<PAGE> 1
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 June 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 (IRS Employer
of incorporation or organization) identification No.)
2070 Las Palmas Drive, Carlsbad, California, 92009
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(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 June 30, 1997 Common Stock, No Par Value_____
<PAGE> 2
PACIFIC RESEARCH & ENGINEERING CORPORATION
FORM 10-QSB
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Part I: Financial Information Page
<S> <C>
Item 1: Financial Statements
Condensed Balance Sheets as of December 31, 1996 and
June 30, 1997 (unaudited) 3
Condensed Statements of Income for the Six Months and
Three Months Ended June 30, 1996 and 1997 (unaudited) 4
Condensed Statements of Cash Flows for the Six Months
Ended June 30, 1996 and 1997 (unaudited) 5
Notes to Condensed Financial Statements (unaudited) 6
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Part II: Other Information
Item 1: Legal Proceedings 22
Item 2: Changes in Securities 22
Item 3: Defaults upon Senior Securities 22
Item 4: Submissions of Matters to a Vote of Security Holders 22
Item 5: Other Information 22
Item 6: Exhibits and Reports on Form 8-K 22
</TABLE>
<PAGE> 3
PACIFIC RESEARCH & ENGINEERING CORPORATION
PART I - FINANCIAL INFORMATION
CONDENSED BALANCE SHEETS
AS OF JUNE 30, 1997 AND DECEMBER 31, 1996
<TABLE>
<CAPTION>
June 30, 1997 December 31, 1996
------------ ------------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 521 $ 610,857
Investments 1,030,358 1,000,000
Accounts receivable, net 999,583 695,919
Inventories, net 2,997,686 1,935,501
Prepaid expenses 436,476 250,943
------------ ------------
TOTAL CURRENT ASSETS 5,464,624 4,493,220
PROPERTY AND EQUIPMENT, net 1,067,496 902,251
OTHER ASSETS 1,664,265 1,052,038
------------ ------------
$ 8,196,385 $ 6,447,509
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,433,774 $ 594,258
Accrued expenses 198,742 195,430
Customer advances 868,814 271,710
Line of credit 693,000 500,000
Capital lease obligations - current portion 38,544 34,140
Deferred tax liability, net 57,250 13,500
------------ ------------
TOTAL CURRENT LIABILITIES 3,290,124 1,609,038
CAPITAL LEASE OBLIGATIONS, net of current portion 30,121 37,156
------------ ------------
TOTAL LIABILITIES 3,320,245 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 699,748 590,410
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 4,876,140 4,801,315
------------ ------------
$ 8,196,385 $ 6,447,509
============ ============
</TABLE>
The accompanying notes are integral part of these financial statements
<PAGE> 4
PACIFIC RESEARCH & ENGINEERING CORPORATION
PART I - FINANCIAL INFORMATION
CONDENSED STATEMENTS OF INCOME FOR THE SIX MONTHS AND
THREE MONTHS ENDED JUNE 30, 1997 AND 1996
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, 1997 June 30, 1996 June 30, 1997 June 30, 1996
------------- ------------- ------------- -------------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
NET SALES $ 3,312,316 $ 1,970,555 $ 5,603,520 $ 3,920,922
COST OF SALES 1,827,688 1,122,445 3,123,626 2,261,678
----------- ----------- ----------- -----------
Gross profit 1,484,628 848,110 2,479,894 1,659,244
OPERATING EXPENSES
General and administrative 418,640 277,198 813,705 530,770
Selling and marketing 432,326 191,958 795,891 362,011
Research and development 237,139 128,278 360,513 222,735
Engineering 129,941 52,631 188,987 116,459
Depreciation and amortization 62,211 41,612 121,600 80,920
----------- ----------- ----------- -----------
TOTAL OPERATING EXPENSES 1,280,257 691,677 2,280,696 1,312,895
----------- ----------- ----------- -----------
INCOME (LOSS) FROM OPERATIONS 204,371 156,433 199,198 346,349
OTHER INCOME (EXPENSES)
Interest, net 18,996 (13,696) 12,025 (26,999)
Gain on sale of assets - - - 16,087
Other 1,010 9,694 174 10,163
----------- ----------- ----------- -----------
TOTAL OTHER INCOME (EXPENSE) 20,006 (4,002) 12,199 (749)
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES 224,377 152,431 211,397 345,600
Income taxes 65,212 - 66,012 -
----------- ----------- ----------- -----------
NET INCOME $ 159,165 $ 152,431 $ 145,385 $ 345,600
