U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 September 30, 1998
<Page 1>
- ------------------------------------------------------------------------
- -----
Pacific Research & Engineering Corporation
Form 10-QSB
Table of Contents
Part I: Financial Information Page
----
Item 1: Financial Statements
Balance Sheets as of September 30, 1998
(unaudited)and December 31, 1997 3
Statements of Income for the Three Months
and Nine Months Ended September 30, 1998
and 1997 (unaudited) 4
Statements of Cash Flows for the Nine Months
Ended September 30, 1998 and 1997 (unaudited) 5
Notes to 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 14
Item 2: Changes in Securities and Use of Proceeds 14
Item 3: Defaults Upon Senior Securities 14
Item 4: Submissions of Matters to a Vote of
Security Holders 14
Item 5: Other Information 14
Item 6: Exhibits and Reports on Form 8-K 14
<Page 2>
- ------------------------------------------------------------------------
- -----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
PACIFIC RESEARCH & ENGINEERING CORPORATION
BALANCE SHEETS
AS OF SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
SEPTEMBER 30, 1998 December 31,1997
------------------ ----------------
(unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 49,901 $ -
Investments in securities - 185,251
Accounts receivable, net 2,029,697 844,048
Contracts in progress - 456,139
Inventories, net (Note 1) 3,316,906 3,014,183
Deferred taxes 25,365 128,000
Prepaid expenses 401,681 402,225
----------- -----------
TOTAL CURRENT ASSETS 5,823,550 5,029,846
PROPERTY AND EQUIPMENT, net 1,561,262 1,352,857
OTHER ASSETS 2,184,644 2,287,149
----------- -----------
$ 9,569,456 $ 8,669,852
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Overdraft $ - $ 144,701
Accounts payable 1,484,016 882,155
Accrued expenses 398,812 328,724
Customer advances 551,166 860,593
Line of credit 1,499,342 1,300,000
Note payable - current portion 250,000 -
Capital lease obligations -
current portion 10,251 30,534
----------- -----------
TOTAL CURRENT LIABILITIES 4,193,587 3,546,707
DEFERRED TAX LIABILITY - 56,000
LONG TERM DEBT, net of current portion 374,702 -
CAPITAL LEASE OBLIGATIONS,
net of current portion 12,813 18,968
----------- -----------
TOTAL LIABILITIES 4,581,102 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 811,962 853,347
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 4,988,354 5,048,177
----------- -----------
$ 9,569,456 $ 8,669,852
=========== ===========
The accompanying notes are integral part of these financial
statements.
<Page 3>
- ------------------------------------------------------------------------
- -----
PACIFIC RESEARCH & ENGINEERING CORPORATION
STATEMENTS OF INCOME FOR THE THREE MONTHS
AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
<TABLE>
Three Months Ended Six Months Ended
September 30, September 30,
1998 1997 1998 1997
----------- ----------- ----------- -----------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
NET SALES $ 3,068,895 $ 3,515,121 $11,720,234 $ 9,118,610
COST OF SALES 1,928,133 1,977,330 7,412,303 5,100,956
----------- ----------- ----------- -----------
Gross profit 1,140,762 1,537,791 4,307,931 4,017,654
OPERATING EXPENSES
General and administrative 513,275 470,707 1,393,905 1,284,412
Selling and marketing 500,815 553,121 1,660,785 1,349,012
Research, development and engineering 312,235 260,634 896,589 810,134
Depreciation and amortization 120,807 150,459 359,699 272,059
----------- ----------- ----------- -----------
TOTAL OPERATING EXPENSES 1,447,132 1,434,921 4,310,978 3,715,617
----------- ----------- ----------- -----------
INCOME FROM OPERATIONS (306,370) 102,870 (3,047) 302,037
OTHER INCOME (EXPENSES)
Interest, net (48,964) (4,782) (121,401) 7,244
Gain on sale of assets - - 34,333 -
Other - 3,813 23,366 3,987
----------- ----------- ----------- -----------
TOTAL OTHER INCOME (EXPENSE) (48,964) (969) (63,702) 11,231
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES (355,334) 101,901 (66,749) 313,268
Income tax benefit (expense) 26,165 5,312 25,365 (60,700)
----------- ----------- ----------- -----------
NET INCOME $ (329,169) $ 107,213 $ (41,384) $ 252,568
=========== =========== =========== ===========
Earnings per average common share $ (0.14) $ 0.05 $ (0.02) $ 0.11
=========== =========== =========== ===========
Fully diluted earnings per
average common share $ ( 0.14) $ 0.05 $ (0.02) $ 0.11
=========== =========== =========== ===========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING: (Exhibit 11.1-EPS) 2,305,500 2,305,500 2,305,500 2,305,500
=========== =========== =========== ===========
</TABLE>
The accompanying notes are integral part of these financial
statements.
<Page 4>
- ------------------------------------------------------------------------
- -----
PACIFIC RESEARCH & ENGINEERING CORPORATION
STATEMENTS OF CASH FLOWS FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
<TABLE>
Nine Months Ended September 30,
---------------------------
1998 1997
------------ ------------
(unaudited) (unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (41,384) $ 252,568
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 359,699 272,059
Gain on investment in securities (18,438) -
Changes in operating assets and liabilities:
Accounts receivable (1,185,649) (332,055)
Inventory (302,723) (1,378,626)
Prepaid expenses and other assets (54,952) (982,435)
Contracts in progress 456,139 -
Accounts payable 601,861 374,598
Deferred income taxes 46,635 59,900
Accrued expenses 70,088 (39,842)
Customer advances (309,427) 586,862
------------ ------------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (378,151) (1,186,971)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (410,604) (353,035)
Proceeds from sales of investments 185,251 458,157
------------ ------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (225,353) 105,122
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from (payments on) notes payable
and lines of credit 824,044 569,103
Overdraft (144,701) -
Payments under capital lease obligations (26,438) (27,051)
Distributions to shareholders - (36,047)
Deferred offering costs, netted against
offering proceeds - (34,513)
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 652,905 71,492
------------ ------------
NET INCREASE (DECREASE) IN CASH 49,401 (610,357)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 500 610,857
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 49,901 $ 500
============ ============
</TABLE>
The accompanying notes are integral part of these financial statements
<Page 5>
- ------------------------------------------------------------------------
- -----
PACIFIC RESEARCH & ENGINEERING CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. Inventories
Inventories at September 30, 1998 and at December 31, 1997 are
summarized as
follows:
September 30, 1998 December 31, 1997
----------- -----------
(unaudited)
Raw materials $ 1,716,740 $ 1,666,885
Work-in-process 740,396 676,630
Finished goods 884,770 695,668
----------- -----------
3,341,906 3,039,183
Less reserve for obsolescence (25,000) (25,000)
----------- -----------
Inventories, net $ 3,316,906 $ 3,014,183
=========== ===========
2. Subsequent Event
On October 5, 1998, the Company entered into a line of credit
facility and promissory note transaction with a bank for
$3,000,000 and $625,000, respectively. These new debt financing
instruments have more favorable covenant requirements and the new
bank doubled the line of credit facility. The proceeds were used
to pay down the line of credit and promissory note included in
these financial statements in the amounts of $1,500,000 and
$625,000, respectively. The terms of the new debt instruments are
principal and interest payments monthly for 59 months at a variable
interest rate currently at 8.5%. As with the previous debt
instruments, this new debt is secured by significantly all of the
Company's assets.
