**FORM10-QSB**

 

**Securitiesand Exchange Commission**

**Washington,D. C. 20549**

 

** **
| **(Mark One)** |   |   |
|----------------|--------|--------|

 
| **ý** |   | **QUARTERLY REPORT UNDER SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934** |
|------------|--------|----------------------------------------------------------------------------------------|

** **

**For the quarterly period ended  September 30, 2001**

 

**OR**

 
| **o** |   | **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.**

(Exactname of small business issuer as specified in its charter)

 

| **Massachusetts**                                         |   | **4-2867416**        |
|-----------------------------------------------------------|--------|----------------------|
| (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)         |

 

Indicateby check mark whether the issuer (1) has filed all reports required to be filedby Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

 

Yes ý    No o

 

Indicatethe number of shares outstanding of each of the issuer's classes of commonequity, as of November 13, 2001.

 

3,375,870 shares ofCommon 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 |

** **

**PACE MEDICAL, INC. ANDWHOLLY-OWNED SUBSIDIARY**

**CONDENSED CONSOLIDATED BALANCESHEETS**

 
|                                        |   | **SEPTEMBER  30, 2001** |      | **DECEMBER  31, 2000** |   |
|---------------------------------------------|--------|-------------------------|-----------|------------------------|--------|
|                                        |   | **(Unaudited)**         |      | **(See  note below)**  |   |
| ASSETS                                      |   |                    |      |                   |   |
|                                        |   |                    |      |                   |   |
| Current assets:                             |   |                    |      |                   |   |
| Cash and cash  equivalents                  |   | $                       | 1,234,464 |                   | $      | 1,252,352 |   |
| Accounts receivable                         |   | 424,762                 |      | 264,873                |   |
| Inventories:                                |   |                    |      |                   |   |
| Raw  materials                              |   | 283,863                 |      | 242,965                |   |
| Work-in-process                             |   | 97,021                  |      | 147,547                |   |
| Finished  goods                             |   | 64,808                  |      | 214,966                |   |
|                                        |   | 445,692                 |      | 605,478                |   |
| Other current assets                        |   | 17,482                  |      | 23,820                 |   |
| Total  current assets                       |   | 2,122,400               |      | 2,146,523              |   |
| Plant and equipment,  net                   |   | 44,226                  |      | 50,652                 |   |
| Other assets                                |   | 145,235                 |      | 121,051                |   |
| TOTAL ASSETS                                |   | $                       | 2,311,861 |                   | $      | 2,318,226 |   |
|                                        |   |                    |      |                   |   |
| LIABILITIES  AND SHAREHOLDERS' EQUITY       |   |                    |      |                   |   |
|                                        |   |                    |      |                   |   |
| Current liabilities:                        |   |                    |      |                   |   |
| Accounts payable                            |   | $                       | 79,811    |                   | $      | 117,304 |   |
| Accrued expenses                            |   | 41,264                  |      | 65,397                 |   |
| Total  current liabilities                  |   | 121,075                 |      | 182,701                |   |
|                                        |   |                    |      |                   |   |
| Shareholders' equity:                       |   |                    |      |                   |   |
| Common stock                                |   | 34,009                  |      | 34,009                 |   |
| Additional paid-in  capital                 |   | 3,147,151               |      | 3,147,151              |   |
| Cumulative translation  adjustment          |   | 32,161                  |      | 32,725                 |   |
| Accumulated deficit                         |   | (990,788                | )         | (1,046,613             | )      |
|                                        |   | 2,222,533               |      | 2,167,272              |   |
| Less Treasury Stock,  at Cost               |   | (31,747                 | )         | (31,747                | )      |
| Total  Shareholders' Equity                 |   | 2,190,786               |      | 2,135,525              |   |
|                                        |   |                    |      |                   |   |
| TOTAL LIABILITIES AND  SHAREHOLDERS' EQUITY |   | $                       | 2,311,861 |                   | $      | 2,318,226 |   |

 

Note:          The balance sheet at December 31, 2000has been taken from the audited financial statements at that date.

