U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
[ ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from __________ to _________
Commission File Number : 001-11773
PACIFIC RESEARCH AND ENGINEERING CORPORATION
---------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
California 95-2638420
------------ ------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) identification No.)
2070 Las Palmas Drive, Carlsbad, California, 92009
----------------------------------------------------
(Address of principal executive offices)
(760) 438-3911
----------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past 12
months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
State the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date:
2,305,500 as of September 30, 1997 Common Stock, No Par Value
<PAGE> 1
PACIFIC RESEARCH AND ENGINEERING CORPORATION
FORM 10-QSB
TABLE OF CONTENTS
Part I: Financial Information Page
Item 1: Financial Statements
Condensed Balance Sheets as of
December 31, 1996 and
September 30, 1997 (unaudited) 2
Condensed Statements of Income
for the Nine Months and Three Months Ended
September 30, 1996 and 1997 (unaudited) 3
Condensed Statements of Cash Flows
for the Nine Months Ended
September 30, 1996 and 1997 (unaudited) 4
Notes to Condensed Financial Statements
(unaudited) 5
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
Part II: Other Information
Item 1: Legal Proceedings 22
Item 2: Changes in Securities 22
Item 3: Defaults upon Senior Securities 23
Item 4: Submissions of Matters to a Vote of
Security Holders 23
Item 5: Other Information 23
Item 6: Exhibits and Reports on Form 8-K 23
<PAGE> 2
<TABLE>
PACIFIC RESEARCH AND ENGINEERING CORPORATION
PART I - FINANCIAL INFORMATION
CONDENSED BALANCE SHEETS
AS OF SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
<CAPTION>
ASSETS September 30,1997 December 31,1996
(unaudited)
------------ ------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 500 $ 610,857
Investments 541,843 1,000,000
Accounts receivable, net 1,027,974 695,919
Inventories, net 3,314,127 1,935,501
Prepaid expenses 375,116 250,943
----------- -----------
TOTAL CURRENT ASSETS 5,259,560 4,493,220
PROPERTY AND EQUIPMENT, net 1,328,884 902,251
OTHER ASSETS 1,579,620 1,052,038
----------- -----------
$ 8,168,064 $ 6,447,509
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 968,865 $ 594,258
Accrued expenses 155,588 195,430
Customer advances 858,572 271,710
Line of credit 1,069,103 500,000
Capital lease obligations -
current portion 32,960 34,140
Deferred tax liability, net 73,400 13,500
----------- -----------
TOTAL CURRENT LIABILITIES 3,158,488 1,609,038
CAPITAL LEASE OBLIGATIONS,
net of current portion 26,262 37,156
----------- -----------
TOTAL LIABILITIES $ 3,184,750 $ 1,646,194
SHAREHOLDERS' EQUITY
Common stock, no par value,
25,000,000 shares authorized;
2,305,500 shares issued and outstanding 4,126,392 4,160,905
Additional paid-in capital 50,000 50,000
Retained earnings 806,922 590,410
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 4,983,314 4,801,315
----------- -----------
$ 8,168,064 $ 6,447,509
=========== ===========
</TABLE>
The accompanying notes are integral part of these financial statements
<PAGE> 3
<TABLE>
PACIFIC RESEARCH AND ENGINEERING CORPORATION
PART I - FINANCIAL INFORMATION
CONDENSED STATEMENTS OF INCOME FOR THE NINE MONTHS AND
THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- ------------------------------
1997 1996 1997 1996
------------- ------------- ------------- -------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
NET SALES $ 3,515,121 $ 2,309,682 $ 9,118,610 $ 6,230,605
COST OF SALES 1,977,330 1,340,834 5,100,956 3,602,512
----------- ----------- ----------- -----------
Gross profit 1,537,791 968,848 4,017,654 2,628,093
OPERATING EXPENSES
General and
administrative 470,707 383,336 1,284,412 914,106
Selling and marketing 553,121 258,791 1,349,012 620,803
Research, development and
engineering 260,634 212,463 810,134 551,658
Depreciation and
amortization 150,459 51,377 272,059 132,297
----------- ----------- ----------- -----------
TOTAL OPERATING EXPENSES 1,434,921 905,967 3,715,617 2,218,864
----------- ----------- ----------- -----------
INCOME FROM OPERATIONS 102,870 62,881 302,037 409,229
OTHER INCOME (EXPENSES)
Interest, net (4,782) 23,831 7,244 (3,168)
Gain on sale of assets - - - 16,087
Other 3,813 8,376 3,987 18,538
----------- ----------- ----------- -----------
TOTAL OTHER INCOME
(EXPENSE) (969) 32,207 11,231 31,457
----------- ----------- ----------- -----------
INCOME BEFORE INCOME
TAXES 101,901 95,088 313,268 440,686
Income tax (benefit)
expense (5,312) 30,000 60,700 55,000
----------- ----------- ----------- -----------
NET INCOME $ 107,213 $ 65,088 $ 252,568 $ 385,686
=========== =========== =========== ===========
Earnings per average
common share $ 0.05 $ 0.03 $ 0.11 $ 0.22
=========== =========== =========== ===========
Fully diluted earnings
per average common
share $ 0.05 $ 0.03 $ 0.11 $ 0.22
=========== =========== =========== ===========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING:
(Exhibit 11.1-EPS) 2,305,500 2,305,500 2,305,500 1,749,945
=========== =========== =========== ===========
</TABLE>
The accompanying notes are integral part of these financial statements
<PAGE> 4
<TABLE>
PACIFIC RESEARCH AND ENGINEERING CORPORATION
PART I - FINANCIAL INFORMATION
CONDENSED STATEMENTS OF CASH FLOWS FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
---------------------------
1997 1996
------------ ------------
(unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 252,568 $ 385,686
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization 272,059 132,297
Gain on sale of assets - (16,087)
Changes in operating assets and liabilities:
Accounts receivable (332,055) (254,704)
Inventories (1,378,626) (218,421)
Prepaid expenses and other assets (982,435) (601,821)
Accounts payable 374,598 260,160
Deferred income taxes 59,900 -
Accrued expenses (39,842) 67,167
Customer advances 586,862 (267,503)
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (1,186,971) (513,226)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (353,035) (417,354)
(Increase) decrease in investment account
principal, net 458,157 -
----------- -----------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 105,122 (417,354)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from (payments on) notes payable and
lines of credit 569,103 170,648
Payments under capital lease obligations (27,051) (21,998)
Proceeds from sale of common stock - 4,098,587
Proceeds from sale of common stock warrants - 50,000
Distributions to shareholders (36,047) (601,722)
Deferred offering costs, netted against
offering proceeds (34,513) -
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 471,492 3,695,515
----------- -----------
NET INCREASE (DECREASE) IN CASH (610,357) 2,764,935
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 610,857 500
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 500 $ 2,765,435
=========== ===========
</TABLE>
The accompanying notes are integral part of these financial statements
<PAGE> 5
PACIFIC RESEARCH AND ENGINEERING CORPORATION
PART I - FINANCIAL INFORMATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. 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.
BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements and
related notes have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission for
Form 10-QSB. Accordingly, they do not include all of the
information and footnotes required by generally accepted
accounting principles for complete financial statements. In
the opinion of management, all adjustments, consisting of a
normal recurring nature and considered necessary for a fair
presentation, have been included. It is suggested that these
financial statements are read in conjunction with the financial
statements and notes thereto included in the Company's annual
report on Form 10-KSB for the year ended December 31, 1996. The
results of operations for the nine month and three month periods
ended September 30, 1997 are not necessarily indicative of the
operating results for the year ended December 31, 1997. For
further information, refer to the financial statements and notes
thereto included in the Company's Annual Report on Form 10-KSB for
the fiscal year December 31, 1996.
RECLASSIFICATIONS
Certain September 30, 1996 balances have been reclassified to
conform to the September 30, 1997 condensed financial statement
presentation.
INVESTMENTS
The Company maintains excess cash available for operating purposes
in a mutual fund of a financial institution. The fund invests
exclusively in the State of California tax-free municipal bonds.
There are no restrictions and the Company may redeem the fund
shares at any time without penalty.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out)
or market. Inventory costs include material, labor and
manufacturing overhead.
<PAGE> 6
PACIFIC RESEARCH AND ENGINEERING CORPORATION
PART I - FINANCIAL INFORMATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 upgrades are capitalized. When properties
are retired or 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.
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 (SFAS) No. 86 "Accounting for the
Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed",
(SFAS 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 commenced concurrent with the shipment of product
during the third quarter of 1997. The Company incurred approximately
$90,000 in amortization expense for the nine-month and three-month
periods ending September 30, 1997 relative to this product. The Company
has begun marketing efforts for its second product and will begin shipping
during the fourth quarter of 1997.
DEFERRED OFFERING COSTS include the costs associated with the initial
public offering ("Offering"). These direct incremental costs associated
with the Offering were capitalized and netted against the proceeds from
the Offering. The Company during the first quarter of 1997 recognized
additional costs related to the offering. These costs were then charged
against offering proceeds and reported in the statement of cash flows and
notes to the condensed financial statements.
2. INVENTORIES
Inventories at September 30, 1997 and at December 31, 1996 are summarized
as follows:
September 30, 1997 December 31, 1996
--------------- ---------------
(unaudited)
Raw materials $ 1,508,045 $ 969,180
Work-in-process 1,101,098 516,687
Finished goods 729,984 474,634
----------- -----------
3,339,127 1,960,501
Less reserve for obsolescence (25,000) (25,000)
----------- -----------
Inventories, net $ 3,314,127 $ 1,935,501
=========== ===========
<PAGE> 7
PACIFIC RESEARCH AND ENGINEERING CORPORATION
PART I - FINANCIAL INFORMATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
3. PROPERTY AND EQUIPMENT
Property and equipment at September 30, 1997 and at December 31, 1996
are summarized as follows:
September 30, 1997 December 31, 1996
--------------- ---------------
(unaudited)
Machinery and equipment $ 1,736,355 $ 1,185,798
Furniture and fixtures 829,164 800,550
Leasehold improvements 667,749 638,348
----------- -----------
3,233,268 2,624,696
Less accumulated depreciation and
amortization (1,904,384) (1,722,445)
----------- -----------
Property and equipment, net $ 1,328,884 $ 902,251
=========== ===========
4. OTHER ASSETS
Other assets at September 30, 1997 and at December 31, 1996 are
summarized as follows:
September 30, 1997 December 31, 1996
--------------- ---------------
(unaudited)
Capitalized software costs $ 1,455,569 $ 949,617
Deposits 106,394 93,696
Other 10,560 -
Employee loan 7,097 8,725
----------- -----------
$ 1,579,620 $ 1,052,038
=========== ===========
5. INCOME TAXES
For the tax period ending May 29, 1996, which was included during
the period ended September 30, 1996, 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 herein 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 the 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. 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.
