<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
/X/ QUARTERLY REPORT PURSUANT TO SECTION 12 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the period ended SEPTEMBER 30, 1996
/ / QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
AND EXCHANGE ACT OF 1934
For the transition period from ___________ to __________
Commission File Number : 333-858-LA
PACIFIC RESEARCH AND ENGINEERING CORPORATION
(Exact name of small business issuer as specified in its charter)
California 95-2638420
(State or other Jurisdiction (IRS Employer
of incorporation) identification No.)
2070 Las Palmas Drive, Carlsbad, California, 92009
(Address of principal executive offices) (Zip code)
(619)438-3911
(issuer's telephone number)
Check whether the issuer (1) filed all reports required to e filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: 2305500 on September 30,
1996
<PAGE> 2
Pacific Research & Engineering Corporation
Form 10-Q
Table of Contents
<TABLE>
<CAPTION>
<S> <C>
Part I: Financial Information
Item 1: Financial Statements................................................
Condensed Consolidated Balance Sheets as of December 31, 1995
and September 30, 1996....................................
Condensed Consolidated Statements of Operations for the Quarters
Ended September 30, 1995 and 1996 and the Nine Months
Ended September 30, 1995 and 1996.........................
Notes to Condensed Consolidated Financial Statements................
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations..............................................
Part II: Other Information
Item 1: Legal Proceedings..................................................
Item 2: Changes in Securities..............................................
Item 3: Defaults upon Senior Securities....................................
Item 4: Submissions of Matters to a Vote of Security Holders...............
Item 5: Other Information..................................................
Item 6: Exhibits and Reports on Form 8-K...................................
Signatures..................................................................
</TABLE>
<PAGE> 3
PACIFIC RESEARCH AND ENGINEERING CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
---------------- ----------------
ASSETS (unaudited)
------------------------------------------------
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 500 $2,765,436
Accounts receivable, less allowance for doubtful accounts of
$15,000 for all periods presented 574,782 829,486
Inventories, net 1,297,549 1,515,970
Deferred tax benefit 6,340 93,000
Prepaid expenses 119,706 182,632
---------- ----------
TOTAL CURRENT ASSETS 1,998,877 5,386,524
PROPERTY AND EQUIPMENT, net 591,644 892,788
OTHER ASSETS 431,875 884,110
========== ==========
$3,022,396 $7,163,422
========== ==========
LIABILITIES AND
SHAREHOLDERS' EQUITY
------------------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 558,225 $ 763,391
Accrued expenses 182,178 249,345
Customer advances 329,381 61,878
Line of credit 96,468 341,468
Notes payable - current portion 99,996 99,996
Capital lease obligations - current portion 30,433 31,073
---------- ----------
TOTAL CURRENT LIABILITIES 1,296,681 1,547,151
NOTES PAYABLE, net of current portion 300,004 225,007
CAPITAL LEASE OBLIGATIONS, net of current portion 70,151 48,153
---------- ----------
TOTAL LIABILITIES 1,666,836 1,820,311
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock, no par value, 25,000,000 shares authorized; 1,305,500 shares
issued and outstanding on December 31, 1995;
2,305,500 shares issued and outstanding on September 30,1996 81,179 4,179,767
Additional paid in capital -- 50,000
Retained earnings 1,274,381 1,113,344
---------- ----------
TOTAL SHAREHOLDERS' EQUITY 1,355,560 5,343,111
---------- ----------
$3,022,396 $7,163,422
========== ==========
</TABLE>
The accompanying notes are an integral part of these condensed financial
statments.
