** **

**FORM 10-QSB**

 

 

**Securities and Exchange Commission**

**Washington, D. C. 20549**

** **

 

**(Mark One)**

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

 

**For the quarterly period ended  June 30, 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**

 

**PaceMedical, Inc.**(Exact name of small 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 the number of shares outstanding of each of the issuer’sclasses of common stock, as of August 12, 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 ConsolidatedBalance Sheets

 

b)      CondensedConsolidated Statements of Operations

 

c)       CondensedConsolidated Statements of Cash Flows

 

d)      Notesto Condensed Consolidated Financial Statements

 

 

 

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

**CONDENSED CONSOLIDATED BALANCE SHEETS**

** **
|                                            |   | **JUNE 30,  2003** |      | **DECEMBER  31, 2002** |      |
|-------------------------------------------------|--------|--------------------|-----------|------------------------|-----------|
|                                            |   | **(Unaudited)**    |      | **(See note  below)**  |      |
| ASSETS                                          |   |               |      |                   |      |
|                                            |   |               |      |                   |      |
| Current assets:                                 |   |               |      |                   |      |
| Cash and cash equivalents                       |   | $                  | 956,927   |                   | $         | 1,115,690 |   |
| Accounts receivable                             |   | 285,937            |      | 353,629                |      |
| Inventories:                                    |   |               |      |                   |      |
| Raw materials                                   |   | 341,789            |      | 290,266                |      |
| Work-in-process                                 |   | 91,659             |      | 146,180                |      |
| Finished goods                                  |   | 99,684             |      | 90,261                 |      |
|                                            |   | 533,132            |      | 526,707                |      |
| Other current assets                            |   | 29,558             |      | 25,792                 |      |
| Total current assets                            |   | 1,805,554          |      | 2,021,818              |      |
|                                            |   |               |      |                   |      |
| Plan and equipment, net                         |   | 27,973             |      | 35,394                 |      |
| Other assets                                    |   | 244,646            |      | 239,461                |      |
| TOTAL ASSETS                                    |   | $                  | 2,078,173 |                   | 2,296,673 |   |
|                                            |   |               |      |                   |      |
| LIABILITIES AND SHAREHOLDERS’ EQUITY       |   |               |      |                   |      |
|                                            |   |               |      |                   |      |
| Current liabilities:                            |   |               |      |                   |      |
| Accounts payable                                |   | $                  | 108,357   |                   | $         | 219,506 |   |
| Accrued expenses                                |   | 54,988             |      | 90,656                 |      |
| Total current liabilities                       |   | 163,345            |      | 310,162                |      |
|                                            |   |               |      |                   |      |
| Shareholders’ equity                       |   |               |      |                   |      |
| Common stock, $.01 par value                    |   | 34,009             |      | 34,009                 |      |
| Additional paid-in capital                      |   | 3,147,151          |      | 3,147,151              |      |
| Cumulative translation adjustment               |   | 144,076            |      | 119,114                |      |
| Accumulated deficit                             |   | (1,378,661         | )         | (1,282,016             | )         |
|                                            |   | 1,946,575          |      | 2,112,433              |      |
| Less Treasury Stock, at Cost,                   |   |               |      |                   |      |
| 46,000 shares                                   |   | (31,747            | )         | (31,747                | )         |
| Total Shareholders’ Equity                 |   | 1,914,828          |      | 1,986,511              |      |
|                                            |   |               |      |                   |      |
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY |   | $                  | 2,078,173 |                   | $         | 2,296,673 |   |

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Note:                               The balancesheet at December 31, 2002 has been taken from the audited financial statementsat that date.

 

See accompanying notes to condensed consolidated financial statements.

