SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
X Annual report pursuant to section 13 or 15(d) of the Securities Exchange
- --- Act of 1934 for the fiscal year ended June 30, 1999
-------------
- --- Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from_____ to_______
Commission file number 0-8864
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PACER TECHNOLOGY
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(Exact name of the registrant as specified in its charter)
California 77-0080305
------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
9420 Santa Anita Avenue
Rancho Cucamonga, California 91730
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number (909) 987-0550
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Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, no par value
------------------------------------
(Title of Class)
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of August 2, 1999 was $14,157,536 (computed by reference to the
average closing bid and asked prices of such stock on August 2, 1999, as
reported in the over-the-counter market).
The number of shares outstanding of the registrant's Common Stock, as of August
2, 1999, was 16,789,975 shares.
Documents incorporated by reference. Pacer Technology's definitive Proxy
Statement dated October 4, 1999 for the 1999 annual meeting of shareholders--
Part III.
<PAGE>
PART I
------
Item 1. Description of Business
Background
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Pacer Technology (the "Company") is engaged in the business of manufacturing and
marketing high performance adhesives, sealants, and nail care related products.
The Company sells these products worldwide under both private label and
proprietary trademarks to industrial, consumer, automotive aftermarket and
hobby markets. The Company was formed in 1975 as a Wyoming corporation and was
reincorporated in California in 1984.
On August 1, 1992, the Company acquired Novest, Inc., a privately-held corpora-
tion. The product line acquired includes adhesives, sealants and lubricants
for engine and body parts, trim applications and accessories.
On October 15, 1993, Pacer acquired the assets of MEXLONIC (formerly Super Glue
Corporation), a manufacturer and packager of adhesive products and plastic
molded clips for use in automotive, stationery, hardware, home, office and
school applications.
On July 15, 1997, Pacer acquired California Chemical Specialties, Inc., a
producer of proprietary sculptured acrylic nail liquids and powders and related
products for the nail care industry.
On March 4, 1998, the Company acquired Cook Bates, a Division of London Inter-
national Group, Inc., a manufacturer and a designer of an extensive line of
manicure products. These products are marketed under such name brands as Gem
and Mr. Mustache. Cook Bates holds numerous patents and also licenses such
brand-name products as Oleg Cassini and Brut.
Major Customers
- ---------------
Pacer did not have net sales to any one individual customer greater than 10% of
total net sales in fiscal years 1999, 1998 or 1997 respectively.
Principal Markets for Adhesive Products
- ---------------------------------------
Industrial
- ----------
The Company's products are sold in the industrial market for use in automotive,
aerospace, electronic, O.E.M. and maintenance repair applications.
Consumer
- --------
The major thrust of Pacer's consumer division consists of products from Super
Glue Corporation. These products include a nationally known brand of adhesives,
sealants, and related products for use in automotive, stationery, hardware,
home, office and school applications. The remaining lines in the division
consist primarily of products demanded by customers who have existing product
lines other than adhesives and wish to expand their product base to include
adhesive products. In these cases, the Company packages the product requested
in containers labeled with the customer's private label trademark.
Hobby
- -----
The Company markets several types of adhesives and related products which may
be used for various project and model assembly requirements.
Manicure Implement
- ------------------
The Company provides a wide range of high quality manicure implements. These
products include tweezers, clippers, toiletries, and emery boards. The Company
also offers brand name products such as Brut, Oleg Cassini, and Gem.
Automotive Aftermarket
- ----------------------
Pacer's automotive aftermarket product line, PRO SEAL, includes adhesives,
sealants and lubricants for engine and body parts, trim applications and
accessories.
Marketing
- ---------
Pacer's products are marketed domestically and internationally. Foreign sales
accounted for 11% of total revenues in 1999, 17% of total revenues in 1998,
and 18% in 1997. Company products are sold to the industrial market by Pacer
<PAGE>
sales personnel and through independent distributors. The Company provides
technical service and sales support using factory trained personnel and sales
representatives. Pacer products are sold to dealers and model shops in the
hobby market through a network of master distributors. In the consumer market
sector, products are sold by Pacer sales personnel and independent represen-
tatives and distributed through mass merchandising retail outlets. Automotive
aftermarket products are sold by Pacer sales personnel and independent represen-
tatives and distributed through retail automotive, professional repair and
installation, agri-business and heavy duty truck outlets.
Backlog
- -------
The backlog of firm orders as of June 30, 1999 was $133,216 versus $5.2 million
as of June 30, 1998. The backlog for fiscal year 1998 included an order build-
up from the Cook Bates acquisition.
Research and Development
- ------------------------
Research and Development expenditures were approximately $472,000, $441,000 and
$348,000 in fiscal years 1999, 1998 and 1997, respectively.
Source and Availability of Raw Materials
- ----------------------------------------
The Company's primary source of raw material is subject to tariff and quota
controls, fluctuations in the value of the U.S. dollar on foreign currency
exchanges and related constraints associated with international trade. This
material is readily available from several suppliers. Other raw materials are
also purchased from suppliers for manufacture of the Company's plastic packag-
ing. Supply of these materials is subject to availability of petroleum by-
products.
Competitive Conditions Affecting the Company
- --------------------------------------------
The principal competitive factors affecting the Company's products are techno-
logy, market coverage, price and service. Some of Pacer's competitors are
larger and have substantially greater financial resources. The Company believes
it is on the leading edge of technology and is price competitive.
Subsidiaries
- ------------
The Company has one active wholly owned subsidiary. Pacer Tech Ltd., based in
the United Kingdom, distributes products in the industrial, hobby, consumer,
manicure implements, automotive aftermarket and private label markets in the
United Kingdom and Europe.
Government Regulations
- ----------------------
The Company is subject to regulation by a variety of governmental authorities,
including federal, state, and local agencies that regulate trade practices,
labor, safety and environmental matters.
Environmental
- -------------
Compliance with federal, state and local provisions regarding the production and
discharge of materials into the environment is expected to have a minimal ad-
verse effect on capital expenditures, earnings, and the competitive position
of the Company.
Employees
- ---------
At August 1, 1999, the Company employed 128 people on a regular full-time basis.
Patents and Licenses
- --------------------
The Company owns a number of United States patents and trademarks relating to
its adhesives, sealants and manicure implements business. These patents expire
on various dates from 1999 to 2013. The patents that expired are not expected
to have a material impact on the Company. The Company also owns several pending
patent applications.
Pacer has obtained patents, and regularly files new patent applications, in
foreign countries, particularly the industrialized countries of Western and
Eastern Europe, South America, Africa, the Middle East and the Far East. Since
applications have not been filed in all foreign countries and due to the varying
degrees of protection afforded by foreign patent laws, the Company has somewhat
less patent protection abroad than in the United States.
The Company has obtained protection for its major trademarks in essentially all
countries where the trademarks are of commercial importance and regularly files
new trademark applications on a worldwide basis. In addition, the Company has
entered into trademark license agreements with others in those cases where the
Company believes it will obtain a competitive advantage thereby.
<PAGE>
Item 2. Description of Property
- --------------------------------
The Company's executive office, manufacturing facility and research and develop-
ment facility are housed in a 47,700 square foot site in Rancho Cucamonga,
California. This facility is leased under an operating lease expiring in May
31, 2009. The Company leases a 10,384 square foot facility in Ontario,
California to manufacture certain flammable products. This lease expires
October 31, 2004. The Company also leases a 41,040 square foot facility in
Memphis, Tennessee to warehouse and distribute products to customers located in
the Midwest and Eastern part of the United States. This lease expires May 31,
2003. To accommodate the increase in products and services the Company acquired
from Cook Bates, Pacer leased an additional 62,134 square foot facility in
Rancho Cucamonga. This lease expires May 31, 2009.
The Company's subsidiary, Pacer Tech Ltd., maintains its sales and distribution
office at a leased facility in Essex, England. This lease expires July, 2001.
The Company believes its present facilities are in good operating condition and
are adequate for the Company's present and anticipated future needs.
Item 3. Legal Proceedings
- --------------------------
None
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
(a) The registrants Special Meeting of Stockholders was held on June
22, 1999.
(b) Not applicable.
(c) There were three matters voted on at the Meeting. A brief des-
cription of each of these matters, and the results of the votes
thereon, are as follows:
1. Election of Directors
Nominee For Withheld
------- ---------- ---------
Hockin 13,247,319 733,124
Hathaway 13,546,394 434,049
Reynolds 13,484,294 496,149
Merriman 13,592,544 387,899
Tirman 13,592,844 387,599
2. To authorize the creation of a class of preferred stock
consisting of 100,000 shares, and the results of the votes
thereon, are as follows:
Broker
For Against Abstain Non-votes
--------- --------- -------- ----------
5,696,232 1,501,963 110,190 6,672,058
This proposal did not receive a majority vote of the outstand-
ing shares and was therefore defeated.
3. To approve an amendment to the Company's 1994 Nonqualified
Stock Option Plan increasing the number of shares issuable
thereunder by 200,000 shares, and the results of the votes
thereon, are as follows:
For Against Abstain
---------- --------- --------
12,403,757 1,431,371 145,315
(d) Not applicable.
<PAGE>
PART II
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Item 5. Market for Common Equity and Related Stockholder Matters
- -----------------------------------------------------------------
Pacer Technology common stock is traded in the over-the-counter market and is
listed on the National Association of Securities Dealers Automated Quotation
System (NASDAQ) under the symbol "PTCH". High and low bid quotations are listed
below:
For the year ended June 30,
1999 1998
--------------- ----------------
HIGH LOW HIGH LOW
------ ------ ------ ------
First Quarter 1.3827 1.2680 1.5313 1.1563
Second Quarter 1.7500 1.1560 1.4375 0.8750
Third Quarter 1.4690 0.9690 1.5313 1.0000
Fourth Quarter 1.1560 0.9380 2.0313 1.1875
The foregoing quotations reflect inter-dealer prices without retail mark-up,
mark-down or commission and may not necessarily represent actual transactions.
