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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 JANUARY 31 ,1997
---------------------
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
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 February 28, 1997.
Common Stock, $0.01 par value 4,165,246
- ------------------------------ ----------------------
Class Number of Shares
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PICO PRODUCTS, INC.
INDEX
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Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
January 31, 1997 and July 31, 1996 3-4
Condensed Consolidated Statements
of Operations - Three and Six Months
Ended January 31, 1997 and 1996 5
Condensed Consolidated Statements
of Cash Flows - Six Months Ended
January 31, 1997 and 1996 6
Notes to Condensed Consolidated Financial
Statements 7-10
Item 2. Management's Discussion and Analysis
of Results of Operations and Financial
Condition 11-15
PART II OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 4. Submission of Matters to a Vote of
Security Holders 16
Item 6. Exhibits and Reports on Form 8-K 16-19
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PICO PRODUCTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
January 31, July 31,
1997 1996
----------- ------------
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents $ 51,764 $ 159,669
Accounts receivable (less allowance
for doubtful accounts: January 31,
1997, $ 250,000; July 31, 1996,
$200,000) 5,504,376 5,289,288
Inventories (Note 2) 15,063,892 10,933,244
Prepaid expenses and other current
assets 477,152 191,215
----------- ------------
TOTAL CURRENT ASSETS 21,097,184 16,573,416
----------- ------------
PROPERTY, PLANT AND EQUIPMENT:
Buildings 217,255 217,255
Leasehold improvements 345,136 345,136
Machinery and equipment 2,854,123 2,637,609
----------- ------------
3,416,514 3,200,000
Less accumulated depreciation
and amortization 2,518,834 2,393,995
----------- ------------
897,680 806,005
----------- ------------
OTHER ASSETS:
Patents and licenses (less accumulated
amortization: January 31, 1997,
$ 65,168; July 31, 1996, $62,180) 156,042 159,030
Excess of cost over net assets of
businesses acquired (less accumulated
amortization: January 31, 1997,
$ 381,450; July 31, 1996, $366,930) 195,985 210,505
Deposits and other noncurrent assets 657,641 195,582
----------- ------------
1,009,668 565,117
----------- ------------
$23,004,532 $17,944,538
----------- ------------
----------- ------------
See notes to condensed consolidated financial statements.
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PICO PRODUCTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(continued)
(Unaudited)
January 31, July 31,
1997 1996
------------ -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Notes payable (Notes 5 & 6) $ 8,429,298 $ 8,227,776
Current portion of long-term debt 314,242 311,086
Accounts payable 3,092,524 3,921,081
Accrued expenses:
Legal and accounting 117,323 170,497
Payroll and payroll taxes 470,040 506,742
Other accrued liabilities 265,978 312,193
------------ -----------
TOTAL CURRENT LIABILITIES 12,689,405 13,449,375
------------ -----------
LONG-TERM DEBT (Note 6) 4,246,417 39,414
------------ -----------
COMMITMENTS AND CONTINGENCIES (Note 4) - -
REDEEMABLE PREFERRED STOCK, $.01 par
value; authorized 500,000 shares;
issued and outstanding 1,000 shares
at January 31, 1997 and -0- shares
at July 31, 1996 (Note 6) 839,587 -
SHAREHOLDERS' EQUITY (Notes 6 and 7):
Common shares, $.01 par value;
authorized 15,000,000 shares;
issued and outstanding 4,065,246
shares at January 31, 1997 and
4,052,246 shares at July 31, 1996 40,652 40,522
Additional paid-in capital 23,054,795 22,035,178
Stock subscriptions receivable (115,000) (115,000)
Accumulated deficit (17,659,139) (17,409,924)
Cumulative translation adjustment ( 92,185) (95,027)
------------ -----------
TOTAL SHAREHOLDERS' EQUITY 5,229,123 4,455,749
------------ -----------
$23,004,532 $17,944,538
------------ -----------
------------ -----------
See notes to condensed consolidated financial statements.
