<PAGE>
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 June 27, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ___________
Commission file number: 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.
140 TECHNOLOGY DRIVE, SUITE 500
IRVINE, CALIFORNIA 92618
(949) 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 April 13, 1999 there were outstanding 14,500,089 shares of Registrant's
Common Stock.
Page 1 of 13 pages
<PAGE>
PINNACLE MICRO, INC.
INDEX
PAGE
----
Part I. Financial Information
Financial Statements 3
Condensed Balance Sheets at September 26, 1998
and unaudited December 27, 1997 3
Condensed Statements of Operations for the thirteen weeks
and twenty-six weeks ended June 27, 1998 and June 28, 1997 4
Condensed Statements of Cash Flows for the twenty-six
weeks ended June 27, 1998 and June 28, 1997 5
Notes to Condensed Financial Statements 6
Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
Part II. Other Information 12
Submission of Matters to a Vote of Security Holders 12
Exhibits and Reports on Form 8-K 12
Signatures 13
2
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PINNACLE MICRO, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
June 27, December 27,
1998 1997
---- ----
(Unaudited) (Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 376,000 $ 454,000
Accounts receivable, net 1,711,000 4,853,000
Inventories 5,367,000 6,404,000
Prepaid expenses and other current assets 329,000 375,000
------------ ------------
Total current assets 7,783,000 12,086,000
Furniture and equipment, net 210,000 447,000
Other assets 68,000 11,000
------------ ------------
Total assets $ 8,061,000 $ 12,544,000
============ ============
Liabilities and Stockholders' Equity
Note payable $ 5,332,000 $ 6,166,000
Accounts payable 17,462,000 18,581,000
Accrued expenses 2,752,000 1,641,000
Accrued restructuring - 1,501,000
Payroll related liabilities 107,000 125,000
------------ ------------
Total current liabilities 25,653,000 28,014,000
Commitments and contingencies
Stockholders' equity:
Common stock 15,000 15,000
Additional paid-in capital 34,977,000 34,977,000
Accumulated deficit (52,584,000) (50,462,000)
------------ ------------
Total stockholders' equity (17,592,000) (15,470,000)
------------ ------------
Total liabilities and stockholders' equity $ 8,061,000 $ 12,544,000
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
3
<PAGE>
PINNACLE MICRO, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
13 Weeks Ended 13 Weeks Ended 26 Weeks Ended 26 Weeks Ended
June 27, 1998 June 28, 1997 June 27, 1998 June 28, 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales $ 1,868,000 $ 11,277,000 $ 5,874,000 $ 25,383,000
Cost of sales 1,527,000 10,768,000 4,516,000 22,046,000
------------ ------------- ------------- -------------
Gross profit 341,000 509,000 1,358,000 3,337,000
------------ ------------- ------------- -------------
Operating expenses:
Selling, general and administrative 1,372,000 4,163,000 3,188,000 8,904,000
Research and development - 1,083,000 - 2,248,000
Nonrecurring charges - - - -
------------ ------------- ------------- -------------
Total operating expenses 1,372,000 5,246,000 3,188,000 11,152,000
------------ ------------- ------------- -------------
Operating loss (1,031,000) (4,737,000) (1,830,000) (7,815,000)
Interest expense (153,000) (254,000) (292,000) (1,217,000)
------------ ------------- ------------- -------------
Income loss before income taxes (1,184,000) (4,991,000) (2,122,000) (9,032,000)
Income tax expense - - - 22,000
------------ ------------- ------------- -------------
Net loss $ (1,184,000) $ (4,991,000) $ (2,122,000) $ (9,054,000)
============ ============= ============= =============
Net loss per share $ (0.08) $ (0.39) $ (0.15) $ (0.77)
============ ============= ============= =============
Weighted average
common shares outstanding 14,500,089 12,957,000 14,500,089 11,747,000
============ ============= ============= =============
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
4
<PAGE>
PINNACLE MICRO, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
26 Weeks Ended 26 Weeks Ended
June 27, 1998 June 28, 1997
--------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(2,122,000) $(9,054,000)
Adjustments to reconcile net loss to
net cash used in operating activities:
Loss from disposal of assets 0 40,000
Depreciation and amortization 231,000 661,000
Provision for doubtful accounts 2,000 140,000
Interest on debentures paid in common stock 0 151,000
Provision for product returns and price protection 9,000 81,000
Provision for inventory obsolescence 0 1,626,000
Non cash interest expense 0 786,000
Compensation related to stock options and warrants 0 72,000