The approximate number of shareholders of record of the Company's common stock
as of August 2, 1999 was 2,056.
Since its incorporation, the Company has not paid any dividends on its common
stock and does not anticipate dividend payments in the foreseeable future.
Item 6. Selected Financial Data
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YEAR ENDED JUNE 30
All amounts in thousands except per share amounts
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1999 1998 1997 1996 1995
-------- -------- ------- ------- --------
Income (loss) Statement Data:
Net Sales $ 46,048 $ 31,939 $ 25,678 $ 22,278 $ 20,584
Gross Profit 15,257 11,346 9,158 7,507 6,622
Operating Income 3,040 2,972 2,562 1,844 136
Net Income 1,286 1,541 1,217 925 (200)
Earnings per share:
Basic $ 0.08 $ 0.10 $ 0.08 $ 0.06 $ (0.01)
Diluted $ 0.08 $ 0.09 $ 0.07 $ 0.06 $ (0.01)
Other Financial Data:
Total Assets $ 30,618 $ 27,799 $ 14,026 $ 13,281 $ 14,629
Working Capital 18,825 14,504 5,778 4,515 3,191
Debt Obligations 12,702 9,869 1,276 2,406 5,118
Stockholders' Equity 12,641 10,632 8,762 7,331 6,290
Item 7. Management's Discussion and Analysis of Financial Conditions and
================================================================
Results of Operations
=====================
Results of Operations
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Table 1 - Cost of Sales and Gross Margin as a
Percentage of Sales
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1999 1998 1997
------ ------ ------
Net Sales 100.0% 100.0% 100.0%
Cost of Sales 66.9% 64.5% 64.3%
Gross Profit 33.1% 35.5% 35.7%
<PAGE>
Comparison of 1999 to 1998
- --------------------------
Net sales improved $14,109,387 to $46,047,901, or 44.2% over the prior year.
Domestic sales increased 54.0% to $40,804,268, and represented 88.6% of total
revenues for fiscal year 1999. The domestic revenue growth was primarily
attributable to sales from Super Glue, Proseal and Cook Bates product lines.
International sales of $5,243,631 represent 11.4% of total revenues for fiscal
year 1999 compared to $5,434,678 or 17.0% of total revenues for the prior year.
The decrease in international sales as a percentage of total revenue was
primarily due to the inclusion of results from Cook Bates, whose products are
mostly distributed domestically, and due to difficult economic conditions
existing in various regions around the world.
Cost of sales for the fiscal years ended 1999 and 1998 were $30,790,950, or
66.9% of sales and $20,592,723, or 64.5% of sales respectively. This represents
an increase of $10,198,227, or 49.5% over the prior year. This rise can be
attributed primarily to increased volume and higher manufacturing costs
associated with the acquisition of Cook Bates. Increased sales volume related
to the Super Glue product line also contributed to the increase.
Selling, General & Administrative expenses were $12,217,423, or 26.5% of sales.
This represents an increase of $3,843,897, or 45.9% over the prior year. This
increase was related to higher sales and marketing expenses as the Company
offered higher levels of cooperative advertising and promotional programs in
order to support the Cook Bates product lines. The rise in general and
administrative expenses can be attributed to additional staffing in the
administrative departments, higher spending for professional and legal fees
and facilities to accomodate the increased volume and operation of Cook Bates
products.
Goodwill related to the Super Glue acquisition is being amortized over 14 years.
Amortization costs of $133,354 were recorded in fiscal year 1999. Goodwill
related to California Chemical is being amortized over 20 years. Amortization
costs of $113,806 were recorded during fiscal year 1999. Management believes
the Super Glue and California Chemical product lines will continue to generate
profits that will significantly exceed the goodwill amortization.
Other expenses for the year were $802,233, or 1.7% of sales. This represents
an increase of $492,900, or 159.1% over the prior year. This increase was
primarily attributed to bank borrowings utilized to finance the acquisition of
Cook Bates, as well as leasehold improvements, capital expenditures, and all
other costs to accomodate the increase in volume of production during the 1999
fiscal year.
The Company's effective tax rate was approximately 42.5% for fiscal year 1999
and 42.1% for fiscal year 1998.
Comparison of 1998 to 1997
- --------------------------
Net sales improved $6,260,674 to $31,938,514, or 24.4% over the prior year.
Domestic sales increased 26.7% to $26,503,842, and represented 82.9% of total
revenues for fiscal year 1998. The domestic revenue growth was primarily
attributable to sales from California Chemical and Cook Bates, Pacer's most
recent acquisitions. International sales increased 15.9% to $5,434,672, and
represented 17.0% of total revenues for fiscal year 1998. The international
revenue growth was attributed to the Company's cosmetic nail care sales to
private label customers in the U.K. and Western Europe, and by gains in Super
Glue sales to customers in the Middle East and Central America.
Cost of sales for the year was $20,592,723, or 64.5% of sales. This represents
an increase of $4,072,429, or 24.7% over the prior year. This rise was attri-
buted primarily to increased volume and higher manufacturing costs as Pacer and
Cook Bates ran parallel operations from March 1998 (the date of acquisition)
through June 1998.
Selling, General & Administrative expenses were $8,373,526, or 26.2% of sales.
This represents an increase of $1,778,013, or 27.0% over the prior year. This
increase was related to sales and marketing expenses required to support the
additional sales volume, and the result of running Pacer and Cook Bates facili-
ties parallel from March 1998 through June 1998. The Cook Bates facilities
were closed in the latter part of June 1998 and relocated to Pacer locations in
California and Tennessee. The rise in administrative expenses was attributed
to Cook Bates and a significant increase of 26.8% in Research and Development
spending, primarily to support the growth in the Company's cosmetic nail care
business. Spending increases for public relations and goodwill pertaining to
the acquisition of California Chemical also contributed to the rise in
administrative expenses.
<PAGE>
Goodwill related to the Super Glue acquisition is being amortized over 14 years.
Amortization costs of $133,354 were recorded in fiscal year 1998. Goodwill
related to California Chemical is being amortized over 20 years. Amortization
costs of $109,064 were recorded during 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.
Other expenses for the year were $309,333, or 1.0% of sales. This represents
an increase of $233,581, or 308.3% over the prior year. This increase was
primarily attributed to bank borrowings utilized to finance the acquisition of
Cook Bates and California Chemical during the 1998 fiscal year.
The Company's effective tax rate was approximately 42.1% for fiscal year 1998
and 51.0% for fiscal year 1997.
Liquidity and Capital Resources
- -------------------------------
Net cash provided by all activities in fiscal year 1999 was $256,163 versus
cash used of $16,928 in the prior year.
Cash consumed by operating activities during 1999 was $2,519,907 compared to
cash used of $1,296,691 in fiscal year 1998. Net income decreased 16.5% in
fiscal year 1999 from fiscal year 1998 due to the first full cycle of the
Company's consolidated operation with Cook Bates since its purchase in March of
1998. The increases in trade accounts receivable and inventory were primarily
volume generated by the Cook Bates acquisition. The decrease in prepaid
expenses and other assets during fiscal year 1999 were primarily due to the
escrow settlement from the acquisition of Cook Bates. The decrease in deferred
income taxes during fiscal year 1999 was due to timing differences for Cook
Bates related tax deductible expenses. The decrease in accounts payable was
due to the timing of payments to suppliers for certain raw materials. Accrued
expenses and other liabilities were lower in fiscal year 1999 compared to fiscal
year 1998 due to the reduction of closing and relocation costs for Cook Bates.
Cash consumed by investing activities in 1999 was $806,372 compared to
$7,899,172 in the prior year. The cash consumed in the prior year was the
result of the Cook Bates and California Chemicals acquisitions. The expen-
ditures for capital equipment in the current fiscal year were to further enhance
the vertical integration of Pacer's manufacturing operations.
Cash provided by financing activities in 1999 was $3,582,442, compared to
$9,178,935 in the prior year. The increase in the prior year was primarily due
to bank borrowings to finance the all cash acquisitions of Cook Bates and
California Chemical. The exercise of certain stock options by officers and
repayment of notes by Directors provided a source of cash for the Company
during fiscal year 1999.
Pacer anticipates continued utilization of its new credit facility with its
predominant bank to supplement cash requirements for working capital, capital
equipment purchases and potential acquisitions during the coming year.
Management is of the opinion that such sources of cash are sufficient for the
ensuing fiscal year.
Certain Trends and Uncertainties
- --------------------------------
The Company has in the past and may in the future make forward-looking state-
ments. These statements are subject to risks and uncertainties that could cause
actual results to differ materially from those predicted. Such risks and
uncertainties include, but are not limited to the following:
Technological Change and Competition
- ------------------------------------
The markets for the Company's products are characterized by frequent new product
introductions and declining average selling prices over product life cycles.
The Company's future success is highly dependent upon the timely completion and
introduction of new products at competitive prices and performance levels. In
addition, the Company must respond to competitors in the Company's markets.
If the Company is not able to make timely introduction of new products or to
respond effectively to competition, its business and operating results could
be adversely affected.
Variable Demand
- ---------------
The consumer adhesives industry has historically been reasonably stable and not
characterized by cyclical product demand. The manicure implement business
(Cook Bates) has had seasonal demand peaks during the last half of the calendar
year.
