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 ,1997
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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
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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
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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 February 28, 1997.
Common Stock, $0.01 par value 4,165,246
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Class Number of Shares
1
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, 1997 and July 31, 1996 3-4
Condensed Consolidated Statements
of Operations - Three and Six Months
Ended January 31, 1997 and 1996 5
Condensed Consolidated Statements
of Cash Flows - Six Months Ended
January 31, 1997 and 1996 6
Notes to Condensed Consolidated Financial
Statements 7-10
Item 2. Management's Discussion and Analysis
of Results of Operations and Financial
Condition 11-15
PART II OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 4. Submission of Matters to a Vote of
Security Holders 16
Item 6. Exhibits and Reports on Form 8-K 16-19
2
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PICO PRODUCTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
January 31, July 31,
1997 1996
----------- ------------
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents $ 51,764 $ 159,669
Accounts receivable (less allowance
for doubtful accounts: January 31,
1997, $ 250,000; July 31, 1996,
$200,000) 5,504,376 5,289,288
Inventories (Note 2) 15,063,892 10,933,244
Prepaid expenses and other current
assets 477,152 191,215
----------- ------------
TOTAL CURRENT ASSETS 21,097,184 16,573,416
----------- ------------
PROPERTY, PLANT AND EQUIPMENT:
Buildings 217,255 217,255
Leasehold improvements 345,136 345,136
Machinery and equipment 2,854,123 2,637,609
----------- ------------
3,416,514 3,200,000
Less accumulated depreciation
and amortization 2,518,834 2,393,995
----------- ------------
897,680 806,005
----------- ------------
OTHER ASSETS:
Patents and licenses (less accumulated
amortization: January 31, 1997,
$ 65,168; July 31, 1996, $62,180) 156,042 159,030
Excess of cost over net assets of
businesses acquired (less accumulated
amortization: January 31, 1997,
$ 381,450; July 31, 1996, $366,930) 195,985 210,505
Deposits and other noncurrent assets 657,641 195,582
----------- ------------
1,009,668 565,117
----------- ------------
$23,004,532 $17,944,538
----------- ------------
----------- ------------
See notes to condensed consolidated financial statements.
3
PICO PRODUCTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(continued)
(Unaudited)
January 31, July 31,
1997 1996
------------ -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Notes payable (Notes 5 & 6) $ 8,429,298 $ 8,227,776
Current portion of long-term debt 314,242 311,086
Accounts payable 3,092,524 3,921,081
Accrued expenses:
Legal and accounting 117,323 170,497
Payroll and payroll taxes 470,040 506,742
Other accrued liabilities 265,978 312,193
------------ -----------
TOTAL CURRENT LIABILITIES 12,689,405 13,449,375
------------ -----------
LONG-TERM DEBT (Note 6) 4,246,417 39,414
------------ -----------
COMMITMENTS AND CONTINGENCIES (Note 4) - -
REDEEMABLE PREFERRED STOCK, $.01 par
value; authorized 500,000 shares;
issued and outstanding 1,000 shares
at January 31, 1997 and -0- shares
at July 31, 1996 (Note 6) 839,587 -
SHAREHOLDERS' EQUITY (Notes 6 and 7):
Common shares, $.01 par value;
authorized 15,000,000 shares;
issued and outstanding 4,065,246
shares at January 31, 1997 and
4,052,246 shares at July 31, 1996 40,652 40,522
Additional paid-in capital 23,054,795 22,035,178
Stock subscriptions receivable (115,000) (115,000)
Accumulated deficit (17,659,139) (17,409,924)
Cumulative translation adjustment ( 92,185) (95,027)
------------ -----------
TOTAL SHAREHOLDERS' EQUITY 5,229,123 4,455,749
------------ -----------
$23,004,532 $17,944,538
------------ -----------
------------ -----------
See notes to condensed consolidated financial statements.
