<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 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 March 12, 1998.
Common Stock, $0.01 par value 4,185,913
- ----------------------------- ------------------------
Class Number of Shares
1
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PICO PRODUCTS, INC.
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
January 31, 1998 and July 31, 1997 3-4
Condensed Consolidated Statements
of Income - Three and Six Months
Ended January 31, 1998 and 1997 5
Condensed Consolidated Statements
of Cash Flows - Six Months
Ended January 31, 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)
<TABLE>
<CAPTION>
January 31, July 31,
1998 1997
----------- -----------
<S> <C> <C>
ASSETS:
CURRENT ASSETS:
Cash and cash equivalents $ 71,010 $ 22,286
Accounts receivable (less allowance
for doubtful accounts: January 31, 1998,
$220,000; July 31, 1997, $200,000) 4,585,653 5,621,232
Inventories (Note 2) 13,203,316 11,961,229
Prepaid expenses and other current
assets 214,503 339,760
----------- -----------
TOTAL CURRENT ASSETS 18,074,482 17,944,507
----------- -----------
PROPERTY, PLANT AND EQUIPMENT:
Buildings 217,255 217,255
Leasehold improvements 186,689 279,842
Machinery and equipment 2,831,987 2,900,270
----------- -----------
3,235,931 3,397,367
Less accumulated depreciation
and amortization 2,364,526 2,431,779
----------- -----------
871,405 965,588
----------- -----------
OTHER ASSETS:
Patents and licenses (less accumulated
amortization: January 31, 1998, $71,144
July 31, 1997, $68,156) 150,066 153,054
Excess of cost over net assets of
businesses acquired (less accumulated
amortization; January 31, 1998, $410,490
July 31, 1997, $395,970) 166,945 181,465
Deposits and other non-current assets 201,362 235,614
Debt issuance costs (less accumulated
amortization; January 31, 1998, $92,758;
July 31, 1997; $43,760) 483,347 415,683
----------- -----------
1,001,720 985,816
----------- -----------
$19,947,607 $19,895,911
----------- -----------
----------- -----------
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
PICO PRODUCTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(continued)
(Unaudited)
<TABLE>
<CAPTION>
January 31, July 31,
1998 1997
----------- -----------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS'DEFICIENCY
- ---------------------------------------
CURRENT LIABILITIES:
Notes payable (Notes 6&7) $9,261,619 $9,425,299
Current portion of long-term debt 133,321 132,902
Accounts payable 3,498,968 3,348,977
Accrued expenses:
Legal and accounting 169,355 212,976
Payroll and payroll taxes 387,101 486,397
Other accrued expenses 398,074 395,552
Restructuring costs 282,907 580,035
----------- -----------
TOTAL CURRENT LIABILITIES 14,131,345 14,582,138
LONG-TERM DEBT (Note 7) 5,520,601 4,915,286
RESTRUCTURING COSTS 97,186 298,744
COMMITMENTS AND CONTINGENCIES - -
(Note 5)
REDEEMBABLE PREFERRED STOCK, $.01 par
value; authorized 500,000 shares; issued
and outstanding 1,165 shares at January 31,
1998 and 1,000 shares at July 31, 1997 1,057,390 917,086
SHAREHOLDERS' DEFICIENCY:
Common shares, $.01 par value; authorized
15,000,000 shares issued and outstand-
ing 4,185,913 shares at January 31, 1998
and July 31, 1997 41,859 41,859
Additional paid-in capital 22,986,545 22,715,292
Stock subscriptions receivable (105,000) (105,000)
Accumulated deficit (23,665,284) (23,381,874)
Cumulative translation adjustment (117,035) (87,620)
----------- -----------
TOTAL SHAREHOLDERS' DEFICIENCY (858,915) (817,343)
----------- -----------
$19,947,607 $19,895,911
----------- -----------
----------- -----------
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
PICO PRODUCTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
January 31, January 31,
---------------------------- -----------------------------
1998 1997 1998 1997
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
SALES $6,460,687 $8,867,254 $14,648,077 $18,565,442
COSTS AND EXPENSES:
Cost of sales 4,691,395 6,701,854 10,604,959 14,031,926
Selling and admini-
strative expenses 1,525,305 2,177,345 3,329,776 4,207,367
----------- ----------- ------------ -----------
TOTAL COSTS AND
EXPENSES 6,216,700 8,879,199 13,934,735 18,239,293
----------- ----------- ------------ -----------
INCOME (LOSS) FROM
OPERATIONS 243,987 (11,945) 713,342 326,149
INTEREST INCOME 3,961 3,834 7,948 7,668
INTEREST EXPENSE (467,581) (317,624) (936,904) (558,699)
----------- ----------- ------------ -----------
LOSS BEFORE
INCOME TAXES (219,633) (325,735) (215,614) (224,882)
----------- ----------- ------------ -----------
INCOME TAX PROVISION -0- -0- -0- -0-
NET LOSS (219,633) (325,735) (215,614) (224,882)
