<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, 1999
------------------------
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 March 17, 1999.
Common Stock, $0.01 par value 4,215,913
- ----------------------------- ------------------------
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, 1999 and July 31, 1998 3-4
Condensed Consolidated Statements
of Income - Three and Six Months
Ended January 31, 1999 and 1998 5
Condensed Consolidated Statements
of Cash Flows - Six Months
Ended January 31, 1999 and 1998 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
2
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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>
January 31, July 31,
1999 1998
----------- --------
<S> <C> <C>
ASSETS:
CURRENT ASSETS:
Cash and cash equivalents $ 23 $ 93
Accounts receivable (less allowance
for doubtful accounts: January 31, 1999,
$141; July 31, 1998, $139) 3,936 3,871
Inventories (Note 2) 6,891 11,997
Prepaid expenses and other current
assets 127 161
------- -------
TOTAL CURRENT ASSETS 10,977 16,122
------- -------
PROPERTY, PLANT AND EQUIPMENT:
Buildings -- 217
Leasehold improvements 140 187
Machinery and equipment 1,775 2,420
------- -------
1,915 2,824
Less accumulated depreciation
and amortization 1,315 1,914
------- -------
600 910
------- -------
OTHER ASSETS:
Patents and licenses (less accumulated
amortization: January 31, 1999, $76
July 31, 1998, $75 144 147
Excess of cost over net assets of
businesses acquired (less accumulated
amortization; January 31, 1999, $440
July 31, 1998, $429) 138 152
Deposits and other non-current assets 456 625
------- -------
738 924
------- -------
$12,315 $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>
January 31, July 31,
1999 1998
------------- ----------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
- ----------------------------------------
CURRENT LIABILITIES:
Notes payable (Notes 6 & 7) $ 6,180 $ 9,139
Current portion of long-term debt 4,381 5,644
Accounts payable 3,345 3,614
Accrued expenses:
Legal and accounting 195 364
Payroll and payroll taxes 331 491
Other accrued expenses 774 661
Restructuring costs 220 269
-------- --------
TOTAL CURRENT LIABILITIES 15,426 20,182
LONG-TERM DEBT (Note 7) 44 115
COMMITMENTS AND CONTINGENCIES -- --
(Note 5)
REDEEMABLE PREFERRED STOCK, $.01 par value;
authorized 500,000 shares; issued
and outstanding 1,250 shares at January 31,
1999 and July 31, 1998 1,083 1,070
SHAREHOLDERS' DEFICIENCY:
Common shares, $.01 par value; authorized
15,000,000 shares issued and outstanding
4,215,913 shares at January 31, 1999 and
July 31, 1998 42 42
Additional paid-in capital 22,952 22,992
Stock subscriptions receivable (81) (81)
Accumulated deficit (27,044) (26,253)
Cumulative translation adjustment (107) (111)
-------- --------
TOTAL SHAREHOLDERS' DEFICIENCY (4,238) (3,411)
-------- --------
$ 12,315 $ 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 Six Months Ended
January 31, January 31,
---------------------------- --------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
SALES $ 5,183 $ 6,461 11,077 14,648
COSTS AND EXPENSES:
Cost of sales 3,873 4,691 8,315 10,605
Selling and administrative
expenses 1,443 1,525 2,838 3,330
----------- ----------- ----------- -----------
TOTAL COSTS AND
EXPENSES 5,316 6,216 11,153 13,935
----------- ----------- ----------- -----------
INCOME FROM
OPERATIONS (133) 245 (76) 713
GAIN ON SALE 177 -- 267
INTEREST INCOME 3 4 6 8
INTEREST EXPENSE (353) (468) (771) (937)
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME
TAXES AND EXTRAORDINARY ITEM (306) (219) (574) (216)
INCOME TAX PROVISION -- -- -- --
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE EXTRA-
ORDINARY ITEM AND DIVIDENDS
ON PREFERRED STOCK (306) (219) (574) (216)
EXTRAORDINARY ITEM -
LOSS RELATED TO EARLY
EXTINGUISHMENT OF DEBT -- -- (151) --
----------- ----------- ----------- -----------
NET INCOME (LOSS) (306) (219) (725) (216)
DIVIDENDS ON PREFERRED STOCK (34) (35) (66) (68)
----------- ----------- ----------- -----------
NET LOSS ATTRIBUTABLE TO
COMMON STOCK $ (340) $ (254) (791) (284)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
BASIC AND DILUTED
NET INCOME (LOSS) PER COMMON SHARE:
NET LOSS BEFORE
EXTRAORDINARY ITEM $ (.07) $ (.05) $ (.14) $ (.05)
EXTRAORDINARY LOSS -- -- (.03) --
----------- ----------- ----------- -----------
NET INCOME (LOSS) (.07) (.05) (.17) (.05)
DIVIDENDS ON PREFERRED STOCK $ (.01) $ (.01) (.02) (.02)
----------- ----------- ----------- -----------
NET LOSS ATTRIBUTABLE
TO COMMON STOCK $ (.08) $ (.06) $ (.19) $ (.07)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
SHARES USED IN PER SHARE
CALCULATIONS 4,215,913 4,185,913 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>
Six Months Ended
January 31,
--------------------
1999 1998
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) before Extraordinary Item
and Preferred Dividends $ (574) $ (216)
Adjustments to reconcile net income to net
cash provided by (used in)
operating activities:
Depreciation and amortization 193 239
Gain on Sale (267) --
Changes in operating assets
and liabilities 240 (665)
------- -------
NET CASH USED IN
OPERATING ACTIVITIES (408) (642)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures -- (31)
Sale of Assets 4,758
------- -------
NET CASH PROVIDED (USED) BY
INVESTING ACTIVITIES 4,758 (31)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments under a
line of credit agreement (2,959) (163)
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 (1,421) (150)
------- -------
NET CASH (USED) PROVIDED BY FINANCING
ACTIVITIES (4,420) 721
------- -------
NET (DECREASE) IN CASH
AND CASH EQUIVALENTS (70) 49
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 93 22
------- -------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 23 $ 71
------- -------
------- -------
</TABLE>
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,
1999, and the results of its operations and its cash flows for the three and
six-month periods ended January 31, 1999 and 1998. 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 January 31, 1999 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 $4,245,000 and
$5,478,000 representing the subordinated long-term debt, as a current liability
at January 31, 1999 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 (SEC). The preparation
of interim financial statements in conformity with GAAP, as modified by SEC
rules and regulations, requires
7
<PAGE>
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>
January 31, July 31,
1999 1998
----------- ---------
(in thousands)
<S> <C> <C>
Raw materials $ 1,495 $ 4,280
Work in process 112 761
Finished goods 5,284 6,956
------- -------
$ 6,891 $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 and six-month periods ended
January 31, 1999 and 1998 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 January 31, 1999 and 1998,
respectively. In addition, the Company had 2,020,678 shares issuable upon the
exercise of outstanding stock options and warrants at prices ranging from
$.60 to $3.19 at January 31, 1999.
8
<PAGE>
(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 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 $1,600,000 plus interest and
attorneys fees. The Company believed that Eagle's
9
<PAGE>
motion was procedurally improper and that, even if the amended complaint were
allowed by the District Court, it had meritorious defenses to the claims
stated in the amended complaint.
The Company responded to Eagle's motion, and Eagle promptly withdrew the
motion to file an amended complaint. At the same time Eagle filed a complaint
in New York State Supreme Court similar to the proposed amended federal
complaint. The Company filed a motion to dismiss Eagle's complaint, which has
been denied. The 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 $8,000,000 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 January 31,
1999).
The revolving line of credit is used to fund operating expenses, product
purchases and letters of credit for import purchases. The line has a
$1,000,000 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
$5,500,000 to $4,000,000. 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 senior lender notified the Company that it had terminated its credit
facility, effective December 31, 1998. The Company's senior lender has
continued to advance funds in accordance with the facilities advance rates.