<PAGE> 4
PACIFIC RESEARCH AND ENGINEERING CORPORATION
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- -------------------------------
1996 1995 1996 1995
------------- ----------- ----------- -------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
NET SALES $ 2,309,682 1,520,724 $ 6,230,605 4,977,454
COST OF SALES 1,340,834 858,405 3,602,512 2,862,085
----------- ----------- ----------- ----------
Gross Profit 968,848 662,319 2,628,093 2,115,369
OPERATING EXPENSES:
General and administrative 383,336 243,739 914,106 758,283
Selling and marketing 258,791 154,185 620,803 495,658
Research and engineering 212,463 234,365 551,658 659,268
Depreciation and amortization 51,377 36,359 132,297 110,781
----------- ----------- ----------- ----------
TOTAL OPERATING EXPENSES 905,967 668,648 2,218,864 2,023,990
INCOME FROM OPERATIONS 62,881 (6,329) 409,229 91,379
OTHER INCOME (EXPENSES):
Interest expense, net of interest income 23,831 (15,395) (3,168) (46,503)
Gain on sale of assets -- -- 16,087 --
Other 8,376 942 18,538 5,829
----------- ----------- ----------- ----------
TOTAL OTHER INCOME (EXPENSE) 32,207 (14,453) 31,457 (40,674)
INCOME BEFORE INCOME TAXES 95,088 (20,782) 440,686 50,705
Income tax provision 30,000 -- 55,000 --
----------- ----------- ----------- ----------
NET INCOME $ 65,088 (20,782) $ 385,686 50,705
=========== =========== =========== ==========
EARNINGS PER AVERAGE
COMMON SHARE (Unaudited) $ 0.03 -- $ 0.22 --
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 2,305,500 -- 1,749,945 --
=========== =========== =========== ==========
PRO FORMA (Unaudited):
Income before income taxes $ (20,782) $ 50,705
Pro forma income taxes -- 17,747
----------- -----------
Pro forma net income (loss) (20,782) 32,958
Pro forma earnings (loss) per common share $ (0.02) $ 0.03
Shares used in pro forma per share calculation 1,320,424 1,320,424
=========== ==========
</TABLE>
The accompanying notes are an integral part of these condensed financial
statments.
<PAGE> 5
PACIFIC RESEARCH AND ENGINEERING CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
---------------------------
1996 1995
----------- ---------
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 385,686 50,705
Adjustments to reconcile net income to net cash provided by (used in) -- --
operating activities: -- --
Depreciation and amortization 132,291 110,781
Deferred income tax provision -- --
Gain on sale of assets -- --
Change in operating assets and liabilities: -- --
Accounts receivable (254,704) 76,464
Inventories (218,421) (141,985)
Prepaid expenses and other assets (601,821) (100,497)
Accounts payable 260,166 229,921
Accrued expenses 67,167 (48,098)
Customer advances (267,503) (292,364)
----------- --------
NET CASH PROVIDED (USED IN) BY OPERATING ACTIVITIES (497,139) (115,073)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (433,441) (199,930)
Proceeds from sale of assets -- --
----------- --------
NET CASH USED INVESTING ACTIVITIES (433,441) (199,930)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable and line of credit 245,000 156,570
Proceeds from sale of common stock 4,098,587 --
Proceeds from sale of common stock warrants 50,000 --
Proceeds (Payments) on notes payable and line of credit (74,352) (36,393)
Payments under capital lease obligations (21,998) (20,000)
Distributions to shareholders (601,722) (7,684)
----------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 3,695,515 92,493
NET INCREASE (DECREASE) IN CASH 2,764,935 (222,510)
CASH, BEGINNING OF PERIOD 500 146,202
----------- --------
CASH, END OF PERIOD $ 2,765,435 (76,308)
=========== ========
</TABLE>
The accompanying notes are an integral part of these condensed financial
statments.
<PAGE> 6
Pacific Research & Engineering Corporation Notes to Condensed Financial
Statements (Information as of September 30, 1996 and for the quarters
and nine months ended September 30, 1995 and 1996 is unaudited)
1. Interim Financial Data (Unaudited):
The unaudited financial statements for the quarters and nine months
ended September 30, 1995 and 1996 have been prepared on the same basis as the
audited financial statements and, in the opinion of management include all
adjustments, consisting of normal recurring adjustments, necessary for a fair
presentation of the financial position and results of operations in accordance
with generally accepted accounting principles. Although certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been omitted
pursuant to the rules and regulations of the Securities and Exchange Commission,
the Company believes the disclosures made are adequate to make the information
presented not misleading.
The Company's balance sheet as of December 31, 1995 was derived from
the Company's audited financial statements but does not included all disclosures
necessary for the presentation to be in accordance with generally accepted
accounting principles.
