<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 31 ,1996
--------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 1-8342
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PICO PRODUCTS, INC.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
NEW YORK 15-0624701
- -------------------------------- ---------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12500 Foothill Blvd.
Lakeview Terrace, California 91342
- ----------------------------------------- --------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:(818) 897-0028
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirement for the past 90 days.
YES X NO
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of March 8, 1996.
Common Stock, $0.01 par value 3,692,246
- ----------------------------- --------------------
Class Number of Shares
This report consists of 22 pages.
1
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PICO PRODUCTS, INC.
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
January 31, 1996 and July 31, 1995 3-4
Condensed Consolidated Statements
of Operations - Three and Six Months
Ended January 31, 1996 and 1995 5
Condensed Consolidated Statements
of Cash Flows - Six Months Ended
January 31, 1996 and 1995 6
Notes to Condensed Consolidated Financial
Statements 7-10
Item 2. Management's Discussion and Analysis
of Results of Operations and Financial
Condition 11-14
PART II OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 4. Submission of Matters to a Vote of
Security Holders 15
Item 6. Exhibits and Reports on Form 8-K 15
</TABLE>
2
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PICO PRODUCTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
January 31, July 31,
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 453,836 $ 501,525
Accounts receivable (less allowance
for doubtful accounts: January 31,
1996, $260,000; July 31, 1995,
$290,000) 5,003,883 5,892,338
Inventories (Note 2) 11,582,153 9,760,164
Prepaid expenses and other current
assets 263,795 183,870
------------ ------------
TOTAL CURRENT ASSETS 17,303,667 16,337,897
------------ ------------
PROPERTY, PLANT AND EQUIPMENT:
Buildings 217,255 217,255
Leasehold improvements 337,540 259,277
Machinery and equipment 2,561,458 2,428,605
------------ ------------
3,116,253 2,905,137
Less accumulated depreciation
and amortization 2,265,848 2,121,382
------------ ------------
850,405 783,755
------------ ------------
OTHER ASSETS:
Patents and licenses (less accumulated
amortization: January 31, 1996,
$59,248; July 31, 1995, $56,204) 161,962 165,006
Excess of cost over net assets of
businesses acquired (less accumulated
amortization: January 31, 1996,
$352,410; July 31, 1995, $337,890) 225,025 239,545
Deposits and other noncurrent assets 98,219 107,147
------------ ------------
485,206 511,698
------------ ------------
$18,639,278 $17,633,350
------------ ------------
------------ ------------
</TABLE>
See notes to condensed consolidated financial statements.
3
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PICO PRODUCTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(continued)
(Unaudited)
<TABLE>
<CAPTION>
January 31, July 31,
1996 1995
------------- -------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 9,047,719 $ 7,778,655
Current portion of long-term debt (Note 6) 339,624 362,239
Accounts payable 3,248,293 3,326,366
Accrued expenses:
Legal and accounting 150,351 90,443
Payroll and payroll taxes 383,217 484,854
Other accrued expenses 333,261 336,450
Other current liabilities (Note 5) 462,066 462,066
------------ -------------
TOTAL CURRENT LIABILITIES 13,964,531 12,841,073
------------ -------------
LONG-TERM DEBT 270,186 278,820
------------ -------------
COMMITMENTS AND CONTINGENCIES (Note 5) - -
SHAREHOLDERS' EQUITY (Note 6):
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 3,692,246
shares at January 31, 1996 and
3,637,046 shares at July 31, 1995 36,922 36,370
Additional paid-in capital 21,586,328 21,565,255
Accumulated deficit (17,107,498) (17,010,269)
Cumulative translation adjustment (111,191) (77,899)
------------ -------------
TOTAL SHAREHOLDERS' EQUITY 4,404,561 4,513,457
------------ -------------
$ 18,639,278 $ 17,633,350
------------ -------------
------------ -------------
</TABLE>
See notes to condensed consolidated financial statements.
