<PAGE>
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 JUNE 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 June 30, 1996
------------------------
<PAGE>
Pacific Research & Engineering Corporation
Form 10-Q
Table of Contents
<TABLE>
<CAPTION>
Part I: Financial Information
<C> <S>
Item 1: Financial Statements.................................................................
Condensed Consolidated Balance Sheets as of December 31, 1995
and June 30, 1996.................................................................... 3
Condensed Consolidated Statements of Operations for the Quarters
Ended June 30, 1995 and 1996 and the Six Months Ended June 30,
1995 and 1996........................................................................ 4
Condensed Statements of Cash Flows for the Six Months Ended June 30,
1995 and 1996........................................................................ 5
Notes to Condensed Consolidated Financial Statements................................. 6
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................................ 8
Part II: Other Information
Item 1: Legal Proceedings.................................................................... 14
Item 2: Changes in Securities................................................................ 14
Item 3: Defaults upon Senior Securities...................................................... 14
Item 4: Submissions of Matters to a vote of Security Holders................................. 14
Item 5: Other Information.................................................................... 14
Item 6: Exhibits and Reports on Form 8-K..................................................... 14
Signatures..................................................................................... 15
</TABLE>
<PAGE>
PACIFIC RESEARCH AND ENGINEERING CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1995 1996
------------ ----------
(unaudited)
<S> <C> <C>
ASSETS
- --------------------------------------------
CURRENT ASSETS: $ 500 $3,304,723
Cash and cash equivalents
Accounts receivable, less allowance for doubtful accounts of
$15,000 for all periods presented 574,782 960,040
Inventories, net 1,297,549 1,495,463
Deferred tax benefit 6,340 96,801
Prepaid expenses 119,706 184,017
---------- ----------
TOTAL CURRENT ASSETS 1,998,877 6,041,044
PROPERTY AND EQUIPMENT, net 591,644 647,993
OTHER ASSETS 431,875 612,328
---------- ----------
$3,022,396 $7,301,365
========== ==========
LIABILITIES AND
SHAREHOLDERS' EQUITY
- --------------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 558,225 $ 608,972
Accrued expenses 182,178 174,693
Customer advances 329,381 296,155
Due to shareholders -- --
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 1,552,357
NOTES PAYABLE, net of current portion 300,004 241,673
CAPITAL LEASE OBLIGATIONS, net of current portion 70,151 55,857
---------- ----------
TOTAL LIABILITIES 1,666,836 1,849,887
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 June 30, 1996 81,179 4,331,798
Additional paid in capital -- 50,000
Retained earnings 1,274,381 1,069,680
---------- ----------
TOTAL SHAREHOLDERS' EQUITY 1,355,560 5,451,478
---------- ----------
$3,022,396 $7,301,365
========== ==========
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
3
<PAGE>
PACIFIC RESEARCH AND ENGINEERING CORPORATION
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
--------------------------- ---------------------------
1996 1995 1996 1995
---------- --------- ---------- ---------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
NET SALES $1,970,555 1,610,629 $3,920,922 3,456,730
COST OF SALES 1,122,445 930,323 2,261,678 2,003,680
---------- --------- ---------- ---------
Gross Profit 848,110 680,306 1,659,244 1,453,050
OPERATING EXPENSES:
General and administrative 277,198 249,708 530,770 514,544
Selling and marketing 191,958 209,035 362,011 341,473
Research and engineering 180,909 220,147 339,194 424,903
Depreciation and amortization 41,612 37,180 80,920 74,422
---------- --------- ---------- ---------
TOTAL OPERATING EXPENSES 691,677 716,070 1,312,895 1,355,342
INCOME FROM OPERATIONS 156,433 (35,764) 346,349 97,708
OTHER INCOME (EXPENSES):
Interest expense (13,696) (17,507) (26,999) (31,108)
Gain on sale of assets - - 16,087 -
Other 9,694 3,005 10,163 4,887
---------- --------- ---------- ---------
TOTAL OTHER INCOME (EXPENSE) (4,002) (14,502) (749) (26,221)
INCOME BEFORE INCOME TAXES 152,431 (50,266) 345,600 71,487
Income taxes - - - -
---------- --------- ---------- ---------
NET INCOME $ 152,431 (50,266) $ 345,600 71,487
========== ========= ========== =========
EARNINGS (LOSS) PER AVERAGE
COMMON SHARE (Unaudited) $ 0.09 -0.04 $ 0.23 0.05
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 1,648,782 1,305,500 1,484,603 1,305,500
========== ========= ========== =========
PRO FORMA (Unaudited):
Income before income taxes $ 152,431 (50,266) $ 345,600 71,487
