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 ,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
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PICO PRODUCTS, INC.
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(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 May 31, 1997.
Common Stock, $0.01 par value 4,175,913
- ----------------------------- -------------------
Class Number of Shares
PICO PRODUCTS, INC.
INDEX
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Page No.
PART I. FINANCIAL INFORMATION ----------
Item 1. Unaudited Financial Statements
Condensed Consolidated Balance Sheets -
April 30, 1997 and July 31, 1996 3-4
Condensed Consolidated Statements
of Operations - Three and Nine Months
Ended April 30, 1997 and 1996 5
Condensed Consolidated Statements
of Cash Flows - Nine Months Ended
April 30, 1997 and 1996 6-7
Notes to Condensed Consolidated Financial
Statements 8-11
Item 2. Management's Discussion and Analysis
of Results of Operations and Financial
Condition 12-16
PART II OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 6. Exhibits and Reports on Form 8-K 17-20
2
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PICO PRODUCTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
April 30, July 31,
1997 1996
--------- ----------
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents $ 70,917 $ 159,669
Accounts receivable (less allowance
for doubtful accounts: April 30,
1997, $250,000; July 31, 1996,
$200,000) 5,203,105 5,289,288
Inventories (Note 2) 15,861,155 10,933,244
Prepaid expenses and other current assets 299,201 191,215
---------- ----------
TOTAL CURRENT ASSETS 21,434,378 16,573,416
---------- ----------
PROPERTY, PLANT AND EQUIPMENT:
Buildings 217,255 217,255
Leasehold improvements 351,926 345,136
Machinery and equipment 3,171,700 2,637,609
---------- ----------
3,740,881 3,200,000
Less accumulated depreciation
and amortization 2,606,506 2,393,995
---------- ----------
1,134,375 806,005
---------- ----------
OTHER ASSETS:
Patents and licenses (less accumulated
amortization: April 30, 1997,
$66,662; July 31, 1996, $62,180) 154,548 159,030
Excess of cost over net assets of
businesses acquired (less accumulated
amortization: April 30, 1997,
$388,710; July 31, 1996, $366,930) 188,725 210,505
Deposits and other noncurrent assets 640,128 195,582
---------- ----------
983,401 565,117
---------- ----------
$23,552,154 $17,944,538
---------- ----------
---------- ----------
See notes to condensed consolidated financial statements.
3
PICO PRODUCTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(continued)
(Unaudited)
April 30, July 31,
1997 1996
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Notes payable (Note 5) $ 8,793,698 $ 8,227,776
Current portion of long-term debt (Note 6) 287,886 311,086
Accounts payable 3,829,417 3,921,081
Accrued expenses:
Legal and accounting 193,965 170,497
Payroll and payroll taxes 545,772 506,742
Other accrued liabilities 306,200 312,193
------------ ------------
TOTAL CURRENT LIABILITIES 13,956,938 13,449,375
------------ ------------
LONG-TERM DEBT (Note 6) 4,437,060 39,414
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 4) - -
REDEEMABLE PREFERRED STOCK, $.01 par
value; authorized 500,000 shares;
issued and outstanding 1,000 shares
at April 30, 1997 and -0- shares
at July 31, 1996 (Note 6) 846,537 -
SHAREHOLDERS' EQUITY (Notes 6 and 7):
Common shares, $.01 par value;
authorized 15,000,000 shares;
issued and outstanding 4,175,913
shares at April 30, 1997 and
4,052,246 shares at July 31, 1996 41,759 40,522
Additional paid-in capital 23,168,442 22,035,178
Stock subscriptions receivable (115,000) (115,000)
Accumulated deficit (18,690,506) (17,409,924)
Cumulative translation adjustment (93,076) (95,027)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 4,311,619 4,455,749
------------ ------------
$23,552,154 $17,944,538
------------ ------------
------------ ------------
See notes to condensed consolidated financial statements.
