**FORM 10-QSB**

 

**Securities and 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  June 30, 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 asspecified in its charter)

 

| **Massachusetts**                                               | ** ** | **04-2867416**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |       | (I.R.S. Employer  identification No.) |
|                                                            |

 

**391Totten Pond Road, Waltham, Massachusetts 02451**

(Address of principal executiveoffices)

 

**(781)890-5656**

(Issuer’s telephone number,

including area code)

 

Indicate the number of shares outstanding of each of the issuer’sclasses of common stock, as of August 20, 2004.

 

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

 

 

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**PART I - FINANCIAL INFORMATION**

 

**Item 1.           Financial Statements.**

 

a)  Condensed Consolidated BalanceSheets

 

b)  Condensed Consolidated Statementsof Operations

 

c)  Condensed ConsolidatedStatements of Cash Flows

 

d)  Notes to Condensed ConsolidatedFinancial Statements

 

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**PACE MEDICAL, INC. AND SUBSIDIARY**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

** **
| ** **                                      | ** ** | **JUNE 30, 2004** | ** ** | **DECEMBER 31, 2003** | ** ** |
|-------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                      | ** ** | **(Unaudited)**   | ** ** | **(See note below)**  | ** ** |
| ASSETS                                          |       |              |       |                  |       |
| Current assets:                                 |       |              |       |                  |       |
| Cash and cash equivalents                       |       | $                 | 829,273    |                  | $          | 1,060,791 |   |
| Accounts receivable                             |       | 249,852           |       | 264,818               |       |
| Inventories:                                    |       |              |       |                  |       |
| Raw materials                                   |       | 312,374           |       | 257,019               |       |
| Work-in-process                                 |       | 124,405           |       | 179,766               |       |
| Finished goods                                  |       | 124,391           |       | 112,804               |       |
|                                            |       | 561,170           |       | 549,589               |       |
| Other current assets                            |       | 35,736            |       | 41,651                |       |
| Total current assets                            |       | 1,676,031         |       | 1,916,849             |       |
|                                            |       |              |       |                  |       |
| Property and equipment, net                     |       | 21,553            |       | 21,127                |       |
| Other assets                                    |       | 248,704           |       | 249,097               |       |
| TOTAL ASSETS                                    |       | $                 | 1,946,288  |                  | $          | 2,187,073 |   |
|                                            |       |              |       |                  |       |
| LIABILITIES AND SHAREHOLDERS’ EQUITY       |       |              |       |                  |       |
|                                            |       |              |       |                  |       |
| Current liabilities:                            |       |              |       |                  |       |
| Accounts payable                                |       | $                 | 94,247     |                  | $          | 326,419 |   |
| Accrued expenses                                |       | 220,094           |       | 125,852               |       |
| Total current liabilities                       |       | 314,341           |       | 452,271               |       |
|                                            |       |              |       |                  |       |
| Shareholders’ equity:                      |       |              |       |                  |       |
| Common stock, $.01 par value                    |       | 34,009            |       | 34,009                |       |
| Additional paid-in capital                      |       | 3,147,151         |       | 3,147,151             |       |
| Cumulative translation adjustment               |       | 263,718           |       | 244,512               |       |
| Accumulated deficit                             |       | (1,781,184        | )          | (1,659,123            | )          |
|                                            |       | 1,663,694         |       | 1,766,549             |       |
| Less Treasury Stock, at Cost, 46,000 shares     |       | (31,747           | )          | (31,747               | )          |
| Total Shareholders’ Equity                 |       | 1,631,947         |       | 1,734,802             |       |
|                                            |       |              |       |                  |       |
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY |       | $                 | 1,946,288  |                  | $          | 2,187,073 |   |

 

Note:                   The balance sheet at December 31,2003 has been taken from the audited financial statements at that date.

 

Seeaccompanying notes to condensed consolidated financial statements.

