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, 1999
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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.
- ------------------------------------------------------------------------------
(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
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of March 17, 1999.
Common Stock, $0.01 par value 4,215,913
- ----------------------------- ------------------------
Class Number of Shares
1
PICO PRODUCTS, INC.
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
April 30, 1999 and July 31, 1998 3-4
Condensed Consolidated Statements
of Income - Three and Nine Months
Ended April 30, 1999 and 1998 5
Condensed Consolidated Statements
of Cash Flows - Nine Months
Ended April 30, 1999 and 1998 6
Notes to Condensed Consolidated Financial
Statements 7-12
Item 2. Management's Discussion and Analysis
of Results of Operations and Financial
Condition 13-16
Item 3. Qualitative and Quantitative Disclosure
About Market Risk 16
PART II OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Default on Senior Securities 17
Item 4. Submission of Matters to a Vote of Security
Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 18-23
2
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PICO PRODUCTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited - in thousands except share and per share amounts)
April 30, July 31,
1999 1998
---------- -----------
ASSETS:
CURRENT ASSETS:
Cash and cash equivalents $ 28 $ 93
Accounts receivable (less allowance
for doubtful accounts: April 30,1999,
$168; July 31, 1998, $139) 3,960 3,871
Inventories (Note 2) 6,691 11,997
Prepaid expenses and other current
assets 87 161
------- -------
TOTAL CURRENT ASSETS 10,766 16,122
------- -------
PROPERTY, PLANT AND EQUIPMENT:
Buildings -- 217
Leasehold improvements 190 187
Machinery and equipment 1,693 2,420
------- -------
1,883 2,824
Less accumulated depreciation
and amortization 1,296 1,914
------- -------
587 910
------- -------
OTHER ASSETS:
Patents and licenses (less accumulated
amortization: April 30, 1999, $79
July 31, 1998, $75 142 147
Excess of cost over net assets of
businesses acquired (less accumulated
amortization; April 30, 1999, $447
July 31, 1998, $429) 131 152
Deposits and other non-current assets 396 625
------- -------
669 924
------- -------
$12,022 $17,956
------- -------
------- -------
See notes to condensed consolidated financial statements.
3
PICO PRODUCTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(continued)
(Unaudited - in thousands except share and per share amounts)
April 30, July 31,
1999 1998
---------- ----------
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Notes payable (Notes 6&7) $ 5,990 $ 9,139
Current portion of long-term debt 4,909 5,644
Accounts payable 3,163 3,614
Accrued expenses:
Legal and accounting 266 364
Payroll and payroll taxes 199 491
Other accrued expenses 943 661
Restructuring costs 201 269
-------- --------
TOTAL CURRENT LIABILITIES 15,671 20,182
LONG-TERM DEBT (Note 7) 60 115
COMMITMENTS AND CONTINGENCIES -- --
(Note 5)
REDEEMABLE PREFERRED STOCK, $.01 par value; authorized 500,000 shares; issued
and outstanding 1,250 shares at April 30,
1999 and July 31, 1998 1,089 1,070
SHAREHOLDERS' DEFICIENCY:
Common shares, $.01 par value; authorized 15,000,000 shares issued and
outstanding 4,215,913 shares at April 30, 1999 and
July 31, 1998 42 42
Additional paid-in capital 22,952 22,992
Stock subscriptions receivable (81) (81)
Accumulated deficit (27,601) (26,253)
Cumulative translation adjustment (110) (111)
-------- --------
TOTAL SHAREHOLDERS' DEFICIENCY (4,798) (3,411)
-------- --------
$ 12,022 $ 17,956
-------- --------
-------- --------
See notes to condensed consolidated financial statements.