4
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PICO PRODUCTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
January 31, January 31,
--------------------------- ---------------------------
1996 1995 1996 1995
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
SALES $8,486,258 $8,007,041 $16,860,220 $16,098,943
COSTS AND EXPENSES:
Cost of sales 6,364,732 6,077,534 12,609,997 12,253,806
Selling and
administrative
expenses 1,985,431 1,744,164 3,886,193 3,453,869
----------- ----------- ------------ ------------
TOTAL COSTS AND EXPENSES 8,350,163 7,821,698 16,496,190 15,707,675
----------- ----------- ------------ ------------
INCOME FROM OPERATIONS 136,095 185,343 364,030 391,268
OTHER INCOME (Note 3) 3,081 121,077 4,890 250,899
INTEREST EXPENSE (238,462) (156,120) (466,149) (308,963)
----------- ----------- ------------ ------------
INCOME (LOSS) BEFORE
INCOME TAXES (99,286) 150,300 (97,229) 333,204
----------- ----------- ------------ ------------
INCOME TAX PROVISION
(Note 4) - - - -
----------- ----------- ------------ ------------
NET INCOME (LOSS) $ (99,286) $ 150,300 $ (97,229) $ 333,204
----------- ----------- ------------ ------------
----------- ----------- ------------ ------------
NET INCOME (LOSS) PER
COMMON AND COMMON
EQUIVALENT SHARE:
Primary $ (0.03) $ 0.04 $ (0.03) $ 0.08
----------- ----------- ------------ ------------
----------- ----------- ------------ ------------
Fully diluted $ (0.03) $ 0.04 $ (0.03) $ 0.08
----------- ----------- ------------ ------------
----------- ----------- ------------ ------------
WEIGHTED AVERAGE COMMON
AND EQUIVALENT SHARES
OUTSTANDING:
Primary 3,684,746 4,220,171 3,668,266 4,275,765
----------- ----------- ------------ ------------
----------- ----------- ------------ ------------
Fully diluted 3,684,746 4,220,171 3,668,266 4,275,765
----------- ----------- ------------ ------------
----------- ----------- ------------ ------------
</TABLE>
See notes to condensed consolidated financial statements.
5
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PICO PRODUCTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
January 31,
----------------------------
1996 1995
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (97,229) $ 333,204
Adjustments to reconcile net income
(loss) to net cash provided (used)
in operating activities:
Depreciation and amortization 176,248 218,253
Changes in operating assets
and liabilities (1,173,532) 2,802
------------- -------------
NET CASH PROVIDED (USED) IN
OPERATING ACTIVITIES (1,094,513) 554,259
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (211,116) (145,085)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) under a
line of credit agreement 1,269,064 (526,515)
Principal payments on long-term debt (62,341) (37,645)
Additional long-term debt financing 31,092 -
Proceeds from exercise of stock options 20,125 3,000
------------- -------------
NET CASH PROVIDED (USED) BY FINANCING
ACTIVITIES 1,257,940 (561,160)
------------- -------------
NET DECREASE IN CASH
AND CASH EQUIVALENTS (47,689) (151,986)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 501,525 441,609
------------- -------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 453,836 $ 289,623
------------- -------------
------------- -------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
CASH PAID DURING THE PERIOD FOR:
Interest $ 460,452 $ 303,329
Income taxes 28,950 -
</TABLE>
See notes to condensed consolidated financial statements.
6
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PICO PRODUCTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) GENERAL
The Company's primary industry is the manufacturing and distribution of
equipment and parts for the cable television (CATV) and satellite master antenna
television (SMATV) markets. The accompanying unaudited condensed consolidated
financial statements include all adjustments which are, in the opinion of the
Company's management, necessary to present fairly the Company's financial
position as of January 31, 1996, and the results of its operations and its cash
flows for the three and six month periods ended January 31, 1996 and 1995. All
such adjustments are of a normal recurring nature. All significant intercompany
accounts and transactions have been eliminated.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission. These condensed consolidated financial
statements should be read in conjunction with the financial statements and
related notes contained in the Company's Annual Report on Form 10-K for the
fiscal year ended July 31, 1995.
