<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 1998
-----------------------
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.
- -------------------------------------------------------------------------------
(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 June 5, 1998.
Common Stock, $0.01 par value 4,185,913
- ------------------------------ ------------------
Class Number of Shares
1
<PAGE>
PICO PRODUCTS, INC.
INDEX
-----
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
April 30, 1998 and July 31, 1997 3-4
Condensed Consolidated Statements
of Income - Three and Nine Months
Ended April 30, 1998 and 1997 5
Condensed Consolidated Statements
of Cash Flows - Nine Months
Ended April 30, 1998 and 1997 6
Notes to Condensed Consolidated Financial
Statements 7-12
Item 2. Management's Discussion and Analysis
of Results of Operations and Financial
Condition 13-16
PART II OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Default on Senior Securities 17
Item 4. Submission of Matters to a Vote of Security
Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 18-24
2
<PAGE>
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PICO PRODUCTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
(Unaudited - in thousands, except share amounts)
<TABLE>
<CAPTION>
April 30, July 31,
1998 1997
--------- --------
ASSETS:
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 15 $ 22
Accounts receivable (less allowance
for doubtful accounts: April 30, 1998,
$181; July 31, 1997, $200) 4,482 5,621
Inventories (Note 2) 13,611 11,961
Prepaid expenses and other current
assets 286 340
--------- --------
TOTAL CURRENT ASSETS 18,394 17,944
--------- --------
PROPERTY, PLANT AND EQUIPMENT:
Buildings 217 217
Leasehold improvements 187 280
Machinery and equipment 2,927 2,900
--------- --------
3,331 3,397
Less accumulated depreciation
and amortization 2,463 2,431
--------- --------
868 966
--------- --------
OTHER ASSETS:
Patents and licenses (less accumulated
amortization: April 30, 1998, $73
July 31, 1997, $68 148 153
Excess of cost over net assets of
businesses acquired (less accumulated
amortization; April 30, 1998, $418
July 31, 1997, $396 160 181
Deposits and other non-current assets 215 236
Debt issuance costs (less accumulated
amortization; April 30, 1998, $117;
July 31, 1997; $44 460 416
--------- --------
983 986
--------- --------
$ 20,245 $19,896
--------- --------
--------- --------
</TABLE>
See notes to condensed consolidated financial statements
3
<PAGE>
PICO PRODUCTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(continued)
(Unaudited - in thousands, except share amounts)
<TABLE>
<CAPTION>
April 30, July 31,
1998 1997
--------- --------
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
<S> <C> <C>
Notes payable (Notes 6&7) $ 9,144 $ 9,425
Current portion of long-term debt 131 133
Accounts payable 4,197 3,349
Accrued expenses:
Legal and accounting 177 213
Payroll and payroll taxes 504 486
Other accrued expenses 440 396
Restructuring costs 270 580
--------- --------
TOTAL CURRENT LIABILITIES 14,863 14,582
LONG-TERM DEBT (Note 7) 5,526 4,915
RESTRUCTURING COSTS 50 299
COMMITMENTS AND CONTINGENCIES - -
(Note 5)
REDEEMABLE PREFERRED STOCK, $.01 par
value; authorized 500,000 shares; issued
and outstanding 1,165 shares at April 30,
1998 and 1,000 shares at July 31, 1997 1,064 917
SHAREHOLDERS' DEFICIENCY:
Common shares, $.01 par value; authorized
15,000,000 shares issued and outstanding
4,185,913 shares at April 30, 1998 and
July 31, 1997 42 42
Additional paid-in capital 22,987 22,715
Stock subscriptions receivable (105) (105)
Accumulated deficit (24,060) (23,382)
Cumulative translation adjustment (122) (87)
--------- --------
TOTAL SHAREHOLDERS' DEFICIENCY (1,258) (817)
--------- --------
$ 20,245 $ 19,896
--------- --------
--------- --------
</TABLE>
See notes to condensed consolidated financial statements
4
<PAGE>
PICO PRODUCTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------
(Unaudited - in thousands except share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
April 30, April 30,
---------------------- -----------------------
1998 1997 1998 1997
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
SALES $ 7,089 $ 7,771 $ 21,737 $ 26,336
COSTS AND EXPENSES:
Cost of sales 5,200 6,090 15,805 20,122
Selling and administrative expenses 1,784 2,317 5,113 6,524
--------- --------- ---------- ----------
TOTAL COSTS AND EXPENSES 6,984 8,407 20,918 26,646
--------- --------- ---------- ----------
INCOME (LOSS) FROM OPERATIONS 105 (636) 819 (310)
INTEREST INCOME 4 4 12 12
INTEREST EXPENSE (470) (370) (1,407) (929)
--------- --------- ---------- ----------
LOSS BEFORE INCOME TAXES (361) (1,002) (576) (1,227)
--------- --------- ---------- ----------
