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 March 31, 1998
[ ] 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 & 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
--------------------------------------------------
(Address of principal executive offices and zip code)
(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 shares of Common Stock, No Par Value as of April 30, 1998
<Page 2>
Pacific Research & Engineering Corporation
Form 10-QSB
Table of Contents
Part I: Financial Information Page
----
Item 1: Financial Statements
Condensed Balance Sheets as of December 31, 1997
and March 31, 1998 (unaudited) 3
Condensed Statements of Income for the Three Months
Ended March 31, 1998 and 1997 (unaudited) 4
Condensed Statements of Cash Flows for the Three
Months Ended March 31, 1998 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 13
Part II: Other Information
Item 1: Legal Proceedings 20
Item 2: Changes in Securities 20
Item 3: Defaults Upon Senior Securities 20
Item 4: Submissions of Matters to a Vote of Security Holders 20
Item 5: Other Information 20
Item 6: Exhibits and Reports on Form 8-K 20
<Page 3>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
PACIFIC RESEARCH & ENGINEERING CORPORATION
CONDENSED BALANCE SHEETS
AS OF MARCH 31, 1998 AND DECEMBER 31, 1997
ASSETS
March 31, 1998 December 31,1997
----------- -----------
(unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 500 $ -
Investments in securities - 185,251
Accounts receivable, net 1,543,936 844,048
Contracts in progress 410,525 456,139
Inventories, net 3,182,411 3,014,183
Deferred taxes 127,350 128,000
Prepaid expenses 344,216 402,225
----------- -----------
TOTAL CURRENT ASSETS 5,608,938 5,029,846
PROPERTY AND EQUIPMENT, net 1,395,608 1,352,857
INTANGIBLES, net 2,194,823 2,046,773
OTHER ASSETS 372,263 240,376
----------- -----------
$ 9,571,632 $ 8,669,852
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Overdraft $ 116,043 $ 144,701
Accounts payable 1,254,183 882,155
Accrued expenses 435,719 328,724
Customer advances 780,083 860,593
Line of credit 890,000 1,300,000
Note payable-current portion 219,045 -
Capital lease obligations - current portion 20,501 30,534
----------- -----------
TOTAL CURRENT LIABILITIES 3,715,574 3,546,707
DEFERRED TAX LIABILITY 50,000 56,000
LONG TERM DEBT, net of current portion 520,833 -
CAPITAL LEASE OBLIGATIONS,
net of current portion 19,295 18,968
----------- -----------
TOTAL LIABILITIES 4,305,702 3,621,675
SHAREHOLDERS' EQUITY
Common stock, no par value,
25,000,000 shares authorized;
2,305,500 shares issued and outstanding 4,126,392 4,126,392
Additional paid-in capital 50,000 50,000
Net unrealized gain on investment
in securities - 18,438
Retained earnings 1,089,538 853,347
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 5,265,930 5,048,177
----------- -----------
$ 9,571,632 $ 8,669,852
=========== ===========
The accompanying notes are integral part of these financial statements.
<Page 4>
PACIFIC RESEARCH & ENGINEERING CORPORATION
CONDENSED STATEMENTS OF INCOME FOR
THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
Three Months Ended March 31,
---------------------------
1998 1997
------------ ------------
(unaudited)
NET SALES $ 4,398,306 $ 2,291,204
COST OF SALES 2,731,661 1,295,938
------------ ------------
Gross profit 1,666,645 995,266
OPERATING EXPENSES
General and administrative 392,037 395,065
Selling and marketing 582,121 363,565
Research, development and engineering 280,588 182,420
Depreciation and amortization 119,406 59,389
------------ ------------
TOTAL OPERATING EXPENSES 1,374,152 1,000,439
------------ ------------
INCOME (LOSS ) FROM OPERATIONS 292,493 (5,173)
OTHER INCOME (EXPENSES)
Interest, net (29,175) (6,971)
Gain on sale of assets 16,362 -
Other 21,911 (835)
------------ ------------
TOTAL OTHER INCOME (EXPENSE) 9,098 (7,806)
------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES 301,591 (12,979)
Income tax expense 65,400 800
------------ ------------
NET INCOME $ 236,191 $ (13,779)
============ ============
Earnings per average common share $ 0.10 $ (0.01)
Fully diluted earnings per average common share $ 0.10 $ (0.01)
------------ ------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
(Exhibit 11.1-EPS) 2,343,818 2,305,500
============ ============
The accompanying notes are integral part of these financial statements.
