<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 October 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
------
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 December 10, 1998.
Common Stock, $0.01 par value 4,215,913
- ----------------------------- -------------------
Class Number of Shares
1
<PAGE>
PICO PRODUCTS, INC.
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
October 31, 1998 and July 31, 1998 3-4
Condensed Consolidated Statements
of Income - Three Months
Ended October 31, 1998 and 1997 5
Condensed Consolidated Statements
of Cash Flows - Three Months
Ended October 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
Item 3. Qualitative and Quantitative Disclosure about
Market Risk. 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 18-23
</TABLE>
2
<PAGE>
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PICO PRODUCTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited - in thousands except share and per share amounts)
<TABLE>
<CAPTION>
October 31, July 31,
1998 1998
------------ ---------
<S> <C> <C>
ASSETS:
CURRENT ASSETS:
Cash and cash equivalents $ 46 $ 93
Accounts receivable (less allowance
for doubtful accounts: October 31,1998,
$139; July 31, 1998, $139) 3,749 3,871
Inventories (Note 2) 7,025 11,997
Prepaid expenses and other current
assets 175 161
------- -------
TOTAL CURRENT ASSETS 10,995 16,122
------- -------
PROPERTY, PLANT AND EQUIPMENT:
Buildings -- 217
Leasehold improvements 140 187
Machinery and equipment 1,772 2,420
------- -------
1,912 2,824
Less accumulated depreciation
and amortization 1,261 1,914
------- -------
651 910
------- -------
OTHER ASSETS:
Patents and licenses (less accumulated
amortization: April 30, 1998, $77
July 31, 1998, $75 145 147
Excess of cost over net assets of
businesses acquired (less accumulated
amortization; October 31, 1998, $436
July 31, 1998, $429) 145 152
Deposits and other non-current assets 471 625
------- -------
761 924
------- -------
$12,407 $17,956
------- -------
------- -------
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
PICO PRODUCTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(continued)
(Unaudited - in thousands except share and per share amounts)
<TABLE>
<CAPTION>
October 31, July 31,
1998 1998
---------- --------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS'DEFICIENCY
CURRENT LIABILITIES:
Notes payable (Notes 6&7) $ 6,768 $ 9,139
Current portion of long-term debt 4,359 5,644
Accounts payable 2,252 3,614
Accrued expenses:
Legal and accounting 188 364
Payroll and payroll taxes 290 491
Other accrued expenses 1,072 661
Restructuring costs 228 269
-------- --------
TOTAL CURRENT LIABILITIES 15,157 20,182
LONG-TERM DEBT (Note 7) 74 115
COMMITMENTS AND CONTINGENCIES - -
(Note 5)
REDEEMBABLE PREFERRED STOCK, $.01 par
value; authorized 500,000 shares; issued
and outstanding 1,250 shares at October 31,
1998 and July 31, 1998 1,077 1,070
SHAREHOLDERS' DEFICIENCY:
Common shares, $.01 par value; authorized
15,000,000 shares issued and outstanding
4,215,913 shares at October 31, 1998 and
July 31, 1998 42 42
Additional paid-in capital 22,952 22,992
Stock subscriptions receivable (81) (81)
Accumulated deficit (26,703) (26,253)
Cumulative translation adjustment (111) (111)
-------- --------
TOTAL SHAREHOLDERS' DEFICIENCY (3,901) (3,411)
-------- --------
$ 12,407 $ 17,956
-------- --------
-------- --------
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
PICO PRODUCTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited - in thousands except share and per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
October 31,
---------------------------------
1998 1997
-------------- ------------
<S> <C> <C>
SALES $ 5,894 $ 8,187
COSTS AND EXPENSES:
Cost of sales 4,442 5,914
Selling and administrative
expenses 1,383 1,804
----------- -----------
TOTAL COSTS AND
EXPENSES 5,825 7,718
----------- -----------
INCOME FROM
OPERATIONS 69 469
GAIN ON SALE 80 -
INTEREST INCOME 2 4
INTEREST EXPENSE (418) (469)
----------- -----------
INCOME(LOSS)BEFORE INCOME
TAXES AND EXTRAORDINARY ITEM (267) 4
INCOME TAX PROVISION - -
----------- -----------
INCOME (LOSS) BEFORE EXTRA-
ORDINARY ITEM AND DIVIDENDS
ON PREFERRED STOCK (267) 4
EXTRAORDINARY ITEM -
LOSS RELATED TO EARLY
EXTINGUISHMENT OF DEBT 151 -
----------- -----------
NET INCOME (LOSS) (418) 4
DIVIDENDS ON PREFERRED STOCK 32 33
----------- -----------
NET LOSS ATTRIBUTABLE TO
COMMON STOCK $ (450) $ (29)
----------- -----------
----------- -----------
BASIC AND DILUTED
NET INCOME (LOSS) PER COMMON
SHARE:
NET LOSS BEFORE
EXTRAORDINARY ITEM $ (.06) $ -
EXTRAORDINARY LOSS (.04) -
----------- -----------
NET INCOME (LOSS) (.10) -
DIVIDENDS ON PREFERRED STOCK $ (.01) $ (.01)
