**FORM 10-QSB**

 

**Securities and Exchange Commission**

**Washington, D. C. 20549**

 
| **(Mark One)**                                                                                                                                      |   |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
| **ý       ****QU****ARTERLY REPORT UNDER SECTION 13  OR 15(d) OF THE**

**SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                |   |   |
| **For the quarterly period ended  June 30, 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 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 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 August 12, 2002.

 

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 |

 

2

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

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

** **
|                                             |   | **JUNE 30,  2002** |      | **DECEMBER  31, 2001** |   |
|--------------------------------------------------|--------|--------------------|-----------|------------------------|--------|
|                                             |   | **(Unaudited)**    |      | **(See note  below)**  |   |
| ASSETS                                           |   |               |      |                   |   |
|                                             |   |               |      |                   |   |
| Current assets:                                  |   |               |      |                   |   |
| Cash and cash  equivalents                       |   | $                  | 1,170,328 |                   | $      | 1,436,366 |   |
| Accounts  receivable                             |   | 219,914            |      | 202,450                |   |
| Inventories:                                     |   |               |      |                   |   |
| Raw materials                                    |   | 368,307            |      | 289,381                |   |
| Work-in-process                                  |   | 109,161            |      | 35,495                 |   |
| Finished goods                                   |   | 83,313             |      | 114,901                |   |
|                                             |   | 560,781            |      | 439,777                |   |
| Other current  assets                            |   | 24,532             |      | 24,222                 |   |
| Total current  assets                            |   | 1,975,555          |      | 2,102,815              |   |
| Plant and  equipment, net                        |   | 35,960             |      | 39,808                 |   |
| Other assets                                     |   | 193,655            |      | 169,624                |   |
| TOTAL ASSETS                                     |   | $                  | 2,205,170 |                   | $      | 2,312,247 |   |
|                                             |   |               |      |                   |   |
| LIABILITIES AND  SHAREHOLDERS’ EQUITY       |   |               |      |                   |   |
|                                             |   |               |      |                   |   |
| Current liabilities:                             |   |               |      |                   |   |
| Accounts payable                                 |   | $                  | 118,333   |                   | $      | 133,366 |   |
| Accrued expenses                                 |   | 62,495             |      | 98,195                 |   |
| Total current  liabilities                       |   | 180,828            |      | 231,561                |   |
|                                             |   |               |      |                   |   |
| Shareholders’  equity:                      |   |               |      |                   |   |
| Common stock,  $.01 par value                    |   | 34,009             |      | 34,009                 |   |
| Additional  paid-in capital                      |   | 3,147,151          |      | 3,147,151              |   |
| Cumulative  translation adjustment               |   | 62,166             |      | 16,555                 |   |
| Accumulated  deficit                             |   | (1,187,237         | )         | (1,085,282             | )      |
|                                             |   | 2,056,089          |      | 2,112,433              |   |
| Less Treasury  Stock, at Cost, 46,000 shares     |   | (31,747            | )         | (31,747                | )      |
| Total  Shareholders’ Equity                 |   | 2,024,342          |      | 2,080,686              |   |
|                                             |   |               |      |                   |   |
| TOTAL  LIABILITIES AND SHAREHOLDERS’ EQUITY |   | $                  | 2,205,170 |                   | $      | 2,312,247 |   |

 

 

Note:                               Thebalance sheet at December 31, 2001 has been taken from the audited financialstatements at that date.

 

See accompanying notes tocondensed consolidated financial statements.

 