<Page 5>
PACIFIC RESEARCH & ENGINEERING CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS FOR THE
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
Three Months Ended March 31,
---------------------------
1998 1997
------------ ------------
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 236,191 $ (13,779)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating
activities:
Depreciation and amortization 119,406 59,389
Gain on sale of investment in securities (16,362) -
Changes in operating assets and liabilities:
Accounts receivable (699,888) (94,171)
Inventories (168,228) (524,793)
Prepaid expenses and other assets (73,878) (1,654)
Contracts in progress 45,614 (75,000)
Accounts payable 372,028 440,094
Deferred income taxes (5,350) -
Accrued expenses 106,995 59,542
Customer advances (80,510) 365,711
------------ ------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (163,982) 215,339
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (109,657) (181,752)
Purchases of software development costs (200,550) (324,193)
Due (to) from officers - (1,047)
Proceeds from sales of investments 183,175 -
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (127,032) (506,992)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from (payments on) notes payable and
lines of credit 329,878 (75,000)
Overdraft (28,658) -
Payments under capital lease obligations (9,706) (8,174)
Deferred offering costs, netted against
offering proceeds - (34,513)
------------ ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 291,514 (117,687)
NET INCREASE (DECREASE) IN CASH 500 (409,340)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD - 610,857
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 500 $ 201,517
============ ============
The accompanying notes are integral part of these financial statements
<Page 6>
PACIFIC RESEARCH & ENGINEERING CORPORATION
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, 1997. The results of
operations for the three-month period ended March 31, 1998 are not
necessarily indicative of the operating results for the year ended
December 31, 1998. 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, 1997.
RECLASSIFICATIONS
Certain March 31, 1997 balances have been reclassified to conform to the
March 31, 1998 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. The Company's marketable securities are categorized as available
for sale securities, as defined by Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." Unrealized gains and losses are reported as a separate
component within the shareholders' equity section of the balance sheet.
Realized gains and losses on all marketable securities are determined using
the average cost method and are charged or credited to current earnings.
<Page 7>
PACIFIC RESEARCH & ENGINEERING CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(CONTINUED)
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 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.
INTANGIBLE ASSETS
Intangible assets consist of capitalized software costs incurred for the
development of software after technological feasibility has been
established. These expenditures are principally related to new products,
and whose costs were capitalized in accordance with the provisions of
Statement of Financial Accounting Standards No. 86, "Accounting for the
Costs of Computer Software to be Sold, Leased, or Otherwise Marketed."
Capitalized software costs are being amortized on a product-by-product
basis using the straight-line method over the remaining estimated economic
useful life of the products which as been established as five years. It is
at least reasonably possible that the Company's estimate of the useful
lives will change.
CUSTOMER ADVANCES
Advance payments received from customers are deferred and recognized as
revenue upon shipment.
REVENUE RECOGNITION
Revenue from product sales is generated primarily from the manufacture and
sale of radio studio broadcasting equipment. The period of time from
initial order to final shipment of the product typically ranges from two to
six weeks. Revenue is recognized when the equipment is shipped.
Revenues from fixed-price and modified fixed-price contracts are recognized
on the percentage-of-completion method, measured by the percentage of
actual costs incurred to date to estimated total costs for each contract.
This method (costs-to-cost) is used because management considers expended
actual costs to be the best available measure of progress on these
contracts.
Contract costs include all direct material and labor costs and those
indirect costs related to contract performance, such as indirect labor,
supplies, tools, repairs, and depreciation costs. Selling, general and
administrative costs are charged to expense as incurred. Provisions for
estimated losses on uncompleted contracts are made in the period in which
such losses are determined. Changes in job performance, job conditions, and
estimated profitability, including those arising from contract penalty
provisions, and final contract settlements may result in revisions to costs
and income and are recognized in the period in which the revisions are
determined. An amount equal to contract costs attributable to claims is
included in revenues when realization is probable and the amount can be
reliably estimated. It is at least reasonably possible that these
estimates will change.
The asset, "contracts in progress," represents revenues recognized in
excess of amounts billed.
