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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 October 31, 1997
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OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-8342
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PICO PRODUCTS, INC.
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(Exact name of registrant as specified in its charter)
NEW YORK 15-0624701
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12500 Foothill Blvd.
Lakeview Terrace, California 91342
- ---------------------------------------- -------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:(818) 897-0028
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirement for the past 90 days.
YES X NO
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of December 6, 1996.
Common Stock, $0.01 par value 4,185,913
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Class Number of Shares
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PICO PRODUCTS, INC.
INDEX
Page No.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
October 31, 1997 and July 31, 1996 3-4
Condensed Consolidated Statements
of Income - Three Months
Ended October 31, 1997 and 1996 5
Condensed Consolidated Statements
of Cash Flows - Three Months
Ended October 31, 1997 and 1996 6
Notes to Condensed Consolidated Financial
Statements 7-11
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 2. Changes in Securities 15
Item 6. Exhibits and Reports on Form 8-K 16-27
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PICO PRODUCTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
October 31, July 31,
1997 1997
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ASSETS:
CURRENT ASSETS:
Cash and cash equivalents $ 18,932 $ 22,286
Accounts receivable (less allowance
for doubtful accounts: October 31, 1997,
$200,000; July 31, 1997, $200,000) 4,387,681 5,621,232
Inventories (Note 2) 11,977,088 11,961,229
Prepaid expenses and other current
assets 262,679 339,760
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TOTAL CURRENT ASSETS 16,646,380 17,944,507
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PROPERTY, PLANT AND EQUIPMENT:
Buildings 217,255 217,255
Leasehold improvements 186,689 279,842
Machinery and equipment 2,887,501 2,900,270
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3,291,445 3,397,367
Less accumulated depreciation
and amortization 2,361,598 2,431,779
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929,847 965,588
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OTHER ASSETS:
Patents and licenses (less accumulated
amortization: October 31, 1997, $69,650;
July 31, 1997, $68,156) 151,560 153,054
Excess of cost over net assets of
businesses acquired (less accumulated
amortization; October 31, 1997, $403,230;
July 31, 1997, $395,970) 174,205 181,465
Deposits and other noncurrent assets 236,823 235,614
Debt issuance costs (less accumulated
amortization; October 31, 1997, $66,405;
July 31, 1997; $43,760) 509,198 415,683
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1,071,786 985,816
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$18,648,013 $19,895,911
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See notes to condensed consolidated financial statements.
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PICO PRODUCTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(continued)
(Unaudited)
October 31, July 31,
1997 1997
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LIABILITIES AND SHAREHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Notes payable (Notes 5&6) $ 8,306,868 $9,425,299
Current portion of long-term debt 134,217 132,902
Accounts payable 2,463,805 3,348,977
Accrued expenses:
Legal and accounting 280,042 212,976
Payroll and payroll taxes 378,499 486,397
Other accrued expenses 404,086 395,552
Restructuring costs 449,725 580,035
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TOTAL CURRENT LIABILITIES 12,417,242 14,582,138
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LONG-TERM DEBT (Note 6) 5,526,468 4,915,286
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RESTRUCTURING COSTS 237,959 298,744
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COMMITMENTS AND CONTINGENCIES - -
(Note 4)
REDEEMBABLE PREFERRED STOCK, $.01 par
value; authorized 500,000 shares; issued
and outstanding 1,165 shares at October 31,
1997 and 1,000 shares at July 31, 1997 1,050,973 917,086
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SHAREHOLDERS' DEFICIENCY:
Common shares, $.01 par value; authorized
15,000,000 shares issued and outstand-
ing 4,185,913 shares at October 31, 1997
and July 31, 1997 41,859 41,859
Additional paid-in capital 22,986,545 22,715,292
Stock subscriptions receivable (105,000) (105,000)
Accumulated deficit (23,410,767) (23,381,874)
Cumulative translation adjustment (97,266) (87,620)
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TOTAL SHAREHOLDERS' DEFICIENCY (584,629) (817,343)
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$18,648,013 $19,895,911
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See notes to condensed consolidated financial statements.
