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, 1999.
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 registrant 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
(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.
There were 16,838,975 shares of common stock, no par value outstanding as of
September 30, 1999.
Page 1
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
PACER TECHNOLOGY & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In Thousands Except Share Amounts)
ASSETS
September 30, June 30,
1999 1999
CURRENT ASSETS:
Cash $ 465 $ 534
Trade receivables, less allowance for doubtful
accounts of $603 and $904 respectively
(note 2) 12,945 8,810
Other receivables 104 132
Notes receivable - Current (note 2) 147 220
Inventories (note 3) 13,799 13,706
Prepaid expenses 723 618
Deferred income taxes 996 996
------ ------
Total current assets 29,179 25,016
EQUIPMENT & LEASEHOLD IMPROVEMENTS:
Cost 6,950 6,873
Accumulated depreciation & amortization (5,095) (4,950)
------ ------
Total Equipment & Leasehold Improvements 1,855 1,923
Notes Receivable-Long term 53 53
Deferred income taxes 192 192
Cost in excess of net assets of businesses
acquired, net 3,337 3,407
Other Assets 26 27
------ ------
Total Assets $ 34,642 $ 30,618
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current Portion of long-term debt (note 4) $ 917 $ 917
Accounts payable 4,407 3,619
Accrued payroll and related expenses 488 469
Other accrued expenses 2,378 1,186
------ ------
Total Current Liabilities 8,190 6,191
Long-term debt, excluding current
installments (note 4) 12,671 11,786
------ ------
Total Liabilities 20,861 17,977
STOCKHOLDERS' EQUITY:
Common stock, no par value. Authorized 50,000,000
shares; issued and outstanding 16,838,975 shares
at September 30, 1999 and 16,789,975 shares at
June 30, 1999. 8,837 8,802
Retained Earnings 4,943 3,899
Notes receivable from directors (10) (47)
Accumulated other comprehensive income 11 (13)
------ ------
Total stockholders' equity 13,781 12,641
------ ------
Total Liabilities & Stockholders' Equity $ 34,642 $ 30,618
====== ======
See accompanying notes to consolidated financial statements.
Page 2
PACER TECHNOLOGY & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In Thousands Except Share and Per Share Amounts)
Three-Months Ended
September 30
1999 1998
---------- ----------
Net Sales $ 14,252 $ 13,658
Cost Of Sales 9,170 8,739
---------- ----------
Gross Profit 5,082 4,919
Selling, General and
Administrative Expenses 2,837 2,810
Depreciation and Amortization 215 234
---------- ----------
Operating Income 2,030 1,875
OTHER (INCOME) EXPENSE:
Interest expense, net 233 253
Other (income) expense, net (19) (43)
---------- ----------
Income before income taxes 1,816 1,665
Income tax expense 772 708
---------- ----------
NET INCOME $ 1,044 $ 957
========== ==========
Weighted Average Shares - Basic 16,806,308 15,864,975
Basic Earnings Per Share $ 0.06 $ 0.06
========== ==========
Adjusted Weighted
Average Shares - Diluted 16,935,434 17,624,745
Diluted Earnings Per Share $ 0.06 $ 0.05
========== ==========
See accompanying notes to consolidated financial statements.
Page 3
PACER TECHNOLOGY & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
Three-Months Ended
September 30,
1999 1998
-------- --------
NET INCOME $ 1,044 $ 957
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation 145 163
Amortization of other assets 70 71
(Decrease) increase in provision for doubtful
accounts (301) 38
Increase in trade accounts
receivable (3,834) (5,073)
Decrease in other receivables 28 22
Decrease in notes receivables 73 26
(Increase) decrease in inventories (93) 127
Increase in prepaid expenses
and other assets (104) (277)
Increase in accounts payable 788 2,009
Increase in accrued payroll
and related expenses 19 5
Increase in accrued expenses and other
liabilities 1,216 1,237
-------- --------
NET CASH USED BY OPERATING ACTIVITIES (949) (695)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (77) (407)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (77) (407)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on line of credit (3,747) (2,422)
Payments on term loan (229) (83)
Borrowings on long-term debt 4,861 3,889
Issuance of Common Stock 35 -
Repayment of Notes Receivables
from Director 37 -
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 957 1,384
-------- --------
Net (decrease) increase in cash (69) 282
Cash at beginning of year 534 277
-------- --------
CASH AT END OF THREE-MONTH PERIOD $ 465 $ 559
======== ========
Supplemental Disclosures of cash flow information:
Cash paid during the quarter for interest $ 227 $ 179
======== ========
Cash paid during the quarter for income tax $ - $ 195
======== ========
See accompanying notes to consolidated financial statements.
