SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(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, 1998.
------------------
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 (IRS Employer Identification No.)
incorporation or organization)
9420 Santa Anita Avenue
Rancho Cucamonga, California 91730-6117
- ---------------------------------------- ----------------------
(Address of principal executive offices) (Zip Code)
909-987-0550
--------------------------------
(Registrant's telephone number)
Indicate by check mark whether the registrant (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 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, 1998 were
15,864,975.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
PACER TECHNOLOGY & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------
ASSETS
September 30, June 30,
1998 1998
(Unaudited) (Unaudited)
------------ ----------
CURRENT ASSETS:
Cash $ 559,060 277,370
Trade receivables, less allowance for doubtful
accounts of $562,096 and $524,596 respectively
(note 2) 13,627,037 8,591,327
Other receivables 141,029 146,299
Notes receivable - Current (note 2) 162,631 188,642
Inventories (note 3) 10,848,060 10,974,578
Prepaid expenses 1,088,143 810,451
Deferred income taxes 1,146,768 1,146,769
---------- ----------
Total current assets 27,572,728 22,135,436
EQUIPMENT & LEASEHOLD IMPROVEMENTS:
Cost 6,658,366 6,276,866
Accumulated depreciation & amortization (4,594,058) (4,457,083)
---------- ---------
Total Equipment & Leasehold Improvements 2,064,308 1,819,783
Deferred income taxes 124,065 124,065
Cost in excess of net assets of businesses
acquired, net 3,618,962 3,689,516
Other Assets 29,043 30,125
---------- ----------
Total Assets $33,409,106 27,798,925
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current Portion of long-term debt (note 4) 333,333 333,333
Accounts payable 6,144,945 4,135,472
Accrued payroll and related expenses 499,620 494,780
Other accrued expenses 3,905,779 2,667,486
---------- ----------
Total Current Liabilities 10,883,677 7,631,071
Long-term debt, excluding current
installments (note 4) 10,919,556 9,535,889
---------- ----------
Total Liabilities 21,803,233 17,166,960
STOCKHOLDERS' EQUITY:
Common stock, no par value. Authorized 50,000,000
shares; issued and outstanding 15,864,975 shares
at Sep 30, 1998 and June 30, 1998. 8,270,633 8,270,633
Retained Earnings 3,570,364 2,613,453
Notes receivable from directors (note 5) (265,227) (265,257)
Other comprehensive income 30,103 13,136
---------- ----------
Total stockholders' equity 11,605,873 10,631,965
Total Liabilities & Stockholders' Equity $33,409,106 27,798,925
========== ==========
See accompanying notes to consolidated financial statements.
<PAGE>
PACER TECHNOLOGY & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
- ------------------------------------------------------------------------------
Three-Months Ended
September 30
1998 1997
(Unaudited) (Unaudited)
---------- -----------
NET SALES $ 13,657,709 $ 7,375,150
COST OF SALES 8,738,720 4,641,009
---------- ----------
Gross Profit 4,918,989 2,734,141
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 3,043,718 1,799,069
---------- ----------
Operating Income 1,875,271 935,072
OTHER (INCOME) EXPENSE:
Interest expense, net 253,388 123,574
Other (income) expense, net (42,610) (2,522)
---------- ----------
Income before income taxes 1,664,493 814,020
Income tax expense 707,582 363,148
---------- ----------
NET INCOME $ 956,911 $ 450,872
========== ==========
Weighted Average Shares - Basic 15,864,975 15,849,975
Basic Earnings Per Share $ 0.06 $ 0.03
========== ==========
Adjusted Weighted
Average Shares - Diluted 17,624,745 17,611,839
Diluted Earnings Per Share $ 0.05 $ 0.03
========== ==========
See accompanying notes to consolidated financial statements.
<PAGE>
PACER TECHNOLOGY & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------
Three-Months Ended
September 30,
1998 1997
(Unaudited) (Unaudited)
--------- ---------
NET INCOME $ 956,911 450,872
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation 162,564 150,304
Amortization of other assets 70,554 66,558
Increase provision for doubtful
accounts 37,500 26,400
(Increase) in trade accounts
receivable (5,073,209) (1,050,499)
Decrease in other receivables 22,266 14,722
Decrease in notes receivables 26,012 3,987
Decrease (Increase) in inventories 126,518 (369,913)
(Increase) Decrease in prepaid expenses
and other assets (276,611) 55,754
Increase in accounts payable 2,009,473 35,536
Increase (decrease) in accrued payroll
and related expenses 4,840 (23,091)
Increase in accrued expenses and other
liabilities 1,238,293 133,227
---------- ----------
NET CASH USED BY OPERATING ACTIVITIES (694,889) (506,143)
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of California Chemical
Specialties, Inc. - (2,276,114)
Capital expenditures (407,088) (138,120)
---------- -----------
NET CASH USED IN INVESTING ACTIVITIES (407,088) (2,414,234)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on line of credit (2,422,000) (792,000)
Payments on term loan (83,333) (2,389,068)
Borrowings on long-term debt 3,889,000 5,634,000
Repayment of Notes Receivables
from Director - 270,956
---------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,383,667 2,723,888
Net increase (decrease) in cash 281,690 (196,489)
Cash at beginning of year 277,370 294,298
---------- ----------
CASH AT END OF THREE-MONTH PERIOD $ 559,060 97,809
========== ==========
Supplemental Disclosures of cash flow information:
Cash paid during the quarter for interest $ 179,070 107,842
========== ==========
Cash paid during the quarter for income tax $ 195,000 200,000
========== ==========
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 September
30, 1998 and 1997 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, 1998 and the results of
operations 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 September 30, 1998 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, 1998 June 30, 1998
------------------ -------------
Raw materials $ 4,599,765 $ 5,103,266
Work-in-process 562,425 542,489
Finished goods 5,685,870 5,328,823
---------- ----------
Total inventories $10,848,060 $10,974,578
========== ==========
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. On
May 18, 1998 this note was increased to $17,000,000 and is cross-
collateralized by trade accounts receivable, inventory and certain
equipment. The interest is at the bank's prime rate (8.25% at September
30, 1998) plus 0.5%. 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 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), as well as to finance
capital equipment purchases and working capital.