4
PICO PRODUCTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
April 30, April 30,
------------------------- ---------------------------
1997 1996 1997 1996
---------- ---------- ----------- -----------
SALES $7,770,948 $9,125,971 $26,336,390 $25,986,191
COSTS AND EXPENSES:
Cost of sales 6,090,096 6,908,521 20,122,021 19,518,518
Selling and administrative
expenses 2,316,895 2,228,527 6,524,262 6,114,720
---------- ---------- ---------- -----------
TOTAL COSTS AND EXPENSES 8,406,991 9,137,048 26,646,283 25,633,238
---------- ---------- ---------- ----------
INCOME (LOSS) FROM OPERATIONS (636,043) (11,077) (309,893) 352,953
INTEREST INCOME 4,267 7,379 11,935 12,269
INTEREST EXPENSE (369,925) (242,898) (928,624) (709,047)
---------- ---------- ---------- -----------
LOSS BEFORE
INCOME TAXES (1,001,701) (246,596) (1,226,582) (343,825)
---------- ---------- ---------- -----------
INCOME TAX PROVISION
(Note 3) - - - -
---------- ---------- ---------- -----------
NET LOSS (1,001,701) (246,596) (1,226,582) (343,825)
---------- ---------- ---------- -----------
DIVIDENDS ON PREFERRED STOCK 29,667 - 54,000 -
---------- ---------- ---------- -----------
NET LOSS
ATTRIBUTABLE TO
COMMON STOCK $(1,031,368) $ (246,596) $(1,280,582) $ (343,825)
----------- ---------- ----------- -----------
----------- ---------- ----------- -----------
NET LOSS PER
COMMON AND COMMON
EQUIVALENT SHARE:
Primary $ (0.25) $ (0.06) $ (0.31) $ (0.09)
----------- ---------- ----------- -----------
----------- ---------- ----------- -----------
Fully diluted $ (0.25) $ (0.06) $ (0.31) $ (0.09)
----------- ---------- ----------- -----------
----------- ---------- ----------- -----------
WEIGHTED AVERAGE COMMON
AND EQUIVALENT SHARES
OUTSTANDING:
Primary 4,157,486 3,821,368 4,090,493 3,718,555
----------- ---------- ----------- -----------
----------- ---------- ----------- -----------
Fully diluted 4,157,486 3,821,368 4,090,493 3,718,555
----------- ---------- ----------- -----------
----------- ---------- ----------- -----------
See notes to condensed consolidated financial statements.
5
PICO PRODUCTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
April 30,
---------------------------
1997 1996
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,226,582) $ (343,825)
Adjustments to reconcile net loss
to net cash used in
operating activities:
Depreciation and amortization 344,161 272,132
Changes in operating assets
and liabilities (5,023,242) (1,355,953)
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (5,905,663) (1,427,646)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ( 232,130) (203,708)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under a
line of credit agreement 565,922 1,701,882
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) (453,311) -
Principal payments on long-term debt (77,370) (94,058)
Proceeds from exercise of stock options 27,800 56,725
Dividends paid on preferred stock (14,000) -
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 6,049,041 1,664,549
----------- -----------
NET INCREASE (DECREASE)IN CASH
AND CASH EQUIVALENTS (88,752) 33,195
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 159,669 501,525
----------- -----------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 70,917 $ 534,720
----------- -----------
----------- -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
During the nine month periods ended April 30, 1997 and 1996 the Company financed
the purchase of computer, office, and test lab equipment totaling approximately
$339,000 and $31,000, respectively.
(Continued on next page)
See notes to condensed consolidated financial statements.
6
PICO PRODUCTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
(Unaudited)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION (CONTINUED):
In March 1996 the holder of $250,000 of the Company's notes payable exercised
250,000 warrants to purchase common stock of the Company at $1.00 per share. In
February 1997 the holder of $100,000 of Company's notes payable exercised
100,000 warrants to purchase common stock of the Company at $1.00 per share.
The proceeds from the exercises of the warrants offset the payments due on the
debt.
In April 1996 an officer of the Company exercised options to acquire 125,000
shares of the Company's common stock in exchange for a stock subscription note
receivable.
See notes to condensed consolidated financial statements.
7
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 April 30,
1997, and the results of its operations and its cash flows for the three and
nine-month periods ended April 30, 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 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.
