**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 September 30, 2003**                                                                                                                                                 |
|                                                                                                                                                                                                  |
| **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.) |
|                                                            |
| **391 Totten Pond Road, Waltham,  Massachusetts 02451**         |
| (Address of principal executive offices)                        |
|                                                            |
| **(781) 890-5656**                                              |
| (Issuer’s telephone number,  including area code)          |

 

Indicate the number of shares outstanding ofeach of the issuer’s classes of common equity, as of November 14, 2003.

 

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 Balance Sheets |   |
|                               |   |   |   |
| b)                                 |   | Condensed Consolidated Statements of  Operations |   |
|                               |   |   |   |
| c)                                 |   | Condensed Consolidated Statements of Cash  Flows |   |
|                               |   |   |   |
| d)                                 |   | Notes to Condensed Consolidated Financial  Statements |   |

 

2

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**PACE MEDICAL, INC. AND WHOLLY-OWNEDSUBSIDIARY****CONDENSED CONSOLIDATED BALANCE SHEETS**

 
|                                            |   | **SEPTEMBER  30, 2003** |      | **DECEMBER  31, 2002** |   |
|-------------------------------------------------|--------|-------------------------|-----------|------------------------|--------|
|                                            |   | **(Unaudited)**         |      | **(See note  below)**  |   |
|                                            |   |                    |      |                   |   |
| ASSETS                                          |   |                    |      |                   |   |
|                                            |   |                    |      |                   |   |
| Current assets:                                 |   |                    |      |                   |   |
| Cash and cash equivalents                       |   | $                       | 857,973   |                   | $      | 1,115,690 |   |
| Accounts receivable                             |   | 353,436                 |      | 353,629                |   |
| Inventories:                                    |   |                    |      |                   |   |
| Raw materials                                   |   | 271,641                 |      | 290,266                |   |
| Work-in-process                                 |   | 158,370                 |      | 146,180                |   |
| Finished goods                                  |   | 79,108                  |      | 90,261                 |   |
|                                            |   | 509,119                 |      | 526,707                |   |
| Other current assets                            |   | 20,127                  |      | 25,792                 |   |
| Total current assets                            |   | 1,740,655               |      | 2,021,818              |   |
| Plant and equipment, net                        |   | 24,344                  |      | 35,394                 |   |
| Other assets                                    |   | 244,568                 |      | 239,461                |   |
| TOTAL ASSETS                                    |   | $                       | 2,009,567 |                   | $      | 2,296,673 |   |
|                                            |   |                    |      |                   |   |
| LIABILITIES  AND SHAREHOLDERS’ EQUITY      |   |                    |      |                   |   |
|                                            |   |                    |      |                   |   |
| Current liabilities:                            |   |                    |      |                   |   |
| Accounts payable                                |   | $                       | 73,356    |                   | $      | 219,506 |   |
| Accrued expenses                                |   | 42,645                  |      | 90,656                 |   |
| Total current liabilities                       |   | 116,001                 |      | 310,162                |   |
|                                            |   |                    |      |                   |   |
| Shareholders’ equity:                      |   |                    |      |                   |   |
| Common stock                                    |   | 34,009                  |      | 34,009                 |   |
| Additional paid-in capital                      |   | 3,147,151               |      | 3,147,151              |   |
| Cumulative translation adjustment               |   | 157,558                 |      | 119,114                |   |
| Accumulated deficit                             |   | (1,413,405              | )         | (1,282,016             | )      |
|                                            |   | 1,925,313               |      | 2,112,433              |   |
|                                            |   |                    |      |                   |   |
| Less Treasury Stock, at Cost                    |   | (31,747                 | )         | (31,747                | )      |
| Total Shareholders’ Equity                 |   | 1,893,566               |      | 1,986,511              |   |
|                                            |   |                    |      |                   |   |
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY |   | $                       | 2,009,567 |                   | $      | 2,296,673 |   |

 

Note:                   The balance sheet at December 31,2002 has been taken from the audited financial statements at that date.

