<PAGE> 1
U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
[ ] 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 August 9, 1999
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PACIFIC RESEARCH & ENGINEERING CORPORATION
FORM 10-QSB
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I: FINANCIAL INFORMATION PAGE
----
<S> <C>
ITEM 1:FINANCIAL STATEMENTS
CONDENSED BALANCE SHEETS AS OF JUNE 30, 1999 AND
DECEMBER 31, 1998 3
CONDENSED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED
JUNE 30, 1999 AND 1998 4
CONDENSED STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED 5
JUNE 30, 1999 AND 1998
CONDENSED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1998 6
NOTES TO CONDENSED FINANCIAL STATEMENTS 7
ITEM 2:MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 10
PART II: OTHER INFORMATION
ITEM 1:LEGAL PROCEEDINGS 16
ITEM 2:CHANGES IN SECURITIES AND USE OF PROCEEDS 16
ITEM 3:DEFAULTS UPON SENIOR SECURITIES 16
ITEM 4:SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS 16
ITEM 5:OTHER INFORMATION 16
ITEM 6:EXHIBITS AND REPORTS ON FORM 8-K 16
</TABLE>
2
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PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PACIFIC RESEARCH & ENGINEERING CORPORATION
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
----------- -----------
(unaudited)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 161,956 $ 320,656
Accounts receivable, net of allowance
for doubtful accounts of $75,000 in 1999
and $65,000 in 1998 982,007 1,008,392
Inventories 2,192,790 2,614,447
Prepaid expenses 55,608 34,144
----------- -----------
Total Current Assets 3,392,361 3,977,639
----------- -----------
Property and equipment, net 1,053,842 1,164,343
Capitalized software development costs, net 768,798 849,481
Deposits and other assets 125,174 142,856
----------- -----------
$ 5,340,175 $ 6,134,319
=========== ===========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current Liabilities
Accounts payable and accrued expenses $ 2,783,059 $ 2,450,457
Customer advances 585,673 1,249,290
Line of credit 2,175,000 2,109,247
Notes payable to shareholder 100,000 --
Bank term loan payable 541,645 606,645
----------- -----------
Total Current Liabilities 6,185,377 6,415,639
----------- -----------
Commitments and Contingencies (Note 2)
Shareholders' Deficit:
Common Stock, no par value, 25,000,000 authorized;
2,305,500 issued and outstanding 4,126,392 4,126,392
Additional paid-in capital 52,325 52,325
Accumulated deficit (5,023,919) (4,460,037)
----------- -----------
Total Shareholders' Deficit (845,202) (281,320)
----------- -----------
$ 5,340,175 $ 6,134,319
=========== ===========
</TABLE>
The accompanying notes are integral part of these condensed financial statements
3
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PACIFIC RESEARCH & ENGINEERING CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
UNAUDITED
<TABLE>
<CAPTION>
For the Three Months Ended
-------------------------------
June 30, June 30,
1999 1998
----------- -----------
<S> <C> <C>
Net sales $ 3,154,342 $ 4,253,033
Cost of sales 2,102,950 3,064,748
----------- -----------
Gross profit 1,051,392 1,188,285
----------- -----------
Operating expenses:
General and administrative 541,288 516,309
Selling and marketing 666,193 716,173
Research and development 315,892 304,715
Depreciation and amortization 129,409 98,944
----------- -----------
Total operating expenses 1,652,782 1,636,141
----------- -----------
Operating loss (601,390) (447,856)
----------- -----------
Other income (expense):
Interest (50,289) (42,508)
Other, net (1,652) 84,026
----------- -----------
(51,941) 41,518
----------- -----------
Loss before income tax expense (653,331) (406,338)
Income tax expense (800) --
----------- -----------
Net loss $ (654,131) $ (406,338)
=========== ===========
Net loss per common share:
Basic $ (0.28) $ (0.18)
Diluted $ (0.28) $ (0.18)
Weighted average common shares:
Basic 2,305,500 2,305,500
Diluted 2,305,500 2,305,500
</TABLE>
The accompanying notes are integral part of these condensed financial statements
4
<PAGE> 5
PACIFIC RESEARCH & ENGINEERING CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
UNAUDITED
<TABLE>
<CAPTION>
For the Six Months Ended
-------------------------------
June 30, June 30,
1999 1998
----------- -----------
<S> <C> <C>
Net sales $ 7,386,996 8,240,814
Cost of sales 4,610,537 5,908,351
----------- -----------
Gross profit 2,776,459 2,332,463
----------- -----------
Operating expenses:
General and administrative 1,115,086 939,306
Selling and marketing 1,236,642 1,366,408
Research and development 622,290 602,494
Depreciation and amortization 236,356 197,808
----------- -----------
Total operating expenses 3,210,374 3,106,016
----------- -----------
Operating loss (433,915) (773,553)
----------- -----------
Other income (expense):
Interest (126,702) (70,928)
Other, net (2,465) 57,699
----------- -----------
(129,167) (13,229)
----------- -----------
Loss before income tax expense (563,082) (786,782)
Income tax expense (800) (800)
----------- -----------
Net loss $ (563,882) $ (787,582)
=========== ===========
Net loss per common share:
Basic $ (0.24) $ (0.34)
Diluted $ (0.24) $ (0.34)
Weighted average common shares:
Basic 2,305,500 2,305,500
Diluted 2,305,500 2,305,500
</TABLE>
The accompanying notes are integral part of these condensed financial statements
5
<PAGE> 6
PACIFIC RESEARCH & ENGINEERING CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
UNAUDITED
<TABLE>
<CAPTION>
For the Six Months Ended
-------------------------------
June 30, June 30,
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (563,882) $ (787,582)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 236,356 197,808
Change in unrealized loss on sale of
investment in securities -- (16,362)
Loss on sale of assets 1,513 --
Changes in operating assets and liabilities:
Accounts receivable 26,385 (1,038,284)
Costs and estimated earnings in excess of
billings on uncompleted contracts -- 456,139
Inventories 421,657 776,375
Prepaid expenses (21,464) (8,167)
Deposits and other assets 18,282 (205,823)
Accounts payable and accrued expenses 332,602 532,277
Customer advances (663,617) (444,662)
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (212,168) (538,281)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (47,285) (283,574)
Proceeds from sale of investments in securities -- 183,175
Increase in capitalized software -- (222,720)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (47,285) (323,119)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Bank overdraft -- 50,356
Net borrowings on line of credit 65,753 124,342
Borrowings under bank term loan -- 750,000
Borrowings under notes payable to shareholder 100,000 --
Payments on bank term loan (65,000) (62,798)
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 100,753 861,900
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (158,700) 500
Cash and cash equivalents, beginning of period 320,656 --
----------- -----------
Cash and cash equivalents, end of period $ 161,956 $ 500
=========== ===========
</TABLE>
The accompanying notes are integral part of these condensed financial statements
6
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PACIFIC RESEARCH & ENGINEERING CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The condensed interim financial statements included herein have been
prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission for interim financial information.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such
rules and regulations, although the Company believes that the
disclosures are adequate to make the information presented not
misleading. These condensed interim financial statements should be read
in conjunction with the Company's audited financial statements and notes
thereto included in its Annual Report on Form 10-KSB for the year ended
December 31, 1998. In the opinion of management, these interim condensed
financial statements contain all adjustments (consisting of normal
recurring entries) which are necessary for a fair and accurate
presentation of financial position at June 30, 1999 and the results of
operations and cash flows for the three and six month periods ended June
30, 1999 and 1998. Interim results are not necessarily indicative of
those to be expected for the full year.
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 the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
2. PLAN OF MERGER, BUSINESS RISKS AND COMMITMENTS
Plan of Merger
On August 2, 1999, the Company announced that it entered into an
Agreement and Plan of Merger to be acquired by Harris Corporation
("Harris") pursuant to a cash tender offer (the "Tender Offer") for an
aggregate value of approximately $9.5 million, including the assumption
of debt. Pursuant to the terms of the transaction, a subsidiary of
Harris has commenced a cash tender offer for 100% of the outstanding
shares of Common Stock of the Company at a price of $2.35 per share, all
outstanding publicly-traded warrants at a price of $0.15 per warrant,
and certain other warrants at a price of $0.15 per each common share
underlying such warrants. The board of directors of each company has
unanimously approved the transaction.
