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, 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
--------------------------------
(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, 1998 were
15,849,975.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
PACER TECHNOLOGY & SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
- ----------------------------------------------------------------------------
ASSETS
March 31,
1998 June 30,
(Unaudited) 1997
----------- ------------
CURRENT ASSETS:
Cash $ 162,513 294,298
Trade receivables, less allowance for doubtful
accounts of $482,588 and $383,170 respectively
(note 2) 6,733,264 4,719,970
Other receivables 172,579 198,855
Notes receivable - Current (note 2) 215,423 248,220
Inventories (note 3) 8,874,207 4,347,497
Prepaid expenses 888,555 390,332
Deferred income taxes 621,804 621,804
----------- ----------
Total current assets 17,668,345 10,820,976
EQUIPMENT & LEASEHOLD IMPROVEMENTS:
Cost 6,203,300 5,370,571
Accumulated depreciation & amortization (4,333,557) (3,925,940)
---------- ----------
Total Equipment & Leasehold Improvements 1,869,743 1,444,631
Deferred income taxes 60,222 60,222
Cost in excess of net assets of businesses
acquired, net 3,760,071 1,690,878
Other Assets 31,778 9,344
----------- ----------
Total Assets $23,390,159 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 2,857,815 2,367,245
Accrued payroll and related expenses 376,369 386,952
Other accrued expenses 1,988,935 1,233,439
---------- ----------
Total Current Liabilities 5,223,119 5,042,502
Long-term debt, excluding current
installments (note 4) 7,979,000 221,202
---------- ----------
Total Liabilities 13,202,119 5,263,704
STOCKHOLDERS' EQUITY:
Common stock, no par value. Authorized 50,000,000
shares; issued and outstanding 15,849,975 shares
at Mar 31, 1998 and June 30, 1997. 8,260,973 8,260,973
Accumulated earnings 2,227,141 1,072,404
Notes receivable from directors (note 5) (300,074) (571,030)
---------- ---------
Total stockholders' equity 10,188,040 8,762,347
----------- ----------
Total Liabilities & Stockholders' Equity $23,390,159 14,026,051
========== ==========
See accompanying notes to condensed consolidated financial statements.
<PAGE>
PACER TECHNOLOGY & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
- -----------------------------------------------------------------------------
Three-Months Ended Nine-Months Ended
March 31, March 31,
1998 1997 1998 1997
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
---------- ---------- ---------- ----------
NET SALES $ 8,321,050 6,606,612 $21,969,702 19,179,074
COST OF SALES 5,348,746 4,279,165 13,990,095 12,342,138
--------- --------- ---------- ----------
Gross Profit 2,972,304 2,327,447 7,979,607 6,836,936
SELLING, GENERAL &
ADMINISTRATIVE EXPENSES 2,067,539 1,661,735 5,571,912 4,946,000
--------- --------- --------- ---------
Operating Income 904,765 665,712 2,407,695 1,890,936
OTHER (INCOME) EXPENSE:
Interest expense, net 139,276 73,595 355,699 157,917
Other (income) expense, net 3,774 ( 9,278) ( 7,938) (60,902)
-------- -------- --------- ----------
Income before income taxes 761,715 601,395 2,059,934 1,793,921
Income tax expense 333,498 248,831 905,197 958,622
-------- --------- --------- --------
NET INCOME $ 428,217 352,564 $1,154,737 835,299
======== ======== ========== ========
Weighted average common
shares outstanding: 15,849,975 15,777,975 15,849,975 15,457,197
Basic E.P.S. $0.03 $0.02 $0.07 $0.05
==== ===== ==== ====
Diluted weighted average
common shares outstanding: 18,126,980 18,135,780 18,126,980 18,135,780
Diluted E.P.S. $0.02 $0.02 $0.06 $0.05
==== ==== ==== ====
See accompanying notes to condensed consolidated financial statements.