----------- -----------
NET LOSS ATTRIBUTABLE
TO COMMON STOCK $ (.11) $ (.01)
----------- -----------
----------- -----------
SHARES USED IN PER SHARE
CALCULATIONS 4,215,913 4,185,913
----------- -----------
----------- -----------
</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>
Three Months Ended
October 31,
---------------------------
1998 1997
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)before Extraordinary Item
and Preferred Dividends $ (267) $ 4
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization 108 99
Gain on Sale (80) -
Changes in operating assets
and liabilities (592) (45)
------- -------
NET CASH USED IN
OPERATING ACTIVITIES (831) (148)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures - (32)
Sale of Assets 4,571
-------
NET CASH PROVIDED (USED) BY
INVESTING ACTIVITIES 4,571 (32)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments under a
line of credit agreement (2,371) (1,118)
Issuance of long-term debt - 985
Issuance of preferred stock - 165
Private placement financing costs - (116)
Retirement of warrants (40) -
Principal payments on long-term debt (1,376) (35)
------- -------
NET CASH (USED) PROVIDED BY FINANCING
ACTIVITIES (3,787) (120)
------- -------
NET (DECREASE) IN CASH
AND CASH EQUIVALENTS (47) (3)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 93 22
------- -------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 46 $ 19
------- -------
------- -------
</TABLE>
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 October 31,
1998, and the results of its operations and its cash flows for the three-month
periods ended October 31, 1998 and 1997. All such adjustments are of a normal
recurring nature. All significant intercompany accounts and transactions have
been eliminated in consolidation.
The consolidated financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has incurred continuing
losses from operations and negative cash flows.
At October 31, 1998 the Company was in technical violation of several of the
financial covenants related to both its senior and subordinated debt. These
factors among others may indicate that the Company will be unable to continue as
a going concern. As a result, the Company has reclassified $4,215 and $5,478
representing the subordinated long-term debt, as a current liability at October
31, 1998 and July 31, 1998, respectively. The subordinated lenders, however,
have not requested payment or any acceleration of payment of the subordinated
debentures in connection with these technical violations of these financial
covenants. See Note 8 for a discussion of the repayment of the subordinated
debentures in connection with the sale of the trap and filter manufacturing
operation.
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
7
<PAGE>
(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, 1998.
The results of operations for the interim periods shown in this Report are not
necessarily indicative of the results to be expected for the fiscal year.
(2) INVENTORIES
The composition of inventories was as follows:
<TABLE>
<CAPTION>
October 31, July 31,
1998 1998
----------- --------
<S> <C> <C>
Raw materials $ 1,607 $ 4,280
Work in process 35 761
Finished goods 5,383 6,956
------- -------
$ 7,025 $11,997
------- -------
------- -------
</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-month periods ended October 31, 1998 and
1997 due to the Company's U.S. Federal, state, and foreign net operating loss
carryforward positions.
(4) EARNING PER SHARE
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. The Company has used the weighted average shares outstanding of
4,215,913 and 4,185,913 at October 31, 1998 and 1997, respectively. In addition,
the Company had 2,025,678 shares issuable upon the exercise of outstanding stock
options and warrants at prices ranging from $.60 to $3.19 at October 31, 1998.
(5) LITIGATION AND CONTINGENCIES
INFORMATION REQUEST
In March 1995, a subsidiary of the Company received a Joint Request for
Information (the "Information Request") from the United States
8
<PAGE>
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 learned
that the EPA added the Onondaga Lake Site to the Superfund National Priorities
List in December 1994, and has completed an onsite assessment of the degree of
hazard. The EPA has indicated that the Company is 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 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
9
<PAGE>
Eagle's complaint, which has been denied. The discovery phase of the case is
proceeding. Management believes that the Company has meritorious defenses to
Eagle's action and that such suit will not have any material adverse effect on
the Company.