=========== =========== =========== ===========
Earnings per average common share $ 0.07 $ 0.06
=========== ===========
Fully diluted earnings per average common share $ 0.07 $ 0.06
=========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
(See Exhibit 11.1-EPS) 2,305,500 2,305,500
=========== ===========
PRO FORMA FOR JUNE 30, 1996
Income before income taxes $ 152,431 $ 345,600
Pro forma income taxes 60,972 138,240
----------- -----------
Pro forma net income $ 91,459 $ 207,360
=========== ===========
Earnings per average common share $ 0.06 $ 0.14
=========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 1,648,782 1,484,603
=========== ===========
</TABLE>
The accompanying notes are integral part of these financial statements
<PAGE> 5
PACIFIC RESEARCH & ENGINEERING CORPORATION
PART I - FINANCIAL INFORMATION
CONDENSED STATEMENTS OF CASH FLOWS FOR THE
SIX MONTHS ENDED JUNE 30, 1996 AND 1997
<TABLE>
<CAPTION>
June 30, 1997 June 30, 1996
----------- -----------
(unaudited) (unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 145,385 $ 345,600
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 121,600 80,920
Gain on sale of assets - (16,087)
Changes in operating assets and liabilities:
Accounts receivable (303,664) (385,258)
Inventories (1,062,185) (197,912)
Prepaid expenses and other assets (797,761) (335,225)
Accounts payable 846,666 50,472
Deferred income taxes 43,750 -
Accrued expenses 3,312 (7,215)
Customer advances 597,104 (33,226)
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (412,943) (497,931)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (271,868) (121,182)
Increase in investment account principal (30,357) -
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (302,225) (121,182)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from (payments on) notes payable and lines of credit 193,000 186,669
Payments under capital lease obligations (17,608) (13,654)
Proceeds from sale of common stock - 4,250,619
Proceeds from sale of common stock warrants - 50,000
Distributions to shareholders (36,047) (550,298)
Deferred offering costs, netted against offering proceeds (34,513) -
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 104,832 3,923,336
----------- -----------
NET INCREASE (DECREASE) IN CASH (610,336) 3,304,223
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 610,857 500
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 521 $ 3,304,723
=========== ===========
</TABLE>
The accompanying notes are integral part of these financial statements
<PAGE> 6
PACIFIC RESEARCH & 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 be read in
conjunction with the financial statements and notes thereto included
in the Company's annual report on Form 10-KSB for the year ending
December 31, 1996. The results of operations for the six month and three
month periods ended June 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 June 30, 1996 balances have been reclassified to conform to the
June 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 fund shares may be redeemed by the Company at any
time without penalty.
<PAGE> 7
PACIFIC RESEARCH & ENGINEERING CORPORATION
PART I - FINANCIAL INFORMATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market. Inventory costs include material, labor and manufacturing overhead.
Property and Equipment
Property and equipment is stated at cost, and depreciated using the
straight-line method over the estimated useful lives of the assets, which
range from three to five years. Assets under capital leases are
depreciated by the straight-line method over the shorter of the lease
term or the useful lives of the assets. Maintenance, repairs and minor
renewals are charged to operations as incurred. Major replacements or
upgrade's 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 No. 86. Capitalized software costs are amortized on
a product-by-product basis. Amortization will be computed based upon the
ratio of annual revenues to total anticipated revenues or the straight-line
method over the estimated life of the product (typically three to five
years), whichever provides the greater amortization. Amortization expense
will commence concurrent with the shipment of the new products in the third
quarter of 1997.
