SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
- --- SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD
ENDED December 31, 1999.
-----------------
OR
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
- --- SECURITIES EXCHANGE ACT OF 1934 For the Transition period from
_______ to ______ .
Commission file number 0-8864
PACER TECHNOLOGY
- -----------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
California 77-0080305
------------------- -----------------
(State or other jurisdiction
of incorporation) IRS Employer Identification No.)
9420 Santa Anita Avenue
Rancho Cucamonga, California 91730-6117
- --------------------------------------- -----------------------
(Address of principal executive offices) (Zip Code)
909-987-0550
----------------
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES XXX NO_____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
There were 16,754,975 shares of Common stock, no par value, outstanding as of
December 31, 1999.
Page 1
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
PACER TECHNOLOGY & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands Except Share Amounts)
ASSETS
December 31, June 30,
1999 1999
(Unaudited) (Audited)
CURRENT ASSETS: ----------- ----------
Cash $ 297 $ 534
Trade receivables, less allowance for doubtful
accounts of $420 and $904, respectively (note 2) 11,278 8,810
Other receivables 364 132
Notes receivable - Current (note 2) 172 220
Inventories (note 3) 13,724 13,706
Prepaid expenses 770 618
Deferred income taxes 996 996
-------- --------
Total current assets 27,601 25,016
EQUIPMENT & LEASEHOLD IMPROVEMENTS:
Cost 6,987 6,873
Accumulated depreciation & amortization (5,236) (4,950)
-------- --------
Total Equipment & Leasehold Improvements 1,751 1,923
Notes Receivable Long-term 87 53
Deferred income taxes 270 192
Cost in excess of net assets acquired, net 3,266 3,407
Other Assets 26 27
-------- --------
Total Assets $ 33,001 $ 30,618
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current Portion of long-term debt (note 4) $ 917 $ 917
Accounts payable 3,925 3,619
Accrued payroll and related expenses 384 469
Other accrued expenses 1,776 1,186
------- -------
Total Current Liabilities 7,002 6,191
Long-term debt, excluding current installments
(note 4) 12,305 11,786
------- -------
Total Liabilities 19,307 17,977
STOCKHOLDERS' EQUITY:
Common stock, no par value. Authorized 50,000,000
shares issued and outstanding 16,754,975 shares
at December 31, 1999 and 16,789,975 shares in
June 30, 1999. 8,738 8,802
Retained Earnings 4,948 3,899
Notes receivable from directors - (47)
Accumulated other comprehensive income 8 (13)
-------- --------
Total stockholders' equity 13,694 12,641
-------- --------
Total Liabilities and Stockholders' Equity $ 33,001 $ 30,618
======== ========
See accompanying notes to condensed consolidated financial statements.
Page 2
PACER TECHNOLOGY & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands Except Per Share Amounts)
(Unaudited)
Three-Months Ended Six-Months Ended
December 31, December 31,
1999 1998 1999 1998
-------- --------- --------- ---------
Net Sales $ 10,385 $ 11,840 $ 24,637 $ 25,498
Cost of Sales 7,125 7,705 16,295 16,444
-------- --------- --------- ---------
Gross Profit 3,260 4,135 8,342 9,054
Selling, General and
Administrative Expenses 3,063 3,193 6,116 6,237
-------- --------- --------- --------
Operating Income 197 942 2,226 2,817
Other (Income) Expense:
Interest expense, net 262 266 495 520
Other income, net (58) (72) (78) (115)
-------- --------- --------- --------
Income (loss) before income taxes (7) 748 1,809 2,412
Income tax expense (benefit) (12) 327 760 1,034
-------- --------- --------- --------
Net Income $ 5 $ 421 $ 1,049 $ 1,378
======== ========= ========= ========
Weighted Average Shares-Basic 16,811 15,914 16,809 15,890
Basic Earnings Per Share $ - $ 0.03 $ 0.06 $ 0.09
======== ========= ========= ========
Adjusted Weighted Average
Shares - Diluted 17,176 17,867 17,030 17,849
Diluted Earnings Per Share $ - $ 0.02 $ 0.06 $ 0.08
======== ========= ========= ========
See accompanying notes to condensed consolidated financial statements.