----------- ----------- ------------ -----------
DIVIDENDS ON PREFERRED
STOCK 34,884 24,333 67,796 24,333
----------- ----------- ------------ -----------
NET LOSS ATTRIBU-
TABLE TO COMMON
STOCK $ (254,517) $ (350,068) $ (283,410) $ (249,215)
----------- ----------- ------------ -----------
----------- ----------- ------------ -----------
BASIC AND DILUTED
NET LOSS PER COMMON
SHARE (NOTE 4) $ (.06) (.09) $ (.07) $ (.06)
----------- ----------- ------------ -----------
----------- ----------- ------------ -----------
</TABLE>
See notes to condensed consoldidated financial statements.
5
<PAGE>
PICO PRODUCTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
January 31,
-------------------------
1998 1997
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (215,614) $ (224,882)
Adjustments to reconcile net loss
to net cash provided by (used in)
operating activities:
Depreciation and amortization 239,286 199,799
Changes in operating assets
and liabilities (644,918) (5,622,743)
---------- ----------
NET CASH USED IN
OPERATING ACTIVITIES (621,246) (5,647,826)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (50,607) (159,620)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) under a
line of credit agreement (163,680) 201,522
Issuance of long-term debt 985,000 5,000,000
Issuance of preferred stock 165,000 1,000,000
Private placement financing costs (116,162) (449,613)
Principal payments on long-term debt (149,581) (54,168)
Proceeds from exercise of stock options - 15,800
Dividend paid on preferred stock - (14,000)
---------- ----------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 720,577 5,699,541
---------- ----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 48,724 (107,905)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 22,286 159,669
---------- ----------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 71,010 $ 51,764
---------- ----------
---------- ----------
</TABLE>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
During the six month ended January 31, 1997, the Company financed the purchase
of office and test lab equipment totaling approximately $87,000.
See notes to condensed consolidated financial statements.
6
<PAGE>
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.
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,
1998, and the results of its operations and its cash flows for the three and
six- month periods ended January 31, 1998 and 1997. 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 notes contained in the Company's Annual Report on Form 10-K for the
fiscal year ended July 31, 1997.
7
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The results of operations for the interim periods shown in this Report are not
necessarily indicative of the results to be expected for the fiscal year.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 ("SFAS 128") "Earnings per Share." SFAS
128 replaces the presentation of primary earnings per share with a presentation
of basic earnings per share based upon the weighted average number of common
shares for the period. It also requires dual presentation of basic and diluted
earnings per share for companies with complex capital structures. SFAS 128 has
been adopted by the Company for the fiscal quarter ending January 31, 1998 and
earnings per share for all prior periods have been restated.
(2) INVENTORIES
The composition of inventories was as follows:
<TABLE>
<CAPTION>
January 31, July 31,
1998 1997
----------- -----------
<S> <C> <C>
Raw materials $ 4,494,279 $ 4,634,967
Work in process 1,159,859 606,218
Finished goods 7,549,178 6,720,044
----------- -----------
$13,203,316 $11,961,229
----------- -----------
----------- -----------
</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 six-month periods ended January 31,
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 Six Months Ended
January 31, January 31,
------------------------------ ------------------------------
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Basic and
Diluted Loss
per Share:
Net Loss $ (219,633) $ (325,735) $ (215,614) $ (224,882)
Plus Dividends
on Preferred
Stock $ 34,884 $ 24,333 $ 67,796 $ 24,333
Net Loss
Attributable to
Common Stock $ (254,517) $ (350,068) $ (283,410) $ (249,215)
Weighted
Average Shares
Outstanding 4,185,913 4,062,637 4,185,913 4,062,637
Basic and
Diluted Loss
per Share: $ (.06) $ (.09) $ (.07) $ (.06)
</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 January 31, 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
9
<PAGE>
Company is only one of 26 companies located in the vicinity of Onondaga Lake or
its tributaries that have received a similar Information Request.