The results of operations for the interim periods shown in this Report are not
necessarily indicative of the results to be expected for the fiscal year.
(2) INVENTORIES
The composition of inventories was as follows:
<TABLE>
<CAPTION>
January 31, July 31,
1996 1995
------------ ------------
<S> <C> <C>
Raw materials $ 3,719,815 $ 3,350,435
Work in process 1,013,845 319,386
Finished goods 6,848,493 6,090,343
------------ ------------
$11,582,153 $ 9,760,164
------------ ------------
------------ ------------
</TABLE>
7
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(3) OTHER INCOME
Other income consisted of the following:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
January 31, January 31,
--------------------- --------------------
1996 1995 1996 1995
--------- --------- -------- --------
<S> <C> <C> <C> <C>
Royalty income $ - $114,854 $ - $239,141
Interest income 3,081 6,223 4,890 11,758
-------- -------- -------- --------
$ 3,081 $121,077 $ 4,890 $250,899
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
(4) INCOME TAXES
No provision for U.S. Federal and state income taxes or foreign income taxes has
been recorded for the three and six month periods ended January 31, 1996 and
1995 due to the Company's U.S. Federal and state net operating loss carryforward
positions and tax holidays granted the Company's foreign subsidiaries.
(5) LITIGATION AND CONTINGENCIES
ARCOM 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.
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
8
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amounts equal to the royalties due to the Company for the manufacture and sale
of products 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 February 29, 1996 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 January 31, 1996. 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. A trial was scheduled to begin in early January 1996 but due
to court scheduling conflicts, has been postponed until April 1996. Management
believes that the outcome of this matter will not have a material adverse effect
on the Company's consolidated financial statements.
EPA INFORMATION REQUEST
On March 6, 1995, a subsidiary of the Company received a Joint Request for
Information (the "Information Request") from the United States Environmental
Protection Agency, Region II (the "EPA"), under the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended ("CERCLA"), with
respect to the release and/or threatened release of hazardous substances,
hazardous wastes, pollutants or contaminants into the environment at the
Onondaga Lake Site, Syracuse, Onondaga County, New York. The Company has
learned that the EPA added the Onondaga Lake Site to the Superfund National
Priorities List on December 6, 1994, and has completed an onsite assessment of
the degree of hazard. The EPA has indicated that the Company is only one of 26
companies located in the vicinity of Onondaga Lake or its tributaries that have
received a similar Information Request.
The Information Request related to the activities of the Company's Printed
Circuit Board Division, which conducted operations within the specified area,
and was sold to a third party in 1992. 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
9
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liability on its part, and, if there were to be any such liability, the basis of
any sharing of such liability with others.
OTHER
The Company is involved, from time to time, in certain other legal actions
arising in the normal course of business. Management believes that the outcome
of other litigation will not have a material adverse effect on the Company's
consolidated financial statements.
(6) DEBT CONVERSION TO EQUITY
In February 1993, the Company completed private placement financings totaling
$1,000,000. The financings consisted of three notes. The first note for
$500,000 was paid in full in May 1994. The second and third notes totaling
$500,000 provide for interest at 8% and are payable in two equal installments in
February 1996 and in February 1997. In connection with the financings, the
Company issued warrants for 425,000 shares of its common stock, exercisable
through fiscal year 1998 at $1.00 per share.
On February 28, 1996, the Company was notified by the holder of the two
outstanding notes payable that they intend to exercise 250,000 warrants to
purchase common stock of the Company as an offset against the first $250,000
installment payment due on the debt. The Company expects this transaction to be
completed by the end of March 1996.
10
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
The following discussion compares the operations of the Company for the three
and six month periods ended January 31, 1996 with the operations for the three
and six month periods ended January 31, 1995, as shown by the unaudited
condensed consolidated statements of operations included in this quarterly
report.
