<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly period ended September 26, 1999 Commission File No. 0-21892
PINNACLE MICRO, INC.
(Exact name of registrant as specified in its charter)
Delaware 33-0238563
- ----------------------------------------- --------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation organization) Identification No.)
140 Technology Drive, Suite 500 Irvine, California 92618
- -------------------------------------------------- --------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (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 .
-----
At November 15, 1999 14,500,089 shares of common stock of the Registrant were
outstanding.
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PINNACLE MICRO, INC.
INDEX
<TABLE>
<CAPTION>
Part I. Financial Information
<S> <C>
Item I Financial Statements
Condensed Balance Sheet at September 26, 1999 (Unaudited) and
December 26, 1998 (Unaudited)......................................................... 2
Condensed Statements of Operations for the thirteen and thirty-nine week periods
ended September 26, 1999 (Unaudited) and September 26, 1998 (Unaudited)............... 3
Condensed Statements of Cash Flows for the thirty-nine week period ended
September 26, 1999 and (Unaudited) and September 26, 1998 (Unaudited)................. 4
Notes to Unaudited Condensed Financial Statements..................................... 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................................. 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk............................ 9
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K...................................................... 10
Signature...................................................................................... 10
</TABLE>
1
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PART I
FINANCIAL INFORMATION
Item I FINANCIAL STATEMENTS
PINNACLE MICRO, INC.
CONDENSED BALANCE SHEETS
(in thousands, except share and per share information)
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
September 26, 1999 December 26, 1998
------------------- -----------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 406 $ 322
Accounts receivable, net 542 742
Inventories, net 3,101 3,592
Prepaid expenses and other current assets 95 134
------------------- -----------------
Total current assets 4,144 4,790
Furniture and equipment, net 2 46
Other Assets 170 143
------------------- -----------------
Total assets $ 4,316 $ 4,979
=================== =================
Current liabilities
Note payable 7,260 5,503
Accounts payable 16,889 17,366
Accrued expenses 2,257 2,036
Payroll related liabilities 54 99
------------------- -----------------
Total current liabilities 26,460 25,004
Stockholders' equity
Common stock, $.001 par value: Authorized shares, 30,000,000
Issued and outstanding 14,500,089 at September 26, 1999 and
14,500,089 at December 26, 1998 15 15
Additional paid-in capital 34,977 34,977
Accumulated deficit (57,136) (55,017)
------------------- -----------------
Total stockholders' equity (22,144) (20,025)
------------------- -----------------
$ 4,316 $ 4,979
=================== =================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
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PINNACLE MICRO, INC.
CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except share and per share information)
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
13 Weeks Ended 13 Weeks Ended 39 Weeks Ended 39 Weeks Ended
September 26, 1999 September 26, 1998 September 26, 1999 September 26, 1998
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Net sales $ 1,908 $ 2,374 $ 5,311 $ 8,248
Cost of sales 1,638 1,829 4,579 6,346
------------------ ------------------ ------------------ ------------------
Gross profit 270 545 732 1,902
------------------ ------------------ ------------------ ------------------
Operating expenses:
Selling, general, and administrative expenses 435 1,325 2,358 4,513
Research and development expenses - - - -
Nonrecurring charges - - - -
------------------ ------------------ ------------------ ------------------
Total operating expenses 435 1,325 2,358 4,513
------------------ ------------------ ------------------ ------------------
Operating loss (165) (780) (1,626) (2,611)
------------------ ------------------ ------------------ ------------------
Other income (expense):
Interest income/expense (184) 422 (492) 130
Non-cash interest expense related
to convertable debenturees - - - -
------------------ ------------------ ------------------ ------------------
Total other income (expense) (184) 422 (492) 130
------------------ ----------------- ------------------ ------------------
Loss before income taxes (349) (358) (2,118) (2,481)
Income tax expense - (12) - -
------------------ ------------------ ------------------ ------------------
Net loss $ (349) $ (346) $ (2,118) $ (2,481)
================== ================== ================== ==================
Loss per common share
Basic ($0.02) ($0.02) ($0.15) ($0.17)
Diluted ($0.02) ($0.02) ($0.15) ($0.17)
Weighted average number of common and potential
common shares outstanding used in computation of
loss per share
Basic 14,500,089 14,500,089 14,500,089 14,500,089
Diluted 14,500,089 14,500,089 14,500,089 14,500,089
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
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PINNACLE MICRO, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
39 Weeks Ended 39 Weeks Ended