<Page 8>
PACIFIC RESEARCH & ENGINEERING CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(CONTINUED)
2. Inventories
Inventories at March 31, 1998 and at December 31, 1997 are summarized
as follows:
March 31, 1998 December 31, 1997
------------------- -----------------
(unaudited)
Raw materials $ 1,418,325 $ 1,666,885
Work-in-process 873,453 676,630
Finished goods 915,636 695,668
--------------- -------------
3,207,411 3,039,183
Less reserve for obsolescence (25,000) (25,000)
--------------- -------------
Inventories, net $ 3,182,411 $ 3,014,183
=============== =============
3. Property, Equipment and Intangibles
Property and equipment at March 31, 1998 and December 31, 1997 are
summarized as follows:
March 31, 1998 December 31, 1997
------------------- -----------------
(unaudited)
Machinery and equipment $ 1,619,959 $ 1,520,981
Furniture and fixtures 830,189 830,189
Leasehold improvements 667,749 667,749
------------------- -----------------
3,117,897 3,018,919
Less accumulated depreciation
and amortization (2,032,782) (1,965,875)
Self-constructed assets not
placed in service 310,493 299,813
------------------- -----------------
Property and equipment, net $ 1,395,608 $ 1,352,857
=================== =================
Intangible assets at March 31, 1998 and December 31, 1997 are
summarized as follows
March 31, 1998 December 31, 1997
------------------- -----------------
(unaudited)
Capitalized software costs $ 2,415,030 $ 2,216,171
Less accumulated amortization (220,207) (169,398)
------------------- -----------------
Intangible assets, net $ 2,194,823 $ 2,046,773
=================== =================
<Page 9>
PACIFIC RESEARCH & ENGINEERING CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(CONTINUED)
4. Other Assets
Other assets at March 31, 1998 and at December 31, 1997 are
summarized as follows:
March 31, 1998 December 31, 1997
------------------- -----------------
(unaudited)
Deposits $ 364,449 $ 203,876
Other - 30,000
Employee loan 7,814 6,500
------------------- -----------------
$ 372,263 $ 240,376
=================== =================
5. Income Taxes
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.
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 1,400,000 shares of the Company's Common Stock has been reserved
for issuance under the Company's Amended 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 exercise and vesting schedules.
As of March 31, 1998 (unaudited), the following grants had been made under
the Stock Plan:
* The Company prior to December 31, 1997 granted approximately 1,015,000
stock options with exercise prices ranging from $2.25 to $5.50 per
share.
<Page 10>
PACIFIC RESEARCH & ENGINEERING CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(CONTINUED)
6. Profit Sharing and Stock Option Plan (continued)
* To Mr. Herbert McCord a member 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, Mr. McCord will
receive an option to purchase 2,500 shares of common stock at the
then-market price at the date of the grant on the first three
anniversaries of his 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.
* On January 15, 1998 the Company granted options to purchase 53,500
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 was set at $3.75 per share under this plan.
Options outstanding as of January 1, 1998 1,015,000
Granted 58,500
Exercised -
Canceled -
Options outstanding as of March 31, 1998 1,073,500
Option price range for options granted
during the period $3.75 to $5.50
Options exercisable as of March 31, 1998 117,200
Options available for grant as of March 31, 1998 326,500
In October 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) 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 three-month
period ended March 31, 1998 and 1997 are summarized as follows:
Three Months Ended March 31,
---------------------------
1998 1997
------------ ------------
(unaudited)
Cash paid for interest and income taxes:
Interest $ 29,777 $ 36,276
Income taxes $ 40,000 $ 800
<Page 11>
PACIFIC RESEARCH & ENGINEERING CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(CONTINUED)
8. Shareholders' Equity
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
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.
Warrants outstanding in addition to those discussed above as of December
31, 1997 and March 31, 1998 (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, 1997 and March 31, 1998 (unaudited), no warrants had
been exercised in connection with these issuances.
9. Earnings Per Share
Certain options granted and outstanding as of March 31, 1998 (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 three month period ended March 31, 1997 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 & ENGINEERING CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(CONTINUED)
10. 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>
PART I - FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
FORWARD-LOOKING INFORMATION - GENERAL
THIS REPORT ON FORM 10-QSB CONTAINS A NUMBER OF FORWARD-LOOKING STATEMENTS,
WHICH REFLECT THE COMPANY'S CURRENT VIEWS WITH RESPECT TO FUTURE EVENTS AND
FINANCIAL PERFORMANCE INCLUDING STATEMENTS REGARDING THE COMPANY'S STRATEGY,
PRODUCTS UNDER DEVELOPMENT AND PLANS FOR EXPANSION. 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," "FUTURE," "PLANS," AND SIMILAR EXPRESSIONS IDENTIFY FORWARD-LOOKING
STATEMENTS. READERS ARE CAUTIONED 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.