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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,
------------------------------ -------------------------------
1997 1996 1997 1996
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
SALES $8,867,254 $8,486,258 $18,565,442 $16,860,220
COSTS AND EXPENSES:
Cost of sales 6,701,854 6,364,732 14,031,926 12,609,997
Selling and administrative
expenses 2,177,345 1,985,431 4,207,367 3,886,193
---------- ---------- ----------- -----------
TOTAL COSTS AND EXPENSES 8,879,199 8,350,163 18,239,293 16,496,190
---------- ---------- ----------- -----------
INCOME (LOSS) FROM OPERATIONS (11,945) 136,095 326,149 364,030
INTEREST INCOME 3,834 3,081 7,668 4,890
INTEREST EXPENSE (317,624) (238,462) (558,699) (466,149)
---------- ---------- ----------- -----------
INCOME (LOSS) BEFORE
INCOME TAXES (325,735) (99,286) (224,882) (97,229)
---------- ---------- ----------- -----------
INCOME TAX PROVISION
(Note 3) - - - -
---------- ---------- ----------- -----------
NET INCOME (LOSS) (325,735) (99,286) (224,882) (97,229)
---------- ---------- ----------- -----------
DIVIDENDS ON PREFERRED STOCK 24,333 - 24,333 -
---------- ---------- ----------- -----------
NET INCOME (LOSS)
ATTRIBUTABLE TO
COMMON STOCK $ (350,068) $ (99,286) $ (249,215) $ (97,229)
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
NET INCOME (LOSS) PER
COMMON AND COMMON
EQUIVALENT SHARE:
Primary $ (0.09) $ (0.03) $ (0.06) $ (0.03)
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
Fully diluted $ (0.09) $ (0.03) $ (0.06) $ (0.03)
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
WEIGHTED AVERAGE COMMON
AND EQUIVALENT SHARES
OUTSTANDING:
Primary 4,062,637 3,684,746 4,058,632 3,668,266
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
Fully diluted 4,062,637 3,684,746 4,058,632 3,668,266
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
</TABLE>
See notes to condensed consolidated financial statements.
5
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PICO PRODUCTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
January 31,
------------------------------
1997 1996
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income(loss) $ (224,882) $ (97,229)
Adjustments to reconcile net income
(loss) to net cash used in
operating activities:
Depreciation and amortization 199,799 176,248
Changes in operating assets
and liabilities (5,622,743) (1,173,532)
---------- ----------
NET CASH USED IN
OPERATING ACTIVITIES (5,647,826) (1,094,513)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (159,620) (180,024)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under a
line of credit agreement 201,522 1,269,064
Issuance of long-term debt (Note 6) 5,000,000 -
Issuance of preferred stock(Note 6) 1,000,000 -
Private placement financing expenses(Note 6) (449,613) -
Principal payments on long-term debt (54,168) (62,341)
Proceeds from exercise of stock options 15,800 20,125
Dividends paid on preferred stock 14,000 -
---------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 5,699,541 1,226,848
---------- ----------
NET DECREASE IN CASH
AND CASH EQUIVALENTS (107,905) ( 47,689)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 159,669 501,525
---------- ----------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 51,764 $ 453,836
---------- ----------
---------- ----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
During the six month periods ended January 31, 1997 and 1996 the Company
financed the purchase of office and test lab equipment totaling approximately
$87,000 and $62,000, respectively.
See notes to condensed consolidated financial statements.
6
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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 January 31,
1997, and the results of its operations and its cash flows for the three and
six-month periods ended January 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 the financial statements and
related
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notes contained in the Company's Annual Report on Form 10-K for the fiscal year
ended July 31, 1996.
The results of operations for the interim periods shown in this Report are not
necessarily indicative of the results to be expected for the fiscal year.
(2) INVENTORIES
The composition of inventories was as follows:
January 31, July 31,
1997 1996
------------ ------------
Raw materials $5,232,611 $ 3,485,548
Work in process 823,188 636,072
Finished goods 9,008,093 6,811,624
------------ ------------
$15,063,892 $10,933,244
------------ ------------
------------ ------------
(3) INCOME TAXES
No provision for U.S. Federal and state regular income taxes or foreign income
taxes has been recorded for the three and six-month periods ended January 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.
(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.
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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.
OTHER
The Company is involved, from time to time, in certain other legal actions
arising in the normal course of business. Management believes that the outcome
of other litigation will not have a material adverse effect on the Company's
consolidated financial statements.