<PAGE>
Political and Economic Considerations
- -------------------------------------
In prior years, a significant portion of the Company's net sales and operating
profit growth have come from international revenues. As a result, the Company's
business activities and its results could be significantly affected by the
policies of foreign governments and prevailing political, social, and economic
conditions. The Company's revenue during fiscal year 1999 was not materially
impacted by the widespread weakness in Asian currencies and it is not certain
what the long-term effect of the weakness of Asian currencies and the liquidity
situation will be on our business.
Availability of Raw Materials
- -----------------------------
The consumer adhesive and manicure implement industries have ample manufacturing
capacity and are expected to continue to do so in the future. The Company's
results of operations could be adversely affected if its raw material suppliers
are unwilling or unable to supply a timely and sufficient supply of product to
the Company.
Intellectual Property Matters
- -----------------------------
The consumer adhesive industry is characterized by minimal litigation regarding
patent and other intellectual property rights. The Company has on occasion been
notified that it may be infringing on patent and other intellectual property
rights of others. In addition, customers purchasing products from the Company
have rights to indemnification and may, under certain circumstances violate the
intellectual property rights of others. Although licenses are generally offered
in such situations, and the Company has successfully resolved these situations
in the past, there can be no assurance that the Company will not be subject to
future litigation alleging intellectual property rights infringement, or that
the Company will be able to obtain licenses on acceptable terms. An unfavorable
outcome regarding one of these matters could have an adverse effect on the
Company's business and operating results.
Year 2000 Risks
- ---------------
The efficient operations of the Company are dependent, in part, upon its
computer software programs, systems and processes (collectively, the "Informa-
tion 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 is in the process of updating its Information Systems
for Year 2000 compliance requirements. Additionally, the Company has also been
in communication with some 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 will meet
the Year 2000 compliance requirements through a combination of Information
Systems modifications and through the acquisition of new equipment and techno-
logy that are Year 2000 compliant. The Company believes that costs required
to replace or modify Information Systems, will not be material and that it will
successfully achieve 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
uncertaintites 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
<PAGE>
minimize the negative effects of emergencies. In addition, we maintain inven-
tories 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 plan 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 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards Nos. 130 and 131, "Reporting Comprehensive
Income" ("SFAS No. 130") and "Disclosures about Segments of an Enterprise and
Related Information" ("SFAS No.131"), respectively (collectively, the "State-
ments"). The Statements are effective for fiscal years beginning after December
15, 1997. SFAS No. 130 established standards for reporting of comprehensive
income and its components in annual financial statements. SFAS No. 131 esta-
blishes standards for reporting financial and descriptive information about an
enterprise's operating segments in its annual financial statements and selected
segment information in interim financial reports. Reclassification or re-
statement of comparative financial statements or financial information for
earlier periods is required upon adoption of SFAS No. 130 and SFAS No. 131,
respectively. The Company has adopted all required accounting standards in its
fiscal year ended on June 30, 1999. Application of the Statements' requirements
did not have a material impact on the Company's consolidated financial position,
results of operations or liquidity.
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.
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>
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
- --------------------------------------------------------------------
Non - Applicable.
Item 8. Financial Statements and Supplementary Data
- -----------------------------------------------------
The following consolidated financial statements are included herein:
Independent Auditors' Report
Consolidated Balance Sheets - June 30, 1999 and 1998.
Consolidated Statements of Operations - Fiscal Years Ended
June 30, 1999, 1998 and 1997.
Consolidated Statements of Stockholders' Equity - Fiscal Years
EndedJune 30, 1999, 1998 and 1997.
Consolidated Statements of Cash Flows - Fiscal Years Ended
June 30, 1999, 1998 and 1997.
Notes to Consolidated Financial Statements.
Item 9. Changes in and Disagreements with Accountants on
- ----------------------------------------------------------
Accounting and Financial Disclosure
-----------------------------------
None
<PAGE>
Independent Auditors' Report
-----------------------------
To the Board of Directors
Pacer Technology:
We have audited the accompanying consolidated balance sheets of Pacer Techno-
logy and subsidiaries as of June 30, 1999 and 1998, and the related consoli-
dated statements of operations, stockholders' equity and cash flows for each
of the years in the three-year period ended June 30, 1999. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial state-
ments based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Pacer Technology
and subsidiaries as of June 30, 1999 and 1998, and the results of their
operations and their cash flows for each of the years in the three-year period
ended June 30, 1999, in conformity with generally accepted accounting prin-
ciples.
/s/ KPMG LLP
------------
Orange County, California
September 3, 1999
<PAGE>
PACER TECHNOLOGY AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, 1999 and 1998
1999 1998
---------- ----------
ASSETS
- ------
Current assets:
Cash $ 533,533 $ 277,370
Trade receivables, less allowance for doubtful
accounts of $904,329 in 1999 and $524,596 in
1998 (notes 2 and 6) 8,810,116 8,591,327
Other receivables 132,281 146,299
Notes receivable - Current (note 2) 220,270 188,642
Inventories (notes 3 and 6) 13,706,050 10,974,578
Prepaid expenses 617,153 810,451
Deferred income taxes (note 10) 996,247 1,146,769
---------- ----------
Total current assets 25,015,650 22,135,436
Equipment and leasehold improvements, net
(notes 4, 6 and 8) 1,922,880 1,819,783
Notes Receivable - Long term 52,925 -
Deferred income taxes (note 10) 192,061 124,065
Costs in excess of net assets of businesses
acquired, net (note 1) 3,407,299 3,689,516
Other assets (note 5) 27,023 30,125
----------- -----------
$ 30,617,838 $ 27,798,925
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Current installments of long-term debt (note 6) $ 916,667 $ 333,333
Accounts payable 3,618,511 4,135,472
Accrued payroll and related expenses 468,555 494,780
Other accrued expenses (note 7) 1,187,348 2,667,486
Total current liabilities 6,191,081 7,631,071
Long-term debt, excluding current installments
(note 6) 11,785,509 9,535,889
---------- ----------
Total liabilities 17,976,590 17,166,960
Stockholders' equity (notes 11, and 17):
Common stock, no par value. Authorized 50,000,000
shares; issued and outstanding 16,789,975 shares
in 1999 and 15,864,975 shares in 1998 8,801,979 8,270,633
Retained earnings 3,899,313 2,613,453
Notes receivable from directors (note 11) (47,115) (265,257)
Accumulated other comprehensive income (12,929) 13,136
---------- ----------
Total stockholders' equity 12,641,248 10,631,965
Commitments and contingencies (notes 8,13, and 17)
$ 30,617,838 $ 27,798,925
========== ==========
See accompanying notes to consolidated financial statements.
<PAGE>
PACER TECHNOLOGY AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended June 30, 1999, 1998 and 1997
1999 1998 1997
----------- ----------- -----------
Net sales $ 46,047,901 $ 31,938,514 $ 25,677,840
Cost of sales 30,790,950 20,592,723 16,520,294
---------- ---------- ----------
Gross profit 15,256,951 11,345,791 9,157,546
Selling, general and administrative
expenses 12,217,423 8,373,526 6,595,513
---------- ---------- ----------
Operating income 3,039,528 2,972,265 2,562,033
Other (income) expense:
Interest expense, net 986,584 520,847 161,716
Other, net (184,351) (211,514) (85,964)
---------- ---------- ----------
Income before income taxes 2,237,295 2,662,932 2,486,281
Income tax expense (note 10) 951,435 1,121,883 1,268,879
---------- ---------- ----------
Net income $ 1,285,860 $ 1,541,049 $ 1,217,402
========== ========== ==========
Weighted Average Shares - basic
(note 12) 16,171,308 15,852,475 15,549,392
---------- ---------- ----------
Basic Earnings Per Share $ .08 $ .10 $ .08
========== ========== =========
Adjusted Weighted
Average Shares - diluted (note 12) 16,922,967 17,554,113 16,484,119
---------- ---------- ----------
Diluted Earnings Per share $ .08 $ .09 $ .07
========== =========== ==========
See accompanying notes to consolidated financial statements.
<PAGE>
PACER TECHNOLOGY AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended June 30, 1999, 1998 and 1997
Number of Notes Accumulated Total
issued and Retained Receivable other com- Stock
outstanding Common Earnings From prehensive holders'
shares Stock (Deficit) Directors income Equity
=========== =========== ======== =========== ========== ==========
Balances
at June
30, 1996 15,213,475 $ 8,105,115 $ (144,998) $ (629,468) $ - $ 7,330,649
Net income - - 1,217,402 - - 1,217,402
Shares
issued
upon exer-
cise of
options
(Note 11) 629,500 150,958 - - - 150,958
Shares
issued
to employees
(Note 11) 7,000 4,900 - - - 4,900
Promissory Note
from Directors
(Note 11) - - - 58,438 - 58,438
---------- ---------- ---------- ---------- -------- ----------
Balances
at June
30, 1997 15,849,975 $ 8,260,973 $ 1,072,404 $ (571,030) $ - $ 8,762,347
========== ========== ========== ========== ========= ==========
Net income - - 1,541,049 - - 1,541,049
Shares
issued
upon exer-
cise of
options
(Note 11) 7,500 3,510 - - - 3,510
Shares
issued
to employees
(Note 11) 7,500 6,150 - - - 6,150
Foreign
currency
translation
adjustment - - - - 13,136 13,136
Promissory Note
from Directors
(Note 11) - - - 305,773 - $ 305,773
---------- ---------- --------- --------- -------- ----------
Balances
at June
30, 1998 15,864,975 $ 8,270,633 $ 2,613,453 $ (265,257) $ 13,136 $10,631,965
========== ========== ========== ========== ======== ==========
Net income - - 1,285,860 - - 1,285,860
Shares
issued
upon exer-
cise of
options
(Note 11) 910,500 515,541 - - - 515,541
Shares
issued
to employees
(Note 11) 14,500 15,805 - - - 15,805
Foreign
currency
translation
adjustment - - - - (26,065) (26,065)
Promissory Note
from Directors
(Note 11) - - - 218,142 - 218,142
---------- ---------- ---------- --------- -------- ----------
Balances
at June
30, 1999 16,789,975 $ 8,801,979 $ 3,899,313 $ (47,115) $(12,929) $12,641,248
========== ========== ========= ========= ======== ==========
See accompanying notes to consolidated financial statements.