However, there can be no assurance that the senior lender will continue to
advance funds. Continuation of the senior debt facility is critical to the
day-to-day operations of the Company. In the event the senior lender did not
continue to advance funds, the Company would need to find alternate sources
of financing. It is highly unlikely that the Company could obtain financing
at acceptable terms and conditions and consequently would have to consider
filing for protection under Chapter 11 of the Bankruptcy code. The Company
has retained an investment banking firm to advise it with respect to the
exploration of strategic alternatives that could lead to the possible sale or
merger of the Company. Such a sale or merger might be consummated under
Chapter 11 of the Bankruptcy code. However, the Company has not determined a
course of action and may ultimately decide to remain independent.
10
<PAGE>
The Company had approximately $6,180,000 outstanding under the senior
facility and the Company's had $89,000 of availability under its line of
credit on January 31, 1999.
At January 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 $4,245,000 as a current liability. However,
the holders of the subordinated debt have not 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 $1,390,000 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 Subordination 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.
In addition, the senior lender exercised 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. This standstill provision expires on March 17, 1999. 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 $5,200,000 and transferred the inventory and certain
manufacturing assets, including equipment, technical designs and plans to the
buyer.
The Company received gross proceeds of $5,200,000, after the deduction of the
net book value of the inventory and fixed assets sold the Company recorded a
gain $606,000. This gain was reduced to -0- due to certain contingencies
related to the reimbursement by the acquirer of expenses incurred in the
transfer of the operation to the acquirer.
In addition, the Company had entered into a commitment to purchase $4,000,000
of finished trap and filter inventory, of which approximately $2,200,000
remains at January 31, 1999.
11
<PAGE>
Subsequent to January 31, 1999 the Company was notified that the supplier
would no longer provide inventory to the Company until the Company was
current on its balance due. The Company is attempting to negotiate an
amendment to the five-year distribution arrangement. The outcome of this
matter cannot be determined at this time, however, the Company does not
expect a material, unfavorable impact on its operating results, due to the
low margins earned on sales of trap and filter product.
Through January 31, 1999, the Company had sales of $1,105,000 and $2,744,000
for the three and six-months ended January 31, 1999, respectively.
In November 1998, the Company sold its St. Kitts building and in a related
transaction settled a lawsuit related to the sale of the trap and filter
business. The Company received gross proceeds of $400,000 and recorded, after
the deduction of the value of the assets sold and transaction costs, a Gain
on Sale of $267,000.
(8) EXTINGUISHMENT OF DEBT
In September 1998 the Company repaid $1,390,000 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 $40,000.
In connection with this transaction, the Company has recorded an
Extraordinary Item, a Loss on Extinguishment of Debt of $151,000. 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 and six months ended January 31, 1999
and 1998.
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, 1999 with the three and six-month
period ended January 31, 1998, as shown by the unaudited condensed
consolidated statements of income included in this quarterly report.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Sales (in thousands): 1999 1998 % Decrease
------- ------- ----------
<S> <C> <C> <C>
Three Months Ended January 31 $ 5,183 $ 6,461 19.8%
Six Months Ended January 31 $11,077 $14,648 24.4%
</TABLE>
The decrease for the three and six-months ended January 31, 1999 as compared
to the same periods in 1998 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.
Cost of Sales (in thousands):
<TABLE>
<CAPTION>
% Increase
1999 1998 (Decrease)
--------- --------- -----------
<S> <C> <C> <C>
Three Months Ended January 31 $ 3,873 $ 4,691 (17.4%)
As a percentage of sales 74.7% 72.6% 2.9%
Six Months Ended January 31 $ 8,315 $ 10,605 (21.6%)
As a percentage of sales 75.1% 72.4% 3.7%
</TABLE>
The decrease in cost of sales was due to the decrease in sales. Cost of
sales, as a percentage of sales, increased due to lower overall volume over
which overhead expenses could be absorbed and an unfavorable, as compared to
prior period, product mix shift to lower margin product.
