SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
- -- EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED
March 31, 1997.
---------------
OR
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
- -- EXCHANGE ACT OF 1934 For the Transition period from _________
to ____________
Commission file number 0-8864
PACER TECHNOLOGY
_________________________________________________________________
(Exact name of small business issuer as specified in its charter)
California 77-0080305
______________________________________________________________________
(State or other jurisdiction
of incorporation or organization) (IRS Employer Identification No.)
9420 Santa Anita Avenue
Rancho Cucamonga, California 91730-6117
- ----------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
909-987-0550
- ----------------------------------------------------------------------
(Issuer's telephone number)
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 XXX NO
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common stock, no par value, shares outstanding as of March 31, 1997 were
15,770,975.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
PACER TECHNOLOGY & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
March 31, June 30,
1997 1996
(Unaudited) (Unaudited)
CURRENT ASSETS: ----------- -----------
Cash $ 262,535 207,995
Trade receivables, less allowance for doubtful
accounts of $500,832 and $388,525 respectively
(note 2) 5,022,847 4,515,127
Other receivables 208,096 188,737
Notes receivable - Current (note 2) 118,636 218,165
Inventories (note 3) 4,433,612 3,954,045
Prepaid expenses 123,766 340,748
Deferred income taxes 534,369 534,369
---------- ----------
Total current assets 10,703,861 9,959,186
EQUIPMENT & LEASEHOLD IMPROVEMENTS:
Cost 5,474,649 5,048,375
Accumulated depreciation & amortization (3,920,758) (3,652,989)
---------- ----------
Total Equipment & Leasehold Improvements 1,553,891 1,395,386
Deferred income taxes 36,110 36,110
Cost in excess of net assets of businesses
acquired, net 1,732,981 1,859,290
Other Assets 14,644 30,544
---------- ----------
Total Assets $14,041,487 13,280,516
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank borrowings (note 4) $ 1,209,000 1,675,000
Current installments of long-term debt 225,672 225,672
Accounts payable 2,190,611 2,382,718
Accrued payroll and related expenses 503,555 298,006
Other accrued expenses 1,254,378 862,779
---------- ----------
Total Current Liabilities 5,383,216 5,444,175
Long-term debt, excluding current
installments (note 4) 322,168 505,692
---------- ----------
Total Liabilities 5,705,384 5,949,867
STOCKHOLDERS' EQUITY:
Common stock, no par value. Authorized 50,000,000
shares; issued and outstanding 15,770,975 shares
at Mar 31, 1997 and 15,213,475 at
June 30, 1996. 8,216,833 8,105,115
Accumulated deficit 690,300 (144,998)
Notes receivable from directors (note 5) (571,030) (629,468)
Total stockholders' equity 8,336,103 7,330,649
---------- ----------
Total Liabilities & Stockholders' Equity $14,041,487 13,280,516
========== ==========
Note:The balance sheet at June 30, 1996 has been taken from the audited
financial statements at that date.
See accompanying notes to consolidated financial statements.
PACER TECHNOLOGY & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three-Months Ended Nine-Months Ended
March 31, March 31,
1997 1996 1997 1996
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
---------- ----------- ---------- ----------
NET SALES $ 6,606,612 5,490,031 19,179,074 16,472,133
COST OF SALES 4,279,165 3,679,908 12,342,138 11,113,648
---------- ----------- ---------- ----------
Gross Profit 2,327,447 1,810,124 6,836,936 5,358,485
SELLING, GENERAL &
ADMINISTRATIVE EXPENSES 1,661,735 1,361,315 4,946,000 4,206,602
---------- ---------- ---------- ----------
Operating Income 665,712 448,809 1,890,936 1,151,884
OTHER (INCOME) EXPENSE:
Interest expense, net 73,595 62,470 157,917 266,098
Other (income) expense, net (9,278) 7,111 (60,902) 22,699
-------- ---------- ---------- ----------
Income before income taxes 601,395 379,228 1,793,921 863,087
Income tax expense 248,831 97,600 958,622 227,500
--------- ---------- ---------- ----------
NET INCOME $ 352,564 281,628 835,299 635,587
========= ========== ========== ==========
Income per common
share and common share
equivalent
Primary:
Net income
(rounded to $ 0.01) $ 0.02 0.02 0.05 0.04
========= ========== ========== ==========
Weighted average
common shares
and common share
equivalents
outstanding: 18,135,780 16,037,002 18,135,780 16,037,002
========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
PACER TECHNOLOGY & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine-Months Ended
March 31,
1997 1996
(Unaudited) (Unaudited)
---------- ---------
NET INCOME (LOSS) $835,298 635,587
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation 356,226 349,588
Amortization of other assets 142,209 142,209
(Gain) loss on sale or disposition
