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 April 30, 1995
--------------------
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
-----------
PICO PRODUCTS, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
NEW YORK 15-0624701
- ----------------------------------------- -------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12500 Foothill Blvd.
Lakeview Terrace, California 91342
- ------------------------------------------- ------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (818) 897-0028
---------------
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
--------- ---------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of June 9, 1995.
Common Stock, $0.01 par value 3,637,046
- ------------------------------ ---------------------
Class Number of Shares
This report consists of 30 pages.
PICO PRODUCTS, INC.
INDEX
Page No.
--------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
April 30, 1995 and July 31, 1994 3-4
Condensed Consolidated Statements
of Income - Three and Nine Months
Ended April 30, 1995 and 1994 5
Condensed Consolidated Statements
of Cash Flows - Nine Months Ended
April 30, 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 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)
April 30, July 31,
1995 1994
------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 559,544 $ 441,609
Accounts receivable (less allowance
for doubtful accounts: April 30,
1995, $350,000; July 31, 1994,
$295,000) 4,950,403 4,417,712
Inventories (Note 2) 8,609,322 7,170,944
Prepaid expenses and other current
assets 102,665 381,242
------------ ------------
Total Current Assets 14,221,934 12,411,507
Property, Plant and Equipment:
Buildings 217,255 217,255
Leasehold improvements 313,244 308,310
Machinery and equipment 3,195,773 3,043,880
------------ ------------
3,726,272 3,569,445
Less accumulated depreciation 2,932,722 2,774,336
------------ ------------
793,550 795,109
Other Assets:
Patents and licenses (less accumulated
amortization: April 30, 1995,
$54,715; July 31, 1994, $1,170,757)
(Note 6) 166,495 241,407
Excess of cost over net assets of
businesses acquired (less accumulated
amortization: April 30, 1995,
$330,630; July 31, 1994, $308,850) 246,805 268,585
Deposits and other miscellaneous assets 109,857 136,405
------------ ------------
523,157 646,397
------------ ------------
$15,538,641 $13,853,013
------------ ------------
------------ ------------
See notes to condensed consolidated financial statements.
PICO PRODUCTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(continued)
(Unaudited)
April 30, July 31,
1995 1994
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable $ 6,241,772 $ 5,787,282
Accounts payable 3,032,903 1,886,757
Accrued expenses:
Legal and accounting 93,581 201,051
Payroll and payroll taxes 372,288 619,018
Other accrued expenses 293,269 261,214
Other liabilities (Note 5) 462,065 403,699
Current portion of long-term debt 364,230 101,547
------------ ------------
Total Current Liabilities 10,860,108 9,260,568
Long-Term Debt 305,165 631,654
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 April 30, 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 (17,146,358) (17,535,970)
Cumulative translation adjustment (81,899) (101,114)
------------ ------------
Total Shareholders' Equity 4,373,368 3,960,791
------------ ------------
$15,538,641 $13,853,013
------------ ------------
------------ ------------
See notes to condensed consolidated financial statements.
PICO PRODUCTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Nine Months
Ended April 30, Ended April 30,
-------------------------- --------------------------
1995 1994 1995 1994
----------- ----------- ----------- -----------
Sales $7,790,384 $7,770,781 $23,889,327 $22,717,002
Cost of sales 5,908,862 5,913,131 18,162,668 17,478,647
Selling and
administrative
expenses 1,642,426 1,679,185 5,096,295 4,621,330
----------- ----------- ----------- -----------
Income from operations 239,096 178,465 630,364 617,025
Other income
(Notes 3, 6) 24,829 164,517 275,728 448,513
Interest expense (181,129) (124,201) (490,092) (381,773)
----------- ----------- ----------- -----------
Income before income
taxes 82,796 218,781 416,000 683,765
Income tax provision
(Note 4) 26,388 0 26,388 0
----------- ----------- ----------- -----------
Net income $ 56,408 $ 218,781 $ 389,612 $ 683,765
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net income per common
and common
equivalent share:
Primary $ 0.01 $ 0.05 $ 0.09 $ 0.16
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Fully diluted $ 0.01 $ 0.05 $ 0.09 $ 0.16
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Weighted average common
and equivalent
shares outstanding:
Primary 4,229,296 4,345,732 4,262,885 4,297,483
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Fully diluted 4,229,296 4,345,732 4,262,885 4,319,164
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
See notes to condensed consolidated financial statements.
