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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
( X ) Annual report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 (Fee Required). For the fiscal year ended July
31, 1995.
OR
( ) Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 (No Fee Required) for the transition period from
to .
--------------- -----------
Commission File Number 1-8342
PICO PRODUCTS, INC.
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(Exact name of registrant as specified in its charter)
NEW YORK 15-0624701
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
12500 Foothill Blvd., Lakeview Terrace, CA 91342
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (818) 897-0028
--------------
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
- --------------------------------- ------------------------
Common Stock, par value $.01 American Stock Exchange
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-K or any amendment to this
Form 10-K. ( )
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The aggregate market value of the Registrant's Voting Stock held by non-
affiliates of the Registrant computed by reference to the closing price of such
stock on the American Stock Exchange at October 6, 1995, was $6,722,290.
Excluded from this value were shares held by officers and directors of the
Registrant.
The number of the Registrant's Common Shares outstanding at October 6,
1995, was 3,682,246.
DOCUMENTS INCORPORATED BY REFERENCE:
Definitive Proxy Statement to be filed pursuant to Regulation 14A in connection
with the 1995 annual meeting of shareholders of the Registrant.
Index to Exhibits is at page 46.
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PART I
ITEM 1. BUSINESS
GENERAL
Pico Products, Inc. was formed as a corporation in the State of New York on
July 31, 1962. Pico and its subsidiaries (the "Company") design, manufacture,
import and market a wide range of products which receive, distribute and secure
telecommunication signals. The Company's primary products include cable
television accessories, passive radio frequency ("passive") devices, equipment
for the commercial reception, processing and distribution of satellite
television signals and Pay TV security devices. A table listing the Company's
subsidiaries is included at the end of Item 1.
TELEVISION DISTRIBUTION INDUSTRY BACKGROUND
Cable television (CATV) systems receive and process television signals at a
central location and distribute these signals to subscribers using fiberoptic
and coaxial cable. CATV systems generally offer their subscribers access to
many more television channels than the limited number of channels broadcast
locally. By subscribing to a CATV system, customers can have access to
television channels relayed from other cities, channels providing access to
public, educational and governmental information and specialized channels
providing shopping, entertainment, sports and movie services. To provide their
customers specialized entertainment channel services, the CATV system operators
contract with the providers of the specialized channel. For example, CATV
system operators wanting to provide their subscribers access to the Home Box
Office (HBO) movie channel would purchase the service from HBO. Customers who
select access to the specialized channels generally pay an extra fee or premium
for this service. Because of the high level of cost associated with installing,
maintaining and operating a CATV system, most system operators use some types of
security products to attempt to limit access to their signals to those
subscribers paying for the service.
In addition to CATV, other television distribution systems have been
developed to provide customers access to more television channels. One of these
distribution systems is a Satellite Master Antenna Television (SMATV) system
which consists of the reception, processing and distribution of satellite and
locally broadcast television signals within a multiple dwelling facility. These
facilities include apartment houses, condominiums, hotels, motels, schools and
hospitals. Similar to CATV system operators, operators of commercial SMATV
systems also contract for access to specialized services such as HBO and charge
their customers a premium for the specialized service.
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Another television distribution system is a Multichannel Multipoint
Distribution System (MMDS) which consists of transmitting television channels at
microwave frequencies and receiving, downconverting and distributing the
television signals to single and multiple dwelling facilities. This system,
also known as "wireless cable", allows the distribution of television signals
into areas where the population density makes installation of a CATV system
uneconomical or areas where the operators choose to compete with an established
CATV system.
Additional television signal distribution systems include Television Access
Only (TVRO) and Direct-To-Home (DTH). In both of these methods a satellite
signal is beamed directly to a subscriber's residence where a satellite dish
antenna and decoding equipment are used to descramble the signal. The
subscriber pays a fee for the descrambling services.
A significant difference that distinguishes SMATV and MMDS systems from
TVRO or DTH systems is that the SMATV and MMDS systems are used to transmit
broadband signals to multiple customer locations in a commercial environment.
For example, in an apartment building an operator can receive SMATV and MMDS
signals, descramble and process the signals through an electronic "headend"
system, and distribute the television signals via fiber or cable to the
television sets of subscribers residing in that apartment building.
PICO MACOM, INC.
The Company's Pico Macom, Inc. (Pico Macom) subsidiary, located in Lakeview
Terrace, California, sells electronic systems equipment and components, cable
television accessories and passive radio frequency products. Pico Macom's sales
are primarily to the SMATV and CATV industries. The majority of Pico Macom's
products are manufactured in Taiwan, China, Malaysia and Thailand (the "Far
East") by a variety of manufacturers and subcontractors. Pico Macom employees
provide the design and quality specifications for most of these products.
Pico Macom maintains active quality control supervision through on-going,
on-site inspections by employees of its subsidiary, Pico Macom Taiwan Co.,
Limited (Pico Macom Taiwan). In addition to quality control functions, Pico
Macom Taiwan employees also provide purchasing and freight consolidation support
functions. Most inspected products are shipped to Pico Macom's Southern
California distribution facility from which they are distributed either with or
without additional assembly and testing. However, large orders can be shipped
directly to customer locations.
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Pico Macom sells over 500 different products at prices ranging from under
$1 for most passive components to over $30,000 for complete SMATV headend and
signal distribution systems. Products are sold to over 1,000 distributors,
dealers and original equipment manufacturers (OEM) located primarily in the
United States. Sales are also made to customers in Canada, Latin America and
the Far East. Sales are made through telemarketing from the Lakeview Terrace
office and directly to major distributors and OEM accounts.
Sales by Pico Macom represented 83%, 83%, and 86% of the Company's
consolidated sales for the fiscal years ended July 31, 1995, 1994 and 1993,
respectively. For the fiscal year ended July 31, 1995 approximately 70% of Pico
Macom's sales revenue was from sales to the television distribution equipment
industry, primarily SMATV systems; the remaining 30% of Pico Macom's sales
revenue was from sales to CATV systems distributors and OEM accounts.
PAY TV SECURITY (CATV) DIVISION
The Company's Pay TV Security (CATV) division sells several types of pay TV
security products. These security products allow a CATV or SMATV system
operator to control the reception of premium service by the system's
subscribers. Products sold include positive and negative traps, encoders, tier
traps and accessories. These products are used primarily in positive or
negative trapping systems.
In a positive trapping system, an encoder is used at a central signal
processing center (headend) to place an interfering or jamming carrier within a
specific television channel. A positive trap is then used at each subscriber
location to decode or remove the interfering carrier. Without installation of
the positive trap, subscribers cannot clearly view the affected television
picture. Alternatively, in a negative trapping system, a negative trap is used
at each non-subscriber location to prevent access to a premium service. Tier
traps are a form of negative trapping in which access to a group or tier of
television channels is denied to non-subscribers.
During the fiscal year ended July 31, 1995 the Company began selling low
noise drop amplifiers (LNDA-trademark-), which allow cable TV system operators
to meet the latest FCC regulations regarding television signal strength. The
Company has applied for a patent on the technology used in these broadband
amplifiers which are intended to boost the CATV system signal level at the
subscribers' residences. The patent has recently been given a notice of
allowance by the U.S. Patent and Trademark office.
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Sales by the Company's CATV division represented 17%, 17% and 14% of the
Company's consolidated sales for the fiscal years ended July 31, 1995, 1994 and
1993, respectively. CATV division sales were primarily to domestic CATV
systems, distributors for CATV systems and to distributors in Taiwan. Sales of
traps are made at prices ranging from $3 - $10 per trap and encoder sales are
made at prices of $250 - $300 per encoder. Sales are made primarily through
direct sales to CATV system operators with telemarketing backup from a sales
office in East Syracuse, New York. Product shipments are made from Pico Macom's
distribution center in Lakeview Terrace, California.
FOREIGN OPERATIONS
In addition to Pico Macom Taiwan discussed above, the Company owns and
operates a manufacturing facility on the island of St. Kitts (St. Christopher
and Nevis) in the Caribbean. Pico (St. Kitts) Limited assembles the circuit
boards for the positive, negative and tier traps sold by the Pay TV Security
division. During the fiscal year ended July 31, 1994 the Company established
two wholly owned subsidiaries, Pico (Bermuda) Limited and Pico Products Asia
Limited (PPAL). PPAL's office in Hong Kong has been established and is now in
full operation. PPAL is actively marketing the Company's product line
throughout Asia. At July 31, 1995 the assets located outside the United States
constituted less than 10% of the company's total assets and the revenues and
operating expenses attributable to the Company's foreign operations were also
less than 10% of the Company's revenues and expenses.
SALES AND MARKETING
At July 31, 1995, 1994 and 1993, the Company had a sales and marketing
staff of 25 persons, 21 person, and 19 persons, respectively. Marketing and
promotion of the Company's products are conducted via direct selling and
telemarketing, and to a lesser extent by advertising in trade publications and
participating in trade shows.
Pico Macom sells products to its markets nationally and internationally
through over 1,000 distributors, dealers and OEM manufacturers. The top fifteen
customers generated approximately 57% of Pico Macom's sales in the year ended
July 31, 1995.
Primarily, sales of the CATV division's Pay TV security products are made
directly to cable system operators by the Company's sales group. Some sales are
to national and regional distributors.
The Company's sales to American Technology Exporters, Inc. ("Amtech") were
approximately 20%, 16% and 12% of consolidated sales for the years ended July
31, 1995, 1994, and 1993, respectively.
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As is customary in the industries served, the Company's sales are normally
made pursuant to individual purchase orders. Orders are subject to cancellation
by the buyer under certain conditions without penalty. The backlog of purchase
orders as of July 31, 1995 and July 31, 1994 was approximately $2,600,000 and
$2,495,000, respectively. These purchase orders were believed to be firm, and
the Company expects to fill the July 31, 1995 backlog within its 1996 fiscal
year.
The largest dollar volume sales are of the Company's active electronic
equipment items used in "head end" installations for which unit prices range
from approximately $100 to $500. However, a large volume of the Company's sales
is of low cost components sold at unit prices under $5.00. Since 1982, a large
portion of Pico Macom's passive products have been sold under the trademark,
"Tru-Spec-REGISTERED TRADEMARK-".
MANUFACTURERS AND SUPPLIERS
Approximately 70% of the Company's sales are from products manufactured by
vendors according to the Company's design and quality specifications. These
vendors are located primarily in Taiwan, China, Malaysia and Thailand (the "Far
East"). For more than ten years, the majority of the SMATV equipment items sold
by Pico Macom have been manufactured under contract on an exclusive basis by one
vendor in Taiwan. The Company is committed to procure a minimum of
approximately $5,375,000 of products from this vendor during fiscal year 1996.
Management believes that the Company's relationship with this vendor is
excellent and that the financial strength of the vendor is adequate; however,
the loss of this vendor could have a material adverse impact on the Company's
operations until the Company could obtain an alternative source of supply. The
contract does not require the vendor to maintain parts inventory, so that from
time-to-time delays are possible in completing customer orders. The current
contract expires in May 1998 and management anticipates renewing the contract
prior to its expiration. Most of the other products obtained from foreign-based
vendors are available from a number of different vendors.
Approximately 17% of the Company's sales are from products manufactured by
the Company. These items consist primarily of passive traps. The trap
manufacturing process involves raw materials procured from domestic and foreign-
based sources which are assembled at the Company's manufacturing facility in St.
Kitts. Final assembly and quality control is accomplished at the manufacturing
facility in Lakeview Terrace, California. The raw materials used in the
manufacturing processes are available from a number of different suppliers, both
domestic and foreign-based, and management believes that no one vendor has the
ability to significantly impact the Company's supply of raw materials.
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The remaining 13% of products sold are primarily items purchased from
domestic vendors for resale and sales of contract labor by Pico (St. Kitts) Ltd.
In August 1987, Pico Macom Taiwan was organized as a Taiwanese export
trading company to facilitate procurement of products from vendors who are too
small to export directly. Pico Macom Taiwan serves as a liaison between Pico
Macom and all of its Far East vendors by monitoring quality control of the
products and assisting in new product development.
PRODUCT DEVELOPMENT
Product development costs are expensed as incurred. Expenses allocated to
product development for the years ended July 31, 1995, 1994 and 1993 totaled
approximately $977,000, $545,000, and $324,000, respectively.
COMPETITION AND PATENTS
Equipment reliability, diversity of product lines, delivery requirements,
price, customer service and technological competence are the major basis of
competition in the television distribution equipment industries. The television
distribution equipment industries are characterized by intense competition and
technological changes. Many companies which provide equipment and services to
these industries are substantially larger in size and in resources than the
Company.
Royalties received on a Company-owned patent were $257,000, $607,000, and
$329,000 during fiscal 1995, 1994 and 1993, respectively. On February 14, 1995,
the Company's patent for positive trapping systems expired resulting in the
reduction of royalties for fiscal year 1995. The Company is awaiting the
issuance of a patent for its new LNDA broadband amplifiers. However, patent
protection is not available for many of the Company's products. Management
believes that its business is dependent upon marketing and product availability
rather than patent protection.
WARRANTIES
The Company warrants its Pay TV Security division products against faulty
materials and workmanship for up to five years. Pico Macom warrants its
products against faulty material and workmanship for two years for its
electronic equipment and one year for its other products. The Company's
warranties are limited to repair or replacement of the defective product.
During the three years ended July 31, 1995, direct costs associated with the
warranties have been minimal.
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EMPLOYEES
At July 31, 1995, the Company employed 365 persons of whom 33 were engaged
in administration and accounting, 22 in engineering and quality control, 25 in
sales and marketing, and the remainder in production, purchasing and shipping.
None of the Company's employees are represented by labor unions.
GOVERNMENTAL REGULATION
The Company's products are subject to Federal Communications Commission
("FCC") regulation. Certain of the Company's customers also are subject to
regulation by the FCC and by state and local governmental authorities. The
rules, regulations, policies and procedures of the FCC affecting the television
distribution industry are constantly under review. The likelihood of changes in
such regulation and its effect on the business of the Company cannot be
ascertained.