<Page 6>
- ------------------------------------------------------------------------
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," "continue," "will," "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
product; 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, and 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 been the market-proven
technology leader in the field of premium-quality audio products and
studio design services for radio and television broadcasters. These
products and services include on-air consoles for radio and television
stations, radio production consoles, and peripheral products as well as
technical furniture and studio design/integration services for turnkey
systems. Having become the brand-name of choice for U.S. major-market
broadcasters, the Company has begun leveraging its high-quality image
and brand superiority into international marketplaces as well.
STRATEGY
MARKETING CHANNEL DEVELOPMENT. The Company's products and services are
being aggressively marketed worldwide through an expanding group of
select international distributors, and has increased staff and
promotional activities designed to increase international business.
Concurrently, the Company has increased its advertising activities and
broadened its domestic sales force in an effort to more effectively
reach a larger market target. The Company is also focusing sales and
marketing efforts specifically on the nation's largest broadcast groups
to better serve these important corporate clients.
HORIZONTAL EXPANSION FOR TOP-MARKET BROADCASTERS. The Company's vision
for the future of radio and television broadcasting includes new
technology products capitalizing on increasing marketplace demands for
digital technology, such as computer controlled air and production
consoles and digital audio processing and interfacing devices. The first
product in this category, the Integrity TM Digital Broadcast Console
(introduced during the Audio Engineering Society ("AES") trade-show in
Munich, Germany in 1997), now leads its field as the U.S.'s best-selling
digital audio console for radio, selling more units in its first twelve
months of production than any other brand. Company management believes
that attaining leadership in this emerging market segment is vital to
future success in other markets.
<Page 7>
- ------------------------------------------------------------------------
PRODUCTS AND SERVICES
The Company's mission is to be the preeminent service/solution provider
for the domestic and international broadcasting industries. Currently,
the Company's products and services are divided into three categories:
Audio Control Consoles, Manufactured Peripheral Equipment and Systems
Products and Services. The Company's finds its equipment and services to
be consistently ranked among the highest in the industry in quality,
reliability, ease of use, maintenance and customer service.
1. Audio Control Consoles are equipment essential to the broadcast
environment. They are the single point for final control of the "on-
air" product in nearly all radio stations, and perform fundamental audio
mixing, routing and monitoring duties. The Company manufactures a
variety of consoles, covering a wide range of applications designed to
meet the needs of virtually all major, middle and small market radio and
television broadcasters.
2. Manufactured Peripheral Equipment includes distribution
amplifiers, audio switchers, studio turrets and control panels, all of
which are integral parts of the broadcast environment and are often in
use on a 24-hour-per-day, seven-day-per-week basis. The Company sells
these products 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 8>
- ------------------------------------------------------------------------
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>
Nine Months Ended Three Months Ended
September 30 September 30
-------------------------- ----------------------------
1998 1997 Percent 1998 1997 Percent
(unaudited) Incr.(Decr.) (unaudited) Incr.(Decr.)
<S> <C> <C> <C> <C> <C> <C>
Net sales 100.0% 100.0% 28.5% 100.0% 100.0% (12.7%)
Cost of sales 63.2% 55.9% 45.3% 62.8% 56.3% (2.5%)
------- ------- ------- ------- ------- -------
Gross profit 36.8% 44.1% 7.2% 37.2% 43.7% (25.8%)
Expenses:
General and administrative 11.9% 14.1% 8.5% 16.7% 13.4% 9.0%
Selling and marketing 14.2% 14.8% 23.1% 16.3% 15.7% (9.5%)
Research and engineering 7.6% 8.9% 10.7% 10.2% 7.4% 19.8%
Depreciation and amortization 3.1% 3.0% 32.2% 3.9% 4.3% (19.7%)
------- ------- ------- ------- ------- -------
Total operating expenses 36.8% 40.8% 16.0% 47.2% 40.8% 0.9%
Income from operations 0.0% 3.3% (101.0%) (10.0%) 2.9% N/A
------- ------- ------- ------- ------- -------
Other income (expenses):
Interest income (expense) (1.0%) 0.1% N/A (1.6%) (0.1%) N/A
Gain on sale of asset 0.3% 0.0% N/A 0.0% 0.0% N/A
Other 0.2% 0.0% N/A 0.0% 0.1% N/A
------- ------- ------- ------- ------- -------
Total other income (expense) (0.5%) 0.1% N/A (1.6%) 0.0% N/A
Income before income taxes (0.6%) 3.4% (121.3%) (11.6%) 2.9% (448.7%)
Provision for income taxes 0.2% (0.7%) N/A 0.9% 0.1% N/A
------- ------- ------- ------- ------- -------
Net income (0.4%) 2.7% (116.4%) (10.7%) 3.0% (407.0%)
</TABLE>
N/A = NOT MEANINGFUL AND/OR IN EXCESS OF 100%
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1997.
Sales increased $2,601,000 or 28.5%, from $9,119,000 for the nine months
ended September 30, 1997 to $11,720,000 for the nine months ended
September 30, 1998. The Company believes the sales increase to be a sign
of the continuing growth of the domestic and international broadcasting
markets, and the Company's increasing share of those markets. 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 $2,311,000 or 45.3% from $5,101,000 to
$7,412,000, reflecting increased sales during that period, and increased
as a percentage of revenues from 55.9% to 63.2% for the nine months
ended September 30, 1998 compared to the same period in 1997. The
increase in cost as a percentage of revenues is a result of the sales
mix experienced in the nine months ended September 30, 1998, causing a
shift in the sales balance between higher margin manufactured products
and lower margin purchased products.
Gross profit increased $290,000 (from $4,018,000 to $4,308,000) or 7.2%
primarily due to the increase in sales but decreased as a percent of
revenue from 44.1% to 36.8% for the nine months ended September 30, 1997
compared to the nine months ended September 30, 1998.
<Page 9>
- ------------------------------------------------------------------------
General and administrative expenses increased approximately $110,000 or
8.5% for the comparable periods ($1,284,000 in 1997, compared to
$1,394,000 in 1998). The increase reflects the Company's sensitivity to
the growing organization needed to support market requirements. As a
percentage of revenue, general and administrative expenses decreased
2.2%, from 14.1% in 1997 to 11.9% in 1998.
Selling and marketing expenses increased $312,000 or 23.1% from
$1,349,000 in 1997 to 1,661,000 in 1998, primarily due to the expansion
of sales and marketing support staff to better address new market trends
and dynamics. Selling and marketing expenses as a percentage of revenue
decreased 0.6% from 14.8% in the comparable period in 1997 to 14.2%
during the nine months ended September 30, 1998.
Research and engineering expenses increased $86,000 or 10.7% from
$810,000 for the nine months ended September 30, 1997 to $897,000 for
the nine months ended September 30, 1998. Research and engineering
expenses decreased as a percentage of revenue, from 8.9% for the nine
months ended September 30, 1997 to 7.6% for the nine months ended
September 30, 1998. The Company believes that continuing research and
development of new products is essential for maintaining leadership in
core markets.
Capitalized research and engineering costs, pursuant to SFAS 86, for the
nine months ended September 30, 1998 are approximately $270,000. The
Company capitalized such costs in the amount of $509,000 for the
comparable period in 1997.
