FORM 10-Q
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 March 29, 1997
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 / X / No / /.
----- -----
As of May 2, 1997, there were outstanding 11,931,458 shares of Registrant's
Common Stock.
Page 1 of pages
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Exhibit Index appears on Page 12
PINNACLE MICRO, INC.
INDEX
PAGE
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Part I. Financial Information
Item 1. Financial Statements
Condensed Balance Sheets at March 29, 1997
and December 28, 1996 3
Condensed Statements of Operations for the thirteen
weeks ended March 29, 1997 and March 30, 1996 4
Condensed Statements of Cash Flows for the thirteen
weeks ended March 29, 1997 and March 30, 1996 5
Notes to Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
Part II. Item 6. Exhibits 12
Signatures 13
2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PINNACLE MICRO, INC.
CONDENSED BALANCE SHEETS
MARCH 29, DECEMBER 28,
1997 1996
------------ ------------
(UNAUDITED)
Assets
Current assets:
Cash and cash equivalents $ 910,000 $ 5,455,000
Accounts receivable, net 11,984,000 11,726,000
Income taxes receivable 1,988,000 1,984,000
Inventories 20,148,000 17,714,000
Prepaid expenses and other current assets 142,000 215,000
------------ ------------
Total current assets 35,172,000 37,094,000
Furniture and equipment, net 2,602,000 1,739,000
Deferred interest related to convertible debentures 42,000 786,000
Other assets 394,000 619,000
------------ ------------
Total assets $ 38,210,000 $ 40,238,000
------------ ------------
------------ ------------
Liabilities and Stockholders' Equity
Current liabilities:
Note payable $ 7,602,000 $ 3,276,000
Accounts payable 15,272,000 15,540,000
Accrued expenses 1,216,000 2,922,000
Accrued restructuring 1,245,000 1,421,000
Payroll related liabilities 1,172,000 1,225,000
------------ ------------
Total current liabilities 26,507,000 24,384,000
Convertible debentures 3,788,000 6,422,000
Other liabilities 791,000 929,000
Commitments and contingencies
Stockholders' equity:
Common stock 11,000 10,000
Additional paid-in capital 31,234,000 28,551,000
Accumulated deficit (24,121,000) (20,058,000)
------------ ------------
Total stockholders' equity 7,124,000 8,503,000
------------ ------------
Total liabilities and stockholders' equity $ 38,210,000 $ 40,238,000
------------ ------------
------------ ------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED FINANCIAL
STATEMENTS.
3
PINNACLE MICRO, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
THIRTEEN WEEKS ENDED THIRTEEN WEEKS ENDED
MARCH 29, 1997 MARCH 30, 1996
--------------------- --------------------
Net sales $14,106,000 $17,434,000
Cost of sales 11,278,000 14,306,000
----------- -----------
Gross profit 2,828,000 3,128,000
----------- -----------
Operating expenses:
Selling, general and administrative 4,741,000 5,252,000
Research and development 1,165,000 1,592,000
Nonrecurring charges - 164,000
----------- -----------
Total operating expenses 5,906,000 7,008,000
----------- -----------
Operating loss (3,078,000) (3,880,000)
Interest expense (219,000) (32,000)
Non-cash interest expense related
to convertible debentures (744,000) -
----------- -----------
Loss before income taxes (4,041,000) (3,912,000)
Income tax expense 22,000 3,000
----------- -----------
Net loss $(4,063,000) $(3,915,000)
----------- -----------
----------- -----------
Net loss per share $ (0.39) $(0.50)
----------- -----------
----------- -----------
Weighted average common shares outstanding 10,537,000 7,868,000
----------- -----------
----------- -----------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED FINANCIAL
STATEMENTS.
4
PINNACLE MICRO, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
THIRTEEN WEEKS ENDED THIRTEEN WEEKS ENDED
MARCH 29, 1997 MARCH 30, 1996
------------------- -------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(4,063,000) $(3,915,000)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 300,000 328,000
Provision for doubtful accounts - 220,000
Interest on debentures paid in common stock 67,000 -
Provision for product returns and price protection - 406,000
Provision for inventory obsolescence 300,000 338,000
Non cash interest expense 744,000 -
Compensation related to stock options and warrants 64,000 -
Changes in operating assets and liabilities:
Accounts receivable (258,000) (1,361,000)
Income taxes receivable (4,000) -
Inventories (2,734,000) (2,658,000)
Prepaid expenses and other current assets 73,000 (153,000)
Other assets 82,000 (167,000)
Accounts payable and accrued expenses (2,129,000) 3,833,000
Payroll related liabilities (53,000) 164,000
Other liabilities (138,000) -
------------ -----------
Net cash used in operating activities (7,749,000) (2,965,000)
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposal of furniture and equipment 1,000 -
Purchase of furniture and equipment (1,185,000) (568,000)
------------ -----------
Net cash used in investing activities (1,184,000) (568,000)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from note payable, net 4,326,000 3,775,000
Principal payments on long-term debt - (8,000)
Proceeds from exercise of stock options 16,000 -
Tax benefit from exercise of stock options 3,000 -
Proceeds from issuance of stock through
the employee stock purchase plan 43,000 -
------------ -----------
Net cash provided by financing activities 4,388,000 3,767,000
------------ -----------
Effect of exchange rate changes on cash - (28,000)
------------ -----------
Increase in cash and cash equivalents (4,545,000) 206,000
Cash and cash equivalents at beginning of period 5,455,000 3,606,000
------------ -----------
Cash and cash equivalents at end of period $ 910,000 $ 3,812,000
------------ -----------
------------ -----------
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 198,000 $ 36,000
------------ -----------
------------ -----------
Income Taxes $ - $ -
------------ -----------
------------ -----------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED FINANCIAL
STATEMENTS.