In October 1992, the U.S Congress enacted legislation to reregulate certain
aspects of the U.S. cable television industry. As part of this legislation, the
FCC mandated two separate rollbacks in subscriber rates totalling as much as 17%
of the prior rates. This rate reduction adversely impacted the Company's sales
of pay TV security devices during fiscal year 1994 as the system operators
reduced their capital expenditure budgets to reflect their lowered revenues.
During fiscal year 1995, the Company experienced an increase in demand for pay
TV security devices as the system operators began to again order products.
While the Company anticipates that the FCC actions may lead to changes, such as
mergers or acquisitions, in the cable industry, it is not yet possible to
determine the full impact of this legislation. At this time, management does
not believe that the FCC actions will have a long-term adverse impact on the
Company's profitability.
The Company's products are used by television distribution systems in
foreign countries, especially in Latin America and Asia. Sales to Latin America
are made directly by the Company or through U.S.-based distributors while sales
to Asia are made through the Company's CATV division and through the Company's
Hong Kong subsidiary, PPAL. Regulation of construction, technical character and
operation of the television distribution system is controlled by each country's
government. The Company cannot predict the impact on its sales due to changes
in regulation or legislation by foreign governments.
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TABLE OF COMPANY'S SUBSIDIARIES
<TABLE>
<CAPTION>
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Name Jurisdiction of Year Active (A)
Incorporation Incorporated Inactive (I)
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<S> <C> <C> <C>
Pico Macom, Inc. Delaware 1983 A (1)
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Pico Macom Taiwan 1987 A (3)
Taiwan Co. Ltd.
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Pico (St. Kitts) St. Christopher 1983 A (2)
Ltd. and Nevis
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Pico (Bermuda) Bermuda 1994 A (1)
Ltd.
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Pico Products Hong Kong 1994 A (4)
Asia Ltd.
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Pico (St. St. Vincent and 1981 I (1)
Vincent) Ltd. the Grenadines
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Pico Satellite, Delaware 1983 I (1)
Inc.
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Pico Cargo, Inc. Delaware 1983 I (1)
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Pico Korea, Ltd. Korea 1985 I (3)
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<FN>
Notes: (1) Subsidiary of Pico Products, Inc.
(2) Subsidiary of Pico (St. Vincent) Ltd.
(3) Subsidiary of Pico Macom, Inc.
(4) Subsidiary of Pico (Bermuda) Limited.
Ownership percentage in all cases exceeds 90%.
</TABLE>
At July 31, 1995, no operational activities were performed by the following
subsidiaries: Pico (St. Vincent) Ltd., Pico Satellite, Inc., Pico Cargo, Inc.
and Pico Korea, Ltd.
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ITEM 2. PROPERTIES
The Company presently owns or leases an aggregate of approximately 84,000
square feet of office, production and warehouse space.
Pico Macom leases 60,000 square feet of space in Lakeview Terrace,
California which is used for corporate headquarters for Pico Products, Inc. and
Pico Macom, Inc., final assembly of Pay TV Security division products and Pico
Macom's administration, sales, engineering and distribution functions. The
five-year facility lease expires in March 1996. The Company is currently
reviewing its space requirement in preparation of renewing the existing lease or
leasing another facility. The net annual rental for the current facility is
approximately $360,000.
The Company leases approximately 1,700 square feet for its CATV division
sales office in East Syracuse, New York. The lease expires in October, 1998.
The net annual rental is approximately $20,000. The Company also leases
approximately 1,700 square feet of office space for the office of its chairman
and chief executive officer in West Conshohocken, Pennsylvania. The lease
expires in October, 2000. The net annual rent is approximately $43,000.
Pico (St. Kitts) Limited, which manufactures components for the Company's
CATV Security products, owns a 16,000 square foot building and the underlying
ground lease located in Saint Christopher and Nevis, a country in the Caribbean.
The net annual rental of the underlying ground lease is $570 through 2018.
Pico Products Asia Limited leases approximately 2,400 square feet for an
office facility in Hong Kong at an annual rental of approximately $44,000. The
lease expires in July, 1997 with an option to extend the lease term for one
additional year.
Pico Macom Taiwan leases approximately 2,000 square feet for an office
facility in Taipei, Taiwan at an annual rental of approximately $30,000. The
lease expires in January 1996 and the Company anticipates renewing it at that
time.
Management believes that the above described properties are sufficient for
the Company's present needs.
ITEM 3. LEGAL PROCEEDINGS
In November 1991, Arrow Communication Laboratories, Inc. (Arcom) of
Syracuse, New York initiated a lawsuit in the Supreme Court in the County of
Onondaga, New York. The suit, which was amended in June 1992, alleges that
Arcom had a paid-up license with respect to the
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Company's patent for positive trapping systems, that Arcom is entitled to
unspecified damages based on overpayment of royalty amounts, and that Arcom has
incurred damages in excess of $250,000 as a result of a Company press release
announcing termination of the license agreement. The suit also asserts that
Arcom is entitled to punitive damages of $3,000,000. The Company responded by
denying all liability and asserting certain common law and statutory defenses.
In December 1993, in response to a summary judgment motion filed by the
Company, the New York State Court rejected Arcom's claim that it had a paid-up
license. Instead, the Court held that when Arcom "defaulted in making royalty
payments on or about November 15, 1991, the license terminated by its own terms
30 days later as asserted by the Company in its termination letter dated January
13, 1992." Following the New York State Court's summary judgment decision, the
Company initiated a patent infringement lawsuit against Arcom in the United
States District Court for the Northern District of New York. In its suit, the
Company asked the Federal Court to award it treble damages for willful
infringement plus attorney's fees. The Company also filed a motion for a
preliminary injunction against further infringement by Arcom. At a court
hearing on February 15, 1994, the parties agreed, and it was ordered by the
Court, that Arcom would post as security amounts equal to the royalties due to
the Company for the manufacture and sale of product covered by the license
agreement from December 15, 1991, the date that the license would have
terminated, until the expiration of the patent in February 1995. Through
September 30, 1995 Arcom has made cash payments of $462,066 covering royalties
through February 14, 1995. The Company has not included these amounts in income
in any fiscal period but has recorded a current liability for $462,066 at July
31, 1995. In addition, Arcom posted an irrevocable letter of credit in an
amount deemed sufficient to permit recovery of a significant portion of the
Company's damages if it were to prevail on its willful infringement claim. In
exchange, the Company withdrew its request for a preliminary injunction. In the
event that the Company does not prevail on its infringement claims, the Company
has agreed to refund all security payments made by Arcom.
In July 1994, the Appellate Division, Fourth Department of the New York
Supreme Court ruled that the interpretation of parts of the license agreement
relating to Arcom's paid-up license claims involves questions of fact that must
be resolved at trial. Management anticipates that a trial will be scheduled
early in 1996. Management believes that the outcome of this matter will not
have a material adverse effect on the Company's consolidated financial
statements.
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On March 6, 1995, a subsidiary of the Company received a Joint Request for
Information (the "Information Request") from the United States Environmental
Protection Agency, Region II (the "EPA"), under the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended ("CERCLA"), with
respect to the release and/or threatened release of hazardous substances,
hazardous wastes, pollutants or contaminants into the environment at the
Onondaga Lake Site, Syracuse, Onondaga County, New York. The Company has
learned that the EPA added the Onondaga Lake Site to the Superfund National
Priorities List on December 6, 1994, and has completed an onsite assessment of
the degree of hazard. The EPA has indicated that the Company is only one of 26
companies located in the vicinity of Onondaga Lake or its tributaries that have
received a similar Information Request.
The Information Request relates to the activities of the Company's Printed
Circuit Board Division, which was sold to a third party in 1992, and which
conducted operations within the specified area. Under the Agreement of Sale
with the buyer, the Company retained liability for environmental obligations
which occurred prior to the sale.
The Company has provided all information requested by the EPA. The
Information Request does not designate the Company as a potentially responsible
party, nor has the EPA indicated the basis upon which it would designate the
Company as a potentially responsible party. The Company is therefore unable to
state whether there is any material likelihood for liability on its part, and,
if there were to be any such liability, the basis of any sharing of such
liability with others.
The Company is involved, from time to time, in certain other legal actions
arising in the normal course of business. Management believes that the outcome
of other litigation will not have material adverse affect on the Company's
consolidated financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
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PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The company's Common Shares are traded on the American Stock Exchange under
the symbol "PPI". The following table sets forth, for the fiscal periods
indicated, closing prices for the Common Shares on the American Stock Exchange
as reported by the American Stock Exchange, Inc.
High Low
Fiscal Year Ended July 31, 1994:
First Quarter.................... 2 11/16 1 3/16
Second Quarter................... 5 2 3/8
Third Quarter.................... 4 1/4 3 1/4
Fourth Quarter................... 3 11/16 2 7/16
Fiscal Year Ended July 31, 1995:
First Quarter.................... 3 11/16 2 7/16
Second Quarter................... 2 15/16 2 3/16
Third Quarter.................... 3 3/16 2 1/8
Fourth Quarter................... 2 9/16 1 15/16
August 1, 1995 to September 30, 1995.. 2 1/2 1 5/8
As of September 30, 1995, there were approximately 2,300 holders of record
of the Company's Common Shares.
The Company has never paid a cash dividend on its Common Shares. The
Company's Board of Directors currently intends to retain any future earnings for
use in the Company's business. Payment of cash dividends in the future will be
dependent upon the Company's earnings, financial condition, capital requirements
and other factors deemed relevant by the Company's Board of Directors.
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ITEM 6. SELECTED FINANCIAL DATA
The following is selected consolidated financial data of the Company for
the five fiscal years ended July 31, 1995. The selected consolidated financial
data should be read in connection with the consolidated financial statements
included as Item 8 of this Annual Report on Form 10-K.
<TABLE>
<CAPTION>
(amounts in thousands,
except per share data) FISCAL YEAR ENDED JULY 31,
--------------------------------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- ------- --------
1) STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C>
Sales $33,367 $29,886 $23,740 $19,520 $16,073
Income (loss) from
operations $ 997 $ 799 $ (225) $ 9 $(1,053)
Income (loss) from
continuing operations $ 526 $ 905 $ (277) $ 3 $(1,307)
Discontinued operations $ - $ - $ - $ 64 $ 13
Net income (loss) $ 526 $ 905 $ (277) $ 67 $(1,294)
Income (loss) from
continuing operations per
common and common
equivalent share - primary
and fully diluted $ 0.12 $ 0.21 $ (0.08) $ - $ (0.36)
Net income (loss) per
common and common
equivalent share - primary
and fully diluted $ 0.12 $ 0.21 $ (0.08) $ 0.02 $ (0.36)
Weighted average common
and equivalent shares
outstanding - primary
and fully diluted 4,240 4,295 3,577 3,829 3,572
2) BALANCE SHEET DATA:
Working capital $ 3,497 $ 3,151 $ 2,180 $ 1,849 $ 1,574
Total assets $17,633 $13,853 $11,592 $10,161 $ 9,958
Long-term debt $ 279 $ 632 $ 732 $ 392 $ 707
Shareholders' equity $ 4,513 $ 3,961 $ 3,009 $ 3,285 $ 3,207
</TABLE>
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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
SALES
Sales for the fiscal year ended July 31, 1995 were $33.4 million compared
to $29.9 million for the prior year, an increase of 12%. The sales increase for
Pico Macom was approximately 12% due primarily to continued increasing demand
for Satellite Master Antenna (SMATV) equipment and products by U.S.-based
distributors for resale into South America. The sales increase for the CATV
division was approximately 9% due primarily to increased industry demand for Pay
TV encoders and decoders in both domestic and international markets during the
third and fourth quarters of fiscal year 1995. The growth in sales of Pico
Macom, the CATV division and the Company's St. Kitts operation resulted in a
blended sales growth rate of 12% in fiscal year 1995. Management anticipates
that sales will continue to grow during fiscal year 1996 due to increased
availability of existing products, to the introduction of new products and to
increased sales to customers in Asia.
Sales for the fiscal year ended July 31, 1994 were $29.9 million compared
to $23.7 million for the prior year, an increase of 26%. The sales increase for
Pico Macom was approximately 21% due primarily to increasing demand for
Satellite Master Antenna (SMATV) equipment and products by U.S.-based
distributors for resale into South America. The sales increase for the CATV
division was approximately 54% due primarily to increased industry demand for
Pay TV encoders and decoders in both domestic and international markets and to
increased product availability.
COST OF SALES
Cost of sales for the year ending July 31, 1995 increased by approximately
$2,430,000, or 11%, compared to the previous year. Cost of sales as a
percentage of sales remained even at 76%. The dollar increase in cost of sales
was primarily attributable to the increase in sales volume. While the
purchasing power of the U.S. dollar in the Far East fluctuated somewhat during
fiscal year 1995 it did not materially affect the Company's profitability in
fiscal year 1995. The cost of sales in future periods could be negatively
impacted, if the purchasing power of the U.S. dollar weakens relative to the
currencies of the countries which supply products to the Company.
16
<PAGE>
Cost of sales for the year ending July 31, 1994 increased by approximately
$3,989,000, or 21%, compared to the previous year. However, cost of sales as a
percentage of sales decreased by 3% (from 79% to 76%). The dollar increase in
cost of sales was primarily attributable to the increase in sales volume. The
decrease in cost of sales as a percentage of sales was primarily due to a
decrease in unit manufacturing costs for Pay TV encoders and decoders as unit
sales and production quantities increased for the year.
SELLING AND ADMINISTRATIVE EXPENSES
Selling and administrative expenses increased by approximately $853,000, or
14%, in fiscal year 1995 compared to the prior year. The primary reasons for
the increase were increased investment in product development and expenditures
related to development of new markets in Asia, and the opening of a new Asia
regional office in Hong Kong. The Hong Kong regional office is in full
operation. While product development expenses and marketing expenses in Asia
continued into the fourth quarter at a rate consistent with the first nine
months of the fiscal year, the Company experienced a reduction in patent
amortization, legal and management incentive expenses compared to the previous
year. Management anticipates that expenditures for product development and
development of new markets in Asia will continue into the next fiscal year.