<PAGE>
PACER TECHNOLOGY AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended June 30, 1999, 1998 and 1997
1999 1998 1997
========== ========== ==========
Net income $ 1,285,860 $ 1,541,049 $ 1,217,402
Adjustments to reconcile net income to
net cash (used in) provided by operating
activities:
Depreciation 664,413 532,248 505,315
Amortization of other assets 282,217 281,013 189,612
(Loss) gain on sale of property
and equipment 12,797 (1,295) (76,000)
Provision for doubtful accounts 379,733 141,426 (5,355)
Changes in operating assets and liabilities,
excluding the effects of acquisitions:
Increase in trade accounts
receivable (598,522) (4,012,782) (199,488)
Decrease (increase) in other
receivables 14,018 65,693 (10,118)
(Increase) decrease in notes receivable (84,553) 59,577 (30,055)
Increase in inventory (2,731,472) (1,746,282) (393,452)
(Increase) decrease in prepaid expenses
and other assets 196,400 (366,943) (49,583)
Decrease (increase) in deferred income
taxes 82,526 (588,808) (111,547)
(Decrease) increase in accounts payable (516,961) 1,768,227 (15,473)
(Decrease) increase in accrued payroll
and related expenses (26,225) 107,828 88,946
(Decrease) increase in accrued expenses
and other liabilities (1,480,138) 922,358 370,662
---------- --------- ---------
Net cash (used in) or provided by
operating activities (2,519,907) (1,296,691) 1,480,864
---------- --------- ---------
Cash flows from investing activities:
Payments for acquisitions - (7,368,067) -
Proceeds from sale of property and
equipment - - 76,000
Capital expenditures (806,372) (531,105) (554,560)
---------- ---------- ---------
Net cash used in investing
activities (806,372) (7,899,172) (478,560)
---------- ---------- ---------
Cash flows from financing activities:
Principal payments on long-term debt (27,288,795) (11,593,229) (247,296)
Borrowings on long-term debt 30,982,860 21,248,731 -
Borrowings on line of credit - - 10,179,500
Repayments on line of credit - (792,000) (11,062,500)
Principal payments on term-loan (861,111) - -
Notes receivable from directors 218,142 305,773 58,438
Issuance of common stock 531,346 9,660 155,858
---------- ----------- ---------
Net cash provided by (used in)
financing activities 3,582,442 9,178,935 (916,000)
Net increase (decrease) in cash 256,163 (16,928) 86,303
Cash at beginning of year 277,370 294,298 207,995
---------- ---------- ---------
Cash at end of year $ 533,533 $ 277,370 $ 294,298
========== ========= ==========
Supplemental disclosures of cash flow information:
Cash paid during the year for interest $ 913,115 $ 497,418 $ 161,716
Cash paid during the year for income tax $ 1,140,800 $ 1,259,000 $ 1,083,939
See accompanying notes to consolidated financial statements.
<PAGE>
PACER TECHNOLOGY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended June 30, 1999, 1998 and 1997
(1) The Company and Summary of Significant Accounting Policies
The Company
- -----------
Pacer Technology ("Pacer") is a vertically integrated manufacturer, formulator
and packager of adhesives, sealants and other related products used in hobby,
cosmetic, industrial, automotive aftermarket, consumer and private label
applications. Pacer produces the plastic containers used to package their
adhesives and also produces plastic containers for other customers. Pacer also
manufactures and markets manicure implements for the retail consumer markets.
Principles of Consolidation
- ---------------------------
The consolidated financial statements include the accounts of Pacer and its
subsidiaries, Pacer Tech Limited ("Pacer Tech"), and Recap Limited ("Recap").
Pacer Tech was formed in 1986 to conduct business operations as a distributor
of adhesives in the United Kingdom. Recap was formed in 1992 and is currently
inactive. All significant intercompany accounts and transactions have been
eliminated in consolidation.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Inventories
- -----------
Inventories are stated at the lower of cost (first-in, first-out) or market (net
realizable value).
Equipment and Leasehold Improvements
- ------------------------------------
Equipment and leasehold improvements are stated at cost less accumulated
depreciation or amortization. Equipment depreciation is calculated using the
straight-line method over the estimated useful lives of the assets. Leasehold
improvements are amortized using the straight-line method over the shorter of
the lease term or estimated useful life of the asset.
Costs in Excess of Net Assets of Businesses Acquired
- ----------------------------------------------------
Costs in excess of net assets of businesses acquired are amortized on the
straight-line method over a 14-year to 20-year life. Pacer assesses the
recoverability of this intangible asset by determining whether the amortization
of the asset balance over its remaining useful life can be recovered through
undiscounted future operating cash flows of the acquired operations.
Earnings per Share
- ------------------
Basic earnings per share are based on weighted average shares and exclude any
dilutive effects of options. Diluted earnings per share reflect dilutive
options. All earnings per share amounts for all periods have been presented
and restated to conform to the SFAS No. 128 requirements (see note 12).
Income Taxes
- ------------
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date
(See note 10).
<PAGE>
Comprehensive Income
- --------------------
On July 1, 1998, the Company adopted 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 and is presented in the consolidated statements of stockholders'
equity. The Statement requires only additional disclosures in the consolidated
financial statements; it does not affect the Company's financial position or
results of operations. Prior year financial statements have been reclassified
to conform to the requirements of SFAS No. 130.
Foreign Currency Translation
- ----------------------------
Assets and liabilities denominated in a functional currency other than U.S.
dollars are translated into U.S. dollars at the current rate of exchange
existing at year-end, and revenues and expenses are translated at the average
monthly exchange rates. Translation adjustments are included as a separate
component of stockholders' equity. Transaction gains and losses included in
net income are immaterial.
Fair Value of Financial Instruments
- -----------------------------------
In December 1991, the FASB issued SFAS No. 107, "Disclosures about Fair Value of
Financial Instruments." SFAS No. 107 requires all entities to disclose the
fair value of financial instruments, both assets and liabilities recognized
and not recognized on the balance sheet, for which it is practicable to estimate
fair value. SFAS No. 107 defines fair value of a financial instrument as the
amount at which the instrument could be exchanged in a current transaction
between willing parties. As of June 30, 1999, the fair value of all financial
instruments approximated carrying value.
Research and Development
- ------------------------
Research and development costs are charged to selling, general and administra-
tive expenses as incurred and amounted to $471,289, $440,861 and $347,691 in
1999, 1998 and 1997, respectively.
Product Warranties
- ------------------
Pacer provides warranties for some products for periods generally ranging from
6 to 12 months. Estimated warranty costs are recognized at the time of the
sale.
Statement of Cash Flows
- -----------------------
Cash and cash equivalents represent cash and short-term, highly liquid invest-
ments with original maturities of three months or less.
Impairment of Long-Lived Assets and Long-Lived Assets To Be Disposed Of
- -----------------------------------------------------------------------
The Company accounts for long-lived assets in accordance with the provisions
of SFAS No.121, Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to Be Disposed Of. This Statement requires that long-lived assets
and certain identifiable intangibles be reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceed the fair value of the assets. Assets
to be disposed of are reported at the lower of the carrying amount or fair
value less costs to sell.
Stock Option Plans
- ------------------
The Company applies the intrinsic value-based method of accounting prescribed by
Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued
to Employees, and related interpretations, in accounting for its fixed plan
stock options. As such, compensation expense would be recorded on the date of
grant only if the current market price of the underlying stock exceeded the
exercise price.
(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.
<PAGE>
(3) Inventories
- ----------------
Inventories are summarized as follows: 1999 1998
---------- -----------
Raw materials $ 7,456,129 $ 5,103,266
Work-in-process 570,688 542,489
Finished goods 5,679,233 5,328,823
---------- ----------
$ 13,706,050 $ 10,974,578
(4) Equipment and Leasehold Improvements
- -----------------------------------------
Equipment and leasehold improvements and the useful lives used for computing
depreciation and amortization are summarized as follows:
Estimated
Useful
Lives 1999 1998
--------- ---------- ----------
Shop equipment 5-10 $ 5,051,487 $ 4,689,188
Office furniture and equipment 5-7 627,639 588,449
Leasehold improvements 10 1,039,329 863,998
Transportation equipment 3 132,109 124,328
Construction in progress - 22,812 10,903
---------- ----------
$ 6,873,376 $ 6,276,866
Less accumulated depreciation
and amortization (4,950,496) (4,457,083)
---------- ----------
$ 1,922,880 $ 1,819,783
========== ==========
(5) Other Assets
- ----------------
Other assets (net of amortization) consist of the following:
1999 1998
--------- ---------
Cook Bates-Patents & trademarks, net $ 22,619 $ 24,405
Patents and trademarks, net 4,404 5,312
Other - 408
--------- ---------
$ 27,023 $ 30,125
========= =========
(6) Line of Credit and 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 $18,000,000, for working capital
requirements. The interest rate on this note is at the bank's Prime Rate
(7.75% at June 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
$7,000,000 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 $10,583,000 and term
loan of $750,000 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 $5,000,000 from January 19,
1999 to January 2, 2001. As of June 30, 1999, total outstanding letters
of credit totalled $112,513 and had a maturity date of October 6, 1999.
(2) Term loan of $2,750,000 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 June 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.