Deferred offering costs include the costs associated with the initial
public offering ("Offering"). These costs related to the direct
incremental costs associated with the Offering and were capitalized and
netted against the amount received from the Offering. Additional costs
related to the offering were netted against common stock during the first
quarter of 1997 as reported in the statement of cash flows and elsewhere
in the notes to the condensed financial statements.
2. INVENTORIES
Inventories at June 30, 1997 and at December 31, 1996 are summarized
as follows:
June 30, 1997 December 31, 1996
----------- -----------
(unaudited)
Raw materials $ 1,485,133 $ 969,180
Work-in-process 930,625 516,687
Finished goods 606,928 474,634
----------- -----------
3,022,686 1,960,501
Less reserve for obsolescence (25,000) (25,000)
----------- -----------
Inventories, net $ 2,997,686 $ 1,935,501
=========== ===========
<PAGE> 8
PACIFIC RESEARCH & ENGINEERING CORPORATION
PART I - FINANCIAL INFORMATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
3. PROPERTY AND EQUIPMENT
Property and equipment at June 30, 1997 and at December 31, 1996 are
summarized as follows:
June 30, 1997 December 31, 1996
----------- -----------
(unaudited)
Machinery and equipment $ 1,422,763 $ 1,185,798
Furniture and fixtures 825,488 800,550
Leasehold improvements 663,291 638,348
----------- -----------
2,911,542 2,624,696
Less accumulated depreciation and
amortization (1,844,046) (1,722,445)
----------- -----------
Property and equipment, net $ 1,067,496 $ 902,251
=========== ===========
4. OTHER ASSETS
Other assets at June 30, 1997 and at December 31, 1996 are summarized
as follows:
June 30, 1997 December 31, 1996
----------- -----------
(unaudited)
Capitalized software costs $ 1,562,329 $ 949,617
Deposits 84,429 93,696
Other 9,828 -
Employee loan 7,680 8,725
----------- -----------
$ 1,664,266 $ 1,052,038
=========== ===========
5. INCOME TAXES
For the tax period ending May 29, 1996, which was included during the
period ended June 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. As of
June 30, 1996, the amount of the current deferred tax asset was $93,000.
The current net deferred tax liability comprises primarily temporary
differences relating to inventory valuation, certain reserves, accruals,
and research and development costs capitalized for book purposes, but
expensed for tax purposes.
<PAGE> 9
PACIFIC RESEARCH & ENGINEERING CORPORATION
PART I - FINANCIAL INFORMATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
5. INCOME TAXES (continued)
Proforma Income Taxes
The accompanying statements of income includes the unaudited proforma
income tax provision for the six month and three month periods ended
June 30, 1996, to reflect the estimated income tax expense of the Company
as if it had been subject to normal federal and state income taxes for the
period presented.
Proforma earnings per share is calculated using the weighted average
outstanding common and common equivalent shares.
Proforma income taxes, assuming the Company was subject to C Corporation
income taxes for the entirety of the period, is presented in the
accompanying statements of income.
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 may elect to make additional discretionary contribution 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 June 30, 1997 (unaudited), the following grants have 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 and Bosworth will receive ten year options to purchase 2,500 shares
of common stock at the then-market price on the date of the grant on the
first three anniversaries of their election as a director. Each grant is
conditioned upon the person being a director at the time of the grant.
<PAGE> 10
PACIFIC RESEARCH & ENGINEERING CORPORATION
PART I - FINANCIAL INFORMATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
6. PROFIT SHARING AND STOCK OPTION PLAN (continued)
The following grant was made on May 29, 1997, the anniversary date of
Messrs. Robbins and Bosworth 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. None of the options have been
exercised as of June 30, 1997.
Additionally, during the year ended December 13, 1996 options to purchase a
total of 750,000 shares of the Common Stock were granted pro rata, based
upon current share ownership, to Messrs. Williams, Dosch, Eyler and
Pollard, executive officers of the Company and Messrs. Staros and Jackson,
key employees of the Company.
These options will 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.
Furthermore, on February 19, 1997 the Company granted 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.