<PAGE>
PACER TECHNOLOGY & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
- -----------------------------------------------------------------------------
Nine-Months Ended
March 31,
1998 1997
(Unaudited) (Unaudited)
---------- ----------
NET INCOME $1,154,737 835,298
Adjustments to reconcile net earnings to
net cash provided by operating activities, net of
effect of acquisitions:
Depreciation 406,612 356,226
Amortization of other assets 206,921 142,209
Loss (Gain) on sale/disposition of property
and equipment 1,005 (76,000)
Increase in provision for doubtful
accounts 99,418 112,307
Increase in trade accounts receivable (1,931,136) (620,027)
Decrease (increase) in other receivables 26,276 (19,359)
Decrease in notes receivables 32,797 99,529
Increase in inventories (63,631) (479,567)
Decrease in prepaid expenses
and other assets 51,617 216,982
Increase (Decrease) in accounts payable 460,937 (192,108)
(Decrease) Increase in accrued payroll and
related expenses (10,583) 205,549
Increase in accrued expenses and other
liabilities 256,153 391,601
------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 691,123 972,640
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Cook Bates (4,818,067) -
Acquisition of California Chemical
Specialties, Inc. (2,550,000) -
Proceeds from sale of property and
equipment - 76,000
Capital expenditures (428,729) (514,732)
---------- ---------
NET CASH USED IN INVESTING ACTIVITIES (7,796,796) (438,732)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on line of credit (792,000) (183,524)
Principle payments on long-term debt (7,935,135) (466,000)
Borrowings on long-term debt 15,430,067 -
Issuance of common stock - 111,718
Notes Receivable from Directors 270,956 58,438
--------- ---------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 6,973,888 (479,368)
Net (decrease) increase in cash (131,785) 54,540
Cash at beginning of year 294,298 207,995
-------- --------
CASH AT END OF NINE-MONTH PERIOD $ 162,513 262,535
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 321,905 179,151
======= =======
Cash paid during the period for income tax $ 998,000 918,000
======= =======
See accompanying notes to condensed consolidated financial statements.
<PAGE>
PACER TECHNOLOGY & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- -----------------------------------------------------------------------------
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
-------------------------------------------
The condensed consolidated financial statements for the nine-months ended
March 31, 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 March 31, 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 March 31, 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:
March 31, 1998 June 30, 1997
-------------- ------------
Finished goods $3,611,006 $1,665,877
Work in process 717,566 249,646
Raw materials 4,545,635 2,431,974
---------- ----------
$8,874,207 $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 March 31, 1998) 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.
On February 24, 1998, the Company entered into an agreement with Comerica
Bank to increase the line of credit for a ten month period to $10,000,000.
The Company utilized the increase to finance the acquisition of Cook Bates
on March 04, 1998.
<PAGE>
This credit agreement requires maintenance of certain financial ratios
and compliance with other bank covenants. Pacer was in compliance with all
covenants at March 31, 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) 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:
<PAGE>
(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.
6. ACQUISITIONS
------------
On July 15, 1997, Pacer Technology ("Pacer") completed the acquisition of
substantially all of the assets of California Chemical Specialties, Inc.
("Cal. Chem"). The assets purchased from Cal. Chem primarily consisted of
trade accounts receivable, inventory, fixed assets, and proprietary
formulas. In addition, Pacer assumed the liability for trade accounts
payable as of the closing date. The total purchase price consisted of
approximately $2,550,000 cash, including transaction costs.
On March 4, 1998, Pacer Technology ("Pacer") completed the acquisition of
certain assets of Cook Bates, a Division of London International Group,
Inc. ("LIG"). The assets purchased from Cook Bates primarily consisted of
inventory, fixed assets, and intellectual property. The total cash
purchase price was approximately $4,800,000.