INCOME TAX PROVISION -0- -0- -0- -0-
NET LOSS (361) (1,002) (576) (1,227)
--------- --------- ---------- ----------
DIVIDENDS ON PREFERRED STOCK 34 30 102 54
--------- --------- ---------- ----------
NET LOSS ATTRIBUTABLE TO COMMON STOCK $ (395) $ (1,032) $ (678) $ (1,281)
--------- --------- ---------- ----------
--------- --------- ---------- ----------
BASIC AND DILUTED NET LOSS PER COMMON
SHARE (NOTE 4) $ (.09) (.25) $ (.16) $ (.31)
--------- --------- ---------- ----------
--------- --------- ---------- ----------
</TABLE>
See notes to condensed consolidated financial statements
5
<PAGE>
PICO PRODUCTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(Unaudited - in thousands except share amounts)
<TABLE>
<CAPTION>
Nine Months Ended
April 30,
--------------------------
1998 1997
---------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (576) $ (1,227)
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization 353 344
Changes in operating assets
and liabilities (256) (5,023)
---------- -----------
NET CASH USED IN OPERATING ACTIVITIES (479) (5,906)
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (127) (232)
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) under a
line of credit agreement (281) 566
Issuance of long-term debt 985 5,000
Issuance of preferred stock 165 1,000
Private placement financing costs (120) (453)
Principal payments on long-term debt (150) ( 78)
Proceeds from exercise of stock options - 28
Dividend paid on preferred stock - (14)
---------- -----------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 599 6,049
---------- -----------
NET (DECREASE) IN CASH AND
CASH EQUIVALENTS (7) (89)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 22 160
---------- -----------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 15 $ 71
---------- -----------
---------- -----------
</TABLE>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
During the nine months ended April 30, 1998 and 1997, the Company financed the
purchase of office and test lab equipment totaling approximately $401 and $339
respectively.
See notes to condensed consolidated financial statements
6
<PAGE>
PICO PRODUCTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
(Unaudited - in thousands except share amounts)
(1) GENERAL
Pico Products, Inc. and its subsidiaries (the "Company") design, manufacture
and distribute products and systems for the pay TV and cable TV industry
(CATV), broadband communications and other signal distribution markets.
These other distribution markets include "private" cable TV systems such as
those found in hotels, schools, hospitals and large apartment complexes.
Private cable systems are referred to in the industry as master antenna
(MATV) or satellite master antenna (SMATV) systems. These systems receive
satellite and "off-air" (or broadcast) signals at a single source known as
the "headend". The signals are processed and then distributed by coaxial or
fiber optic cable to the consumer. Also included in other signal distribution
markets are wireless cable or MMDS (multichannel multipoint distribution
systems) and business-to-business or direct-to-home (DTH) communications by
satellite. The Company also sells pay TV security products and home
satellite market products.
The accompanying unaudited condensed consolidated financial statements
include the accounts of Pico Products, Inc. and its wholly owned
subsidiaries, and include all adjustments which are, in the opinion of the
Company's management, necessary to present fairly the Company's financial
position as of April 30, 1998, and the results of its operations and its cash
flows for the three and nine-month periods ended April 30, 1998 and 1997. All
such adjustments are of a normal recurring nature. All significant
inter-company 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 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.
7
<PAGE>
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 was
adopted by the Company in the fiscal quarter ending January 31, 1998. Earnings
per share for all prior periods have been restated to conform to the
requirements of SFAS 128.
(2) INVENTORIES
The composition of inventories was as follows:
<TABLE>
<CAPTION>
April 30, July 31,
1998 1997
--------- ----------
<S> <C> <C>
Raw materials $ 5,325 $ 4,635
Work in process 1,393 606
Finished goods 6,893 6,720
--------- ----------
$ 13,611 $ 11,961
--------- ----------
--------- ----------
</TABLE>
(3) INCOME TAXES
No provision for U.S. Federal and state regular income taxes or foreign
income taxes has been recorded for the three and nine-month periods ended
April 30, 1998 and 1997 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.
8
<PAGE>
(4) EARNING PER SHARE - SFAS 128 Disclosures.
