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
September 30, 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 September 30, 1997 were
15,849,975.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
PACER TECHNOLOGY & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
September 30, June 30,
1997 1997
(Unaudited) (Unaudited)
------------ -----------
CURRENT ASSETS:
Cash $ 97,809 294,298
Trade receivables, less allowance for doubtful
accounts of $409,570 and $383,170 respectively
(note 2) 5,744,069 4,719,970
Other receivables 184,133 198,855
Notes receivable - Current (note 2) 244,233 248,220
Inventories (note 3) 4,717,410 4,347,497
Prepaid expenses 334,577 390,331
Deferred income taxes 621,804 621,804
---------- ----------
Total current assets 11,944,034 10,820,976
EQUIPMENT & LEASEHOLD IMPROVEMENTS:
Cost 5,484,488 5,370,571
Accumulated depreciation & amortization (4,052,041) (3,925,940)
---------- ----------
Total Equipment & Leasehold Improvements 1,432,447 1,444,631
Deferred income taxes 60,222 60,222
Cost in excess of net assets of businesses
acquired, net 3,901,180 1,690,878
Other Assets 8,600 9,344
----------- ----------
Total Assets $17,346,483 14,026,051
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank borrowings (note 4) $ - 792,000
Current installments of long-term debt - 262,866
Accounts payable 2,402,781 2,367,245
Accrued payroll and related expenses 363,860 386,952
Other accrued expenses 1,366,666 1,233,439
--------- ---------
Total Current Liabilities 4,133,307 5,042,502
Long-term debt, excluding current
installments (note 4) 3,729,000 221,202
--------- ---------
Total Liabilities 7,862,307 5,263,704
STOCKHOLDERS' EQUITY:
Common stock, no par value. Authorized 50,000,000
shares; issued and outstanding 15,849,975 shares
at Sep 30, 1997 and June 30, 1997. 8,260,973 8,260,973
Accumulated earnings 1,523,277 1,072,404
Notes receivable from directors (note 5) (300,074) (571,030)
----------- ----------
Total stockholders' equity 9,484,176 8,762,347
----------- -----------
Total Liabilities & Stockholders' Equity $17,346,483 14,026,051
=========== ==========
Note: The balance sheet at June 30, 1997 has been taken from the audited
financial statements at that date.
See accompanying notes to consolidated financial statements.
<PAGE>
PACER TECHNOLOGY & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three-Months Ended
September 30
1997 1996
(Unaudited) (Unaudited)
------------ -----------
NET SALES $ 7,375,150 6,673,594
COST OF SALES 4,641,009 4,254,283
---------- ---------
Gross Profit 2,734,141 2,419,311
SELLING, GENERAL &
ADMINISTRATIVE EXPENSES 1,799,069 1,717,008
--------- ---------
Operating Income 935,072 702,303
OTHER (INCOME) EXPENSE:
Interest expense, net 123,574 64,307
Other (income) expense, net (2,522) 17,596
-------- --------
Income before income taxes 814,020 620,400
Income tax expense 363,148 278,581
--------- ---------
NET INCOME $ 450,872 341,819
========== =========
Income per common
share and common share
equivalent
Primary:
Net income (rounded to $ 0.01) $ 0.03 0.02
=========== ===========
Weighted average common
shares and common share
equivalents outstanding: 18,126,980 16,972,280
========== ==========
See accompanying notes to consolidated financial statements.
<PAGE>
PACER TECHNOLOGY & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three-Months Ended
September 30,
1997 1996
(Unaudited) (Unaudited)
----------- -----------
NET INCOME (LOSS) $450,872 341,819
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation 150,304 117,375
Amortization of other assets 66,558 47,392
Increase provision for doubtful
accounts 26,400 43,359
(Increase) in trade accounts
receivable (1,050,499) (508,792)
Decrease (increase) in other receivables 14,722 (14,614)
Decrease in notes receivables 3,987 79,594
(Increase) in inventories (369,913) (73,104)
Decrease (increase) in prepaid expenses
and other assets 55,754 (189,393)
Increase in accounts payable 35,536 46,440
(Decrease) increase in accrued payroll
and related expenses (23,091) 40,481
Increase in accrued expenses and other
liabilities 133,227 238,101
--------- ---------
NET CASH (USED) PROVIDED BY OPERATING
ACTIVITIES (506,143) 168,658
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of California Chemical
Specialties, Inc. (2,276,114) -
Capital expenditures (138,120) (224,905)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (2,414,234) (224,905)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on line of credit (792,000) -
Payments on long-term debt (2,389,068) (60,119)
Borrowings on long-term debt 5,634,000 320,000
Notes Receivable from Directors 270,956 -
---------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,723,888 259,881
Net (decrease) increase in cash (196,489) 203,634
Cash at beginning of year 294,298 207,995
---------- ---------
CASH AT END OF THREE-MONTH PERIOD $ 97,809 411,629
=========== =========
See accompanying notes to consolidated financial statements.
<PAGE>
PACER TECHNOLOGY & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. CONSOLIDATED FINANCIAL STATEMENTS:
----------------------------------
The consolidated financial statements for the three-months ended Sep-
tember 30, 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 September 30, 1997 and the results of
operations for the period then ended have been made. All such adjust-
ments 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 September 30, 1997 are not necessarily indicative of the
operating results for the full year.
2. NOTES RECEIVABLE:
----------------
Several customers have converted trade receivable balances to term notes.