Income from operations decreased $305,000, from $302,000 for the nine
months ended September 30, 1997 to a loss of $3,000 for the nine months
ended September 30, 1998 reflecting the 7.2% increase in gross margin
offset by the 16.0% increase in operating expenses for the comparable
period. Operating income, as a percentage of revenue, decreased from
3.3% for the nine months ended September 30, 1997 to 0.0% for the nine
months ended September 30, 1998.
Net interest expense increased $129,000 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 September 30, 1998 and recognized a gain of
approximately $34,000 for the nine months ended September 30, 1998.
The combined results, as discussed above, yielded a net loss before
taxes of $67,000 for the nine months ended September 30, 1998 compared
to $313,000 for the nine months ended September 30, 1997, a decrease of
121.3%.
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1997.
Sales decreased $446,000 or 12.7%, from $3,515,000 for the three months
ended September 30, 1997 to $3,069,000 for the three months ended
September 30, 1998. The Company believes the sales decrease to be a
result of the timing of anticipated larger system projects moving into
next quarter.
Cost of sales decreased $49,000 or 2.5% from $1,977,000 to $1,928,000
due to the sales increase, and increased as a percent of revenues by
6.5% for the three months ended September 30, 1998 compared to the same
period in 1997. The decrease in cost as a percentage of revenues is a
result of the sales mix experienced in the period ended September 30,
1998, causing a shift in the sales balance between higher margin
manufactured products and lower margin purchase products.
Gross profit decreased from $1,538,000 as of September 30, 1997 to
$1,141,000 for the same period ended 1998 or 25.8% due primarily to the
increase in sales, and decreased as a percent of revenue from 43.7% to
37.2%, for the three months ended September 30, 1997 compared to the
three months ended September 30, 1998 due to the higher cost of sales as
described above.
General and administrative expenses increased approximately $42,000, or
9.0% for the comparable periods ($471,000 in 1997, compared to $513,000
in 1998), as a result of the Company's increased pursuit of the widening
range of opportunities within the industry. As a percent of revenue,
general and administrative expenses increased 3.3%, from 13.4% in 1997
to 16.7% in 1998.
Selling and marketing expenses decreased $52,000 or 9.5% from $553,000
in 1997 to $501,000 in 1998 due, primarily, to additional sales
professionals and advertising costs. The Company expects to take
advantage of the growing radio market, and will continue to invest
prudently in this area to maximize market penetration. Selling and
marketing expenses as a percentage of revenue increased 0.6% from 15.7%
in 1997 to 16.3% during the three months ended September 30, 1998.
<Page 10>
- ------------------------------------------------------------------------
Research and engineering expenses increased $52,000 or 19.8% from
$260,000 for the three months ended September 30, 1997 to $312,000 for
the three months ended September 30, 1998. The primary reason for the
increase is that, beginning in 1998, the Company reclassified certain
customer service and end-product support expense categories from sales
and marketing to the engineering department, providing a more accurate
expense allocation.
Capitalized research and engineering costs, pursuant to Statement of
Financial Accounting Standards No. 86, for the three months ended
September 30, 1998 are approximately $55,000. The Company capitalized
such costs in the amount of $97,000 for the comparable period in 1997.
Research and engineering expenses increased, as a percent of revenue,
from 7.4% for the three months ended September 30, 1997 to 10.2% for the
three months ended September 30, 1998.
Income from operations decreased $409,000 from a profit of $103,000 for
the three months ended September 30, 1997 to a loss of $3,000 for the
three months ended September 30, 1998 reflecting the 12.7% decrease in
sales, and 25.8% decrease in gross profit for the comparable periods.
Operating income, as a percent of revenue, decreased by 12.9% from 2.9%
for the three months ended September 30, 1997 to (10.0%) for the three
months ended September 30, 1998.
Net interest expense increased $44,000 over the comparable period,
reflecting an increase in borrowings pursuant to debt obligations, the
line of credit, and a decrease in interest bearing investments.
The combined results, as discussed above, yielded a net loss before
taxes of $355,000 for the three months ended September 30, 1998 compared
to a net income before taxes of $102,000 for the three months ended
September 30, 1997. This decrease is directly attributable to changes in
the mix of products sold during this period.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically satisfied its cash requirements through
equity financing, 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.
The Company's current ratio remained at 1.4 as of September 30, 1998
compared to December 31, 1997. The Company experienced an increase in
working capital of approximately $148,000 from $1,483,000 at December
31, 1997 to $1,630,000 at September 30, 1998.
The Company's operating activities consumed cash of $378,000 for the
nine months ended September 30, 1998, primarily due to increases in
accounts receivable ($1,186,000) and a decrease in customer advances
($309,000). These were offset by an increase in accounts payable
($602,000).
Cash used in investing activities for the nine months ended September
30, 1998 totaled $225,000. Such investing activities included purchases
of property and equipment ($411,000), offset by proceeds from the sale
of investments of $185,000.
Cash provided by financing activities was $653,000 for the nine months
ended September 30, 1998. This consisted primarily of the proceeds from
borrowings on the Company's line of credit and long term debt of
$750,000.
<Page 11>
- ------------------------------------------------------------------------
On October 5, 1998, the Company entered into a line of credit facility
and a promissory note transaction with a bank for $3,000,000 and
$625,000, respectively. In addition to doubling the line of credit
available to the Company, the new debt also carries more favorable
terms, conditions and covenants as follows: tangible net worth of not
less than $2,400,000; a leverage ratio of not more than 2.5:1; a debt
service coverage ratio of not less than 1.25:1 and a trading ratio of
not less than 1.15:1. The line of credit bears interest at a rate of
prime plus .25% (currently 8.5%) and matures on 10/04/1999. The term
loan is payable in 59 consecutive monthly principal payments of $10,833
each plus interest at prime plus .25%
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.
Assuming no material changes in the Company's operating plans, the
Company believes that cash generated from operations and cash available
under its current credit line will be sufficient to meet the Company's
working capital and capital expenditure requirements for at least the
next 12 months. Nevertheless, the Company may seek additional debt or
equity financing to meet these requirements. In addition, in the event
that the Company elects to acquire complementary businesses, products or
technologies, the Company may require additional funding prior to that
time. There can be no assurance that the Company will be able to obtain
such financing at favorable terms or at all.
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 was 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.
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 non-owner sources. The implementation of SFAS
130 for the fiscal quarter ended September 30, 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 September 30, 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.