Overview
The Company
Since its incorporation in 1969, Pacific Research & Engineering Corporation
(PR&E) or (the Company) has produced high quality audio products and studio
design services for the radio and television broadcasting industry. These
include on-air consoles for radio and television stations, radio production
consoles and workstations, and peripheral products as well as technical
furniture and studio design/integration services for turnkey systems. The
Company has historically targeted the top-rated radio stations and network
facilities in the major United States (U.S.) broadcast markets, but has recently
begun expanding its product offerings and marketing efforts to target middle and
small market broadcasters in the U.S. as well as abroad.
Strategy
MARKETING CHANNEL DEVELOPMENT. Management plans to market the Company's
products and services worldwide by increasing domestic and international
advertising and promotional activities. The Company recently reorganized its
sales force to improve focus in the major markets and establish channels to
better market its products to more economic segments within geographic targets.
Along with this reorganization, the Company has increased its advertising and
promotional activities in an effort to more effectively reach the expanded
market target. The Company is also focusing sales and marketing efforts
specifically on the nation's large broadcast groups to better serve these
important corporate clients. Additionally, the Company has increased staff and
promotional activities designed to increase international business, which, until
recently, has remained relatively undeveloped.
HORIZONTAL EXPANSION FOR TOP-MARKET BROADCASTERS. The Company intends to
develop a range of new technology products and services for the Company's
primary market segment, such as computer controlled air and production consoles
and digital audio processing and interfacing devices. The first product in this
category is the Integrity TM Digital Broadcast Console, which was introduced
during the Audio Engineering Society (AES) trade-show in Munich, Germany in 1997
and commercially released during the third quarter of 1997. Company management
believes there is a market for high technology products and services in this
category, and maintaining dominance in its existing market segment is vital to
future success in other markets.
<Page 14>
PART I - FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. (CONTINUED)
MIDDLE MARKET PRODUCTS AND SERVICES. The Company plans to develop products and
services to better meet the demands of broadcasters within economic markets,
which the Company has not historically targeted. The Company's recently expanded
direct sales force and select international dealers will sell products for this
market segment. The Company has completed the development of the AirWave TM; a
low cost on-air broadcast console which began shipping during March 1997. The
Company is also in the final phase of development of a new line of ready-to-
assemble studio furniture, QuikBilt TM, which offers high quality styling and
craftsmanship at a low price. The Company intends to further expand these new
product lines with other low-cost products as well as design and integration
services aimed at serving the needs of smaller market broadcasters.
DEVELOPMENT OF OEM AUDIO ENGINE. The Company is developing a high quality,
digital audio engine to be marketed as original equipment (''OEM'') to
manufacturers of computer-based digital audio recording/playback systems. This
device, named SoundFire TM, translates sound into data which can be manually or
automatically processed by computer. This engine will employ much of the digital
signal processing (''DSP'') technology being applied to the Company's other
digital audio products, and will provide a vehicle for establishing OEM
relationships with other manufacturers, which could lead to further product
opportunities in the future. Additionally, the audio engine has the potential
for varied applications in the high-end multimedia market as an audio server
engine.
Products & Services
The Company's current line of products and services address the technical
operating requirements of control rooms and studios in the broadcasting
industry. The Company's products and services are divided into three categories:
Audio Control Consoles, Manufactured Peripheral Equipment and Systems Products
and Services. The Company believes its equipment and services are ranked among
the highest in the industry in quality, reliability, ease of use, maintenance,
and customer service, among others.
1. Audio Control Consoles are audio mixing, routing and monitoring systems.
The Company manufactures a variety of consoles, covering a wide range of
applications designed to meet the needs of major market radio and television
broadcasters as well as middle and small market radio and television
broadcasters.
2. Manufactured Peripheral Equipment includes distribution amplifiers,
audio switchers, digital audio workstations, studio turrets and control
panels. These products are sold both independently and as part of system
design and integration.
3. System Products and Services include design, engineering and fabrication
services, which range from providing a single studio to a complete broadcasting
facility. As part of the system integration business, the Company is a
distributor for third-party manufacturers of supporting peripheral equipment.
However, the Company is not materially dependent on any third-party
manufacturer for which it distributes peripheral equipment.