Directors and executive officers of the Company that hold shares,
including the Company's principal shareholder, have agreed to support
the transaction and to tender their shares pursuant to agreements with
Harris. The Company also entered into a Stock Option Agreement with
Harris pursuant to which the Company has granted Harris an irrevocable
option to purchase from time to time up to 461,099 authorized and
unissued shares of Common Stock (19.9% of total outstanding shares), at
a price of $2.35 per share. The Tender Offer is contingent upon
customary conditions, including the tender of at least 90 percent of the
Company's outstanding capital stock. The Tender Offer commenced on or
about August 9, 1999 and the acquisition is expected to close in
September, 1999, unless the offer is extended. After the tender is
completed, all non-tendered shares will be converted through a merger
into the right to receive $2.35 per share in cash. Harris will finance
the transaction with cash on hand. The transaction with Harris is
subject to a number of conditions and there can be no assurance that the
transaction will be completed on a timely basis, or at all.
Business Risks
The Company has incurred net losses and negative cash flows from
operations for each of the last
7
<PAGE> 8
three fiscal years ended December 31, 1998, 1997 and 1996 as well as the
second quarter and first six months of 1999. As of June 30, 1999, the
Company has a working capital deficit of $2,793,000 and a shareholders'
deficit of $845,000. Additionally, the Company is in default of certain
financial covenants under its line of credit and term loan agreements
and the Company's bank has elected to freeze the line of credit at
$2,175,000 total outstanding principal. Furthermore, due to the covenant
violations, the loans under both the agreements are potentially callable
by the bank. As such, the entire outstanding balances of both the line
of credit and the term loan are reflected in current liabilities.
In May 1999, the bank increased the interest rate on the total
outstanding borrowings to the bank's prime rate plus 2.25 percent.
Between June 1999 and July 1999, the Company borrowed $240,000 in the
form of promissory notes payable to its founder, shareholder and
chairman of the Company's board of directors (the "Shareholder Notes").
As of August 9, 1999, the Company remains in default of certain of its
financial covenants and continues to operate with its existing line of
credit frozen at $2,175,000 total principal outstanding. Based on
current discussions with the bank, management has agreed to work towards
a plan of exit with the bank whereby all outstanding bank borrowings
will be paid in full upon maturity of the line of credit on October 4,
1999. Management is seeking to raise the appropriate funds necessary to
pay off the bank before the expiration of the existing line of credit,
however, there can be no assurance that such financing will be obtained.
During this period, the Company will continue to be solely dependent
upon cash flows from operations for its working capital requirements.
Management currently expects, and is operating under the assumption that
its cash flows from operations as well as the funds received from the
Shareholder Notes will be sufficient to allow the Company to meet its
obligations in the normal course of business. There can be no assurance
that cash flows from operations and funds received from the Shareholder
Notes will be sufficient or that additional financing, if necessary,
will be available on terms acceptable to the Company, if at all (see
"Plan of Merger").
The Company's current financial condition and uncertainties as described
above, raise doubt about the Company's ability to continue as a going
concern. The accompanying financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
Commitments
The Company currently has a commitment to purchase an aircraft at an
estimated cost of $1,600,000, payable upon delivery in 2001.
3. LINE OF CREDIT AND BANK TERM LOAN
Borrowings outstanding under the line of credit and bank term loan bear
interest at the bank's prime lending rate plus 2.25% (10% at June 30,
1999) and are secured by substantially all of the Company's assets. The
line of credit expires in October 1999. The term loan is payable in
consecutive monthly installments of $10,833 plus interest. As of
December 31, 1998 and June 30, 1999, the Company was in violation of
certain of the financial covenants under these loan agreements, and the
amount available under the line has been frozen by the bank at the
amount outstanding as of March 31, 1999. Management has agreed to work
towards a plan of exit with the bank whereby all outstanding bank
borrowings be paid in full upon maturity of the line of credit on
October 4, 1999. The Company is seeking to raise the appropriate funds
to pay off the bank within the time frame provided by the bank, however,
there is no assurance that such financing will be obtained. As a result
of the covenant violations, the entire balance of the term loan is
reflected in current liabilities (see Note 2 "Plan of Merger").
8
<PAGE> 9
4. INVENTORIES
Inventories consist of:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---------- ----------
(unaudited)
<S> <C> <C>
Raw materials $1,133,587 $1,005,585
Work-in-process 236,165 352,171
Finished goods 823,038 1,256,691
---------- ----------
$2,192,790 $2,614,447
========== ==========
</TABLE>
5. NET LOSS PER COMMON SHARE
The computation of basic net loss per common share is based on the
weighted average number of common shares outstanding for the period.
Diluted earnings per share includes any dilutive effects of outstanding
stock options and warrants. Due to the net losses reported for the three
and six month periods ending June 30, 1999 and 1998, the effect of stock
options and warrants outstanding has been excluded from the diluted
earnings per share calculation as their inclusion would be
anti-dilutive.
6. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Six Months Six Months
Ended Ended
June 30, 1999 June 30, 1998
------------- -------------
(unaudited) (unaudited)
<S> <C> <C>
Cash paid for:
Interest $124,081 $ 73,440
Income taxes $ 800 $ 40,000
</TABLE>
7. SEGMENT INFORMATION
The Company operates in one industry segment: the design, manufacture,
marketing and support of high quality broadcast products for use in
radio broadcast studios. The Company has no operations or assets located
outside of the United States. Export sales represented less than 10% of
net sales in the three and six month periods ending June 30, 1999 and
1998. One customer represented approximately 15% and 14% of net sales
for the three and six-month periods ended June 30, 1998, respectively.
8. RELATED PARTY TRANSACTION
As of June 30, 1999, the Company had borrowed $100,000 in the form of
promissory notes payable to its founder, shareholder and chairman of the
Company's board of directors (the "Shareholder Notes"). During July
1999, the Company borrowed an additional $140,000 from the founder and
shareholder. As of August 9, 1999, the outstanding principal amount of
the Shareholder Notes totaled $240,000. The principal balance of the
Shareholder Notes is payable on demand and bears interest at 9%. As of
August 9, 1999, there has been no demand for payment.
9
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Forward-Looking Information - General
The following discussion should be read in conjunction with the
condensed financial statements and related condensed notes included elsewhere
herein. This discussion should not be construed to imply that the results
discussed herein will necessarily continue into the future or that any
conclusion reached herein will necessarily be indicative of actual operating
results in the future. Statements used in this discussion that relate to future
plans, events, financial results or performance are forward-looking statements
as defined under the Private Securities Litigation Reform Act of 1995. These
statements include the words "anticipates," "believe," "expect," "intends,"
"future," "may," "planned," "will," and similar expressions including statements
regarding the Company's acquisition by Harris Corporation, future personnel
levels, investment in product development, potential sources of liquidity, and
sufficiency of cash flows from operations to meet obligations. 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 including those set forth under "Factors That May Affect Future
Results" included in the Management's Discussion and Analysis of Financial
Condition and Results of Operations. 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 or to reflect events or circumstances that may
arise after the date hereof.
RESULTS OF OPERATIONS
The following table sets forth the percentage of net sales represented by
certain items in the Company's condensed statements of operations for the
periods indicated:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
1999 1998 1999 1998
----- ----- ----- -----
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 66.7% 72.1% 62.4% 71.7%
----- ----- ----- -----
Gross profit 33.3% 27.9% 37.6% 28.3%
Expenses:
General and administrative 17.2% 12.1% 15.1% 11.4%
Selling and marketing 21.1% 16.8% 16.8% 16.6%
Research and engineering 10.0% 7.2% 8.4% 7.3%
Depreciation and amortization 4.1% 2.3% 3.2% 2.4%
----- ----- ----- -----
Total operating expenses 52.4% 38.4% 43.5% 37.7%
Operating loss (19.1%) (10.5%) (5.9%) (9.4%)
----- ----- ----- -----
Other income (expenses):
Interest (1.6%) (1.0%) (1.7%) (0.9%)
Other 0.0% 0.0% 0.0% 0.7%
----- ----- ----- -----
Total other income (expense) (1.6%) (1.0%) (1.7%) (0.2%)
Loss before income taxes (20.7%) (9.5%) (7.6%) (9.6%)
Provision for income taxes 0.0% 0.0% 0.0% 0.0%
----- ----- ----- -----
Net loss (20.7%) (9.5%) (7.6%) (9.6%)
===== ===== ===== =====
</TABLE>
10
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Three months ended June 30, 1999 compared to three months ended June 30, 1998
Net sales decreased 25.8% to $3,154,000 for the three months ended June 30, 1999
compared to $4,253,000 for the three months ended June 30, 1998. The decrease
was largely attributable to an overall reduction in the number of large radio
studio system projects from the prior period including one customer project that
accounted for $649,000 of sales in the first quarter of 1998. Audio console unit
sales increased for the period while average selling prices declined due to
increased sales of the AirWave Digital console (that carries a lower average
selling price than other consoles) offset by lower unit sales of the Integrity
and BMX class consoles. Cabinetry and custom engineering products and services
declined commensurate with the lower number of radio studio system projects in
the second quarter. Net sales to customers within the United States for the
second quarter of 1999 compared to the second quarter of 1998 were approximately
91% and 97%, respectively.