The Information Request related to the activities of the Company's Printed
Circuit Board Division, which was sold to a third party in 1992, and which
conducted operations within the specified area. Under the Agreement of Sale
with the buyer, the Company retained liability for environmental obligations
which occurred prior to the sale.
The Company has provided all information requested by the EPA. The Information
Request does not designate the Company as a potentially responsible party, nor
has the EPA indicated the basis upon which it would designate the Company as a
potentially responsible party. The Company is therefore unable to state whether
there is any material likelihood for liability on its part, and, if there were
to be any such liability, the basis of any sharing of such liability with
others.
In March 1997, the Company received a follow-on request for additional
information in this matter and has provided all information requested.
EAGLE LITIGATION
On July 30, 1997, Eagle Comtronics, Inc. ("Eagle") filed a motion in the United
States District Court for the Northern District of New York to amend the
complaint for patent infringement it had filed in 1979 against the Company.
This 1979 action had been settled by Consent Judgment in 1988, pursuant to which
the Company and Eagle entered into a License Agreement providing for specified
royalty payments from Eagle to the Company. Eagle's motion sought the District
Court's permission to proceed against the Company under various legal theories
for breach of the License Agreement, based on Eagle's allegation that the
Company, in violation of the License Agreement's "most favored nation" clause,
granted a license to a third party (Arrow Communication Laboratories, Inc.) on
more favorable terms than those provided to Eagle. Eagle sought damages of
approximately $1,600,000 plus interest and attorneys fees. The Company believed
that Eagle's motion was procedurally improper and that, even if the amended
complaint were allowed by the District Court, it had meritorious defenses to the
claims stated in the amended complaint.
The Company responded to Eagle's motion, and Eagle promptly withdrew the motion
to file an amended complaint. At the same time Eagle filed a complaint in New
York State Supreme Court similar to the proposed amended federal complaint.
Management believes that the Company has meritorious defenses to Eagle's action
and that such suit will not have any material adverse effect on the Company.
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 January 31, 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 January 31, 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 $1,650,000 with two U.S.-based institutional investors to provide funds
for general working capital requirements. The private placement provides for an
investment of up to $1,485,000 of three-year 10 percent junior subordinated
debentures and $165,000 of three-year 10 percent redeemable preferred stock. In
connection with the financing, the Company has agreed to issue to the investors
warrants for up to 1,442,000 shares of its common stock, of which 300,000 shares
are subject to call provisions. These call provisions permit the Company at any
time up to 90 days after all of its obligations under the debentures are fully
paid to purchase from the
11
<PAGE>
investors up to 300,000 shares of the warrant shares, at $3.00 per share, or if
the warrants have not been exercised, to repurchase such unexercised warrants
subject to call at $3.00 per warrant share less the per share exercise price.
As of March 15, 1998, the Company had received cash of $985,000 of the total
subordinated debenture financing facility, with $500,000 still available to fund
the Company's operating needs. The remaining $150,000 of the private placement
facility represents the refinancing of previously issued subordinated notes
payable by the Company which were purchased by one of the institutional
investors in June 1997. Additionally, the Company issued to the investors
warrants for 1,004,641 shares of its common stock, of which 209,010 shares are
subject to the above call provisions. Warrants to purchase an additional
437,359 shares, of which 90,990 will be subject to call, will be issued to the
investors when the balance of the financing is funded.
The warrants issued in conjunction with this financing are exercisable at any
time prior to the later of the date which is (i) three years after the
obligations under the debentures are satisfied in full, or (ii) 6 years from the
date of issuance, at a price equal to the average trading price of the Company's
common stock over the 90-day period commencing December 13, 1997.