4
PICO PRODUCTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited - in thousands except share and per share amounts)
Three Months Ended Nine Months Ended
April 30, April 30,
-------------------------- ---------------------------
1999 1998 1999 1998
----------- ----------- ----------- ----------
SALES $ 4,388 $ 7,089 15,466 21,737
COSTS AND EXPENSES:
Cost of sales 3,282 5,200 11,598 15,805
Selling and administrative
expenses 1,286 1,784 4,123 5,113
----------- ----------- ----------- -----------
TOTAL COSTS AND
EXPENSES 4,568 6,984 15,721 20,918
----------- ----------- ----------- -----------
INCOME FROM
OPERATIONS (180) 105 (255) 819
GAIN ON SALE -- -- 267
INTEREST INCOME 3 4 9 12
INTEREST EXPENSE (345) (470) (1,116) (1,407)
----------- ----------- ----------- -----------
INCOME(LOSS)BEFORE INCOME
TAXES AND EXTRAORDINARY ITEM (522) (361) (1,095) (576)
INCOME TAX PROVISION -- -- -- --
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE EXTRA-
ORDINARY ITEM AND DIVIDENDS
ON PREFERRED STOCK (522) (361) (1,095) (576)
EXTRAORDINARY ITEM -
LOSS RELATED TO EARLY
EXTINGUISHMENT OF DEBT -- -- (151) --
----------- ----------- ----------- -----------
NET INCOME (LOSS) (522) (361) (1,246) (576)
DIVIDENDS ON PREFERRED STOCK (35) (34) (101) (102)
----------- ----------- ----------- -----------
NET LOSS ATTRIBUTABLE TO
COMMON STOCK $ (557) $ (395) (1,347) (678)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
BASIC AND DILUTED
NET INCOME (LOSS) PER COMMON SHARE:
NET LOSS BEFORE
EXTRAORDINARY ITEM $ (.12) $ (.08) $ (.26) $ (.14)
EXTRAORDINARY LOSS -- -- (.04) --
----------- ----------- ----------- -----------
NET INCOME (LOSS) (.12) (.08) (.30) (.14)
DIVIDENDS ON PREFERRED STOCK $ (.01) $ (.01) (.02) (.02)
----------- ----------- ----------- -----------
NET LOSS ATTRIBUTABLE
TO COMMON STOCK $ (.13) $ (.09) $ (.32) $ (.16)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
SHARES USED IN PER SHARE
CALCULATIONS 4,215,913 4,185,913 4.215.913 4,185,913
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
See notes to condensed consolidated financial statements.
5
PICO PRODUCTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited in thousands except share amounts)
Nine Months Ended
April 30,
------------------------
1999 1998
------------ ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)before Extraordinary Item
and Preferred Dividends $(1,096) $ (216)
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization 287 239
Gain on Sale (267) --
Changes in operating assets
and liabilities 351 (665)
------- -------
NET CASH USED IN
OPERATING ACTIVITIES (725) (642)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures -- (31)
Sale of Assets 4,758
------- -------
NET CASH PROVIDED (USED) BY
INVESTING ACTIVITIES 4,758 (31)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments under a
line of credit agreement (3,149) (163)
Issuance of long-term debt 50 985
Issuance of short-term debt 500 --
Issuance of preferred stock -- 165
Private placement financing costs -- (116)
Retirement of warrants (40) --
Principal payments on long-term debt (1,459) (150)
------- -------
NET CASH (USED) PROVIDED BY FINANCING
ACTIVITIES (4,098) 721
------- -------
NET (DECREASE) IN CASH
AND CASH EQUIVALENTS (65) 49
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 93 22
------- -------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 28 $ 71
------- -------
------- -------
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.
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,
1999, and the results of its operations and its cash flows for the three and
nine-month periods ended April 30, 1999 and 1998. All such adjustments are of a
normal recurring nature. All significant inter-company accounts and transactions
have been eliminated in consolidation.
The consolidated financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has incurred continuing
losses from operations and negative cash flows.