<Page 15>
PART I - FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. (CONTINUED)
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:
Three Months Ended March 31,
--------------------------- Percent
1998 1997 Inc.(Decr.)
------------ ------------ -----------
(unaudited)
Net sales 100.0% 100.0% 91.9%
Cost of sales 62.1% 56.5% N/A
------------ ------------ -----------
Gross profit 37.9% 43.5% 67.5%
Expenses:
General and administrative 8.9% 17.3% (0.7%)
Selling and marketing 13.2% 15.9% 60.1%
Research and engineering 6.4% 7.9% 53.8%
Depreciation and amortization 2.7% 2.6% N/A
------------ ------------ -----------
Total operating expenses 31.2% 43.7% 37.4%
Income loss from operations 6.7% (0.2%) N/A
------------ ------------ -----------
Other incomes (expenses):
Interest income (expense) (0.7%) (0.2%) N/A
Gain on sale of asset 0.4% 0.0% N/A
Other 0.5% 0.0% N/A
------------ ------------ -----------
Total other income (expense) 0.2% (0.2%) N/A
Income before income taxes 6.9% (0.4%) N/A
Provision for income taxes 1.5% 0.1% N/A
------------ ------------ -----------
Net Income 5.4% (0.5%) N/A
N/A = NOT MEANINGFUL OR IN EXCESS OF 100%.
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997.
Sales increased $2,107,000 or 91.9%, from $2,291,000 for the three months ended
March 31, 1997 to $4,398,000 for the three months ended March 31, 1998. 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. The Company believes that radio will remain a strong
and cost effective alternative to television and print media competing for
advertising dollars. The continued advertising revenue growth provides
broadcasters with the necessary capital to accomplish their consolidation goals
and upgrade their facilities. There can be no assurance, however, that the
Company's revenues will continue to increase or will be maintained at current
levels.
Cost of sales increased $1,436,000 or 110.8% from $1,296,000 to $2,732,000 due
to the sales increase, and increased as a percentage of revenues from 56.5% to
62.1% for the three months ended March 31, 1998 compared to the same period in
1997. The increase in margin as a percentage of revenues is a result of the
sales mix experienced in the first quarter ended March 31, 1998, consisting of
larger than usual sales of lower margin distributor products and cabinetry
associated with large systems contracts.
Accordingly, gross margin increased $672,000 (from $995,000 to $1,667,000) or
67.5% primarily due to the increase in sales, and decreased as a percent of
revenue from 43.5% to 37.9% for the three months ended March 31, 1997 compared
to the three months ended March 31, 1998.
<Page 16>
PART I - FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. (CONTINUED)
General and administrative expenses decreased approximately $3,000 or (0.7)%
for the comparable periods ($392,000 in 1998, compared to $395,000 in 1997).
The slight decrease is primarily due to the Company's maintenance of its
administrative functions and expenses. As a percentage of revenue, general and
administrative expenses decreased 8.4%, from 17.3% in 1997 to 8.9% in 1998.
Selling and marketing expenses increased $218,000 or 59.9% from $364,000 in
1997 to $582,000 in 1998, primarily due to the addition of sales executives,
as well as other 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 its market penetration. The Company has
increased its trade-show attendance, expenditures related to advertising and
brochures, expenditures relative to travel for the interviewing and the
hiring of distributors for the overseas market and business, and the use of
commission based incentives for its sales executives. Selling and marketing
expenses as a percentage of revenue decreased 2.7% from 15.9% in 1997 to 13.2%
during the three months ended March 31, 1998.
Research and engineering expenses increased $99,000 or 53.8% from $182,000 for
the three months ended March 31, 1997 to $281,000 for the three months ended
March 31, 1998. The primary reason for the increase for the three months ended
March 31, 1998 is that the Company decreased capitalization of certain
development costs related to new products. The Company intends to sell, lease
or otherwise market these new products in accordance with the provisions of
SFAS 86. The Company currently expenses these costs. Research and engineering
expenses increased as a percentage of revenue, from 8.9% for the three months
ended March 31, 1997 to 6.4% for the three months ended March 31, 1998. This
was primarily due to the development of new products, and the expensing of
costs for research and development efforts.
Capitalized research and engineering costs, pursuant to SFAS 86, for the three
months ended March 31, 1998 are approximately $199,000. The Company capitalized
such costs in the amount of $315,000 for the comparable period in 1997. 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 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.