 

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#### **PACEMEDICAL, INC. AND SUBSIDIARY**

## **CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

**(Unaudited)**

 
| ** **                          | ** ** | **For the three months   ended June 30** | ** ** | **For the six months   ended June 30** | ** ** |
|-------------------------------------|------------|------------------------------------------|------------|----------------------------------------|------------|
| ** **                          | ** ** | **2004**                                 | ** ** | **2003**                               | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net sales                           |       | $                                        | 228,161    |                                   | $          | 277,618 |   | $ | 609,914 |   | $ | 671,348 |   |
| Cost of sales                       |       | 193,055                                  |       | 161,843                                |       | 352,075 |   | 384,398 |   |
|                                |       | 35,106                                   |       | 115,775                                |       | 257,839 |   | 286,950 |   |
| Other operating expenses            |       | 211,269                                  |       | 211,716                                |       | 401,783 |   | 403,867 |   |
| Loss from operations                |       | (176,163                                 | )          | (95,941                                | )          | (143,944 | ) | (116,917 | ) |
| Other income                        |       | 2,081                                    |       | 6,630                                  |       | 8,292 |   | 12,072 |   |
| Net loss                            |       | $                                        | (174,082   | )                                      | $          | (89,311 | ) | $ | (135,652 | ) | $ | (104,845 | ) |
| Net loss per share:                 |       |                                     |       |                                   |       |   |   |   |   |
| Basic                               |       | $                                        | (0.05      | )                                      | $          | (0.03 | ) | $ | (0.04 | ) | $ | (0.03 | ) |
| Diluted                             |       | $                                        | (0.05      | )                                      | $          | (0.03 | ) | $ | (0.04 | ) | $ | (0.03 | ) |
| Weighted Average Shares Outstanding |       | 3,354,870                                |       | 3,354,870                              |       | 3,354,870 |   | 3,354,870 |   |

 

See accompanying notes to condensedconsolidated financial statements.

 

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#### **PACEMEDICAL, INC. AND SUBSIDIARY**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

 
| ** **                                                                   | ** ** | **SIX MONTHS ENDED  JUNE 30** | ** ** |
|------------------------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                                   | ** ** | **2004**                      | ** ** | **2003** | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                        |       |                          |       |   |   |
| Net loss                                                                     |       | $                             | (135,652   | ) | $ | (104,845 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities: |       |                          |       |   |   |
| Depreciation and amortization                                                |       | 1,024                         |       | 7,421 |   |
| Changes in assets and liabilities, net:                                      |       | (95,440                       | )          | (61,339 | ) |
| Net cash used in operating activities                                        |       | (230,068                      | )          | (158,763 | ) |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                        |       |                          |       |   |   |
| Purchases of property and equipment                                          |       | (1,450                        | )          | (— | ) |
| NET DECREASE IN CASH AND CASH EQUIVALENTS                                    |       | (231,518                      | )          | (158,763 | ) |
| CASH AND CASH EQUIVALENTS AT BEGINNING OF  PERIOD                            |       | 1,060,791                     |       | 1,115,690 |   |
| CASH AND CASH EQUIVALENTS AT END OF PERIOD                                   |       | $                             | 829,273    |   | $ | 956,927 |   |

 

See accompanying notes to condensedconsolidated financial statements.

 

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**PACE MEDICAL, INC. AND SUBSIDIARY**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

 

1.                                       Theaccompanying unaudited consolidated financial statements and these notes havebeen condensed and do not contain all disclosures required by generallyaccepted accounting principles.  Seenotes to audited consolidated financial statements contained in the Company’sannual report.

 

2.                                       Inthe opinion of the Company, the accompanying unaudited condensed financialstatements contain all adjustments, all of which are normal and recurring,necessary to present fairly the financial position of the Company and itssubsidiary as of June 30, 2004 and the results of their operations for thethree and six months ended June 30, 2004 and June 30, 2003 and their cash flowsfor the six months ended June 30, 2004 and June 30, 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 June 30, 2004 or 2003.  Cost of sales for such periods was calculatedprimarily using standard cost methods.

 

4.                                       Theresults of operations for the three and six months ended June 30, 2004 are notnecessarily indicative of the results to be expected for the full year.

 

5.                                       Thedenominator used to determine basic net income per share includes the weightedaverage common shares outstanding during the quarter.  The denominator used to determine diluted netincome (loss) per share includes the shares used in the calculation of basicnet income (loss) per share plus the weighted average options outstandingduring the period using the treasury-stock method.  The effect of stock options was anti-dilutivefor all periods presented.