At April 30, 1999 the Company was in technical violation of several of the
financial covenants related to both its senior and subordinated debt. These
factors among others may indicate that the Company will be unable to continue as
a going concern. As a result, the Company has reclassified $4,245,000 and
$5,478,000 representing the subordinated long-term debt, as a current liability
at April 30, 1999 and July 31, 1998, respectively. The subordinated lenders,
however, have not requested payment or any acceleration of payment of the
subordinated debentures in connection with these technical violations of these
financial covenants. See Note 8 for a discussion of the repayment of the
subordinated debentures in connection with the sale of the trap and filter
manufacturing operation.
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
7
(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, 1998.
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,
(in thousands) 1999 1998
-------- --------
Raw materials $ 1,416 $ 4,280
Work in process 166 761
Finished goods 5,109 6,956
------- -------
$ 6,691 $11,997
------- -------
------- -------
(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,
1999 and 1998 due to the Company's U.S. Federal, state, and foreign net
operating loss carryforward positions.
(4) EARNING PER SHARE
Due to a Net Loss Attributable to Common Stock, shares issuable upon exercise of
stock options and warrants have not been included in the calculation of Diluted
Loss per Share. The Company has used the weighted average shares outstanding of
4,215,913 and 4,185,913 at April 30, 1999 and 1998, respectively. In addition,
the Company had 3,020,678 shares issuable upon the exercise of outstanding stock
options and warrants at prices ranging from $.085 to $3.19 at April 31, 1999.
8
(5) LITIGATION AND CONTINGENCIES
INFORMATION REQUEST
In March 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 learned
that the EPA added the Onondaga Lake Site to the Superfund National Priorities
List in December 1994, and has completed an onsite assessment of the degree of
hazard. The EPA has indicated that the Company is one of 26 companies located in
the vicinity of Onondaga Lake or its tributaries that have received a similar
Information Request.
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.
EAGLE LITIGATION
On July 30, 1997, Eagle Comtronics, Inc. ("Eagle") filed a motion in the United
States District Court for the Northern District of New York to amend the
complaint for patent infringement it had filed in 1979 against the Company. This
1979 action had been settled by Consent Judgment in 1988, pursuant to which the
Company and Eagle entered into a License Agreement providing for specified
royalty payments from Eagle to the Company. Eagle's motion sought the District
Court's permission to proceed against the Company under various legal theories
for breach of the License Agreement, based on Eagle's allegation that the
Company, in violation of the License Agreement's "most favored nation" clause,
granted a license to a third party (Arrow Communication Laboratories, Inc.) on
more favorable terms than those provided to Eagle. Eagle sought damages of
approximately $1,600,000 plus interest and attorneys fees. The Company believed
that Eagle's
9
motion was procedurally improper and that, even if the amended complaint were
allowed by the District Court, it had meritorious defenses to the claims stated
in the amended complaint.
The Company responded to Eagle's motion, and Eagle promptly withdrew the motion
to file an amended complaint. At the same time Eagle filed a complaint in New
York State Supreme Court similar to the proposed amended federal complaint. The
Company filed a motion to dismiss Eagle's complaint, which has been denied. The
discovery phase of the case is proceeding. Management believes that the Company
has meritorious defenses to Eagle's action and that such suit will not have any
material adverse effect on the Company.
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 affect on the Company's
consolidated financial statements.
(6) NOTES PAYABLE AND LONG-TERM DEBT
The terms of the Company's senior debt facility were recently revised in
connection with the sale of the Company's trap and filter manufacturing
business. As revised the loan agreement provides for a $8,000,000 revolving bank
line of credit which is secured by substantially all of the Company's assets,
including all trade accounts receivable and inventories. The line provides for
interest at the prime rate plus 1.25% (9% at April 30, 1999).
The revolving line of credit is used to fund operating expenses, product
purchases and letters of credit for import purchases. The line has a $1,000,000
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. These recent revisions
lowered the advance rate for inventory from 63% to 50% and reduced the total
amount of the line supported by inventory from $5,500,000 to $4,000,000. These
recent revisions in the senior debt availability formulas have adversely
affected the Company's ability to purchase inventory, which has resulted, and
can be expected to continue in the near future to result in, reduced sales. The
credit facility is subject to certain financial tests and covenants continuing
through the term of the agreement.