4
PICO PRODUCTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
January 31, January 31,
------------------------------ -------------------------------
1997 1996 1997 1996
---------- ---------- ----------- -----------
SALES $8,867,254 $8,486,258 $18,565,442 $16,860,220
COSTS AND EXPENSES:
Cost of sales 6,701,854 6,364,732 14,031,926 12,609,997
Selling and administrative
expenses 2,177,345 1,985,431 4,207,367 3,886,193
---------- ---------- ----------- -----------
TOTAL COSTS AND EXPENSES 8,879,199 8,350,163 18,239,293 16,496,190
---------- ---------- ----------- -----------
INCOME (LOSS) FROM OPERATIONS (11,945) 136,095 326,149 364,030
INTEREST INCOME 3,834 3,081 7,668 4,890
INTEREST EXPENSE (317,624) (238,462) (558,699) (466,149)
---------- ---------- ----------- -----------
INCOME (LOSS) BEFORE
INCOME TAXES (325,735) (99,286) (224,882) (97,229)
---------- ---------- ----------- -----------
INCOME TAX PROVISION
(Note 3) - - - -
---------- ---------- ----------- -----------
NET INCOME (LOSS) (325,735) (99,286) (224,882) (97,229)
---------- ---------- ----------- -----------
DIVIDENDS ON PREFERRED STOCK 24,333 - 24,333 -
---------- ---------- ----------- -----------
NET INCOME (LOSS)
ATTRIBUTABLE TO
COMMON STOCK $ (350,068) $ (99,286) $ (249,215) $ (97,229)
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
NET INCOME (LOSS) PER
COMMON AND COMMON
EQUIVALENT SHARE:
Primary $ (0.09) $ (0.03) $ (0.06) $ (0.03)
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
Fully diluted $ (0.09) $ (0.03) $ (0.06) $ (0.03)
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
WEIGHTED AVERAGE COMMON
AND EQUIVALENT SHARES
OUTSTANDING:
Primary 4,062,637 3,684,746 4,058,632 3,668,266
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
Fully diluted 4,062,637 3,684,746 4,058,632 3,668,266
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
See notes to condensed consolidated financial statements.
5
PICO PRODUCTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
January 31,
------------------------------
1997 1996
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income(loss) $ (224,882) $ (97,229)
Adjustments to reconcile net income
(loss) to net cash used in
operating activities:
Depreciation and amortization 199,799 176,248
Changes in operating assets
and liabilities (5,622,743) (1,173,532)
---------- ----------
NET CASH USED IN
OPERATING ACTIVITIES (5,647,826) (1,094,513)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (159,620) (180,024)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under a
line of credit agreement 201,522 1,269,064
Issuance of long-term debt (Note 6) 5,000,000 -
Issuance of preferred stock(Note 6) 1,000,000 -
Private placement financing expenses(Note 6) (449,613) -
Principal payments on long-term debt (54,168) (62,341)
Proceeds from exercise of stock options 15,800 20,125
Dividends paid on preferred stock 14,000 -
---------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 5,699,541 1,226,848
---------- ----------
NET DECREASE IN CASH
AND CASH EQUIVALENTS (107,905) ( 47,689)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 159,669 501,525
---------- ----------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 51,764 $ 453,836
---------- ----------
---------- ----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
During the six month periods ended January 31, 1997 and 1996 the Company
financed the purchase of office and test lab equipment totaling approximately
$87,000 and $62,000, respectively.
See notes to condensed consolidated financial statements.
6
PICO PRODUCTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) GENERAL
Pico Products, Inc. and its subsidiaries (the "Company") design, manufacture and
distribute products and systems for the pay TV and cable TV industry (CATV),
broadband communications and other signal distribution markets. These other
distribution markets include "private" cable TV systems such as those found in
hotels, schools, hospitals and large apartment complexes. Private cable systems
are referred to in the industry as master antenna (MATV) or satellite master
antenna (SMATV) systems. These systems receive satellite and "off-air" (or
broadcast) signals at a single source known as the "headend". The signals are
processed and then distributed by coaxial or fiber optic cable to the consumer.
Also included in other signal distribution markets are wireless cable or MMDS
(multichannel multipoint distribution systems) and business to business or
direct-to-home (DTH) communications by satellite. The Company also sells pay TV
security products and home satellite market products. Finally, the Company is
pursuing development and introduction of broadband communications products that
will support high speed internet transmissions.
