SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended: September 30, 2001
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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
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PACER TECHNOLOGY
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(Exact name of small business issuer as specified in its charter)
CALIFORNIA 77-0080305
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(State or other jurisdiction (I.R.S. Employer Identification
of incorporation or organization) Number)
9420 Santa Anita Avenue, Rancho Cucamonga, California 91730-6117
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(Address of principal executive offices) (Zip Code)
(909) 987-0550
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal
year, if changed, since last year)
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 XX NO .
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APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
3,060,705 shares of Common Stock at September 30, 2001
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PACER TECHNOLOGY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
September 30, June 30,
2001 2001
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(unaudited) (audited)
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ASSETS
Current Assets
Cash $ 732 $ 471
Trade receivables, less allowance for doubtful accounts of $320 and $343, respectively 8,287 8,292
Other receivables 391 966
Inventories 5,056 7,950
Prepaid expenses 580 292
Deferred income taxes 1,860 1,860
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Total Current Assets 16,906 19,831
Equipment and Leasehold Improvements
Cost 7,032 7,498
Accumulated depreciation and amortization (5,685) (5,864)
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Total Equipment and Leasehold Improvements, net 1,347 1,634
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Cost in excess of assets acquired, net 1,329 1,385
Other Assets 3 21
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Total Assets $ 19,585 $ 22,871
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 2,538 $ 2,391
Accrued expenses 1,731 1,506
Revolving bank line of credit 3,184 4,648
Current installments of long-term debt 100 3,042
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Total current liabilities 7,553 11,587
Deferred income taxes 44 44
Long-term debt, excluding current installments 147 166
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Total Liabilities 7,744 11,797
Shareholders' Equity
Common stock, no par value; authorized: 50,000,000 shares; issued and
outstanding: 3,060,705 at September 30, 2001 and 3,091,905 at June 30, 2001 7,751 7,888
Retained earnings 4,090 3,186
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Total shareholders' equity 11,841 11,074
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Total Liabilities and Shareholders' Equity $ 19,585 $ 22,871
========= ========
See accompanying notes to consolidated financial statements.
2
PACER TECHNOLOGY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Three Months Ended
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September 30, September 30,
2001 2000
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Net sales $ 10,778 $ 14,548
Cost of sales 7,099 9,520
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Gross profit 3,679 5,028
Selling, general and administrative expenses 2,964 3,349
Restructuring charges 337 --
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Total operating expenses 3,301 3,394
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Operating income before gain on sale of Cook Bates product line 378 1,679
Gain on sale of Cook Bates product line 1,252 --
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Operating income 1,630 1,679
Other (income) expense
Interest expense, net 130 249
Other (income) expense, net 26 (10)
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Income before income taxes 1,474 1,440
Income tax expense 570 571
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Net Income $ 904 $ 869
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Net earnings per share:
Basic earnings per share $ 0.29 $ 0.26
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Diluted earnings per share $ 0.29 $ 0.26
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Weighted average shares outstanding:
Weighted average shares - basic 3,089 3,317
Weighted average shares - diluted 3,102 3,329
See accompanying notes to consolidated financial statements.
3
PACER TECHNOLOGY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
Three Months Ended
September 30,
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2001 2000
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Net Income $ 904 $ 869
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation 125 130
Amortization of other assets 56 84
Write off of fixed assets 113 --
Loss on sale/disposition of property and equipment 16 --
Restructuring charges 337 --
Cash received on sale of Cook Bates product line 5,341 --
Gain on sale of Cook Bates product line (1,252) --
Increase (decrease) in allowance for doubtful accounts (23) 10
Decrease (increase) in trade accounts receivable 28 (3,016)
Decrease in other receivables 575 407
Decrease in notes receivables -- 65
Decrease (increase) in inventories (947) 877
Decrease (increase) in prepaid expenses and other assets (289) 41
Increase in accounts payable 147 714
Increase (decrease) in accrued expenses (255) 283
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Net Cash Provided By Operating Activities 4,876 464
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Cash Flows From Investing Activities:
Capital expenditures (53) (54)
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Net Cash Used In Investing Activities (53) (54)
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Cash Flows From Financing Activities:
Payments on long-term debt and revolving line of credit (8,901) (4,035)
Borrowings on long-term debt and revolving line of credit 4,476 3,906
Repurchase of common stock (137) (100)
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Net Cash Used In Financing Activities (4,562) (229)
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Net increase in cash 261 181
Cash at beginning of period 471 451
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Cash At End Of Three-Month Period $ 732 $ 632
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See accompanying notes to consolidated financial statements.
