<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 September 26, 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>
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 September 26, 1998 and
June 28, 1997 4
Condensed Statements of Cash Flows for the twenty-six
weeks ended September 26, 1998 and September 27, 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>
September 26, December 27,
1998 1997
(Unaudited) (Unaudited)
------------- -------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 416,000 $ 454,000
Accounts receivable, net 1,051,000 4,853,000
Inventories 4,850,000 6,404,000
Prepaid expenses and other current assets 119,000 375,000
------------- -------------
Total current assets 6,436,000 12,086,000
Furniture and equipment, net 123,000 447,000
Other assets 84,000 11,000
------------- -------------
Total assets $ 6,643,000 $ 12,544,000
============= =============
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Note payable $ 5,390,000 $ 6,166,000
Accounts payable 17,104,000 18,581,000
Accrued expenses 2,002,000 3,142,000
Payroll related liabilities 85,000 125,000
------------- -------------
Total current liabilities 24,581,000 28,014,000
Commitments and contingencies
Stockholders' equity (deficit):
Common stock 15,000 15,000
Additional paid-in capital 34,977,000 34,977,000
Accumulated deficit (52,930,000) (50,462,000)
------------- -------------
Total stockholders' equity (deficit) (17,938,000) (15,470,000)
------------- -------------
Total liabilities and stockholders' equity (deficit) $ 6,643,000 $ 12,544,000
============= =============
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
2
<PAGE>
PINNACLE MICRO, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
13 Weeks Ended 13 Weeks Ended 39 Weeks Ended 39 Weeks Ended
Sept. 26, 1998 Sept. 27, 1997 Sept. 26, 1998 Sept. 27, 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net sales $ 2,374,000 $ 3,307,000 $ 8,248,000 $ 28,690,000
Cost of sales 1,829,000 12,593,000 6,346,000 34,639,000
-------------- -------------- -------------- --------------
Gross profit (loss) 545,000 (9,286,000) 1,902,000 (5,949,000)
Operating expenses:
Selling, general and administrative 1,325,000 3,550,000 4,513,000 12,454,000
Research and development - 736,000 - 2,983,000
Nonrecurring charges - 930,000 - 930,000
-------------- -------------- -------------- --------------
Total operating expenses 1,325,000 5,216,000 4,513,000 16,367,000
Operating loss (780,000) (14,502,000) (2,611,000) (22,316,000)
Interest income/(expense) 422,000 (167,000) 130,000 (598,000)
Non-cash interest expense related
to convertible debentures - - - (786,000)
-------------- -------------- -------------- --------------
Loss before income taxes (358,000) (14,669,000) (2,481,000) (23,700,000)
Income tax expense/(refund) (12,000) 41,000 - 63,000
-------------- -------------- -------------- --------------
Net loss $ (346,000) $ (14,710,000) $ (2,481,000) $ (23,763,000)
============== ============== ============== ==============
Net loss per share $ (0.02) $ (1.02) $ (0.17) $ (3.01)
============== ============== ============== ==============
Weighted average
common shares outstanding 14,500,089 14,485,000 14,500,089 7,904,000
============== ============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
3
<PAGE>
PINNACLE MICRO, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
39 Weeks Ended 39 Weeks Ended
Sept. 26, 1998 Sept. 27, 1997
-------------- --------------
<S> <C> <C>
Cash Flows from Operating Activities
Net loss $ (2,648,000) $ (23,763,000)
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation and amortization 313,000 1,013,000
Provision for product returns and price protection 968,000 1,639,000
Provision for inventory obsolescence - 6,013,000
Interest on debentures paid in common stock - 153,000
Non-cash interest expense - 786,000
Changes in operating assets and liabilities:
Accounts receivable 3,802,000 4,031,000
Income taxes receivable - 1,984,000
Inventories 1,554,000 4,259,000
Prepaid expenses and other current assets 256,000 (126,000)
Other assets (73,000) 547,000
Accounts payable and accrued expenses (2,617,000) (65,000)
Payroll related liabilities (40,000) (868,000)
Other liabilities - (520,000)
--------------- --------------
Net cash provided by (used in) operating activities 1,520,000 (4,917,000)
--------------- --------------
Cash Flows from Investing Activities
Proceeds from disposal of furniture and equipment - 30,000
Purchase of furniture and equipment (5,000) (1,384,000)
--------------- --------------
Net cash used in investing activities (5,000) (1,354,000)
--------------- --------------
Cash Flows from Financing Activities
Net cash provided by (used to) repay note payable (1,477,000) 1,251,000
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 option plan - 118,000
--------------- --------------
Net cash provided by (used in) financing activities (1,477,000) 1,388,000
Effect of exchange rate changes on cash - -
--------------- --------------
Decrease in cash and cash equivalents (38,000) (4,883,000)
Cash and cash equivalents at beginning of period 454,000 5,455,000
--------------- --------------
Cash and cash equivalents at end of period $ 416,000 $ 572,000
=============== ==============
Supplemental Cash Flow Information
Cash paid during the period for:
Interest $ 612,000 $ 612,000
=============== ==============
Income taxes - -
=============== ==============
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
4
<PAGE>
PINNACLE MICRO, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 27, 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 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 and results of
operations and cash flows as of and for the thirty-nine weeks ended
September 26, 1998 and September 27, 1997.
New Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board 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 Statement of
Financial Accounting Standards No. 130 and 131, Reporting Comprehensive
Income (SFAS 130) and Disclosure About Segments of an Enterprise and
Related Information (SFAS 131), respectively (collectively, the
"Statements"). The statements are effective for fiscal years beginning
after December 15, 1997. SFAS 130 establishes standards for reporting of
comprehensive income and its components in annual financial statements.
SFAS 131 establishes standards for reporting financial and descriptive
information about an enterprise's operating segments in its annual
financial statements and selected segment information in interim financial
reports. Reclassification or restatement of comparative financial
statements for earlier periods is required upon adoption of SFAS 130 and
SFAS 131, respectively. Application of the Statements' requirements is not
expected to have a material impact on the Company's financial position,
results of operations or cash flow. . 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.
5
<PAGE>
2. NET INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
September 26, December 27,
1998 1997
---- ----
<S> <C> <C>
Components and
work-in-process $4,674,000 $4,222,000
Finished goods 176,000 2,182,000
---------- ----------
$4,850,000 $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.
6
<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 $3,307,000 and $2,374,000 for the thirteen weeks ended September
27, 1997 and September 26, 1998, respectively, representing a year to year
decrease of 28%. Net sales were $28,690,000 and $8,249,000 for the thirty-nine
weeks ended September 27, 1997 and September 26, 1998, respectively,
representing a decrease of 71%. These significant decreases are 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
products. Virtually all of the Company's vendors will only sell to the Company
on a prepay basis. The third quarter of 1998 was 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 loss decreased from ($9,286,000) for the thirteen weeks ended September
27, 1997, to a gross profit of $545,000 for the thirteen weeks ended September
26, 1998. Gross loss decreased from ($5,949,000) for the thirty-nine weeks ended
September 27, 1997, to a gross profit of $1,903,000 for the thirty-nine weeks
ended September 26, 1998. The gross loss for the quarter ended September 27,
1997 was primarily attributable to the write-off of a portion of the Company's
service inventories and the establishment of substantial additional inventory
reserves. No such reserves were taken for the quarter ended September 28, 1998
resulting in a gross margin for the quarter. As noted above, the Company has
experienced 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 1998, and is expected to
continue placing pressure on gross margins in future periods for existing
products.
Selling, General and Administrative
Selling, general and administrative expenses were $3,550,000 and $1,325,000 in
the thirteen weeks ended September 27, 1997 and September 26, 1998,
respectively, and represented 107.4% and 55.8% of net sales. Selling, general
and administrative expenses were $12,454,000 and $4,513,000 in the thirty-nine
weeks ended September 27, 1997 and September 26, 1998, respectively, and
represented 43.4% and 54.7% of net sales. The decreases in expenditures resulted
primarily from reduced advertising and promotional expenditures and the
reduction of Company personnel.
Research and Development
Research and development expenses were $736,000 and $0 for the thirteen weeks
ended September 27, 1997 and September 26, 1998, respectively, or 22.2% and 0%
of net sales. Research and development expenses were $2,983,000 and $0 for the
thirty-nine weeks ended September 27, 1997 and September 26 1998, respectively,
or 10.4% and 0% of net sales. The decrease in research and development expenses
related to the Company's
7
<PAGE>
discontinuation of the Colorado Research facility and its decision to focus on
out-sourced products and services in order to meet future product needs.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents of $416,000 at September 26, 1998 were $38,000 lower
than the $454,000 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. However, as of the date of this filing the company had
secured an extension through December 31, 1999. 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 has exceeded the maximum available under the
line of credit. Borrowings under the line of credit totaled $6,166,000 at
December 27, 1997 and $5,390,000 at September 26, 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 Bankruptcy Act.
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.
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 bankruptcy laws.
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.
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 engineering and manufacturing experience
greater than the Company, and may be able to bring comparable or superior
products to market which,
8
<PAGE>
will 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 creditor protection under Federal bankruptcy law.
In the event that the Company is unable to locate other sources of funding to
meet its current cash needs, it may be unable to continue to operate as a going
concern and may be required to seek protection under the Federal bankruptcy
laws.
9
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit Number Description
- -------------- -----------
27 Financial Data Schedule
(b) Reports on Form 8-K:
None.
10
<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
(Duly Authorized Officer)
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-26-1998
<PERIOD-START> JUN-28-1998
<PERIOD-END> SEP-26-1998
<CASH> 416,000
<SECURITIES> 0
<RECEIVABLES> 1,051,000
<ALLOWANCES> 0
<INVENTORY> 4,850,000
<CURRENT-ASSETS> 6,436,000
<PP&E> 123,000
<DEPRECIATION> 318,000
<TOTAL-ASSETS> 6,643,000
<CURRENT-LIABILITIES> 24,581,000
<BONDS> 0
0
0
<COMMON> 15,000
<OTHER-SE> (17,953,000)
<TOTAL-LIABILITY-AND-EQUITY> 6,643,000
<SALES> 2,374,000
<TOTAL-REVENUES> 2,374,000
<CGS> 1,829,000
<TOTAL-COSTS> 1,829,000
<OTHER-EXPENSES> 1,325,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (130,000)
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> (346,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (346,000)
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