Selling and administrative expenses increased by approximately $1,133,000,
or 22%, in fiscal year 1994 compared to the prior year. The primary reasons for
the increase were increased expenditures for product and market development,
sales expenses, and administrative expenses to support the increased sales
volume. Legal expenses decreased by approximately $565,000 in fiscal year 1994
compared to the previous year, as the majority of the Company's outstanding
litigation had been settled in fiscal year 1993.
PRODUCT DEVELOPMENT
Product development expenditures for fiscal years 1995, 1994, and 1993 were
approximately $977,000, $545,000, and $324,000, respectively. These amounts are
included in the selling and administrative expense totals mentioned previously.
The product development efforts during fiscal year 1995 were concentrated on
improving Pico Macom's product line to CATV industry features and levels of
quality. Additionally, new products were developed for the CATV Division that
incorporates 1 GHz capability in specialized RF filter products. Also,
broadband amplifiers that support 1 GHz with two-way capabilities were designed
and brought into production. Finally agile headend products, including
modulator and demodulator products, were designed and put into field testing.
17
<PAGE>
Management believes that in order to remain competitive in a constantly changing
technological market place, the Company needs to maintain at least the current
level of product development expenses.
OTHER INCOME
Other income decreased by approximately $367,000, or 57%, for fiscal year
1995 compared to the prior year. The decrease was primarily related to
decreased royalty income from license holders following the expiration of the
Company's patent for positive encoding and decoding systems in February, 1995.
Other income increased by approximately $278,000, or 75%, for fiscal year
1994 compared to the prior year. The increase was primarily related to an
increase in royalty payments due to increased sales volume by license holders of
the Company's patent for positive encoding and decoding systems.
INTEREST EXPENSE
Interest expense increased by approximately $170,000, or 31%, for fiscal
year 1995 compared to the prior year. The increase was due primarily to higher
borrowing levels on the Company's bank lines of credit to support the Company's
working capital requirements, and due to several increases in the prime rate.
Interest expense increased by approximately $120,000, or 28%, for fiscal
year 1994 compared to the prior year. The increase was due primarily to higher
borrowing levels on the Company's bank lines of credit to support the Company's
working capital requirements, and due to several increases in the prime rate.
INCOME TAX PROVISION
A provision for U.S. Federal and State alternative minimum tax has been
established for Fiscal Year 1995. However, neither regular U.S. Federal and
State income taxes nor foreign income taxes have been provided for Fiscal 1995,
Fiscal 1994 or Fiscal 1993 due to the Company's U.S. Federal and State net
operating loss carryforward positions and tax holidays granted the Company's
foreign subsidiaries.
OTHER
In fiscal year 1994, the Company's main manufacturing, sales, distribution
and administration facility suffered damage during the January 17, 1994
Northridge earthquake. The Company's office, engineering and manufacturing
areas were damaged primarily from broken
18
<PAGE>
high-pressure sprinkler pipes when a portion of the leased facility's roof
collapsed. No employees were injured, and the Company's inventory and equipment
were relatively undamaged. Normal operations were suspended for one week while
the offices, engineering and a part of the manufacturing operations were moved
to a section of the warehouse and temporary telephone, power and computer cables
were installed. Normal operations resumed on January 24, 1994. Repairs to the
damaged portion of the facility were completed in late May and the refurbished
offices were reoccupied. Costs for repairs, replacements and extra expenses
were covered by the Company's insurance policies, and the Company experienced no
material adverse financial impact from the earthquake.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
As of July 31, 1995, the Company had working capital of approximately
$3,497,000 and a ratio of current assets to current liabilities of approximately
1.27:1 compared with working capital of approximately $3,151,000 and a ratio of
1.34:1 as of July 31, 1994. During fiscal 1995 the Company recorded negative
cash flow from operating activities primarily as a result of increased inventory
purchases to support the current and anticipated future sales levels.
During the years ended July 31, 1995, 1994 and 1993, cash used for capital
expenditures was approximately $221,000, $116,000 and $93,000, respectively.
The Company financed approximately $250,000 for the acquisition of a new
management information system during fiscal 1994. Capital expenditures for
fiscal year 1996 are expected to be under $200,000.
At July 31, 1995, Pico Macom had a $10,000,000 revolving bank line of
credit, which provides for interest at the prime rate (8.75% at July 31, 1995)
plus 1.25%. The bank line of credit is used to fund operating expenses, product
purchases, and letters of credit for import purchases. The line is structured
as a $10,000,000 line of credit with a sublimit of $1,500,000 for outstanding
letters of credit. The amount available is based on various percentages of
eligible accounts receivable and inventories as defined in the agreement. At
July 31, 1995 Pico Macom had approximately $7,779,000 in revolving loans and
approximately $46,000 in letters of credit outstanding, and the unused portion
of the borrowing base was approximately $725,000.
The line of credit arrangement is subject to various terms and conditions,
including but not limited to, tangible net worth, working capital and current
ratio requirements; and certain restrictions on
19
<PAGE>
acquisitions, capital expenditures and payment of dividends or purchase of
stock. The line of credit is subject to review and renewal on May 25, 1996.
Management anticipates that the bank line of credit will be renewed. In the
event that it were not renewed, the Company would seek alternative asset-based
financing. Failure to obtain such financing would have a materially adverse
affect on the Company's working capital requirements.
Management believes that continued profitable operations along with
the current credit arrangements will provide sufficient cash to fund the
Company's operational needs for the next year. In the event that the Company
could not maintain profitability or that its cash needs were significantly
beyond its ability to generate cash internally, the Company would consider
seeking alternative 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.
Maintaining profitable operations is subject to various uncertainties
including general economic conditions, favorable resolution of ongoing
litigation, U.S. and foreign governmental regulations and the actions of actual
and potential competitors and customers. The rapid changes occurring in the
telecommunication industry could adversely affect short-term profitability as
the cable television industry and certain of the Company's customers are
impacted by the entry of significant competitors such as the regional telephone
operating companies. In addition, continued changes in the regulatory climate
could also adversely affect short-term profitability as the Company's customers
are impacted by mandated rate reductions. Significant changes in technology
could adversely affect the Company's current product mix and long-term
profitability.
OTHER
IMPACT OF TECHNOLOGICAL OBSOLESCENCE
The Company's products are subject to technological obsolescence as
government regulations, competition or the nature of the television industry
could require changes in the current product lines. The rapid changes in all
sectors of the communications industry and the entry of new technology could
significantly impact the sale of the Company's products. While management is
not aware of any specific products, regulations or requirements that would
create significant obsolescence in the next fiscal year, technological
obsolescence could materially affect the operating results of the Company in any
fiscal period.
20
<PAGE>
IMPACT OF INFLATION AND CHANGING PRICES
Although the Company cannot accurately determine the precise effect of
inflation, the Company has experienced some increased costs of materials,
supplies, salaries and benefits due to inflation. The Company attempts to pass
on increased costs and expenses by increasing selling prices, when possible, and
by developing more useful and economical products that can be sold at favorable
profit margins.
FOREIGN OPERATIONS
Because a substantial portion of the Company's products are purchased from
vendors in Taiwan, China, Malaysia and Thailand (the "Far East"), the Company is
subject to price increases imposed by those vendors to compensate for currency
fluctuations. During fiscal years 1995 and 1994, the U.S. dollar generally
maintained its purchasing power against the currencies of the countries from
which the Company purchases most of its products. If the U.S. dollar were to
weaken, the Company would consider setting price increases for its products.
Continued weakening of the U.S. dollar could cause the Company to lose its
competitive costing edge to U.S.-based manufacturers which could adversely
affect operating results. Restrictive foreign government regulations or
political instability could also materially affect the operating results of the
Company. As discussed above, foreign economic and financial uncertainties could
also materially affect sales levels to foreign customers which could materially
affect the operating results of the Company.
21
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
22
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders of
Pico Products, Inc.:
We have audited the accompanying consolidated balance sheets of Pico Products,
Inc. and its subsidiaries as of July 31, 1995 and 1994, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended July 31, 1995. Our audits also
included the financial statement schedule listed at Item 14a(2). These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Pico Products, Inc. and its
subsidiaries at July 31, 1995 and 1994, and the results of their operations and
their cash flows for each of the three years in the period ended July 31, 1995
in conformity with generally accepted accounting principles. Also, in our
opinion, such financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Los Angeles, California
October 11, 1995
23
<PAGE>
PICO PRODUCTS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
July 31,
--------------------------------
1995 1994
------------ --------------
ASSETS (Note C):
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 501,525 $ 441,609
Accounts receivable (less allowance
for doubtful accounts: July 31, 1995,
$290,000; July 31, 1994, $295,000) 5,892,338 4,417,712
Inventories (Note B) 9,760,164 7,170,944
Prepaid expenses and other current
assets 183,870 381,242
----------- -----------
TOTAL CURRENT ASSETS 16,337,897 12,411,507
----------- -----------
PROPERTY, PLANT AND EQUIPMENT
(Notes D and E):
Buildings 217,255 217,255
Leasehold improvements 259,277 308,310
Machinery and equipment 2,428,605 3,043,880
----------- -----------
2,905,137 3,569,445
Less accumulated depreciation
and amortization 2,121,382 2,774,336
----------- -----------
783,755 795,109
----------- -----------
OTHER ASSETS:
Patents and licenses (less accumulated
amortization: July 31, 1995, $56,204;
July 31, 1994, $1,170,757)
165,006 241,407
Excess of cost over net assets of
businesses acquired (less accumulated
amortization; July 31, 1995, $337,890;
July 31, 1994, $308,850) 239,545 268,585
Deposits and other noncurrent assets 107,147 136,405
----------- -----------
511,698 646,397
----------- -----------
$17,633,350 $13,853,013
----------- -----------
----------- -----------
</TABLE>
See notes to consolidated financial statements.
24
<PAGE>
PICO PRODUCTS, INC.
CONSOLIDATED BALANCE SHEETS
(CONTINUED)
<TABLE>
<CAPTION>
July 31,
------------------------------
1995 1994
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
<S> <C> <C>
Notes payable (Note C) $ 7,778,655 $ 5,787,282
Current portion of long-term debt
(Note D) 362,239 101,547
Accounts payable 3,326,366 1,886,757
Accrued expenses:
Legal and accounting 90,443 201,051
Payroll and payroll taxes 484,854 619,018
Other accrued expenses 336,450 261,214
Other current liabilities (Note M) 462,066 403,699
----------- -----------
TOTAL CURRENT LIABILITIES 12,841,073 9,260,568
----------- -----------
LONG-TERM DEBT (Note D) 278,820 631,654
----------- -----------
COMMITMENTS AND CONTINGENCIES - -
(Notes E and M)
SHAREHOLDERS' EQUITY (Notes J and K):
Preferred shares, $.01 par value;
authorized 500,000 shares;
no shares issued - -
Common shares, $.01 par value;
authorized 15,000,000 shares;
issued and outstanding 3,637,046
shares at July 31, 1995 and 3,632,046
shares at July 31, 1994 36,370 36,320
Additional paid-in capital 21,565,255 21,561,555
Accumulated deficit (17,010,269) (17,535,970)
Cumulative translation adjustment (77,899) (101,114)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 4,513,457 3,960,791
----------- -----------
$17,633,350 $13,853,013
----------- -----------
----------- -----------
</TABLE>
See notes to consolidated financial statements.
25
<PAGE>
PICO PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended July 31,
-------------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
SALES (Note I) $33,367,249 $29,886,482 $23,740,218
COST AND EXPENSES
Cost of Sales 25,225,052 22,795,447 18,806,590
Selling and administrative
expenses (Note H) 7,145,472 6,292,002 5,158,576
----------- ----------- ------------
TOTAL COSTS AND EXPENSES 32,370,524 29,087,449 23,965,166
----------- ----------- ------------
INCOME (LOSS) FROM OPERATIONS 996,725 799,033 (224,948)
OTHER INCOME (Note F) 281,897 649,314 371,493
INTEREST EXPENSE (712,921) (543,332) (423,193)
----------- ----------- ------------
INCOME (LOSS)
BEFORE INCOME TAXES 565,701 905,015 (276,648)
INCOME TAX PROVISION (Note G) 40,000 - -
----------- ----------- ------------
NET INCOME (LOSS) $ 525,701 $ 905,015 $ (276,648)
----------- ----------- ------------
----------- ----------- ------------
NET INCOME (LOSS) PER
COMMON AND COMMON
EQUIVALENT SHARE:
Primary $ 0.12 $ 0.21 $ (0.08)
----------- ----------- ------------
----------- ----------- ------------
Fully Diluted $ 0.12 $ 0.21 $ (0.08)
----------- ----------- ------------
----------- ----------- ------------
WEIGHTED AVERAGE COMMON AND
EQUIVALENT SHARES OUTSTANDING:
Primary 4,240,241 4,294,784 3,577,246
----------- ----------- ------------
----------- ----------- ------------
Fully Diluted 4,240,241 4,294,784 3,577,246
----------- ----------- ------------
----------- ----------- ------------
</TABLE>
See notes to consolidated financial statements.