Page 4
PACER TECHNOLOGY & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 1999
1. CONSOLIDATED FINANCIAL STATEMENTS:
The consolidated financial statements for the three-months ended September
30, 1999 and 1998 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, 1999 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, 1999 and 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 bank.
3. INVENTORIES:
Inventories consisted of the following (in thousands):
September 30, 1999 June 30, 1999
------------------ -------------
Raw materials $ 7,801 $ 7,456
Work-in-process 535 571
Finished goods 5,463 5,679
-------- --------
Total inventories $ 13,799 $ 13,706
======== ========
4. LONG-TERM DEBT:
On January 19, 1999, the Company entered into a new promissory note
agreement with a bank whereby Pacer can borrow up to $18.0 million, for
working capital requirements. The interest rate on this note is at the
bank's Prime Rate (7.75% at September 30, 1999) less 0.5%. On June 4,
1999, the Company entered into a three-month fixed LIBOR base rate of
5.0975% plus 1.625 initial spread for $7 million of this facility. This
note requires monthly interest payments only and has a maturity date of
January 2, 2001. Prepayments of principal balance are permitted without
penalty. This new credit facility was utilized to retire in February
1999, the Company's line of credit balance of $10.6 million and term loan
of $.8 million with its previous primary bank.
In addition, the Company entered into other agreements with the bank as
follows:
(1) Commercial Letter of credit, Standby Letter of credit, and Banker's
Acceptances subfeatures, each not to exceed $5.0 million from
January 19, 1999 to January 2, 2001. As of September 30, 1999,
there were no outstanding letters of credit.
Page 5
(2) Term loan of $2.75 million effective January 19, 1999, with a
maturity date of January 2, 2002. Principal shall be payable on the
2nd day of each month in installments of $76,389, commencing
March 2, 1999. This term loan bears interest at the Prime Rate
(7.75% at September 30, 1999) less 0.5%. On June 8, 1999, the
Company entered into a three-month fixed LIBOR base rate on this
facility of 5.09625% plus 1.625 initial spread. As of September 30,
1999 there was a balance of $2.2 million.
(3) Term commitment note of $750,000 effective January 19, 1999 with a
maturity date of January 2, 2000. This term commitment bears
interest at the Prime Rate (7.75% at September 30, 1999) less 0.5%.
At September 30, 1999 there was no borrowing against this note.
The agreements require maintenance of certain financial ratios and contain
other restrictive covenants. Pacer was in compliance with all debt
covenants on September 30, 1999.
5. COMMITMENTS AND CONTINGENCIES:
Pacer has entered into sales agreements with many of its customers which
contain pricing terms, including the amounts of promotional allowances and
co-op advertising, renewability clauses, and provisions which convey
trademark rights. Each of these agreements is unique and may include one
or more of these features as part of its terms.
A lawsuit was filed on September 27, 1999 in the Superior Court of
California by James T. Munn and Roberto J. Cavazos, Jr., former officers
of the company. The lawsuit alleges that Pacer Technology and its Board
of Directors breached their fiduciary duties to shareholders and that the
Board of Directors sought special treatment in a proposed sale of the
Company in June 1998 and cites their failure to publicly disclose the
offer to shareholders. The plaintiffs are seeking unspecified damages.
The company secured outside legal council and in the opinion of management
believes that it is unlikely the plaintiffs will prevail and that such
litigation will be resolved without material effect on Pacer's financial
position or results of operations.
6. COMPREHENSIVE INCOME:
On July 1, 1998, the Company adopted Financial Accounting Standard Board's
Statement of Financial Accounting Standards No. 130 (SFAS No. 130),
"Reporting Comprehensive Income". SFAS No. 130 establishes standards for
reporting and presentation of comprehensive income and its components in
a full set of financial statements. Comprehensive income consists of net
income and foreign currency translation adjustments. Total comprehensive
income for the quarter ended September 30, 1999 was $1.1 million compared
to $1.0 million for the same quarter in the prior fiscal year. The
difference is the result of an increase in net income of $87,000.
Page 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
RESULTS OF OPERATIONS
- --------------------- Three Months Ended
September 30, September 30,
1999 1998
------------- -------------
Sales 100.0% 100.0%
Gross Profit 35.7% 36.0%
Operating Expenses:
Selling, General and Administrative Expenses 19.9% 20.6%
Depreciation and Amortization 1.5% 1.7%
Operating Profit 14.3% 13.7%
Interest Expense, net 1.6% 1.9%
Other (Income) loss - (net) (.1%) (.3%)
Income before income taxes 12.8% 12.1%
Net sales for the quarter ended September 30, 1999 increased by 4.4% to $14.3
million from $13.7 million for the same quarter last year. Domestic sales
accounted for approximately 90.6% of total sales for the first quarter of fiscal
year 2000. This performance was primarily attributable to revenues from higher
Cosmetic and Super Glue product sales. Approximately $3.6 million of 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 2000. International sales increased to $1.3 million,
representing 9.1% of total sales for the quarter, versus $1.2 million, or 8.8%
of total sales for the comparable period last year. The increase in demand was
driven by weakness in the U.S. dollar and a general recovery in the world
economy.