(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 June 30, 1999) less 0.5%. At June 30, 1999
there was no borrowing against this note.
<PAGE>
The agreements require maintenance of certain financial ratios and contain other
restrictive covenants. Pacer Technology was in compliance with all debt
covenants on June 30, 1999.
Long-term debt consists of the following: 1999 1998
--------- ---------
Term Loan at prime plus 0.5%, secured by
certain assets, due in monthly install-
ments of principal plus interest through
July 1, 2000. $ - $ 972,222
Term Loan at prime less 0.5% secured by
certain assets, due in monthly install-
ments of principal plus interest through
January 2, 2002. 2,444,444 -
Promissory note agreement with monthly
interest payments at prime plus 0.5%,
secured by certain assets. This note
matures July 1, 2000. - 8,897,000
Promissory note agreement with monthly
interest payments at prime less 0.5%,
secured by certain assets. This note
matures January 2, 2001. 10,257,732 -
Less: Current installments (916,667) ( 333,333)
----------- ----------
Total Long-Term Debt $ 11,785,509 $ 9,535,889
=========== ==========
(7) Other Accrued Expenses
- ---------------------------
Other accrued expenses at June 30, 1999 and 1998 consist of the following:
1999 1998
------- ---------
Sales and Marketing Expenses $ 496,557 $ 831,912
Legal and Accounting Expenses 75,000 67,000
Warranty 276,700 310,060
Income and Other Taxes 201,129 715,944
Relocation and Closure Costs 70,553 531,654
Other 67,409 210,916
---------- ---------
Total Accrued Liabilities $ 1,187,348 $ 2,667,486
========== =========
(8) Lease Obligations
- ----------------------
Pacer leases three manufacturing facilities under operating leases expiring in
May 2009, October 2004, and May 2009. Pacer also leases two distribution
facilities and office equipment under operating lease agreements. Leases for
the two distribution facilities expire in July 2001 and May 2003. Future
minimum lease payments under noncancellable operating leases as of June 30,
1999 are as follows:
Operating
Year ending June 30, Leases
------------------- ----------
2000 $ 711,746
2001 704,076
2002 706,875
2003 711,810
2004 568,056
Thereafter 2,745,421
----------
Minimum future lease payments $ 6,147,984
==========
<PAGE>
Rent expense was $861,134, $405,134, and $404,107 in 1999, 1998 and 1997,
respectively.
(9) Major Customers and Export Sales
- -------------------------------------
Pacer's export sales represent approximately 11.4% of net sales in 1999, 17.0%
of net sales in 1998 and 18.3% of net sales in 1997.
(10) Income Taxes
- ------------------
Income tax expense (benefit) from continuing operations for the years ended
June 30, 1999, 1998 and 1997 consist of:
1999 1998 1997
--------- --------- ---------
Federal:
Current $ 715,935 $ 1,423,861 $ 1,139,387
Deferred 73,612 (446,021) (94,828)
-------- --------- ---------
789,547 977,840 1,044,559
State:
Current 152,974 286,830 241,039
Deferred 8,914 (142,787) (16,719)
-------- --------- ---------
$ 951,435 $ 1,121,883 $ 1,268,879
======== ========= =========
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets at June 30, 1999 and 1998 are presented below:
Current deferred tax assets (liabilities): 1999 1998
--------- ---------
Allowance for doubtful accounts $ 382,765 $ 224,737
Inventory 183,686 259,110
Prepaid expenses (92,643) (89,982)
Vacation accruals 65,302 64,272
Warranty accruals 118,537 132,829
Advertising accruals 34,497 71,340
Amortization 138,698 114,833
Other accruals 165,405 369,630
--------- ----------
Net current deferred tax assets $ 996,247 $ 1,146,769
========= ==========
Non-current deferred tax assets:
Depreciation $ 192,061 $ 124,065
========= =========
The Company believes that it is more likely than not that the net deferred tax
assets will be realized. This belief is based on recent and anticipated future
earnings.
The total income tax expense differs from the "expected" tax expense (computed
by applying the U.S. Federal corporate income tax rate of 34%) for 1999, 1998
and 1997 as follows:
1999 1998 1997
-------- ---------- ---------
Expected income tax provision $ 760,680 $ 905,396 $ 845,336
Non-deductible expenses 52,754 69,446 78,633
State income tax, net of
Federal income tax benefit 106,847 95,068 148,051
Effect of foreign operations 34,053 33,745 19,303
Other (2,899) 18,228 177,556
--------- --------- ---------
$ 951,435 $ 1,121,883 $ 1,268,879
======== ========= =========
<PAGE>
(11) Stockholders' Equity
- --------------------------
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 $58,438 ($175,313
total) with interest of 7.8% per annum payable to Pacer Technology. Two of
these notes were paid in full on January 13, 1997, and April 30, 1999, plus
interest accrued as of the date of payment. The balance of $23,115 is secured
by 39,554 shares of the Company's common stock. The Director made a payment
of $8,000 and the balance is expected to be collected on or about October 1,
1999.
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 $309,188, plus simple interest of 7.89% per annum
payable to Pacer Technology. On August 14, 1997, the Director paid $149,988
against the principal balance, plus accrued interest. The balance of this note,
$159,199 was paid in full on April 26, 1999 plus accrued interest.
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 the Security Agreement between the
Company and the Director.
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.
On September 15, 1999, the Director paid $15,000 towards the principal of this
note and the balance is expected to be collected on or about October 1, 1999.
Common Stock
- ------------
During the year ended June 30, 1994, Pacer adopted a stock incentive plan which
awards shares of stock to employees for years of service. Under this plan,
500 shares of Pacer stock are granted to each employee for every five years of
service. The shares are restricted for one year after the grant date. Pacer
awarded 14,500, 7,500, and 7,000 shares to employees for past service and
recorded compensation expense of $15,805, $6,150, and $4,900 in 1999, 1998 and
1997, respectively.
Nonqualified Stock Option and Incentive Stock Option Plans
- ----------------------------------------------------------
During the year ended June 30, 1995, Pacer adopted the 1994 Stock Option Plan
to provide key employees and directors an opportunity to purchase the nonquali-
fied common stock of the Company pursuant to "non-qualified stock options" at
the discretion of the Board of Directors.
Under the 1994 Stock Option Plan, options to purchase up to 2,200,000 shares
of Pacer Technology common stock can be granted. The purchase price shall be
no less than fair market value on the grant date. The exercise period shall
not exceed ten years from grant date and options vest immediately.
There were no stock options granted under the nonqualified Stock Option Plan
during fiscal year 1999, 1998, and 1997.
During the year ended June 30, 1995, Pacer adopted the 1994 Incentive Stock
Option Plan that qualifies as "incentive stock options" under Section 422 of
the Internal Revenue Service Code.
<PAGE>
Under the 1994 Incentive Stock Option Plan, options to purchase up to an aggre-
gate of 2,000,000 shares of Pacer Technology common stock can be granted. The
purchase price shall be no less than the fair market value of the common stock
on the grant date. In the event such option is granted to an employee who, at
the time the option is granted, owns common stock possessing more than 10% of
the total combined voting power of all classes of stock of the Company, the
exercise price of the option shall be no less than 110% of the fair market
value. The exercise period for the options shall not exceed ten years. The
option agreement may provide (a) that the right to exercise the option in
whole or in part shall not accrue until a certain date or the occurrence of
an event; (b) that the right to exercise the option shall accrue over time in
accordance with a vesting schedule; or (c) that such accrual shall be accele-
rated upon the occurrence of certain specified event(s).
In fiscal year 1998, under this plan, Pacer granted an option to an employee
to purchase 50,000 shares of Pacer's common stock at $1.406 per share. The
market value of the stock was $ 1.25 per share on the date of grant. The fair
value of the stock option granted during fiscal 1998 was $47,500 on the date
of grant using the Black Scholes option-pricing model with the following
assumptions: volatility rate of 64.88%, risk-free interest rate of 5.60%, and
an expected life of 10 years.
In fiscal year 1999, under this plan, Pacer granted two options to employees
to purchase a total of 75,000 shares of Pacer's common stock at $1.047 per
share. The market value of the stock was $ 1.047 per share on the date of
grant. The fair value of the stock options granted during fiscal 1999 was
$60,628 on the date of grant using the Black Scholes option-pricing model with
the following assumptions: volatility rate of 66.54%, risk-free interest rate of
5.93%, and an expected life of 10 years.
The Company applies APB Opinion No.25 in accounting for its Plan and,
accordingly, no compensation cost has been recognized for its stock options
in the financial statements. Had the Company determined compensation cost based
on the fair value at the grant date for its stock options under SFAS No.123,
the Company's net income would have been reduced to the pro forma amounts
indicated below:
1999 1998 1997
---------- ---------- ----------
Net income As reported $ 1,285,860 $ 1,541,049 $ 1,217,402
Pro forma $ 1,255,546 $ 1,513,499 $ 1,217,402
E.P.S. As reported-Basic $ 0.08 $ 0.10 $ 0.07
Pro forma-Basic $ 0.08 $ 0.10 $ 0.07
As reported-Diluted $ 0.08 $ 0.09 $ 0.07
Pro forma-Diluted $ 0.08 $ 0.09 $ 0.07
Pacer had 4,800,000 shares of common stock reserved for non-qualified and
qualified incentive stock options under the Company's 1982 Stock Option Plan
and the 1982 Incentive Stock Option Plan. These Plans expired in 1992, and no
options were granted under these plans thereafter.
Under the 1982 Stock Option Plan, options to purchase up to an aggregate of
1,800,000 shares of common stock could be granted to both directors and key
employees. The purchase price was not normally less than the fair market value
of the shares on the date the option was granted, and in no event was the
purchase price less than 85% of the fair market value of the shares on the date
the option was granted. The exercise period for an option could not exceed
ten years, and options granted vested immediately.