4
PACER TECHNOLOGY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. CONSOLIDATED FINANCIAL STATEMENTS:
The consolidated financial statements for the three-month periods ended
September 30, 2001 and September 30, 2000 have been prepared by the Company
without audit. In the opinion of management, all adjustments (which consist of
normal recurring adjustments and accruals) necessary to present fairly the
consolidated financial position at September 30, 2001 and the results of
operations for the periods then ended have been made.
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
for the fiscal year ended June 30, 2001 filed with the Securities and Exchange
Commission on Form 10-K. The results of operations for the periods ended
September 30, 2001 and September 30, 2000 are not necessarily indicative of the
operating results that might be expected for the full year.
2. INVENTORIES:
Inventories consisted of the following (in thousands):
September 30, June 30,
2001 2001
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Raw materials $ 1,377 $ 4,378
Work in process 386 508
Finished goods 3,588 3,341
Less: reserves (295) (277)
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Inventories, net $ 5,056 $ 7,950
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3. LONG-TERM DEBT:
Pacer has a revolving bank credit line that permits it to borrow up to
the lesser of (i) $7.0 million, or (ii) the sum of 70% of the amount of eligible
accounts receivable plus approximately 40% of the cost of its inventories.
Credit line borrowings are used primarily to fund working capital requirements.
Borrowings under the credit line bear interest at the bank's prime rate (6.0% as
of September 30, 2001) less 0.25%, or at a LIBOR base rate plus 2.50%. Pacer is
required to make monthly interest only payments on outstanding borrowings until
the maturity date of the credit line, which is January 1, 2003. Pacer also is
permitted to use borrowings under the credit line to purchase up to $800,000 of
its outstanding shares of common stock annually. As of September 30, 2001, $3.2
million of borrowings were outstanding under the credit line. Of this amount, $1
million bore interest at a LIBOR base rate of 4.125% plus 2.50%. At September
30, 2001, the Company had approximately $1.3 million of additional borrowings
available based on eligible collateral.
In connection with this credit line, the Company maintains a Commercial
Letter of Credit, Standby Letter of Credit, and Banker's Acceptance, not to
exceed $1.5 million in the aggregate. Any amount outstanding on this additional
credit facility reduces the borrowing base on the revolving bank credit line.
This credit facility expires on January 1, 2003. As of September 30, 2001, there
were banker's acceptances totaling approximately $681,000, but no letters of
credit, outstanding under this facility.
5
Prior to the end of the first quarter of the current fiscal year, we
had obtained the following term loans from this bank, which were paid in full in
September 2001:
(1) A $2.7 million term loan that bore interest at the bank's
prime rate (6.0% at September 30, 2001) less 0.5%, or at a
LIBOR base rate of 6.75% plus 1.625% per annum and that was
payable in monthly installments of principal, each in the
amount of $76,000, plus interest, until its maturity date of
April 2, 2004.
(2) Borrowings under a $750,000 term loan commitment which was
available to fund capital expenditures and which bore interest
at the bank's prime rate, less 0.5%, per annum.
The agreements with the bank require Pacer to maintain certain
financial ratios and to comply with certain restrictive covenants. As of
September 30, 2001, Pacer was in compliance with respect to all of these
covenants. All borrowings from the bank are secured by a first priority security
interest in all of Pacer's assets.