Page 3
PACER TECHNOLOGY & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
Six-Months Ended
December 31,
1999 1998
------- -------
NET INCOME $ 1,049 $ 1,378
Adjustments to reconcile net earnings to
net cash used in operating activities:
Depreciation 294 316
Amortization of other assets 141 141
(Gain) Loss on sale of property and equipment (8) -
Increase (decrease) provision for doubtful
accounts (484) 75
Increase in trade accounts receivable (1,984) (5,309)
Increase in other receivables (211) (28)
Decrease in notes receivables 14 59
Increase in inventories (18) (541)
Increase in prepaid expenses and other assets (151) (149)
Increase in deferred income taxes (78) -
Increase in accounts payable 306 599
Increase (decrease) in accrued payroll
and related expenses (85) 173
Increase in accrued expenses and other
liabilities 590 130
-------- -------
NET CASH USED IN OPERATING ACTIVITIES (625) (3,156)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment 26 -
Capital expenditures (140) (647)
-------- -------
NET CASH USED IN INVESTING ACTIVITIES (114) (647)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on line of credit (8,041) (5,420)
Payments on term loan (458) (167)
Borrowings on long-term debt 9,018 9,740
Issuance (repurchase) of Common Stock (64) 35
Repayment of Notes Receivables from Directors 47 -
-------- -------
NET CASH PROVIDED BY FINANCING ACTIVITIES 502 4,188
Net increase (decrease) in cash (237) 385
Cash at beginning of period 534 277
------- -------
CASH AT END OF SIX-MONTH PERIOD $ 297 $ 662
======= =======
See accompanying notes to condensed consolidated financial statements.
Page 4
PACER TECHNOLOGY & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. CONSOLIDATED FINANCIAL STATEMENTS:
The consolidated financial statements for the three-month and the six-month
periods ended December 31, 1999 and 1998 have been prepared by the Company
without audit. In the opinion of Management, adjustments necessary to present
fairly the consolidated financial position at December 31, 1999 and the
results of operations for the period then ended have been made. All such
adjustments are of a normal recurring nature.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these consolidated
financial statements be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's Annual Report to
shareholders. The results of operations for the periods ended December 31,
1999 and December 31, 1998 are not necessarily indicative of the operating
results for the full year.
2. NOTES RECEIVABLE:
Several customers have converted trade receivable balances to term notes. The
notes are payable in monthly installments of principal and interest at a rate
higher than the rate of interest charged to Pacer for its borrowing of funds
from its predominant bank.
3. INVENTORIES:
Inventories consisted of the following (in thousands):
December 31, 1999 June 30, 1999
----------------- -------------
Raw materials $ 7,602 $ 7,456
Work-in-process 456 571
Finished goods 5,666 5,679
----------- -----------
Total inventories $ 13,724 $ 13,706
=========== ===========
4. LONG-TERM DEBT:
On January 19, 1999, the Company entered into a new promissory note agreement
with a bank whereby Pacer can borrow up to $18.0 million, for working capital
requirements. The interest rate on this note is at the bank's Prime Rate (8.50%
at December 31, 1999) less 0.5%. On December 1, 1999 and December 7, 1999,
the Company entered into a three-month and six-month fixed LIBOR base rate of
6.125% plus 1.625 initial spread for $3 million and $5 million respectively of
this facility. This note requires monthly interest payments only and has a
maturity date of January 2, 2001. Prepayments of the principal balance
are permitted without penalty. This new credit facility was utilized to
retire in February 1999, the Company's line of credit balance of $10.6 million
and term loan of $.8 million with its previous bank. On December 17, 1999
the agreement was amended to provide for the repurchase of Pacer stock in the
open market not to exceed $100,000 in the aggregate for all such purchases made
in any fiscal quarter.