The senior lender notified the Company that it had terminated its credit
facility, effective December 31, 1998. The Company's senior lender has continued
to advance funds in accordance with the facilities advance rates. However, there
can be no assurance that the senior lender will continue to advance funds.
Continuation of the senior debt facility is critical to the day-to-day
operations of the Company. In the event the senior lender did not continue to
advance funds, the Company would need to find alternate sources of financing.
10
It is highly unlikely that the Company could obtain financing at acceptable
terms and conditions and consequently would have to consider filing for
protection under Chapter 11 of the Bankruptcy code. The Company has retained an
investment banking firm to advise it with respect to the exploration of
strategic alternatives that could lead to the possible sale or merger of the
Company. Such a sale or merger might be consummated under Chapter 11 of the
Bankruptcy code. However, the Company has not determined a course of action and
may ultimately decide to remain independent.
The Company had approximately $5,990,000 outstanding under the senior facility
and the Company had $109,000 of availability under its line of credit on April
30, 1999.
At April 30, 1998 the Company was in violation of several of the financial
covenants under its senior and subordinated debt, including covenants with
respect to quarterly sales and earnings.
Due to the uncertainty related to the achieving continuing compliance and that
no waivers have been obtained from either it's senior or subordinated lender the
Company has classified $4,245,000 as a current liability. However, the holders
of the subordinated debt have not requested payment or any acceleration of
payment of the subordinated debentures due to the failure to meet the various
financial tests and covenants.
See Note 8 for a discussion of the repayment of $1,390,000 principal amount of
the 12% subordinated debt in connection with the sale of the trap and filter
manufacturing operation.
In addition the senior lender has notified the Company and the subordinated
lenders that the payment to the subordinated lenders of a portion of the
proceeds from the sale of the Company's trap and filter manufacturing business
breached the Surbordination Agreement among the senior lender, the subordinated
lenders and the Company. The Company does not believe it is in violation of the
subordinated loan agreement having relied upon discussions with the senior
lender in which the Company had disclosed the proposed disposition of the
proceeds from the sale of the trap and filter manufacturing operation.
In addition, the senior lender exercised rights under the Subordination
Agreement to prohibit the Company from making any further payments of interest
or principal to the holders of the subordinated debt for a period of 120 days.
This standstill provision expired on March 17, 1999. The Company continues not
to pay interest on the subordinated debt. The senior lender has also demanded
repayment by the subordinated lenders of the prepayment of principal.
On April 15, 1999 the Company received a loan from one of its subordinated
lenders in the amount of $500,000 with interest and principal due on May 15,
1999. The proceeds from this loan were used to purchase inventory to support the
Company's sales efforts. In connection with this transaction the Company issued
warrants to
11
purchase 1,000,000 shares of the Company's Common Stock at a purchase price of
$.095 per share. At this time, no valuation has been assigned to these warrants.
As of May 31, 1999 the Company has not repaid this loan and has begun
discussions with its subordinated lender with respect to renegotiating the
payment terms of this note. Under the terms of this subordinated note, it is
senior in preference to previously issued subordinated debt but junior to the
debt issued under the working capital line of credit. There can be no assurance
that the Company will be able to renegotiate the payment terms of this note.
(7) SALE OF TRAP AND FILTER MANUFACTURING OPERATION
On September 3, 1998, the Company sold its trap and filter manufacturing
operation and entered into an arrangement to purchase its trap and filter
requirements exclusively for a five-year term. The Company received gross
proceeds of $5,200,000 and transferred the inventory and certain
manufacturing assets, including equipment, technical designs and plans to the
buyer.
The Company received gross proceeds of $5,200,000, after the deduction of the
net book value of the inventory and fixed assets sold the Company recorded a
gain $606,000. This gain was reduced to -0- due to certain contingencies related
to the reimbursement by the acquirer of expenses incurred in the transfer of the
operation to the acquirer.