Options outstanding as of January 1, 1997 760,000
Granted 185,000
Exercised -
Canceled -
Options outstanding as of June 30, 1997 945,000
Option price range for options
granted during the period $2.25 to $2.50
Options exercisable as of June 30, 1997 51,000
Options available for grant as of June 30, 1997 255,000
<PAGE> 11
PACIFIC RESEARCH & ENGINEERING CORPORATION
PART I - FINANCIAL INFORMATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
6. PROFIT SHARING AND STOCK OPTION PLAN (continued)
In October 1995, the FASB issued Statement of Financial Accounting Standard
No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123), which
becomes effective for financial statements for fiscal years beginning after
December 15, 1995. SFAS No. 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 the 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 six month
periods ended June 30, 1997, and 1996 are summarized as follows:
Six Months Ended
June 30, 1997 June 30, 1996
----------- -----------
(unaudited) (unaudited)
Cash paid for interest and income taxes:
Interest $ 23,148 $ 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 the 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> 12
PACIFIC RESEARCH & 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 six month period
ended June 30, 1996, the Company distributed accumulated undistributed
retained earnings of $694,722 to its shareholders. These amounts
represented a portion of the S Corporation earnings through May 29, 1996
and were 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 its 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 short
period tax return for the S Corporation.
Common 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 June 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 June 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 June 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 six month and three month periods ended June 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 the 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> 13
PACIFIC RESEARCH & ENGINEERING CORPORATION
PART I - FINANCIAL INFORMATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
10. EARNINGS PER SHARE (continued)
In February 1997, the Financial Accounting Standards Board issued
"Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings per
Share," 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 six
months and three months ended June 30, 1997 and March 31, 1996. The impact
of Statement 128 on the calculation of fully diluted earnings per share for
these periods is also not expected to be material.
11. USE OF EXTIMATES
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> 14
PACIFIC RESEARCH & ENGINEERING CORPORATION
PART I - FINANCIAL INFORMATION
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
The following information contains certain forward-looking statements that
anticipate future trends or events. 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 will 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 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.
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 do not meet with the Company's
forecast, operating results may be materially adversely affected.
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.
<PAGE> 15
PACIFIC RESEARCH & ENGINEERING CORPORATION
PART I - FINANCIAL INFORMATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW (continued)
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 termed the ADX
Ensemble. The Ensemble is a stand alone digital audio workstation featuring
automated digital recording and mixing, incorporating an Apple Macintosh
6100/66 for display and control. Like a word processor for audio, Ensemble
has the ability to cut, copy, paste and move audio segments around to create
sophisticated audio productions. An optical backup drive feature, similar
to a recordable compact disc, allows the user to read and write directly to
an optical drive without having to load individual projects onto the hard
drive.
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
During the six month and three month periods ended June 30, 1997 and 1996 the
Company spent approximately $361,000 and $223,000 (six months), $237,000 and
$128,000 (three months), respectively on internally funded research and
development and approximately $189,000 and $116,000 (six months), and $130,000
and $53,000 (three months), respectively in engineering costs. Additionally,
during the six month and three month periods ended June 30, 1997 and 1996 the
Company capitalized approximately $612,000 and $311,000 (six months), $297,000
and $168,000 (three months), respectively on research and development costs
and engineering costs that were specifically related to certain projects under
development by the Company.
The main costs associated with research and engineering are expenditures
related to licenses, permits and CE (European Conformity) certification for
existing products marketed overseas, increased research and development
activities and the hiring of additional engineering staff incurred in the
development of the new digital products. These expenditures would have been
significantly more if not for the fact that the Company has capitalized
certain development costs relating to the coding, testing and other
expenditures related to new products that will be sold, leased or otherwise
marketed, in accordance with the provisions of Statement of Financial
Accounting Standards No. 86.