Page 5
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
Acceptance subfeatures, each not to exceed $5.0 million from
January 19, 1999 to January 2, 2001. As of December 31, 1999, total
outstanding letters of credit totaled $86,000.
(2) Term loan of $2.75 million effective January 19, 1999, with a maturity
date of January 2, 2002. Principal shall be payable on the 2nd day of
each month in installments of $76,000, commencing March 2, 1999.
This term loan bears interest at the Prime Rate (8.50% at December 31,
1999) less 0.5%. On June 8, 1999, the Company entered into a three-month
fixed LIBOR base rate on this facility of 5.09625% plus 1.625 initial
spread. As of December 31, 1999 there was a balance of $2.0 million.
(3) Term commitment note of $750,000 effective January 19, 1999 with a
maturity date of January 2, 2000. This term commitment bears interest at
the Prime Rate (8.50% at December 31, 1999) less 0.5%. At December 31,
1999 there was no borrowing against this note. On January 14, 2000, the
commitment note was extended for an additional one year term maturing on
January 2, 2001.
The agreements require maintenance of certain financial ratios and contain other
restrictive covenants.
Pacer Technology was in compliance with all debt covenants on December 31, 1999.
5. COMMITMENTS AND CONTINGENCIES:
Pacer has entered into sales agreements with many of its customers which contain
pricing terms, including the amounts of promotional allowances and co-op
advertising, renewability clauses, and provisions which convey trademark rights.
Each of these agreements is unique and may included one or more of these
features as part of its terms.
A lawsuit was filed on September 27, 1999 in the Superior Court of California by
James T. Munn and Roberto J. Cavazos, Jr., former officers of the company. The
lawsuit alleges that Pacer Technology and its Board of Directors breached their
fiduciary duties to shareholders and that the Board of Directors sought
special treatment in a proposed sale of the company in June 1998 and cites their
failure to publicly disclose the offer to shareholders. The plaintiffs are
seeking unspecified damages. The Company secured outside legal counsel and in
the opinion of management believes that it is unlikely the plaintiffs will
prevail and that such litigation will be resolved without material effect on
Pacer's financial position or results of operations.
6. COMPREHENSIVE INCOME:
On July 1, 1998, the Company adopted Financial Accounting Standard Board's
Statement of Financial Accounting Standards No. 130 (SFAS No. 130),
"Reporting Comprehensive Income". SFAS No. 130 establishes standards for
reporting and presentation of comprehensive income and its components in a
full set of financial statements. Comprehensive income consists of net
income and foreign currency translation adjustments. Total comprehensive income
for the quarter ended December 31, 1999 was $2,000 compared to $404,000 for the
same quarter in the prior fiscal year. The difference is the result of
a decrease in net income of $416,000 and an increase in foreign currency
translation adjustments of $14,000. Total comprehensive income for the six-
month period ended December 31, 1999 was $1.1 million compared to $1.4 million
for the comparable six-month period in the prior fiscal year. The difference
was primarily the result of a decrease in net income.
Page 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Results of Operation:
Three Months Ended Six Months Ended
Dec. 31, Dec. 31, Dec. 31, Dec. 31,
1999 1998 1999 1998
------ ------ ------- -------
Sales 100.0% 100.0% 100.0% 100.0%
Gross Profit 31.4% 34.9% 33.9% 35.5%
Operating Expenses:
Selling, General and
Administrative Expense 29.5% 27.0% 24.9% 24.5%
Operating Profit 1.9% 7.9% 9.0% 11.0%
Interest Expense, net 2.5% 2.2% 2.0% 2.0%
Other (Income) loss - net (.5%) (.6%) (.3%) (.5%)
Income (loss) before income taxes (.1%) 6.3% 7.3% 9.5%
RESULTS OF OPERATIONS
- -----------------------
Net sales for the quarter ended December 31, 1999 decreased by 12.3% to $10.4
million from $11.8 million for the same quarter in the prior year. This $1.4
million decrease in sales was the result of a major retail customer's
decision to offer its own private label holiday gift sets which resulted in a
loss of sales of $2.0 million partially offset by other sales increases. Sales
for the six-months ended December 31, 1999 were $24.6 million, a 3.4%
decrease from the $25.5 million recorded in the first six months of fiscal 1999.