Note 4. EARNINGS PER SHARE:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
April 30, April 30,
--------------------------- --------------------------
1998 1997 1998 1997
--------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Basic and
Diluted Loss
per Share:
Net Loss $ (361) $ ( 1,002) $ (576) $ (1,227)
Plus Dividends
on Preferred
Stock $ 34 $ 30 $ 102 $ 54
Net Loss
Attributable to $ (395) $ (1,032) $ (678) $ (1,281)
Common Stock
Weighted
Average Shares 4,185,913 4,157,486 4,185,913 4,090,493
Outstanding
Basic and
Diluted Loss $ (.09) $ (.25) $ (.16) $ (.31)
per Share:
</TABLE>
Due to a Net Loss Attributable to Common Stock, shares issuable upon exercise
of stock options and warrants have not been included in the calculation of
Diluted Loss per Share. At April 30, 1998, the Company had 2,290,215 shares
issuable upon the exercise of outstanding stock options and warrants at
prices ranging from $1.10 to $3.19.
(5) 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.
9
<PAGE>
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 (Update for recent activities)
On July 30, 1997, Eagle Comtronics, Inc. ("Eagle") filed a motion in the
United States District Court for the Northern District of New York to amend
the complaint for patent infringement it had filed in 1979 against the
Company. This 1979 action had been settled by Consent Judgment in 1988,
pursuant to which the Company and Eagle entered into a License Agreement
providing for specified royalty payments from Eagle to the Company. Eagle's
motion sought the District Court's permission to proceed against the Company
under various legal theories for breach of the License Agreement, based on
Eagle's allegation that the Company, in violation of the License Agreement's
"most favored nation" clause, granted a license to a third party (Arrow
Communication Laboratories, Inc.) on more favorable terms than those provided
to Eagle. Eagle sought damages of approximately $1,600 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. The Company filed a motion to dismiss Eagle's complaint,
which has been denied. The Company intends to appeal such denial and has
asked for a stay on discovery pending the outcome of such appeal. In the
event that such request is denied, the case will proceed to the discovery
phase.
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.
10
<PAGE>
OTHER
The Company is involved, from time to time, in certain other legal actions
arising in the normal course of business. Management believes that the
outcome of other litigation will not have a material adverse affect on the
Company's consolidated financial statements.
(6) 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 April 30, 1998 the Company was in technical violation of several of the
financial covenants related to the subordinated debt issued in connection
with the private placement financing. These covenants provided for achieving
certain quarterly sales, earnings and related ratio tests. The holders of
the subordinated debt have agreed to waive these violations as of April 30,
1998.
The Company is in compliance with all of the loan covenants held by its
senior lender and anticipates continuing in compliance.
(7) NEW FINANCING
On September 12, 1997 the Company completed a private placement financing
totaling $1,650 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 of three-year 10 percent junior subordinated
debentures and $165 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 warrant share less the per share exercise price.
The Company has received cash of $985 of the total subordinated debenture
financing facility, with $500 still available to fund the Company's operating
needs. The remaining $150 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
11
<PAGE>
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 $335. On March 1, 1998, an
officer of the Company entered into the participation agreement with such
investors for an additional $200.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
------------------------------------------------
The following discussion compares the operations of the Company for the three
and nine-month periods ended April 30, 1998 with the operations for the three
and nine-month periods ended April 30, 1997, as shown by the unaudited
condensed consolidated statements of income included in this quarterly report.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
1998 1997 %Decrease
------- ------- ---------
<S> <C> <C> <C>
Sales (in thousands):
Nine Months Ended April 30 $21,737 $26,336 (17.5%)
Three Months Ended April 30 7,089 7,771 ( 8.8%)
</TABLE>
The decrease in sales for the three and nine-months ended April 30, 1998
compared to the same periods in 1997 was primarily due to decreased demand
for Satellite Master Antenna Television (SMATV) products in the Middle East
and a decrease in prices charged for its product. In addition, the lack of
availability of product for certain high demand product sourced from Taiwan
adversely impacted sales performance.
Cost of Sales (in thousands):
<TABLE>
<CAPTION>
1998 1997 %Decrease
-------- -------- ---------
<S> <C> <C> <C>
Nine Months Ended April 30 $15,805 $20,122 (21.5%)
As a percentage of sales 72.7% 76.4% ( 4.8%)
Three Months Ended April 30 5,200 6,090 (14.6%)
As a percentage of sales 73.4% 78.4% ( 6.4%)
</TABLE>
The dollar decrease in cost of sales for the three and nine month periods in
1997 compared to the same periods in 1998 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, lower prices for purchased product and the decrease in sales of high
cost products through the Company's Hong Kong subsidiary, which was closed in
the fourth fiscal quarter of 1997.
