UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 1995
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OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to _________
Commission File Number 1-8342
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PICO PRODUCTS, INC.
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(Exact name of registrant as specified in its charter)
NEW YORK 15-0624701
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12500 Foothill Blvd.
Lakeview Terrace, California 91342
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (818) 897-0028
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirement for the past 90 days.
YES X NO
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of March 3, 1995.
Common Stock, $0.01 par value 3,637,046
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Class Number of Shares
This report consists of 26 pages.
PICO PRODUCTS, INC.
INDEX
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Page No.
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
January 31, 1995 and July 31, 1994 3-4
Condensed Consolidated Statements
of Income - Three and Six Months
Ended January 31, 1995 and 1994 5
Condensed Consolidated Statements
of Cash Flows - Six Months Ended
January 31, 1995 and 1994 6
Notes to Condensed Consolidated Financial
Statements 7-10
Item 2. Management's Discussion and Analysis
of Results of Operations and Financial
Condition 11-13
PART II OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Security
Holders 14
Item 6. Exhibits and Reports on Form 8-K 14
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PICO PRODUCTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
January 31, July 31,
ASSETS 1995 1994
------------ ----------
Current Assets:
Cash and cash equivalents $ 289,623 $ 441,609
Accounts receivable (less allowance
for doubtful accounts: January 31,
1995, $360,000; July 31, 1994,
$295,000) 4,962,357 4,417,712
Inventories (Note 2) 7,063,132 7,170,944
Prepaid expenses and other current
assets 98,137 381,242
----------- ------------
Total Current Assets 12,413,249 12,411,507
Property, Plant and Equipment:
Buildings 217,255 217,255
Leasehold improvements 313,244 308,310
Machinery and equipment 3,170,524 3,043,880
----------- ------------
3,701,023 3,569,445
Less accumulated depreciation 2,870,711 2,774,336
----------- ------------
830,312 795,109
Other Assets:
Patents and licenses (less accumulated
amortization: January 31, 1995,
$53,226; July 31, 1994, $1,170,757)
(Note 6) 167,984 241,407
Excess of cost over net assets of
businesses acquired (less accumulated
amortization: January 31, 1995,
$323,370; July 31, 1994, $308,850) 254,065 268,585
Deposits and other miscellaneous assets 118,274 136,405
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540,323 646,397
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$13,783,884 $13,853,013
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----------- -----------
See notes to condensed consolidated financial statements.
PICO PRODUCTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(continued)
(Unaudited)
January 31, July 31,
1995 1994
------------ -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable $ 5,260,767 $ 5,787,282
Accounts payable 2,336,050 1,886,757
Accrued expenses:
Legal and accounting 66,023 201,051
Payroll and payroll taxes 394,236 619,018
Other accrued expenses 263,801 261,214
Other liabilities (Note 5) 457,817 403,699
Current portion of long-term debt 109,822 101,547
------------ ------------
Total Current Liabilities 8,888,516 9,260,568
Long-Term Debt 585,734 631,654
Commitments and Contingencies (Note 5) - -
Shareholders' Equity:
Preferred shares, $.01 par value;
authorized 500,000 shares;
no shares issued - -
Common shares, $.01 par value;
authorized 15,000,000 shares;
issued and outstanding 3,637,046
shares at January 31, 1995 and
3,632,046 at July 31, 1994 36,370 36,320
Additional paid-in capital 21,565,255 21,561,555
Accumulated deficit (17,202,766) (17,535,970)
Cumulative translation adjustment (89,225) (101,114)
------------ ------------
Total Shareholders' Equity 4,309,634 3,960,791
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$13,783,884 $13,853,013
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----------- -----------
See notes to condensed consolidated financial statements.