The following summary represents the unaudited pro forma results of
operations as if the acquisitions of Cal. Chem. and Cook Bates had occurred
at the beginning of the periods presented, after consideration for certain
adjustments including the amortization of cost in excess of net assets
acquired (if applicable) and interest expense:
Nine-months ended March 31,
1998 1997
(Unaudited) (Unaudited)
-------------- -------------
Net Sales $38,826,693 $39,002,776
Net Income 900,835 869,761
Basic E.P.S. $ 0.06 $ 0.06
Diluted E.P.S. $ 0.05 $ 0.05
The pro forma data is provided for illustrative purposes only. It does not
purport to be indicative of the results that would have actually occurred
if the acquisitions of California Chemical Specialties Inc., and Cook Bates
had been consummated on the dates indicated or that may be obtained in the
future.
<PAGE>
RESULTS OF OPERATIONS
- ---------------------
Net sales for the three months ended March 31, 1998 increased by 26.0% to
$8,321,050 from $6,606,612 for the same quarter last year. Operating income
improved 35.9% to $904,765 for the third quarter compared to $665,712 in the
same period a year ago. Net income improved 21.5% to $428,217 versus $352,564
for the corresponding quarter last year. For the nine months ended March 31,
1998, net sales improved 14.6% to $21,969,702 from $19,179,074 for the
comparable period in 1997. Operating income was $2,407,695, a 27.3% increase
from $1,890,936 in the comparable period a year ago. Net income rose 38.2% to
$1,154,737 from $835,299 in the comparable period last year.
Domestic sales for the nine-month period of fiscal year 1998, increased 12.7% to
$17,891,510 from $15,875,695 in the prior year. Approximately 81.4% of total
sales for the nine-month period were attributable to domestic sales. These
results were favorably impacted by the revenue contribution from California
Chemical which performed in line with expectations and from Cook Bates, Pacer's
most recent acquisition.
International sales increased to $4,078,191, representing 18.6% of total sales
for the nine-month period, versus $3,303,379, or 17.2% of total sales for the
comparable period last year. The Company benefited from strong sales of its Pro
Seal line in the Middle East, South America and the Philippines. Demand for
cosmetic private label nail care products was strong during the first nine
months, particularly in Germany and the United Kingdom.
Cost of sales for the third quarter ended March 31, 1998 was $5,348,746, or
64.3% of sales. This represents an increase of $1,069,581, or 25.0% over the
comparable period in the prior year. For the nine months ended March 31, 1998,
cost of sales was $13,990,095, or 63.7% of sales. This represents a rise of
$1,647,957, or 13.4% over the same period last year. The increase was primarily
due to higher volume, partially offset by improved efficiency resulting from
further vertical integration of manufacturing operations.
Selling, general and administrative expenses for the third quarter ended March
31, 1998 were $2,067,539 or 24.8% of sales. This represents an increase of
$405,804 from $1,661,735, or 24.4% over the comparable quarter in the prior
year. For the nine-month period ended March 31, 1998, selling, general and
administrative expenses were $5,571,912, or 25.4% of sales. This was an
increase of $625,912, or 12.7% over the same period in the prior year. This
spending was attributed to operating expenses related to the acquisition of
Cook Bates and California Chemical.
Goodwill related to the Super Glue acquisition is being amortized over 14 years.
Amortization costs of $33,338 and $100,015 were recorded during the third
quarter and nine-month period ended March 31, 1998 respectively. Goodwill
related to California Chemical Specialties, Inc., is being amortized over 20
years. Amortization costs of $28,451 and $80,612 were recorded during the
third quarter and nine-month period of fiscal year 1998. 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 quarter ended March 31, 1998 was $139,276 compared to
$73,595 for the same period in fiscal year 1997. For the nine-month period
ended March 31, 1998, interest expense was $355,698 versus $157,917 during the
same period in the prior year. This increase was attributed primarily to bank
borrowings utilized to finance the acquisition of California Chemical and Cook
Bates.