September 26, 1999 September 26, 1998
------------------ -------------------
<S> <C> <C>
Cash Flows from Operating Activities
Net loss $ (2,118) $ (2,481)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 44 313
Provision for doubtful accounts - -
Provision for product returns and price protection - 29
Changes in operating assets and liabilities:
Accounts receivable 200 3,802
Inventories 491 1,554
Prepaid expenses and other assets 38 256
Other assets (27) (73)
Accounts payable and accrued expense (254) (2,617)
Payroll related liabilities (47) (40)
Other liabilities - -
------------------ -------------------
Net cash provided by (used in) operating activities (1,673) 743
Cash Flows from Investing Activities
Proceeds from disposal of furniture and equipment - -
Purchase of furniture and equipment - 5
------------------ -------------------
- (5)
Cash Flows from Financing Activities
Net cash provided by (used to) repay note payable 1,757 (776)
------------------ -------------------
Net cash provided by (used in) financing activities 1,757 (776)
Increase(Decrease) in cash and cash equivalents 84 (38)
Cash and cash equivalents at beginning of period 322 454
------------------ -------------------
Cash and cash equivalents at end of period 406 416
Supplement Cash Flow Information
Cash paid during the period for:
Interest 492 293
Income taxes - -
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
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PINNACLE MICRO, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 26, 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY HAS BEEN UNABLE TO OBTAIN AN AUDIT OPINION ON THE FINANCIAL
- -----------------------------------------------------------------------
STATEMENTS AND NOTES THERTO FOR THE YEARS 1997 AND 1998 FROM ITS INDEPENDENT
- ----------------------------------------------------------------------------
AUDITOR PRINCIPALLY AS A RESULT OF THE INDEPENDENT AUDITOR'S CONCERN OVER THE
- -----------------------------------------------------------------------------
ABILITY OF THE COMPANY TO CONTINUE AS A GOING CONCERN. THE READER OF THE
- ------------------------------------------------------------------------
FINANCIAL STATEMENTS, NOTES, AND MANAGEMENT'S DISCUSSION AND ANALYSIS OF
- ------------------------------------------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS SHOULD CAREFULLY CONSIDER THE LACK
- --------------------------------------------------------------------------------
OF AN INDEPENDENT AUDITORS ATTESTATION TO THE FINANCIAL CONDITION AND RESULTS OF
- --------------------------------------------------------------------------------
OPERATIONS OF THE COMPANY FOR DECEMBER 27, 1997 AND DECEMBER 26, 1998 PRESENTED
- -------------------------------------------------------------------------------
IN THE COMPANY'S FORM 10-K.
- ---------------------------
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 26, 1998. 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 and
thirty-nine week periods ending September 26, 1999.
New Accounting Pronouncements
The FASB has recently issued Statement of Financial Accounting Standards No.
137, "Accounting for Derivative Instruments and Hedging Activities--Deferral of
the Effective Date of FASB Statement No. 133 (SFAS 133)" (SFAS 137), which
amended SFAS 133 to be effective for periods beginning after June 15, 2000.
Management does not expect the adoption of SFAS 133 to have a material impact on
the Company's financial position or results of operations.
5
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2. NET INVENTORIES
Inventories consist of the following:
(in thousands)
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
September 26, 1999 December 26, 1998
---------------------------------------------------
<S> <C> <C>
Components and work in process $ 11,027 $ 11,204
Finished goods 520 845
Reserve for excess and obsolete (8,446) (8,457)
----------------------------------------------------
$ 3,101 $ 3,592
</TABLE>
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 VARIOUS FACTORS SET FORTH IN THIS REPORT AS WELL AS IN THE
COMPANY'S ANNUAL REPORT ON FORM 10-K AND OTHER REPORTS FILED WITH THE SECURITIES
AND EXCHANGE COMMISSION.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE COMPANY HAS BEEN UNABLE TO OBTAIN AN AUDIT OPINION ON THE FINANCIAL
- -----------------------------------------------------------------------
STATEMENTS AND NOTES THERTO FOR THE YEARS 1997 AND 1998 FROM ITS INDEPENDENT
- ----------------------------------------------------------------------------
AUDITOR PRINCIPALLY AS A RESULT OF THE INDEPENDENT AUDITOR'S CONCERN OVER THE
- -----------------------------------------------------------------------------
ABILITY OF THE COMPANY TO CONTINUE AS A GOING CONCERN. THE READER OF THE
- ------------------------------------------------------------------------
FINANCIAL STATEMENTS, NOTES, AND MANAGEMENT'S DISCUSSION AND ANALYSIS OF
- ------------------------------------------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS SHOULD CAREFULLY CONSIDER THE LACK
- --------------------------------------------------------------------------------
OF AN INDEPENDENT AUDITORS ATTESTATION TO THE FINANCIAL CONDITION AND RESULTS OF
- --------------------------------------------------------------------------------
OPERATIONS OF THE COMPANY FOR DECEMBER 27, 1997 AND DECEMBER 26, 1998 PRESENTED
- -------------------------------------------------------------------------------
IN THE COMPANY'S FORM 10-K.