OTHER
The Company is involved, from time to time, in certain other legal actions
arising in the normal course of business. Management believes that the outcome
of other litigation will not have a material adverse affect on the Company's
consolidated financial statements.
(6) NOTES PAYABLE AND LONG-TERM DEBT
The terms of the Company's senior debt facility were recently revised in
connection with the sale of the Company's trap and filter manufacturing
business. As revised the loan agreement provides for a $8,000 revolving bank
line of credit which is secured by substantially all of the Company's assets,
including all trade accounts receivable and inventories. The line provides for
interest at the prime rate plus 1.25% (9.25% at October 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 $1,000
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. These recent revisions
lowered the advance rate for inventory from 63% to 50% and reduced the total
amount of the line supported by inventory from $5,500 to $4,000. These recent
revisions in the senior debt availability formulas have adversely affected the
Company's ability to purchase inventory, which has resulted, and can be expected
to continue in the near future to result in, reduced sales. The credit facility
is subject to certain financial tests and covenants continuing through the term
of the agreement. The line of credit is subject to review and renewal on
December 31, 1998 and renews automatically for successive monthly terms;
provided, however, that either party may terminate the loan agreement upon
written notice.
The Company had approximately $6,768 outstanding under the senior facility and
the Company's borrowings exceeded its calculated borrowing base by $290 on
October 31, 1998.
At October 31,1998 the Company was in violation of several of the financial
covenants under its senior and subordinated debt, including covenants with
respect to quarterly sales and earnings.
Due to the uncertainty related to the achieving continuing compliance and that
no waivers have been obtained from either its senior or subordinated lender the
Company has classified $4,215 as a current liability. However, the holders of
the subordinated debt have not
10
<PAGE>
requested payment or any acceleration of payment of the subordinated debentures
due to the failure to meet the various financial tests and covenants.
See Note 8 for a discussion of the repayment of $1,390 principal amount of the
12% subordinated debt in connection with the sale of the trap and filter
manufacturing operation.
In addition the senior lender has notified the Company and the subordinated
lenders that the payment to the subordinated lenders of a portion of the
proceeds from the sale of the Company's trap and filter manufacturing business
breached the Surbordination Agreement among the senior lender, the subordinated
lenders and the Company. The Company does not believe it is in violation of the
subordinated loan agreement having relied upon discussions with the senior
lender in which the Company had disclosed the proposed disposition of the
proceeds from the sale of the trap and filter manufacturing operation.
The senior lender has notified the Company and the subordinated lender that it
has exercised its rights under the Subordination Agreement to prohibit the
Company from making any further payments of interest or principal to the holders
of the subordinated debt for a period of 120 days. The senior lender has also
demanded repayment by the subordinated lenders of the prepayment of principal.
(7) SALE OF TRAP AND FILTER MANUFACTURING OPERATION
On September 3, 1998, the Company sold its trap and filter manufacturing
operation and entered into an arrangement to purchase its trap and filter
requirements exclusively for a five-year term. The Company received gross
proceeds of $5,200 and transferred the inventory and certain manufacturing
assets, including equipment, technical designs and plans to the buyer. The
Company will continue to market and sell traps and filters, which in fiscal 1998
represented approximately 21% of total sales.
Management expects to continue this business at a comparable level of sales and
profitability. In connection with the five-year distribution arrangement, the
Company issued a irrevocable purchase order to purchase $4,000 of inventory over
two years, of which approximately $3,400 remains to be purchased at October 31,
1998.
The Company received gross proceeds of $5,200 and, after the deduction of the
net book value of the inventory and fixed assets sold, the Company recorded a
gain $606. Due to certain contingencies related to the transfer of the operation
to the acquirer and the commitment to purchase $4,000 of finished trap and
filter inventory the Company has deferred $526 of the total gain, which is
included in Other Accrued Liabilities. This deferred gain will be realized as
the Company fulfills its purchase commitment and resolves the remaining
contingencies related to the sale.
11
<PAGE>
Subsequent to October 31, 1998 the Company completed the sale of its St. Kitts
building and in a related transaction settled a lawsuit related to the sale of
the trap and filter business. The Company will receive gross proceeds of $400.