26
<PAGE>
PICO PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Number of Common Additional Accumulated Cumulative Total
Common Shares - Paid-In Deficit Translation
Shares Par Value Capital Adjustment
<S> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------
BALANCE,
August 1, 1992 3,577,246 $35,772 $21,491,541 $(18,164,337) $(77,683) $3,285,293
- -----------------------------------------------------------------------------------------------------------------
Cumulative
translation
adjustment - - - - (13,302) (13,302)
Warrants
issued
under new
financing - - 14,063 - - 14,063
Net loss - - - (276,648) - (276,648)
- -----------------------------------------------------------------------------------------------------------------
BALANCE
July 31, 1993 3,577,246 35,772 21,505,604 (18,440,985) (90,985) 3,009,406
- -----------------------------------------------------------------------------------------------------------------
Cumulative
translation
adjustment - - - - (10,129) (10,129)
Shares issued
under stock
incentive
plans 54,800 558 55,951 - - 56,499
Net income - - - 905,015 - 905,015
- -----------------------------------------------------------------------------------------------------------------
BALANCE
July 31, 1994 3,632,046 36,320 21,561,555 (17,535,970) (101,114) 3,960,791
- -----------------------------------------------------------------------------------------------------------------
Cumulative
translation
adjustment - - - - 23,215 23,215
Shares issued
under stock
incentive plans 5,000 50 3,700 - - 3,750
Net income - - - 525,701 - 525,701
- -----------------------------------------------------------------------------------------------------------------
BALANCE
July 31, 1995 3,637,046 $36,370 $21,565,255 $(17,010,269) $(77,899) $4,513,457
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
27
<PAGE>
PICO PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended July 31,
---------------------------------------------------
1995 1994 1993
----------- ----------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income (loss) $ 525,701 $ 905,015 $ (276,648)
Adjustments to reconcile net
income (loss) to net cash
used in operating activities:
Depreciation and amortization 370,176 536,269 441,596
Provision for losses on
accounts receivable 142,897 246,602 108,479
Provision for inventory
obsolescence 91,200 184,515 112,278
Net assets of discontinued
operations - - 52,091
Changes in operating assets
and liabilities:
Accounts receivable (1,617,523) (409,784) (684,322)
Inventories (2,657,205) (2,251,036) (1,162,759)
Prepaid expenses and
other current assets 197,372 (138,509) (46,854)
Other assets (3,591) (54,922) 10,951
Accounts payable 1,439,609 38,205 491,922
Accrued expenses (168,786) 306,865 318,890
Other liabilities 58,367 403,699 -
------------ ----------- -----------
NET CASH USED IN
OPERATING ACTIVITIES (1,621,783) (233,081) (634,376)
------------ ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (220,532) (115,664) (93,197)
------------ ----------- -----------
</TABLE>
Continued on next page.
See notes to consolidated financial statements.
28
<PAGE>
PICO PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
<TABLE>
<CAPTION>
Year Ended July 31,
--------------------------------------------------
1995 1994 1993
------------- ----------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
<S> <C> <C> <C>
Net borrowings under line of
credit agreements $ 1,991,373 $1,177,059 $ 373,613
Principal payments on long-term
debt (92,142) (854,113) (477,388)
Change in restricted cash - 209,993 14,137
Proceeds from exercise of stock
options 3,000 48,000 -
Proceeds from private placement
financings (Note D) - - 1,000,000
Private placement financing
expenses (Note D) - - (106,807)
---------- ---------- -----------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 1,902,231 580,939 803,555
----------- ---------- -----------
NET INCREASE IN CASH
AND CASH EQUIVALENTS 59,916 232,194 75,982
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 441,609 209,415 133,433
----------- ---------- -----------
CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 501,525 $ 441,609 $ 209,415
----------- ---------- -----------
----------- ---------- -----------
</TABLE>
<TABLE>
<CAPTION>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
CASH PAID DURING THE YEAR FOR: Year Ended July 31,
--------------------------------------------------
1995 1994 1993
----------- ---------- ----------
<S> <C> <C> <C>
Interest $ 681,803 $ 529,605 $ 411,592
----------- ---------- ----------
----------- ---------- ----------
Income taxes $ 15,138 $ - $ -
----------- ---------- ----------
----------- ---------- ----------
</TABLE>
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
In fiscal 1994, the Company financed its new management information system,
totaling $247,561.
See notes to consolidated financial statements.
29
<PAGE>
PICO PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
INDUSTRY SEGMENT
The Company's primary industry is the manufacturing and distribution of
equipment and parts for the cable television (CATV) and satellite master antenna
television (SMATV) markets.
CONCENTRATION OF CREDIT RISK
Financial instruments which subject the Company to credit risk consist
primarily of accounts receivable. Concentration of credit risk with respect
to accounts receivable is generally diversified due to the large number of
entities comprising the Company's customer base and their geographic
dispersion. The Company performs ongoing credit evaluations of its customers
and maintains an allowance for potential credit losses.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market. Inventory costs consist of material, direct labor and overhead.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Depreciation and
amortization are provided for on the straight-line method over the estimated
useful lives of the assets as follows:
Buildings 20 years
Leasehold improvements Term of lease
Machinery and equipment 3 to 10 years
During the fiscal year ended July 31, 1995, approximately $878,000 of cost
and the related accumulated depreciation was removed from the accounting records
for fully depreciated assets no longer in use.
Repairs and maintenance costs not extending the useful life of the assets
are expensed in the year incurred. Betterments are capitalized.
30
<PAGE>
PATENTS AND LICENSES
Patents and licenses are amortized on the straight-line method over the
shorter of their estimated useful lives or the remaining lives of the patents
and licenses which at July 31, 1995 represented 17 years.
EXCESS OF COST OVER NET ASSETS OF BUSINESSES ACQUIRED
The excess of the Company's purchase price of subsidiaries over the fair
market value of net assets acquired is being amortized on the straight-line
method over twenty years. The Company reviews the carrying value of all
intangible assets on a regular basis, and if the undiscounted future cash flows
are believed insufficient to recover the remaining carrying value of an
intangible asset, the carrying value is written down to its estimated fair
value in the period the impairment is identified.
REVENUE RECOGNITION
Revenue from sale of products or services is recognized when goods are
delivered or services performed. Revenue from interest and royalties is
recognized at the amount received or expected to be received.
DEBT ISSUANCE COSTS
Debt issuance costs are included in other noncurrent assets and are
amortized over the term of the related debt.
INCOME TAXES
The Company accounts for income taxes under Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes". Deferred
income taxes reflect the net tax effects of (a) temporary differences between
the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes, and (b) operating
loss and tax credit carryforwards.
INCOME (LOSS) PER SHARE
Income (loss) per common and common equivalent share is based upon the
weighted average number of common shares outstanding during each year, assuming
exercise of dilutive outstanding stock options under the treasury stock method.
For the year ended July 31, 1993, common stock equivalents relative to stock
options were not included in the computations since their inclusion would be
anti-dilutive.
31
<PAGE>
CERTAIN RECLASSIFICATIONS
The Company has made certain reclassifications to the 1994 and 1993
consolidated financial statements to conform to the classifications used in the
1995 consolidated financial statements.
B. INVENTORIES
The composition of inventories was as follows:
<TABLE>
<CAPTION>
July 31,
---------------------------
1995 1994
---------- -----------
<S> <C> <C>
Raw materials $3,350,435 $2,229,884
Work in process 319,386 86,551
Finished goods 6,090,343 4,854,509
---------- -----------
$9,760,164 $7,170,944
---------- -----------
---------- -----------
</TABLE>
C. NOTES PAYABLE
At July 31, 1995, the Company's Pico Macom, Inc. subsidiary had a
$10,000,000 revolving bank line of credit with Marine Midland Business Loans, a
member of the Hongkong Shanghai Banking Corporation Group, which provides for
interest at the prime rate (8.75% at July 31, 1995 and 7.25% at July 31, 1994)
plus 1.25%. The bank line of credit is used to fund operating expenses, product
purchases and letters of credit for import purchases. The line of credit is
secured by substantially all of Pico Macom's assets, including all trade
accounts receivable and inventories.
The line is structured as a $10,000,000 line of credit with a sublimit of
$1,500,000 for outstanding letters of credit. The amount available is based on
various percentages of eligible accounts receivable and inventories as defined
in the agreement. At July 31, 1995, Pico Macom had $7,778,655 in revolving
loans and $45,843 in letters of credit outstanding, and the unused portion of
the borrowing base was $725,370.
The line of credit arrangement is subject to various terms and conditions,
including but not limited to, tangible net worth, working capital and current
ratio requirements; and contains certain restrictions on acquisitions, capital
expenditures and payment of dividends or purchases of stock. The line of credit
is subject to review and renewal on May 25, 1996.
32
<PAGE>
D. LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
July 31,
-------------------------------
1995 1994
----------- ----------
<S> <C> <C>
Notes payable to Bermuda-based and Jersey-
based investment funds, payable in equal
installments in fiscal 1996 and 1997,
with interest at 8.0% $ 500,000 $ 500,000
Capital lease obligations (Note E) 130,151 230,052
Other loans payable 10,908 8,770
Debt discount - (5,621)
--------- ---------
641,059 733,201
Less current portion 362,239 101,547
--------- ---------
$ 278,820 $ 631,654
--------- ---------
--------- ---------
</TABLE>
On February 11, 1993, the Company completed private placement financings
totaling $1,000,000. The financings consisted of three notes. The first note
for $500,000 was a term loan payable over a 30-month period at an interest rate
of 1.5% above the prime rate. This loan was paid in full in May 1994 with
proceeds from Pico Macom's new bank line of credit (Note C). The second and
third notes totaling $500,000 provide for interest at 8% and are payable in two
equal installments in February 1996 and 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.
Long-term debt at July 31, 1995 is payable as follow:
<TABLE>
<S> <C>
Year ending July 31, 1996 $362,239
Year ending July 31, 1997 274,853
Year ending July 31, 1998 2,799
Year ending July 31, 1999 1,168
---------
$641,059
---------
---------
</TABLE>
E. LEASE COMMITMENTS
The Company leases manufacturing, computer and office equipment under lease
agreements, some of which have been capitalized. These capitalized lease
obligations are payable in monthly and quarterly installments through fiscal
1997 and have interest rates varying from
33
<PAGE>
13% to 18%. The Company has included the cost of equipment under capital leases
of $371,824 in property, plant and equipment at July 31, 1995 and 1994.
Accumulated depreciation on such assets was $185,523 and $113,691 at July 31,
1995 and 1994, respectively.
The Company also leases certain of its manufacturing and office facilities
and equipment under operating lease agreements. Minimum rental commitments at
July 31, 1995 for these leases are as follows:
<TABLE>
<CAPTION>
Capital Operating
--------- ---------
<S> <C> <C>
Year ending July 31, 1996 $122,678 $399,051
Year ending July 31, 1997 22,603 135,401
Year ending July 31, 1998 - 83,454
Year ending July 31, 1999 - 49,838
Year ending July 31, 2000 - 44,465
Thereafter - 26,416
--------- ---------
145,281 $738,625
Less imputed interest 15,130 ---------
--------- ---------
$130,151
---------
---------
</TABLE>
Renewal options exist on certain of the operating leases for additional
periods at increased rental rates. Total rental expense for the years ended
July 31, 1995, 1994 and 1993 was $507,739, $461,656, and $453,016, respectively.
The Company is also required to pay real estate taxes and other occupancy costs
of the facilities in addition to the above rentals.
F. OTHER INCOME
Other income consisted of the following:
<TABLE>
<CAPTION>
Year Ended July 31,
-------------------------------------------
1995 1994 1993
-------- -------- ---------
<S> <C> <C> <C>
Royalty income $256,657 $606,985 $328,553
Interest income 25,240 15,771 11,748
Miscellaneous income - 26,558 31,192
-------- -------- --------
$281,897 $649,314 $371,493
-------- -------- --------
-------- -------- --------
</TABLE>
On February 14, 1995, the Company's patent for positive trapping systems
expired. Licenses issued for use of this patented technology generated the
Company's royalty income. As of July 31, 1995, the Company has fully written
off the patent's cost and the related accumulated amortization from its books
and records.
34
<PAGE>
G. INCOME TAXES
A reconciliation of the Company's income tax provision to that computed
using the Federal statutory rate is as follows:
<TABLE>
<CAPTION>
Year Ended July 31,
------------------------------------------------
1995 1994 1993
---------- --------- --------
<S> <C> <C> <C>
Federal tax (benefit)
based on statutory tax rate $ 198,000 $ 317,000 $(94,000)
Nontaxable foreign
(income) loss 139,000 (63,000) (22,000)
Other 31,000 20,000 12,000
Net operating loss
carryforward (utilization) (368,000) (274,000) 104,000
Alternative minimum tax 40,000 - -
--------- -------- --------
$ 40,000 $ - $ -
--------- -------- --------
--------- -------- --------
</TABLE>
At July 31, 1995, the Company has net operating loss carryforwards for
federal income tax purposes of approximately $14,965,000 which expire in varying
amounts from the year 2000 through the year 2008. Additionally, the Company has
federal tax credit carryforwards of approximately $530,000 which expire in
varying amounts from the year 1996 through the year 2001.
Neither U.S. nor foreign taxes have been provided on the cumulative
undistributed foreign earnings, $973,000 at July 31, 1995, due to exemptions
from foreign taxes, which expire in 1996, 1997 and 1998, and the intention of
the Company to permanently reinvest earnings in the operations of foreign
subsidiaries.
The following represents the tax effects of significant items comprising
the Company's deferred income taxes as of July 31, 1995 and 1994. The Company
recognized a valuation allowance to offset the net deferred tax asset since the
future benefit of these assets is not assured. The valuation allowance
decreased $368,000 from the prior year primarily due to the use of net
operating losses to offset current year taxable income.
35
<PAGE>
<TABLE>
<CAPTION>
July 31,
-----------------------------
1995 1994
------------- ------------
<S> <C> <C>
Deferred income tax liabilities:
Differences between book and
tax basis of property - $ 29,000
-------------- ------------
Deferred income tax assets:
Differences between book and
tax basis of property $ 48,000 -
Reserves not currently deductible 493,000 449,000
Other 59,000 42,000
Operating loss carryforwards 5,773,000 6,183,000
Tax credit carryforwards 530,000 626,000
---------- ----------
6,903,000 7,300,000
---------- ----------
Net deferred items 6,903,000 7,271,000
Valuation allowance (6,903,000) (7,271,000)
----------- -----------
Net deferred income taxes $ -0- $ -0-
----------- -----------
----------- -----------
</TABLE>
H. PRODUCT DEVELOPMENT COSTS
Product development costs are expensed as incurred and are included as part
of selling and administrative expenses. Expenses related to product development
for the years ended July 31, 1995, 1994 and 1993 amounted to approximately
$977,000, $545,000, and $324,000, respectively.
I. SIGNIFICANT CUSTOMERS
In fiscal 1995, 1994 and 1993 the Company's sales to one customer were
approximately 20%, 16%, and 12%, respectively, of the Company's consolidated
sales.