Selling and Administration Expenses (in thousands)
<TABLE>
<CAPTION>
% Increase
1999 1998 (Decrease)
--------- --------- ----------
<S> <C> <C> <C>
Three Months Ended January 31 $ 1,443 $ 1,525 (5.4%)
As a percentage of sales 27.8% 23.6% 17.8%
Six Months Ended January 31 $ 2,838 $ 3,330 (14.8%)
As a percentage of sales 25.6% 22.7% 12.8%
</TABLE>
The decrease in selling and administration costs from 1997 to 1998 is a
result of on-going cost control efforts, including headcount reductions begun
in fiscal 1997, continuing through fiscal 1998 and into fiscal 1999. The
decreases for both the three- and six-months ended January 31, 1999, as
compared to the same periods in 1998 resulted from the reduction of selling,
production, and administrative headcount and expenses related to the trap and
filter business.
13
<PAGE>
Interest expense (in thousands):
The decrease in interest expense is due to the repayment of both senior and
subordinated debt in September 1998 using proceeds received from the sale of
the trap and filter manufacturing operation.
Gain on Sale:
Included in Gain on Sale for the six-months ended January 31, 1999 is
$267,000 from the sale of the St. Kitts facility. During the three-months
ended January 31, 1999 the Company reversed $80,000 of the Gain related to
the sale of trap and filter business recorded during the three-months ended
October 31, 1998. This reversal was due to certain costs incurred in
completing the transfer of the trap and filter business to the purchaser, for
which the purchaser may not reimburse the Company.
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 January 31,
1999 and 1998 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 the Company obtaining adequate
financing to purchase product inventory.
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 $8,000,000 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
$1,000,000 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
$5,500,000 to $4,000,000. 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 senior lender notified the Company that it had terminated its credit
facility, effective December 31, 1998. The Company's senior lender has
continued to advance funds in accordance with the facilities advance rates.
However, there can be no assurance that the senior lender will continue to
advance funds. Continuation of the senior debt facility is critical to the
day-to-day operations of the Company. In the event the senior lender did not
continue to advance funds, the Company would need to find alternate sources
of financing. It is highly unlikely that the Company could obtain financing
at acceptable terms and conditions and consequently would have to consider
filing for protection under Chapter 11 of the Bankruptcy code. The Company
has retained an investment banking firm to advise it with respect to the
exploration of strategic alternatives that could lead to the possible sale or
merger of the Company. Such a sale or merger might be consummated under
Chapter 11 of the Bankruptcy code. However, the Company has not determined a
course of action and may ultimately decide to remain independent.
14
<PAGE>
The Company had approximately $6,768,000 outstanding under the senior
facility and the Company's borrowings exceeded its calculated borrowing base
by $290,000 on January 31, 1999.
At January 31, 1999, 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 had 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 Subordination 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 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.
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
15
<PAGE>
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.
On February 18, 1999 the Company announced that it had notified
the American Stock Exchange that it was withdrawing its appeal of the
decision of the Exchange's staff to file an application with the
Securities and Exchange Commission to delist the Company's Common
Stock. The Exchange's staff decision was based on the Company's
failure to meet continuing listing guidelines, arising from past
operating losses and a resulting accumulated deficit as well as other
factors. The Company's shares have begun to trade on the
over-the-counter market under symbol PPIP.
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.
(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:
<TABLE>
<CAPTION>
Holder Amount
--------------------------------- ----------
<S> <C>
Allied Investment Corporation $2,300,000
Allied Investment Corporation II $1,450,000
Allied Capital Corporation II $ 550,000
</TABLE>
4(j)i Letter Agreement covering the issuance and sale by
the Company of Preferred Stock to The Sinkler
Corporation, dated November 21, 1996.
18
<PAGE>
4(k)i Stock Purchase Warrant issued by the Company to
Allied Capital Corporation, dated November 21, 1996.
The Company has issued warrants in substantially the
same form as this warrant to the following parties
for the following number of shares:
<TABLE>
<CAPTION>
Holder Shares
------------------------------------------------ ---------------
<S> <C>
Allied Investment Corporation 358,484
Allied Investment Corporation II 226,001
Allied Capital Corporation II 85,724
The Sinkler Corporation 155,863
Shipley Raidy Capital Partners, LP 20,000
</TABLE>
4(l)i Stock Purchase Warrant issued by the Company to
Allied Capital Corporation, dated November 21, 1996.