 

Seeaccompanying notes to condensed consolidated financial statements.

 

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

(Unaudited)

 
|                           |   | **For  the Three Months**     |       | **For  the Nine Months**      |       |
|--------------------------------|--------|-------------------------------|------------|-------------------------------|------------|
|                           |   | **Ended  September 30 ** | ** ** | **Ended  September 30 ** | ** ** |
|                           |   | **2001**                      |       | **2000**                      |       | **2001** |   | **2000** |   |
| Net Sales                      |   | $                             | 437,617    |                          | $          | 233,007 |   | $ | 1,215,172 |   | $ | 921,478 |   |
|                           |   |                          |       |                          |       |   |   |   |   |
| Cost of sales                  |   | 206,722                       |       | 121,759                       |       | 608,286 |   | 405,115 |   |
|                           |   |                          |       |                          |       |   |   |   |   |
|                           |   | 230,895                       |       | 111,248                       |       | 606,886 |   | 516,363 |   |
|                           |   |                          |       |                          |       |   |   |   |   |
| Other operating  expenses      |   | 198,140                       |       | 184,430                       |       | 589,479 |   | 586,565 |   |
|                           |   |                          |       |                          |       |   |   |   |   |
| Income (loss) from  operations |   | 32,755                        |       | (73,182                       | )          | 17,407 |   | (70,202 | ) |
|                           |   |                          |       |                          |       |   |   |   |   |
| Other income                   |   | 10,612                        |       | 10,196                        |       | 38,418 |   | 39,878 |   |
|                           |   |                          |       |                          |       |   |   |   |   |
| Net income (loss)              |   | $                             | 43,367     |                          | $          | (62,986 | ) | $ | 55,825 |   | $ | (30,324 | ) |
|                           |   |                          |       |                          |       |   |   |   |   |
| Net income (loss) per  share:  |   |                          |       |                          |       |   |   |   |   |
|                           |   |                          |       |                          |       |   |   |   |   |
| Basic                          |   | $                             | .01        |                          | $          | (.02 | ) | $ | .02 |   | $ | (.01 | ) |
|                           |   |                          |       |                          |       |   |   |   |   |
| Diluted                        |   | $                             | .01        |                          | $          | (.02 | ) | $ | .02 |   | $ | (.01 | ) |

 

Seeaccompanying notes to condensed consolidated financial statements.

 

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

(Unaudited)

 
|                                                                                                 |   | **NINE  MONTHS ENDED** |       |
|------------------------------------------------------------------------------------------------------|--------|------------------------|------------|
|                                                                                                 |   | **SEPTEMBER  30**      | ** ** |
|                                                                                                 |   | **2001**               |       | **2000** |   |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                                               |   |                   |       |   |   |
| Net  income (loss)                                                                                   |   | $                      | 55,825     |   | $ | (30,324 | ) |
| Adjustments  to reconcile net income (loss) to net cash provided by (used in) operating  activities: |   |                   |       |   |   |
| Depreciation  and amortization                                                                       |   | 14,555                 |       | 12,922 |   |
| Change  in assets and liabilities, net:                                                              |   | (79,680                | )          | (137,516 | ) |
|                                                                                                 |   |                   |       |   |   |
| Net  cash (used in) provided by operating activities                                                 |   | (9,300                 | )          | (154,918 | ) |
|                                                                                                 |   |                   |       |   |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                                               |   |                   |       |   |   |
|                                                                                                 |   |                   |       |   |   |
| Purchases  of property and equipment                                                                 |   | (8,588                 | )          | (18,681 | ) |
|                                                                                                 |   |                   |       |   |   |
| NET INCREASE  (DECREASE) IN CASH AND CASH EQUIVALENTS                                                |   | (17,888                | )          | (173,599 | ) |
| CASH AND CASH  EQUIVALENTS AT BEGINNING OF PERIOD                                                    |   | 1,252,352              |       | 1,513,514 |   |
|                                                                                                 |   |                   |       |   |   |
| CASH AND CASH  EQUIVALENTS AT END OF PERIOD                                                          |   | $                      | 1,234,464  |   | $ | 1,339,915 |   |

 

Seeaccompanying notes to condensed consolidated financial statements.