The accompanying unaudited condensed consolidated financial statements include
the accounts of Pico Products, Inc. and its wholly owned subsidiaries, and
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,
1997, and the results of its operations and its cash flows for the three and
six-month periods ended January 31, 1997 and 1996. All such adjustments are of
a normal recurring nature. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
(GAAP) have been condensed or omitted pursuant to the rules and regulations of
the Securities and Exchange Commission (SEC). The preparation of interim
financial statements in conformity with GAAP, as modified by SEC rules and
regulations, requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures 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 these estimates. These condensed consolidated financial
statements should be read in conjunction with the financial statements and
related
7
notes contained in the Company's Annual Report on Form 10-K for the fiscal year
ended July 31, 1996.
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,
1997 1996
------------ ------------
Raw materials $5,232,611 $ 3,485,548
Work in process 823,188 636,072
Finished goods 9,008,093 6,811,624
------------ ------------
$15,063,892 $10,933,244
------------ ------------
------------ ------------
(3) INCOME TAXES
No provision for U.S. Federal and state regular income taxes or foreign income
taxes has been recorded for the three and six-month periods ended January 31,
1997 and 1996 due to the Company's U.S. Federal, state, and foreign net
operating loss carryforward positions and a tax holiday granted to one of the
Company's foreign subsidiaries.
(4) LITIGATION AND CONTINGENCIES
INFORMATION REQUEST
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.
8
The Information Request related 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 for liability on its part, and, if there were
to be any such liability, the basis of any sharing of such liability with
others.
OTHER
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 a material adverse effect on the Company's
consolidated financial statements.
(5) DEBT COVENANT VIOLATION AND NEW DEBT COVENANTS
At October 31, 1996, the Company was in technical violation of several financial
covenants relating to Pico Macom's bank revolving line of credit. These
covenants restrict the maximum advances to affiliates by Pico Macom and limit
certain financial ratios. Pico Macom's bank issued a waiver of these
violations effective October 31, 1996. All other covenants relating to this
line of credit were met as of October 31, 1996.
As described below, subsequent to October 31, 1996, the Company completed a
private placement financing. The financing agreements require the Company to
meet certain financial covenants which are very similar to the financial
covenants relating to Pico Macom's bank revolving line of credit. Additionally,
these new agreements prohibit the distribution of cash, stock or other property
to shareholders (whether characterized as dividends or otherwise) or the
redemption or repurchase of the Company's capital stock or similar securities,
subject to limited exceptions. At January 31, 1997, the Company was in
compliance with all financial covenants related to the private placement and the
bank revolving line of credit.
(6) NEW FINANCING
On November 21, 1996 the Company completed a private placement financing
totaling $6 million with two institutional investors. The
9
private placement consisted of $5 million of seven-year 12 percent subordinated
debentures and $1 million of seven-year 12 percent redeemable preferred stock.
In connection with the financing, the Company issued warrants to the investors
and to the Company's investment banker for 955,176 shares of its common stock.
These warrants are exercisable no later than 10 years from the date of issuance,
at a price of $1.81 per share.
Additionally, the Company issued warrants to the investors providing for the
purchase, in the aggregate, of up to 18% of the number of shares of the
Company's common stock resulting from the exercise from time-to-time by holders
of options and warrants previously granted by the Company. These contingent
warrants are exercisable no later than 10 years from the date of issuance, at a
price of $1.81 per share.
The Company has preliminarily measured the fair value of the warrants issued in
connection with the financing. This value has been allocated as a discount
applied against the related long-term debt and preferred stock and will be
amortized over the seven-year term of the debt and preferred stock.
(7) DEBT CONVERSION TO EQUITY
In February 1993, the Company completed private placement financings totaling
$1,000,000. The financings consisted of three notes. The first note for
$500,000 was paid in full in May 1994. The second and third notes totaling
$500,000 provided for interest at 8% and were payable in two equal installments
in February 1996 and in February 1997. In connection with the financings, the
Company issued warrants for 425,000 shares of its common stock, exercisable
through fiscal year 1998 at $1.00 per share.
In February 1996, the Company was notified by the holders of the two outstanding
notes payable that they intended to exercise 250,000 warrants to purchase common
stock of the Company as an offset against the first $250,000 installment payment
due on the debt. This transaction was completed in March 1996.
On February 7, 1997, the Company was notified by the holders of the two
outstanding notes payable that they intended to exercise their remaining 100,000
warrants to purchase common stock of the Company as a partial offset against the
final $250,000 installment payment due on the debt. This transaction was
completed in February 1997.
