**FORM 10-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 March 31,  2004**                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   |
| **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.**

(Exact name of small business issuer as specified in its charter)

 
| **Massachusetts**                                               |   | **04-2867416**                        |
|-----------------------------------------------------------------|--------|---------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |   | (I.R.S. Employer  identification No.) |
|                                                            |   |                                  |
| **391 Totten Pond Road, Waltham, Massachusetts 02451**          |
| (Address of principal executive offices)                        |
|                                                            |   |                                  |
| **(781) 890-5656**                                              |
| (Issuer’s telephone number,  including area code)          |

 

Indicate bycheck mark whether the issuer (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.                                Yes    ý    Noo

 

Indicate thenumber of shares outstanding of each of the issuer’s classes of common stock,as of May 12, 2004.

 

3,354,870shares of Common Stock, par value $.01 per share

 

 

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**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 |

 

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**PACE MEDICAL, INC. AND WHOLLY-OWNEDSUBSIDIARY**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

 
|                                                                         |   | **MARCH 31,  2004** |      | **DECEMBER  31, 2003** |    |
|------------------------------------------------------------------------------|--------|---------------------|-----------|------------------------|---------|
|                                                                         |   | **(Unaudited)**     |      | **(See note  below)**  |    |
|                                                                         |   |                |      |                   |    |
| ASSETS                                                                       |   |                |      |                   |    |
|                                                                         |   |                |      |                   |    |
| Current assets:                                                              |   |                |      |                   |    |
| Cash and cash equivalents                                                    |   | $                   | 1,004,491 |                   | $       | 1,060,791 |   |
| Accounts receivable                                                          |   | 302,515             |      | 264,818                |    |
| Inventories:                                                                 |   |                |      |                   |    |
| Raw materials                                                                |   | 317,250             |      | 257,019                |    |
| Work-in-process                                                              |   | 197,160             |      | 179,766                |    |
| Finished goods                                                               |   | 132,925             |      | 112,804                |    |
|                                                                         |   | 647,335             |      | 549,589                |    |
| Other current assets                                                         |   | 9,944               |      | 41,651                 |    |
| Total current assets                                                         |   | 1,964,285           |      | 1,916,849              |    |
| Property and equipment, net                                                  |   | 23,244              |      | 21,127                 |    |
| Other assets                                                                 |   | 248,861             |      | 249,097                |    |
| TOTAL ASSETS                                                                 |   | $                   | 2,236,390 |                   | $       | 2,187,073 |   |
|                                                                         |   |                |      |                   |    |
| LIABILITIES AND SHAREHOLDERS’ EQUITY                                    |   |                |      |                   |    |
|                                                                         |   |                |      |                   |    |
| Current liabilities:                                                         |   |                |      |                   |    |
| Accounts payable                                                             |   | $                   | 224,935   |                   | 326,419 |   |
| Accrued expenses                                                             |   | 192,780             |      | 125,852                |    |
| Total current liabilities                                                    |   | 417,715             |      | 452,271                |    |
|                                                                         |   |                |      |                   |    |
| Shareholders’ equity:                                                   |   |                |      |                   |    |
| Common stock, $.01 par value, 5,000,000  shares authorized, 3,400,870 issued |   | 34,009              |      | 34,009                 |    |
| Additional paid-in capital                                                   |   | 3,147,151           |      | 3,147,151              |    |
| Cumulative translation adjustment                                            |   | 289,955             |      | 244,512                |    |
| Accumulated deficit                                                          |   | (1,620,693          | )         | (1,659,123             | )       |
|                                                                         |   | 1,850,422           |      | 1,766,549              |    |
| Less: Treasury Stock, at Cost, 46,000  shares                                |   | (31,747             | )         | (31,747                | )       |
| Total Shareholders’ Equity                                              |   | 1,818,675           |      | 1,734,802              |    |
|                                                                         |   |                |      |                   |    |
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY                              |   | $                   | 2,236,390 |                   | $       | 2,187,073 |   |

 

Note:                               Thebalance sheet at December 31, 2003 has been derived from the audited financialstatements at that date.

 

See accompanying notes to condensedconsolidated financial statements.

 

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

#### **CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

(Unaudited)

 
|                          |   | **For the  Three Months  Ended March 31** |    |
|-------------------------------|--------|-------------------------------------------|---------|
|                          |   | **2004**                                  |    | **2003** |   |
|                          |   |                                      |    |   |   |
| Net sales                     |   | $                                         | 381,753 |   | $ | 393,730 |   |
|                          |   |                                      |    |   |   |
| Cost of sales                 |   | 159,020                                   |    | 222,555 |   |
|                          |   |                                      |    |   |   |
|                          |   | 222,733                                   |    | 171,175 |   |
|                          |   |                                      |    |   |   |
| Operating expenses            |   | 190,514                                   |    | 192,151 |   |
|                          |   |                                      |    |   |   |
| Income (loss) from operations |   | 32,219                                    |    | (20,976 | ) |
|                          |   |                                      |    |   |   |
| Other income                  |   | 6,211                                     |    | 5,442 |   |
|                          |   |                                      |    |   |   |
| Net income (loss)             |   | $                                         | 38,430  |   | $ | (15,534 | ) |
|                          |   |                                      |    |   |   |
| Net income (loss) per share:  |   |                                      |    |   |   |
|                          |   |                                      |    |   |   |
| Basic                         |   | $                                         | 0.01    |   | $ | (0.00 | ) |
|                          |   |                                      |    |   |   |
| Diluted                       |   | $                                         | 0.01    |   | $ | (0.00 | ) |

 

See accompanying notes to condensedconsolidated financial statements.