Under the 1982 Incentive Stock Option Plan, options to purchase an aggregate
of 3,000,000 shares of common stock could be granted to key employees of Pacer.
The purchase price was not less than the fair market value of the shares on the
date the option was granted. These options generally expired in ten years and
vested immediately.
<PAGE>
A summary of transactions under the stock option plans is as follows:
1982 Stock Option Plan & ISOP
Options Outstanding Options
Available Exercise Aggregate
for Grant Shares Price Value
---------- --------- ------------ ----------
Balances at June 30, 1996 - 1,276,500 $ 0.19-0.55 $ 474,890
Options exercised - (629,500) $ 0.19-0.55 $ (150,959)
---------- ---------- ---------- ---------
Balances at June 30, 1997 - 647,000 $ 0.19-0.55 $ 323,931
Options exercised - (7,500) $ 0.47 $ (3,510)
---------- ---------- ---------- ----------
Balances at June 30, 1998 - 639,500 $ 0.19-0.55 $ 320,421
Options exercised - (639,500) $ 0.47-0.55 $ (320,421)
---------- ---------- ---------- ----------
Balances at June 30, 1999 - 0 $ 0 $ 0
========== ========== ========== ==========
Other Stock Option Plan
Options Outstanding Options
Available Exercise Aggregate
for Grant Shares Price Value
----------- ---------- ---------- ----------
Balances at June 30, 1996 - 1,200,000 $ 1.00-1.08 $ 1,213,800
Options cancelled - (100,000) $ 1.05 $ (100,000)
----------- ---------- ---------- ----------
Balances at June 30, 1997 - 1,100,000 $ 1.00-1.08 $ 1,113,800
----------- ---------- ---------- ----------
Balances at June 30, 1998 - 1,100,000 $ 1.00-1.08 $ 1,113,800
----------- ---------- ---------- ----------
Options expired - (400,000) $ 1.00-1.08 $ (407,800)
----------- ---------- ---------- ----------
Balances at June 30, 1999 - 700,000 $ 1.00-1.08 $ 706,000
=========== ========== ========== =========
1994 SOP & ISOP
Options Outstanding Options
Available Exercise Aggregate
for Grant Shares Price Value
---------- --------- ---------- ----------
Balances at June 30, 1996 300,000 3,700,000 $ 0.72-1.00 $ 3,463,500
Balances at June 30, 1997 300,000 3,700,000 $ 0.72-1.00 $ 3,463,500
---------- --------- ---------- -----------
Options granted (50,000) 50,000 $ 1.41 $ 70,313
---------- --------- ---------- -----------
Balances at June 30, 1998 250,000 3,750,000 $ 0.72-1.41 $ 3,533,813
---------- --------- ---------- -----------
Options granted (75,000) 75,000 $ 1.05 $ 78,525
Options exercised 271,000 (271,000) $ 0.72-1.00 $ (195,120)
Options expired 1,000,000 (1,000,000) $ 0.72-1.00 $ (1,000,000)
Options cancelled 25,000 (25,000) $ 0.72-1.00 $ (18,000)
Options authorized 200,000 - $ - $ -
--------- --------- ---------- -----------
Balances at June 30, 1999 1,671,000 2,529,000 $ 0.72-1.41 $ 2,399,218
========= ========= ========== ==========
At June 30, 1999 and 1998, the options exercisable were 454,000 and 925,000
respectively.
<PAGE>
(12) Earnings Per Share
- -----------------------
Earnings per share was computed as follows:
YEARS ENDED
JUNE 30, JUNE 30, JUNE 30,
1999 1998 1997
---------- ----------- ----------
Numerator:
Numerator for basic and diluted
earnings per share--net income--........$ 1,285,860 $ 1,541,049 $ 1,217,402
Denominator:
Denominator for basic earnings per
share--weighted average number of
common shares outstanding during
the period.............................. 16,171,308 15,852,475 15,549,392
Incremental common shares attributable
to exercise of outstanding options...... 751,659 1,701,638 934,727
----------- ---------- ----------
Denominator for diluted earnings
per share.............................. $16,922,967 $17,554,113 $16,484,119
========== ========== ==========
Basic earnings per share................. $ .08 $ .10 $ .08
========= ========== ==========
Diluted earnings per share............... $ .08 $ .09 $ .07
========= ========== =========
Substantially all options were included in the computation of diluted earnings
per share for 1999, 1998, and 1997.
(13) 401(k) Plan
- ----------------
Pacer's 401(k) plan is available to all full-time employees who have completed
a minimum service of one year at January 1 or July 1 of each year.
Employees who elect to participate in the plan may make contributions to the
plan on a pre-tax basis from 2% to 16% of their annual compensation. Pacer
contributions, when made, will match 50% of employee contributions up to 4% of
salaries paid. Pacer contributions are accrued as participant contributions
are withheld, and participants become fully vested in Pacer contributions after
six years of service.
Plan expense for the years ended June 30, 1999, 1998 and 1997 was $ 74,428,
$45,088 and $35,740, respectively.
(14) Quarterly Financial Data (Unaudited)
- ----------------------------------------
NET INCOME
==========
Net Income
Per Share
Revenues Gross Profit Net Income Basic Diluted
---------- ------------ ---------- ------ -------
1999
====
First Quarter $13,657,709 $ 4,918,989 $ 956,911 $ .06 $ .05
Second Quarter 11,840,117 4,135,518 420,886 .03 .02
Third Quarter 9,993,995 3,125,342 (391,513) (.02) (.02)
Fourth Quarter 10,556,080 3,077,102 299,576 .02 .02
1998
====
First Quarter $ 7,375,150 $ 2,734,141 $ 450,872 $ .03 $ .03
Second Quarter 6,273,501 2,252,160 275,646 .02 .02
Third Quarter 8,321,050 2,972,304 428,217 .03 .03
Fourth Quarter 9,968,813 3,387,186 386,314 .02 .02
<PAGE>
(15) Acquisitions
- -----------------
On July 15, 1997, the Company acquired the assets of California Chemical
Specialties, Inc.,("CCSI"). The assets purchased 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.
The acquisition of CCSI has been accounted for as a purchase and, accordingly,
the results of operations of CCSI are included in the Company's consolidated
statements of operations from the date of acquisition. The excess of fair
value of net assets acquired was approximately $ 2,276,000 and is being
amortized on a straight-line basis over 20 years.
On March 4, 1998, the Company 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 acquisition of Cook Bates has been accounted for as a purchase and,
accordingly, the results of operations of Cook Bates are included in the
Company's consolidated statements of operations from the date of acquisition.
The following summary represents the unaudited pro forma results of operations
as if the acquisitions of California Chemical and Cook Bates had occurred at
the beginning of the periods presented, after consideration for certain adjust-
ments including the amortization of cost in excess of net assets acquired (if
applicable) and interest expense:
Twelve-months ended June 30,
1998
(Unaudited)
---------------------------
Net Sales $ 51,667,711
Net Income $ 1,153,874
Basic E.P.S. $ 0.07
Diluted E.P.S. $ 0.07
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 and Cook Bates had been consummated on
the dates indicated or that may be obtained in the future.
(16) Related Party Transactions
- -------------------------------
The Company has made loans to certain directors which are evidenced by promis-
sory notes and secured by shares of common stock. The loans have maturities
of 4 years. As of June 30, 1999, the outstanding principal amount on the notes
was $47,115 and is included in stockholders' equity. (Note 11)
(17) 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.
Pacer is involved in certain legal actions and claims arising in the ordinary
course of business. It is the opinion of management (based on advice of legal
counsel) that such litigation will be resolved without material effect on
Pacer's financial position or results of operations.
<PAGE>
PART III
========
Item 10. Directors and Executive Officers of the Registrant
- ------------------------------------------------------------
Identification of the directors and executive officers of the Company is
incorporated by reference from the "Election of Directors--Nominees" and
"Executive Officers" sections of the Company's definitive Proxy Statement dated
October 4, 1999 to be mailed to shareholders in connection with the 1999 Annual
Shareholders Meeting and filed with the Securities and Exchange commission on
or about October 4, 1999 (the "Proxy Statement"). Information regarding
compliance with Section 16(a) of the Exchange Act is incorporated by reference
from the "Section 16(a) Beneficial Ownership Reporting Compliance" section
of the Proxy Statement.
Item 11. Executive Compensation
- -------------------------------
Incorporated by reference from the "Election of Directors--Executive Compensa-
tion", "Report of Compensation Committee" and "Stock Price Performance Graph",
sections of the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- -----------------------------------------------------------------------
Incorporated by reference from the "General Information--Share Ownership of
Management" section of the Proxy Statement.
Item 13. Certain Relationships and Related Party Transactions
- --------------------------------------------------------------
Incorporated by reference from the "Certain Transactions" section of the Proxy
Statement.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
- -------------------------------------------------------------------------
(a)(1) Financial Statements:
The following is a list of the exhibits filed with this Form 10-K.
Exhibit 3.1 Articles of Incorporation (2)
Exhibit 3.2 By-laws (2)
Exhibit 10.3 Employement agreement dated November 21, 1989 between the
Company and James Munn (3)
Exhibit 10.5 Lease Agreement for new facilities in Rancho Cucamonga,
California, dated March 1, 1988. (1)
Exhibit 10.6 Agreement To Extend Term of Executive Employment Agreement,
dated April 12, 1995. (4)
Exhibit 10.7 Agreement To Extend Term of lease agreement dated March
1, 1988 for facilities in Rancho Cucamonga.
