**FORM 10-QSB**

 

**Securities and Exchange Commission**

**Washington, D. C. 20549**

 

**(Mark One)**
| **ý**                                                                                                                                                                                                                                                                             | **QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934**        |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------|
| ** **                                                                                                                                                                                                                                                                             |
| **For the  quarterly period ended September 30, 2004**                                                                                                                                                                                                                                 |
| ** **                                                                                                                                                                                                                                                                             |
| **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 asspecified in its charter)

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

 

Check whetherthe issuer (1) filed all reports required to be filed by Section 13 or 15 (d)of the Exchange Act during the past 12 months (or for such shorter period thatthe registrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.

 

Yes  ý       No  o

 

Indicate the number of shares outstanding ofeach of the issuer’s classes of common equity, as of November 15, 2004.

 

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

 

Transitional Small Business Disclosure format:  Yes  o    No  ý

 

 

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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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**PACEMEDICAL, INC. AND SUBSIDIARYCONDENSED CONSOLIDATED BALANCESHEETS**

 
| ** **                                      | ** ** | **SEPTEMBER 30, 2004** | ** ** | **DECEMBER 31, 2003** | ** ** |
|-------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                      | ** ** | **(Unaudited)**        | ** ** | **(See note below)**  | ** ** |
| ASSETS                                          |       |                   |       |                  |       |
|                                            |       |                   |       |                  |       |
| Current assets:                                 |       |                   |       |                  |       |
| Cash and cash equivalents                       |       | $                      | 721,357    |                  | $          | 1,060,791 |   |
| Accounts receivable                             |       | 376,494                |       | 264,818               |       |
| Inventories:                                    |       |                   |       |                  |       |
| Raw materials                                   |       | 246,667                |       | 257,019               |       |
| Work-in-process                                 |       | 108,564                |       | 179,766               |       |
| Finished goods                                  |       | 87,867                 |       | 112,804               |       |
|                                            |       | 443,098                |       | 549,589               |       |
| Other current assets                            |       | 25,533                 |       | 41,651                |       |
| Total current assets                            |       | 1,566,482              |       | 1,916,849             |       |
| Plant and equipment, net                        |       | 20,974                 |       | 21,127                |       |
| Other assets                                    |       | 248,625                |       | 249,097               |       |
| TOTAL ASSETS                                    |       | $                      | 1,836,081  |                  | $          | 2,187,073 |   |
|                                            |       |                   |       |                  |       |
| LIABILITIES AND SHAREHOLDERS’ EQUITY       |       |                   |       |                  |       |
|                                            |       |                   |       |                  |       |
| Current liabilities:                            |       |                   |       |                  |       |
| Accounts payable                                |       | $                      | 121,977    |                  | $          | 326,419 |   |
| Accrued expenses                                |       | 138,659                |       | 125,852               |       |
| Total current liabilities                       |       | 260,636                |       | 452,271               |       |
|                                            |       |                   |       |                  |       |
| Shareholders’ equity:                      |       |                   |       |                  |       |
| Common stock                                    |       | 34,009                 |       | 34,009                |       |
| Additional paid-in capital                      |       | 3,147,151              |       | 3,147,151             |       |
| Cumulative translation adjustment               |       | 249,313                |       | 244,512               |       |
| Accumulated deficit                             |       | (1,823,281             | )          | (1,659,123            | )          |
|                                            |       | 1,607,192              |       | 1,766,549             |       |
|                                            |       |                   |       |                  |       |
| Less Treasury Stock, at Cost                    |       | (31,747                | )          | (31,747               | )          |
| Total Shareholders’ Equity                 |       | 1,575,445              |       | 1,734,802             |       |
|                                            |       |                   |       |                  |       |
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY |       | $                      | 1,836,081  |                  | $          | 2,187,073 |   |

 

Note:          The balance sheet atDecember 31, 2003 has been taken from the audited financial statements at thatdate.

 

See accompanying notes to condensedconsolidated financial statements.

 

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**PACE MEDICAL, INC. AND SUBSIDIARYCONDENSED CONSOLIDATED STATEMENTSOF OPERATIONS**(Unaudited)