Gross margin was 33.3% and 27.9% for the three months ended June 30, 1999 and
1998, respectively. The increase in gross margin was primarily due to improved
manufacturing labor efficiency as compared to the previous year's second
quarter.
General and administrative expenses increased 4.8% to $541,000 for the three
months ended June 30, 1999 from $516,000 for the comparable period of 1998. This
increase is primarily due the hiring of certain senior level employees and
higher costs incurred for professional services. Although management believes
that the majority of its hiring in the general and administrative area is
complete, these expenses as a percentage of sales may vary in future periods.
Selling and marketing expenses decreased 7.0% to $666,000 for the three months
ended June 30, 1999 from $716,000 for the three months ended June 30, 1998. This
decrease is primarily due to reduced spending for media relations and
advertising, partially offset by higher salary and benefit related costs due to
sales staff additions. During the quarter, the Company expensed approximately
$235,000 in marketing costs associated with attendance at the National
Association of Broadcasters industry trade show held in April 1999. Management
anticipates that it will add sales and sales support personnel during the third
quarter of 1999 to support activities associated with the Company's increased
focus on systems integration and the increased number of value-added
distributors, end-user customers and new products.
Research and development expenses were $316,000 for the three months ended June
30, 1999 compared to $305,000 for the three months ended June 30, 1998. Spending
for new product development activities were approximately $73,000 during the
second quarter. There were no software development costs incurred that required
capitalization in accordance with SFAS 86 for the second quarter of 1999 and
1998.
Interest expense was $50,000 for the three months ended June 30, 1999 compared
to $43,000 for the three months ended June 30, 1998. This increase is the result
of higher average borrowings outstanding under the Company's bank line of credit
and term loan agreements as well as an increase in the interest rate on
outstanding borrowings effective May 1, 1999.
Due to the factors as described above, the Company reported a net loss of
$654,000 for the three months ended June 30, 1999 compared to a net loss of
$406,000 for the three months ended June 30, 1998.
Six months ended June 30, 1999 compared to six months ended June 30, 1998
Net sales decreased 10.4% to $7,387,000 for the six months ended June 30, 1999
compared to $8,241,000 for the six months ended June 30, 1998. The decrease was
largely attributable to an overall reduction in the number of large radio studio
system projects from the prior period including one customer project that
accounted for $1,133,000 of sales in the first six months of 1998. Unit sales of
the Company's audio console products increased in the aggregate from the prior
period due to the introduction of the AirWave Digital Console in December 1998.
The increase in sales associated with the AirWave Digital Console was partially
offset by a decrease in sales of the Integrity digital computer-controlled
console. Sales of custom studio cabinetry, specialized audio broadcast
11
<PAGE> 12
products (design for use in conjunction with the cabinetry) and custom
engineering services decreased due to the single customer project from the prior
period. Net sales to customers within the United States for the second quarter
of 1999 compared to the second quarter of 1998 were approximately 93% and 96%,
respectively.
Gross margin was 37.6% and 28.3% for the six months ended June 30, 1999 and
1998, respectively. The increase in gross margin was primarily due to a modest
shift in product mix to higher margin products, improved manufacturing
efficiencies and, to a lesser extent, cost reduction actions.
General and administrative expenses increased 18.7% to $1,115,000 for the six
months ended June 30, 1999 from $939,000 for the comparable period of 1998. This
increase is primarily the result of hiring additional employees and higher costs
incurred for professional services. As a percentage of sales, these expenses
increased to 15.1% for the first half of 1999 from 11.4% for the comparable
period in 1998. Management believes that these expenses, as a percentage of
sales, may vary in future periods due to the relatively fixed nature of these
costs.
Selling and marketing expenses decreased 9.4% to $1,237,000 for the six months
ended June 30, 1999 from $1,366,000 for the six months ended June 30, 1998. This
decrease is primarily due to reduced spending for media relations and
advertising, partially offset by higher personnel costs and trade show
expenditures. Management anticipates that it will add sales and sales support
personnel during the third quarter of 1999 to support activities associated with
the Company's increased focus on systems integration and the increased number of
value-added distributors, end-user customers and new products.
Research and development expenses were $622,000 for the six months ended June
30, 1999 compared to $602,000 for the six months ended June 30, 1998. During the
first half of 1999, all product development costs have been expensed as
incurred. During the first half of 1998, approximately $223,000 of costs related
to software development were capitalized in accordance with SFAS 86.
Interest expense was $127,000 for the six months ended June 30, 1999 compared to
$71,000 for the six months ended June 30, 1998. This increase is the result of
higher average borrowings outstanding under the Company's bank line of credit
and term loan agreements and, to a lesser extent, an increase in the interest
rate on outstanding borrowings effective May 1, 1999.
Due to the factors as described above, the Company reported a net loss of
$564,000 for the six months ended June 30, 1999 compared to a net loss of
$788,000 for the six months ended June 30, 1998
LIQUIDITY AND CAPITAL RESOURCES
On August 2, 1999, the Company announced that it entered into an Agreement and
Plan of Merger to be acquired by Harris Corporation ("Harris") pursuant to a
cash tender offer (the "Tender Offer") for an aggregate value of approximately
$9.5 million, including the assumption of debt. Pursuant to the terms of the
transaction, a subsidiary of Harris has commenced a cash tender offer for 100%
of the outstanding shares of Common Stock of the Company at a price of $2.35 per
share, all outstanding publicly-traded warrants at a price of $0.15 per warrant,
and certain other warrants at a price of $0.15 per each common share underlying
such warrants. The board of directors of each company has unanimously approved
the transaction.
Directors and executive officers of the Company that hold shares, including the
Company's principal shareholder, have agreed to support the transaction and to
tender their shares pursuant to agreements with Harris. The Company also entered
into a Stock Option Agreement with Harris pursuant to which the Company has
granted Harris an irrevocable option to purchase from time to time up to 461,099
authorized and unissued shares of Common Stock (19.9% of total outstanding
shares), at a price of $2.35 per share. The Tender Offer is contingent upon
customary conditions, including the tender of at least 90 percent of the
Company's outstanding capital stock. The Tender Offer commenced on or about
August 9, 1999 and the acquisition is expected to close in September, 1999,
unless the offer is extended. After the tender is completed, all non-tendered
shares will be converted through a merger into the right to receive $2.35 per
share in cash. Harris will finance the transaction with cash on hand.
The transaction with Harris is subject to a number of conditions and there can
be no assurance that the transaction
12
<PAGE> 13
will be completed on a timely basis, or at all.
The Company's recent working capital and capital expenditure requirements have
been financed using the bank credit facility and term loan financing. Since the
initial public offering in 1996, the Company has incurred significant product
development costs and has hired personnel to support the Company's operations.
Additionally, the Company has substantially increased its sales and customer
support staff in order to broaden its domestic market presence and gain entry
into foreign markets. As a result of these factors, the Company's internally
generated cash flow has not been sufficient to finance operations.