Changes in operating assets and liabilities:
Accounts receivable 3,142,000 1,972,000
Income taxes receivable 0 1,035,000
Inventories 1,037,000 (1,877,000)
Prepaid expenses and other current assets 46,000 (380,000)
Other assets (57,000) 110,000
Accounts payable and accrued expenses (1,119,000) 619,000
Payroll related liabilities (18,000) (433,000)
Other liabilities (390,000) (520,000)
----------- -----------
Net cash provided by (used in) operating activities 1,215,000 (4,971,000)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposal of furniture and equipment 0 30,000
Purchase of furniture and equipment 5,000 (1,332,000)
----------- -----------
Net cash used in investing activities (5,000) (1,302,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from (Payments on) note payable, net (834,000) 3,070,000
Proceeds from exercise of stock options 0 16,000
Tax benefit from exercise of stock options 0 3,000
Proceeds from issuance of stock through
the employee stock purchase plan 0 118,000
----------- -----------
Net cash provided by (used in) financing activities (834,000) 3,207,000
----------- -----------
Decrease in cash and cash equivalents (78,000) (3,066,000)
Cash and cash equivalents at beginning of period 454,000 5,455,000
----------- -----------
Cash and cash equivalents at end of period $ 376,000 $ 2,389,000
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for:
Interest 293,000 540,000
Income Taxes - -
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
5
<PAGE>
PINNACLE MICRO, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 27, 1998
(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 unaudited Form 10-K for the year
ended December 27, 1997. 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 as of June 27,
1998 and results of operations and cash flows as of and for the twenty-six
weeks ended June 27, 1998 and June 28, 1997.
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.
In June 1997, the Financial Accounting Standards Board issued SFAS No.
131,Disclosures about Segments of an Enterprise and Related Information.
SFAS No.131 establishes standards for the way companies report information
about operating segments in annual financial statements. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. The disclosures prescribed by SFAS
No. 131 are effective for the year ended January 31, 1999. The Company has
determined that it does not have any separately reportable business
segments as of January 31, 1999 and 1997, respectively. In March 1998, the
American Institute of Certified Public Accountants issued Statement of
Position ("SOP") No. 98-1, Software for Internal Use, which provides
guidance on accounting for the cost of computer software developed or
obtained for internal use. SOP No. 98-1 is effective for financial
statements for fiscal years beginning after December 15, 1998. The Company
does not expect that the adoption of SOP No. 98-1 will have a material
impact on its consolidated financial statements.
6
<PAGE>
2. NET INVENTORIES
Net Inventories consist of the following:
<TABLE>
<CAPTION>
June 27, December 27,
1998 1997
---- ----
<S> <C> <C>
Components and
work-in-process $5,964,000 $4,222,000
Finished goods 597,000 2,182,000
---------- ----------
$5,367,000 $6,404,000
========== ==========
</TABLE>
3. CONTINGENCIES
On March 15, 1996, a complaint was filed against the Company and certain of
its current and then directors and 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. On or about November 10, 1997, the
Company reached an agreement in principle with the plaintiffs to settle the
lawsuit. Plaintiffs have agreed to accept payment of $2,325,000 in
exchange for a complete release of all claims arising from the allegations
set forth in the plaintiffs' complaint. All of the terms of the settlement
are not final, and the settlement is subject to preliminary and final
approval by Court as well as approval by the members of the class. The
Company's insurers agreed to advance all settlement and defense costs,
including the Company's attorneys' fees and expenses, subject to the
Company's agreement to reimburse the insurers for up to approximately
$577,000 of those settlement and defense costs if the Company achieved
certain positive financial results prior to the Federal Court's final
approval of the settlement. Although the Company did not concede that any
portion of the class action settlement is allocable to the Company, the
Company agreed to the terms of the settlement to avoid further costs. The
Company's portion of the settlement, which totaled $232,000, was included
in the results of operations for the fourth quarter ended December 27,
1997.