 

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

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

(Unaudited)

 
|                                                                                  |   | **THREE  MONTHS ENDED  MARCH 31,** |      |
|---------------------------------------------------------------------------------------|--------|------------------------------------|-----------|
|                                                                                  |   | **2004**                           |      | **2003** |   |
|                                                                                  |   |                               |      |   |   |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                 |   |                               |      |   |   |
| Net income (loss)                                                                     |   | $                                  | 38,430    |   | $ | (15,534 | ) |
| Adjustments to reconcile net income (loss)  to net cash used in operating activities: |   |                               |      |   |   |
| Depreciation and amortization                                                         |   | 3,228                              |      | 4,244 |   |
| Change in assets and liabilities, net:                                                |   | (92,613                            | )         | (1,814 | ) |
|                                                                                  |   |                               |      |   |   |
| Net cash used in operating activities                                                 |   | (50,955                            | )         | (13,104 | ) |
|                                                                                  |   |                               |      |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES -                                                |   |                               |      |   |   |
|                                                                                  |   |                               |      |   |   |
| Purchases of property and equipment                                                   |   | 5,345                              |      | — |   |
|                                                                                  |   |                               |      |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES                                                  |   |                               |      |   |   |
|                                                                                  |   |                               |      |   |   |
|                                                                                  |   | —                             |      | — |   |
|                                                                                  |   |                               |      |   |   |
| NET DECREASE IN CASH AND CASH EQUIVALENTS                                             |   | (56,300                            | )         | (13,104 | ) |
|                                                                                  |   |                               |      |   |   |
| CASH AND CASH EQUIVALENTS AT BEGINNING OF  PERIOD                                     |   | $                                  | 1,060,791 |   | $ | 1,115,690 |   |
|                                                                                  |   |                               |      |   |   |
| CASH AND CASH EQUIVALENTS AT END OF PERIOD                                            |   | $                                  | 1,004,491 |   | $ | 1,102,586 |   |

 

See accompanying notes to condensed consolidated financial statements.

 

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**PACE MEDICAL, INC.AND WHOLLY-OWNED SUBSIDIARY**

**NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

1.             The accompanying unaudited consolidated financialstatements and these notes have been condensed and do not contain alldisclosures required by generally accepted accounting principles.  See notes to audited consolidated financialstatements contained in the Company’s annual report.

 

2.             In the opinion of the Company, the accompanyingunaudited condensed financial statements contain all adjustments, all of whichare normal and recurring, necessary to present fairly the financial position ofthe Company and its wholly-owned subsidiary as of March 31, 2004 and theresults of their operations for the three months ended March 31, 2004 and March31, 2003 and their cash flows for the three months ended March 31, 2004 andMarch 31, 2003.

 

3.             TheCompany prepares its financial information using the same accounting principlesas for its annual financial statements except that no physical inventories weretaken during either of the periods ended March 31, 2004 and 2003.  Cost of sales for such periods wascalculated primarily using standard cost methods.

 

4.             The results of operations for the three months endedMarch 31, 2004 are not necessarily indicative of the results to be expected forthe full year.

 

5.             The denominator used to determine both the basic andfully diluted net loss per share includes the weighted average common shares outstandingduring the quarter.  The effect of stockoptions was anti-dilutive for the period ended March 31, 2003.

 
|                                |   | **Three  Months Ended  March 31,** | ** ** |
|-------------------------------------|--------|------------------------------------|------------|
|                                |   | **2004**                           |       | **2003** | ** ** |
|                                |   |                               |       |   |   |
| Net Income (loss)                   |   | $                                  | 38,430     |   | $ | (15,534 | ) |
|                                |   |                               |       |   |   |
| Weighted-average shares outstanding |   | 3,354,870                          |       | 3,354,870 |   |
| Effect of dilutive securities       |   | 7,000                              |       | — |   |
|                                |   |                               |       |   |   |
| Total shares                        |   | 3,361,870                          |       | 3,354,870 |   |
|                                |   |                               |       |   |   |
| Basic net income (loss) per share   |   | $                                  | 0.01       |   | $ | (0.00 | ) |
|                                |   |                               |       |   |   |
| Diluted net income (loss) per share |   | $                                  | 0.01       |   | $ | (0.00 | ) |

 