 

See accompanying notes to condensedconsolidated financial statements.

 

3

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

**CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS**

(Unaudited)

 
|                          |   | **For the  Three Months  Ended September 30** |    | **For the  Nine Months  Ended September 30** |   |
|-------------------------------|--------|-----------------------------------------------|---------|----------------------------------------------|--------|
|                          |   | **2003**                                      |    | **2002**                                     |   | **2003** |   | **2002** |   |
|                          |   |                                          |    |                                         |   |   |   |   |   |
| Net Sales                     |   | $                                             | 316,125 |                                         | $      | 377,627 |   | $ | 987,473 |   | $ | 852,147 |   |
|                          |   |                                          |    |                                         |   |   |   |   |   |
| Cost of sales                 |   | 161,378                                       |    | 189,450                                      |   | 545,776 |   | 418,790 |   |
|                          |   |                                          |    |                                         |   |   |   |   |   |
|                          |   | 154,747                                       |    | 188,177                                      |   | 441,697 |   | 433,357 |   |
|                          |   |                                          |    |                                         |   |   |   |   |   |
| Operating expenses            |   | 194,388                                       |    | 171,614                                      |   | 598,255 |   | 534,221 |   |
|                          |   |                                          |    |                                         |   |   |   |   |   |
| Income (loss) from operations |   | (39,641                                       | )       | 16,563                                       |   | (156,558 | ) | (100,864 | ) |
|                          |   |                                          |    |                                         |   |   |   |   |   |
| Other income                  |   | 4,896                                         |    | 6,857                                        |   | 16,968 |   | 22,238 |   |
|                          |   |                                          |    |                                         |   |   |   |   |   |
| Net income (loss)             |   | $                                             | (34,745 | )                                            | $      | 23,420 |   | $ | (139,590 | ) | $ | (78,536 | ) |
|                          |   |                                          |    |                                         |   |   |   |   |   |
| Net income (loss) per share:  |   |                                          |    |                                         |   |   |   |   |   |
|                          |   |                                          |    |                                         |   |   |   |   |   |
| Basic                         |   | $                                             | (.01    | )                                            | $      | .01 |   | $ | (.04 | ) | $ | (.02 | ) |
|                          |   |                                          |    |                                         |   |   |   |   |   |
| Diluted                       |   | $                                             | (.01    | )                                            | $      | .01 |   | $ | (.04 | ) | $ | (.02 | ) |

 

See accompanying notes to condensed consolidatedfinancial statements.

 

4

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**PACE MEDICAL, INC.AND WHOLLY-OWNED SUBSIDIARY****CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

(Unaudited)

 
|                                                                                       |   | **NINE  MONTHS ENDED  SEPTEMBER 30** |     |
|--------------------------------------------------------------------------------------------|--------|--------------------------------------|----------|
|                                                                                       |   | **2003**                             |     | **2002** |   |
|                                                                                       |   |                                 |     |   |   |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                      |   |                                 |     |   |   |
| Net loss                                                                                   |   | $                                    | (139,590 | ) | $ | (78,536 | ) |
| Adjustments to reconcile net loss to net  cash provided by (used in) operating activities: |   |                                 |     |   |   |
| Depreciation and amortization                                                              |   | 11,050                               |     | 12,664 |   |
| Change in assets and liabilities, net:                                                     |   | (129,177                             | )        | (251,416 | ) |
|                                                                                       |   |                                 |     |   |   |
| Net cash used in operating activities                                                      |   | (257,717                             | )        | (317,288 | ) |
|                                                                                       |   |                                 |     |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                                      |   |                                 |     |   |   |
|                                                                                       |   |                                 |     |   |   |
| Purchases of property and equipment                                                        |   | —                               |     | (5,684 | ) |
|                                                                                       |   |                                 |     |   |   |
| NET DECREASE IN CASH AND CASH EQUIVALENTS                                                  |   | (257,717                             | )        | (322,972 | ) |
|                                                                                       |   |                                 |     |   |   |
| CASH AND CASH EQUIVALENTS AT BEGINNING OF  PERIOD                                          |   | 1,115,690                            |     | 1,436,366 |   |
|                                                                                       |   |                                 |     |   |   |
| CASH AND CASH EQUIVALENTS AT END OF PERIOD                                                 |   | $                                    | 857,973  |   | $ | 1,113,394 |   |

 

See accompanying notes to condensedconsolidated financial statements.

