----

----

**Securitiesand Exchange Commission****Washington, D. C. 20549**

**FORM10-QSB**

 

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

**For the quarterly period ended June 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.**                                             |
|--------------------------------------------------------------------|
| (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) | (Zip Code)                            |
|                                                                                 |                                  |
| **(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.            YesýNo o

             Indicatethe number of shares outstanding of each of the issuer's classes of commonstock, as of August 11, 2001.

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

----

----

**PART I- FINANCIAL INFORMATION**

**Item 1.****Financial Statements.**

             a)          CondensedConsolidated Balance Sheets

             b)          CondensedConsolidated Statements of Operations

             c)          CondensedConsolidated Statements of Cash Flows

             d)          Notesto Condensed Consolidated Financial Statements

**PACE MEDICAL, INC. AND WHOLLY-OWNED SUBSIDIARY****CONDENSED CONSOLIDATED BALANCE SHEETS**
|                                        | JUNE  30, 2001              |      | DECEMBER  31, 2000 |      |
|---------------------------------------------|-----------------------------|-----------|--------------------|-----------|
|                                        |                             |      |                    |      |
|                                        | (Unaudited)                 |      | (See  note below)  |      |
| ASSETS                                      |                        |      |               |      |
|                                             |                        |      |               |      |
| Current assets:                             |                        |      |               |      |
| Cash and cash  equivalents                  | $                           | 1,147,388 |               | $         | 1,252,352 |   |
| Accounts receivable                         | 410,045                     |      | 264,873            |      |
| Inventories:                                |                        |      |               |      |
|                                        | Raw materials               | 314,467   |               | 242,965   |   |
|                                        | Work-in-process             | 129,617   |               | 147,547   |   |
|                                        | Finished goods              | 72,916    |               | 214,966   |   |
|                                        |                             |      |                    |      |
|                                        | 517,000                     |      | 605,478            |      |
| Other current assets                        | 23,017                      |      | 23,820             |      |
|                                        |                             |      |                    |      |
|                                        | Total current assets        | 2,097,450 |               | 2,146,523 |   |
| Plant and equipment,  net                   | 42,944                      |      | 50,652             |      |
| Other assets                                | 144,800                     |      | 121,051            |      |
|                                        |                             |      |                    |      |
| TOTAL ASSETS                                | $                           | 2,285,194 |               | $         | 2,318,226 |   |
|                                        |                             |      |                    |      |
| LIABILITIES AND  SHAREHOLDERS' EQUITY       |                        |      |               |      |
|                                             |                        |      |               |      |
| Current liabilities:                        |                        |      |               |      |
| Accounts payable                            | $                           | 145,827   |               | $         | 117,304 |   |
| Accrued expenses                            | 28,892                      |      | 65,397             |      |
|                                        |                             |      |                    |      |
|                                        | Total current  liabilities  | 174,719   |               | 182,701   |   |
|                                        |                             |      |                    |      |
| Shareholders' equity:                       |                        |      |               |      |
| Common stock, $.01 par  value               | 34,009                      |      | 34,009             |      |
| Additional paid-in  capital                 | 3,147,151                   |      | 3,147,151          |      |
| Cumulative translation  adjustment          | 29,226                      |      | 32,725             |      |
| Accumulated deficit                         | (1,034,155                  | )         | (1,046,613         | )         |
|                                        |                             |      |                    |      |
|                                        | 2,142,222                   |      | 2,167,272          |      |
|                                        |                             |      |                    |      |
| Less Treasury Stock, at  Cost               | (31,747                     | )         | (31,747            | )         |
|                                        |                             |      |                    |      |
|                                        | Total Shareholders'  Equity | 2,110,475 |               | 2,135,525 |   |
|                                        |                             |      |                    |      |
| TOTAL LIABILITIES AND  SHAREHOLDERS' EQUITY | $                           | 2,285,194 |               | $         | 2,318,226 |   |
|                                        |                             |      |                    |      |
|                                             |                             |           |                    |           |  |  |  |  |

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

                    See accompanying notes tocondensed consolidated financial statements.