As a condition to the financing, one of the investors requested that the
Company's Board of Directors participate in the financing. On November 5, 1997,
four members of the Company's Board of Directors executed a participation
agreement with such investor for an amount up to $335,000.
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 six-month periods ended January 31, 1998 with the operations for the three
and six-month period ended January 31, 1997, as shown by the unaudited condensed
consolidated statements of income included in this quarterly report.
RESULTS OF OPERATIONS
Sales (in thousands):
<TABLE>
<CAPTION>
1998 1997 %Decrease
---- ---- ---------
<S> <C> <C> <C>
Six Months Ended January 31 $14,648 $18,565 (21.1%)
Quarter Ended January 31 6,461 8,867 (27.1%)
</TABLE>
The decrease for the six and three-months ended January 31, 1998 and 1997 was
primarily due to decreased demand for Satellite Master Antenna Television
(SMATV) products in the Middle East, an industry-wide downturn in demand for
single channel pay TV decoders, partially offset by sales of the Company's new
high pass filter used in two-way interactive communications systems, and the
impact of the closure of the Company's Hong Kong subsidiary. Management believes
that shipments of the new high pass filter will remain strong throughout fiscal
year 1998. In 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>
Six Months Ended January 31 $10,605 $14,032 (24.4%)
As a percentage of sales 72.3% 75.6% ( 4.2%)
Quarter Ended January 31 4,691 6,702 (30.0%)
As a percentage of sales 72.4% 75.6% ( 4.0%)
</TABLE>
The dollar decrease in cost of sales was primarily attributable to the decrease
in sales volume. The decrease in cost of sales as a percentage of sales was
primarily due to better exchange rates with the Company's Taiwanese vendors and
the decrease in sales of high cost products through the Company's Hong Kong
subsidiary.
Included as a reduction to cost of sales, for both the three and six- months
ended January 31, is a favorable adjustment to certain inventory valuation
reserves due to the disposition of certain inventory items at higher than
expected sales value.
13
<PAGE>
Selling and Administration
Expenses (in thousands)
<TABLE>
<CAPTION>
1998 1997 %Decrease
--------- --------- ---------
<S> <C> <C> <C>
Six Months Ended January 31 $ 3,330 $ 4,207 (20.9%)
As a percentage of sales 22.7% 22.7% ( - )
Quarter Ended January 31 1,525 2,177 (29.9%)
As a percentage of sales 23.6% 24.6% ( 4.1%)
</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. In
addition, the Company favorably settled certain obligations related to the
closure of its Hong Kong Subsidiary.
Interest expense (in thousands):
<TABLE>
<CAPTION>
1998 1997 %Decrease
--------- --------- ---------
<S> <C> <C> <C>
Six Months Ended January 31 $937 $559 67.6%
Quarter Ended January 31 468 318 47.2%
</TABLE>
The increase in interest expense is due to increased borrowing 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 six-month periods ended January 31,
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 six-months ended January 31,
1998 of $254,517 and $283,410. 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 January 31, 1998, the Company had working capital of approximately $3.9
million and a ratio of current assets to current
liabilities of approximately 1.28:1, compared with working capital of
approximately $3.4 million 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 six months ended January 31,
1998 and 1997, cash used for capital expenditures was approximately $51,000 and
$160,000 respectively. No significant capital expenditures for the remainder of
fiscal year 1998 are expected at this time.
Pico Macom has an $11,000,000 revolving bank line of credit which is secured by
substantially all of Pico Macom's assets, including all trade accounts
receivable and inventories. The line provides for interest at the prime rate
plus 1.25% (9.75% at January 31, 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 $1,500,000
sublimit for outstanding letters of credit. The amount available to borrow at
any one time is based upon various percentages of eligible accounts receivable
and eligible inventories as defined in the agreement, which is subject to review
and renewal on December 31, 1998. The credit facility is subject to certain
financial tests and covenants. At January 31, 1998, Pico Macom had
approximately $9.3 million in revolving loans outstanding, and the unused
portion of the borrowing base was approximately $453,000.