PICO PRODUCTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Six Months
Ended January 31, Ended January 31,
------------------------- --------------------------
1995 1994 1995 1994
------------------------- --------------------------
Sales $8,007,041 $7,183,306 $16,098,943 $14,946,221
Cost of sales 6,077,534 5,441,358 12,253,806 11,565,516
Selling and
administrative
expenses 1,744,164 1,528,429 3,453,869 2,942,145
---------- ---------- ---------- -----------
Income from operations 185,343 213,519 391,268 438,560
Other income
(Notes 3, 6) 121,077 129,401 250,899 283,996
Interest expense (156,120) (130,414) (308,963) (257,572)
----------- ---------- ---------- --------
Net income $ 150,300 $ 212,506 $ 333,204 $ 464,984
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---------- ---------- ---------- ----------
Net income per common
and common
equivalent share:
Primary $ 0.04 $ 0.05 $ 0.08 $ 0.11
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---------- ---------- ---------- ----------
Fully diluted $ 0.04 $ 0.05 $ 0.08 $ 0.11
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Weighted average common
and equivalent
shares outstanding:
Primary 4,220,171 4,368,646 4,275,765 4,270,944
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Fully diluted 4,220,171 4,368,646 4,275,765 4,336,704
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See notes to condensed consolidated financial statements.
PICO PRODUCTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
January 31,
------------------------
1995 1994
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Cash Flows From Operating Activities:
Net income $ 333,204 $ 464,984
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 218,253 263,570
Changes in operating assets
and liabilities 2,802 (241,806)
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Net cash provided by operating
activities 554,259 486,748
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Cash Flows From Investing Activities:
Capital expenditures (145,085) (17,288)
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Cash Flows From Financing Activities:
Net payments under a line of credit
agreement (526,515) (265,437)
Principal payments on long-term debt (37,645) (489,434)
Change in restricted cash - 209,993
Proceeds from exercise of stock options 3,000 34,000
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Net cash used by financing activities (561,160) (510,878)
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Net decrease in cash and cash equivalents (151,986) (41,418)
Cash and cash equivalents at
beginning of period 441,609 209,415
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Cash and cash equivalents at
end of period $ 289,623 $ 167,997
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---------- -----------
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest $ 303,329 $ 256,515
Income taxes - -
The Company financed its new management information system, totaling
$247,561, during the fiscal quarter ended October 31, 1993.
See notes to condensed consolidated financial statements.
PICO PRODUCTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) GENERAL
The Company's primary industry is the manufacturing and distribution of
equipment and parts for the cable television (CATV) and satellite master antenna
television (SMATV) markets. The accompanying unaudited condensed consolidated
financial statements include all adjustments which are, in the opinion of the
Company's management, necessary to present fairly the Company's financial
position as of January 31, 1995, and the results of its operations and its cash
flows for the three and six month periods ended January 31, 1995 and 1994. All
significant intercompany accounts and transactions have been eliminated. All
such adjustments are of a normal recurring nature.
The Company has made certain reclassifications to the condensed consolidated
financial statements for the three and six month periods ended January 31, 1994
to conform with classifications used in the condensed consolidated financial
statements for the three and six month periods ended January 31, 1995.
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 the rules and regulations of the
Securities and Exchange Commission. These condensed consolidated financial
statements should be read in conjunction with the financial statements and
related notes contained in the Company's Annual Report on Form 10-K for the
fiscal year ended July 31, 1994.
The results of operations for the interim periods shown in this Report are not
necessarily indicative of the results to be expected for the fiscal year.
(2) INVENTORIES
The composition of inventories was as follows:
January 31, July 31,
1995 1994
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Raw materials $ 2,338,395 $ 2,229,884
Work in process 152,662 86,551
Finished goods 4,572,075 4,854,509
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$ 7,063,132 $ 7,170,944
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(3) OTHER INCOME
Other income consisted of the following:
Three Months Ended Six Months Ended
January 31, January 31,
----------------------- -----------------------
1995 1994 1995 1994
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Royalty income $114,854 $124,198 $239,141 $275,498
Interest income 6,223 5,203 11,758 8,498
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$121,077 $129,401 $250,899 $283,996
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(4) INCOME TAXES
Neither U.S. nor foreign income taxes have been provided for the three and six
month periods ended January 31, 1995 and 1994 due to the Company's U.S. Federal
and State net operating loss carryforward positions and tax holidays granted the
Company's foreign subsidiaries.