3

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

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

**(Unaudited)**

 
|                           |   | **For the  three months  ended June 30** |    | **For the  six months  ended June 30** |   |
|--------------------------------|--------|------------------------------------------|---------|----------------------------------------|--------|
|                           |   | **2002**                                 |    | **2001**                               |   | **2002** |   | **2001** |   |
|                           |   |                                     |    |                                   |   |   |   |   |   |
| Net sales                      |   | $                                        | 256,625 |                                   | $      | 383,084 |   | $ | 474,520 |   | $ | 777,555 |   |
|                           |   |                                     |    |                                   |   |   |   |   |   |   |   |   |   |
| Cost of sales                  |   | 122,041                                  |    | 206,335                                |   | 229,340 |   | 401,564 |   |
|                           |   |                                     |    |                                   |   |   |   |   |   |
|                           |   | 134,584                                  |    | 176,749                                |   | 245,180 |   | 375,991 |   |
|                           |   |                                     |    |                                   |   |   |   |   |   |
| Other operating  expenses      |   | 198,695                                  |    | 214,141                                |   | 362,607 |   | 391,339 |   |
|                           |   |                                     |    |                                   |   |   |   |   |   |
| Income (loss)  from operations |   | (64,111                                  | )       | (37,392                                | )      | (117,427 | ) | (15,348 | ) |
|                           |   |                                     |    |                                   |   |   |   |   |   |
| Other income                   |   | 8,456                                    |    | 14,574                                 |   | 15,472 |   | 27,806 |   |
|                           |   |                                     |    |                                   |   |   |   |   |   |
| Net income  (loss)             |   | $                                        | (55,655 | )                                      | $      | (22,818 | ) | $ | (101,955 | ) | $ | 12,458 |   |
|                           |   |                                     |    |                                   |   |   |   |   |   |   |   |   |   |
| Net income  (loss) per share:  |   |                                     |    |                                   |   |   |   |   |   |
|                           |   |                                     |    |                                   |   |   |   |   |   |
| Basic                          |   | $                                        | (0.02   | )                                      | $      | (.01 | ) | $ | (0.03 | ) | $ | .00 |   |
|                           |   |                                     |    |                                   |   |   |   |   |   |   |   |   |   |
| Diluted                        |   | $                                        | (0.02   | )                                      | $      | (.01 | ) | $ | (0.03 | ) | $ | .00 |   |
|                                |        |                                          |         |                                        |        |  |  |  |  |  |  |  |  |  |

 

See accompanyingnotes to condensed consolidated financial statements.

 

4

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

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

 
|                                                                                                 |   | **SIX MONTHS  ENDED  JUNE 30** |       |
|------------------------------------------------------------------------------------------------------|--------|--------------------------------|------------|
|                                                                                                 |   | **2002**                       | ** ** | **2001** | ** ** |
|                                                                                                 |   |                           |       |   |   |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                                               |   |                           |       |   |   |
| Net income  (loss)                                                                                   |   | $                              | (101,955   | ) | $ | 12,458 |   |
| Adjustments to  reconcile net income (loss) to net cash (Used in) provided by operating  activities: |   |                           |       |   |   |
| Depreciation and  amortization                                                                       |   | 7,033                          |       | 10,245 |   |
| Change in assets  and liabilities, net:                                                              |   | (168,130                       | )          | (125,130 | ) |
|                                                                                                 |   |                           |       |   |   |
| Net cash (used  in) provided by operating activities                                                 |   | (263,052                       | )          | (102,427 | ) |
|                                                                                                 |   |                           |       |   |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                                               |   |                           |       |   |   |
|                                                                                                 |   |                           |       |   |   |
| Purchases of  property and equipment                                                                 |   | (2,986                         | )          | (2,537 | ) |
|                                                                                                 |   |                           |       |   |   |
| NET (DECREASE)  IN CASH AND CASH EQUIVALENTS                                                         |   | (266,038                       | )          | (104,964 | ) |
|                                                                                                 |   |                           |       |   |   |
| CASH AND CASH  EQUIVALENTS AT BEGINNING OF PERIOD                                                    |   | $                              | 1,436,366  |   | $ | 1,252,352 |   |
|                                                                                                 |   |                           |       |   |   |   |   |
| CASH AND CASH  EQUIVALENTS AT END OF PERIOD                                                          |   | $                              | 1,170,328  |   | $ | 1,147,388 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

 

5

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

**NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

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 June 30, 2002 and the results of their operationsfor the three and six months ended June 30, 2002 and June 30, 2001 and theircash flows for the six months ended June 30, 2002 and June 30, 2001.

 

3.          TheCompany prepares its financial information using the same accounting principlesas for its annual financial statements except that no physical inventories weretaken during either of the periods ended June 30, 2002 or 2001.  Cost of sales for such periods wascalculated primarily using standard cost methods.