Pro forma income taxes 60,972 - 138,240 28,595
---------- --------- ---------- ---------
Pro forma net income (loss) 91,459 (50,266) 207,360 42,892
Pro forma earnings (loss) per common share $ 0.06 -0.04 $ 0.14 0.03
Shares used in pro forma per share calculation 1,648,782 1,305,500 1,484,603 1,305,500
========== ========= ========== =========
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
4
<PAGE>
PACIFIC RESEARCH AND ENGINEERING CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30,
--------------------
1996 1995
---------- --------
(unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 345,600 64,292
Adjustments to reconcile net income to net cash provided by (used in) -- --
operating activities: -- --
Depreciation and amortization 80,920 74,421
Deferred income tax provision -- --
Gain on sale of assets -- --
Change in operating assets and liabilities: -- --
Accounts receivable (385,258) (4,194)
Inventories (197,912) (85,911)
Prepaid expenses and other assets (335,225) (37,122)
Accounts payable 50,472 217,170
Accrued expenses (7,215) (53,045)
Customer advances (33,226) (223,091)
---------- --------
NET CASH PROVIDED (USED IN) BY OPERATING ACTIVITIES (481,844) (47,480)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (137,269) (181,260)
Proceeds from sale of assets -- --
---------- --------
NET CASH USED INVESTING ACTIVITIES (137,269) (181,260)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable and line of credit 245,000 160,000
Proceeds from sale of common stock 4,250,619 --
Proceeds from sale of common stock warrants 50,000 --
Proceeds (Payments) on notes payable and line of credit (58,331) (27,612)
Payments under capital lease obligations (13,654) (13,128)
Distributions to shareholders (550,298) (36,222)
---------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 3,923,336 83,038
NET INCREASE (DECREASE) IN CASH 3,304,223 (145,702)
CASH, BEGINNING OF PERIOD 500 146,202
---------- --------
CASH, END OF PERIOD $3,304,723 500
========== ========
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
5
<PAGE>
Pacific Research & Engineering Corporation Notes to Condensed Financial
Statements (Information as of June 30, 1996 and for the quarters and six months
ended June 30, 1995 and 1996 is unaudited)
1. Interim Financial Data (Unaudited):
The unaudited financial statements for the quarters and six months ended
June 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 include 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. 33-858-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 June 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
$640,000.
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.
6
<PAGE>
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 June 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 June 30, 1996 are antidilutive for
purposes of calculating primary and fully diluted earnings per share and are,
therefore, ignored.
7. As discussed in Note 3, the Company's corporation status terminated upon
completion of its initial public offering in May, 1996. The accompanying
condensed statements of income include unaudited proforma income tax provisions,
to reflect the income tax expense of the Company as if it had been subject to
normal federal and state income taxes for the period presented.
7
<PAGE>
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.
8
<PAGE>
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 June 30 Six Months Ended June 30
------------------------------------- ------------------------------------------
1996 1995 Percent 1996 1995 Percent
(Unaudited) (Unaudited) Incr (Decr) (Unaudited) (Unaudited) Incr (Decr)
<S> <C> <C> <C> <C> <C> <C>
Net sales 100.0% 100.0% 22.4% 100.0% 100.0% 13.4%
Cost of sales 57.0% 57.8% 20.7% 57.7% 58.0% 12.9%
----------------------------------------------------------------------------------
Gross profit 43.0% 42.2% 24.7% 42.3% 42.0% 14.2%
Expenses:
- ------------------------------
General and administrative 14.1% 15.5% 11.0% 13.5% 14.9% 3.2%
Selling and marketing 9.8% 13.0% (8.2%) 9.2% 9.9% 6.0%
Research and engineering 9.3% 13.7% (17.8%) 8.7% 12.3% (20.2%)
Depreciation and amortization 2.1% 2.3% 11.9% 2.1% 2.2% 8.7%
----------------------------------------------------------------------------------
Total operating expenses 35.3% 44.5% (3.4%) 33.5% 39.2% (3.1%)
Income from operations 7.7% (2.2%) NA 8.8% 2.8% NA
Other income (expenses):
- ------------------------------
Interest income (expense) (0.7%) (1.1%) (21.8%) (0.7%) (0.9%) (13.2%)
Gain on sale of asset 0.0% - NA 0.4% - -
Other 0.5% 0.2% NA 0.3% 0.1% NA
----------------------------------------------------------------------------------
Total other income (expense) (0.2%) (0.9%) (72.4%) 0.0% (0.8%) (97.1%)
Income before income taxes 7.5% (3.1%) NA 8.8% 2.1% NA
Provision for income taxes - - - - - -
Net income 7.5% (3.1%) NA 8.8% 2.1% NA
</TABLE>
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995.