The holder of the two outstanding notes payable has agreed to defer the
remaining $150,000 payment due on the debt until May 1997. This debt will
accrue interest at an increased annual rate of 12.25% until the debt is paid in
full.
10
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, 1997 with the operations for the three
and six-month periods ended January 31, 1996, as shown by the unaudited
condensed consolidated statements of operations included in this quarterly
report.
RESULTS OF OPERATIONS
Sales increased by approximately $1,705,000, or 10%, for the six months ended
January 31, 1997 compared with the six months ended January 31, 1996, and sales
increased by approximately $381,000, or 5%, for the fiscal quarter ended January
31, 1997 compared to the same period in the previous fiscal year. The Company's
Pico Macom subsidiary recorded sales increases of approximately $1,800,000 (or
14%) and $841,000 (or 13%), respectively, for the six and three month periods
ended January 31, 1997 compared to the same periods in the previous fiscal year.
These increases were primarily due to continued demand for Satellite Master
Antenna Television (SMATV) products in South America and the Middle East. The
Company's CATV division recorded sales decreases of approximately $343,000 (or
11%) and $561,000 (or 36%), respectively, for the six and three month periods
ended January 31, 1997 compared to the same periods in the pervious fiscal year.
These decreases were primarily due to an industry-wide downturn in demand for
single channel pay TV decoders. However, during the second quarter of the
current fiscal year the Company began shipments of a new high pass filter used
in two-way interactive communications systems. The Company's Hong Kong
subsidiary recorded sales increases of approximately $292,000 (or 74%) and
$108,000 (or 50%), respectively, for the six and three month periods ended
January 31, 1997 compared to the same periods in the previous fiscal year.
These increases were primarily due to increased sales of lower margin
third-party products and marketing efforts in China, Hong Kong and Southeast
Asia.
Although total sales increased for both the six and three month periods, sales
were substantially below the Company's targeted sales levels. This shortfall
has resulted in an inventory buildup at January 31, 1997 which management is
addressing through an expansion of its sales and marketing efforts and an
aggressive inventory reduction program. Management believes that the Company's
overall sales during the remainder of fiscal year 1997 will show a slight
improvement over the same period of the prior fiscal year due to increased
availability of existing products, the introduction of new products, and the
impact of increased sales and marketing efforts.
11
Cost of sales increased by approximately $1,422,000, or 11%, for the six months
ended January 31, 1997 compared with the six months ended January 31, 1996, and
the cost of sales increased by $337,000, or 5%, for the fiscal quarter ended
January 31, 1997 compared with the same fiscal quarter in the previous year.
Cost of sales as a percentage of sales increased by 1% (from 75% to 76%) for the
six and three month periods ended January 31, 1997 versus the same periods in
the previous fiscal year. The dollar increase in cost of sales was primarily
attributable to the increase in sales volume. The 1% increase in cost of sales
as a percentage of sales was primarily due to the lower margins generated by the
sales for third-party products by the Company's Hong Kong subsidiary, price
competition which has resulted in price reductions for some of the Company's
products, under-absorption of overhead as a result of reduced single channel
trap sales, and startup costs related to initial manufacturing of some of the
Company's new products.
Selling and administrative expenses increased by approximately $321,000, or 8%,
for the six months ended January 31, 1997 compared to the six months ended
January 31, 1996, and increased by approximately $192,000, or 10%, for the
fiscal quarter ended January 31, 1997 compared to the same fiscal quarter of the
previous year. The primary reason for the increases in selling and
administrative expenses were continuing expenditures related to development of
new markets in Asia, South America and the Middle East.
Interest expense increased by approximately $ 93,000, or 20%, for the six months
ended January 31, 1997 compared with the six months ended January 31, 1996, and
the interest expense increased by approximately $79,000, or 33%, for the fiscal
quarter ended January 31, 1997 compared with the same fiscal quarter of the
previous year. The increases were primarily due to higher borrowing levels on
the Company's bank line of credit to support the Company's increased working
capital levels. Working capital is higher than planned due to the Company's
sales being substantially below targeted levels during the six months ended
January 31, 1997, thus resulting in an inventory buildup. Additionally,
interest increased during the fiscal quarter ended January 31, 1997 due to the
higher interest rates on the $5 million subordinated debt financing completed in
November 1996.