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PICO PRODUCTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
October 31,
-------------------------------
1997 1996
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SALES $ 8,187,390 $ 9,698,188
COSTS AND EXPENSES:
Cost of sales 5,913,564 7,330,072
Selling and administrative expenses 1,804,471 2,025,788
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TOTAL COSTS AND EXPENSES 7,718,035 9,355,860
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INCOME FROM OPERATIONS 469,355 342,328
INTEREST INCOME 3,987 3,834
INTEREST EXPENSE (469,323) (241,075)
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INCOME BEFORE INCOME TAXES 4,019 105,087
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INCOME TAX PROVISION (Note 3) - 4,234
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NET INCOME 4,019 100,853
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DIVIDENDS ON PREFERRED STOCK (32,912) -
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NET INCOME (LOSS)
ATTIBUTABLE TO
COMMON STOCK $ (28,893) $ 100,853
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NET INCOME (LOSS) PER COMMON AND COMMON
EQUIVALENT SHARE:
Primary $ (0.01) $ 0.02
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Fully diluted $ (0.01) $ 0.02
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WEIGHTED AVERAGE COMMON AND
EQUIVALENT SHARES OUTSTANDING:
Common
Primary 4,185,913 4,249,724
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Fully diluted 4,185,913 4,249,724
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See notes to condensed consolidated financial statements.
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PICO PRODUCTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
October 31,
-------------------------------
1997 1996
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,019 $ 100,853
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization 98,904 86,378
Changes in operating assets
and liabilities 45,491 (1,022,057)
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NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 148,414 (834,826)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (31,765) (90,971)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) under a
line of credit agreement (1,118,431) 985,588
Issuance of long-term debt 985,000 -
Issuance of preferred stock 165,000 -
Private placement financing costs (116,162) -
Principal payments on long-term debt (35,410) (35,905)
Proceeds from exercise of stock options - 1,800
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NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES (120,003) 951,483
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NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (3,354) 25,686
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 22,286 159,669
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CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 18,932 $ 185,355
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
During the fiscal quarter ended October 31, 1996, the Company financed the
purchase of office and test lab equipment totaling approximately $87,000.
See notes to condensed consolidated financial statements.
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PICO PRODUCTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) GENERAL
Pico Products, Inc. and its subsidiaries (the "Company") design,
manufacture and distribute products and systems for the pay TV and cable TV
industry (CATV), broadband communications and other signal distribution
markets. These other distribution markets include "private" cable TV systems
such as those found in hotels, schools, hospitals and large apartment
complexes. Private cable systems are referred to in the industry as master
antenna (MATV) or satellite master antenna (SMATV) systems. These systems
receive satellite and "off-air" (or broadcast) signals at a single source
known as the "headend". The signals are processed and then distributed by
coaxial or fiber optic cable to the consumer. Also included in other signal
distribution markets are wireless cable or MMDS (multichannel multipoint
distribution systems) and business-to- business or direct-to-home (DTH)
communications by satellite. The Company also sells pay TV security products
and home satellite market products. Finally, the Company is pursuing
development and introduction of broadband communications products that will
support high speed internet transmissions.
The accompanying unaudited condensed consolidated financial statements include
the accounts of Pico Products, Inc. and its wholly owned subsidiaries, and
include all adjustments which are, in the opinion of the Company's management,
necessary to present fairly the Company's financial position as of October 31,
1997, and the results of its operations and its cash flows for the three-month
periods ended October 31, 1997 and 1996. All such adjustments are of a normal
recurring nature. All significant intercompany accounts and transactions have
been eliminated in consolidation.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
(GAAP) have been condensed or omitted pursuant to the rules and regulations of
the Securities and Exchange Commission (SEC). The preparation of interim
financial statements in conformity with GAAP, as modified by SEC rules and
regulations, requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from these estimates. These condensed consolidated financial
statements should be read in conjunction with
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the financial statements and related notes contained in the Company's Annual
Report on Form 10-K for the fiscal year ended July 31, 1997.
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.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 ("SFAS 128") "Earnings per Share." SFAS
128 replaces the presentation of primary earnings per share with a presentation
of basic earnings per share based upon the weighted average number of common
shares for the period. It also requires dual presentation of basic and diluted
earnings per share for companies with complex capital structures. SFAS 128 will
be adopted by the Company for the fiscal quarter ending January 31, 1998 and
earnings per share for all prior periods will be restated upon adoption.
(2) INVENTORIES
The composition of inventories was as follows:
October 31, July 31,
1997 1997
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Raw materials $ 4,584,495 $ 4,634,967
Work in process 956,065 606,218
Finished goods 6,436,527 6,720,044
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$11,977,087 $11,961,229
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(3) INCOME TAXES
No provision for U.S. Federal and state regular income taxes or foreign income
taxes has been recorded for the three-month periods ended October 31, 1997 and
1996 due to the Company's U.S. Federal, state, and foreign net operating loss
carryforward positions and a tax holiday granted to one of the Company's foreign
subsidiaries. However, a provision for U.S. Federal and state alternative
minimum tax has been recorded for the three-month period ended October 31, 1996.
