<PAGE> 1
FORM 10-Q/A
AMENDMENT NO. 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 28, 1996
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: 0-21892
PINNACLE MICRO, INC.
DELAWARE 33-0238563
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
PINNACLE MICRO, INC.
19 TECHNOLOGY DRIVE
IRVINE, CALIFORNIA 92618
(714) 789-3000
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 requirements for the past 90 days. Yes No X
----- -----
As of November 6, 1996, there were outstanding 9,061,840 shares of Registrant's
Common Stock.
Page 1 of 13 pages
Exhibit Index appears on Page 12
<PAGE> 2
PINNACLE MICRO, INC.
The Registrant hereby amends Item 1, Financial Statements, Item 2,
Management's Discussion and Analysis of Financial Condition and Item 6,
Exhibits, for the period ended September 28, 1996.
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I. Financial Information
Item 1. Financial Statements 3
Condensed Balance Sheets at September 28, 1996
and December 30, 1995 3
Condensed Statements of Operations for the thirteen
weeks and thirty-nine weeks ended September 28, 1996
and September 30, 1995 4
Condensed Statements of Cash Flows for the thirty-nine
weeks ended September 28, 1996 and September 30, 1995 5
Notes to Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Part II. Other Information - Omitted 12
Item 6. Exhibits 12
Signatures 13
</TABLE>
2
<PAGE> 3
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PINNACLE MICRO, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September 28, December 30,
1996 1995
------------- ------------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 2,971,000 $ 3,606,000
Accounts receivable, net 10,272,000 11,354,000
Income taxes receivable 963,000 999,000
Inventories 12,317,000 11,413,000
Prepaid expenses and other current assets 705,000 961,000
Deferred income taxes 1,058,000 1,058,000
------------ ------------
Total current assets 28,286,000 29,391,000
Deferred interest related to convertible debentures 380,000 -
Furniture and equipment, net 1,787,000 2,098,000
Deferred income taxes 213,000 213,000
Other assets 908,000 303,000
------------ ------------
Total assets $ 31,574,000 $ 32,005,000
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 11,831,000 $ 11,644,000
Accrued expenses 5,004,000 1,244,000
Payroll related liabilities 1,125,000 956,000
Note payable to bank and current
portion of long-term debt - 6,000
------------ ------------
Total current liabilities 17,960,000 13,850,000
Long-term debt, less current portion 10,000,000 14,000
Other liabilities 829,000 1,400,000
Commitments and contingencies
Stockholders' equity:
Common stock 8,000 8,000
Additional paid-in capital 19,304,000 16,158,000
Retained earnings (16,146,000) 775,000
Foreign currency translation adjustment (381,000) (200,000)
------------ ------------
Total stockholders' equity 2,785,000 16,741,000
------------ ------------
Total liabilities and stockholders' equity $ 31,574,000 $ 32,005,000
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
3
<PAGE> 4
PINNACLE MICRO, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
13 Weeks Ended 13 Weeks Ended 39 Weeks Ended 39 Weeks Ended
Sept. 28, 1996 Sept. 30, 1995 Sept. 28, 1996 Sept. 30, 1995
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net sales $14,259,000 $21,401,000 $ 44,026,000 $62,186,000
Cost of sales 11,646,000 15,490,000 36,132,000 45,192,000
----------- ----------- ------------ -----------
Gross profit 2,613,000 5,911,000 7,894,000 16,994,000
----------- ----------- ------------ -----------
Operating expenses:
Selling, general and administrative 4,451,000 4,325,000 14,132,000 13,123,000
Research and development 1,494,000 1,378,000 4,522,000 3,058,000
Nonrecurring charges 4,333,000 198,000 4,584,000 606,000
----------- ----------- ------------ -----------
Total operating expenses 10,278,000 5,901,000 23,238,000 16,787,000
----------- ----------- ------------ -----------
Operating income (loss) (7,665,000) 10,000 (15,344,000) 207,000
Interest income (expense) (142,000) 29,000 (288,000) 115,000
Non-cash interest expense related
to convertible debentures (1,286,000) - (1,286,000) -
----------- ----------- ------------ -----------
Income (loss) before income taxes (9,093,000) 39,000 (16,918,000) 322,000