As of June 30, 1999 and December 31, 1998, the Company was in violation of
certain financial covenants with respect to the bank line of credit and term
loan agreement. Specifically, due to net losses incurred, the Company's tangible
net worth is below the minimum requirement of $2,400,000. Additionally, the
Company does not meet certain financial ratios including 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. As a result of the covenant violations,
the bank has notified the Company that it is in default of the loan agreements
and elected to freeze the line of credit at $2,175,000 total outstanding
principal. Furthermore, the entire balance of the bank term loan is reflected as
a current liability.
Due to the restrictions from borrowing additional funds under the bank line of
credit, the Company's principal source of liquidity is its planned cash flows
from operations. Borrowings outstanding under the line of credit were $2,175,000
as of June 30, 1999, representing the maximum available borrowings against the
line. The Company's working capital deficit position has increased $454,000 from
the three months period ended March 31, 1999. The Company has a working capital
deficit of $2,793,000 as of June 30, 1999 compared to a working capital deficit
of $2,438,000 as of December 31, 1998. For the quarter ended June 30, 1999, the
Company satisfied its working capital and capital expenditure requirements
primarily through reductions in accounts receivable levels, extension of trade
payable days outstanding levels and shareholder loans (see also "Factors That
May Affect Future Results" included elsewhere herein).
Cash used in investing activities of $47,000 for the six months ended June 30,
1999 related to expenditures for capital equipment. The Company currently has no
significant capital commitments to support its operating requirements for the
next twelve months other than commitments under facilities and other operating
leases.
In June 1999, the Company borrowed $100,000 in the form of promissory notes
payable to the Chief Executive Officer of the Company, Chairman of the board of
directors and shareholder. The principal balance is payable on demand and bears
interest at 9%. In July 1999, the Company borrowed an additional $140,000 from
the same executive officer and director at similar terms. As of August 9, 1999,
the outstanding principal amount of the promissory notes totaled $240,000. As of
August 9, 1999, there has been no demand or payment.
As a result of the Company's past operating losses and liquidity pressures there
is a risk that the Company may not have the ability to maintain its operations
at its current levels or expand its market presence. If cash generated from
operations is insufficient to satisfy the Company's liquidity requirements, the
Company may seek to sell additional equity or debt securities to satisfy its
business plan. In this regard, management is currently working with its bank to
obtain a covenant waiver or forbearance agreement, and to renegotiate covenants
and terms for its line of credit and term loan agreements. As of August 9, 1999,
the bank has not waived said covenant violations and, instead, has elected to
freeze the line of credit at $2,175,000 outstanding principal and request that
the Company work towards a plan of exit to repay all outstanding bank borrowings
upon maturity of the line of credit on October 4, 1999. As a result, the Company
will be solely dependent upon cash flows from operations for its working capital
requirements. Management currently expects, and is operating under the
assumption that its cash flows from operations as well as the funds received
from the Shareholder Notes will be sufficient to allow the Company to meet its
obligations in the normal course of business. Management is seeking to raise the
appropriate funds to pay off the bank within the time frame provided, however,
there is no assurance that such financing will be obtained. The sale of
additional equity or convertible debt securities could result in dilution to
existing shareholders. There can be no assurance that such financing will be
available on terms acceptable to the Company, if at all (see discussion of the
Agreement and Plan of Merger above).
13
<PAGE> 14
FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company has experienced net losses in each of the last three fiscal years as
well as the second quarter and first six months of 1999. There can be no
assurance that the Company will be able to operate profitably on a quarterly or
annual basis in the future or sustain such profitability when achieved. As of
June 30, 1999 the Company had a working capital deficit of $2,793,000 and a
shareholders' deficit of $845,000. As a result of net losses and the
shareholders' deficit, the Company has been notified by its bank that it is in
default for the failure to meet and maintain the financial covenants with
respect to its bank line of credit and term loan agreements. In addition, based
upon these financial results, the Company has fallen below the continued listing
requirements of the American Stock Exchange. There can be no assurance that the
Company will be able to maintain its listing.
The Company is currently operating without access to a working capital line of
credit and is solely dependent upon cash flows from operations to sustain its
activities. To satisfy it working capital requirements the Company has extended
its trade payables days outstanding with vendors and suppliers. There can be no
assurance that the vendors and suppliers will continue to provide product and
services to the Company on a credit basis or that the vendors and suppliers will
not begin to require cash in advance payments or send the Company to collection
services for payment of outstanding amounts. Such events would negatively impact
the Company's ability to fulfill its customer orders.
The radio broadcast equipment market is competitive, and as such, the Company's
growth is dependent upon its ability to develop a market presence with middle
and small market broadcasters, broaden its product offerings, enhance its
existing products and introduce new products on a timely basis. There can be no
assurance that the Company will successfully expand its market presence and
develop and bring new products to the market in a timely manner or that such
products will be desired by the market. The Company's ability to pursue its
business plan is dependent on its ability to maintain adequate financing.
The Company anticipates that it will continue efforts to expand into third party
or indirect distribution channels. Sales from these channels generally result in
lower gross margins.
The Company typically operates with a relatively small backlog. Customers
generally order on an "as needed" basis and the Company normally ships products
within a relatively short period of time after receipt of order. However, delays
in shipment may occur due to customer-driven changes to specifications and
delivery dates which are outside of the control of the Company. As a result,
quarterly sales and operating results generally depend on the volume, timing and
ability to fulfill orders received within the quarter, which are difficult to
forecast. Additionally, quarterly sales and operating results may vary depending
on the proportion of sales represented by large studio integration projects as a
percentage of total sales in a quarterly period. Also, the Company is attempting
to expand its sales into international markets, through third-party distributors
and integrators. Accordingly, the Company is dependent on the efforts of these
independent organizations to sell the Company's products. The results of
operations for any quarter are not necessarily indicative of the results to be
expected for any future period. A significant portion of the Company's operating
expenses are relatively fixed, and planned expenditures are based primarily on
sales forecasts. As a result, if sales generated in the quarterly period do not
meet the Company's forecast, operating results may be materially adversely
affected.
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Computer programs that
have time sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in miscalculations or failures in
the information systems and/or manufacturing equipment. Such instances could
cause disruption of normal business activities. The Company has completed a
review of its own products and believes they are Year 2000 compliant. These
products are used in connection with other software programs, operating systems
or hardware which may contain Year 2000 issues and disrupt the use of the
Company's products. There can be no assurance that such disruption would not
negatively impact costs and sales in future years.
14
<PAGE> 15
The Company has completed a review and assessment of its major internal
management information systems and believes they are Year 2000 compliant. The
Company is in communication with its significant suppliers and customers to
determine the extent to which the Company is vulnerable to any third party's
failure to remedy their own Year 2000 issues. To date, the Company is not aware
of any such suppliers or customers with a Year 2000 issue that could have a
material adverse effect on the Company's business, financial condition and
operating results. The Company could be adversely affected if its significant
suppliers or customers are unable to complete their Year 2000 resolution in a
timely fashion. The ultimate effect of non-compliance by these parties is not
determinable. To date, costs related to Year 2000 issues have not been material.
15
<PAGE> 16
PART II OTHER INFORMATION
<TABLE>
<S> <C> <C>
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 SECURITY HOLDERS
None
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 - Other Events, change in accountants,
filed May 10, 1999
</TABLE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
PACIFIC RESEARCH & ENGINEERING CORP.
Dated: August 11, 1999 By /s/ Blake F. Clark
---------------------------------
Blake F. Clark
Chief Financial Officer and Principal
Accounting Officer
16
<PAGE> 17
EXHIBIT INDEX
<TABLE>
<S> <C>
2.1.1 Agreement and Plan of Merger, dated August 2, 1999, by and among Harris
Corporation, Space Coast Merger Corp., and Pacific Research &
Engineering Corporation (6)
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)(5)
10.6 Employment Contract by and between the Registrant and David Pollard
(1)(5)
10.7 1996 Omnibus Stock Plan and form of Stock Option Agreement thereunder
(1)(5)
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
(2)(5)
10.10 Employment Contract by and between the Registrant and Donald Naab (3)(5)
10.11 Lease Agreement dated December 19, 1997 (3)
10.12 Line of Credit Facility by and between the Registrant and Union Bank
dated March 11, 1998 (3)
10.13 Line of Credit and Note Payable between the Registrant and Imperial Bank
dated October 5, 1998 (4)
10.14 Amendment to Employment Contract by and between the Registrant and
Donald Naab (5)
10.15 Employment Contract by and between the Registrant and Blake Clark (5)
10.16 Amendment to Employment Contract by and between the Registrant and Blake
Clark (5)
10.17 Aircraft Purchase and Sale Agreement dated December 18, 1996
27.1 Financial Data Schedule
</TABLE>
(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 10-QSB, September
30, 1997, and incorporated herein by reference.
