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
December 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 (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 December 31, 1997 were
15,849,975.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
PACER TECHNOLOGY & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- -----------------------------------------------------------------------------
ASSETS
December 31, June 30,
1997 1997
(Unaudited) (Audited)
------------ ----------
CURRENT ASSETS:
Cash $ 385,673 294,298
Trade receivables, less allowance for doubtful
accounts of $435,970 and $383,170 respectively
(note 2) 5,307,145 4,719,970
Other receivables 167,387 198,855
Notes receivable - Current (note 2) 221,144 248,220
Inventories (note 3) 4,627,436 4,347,497
Prepaid expenses 798,569 390,331
Deferred income taxes 621,804 621,804
---------- ----------
Total current assets 12,129,157 10,820,976
EQUIPMENT & LEASEHOLD IMPROVEMENTS:
Cost 5,733,620 5,370,571
Accumulated depreciation & amortization (4,193,929) (3,925,940)
---------- ----------
Total Equipment & Leasehold Improvements 1,539,690 1,444,631
Deferred income taxes 60,222 60,222
Cost in excess of net assets of businesses
acquired, net 3,830,625 1,690,878
Other Assets 7,078 9,344
----------- ----------
Total Assets $17,566,772 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 1,779,309 2,367,245
Accrued payroll and related expenses 459,748 386,952
Other accrued expenses 1,464,893 1,233,439
--------- ---------
Total Current Liabilities 3,703,950 5,042,502
Long-term debt, excluding current
installments (note 4) 4,103,000 221,202
--------- ---------
Total Liabilities 7,806,950 5,263,704
STOCKHOLDERS' EQUITY:
Common stock, no par value. Authorized 50,000,000
shares; issued and outstanding 15,849,975 shares
at Dec 31, 1997 and June 30, 1997. 8,260,973 8,260,973
Accumulated earnings 1,798,923 1,072,404
Notes receivable from directors (note 5) (300,074) (571,030)
---------- ---------
Total stockholders' equity 9,759,822 8,762,347
Total Liabilities & Stockholders' Equity $17,566,772 14,026,051
=========== ===========
See accompanying notes to consolidated financial statements.
<PAGE>
PACER TECHNOLOGY & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
- -----------------------------------------------------------------------------
Three-Months Ended Six-Months Ended
December 31, December 31,
1997 1996 1997 1996
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
----------- ----------- ----------- -----------
NET SALES $ 6,273,501 5,898,868 $13,648,651 12,572,462
COST OF SALES 4,021,341 3,808,690 8,662,349 8,062,973
--------- --------- ---------- ---------
Gross Profit 2,252,160 2,090,178 4,986,302 4,509,489
SELLING, GENERAL &
ADMINISTRATIVE EXPENSES 1,705,678 1,567,257 3,504,747 3,284,265
--------- --------- --------- ---------
Operating Income 546,483 522,921 1,481,556 1,225,224
OTHER (INCOME) EXPENSE:
Interest expense, net 71,728 18,739 195,051 84,322
Other (income) expense, net (9,441) (67,944) (11,712) (51,624)
------- ------- --------- ---------
Income before income taxes 484,196 572,126 1,298,217 1,192,526
Income tax expense 208,550 431,210 571,698 709,791
------- ------- -------- -------
NET INCOME $ 275,646 140,916 $ 726,519 482,735
======= ======= ======= =======
Weighted average common
shares outstanding: 15,849,975 15,380,142 15,849,975 15,380,142
Basic E.P.S. $0.02 $0.01 $0.05 $0.03
==== ==== ==== ====
Diluted weighted average
common shares outstanding: 18,126,980 16,272,280 18,126,980 16,272,280
Diluted E.P.S. $0.02 $0.01 $0.04 $0.03
==== ==== ==== ====
See accompanying notes to consolidated financial statements.
<PAGE>
PACER TECHNOLOGY & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ----------------------------------------------------------------------------
Six-Months Ended
December 31,
1997 1996
(Unaudited) (Unaudited)
----------- ----------
NET INCOME $726,519 482,735
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation 284,673 235,085
Amortization of other assets 136,367 94,806
(Gain) on sale/disposition of property
and equipment - (76,000)
Increase in provision for doubtful
accounts 52,800 67,326
(Increase) in trade accounts
receivable (639,975) (38,377)
Decrease (increase) in other receivables 31,468 (59,979)
Decrease in notes receivables 27,076 88,078
(Increase) in inventories (279,939) (140,267)
(Increase) Decrease in prepaid expenses
and other assets (405,972) 88,503
(Decrease) in accounts payable (587,936) (500,789)
Increase in accrued payroll and
related expenses 72,797 228,204
Increase in accrued expenses and other
liabilities 231,455 233,636
-------- --------
NET CASH (USED) PROVIDED BY OPERATING
ACTIVITIES (350,667) 702,961
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of California Chemical
Specialties, Inc. (2,276,114) -
Proceeds from sale of property and
equipment - 76,000
Capital expenditures (379,732) (348,437)
----------- ----------
NET CASH USED IN INVESTING ACTIVITIES (2,655,846) (272,437)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on line of credit (792,000) (375,000)
Principle payments on long-term debt (4,980,068) (121,358)
Borrowings on long-term debt 8,599,000 -
Issuance of common stock - 93,750
Notes Receivable from Directors 270,956 -
--------- ----------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 3,097,888 (402,608)
Net increase in cash 91,375 27,916
Cash at beginning of year 294,298 207,995
--------- ---------
CASH AT END OF SIX-MONTH PERIOD $ 385,673 235,911
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 six-months ended December
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 December 31, 1997 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 December 31, 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:
December 31, 1997 June 30, 1997
----------------- -------------
Finished goods $2,013,699 $1,665,877
Work in process 407,419 249,646
Raw materials 2,206,318 2,431,974
---------- ----------
$4,627,436 $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 December 31, 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 December 31, 1997.