Included as a reduction to cost of sales, for both the three and nine-months
ended April 30, is a favorable adjustment to inventory valuation reserves due
to the disposition of certain inventory items at a higher than expected sales
value.
13
<PAGE>
Selling and Administration
Expenses (in thousands)
<TABLE>
<CAPTION>
1998 1997 %Decrease
-------- -------- ---------
<S> <C> <C> <C>
Nine Months Ended April 30 $ 5,113 $ 6,524 (21.6%)
As a percentage of sales 23.5% 24.8% ( 5.2%)
Quarter Ended April 30 1,784 2,317 (23.0%)
As a percentage of sales 25.2% 29.8% (15.4%)
</TABLE>
The decrease in selling and administration costs from 1997 to 1998 is a
result of the closure of the Company's Hong Kong, Thailand and Taiwan
subsidiaries during the fourth quarter of Fiscal 1997 and first quarter of
Fiscal 1998.
Interest expense (in thousands):
<TABLE>
<CAPTION>
1998 1997 %Increase
-------- -------- ---------
<S> <C> <C> <C>
Nine Months Ended April 30 $1,407 $ 929 51.5%
Quarter Ended April 30 470 370 27.0%
</TABLE>
The increase in interest expense is due to increased borrowing levels under
the Company's bank line of credit and private placement financing completed
in September 1997 and November 1996.
Income Taxes:
No provision for U.S. Federal and state regular income taxes or foreign
income taxes has been recorded for the three and nine-month periods ended
April 30, 1998 and 1997 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.
Summary:
The Company has recorded a net loss for three and nine-months ended April 30,
1998 of $395 and $678. A return to profitability is contingent upon a
resurgence of demand for the Company's product coupled with effective
inventory management, cost control and accurate forecasting of demand for the
Company's product.
LIQUIDITY AND CAPITAL RESOURCES
As of April 30, 1998, the Company had working capital of approximately $3,500
and a ratio of current assets to current liabilities of approximately 1.24:1,
compared with working capital of approximately $3,400 and a ratio of 1.23:1
as of July 31, 1997.
14
<PAGE>
The increase in working capital was primarily due to the private placement in
September 1997 (as described below). During the nine months ended April 30,
1998 and 1997, cash used for capital expenditures was approximately $127 and
$232 respectively. No significant capital expenditures for the remainder of
fiscal year 1998 are expected at this time.
Pico Macom has an $11,000 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
plus 1.25% (9.75% at April 30, 1998).
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
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 April 30, 1998, Pico
Macom had approximately $9,200 million in revolving loans outstanding, and
the unused portion of the borrowing base was approximately $273.
On September 12, 1997 the Company completed a private placement financing
totaling $1,650 million 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 of three-year 10 percent
junior subordinated debentures and $165 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.
As of December 15, 1997 the Company had received cash of $985 of the total
subordinated debenture financing facility, with $500 still available to fund
the Company's operating needs. The remaining $150 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.
15
<PAGE>
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 $335. On March 1, 1998, an
officer of the Company entered into the participation agreement with such
investors for an additional $200.
As discussed in Note 6 to the Financial Statements, the Company was in
technical violation of several financial covenants related to the
subordinated debt.
As pointed out above, the Company has recorded a net loss for the three-and
nine-months ended April 30, 1998. A return to profitability is contingent
upon a resurgence of demand for the Company's product coupled with effective
inventory management, cost control and accurate forecasting of demand for the
Company's product. 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.
16
<PAGE>
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Incorporated by reference from financial statement footnote number 5 of Part I.
ITEM 2 None.
ITEM 3. DEFAULT ON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
ITEM 5. OTHER INFORMATION.
None.
17
<PAGE>
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.
3(c)m Amendment to By-Laws of the Company, adopted November 14, 1997.
4(a)b 1981 Non-Qualified Stock Option Plan
4(b)a 1982 Incentive Stock Option Plan
4(c)d 1992 Incentive Stock Plan
4(f)g Amendment to 1992 Incentive Stock Plan.
4(g)h Amendment to 1981 Non-Qualified Stock Option Plan.
4(h)i Investment Agreement between the Company and certain of its
subsidiaries, and Allied Capital Corporation and certain of its
affiliated companies, dated November 21, 1996.
4(i)i Subordinated Secured Debenture issued by the Company and certain
of its subsidiaries, payable to Allied Capital Corporation, dated
November 21, 1996. The Company has issued subordinated secured
debentures in substantially the same form as this debenture to
the following parties for the following amounts:
<TABLE>
<CAPTION>
Holder Amount
-------------------------------- ----------
<S> <C>
Allied Investment Corporation $2,300,000
Allied Investment Corporation II $1,450,000
Allied Capital Corporation II $ 550,000
</TABLE>
4(j)i Letter Agreement covering the issuance and sale by the Company of
Preferred Stock to The Sinkler Corporation, dated November 21,
1996.