No provision for U.S. Federal and state income taxes or foreign income taxes has
been recorded for the three and six-month periods ended January 31, 1997 and
1996 due to the Company's U.S. Federal, state and foreign net operating loss
carryforward positions and a tax holiday granted to one of the Company's foreign
subsidiaries.
The Company recorded a net loss in the three-month period ended January 31, 1997
of approximately $326,000. Return to profitability is contingent upon a
resurgence of demand for the Company's products
12
coupled with an effective inventory reduction program to bring stocking levels
in line with Company requirements.
LIQUIDITY AND CAPITAL RESOURCES
As of January 31, 1997, the Company had working capital of approximately
$8,408,000 and a ratio of current assets to current liabilities of approximately
1.66 to 1, compared with working capital of approximately $3,124,000 and a ratio
of approximately 1.23 to 1 as of July 31, 1996. The increase in working capital
was primarily due to the $6 million private placement in November 1996
(long-term financing described below). During the six-month period ended
January 31, 1997, the Company recorded negative cash flow from operating
activities primarily as a result of increased inventory purchases to support the
Company's targeted sales levels.
During the six-month period ended January 31, 1997 and 1996, cash used for
capital expenditures was approximately $160,000 and $180,000, respectively.
Capital expenditures for the remainder of fiscal year 1997 are expected to be
under $500,000.
Pico Macom, Inc. ("Pico Macom"), a wholly-owned subsidiary of the Company, has
an $11,000,000 revolving bank line of credit which is secured by substantially
all of Pico Macom's assets, including all trade accounts receivable and
inventories. The line provides for interest at the prime rate (8.25% at January
31, 1997) plus 1.25%. The revolving line of credit is used to fund operating
expenses, product purchases and letters of credit for import purchases. The
line has a $1,500,000 sublimit for outstanding letters of credit. The amount
available to borrow at any one time is based upon various
percentages of eligible accounts receivable and eligible inventories as defined
in the agreement, which is subject to review and renewal on December 31, 1997.
The credit facility is subject to certain financial tests and covenants. At
January 31, 1997, Pico Macom had approximately $8,429,000 in revolving loans
outstanding and approximately $30,000 in letters of credit outstanding, and the
unused portion of the borrowing base was approximately $1,018,000.
At October 31, 1996, the Company was in technical violation of several financial
covenants relating to Pico Macom's bank revolving line of credit. These
covenants restrict the maximum advances to affiliates by Pico Macom and limit
certain financial ratios. Pico Macom's bank issued a waiver of these
violations effective October 31, 1996. All other covenants relating to this
line of credit were met as of October 31, 1996.
As described below, subsequent to October 31, 1996, the Company completed a
private placement financing. The financing agreements require the Company to
meet certain financial covenants which are very similar to the financial
covenants relating to Pico Macom's
13
bank revolving line of credit. Additionally, these new agreements prohibit the
distribution of cash, stock or other property to shareholders (whether
characterized as dividends or otherwise) or the redemption or repurchase of the
Company's capital stock or similar securities, subject to limited exceptions.
At January 31, 1997, the Company was in compliance with all financial covenants
related to the private placement and the bank revolving line of credit.
During the second half of fiscal year 1996, management determined that the
Company's credit arrangements, along with an inventory reduction program
implemented by the Company, would not provide
sufficient cash to fund growth in the Company's sales and planned operations for
fiscal year 1997 and beyond. Consequently, on November 21, 1996, the Company
completed a private placement financing totaling $6 million with two
institutional investors to provide funds for general working capital
requirements and investment in new product development, market development, and
upgrade of facilities. The private placement consisted of $5 million of
seven-year 12 percent subordinated debentures sold to Allied Capital Corporation
of Washington, D.C. and certain of its affiliates, and $1 million of seven-year
12 percent redeemable preferred stock sold to The Sinkler Corporation of
Wilmington, Delaware. In connection with the financing, Allied Capital
Corporation and affiliates received warrants to purchase 779,313 shares of the
Company's common stock, The Sinkler Corporation received warrants to purchase
155,863 shares of the Company's common stock, and Shipley Raidy Capital
Partners, LP, the Company's investment banker, received warrants to purchase
20,000 shares of the Company's common stock. Additionally, Allied Capital
Corporation and affiliates and The Sinkler Corporation received warrants to
purchase, in the aggregate, up to 18% of the number of shares of the Company's
common stock resulting from the exercise from time to time by holders of options
and warrants previously granted by the Company. The warrants are exercisable at
a price of $1.81 per share, the average closing price of the Company's common
stock for the 30 trading days prior to November 21, 1996.