In addition, the Company had entered into a commitment to purchase $4,000,000 of
finished trap and filter inventory, of which approximately $2,200,000 remains at
April 30, 1999.
Subsequent to January 31, 1999 the Company was notified that the supplier would
no longer provide inventory to the Company until the Company was current on its
balance due. The Company is attempting to negotiate an amendment to the
five-year distribution arrangement. The outcome of this matter cannot be
determined at this time, however, the Company does not expect a material,
unfavorable impact on its operating results, due to the low margins earned on
sales of trap and filter product.
Through April 30, 1999, the Company had trap and filter sales of $204,000
and $2,948,000 for the three and nine-months ended April 30, 1999,
respectively.
In November 1998, the Company sold its St. Kitts building and in a related
transaction settled a lawsuit related to the sale of the trap and filter
business. The Company received gross proceeds of $400,000 and recorded, after
the deduction of the value of the assets sold and transaction costs, a Gain on
Sale of $267,000.
(8) EXTINGUISHMENT OF DEBT
In September 1998 the Company repaid $1,390,000 to its subordinated lender in
connection with the subordinated lender agreeing to the release of its security
interest in assets related to the trap and filter manufacturing operation. The
subordinated lender also agreed
12
to return 265,539 warrants to purchase common stock, which had been issued in
connection with this debt. The Company has estimated the fair value of these
warrants to be $40,000.
In connection with this transaction, the Company has recorded an Extraordinary
Item, a Loss on Extinguishment of Debt of $151,000. This loss represents the
write-off of the unamortized portion of deferred loan costs and debt discount,
less the amount paid to retire the warrants.
(9) NEW ACCOUNTING PRONOUNCEMENT
In conformity with generally accepted accounting principles the Company has
adopted Statement of Financial Accounting Standards No. 131 "Reporting
Comprehensive Income." Comprehensive Net Income (Loss) was the same as the Net
Income (Loss) for both the three and nine months ended April 30, 1999 and 1998.
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, 1999 with the three and nine month period
ended April 30, 1998, as shown by the unaudited condensed consolidated
statements of income included in this quarterly report.
RESULTS OF OPERATIONS
Sales (in thousands): 1999 1998 %(Decrease)
----------- ------------- -------------
Three Months Ended April 30 $ 4,388 $ 7,089 (38.1%)
Nine Months Ended April 30 $ 15,466 $ 21,737 (28.8%)
The decrease for the three and nine-months ended April 30, 1999 as compared to
the same periods in 1998 is a result of continuing shortages of select inventory
items (including traps and filters) in the U.S. distribution market, lower sales
in South America due to economic and competitive pressures, and a decrease in
proprietary sales. Difficulties in obtaining adequate credit resulted in the
inability to purchase inventory, which contributed to product shortages and
adversely impacted sales.
Cost of Sales (in thousands):
% Increase
1999 1998 (Decrease)
---------- ---------- -----------
Three Months Ended April 30, $ 3,282 $ 5,200 (36.9%)
As a percentage of sales 74.7% 73.4% 1.8%
Nine Months Ended April 30, $ 11,598 $ 15,805 (26.6)
As a percentage of sales 75.0% 72.7% 3.2%
The decrease in cost of sales was due to the decrease in sales. Cost of sales,
as a percentage of sales, increased due to lower overall volume over which
overhead expenses could be absorbed and an
13
unfavorable, as compared to prior period, product mix shift to lower margin
product.
Selling and Administration Expenses (in thousands)
% Increase
1999 1998 (Decrease)
---------- ---------- -----------
Three Months Ended April 30, $ 1,286 $ 1,784 (27.9%)
As a percentage of sales 29.3% 25.2% 16.3%
Nine Months Ended April 30, $ 4,123 $ 5,113 (19.4%)
As a percentage of sales 26.7% 23.5% 13.6%
The decrease in selling and administration costs from 1997 to 1998 is a result
of on-going cost control efforts, including headcount reductions begun in fiscal
1997, continuing through fiscal 1998 and into fiscal 1999. The decreases for
both the three-and nine-months ended April 30, 1999, as compared to the same
periods in 1998 resulted from the reduction of selling, production, and
administrative headcount and expenses related to the trap and filter business.
