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, 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 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 02451 -------------------------------------------------- (Address of principal executive offices ) (781) 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_____ --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of May 9, 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 Income 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 (UNAUDITED) MARCH 31, 1999 DECEMBER 31, 1998 -------------- ----------------- ASSETS Current assets: Cash and cash equivalents $1,243,579 $1,257,700 Accounts receivable 579,607 350,916 Inventories: Raw materials 238,742 255,821 Work-in-process 163,048 176,999 Finished goods 121,128 160,125 ---------- ---------- 522,918 592,945 Other current assets 44,441 43,749 ----------- ----------- Total current assets 2,390,545 2,245,310 Plant and equipment, net 84,324 46,130 Other assets 775 35,183 ------------ ----------- TOTAL ASSETS $2,475,644 $2,326,623 ------------ ----------- ------------ ----------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 186,676 $114,823 Accrued expenses 28,745 40,490 ------------ ----------- Total current liabilities 215,421 155,313 ------------ ----------- Shareholders' equity: Common stock 34,009 34,009 Additional paid-in capital 3,147,151 3,147,151 Cumulative translation adjustment 89,403 104,836 Accumulated deficit (991,653) (1,095,999) ------------ ----------- 2,278,910 2,189,997 ------------ ----------- Less Treasury Stock, at Cost (18,687) (18,687) ------------ ----------- Total Shareholders' Equity 2,260,223 2,171,310 ------------ ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,475,644 $2,326,623 ------------ ----------- ------------ ----------- See accompanying notes to condensed consolidated financial statements. -3- PACE MEDICAL, INC. AND WHOLLY-OWNED SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) FOR THE THREE MONTHS ENDED MARCH 31 -------------------- 1999 1998 ---- ---- Net Sales $519,915 $279,928 Cost of sales 212,104 107,816 -------- -------- 307,811 172,112 Other operating expenses 214,046 179,341 -------- -------- Income from operations 93,765 (7,229) Other income 10,581 11,177 -------- --------- Net income before taxes 104,346 3,948 Provision for income taxes - - -------- --------- Net income $104,346 $ 3,948 -------- --------- -------- --------- Net Income per Share: Basic $ .03 $ .00 -------- --------- -------- --------- Diluted $ .03 $ .00 -------- --------- -------- --------- See accompanying notes to condensed consolidated financial statements. -4- PACE MEDICAL, INC. AND WHOLLY-OWNED SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) THREE MONTHS ENDED ------------------ MARCH 31 ------------------ 1999 1998 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 104,346 $ 3,948 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 6,000 6,138 Change in assets and liabilities, net: (80,273) 79,794 ----------- ----------- Net cash provided by (used in) operating activities 30,073 89,880 CASH FLOWS FROM INVESTING ACTIVITIES - Additions to property and equipment (44,194) (8,966) CASH FLOW FROM FINANCING ACTIVITIES - Purchase of treasury stock -- (9,687) ----------- ----------- NET INCREASE (DECREASE) IN CASH (14,121) 71,227 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,257,700 1,318,652 CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,243,579 $ 1,389,879 ----------- ----------- ----------- ----------- See accompanying notes to condensed consolidated financial statements. -5- PACE MEDICAL, INC. AND WHOLLY-OWNED SUBSIDIARY MARCH 31, 1999 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 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. The accompanying unaudited consolidated financial statements should be read in conjunction with the 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, consisting only of normal recurring adjustments, necessary to present fairly the financial position of the Company and its wholly-owned subsidiary as of March 31, 1999 and December 31, 1998, and the results of their operations for the three months ended March 31, 1999 and March 31, 1998, and their cash flows for the three months ended March 31, 1999 and March 31, 1998. 3. The Company prepares its financial information using the same accounting principles as those used in its annual financial statements, except that no physical inventories were taken during the periods ended March 31, 1999 or 1998. Cost of sales for such periods was calculated primarily using standard cost methods. 4. The results of operations for the three months ended March 31, 1999 and 1998 are not necessarily indicative of the results to be expected for the full year. 5. 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 dilutive weighted average options outstanding during the period using the treasury-stock method. -6- For the three months ended March 31, 1999 Income Shares Per Share (Numerator) (Denominator) Amount Net Income $104,346 Weighted-average shares outstanding - 3,375,870 ---------- --------- Basic net income per share $104,346 3,375,870 $0.03 ----- ----- Effect of dilutive securities - 34,578 ---------- ----------- Diluted net income per share $104,346 3,410,448 $0.03 -------- --------- ----- -------- --------- ----- For the three months ended March 31, 1998 Income Shares Per Share (Numerator) (Denominator) Amount Net Income $3,948 Weighted-average shares outstanding - 3,400,183 ---------- ---------- Basic net income per share $3,948 3,400,183 $0.00 ----- ----- Effect of dilutive securities - 85,621 ---------- ----------- Diluted net income per share $3,948 3,485,804 $0.00 -------- --------- ----- -------- --------- ----- 6. The Company has adopted the provisions of SFAS No. 130," Reporting Comprehensive Income". Comprehensive Income includes net income and foreign currency translation adjustments, which were $(15,433) and $7,655 for the three months ended March 31, 1999 and 1998, respectively. Accordingly, comprehensive income was $88,913 and $11,603, for the three months ended March 31, 1999 and 1998, respectively. -7- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. FINANCIAL CONDITION As of March 31, 1999, the Company had cash and cash equivalents of $1,243,579 and working capital of $2,175,124. The increase in working capital from the position at December 31, 1998 is attributable entirely to the profit from operations of $93,765. The Company's cash flows have historically tracked its operational results. The Company expects to maintain a sound financial base for the balance of 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 MARCH 31, 1999 VERSUS THE THREE MONTHS ENDED MARCH 31, 1998. Sales in the first quarter of 1999 increased approximately 84% from sales posted in the first quarter of 1998. The increase in sales reflects an increase in sales by the Company to its OEM accounts and distributor. The Company expects this situation to continue during the second quarter. The Company's margins in the first quarter were slightly less than those achieved in the first quarter of 1998 (from 62% in 1998 to 59% in 1999). This occurred due to a change in product mix. It should be noted that pricing continued to remain firm on all products. Operating expenses increased during the first quarter of 1999 due to increased product development and additional marketing costs. Management anticipates some increases in its operating expenditures over 1998 amounts during the balance of 1999. No tax provision was recorded for the three months ended March 31, 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 quarter was $104,346 or $.03 per share in contrast to $3,948 or $.00 per share in the first quarter of 1998. -8- 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, anticipated working capital) and the impact of the Year 2000 issue (discussed below) 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 difficulties 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. 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. -9- PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 27. Financial Data Schedule (b) Reports on Form 8-K: None -10- 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, 1999 RALPH E. HANSON ----------------- ------------------------------- Ralph E. Hanson, President and Principal Executive Officer Date: MAY 14, 1999 RALPH E. HANSON ----------------- ------------------------------- Ralph E. Hanson, Principal Financial Officer -11-