Management believes that the current credit arrangements along with an inventory
reduction program should provide sufficient cash to fund the Company's
operations for the remainder of the fiscal year. 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.
However, there can be no assurance that additional financing with favorable
terms will be available if needed.
Profitability of operations is subject to various uncertainties including
general economic conditions and the actions of actual or potential competitors
and customers. The Company's future depends on
14
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.
FORWARD LOOKING STATEMENTS
Statements which are not historical facts, including statements about the
Company's confidence, strategies and expectations, technologies and
opportunities, industry and market segment growth, demand and acceptance of
new and existing products, and return on investments in products and markets,
are forward looking statements that involve risks and uncertainties,
including without limitation, the effect of general economic and market
conditions, industry market conditions caused by changes in the supply and
demand for the Company's products, the continuing strength of the markets
served by the Company, competitor pricing, maintenance of the Company's
current momentum and other factors.
15
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Incorporated by reference from financial statement footnote number 4 of Part I.
ITEM 2. CHANGES IN SECURITIES
As discussed in Management's Discussion and Analysis of Financial Condition and
Results of Operations, the Company and certain of its subsidiaries issued
subordinated debentures and preferred stock in the face amounts of $5 million
and $1 million, respectively, on November 21, 1996. The debentures and
the preferred stock were issued pursuant to the terms of agreements which
contain various financial and other covenants. These agreements prohibit the
distribution of cash, stock or other property to shareholders (whether
characterized as dividends or otherwise) or the redemption or repurchase of the
Company's capital stock or similar securities, subject to limited exceptions.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On December 12, 1996, the Company held its 1996 annual meeting of shareholders.
Management's nominees for director were elected by the following votes: Charles
G. Emley, Jr., 2,748,000 (262,607 withheld); David A. Heenan, 2,507,800 (502,807
withheld); Everett T. Keech, 1,744,096 (1,266,511 withheld); E.B. Leisenring,
Jr., 2,516,800 (493,807 withheld); Pierson G. Mapes, 2,743,800 (266,807
withheld); William W. Mauritz, 2,501,600 (509,007 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, 1997, was approved
by the following vote: 2,789,392 for; 100,815 against; and 120,400 abstentions.
Management's proposal to adopt the Company's 1996 Incentive Stock Plan was
approved by the following vote: 2,104,035 for; 873,847 against; and 32,725
abstentions. There were no broker non-votes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
3(a)i Complete copy of the Certificate of Incorporation of the Company,
as amended on November 19, 1996.
3(b)c By-Laws of the Company, as amended on December 17, 1987.
Note: Key to Index of Exhibits Incorporated by Reference follows this List of
Exhibits.
16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (CONTINUED).
4(a)b 1981 Non-Qualified Stock Option Plan.
4(b)a 1982 Incentive Stock Option Plan.
4(c)d 1992 Incentive Stock Plan.
4(d)e Warrant Certificates issued to Scimitar Development Capital Fund
and Scimitar Development Capital "B" Fund,dated February 10,
1993.
4(e)f Warrant Certificate issued to City National Bank, dated February
10, 1993.
4(f)g Amendment to 1992 Incentive Stock Plan.
4(g)h Amendment to 1981 Non-Qualified Stock Option Plan.
4(h)i Investment Agreement between the Company and certain of its
subsidiaries, and Allied Capital Corporation and certain of its
affiliated companies, dated November 21, 1996.
4(i)i Subordinated Secured Debenture issued by the Company and certain
of its subsidiaries, payable to Allied Capital Corporation, dated
November 21, 1996. The Company has issued subordinated secured
debentures in substantially the same form as this debenture to
the following parties for the following amounts:
Holder Amount
--------------------------- -----------------
Allied Investment Corporation $2,300,000
Allied Investment Corporation II $1,450,000
Allied Capital Corporation II $ 550,000
4(j)i Letter Agreement covering the issuance and sale by the Company of
Preferred Stock to The Sinkler Corporation, dated November 21,
1996.