Interest expense (in thousands):
The decrease in interest expense is due to the repayment of both senior and
subordinated debt in September 1998 using proceeds received from the sale of the
trap and filter manufacturing operation.
Gain on Sale:
Included in Gain on Sale for the nine-months ended April 30, 1999 is
$267,000 from the sale of the St. Kitts facility.
Income Taxes:
No provision for U.S. Federal and state regular income taxes or foreign income
taxes has been recorded for the nine-month periods ended April 30, 1999 and 1998
due to a currently reportable taxable loss and the Company's U.S. Federal,
state, and foreign net operating loss carry-forward positions.
Summary:
A return to profitability is contingent upon the Company continuing to have
access to adequate financing to purchase product inventory.
LIQUIDITY AND CAPITAL RESOURCES
The terms of the Company's senior debt facility were recently revised in
connection with the sale of the Company's trap and filter manufacturing
business. See Note 6 to Notes to Condensed Consolidated Financial Statements. As
revised, the loan agreement provides for a $8,000,000 revolving bank line of
credit, which is secured by substantially all of the Company's assets, including
all trade
14
accounts receivable and inventories. The line provides for interest at
the prime rate plus 1.25% (9% at April 30, 1999).
The revolving line of credit is used to fund operating expenses, product
purchases and letters of credit for import purchases. The line has a $1,000,000
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. These recent revisions
lowered the advance rate for inventory from 63% to 50% and reduced the total
amount of the line supported by inventory from $5,500,000 to $4,000,000. These
recent revisions in the senior debt availability formulas have adversely
affected the Company's ability to purchase inventory, which has resulted, and
can be expected to continue in the near future to result in, reduced sales. The
credit facility is subject to certain financial tests and covenants continuing
through the term of the agreement.
The senior lender notified the Company that it had terminated its credit
facility, effective December 31, 1998. The Company's senior lender has continued
to advance funds in accordance with the facilities advance rates. However, there
can be no assurance that the senior lender will continue to advance funds.
Continuation of the senior debt facility is critical to the day-to-day
operations of the Company. In the event the senior lender did not continue to
advance funds, the Company would need to find alternate sources of financing. It
is highly unlikely that the Company could obtain financing at acceptable terms
and conditions and consequently would have to consider filing for protection
under Chapter 11 of the Bankruptcy code. The Company has retained an investment
banking firm to advise it with respect to the exploration of strategic
alternatives that could lead to the possible sale or merger of the Company. Such
a sale or merger might be consummated under Chapter 11 of the Bankruptcy code.
However, the Company has not determined a course of action and may ultimately
decide to remain independent.
The Company had approximately $5,990,000 outstanding under the senior facility
and the unused portion of its calculated borrowing base was $109,000 on April
30,1999.
At April 30, 1999, the Company was in violation of several of the financial
covenants under its senior and subordinated debt. The Company has not received
any waivers from either of its lenders. The Company's senior lender continues to
make advances, however, there can be no assurance that its senior lender will
continue to advance funds nor demand immediate payment of the outstanding
balance due.
In addition the senior lender had notified the Company and the subordinated
lenders that the payment to the subordinated lenders of a portion of the
proceeds from the sale of the Company's trap and filter manufacturing
business breached the Surbordination Agreement among the senior lender, the
subordinated lenders and the Company. (See Note 6 to Notes to Condensed
Consolidated Financial Statements.) The Company
15
does not believe it is in violation of the subordinated loan agreement having
relied upon discussions with the senior lender in which the Company had
disclosed the proposed disposition of the proceeds from the sale of the trap and
filter manufacturing operation.
The senior lender notified the Company and the subordinated lender that it has
exercised its rights under the Subordination Agreement to prohibit the Company
from making any further payments of interest or principal to the holders of the
subordinated debt for a period of 120 days. The senior lender has also demanded
repayment by the subordinated lenders of the prepayment of principal.