of property and equipment (76,000) 1,360
Increase provision for doubtful
accounts 112,307 23,714
(Increase) in trade accounts
receivable (620,027) (156,815)
(Increase) in other receivables (19,359) (79,165)
Decrease in notes receivables 99,529 113,118
(Increase) decrease in inventories (479,567) 1,688,275
(Increase) decrease in prepaid expenses
and other assets 216,982 (119,750)
Increase (decrease) in accounts payable (192,108) 25,089
Increase in accrued payroll and related
expenses 205,549 90,471
Increase (decrease) in accrued expenses
and other liabilities 391,601 ( 35,349)
NET CASH PROVIDED BY OPERATING ---------- ----------
ACTIVITIES 972,640 2,678,332
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment 76,000 (50)
Capital expenditures (514,732) (131,048)
---------- ----------
NET CASH USED IN INVESTING ACTIVITIES (438,732) (131,098)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt (183,524) (170,202)
Decrease in notes payable to bank (466,000) (2,533,000)
Repayment of Notes Receivables
from Director 58,438 -
Issuance of common stock 111,718 117,952
--------- ----------
NET CASH USED BY FINANCING ACTIVITIES (479,368) (2,585,250)
Net increase (decrease) in cash 54,540 (38,016)
Cash at beginning of year 207,995 119,233
--------- -----------
CASH AT END OF NINE-MONTH PERIOD $ 262,535 81,217
========= ===========
See accompanying notes to consolidated financial statements.
PACER TECHNOLOGY & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. CONSOLIDATED FINANCIAL STATEMENTS:
The consolidated financial statements for the nine-months ended March 31,
1997 and 1996 have been prepared by the Company without audit. In the
opinion of Management, adjustments necessary to present fairly the
consolidated financial position at March 31, 1997 and the results of
operation for the period then ended have been made. All such adjustments
are of a normal recurring nature.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. It is suggested
that these consolidated financial statements be read in conjunction with
the consolidated financial statements and notes thereto included in the
Company's Annual Report to shareholders. The results of operations for
the period ended March 31, 1997 are not necessarily indicative of the
operating results for the full year.
2. NOTES RECEIVABLE:
During fiscal year 1996, a customer converted a trade receivable balance
to a term note. The note is payable in monthly installments of principal
and interest and matures on June 15, 1997. The note bears interest at a
rate higher than the rate of interest charged to Pacer for its borrowing
of funds from its predominant bank.
3. INVENTORIES:
Inventories consisted of the following:
March 31, 1997 June 30, 1996
-------------- -------------
Finished goods $1,862,117 1,724,468
Work in process 354,689 307,763
Raw materials 2,216,806 1,921,814
-------------- -------------
$4,433,612 3,954,045
============== =============
4. NOTES PAYABLE TO BANK:
Pacer has a line of credit which is cross-collateralized by trade accounts
receivable, inventory, and certain equipment. The current line of credit
bears interest at the bank's prime rate (8.50% at March 31, 1997) plus
.50% and is payable on demand. Total borrowing on the line of credit
amounted to $1,209,000 at March 31, 1997.
The line of credit agreement requires maintenance of certain financial
ratios and contains other restrictive covenants. Pacer was in compliance
with all debt covenants at March 31, 1997.
Pacer also entered into a promissory note agreement whereby the company
can borrow up to an aggregate of $250,000. The promissory note bears
interest at prime plus 1.5% and is payable in monthly installments of
principal and interest. The principal outstanding on this note was
$145,834 at March
31, 1997.
Additionally, the company has a term loan agreement providing for maximum
borrowings of $1,000,000 bearing interest at a rate of prime plus 2%.
Total principal outstanding on this credit facility was $402,006 as of
March 31, 1997. All borrowings are secured by certain assets of Pacer.
5. NOTES RECEIVABLE FROM DIRECTORS:
On September 27, 1994, three Directors exercised options to purchase
100,000 shares each (300,000 total) of Pacer Technology common stock. Each
Director signed a secured promissory note for the principal sum of
$58,437.50 ($175,312.50 total) plus simple interest of 7.8% per annum
payable to Pacer Technology. One of these notes was paid in full on
January 13, 1997, plus interest accrued as of the date of payment. On
October 19, 1994, a Director exercised options to purchase 485,000 shares
of Pacer Technology common stock. This director signed a secured
promissory note for the principal sum of $309,187.50, plus simple interest
of 7.89% per annum payable to Pacer Technology. Principal and all accrued
interest will be due and payable in one lump sum on September 27, 1998 and
October 19, 1998, respectively; subject to the provisions regarding
prepayment noted below.
