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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [Fee Required] for the fiscal year ended December
31, 1996.
[ ] Transition report under Section 13 or 15(d) of the Securities Exchange
Act of 1943 [No Fee Required] for the transition period from to
Commission file number 001-11773
PACIFIC RESEARCH & ENGINEERING CORPORATION
[Name of small business issuer in its charter]
California 95-2638420
(State or other jurisdiction of (IRS Employer Identification No.)
Incorporation or organization)
2070 Las Palmas Drive
Carlsbad, California 92009
(Address of principal executive offices and zip code)
Issuer's telephone number: (619) 438-3911
Securities registered pursuant to Section 12(b) of the Exchange Act:
Common Stock, no par value
Common Stock Purchase Warrants American Stock Exchange
(Title of class) (Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Exchange Act: None
Check whether the issuer (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 X NO
--- ---
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B is not contained in this form, and no disclosure will
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
Issuers' revenues for the year ended December 31, 1996 were $7.696
million. The aggregate market value of voting stock held by nonaffiliates of the
registrant is approximately $2,162,500 (based on the last American Stock
Exchange reported sales price on March 27, 1997). This amount was calculated by
reducing the total number of shares of the registrant's common stock outstanding
by the total number of shares of common stock held by officers, directors, and
stockholders owning in excess of 10% of the registrant's common stock, and
multiplying the remainder by the last reported sales price on March 27, 1997.
The information provided shall in no way be construed as an admission that any
officer, director, or more than 10% stockholder of the registrant may be deemed
an affiliate of the registrant or that such person is the beneficial owner of
the shares reported as being held by such person, and any such inference is
hereby disclaimed. As of March 5, 1997 there were 2,305,500 shares of the
issuers common stock and warrants to purchase 500,000 shares of common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: Form 14g - Proxy Statement is incorporated
by reference in Items 9, 10, 11 and 12
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TABLE OF CONTENTS
PART I
Item 1. Business............................................. 3
Item 2. Properties........................................... 12
Item 3. Legal Proceedings.................................... 12
Item 4. Submission of Matters to a Vote of
Security Holders..................................... 12
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters.......................... 12
Item 6. Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................................... 13
Item 7. Financial Statements and Selected Financial Data..... 18
Item 8. Changes in and Disagreements With Accounting
and Financial Disclosure............................. 20
PART III
Item 9. Directors, Executive Officers, Promoters and
Control Persons; Compliance with Section 16(a)
of the Exchange Act.................................. 20
Item 10. Executive Compensation............................... 20
Item 11. Security Ownership of Certain Beneficial Owners
and Management....................................... 20
Item 12. Certain Relationships and Related Transactions....... 20
Item 13. Exhibits and Reports on Form 8-K..................... 20
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PART I
ITEM 1. BUSINESS
The Company
Since its incorporation in October 1969, PR&E has produced high quality
studio products and services including audio control and mixing consoles,
cartridge machines, digital audio 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 has
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.
Industry Overview
According to the Radio Advertising Bureau, an industry analyst, radio
advertisers spent over $10 billion in 1994, $11 billion in 1995 and $12 billion
for 1996. Radio continues to be an advertising medium of choice for targeting
specific segments of the consumer marketplace. Opportunities created by
advertising growth and changes in Federal Communication Commission (FCC)
regulations have caused many changes in radio station ownership and operation,
with new stations, new formats, combined station facilities, local marketing
agreements (LMA) and duopoly, all creating the need for new studio equipment and
services. The Company is planning on exploiting this growth potential with new
products and services designed to carry the Company into new market segments
both domestically and internationally.
The radio broadcasting industry has been in transition since the advent of
television in the early 1950's. Over this period the industry developed new
programming and embraced new technology to survive and compete effectively with
the wide variety of advertising media. Radio accounts for about 7% of the total
spent on advertising nationally. The Company believes that recent regulatory
changes by the FCC regarding multiple station operation will not only change the
ownership structure of the radio broadcasting industry, but will also create
additional applications and opportunities for the Company to introduce new and
more efficient technologies. Following a complex market size and share formula,
one entity may own up to eight stations in a market.
The Company's primary market has been the United States radio broadcast
industry, which now numbers over 12,700 operating licensees of the FCC.
Additionally, the Company has placed significant focus on the international
market, increased efforts in sales staff and presence by establishing
distributor relationships abroad and increasing its export staff.
The radio market is ranked by Arbitron according to area of dominant
influence ("ADI"). Each radio market is assigned a rank according to the
population of the listening area, for example, the "Top 10 Markets" are New
York, Los Angeles, Chicago, San Francisco, Philadelphia, Detroit, Boston,
Houston, Washington DC and Dallas.
The following table sets forth the Company's customers according to a
market share breakdown based on an ADI market ranking as of December 31, 1996.
<TABLE>
<CAPTION>
Percentage
Number of PR&E
Number of Clients Per
of PR&E Market
Radio Market Rank Stations Clients Rank(1)
----------------- -------- ------- -------
<S> <C> <C> <C>
1-50............ 1875 521 27.8%
51-100.......... 1164 171 14.7%
101-150......... 753 85 11.3%
151-261......... 1356 86 6.3%
</TABLE>
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(1) Represents the percentage of the number of radio stations in each Market
Rank to which the Company has sold and/or continues to sell products. The
Company's competitors may also sell products to the same radio stations.
The results set forth in the table are based on an informal survey
conducted by the Company.
Radio stations in each market are rated by the Arbitron rating service
according to their market share or listener audience. The Company has
historically targeted those stations in the top 50 markets that have had an
audience rating share of 1.0% or greater. While this selection criteria does not
identify all of the potential clients in each market, it does define a
reasonable pool of potential clients who are strong enough to afford the
Company's existing products and services.
Strategy
- Marketing Channel Development. Management plans to market the Company's
existing products and services worldwide by significantly increasing domestic
and international advertising and promotional activities. The Company is
reorganizing its sales force to improve focus in the major markets and establish
a channel for marketing lowered priced products for less affluent domestic and
international broadcasters. Both the enhancements of the Company's direct sales
efforts and the increased promotional activities will place an emphasis on
international business that, until now, has remained relatively undeveloped.
- Horizontal Expansion for Top-Market Broadcasters. The Company intends to
develop a range of new technology products and services for the Company's
primary market segment, such as computer controlled air and production consoles
and digital audio processing and interfacing devices. The first product in this
category is the Integrity Digital Broadcast Console scheduled for introduction
at the Audio Engineering Society (AES) trade show in Munich, Germany in March,
1997 and commercial release in the second quarter of 1997. Company's management
believes there is a market for high technology products and services in this
category, and that maintaining dominance in its existing market segment is vital
to future success in other markets.
- Middle Market Products and Services. The Company plans to develop
products and services for the broadcasters in somewhat less affluent markets
than those to which the Company has historically sold. Products for this market
segment will be sold by the Company's direct sales force and a few select
international dealers. The Company has just completed the development of the
AirWave (TM), a low cost broadcast console, which will begin shipping to clients
during March, 1997. The Company is also in the final phase of development of a
new line of ready-to-assemble studio furniture named QuickBilt(TM) which offers
high quality styling and craftsmanship at a very low price point.
- Development of OEM Audio Engine. The Company is developing a high
quality, digital audio engine to be marketed as original equipment ("OEM") to
manufacturers of computer-based digital audio recording/playback systems. This
device, named Soundfire (TM), translates sound into data that can be manually or
automatically processed by computer. This engine will employ much of the digital
signal processing ("DSP") technology being applied to the Company's other
digital audio products, and will provide a vehicle for establishing OEM
relationships with other manufacturers, which could lead to further products in
the future. Additionally, the audio engine has the potential for varied
applications in the highend multimedia market as an audio server engine.
Products & Services
The Company's current line of products and services address the technical
operating requirements of control rooms and studios in the broadcasting
industry. The Company's products and services are divided into four categories:
Audio Control Consoles, Digital Recording Equipment, Peripheral Equipment and
System Products and Services. The Company believes its equipment and services
are ranked among the highest in the industry in quality, reliability, ease of
use, ease of maintenance and customer service, among others.
1. Audio Control Consoles are audio mixing, routing and monitoring systems.
The Company manufactures two classes of consoles, one targeted at the major
broadcasters and networks and the other at the middle and lower market segments.
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Approximately 50%, 58% and 53% for fiscal years 1996, 1995 and 1994,
respectively, was attributable to the console line of business.
2. Digital Recording Products include digital audio recording, editing and
automated mixing systems. Digital recording devices record audio material on
disk and cut, copy, paste and move elements of the recording through computer
software applications. Approximately, 6%, 9% and 5% of gross income for fiscal
years 1996, 1995 and 1994, respectively, was attributable to digital recording
products.
3. Peripheral Equipment includes distribution amplifiers, audio switchers,
studio turrets and control panels. These products are sold both independently
and as part of the Company's system design and integration business.
Approximately, 4%, 3% and 5% for fiscal years 1996, 1995 and 1994, respectively,
was attributable to sales of peripheral equipment.
4. System Products include design, engineering and fabrication services,
which range from providing a single studio to a complete broadcast facility. As
part of the system integration business, the Company is also a distributor for
manufacturers of supporting peripheral equipment. The Company is not materially
dependent on any manufacturer for which it distributes peripheral equipment.
Approximately 30%, 23% and 31% for fiscal years 1996, 1995 and 1994,
respectively, was attributable to this line of business.
Audio Control Consoles
Audio control consoles are modular products and are configured according to
customer specifications, prices vary according to the console features and
configuration.
X-Class Consoles
- - ABX Multitrack Production Console. The ABX was designed to provide the
industry with an integrated broadcast operations console. The console is
equipped with several unique features designed to accommodate a wide range of
tasks, including live on-air programming, telephone talk-show and stereo and
multitrack production. The ABX is also the design "master model" for the AMX and
BMX Series III consoles listed below. These designs are all compatible to each
other in terms of key parts, circuitry, performance and basic features and
differ only in the quantity of facilities offered by each model. Prices range
from $35,000 to $75,000 depending upon the configuration.
- - AMX Stereo Production Console. The AMX console was a "spin-off" of the ABX.
The design shares several modules with the ABX and offers most of the same
features in a console designed for two-channel, stereo, production techniques.