5
PINNACLE MICRO, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
March 29, 1997
(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, and these financial statements
should be read in conjunction with the Company's Form 10-K for the
year ended December 28, 1996. 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 thirteen weeks ended March 29, 1997 and March 30, 1996.
NEW ACCOUNTING STANDARD
In March 1997, the FASB issued Statement of Financial Accounting
Standards No. 128, EARNINGS PER SHARE (SFAS 128). This
pronouncement provides a different method of calculating earnings
per share than is currently used in accordance with APB 15,
EARNINGS PER SHARE. SFAS 128 provides for the calculation of Basic
and Diluted earnings per share. Basic earnings per share includes
no dilution and is computed by dividing income available to common
shareholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflects
the potential dilution of securities that could share in the
earnings of an entity, similar to fully diluted earnings per share.
This pronouncement is effective for fiscal years and interim
periods ending after December 15, 1997; early adoption is not
permitted. The Company does not believe that the adoption of this
pronouncement will have a material impact on the net loss per share
presented in the accompanying condensed statements of operations.
2. INVENTORIES
Inventories consist of the following:
MARCH 29, DECEMBER 28,
1997 1996
----------- ------------
Components and
Work-in-process $18,853,000 $13,991,000
Finished goods 1,295,000 3,723,000
----------- -----------
$20,148,000 $17,714,000
----------- -----------
----------- -----------
3. 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 may incur significant legal costs relating
to this suit in 1997.
4. CONVERTIBLE DEBENTURES
In December 1996, the Company completed a second offshore placement of
$5,000,000 principal amount of convertible subordinated 6% debentures
due December 2001. The debenture holders could convert the principal
of the 6% debentures as follows: 30%, 40% and 30%, at discounts
6
from the then market price of 15%, 17.5% and 20%, in intervals
commencing 50, 80 and 110 days after closing, respectively.
As of March 29, 1997, debentures aggregating $2,634,000 were converted
into 1,004,412 shares of common stock at conversion prices ranging
from $4.16 to $2.10 per share.
5. RESTRUCTURING
During 1996, the Company recorded restructuring charges of
$3,028,000 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.
These restructuring charges principally reflect the cost associated
with early termination of existing leases, losses from the disposal
of assets and severance costs resulting from work force reductions.
During the first quarter of 1997, charges totaling $314,000 were
incurred in connection with this restructuring, including: $102,000
for severance related to the termination of 17 employees who worked
in the Irvine sales function; $191,000 for facility and
lease terminations; and $21,000 for the writeoff of leasehold
improvements. Based upon certain other actions that are being
pursued, the Company believes it can reduce the original exposure
of lease termination costs by approximately $250,000. These
savings, however, will be offset as a result of the severance of an
additional 28 employees, primarily in Irvine administration and the
European Sales Office. The remaining balance of the restructuring
liability as of March 29, 1997 was $2,036,000, of which $791,000
relates to longer term lease and severance agreements which should
be paid or settled in 1998.
7
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 AS WELL AS IN THE COMPANY'S ANNUAL REPORT ON FORM 10 - K.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
NET SALES
Net sales were $17,434,000 and $14,106,000 for the thirteen weeks ended March
30, 1996 and March 29, 1997, respectively, representing a decrease of 19%.
This decrease reflects a change in product mix as a result of products such as
Sierra and Tahoe, reaching the end of their product lives and reduced unit
sales of older generation RCD products.
After completing shipment of the backlog of orders for Apex drives, new
orders for Apex declined in the second and third months of the quarter.
Management believes that a contributing factor to the decline in single -
unit APEX sales is the overall decline in the Apple Macintosh market, where
magneto-optical technology was historically most popular. In addition, the
Company accepted higher than normal product returns to bring distributor
inventories into line with demand at that time. In the first quarter of 1997,
sales of Apex-based optical library systems (jukeboxes) and new generation
RCD products, however, exceeded expectations.