The Company has issued warrants in substantially the
same form as this warrant to the following parties
for the following percentage of shares:
<TABLE>
<CAPTION>
Percentage of
Holder Shares
-------------------------------------------- -----------------
<S> <C>
Allied Investment Corporation 6.9%
Allied Investment Corporation II 4.35%
Allied Capital Corporation II 1.65%
The Sinkler Corporation 3.0%
</TABLE>
4(m)i Registration Rights Agreement between the Company,
Allied Capital Corporation and certain of its
affiliated companies, Scimitar Development Capital
Fund and Scimitar Development Capital "B" Fund,
Shipley Raidy Capital Partners, LP, and The Sinkler
Corporation, dated November 21, 1996.
4(n)j Amended and Restated 1996 Incentive Stock Plan.
4(o)k Investment Agreement between the Company and certain
of its subsidiaries, and Allied Capital Corporation
and certain of its affiliated companies, dated
September 12, 1997.
4(p)k Junior Subordinated Secured Debenture issued by the
Company and certain of its subsidiaries, payable to
Allied Capital Corporation, dated September 12, 1997.
The Company has issued junior subordinated secured
debentures in substantially the same form as this
debenture to the following parties for the following
amounts:
<TABLE>
<CAPTION>
Holder Amount
----------------------------- -------------------
<S> <C>
Allied Investment Corporation $374,300
Allied Capital Corporation II $394,000
</TABLE>
19
<PAGE>
4(q)k Letter Agreement covering the issuance and sale by
the Company of Preferred Stock and issuance of
warrants to purchase shares of Common Stock to The
Sinkler Company, dated September 12, 1997.
4(r)k Stock Purchase Warrant issued by the Company to
Allied Capital Corporation, dated September 12, 1997.
The Company has issued warrants in substantially the
same form as this warrant to the following parties
for the following number of shares:
<TABLE>
<CAPTION>
Holder Shares
----------------------------- ----------
<S> <C>
Allied Investment Corporation 258,944
Allied Capital Corporation II 272,572
The Sinkler Corporation 114,200
</TABLE>
4(s)k Stock Purchase Warrant -- Subject to Call issued by
the Company to Allied Capital Corporation, dated
September 12, 1997. The Company has issued warrants
in substantially the same form as this warrant to the
following parties for the following number of shares:
<TABLE>
<CAPTION>
Holder Shares
----------------------------- -----------
<S> <C>
Allied Investment Corporation 68,024
Allied Capital Corporation II 71,604
The Sinkler Corporation 30,000
</TABLE>
4(t)k First Amendment to Investment Agreement between the
Company and Allied Capital Corporation and certain of
its affiliated companies (original agreement dated
November 21, 1996)- amendment dated September 12,
1997.
10(q)(l) Amendment No. 5 to the Loan and0 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).
28
(b) Reports on Form 8-K:
None.
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: March 22, 1999 /s/ Mike Gavigan
------------------------------------
Chief Financial Officer
DATE: March 22, 1999 /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
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-1999
<PERIOD-START> NOV-01-1998
<PERIOD-END> JAN-31-1999
<CASH> 23
<SECURITIES> 0
<RECEIVABLES> 4,077
<ALLOWANCES> 141
<INVENTORY> 6,891
<CURRENT-ASSETS> 10,977
<PP&E> 1,915
<DEPRECIATION> 1,315
<TOTAL-ASSETS> 12,315
<CURRENT-LIABILITIES> 15,426
<BONDS> 0
1,083
0
<COMMON> 42
<OTHER-SE> (4,280)
<TOTAL-LIABILITY-AND-EQUITY> 12,315
<SALES> 5,183
<TOTAL-REVENUES> 5,183
<CGS> 3,873
<TOTAL-COSTS> 5,316
<OTHER-EXPENSES> (177)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 353
<INCOME-PRETAX> (306)
<INCOME-TAX> 0
<INCOME-CONTINUING> (306)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (340)
<EPS-PRIMARY> (.08)
<EPS-DILUTED> (.08)
</TABLE>