The remaining Notes are secured by 100,000 and 485,000 shares,
respectively, of the Company's common stock as provided in a Security
Agreement between the Company and each Director.
Each Director may sell the shares securing the Note in whole or in part,
without penalty, provided that the proceeds of sale are applied to pre-pay
the Note. The amount of each prepayment shall be applied as follows:
(a) first, to interest accrued on the Note with respect to the shares
sold, to the date of sale;
(b) second, to the outstanding principal on the Note in the amount of
$0.584375 and $0.6375 per share sold, respectively; and
(c) third, to the seller or his designee.
If all principal and accrued interest on the Note is not paid in full on
or before September 27, 1998 and October 19, 1998, respectively, the
Company shall be entitled to exercise any and all remedies available to it
under the California Commercial Code, with full recourse to the personal
assets of the Director.
On September 11, 1995, one Director exercised options to purchase 100,000
shares of Pacer Technology common stock. The Director signed a secured
promissory note for the principal sum of $24,000 plus simple interest of
7.015% per annum payable to Pacer Technology. On November 20, 1995, a
Director exercised warrants to purchase 381,000 shares of Pacer Technology
common stock. This director signed a secured promissory note for the
principal sum of $120,967.50, plus simple interest of 6.6939% per annum
payable to Pacer Technology. Principal and all accrued interest will be
due and payable in one lump sum on September 11, 1999 and November 20,
1999, respectively; subject to the provisions regarding prepayment noted
below.
Each Note is secured by 100,000 and 381,000 shares, respectively, of the
Company's common stock as provided in a Security Agreement between the
Company and each Director.
Each Director may sell the shares securing the Note in whole or in part,
without penalty, provided that the proceeds of sale are applied to pre-pay
the Note. The amount of each prepayment shall be applied as follows:
(a) first, to interest accrued on the Note with respect to the shares
sold, to the date of sale;
(b) second, to the outstanding principal on the Note in the amount of
$0.24 and $0.3175 per share sold, respectively; and
(c) third, to the seller or his designee.
If all principal and accrued interest on the Note is not paid in full on
or before September 11, 1999 and November 20, 1999, respectively, the
Company shall be entitled to exercise any and all remedies available to it
under the California Commercial Code, with full recourse to the personal
assets of the Director.
RESULTS OF OPERATIONS
- ---------------------
Net sales for the third quarter ended March 31, 1997 increased by 20% to
$6,606,612 from $5,490,031 for the same quarter last year. Net sales for the
nine month period ended March 31, 1997 increased by 16% to $19,179,074 from
$16,472,133 during the same period in the prior year. Domestic sales increased
by 23% for the third quarter to represent 81% of total revenue in fiscal year
1997. For the nine month period, domestic sales improved by 15% to represent
83% of Pacer's total revenues. These increases were driven primarily by Pacer's
Super Glue, consumer, and cosmetic private label product sales. Sales to
customers outside the United States increased by 23% for the third quarter to
represent 19% of total revenues in fiscal year 1997. For the nine month period,
international sales increased by 22% and represented 17% of the Company's total
revenues. The international increases were attributed to increased demand for
the Company's private label consumer and cosmetic products.
Cost of sales for the quarter was $4,279,165, or 65% of sales. This represents
an increase of $599,257, or 16% over the comparable period in fiscal year 1996.
This rise was primarily due to increased volume partially offset by demand for
a more favorable product mix. For the nine month period ended March 31, 1997,
cost of sales was $12,342,138, or 64% of sales. This increase of $1,228,490, or
11% over the same period in the prior year was attributed to higher volume,
partially offset by demand for a more favorable product mix.
Selling, general & administrative expenses for the quarter ended March 31, 1997
were $1,661,735 or 25% of sales. This represented an increase of $300,420
or 22% over the comparable quarter in the prior year. For the nine month period
ended March 31, 1997, Selling, General and Administrative expenses were
$4,946,000, or 26% of sales. This resulted in an increase of $739,398, or 18%
over the same period in the prior year. The increase for both periods was
attributed to volume related marketing expenses, promotion, advertising costs,
and investor relations fees. Additional accounting fees were incurred
pertaining to a transfer pricing study and for a proposed acquisition that did
not materialize.
Goodwill related to the Super Glue acquisition is being amortized over 14 years.
