**FORM 10-QSB**

 

**Securities and Exchange CommissionWashington, D. C. 20549**

 

|                                                              | **(Mark One)**                                                                                                                                                                                                     |
|-------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                              | **ý**                                                                                                                                                                                                         | **QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|                                                              |
|                                                              | **For  the quarterly period ended March 31, 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 as specified in its charter) |
|                                                              |
|                                                              |
| **Massachusetts**                                                 |                                                                                                                                                                                                               | **04-2867416** |
| (State or other jurisdiction of  incorporation or organization)   |                                                                                                                                                                                                               | (I.R.S. Employer  identification No.) |
|                                                              |
| **391 Totten Pond Road, Waltham,  Massachusetts 02451**           |
| (Address of principal executive offices)                          |
|                                                              |
| **(781) 890-5656**                                                |
| (Issuer’s telephone number,  including area code)            |
|                                                                   |                                                                                                                                                                                                                    |  |  |  |

 

Indicate by check mark whether the issuer (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90days.               Yes  ý    No  o

 

Indicate the number of shares outstanding of each ofthe issuer’s classes of common stock, as of May 12, 2003.

 

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

 

 

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**PART I - FINANCIAL INFORMATION**

 
| **Item  1.** | **Financial Statements.**                             |
|--------------|-------------------------------------------------------|
|         |                                                  |
| a)           | Condensed  Consolidated Balance Sheets                |
|         |                                                  |
| b)           | Condensed  Consolidated Statements of Operations      |
|         |                                                  |
| c)           | Condensed  Consolidated Statements of Cash Flows      |
|         |                                                  |
| d)           | Notes  to Condensed Consolidated Financial Statements |

 

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

#### **CONDENSEDCONSOLIDATED BALANCE SHEETS**

 
|                                                                         |   | **MARCH 31,  2003** |      | **DECEMBER  31, 2002** |   |
|------------------------------------------------------------------------------|--------|---------------------|-----------|------------------------|--------|
|                                                                         |   | **(Unaudited)**     |      | **(See note  below)**  |   |
|                                                                         |   |                |      |                   |   |
| ASSETS                                                                       |   |                |      |                   |   |
|                                                                         |   |                |      |                   |   |
| Current assets:                                                              |   |                |      |                   |   |
| Cash and cash  equivalents                                                   |   | $                   | 1,102,586 |                   | $      | 1,115,690 |   |
| Accounts  receivable                                                         |   | 334,690             |      | 353,629                |   |
| Inventories:                                                                 |   |                |      |                   |   |
| Raw materials                                                                |   | 288,442             |      | 290,266                |   |
| Work-in-process                                                              |   | 134,465             |      | 146,180                |   |
| Finished goods                                                               |   | 88,776              |      | 90,261                 |   |
|                                                                         |   | 511,683             |      | 526,707                |   |
| Other current  assets                                                        |   | 6,350               |      | 25,792                 |   |
| Total current  assets                                                        |   | 1,955,309           |      | 2,021,818              |   |
| Plant and  equipment, net                                                    |   | 31,150              |      | 35,394                 |   |
| Other assets                                                                 |   | 244,747             |      | 239,461                |   |
| TOTAL ASSETS                                                                 |   | $                   | 2,231,206 |                   | $      | 2,296,673 |   |
|                                                                         |   |                |      |                   |   |
| LIABILITIES AND  SHAREHOLDERS’ EQUITY                                   |   |                |      |                   |   |
|                                                                         |   |                |      |                   |   |
| Current  liabilities:                                                        |   |                |      |                   |   |
| Accounts payable                                                             |   | $                   | 222,160   |                   | $      | 219,506 |   |
| Accrued expenses                                                             |   | 43,247              |      | 90,656                 |   |
| Total current  liabilities                                                   |   | 265,407             |      | 310,162                |   |
|                                                                         |   |                |      |                   |   |
| 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                                           |   | 105,735             |      | 119,114                |   |
| Accumulated  deficit                                                         |   | (1,289,349          | )         | (1,282,016             | )      |
|                                                                         |   | 1,997,546           |      | 2,018,258              |   |
| Less: Treasury  Stock, at Cost, 46,000 shares                                |   | (31,747             | )         | (31,747                | )      |
| Total  Shareholders’ Equity                                             |   | 1,965,799           |      | 1,986,511              |   |
|                                                                         |   |                |      |                   |   |
| TOTAL  LIABILITIES AND SHAREHOLDERS’ EQUITY                             |   | $                   | 2,231,206 |                   | $      | 2,296,673 |   |

 

Note:                               Thebalance sheet at December 31, 2002 has been derived from the audited financialstatements at that date.

