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, 1998 ----------------------------- 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 ) (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 August 13, 1998. 3,390,870 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 JUNE 30, 1998 DECEMBER 31, 1997 ------------- ----------------- (Unaudited) (See note below) ASSETS - ------ Current assets: Cash and cash equivalents $ 1,170,797 $ 1,318,652 Accounts receivable 401,877 416,897 Inventories: Raw materials 309,124 235,464 Work-in-process 195,320 77,061 Finished goods 132,747 117,815 ----------- ----------- 637,191 430,340 Other current assets 50,301 43,208 ----------- ----------- Total current assets 2,260,166 2,209,097 Plant and equipment, net 46,508 41,681 Other assets 38,607 41,080 ----------- ----------- TOTAL ASSETS $ 2,345,281 $ 2,291,858 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------ Current liabilities: Accounts payable $ 168,319 $ 129,509 Due to officer 9,845 7,110 Accrued expenses 14,393 26,619 ----------- ----------- Total current liabilities 192,557 163,238 ----------- ----------- Shareholders' equity: Common stock 34,009 34,009 Additional paid-in capital 3,147,151 3,147,151 Cumulative translation adjustment 100,865 102,899 Accumulated deficit (1,119,614) (1,155,439) ----------- ----------- 2,162,411 2,128,620 ----------- ----------- Less Treasury Stock, at Cost (9,687) 0 ----------- ----------- Total Shareholders' Equity 2,152,724 2,128,620 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,345,281 $ 2,291,858 =========== =========== Note: The balance sheet at December 31, 1997 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 STATEMENTS OF INCOME (UNAUDITED) For the three months For the six months ended June 30 ended June 30 ---------------------- ------------------------- 1998 1997 1998 1997 -------- -------- -------- ---------- Net Sales $477,971 $683,373 $757,899 $1,145,214 Cost of sales 185,869 329,238 293,685 568,363 -------- -------- -------- ---------- 292,102 354,135 464,214 576,851 Other operating expenses 272,489 191,183 451,830 347,123 -------- -------- -------- ---------- Income from operations 19,613 162,952 12,384 229,728 Other income 12,264 10,338 23,441 20,054 -------- -------- -------- ---------- Net income $ 31,877 $173,290 $ 35,825 $ 249,782 ======== ======== ======== ========== Net income per share: Basic $.01 $.05 $.01 $.07 ==== ==== ==== ==== Diluted $.00 $.05 $.01 $.07 ==== ==== ==== ==== See accompanying notes to consolidated condensed financial statements. - 4 - 5 PACE MEDICAL, INC. AND WHOLLY-OWNED SUBSIDIARY CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) SIX MONTHS ENDED ---------------------------- JUNE 30 ---------------------------- 1998 1997 ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 35,825 $ 249,782 Adjustments to reconcile net income to net cash (Used in) provided by operating activities: Depreciation and amortization 7,743 53 Change in assets and liabilities, net: (169,743) (89,511) ---------- ---------- Net cash (used in) provided by operating activities (126,175) 160,324 CASH FLOWS FROM INVESTING ACTIVITIES - Purchases of property and equipment (11,993) (35,247) CASH FLOW FROM FINANCING ACTIVITIES - Purchase of treasury stock (9,687) (0) ---------- ---------- NET INCREASE IN CASH AND $ (147,855) $ 125,077 CASH EQUIVALENTS CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD $1,318,652 $1,029,666 ---------- ---------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $1,770,797 $1,154,743 ========== ========== See accompanying notes to consolidated condensed financial statements. - 5 - 6 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, 1998 and the results of their operations for the three and six months ended June 30, 1998 and June 30, 1997 and their cash flows for the six months ended June 30, 1998 and June 30, 1997. 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 June 30, 1998 or 1997. Cost of sales for such periods was calculated primarily using standard cost methods. 4. The results of operations for the three and six months ended June 30, 1998 are not necessarily indicative of the results to be expected for the full year. 5. The Company has adopted Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share" for purposes of presenting basic and diluted net income per share and has restated all periods presented to conform to the new presentation. The denominator used to determine basic net income 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. For the three months ended June 30, 1998 Income Shares Per Share (Numerator) (Denominator) Amount Net Income $31,877 Weighted-average shares outstanding - 3,390,850 ------- --------- Basic net income per share $31,877 3,390,850 $0.01 ===== Effect of dilutive securities - 96,505 ------- --------- Diluted net income per share $31,877 3,487,355 $0.00 ======= ========= ===== - 6 - 7 For the three months ended June 30, 1997 Income Shares Per Share (Numerator) (Denominator) Amount Net Income $173,290 Weighted-average shares outstanding - 3,400,850 -------- --------- Basic net income per share $173,290 3,400,850 $0.05 ===== Effect of dilutive securities - 166,053 -------- --------- Diluted net income per share $173,290 3,566,903 $0.05 ======== ========= ===== For the six months ended June 30, 1998 Income Shares Per Share (Numerator) (Denominator) Amount