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(4) LITIGATION AND CONTINGENCIES
INFORMATION REQUEST
On March 6, 1995, a subsidiary of the Company received a Joint Request for
Information (the "Information Request") from the United States Environmental
Protection Agency, Region II (the "EPA"), under the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended
("CERCLA"), with respect to the release and/or threatened release of
hazardous substances, hazardous wastes, pollutants or contaminants into the
environment at the Onondaga Lake Site, Syracuse, Onondaga County, New York.
The Company has learned that the EPA added the Onondaga Lake Site to the
Superfund National Priorities List on December 6, 1994, and has completed an
onsite assessment of the degree of hazard. The EPA has indicated that the
Company is only one of 26 companies located in the vicinity of Onondaga Lake
or its tributaries that have received a similar Information Request.
The Information Request related to the activities of the Company's Printed
Circuit Board Division, which was sold to a third party in 1992, and which
conducted operations within the specified area. Under the Agreement of Sale
with the buyer, the Company retained liability for environmental obligations
which occurred prior to the sale.
The Company has provided all information requested by the EPA. The Information
Request does not designate the Company as a potentially responsible party, nor
has the EPA indicated the basis upon which it would designate the Company as a
potentially responsible party. The Company is therefore unable to state whether
there is any material likelihood for liability on its part, and, if there were
to be any such liability, the basis of any sharing of such liability with
others.
In March 1997, the Company received a follow-on request for additional
information in this matter and has provided all information requested.
EAGLE LITIGATION
On July 30, 1997, Eagle Comtronics, Inc. ("Eagle") filed a motion in the
United States District Court for the Northern District of New York to amend the
complaint for patent infringement it had filed in 1979 against the Company.
This 1979 action had been settled by Consent Judgment in 1988, pursuant to which
the Company and Eagle entered into a License Agreement providing for specified
royalty payments from Eagle to the Company. Eagle's motion sought the District
Court's permission to proceed against the Company under
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various legal theories for breach of the License Agreement, based on Eagle's
allegation that the Company, in violation of the License Agreement's "most
favored nation" clause, granted a license to a third party (Arrow Communication
Laboratories, Inc.) on more favorable terms than those provided to Eagle. Eagle
sought damages of approximately $1,600,000 plus interest and attorneys fees.
The Company believed that Eagle's motion was procedurally improper and that,
even if the amended complaint were allowed by the District Court, it had
meritorious defenses to the claims stated in the amended complaint.
The Company responded to Eagle's motion, and Eagle promptly withdrew the
motion to file an amended complaint. At the same time Eagle filed a complaint
in New York State Supreme Court similar to the proposed amended federal
complaint. Management believes that the Company has meritorious defenses to
Eagle's action and that such suit will not have any material adverse effect on
the Company.
OTHER
The Company is involved, from time to time, in certain other legal actions
arising in the normal course of business. Management believes that the outcome
of other litigation will not have a material adverse affect on the Company's
consolidated financial statements.
(5) NEW DEBT COVENANTS
On October 31, 1997, the Company negotiated new, less restrictive covenants
related to Pico Macom's revolving line of credit. These covenants require a
certain minimum net income for the fiscal year and limit certain financial
ratios.
As described below, the Company completed a private placement financing. The
November 21, 1996 and September 12, 1997 financing agreements require the
Company to meet financial covenants which are very similar to the financial
covenants relating to Pico Macom's bank revolving line of credit. At October
31, 1997, the Company was in compliance with all financial covenants related to
the private placement and the bank revolving line of credit.
(6) NEW FINANCING
On September 12, 1997 the Company completed a private placement financing
totaling $1,650,000 with two U.S.-based institutional investors to provide funds
for general working capital requirements. The private placement provides for an
investment of up to $1,485,000 of three-year 10 percent junior subordinated
debentures and $165,000 of three-year 10 percent redeemable preferred stock. In
connection with the financing, the Company has agreed to issue to the investors
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warrants for up to 1,442,000 shares of its common stock, of which 300,000 shares
are subject to call provisions. These call provisions permit the Company at any
time up to 90 days after all of its obligations under the debentures are fully
paid to purchase from the investors up to 300,000 shares of the warrant shares,
at $3.00 per share, or if the warrants have not been exercised, to repurchase
such unexercised warrants subject to call at $3.00 per warrant share less the
per share exercise price.