J. STOCK INCENTIVE PLANS
The Company has three stock incentive plans; the 1981 Non-Qualified Stock
Option Plan (1981 Plan) amended in December, 1991; the 1982 Incentive Stock
Option Plan (1982 Plan) adopted in April 1982; and the 1992 Incentive Stock Plan
(1992 Plan), adopted in January, 1993 and amended in July, 1994. The 1981 Plan
reserves 450,000 common shares for issuance, the 1982 Plan reserves 150,000
shares for issuance, and the 1992 Plan reserves 175,000 common shares for
issuance. Each plan is administered by the board of directors, or a special
committee
36
<PAGE>
thereof, which has the authority to determine the persons, the shares and the
related terms and provisions of the incentives which may be granted.
Under the 1981 Plan, the option exercise price may not be less than 80% of
the fair market value of the shares at the date of grant. Under the 1982 Plan,
the option exercise price may not be less than 100% (or 110% if the optionee
owns 10% or more of the Company's outstanding voting securities) of the fair
market value of the shares at the date of grant. Options under the 1981 Plan
and the 1982 Plan may not be exercised more than five years and ten years,
respectively, from the date of grant. The 1982 Plan provides limitations on the
number of option shares which may be granted to officers and directors. In both
plans, options become exercisable as specified in the option agreement, subject
to the limitation that no option may be exercised within twelve months after the
date it is granted. The 1982 Plan provides that no incentive stock options be
granted after April 28, 1992.
Under the 1992 Plan, incentive stock options ("ISO"), nonqualified stock
options ("NSO"), stock appreciation rights ("Rights") and stock awards
("Awards") may be granted to eligible persons. The board of directors, or a
committee thereof, determines the option prices and vesting periods for all
options granted; however, options may not be exercised less than one nor more
than ten years from the date of grant. The option exercise prices for ISO's
must be at 100% of the fair market value of the shares at the date of grant to
comply with tax regulations. The 1992 Plan specified that each director who is
not also an employee of the Company or any of its affiliates would be awarded an
annual grant of 5,000 NSO's at an option price equal to 80% of the fair market
value on the date of grant. During fiscal year 1994, the board of directors
amended the plan by reducing the annual grant to directors to 2,000 NSO's with
option prices and vesting provisions consistent with all other plan options.
During fiscal year 1994, the board of directors also determined that NSO's would
be granted at 100% of the fair market value of the shares at the date of grant.
Rights may be granted to holders of stock options outstanding under the
1981 Plan, the 1982 Plan, or the 1992 Plan, whereby the holder of such options,
in exchange for the surrender of the options to the Company, will receive from
the Company an amount equal to the excess of the fair market value of the
related shares over the option price of the options surrendered. Awards may be
granted to selected recipients, without payment therefore, as additional
compensation for their services to the Company or its affiliates. Any awards
will be subject to various terms and conditions as determined by the committee.
37
<PAGE>
A summary of changes in shares under option for the Company's three stock
incentive plans is as follows:
<TABLE>
<CAPTION>
Year Ended July 31,
-------------------------------------------------
1995 1994 1993
---------- ----------- -----------
<S> <C> <C>
Non Qualified Plan (1981):
- --------------------------
Outstanding at beginning of year 408,500 417,000 388,000
Options granted 6,500 31,500 44,000
Options expired - (5,000) (15,000)
Options exercised (5,000) (35,000) -
-------- ---------- -----------
Outstanding at end of year 410,000 408,500 417,000
-------- ---------- -----------
-------- ---------- -----------
Exercisable at end of year 370,000 351,000 329,000
-------- ---------- -----------
-------- ---------- -----------
Average exercise price of
outstanding options $ 0.83 $ 0.80 $ 0.74
-------- ---------- -----------
-------- ---------- -----------
Average exercise price of
exercisable options $ 0.75 $ 0.71 $ 0.71
-------- ---------- -----------
-------- ---------- -----------
Incentive Plan (1982):
- ----------------------
Outstanding at beginning of year 45,200 60,000 60,000
Options granted - - -
Options expired - - -
Options exercised - (14,800) -
-------- ---------- -----------
Outstanding at end of year 45,200 45,200 60,000
-------- ---------- -----------
-------- ---------- -----------
Exercisable at end of year 45,200 45,200 60,000
-------- ---------- -----------
-------- ---------- -----------
Average exercise price of
outstanding options $ 0.31 $ 0.31 $ 0.47
-------- ---------- -----------
-------- ---------- -----------
Average exercise price of
exercisable options $ 0.31 $ 0.31 $ 0.47
-------- ---------- -----------
-------- ---------- -----------
Stock Plan (1992)
- -----------------
(Nonqualified options)
Outstanding at beginning of year 45,000 15,000 -
Options granted 69,000 35,000 15,000
Options expired - - -
Options exercised - (5,000) -
-------- ---------- -----------
Outstanding at end of year 114,000 45,000 15,000
-------- ---------- -----------
-------- ---------- -----------
Exercisable at end of year 28,000 10,000 0
-------- ---------- -----------
-------- ---------- -----------
Average exercise price of
outstanding options $ 2.29 $ 1.16 $ 1.00
-------- ---------- -----------
-------- ---------- -----------
Average exercise price of
exercisable options $ 1.13 $ 1.00 $ -
-------- ---------- -----------
-------- ---------- -----------
</TABLE>
38
<PAGE>
K. OTHER STOCK OPTIONS
During fiscal year 1994, the board of directors issued nonqualified,
nonplan options to two individuals. These options were issued in November 1993
and became exercisable in November 1994. A total of 30,000 options were issued
at an average exercise price of $1.29 per share. The Company recognized
compensation expense of $12,292 and $33,958 during fiscal year 1995 and fiscal
year 1994, respectively, for the difference between the fair value of the stock
options at the date of the grant and the exercise price of the options.
L. RETIREMENT BENEFITS
During fiscal year 1994, the Company established a defined contribution
pension plan (under Internal Revenue Code Section 401(k)) covering substantially
all of its U.S. -based employees with more than one year of service. Company
contributions are determined at 50% of each employee's voluntary contribution
(up to 6% of compensation) to the plan. The Company's contribution expense
totaled $63,958 and $37,385 for the years ended July 31, 1995 and 1994,
respectively.
M. COMMITMENTS AND CONTINGENCIES
Purchase Commitments
The majority of the SMATV equipment items sold by Pico Macom are
manufactured under contract on an exclusive basis by one vendor in Taiwan. The
Company is committed to purchase a minimum of approximately $5,375,000 from this
vendor during fiscal year 1996.
Litigation
In November 1991, Arrow Communication Laboratories, Inc. (Arcom) of
Syracuse, New York initiated a lawsuit in the Supreme Court in the County of
Onondaga, New York. The suit, which was amended in June 1992, alleges that
Arcom had a paid-up license with respect to the Company's patent for positive
trapping systems, that Arcom is entitled to unspecified damages based on
overpayment of royalty amounts, and that Arcom has incurred damages in excess of
$250,000 as a result of a Company press release announcing termination of the
license agreement. The suit also asserts that Arcom is entitled to punitive
damages of $3,000,000. The Company responded by denying all liability and
asserting certain common law and statutory defenses.
39
<PAGE>
In December 1993, in response to a summary judgment motion filed by the
Company, the New York State Court rejected Arcom's claim that it had a paid-up
license. Instead, the Court held that when Arcom "defaulted in making royalty
payments on or about November 15, 1991, the license terminated by its own terms
30 days later as asserted by the Company in its termination letter dated January
13, 1992." Following the New York State Court's summary judgment decision, the
Company initiated a patent infringement lawsuit against Arcom in the United
States District Court for the Northern District of New York. In its suit, the
Company asked the Federal Court to award it treble damages for willful
infringement plus attorney's fees. The Company also filed a motion for a
preliminary injunction against further infringement by Arcom. At a court
hearing on February 15, 1994, the parties agreed, and it was ordered by the
Court, that Arcom would post as security amounts equal to the royalties due to
the Company for the manufacture and sale of product covered by the license
agreement from December 15, 1991, the date that the license would have
terminated, until the expiration of the patent in February 1995. Through
September 30, 1995 Arcom has made cash payments of $462,066 covering royalties
through February 14, 1995. The Company has not included these amounts in income
in any fiscal period but has recorded a current liability for $462,066 at July
31, 1995. In addition, Arcom posted an irrevocable letter of credit in an
amount deemed sufficient to permit recovery of a significant portion of the
Company's damages if it were to prevail on its willful infringement claim. In
exchange, the Company withdrew its request for a preliminary injunction. In the
event that the Company does not prevail on its infringement claims, the Company
has agreed to refund all security payments made by Arcom.
In July 1994, the Appellate Division, Fourth Department of the New York
Supreme Court ruled that the interpretation of parts of the license agreement
relating to Arcom's paid-up license claims involves questions of fact that must
be resolved at trial. Management anticipates that a trial will be scheduled
early in 1996. Management believes that the outcome of this matter will not
have a material adverse effect on the Company's consolidated financial
statements.
On March 6, 1995, a subsidiary of the Company received a Joint Request for
Information (the "Information Request") from the United States Environmental
Protection Agency, Region II (the "EPA"), under the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended ("CERCLA"), with
respect to the release and/or threatened release of hazardous substances,
hazardous wastes, pollutants or contaminants into the environment at the
Onondaga Lake Site, Syracuse, Onondaga County, New York. The Company has
learned
40
<PAGE>
that the EPA added the Onondaga Lake Site to the Superfund National Priorities
List on December 6, 1994, and has completed an onsite assessment of the degree
of hazard. The EPA has indicated that the Company is only one of 26 companies
located in the vicinity of Onondaga Lake or its tributaries that have received a
similar Information Request.
The Information Request relates to the activities of the Company's Printed
Circuit Board Division, which was sold to a third party in 1992, and which
conducted operations within the specified area. Under the Agreement of Sale
with the buyer, the Company retained liability for environmental obligations
which occurred prior to the sale.
The Company has provided all information requested by the EPA. The
Information Request does not designate the Company as a potentially responsible
party, nor has the EPA indicated the basis upon which it would designate the
Company as a potentially responsible party. The Company is therefore unable to
state whether there is any material likelihood for liability on its part, and,
if there were to be any such liability, the basis of any sharing of such
liability with others.
The Company is involved, from time to time, in certain other legal actions
arising in the normal course of business. Management believes that the outcome
of other litigation will not have a material adverse affect on the Company's
consolidated financial statements.
41
<PAGE>
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Additions
Balance charged to Balance
beginning cost and end of
Description of period expenses Deduction* Period
- ----------- --------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Fiscal Year Ended July 31, 1993:
Allowance for
doubtful accounts $185,207 $108,479 $ 43,686 $250,000
Fiscal Year Ended July 31, 1994:
Allowance for
doubtful accounts $250,000 $246,602 $201,602 $295,000
Fiscal Year Ended July 31, 1995:
Allowance for
doubtful accounts $295,000 $142,897 $147,897 $290,000
* Write-off of uncollectible accounts receivable.
</TABLE>
42
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable.
43
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information called for by this item is incorporated by reference to the
Company's Proxy Statement for its 1995 annual meeting of shareholders which will
be filed prior to November 28, 1995.
ITEM 11. EXECUTIVE COMPENSATION.
The information called for by this item is incorporated by reference to the
Company's Proxy Statement for its 1995 annual meeting of shareholders which will
be filed prior to November 28, 1995.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information called for by this item is incorporated by reference to the
Company's Proxy Statement for its 1995 annual meeting of shareholders which
will be filed prior to November 28, 1995.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information called for by this item is incorporated by reference to the
Company's Proxy Statement for its 1995 annual meeting of shareholders which will
be filed prior to November 28, 1995.
44
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. The following consolidated financial statements are included in
Part II Item 8:
Independent Auditors' Report
Consolidated Balance Sheets as of July 31, 1995 and 1994
Consolidated Statements of Operations for the Years Ended July 31,
1995, 1994 and 1993
Consolidated Statements of Shareholders' Equity for the Years Ended
July 31, 1995, 1994 and 1993
Consolidated Statements of Cash Flows for the Years Ended July 31,
1995, 1994 and 1993
Notes to Consolidated Financial Statements
2. The following consolidated financial statement schedule should be read
in conjunction with the consolidated financial statements set forth in
Part II Item 8:
Valuation and Qualifying Accounts
All other schedules called for under Regulation S-X are not submitted
because they are not applicable or not required or because the
required information is not material or is included in the
consolidated financial statements or notes thereto.
3. See Index to Exhibits for a list of exhibits to this Annual
Report.
(b) REPORTS ON FORM 8-K.
None
45
<PAGE>
(C) INDEX TO EXHIBITS
3(a)e Restated Articles of Incorporation of the Company, as amended on
December 17, 1987
(b)e By-Laws of the Company, as amended on December 17, 1987 and as
currently in effect
4(a)b 1981 Non-Qualified Stock Option Plan
(b)a 1982 Incentive Stock Option Plan
(c)i 1992 Incentive Stock Plan
(d)j Warrant Certificates issued to Scimitar Development Capital Fund
and Scimitar Development Capital "B" Fund, dated February 10,
1993
(e)k Warrant Certificate issued to City National Bank, dated February
10, 1993
(f)m Amendment to 1992 Incentive Stock Plan
10(a)f The Company's product warranties
(b)c Pico (St. Kitts) Limited lease on Pond Pasture Industrial Estate,
Basseterre, St. Christopher and Nevis
(c)d Pico Macom, Inc. lease on approximately 60,000 square feet of
building at 12500 Foothill Blvd., Lakeview Terrace, California
(d)g Amendment to Pico Macom, Inc. lease of building at 12500 Foothill
Blvd., Lakeview Terrace, California
(e)e Lease on office of Pico Macom Taiwan Co. Ltd.
(f)g Exclusive Manufacturing Agreement between Pico Macom, Inc. and
Good Mind Industries, dated April 26, 1989
(g)h Employment Agreement between Pico Macom, Inc. and George M.