The AMX combines the features of an advanced broadcast on-air console with a
versatile stereo production console. This console is positioned as the "center"
model of the three designs, and offers the potential client the "safest"
purchasing decision for projects where future flexibility is very important.
Prices range from $25,000 to $55,000 depending upon the configuration.
- - BMX Series III On-Air Console. The Series III console is the latest version of
the BMX Series. The Series III retains the basic concepts developed in the
earlier BMX consoles and enhances them with features and facilities developed
for the ABX and AMX designs. The console shares many modules and components with
the AMX Model; for example, it is possible to equip a BMX Series III with input
modules from the AMX when the extra facilities of that design are required.
Prices range from $20,000 to $40,000 depending upon the configuration.
- - STX. The STX is the Company's first audio console designed for television
operations. The STX offers several new and unique features for stereo television
audio applications plus the traditional quality and reliability of the Company's
products. Prices range from $60,000 to $120,000 depending upon the
configuration.
Mixer-Class Consoles:
- - NEWSMIXER. The Newsmixer is the Company's first audio mixing, routing and
monitoring system specifically designed
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for radio news preparation, assembly and production. The Newsmixer offers mixing
and control facilities required for a news editor to assemble and produce a news
story or "actuality" for broadcast. The operational design is efficient and
provides a range of features and capabilities in a compact package.
- - STEREOMIXER. The Stereomixer is a compact mixer with most of the signal and
logic control features of the BMX Series III console. Appearing similar to the
Newsmixer, the Stereomixer combines extensive operational capabilities in an
efficient and easy to use package.
- - RADIOMIXER. The Radiomixer console is the Company's first full-featured
console targeted for the middle-market broadcaster. Radiomixer has the features
and performance expected of the Company's consoles including an easy-to-use
telephone mix-minus system.
- - PRODUCTIONMIXER. The Productionmixer console is the stereo/multitrack
production console companion to the Radiomixer.
- - AIRWAVE. The Company's newest console, the AirWave, was specifically designed
for broadcasters in less affluent domestic and international markets. AirWave
contains many of the same features found in the Company's more sophisticated
consoles in a very attractive and cost effective package.
Digital Recording Equipment
- - ADX Digital Workstation & Mixstation. The ADX-Eight consists of two component
products, a multitrack digital audio recording and editing workstation and an
automated mixing control surface, called a mixstation. The mixstation is
designed for installation in the ABX or Productionmixer console and provides
control of the workstation during recording and automated mixing facilities
during replay and mixdown phases of production. The ADX is the Company's first
fully integrated digital audio recording system designed to specifically address
the creativity and efficiency requirements of broadcast production. The
workstation incorporates an on-board automated mixing surface, in a convenient
roll-around package. The workstation features familiar analog transport controls
for common functions, enabling a smooth transition from the cut and splice
editing of tape to the creative flexibility of digital audio editing. Intuitive
software guides the user through the editing features. The advanced mix
automation can reproduce and store recordings, limited only to the extent of the
computer's memory. All automation is cue based, and once created, it follows the
cue wherever it is moved, independent of time code or track.
- - ADX Ensemble. This is a new version of the ADX digital audio workstation
system. This new version combines several of the features of the ADX Workstation
& Mixstation into a more price-competitive, stand-alone package. This new
workstation is targeted at increasing market share in the more price-sensitive
segment of the market. Additionally, this product is expected to satisfy a
broader range of workstation applications than just broadcast production,
including film and video post-production.
Peripheral Equipment
- - SDA-8A Stereo Distribution Amplifier. The SDA-8A offers several features not
found in competitive designs, such as: input mode switching, input/output
metering, very wide input level accommodation and extensive operating headroom.
With its features and performance the SDA-8A is designed for high end
applications.
- - Utility Switchers. The Company manufactures three mechanical switching
products that offer the customer a simple method to accommodate the selection
and routing of audio signals. These are the models are the LS-5, LS-10 and
LS-20. These switchers are used to select remote lines for input to a mixing
console and cross connect tape machines for transfer recording. All three of
these items were originally developed to support a particular custom system
requirement and were later developed into products when the market need
demonstrated itself.
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System Products and Services
- - System Design. This service includes consultation with the client to determine
and design custom systems to meet particular operational requirements. This is a
growing market as broadcasters continue to reduce the size of in-house technical
staff and turn to the Company for its wide expertise and design resources. This
service is not offered independently, but only as part of a custom system
fabrication project.
- - Custom Engineering. The sale of custom broadcast systems often entails the
design and manufacture of custom panels, switchers and other electromechanical
components to meet the client's operating needs. The Company's product
engineering and system design groups work together to develop the custom
product, with a view to future market potential. Historically, several strong
products have emerged from this custom engineering activity.
- - Cabinetry Fabrication. The Company has been designing and manufacturing custom
studio furniture since 1972. The design and fabrication activity support both
the component level and custom system sales. The Company manufactures both
custom designed cabinetry and a standard series, PrimeLine, listed below. The
Company is the only company known to management to offer complex custom cabinet
designs tailored to meet the particular requirements of facility space and
function.
- - PrimeLine Cabinetry. The Company introduced a line of "standard" radio studio
cabinetry at the 1990 National Association of Broadcasters ("NAB") show. This
line is designed to satisfy many of the application requirements of the
mid-market broadcaster who does not need or cannot afford custom designed and
fabricated studio furniture. The series is constructed of pre-manufactured
panels and components to produce attractive and functional cabinetry. In keeping
with the high quality image of the Company, the price savings are achieved
through standardization and production technology.
- - Wiring Fabrication. Audio and logic wiring assembly is part of custom system
services and includes the design, documentation and fabrication of patch fields,
terminal blocks and system interconnection harnesses. The Company has developed
standardized wiring documentation, components and procedures, which are
efficient in fabrication and offer system flexibility to the client.
- - Installation Services. The Company offers system installation assistance to
the Broadcast Console. The Company is currently developing a price-competitive
computer-controlled digital audio on-air broadcast console targeted at major and
middle market U.S. and international broadcasters. Conceptual development is
complete and approximately 50% of the design and engineering tasks have been
accomplished. Various prototype assemblies and components have been produced and
the product is scheduled to begin shipping in the fourth quarter of 1996.)
The Company is currently performing product definition and preliminary
design efforts for future products in the following areas:
- - Radio Audio Control Consoles. The Company is defining computer controlled
consoles for the future replacement of the existing BMX, AMX and ABX console
line. These consoles will be designed to offer significantly more creative and
control capability than current designs.
- - Television/Teleproduction Audio Control Console. The Company has outlined a
computer based audio control console to accommodate the extraordinary
operational demands of major market, network and teleproduction applications.
The console will be designed to work with the camera motion and video switching
automation systems used in the television industry.
- - Theme Park Audio Electronics. The Company has provided products and services
to theme park companies including Walt Disney and Universal Studios and is
exploring entry into the design and manufacture of unique audio electronic
components manufactured to their high-reliability standards and performance
specifications.
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Manufacturing
The Company uses an advanced material resource planning system ("MRP") to
control inventory and manpower requirements in manufacturing. This system is
fully integrated with marketing, accounting, engineering and management to
provide enterprise-wide information visibility, enabling the Company to
efficiently forecast and resolve potential parts and/or manpower shortfalls.
Electro-Mechanical Assembly. The Company manufactures its products in-house
with a trained assembly staff. New production equipment, tooling and procedures
have recently been installed to support the quality of the products and improve
assembly efficiency. One example is the recent installation of several
semi-automated pick and place printed circuit assembly machines. These machines
have significantly improved both quality and productivity.
System Cabinetry & Furniture. The Company brought the production of system
cabinetry in-house in 1988, hiring several key individuals from former long-term
suppliers. This enables the Company to have better control of scheduling and
cost compared to total reliance upon independent shops. Outside shops will
continue to be used for accommodating peak demands.
Quality Assurance & Test Operations. The Company's quality control
procedures include source inspection, incoming inspection, assembly line test
and-final product test. The Company is currently investing in Automatic Test
Equipment ("ATE") to provide faster, more thorough, and efficient testing at
both the assembly line and final product levels. All assembly workers are
trained in quality methods and all are accountable for the high quality
standards of the Company.
Metal Fabrication. In August 1993, the Company entered into an agreement to
sell various metal fabrication assets used in the Company's production process
to an independent third party, Pacific Metal Fabrications, Inc. ("PMF"). In
connection with this sale, the Company agreed to allow PMF to bid on all its
future metal fabrication products. So long as PMF satisfies certain conditions
relating to product quality and delivery, and PMF's bid is not more than 5%
higher than other bids, the Company must accept PMF's bid. During 1996 and 1995,
the Company purchased approximately $562,000 and $455,000 of metal fabrication
products from PMF, respectively. The Company believes that this arrangement with
PMF does not materially adversely impact the Company.
The Company does not rely on subcontractors in the manufacture of its
products and services. Some manufacturing processes are outsourced on an
as-needed basis when demand exceeds planned capacity. This outsourcing is not
material and is not dependent on a particular vendor, as the processes are
generic and available from multiple sources. Raw materials used in the
manufacture of the Company's products are also available from multiple sources
of supply. The Company designs its products so as to not be dependent on the
continuing availability of specialty parts or processes.
Marketing & Distribution
The Company's products and services are sold directly to the domestic
market by the Company's six in-house sales personnel. The benefits of direct
sales as opposed to selling through distributors are as follows:
- - Access to the purchaser and the end-user directly; to define sales closure
requirements, customer needs for training and additional product features
desired.
- - Accurate sales forecasts based on direct customer response to minimize
finished goods inventories and maximize inventory turns.
- - Feedback on product-line upgrades and new products.
- - Direct management of the customer base to understand product/market
environmental changes as they occur.
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Personal support of customers in post-sales and network enhancement (add-on
sales) situations.
Improved factory margins due to the elimination of dealer commissions.
The Company's domestic sales force is based at its California facility, and
consists of the Territorial Sales Representatives and support staff, all of whom
report directly to the operating management of the Company, and are responsible
for the sales of individual products and custom engineered systems. Add-on sales
are contributed by the Customer Service Representatives and the System Design
Engineers. As part of the growth plan, the Company plans to recruit a number of
new domestic and international sales representatives to supplement its already
expanded sales force.