The building's net book value of $70 has been reclassified as Other Current
Assets at October 31, 1998.
(8) EXTINGUISHMENT OF DEBT
In September 1998 the Company repaid $1,390 to its subordinated lender in
connection with the subordinated lender agreeing to the release of its
security interest in assets related to the trap and filter manufacturing
operation. The subordinated lender also agreed to return 265,539 warrants to
purchase common stock which had been issued in connection with this debt. The
Company has estimated the fair value of these warrants to be $40.
In connection with this transaction the Company has recorded as an Extraordinary
Item, a Loss on Extinguishment of Debt of $151. This loss represents the write
off of the unamortized portion of deferred loan costs and debt discount, less
the amount paid to retire the warrants.
(9) NEW ACCOUNTING PRONOUNCEMENT
In conformity with generally accepted accounting principles the Company has
adopted Statement of Financial Accounting Standards No. 131 "Reporting
Comprehensive Income." Comprehensive Net Income (Loss) was the same as the Net
Income (Loss) for both the three months ended October 31, 1998 and 1997.
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-month period ended October 31, 1998 with the three-month period ended
October 31, 1997, as shown by the unaudited condensed consolidated statements of
income included in this quarterly report.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Sales (in thousands):
1998 1997 %Decrease
----------- ----------- -----------
<S> <C> <C> <C>
Three Months Ended October 31 $ 5,894 $ 8,187 (28.0%)
</TABLE>
The decrease for the three-months ended January 31, 1998 as compared to the same
period in 1997 is a result of continuing shortages of select inventory items in
the U.S. distribution market, lower sales in South America due to economic and
competitive pressures, and a decrease in proprietary sales. Difficulties in
obtaining adequate credit resulted in the inability to purchase inventory which
contributed to product shortages and adversely impacted sales.
<TABLE>
<CAPTION>
Cost of Sales (in thousands): % Increase
1998 1997 (Decrease)
-------- --------- ------------
<S> <C> <C> <C>
Three Months Ended October 31 $ 4,442 $ 5,913 (24.9%)
As a percentage of sales 75.4% 72.2% 4.4%
</TABLE>
The dollar decrease in cost of sales was primarily attributable to the decrease
in sales volume. Cost of sales, as a percentage of sales, increased slightly due
to lower overall volume and an unfavorable, as compared to prior period, product
mix shift to lower margin product.
13
<PAGE>
<TABLE>
<CAPTION>
Selling and Administration
Expenses (in thousands) % Increase
1998 1997 (Decrease)
-------- --------- ------------
<S> <C> <C> <C>
Three Months Ended October 31 $ 1,383 $ 1,804 (23.3%)
As a percentage of sales 23.5% 22.0% 6.8%
</TABLE>
The decrease in selling and administration costs from 1997 to 1998 is a result
of cost control efforts, including headcount reductions begun in fiscal 1997.
<TABLE>
<CAPTION>
Interest expense (in thousands):
1998 1997 %Decrease
-------- --------- -----------
<S> <C> <C> <C>
Quarter Ended October 31 $ 418 $ 469 10.9%
</TABLE>
The decrease in interest expense is due to a decrease in average borrowing under
the Company's bank line of credit and the repayment, in connection with the sale
of the trap and filter manufacturing operation of senior and subordinated debt
in September 1998.
Gain on Sale:
The Company recorded a Gain on Sale of $80 related to the sale of the trap and
filter manufacturing operation. The trap and filter manufacturing operation
consisted of machinery and equipment, inventory, manufacturing processes, and
product design. The Company will continue to market and sell traps and filters
through a five-year distribution arrangement with the acquirer. In connection
with the sale, the Company has deferred $526 of the gain related to certain
contingencies related to the transfer of the operation to the acquirer and the
commitment to purchase $4,000 of inventory over two years.
Income Taxes:
No provision for U.S. Federal and state regular income taxes or foreign income
taxes has been recorded for the three-month periods ended October 31, 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:
A return to profitability is contingent upon a resurgence of demand for the
Company's product coupled with adequate working capital financing to support its
inventory requirements.