GROSS PROFIT
Gross profit decreased from $3,128,000 for the thirteen weeks ended March 30,
1996, to $2,828,000 for the thirteen weeks ended March 29, 1997 primarily due
to lower sales volumes. The gross profit as a percentage of net sales
increased from 17.9% for the thirteen weeks ended March 30, 1996 to 20.0% for
the thirteen weeks ended March 29, 1997, as a result of an improved margin mix
derived from the sale of the Apex drives and Apex-based optical library systems.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses were $5,252,000, and $4,741,000
for the thirteen weeks ended March 30, 1996 and March 29, 1997 respectively,
and represented 30.1% and 33.6% of net sales. This decrease is due to reduced
advertising and promotional expenditures and certain other expenses, with
partial offsets from consulting fees related to the relocation of operations
to Colorado Springs.
RESEARCH AND DEVELOPMENT
Research and development expenses were $1,592,000, and $1,165,000 for the
thirteen weeks ended March 30, 1996 and March 29, 1997 respectively, and
represented 9.1% and 8.3% of net sales. For the thirteen weeks ended March
30, 1996, the Company incurred expenses for Vertex and Apex prototypes and
for ASIC development fees paid to third parties. The Company expects to
sustain the current spending levels to fund new product development projects
in the second quarter of 1997.
8
NON-CASH INTEREST EXPENSE RELATED TO CONVERTIBLE DEBENTURES
A non-cash interest charge relating to certain convertible debentures issued
with discount features (see Note 4 to Notes to Financial Statements) had no
effect upon the operating loss but added $744,000 to the net loss.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents of $910,000 at March 29, 1997 were $4,545,000 lower
than the balance at December 28, 1996. This was due mainly to the increase
in inventory, payment of certain expenses and other costs related to the
restructuring which the Company recorded in the third quarter of 1996 and the
loss incurred in the first quarter of 1997. Inventory balances were higher
at March 29, 1997, than at year-end 1996 by $2,434,000. The higher inventory
results from declining APEX bookings and the long-lead nature of many APEX
components. The Company has taken a number of actions in the second quarter
which it believes will reduce inventory, particularly of APEX components and
subassemblies. Cash flow of approximately $1,000,000 related to certain
leasehold improvements in the first quarter for the new facility in Colorado
Springs, as well as to lease terminations at former premises and severance
costs.
The Company currently has a revolving line of credit agreement with a lender
collateralized by substantially all assets of the Company which expires on
September 30, 1998. The Company has a maximum availability of $10,000,000
under the line of credit based on a percentage of eligible accounts
receivables and inventories. Borrowings under the line of credit totaled
$3,276,000 at December 28, 1996 and $7,602,000 at March 29, 1997.
The Company's liquidity position continues to be constrained. Its ability to
borrow against the revolving line of credit is largely dependent upon its
level of accounts receivable. From time to time the Company utilizes the
maximum available under the facility. Because of its lower than expected
level of shipments, the Company is currently unable to fully utilize its line
of credit. If shipments improve during the remainder of the second quarter
of 1997, the Company will be able to more effectively utilize its line of
credit. The Company is focusing on increasing sales, especially optical
library sales, in the second quarter.
The Company is presently pursuing a number of options related to raising
additional working capital and relieving its cash constraints. These
activities include private placements of debt and equity and working with its
key suppliers on payment terms. As long as the Company's convertible
debentures are outstanding, they are likely to adversely impact the terms on
which the Company can obtain additional financing.
In an effort to address its working capital needs, the Company has also taken
or intends to take a number of actions to further reduce operating expenses
to align costs with revenue. In the first quarter of 1997 the Company
continued to reduce its fixed costs and operating expenses. The European
Sales office will be substantially reduced in size, as well as reorganized,
in the second quarter of 1997. Spending controls and cash management programs
were implemented.
As of March 29, 1997, the Company had an income tax receivable of $1,988,000.
This amount relates to tax losses for 1996 and 1995 carried back to prior
years. All or a significant portion of the refund is expected to be paid
before the end of the second quarter 1997.
Assuming that certain of the aforementioned events occur, the Company believes
that the current sources of financing available to the Company will be
sufficient to fund the Company's operations through at least the second quarter
of its fiscal 1997. If the Company is unsuccessful in increasing its sales in
the second quarter of 1997 and in reaching agreements with its key vendors
concerning payment terms, this would have a material adverse effect upon the
Company.
The Company will also need additional funds in the third quarter 1997 for
working capital and to pay its suppliers. The Company is negotiating
possible investments into the Company, but there can be no assurance that any
of such negotiations will be successful. The inability to obtain needed
funding on satisfactory terms would have a material adverse effect on the
Company's business and financial results.