Internationally, the Company's products and services are sold through
several selected distributors and dealers located throughout the world. The
Company currently has distributors in several of the countries of Western
Europe, plus Japan, South Korea, Columbia, Canada and Mexico. The Company is
continuing to identify, qualify and establish dealer and distributor
organizations in the other export markets. The Company's management believes
that a significant portion of its future growth will come from the export
markets. The Company intends to appoint several international sales
representatives to focus on cultivating the export markets. There can be no
assurance that the Company will be successful in expanding into international
markets.
The Company has solicited and been awarded a United States General Services
Agency ("GSA") contract, which allows various federal government agencies to
purchase products directly from the Company without the usual bidding and vendor
qualification processes. GSA sales accounted for only 0.4% and 1.3% of sales
during 1996 and 1995, respectively.
The Company reaches the domestic market through direct marketing, display
advertising in industry trade magazines, exhibit display at the annual NAB
convention and distribution of the Company's newsletter, Aircheck, which is
mailed to approximately 10,000 recipients' two to four times per year at no cost
to the recipient. The Company also has brochures and other supporting literature
available for its products and services. The Company intends to invest in direct
and display advertising, regional trade shows, product clinics (road shows), and
special promotions to improve market penetration.
Customer Service & Product Support
Management believes customer service, including ongoing product support, is
a critical aspect of maintaining customer relationships. The Company recognizes
that its future sales success depends upon the quality of support provided to
existing customers. The Company has therefore established a Customer Service
Department that reports directly to the operating management and, has the
ability to promptly resolve any technical problem that may arise. As the Company
grows and develops more software-based products, the technical support function
of the Customer Service Department will be expanded to offer training programs,
applications support, and cash flow-generating software maintenance and support
agreements. The Company warranties its products for one year. The Company's
warranty claim history has been less than 1/2% per year of revenues.
Competition
The Company is not aware of any single competitor which offers the full
range of products in addition to systems design and integration services.
However, the Company does have established competition in each of the product
areas within the target market and a number of firms have carved niches below
the Company's target market selling economy-grade goods. In the Audio Control
Console market, Auditronics, Wheatstone, Arrakis, and Broadcast Electronics
compete against the Company. Based on an informal Company survey of the "Top 10
Markets" and the top rated radio stations in those markets, the Company believes
that it provides products and/or services to a significant percentage of the
high end market in audio control consoles. See "--Industry Overview."
In the digital workstation market Orban, Studer/Editech and Sadie compete
against the Company.
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With respect to the system design business of the Company, there are a few
distributors, such as Harris/Allied, which advertise system integration services
using the products they sell. Wheatstone introduced a line of studio cabinetry
in 1989 and has recently indicated they may consider the systems integration
business.
The Company's products compete based upon operating features and quality,
not price. To counter-balance the competitions' offerings and expand its market
base, the Company has introduced lower priced, high-value products, such as the
Radiomixer and Productionmixer. There can be no assurance that these products
will achieve market acceptance.
The Company sees a potential competitive threat from a trend of mergers
between, and acquisitions of, broadcast equipment companies rather than from any
one of the existing specialty manufacturers or general distributors. It is
unknown if any of these firms have ambitions in competing with the Company's
products or system integration services. To date, the Company has not
experienced any erosion of market share as a result of such mergers.
Technology provides a competitive threat to all companies addressing this
market. The advent of digital audio, satellite delivered programming,
computerized "operator assist" systems and full automation are all examples of
emerging technologies seeking applications in broadcasting. The Company has
products in development and is planning new products to address the changing
technical needs of this market.
To respond to increasingly complex products driven by advances in
technology, the Company plans to develop its new products so that they can be
used by non-technical personnel while containing the most recent technological
advances.
Research and Development and Engineering
In 1995 and 1996 the Company spent approximately $395,000 and $410,000,
respectively on internally funded research and development and approximately
$140,000 and $175,000, respectively in engineering.
The main costs associated with research and engineering are expenditures
related to licenses, permits and CE (European Conformity) certification for
existing products marketed overseas, increased research and development
activities and the hiring of additional engineering staff incurred in the
development of the new digital products. These expenditures would have been
significantly more if not for the fact that the Company has 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. See
"Business--Product Development Status'," and "Notes A and D of Notes to
Financial Statements." The amount of capitalized research and engineering
expenses for 1996 and 1995 was approximately $950,000 and $230,000,
respectively.
Proprietary Rights, Patents, Trademarks & Copyrights
The Company holds no patents at this time. The Company has developed
several proprietary circuit design and construction techniques that yield both
measured and subjective (listening) performance improvements. The Company also
has considerable expertise in the area of radio frequency interference ("RFI")
problems and has developed advanced construction techniques to enable the use of
high performance circuitry in the severe environments often encountered at radio
and television transmission sites.
The Company holds registered trademarks for the name of its industry
newsletter, Aircheck as well as for several of its products including:
Radiomixer, Newsmixer, Stereomixer and others.
Regulation
The U.S. "on-the-air" broadcast industry is regulated by the FCC which
establishes the rules and regulations for issues ranging from license
qualification and technical standards to attempts at defining "indecent"
programming. The FCC has recently changed the ownership rules regarding both the
total number of broadcast properties which one entity
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may own, and the number of stations owned in one market. Following a complex
market size and share formula, one entity may own up to eight stations in a
market. The Company's major customers have been in the lead in prospecting for
and acquiring additional stations in their established markets. The "off-air"
broadcast industry is not subject to FCC regulation. These include the broadcast
networks, independent program producers and syndicators, and commercial
production houses. Current legislative proposals in Congress, if enacted, could
materially alter the rules as to station ownership and may have other
consequences for the radio and television industries. The impact on the Company
cannot be determined at this time from the passage of such legislation.
Employees
As of December 31, 1996, the Company employed 113 persons on a full-time
basis and an additional 2 on a part-time basis. Of the 115 total employees, 69
were engaged in manufacturing and operational support, 18 in engineering and
design/drafting and 28 in marketing and administration. The Company's employees
are not represented by a union and the Company believes its relations with its
employees are excellent.
Executive Officers
The following table sets forth the name, age and position of each person
who is an executive officer of the Company:
<TABLE>
<CAPTION>
Name Age Position
- -------------- --- -------------------------------------------------
<S> <C> <C>
Jack Williams 55 Chairman of the Board, Chief Executive Officer
and President
Michael Dosch 34 Vice President, Chief Operating Officer and
Director
Larry Eyler 43 Vice President, Finance, Chief Financial Officer,
Corporate Secretary & Director
David Pollard 44 Vice President, Engineering and Director
</TABLE>
Jack Williams has served as Chief Executive Officer, President and Chairman
of the Board of Directors since October 1969. Prior to founding the Company, Mr.
Williams was a professional recording engineer and an audio and video systems
designer at the University of California, San Diego.
Michael Dosch has been a Director of the Company since December 1995. Mr.
Dosch joined the Company in July 1984 as an Audio Project Engineer, was promoted
to Product Engineering Manager in late 1988 with Marketing duties added in
October 1990. Mr. Dosch was promoted to General Manager in June of 1992 to
oversee the Company's day-to-day operating management while continuing to direct
marketing activities. Mr. Dosch's prior experience includes positions with
Xentek, Inc., a manufacturer of state of the art switching power supplies, and
Carvin Company, a manufacturer of professional audio products for the music
performance industry.
Larry Eyler joined the Company in July of 1992 as the Chief Financial
Officer, and was elected a Director in December 1995. Prior to joining the
Company, Mr. Eyler was Director of Finance, Real Estate, for The Price Company
from October 1987 to July 1989, and Chief Financial Officer for Club
Merchandising from July 1989 to September 1992. Mr. Eyler also had experience
with Peat Marwick, Mitchell & Co., CPA's and Dixieline Lumber Company.
David Pollard has been a Director of the Company since May 1996. Mr.
Pollard has served as Vice President, Engineering of the Company since December
1995, and as manager of various operating functions since September 1985,
including product engineering, systems engineering/manufacturing as well as
sales. Mr. Pollard now oversees the technical staff responsible for research &
development, product design, systems engineering and documentation. Mr. Pollard
was originally employed by the Company from 1973 to 1977 and was a key
individual in the early development of the Company's system design capability.
Mr. Pollard left the Company in 1977 to return to school and later joined the
RKO Radio Network in New York (then under construction by the Company) as Chief
Engineer in 1979. Mr. Pollard rejoined the Company in August 1985.
11
<PAGE> 12
ITEM 2. PROPERTIES
The Company leases two buildings of approximately 40,000 total square feet
in Carlsbad, California. The buildings house the Company's corporate offices as
well as manufacturing operations and technical cabinet fabrication facilities.
PMF, a sheet metal fabrication company and supplier to the Company, sub-leases a
portion of one of the buildings. The buildings are approximately eleven years
old. The lease terms for the facilities are 10 years: the rental rate is
approximately $22,000 per month, net of $8,750 sublease income.
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently a party to any legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Inapplicable
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock and common stock purchase warrants are traded on
the American Stock Exchange (the "AMEX") Market under the symbol "PXE"; "PXEW".
For the periods indicated below, the following table sets forth the high
and low closing sales prices of the Company's common stock as reported on AMEX,
rounded to the nearest eighth of a dollar.
<TABLE>
<CAPTION>
Common Stock Common Stock
Purchase Warrants
YEAR ENDED DECEMBER 31, 1996 HIGH LOW HIGH LOW
- ---------------------------- ---- --- ---- ---
<S> <C> <C> <C> <C>
May 29 -June 30.................. $4.13 $3.13 $0.63 $0.25
July 1 - Sept. 30................ $3.88 $2.38 $0.94 $0.19
Oct. 1 - Dec. 31................. $3.00 $2.00 $0.75 $0.19
</TABLE>
As of March 27, 1997, there were approximately 990,000 shares of common
stock and 500,000 redeemable common stock purchase warrants held in account by
35 brokerage houses. The Company believes that there are numerous "beneficial"
owners of its Common Stock who hold shares and/or common stock purchase warrants
in "street name," of which it is believed that there are more than 400
shareholders to date.