- ---------------------------
Likelihood of Need to Seek Protection Under Bankruptcy Laws
The Company continues to incur significant losses with quarterly sales
significantly below historical levels and those levels required for
profitability. 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. As of the date of this filing, the Company's liabilities
significantly exceed its assets. The Company's liquidity position continues to
be severely constrained. As a result of the Company's severe liquidity problems,
the Company is unable to pay its trade debt on a timely basis. The Company has
sought and has been unable to obtain a forbearance agreement with its creditors.
In the event the Company is unable to obtain some sort of agreement with the
secured and/or unsecured creditors and immediate
6
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funding, it will be unable to operate as a going concern and will likely seek
protection under the Federal bankruptcy laws.
RESULTS OF OPERATIONS
FOR THE THIRTY-NINE WEEK PERIOD ENDED SEPTEMBER 26, 1999 AND SEPTEMBER 26, 1998
Net Sales
Net sales were $8,248 thousand and $5,311 thousand for the thirty-nine week
period ended September 26, 1998 and September 26, 1999, respectively,
representing a year-to-year decrease of 36%. The decrease in sales is primarily
attributable to decreased unit sales as a result of increased competition, the
Company's inability to acquire products for sale because of the Company's lack
of financial resources and the discontinuance of certain of the Company's legacy
products. Virtually all of the Company's vendors will only sell to the Company
on a prepay basis. The second quarter of 1999 continues to be adversely affected
by significant declines in the prices of disk drives, continued uncertainty
among customers created by the news of the Company's operational and financial
difficulties, and the Company's inability to purchase product because of its
financial condition.
Gross Profit (Loss)
Gross profit decreased from $1,902 thousand for the thirty-nine week period
ended September 26, 1998, to a gross profit of $732 thousand for the thirty-nine
week period ended September 26, 1999. The decrease in gross profit was primarily
attributed to the decrease in sales. The lack of funding for adequate marketing
has severely crippled the Company's ability to promote new sales.
Selling, General and Administrative
Selling, general and administrative expenses were $4,513 thousand and $2,358
thousand in the thirty-nine week period ended September 26, 1998 and September
26, 1999, respectively, and represented 55% and 44% of net sales. The decreases
in expenditures resulted primarily from reduced advertising and promotional
expenditures and the continued reduction of Company personnel.
Research and Development
The Company did not incur any Research and Development expenses during the
thirty-nine week period ending September 26, 1998 and September 26, 1999. In
late 1997, the Company was forced to abandon the research and development and
manufacturing facility located in Colorado Springs, Colorado due to increased
financial problems and decreased working capital.
7
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RESULTS OF OPERATIONS
FOR THE THIRTEEN-WEEK PERIOD ENDED SEPTEMBER 26, 1999 AND SEPTEMBER 26, 1998
Net Sales
Net sales were $2,374 thousand and $1,908 thousand for the thirteen-week period
ended September 26, 1998 and September 26, 1999, respectively, representing a
year-to-year decrease of 20%. The decrease in sales is primarily attributable to
decreased unit sales as a result of increased competition, the Company's
inability to acquire products for sale because of the Company's lack of
financial resources and the discontinuance of certain of the Company's legacy
products. Virtually all of the Company's vendors will only sell to the Company
on a prepay basis. The second quarter of 1999 continues to be adversely affected
by significant declines in the prices of disk drives, continued uncertainty
among customers created by the news of the Company's operational and financial
difficulties, and the Company's inability to purchase product because of its
financial condition.
Gross Profit (Loss)
Gross profit decreased from $545 thousand for the thirteen-week period ended
September 26, 1998, to a gross profit of $270 thousand for the thirteen week
period ended September 26, 1999. The decrease in gross profit was primarily
attributed to the decrease in sales. The lack of funding for adequate marketing
has severely crippled the Company's ability to promote new sales.