 

**PACEMEDICAL, INC. AND WHOLLY-OWNED SUBSIDIARY****CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS****(Unaudited)**
|                           | For  the three months ended June 30 |    | For  the six months ended June 30 |   |
|--------------------------------|------------------------------------------|---------|----------------------------------------|--------|
|                           |                                     |
|                           |                                          |    |                                        |   |
|                           | 2000                                     |    | 2001                                   |   | 2000 |   | 2001 |   |
|                           |                                          |    |                                        |   |  |   |  |   |
| Net Sales                      | $                                        | 383,084 |                                   | $      | 248,263 |   | $ | 777,555 |   | $ | 688,471 |   |
| Cost of sales                  | 206,335                                  |    | 103,881                                |   | 401,564 |   | 283,356 |   |
|                           |                                          |    |                                        |   |  |   |  |   |
|                           |                                     |    |                                   |   |   |   |   |   |
|                           | 176,749                                  |    | 144,382                                |   | 375,991 |   | 405,115 |   |
| Other operating  expenses      | 214,141                                  |    | 211,555                                |   | 391,339 |   | 402,135 |   |
|                           |                                          |    |                                        |   |  |   |  |   |
| Income (loss) from  operations | (37,392                                  | )       | (67,173                                | )      | (15,348 | ) | 2,980 |   |
| Other income                   | 14,574                                   |    | 14,848                                 |   | 27,806 |   | 29,682 |   |
|                           |                                          |    |                                        |   |  |   |  |   |
| Net income (loss)              | $                                        | (22,818 | )                                      | $      | (52,325 | ) | $ | 12,458 |   | $ | 32,662 |   |
|                           |                                          |    |                                        |   |  |   |  |   |
| Net income (loss) per  share:  |                                     |    |                                   |   |   |   |   |   |
|                           | Basic                                    | $       | (.01                                   | )      | $ | (.02 | ) | $ | .00 |   | $ | .01 |   |
|                           |                                          |    |                                        |   |  |   |  |   |
|                           | Diluted                                  | $       | (.01                                   | )      | $ | (.02 | ) | $ | .00 |   | $ | .01 |   |
|                           |                                          |    |                                        |   |  |   |  |   |
|                           |                                     |    |                                   |   |   |   |   |   |

 

Seeaccompanying notes to condensed consolidated financial statements.

**PACE MEDICAL, INC. ANDWHOLLY-OWNED SUBSIDIARY****CONDENSED CONSOLIDATED STATEMENTS OFCASH FLOWS****(Unaudited)**
|                                              |                                                 | SIX  MONTHS ENDED |      |
|---------------------------------------------------|------------------------------------------------------|-------------------|-----------|
|                                              |                                                 |                   |      |
|                                              |                                                 | JUNE  30          |      |
|                                              |                                                 |                   |      |
|                                              |                                                 | 2001              |      | 2000 |   |
|                                              |                                                 |                   |      |  |   |
| CASH FLOWS FROM  OPERATING ACTIVITIES:            |                                                 | $                 | 12,458    |   | $ | 32,662 |   |
|                                              | Net income                                           |              |      |   |   |   |
|                                              | Adjustments to  reconcile net income to net cash     |              |      |   |   |   |
|                                              | (Used in) provided by  operating activities:         |              |      |   |   |   |
|                                              | Depreciation and  amortization                       |              | 10,245    |   | 15,563 |   |
|                                              | Change in assets and  liabilities, net:              |              | (125,130  | ) | (83,649 | ) |
|                                              |                                                 |                   |      |  |   |
|                                              | Net cash (used in)  provided by operating activities |              | (102,427  | ) | (35,424 | ) |
| CASH FLOWS FROM  INVESTING ACTIVITIES:            |                                                 |              |      |   |   |
|                                              | Purchases of property  and equipment                 |              | (2,537    | ) | (5,089 | ) |
| NET (DECREASE) IN CASH  AND CASH EQUIVALENTS      |                                                 | (104,964          | )         | (40,513 | ) |
| CASH AND CASH  EQUIVALENTS AT BEGINNING OF PERIOD |                                                 | $                 | 1,252,352 |   | $ | 1,513,514 |   |
|                                              |                                                 |                   |      |  |   |
| CASH AND CASH  EQUIVALENTS AT END OF PERIOD       |                                                 | $                 | 1,147,388 |   | $ | 1,473,001 |   |
|                                              |                                                 |                   |      |  |   |

 

Seeaccompanying notes to condensed consolidated financial statements.

**PACE MEDICAL, INC. ANDWHOLLY-OWNED SUBSIDIARY****NOTES TO CONDENSED CONSOLIDATEDFINANCIAL 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 of June30, 2001 and the results of their operations for the three and six months endedJune 30, 2001 and June 30, 2000 and their cash flows for the six months endedJune 30, 2001 and June 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 June 30, 2001 or 2000. Cost of sales for such periods was calculated primarily using standardcost methods.

4.             The results of operations for thethree and six months ended June 30, 2001 are not necessarily indicative of theresults to be expected for the full year.