(5) LITIGATION AND CONTINGENCIES
In November 1991, Arrow Communication Laboratories, Inc. (Arcom) of Syracuse,
New York initiated a lawsuit in the Supreme Court in the County of Onondaga,
New York. The suit, which was amended in June 1992, alleges that Arcom has a
paid-up license with respect to the Company's patent for positive trapping
systems, that Arcom is entitled to unspecified damages based on overpayment of
royalty amounts, and that Arcom has incurred damages in excess of $250,000 as
a result of a Company press release announcing termination of the license
agreement. The suit also asserts that Arcom is entitled to punitive damages of
$3,000,000. The Company responded by denying all liability and asserting
certain common law and statutory defenses.
In December 1993, in response to a summary judgment motion filed by the Company,
the New York State Court rejected Arcom's claim that it had a paid-up license.
Instead, the Court held that when Arcom "defaulted in making royalty payments
on or about November 15, 1991, the license terminated by its own terms 30
days later as asserted by the Company in its termination letter dated January
13, 1992." Following the New York State Court's summary judgment decision, the
Company initiated a patent infringement lawsuit against Arcom in the United
States District Court for the Northern District of New York. In its suit,
the Company asked the Federal Court to award it treble damages for willful
infringement plus attorney's fees. The Company also filed a motion for a
preliminary injunction against further infringement by Arcom. At a court
hearing on February 15, 1994, the parties agreed, and it was ordered by the
Court, that Arcom would post as security amounts equal to the royalties due to
the Company for the manufacture and sale of product covered by the license
agreement from December 15, 1991, the
date that the license would have terminated, until the expiration of the patent
in February 1995. Through February 28, 1995 Arcom has made cash
payments of $449,817 covering royalties through December 31, 1994, and an
estimate of $8,000 has been recorded for royalties for the month of January
1995. The Company has not included these amounts in income in any fiscal period
but has recorded a current liability for $457,817 at January 31, 1995. In
addition, Arcom posted an irrevocable letter of credit in an amount deemed
sufficient to permit recovery of a significant portion of the Company's damages
if it were to prevail on its willful infringement claim. In exchange, the
Company withdrew its request for a preliminary injunction. In the event that
the Company does not prevail on its infringement claims, the Company has agreed
to refund all security payments made by Arcom.
In July 1994, the Appellate Division, Fourth Department of the New York Supreme
Court ruled that parts of the license agreement relating to Arcom's paid-up
license claims involve questions of fact that must be resolved at trial.
Management anticipates that a trial will be scheduled in the fall of 1995.
Management believes that the outcome of this matter will not have a material
adverse effect on the Company's consolidated financial statements.
On March 6, 1995, a subsidiary of the Company received a Joint Request for
Information (the "Information Request") from the United States Environmental
Protection Agency, Region II (the "EPA"), under the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended ("CERCLA"), with
respect to the release and/or threatened release of hazardous substances,
hazardous wastes, pollutants or contaminants into the environment at the
Onondaga Lake Site, Syracuse, Onondaga County, New York. The Company has
learned that the EPA added the Onondaga Lake Site to the Superfund National
Priorities List on December 6, 1994, and has completed an onsite assessment of
the degree of hazard. The EPA has indicated that the Company is only one of 26
companies located in the vicinity of Onondaga Lake or its tributaries that
have received a similar Information Request.
The Company believes that the Information Request relates to the activities of
the Company's Printed Circuit Board Division, which was sold to a third party in
1992, and which conducted operations within the specified area. Under the
Agreement of Sale with the buyer, the Company retained liability for
environmental obligations which occurred prior to the sale.
The Company intends to comply with the Information Request and to investigate
the extent of any potential liability. However, because it appears that the EPA
has not completed any feasibility study or remediation assessment, the Company
is not in a position to estimate its potential liability. In addition, the
Company is unable to state whether any liability would be shared with others.
The Company is involved, from time to time, in certain other legal actions
arising in the normal course of business. Management believes that the outcome
of other litigation will not have material adverse affect on the Company's
consolidated financial statements.