 

4.          Theresults of operations for the three and six months ended June 30, 2002 are notnecessarily indicative of the results to be expected for the full year.

 

5.          Thedenominator used to determine basic net income per share includes the weightedaverage common shares outstanding during the quarter.  The denominator used to determine diluted net income (loss) pershare includes the shares used in the calculation of basic net income (loss)per share plus the weighted average options outstanding during the period usingthe treasury-stock method.  The effectof stock options was anti-dilutive for all periods presented except for the sixmonth period ended June 30, 2001.

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

 

6

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|                                 |   | **For the  three months ended June 30, 2001** |    |
|--------------------------------------|--------|-----------------------------------------------|---------|
|                                 |   | **Income  (loss)  (Numerator)**               |    | **Shares  (Denominator)** |   | **Per Share  Amount** |   |
|                                 |   |                                          |    |   |   |   |   |
| Net Income  (loss)                   |   | $                                             | (22,818 | ) |   |   |   |   |
|                                 |   |                                          |    |   |   |   |   |
| Weighted-average  shares outstanding |   | —                                        |    | 3,354,870 |   |   |   |
|                                 |   |                                          |    |   |   |   |   |
| Basic net income  (loss) per share   |   | $                                             | (22,818 | ) | 3,354,870 |   | $ | (0.01 | ) |
|                                 |   |                                          |    |   |   |   |   |
| Effect of  dilutive securities       |   | —                                        |    | — |   |   |   |
|                                 |   |                                          |    |   |   |   |   |
| Diluted net  income (loss) per share |   | $                                             | (22,818 | ) | 3,354,870 |   | $ | (0.01 | ) |

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

 
|                                 |   | **For the  six months ended June 30, 2001** |   |
|--------------------------------------|--------|---------------------------------------------|--------|
|                                 |   | **Income  (loss)  (Numerator)**             |   | **Shares  (Denominator)** |   | **Per Share  Amount** |   |
|                                 |   |                                        |   |   |   |   |   |
| Net Income                           |   | $                                           | 12,458 |   |   |   |   |   |
|                                 |   |                                        |   |   |   |   |   |
| Weighted-average  shares outstanding |   | —                                      |   | 3,354,870 |   |   |   |
|                                 |   |                                        |   |   |   |   |   |
| Basic net income  per share          |   | $                                           | 12,458 |   | 3,354,870 |   | $ | 0.00 |   |
|                                 |   |                                        |   |   |   |   |   |
| Effect of  dilutive securities       |   | —                                      |   | 13,815 |   |   |   |
|                                 |   |                                        |   |   |   |   |   |
| Diluted net  income per share        |   | $                                           | 12,458 |   | 3,368,685 |   | $ | 0.00 |   |

 

7

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6.             The Company has adopted theprovisions of SFAS No. 130,” Reporting Comprehensive Income”.  Comprehensive income (loss) includes netincome (loss) and foreign currency translation adjustments.  Comprehensive income (loss) for the threeand six months ended June 30, 2002 and 2001 is as follows:

 
|                             |   | **Three  Months Ended June 30,** |    | **Six Months  Ended June 30,** |   |
|----------------------------------|--------|----------------------------------|---------|--------------------------------|--------|
|                             |   | **2002**                         |    | **2001**                       |   | **2002** |   | **2001** |   |
|                             |   |                             |    |                           |   |   |   |   |   |
| Net Income  (loss)               |   | $                                | (55,655 | )                              | $      | (22,818 | ) | $ | (101,955 | ) | $ | 12,458 |   |
|                             |   |                             |    |                           |   |   |   |   |   |
| Currency  Translation Adjustment |   | 69,374                           |    | 2,658                          |   | 45,611 |   | (37,508 | ) |
|                             |   |                             |    |                           |   |   |   |   |   |
| Total                            |   | $                                | 13,719  |                           | $      | 20,160 |   | $ | (56,344 | ) | $ | 25,050 |   |

 

8

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**Item2.            Management’s Discussion andAnalysis of Financial Condition and Results of Operations.**

 

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

 

**MANAGEMENT’S DISCUSSION AND ANALYSISOF**

**FINANCIAL CONDITION AND RESULTS OFOPERATIONS**

 

## **Financial Condition**

 

As of June 30,2002, the Company had cash and cash equivalents of $1,170,328 and workingcapital of $1,794,727.  Working capitaldecreased $76,527 since December 31, 2001 owing to a decrease in overall salesrevenue.  The Company’s cash flows havehistorically tracked its operational results.