 

5

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**PACEMEDICAL, INC. AND WHOLLY-OWNED 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 itswholly-owned subsidiary as of September 30, 2003 and the results of their operationsfor the three and nine months ended September 30, 2003 and September 30, 2002and their cash flows for the nine months ended September 30, 2003 and September30, 2002.

 

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 September 30, 2003 or 2002.  Cost of sales for such periods wascalculated primarily using standard cost methods.

 

4.                                       Theresults of operations for the three and nine months ended September 30, 2003are not necessarily indicative of the results to be expected for the full year.

 

5.                                       Thedenominator used to determine basic net income (loss) per share includes theweighted average common shares outstanding during the quarter.  The denominator used to determine dilutednet income per share includes the shares used in the calculation of basic netincome per share plus the weighted average options outstanding during theperiod using the treasury-stock method.

 
|                                |   | **For the  three months ended September 30, 2003** |    |
|-------------------------------------|--------|----------------------------------------------------|---------|
|                                |   | **Income  (Loss)  (Numerator)**                    |    | **Shares  (Denominator)** |   | **Per Share  Amount** |   |
|                                |   |                                               |    |   |   |   |   |
| Net Income (Loss)                   |   | $                                                  | (34,745 | ) |   |   |   |   |
|                                |   |                                               |    |   |   |   |   |
| Weighted-average shares outstanding |   | —                                             |    | 3,354,870 |   |   |   |
|                                |   |                                               |    |   |   |   |   |
| Basic net income (loss) per share   |   | (34,745                                            | )       | 3,354,870 |   | $ | (0.01 | ) |
|                                |   |                                               |    |   |   |   |   |
| Effect of dilutive securities       |   | —                                             |    | — |   |   |   |
|                                |   |                                               |    |   |   |   |   |
| Diluted net income (loss) per share |   | $                                                  | (34,745 | ) | 3,354,870 |   | $ | (0.01 | ) |

 

6

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|                                |   | **For the  three months ended September 30, 2002** |   |
|-------------------------------------|--------|----------------------------------------------------|--------|
|                                |   | **Income  (Loss)  (Numerator)**                    |   | **Shares  (Denominator)** |   | **Per Share  Amount** |   |
|                                |   |                                               |   |   |   |   |   |
| Net Income (Loss)                   |   | $                                                  | 23,420 |   |   |   |   |   |
|                                |   |                                               |   |   |   |   |   |
| Weighted-average shares outstanding |   | —                                             |   | 3,354,870 |   |   |   |
|                                |   |                                               |   |   |   |   |   |
| Basic net income (loss) per share   |   | 23,420                                             |   | 3,354,870 |   | $ | 0.01 |   |
|                                |   |                                               |   |   |   |   |   |
| Effect of dilutive securities       |   | —                                             |   | 9,242 |   |   |   |
|                                |   |                                               |   |   |   |   |   |
| Diluted net income (loss) per share |   | $                                                  | 23,420 |   | 3,364,112 |   | $ | 0.01 |   |