<PAGE> 16
PACIFIC RESEARCH & ENGINEERING CORPORATION
PART I - FINANCIAL INFORMATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
AND RESULTS OF OPERATIONS
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>
Six Months Ended June 30 Three Months Ended June 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% 42.9% 100.0% 100.0% 68.1%
Cost of sales 55.7% 57.7% 38.1% 55.2% 57.0% 62.8%
------------------------ --------------------------
Gross profit 44.3% 42.3% 49.5% 44.8% 43.0% 75.1%
Expenses:
General and administrative 14.5% 13.5% 53.3% 12.6% 14.1% 51.0%
Selling and marketing 14.2% 9.2% N/A 13.1% 9.7% N/A
Research and engineering 9.8% 8.7% 62.0% 11.1% 9.2% N/A
Depreciation and amortization 2.2% 2.1% 50.3% 1.9% 2.1% 49.5%
------------------------ --------------------------
Total operating expenses 40.7% 33.5% 73.7% 38.7% 35.1% 85.1%
Income from operations 3.6% 8.8% (42.5)% 6.1% 7.9% 30.6%
------------------------ --------------------------
Other income (expenses):
Interest income (expense) 0.2% (0.7%) N/A 0.6% (0.7%) N/A
Gain on sale of asset 0.0% 0.4% N/A 0.0% 0.0% N/A
Other 0.0% 0.3% (98.3)% 0.0% 0.5% (89.6)%
------------------------ --------------------------
Total other income (expense) 0.2% 0.0% N/A 0.6% (0.2%) N/A
Income before income taxes 3.8% 8.8% (38.8)% 6.7% 7.7% 47.2%
Provision for income taxes 1.2% 3.5% (52.3)% 1.9% 3.1% 6.9%
------------------------ --------------------------
Net income 2.6% 5.3% (29.9)% 4.8% 4.6% 74.0%
</TABLE>
NA = NOT MEANINGFUL OR IN EXCESS OF 100%
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
Sales increased $1,683,000 or 42.9%, from $3,921,000 for the six months ended
June 30, 1996 to $5,604,000 for the six months ended June 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 expanding
efforts in capturing 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. There can be no assurance,
however, that the Company's revenues will continue to increase or will be
maintained at their recent levels.
Additionally, radio remains a strong and cost effective alternative to
television and print media competing for advertising dollars. The continued
advertising revenue growth provides the broadcasters with the capital
necessary to accomplish their consolidation goals and upgrade their facilities.
<PAGE> 17
PACIFIC RESEARCH & ENGINEERING CORPORATION
PART I - FINANCIAL INFORMATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
(continued)
Cost of sales increased $862,000 or 38.1% from $2,262,000 to $3,124,000 due to
the sales increase, and decreased slightly as a percent of revenues for the
six months ended June 30, 1997 compared to the same period in 1996. This
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
$821,000 (from $1,659,000 to $2,480,000) or 49.5% due primarily to the
increase in sales, and increased slightly as a percent of revenue from 42.3%
to 44.3% for the six months ended June 30, 1996 compared to the six months
ended June 30, 1997.
General and administrative expenses increased approximately $283,000, or 53.3%
for the comparable periods ($814,000 in 1997, compared to $531,000 in 1996).
The increase was due, primarily, to additional expenses incurred in expanding
the Company's infrastructure and costs in connection with the Company's public
reporting requirements and additional payroll costs. As a percent of revenue,
however, general and administrative expenses increased 1.0%, from 13.5% in 1996
to 14.5% in 1997.
Selling and marketing expenses increased $434,000 or 119.9% from $362,000 in
1996 to $796,000 in 1997 due, primarily, to the addition of a Sales Manager 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. 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
5.0% from 9.2% in 1996 to 14.2% during the six months ended June 30, 1997.
Research and engineering expenses increased $210,000 or 62.0% from $339,000
for the six months ended June 30, 1996 to $549,000 for the six months ended
June 30, 1997. The primary reason for the increase is that, during the
six months ended June 30, 1997, the Company decreased capitalization of
certain development costs relating to the coding, testing and other
expenditures related to new products that the Company intends to sell,
lease or otherwise market, in accordance with the provisions of Statement
of Financial Accounting Standards No. 86 and now currently expenses these costs.
Capitalized research and engineering costs, pursuant to Statement of
Financial Accounting Standards No. 86, for the six months ended June 30, 1997
are approximately $612,000. The Company capitalized such costs in the amount
of $311,000 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, as a percent of revenue, from 8.7%
for the six months ended June 30,1996 to 9.8% for the six months ended
June 30, 1997 due to the addition of engineering and drafting staff, and the
reduction of expense capitalization as discussed above.