(3) Previously filed as an exhibit to the Company's Form 10-QSB, June 30,
1998, and incorporated herein by reference.
(4) Previously filed as an exhibit to the Company's Form 10-QSB, September
30, 1998, and incorporated herein by reference.
(5) Executive Compensation Plans and Agreements.
(6) Incorporated by reference from Harris Corporation's Schedule 14D-1 filed
with the SEC on August 9, 1999.
17
<PAGE> 1
EXHIBIT 10.14
AMENDMENT TO EMPLOYMENT AGREEMENT
This Amendment to Employment Agreement is made by and between Pacific Research &
Engineering Corporation ("PR&E") and Donald C. Naab ("Naab"), effective April
12, 1999. The purpose of this agreement is to amend the Employment Agreement
dated June 29, 1998 as follows:
Paragraph 6.2 shall be revised to read as follows:
6.2 Renewal. On completion of the Initial Term specified in
paragraph 6.1 above, Naab shall be employed for an additional
two years beginning on 1/1/2000 and continuing until 12/31/2001
("Second Term"), unless terminated sooner in accordance with
Paragraph 7.1 or 7.2. After the Second Term, the employment
relationship between Naab and PR&E will be "at-will" and may be
terminated by either Naab or PR&E at any time, with or without
cause, upon 30 days advance notice, unless the parties agree, in
writing, to renew this agreement for a future specified term.
In addition, paragraph 13, Entire Agreement, is revised to read:
13 Entire Agreement. This Employment Agreement dated June 29,
1998, including Exhibit A appended hereto and the PR&E Stock
Option Plan referenced herein, and the Amendment to Employment
Agreement dated April 12, 1999, constitutes the entire agreement
between the parties relating to this subject matter and
supersedes all prior and simultaneous representations,
discussions, negotiations and agreements, whether written or
oral. This Agreement may be amended or modified only with the
written consent of Naab and the CEO of PR&E. No oral waiver,
amendment or modification will be effective under any
circumstances whatsoever.
The parties intend that all other provisions of the June 29, 1998 agreement
shall remain in full force and effect. THE PARTIES TO THIS AGREEMENT HAVE READ
THE FOREGOING AMENDMENT TO EMPLOYMENT AGREEMENT AND FULLY UNDERSTAND EACH AND
EVERY PROVISION CONTAINED HEREIN. WHEREFORE, THE PARTIES HAVE FREELY AND
VOLUNTARILY EXECUTED THIS AGREEMENT ON THE DATES SHOWN BELOW.
- ---------------------------------- ------------------------------------
Dated Donald C. Naab
2366 Casa Hermosa Court
Encinitas, CA 92024
PACIFIC RESEARCH & ENGINEERING
By:
- ---------------------------------- ------------------------------------
Dated Jack Williams
Chief Executive Officer
2070 Las Palmas Drive
Carlsbad, CA 92121
<PAGE> 1
EXHIBIT 10.15
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is made effective as of January
26, 1999, by and between Pacific Research and Engineering Corporation ("PR&E")
and Blake F. Clark ("Clark").
NOW, THEREFORE, the parties agree as follows:
1. Employment. PR&E hereby engages Clark, and Clark hereby accepts such
engagement, upon the terms and conditions set forth herein.
2. Duties.
2.1 Position. Clark is engaged in the position of Chief
Financial Officer, reporting to the President & Chief Operating Officer ("COO")
of PR&E and shall have responsibility for PR&E's financial and accounting
concerns and shall support the SEC guidelines appropriate for a public company.
Clark shall perform faithfully and diligently such duties, as well as such other
duties as the President & COO shall reasonably assign from time to time. PR&E
reserves the right to modify Clark's position and duties at any time in its sole
and absolute discretion.
2.2 Best Efforts/Full-time. Clark will expend his best efforts
on behalf of PR&E, and will abide by all policies and decisions made by PR&E, as
well as all applicable federal, state and local laws, regulations or ordinances.
Clark will act in the best interest of PR&E at all times. Clark shall devote
Clark's full business time and efforts to the performance of his assigned
duties, unless Clark notifies PR&E in advance of his intent to engage in other
paid work and receives PR&E's express written consent to do so. Clark must not
engage in any work, paid or unpaid, that creates an actual or potential conflict
of interest with PR&E and, if PR&E believes a conflict exists, PR&E may ask
Clark to choose whether to discontinue the other work or resign employment with
PR&E.
3. Compensation.
3.1 Base Salary. As compensation for the proper and satisfactory
performance of all duties to be performed by Clark hereunder, PR&E shall pay to
Clark an initial Base Salary of $130,000 per year, payable in accordance with
the normal payroll practices of PR&E, less required deductions for state and
federal withholding tax, social security and all other employment taxes and
payroll deductions. In the event Clark's employment under this Agreement is
terminated by either party, for any reason whatsoever, before the last day of
any employment year, Clark will be entitled to receive for such year the Base
Salary prorated to the date of termination.
3.2 Incentive Compensation. Clark will be eligible to earn
incentive compensation on an annual basis in accordance with the terms and
conditions established by PR&E in its sole and exclusive discretion. The
Incentive Compensation Plan established for calendar year 1999 is set forth on
Exhibit A.
3.3 Stock Options. Clark will receive 30,000 stock options in
accordance with the terms and conditions of the PR&E Stock Option Plan.
3.4 Performance Review. The COO will periodically review Clark's
performance on no less than an annual basis. Adjustments to salary or other
compensation, if any, will be made by the COO, as approved by the compensation
committee, in their sole and absolute discretion.
4. Fringe Benefits.
<PAGE> 2
4.1 Customary Fringe Benefits. Clark will be eligible for all
customary and usual fringe benefits generally available to employees of PR&E,
with the exception that Clark will accrue three weeks of paid vacation per year
for each of the first five years of full-time employment and four weeks per year
thereafter. PR&E reserves the right to change or terminate the fringe benefits
on a prospective basis, at any time, effective upon notice to Clark.
4.2 Car Allowance. PR&E will pay Clark PR&E's standard executive
car allowance of $250 per month for each full month that Clark is employed.
5. Business Expenses. Clark will be reimbursed for all reasonable,
out-of-pocket business expenses incurred in the performance of his duties on
behalf of PR&E. To obtain reimbursement, expenses must be submitted promptly
with appropriate supporting documentation and must be approved by the Chief
Financial Officer of PR&E.
6. At-Will Employment Relationship. Clark's employment with PR&E is not
for any specified period and may be terminated at any time, with or without
cause or advance notice, by either Clark or PR&E. In addition, PR&E reserves the
right to modify Clark's position and duties at any time in its sole and absolute
discretion and to impose disciplinary action short of termination whenever PR&E
deems it appropriate to do so. No representative of PR&E, other than the COO,
CEO or the majority vote of the board of directors, has the authority to alter
the at-will employment relationship. Any change to the at-will employment
relationship must be by specific, written agreement. Nothing in this Agreement
is intended to or should be construed to contradict, modify or alter this
at-will policy.
7. Competitive Employment. During the term of Clark's employment with
PR&E, Clark agrees that he will not directly or indirectly compete with PR&E in
any way, and will not act as an officer, director, employee, consultant,
shareholder, volunteer, lender, or agent of any business enterprise of the same
nature as, or which is in direct competition with, the business in which PR&E is
now engaged or in which PR&E becomes engaged during the term of Clark's
employment with PR&E, as may be determined by PR&E in its sole discretion.
Further, Clark agrees not to refer any client or potential client to competitors
of PR&E without PR&E's written consent during the term of Clark's employment
with PR&E.
8. Confidentiality and Proprietary Rights. As a condition of employment,
Clark agrees to read, sign and abide by PR&E's Employee Innovations and
Proprietary Rights Assignment Agreement, which is provided with this Agreement
and incorporated herein by reference.