As of December 15, 1997 the Company had received cash of $985,000 of the
total subordinated debenture financing facility, with $500,000 still available
to fund the Company's operating needs. The remaining $150,000 of the private
placement facility represents the refinancing of previously issued subordinated
notes payable by the Company which were purchased by one of the institutional
investors in June 1997. Additionally, the Company issued to the investors
warrants for 1,004,641 shares of its common stock, of which 209,010 shares are
subject to the above call provisions. Warrants to purchase an additional
437,359 shares, of which 90,990 will be subject to call, will be issued to the
investors when the balance of the financing is funded.
The warrants issued in conjunction with this financing are exercisable at
any time prior to the later of the date which is (i) three years after the
obligations under the debentures are satisfied in full, or (ii) 6 years from the
date of issuance, at a price equal to the average trading price of the Company's
common stock over the 90-day period commencing December 13, 1997.
As a condition to the financing, one of the investors requested that the
Company's Board of Directors participate in the financing. On November 5, 1997,
four members of the Company's Board of Directors executed a participation
agreement with such investor for an amount up to $335,000.
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-month period ended October 31, 1997 with the operations for the
three-month period ended October 31, 1996, as shown by the unaudited condensed
consolidated statements of income included in this quarterly report.
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RESULTS OF OPERATIONS
Sales decreased by approximately $1,511,000, or 16%, for the fiscal quarter
ended October 31, 1997 compared to the fiscal quarter ended October 31, 1996.
This decrease was primarily due to decreased demand for Satellite Master Antenna
Television (SMATV) products in the Middle East, an industry-wide downturn in
demand for single channel pay TV decoders, partially offset by sales of the
Company's new high pass filter used in two-way interactive communications
systems, and the temporary impact of the closure of the Company's Hong Kong
subsidiary. Management believes that shipments of the new high pass filter will
remain strong throughout fiscal year 1998. In November, 1997 the Company reached
an agreement with a Far East distributor to sell products in China, Honk Kong,
and Southeast Asia. Management believes sales in China, Honk Kong, and
Southeast Asia will increase during the remainder of fiscal year as a result of
this agreement.
Cost of sales decreased by approximately $1,417,000, or 19%, for the fiscal
quarter ended October 31, 1997 compared with the fiscal quarter ended October
31, 1996. Cost of sales as a percentage of sales decreased by 4% (from 76% to
72%) for the fiscal quarter ended October 31, 1997 versus the same fiscal
quarter in the previous year. The dollar decrease in cost of sales was
primarily attributable to the decrease in sales volume. The decrease in cost of
sales as a percentage of sales was primarily due to better exchange rates with
the Company's Taiwanese vendors and the decrease in sales of high cost products
through the Company's Hong Kong subsidiary.
Selling and administrative expenses decreased by approximately $221,000, or 11%,
for the fiscal quarter ended October 31, 1997 compared to the fiscal quarter
ended October 31, 1996. The primary reason for the decrease in selling and
administrative expenses was the closure the Company's Hong Kong subsidiary in
the fourth quarter of fiscal year 1997.
Interest expense increased by approximately $228,000, or 95%, for the fiscal
quarter ended October 31, 1997 compared with the fiscal quarter ended October
31, 1996. The increase was primarily due to the interest on the financing
completed in November 1996 and September 1997.
No provision for U.S. Federal and state regular income taxes or foreign income
taxes has been recorded for the three-month periods ended October 31, 1997 and
1996 due to the Company's U.S. Federal, state, and foreign net operating loss
carryforward positions and a tax holiday granted to one of the Company's foreign
subsidiaries. However, a provision for U.S. Federal and state alternative
minimum
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tax has been recorded for the three-month period ended October 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
As of October 31, 1997, the Company had working capital of approximately
$4,229,000 and a ratio of current assets to current liabilities of approximately
1.34:1, compared with working capital of approximately $3,362,000 and a ratio of
1.23:1 as of July 31, 1997. The increase in working capital was primarily due to
the private placement in September 1997(as described below).
During the fiscal quarters ended October 31, 1997 and 1996, cash used for
capital expenditures was approximately $32,000 and $91,000 respectively.
Capital expenditures for the remainder of fiscal year 1998 are expected to be
under $500,000.
Pico Macom has an $11,000,000 revolving bank line of credit which is secured by
substantially all of Pico Macom's assets, including all trade accounts
receivable and inventories. The line provides for interest at the prime rate
(8.25% at October 31, 1997) plus 1.25%. The revolving line of credit is used to
fund operating expenses, product purchases and letters of credit for import
purchases. The line has a $1,500,000 sublimit for outstanding letters of
credit. The amount available to borrow at any one time is based upon various
percentages of eligible accounts receivable and eligible inventories as defined
in the agreement, which is subject to review and renewal on December 31, 1998.