RESULTS OF OPERATIONS
Sales increased by approximately $761,000, or 5%, for the six months ended
January 31, 1996 compared with the six months ended January 31, 1995, and sales
increased by approximately $479,000, or 6%, for the fiscal quarter ended January
31, 1996 compared to the same period in the previous fiscal year. The Company's
CATV division recorded sales increase of approximately 39% and 34%,
respectively, for the six and three month periods ended January 31, 1996
compared to the same periods in the previous fiscal year. These increases were
primarily due to increasing demand for television signal security products both
internationally and domestically. The Company's Pico Macom subsidiary recorded
sales decreases of approximately 3% and 1%, respectively, for the six and three
month periods ended January 31, 1996, compared to the same periods of the
previous fiscal year. These decreases resulted mainly from purchasing
reductions by the major U.S. cable TV system operators (MSO's) in the wake of
consolidation of cable system ownership, as well as a slowdown in orders from
South America. The Company anticipates that orders from South America for the
remainder of fiscal 1996 will be stronger.
Cost of sales increased by approximately $356,000, or 3%, for the six months
ended January 31, 1996 compared with the six months ended January 31, 1995, and
cost of sales increased by $287,000, or 5%, for the fiscal quarter ended January
31, 1996 compared with the same fiscal quarter in the previous year. Cost of
sales as a percentage of sales decreased by 1% (from 76% to 75%) for the six and
three month periods ended January 31, 1996 versus the same periods in the
previous fiscal year. The dollar increase in cost of sales was primarily
attributable to the increase in sales volume. The 1% decrease in cost of sales
as a percentage of sales was primarily due to the improved purchasing power of
the U.S. dollar in the Far East which resulted in slight product cost
reductions, and due to manufacturing cost improvements for the Company's CATV
division security products.
Selling and administrative expenses increased by approximately $432,000, or 13%,
for the six months ended January 31, 1996 compared to the six months ended
January 31, 1995, and increased by approximately $241,000, or 14%, for the
fiscal quarter ended January 31, 1996 compared to the same fiscal quarter of the
previous year. The primary reasons for the increases in selling and
administrative expenses were continuing increased investment in
11
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product development and expenditures related to development of new markets in
Asia and to the Company's new regional office in Hong Kong. The Company's
product development and Asian market development expenses increased for the six
month period ended January 31, 1996 by over $260,000 and $375,000, respectively,
compared to same period of the previous fiscal year. Management anticipates
that this current level of selling and administrative expenses will continue
throughout fiscal year 1996.
Other income decreased by approximately $246,000, or 98% for the six months
ended January 31, 1996 compared to the six months ended January 31, 1995, and
other income decreased by approximately $118,000, or 98%, for the fiscal quarter
ended January 31, 1996 compared to the same fiscal quarter in the previous year.
The decreases in other income were primarily due to the elimination of royalty
income from license holders following the expiration of the Company's patent for
positive encoding and decoding systems in February 1995.
Interest expense increased by approximately $157,000, or 51%, for the six months
ended January 31, 1996 compared with the six months ended January 31, 1995, and
interest expense increased by approximately $82,000, or 53%, for the fiscal
quarter ended January 31, 1996 compared with the same fiscal quarter of the
previous year. The increases were primarily due to higher borrowing levels on
the Company's bank line of credit to support the Company's working capital
requirements, and due to a higher prime rate during the six and three month
periods ended January 31, 1996.
No provision for U.S. Federal and state income taxes or foreign income taxes has
been recorded for the three and six month periods ended January 31, 1996 and
1995 due to the Company's U.S. Federal and state net operating loss carryforward
positions and tax holidays granted the Company's foreign subsidiaries.
The Company recorded a net loss in both the six and three month periods ended
January 31, 1996 of approximately $97,000 and $99,000, respectively. Return to
profitability is contingent upon a resurgence of demand in South America for the
Company's products coupled with an increase in capital spending by the major
U.S. cable TV system operators.