 

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 June 30, 2002 versus Three Months ended June 30, 2001**

 

Sales in thesecond quarter of 2002 decreased 33% from the sales posted in the secondquarter of 2001.  The decrease in saleswas caused by lower volume of products being shipped to our domestic OEMcustomers.

 

The Company’smargins in the second quarter were higher than those attained in 2001 (from 46%in 2001 to 52% in 2002).  This occurreddue to a higher percentage of sales made to independent distributors ratherthan to OEM customers.  It should benoted that pricing is continuing to remain firm on all products.

 

Operating expenseswere lower in the three months ended June 30, 2002 versus the three monthsended June 30, 2001.  Management anticipatessome increase in its operating expenditures during the balance of 2002.

 

No tax benefit wasrecorded for the three months ended June 30, 2002 owing to uncertaintyregarding the Company’s ability to use net operating loss carryforwards in boththe U.S. and U.K.

 

Net loss for thequarter was $55,655 or $.02 per share, representing an increase in the loss of$32,837 from the comparable quarter in 2001.

 

9

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**FinancialResults - Six Months ended June 30, 2002 versus Six Months ended June 30, 2001**

 

Sales in the sixmonths ended June 30, 2002 decreased from the amount posted in the six monthsended in June 30, 2001.  The decrease insales was primarily attributed to decreased shipment of products to our domesticOEM customers.

 

The Company’smargins for the year-to-date period were higher than those achieved in thefirst half of 2001 (from 48% in 2001 to 52% in 2002).  This occurred due to a higher percentage of sales made toindependent distributors rather than to OEM customers.  It should be noted that pricing continued toremain firm on all products.

 

Operating expenseswere lower for the six months ended June 30, 2002 versus the six months endedJune 30, 2001.  Management anticipatessome increase in its operating expenditures during the balance of 2002.

 

No tax benefit wasrecorded for the six months ended June 30, 2002 owing to uncertainty regardingthe Company’s ability to use net operating loss carryforwards in both the U.S.and U.K.

 

Net loss for thesix months was $101,955 or $.03 per share, versus a net income of $12,458 forthe comparable period in 2001.

 

**Factors That May Affect FutureResults**

 

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 which backlog of orders can befulfilled, 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, personell requirements, the Company’s relationships withdistributors and OEM’s, the economic health of such OEM’s, governmentregulation, competition and general economic conditions.

 

10

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**PART II - OTHER INFORMATION**

 

**Item4.            Submission of Matters to aVote of Security Holders**

 

At the Company’sAnnual Meeting of Stockholders held on June 7, 2002, the following members werereelected to the Board of Directors:

 
|                 |   | **Votes for** |   | **Votes  Withheld** |   |
|----------------------|--------|---------------|--------|---------------------|--------|
|                 |   |          |   |                |   |
| Ralph E. Hanson      |   | 3,019,642     |   | 88,300              |   |
| George F. Harrington |   | 3,019,642     |   | 88,300              |   |
| Derrick Ebden        |   | 3,019,642     |   | 88,300              |   |

 

**Item6.****            Exhibits and Reportson Form 8-K**

 

(a)        Exhibits:

 
| 3 (ii) |   | Restated By-laws                                                                                                        |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                    |
| 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)        Reports on Form 8-K:

 

None

 

11

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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:  | August 14, 2002 |                                                                                           | /s/ Ralph E. Hanson |   |
|   |            | Ralph E. Hanson, President and Chief Executive Officer (principal executive officer) |
|   |            |                                                                                           |
| Date:  | August 14, 2002 |                                                                                           | /s/ Ralph E. Hanson |   |
|   |            | Ralph E. Hanson, Chief Financial Officer (principal financial officer)               |
|        |                 |                                                                                                |                     |  |  |  |

 

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