes experienced with our OEM accounts stabilize. In addition, the use of a national distributor company is being considered to improve our coverage of the U.S. marketplace. The Company's margins of 48% in the first quarter of 1997 are consistent with those in the first quarter of 1996. These margin levels are in accordance with those that management would expect during a period when new products are introduced to manufacturing. The margin primarily reflects the current ability of the Company to absorb the overhead structure that has been established to support its products. It should be noted that pricing is continuing to remain firm on its products. Operating expenses decreased slightly between 1997 and 1996. This reflects management's commitment to containing costs. Management also does not anticipate any significant increases in its operating expenditures during the balance of 1997. 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 taxes were provided on income owing to the Company's substantial net operating loss carryforwards on both the U.S. and the U.K. The Company earned net income for the quarter of $76,492 or $.02 per share. This contrasts with net income of $131,025 or $.04 per share in the first quarter of 1996. These differences are reflective of the domestic OEM distribution changes experienced in the first quarter of 1997. In February, 1997, the Financial Accounting Standards Board released Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share", which the Company will adopt in the fourth quarter of 1997. Had SFAS No. 128 been effective for the quarters ended March 31, 1997 and March 31, 1996, basic and diluted earnings per share under SFAS 128 would have been the same as the reported income per share. -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: May 14, 1997 RALPH E. HANSON --------------------- --------------------------------- Ralph E. Hanson, President and Principal Executive Officer Date: May 14, 1997 RALPH E. HANSON --------------------- --------------------------------- Ralph E. Hanson, Principal Financial Officer -10-