Income from operations decreased $147,000 or 42.5% from $346,000 for the six
months ended June 30, 1996 to $199,000 for the six months ended June 30, 1997
reflecting the 49.5% increase in gross margin offset by the 73.7% increase in
operating expenses for the comparable periods. Operating income, as a percent
of revenue, decreased 5.2% from 8.8% for the six months ended June 30, 1996 to
3.6% for the six months ended June 30, 1997.
Net interest expense decreased $39,000 or 144.5% for the comparable periods,
reflecting a decrease in borrowings on the line of credit and other debt, as
well as interest earned on the investment fund.
<PAGE> 18
PACIFIC RESEARCH & ENGINEERING CORPORATION
PART I - FINANCIAL INFORMATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINACIAL CONDITION
AND RESULTS OF OPERATION
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
(continued)
The Company incurred a gain of approximately $16,000 for the six months ended
June 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 six
months ended June 30, 1997.
The combined results, as discussed above, yielded net income before taxes of
$211,000 for the six months ended June 30, 1997 compared to net income before
taxes of approximately $346,000 for the six months ended June 30, 1996,
representing approximately a 39.0% 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 convention in April of 1997. During the
show, both Integrity and AirWave won "best of show" awards
from the media.
The Company will continue to focus on the expansion in 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 JUNE 30, 1997 COMPARED TO THREE MONTHS ENDED JUNE 30, 1996
Sales increased $1,341,000 or 68.1%, from $1,971,000 for the three months
ended June 30, 1996 to $3,312,000 for the three months ended June 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 six months ended June 30, 1997). The Company
believes the current conditions prevalent in the radio industry will continue
to create a market for the Company's goods and services.
Cost of sales increased $706,000 or 62.8% from $1,122,000 to $1,828,000 due
to the sales increase, and decreased slightly as a percent of revenues for the
three months ended June 30, 1997 compared to the same period in 1996.
The Company continually evaluates its inventory purchasing and handling
policies, as well as its manufacturing processes, to ensure the maintenance
of, or improvement to, gross margins. Accordingly, gross margin increased
$637,000 (from $848,000 to $1,485,000) or 75.1% due primarily to the increase
in sales, and increased slightly as a percent of revenue from 43.0% to 44.8%
for the three months ended June 30, 1996 compared to the three months ended
June 30, 1997.
General and administrative expenses increased approximately $141,000, or 51.0%
for the comparable periods ($277,000 in 1996, compared to $419,000 in 1997).
The increase was due, primarily, to additional expenses incurred in ramping up
the infrastructure and costs in connection with the Company's public filing
requirements, additional payroll costs, and other expenses associated with the
public offering. As a percent of revenue, however, general and administrative
expenses decreased 1.5%, from 14.1% in 1996 to 12.6% in 1997.
<PAGE> 19
PACIFIC RESEARCH & ENGINEERING CORPORATION
PART I - FINANCIAL INFORMATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINACIAL CONDITION
AND RESULTS OF OPERATION
THREE MONTHS ENDED JUNE 30, 1997 COMPARED TO THREE MONTHS ENDED JUNE 30, 1996
(continued)
Selling and marketing expenses increased $240,000 or 125.2% from $192,000 in
1996 to $432,000 in 1997 due, primarily, to the addition of a Sales Manager as
well as additional sales professionals. The Company expects to take advantage
of the growing radio market generated by the Telecommunication Bill (see
management's discussion and analysis of sales, above) and will continue to
invest prudently in this area to maximize market penetration. Selling and
marketing expenses as a percentage of revenue increased 3.4% from 9.7% in 1996
to 13.1% during the three months ended June 30, 1997.
Research and engineering expenses increased $186,000 or 102.9% from $181,000
for the three months ended June 30, 1996 to $367,000 for the three months
ended June 30, 1997. The primary reason for the substantial increase is that,
during the three months ended June 30, 1997, the Company significantly
decreased its 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
Statement of Financial Accounting Standards No. 86 and is now currently
expensing these costs.