<PAGE> 8
PACIFIC RESEARCH AND ENGINEERING CORPORATION
PART I - FINANCIAL INFORMATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
6. PROFIT SHARING AND STOCK OPTION PLAN
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
salary deferrals not to exceed the lesser of 14% of an employee's
salary or the maximum amount allowed by law. The Company will
match a portion of that amount, which is currently set at 20%.
The Company may elect to make additional discretionary
contributions in any Plan year.
STOCK OPTION PLAN
A total of 1,200,000 shares of the Company's Common Stock has been
reserved for issuance under the Company's 1996 Omnibus Stock Plan
(the "Stock Plan"), which expires by its own terms in 2006.
The Stock Plan provides for the grant of "incentive stock options"
within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended, and non-qualified stock options to employees,
officer, directors and consultants of the Company. Incentive stock
options may be granted only to employees. The Stock Plan is
administered by the Board of Directors or a committee appointed by
the Board, which determines the terms of all grants, including the
exercise price, the number of shares subject to grants, and the
exercisability and vesting schedules.
As of September 30, 1997 (unaudited), the following grants had been
made under the Stock Plan:
* To each of Messrs. John Robbins and Michael Bosworth, both
members of the Company's Board of Directors, a ten year option
to purchase 5,000 shares of Common Stock, exercisable at $5.50
per share. Additionally, Messrs. Robbins, Bosworth and
Messr. John Lane (a member of the Company's Board of Directors)
will receive options to purchase 2,500 shares of common stock at
the then-market price on the date of the grant on the first three
anniversaries of their election as a director. Each grant is
conditioned upon the person being a director at the time of the
grant and must be exercised within ten years from the date of grant.
* The following grant was made on May 29, 1997, the anniversary
date of Messrs. Robbins', Bosworth's, and Lane's directorship;
an option to purchase 2,500 shares of common stock each at the
then-market price of $2.25 per share, pursuant to the terms of
Directors Options.
* During the year ended December 31, 1996 options to purchase a
total of 750,000 shares of the Common Stock were granted pro
rata, based upon current share ownership, to certain executive
officers of the Company and two key employees of the Company.
<PAGE> 9
PACIFIC RESEARCH AND ENGINEERING CORPORATION
PART I - FINANCIAL INFORMATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
6. PROFIT SHARING AND STOCK OPTION PLAN (continued)
These options will vest and become exercisable pursuant to the
schedule set forth below, if the Company achieves the following
performance criteria; (i) 100,000 shares the first year if the
Company's earnings per share are at least $0.25 or the Common
Stock achieves a price of at least $6.00 per share; (ii) 100,000
shares the second year if the Company's earnings per share are at
least $0.30 or the Common Stock achieves a price of at least $7.20
per share; (iii) 100,000 shares in the third year if the Company's
earnings per share are at least $0.36 or the Common Stock achieves
a price of at least $8.64 per share; (iv) 225,000 shares will be
available in the fourth year if the Company's earnings per share
are at least $0.43 or the Common Stock achieves a price of at
least $10.37 per share; (v) 225,000 shares in the fifth year if
the Company's earnings per share are at least $0.52 or the Common
Stock achieves a price of at least $12.44 per share. In the event
the Company does not achieve these performance criteria in any
given year, any shares reserved for issuance but not yet vested
will become exercisable in addition to such subsequent year's
shares if the Company achieves the performance criteria in such
subsequent year. In any event, vesting occurs after year seven
for all shares that are reserved for issuance. For purposes of
calculating earnings per share under the above formula, earnings
per share will be calculated without taking into account any
compensation expense required under generally accepted accounting
principles due to recognition of any expense as a result of the
exercisability of the performance shares.
* On February 19, 1997 the Company granted options to purchase
180,000 shares of common stock to its employees pursuant to
the Stock Plan. The options vest for each employee at a rate
of 20% per year with full vesting by year five, and expire
10 years from the date of grant. The option price set was
$2.50 per share under this plan.
* On July 17, 1997 the Company granted options to purchase 7,500
shares of common stock to an individual employee pursuant to
the Stock Plan. These options vest in the following manner;
20% vesting 90 days after the date of hire and then 20% per
year thereafter with full vesting by year five, and expire
10 years from the date of grant. The option price set was
$3.00 per share under this plan.
* On July 25, 1997 the Company granted options to purchase
60,000 shares of common stock to an individual employee
pursuant to the Stock Plan. These options vest in the
following manner; 20% vesting 90 days after the date of
hire and then 20% per year thereafter with full vesting by
year five, and expire 10 years from the date of grant. The
option price set was $2.88 per share under this plan.
Options outstanding as of January 1, 1997 760,000
Granted 255,000
Exercised -
Canceled -
Options outstanding as of September 30, 1997 1,015,000
Option price range for options
granted during the period $2.25 to $3.00
Options exercisable as of September 30, 1997 53,500
Options available for grant as
September 30, 1997 185,000
<PAGE> 10
PACIFIC RESEARCH AND ENGINEERING CORPORATION
PART I - FINANCIAL INFORMATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
6. PROFIT SHARING AND STOCK OPTION PLAN (continued)
In October 1995, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standard No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123), which becomes
effective for financial statements for fiscal years beginning after
December 15, 1995. SFAS 123 defines a fair value based method of
accounting for an employee stock option or similar equity instrument
and encourages all entities to adopt that method of accounting for
all of their employee stock compensation plans. However, it also
allows an entity to continue to measure compensation cost for those
plans using the intrinsic value based method of accounting prescribed
by Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" (APB 25). The Company currently accounts for
stock-based compensation under APB 25 and will continue to account
for stock-based compensation under this method.
7. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental disclosures of cash flow information for the nine-month
periods ended September 30, 1997 and 1996 are summarized as follows:
NINE MONTHS
ENDED
SEPTEMBER 30,
---------------------------
1997 1996
------------ ------------
(unaudited)
Cash paid for interest and income taxes:
Interest $ 36,276 $ 42,106
Income taxes $ - $ -
Non cash investing and financing activities:
Capital lease obligations $ 14,799 $ -
8. INITIAL PUBLIC OFFERING
Effective May 28, 1996, the Company sold 500,000 equity units (Unit)
to the general public.
Each Unit sold for $11.00 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 transferable 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 initial public
offering (Offering), one share of common stock at a price of $8.00 per
share. Commencing from the date of the Offering, 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
$10.00 per share for a period of ten consecutive trading days.
<PAGE> 11
PACIFIC RESEARCH AND ENGINEERING CORPORATION
PART I - FINANCIAL INFORMATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
9. SHAREHOLDERS' EQUITY
S CORPORATION DISTRIBUTIONS
For the year ended December 31, 1996, which includes the nine
month period ended September 30, 1996, the Company distributed
accumulated undistributed retained earnings of $694,722. This
amount represented a portion of the S Corporation earnings through
May 29, 1996 and was distributed from retained earnings to the
shareholders. The Company's status as an S Corporation
automatically terminated following the initial public offering.
During the second quarter of 1997 the Company distributed an
additional $36,047 to these shareholders. This additional amount
represents the remaining portion of the S Corporation earnings that
were earned and taxed (through the shareholders personal income tax)
through May 29, 1996 as determined by the filing of the Company's
tax return.
COMMMON STOCK
During 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. Common stock has been retroactively restated for
the stock splits.
WARRANTS
Warrants outstanding in addition to those discussed in Note 8 above
as of December 31, 1996 and September 30, 1997 (unaudited) consists
of warrants granted to a former director 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. At the closing of the
Offering, the Company issued to the Underwriter a warrant (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 $17.05 per Unit.
As of December 31, 1996 and September 30, 1997 (unaudited), no
warrants had been exercised in connection with these issuance's.
10. EARNINGS PER SHARE
Certain options granted and outstanding as of September 30, 1997
(unaudited) were dilutive for purposes of calculating primary and
fully diluted earnings per share and therefore are included in the
earnings per share calculations. However, warrants granted and
outstanding are anti-dilutive for purposes of calculating primary
and fully diluted earnings per share, due to exercise prices of
the warrants in excess of current market price. For the nine month
and three month periods ended September 30, 1996 the calculation for
earnings per share was based solely on the weighted number of shares
outstanding, since both options and warrants granted and outstanding
were immaterial and the length of grant was immaterial during these
periods. Refer to Note 6 as to the amount of options granted and
their exercise price and Exhibit 11.1 for calculation of primary and
fully diluted earnings per share.
<PAGE> 12
PACIFIC RESEARCH AND ENGINEERING CORPORATION
PART I - FINANCIAL INFORMATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
10. EARNINGS PER SHARE (continued)
In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 128, "Earnings per Share," (SFAS 128) which is required
to be adopted on December 31, 1997. At that time, the Company will
be required to change the method currently used to compute earnings
per share and to restate all prior periods. Under the new
requirements for calculating primary earnings per share, the dilutive
effect of stock options will be excluded. The impact is not expected
to result in any change in primary earnings per share for the nine
months and three months ended September 30, 1997 and 1996. The impact
of SFAS 128 on the calculation of fully diluted earnings per share for
these periods is expected to be not material.
11. USE OF ESTIMATES
The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. Actual results
could differ from those estimates.
<PAGE> 13
PACIFIC RESEARCH AND ENGINEERING CORPORATION
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
This Quarterly Report on Form 10-QSB contains forward-looking
statements that involve risks and uncertainties. The Company's
actual results may differ significantly from the results discussed
in the forward-looking statements. Factors that might cause such a
difference include, but are not limited to, those discussed in the
section entitled "Factors Affecting Future Operating Results."
FORWARD-LOOKING INFORMATION - GENERAL
This report contains a number of forward-looking statements which
reflect the Company's current views with respect to future events
and financial performance. These forward-looking statements are
subject to certain risks and uncertainties that could cause actual
results to differ materially from historical results or those
anticipated. In this report, the words "anticipates", "believes",
"expects", "intends", "plans", "may", "future", and similar
expressions identify forward-looking statements. Readers are
cautioned to consider the risk factors described above and in the
Company's Annual Report on Form 10-KSB for the year ended
December 31, 1996, and not to place undue reliance on the
forward-looking statements contained herein, which speak only
as of the date hereof. The Company undertakes no obligation to
publicly revise these forward-looking statements, to reflect events
or circumstances that may arise after the date hereof.