(5) DEBT COVENANT VIOLATION AND NEW DEBT COVENANTS
At October 31, 1996, the Company was in technical violation of several financial
covenants relating to Pico Macom's bank revolving line of credit. These
covenants restrict the maximum advances to affiliates by Pico Macom and limit
certain financial ratios. Pico Macom's bank issued a waiver of these
violations effective October 31, 1996. All other covenants relating to this
line of credit were met as of October 31, 1996.
As described below, subsequent to October 31, 1996, the Company completed a
private placement financing. The financing agreements require the Company to
meet certain financial covenants which are very similar to the financial
covenants relating to Pico Macom's bank revolving line of credit. Additionally,
these new agreements prohibit the distribution of cash, stock or other property
to shareholders (whether characterized as dividends or otherwise) or the
redemption or repurchase of the Company's capital stock or similar securities,
subject to limited exceptions. At January 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 November 21, 1996 the Company completed a private placement financing
totaling $6 million with two institutional investors. The
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private placement consisted of $5 million of seven-year 12 percent subordinated
debentures and $1 million of seven-year 12 percent redeemable preferred stock.
In connection with the financing, the Company issued warrants to the investors
and to the Company's investment banker for 955,176 shares of its common stock.
These warrants are exercisable no later than 10 years from the date of issuance,
at a price of $1.81 per share.
Additionally, the Company issued warrants to the investors providing for the
purchase, in the aggregate, of up to 18% of the number of shares of the
Company's common stock resulting from the exercise from time-to-time by holders
of options and warrants previously granted by the Company. These contingent
warrants are exercisable no later than 10 years from the date of issuance, at a
price of $1.81 per share.
The Company has preliminarily measured the fair value of the warrants issued in
connection with the financing. This value has been allocated as a discount
applied against the related long-term debt and preferred stock and will be
amortized over the seven-year term of the debt and preferred stock.
(7) DEBT CONVERSION TO EQUITY
In February 1993, the Company completed private placement financings totaling
$1,000,000. The financings consisted of three notes. The first note for
$500,000 was paid in full in May 1994. The second and third notes totaling
$500,000 provided for interest at 8% and were payable in two equal installments
in February 1996 and in February 1997. In connection with the financings, the
Company issued warrants for 425,000 shares of its common stock, exercisable
through fiscal year 1998 at $1.00 per share.
In February 1996, the Company was notified by the holders of the two outstanding
notes payable that they intended to exercise 250,000 warrants to purchase common
stock of the Company as an offset against the first $250,000 installment payment
due on the debt. This transaction was completed in March 1996.
On February 7, 1997, the Company was notified by the holders of the two
outstanding notes payable that they intended to exercise their remaining 100,000
warrants to purchase common stock of the Company as a partial offset against the
final $250,000 installment payment due on the debt. This transaction was
completed in February 1997.
The holder of the two outstanding notes payable has agreed to defer the
remaining $150,000 payment due on the debt until May 1997. This debt will
accrue interest at an increased annual rate of 12.25% until the debt is paid in
full.
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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, 1997 with the operations for the three
and six-month periods ended January 31, 1996, as shown by the unaudited
condensed consolidated statements of operations included in this quarterly
report.
RESULTS OF OPERATIONS
Sales increased by approximately $1,705,000, or 10%, for the six months ended
January 31, 1997 compared with the six months ended January 31, 1996, and sales
increased by approximately $381,000, or 5%, for the fiscal quarter ended January
31, 1997 compared to the same period in the previous fiscal year. The Company's
Pico Macom subsidiary recorded sales increases of approximately $1,800,000 (or
14%) and $841,000 (or 13%), respectively, for the six and three month periods
ended January 31, 1997 compared to the same periods in the previous fiscal year.
These increases were primarily due to continued demand for Satellite Master
Antenna Television (SMATV) products in South America and the Middle East. The
Company's CATV division recorded sales decreases of approximately $343,000 (or
11%) and $561,000 (or 36%), respectively, for the six and three month periods
ended January 31, 1997 compared to the same periods in the pervious fiscal year.
These decreases were primarily due to an industry-wide downturn in demand for
single channel pay TV decoders. However, during the second quarter of the
current fiscal year the Company began shipments of a new high pass filter used
in two-way interactive communications systems. The Company's Hong Kong
subsidiary recorded sales increases of approximately $292,000 (or 74%) and
$108,000 (or 50%), respectively, for the six and three month periods ended
January 31, 1997 compared to the same periods in the previous fiscal year.