The credit facility is subject to certain financial tests and covenants. At
October 31, 1997, Pico Macom had approximately $8,307,000 in revolving loans
outstanding and approximately $4,500 in letters of credit outstanding, and the
unused portion of the borrowing base was approximately $309,000.
On September 12, 1997 the Company completed a private placement financing
totaling $1,650,000 with two U.S.-based institutional investors to provide funds
for general working capital requirements. The private placement provides for an
investment of up to $1,485,000 of three-year 10 percent junior subordinated
debentures and $165,000 of three-year 10 percent redeemable preferred stock. In
connection with the financing, the Company has agreed to issue to the investors
warrants for up to 1,442,000 shares of its common stock, of which 300,000 shares
are subject to call provisions. These call provisions permit the Company at any
time up to 90 days after all of its obligations under the debentures are fully
paid to purchase from the investors up to 300,000 shares of the warrant shares,
at $3.00 per share, or if the warrants have not been exercised, to repurchase
such unexercised warrants subject to call at $3.00 per share less the per share
exercise price.
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As of December 15, 1997 the Company had received cash of $985,000 of the total
subordinated debenture financing facility, with $500,000 still available to fund
the Company's operating needs. The remaining $150,000 of the private placement
facility represents the refinancing of previously issued subordinated notes
payable by the Company which were purchased by one of the institutional
investors in June 1997. Additionally, the Company issued to the investors
warrants for 1,004,641 shares of its common stock, of which 209,010 shares are
subject to the above call provisions. Warrants to purchase an additional
437,359 shares, of which 90,990 will be subject to call, will be issued to the
investors when the balance of the financing is funded.
The warrants issued in conjunction with this financing are exercisable at any
time prior to the later of the date which is (i) three years after the
obligations under the debentures are satisfied in full, or (ii) 6 years from the
date of issuance, at a price equal to the average trading price of the Company's
common stock over the 90-day period commencing December 13, 1997.
As a condition to the financing, one of the investors requested that the
Company's Board of Directors participate in the financing. On November 5, 1997,
four members of the Company's Board of Directors executed a participation
agreement with such investor for an amount up to $335,000.
Profitability of operations is subject to various uncertainties including
general economic conditions and the actions of actual or potential competitors
and customers. The Company's future depends on the growth of the cable TV
market in the United States and internationally. In the United States, a number
of factors could affect the future profitability of the Company, including
changes in the regulatory climate for cable TV, changes in the competitive
structure of the cable and telecommunications industries or changes in the
technology base of the industry. Internationally, the Company's profitability
depends on its ability to penetrate new markets in the face of competition from
other United States and foreign companies.
FORWARD LOOKING STATEMENTS
Statements which are not historical facts, including statements about our
confidence, strategies and expectations, technologies and opportunities,
industry and market segment growth, demand and acceptance of new and existing
products, and return on investments in products and markets, are forward looking
statements that involve risks and uncertainties, including without limitation,
the effect of general economic and market conditions, industry market conditions
caused by changes in the supply and demand for our products, the continuing
strength of the markets we serve, competitor pricing, maintenance of our current
momentum and other factors.
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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Incorporated by reference from financial statement footnote number 4 of Part I.
ITEM 2. CHANGES IN SECURITIES
As discussed in Management's Discussion and Analysis of Financial Condition and
Results of Operations, on September 12, 1997 the Company and certain of its
subsidiaries issued (i) subordinated debentures to Allied Capital Corporation
and certain of its affiliates ("Allied") in exchange for Allied's commitment to
lend the Company $1,485,000 ($985,000 of which has been advanced) and (ii)
preferred stock to Sinkler Corporation ("Sinkler") for $165,000. In connection
with the issuance of the subordinated notes and preferred stock, the Company
issued warrants to purchase 860,441 and 144,200 shares of common stock to Allied
and Sinkler, respectively. Warrants to purchase an additional 437,359 shares
will be issued to Allied on a pro rata basis as the balance of the loan
commitment is advanced to the Company. The warrants may be exercised at any
time prior to the later of (i) three years after the obligations under the
debentures are satisfied in full, or (ii) six years from the date of issuance.