Additionally, these statements are based on certain assumptions that
may prove to be erroneous and are subject to certain risks including,
but not limited to, the Company's ability to introduce new products,
the concentration of the Company's current products in a relatively
narrow segment of the professional audio market, technological change
and increased competition in the industry, the Company's ability to
manage its rapid growth, its limited protection of technology and
trademarks, the Company's dependence on limited suppliers,
representatives, distributors, and its dependence on certain key
personnel within the Company. Accordingly, actual results may differ,
possibly materially, from the predictions contained herein.
The Company's gross margins have fluctuated from time to time due
primarily to inefficiencies related to the introduction and
manufacturing of new products and inefficiencies associated with
integrating new equipment into the Company's manufacturing processes.
Historically, fluctuations have also resulted from increases in
overhead, varying prices of components and competitive pressures.
The Company plans to introduce new products and revisions at a more
rapid rate than it has in the past. Some anticipated new products
would require the implementation of manufacturing practices with which
the Company is not familiar. This could result in lower margins, as
the Company becomes more familiar with these new manufacturing
procedures.
Although the Company cannot accurately anticipate the effect of
inflation, the Company does not believe inflation has had or is
likely to have a material effect on its results of operations or
liquidity.
The Company's quarterly operating results vary significantly depending
on the timing of new product introductions and enhancements by the
Company and its competitors and on the volume and timing of orders,
which are difficult to forecast. Customers generally order on an
as-needed basis, and the Company normally ships' products within a
short period of time after receipt of an order. The results of
operations for any quarter are not necessarily indicative of the
results to be expected for any future period. A disproportionate
percentage of the Company's quarterly net revenue is typically
generated in the last few weeks of the quarter. A significant portion
of the Company's operating expenses is relatively fixed, and planned
expenditures are based primarily on sales forecasts. As a result, if
revenue generated in the last few weeks of a quarter does not meet
with the Company's forecast, operating results may be materially
adversely affected.
<PAGE> 14
PACIFIC RESEARCH AND ENGINEERING CORPORATION
PART I - FINANCIAL INFORMATION
OVERVIEW
Since incorporation in October 1969, Pacific Research & Engineering,
a California corporation, ("PR&E," the "Company") has produced high
quality studio products and services including audio control and
mixing consoles, cartridge machines, digital workstations, and a wide
range of peripheral products for the radio broadcasting industry.
The Company also provides technical furniture and offers studio
integration and design services for turnkey systems projects. The
Company's primary customers are the nation's top rated radio stations
and network facilities. The Company believes it has developed a solid
reputation in supplying quality products and services to the broadcast
industry.
The Company's manufacturing and development activities are conducted
in four principal areas: audio control consoles, digital recording
equipment, peripheral equipment and custom system products. Some of
the Company's customers include Capital Cities/ABC, Disney, Infinity
Broadcasting and Bonneville International.
One family of audio control consoles, which the Company manufactures
(the "X-Class") are mainframes with both on-air and production
capabilities configured with various accessory modules affording
flexible add-on-features. Modules for high-end consoles may include
the capacity to: handle a talk show with four independent telephone
feeds, equalize and/or process the inputs, record a stereo feed for
later broadcast and work with two separate studios and a remote all
at the same time. The Radiomixer console (part of the "Mixer-Class")
was developed by the Company as a lower-priced on-air console targeted
at price sensitive domestic and international markets. The Radiomixer
can perform several jobs simultaneously handling up to two telephones.
Digital recording equipment is manufactured and sold as part of the ADX
workstation line with one of the more popular versions named the ADX
Ensemble (the Ensemble). The Ensemble is a stand alone digital audio
workstation featuring automated digital recording and mixing,
incorporating an Apple Macintosh 6100/66 for display and control.
Like a word processor for audio, Ensemble has the ability to cut,
copy, paste and move audio segments around to create sophisticated
audio productions. An optical backup drive feature, similar to a
recordable compact disc, allows the user to read and write directly
to an optical drive without having to load individual projects on to
the hard drive.
The needs of a broadcast studio vary depending upon the specific
requirements and budgets of the individual broadcast facility. The
Company custom builds integrated turnkey systems to meet each
studio's objective providing custom cabinetry, audio and logic
wiring, as well as installation services. Each customized system
is fully documented and thoroughly tested in the Company's
manufacturing facility prior to shipment.
RESEARCH/DEVELOPMENT AND ENGINEERING COSTS
The main costs associated with research/development and
engineering are expenditures related to licenses, permits and CE
(European Conformity) certification for existing products
marketed overseas, increased research and development activities,
outside consultants, and the hiring of additional engineering
staff incurred in the development of the new digital products.
These expenditures which affect current earnings 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 software based
products that will be sold, leased or otherwise marketed, in
accordance with the provisions of SFAS 86.
Through September 30, 1997, the Company capitalized approximately
$1.5 million of such costs, primarily related to the development
of its first software-based on-air digital console. The approximate
breakout of costs are as follows: Engineering wages and benefits,
$555,000; outside software consultants, $731,000; and materials/parts
of $259,000.
The costs are capitalized according to SFAS 86 whereby it specifies
that all costs incurred after technological feasibility has been
established for a computer software product that is sold, leased,
or otherwise marketed by an enterprise shall be capitalized.
Additionally, capitalization of computer software costs shall be
discontinued when the computer software product is available to be
sold, leased or otherwise marketed. Costs of maintenance and customer
support shall be charged to expense when incurred or when the related
revenue is recognized, whichever occurs first.
<PAGE> 15
PACIFIC RESEARCH AND ENGINEERING CORPORATION
PART I - FINANCIAL INFORMATION
The Company's amortization policy is to expense software development
costs over the shorter of 3-5 years or the ratio of current revenue
to the total of current and anticipated future revenue. The Company
is currently amortizing the costs over five years based on the
straight line method. The Company has started shipping the product
during the third quarter of 1997 and has to date recognized
approximately $90,000 in amortization.(Refer to Note 1 to the
Condensed Financial Statements)
RESULTS OF OPERATIONS
The following table sets forth the percentage of revenue represented
by certain items in the Company's Condensed Statements of Operations
for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended September 30 Nine Months Ended September 30
---------------------------------------- ---------------------------------------------
1997 1996 Percent 1997 1996 Percent
(Unaudited) Incr (Decr) (Unaudited) Incr (Decr)
<S> <C> <C> <C> <C> <C> <C>
Net sales 100.0% 100.0% 52.2% 100.0% 100.0% 46.4%
Cost of sales 56.3% 58.1% 47.5% 55.9% 57.8% 41.6%
---------------------------------------------------------------------------------------
Gross profit 43.7% 41.9% 58.7% 44.1% 42.2% 52.9%
Expenses:
General and administrative 13.4% 16.6% 22.8% 14.1% 14.7% 40.5%
Selling and marketing 15.7% 11.2% N/A 14.8% 10.0% N/A
Research and engineering 7.4% 9.2% 22.7% 8.9% 8.9% 46.9%
Depreciation and amortization 4.3% 2.2% N/A 3.0% 2.1% N/A
---------------------------------------------------------------------------------------
Total operating expenses 40.8% 39.2% 58.4% 40.8% 35.7% 67.5%
Income from operations 2.9% 2.7% 63.6% 3.3% 6.5% (26.2%)
---------------------------------------------------------------------------------------
Other income (expenses):
Interest income (expense) (0.1%) 1.0% N/A 0.1% (0.1%) N/A
Gain on sale of asset 0.0% 0.0% N/A 0.0% 0.3% N/A
Other 0.1% 0.4% (54.5%) 0.0% 0.3% (78.5%)
---------------------------------------------------------------------------------------
Total other income (expense) 0.0% 1.4% N/A 0.1% 0.5% (64.3%)
Income before income taxes 2.9% 4.1% 7.2% 3.4% 7.0% (28.9%)
Provision for income taxes (0.1%) 1.3% N/A 0.7% 0.9% (10.4%)
---------------------------------------------------------------------------------------
Net income 3.0% 2.8% 64.7% 2.7% 6.1% (34.5%)
</TABLE>
N/A = NOT MEANINGFUL OR IN EXCESS OF 100%
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1996.
Sales increased $2,888,000 or 46.4%, from $6,231,000 for the nine
months ended September 30, 1996 to $9,119,000 for the nine months
ended September 30, 1997. The Company believes the sales increase
to be the result of the continuing wave of consolidation, merger
and acquisition activity triggered by the signing of the
Telecommunications Bill in February of 1996 and the Company's
efforts to capture a larger percentage of the market. The
Company's increased sales and marketing efforts have had, and may
continue to have a positive impact on future sales and bookings,
although there can be no assurance that increased spending on
selling and marketing expenses will result in increased sales.
Additionally, radio remains a strong and cost effective
alternative to television and print media competing for
advertising dollars. The advertising revenue growth has
provided the broadcasters with the capital necessary to
accomplish their consolidation goals and upgrade their
facilities.
Cost of sales increased $1,498,000, or 41.6%, from $3,602,000
to $5,101,000 due to the sales increase, and decreased slightly
as a percentage of revenues from 57.8% for the nine months ended
September 30, 1996, to 55.9% for the nine month period ended
September 30, 1997. This decrease is attributable to improved
purchasing and requisition procedures, and improved
manufacturing processes.
<PAGE> 16
PACIFIC RESEARCH AND ENGINEERING CORPORATION
PART I - FINANCIAL INFORMATION
The Company continually evaluates its inventory purchasing and
handling policies, as well as its manufacturing processes, to
ensure the maintenance of, or improvement to, gross margins.
Accordingly, gross margin increased $1,390,000 (from $2,628,000
to $4,018,000) or 52.9% due primarily to the increase in sales,
and increased slightly as a percent of revenue from 42.2% to 44.1%
for the nine months ended September 30, 1996 compared to the nine
months ended September 30, 1997.
General and administrative expenses increased approximately
$370,000, or 40.5%, to $1,284,000 in 1997 compared to $914,000
in 1996. The increase was due, primarily, to additional expenses
incurred in expanding the Company's infrastructure and costs
accompanying the Company's public reporting requirements and
additional payroll costs. As a percentage of revenue, however,
general and administrative expenses decreased 0.6%, from 14.7%
in 1996 to 14.1% in 1997.