These increases were primarily due to increased sales of lower margin
third-party products and marketing efforts in China, Hong Kong and Southeast
Asia.
Although total sales increased for both the six and three month periods, sales
were substantially below the Company's targeted sales levels. This shortfall
has resulted in an inventory buildup at January 31, 1997 which management is
addressing through an expansion of its sales and marketing efforts and an
aggressive inventory reduction program. Management believes that the Company's
overall sales during the remainder of fiscal year 1997 will show a slight
improvement over the same period of the prior fiscal year due to increased
availability of existing products, the introduction of new products, and the
impact of increased sales and marketing efforts.
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Cost of sales increased by approximately $1,422,000, or 11%, for the six months
ended January 31, 1997 compared with the six months ended January 31, 1996, and
the cost of sales increased by $337,000, or 5%, for the fiscal quarter ended
January 31, 1997 compared with the same fiscal quarter in the previous year.
Cost of sales as a percentage of sales increased by 1% (from 75% to 76%) for the
six and three month periods ended January 31, 1997 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% increase in cost of sales
as a percentage of sales was primarily due to the lower margins generated by the
sales for third-party products by the Company's Hong Kong subsidiary, price
competition which has resulted in price reductions for some of the Company's
products, under-absorption of overhead as a result of reduced single channel
trap sales, and startup costs related to initial manufacturing of some of the
Company's new products.
Selling and administrative expenses increased by approximately $321,000, or 8%,
for the six months ended January 31, 1997 compared to the six months ended
January 31, 1996, and increased by approximately $192,000, or 10%, for the
fiscal quarter ended January 31, 1997 compared to the same fiscal quarter of the
previous year. The primary reason for the increases in selling and
administrative expenses were continuing expenditures related to development of
new markets in Asia, South America and the Middle East.
Interest expense increased by approximately $ 93,000, or 20%, for the six months
ended January 31, 1997 compared with the six months ended January 31, 1996, and
the interest expense increased by approximately $79,000, or 33%, for the fiscal
quarter ended January 31, 1997 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 increased working
capital levels. Working capital is higher than planned due to the Company's
sales being substantially below targeted levels during the six months ended
January 31, 1997, thus resulting in an inventory buildup. Additionally,
interest increased during the fiscal quarter ended January 31, 1997 due to the
higher interest rates on the $5 million subordinated debt financing completed in
November 1996.
No provision for U.S. Federal and state income taxes or foreign income taxes has
been recorded for the three and six-month periods ended January 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.
The Company recorded a net loss in the three-month period ended January 31, 1997
of approximately $326,000. Return to profitability is contingent upon a
resurgence of demand for the Company's products
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coupled with an effective inventory reduction program to bring stocking levels
in line with Company requirements.
LIQUIDITY AND CAPITAL RESOURCES
As of January 31, 1997, the Company had working capital of approximately
$8,408,000 and a ratio of current assets to current liabilities of approximately
1.66 to 1, compared with working capital of approximately $3,124,000 and a ratio
of approximately 1.23 to 1 as of July 31, 1996. The increase in working capital
was primarily due to the $6 million private placement in November 1996
(long-term financing described below). During the six-month period ended
January 31, 1997, the Company recorded negative cash flow from operating
activities primarily as a result of increased inventory purchases to support the
Company's targeted sales levels.
During the six-month period ended January 31, 1997 and 1996, cash used for
capital expenditures was approximately $160,000 and $180,000, respectively.
Capital expenditures for the remainder of fiscal year 1997 are expected to be
under $500,000.
Pico Macom, Inc. ("Pico Macom"), a wholly-owned subsidiary of the Company, 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 January
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, 1997.
The credit facility is subject to certain financial tests and covenants. At
January 31, 1997, Pico Macom had approximately $8,429,000 in revolving loans
outstanding and approximately $30,000 in letters of credit outstanding, and the
unused portion of the borrowing base was approximately $1,018,000.