 

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

1.             The accompanying unauditedconsolidated financial statements and these notes have been condensed and donot contain all disclosures required by generally accepted accountingprinciples.  See notes to auditedconsolidated financial statements contained in the Company's annual report.

 

2.             In the opinion of the Company, theaccompanying unaudited condensed financial statements contain all adjustments,all of which are normal and recurring, necessary to present fairly thefinancial position of the Company and its wholly-owned subsidiary as ofSeptember 30, 2001 and the results of their operations for the three and ninemonths ended September 30, 2001 and September 30, 2000 and their cash flows forthe nine months ended September 30, 2001 and September 30, 2000.

 

3.             The Company prepares its financialinformation using the same accounting principles as for its annual financialstatements except that no physical inventories were taken during either of theperiods ended September 30, 2001 or 2000. Cost of sales for such periods was calculated primarily using standardcost methods.

 

4.             The results of operations for thethree and nine months ended September 30, 2001 are not necessarily indicativeof the results to be expected for the full year.

 

5.             The denominator used to determinebasic net income (loss) per share includes the weighted average common sharesoutstanding during the quarter.  Thedenominator used to determine diluted net income per share includes the sharesused in the calculation of basic net income per share plus the weighted averageoptions outstanding during the period using the treasury-stock method.

 
|                                |   | **For the three months ended September 30, 2001** |   |
|-------------------------------------|--------|---------------------------------------------------|--------|
|                                |   | **Income (loss)**                                 |   | **Shares** | ** ** | **Per Share** | ** ** |
|                                |   | **(Numerator)**                                   |   | **(Denominator)** |   | **Amount** |   |
| Net Income (loss)                   |   | $                                                 | 43,367 |   |   |   |   |   |
|                                |   |                                              |   |   |   |   |   |
| Weighted-average shares outstanding |   | -                                                 |   | 3,354,870 |   |   |   |
|                                |   |                                              |   |   |   |   |   |
| Basic net income (loss) per share   |   | 43,367                                            |   | 3,354,870 |   | $ | 0.01 |   |
|                                |   |                                              |   |   |   |   |   |
| Effect of dilutive securities       |   | -                                                 |   | 2,669 |   |   |   |
|                                |   |                                              |   |   |   |   |   |
| Diluted net income (loss) per share |   | $                                                 | 43,367 |   | 3,357,539 |   | $ | 0.01 |   |

 

 
|                                |   | **For the three months ended September 30, 2000** |     |
|-------------------------------------|--------|---------------------------------------------------|----------|
|                                |   | **Income (loss)**                                 |     | **Shares** |   | **Per Share** |   |
|                                |   | **(Numerator)**                                   |     | **(Denominator)** |   | **Amount** |   |
| Net Income (loss)                   |   | $                                                 | (62,986) |   |   |   |   |   |
|                                |   |                                              |     |   |   |   |   |
| Weighted-average shares outstanding |   | -                                                 |     | 3,375,870 |   |   |   |
|                                |   |                                              |     |   |   |   |   |
| Basic net income per share          |   | $                                                 | (62,986) |   | 3,375,870 |   | $ | (0.02) |   |
|                                |   |                                              |     |   |   |   |   |
| Effect of dilutive securities       |   | -                                                 |     |   |   |   |   |
|                                |   |                                              |     |   |   |   |   |
| Diluted net income (loss) per share |   | $                                                 | (62,986) |   | 3,375,870 |   | $ | (0.02) |   |