Sales increased $464,000 or 13.4%, from $3,457,000 for the six months ended
June 30, 1995 to $3,921,000 for the six months ended June 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 June 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.
Additionally, radio advertising revenues continue to grow, providing the
capital broadcasters need to upgrade their facilities in order to attract and
maintain top talent.
9
<PAGE>
Cost of sales increased $258,000 or 12.9% from $2,004,000 to $2,262,000 due
to the sales increase, but decreased slightly as a percent of revenues for the
six months ended June 30, 1996 compared to the same period in 1995.
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 $207,000
(from $1,453,000 to $1,659,000) or 14.2% due primarily to the increase in sales,
and increased as a percent of revenue from 42.0% to 42.3% for the six months
ended June 30, 1996 compared to the six months ended June 30, 1995.
General and administrative expenses (including depreciation and
amortization) increased approximately $23,000 or 3.9% for the comparable periods
($612,000 in 1996, compared to $589,000 in 1995). 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 1.5% from 17.1% in 1995 to 15.6% in 1996.
Selling and marketing expenses increased $21,000 or 6.1% from $341,000 in
1995 to $362,000 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 decreased slightly from 9.9% in
1995 to 9.2% in 1996.
Research and engineering expenses decreased $86,000 or 20.2% from $425,000
in 1995 to $339,000 in 1996. The primary reason for the decrease is that,
during the six months ended June 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 expenses for the six months ended June
30, 1996 are approximately $311,000. 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
12.3% for the six months ended June 30,1995 to 8.7% for the six months ended
June 30, 1996 due to the increase in sales, and to the expense capitalization
discussed above.
Income from operations increased $249,000 or 254.4% from $98,000 for the
six months ended June 30, 1995 to $346,000 for the six months ended June 30,
1996 reflecting the 14.2% increase in gross margin and 3.1% reduction in
operating expenses for the comparable periods. Operating income, as a percent
of revenue, increased 6% from 2.8% for the six months ended June 30, 1995 to
8.8% for the six months ended June 30, 1996.
10
<PAGE>
Interest expense decreased $4,000 or 13.2% for the comparable periods,
reflecting a decrease in borrowing on the line of credit.
The Company incurred a gain of approximately $16,000 for the six months
ended June 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
six months ended June 30, 1995.
The combined results, as discussed above, yielded a net income before taxes
of $346,000 for the six months ended June 30, 1996 compared to approximately
$71,000 for the six months ended June 30, 1995, or an approximately 383.4%
increase.
THREE MONTHS ENDED JUNE 30, 1996 COMPARED TO THREE MONTHS ENDED JUNE 30, 1995.
Sales increased $360,000 or 22.4% from $1,610,000 for the three months
ended June 30, 1995 to $1,971,000 for the three months ended June 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 $192,000 or 21% due to the sales increase, but
remained essentially unchanged as a percent of revenues for the three months
ended June 30, 1996 compared to the same period in 1995. Accordingly, the
Company experienced a nearly 25% increase in gross profit for the three months
ended June 30, 1996 compared to 1995.
General and administrative expenses (including depreciation and
amortization) increased approximately $32,000, or 11.1% for the comparable three
month periods ($319,000 in 1996, compared to $287,000 in 1995). 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 decreased 1.6%, from 17.8% in 1995
to 16.2% in 1996.
Selling and marketing expenses decreased $17,000 or 8.1% from $209,000 in
1995 to $192,000 in 1996. The Company expects selling and marketing expenses to
increase, beginning in the third quarter of 1996, as it invests in the sales
personnel and marketing materials necessary to take advantage of the growing
radio market. Selling and marketing expenses as a percentage of revenue
decreased 3.2% from 13.0% in 1995 to 9.8% in 1996.
Research and engineering expenses decreased $39,000 or 17.8%, from $220,000
in 1995 to $181,000 in 1996. The primary reason for the decrease is that, during
the three months ended June 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 June
30, 1996 are approximately $168,000.
Income from operations increased nearly $193,000 from a loss of $36,000 in
1995 to $156,000 in 1996, primarily due to the increase in sales. Accordingly,
operational income, as a percent of revenue, increased from -2.2% in 1995 to
7.7% in 1996.