 

See accompanying notes to condensed consolidatedfinancial statements.

 

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**PACE MEDICAL, INC. AND WHOLLY-OWNEDSUBSIDIARYCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(Unaudited)**

 
|                      |   | **For the  Three Months  Ended March 31** |    |
|---------------------------|--------|-------------------------------------------|---------|
|                      |   | **2003**                                  |    | **2002** |   |
|                      |   |                                      |    |   |   |
| Net sales                 |   | $                                         | 393,730 |   | $ | 217,895 |   |
|                      |   |                                      |    |   |   |
| Cost of sales             |   | 222,555                                   |    | 107,299 |   |
|                      |   |                                      |    |   |   |
|                      |   | 171,175                                   |    | 110,596 |   |
|                      |   |                                      |    |   |   |
| Other operating  expenses |   | 192,151                                   |    | 163,912 |   |
|                      |   |                                      |    |   |   |
| Loss from  operations     |   | (20,976                                   | )       | (53,316 | ) |
|                      |   |                                      |    |   |   |
| Other income              |   | 5,442                                     |    | 7,016 |   |
|                      |   |                                      |    |   |   |
| Net loss                  |   | $                                         | (15,534 | ) | $ | (46,300 | ) |
|                      |   |                                      |    |   |   |
| Net loss per  share:      |   |                                      |    |   |   |
|                      |   |                                      |    |   |   |
| Basic                     |   | $                                         | (0.00   | ) | $ | (0.01 | ) |
|                      |   |                                      |    |   |   |
| Diluted                   |   | $                                         | (0.00   | ) | $ | (0.01 | ) |

 

See accompanying notes tocondensed consolidated financial statements.

 

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**PACE MEDICAL, INC. AND WHOLLY-OWNEDSUBSIDIARYCONDENSED CONSOLIDATED STATEMENTSOF CASH FLOWS(Unaudited)**

 
|                                                                         |   | **THREE  MONTHS ENDED  MARCH 31,** |      |
|------------------------------------------------------------------------------|--------|------------------------------------|-----------|
|                                                                         |   | **2003**                           |      | **2002** |   |
|                                                                         |   |                               |      |   |   |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                       |   |                               |      |   |   |
| Net loss                                                                     |   | $                                  | (15,534   | ) | $ | (46,300 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities: |   |                               |      |   |   |
| Depreciation and  amortization                                               |   | 4,244                              |      | 5,885 |   |
| Change in assets  and liabilities, net:                                      |   | (1,814                             | )         | (49,890 | ) |
|                                                                         |   |                               |      |   |   |
| Net cash used in  operating activities                                       |   | (13,104                            | )         | (90,305 | ) |
|                                                                         |   |                               |      |   |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES -                                      |   |                               |      |   |   |
|                                                                         |   |                               |      |   |   |
| Purchases of property  and equipment                                         |   | —                             |      | (2,782 | ) |
|                                                                         |   |                               |      |   |   |
| CASH FLOWS FROM  FINANCING ACTIVITIES -                                      |   |                               |      |   |   |
|                                                                         |   | —                             |      | — |   |
|                                                                         |   |                               |      |   |   |
| NET DECREASE IN  CASH AND CASH EQUIVALENTS                                   |   | (13,104                            | )         | (93,087 | ) |
|                                                                         |   |                               |      |   |   |
| CASH AND CASH  EQUIVALENTS AT BEGINNING OF PERIOD                            |   | $                                  | 1,115,690 |   | $ | 1,436,366 |   |
|                                                                         |   |                               |      |   |   |
| CASH AND CASH  EQUIVALENTS AT END OF PERIOD                                  |   | $                                  | 1,102,586 |   | $ | 1,343,279 |   |

 

See accompanying notes tocondensed consolidated financial statements.