At October 31, 1996, the Company was in technical violation of several financial
covenants relating to Pico Macom's bank revolving line of credit. These
covenants restrict the maximum advances to affiliates by Pico Macom and limit
certain financial ratios. Pico Macom's bank issued a waiver of these
violations effective October 31, 1996. All other covenants relating to this
line of credit were met as of October 31, 1996.
As described below, subsequent to October 31, 1996, the Company completed a
private placement financing. The financing agreements require the Company to
meet certain financial covenants which are very similar to the financial
covenants relating to Pico Macom's
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bank revolving line of credit. Additionally, these new agreements prohibit the
distribution of cash, stock or other property to shareholders (whether
characterized as dividends or otherwise) or the redemption or repurchase of the
Company's capital stock or similar securities, subject to limited exceptions.
At January 31, 1997, the Company was in compliance with all financial covenants
related to the private placement and the bank revolving line of credit.
During the second half of fiscal year 1996, management determined that the
Company's credit arrangements, along with an inventory reduction program
implemented by the Company, would not provide
sufficient cash to fund growth in the Company's sales and planned operations for
fiscal year 1997 and beyond. Consequently, on November 21, 1996, the Company
completed a private placement financing totaling $6 million with two
institutional investors to provide funds for general working capital
requirements and investment in new product development, market development, and
upgrade of facilities. The private placement consisted of $5 million of
seven-year 12 percent subordinated debentures sold to Allied Capital Corporation
of Washington, D.C. and certain of its affiliates, and $1 million of seven-year
12 percent redeemable preferred stock sold to The Sinkler Corporation of
Wilmington, Delaware. In connection with the financing, Allied Capital
Corporation and affiliates received warrants to purchase 779,313 shares of the
Company's common stock, The Sinkler Corporation received warrants to purchase
155,863 shares of the Company's common stock, and Shipley Raidy Capital
Partners, LP, the Company's investment banker, received warrants to purchase
20,000 shares of the Company's common stock. Additionally, Allied Capital
Corporation and affiliates and The Sinkler Corporation received warrants to
purchase, in the aggregate, up to 18% of the number of shares of the Company's
common stock resulting from the exercise from time to time by holders of options
and warrants previously granted by the Company. The warrants are exercisable at
a price of $1.81 per share, the average closing price of the Company's common
stock for the 30 trading days prior to November 21, 1996.
Management 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 and the actions of actual or potential competitors
and customers. The Company's future depends on
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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 the
Company's confidence, strategies and expectations, technologies and
opportunities, industry and market segment growth, demand and acceptance of
new and existing products, and return on investments in products and markets,
are forward looking statements that involve risks and uncertainties,
including without limitation, the effect of general economic and market
conditions, industry market conditions caused by changes in the supply and
demand for the Company's products, the continuing strength of the markets
served by the Company, competitor pricing, maintenance of the Company's
current momentum and other factors.
15
<PAGE>
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Incorporated by reference from financial statement footnote number 4 of Part I.
ITEM 2. CHANGES IN SECURITIES
As discussed in Management's Discussion and Analysis of Financial Condition and
Results of Operations, the Company and certain of its subsidiaries issued
subordinated debentures and preferred stock in the face amounts of $5 million
and $1 million, respectively, on November 21, 1996. The debentures and
the preferred stock were issued pursuant to the terms of agreements which
contain various financial and other covenants. These agreements prohibit the
distribution of cash, stock or other property to shareholders (whether
characterized as dividends or otherwise) or the redemption or repurchase of the
Company's capital stock or similar securities, subject to limited exceptions.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On December 12, 1996, the Company held its 1996 annual meeting of shareholders.
Management's nominees for director were elected by the following votes: Charles
G. Emley, Jr., 2,748,000 (262,607 withheld); David A. Heenan, 2,507,800 (502,807
withheld); Everett T. Keech, 1,744,096 (1,266,511 withheld); E.B. Leisenring,
Jr., 2,516,800 (493,807 withheld); Pierson G. Mapes, 2,743,800 (266,807
withheld); William W. Mauritz, 2,501,600 (509,007 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, 1997, was approved
by the following vote: 2,789,392 for; 100,815 against; and 120,400 abstentions.
Management's proposal to adopt the Company's 1996 Incentive Stock Plan was
approved by the following vote: 2,104,035 for; 873,847 against; and 32,725
abstentions. There were no broker non-votes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
3(a)i Complete copy of the Certificate of Incorporation of the Company,
as amended on November 19, 1996.