On September 12, 1997 the Company completed a private placement financing
totaling $1,650,000 with two U.S.-based institutional investors to provide funds
for general working capital requirements. The private placement provides for an
investment of up to $1,485,000 of three-year 10 percent junior subordinated
debentures and $165,000 of three-year 10 percent redeemable preferred stock. In
connection with the financing, the Company has agreed to issue to the investors
warrants for up to 1,442,000 shares of its common stock, of which 300,000 shares
are subject to call provisions. These call provisions permit the Company at any
time up to 90 days after all of its obligations under the debentures are fully
paid to purchase from the investors up to 300,000 shares of the warrant shares,
at $3.00 per share, or if the warrants have not been exercised, to repurchase
such unexercised warrants subject to call at $3.00 per share less the per share
exercise price.
As of December 15, 1997 the Company had received cash of $985,000 of the total
subordinated debenture financing facility, with $500,000 still available to fund
the Company's operating needs. The remaining $150,000 of the private placement
facility represents the refinancing of previously issued subordinated notes
payable by the Company which were purchased by one of the institutional
investors in June 1997. Additionally, the Company issued to the investors
warrants for 1,004,641 shares of its common stock, of which 209,010 shares are
subject to the above call provisions. Warrants to purchase an additional 437,359
shares, of which
15
<PAGE>
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 $335,000.
As discussed in Note 6 to the Financial Statements the Company was in
technical violation of several of the financial covenants related to the
subordinated debt. In order to achieve compliance with the covenants in
subsequent quarters it will be critical to reverse recent negative sales
trends and to continue improvement in cost containment. In the event that the
Company fails to next certain covenants under the subordinated debt,
management will seek to obtain a waiver. However, there can be no assurances
that the subordinated lender would grant a waiver of any covenant violations.
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.
On January 17, 1998, the Company held its 1997 annual meeting of shareholders.
Management's nominees for director were elected by the following votes:
<TABLE>
<CAPTION>
Nominee Votes For Votes Withheld
- ------- --------- --------------
<S> <C> <C>
Charles G. Emley, Jr. 3,053,493 260,313
E. B. Leisenring, Jr. 3,045,403 268,383
Pierson G. Mapes 3,052,253 261,533
William W. Mauritz 3,052,403 261,383
</TABLE>
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, 1998,
was approved by the following vote:
<TABLE>
<CAPTION>
For Against Abstain
- --- ------- -------
<S> <C> <C>
3,181,486 120,610 11,690
</TABLE>
There were no broker non-votes.
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) 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
19
<PAGE>
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>
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) 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.
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: March 17, 1998 /s/ E. James Selzer
-----------------------------------
Chief Financial Officer
DATE: March 17, 1998 /s/Charles G. Emley, Jr.
-----------------------------------
Chairman and Chief Executive
Officer
23
<PAGE>
INDEX TO EXHIBITS FILED
3(c) Amendment to By-Laws of the Company, adopted November 14, 1997.
10(r) 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).
24
<PAGE>
Exhibit 3(c)
AMENDMENT TO BY-LAWS
PICO PRODUCTS, INC.
ADOPTED AS OF NOVEMBER 14, 1997
Section 2.2 of the By-Laws is amended to read in its entirety as follows:
Section 2.2. An annual meeting of the shareholders for the purpose of
electing directors and of transacting such other business as may come before
it shall be held each fiscal year at such date, time and place, either within
or without the State of New York, as may be specified by the Board of
Directors.
<PAGE>
Exhibit 10(r)
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT (the "Agreement") dated as of January 8, 1998,
between PICO PRODUCTS, INC., a New York corporation ("Employer"), and CHARLES G.
EMLEY, JR. ("Employee").
BACKGROUND. Employee currently serves under a consulting agreement as
Employer's Chairman and Chief Executive Officer. Employer and Employee mutually
agree to employ Employee as Chairman and Chief Executive Officer of Employer
upon the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants and agreements hereinafter set forth, the parties hereto, intending to
be legally bound hereby, agree as follows:
1. EMPLOYMENT. Employer hereby employs Employee, and Employee hereby
accepts such employment and agrees to perform his duties and responsibilities
hereunder, in accordance with the terms and conditions hereinafter set forth.