Income tax expense - 15,000 3,000 124,000
----------- ----------- ------------ -----------
Net income (loss) $(9,093,000) $ 24,000 $(16,921,000) $ 198,000
=========== =========== ============ ===========
Net income (loss) per share $ (1.15) $ 0.00 $ (2.14) $ 0.02
=========== =========== ============ ===========
Weighted average common shares
outstanding 7,926,000 8,121,000 7,904,000 7,995,000
=========== =========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
4
<PAGE> 5
PINNACLE MICRO, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
39 Weeks Ended 39 Weeks Ended
Sept. 28, 1996 Sept. 30, 1995
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $(16,921,000) $ 198,000
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation and amortization 979,000 682,000
Provision for doubtful accounts 306,000 113,000
Provision for product returns and price protection 831,000 (300,000)
Provision for inventory obsolescence 427,000 (304,000)
Non-cash interest expense 1,286,000 -
Deferred compensation recognized - 13,000
Changes in operating assets and liabilities:
Accounts receivable (55,000) (2,916,000)
Income taxes receivable 36,000 (319,000)
Inventories (1,331,000) (1,567,000)
Prepaid expenses and other current assets 256,000 (740,000)
Other assets (29,000) (293,000)
Accounts payable and accrued expenses 3,761,000 2,905,000
Payroll related liabilities 169,000 175,000
Income taxes payable - (294,000)
Other liabilities 829,000 -
------------ -----------
Net cash used in operating activities (9,456,000) (2,647,000)
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Sale of short-term investments - 1,669,000
Purchase of furniture and equipment (644,000) (1,058,000)
------------ -----------
Net cash provided by (used in) investing activities (644,000) 611,000
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of convertible debentures 10,000,000 -
Payment of debt issuance costs (600,000) -
Principal payments on note payable to bank - (1,400,000)
Principal payments on long-term debt (20,000) (19,000)
Proceeds from exercise of stock options 56,000 141,000
Tax benefit from exercise of stock options 4,000 49,000
Proceeds from issuance of stock through
the employee stock purchase plan 20,000 135,000
------------ -----------
Net cash provided by (used in) financing activities 9,460,000 (1,094,000)
------------ -----------
Effect of exchange rate changes on cash 5,000 (83,000)
------------ -----------
Decrease in cash and cash equivalents (635,000) (3,213,000)
Cash and cash equivalents at beginning of period 3,606,000 4,866,000
------------- -----------
Cash and cash equivalents at end of period $ 2,971,000 $ 1,653,000
============ ===========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 178,000 $ 31,000
============ ===========
Income taxes $ - $ 670,000
============ ===========
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
5
<PAGE> 6
PINNACLE MICRO, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 28, 1996
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Interim Period Accounting Policies
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles.
Certain information normally included in annual financial statements
prepared in accordance with generally accepted accounting principles
has been condensed or omitted pursuant to the rules and regulations of
the Securities and Exchange Commission, ("SEC") and these financial
statements should be read in conjunction with the Company's Form 10-K
for the year ended December 30, 1995. In the opinion of management,
the accompanying condensed financial statements reflect all material
adjustments which are necessary for a fair presentation of the
financial position and results of operations and cash flows as of and
for the thirty-nine weeks ended September 28, 1996 and September 30,
1995.
Restatements - 1996
This Quarterly Report on Form 10-Q/A is filed to restate the Company's
financial statements for the thirteen week and thirty-nine week periods
ended September 28, 1996. The Company has since determined that the
recognition of non-cash interest expense should be reported for the
thirteen week and thirty-nine week periods ended September 28, 1996 as
more fully described in Note 5.