 

6.                                       Comprehensiveincome (loss) includes net income (loss) and foreign currency translationadjustments.  Comprehensive income (loss)for the three and six months ended June 30, 2004 and 2003 is as follows:

 
| ** **                      | ** ** | **Three Months Ended   June 30,** | ** ** | **Six Months Ended   June 30,** | ** ** |
|---------------------------------|------------|-----------------------------------|------------|---------------------------------|------------|
| ** **                      | ** ** | **2004**                          | ** ** | **2003**                        | ** ** | **2004** | ** ** | **2003** | ** ** |
|                            |       |                              |       |                            |       |   |   |   |   |
| Net Loss                        |       | $                                 | (174,082   | )                               | $          | (89,311 | ) | $ | (135,652 | ) | $ | (104,845 | ) |
|                            |       |                              |       |                            |       |   |   |   |   |
| Currency Translation Adjustment |       | (26,237                           | )          | 38,341                          |       | 19,206 |   | 23,262 |   |
|                            |       |                              |       |                            |       |   |   |   |   |
| Total                           |       | $                                 | (200,319   | )                               | $          | (50,970 | ) | $ | (116,446 | ) | $ | (80,833 | ) |

 

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**Item 2.****                                                           Management’sDiscussion and Analysis or Plan of Operation.**

 

**PACE MEDICAL, INC. AND SUBSIDIARY**

 

**MANAGEMENT’S DISCUSSION AND ANALYSIS OF**

**FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

## **Financial Condition**

 

As of June 30, 2004, the Company had cash and cash equivalents of$829,273 and working capital of $1,361,690. Working capital decreased $102,888 since December 31, 2003 owing to theuse of cash in operations.  The Company’scash flows have historically tracked its operational results.

 

Management continues to believe that the current level of workingcapital should suffice to ensure that on-going operations are financedadequately.

 

**Financial Results - Three Months ended June 30, 2004 versus Three Monthsended June 30, 2003**

 

Sales in the second quarter of 2004 decreased 18% from the salesrecognized in the second quarter of 2003. The decrease in sales was due, in part, to the Company’s inability toobtain raw materials on a scheduled basis from its suppliers.  The Company anticipates that it may encounteradditional component shortages in future quarters.  Sales were also lower due to a suspension ofshipments of its model 4170 in response to a medical issue raised by theProducts Regulatory Agency (England) in May, 2004.  The medical issue has since been resolved andshipments of the 4170 are expected to resume in September 2004.

 

The Company’s margins in the second quarter were lower than thoseattained in 2003 (from 42% in 2003 to 15% in 2004). This occurred due toreduced sales and production variances. It should be noted that pricing has remained firm on all products.

 

Operating expenses were essentially unchanged in the three months endedJune 30, 2004 versus the three months ended June 30, 2003.  Management anticipates some increase in itsoperating expenditures during the balance of 2004.

 

No tax benefit was recorded for the three months ended June 30, 2004owing to uncertainty regarding the Company’s ability to use net operating losscarryforwards in both the U.S. and U.K.

 

Net loss for the quarter was $174,082 or $0.05 per share, representingan increase in the loss of $84,771 from the comparable quarter in 2003.

 

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**Financial Results - Six Months ended June 30, 2004 versus Six Monthsended June 30, 2003**

 

Sales in the six months ended June 30, 2004 decreased 9% from theamount posted in the six months ended in June 30, 2003.  The decrease in sales was due to theCompany’s inability to obtain raw materials on a scheduled basis from itssuppliers and the suspension of shipments of the Model 4170 described above, ineach case, during the second quarter.

 

The Company’s margins for the year-to-date period were lower than thoseachieved in the first half of 2003 (from 43% in 2003 to 42% in 2004). Thisoccurred due to the sales decline and production variances in the secondquarter.  It should be noted that pricinghas remained firm on all products.

 

Operating expenses were essentially unchanged for the six months endedJune 30, 2004 versus the six months ended June 30, 2003.  Management anticipates some increase in itsoperating expenditures during the balance of 2004.