Gross Profit for the second quarter ended December 31, 1999 was $3.3 million, or
31.4% of sales versus $4.1 million, or 34.9% of sales in the same period in the
prior year. This decrease in gross profit during the second quarter was
primarily due to the loss of $2.0 million of the Company's higher margin
seasonal gift set sales. Although the Company was able to recover some of the
revenue through seasonal and non-seasonal sales to other customers, the revenue
and profit margins on these additional sales weren't sufficient
to fully offset the reduction in gross profit from the lost gift set sales.
Inventory closeout sales at margins below those typically generated also
contributed to the decline in margin. For the six-month period ended
December 31, 1999, gross profit was $8.3 million or 33.9% of sales compared to
$9.1 million or 35.5% of sales for the same period in the prior year.
Selling, general and administrative expenses for the second quarter ended
December 31, 1999 were $3.1 million or 29.5% of sales compared to $3.2 million
or 27.0% of sales for the same quarter of the prior year. The increase in
selling, general and administrative costs during the second quarter ended
December 31, 1999 was primarily due to expenses incurred to defend shareholders
and the Company in a proxy contest waged by a group of dissident shareholders.
These proxy related costs totaled $275,000 as of December 1999 and were
partially offset by cost reductions in administrative related expenses. For the
six-month period ended December 31, 1999, selling, general and administrative
expenses were $6.1 million, or 24.9% of sales compared to $6.2 million or 24.5%
of sales for the same six-month period in the prior year.
Operating income decreased to $197,000 or 1.9% of sales for the second quarter
from $942,000 or 7.9% of sales in the same quarter in the prior year. For the
six-month period ended December 31, 1999 operating income decreased 21.0% to
$2.3 million or 9.0% of sales compared to $2.8 million or 11.0% of sales, for
the first six-months of the prior year.
Interest expense, net for the quarter ended December 31, 1999 was $262,000 or
2.5% of sales compared to $266,000 or 2.2% of sales for the same period in the
prior year. For the six-month period ended December 31, 1999, interest expense,
net was $495,000 or 2.0% of sales versus $520,000 or 2.0% of sales during the
same period in the prior year.
Other income for the second quarter of fiscal year 1999 was $58,000 or .5% of
sales compared to $72,000 or .6% of sales for the same period in the prior year.
For the six-month period ended December 31, 1999, other income was $78,000 or
.3% of sales versus $115,000 or .5% of sales for the first half of fiscal year
1998. This small decrease was mainly due to a decrease in royalty income during
the current fiscal year.
Page 7
Net income totaled $5,000 compared to $421,000 or $.02 per share in the
corresponding quarter last year and totaled $1.1 million, or $.06 per share,
compared to $1.4 million or $.08 per share, for the first six-months of
fiscal 1999.
LIQUIDITY AND CAPITAL RESOURCES:
- -------------------------------
Net cash consumed by all activities during the first six months of fiscal year
2000 was $237,000 compared to cash provided of $385,000 during the comparable
period in fiscal year 1999.
Cash consumed by operations during the first half of fiscal year 2000 was
$625,000 compared to cash consumed of $3.2 million during the comparable period
in fiscal year 1999. Cashflow from operations improved during the current year
due to an increase in accrued expenses and a smaller increase in accounts
receivable and inventories compared to the prior year.
Cash used in investing activities was $114,000 in the first six months of fiscal
year 2000 compared to $647,000 during the comparable period in fiscal year 1999.
Cashflows from investing activities improved during the current year due to
fewer capital expenditures, as most of the acquisition related capital
expenditures had been made during the prior year.