Knapp, dated June 19, 1992
(h)k Pico Products, Inc. 8% Subordinated Notes Payable to Scimitar
Development Capital Fund and Scimitar Development Capital "B"
Fund, dated February 10, 1993
See page 48 for Key to Index for Exhibits.
46
<PAGE>
(C) INDEX TO EXHIBITS (continued)
(i)k Amendment to Exclusive Manufacturing Agreement between Pico
Macom, Inc. and Good Mind Industries (dated April 26, 1989) -
amendment dated April 27, 1993
(j)l Loan and Security Agreement between Pico Macom, Inc. and Marine
Midland Business Loans, Inc. dated May 25, 1994
(k)n Employment Agreement between Pico Products, Inc. and Joseph T.
Kingsley, dated January 1, 1995.
(l)o Employment Agreement between Pico Macom, Inc. and Norman
Reinhardt, dated March 22, 1995.
(m)o Amendment to the Exclusive Manufacturing/Marketing Agreement
between Pico Macom, Inc. and Goodmind Industries (dated April 26,
1989) - amendment dated April 10, 1995.
(n) Amendments to the Loan and Security Agreement between Pico Macom,
Inc. and Marine Midland Business Loans, Inc. dated May 25, 1994 -
amendments dated April 27, 1995 and May 18, 1995.
(o) Employment Agreement between Pico Products, Inc. and Everett T.
Keech, dated September 22, 1995.
11.1 Computation of Per Share Earnings.
22(a) Subsidiaries of the Company are listed in the Table at the end of
Item 1
24(a) Independent Auditors' Consent
27 Financial Data Schedule (included only in the EDGAR filing).
See next page for Key to Index of Exhibits.
47
<PAGE>
KEY TO INDEX OF EXHIBITS
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, 1983 and incorporated by
reference.
d Previously filed by the Company as an exhibit to the Company's Form
10-K for the fiscal year ended July 31, 1985 and incorporated by
reference.
e 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.
f Previously filed by the Company as an exhibit to the Company's Form
10-K for the fiscal year ended July 31, 1990 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, 1991 and incorporated by
reference.
h Previously filed by the Company as an exhibit to the Company's Form
10-K for the fiscal year ended July 31, 1992 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 January 31, 1993 and incorporated by
reference.
j Previously filed as exhibits to Schedule 13D, dated February 16, 1993,
filed by Standard Chartered Equitor Trustee CI Limited, Scimitar
Development Capital Fund and Scimitar Development Capital "B" Fund,
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, 1993 and incorporated by
reference.
48
<PAGE>
KEY TO INDEX OF EXHIBITS (continued)
l Previously filed by the Company as an exhibit to the Company's
Form 10-Q for the fiscal quarter ended April 30, 1994 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, 1994 and
incorporated by reference.
n Previously filed by the Company as an exhibit to the Company's
Form 10-Q for the fiscal quarter ended January 31, 1995 and
incorporated by reference.
o Previously filed by the Company as an exhibit to the Company's
Form 10-Q for the fiscal quarter ended April 30, 1995 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.
49
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, Pico Products, Inc. has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Date: October 12, 1995
PICO PRODUCTS, INC.
By: /s/ Everett T. Keech By: /s/ Joseph T. Kingsley
------------------------------- -----------------------------
Everett T. Keech Joseph T. Kingsley
Chairman of the Board Principal Financial &
(Principal Executive Officer) Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of Pico Products, Inc.
and in the capacities and on the dates indicated.
/s/ Everett T. Keech /s/ Charles G. Emley, Jr.
- -------------------------------- ------------------------------
Everett T. Keech Charles G. Emley, Jr.
Chairman of the Board Director
October 12, 1995 October 12, 1995
/s/ David Heenan /s/ George M. Knapp
- -------------------------------- -------------------------------
David Heenan George M. Knapp
Director Director
October 12, 1995 October 12, 1995
/s/ E.B. Leisenring, Jr. /s/ William W. Mauritz
- ------------------------------- -------------------------------
E.B. Leisenring, Jr. William W. Mauritz
Director Director
October 12, 1995 October 12, 1995
/s/ J. Michael Sills
- ------------------------------
J. Michael Sills
Director
October 12, 1995
50
<PAGE>
FORM 10-K
YEAR ENDED JULY 31, 1995
EXHIBITS
_______________________________________________________________________
10(n) Amendments to the Loan and Security Agreement between Pico Macom, Inc.
and Marine Midland Business Loans, Inc. dated May 25, 1994 -
amendments dated April 27, 1995 and May 18, 1995.
10(o) Employment Agreement between Pico Products, Inc. and Everett T. Keech,
dated September 22, 1995.
11.1 Computation of Per Share Earnings
24(a) Independent Auditors' Consent
27 Financial Data Schedule (included only in the EDGAR filing).
51
<PAGE>
EXHIBIT 10(n)
AMENDMENT NO. 1
TO LOAN AND SECURITY AGREEMENT
This Amendment dated as of April 27, 1995, is entered into by and between
Pico Macom, Inc., a Delaware corporation ("Debtor"), and Marine Midland
Business Loans, Inc., a Delaware corporation ("Secured Party"), with
reference to the following facts:
RECITALS
A. Secured Party is extending various secured financial accommodations to
Debtor upon the terms of that certain Loan and Security Agreement dated as of
May 25, 1994 (the "Loan Agreement").
B. Debtor and Secured Party desire to amend the Loan Agreement upon the
terms and conditions set forth herein.
NOW THEREFORE, in consideration of the foregoing and for the other good and
valuable consideration, the receipt and adequacy of which is hereby acknowledged
by each party hereto, Debtor and Secured Party hereby agree as follows:
1. DEFINED TERMS. Unless otherwise specified herein, any capitalized
terms defined in the Loan Agreement shall have the same respective meanings as
used herein.
2. LEASES. With respect to Section 10.10 of the Loan Agreement and Item
30 of the Schedule thereto, the maximum aggregate lease rentals during any
fiscal year shall be increased from $500,000 to $750,000.
3. QUARTERLY STATEMENTS. With respect to Section 9.1(b) of the Loan
Agreement, the quarterly financial statements shall include a statement of cash
flow instead of a statement of retained earnings.
4. MONTHLY STATEMENTS. The requirements of Section 9.1(c) of the Loan
Agreement shall apply only to those months that are not the last month of a
fiscal quarter or fiscal year; where a month is the last month of a fiscal
quarter or fiscal year, the requirements of Sections 9.1(a) or (b) (as
applicable) shall instead apply.
5. QUARTERLY COMPLIANCE CERTIFICATE. The compliance certificate provided
in Section 9.1(d) of the Loan Agreement shall be furnished within forty-five
(45) days after the end of each fiscal quarter.
52
<PAGE>
6. REPRESENTATIONS AND WARRANTIES. Debtor reaffirms that the
representations and warranties made to Secured Party in the Loan Agreement and
other Transaction Documents are true and correct in all material respects as of
the date of this Amendment as though made as of such date and after giving
effect to this Amendment. In addition, Debtor makes the following
representations and warranties to Secured Party, which shall survive the
execution of this Amendment:
(a) The execution, delivery and performance of this Amendment are
within Debtor's powers, have been duly authorized by all necessary actions, have
received all necessary governmental approvals, if any, and do not contravene any
law or any contractual restrictions binding on Debtor.
(b) This Amendment is the legal, valid and binding obligation of
Debtor, enforceable against Debtor in accordance with its terms, except as
enforcement may be limited by bankruptcy, insolvency, moratorium and other
similar laws affecting the rights of creditors generally.
(c) No event has occurred and is continuing, or would result from the
execution, delivery and/or performance of this Amendment, which constitutes an
Event of Default under the Loan Agreement or any other of the Transaction
Documents, or would constitute such an Event of Default but for the requirement
that notice be given or time elapse or both.
7. CONTINUING EFFECT OF LOAN DOCUMENTS. To the extent of any
inconsistencies between the terms of this Amendment and the Loan Agreement, this
Amendment shall govern. In all order respects, the Loan Agreement and other
Transaction Documents shall remain in full force and effect and are hereby
ratified and confirmed.
8. REFERENCES. Upon the effectiveness of this Amendment, each reference
in any Transaction Document to "the Agreement", "hereunder," "herein," "hereof,"
or of like import referring to the Loan Agreement shall mean and be a reference
to the Loan Agreement as amended hereby.
9. GOVERNING LAWS. This Amendment, upon becoming effective, shall be
deemed to be a contract made under, governed by, and subject to, and shall be
construed in accordance with, the internal laws of the State of California.
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10. CONDITIONS PRECEDENT. This Amendment shall become effective when, and
only when, Secured Party shall have received a counterpart of this Amendment
duly executed by Debtor and acknowledged by the guarantors indicated
hereinbelow, together with such other documents, instruments or agreements as
Secured Party or its legal counsel may reasonably request.
IN WITNESS WHEREOF, the parties hereto, intending to be legally bound here
by, have executed this Amendment as of the date first set forth above, to become
effective in the manner set forth above.
PICO MACOM, INC.
By /s/ JOSEPH T. KINGSLEY
--------------------------------
Senior Vice President, CFO
MARINE MIDLAND BUSINESS LOANS, INC.
By /s/ WILLIAM FIELD
--------------------------------
Vice President
54
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CONSENT OF GUARANTOR
The undersigned, as guarantor of the Indebtedness of Pico Macom, Inc. to
Marine Midland Business Loans, Inc. pursuant to that certain Unlimited
Continuing Guaranty dated as of May 25, 1994 (the "Guaranty"), hereby
acknowledges receipt of a copy of the foregoing Amendment No. 1 and
acknowledges, consents and agrees that (i) the Guaranty remains in full force
and effect, and (ii) the execution and delivery of the foregoing Amendment No. 1
and any and all documents executed in connection therewith shall not alter,
amend, reduce or modify its obligations and liabilities under the Guaranty.
Dated: April 27, 1995
PICO PRODUCTS, INC.
By: /s/ JOSEPH T. KINGSLEY
-------------------------------
Senior Vice President, CFO
55
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AMENDMENT NO. 2
TO LOAN AND SECURITY AGREEMENT
This Amendment dated as of May 18, 1995, is entered into by and between
Pico Macom, Inc., a Delaware corporation ("Debtor"), and Marine Midland Business
Loans, Inc., a Delaware corporation ("Secured Party"), with reference to the
following facts:
RECITALS
A. Secured Party is extending various secured financial accommodations to
Debtor upon the terms of that certain Loan and Security Agreement dated as of
May 25, 1994, as amended (the "Loan Agreement").
B. Debtor and Secured Party desire to amend the Loan Agreement upon the
terms and conditions set forth herein.
NOW THEREFORE, in consideration of the foregoing and for the other good and
valuable consideration, the receipt and adequacy of which is hereby acknowledged
by each party hereto, Debtor and Secured Party hereby agree as follows:
1. DEFINED TERMS. Unless otherwise specified herein, any capitalized
terms defined in the Loan Agreement shall have the same respective meanings as
used herein.
2. ST. KITTS INVENTORY. With respect to Section 4.4 of the Loan
Agreement, and subject to eligibility requirements set forth in Section 1.1(j)
of the Loan Agreement, the Inventory of Debtor located at the premises of Pico
(St. Kitts) Ltd. at the Pond Industrial Site in St. Kitts shall be deemed
Eligible Inventory; provided, however, that the maximum amount of the Borrowing
Capacity calculated upon such Inventory pursuant to Item 1(B)(ii) of the
Schedule shall be limited to $750,000.
3. REPRESENTATIONS AND WARRANTIES. Debtor reaffirms that the
representations and warranties made to Secured Party in the Loan Agreement and
other Transaction Documents are true and correct in all material respects as of
the date of this Amendment as though made as of such date and after giving
effect to this Amendment. In addition, Debtor makes the following
representations and warranties to Secured Party, which shall survive the
execution of this Amendment:
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(a) The execution, delivery and performance of this Amendment are
within Debtor's powers, have been duly authorized by all necessary actions, have
received all necessary governmental approvals, if any, and do not contravene any
law or any contractual restrictions binding on Debtor.
(b) This Amendment is the legal, valid and binding obligation of
Debtor, enforceable against Debtor in accordance with its terms, except as
enforcement may be limited by bankruptcy, insolvency, moratorium and other
similar laws affecting the rights of creditors generally.
(c) No event has occurred and is continuing, or would result from the
execution, delivery and/or performance of this Amendment, which constitutes an
Event of Default under the Loan Agreement or any other of the Transaction
Documents, or would constitute such an Event of Default but for the requirement
that notice be given or time elapse or both.
4. CONTINUING EFFECT OF LOAN DOCUMENTS. To the extent of any
inconsistencies between the terms of this Amendment and the Loan Agreement, this
Amendment shall govern. In all other respects, the Loan Agreement and other
Transaction Documents shall remain in full force and effect and are hereby
ratified and confirmed.
5. REFERENCES. Upon the effectiveness of this Amendment, each reference
in any Transaction Document to "the Agreement", "hereunder," "herein," "hereof,"
or of like import referring to the Loan Agreement shall mean and be a reference
to the Loan Agreement as amended hereby.
6. GOVERNING LAWS. This Amendment, upon becoming effective, shall be
deemed to be a contract made under, governed by, and subject to, and shall be
construed in accordance with, the internal laws of the State of California.
7. CONDITIONS PRECEDENT. This Amendment shall become effective when, and
only when, Secured Party shall have received a counterpart of this Amendment
duly executed by Debtor and acknowledged by the guarantor indicated hereinbelow,
together with the following documents in form and substance satisfactory to
Secured Party:
(a) Letter agreement with Pico (St. Kitts) Ltd. pursuant to which it
waives certain rights with respect to the Inventory in its possession and agrees
to deliver such Inventory to Secured Party upon an Event of Default;
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(b) Favorable letter of opinion from Inniss and Inniss with respect
to the enforceability, perfection and first-priority of Secured Party's security
interest in such Inventory; and
(c) Such other documents as Secured Party may reasonably request.
IN WITNESS WHEREOF, the parties hereto, intending to be legally bound
hereby, have executed this Amendment as of the date first set forth above, to
become effective in the manner set forth above.