The exercise price of the warrants is equal to the average closing price for the
90 calendar days commencing December 13, 1997. Certain of the warrants (or the
shares issued upon exercise of the warrants) are subject to call by the Company
at a price per share equal to $3.00 less the exercise price per share (or for
shares that have been issued, $3.00 per share). No underwriters were involved
in the placement of the foregoing securities and no underwriting discounts or
commissions were paid in connection therewith. An investment banking fee of
approximately $38,000 was paid in connection with the placement of the foregoing
securities. The Company believes that the issuance of the foregoing securities
is exempt from registration under the Securities Act of 1933, as amended, by
virtue of the exemption provided by Section 4(2) thereof for transactions not
involving a public offering. The debentures, preferred stock and warrants were
issued pursuant to the terms of agreements which contain various financial and
other covenants. These agreements prohibit the distribution of cash, stock or
other property to shareholders (whether characterized as dividends or otherwise)
or the redemption or repurchase of the Company's capital stock or similar
securities, subject to limited exceptions.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits: (Note - A Key To Index of Exhibits Incorporated By Reference is
provided at the end of this Item 6.)
3(a)k Restated Certificate of Incorporation of the Company, as filed on
September 5, 1997.
3(b)c By-Laws of the Company, as amended on December 17, 1987.
4(a)b 1981 Non-Qualified Stock Option Plan
4(b)a 1982 Incentive Stock Option Plan
4(c)d 1992 Incentive Stock Plan
4(d)e Warrant Certificates issued to Scimitar Development Capital Fund
and Scimitar Development Capital "B" Fund, dated February 10,
1993.
4(e)f Warrant Certificate issued to City National Bank, dated February
10, 1993.
4(f)g Amendment to 1992 Incentive Stock Plan.
4(g)h Amendment to 1981 Non-Qualified Stock Option Plan.
4(h)i Investment Agreement between the Company and certain of its
subsidiaries, and Allied Capital Corporation and certain of its
affiliated companies, dated November 21, 1996.
16
<PAGE>
4(i)i Subordinated Secured Debenture issued by the Company and certain
of its subsidiaries, payable to Allied Capital Corporation, dated
November 21, 1996. The Company has issued subordinated secured
debentures in substantially the same form as this debenture to
the following parties for the following amounts:
Holder Amount
------------------------------ ---------------
Allied Investment Corporation $2,300,000
Allied Investment Corporation II $1,450,000
Allied Capital Corporation II $ 550,000
4(j)i Letter Agreement covering the issuance and sale by the Company of
Preferred Stock to The Sinkler Corporation, dated November 21,
1996.
4(k)i Stock Purchase Warrant issued by the Company to Allied Capital
Corporation, dated November 21, 1996. The Company has issued
warrants in substantially the same form as this warrant to the
following parties for the following number of shares:
Holder Shares
---------------------------------- ------------
Allied Investment Corporation 358,484
Allied Investment Corporation II 226,001
Allied Capital Corporation II 85,724
The Sinkler Corporation 155,863
Shipley Raidy Capital Partners, LP 20,000
4(l)i Stock Purchase Warrant issued by the Company to Allied Capital
Corporation, dated November 21, 1996. The Company has issued
warrants in substantially the same form as this warrant to the
following parties for the following percentage of shares:
Percentage of
Holder Shares
------------------------------ ---------------
Allied Investment Corporation 6.9%
Allied Investment Corporation II 4.35%
Allied Capital Corporation II 1.65%
The Sinkler Corporation 3.0%
17
<PAGE>
4(m)i Registration Rights Agreement between the Company, Allied Capital
Corporation and certain of its affiliated companies, Scimitar
Development Capital Fund and Scimitar Development Capital "B"
Fund, Shipley Raidy Capital Partners, LP, and The Sinkler
Corporation, dated November 21,1996.
4(n)j Amended and Restated 1996 Incentive Stock Plan.
4(o)k Investment Agreement between the Company and certain of its
subsidiaries, and Allied Capital Corporation and certain of its
affiliated companies, dated September 12, 1997.
4(p)k Junior Subordinated Secured Debenture issued by the Company and
certain of its subsidiaries, payable to Allied Capital
Corporation, dated September 12, 1997. The Company has issued
junior subordinated secured debentures in substantially the same
form as this debenture to the following parties for the following
amounts:
Holder Amount
----------------------------- -------------
Allied Investment Corporation $374,300
Allied Capital Corporation II $394,000
4(q)k Letter Agreement covering the issuance and sale by the Company of
Preferred Stock and issuance of warrants to purchase shares of
Common Stock to The Sinkler Company, dated September 12, 1997.