Exhibit 21 Subsidiaries of Registrant
Exhibit 23 Consent of Independent Auditors
(a)(2) Financial Statement Schedule:
Schedule
II. Valuation and Qualifying Accounts
All other schedules have been omitted as the required information is
reported or incorporated by reference elsewhere in this Annual Report
or is not applicable.
(b) Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
On May 12, 1998, the registrant filed form 8-KA. The purpose of the
filing was to amend the Form 8-K filed on March 13, 1998 disclosing the
acquisition by the
<PAGE>
registrant of certain assets of Cook Bates, a division of London Inter-
national Group, Inc., under Item 2 of form 8-K. The following financial
statements were filed as part of this Form 8-KA:
i) Financial Statements of Business Acquired
- Independent Auditors' Report
- Audited Balance Sheet as of February 28, 1998
- Audited Statement of Operations and Accumulated Deficit for
the eleven months ended February 28, 1998
- Notes to Financial Statements for the eleven months ended
February 28, 1998
ii) Pro Forma Combined Balance of Financial Information
- Unaudited Pro Forma Combined Financial Information
- Unaudited Pro Forma Combined Balance Sheet of Pacer Technology
and Subsidiaries at December 31, 1997
- Unaudited Pro Forma Combined Statement of Income of Pacer
Technology and Subsidiaries for the six months ended December 31,
1997
- Unaudited Pro Forma Combined Statement of Income of Pacer
Technology and subsidiaries for the year ended June 30, 1997
- Notes to Unaudited Pro Forma Combined Financial Data as of
December 31, 1997 and June 30, 1997
- ---------------------------------
1) Incorporated by reference to exhibits to Form 10-K for fiscal year
ended June 30, 1988.
2) Incorporated by reference to exhibits to Form 10-K for fiscal year
ended June 30, 1986.
3) Incorporated by reference to exhibits to Form 10-K for fiscal year
ended June 30, 1990.
4) Incorporated by reference to exhibits to Form 10-K for fiscal year
ended June 30, 1995.
<PAGE>
INDEPENDENT AUDITORS' REPORT ON SCHEDULE
----------------------------------------
To the Board of Directors and Shareholders
Pacer Technology:
The audits referred to in our report dated September 3, 1999 included the
related financial statement schedule as of June 30, 1999 and 1998, and for each
of the years in the three-year period ended June 30, 1999, included in the
annual report on Form 10-K of Pacer Technology. This financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion on this financial statement schedule based on our
audits. In our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/KPMG LLP
-----------
Orange County, California
September 3, 1999
<PAGE>
SCHEDULE II - PACER TECHNOLOGY
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED JUNE 30
(in thousands)
Balance at Charged to
Beginning Costs and Balance At
Period Expenses Deductions End of Period
----------- ----------- ----------- --------------
FY 1997:
Allowance for
Doubtful Accounts $ 389 $ 219 $ 225 $ 383
Allowance for
Obsolescence 343 78 166 255
------ ------ ------ ------
$ 732 $ 297 $ 391 $ 638
FY 1998:
=======
Allowance for
Doubtful Accounts $ 383 $ 166 $ 24 $ 525
Allowance for
Obsolescence 255 918 66 1,107
------ ------ ------ ------
$ 638 $ 1,084 $ 90 $ 1,632
FY 1999:
=======
Allowance for
Doubtful Accounts $ 525 $ 390 $ 11 $ 904
Allowance for
Obsolescence 1,107 226 522 811
------ ------ ------ ------
$ 1,632 $ 616 $ 533 $ 1,715
<PAGE>
Signatures
----------
Pursuant to the requirements of section 13 or 15(d) 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
--------------------------
William T. Nightingale III
Date: September 24, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
- --------- ------------ ------------------
__________________________ President/ September 24, 1999
William T. Nightingale III Chief Executive
Officer/Director
__________________________ Chief Financial September 24, 1999
Laurence R. Huff Officer
__________________________ Chairman of September 24, 1999
John G. Hockin, II, DDS the Board and
Director
__________________________ Director September 24, 1999
Geofrrey Tirman
__________________________ Director September 24, 1999
D. Jonathan Merriman
__________________________ Director September 24, 1999
Carl Hathaway
__________________________ Secretary and September 24, 1999
Larry K. Reynolds Director
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) 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
/s/ William T. Nightingale III
------------------------------
William T. Nightingale III, President
Date: September 24, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the regis-
trant and in the capacities and on the dates indicated.
Signature Title Date
- --------- -------------- ------------------
/s/ William T. Nightingale III President/ September 24, 1999
- ------------------------------ Chief Executive
William T. Nightingale III Officer/Director
/s/ Laurence R. Huff Chief Financial September 24, 1999
- ------------------------------ Officer
Laurence R. Huff
/s/ John G. Hockin II Chairman of the September 24, 1999
- ------------------------------ Board and Director
John G. Hockin II
/s/ Geoffrey Tirman Director September 24, 1999
- ------------------------------
Geoffrey Tirman
/s/ D. Jonathan Merriman Director September 24, 1999
- ------------------------------
D. Jonathan Merriman
/s/ Carl Hathaway Director September 24, 1999
- ------------------------------
Carl Hathaway
/s/ Larry K. Reynolds Secretary and September 24, 1999
- ------------------------------ Director
Larry K. Reynolds
<PAGE>
INDEX TO EXHIBITS
Number Name
- ------------ -----------------------------
Exhibit 3.1 Articles of Incorporation (2)
Exhibit 3.2 By-laws (2)
Exhibit 10.3 Employement agreement dated November 21, 1989 between the
Company and James Munn (3)
Exhibit 10.5 Lease Agreement for new facilities in
Rancho Cucamonga, California, dated
March 1, 1988. (1)
Exhibit 10.6 Agreement To Extend Term of Executive Employment Agreement,
dated April 12, 1995. (4)
Exhibit 10.7 Agreement To Extend Term of lease agreement dated
March 1, 1988 for facilities in Rancho Cucamonga
Exhibit 21 Subsidiaries of Registrant
Exhibit 23 Consent of Independent Auditors
- -------------------------------
1) Incorporated by reference to exhibits to Form 10-K for fiscal
year ended June 30, 1988.
2) Incorporated by reference to exhibits to Form 10-K for fiscal
year ended June 30, 1986.
3) Incorporated by reference to exhibits to Form 10-K for fiscal
year ended June 30, 1990.
4) Incorporated by reference to exhibits to Form 10-K for fiscal
year ended June 30, 1995.
<PAGE>
EXHIBIT 10.7
AMENDMENT TO LEASE AGREEMENT FOR FACILITIES IN RANCHO CUCAMONGA
===============================================================
This AMENDMENT TO LEASE ("Amendment") is made by and between COLAVIN DAY CREEK,
a California general partnership ("Lessor"), and PACER TECHNOLOGY, a California
Corporation ("Lessee"), effective as of the 1st day of June, 1997.
WHEREAS, the parties entered into that certain lease dated March 1, 1988,
including two attached Addenda containing Paragraphs 48 to 72, inclusive, and
Paragraphs 73 to 79, inclusive, respectively (together, the "Lease") with
respect to that certain real property located in the County of San Bernardino
and described as Pacer 3 of Map No.4749, as per Map recorded in Book 47, Pages
28 and 29 of Maps in the Office of the County Recorder of San Bernardino County
(the "Premises"), upon which a building was constructed (the "Building")
containing approximately 47,700 square feet of floor area, a portion of which
has been improved as office space; and
WHEREAS, the parties desire to enter into this Amendment in order to extend the
Lease Term so as to expire on May 31, 2009, with the adjusted rental rates and
other terms to be effective June 1, 1997, as set forth hereinbelow.
NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, Lessor and Lessee hereby agree to amend the Lease as
follows:
1. Term. The Term of this Lease shall extend through May 31, 2009, and the
terms of this Amendment shall be effective as of June 1, 1997 (the "Effective
Date").
2. Rent. The monthly rent for the Premises, commencing on the Effective Date,
shall $15,741 per month, calculated at $.33 per square foot of Building area
on 47,700 square feet, together with the additional rental obligations under
Paragraphs 7 (Repairs and Maintenance), 8 (Insurance), 10 (Real Property Taxes)
and 11 (Utilities) of the Lease. The base monthly rental $15,741 per month
shall be increased at the beginning of the 31st, 61st, 91st, and 121st months
of the Term of the Lease by multiplying the then-existing monthly rental by
1.0768 (3% per annum on a compounded basis). Therefore, base monthly rent
shall be as follows:
Effective Period Base Monthly Rent
---------------- ------------------
Months 1-30 $ 15,741
Months 31-60 $ 16,950
Months 61-90 $ 18,252
Months 91-120 $ 19,653
Months 121-144 $ 21,162
3. Options to Extend.
3.1 Grant. Lessor hereby grants to Lessee two (2) consecutive options to
extend the Term of this Lease for periods of five (5) years each (the "Option
Terms"), which options shall be exercisable only by written notice delivered
by Lessee to Lessor not more than fifteen (15) months and not less than twelve
(12) months prior to the expiration of the then-current Term. As a condition
to exercising the respective options, as of the delivery date of Lessee's
notice, Lessee shall not then be in default under the Lease following the
expiration of applicable cure periods. Upon the proper exercise of each option
to extend, the Term of the Lease shall be extended for a period of five (5)
years. The rights contained in this Paragraph 3 shall be personal to Lessee
and may only be exercised by Lessee; provided, however, that if Lessor consents
to any assignment or subletting of all or any portion of the Premises, or if
Lessee assigns or sublets as allowed pursuant to Section 12.2 of this Lease,
then the assignee (but not a sublessee) may exercise the rights contained in
this Paragraph 3, with Lessee remaining liable under this Leasee during such
extended term or terms. The rent payable by Lessee during the Option Terms
(the "Option Rent") shall be ninty-five percent (95%) of the "Market Rental
Value," with no refurbishment allowance or rental abatement or, in the alter-
native, at one hundred percent (100%) of the Market Rental Value, with no
refurbishment allowance but with two (2) months of base monthly rental abated
for each such extension, which alternative shall be selected by Lessee and
submitted to Lessor concurrently with Lessee's exercise of its then-applicable
option to extend.