PICO MACOM, INC.
By /s/ JOSEPH T. KINGSLEY
--------------------------------
Senior Vice President, CFO
MARINE MIDLAND BUSINESS LOANS, INC.
By /s/ WILLIAM FIELD
--------------------------------
Vice President
58
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CONSENT OF GUARANTOR
The undersigned, as guarantor of the Indebtedness of Pico Macom, Inc. to
Marine Midland Business Loans, Inc. pursuant to that certain Unlimited
Continuing Guaranty dated as of May 25, 1994 (the "Guaranty"), hereby
acknowledges receipt of a copy of the foregoing Amendment No. 2 and
acknowledges, consents and agrees that (i) the Guaranty remains in full force
and effect, and (ii) the execution and delivery of the foregoing Amendment No. 2
and any and all documents executed in connection therewith shall not alter,
amend, reduce or modify its obligations and liabilities under the Guaranty.
Dated: May 18, 1995
PICO PRODUCTS, INC.
By /s/ JOSEPH T. KINGSLEY
--------------------------------
Senior Vice President, CFO
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PICO (ST. KITTS) LTD.
P.O. Box 460, Pond Estate
Basseterre, St. Kitts, West Indies
(809) 465-8079, (809) 465-8558
FAX (809) 465-1029
TELEX #361-6890
May 18, 1995
MARINE MIDLAND BUSINESS LOANS, INC.
4695 MacArthur Court
Suite 100
Newport Beach, California 92660
Gentlemen:
From time to time we have in our possession certain inventory (the "Inventory")
of Pico Macom, Inc. a Delaware corporation (the "Debtor") which is in our
possession for the purpose of processing, performing work on, or adding
accessories or accessions to such Inventory at our place of business at the
Ponds Industrial Site in St. Kitts (the "Premises").
We understand that pursuant to a Loan and Security Agreement dated as of May 25,
1994, as amended by and between the Debtor and Marine Midland Business Loans,
Inc. (the "Lender") and related documents (collectively the "Transaction
Documents"), the Lender has agreed in accordance with the terms specified
therein, to extend credit to the Debtor based, in part, on the value of the
Inventory. We further understand that such extensions of credit are secured by,
among other things, a security interest granted by the Debtor to the Lender in
all of the Debtor's now owned or hereafter acquired Inventory, including without
limitation, the Inventory.
In consideration of our business relationship with the Debtor and in order to
induce the Lender to extend credit to the Debtor from time to time based, in
part, upon the value of the Inventory, we agree, intending to be legally bound
hereby, as follows (this "Agreement"):
1. We hereby acknowledge notice of the Lender's security interest in the
Inventory.
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Marine Midland Business Loans, Inc.
May 18, 1995
Page 2
2. While the Inventory is in our possession, we will identify the
Inventory in a manner satisfactory to be Lender as property of the
Debtor.
3. We hereby acknowledge and agree that any lien claim or security
interest which we now have or may at any time hereafter acquire
(whether arising under applicable law by contract with the Debtor or
otherwise) in, to or against Inventory in our possession at the
Premises or in the possession of our agents shall be junior and
subordinate to the Lender's security interest in such Inventory,
notwithstanding priorities which might otherwise exist under
applicable law.
4. As long as this Agreement is in effect, we will not foreclose upon,
levy execution upon, attach or otherwise realize upon any security
interest in, lien upon, or claim to any of the Inventory.
5. We shall permit the Lender or its agents to enter upon the Premises
during normal business hours to inspect or remove any of the
Inventory. After the occurrence of an "Event of Default" as defined
in the Transaction Documents, and upon the oral or written direction
of the Lender, we shall refuse to release the Inventory to the Debtor
or any party other than the Lender or the party designated by the
Lender in such oral or written direction.
6. By its signature below, the Debtor agrees that we shall have no
liability to the Debtor whatsoever by reason of our surrender of
possession of Inventory to the Lender at the Lender's oral or written
direction.
7. We agree that this agreement shall bind us and our successors and
assigns, and shall inure to the benefit of and be enforceable by the
Lender and its successors and assigns.
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Marine Midland Business Loans, Inc.
May 18, 1995
Page 3
8. This Agreement shall be a continuing agreement and shall remain in
full force and effect until all liabilities and obligations of the
Debtor to the Lender of every kind and description have been paid and
discharged in full and all Transaction Documents have been terminate.
This Agreement may not be amended or supplemented in any manner, other
than by a writing signed by us, the Lender, and the Debtor.
Very truly yours,
PICO (ST. KITTS) LTD.
By /s/ GRAYDON B. WALKER
-----------------------------
General Manager
ACKNOWLEDGED AND AGREED TO
PICO MACOM, INC.
By /s/ JOSEPH T. KINGSLEY
-----------------------------
Senior Vice President, CFO
ACCEPTED:
MARINE MIDLAND BUSINESS LOANS, INC.
By /s/ WILLIAM FIELD
-----------------------------
Vice President
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EXHIBIT 10(o)
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT (the "Agreement") dated as of September 22, 1995,
between PICO PRODUCTS, INC., a New York corporation ("Employer"), and EVERETT T.
KEECH ("Employee").
BACKGROUND. Employee is currently employed by Employer as its
Chairman and Chief Executive Officer. Employer and Employee mutually agree to
continue the employment of Employee as Chairman and Chief Executive Officer of
Employer upon the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants and agreements hereinafter set forth, the parties hereto, intending to
be legally bound hereby, agree as follows:
1. EMPLOYMENT. Employer hereby employs Employee, and Employee hereby
accepts such employment and agrees to perform his duties and responsibilities
hereunder, in accordance with the terms and conditions hereinafter set forth.
1.1 EMPLOYMENT TERM. The employment term of this Agreement shall be
for a period of three years and may be renewed in accordance with Section 1.2.
The term "Employment Term" shall refer to the initial Employment Term, which
shall commence on the date hereof and shall continue until and end of the third
anniversary date of this Agreement (unless terminated prior thereto in
accordance with Section 7 hereof) and, to the extent this Agreement is renewed
pursuant to Section 1.2, to the last day of any successive one year period.
1.2 RENEWAL. This Agreement shall be automatically renewed for
successive one year terms at the expiration of the initial Employment Term, and
any subsequent Employment Term, unless written notice to the contrary is
provided by either the Employer or the Employee at least ninety days prior to
the expiration of such Employment Term. In the event that Employer does not
elect to renew this Agreement upon the expiration of an Employment Term,
Employee shall be entitled to receive the severance compensation described in
Section 1.8(a)(i) and Section 1.8(b).
1.3 DUTIES AND RESPONSIBILITIES.
(a) During the Employment Term, Employee shall serve as Chairman
and Chief Executive Officer of Employer and shall perform all duties and accept
all responsibilities incidental to such position or as
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may be assigned to him by Employer's Board of Directors, and he shall report to
and cooperate fully with the Board of Directors. Employee shall operate
primarily out of Employer's executive office in West Conshohocken, Pennsylvania,
but shall be expected to spend a significant amount of time devoted to
Employer's business affairs at other locations, including Employer's principal
offices in Los Angeles and Employer's facilities outside the United States, and
traveling as appropriate on Employer's business.
(b) Employee represents and covenants to Employer that he is
subject to or a party to only those employment agreements, non-competition
covenants, and non-disclosure agreements listed on Exhibit "A" hereto. Employee
represents and covenants to Employer that neither those documents nor any other
similar agreement, covenant, understanding or restriction to which Employee is
subject would prohibit Employee from executing this Agreement and performing his
duties and responsibilities hereunder, or would in any manner, directly or
indirectly, limit or affect the duties and responsibilities which may now or in
the future be assigned to Employee by Employer.
1.4 EXTENT OF SERVICE. During the Employment Term, Employee agrees
to use his best efforts to carry out his duties and responsibilities under
Section 1.3 hereof and to devote his full time, attention and energy thereto.
The foregoing shall not be construed as preventing Employee from (a) serving as
a consultant or director for one or more non-competitive business enterprises,
(b) engaging in charitable or civic activities, (c) teaching, or (d) making
investments in other businesses or enterprises; provided that such activities in
the aggregate shall not prevent him from discharging his duties and
responsibilities to Employer.
1.5 BASE COMPENSATION. For all the services rendered by Employee
hereunder, Employer shall pay Employee an annual salary at the rate of $175,000
for the Employment Term, plus such additional amounts, if any, as may be
approved by the Employer's Board of Directors, less withholding required by law
or agreed to by Employee, payable in installments at such times as Employer
customarily pays its other executive officers. The annual salary may be
increased by the Board of Directors in its sole discretion.
1.6 BENEFITS. During the Employment Term, Employee shall be entitled
to certain benefits and shall be eligible for certain incentive compensation, as
follows:
(a) During the Employment Term, Employee shall be entitled to
fifteen working days of paid vacation during the Employment Term in accordance
with Employer's then existing vacation policy.
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(b) Employee shall be entitled to all normal and usual benefits
provided by Employer to its management employees, including, but not limited to,
participation in profit sharing, disability, health, hospitalization and
retirement plans and such other benefits as the Board of Directors of Employer
may from time to time determine based upon the benefits paid to other executive
officers of Employer. In addition Employee shall be entitled to a car allowance
of $9,600 per annum. Employee shall also be entitled to such executive
benefits, including executive disability and life insurance as shall be approved
by Employer's Board of Directors or an appropriate committee of the Board.
(c) Employee shall be eligible to receive such stock options or
other forms of stock grants as shall be determined by Employer's Board of
Directors or an appropriate committee of such Board.
(d) Employee shall be eligible for an annual management bonus
with such target levels and performance goals as shall be set by Employer's
Board of Directors or an appropriate committee of such Board.
1.7 CHANGE IN CONTROL.
(a) For purposes of this paragraph 1.7, "Change in Control"
shall mean (i) a merger or consolidation of Employer with any entity other than
an entity with which Employer is affiliated at the date of execution of this
Agreement; (ii) a sale of substantially all of the assets of Employer to any
person or entity other than a person or entity with which Employer is affiliated
at the date of execution of this Agreement; or (iii) a change in a majority of
the members of the Board of Directors of Employer within any twelve-month
period.
(b) In the event of a Change in Control, Employee may elect,
within one year after such Change in Control, to terminate this Agreement. If
Employee terminates this Agreement following a Change in Control:
(i) Employer shall pay Employee, as severance compensation,
an amount equal to 2.99 times Employee's base annual cash compensation. Such
severance compensation shall be paid in twenty-four equal monthly installments,
commencing thirty days after the date of termination of this Agreement; and
(ii) Employer shall continue to provide Employee with all
health, dental, hospitalization, life, and disability insurance benefits, plus
car allowance, which Employee received pursuant to Section 1.6(b) hereof, for a
period of twenty-four months following the termination of this Agreement.
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Notwithstanding the foregoing, the payments to be made to Employee pursuant to
this paragraph (b) shall not exceed an amount sufficient to characterize any
portion of such payments as an "excess parachute payment" within the meaning of
Section 280G(b) of the Internal Revenue Code of 1986, as amended, or any
successor provision. In the event that a portion of such payments would
otherwise be deemed to be an excess parachute payment, Employer shall notify
Employee of such fact and Employee shall have a period of thirty days in which
to notify Employer of the order in which the categories of amounts payable to
him hereunder shall be reduces to that no portion of such payments shall
constitute an excess parachute payment. In the event that Employee shall fail
so to notify Employer, Employer shall solely make such determination.
1.8 SEVERANCE COMPENSATION. If Employer terminates this Agreement,
other than pursuant to Section 7 hereof:
(a) Employer shall pay Employee an amount equal to twice the sum
of (i) Employee's base annual cash compensation plus (ii) the bonus or other
additional compensation Employee would have received for the current fiscal year
based on targeted performance goals. Such severance compensation shall be
payable in 24 equal monthly installments, commencing thirty days after the date
of termination of this Agreement; and
(b) Employer shall continue to provided Employee with the
health, dental, hospitalization and disability benefits which Employee received
pursuant to Section 1.6(b) hereof, for a period of twelve months following the
termination of this Agreement.
Notwithstanding the foregoing, in the event that Employer terminates this
Agreement, other than pursuant to Section 7 hereof, within one year after a
Change in Control, Keech shall be entitled to the benefits of Section 1.7 of
this Section 1.8, which ever shall be greater.
2. EXPENSES. Employee shall be reimbursed for the reasonable business
expenses incurred by him in connection with his performance of services
hereunder during the Employment Term upon presentation of an itemized account
and written proof of such expenses.
3. DEVELOPMENTS. Employee will disclose promptly in writing to Employer
all inventions, ideas, discoveries, and improvements, whether or not patentable,
conceived by Employee during the period of Employee's employment with Employer,
or a parent or subsidiary thereof, whether alone or with others, and whether or
not during regular business hours, or on Employer premises or with the aid of
Employer materials, which pertain in any way to Employee's work with Employer or
to any business activity which is or at the time of such conception may be
carried on by Employer or a parent or subsidiary thereof. All such inventions,
ideas, discoveries, and
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improvements are the property of Employer to which Employee hereby assigns and
transfers forever all Employee's rights, titles and interests.
Employee, upon request by Employer and at Employer's sole expense,
will prepare and execute applications for patents for such inventions, ideas,
discoveries, and improvements, both in the United States and in foreign
countries, and will do everything necessary to ensure the issuance of such
patents, irrespective of whether required to be done during or after the
termination of Employee's period of employment with Employer.
Any inventions, ideas, discoveries, and improvements conceived or made
by Employee prior to the execution of this Agreement and not intended to be
included within its provisions are listed or described on Exhibit "B" attached
to this Agreement, and the absence of any such list or description indicates
that there are no inventions, ideas, discoveries, or improvements not covered by
this Agreement.
4. TRADE SECRETS. The Employee agrees that he will not at any time,
either during or subsequent to the Employment Term, unless given express consent
in writing by the Employer, either directly or indirectly use or communicate to
any person or entity any confidential information of any kind concerning matters
affecting or relating to the names, addresses, buying habits or practices of any
of Employer's clients or customers; Employer's marketing methods, programs,
formulas, patterns, compilations, devices, methods, techniques or processes and
related data; the amount of compensation paid by Employer to employees and
independent contractors and other terms of their employment or contractual
relationships; other information concerning Employer's manner of operations.