Prior to May 28, 1996, the Company was being treated as an S Corporation
for income tax purposes under Subchapter S of the Internal Revenue Code of 1986,
as amended. As a result, the income of the Company was not subject to federal
taxation, except for certain built-in gains tax, and was subject to state
taxation on income at a reduced rate. See Note G of Notes to Financial
Statements. The shareholders are liable for individual federal and state income
taxes on their allocated portions of the Company's taxable income. The Company's
status as an S Corporation was automatically terminated as a result of the
Company's initial public offering. The Company during the year ended December
31, 1996 made final distributions to its shareholders of certain previously
taxed and undistributed S Corporation earnings. For the years ended December 31,
1996, 1995, and 1994, the Company distributed approximately $695,000, $45,000,
and $108,000, respectively, to its shareholders.
The Company does not intend to pay dividends to its shareholders for the
foreseeable future.
12
<PAGE> 13
All the reports required to be filed pursuant to Section 16(a) of the
Exchange Act of 1934, as amended, were timely filed except for the initial
statements of beneficial ownership for the named executive officers and ten
percent shareholders.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General Overview
In 1996, the Company achieved several major financial accomplishments. The
company completed its initial public offering in May 1996, and immediately
launched its growth initiatives. The Company expanded its sales and marketing
departments, research and development department, engineering department,
expanded its inventory level, and increased capital expenditures to upgrade its
manufacturing capabilities. The completion of these business objectives
strengthened the Company's financial position and contributed to its continued
growth.
Results of Operations
The following table sets forth for the periods indicated and comparatives
and percentages which certain items in Selected Operating Data bear to total
revenue.
<TABLE>
<CAPTION>
Year to Year
Percentage of Sales Increase (Decrease)
------------------- -------------------
Year Ended December 31,
-----------------------
1996 1995
Compared Compared
1996 1995 1994 to 1995 to 1994
---- ---- ---- ------- -------
<S> <C> <C> <C> <C> <C>
Net sales ..................... 100.0 100.0 100.0 10.8 (6.3)
Cost of sales ................. 59.1 59.8 63.2 9.5 (11.3)
----- ----- ----- ------ ------
Gross profit .................. 40.9 40.2 36.8 4.6 7.4
General and administrative .... 19.7 16.3 14.3 34.5 6.4
Selling and marketing ......... 14.0 11.2 10.8 39.2 (3.6)
Research & engineering ........ 7.6 7.8 6.5 8.9 12.5
----- ----- ----- ------ ------
Operating (loss) income ....... (0.4) 4.9 5.2 (110.4) (9.2)
Interest expense, net ......... (0.0) 0.9 0.9 21.9 (2.7)
Other expense (income) ........ (0.1) 0.1 (1.2) (195.9) (107.1)
----- ----- ----- ------ ------
Income before income taxes 0.0 3.9 5.5 (88.8) (31.6)
----- ----- ----- ------ ------
</TABLE>
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Sales increased $751,000 or 10.8%, from $6,945,000 in 1995 to $7,696,000 in
1996. The Company believes the increase 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 their planned mergers and
acquisitions, they will continue to focus on the capital spending needs of these
larger entities, creating increased opportunities for the Company.
Additionally, the Company believes that as radio advertising revenues
continue to grow, this will provide the proper
13
<PAGE> 14
capital resources that broadcasters need to upgrade their facilities in order to
attract and maintain top talent, therefore suggesting that the trend is towards
an expansion of the market.
Cost of sales increased nearly $394,000 or 9.5%, from $4,153,000 in 1995 to
$4,547,000 in 1996, due to the sales increase, but remained essentially
unchanged as a percent of revenues for 1996 compared to 1995. The Company
continually evaluates its inventory purchasing and handling policies, as well as
its manufacturing processes, to ensure the maintenance of, and improvement to
gross margins. Accordingly, gross margin increased by $358,000 or 12.8% from
$2,791,000 in 1995 to $3,149,000 in 1996 due primarily to the increase in sales,
but increased slightly as a percentage of revenues from 40.2% in 1995 to 40.9%
in 1996. The company believes that as the sales volume increases, the gross
margin will increase incrementally as fixed costs inherent in its manufacturing
processes are amortized over a broader sales base.
General and administrative expenses (including depreciation and
amortization) increased by $390,000 or 34.5% ($1,519,000 in 1996 compared to
$1,129,000 in 1995). As a percentage of revenue, general and administrative
expenses increased by 3.4%, from 16.3% in 1995 to 19.7% in 1996.
This increase was due, primarily, to additional expenses incurred in
connection with the Company's initial public offering completed in May 1996. The
Company also incurred increased payroll costs and benefits, professional
services, and expenses associated with the donation of radio equipment to a
public radio broadcast facility early in 1996. Additionally, the Company's
annual depreciation expense increased by $128,000 pursuant to the Company's
increase in capital assets purchased during the year ended December 31, 1996.
Selling and marketing expenses increased nearly $304,000 or 39.2%, from
$775,000 in 1995 to $1,079,000 in 1996. The increase reflects the hiring of a
sales manager and staffing of an expanded sales department as well as increased
spending on advertising and marketing materials for new product releases. The
Company expects to take advantage of the growing radio market business generated
by the Telecommunications Bill and will continue to invest in this area in order
to maximize the Company's market penetration. Selling and marketing expenses as
a percentage of revenue increased 2.8% from 11.2% in 1995 to 14.0% in 1996.
Research and engineering expenses increased $48,000 or 8.9%, from $539,000 in
1995 to $587,000 in 1996. The primary reasons for the increase are expenditures
related to licenses, permits and CE (European Conformity) certification for
existing products marketed overseas, increased research and development
activities and the hiring of additional engineering staff. These expenditures
would have been significantly more if not for the fact that the Company has
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. See "Business--Product Development Status'," and "Notes A and
D of Notes to Financial Statements." The amount of capitalized research and
engineering expenses for 1996 was approximately $950,000. Research and
engineering, as a percentage of sales, decreased 0.2% from 7.8% in 1995 to 7.6%
in 1996.
Income from operations decreased by $383,000 or 110.4% from $347,000 in
1995 to a loss of $36,000 in 1996, primarily due to the increase in sales and
marketing expenses and general and administrative expenses since its initial
public offering in May of 1996. The Company has invested significantly in
infrastructure and personnel in the implementation of its growth initiatives as
outlined in its initial public offering registration statement. The Company
expects to begin realizing increased revenues from this investment early in
1997, consequently, operating income in the fourth quarter of 1996 was adversely
affected by this investment of capital. Operating income, as a percentage of
revenue, decreased by 5.3%, from 4.9% in 1995 to (0.4%) in 1996.
Interest expense increased by $14,000 from $64,000 in 1995 to $78,000 in
1996. The Company earned interest income of $75,000 on its surplus cash compared
to zero during 1995. See Notes E and F of Notes to Financial Statements for
further discussion of the Company's bank credit facilities and cash investment
activities.
The Company incurred a gain of approximately $16,000 resulting from an
upgrade to an enhanced
14
<PAGE> 15
CAD/Engineering software package. The gain has been classified as other income
in the financial statements.
Net income before taxes decreased by $245,000 or 88.8%, from $276,000 in
1995 to $31,000 in 1996, primarily due to the increased expenditures for sales
and marketing and general and administrative expenses.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Sales decreased approximately $465,000 or 6.3%, from $7,410,000 in 1994 to
$6,945,000 in 1995, due to several large systems and console projects falling
back into the first and second quarter of 1996. The Company experienced an order
rate decrease during the second and third quarter with a significant increase in
the quantity and total value of new quotations and proposals in the Company's
sales pipeline. The Company believes these events were the result of industry
concern about regulatory changes in the Telecommunications Bill, pending before
Congress in January 1996, along with ongoing planning and budgeting. This was
also a period when several major broadcast media acquisitions were announced by
The Walt Disney Company, Westinghouse, Chancellor, Evergreen and others.
Ownership transfers typically suspend capital spending until the new entity is
stabilized.
Cost of sales decreased $531,000 or 11.3%, from $4,684,000 in 1994 to
$4,153,000 in 1995, due, in part to lower revenues. Additionally, cost of sales,
as a percentage of revenue, decreased 3.4%, from 63.2% to 59.8%. This margin
improvement reflects a shift in product mix, to higher margin products, as well
as a reduction in fixed costs through enhanced inventory procurement and
handling, and improved manufacturing processes.
General and administrative expenses (including depreciation and
amortization) increased approximately $68,000 or 6.4%, to $1,129,000 in 1995
from $1,061,000 in 1994, primarily due to salary increases, premiums incurred as
result of insurance coverage upgrades, and accounting and professional fees
incurred in conjunction with a study conducted to place a valuation on the
Company. General and administrative expenses, as a percentage of sales,
increased 2.0% (from 14.3% to 16.3%), largely due to the decrease in revenues.
Selling and marketing expenses decreased approximately $28,000 or 3.6%,
from $803,000 in 1994 to $775,000 in 1995. The majority of the reduction focused
on trade shows and general advertising as the Company opted not to attend
certain shows nor place advertisements in certain publications that, in the
opinion of management, did not provide the exposure sufficient to warrant the
expenditure. Additionally, the Company incurred significant expenses in 1994 to
replace and/or upgrade its inventory of collateral marketing material providing
brochure inventory well into 1995. Conversely, the Company increased its sales
staff during 1995 to provide more thorough market coverage, both domestically
and internationally. Selling and marketing expenses as a percentage of sales
increased slightly (10.8% to 11.2%) in 1995. The Company expects selling and
marketing expenditures to increase significantly in 1996 upon completion of its
initial public offering.
Research and engineering expenses increased approximately $60,000 or 12.5%,
from $479,000 in 1994 to $539,000 in 1995, due to increased spending related to
the development of a new digital console, professional audio sound card and a
new "low-priced" console, all of which are scheduled to be introduced during
1996. Additionally, the Company has capitalized certain costs relative to the
development of the digital console and audio card mentioned above. Total costs
capitalized as of December 31, 1995 amounted to $227,168. See Notes A and D of
Notes to Financial Statements. Research and engineering, as a percentage of
sales, increased 1.3% from 6.5% in 1994 to 7.8% in 1995.
Income from operations decreased approximately $35,000 or 9.2%, from
$382,000 in 1994 to $347,000 in 1995, primarily due to the decrease in sales
noted above. For the same reason, operational income as a percentage of sales
decreased to 5.0% in 1995 compared to 5.2% in 1994.
Interest expense decreased approximately $2,000 or 2.7%, from $66,153 in
1994 to $64,362 in 1995. Bank debt
15
<PAGE> 16
increased from $311,000 in 1994 to $496,468. This increase is attributable to
the Company's incurring additional debt in December of 1995, totaling $150,000,
to finance the research and development of new products. See Notes E and F of
Notes to Financial Statements for further discussion of the Company's bank
credit facilities.