 
|                                |   | **For the  nine months ended September 30, 2003** |     |
|-------------------------------------|--------|---------------------------------------------------|----------|
|                                |   | **Income  (Loss)  (Numerator)**                   |     | **Shares  (Denominator)** |   | **Per Share  Amount** |   |
|                                |   |                                              |     |   |   |   |   |
| Net Income (Loss)                   |   | $                                                 | (139,590 | ) |   |   |   |   |
|                                |   |                                              |     |   |   |   |   |
| Weighted-average shares outstanding |   | —                                            |     | 3,354,870 |   |   |   |
|                                |   |                                              |     |   |   |   |   |
| Basic net income (loss) per share   |   | (139,590                                          | )        | 3,354,870 |   | $ | (0.04 | ) |
|                                |   |                                              |     |   |   |   |   |
| Effect of dilutive securities       |   | —                                            |     | — |   |   |   |
|                                |   |                                              |     |   |   |   |   |
| Diluted net income (loss) per share |   | $                                                 | (139,590 | ) | 3,354,870 |   | $ | (0.04 | ) |

 
|                                |   | **For the  nine months ended September 30, 2002** |    |
|-------------------------------------|--------|---------------------------------------------------|---------|
|                                |   | **Income  (Loss)  (Numerator)**                   |    | **Shares  (Denominator)** |   | **Per Share  Amount** |   |
|                                |   |                                              |    |   |   |   |   |
| Net Income (Loss)                   |   | $                                                 | (78,536 | ) |   |   |   |   |
|                                |   |                                              |    |   |   |   |   |
| Weighted-average shares outstanding |   | —                                            |    | 3,354,870 |   |   |   |
|                                |   |                                              |    |   |   |   |   |
| Basic net income (loss) per share   |   | (78,536                                           | )       | 3,354,870 |   | $ | (0.02 | ) |
|                                |   |                                              |    |   |   |   |   |
| Effect of dilutive securities       |   | —                                            |    | — |   |   |   |
|                                |   |                                              |    |   |   |   |   |
| Diluted net income (loss) per share |   | $                                                 | (78,536 | ) | 3,354,870 |   | $ | (0.02 | ) |

 

7

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6.                                       Comprehensiveincome (loss) includes net income (loss) and foreign currency translationadjustments.  Comprehensive income(loss) for the three and nine months ended September 30, 2003 and 2002 are asfollows:

 
|                            |   | **Three  Months Ended  September 30,** |    | **Nine  Months Ended  September 30,** |   |
|---------------------------------|--------|----------------------------------------|---------|---------------------------------------|--------|
|                            |   | **2003**                               |    | **2002**                              |   | **2003** |   | **2002** |   |
|                            |   |                                   |    |                                  |   |   |   |   |   |
| Net Income (Loss)               |   | $                                      | (34,745 | )                                     | $      | 23,420 |   | $ | (139,590 | ) | $ | (78,536 | ) |
|                            |   |                                   |    |                                  |   |   |   |   |   |
| Currency Translation Adjustment |   | 13,482                                 |    | 34,136                                |   | 38,444 |   | 79,748 |   |
|                            |   |                                   |    |                                  |   |   |   |   |   |
| Total                           |   | $                                      | (21,263 | )                                     | $      | 57,556 |   | $ | (101,146 | ) | $ | 1,212 |   |

 

8

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**Item2.****           Management’s Discussionand Analysis or Plan of Operation.**

 

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

 

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

 

**FinancialCondition**

 

As of September 30, 2003, the Company hadcash and cash equivalents of $857,973 and working capital of $1,624,654.  Working capital decreased $87,002 sinceDecember 31, 2002 owing to the use of cash in operations.  The Company’s cash flows have historicallytracked its operational results.

 

The Company expects to maintain a soundfinancial base for the balance of fiscal 2003. Management continues to believe that the current level of workingcapital, coupled with the flexibility of the Company’s cost structure, shouldsuffice to ensure that on-going operations are financed adequately.

 

**FinancialResults - Three Months ended September 30, 2003 versus Three Months endedSeptember 30, 2002**

 

Sales in the third quarter of 2003 decreased16% from the sales posted in the third quarter of 2002.  The decrease in sales was due to theCompany’s inability to obtain raw materials. While the Company has had some success in addressing the componentshortages, there can be no assurance that the Company will not encountercomponent shortages in future quarters.