Net Income $35,825 Weighted-average shares outstanding - 3,395,517 ------- --------- Basic net income per share $35,825 3,395,517 $0.01 ===== Effect of dilutive securities - 90,883 ------- --------- Diluted net income per share $35,825 3,486,400 $0.01 ======= ========= ===== For the six months ended June 30, 1997 Income Shares Per Share (Numerator) (Denominator) Amount Net Income $249,782 Weighted-average shares outstanding - 3,400,850 -------- --------- Basic net income per share $249,782 3,400,850 $0.07 ===== Effect of dilutive securities - 177,488 -------- --------- Diluted net income per share $249,782 3,578,388 $0.07 ======== ========= ===== 6. The Company has adopted the provisions of SFAS No. 130," Reporting Comprehensive Income". Comprehensive income includes net income and foreign currency translation adjustments. Comprehensive income for the three and six months ended June 30, 1998 and 1997 is as follows: - 7 - 8 Three Months Ended Six Months Ended June 30, June 30, ---------------------- ----------------------- 1998 1997 1998 1997 ------- -------- ------- -------- Net Income $31,877 $173,290 $35,825 $249,782 Currency Translation Adjustment 9,689 8,492 (2,034) (15,283) ------- -------- ------- -------- Total $41,566 $181,782 $33,791 $234,499 ======= ======== ======= ======== 7. The Company has entered into a three-year employment agreement with its Chairman that provides for annual compensation of $125,000 - The agreement expires in June, 2001. - 8 - 9 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, 1998, the Company had cash and cash equivalents of $1,170,797 and working capital of $2,067,609. Working capital has increased slightly since December 31, 1997 owing to the profitable operations of the Company over the first half of the year. The Company's cash position has decreased somewhat over December 31, 1997 because of increased inventory as a result of lower than expected sales. The Company expects to maintain a sound financial base for the balance of fiscal 1998. 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, 1998 VERSUS THREE MONTHS ENDED JUNE 30, 1997 Sales in the second quarter of 1998 decreased 30% from the sales posted in the second quarter of 1997. The decrease in sales reflects a decrease in OEM sales to a distributor. The Company's margins in the second quarter increased over those seen in 1997 (from 51% in 1997 to 61% in 1998). 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 June 30, 1998 versus the three months ended June 30, 1997 due to increased advertising and marketing and ISO 9001 certification related expenditures. Management anticipates some increase in its operating expenditures during the balance of 1998. 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 June 30, 1998 owing to the Company's ability to use net operating loss carryforwards in both the U.S. and - 9 - 10 U.K. Net income for the quarter was $31,877 or $.01 per share. This is substantially lower than that seen in the second quarter of 1997 and reflects the decrease in OEM sales. FINANCIAL RESULTS - SIX MONTHS ENDED JUNE 30, 1998 VERSUS SIX MONTHS ENDED JUNE 30, 1997 Sales in the six months ended June 30, 1998 decreased from the amount posted in the six months ended in June 30, 1997. This decrease is attributable to the Company's decrease in OEM sales to a distributor. The Company's margins for the year-to-date period are slightly more than those of last year. This occurred due to a change in the product mix. Operating expenses were higher for the six months ended June 30, 1998 versus the six months ended June 30, 1997 due to increased advertising and marketing and ISO 9001 certification related expenditures. Management anticipates some increase in its operating expenditures during the balance of 1998. 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, 1998 owing to the Company's ability to use net operating loss carryforwards in both the U.S. and U.K. Net income for the six months was $ 35,825 or $.01 per share, representing a decrease of 86% from the comparable period in 1997. This is a substantial reduction from the earnings in the first six months of 1997 and is attributable to the factors described above. - 10 - 11 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, government regulation, competition and general economic conditions. - 11 - 12 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 May 21, 1998, the following members were elected to the Board of Directors: - -------------------------------------------------------------------------------- Votes Votes For Withheld - -------------------------------------------------------------------------------- Ralph E. Hanson 2,963,229 14,000 George F. Harrington 2,963,229 14,000 Derrick Ebden 2,963,229 14,000 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 10.1. Employment Agreement with Ralph Hanson 10.2 Non Qualified Stock Option Agreement with Drusilla F. Hays 27. Financial Data Schedule (b) Reports on Form 8-K: None - 12 - 13 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, 1998 /s/ Ralph E. Hanson --------------- -------------------------------- Ralph E. Hanson, President and Chief Executive Officer (principal executive officer) Date: August 19, 1998 /s/ Ralph E. Hanson --------------- ------------------------------- Ralph E. Hanson, Chief Financial Officer (principal financial officer) - 13 -