5.             The denominator used to determinebasic net income 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 June 30, 2001 |    |
|--------------------------------------|-------------------------------------------|---------|
|                                 | Income  (loss)                            |    | Shares |   | Per  Share |   |
|                                 | (Numerator)                               |    | (Denominator) |   | Amount |   |
| Net Income (loss)                    | $                                         | (22,818 | ) |   |   |   |   |
| Weighted-average  shares outstanding | -                                         |    | 3,354,870 |   |   |   |
|                                 |                                           |    |  |   |   |   |
| Basic net income  (loss) per share   | $                                         | (22,818 | ) | 3,354,870 |   | $ | (0.01 | ) |
|                                 |                                      |    |   |   |  |   |
| Effect of dilutive  securities       | -                                         |    | - |   |   |   |
|                                 |                                           |    |  |   |   |   |
| Diluted net income (loss)  per share | $                                         | (22,818 | ) | 3,354,870 |   | $ | (0.01 | ) |
|                                 |                                           |    |  |   |  |   |

 

|                                 | For  the three months ended June 30, 2000 |    |
|--------------------------------------|-------------------------------------------|---------|
|                                 | Income  (loss)                            |    | Shares |   | Per  Share |   |
|                                 | (Numerator)                               |    | (Denominator) |   | Amount |   |
| Net Income (loss)                    | $                                         | (52,325 | ) |   |   |   |   |
| Weighted-average  shares outstanding | -                                         |    | 3,375,870 |   |   |   |
|                                 |                                           |    |  |   |   |   |
| Basic net income per  share          | $                                         | (52,325 | ) | 3,375,870 |   | $ | (0.02 | ) |
|                                 |                                      |    |   |   |  |   |
| Effect of dilutive  securities       | -                                         |    |   |   |   |   |
|                                 |                                           |    |  |   |   |   |
| Diluted net income  (loss) per share | $                                         | (52,325 | ) | 3,375,870 |   | $ | (0.02 | ) |
|                                 |                                           |    |  |   |  |   |

 

|                                 | For  the six months ended June 30, 2001 |   |
|--------------------------------------|-----------------------------------------|--------|
|                                 | Income                                  |   | Shares |   | Per  Share |   |
|                                 | (Numerator)                             |   | (Denominator) |   | Amount |   |
| Net Income                           | $                                       | 12,458 |   |   |   |   |   |
| Weighted-average  shares outstanding | -                                       |   | 3,354,870 |   |   |   |
|                                 |                                         |   |  |   |   |   |
| Basic net income per  share          | $                                       | 12,458 |   | 3,354,870 |   | $ | 0.00 |   |
|                                 |                                    |   |   |   |  |   |
| Effect of dilutive  securities       | -                                       |   | 13,815 |   |   |   |
|                                 |                                         |   |  |   |   |   |
| Diluted net income per  share        | $                                       | 12,458 |   | 3,368,685 |   | $ | 0.00 |   |
|                                 |                                         |   |  |   |  |   |

 

|                                 | For  the six months ended June 30, 2000 |   |
|--------------------------------------|-----------------------------------------|--------|
|                                 | Income                                  |   | Shares |   | Per  Share |   |
|                                 | (Numerator)                             |   | (Denominator) |   | Amount |   |
| Net Income                           | $                                       | 32,662 |   |   |   |   |   |
| Weighted-average shares  outstanding | -                                       |   | 3,354,870 |   |   |   |
|                                 |                                         |   |  |   |   |   |
| Basic net income per  share          | $                                       | 32,662 |   | 3,375,870 |   | $ | 0.01 |   |
|                                 |                                    |   |   |   |  |   |
| Effect of dilutive  securities       | -                                       |   | 103,245 |   |   |   |
|                                 |                                         |   |  |   |   |   |
| Diluted net income per  share        | $                                       | 32,662 |   | 3,479,115 |   | $ | 0.01 |   |
|                                 |                                         |   |  |   |  |   |

 

6.             The Company has adopted theprovisions of SFAS No. 130," Reporting Comprehensive Income".  Comprehensive income (loss) includes netincome (loss) and foreign currency translation adjustments.  Comprehensive income (loss) for the threeand six months ended June 30, 2001 and 2000 is as follows:

|                             | Three  Months Ended |    | Six  Months Ended |   |
|----------------------------------|---------------------|---------|-------------------|--------|
|                             | June  30,           |    | June  30,         |   |
|                             |                     |    |                   |   |
|                             | 2001                |    | 2000              |   | 2001 |   | 2000 |   |
|                             |                     |    |                   |   |  |   |  |   |
| Net Income (loss)                | $                   | (22,818 | )                 | $      | (52,325 | ) | $ | 12,458 |   | $ | 32,662 |   |
| Currency Translation  Adjustment | 36,667              |    | (33,786           | )      | (3,499 | ) | (44,065 | ) |
|                             |                     |    |                   |   |  |   |  |   |
| Total                            | $                   | 13,849  |              | $      | (86,111 | ) | $ | 8,959 |   | $ | (11,403 | ) |
|                             |                |         |              |   |  |   |   |  |   |   |  |   |
|                                  |                     |         |                   |        |  |  |  |  |  |  |  |  |  |

