Pace Medical (PMDL) 10QSB 2003 Q1 Quarterly report (small business)

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 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) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.               Yes  ý    No  o

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

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

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

CONDENSED CONSOLIDATED 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:The balance sheet at December 31, 2002 has been derived from the audited financial statements at that date.

See accompanying notes to condensed consolidated financial statements.

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PACE MEDICAL, INC. AND WHOLLY-OWNED SUBSIDIARY
CONDENSED 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 to condensed consolidated financial statements.

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PACE MEDICAL, INC. AND WHOLLY-OWNED SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF 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 to condensed consolidated financial statements.

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PACE MEDICAL, INC. AND WHOLLY-OWNED SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.The accompanying unaudited consolidated financial statements and these notes have been condensed and do not contain all disclosures required by generally accepted accounting principles.  See notes to audited consolidated financial statements contained in the Company’s annual report.

2.In the opinion of the Company, the accompanying unaudited condensed financial statements contain all adjustments, all of which are normal and recurring, necessary to present fairly the financial position of the Company and its wholly-owned subsidiary as of March 31, 2003 and the results of their operations for the three months ended March 31, 2003 and March 31, 2002 and their cash flows for the three months ended March 31, 2003 and March 31, 2002.

3.The Company prepares its financial information using the same accounting principles as for its annual financial statements except that no physical inventories were taken during either of the periods ended March 31, 2003 or 2002.  Cost of sales for such periods was calculated primarily using standard cost methods.

4.The results of operations for the three months ended March 31, 2003 are not necessarily indicative of the results to be expected for the full year.

5.The denominator used to determine both the basic and fully diluted net loss per share includes the weighted average common shares outstanding during the quarter.  The effect of stock options was 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.The Company has adopted the provisions of SFAS No. 130, “Reporting Comprehensive Income”.  Comprehensive income includes net income and foreign currency translation adjustments.  Comprehensive income for the three months ended 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.The Company periodically grants stock options for a fixed number of shares to employees and directors with an exercise price equal to the fair market value of the shares on the date of grant.  The Company accounts for such stock option grants using the intrinsic value method.  Stock options granted to non-employees are accounted for using the fair value method.  There were 380,000 options outstanding and exercisable at December 31, 2002 and March 31, 2003 with a weighted average exercise price of $0.35 per share.  At March 31, 2003, the options outstanding and exercisable had weighted average remaining contractual lives of 2.4 years.

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

Financial Condition

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 at December 31, 2002.

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

Financial Results - 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 posted in the first quarter of 2002.  The increase in sales was due to the Company’s ability to obtain raw materials that had been unavailable in 2002, thereby enabling the Company to ship more products in 2003.  While the Company has had some success in addressing the component shortages in the first quarter of 2003, there can be no assurance that the Company will not encounter component shortages in future quarters.

The Company’s margins in the first quarter were lower than those seen in 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 all products.

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

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

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

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Factors That May Affect Future Results

From time to time, information provided by the Company or statements made by its employees may contain “forward-looking” information which involves risks and uncertainties.  In particular, statements contained in this report which are not historical facts (including but not limited to the Company’s expectations regarding business strategy, new product availability, pricing, anticipated operating results, market share, the rate at which backlog of orders can be fulfilled, operating expenses and anticipated working capital) may be “forward-looking” statements.  The Company’s actual results may differ from those 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 supplier performance, development of markets for new products offered by the Company, personnel requirements, the Company’s relationships 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

The Company’s President and Chief Executive Officer has conducted an evaluation of the effectiveness of disclosure controls and procedures pursuant to Exchange Act Rule 13a-14.  Based on that evaluation, the President and Chief Executive Officer concluded that the disclosure controls and procedures are effective in ensuring that all material information required to be filed in this quarterly report has been made known to him in a timely fashion. There have been no significant changes in internal controls, or in factors that could significantly affect internal controls, subsequent to the date the President and Chief Executive Officer completed his evaluation.

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PART II - OTHER INFORMATION

Item 6.Exhibits and 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)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 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.I have reviewed this quarterly report on Form 10-QSB of Pace Medical, Inc.;

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

3.Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

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

a)designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

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

c)presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a)all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b)any fraud, whether or not material, that involves management or other

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

6.The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard 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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