In addition to the above, on May 18, 1998 the Company entered into two
(2) other agreements as follows:
(1) Letter of credit: $5,000,000 from May 1, 1998 to September 30,
1998 and $2,000,000 from October 1, 1998 to April 30, 1999.
<PAGE>
This agreement includes issuance fees of 1/8% for each letter
of credit.
(2) Term loan of $1,000,000 with a maturity date of July 1, 2000
bearing interest at the prime rate (8.25% at September 30, 1998)
plus .5%. This term loan was used to finance leasehold
improvements, capital expenditures, and all other costs related
to closing and relocating Cook Bates facilities to Pacer
locations. This term loan has a maturity date of 3 years from
funding and is payable in monthly installments of principal and
interest.
The agreements require maintenance of certain financial ratios and
contains other restrictive covenants. Pacer Technology was in compliance
with all debt covenants on September 30, 1998.
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) with 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 April 1, 1998,
one Director paid $34,846.59 against the principal balance, plus accrued
interest. The balance of this note, $23,590.91, is secured by 40,369
shares of the Company's common stock. The remaining 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 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 March 29, 1999 and April 19, 1999, 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 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 March 29, 1999 and April 19, 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 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
<PAGE>
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;
(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>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
RESULTS OF OPERATIONS
- ---------------------
Net sales for the quarter ended September 30, 1998 increased by 85% to
$13,657,709 from $7,375,150 for the same quarter last year. Domestic sales
accounted for approximately 92% of total sales for the first quarter of fiscal
year 1999. This performance was primarily attributable to revenues from Cook
Bates, Pacer's most recent acquisition, and higher sales for Super Glue
products. A significant portion of Cook Bates sales during the quarter were
related to seasonal revenues from Halloween and Christmas products. This
business is expected to decrease during the balance of fiscal year 1999.
International sales decreased to $1,154,950, representing 8% of total sales
for the quarter, versus $1,631,415, or 22% of total sales for the comparable
period last year. The reduced demand was driven by the widespread weakness
in foreign currencies and the general slow down in the world economy.
Cost of sales for the quarter ended September 30, 1998 increased $4,097,711, or
88% to $8,738,720 from $4,641,009 during the comparable quarter last year. This
rise was attributed primarily to increased volume related to the Cook Bates
acquisition.
Selling, general and administrative expenses for the first quarter ended
September 30, 1998 were $3,043,718 or 22% of sales. This represents an increase
of $1,244,649 or 69% over the comparable quarter in the prior year. The
increase for the period pertained to sales and marketing expenses, and certain
administrative expenses directly related to Cook Bates.
Selling, general and administrative expenses also include goodwill amortization
related to the acquisition of Super Glue Corporation and California Chemical
Specialties, Inc. Goodwill from the Super Glue acquisition is being amortized
over 14 years. Amortization costs of $33,339 were 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 were $28,451. 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, 1998 was
$253,388 compared to $123,574 for the same period in fiscal year 1998. This
increase was attributed primarily to bank borrowings utilized to finance
working capital and all costs related to the acquisition and subsequent
relocation of Cook Bates facilities to Pacer's locations.
The company's effective tax rate was 43% for the first quarter ended September
30,1998.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES:
- -------------------------------
Net cash provided by all activities during the first three months of fiscal year
1999 was $281,690 compared to cash consumed of $196,489 during the comparable
period in fiscal year 1998.
Cash used by operations during the first three months of fiscal year 1999 was
$694,889 compared to cash used of $506,143 in the prior year. The significant
rise of 112% in net income in the first quarter of fiscal year 1999 was a
positive contributor to this change. The increases in trade accounts
receivable, accounts payable, and accrued expenses were primarily volume
generated from the Cook Bates acquisition. The increase in prepaid expenses
and other assets during fiscal year 1999 was caused primarily by advance
payments to suppliers and prepaid income taxes.
Cash used in investing activities was $407,088 in the first quarter of fiscal
year 1999 compared to $2,414,234 in the prior year. The increase during the
quarter of fiscal year 1998 was due to the acquisition of California Chemical
Specialties, Inc.
Cash provided by the company's financing activities was $1,383,667 during the
first three months of fiscal year 1999 versus $2,723,888 during the same period
in fiscal year 1998. The increase during the first quarter of fiscal year 1998
was attributed primarily to the Company's long term debt borrowings to finance
the acquisition of California Chemical Specialties, Inc.
Pacer anticipates continued utilization of its new credit facility with its
predominant bank to supplement cash requirements for working capital and capital
equipment purchases during the coming year. Management is of the opinion that
such sources of cash will be sufficient to support the needs of the operation
for the ensuing fiscal year.
<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
November 06, 1998 /s/James T. Munn
----------------
James T. Munn
President/Chief Executive Officer
November 06, 1998 /s/Roberto J. Cavazos, Jr.
--------------------------
Roberto J. Cavazos, Jr.
Chief Financial Officer
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<PERIOD-END> SEP-30-1998
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0
<COMMON> 8,271
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<TOTAL-LIABILITY-AND-EQUITY> 11,606
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