LIQUIDITY AND CAPITAL RESOURCES
As of January 31, 1996, the Company had working capital of approximately
$3,339,000 and a ratio of current assets to current liabilities of approximately
1.24:1, compared with working capital of approximately $3,497,000 and a ratio of
1.27:1 as of July 31, 1995. During the six months ended January 31, 1996, the
Company recorded negative cash flow from operating activities primarily as a
result of increased inventory purchases to support the Company's forecasted
sales levels.
12
<PAGE>
However, sales for the first six months of fiscal year 1996 have been lower than
anticipated, resulting in higher inventory levels. This inventory investment
has placed a strain on the Company's working capital position. The Company is
working to reduce inventory levels through increased orders from South America,
Asia and U.S. cable TV system operators, and through conversion of raw material
and components for newly developed products into finished goods for shipment to
customers.
During the six months ended January 31, 1996 and 1995, cash used for capital
expenditures was approximately $211,000 and $145,000 respectively. Capital
expenditures for the remainder of fiscal year 1996 are expected to be under
$100,000.
In November 1995, Pico Macom requested an amendment to its revolving bank line
of credit to increase the borrowing limit against eligible inventories. In
December 1995, Pico Macom's bank increased the limit on its line of credit from
$10,000,000 to $11,000,000, and increased the borrowing limit against eligible
inventories from $4,500,000 to $5,500,000. The bank also extended the term of
the line of credit from May 25, 1996 to December 31, 1996.
At January 31, 1996 Pico Macom had an $11,000,000 revolving bank line of credit
which provides for interest at the prime rate (8.50% at January 31, 1996) 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 $11,000,000 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, which
is subject to review and renewal on December 31, 1996. The credit facility is
subject to certain financial tests and covenants.
Management anticipates that the bank line of credit will be renewed. In the
event that it was not renewed, the Company would seek alternative asset-based
financing. Failure to obtain such financing would have a materially adverse
effect on the Company's working capital requirements. At January 31, 1996, Pico
Macom had approximately $9,048,000 in revolving loans and approximately $94,000
in letters of credit outstanding, and the unused portion of the borrowing base
was approximately $100,000.
In February 1993, the Company completed private placement financings totaling
$1,000,000. The financings consisted of three notes. The first note for
$500,000 was paid in full in May 1994. The second and third notes totaling
$500,000 provide for interest at 8% and are payable in two equal installments in
February 1996 and in February 1997. In connection with the financings, the
Company issued warrants for 425,000 shares of its common stock, exercisable
through fiscal year 1998 at $1.00 per share.
13
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On February 28, 1996, the Company was notified by the holder of the two
outstanding notes payable that they intend to exercise 250,000 warrants to
purchase common stock of the Company as an offset against the first $250,000
installment payment due on the debt. The Company expects this transaction to be
completed by the end of March 1996.
Management believes that the current credit arrangements along with an
inventory reduction program should provide sufficient cash to fund the Company's
operations for the remainder of the fiscal year. Should the Company identify
opportunities that require cash beyond that generated internally or available
from its credit line, the Company would seek to increase its current credit
line. Alternatively, the Company would consider seeking other sources of cash,
including, but not limited to, a public offering or a private placement.
However, there can be no assurance that additional financing with favorable
terms will be available if needed.
Profitability of operations is subject to various uncertainties including
general economic conditions, favorable settlement of ongoing litigation and the
actions of actual or potential competitors and customers. The Company's
future depends on the growth of the cable TV market in the United States and
internationally. In the United States, a number of factors could affect the
future profitability of the Company, including changes in the regulatory climate
for cable TV, changes in the competitive structure of the cable and
telecommunications industries or changes in the technology base of the industry.
Internationally, the Company's profitability depends on its ability to penetrate
new markets in the face of competition from other United States and foreign
companies.
14
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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Incorporated by reference from financial statement footnote number 5 of Part I.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On December 14, 1995, the Company held its 1995 annual meeting of shareholders.