 
| ** **                           | ** ** | **For the Three Months  Ended September 30** | ** ** | **For the Nine Months  Ended September 30** | ** ** |
|--------------------------------------|------------|----------------------------------------------|------------|---------------------------------------------|------------|
| ** **                           | ** ** | **2004**                                     | ** ** | **2003**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                 |       |                                         |       |                                        |       |   |   |   |   |
| Net Sales                            |       | $                                            | 398,577    |                                        | $          | 316,125 |   | $ | 1,008,491 |   | $ | 987,473 |   |
|                                 |       |                                         |       |                                        |       |   |   |   |   |
| Cost of sales                        |       | 237,691                                      |       | 161,378                                     |       | 589,766 |   | 545,776 |   |
|                                 |       |                                         |       |                                        |       |   |   |   |   |
|                                 |       | 160,886                                      |       | 154,747                                     |       | 418,725 |   | 441,697 |   |
|                                 |       |                                         |       |                                        |       |   |   |   |   |
| Operating expenses                   |       | 196,345                                      |       | 194,388                                     |       | 598,128 |   | 598,255 |   |
|                                 |       |                                         |       |                                        |       |   |   |   |   |
| Loss from operations                 |       | (35,459                                      | )          | (39,641                                     | )          | (179,403 | ) | (156,558 | ) |
|                                 |       |                                         |       |                                        |       |   |   |   |   |
| Other income                         |       | 6,953                                        |       | 4,896                                       |       | 15,245 |   | 16,968 |   |
|                                 |       |                                         |       |                                        |       |   |   |   |   |
| Net loss                             |       | $                                            | (28,506    | )                                           | $          | (34,745 | ) | $ | (164,158 | ) | $ | (139,590 | ) |
|                                 |       |                                         |       |                                        |       |   |   |   |   |
| Basic and Diluted Net loss per share |       | $                                            | (.01       | )                                           | $          | (.01 | ) | $ | (.05 | ) | $ | (.04 | ) |

 

See accompanying notes to condensedconsolidated financial statements.

 

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**PACE MEDICAL, INC. AND SUBSIDIARYCONDENSED CONSOLIDATED STATEMENTSOF CASH FLOWS(Unaudited)**

 
| ** **                                                                                 | ** ** | **NINE MONTHS ENDED  SEPTEMBER 30** | ** ** |
|--------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                                 | ** ** | **2004**                            | ** ** | **2003** | ** ** |
|                                                                                       |       |                                |       |   |   |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                      |       |                                |       |   |   |
| Net loss                                                                                   |       | $                                   | (164,158   | ) | $ | (139,590 | ) |
| Adjustments to reconcile net loss to net cash  provided by (used in) operating activities: |       |                                |       |   |   |
| Depreciation and amortization                                                              |       | 1,588                               |       | 11,050 |   |
| Change in assets and liabilities, net:                                                     |       | (175,429                            | )          | (129,177 | )) |
|                                                                                       |       |                                |       |   |   |
| Net cash used in operating activities                                                      |       | (337,999                            | )          | (257,717 | ) |
|                                                                                       |       |                                |       |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                                      |       |                                |       |   |   |
|                                                                                       |       |                                |       |   |   |
| Purchases of property and equipment                                                        |       | (1,435                              | )          |   |   |
|                                                                                       |       |                                |       |   |   |
| NET DECREASE IN CASH AND CASH EQUIVALENTS                                                  |       | (339,434                            | )          | (257,717 | ) |
|                                                                                       |       |                                |       |   |   |
| CASH AND CASH EQUIVALENTS AT BEGINNING OF  PERIOD                                          |       | 1,060,791                           |       | 1,115,690 |   |
|                                                                                       |       |                                |       |   |   |
| CASH AND CASH EQUIVALENTS AT END OF PERIOD                                                 |       | $                                   | 721,357    |   | $ | 857,973 |   |

 

See accompanying notes to condensedconsolidated financial statements.

 

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**PACE MEDICAL, INC. AND SUBSIDIARYNOTES 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.  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 itssubsidiary as of September 30, 2004 and the results of their operationsfor the three and nine months ended September 30, 2004 and September 30, 2003and their cash flows for the nine months ended September 30, 2004 and September30, 2003.

 

3.             Theresults of operations for the three and nine months ended September 30, 2004are not necessarily indicative of the results to be expected for the full year.

 

4.             Basicnet income (loss) per share is computed by dividing net income (loss) by theweighted average number of common shares outstanding during the period.  Diluted net income (loss) per share iscomputed by dividing net income (loss) by the weighted average number of commonand dilutive common equivalent shares outstanding during the period, exceptwhere the effect would be anti-dilutive. The number of dilutive common equivalent shares outstanding during theperiod has been determined in accordance with the treasury-stock method.  Common equivalent shares consist of commonstock issuable upon the exercise of outstanding options.

 

The number of basic and dilutedweighted average common shares outstanding were 3,354,870 for all periodspresented.  For both the three and ninemonths ended September 30, 2004 and 2003, options to purchase 360,000 and380,000 common shares, respectively, were outstanding but not included in thediluted weighted average common share calculation as the effect would have beenantidilutive.

 

5.                 Comprehensiveloss includes net loss and foreign currency translation adjustments.  Comprehensive loss for the three and ninemonths ended September 30, 2004 and 2003 was as follows:

 
| ** **                      | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                      | ** ** | **2004**                              | ** ** | **2003**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
|                            |       |                                  |       |                                 |       |   |   |   |   |
| Net Loss                        |       | $                                     | (28,506    | )                                    | $          | (34,745 | ) | $ | (164,158 | ) | $ | (139,590 | ) |
|                            |       |                                  |       |                                 |       |   |   |   |   |
| Currency Translation Adjustment |       | (14,405                               | )          | 13,482                               |       | 4,801 |   | 38,444 |   |
|                            |       |                                  |       |                                 |       |   |   |   |   |
| Total                           |       | $                                     | (42,911    | )                                    | $          | (21,263 | ) | $ | (159,357 | ) | $ | (101,146 | ) |

 

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**Item 2.****                    Management’sDiscussion and Analysis or Plan of Operation.**

 

**PACE MEDICAL, INC. AND SUBSIDIARY**

 

**MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

**FinancialCondition**

 

As of September 30, 2004, the Company hadcash and cash equivalents of $721,357 and working capital of $1,305,846.Working capital decreased $185,732 since December 31, 2003 owing to the use ofcash in operations.  The Company’s cashflows have historically tracked its operational results.

