**FORM 10-QSB**

 

**Securitiesand Exchange Commission**

**Washington, D. C. 20549**

 

**(MarkOne)**
| **ý**                                                                                                                                                                                                                  | **QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**        |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                        |                                                                                          |
| **For  the quarterly period ended March 31, 2002**                                                                                                                                                                          |
|                                                                                                                                                                                                                        |                                                                                          |
| **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 ofsmall business issuer as specified in its charter)

 

 

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

 

 

Indicate by checkmark whether the issuer (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.            Yes  ý    No  o

 

Indicate thenumber of shares outstanding of each of the issuer’s classes of common stock,as of May 12, 2002.

 

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

 

 

 

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**PART I - FINANCIAL INFORMATION**

 

**Item 1.  Financial Statements.**

 

a)       CondensedConsolidated Balance Sheets

 

b)      CondensedConsolidated Income Statements

 

c)       CondensedConsolidated Statements of Cash Flows

 

d)      Notesto Condensed Consolidated Financial Statements

 

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

#### **CONDENSEDCONSOLIDATED BALANCE SHEETS**

 
|                                                                         |   | **MARCH 31, 2002** |      | **DECEMBER  31, 2001** |   |
|------------------------------------------------------------------------------|--------|--------------------|-----------|------------------------|--------|
|                                                                         |   | **(Unaudited)**    |      | **(See note  below)**  |   |
|                                                                         |   |               |      |                   |   |
| ASSETS                                                                       |   |               |      |                   |   |
|                                                                         |   |               |      |                   |   |
| Current assets:                                                              |   |               |      |                   |   |
| Cash and cash  equivalents                                                   |   | $                  | 1,343,279 |                   | $      | 1,436,366 |   |
| Accounts  receivable                                                         |   | 175,438            |      | 202,450                |   |
| Inventories:                                                                 |   |               |      |                   |   |
| Raw materials                                                                |   | 316,260            |      | 289,381                |   |
| Work-in-process                                                              |   | 33,817             |      | 35,495                 |   |
| Finished goods                                                               |   | 77,117             |      | 114,901                |   |
|                                                                         |   | 427,194            |      | 439,777                |   |
| Other current  assets                                                        |   | 5,159              |      | 24,222                 |   |
| Total current  assets                                                        |   | 1,951,070          |      | 2,102,815              |   |
| Plant and  equipment, net                                                    |   | 37,985             |      | 39,808                 |   |
| Other assets                                                                 |   | 168,344            |      | 169,624                |   |
| TOTAL ASSETS                                                                 |   | $                  | 2,157,399 |                   | $      | 2,312,247 |   |
|                                                                         |   |               |      |                   |   |
| LIABILITIES AND  SHAREHOLDERS’ EQUITY                                   |   |               |      |                   |   |
|                                                                         |   |               |      |                   |   |
| Current  liabilities                                                         |   |               |      |                   |   |
| Accounts payable                                                             |   | $                  | 91,093    |                   | $      | 133,366 |   |
| Accrued expenses                                                             |   | 55,683             |      | 98,195                 |   |
| Total current  liabilities                                                   |   | 146,776            |      | 231,561                |   |
|                                                                         |   |               |      |                   |   |
| Shareholders’ equity:                                                   |   |               |      |                   |   |
| Common stock,  $.01 par value, 5,000,000 shares authorized, 3,400,870 issued |   | 34,009             |      | 34,009                 |   |
| Additional  paid-in capital                                                  |   | 3,147,151          |      | 3,147,151              |   |
| Cumulative  translation                                                      |   |               |      |                   |   |
| Adjustment                                                                   |   | (7,208             | )         | 16,555                 |   |
| Accumulated  deficit                                                         |   | (1,131,852         | )         | (1,085,282             | )      |
|                                                                         |   | 2,042,370          |      | 2,112,433              |   |
| Less: Treasury  Stock, at Cost,  46,000 shares                          |   | (31,747            | )         | (31,747                | )      |
| Total  Shareholders’ Equity                                             |   | 2,010,623          |      | 2,080,686              |   |
|                                                                         |   |               |      |                   |   |
| TOTAL  LIABILITIES AND SHAREHOLDERS’ EQUITY                             |   | $                  | 2,157,399 |                   | $      | 2,312,247 |   |

 

 

| Note: | The balance sheet at December 31, 2001 has been  taken from the audited financial statements at that date. |
|-------|------------------------------------------------------------------------------------------------------------|

 

See accompanyingnotes to condensed consolidated financial statements.