2. Initial Public Offering:
The Company completed its initial public offering of 500,000 units,
each consisting of two shares of common stock and one redeemable warrant to
purchase one share of common stock, at $11 per unit, in May of 1996, (R NO.
#333-858-LA).
3. Termination of S Corporation status:
Prior to the completion of its initial public offering discussed above,
the Company had elected treatment as an S Corporation for federal and state
income tax purposes. Under S-corp provision, shareholders are liable for their
respective shares of the Company's taxable income. Upon completion of the public
offering, the Company's S Corporation status for federal and state income tax
purposes was terminated, resulting in the establishment of a net deferred tax
asset calculated at normal federal and state income tax rates. The establishment
of the asset caused a one-time credit to earnings as a reduction of income tax
expense equal to the amount of the net change in deferred tax benefit. As of
September 30, 1996, the amount of the current deferred tax asset was
approximately $93,000. The current deferred tax asset comprises, primarily,
temporary differences relating to inventory valuation and certain reserves and
accruals.
4. Distribution to Shareholders:
Concurrent with the termination of its S Corporation status, the
Company made a distribution to its shareholders of previously taxed and
undistributed S Corporation earnings (see note K of the Company's December 31,
1995 audited financial statements). The amount of the distribution was
approximately $694,000.
5. Stock Option Plan:
A total of 1,200,000 shares of the Company's Common Stock has been
reserved for issuance under the Company's 1996 Omnibus Stock Plan (the "Stock
Plan"), which expires by its own terms in 2006.
<PAGE> 7
Pacific Research & Engineering Corporation Notes to Condensed Financial
Statements Continued
The Stock Plan provides for the grant of "incentive stock options"
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended, and non-qualified stock options to employees, officer, directors and
consultants of the Company. Incentive stock options may be granted only to
employees. The Stock Plan is administered by the Board of Directors or a
committee appointed by the Board, which determines the terms of all grants,
including the exercise price, the number of shares subject to grants, and the
exercisability and vesting schedules.
As of September 30, 1996, the following grants have been made under the
Stock Plan:
To each of Mssrs. John Robbins and Michael Bosworth, both members of
the Company's Board of Directors, a ten year option to purchase 5,000 shares of
Common Stock, exercisable at the initial public offering price. Additionally,
Mssrs. John Robbins and Michael Bosworth will receive ten year options to
purchase 2,500 shares of common Stock at the then-market price on the date of
the grant on the first three anniversaries of their election as a director. Each
grant is conditioned upon the person being a director at the time of the grant.
Additionally, options to purchase a total of 750,000 shares of the
Common Stock were granted pro rata, based upon current share ownership, to
Messrs. Williams, Dosch, Eyler and Pollard, executive officers of the Company
and Messrs. Staros and Jackson, key employees of the Company. These options will
become exercisable, if at all, over a five year period commencing on the
effective date of the Offering, at the initial public offering price, pursuant
to the schedule set forth below, if the Company achieves the following
performance criteria: (i) 100,000 shares the first year following the Offering
if the Company's earnings per share are at least $0.25 or the Common Stock
achieves a price of at least $6.00 per share; (ii) 100,000 shares the second
year following the Offering if the Company's earnings per share are at least
$0.30 or the Common Stock achieves a price of at least $7.20 per share; (iii)
100,000 shares in the third year following the Offering if the Company's
earnings per share are at least $0.36 or the Common Stock achieves a price of at
least $8.64 per share; (iv) 225,000 shares will be available in the fourth year
following the Offering if the Company's earnings per share are at least $0.43
per share or the Common Stock achieves a price of at least $10.37 per share; and
(v) 225,000 shares in the fifth year following the Offering if the Company's
earnings per share are at least $0.52 or the Common Stock achieves a price of at
least $12.44 per share. In the event the Company does not achieve these
performance criteria in any given year, any shares reserved for issuance but not
yet vested will become exercisable in addition to such subsequent year's shares
if the Company achieves the performance criteria in such subsequent year. For
purposes of calculating earnings per share under the above formula, earnings per
share will be calculated without taking into account any compensation expense
required under generally accepted accounting principles due to recognition of
any expense as a result of the exercisability of the performance shares.
6. Earnings per share:
Options and warrants outstanding as of September 30, 1996 are
antidilutive for purposes of calculating primary and fully diluted earnings per
share and are, therefore, ignored.