The aggregate effect of such adjustments in the thirteen week
and thirty-nine week periods ended September 28, 1996 is summarized
below:
<TABLE>
<CAPTION>
Thirteen Weeks Ended Sept. 28, 1996 Thirty-nine Weeks Ended Sept. 28, 1996
------------------------------------------ ------------------------------------------
(Before Restatements) (After Restatements) (Before Restatements) (After Restatements)
--------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C> <C>
Total Assets $31,194,000 $31,574,000 $31,194,000 $31,574,000
Stockholders' equity 2,405,000 2,785,000 2,405,000 2,785,000
Operating loss 7,665,000 7,665,000 15,344,000 15,344,000
Net loss 7,807,000 9,093,000 15,635,000 16,921,000
Net loss per share $(0.98) $(1.15) $(1.98) $(2.14)
</TABLE>
Revenue Recognition
The Company recognizes product sales revenue at the time of shipment
and records a reserve for estimated sales returns and price
adjustments. The Company has agreements with its resellers which,
under certain circumstances, provide for stock rotation for slow-
moving items and price protection for inventories held by the
resellers at the time of published price reductions.
6
<PAGE> 7
Foreign Currency Transactions
Gains and losses from foreign currency transactions are included in
operating results in selling, general and administrative expenses.
Transaction gains increased operating income in the thirteen weeks
ended September 28, 1996 and September 30, 1995 by $52,000 and
$105,000, respectively. Transaction gains increased operating income
in the thirty-nine weeks ended September 28, 1996 by $230,000 while
transaction losses decreased operating income for the thirty-nine
weeks ended September 30, 1995 by $684,000.
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
September 28, December 30,
1996 1995
------------- ------------
<S> <C> <C>
Components and work-in-process $10,168,000 $ 9,522,000
Finished goods 2,149,000 1,891,000
----------- -----------
$12,317,000 $11,413,000
=========== ===========
</TABLE>
3. INCOME TAXES
The Company estimated an effective tax rate of 38.5% for the thirteen
weeks and thirty-nine weeks ended September 30, 1995. The Company did
not accrue a tax benefit for the operating losses incurred in the
thirteen week and thirty-nine week periods ended September 28, 1996.
4. CONTINGENCIES
On March 15, 1996, a complaint was filed against the Company and
certain of its directors and then executive officers in a securities
class action lawsuit which alleges that Company management engaged in
improper accounting practices and made certain false and misleading
statements. The complaint was filed in the United States District
Court for the Central District of California under the case name
Wills, Cohen, et al. v. William Blum et al., Case No. SACV96-261GLT.
The Company denies all allegations and intends to vigorously contest
the suit. The ultimate outcome of this matter cannot presently be
determined. Accordingly, no provision for any liability that may
result has been made in the accompanying financial statements.
However, any adverse determination with respect to the pending lawsuit
could have a material adverse effect on the Company's financial
statements. The Company expects to incur significant legal costs
relating to this suit in 1996 and into 1997.
5. CONVERTIBLE DEBENTURES
The Company completed an offshore placement of $10,000,000 principal
amount of convertible subordinated 8% notes in July 1996. The
$10,000,000 placement was completed on July 19, 1996, yielding
aggregate net proceeds of $9,400,000 after commissions (fees) to First
Bermuda Securities Limited ("First Bermuda"). First Bermuda will also
receive additional compensation in the form of warrants exercisable
for five years at a strike price of 125% of the closing bid price on
the closing date. First Bermuda received customary piggyback
registration rights beginning 90 days from the closing date and demand
rights after two years. The note holders may convert the principal of
the 8% notes in thirds, at discounts from the then market price of
15%, 17.5% and 20%, in intervals commencing 60, 90 and 120 days after
the closing.