9. Nonsolicitation. During the term of this Agreement and for a period
of one year thereafter, irrespective of the reason for termination of
employment, Clark agrees not to, directly or indirectly, separately or in
association with others:
9.1 Interfere with, impair, disrupt or damage PR&E's
relationship with any of its clients or prospective clients by soliciting or
encouraging or causing others to solicit or encourage, any of them for the
purpose of diverting or taking away the business such clients have with PR&E; or
9.2 Interfere with, impair, disrupt or damage PR&E's business by
soliciting, encouraging or causing others to solicit or encourage any of PR&E's
employees to discontinue their employment with PR&E.
10. General Provisions.
10.1 Successors and Assigns. The rights and obligations of PR&E
under this Agreement shall inure to the benefit of and shall be binding upon the
successors and assigns of PR&E. Clark shall not be entitled to assign any of
Clark's rights or obligations under this Agreement.
2
<PAGE> 3
10.2 Waiver. Either party's failure to enforce any provision of
this Agreement shall not in any way be construed as a waiver of any such
provision, or prevent that party thereafter from enforcing each and every other
provision of this Agreement.
10.3 Severability. In the event any provision of this Agreement
is found to be unenforceable by an arbitrator or court of competent
jurisdiction, such provision shall be deemed modified to the extent necessary to
allow enforceability of the provision as so limited, it being intended that PR&E
shall received the benefit contemplated herein to the fullest extent permitted
by law. If a deemed modification is not satisfactory in the judgment of such
arbitrator or court, the unenforceable provision shall be deemed deleted, and
the validity and enforceability of the remaining provisions shall not be
affected thereby.
10.4 Interpretation; Construction. The headings set forth in
this Agreement are for convenience only and shall not be used in interpreting
this Agreement. This Agreement has been drafted by legal counsel representing
PR&E, but Clark has participated in the negotiation of its terms. Furthermore,
Clark acknowledges that he has had an opportunity to review and revise the
Agreement and have it reviewed by legal counsel, if desired, and, therefore, the
normal rule of construction to the effect that any ambiguities are to be
resolved against the drafting party shall not be employed in the interpretation
of this Agreement.
10.5 Governing Law. This Agreement will be governed by and
construed in accordance with the laws of the United States and the State of
California.
10.6 Notices. Any notice required or permitted by this Agreement
shall be in writing and shall be delivered as follows with notice deemed given
as indicated: (a) by personal delivery when delivered personally, (b) by
overnight courier upon written verification of receipt, (c) by telecopy or
facsimile transmission upon acknowledgment of receipt of electronic
transmission, or (d) by certified or registered mail, return receipt requested,
upon verification of receipt. Notice shall be sent to the addresses set forth
below, or such other address as either party may specify in writing.
10.7 Survival. Sections 8 ("Confidentiality and Proprietary
Rights"), 9 ("Nonsolicitation"), 10 ("General Provisions") and 11 ("Entire
Agreement") of this Agreement shall survive Clark's employment by PR&E.
11. Entire Agreement. This Agreement, including Exhibit A appended
hereto and the PR&E Employee Innovations and Proprietary Rights Assignment
Agreement incorporated by reference, constitutes the entire agreement between
the parties relating to this subject matter and supersedes all prior or
simultaneous representations, discussions, negotiations, and agreements, whether
written or oral. This Agreement may be amended or modified only with the written
consent of Clark and the COO, CEO or majority vote of the board of directors of
PR&E. No oral waiver, amendment or modification will be effective under any
circumstances whatsoever.
THE PARTIES TO THIS AGREEMENT HAVE READ THE FOREGOING AGREEMENT AND FULLY
UNDERSTAND EACH AND EVERY PROVISION CONTAINED HEREIN. WHEREFORE, THE PARTIES
HAVE EXECUTED THIS AGREEMENT ON THE DATES SHOWN BELOW.
BLAKE F. CLARK
- ---------------------------------- ------------------------------------
Dated:
1574 Bella Vista Drive
Leucadia, CA 92024-1265
3
<PAGE> 4
PACIFIC RESEARCH & ENGINEERING
CORPORATION
- ---------------------------------- ------------------------------------
Dated: By:
Donald C. Naab
President & Chief Operating Officer
2070 Las Palmas Drive
Carlsbad, CA 92121
4
<PAGE> 5
EXHIBIT A
INCENTIVE COMPENSATION PLAN
CALENDAR YEAR 1999
In addition to the Base Salary, Clark will be eligible to earn incentive
compensation in the form of a Performance Bonus and a Stock Option Award
calculated and paid in accordance with the terms and conditions set forth below.
A. Performance Bonus.
1. Bonus Potential. Clark will be eligible to earn a maximum annual
performance bonus equal to 50 percent of the Base Salary in effect on the first
day of the applicable calendar year.
2. Prerequisites to Earning Bonus. In order to earn a performance bonus
for any calendar year, Clark must be employed by PR&E on the last day of the
applicable calendar year.
3. Bonus Calculation. Bonus will be based on the achievement of annual
budget goals in each of four (4) categories: gross margin, inventory, revenue
and cash flow; the budget goals for the year will be set by PR&E in its sole and
absolute discretion. If PR&E achieves its annual budget goals for each and every
category, Clark will be paid a 30-percent bonus. If PR&E exceeds its annual
budget goals by 10 percent or more in each and every category, Clark will earn a
40-percent bonus. In the event that one or more categories falls short of the
30-percent, 40-percent or 50-percent bonus target, Clark may be paid a prorated
bonus based on the actual achievement in each category. See chart below:
<TABLE>
<CAPTION>
Budget Bonus Budget Bonus Budget Bonus Budget Bonus
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Profit 90% 2.5% 100% 10% 110% 12% 125% 15%
Cash 90% 2.5% 100% 5% 110% 8% 125% 10%
Inventory 90% 2.5% 100% 10% 110% 12% 125% 15%
Revenue 90% 2.5% 100% 5% 110% 8% 125% 10%
---- -- -- ---
10% 30% 40% 50%
</TABLE>
4. Payment of Bonus. The annual performance bonus, if any, will be paid
within 30 days after the completion of the annual audit.
5. Termination of Employment. In the event of termination of employment
prior to the end of any calendar year, Clark will not earn an annual performance
bonus; however, if Clark's employment is terminated by PR&E without cause within
the last six months of the calendar year, PR&E will pay Clark a prorated bonus
based on PR&E's achievement of budget goals to the date of termination provided
Clark complies with all surviving provisions of the Employment Agreement and
executes a full general release of all claims, known or unknown, arising out of
or related to Clark's employment or termination of employment with PR&E. In the
event of Clark's voluntary resignation, termination with cause, or termination
without cause within the first six months of any calendar year, Clark will not
be entitled to receive the prorated bonus or any part thereof.
B. Stock Option Award.
If PR&E meets or exceeds 110% of its annual budget goals in all four (4)
categories of gross margin, inventory, revenue and cash flow, as established by
PR&E in its sole and absolute discretion, Clark will receive 5,000 stock options
in accordance with the terms and conditions of PR&E's Stock Option Plan,
provided Clark is employed by PR&E on December 31, 1999 and meets all other
eligibility requirements of that Plan. The stock option award will not be
prorated. Furthermore, in the event of termination of employment, for any reason
whatsoever, prior to the end of the calendar year, Clark will not earn and will
not be awarded the 5,000 stock options or any part thereof.
5
<PAGE> 1
EXHIBIT 10.16
AMENDMENT TO EMPLOYMENT AGREEMENT
This Amendment to Employment Agreement is made by and between Pacific Research &
Engineering Corporation ("PR&E") and Blake F. Clark ("Clark"), effective April
12, 1999. The purpose of this agreement is to amend the Employment Agreement
dated February 1, 1999 as follows:
Paragraph 6 will be deleted and replaced by the new paragraph 6, which reads as
follows:
6. Term. The parties agree that the employment relationship
between Clark and PR&E shall continue for a period of two years
commencing on April 1, 1999 and continuing until March 31, 2001,
unless sooner terminated in accordance with paragraph 6.1 or 6.2
below. Upon completion of this term, the employment relationship
between Clark and PR&E will be "at will" and may be terminated
by either Clark or PR&E at any time, with or without cause, upon
30 days advance notice, unless the parties agree, in writing, to
renew this Agreement for a future specified term.