 
|                                |   | **For  the nine months ended September 30, 2001** |   |
|-------------------------------------|--------|---------------------------------------------------|--------|
|                                |   | **Income**                                        |   | **Shares** |   | **Per  Share** |   |
|                                |   | **(Numerator)**                                   |   | **(Denominator)** |   | **Amount** |   |
| Net Income                          |   | $                                                 | 55,825 |   |   |   |   |   |
|                                |   |                                              |   |   |   |   |   |
| Weighted-average shares outstanding |   | -                                                 |   | 3,375,870 |   |   |   |
|                                |   |                                              |   |   |   |   |   |
| Basic net income per shar           |   | 55,825                                            |   | 3,375,870 |   | $ | 0.02 |   |
|                                |   |                                              |   |   |   |   |   |
| Effect of dilutive securities       |   | -                                                 |   | 10,109 |   |   |   |
|                                |   |                                              |   |   |   |   |   |
| Diluted net income per share        |   | $                                                 | 55,825 |   | 3,385,979 |   | $ | 0.02 |   |

 
|                                |   | **For  the nine months ended September 30, 2000** |     |
|-------------------------------------|--------|---------------------------------------------------|----------|
|                                |   | **Income**                                        |     | **Shares** |   | **Per  Share** |   |
|                                |   | **(Numerator)**                                   |     | **(Denominator)** |   | **Amount** |   |
| Net Income                          |   | $                                                 | (30,324) |   |   |   |   |   |
|                                |   |                                              |     |   |   |   |   |
| Weighted-average shares outstanding |   | -                                                 |     | 3,375,870 |   |   |   |
|                                |   |                                              |     |   |   |   |   |
| Basic net income per share          |   | $                                                 | (30,324) |   | 3,375,870 |   | $ | 0.01 |   |
|                                |   |                                              |     |   |   |   |   |
| Effect of dilutive securities       |   | -                                                 |     | - |   |   |   |
|                                |   |                                              |     |   |   |   |   |
| Diluted net income per share        |   | $                                                 | (30,324) |   | 3,375,870 |   | $ | 0.01 |   |

 

6.                 The Company has adopted theprovisions of SFAS No. 130,  “ReportingComprehensive Income". Comprehensive income includes net income (loss)  and foreign currency translationadjustments.  Comprehensive income forthe three and nine months ended September 30, 2001 and 2000 is as follows:

 
|                             |   | **Three  Months Ended** |   | **Nine  Months Ended** |   |
|----------------------------------|--------|-------------------------|--------|------------------------|--------|
|                             |   | **September  30**       |   | **September  30,**     |   |
|                             |   | **2001**                |   | **2000**               |   | **2001** |   | **2000** |   |
| Net Income (loss)                |   | $                       | 43,367 |                   | $      | (62,986 | ) | $ | 55,825 |   | $ | (30,324 | ) |
|                             |   |                    |   |                   |   |   |   |   |   |
| Currency Translation  Adjustment |   | 36,944                  |   | (13,464                | )      | (564 | ) | (57,529 | ) |
|                             |   |                    |   |                   |   |   |   |   |   |
| Total                            |   | $                       | 80,311 |                   | $      | (76,450 | ) | $ | 55,261 |   | $ | (87,853 | ) |

 

**Item 2.    Management's Discussion and Analysis ofFinancial Condition and Results of Operations.**

 

**PACEMEDICAL, INC. AND WHOLLY-OWNED SUBSIDIARY**

 

**MANAGEMENT'SDISCUSSION AND ANALYSIS OF**

### **FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

## **Financial Condition**

 

Asof September 30, 2001, the Company had cash and cash equivalents of $1,234,464and working capital of $2,001,325. Working capital has increased slightly since December 31, 2000 owing tothe Company’s slight net income over the first nine months of the year.

 

TheCompany expects to maintain a sound financial base for the balance of fiscal2001.  Management continues to believethat the current level of working capital, coupled with the flexibility of theCompany's cost structure, should suffice to ensure that on-going operations arefinanced adequately.