3(b)c By-Laws of the Company, as amended on December 17, 1987.
Note: Key to Index of Exhibits Incorporated by Reference follows this List of
Exhibits.
16
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (CONTINUED).
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.
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:
17
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (CONTINUED).
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(1)i Stock Purchase Warrant issued by the Company to Allied Capital
Corporation, dated November 21, 1996. The Company has issued warrants
in substantially the same form as this warrant to the following
parties for the following percentage of shares:
Percentage of
Holder Shares
------------------------------- ---------------
Allied Investment Corporation 6.9%
Allied Investment Corporation II 4.35%
Allied Capital Corporation II 1.65%
The Sinkler Corporation 3.0%
4(m)i Registration Rights Agreement between the Company, Allied Capital
Corporation and certain of its affiliated companies, Scimitar
Development Capital Fund and Scimitar Development Capital "B"
Fund, Shipley Raidy Capital Partners, LP, and The Sinkler
Corporation, dated November 21, 1996.
4(n)j Amended and Restated 1996 Incentive Stock Plan.
10(s) Employment Agreement between Pico Macom, Inc. and Robert G.
Cunningham, dated December 12, 1996.
11.1 Computation of Per Share Earnings.
27 Financial Data Schedule (included only in the EDGAR filing.)
Note: Key to Index of Exhibits Incorporated by Reference follows this List
of Exhibits.
(b) Reports on Form 8-K:
Current report on Form 8-K dated November 22, 1996.
18
<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 19, 1993,
filed by Standard Chartered Equitor Trustee CI Limited, Scimiter
Development Capital Fund and Scimitar Development Capital "B" Fund, and
incorporated by reference.
f Previously filed by the Company as an exhibit to the Company's Form 10-K
for the fiscal year ended July 31, 1993 and incorporated by reference.
g Previously filed by the Company as an exhibit to the Company's Form 10-K
for the fiscal year ended July 31, 1994 and incorporated by reference.
h Previously filed by the Company as an exhibit to the Company's Form 10-Q
for the fiscal quarter ended January 31, 1996 and incorporated by reference.
i Previously filed by the Company as an exhibit to the Company's Form 10-Q
for the fiscal quarter ended October 31, 1996 and incorporated by
reference.
j Previously filed by the Company as an amendment to the Company's definitive
proxy statement dated December 4, 1996 and incorporated by reference.
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.
19
<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.
REGISTRANT
DATE: March 7, 1997 /s/ Joseph T. Kingsley
----------------------------------------
Senior Vice President of Finance
and Chief Financial Officer
20
<PAGE>
FORM 10-Q
QUARTER ENDED JANUARY 31, 1997
LIST OF NEW EXHIBITS
10(s) Employment Agreement between Pico Macom, Inc. and Robert G.
Cunningham, dated December 12, 1996.
11.1 Computation of Per Share Earnings.
27 Financial Data Schedule (included only in the EDGAR filing).
<PAGE>
EXHIBIT 10(s)
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT (the "Agreement") dated as of December 12, 1996,
between PICO MACOM, INC., a Delaware corporation ("Employer"), and ROBERT G.
CUNNINGHAM ("Employee").
BACKGROUND. Employer desires to employ Employee as its Senior Vice
President, Sales and Marketing, and Employee desires to be so employed, 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 one year (the "Employment Term"). The initial Employment Term
shall commence on the date hereof and shall continue until and end on the first
anniversary date of this Agreement, unless terminated prior thereto in
accordance with Section 7 hereof.
1.2 RENEWAL. This Agreement shall be automatically renewed for
successive one year terms at the expiration of each Employment Term unless
written notice to the contrary is provided by either Employer or Employee at
least sixty days prior to the expiration of such Employment Term.
1.3 DUTIES AND RESPONSIBILITIES.
(a) During the Employment Term, Employee shall serve as Senior
Vice President, Sales and Marketing, of Employer and shall perform all duties
and accept all responsibilities incidental to such position or as may be
assigned to him by the Chief Executive Officer of Employer and Employer's Board
of Directors, and he shall cooperate fully with the Board of Directors and other
executive officers of Employer.