9
Because of the Company's present financial condition, normal sources of
external financing may not be available to the Company in the future,
including a replacement line of credit. The Company has not identified as of
this filing any additional financing and is unable to indicate at this time
whether any additional financing will be available to the Company in the
future.
GENERAL AND RISK FACTORS
SALES AND MARKETING
- -------------------
The long-standing order backlog for APEX was substantially shipped as of
March 29, 1997. The post-backlog shipment and order rate in the first
quarter for single-unit APEX drives is below the level necessary to support
the Company's strategy as a drive business. In the second quarter, the
Company is moving agressively to focus on the optical library market. The
critical tasks facing the Company in the second quarter are managing cash and
building demand for APEX technology (and applications of that technology such
as optical libraries). Sales of optical libraries and CD Recorders exceeded
expectations for the first quarter and partially offset the lower than
expected APEX sales. Although management believes that the demand for
optical libraries indicates market acceptance of the APEX 4.6 GB capacity
point, if demand for APEX-based optical library solutions cannot be developed
to satisfactory levels and sustained the Company will have further
significant liquidity constraints.
Marketing efforts are being directed at optical libraries and midrange
($10,000-$100,000 systems) computer systems, medical imaging, near on-line
storage, video on demand and document imaging markets. Distribution
agreements were entered into in the first quarter with value - added
resellers ("VARs") that specialize in optical technology markets. It is
premature to predict what effect, if any, these agreements may have on
single-unit APEX sales. The Company is seeking to have its products
certified as compatible by additional leading software vendors in the belief
that such certification may generate additional sales of APEX.
CONVERSION OF CONVERTIBLE DEBENTURES
- ------------------------------------
In December 1996, the Company sold an additional $5,000,000 principal amount
of 6% convertible debentures pursuant to an offshore private placement. The
proceeds from this offering were used entirely for the Company's liquidity
needs at the end of the fourth quarter of 1996 and during the first quarter
of 1997.
As of May 2, 1997, debentures aggregating $3,126,000 have been converted into
1,531,404 shares of common stock at conversion prices ranging from $0.855 to
$4.16 per share. Stockholders' equity was increased by the full amount of the
debentures converted less the unamortized debt issuance costs. In addition,
26,292 shares of common stock were issued for $49,296 of interest payable on
the converted debentures.
The exact number of shares to be issued upon conversion of the remaining
convertible debentures cannot be predicted closely because the number of
shares issued vary inversely with the market price of the Company's Common
Stock at the time of conversion and there is no contractual limit on the
number of shares that may be issued. Such conversions will dilute the
existing holders of the Common Stock of the Company. For so long as the
convertible debentures are outstanding they are likely to adversely affect
the terms on which the Company can obtain additional financing.
10
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, 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. As is common in many high technology
companies, the Company's shipments tend to be disproportionately higher in
the latter part of each quarter. Past results are not necessarily indicative
of future performance for any particular period.
The computer industry in general, and the market for the Company's products
in particular, is characterized by rapidly changing technology, evolving
industry standards, frequent new product introductions and significant price
competition, resulting in short product life cycles and reductions in unit
selling prices over the life of a specific product. The Company faces
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. The Company faces increasing
competition in the "3R" or removable, rewritable and random access storage
market from companies such as Syquest and Iomega.
There can be no assurance that there will be continued acceptance of the
Company's existing products or that the Company's future products will
achieve market acceptance at acceptable margins.
The market prices for shares of high technology companies, including the
securities of the Company, have been volatile. The Company's Common Stock
experienced substantial levels of short selling in the last 12 - 18 months
which has depressed the market price, and increased the volatility of the
market price, of the Company's Common Stock. Factors such as announcements
of technological innovations or new products by the Company or its
competitors, variations in the Company's quarterly operating results,
continued high levels of short selling of the Company's common Stock, or
general economic or stock market conditions unrelated to the Company's
operating performance may have material adverse effects on the market price
of the Company's Common Stock.
11
permitted. The Company does not believe that the adoption of this
pronouncement will have a material impact on the net loss per share presented
in the accompanying condensed statements of operations.
ITEM 6. EXHIBITS
(a) Exhibits:
EXHIBIT NUMBER DESCRIPTION PAGE NUMBER
- -------------- ----------- -----------
10.45 Employment Agreement for Bernard Wu
dated as of March 26, 1997
10.46 Employment Agreement for David Nesbit
dated as of March 26, 1997
27.1 Financial Data Schedule
12
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: May 13, 1997 By: /s/ KENNETH C. CAMPBELL
-------------------------------
Kenneth C. Campbell
President
(Duly Authorized Officer)
Date: May 13, 1997 By: /s/ ROGER HAY
-------------------------------
Roger Hay
Executive Vice President and Chief
Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
13