Capitalized research and engineering costs, pursuant to Statement of Financial
Accounting Standards No. 86, for the three months ended June 30, 1997 are
approximately $297,000. The Company capitalized such costs in the amount of
$168,000 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 increased, as a percent of revenue, from
9.2% for the three months ended June 30, 1996 to 11.1% for the three months
ended June 30, 1997 due to the increase in development activities, and the
change in expense capitalization discussed above.
Income from operations increased $48,000 or 30.6% from $156,000 for the three
months ended June 30, 1996 to $204,000 for the three months ended June 30, 1997
reflecting the 75.1% increase in gross margin and 85.1% increase in operating
expenses for the comparable periods. Operating income, however as a percent of
revenue, decreased slightly by 1.8% from 7.9% for the three months ended
June 30, 1996 to 6.1% for the three months ended June 30, 1997.
Net interest expense decreased $33,000 or 238.7% for the comparable periods,
reflecting a large decrease in borrowings pursuant to debt obligations and
line of credit, as well as interest earned on invested funds.
The combined results, as discussed above, yielded net income before taxes of
$224,000 for the three months ended June 30, 1997 compared to $152,000 for the
three months ended June 30, 1996, or approximately, a 47.2% increase.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal capital requirements are to fund the expansion of its
internal sales department, increase advertising and marketing, increase
engineering and development of new products and the development and
penetration of 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.
<PAGE> 20
PACIFIC RESEARCH & ENGINEERING CORPORATION
PART I - FINANCIAL INFORMATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINACIAL CONDITION
AND RESULTS OF OPERATION
LIQUIDITY AND CAPITAL RESOURCES (continued)
The Company completed its initial public offering May 28, 1996 and realized
net proceeds of approximately $4.2 million after underwriting discounts and
offering expenses. As of December 31, 1996 and June 30, 1997 the Company had
$1.6 and $1.0 million in cash and cash equivalents, respectively.
The Company's current ratio at June 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 $709,000 from
$2,884,000 at December 31, 1996 to $2,175,000 at June 30, 1997.
The Company's operating activities consumed cash of $413,000 for the six
months ended June 30, 1996. Cash used in operations for the six months ended
June 30, 1997 was the result, primarily, of an increase in inventory
($1,062,000), an increase in accounts receivable ($304,000), an increase in
prepaid expenses and other assets ($798,000) (which was primarily a result
of capitalized engineering expenses in accordance with Statement of Financial
Accounting Standards No. 86), offsetting increases in accounts payable of
$847,000 and customer advances of $597,000 which are related to deposits on
major equipment purchases expected to be completed during the third and forth
quarter of 1997.
Cash used in investing activities for the six month period ended June 30, 1997
was $302,000. Such investing activities involved purchases of property and
equipment ($272,000) and principal growth from invested funds ($30,000).
Cash provided by financing activities was $105,000 for the six months ended
June 30, 1997, consisting primarily of net borrowings on the Company's line of
credit $193,000 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 $18,000
relative to the Company's capital lease obligations.
As a result of the above the Company experienced a substantial decrease in
cash from $611,000 at December 31, 1996 to approximately $500 for the six
month period ended June 30, 1997.
The Company believes that the net proceeds from its initial public offering
completed May 28, 1996, together with its line of credit facility and cash
flows generated by operations should be adequate to meet its operating and
working capital needs for the foreseeable future.
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 Financial Accounting Standards Board issued "Statement
of Financial Accounting Standards ("SFAS") 128, Earnings per Share." 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.
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. 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. 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.
<PAGE> 21
PACIFIC RESEARCH & ENGINEERING CORPORATION
PART I - FINANCIAL INFORMATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINACIAL CONDITION
AND RESULTS OF OPERATION
FACTORS AFFECTING FUTURE OPERATING RESULTS (continued)
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.
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
lease 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 events, the price of the Company's Common Stock would
likely be materially adversely affected.