The notes are payable in monthly installments of principal and 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:
September 30, 1997 June 30, 1997
------------------ --------------
Finished goods $2,423,815 $1,665,877
Work in process 453,870 249,646
Raw materials 1,839,725 2,431,974
---------- -----------
$4,717,410 $4,347,497
4. LONG-TERM DEBT:
--------------
On June 25, 1997, the Company entered into a promissory note agreement
with its primary bank whereby Pacer can borrow up to $8,000,000 to be
utilized for working capital, capital expenditures and acquisitions.
This promissory note is cross-collateralized by trade accounts receivable,
inventory, and certain equipment, and bears interest at the bank's prime
rate (8.50% at September 30, 1997) plus 0.50%. The note requires monthly
interest payments only and has a maturity date of July 1, 2000.
Prepayments of the principal balance are permitted without penalty.
This new credit facility was utilized initially to retire in July, 1997,
the Company's line of credit balance ($792,000 at June 30, 1997), and two
(2) term loans ($484,068 total at June 30, 1997). On July 15, 1997,
Pacer utilized this credit facility to finance the acquisition of
California Chemical Specialties, Inc.
This credit agreement requires maintenance of certain financial ratios
and compliance with other bank covenants. Pacer was in full compliance
at September 30, 1997.
<PAGE>
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. The
remaining notes are secured by 100,000 shares each of the Company's
common stock as provided in a Security Agreement between the Company and
each Director. 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.
This note was secured by 485,000 shares of the Company's common stock
as provided in a Security Agreement between the Company and the Director.
On August 14, 1997, the director paid $149,988.45 against the principal
balance, plus accrued interest. The balance of this note, $159,199.05,
is secured by 249,724 shares of the Company's common stock.
The remaining principal balances 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.
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 Notes 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 Directors.
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. Principal and all accrued
interest will be due and payable in one lump sum on September 11, 1999;
subject to the provisions regarding prepayment noted below. The note is
secured by 100,000 shares of the Company's common stock as provided in a
Security Agreement between the Company and the Director. 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. This note was paid in
full on August 14, 1997 plus interest accrued as of the date of payment.
The Director may sell the shares securing the $24,000 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;
<PAGE>
(b) second, to the outstanding principal on the Note in the amount of
$0.24 per share sold; 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, 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.
<PAGE>
RESULTS OF OPERATIONS
- ---------------------
Net sales for the quarter ended September 30, 1997 increased by 11% to
$7,375,150 from $6,673,594 for the same quarter last year. Domestic sales
accounted for approximately 78% of total sales for the first quarter of fiscal
year 1998. This performance was impacted by fewer in-store promotions during
this year's first quarter compared to last year's first quarter. Revenues from
the California Chemical acquisition contributed positively to the results for
this period. International sales increased to $1,631,415, representing 22% of
total sales for the quarter, versus $958,090, or 14% of total sales for the
comparable period last year. The Company attributed this increase to strong
sales of its Pro Seal and cosmetic private label nail care products during
the quarter.
Cost of sales for the quarter ended September 30, 1997 increased $386,726, or 9%
to $4,641,009 from $4,254,283 during the comparable quarter last year. This
rise was primarily due to increased volume partially offset by efficiency
improvements resulting from further vertical integration of manufacturing
operations.
Selling, general and administrative expenses for the first quarter ended
September 30, 1997 were $1,799,078 or 24% of sales. This represents an increase
of $82,070 or 5% over the comparable quarter in the prior year. The increase
for the period was attributed to marketing expenses to develop new business,
public relations fees and goodwill amortization related to the acquisition of
California Chemical.
Goodwill related to the Super Glue acquisition is being amortized over 14 years.
Amortization costs of $33,339 was recorded during the first quarter of fiscal
year 1998. In addition, goodwill related to California Chemical Specialties,
Inc., is being amortized over 20 years. Amortization costs for the first
quarter was $23,710. Management believes the Super Glue and California
Chemical product lines will continue to generate profits that will significantly
exceed the goodwill amortization.
Interest expense for the three month period ended September 30, 1997 was
$121,052 compared to $81,903 for the same period in fiscal year 1997. This
increase was attributed primarily to bank borrowings utilized to finance the
acquisition of California Chemicals.
The company's effective tax rate was 45% for the first quarter ended September
30,1997.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES:
- --------------------------------
Net cash used by all activities during the first three months of fiscal year
1998 was $196,489 compared to cash provided of $203,634 during the comparable
period in fiscal year 1997.
Cash consumed by operations during the first three months of fiscal year 1998
was $506,143 compared to cash provided of $168,658 in the prior year. This
change was primarily attributed to increases in accounts receivable and
inventories partially offset by stronger net income. The increases in accounts
receivable and inventories were mainly volume related.
Cash used in investing activities was $2,414,234 in the first quarter of fiscal
year 1998 compared to $224,905 in the prior year. This change was due to the
acquisition of California Chemical Specialties Inc.
Cash provided by the company's financing activities was $2,723,888 during the
first three months of fiscal year 1998 versus $259,881 during the same period in
fiscal year 1997. This change was attributed primarily to the Company's long-
term debt borrowings to finance the acquisition of California Chemical.
Pacer anticipates that cash generated from operations coupled with continued
utilization of its credit facility from its predominant bank will provide the
necessary funding to meet capital equipment and working capital requirements
during the balance of fiscal year 1998.
<PAGE>
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
October 30, 1997 /s/James T. Munn
--------------------------------
James T. Munn
President/Chief Executive Officer
October 30, 1997 /s/Roberto J. Cavazos, Jr.
------------------------------
Roberto J. Cavazos, Jr.
Chief Financial Officer
<PAGE>
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
October 30, 1997 ______________________________
By: James T. Munn
President/Chief Executive Officer
October 30, 1997 ____________________________
By: Roberto J. Cavazos, Jr.
Chief Financial Officer
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