Selling and marketing expenses increased $728,000 or 117.3%
from $621,000 in 1996 to $1,349,000 in 1997 due, primarily, to
the addition of two sales executives, as well as additional sales
professionals. The Company intends to take advantage of the
growing radio market generated by the Telecommunication Bill
(see management's discussion and analysis of sales, above) and
will continue to invest in this area to maximize market
penetration. There can be no assurance that the Company's
increase in selling and marketing expenses will result in a
higher level of sales. The Company has increased its tradeshow
attendance, increased expenditures related to advertising and
brochures, and has increased its expenditures relative to travel
for the interviewing and the hiring of distributors for the
overseas market and business. Selling and marketing expenses
as a percentage of revenue increased 4.8% from 10.0% in 1996
to 14.8% during the nine months ended September 30, 1997.
Research and engineering expenses increased $258,000 or 46.9%
from $552,000 for the nine months ended September 30, 1996 to
$810,000 for the nine months ended September 30, 1997. The
primary reason for the increase is that, during the nine months
ended September 30, 1997, the Company decreased capitalization
of certain development costs relating to the coding, testing
and other expenditures related to new products that will the
Company intends to sell, lease or otherwise market in
accordance with the provisions of SFAS 86 and now currently
expenses these costs.
Capitalized research and engineering costs, pursuant to SFAS 86,
for the nine months ended September 30, 1997 are approximately
$596,000. The Company capitalized such costs in the amount of
$602,000 for the comparable period in 1996. The Company has
incurred and will continue to incur additional research and
engineering payroll expenses as it recruits and hires the
engineering staff necessary to develop and launch new product.
The Company will continue to invest in state-of-the-art computer
equipment and CAD products to enable its engineering team to
manage product development as radio migrates from analog to digital.
Research and engineering expenses increased slightly as a
percentage of revenue, from 8.85% for the nine months ended
September 30,1996 to 8.88% for the nine months ended
September 30, 1997 due to the addition of engineering and
drafting staff, and the reduction of expense capitalization
as discussed above. (Refer to "Management's Discussion and
Analysis of Financial Condition and Results of
Operations-Research/Development and Engineering Costs" for further
explanation of capitalization of software development costs pursuant
to SFAS 86 and the Company's compliance with the standard set forth).
Income from operations decreased $107,000 or 26.2% from $409,000
for the nine months ended September 30, 1996 to $302,000 for the
nine months ended September 30, 1997 reflecting the 52.9% increase
in gross margin offset by the 67.5% increase in operating expenses
for the comparable periods. Operating income, as a percentage of
revenue, decreased 3.2% from 6.5% for the nine months ended
September 30, 1996 to 3.3% for the nine months ended
September 30, 1997.
Net interest income (expense) increased $10,000 from an expense
of $3,000 in 1996 to a gain of $7,000 in 1997 reflecting interest
earned on the investment fund.
The Company incurred a gain of approximately $16,000 for the nine
months ended September 30, 1996, resulting from an upgrade to a new
enhanced CAD/engineering software package. The gain was classified
as other income in the financial statements. The Company had no
income of this nature for the nine months ended September 30, 1997.
<PAGE> 17
PACIFIC RESEARCH AND ENGINEERING CORPORATION
PART I - FINANCIAL INFORMATION
The combined results, as discussed above, yielded net income before
taxes of $313,000 for the nine months ended September 30, 1997
compared to net income before taxes of approximately $441,000 for
the nine months ended September 30, 1996, representing approximately
a 28.9% decrease in net income before taxes.
Despite the decrease, it is important to highlight a few factors
that the Company believes bode well for the Company's future:
* Expenses related to new product development and marketing
are expected to decrease and stabilize, respectively.
* As ownership groups complete organizational shakeouts and
begin consolidating and integrating newly acquired stations
over the next few months, the Company anticipates that they
too will return to the marketplace for additional products
and services, creating new business opportunities for the
Company.
* The Company's new products have been well received in the
industry, particularly at the recent National Association of
Broadcasters conventions in April and September of 1997.
During the April show, both Integrity and AirWave won "best
of show" awards from the media.
* The Company will continue to focus on the expansion of new
markets in the United States, Asia and Europe.
There can be no assurance, however, that these factors will result
in increased revenues or decreased expenses for the Company in the
future.
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS
ENDED SEPTEMBER 30, 1996.
Sales increased $1,205,000 or 52.2%, from $2,310,000 for the three
months ended September 30, 1996 to $3,515,000 for the three months
ended September 30, 1997. The Company believes the sales increase
to be the result of the continuing wave of consolidation, merger
and acquisition activity triggered by the signing of the
Telecommunications Bill in February of 1996 (see management's
discussion and analysis for the nine months ended
September 30, 1997).
Cost of sales increased $636,000 or 47.5% from $1,341,000
to $1,977,000 due to the sales increase, and decreased slightly
as a percentage of revenues for the three months ended
September 30, 1997 compared to the same period in 1996. The
decrease is attributable to improved purchasing and requisition
procedures, and improved manufacturing processes.
The Company continually evaluates its inventory purchasing and
handling policies, as well as its manufacturing processes, to
ensure the maintenance of, or improvement to, gross margins.
Accordingly, gross margin increased $569,000 (from $969,000 to
$1,538,000) or 58.7% due primarily to the increase in sales, and
increased slightly as a percent of revenue from 41.9% to 43.7%
for the three months ended September 30, 1996 compared to the
three months ended September 30, 1997.
General and administrative expenses increased approximately $88,000,
or 22.8%, from $383,000 for the three months ended September 30, 1996
to $471,000 for the three months ended September 30, 1997. The
increase was due, primarily, to additional expenses incurred in
ramping up the infrastructure, additional payroll costs, and other
expenses associated with the public offering. As a percentage of
revenue, however, general and administrative expenses decreased 3.2%,
from 16.6% in 1996 to 13.4% in 1997.
Selling and marketing expenses increased $294,000 or 113.7% from
$259,000 in 1996 to $553,000 in 1997 due, primarily, to the addition
of two sales executives, a vice-president and senior vice-president
of sales as well as additional sales professionals. The Company
expects to take advantage of the growing radio market generated by
the Telecommunication Bill (see management's discussion and analysis
of sales, above) and will continue to invest prudently in this area
to maximize market penetration. There can be no assurance that the
Company's increase in selling and marketing expenses will result in
a higher level of sales. Selling and marketing expenses as a
percentage of revenue increased 4.5% from 11.2% in 1996 to 15.7%
during the three months ended September 30, 1997.
<PAGE> 18
PACIFIC RESEARCH AND ENGINEERING CORPORATION
PART I - FINANCIAL INFORMATION
Research and engineering expenses increased $48,000 or 22.7% from
$212,000 for the three months ended September 30, 1996 to $260,000
for the three months ended September 30, 1997. The primary reason
for the increase is that, during the three months ended
September 30, 1997, the Company started to decrease capitalization
of certain development costs relating to the coding, testing and
other expenditures related to new products that may be sold, leased
or otherwise marketed, in accordance with the provisions of SFAS 86
and currently expenses these costs. The Company ceased capitalizing
the research and development costs associated with one of its product
lines during the third quarter of 1997 in accordance with the
provisions of SFAS 86 (see notes 1 and 4 to the Condensed Financial
Statements included herein).
Capitalized research and engineering costs, pursuant to SFAS 86,
for the three months ended September 30, 1997 are approximately
$97,000. The Company capitalized such costs in the amount of
$265,000 for the comparable period in 1996. The Company has
incurred and will continue to incur additional research and
engineering payroll expenses as it recruits and hires the
engineering staff necessary to develop and launch new products.
The Company will also continue to invest in state-of-the-art
computer equipment and CAD products to enable its engineering
team to manage product development as radio migrates from analog
to digital.
Research and engineering expenses decreased, as a percentage of
revenue, from 9.2% for the three months ended September 30, 1996
to 7.4% for the three months ended September 30, 1997 due to the
increase and the change in expense capitalization discussed above.
(Refer to "Management's Discussion and Analysis of Financial
Condition and Results of Operations-Research/Development and
Engineering Costs" for further explanation of capitalization of
software development costs pursuant to SFAS 86 and the Company's
compliance with the standard set forth)
Income from operations increased $40,000 or 63.6% from $63,000
for the three months ended September 30, 1996 to $103,000 for
the three months ended September 30, 1997 reflecting the 58.7%
increase in gross margin and 58.4% increase in operating expenses
for the comparable periods. Operating income, however as a
percentage of revenue, increased slightly by 0.2% from 2.7% for
the three months ended September 30, 1996 to 2.9% for the three
months ended September 30, 1997.
Net interest income (expense) decreased $28,000 or 120.1% from
the comparable period, reflecting a significant increase in
borrowings from the Company's line of credit, with a corresponding
reduction in interest earned on invested funds, due primarily to
the redemption of principal of this investment fund.
The combined results, as discussed above, yielded net income
before taxes of $102,000 for the three months ended
September 30, 1997 compared to $95,000 for the three months
ended September 30, 1996, or approximately, a 7.2% increase.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal capital requirements have been to fund
the expansion of its internal sales department, increase
advertising and marketing, increase engineering and development
of new products and to develop and penetrate worldwide markets.
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 for the remaining amount
based upon 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.
The Company completed its initial public offering May 28, 1996
and realized net proceeds of approximately $4.1 million after
underwriting discounts and offering expenses. As of
December 31, 1996 and September 30, 1997 the Company had $1.6 and
$0.5 million in cash and cash equivalents, respectively.
<PAGE> 19
PACIFIC RESEARCH AND ENGINEERING CORPORATION
PART I - FINANCIAL INFORMATION
Through September 30, 1997, the Company's inventory increased
to $3,314,000 from $1,935,000 at December 31, 1996, an increase
of $1,379,000 or 71.3%. This increase was primarily due to the
manufacture of new products. The increases in raw material and
work-in-process were made in anticipation of the Company's planned
expansion of its sales efforts in the United States and overseas.
In order to meet the needs of customers, the Company increased its
inventory levels to supply the expected demand, as some of the larger
customers require shipment in less than one months time from order
to fulfillment.
The Company is attempting to secure a new revolving line of credit
and long term debt financing, to replace its current facility. The
Company has been out of covenant with this credit facility as
described below. As of September 30, 1997, the revolving line of
credit had borrowings of $1,069,000, which was classified as current.
The borrowings on the line of credit increased during the period as a
result of operating needs, research and development efforts, equipment
and leasehold improvements.
The Company's financial lending institution has entered into an
informal agreement to waive the loan covenants violations with respect
to the $1,500,000 line of credit. The Company is currently in
discussions with this same financial institution regarding modifications
to the loan covenants and restructure of its credit facility as discussed
above.