For the nine-month period ended March 31, 1998, other income was $7,938 compared
to $60,902 for the first half of fiscal year 1997. This was primarily due to a
one-time gain from the disposition of surplus equipment recorded during the
third quarter of fiscal year 1997.
<PAGE>
Income taxes increased during the third quarter from the comparable period a
year ago due to the rise in taxable income. For the nine-month period ended
March 31, 1998, income taxes declined compared to the corresponding prior year
period when the Company recorded an unusually higher level of income tax
expense due to a one-time charge.
The Company's effective tax rate for the third quarter and nine-month period
ended March 31, 1998 was 43.8% and 43.9%, respectively.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES:
- ---------------------------------
Net cash used by all activities during the first nine months of fiscal year 1998
was $131,785 compared to cash provided of $54,540 during the comparable period
in fiscal year 1997.
Cash provided by operations during the nine-month period of fiscal year 1998 was
$691,123 compared to cash provided of $972,640 during the comparable period in
fiscal year 1997. This change was primarily attributed to an increase in
accounts receivable, partially offset by an increase in accounts payable and
stronger net income. The rise in accounts receivable and accounts payable was
primarily attributed to the Cook Bates acquisition.
Cash used in investing activities was $7,796,796 in the nine-month period ended
March 31, 1998, compared to $438,732 during the same period in the prior year.
This increase was prompted by the acquisitions of California Chemical
Specialties, Inc. and Cook Bates.
Cash provided by the Company's financing activities was $6,973,888 during the
first nine-month period of fiscal year 1998, versus cash consumed of $479,368
during the same period in fiscal year 1997. This increase was attributed
primarily to the Company's long-term debt borrowings utilized to finance the
acquisition of California Chemical in July of 1997 and the acquisition of Cook
Bates in March of 1998.
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.
CERTAIN TRENDS AND UNCERTAINTIES
- --------------------------------
Year 2000 Risks:
- ---------------
The 'Year 2000' issue concerns the potential exposures related to the automated
generation of business and financial misinformation resulting from the appli-
cation of computer programs which have been written using two digits, rather
than four, to define the applicable year of business transactions. Most of the
Company's operating systems with Year 2000 issues have been modified to address
those issues; accordingly, management does not anticipate any significant costs,
problems or uncertainties associated with becoming Year 2000 compliant. The
Company is currently developing a plan to assure that its other internal
operating systems with Year 2000 issues are modified on a timely basis.
Suppliers, customers and creditors of the Company also face similar Year 2000
issues. A failure to successfully address the Year 2000 issue could have a
material adverse effect on the Company's business or results of operations.
Impact of Recently Issued Accounting Standards:
- ----------------------------------------------
In June 1997, the Financial Accounting Standards Board issued a new statement
titled "Reporting Comprehensive Income." The new statement is effective for
fiscal years beginning after December 15, 1997. The Company is currently
evaluating its options for disclosure under this new standard and will imple-
ment the statement during its fiscal year ending June 10, 1999.
In June 1997, The Financial Accounting Standards Board issued a new statement
titled "Disclosures about Segments of an Enterprise and Related Information."
The new statement is effective for fiscal years beginning after December 15,
1997. The Company is currently evaluating its options for disclosure under this
standard and will implement the statement during its fiscal year ending June 30,
1999.
<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
May 15, 1998 /s/James T. Munn
-------------------------------
James T. Munn
President/Chief Executive Officer
May 15, 1998 /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
May 15, 1998 --------------------------------
By: James T. Munn
President/Chief Executive Officer
May 15, 1998 --------------------------------
By: Roberto J. Cavazos, Jr.
Chief Financial Officer
<PAGE>
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<FISCAL-YEAR-END> Jun-30-1998
<PERIOD-START> Jul-01-1997
<PERIOD-END> Mar-31-1998
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<ALLOWANCES> 483
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<CURRENT-ASSETS> 17668
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<BONDS> 0
0
0
<COMMON> 8261
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