 

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**PACE MEDICAL, INC. AND WHOLLY-OWNEDSUBSIDIARYNOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

 

1.                                       Theaccompanying unaudited consolidated financial statements and these notes havebeen condensed and do not contain all disclosures required by generallyaccepted accounting principles.  See notesto audited consolidated financial statements contained in the Company’s annualreport.

 

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 March 31, 2003 and the results of theiroperations for the three months ended March 31, 2003 and March 31, 2002 andtheir cash flows for the three months ended March 31, 2003 and March 31, 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 March 31, 2003 or 2002.  Cost of sales for such periods wascalculated primarily using standard cost methods.

 

4.                                       Theresults of operations for the three months ended March 31, 2003 are notnecessarily indicative of the results to be expected for the full year.

 

5.                                       Thedenominator used to determine both the basic and fully diluted net loss pershare includes the weighted average common shares outstanding during thequarter.  The effect of stock optionswas anti-dilutive for the periods presented.

 
|                                 |   | **Three  Months Ended  March 31,** |    |
|--------------------------------------|--------|------------------------------------|---------|
|                                 |   | **2003**                           |    | **2002** |   |
|                                 |   |                               |    |   |   |
| Net Loss                             |   | $                                  | (15,534 | ) | $ | (46,300 | ) |
|                                 |   |                               |    |   |   |
| Weighted-average  shares outstanding |   | 3,354,870                          |    | 3,354,870 |   |
| Effect of  dilutive securities       |   | —                             |    | — |   |
|                                 |   |                               |    |   |   |
| Total shares                         |   | 3,354,870                          |    | 3,354,870 |   |
|                                 |   |                               |    |   |   |
| Basic net loss  per share            |   | $                                  | (0.00   | ) | $ | (0.01 | ) |
|                                 |   |                               |    |   |   |
| Diluted net loss  per share          |   | $                                  | (0.00   | ) | $ | (0.01 | ) |

 

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6.                                       TheCompany has adopted the provisions of SFAS No. 130, “Reporting ComprehensiveIncome”.  Comprehensive income includesnet income and foreign currency translation adjustments.  Comprehensive income for the three monthsended March 31, 2003 and 2002 is as follows:

 
|                             |   | **Three  Months Ended  March 31,** |    |
|----------------------------------|--------|------------------------------------|---------|
|                             |   | **2003**                           |    | **2002** |   |
|                             |   |                               |    |   |   |
| Net Loss                         |   | $                                  | (15,534 | ) | $ | (46,300 | ) |
|                             |   |                               |    |   |   |
| Currency  Translation Adjustment |   | (13,379                            | )       | (23,763 | ) |
|                             |   |                               |    |   |   |
| Total                            |   | $                                  | (28,913 | ) | $ | (70,063 | ) |

 

7.                                       TheCompany periodically grants stock options for a fixed number of shares toemployees and directors with an exercise price equal to the fair market valueof the shares on the date of grant.  TheCompany accounts for such stock option grants using the intrinsic valuemethod.  Stock options granted tonon-employees are accounted for using the fair value method.  There were 380,000 options outstanding andexercisable at December 31, 2002 and March 31, 2003 with a weighted averageexercise price of $0.35 per share.  AtMarch 31, 2003, the options outstanding and exercisable had weighted averageremaining contractual lives of 2.4 years. 

 

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**Item 2.****           Management’sDiscussion and Analysis of Financial Condition and Results of Operations.**

 

### **FinancialCondition**

 

As of March 31, 2003, the Company had cash and cash equivalents of$1,102,586 and working capital of $1,689,902. The working capital at March 31, 2003 was lower than the amount atDecember 31, 2002.

 

The Company expects to maintain a sound financial base for the balanceof fiscal 2003.  Management continues tobelieve that the current level of working capital, coupled with the flexibilityof the Company’s cost structure, should suffice to ensure that on-goingoperations are financed adequately.