The Company's current loan covenants include the following: minimum
tangible net worth must be in excess of $3,750,000 as of the end of each
fiscal quarter and $4,000,000 as of the end of the fiscal year, quick
ratio must be a minimum of 1.25 to 1.00 disregarding inventory and prepaid
expenses, maintenance of minimum of $1,000,000 in cash and marketable
securities, and lastly total liabilities over net tangible net worth
must be less than .60 to 1.00. The Company, as of September 30, 1997,
is out of covenant with respect to its quick ratio and minimum cash as
described above, and has initiated discussions to modify and/or increase
the line of credit facilities and covenants. The Company believes
negotiations will be favorable for the Company in its obtaining of a new
credit facility and covenants.
The Company's current ratio as of September 30, 1997 was 1.7 compared
to 2.8 at December 31, 1996. The decrease was attributable, primarily,
to the decrease in cash and cash equivalents, and increases in accounts
payables, customer advances and capitalized software costs. For the same
reasons, the Company experienced a decrease in working capital of
approximately $882,000 from $2,884,000 at December 31, 1996 to $2,002,000
at September 30, 1997.
The Company's operating activities consumed cash of $1,187,000 for the nine
months ended September 30, 1997. Cash used in operations for the nine months
ended September 30, 1997 was the result, primarily, of an increase in
inventory ($1,379,000), an increase in accounts receivable ($332,000), an
increase in prepaid expenses and other assets ($982,000) (which was primarily
a result of capitalized engineering expenses in accordance with SFAS 86),
offsetting increases in accounts payable of $375,000 and customer advances of
$587,000 which are related to deposits on major equipment purchases expected
to be completed during the fourth quarter of 1997 and the first quarter of 1998.
Cash provided by investing activities for the nine month period ended
September 30, 1997 was $105,000. Such investing activities involved purchases
of property and equipment ($353,000) offset by the principal redemption of
invested funds $458,000.
Cash provided by financing activities was $471,000 for the nine months ended
September 30, 1997, consisting primarily of net borrowings on the Company's
line of credit $569,000 and the offset of additional deferred offering costs
associated with the Company's initial public offering of $35,000, shareholder
retained earnings distribution of $36,000 and principal payments of $27,000
relative to the Company's capital lease obligations.
As a result of the above the Company experienced a significant decrease in
cash from $611,000 at December 31, 1996 to approximately $500 for the nine
month period ended September 30, 1997.
Based on the Company's cash position and currently planned expenditures and
level of operations, the Company estimates it may seek additional capital
within the next six months to meet its debt obligations as they become due
and to continue with investing in infrastructure growth and expansion into
other markets. The Company is currently considering various alternatives
to meet its needs for capital including, without limitation, the bank
financing previously described, as well as public or private debt, or
equity financing. There can be no assurance the Company will be successful
in obtaining such financing and any such financing may be dilutive to
current shareholders. The failure to raise additional funds could have
a material adverse effect on the Company and could force the Company to
reduce or curtail operations.
<PAGE> 20
PACIFIC RESEARCH AND ENGINEERING CORPORATION
PART I - FINANCIAL INFORMATION
Although the Company cannot accurately anticipate the effects of inflation,
the Company does not believe inflation has had or is likely to have a
material effect on its results of operations or liquidity.
NEWLY ISSUED FINANCIAL REPORTING PRONOUNCEMENTS
In February 1997, the FASB issued Statement of Financial Accounting
Standards 128, "Earnings per Share" (SFAS 128). The new standard
revises the disclosure requirements of earnings per share, simplifies
the computation of earnings per share and increases the comparability
of earnings per share on an international basis. SFAS 128 will be
effective for the Company for the year ending December 31, 1997. The
Company has determined that the impact in adopting SFAS 128 will not
be material to its financial statements.
In June 1997, the FASB issued SFAS 130, "Reporting Comprehensive Income".
SFAS 130, which is effective for fiscal years beginning after
December 15, 1997 and requires restatement of earlier periods presented,
establishes standards for the reporting and display of comprehensive
income and its components in a full set of general purpose financial
statements. Comprehensive income is defined as the change in equity
of a business enterprise during a period from transactions and other
events and circumstances from nonowner sources. The implementation of
SFAS 130 is not expected to have a material effect on the Company's
results of operations.
In June 1997, the FASB issued SFAS 131, "Disclosures About Segments
of an Enterprise and Related Information". SFAS 131, which is
effective for fiscal years beginning after December 15, 1997 and
requires restatement of earlier periods presented, establishes
standards for the way that a public enterprise reports information
about key revenue-producing segments in the annual financial statements
and selected information in interim financial reports. It also
establishes standards for related disclosures about products and
services, geographic areas and major customers. The implementation
of SFAS 131 is not expected to have a material effect on the Company's
current reporting disclosures.
FACTORS AFFECTING FUTURE OPERATING RESULTS
The Company believes that in some cases it is more difficult to secure
orders in the summer months, which may in turn adversely affect the
Company's revenues, thereby affecting the overall nine months revenue.
Moreover, the Company's expense levels have increased since its initial
public offering in May of 1996, as it added personnel and infrastructure
in anticipation of revenue growth. The Company anticipates this growth
will come from new product offerings and increased demand overall,
created by the continuing mergers and acquisition activities in the
radio broadcast industry, although there can be no assurance that this
anticipated demand will materialize or that the company will be able
to successfully engineer and bring to market any new product offerings.
If revenue falls below these expectations, the Company's operating
results are likely to be adversely affected. In addition, the timing
of revenue is influenced by a number of other factors, including the
timing of individual orders and shipments, industry trade shows, changes
in product development and sales and marketing expenditures, production
limitations and sales activity. Because the Company's operating expenses
are based on anticipated revenue levels and a high percentage of the
Company's expenses are relatively fixed, variations in the timing of
recognition of revenue could possibly cause fluctuations in operating
results from quarter to quarter and could result in unanticipated
quarterly earnings shortfalls or losses.
The markets for the Company's products, services and systems are
characterized by changing technologies and new product introductions.
The Company's future success will depend in part upon its continued
ability to enhance its base products with features including new software
and hardware add-ons and to develop or acquire and introduce new products
and features which meet new market demands and changing customer
requirements on a timely basis. In addition, there can be no assurance
that products or technologies developed by others will not render the
Company's products or technologies non-competitive or obsolete.
<PAGE> 21
PACIFIC RESEARCH AND ENGINEERING CORPORATION
PART I - FINANCIAL INFORMATION
To date, the Company's primary market success has been in the radio
industry segment of the professional audio market. In order for the
Company to grow, the Company believes that it must continue to gain
market share in the radio market, as well as other targeted market
segments. There can be no assurance that the Company will be able to
compete favorably in any other market segments. The Company's
inability to compete favorably could have a material adverse effect
on its business and results of operations. The markets for the
Company's products are intensely competitive and characterized by
significant price competition. The Company believes that its ability
to compete depends on elements both within and outside its control,
including the success and timing of new product development and
introduction by the Company and its competitors, product performance
and price, distribution, availability of leases or other financing
alternatives and customer support.
The Company generally relies on a combination of trade secret, copyright
law and trademark law, contracts and technical measures to establish and
protect its proprietary rights in its products and technologies.
However, the Company believes that such measures provide only limited
protection of its proprietary information, and there is no assurance
that such measures will be adequate to prevent misappropriation. In
addition, significant and protracted litigation may be necessary to
protect the Company's intellectual property rights, to determine the
scope of the proprietary rights of others or to defend against claims
of infringement. There can be no assurance that third-party claims
alleging infringement will not be asserted against the Company in the
future. Any such claims could have a material adverse effect on the
Company's business and results of operations.
The Company's success depends, in part, on its ability to retain key
management and technical employees and its continued ability to attract
and retain highly skilled personnel. In addition, the Company's
ability to manage any growth will require it to continue to improve
and expand its management, operational and financial systems and controls.
If the Company's management is unable to manage growth effectively, its
business and results of operations will be adversely affected.
As a result of these and other factors, the Company has experienced
from time to time quarterly fluctuations in operating results. The
Company anticipates that these fluctuations could reoccur in future
periods. There can be no assurance that the Company will be successful
in maintaining or improving its profitability or avoiding losses in any
future period. Further, it is likely that in some future period the
Company's net revenues or operating results will be below the expectations
of public market securities analysts and investors. In such event, the
price of the Company's Common Stock would likely be materially adversely
affected.
<PAGE> 22
PACIFIC RESEARCH AND ENGINEERING CORPORATION
PART II - OTHER INFORMATION
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
Use of Proceeds from the Company's Initial Public Offering
The following information is being provided in accordance with
Rule 463 of the Securities Act of 1933 (the "Securities Act")
and Item 701 of Regulation S-B under the Securities Act. On
May 29, 1996, the Company completed an initial public offering
of 500,000 Units which consisted of 1,000,000 shares of its
Common Stock and 500,000 Warrants to purchase shares of its
Common Stock (the "Offering").
The effective date of the Company's Registration Statement
on Form SB-2 (Registration No. 333-858-LA) was May 28, 1997.
The Offering commenced on May 28, 1996 and terminated on
May 29, 1996, after all securities registered under the
Offering were sold.
The managing underwriter of the Offering was Nutmeg
Securities, Ltd.
The following classes of securities were registered
pursuant to the Offering: (i) Units (consisting of two
shares of no par value common stock plus one warrant)
and (ii) Common Stock, underlying Warrants, each to
purchase one share of Common Stock at a price of $8.00
at any time commencing six months from the date of the
Offering, through and including May 28, 2001; the
Warrants are redeemable by the Company upon (a) the
consent of the managing underwriter and (b) the
occurrence of certain other events,
(iii) Representative's Warrants, warrants to purchase
50,000 Units, exercisable after the separation date and
prior to 5/28/01 at an exercise price of $17.05 per Unit.
All of the securities registered in the Offering of which
(i) and (ii) above were sold for the account of the
company. There were no selling shareholders in the
Offering. The Company registered 1,000,000 shares of
Common Stock and Warrants to purchase 500,000 shares of
Common Stock (500,000 Units). The aggregate price of the
500,000 Units, before underwriting discounts and
commissions, was $5,500,000.
The amount of expenses incurred by the company in
connection with the Offering are listed below as of
the September 30, 1997.
Underwriting discounts and commissions $ 550,000
Finders fees 37,500
Non-accountable expenses and management
fee to underwriter 237,000
Other expenses (audit, legal, etc.) 550,122
----------
Total $ 1,385,926
==========
<PAGE> 23
PACIFIC RESEARCH AND ENGINEERING CORPORATION
PART II - OTHER INFORMATION
The net proceeds to the Company of the Offering were
$4,114,074.