The first agreed upon conversion date of the convertible debentures
was September 14, 1996. There were no conversions as of September 28,
1996. As a result of the conversion requests received through
October, approximately $5,000,000 of the debentures had been converted
into
7
<PAGE> 8
approximately 1,137,000 shares of common stock at conversion prices
ranging from $4.55 to $6.44 per share. Prior to the first conversion
date, the Company had 7,924,850 shares of its common stock issued and
outstanding. The Company had approximately 9,062,000 shares
outstanding as of November 6, 1996, the increase resulting from share
issuances from debenture conversions. The new shares increased the
Company's issued and outstanding common stock by approximately 14.3%
as compared the issued and outstanding immediately prior to the first
conversion date.
A portion of the proceeds from this placement and cash on hand were
used to repay the bank loan with Bank of America, the Company's
lender, on July 17, 1996. The Company, which no longer has a lending
relationship with Bank of America, subsequently entered into a secured
lending relationship in September 1996 with Coast Business Credit
which provides for borrowings of up to $10,000,000. The Company had
no borrowings against this lending relationship at September 28, 1996
but borrowed $3,000,000 as of November 6, 1996.
According to the views of members of the Staff of the SEC which the
Company became aware of in December 1996, convertible debt instruments
which are convertible at a discount to market should be accounted for
by treating such discount as additional interest expense. The Company
determined to conform those views and computed the amount of the
discount based on the difference between the conversion price and fair
value of the underlying common stock on the date the debenture was
issued. The Company recorded $1,666,000 of additional paid-in capital
for the discount related to the embedded interest in the convertible
debentures. Of this amount, $1,286,000 was amortized and is included
in the caption "Non-cash interest expense related to convertible
debentures" in the accompanying statement of operations for the
thirteen week and thirty-nine week periods ended September 28, 1996.
The unamortized balance of deferred interest related to convertible
debentures is $380,000 at September 28, 1996 and is being amortized to
interest expense over the period that the debentures are first
convertible using the effective interest rate method. When this
interest is fully amortized through the fourth quarter 1996, the net
effect on equity at year-end will be nil.
6. RESTRUCTURING CHARGES
During the third quarter of 1996, the Company recorded nonrecurring
charges of $4,333,000 which include a restructuring charge of
$2,731,000 for costs associated with the Company's planned
consolidation and transfer of manufacturing operations to Colorado
Springs, Colorado and the closing of its branch office in Japan, as
well as a charge of $1,602,000 primarily for changes to major
component contracts with two key suppliers. As a result of the
manufacturing consolidation, the Company expects the elimination of
approximately 30 manufacturing positions in California, of which
approximately half will be replaced in Colorado. The majority of
these liabilities should be paid or settled by the end of the 1997
fiscal year.
8
<PAGE> 9
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANINGS OF
SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934. ACTUAL RESULTS AND EVENTS COULD DIFFER MATERIALLY FROM
THOSE PROJECTED AS A RESULT OF THE RISK FACTORS SET FORTH IN THIS REPORT.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Net Sales
Net sales were $21,401,000 and $14,259,000 for the thirteen weeks ended
September 30, 1995 and September 28, 1996, respectively, representing a
decrease of 33%. Net sales were $62,186,000 and $44,026,000 for the
thirty-nine weeks ended September 30, 1995 and September 28, 1996,
respectively, representing a decrease of 29%. These decreases are primarily
attributable to decreased unit sales and average sales prices of the current
recordable CD, Sierra and Tahoe 230 products. While the recordable CD product
is facing increased competition, the Sierra and Tahoe 230 products have reached
the end of their product lives. These decreases were partially offset by sales
of the Vertex product which began shipping at the end of the second quarter of
1996 and the Tahoe 640 product which began shipping at the end of the third
quarter of 1996.
Gross Profit
Gross profit decreased from $5,911,000 for the thirteen weeks ended September
30, 1995, to $2,613,000 for the thirteen weeks ended September 28, 1996, and
decreased as a percentage of net sales from 27.6% to 18.3%. Gross profit
decreased from $16,994,000 for the thirty-nine weeks ended September 30, 1995,
to $7,894,000 for the thirty-nine weeks ended September 28, 1996, and decreased
as a percentage of net sales from 27.3% to 17.9%. As noted above, the Company
has observed increased competition in the recordable CD market for its current
products and this competition placed additional pressures on selling prices and
gross margins during the first three quarters of 1996, and is expected to
continue placing pressure on gross margins in future periods for existing
recordable CD products. The reduction in gross profit is also attributable to
the Sierra and Tahoe 230 products which reached the end of their product lives.