** **

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

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

**MANAGEMENT'SDISCUSSION AND ANALYSIS OF****FINANCIALCONDITION AND RESULTS OF OPERATIONS**

**FinancialCondition**

Asof June 30, 2001, the Company had cash and cash equivalents of $1,147,388 andworking capital of $1,922,731.  Workingcapital decreased $41,091 since December 31, 2000 owing to an increase inproduct development expenditures.  TheCompany's cash flows have historically tracked its operational results.

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 June 30, 2001 versus Three Months ended June 30,2000**

Salesin the second quarter of 2001 increased 54% from the sales posted in the secondquarter of 2000.  The increase in saleswas caused by higher volume of products shipped to an internationaldistributor.

TheCompany's margins in the second quarter were lower than those attained in 2000(from 58% in 2000 to 46% in 2001).  Thisoccurred due to higher than average international sales.  It should be noted that pricing iscontinuing to remain firm on all products.

Operatingexpenses were slightly higher in the three months ended June 30, 2001 versusthe three months ended June 30, 2000. Management anticipates some increase in its operating expendituresduring the balance of 2001.

Notax benefit was recorded for the three months ended June 30, 2001 owing touncertainty regarding the Company's ability to use net operating losscarryforwards in both the U.S. and U.K.

Netloss for the quarter was $22,818 or $.01 per share, representing a decrease inthe loss of $29,507 from the comparable quarter in 2000.

**FinancialResults - Six Months ended June 30, 2001 versus Six Months ended June 30, 2000**

Salesin the six months ended June 30, 2001 increased from the amount posted in thesix months ended in June 30, 2000.  Theincrease in sales was primarily attributed to increased shipment of products toour international distributor.

TheCompany's margins for the year-to-date period were lower than those achieved inthe first half of 2000 (from 59% in 2000 to 48% in 2001).  This occurred due to higher than averageinternational sales.  It should be notedthat pricing continued to remain firm on all products.

Operatingexpenses were lower for the six months ended June 30, 2001 versus the sixmonths ended June 30, 2000.  Managementanticipates some increase in its operating expenditures during the balance of2001.

Notax provision was recorded for the six months ended June 30, 2001 owing to theCompany's ability to use net operating loss carryforwards in both the U.S. andU.K.

Netincome for the six months was $12,458 or $.00 per share, representing  a decrease of $20,224 from the comparableperiod in 2000.

**FactorsThat May Affect Future Results**

From time to time, information providedby the Company or statements made by its employees may contain"forward-looking" information which involves risks anduncertainties.  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 not limitedto, risks associated with the introduction of new products, development ofmarkets 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 4.**              **Submission of Matters to a Vote of Security Holders**

             At the Company's Annual Meeting of Stockholders held onJune 8, 2001, the following members were elected to the Board of Directors:

|                 | Votes     |   | Votes    |   |
|----------------------|-----------|--------|----------|--------|
|                 | For       |   | Withheld |   |
|                      |           |   |          |   |
| Ralph E. Hanson      | 2,585,455 |   | 0        |   |
| George F. Harrington | 2,585,455 |   | 0        |   |
| Derrick Ebden        | 2,585,455 |   | 0        |   |

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

             (a)         Exhibits:

                                        10.1.     Employment Agreement with Ralph Hanson

 

             (b)        Reports on Form 8-K:

                                        None

 

**SIGNATURES**

 

                Pursuant to the requirements ofthe Securities Exchange Act of 1934, the registrant has duly caused this reportto be signed on its behalf by the undersigned thereunto duly authorized.

|                        | PACE  MEDICAL, INC.                 |
|-----------------------------|-------------------------------------|
|                        |                                     |
|                        | (Registrant)                        |
|                        |                                |
| Date:  August 14, 2001 | /s/  Ralph E. Hanson                |
|                        |                                     |
|                        | Ralph  E. Hanson, President         |
|                        |  and Chief Executive Officer   |
|                        |  (principal executive officer) |
|                        |                                |
| Date:  August 14, 2001 | /s/  Ralph E. Hanson                |
|                        |                                     |
|                        | Ralph  E. Hanson, Chief             |
|                        |  Financial Officer             |
|                        |  (principal financial officer) |
|                        |                                |