Management's nominees for director were elected by the following votes: Charles
G. Emley, Jr., 3,027,892 (275,029 withheld); David A. Heenan, 3,086,356 (216,565
withheld); Everett T. Keech, 3,027,492 (275,429 withheld); George M. Knapp,
3,086,456 (216,465 withheld); E.B. Leisenring, Jr., 3,088,456 (216,465
withheld); William W. Mauritz, 3,028,192 (274,729 withheld); J. Michael Sills,
3,087,436 (215,485 withheld). Management's proposal to ratify the appointment
of Deloitte and Touche LLP as the Company's independent accountants for the
fiscal year ending July 31, 1996, was approved by the following vote: 3,266,121
for; 24,800 against; and 12,000 abstentions. Management's proposal to amend the
Company's 1981 Non-Qualified Stock Option Plan was approved by the following
vote: 1,239,861 for; 886,502 against; and 38,382 abstentions.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
4 (g) Amendment to 1981 Non-Qualified Stock Option Plan.
10(q) Amendment No. 3 to the Loan and Security Agreement between Pico
Macom, Inc. and Marine Midland Business Loans, Inc. dated May 25,
1994 - amendment dated December 20, 1995.
11.1 Computation of Per Share Earnings.
27 Financial Data Schedule (included only in the EDGAR filing).
(b) Reports on Form 8-K:
Current report on Form 8-K dated December 29, 1995.
15
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PICO PRODUCTS, INC.
REGISTRANT
DATE: March 12, 1996 Joseph T. Kingsley
-------------------------------------
Senior Vice President of Finance
Chief Financial Officer
16
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FORM 10-Q
QUARTER ENDED JANUARY 31, 1996
EXHIBITS
4 (g) Amendment to 1981 Non-Qualified Stock Option Plan.
10(q) Amendment No. 3 to the Loan and Security Agreement between Pico Macom,
Inc. and Marine Midland Business Loans, Inc. dated May 25, 1994 -
amendment dated December 20, 1995.
11.1 Computation of Per Share Earnings
27 Financial Data Schedule (included only in the EDGAR filing).
17
<PAGE>
EXHIBIT 4(G)
AMENDMENT TO 1981 NON-QUALIFIED STOCK OPTION PLAN
(Adopted by the Board of Directors as of November 6, 1995)
Section 7.4 of the 1981 Non-Qualified Stock Option Plan of Pico Products, Inc.,
a New York corporation, is hereby amended to read in its entirety as follows
(with brackets indicating deletions and double-underlining indicating
additions):
7.4 Option Period. Each Option granted under the Plan shall expire no
later than (five) ten years from the date the Option is granted. Option
---
---
Agreements for Key Employees shall contain provisions for the earlier
expiration of the Options in the event of the Key Employee's termination of
employment as provideed by Section 7.9. Option Agreements for Key
Contractors shall contain such provisions for the earlier expiration of the
Options as the Board or Committee deems appropriate. The Committee shall
-------------------
-------------------
have the right, in its discretion, to modify any existing Option Agreement
--------------------------------------------------------------------------
--------------------------------------------------------------------------
by extending the expiration date of an Option to a date no later than ten
-------------------------------------------------------------------------
-------------------------------------------------------------------------
years from the date of grant of such Option.
--------------------------------------------
--------------------------------------------
18
<PAGE>
EXHIBIT 10(Q)
AMENDMENT NO. 3
TO LOAN AND SECURITY AGREEMENT
This Amendment dated as of December 20, 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. MAXIMUM BORROWING CAPACITY. With respect to the definition of
"Borrowing Capacity" in Section 1.1 of the Loan Agreement and Item
1(A) of the Schedule thereto, the maximum Borrowing Capacity shall be
increased from $10,000,000.00 to $11,000,000.00.
3. INVENTORY SUB-LINE. With respect to Item 1(B)(ii) of the Schedule to
the Loan Agreement, the sub-line for Advances against Eligible
Inventory shall be increased from $4,500,000.00 to $5,500,000.00.