<PAGE> 8
Management Discussion and Analysis of Financial Condition
and Results of Operation
Overview
Since incorporation in October 1969, Pacific Research & Engineering, a
California corporation, ("PR&E," the "Company") has produced high quality studio
products and services including audio control and mixing consoles, cartridge
machines, digital workstations, and a wide range of peripheral products for the
radio broadcasting industry. The Company also provides technical furniture and
offers studio integration and design services for turnkey systems projects. The
Company's primary customers are the nation's top rated radio stations and
network facilities. The Company believes it had developed a solid reputation in
supplying quality products and services to the broadcast industry. The Company
recently introduced, on a limited basis, products for the television broadcast
industry.
The Company's manufacturing and development activities are conducted in
four principal areas: audio control consoles, digital recording equipment,
peripheral equipment and custom system products. Some of the Company's customers
include Capital Cities/ABC, Disney, Infinity Broadcasting and Bonneville
International ("Bonneville").
One family of audio control consoles which the Company manufactures
(the "X- Class") are mainframes with both on-air and production capabilities
configured with various accessory modules affording flexible add-on-features.
Modules for high-end consoles may include the capacity to: handle a talk show
with four independent telephone feeds, equalize and/or process the inputs,
record a stereo feed for later broadcast and work with two separate studios and
a remote all at the same time. The Radiomixer console (part of the
"Mixer-Class") was developed by the Company as a lower-priced on-air console
targeted at price sensitive domestic and international markets. The Radiomixer
can perform several jobs simultaneously handling up to two telephones.
Approximately 58% of gross income for fiscal 1995 and 53% for fiscal 1994 was
attributable to the console line of business.
Digital recording equipment is manufactured and sold as part of the ADX
workstation line with one of the more popular versions termed the ADX Ensemble.
The Ensemble is a stand alone digital audio workstation featuring automated
digital recording and mixing, incorporating an Apple Macintosh 6100/66 for
display and control. Like a word processor for audio, Ensemble has the ability
to cut, copy, paste and move audio segments around to create sophisticated audio
productions. An optical backup drive feature, similar to a recordable compact
disc, allows the user to read and write directly to an optical drive without
having to load individual projects onto the hard drive. Approximately 9% of
gross income for fiscal 1995 and 5% for fiscal 1994 was attributable to the ADX
line.
The needs of a broadcast studio vary depending upon the requirements
and budgets of the broadcast facility. The Company custom builds integrated
turnkey systems to meet each studio's objective providing custom cabinetry,
audio and logic wiring, as well as installation services. Each customized system
is fully documented and thoroughly tested in the Company's manufacturing
facility prior to shipment. Approximately 23% of gross revenues for fiscal 1995
and 31% for fiscal 1994 was attributable to this line of business.
The Company is located at 2070 Las Palmas Drive, Carlsbad, California
92009, telephone (619) 438-3911. The Company has been in continual operation
since it was incorporated in 1969.
<PAGE> 9
RESULTS OF OPERATIONS
The following table sets forth the percentage of revenue represented by
certain items in the Company's Condensed Statements of Operations for the
periods indicated:
<TABLE>
<CAPTION>
Three Months Ended September 30 Nine Months Ended September 30
---------------------------------------- ---------------------------------------------
1996 1995 Percent 1996 1995 Percent
(Unaudited) Incr (Decr) (Unaudited) Incr (Decr)
<S> <C> <C> <C> <C> <C> <C>
Net sales 100.0% 100.0% 51.9% 100.0% 100.0% 25.2%
Cost of sales 58.1% 56.5% 56.2% 57.8% 57.5% 25.9%
---------------------------------------------------------------------------------------
Gross profit 41.9% 43.5% 46.2% 42.2% 42.5% 24.2%
Expenses:
General and administrative 16.6% 16.0% 57.3% 14.7% 15.2% 20.5%
Selling and marketing 11.2% 10.1% 67.8% 10.0% 10.0% 25.3%
Research and engineering 9.2% 15.4% (9.4%) 8.9% 13.3% (16.3%)
Depreciation and amortization 2.2% 2.4% 41.3% 2.1% 2.2% 19.4%
---------------------------------------------------------------------------------------
Total operating expenses 39.2% 43.9% 35.5% 35.7% 40.7% 9.6%
Income from operations 2.7% (0.4%) NA 6.5% 1.8% NA
Other income (expenses):
Interest income (expense) 1.0% (1.0%) NA (0.1%) (0.9%) (93.2%)
Gain on sale of asset 0.0% -- NA 0.3% -- --
Other 0.4% -- NA 0.3% 0.1% NA
---------------------------------------------------------------------------------------
Total other income (expense) 1.4% (1.0%) NA 0.5% (0.8%) NA
Income before income taxes 4.1% (1.4%) NA 7.0% 1.0% NA
Provision for income taxes 1.3% -- NA 0.9% -- NA
Net income 2.8% (1.4%) NA 6.1% 1.0% NA
</TABLE>
NA = NOT MEANINGFUL OR IN EXCESS OF 100%
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1995.