The amount of the net proceeds used by the Company for
specific uses is provided below as of September 30, 1997.
Use of Proceeds: Approximated within $1,000 for all,
other than Working Capital.
Sales and marketing
Expansion of domestic and international
sales staff $ 332,000
Increased advertising, direct marketing
activities, domestic and international
shows, and related travel 290,000
----------
622,000
==========
Research, engineering and development
Additional engineering staff:
CAD operators/PC designers and
technical cabinetry staff 355,000
Increased prototype engineering activity 354,000
Increased outside consulting 139,000
Additional engineering capital spending 234,000
----------
1,082,000
==========
General operations
Additional quality assurance, manufacturing
and test engineers and additional
senior buyers 287,000
Increased inventory spending to support
new product development 1,000,000
Capital spending to upgrade manufacturing
floor and cabinet shop 330,000
----------
1,617,000
Debt reduction 700,000
Working capital 93,074
----------
Total $4,114,074
==========
Item 3. Default Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Securities Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit 10.9 - Employment Contract by and between the
Registrant and Susan Dingethal
Exhibit 11.1 - Calculation of Earnings Per Share
The exhibits listed on the accompanying index immediately
following the signature page are filed as part of this
report.
(b) Reports on Form 8-K
None.
<PAGE> 24
PACIFIC RESEARCH AND ENGINEERING CORPORATION
SIGNATURE PAGE
Signatures
In accordance with the requirements of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly authorized.
PACIFIC RESEARCH & ENGINEERING CORP.
By: /S/ Larry Eyler
Larry Eyler
Chief Financial Officer and
Accounting Officer
<PAGE> 25
PACIFIC RESEARCH AND ENGINEERING CORPORATION
EXHIBIT INDEX
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)
10.9 Employment Contract by and between the Registrant and
Susan Dingethal
11.1 Calculation of Earnings Per Share
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.
EXHIBIT 10.9 Statement re: Employment Contract by and between
the Registrant and Susan Dingethal
EMPLOYMENT AND NON-DISCLOSURE AGREEMENT
THIS EMPLOYMENT AND NON-DISCLOSURE AGREEMENT is made effective
as of this 28 day of JULY , 1997 , by and between PACIFIC
RESEARCH AND ENGINEERING CORPORATION ("Employer"), and SUSAN
DINGETHAL, an individual ("Employee"), with reference to the
following facts:
R E C I T A L S
WHEREAS the parties hereto wish to formalize the employment
relationship as more fully set forth herein;
WHEREAS, as a result of Employee's employment with Employer,
Employee will acquire knowledge of Employer's trade secrets,
including confidential information concerning product and service
marketing plans and strategy, customer needs and peculiarities,
and customer lists and detailed information regarding Employer's
technology incorporated in Employer's products and services (the
"Trade Secrets");
WHEREAS, Employer desires that Employee be employed as set
forth herein, such employment to become effective on the date first
set forth above; and
WHEREAS, Employee is willing to be employed by Employer as
described under the terms and conditions herein stated.
NOW, THEREFORE, in consideration of the mutual covenants and
agreements hereinafter contained, and for other good and valuable
consideration, it is hereby agreed by and between the parties
hereto as follows:
1. Employment, Services, and Duties. Employer hereby
employs Employee and Employee hereby agrees to perform the services
of Sales & Marketing Vice President with the duties consistent
therewith. Employee shall render her services to Employer by and
subject to the instructions and directions of Employer's Chief
Operating Officer to whom Employee shall directly report.
The Employee agrees to continue to devote all of her time,
attention, skill, and efforts to the performance of her duties
and responsibilities of the Company, and of any subsidiary or
subsidiaries of the Company, all under the supervision and
direction of their respective boards of directors, but nothing
in this Agreement shall preclude the Executive from devoting
reasonable periods required for:
(i) serving as a director or member of a committee of any
organization involving no conflict of interest with the interests
of the Company and with written consent of the Company, said
consent not to be unreasonably withheld;
(ii) engaging in professional organization and program
activities;
(iii) serving as a consultant in her area of expertise
to government industrial and academic panels; and
(iv) managing her personal investments or engaging in any
other noncompeting business provided that such activities do not
materially interfere with the regular performance of her duties
and responsibilities under this Agreement.
2. Term and Termination
2.1 Unless sooner terminated pursuant to Paragraph 2.2
hereof, Employee's employment shall commence on the date first set
forth above and shall continue for a period of twenty (20) months
unless extended by the mutual agreement of Employer and Employee
(the "Term").
2.2 Employee's employment shall terminate prior to the
expiration of the Term upon the happening of any of the following
events:
(a) Upon the death of Employee;
If the Employee dies during the term of her
employment hereunder, the Employee's legal representatives
shall be entitled to receive:
(i) her fixed compensation provided in
Section 3.1 hereof to the last day of the calendar month in which
the executive's death shall have occurred;
(ii) additional compensation for the year
in which her death took place, computed as provided in Section 3.1
hereof as determined by the Board of Directors; and
(iii) additional compensation or benefits
as provided in the provisions of any other plan in which the
Executive participates.
(b) Upon dissolution and termination of the
Employer;
(c) For cause by the Employer, that is to say
only:
(i) if Employee is convicted of (or pleads
nolo contendere to) or at any time prior to employment by Employer
has been convicted of (or pled nolo contendere to) a crime of
dishonesty or breach of trust or crime leading to incarceration
of more than ninety (90) days (including, without limitation,
embezzlement or theft from Employer) or the payment of a penalty
or fine of $10,000, or more;
(ii) upon a determination by Employer that
Employee has engaged in willful misconduct or neglect in the
performance of her duties under this Agreement or has refused or
failed to effectively perform the services which she has been
hired to perform, or has committed an act of fraud, theft or
dishonesty against Employer;
(iii) if Employee has materially breached any
of the terms of this Agreement or any other material legal obligation
to Employer including, without limitation, a breach of trust or
fiduciary duty involving Employer or a material violation of policies
or procedures of Employer and has not cured any such breach within
thirty (30) days after having been given written notice thereof by
Employer; or
(iv) Any determination of "cause" as used in
this Section 2.2(c) shall be made only in good faith by an
affirmative majority vote of the Board of Directors of the Employer;
(d) By mutual agreement between Employer and
Employee; or
(e) Without cause by Employer.
2.3 Except for the remaining obligations set forth in
Sections 4, 5, 6 and 7 herein, in the event that Employee's
employment is terminated pursuant to Sections 2.2(a), (b), (c)
or (d) herein, neither Employer nor Employee shall have any
remaining duties or obligations hereunder, except that,
(i) Employer shall pay to Employee, or her
representatives, on the date of termination of employment
("Termination Date"), such compensation as is due pursuant to
Section 3.1(a) herein, prorated through the Termination Date; and
(ii) Employer shall pay to Employee, or her
representatives, on the date of termination of employment
("Termination Date"), expense reimbursements and car allowances
due and owing to Employee as of the Termination Date.
(iii) Employee or her representatives shall
reimburse to Company on the date of termination of employment
("Termination Date"), the entire amount of the cash signing bonus
defined in section 3.1(i).
2.4 Except for the remaining obligations set forth
in Sections 4, 5, 6 and 7 herein, in the event that Employee's
employment is terminated pursuant to Section 2.2(e)(without cause),
neither Employer nor Employee shall have any remaining duties or
obligations hereunder, except that Employer shall pay to Employee,
or her representatives, on the Termination Date,
(i) all such compensation as is due pursuant
Section 3.1(a) through the Term;
(ii) whatever non-discretionary bonus or
incentive compensation is provided by any plan for the year of
termination, prorated through the Termination Date; and
(iii) expense reimbursements, if any, due and
owing to Employee as of the Termination Date.
2.5 There is no Section 2.5.
2.6 There is no Section 2.6.
2.7 This Agreement shall not be terminated by any:
(a) Merger, whether the Employer is or is not
the surviving corporation; or
(b) Transfer of all or substantially all of
the assets or capital stock of the Employer.
In the event of any such merger, transfer of
assets or capital stock, dissolution, liquidation, or consolidation,
the surviving corporation or transferee, as the case may be, shall
be bound by and shall have the benefits of this Agreement, and the
Employer shall take all action to ensure that such corporation or
transferee is bound by the provisions of this Agreement.
3. Compensation
3.1 As the total consideration for the services which
Employee agrees to render hereunder, Employee is entitled to the
following:
(a) A salary of One Hundred Fifteen Thousand
Dollars ($115,000.00) per year ("Salary"), payable in equal
installments biweekly on those days when Employer normally pays
its employees, said Salary to be subject to annual review;
(b) The Employee shall be entitled to a
vacation of three (3) weeks per full calendar year, during
which time, her compensation will be paid in full. The Employee
can "carry over" up to six (6) weeks vacation into succeeding
years. Payment for unused vacation upon termination will be made
in accordance with relevant state laws;
(c) Employer shall be entitled to participate
in Employee incentive stock options, such options to be determined
by the Board of Directors in their discretion.
(d) The Employee shall be a participant in, and
beneficiary of, any and all pension, profit sharing, life, dental,
medical, and other group benefit plans provided by the Company
during the term of this Agreement, assuming she qualifies for
coverage in these plans in accordance with provisions of law or
requirements of underwriters or third party plan sponsors.
(e) The Employee shall be provided with a car
allowance of $250 per month, unless modified or terminated by
mutual consent.
(f) The Employee shall be eligible for
participation in any supplemental executive retirement plan
adopted by the Company's Board of Directors during the term
of this Agreement.
(g) The Employee shall do whatever is
reasonably necessary in order to enable the Company to
maintain key man life insurance on her life with all benefits
payable to the Company. Upon a finally arbitrated or adjudicated
breach of this Agreement by a court pursuant to Section 17 herein
or board of competent jurisdiction by the Company, the Employee
shall have the right to cancel her key man life insurance policy
or rename the beneficiary upon the Employee's assuming the payment
of premiums from the Company.
(h) Such other benefits as the Board of Directors
of Employer, in its sole discretion, may from time to time provide.
(i) A one-time cash signing bonus of Thirty-Five
Thousand Dollars ($35,000) to be paid in five monthly installments
of Seven Thousand Dollars ($7,000), with the first payment due on
or before August 31, 1997, and all payments to be completed on or
before December 31, 1997.
3.2 Employer shall have the right to deduct from the
compensation due to Employee hereunder any and all sums required
for social security and withholding taxes and for any other federal,
state, or local tax or charge which may be in effect or hereafter
enacted or required as a charge on the compensation of Employee.