<Page 12>
- ------------------------------------------------------------------------
FACTORS AFFECTING FUTURE OPERATING RESULTS
The Year 2000 computer issue presents potential concerns for business
and consumer computing. The consequences of this issue may include
systems failures and business process interruption. It may also include
additional business and competitive differentiation. Aside from the
well known calculation problems with the use of 2-digit date formats as
the year changes from 1999 to 2000, the year 2000 is a special case leap
year and in many organizations using older technology, dates were used
for special programmatic functions. The Year 2000 issue also affects
the Company's internal systems, including information technology (IT)
and non-IT systems. Based on recent and ongoing assessment, the Company
has determined that it will be required to modify or replace portions of
its software that has been sold to customers so that computer systems
will function properly with respect to dates in the year 2000 and
thereafter. The Company's management believes that all material systems
will be compliant by the Year 2000 and that the cost to address the
issues is not material. All organizations dealing with the Year 2000
must address the effect the issue will have on their third-party supply
chain. The Company is undertaking steps to identify its key third-party
vendors and to formulate a system of working with them to avoid business
interruptions in 2000. The Company currently anticipates completing the
Year 2000 project within one year, but not later than March 31, 1999,
which is prior to any anticipated impact on its operating systems. The
costs of the project, and the date on which the Company believes it will
complete Year 2000 modifications are based on Company management's best
estimates, which were derived utilizing numerous assumptions of future
events, including the continued availability of certain resources, third
party modification plans and other factors. Resolving any Year 2000
issues is a worldwide phenomenon that will likely absorb a substantial
portion of IT budgets and attention in the near term. However, the
impact of the Year 2000 on future Company revenue is difficult to
discern but is a risk to be considered in evaluating future growth of
the Company.
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. The customer base has decreased in numbers,
but increased in relative size. The Company has benefited in nearly
every instance of one customer merging with another. This can be
attributed both to the Company's leadership role within the industry and
successful history with nearly all major potential customers. 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, 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 revenue recognition 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 react
to, and anticipate, changing requirements and preferences within its
target markets. 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.
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 widen
both its share of historic markets, and within markets driven by
emerging methods of content distribution. 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.
<Page 13>
- ------------------------------------------------------------------------
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 for the
next 12-months: (1) Focusing its sales and marketing efforts on
expanding its domestic and international opportunities; (2) Introducing
new solutions to respond to new trends and customer demands; (3) Enhance
the core competencies already within the Company's manufacturing
operations, while taking advantage of skills in place at key suppliers,
thus forming key partner relationships; (4) Restructuring the Company to
exhibit a market/customer driven operation, thus targeting new business
and service needs in the expanding international and domestic
marketplaces; and (5) refocusing the Company's organization to
positively impact overhead and operating expenses. There can be no
assurance the Company can maintain profitable operations in the future.
PACIFIC RESEARCH & ENGINEERING CORPORATION
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
The Annual Meeting of Shareholders of the Company was held
on June 25, 1998. The following items were voted upon by
the shareholders with all items being approved.
a. To elect five directors to serve for the ensuing year
and until their successors are elected.
Votes Votes against Abstained Broker
for or withheld Non-Votes
--------- --------- -------- --------
Jack Williams 2,000,947 3,140 - -
Michael Bosworth 2,000,947 3,140 - -
John Lane 1,992,267 11,820 - -
John Robbins 2,000,947 3,140 - -
Herbert McCord 2,000,947 3,140 - -
b. To approve an amendment to the Company's 1996 Omnibus
Stock Plan to increase the shares reserved for issuance by
200,000.
Votes Votes against Abstained Broker
for or withheld Non-Votes
--------- --------- -------- --------
1,336,933 56,080 12,089 -
c. To ratify the appointment of Harlan & Boettger, LLP as
the independent accountants for the Company.
Votes Votes against Abstained Broker
for or withheld Non-Votes
--------- --------- -------- --------
1,988,818 3,180 12,089 -
Item 5. OTHER INFORMATION
None.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits.
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 14>
- ------------------------------------------------------------------------
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/ Jack Williams
Jack Williams
Chairman, Chief Executive Officer
<Page 15>
- ------------------------------------------------------------------------
EXHIBIT INDEX
Exhibit
Number Exhibit Title
11.1 Calculation of Earnings Per Share
EXHIBIT 10.13 Line of Credit Facility and Note Payable between the
Registrant and Imperial Bank dated October 5, 1998
Imperial Bank
- ----------------------------
INNOVATIVE BUSINESS BANKING
Member FDIC
PROMISSORY NOTE
Principal Loan Date Maturity Loan No Call Collateral
$3,000,000.00 10-05-1998 10-04-1999
Account OFFICER INITIAL
829342 MB /S/MB
References in the shaded area are for Lender's use only and do not limit
the applicability of this document to any particular loan or term.
Borrower: PACIFIC RESEARCH & Lender: Imperial Bank
ENGINEERING CORPORATION San Diego Regional Office
2070 LAS PALMAS DRIVE 701 B Street, Suite 600
CARLSBAD, CA 92009 San Diego, CA 92112-4168
========================================================================
Principal Amount: Initial Rate: Date of Note:
$3,000,000.00 8.500% October 5,1998
PROMISE TO PAY. PACIFIC RESEARCH & ENGINEERING CORPORATION ("Borrower")
promises to pay to Imperial Bank ("Lender"), or order, in lawful money
of the United States of America, the principal amount of Three Million &
00/100 Dollars ($3,000,000.00) or so much as may be outstanding,
together with interest on the unpaid outstanding principal balance of
each advance. Interest shall be calculated from the date of each advance
until repayment of each advance.
PAYMENT. Borrower will pay this loan in one payment of all outstanding
principal plus all accrued unpaid Interest on October 4, 1999. In
addition, Borrower will pay regular monthly payments of accrued unpaid
interest beginning November 5, 1998, and all subsequent interest
payments are due on the same day of each month after that. The annual
interest rate for this Note is computed on a 365/360) basis: that is ,
by applying the ratio of the annual interest rate over a year of 360
days, multiplied by the outstanding principal balance, multiplied by the
actual number of days the principal balance is outstanding. Borrower
will pay Lender at Lender's address shown above or at such other place
as Lender may designate in writing. Unless otherwise agreed or required
by applicable law, payments will be applied first to any unpaid
collection costs and any late charges, then to any unpaid interest, and
any remaining amount to principal.
VARIABLE INTEREST RATE. The interest rate on this Note is subject to
change from time to time based on changes in an index which is the
Imperial Bank Prime Rate (the "Index"). The Prime Rate is the rate
announced by Lender as its Prime Rate of interest from time to time.
Lender will tell Borrower the current index rate upon Borrower's
request. Borrower understands that Lender may make loans based on other
rates as well. The interest rate change will not occur more often than
each day. The index currently is 8.250%. The interest rate to be applied
to the unpaid principal balance of this Note will be at a rate of 0.250
percentage points over the Index, resulting in an initial rate of
8.500%. NOTICE: Under no circumstances will the interest rate on this
Note be more than the maximum rate allowed by applicable law.
PREPAYMENT; MINIMUM INTEREST CHARGE. In any event, even upon full
prepayment of this Note, Borrower understands that Lender is entitled to
a minimum interest charge of $250.00. Other than Borrower's obligation
to pay any minimum interest charge, Borrower may pay without penalty all
or a portion of the amount owed earlier than it is due. Early payments
will not, unless agreed to by Lender in writing, relieve Borrower of
Borrower's obligation to continue to make payments of accrued unpaid
interest. Rather, they will reduce the principal balance due.
LATE CHARGE. If a payment is 10 days or more late, Borrower will be
charged 5.000% of the unpaid portion of the regularly scheduled payment.