<PAGE>
3.2 Market Rental Value Adjustment. The market Rental Value for the Premises
shall be determined as follows:
(a) Not later than four (4) months prior to the commencement of the then-
applicable Option Term, the parties shall attempt to agree upon what the new
Market Rental Value ("MRV") will be on the first date of the applicable Option
Term. If agreement cannot be reached within thirty (30) days, then Lessor and
Lessee shall each immediately make a reasonable determination of the MRV and
submit such determination, in writing, to arbitration in accordance with the
following provisions:
(i) Within fifteen (15) days after the thirty (30) day period described above,
Lessor and Lessee shall each appoint one arbitrator who shall, by profession,
be a real estate broker who shall have been active over the five (5) year period
ending on the date of such appointmet in the leasing of, and determination of
rental rates for, similar properties in San Bernardino County and particularly
within the vicinity of the Building. The two arbitrators so appointed shall
immediately select a third mutually acceptable arbitrator.
(ii) The three arbitrators shall, within thirty (30) days of the appointment
of the third arbitrator, reach a decision as to what the actual MRV for the
Premises is, and whether Lessor's or Lessee's submitted MRV is the closest
thereto. The decision of the majority of the arbitrators shall be binding on
the parties. The submitted MRV which is determined to be the closest to the
actual MRV shall thereafter be used by the parties.
(iii) If either of the parties fails to appoint an arbitrator within the
specified fifteen (15) days, the arbitrator timely appointed by one of them
shall reach a decision on his or her own, and said decision shall be binding
on the parties.
(iv) The entire cost of such arbitration shall be paid by party whose submit-
ted MRV was not selected by the arbitrators, but in no event shall the party
whose submitted MRV was not selected by the arbitrator be required to pay more
than the cost incurred for the arbitrator chosen by it plus an equal amount to
be applied toward the successful arbitrating parties' cost. By way of illus-
tration, if Lessee is the party whose MRV was not selected and if Lessee's cost
in connection with the arbitration equaled $1,200 and Lessor's cost equals
$1,400, the Lessee's total exposure for the cost of arbitration shall be
$2,400, and not $2,600.
(b) The MRV which is selected pursuant to the foregoing provisions shall be
multiplied by ninety-five percent (95%), if Lessee selected the alternative
without a refurbishment allowance or rental abatement, and by one hundred
percent (100%) if Lessee selected the alternative with no refurbishment but
with two months abated rent.
4. Tenant Improvements. Lessor shall, at its sole cost and expense, paint the
exterior of the Building, and repair, slurry and restripe the parking lot as
soon as reasonably possible following the execution and delivery of this
Amendment.
5. Option to Expand. Lessor hereby grants to Lessee the option to cause Lessor
to expand the Building by not less than 20,000 square fee, subject to approval
of Lessor's first mortgagee, which approval or disapproval shall be given not
later than thirty (30) days following the delivery to Lessor by Lessee of the
exercise of this option to expand. The terms of the option to expand shall be
as follows:
5.1 The construction of the improvements shall be pursuant to the provisions of
Paragraph 66 of the Lease, with appropriate modifications to reflect the new
square footage and the performance dates for delivery of plans.
5.2 The Term of the Lease shall be extended for a period of ten (10) years
from the date of substantial completion of the expansion improvements.
5.3 The interior improvements shall be constructed and paid for pursuant to the
provisions of Paragraph 67 of the Lease, with the allowance referenced in
Paragraph 67(vii) of the Lease to be adjusted proportionately based on the size
of the expansion selected by Lessee, given that the allowance in Paragraph 67
(vii) was based on a 46,000 square foot building (thereafter expanded to 47,700
square feet). Further, the leasehold improvement payment in Paragraph 68 of
the Lease shall be applicable, with proportionate adjustments based on the size
of the expansion.
<PAGE>
5.4 Base monthly rental shall be the MRV for the expanded Premises, not
taking into account the Lessee improvements described in Paragraph 5.3 above;
i.e., Lessee's adjusted monthly base rental shall be increased by the leasehold
improvement payments required pursuant to the promulgation of Paragraph 68 of
the Lease to the circumstances resulting from Lessee's election to expand.
The MRV shall be calculated in the same manner as MRV is calculated pursuant
to Lessee's options to extend at the one hundred percent (100%) level, but
without a two-month abatement.
6. Disclosure. Lessor hereby represents to Lessee that, to the best of
Lessor's acknowledge (which shall mean and refer to the actual knowledge of
Sam C. Longo, JR.), there are no currently pending operating costs, taxes or
service accruals or escalations which have not been disclosed to Lessee, which
could impact Lessee's total occupancy costs beyond average historical increases,
and there are no pending sales of the Building.
7. Assignment. In the event that Lessee assigns its interest in this Lease
or subleases all or any portion of the Premises pursuant to the provisions of
Paragraph 12 of the Lease, and if as a result thereof a "Transfer Premium"
exists, Lessee shall pay to Lessor fifty percent (50%) of any Transfer Premium.
As used herein, "Transfer Premium" shall mean and refer to all rent, additional
rent or other consideration payable by the assignee or sublessee (the
"Transferee") in connection with the proposed assignment or sublease (the
"Transfer") in excess of the rent and additional rent payable by Lessee
under the Lease during the term of the Transfer on a per rentable square foot
basis if less than all of the Premises is transferred, after deducting the
reasonable expenses incurred by Lessee for (i) any changes, alterations and
improvements to the Premises in connection with the Transfer, (ii) any brokerage
commissions in connection with the Transfer, (iii) any cost to buy-out or take
over the previous lease of a transferee, (iv) reasonable legal fees incurred
in connection with the Transfer, and (v) any other "out-of-pocket" monetary
concessions reasonably provided in connection with the Transfer, including but
not limited to tenant improvement or decorating allowances. Determination
of the amount of the Transfer Premium shall be made on an annual basis in
accordance with the terms of this Paragraph 7, but an estimate of the amount
of the Transfer Premium shall be made each month and one twenty-fourth (1/24)
of such estimated amount shall be paid to Lessor promptly, but in no event later
than the next date for payment of base monthly rental hereunder, subject to
an annual reconciliation on each anniversay date of the transfer. If the
payments to Lessor under this Paragraph 7 during the twelve (12) months
preceding each annual reconciliation exceed the amount of fifty percent (50%) of
the Transfer Premium as determined on an annual basis, then Lessor shall credit
the overpayment against Lessee's future obligations under this Paragraph 7, or
if the overpayment occurs during the last year of the Transfer in question,
Lessor shall refund the excess to Lessee. If Lessee has underpaid Lessor's
share of the Transfer Premium, as determined by such annual reconciliation,
Lessee shall pay the amount of such deficiency to Lessor promptly, but in no
event later than the next date for the payment of base monthly rental hereunder.
8. Americans With Disabilities Act ("ADA"). Lessor hereby represents to Lessee
that in no event shall costs associated with the ADA, with code compliance
pursuant to applicable local, county or state law, or with any other applicable
legal requirements (together, the "Applicable Laws")be, at any time during the
term of the Lease, passed through to Lessee with the exception of those costs
of compliance with Applicable Laws which are directly related to any alterations
(as defined under Paragraph 7.5 of the Lease) or the construction of any
improvements to the Premises contemplated by this amendment; i.e., Lessee shall
be protected from costs which arise from the application of Applicable Laws
which are unrelated to modifications to the Premises required or otherwise
undertaken by or on behalf of Lessee.
9. Commissions. Lessor and Lessee hereby represent to each other that no
brokerage commissions are payable in connection with this Amendment other than
a commission payable to The Eldon Company in the sum of 2.75% of the base
monthly rent set forth in Paragraph 2 above for months 1 through 60, and 1.25%
of the base monthly rent set forth in Paragraph 2 of this Amendment for months
61 through 144. No adjustment to such commission shall be payable based on the
exercise any option to extend or option to expand permitted under this amend-
ment.
10. Deleted Paragraphs. The provisions of Paragraphs 66 through 72 and
Paragraphs 75 through 79 of the Addenda to the Lease are of no further force
and effect, with the exception of their application to the construction of
expansion improvements pursuant to the provisions of Paragraph 5 above.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Amendment to Lease as of
the day and year first above written.
LESSOR COLAVIN DAY CREEK, a California general partnership
By:/S/Sam C. Longo, Jr.
---------------------
Its Managing General Partner
LESSEE PACER TECHNOLOGY, a California Corporation
By: /S/James Munn
-------------------
Its President/C.E.O.
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF PACER TECHNOLOGY
================================
1. Pacer Tech Ltd.
A United Kingdom Corporation - 100% owned
<PAGE>
EXHIBIT 23
Consent of Independent Auditors
===============================
The Board of Directors and Stockholders
Pacer Technology:
We consent to incorporation by reference in the registration statement (No.33-
48090) on form S-8 of Pacer Technology of our report dated September 3, 1999,
relating to the consolidated balance sheets of Pacer Technology and subsidia-
ries as of June 30, 1999 and 1998, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the years in the
three-year period ended June 30, 1999 which report appears in the June 30, 1999
annual report on Form 10-K of Pacer Technology.
/s/ KPMG LLP
------------
Orange County, California
September 24, 1999
<PAGE>
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