4(r)k Stock Purchase Warrant issued by the Company to Allied Capital
Corporation, dated September 12, 1997. The Company has issued
warrants in substantially the same form as this warrant to the
following parties for the following number of shares:
Holder Shares
----------------------------- -------------
Allied Investment Corporation 258,944
Allied Capital Corporation II 272,572
The Sinkler Corporation 114,200
18
<PAGE>
4(s)k Stock Purchase Warrant -- Subject to Call issued by the Company
to Allied Capital Corporation, dated September 12, 1997. The
Company has issued warrants in substantially the same form as
this warrant to the following parties for the following number of
shares:
Holder Shares
----------------------------- --------------
Allied Investment Corporation 68,024
Allied Capital Corporation II 71,604
The Sinkler Corporation 30,000
4(t)k First Amendment to Investment Agreement between the Company and
Allied Capital Corporation and certain of its affiliated
companies (original agreement dated November 21, 1996) -
amendment dated September 12, 1997.
10(q) Amendment No. 5 to the Loan and Security Agreement between Pico
Macom, Inc. and HSBC Business Loans, Inc., as successor to Marine
Midland Business Loans, Inc., dated May 25, 1994 -- Amendment
dated October 31, 1997.
11.1 Computation of Per Share Earnings.
27 Financial Data Schedule (included only in the EDGAR filing).
(b) Reports on Form 8-K:
None.
19
<PAGE>
KEY TO INDEX OF EXHIBITS INCORPORATED BY REFERENCE
a Previously filed by the Company as an exhibit to the Company's Registration
Statement on Form S-1, File No. 2-77439 and incorporated by reference.
b Previously filed by the Company as an exhibit to the Company's Registration
Statement on Form S-18, File No. 2-72318 and incorporated by reference.
c Previously filed by the Company as an exhibit to the Company's Form 10-K
for the fiscal year ended July 31, 1988 and incorporated by reference.
d Previously filed by the Company as an exhibit to the Company's Form 10-Q
for the fiscal quarter ended January 31, 1993 and incorporated by
reference.
e Previously filed as exhibits to Schedule 13D, dated February 16, 1993,
filed by Standard Chartered Equitor Trustee CI Limited, Scimitar
Development Capital Fund and Scimitar Development Capital "B" Fund, and
incorporated by reference.
f Previously filed by the Company as an exhibit to the Company's Form 10-K
for the fiscal year ended July 31, 1993 and incorporated by reference.
g Previously filed by the Company as an exhibit to the Company's Form 10-K
for the fiscal year ended July 31, 1994 and incorporated by reference.
h Previously filed by the Company as an exhibit to the Company's Form 10-Q
for the fiscal quarter ended January 31, 1996 and incorporated by
reference.
i Previously filed by the Company as an exhibit to the Company's Form 10-Q
for the fiscal quarter ended October 31, 1996 and incorporated by
reference.
j Previously filed as an appendix to the Company's definitive proxy statement
dated December 4, 1996 and incorporated by reference.
k Previously filed by the Company as an exhibit to the Company's Form 10-K
for the fiscal year ended July 31, 1997 and incorporated by reference.
Copies of all exhibits incorporated by reference are available at no charge
by written request to Assistant Corporate Secretary, Pico Products, Inc.,
12500 Foothill Blvd., Lakeview Terrace, California 91342.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PICO PRODUCTS, INC.
DATE: December 15, 1997 /s/ Todd Fraser
--------------------------------------
Corporate Controller
Principal Accounting Officer
DATE: December 15, 1997 /s/Charles G. Emley, Jr.
---------------------------------------
Chairman and Chief Executive Officer
Principal Financial Officer
21
<PAGE>
INDEX TO EXHIBITS FILED
10(q) Amendment No. 5 to the Loan and Security Agreement between Pico
Macom, Inc. and HSBC Business Loans, Inc., as successor to Marine
Midland Business Loans, Inc., dated May 25, 1994 -- Amendment
dated October 31, 1997.