Net income before taxes decreased approximately $128,000 or 31.6%, from
$404,000 in 1994 to $276,000 in 1995, primarily due to decreased 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
and penetration. The Company has historically satisfied its cash requirements
through cash flows from operations and bank borrowings. Under some project
contracts, the Company requires customer advances upon project acceptance, then
invoices based upon the completion of specified conditions and milestones.
Depending upon the stage of completion, it may be necessary for the Company,
from time to time, to finance a portion of its working capital needs.
Additionally, developing and launching new products exerts additional pressure
on the working capital requirements of the Company. The Company through the use
of its offering proceeds was able to fulfill these capital requirements during
the previous year and to initiate its expansion plans.
The Company completed its initial public offering May 28, 1996 and realized
net proceeds of approximately $4.2 million after underwriting discounts and
offering expenses. As of December 31, 1996 the Company had $1.6 million in cash
and cash equivalents.
The Company's current ratio at December 31, 1996 was 2.8 compared to 1.5 at
December 31, 1995. The increase was attributable, primarily, to the proceeds
from the Company's initial public offering less costs incurred completing the
offering. For the same reasons, the Company experienced an increase in working
capital of approximately $2,182,000 from $702,000 at December 31, 1995 to
$2,884,000 at December 31, 1996.
The Company's operating activities consumed cash of $1,285,000 for the year
ended December 31,1996. Cash used in operations for the year ended December 31,
1996 was the result, primarily, of an increase in inventory ($638,000), an
increase in accounts receivable ($121,000), and an increase in prepaid expense
and other assets ($751,000), 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 year ended December 31, 1996 was
$1,514,000. Such investing activities involved purchases of property and
equipment ($514,000) and an investment in a California tax free bond fund with
an affiliate of the Company's commercial banking facility ($1,000,000).
Cash provided by financing activities was $3.4 million and for the year
ended December 31, 1996, consisting primarily of the proceeds of the Company's
initial public offering of $4.3 million and proceeds from the Company's line of
credit with a bank facility of $500,000.
As a result of the above the Company experienced a substantial increase in
cash and cash equivalents from $500 at December 31, 1995 to $610,000 for the
year ended December 31, 1996.
The Company's current ratio at December 31, 1995 was 1.5 compared to 1.8 as
of December 31, 1994. The primary reason for the decrease was a nearly $300,000
or 113.0% increase in accounts payable as of December 31, 1995 as compared to
December 31, 1994, necessary to fund inventory and capital spending for new
products and trade show consoles. This balance was paid down during the first
quarter of 1996.
The Company experienced a decrease in working capital of $114,533 for the
year ended December 31, 1995 due
16
<PAGE> 17
primarily to an increase in research and engineering costs for the digital
console, sound card and costs associated with this Offering. The Company also
refinanced its bank debt in December 1995. Under the financing, the Company
secured a more favorable interest rate and borrowed an additional $150,000 in
term debt. See Notes E and F of Notes to Financial Statements. The Company
retired the debt upon the completion of its initial public offering.
The Company experienced a net decrease in cash of $145,702 during the year
ended December 31, 1995 compared to a net increase of $125,864 for the year
ended December 31, 1994. The primary uses of cash in 1995 were for development
of new products ($227,168), expenses related to the Company's initial public
offering ($141,060) and an increase in accounts receivable ($132,674). Cash
flows from investing activities used $219,531, while financing activities
provided $113,572.
During the year ended December 31, 1994, the Company's cash increased by
$125,864. Operating activities provided $727,625 of cash primarily attributable
to net income ($409,687), accounts receivable ($150,314) and customer advances.
Investing activities, primarily capital expenditures, used $157,770. Financing
activities used $443,991 primarily attributable to debt pay down ($627,826) and
shareholder distributions ($107,802) offset by new debt proceeds of $311,072.
The Company believes that the net proceeds from its initial public offering
completed May 28, 1996, together with its line of credit facility, capital
leases and cash flows generated by operations should be adequate to meet its
operating and working capital needs for the foreseeable future.
S Corporation Distributions
Prior to May 28, 1996, the Company was being treated as an S Corporation
for income tax purposes under Subchapter S of the Internal Revenue Code of 1986,
as amended. As a result, the income of the Company was not subject to federal
taxation, except for certain built-in gains tax, and was subject to state
taxation on income at a reduced rate. See Note G of Notes to Financial
Statements. The shareholders are liable for individual federal and state income
taxes on their allocated portions of the Company's taxable income. The Company's
status as an S Corporation was automatically terminated as a result of the
Company's initial public offering. The Company during the year ended December
31, 1996 made final distributions to its shareholders of certain previously
taxed and undistributed S Corporation earnings. For the year ended December 31,
1996, the S corporation distribution was approximately $700,000.
For the years ended December 31, 1996, 1995, and 1994, the Company
distributed approximately $695,000, $45,000, and $108,000, respectively, to its
shareholders. The Company made this distribution to the shareholders during the
second quarter of 1996 from cash on hand.
BUSINESS RISKS
Risks Associated with the Development of New Products and Technological Change
The markets for the Company's products are characterized by rapidly
changing technology and new product introductions. Accordingly, the Company
believes its future prospects depend on its ability to develop and introduce in
a timely fashion new and complementary products that achieve market acceptance
based on continuing technological innovations. The Company invests significant
time and resources in research and development of new products and system
configurations. The Company anticipates diversifying it product line in response
to new market opportunities some of which are expected to be created or
accelerated by federal government initiatives. There can be no assurance that
new products or product enhancements developed by the Company will achieve
market acceptance.
Competition
17
<PAGE> 18
The Company does not have direct across the board competitors, but does
have competition in its individual product categories. The high performance
broadcast market is intensely competitive and is characterized by rapid
technological advances, evolving industry standards and technological
obsolescence. Although the Company believes it is one of the more significant
competitors in the audio custom system design and fabrication services market,
many of the Company's competitors have greater financial, technical, sales,
marketing and other resources than the Company. The Company believes that the
principal competitive factors in the market for high end broadcasting equipment
and services are offering customers a range of high end products, custom system
design and fabrication services. Although the Company believes that it competes
favorably with respect to certain of these factors, there can be no assurance
that other present or potential competitors will not develop additional products
or alternative technologies which make the Company's products obsolete.
Management of Growth
If the Company is successful in implementing its growth strategy, the
Company believes it could undergo a period of rapid growth which could place a
significant strain on its management, financial and other resources. The
Company's ability to manage its growth will require it to continue to improve
its operational and financial systems and to motivate and effectively manage its
employees. If the Company grows, it will have to implement new financial,
budgeting, management information and internal control systems. The success of
the Company will depend in the ability of management to effectively implement
these changes and to manage the Company's operations over the long term. The
Company's success also will depend in large part upon its ability to attract and
retain highly skilled technical personnel to provide technological depth and
support, to complete and enhance its products and to develop new products. In
addition, marketing and sales personnel will be needed. Competition for highly
skilled management, technical, marketing and sales personnel is intense. There
can be no assurance that the Company will be successful in attracting and
retaining key management, technical, marketing and sales personnel, and its
failure to do so would materially and adversely affect the Company's business
and results of operations.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial Statements together with the report thereon of Harlan &
Boettger are included in this report commencing at Page F-1.
18
<PAGE> 19
SUPPLEMENTARY FINANCIAL DATA
The data set forth below is qualified by reference to, and should be read in
conjunction with, the financial statements and notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this report and the Company's previously filed SB-2
registration statement. The following selected financial data of the Company as
of December 31, 1996, 1995 and 1994 and for the years ended December 31, 1996,
1995, 1994 and 1993, are derived from the financial statements of the Company
audited by Harlan & Boettger, independent accountants. This information should
be read in conjunction with the financial statements and notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", set forth elsewhere in this report. Balance sheets at December 31,
1995 and 1996 and the related statements of income and cash flow for the two
years ended December 31, 1996 and notes thereto appear elsewhere in this report.
The pro forma income statement data for the periods shown below is unaudited.
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------------------------------------
1996 1995 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net sales $7,696,160 $6,944,737 $7,410,176 $5,974,064
Cost of sales 4,547,132 4,153,472 4,684,283 3,950,767
Gross profit 3,149,028 2,791,265 2,725,893 2,023,297
General and administrative 1,331,438 1,069,774 996,628 907,431
Selling and marketing 1,079,137 775,281 803,455 531,418
Research and development 412,211 397,813 430,712 319,096
Engineering 175,000 142,092 48,678 18,411
Depreciation and amortization 187,588 59,228 63,989 64,941
Total operating expenses 3,185,374 2,444,188 2,343,552 1,841,297
Income (loss) from operations (36,346) 347,077 382,341 182,000
Other income (expense),net 67,796 (70,653) 21,871 43,796
Income before income taxes 31,450 276,424 404,212 225,796
Income taxes (benefit) 20,700 7,400 13,727
Net income $ 10,750 $ 269,024 $ 409,687 $ 212,069
Net income per share $ 0.01
Weighted average common shares outstanding (2) 1,888,833
STATEMENT OF INCOME DATA: (1)
Pro forma income before income taxes $ 276,424 $ 404,221 $ 225,796
Pro forma provision for income taxes 116,000 193,000 177,000
Pro forma net income 160,424 211,212 48,796
Pro forma net income per share $ 0.12 $ 0.16 $ 0.04
Weighted average common shares outstanding (2) 1,305,500 1,305,500 1,305,500
</TABLE>
<TABLE>
<CAPTION>
December 31, December 31, December 31,
BALANCE SHEET DATA: 1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Working capital $2,884,182 $ 702,196 $ 816,729
Total assets 6,447,509 3,022,396 2,487,639
Total long-term debt and capital lease obligations 37,156 370,155 279,844
Total shareholders' equity $4,801,315 $1,355,560 $1,131,066
</TABLE>
Prior to May 28, 1996 the Company was exempt from payment of federal income
19
<PAGE> 20
taxes and paid certain state income taxes at a reduced rate as a result of an S
Corporation election made by the Company. Pro forma income statement data
reflect the income tax expense that would have been recorded had the Company not
been exempt from paying taxes under the S Corporation election. As a result of
terminating the Company's S Corporation status upon completion of the initial
public offering, the Company was required to record a one-time non-cash credit
to earnings as a reduction of income tax expense for additional deferred tax
benefit based upon the increase in the effective tax rates from the Company's S
Corporation status to C Corporation status See "Management's Discussion and
Analysis of Financial Condition and Results of Operation" and Note G of Notes to
Financial Statements.