Income from operations increased $297,000, from a loss of $5,000 for the three
months ended March 31, 1997 to $292,000 for the three months ended March 31,
1998 reflecting the 67.5% increase in gross margin offset by the 37.4% increase
in operating expenses for the comparable periods. Operating income, as a
percentage of revenue, increased 6.9%, from (0.2)% for the three months ended
March 31, 1997, to 6.7% for the three months ended March 31, 1998.
Net interest expense increased $22,000 from the comparable period, reflecting
an increase in borrowings on the line of credit and the establishment of long
term debt. The Company has liquidated its entire investment portfolio as of
March 31, 1998 and recognized a gain of approximately $16,000 for the three
months ended March 31, 1998.
The combined results, as discussed above, yielded net income before taxes of
$302,000 for the three months ended March 31, 1998 compared to a net loss
before taxes of approximately $13,000 for the three months ended March 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically satisfied its cash requirements through cash flows
from operations and bank borrowings. Under the terms of some project contracts,
the Company requires deposits upon project acceptance, then invoices the
customer based upon the completion of specified conditions and/or milestones.
Depending upon the stage of completion and the size of the contract, it may be
necessary for the Company, from time to time, to finance a portion of its
working capital needs until the realization of income from milestones has been
achieved. Additionally, developing and launching new products has exerted
additional pressure on the working capital requirements of the Company.
<Page 17>
PART I - FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. (CONTINUED)
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 March 31, 1998 the Company had no cash or cash
equivalents and had incurred an overdraft of approximately $116,000.
The Company's current ratio at March 31, 1998 was 1.5 compared to 1.4 at
December 31, 1997. The increase was primarily attributable to obtaining long-
term debt and to an increase in accounts receivable, offset by an increase in
accounts payable. For the same reasons, the Company experienced an increase in
working capital of approximately $410,000 from $1,483,000 at December 31, 1997
to $1,893,000 at March 31, 1998.
The Company's operating activities consumed cash of $164,000 for the three
months ended March 31, 1997, primarily due to an increase in inventory
($168,000), an increase in accounts receivable ($700,000) and an increase in
prepaid expense and other assets ($74,000). These were offset by an increase
in accounts payable ($372,000) and accrued expense ($107,000).
Cash used in investing activities for the three months ended March 31, 1998
totaled $127,000. Such investing activities included purchases of property and
equipment necessary to support the manufacturing and testing of the new digital
and analog product offerings introduced in 1997, and the result of capitalized
engineering expense in accordance with SFAS 86. Additionally, the Company
realized approximately $183,000 in cash from the final disposition of its
investment account.
Cash provided by financing activities was $292,000 for the three months ended
March 31, 1998. This consisted primarily of the proceeds from borrowings on the
Company's line of credit and the restructuring of long term debt of $750,000.
These were offset by payments toward the line of credit of $420,000, capital
leases of $9,700 and an increase in the overdraft of $29,000.
As of December 31, 1997 the Company had withdrawn a significant portion of its
revolving line of credit in the amount of $1,300,000. Also, the Company was in
violation with respect to certain related loan convenants. The Company's loan
convenants as of December 31, 1997 were as follows: a tangible net worth 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; a quick ratio of 1.25 to 1.00; a minimum balance of
cash and marketable securities of $1,000,000; and total liabilities to tangible
net worth of not greater than .60 to 1.00. The Company, as of December 31,
1997, was in violation with respect to two of the four covenants. The Company's
lending institution agreed to waive, in all respects, the convenant violations,
and the Company has renegotiated and modified, subsequent to year end, its
credit facility and loan covenants as follows: on March 11, 1998 the Company
secured a fully amortizing term loan in the principal amount of $750,000, the
proceeds from which will be used to pay down the $1,500,000 revolving line.
The term loan is for a duration of 36 months and carries an interest rate of
LIBOR plus three percent. The revolving line remains at $1,500,000, with a
one-year renewal option and interest at LIBOR plus two percent. The convenants
have been modified as follows: minimum tangible net worth of $3,500,000; a
current ratio of 1.50 to 1.00; cash flow to debt service ratio of 1.50 to 1.00;
and total liabilities to tangible net worth not greater than 1.25 to 1.00. The
Company expects to remain in compliance with the covenants as proposed for this
new debt facility. The above loans are secured by substantially all of the
assets of the Company.
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 is
not material to its financial statements.
<Page 18>
PART I - FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. (CONTINUED)
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 for the fiscal quarter ended March 31, 1998, did not have a material
effect on the Company's results of operations for the current or prior periods.