11.1 Computation of Per Share Earnings.
27 Financial Data Schedule (included only in the EDGAR filing).
22
<PAGE>
EXHIBIT 10(Q)
AMENDMENT NO. 5
TO LOAN AND SECURITY AGREEMENT
This Amendment dated as of OCTOBER 31, 1997, is entered into by and between
Pico Macom, Inc., a Delaware corporation ("Debtor"), and HSBC Business Loans,
Inc., a Delaware corporation, as successor to Marine Midland Business Loans,
Inc. ("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. 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 $3,000,000.00 as of the end
of each fiscal quarter ending on or after October 31, 1997;
(b) Working Capital Ratio of not less than 1.20:1 as of the end of
each fiscal quarter ending on or after October 31, 1997;
(c) Tangible Net Worth of not less than $3,500,000.00 as of the end
of each fiscal
23
<PAGE>
quarter ending on or after October 31, 1997;
(d) Debt to Tangible Net Worth ratio of not more than 4.5:1 as of the
end of each fiscal quarter ending on or after October 31, 1997;
and
(e) Net Income Before Taxes of not less than $750,000.00 during each
fiscal year ending on or after July 31, 1998.
3. AMENDMENT FEE. In consideration of this Amendment,
Debtor shall pay Secured Party an amendment fee equal to $1,500.00
upon the effectiveness hereof.
4. 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
unwaived 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.
5. 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.
24
<PAGE>
6. 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.
7. 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 law of the State of California.
8. CONDITIONS PRECEDENT. This Amendment shall become effective if, and
only if, Secured Party shall have received a counterpart of this Amendment duly
executed by Debtor and acknowledged by the guarantor indicated hereinbelow, and
a Subordination Agreement duly executed by Pico Macom, Pico Macom Taiwan ' Pico
CATV Division, Pico St. Kitts, Pico Products Asia, Pico Bermuda, Pico Siam, Pico
Corporate, Pico St. Vincent and Pico Cargo in form and substance satisfactory to
Secured Party, together with such other documents, instruments or agreements as
Secured Party or its legal counsel may reasonably request, all on or before
November 12, 1997.
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/ Jack Brucker
------------------------------
Name Jack Brucker
------------------------------
Title Executive Vice President,
------------------------------
Finance and Administration
------------------------------
HSBC BUSINESS LOANS, INC.
By /s/ William Field
------------------------------
Name William Field
------------------------------
Title Vice President
------------------------------
25
<PAGE>
CONSENT OF GUARANTOR
The undersigned, as guarantor of the Indebtedness of Pico Macom, Inc. to HSBC
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. 5 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. 5 and any and all documents executed in
connection therewith shall not alter, amend, reduce or modify its obligations
and liabilities under the Guaranty.
Dated: OCTOBER 31, 1997
PICO PRODUCTS, INC.
By /s/ Jack Brucker
------------------------------
Name Jack Brucker
------------------------------
Title EXECUTIVE VICE PRESIDENT,
------------------------------
FINANCE AND ADMINISTRATION
------------------------------
26
<PAGE>
EXHIBIT 11.1
PICO PRODUCTS, INC.
COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
Three Months
Ended October 31,
-------------------------
1997 1996
-------- -------
NET INCOME (LOSS) ATTRIBUTABLE
TO COMMON STOCK $ ( 29) $ 101
-------- -------
-------- -------
PRIMARY EARNINGS PER SHARE:
Weighted average number of
of common shares outstanding 4,186 4,055
Dilutive effect of stock options
and warrants after application
of treasury stock method - 195
-------- -------
Number of shares used to
compute primary earnings
per share 4,186 4,250
Primary earnings (loss) per share $ (0.01) $ 0.02
-------- -------
-------- -------
FULLY DILUTED EARNINGS PER SHARE:
Weighted average number
of common shares
outstanding 4,186 4,055
Dilutive effect of stock
options and warrants
after application of
treasury stock method - 195
-------- -------
Number of shares used to
compute fully diluted
earnings (loss) per share 4,186 4,250
Fully diluted earnings (loss)
per share $(0.01) $ 0.02
-------- -------
-------- -------
27
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<PAGE>
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<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-START> AUG-01-1997
<PERIOD-END> OCT-31-1997
<EXCHANGE-RATE> 1
<CASH> 19
<SECURITIES> 0
<RECEIVABLES> 4,588
<ALLOWANCES> 200
<INVENTORY> 11,977
<CURRENT-ASSETS> 16,646
<PP&E> 3,291
<DEPRECIATION> 2,362
<TOTAL-ASSETS> 18,648
<CURRENT-LIABILITIES> 12,417
<BONDS> 5,526
1,051
0
<COMMON> 42
<OTHER-SE> (627)
<TOTAL-LIABILITY-AND-EQUITY> 18,648
<SALES> 8,187
<TOTAL-REVENUES> 8,187
<CGS> 5,914
<TOTAL-COSTS> 7,747
<OTHER-EXPENSES> 0
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<INTEREST-EXPENSE> 469
<INCOME-PRETAX> (29)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (29)
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