 

 

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#### **PACE MEDICAL, INC. ANDWHOLLY-OWNED SUBSIDIARY**

## **CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

**(Unaudited)**

 
|                     |   | **For the  three months  ended June 30** |    | **For the  six months  ended June 30** |   |
|--------------------------|--------|------------------------------------------|---------|----------------------------------------|--------|
|                     |   | **2003**                                 |    | **2002**                               |   | **2003** |   | **2002** |   |
| Net sales                |   | $                                        | 277,618 |                                   | $      | 256,625 |   | $ | 671,348 |   | $ | 474,520 |   |
| Cost of sales            |   | 161,843                                  |    | 122,041                                |   | 384,398 |   | 229,340 |   |
|                     |   | 115,775                                  |    | 134,584                                |   | 286,950 |   | 245,180 |   |
| Other operating expenses |   | 211,716                                  |    | 198,695                                |   | 403,867 |   | 362,607 |   |
| Loss from operations     |   | (95,941                                  | )       | (64,111                                | )      | (116,917 | ) | (117,427 | ) |
| Other income             |   | 6,630                                    |    | 8,456                                  |   | 12,072 |   | 15,472 |   |
| Net loss                 |   | $                                        | (89,311 | )                                      | $      | (55,655 | ) | $ | (104,845 | ) | $ | (101,955 | ) |
| Net loss per share:      |   |                                     |    |                                   |   |   |   |   |   |
| Basic                    |   | $                                        | (0.02   | )                                      | $      | (0.02 | ) | $ | (0.03 | ) | $ | (0.03 | ) |
| Diluted                  |   | $                                        | (0.02   | )                                      | $      | (0.02 | ) | $ | (0.03 | ) | $ | (0.03 | ) |

 

See accompanying notes to condensed consolidated financial statements.

 

 

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#### **PACE MEDICAL, INC. ANDWHOLLY-OWNED SUBSIDIARY**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

 

 
|                                                                         |   | **SIX MONTHS  ENDED  JUNE 30** |      |
|------------------------------------------------------------------------------|--------|--------------------------------|-----------|
|                                                                         |   | **2003**                       |      | **2002** |   |
| CASH FLOWS FROM OPERATING ACTIVITIES                                         |   |                           |      |   |   |
|                                                                         |   |                           |      |   |   |
| Net loss                                                                     |   | $                              | (104,845  | ) | $ | (101,955 | ) |
| Adjustments to reconcile net loss to net cash used in operating  activities: |   |                           |      |   |   |
| Depreciation and amortization                                                |   | 7,421                          |      | 7,033 |   |
| Changes in assets and liabilities, net:                                      |   | (61,339                        | )         | (168,130 | ) |
|                                                                         |   |                           |      |   |   |
| Net cash used in operating activities                                        |   | (158,763                       | )         | (263,052 | ) |
|                                                                         |   |                           |      |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                        |   |                           |      |   |   |
|                                                                         |   |                           |      |   |   |
| Purchases of property and equipment                                          |   | (—                        | )         | (2,986 | ) |
|                                                                         |   |                           |      |   |   |
| NET DECREASE IN CASH AND CASH EQUIVALENTS                                    |   | (158,763                       | )         | (266,038 | ) |
|                                                                         |   |                           |      |   |   |
| CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                             |   | $                              | 1,115,690 |   | $ | 1,436,366 |   |
|                                                                         |   |                           |      |   |   |
| CASH AND CASH EQUIVALENTS AT END OF PERIOD                                   |   | $                              | 956,927   |   | $ | 1,170,328 |   |

 

See accompanying notes to condensed consolidated financial statements.

 

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

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

1.             The accompanyingunaudited consolidated financial statements and these notes have been condensedand do not 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, the accompanying unauditedcondensed financial statements contain all adjustments, all of which are normaland recurring, necessary to present fairly the financial position of theCompany and its wholly-owned subsidiary as of June 30, 2003 and the results oftheir operations for the three and six months ended June 30, 2003 and June 30,2002 and their cash flows for the six months ended June 30, 2003 and June 30,2002.

 

3.             The Companyprepares its financial information using the same accounting principles as forits annual financial statements except that no physical inventories were takenduring either of the periods ended June 30, 2003 or 2002.  Cost of sales for such periods wascalculated primarily using standard cost methods.

 

4.             The results of operationsfor the three and six months ended June 30, 2003 are not necessarily indicativeof the results to be expected for the full year.