The Company and certain members and former members of its senior management
were the subject of an investigation by the Securities and Exchange
Commission (the "SEC") relating principally to the restatement of the
Company's previously reported financial results for 1993 and 1994. During
the fourth quarter of 1997, the investigation conducted by the SEC relating
principally to the restatement of the Company's previously reported
financial results for 1993 and 1994 and for certain interim periods for
1995 involving the Company and certain former members of its senior
management was concluded. The Commission instituted a cease and desist
order against the Company and two former officers and a permanent
injunction barring future violations of certain accounting provisions
against a third former officer, who was also fined $25,000.
The resignation of the Company's prior independent public accountants on
February 20, 1996, led to additional inquiries by the SEC. These inquiries
related principally to the accounting matters discussed in the December 27,
1998 Form 10-K. The inquiries by the SEC were concluded as part of the
resolution of the SEC's investigation.
The Company is also subject to other legal proceedings and claims that
arise in the normal course of business. The outcome of these proceedings
cannot be predicted with certainty.
7
<PAGE>
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
Adverse operating results - at the date of this filing the Company has continued
to incur significant losses and has experienced severe cash constraints. Sales
have continually declined in light of significant competition, price pressures
and the uncertainty on the part of potential customers over the financial
condition of the Company. Further, the Company has been unable to raise
alternative sources of funding to fund operating losses. All of these factors
have had a material impact on the Company and its results of operation. Absent
an immediate infusion of capital or significantly increased sales the Company
will seek protection under the Federal bankruptcy laws.
Net Sales
Net sales were $11,277,000 and $1,868,000 for the thirteen weeks ended June 28,
1997 and June 27, 1998, respectively, representing a decrease of 91.9%. Net
sales were $25,383,000 and $5,874,000 for the twenty-six weeks ended June 28,
1997 and June 28, 1997, respectively, representing a decrease of 76.8%. These
decreases were primarily attributable to decreased unit sales and average sales
prices of the Company's current products as a result of intense competition in
the industry.
A major contributing factor to lower sales in sequential quarters was the
Company's shortage of cash. Several key vendors will only ship to the Company
on a prepay basis with which the Company has had difficulty complying, and,
accordingly the Company's ability to purchase key components has been limited.
As a result, sales were adversely affected.
Gross Profit
Gross profit decreased from $509,000 for the thirteen weeks ended June 28, 1997
to $341,000 for the thirteen weeks ended June 27, 1998, and decreased as a
percentage of sales from 4.5% to 20.5%. Gross profit decreased from $3,337,000
for the twenty-six weeks ended June 28, 1997 to $1,358,000 for the twenty-six
weeks ended June 27, 1998, and increased as a percentage of sales from 13.1% to
approximately 23.1%. The company experienced increased competition in the
recordable CD market for the current product.
Gross profit decreased from $509,000 for the thirteen weeks ended June 28, 1997
to $341,000 for the thirteen weeks ended June 27, 1998. These decreases are
related to lower volume sales.
8
<PAGE>
Selling, General and Administrative
Selling, general and administrative expenses were $4,163,000, and $1,372,000 for
the thirteen weeks ended June 28, 1997 and June 27, 1998, respectively, and
represented approximately 36.9% and 73.5% of net sales. Selling, general and
administrative expenses were $8,904,000 and $3,188,000 for the twenty-six weeks
ended June 28, 1997 and June 27, 1998, respectively, and represented
approximately 35.1% and 54.3% of net sales, respectively. The decrease in
expenditures resulted primarily from reduced advertising and promotional
expenditures and the reduction of the Company's sales staff.