1.1. EMPLOYMENT TERM. The employment term of this Agreement shall
be for a period of three years and may be renewed in accordance with Section
1.2. The term "Employment Term" shall refer to the initial Employment Term,
which shall commence on the date hereof and shall continue until and end on the
third anniversary date of this Agreement (unless terminated prior thereto in
accordance with Section 7 hereof) and, to the extent this Agreement is renewed
pursuant to Section 1.2, to the last day of any successive one year period.
1.2. RENEWAL. This Agreement shall be automatically renewed for
successive one year terms at the expiration of the initial Employment Term, and
any subsequent Employment Term, unless written notice to the contrary is
provided by either Employer or Employee at least ninety days prior to the
expiration of such Employment Term. In the event that Employer does not elect
to renew this Agreement upon the expiration of an Employment Term, Employee
shall be entitled to receive the severance compensation described in Section
1.8(a)(i) and Section 1.8(b).
1.3. DUTIES AND RESPONSIBILITIES.
(a) During the Employment Term, Employee shall serve as
Chairman and Chief Executive Officer of Employer and shall perform all duties
and accept all responsibilities incidental to such position or as may be
assigned to him by Employer's Board of Directors, and he shall report to and
cooperate fully with the Board of Directors. Employee shall operate primarily
out of Employer's principal executive office in Los Angeles, California, but
shall be expected to travel as appropriate on Employer's business.
<PAGE>
(b) Employee represents and covenants to Employer that he
is subject to or a party to only those employment agreements, non-competition
covenants, and non-disclosure agreements listed on Exhibit "A" hereto. Employee
represents and covenants to Employer that neither those documents nor any other
similar agreement, covenant, understanding or restriction to which Employee is
subject would prohibit Employee from executing this Agreement and performing his
duties and responsibilities hereunder, or would in any manner, directly or
indirectly, limit or affect the duties and responsibilities which may now or in
the future be assigned to Employee by Employer.
1.4. EXTENT OF SERVICE. During the Employment Term, Employee agrees
to use his best efforts to carry out his duties and responsibilities under
Section 1.3 hereof and to devote his full time, attention and energy thereto.
The foregoing shall not be construed as preventing Employee from continuing as
(a) Dean of the Peter F. Drucker Graduate Management Center of the Claremont
Graduate School, (b) serving as a consultant or director for one or more
non-competitive business enterprises, (c) engaging in charitable or civic
activities, (d) teaching, or (e) making investments in other businesses or
enterprises; provided that such activities in the aggregate shall not prevent
him from discharging his duties and responsibilities to Employer.
1.5. BASE COMPENSATION. For all the services rendered by Employee
hereunder, Employer shall pay Employee an annual salary at the rate of $175,000
for the Employment Term, plus such additional amounts, if any, as may be
approved by Employer's Board of Directors, less withholding required by law or
agreed to by Employee, payable in installments at such times as Employer
customarily pays its other executive officers. The annual salary may be
increased by the Board of Directors in its sole discretion. The first salary
review shall be as of the end of the first six months of this Agreement.
1.6. BENEFITS. During the Employment Term, Employee shall be
entitled to certain benefits and shall be eligible for certain incentive
compensation, as follows:
(a) Employee shall be entitled to fifteen working days of
paid vacation per annum 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 management employees, including, but not
limited to, participation in profit sharing, disability, health, hospitalization
and retirement plans and such other benefits as the Board of Directors of
Employer may from time to time determine based upon the benefits paid to other
executive officers of Employer. In addition Employee shall be entitled to a car
allowance of $9,600 per annum. Employee shall also be entitled to a $1,000,000
life insurance policy on a split dollar basis and such other executive benefits
as shall be approved by Employer's Board of Directors or an appropriate
committee of the Board.
(c) In connection with his appointment as Chairman and
Chief Executive Officer of Employer, Employee has been granted options to
purchase 118,000 shares of Employer's Common Stock. Employee shall also be
granted 82,000 "phantom stock units." Said grant shall be made as soon as
practicable but in no event later than January 15, 1998. Employee shall be
eligible to receive additional stock options, additional phantom stock units, or
<PAGE>
other forms of stock grants as shall be determined by Employer's Board or
Directors or an appropriate committee of such Board.