 

The Company’s margins in the third quarterwere lower than those attained in 2002 (from 50% in 2002 to 49% in 2003). Thisoccurred due to a change in product mix. It should be noted that pricing has remained firm on all products.

 

Operating expenses were higher in the threemonths ended September 30, 2003 versus the three months ended September 30,2002, mostly due to changes in currency exchange rates.  Management anticipates some increase in itsoperating expenditures during the balance of 2003.

 

No tax benefit was recorded for the threemonths ended September 30, 2003 owing to uncertainty regarding the Company’sability to use net operating loss carryforwards in both the U.S. and U.K.

 

Net loss for the quarter was $34,745 or $0.01per share, verses a net income of $23,420 in the comparable quarter in 2002.

 

9

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**FinancialResults - Nine Months ended September 30, 2003 versus Nine Months endedSeptember 30, 2002**

 

Sales in the nine months ended September 30,2003 increased 16% from the amount posted in the nine months ended in September30, 2002.  The increase in sales wasprimarily due to changes in currency exchange rates.

 

The Company’s margins for the year-to-dateperiod were lower than those achieved in the first half of 2002 (from 51% in2002 to 45% in 2003). This occurred due to a change in product mix.  It should be noted that pricing has remainedfirm on all products.

 

Operating expenses were higher for the ninemonths ended September 30, 2003 versus the nine months ended September 30,2002, mostly due to changes in currency exchange rates.  Management anticipates some increase in itsoperating expenditures during the balance of 2003.

 

No tax benefit was recorded for the ninemonths ended September 30, 2003 owing to uncertainty regarding the Company’sability to use net operating loss carryforwards in both the U.S. and U.K.

 

Net loss for the first nine months of 2003was $139,590 or $0.04 per share, versus a net loss of $78,536, or $0.02 per share,for the comparable period in 2002.

 

**FactorsThat 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, the rate which backlog oforders can be fulfilled, operating expenses and anticipated working capital)may be “forward-looking” statements. The Company’s actual results may differ from those stated in anyforward-looking statements.  Factorsthat may cause such differences include, but are not limited to, risksassociated with the introduction of new products including supplierperformance, risks associated with the manufacture of existing productsincluding supplier performance, development of markets for new and existingproducts offered by the Company, personnel requirements, the Company’srelationships with distributors and OEM’s, the economic health of such OEM’s,government regulation, competition and general economic conditions.

 

10

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**Item3. Controls and Procedures**

 

The Company’s President and Chief ExecutiveOfficer has conducted an evaluation of the effectiveness of disclosure controlsand procedures pursuant to Exchange Act Rule 13a-14.  Based on that evaluation, the President and Chief ExecutiveOfficer concluded that the disclosure controls and procedures are effective inensuring that all material information required to be filed in this quarterlyreport has been made known to him in a timely fashion.

 

**PARTII - OTHER INFORMATION**

 

**Item 6.****                                   Exhibitsand 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 the Sarbanes-OxleyAct of 2002.

 

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

 

(b)                            Reports on Form 8-K:

 

None

 

11

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**SIGNATURES**

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.

 
|   | PACE MEDICAL, INC.                                                                                  |   |
|--------|-----------------------------------------------------------------------------------------------------|--------|
|   | (Registrant)                                                                                        |   |
|   |                                                                                                |
|   |                                                                                                |
| Date:  |  November  14, 2003                                                                            |   | /s/ Ralph E.  Hanson |   |
|   | Ralph E.  Hanson, President   and Chief Executive Officer   (principal executive officer) |
|   |                                                                                                |
|   |                                                                                                |
| Date:  |   November  14, 2003                                                                      |   | /s/ Ralph E.  Hanson |   |
|   | Ralph E.  Hanson, Chief   Financial Officer   (principal financial officer)               |
|        |                                                                                                     |        |  |  |  |

 

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PACE MEDICAL, INC.

FORM 10-QSB

September 30, 2003

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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