4. RESTRUCTURING CHARGES
During the fiscal quarter ended September 30, 2001 we recorded $337,000
of restructuring charges as a result of our planned closure of certain
facilities and relocation of the operations conducted at those facilities to
other facilities leased by us. The restructuring charges included lease
termination charges and a write off of leasehold improvements, a deferred rent
credit, and employee termination costs. We also plan to acquire certain
equipment and make certain leasehold improvements to accommodate the relocated
operations at our retained facilities at a cost of approximately $283,000, which
will be capitalized and depreciated over the useful lives of the acquired
assets.
5. SALE OF COOK BATES PRODUCT LINE
On September 28, 2001, we sold inventory and certain fixed and
intangible assets related to the Cook Bates product line (which consisted
largely of personal care manicure implements, seasonal gift sets and Halloween
merchandise) to The W.E. Bassett Company for $5.3 million cash. That inventory
totaled $3.8 million and the net book value of the remaining assets sold in that
transaction totaled $105,000. In connection with the sale, Pacer recorded
transaction related costs of $142,000 and a gain of $1.3 million, which is
included in operating income in the accompanying statement of income for the
quarter ended September 30, 2001.
6. COMMITMENTS AND CONTINGENCIES:
We have entered into sales agreements with many of our customers that
contain pricing terms, including the amounts of promotional allowances and co-op
advertising and provisions that convey trademark rights. Each of these
agreements is unique and may include one or more of these features as part of
its terms.
7. COMPREHENSIVE INCOME:
On July 1, 1998, we 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 or loss and
foreign currency translation adjustments. The total comprehensive income for the
quarter ended September 30, 2001 and 2000 was $904,000 and $804,000,
respectively. The impact of changes in foreign currency valuation was nominal
and did not materially affect total comprehensive income or loss.
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
During the quarter ended September 30, 2001, we completed a previously
announced sale of the Cook Bates product line, which generated a gain of
$1,252,000 in that quarter. We also provided for the planned closure of certain
of our facilities and relocation of the operations that are conducted there to
our primary manufacturing facility in Rancho Cucamonga, California, resulting in
restructuring charges of $337,000 in that quarter.
The following table presents significant line items from the Company's
statements of income for the three-month periods ended September 30, 2001 and
2000, as a percentage of our net sales in those periods:
Three Months Ended September 30,
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2001 2000
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Net sales 100.0% 100.0%
Gross profit 34.1% 34.5%
Selling, general and administrative expenses 27.5% 23.0%
Restructuring charges 3.1% --
Gain on the Cook Bates sale 11.6% --
Operating income 15.1%(1) 11.5%
Interest expense, net 1.2% 1.7%
Other (income)expense, net 0.2% (0.1)%
Income before income taxes 13.7% 9.9%
Net income 8.4% 6.0%
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(1) If the restructuring charges and the gain on the Cook Bates
sale are eliminated, operating income would represent 6.6% of
net sales in the quarter ended September 30, 2001.
Net Sales. Net sales for the quarter ended September 30, 2001 decreased
by 25.9% to $10.8 million from $14.6 million for the same quarter in the prior
year. This $3.8 million decrease was attributable to several factors, including:
late Cook Bates holiday orders of more than $1 million that will be shipped, and
therefore recorded, in the second quarter of the fiscal year; the loss of a
major Cook Bates retail customer that accounted for $1.2 million in sales in the
first fiscal quarter of 2000; the sale of the California Chemical product line
in June 2001, which had $0.5 million of sales in the prior year period; lost
sales as a result of the closure of Pacer's UK office; the slowing economy which
resulted in a reduction in Super Glue product sales and increased reserves for
possible returns later this year of holiday gift sets that were shipped in the
first quarter of the current fiscal year.
Gross Profit. Our gross profit for the quarter ended September 30, 2001
was $3.7 million, or 34.1% of sales versus $5.0 million, or 34.5% of sales in
the same period in the prior year.