Research and Development
Research and development expenses were $1,083,000 and $0 for the thirteen weeks
ended June 28, 1997 and June 27, 1998, respectively, or approximately 9.6% and
0% of net sales. Research and development expenses were $2,248,000 and $0 for
the twenty-six weeks ended June 28, 1997 and June 27, 1998, respectively or 8.9%
and 0% of net sales. The decrease in research and development expenses related
to the Company's discontinuation of the Colorado Research facility and its
decision to focus on outsourced products and services in order to meet future
product needs.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents of $376,000 at June 27, 1998 were $78,000 lower than
the balance at December 27, 1997.
The Company's liquidity position continues to be severely constrained. 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. Although 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, its ability to borrow against the revolving line of
credit is largely dependent upon its level of eligible accounts receivable.
Because of its lower than expected level of shipments, the Company's eligible
account receivables are also lower than expected and the Company frequently
utilizes the maximum available under the line of credit. Borrowings under the
line of credit totaled $6,166,000 at December 27, 1997 and $5,332,000 at June
27, 1998. The Company's inability to increase sales and find alternative
sources of funding have severely impacted the Company and will result in the
company seeking creditor protection under the Federal Bankrupcy Laws.
As a result of the Company's difficulty in paying its trade debt on a timely
basis, the Company sought the cooperation of its creditors in a restructuring of
its trade debt. As previously disclosed, on July 14, 1997, the Company held a
meeting with its trade creditors. Shortly after the meeting, a committee of the
creditors, representing in excess of 50% of the Company's trade debt, agreed to
an initial 60-day moratorium on the payment of the Company's outstanding trade
debt. No assurance can be given that the moratorium will be extended.
In the event that the Company is unable to locate a financial partner or other
sources of funding to meet its current cash needs, it may be unable to continue
to operate as a going concern and will be required to seek protection under the
Federal Bankruptcy Laws.
9
<PAGE>
GENERAL AND RISK FACTORS
Sales and Marketing
The Company's sales continue to decline as a result of intense competition,
reduced prices, the inability to market the product as a result of cash
constraints, and the lack of resources to pursue alternative products.
Consequently, a continued decline in sales and the inability to find alternative
sources of cash will require the company to seek creditor protection under the
Federal Bankrupcy Act.
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 will 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 Iomega and
Sony.
There can be no assurance that there will be acceptance of the Company's
existing products or that the Company's future products will achieve market
acceptance at acceptable margins. The absence of either will require the
Company to seek protection under the Federal Bankruptcy Act.
10
<PAGE>
PART II
OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit Number Description Page Number
-------------- ----------- -----------
27 Financial Data Schedule
(b) Reports on Form 8-K:
The Company filed a Current Report on Form 8-K, dated May 12, 1999,
with the commission announcing Mr. Bruce Bastl's resignation from
the Board of Directors.
11
<PAGE>
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 12, 1999 By: /s/ WILLIAM F. BLUM
_________________________
William F. Blum
Director, Chairman, President, Chief Executive
Officer and Chief Financial Officer and Chief
Accounting Officer
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-26-1998
<PERIOD-START> MAR-29-1998
<PERIOD-END> JUN-27-1998
<CASH> 376,000
<SECURITIES> 0
<RECEIVABLES> 1,711,000
<ALLOWANCES> 0
<INVENTORY> 5,367,000
<CURRENT-ASSETS> 7,783,000
<PP&E> 210,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 8,061,000
<CURRENT-LIABILITIES> 25,653,000
<BONDS> 0
0
0
<COMMON> 15,000
<OTHER-SE> (17,607,000)
<TOTAL-LIABILITY-AND-EQUITY> 8,061,000
<SALES> 1,868,000
<TOTAL-REVENUES> 1,868,000
<CGS> 1,527,000
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,372,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 153,000
<INCOME-PRETAX> (1,184,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,184,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,184,000)
<EPS-PRIMARY> (.08)
<EPS-DILUTED> (.08)
</TABLE>