(d) Employee shall be eligible for an annual management
bonus with a target level equal to at least 50% of base salary based on
performance goals as shall be set by Employer's Board of Directors or an
appropriate committee of such Board.
(e) Employee shall be paid an amount equal to $44,600,
representing reimbursement for the present value of the loss of pension benefits
from Deloitte & Touche LLP as a result of Employee's assumption of the position
of Chief Executive Officer of Employer.
1.7. CHANGE IN CONTROL.
(a) For purposes of this paragraph 1.7, "Change in Control"
shall mean (i) a merger or consolidation of Employer with any entity other than
an entity with which Employer is affiliated at the date of execution of this
Agreement; (ii) a sale of substantially all of the assets of Employer to any
person or entity other than a person or entity with which Employer is affiliated
at the date of execution of this Agreement; or (iii) a change in a majority of
the members of the Board of Directors of Employer within any twelve-month
period.
(b) In the event of a Change in Control, Employee may elect
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:
<PAGE>
(i) Employer shall pay Employee, as severance compensation,
an amount equal to 24 times Employee's base monthly cash compensation. Such
severance compensation shall be paid in 24 equal monthly installments,
commencing thirty days after the date of termination of this Agreement;
(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; and
(iii) All stock options and phantom stock units held by
Employee which shall not have vested shall immediately vest.
Notwithstanding the foregoing, the payments to be made and other benefits to be
provided to Employee pursuant to this paragraph (e) shall not exceed an amount
sufficient to characterize any portion of such payments as an "excess parachute
payment" within the meaning of Section 280G(b) of the Internal Revenue Code of
1986, as amended, or any successor provision. In the event that a portion of
such payments or benefits would otherwise be deemed to be an excess parachute
payment, Employer shall notify Employee of such fact and Employee shall have a
period of thirty days in which to notify Employer of the order in which the
categories of amounts payable or benefits to be provided to him hereunder shall
be reduced so that no portion of such payments or benefits shall constitute an
excess parachute payment. In the event that Employee shall fail so to notify
Employer, Employer shall solely make such determination.
1.8. SEVERANCE COMPENSATION. If Employer terminates this Agreement,
other than pursuant to Section 7 hereof:
(a) Employer shall pay Employee an amount equal to the sum of
(i) Employee's base annual cash compensation plus (ii) the bonus or other
additional compensation Employee would have received for the current fiscal year
based on targeted performance goals. Such severance compensation shall be
payable in 12 equal monthly installments, commencing thirty days after the date
of termination of this Agreement; and
(b) Employer shall continue to provide Employee with the
health, dental, hospitalization and disability benefits which Employee received
pursuant to Section 1.6(b) hereof for a period of twelve months following the
termination of this Agreement. Thereafter, Employee shall be afforded the
opportunity to purchase coverage pursuant to the provisions of the Consolidated
Omnibus Budget Reconciliation Act (COBRA).
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
<PAGE>
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 the Employer with the understanding, however, that the
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. TRADE SECRETS. The Employee agrees that he will not at any time,
either during or subsequent to the Employment Term, unless given express consent
in writing by the Employer, either directly or indirectly use or communicate to
any person or entity any confidential information of any kind concerning matters
affecting or relating to the names, addresses, buying habits or practices of any
of Employer's clients or customers; Employer's marketing methods, programs,
formulas, patterns, compilations, devices, methods, techniques or processes and
related data; the amount of compensation paid by Employer to employees and
independent contractors and other terms of their employment or contractual
relationships; other information concerning Employer's manner of operations.
(The foregoing shall not be deemed to prohibit the disclosure of information
which (a) is, at the time of disclosure, in the public domain other than as a
result of Employee's breach of this Agreement, or (b) can be demonstrated by
Employee to be known by Employee on the date of his commencement of employment.)
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
<PAGE>
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 if such action is on behalf of any person
(including Employee) who shall then be in a business competitive with that of
Employer, for any commercial or business reason whatsoever. 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.
6.1. 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 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.
6.2. 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.