Sales increased $1,254,000 or 25.2%, from $4,977,000 for the nine
months ended September 30, 1995 to $6,231,000 for the nine months ended
September 30, 1996. The Company believes the sales increase to be the result of
a wave of consolidation, merger and acquisition activity triggered by the
signing of the Telecommunications Bill in February of 1996 (see management's
discussion and analysis for the three months ended September 30, 1996). The
Company believes the current conditions prevalent in the radio industry will
continue to create a market for the Company's goods and services.
<PAGE> 10
Additionally, radio advertising revenues continue to grow, providing
the capital broadcasters need to upgrade their facilities in order to attract
and maintain top talent.
Cost of sales increased $740,000 or 25.9% from $2,862,000 to $3,602,000
due to the sales increase, and remained essentially unchanged as a percent of
revenues for the nine months ended September 30, 1995 compared to the same
period in 1996.
The Company continually evaluates its inventory purchasing and handling
policies, as well as its manufacturing processes, to ensure the maintenance of,
or improvement to, gross margins. Accordingly, gross margin increased $513,000
(from $2,115,000 to $2,628,000) or 24.2% due primarily to the increase in sales,
but decreased slightly as a percent of revenue from 42.5% to 42.2% for the nine
months ended September 30, 1995 compared to the nine months ended September 30,
1996.
General and administrative expenses (including depreciation and
amortization) increased approximately $177,000, or 20.4% for the comparable
periods ($869,000 in 1995, compared to $1,046,000 in 1996). The increase was
due, primarily, to additional expenses incurred in connection with the Company's
initial public offering, completed in May, 1996, additional payroll costs, and
expenses associated with the donation of radio equipment to a public radio
broadcast facility ($15,000). As a percent of revenue, however, general and
administrative expenses decreased .7%, from 17.5% in 1995 to 16.8% in 1996.
Selling and marketing expenses increased $125,000 or 25.3% from
$496,000 in 1995 to $621,000 in 1996 due, primarily, to the addition of a Sales
Manager as well as additional sales professionals. The Company expects to take
advantage of the growing radio market generated by the Telecommunication Bill
(see management's discussion and analysis of sales, above) and will continue to
invest prudently in this area to maximize market penetration. Selling and
marketing expenses as a percentage of revenue remained unchanged at 10.0% for
both years.
Research and engineering expenses decreased $108,000 or 16.3% from
$659,000 in 1995 to $552,000 in 1996. The primary reason for the decrease is
that, during the nine months ended September 30, 1996, the Company capitalized
certain development costs relating to the coding, testing and other expenditures
related to new products that will be sold, leased or otherwise marketed, in
accordance with the provisions of Statement of Financial Accounting Standards
No. 86.
Capitalized research and engineering costs, pursuant to Statement of
Financial Accounting Standards No. 86, for the nine months ended September 30,
1996 are approximately $804,000. The Company did not capitalize any such costs
for the comparable period in 1995. The Company has incurred and will continue to
incur additional research and engineering payroll expenses as it recruits and
hires the engineering staff necessary to develop and launch new product. The
Company will also continue to invest in state-of -the-art computer equipment and
CAD products to enable its engineering team to manage product development as
radio migrates from analog to digital.