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 three months ended December 31, 1997 increased by 6.4% to
$6,273,501 from $5,898,868 for the same quarter last year. Operating income
improved 4.5% to $546,483 for the second quarter compared to $522,921 in the
year ago second quarter. Net income improved 95.6% to $275,646 versus $140,916
for the corresponding quarter last year. For the six months ended December 31,
1997, net sales improved 8.6% to $13,648,651 from $12,572,462 for the comparable
period in 1996. Operating income was $1,481,556, a 20.9% increase from
$1,225,224 in the comparable period a year ago. Net income rose 50.5% to
$726,519 from $482,735 in the 1996 first six-month period.
Domestic sales for the first half of fiscal year 1998 increased 3.8% to
$10,920,453 from $10,520,476 in the prior year. Approximately 80% of total
sales for the first half were attributable to domestic sales. The Company
experienced a temporary softness in demand during the most recent quarter,
resulting in relatively level domestic sales period-to-period. Domestic results
were, however, favorably impacted by the revenue contribution from California
Chemical which performed in line with expectations.
International sales increased to $2,728,198, representing 20% of total sales for
the first half, versus $2,051,987, or 16.3% 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 half, particularly
in Germany and the United Kingdom.
Cost of sales for the second quarter ended December 31, 1997 was $4,021,341, or
6.4% of sales. This represents an increase of $212,651, or 5.6% over the
comparable period in the prior year. For the six months ended December 31,
1997, cost of sales was $8,662,349, or 6.4% of sales. This represented a rise
of $599,376, or 7.4% over the same period last year. The increases were
primarily due to higher volume, partially offset by efficiency improvements
resulting from further vertical integration of manufacturing operations.
Selling, general and administrative expenses for the second quarter ended
December 31, 1997 were $1,705,678 or 27% of sales. This represented an increase
of $138,421 from $1,567,257, or 8.8% over the comparable quarter in the prior
year. For the six-month period ended December 31, 1997, selling, general and
adminstrative expenses were $3,504,747, or 26% of sales. This was an increase
of $220,482, or 6.7% over the same period in the prior year. This spending was
attributed to marketing expenses required to support the Company's expanding
sales effort world wide. Additional expenditures pertained to 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 $33,338 and $66,677 were recorded during the second
quarter and six-month period ended December 31, 1997 respectively. Goodwill
related to California Chemical Specialties, Inc., is being amortized over 20
years. Amortization costs of $28,451 and $52,161 were recorded during the
second quarter and six-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 December 31, 1997 was $71,728 compared to
$18,739 for the same period in fiscal year 1997. For the six-month period ended
December 31, 1997, interest expense was $195,051 versus $84,322 during the same
period in the prior year. This increase was attributed primarily to bank
borrowings utilized to finance the acquisition of California Chemical.
Other income for the second quarter of fiscal year 1998 was $9,441. This
compared to $67,944 for the same period in the prior year. This change was
mainly attributed to a one-time gain of $76,000 from the disposition of surplus
equipment during fiscal year 1997, partially offset by early payment discounts
granted to customers. For the six-month period ended December 31, 1997, other
<PAGE>
income was $11,712 compared to $51,624 for the first half of fiscal year 1997.
This was primarily due to the one-time gain from the disposition of surplus
equipment recorded during the second quarter of fiscal year 1997.
Income taxes declined significantly during the second quarter and six-month
period ended December 31, 1997 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 was 43% and 44%, respectively for the second
quarter and six-month period ended December 31,1997.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES:
- -------------------------------
Net cash provided by all activities during the first six months of fiscal year
1998 was $91,375 compared to $27,916 during the comparable period in fiscal year
1997.
Cash consumed by operations during the first half of fiscal year 1998 was
$350,667 compared to cash provided of $702,961 during the comparable period in
fiscal year 1997. This change was primarily attributed to increases in prepaid
expenses, accounts receivable and inventories, coupled with a decrease in
accounts payable. The increases in working capital were partially offset by
stronger net income. The rise in accounts receivable and inventories were
attributed to higher volume. The decrease in accounts payable was due to the
timing of payments to suppliers for certain raw materials. The increase in
prepaid expenses was mainly due to prepayment of income taxes for the first half
of fiscal year 1998.
Cash used in investing activities was $2,655,846 in the first quarter of fiscal
year 1998 compared to $272,437 in the prior year. This increase was prompted by
goodwill related to the acquisition of California Chemical Specialties, Inc.
Cash provided by the Company's financing activities was $3,097,888 during the
first half of fiscal year 1998, versus cash consumed of $402,608 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.
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
February 10, 1998 /s/James T. Munn
----------------
James T. Munn
President/Chief Executive Officer
February 10, 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
February 10, 1998 ___________________________
By: James T. Munn
President/Chief Executive Officer
February 10, 1998 ____________________________
By: Roberto J. Cavazos, Jr.
Chief Financial Officer
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