<PAGE> 22
PACIFIC RESEARCH & ENGINEERING CORPORATION
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Default Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Securities Holders
Schedule Form 14 (a) Proxy Statement, dated May 15, 1997
At the Annual Meeting of Shareholders held on June 5, 1997,
at the Olympic Resort, 6111 El Camino Real, Carlsbad,
California, the Company shareholders voted to:
1.) Approve Jack Williams, Michael Dosch, Larry Eyler,
Dave Pollard, Michael Bosworth, John Lane, and John
Robbins to continue to serve as directors for the
ensuing year end until their successors are elected.
The vote for the nominated directors was as follows:
out of a total of 2,305,500 eligible to vote at the
meeting, 2,139,712 voted in favor and 12,500 withheld
for the approval of each of the respective directors.
2.) Approve the appointment of Harlan & Boettger as the
Company's independent accountants for the current
fiscal year: out of a total of 2,305,500 eligible
to vote at the meeting, 2,139,712 voted in favor,
2,280 voted against and 12,500 withheld for the
appointment of the independent accountants.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
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> 23
PACIFIC RESEARCH & ENGINEERING CORPORATION
PART II - OTHER INFORMATION
SIGNATURE
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
<PAGE> 24
PACIFIC RESEARCH & ENGINEERING CORPORATION
EXHIBIT INDEX
Exhibit
Number Exhibit Title
11.1 Calculation of Earnings Per Share
EXHIBIT 11.1 Statement re: Computation of Per Share Earnings (Loss)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------- -------------------
June 30, June 30, June 30, June 30,
1997 1996 1997 1996
------------------------------------------
<S> <C> <C> <C> <C>
PRIMARY
Weighted average common shares outstanding 2,305,500 1,648,782 2,305,500 1,484,603
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 1,648,782 2,305,500 1,484,603
-------------------------------------------
Net income $ 159,165 $ 91,459 $ 145,385 $ 207,360
Net income per share $ 0.07 $ 0.06 $ 0.06 $ 0.14
FULLY DILUTED
Weighted average common shares outstanding 2,305,500 1,648,782 2,305,500 1,484,603
Common equivalents 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 6,596 - 2,954 -
Shares related to SAB No. 55, 64 and 83 - - - -
-------------------------------------------
Number of shares used in computing per share amounts 2,312,096 1,648,782 2,308,454 1,484,603
-------------------------------------------
Net income $ 159,165 $ 91,459 $ 145,385 $ 207,360
Net income per share $ 0.07 $ 0.06 $ 0.06 $ 0.14
</TABLE>
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."
<PAGE> 25
PACIFIC RESEARCH & ENGINEERING CORPORATION
EXHIBIT INDEX
Exhibit
Number Exhibit Title
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)
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.
<TABLE> <S> <C>
<ARTICLE> 5
<PAGE>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997
<PERIOD-START> APR-01-1997 JAN-01-1997
<PERIOD-END> JUN-30-1997 JUN-30-1997
<CASH> 0 521
<SECURITIES> 0 1,030,358
<RECEIVABLES> 0 1,014,583
<ALLOWANCES> 0 15,000
<INVENTORY> 0 2,997,686
<CURRENT-ASSETS> 0 5,464,624
<PP&E> 0 2,912,542
<DEPRECIATION> 0 1,844,046
<TOTAL-ASSETS> 0 8,196,385
<CURRENT-LIABILITIES> 0 3,290,124
<BONDS> 0 0
0 0
0 0
<COMMON> 0 4,126,392
<OTHER-SE> 0 749,748
<TOTAL-LIABILITY-AND-EQUITY> 0 8,196,385
<SALES> 3,312,316 5,603,520
<TOTAL-REVENUES> 3,312,316 5,603,520
<CGS> 1,827,688 3,123,626
<TOTAL-COSTS> 1,280,257 2,280,696
<OTHER-EXPENSES> 20,006 12,199
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 18,996 12,025
<INCOME-PRETAX> 224,377 211,397
<INCOME-TAX> 65,212 66,012
<INCOME-CONTINUING> 159,165 145,385
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 159,165 145,385
<EPS-PRIMARY> .07 .06
<EPS-DILUTED> .07 .06
</TABLE>