See Note A of Notes to Financial Statements for weighted average shares
outstanding for previous periods.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
Certain information required by Part III is omitted from this Report,
in that the Company will file its Proxy Statement pursuant to Regulation 14A not
later than 120 days after the end of the fiscal year covered by this Report, an
certain information included therein is incorporated by reference.
ITEM 9 DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROLLING PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
The information relating to the directors of the Company is incorporated by
reference from the Company's Proxy Statement filed in connection with the
Company's Annual Meeting of Stockholders to be held on May 8, 1997 (the "Proxy
Statement") as set forth under the caption "Election of Directors". Information
relating to the executive officers of the Company is set forth in Part I of this
Report under the caption "Executive Officers of the Registrant". Information
with respect to compliance with Section 16(a) of the Exchange Act is
incorporated by reference to the Proxy Statement as set forth under the caption
"Section 16(a) Beneficial Ownership Reporting Compliance."
ITEM 10. EXECUTIVE COMPENSATION
The information relating to executive compensation is incorporated by
reference to the Proxy Statement under the caption "Executive Compensation and
Other Matters."
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information relating to ownership of equity securities of the Company
by certain beneficial owners and management is incorporated by reference to the
Proxy Statement as set forth under the caption "General Information--Stock
Ownership of Certain Beneficial Owners and Management".
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information relating to certain relationships and related transactions
is incorporated by reference to the Proxy Statement under the caption "Certain
Transactions".
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
20
<PAGE> 21
a) THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS REPORT;
1) The following financial statements of the Company are filed as a part
of this report.
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report F-1
Balance Sheets - December 31, 1996 and 1995 F-2
Statements of Operations - For the Years Ended December 31, 1996 and 1995 F-3
Statement of Stockholders' Equity - For the Years Ended December 31, 1996 and 1995 F-4
Statements of Cash Flows - For the Years Ended December 31, 1996 and 1995 F-5
Notes to Financial Statements Ended December 31, 1996 F-6
</TABLE>
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.
2) Exhibits. The Exhibits listed in the accompanying Exhibit index are
filed or incorporated by reference as part of this Report.
b) REPORTS ON FORM 8-K. The Company filed no reports on Form 8-K during
fiscal 1996.
21
<PAGE> 22
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
PACIFIC RESEARCH & ENGINEERING CORPORATION:
We have audited the accompanying balance sheets of Pacific Research &
Engineering Corporation (a California corporation) as of December 31, 1996 and
1995, and the related statements of income, shareholders' equity and cash flows
for the periods then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Pacific Research & Engineering
Corporation as of December 31, 1996 and 1995, and the results of its operations
and its cash flows for each of the periods then ended, in conformity with
generally accepted accounting principles.
HARLAN & BOETTGER
San Diego, California
February 4, 1997
F-1
<PAGE> 23
PACIFIC RESEARCH & ENGINEERING CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
As of December 31,
---------------------------
CURRENT ASSETS 1996 1995
---------- ----------
<S> <C> <C>
Cash and cash equivalents $ 610,857 $ 500
Investments 1,000,000 --
Accounts receivable, less allowance for doubtful accounts
of $15,000 for 1996 and 1995 695,919 574,782
Inventories, net (Note B) 1,935,501 1,297,549
Deferred tax benefit (Note G) -- 6,340
Prepaid expenses 250,943 119,706
---------- ----------
TOTAL CURRENT ASSETS 4,493,220 1,998,877
PROPERTY AND EQUIPMENT, net (Note C) 902,251 591,644
OTHER ASSETS (Note D) 1,052,038 431,875
---------- ----------
$6,447,509 $3,022,396
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 594,258 $ 558,225
Accrued expenses 195,430 182,178
Customer advances 271,710 329,381
Line of credit (Note E) 500,000 96,468
Notes payable - current portion (Note F) -- 99,996
Capital lease obligations - current portion (Note H) 34,140 30,433
Deferred tax liability, net (Note G) 13,500 --
---------- ----------
TOTAL CURRENT LIABILITIES 1,609,038 1,296,681
NOTES PAYABLE, net of current portion (Note F) -- 300,004
CAPITAL LEASE OBLIGATIONS, net of current portion (Note H) 37,156 70,151
---------- ----------
TOTAL LIABILITIES 1,646,194 1,666,836
COMMITMENTS AND CONTINGENCIES (Notes H and K) -- --
SHAREHOLDERS' EQUITY (Note L)
Common stock, no par value, 25,000,000 shares
authorized; 2,305,500 and 1,865,000 shares issued
and outstanding 4,210,905 81,179
Retained earnings 590,410 1,274,381
---------- ----------
TOTAL SHAREHOLDERS' EQUITY 4,801,315 1,355,560
---------- ----------
$6,447,509 $3,022,396
========== ==========
</TABLE>
F-2
<PAGE> 24
PACIFIC RESEARCH & ENGINEERING CORPORATION
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1996 1995
---------- ----------
<S> <C> <C>
NET SALES $7,696,160 $6,944,737
COST OF SALES 4,547,132 4,153,472
---------- ----------
Gross profit 3,149,028 2,791,265
OPERATING EXPENSES
General and administrative 1,331,438 1,069,774
Selling and marketing 1,079,137 775,281
Research and development 432,657 397,813
Engineering 154,552 142,092
Depreciation and amortization 187,588 59,228
---------- ----------
TOTAL OPERATING EXPENSES 3,185,374 2,444,188
---------- ----------
INCOME (LOSS) FROM OPERATIONS (36,344) 347,077
OTHER INCOME (EXPENSES)
Interest income 74,933 --
Interest expense (77,870) (64,362)
Gain on sale of assets 16,087 250
Other 54,646 (6,541)
---------- ----------
TOTAL OTHER INCOME (EXPENSE) 67,796 (70,653)
---------- ----------
INCOME BEFORE INCOME TAXES 31,452 276,424
Income taxes (Note G) 20,700 7,400
---------- ----------
NET INCOME $ 10,752 $ 269,024
========== ==========
Earnings per average common share $ 0.01
==========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 1,888,833
==========
PRO FORMA FOR 1995 (UNAUDITED) (Notes A and G)
Income before income taxes $ 276,424
Pro Forma income taxes 116,000
----------
Pro forma net income $ 160,424
==========
Earnings per average common share $ 0.12
==========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 1,305,500
==========
</TABLE>
F-3
<PAGE> 25
PACIFIC RESEARCH & ENGINEERING CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock
------------------------- Retained
Shares Amounts Earnings Total
------ ------- -------- -----
(Note L)
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994 1,865,000 $ 81,179 $1,049,887 $1,131,066
Net income -- -- 269,024 269,024
Distributions to shareholders -- -- (44,530) (44,530)
--------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 1995 1,865,000 $ 81,179 $1,274,381 $1,355,560
--------- ---------- ---------- ----------
Restated issuances of .7-for-1
reverse stock split (559,500) -- -- --
Net proceeds from IPO 1,000,000 4,129,726 -- 4,129,726
Net income -- -- 10,752 10,752
Distributions to shareholders -- -- (694,723) (694,723)
--------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 1996 2,305,500 $4,210,905 $ 590,410 $4,801,315
========= ========== ========== ==========
</TABLE>
F-4
<PAGE> 26
PACIFIC RESEARCH & ENGINEERING CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1996 1995
----------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 10,752 $ 269,024
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 187,588 149,112
Deferred income tax provision 23,640 (202)
Gain on sale of assets 16,087 250
Changes in operating assets and liabilities:
Accounts receivable (121,137) (132,674)
Inventories (637,952) (59,943)
Prepaid expenses and other assets (751,399) (417,236)
Accounts payable 36,033 296,605
Accrued expenses 9,452 21,802
Customer advances (57,671) (166,481)
----------- ---------
NET CASH USED IN OPERATING ACTIVITIES (1,284,607) (39,743)
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (514,282) (219,531)
Increase in investments (1,000,000) --
----------- ---------
NET CASH USED IN INVESTING ACTIVITIES (1,514,282) (219,531)
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of notes payable and line of credit 500,000 780,908
Payments on notes payable and line of credit (496,468) (595,747)
Payments under capital lease obligations (29,289) (27,059)
Distributions to shareholders (694,723) (44,530)
Proceeds from initial public offering 4,129,726 --
----------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 3,409,246 113,572
----------- ---------
NET INCREASE (DECREASE) IN CASH 610,357 (145,702)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 500 146,202
----------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 610,857 $ 500
=========== =========
</TABLE>
F-5
<PAGE> 27
PACIFIC RESEARCH & ENGINEERING CORPORATION
NOTES TO FINANCIAL STATEMENTS
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Organization and Nature of Operations
Pacific Research & Engineering Corporation (the "Company") was
incorporated on October 17, 1969 in the state of California. The Company's
principal operations are the manufacturing and selling of professional
radio studio broadcasting equipment. The Company also provides technical
furniture and studio integration and design services to radio stations and
network facilities. The Company operated under the name Pacific Recorders
& Engineering Corporation until December 21, 1995, at which date the
Company changed its name to Pacific Research & Engineering Corporation.
Basis of Accounting
The Company's policy is to use the accrual method of accounting and to
prepare and present financial statements which conform to generally
accepted accounting principles. The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and reported amounts
of revenues and expenses during the reporting periods. Actual results
could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with maturities of
three months or less to be cash equivalents. The Company has a balance of
$610,857 in a single financial institution, $510,857 of which is in excess
of federally insured amounts as of December 31, 1996.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market. Inventory costs include material, labor and manufacturing
overhead.
Property and Equipment
Property and equipment is stated at cost, and depreciated using the
straight-line method over the estimated useful lives of the assets, which
range from three to five years. Assets under capital leases are
depreciated by the straight-line method over the shorter of the lease term
or the useful lives of the assets. Maintenance, repairs and minor renewals
are charged to operations as incurred. Major replacements or betterments
are capitalized. When properties are retired or
F-6
<PAGE> 28
otherwise disposed, the related cost and accumulated depreciation are
eliminated from the respective accounts and any gain or loss on
disposition is reflected as income or expense.