Amortization costs of $33,339 and $100,016 were recorded during the third
quarter and nine month period ended March 31, 1997 respectively. Management
believes the Super Glue product line will continue to generate profits that will
significantly exceed the goodwill amortization.
Interest expense for the quarter ended March 31, 1997 was $73,595 compared to
$62,470 for the same period in fiscal year 1996. For the nine month period
ended March 31,1997, interest expense was $157,917 versus $266,098 during the
same period in the prior year. This expense reduction was attributed primarily
to lower utilization of the Company's bank line of credit.
For the nine month period ended March 31, 1997, other income was $60,902,
primarily due to the one time gain from the disposition of surplus equipment
recorded during the second quarter of fiscal year 1997.
Pacer Technology is currently undergoing a tax audit by the Internal Revenue
Service for fiscal years 1994 and 1995. While the results of this audit have
not been concluded, the company has recorded a one time income tax charge of
$160,000 for a potential liability pertaining to transfer pricing during fiscal
years 1994 and 1995 between the U.S. parent company and its wholly owned
subsidiary Pacer Tech Ltd. Excluding this one time charge, the company's
effective tax rate was 41% and 45%, respectively for the third quarter and nine
month period ended March 31,1997.
LIQUIDITY AND CAPITAL RESOURCES:
- -------------------------------
Net cash provided by all activities during the first nine months of fiscal year
1997 was $54,540 compared to cash consumed of $38,016 during the comparable
period in fiscal year 1996.
Cash provided by operating activities during the first nine months of fiscal
year 1997 was $972,640 versus $2,678,332 during the comparable period in fiscal
year 1996. This change was mainly attributed to an inventory reduction plan
implemented in June 1995 that ultimately resulted in the most significant
generator of operating cash flow during the first nine months of fiscal year
1996. Cash flow from operations during the first nine months of fiscal year
1997 was positively impacted by an improvement in net income, an increase in
accrued liabilities and a decrease in prepaid expenses compared to the same
period in the prior year. The increase in accrued liabilities was attributed
primarily to income taxes payable for a potential liability pertaining to the
I.R.S. audit for fiscal years 1994 and 1995, and timing related expenses
pertaining to payroll and fringe benefits. The decrease in prepaid expenses was
attributed to a reduction in prepayments to suppliers. In addition to a
decrease in accounts payable, increases in inventory and accounts receivable
negatively impacted cash flow for the nine month period ended March 31,1997.
The increases in inventory and accounts receivable were volume related, while
the decrease in accounts payable was mainly attributed to the timing of
purchases for certain raw materials.
Cash used in investing activities during the nine month period ended March 31,
1997 was $438,732 compared to $131,098 during the comparable period in the prior
year. This change was due to increased purchases for capital equipment to
improve the company's manufacturing efficiency and productivity.
Cash consumed by the company's financing activities was $479,368 during the
first nine months of fiscal year 1997 versus $2,585,250 during the same period
in fiscal year 1996. This change was attributed primarily to the significant
reduction of bank borrowings during fiscal year 1996 from cash generated by the
Company's inventory reduction program.
The Company anticipates that cash generated from operations coupled with
continued utilization of its line of credit will provide the necessary funding
to meet its capital equipment needs and working capital requirements during the
balance of fiscal year 1997.
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.
PACER TECHNOLOGY
May 8, 1997 /s/James T. Munn
---------------------------------
James T. Munn
President/Chief Executive Officer
May 8, 1997 /s/Roberto J. Cavazos, Jr.
---------------------------------
Roberto J. Cavazos, Jr.
Chief Financial Officer
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.
PACER TECHNOLOGY
May 8, 1997 _____________________________________
By: James T. Munn
President/Chief Executive Officer
May 8, 1997 _____________________________________
By: Roberto J. Cavazos, Jr.
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 263
<SECURITIES> 0
<RECEIVABLES> 5023
<ALLOWANCES> 501
<INVENTORY> 4434
<CURRENT-ASSETS> 10704
<PP&E> 5475
<DEPRECIATION> 3921
<TOTAL-ASSETS> 14041
<CURRENT-LIABILITIES> 5383
<BONDS> 0
0
0
<COMMON> 8217
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 14041
<SALES> 19179
<TOTAL-REVENUES> 19240
<CGS> 12342
<TOTAL-COSTS> 17288
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 158
<INCOME-PRETAX> 1794
<INCOME-TAX> 959
<INCOME-CONTINUING> 835
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 835
<EPS-PRIMARY> .05
<EPS-DILUTED> .05
</TABLE>