4. Non-Competition
(a) During the term of this Agreement, Employee shall
not, directly or indirectly, engage or participate in, prepare or
set up, assist or have any interest in any person, partnership,
corporation, firm, association, or other business organization,
entity or enterprise (whether as an employee, officer, director,
agent, security holder, creditor, consultant or otherwise) that
engages in any activity, which is the same as, similar to, or
competitive with any activity now engaged in by Employer or in
any way relating to the business currently conducted by Employer
in those geographic areas where Employer conducts its business.
(b) Nothing contained in this Agreement shall be
deemed to preclude Employee from purchasing or owning, directly
or beneficially, as a passive investment, one percent (1%) or
less of any class of a publicly traded security of any entity,
if she does not actively participate in or control, directly or
indirectly, any investment or other decisions with respect to
such entity.
(c) The Employee agrees that during the term of her
employment, and during a further period of two (2) years after
leaving the employ of the Company, whether upon the expiration
of this contract or otherwise, she will not directly or indirectly,
for her own benefit, or on behalf of others, compete, or be an
officer, director, employee or controlling shareholder of the
capital stock or other equity interest of any corporation or other
entity which competes with any business conducted by the Company
during the term of her employment and at the date of such
termination. Any breach or threatened breach of any provision of
this Section shall entitle the Company to legal remedies including
but not limited to injunctive relief.
5. Confidentiality.
Employee shall keep all Trade Secrets confidential;
use Trade Secrets only in the course of her duties hereunder;
maintain in trust, as Employer's property, all documents concerning
Employer's business, including her own work papers of any kind
including telephone directories and notes, and any and all copies
thereof in her possession or under her control; and transfer to
Employer all documents that belong to Employer and any and all
copies that are in her possession or under her control when her
Employment terminates, or at any other time upon request by
Employer. Employee shall sign the attached Pacific Research and
Engineering Corporation Proprietary Information and Confidentiality
Agreement which by this reference is incorporated herein.
6. Return of Documents.
Upon leaving the employ of the Company, the Employee
shall not take with him, without written consent of an Employee
Officer of the Company, any manuals, records, drawings, blueprints,
data, tables, calculations, letters, documents, or any copy or
other reproduction thereof, or any other property or confidential
information, of or pertaining to the Company or any of its
subsidiaries. All of the foregoing shall be returned to the
Employee's immediate manager on or before the date of termination
of employment.
7. Injunctive Relief
Employee hereby acknowledges and agrees that it would
be difficult to fully compensate Employer for damages resulting
from the breach or threatened breach of Sections 4 and 5 herein
and, accordingly, that Employer shall be entitled to temporary
and injunctive relief, including temporary restraining orders,
preliminary injunctions and permanent injunctions, to enforce such
Sections without the necessity of proving actual damages therewith.
This provision with respect to injunctive relief shall not, however,
diminish Employer's right to claim and recover damages or enforce
any other of its legal and/or equitable rights or defenses.
8. Severable Provisions
The provisions of this Agreement are severable and if
any one or more provisions may be determined to be illegal or
otherwise unenforceable, in whole or in part, the remaining
provisions, and any partially unenforceable provisions to the
extent enforceable, shall nevertheless be binding and enforceable.
9. Reference Provision
(a) Each controversy, dispute or claim between the
parties arising out of or relating to this Agreement, which
controversy, dispute or claim is not settled in writing within
thirty (30) days after the "Claim Date" (defined as the date on
which a party subject to the Agreement gives written notice to
the other that a controversy, dispute or claim exists), will be
settled by binding arbitration in San Diego, California in
accordance with the provisions of the American Arbitration
Association, which shall constitute the exclusive remedy for the
settlement of any controversy, dispute or claim, and the parties
waive their rights to initiate any legal proceedings against each
other in any court or jurisdiction other than the Superior Court
of Los Angeles (the "Court"). Any decision rendered by the
arbitrator and such arbitration will be final, binding and
conclusive and judgment shall be entered pursuant to
CCP Section 644 in any court in the State of California
having jurisdiction.
(b) Except as expressly set forth in this Agreement,
the arbitrator shall determine the manner in which the proceeding
is conducted, including the time and place of all hearings, the
order of presentation of evidence, and all other questions that
arise with respect to the course of the proceeding. All
proceedings and hearings conducted before the arbitrator, except
for trial, shall be conducted without a court reporter, except
that when any party so requests, a court reporter will be used
at any hearing conducted before the arbitrator. The party making
such a request shall have the obligation to arrange for any pay
for the court reporter. The costs of the court reporter shall be
borne equally by the parties.
(c) The arbitrator shall be required to determine
all issues in accordance with existing case law and the statutory
laws of the State of California. The rules of evidence applicable
to proceedings at law in the State of California will be applicable
to the reference proceeding. The arbitrator shall be empowered to
enter equitable as well as legal relief, to provide all temporary
and/or provisional remedies and to enter equitable orders that will
be binding upon the parties. The arbitrator shall issue a single
judgement at the close of the proceeding which shall dispose of all
of the claims of the parties that are the subject of the proceeding.
The parties hereto expressly reserve the right to contest or appeal
from the final judgment or any appealable order or appealable
judgement entered by the arbitrator. The parties hereto expressly
reserve the right to findings of fact, conclusions of law, a written
statement of decision, and the right to move for a new trial or a
different judgment, which new trial, if granted, is also to be a
proceeding governed under this provision.
10. Binding Agreement
This Agreement shall inure to the benefit of and shall be
binding upon Employer, its successors and assigns.
11. Captions
The Section captions are inserted only as a matter of
convenience and reference and in no way define, limit or describe
the scope of this Agreement or the intent of any provisions hereof.
12. Entire Agreement
This Agreement contains the entire agreement of the
parties relating to the subject matter hereof, and the parties
hereto have made no agreements, representations or warranties
relating to the subject matter of this Agreement that are not
set forth otherwise herein. This Agreement supersedes any and
all prior agreements, written or oral, between Employee and
Employer and its affiliates. No modification of this Agreement
shall be valid unless made in writing and signed by the parties
hereto and unless such writing is made by an executive officer
of Employer. The parties hereto agree that in no event shall an
oral modification of this Agreement be enforceable or valid.
13. Governing Law
This Agreement shall be governed and construed in
accordance with the laws of the State of California.
14. Notices
All notices and other communications under
this Agreement shall be in writing (including, without
limitation, telegraphic, telex, telecopy or cable
communication) and mailed, telegraphed, telexed, telecopied,
cabled or delivered by hand or by a nationally recognized
courier service guaranteeing overnight delivery to a party
at the following address (or to such other address as such
party may have specified by notice given to the other party
pursuant to this provision):
If to the Employer, to:
Michael Dosch, Vice President & C.O.O.
Pacific Research and Engineering Corporation
2070 Las Palmas Drive
Carlsbad, California 92009
Telephone: (760) 438-3911
Facsimile: (760) 438-9277
If to the Employee, to:
Susan Dingethal
308 E. Republican Street, #314
Seattle, WA 98102
Telephone: (206) 323-5933
All such notices and communications shall, when mailed,
telegraphed, telexed, telecopied, cabled or delivered, be
effective three days after deposit in the mails, delivered
to the telegraph company, confirmed by telex answerback,
telecopied with confirmation of receipt, delivered to the
cable company, delivered by hand to the addressee or one day
after delivery to the courier service.
15. Attorney's Fees
In the event that any party shall bring an action or
proceeding in connection with the performance, breach or
interpretation hereof, then the prevailing party in such action
as determined by the court or other body having jurisdiction
shall be entitled to recover from the losing party in such action,
as determined by the court or other body having jurisdiction, all
reasonable costs and expense of litigation or arbitration,
including reasonable attorney's fees, court costs, costs of
investigation and other costs reasonably related to such proceeding.
IN WITNESS WHEREOF, this Employment Agreement is executed as
of the day and year first above written.
"EMPLOYER"
PACIFIC RESEARCH AND ENGINEERING
CORPORATION
By:_/S/Michael Dosch_
Name: Michael Dosch
Title: Vice President & C.O.O.
"EMPLOYEE"
By:_/S/Susan Dingethal_
Susan Dingethal
PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT
To: Pacific Research & Engineering Corporation
2070 Las Palmas Drive
Carlsbad, California 92009
As of July 28, 1997
The undersigned, in consideration of and as a condition of
my employment or continued employment by you and/or by companies
which you own, control, or are affiliated with or their successors
in business (collectively, the "Company"), hereby agrees as follows:
1. Confidentiality.
I agree to keep confidential, except as the Company may
otherwise consent in writing, and, except for the Company's
benefit, not to disclose or make any use of at any time either
during or subsequent to my employment, any Inventions
(as hereinafter defined), trade secrets and confidential
information, knowledge, data or other information of the
Company relating to products, processes, know-how, techniques,
methods, designs, formulas, test data, customer lists, business
plans, marketing plans and strategies, pricing strategies, or
other subject matter pertaining to any business of the Company
or any of its affiliates, which I may produce, obtain, or
otherwise acquire during the course of my employment, except
as herein provided. I further agree not to deliver, reproduce
or in any way allow any such trade secrets and confidential
information, knowledge, data or other information, or any
documentation relating thereto, to be delivered to or used by
any third parties without specific direction or consent of a
duly authorized representative of the Company.
2. Conflicting Employment; Return of Confidential Material.
I agree that during my employment with the Company I will
not engage in any other employment, occupation, consulting or
other activity relating to the business in which the Company is
now or may hereafter become engaged, or which would otherwise
conflict with my obligations to the Company. In the event my
employment with the Company terminates for any reason whatsoever,
I agree to promptly surrender and deliver to the Company all
records, materials, equipment, drawings, computer disks, documents
and data of which I may obtain or produce during the course of my
employment, and I will not take with me any description containing
or pertaining to any confidential information, knowledge or data
of the Company which I may produce or obtain during the course of
my employment.
3. Assignment of Inventions.
3.1 I hereby acknowledge and agree that the Company is
the owner of all Inventions. In order to protect the Company's
rights to such Inventions, by executing this Agreement I hereby
irrevocably assign to the Company all my right, title and
interest in and to all Inventions to the Company.
3.2 For purposes of this Agreement, "Inventions" shall
mean all discoveries, processes, designs, methods, techniques,
technologies, devices, or improvements in any of the foregoing
or other ideas, whether or not patentable or copyrightable and
whether or not reduced to practice, made or conceived by me
(whether solely or jointly with others) during the period of
my employment with the Company which relate in any manner to
the actual or demonstrably anticipated business, work, or
research and development of the Company, or result from or are
suggested by any task assigned to me or any work performed by
me for or on behalf of the Company.