 

**FinancialResults - Three Months ended September 30, 2001 versus Three Months endedSeptember 30, 2000**

 

Salesin the third quarter of 2001 increased 88% from the sales posted in the thirdquarter of 2000.  The increase in saleswas due to an increase in our international business and favorable foreignexchange conversion rates.

 

TheCompany's margins in the third quarter increased from those seen in 2000 (from46% in 2000 to 53% in 2001).  Thisoccurred due to a change in the product mix and favorable productionvariances.  It should be noted thatpricing is continuing to remain firm on all products.

 

Operatingexpenses were higher in the three months ended September 30, 2001 versus thethree months ended September 30, 2000 due to increased administration andmarketing related expenses.  Managementanticipates some increase in its operating expenditures during the balance of2001.  This level will also suffice tomaintain the Company's research and development efforts in developing newproducts in the temporary pacing field.

 

Notax provision was recorded for the three months ended September 30, 2001 owingto the Company's ability to use net operating loss carry forwards in both theU.S. and United Kingdom.

 

Netincome for the quarter was $43,367 or $.01 per share.  This represents a substantial increase in profitability over theresults achieved in the third quarter of 2000.

 

**FinancialResults - Nine Months ended September 30, 2001 versus Nine Months endedSeptember 30, 2000**

 

Salesin the nine months ended September 30, 2001 increased 32% from the amountposted in the nine months ended in September 30, 2000.  This increase is due to an increase in ourinternational business and favorable foreign exchange conversion rates.  The Company's margins for the year-to-dateperiod decreased 6% from those of last year (from 56% in 2000 to 50% in2001).  This occurred due to a change inthe product mix and unfavorable production variances.

 

Operatingexpenses were flat  for the nine monthsended September 30, 2001 versus the nine months ended September 30, 2000.  Management anticipates some increase in itsoperating expenditures during the balance of 2001.  This level will also suffice to maintain the Company's researchand development efforts in developing new products in the temporary pacingfield.

 

Notax provision was recorded for the nine months ended September 30, 2001 owingto the Company's ability to use net operating loss carry forwards in both theU.S. and U.K.

 

Netincome for the nine months was $55,825 or $.02 per share, versus a net loss of$(30,324) or $(.01) per share for the comparable period in 2000.

 

**FactorsThat May Affect Future Results**

 

Fromtime to time, information provided by the Company or statements made by itsemployees may contain "forward-looking" information which involvesrisks and uncertainties.  In particular,statements contained in this report which are not historical facts (includingbut not limited to the Company's expectations regarding business strategy,pricing, anticipated operating results, operating expenses and anticipatedworking capital) may be "forward-looking" statements.  The Company's actual results may differ fromthose stated in any forward-looking statements.  Factors that may cause such differences include, but are notlimited to, risks associated with the introduction of new products, developmentof markets for new products offered by the Company, the Company's relationshipswith distributors and OEM's, the economic health of such OEM's, governmentregulation, competition and general economic conditions.

 

**PART II- OTHER INFORMATION**

 
| **Item 6.** |   | **Exhibits and Reports on Form 8-K**   |   |
|-------------|--------|----------------------------------------|--------|
|        |   |                                   |   |
|        | (a)    | Exhibits:   None             |
|        |   |                                   |   |
|        | (b)    | Reports on Form  8-K:   None |   |

 

**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
|   |              |   | PACE  MEDICAL, INC.                 |
|--------|-------------------|--------|-------------------------------------|
|   |              |   | (Registrant)                        |
|   |              |   |                                |
| Date:  | November 13, 2001 |   | /s/  Ralph E. Hanson           |
|   |              |   | Ralph E. Hanson,  President         |
|   |              |   |  and Chief Executive Officer   |
|   |              |   |  (principal executive officer) |
|   |              |   |                                |
| Date:  | November 13, 2001 |   | /s/  Ralph E. Hanson           |
|   |              |   | Ralph E. Hanson, Chief              |
|   |              |   |  Financial Officer             |
|   |              |   |  (principal financial officer) |