 

No tax benefit was recorded for the six months ended June 30, 2004owing to uncertainty regarding the Company’s ability to use net operating losscarryforwards in both the U.S. and U.K.

 

Net loss for the first six months of 2004 was $135,652 or $0.04 pershare, versus a net loss of $104,845, or $0.03 per share, for the comparableperiod in 2003.

 

**Factors That May Affect Future Results**

 

From time to time, information provided by the Company or statementsmade by its employees 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, newproduct availability, pricing, anticipated operating results, marketshare,  the rate which backlog of orderscan be fulfilled, operating expenses and anticipated working capital) may be“forward-looking” statements.  TheCompany’s actual results may differ from those stated in any forward-lookingstatements.  Factors that may cause suchdifferences include, but are not limited to, risks associated with theintroduction of new products including supplier performance, development ofmarkets for new products offered by the Company, personnel requirements, theCompany’s relationships with distributors and OEM’s, the economic health ofsuch OEM’s, government regulation, competition and general economic conditions.

 

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## **Item 3. Controls andProcedures**

 

As of the date of this report, our President and Chief ExecutiveOfficer performed an evaluation of the effectiveness of the design andoperation of the Company’s disclosure controls and procedures pursuant toExchange Act Rule 13a-14.  Based uponthat evaluation, the President and Chief Executive Officer concluded that theCompany’s disclosure controls and procedures are effective in ensuring thereporting of material information required to be included in the Company’speriodic filings with the Securities and Exchange Commission.  There were no significant changes in theCompany’s internal controls over financial reporting or in other factors thatcould significantly affect these internal controls over financial reportingsubsequent to the date of the most recent evaluation.

 

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**PART II - OTHER INFORMATION**

 

**Item 4.****           Submissionof Matters to a Vote of Security Holders**

 

At the Company’s Annual Meeting of Stockholders held on June 3, 2004,the following members were reelected to the Board of Directors:

 
| ** **           | ** ** | **Votes for** | ** ** | **Votes   Withheld** | ** ** |
|----------------------|------------|---------------|------------|----------------------|------------|
|                 |       |          |       |                 |       |
| Ralph E. Hanson      |       | 2,966,400     |       | 172,600              |       |
| George F. Harrington |       | 2,966,400     |       | 172,600              |       |
| Derrick Ebden        |       | 2,966,400     |       | 172,600              |       |

 

**Item 6.****           Exhibitsand Reports on Form 8-K**

 

(a)                                  Exhibits:

 
| 31     |   | Certification pursuant to Rules 13a -14 and 15d -14 promulgated under  the Securities Exchange Act of 1934, as amended, as adopted pursuant to  section 302 of the Sarbanes-Oxley Act of 2002. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                           |
| 32     |   | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002                                                                        |

 

(b)                                 Reportson Form 8-K:

 

None

 

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**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 theundersigned thereunto duly authorized.

 
|        | PACE MEDICAL, INC.                                      |
|-------------|---------------------------------------------------------|
|        | (Registrant)                                            |
|        |                                                    |
|        |                                                    |
| Date:  | August 23, 2004                                         |   | /s/ Ralph E. Hanson |   |
|        | Ralph E. Hanson, President  and Chief Executive Officer |
|        |
|        |    (principal executive officer)         |
|        |                                                    |
|        |                                                    |
| Date:  | August 23, 2004                                         |   | /s/ Ralph E. Hanson |   |
|        | Ralph E. Hanson, Chief   Financial Officer              |
|        |
|        |    (principal financial officer)         |

 

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PACE MEDICAL, INC.

FORM 10-QSB

June 30, 2004

EXHIBIT INDEX

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                 |
|-----------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **      | ** ** | ** **                                                                                                                                                                                      |
| 31              |       | Certification pursuant to Rules 13a - 14 and 15d -14 promulgated  under the Securities Exchange Act of 1934, as amended, as adopted pursuant to  section 302 of the Sarbanes-Oxley Act of 2002. |
|            |       |                                                                                                                                                                                            |
| 32              |       | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002                                                                         |

 

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