 

5.             The denominatorused to determine basic net income per share includes the weighted averagecommon shares outstanding during the quarter. The denominator used to determine diluted net income (loss) per shareincludes the shares used in the calculation of basic net income (loss) pershare plus the weighted average options outstanding during the period using thetreasury-stock method.  The effect ofstock options was anti-dilutive for all periods presented.

 
|                                |   | **For the  three months ended June 30, 2003** |    |
|-------------------------------------|--------|-----------------------------------------------|---------|
|                                |   | **Loss  (Numerator)**                         |    | **Shares  (Denominator)** |   | **Per Share  Amount** |   |
| Net loss                            |   | $                                             | (89,311 | ) |   |   |   |   |
| Weighted-average shares outstanding |   |                                          |    | 3,354,870 |   |   |   |
| Basic net loss per share            |   | $                                             | (89,311 | ) | 3,354,870 |   | $ | (.03 | ) |
| Effect of dilutive securities       |   | —                                        |    | — |   |   |   |
| Diluted net loss per share          |   | $                                             | (89,311 | ) | 3,354,870 |   | $ | (.03 | ) |

 

 

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|                                |   | **For the  three months ended June 30, 2002** |    |
|-------------------------------------|--------|-----------------------------------------------|---------|
|                                |   | **Loss  (Numerator)**                         |    | **Shares  (Denominator)** |   | **Per Share  Amount** |   |
| Net loss                            |   | $                                             | (55,655 | ) |   |   |   |   |
| Weighted-average shares outstanding |   | —                                        |    | 3,354,870 |   |   |   |
| Basic net loss per share            |   | $                                             | (55,655 | ) | 3,354,870 |   | $ | (0.02 | ) |
| Effect of dilutive securities       |   | —                                        |    | — |   |   |   |
| Diluted net loss per share          |   | $                                             | (55,655 | ) | 3,354,870 |   | $ | (0.02 | ) |

 

 
|                                |   | **For the  six months ended June 30, 2003** |     |
|-------------------------------------|--------|---------------------------------------------|----------|
|                                |   | **Loss  (Numerator)**                       |     | **Shares  (Denominator)** |   | **Per Share  Amount** |   |
| Net loss                            |   | $                                           | (104,845 | ) |   |   |   |   |
| Weighted-average shares outstanding |   | —                                      |     | 3,354,870 |   |   |   |
| Basic net loss per share            |   | $                                           | (104,845 | ) | 3,354,870 |   | $ | (0.03 | ) |
| Effect of dilutive securities       |   |                                        |     |   |   |   |   |
| Diluted loss per share              |   | $                                           | (104,845 | ) |   |   | $ | (0.03 | ) |

 

 
|                                |   | **For the  six months ended June 30, 2002** |     |
|-------------------------------------|--------|---------------------------------------------|----------|
|                                |   | **Loss  (Numerator)**                       |     | **Shares  (Denominator)** |   | **Per Share  Amount** |   |
| Net loss                            |   | $                                           | (101,955 | ) |   |   |   |   |
| Weighted-average shares outstanding |   | —                                      |     | 3,354,870 |   |   |   |
| Basic net loss per share            |   | $                                           | (101,955 | ) | 3,354,870 |   | $ | (0.03 | ) |
| Effect of dilutive securities       |   | —                                      |     | — |   |   |   |
| Diluted net loss per share          |   | $                                           | (101,955 | ) | 3,354,870 |   | $ | (0.03 | ) |

 

 

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6.             Comprehensiveincome (loss) includes net income (loss) and foreign currency translationadjustments.  Comprehensive income(loss) for the three and six months ended June 30, 2003 and 2002 is as follows:

 

 
|                            |   | **Three  Months Ended June 30,** |    | **Six Months  Ended June 30,** |   |
|---------------------------------|--------|----------------------------------|---------|--------------------------------|--------|
|                            |   | **2003**                         |    | **2002**                       |   | **2003** |   | **2002** |   |
| Net Loss                        |   | $                                | (89,311 | )                              | $      | (55,655 | ) | $ | (104,845 | ) | $ | (101,955 | ) |
| Currency Translation Adjustment |   | 38,341                           |    | 69,374                         |   | 23,962 |   | 45,611 |   |
| Total                           |   | $                                | (50,970 | )                              | $      | 13,719 |   | $ | (80,883 | ) | $ | (56,344 | ) |

 

 

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**Item 2.****          ****Management’s Discussion andAnalysis or Plan of Operation.**

 

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

 

**MANAGEMENT’SDISCUSSION AND ANALYSIS OF**

**FINANCIALCONDITION AND RESULTS OF OPERATIONS**

 

## **Financial Condition**

 

As of June 30, 2003, the Company had cash and cash equivalents of$956,927 and working capital of $1,642,209. Working capital decreased $69,447 since December 31, 2002 owing to theuse of cash in operations.  TheCompany’s cash flows have historically tracked its operational results.