8
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 ("SFAS 128") "Earnings per Share." SFAS
128 replaces the presentation of primary earnings per share with a presentation
of basic earnings per share based upon the weighted average number of common
shares for the period. It also requires dual presentation of basic and diluted
earnings per share for companies with complex capital structures. SFAS 128 will
be adopted by the Company for the fiscal quarter ending January 31, 1998 and
earnings per share for all prior periods will be restated upon adoption.
2) INVENTORIES
The composition of inventories was as follows:
April 30, July 31,
1997 1996
------------- ------------
Raw materials $ 6,173,627 $ 3,485,548
Work in process 1,171,065 636,072
Finished goods 8,516,463 6,811,624
------------- ------------
$ 15,861,155 $ 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 nine-month periods ended April 30,
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.
9
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.
In March 1997 the Company received a follow-on request for additional
information in this matter and has provided all information requested.
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) NEW DEBT COVENANTS
In November 1996, the Company completed a private placement financing as
described below. 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 April 30, 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 private placement
consisted of $5 million of seven-year 12 percent subordinated debentures and $1
million of seven-year 12 percent
10
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.
Payment has been deferred on the two outstanding notes payable totaling
$150,000. The Company anticipates either making the note payments on or before
June 30, 1997, or refinancing the debt.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following discussion compares the operations of the Company for the three
and nine-month periods ended April 30, 1997 with the operations for the three
and nine-month periods ended April 30, 1996, as shown by the unaudited condensed
consolidated statements of operations included in this quarterly report.
Sales increased by approximately $350,000, or 1%, for the nine months ended
April 30, 1997 compared with the nine months ended April 30, 1996 and sales
decreased by approximately $ 1,355,000, or 15%, for the fiscal quarter ended
April 30, 1997 compared to the same period in the previous fiscal year. The
Company's Pico Macom subsidiary recorded a sales increase of approximately
$294,000 (or 1%) and a sales decrease of approximately $1,506,000 (or 21%),
respectively, for the nine and three-month periods ended April 30, 1997 compared
to the same periods in the previous fiscal year. The third quarter decrease was
primarily due to severe competition from US-based distributors of Satellite
Master Antenna Television (SMATV) products in South America. Management is
working diligently to recapture lost market share through competitive pricing
and the customer support of the Company's Brazilian sales and marketing office.
However, management believes that the reduced level of sales into South America
will continue into the fourth quarter of fiscal year 1997. The Company's CATV
division recorded a sales decrease of approximately $284,000(or 6%) and a sales
increase of approximately $59,000 (or 3%), respectively, for the nine and
three-month periods ended April 30, 1997 compared to the same periods in the
pervious fiscal year. The nine month decrease was primarily due to an
industry-wide downturn in demand for single channel pay TV decoders. The three
month increase was due mainly to shipments of a new high pass filter used in
two-way interactive communications systems. Management believes that shipments
of the new high pass filter will remain strong throughout the fourth quarter of
fiscal year 1997 and into the early part of fiscal year 1998. The Company's Hong
Kong subsidiary recorded sales increases of approximately $343,000 (or 61%) and
$51,000 (or 30%), respectively, for the nine and three-month periods ended April
30, 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.
Total sales increased slightly for the nine-month period compared to the prior
year, but declined severely in the third quarter of fiscal year 1997 compared to
the third quarter of fiscal year 1996. Additionally, sales for both periods
were substantially below the Company's targeted sales levels. This shortfall
has resulted in a continued inventory buildup at April 30, 1997 which has put a
strain on the Company's financial position. Management is addressing this
problem through an expansion of its sales and marketing efforts and an
aggressive inventory reduction program. However, management believes that the
Company's overall sales during the fourth quarter of fiscal year 1997 will fall
short of the sales level of the fourth quarter of fiscal year 1996.
12
Cost of sales increased by approximately $604,000 or 3%, for the nine months
ended April 30, 1997 compared with the nine months ended April 30, 1996, and
the cost of sales decreased by approximately $818,000, or 12%, for the fiscal
quarter ended April 30, 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%) and increased by 2% (from 76% to 78%) for the nine and
three-month periods ended April 30, 1997 versus the same periods in the
previous fiscal year. The dollar changes in cost of sales for both the nine
and three-month periods were primarily attributable to the changes in sales
volume. The increases in cost of sales as a percentage of sales in the nine
and three-month periods ended April 30, 1997 versus the same periods in the
previous fiscal year were primarily due to price competition which has
resulted in price reductions for many of the Company's products, startup
costs related to initial manufacturing of some of the Company's new products,
and the lower margins generated by the sales for third-party products by the
Company's Hong Kong subsidiary.