DEFAULT. Borrower will be in default if any of the following happens:
(a) Borrower fails to make any payment when due. (b) Borrower breaks any
promise Borrower has made to Lender, or Borrower fails to comply with or
to perform when due any other term, obligation, covenant, or condition
contained in this Note or any agreement related to this Note, or in any
other agreement or loan Borrower has with Lender. (c) Any representation
or statement made or furnished to Lender by Borrower or on Borrower's
behalf is false or misleading in any material respect either now or at
the time made or furnished. (d) Borrower becomes insolvent, a receiver
is appointed for any part of Borrower's property, Borrower makes an
assignment for the benefit of creditors, or any proceeding is commenced
either by Borrower or against Borrower under any bankruptcy or
insolvency laws. (e) Any creditor tries to take any of Borrower's
property on or in which Lender has a lien or security interest. This
includes a garnishment of any of Borrower's accounts with Lender. (f)
Any guarantor dies or any of the other events described in this default
section occurs with respect to any guarantor of this Note. (g) A
material adverse change occurs in Borrower's financial condition, or
Lender believes the prospect of payment or performance of the
Indebtedness is impaired. (h) Lender in good faith deems itself
insecure.
If any default, other than a default in payment, is curable and if
Borrower has not been given a notice of a breach of the same provision
of this Note within the preceding twelve (12) months, it may be cured
(and no event of default will have occurred) if Borrower, after
receiving written notice from Lender demanding cure of such default; (a)
cures the default within ten (10) days; or (b) if the cure requires more
than ten (10) days, immediately initiates steps which Lender deems in
Lender's sole discretion to be sufficient to cure the default and
thereafter continues and completes all reasonable and necessary steps
sufficient to produce compliance as soon as reasonably practical.
LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid
principal balance on this Note and all accrued unpaid interest
immediately due, without notice, and then Borrower will pay that amount.
Upon Borrower's failure to pay all amounts declared due pursuant to this
section, including failure to pay upon final maturity, Lender, at its
option, may also, if permitted under applicable law, do one or both of
the following: (a) increase the variable interest rate on this Note to
5.250 percentage points over the Index, and (b) add any unpaid accrued
interest to principal and such sum will bear interest therefrom until
paid at the rate provided in this Note (including any increased rate).
Lender may hire or pay someone else to help collect this Note if
Borrower does not pay. Borrower also will pay Lender that amount. This
includes, subject to any limits under applicable law, Lender's
attorneys' fees and Lender's legal expenses whether or not there is a
lawsuit, including attorneys' fees and legal expenses for bankruptcy
proceedings (including efforts to modify or vacate any automatic stay or
injunction), appeals, and any anticipated post-judgment collection
services. Borrower also will pay any court costs, in addition to all
other sums provided by law. This Note has been delivered to Lender and
accepted by Lender in the State of California. If there is a lawsuit,
Borrower agrees upon Lender's request to submit to the jurisdiction of
the courts of Los Angeles County, the State of California. Lender and
Borrower hereby waive the right to any jury trial in any action,
proceeding, or counterclaim brought by either Lender or Borrower against
the other. (Initial Here /S/DCN, /S/LEE, /S/JKW) This Note shall be
governed by and construed in accordance with the laws of the State of
California.
DISHONORED ITEM FEE. Borrower will pay a fee to Lender of $25.00 if
Borrower makes a payment on Borrower's loan and the check or
preauthorized charge with which Borrower pays is later dishonored.
RIGHT OF SETOFF. Borrower grants to Lender a contractual security
interest in, and hereby assigns, conveys, delivers, pledges, and
transfers to Lender all Borrower's right, title and interest in and to,
Borrower's accounts with Lender (whether checking, savings, or some
other account), including without limitation all accounts held jointly
with someone else and all accounts Borrower may open in the future,
excluding however all IRA and Keogh accounts, and all trust accounts for
which the grant of a security interest would be prohibited by law.
Borrower authorizes Lender, to the extent permitted by applicable law,
to charge or setoff all sums owing on this Note against any and all such
accounts.
LINE OF CREDIT. This Note evidences a revolving line of credit. Advances
under this Note may be requested orally by Borrower or by an authorized
person. All oral requests shall be confirmed in writing on the day of
the request. All communications, instructions, or directions by
telephone or otherwise to Lender are to be directed to Lender's office
shown above. The following party or parties are authorized to request
advances under the line of credit until Lender receives from Borrower at
Lender's address shown above written notice of revocation of their
authority: DONALD C. NAAB, PRESIDENT; LARRY EYLER, VICE
PRESIDENT/SECRETARY; and JACK WILLIAMS, CHAIRMAN/CEO. Borrower agrees to
be liable for all sums either (a) advanced in accordance with the
instructions of an authorized person or (b) credited to any of
Borrower's accounts with Lender. The unpaid principal balance owing on
this Note at any time may be evidenced by endorsements on this Note or
by Lender's internal records, including daily computer print-outs.
Lender will have no obligation to advance funds under this Note if: (a)
Borrower or any guarantor is in default under the terms of this Note or
any agreement that Borrower or any guarantor has with Lender, including
any agreement made in connection with the signing of this Note; (b)
Borrower or any guarantor ceases doing business or is insolvent (c) any
guarantor seeks, claims or otherwise attempts to limit, modify or revoke
such guarantor's guarantee of this Note or any other loan with Lender:
(d) Borrower has applied funds provided pursuant to this Note for
purposes other than those authorized by Lender; or (e) Lender in good
faith deems itself insecure under this Note or any other agreement
between Lender and Borrower.
REFERENCE PROVISION. 1. Other than (i) non-judicial foreclosure and
all matters in connection therewith regarding security interests in real
or personal property; or (ii) the appointment of a receiver, or the
exercise of other provisional remedies (any and all of which may be
initiated pursuant to applicable law), each controversy dispute or claim
between the parties arising out of or relating to this document
("Agreement"), which controversy, dispute or claim is not settled in
writing within thirty (30) days after the "Claim Data" (defined as the
date on which a party subject to the Agreement gives written notice to
all other parties that a controversy, dispute or claim exists), will be
settled by a reference proceeding in California in accordance with the
provisions of Section 638 et sequiter of the California Code of Civil
Procedures, or their successor section ("CCP"), which shall constitute
the exclusion remedy for the settlement of any controversy, dispute or
claim concerning this Agreement, including whether such controversy,
dispute or
claim is subject to the reference proceeding and except as set forth
above, the parties waive their rights to initiate any legal proceedings
against each other in any court or jurisdiction other than the Superior
Court in the County where the Real Property, if any, is located or Los
Angeles County if none (the Court"). The referee shall be a retired
Judge of the Court selected by mutual agreement of the parties, and if
they cannot so agree within forty-five (45) days after the Claim Date,
the referee shall be promptly selected by the Presiding Judge of the
Court (or has representative). The referee shall be appointed to sit as
a temporary judge, with all of the powers for a temporary judge, as
authorized by law, and upon selection should take and subscribe to the
oath of office as provided for in Rule 244 of the California Rules of
Court (or any subsequently enacted Rule). Each party shall have one
peremptory challenge pursuant to CCP 170.6. The referee shall (a) be
requested to set the matter for hearing within sixty (60) days after the
Claim Date and (b) try any and all issues of law or fact and report a
statement of decision upon them, if possible, within ninety (90) days of
the Claim Date. Any decision rendered by the referee will be final,
binding and conclusive and judgement shall be entered pursuant to CCP
644 in any court in the State of California having jurisdiction. Any
party may apply for a reference proceeding at any time after thirty (30)
days following notice to any other party of the nature of the
controversy, dispute or claim, by filing a petition for a hearing and/or
trial. All discovery permitted by this Agreement shall be completed no
later than fifteen (15) days before the first hearing date established
by the referee, The referee may extend such period in the event of a
party's refusal to provide requested discovery for any reason
whatsoever, including, without limitation, legal objections raised to
such discovery or unavailability of a witness due to absence or illness.