The Company currently maintains manufacturing facilities in both California and
Colorado, each of which are currently underutilized. The overhead costs
associated with these facilities significantly reduced the Company's gross
margins in the current thirteen week and thirty-nine week periods. The Company
plans to consolidate all manufacturing operations into one facility located in
Colorado as part of the announced restructuring in order to reduce overhead
costs and increase efficiencies. (See Note 6 of Notes to Condensed Financial
Statements).
Selling, General and Administrative
Selling, general and administrative expenses were $4,325,000 and $4,451,000 in
the thirteen weeks ended September 30, 1995 and September 28, 1996,
respectively, and represented 20.2% and 31.2% of net sales. Selling, general
and administrative expenses were $13,123,000 and $14,132,000 in the thirty-nine
weeks ended September 30, 1995 and September 28, 1996, respectively, and
represented 21.1% and 32.1% of net sales. The increase in expenditures
resulted primarily from increased advertising and promotional expenditures and
the expansion of the Company's sales and administrative staffs. In the
thirteen weeks ended September 30, 1995 and September 28, 1996, selling,
general and administrative expenses were decreased by $105,000 and $52,000,
respectively, because of Japanese Yen denominated transactions as the value of
the U.S. dollar fluctuated in relationship to the Japanese Yen. Selling,
general and administrative expenses were increased by $684,000 and decreased by
$230,000 for the thirty-nine weeks ended September 30, 1995 and September 28,
1996, respectively, for the same reason. The Company has
9
<PAGE> 10
initiated a plan of restructuring intended to reduce its cost structure in
1997, including the closing of its branch office in Japan. (See Note 6 of
Notes to Condensed Financial Statements).
Research and Development
Research and development expenses were $1,378,000 and $1,494,000 for the
thirteen weeks ended September 30, 1995 and September 28, 1996, respectively,
or 6.4% and 10.5% of net sales. Research and development expenses were
$3,058,000 and $4,522,000 for the thirty-nine weeks ended September 30, 1995
and September 28 1996, respectively, or 4.9% and 10.3% of net sales. These
increases resulted from increased staffing at the Company's research and
development facility, along with expenses for Apex and Vertex prototypes and
for ASIC development fees paid to third parties. The Company expects to
increase its research and development expense during the next twelve months to
fund new product development projects.
Nonrecurring Charges
Nonrecurring charges were $198,000 and $4,333,000 in the thirteen weeks ended
September 30, 1995 and September 28, 1996, respectively. Nonrecurring charges
were $606,000 and $4,584,000 in the thirty-nine weeks ended September 30, 1995
and September 28, 1996, respectively. Nonrecurring charges for the current
period also include $2,731,000 for costs associated with the Company's planned
restructuring and $1,602,000 primarily for changes to major component contracts
with two key suppliers. Also included in nonrecurring charges are certain
professional fees related to the restatements and related legal matters.
Management expects related legal fees to continue at noticeable levels through
1996 and into 1997. (See Notes 4 and 6 of Notes to Condensed Financial
Statements).
Non-cash Interest Expense Related to Convertible Debentures
Non-cash interest expense, which was $1,286,000 for the thirteen weeks ended
September 28, 1996, results from issuing debentures which are convertible at a
discount from market price of the common stock. The non-cash interest recorded
on the convertible debentures is amortized over the period which the debentures
are first convertible and will have no effect on stockholders' equity. The
remaining deferred interest related to convertible debentures totaled $380,000
at September 28, 1996 and will be amortized during the fourth quarter of 1996.
(See Note 5 of Notes to Condensed Financial Statements).