 

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

#### **CONDENSEDCONSOLIDATED INCOME STATEMENTS**

**(Unaudited)**

 
|                           |   | **For the Three Months** |    |
|--------------------------------|--------|--------------------------|---------|
|                           |   | **Ended March 31**       |    |
|                           |   |                     |    |   |   |
|                           |   | **2002**                 |    | **2001** |   |
|                           |   |                     |    |   |   |
| Net Sales                      |   | $                        | 217,895 |   | $ | 394,471 |   |
|                           |   |                     |    |   |   |
| Cost of sales                  |   | 107,299                  |    | 195,229 |   |
|                           |   |                     |    |   |   |
|                           |   | 110,596                  |    | 199,242 |   |
|                           |   |                     |    |   |   |
| Other operating  expenses      |   | 163,912                  |    | 177,198 |   |
|                           |   |                     |    |   |   |
| Income (Loss)  from operations |   | (53,316                  | )       | 22,044 |   |
|                           |   |                     |    |   |   |
| Other income                   |   | 7,016                    |    | 13,232 |   |
|                           |   |                     |    |   |   |
| Net income  (loss)             |   | $                        | (46,300 | ) | $ | 35,276 |   |
|                           |   |                     |    |   |   |
| Net income  (loss) per share:  |   |                     |    |   |   |
|                           |   |                     |    |   |   |
| Basic                          |   | $                        | (.01    | ) | $ | .01 |   |
|                           |   |                     |    |   |   |
| Diluted                        |   | $                        | (.01    | ) | $ | .01 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

 

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

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

 
|                                                                                  |   | **THREE  MONTHS ENDED** |      |
|---------------------------------------------------------------------------------------|--------|-------------------------|-----------|
|                                                                                  |   | **MARCH 31**            |      |
|                                                                                  |   |                    |      |   |   |
|                                                                                  |   | **2002**                |      | **2001** |   |
|                                                                                  |   |                    |      |   |   |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                                |   |                    |      |   |   |
| Net income  (loss)                                                                    |   | $                       | (46,300   | ) | $ | 35,276 |   |
| Adjustments to  reconcile net income (loss) to net cash used in operating activities: |   |                    |      |   |   |
| Depreciation and  amortization                                                        |   | 5,885                   |      | 4,283 |   |
| Change in assets  and liabilities, net:                                               |   | (49,890                 | )         | (98,199 | ) |
|                                                                                  |   |                    |      |   |   |
| Net cash used in  operating activities                                                |   | (90,305                 | )         | (58,640 | ) |
|                                                                                  |   |                    |      |   |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES -                                               |   |                    |      |   |   |
|                                                                                  |   |                    |      |   |   |
| Purchases of  property and equipment                                                  |   | (2,782                  | )         | (2,537 | ) |
|                                                                                  |   |                    |      |   |   |
| CASH FLOW FROM  FINANCING ACTIVITIES -                                                |   |                    |      |   |   |
|                                                                                  |   | —                  |      | — |   |
|                                                                                  |   |                    |      |   |   |
| NET DECREASE IN  CASH AND CASH EQUIVALENTS                                            |   | (93,087                 | )         | (61,177 | ) |
|                                                                                  |   |                    |      |   |   |
| CASH AND CASH  EQUIVALENTS AT BEGINNING OF PERIOD                                     |   | $                       | 1,436,366 |   | $ | 1,252,352 |   |
|                                                                                  |   |                    |      |   |   |
| CASH AND CASH  EQUIVALENTS AT END OF PERIOD                                           |   | $                       | 1,343,279 |   | $ | 1,191,175 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

 

5

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

**NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

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

 

2.             In the opinion of the Company, theaccompanying unaudited condensed financial statements contain all adjustments,all of which are normal and recurring, necessary to present fairly thefinancial position of the Company and its wholly-owned subsidiary as of March31, 2002 and the results of their operations for the three months ended March31, 2002 and March 31, 2001 and their cash flows for the three months endedMarch 31, 2002 and March 31, 2001.

 

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 March 31, 2002 or 2001. Cost of sales for such periods was calculated primarily using standardcost methods.

 

4.             The results of operations for thethree months ended March 31, 2002 are not necessarily indicative of the resultsto be expected for the full year.