6.1 Termination for Cause by PR&E. Although PR&E
anticipates a mutually rewarding employment relationship with
Clark, upon written notice to Clark, PR&E may terminate the
employment relationship immediately in the event of any good
cause, including, but not limited to, default, dishonesty,
neglect of duties, failure to perform, conviction of a felony or
crime of moral turpitude or death of Clark.
6.2 Voluntary Resignation Without Cause by Clark. Clark
may voluntarily resign his position with PR&E with or without
cause at any time on 30 days written notice.
Paragraph 11, Entire Agreement, shall also be amended to read as follows:
11. Entire Agreement. This Employment Agreement dated February
1, 1999, including Exhibit A appended hereto and the PR&E
Employee Innovations and Proprietary Rights Assignment Agreement
incorporated by reference, along with the Amendment to
Employment Agreement dated April 12, 1999, constitutes the
entire agreement between the parties relating to this subject
matter and supersedes all prior or simultaneous representations,
discussions, negotiations and agreements whether written or
oral. This Agreement may be amended or modified only with the
written consent of Clark and the COO, CEO or majority vote of
the Board of Directors of PR&E. No oral waiver, amendment or
modification will be effective under any circumstances
whatsoever.
All other terms and conditions of the February 1, 1999 Employment Agreement
remain in full force and effect. THE PARTIES TO THIS AGREEMENT HAVE READ THE
FOREGOING AMENDMENT TO EMPLOYMENT AGREEMENT AND FULLY UNDERSTAND EACH AND EVERY
PROVISION CONTAINED HEREIN. WHEREFORE, THE PARTIES HAVE FREELY AND VOLUNTARILY
EXECUTED THIS AGREEMENT ON THE DATES SHOWN BELOW.
- ---------------------------------- ------------------------------------
Dated Blake F. Clark
1574 Bella Vista Drive
Leucadia, CA 92024-1265
<PAGE> 2
PACIFIC RESEARCH & ENGINEERING
By:
- ---------------------------------- ------------------------------------
Dated Donald C. Naab
President and Chief Operating
Officer
2070 Las Palmas Drive
Carlsbad, CA 92121
<PAGE> 1
EXHIBIT 10.17
AIRCRAFT PURCHASE AND SALE AGREEMENT
This purchase agreement made on this, 18(th) day of December 1996
BETWEEN: Pacific Research & Engineering (the "Buyer") and VisionAire Corporation
(the "Seller").
In consideration of the mutual covenants herein contained, Buyer and Seller
agree to the provisions of this Aircraft Purchase and Sale Agreement (the
"Agreement") as follows:
Purchase Price. Payment and Delivery
Seller shall sell and deliver to Buyer, and Buyer shall take delivery of and pay
for one VISIONAIRE VANTAGE, Serial Number 69 (the "Aircraft"), as described in
the Airplane Specifications dated September, 1995 attached hereto and made a
part of this Agreement by reference. The price of the Aircraft shall be One
Million Six Hundred Thousand U.S. Dollars ($1,600,000.00) payable to Seller as
follows:
<TABLE>
<S> <C>
Initial Deposit at execution of Agreement $ 10,000.00
Additional Deposit due upon Proof-of-Concept aircraft first flight $ 50,000.00
Additional Deposit due 12 months prior to Preliminary
Delivery Date of Aircraft $ 100,000.00
Additional Deposit due 6 months prior to Scheduled Delivery Date of Aircraft $ 160,000.00
Balance due at time of delivery $ 1,280,000.00
</TABLE>
THE UNDERSIGNED BUYER HAS READ THE TERMS AND PROVISIONS SET OUT ON THE REVERSE
SIDE HEREOF AND AGREES THAT SUCH TERMS AND PROVISIONS ARE INCLUDED IN AND ARE
PART OF THIS AGREEMENT ALL AS IF FULLY SET FORTH ON THE FACE HEREOF.
Accepted By:
Buyer: Pacific Research & Engineering Corporation
By: Jack Williams
Seller: VisionAire Corporation
By: Jorge C. Puree
<PAGE> 2
Article 1 DEPOSITS AND PAYMENTS
1.1 The Deposits set forth in the face hereof are to be drawn to the order of
"Magna Trust Company, Escrow Agent for VisionAire Corporation". Buyer's funds
will be deposited in an interest bearing escrow account until Seller notifies
the Escrow Agent, with a copy to Buyer, that the Aircraft meets the GUARANTEED
PERFORMANCE PARAMETERS and is ready for delivery, at which time all deposits in
escrow together with all earnings on the escrow account, will be released to
Seller.
1.2 Except as set forth in Articles 2.2, 3.2 and 5.1, in the event that (i) this
Agreement is terminated by Buyer for any cause whatsoever, (ii) following 21
days written notice to Buyer providing Buyer an opportunity to cure, Buyer fails
to pay the deposits and balance on the Aircraft and other charges under this
Agreement when due, or (iii) Buyer fails or refuses to take delivery of the
Aircraft within 21 days after Seller has tendered the Aircraft for delivery and
such failure or refusal is not due to any defect, discrepancy or non-conformity,
Seller shall retain $60,000 plus all interest earned on the Escrow Fund (or the
balance of the Escrow Fund, whichever is less) as liquidated damages for
default, not as forfeiture or penalty; whereupon this Agreement shall be
terminated and the balance of the Escrow Fund, if any, shall be returned to the
Buyer.
1.3 In addition to the purchase price set forth in the face hereof, Buyer agrees
to pay for all optional equipment and modifications selected by Buyer, and all
taxes, excises, tariffs, and charges assessed upon the manufacture or sale of
the Aircraft and required by law to be paid.
1.4 All deposits and payments set forth in the face hereof shall be made in U.S.
dollars by wire transfer or by other method acceptable to Seller.
Article 2
SELLER'S OBLIGATIONS
2.1 Seller represents it will obtain a Type Certificate issued in accordance
with FAR Part 23 of the Federal Aviation Regulations of the United States
Federal Aviation Administration. In addition, (i) Seller shall execute and
deliver to Buyer, at time of delivery, an FAA bill of sale and such other
instruments of conveyance and ownership as are customary to evidence Buyer's
ownership of the Aircraft and the transfer of title thereto to Buyer; and (ii)
Seller shall obtain and deliver to Buyer all certificates and instruments,
including an FAA Airworthiness Certificate.
2.2 The Aircraft will generally conform to the specifications and shall at least
meet the GUARANTEED PERFORMANCE PARAMETERS as described in the Airplane
Specifications dated September, 1995. In the event that the Aircraft does not
meet the GUARANTEED PERFORMANCE PARAMETERS Buyer may elect to terminate this
Agreement and be entitled to the remedies outlined in Article 2.5, whereupon
this Agreement shall become null and void.
2.3 Seller shall provide one copy of all technical and service publications, and
training for one pilot and one maintenance technician. Pilot training shall be
arranged as soon as possible after delivery of the Aircraft and shall be
conducted by FlightSafety International or other recognized training provider
designated to perform type rating of the Vantage aircraft.
2.4 Changes to Aircraft. Seller may, prior to the Scheduled Delivery Date and
without Buyer's consent, substitute the kind, type or source of any material,
part, accessory or equipment and make such changes and modifications to the
aircraft as it deems appropriate to improve the Aircraft, its maintainability or
appearance, or to prevent delays in manufacture or delivery, provided that such
change or modification shall not adversely affect the purchase price or the
Aircraft Specifications attached hereto as Exhibit A. It is further understood
and agreed between Seller and Buyer that the Airplane Specifications are
preliminary in form and content except for GUARANTEED PERFORMANCE PARAMETERS and
are subject to revision by the Seller upon development of final data for the
VISIONAIRE VANTAGE Aircraft, at which time Seller shall provide Buyer a copy of
the Final Aircraft Specifications for incorporation herein and to supersede and
replace said preliminary Aircraft Specifications.
2.5 Buyer's exclusive remedy and Seller's liability for any failure to perform
any part of this Agreement is limited to the return of the Escrow Fund or, in
the event the Escrow Fund has been paid to the Seller, return of all deposits
made by Buyer.