LIQUIDITY AND CAPITAL RESOURCES
As of September 28, 1996, the Company had cash and cash equivalents of
$2,971,000 as compared to $3,606,000 at December 30, 1995. During the
thirty-nine weeks ended September 30, 1995, the Company's operations used
$2,647,000 in cash, while they used $10,056,000 in cash during the thirty-nine
weeks ended September 28, 1996. Inventories increased from $11,413,000 at
December 30, 1995 to $12,317,000 at September 28, 1996 as the Company procured
additional quantities of long lead time components used in the Vertex and Apex
products. Accrued expenses increased from $1,244,000 at December 30, 1995 to
$5,004,000 at September 28, 1996 as a result of accrued restructuring charges.
Accounts receivable decreased from $11,354,000 at December 30, 1995 to
$10,272,000 at September 28, 1996 as the Company experienced decreased sales in
the current period.
Portions of the Company's accounts payable balance typically include items
denominated in Japanese Yen. As the Japanese Yen generally strengthened during
the thirty-nine weeks ended September 30, 1995, the cost to repay these
liabilities in terms of U.S. Dollars increased substantially. The Company has
renegotiated most of its principal contracts with Japanese suppliers for
payment in U.S. Dollars. In contrast, as the Japanese Yen generally weakened
during the thirty-nine weeks ended September 28, 1996, the cost to repay these
liabilities in terms of U.S. Dollars decreased. (See "Selling, General and
Administrative" above for details of these expenses.) These Japanese Yen
liabilities were not hedged at September 28, 1996.
10
<PAGE> 11
The Company's investing activities during this period included capital
expenditures of $644,000 primarily for test and manufacturing equipment
associated with the Company's manufacturing facility in Colorado.
In October 1996, the Company entered into a Loan and Security Agreement with
Coast Business Credit which permits the Company to borrow the lesser of
$10,000,000 at any one time or an available credit limit determined by a
formula based on the Company's receivables, inventory and equipment and a term
loan limitation. The loan agreement has a letter of credit sublimit of
$3,500,000 and all amounts outstanding bear interest at a rate equal to the
"prime rate" (as defined in the agreement) plus 1-3/4% per annum. The
Company's obligations under the agreement are secured by assets of the Company.
The agreement contains various covenants and the scheduled maturity date of the
agreement is September 30, 1998, subject to renewal as provided for in the
agreement. As of November 6, 1996, the Company had borrowed approximately
$3,000,000 under the agreement.
In addition to the Loan and Security Agreement with Coast Business Credit, the
Company also plans an additional private placement of $8,000,000 of convertible
subordinated notes with First Bermuda to take place in the fourth quarter of
1996. The Company believes the liquidity provided by the lending relationship
with Coast Business Credit along with the additional $8,000,000 from the
private placement should provide adequate working capital for the Apex ramp-up
of manufacturing which is expected in the fourth quarter of 1996. If the
Company can not complete the planned fourth quarter offshore placement of
subordinated debentures it is likely to have serious liquidity problems. (See
Note 5 of Notes to Condensed Financial Statements).
GENERAL AND RISK FACTORS
Vertex and Apex
Vertex 2.6 GB optical drive was relaunched in June 1996. Current production is
sufficient to satisfy the existing backlog of orders and meet current demand.
Apex 4.6 GB optical drive was in pilot release for evaluation before volume
production begins in November. As the scheduled Apex production date in the
fourth quarter has drawn nearer, customer demand for Vertex is softening. In
the third quarter, the Company began testing the credit card direct sales
backlog for Apex, some of which were booked more than one year ago.
Verification of orders is continuing, with approximately 30% of credit card
orders (which is a small part of the backlog) dropping out. Management may
make changes in Vertex's market position and in its sales strategy in the
fourth quarter in an attempt to improve Vertex sales in subsequent periods.
Market acceptance of Apex is critical to the Company's success in the near
term.