 

**FinancialResults - Three Months ended March 31, 2003 versus Three Months ended March 31,2002**

 

Sales in the first quarter of 2003 increased 81% from the sales postedin the first quarter of 2002.  Theincrease in sales was due to the Company’s ability to obtain raw materials thathad been unavailable in 2002, thereby enabling the Company to ship moreproducts in 2003.  While the Company hashad some success in addressing the component shortages in the first quarter of2003, there can be no assurance that the Company will not encounter componentshortages in future quarters.

 

The Company’s margins in the first quarter were lower than those seenin 2002 (51% in 2002 and 43% in 2003). This occurred due to a change in product mix.  It should be noted that pricing has remained firm on allproducts.

 

Operating expenses were higher in the three months ended March 31, 2003versus the three months ended March 31, 2002, principally due to an increase inthe number of employees. Management anticipates some increase in its operatingexpenditures during the balance of 2003.

 

No tax provision was recorded for the three months ended March 31, 2003owing to the Company’s ability to use net operating loss carryforwards in boththe United States and the United Kingdom.

 

Net loss for the quarter was $15,534 or $.00 per share in contrast to anet loss of $46,300 or $.01 per share in the first quarter of 2002.

 

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**FactorsThat 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, market share, therate at which backlog of orders can be fulfilled, operating expenses andanticipated working capital) may be “forward-looking” statements.  The Company’s actual results may differ fromthose stated in any forward-looking statements.  Factors that may cause such differences include, but are notlimited to, risks associated with the introduction of new products includingsupplier performance, development of markets for new products offered by theCompany, personnel requirements, the Company’s relationships with distributorsand OEM’s, the economic health of such OEM’s, government regulation,competition and general economic conditions.

 

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**Item3.  Controls and Procedures**

 

The Company’s President and Chief Executive Officerhas conducted an evaluation of the effectiveness of disclosure controls andprocedures 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. There have been nosignificant changes in internal controls, or in factors that couldsignificantly affect internal controls, subsequent to the date the Presidentand Chief Executive Officer completed his evaluation.

 

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**PART II - OTHER INFORMATION**

 

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

 

(a)                                            Exhibits:

 

99.1 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 SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 
|   | PACE MEDICAL, INC.                                                                             |   |
|--------|------------------------------------------------------------------------------------------------|--------|
|   | (Registrant)                                                                                   |   |
|   |
|   |
| Date:  | May 15, 2003                                                                                   |   | /s/ Ralph E. Hanson |   |
|   | Ralph E. Hanson, President and Chief Executive Officer (principal executive officer) |   |
|   |
|   |
| Date:  | May 15, 2003                                                                                   |   | /s/ Ralph E. Hanson |   |
|   | Ralph E. Hanson, Chief Financial Officer (principal financial officer)               |   |

 

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**CERTIFICATION**

 

I, Ralph E. Hanson, certify that:

 

1.                                       Ihave reviewed this quarterly report on Form 10-QSB of Pace Medical, Inc.;

 

2.                                       Basedon my knowledge, this quarterly report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this quarterlyreport;

 

3.                                       Basedon my knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this quarterly report;

 

4.                                       Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and have:

 

a)                                      designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this quarterly report is being prepared;

 

b)                                     evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c)                                      presentedin this quarterly report our conclusions about the effectiveness of thedisclosure controls and procedures based on our evaluation as of the EvaluationDate;

 

5.                                       Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

 

a)                                      allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)                                     anyfraud, whether or not material, that involves management or other 

 

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employees who have asignificant role in the registrant’s internal controls; and

 

6.                                       Theregistrant’s other certifying officers and I have indicated in this quarterlyreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 

 
|   | Date: May 15, 2003                                                                      |
|--------|-----------------------------------------------------------------------------------------|
|   |
|   |
|   | /s/ Ralph E. Hanson                                                                     |
|   | Ralph  E. Hanson,                                                                       |
|   | President and Treasurer  (principal executive officer and  principal financial officer) |

 

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