(6) PATENT EXPIRATION
On February 14, 1995, the Company's patent for positive trapping systems
expired. As of January 31, 1995, the Company has fully amortized the cost of
this patent and has written off the patent's cost and accumulated amortization
from its books and records. Royalty income from license holders of the
Company's patent totaled $239,141 and $114,854 for the six and three month
periods ended January 31, 1995. Royalty income in future fiscal periods will
end once the royalties earned through the patent's expiration date have been
received.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
The following discussion compares the operations of the Company for the three
and six month periods ended January 31, 1995 with the operations for the three
and six month periods ended January 31, 1994, as shown by the unaudited
condensed consolidated statements of income included in this quarterly report.
RESULTS OF OPERATIONS
Sales increased by approximately $1,153,000, or 8%, for the six months ended
January 31, 1995 compared with the six months ended January 31, 1994, and sales
increased by approximately $824,000, or 12%, for the fiscal quarter ended
January 31, 1995 compared to the same period in the previous fiscal year. The
Company's Pico Macom subsidiary recorded sales increases of approximately 12%
and 15%, respectively, for the six and three month periods ended January 31,
1995 compared to the same periods in the previous fiscal year. These increases
reflect a continued strong demand for Satellite Master Antenna Television
(SMATV) equipment and products both internationally and domestically. The
Company's CATV division recorded sales decreases of approximately 15% and 11%,
respectively, for the six and three month periods ended January 31, 1995
compared to the same periods in the previous fiscal year. These decreases were
primarily due to the purchasing reductions by U.S. cable TV system operators as
a result of subscriber fee reductions mandated by the U.S. Federal
Communications Commission. Management anticipates that the Company's sales
growth will continue during the second half of fiscal year 1995 compared to the
second half of fiscal year 1994 due to new product introductions and increased
sales to customers in the Far East.
Cost of sales increased by approximately $688,000, or 6%, for the six months
ended January 31, 1995 compared with the six months ended January 31, 1994, and
cost of sales increased by $636,000, or 12%, for the fiscal quarter ended
January 31, 1995 compared with the same fiscal quarter in the previous year.
Cost of sales as a percentage of sales decreased by 1% (from 77% to 76%) for the
six months ended January 31, 1995 compared with the six months ended January 31,
1994, and cost of sales as a percentage of sales remained unchanged at 76% for
the fiscal quarter ended January 31, 1995 compared with the same fiscal quarter
in the previous year. The dollar increases in cost of sales for the three and
six month periods were primarily attributable to the increase in sales volume.
The decrease in cost of sales as a percentage of sales for the six month period
was primarily due to a change in product mix between Pico Macom and the CATV
Division.
Selling and administrative expenses increased by approximately $512,000, or 17%,
for the six months ended January 31, 1995 compared to the six months ended
January 31, 1994, and increased by approximately $216,000, or 14%, for the
fiscal quarter ended January 31, 1995 compared to the
same fiscal quarter of the previous year. The primary reasons for the increases
were increased investment in product development and expenditures related to
development of new markets in Asia, and the opening of a new Asia regional
office in Hong Kong. Management anticipates that this current level of selling
and administrative expenses will continue throughout the second half of fiscal
year 1995.
Other income decreased by approximately $33,000, or 12%, for the six months
ended January 31, 1995 compared to the six months ended January 31, 1994, and
other income decreased by approximately $8,000, or 6%, for the fiscal quarter
ended January 31, 1995 compared to the same fiscal quarter in the previous year.
The decreases in other income for both the six and three month periods primarily
related to decreases in royalty payments due to reduced sales volume by license
holders of the Company's patent for positive trapping systems. This patent
expired in February, 1995, and thus royalty income will decrease in fiscal year
1995 compared to fiscal year 1994.
Interest expense increased by approximately $51,000, or 20% for the six months
ended January 31, 1995 compared with the six months ended January 31, 1994, and
interest expense increased by $26,000, or 20%, for the fiscal quarter ended
January 31, 1995 compared with the fiscal quarter ended January 31, 1994. The
increase was primarily due to higher borrowing levels on the Company's bank line
of credit to support the Company's working capital requirements, and due to
several increases in the prime rate during the six months ended January 31,
1995.
The Company's effective income tax rate for the three and six month periods
ended January 31, 1995 and 1994 was 0%, due to U.S. federal and state income tax
net operating loss carryforwards for the Company's U.S. operations and tax
exemptions from foreign taxes.