Research and engineering expenses decreased, as a percent of revenue,
from 13.3% for the nine months ended September 30,1995 to 8.9% for the nine
months ended September 30, 1996 due to the increase in sales, and to the expense
capitalization discussed above.
Income from operations increased $318,000 or 347.8% from $91,000 for
the nine months ended September 30, 1995 to $409,000 for the nine months ended
September 30, 1996 reflecting the 24.2% increase in gross margin and 9.6%
reduction in operating expenses for the comparable periods. Operating income, as
a percent of revenue, increased 4.7% from 1.8% for the nine months ended
September 30, 1995 to 6.5% for the nine months ended September 30, 1996.
<PAGE> 11
Net interest expense decreased $43,000 or 93.2% for the comparable
periods, reflecting a decrease in borrowing on the line of credit, as well as
interest earned on invested funds.
The Company incurred a gain of approximately $16,000 for the nine
months ended September 30, 1996, resulting from an upgrade to an enhanced
CAD/engineering software package. The gain has been properly classified as other
income in the financial statements. The Company had no other income of this
nature for the nine months ended September 30, 1995.
The combined results, as discussed above, yielded a net income before
taxes of $441,000 for the nine months ended September 30, 1996 compared to
approximately $51,000 for the nine months ended September 30, 1995, or an
approximately 769.1% increase.
THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1995.
Sales increased $789,000 or 51.9% from $1,521,000 for the three months
ended September 30, 1995 to $2,310,000 for the three months ended September 30,
1996. The Company believes the increase in activity was directly related to the
passage of the Telecommunication Bill in early February of 1996, which relaxed
the ownership requirements imposed upon group broadcast companies. The Company
believes that as broadcast companies complete planned mergers and acquisitions,
they will continue to focus on the capital spending needs of these larger
entities, creating increased opportunities for the Company.
Cost of sales increased $483,000 or 56.2% due to the sales increase,
but increased approximately 1.6% as a percent of revenues for the three months
ended September 30, 1996 compared to the same period in 1995. The Company
believes the increase is due to inherent inefficiencies related to the
introduction and manufacturing of multiple new products and inefficiencies
associated with integrating new equipment into the Company's manufacturing
processes. Accordingly, the Company experienced a 46.2% increase in gross profit
for the three months ended September 30, 1996 compared to 1995.
General and administrative expenses (including depreciation and
amortization) increased approximately $155,000, or 55.4% for the comparable
three month periods ($280,000 in 1995, compared to $435,000 in 1996). The
increase was due, primarily, to additional expenses incurred in connection with
the Company's initial public offering, completed in May, 1996. As a percent of
revenue, however, general and administrative expenses increased only slightly,
from 18.4% in 1995 to 18.8% in 1996.
Selling and marketing expenses increased $105,000 or 68.0% from
$154,000 in 1995 to $259,000 in 1996. The Company expects selling and marketing
expenses to increase as it invests in the sales personnel and marketing
materials necessary to take advantage of the growing radio market, and to market
and sell multiple new products concurrently. Selling and marketing expenses as a
percentage of revenue increased 1.1% from 10.1% in 1995 to 11.2% in 1996.
Research and engineering expenses decreased $21,000 or 9.0%, from
$234,000 in 1995 to $213,000 in 1996. The primary reason for the decrease is
that, during the three months ended September 30, 1996, the Company capitalized
certain development costs relating to the coding, testing and other expenditures
related to new products that will be sold, leased or otherwise marketed, in
accordance with the provisions of Statement of Financial Accounting Standards
No. 86. The capitalized research and engineering expenses for the three months
ended September 30, 1996 are approximately $265,000.
<PAGE> 12
Income from operations increased nearly $69,000 from a loss of $6,000
in 1995 to $63,000 in 1996, primarily due to the increase in sales. Accordingly,
operational income, as a percent of revenue, increased from -.4% in 1995 to 2.7%
in 1996.
The Company earned interest income, net of interest expense, of $24,000
for the three months ended September 30, 1996, compared to a loss in interest
expense of $15,000 for the comparable period in 1995, reflecting a decrease in
borrowing on the Company's line of credit, and earnings on invested funds.