Selling, general and administrative. Selling, general and
administrative expenses declined by $385,000 in the quarter ended September 30,
2001 to $3.0 million from $3.3 million in the same quarter of the prior year due
primarily to decreases in promotional and advertising expenses. However, as a
percentage of sales, selling, general and administrative expenses increased to
27.5% in the quarter ended September 30, 2001 from 23.0% in the same quarter of
the prior year.
Operating Income. Operating income for the quarter ended September 30,
2001 was $1.6 million, or 15.1% of sales, compared to $1.7 million or 11.5% of
sales in the same quarter of the prior year. If the restructuring charges and
the gain on the Cook Bates sale were eliminated, our operating income for the
quarter ended September 30, 2001 would have been $715,000 or 6.6% of net sales.
Interest expense, net. Interest expense declined in the quarter ended
September 30, 2001 to $130,000 or 1.2% of sales as compared to $249,000 or 1.7%
of sales in the corresponding quarter of the prior year. That decline was due to
a reduction in our outstanding bank borrowings and lower interest rates due to
declining market rates of interest.
7
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by all activities during the quarter ended September
30, 2001 was $261,000, compared to cash provided of $181,000 during the same
quarter of the prior year.
Cash provided by operations during the first quarter of the current
fiscal year was $4.9 million compared to $464,000 during the same quarter of the
prior year. This improvement in cash flow from operations was primarily due to a
decrease in inventories as a result of the sale of the Cook Bates inventories to
the buyer of the Cook Bates product line.
Cash consumed by our financing activities was $4.6 million during the
first-three months of the current fiscal year as compared to $229,000 during the
same period in fiscal 2001. The increase in cash consumed was primarily due to
the use of cash, generated primarily by the Cook Bates sale, to reduce
outstanding bank borrowings and to repurchase common shares in our open market
and private stock repurchase program.
We fund our working capital requirements primarily with a combination
of internally generated funds and borrowings under a $7 million revolving line
of credit from a bank. Borrowings under the credit line bear interest at the
bank's prime rate (6.0% at September 30, 2001), less 0.25%, or at the bank's
LIBOR base rate, plus 2.5%. We are required to make monthly interest-only
payments on the credit line until its maturity date of January 1, 2003.
Prepayments of the principal balance are permitted without penalty. Borrowings
under the credit line are secured by substantially all of our assets. As of
September 30, 2001 such borrowings amounted to $3.2 million and approximately
$1.3 million of unused borrowings were available under the credit line. By
comparison, at June 30, 2001 outstanding bank borrowings (both revolving and
term) totaled nearly $7.9 million. That reduction in our outstanding borrowings
was funded with proceeds from the Cook Bates sale. We expect to make further
reductions in outstanding bank borrowings during the second quarter of the
current fiscal year with proceeds from collections of the remaining Cook Bates
receivables that were retained by us and not sold as part of the Cook Bates
sale.
We believe that borrowings under our credit line, together with
internally generated funds, will be sufficient to enable us to meet our working
capital and other cash requirements over the next twelve months. We do not
presently anticipate any material cash requirements or, with the exception of
the proceeds from the remaining Cook Bates receivables, any material changes in
our sources of funds, in the foreseeable future.
RECENT ACCOUNTING PRONOUNCEMENTS
In June, 2001, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards (SFAS) No. 141, "Business
Combinations" and No. 142, "Goodwill and Other Intangible Assets." Under the new
rules, goodwill and indefinite lived intangible assets are no longer amortized
but are reviewed annually for impairment. Separable intangible assets that are
not deemed to have an indefinite life will continue to be amortized over their
useful lives. The amortization provisions of SFAS No. 142 apply to goodwill and
intangible assets acquired after June 30, 2001. With respect to goodwill and
intangible assets acquired prior to July 1, 2001, the Company will apply the new
accounting rules beginning July 1, 2002. SFAS No. 142 will require the Company
to complete a transitional goodwill impairment test by January 1, 2002, six
months prior to the date of the Company's adoption of SFAS 142. The Company also
will be required to reassess the useful lives of other intangible assets within
the first interim quarter after adoption of SFAS No. 142. We are currently
assessing the financial impact SFAS No. 141 and No. 142 will have on our
Consolidated Financial Statements.