On April 15, 1999 the Company received a loan from one of its subordinated
lenders in the amount of $500,000 with interest and principal due on May 15,
1999. The proceeds from this loan were used to purchase inventory to support the
Company's sales efforts. In connection with this transaction the Company issued
warrants to purchase 1,000,000 shares of the Company's Common Stock at a
purchase price of $.095 per share. At this time, no valuation has been assigned
to these warrants. As of May 31, 1999 the Company has not repaid this loan and
has begun discussions with its subordinated lender with respect to renegotiating
the payment terms of this note. Under the terms of this subordinated note, it is
senior in preference to previously issued subordinated debt but junior to the
debt issued under the working capital line of credit.
In addition to obtaining increased liquidity, 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.
YEAR 2000
The Company has developed a plan to address the possible exposure related to the
impact on its computer systems of the Year 2000. Key financial information and
operational and product systems have been assessed and plans have been developed
to address systems modifications required by December 31, 1999. The financial
impact of making the required systems changes is not expected to be material to
the Company's consolidated financial position, results of operations, or cash
flow. In addition, the Company will be communicating with others with whom it
does significant business, including but not limited to its suppliers, key
customers and lenders, to determine their Year 2000 compliance readiness and the
extent to which the Company is vulnerable to any third party Year 2000 issues.
However,
16
there can be no guarantee that the systems of other companies on which the
Company's systems rely will be timely converted or that a failure to convert by
another company would not have a material adverse effect on the Company. The
risk of Year 2000 issues is mitigated by the fact that the Company does not
significantly rely upon any one major supplier or customer and that its products
do not contain date-sensitive computer software or hardware.
FORWARD LOOKING STATEMENTS
Statements which are not historical facts, including statements about our
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 our products, the continuing
strength of the markets we serve, competitor pricing, maintenance of our current
momentum and other factors.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
17
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Incorporated by reference from financial statement footnote number 5
of Part I.
ITEM 2 CHANGES IN SECURITIES.
On February 18, 1999 the Company announced that it had notified the
American Stock Exchange that it was withdrawing its appeal of the
decision of the Exchange's staff an application with the Securities
and Exchange Commission to delist the Company's Common Stock. The
Exchange's staff decision was based on the Company's failure to meet
continuing listing guidelines, arising from past operating losses
and a resulting accumulated deficit as well as other factors. The
Company's shares have begun to trade on the over-the-counter market
under the symbol PPIP.
ITEM 3. DEFAULT ON SENIOR SECURITIES
Incorporated by reference from financial statement footnote number 6
of Part I.
On April 14, 1999 the Company and certain of its subsidiaries issued
subordinated debentures to Allied Investment Corporation, an
affiliate of Allied Capital Corporation, representing indebtedness
of $500,000 due May 14, 1999. In connection with these subordinated
debentures the Company issued 1,000,000 warrants to purchase Common
Stock of the Company at a price of .095 per share. The warrants
contain certain anti-dilution provisions and expire six years from
the date issued. The Company believes that the issuance of the
foregoing securities is exempt from registration under the
Securities Act of 1933, as amended, by virtue of the exemption
provided by Section 4 (2) thereof for transactions not involving a
public offering. The debentures and warrants were issued pursuant to
the terms of agreements which contain various financial and other
covenants similar to those under its existing debenture and
warrants. 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.
None
ITEM 5. OTHER INFORMATION.
None.
18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits: (Note - A Key To Index of Exhibits Incorporated By Reference
is provided at the end of this Item 6.)
2(a)e Asset Purchase Agreement, dated as of September 3,1998
between Pico Products, Inc., a New York Corporation and
Thomas & Betts Corporation.
3(a)k Restated Certificate of Incorporation of the Company, as
filed on September 5, 1997.
3(b)c By-Laws of the Company, as amended on December 17, 1987.
3(c) Amendment to By-Laws of the Company, adopted November 14,
1997.
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(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.