<PAGE>
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 six consecutive months, during which time he shall continue to be
compensated as provided in Section 1.5 hereof (less any payments due Employee
under Employer or government provided disability benefits 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 in which he participated. Employee agrees, in the event
of any dispute under this Section 7.1, to submit to a physical examination by a
licensed physician mutually agreed upon by Employee and the Board of Directors
of Employer. It is understood that nothing in the foregoing paragraph shall
constitute a waiver of any rights which Employee may have under applicable
workers' compensation laws, provisions of the American with Disabilities Act, or
provisions of state statutes of similar effect.
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 under the terms of this Agreement to his
executors, legal representatives, administrators, heirs or assigns or any other
person claiming under or through him; provided, however, that Employee's estate
or designated beneficiaries shall be entitled to receive the payments prescribed
for such recipients under any death benefit plan which may be in effect for
employees of the Employer in which Employee participated. It is understood and
agreed by the parties that nothing in this provision shall be deemed to waive
any protection provided to Employee by any workers' compensation statute or
other law requiring provision of a safe work place.
7.3. CAUSE. Notwithstanding any other provision hereof, Employer
may terminate this Agreement at any time for "cause." For purposes of this
Agreement, "cause" shall include, but not be limited to, the failure of Employee
to perform or observe any of the terms or provisions of this Agreement (after
notice of such failure and an opportunity to cure such failure within 30 days
after such notice), dishonesty, misconduct, conviction of a crime involving
moral turpitude, habitual insobriety, misappropriation of funds, disparagement
of 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 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.
<PAGE>
9. GOVERNING LAW. This Agreement shall be governed by and interpreted
under the laws of the State of California.
10. NOTICES. All notices and other communications required or permitted
hereunder or necessary or convenient in connection herewith shall be in writing
and shall be deemed to have been given when hand delivered or mailed by
registered or certified mail, as follows (provided that notice of change of
address shall be deemed given only when received):
If to Employer, to: Pico Products, Inc.
12500 Foothill Boulevard
Lakeview Terrace, CA 91342
With a required copy to: Spencer W. Franck, Jr., Esquire
Saul, Ewing, Remick & Saul
3800 Centre Square West
1500 Market Street
Philadelphia, PA 19102
If to Employee, to: Mr. Charles G. Emley, Jr.
-------------------
-------------------
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.
11. CONTENTS OF AGREEMENT; AMENDMENT AND ASSIGNMENT.
11.1. 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.
11.2. 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.
<PAGE>
11.3. Subject to the provisions of paragraph 1.7 above, 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.
12. 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.
13. REMEDIES CUMULATIVE; NO WAIVER. No remedy conferred upon Employer or
Employee 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 or Employee in exercising any right, remedy or
power hereunder or existing at law or in equity shall be construed as a waiver
thereof, and any such right, remedy or power may be exercised by Employer or
Employee from time to time and as often as may be deemed expedient or necessary
by Employer or Employee, each in its sole discretion.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the
date first above written.
Attest: PICO PRODUCTS, INC.
- ------------------------------ By:
Secretary -------------------------
-------------------------
CHARLES G. EMLEY, JR.
<PAGE>
EXHIBIT "A"
EMPLOYMENT AGREEMENTS, NON-COMPETITION AGREEMENTS AND NON-DISCLOSURE AGREEMENTS
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-START> JAN-31-1998
<PERIOD-END> JAN-31-1998
<CASH> 71
<SECURITIES> 0
<RECEIVABLES> 4,806
<ALLOWANCES> 220
<INVENTORY> 13,203
<CURRENT-ASSETS> 18,074
<PP&E> 3,236
<DEPRECIATION> 2,364
<TOTAL-ASSETS> 19,948
<CURRENT-LIABILITIES> 14,131
<BONDS> 0
1,057
0
<COMMON> 42
<OTHER-SE> (901)
<TOTAL-LIABILITY-AND-EQUITY> 19,948
<SALES> 6,461
<TOTAL-REVENUES> 6,461
<CGS> 4,691
<TOTAL-COSTS> 6,217
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 468
<INCOME-PRETAX> (220)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (255)
<EPS-PRIMARY> (.06)
<EPS-DILUTED> (.06)
</TABLE>