11
<PAGE>
Interest expense for the comparable quarters decreased nearly $4,000 or 22%
from $18,000 in 1995 to $14,000 in 1996. Reflecting a decrease in borrowing on
the Company's line of credit.
Net income before taxes increased nearly $203,000 from a loss of $50,000 in
1995 to $152,000 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 of Common Stock in May of 1996 and realized net proceeds
of approximately $4.2 million after underwriting discount and offering expenses.
As of June 30, 1996, the Company had $3.3 million in cash and cash equivalents.
The Company's operating activities used cash of $482,000 and $48,000 for
the six months ended June 30, 1996 and 1995 respectively. The cash used in
operations for the six months ended June 30, 1995 was accounted for primarily by
a reduction in customer advances ($223,091) and an increase in inventory
($86,000). Cash used in operations for the six months ended June 30, 1996 was
the result, primarily, of an increase in inventory ($198,000), an increase in
accounts receivable ($335,000), 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 six months ended June 30, 1996
and 1995 was $137,000 and $181,000, respectively. Such investing activities for
all periods involved primarily purchases of property and equipment.
Cash provided by financing activities was $3.9 million and $83,000 in the
six months ended June 30, 1996 and 1995, respectively. For the six months ended
June 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 six months ended June 30,
1995, such financing activities consisted primarily of borrowing on the line of
credit.
At June 30, 1996, the Company's principal sources of liquidity were its
cash and cash equivalents of $3.3 million. The Company expects to repay its
bank term loans, of approximately $342,000, in the third quarter of 1996.
Additionally, the Company expects to re negotiate 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.
12
<PAGE>
As a result of terminating its S Corporation status upon completion of its
Initial Public Offering, the Company was required to record additional deferred
tax benefit, which relates primarily to temporary differences between financial
and income tax reporting of depreciation, accrued expenses and inventory
valuation, that were attributable to the periods it had elected to be treated as
an S Corporation. Under Statement of Financial Standards No. 109, "Accounting
for Income Taxes" ("SFAS No. 109"), which is effective for fiscal years
beginning after December 15, 1992, the recording of additional deferred tax
benefit resulted in a one-time non-cash credit to earnings as a reduction of
income tax equal to the amount of the deferred tax asset adjustment. The change
by the Company from a S Corporation to a C Corporation had a positive impact on
the Company's reported income for the quarter ending June 30, 1996, and is
expected to have a positive impact on the Company's reported income for the year
ending December 31, 1996. As of June 30, 1996, the amount of the Company's
additional deferred tax asset to be recorded was approximately $93,000.
13
<PAGE>
PART II - OTHER INFORMATION
<TABLE>
<CAPTION>
<S> <C>
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 Form 8-K None
</TABLE>
14
<PAGE>
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: /s/ Larry Eyler
---------------------------------
Larry Eyler
Chief Financial Officer
(Principal Financial and Accounting Officer)
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-START> APR-01-1996 JAN-01-1996
<PERIOD-END> JUN-30-1996 JUN-30-1996
<CASH> 0 3,304,723
<SECURITIES> 0 0
<RECEIVABLES> 0 975,040
<ALLOWANCES> 0 15,000
<INVENTORY> 0 1,495,463
<CURRENT-ASSETS> 0 6,041,044
<PP&E> 0 2,263,770
<DEPRECIATION> 0 1,615,777
<TOTAL-ASSETS> 0 7,301,365
<CURRENT-LIABILITIES> 0 1,552,357
<BONDS> 0 0
0 0
0 0
<COMMON> 0 4,331,798
<OTHER-SE> 0 1,119,680
<TOTAL-LIABILITY-AND-EQUITY> 0 7,301,365
<SALES> 1,970,555 3,920,922
<TOTAL-REVENUES> 1,970,555 3,920,922
<CGS> 1,122,445 2,261,678
<TOTAL-COSTS> 691,677 1,312,895
<OTHER-EXPENSES> (9,694) 26,250
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 13,696 26,999
<INCOME-PRETAX> 152,431 345,600
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 152,431 345,600
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 152,431 345,600
<EPS-PRIMARY> .09 .23<F1>
<EPS-DILUTED> .09 .23<F1>
<FN>
<F1> Options and warrants outstanding as of June 30, 1996 are antidilutive for
purposes of calculating primary and fully diluted earnings per share and are,
therefore, ignored.
</TABLE>