A. SUMMARY OF SIGNIFICANT ACCOUNTING
Other Assets
Other assets consist primarily of capitalized software costs and deferred
offering costs.
Capitalized software costs consist of certain costs incurred for the
development of software after technological feasibility has been
established. These expenditures are principally related to new products
which will be sold, leased or otherwise marketed and which have been
capitalized in accordance with the provisions of Statement of Financial
Accounting Standards No. 86. Capitalized software costs are amortized on
a product-by-product basis. Amortization will be computed based upon the
ratio of annual revenues to total anticipated revenues or the
straight-line method over the estimated life of the product (typically
three to five years), whichever provides the greater amortization.
Amortization expense for capitalized software costs have not been
incurred since none of the products are available for sale at December
31, 1996.
Deferred offering costs include the costs associated with the initial
public offering. These costs related to the direct incremental costs
associated with the initial public offering and were capitalized and
netted against the amount received from the public offering.
Customer Prepayments
Advance payments received from customers are deferred and recognized as
revenue upon shipment.
Revenue Recognition
Revenue from product sales is generated primarily from the manufacture
and sale of radio studio broadcasting equipment. The period of time from
initial order to final shipment of the product typically ranges from two
to six weeks. Revenue is recognized when the equipment is shipped. The
Company expenses warranty costs as incurred, as historically such costs
have not been significant.
Research and Development
Research and development costs, consisting principally of engineering,
design and development costs devoted to creating new products or
improving existing products, are expensed as incurred.
Income Taxes
Income taxes, including pro forma computations, are provided using the
liability method of accounting in accordance with Statement of Financial
Accounting Standards No. 109 (SFAS 109), "Accounting for Income Taxes." A
deferred tax asset or liability is recorded for all temporary
F-7
<PAGE> 29
PACIFIC RESEARCH & ENGINEERING CORPORATION
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
differences between financial and tax reporting. Deferred tax expense
(benefit) results from the net change during the year of deferred tax
assets and liabilities.
B. INVENTORIES:
Inventories at December 31, 1996 and 1995 are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Raw materials $ 969,180 $ 843,307
Work-in-process 516,687 82,741
Finished goods 474,634 396,501
---------- ----------
1,960,501 1,322,549
Less reserve for obsolescence (25,000) (25,000)
---------- ----------
Inventories, net $1,935,501 $1,297,549
========== ==========
</TABLE>
C. PROPERTY AND EQUIPMENT:
Property and equipment at December 31, 1996 and 1995 are summarized as
follows:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Machinery and equipment $ 1,185,798 $ 758,752
Furniture and fixtures 800,550 1,034,923
Leasehold improvements 638,348 594,746
----------- -----------
2,624,696 2,388,421
Less accumulated depreciation and
amortization (1,722,445) (1,796,777)
----------- -----------
Property and equipment, net $ 902,251 $ 591,644
=========== ===========
</TABLE>
D. OTHER ASSETS:
Other assets at December 31, 1996 and 1995 are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
---------- --------
<S> <C> <C>
Capitalized software costs $ 949,617 $227,168
Deferred offering costs -- 141,060
Deposits 93,696 63,647
</TABLE>
F-8
<PAGE> 30
PACIFIC RESEARCH & ENGINEERING CORPORATION
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
<TABLE>
<CAPTION>
1996 1995
---------- --------
<S> <C> <C>
Employee loan 8,725 --
---------- --------
$1,052,038 $431,875
========== ========
</TABLE>
E. LINE OF CREDIT:
The Company has a line of credit facility with a bank which expires in May
1997. The line bears interest at Libor (5.5625% at December 31, 1996) plus
2.00%. The line of credit provides for maximum borrowings of $1,500,000,
and is secured by substantially all assets of the Company. At December 31,
1996, the Company had $1,000,000 of available credit under the line. This
facility contains certain covenants, as defined, for which, as of December
31, 1996, the Company was in violation. Financial covenants and ratios are
as follows: minimum tangible net worth of at least $4,000,000, a quick
ratio of 1.50 to 1.00, a minimum of $2,000,000 in cash/marketable
securities, and a ratio of total liabilities to tangible net worth of not
greater than .60 to 1.00. Management is aware of violations of some of
these covenants existing as of December 31, 1996 and is currently
negotiating the revision of such covenants with the financial institution.
F. NOTES PAYABLE:
Notes payable at December 31, 1996 and 1995 are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Note payable due to a bank, maturing in November, 1999, with monthly
installments of $5,208, plus interest at 10.5%, collateralized by
substantially all assets of the Company and personally guaranteed
by the principal shareholders $-- $250,000
Note payable due to a bank, maturing in December, 1999, with monthly
installments of $3,125, plus interest at 10.5%, collateralized by
substantially all assets of the Company and personally guaranteed by
the principal shareholders -- 150,000
--- --------
-- 400,000
Less current portion -- (99,996)
--- --------
$-- $300,004
=== ========
</TABLE>
The outstanding notes payable agreements at December 31, 1995, contained
certain covenants which included, but were not limited to, requiring the
Company to maintain a minimum current ratio of 1.5 to 1.0, a maximum debt
to net worth ratio of 2.0 to 1.0 and a tangible net worth of $1,100,000.
As of December 31, 1995, the Company was in compliance with these
covenants.
F-9
<PAGE> 31
PACIFIC RESEARCH & ENGINEERING CORPORATION
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
G. INCOME TAXES:
For the tax period ending May 29, 1996 and the year ended December 31,
1995 the Company elected to be taxed under the provisions of Subchapter S
of the Internal Revenue Code. Under those provisions, the Company would
normally not be subject to federal corporate taxes since the shareholders
are liable for individual Federal income taxes on their respective shares
of the Company's taxable income.
The public offering discussed in Notes A and K, resulted in the
termination of the Company's S Corporation status for federal and state
income tax purposes. This resulted in the establishment of a net deferred
tax asset calculated at normal federal and state income tax rates, causing
a one-time non-cash credit to earnings as a reduction of income tax
expense equal to the amount of the net change in deferred tax benefit. As
of December 31, 1995, the amount of the current deferred tax asset, which
would have been recorded had the Company's S Corporation status terminated
on that date, was $93,000. The current net deferred tax liability
comprises primarily temporary differences relating to inventory valuation,
certain reserves, accruals, and research and development costs capitalized
for book purposes, but expensed for tax purposes.
For the short C-corporation filing period from June 1 through December 31,
1996, the Company will have a federal and state tax net operating loss
carryforward of $528,000 and $259,000, respectively. For this same period
the Company will have research and development credit carryforwards of
$9,000 and $5,000, respectively. The net operating loss carryforwards will
expire in fifteen (15) years and five (5) years, respectively, if not
utilized and the credit carryforwards will expire in fifteen (15) years,
if not utilized.
The components of the historical provision for income taxes are as
follows:
<TABLE>
<CAPTION>
1996 1995
-------- ------
<S> <C> <C>
Current:
Federal $ -- $ --
State 800 7,602
-------- ------
800 7,602
-------- ------
Deferred:
Federal (17,000) --
State 36,900 (202)
-------- ------
19,900 (202)
-------- ------
$ 20,700 $7,400
======== ======
</TABLE>
F-10
<PAGE> 32
PACIFIC RESEARCH & ENGINEERING CORPORATION
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
G. INCOME TAXES: (CONTINUED)
Pro forma Income Taxes
The accompanying statements of income includes the unaudited pro forma
income tax provision for 1995, to reflect the estimated income tax expense
of the Company as if it had been subject to normal federal and state
income taxes from the period presented.
Pro forma earnings per share is calculated using the weighted average
outstanding common and common equivalent shares.
Pro forma income taxes, assuming the Company was subject to C Corporation
income taxes for the entirety of the period, are as follows:
<TABLE>
<CAPTION>
Pro forma
1995
(Unaudited)
-----------
<S> <C>
Federal $ 89,500
States taxes, net of federal benefits 26,500
--------
$116,000
========
</TABLE>
The reconciliation of the federal statutory rate for income taxes is as
follows:
<TABLE>
<CAPTION>
Pro forma
1995
1996 (Unaudited)
---- -----------
<S> <C> <C>
Statutory federal rate 34% 34%
State taxes, net of federal benefits 6 6
Adjustment for prior year deferred taxes
calculated as an S-corporation 32 --
Benefit of tax adjustments -- 2
-- --
72% 42%
== ==
</TABLE>
The net deferred tax liability as of December 31, 1996, relate to the
following temporary differences:
<TABLE>
<S> <C>
Nondeductible reserves $ (16,400)
Nondeductible accruals (11,900)
Inventory valuation (56,800)
Depreciation 36,200
Research and development costs 276,400
Net operating loss and credit carryforwards (214,000)
---------
$ 13,500
=========
</TABLE>
F-11
<PAGE> 33
PACIFIC RESEARCH & ENGINEERING CORPORATION
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
H. COMMITMENTS AND CONTINGENCIES:
Operating Leases
The Company leases its facilities under a noncancelable operating lease
from an unrelated third party which expires in May 2005. Rental expense
for the years ended December 31, 1996 and 1995 was $383,440 and $397,737,
respectively. The Company subleases space in one of the buildings to an
unrelated third party and receives $8,750 per month. The sublease
agreement will be assigned to the lessor in October 1998, releasing the
Company from any future responsibility or liability as set forth in the
lease agreement.
At December 31, 1996, minimum annual rent payable and sublease income
under the noncancelable leases in each of the next five years ending
December 31 and thereafter are as follows:
<TABLE>
<CAPTION>
Rent Payable Sublease Income
------------ ---------------
<S> <C> <C>
1997 $ 377,077 $105,000
1998 368,573 78,750
1999 292,559 --
2000 304,261 --
2001 316,433 --
Thereafter 1,177,995 --
---------- --------
Total $2,836,898 $183,750
========== ========
</TABLE>
The noncancelable operating lease provides that the Company pays for
property taxes, insurance and certain other operating expenses applicable
to the leased premises.
Capital Leases
The Company leases part of its equipment under capital leases. The
economic substance of the capital lease agreements is that the Company
finances the acquisition of machinery by making monthly payments of $3,387
over a sixty month period, and accordingly, the capital leases are
reflected as a capital lease obligation and the asset as a component of
property and equipment. The following is an analysis of the book value of
the leased assets included in property and equipment as of December 31,
1996 and 1995.