No party shall be entitled to "priority" in conducting discovery.
Depositions may be taken by either party upon seven (7) days written
notice, and request for production or inspection of documents shall be
responded to within ten (10) days after service. All disputes relating
to discovery which cannot be resolved by the parties shall be submitted
to the referee whose decision shall be final and binding upon the
parties. Pending appointment of the referee as provided herein, the
Superior Court is empowered to issue temporary and/or provisional
remedies, as appropriate.
2. Except as expressly set forth in this Agreement, the referee
shall determine the manner in which the reference proceeding is
conducted including the time and place of all hearings, the order of
presentation of evidence, and all other questions that arise with
respect to the course of the reference proceeding. All proceedings and
hearings conducted before the referee, except for trial, shall be
conducted without a court reporter, except that when any party so
requests, a court reporter will be used at any hearing conducted before
the referee. The party making such a request shall have the obligation
to arrange for and pay for the court reporter. The costs of the court
reporter at the trial shall be borne equally by the parties.
3. The referee shall be required to determine all issues in
accordance with existing case law and the statutory laws of the State of
California. The rules of evidence applicable to proceedings at law in
the State of California will be applicable to the reference proceeding.
The referee shall be empowered to enter equitable as well as legal
relief, to provide all temporary and/or provisional remedies and to
enter equitable orders that will be binding upon the parties. The
referee shall issue a singe judgment at the close of the reference
proceeding which shall dispose of all of the claims of the parties that
are the subject of the reference. The parties hereto expressly reserve
the right to contest or appeal from the final judgment or any appealable
order or appealable judgment entered by the referee. The parties hereto
expressly reserve the right to findings of fact, conclusions of law, a
written statement of decision, and the right to move for a new trial or
a different judgment, which new trial, if granted, is also to be a
reference proceeding under this provision.
4. In the event that the enabling legislation which provides for
appointment of a referee is repealed (and no successor statute is
enacted), any dispute between the parties that would otherwise be
determined by the reference procedure herein described will be resolved
and determined by arbitration. The arbitration will be conducted by a
retired judge of the Court, in accordance with the California
Arbitration Act, 1280 through 1294.2 of the CCP as amended from time to
time. The limitations with respect to discovery as set forth herein
above shall apply to any such arbitration proceeding.
CREDIT AGREEMENT. This Note is subject to the provisions of the Credit
Agreement dated October 5, 1998 and all amendments thereto and
replacements therefor.
GENERAL PROVISIONS. Lender may delay or forgo enforcing any of its
rights or remedies under this Note without losing them. Borrower and any
other person who signs, guarantees or endorses this Note, to the extent
allowed by law, waive any applicable statute of limitations,
presentment, demand for payment, protest and notice of dishonor. Upon
any change in the terms of this Note, and unless otherwise expressly
stated in writing, no party who signs this Note, whether as maker,
guarantor, accommodation maker or endorser, shall be released from
liability. All such parties agree that Lender may renew or extend
(repeatedly and for any length of time) this loan, or release any party
or guarantor or collateral; or impair fail to realize upon or perfect
Lender's security interest in the collateral; and take any other action
deemed necessary by Lender without the consent of or notice to anyone.
All such parties also agree that Lender may modify this loan without the
consent of or notice to anyone other than the party with whom the
modification is made.
PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE
PROVISIONS OF THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE
PROVISIONS. BORROWER AGREES TO THE TERMS OF THE NOTE AND ACKNOWLEDGES
RECEIPT OF A COMPLETED COPY OF THE NOTE.
BORROWER:
PACIFIC RESEARCH & ENGINEERING CORPORATION
By:
_____/S/ DONALD C. NAAB_________ ______/S/ LARRY EYLER______
DONALD C. NAAB, PRESIDENT, LARRY EYLER, VICE PRESIDENT/
SECRETARY
_____/S/ JACK WILLIAMS__________
JACK WILLIAMS, CHAIRMAN/CEO
- ------------------------------------------------------------------------
- -----
Imperial Bank
- ----------------------------
INNOVATIVE BUSINESS BANKING
Member FDIC
PROMISSORY NOTE
Principal Loan Date Maturity Loan No Call Collateral
$ 650,000.00 10-05-1998 10-06-2003
Account OFFICER INITIAL
629342 MB /S/MB
References in the shaded area are for Lender's use only and do not limit
the applicability of this document to any particular loan or term.
Borrower: PACIFIC RESEARCH & Lender: Imperial Bank
ENGINEERING CORPORATION San Diego Regional Office
2070 LAS PALMAS DRIVE 701 B Street, Suite 600
CARLSBAD, CA 92009 San Diego, CA 92112-4168
========================================================================
Principal Amount: Date of Note:
$ 650,000.00 October 5, 1998
PROMISE TO PAY. PACIFIC RESEARCH & ENGINEERING CORPORATION ("Borrower")
promises to pay to Imperial Bank ("Lender"), or order, in lawful money
of the United States of America, the principal amount of Six Hundred
Fifty Thousand & 00/100 Dollars ($650,000.00), together with interest on
the unpaid principal balance from October 5, 1996, until paid in full.
PAYMENT, Subject to any payment changes resulting from changes in the
index, Borrower will pay this loan in accordance with the following
payment schedule:
59 consecutive monthly principal payments of $10,833.33 each,
beginning November 3,1998, with interest calculated on the
unpaid principal balances at an interest rate of 0.250 percentage
points over the index described below; 59 consecutive monthly
interest payments, beginning November 3, 1998, with interest
calculated on the unpaid principal balances at an interest rate
of 0.250 percentage points over the Index described below;
1 principal payment of $10,833.53 on October 6, 2003, with
interest calculated on the unpaid principal balances at an
interest rate of 0.250 percentage points over the Index
described below; and 1 interest payment on October 6, 2003,
with interest calculated on the unpaid principal balances at
an interest rate of O.25O percentage points over the Index
described below. This estimated final payment is based on the
assumption that all payments will be made exactly as scheduled
and that the Index does not change; the actual final payment
will be for all principal and accrued interest not yet paid,
together with any other unpaid amounts under this Note.
The annual interest rate for this Note is computed on a 365/360 basis;
that is, by applying the ratio of the annual interest rate over a year
of 360 days, multiplied by the outstanding principal balance, multiplied
by the actual number of days the principal balance is outstanding.
Borrower will pay Lender at Lender's address shown above or at such
other place as Lender may designate in writing. Unless otherwise agreed
or required by applicable law, payments will be applied first to any
unpaid collection costs and any late charges, then to any unpaid
interest, and any remaining amount to principal.
VARIABLE INTEREST RATE. The interest rate on this Note is subject to
change from time to time based on changes in an index which is the
Imperial Bank Prime Rate (the "Lender"). The Prime Rate is the rate
announced by Lender as its Prime Rate of interest from time to time.
