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, 2005

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		(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)

Check whether the 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 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 equity, as of August 12, 2005.

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

Transitional Small Business Disclosure format: Yes o No ý

PACE MEDICAL, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

	JUNE 30, 2005			DECEMBER 31, 2004
	(Unaudited)			(See note below)
ASSETS

Current assets:
Cash and cash equivalents	$	614,746		$	902,198
Accounts receivable	419,741			215,504
Inventories:
Raw materials	280,469			271,812
Work-in-process	114,162			119,876
Finished goods	88,013			79,707
	482,644			471,395
Other current assets	38,088			39,309
Total current assets	1,555,219			1,628,406

Property and equipment, net	11,630			18,812
Other assets	254,025			248,626
TOTAL ASSETS	$	1,820,874		$	1,895,844

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:
Accounts payable	$	240,665		$	241,779
Accrued expenses	64,190			118,396
Total current liabilities	304,855			360,175

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
Accumulated other comprehensive income	253,235			355,011
Accumulated deficit	(1,886,629		)	(1,968,755		)
	1,547,766			1,567,416
Less Treasury Stock, at Cost, 46,000 shares	(31,747		)	(31,747		)
Total Shareholders’ Equity	1,516,019			1,535,669

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	1,820,874		$	1,895,844

Note: The balance sheet at December 31, 2004 has been taken from the audited financial statements at that date.

The accompanying notes are an integral part of these condensed consolidated financial statements.

PACE MEDICAL, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	For the three months ended June 30					For the six months ended June 30
	2005		2004			2005		2004

Net sales	$	441,398	$	228,161		$	915,491	$	609,914

Cost of sales	170,858		193,055			386,448		352,075

	270,540		35,106			529,043		257,839

Operating expenses	249,591		211,269			472,762		401,783

Income (loss) from operations	20,949		(176,163		)	56,281		(143,944		)

Other income	20,635		2,081			25,845		8,292

Net Income (loss)	$	41,584	$	(174,082	)	$	82,126	$	(135,652	)

Net Income (loss) per share:

Basic	$	.01	$	(.05	)	$	.02	$	(.04	)

Diluted	$	01	$	(.05	)	$	.02	$	(.04	)

The accompanying notes are an integral part of these condensed consolidated financial statements.

PACE MEDICAL, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	SIX MONTHS ENDED
	JUNE 30
	2005			2004

CASH FLOWS FROM OPERATING ACTIVITIES:

Net income (loss)	$	82,126		$	(135,652	)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization	7,182			1,024
Changes in assets and liabilities, net:	(376,760		)	(95,440		)

Net cash used in operating activities	(287,452		)	(230,068		)

CASH FLOWS FROM INVESTING ACTIVITIES:

Purchases of property and equipment	—			1,450

CASH FLOWS FROM FINANCING ACTIVITIES	—			—

NET DECREASE IN CASH AND CASH EQUIVALENTS	(287,452		)	(31,518		)

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD	902,198			1,060,791

CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	614,746		$	829,273

The accompanying notes are an integral part of these condensed consolidated financial statements.

PACE MEDICAL, INC. AND 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 subsidiary as of June 30, 2005 and the results of their operations for the three and six months ended June 30, 2005 and June 30, 2004 and their cash flows for the six months ended June 30, 2005 and June 30, 2004.

3. The results of operations for the three and six months ended June 30, 2005 are not necessarily indicative of the results to be expected for the full year.

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

	Three Months Ended June 30,					Six Months Ended June 30,
	2005		2004			2005		2004

Net income (loss)	$	41,584	$	(174,082	)	$	82,126	$	(135,652	)

Weighted-average shares outstanding	3,354,870		3,354,870			3,354,870		3,354,870

Effect of dilutive securities	351,727					351,727

Total Shares	3,706,597		3,354,870			3,706,597		3,354,870

Basic net income (loss) per share	$	.01	$	(.05	)	$	.02	$	(.04	)

Diluted net income (loss) per share	$	.01	$	(.05	)	$	.02	$	(.04	)

For both the three and six month periods ended June 30, 2004, options to purchase 340,000 common shares were outstanding, but not included in the diluted weighted average common share calculation as the effect would have been antidilutive.

5. Comprehensive loss includes net income (loss) and foreign currency translation adjustments. Comprehensive loss for the three and six months ended June 30, 2005 and 2004 was as follows:

	Three Months Ended June 30,						Six Months Ended June 30,
	2005			2004			2005			2004

Net income (loss)	$	41,584		$	(174,082	)	$	82,126		$	(135,652	)

Currency Translation Adjustment	(79,351		)	(26,237		)	(101,776		)	19,206

Total	$	(37,767	)	$	(200,319	)	$	(19,650	)	$	(116,446	)

6. Stock-Based Compensation

The Company applies Statement of Financial Accounting Standards (“SFAS”) No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock Based Compensation Transition and Disclosure, an amendment to FASB Statement No. 123, to its stock compensation arrangements, which requires entities to recognize as expense over the vesting period the fair value of stock-based awards on the date of grant or measurement date. For employee stock-based awards, however, SFAS Nos. 123 and 148 allow entities to continue to apply the intrinsic value method under the provisions of Accounting Principles Board (“APB”) Opinion No. 25 and provide pro forma net earnings disclosures as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company has elected to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosures of SFAS Nos. 123 and 148.