(b) Notwithstanding the provisions of Section 1.3(a) hereof,
Employer's Board of Directors may alter the titles, duties and responsibilities
of Employee as long as Employee is retained in an executive capacity with
Employer.
(c) Employee represents and covenants to Employer that he is
subject to or a party to only those employment agreements, non-competition
covenants and nondisclosure
<PAGE>
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 making
investments in other businesses or enterprises provided that Employee agrees not
to become engaged in any other business activity which may interfere with his
ability to discharge his duties and responsibilities to Employer. Employee
further agrees not to work either on a part time or independent contracting
basis for any other business or enterprise during the Employment Term without
the prior written consent of the Board of Directors of Employer.
1.5 BASE COMPENSATION. For all the services rendered by Employee
hereunder, Employer shall pay Employee an annual salary at the rate of $120,000
for the one-year Employment Term, plus such additional amounts, if any, as may
be approved by 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..
1.6 BENEFITS.
(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.
(b) Employee shall be entitled to all normal and usual benefits
provided by Employer to its employees, including, but not limited to,
participation in profit sharing, disability, health, dental, hospitalization and
retirement plans and such other benefits as the Board of Directors of Employer
may from time to time determine.
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 or Employer's parent, Pico
Products, Inc., a New York corporation ("Products"), with any entity other than
an entity with which Employer or Products 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 or
Products is affiliated at the date of execution of this Agreement, or (iii)
individuals who were members of the Board of Directors of Products on the date
of execution of this Agreement, or the most recent renewal date of this
Agreement if this Agreement has been extended pursuant to Section 1.2, no longer
constitute a majority of the Board of Directors of Products.
2
<PAGE>
(b) In the event of a Change in Control, Employee may elect to
terminate this Agreement for Good Cause. For purposes of this Agreement, "Good
Cause" shall mean:
(i) the assignment to Employee of any duties inconsistent
with his positions, duties, responsibilities and status with Employer as in
effect immediately prior to such Change in Control;
(ii) a change in Employee's reporting responsibilities,
titles or offices as in effect immediately prior to such Change in Control;
(iii) a reduction in Employee's base salary as in effect
immediately prior to such Change in Control; or
(iv) a relocation of Employee's office to a city other than
the city where Employee was based immediately prior to such Change in Control.
(c) Employee shall provide written notice to Employer of his
election to terminate this Agreement for Good Cause, and shall specify in such
written notice the date upon which this Agreement shall terminate.
(d) If Employee terminates this Agreement following a Change in
Control for any reason other than Good Cause, Employer shall pay Employee his
base salary through the effective date of termination.
(e) If Employee elects to terminate this Agreement for Good
Cause:
(i) Employer shall pay Employee, as severance compensation,
an amount equal to twelve times Employee's base monthly cash compensation. Such
severance compensation shall be paid in twelve 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 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.
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 twelve times
Employee's base monthly cash compensation. Such severance compensation shall be
payable; in twelve equal monthly installments, commencing thirty days after the
date of termination of this Agreement; and
3
<PAGE>
(b) Employer shall continue to provide Employee with all 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.
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 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.
Employee has read the attached provisions of California law (Chapter
2, Div. 3 Labor Code Sec. 1 Art. 3.5, Sections 2870, 2871 and 2872) and
understands that under its provisions Employee may retain ownership of certain
inventions that Employee may make during the term of employment. Such
inventions shall not be subject to the terms of this Agreement. Any such
inventions which Employee desires to retain as Employee's property will be
reported and disclosed to Employer with the understanding, however, that
Employer may require Employee to disclose such information about such
inventions, as in Employer's opinion is necessary to enable it to determine if
the invention qualifies under this law for retention as Employee's property. It
is further understood that information disclosed by Employee will be held in
confidence by Employer. However, Employer need not treat any such disclosed
information as confidential if it has previously been known to it, or if at the
time of Employee's disclosure or thereafter it is disclosed in patents or other
publications, imparted to it by other parties having lawful possession of the
same, or is well known to the trade to which it relates.
4
<PAGE>
4. TRADE SECRETS. Employee agrees that he will not at any time, either
during or subsequent to- the Employment Term, unless given express consent in
writing by 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.