Cash provided by the company's financing activities was $502,000 during the
first six months of fiscal year 2000 versus $4.2 million during the same period
in fiscal year 1999. Net borrowings on the line of credit dropped during the
current year as cashflow improved due to a drop in trade receivable balances and
capital expenditures compared to the prior year. The increase in the cashflows
from financing activities during the first half of fiscal year 1999 was
attributed primarily to the Company's long term debt borrowings utilized
to finance working capital and capital equipment to support higher volumes
generated by the Cook Bates acquisition.
Pacer anticipates continued utilization of its new credit facility to supplement
cash requirements for working capital and capital equipment purchases during the
coming year. Management is of the opinion that such sources of cash will be
sufficient to support the needs of the operation for the ensuing fiscal year.
Year 2000 Risks
- ---------------
The efficient operations of the Company are dependent, in part, upon its
computer software programs and systems and processes (collectively, the
"Information Systems"). The Company's Information Systems are used in
several key areas of the Company, including, but not limited to, warehousing and
distribution, merchandising and purchasing, inventory management, and accounting
and financial reporting. The Company has updated its Information Systems for
Year 2000 compliance requirements. Additionally, the Company has also been in
communication with most of its vendors, financial institutions and others whose
computer software, programs and information systems may interface with those
of the Company to assess the status of their compliance with Year 2000
requirements. Failure of companies (that the Company conducts business with)
to comply with the Year 2000 requirements could have an adverse effect on the
Company's operations. As of February 1, 2000, no Year 2000 related problems or
anomalies have been detected. However, no assurance can be given that
unforeseen problems may occur in the future that may have an adverse effect on
the Company's results of operations, liquidity, or financial condition.
Impact of Recently issued Accounting Pronouncements
- ---------------------------------------------------
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes
accounting and reporting standards for derivative instruments, including
derivative instruments embedded in other contracts, and hedging activities.
SFAS 133 is effective for all fiscal quarters of fiscal years beginning after
June 15, 2000. Application of this accounting standard is not expected to have
a material impact on the Company's consolidated financial position, results of
operations or liquidity.
Page 8
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 9
Part II Other Information
Item 1. Legal Proceedings
A lawsuit was filed on September 27, 1999 in the Superior Court of California by
James T. Munn and Roberto J. Cavazos, Jr., former officers of the company. The
lawsuit alleges that Pacer Technology and its Board of Directors breached their
fiduciary duties to shareholders and that the Board of Directors sought
special treatment in a proposed sale of the Company in June 1998 and cites their
failure to publicly disclose the offer to shareholders. The plaintiffs are
seeking unspecified damages. The Company secured outside legal counsel and
in the opinion of management believes that it is unlikely the plaintiffs will
prevail and that such litigation will be resolved without material effect on
Pacer's financial position or results of operation.
Item 6. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) Exhibits
Exhibits are as follows:
Exhibit No. Description
27 Financial Data Schedule
Copies of exhibits listed herein can be obtained by writing and requesting
such exhibits from: Pacer Technology, CFO 9420 Santa Anita Ave, Rancho
Cucamonga, CA 91730.
(b) Reports on Form 8-K
On October 18, 1999, the registrant filed form 8-K. The purpose of the
filing was to disclose under Item 4 a change in the Company's certifying
accountant from KPMG LLP to Ernst & Young LLP.
On December 9, 1999, the registrant filed form 8-K. The purpose of the
filing was to disclose under Item 5 the results of the annual Election of
Directors and the resignation of Messrs. Tirman and Merriman from the
Board of Directors.
On December 21, 1999, the registrant filed form 8-K. The purpose of the
filing was to disclose under Item 5 the Company's newly approved Stock
Repurchase Program whereby the Company can repurchase up to 10% of its
outstanding common stock.
Page 10
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PACER TECHNOLOGY
February 5, 2000 /s/Tom Nightingale III
----------------------
Tom Nightingale III
President/Chief Executive Officer
February 5, 2000 /s/Laurence Huff
------------------------
Laurence Huff
Chief Financial Officer
Page 11
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