Had compensation expense for awards under the Company’ s Stock Option Plans been determined based on the fair value method set forth in SFAS No. 123, the effect on the Company’s net income (loss) and per share amounts would have been as follows (in thousands, except per share data):

	Three Months Ended June 30,						Six Months Ended June 30,
	2005			2004			2005			2004

Net income (loss), as reported	$	41,584		$	(174,082	)	$	82,126		$	(135,652	)

Less: Compensation expense for option awards determined under fair value based method.	(27,991		)	0			(55,945		)	0

Pro forma net income (loss)	$	13,593		$	(174,082	)	$	26,181		$	(135,652	)

Net income (loss) per share:
As reported—basic and diluted	$	.01		$	(.05	)	$	.02		$	(.04	)
Pro forma—basic and diluted	$	.00		$	(.05	)	$	.01		$	(.04	)

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

General

The second quarter of 2005 represented the second consecutive quarter of positive results for the Company as measured both by revenues and earnings. Revenues for the quarter were nearly double the prior year level, and the Company achieved net income for the quarter of $41,584, compared to a loss of $(174,082) in the corresponding prior year period.

Liquidity and Capital Resources

As of June 30, 2005, the Company had cash and cash equivalents of $614,746 and working capital of $1,250,364. The working capital at June 30, 2005 was approximately $17,867 less than the amount at December 31, 2004, owing primarily to exchange rate variations. The Company’s cash flows have historically tracked its operating results.

Management believes that its working capital should suffice to ensure that its on-going operations are financed adequately. In the short term, however, additional equity and or debt financing may be sought to continue funding research and development, capital equipment, replacement inventories, and to expand the Company’s marketing operations. The obtaining of additional capital through the issuance of equity securities may result in dilution of existing shareholders’ interests.

Results of Operations - Three Months ended June 30, 2005 versus Three Months ended June 30, 2004

Net sales in the second quarter of 2005 increased 93% from the sales in the second quarter of 2004. This was due primarily to improved delivery of key components from our vendors, increased product availability, strong international sales and attending major industry trade shows. The 2004 results were adversely affected by component shortages and the voluntary suspension of production of the Company’s Model 4170 Temporary Pacemaker for a period of approximately 5 months. While the Company has had success in addressing the component shortages, there can be no assurance that the Company will not encounter component shortages in future quarters.

The Company’s margins in the second quarter were substantially higher than those seen in 2004 (61% in 2005 compared to 15% in 2004). This occurred due to the resumption of production of the Model 4170 following the end of the second quarter in 2004.

Operating expenses increased 28% during the three months ended June 30, 2005 versus the three months ended June 30, 2004, primarily due to the hiring of additional management personnel. Management anticipates some increase in its operating expenditures during the balance of 2005.

No tax provision was recorded for the three months ended June 30, 2005 owing to the Company’s ability to use net operating loss carryforwards in the United States.

Net income for the quarter was $41,584 or $.01 per share in contrast to a net loss of $(174,082) or $(.05) per share in the second quarter of 2004.

Results of Operations - Six Months ended June 30, 2005 versus Six Months ended June 30, 2004

Net sales in the six months ended June 30, 2005 increased 50% from the sales in the six months ended June 30, 2004. This was due primarily to improved delivery of key components from our vendors, increased product availability, strong international sales and attending major industry trade shows.

The Company’s margins in the first half of 2005 were higher than those seen in 2004 (58% in 2005 compared to 42% in 2004). This occurred due to a change in product mix. It should be noted that pricing has remained firm on all products.

Operating expenses increased 18% during the six months ended June 30, 2005 compared to the six months ended June 30, 2004, primarily due to the hiring of additional management personnel. Management anticipates some increase in its operating expenditures during the balance of 2005.

No tax provision was recorded for the six months ended June 30, 2005 owing to the Company’s ability to use net operating loss carryforwards in the United States.

Net income for the first half of 2005 was $82,126 or $.02 per share in contrast to a net loss of $(135,652) or $(.04) per share in the first half of 2004.

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 backlogs of orders can be filled, 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, risks associated with the manufacture of existing products, including supplier performance, development of markets for new products and existing 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.

Item 3. Controls and Procedures

As of the end of the period covered by this report, our President and Chief Executive Officer and our Treasurer performed an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the President and Chief Executive Officer and the Treasurer concluded

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

31.1		Certification of the President and Chief Executive Officer 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.

31.2		Certification of the Treasurer 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		Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

		PACE MEDICAL, INC.
		(Registrant)


Date:	August 12, 2005	/s/ Steven E. Hanson
		Steven E. Hanson, President
		and Chief Executive Officer

Exhibit No.		Description

31.1		Certification of President and Chief Executive Officer 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.

31.2		Certification of Treasurer 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		Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Washington, D. C. 20549

PACE MEDICAL, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

PACE MEDICAL, INC. AND SUBSIDIARY

Liquidity and Capital Resources

Exhibit No.

Description