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6.             Comprehensive income (loss) includes net income (loss)and foreign currency translation adjustments. Comprehensive income (loss) for the three months ended March 31, 2004and 2003 is as follows:

 
|                            |   | **Three  Months Ended  March 31,** |   |
|---------------------------------|--------|------------------------------------|--------|
|                            |   | **2004**                           |   | **2003** | ** ** |
|                            |   |                               |   |   |   |
| Net Income (Loss)               |   | $                                  | 38,430 |   | $ | (15,534 | ) |
|                            |   |                               |   |   |   |
| Currency Translation Adjustment |   | (45,443                            | )      | (13,379 | ) |
|                            |   |                               |   |   |   |
| Total                           |   | $                                  | (7,013 | ) | $ | (28,913 | ) |

 

7.             The Company periodically grants stock options for a fixednumber of shares to employees and directors with an exercise price equal to thefair market value of the shares on the date of grant.  The Company accounts for such stock option grants using theintrinsic value method.  Stock optionsgranted to non-employees are accounted for using the fair value method.  There were 360,000 options outstanding andexercisable at December 31, 2003 and March 31, 2004 with a weighted averageexercise price of $0.33 per share.  AtMarch 31, 2004, the options outstanding and exercisable had weighted averageremaining contractual lives of approximately two years.

 

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**Item 2.   Management’s Discussion and Analysis of Financial Condition and Results ofOperations.**

 

**FinancialCondition**

 

As of March 31, 2004, theCompany had cash and cash equivalents of $1,004,491 and working capital of$1,546,570.  The working capital atMarch 31, 2004 was higher than the amount at December 31, 2003, owing to the netincome from operations.  The Company’scash flows have historically tracked its operating results.

 

The Company expects to maintaina sound financial base for the balance of fiscal 2004.  Management continues to believe that thecurrent level of working capital, coupled with the flexibility of the Company’scost structure, should suffice to ensure that on-going operations are financedadequately.

 

**Financial Results - Three Months ended March31, 2004 versus Three Months ended March 31, 2003**

 

Sales in the first quarter of2004 decreased 3% from the sales posted in the first quarter of 2003.  While the Company has had some success inaddressing the component shortages in the first quarter of 2004, there can beno assurance that the Company will not encounter component shortages in futurequarters.

 

The Company’s margins in thefirst quarter were higher than those seen in 2003 (43% in 2003 and 58% in2004).  This occurred due to a change inproduct mix.  It should be noted thatpricing has remained firm on all products.

 

Operating expenses were lowerin the three months ended March 31, 2004 versus the three months ended March31, 2003.  Management anticipates someincrease in its operating expenditures during the balance of 2004.

 

No tax provision was recordedfor the three months ended March 31, 2004 owing to the Company’s ability to usenet operating loss carryforwards in both the United States and the UnitedKingdom.

 

Net income for the quarter was $38,430 or $.01 pershare in contrast to a net loss of $15,534 or $.00 per share in the first quarterof 2003.

 

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**Factors That May Affect Future Results**

 

From time to time, informationprovided by the Company or statements made by its employees may contain“forward-looking” information which involves risks and uncertainties.  In particular, statements contained in thisreport which are not historical facts (including but not limited to theCompany’s expectations regarding business strategy, new product availability,pricing, anticipated operating results, market share, operating expenses andanticipated working 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 includingsupplier performance, development of markets for new products offered by theCompany, personnel requirements, the Company’s relationships with distributorsand OEM’s, the economic health of such OEM’s, government regulation,competition and general economic conditions.

 

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**Item 3. Controls and Procedures**

 

The Company’s Presidentand Chief Executive Officer has conducted an evaluation of the effectiveness ofdisclosure controls and procedures pursuant to Exchange Act Rule 13a-14.  Based on that evaluation, the President andChief Executive Officer concluded that the disclosure controls and proceduresare effective in ensuring that all material information required to be filed inthis quarterly report has been made known to him in a timely fashion. Therehave been no significant changes in internal controls over financial reporting,or in factors that could significantly affect internal controls over financialreporting, subsequent to the date the President and Chief Executive Officercompleted his evaluation.

 

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**PARTII - OTHER INFORMATION**

 

**Item 6.   Exhibits and Reports on Form 8-K**

 

(a)                                  Exhibits:

 

31                                                                        Certificationpursuant to Rules 13a -14 and 15d -14 promulgated under the Securities ExchangeAct of 1934, as amended, as adopted pursuant to section 302 of theSarbanes-Oxley Act of 2002.

 

32                                                                        Certificationpursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of theSarbanes-Oxley Act of 2002.

 

(b)                                 Reportson Form 8-K:

 

None

 

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**SIGNATURES**

 

Pursuant tothe 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:  |   May  24, 2004            |   | /s/ Ralph E.  Hanson |   |
|   | Ralph E.  Hanson, President          |
|   |  and Chief Executive Officer    |
|   |  (principal executive officer)  |
|   |                                 |
|   |                                 |
| Date:  |   May  24, 2004            |   | /s/ Ralph E.  Hanson |   |
|   | Ralph E.  Hanson, Chief              |
|   |  Financial  Officer             |
|   |  (principal  financial officer) |
|        |                                      |        |  |  |  |

 

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