4(k)i Stock Purchase Warrant issued by the Company to Allied Capital
Corporation, dated November 21, 1996. The
Company has issued warrants in substantially the same form as
this warrant to the following parties for the following number of
shares:
17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (CONTINUED).
Holder Shares
------------------------------- ----------------
Allied Investment Corporation 358,484
Allied Investment Corporation II 226,001
Allied Capital Corporation II 85,724
The Sinkler Corporation 155,863
Shipley Raidy Capital Partners, LP 20,000
4(1)i Stock Purchase Warrant issued by the Company to Allied Capital
Corporation, dated November 21, 1996. The Company has issued warrants
in substantially the same form as this warrant to the following
parties for the following percentage of shares:
Percentage of
Holder Shares
------------------------------- ---------------
Allied Investment Corporation 6.9%
Allied Investment Corporation II 4.35%
Allied Capital Corporation II 1.65%
The Sinkler Corporation 3.0%
4(m)i Registration Rights Agreement between the Company, Allied Capital
Corporation and certain of its affiliated companies, Scimitar
Development Capital Fund and Scimitar Development Capital "B"
Fund, Shipley Raidy Capital Partners, LP, and The Sinkler
Corporation, dated November 21, 1996.
4(n)j Amended and Restated 1996 Incentive Stock Plan.
10(s) Employment Agreement between Pico Macom, Inc. and Robert G.
Cunningham, dated December 12, 1996.
11.1 Computation of Per Share Earnings.
27 Financial Data Schedule (included only in the EDGAR filing.)
Note: Key to Index of Exhibits Incorporated by Reference follows this List
of Exhibits.
(b) Reports on Form 8-K:
Current report on Form 8-K dated November 22, 1996.
18
KEY TO INDEX OF EXHIBITS INCORPORATED BY REFERENCE
a Previously filed by the Company as an exhibit to the Company's
Registration Statement on Form S-1, File No. 2-77439 and incorporated by
reference.
b Previously filed by the Company as an exhibit to the Company's Registration
Statement on Form S-18, File No. 2-72318 and incorporated by reference.
c Previously filed by the Company as an exhibit to the Company's Form 10-K
for the fiscal year ended July 31, 1988 and incorporated by reference.
d Previously filed by the Company as an exhibit to the Company's Form 10-Q
for the fiscal quarter ended January 31, 1993 and incorporated by
reference.
e Previously filed as exhibits to Schedule 13D, dated February 19, 1993,
filed by Standard Chartered Equitor Trustee CI Limited, Scimiter
Development Capital Fund and Scimitar Development Capital "B" Fund, and
incorporated by reference.
f Previously filed by the Company as an exhibit to the Company's Form 10-K
for the fiscal year ended July 31, 1993 and incorporated by reference.
g Previously filed by the Company as an exhibit to the Company's Form 10-K
for the fiscal year ended July 31, 1994 and incorporated by reference.
h Previously filed by the Company as an exhibit to the Company's Form 10-Q
for the fiscal quarter ended January 31, 1996 and incorporated by reference.
i Previously filed by the Company as an exhibit to the Company's Form 10-Q
for the fiscal quarter ended October 31, 1996 and incorporated by
reference.
j Previously filed by the Company as an amendment to the Company's definitive
proxy statement dated December 4, 1996 and incorporated by reference.
Copies of all exhibits incorporated by reference are available at no charge
by written request to Assistant Corporate Secretary, Pico Products, Inc.,
12500 Foothill Blvd., Lakeview Terrace, California 91342.
19
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 7, 1997 /s/ Joseph T. Kingsley
----------------------------------------
Senior Vice President of Finance
and Chief Financial Officer
20
FORM 10-Q
QUARTER ENDED JANUARY 31, 1997
LIST OF NEW EXHIBITS
10(s) Employment Agreement between Pico Macom, Inc. and Robert G.
Cunningham, dated December 12, 1996.
11.1 Computation of Per Share Earnings.
27 Financial Data Schedule (included only in the EDGAR filing).