18
<PAGE>
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:
<TABLE>
<CAPTION>
Holder Shares
---------------------------------- ----------
<S> <C>
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
</TABLE>
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:
<TABLE>
<CAPTION>
Percentage of
Holder Shares
-------------------------------- -------------
<S> <C>
Allied Investment Corporation 6.9%
Allied Investment Corporation II 4.35%
Allied Capital Corporation II 1.65%
The Sinkler Corporation 3.0%
</TABLE>
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:
<TABLE>
<CAPTION>
Holder Amount
------------------------------ --------
<S> <C>
Allied Investment Corporation $374,300
Allied Capital Corporation II $394,000
</TABLE>
19
<PAGE>
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:
<TABLE>
<CAPTION>
Holder Shares
------------------------------- --------
<S> <C>
Allied Investment Corporation 258,944
Allied Capital Corporation II 272,572
The Sinkler Corporation 114,200
</TABLE>
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:
<TABLE>
<CAPTION>
Holder Shares
------------------------------- --------
<S> <C>
Allied Investment Corporation 68,024
Allied Capital Corporation II 71,604
The Sinkler Corporation 30,000
</TABLE>
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.
20
<PAGE>
10(q)(l) Amendment No. 5 to the Loan and Security Agreement between Pico
Macom, Inc. and HSBC Business Loans, Inc., as successor to Marine
Midland Business Loans, Inc., dated May 25, 1994 -- Amendment
dated October 31, 1997.
10(r)(m) Employment agreement dated January 8, 1998 between the Company
and Charles G. Emley, Jr.
11.1 Computation of Per Share Earnings. Incorporated by reference
from financial statement footnote Number 4 of Part 1
27 Financial Data Schedule (included only in the EDGAR filing).
(b) Reports on Form 8-K:
None.
21
<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 Not used.
f Not used.
g Previously filed by the Company as an exhibit to the Company's Form 10-K
for the fiscal year ended July 31, 1994 and incorporated by reference.
h Previously filed by the Company as an exhibit to the Company's Form 10-Q
for the fiscal quarter ended January 31, 1996 and incorporated by
reference.
i Previously filed by the Company as an exhibit to the Company's Form 10-Q
for the fiscal quarter ended October 31, 1996 and incorporated by
reference.
j Previously filed as an appendix to the Company's definitive proxy statement
dated December 4, 1996 and incorporated by reference.
k Previously filed by the Company as an exhibit to the Company's Form 10-K
for the fiscal year ended July 31, 1997 and incorporated by reference.
l Previously filed by the Company as an exhibit to the Company's Form 10-Q
for the fiscal quarter ended October 31, 1997 and incorporated by
reference.
m Previously filed by the Company as an Exhibit to the Company's Form 10-Q
for the fiscal quarter ended January 31, 1998 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.
22
<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: June 10, 1998 /s/ E. James Selzer
------------------------------
Chief Financial Officer
DATE: June 10, 1998 /s/Charles G. Emley, Jr.
------------------------------
Chairman and Chief Executive
Officer
23
<PAGE>
INDEX TO EXHIBITS FILED
11.1 Computation of Per Share Earnings. Incorporated by reference
from financial statement footnote number 4 of Part 1.
27 Financial Data Schedule (included only in the EDGAR filing).
24
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-START> FEB-01-1998
<PERIOD-END> APR-30-1998
<CASH> 15
<SECURITIES> 0
<RECEIVABLES> 4,663
<ALLOWANCES> 181
<INVENTORY> 13,611
<CURRENT-ASSETS> 18,394
<PP&E> 3,331
<DEPRECIATION> 2,463
<TOTAL-ASSETS> 20,245
<CURRENT-LIABILITIES> 14,863
<BONDS> 0
1,064
0
<COMMON> 42
<OTHER-SE> (1,300)
<TOTAL-LIABILITY-AND-EQUITY> 20,245
<SALES> 7,089
<TOTAL-REVENUES> 7,089
<CGS> 5,200
<TOTAL-COSTS> 6,984
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 470
<INCOME-PRETAX> (361)
<INCOME-TAX> 0
<INCOME-CONTINUING> (361)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (395)
<EPS-PRIMARY> (.09)
<EPS-DILUTED> (.09)
</TABLE>