Challenges
The Company's main challenges fall into three categories: technology,
management and liquidity. The Company's future success depends upon its R&D
strategy and investments and related identification and development of new
markets for the Company's products. The Company is still building the
management team it needs. Management is actively recruiting a Vice President
of Marketing. The Company's cash requirements will be high through 1996 and
into the second quarter of 1997, as the Company invests in R&D and
manufacturing ramp-up. If the Company is unable to raise capital through the
planned second offshore private placement, growth will be slowed.
The manufacturing consolidation and reorganization in Colorado Springs may not
be completed until the first quarter of next year due to a planned move to a
new facility.
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<PAGE> 12
Background Risks
The Company's quarterly operating results fluctuate significantly depending on
factors such as timing of product introductions by the Company and its
competitors, market acceptance of new products and enhanced versions of the
Company's existing products, changes in pricing policies by the Company and its
competitors, currency fluctuations and the timing of expenditures on
advertising, promotion and research and development.
In addition, the Company's component purchases, production and spending levels
are made based upon forecasted demand for the Company's products. Accordingly,
any inaccuracy in forecasting could adversely affect the Company's results of
operations. Demand for the Company's products could be adversely affected by a
slowdown in the overall demand for computer systems or data storage products.
Further, as is common in many high technology companies, the Company's
shipments tend to be disproportionately higher in the latter part of each
quarter. The Company has historically experienced an increase in the number of
orders and shipments in the latter part of each calendar quarter and the
Company expects this pattern to continue in the future. The Company's failure
to receive anticipated orders or to complete shipments in the latter part of a
quarter could have a material adverse effect on the Company's results of
operations for that quarter. Past results are not necessarily indicative of
future performance for any particular period.
The Company continues to face competition from much larger magnetic and optical
storage device developers, including Fujitsu, Sony and Philips. These
competitors have larger R&D budgets and staffs, greater engineering and
manufacturing experience, and may be able to bring comparable or superior
products to market which could negatively impact the results of the Company.
PART II. OTHER INFORMATION
OMITTED
ITEM 6. EXHIBITS
(a) Exhibits:
Exhibit Number Description Page Number
- -------------- ----------- -----------
27.1 Financial Data Schedule
12
<PAGE> 13
SIGNATURES
PINNACLE MICRO, INC.
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.
Date: March 24, 1997 By: /s/ KENNETH C. CAMPBELL
--------------------------------
Kenneth C. Campbell
President
(Duly Authorized Officer)
Date: March 24, 1997 By: /s/ ROGER HAY
--------------------------------
Roger Hay
Executive Vice President
and Chief Financial Officer
(Principal Financial Officer
and Principal Accounting Officer)
13
<TABLE> <S> <C>
<ARTICLE> 5 <LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONDENSED BALANCE SHEET AS OF SEPTEMBER 28, 1996 AND THE UNAUDITED
CONDENSED STATEMENT OF OPERATIONS FOR THE THIRTY-NINE WEEKS ENDED SEPTEMBER 28,
1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-28-1996
<PERIOD-START> DEC-31-1995
<PERIOD-END> SEP-28-1996
<CASH> 2,971
<SECURITIES> 0
<RECEIVABLES> 11,235
<ALLOWANCES> 985
<INVENTORY> 12,317
<CURRENT-ASSETS> 28,286
<PP&E> 4,997
<DEPRECIATION> 3,210
<TOTAL-ASSETS> 31,574
<CURRENT-LIABILITIES> 17,960
<BONDS> 10,000
0
0
<COMMON> 8
<OTHER-SE> 2,777
<TOTAL-LIABILITY-AND-EQUITY> 31,574
<SALES> 44,026
<TOTAL-REVENUES> 44,026
<CGS> 36,132
<TOTAL-COSTS> 36,132
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,574
<INCOME-PRETAX> (16,918)
<INCOME-TAX> 3
<INCOME-CONTINUING> (16,921)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (16,921)
<EPS-PRIMARY> (2.14)
<EPS-DILUTED> (2.14)
</TABLE>