19
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.
4(n)j Amended and Restated 1996 Incentive Stock Plan.
4(o)k Investment Agreement between the Company and certain of its
subsidiaries, and Allied Capital Corporation and certain of
its affiliated companies, dated September 12, 1997.
4(p)k Junior Subordinated Secured Debenture issued by the Company
and certain of its subsidiaries, payable to Allied Capital
Corporation, dated September 12, 1997. The Company has
issued junior subordinated secured debentures in
substantially the same form as this debenture to the
following parties for the following amounts:
Holder Amount
-------------------------------------------- -------------------
Allied Investment Corporation $374,300
Allied Capital Corporation II $394,000
20
4(q)k Letter Agreement covering the issuance and sale by the
Company of Preferred Stock and issuance of warrants to
purchase shares of Common Stock to The Sinkler Company,
dated September 12, 1997.
4(r)k Stock Purchase Warrant issued by the Company to Allied
Capital Corporation, dated September 12, 1997. 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 258,944
Allied Capital Corporation II 272,572
The Sinkler Corporation 114,200
4(s)k Stock Purchase Warrant -- Subject to Call issued by the
Company to Allied Capital Corporation, dated September 12,
1997. 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 68,024
Allied Capital Corporation II 71,604
The Sinkler Corporation 30,000
4(t)k First Amendment to Investment Agreement between the Company
and Allied Capital Corporation and certain of its
affiliated companies (original agreement dated November 21,
1996)- amendment dated September 12, 1997.
4 (u) Junior Subordinated Secured Debenture issued by the Company
and certain of its subsidiaries, payable to Allied Capital
Corporation, dated April 15, 1999.
4 (v) Stock Purchase Warrant issued by the Company to Allied
Capital Corporation, dated April 15, 1999.
10(q)(l) Amendment No. 5 to the Loan and Security Agreement between
Pico Macom, Inc. and HSBC Business Loans, Inc., as
successor to Marine Midland Business Loans, Inc., dated May
25, 1994 -- Amendment dated October 31, 1997.
10(r)f Employment agreement dated January 8, 1998 between the
Company and Charles G. Emley, Jr.
10(s)m Amendments No 6, 7, 8, and 9 to the Loan and Security
Agreement between Pico Macom, Inc. and HSBC Business Loans,
Inc., dated December 12, 1997, June 1, 1998, October 11,
1998 and November 13, 1998, respectively.
21
11.1 Computation of Per Share Earnings. Incorporated by
reference from financial statement footnote Number 4 of
Part 1
27 Financial Data Schedule (included only in the EDGAR filing).
28
(b) Reports on Form 8-K:
None.
22
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 by the Company as an exhibit to the Company's Form 8-K
filed on September 18, 1998 and incorporated by reference.
f Previously filed by the Company as an exhibit to the Company's Form
10-Q for the fiscal quarter ended January 31, 1998 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 as an appendix 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-K for the fiscal year ended July 31, 1997 and incorporated by
reference.
l Previously filed by the Company as an exhibit to the Company's Form
10-Q for the fiscal quarter ended October 31, 1997 and incorporated by
reference.
m Previously filed by the Company as an exhibit to the Company's Form
10-K for the fiscal year ended July 31, 1998.
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.
23
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.
DATE: June 14, 1999 /s/ Mike Gavigan
-----------------------------------
Chief Financial Officer
DATE: June 14, 1999 /s/ Charles G. Emley, Jr.
-----------------------------------
Chairman and Chief Executive Officer
24
INDEX TO EXHIBITS FILED
11.1 Computation of Per Share Earnings. Incorporated by reference from
financial statement footnote number 4 of Part 1.
4(u) Junior Subordinated Secured Debenture issued by the Company and
certain of its subsidiaries, payable to Allied Capital Corporation,
dated April 15, 1999.
4(v) Stock Purchase Warrant issued by the Company to Allied Capital
Corporation, dated April 15, 1999.
27 Financial Data Schedule (included only in the EDGAR filing).
25