 

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

 

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|                                |   | **Three Months Ended** |    |
|-------------------------------------|--------|------------------------|---------|
|                                |   | **March 31**           |    |
|                                |   |                   |    |   |   |
|                                |   | **2002**               |    | **2001** |   |
|                                |   |                   |    |   |   |
| Net Income (Loss)                   |   | $                      | (46,300 | ) | $ | 35,276 |   |
|                                |   |                   |    |   |   |
| Weighted-average shares outstanding |   | 3,354,870              |    | 3,354,870 |   |
| Effect of dilutive securities       |   | 9,242                  |    | 27,629 |   |
| Total shares                        |   | 3,364,112              |    | 3,382,499 |   |
|                                |   |                   |    |   |   |
| Basic net income per share          |   | $                      | (0.01   | ) | $ | 0.01 |   |
|                                |   |                   |    |   |   |
| Diluted net income per share        |   | $                      | (0.01   | ) | $ | 0.01 |   |

 

 

6.                 The Company has adopted theprovisions of SFAS No. 130, “Reporting Comprehensive Income”.  Comprehensive income includes net income andforeign currency translation adjustments. Comprehensive income for the three months ended March 31, 2002 and 2001is as follows:

 
|                             |   | **Three  Months Ended** |    |
|----------------------------------|--------|-------------------------|---------|
|                             |   | **March 31,**           |    |
|                             |   |                    |    |   |   |
|                             |   | **2002**                |    | **2001** |   |
|                             |   |                    |    |   |   |
| Net Income  (Loss)               |   | $                       | (46,300 | ) | $ | 35,276 |   |
|                             |   |                    |    |   |   |
| Currency  Translation Adjustment |   | (23,763                 | )       | (40,166 | ) |
|                             |   |                    |    |   |   |
| Total                            |   | $                       | (70,063 | ) | $ | (4,890 | ) |

 

 

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**Item 2.****          ****Management’s Discussion and Analysis of Financial Conditionand Results of Operations.**

### **FinancialCondition**

As of March 31, 2002,the Company had cash and cash equivalents of $1,343,279 and working capital of$1,804,294.  The working capital atMarch 31, 2002 was slightly lower than the amount at December 31, 2001.

 

The Companyexpects to maintain a sound financial base for the balance of fiscal 2002.  Management continues to believe that thecurrent level of working capital, coupled with the flexibility of the Company’scost structure, should suffice to ensure that on-going operations are financedadequately.

 

**Financial Results - Three Monthsended March 31, 2002 versus Three Months ended March 31, 2001**

 

Sales in the firstquarter of 2002 decreased 45% from the sales posted in the first quarter of2001.  The decrease in sales was due toour inability to ship product due to component shortages at our suppliers.  The Company believes that the shortages havenow been alleviated and expects that the resulting backlog of orders will befulfilled in the second and third quarters.

 

The Company’smargins in the first quarter were essentially the same as those seen in 2001(50% in 2001 and 51% in 2002).

 

Operating expenseswere lower in the three months ended March 31, 2002 versus the three monthsended March 31, 2001, principally due to a decrease in employees’ salaries.Management anticipates some increase in its operating expenditures during thebalance of 2002.

 

No tax provisionwas recorded for the three months ended March 31, 2002 owing to the Company’sability to use net operating loss carryforwards in both the U.S. and UnitedKingdom.

 

Net loss for thequarter was $46,300 or $.01 per share in contrast to a net profit of $35,276 or$.01 per share in the first quarter of 2001. This was the result of our inability to ship product.

 

 

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**FactorsThat May Affect Future Results**

 

From time to time,information provided by the Company or statements made by its employees maycontain “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, the rate at which backlog of orders canbe 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, development of markets for new products offeredby the Company, personnel requirements, the Company’s relationships withdistributors and OEM’s, the economic health of such OEM’s, governmentregulation, competition and general economic conditions.

 

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**PART II - OTHER INFORMATION**

 

 

 

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

 

 

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**SIGNATURES**

 

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
|   |         | PACE MEDICAL, INC.             |
|--------|--------------|--------------------------------|
|   |         | (Registrant)                   |
|   |         |                           |
|   |         |                           |
| Date:  | May 14, 2002 |                           | /s/ Ralph E. Hanson |
|   |         | Ralph E. Hanson,  President    |
|   |         | and Chief Executive  Officer   |
|   |         | (principal executive  officer) |
|   |         |                           |
|   |         |                           |
| Date:  | May 14, 2002 |                           | /s/ Ralph E. Hanson |
|   |         | Ralph E. Hanson, Chief         |
|   |         | Financial Officer              |
|   |         | (principal financial  officer) |

 

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