LIQUIDITY AND CAPITAL RESOURCES
The terms of the Company's senior debt facility were recently revised in
connection with the sale of the Company's trap and filter manufacturing
business. See Note 6 to Notes to Condensed Consolidated Financial Statements. As
revised the loan agreement provides for a $8,000 revolving bank line of credit
which is secured by substantially all of the Company's assets, including all
trade accounts receivable
14
<PAGE>
and inventories. The line provides for interest at the prime rate plus 1.25%
(9.25% at October 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 $1,000
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. These recent revisions
lowered the advance rate for inventory from 63% to 50% and reduced the total
amount of the line supported by inventory from $5,500 to $4,000. These recent
revisions in the senior debt availability formulas have adversely affected the
Company's ability to purchase inventory, which has resulted, and can be expected
to continue in the near future to result in, reduced sales. The credit facility
is subject to certain financial tests and covenants continuing through the term
of the agreement. The line of credit is subject to review and renewal on
December 31, 1998 and renews automatically for successive monthly terms;
provided, however, that either party may terminate the loan agreement upon
written notice.
The Company had approximately $6,768 outstanding under the senior facility and
the Company's borrowings exceeded its calculated borrowing base by $290 on
October 31, 1998.
At October 31,1998 the Company was in violation of several of the financial
covenants under its senior and subordinated debt, including covenants with
respect to quarterly sales and earnings.
In addition the senior lender has notified the Company and the subordinated
lenders that the payment to the subordinated lenders of a portion of the
proceeds from the sale of the Company's trap and filter manufacturing business
breached the Surbordination Agreement among the senior lender, the subordinated
lenders and the Company. (See Note 6 to Notes to Condensed Consolidated
Financial Statements.) The Company does not believe it is in violation of the
subordinated loan agreement having relied upon discussions with the senior
lender in which the Company had disclosed the proposed disposition of the
proceeds from the sale of the trap and filter manufacturing operation.
The senior lender has notified the Company and the subordinated lender that it
has exercised its rights under the Subordination Agreement to prohibit the
Company from making any further payments of interest or principal to the holders
of the subordinated debt for a period of 120 days. The senior lender has also
demanded repayment by the subordinated lenders of the prepayment of principal.
The senior lender continues to provide financing under the senior debt facility
and has indicated its desire to discuss this matter with the Company and the
subordinated lenders. The Company is unable to predict the outcome of such
discussions. Continuation of the senior debt facility is critical to the
day-to-day operations of the Company. In the event that the senior lender were
to terminate the senior facility, the Company would be forced immediately to
seek alternative
15
<PAGE>
financing, which might not be available on acceptable terms, or to seek a merger
partner or sale of the Company. The Company is also considering the engagement
of an investment banking firm to advise it with respect to possible merger or
sale of the Company and other possible restructurings in this event.
In addition to obtaining increased liquidity, 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.
YEAR 2000
The Company has developed a plan to address the possible exposure related to the
impact on its computer systems of the Year 2000. Key financial information and
operational and product systems have been assessed and plans have been developed
to address systems modifications required by December 31, 1999. The financial
impact of making the required systems changes is not expected to be material to
the Company's consolidated financial position, results of operations, or cash
flow. In addition, the Company will be communicating with others with whom it
does significant business, including but not limited to its suppliers, key
customers and lenders, to determine their Year 2000 compliance readiness and the
extent to which the Company is vulnerable to any third party Year 2000 issues.
However, there can be no guarantee that the systems of other companies on which
the Company's systems rely will be timely converted or that a failure to convert
by another company would not have a material adverse effect on the Company. The
risk of Year 2000 issues is mitigated by the fact that the Company does not
significantly rely upon any one major supplier or customer and that its products
do not contain date-sensitive computer software or hardware.
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
16
<PAGE>
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Incorporated by reference from financial statement footnote number 5 of
Part I.
ITEM 2 CHANGES IN SECURITIES.
None.
ITEM 3. DEFAULT ON SENIOR SECURITIES
Incorporated by reference from financial statement footnote number 6 of
Part I.
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.
<TABLE>
<S> <C>
(a) Exhibits: (Note - A Key To Index of Exhibits Incorporated By Reference
is provided at the end of this Item 6.)
2(a)e Asset Purchase Agreement, dated as of September 3,1998 between
Pico Products, Inc., a New York Corporation and Thomas & Betts
Corporation.
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:
<CAPTION>
Holder Amount
------------------------------- ----------
<S> <C> <C>
Allied Investment Corporation $2,300,000
Allied Investment Corporation II $1,450,000
Allied Capital Corporation II $ 550,000
4(j)i Letter Agreement covering the issuance and sale by the Company
of Preferred Stock to The Sinkler Corporation, dated November
21, 1996.