Cost of sales for the quarter ended September 30, 1999 increased $431,000, or
4.9% to $9.2 million from $8.7 million during the comparable quarter last year.
This rise was attributed primarily to increased volume compounded by a shift in
product mix from seasonal sales to more consistent nonseasonal sales.
Selling, general and administrative expenses for the first quarter ended
September 30, 1999 were $2.8 million or 19.9% of sales. Selling, general and
administrative expenses for the comparable quarter ended September 30, 1998 were
$2.8 million or 20.6% of sales. The decrease in selling, general and
administrative expenses as a percent of sales for the period was due to a
reduction in other discretionary expenditures.
Depreciation and amortization was $215,000 or 1.5% of sales for the quarter
ended September 30, 1999 compared to $234,000 or 1.7% of sales for the
comparable quarter last year.
Depreciation and amortization includes goodwill of $70,000 for the first quarter
of fiscal 2000 and $71,000 for the first quarter of fiscal 1999 related to the
acquisition of Super Glue Corporation which is being amortized over 14 years
($33,000); California Chemical Specialties, Inc. which is being amortized over
20 years ($28,000); and Novest (Pro Seal) which is being amortized over 14 years
($9,000). Management believes that all of the above product lines will
continue to generate profits that will significantly exceed the goodwill
amortization.
Interest expense for the three month period ended September 30, 1999 was
$233,000 compared to $253,000 for the same period in the prior fiscal year.
This change was due primarily to increased bank borrowings utilized to finance
workingcapital requirements offset by a decrease in financing costs resulting
from the change in debt structure implemented in the third quarter of fiscal
1999.
Net income before taxes for the quarter ended September 30, 1999 increased
$151,000, or 9.1% to $1.8 million from $1.7 million during the comparable
quarter last year. This increase was primarily the result of a reduction of
Selling, General and Administrative expenses as a percent of sales.
The company's effective tax rate was 42.5% for the first quarter ended September
30,1999 and 1998.
Page 7
LIQUIDITY AND CAPITAL RESOURCES:
- -------------------------------
The Company historically has funded its daily cash flow requirements through
funds provided by operations and through borrowings from short-term revolving
credit facilities. The Company's short-term bank credit agreement is between
Pacer Technology and a bank and consists of revolving credit of $18.0 million of
which $6.6 million was available at September 30, 1999, and a standby letter of
credit, commercial letter of credit and bankers acceptance feature each not to
exceed $5.0 million, all of which were available as of September 30, 1999. The
bank credit agreement expires on January 2, 2001.
Working capital amounted to $21.0 million at September 30, 1999 and $16.7
million at September 30, 1998, and the Company's current ratios were 3.56:1 and
2.53:1, respectively.
Net cash consumed by all activities during the first three months of fiscal year
2000 was $69,000 compared to cash provided of $282,000 during the comparable
period in fiscal year 1999.
Cash used by operations during the first three months of fiscal year 2000 was
$949,000 compared to cash used of $695,000 in the prior year. This decrease in
cash flow was due to a volume generated increase in trade receivables and
inventories partially offset by a smaller increase in accounts payable and
accrued expenses. Cash flow from operations was also positively impacted by an
increase in net income and a smaller increase in prepaid expenses compared to
the same period last year.
Cash used in investing activities was $77,000 in the first quarter of fiscal
year 2000 compared to $407,000 in the prior year. Capital expenditures were
lower in the current period compared to the same period in the prior year, as
expenditures in the prior period were primarily due to the integration of the
Cook Bates acquisition.
Cash provided by the company's financing activities was $957,000 during the
first three months of fiscal year 2000 versus $1.4 million during the same
period in fiscal year 1999. Cash flow from financing activities was lower
during the first quarter of fiscal year 2000 compared to the first quarter of
1999. During the first quarter of 1999, bank debt was used to finance
integration and transition related expenses for the Cook Bates acquisition.