FORWARD-LOOKING STATEMENTS
Statements contained in this Report on Form 10-Q that are not
historical facts or that discuss our expectations or beliefs regarding our
future financial performance constitute "forward-looking statements" as defined
in the Private Securities Litigation Reform Act of 1995. Forward-looking
statements are estimates of future performance that are based upon current
information and that are subject to a number of risks and uncertainties that
could cause actual operating results during future periods to differ
significantly from those expected at the current time. Those risks and
uncertainties are set forth in detail in Pacer's Annual Report on Form 10-K for
its fiscal year ended June 30, 2001 filed with the Securities and Exchange
Commission on September 26, 2001. The risks and uncertainties include, but are
not limited to, the following:
8
Dependence on Major Customers. Even though no single customer
represents more than 10% of our total sales volume, our customers include
several large national mass merchandisers and national and regional food and
drug store chains, the loss of business from one or more of which could result
in unexpected reductions in sales and earnings.
Risks of Foreign Operations. Our operating results could
decline as a result of foreign currency fluctuations and changes in the value of
the U.S. Dollar in relation to foreign currencies in the countries in Europe,
Asia and Latin America where we sell our products and where we obtain some of
our raw materials.
Recent Changes in Economic Conditions. According to government
and other public reports, the quarter ended September 30, 2001 was characterized
by a slowing of consumer demand and confidence in the United States. We believe
that like other manufacturers of retail products, our sales during that quarter
were adversely impacted by these conditions. It now appears that these
conditions, along with concerns and heightened uncertainties created by the
recent terrorist attacks in the United States, will continue to adversely affect
consumer demand and confidence, and therefore could adversely affect our sales
in succeeding quarters of the current fiscal year.
Changes in Business Strategy and Operations. We sold our
California Chemical product line in June 2001 and our Cook Bates product line in
September 2001 in order to focus on and grow our core adhesives business.
Although these actions will result in a significant decline in our net sales in
the current fiscal year ending June 30, 2002, as compared to the last three
years, we believe that the sales of those businesses will enable us to improve
our profitability. However, our future profitability could be adversely affected
if we are not able to reduce and, thereby, align our future operating costs to
match sales levels in future periods or if we are unable to grow and thereby
meaningfully increase the revenues of our core adhesives business.
The forward-looking statements contained in this Report are made only
as of this date and Pacer undertakes no obligation to update or revise
forward-looking statements, contained in this Report or in our Annual Report on
Form 10-K for the year ended June 30, 2001, whether as result of new
information, future events or developments or otherwise.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Pacer's exposure to market risk with respect to financial instruments
is primarily related to changes in interest rates with respect to borrowing
activities, which may adversely affect its financial position, results of
operations and cash flows. To a lesser degree, we are exposed to market risk
from foreign currency fluctuations associated with our purchases of raw
materials and sales of products outside of the United States. We do not use
financial instruments for trading or other speculative purposes and we are not
party to any derivative financial instruments.
In seeking to minimize the risks from interest rate fluctuations, we
manage exposures through our regular operating and financing activities. The
fair value of borrowings under our revolving bank credit facility approximate
the carrying value of those obligations.
9
PART II -- OTHER INFORMATION
ITEM 6. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Exhibits:
None.
(b) Reports on Form 8-K
On October 11, 2001, we filed a Current Report on Form 8-K to
report, under Item 2 - "Acquisition or Disposition of Assets" our sale
of the Cook Bates product line to The W.E. Bassett Company. That report
also included pro forma financial data related to that sale.
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
Dated: November 12, 2001 By: /s/ RICHARD S. KAY
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Richard S. Kay
Chairman of the Board of Directors,
Chief Executive Officer and President
Dated: November 12, 2001 By: /s/ LAURENCE R. HUFF
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Laurence R. Huff
Chief Financial Officer
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