Selling and administrative expenses increased by approximately $410,000, or
7%, for the nine months ended April 30, 1997 compared to the nine months
ended April 30, 1996, and increased by approximately $88,000, or 4%, for the
fiscal quarter ended April 30, 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, and due to the
expansion of the Company's domestic sales and marketing efforts.
Interest expense increased by approximately $ 220,000, or 31%, for the nine
months ended April 30, 1997 compared with the nine months ended April 30,
1996, and the interest expense increased by approximately $127,000, or 52%,
for the fiscal quarter ended April 30, 1997 compared with the same fiscal
quarter of the previous year. The increases were primarily due to higher
debt levels 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 nine months ended April
30,1997, thus resulting in an inventory buildup. Additionally, interest
increased during the fiscal quarter ended April 30, 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 nine-month periods ended April 30, 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 attributable to common stock in the three and
nine-month periods ended April 30, 1997 of approximately $1,031,000 and
$1,281,000. Return to profitability is contingent upon a resurgence of
demand for the Company's products coupled with an effective inventory
reduction program to bring stocking levels in line with Company requirements.
LIQUIDITY AND CAPITAL RESOURCES
As of April 30, 1997, the Company had working capital of approximately
$7,477,000, and a ratio of current assets to current
13
liabilities of approximately 1.54 to 1, compared with working capital of
approximately $3,124,000 and a ratio of current assets to current liabilities
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 nine-month period
ended April 30, 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. However, the lower sales levels
recorded during this period has caused inventory to remain at higher than
required levels, thus straining the Company's liquidity.
During the nine-month periods ended April 30, 1997 and 1996, cash used for
capital expenditures was approximately $232,000 and $204,000, respectively.
Capital expenditures for the remainder of fiscal year 1997 are expected to be
under $50,000.
The Company's Pico Macom subsidiary 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 (8.5% sat April 30, 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 April 30,
1997, Pico Macom had approximately $8,794,000 in revolving loans outstanding
and approximately $23,000 in letters of credit outstanding, and the unused
portion of the borrowing base was approximately $308,000.
In November 1996, the Company completed a private placement financing as
described below. 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 April 30, 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
14
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 has determined that the current credit arrangements along with the
ongoing inventory reduction program is not likely to provide sufficient cash
to fund the Company's operations at anticipated levels for the next fiscal year.
Consequently, the Company is pursuing other financing alternatives including,
but not limited to, additional subordinated debt financing and adjustments to
the availability formula of Pico Macom's revolving line of credit in order to
increase the amount available to borrow against the credit facility. The
Company has received an indication of interest from a potential investor with
respect to an additional subordinated debt financing, which would be subject to
satisfactory completion of the investor's due diligence investigation and
negotiation and execution of a definitive agreement. Although management
believes that the Company will successfully complete a financing on acceptable
terms, or will increase its bank line availability, there can be no assurance
that it will be able to do so. To the extent that the Company was unable to
obtain such additional financing or availability, it would be forced to retrench
operations and postpone its growth plans.
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 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.
15
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.
16
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 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.
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.
Note: Key to Index of Exhibits Incorporated by Reference follows this
List of Exhibits.
17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (CONTINUED).
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:
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(l)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.
Note: Key to Index of Exhibits Incorporated by Reference follows this List
of Exhibits.
18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (CONTINUED).
4(n)j Amended and Restated 1996 Incentive Stock Plan.
10(s)k 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:
None.
19
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.
k Previously filed by the Company as an exhibit to the Company's Form 10-Q
for the fiscal quarter ended January 31, 1997 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.
20
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 13, 1997 /s/ Gary M. Atkinson
----------------------------------------
Vice President, Finance and Administration
and Chief Accounting Officer
21
FORM 10-Q
QUARTER ENDED APRIIL 30, 1997
LIST OF NEW EXHIBITS
11.1 Computation of Per Share Earnings.
27 Financial Data Schedule (included only in the EDGAR filing).
22