PICO PRODUCTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
April 30,
---------------------------
1995 1994
------------ ------------
Cash Flows From Operating Activities:
Net income $ 389,612 $ 683,765
Adjustments to reconcile net income
to net cash used by
operating activities:
Depreciation and amortization 296,122 401,957
Changes in operating assets
and liabilities (791,149) (1,292,688)
------------ ------------
Net cash used by operating activities (105,415) (206,966)
------------ ------------
Cash Flows From Investing Activities:
Capital expenditures (170,334) (64,787)
------------ ------------
Cash Flows From Financing Activities:
Net borrowings under a line of
credit agreement 454,490 519,759
Principal payments on long-term debt (63,806) (565,756)
Change in restricted cash - 209,993
Proceeds from exercise of stock options 3,000 34,000
------------ ------------
Net cash provided by financing activities 393,684 197,996
------------ ------------
Net increase (decrease) in cash and cash
equivalents 117,935 (73,757)
Cash and cash equivalents at
beginning of period 441,609 209,415
------------ ------------
Cash and cash equivalents at
end of period $ 559,544 $ 135,658
------------ ------------
------------ ------------
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest $ 476,070 $ 379,241
Income taxes 15,138 -
The Company financed its new management information system, totaling
$247,561, during the nine months ended April 30, 1994.
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 April 30, 1995, and the results of its operations and its cash
flows for the three and nine month periods ended April 30, 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 nine month periods ended April 30, 1994
to conform with classifications used in the condensed consolidated financial
statements for the three and nine month periods ended April 30, 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:
April 30, July 31,
1995 1994
----------- -----------
Raw materials $2,167,406 $ 2,229,884
Work in process 285,913 86,551
Finished goods 6,156,003 4,854,509
----------- -----------
$8,609,322 $ 7,170,944
----------- -----------
----------- -----------
(3) OTHER INCOME
Other income consisted of the following:
Three Months Ended Nine Months Ended
April 30, April 30,
----------------------- ----------------------
1995 1994 1995 1994
-------- -------- -------- --------
Royalty income $ 17,516 $160,464 $256,657 $435,962
Interest income 7,313 4,053 19,071 12,551
-------- -------- -------- --------
$ 24,829 $164,517 $275,728 $448,513
-------- -------- -------- --------
-------- -------- -------- --------
(4) INCOME TAXES
A provision for U.S. Federal and State alternative minimum tax has been
established for the three and nine month periods ended April 30, 1995. However,
neither regular U.S. Federal and State income taxes nor foreign income taxes
have been provided for the three and nine month periods ended April 30, 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
May 31, 1995 Arcom has made cash payments of $462,065 covering royalties through
February 14, 1995. The Company has not included these amounts in income in any
fiscal period but has recorded a current liability for $462,065 at April 30,
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 late in 1995 or early in
1996. 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 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 has provided all information requested by the EPA. The Information
Request does not designate the Company as a potentially responsible party, nor
has the EPA indicated the basis upon which it would designate the Company as a
potentially responsible party. The Company is therefore unable to state
whether there is any material
likelihood of liability on its part, and, if there were to be any such
liability, the basis of any sharing of such liability 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 April 30, 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 $17,516 and $256,657 for the three and nine month periods ended
April 30, 1995.
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 nine month periods ended April 30, 1995 with the operations for the three
and nine month periods ended April 30, 1994, as shown by the unaudited condensed
consolidated statements of income included in this quarterly report.
RESULTS OF OPERATIONS
Although sales increased by approximately $1.2 million, or 5%, for the nine
months ended April 30, 1995 compared to the nine months ended April 30, 1994,
sales for the quarter ended April 30, 1995 were flat compared to the same period
of the previous fiscal year. The Company's sales and profits would have been
higher for the quarter had product been received when initially scheduled.
However, delays in receipt of raw material and finished product from offshore
vendors, and delays in receiving letters of credit and government documentation
for shipments to customers in South America, resulted in shipments being delayed
into the fourth quarter. The Company's order backlog, however, at April 30,
1995 was $5.0 million compared to $3.6 million at April 30, 1994 and represents
a strong demand for the Company's products.
The Company's Pico Macom subsidiary recorded sales increases of approximately 7%
in the nine months ended April 30, 1995, compared to the nine months ended April
30, 1994, but recorded a slight sales decrease of 1% in the quarter ended April
30, 1995, compared to the same period for the previous year. As stated
previously, delays in receipt of product shipments from vendors caused the sales
decrease. Although the Company's CATV division recorded a sales decrease of
approximately 9% for the nine months ended April 30, 1995 compared to the same
period of the prior year, the CATV division's sales in the third quarter
increased by 4% compared to the third quarter of the prior fiscal year. This
increase reflected a strong demand for cable security devices during the third
quarter in the United States and overseas.