Net income before taxes increased nearly $116,000 from a loss of
$21,000 in 1995 to a gain of $95,000 in 1996, primarily due to increased sales.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal capital requirements are to fund the expansion
of its internal sales department, increase advertising and marketing, increase
engineering and development of new products and development of worldwide
markets. The Company has historically satisfied its cash requirements through
cash flows from operations and bank borrowings. The Company completed its
initial public offering in May of 1996 and realized net proceeds of
approximately $4.2 million after underwriting discount and offering expenses. As
of September 30, 1996, the Company had $2.8 million in cash and cash
equivalents.
The Company's operating activities used cash of $497,000 and $115,000
for the nine months ended September 30, 1996 and 1995 respectively. The cash
used in operations for the nine months ended September 30, 1995 was accounted
for primarily by a reduction in customer advances ($292,000) and an increase in
inventory ($142,000). Cash used in operations for the nine months ended
September 30, 1996 was the result, primarily, of an increase in inventory
($218,000), an increase in accounts receivable ($255,000), and an increase in
prepaid expense ($602,000), which was primarily a result of capitalized
engineering expenses in accordance with Statement of Financial Accounting
Standards No. 86
Cash used in investing activities for the nine months ended September
30, 1996 and 1995 was $433,000 and $200,000, respectively. Such investing
activities for all periods involved primarily purchases of property and
equipment.
Cash provided by financing activities was $3.7 million and $92,000 in
the nine months ended September 30, 1996 and 1995, respectively. For the nine
months ended September 30, 1996, such financing activities consisted primarily
of the proceeds of the Company's initial public offering of Common Stock, and,
to a lesser extent, borrowings on the Company's line of credit. For the nine
months ended September 30, 1995, such financing activities consisted primarily
of borrowing on the line of credit.
At September 30, 1996, the Company's principal sources of liquidity
were its cash and cash equivalents of $2.8 million. The Company repaid its bank
term loans, of approximately $342,000, in the third quarter of 1996.
Additionally, the Company renegotiated its current line of credit, under more
favorable terms and conditions, to provide additional liquidity.
The Company believes that the net proceeds from its initial public
offering completed as May 1996, together with current cash and equivalents, its
bank line of credit, its capital leases and funds generated from operations, if
any, will provide adequate liquidity, to meet the Company's capital and
operating requirements through at least the year ending December 31, 1997.
<PAGE> 13
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Default Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Securities Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits None
(b) Reports on From 8-K None
<PAGE> 14
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.
PACIFIC RESEARCH & ENGINEERING CORP.
By:_______________________________________
Larry Eyler
Chief Financial Officer
(Principal Financial and Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-START> JUL-01-1996 JAN-01-1996
<PERIOD-END> SEP-30-1996 SEP-30-1996
<CASH> 0 2,765,436
<SECURITIES> 0 0
<RECEIVABLES> 0 844,486
<ALLOWANCES> 0 15,000
<INVENTORY> 0 1,515,970
<CURRENT-ASSETS> 0 5,386,524
<PP&E> 0 2,559,943
<DEPRECIATION> 0 1,667,154
<TOTAL-ASSETS> 0 7,163,422
<CURRENT-LIABILITIES> 0 1,547,151
<BONDS> 0 0
0 0
0 0
<COMMON> 0 4,179,767<F1>
<OTHER-SE> 0 1,163,344
<TOTAL-LIABILITY-AND-EQUITY> 0 7,163,422
<SALES> 2,309,682 6,230,605
<TOTAL-REVENUES> 2,309,682 6,230,605
<CGS> 1,340,834 3,602,512
<TOTAL-COSTS> 905,967 2,218,864
<OTHER-EXPENSES> (8,376) (34,625)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (23,831) 3,168
<INCOME-PRETAX> 95,088 440,686
<INCOME-TAX> 30,000 55,000
<INCOME-CONTINUING> 65,088 385,686
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 65,088 385,688
<EPS-PRIMARY> .03 .22
<EPS-DILUTED> .03 .22
<FN>
<F1>(1)OPTIONS AND WARRANTS OUTSTANDING AS OF SEPTEMBER 30, 1996 ARE ANTIDILUTIVE
FOR PURPOSES OF CALCULATING PRIMARY AND FULLY DILUTED EARNINGS PER SHARE AND
ARE, THEREFORE IGNORED.
</FN>
</TABLE>