 

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 June 30, 2003 versus Three Months ended June 30,2002**

 

Sales in the second quarter of 2003 increased 8% from the sales postedin the second 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 more productsin 2003.  While the Company has had somesuccess in addressing the component shortages in the second quarter of 2003,there can be no assurance that the Company will not encounter componentshortages in future quarters.

 

The Company’s margins in the second quarter were lower than thoseattained in 2002 (from 52% in 2002 to 42% in 2003). This occurred due to achange in product mix.  It should benoted that pricing has remained firm on all products.

 

Operating expenses were higher in the three months ended June 30, 2003versus the three months ended June 30, 2002 mostly due to changes in currencyexchange rates.  Management anticipatessome increase in its operating expenditures during the balance of 2003.

 

No tax benefit was recorded for the three months ended June 30, 2003owing to uncertainty regarding the Company’s ability to use net operating losscarryforwards in both the U.S. and U.K.

 

Net loss for the quarter was $89,311or $0.02 per share, representing anincrease in the loss of $33,656 from the comparable quarter in 2002.

 

 

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**FinancialResults - Six Months ended June 30, 2003 versus Six Months ended June 30, 2002**

 

Sales in the six months ended June 30, 2003 increased 41% from theamount posted in the six months ended in June 30, 2002.  The increase in sales was primarily due tothe Company’s ability to obtain raw materials in the first and second quartersthat had been unavailable in the comparable periods in 2002, thereby enablingthe Company to ship more products in 2003. While the Company has had some success in addressing the componentshortages in the first six months of 2003, there can be no assurance that theCompany will not encounter component shortages in future quarters.

 

The Company’s margins for the year-to-date period were lower than thoseachieved in the first half of 2002 (from 52% in 2002 to 43% 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 for the six months ended June 30, 2003versus the six months ended June 30, 2002 mostly due to changes in currencyexchange rates.  Management anticipatessome increase in its operating expenditures during the balance of 2003.

 

No tax benefit was recorded for the six months ended June 30, 2003owing to uncertainty regarding the Company’s ability to use net operating losscarryforwards in both the U.S. and U.K.

 

Net loss for the first six months of 2003 was $104,845 or $0.03 pershare, versus a net loss of $101,955, or $0.03 per share, for the comparableperiod in 2002.

 

**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, marketshare,  the rate which backlog of orderscan be fulfilled, operating expenses and anticipated working capital) may be“forward-looking” statements.  TheCompany’s actual results may differ from those stated in any forward-looking statements.  Factors that may cause such differencesinclude, but are not limited to, risks associated with the introduction of newproducts including supplier performance, development of markets for newproducts 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.

 

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## **Item 3. Controls andProcedures**

 

                The Company’sPresident and Chief Executive Officer has conducted an evaluation of theeffectiveness of disclosure controls and procedures pursuant to Exchange ActRule 13a-14.  Based on that evaluation,the President and Chief Executive Officer concluded that the disclosurecontrols and procedures are effective in ensuring that all material informationrequired to be filed in this quarterly report has been made known to him in atimely fashion.

 

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**PART II -OTHER INFORMATION**

 

 

**Item 4.    Submission of Matters to a Vote of SecurityHolders**

 

At the Company’s Annual Meeting of Stockholders held on June 6, 2003,the following members were reelected to the Board of Directors:

 

|                 |   | **Votes for** |   | **Votes  Withheld** |   |
|----------------------|--------|---------------|--------|---------------------|--------|
| Ralph E. Hanson      |   | 3,041,517     |   | 61,850              |   |
| George F. Harrington |   | 3,041,517     |   | 61,850              |   |
| Derrick Ebden        |   | 3,041,517     |   | 61,850              |   |

 

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

 

(a)                                  Exhibits:

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

 

(b)           Reports on Form 8-K:

 

                None

 

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**SIGNATURES**

 

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

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

June 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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