Selling, General and Administrative
Selling, general and administrative expenses were $1,325 thousand and $765
thousand in the thirteen week period ended September 26, 1998 and September 26,
1999, respectively, and represented 56% and 40% of net sales. The decreases in
expenditures resulted primarily from reduced advertising and promotional
expenditures and the continued reduction of Company personnel.
Research and Development
The Company did not incur any Research and Development expenses during the
thirteen-week period ending September 26, 1998 and September 26, 1999. In late
1997, the Company was forced to abandon the research and development and
manufacturing facility located in Colorado Springs, Colorado due to increased
financial problems and decreased working capital.
Liquidity and Capital Resources
Cash and cash equivalents of $406 thousand at September 26, 1999 were $84
thousand higher than the $322 thousand balance at December 26, 1998.
The Company's liquidity position continues to be severely constrained. The
Company's revolving line of credit agreement with a lender, collateralized by
substantially all assets of the Company, and expired on September 30, 1999. The
Company is currently in default under the
8
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agreement pertaining to its secured line of credit. There is no forbearance
agreement in place with the Company's secured lender, although then lender has
continued to provide advances to the Company under the line of credit. While the
lender has cooperated so far with the Company's efforts to meet its ongoing
working capital requirements, there can be no assurance that such cooperation
will continue. In the event that the Company is declared in default under the
line of credit by the lender and demand for payment is made, the Company would
be unable to make such payment, would be unable to continue to operate as a
going concern, and would be forced to seek protection under the federal
bankruptcy laws
Borrowings under the line of credit totaled $5,503 thousand at December 26, 1998
and $7,260 thousand at September 26, 1999.
In the event that the Company is unable to locate a financial partner or other
sources of immediate funding to meet its current cash needs, it will be unable
to continue to operate as a going concern and will likely be required to seek
protection under the Federal bankruptcy laws.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's financial instruments include cash and cash equivalents. At
September 26, 1999, the carrying value of the Company's financial instruments
approximated their fair values based on current market prices and rates.
It is the Company's policy not to enter into derivative financial instruments.
The Company does not currently have and significant foreign currency exposure
since it does not transact business in foreign currencies. As a result, the
Company does not have significant overall currency exposure at September 26,
1999. The Company's market risk disclosures are not material and are therefore
not required.
PART II OTHER INFORMATION
A complaint was filed against two former officers of the Company alleging that
the officers took actions which unlawfully deprived Coast Business Credit of
certain assets of the Company in which Coast Business Credit had a security
interest, or which actions otherwise violated the terms of agreements between
the Company and Coast Business Credit. The complaint was filed in the Orange
County Superior Court under the name Coast Business Credit v. Campbell, et al,
Case Number 787394.
These officers in turn filed a complaint against the Company claiming a right to
defense and indemnity under the terms of the Company's bylaws and under the
terms of their employment agreements. The Company has filed an answer to this
complaint for indemnity, however it does not have the resources to provide any
defense or indemnity at this time. The former officers made a motion for
issuance of an order of attachment to themselves and which they contend they are
contractually entitled to recover from the Company. At this time the outcome of
this proceeding cannot be predicted with certainty
The Company is subject to legal proceedings and claims that arise in the normal
course of business. The outcome of these proceedings cannot be predicted with
certainty.
9
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Number Description
- ------ -----------
27 Financial Data Schedule
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: November 15, 1999
By: /s/ William F. Blum
-------------------
William F. Blum Director, Chairman, President, Chief Executive Officer and Chief
Financial Officer and Chief Accounting Officer (Duly Authorized Officer)
10
<TABLE> <S> <C>
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<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Pinnacle
Micro and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-26-1999 DEC-26-1999
<PERIOD-START> JUN-28-1999 DEC-27-1998
<PERIOD-END> SEP-26-1999 SEP-26-1999
<CASH> 406 0
<SECURITIES> 0 0
<RECEIVABLES> 542 0
<ALLOWANCES> 0 0
<INVENTORY> 3,101 0
<CURRENT-ASSETS> 4,144 0
<PP&E> 2 0
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 4,316 0
<CURRENT-LIABILITIES> 26,460 0
<BONDS> 0 0
0 0
0 0
<COMMON> 34,992 0
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 4,316 0
<SALES> 1,908 5,311
<TOTAL-REVENUES> 1,908 5,311
<CGS> 1,638 4,579
<TOTAL-COSTS> 435 2,358
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 184 492
<INCOME-PRETAX> (349) (2,118)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (349) (2,118)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (349) (2,118)
<EPS-BASIC> (0.02) (0.15)
<EPS-DILUTED> (0.02) (0.15)
</TABLE>