4. FINANCIAL COVENANTS. With respect to Section 10.15 of the Loan
Agreement and Item 26 of the Schedule thereto, Debtor shall maintain
the following levels of financial performance:
(a) Net Working Capital of not less than $3,500,000.00 at all times after
the date of this Amendment;
(b) Working Capital Ratio of not less than 1.30:1 at all times after the
date of this Amendment;
19
<PAGE>
(c) Tangible Net Worth of not less than $4,000,000.00 at all times after
the date of this Amendment;
(d) Debt to Tangible Net Worth ratio of not more than 3.0:1 after the date
of this Amendment; and
(e) Net Income After Taxes of not less than $750,000.00 during each fiscal
year ending on or after December 31, 1995.
5. TERM. With respect to Section 13.13(a) of the Loan Agreement and Item 35
of the schedule thereto, the term thereof is hereby extended to December
31, 1996, and shall be automatically renewed for successive annual terms,
subject to the termination provisions set forth therein.
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 or 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 other respects, the
Loan Agreement and other Transaction Documents shall remain in full
force and effect and are hereby ratified and confirmed.
20
<PAGE>
8. REFERENCES. Upon the effectiveness of this Amendment, each reference in
any Transaction Document to "the Agreement", "hereunder", "herein", 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.
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 guarantor 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 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 Joseph T. Kingsley
----------------------------------
Title V.P. Finance
----------------------------------
MARINE MIDLAND BUSINESS LOANS, INC.
By William Field
----------------------------------
Title Vice President
----------------------------------
21
<PAGE>
EXHIBIT 11.1
PICO PRODUCTS, INC.
COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
<TABLE>
<CAPTION>
Three Months Six Months
Ended January 31, Ended January 31,
------------------- -------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
NET INCOME (LOSS) ATTRIBUTABLE
TO COMMON STOCK $ (99) $ 150 $ (97) $ 333
-------- -------- -------- --------
-------- -------- -------- --------
PRIMARY EARNINGS PER SHARE:
Weighted average number
of common shares
outstanding 3,685 3,636 3,668 3,634
Dilutive effect of stock
options and warrants
after application of
treasury stock method - 584 - 642
-------- -------- -------- --------
Number of shares used to
compute primary
earnings (loss)per share 3,685 4,220 3,668 4,276
Primary earnings (loss) per share $ (0.03) $ 0.04 $ (0.03) $ 0.08
-------- -------- -------- --------
-------- -------- -------- --------
FULLY DILUTED EARNINGS PER SHARE:
Weighted average number
of common shares
outstanding 3,685 3,636 3,668 3,634
Dilutive effect of stock
options and warrants
after application of
treasury stock method - 584 - 642
-------- -------- -------- --------
Number of shares used to
compute fully diluted
earnings (loss) per share 3,685 4,220 3,668 4,276
Fully diluted earnings (loss)per
share
$ (0.03) $ 0.04 $ (0.03) $ 0.08
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
22
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUL-31-1996
<PERIOD-START> AUG-01-1995
<PERIOD-END> JAN-31-1996
<EXCHANGE-RATE> 1
<CASH> 454
<SECURITIES> 0
<RECEIVABLES> 5,264
<ALLOWANCES> 260
<INVENTORY> 11,582
<CURRENT-ASSETS> 17,304
<PP&E> 3,116
<DEPRECIATION> 2,266
<TOTAL-ASSETS> 18,639
<CURRENT-LIABILITIES> 13,964
<BONDS> 270
0
0
<COMMON> 37
<OTHER-SE> 4,368
<TOTAL-LIABILITY-AND-EQUITY> 18,639
<SALES> 16,860
<TOTAL-REVENUES> 16,865
<CGS> 12,610
<TOTAL-COSTS> 16,496
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 466
<INCOME-PRETAX> (97)
<INCOME-TAX> 0
<INCOME-CONTINUING> (97)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (97)
<EPS-PRIMARY> (0.03)
<EPS-DILUTED> (0.03)
</TABLE>