(The foregoing shall not be deemed to prohibit the disclosure of information
which (a) is, at the time of disclosure, in the public domain other than as a
result of Employee's breach of this Agreement, or (b) can be demonstrated by
Employee to be known by Employee on the date of his commencement of employment.)
The Employee agrees that the above information and items are important, material
and confidential trade secrets and that they affect the successful conduct of
the Employer's business and its good will. The Employee agrees that all
business procured by the Employee while employed by the Employer is and shall
remain the permanent and exclusive property of the Employer. Employee further
agrees that Employer's relationship with each of its employees and independent
contractors is a significant and valuable asset of the Employer. Any
interference with the Employer's business, property, confidential information,
trade secrets, clients, customers, employees or independent contractors by the
Employee or any of Employee's agents during or after the term of this Agreement
shall be deemed a material breach of this Agreement.
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5. NONSOLICITATION; COVENANT NOT TO COMPETE.
(a) The Employee hereby acknowledges and agrees that he is likely to
be exposed to a significant amount of confidential information concerning the
Employer's business methods, operations, employment relationships and customers
while employed under this Agreement, that such information might be retained by
Employee in tangible form or simply retained in the Employee's memory, and that
the protection of the Employer's exclusive rights to such confidential
information and the benefits flowing from it can best be ensured by means of a
restriction on the Employee's activities after termination of employment.
Therefore, the Employee agrees that for the one-year period following
termination of employment (whether with or without cause) he shall not solicit,
divert or initiate (or attempt to solicit, divert or initiate) any contact with
any customer, client or vendor of the Employer if such action is on behalf of
any person (including Employee) who shall then be in a business competitive with
that of Employer, for any commercial or business reason whatsoever. The
Employee also agrees that for such period he will not directly or indirectly
solicit the employment of any employee of the Employer and will not attempt to
persuade any employee to leave the employment of the Employer.
(b) Employee covenants that during his employment with Employer, and
for a period of one year after termination of such employment, Employee will not
directly or indirectly, as principal, owner, employee, or agent, engage in any
business competing with the business of Employer (or an affiliate of Employer)
in any place where Employer (or such affiliate of Employer) is conducting
business or exploring business opportunities at the time of termination of
Employee's employment with Employer.
6. EQUITABLE RELIEF.
(a) Employee acknowledges that the restrictions contained in Sections
4 and 5 hereof are reasonable and necessary to protect the legitimate interests
of Employer and that any violation of such restrictions would result in
irreparable injury to Employer. If the period of time or other restrictions
specified in Sections 4 and 5 should be adjudged unreasonable at any proceeding,
then the period of time or such other restrictions shall be reduced by the
elimination or reduction of such portion thereof so that such restrictions may
be enforced in a manner adjudged to be reasonable. Employee acknowledges that
Employer shall be entitled to preliminary and permanent injunctive relief for a
violation of any such restrictions without having to prove actual damages or to
post a bond; Employer shall also be entitled to an equitable accounting of all
earnings, profits and other benefits arising from such violation, which rights
shall be cumulative and in addition to any other rights or remedies
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to which Employer may be entitled in law or equity. In the event of a
violation, the period referred to in Section 5 hereof shall be extended by a
period of time equal to that period beginning with the commencement of any such
violation and ending when such violation shall have been finally terminated in
good faith.
(b) Employee agrees that until the expiration of the covenants
contained in Sections 4 and 5 of this Agreement, he will provide, and that
Employer may similarly provide, a copy of the covenants contained in such
Sections to any business or enterprise (i) which he may directly or indirectly
own, manage, operate, finance, join, control or participate in the ownership,
management, operation, financing, control or control of, or (ii) with which he
may be connected with as an officer, director, employee, partner, principal,
agent, representative, consultant or otherwise, or in connection with which he
may use or permit his name to be used.
7. TERMINATION. This Agreement shall terminate prior to the expiration
of the term set forth in Section 1.1 above upon the occurrence of any one of the
following events:
7.1 DISABILITY. In the event that Employee is unable fully to
perform his duties and responsibilities hereunder to the full extent required by
the Board of Directors of the Employer by reason of illness, injury or
incapacity for six consecutive months, during which time he shall continue to be
compensated as provided in Section 1.5 hereof (less any payments due Employee
under disability benefit programs, including Social Security disability,
workers' compensation and disability retirement benefits), this Agreement may be
terminated by Employer, and Employer shall have no further liability or
obligation to Employee for compensation hereunder; provided, however, that
Employee will be entitled to receive the payments prescribed under any
disability benefit plan which may be in effect for employees of Employer and in
which he participated. Employee agrees, in the event of any dispute under this
Section 7.1, to submit to a physical examination by a licensed physician
mutually agreed on by Employee and the Board of Directors of Employer.
7.2 DEATH. In the event that Employee dies during the Employment
Term, Employer shall pay to his executors, legal representatives or
administrators an amount equal to the installment of his salary set forth in
Section 1.5 hereof for the month in which he dies, and thereafter Employer shall
have no further liability or obligation hereunder to his executors, legal
representatives, administrators, heirs or assigns or any other person claiming
under or through him; provided, however, that Employee's estate or designated
beneficiaries shall be entitled to receive the payments prescribed for such
recipients under any death benefit plan which may be in effect for employees of
the Employer and in which Employee participated.
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7.3 CAUSE. Notwithstanding any other provision hereof, Employer
may terminate this Agreement at any time for "cause." For purposes of this
Agreement, "cause" shall include, but not be limited to, the failure of Employee
to perform or observe any of the terms or provisions of this Agreement (after
notice of such failure and an opportunity to cure such failure within 30 days
after such notice), dishonesty, misconduct, conviction of a crime involving
moral turpitude, habitual insobriety, misappropriation of funds, disparagement
of the Employer, its management or its employees or financial inability of the
Employer to continue to do business. The Employer's liability, if any, for
payment to Employee as a consequence of termination of Employee's employment
pursuant to this Agreement shall be reduced by and to the extent of any earnings
received by or accrued for the benefit of Employee during any unexpired part of
the Employment Term.
8. SURVIVAL. Notwithstanding the termination of this Agreement by reason
of Employee's disability under Section 7.1 or for cause under Section 7.3, his
obligations under Sections 4 and 5 hereof shall survive and remain in full force
and effect for the periods therein provided, and the provisions for equitable
relief against Employee in Section 6 hereof shall continue in force.
9. GOVERNING LAW. This Agreement shall be governed by and interpreted
under the laws of the Commonwealth of Pennsylvania.
10. DISPUTES AND ARBITRATION. Any disputes arising hereunder, including
disputes arising from or relating to termination, shall be resolved by binding
arbitration. Notice of the demand for arbitration by either party shall be
given in writing to the other party to this Agreement. Upon such demand, the
dispute shall be settled by arbitration before a single arbitrator pursuant to
the rules of the American Arbitration Association (the "AAA"). Discovery shall
be permitted prior to arbitration and Pennsylvania law shall be applied. The
arbitrator shall be selected by the joint agreement of the parties, but if the
parties do not so agree within twenty days after the date of the notice referred
to above, the selection shall be made pursuant to the rules of, and from the
panels of arbitrators maintained by the AAA. Any award rendered by the
arbitrator shall be conclusive and binding upon the parties hereto; provided,
however, that any such award shall be accompanied by written opinion of the
arbitrator giving the reasons for the award. Each party shall pay its own
expenses of arbitration and the expenses of the arbitrator shall be equally
shared by the parties. Nothing herein shall prevent the parties from settling
any dispute by mutual agreement at any time.
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11. NOTICES. All notices and other communications required or permitted
hereunder or necessary or convenient in connection herewith shall be in writing
and shall be deemed to have been given when hand delivered or mailed by
registered or certified mail, as follows (provided that notice of change of
address shall be deemed given only when received):
If to Employer, to: Pico Products, Inc.
12500 Foothill Boulevard
Lakeview Terrace, CA 91342
With a required copy to: Spencer W. Franck, Jr., Esquire
Saul, Ewing, Remick & Saul
3800 Centre Square West
Philadelphia, PA 19102
If to Employee, to: Mr. Everett T. Keech
-----------------------------
-----------------------------
or to such other names or addresses as Employer or Employee, as the case may be,
shall designate by notice to each other person entitled to receive notices in
the manner specified in this Section.
12. CONTENTS OF AGREEMENT; AMENDMENT AND ASSIGNMENT.
(a) This Agreement supersedes all prior agreements and sets forth the
entire understanding among the parties hereto with respect to the subject matter
hereof and cannot be changed, modified, extended or terminated except upon
written amendment approved by the Board of Directors of Employer and executed on
its behalf by a duly authorized officer. Without limitation, nothing in this
Agreement shall be construed as giving Employee any right to be retained in the
employ of Employer beyond the expiration of the Employment Term, and Employee
specifically acknowledges that, unless this Agreement is renewed in accordance
with Section 1.2 hereof, he shall be an employee-at-will of Employer thereafter,
and thus subject to discharge by Employer with or without cause and without
compensation of any nature.
(b) Employee acknowledges that from time to time, Employer may
establish, maintain and distribute employee manuals or handbooks or personnel
policy manuals, and officers or other representatives of Employer may make
written or oral statements relating to personnel policies and procedures. Such
manuals handbooks and statements are intended only of general guidance. No
policies, procedures or statements of any nature by or on behalf of Employer
(whether written or oral, and whether or not contained in any employee manual or
handbook or personnel policy manual),
71
<PAGE>
and no acts or practices of any nature, shall be construed to modify this
Agreement or to create express or implied obligations of any nature to Employee.
(c) All of the terms and provisions of this Agreement shall be
binding upon and inure to the benefit of and be enforceable by the respective
heirs, executors, administrators, legal representatives, successors and assigns
of the parties hereto, except that the duties and responsibilities of Employee
hereunder are of a personal nature and shall not be assignable or delegatable in
whole or in part by Employee.
13. SEVERABILITY. If any provision of this Agreement or application
thereof to anyone or under any circumstances is adjudicated to be invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall not
affect any other provision or application of this Agreement which can be given
effect without the invalid or unenforceable provision or application and shall
not invalidate or render unenforceable such provision or application in any
other jurisdiction.
14. REMEDIES CUMULATIVE; NO WAIVER. No remedy conferred upon Employer by
this Agreement is intended to be exclusive of any other remedy, and each and
every such remedy shall be cumulative and shall be in addition to any other
remedy given hereunder or now or hereafter existing at law or in equity. No
delay or omission by Employer in exercising any right, remedy or power hereunder
or existing at law or in equity shall be construed as a waiver thereof, and any
such right, remedy or power may be exercised by Employer from time to time and
as often as may be deemed expedient or necessary by Employer in its sole
discretion.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date
first above written.
Attest: PICO PRODUCTS, INC.
/s/ Spencer W. Franck, Jr. By: /s/ Joseph T. Kingsley
- ----------------------------- -------------------------------
Secretary Senior Vice President, CFO
/s/ Everett T. Keech
-------------------------------
Chairman and CEO
72
<PAGE>
EXHIBIT "A"
EMPLOYMENT AGREEMENTS, NON-COMPETITION AGREEMENTS AND NON-DISCLOSURE AGREEMENTS
73
<PAGE>
EXHIBIT 11.1
PICO PRODUCTS, INC.
COMPUTATION OF PER SHARE EARNINGS
YEARS ENDED JULY 31, 1995 AND 1994 AND 1993
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Net income (loss) attributable
to common stock $ 526 $ 905 $ (277)
Net income (loss) used to compute
fully diluted earnings
per share $ 526 $ 905 $ (277)
-------- -------- --------
Primary earnings per share:
Weighted average number
of common shares outstanding 3,636 3,605 3,577
Dilutive effect of stock options
and warrants after application
of treasury stock method 604 690 -
-------- -------- --------
Number of shares used to compute
primary earnings per share 4,240 4,295 3,577
Primary earnings per share $ 0.12 $ 0.21 $ (0.08)
-------- -------- --------
-------- -------- --------
Fully diluted earnings per share:
Weighted average number
of common shares outstanding 3,636 3,605 3,577
Dilutive effect of stock options
and warrants after application
of treasury stock method 604 690 -
-------- -------- --------
Number of shares used to compute
fully diluted earnings per share 4,240 4,295 3,577
Fully diluted earnings per share $ 0.12 $ 0.21 $ (0.08)
-------- -------- --------
-------- -------- --------
</TABLE>
74
<PAGE>
EXHIBIT 24(a)
INDEPENDENT AUDITOR'S CONSENT
We consent to the incorporation by reference in Registration Statement No. 33-
78550 of Pico Products, Inc. on Form S-8 of our report dated October 11, 1995
appearing in this Annual Report on Form 10-K of Pico Products, Inc. for the year
ended July 31, 1995.
DELOITTE & TOUCHE LLP
Los Angeles, California
October 11, 1995
75
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1995
<PERIOD-START> AUG-01-1994
<PERIOD-END> JUL-31-1995
<CASH> 502
<SECURITIES> 0
<RECEIVABLES> 6,182
<ALLOWANCES> 290
<INVENTORY> 9,760
<CURRENT-ASSETS> 16,338
<PP&E> 2,905
<DEPRECIATION> 2,121
<TOTAL-ASSETS> 17,633
<CURRENT-LIABILITIES> 12,841
<BONDS> 279
<COMMON> 36
0
0
<OTHER-SE> 4,477
<TOTAL-LIABILITY-AND-EQUITY> 17,633
<SALES> 33,367
<TOTAL-REVENUES> 33,649
<CGS> 25,225
<TOTAL-COSTS> 32,227
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 143
<INTEREST-EXPENSE> 713
<INCOME-PRETAX> 566
<INCOME-TAX> 40
<INCOME-CONTINUING> 526
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 526
<EPS-PRIMARY> 0.12
<EPS-DILUTED> 0.12
</TABLE>