 

**Financial Results - Three Months endedSeptember 30, 2004 versus Three Months ended September 30, 2003**

 

Sales in the third quarter of 2004 increased26% from the sales posted in the third quarter of 2003.  The increase in sales was due primarily toincreases in volume of products shipped to international customers.  While the Company has had some success inaddressing the component shortages, there can be no assurance that the Companywill not encounter component shortages in future quarters.

 

The Company’s margins in the third quarterwere lower than those attained in 2003 (from 49% in 2003 to 40% in 2004). Thisoccurred due to a change in product mix. It should be noted that pricing has remained firm on all products.

 

Operating expenses were virtually unchangedin the three months ended September 30, 2004, versus the three months endedSeptember 30, 2003.  Managementanticipates some increase in its operating expenditures during the balance of2004.

 

No tax benefit was recorded for the threemonths ended September 30, 2004 owing to uncertainty regarding the Company’sability to use net operating loss carryforwards in both the U.S. and U.K.

 

Net loss for the quarter was $28,506, or$0.01 per share, verses a net loss of $34,745, or $.01 per share, for thecomparable quarter in 2003.

 

**FinancialResults - Nine Months ended September 30, 2004 versus Nine Months endedSeptember 30, 2003**

 

Sales in the nine months ended September 30,2004 increased 2% from the amount posted in the nine months ended in September30, 2003.  The increase in sales wasprimarily due to the higher volumes of products shipped in the third quarteroffset by lower volumes in the first two quarters.

 

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The Company’s margins for the year-to-dateperiod were lower than those achieved in the first half of 2003 (from 45% in2003 to 42% in 2004). This occurred due to a change in product mix.  It should be noted that pricing has remainedfirm on all products.

 

Operating expenses were virtually unchangedfor the nine months ended September 30, 2004, versus the nine months endedSeptember 30, 2003.  Managementanticipates some increase in its operating expenditures during the balance of2004.

 

No tax benefit was recorded for the ninemonths ended September 30, 2004 owing to uncertainty regarding the Company’sability to use net operating loss carryforwards in both the U.S. and U.K.

 

Net loss for the first nine months of 2004was $164,158 or $0.05 per share, versus a net loss of $139,590, or $0.04 pershare, for the comparable period in 2003.

 

**FactorsThat May Affect Future Results**

 

From time to time, informationprovided by the Company or statements made by its employees may contain “forward-looking”information which involves risks and uncertainties.  In particular, statements contained in thisreport which are not historical facts (including but not limited to the Company’sexpectations regarding business strategy, new product availability, pricing,anticipated operating results, market share, the rate which backlog of orders can be fulfilled, operating expensesand anticipated 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 not limited to,risks associated with the introduction of new products including supplierperformance, risks associated with the manufacture of existing productsincluding supplier performance, development of markets for new and existingproducts offered by the Company, personnel requirements, the Company’srelationships with distributors and OEM’s, the economic health of such OEM’s,government regulation, competition and general economic conditions.

 

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**Item 3.  Controls and Procedures**

 

As of the dateof this report, our President and Chief Executive Officer performed an evaluationof the effectiveness of the design and operation of the Company’s disclosurecontrols and procedures pursuant to Exchange Act Rule 13a-14.  Based upon that evaluation, the President andChief Executive Officer concluded that the Company’s disclosure controls andprocedures are effective in ensuring the reporting of material informationrequired to be included in the Company’s periodic filings with the Securitiesand Exchange Commission.  There were nosignificant changes in the Company’s internal controls over financial reportingor in other factors that could significantly affect these internal controlsover financial reporting subsequent to the date of the most recent evaluation.

 

**PART II - OTHER INFORMATION**

 
| **Item 6.** | ** ** | **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 |

 

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**SIGNATURES**

 

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

 
|   |              | PACE MEDICAL, INC.                                                                     |                 |
|--------|-------------------|----------------------------------------------------------------------------------------|----------------------|
|   |              | (Registrant)                                                                           |                 |
|   |              |                                                                                   |
|   |              |                                                                                   |
| Date:  | November 15, 2004 |                                                                                   | /s/ Ralph E.  Hanson |
|   |              | Ralph E. Hanson, President  and Chief Executive Officer  (principal executive officer) |
|   |              |                                                                                   |
|   |              |                                                                                   |
| Date:  | November 15, 2004 |                                                                                   | /s/ Ralph E.  Hanson |
|   |              | Ralph E. Hanson, Chief  Financial Officer  (principal financial officer)               |

 

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PACE MEDICAL, INC.FORM 10-QSBSeptember 30, 2004EXHIBIT 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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