Lender will tell Borrower the current Index rate upon Borrower's
request, Borrower understands that Lender may make loans based on other
rates as well. The interest rate change will not occur more often than
each day. The Index currently is 8.250%. The interest rate or rates to
be applied to the unpaid principal balance of this Note will be the rate
or rates set forth above in the "Payment" section. NOTICE: Under no
circumstances will the interest rate on this Note be more than the
maximum rate allowed by applicable law. Whenever increases occur in the
interest rate, Lender, at its option, may do one or more of the
following: (a) increase Borrower's payments to ensure Borrower's loan
will pay off by its original final maturity date, (b) increase
Borrower's payments to cover accruing interest, (c) increase the number
of Borrower's payments, and (d) continue Borrower's payments at the same
amount and increase Borrower's final payment.
PREPAYMENT; MINIMUM INTEREST CHARGE. In any event, even upon full
prepayment of this Note, Borrower understands that Lender is entitled to
a minimum interest charge of $250.00. Other than Borrower's obligation
to pay any minimum interest charge. Borrower may pay without penalty all
or a portion of the amount owed earlier than it is due. Early payments
will not, unless agreed to by Lender in writing, relieve Borrower of
Borrower's obligation to continue to make payments under the payment
schedule. Rather, they will reduce the principal balance due and may
result in Borrower making fewer payments.
LATE CHARGE. If a payment is 10 days or more late, Borrower will be
charged 5.000% of the unpaid portion of the regularly scheduled payment
DEFAULT. Borrower will be in default if any of the following happens:
(a) Borrower fails to make any payment when due. (b) Borrower breaks any
promise Borrower has made to Lender, or Borrower fails to comply with or
to perform when due any other term, obligation, covenant, or condition
contained in this Note or any agreement related to this Note, or in any
other agreement or loan Borrower has with Lender. (c) Any representation
or statement made or furnished to Lender by Borrower or on Borrower's
behalf is false or misleading in any material respect either now or at
the time made or furnished. (d) Borrower becomes insolvent, a receiver
is appointed for any part of Borrower's property, Borrower makes an
assignment for the benefit of creditors, or any proceeding is commenced
either by Borrower or against Borrower under any bankruptcy or
insolvency laws, (e) Any creditor tries to take any of Borrower's
property on or in which Lender has a lien or security interest. This
includes a garnishment of any of Borrower's accounts with Lender. (i)
Any guarantor dies or any of the other events described in this default
section occurs with respect to any guarantor of this Note, (g) A
material adverse change occurs in Borrower's financial condition, or
Lender believes the prospect of payment or performance of the
Indebtedness is impaired. (h) Lender in good faith deems itself
insecure.
If any default, other than a default in payment, is curable and if
Borrower has not been given a notice of a breach of the same provision
of this Note within the preceding twelve (12) months, it may be cured
(and no event of default will have occurred) if Borrower, after
receiving written notice from Lender demanding cure of such default (a)
cures the default within ten (10) days; or (b) if the cure requires more
than ten (10) days, immediately initiates steps which Lender deems in
Lender's sole discretion to be sufficient to cure the default and
thereafter continues and completes all reasonable and necessary steps
sufficient to produce compliance as soon as reasonably practical.
LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid
principal balance on this Note and all accrued unpaid interest
immediately due, without notice, and then Borrower will pay that amount.
Upon Borrower's failure to pay all amounts declared due pursuant to this
section, including failure to pay upon final maturity, Lender, at its
option, may also, if permitted under applicable law, do one or both of
the following: (a) increase the variable interest rate on this Note
5.000 percentage points, and (b) add any unpaid accrued interest to
principal and such sum will bear interest therefrom until paid at the
rate provided in this Note (including any increased rate). Lender may
hire or pay someone else to help collect this Note if Borrower does not
pay. Borrower also will pay Lender that amount. This includes, subject
to any limits under applicable law, Lender's attorneys' fees and
Lender's legal expenses whether or not there is a lawsuit, including
attorneys fees and legal expenses for bankruptcy proceedings (including
efforts to modify or vacate any automatic stay or injunction), appeals,
and any anticipated post-judgement collection services. Borrower also
will pay any court costs, in addition to all other sums provided by law.
This Note has been delivered to Lender and accepted by Lender in the
State of California. If there is a lawsuit Borrower agrees upon Lender's
request to submit to the jurisdiction of the courts of Los Angeles
County, the State of California. Lender and Borrower hereby waive the
right to any jury trial in any action, proceeding, or counterclaim
brought by either Lender or Borrower against the other. (Initial Here
/S/DCN, /S/LEE, /S/JKW) This Note shall be governed by and construed in
accordance with the laws of the State of California.
DISHONORED ITEM FEE. Borrower will pay a fee to Lender of $25.00 if
Borrower makes a payment on Borrower's loan and the check or
preauthorized charge with which Borrower pays is later dishonored.
RIGHT OF SETOFF. Borrower grants to Lender a contractual security
interest in, and hereby assigns, conveys, delivers, pledges, and
transfers to Lender all Borrower's right, title and interest in and to,
Borrower's accounts with Lender (whether checking, savings, or some
other account), including without limitation all accounts held jointly
with someone else and all accounts Borrower may open in the future,
excluding however all IRA and Keogh accounts, and all trust accounts for
which the grant of a security interest would be prohibited by law.
Borrower authorizes Lender, to the extent permitted by applicable law,
to charge or setoff all sums owing on this Note against any and all such
accounts.
REFERENCE PROVISION. 1. Other than (i) non-judicial foreclosure and
all matters in connection therewith regarding security interests in real
or personal property; or (ii) the appointment of a receiver, or the
exercise of other provisional remedies (any and all of which may be
initiated pursuant to applicable law), each controversy dispute or claim
between the parties arising out of or relating to this document
("Agreement"), which controversy, dispute or claim is not settled in
writing within thirty (30) days after the "Claim Data" (defined as the
date on which a party subject to the Agreement gives written notice to
all other parties that a controversy, dispute or claim exists), will be
settled by a reference proceeding in California in accordance with the
provisions of Section 638 et sequiter of the California Code of Civil
Procedures, or their successor section ("CCP"), which shall constitute
the exclusion remedy for the settlement of any controversy, dispute or
claim concerning this Agreement, including whether such controversy,
dispute or claim is subject to the reference proceeding and except as
set forth above, the parties waive their rights to initiate any legal
proceedings against each other in any court or jurisdiction other than
the Superior Court in the County where the Real Property, if any, is
located or Los Angeles County if none (the Court"). The referee shall be
a retired Judge of the Court selected by mutual agreement of the
parties, and if they cannot so agree within forty-five (45) days after
the Claim Date, the referee shall be promptly selected by the Presiding
Judge of the Court (or has representative). The referee shall be
appointed to sit as a temporary judge, with all of the powers for a
temporary judge, as authorized by law, and upon selection should take
and subscribe to the oath of office as provided for in Rule 244 of the
California Rules of Court (or any subsequently enacted Rule). Each party
shall have one peremptory challenge pursuant to CCP 170.6. The referee
shall (a) be requested to set the matter for hearing within sixty (60)
days after the Claim Date and (b) try any and all issues of law or fact
and report a statement of decision upon them, if possible, within ninety
(90) days of the Claim Date. Any decision rendered by the referee will
be final, binding and conclusive and judgement shall be entered pursuant
to CCP 644 in any court in the State of California having jurisdiction.