Article 3 DELIVERY
3.1 The Preliminary Delivery Date for the aircraft is December 31,1999. The
Scheduled Delivery Date shall be established by the Seller at least 180 days
prior to the delivery of the aircraft and shall be no later than the Preliminary
Delivery Date, as adjusted pursuant to Article 3.2. If for any reason Seller
should fail to make delivery within one hundred eighty (180) days after December
31, 1999, adjusted if necessary for the delays described in Articles 3.2 and
3.3, Buyer may elect to terminate this Agreement and be entitled to the remedies
outlined in Article 2.5, whereupon this Agreement shall become null and void.
3.2 In the event of any delay on the part of the Seller in the performance of
its obligations and responsibilities under the provisions of this Agreement, due
directly or
2
<PAGE> 3
indirectly to acts of God or any fire, flood, earthquake, or be entitled to the
liquidated damages outlined in Article ___ other action of the elements, or
other catastrophe or accident, war, strikes, insurrection, or any legislation,
order, or regulation of any governmental authority, or
3.3 Prior to acceptance of the Aircraft, Buyer may elect to subject the Aircraft
to an inspection and flight evaluation. Such flight evaluation shall be
performed at Seller's plant location. The flight evaluation shall be conducted
by a qualified pilot, type rated for the Aircraft, and shall not exceed two
hours duration. The cost of the flight evaluation of the Aircraft shall be borne
by the Seller. In the event Buyer's inspection and flight evaluation of the
Aircraft reveals any defect, discrepancy or non-conformity, Buyer shall so
notify Seller and Seller shall have a reasonable time to correct any such
defect, discrepancy or non-conformity, and, if necessary, the Scheduled Delivery
Date shall be adjusted accordingly. Acceptance of the Aircraft shall constitute
Buyer's agreement that the Aircraft conforms to the specifications, standards
and other requirements of this Agreement. Risk of loss or damage shall pass from
Seller to Buyer, upon execution by Buyer of receipt acknowledging delivery of
the Aircraft.
3.4 Seller will send Buyer written notice of the Scheduled Delivery Date. Place
of delivery shall be VisionAire Corporation plant location, or at such other
location mutually acceptable to the parties hereto. The full balance due on the
Aircraft and all other charges shall be paid at the time the Aircraft is
delivered to Buyer, Buyer has accepted delivery pursuant to Article 3.3, and
Seller has met its other obligations set forth in Article 2 (except for pilot
and maintenance technician training which is anticipated to occur after delivery
of the Aircraft). If Buyer does not accept delivery of the Aircraft according to
Article 3.3, Buyer is deemed in default of a material term and condition of this
Agreement and Seller may terminate this Agreement.
Article 4 WARRANTY
4.1 Seller warrants (the Warranty) that the Aircraft shall parts, delay or
failure of subcontractors or suppliers for conform to the GUARANTEED PERFORMANCE
any reason whatsoever, delay in obtaining any type PARAMETERS defined in the
Aircraft Specifications approval or any Airworthiness Certificates by reason of
dated September, 1995 and shall be free from defects in any law or governmental
order or regulation, requiring material, design and manufacture. Seller's sole
obligation any modification in the Aircraft in order to obtain the type and
liability under this Warranty is limited to correction, approval, or any other
cause whatsoever beyond Seller's by repair, replacement, or rework, of any
defects control, Seller shall not be responsible for any such specified above at
Seller's repair facility or such other delays, and the time required for the
performance of any facility designated by Seller. obligation in this Agreement
shall be extended for a period equal to the period during which such cause
4.2 The Warranty period applicable to items produced by occurred, provided,
however, if any of the foregoing the Seller or to Seller's detailed
specifications (exclusive events result in delays exceeding 180 days in the of
exterior finish and cabin furnishings) shall be to the aggregate, Buyer may
elect to terminate this Agreement item's first scheduled replacement or overhaul
due date and be entitled to the liquidated damages outlined in or for 1,500
flight hours or three years from delivery of Article 2.5. Seller shall exercise
good faith, best efforts the Aircraft, whichever occurs first. The warranty
period and due diligence to avoid any delays and to promptly applicable to
airframe structures (fuselage, empanage, overcome any delays that are
unavoidable,
4.3 Seller shall be relieved of any liability with respect to any claim under
the Warranty if Buyer fails to promptly notify Seller or provide satisfactory
evidence of the claimed defect or if such claim results from any of the
following: (a) the Aircraft is not operated or maintained in compliance with
applicable provisions of Seller's flight manual, maintenance manual, and servi&e
bulletins; (b) the cause of a defect is due to repairs or modifications to the
Aircraft made by Buyer or any party not duly authorized by Seller; (c) the
Aircraft is subject to misuse, abuse or accident or is not properly stored or
protected against the elements when not in use. Buyer shall not be entitled to
the benefits of the Warranty if Buyer does not maintain complete records of
operations and maintenance of the Aircraft and make such records available to
the Seller upon Seller's request.
4.4 The Warranty shall not apply to any engines or engine accessories installed
in the Aircraft. Any engine warranty shall be provided directly by the engine
manufacturer (Pratt & Whitney of Canada) to Buyer, shall be the sole
responsibility of the engine manufacturer and shall be in effect and applicable
at time of delivery of the Aircraft. The Warranty shall not apply to any
avionics equipment installed in the Aircraft. Any avionics equipment warranty
shall be provided directly by the avionics equipment manufacturer to Buyer, and
shall be the sole responsibility of the avionics equipment manufacturer.
4
<PAGE> 4
4.5. Seller does not warrant, and is hereby relieved of any obligation for, any
accessory or equipment incorporated in the Aircraft by anyone other than Seller
and not furnished pursuant to this Agreement.
4.6 Upon notice to Seller of title transfer, which notice must be given in
writing within 90 days of said transfer, the Warranty shall run to Buyer, and to
all persons to whom title of the aircraft may be transferred during the Warranty
periods set forth in Article 4.2.
THERE ARE NO EXPRESS OR IMPLIED WARRANTIES BY SELLER WHICH EXTEND BEYOND THE
DESCRIPTION ON THE FACE HEREOF. THERE ARE NO WARRANTIES OF MERCHANTABILITY OR
OTHERWISE. THE EXTENT OF VISIONAIRE'S LIABILITY UNDER THIS WARRANTY IS LIMITED
TO REPAIR, REWORK OR REPLACEMENT OF DEFECTS. SELLER SHALL NOT BE LIABLE FOR ANY
CQNSEQUENTIAL, INCIDENTAL, PUNITIVE AND/OR OTHER DAMAGES ARISING OUT OF THE
SALE, USE OR OPERATION OF THE AIRCRAFT COVERED BY THIS AGREEMENT.
Article 5 MISCELLANEOUS
5.1 Termination. In the event that Seller has filed a petition in bankruptcy, a
petition for the appointment of a receiver, an assignment for the benefit of
creditors, admitted insolvency, or the suspension of business on account of
insolvency, the Buyer may terminate this Agreement by written notice and shall
be entitled to an immediate return of the Escrow Fund, including interest. In
the event that Buyer has filed a petition in bankruptcy, a petition for the
appointment of a receiver, an assignment for the benefit of creditors, admitted
insolvency, or the suspension of business on account of insolvency, the Seller
may terminate this Agreement by written notice and shall retain $60,000 plus all
interest earned on the Escrow Fund (or the balance of the Escrow Fund, whichever
is less) as liquidated damages for default, not as forfeiture or penalty;
whereupon this Agreement shall be terminated and any remaining balance in the
Escrow Fund shall be paid to the Buyer.
5.2 Agreement. This Agreement and related Escrow Agreement are the only contract
controlling the sale and purchase of the Aircraft and contain all agreements
between Buyer and Seller, whether oral or written. Buyer hereby acknowledges
receipt of a copy of this Agreement. If any of the provisions of this Agreement
are for any reason declared by judgment of a court of competent jurisdiction to
be unenforceable or ineffective, those provisions shall be deemed severable from
the other provisions of this Agreement and the remainder of this Agreement shall
remain in full force and effect. This Agreement, including the rights of Buyer
hereunder, may be assigned by Buyer upon Buyer providing prior written
notification to Seller. This Agreement shall be governed by and~ interpreted in
accordance with the laws of the State of Missouri, United States of America.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 161,956
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<RECEIVABLES> 1,057,007
<ALLOWANCES> (75,000)
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