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Cost $155,297 $155,297
Accumulated depreciation 84,737 53,677
-------- --------
$ 70,560 $101,620
======== ========
</TABLE>
The future minimum lease payments under capitalized leases and the present
value of the net minimum lease payments as of December 31, 1996 are as
follows:
<TABLE>
<S> <C>
1997 $ 40,649
1998 29,583
1999 10,569
--------
80,801
Less amount representing interest (9,505)
Less current portion of capital lease obligations (34,140)
--------
$ 37,156
========
</TABLE>
F-12
<PAGE> 34
PACIFIC RESEARCH & ENGINEERING CORPORATION
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
H. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
Purchase Commitments
During August 1993, the Company entered into an agreement to sell certain
assets and certain liabilities associated with the Company's former sheet
metal fabrication process to an unrelated third party (the "Buyer"). In
connection with the sale, the Company agreed to allow the Buyer to bid on
all of the Company's future metal fabrication orders, if the Buyer can
satisfy certain quality control and delivery schedule requirements. Under
this agreement, the Company is obligated to accept the Buyer's bid if the
bid does not exceed 8% of other bids through August 1994, and 5% for bids
thereafter. The Company purchased approximately $562,561 and $454,700 of
metal fabrication from the Buyer for the years ended December 31, 1996 and
1995, respectively.
Other
The Company is subject to numerous federal, state, and local environmental
laws and regulations. Management believes that the Company is in material
compliance with such laws and regulations and that potential environmental
liabilities, if any, are not material to the financial statements.
I. PROFIT SHARING PLAN:
The Company maintains a profit sharing plan (the "Plan") that provides for
tax deferred employee benefits under Section 401(k) of the Internal
Revenue Code. The Plan allows employees to make contributions, a portion
of which will be matched by the Company, up to the lesser of 5% of an
employee's salary or the amount allowed by law, as defined. The Company
may elect to make an additional discretionary contribution in any Plan
year. There were no discretionary Company contributions during the periods
ended December 31, 1996 and 1995. Company contributions vest at a rate of
20% per year, beginning after two years of employment. The Company has
made matching contributions to the Plan of approximately $25,600 for the
year ended December 31, 1996. The Company pays the administrative costs of
the Plan, which approximates $5,000.
J. SUPPLEMENTAL CASH FLOW INFORMATION:
Supplemental disclosures of cash flow information for the years ended
December 31, 1996, and 1995 are summarized as follows:
F-13
<PAGE> 35
PACIFIC RESEARCH & ENGINEERING CORPORATION
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Cash paid for interest and income taxes:
Interest $77,870 $64,362
Income taxes $ 800 $21,000
</TABLE>
K. INITIAL PUBLIC OFFERING:
Effective May 1996, the Company sold 500,000 equity Units (Unit) to the
general public. Each Unit sold for $5.50 and consisted of two shares of
common stock and one redeemable common stock purchase warrant. The common
stock and the warrant were detachable and separately transferrable
immediately after the closing of the offering. Each warrant entitles the
registered holder to purchase, at any time over a five year period
commencing on the date of the Prospectus, one share of common stock at
120% of the initial public offering price per share. Commencing from the
date of the Prospectus, the warrants are subject to redemption at $0.10
per warrant on thirty days written notice if the closing bid price of the
common stock is in excess of 150% of the then current exercise price of
the warrants for a period of ten consecutive trading days.
At the closing of the Offering, the Company issued to the Underwriter the
Representative's Warrant to purchase for investment a maximum of 50,000
Units of the Company, each Unit consisting of two shares of common stock
and one warrant, but which may be exercised separately by the Underwriter
at an exercise price of 120% of the public offering price of the
securities being offered.
L. SHAREHOLDERS' EQUITY:
S Corporation Distributions
For the years ended December 31, 1996 and 1995, the Company distributed
$694,722 and $44,530, respectively, to its shareholders. These amounts
represented a portion of the S Corporation earnings through December 31 of
each of the periods ended. The Company's status as an S Corporation
automatically terminated following the initial public offering (the "S
Corporation Termination Date").
Common Stock
In December 1995, the Board of Directors and shareholders voted to amend
the Company's Articles of Incorporation and By-laws. The effect of the
restatement is (i) to change the authorized capital from 1,500 shares of
common stock to 25,000,000 shares of common stock, no par value and (ii)
to effect a 12,433.33-for-1 stock split of the Company's common stock. In
April 1996, the Board of Directors and shareholders voted to effect a
.7-for-1 stock split of the Company's stock.
F-14
<PAGE> 36
PACIFIC RESEARCH & ENGINEERING CORPORATION
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
L. SHAREHOLDERS' EQUITY: (CONTINUED)
Warrants
Warrants outstanding in addition to those discussed in Note K above at
December 31, 1996 and 1995 consist of warrants granted to a former
director/officer of the Company. These warrants provide for the purchase
of 100,100 shares of common stock, exercisable at $4.68 per share, which
was an amount in excess of the fair market value at the date of grant. A
summary of warrants outstanding at December 31, 1996 and 1995 is as
follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Officer/director warrants $100,100 $100,100
IPO Unit warrants 500,000 --
Representatives warrants 50,000 --
-------- --------
$650,100 $100,100
======== ========
</TABLE>
As of December 31, 1996 and 1995, no warrants had been exercised in
connection with these issuances.
M. SEGMENT AND GEOGRAPHIC DATA:
The Company is engaged in one line of business, the manufacturing and
selling of professional radio studio broadcasting equipment. The Company
does not have any employees, capital expenditures or other assets that are
located outside of the United States.
The Company's operations consist primarily of sales of products to both
domestic and foreign markets. Information about the sales of the Company
by geographical markets is presented below for the years ended December
31, 1996 and 1995.
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Europe $ 164,218 $ 351,129
Central America 40,345 63,907
Canada 27,693 38,780
Middle East 191,287 35,478
Southeast Asia 1,926 1,225
Other foreign countries 13,802 52,575
---------- ----------
Total foreign sales 439,271 543,094
Total domestic sales 7,256,889 6,401,643
---------- ----------
$7,696,160 $6,944,737
========== ==========
</TABLE>
F-15
<PAGE> 37
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Date: March 27, 1997
Pacific Research & Engineering, Corporation
By: /s/ Jack Williams
-------------------------
Jack Williams
President, Chief Executive Officer, Chairman of the Board
22
<PAGE> 38
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
date indicated.
<TABLE>
<CAPTION>
Title Date
<S> <C> <C>
/s/ Jack Williams Director, President, Chief Executive March 27, 1997
- --------------------- Officer, and Chairman of the Board
/s/ Larry Eyler Director, Secretary, Chief Financial March 27, 1997
- --------------------- Officer, and Vice President of Finance
(Principal Financial Officer)
/s/ Michael Dosch Director, Chief Operating Officer, and March 27, 1997
- --------------------- Vice President
/s/ David Pollard Director, Engineering-Vice President March 27, 1997
- ---------------------
/s/ John Lane Director March 27, 1997
- ---------------------
/s/ Michael Bosworth Director March 27, 1997
- ---------------------
/s/ John Robbins Director March 27, 1997
- ---------------------
</TABLE>
23
<PAGE> 39
Exhibit Index
4.1 Articles of Incorporation of the Company (1)
4.2 Bylaws of the Company (1)
4.3 Warrant Agreement (1)
4.4 Warrant Certificate (1)
4.5 Stock Certificate (1)
4.6 Unit Certificate (1)
5.1 Opinion re legality of S-8 filing (2)
10.1 Lease Agreement dated May 9, 1995 (1)
10.2 Sublease Agreement dated May 9, 1995 by and between the Registrant and
Pacific Metal Fabricators (1)
10.3 Employment Contract by and between the Registrant and Jack Williams (1)
10.4 Employment Contract by and between the Registrant and Michael Dosch (1)
10.5 Employment Contract by and between the Registrant and Larry Eyler (1)
10.6 Employment Contract by and between the Registrant and David Pollard (1)
10.7 1996 Omnibus Stock Plan and form of Stock Option Agreement thereunder
(1)
10.8 Asset Purchase Agreement between the Registrant and Pacific Metal
Fabricators, Inc. (1)
23.1 Consent of Harlan & Boettger, Independent Auditors
24.1 Power of Attorney (included in signature pages to this registration
statement)
26.1 Form S-8 filing, dated February 29, 1997 (2)
- -----------------------
(1) Previously filed as an exhibit to the Company's Form SB-2, file no.
333-858-LA, and incorporated herein by reference.
(2) Previously filed as an exhibit to the Company's Form S-8, file no.
333-22407, and incorporated herein by reference.
24
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use of our report included in the Registration
Statement on Form 10-KSB dated February 4, 1997 relating to the financial
statements of Pacific Research & Engineering Corporation.
HARLAN & BOETTGER
San Diego, California
February 4, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 610,857
<SECURITIES> 1,000,000
<RECEIVABLES> 710,919
<ALLOWANCES> 15,000
<INVENTORY> 1,935,501
<CURRENT-ASSETS> 4,493,220
<PP&E> 902,251
<DEPRECIATION> 0
<TOTAL-ASSETS> 6,447,509
<CURRENT-LIABILITIES> 1,609,038
<BONDS> 0
0
0
<COMMON> 4,210,905
<OTHER-SE> 590,410
<TOTAL-LIABILITY-AND-EQUITY> 6,447,509
<SALES> 7,696,160
<TOTAL-REVENUES> 7,696,160
<CGS> 4,547,132
<TOTAL-COSTS> 4,547,132
<OTHER-EXPENSES> 3,185,374
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 67,796
<INCOME-PRETAX> 31,450
<INCOME-TAX> 20,700
<INCOME-CONTINUING> 10,750
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,750
<EPS-PRIMARY> 0.01
<EPS-DILUTED> 0.01<F1>
<FN>
<F1>OPTIONS AND WARRANTS OUTSTANDING AS OF DECEMBER 31, 1996 AND ANTIDILUTIVE FOR
PURPOSES OF CALCULATING PRIMARY AND FULLY DILUTED EARNINGS PER SHARE AND
THEREFORE ARE IGNORED IN THE CALCULATION
</FN>
</TABLE>