Cost of sales increased by approximately $684,000, or 4%, for the nine months
ended April 30, 1995 compared with the nine months ended April 30, 1994, and
cost of sales was even for the fiscal quarter ended April 30, 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 nine months ended April 30, 1995
compared with the nine months ended April 30, 1994, and cost of sales as a
percentage of sales was even for the fiscal quarter ended April 30, 1995
compared with the same fiscal quarter in the previous year. The dollar increase
in cost of sales for the nine month period was primarily attributable to the
increase in sales volume. The decrease in cost of sales as a percentage of sales
for the nine 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 $475,000, or 10%,
for the nine months ended April 30, 1995 compared to the nine months ended April
30, 1994. The primary reasons for these 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. The Hong Kong
regional office is in full operation. Selling and administrative expenses for
the third quarter were slightly lower compared to the same period of the
previous year. While product development expenses and marketing expenses in
Asia continued into the third quarter at a rate consistent with the first six
months of the fiscal year, the Company experienced a reduction in patent
amortization, legal and management incentive expenses compared to the third
quarter of the previous year. Management anticipates that expenditures for
product development and development of new markets in Asia will continue for
the remainder of the fiscal year.
Other income was $25,000 for the third quarter ended April 30, 1995, compared
with $165,000 for the same quarter in the previous year, a decrease of 85%.
Other income decreased by approximately $173,000, or 39%, for the nine months
ended April 30, 1995 compared to the nine month period in the previous year.
The decreases in other income for both the three and nine month periods
primarily related to expiration of the Company's patent for positive trapping
systems in February, 1995.
Interest expense increased by approximately $108,000, or 28% for the nine months
ended April 30, 1995 compared with the nine months ended April 30, 1994, and
interest expense increased by $57,000, or 46%, for the fiscal quarter ended
April 30, 1995 compared with the fiscal quarter ended April 30, 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 nine months ended April 30, 1995.
A provision for U.S. Federal and State alternative minimum tax has been
established for the three and nine month periods ended April 30, 1995. However,
neither regular U.S. Federal and State income taxes nor foreign income taxes
have been provided for the three and nine month periods ended April 30, 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.
LIQUIDITY AND CAPITAL RESOURCES
As of April 30, 1995, the Company had working capital of approximately
$3,362,000 and a ratio of current assets to current liabilities of approximately
1.3:1, compared with working capital of approximately $3,151,000 and a ratio of
1.3:1 as of July 31, 1994. During the nine months ended April 30, 1995, the
Company recorded negative cash flow from operating activities primarily as a
result of increased inventory purchases.
The Company's growth depends on its ability to supply a diverse line of products
compatible with cable systems in the United States, Asia and South America.
Further, as discussed earlier, the Company is investing resources in new product
development. The result has been an increase in inventory while the Company
continues to have a large backlog of orders due to the delay in the delivery of
product from Asian vendors and the delay in receiving letters of credit and
import documents for shipments to South American customers where the Company has
existing purchase orders.
During the nine months ended April 30, 1995 and 1994, cash used for capital
expenditures was approximately $170,000 and $65,000, respectively. During the
first nine months of fiscal year 1994, the Company financed approximately
$250,000 for the acquisition of a new management information system.
At April 30, 1995, Pico Macom had a $10,000,000 revolving bank line of credit
which provides for interest at the prime rate (9.0% at April 30, 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 sub-limit 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 April 30, 1995, Pico Macom had approximately $6,242,000
in revolving loans and approximately $196,000 in letters of credit outstanding,
and the unused portion of the borrowing base was approximately $1,358,000.
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 United States and
internationally. In the United States, 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 United States and foreign
companies.
PART II OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.
Incorporated by reference from financial statement footnote number 5 of Part I.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
10(N) Employment Agreement between Pico Macom, Inc. and
Norman Reinhardt, dated March 22, 1995.
10(O) Amendment to the Exclusive Manufacturing/Marketing Agreement
between Good Mind Industries and Pico Macom, Inc., dated April
26, 1989.
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: June 9, 1995 Joseph T. Kingsley
----------------------------
Senior Vice President of Finance
Chief Financial Officer
FORM 10-Q
QUARTER ENDED APRIL 30, 1995
EXHIBITS
10(N) Employment Agreement between Pico Macom, Inc. and Norman Reinhardt,
dated March 22, 1995. (12 pages)
10(O) Amendment to the Exclusive Manufacturing/Marketing Agreement between
Good Mind Industries and Pico Macom, Inc., dated April 26, 1989.
11.1 Computation of Per Share Earnings
27 Financial Data Schedule (included only in the EDGAR filing).