LIQUIDITY AND CAPITAL RESOURCES
As of January 31, 1995, the Company had working capital of approximately
$3,525,000 and a ratio of current assets to current liabilities of approximately
1.40:1, compared with working capital of approximately $3,151,000 and a ratio of
1.34:1 as of July 31, 1994. During the six months ended January 31, 1995, the
Company recorded positive cash flow from operating activities primarily due to
profitable operations.
During the six months ended January 31, 1995 and 1994, cash used for capital
expenditures was approximately $145,000 and $17,000, respectively. During the
first half of fiscal year 1994, the Company financed approximately $250,000 for
the acquisition of a new management information system.
At January 31, 1995, Pico Macom had a $10,000,000 revolving bank line of credit
which provides for interest at the prime rate (8.5% at January 31, 1995) plus
1.25%. The bank line of credit is used to fund operating expenses, product
purchases, and letters of credit for import purchases. The line is structured as
a $10,000,000 line of credit with a sublimit of $1,500,000 for outstanding
letters of credit. The amount available is based on various percentages of
eligible accounts receivable and
inventories as defined in the agreement, which expires on May 25, 1996. The
credit facility is subject to certain financial tests and covenants. At January
31, 1995, Pico Macom had approximately $5,261,000 in revolving loans and
approximately $71,000 in letters of credit outstanding, and the unused portion
of the borrowing base was approximately $1,580,000.
Despite the expiration of the Company's patent for positive trapping systems in
February 1995, management believes that continued profitable operations along
with the current credit arrangements will provide sufficient cash to fund the
Company's operational needs for the balance of the fiscal year 1995. Should the
Company identify opportunities that require cash beyond that generated
internally or available from its credit line, the Company would seek to increase
its current credit line. Alternatively, the Company would consider seeking other
sources of cash, including, but not limited to, a public offering or a private
placement.
Profitability of operations is subject to various uncertainties including
general economic conditions, favorable settlement of ongoing litigation and the
actions of actual or potential competitors and customers. The Company's future
depends on the growth of the cable TV market in the U.S. and internationally.
In the U.S., a number of factors could affect the future profitability of the
Company, including changes in the regulatory climate for cable TV, changes in
the competitive structure of the cable and telecommunications industries or
changes in the technology base of the industry. Internationally, the
Company's profitability depends on its ability to penetrate new markets in
the face of competition from other U.S. and foreign companies.
PART II OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.
Incorporated by reference from financial statement footnote number 5 of Part I.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On December 15, 1994, the Company held its 1994 annual meeting of stockholders.
Management's nominees for director were elected by the following votes: Charles
G. Emley, Jr. 2,840,815 (19,750 withheld); Everett T. Keech, 2,836,315 (24,250
withheld); George M. Knapp, 2,838,215 (22,350 withheld); E.B. Leisenring, Jr.
2,839,515 (21,050 withheld); William W. Mauritz, 2,840,515 (20,050 withheld);
Peter J. Moerbeek, 2,843,815 (16,750 withheld); J. Michael Sills, 2,843,715
(16,850 withheld). Management's proposal to ratify the appointment of Deloitte
and Touche LLP as the Company's independent accountants for the fiscal year
ending July 31, 1995, was approved by the following vote: 2,847,765 for; 5,550
against; and 7,250 abstentions.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
10(M) Employment Agreement between Pico Products, Inc. and
Joseph T. Kingsley, dated January 1, 1995.
11.1 Computation of Per Share Earnings.
27 Financial Data Schedule (included only in the EDGAR
filing).
(b) Reports on Form 8-K:
None.
SIGNATURES
Pursuant to 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.
PICO PRODUCTS, INC.
REGISTRANT
DATE: March 13, 1995 Joseph T. Kingsley
--------------------------------
Senior Vice President of Finance
Chief Financial Officer
FORM 10-Q
QUARTER ENDED JANUARY 31, 1995
EXHIBITS
10(M) Employment Agreement between Pico Products, Inc. and Joseph T.
Kingsley, dated January 1, 1995. (10 pages)
11.1 Computation of Per Share Earnings
27 Financial Data Schedule (included only in the EDGAR
filing).