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 for the
fiscal quarter ended March 31, 1998, did not have a material effect on the
Company's reporting disclosures for the current or prior periods.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." SOP 98-1 establishes the
accounting guidance for the capitalization of certain internal-use software
costs once certain criteria are met. This accounting standard will be effective
for the Company beginning January 1, 1999. The adoption of SOP 98-1 is not
expected to have a material impact on the Company.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-Up
Activities." SOP 98-5 provides guidance on the financial reporting of start-up
activities and organization costs to be expensed as incurred. This statement
will be effective for the Company's financial statements for the year ended
December 31, 1999. The Company is currently evaluating SOP 98-5, but does not
expect it to have a material impact on 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,
thereby affecting the overall annual 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. 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. The Company's
operating expenses are based on anticipated revenue levels and a high percentage
of the Company's expenses are relatively fixed. Therefore, 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.
Changing technologies and new product introductions characterize the markets for
the Company's products, services and systems. 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 obsolete and therefore non-competitive.
<Page 19>
PART I - FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. (CONTINUED)
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 an 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 adversely
affected.
Following are steps management has taken to improve operations with the goal of
sustaining Company operations for the next twelve months and beyond. (1)
Focusing its sales efforts on expanding its domestic and, to a lesser degree,
it's international distribution channels. (2) Introducing new product lines to
respond to new trends and customer demands. (3) Streamlining its manufacturing
process and facility. (4) Restructuring its sales and customer service
departments to more effectively target new business and service its existing
customer base, and (5) reducing overhead and operating expenses. There can be
no assurance the Company can continue to attain increasing profitable operations
in the future.
<Page 20>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Securities Holders
Schedule Form 14(a) Proxy Statement, dated April 30, 1998
Annual Shareholders Meeting, June 25, 1998
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 21>
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 22>
EXHIBIT INDEX
Exhibit
Number Exhibit Title
11.1 Calculation of Earnings Per Share
EXHIBIT 11.1 Statement re: Computation of Per Share Earnings (Loss)
Three Months Ended March 31,
---------------------------
1998 1997
------------ ------------
(unaudited)
PRIMARY
Weighted average common shares outstanding 2,305,500 2,305,500
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 38,318 -
Shares related to SAB No. 55, 64 and 83 - -
------------ ------------
Number of shares used in computing per
share amounts 2,343,818 2,305,500
------------ ------------
Net income $ 236,191 $ (13,799)
Net income per share $ 0.10 $ (0.01)
FULLY DILUTED
Weighted average common shares outstanding 2,305,500 2,305,500
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 46,508 -
Shares related to SAB No. 55, 64 and 83 - -
------------ ------------
Number of shares used in computing per
share amounts 2,352,008 1,749,945
------------ ------------
Net income $ 236,191 $ (13,799)
Net income per share $ 0.10 $ (0.01)
Please refer to Notes to Condensed Financial Statements, Nos. 6 and 9 for
additional information related to the above schedule.
<Page 23>
EXHIBIT INDEX (CONTINUED)
3.1 Articles of Incorporation of the Company (1)
3.2 Bylaws of the Company (1)
4.1 Warrant Agreement (1)
4.2 Warrant Certificate (1)
4.3 Stock Certificate (1)
4.4 Unit Certificate (1)
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
27.1 Financial Data Schedule
(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
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 500
<SECURITIES> 0
<RECEIVABLES> 1,558,936
<ALLOWANCES> 15,000
<INVENTORY> 3,182,411
<CURRENT-ASSETS> 5,608,938
<PP&E> 3,428,390
<DEPRECIATION> 2,032,782
<TOTAL-ASSETS> 9,571,632
<CURRENT-LIABILITIES> 3,715,574
<BONDS> 0
0
0
<COMMON> 4,126,392
<OTHER-SE> 1,139,538
<TOTAL-LIABILITY-AND-EQUITY> 5,265,930
<SALES> 4,398,305
<TOTAL-REVENUES> 4,398,305
<CGS> 2,731,661
<TOTAL-COSTS> 1,374,152
<OTHER-EXPENSES> 9,098
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 29,175
<INCOME-PRETAX> 301,591
<INCOME-TAX> 65,400
<INCOME-CONTINUING> 236,191
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 236,191
<EPS-PRIMARY> .10
<EPS-DILUTED> .10
</TABLE>