3.3 Any discovery, process, design, method, technique,
technology, device, or improvement in any of the foregoing or
other ideas, whether or not patentable or copyrightable and
whether or not reduced to practice, made or conceived by me
(whether solely or jointly with others) which I develop
entirely on my own time not using any of the Company's
equipment, supplies, facilities, or trade secret information
("Personal Invention") is excluded from this Agreement
provided such Personal Invention (i) does not relate to the
actual or demonstrably anticipated business, research and
development of the Company, and (ii) does not result, directly
or indirectly, from any work performed by me for or on behalf
of the Company.
4. Disclosure of Inventions.
I agree that in connection with any Invention, I will
promptly disclose such Invention to the Board of Directors
and the Executive Committee of the Company in order to permit
the Company to enforce its property rights to such Invention
in accordance with this Agreement. My disclosure shall be
received in confidence by the Company.
5. Patents and Copyrights; Execution of Documents.
5.1 Upon request, I agree to assist the Company or its
nominee (at its expense) during and at any time subsequent to
my employment in every reasonable way to obtain for its own
benefit patents and copyrights for Inventions in any and all
countries. Such patent and copyrights shall be and remain the
sole and exclusive property of the Company or its nominee. I
agree to perform such lawful acts as the Company deems to be
necessary to allow it to exercise all right, title and interest
in and to such patents and copyrights.
5.2 In connection with this Agreement, I agree to
execute, acknowledge and deliver to the Company or its nominee
upon request and at its expense all documents, including
assignments of title, patent or copyright applications,
assignments of such applications, assignments of patents or
copyrights upon issuance, as the Company may determine necessary
or desirable to protect the Company's or its nominee's interest
in Inventions, and/or to use in obtaining patents or copyrights
in any and all countries and to vest title thereto in the Company
or its nominee to any of the foregoing.
6. Maintenance of Records.
It is understood that all Personal Inventions, if any,
whether patented or unpatented, which I made prior to my
employment by the Company, are excluded from this Agreement.
To preclude any possible uncertainty, I have set forth on
Schedule A attached hereto a complete list of all of my prior
Personal Inventions, including numbers of all patents and patent
applications and a brief description of all unpatented Personal
Inventions which are not the property of a previous employer.
I represent and covenant that the list is complete and that, if
no items are on the list, I have no such prior Personal Inventions.
I agree to notify the Company in writing before I make any
disclosure or perform any work on behalf of the Company which
appears to threaten or conflict with proprietary rights I claim
in any Personal Invention. In the event of my failure to give
such notice, I agree that I will make no claim against the company
with respect to any such Personal Invention.
7. Other Obligations.
I acknowledge that the Company from time to time may have
agreements with other persons, companies, entities, the
U.S. Government or agencies thereof, which impose obligations
or restrictions on the Company regarding Inventions made during
the course of work thereunder or regarding the confidential
nature of such work. I agree to be bound by all such
obligations and restrictions and to take all action necessary
to discharge the Company's obligations.
8. Trade Secrets of Others.
I represent that my performance of all the terms of this
Agreement and as an employee of the Company does not and will
not breach any agreement to keep confidential proprietary
information, knowledge or data acquired by me in confidence or
in trust prior to my employment with the Company, and I will
not disclose to the Company, or induce the Company to use, any
confidential or proprietary information or material belonging to
any previous employer or others. I agree not to enter into any
agreement either written or oral in conflict herewith.
9. Modification.
I agree that any subsequent change or changes in my
employment duties, salary or compensation or, if applicable,
in any Employment Agreement between the Company and me, shall
not affect the validity or scope of this Agreement.
10. Arbitration.
Any dispute concerning this Agreement including, but not
limited to, its existence, validity, interpretation,
performance or non-performance, arising before or after
termination or expiration of this Agreement, shall be settled
by a single arbitrator in San Diego, California, in accordance
with the expedited procedures of the commercial rules then in
effect of the American Arbitration Association. Judgment upon
any award may be entered in the highest court, state or federal,
having jurisdiction. The cost of such arbitration shall be borne
equally between the parties thereto unless otherwise determined
by such arbitration panel.
11. Binding Effect.
This Agreement shall be binding upon and inure to the benefit
of the parties hereto and their respective legal representatives a
nd successors.
12. Interpretation.
IT IS THE INTENT OF THE PARTIES THAT in case any one or more
of the provisions contained in this Agreement shall, for any
reason, be held to be invalid, illegal or unenforceable in any
respect, such invalidity, illegality or unenforceability shall
not affect the other provisions of this Agreement, and this
Agreement shall be construed as if such invalid, illegal or
unenforceable provision had never been contained herein.
MOREOVER, IT IS THE INTENT OF THE PARTIES THAT if any provision
of this Agreement is or becomes or is deemed invalid, illegal
or unenforceable or in case any one or more of the provisions
contained in this Agreement shall for any reason be held to be
excessively broad as to duration, geographical scope, activity
or subject, such provision shall be construed by amending,
limiting and/or reducing it to conform to applicable laws so as
to be valid and enforceable or, if it cannot be so amended
without materially altering the intention of the parties, it
shall be stricken and the remainder of this Agreement shall
remain in full force and effect.
13. Waivers.
No waiver of any right under this Agreement shall be deemed
effective unless contained in a writing signed by the party
charged with such waiver, and no waiver of any right arising
from any breach or failure to perform shall be deemed to be a
waiver of any future such right or of any other right arising
under this Agreement.
14. Entire Agreement; Modification.
This Agreement constitutes the entire agreement between the
Parties and supersedes any prior oral or written communications,
representations, understandings or agreements concerning the
subject matter hereof with the Company or any officer or
representative thereof. This Agreement may be amended, modified,
or certain provisions waived only by a written instrument signed
by the parties hereto, upon authorization of the Company's Board
of Directors.
15. Headings.
The headings of the Sections contained in this Agreement
are inserted for convenience and reference only and in no way
define, limit, extend or describe the scope of this Agreement,
the intent of any provisions hereof, and shall not be deemed to
constitute a part hereof nor to affect the meaning of this
Agreement in any way.
16. Counterparts.
This Agreement may be signed in two counterparts, each of
which shall be deemed an original and both of which shall
together constitute one agreement.
17. Governing Law.
This Agreement shall be governed and construed in accordance
with the laws of the State of California.
18. Notices.
All notices, requests, demands and communications which
are or may be required to be given hereunder shall be deemed
given if and when sent by registered or certified mail, return
receipt requested, postage prepaid, to the following addresses:
If to the Company: Pacific Research & Engineering Corporation
2070 Las Palmas Drive
Carlsbad, California 92009
Telephone: (760) 438-3911
Fax: (760) 438-9277
With a copy to: Rebecca Schmitt
Gray, Cary, Ware & Freidenrich
4365 Executive Drive, Suite 1600
San Diego, CA 92121
Telephone: (619) 699-2700
Fax: (619) 677-1477
If to Employee: Susan Dingethal
308 E. Republican Street, #314
Seattle, WA 98102
Telephone: (206) 323-5933
EMPLOYEE
Susan Dingethal
Accepted and Agreed:
PACIFIC RESEARCH & ENGINEERING CORPORATION
By:_/S/Michael Dosch_
Michael Dosch
Vice President & Chief Operating Officer
Duly Authorized
SCHEDULE A
LIST OF PRIOR INVENTIONS
OF
SUSAN DINGETHAL
Title Date Identifying Number or Brief Description
<TABLE>
EXHIBIT 11.1 Statement re: Computation of Per Share Earnings (Loss)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
--------------------------------------------
<S> <C> <C> <C> <C>
PRIMARY
Weighted average common shares outstanding 2,305,500 2,305,500 2,305,500 1,749,945
Common equivalent shares attributable to
convertible preferred stock - - - -
Common equivalent shares attributable to
the net effect of dilutive stock options
based on the treasury stock method using
average market price - - - -
Shares related to SAB No. 55, 64 and 83 - - - -
Number of shares used in computing per --------------------------------------------
share amounts 2,305,500 2,305,500 2,305,500 1,749,945
--------------------------------------------
Net income $ 107,213 $ 65,088 $ 252,568 $ 385,686
Net income per share $ 0.05 $ 0.03 $ 0.11 $ 0.22
FULLY DILUTED
Weighted average common shares outstanding 2,305,500 2,305,500 2,305,500 1,749,945
Common equivalent shares attributable to
convertible preferred stock - - - -
Common equivalent shares attributable to
the net effect of dilutive stock options
based on the treasury stock method using
quarter end (period-end) price, if higher
than average market price 4,372 - 3,162 -
Shares related to SAB No. 55, 64 and 83 - - - -
Number of shares used in computing per --------------------------------------------
share amounts 2,309,872 2,305,500 2,308,662 1,749,945
--------------------------------------------
Net income $ 107,213 $ 65,088 $ 252,568 $ 385,686
Net income per share $ 0.05 $ 0.03 $ 0.11 $ 0.22
<F1>
Please refer to Notes to Condensed Financial Statements, #6 and #10 for
additional information related to the above schedule on "Calculation of
Earnings Per Share."
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997
<PERIOD-START> APR-01-1997 JAN-01-1997
<PERIOD-END> SEP-30-1997 SEP-30-1997
<CASH> 0 500
<SECURITIES> 0 541,843
<RECEIVABLES> 0 1,042,974
<ALLOWANCES> 0 15,000
<INVENTORY> 0 3,314,127
<CURRENT-ASSETS> 0 5,259,560
<PP&E> 0 3,233,268
<DEPRECIATION> 0 1,904,384
<TOTAL-ASSETS> 0 8,168,064
<CURRENT-LIABILITIES> 0 3,158,488
<BONDS> 0 0
0 0
0 0
<COMMON> 0 4,126,392
<OTHER-SE> 0 856,922
<TOTAL-LIABILITY-AND-EQUITY> 0 8,168,064
<SALES> 3,515,121 9,118,610
<TOTAL-REVENUES> 3,515,121 9,118,610
<CGS> 1,977,330 5,100,956
<TOTAL-COSTS> 1,434,921 3,715,617
<OTHER-EXPENSES> 969 (11,231)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 17,772 32,555
<INCOME-PRETAX> 101,901 313,268
<INCOME-TAX> (5,312) 60,700
<INCOME-CONTINUING> 107,213 252,568
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 107,213 252,568
<EPS-PRIMARY> .05 .11
<EPS-DILUTED> .05 .11
</TABLE>