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:
<CAPTION>
Holder Shares
---------------------------------- ------------
<S> <C> <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
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:
<CAPTION>
Percentage of
Holder Shares
-------------------------------- -------------
<S> <C> <C>
Allied Investment Corporation 6.9%
Allied Investment Corporation II 4.35%
Allied Capital Corporation II 1.65%
The Sinkler Corporation 3.0%
4(m)i Registration Rights Agreement between the Company, Allied
Capital Corporation and certain of its affiliated companies,
Scimitar Development Capital Fund and Scimitar Development
Capital "B" Fund, Shipley Raidy Capital Partners, LP, and The
Sinkler Corporation, dated November 21,1996.
4(n)j Amended and Restated 1996 Incentive Stock Plan.
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:
<CAPTION>
Holder Amount
-------------------------------- -------------
<S> <C> <C>
Allied Investment Corporation $374,300
Allied Capital Corporation II $394,000
4(q)k Letter Agreement covering the issuance and sale by the Company
of Preferred Stock and issuance of warrants to
19
<PAGE>
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:
<CAPTION>
Holder Shares
---------------------------------- ----------
<S> <C> <C>
Allied Investment Corporation 258,944
Allied Capital Corporation II 272,572
The Sinkler Corporation 114,200
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:
<CAPTION>
Holder Shares
---------------------------------- ----------
<S> <C> <C>
Allied Investment Corporation 68,024
Allied Capital Corporation II 71,604
The Sinkler Corporation 30,000
4(t)k First Amendment to Investment Agreement between the Company
and Allied Capital Corporation and certain of its affiliated
companies (original agreement dated November 21, 1996) -
amendment dated September 12, 1997.
10(q)(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)f Employment agreement dated January 8, 1998 between the Company
and Charles G. Emley, Jr.
10(s)m Amendments No 6, 7, 8, and 9 to the Loan and Security
Agreement between Pico Macom, Inc. and HSBC Business Loans,
Inc., dated December 12, 1997, June 1, 1998, October 11, 1998
and November 13, 1998, respectively.
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.
</TABLE>
20
<PAGE>
KEY TO INDEX OF EXHIBITS INCORPORATED BY REFERENCE
a Previously filed by the Company as an exhibit to the Company's Registration
Statement on Form S-1, File No. 2-77439 and incorporated by reference.
b Previously filed by the Company as an exhibit to the Company's Registration
Statement on Form S-18, File No. 2-72318 and incorporated by reference.
c Previously filed by the Company as an exhibit to the Company's Form 10-K
for the fiscal year ended July 31, 1988 and incorporated by reference.
d Previously filed by the Company as an exhibit to the Company's Form 10-Q
for the fiscal quarter ended January 31, 1993 and incorporated by
reference.
e Previously filed by the Company as an exhibit to the Company's Form 8-K
filed on September 18, 1998 and incorporated by reference.
f 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.
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-K
for the fiscal year ended July 31, 1998.
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.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PICO PRODUCTS, INC.
DATE: December 15, 1998 /s/ E. James Selzer
------------------------------------
Chief Financial Officer
DATE: December 15, 1998 /s/Charles G. Emley, Jr.
------------------------------------
Chairman and Chief Executive
Officer
22
<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).
23
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-1999
<PERIOD-START> AUG-01-1998
<PERIOD-END> OCT-31-1998
<CASH> 46
<SECURITIES> 0
<RECEIVABLES> 3,888
<ALLOWANCES> 139
<INVENTORY> 7,025
<CURRENT-ASSETS> 10,995
<PP&E> 1,912
<DEPRECIATION> 1,261
<TOTAL-ASSETS> 12,407
<CURRENT-LIABILITIES> 15,157
<BONDS> 0
1,077
0
<COMMON> 42
<OTHER-SE> (3,943)
<TOTAL-LIABILITY-AND-EQUITY> 12,407
<SALES> 5,894
<TOTAL-REVENUES> 5,894
<CGS> 4,442
<TOTAL-COSTS> 5,825
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 418
<INCOME-PRETAX> (267)
<INCOME-TAX> 0
<INCOME-CONTINUING> (267)
<DISCONTINUED> 0
<EXTRAORDINARY> (151)
<CHANGES> 0
<NET-INCOME> (450)
<EPS-PRIMARY> (.11)
<EPS-DILUTED> (.11)
</TABLE>