Any party may apply for a reference proceeding at any time after thirty
(30) days following notice to any other party of the nature of the
controversy, dispute or claim, by filing a petition for a hearing and/or
trial. All discovery permitted by this Agreement shall be completed no
later than fifteen (15) days before the first hearing date established
by the referee, The referee may extend such period in the event of a
party's refusal to provide requested discovery for any reason
whatsoever, including, without limitation, legal objections raised to
such discovery or unavailability of a witness due to absence or illness.
No party shall be entitled to "priority" in conducting discovery.
Depositions may be taken by either party upon seven (7) days written
notice, and request for production or inspection of documents shall be
responded to within ten (10) days after service. All disputes relating
to discovery which cannot be resolved by the parties shall be submitted
to the referee whose decision shall be final and binding upon the
parties. Pending appointment of the referee as provided herein, the
Superior Court is empowered to issue temporary and/or provisional
remedies, as appropriate.
2. Except as expressly set forth in this Agreement, the referee
shall determine the manner in which the reference proceeding is
conducted including the time and place of all hearings, the order of
presentation of evidence, and all other questions that arise with
respect to the course of the reference proceeding. All proceedings and
hearings conducted before the referee, except for trial, shall be
conducted without a court reporter, except that when any party so
requests, a court reporter will be used at any hearing conducted before
the referee. The party making such a request shall have the obligation
to arrange for and pay for the court reporter. The costs of the court
reporter at the trial shall be borne equally by the parties.
3. The referee shall be required to determine all issues in
accordance with existing case law and the statutory laws of the State of
California. The rules of evidence applicable to proceedings at law in
the State of California will be applicable to the reference proceeding.
The referee shall be empowered to enter equitable as well as legal
relief, to provide all temporary and/or provisional remedies and to
enter equitable orders that will be binding upon the parties. The
referee shall issue a singe judgment at the close of the reference
proceeding which shall dispose of all of the claims of the parties that
are the subject of the reference. The parties hereto expressly reserve
the right to contest or appeal from the final judgment or any appealable
order or appealable judgment entered by the referee. The parties hereto
expressly reserve the right to findings of fact, conclusions of law, a
written statement of decision, and the right to move for a new trial or
a different judgment, which new trial, if granted, is also to be a
reference proceeding under this provision.
4. In the event that the enabling legislation which provides for
appointment of a referee is repealed (and no successor statute is
enacted), any dispute between the parties that would otherwise be
determined by the reference procedure herein described will be resolved
and determined by arbitration. The arbitration will be conducted by a
retired judge of the Court, in accordance with the California
Arbitration Act, 1280 through 1294.2 of the CCP as amended from time to
time. The limitations with respect to discovery as set forth herein
above shall apply to any such arbitration proceeding.
CREDIT AGREEMENT. This Note is subject to the provisions of the Credit
Agreement dated October 5, 1998 and all amendments thereto and
replacements therefor.
GENERAL PROVISIONS. Lender may delay or forgo enforcing any of its
rights or remedies under this Note without losing them. Borrower and any
other person who signs, guarantees or endorses this Note, to the extent
allowed by law, waive any applicable statute of limitations,
presentment, demand for payment, protest and notice of dishonor. Upon
any change in the terms of this Note, and unless otherwise expressly
stated in writing, no party who signs this Note, whether as maker,
guarantor, accommodation maker or endorser, shall be released from
liability. All such parties agree that Lender may renew or extend
(repeatedly and for any length of time) this loan, or release any party
or guarantor or collateral; or impair fail to realize upon or perfect
Lender's security interest in the collateral; and take any other action
deemed necessary by Lender without the consent of or notice to anyone.
All such parties also agree that Lender may modify this loan without the
consent of or notice to anyone other than the party with whom the
modification is made.
PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE
PROVISIONS OF THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE
PROVISIONS. BORROWER AGREES TO THE TERMS OF THE NOTE AND ACKNOWLEDGES
RECEIPT OF A COMPLETED COPY OF THE NOTE.
BORROWER:
PACIFIC RESEARCH & ENGINEERING CORPORATION
By:
_____/S/ DONALD C. NAAB_________ ______/S/ LARRY EYLER______
DONALD C. NAAB, PRESIDENT, LARRY EYLER, VICE PRESIDENT/
SECRETARY
_____/S/ JACK WILLIAMS__________
JACK WILLIAMS, CHAIRMAN/CEO
EXHIBIT 11.1 Statement re: Computation of Per Share Earnings (Loss)
<TABLE>
Nine Months Ended
September 30,
-----------------
- ----------
1998
1997
------------ --
- ----------
(unaudited)
(unaudited)
<S> <C>
<C>
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 -
- -
------------ --
- ----------
Number of shares used in computing per share amounts 2,305,500
2,305,500
------------ --
- ----------
Net income $ (41,384) $
252,568
Net income per share $ (0.02) $
0.11
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 -
3,162
------------ --
- ----------
Number of shares used in computing per share amounts 2,305,500
2,308,662
------------ --
- ----------
Net income $ (41,384) $
252,568
Net income per share $ (0.02) $
0.11
</TABLE>
<Page 16>
- ------------------------------------------------------------------------
- -----
Exhibit Index
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)
10.9 Employment Contract by and between the Registrant and Susan
Dingethal (1)
10.10 Employment Contract by and between the Registrant and Donald
Naab(2)
10.11 Lease Agreement dated December 19, 1997(2)
10.12 Line of Credit Facility by and between the Registrant and
Union Bank March 11, 1998(2)
10.13 Line of Credit Facility and Note Payable between the Registrant
and Imperial Bank dated October 5, 1998
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 June 30, 1998
Form 10-QSB, and incorporated herein by reference.
<Page 17>
- ------------------------------------------------------------------------
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> JAN-01-1998 JAN-01-1998
<PERIOD-END> MAR-31-1998 SEP-30-1998
<CASH> 500 49,901
<SECURITIES> 0 0
<RECEIVABLES> 1,543,936 2,029,697
<ALLOWANCES> 15,000 15,000
<INVENTORY> 3,182,411 3,316,906
<CURRENT-ASSETS> 5,608,938 5,823,550
<PP&E> 3,428,390 3,745,906
<DEPRECIATION> 2,032,782 2,403,944
<TOTAL-ASSETS> 9,571,632 9,569,456
<CURRENT-LIABILITIES> 3,715,574 4,193,587
<BONDS> 0 0
0 0
0 0
<COMMON> 4,126,392 4,126,392
<OTHER-SE> 1,139,538 861,962
<TOTAL-LIABILITY-AND-EQUITY> 9,571,632 9,569,456
<SALES> 4,398,306 11,720,234
<TOTAL-REVENUES> 4,398,306 11,720,234
<CGS> 2,731,661 7,412,303
<TOTAL-COSTS> 1,374,152 4,310,978
<OTHER-EXPENSES> 9,098 (63,702)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (29,175) (121,401)
<INCOME-PRETAX> 301,591 (66,749)
<INCOME-TAX> (65,400) 25,365
<INCOME-CONTINUING> 236,191 (41,384)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 236,191 (41,384)
<EPS-PRIMARY> .10 (.02)
<EPS-DILUTED> .10 (.02)
</TABLE>