Employee agrees that the above information and items are important, material and
confidential trade secrets and that they affect the successful conduct of
Employer's business and its good will. Employee agrees that all business
procured by Employee while employed by- Employer is and shall remain the
permanent and exclusive property of Employer. Employee further agrees that
Employer's relationship with each of its employees and independent contractors
is a significant and valuable asset of Employer. Any interference with
Employer's business, property, confidential information, trade secrets, clients,
customers, employees or independent contractors by Employee or any of Employee's
agents during or after the term of this Agreement shall be deemed a material
breach of this Agreement.
5. NONSOLICITATION. Employee hereby acknowledges and agrees that he is
likely to be exposed to a significant amount of confidential information
concerning 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 Employee's memory,
and that the protection of Employer's exclusive rights to such confidential
information and the benefits flowing from it can best be ensured by means of a
restriction on Employee's activities after termination of employment.
Therefore, 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 Employer for any commercial or business reason
whatsoever. Employee also agrees that for such period he will not directly or
indirectly solicit the employment of any employee of employer and will not
attempt to persuade any employee to leave the employment of 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 to which
Employer may be entitled
5
<PAGE>
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 Employer by reason of illness, injury or incapacity
for four 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
selected by 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
Employer and in which Employee participated.
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,
dishonesty, misconduct, conviction of a crime involving moral turpitude,
habitual insobriety, misappropriation of funds, disparagement of Employer, its
management or its employees or financial inability of Employer to continue to do
business. 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
6
<PAGE>
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 State of California.
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 California 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.
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 Macom, Inc.
12500 Foothill Boulevard
Lakeview Terrace, CA 91342
Attention: Chief Financial Officer
With a required copy to: Spencer W. Franck, Jr., Esquire
Saul, Ewing, Remick & Saul
3800 Centre Square
West Philadelphia, PA 19102
7
<PAGE>
If to Employee, to: Mr. Robert G. Cunningham
530 Morning Mist Court
Alpharetta, Georgia 30202
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 for 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), 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
8
<PAGE>
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 MACOM, INC.
Joseph T. Kingsley By: Everett T. Keech
- ------------------- ---------------------------------------
Secretary Chairman and Chief Executive Officer
Robert G. Cunningham
---------------------------------------
ROBERT G. CUNNINGHAM
9
<PAGE>
EXHIBIT "A"
EMPLOYMENT AGREEMENTS. NON-COMPETITION AGREEMENTS AND NON-DISCLOSURE AGREEMENTS
10
<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,
---------------------------- ----------------------------
1997 1996 1997 1996
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
NET INCOME (LOSS) ATTRIBUTABLE
TO COMMON STOCK $ (350) $ (99) $ (249) $ (97)
-------- ---------- -------- ----------
-------- ---------- -------- ----------
PRIMARY EARNINGS PER SHARE:
Weighted average number
of common shares
outstanding 4,063 3,685 4,059 3,668
Dilutive effect of stock
options and warrants
after application of
treasury stock method - - - -
-------- ---------- -------- ----------
Number of shares used to
compute primary
earnings (loss) per share 4,063 3,685 4,059 3,668
Primary earnings (loss) per share $ (0.09) $ (0.03) $ (0.06) $ (0.03)
-------- ---------- -------- ----------
-------- ---------- -------- ----------
FULLY DILUTED EARNINGS PER SHARE:
Weighted average number
of common shares
outstanding 4,063 3,685 4,059 3,668
Dilutive effect of stock
options and warrants
after application of
treasury stock method - - - -
-------- ---------- -------- ----------
Number of shares used to
compute fully diluted
earnings (loss) per share 4,063 3,685 4,059 3,668
Fully diluted earnings (loss) per
share $ (0.09) $ (0.03) $ 0.06) $ (0.03)
-------- ---------- -------- ----------
-------- ---------- -------- ----------
</TABLE>
<TABLE> <S> <C>
<PAGE>
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<S> <C>
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<FISCAL-YEAR-END> JUL-31-1997
<PERIOD-START> AUG-01-1996
<PERIOD-END> JAN-31-1997
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840
0
<COMMON> 41
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<NET-INCOME> (249)
<EPS-PRIMARY> (0.06)
<EPS-DILUTED> (0.06)
</TABLE>