Pacer anticipates continued utilization of its new credit facility 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 8
Year 2000 Risks
- ---------------
The efficient operations of the Company are dependent, in part, upon its
computer software programs, systems and processes (collectively, the
"Information Systems"). The Company's Information Systems are used in several
key areas of the Company, including, but not limited to, warehousing and
distribution, merchandising and purchasing, inventory management, and accounting
and financial reporting. The Company has updated its Information Systems for
Year 2000 compliance requirements. Additionally, the Company has also been in
communication with most of its vendors, financial institutions and others whose
computer software, programs and information systems may interface with those of
the Company to assess the status of their compliance with Year 2000
requirements. Failure of companies (that the Company conducts business with) to
comply with the Year 2000 requirements could have an adverse effect on the
Company's operations.
Based on the information currently available, the Company believes it has met
the Year 2000 compliance requirements through a combination of Information
Systems modifications and through the acquisition of new equipment and
technology that are Year 2000 compliant. Costs required to replace or modify
Information Systems, were not material. The Company believes that they have
successfully addressed compliance with the year 2000 requirements, however no
assurances can be given that the Company's Information Systems and its vendors,
financial institutions and others will be successful in achieving Year 2000
compliance.
Worst Case Scenario and Contingency Plan
- ----------------------------------------
We believe we have taken and continue to take all prudent steps to identify and
remediate our year 2000 exposure and that we have an effective program in place
to address any Year 2000 problems in a timely manner. Our expectations
regarding our Year 2000 efforts, however, are subject to various uncertainties
that could cause actual results to differ from those discussed here. Those
uncertainties include our success in identifying systems that are not Year 2000
compliant and the success of vendors, suppliers, customers and other third
parties we interact with in addressing any Year 2000 problems they might have.
We believe that our most reasonable worst case scenario is that there could be
some interruptions in deliveries from our third party vendors and possibly in
our interactions with customers, to the extent that they have their own
Year 2000 problems.
We have not developed a specific contingency plan to deal with the Year 2000
problem because, in the ordinary course of business, we maintain a general
contingency plan for emergencies. In this regard, each of our departments is
responsible for ensuring that they have back-up capabilities to eliminate or
minimize the negative effects of emergencies. In addition, we maintain
inventories capable of supporting sales activities for approximately 90 days
with an additional 30 days of inventory in-transit to our facility at any given
time.
We will consider developing more specific contingency plans as we complete
assessment of our non-information systems and our third party exposure over the
next few months.
Impact of Recently issued Accounting Pronouncements
- ---------------------------------------------------
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 establishes accounting and
reporting standards for derivative instruments, including derivative instruments
embedded in other contracts, and hedging activities. SFAS 133 is effective for
all fiscal quarters of fiscal years beginning after June 15, 2000. Application
of this accounting standard is not expected to have a material impact on the
Company's consolidated financial position, results of operations or liquidity.
Page 9
Cautionary Statement
- --------------------
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. Certain information contained in the Company's
filings with the Securities and Exchange Commission (as well as information
included in oral statements or other written statements made or to be made by
the Company) include statements that are forward-looking, such as statements
relating to plans for future activities. Such forward-looking information
involves important risks and uncertainties that could significantly affect
results in the future and, accordingly, such results may differ from those
expressed in any forward-looking statements made by or on behalf of the Company.
These risks and uncertainties include, but are not limited to, those relating to
foreign and domestic economic conditions, seasonal and weather fluctuations,
expansion and other activities of competitors, changes in federal or state laws
and the administration of such laws and the general condition of the economy.
Page 10
Part II Other Information
Item 1. Legal Proceedings
A lawsuit was filed on September 27, 1999 in the Superior Court of California by
James T. Munn and Roberto J. Cavazos, Jr., former officers of the company. The
lawsuit alleges that Pacer Technology and its Board of Directors breached their
fiduciary duties to shareholders and that the Board of Directors sought special
treatment in a proposed sale of the Company in June 1998 and cites their failure
to publicly disclose the offer to shareholders. The plaintiffs are seeking
unspecified damages. The company secured outside legal counsel and in the
opinion of management believes that it is unlikely the plaintiffs will prevail
and that such litigation will be resolved without material effect on Pacer's
financial position or results of operation.
Item 6. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) Exhibits
Exhibits are as follows:
Exhibit No. Description
----------- ---------------------------------
27 Financial Data Schedule
Copies of exhibits listed herein can be obtained by writing and requesting
such exhibits from: Pacer Technology, CFO 9420 Santa Anita Ave, Rancho
Cucamonga, CA 91730.
(b) Reports on Form 8-K
On October 18, 1999, the registrant filed form 8-K. The purpose of the
filing was to disclose under Item 4 a change in the Company's certifying
accountant from KPMG LLP to Ernst & Young LLP.
Page 11
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 12, 1999 /s/Tom Nightingale III
---------------------------------
W.T Nightingale, III
President/Chief Executive Officer
November 12, 1999 /s/Laurence Huff
---------------------------------
Laurence Huff
Chief Financial Officer
Page 12
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